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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© FBEI 2010
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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© FBEI 2010
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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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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© FBEI 2010
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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