Commercial Real Estate Market Cycles: How They Affect Your Local Market

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Learn how to analyze your local market and compare it to tenants and investors in other markets. With his 35 years of commercial real estate research expertise, Dr. Mueller analyzes supply/demand factors for the five major property types and how they affect occupancies and rents in 55 U.S. markets. Gain a deeper understanding of commercial real estate fundamentals and learn how to turn market cycle information into useable knowledge for decision making.

Published in: Business, Economy & Finance

Commercial Real Estate Market Cycles: How They Affect Your Local Market

  1. 1. Glenn R. Mueller, Ph.D. Professor University of Denver Franklin L. Burns School of Real Estate & Construction Management & Real Estate Investment Strategist Dividend Capital Research gmueller@dividendcapital.com
  2. 2. Dr. Glenn Mueller • Real Estate Investment Strategist – Dividend Capital Group  Professor – University of Denver – Franklin L. Burns School of Real Estate & Construction Management  Visiting Professor – Harvard University, 2002-2012 & summer executive education semesters  Guest Lecturer – Wharton School, Yale, Berkeley, Ohio State, Indiana Univ., UNC, USC, European Business School, University of Regensburg Previous Experience  Legg Mason – Real Estate Investment Strategist – Head of REIT research group  PriceWaterhouseCoopers – National Director of Real Estate Research  Alex. Brown Kleinwort Benson – Head of Real Estate Research  Prudential Real Estate Investors – Vice President of Real Estate Research  B.S.B.A. in finance from the University of Denver  MBA from Babson College  Ph.D. in Real Estate from Georgia State University
  3. 3. Why Real Real Estate Fits A= SIZE Why Estate Fits a Portfolio Portfolio = Size U.S. Real Estate vs. Other Asset Classes - 12/10 U.S. Real Estate vs. Other Asset Classes (December 2010) Source: CoStar2010, Federal Reserve, December 2010 and The Bond Market Association, 2010. This investment is subject to real estate risks associated with operating and leasing properties. Additional risks include changes in economic conditions, interest rates, property values, and supply and demand, as well as possible environmental liabilities, zoning issues and natural disasters.
  4. 4. All Real Estate = Half - 12/06 U.S. Real Estate Values = $33.3 Trillion Source: Prudential Real Estate Investors, December 2006.
  5. 5. 5 Key Macro Economic Factors Population Growth Exhibit 1 Exhibit 2 Employment Growth GDP Growth 4.0% 5.0% 4.4% 4.0% 4.4% 3.6% 3.1% 3.0% 2.5% 2.0% 2.8% 3.1% 1.9% 1.8% 1.7% 2.0% 2.8% 2.7% 3.0% 1.0% 3.3% 1.8% 1.1% 1.1% 1.0% 0.0% 0.0% 1.1% 1.0% 0.0% -3.0% -4.0% -2.0% -2.6% -3.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 -4.3% -5.0% 2010 2011 2012 2013 2001 2014 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Moody’s Précis U.S. Metro December 2010, Bureau of Labor Statistics (bls.gov) Source: 4 Exhibit Moody’s Précis U.S. Metro December 2010; Bureau of Economic Analysis (bea.gov) Exhibit 3 Interest Rates Infla on 6.00% 5.19% 5.30% 5.00% -0.5% -1.2% -2.0% -1.0% -0.6% -0.3% -1.0% 0.0% 2.9% 2.0% 5.0% 5.02% 5.2% 5.0% 4.0% 4.3% 4.3% 4.8% 4.6% 4.00% 3.7% 3.63% 3.56% 3.00% 4.40% 4.11% 3.5% 3.3% 3.2% 3.0% 3.2% 2.8% 2.3% 2.5% 2.9% 2.9% 2.7% 2.5% 2.0% 2.91% 91- Day LIBOR _______ 2.30% 2.00% 1.68% 1.79% 10-Year Treasury _______ 3.8% 3.4% 3.5% 4.61% 1.00% 4.0% 2.5% 1.6% 1.5% 1.6% 1.6% 1.0% 0.5% 0.0% 1.22% 0.69% 0.34% -0.3% -0.5% 0.46% -1.0% 0.00% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Moody’s Précis U.S. Macro September 2010 & U.S. Metro December 2010; wsjprimerate.com/libor 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Moody’s Précis U.S. Macro September 2010; Bureau of Labor Statistics (bls.gov) 2012 2013 2014
  6. 6. Demand For Real Estate  Employment growth lags GDP growth by 2 to 4 quarters  GDP turned positive in 3Q09 — Employment turned positive in 2Q 2010 Forecast
