Lancaster County PA Economic Forecast--High Associates Ltd. 02-12-2014

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  • 1. 2013 Macro Economic Assumptions “Slow, but Steady, Economic Recovery” GDP (2013 Average for 3 Quarters) GDP (4th Quarter 2013 Estimated) Total GDP 2013 Actual 2.57% 3.1% 2.70% 2.25% Inflation (2013) 1.5% 1.5% Unemployment ◦ Nationally ◦ State ◦ Locally 7.9% to 6.7% 8.2% to 7.5% 6.7% to 5.9% 6.7% 7.0% 6.25% to 5.5% 3.04% 3.5% Loosening for Existing Buildings. Tight for Development. Less stringent for existing. Loosening for Development. 10-Year Treasury (12/31/13) Credit Environment 2014
  • 2. National Real Estate Overview • Apartments: Rent/Values Above Pre-Recession Peaks; Cap Rate rose slightly in 2013, some believe market has peaked. • Industrial: Positive Absorption of 45 Million Square Feet in first three quarters with National Vacancy at 11.7%; Strong Demand from Institutional Investors. • Hotels: Significant RevPAR Improvement Year Over Year; Strong Demand from Institutional Investors. • CBD Office Occupancy Back; Strong Institution Demand for Trophy Properties at Historically Low Cap Rates. • Suburban Office Continues a Slow Road to Recovery; National Vacancy at 16.9%.
  • 3. National Real Estate Overview • Cap Rate Movement Lower in All Asset Classes. Apartments Industrial Suburban Hotels CBD Office Suburban Office Neighborhood/Community Centers Range 3.5%-10% 5%-7.75% 7%-10.5% 4%-9% 5%-9.5% 5%-10% 2013 Average 5.8% 6.22% 8.16% 6.45% 6.98% 6.98% • Supply Growth Kept in Check Due to Limited Supply of Debt Capital. • Philadelphia – Suburban Office Caps Rate at 8.77%, Apartments 5.77%, and Warehouse 5.73%. • Equity is Abundant, Looking for “Core” and “Core Plus” and “Value Added Opportunities”. • Source of CAP Rates is Price Waterhouse Cooper. Change      
  • 4. Industrial “Logistics Revolution” • Leads recovery of commercial products • Vacancy fell 70 basis points to 11.7%. • Effective Rents rise 1.6% (slightly less than expected). • New Development back to post-recession high at 7.4 million SF in third quarter. • Continued new development more likely than any other products. • Favored Asset Class of Lenders.
  • 5. Industrial Drivers for 2014 and Beyond • E-Commerce: Major retailers looking for multiple distribution hubs to get closer to customers. o Allentown/Carlisle corridor first, Lebanon and Lancaster now on radar screen. • “Reshoring” sees the return of manufacturing. o Rising off-shore labor cost and increasing transportation expense. • Panama Canal-Port and intermodal cities prepare for increase in demand. o Los Angeles, Houston, Philadelphia, Newark, New Orleans
  • 6. Industrial Building Trends • Location importance heightened – E-commerce o • Highway access, workforce access, last mile provider access. Size demand increases 500,000-1,500,000 (now 26% of new development compared to 3% 2 decades before). o o • Nationally – Amazon and Walmart have multiple million SF projects underway. Locally – Nordstrom's – 1.2 million SF (Conewago); Urban Outfitters 1.2 million SF (Gap), Walmart 1 million SF (Bethlehem, PA). Design Criteria o o o Cross Dock Design On-Site Trailer Storage Clear Height Increasing and Mezzanines
  • 7. Office “Tale of Two Cities” Suburban / Urban • Continues slow recovery. • Vacancy fell 20 basis points to 16.9%. o Slower recovery performance than 2012. • Effective Rents grew by 2.2% slightly better than expectations. o Rents have grown for 13 consecutive quarters. • Least likely of all products for development for foreseeable future. • Second least favorite among Lenders.
  • 8. Office Drivers for 2014 and Beyond • Markets centered in Technology and Energy will recover first. o Houston, San Francisco, Denver, Charlotte • Markets rich with Meds and Eds will recover at a slightly faster pace. o Boston, Philadelphia • Gen Y takes a larger role, driving demand toward CBD from suburbs.
  • 9. Office Building Trends – Gen Y Re-writing the Office Playbook • Migration to Urban locations. o Transportation, housing, food and entertainment. • Communication Infrastructure Key • Square foot per employee decreases. • Collaboration areas increase, with increased amenities. • Access Flexibility = 24/7 Office. • Energy Efficiency and Green Features becoming more required.
  • 10. Apartments “Let the Good Times Roll” • Vacancy falls by 50 basis points to 4.1%. • Effective rent growth has slowed: unusually weak compared to Vacancy at 2.5%. • Second most active in development cycle – are we becoming over supplied? • • Five projects being discussed locally 1,600 plus units. Popular among Lenders and Investors, except luxury which is declining.
  • 11. Generational Changes Impacting Apartments • Baby Boomers are selling. o Looking for walkable downtown locations or active centers. • Gen Y – Is Home Ownership no longer the dream? o 54% rent their home verses 32% of all adults. o 63% expect to move in 5 years. o Of those that move, 69% expect to rent. o Looking for smaller space with more amenities, walkability or mass transit use, close to work, friends, and shopping/entertainment.
