Economic Commercial RE Outlook

Presentation at the Leadership SummitPresentation at the Leadership SummitChicago, IL -- August 18, 2005Chicago, IL -- August 18, 2005

Lawrence Yun, Ph.D., Senior EconomistLawrence Yun, Ph.D., Senior EconomistNATIONAL ASSOCIATION OF REALTORSNATIONAL ASSOCIATION OF REALTORS®®

Presentation at the Leadership SummitPresentation at the Leadership SummitChicago, IL -- August 18, 2005Chicago, IL -- August 18, 2005

Lawrence Yun, Ph.D., Senior EconomistLawrence Yun, Ph.D., Senior EconomistNATIONAL ASSOCIATION OF REALTORSNATIONAL ASSOCIATION OF REALTORS®®

Economic and Commercial Real Estate Market

Trends and Outlook

Economic and Commercial Real Estate Market

Trends and Outlook

Economy GrowingEconomy Growing

-2

-1

0

1

2

3

4

5

6

7

8

Real Gross Domestic Product (SAAR, Bil.Chn.2000$)%

Source: BEA

Decent Job Additions Decent Job Additions

-500

-400

-300

-200

-100

0

100

200

300

400

500

600

Source: BLS

Job Gains/Losses 2005 vs 2001

Job Gains/Losses 2005 vs 2001

-200

-150

-100

-50

0

50

100

150

200

Net New Jobs

-200

-150

-100

-50

0

50

100

150

200

Net New Jobs

Source: BLS

In thousands

Job Gains/Losses in the Recent 12 months

Job Gains/Losses in the Recent 12 months

-100

1020304050607080

Net New Jobs

-100

1020304050607080

Net New Jobs

Source: BLS

In thousands

Resilient Consumer Spending Resilient Consumer Spending

0

1

2

3

4

5

6

7

8

Personal Consumption Expenditure % change from a year ago

Source: BEA

Stable Consumer ConfidenceStable Consumer Confidence

50

60

70

80

90

100

110

120

130

140

150

Conference Board: Consumer Confidence (SA, 1985=100)

Despite High Oil Prices Despite High Oil Prices

0

10

20

30

40

50

60

70

Brent Crude Oil per Barrel

Source: Department of Energy

Corporate Profits are StrongCorporate Profits are Strong

0

200

400

600

800

1000

1200

1400

Corporate Profits with IVA and CCAdj (SAAR, Bil.$)

Source: BEA

Business Spending Rising at Double-Digit Pace

Business Spending Rising at Double-Digit Pace

-15

-10

-5

0

5

10

15

Non-residential fixed investment, % change from a year ago

Source: BEA

Stock Market at 3-year High Stock Market at 3-year High

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

S&P 500

Trade Deficit in Bad ShapeTrade Deficit in Bad Shape

-700

-600

-500

-400

-300

-200

-100

0

1980 1983 1986 1989 1992 1995 1998 2001 2004

Net Exports

Source: BEA

Overall Trade Increasing Overall Trade Increasing

0

500000

1000000

1500000

2000000

2500000

1980 1983 1986 1989 1992 1995 1998 2001 2004

Exports Imports

Source: BEA

$ millions

Dollar Recovering – A Bit Dollar Recovering – A Bit

100

105

110

115

120

125

130

135

Trade-weighted exchange value of dollar (1997 = 100)

Source: Federal Reserve

Inflation Building but Still Contained

Inflation Building but Still Contained

0

0.5

1

1.5

2

2.5

3

3.5

4

Core Overall CPI% change from a year ago

Source: BLS

Fed Nervous About Inflation – Forced to Tighten Credit

Fed Nervous About Inflation – Forced to Tighten Credit

0

1

2

3

4

5

6

7

Jan-0

0

Jan '0

1

Jan '0

2

Jan '0

3

Jan '0

4

Jan '0

5

Federal Open Market Committee: Fed Funds Target Rate (%)

Forecast to4.00% by Dec. 2005

Narrow Spreads Suggest Further Short-term

Fed Rate Hikes Pushing up Long-term Rates Narrow Spreads Suggest Further Short-term

