Real Estate and Economic Outlook Presentation to:
Hofstra
2014
Randy Anderson, Ph.D. CRE Griffin Capital Corporation Chief Economist and Portfolio Manager
Overall Economy
Nearing the End of the Gravy Boat Recovery Why Gravy Boat? 1. All the reasons everyone talked about + 2. Structural Change in the labor market – lead to lower labor market participation rates
Factors leading to 14-15 Growth
Housing Market is much stronger than it has been Corporate Profit Margins are at a 15 year high Consumer Confidence is higher Business Survey’s showing firms plans to higher have increased
IN OTHER WORDS – THE HEADWINDS OF YESTERDAY ARE REALLY THE TAILWINDS FOR US IN 2014-2015…..THE ISSUE FOR REAL ESTATE IS THAT ONCE EMPLOYMENT IS “ACTUALLY STRONG” AND GDP STARTS ACCELERATING – INTEREST RATES ARE GOING TO RISE…AND EVENTUALLY SO WILL CAP RATES….
3
So where is the 10-year going?
Year – end 3%-3.5%, 2016 4.25% - 4.75%
30-Year Average: 5.93%
20-Year Average: 4.60%
10-Year Average: 3.51%
Current Yield:
2.86%
(as of January 10, 2014)
Cap Rates by Product Type
Latest data as of 3Q13; 125 basis points subtracted Sources: ACLI, RCG
Cap Rate Spreads vs. 10-Year Treasury Yield Basis Points
Latest data as of 3Q13; 125 basis points subtracted Sources: ACLI, RCG
Remarks
Spreads in recent days have been as high as 350 bps Today they are on average > 200 bps Long term average is closer to 125-150bps SO…..
7
Remarks
SO‌.. 1. That is why Cap Rates have not headed up yet‌and there is still (for many markets and property types) some cushion in place 2. Capital flows from domestic and foreign sources is on the rise putting more demand relative to supply on the market which is likely to keep cap rates lower longer 3. Once cap rates start to expand, the elasticity is about .6
8
What does that mean for Pricing “Old School Asset Selection and Management” And “Style Drift” P = NOI/Cap Rate Investing in 14 and 15 is all about the NOI growth. Can’t expect to grow value via cap rate compression especially in core assets and core markets. Most funds are getting raised today for value-add opportunities Also – investors are moving further out the risk frontier in terms of market and asset quality – this game is further along than the research reports are indicating
9
Commercial Real Estate Asset Class Overview Office Multifamily Retail Hospitality Industrial
IU-NL102(512v021513)
Office Construction
Value of Construction Put-in-Place Billions (2009$)
Latest data as of 3Q13, seasonally adjusted annual rate Sources: Census, RCG
Office Availability Rates Downtown and Suburban
17.4% 13.4%
Latest data as of 3Q13 Sources: C&W, RCG
U.S. Downtown Office Rent Growth
Latest data year-to-date as of 3Q13 Sources: C&W, Grubb & Ellis, Various Local Brokers, RCG
Commercial Real Estate: Office Sector Overview
• Prime CBD low vacancy, premium pricing • New construction in certain markets • Mixed performance in other markets • Look for continued reduction in space/worker
Multifamily Rental Housing Starts Units (Thousands)
Note: 2013 through 2018 data are forecasted Sources: Census, RCG
Population Turning 18 1960-2020 Millions
Sources: Census, RCG
Young Adults Aged 18-34 Living with Parents Millions
Sources: Census, RCG
Growth in Population Aged 65+ Millions
Source: Census
% of Total
Renter Households
Proportion of Total Households
Latest data as of 3Q13 Source: Census
Household Headship Formation HH Formation (000s)
Latest data year-over-year as of December 2012 Source: Census
Annual Growth
U.S. Rental Apartment Vacancy Rate (5+ Units)
9.2% 4.6%
Latest data as of 3Q13 Sources: Census, NMHC
Commercial Real Estate:
Multifamily Sector Overview
• Multifamily housing starts accelerating • Both baby boom and eco boom provide demographic demand support • Household headship formation rate ticking up • Vacancy rates down close to peak levels
Retail Space Construction
Value of Construction Put-in-Place Billions (2009$)
Latest data as of 3Q13, seasonally adjusted annual rate Sources: Census, RCG
Real Retail Sales Growth
Nominal Monthly % Change
Excluding Autos Annual % Change
10
Latest year-over-year change data as of 3Q13, monthly change is as of November 2013 Source: Census
11
12
13
Super-Stores and Internet Sales Cannibalization Percentage of total sales by retail type
Grocery Stores Department Stores
Warehouse Clubs and Super-Stores
Latest data as of October 2013 Source: Census
Internet Sales
Retail Vacancy Rate
Green line is forecast Sources: Valuation International, Viewpoint, SNL, RCG
Commercial Real Estate: Retail Sector Overview
• Under attack by e-tailing – location, concept and tenancy critical factors to success • Prime regional malls have outperformed – very pricy • Secondary and low density markets are at risk • Broad retail recovery couple years off
Industrial Warehouse Construction Value of Construction Put-in-Place Billions (2009$)
Latest data as of 3Q13, seasonally adjusted annual rate Sources: Census, RCG
Industrial Vacancy Rate
2010: 2011: 1Q12: 2Q12: 3Q12: 4Q12: 1Q13: 2Q13: 3Q13: 2013f:
Latest data as of 3Q13; green line is forecast Sources: CBRE, C&W, RCG
10.3% 9.2% 9.0% 8.7% 8.5% 8.3% 8.2% 8.0% 7.8% 7.6%
Commercial Real Estate: Industrial Sector Overview
• Overall occupancy and rent trends encouraging • Still large recovery ahead to reach typical occupancy – same with most office markets • Trends that drive future direction:
• E-tailer shorter delivery demand – locate in dense areas • Integration of robotics – increase cubic utilization
Commercial Real Estate General Conclusions
IU-NL102(512v021513)
Commercial Real Estate: General Conclusions
• Market Peak in mid-2007: Prices > Replacement Cost • Market Trough in mid-2009: Prices < Replacement Cost • Recovery Phase from mid-2009 through mid- to late-2013 • Market Stabilization mid-2013 through end of 2016 • Prices approach Replacement Cost – new development ensues
• Market Peak end of 2016 – 2017…???