2015 trends keynote

Real Estate Market Trends and Outlook

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation at Baton Rouge Trends Seminar

Greater Baton Rouge Association of REALTORS® CIDand

Real Estate Research Institute at Louisiana State University

April 16, 2015

Commercial Investment Sales of Large Properties(Properties valued at $2.5 million and over)

362423

233299

355400 420 430

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Commercial Sales in $Billions

Federal Reserve Commercial Property Price Index

‐ Q1

‐ Q3

‐ Q1

‐ Q3

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GDP Burstin 2014 Q2, Q3, Q4

2007‐ Q1

2007‐ Q3

2008‐ Q1

2008‐ Q3

2009‐ Q1

2009‐ Q3

2010‐ Q1

2010‐ Q3

2011‐ Q1

2011‐ Q3

2012‐ Q1

2012‐ Q3

2013‐ Q1

2013‐ Q3

2014‐ Q1

2014‐ Q3

GDP Annualized Growth Rate

Jobs(8 million lost … 12 million gained)

124000

126000

128000

130000

132000

134000

136000

138000

140000

1420002000

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In thousands

Weekly New Unemployment Insurance Claims

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In thousands

Unemployment Rate

‐ Jan

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Jobs in D.C. Metro

2000‐ Jan

2001‐ Jan

2002‐ Jan

2003‐ Jan

2004‐ Jan

2005‐ Jan

2006‐ Jan

2007‐ Jan

2008‐ Jan

2009‐ Jan

2010‐ Jan

2011‐ Jan

2012‐ Jan

2013‐ Jan

2014‐ Jan

2015‐ Jan

In thousands

Jobs in Detroit

2000‐ Jan

2001‐ Jan

2002‐ Jan

2003‐ Jan

2004‐ Jan

2005‐ Jan

2006‐ Jan

2007‐ Jan

2008‐ Jan

2009‐ Jan

2010‐ Jan

2011‐ Jan

2012‐ Jan

2013‐ Jan

2014‐ Jan

2015‐ Jan

In thousands

Jobs in New Orleans

2000‐ Jan

2001‐ Jan

2002‐ Jan

2003‐ Jan

2004‐ Jan

2005‐ Jan

2006‐ Jan

2007‐ Jan

2008‐ Jan

2009‐ Jan

2010‐ Jan

2011‐ Jan

2012‐ Jan

2013‐ Jan

2014‐ Jan

In thousands

Jobs in Baton Rouge

2000‐ Jan

2001‐ Jan

2002‐ Jan

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2005‐ Jan

2006‐ Jan

2007‐ Jan

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2009‐ Jan

2010‐ Jan

2011‐ Jan

2012‐ Jan

2013‐ Jan

2014‐ Jan

2015‐ Jan

In thousands

Household Net Worth at All‐Time High

40000450005000055000600006500070000750008000085000

$ billion

But Wait …

“But, I am not feeling it”

REALTORS® Report Commercial Sales Increase

‐50%

‐40%

‐30%

‐20%

‐10%

Percen

nge, ye

ar‐over‐year

Sales VolumeSales Volume

Source: National Association of Realtors®

REALTOR® Markets & Deal Size(Not $2.5 million Properties)

< $250,000

$250,000 ‐ $500,000

$500,000 ‐ $1,000,000

$1,000,000 ‐ $2,000,000

$2,000,000 ‐ $5,000,000

$5,000,000 ‐ $10,000,000

> $10,000,000

2013 CRE Lending Survey: Value of most recent sales transaction

Source: NAR

1% 11%3%

Current sources of financing for commercial deals

National banks (“Big four”)

Regional banks

Local banks

Credit unions

Life insurance companies

Private investors

Public companies

Small Business Administration

Other, please specify

Source: NAR

Small Banks Important to REALTORS®

GDP Still not Robust … Below 3% for 9 straight years

GDP Annual Growth Rate

Sluggish Growth + Gap after Great Recession ($1.5 trillion gap … $4,700 per person)

1998‐ Q1

1999‐ Q1

2000‐ Q1

2001‐ Q1

2002‐ Q1

2003‐ Q1

2004‐ Q1

2005‐ Q1

2006‐ Q1

2007‐ Q1

2008‐ Q1

2009‐ Q1

2010‐ Q1

2011‐ Q1

2012‐ Q1

2013‐ Q1

2014‐ Q1

GDP in 2009 Dollars

Real GDP Real GDP W/O Recession

3% Growth Line

2.2% Growth Line

Employment Rate

‐ Jan

‐ Jul

‐ Jan

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Renter Households over 10 years (Increased by 8 million)

25,00027,00029,00031,00033,00035,00037,00039,00041,00043,000

‐ Q1

In thousands

Homeowner Households over 10 years(Decreased by 2 million)

50,000

55,000

60,000

65,000

70,000

75,000

80,0001980

‐ Q1

In thousands

Homeownership Rate

6061626364656667686970

‐ Q1

Median Home Price

$166,100

$176,800

$197,100

$208,500

$150,000

$160,000

$170,000

$180,000

$190,000

$200,000

$210,000

$220,000

2011 2012 2013 2014

Household Net Worth($5,500 vs. $195,500)

$50,000

$100,000

$150,000

$200,000

$250,000

Renter Homeowner

1998 2001 2004 2007 2010 2013

x31 x46x36 x34x46

Homeowner net worth ranges from 31 to 46 times that of renters x36

Source: Federal Reserve Survey of Consumer Finances

The Reason for Not Feeling It

• Very Slow Housing Market Recovery• Very Slow Commercial Market Recovery

• Holds Back Economic Recovery

Pent Up Demand2000 2014

Existing Home Sales 5.2 m 4.9 m

New Home Sales 880 K 440 K

Mortgage Rates 8.0% 4.2%

Payroll Jobs 132.0 m 138.9 m

Population 282 m 319 m

37 million more people living in the country

Home Sales: Two and Out?Or Multi‐year Expansion?

