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Commercial Real Estate Insights2018 Economic ForecastCrowne Plaza Sacramento | February 8, 2018

Joshua PalmerAssociateOffice Specialist

Greg ThomasSenior Vice PresidentRetail Specialist

Tommy Ponder, SIORVice PresidentIndustrial Specialist

Brian NelsonSenior Vice PresidentMultifamily Specialist

Colliers Experts

Randy DixonManaging Director

Agenda

• Overall Economic Outlook

• Market Overview• Tenant Demand• Rental Rates• Sales Activity

• Forecast and Commentary

• Q&A

Key Themes

Economic Outlook

An overall look at 2017What were major influences

Major Influences

• Employment• Vacancy• New Supply

85.0%

90.0%

95.0%

100.0%

105.0%

110.0%

115.0%

Jan2008

Jan2009

Jan2010

Jan2011

Jan2012

Jan2013

Jan2014

Jan2015

Jan2016

Jan2017

PERC

ENT

BASE

D ON

JAN

200

8 LE

VEL

Sacramento MSA California Statewide US National

1. Tempe, AZ2. Boise, ID3. Miami, FL4. Atlanta, GA5. Tacoma, WA

6. Sacramento, CA7. Pittsburgh, PA8. McKinney, TX9. Richmond, VA10. Jersey City, NJ11. Olympia, WA12. Durham, NC13. Redding, CA

14. Surprise, AZ15. Kissimmee, FL16. Yonkers, NY17. San Francisco, CA18. Brooklyn, NY19. Brandon, FL20. Edmond, OK21. Manhattan, NY22. Saint Cloud, FL23. Murrieta, CA24. Prosper, TX25. Myrtle Beach, SC

1. Texas2. Florida3. Arkansas4. South Carolina5. Tennessee…50. California

Regional Migration – U-Haul Study

Top Growth Cities Growth State Rankings

Major Influences

• Employment• Vacancy• New Supply

DemandAbsorptionVacancyNew Supply

Absorption, Vacancy and New SupplyOffice

14.8%

16.9%

19.1%20.1% 20.5%

19.1%17.8%

16.5%14.9%

14.2%13.4%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

(750,000)

(250,000)

250,000

750,000

1,250,000

1,750,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

% V

ACA

NCY

TOTA

L SF

Source: Colliers International Research

Presenter

Presentation Notes

No new supply in 2017 Overall market vacancy is now below pre-recession Sacramento’s lowest unemployment rate since 2000 – drove down vacancy rates Existing businesses showing health and strength, ORGANIC GROWTH not a large influx of office users Reasons why it will stabilize at 13% range: Talent gap Obsolete product

• Product quality and location

• Urban revival

• Build to suit development

Office Supply & DemandTalent War:

77% of CEOs see availability of key

skills as the #1 threat to their

business PwC, 2017

Presenter

Presentation Notes

ALL ABOUT MILLENIAL TALENT *image is rendering of the Cannery co-working space Downtown – Midtown – Folsom – Roseville hot submarkets In Roseville – 9.8% vacancy is the lowest it’s been on record Folsom – lowest in a decade WHY? Young educated professionals with families, decision makers – both want to live there Of course, Downtown/Midtown – young single professionals Build to suit – No large space to really accommodate Centene or the State Building in Downtown, State Building in Natomas, Centene – adding to 3,000 existing jobs in Rancho, an additional 2,000 jobs when they complete campus Spec Development – Ice Blocks the only sizeable office building under construction 138k SF with about 108k office (30k SF ground floor retail) Medical office and healthcare administration – job growth, biggest occupiers Efficiency, creativity, utility and brand instead of traditional https://www.pwc.com/gx/en/ceo-survey/2017/deep-dives/ceo-survey-global-talent.pdf

14.6%

18.3%

20.7%22.1%

21.3%20.3%

18.8%17.9%

16.2%

13.6%

11.2%9.6% 10.3%

11.9%13.0% 12.6% 12.4%

11.6%9.9% 9.1%

7.2%

5.2%

-14.0%-12.0%-10.0%-8.0%-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%16.0%18.0%20.0%22.0%24.0%

(3,000,000)

(2,000,000)

(1,000,000)

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

VACANCY RATE

TOTA

L NE

T AB

SORP

TION

Source: Colliers International, CoStar

Total Net Absorption New Supply Flex Vacancy % Warehouse Vacancy %

Absorption, Vacancy and New SupplyIndustrial

NEWRECORD

Largest annual net absorption

on record

• Extremely low vacancy

• E-commerce, cannabis

• Build-to-suit vs spec development

Industrial Supply & DemandKey Fact:

Vacancy rate fell 250 basis points to 5.9% overall,

the lowest onrecord.