  7. 7. US Commercial Real Estate Cycle Follows US Economic Cycles 3 Key Metrics: • Occupancies • Rents • Prices Source: Glenn Mueller, PhD
  8. 8. Market Cycle Analysis Physical Cycle Demand & Supply drive Occupancy Occupancy drives Rental Growth
  9. 9. Market Cycle Quadrants Phase 2 - Expansion Phase 3 - Hypersupply Demand/Supply Equilibrium Point Occupancy Long Term Vacancy Average Phase 1 - Recovery Phase 4 - Recession Legg Mason Real Estate Research Time
  10. 10. Phase 2 - Expansion Phase 3 - Hypersupply Demand/Supply Equilibrium Occupancy High Rent Growth in Rent Growth Rents Rise Tight Market Positive But Rapidly Declining Toward New Construction Levels Cost Feasible New Long Term Average Occupancy Construction Rents Below Inflation & Negative Rent Growth - Below Inflation Rental Growth Physical Market Cycle Characteristics Negative Rental Growth Phase 1 - Recovery Source: Mueller,1995 Phase 4 - Recession Time
  11. 11. Historic National Office Rental Growth 11.0% 10.5% 11 10 12 6.4% 9 8 Occupancy 10.0% 13 6 14 6.7% 5 0.3% 4 15 4.0% -1.0% -3.0% 1.6% 3 1 3.3% 7 Long Term Average Occupancy 1.7% 12.5% 6.1% 2 2.7% 16 30 Year Cycle - Periods 1968-1997 -1.5% Time 1
  12. 12. Historic National Industrial Rental Growth % 8.3% 6.8% 4.6% 11 10 5.1% 9 8 Long Term Avg Occupancy 7 3.0% 8.5% 12 5.9% 3.8% 14 6 Occupancy 4.8% 13 5 -2.1% 4 15 4.6% -0.4% 0.8% 3 1 0.7% 0.4% 16 2 30 Year Cycle - Periods 1968-1997 2.8% Time 1
  13. 13. National Property Type Cycle Locations Phase III — Hypersupply Phase II — Expansion Apartment Health Facility Hotel — Ltd. Service Retail — 1st Tier Regional Mall Retail — Factory Outlet+1 Industrial — R&D Flex Retail — Neighborhood/Community+1 10 9 11 12 8 7 13 LT Average Occupancy 6 Hotel — Full-Service 1 2 3 4 5 Industrial — Warehouse Senior Housing Office — Downtown+1 Office — Suburban Retail — Power Center+1 Phase I — Recovery 14 15 16 2nd Qtr 2013 Source: Mueller, 2013 Phase IV — Recession 1
  14. 14. Office Market Cycle Analysis 2nd Quarter, 2013 Albuquerque Chicago Cleveland East Bay Hartford Las Vegas Long Island Los Angeles Milwaukee Norfolk N. New Jersey Sacramento San Antonio Stamford Wilmington Wash DC 1 3 2 Cincinnati Atlanta Baltimore+1 Boston Charlotte Dallas FW Denver Houston Miami+1 Minneapolis New Orleans+1 Nashville Oklahoma City Orlando+1 Philadelphia+1 Riverside Seattle+1 Tampa 4 Columbus Detroit Ft. Lauderdale+1 Indianapolis Kansas City+1 Memphis Orange County Palm Beach Phoenix+1 Richmond San Diego St. Louis+1 NATION Pittsburgh Portland+1 Raleigh-Durham+1 San Francisco+2 10 11 9 12 8 13 7 14 6 5 Jacksonville+1 San Jose Austin Honolulu New York+1 Salt Lake LT Average Occupancy Source: Mueller, 2013 15 16 1
  15. 15. Industrial Market Cycle Analysis 2nd Quarter, 2013 Denver+1 Salt Lake+1 San Francisco+1 Long Island Norfolk Orange County Sacramento St. Louis 1 2 Hartford Jacksonville Las Vegas+1 New Orleans+1 Orlando Richmond+1 Stamford 3 Atlanta+1 Boston+1 Austin+1 Baltimore Palm Beach+2 Cincinnati Portland+1 Cleveland San Antonio+1 Columbus+2 Seattle+1 Detroit East Bay Philadelphia Raleigh-Durham Tampa Wash DC 7 6 4 Charlotte+1 Kansas City+1 Memphis+1 Milwaukee Miami+1 Nashville+2 New York+1 N. New Jersey Oklahoma City Phoenix NATION 5 Honolulu Houston Indianapolis Los Angeles Riverside San Jose 10 11 9 12 8 13 LT Average Occupancy 14 15 Chicago+1 Dallas FW+2 Ft. Lauderdale+1 Minneapolis Pittsburgh San Diego+1 Source: Mueller, 2013 16 1
  16. 16. Apartment Market Cycle Analysis 2nd Quarter, 2013 Charlotte Cleveland Indianapolis+1 Jacksonville Oklahoma City Orlando Raleigh-Durham Stamford St. Louis Tampa Norfolk 1 2 Detroit Nashville Palm Beach+1 3 Memphis Richmond San Antonio Chicago+1 East Bay Las Vegas+1 Long Island Miami N. New Jersey+1 Portland+1 Salt Lake+1 San Diego Seattle +5 Wash DC 7 6 4 5 Atlanta+1 Houston Ft. Lauderdale Milwaukee New Orleans+1 Orange County Baltimore+1 Columbus+1 Cincinnati Hartford Honolulu Kansas City Los Angeles Minneapolis Philadelphia Pittsburgh Riverside Sacramento+1 NATION Boston+1 Dallas FW+1 Denver New York Phoenix+1 San Jose+1 10 11 9 8 Austin San Francisco 12 13 LT Average Occupancy Source: Mueller, 2013 14 15 16 1
