george ratiu | @georgeratiu · 5/18/2017 · 2007.q3: $52.6t > 2016.q4: $75.5t source: federal...

Commercial Real Estate 2017: Changes in the Air

Commercial Economic Issues & Trends Forum

REALTORS® Legislative Meetings & Trade Expo | @NARLegislative

Washington, DC | May 18, 2017

GEORGE RATIU | @GeorgeRatiu

What is a VCR?

What is a VCR?

• Video Cassette Recorder

• Developed in the 1960s; reached mass market in the 1970s

• VCR was the home TV recording tech of 1980s-90s

• 2016: VCR was officially out of production

Do you remember RZRs & Curves? iPhone’s getting old…

• Motorola RZR – marketed 2004-2007

• Blackberry Curve – introduced in 2007

• 2017: iPhone turns 10 years old

May we live in interesting times…TECHNOLOGYArtificial intelligenceAutonomous vehiclesSharing services3D PrintingBiotech

INFRASTRUCTUREPublic roadsTransportation hubs

POLITICSPresidential electionCongressStates / Cities

DEMOGRAPHICSGen X / Gen Y / Gen ZUrban / RuralWealth disparity

MONETARY/FISCALFunds target rateFederal budget

FINANCECapital marketsFintechCrowdfunding

GLOBALEconomic weaknessBrexit/NationalismMigrationWars/military conflicts

SOCIALWealth disparityCannabis legalization

…as we swim in a sea of acronyms…

GDP ROI

NOI

ADS

DSCR

CAP

IRR

IR

BPS

DCF

CDO

CMBS

CDS

CPI

EBITDAEPS

FOMC

FX

GAAPLIBOR

ISM

LOI

NPV

NYSE

DJIA

OECD

ROE

SAAS

VAT

WTO

WTI

P&L

P/E

EXP

IMP $/SF

CAPEX

B2B

LTV

GDP ROI

NOI

ADS

DSCR

CAP

IRR

IR

BPS

DCF

CDO

CMBS

CDS

CPI

EBITDAEPS

FOMC

FX

GAAPLIBOR

ISM

LOI

NPV

NYSE

DJIA

OECD

ROE

SAAS

VAT

WTO

WTI

P&L

P/E

EXP

IMP $/SF

CAPEX

B2B

LTV

PEOPLE

Demographics accelerate change

10.5%

23.6%

15.4%24.5%

25.9%

2017 U.S. Population by Demographic Cohort

Swing/Silent (69+)

Baby Boomers (50-68)

Gen X (38-49)

Gen Y (20-37)

Gen Z (0-19)

Source: Sparks & Honey Source: Pew Research Center

Monetary policy helped housing, hurt savings…

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FOMC Fed Funds Target Rate (EOP, %)

Source: Federal Reserve Board

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Households: Nonfinancial/Tangible Assets: Real Estate (NSA, Bil.$)


2006.Q2: $22.7T > 2016.Q4: $23.1T

Multifamily demand follows population growth

• Mixed-use urban development; live/work/play

• Class A supply; small floorplans; amenities

• Demand remains robust; 2016 net absorption 201,300 units

• 2016 Completions: 242,800 units

• Vacancy moves up (4.9%), moderates rent growth

• Affordability declines

Bull market boosts household wealth

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Households & Nonprofit Org: Total Financial Assets (NSA, Bil.$)

2007.Q3: $52.6T > 2016.Q4: $75.5T


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S&P 500 (EOP, 1941-43=10) DJIA (EOP, May 26, 1896=40.94)

Source: Wall Street Journal

Office demand drives vacancy under 13%

• Payroll employment advances; professional & business svcs.

• Mobile workforce; increased telecommuting

• Space efficiency, flexible designs

• Sustainability tied to workforce retention & financial impact

• Positive net absorption + moderate completions = Vacancy @ 12.9%

Industrial absorption boosts rents

• Increased trade

• Rising e-commerce

• “Last mile” distribution

• Intermodal logistics

• Panama Canal; East coast ports

• Net absorption: 256.7M SF

• Net rent growth accelerates, $6.6 PSF

Corporations remain cautious

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.Q3

Real Corporate Profits After Tax (SAAR, Bil.Chn.2009$)

2016.Q3: $1.5 Trillion

Source: BEA

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Corporate Cash/Cash Equivalent Holdings (NSA, Bil.$)

2016.Q4: $2.1 Trillion

Source: Federal Reserve

Retail transformation

• Department stores lose ground

• Food/drinking services: NY’s Eataly

• Small/discount grocery stores heat up; Aldi, Lidl

• Completions remain low, availability at 7.1%

• Rents experience solid growth, $16.6 PSF

Speaking of investors…

2.3

0.04

1.6 1.20.39 0.690.470.84

0.390.570

9.6

3.7

6.9

8.1

10

U.S

.

