THE GLOBAL ECONOMY, GLOBAL CHALLENGES & U.S. REAL ESTATE TIMOTHY H. SAVAGE, PH.D. SENIOR MANAGING ECONOMIST PRINCIPAL DATA SCIENTIST

THE GLOBAL ECONOMY, GLOBAL CHALLENGES & U.S. REAL ESTATE TIMOTHY H. SAVAGE, PH.D. SENIOR MANAGING ECONOMIST PRINCIPAL DATA SCIENTIST

GROWTH SLIGHTLY BETTER IN THE NEXT 2 YEARS Source: Macrobond, Oxford Economics, CBRE Econometric Advisors, January 2018.

WITH SOME MILD FISCAL EXPANSION Contraction Expansion Expansion Source: Macrobond, Oxford Economics, CBRE Econometric Advisors, January 2018.

BUT CORE INFLATION REMAINS WEAK 3% Target 2% Target Source: Oxford Economics, CBRE Econometric Advisors, January 2018.

GOLDILOCKS IS STILL HERE

UNEMPLOYMENT: A GOOD, CLEAR CYCLICAL INDICATOR 3y 8m 7y 7m 9y 6m 11y 6y 4m 10y+ Source: CBRE Econometric Advisors and Macrobond, CBRE Research.

BUT HOW LOW CAN YOU GO? Source: CBRE Econometric Advisors and Macrobond, CBRE Research, Q4 2017.

WORLD IN GRIP OF MASSIVE LABOR SUPPLY SHOCK Fall of Communism Source: IMF World Economic Outlook, CBRE Econometric Advisors.

GOLDILOCKS IS STILL HERE

SO ARE THE BEARS

WAGE GROWTH SPOOKS MARKETS Growth Rate, (% Y/Y, 3MA) 6 5 4 3 2 1 US Wage Growth 0 Source: Current Population Survey, Bureau of Labor Statistics, and Federal Reserve Bank of Atlanta Calculations, February 2018.

WHY? UNEVEN PRODUCTIVITY GROWTH Annualized Growth (%) 10 8 6 4 2 0 (2) (4) (6) Source: Federal Reserve Bank of Atlanta, February 2018.

REAL INTEREST RATES NEGATIVE IN 2018 Source: Oxford Economics, CBRE Econometric Advisors, January 2018.

QUANTITATIVE EASING IS FADING Trillions Outstanding ($) Forecast Fed BoJ ECB BoE Total 14 12 10 8 6 4 2 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 Source: Oxford Economics, CBRE Research, January 2018.

THE END OF CHIMERICA?

WHERE DOES THIS LEAVE REAL ESTATE?

OFFICE CYCLE: MUTED Source: CBRE Econometric Advisors and Macrobond, CBRE Research.

RETAIL CYCLE: MUTED Source: CBRE Econometric Advisors and Macrobond, CBRE Research.

MULTIFAMILY CYCLE: STRUCTURAL BOOST Source: CBRE Econometric Advisors and Macrobond, CBRE Research.

INDUSTRIAL CYCLE: GAINING FROM RETAIL Source: CBRE Econometric Advisors and Macrobond, CBRE Research.

THE CHICAGO BEARS?

OFFICE CYCLE: CHICAGO IN LINE Unemployment (%) Civilian Unemployment Rate Office Rent Inflation (%) Chicago Office Rent Inflation (%) 10 9 8 7 6 5 4 3 Y-o-Y Rent Growth (%) 15 10 5 0-5 -10 2 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017-15 Source: CBRE Econometric Advisors and Macrobond, CBRE Research.

RETAIL CYCLE: CHICAGO TRAILING Unemployment (%) U.S. Unemployment TW Rent Index Chicago TW Rent Index Y-o-Y Rent Growth (%) 10 10 9 5 8 7 0 6-5 5-10 4 3-15 2-20 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Source: CBRE Econometric Advisors and Macrobond, CBRE Research.

