COMMERCIAL ECONOMIC ISSUES & TRENDS FORUM
COMMERCIAL REAL ESTATE:
2015 INVESTMENT OUTLOOK
LAWRENCE YUN, PhD
RICHARD M. GATTO
DONALD E. HUFFNER
ANDREW H. TROTTER, III
Chief Economist, Sr. VP
Executive Vice
President
Managing Director,
Head of Americas
Chief Investment
Officer
National Association
of REALTORS®
The Alter Group
AIG Global Real Estate
Centennial Holding
Company
Commercial Real Estate Trends
and Outlook
Lawrence Yun, Ph.D.
Chief Economist
NATIONAL ASSOCIATION OF REALTORS®
Presentation at:
NAR Annual Commercial Real Estate Forum
New Orleans, LA
November 7, 2014
Commercial Investment Sales of Large
Properties
(Properties valued at $2.5 million and over)
Federal Reserve Commercial Property
Price Index
GDP Rebound
in 2014 Q2 and Q3
GDP Still not Robust …
Below 3% for 9 straight years
Household Net Worth at All-Time High
Monetary Policy by Federal Reserve
(zero rate policy for 6 years!)
%
Federal Reserve Balance Sheet from
Quantitative Easing
$ million
10-year Treasury Yield
Non-worrisome CPI Inflation – Yet
COLA of 1.7% in 2015
Rising Renters’ and Homeowners’ Rent
Growth
(Above 3%)
Oil Price
REALTOR® Rent Survey –
Shows Rent Pressure
U.S. Dollar Strength vs Euro
U.S. Dollar Weakness vs Chinese Yuan
Monetary Policy
• Quantitative Easing … Finished
• Fed Funds Rate … hike in 2015 Q1/Q2
• Earlier Move to Tighten because of
Inflation Pressure
• Long-term Steady State Rate (2016
onwards) .. 10 year Treasury at 5.0%
• Mortgage Rates reaching 6% by 2016
Jobs
(8 million lost … 10 million gained)
In thousands
Weekly New Unemployment Insurance
Claims
In thousands
Job Market Comparisons by State
Fast Growing
States
1-year Growth
Rate
Slow Moving
States
1-year Growth
Rate
North Dakota
4.5
Michigan
0.7
Nevada
3.7
Alabama
0.6
Texas
3.4
Wyoming
0.6
Florida
2.9
South Dakota
0.3
Utah
2.9
Virginia
0.3
Colorado
2.8
New Jersey
0.1
Oregon
2.7
Illinois
0.0
Delaware
2.6
Alaska
0.0
West Virginia
2.5
New Mexico
-0.1
California
2.2
Vermont
-0.2
REALTOR® Markets & Deal Size
(Not $2.5 million Properties)
2013 CRE Lending Survey: Value of most recent sales transaction
> $10,000,000
$5,000,000 - $10,000,000
$2,000,000 - $5,000,000
$1,000,000 - $2,000,000
2%
1%
12%
17%
$500,000 - $1,000,000
$250,000 - $500,000
< $250,000
26%
22%
21%
Source: NAR
Small Banks Important to REALTORS®
Current sources of financing for commercial deals
3%
1%
National banks (“Big four”)
8%
Regional banks
11%
Local banks
17%
Credit unions
Life insurance companies
REITs
18%
Private investors
Public companies
Small Business Administration
4%
25%
6%
7%
Source: NAR
Other, please specify
NAR Member Commercial Activity Survey
2nd Quarter, 2014
• Sales volume rose 7% YoY
• Sales prices increased 3% YoY
• Cap rates averaged 8.3%
Main market challenges:
• Inventory shortage
• Pricing gap between buyers and sellers
• Local economies
REALTORS® Help Small Businesses
Did you close a sale in the past 12
months?
