Economic and Commercial Real Estate Market Outlook
GEORGE RATIU, Economist NATIONAL ASSOCIATION OF REALTORS®
NAR Research Webinar July 28, 2009
Macroeconomic Issues
• • • • • • Recession – signs of recovery? Rising unemployment Housing impact Financial Crisis – liquidity Consumer Confidence Inflation
0
2
4
6
8
10
-8
% Annualized Growth Rate
-6
-4
2000 - Q1 2000 - Q2 2000 - Q3 2000 - Q4 2001 - Q1 2001 - Q2 2001 - Q3 2001 - Q4 2002 - Q1 2002 - Q2 2002 - Q3 2002 - Q4 2003 - Q1 2003 - Q2 2003 - Q3 2003 - Q4 2004 - Q1 2004 - Q2 2004 - Q3 2004 - Q4 2005 - Q1 2005 - Q2 2005 - Q3 2005 - Q4 2006 - Q1 2006 - Q2 2006 - Q3 2006 - Q4 2007 - Q1 2007 - Q2 2007 - Q3 2007 - Q4 2008 - Q1 2008 - Q2 2008 - Q3 2008 - Q4 2009 - Q1 Source: BEA
-2
GDP Growth
0
4
6
8
2
-6
% Annualized Growth Rate
-4
-2
Personal Consumption
2000 - Q1 2000 - Q2 2000 - Q3 2000 - Q4 2001 - Q1 2001 - Q2 2001 - Q3 2001 - Q4 2002 - Q1 2002 - Q2 2002 - Q3 2002 - Q4 2003 - Q1 2003 - Q2 2003 - Q3 2003 - Q4 2004 - Q1 2004 - Q2 2004 - Q3 2004 - Q4 2005 - Q1 2005 - Q2 2005 - Q3 2005 - Q4 2006 - Q1 2006 - Q2 2006 - Q3 2006 - Q4 2007 - Q1 2007 - Q2 2007 - Q3 2007 - Q4 2008 - Q1 2008 - Q2 2008 - Q3 2008 - Q4 2009 - Q1 Source: BEA
10
20
30
40
50
0
-30
2001 - Q1 2001 - Q2 2001 - Q3 2001 - Q4 2002 - Q1 2002 - Q2 2002 - Q3 2002 - Q4 2003 - Q1 2003 - Q2 2003 - Q3 2003 - Q4 2004 - Q1 2004 - Q2 2004 - Q3 2004 - Q4 2005 - Q1 2005 - Q2 2005 - Q3 2005 - Q4 2006 - Q1 2006 - Q2 2006 - Q3 2006 - Q4 2007 - Q1 2007 - Q2 2007 - Q3 2007 - Q4 2008 - Q1 2008 - Q2 2008 - Q3 2008 - Q4 2009 - Q1 Source: BEA % Annualized Growth Rate
-20
-10
Consumption by Category
Durable Goods Nondurable Goods Services
20
10
0
-40
2000 - Q1 2000 - Q2 2000 - Q3 2000 - Q4 2001 - Q1 2001 - Q2 2001 - Q3 2001 - Q4 2002 - Q1 2002 - Q2 2002 - Q3 2002 - Q4 2003 - Q1 2003 - Q2 2003 - Q3 2003 - Q4 2004 - Q1 2004 - Q2 2004 - Q3 2004 - Q4 2005 - Q1 2005 - Q2 2005 - Q3 2005 - Q4 2006 - Q1 2006 - Q2 2006 - Q3 2006 - Q4 2007 - Q1 2007 - Q2 2007 - Q3 2007 - Q4 2008 - Q1 2008 - Q2 2008 - Q3 2008 - Q4 2009 - Q1
-30
% Annualized Growth Rate
-20
-10
Business Spending
Source: BEA
10
30
20
0
-40
-30
-20
-10
-50
Business Spending on Structures
% Annualized Growth Rate
2000 - Q1 2000 - Q2 2000 - Q3 2000 - Q4 2001 - Q1 2001 - Q2 2001 - Q3 2001 - Q4 2002 - Q1 2002 - Q2 2002 - Q3 2002 - Q4 2003 - Q1 2003 - Q2 2003 - Q3 2003 - Q4 2004 - Q1 2004 - Q2 2004 - Q3 2004 - Q4 2005 - Q1 2005 - Q2 2005 - Q3 2005 - Q4 2006 - Q1 2006 - Q2 2006 - Q3 2006 - Q4 2007 - Q1 2007 - Q2 2007 - Q3 2007 - Q4 2008 - Q1 2008 - Q2 2008 - Q3 2008 - Q4 2009 - Q1
Source: BEA
Employment
One month payroll job changes (in thousands)
400
200
6.5 million jobs cut
0
-200
-400
-600
Since December 2007: • Professional Business Services: 1.5 million jobs cut • Construction: 1.3 million jobs cut
Source: BLS
-800
-50
-300 50
-250
-200
-150
-100
0
One month payroll job changes (in thousands)
