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COMMERCIAL ECONOMIC ISSUES AND TRENDS FORUM
May 8, 2020 | 1 – 2 PM Central Time
COMMERCIAL ECONOMIC ISSUES AND TRENDS FORUMMay 8, 2020 | 1- 2 PM Central Time
1:00 – 1:05 PM | 2020 Forum Chair Mike Vachani, MBAOpening Remarks
1:05-1:40 PM | Lawrence Yun, PhD Economic Outlook and Impact of Social Distancing on Commercial Real Estate
1:40-2:00 PM | 2020 Forum Chair Mike Vachani
Q & A
GDP Collapse in 2020 after a decade of growth
-3
-2
-1
0
1
2
3
4
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
???
GDP Details in 2020 Q1
2020 Q1 % change annualized rate
GDP -4.8%
Consumer Spending -8%
Business Spending -9%
Residential Investment(Home building, home sales, remodeling)
+21%
Commercial Structure Completion -7%
Federal and State Government Spending on Investment
Modestly Positive
Personal Income +2%
Personal Savings +152%
Spending Growth at Grocery Shops versus Restaurants
-30
-20
-10
0
10
20
30
40
2019 -Jan
2019 -Feb
2019 -Mar
2019 -Apr
2019 -May
2019 -Jun
2019 -Jul
2019 -Aug
2019 -Sep
2019 -Oct
2019 -Nov
2019 -Dec
2020 -Jan
2020 -Feb
2020 -Mar
% change from one year ago
Consumer Retail Spending% change from one year ago to
March
Building Material and Gardening
+10.4%
Clothing Stores -52.5%
Sporting and Hobby Stores -23.8%
Department Stores -24.5%
Non-Store Purchase +15.5%
Total Cases: Unemployment Insurance Filers(26 million estimated due to data lag)
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
Jan 42020
Jan 112020
Jan 182020
Jan 252020
Feb 12020
Feb 82020
Feb 152020
Feb 222020
Feb 292020
Mar 72020
Mar 142020
Mar 212020
Mar 282020
Apr 42020
Apr 112020
Apr 182020
Apr 252020
May 22920
New Cases: Unemployment Insurance Filers: (33 million cumulative since Lockdown)
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
Jan 42020
Jan 112020
Jan 182020
Jan 252020
Feb 12020
Feb 82020
Feb 152020
Feb 222020
Feb 292020
Mar 72020
Mar 142020
Mar 212020
Mar 282020
Apr 42020
Apr 112020
Apr 182020
Apr 252020
May 22020
Maryland: New Cases Increasedbecause of New Website for Independent Contractors
0
20000
40000
60000
80000
100000
120000
140000
Jan 42020
Jan 112020
Jan 182020
Jan 252020
Feb 12020
Feb 82020
Feb 152020
Feb 222020
Feb 292020
Mar 72020
Mar14
2020
Mar21
2020
Mar28
2020
Apr 42020
Apr 112020
Apr 182020
Apr 252020
May 22020
However, claims filed has fallen in the past two weeks, indicating furloughed/unemployed are getting back to work
Unemployment insurance benefits don’t fully replace wages in some states
20.5 M jobs lost in April 2020; one in three jobs lost were in leisure/hospitality
-3.3
-50
-254
-262
-362.8
-584.1
-975
-980
-1267
-1330
-2106.9
-2128
-2544
-7653
Utilities
Mining and Logging Employment
Information
Financial Activities
Wholesale Trade
Transportation and Warehousing
Construction
Government
Other Services
Manufacturing
Retail Trade
Professional and Business Services
Education and Health
Leisure and Hospitality
Nonfarm Payroll Jobs Lost in April 2020 (‘000)
Source: BLS
Local Disaster Events: Katrina and 9-11Unemployment Rates
0
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9 -
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New Orleans
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5 -
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7 -
Jan
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01
9 -
Jan
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NYC Metro
Source: NAR 2020 CARES Act Small Business Loans Survey
All-out monetary and fiscal policy to mitigate coronavirus impact
• $2.2 trillion CARES Act Package and supplemental $484 billion to assist furloughed or laid off workers through the Pandemic Unemployment Assistance program; provide forgivable loans under the Payment Protection Plan to small businesses if they retain employees; provide financial assistance through the through Economic Injury Disaster Loan program
• Mortgage forbearance on federally backed loans ( 67% of residential mortgages and 47% of multifamily mortgages)
• Federal Open Market Committee reduced federal funds rate to 0% to 0.25% on March 15
• Federal Reserve Bank reduced the discount window rates by 150 basis points to 0.25% (rates it charges to lend to banks)
Source: NAR 2020 CARES Act Small Business Loans Survey
35%
44%
24%
26%
31%
24%
51%
41%
61%
Other*
Commercial
Residential SBA 7(a) PaycheckProtection Program
Economic Injury DisasterLoan
Did not apply
*Multiple responses allowed so percentages won’t sum up to 100 percent. “Other” includes brokers/owners without sales activity, appraisers, property managers,
consultants, developers.