Fed Rate Hikes Pushing up Long-term Rates

0

1

2

3

4

5

6

7

3-month 10-year Treasury

Economic OutlookEconomic Outlook

20052005 20062006

GDPGDP 3.6%3.6% 3.5%3.5%

Unemployment RateUnemployment Rate 5.1%5.1% 5.1%5.1%

Job AdditionsJob Additions 2.0 million2.0 million 2.2 million2.2 million

CPI InflationCPI Inflation 3.0%3.0% 2.7%2.7%

3-month Treasury3-month Treasury 3.2%3.2% 4.0%4.0%

10-year Treasury10-year Treasury 4.4%4.4% 5.0%5.0%

Commercial Real Estate Market

Commercial Real Estate Market

Commercial OutlookCommercial Outlook• Good economic fundamentalsGood economic fundamentals

• Capital flow into commercial real estate at Capital flow into commercial real estate at record levelsrecord levels

• Modest increase in interest rates not yet Modest increase in interest rates not yet impacting long term investmentsimpacting long term investments

• Job growth steadyJob growth steady

Commercial Market HighlightsCommercial Market Highlights

• Significant investment in office buildings (30% increase Significant investment in office buildings (30% increase in 2005)in 2005)

• Port and major distribution hubs leading industrial sectorPort and major distribution hubs leading industrial sector

• Commercial lending volume up, delinquencies downCommercial lending volume up, delinquencies down

• Retail – conservative investment vehicle for Retail – conservative investment vehicle for

pension fundspension funds

Commercial Real Estate Loans Performing

Commercial Real Estate Loans Performing

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

2

Q1 '00

Q1 '01

Q1 '02

Q1 '03

Q1 '04

Commercial RE Loans Delinquency

Source: Federal Reserve

%

Commercial Property Rate of Return(Return = net operating income + capital appreciation)

Commercial Property Rate of Return(Return = net operating income + capital appreciation)

0

1

2

3

4

5

Q1 '00

Q1 '01

Q1 '02

Q1 '03

Q1 '04

Rate of Return

Source: Haver Analytics, NCREIF

Commercial Property Rates of Return by Sectors

Commercial Property Rates of Return by Sectors

-2

-1

0

1

2

3

4

5

6

7

8

Q1 '00

Q1 '01

Q1 '02

Q1 '03

Q1 '04

Apartment Industrial Office Retail

Source: Haver Analytics, NCREIF

Best performer

Commercial Construction DisciplinedCommercial Construction Disciplined

200

220

240

260

280

300

320

340

$billion (chain 2000)

Source: BEA

Office Market Office Market

• Vacancy falling, slowdown in new supplyVacancy falling, slowdown in new supply

• Rental growth gaining tractionRental growth gaining traction

• Strong investor interest (REITS and foreign Strong investor interest (REITS and foreign investors)investors)

• Strongest investment markets in the West Strongest investment markets in the West

& Northeast& Northeast

Office Job Creation Growth Office Job Creation Growth

-500

-400

-300

-200

-100

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005

Office Employment Change

Source: NAR/Torto-Wheaton

In thousands

Office Market Fundamentals Office Market Fundamentals

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

2002

.4

2003

.1

2003

.2

2003

.3

2003

.4

2004

.1

2004

.2

2004

.3

2004

.4

2005

.1

Completion Net Absorption

In thousand square feet


Vacancy Rate Falling Vacancy Rate Falling

14

14.5

15

15.5

16

16.5

17

17.5

2002

.4

2003

.1

2003

.2

2003

.3

2003

.4

2004

.1

2004

.2

2004

.3

2004

.4

2005

.1

Vacancy Rate%


Office Rent - Gaining Traction Office Rent - Gaining Traction

-10

-5

0

5

10

15

1999 2000 2001 2002 2003 2004 2005

Rent Growth


%

Industrial Market Industrial Market • Markets bifurcated by age and location Markets bifurcated by age and location

• But the pace of restocking barely keeping with shipmentsBut the pace of restocking barely keeping with shipments

• Level of obsolesce in some markets cause for high vacancyLevel of obsolesce in some markets cause for high vacancy

• Rents struggling to gain traction in some markets – rising in Rents struggling to gain traction in some markets – rising in others (Southern California)others (Southern California)

• Port markets (both traditional and inland) are outperformingPort markets (both traditional and inland) are outperforming

Business Inventory ChangeBusiness Inventory Change

-100

-50

0

50

100

150

Business Inventory Change ($billion)%

Source: BEA

Negative ???

