The New Economics of
Real Estate
Lynn Reaser, Ph.D.
Chief Economist Fermanian Business & Economic Institute
Point Loma Nazarene University
IREM San Diego Chapter 18
2010 Annual Economic Forecast Breakfast
December 9, 2010
Copyright 2010 by the Fermanian Business & Economic Institute, San Diego, CA 92106
This Report was prepared based upon assumptions reflecting the FBEI’s judgment and information available at publication date. Actual results may vary
depending on a number of factors. It is not intended to serve as investment or financial advice. Neither the FBEI, the Fermanian School of Business or Point Loma
Nazarene University shall be held responsible as a result of any such variance. Publication or distribution of this Report in any form in part or whole is prohibited
unless approved by the FBEI in advance.
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© FBEI 2010
Key Topics
Economic Backdrop
Key Segments
•
•
•
•
Apartments
Industrial
Office
Retail
The New “Normal” for Real Estate
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Economic Backdrop
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U.S. Real GDP Posts Moderate
Rebound
4.0
4th quarter, percent change over prior year
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
2007
2008
2009
2010e
The Fermanian Business & Economic Institute – business & economics in action
2011f
© FBEI 2010
Consumer Prices Still Subdued
4th quarter, percent change over prior year
5.0
4.0
3.0
2.0
1.0
0.0
2007
2008
2009
2010e
The Fermanian Business & Economic Institute – business & economics in action
2011f
© FBEI 2010
San Diego to See More Jobs in 2011
December, change from previous year, thousands
40
20
0
-20
-40
-60
-80
2007
2008
2009
2010e
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2011f
© FBEI 2010
Interest Rates to Eventually Rise
Quarter-end, percent
6.0
5.0
10-year Treasury Note
4.0
3.0
2.0
1.0
Fed Funds Target
0.0
2006
2007
2008
2009
2010e
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2011f
© FBEI 2010
Banks Still Restrict Real Estate Lending
Net percentage tightening or relaxing terms
100
Tighter
80
60
40
20
0
-20
Looser
-40
2005
2006
2007
2008
2009
2010
Source: U.S. Federal Reserve survey
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Key Commercial Real
Estate Sectors
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Commercial Real Estate Prospects
San Diego, Scale 0 to 10
Retail
Office
Industrial
Apartment
0
5
Abysmal
Fair
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10
Excellent
© FBEI 2010
Apartments
Strengths
Sharp Drop in
Building
Job Growth
Military Demand
“Uncoupling”
Weaknesses
Home Ownership
More Attractive
“Shadow” Housing
Inventory
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© FBEI 2010
San Diego Apartment Vacancy Rates Healthy
Percent, year-end
6
5
5.1
4.8
4.8
4.6
4.6
4.4
4
3
2
1
0
City
County
2010e
2011f
Total
Source: Rentalowner; FBEI
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Industrial
Strengths
Inventory
Rebuilding
Foreign Trade
No New Supply
Technology Firms
Weaknesses
Maturing 5-year
leases
E-Commerce and
Point-to-Point
Shipping
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Industrial Vacancy Rates Peak
20
Percent, annual average
Flex Space
16
Total
12
8
Warehouse
4
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e 2011f
Source: Costar; FBEI
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Office
Strengths
Minimal New
Space
Job Gains in
Professional
Services
Health Care
Expands
Weaknesses
Companies Cut
Costs
Outsourcing Jobs
Government
Demand Drops
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Office Vacancy Rates High
24
Percent, annual average
Class A
20
16
Total
12
8
4
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010e 2011f
Source: Costar; FBEI
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Retail
Strengths
Little New Supply
Consumer
Spending rises
Retail Profits
Improve
Location Matters
Weaknesses
E-Commerce
Tenant “Poaching”
Fringe Retail
Strips, Older Malls,
Empty Box Power
Centers
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Retail Vacancy Rates Slowly Subside
Percent, quarterly
6
5
4
3
2
Actual
1
Forecast
0
2006
2007
2008
2009
2010
2011f
Source: Costar; FBEI
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New Economics of Commercial
Real Estate
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Long-Term Changes
Technology and E-Commerce
Social Media
Investors Greater Role
Foreign Demand
Environmental Standards
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Temporary Changes
Low Interest Rates
Double-Digit Unemployment
Rent Declines
Management of Distressed Properties
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Remaining Unchanged
Cyclicality
Cost Control and Efficiency Vital
Capital/Debt Ratios Important
Tenant Relationships Key
Value Good Employees
Integrity Counts
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© FBEI 2010
Make Plans to Attend
The Fermanian Business & Economic Institute’s
2011 Economic Outlook Forum
Dr. Lynn Reaser, Chief Economist
Point Loma Nazarene University
Wednesday March 2, 2011
San Diego Marriott Hotel & Marina
For more information contact Cathy Gallagher at 619.849.2564
www.pointloma.edu/fbei
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The Fermanian Business & Economic Institute
at
Point Loma Nazarene University
Educational, Business & Economic Resources
for the San Diego Region
www.pointloma.edu/fbei
Economic Consulting Research & White Papers
Public Speaking
Business Plan Writing
Strategic Retreats
Internships
MBA Program at Mission Valley Campus
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