Jap

an

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ada

Bri

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Euro

are

a

Den

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Fin

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Fran

ce

Ger

man

y

Swed

en

Swit

zerl

and

Bra

zil

Ch

ina*

Ind

ia

Ru

ssia

Turk

ey

Interest Rates % (10-yr Gov bonds)

Source: Economist Intelligence Unit; *5-year yield

Global CRE investors hit ‘Pause’ button, search for yield

16 U.S. Markets in Global Top 30

Market Sales Vol. ($B)

NYC Metro $60.0LA Metro $34.9SF Metro $30.0

London Metro $27.7Paris $23.1

DC Metro $18.5Dallas $18.0

Chicago $17.5Tokyo $16.4

Atlanta $15.6Miami/So Fla $15.1

Shanghai $14.8Boston Metro $13.9

Seattle $13.7Hong Kong $13.5

Amsterdam/Randstad $10.7Denver $10.5Seoul $9.9

Phoenix $9.6Berlin-Brandenburg $9.6

Sydney $9.3Austin $8.3

Singapore $8.1Houston $8.0

Rhine-Ruhr $7.9Madrid $7.5

San Diego $7.2Las Vegas $7.2Munich $6.7

Frankfurt/Rhine-Main $6.7

YoY % Chg.

Source: Real Capital Analytics

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billionsAmericas Asia Pac EMEA

2016: $860B; -11% YoY2017.Q1: $157B; -19% YoY

Where is global CRE money flowing (large cap)?Q1'17 Last 12 Months

$b YOY Chg $b YOY Chg

United States 76.1 -19% 387.8 -8%Germany 17.1 40% 68.5 -4%United Kingdom 10.4 -47% 53.1 -45%China 4.2 -40% 35.0 -2%Japan 7.2 -13% 31.3 -19%France 3.9 -37% 30.5 -12%Australia 1.8 -59% 23.8 -26%Canada 3.2 -19% 18.5 1%Spain 3.5 63% 17.9 76%Sweden 2.9 -24% 17.3 12%Netherlands 2.1 -29% 14.7 7%South Korea 2.0 242% 14.0 30%Hong Kong 2.9 -41% 13.2 -10%Italy 1.7 -40% 10.1 -4%Singapore 2.3 170% 10.0 107%All Others 15.1 -23% 78.1 -13%

Grand Total 156.8 -19% 823.9 -10%

YoY Sales Volume Gains - Q1.2017

- San Francisco: 15%- Dallas: 11%- Charlotte: 45%- Houston: 10%- Baltimore: 97%

U.S. CRE is a tale of two markets…

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Sales Volume (YoY % Chg)

Real Capital Analytics CRE Markets

REALTOR® CRE Markets

-40.0%

-30.0%

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-10.0%

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Sale Prices (YoY % Chg)

Real Capital Analytics CRE Markets

REALTOR® CRE Markets

Sources: NAR, Real Capital Analytics

Large cap U.S. markets follow global trends…

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$b Transaction Volume

-50%

0%

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100%

'11 '12 '13 '14 '15 '16 '17

Year-Over-Year Change


5.0%

6.0%

7.0%

8.0%

9.0%Off Ret Ind Apt Htl

Cap Rates

-5%

0%

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'11 '12 '13 '14 '15 '16 '17

Moody’s/RCA CPPI™

Year-Over-Year Change

…as yield drives gains in secondary CRE markets

2016Vol ($b) YOY

Office 141.7 -6%Retail 75.7 -16%Industrial 59.2 -24%Hotel 35.8 -29%Apartment 158.4 3%Dev Site 17.8 -26%Total 488.6 -11%Major Metros 206.1 -16%Secondary Markets 215.5 -3%Tertiary Markets 64.5 -12%


6MM Apartment

6MM CBD Office

6MM Industrial

6MM Retail

6MM Suburban Office

NMM Apartment

NMM CBD Office

NMM Industrial

NMM Retail

NMM Suburban Office

Hotel

-5%

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-40% -30% -20% -10% 0% 10% 20%

CP

PI

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6 vs

'15

Volume Change '16 vs '15

REALTORS® sales drop 4.4% in Q1.2017. Blip or trend?

