economic outlook for real estate investors and decision makers: mark vitner

7/31/2019 Economic Outlook for Real Estate Investors and Decision Makers: Mark Vitner

1/24

U.S. Economic Outlook

Mark Vitner, Managing Director & Senior Economist

October 16, 2012


2/24

Economic Outlook 2

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

2000 2002 2004 2006 2008 2010 2012 2014

U.S. Real GDPBars = CAGR Line = Yr/Yr Percent Change

GDP - CAGR: Q2 @ 1.3%

GDP - Yr/Yr Percent Change: Q2 @ 2.1%

Forecast

Economic Growth

We are more than three yearsinto the economic recovery and

there is still a considerableamount of uncertainty regardingsovereign debt issues in Europe,

the federal budget deficit andthe willingness of businessesand households to commit to

major capital purchases.

Source: U.S. Department of Commerce and Wells Fargo Securities, LLC


3/24

Economic Outlook 3

0%

3%

6%

9%

12%

15%

18%

21%

0%

3%

6%

9%

12%

15%

18%

21%

1971 1976 1981 1986 1991 1996 2002 2007 2012

10-Year Treasury & Fed Funds Target

Yield

10-Year Treasury Yield: Oct @ 1.74%

Fed Funds Target: Oct @ 0.25%

Financial Crises Are Becoming More Frequent

Treasury yields are currentlynear record low levels. Webelieve uncertainty is the

primary driver ofultra-low interest rates.

Source: IHS Global Insight and Wells Fargo Securities, LLC


4/24

Economic Outlook 44

The Timing of The First Fed Rate Hike

The timing for the Feds first tightening move has been pushed even further out.Long-Term growth estimates have also been scaled back.

Source: Federal Reserve Board and Wells Fargo Securities, LLC

Individual FOMC Member ForecastsConsensus Fed Funds Rate Hike

0

2

4

6

8

10

12

14

0

2

4

6

8

10

12

14

2012 2013 2014 2015 2016

Appropriate Timing of Policy FirmingNumber of Participants

June Release

September Release

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Appropriate Pace of Policy FirmingTarget Federal Funds Rate at Year-End

June Projection

September Projection

2012 2013 2014 2015 Longer Run


5/24

Economic Outlook 5

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

2007 2008 2009 2010 2011 2012

Federal Reserve Balance SheetTrillions

Other: Sep @ $203.3B

Foreign Swaps: Sep @ $19.4B

PDCF & TAF

Commercial Paper & Money Market

Repos & Dis. Window: Sep @ $0.3B

Agencies & MBS: Sep @ $930.9B

Treasuries: Sep @ $1,652.5B

Federal Reserve Balance Sheet

The massive expansion of theFeds balance sheet has lifted

asset prices and has also giventhe economy a boost. But all

magic comes with a price!



6/24

Economic Outlook 6

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1994 1997 2000 2003 2006 2009 2012

Unemployment Rate - SA vs. NSAPercent

12-Month Rolling Average (NSA): Sep @ 8.3%

Unemployment Rate (SA): Sep @ 7.8%

Labor Market

Unemployment is graduallytrending down, although muchof the improvement has come

from unusual forces.

Source: U.S. Department of Labor and Wells Fargo Securities, LLC


7/24Economic Outlook 7

-8.0%

-4.0%

0.0%

4.0%

8.0%

12.0%

16.0%

20.0%

-8.0%

-4.0%

0.0%

4.0%

8.0%

12.0%

16.0%

20.0%

0 6 12 18 24 30 36 42 48 54 60 66 72 78 84

Employment CyclesPercent Change from Cycle Peak

1948-1949 Cycle

1981-1982 Cycle

1989-1991 Cycle

2001 Cycle

2007-To-Date

Forecast

Labor Market

Job losses exceeded every post-World War II downturn, and the

modest recovery to date hasbeen extremely disappointing.

Source: U.S. Department of Labor and Wells Fargo Securities, LLC


8/24



Consumer Confidence

Economic growth is unlikely to accelerate in a meaningful way until consumers feel betterabout current economic conditions than they do about future economic prospects.