CARES Act PPP/EIDL small business loans to mitigate coronavirus impact59% of commercial members have availed of SBA loans
Federal Reserve All-InQuantitative Easing including buying Corporate Debts
0
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Fed Funds Rate
No Inflation … No Worries for Now
-3
-2
-1
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1
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CPI Inflation
Oil Price Collapse … Global Economic Collapse … Russia and Saudi Oil War
0
20
40
60
80
100
120
140
160
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West Texas
Beef Price Rising … Cattle Price Falling
0.5
0.6
0.7
0.8
0.9
1
1.1
2019 -Jan
2019 -Feb
2019 -Mar
2019 -Apr
2019 -May
2019 -Jun
2019 -Jul
2019 -Aug
2019 -Sep
2019 -Oct
2019 -Nov
2019 -Dec
2020 -Jan
2020 -Feb
2020 -Mar
2020 -Apr
Index
Commercial Property Price IndexGreen Street Advisors
0
20
40
60
80
100
120
140
160
20
00
…
20
00
…
20
01
…
20
01
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17
…
20
17
…
20
18
…
20
18
…
20
19
…
20
19
…
20
20
…
Home Price NAR Median Home Price … 8% higher from a year ago
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,0002
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Housing Shortage …Land Purchase and Development in the Suburbs in the Future
0
500
1000
1500
2000
2500
2000 -Jan
2001 -Jan
2002 -Jan
2003 -Jan
2004 -Jan
2005 -Jan
2006 -Jan
2007 -Jan
2008 -Jan
2009 -Jan
2010 -Jan
2011 -Jan
2012 -Jan
2013 -Jan
2014 -Jan
2015 -Jan
2016 -Jan
2017 -Jan
2018 -Jan
2019 -Jan
2020 -Jan
In thousand units
Federal Budget Deficit … $4 trillion in 2020
-4500000
-4000000
-3500000
-3000000
-2500000
-2000000
-1500000
-1000000
-500000
0
500000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
COMMERCIAL MARKET TRENDS
Sales transactions contracted in both small and large CRE markets in 2020 Q1Less than $2.5M market: -1%y/y; $2.5M+ market: -35% y/y
Source: NAR Commercial Real Estate Quarterly Market Survey and Real Capital Analytics. Among Realtors®, the typical transactions is less than $2.5 million (‘small” commercial market) while RCA tracks $2.5 M or over transactions (“large” commercial market).
-1%
-35%-40%-30%-20%-10%
0%10%20%30%40%
2012
2013
2014
2015
2016
2017
2018
2019
2020
.Q1
Quarterly Sales Volume (Y/Y % Chg)
REALTOR® CRE Markets $2.5+M MarketSources: National Association of REALTORS®, Real Capital Analytics
Source: NAR Commercial Real Estate Quarterly Market Survey; Realtor® typical transaction is less than $2.5 M.
Fewer respondents reported y/y sales gains in 2020 Q1 compared to 2019 Q4
15%22% 25%
32%
20%
26%
12%17%
6% 7%
33% 35%
12% 14%
0%5%
10%15%
20%25%30%35%40%45%50%
Percent of Respondents Who Reported a Y/Y Increase in Dollar Sales Volume
2019 Q4 2020 Q1
Commercial sales prices increased at a slower pace in 2020 Q1Less than $2.5M market: 0.8%y/y; $2.5M+ market: 6.6% y/y
0.8%
6.6%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%2
00
9
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
Q1
Y/Y Change in Commercial Sales Prices
REALTOR® CRE Markets $2.5M+ Market
Source: NAR Commercial Real Estate Quarterly Market Survey and Real Capital Analytics. Among Realtors®, the typical transactions is less than $2.5 million (‘small” commercial market) while RCA tracks $2.5 M or over transactions (“large” commercial market).
Cap rates compressed in small commercial market, but slightly rose in the large CRE market; large investors more risk-averse?
5.0%
6.0%
7.0%
8.0%
9.0%
'13 '14 '15 '16 '17 '18 '19 '20
Off Ret Ind Apt Htl
Cap Rates in $2.5M + Market
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Q1
REALTORS® Cap Rates
Office Industrial
Retail Multifamily
Hotel All commercial
Source: NAR Commercial Real Estate Quarterly Market Survey and Real Capital Analytics. Among Realtors®, the typical transactions is less than $2.5 million (‘small” commercial market) while RCA tracks $2.5 M or over transactions (“large” commercial market).
Investors more risk-averse, indicated by rising cap rate spreads since 2019Less than $2.5M market: 510 bp; $2.5M + market: 530 bp (~ 400 bp in 2018)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
.Q1
2019
.Q2
2019
.Q3
2019
.Q4
2020
.Q1
Cap Rates Less 10-Year T-Bond (Spread)
REALTOR® CRE Markets $2.5+M Market
Source: NAR Commercial Real Estate Quarterly Market Survey and Real Capital Analytics. Among Realtors®, the typical transactions is less than $2.5 million (‘small” commercial market) while RCA tracks $2.5 M or over transactions (“large” commercial market).