-50%

-40%

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-20%

-10%

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Per

cen

t C

han

ge, y

ear-

ove

r-ye

ar

Sales Volume Sales Prices

Source: National Association of Realtors®

4%5%

8% 10%

14% 12%

13% 16%

21% 19%

37% 37%

2017.Q1 2016.Q4

REALTORS® Most Pressing Challenges

Inventory Shortage

Pricing Gap: Buyersvs Sellers

Local Economy

Financing

Other

National Economy

Distressed Properties

Capital markets retain liquidity at high end…

CRE Debt Universe - $3.76T

U.S. CharteredDepositoryInstitutionsCMBS, CDO, otherABS

GSEs (Freddie,Fannie)

Life InsuranceCompanies

Foreign BankingOffices in U.S.

Other


CRE Equity Investments - $2.85T

Private Equity

REITs

Pension Funds

Life Insurance Cos.

Commercial Banks

Corporations

Foreign Investors

Gov't, GSEs & Others

Sources: Situs RERC, NAREIT, PREA, AFIRE, Prequin, Real Capital Analytics, NCREIF

…as financing in small cap markets diverges…

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Real Capital Analytics Lending Sources ($2.5M+)

Pvt/Other

Reg'l/Local Bank

Nat'l Bank

Int'l Bank

Insurance

Gov't Agency

Financial

CMBS


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REALTOR® Commercial Real Estate Lending Sources

Small Business Administration

REITs

Regional Banks

Public Cos.

Private Investors

Other

National Banks

Local/Comm. Banks

Life Insurance Cos.

International banks

GSEs

Credit Unions

CMBS

Source: National Association of REALTORS®

…and lending conditions tighten, despite rising NOI

0%

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100%

2010 2011 2012 2013 2014 2015 2016

Change in Lending Conditions over Past Year

Eased Significantly

Eased Somewhat

Not Changed

TightenedSomewhat

TightenedSignificantly


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20%

30%

40%

50%

60%

70%

80%

90%

100%

2012 2013 2014 2015 2016 2017

12-Month Change in NOI ($/SF) of properties sold/leased

Decreased 50% - 75%

Decreased 40% - 49%

Decreased 35% - 39%

Decreased 30% - 34%

Decreased 25% - 29%

Decreased 20% - 24%

Decreased 10% - 19%

Decreased 5% - 9%

No Change

Increased 20% - 25%

Increased 15% - 19%

Increased 10% - 14%

Increased 5% - 9%

Increased 1% - 4%


Legislative & regulatory uncertainties remain

0%

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50%

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70%

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100%

2011 2012 2013 2014 2015 2016

Causes of Insufficient Bank Capital for CRE Lending:

Other, please specify

Global economic uncertainty

U.S. Economic uncertainty

Inability of banks to dispose ofdistressed assetsNew/proposed US legislative andregulatory initiativesRegulatory uncertainty for financialinstitutionsSlow-down in pooling/packaging ofCMBSReduced NOI, property values, andequity


CRE Outlook – positive fundamentals for 2017

Commercial Real Estate Vacancy Forecast (%)

2016.Q4 2017.Q1 2017.Q2 2017.Q3 2017.Q4 2018.Q1 2018.Q2 2018.Q3 2016 2017 2018

Office 13.6 13.5 13.3 13.0 12.7 12.5 12.4 12.4 13.0 13.3 12.5

Industrial 9.4 9.2 9.0 8.7 8.4 8.1 7.9 7.9 9.4 9.1 8.1

Retail 13.2 12.5 12.5 12.5 12.6 12.7 12.8 13.1 12.0 12.6 12.8

Multifamily 5.9 6.5 6.3 6.1 6.5 6.2 6.1 6.2 6.3 6.2 6.2Source: National Association of REALTORS®

CRE Outlook – investment risks

Risks

• Economic growth > CRE Fundamentals

• Cost of funds vs. yield

• Legislative: • Tax reform • IRC Sec. 1031

• Regulatory: • Dodd-Frank (?)• Basel III - HVCRE

Spread Between CRE Yields or Going-in Cap Rates and 10-Year Treasury

• Economy

• Capital markets

• Property markets

• Office

• Industrial

• Retail

• Apartment

www.NAR.REALTOR/research-and-statistics

• Economic Overview

• Commercial Real Estate

• Survey Results

• Market Environment

• Lending Environment

• Appraisals

www.NAR.REALTOR/research-and-statistics

Commercial Real Estate 2017: Changes in the Air

Commercial Economic Issues & Trends Forum

REALTORS® Legislative Meetings & Trade Expo | @NARLegislative

Washington, DC | May 18, 2017

GEORGE RATIU | @GeorgeRatiu

george ratiu | @georgeratiu · 5/18/2017 · 2007.q3: $52.6t > 2016.q4: $75.5t source: federal...

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