2000 - Jan 2000 - Apr 2000 - Jul 2000 - Oct 2001 - Jan 2001 - Apr 2001 - Jul 2001 - Oct 2002 - Jan 2002 - Apr 2002 - Jul 2002 - Oct 2003 - Jan 2003 - Apr 2003 - Jul 2003 - Oct 2004 - Jan 2004 - Apr 2004 - Jul 2004 - Oct 2005 - Jan 2005 - Apr 2005 - Jul 2005 - Oct 2006 - Jan 2006 - Apr 2006 - Jul 2006 - Oct 2007 - Jan 2007 - Apr 2007 - Jul 2007 - Oct 2008 - Jan 2008 - Apr 2008 - Jul 2008 - Oct 2009 - Jan 2009 - Apr
Manufacturing Employment
10-Year Net Change: 5.4 million jobs lost
Source: BLS
100
120
-40 40 60
2000 - Jan 2000 - Apr 2000 - Jul 2000 - Oct 2001 - Jan 2001 - Apr 2001 - Jul 2001 - Oct 2002 - Jan 2002 - Apr 2002 - Jul 2002 - Oct 2003 - Jan 2003 - Apr 2003 - Jul 2003 - Oct 2004 - Jan 2004 - Apr 2004 - Jul 2004 - Oct 2005 - Jan 2005 - Apr 2005 - Jul 2005 - Oct 2006 - Jan 2006 - Apr 2006 - Jul 2006 - Oct 2007 - Jan 2007 - Apr 2007 - Jul 2007 - Oct 2008 - Jan 2008 - Apr 2008 - Jul 2008 - Oct 2009 - Jan 2009 - Apr
-20
20
One month payroll job changes (in thousands)
80
0
Education & Health Employment
Source: BLS
Government Employment
One month payroll job changes (in thousands) 150
100
50
0
-50
-100
Source: BLS
Percentage
10
3
2000 - Jan 2000 - Apr 2000 - Jul 2000 - Oct 2001 - Jan 2001 - Apr 2001 - Jul 2001 - Oct 2002 - Jan 2002 - Apr 2002 - Jul 2002 - Oct 2003 - Jan 2003 - Apr 2003 - Jul 2003 - Oct 2004 - Jan 2004 - Apr 2004 - Jul 2004 - Oct 2005 - Jan 2005 - Apr 2005 - Jul 2005 - Oct 2006 - Jan 2006 - Apr 2006 - Jul 2006 - Oct 2007 - Jan 2007 - Apr 2007 - Jul 2007 - Oct 2008 - Jan 2008 - Apr 2008 - Jul 2008 - Oct 2009 - Jan 2009 - Apr
4
5
6
7
8
9
National Unemployment Rate
June 2009: 9.5%
Source: BLS
Housing Valuation
23000 22000 21000
($4 trillion loss in wealth from peak)
Billions
20000 19000 18000 17000 16000
2005 - Q1 2005 - Q3 2006 - Q1 2006 - Q3 2007 - Q1 2007 - Q3 2008 - Q1 2008 - Q3
Consumer Confidence
Source: The Conference Board
Inflation
Overall CPI Core CPI
6
5 4
% Change from a year ago
3 2 1 0 -1 -2
Source: BLS
Financial Environment
• Economic Stimulus Act - $780 billion (35% tax cuts)
– CRE impacts:
• Energy efficiency/Green buildings • Business tax incentives • Infrastructure investment
• TARP / TALF – Treasury Financial Stability Plan
– Expansion of TALF to $1 trillion capacity & legacy securities – PPIP – purchase of legacy assets; funded from TARP
• • • •
Tighter credit standards Money Supply and interest rates Consumer/Homebuyer Confidence Impacts on prices and real estate markets
U.S. Commercial RE Market
• Commercial Real Estate
– Demand is down – Lower level of transactions – Pricing gap between buyers and sellers – Vacancy Rates rising across all markets – Rent Growth turned negative in most markets and most property types
• Capital Markets / Financing – Impacting markets
– Overall economic uncertainty – Equity capital not being invested (wait and see)
– Limited financing options
Office Market Fundamentals