  • 12. Retail “Foot Traffic Down, Sales are Up” What’s Going On? • Neighborhood and Community Centers o Rent Growth – 1.4%, highest since 2007. o Vacancy Rates – down 30 basis points to 10.4%. o Moderate Development Opportunities in 2014. • Regional Malls (particularly “fortress malls” in major Metropolitan areas) – out performs the retail recovery. o Rent Growth – 1.6% eleventh straight quarter of gain. o Vacancy Rates – down 70 basis points to 7.9%.
  • 13. Retail Trends for 2014 and Beyond • Technology improvements has retailers investing in omnichannel distribution platforms, and “rationalizing” on brick and mortar footprints. • Outlets and high-end retailers like Nordstroms are performing better than mid-tier like Kohl’s and WalMart. • Ecommerce continues to expand exponentially. o Currently 6% of all retail sales, 30% by 2025. • Retail Developments become a place to experience the product, connect with friends and be entertained. Buy on-line.
  • 14. 2013 Underwriting Criteria for Investment Grade Real Estate LTV Vacancy Cap Rate Spread 10-Year Treasury All In Rate Residential 70-80% 5-7% 5-7% 1.75-2% 2% 3.75-4% Industrial 65-75% 10-15% 6.75-9% 2-2.25% 2% 4-4.25% Office Suburban 60-75% 10-15% 7.5-9% 2.25-2.5% 2% 4.25-4.5% Retail Anchored 65-75% 7-10% 7-7.5% 2-2.5% 2% 4-4.5%
  • 15. National Real Estate Cycle Third Quarter 2012 Phase II - Expansion Office Multi-Family Industrial Phase III - Hypersupply Retail Office Industrial 6 5 1 2 3 4 1 H o t e l Retail Phase I - Recovery Phase IV - Recession Source: Dividend Capital Research Cycle Monitor – Real Estate Market Cycles
  • 16. National Real Estate Cycle Third Quarter 2013 Phase II - Expansion Multi-Family Phase III - Hypersupply Hotel Retail 6 1 2 3 4 1 Industrial Office Phase I - Recovery Phase IV - Recession Source: Dividend Capital Research Cycle Monitor – Real Estate Market Cycles
  • 17. • Research – Primary Research ◦ Secondary Sources (CoStar, MLS, C&I Council) • Industrial – Institutional Grade, for Lease ◦ Over 10,000 SF in size ◦ Lancaster County Market • Office – Institutional Grade, for Lease ◦ Over 5,000 SF in size ◦ Lancaster City, Manheim Township, East Hempfield, East Lampeter • Retail – Statistics are provided by LCAR/C&I Council
  • 18. Major Office Changes • Armstrong - 70,000 SF - Manor Campus • Jay Group - 48,000 SF - East Hempfield • Wachovia - 21,200 SF - Lancaster City • Reese Lower Patrick & Scott - 16,700 SF - Manheim Twshp. • Erin Court properties removed from study - 49,000 SF
  • 19. Lancaster Market Comparison 2010 - 2013 14 Year Average Class “A” Space Absorption Vacancy Amount Constructed Available Supply 2010 2011 2012 2013 212 8.3% 0 138,949 583 8.3% 0 138,366 40,010 5.9% 0 98,356 -146,368 13.6% 0 244,724 17,037 Class “B” Space Absorption Vacancy Amount Constructed Available Supply -134,035 18.6% 0 423,080 -112,872 21.9% 0 535,952 22,414 20.2% 0 513,538 10,395 19.3% 0 503,143 -3,987 Business Center Absorption Vacancy Amount Constructed Available Supply 43,963 20.7% 71,500 247,136 16,669 19.9% 12,500 242,967 2,563 19.7% 0 240,404 58,165 15.7% 0 182,239 13,250 31,944 9,233 22,653
  • 20. Major Industrial Changes • Childcraft becomes available - 400,000 SF - Mt. Joy • New Design Ind. Park, Jayln, Orlan ◦ 100,000+ SF absorbed – New Holland • Large Flex User vacates a Running Pump Road property
  • 21. Lancaster Market Comparison 2010 - 2013 2010 2011 2012 2013 14 Year Average Industrial Space Absorption Vacancy Amount Constructed Available Supply 88,317 9.73% 0 1,293,492 -90,245 10.25% 0 1,383,737 -16,430 10.75% 125,000 1,525,167 59,719 10.33% 58,289 Flex Space Absorption Vacancy Amount Constructed Available Supply 523 15.1% 0 103,074 26,705 11.2% 0 76,369 11,370 8.4% 0 64,999 -22,352 11.3% Retail Space Absorption Vacancy Amount Constructed Available Supply 147,863 8.24% 251,200 500,136 47,993 8.25% 52,964 505,107 -41,135 8.9% 0 546,242 48,485 8.1% 0 497,757 112,794 1,465,448 11,855 17,845 87,351 63,356 76,710
  • 22. • 2008 – 2013 Loss of 9,500 Jobs (3.6%) • Unemployment ◦ January 2013 – 18,300 (6.7%) ◦ January 2014 – 15,900 (5.9%) • 2013 Creation of 2,776 job (private sector) ◦ Retail Positions +100 ◦ Office Positions +886 ◦ Industrial Positions +609
  • 23. • Presentation will be available at www.highassociates.com • Subscribe to our blog: http://blog.highassociates.com/ • If you would like the presentation e-mailed to you, please drop your business card in the bowl at the back table.