Economic Potential Drives Commercial Real Estate

9/23/2016

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What Drives Commercial Real Estate Today

September, 2016

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First American Economics

Economic Potential Drives

Commercial Real Estate

9/23/2016

2


@mflemingecon #FirstAmEcon

95

96

97

98

99

100

1 2 3 4 5 6 7 8

Underperforming PotentialUnderperforming PotentialUnderperforming PotentialUnderperforming Potential---- GDP Depth and DurationGDP Depth and DurationGDP Depth and DurationGDP Depth and DurationReal Quarterly GDP (SA, %, Recession Peak = 100)

1953 1957 1973 1981 1990 2007

Source: BEA, FRED, Q3 2009

Year from Peak


@mflemingecon #FirstAmEcon4

58

60

62

64

66

68

0

2

4

6

8

10

12

14

16

18

Source: BLS,CBO, FRED, Q2 2016

Underworked or Aging? Finding the New NormalUnderworked or Aging? Finding the New NormalUnderworked or Aging? Finding the New NormalUnderworked or Aging? Finding the New NormalUnemployment Rates and Labor Force Participation (%,SA)

Recessions Unemployed (LHS)

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80

100

120

140

160

180

Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15

Capital Versus LaborCapital Versus LaborCapital Versus LaborCapital Versus Labor---- Who Gains the Growth Benefits?Who Gains the Growth Benefits?Who Gains the Growth Benefits?Who Gains the Growth Benefits?Real GDP Per Capita and Full Time Employed Median Earnings (SA, Q1 1979 = 100)

Recessions Earnings Real GDP

Source: BLS, BEA, FRED, Q2 2016



20

25

30

35

40

45

50

55

60

Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Jan-12

Source: BLS, Census, FRED, 2014

Household Income Stagnating for DecadesHousehold Income Stagnating for DecadesHousehold Income Stagnating for DecadesHousehold Income Stagnating for DecadesMedian Household Income ($ Thousands, Annual)

Recessions 2014 Current Dollars Nominal

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80

90

100

110

120

130

Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14

Job PolarizationJob PolarizationJob PolarizationJob Polarization---- Job Creation is Skill SkewedJob Creation is Skill SkewedJob Creation is Skill SkewedJob Creation is Skill SkewedEmployment Count of Full Time Workers (Q3 2000 = 100)

Recessions Total Low Earning Total High Earning

Source: BLS, Q2 2016



90

95

100

105

110

Jul-00 Jan-02 Jul-03 Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12 Jan-14 Jul-15

Robot Maker or Wage TakerRobot Maker or Wage TakerRobot Maker or Wage TakerRobot Maker or Wage TakerMedian Usual Weekly Earnings (Inflation Adjust Q1 2016, Q3 2000 = 100)

Recessions < $40k > $40k

Source: BLS, Q2 2016

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50

90

130

170

210

Mar-01 Sep-02 Mar-04 Sep-05 Mar-07 Sep-08 Mar-10 Sep-11 Mar-13 Sep-14 Mar-16

Recession US CPPI GDP

Source: Real Capital Analytics, Inc., FRED, 2016

EconomicEconomicEconomicEconomic Growth Drives Commercial Real EstateGrowth Drives Commercial Real EstateGrowth Drives Commercial Real EstateGrowth Drives Commercial Real EstateGDP And Commercial Property Price Index (CPPI trailing 12 months, Dec. 2000=100)

mf4mf9


“It ain’t what you don’t know that gets you into trouble. It’s

what you know for sure that just ain’t so.”