Presenter

Presentation Notes

Remind audience what vacancy was last year – 8.1% overall How did it get even lower? The biggest absorption total on record E-Commerce- NOT just Amazon – the furniture distributors selling on Wayfair, etc. Ecommerce has disrupted outdoor furniture Doesn’t always mean 100k SF … still geographically significant last-mile delivery stations Warehousing job growth was 10% YOY, the highest percentage increase Tell about Channel Dr A vacancy opens up, it’s filled, opens up a new vacancy – DOMINOE DEALS Cannabis – ripple effect Starting to see activity in land, but fees and cost of construction still a gap Build to suits: McKesson underway, Amazon delivered in 2017 PREDICTION: We tell people NOW is the time, seeing development on the horizon

Absorption, Vacancy and New SupplyRetail

10.6%

13.4% 13.6% 13.2% 13.0%

11.9%

10.7%10.1% 10.3%

8.9%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

(1,000,000)

(800,000)

(600,000)

(400,000)

(200,000)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD

% VA

CANCYTO

TAL

SF

Total Net Absorption New Supply


Presenter

Presentation Notes

Net absorption in 2017: 42.5% of total came from new construction (buildings completed and occupied in 2017) Delta Shores, DOCO, Rocklin Crossing, Rocklin Commons

Retail ConceptsWhich quadrant does tenant belong to?

Established Brands

Expa

ndin

gD

owns

izin

g

Trending

Presenter

Presentation Notes

E-commerce Flight to quality Continued erosion of mom/pop shops except salons, personal services

92.7% 92.7%

94.3% 94.1% 94.2%

95.2%

97.0% 96.1% 95.9%96.4%

90%

92%

94%

96%

98%

100%

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Mar

ket O

ccup

ancy

Aver

age

Mar

ket R

ent

Average Rent Average Occupancy

OccupancyMultifamily

Presenter

Presentation Notes

Total market occupancy hasn’t been below 95% since 2012 2008 it was at 92 %

Historical apartment supply

0

1000

2000

3000

4000

5000

6000

# U

nits

und

er c

onst

ruct

ion

Unit Count Average

Average: 2,409 Units

Source: CoStar, MPF

Q4 2017 total: 3,808 units

Note: Totals above based on multifamily construction in four-county Sacramento region.

Presenter

Presentation Notes

Limited new supply: rents and construction cost did not support development NOW CHANGING: Rents have risen, supports new construction in core areas Downtown, Midtown, Roseville, Folsom Limited new supply historically Occupancy has pushed rents New supply picking up �New projects – 2016 – 300 units 2017 – about 800 units last year, primarily in core markets Downtown, Midtown, Roseville, Folsom Rents support the cost of new construction

Rental Rates Rates by Class/Type

Rental Rates and Cost of OccupancyOffice

$201 $182 $116 $117 $79 $115 $141 $143 $163 $157

$1.99

$1.87$1.80

$1.72 $1.69 $1.68 $1.70$1.76

$1.80$1.84

$2.34$2.26

$2.16$2.09 $2.10 $2.08 $2.06

$2.16 $2.19$2.27

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

$2.60

$50

$70

$90

$110

$130

$150

$170

$190

$210

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

ASK

ING

RENT

AL

RATE

Avg

. $ P

aid/

Bldg

. SF

Source: Colliers International Research Avg. $ Paid/Bldg. SF Class B Class A

Presenter

Presentation Notes

Class A is 3.6% difference, this is OVERALL Submarkets have seen dramatic rate increases – Roseville/Folsom/Midtown/Elk Grove/Campus Commons Arena effect has driven rates close to the Capitol core Note that the average sale price/SF is still WELL BELOW replacement cost Real story is that properties are still an attractive bargain

• High demand areas

• Trades, new owners push

• Rehabs, injecting capital

Office rates

Presenter

Presentation Notes

Percentage increase in certain projects, separation of desirable vs obsolete Roseville: 40% range Folsom: 17-18% Campus Commons: 20-30% in some cases (Jackson rehabbing Parkcenter pictured) Downtown: 10% at least on Class A close to Golden 1 Center Haven’t seen tenants bucking rental rates

Rental Rates and Cost of OccupancyIndustrial

$70.71 $84.65 $61.61 $47.94 $47.61 $45.60 $54.31 $48.59 $67.22 $73.87 $69.45

$0.51$0.47

$0.43$0.38 $0.36 $0.37 $0.38 $0.37 $0.39 $0.40

$0.43

$1.01 $1.01

$0.88

$0.80 $0.79 $0.78 $0.78 $0.76 $0.77$0.81 $0.83

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

RENT $/SF/MONTH

AVG.

