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