Outlook for Commercial Real Estate
in the
Near and Long Term
UC Real Estate Roundtable
November 2, 2012
Calvin Schnure
VP, Research & Industry Information
NAREIT
Fundamentals still support the commercial real estate
recovery, despite the weak macro news
• Economic growth is disappointing—extremely—but weakness is
cyclical, not structural;
• Drags on GDP growth are set to fade, while sources of strength
build;
• Momentum to pick up slowly through 2013, 2014;
• Commercial real estate markets are facing low new supply,
considerable pent-up demand.
1
The “Tug of War” on economic growth:
Drags
Sources of strength
•
•
Housing crisis/ mortgage mess/
deleveraging
Longer-term
Outlook
Productivity growth
• Wealth effect
•
Fiscal drag, incl. state & local
•
Uncertainty, lack of confidence…
and Europe, US fiscal cliff
•
Monetary policy
•
Growing pent-up demand
2
When did the “New Normal” begin?
Longer-term
Outlook
Months since trough
Source: Bureau of Labor Statistics, Haver Analytics.
3
“New Normal”? Private sector GDP growth is in
line with history
4
Longer-term
Outlook
Contribution to
GDP growth, in
percentage points
Federal Government
3
Private sector
2
1
0
1960 - 2008:Q2
2008:Q3 - 2009:Q4
2010:Q1 - 2010:Q3
-1
Source: U.S. Bureau of Economic Analysis, Haver Analytics.
2010:Q4 - 2012:Q2
State and Local Governments
4
Productivity growth hasn’t flagged
Longer-term
Outlook
“Stagflation” was the original “New Normal”
Source: U.S. Census Bureau, Haver Analytics.
5
Productivity growth stagnated during Japan’s “Lost Decade”
Percent change
8
6
1-year change
4
3-year change
2
0
1981
1984
1987
-2
1990
1993
1996
1999
2002
2005
2008
2011
The "Lost Decade" is into re-runs
-4
-6
Source: Haver Analytics
6
Wealth effects: shifting from negative to positive
Source: Federal Reserve Board Flow of Funds Accounts, Bureau of Economic Analysis.
Longer-term
Outlook
7
Monetary policy is supportive
Source: Federal Reserve Board.
Longer-term
Outlook
8
State of Commercial Real Estate
• Q3 saw modest improvements nationwide;
– Multifamily: vacancy rates slide lower still, rent growth slows;
– Office: vacancies edging down, rent growth weak. CBD vs
suburban;
– Retail: regional malls seeing improvements in vacancies,
rents, while neighborhood and community centers lag.
• A puzzle: the macro economy is at a crawl; why did
CRE show any improvement?
– New supply is negligible, so even a tiny bit of absorption
yields improvements.
– But robust gains will need a robust macroeconomy.
• Rates are low but access to financing still tight.
9
Construction at decades-low levels generates more
pent-up demand
Source: U.S. Census Bureau, Haver Analytics.
Longer-term
Outlook
10
Borrowing demand for commercial mortgages is gaining
momentum
Source: Federal Reserve Board Senior Loan Officer Survey, October 2012.
11
But standards are still tight
Source: Federal Reserve Board Senior Loan Officer Survey, October 2012.
12
Forecasters have been expecting long term interest rates
to rise… for a decade, now.
Percent
Percent
6
6
5
5
4
4
3
3
2
2
Actual 10-year Treasury yield (solid black line)
1
Predictions out to five quarters ahead of professional forecasters (hatched lines)
1
0
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: Philadelphia Federal Reserve Survey of Professional Forecasters, Bloomberg
13
Pent-up demand continues to drive multifamily sector,
while new supply still falls short
Focus on
Multifamily
• Market conditions in multifamily rental housing have
tightened since the housing crisis began;
• Sustained low household formation has caused
unprecedented pent-up demand;
• New supply falls far short of potential demand;
• Key factor limiting rent growth: wages.
14
Household formation plunged during the Great Recession,
remains less than half its trend pace
Focus on
Multifamily
Percent change over year ago
3
2
Fitted Trend
1
0
1966
1970
1974
1978
Source: U.S. Census Bureau, Haver Analytics.
1982
1986
1990
1994
1998
2002
2006
2010
15
Millions have moved in with parents, other family, or
nonfamily housemates
Shared households, percent of total
Focus on
Multifamily
25
24
The number of shared
households, defined as those
with an extra adult, rose 2.9
million in 2008-2010.
23
22
21
20
1988
1990
1992
1994
Source: U.S. Census Bureau, Haver Analytics.
1996
1998
2000
2002
2004
2006
2008
2010
16
Multifamily housing construction since 2008 has totaled
700,000 below the prior trend pace
Focus on
Multifamily
Thousands of units, seasonally-adjusted annual rate
600
500
400
Average, 2000-2007
300
200
100
0
2000
2002
2004
Source: U.S. Census Bureau, Haver Analytics.
2006
2008
2010
2012
17
REIT acquisitions benefit from access to capital, market
discipline
Focus on
Acquisitions
• The REIT business model influences property
acquisitions in two ways:
– Access to capital allows REITs to buy properties when they
are available at attractive prices—rather than being rationed
by credit standards or driven by investment fund flows;
– Market discipline discourages REITs from over-paying at
the market peak—in fact, REITs sold at the top of the 2000s
boom.
• REIT acquisitions early in a price cycle add value
over the long haul… and REITs are the main buyers
today.
18
Commercial Property Prices
Percent change over year ago
Source: NARIET Pure Property Index®
Focus on
Acquisitions
19
Gross Acquisitions and Dispositions
Source: RCA
Focus on
Acquisitions
20
Net Acquisitions Adjusted*
Focus on
Acquisitions
* Adjusted to remove the Equity Office and Archstone transactions
Source: RCA
21
REITs are raising record amounts of capital
60
Billions of dollars
Focus on
Acquisitions
Debt
Preferred shares
IPO
50
Secondary equity offerings
40
30
20
10
0
2004
2005
2006
2007
*2012 offerings through July. Source: SNL Financial, NAREIT.
2008
2009
2010
2011
2012*
22
Net Acquisitions… buy low, sell high
Pre-boom
Focus on
Acquisitions
Bust
Recovery
2001-2003
Boom and
market peak
2004-2007
2008-2009
2010-Current
Total
$ Millions
$ Millions
$ Millions
$ Millions
$ Millions
REITs
15,400
(20,898)
(7,425)
27,313
14,390
Private
11,760
(81,483)
9,120
(22,957)
(22,360)
(13,101)
141,731
5,579
(2,439)
131,771
736
38,140
2,533
1,054
42,464
(14,795)
(77,490)
(9,808)
(2,971)
(166,264)
Inst'l/Eq
Cross-Border
Other
Source: RCA
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