$/S

F


Avg. $ Paid/Bldg. SF Warehouse Rents Flex Rents

Presenter

Presentation Notes

$.40NNN to $.43NNN looks like some movement, but the graph is misleading in showing it so flat. Those are averages for the whole year. Look at EOY rates in ‘16 they were $0.39NNN and EOY rates in 2017 was $0.44NNN That’s a 12.8 percent rise Look even closer, and you’ll see even more movement in key submarkets where vacancy is really .

Industrial Lease RatesAverage warehouse rates in key submarkets (Q4 2017 compared to Q4 2016)

Sunrise/Hwy 5014.3%

$0.56 per sf

Power Inn65.8%

$0.63 per sf

West Sacramento7.5%

$0.43 per sf

Roseville/Rocklin7.5%

$0.43 per sfNatomas/Northgate14.6%

$0.47 per sf

Presenter

Presentation Notes

Product quality – Knowing Class A/new vs 3rd Gen Class B-C Marijuana – risk premium at least 50% Doing deals at $1.60/SF NNN just to get foot in the door. (can’t produce anything without the permit) Owner occupant turned into a LL – cabinet maker shut down his business to start collecting $15k/mo passive income Tenants have to accept reality, not much push-back on rates

Rental RatesRetail

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

$2.60

$2.80

ASK

ING

RENT

AL

RATE

Overall Avg. Community Neighborhood Power Regional Specialty Strip


Presenter

Presentation Notes

Main takeaway, there are so many ways of classifying a retail property. Keep a wide focus, Power Regional has suffered the most dramatic fall Community Neighborhood has maintained relative stability, obvious explanation is that there are simply WAY more properties that factor into this average (roughly 3x the base of Power Regional) Power Regional took a dip in 2016 but keep in mind, this is an indication of what is on the market with an asking price. When Delta Shores hit the market it gave a dramatic bump As appraisers, what should they take away? DON’T fall into the trap of assuming that average lease rates make any difference. A project’s value is the current rent roll with tenant longevity factored in.

• Flight to quality, experiences

• Updating drives rates

• Size, location, signage

Retail lease rates

Presenter

Presentation Notes

E-commerce has dramatically shifted the requirement for quality centers.

Rental RatesMultifamily

$989 $1,016 $1,042 $1,046 $1,062 $1,103 $1,133 $1,143 $1,171 $1,222 $1,273 $1,271 $1,284 $1,348 $1,377 $1,359

4.2%

5.5%

6.9% 7.1% 7.3%

8.6%

9.5% 9.5%

10.4%11.0%

11.3%

10.5%

9.2% 9.2%

7.8%

6.5%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

$900

$1,000

$1,100

$1,200

$1,300

$1,400

YOY

Sam

e-st

ore

rent

gro

wth

Aver

age

Mar

ket R

ent

Average Rent YOY Change in Avg Rent

Presenter

Presentation Notes

Had to adjust the scale on the left axis, when we presented last year, the average rent was $1235

• As predicted, rent growth decelerated

• New development will push top-of-market rents

• Value-add rehabbers still active but diminishing

Apartment rents

Presenter

Presentation Notes

Remind the audience that when you spoke last year you said 10-11% YOY growth was unsustainable, the prediction was that we’d see it settle into 6-8%... According to Q4 numbers we were at 6.5% Visuals -

Sales Activity Sales VolumeNumber of Transactions

Annual Sales Volume & Number of TransactionsOffice

1714 15

44

11

18 19

27 25 27 2631

2428 30

42

25

3439

59

37 39

27

40

0

10

20

30

40

50

60

70

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

# O

F TR

ANS

ACT

IONS

SALE

S VO

LUM

E (I

N M

ILLI

ONS

)

Source: Colliers International Research

Rolling 12-Month Total Qtrly Sales Volume #of Transactions

Presenter

Presentation Notes

Sacramento getting its best looks from institutional investors Point to $1B in sales from 2016 AND 2017 And more than 20% there for ‘18 already Still a strong investment market, consistent high volume of trades chasing yield Sellers seeing healthy exits, buyers seeing anticipated rent growth

• Class A trades

• Price per SF below replacement cost

• Limited new supply

Office sales activity

Government Properties Income Trust

Presenter

Presentation Notes

Institutional owners looking at Sacramento market, they see: value… chasing yield Buying well below replacement cost, adding capital, pushing rents Trades – if you survey all of the Class A properties in the market, 20%+ have new owners in the last 24 months All say after they buy one that they’d like to buy more … economies of scale and control more of the market

