U.S. Property Market Outlook, 2013Q1 Jim Costello, Managing Director CBRE Americas Research Investment Research
CBRE Page 2 Outlook for the Real Side of the Economy
Operationally, what do Research Teams do? Strategy Provide input to fund strategies, ensuring that they are consistent with house view, providing input into capital allocation decisions Business Development Support new and existing product with business cases and identification of opportunities. Client Relations / Marketing Strengthen relationships with clients Investment Analysis Input to the decision on major acquisitions, developments and asset reviews and ensure assumptions are consistent with the house view Information Management Maintain libraries and coordinate databases of information for use by the business. CBRE Page 3
The Future of Manufacturing Source: Wikipedia CBRE Page 4
National Economic Summary 2004 to 2006 2011 2012 2013 2014 to 2017 Employment G rowth 1.6 1.5 1.6 1.6 1.3 Retail Sales G rowth 6.0 7.5 3.8 3.3 4.4 Inflation 3.1 3.3 1.8 2.4 2.5 Ten Year Treasury 4.5 2.0 1.9 2.8 4.4 Unemployment Rate 5.1 8.7 7.8 7.6 6.1 GDP Growth 3.1 2.0 2.0 2.5 3.6 Sources: Moody s Analytics, CBRE Research Calculations CBRE Page 5
U.S. Back to Peak Jobs in 2014: A Year Later in the Midwest Employment Index, 1997q1 = 100 120 Forecast 115 110 105 100 95 90 1999.1 1999.4 2000.3 2001.2 2002.1 2002.4 2003.3 2004.2 2005.1 2005.4 2006.3 2007.2 2008.1 2008.4 2009.3 2010.2 2011.1 2011.4 2012.3 2013.2 2014.1 2014.4 2015.3 2016.2 2017.1 2017.4 Chicago Midwest U.S. Sources: Moody s Analytics, CBRE Research Calculations CBRE Page 6
Chicago Losing Ground as a Manufacturing Hub % Share of Jobs in Manufacturing 32 28 Forecast 24 20 16 12 8 4 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Chicago Midwest U.S. Overall Sources: Moody s Analytics, CBRE Research Calculations CBRE Page 7
Nationally, Manufacturing Jobs at the Peak Jobs x 1 million Industrial Production 2007 = 100 20 19 18 17 16 15 14 13 12 11 10 1970 1971 1973 1975 1977 1978 1980 1982 1984 1985 1987 1989 1991 1992 1994 1996 1998 1999 2001 2003 2005 2006 2008 2010 2012 2013 2015 2017 120 110 100 90 80 70 60 50 40 30 20 Manufacturing Jobs Industrial Production Sources: Moody s Analytics, CBRE Research Calculations CBRE Page 8
Greatest Job Momentum by Industry Professional and business services, Construction, Health Care, and Education saw the greatest job growth relative to their share of total jobs. Construction and Education added the greatest number of jobs relative to their low share of the current total. Retail Trade and Government jobs were the worst performers of the month. Sources: BLS, CBRE Research Calculations CBRE Page 9
Lower Unemployment Rate is Not Under Best Circumstances The unemployment rate moved down a tick to 7.6% in March. This is not entirely good news nearly 500,000 people fell out of the labor force last month. The labor force participation rate dropped.2% to 63.3%, the lowest level since 1979. Sources: BLS, CBRE Research Calculations CBRE Page 10
CBRE Page 11 The Financial Side of the of the Economy