- Mark Twain

Slide 9

mf4 remove decimal from y-axis labels, why does x-axis start with March-01 when indexed to 100 for Dec

2000. Why q4 2000 for the index start point? Can we us a quarter label. Center legend, Source date? mark fleming, 9/6/2016

mf9 or the first month in the quarter instead of last- see GDP charts.mark fleming, 9/6/2016

9/23/2016

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-4

-3

-2

-1

0

1

2

3

4

5

6


Source: Census Bureau, FRED, Q2 2016

Demographics Drives Rental DemandDemographics Drives Rental DemandDemographics Drives Rental DemandDemographics Drives Rental DemandHousehold Formation by Occupancy Type (Year-Over-Year Inventory Growth, %)

Recession Rented Owned Rented Three Year Moving Average



90

95

100

105

110

115

120

125

130


Source: Census Bureau, FRED, Q2 2016

Millennials Like the SunMillennials Like the SunMillennials Like the SunMillennials Like the Sun---- Or the Low Living Cost and Tech JobsOr the Low Living Cost and Tech JobsOr the Low Living Cost and Tech JobsOr the Low Living Cost and Tech JobsRenter Occupied Households By Region (Index, Q4 2007=100)

Recessions West South MidWest NorthEast

mf7mf10

Slide 12

mf7 quarterly date formattingmark fleming, 9/6/2016

mf10 most recent?mark fleming, 9/6/2016

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0.8

1

1.2

1.4

1.6

Homeownership

Income

Employment

Education

Children

Marriage

Baby Boomers

Generation X

Millennials

Over or Under Achieving GenYOver or Under Achieving GenYOver or Under Achieving GenYOver or Under Achieving GenY

Source: Census Bureau, 2013-2014

13



0

20

40

60

80

100

1992 1997 2002 2007 2012

Educational Attainment Sees Improvement NationallyEducational Attainment Sees Improvement NationallyEducational Attainment Sees Improvement NationallyEducational Attainment Sees Improvement NationallyEducational Attainment by Degree Type (% of Total)

No High School High School Degree Bachelor Degree MA or Higher

Source: IPUMS CPS, 2015

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0

5

10

15

20

25

30

35

40

45

20 25 30 35 40 45 50 55 60 65

With Age Comes WisdomWith Age Comes WisdomWith Age Comes WisdomWith Age Comes WisdomPercent Share of Population with Bachelors Degree or Higher by Age

Baby Boomers Gen X Millennials

Source: ACS IPUMS, 2015



0

10

20

30

40

50

60

70

80

90

100

25 35 45 55 65

With Age Comes With Age Comes With Age Comes With Age Comes A Different Tenure ChoiceA Different Tenure ChoiceA Different Tenure ChoiceA Different Tenure ChoicePercent of Renters

Asian Black Hispanic White


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First American Economics

Seattle, Washington



-4

-2

0

2

4

6

8

Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

GDP Begins to Trail Upwards in WashingtonGDP Begins to Trail Upwards in WashingtonGDP Begins to Trail Upwards in WashingtonGDP Begins to Trail Upwards in WashingtonPercent Change (%) and Millions of Dollars ($), NSA

Washington GDP Growth US GDP GrowthSource: BEA, FRED, 2015

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2

4

6

8

10

12

Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Jan-14

Unemployment Sees a Steady Drop Unemployment Sees a Steady Drop Unemployment Sees a Steady Drop Unemployment Sees a Steady Drop Unemployment Rates (SA, %)

Recession Seattle National

Source: BLS, FRED, Q2 2016



0

20

40

60

80

100

1992 1997 2002 2007 2012

Educational Attainment Sees Improvement in WashingtonEducational Attainment Sees Improvement in WashingtonEducational Attainment Sees Improvement in WashingtonEducational Attainment Sees Improvement in WashingtonEducational Attainment by Degree Type (% of Total)

No High School High School Degree Bachelor Degree MA or Higher


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20

30

40

50

60

70

80



Seattle Income Outpaces NationalSeattle Income Outpaces NationalSeattle Income Outpaces NationalSeattle Income Outpaces NationalMedian Household Income ($ Thousands, Annual)

Recessions Seattle 2014 Current Dollars Seattle Nominal National 2014 Current Dollars



23

25

27

29

31

33

35

37

39

41

43

1980 1985 1990 1995 2000 2005 2010 2015

Rentership on the RiseRentership on the RiseRentership on the RiseRentership on the RiseRentership Rates, %

Seattle National

Source: IPUMS CPS, Census, FRED, 2015

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Economic Potential Drives Commercial Real Estate