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Capital Markets Outlook:

The Elusive Search for Yield

WEBINAR

JANUARY 2018

KEVIN THORPE

Chief Economist,

Global Head of Research

WEBINAR

JANUARY 2018

Capital Markets Outlook:


Today’s Agenda

Economic Outlook

Strategies for 2018/19

Global Capital Flows

Local Market Dynamics

Source: BEA, Cushman & Wakefield Research

As the Economy Goes, So Goes CRE

U.S. Real GDP vs. U.S. Net Absorption (Office + Industrial)

• U.S. GDP set to

accelerate, not a boom,

but stronger

• U.S. GDP growth and

demand for real estate

space generally move in

tandem

• On track to be longest

expansion in the Post

WWII Era

• 92% probability U.S.

expansion continues

Key Takeaways

-300

-200

-100

0

100

200

300

400

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

20

00

20

01

20

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11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

GDP (LHS) Net Absorption (msf)Recession

Correlation = .75

Source: BEA, Cushman & Wakefield Research, Various

U.S. Economic Outlook

GDP Trends & Forecasts

Latest Trends GDP Forecasts

3.1%3.2%

2.6%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2015Q

4

2016Q

1

2016Q

2

2016Q

3

2016Q

4

2017Q

1

2017Q

2

2017Q

3

2017Q

4

Real GDP, % change annualized

2.9%

2.2%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Moody's Oxford Capital Economics C&W

Source: Moody’s Analytics, Cushman & Wakefield Research

Growing Nearly Everywhere

GDP Forecasts for 2018

Solid & accelerating. Likely

to get a near-term boost

from tax cuts.

Pulling out of commodities

slump. Latin America on the

mend.

Powering through political

uncertainty and on the upswing.

Eurozone creating jobs at

fastest pace in over a decade.

APAC remains fastest

growing global region,

growth strengthening

in nearly all pockets.

Stable/Strong >2%

Recession <0%

Modest 1 – 2%

Weak 0 – 1%

Source: BEA, Federal Reserve, Moody’s Analytics, Oxford Economics, Cushman & Wakefield Research

Sprinkle in Some Tax Stimulus

History as a Guide

-5

0

5

10

1980 1981 1982 1983 1984

Tax cut

Real GDP, %

0

1

2

3

4

5

1985 1986 1987 1988 1989

0

1

2

3

4

5

2000 2001 2002 2003 2004

10-Year Treasury Yield,%

Tax

reform

Tax cut

10

11

12

13

14

15

1980 1981 1982 1983 1984

7

8

9

10

11

1985 1986 1987 1988 1989

4

4.5

5

5.5

6

6.5

2000 2001 2002 2003 2004

2017 Tax Bill

Positives

Big win for businesses

2018 GDP expected to be 30-40 bps

stronger

Stronger wage growth

Stock prices will get lift – wealth effect

Negatives

Increases the deficit

Higher interest rates more likely

Housing sector will contribute less

Source: Cushman & Wakefield Research

4% U.S. GDP Growth Is Possible

Stronger GDP… …Means Stronger NOI Growth

-4

-3

-2

-1

0

1

2

3

4

5

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

20

18

Baseline Real GDP Bullish Scenario-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

19

90

19

94

19

98

20

02

20

06

20

10

20

14

20

18

Office Returns Unlevered (LHS) GDP Growth (RHS)


Indicators to Keep An Eye On

Recession Predictors

Indicator Status Risk Level

Stock P/E Ratios Elevated, due for a correction

China’s Debt BurdonDebt-to-GDP nearing 300%, but foreign exchange

reserves still very strong

Geopolitical Threats U.S.- North Korea/Iran/Russia/China; Brexit-EU

Oil/Commodities A spike in oil? Highly unlikely

Inverted Yield Curve 100+ bps spread, pretty normal but watch it

Leading Indicator Index Surging again

Symbols: Green = no imminent threat; Orange equals caution; Red = elevated risk of recession

Source: Federal Reserve, Cushman & Wakefield Research

Should Investors Fear the Rising 10-Yr?