Annual Sales Volume & Number of TransactionsIndustrial

305.9 197.6 100.5 129.7 195.5 166.2 339.4 224.0 503.7 304.2 856.4

130

7652

73

111

209

120137

195

159

303

3422 14 13

23

53 5029

7554 44

-30

20

70

120

170

220

270

320

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

# OF TRANSACTIONS

IN M

ILLI

ONS


Sacramento Sales Activity (Millions) # of Warehouse Transactions # of Flex Transactions

Presenter

Presentation Notes

Updated Note: we had to change the scale on this because Q3 2017 was literally “off the chart” Westcore portfolio traded for $590M, 100 buildings sold, of that, rough calculation is $456M for the 82 buildings in our market

• Limited inventory

• More buyers than buildings

• Investment buyers, especially Bay Area

• Marijuana growers push traditional users to outlying areas

• Land

Industrial sales

Presenter

Presentation Notes

Exactly the same as what we said last year, but we’re adding LAND to this Existing investment properties like the one pictured finding eager buyers, almost every multi-tenant property like this is stable, fully leased Now talking to more clients about developable land. WHERE will future development take off: West Sacramento Metro Air Park WHO? Harsch Ridge Buzz Panattoni

Annual Sales Volume & Number of TransactionsRetail

81

118

100

220

69

94107

9381

9488

174

139

121

168

132

117 117

133

154

124

166173

214

0

50

100

150

200

250

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

# O

F TRANSA

CTIONS

SALE

S VO

LUM

E (I

N M

ILLI

ONS

)

Rolling 12 Month $ Total $ Volume # TransactionsSource: Colliers International, CoStar

1431-1441 Howe AveRenaissance PlazaSale Date: Jan 2, 2018Price: $7 millionSize: 10,600 sq ft$/SF: $660.33Buyer: GCG Properties LLCSeller: Howe Renaissance Partners LLC

2450 Watt AveMacy's @ Country ClubSale Date: Jan 3, 2018Price: $5 millionSize: 156,595 sq ft$/SF: $31.93Buyer: EDM RealtySeller: Macy's West Stores

Retail SalesDisparity

Presenter

Presentation Notes

Talk about tenant mix – Renaissance Plaza has Habit, Panda, PizzaRev, T-Mobile, and Icicles Age of the building, obviously talking about obsolete space.

Sacramento Sales Exceeding $20MM PriceMultifamily

10

6 6

8

11 11

1312

16

2322

2625 25 25

21

1817

19

21

2

5

8

11

14

17

20

23

26

29

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

$1,100

1Q2013

2Q2013

3Q2013

4Q2013

1Q2014

2Q2014

3Q2014

4Q2014

1Q2015

2Q2015

3Q2015

4Q2015

1Q2016

2Q2016

3Q2016

4Q2016

1Q2017

2Q2017

3Q2017

4Q2017

Num

ber

of P

rope

rtie

s

Sale

s Vo

lum

e ($

mill

ion)

Sales Volume # Properties

Presenter

Presentation Notes

Properties traded multiple times in the last 5 years 1111 Howe, the Element (student housing), The Falls At Arden (Biz Journal 2.7.18) https://www.bizjournals.com/sacramento/news/2018/02/07/arden-arcade-apartments-see-67-percent-jump-in.html?ana=e_du_prem&s=article_du&ed=2018-02-07&u=lkGE47DWG4z8qcYClmvLWcBQUdm&t=1518050173&j=79884051

• Limited inventory, competitive bidding

• More amenities, community vibe

• Record per-unit price

Apartment sales NEWRECORD

Median price per unit in Q4 2017:

$106,571

Presenter

Presentation Notes

Brian: Give your “full exposure to the market” schpeel.

Forecast What do we see in 2018?

Presenter

Presentation Notes

Tommy – increase in rents, decrease in trades, increase in investment activity, increase in land investments, new construction Greg – flight to quality, Josh – More investment, some build-to-suit development,

2018 Forecast

• Summary from each product type• Major signals of change

• New Supply• Employment and Recruiting• Internet Disruption• Political Climate• Healthcare Spending• Housing Affordability

• Federal Tax Reform

Federal Tax Reform

“The landmark tax reform legislation enacted in December included numerous important victories for commercial real estate, but the signing of the bill by President Trump doesn’t end Congress’ work… Given the size and scope of the law, the Bill’s language will have to be clarified in several areas to function as intended.”

- National Multifamily Housing Council

Questions?

Joshua PalmerAssociateOffice Specialist

Greg ThomasSenior Vice PresidentRetail Specialist

Tommy PonderVice PresidentIndustrial Specialist

Brian NelsonSenior Vice PresidentMultifamily Specialist

commercial real estate insights - appraisal institute...• q&a key themes economic outlook an...

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