Source: Conference Board and Wells Fargo Securities, LLC

Confidence GapConsumer Confidence

0

25

50

75

100

125

150

175

200

225

250

0

25

50

75

100

125

150

175

200

225

250

87 89 91 93 95 97 99 01 03 05 07 09 11

Conference Board Consumer ConfidencePresent Situation and Expectations Index

Present Situation Yr/Yr % Chg: Sep @ 50.8%

Present Situation: Sep @ 50.2

Expectations: Sep @ 83.7

-100

-75

-50

-25

0

25

50

75

100

-100

-75

-50

-25

0

25

50

75

100

87 89 91 93 95 97 99 01 03 05 07 09 11

Confidence GapPresent Situation Minus Expectations

Confidence Gap: Sep @ -33.5



0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Housing StartsMillions of Units

Forecast

Homebuilding

We believe housing starts havebottomed and will increasemodestly over the next few

years.




Housing Starts

Apartment construction accounts for much of the recent improvement in homebuilding.We believe multifamily housing will account for a larger proportion of future starts.


Multifamily Housing StartsSingle & Multifamily Housing Starts

0

60

120

180

240

300

360

420

480

540

600

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

87 89 91 93 95 97 99 01 03 05 07 09 11

Single & Multifamily Housing StartsSAAR, In Thousands, 3-Month Moving Average

Single-family Housing Starts: Aug @ 524K (Left Axis)

Multifamily Housing Starts: Aug @ 221K (Right Axis)

0

40

80

120

160

200

0

100

200

300

400

500

87 89 91 93 95 97 99 01 03 05 07 09 11

Multifamily Housing StartsSAAR, In Thousands, 3-Month Moving Average

5+ Units: Aug @ 212.3 (Left Axis)

2-4 Units: Aug @ 9.0 (Right Axis)



-32%

-24%

-16%

-8%

0%

8%

16%

24%

-32%

-24%

-16%

-8%

0%

8%

16%

24%

96 98 00 02 04 06 08 10 12

Home PricesYear-over-Year Percentage Change

Median Sale Price: Aug @ $188,700

Median Sales Price 3-M Mov. Avg.: Aug @ 9.2%

FHFA (OFHEO) Purchase Only Index: Jul @ 3.7%

S&P Case-Shiller Composite 10: Jul @ 0.6%

Home Prices

Home prices have firmedrecently as foreclosures have

become a smaller portion ofoverall sales. Prices will likely

fluctuate along a low trajectoryuntil more foreclosures clear

through the pipeline.

Source: Federal Housing Finance Agency, National Association of Realtors, S&P Corp. and Wells Fargo Securities, LLC


13/24

Economic Outlook 13

0

10

20

30

40

50

60

70

80

90

0

10

20

30

40

50

60

70

80

90

87 89 91 93 95 97 99 01 03 05 07 09 11

NAHB/Wells Fargo Housing Market IndexDiffusion Index

NAHB Housing Market Index: Sep @ 40.0

NAHB/Wells Fargo Housing Market Index

Homebuilder sentiment hasrisen significantly over the pastyear, but it is still at a relatively

low level.

Source: National Association of Home Builders and Wells Fargo Securities, LLC


14/24

Economic Outlook 1414

Construction

Homebuilding is now adding to overall economic activity. Nonresidential construction remainsstuck in low gear, however, with recent gains in energy & power cooling off.


NonresidentialResidential

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

2000 2002 2004 2006 2008 2010 2012 2014

Real Residential InvestmentBars = CAGR Line = Yr/Yr Percent Change

Res. Investment - CAGR: Q2 @ 8.9%

Res. Construction - Yr/Yr Percent Change: Q2 @ 10.5%

Forecast

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2000 2002 2004 2006 2008 2010 2012 2014

Real Nonresidential ConstructionBars = CAGR Line = Yr/Yr Percent Change

Nonres Construction - CAGR: Q2 @ 2.8%

Nonres Construction - Yr/Yr Percent Change: Q2 @ 11.8%

Forecast


15/24


Commercial Real Estate

Commercial Real Estate fundamentals are beginning to improve.

