THE ECONOMY AND REAL ESTATE
GARY BARAGONA
DIRECTOR, RESEARCH & ANALYSIS
JANUARY 2014
GLOBAL RESEARCH AND CONSULTING
TOPICS COVERED
U.S. Economy
Southern California Economy
Mega-Trend: Workplace Strategy
Mega-Trend: E-Commerce
U.S. Property Market Fundamentals
Los Angeles Market Fundamentals
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GLOBAL RESEARCH AND CONSULTING
U.S. ECONOMY
GLOBAL RESEARCH AND CONSULTING
U.S. ECONOMY
 Economic growth will strengthen in 2014
 Jobs are everything
 Industrial indicators are solid
 Resurgent housing market
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GLOBAL RESEARCH AND CONSULTING
U.S. ECONOMIC EXPANSION OUTLOOK
Annual % Change
Real Private Consumption
Real GDP Growth
6%
FORECAST
4%
2%
0%
-2%
-4%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: HIS Global Insight
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GLOBAL RESEARCH AND CONSULTING
U.S. JOB GROWTH SLOW AND STEADY
U.S. Total Nonfarm Payroll, Annual Net Jobs (1000s)
FORECAST
Source: U.S. Bureau of Labor Statistics, Moody’s Analytics
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GLOBAL RESEARCH AND CONSULTING
RETURN TO PREVIOUS PEAK IN EARLY 2014
U.S. Total Nonfarm Payroll, (Millions of Jobs)
FORECAST
Source: U.S. Bureau of Labor Statistics, Moody’s Analytics
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GLOBAL RESEARCH AND CONSULTING
RECOVERY TRAILS PAST CYCLES
Monthly Job Growth Index (Business Cycle Peak=100)
Source: U.S. Bureau of Labor Statistics
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GLOBAL RESEARCH AND CONSULTING
GROWTH RATE VARIES BY REGION
Monthly Job Growth Index (Dec 2007=100)
Source: U.S. Bureau of Labor Statistics
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GLOBAL RESEARCH AND CONSULTING
TECH & ENERGY MARKETS LEADING
Office-Using Employment Outlook, CAGR 2013-2018
Source: U.S. Bureau of Labor Statistics (BLS): Current Employment Statistics (CES), Quarterly Census of Employment and Wages (QCEW); Moody's Analytics (ECCA) Estimates
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GLOBAL RESEARCH AND CONSULTING
U.S. INDUSTRIAL PRODUCTION
Industrial production is just shy of pre-recession levels
Source: Federal Reserve
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GLOBAL RESEARCH AND CONSULTING
U.S. IMPORTS & EXPORTS
Imports are stronger than they appear once oil is excluded
Source: U.S. Census Bureau
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GLOBAL RESEARCH AND CONSULTING
HOUSING PRICES CONTINUE TO GROW
S&P/Case-Shiller Home Price Index
Source: S&P Case-Shiller Index
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GLOBAL RESEARCH AND CONSULTING
RETAIL SALES
Housing Recovery Boosts Retail Sales
Source: U.S. Census Bureau
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GLOBAL RESEARCH AND CONSULTING
SOUTHERN CALIFORNIA ECONOMY
GLOBAL RESEARCH AND CONSULTING
POSITIVE BUT LACKLUSTER JOB GROWTH
Southern California: Year-Over-Year Employment Growth
FORECAST
Source: CBRE Econometric Advisors, Economy.com
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GLOBAL RESEARCH AND CONSULTING
SOUTHERN CALIFORNIA ECONOMY
Total Employment Forecast (in Millions)
90+ MONTHS TO
REACH PREVIOUS PEAK
WE ARE ONLY
HALF WAY THERE
Source: CBRE Econometric Advisors, Economy.com
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GLOBAL RESEARCH AND CONSULTING
SOUTHERN CALIFORNIA ECONOMY
Hospitality & leisure, construction, education & health services, professional & business services & technology will lead the
way
Source: CBRE Econometric Advisors, Economy.com
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GLOBAL RESEARCH AND CONSULTING
MEGA-TRENDS:
WORKPLACE STRATEGY & E-COMMERCE
GLOBAL RESEARCH AND CONSULTING
MEGA-TREND: WORKPLACE STRATEGY
Underutilized space and modern design slow occupancy growth
Source: CBRE Econometric Advisors, Moody’s Analytics
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GLOBAL RESEARCH AND CONSULTING
MEGA-TREND: E-COMMERCE
E-commerce will drive demand for industrial space and continue to reshape the retail market
Source: CBRE Econometric Advisors, Moody’s Analytics
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GLOBAL RESEARCH AND CONSULTING
U.S. PROPERTY MARKET FUNDAMENTALS
GLOBAL RESEARCH AND CONSULTING
PROPERTY SECTOR TRAJECTORY
2013 Q4
Past Cyclic
High
“Natural
Rate”
Year Back to
"Natural Rate"
15.0
16.8 / 2010