Yes
No
Average Value of Sale Transaction
$10,000,000 <
N/A
3%
80%
$5,000,000 - $10,000,000
70%
60%
4%
$2,000,000 - $4,999,999
10%
$1,000,000 - $1,999,999
17%
$500,000 - $999,999
25%
$250,000 - $499,999
25%
< $250,000
16%
50%
40%
30%
20%
10%
0%
2011
2012
2013
2014
Credit Difficulty
Sales transaction fail during the past 12
months due to lack of financing
Yes
No
If answered "Yes," the reason was:
N/A
Financing
availability
80%
70%
17%
20%
60%
Loan
underwriting /
lender
requirements
50%
40%
30%
20%
63%
10%
0%
2011
2012
2013
2014
Appraisal /
valuation
A Typical Commercial REALTOR®
BUSINESS REVENUE AND FIRM AFFILIATION
• The median gross annual income of commercial members was $96,200 in
2013, an increase from $90,200 in 2012. The median gross annual income
of commercial members has increased for the past four years.
• Eighty percent of commercial members work at least 40 hours a week.
• Sixty-two percent of commercial members of NAR derived 50 percent or
more of their income from all commercial real estate in 2013.
• Fifty-seven percent of members work for a local commercial real estate
firm.
BUSINESS ACTIVITIES OF NAR COMMERCIAL MEMBERS
•Commercial members completed a median of eight transactions in 2013.
•The median sales transaction volume in 2013 for members who had a
transaction was $2,554,700 – an increase from $2,507,700 in 2012.
•The median gross leasing volume was $431,600 in 2013– a decrease from the
$476,400 in 2012.
CCIM Member Survey on Cap Rates
SIOR Member Survey on Activity
140.0
120.0
SIOR Index
Industrial
Office
100.0
80.0
60.0
40.0
20.0
0.0
Sources: SIOR, NAR
Economic Forecast
GDP Growth
Job Growth
2013
2014
Likely
2.2%
2.2%
2015
2016
Forecast Forecast
2.7%
2.9%
+2.3 million +2.5 million +2.5 million +2.6 million
CPI Inflation
1.5%
1.6%
2.7%
3.3%
Consumer
Confidence
73
87
95
98
2.5%
2.6%
3.2%
4.3%
10-year
Treasury
Commercial Real Estate Forecast
OFFICE
Vacancy Rate
Net Absorption ('000 sq. ft.)
Completions ('000 sq. ft.)
Rent Growth
2014
16.2%
36,192
26,450
2.6%
2015
15.8%
50,678
41,799
3.2%
2016
15.6%
57,782
44,862
3.6%
INDUSTRIAL
Vacancy Rate
Net Absorption ('000 sq. ft.)
Completions ('000 sq. ft.)
Inventory ('000,000 sq. ft.)
Rent Growth
2014
8.9%
107,580
83,424
8,468
2.4%
2015
8.5%
104,948
68,755
8,537
2.8%
2016
8.1%
105,044
61,720
8,598
2.9%
RETAIL
Vacancy Rate
Net Absorption ('000 sq. ft.)
Completions ('000 sq. ft.)
Rent Growth
2014
9.8%
11,214
7,275
2.0%
2015
9.7%
19,314
12,196
2.4%
2016
9.4%
24,313
16,342
3.0%
2014
4.0%
223,421
191,481
4.0%
2015
4.0%
170,065
146,461
3.9%
2016
4.2%
140,128
122,381
3.5%
MULTI-FAMILY
Vacancy Rate
Net Absorption (Units)
Completions (Units)
Rent Growth
Sources: National Association of REALTORS® / Reis, Inc.
Washington Policy Watch on
Commercial Real Estate
• Facilitate Covered Bonds to help credit flow
• Raise cap on holding of commercial RE loans
by credit unions
• Preserve Like-Kind Exchanges
• Preserve Terrorism Insurance
• Preserve capital gains status on carried interest
• Depreciation Rules should match economic life
• Oppose lease-accounting changes
Richard M. Gatto
Executive Vice President
The Alter Group
Donald E. Huffner
Managing Director, Head of the
Americas
AIG Global Real Estate
Andrew H. Trotter, III
Chief Investment Officer
Centennial Holding Company
COMMERCIAL ECONOMIC ISSUES & TRENDS FORUM
COMMERCIAL REAL ESTATE:
2015 INVESTMENT OUTLOOK
LAWRENCE YUN, PhD
RICHARD M. GATTO
DONALD E. HUFFNER
ANDREW H. TROTTER, III
Chief Economist, Sr. VP
Executive Vice
President
Managing Director,
Head of Americas
Chief Investment
Officer
National Association
of REALTORS®
The Alter Group
AIG Global Real Estate
Centennial Holding
Company