Source: Reis, Inc., PPR, Real Capital Analytics, Federal Reserve Board and Wells Fargo Securities, LLC

CRE Cap Rates vs 10-Year TreasuryVacancy Rates

0%

4%

8%

12%

16%

20%

24%

0%

4%

8%

12%

16%

20%

24%

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Commercial Real Estate Vacancy RatesPercent

Office Vacancy Rate: Q2 @ 17.2%

Industrial Vacancy Rate: Q2 @ 8.8%

Retail Vacancy Rate: Q2 @ 10.8%

Apartment Vacancy Rate: Q2 @ 4.7%

0%

2%

4%

6%

8%

10%

12%

0%

2%

4%

6%

8%

10%

12%

1995 1997 1999 2001 2003 2005 2007 2009 2011

CRE Cap Rates vs. 10-Year Treasury YieldsPercent, Yield

Industrial: Q2 @ 7.7%

Retail: Q2 @ 7.2%

Office: Q2 @ 7.1%

Apartment: Q2 @ 6.2%

10-Year Yield: Q2 @ 1.8%


16/24


Capital Markets

Financing is flowing to commercial real estate again, the current is simply not very strong justyet.


U.S. CMBS IssuanceVacancy Rates

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

2005 2006 2007 2008 2009 2010 2011 2012

Commercial Mortgages OutstandingBillions of Dollars, Non-Seasonally Adjusted

Other: Q2 @ $203B

Life Insurance Companies: Q2 @ $270B

Securitized: Q2 @ $472B

U.S. Chartered Depository Institutions: Q2 @ $1,192B

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

2004 2005 2006 2007 2008 2009 2010 2011 2012

U.S. CMBS IssuanceBillions of Dollars

CMBS Issuance: Sep @ $4.1 Billion

d d


17/24

Economic Outlook 17

-40%

-20%

0%

20%

40%

60%

80%

100%

-40%

-20%

0%

20%

40%

60%

80%

100%

1990 1994 1998 2002 2006 2010

Net Percent of Banks Tightening StandardsCommercial Real Estate Loans

Commercial Real Estate Loans: Q3 @ -10.9%

Loan Standards

Banks are becoming a littlemore aggressive in lending for

commercial real estate.


l d


18/24

Economic Outlook 18

Supply & Demand

Apartments have seen the greatest improvement in operating fundamentals.

-75

-50

-25

0

25

50

75

100

2%

3%

4%

5%

6%

7%

8%

9%

05 06 07 08 09 10 11 12

Apartment Supply & DemandPercent, Thousands of Units

Apartment Net Completions: Q2 @ 10,382 Units (Right Axis)

Apartment Net Absorption: Q2 @ 28,353 Units (Right Axis)

Apartment Vacancy Rate: Q2 @ 4.7% (Left Axis)

Source: Reis, Inc., PPR and Wells Fargo Securities, LLC

IndustrialApartment

-80

-60

-40

-20

0

20

40

60

0%

2%

4%

6%

8%

10%

12%

14%

2005 2006 2007 2008 2009 2010 2011 2012

Industrial Supply & DemandPercent, Millions of Square Feet

Industrial Net Completions: Q2 @ -6.3M SF (Right Axis)

Industrial Net Absorption: Q2 @ 25.8M SF (Right Axis)

Industrial Vacancy Rate: Q2 @ 8.8% (Left Axis)

S l & D d


19/24

Economic Outlook 19

Supply & Demand

Office vacancy rates have leveled off but absorption remains relatively weak.

-40

-30

-20

-10

0

10

20

30

0%

3%

6%

9%

12%

15%

18%

21%

2005 2006 2007 2008 2009 2010 2011 2012

Office Supply & DemandPercent, Millions of Square Feet

Office Net Completions: Q2 @ 1.6M SF (Right Axis)

Office Net Absorption: Q2 @ 4.1M SF (Right Axis)

Office Vacancy Rate: Q2 @ 17.2% (Left Axis)