13 to 15
2013
Industrial Availability Rate
11.5
14.5 / 2010
9 to 10
2015
Retail Availability Rate
12.0
13.2 / 2011
9 to 10
2016
5.3
7.4 / 2009
5 to 6
2010
Office
Multifamily
Vacancy Rate
Vacancy Rate
Source: CBRE Research, CBRE Econometric Advisors
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GLOBAL RESEARCH AND CONSULTING
PROPERTY SECTOR TRENDS
 OFFICE
•
•
•
•
Urbanization & densification
Impact of workplace strategy
Investor interest in suburban, non-gateway markets
Tech markets leading the way
 INDUSTRIAL
•
•
•
•
Supply chain efficiencies
Peak manufacturing productivity
Impact of e-commerce
More speculative construction but still in check
 RETAIL
•
•
•
•
High-street retail still strong
E-commerce growing impact
Omni channel strategies
Shrinking retail footprints
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GLOBAL RESEARCH AND CONSULTING
U.S. OFFICE RENT CYCLE Q4 2013
Atlanta
Dallas (Suburban)
Orange County
San Diego
A
C
D
D
L
M
O
P
P
S
A
N
S
S
B
Seattle
Boston
D
H
W
L
N
Source: CBRE Research
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GLOBAL RESEARCH AND CONSULTING
RENT GROWTH LED BY TECH MARKETS
5-Year Annualized Rent Growth (%), Largest 20 Office Markets
Source: CBRE Econometric Advisors
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GLOBAL RESEARCH AND CONSULTING
OFFICE OUTLOOK
Completions, Net Absorption & Vacancy Rate
FORECAST
Source:
CBRE Research, CBRE Econometric Advisors
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GLOBAL RESEARCH AND CONSULTING
INDUSTRIAL OUTLOOK
Completions, Net Absorption & Availability Rate
FORECAST
Source:
CBRE Research, CBRE Econometric Advisors
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GLOBAL RESEARCH AND CONSULTING
RETAIL OUTLOOK
Completions, Net Absorption & Availability Rate
FORECAST
Source:
CBRE Research, CBRE Econometric Advisors
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GLOBAL RESEARCH AND CONSULTING
REAL ESTATE INVESTMENT TRENDS
 Increased global interest in U.S. markets
 2013 saw the beginning of interest rate increases. In
2014, look for the end of cap rate compression and a
new era of NOI growth.
 Expect improved economic performance to correspond
with interest rate increase
 Expect spreads to between primary & secondary
markets to compress
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GLOBAL RESEARCH AND CONSULTING
NATIONAL INVESTMENT SALES
Sales Volume ($ Billions)
Source: Real Capital Analytics
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GLOBAL RESEARCH AND CONSULTING
INTEREST RATE
U.S. Ten Year Treasury Bonds
FORECAST
Source: Federal Reserve
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GLOBAL RESEARCH AND CONSULTING
A RANGE OF OPINIONS
Q2 Survey of economists places the 10-year treasury at 3.5% at the end of 2014
Ten Year Treasury, %
5.5
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
2013.3 2013.4 2014.1 2014.2 2014.3 2014.4 2015.1 2015.2 2015.3 2015.4
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GLOBAL RESEARCH AND CONSULTING
CAP RATE FORECAST
Average CAP rates in all product types will remain flat in the near term
FORECAST
Source: CBRE Econometric Advisors, NCREIF
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GLOBAL RESEARCH AND CONSULTING
LOS ANGELES MARKET FUNDAMENTALS
GLOBAL RESEARCH AND CONSULTING
LOS ANGELES OFFICE OUTLOOK
Vacancy Rate & Avg Asking Lease Rate
FORECAST
Source: CBRE Research, CBRE Econometric Advisors
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GLOBAL RESEARCH AND CONSULTING
LOS ANGELES OFFICE
Market dynamics vary greatly on the submarket area
Source: CBRE Research
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GLOBAL RESEARCH AND CONSULTING
LOS ANGELES OFFICE
Market dynamics vary greatly on the submarket area
Source: CBRE Research
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GLOBAL RESEARCH AND CONSULTING
LOS ANGELES INDUSTRIAL OUTLOOK
Availability Rate & Avg Asking Lease Rate
FORECAST
Source: CBRE Research, CBRE Econometric Advisors
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GLOBAL RESEARCH AND CONSULTING
LOS ANGELES RETAIL OUTLOOK
Availability Rate & Avg Asking Lease Rate
FORECAST
Source: CBRE Research, CBRE Econometric Advisors
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GLOBAL RESEARCH AND CONSULTING
THE ECONOMY AND REAL ESTATE
GARY BARAGONA
DIRECTOR, RESEARCH & ANALYSIS
JANUARY 2014
GLOBAL RESEARCH AND CONSULTING