Volume of new leases declined 2% in 2020 Q1 in small CRE market
-1.5%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
.Q1
REALTORS® Commercial Leasing Volume (YoY % Chg)
Source: NAR Commercial Real Estate Quarterly Market Survey and Real Capital Analytics. Among Realtors®, the typical transactions is less than $2.5 million (‘small” commercial market)
21% 22% 24%30%
25%28%
14% 16%
6%10%
35% 33%
0%
10%
20%
30%
40%
50%
60%
Percent of Respondents Who Reported a Y/Y Increase in Dollar Volume of New Leases
2019 Q4 2020 Q1
Fewer respondents reported y/y new leasing volume in 2020 Q1 vs. 2019 Q4
Source: NAR Commercial Real Estate Quarterly Market Survey and Real Capital Analytics. Among Realtors®, the typical transactions is less than $2.5 million (‘small” commercial market)
SIOR Commercial Index on office and industrial markets declined in 2020 Q1
124
94120
020406080
100120140160
200
5.Q
3
200
6.Q
2
200
7.Q
1
200
7.Q
4
200
8.Q
3
200
9.Q
2
2010
.Q1
2010
.Q4
2011
.Q3
2012
.Q2
2013
.Q1
2013
.Q4
2014
.Q3
2015
.Q2
2016
.Q1
2016
.Q4
2017
.Q3
2018
.Q2
2019
.Q1
2019
.Q4
SIOR Commercial Real Estate Index
Industrial Office NationalSource: SIOR, NAR
Source: SIOR Commercial Survey
Vacancy rates rose in all property markets in 2020 Q1 compared to 2019 Q4
Source: NAR Commercial Real Estate Quarterly Market Survey
9.0%
5.0%
8.8%
4.0%
6.7%
11%
5%
10%
5%
8%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
Office Industrial Retail Multifamily Average
Vacancy Rates
2019.Q4 2020.Q1
Steep decline in retail construction since 2018 through Feb 2020
Downturn in lodging construction since 2019 through Feb 2020
Flat office construction since 2018 through Feb 2020
But warehouse construction has been rising
Multi-family construction was picking up prior to the coronavirus pandemic
OUTLOOK 2020-2021
Forecast2019 2020
Forecast2021
Forecast
GDP Growth +2.3% -4.5% +3%
Job Gains +2.2 million - 4 million + 2 million
Commercial RE Prices
+7% -10% to -13% +1% to +3%
Realtors® expect 5% decline in commercial prices in next 12 months
12%
6%
16%
8%
10%
4%
15%
10%9%
4%5%
1% 1%
Worsethan -20%
-16% to-20%
-10% to-15%
-7% to-9%
-4% to-6%
-1% to-3%
0% 1% to3%
4% to6%
7% to9%
10% to15%
16% to20%
Over20%
Distribution of 1-Year Price Outlook
Apartment: higher unemployment, pandemic uncertainty will delay homebuying, increasing demand for multifamily properties
Industrial: on-line delivery due to social distancing and changes in habit will lead to more lead to higher demand for warehouses; because this is a bright sector, more construction expected in this sector
Office: some decline as businesses hire more cautiously , less demand for co-working ; but expect a pickup in demand for financial services, insurance companies, legal offices, banks, software/tech companies as demand for legal , financial and technology services increase as businesses prepare for potential pandemics
Retail: social distancing and online shopping will continue to depress demandfor brick and mortar stores; retail stores will be repurposed for other uses(e.g. fulfillment/distribution centers such as Target and BJ’s).
Demand for apartments and industrial properties expected to increase in 2020-2021
Higher vacancy rates in 2020: Retail (19%), Hotel (22%), Office (13%)Lower vacancy rates in 2020: Apartment (6%), Industrial (6%)
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2018 2019 2020F 2021F
Commercial Vacancy Rates Forecast 2020-2021
Apartment Industrial Office Retail
Vacant malls are being repurposed for mixed use development, warehouses, multifamily, fulfillment centers, health care centers, data centers, storage centers, a potentially as health armories.
1%1%1%1%1%1%1%1%1%1%1%2%3%3%3%4%4%5%
7%9%
16%31%
Call centerCanabis business
Cricket stadiumData center
FlexManufacturingMovie theater
Non-profitPolice precint
RestaurantsSelf-storage
Entertainment centerChurch
OfficeSports plex/fitness center
Community college or university campus…Health care/hospital/medical
Delivery/distribution/fulfillment stationMultifamily/Residential
WarehouseMixed use (residential, office, retail)
Another retail store, popup,…
Percentage distribution among 94 distinct cases
Source: NAR, Repurposing Vacant Retail Malls, May 2020
Empty Malls into Healthcare Armory?
Post-Pandemic Suburban Retail/Office
Virtual Office Meetings
More Remote Working
Parking Spaces, not public transit
Less Traffic near City Centers