Source: Reis, Inc. and Wells Fargo Securities, LLC

RetailOffice

-8

-4

0

4

8

12

16

20

0%

2%

4%

6%

8%

10%

12%

14%

2005 2006 2007 2008 2009 2010 2011 2012

Retail Supply & DemandPercent, Millions of Square Feet

Retail Net Completions: Q2 @ 0.6M SF (Right Axis)

Retail Net Absorption: Q2 @ 2.1M SF (Right Axis)

Retail Vacancy Rate: Q2 @ 10.8% (Left Axis)

I t W t h


20/24

Economic Outlook 20

China EconomicSlowdown

Election YearUncertainty

Credit Availability

& Financial Reform

European

Debt Crisis

Deleveraging

Fiscal &Monetary Policy

GeopoliticalTensions

Energy/CommodityPrice Swings

Issues to Watch

O F t


21/24

Economic Outlook 21

Our Forecast

Wells Fargo U.S. Economic Forecast

2010 2011 2012 2013

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Real Gross Domestic Product 1 2.0 1.3 1.6 1.2 1.0 1.5 1.8 1.9 2.4 1.8 2.1 1.4

Personal Consumption 2.4 1.5 1.8 1.1 0.6 1.5 1.4 1.3 1.8 2.5 1.8 1.2

Inflation Indicators 2

PCE Deflator 2.4 1.6 1.4 1.6 1.3 1.5 1.5 1.5 1.9 2.4 1.7 1.4

Consumer Price Index 2.8 1.9 1.6 2.1 2.1 2.6 2.7 2.4 1.6 3.1 2.1 2.4

Industrial Product ion 1 5.9 2.6 0.1 1.1 0.7 3.5 4.1 4.1 5.4 4.1 3.7 2.0

Corporate Profits Before Taxes 2 10.3 6.7 5.7 5.3 4.8 5.2 5.7 6.3 26.8 7.3 6.9 5.5

Trade Weighted Dollar Index 3 72.7 74.5 72.7 72.5 73.0 74.0 75.0 76.0 75.4 70.9 73.1 74.5

Unemployment Rate 8.3 8.2 8.1 7.6 7.6 7.9 8.1 8.0 9.6 9.0 8.0 7.9

Housing Starts 4 0.71 0.74 0.77 0.84 0.85 0.88 0.91 0.92 0.59 0.61 0.76 0.89

Quarter-End Interest Rates 5

Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25

Conventional Mortgage Rate 3.95 3.68 3.50 3.30 3.30 3.30 3.35 3.40 4.69 4.46 3.61 3.34

10 Year Note 2.23 1.67 1.65 1.60 1.65 1.70 1.75 1.80 3.22 2.78 1.79 1.73

Forecast as of: October 12, 2012Compound Annual Growth Rate Quarter-over-Quarter

2 Year-over-Year Percentage Change

Federal Reserve Major C urrency Index, 1973=100 - Quarter End4 Millions of Units5 Annual Numbers Represent Averages

Actual Forecast2013

Actual2012

Forecast


22/24

Appendix

W ll F E i G P bli ti


23/24

Economic Outlook 23

Recent Special Commentary

Wells Fargo Economics Group Publications

To view any of our past researchplease visit:

http://www.wellsfargo.com/

economics

To join any of our researchdistribution lists please visit:http://www.wellsfargo.com/

economicsemail

Date Title Authors

September-25 Local Budgets Under Pressure: A Fiscal Outlook Silvia & Brown

September-17 Global Chartbook: September 2012 Bryson, Aleman & Quinlan

Sept ember-10 U.S. Fisc al Primer II: Federal Government Spending Silvia, Bryson & BrownSeptember-06 Commercial Real Estate Chartbook: Quarter 2 Vitner & Khan

September-05 Brazilian Economy Slows Down; Better Times Ahead Aleman

August-22 Mexico: Thanks to Auto Demand Aleman

August-15 California's Economy: Gaining Momentum Vitner & Watt

August-14 Real GDP in Eurozone Slumped in Q2 Bryson

August-09 Rocky Mountain Summit: July 2012 Silvia

August-06 Orders and Production: No Time for Complacency Silvia, Quinlan & Watt

August-01 U.S. Fiscal Primer I: The Deficit and Debt Silvia, Bryson & Brown

July-19 U.S. States Grapple with Europe's Woes Vitner & Brown

July-13 The Lowdown on Consumer Spending Vitner & Quinlan

July-11 Employment: Beyond the Sound BitesReading the Signals IX Silvia & Watt

July-10 Employment: Beyond the Sound BitesReading the Signals VIII Silvia & Watt

July-09 Employment: Beyond the Sound BitesReading the Signals VII Silvia & WattJuly-05 Housing Data Wrap-Up: June 2012 Vitner & Khan