Completions
30000 20000
Square Feet ('000s)
Absorption
Vacancy
20.0% 18.0% 16.0% 14.0%
Percent (%)
10000 0
2008.4
-10000 -20000 -30000
2009.1
2009.2
2009.3
2009.4
12.0% 10.0% 8.0%
Source: NAR/TWR
Office Rent Growth
National Rent Growth
12.00% 10.00% 8.00%
6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00% -8.00% -10.00% Source: NAR/TWR
2004
2005
2006
2007
2008
2009
2010
Office Investment Market
Office Sales Volume
Office - CBD
Billions
Office - Sub
$80 $70 $60 $50 $40 $30 $20
-95% from peak
-75% Y-o-Y
$10
$0
06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2*
Source: Real Capital Analytics
Industrial Market Fundamentals
Completions
80000 60000 14.0% 40000
Square Feet ('000s)
Absorption
Vacancy
15.0%
0 -20000 -40000
2008.4
2009.1
2009.2
2009.3
2009.4
12.0% 11.0% 10.0%
-60000
-80000
-100000
9.0%
Source: NAR/TWR
Percentage (%)
20000
13.0%
Industrial Rent Growth
National Rent Growth
6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00% -8.00% -10.00% -12.00% Source: NAR/TWR
2004
2005
2006
2007
2008
2009
2010
Industrial Investment Market
Industrial Sales Volume
Flex
Billions
Warehouse
$16 $14 $12 $10 $8 $6 $4 $2 $0
06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2*
Source: Real Capital Analytics
-88% from peak
-83% Y-o-Y
Retail Market Fundamentals
Completions
10000
Absorption
Vacancy
14.0% 13.0%
5000
Square Feet (000's)
12.0%
Percentage (%)
0
11.0%
2008.4
-5000
2009.1
2009.2
2009.3
2009.4
10.0% 9.0%
-10000
8.0%
7.0%
-15000
6.0%
Source: NAR/TWR
Retail Rent Growth
National Rent Growth
4.00% 3.00% 2.00% 1.00% 0.00%
2004
-1.00% -2.00% -3.00%
2005
2006
2007
2008
2009
2010
Source: NAR/TWR
Retail Investment Market
Retail Sales Volume
Mall & Other
Billions
Strip
$20 $18 $16 $14 $12 $10 $8 $6 $4 $2 -72% Y-o-Y
-90% from peak
$0
06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2*
Source: Real Capital Analytics
Multi-family Market Fundamentals
Completions
90000 80000
Absorption
Vacancy Rate
8.0% 7.5% 7.0% 6.5% 6.0%
Percent (%)
70000 60000
Nr. of Units
50000 40000 30000 20000 10000 0 -10000
5.5%
2008.4
2009.1
2009.2
2009.3
2009.4
5.0%
Source: NAR/TWR
Multi-family Rent Growth
National Rent Growth
4.50% 4.00% 3.50% 3.00%
2.50%
2.00% 1.50% 1.00% 0.50% 0.00%
2004
2005
2006
2007
2008
2009
2010
Source: NAR/TWR
Multi-family Investment Market
Multi-family Sales Volume
Garden
Billions
Mid/Highrise
$40
$35
$30 $25 $20 $15 $10 $5 $0
-90% from peak
-85% Y-o-Y
06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2*
Source: Real Capital Analytics
Percentage
10.0%
11.0%
5.0%
6.0%
7.0%
8.0%
9.0%
Cap Rates Rising
Apartment Industrial Office Retail
01Q1 01Q2 01Q3 01Q4 02Q1 02Q2 02Q3 02Q4 03Q1 03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4 06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2*
Source: Real Capital Analytics
Prices Moving Down
Low Number of Sales Skew Data
Industrial
$300 $250 $200
Price/Sq.Ft.