U.S. 10-Yr Treasury Yield Demand for Treasuries

2

2.1

2.2

2.3

2.4

2.5

2.6

2.7

02

Jun

20

17

23

Jun

20

17

14

Jul 2

017

04

Au

g 2

017

25

Au

g 2

017

15

Se

p 2

017

06

Oct 201

7

27

Oct 201

7

17

No

v 2

017

08

De

c 2

017

29

De

c 2

017

19

Jan

20

18

10 Yr Treasury Yield

$50.5

$51.0

$51.5

$52.0

$52.5

$53.0

$53.5

$54.0

Jan 2017 Jan 2018

Auction Bids for 10-Yr US Gov't Bonds

Source: Oxford Economics, Cushman & Wakefield Research

Global Inflation is Still Very Low

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2016 2017 2018 2019 2020 2021 2022

Advanced Economies

2% Inflation Target

Latest Reading 2017Q4*

CPI

U.S. 2.1%

Canada 1.6%

Brazil 2.8%

Japan 0.2%

Eurozone 1.4%

Advanced Economies 1.7%

Source: Oxford Economics, Bloomberg, Cushman & Wakefield

*Average 1990 – 2016; Current = as of 1/9/2018, forecasts updated 12-14-2017

Slightly Higher, but Still Historically Low

10-year Government Bond Rates

0.2% 0.1%0.6%

1.0%

1.7% 1.8%2.2%

2.5% 2.4%2.7% 2.7% 2.7%

4.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

Current 2018F Historical Average

Global Capital Flows

Source: Preqin, Cushman & Wakefield Research

Fundraising for CRE Robust & Trending Up

Real Estate Debt Funds Dry Powder, billions

56

66

98

0

20

40

60

80

100

120

Sept 2015 Sept 2016 Sept 2017

No. of Funds Raising Aggregate Capital Targeted (Bn)

$0

$50

$100

$150

$200

$250

2012 2013 2014 2015 2016 2017

North America

Europe

Asia

Rest of World


Capital Shifts: This Will Rightsize

Too much capital going to stocks, higher percentage set to target CRE

-2

0

2

4

6

8

10

U.S. Stock Market U.S. CRE

Growth in U.S. Wealth Last 2 Years

Capital Pouring Into Stocks

$9,170,510,000,000

Pulling out of CRE

-$97,102,127,072

Source: Real Capital Analytics, Cushman & Wakefield

Cross-border Capital Flows

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450M

ar-

08

Sep-0

8

Mar-

09

Sep-0

9

Mar-

10

Sep-1

0

Mar-

11

Sep-1

1

Mar-

12

Sep-1

2

Mar-

13

Sep-1

3

Mar-

14

Sep-1

4

Mar-

15

Sep-1

5

Mar-

16

Sep-1

6

Mar-

17

Sep-1

7

U.S

., B

illio

ns

U.S. All Property Types Cross-Border Volume ($) Europe All Property Types Cross-Border Volume ($)

UK All Property Types Cross-Border Volume ($) AsiaPac All Property Types Cross-Border Volume ($)

Global All Property Types Cross-Border Volume ($)

Source: Real Capital Analytics, Altus Insite Investment Trends Survey, Cushman & Wakefield

Current = 2017Q4

America’s Still Relatively Attractive

Prime Office Cap Rates (%)

0%

2%

4%

6%

8%

10%

12%

Max* Min* Current Average

APAC/China AmericasEurope

(*max/min/avg refer to 2007-2017)

Source: Real Capital Analytics, Altus Insite Investment Trends Survey, Cushman & Wakefield

Current = 2017Q4

Spreads Are Still Attractive

Prime Office Cap Rates Spread to 10-Year Gov’t Bond (bps)

-200

-100

0

100

200

300

400

500

600

700

Max* Min* Current 2016

APAC/China AmericasEurope

(*max/min refer to 2007-2017)

REVATHI GREENWOOD

Americas Head of Research

U.S. Real Estate Outlook:


WEBINAR

JANUARY 2018

Three Key Drivers

Investor

Interest

CRE

FundamentalsLong term

structural drivers

Source: NCREIF, Cushman & Wakefield Research

Performance Across Real Estate Sectors

NCREIF Property Index Total Returns (%)

6.1% 6.1%

7.2%

4.9%

7.5%

10.2%

9.2%

13.2%

9.2%

11.1%

7.0%

6.2%

13.1%

6.0%5.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

All Property Types Apartment Industrial Office Retail

10Y CAGR 5Y CAGR 2017

Source: RCA, Cushman & Wakefield Research

Deals over $5 million

Too Expensive?

RCA Commercial Property Price Index: Jan 2000 – December 2017December 2006 = 100

40

60

80

100

120

140

160

Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17

Multifamily Retail Industrial Office - CBD Office - Suburban

Source: Axiometrics, Cushman & Wakefield Research

Note: effective rent growth for multifamily

• New supply

primarily in

Gateways

• Secondary

markets see

less softening

• Absorption is

strong; supply

response

bringing

markets into

balance

• Slower rent

growth in near-

term

• Rent growth

decelerating as

supply responds

• Employment

growth slows but

remains elevated

historically and

relative to CBD

• Strong renter

demand expected

to absorb peak

deliveries as

permitting slows

• Gradual rebound

in rent growth,

declining vacancy

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2015 2016 2017 2018 2019

CBD Office

13.6%

13.8%

14.0%

14.2%

14.4%

14.6%

14.8%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2015 2016 2017 2018 2019