July-02 Do Too Many Dollars Make Us an Inflation Nation? Bullard & Quinlan

June-29 2012 State Budget Outlook Silvia & Brown

June-22 Student Loans: The Best of Intentions Silvia, Seydl & Watt

June-20 FOMC: Keep On Twisting Until Europe's Fever Breaks Vitner

June-20 The Fiscal Cliff: Likelihood and Economic Impact Silvia, Brown & Watt

June-20 Credit Quality Monitor: June 2012 Anderson & Kashmarkek

June-19 The Fed: Same Goal, Different Method Silvia & Khan

June- 15 Ec onomic Growt h Appears to Be Lost in a Fog of Unc ert aint y Vitner

June-07 What Happens if Span or Italy Leaves EMU? Bryson, Quinlan & Swankoski

June-07 Housing Chartbook: May 2012 Vitner, Khan & Seydl

May-29 Implications of a Euro Exit to Greece Bryson, Quinlan & Swankoski

May-24 Puerto Rico: Failure of the State AlemanMay-22 Commercial Real Estate Snapshot: South Carolina Vitner & Watt

May-16 Expected Inflation Continues to Fall, Challenging the FOMC Bullard & Seydl

May- 16 Work or Retirement? The Employment Out look for Seniors Bryson & Watt

May-15 The Not So Great Migration Silvia, Brown & Seydl

May-07 North Carolina: A Better Year Ahead? Silvia, Brown & Watt

April-24 Lessons from British Fiscal Consolidation Bryson & Seydl

April-19 Credit: Changing Patterns in How We Finance Growth Silvia & Iqbal

April-18 Business, Banking & the 2008 F inancia l Cris is: Where Are we Now? Silv ia

A Sampling of Our Recent Special, Regional & Industry Commentary

Wells Fargo Securities LLC Economics Group


24/24

Economic Outlook

Wells Fargo Securities, LLC Economics Group

24

John Silvia ....................... [email protected]

Global Head of Research and Economics

Diane Schumaker-Krieg [email protected]

Global Head of Research & Economics

Chief Economist

Mark Vitner, Senior Economist..... . [email protected]

Jay Bryson, Global Economist [email protected]

Eugenio Aleman, Senior Economist [email protected]

Sam Bullard, Senior Economist [email protected]

Anika Khan, Senior Economist . . [email protected]

Senior EconomistsSarah Watt, Economic Analyst [email protected]

Kaylyn Swankoski, Economic Analyst [email protected]

Zachary Griffiths, Economic Analyst [email protected]

Sara Silverman, Economic Analyst [email protected]

Economists

Azhar Iqbal, [email protected]

Tim Quinlan, [email protected]

Michael A. Brown, Economist [email protected]

Economic Analysts

Administrative Assistants

Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, theFinancial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, butnot limited to, Wells Fargo & Company, Wells Fargo Bank N.A, Wells Fargo Advisors, LLC, and Wells Fargo Securities International Limited. The information and opinions herein are for general

information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result fromthe reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended asan offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliatedbanks and is a wholly owned subsidiary of Wells Fargo & Company.

SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE

Important Information for Non-U.S. Recipients

For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited (WFSIL). WFSIL is a U.K. incorporated investment firm authorized and regulated by theFinancial Services Authority. The content of this report has been approved by WFSIL a regulated person under the Act. WFSIL does not deal with retail clients as defined in the Markets inFinancial Instruments Directive 2007. The FSA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, not will the FinancialServices Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying thisdocument (collectively, the Materials) are provided for general informational purposes only.

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economic outlook for real estate investors and decision makers: mark vitner

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