Office
Retail
Apartment
$130,000 $120,000 $110,000
Price/Unit
$100,000 $150 $90,000 $100 $50 $0
01Q1 01Q2 01Q3 01Q4 02Q1 02Q2 02Q3 02Q4 03Q1 03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4 06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2*
$80,000 $70,000 $60,000
Source: Real Capital Analytics
Distressed CRE Growing
Monthly Cummulative Distress
All Property Types
Billions
$120
2009 YTD
$108
$100 $80 $60 $40
$20
$ Bil
# Props
Retail Hotel Apartment Office Industrial
$17.80 11.8 8.1 8.9 1.4
525 894 588 258 199
$52
$3
$0 J '08 F M A M J J A S O N D J '09 F M A M J
Source: Real Capital Analytics
CRE Distress Concentration
Distribution of Distress by Lender Type
Income Producing Properties
CMBS Wall Street/Finance International Bank National Bank Local Bank Insurance Other
Apartment
32%
28%
5%
17%
11%
1% 6%
Hotel
18%
39%
12%
13%
12%
6% 0%
Retail
57%
18%
6%
8%
8%
2% 1%
Industrial
29%
24%
6%
15%
16%
3%
8%
Office
26%
0% 10% 20% 30%
18%
40% 50%
24%
20%
5% 3% 3%
60%
70%
80%
90%
100%
Source: Real Capital Analytics
Looming Commercial Debt
Commercial Real Estate Debt Maturities
Billions $2,000 $1,800 $1,600 $1,800
$1,400
$1,200 $1,000 $800 $600 $400 $200 $0 2008/2009 2010 2011 2012+
Source: Goldman Sachs and REIT filings
$410
$500 $310
Commercial Real Estate Financing
U.S. CMBS Issuance ($ billions)
250
200 150 100 50 2009 – only active markets: Europe & Asia
- $17.4 billion – Europe (Germany, UK) - $720 million – Japan
- Commercial Banks: - CMBS Issuers: - Life Companies: - Savings Institutions: - GSEs: 44.3% 25.6% 9.0% 5.5% 5.4%
230
203 169
Holders of Commercial Loans
93 74 57 14 16 15 16 26 37 47 67 52 78
4 0
5
12
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 YTD Source: Commercial Mortgage Alert
Buyer Composition
Equity, Institutional & International Investors Dropped Out
Billions
$140 $120
$100
$80 $60 $40 $20
Unknown User/other
Public
Private Inst'l Equity Fund Crossborder
$07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2*
Source: Real Capital Analytics
Sources of Financing
Under $5 million
100% 90%
CMBS
80%
70% 60%
Wall Street International Bank National Bank
50%
40% 30%
Regional/Local Bank
Financial Insurance Government Agecy Private Seller Financed Assumed Debt
20%
10% 0%
Q4.06 - Q3.07
Q4.07 - Q3.08
Q4.08 - Q1.09
Source: Real Capital Analytics
Commercial Market Outlook
• Office
– Demand drives slowdown – Financial employment – impacting downtown markets – Suburban markets – supply vs. vacancy – Rent growth – negative
• Retail
– Consumer spending – down to necessities – Bankruptcies – Circuit City, General Growth Properties, Eddie Bauer – Availability rates increase
• Industrial
– Import decline affects coastal warehouse demand – Warehouse completions – still coastal – Warehouse demand moves inland • Increased transportation costs – closer to consumer • Rail, intermodal centers
• Multi-Family
– Moderate growth ahead – Foreclosures generally increase rental demand – Supply pipeline – possible overhang – Wider variations among markets
Commercial Market Outlook
• 2008 to 2009
– – – – Net absorption turns negative Rising Vacancy Rates and Stagnant Rent Markedly Fewer Transactions Property Prices Falling … providing opportunities for cash
• 2010
– Economic recovery – Commercial recovery with lag time – Modestly Positive net absorption
Economic Outlook
2007 GDP CPI Job Growth 2.0% 2.9%
2008
2009
2010
1.1% -2.7% 1.6% 3.8% -0.4% 2.2% 5.8% 9.5% 10.1%
1.1% -0.4% -3.4% 0.0%
Unemployment 4.6%
Source: NAR, June 2009
Federal Budget Deficit
$ million
Final Considerations
• • • • • • • Financial liquidity resolution Consumer confidence Government intervention Fed rate vs. inflation Decline in prices – opportunities Global commercial real estate NAR CRE Stimulus Advocacy
• Relax mark-to-market accounting • Restart U.S. CMBS market (via TALF and TARP) • Preserve low capital gains tax rate
Economic and Commercial Real Estate Market Outlook
Questions / Comments:
George Ratiu National Association of REALTORS® 500 New Jersey Avenue NW Washington, DC 20001 gratiu@realtors.org