Suburban Office

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2015 2016 2017 2018 2019

Industrial

4.7%

4.8%

4.9%

5.0%

5.1%

5.2%

5.3%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

2015 2016 2017 2018 2019

Multifamily

CRE Fundamentals Solid With Substantial Differentiation

VacancyAsking rent growth


Demand Slows Just as New Supply Comes Online

U.S. Office Sector Fundamentals

Vacancy Bottoming Forecast

12.0%

12.5%

13.0%

13.5%

14.0%

14.5%

15.0%

15.5%

0.0

5.0

10.0

15.0

20.0

25.0

Net Absorption (msf) Completions (msf) Vacancy

12.0%

12.4%

12.8%

13.2%

13.6%

14.0%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2016 2017 2018 2019

Net Absorption (msf) Completions (msf) Vacancy


Note: Rankings based on the 40 largest new office leasing deals by year in all reported major markets.

Who Is Driving Demand: New Office Leasing Trends by Industry

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Energy

Insurance

Creative Industries

Legal

Government

Healthcare & Life Sciences

Financial Services

Business Services

High Tech

2017 2016 2015 2014

Next Two Year Purchasing Power vs. Millennial Population GrowthPercent (%)

new york

los angeles

chicago

washingtonboston

san francisco

orange county

oakland

newark NJ

san jose

atlanta

ft lauderdaletampa

orlando

charlotte

seattle

san diego

portland

sacramento

minneapolis

denver

baltimore

cleveland

cincinnati

columbus

philadelphia

indianapolis

milwaukee

houstondallas

miami

phoenix

las vegas

austin

palm beach

ft worth

san antonio

nashville

raleigh

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5%

2Y

R

Mill

ennia

l P

op

ula

tio

n G

row

th F

ore

ca

st

2YR GDP per Capita Growth Forecast

National

Source: Moody’s Analytics Forecasts, Cushman & Wakefield Research

Which Cities Are Magnets for Talent?

Cities for Amazon HQ2 Shortlist


Deconstructing Construction

44% of the Country’s New Supply Occurring in These Markets

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

U/C Preleased % Inventory U/C Available % Inventory Market Vacancy Rate U.S. Vacancy

Construction U.S. Average: 2.0%

Vacancy% of inventory

Retail and Industrial

Retail Apocalypse?

Source: Costar Group, Cushman & Wakefield Research

Online Not Killing Neighborhoods

Neighborhood/Community Centers eCommerce Resistant

Core Tenancy of

Neighborhood/Community Centers

• Grocery: Traditional, Organic, Ethnic, Discount, Niche

• Restaurants

• Off-Price Apparel

• Service Related Retail

• Medical Retail

• Personal Services

Overall Vacancy

8.0%

Class A Vacancy

4-5.0%

Class B Vacancy

7-9.0%

Class C Vacancy

13-16.0%

NUMBER OF

U.S. MALLS

2007: 1,350

2017: 1,150

2027: 850


Seriously, What Is Really Happening?Radical Shifts in Retail

Retrenchment & Reinvention

Greater Bifurcation on Basis of Class

Over Retailed

Marketplace

Acceleration of

NewCommerce

Race to the

Bottom

Discounting

Shifting

Consumer

Spending

Patterns

(Millennials)

Radical Shifts in Retail

Retrenchment & Reinvention

Greater Bifurcation on Basis of Class

Source: U.S. Census Bureau, Company filings, Federal Reserve, Cushman & Wakefield Research

Retail’s Pain Is Industrial’s Gain

Growth Rates are Accelerating

Online Sales Are UnderstatedRetail Sales ($, Billions) & eCommerce Penetration (%)

Top 1,000 Online Retailers’ Sales Growth by Category

2016 YoY Sales Growth

0%

2%

4%

6%

8%

10%

12%

14%

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450eCommerce Sales

eCommerce Penetration

-5%

0%

5%

10%

15%

20%

25%

30%

Labor Market and Supply Chain in Flux

= Amazon warehousing facility

= Recently closed Kmart, J.C. Penney, Macy’s or Sears

53% Amazon accounted for over

half of all online sales growth

in the U.S. in 2016

Source: Bloomberg, Amazon, J.C. Penny’s, Macy’s, Search, Cushman & Wakefield Research

…And Specifically Amazon


Industrial Sector Dynamics

Absorption and Rents Have Reached All-Time Highs

4Q Trailing Average

Vacancy will Slowly Rebalance

Vacancy Rate, %

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

0

10

20

30

40

50

60

70

80

Net Absorption, MSF Weighted Asking Rent, $ PSF

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Overall Vacancy Rate

10-Year Historical Average

Source: Cushman & Wakefield

Industrial Sector Dynamics

0

5

10

15

20

25

30

Speculative Build-to-Suit

2017 Deliveries by Type

Deliveries (MSF), Vacancy (YoY Chg., bps)