Baseline Outlook: Everything Works out O.K. % Rate 16 14 Forecast 12 10 8 6 4 2 0-2 -4 1970.1 1971.3 1973.1 1974.3 1976.1 1977.3 1979.1 1980.3 1982.1 1983.3 1985.1 1986.3 1988.1 1989.3 1991.1 1992.3 1994.1 1995.3 1997.1 1998.3 2000.1 2001.3 2003.1 2004.3 2006.1 2007.3 2009.1 2010.3 2012.1 2013.3 2015.1 2016.3 Ten Year Treasury Inflation Sources: Federal Reserve Bank, Moody s Analytics CBRE Page 12
Asset Values are Climbing Appraised Values, 2005 q1 = 100 220 200 180 160 140 120 100 80 60 40 2000.1 2000.3 2001.1 2001.3 2002.1 2002.3 2003.1 2003.3 2004.1 2004.3 2005.1 2005.3 2006.1 2006.3 2007.1 2007.3 2008.1 2008.3 2009.1 2009.3 2010.1 2010.3 2011.1 2011.3 2012.1 2012.3 2013.1 Apartment Industrial Office Retail Source: NCREIF 2013q1 CBRE Page 13
Composition of Value Growth in Apartments Apartment Year over Year Change in Value 40 30 20 10 0-10 -20-30 -40 Income Contribution Cap Rate Contribution Value Growth Source: NCREIF 2013q1, CBRE Research Calculations CBRE Page 14
Composition of Value Growth in Offices Office Year over Year Change in Value 40 30 20 10 0-10 -20-30 -40 Income Contribution Cap Rate Contribution Value Growth Source: NCREIF 2013q1, CBRE Research Calculations CBRE Page 15
Commercial Real Estate Is Still A Good Relative Value Cap Rate Spreads Remain Wide 10 9 8 7 6 5 455 bps 57 bps 4 3 446 bps 2 1 2000Q2 2000Q4 2001Q2 2001Q4 2002Q2 2002Q4 2003Q2 2003Q4 2004Q2 2004Q4 2005Q2 2005Q4 2006Q2 2006Q4 2007Q2 2007Q4 2008Q2 2008Q4 2009Q2 2009Q4 2010Q2 2010Q4 2011Q3 2012Q1 2012Q4 10-Year UST Rate NCREIF Transaction Cap Rate Moody's Baa Corporate Bond Rate Source: Moody s Economy.com, NCREIF, CBRE Research CBRE Page 16
Cap Rate Spreads Tend to Compress During Periods of Rising Rates 600 500 400 300 200 100 0-100 -200 Basis Point Change During Periods of Rising Treasury Rates Mar '78 to Sep '83 Jun '83 to Jun '84 Mar '87 to Mar '89 Dec '93 to Dec '94 Dec '98 to Mar '00 Mar '04 to Jun '06 10-Year UST Moody's Baa Corporate Bond NCREIF Appraisal Cap Rate Source: Moody s Economy.com, NCREIF, CBRE Research CBRE Page 17
CBRE Page 18 Property Market Trends
Vacancy and Availability Rates Q1 2013 Q1 2012 Past Cyclic High Natural Rate Year Back to "Natural Rate" Office Vacancy Rate 15.3 16.0 16.8 / 2010 13 to 15 2013 Industrial Availability Rate 12.4 13.4 14.5 / 2010 9 to 10 2015 Retail Availability Rate 12.5 13.1 13.2 / 2011 9 to 10 2017 Multi-Housing Vacancy Rate 5.0 5.2 7.41 / 2009 5 to 6 2010 Full Service Hotels* Vacancy Rate 32.9 33.8 43 / 2009 34 to 38 2010 *Forecast values of 2012Q4, Hotels report an occupancy rate normally, this figure is the inverse for purposes of comparison to other asset classes Sources: CBRE-EA 2013Q1 CBRE Page 19 19
CBRE Page 20 Office
Significant Excess Capacity Remains in Office Market Occupied Square Feet per Worker Inflation Adjusted TW Rent Index 230 40 Forecast 225 38 220 215 210 205 200 195 190 185 180 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 35 33 30 28 25 Occupied sqft per Worker Inflation Adjusted Rents Sources: CBRE-EA 2013Q1 CBRE Page 21
The Demand for Suburbs is not what it was Net Absorption as % of Stock 8 Forecast 6 4 2 0-2 -4-6 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Downtown Suburban Sources: CBRE-EA 2013Q1 CBRE Page 22
