ABA Commercial Real Estate Lending Committee Commercial Real Estate Outlook The Good, the Bad and the Ugly January 16, 2019 Rob Strand Senior Economist American Bankers Association aba.com 1-800-BANKERS
The Good
Inflation-Adjusted GDP Growth 3% Bank Economists Forecast 2% 1% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: U.S. Bureau of Economic Analysis
Business and Consumer Optimism 110 100 90 Recession Small Business Optimism Index 80 70 60 Index of Consumer Sentiment 50 2005 2007 2009 2011 2013 2015 2017 Source: Nat l Federation of Independent Business, University of Michigan
Unemployment Rate 15% 10% Unemployed Underemployed 7.6% 5% 3.9% 0% 1970 1980 1990 2000 2010 2020 Source: U.S. Bureau of Labor Statistics Bank economists predict 3.6% this year.
Unemployed Workers per Job Opening 6 4 2 0 2001 2003 2005 2007 2009 2011 2013 2015 2017 2018 Source: U.S. Bureau of Labor Statistics
Personal Income Seasonally-Adjusted Quarterly Growth Rate on Quarter Average 12% 6% 0% -6% -12% 2001 2005 2009 2013 2017 Source: U.S. Dept. of Commerce, Bureau of Economic Analysis
Wage Growth 3-Month Moving Year/Year Average Growth 3.5% Bank Economists Forecast 3.0% 2.5% 2.0% 1.5% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: U.S. Bureau of Labor Statistics
Household Spending in Line With Income Y/Y percent change 6% 4% After-tax Income Spending 2% 0% 2015 2016 2017 2018 Source: U.S. Bureau of Economic Analysis
Contraction Expansion Business Indexes 70 107 60 101 50 95 40 Industrial Production ISM Manufacturing ISM Non-Manufacturing 30 2001 2005 2009 2013 2017 Sources: Federal Reserve, Institute for Supply Management 89 83
Small Business Optimism 35% 30% Recession 110 105 25% 20% 15% 10% Small Business Optimism Index 100 95 90 5% Small businesses that expect to expand 0% 2005 2007 2009 2011 2013 2015 2017 2018 85 80 Source: National Federation of Independent Business
Business Investment 16% Inflation-Adjusted Growth 12% Pre-2007 Average 8% Fixed Investment Inventories 4% 0% -4% -8% 1960s 1980s 2000s 2011 2013 2015 2017 18Q3 Source: U.S. Bureau of Economic Analysis
The Bad
Small Businesses Struggle to Find Skilled Labor Businesses Reporting Few or No Qualified Applicants 54% 25% 31% 38% 2010 2012 2014 2018 Source: National Federation of Independent Business
FOMC 2019 Projections Number of Rate Hikes in 2019 5 4 December 2018 September 2018 3 2 1 0 0 1 2 3 4 5 6 Source: FOMC FOMC Participants
Federal Reserve Balance Sheet ($Billions) $4 $3 $2 $1 Liquidity Programs Agency MBS and Debt U.S. Treasury Securities $0 2008 2008 2009 2010 2011 2013 2014 2015 2016 2017 2018 Source: Federal Reserve
Interest Rates on U.S. Treasuries 15% 12% 9% 10 Year 2 Year 3 Month 6% 3% 0% 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 Source: Federal Reserve
National Financial Conditions Index 2 1 Tighter 0-1 Looser -2 2004 2008 2012 2016 Source: Federal Reserve Bank of Chicago
Home Price Changes 16% 12% 8% 4% 0% -4% -8% -12% 1987 1992 1997 2002 2007 2012 2017 Source: S&P CoreLogic Case-Shiller U.S. National Home Price Index
Housing Prices Outpacing Wage Growth 240 Index, Q2 1996=100 220 200 180 160 Home Price Index 140 120 Wages Index 100 80 1992 1995 1998 2001 2004 2007 2010 2013 2016 Source: U.S. Census Bureau, U.S. Bureau of Labor Statistics
The Ugly
Compounding Risks Source: Wall Street Journal
Uneven Income Growth Real Mean Household Income* Index, 1990=100 140 Lowest Quintile Second Quintile Third Quintile Fourth Quintile Highest Quintile 130 120 110 100 90 1990 1994 1998 2002 2006 2010 2014 Source: U.S. Census Bureau 2017-Adjusted Dollars
Non-financial Corporate Debt 75% Percent of GDP 50% 25% 1952 1960 1968 1976 1984 1992 2000 2008 2016 Source: Bank for International Settlements
U.S. Federal Budget Balance $ Billions $300 $0 Projected -$300 -$600 -$900 -$1,200 -$1,500 2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 Source: Congressional Budget Office, Wells Fargo
Federal Debt Held by the Public 150 % of GDP Projected 100 50 Civil War Great Depression World War I World War II 0 1790 1810 1830 1850 1870 1890 1910 1930 1950 1970 1990 2010 2030 Source: Congressional Budget Office
Net Interest Outlays 7% 6% 5% Net Interest as a Share of GDP 4% 3% 2% 1% 0% 1980 1988 1996 2004 2012 2020 2028 2036 2044 Source: Congressional Budget Office (June 2018)
Outlook Current economic fundamentals remain positive. Risks to the economy are compounding. Policy uncertainty trade, government shutdown, fiscal, global is creating drags. Geopolitical turmoil is always a big risk.
Commercial Real Estate
Dodge Momentum Index 200 175 150 125 100 75 50 2003 2005 2007 2009 2011 2013 2015 2017 2019 Source: McGraw Hill Dodge Data & Analytics
Nonresidential Construction Spending $1,200 $Billions $1,000 $800 $600 $400 $200 $0 Private Public 2002 2004 2006 2008 2010 2012 2014 2016 2018 October Source: U.S. Department of Commerce
Net Operating Income Year/Year Growth 10% 5% 0% -5% -10% -15% Apartment Retail Industrial Office 2003 2005 2008 2019 2011 2013 2015 2017 2018 Source: National Council of Real Estate Investment Fiduciaries
CRE Capitalization Rates 10% 9% 8% 7% 6% 5% 4% 2001 2003 2005 2008 2019 2011 2013 2015 2017 2018 Source: Real Capital Analytics
Commercial Property Price Index 175 150 125 100 75 50 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Real Capital Analytics
Property Prices Year/Year Change 20% 10% 0% -10% -20% -25% Apartment Retail Industrial Office, CBD Office, Suburban 2003 2005 2008 2019 2011 2013 2015 2017 2018 Source: Mortgage Bankers Association
Contributions to Commercial Property Price Changes 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 Source: National Council of Real Estate Investment Fiduciaries