+10 basis points

+50

-30 -130

+40

+230 -90 -110 +60 -10 -120 +110 -180 +110 -80 +60 -100

+80 +30 +40 +30 -100 -110 -20 -20

Source: JCHS, Cushman & Wakefield Research

Millions of New Renter Households Emerging

Homeownership Trends Will Determine Extent of Current Undersupply

2.5

6.3

0.8

4.7

8.7

2.9

7.1

11.2

5.2

9.4

13.5

7.4

Constant Homeownership Falling Homeownership Rising Homeownership

2020 2025 2030 2035

Source: Axiometrics, Cushman & Wakefield Capital Markets

Rising Inventory

Current Vacancy & One Year Forward Increase in Inventory, Top 25 Markets by Inventory

0%

1%

2%

3%

4%

5%

6%

7%

Vacancy Rate 2017 Q4 Projected Increase in Inventory 2018 Q4

Source: Axiometrics, Cushman & Wakefield Capital Markets

Apartment Market Momentum

2 Bedroom Effective Rent to Median Family Income Ratio, 2017

20% 20% 20% 21% 21% 21% 21%24% 24% 24% 24%

27%28%

31%

39%42%

45%46%

Key Takeaways

Luxury apartment Gateway office

commodity A

Technology

driven office

Medical office

Last mile

logistics

Data centers Multifamily:

Millennials/

Seniors

B/C Malls / Power centers

Food halls/

experiential

retail

Secondary

market infill

industrial

Class A Malls in

secondary markets

Cold storage

Discount

retail

NNN drug stores

Traditional bulk

warehouse

Class A

warehouse

Secondary markets/sunbelt:

Office, Class A shopping

LO

W IN

VE

ST

OR

AP

PE

TIT

E

HIG

H I

NV

ES

TO

R A

PP

ET

ITE

WEAK LONG TERM STRUCTURAL GROWTH STRONG LONG TERM STRUCTURAL GROWTH

Source: Cushman Wakefield Research, Boston Consulting Group, RCLCO

?

NOBLE CARPENTER

President Capital Markets, Americas

Investment Strategies 2018/19

JANUARY 2018


Investment Ideas for 2018/19

Idea Status Comment

Buy

Momentum

Markets with accelerating job growth & disciplined new supply

(e.g. Charlotte, Minneapolis, Phoenix, Northern Virginia)

Niche sectorsSelf-storage, medical office, student housing, data centers – less cyclical.

Driven more by demographics. Offer safer yields during a downturn.

eCommerce &

Last Mile

eCommerce continues to grow furiously. Over 2.3 billion sqft of warehouse space

needed by 2035. Population centers are almost a can’t miss.

Smaller/Tier 2

Cities

Gateway cities bumping up against labor shortages.

Secondary/Tier 2 cities have more room to run & will emerge as new growth leaders.

Demographic

shifts

People drive demand. Sunbelt markets lead in net migration (e.g. Miami, Dallas, Atlanta, Tampa) –

offer some of the strongest risk-adjusted returns.

Blended

Returns

Tier 1 cities are safest, but offer little yield. Diversify into more markets/product types (e.g.

Manhattan Office + Indianapolis Industrial + Data center) to achieve a higher blended return.

Experiential

Retail

Food-centric retail, restaurants and bars, health & fitness in Class A locations are thriving.

Stay away from anything that is achievable from behind a computer.

Symbols: Green = attractive investment opportunities; Orange equals caution; Red = reduce your position

Source: Cushman & Wakefield

Investment Ideas for 2018/19

Idea Status Comment

CoworkingHistorically, not recession resilient. It’s a strong engine now and it’s not a fad,

but be careful not to become overly exposed.

Building late in

the cycleBe extra cautious with office markets that are potentially overbuilding this late in the cycle.

Sell to

aggressive

foreign capital

Insatiable foreign demand for core assets - sometimes ignoring the fundamentals,

simply parking cash. Sell to them and find better yield elsewhere.

Luxury

apartmentsBuilding too many. Not everyone is rich, most are not.

Mid-quality

Office

The new construction cycle is going to create pain for mid-quality office.

If it can’t be upgraded to meet today’s tastes & preferences, let someone else deal with it.

Traditional

Retail11,000 more stores expected to close in 2018. Retail secular stress continues.

Symbols: Green = attractive investment opportunities; Orange equals caution; Red = reduce your position

Q&A

U.S. Real Estate Outlook:


WEBINAR

JANUARY 2018

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