Inventory-to-Sales RatioInventory-to-Sales Ratio

1.45

1.50

1.55

1.60

1.65

1.70

Brent Crude Oil per Barrel

Source: Department of Commerce

Industrial Market Fundamentals Industrial Market Fundamentals

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2002

.4

2003

.1

2003

.2

2003

.3

2003

.4

2004

.1

2004

.2

2004

.3

2004

.4

2005

.1

Completion Net Absorption

In thousand square feet

Source: NAR/Torto-Wheaton Research

Industrial Vacancy Rate Industrial Vacancy Rate

10.2

10.4

10.6

10.8

11

11.2

11.4

11.6

11.8

2002

.4

2003

.1

2003

.2

2003

.3

2003

.4

2004

.1

2004

.2

2004

.3

2004

.4

2005

.1

Vacancy Rate%


Industrial Rent Growth Industrial Rent Growth

-6

-4

-2

0

2

4

6

8

10

1999 2000 2001 2002 2003 2004 2005

Rent Growth


%

Retail Market Retail Market

• Consumer spending holding steady despite modest Consumer spending holding steady despite modest interest rate increases and higher oil pricesinterest rate increases and higher oil prices

• Sizable housing wealth additions in coastal marketsSizable housing wealth additions in coastal markets

• Most new construction is strip malls and power Most new construction is strip malls and power centers.centers.

• Very active REIT market – best long term investment Very active REIT market – best long term investment return (in recent year)return (in recent year)

Retail Rent GrowthRetail Rent Growth

0

1

2

3

4

5

6

1999 2000 2001 2002 2003 2004 2005

Rent Growth


%

Multi-Family MarketMulti-Family Market

• Rising mortgage rates will boost renter demandRising mortgage rates will boost renter demand

• Local concentrated job growth raises demand for Local concentrated job growth raises demand for rental apartmentsrental apartments

• Condo Conversions (70,800 units in 2004 and higher Condo Conversions (70,800 units in 2004 and higher pace in 2005) pace in 2005) – More prevalent in Miami, Northern Virginia, Las More prevalent in Miami, Northern Virginia, Las

Vegas, and San Diego Vegas, and San Diego

Multi-family Market Fundamentals Multi-family Market Fundamentals

-200,000

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

2002

.4

2003

.1

2003

.2

2003

.3

2003

.4

2004

.1

2004

.2

2004

.3

2004

.4

2005

.1

Completion Net AbsorptionIn number of units


Multi-family Vacancy Rate Multi-family Vacancy Rate

0

1

2

3

4

5

6

7

8

2002

.1

2002

.2

2002

.3

2002

.4

2003

.1

2003

.2

2003

.3

2003

.4

2004

.1

2004

.2

2004

.3

2004

.4

2005

.1

Vacancy Rate%


Multi-family Rent Growth Multi-family Rent Growth

-1

0

1

2

3

4

5

6

7

8

1999 2000 2001 2002 2003 2004 2005

Rent Growth%


Housing Affordability Slipping Housing Affordability Slipping

100

105

110

115

120

125

130

135

140

145

150

Housing Affordability Index

Source: NAR

Commercial Market Outlook Net Absorption

Commercial Market Outlook Net Absorption

20052005 20062006

Office Office ( x 1,000 sq ft)( x 1,000 sq ft) 61,000 61,000 56,00056,000

Industrial Industrial ( x 1,000 sq ft)( x 1,000 sq ft) 133,000133,000 153,000153,000

Retail Retail ( x 1,000 sq ft)( x 1,000 sq ft) 34,00034,000 29,00029,000

Multi-Family Multi-Family (units)(units) 237,000237,000 262,000262,000

(Based on 57 markets)

Source: NAR Forecast

Commercial Market Outlook Vacancy Rate

Commercial Market Outlook Vacancy Rate

20052005 20062006

Office Office 14.1%14.1% 13.2%13.2%

IndustrialIndustrial 10.3%10.3% 9.8%9.8%

RetailRetail 6.3%6.3% 6.3%6.3%

Multi-FamilyMulti-Family 6.2%6.2% 5.2%5.2%


Commercial Market Outlook Rent Growth

Commercial Market Outlook Rent Growth

20052005 20062006

Office Office 2.3%2.3% 3.4%3.4%

IndustrialIndustrial 0.7%0.7% 1.8%1.8%

RetailRetail 4.4%4.4% 4.0%4.0%

Multi-FamilyMulti-Family 2.5%2.5% 3.0%3.0%