Office Performance Suggests Limited Supply Ahead Office Completions & Net Absorption, SF x 1MM Vacancy Rate, % 150 22 100 Forecast 19 50 16 0 13-50 10-100 7-150 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Completions Net Absorption Vacancy Rate 4 Sources: CBRE-EA 2013Q1 CBRE Page 23
CBRE Page 24 Industrial
Skewed Demand for Warehouse Subtypes Warehouse Net Absorption, sqft x 1 million 250 200 150 100 50 0-50 - 100-150 - 200-250 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* Modern Assets 450k sqft + Rest of the Warehouse Market Warehouse Net Absorption *2013 Year to Date Sources: CBRE Research Calculations CBRE Page 25
Industrial Availability Varies by Size Range Availability Rate, % 16 14 12 National Average 10 8 6 4 2 0 10K- 49K 50K- 99K 100K- 199K 200K- 399K 400K+ Sources: CBRE-EA 2013Q1 CBRE Page 26
Industrial Supply Rising to meet Demand Net Absoption and Construction x 1 million Availability Rate, % 400 300 Forecast 16 14 200 12 100 10 0 8-100 6-200 4-300 2 Construction Net Absorption Availability Sources: CBRE-EA 2013Q1 CBRE Page 27
CBRE Page 28 Retail
E-Commerce Taking a Bite out of Local Sales Year Over Year Growth 40% E-Commerce Share of Core Sales 8% 35% 7% 30% 25% 20% 15% 10% 5% 0% -5% -10% 6% 5% 4% 3% 2% 1% 0% Yr/Yr Growth in E-Commerce Yr/Yr Growth in Core Share of Core Sources: Bureau of the Census, CBRE Research Calculations CBRE Page 29
Retailers are Shrinking their Footprints 200 180 Average Store Square Feet (x 1,000) 160 140 120 100 80 60 40 20 0 Best Buy Lowe's Office Depot Target Wal- Mart Sources: CBRE-EA/FW Dodge Pipeline, CBRE Research Calculations 2008 2009 2010 2011 2012 CBRE Page 30
Perversely, Retail Construction Grows Quickly Net Absoption and Construction x 1 million Availability Rate, % 100 14 Forecast 80 12 60 10 40 8 20 0 6-20 4-40 2 Construction Net Absorption Availability Sources: CBRE-EA 2013Q1 CBRE Page 31
CBRE Page 32 Multi-Housing
Home Ownership Rate falls to early 1990s Levels US Homeownership Rate, % Households x 1 million 70 45 69 68 67 66 65 64 63 62 61 60 40 35 30 25 20 15 10 5 0 Homeownership Rate % (right) Rental Households Sources: Bureau of the Census, CBRE Research Calculations CBRE Page 33
The Next 7 Years Are Not Like the Last 2 Average annual income growth, % 0 2 4 6 8 10 Atlanta Boston San Francisco Los Angeles Washington, DC Phoenix Last 15 years Last 2 years Next 7 years New York Average Chicago Sources: CBRE-EA 2013Q1 CBRE Page 34
Multi-Housing Vacancy Stable Moving Forward Net Absoption and Construction, units x 1,000 Vacancy Rate, % 400 8 Forecast 300 7 200 6 100 5 0 4-100 3-200 2 Construction Net Absorption Availability Sources: CBRE-EA 2013Q1 CBRE Page 35
Jim Costello Jim Costello joined CBRE in 1995 with economic and real estate research experience developed through work with government agencies in the Chicago area. Jim manages the Investment Strategy and Consulting group within the America s Research team. This group delivers investment opinions and insights to institutional investors with the aim of helping them develop a house view. Mr. Costello holds a BA in Political Science from the University of Chicago and a MA in Economics. jim.costello@cbre.com CBRE Page 36
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