(Single‐Family Existing Home Sales Only)

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,0001968

Housing Starts Rising … Too Slowly

300019

70 ‐ Jan

‐ Jan

Thousand units

Time to Sell a New Spec Home(in months)

2000‐ Jan

2001‐ Jan

2002‐ Jan

2003‐ Jan

2004‐ Jan

2005‐ Jan

2006‐ Jan

2007‐ Jan

2008‐ Jan

2009‐ Jan

2010‐ Jan

2011‐ Jan

2012‐ Jan

2013‐ Jan

2014‐ Jan

Sluggish Recovery in Housing Starts

• Cost of Construction Rising Faster than CPI

• Labor Shortage for construction work

• Construction loan difficulty for small local homebuilders … Dodd‐Frank financial regulations?

Rising Interest Rates:How Soon and How Much?

Monetary Policy by Federal Reserve (zero rate policy for 6 years!)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Fed Funds%

Federal Reserve Balance Sheet from Quantitative Easing

05000001000000150000020000002500000300000035000004000000

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Total Asset Purchase

$ million

10‐year Treasury Yield

2000‐ Jan

2001‐ Jan

2002‐ Jan

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2006‐ Jan

2007‐ Jan

2008‐ Jan

2009‐ Jan

2010‐ Jan

2011‐ Jan

2012‐ Jan

2013‐ Jan

2014‐ Jan

2015‐ Jan

Non‐worrisome CPI Inflation – YetCOLA of 1.7% in 2015

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Rising Renters’ and Homeowners’ Rent Growth (Above 3%)

‐ Jan

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Owners' Equivalent Rent Renters' Rent

Oil Price

‐ Jan

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‐ De

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Supply and Demand: Oil in U.S.

U.S. Dollar – The Most Trusted

‐ Jan

Dollar Strength Index – Trade Weighted

Who is Stalking the Dollar?

‐ Jan

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Yuan per Dollar

Monetary Policy

• Quantitative Easing … Finished

• Fed Funds Rate … hike in mid‐2015

• Long‐term Steady State Rate (2016 onwards) .. 10 year Treasury at 4.5%

Forecast

Economic Forecast

2013 2014 2015Forecast

2016 Forecast

GDP Growth 2.2% 2.6% 3.0% 3.0%

Job Growth +2.3 million +3.0 million +2.7 million +2.7 million

CPI Inflation 1.5% 1.2% 1.4% 3.2%

Consumer Confidence

73 87 95 98

10‐yearTreasury

2.5% 2.6% 2.3% 3.6%

Housing Forecast

2013 2014Likely

2015Forecast

2016 Forecast

Housing Starts 925,000 990,000 1.2 million 1.4 million

New Home Sales

430,000 440,000 600,000 720,000

Existing Home Sales

5.1 million 4.9 million 5.3 million 5.4 million

Median Price Growth

+ 11.5% + 5.3% + 4% + 4%

30‐year Rate 4.0% 4.2% 4.8% 5.8%

Underwriting Standards

Strict Strict Transition Normal

OFFICE 2014 2015 2016Vacancy Rate 16.2% 15.8% 15.6%Net Absorption ('000 sq. ft.) 36,192 50,678 57,782Completions ('000 sq. ft.) 26,450 41,799 44,862Rent Growth 2.6% 3.2% 3.6%

INDUSTRIAL 2014 2015 2016Vacancy Rate 8.9% 8.5% 8.1%Net Absorption ('000 sq. ft.) 107,580 104,948 105,044Completions ('000 sq. ft.) 83,424 68,755 61,720Inventory ('000,000 sq. ft.) 8,468 8,537 8,598Rent Growth 2.4% 2.8% 2.9%

RETAIL 2014 2015 2016Vacancy Rate 9.8% 9.7% 9.4%Net Absorption ('000 sq. ft.) 11,214 19,314 24,313Completions ('000 sq. ft.) 7,275 12,196 16,342Rent Growth 2.0% 2.4% 3.0%

MULTI‐FAMILY 2014 2015 2016Vacancy Rate 4.0% 4.0% 4.2%Net Absorption (Units) 223,421 170,065 140,128Completions (Units) 191,481 146,461 122,381Rent Growth 4.0% 3.9% 3.5%

Sources: National Association of REALTORS® / Reis, Inc.

Commercial Real Estate Forecast

Forecast over the next 2 years

• Rising interest rates … • Cap rates rise somewhat (narrow the gap first)• Increased occupancy and falling vacancy (new supply lacking)

• Rising rents … can offset rising rates to support property values

• Overall … improving business opportunities

Washington Policy Watch onCommercial Real Estate

• Preserve 1031 Like‐Kind Exchanges• Facilitate Covered Bonds to help credit flow• Raise cap on holding of commercial RE loans by credit unions

• Preserve capital gains status on carried interest• Depreciation Rules should match economic life• Oppose lease‐accounting changes

2015 trends keynote

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