MULTIFAMILY CYCLE: CHICAGO ALL CAUGHT UP Unemployment (%) U.S. Unemployment TW Rent Index Chicago TW Rent Index Y-o-Y Rent Growth (%) 12 12 10 10 8 8 6 4 6 2 0 4-2 -4 2-6 -8 0-10 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CBRE Econometric Advisors and Macrobond, CBRE Research.

INDUSTRIAL CYCLE: UPSIDE POTENTIAL Unemployment (%) Civilian Unemployment Rate Industrial Rent Inflation Chicago Industrial Rent Inflation Y-o-Y Rent Growth (%) 12 10 8 6 4 2 0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 20 15 10 5 0-5 -10-15 -20 Source: CBRE Econometric Advisors and Macrobond, CBRE Research.

BUILD IT AND THEY WILL COME

NEW SUPPLY IS RAMPING UP NATIONALLY Source: CBRE Econometric Advisors, February 2018.

CHICAGO SUPPLY: AT RECORD HIGHS (DRIVEN BY MF) Completions Index (2002 = 100 Total) 180 160 140 120 100 80 60 40 20 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: CBRE Econometric Advisors, February 2018. Office Industrial Apartment Retail

RETAIL COMPLETIONS APPEAR HISTORICALLY LOW Source: CBRE Econometric Advisors, Q4 2017.

YET WITH IMPACT OF ECOMMERCE Source: CBRE Econometric Advisors, Q4 2017.

U.S. COMMERCIAL REAL ESTATE INVESTMENT

2007.1 2007.2 2007.3 2007.4 2008.1 2008.2 2008.3 2008.4 2009.1 2009.2 2009.3 2009.4 2010.1 2010.2 2010.3 2010.4 2011.1 2011.2 2011.3 2011.4 2012.1 2012.2 2012.3 2012.4 2013.1 2013.2 2013.3 2013.4 2014.1 2014.2 2014.3 2014.4 2015.1 2015.2 2015.3 2015.4 2016.1 2016.2 2016.3 2016.4 2017.1 2017.2 2017.3 2017.4 CHICAGO COMMERCIAL REAL ESTATE INVESTMENT USD Billion, floating exchange rates 8 7 6 5 4 3 2 1 300 250 200 150 100 50 0 - Apartment (L) Hotel (L) Industrial (L) Office (L) Retail (L) Rolling 4-Qtr Global Average (R.) Source: CBRE Research, Real Capital Analytics, Q4 2017.

CHICAGO CAP RATES TIGHTER Cap Rate Comparison 6.5 Cap Rate(%) 6.0 5.5 5.0 4.5 4.0 Office Industrial Apartment Retail Chicago National Source: CBRE Research, CBRE Cap Rate Survey, Q4 2017.

AND TIGHTER IN H2 2017 Cap Rate Comparison 6.0 5.8 5.6 5.4 5.2 5.0 4.8 4.6 4.4 4.2 4.0 Cap Rate(%) Office Industrial Apartment Retail Chicago H1 2017 Chicago H2 2017 Source: CBRE Research, CBRE Cap Rate Survey, Q4 2017.

DON T FIGHT THE FED

INTEREST RATES ARE KEY WHITHER RATES? (BERNANKE S CONUNDRUM) Interest Rates Fed Funds & 10-Year Treasury INTEREST RATES FED FUNDS AND 10-YEAR TREASURY 10 8 6 4 2 0 (2) 1990 1991 1993 1994 1996 1997 1999 2000 2002 2003 2005 2006 2008 2009 2011 2012 2014 2015 2017 2018 Gap Effective Federal Funds Rate 10-Year Treasury Constant Maturity Rate Source: CBRE Research, Federal Reserve Bank of St. Louis, February 2018.

CONCLUSIONS IF THIS SOUNDED COMPLICATED... IT IS. GROWTH OUTLOOK HAS IMPROVED U.S. LEADS. MONETARY POLICY IS TIGHTENING U.S. LEADS. LARGE GEOPOLITICAL SHIFTS LEADS. WHAT WEATHERS THIS STORM? IS IT TIME TO EASE BACK ON SUPPLY?

Q&A