  17. 17. Retail Market Cycle Analysis 2nd Quarter, 2013 Atlanta Chicago Cincinnati Kansas City Milwaukee N. New Jersey Philadelphia Richmond Riverside 1 2 Cleveland Detroit 3 Boston+1 New York+1 Austin+1 Pittsburgh Baltimore+1 Salt Lake Miami+2 Wash DC Minneapolis+1 Hartford San Diego Indianapolis Las Vegas+1 Palm Beach NATION+1 Honolulu+1 San Francisco+1 San Jose+1 10 11 9 12 8 7 6 4 5 Charlotte Columbus Dallas FW+1 Ft. Lauderdale+1 Jacksonville Memphis Nashville New Orleans+1 Norfolk Oklahoma City+1 Orange County Orlando Phoenix+1 Sacramento+1 St. Louis Tampa 13 LT Average Occupancy Denver+1 East Bay Houston Long Island+1 Los Angeles +1 Portland+1 Raleigh-Durham+1 Seattle 14 15 San Antonio+1 Stamford Source: Mueller, 2013 16 1
  18. 18. Hotel Market Cycle Analysis 2nd Quarter, 2013 Atlanta Baltimore Charlotte Cleveland Detroit+1 Orange County Cincinnati Hartford Kansas City Norfolk Phoenix Richmond Sacramento 1 Chicago Los Angeles+1 Minneapolis+1 East Bay Nashville New Orleans Pittsburgh+1 Seattle+1 NATION Ft. Lauderdale+1 Miami N. New Jersey+1 Palm Beach+1 Portland+1 San Francisco+1 San Jose+1 Honolulu New York 10 9 8 7 2 Indianapolis Memphis Milwaukee Riverside Stamford 4 5 Columbus Dallas FW Jacksonville Las Vegas Oklahoma City+1 Raleigh-Durham St. Louis San Antonio 12 13 6 3 11 LT Average Occupancy Philadelphia Salt Lake Tampa Austin+1 Boston+1 Denver+1 Houston+1 Long Island Orlando San Diego Wash DC Source: Mueller, 2013 14 15 16 1
  19. 19. 1970s Cycle •Factors Driving The First Half Cycle (5 Year) •Strong Demand from the 1960s that stopped •Recession 1974 •Capital Flow - Mortgage REITs produced oversupply •Factors Driving The Second Half Cycle (5 Year) •Baby Boom Generation Goes to Work = Demand •Capital Flow Shut Down = no supply = Lenders Recover •Markets tighten and reach peak occupancy 1979 (5% vacancy)
  20. 20. 1970s Office Demand & Supply Demand Supply 8% Oversupply Years Baby Boomers Go To Work 6% 4% 2% Source: FW Dodge, CB Commercial, BLS, Mueller 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 0%
  21. 21. 1980s Cycle •Factors Driving The First Half Cycle (5 Year) •Tight market in 1979 pushes rents and prices up •Inflation pushes real estate prices higher •Tax Act of 1981 attracts taxable investors supply up •Thrift Deregulation allows capital to flow •Factors Driving The Second Half Cycle (5 Year) •Tax Act of 1986 slows taxable investors, but not tax free •Poor stock market attracts Pension & Foreign capital •Rising R.E. prices masks poor income returns
  22. 22. 1980s Office Demand & Supply Demand Supply 10% 8% Oversupply Years 6% 4% 2% Source: FW Dodge, CB Commercial, BLS, Mueller 1989 1988 1987 1986 1985 1984 1983 1982 1981 1980 0%
  23. 23. 1990s Cycle •Factors Driving The First Half Cycle (5 Year) •Moderate but stable demand growth (1991 recession minor) •Oversupply and Foreclosures shut down construction •Excess space Absorbed – ―Markets Recover‖ •Factors Driving The Second Half Cycle (5 Year) •Moderate Demand growth Continues •Oversupply Absorbed and Return Performance improves •Construction ―Constrained‖ causing rents & prices to rise •More ―Efficient Markets‖ match supply to demand
  24. 24. Demand Supply 1990s Office Demand & Supply 3.0% Demand 2.5% Matched Supply Oversupply Absorbed 2.0% 1.5% 1.0% 0.5% Source: FW Dodge, CB Commercial, BLS, Mueller 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 0.0%
  25. 25. 2000 - 2010 Cycle Demand Globalization‖ - creates more stable U.S. economy •― •Job Growth out of ―Technology Change‖ •2.8 million population growth per year for 10 years •Baby boomers at ―highest income earning‖ years •second home market wave •Echo boom children – college, first job, & renting •Aging population not a major factor till 2014 •Employment Growth drives commercial demand
  26. 26. World Growth Continues U.S. Growth driven by World World GDP Shares Source: World Bank — Historic GDP, Capital Economics Outlook Report — Forecasts, 3Q2011. 2011 & 2012 GDP Forecasts
  27. 27. 2000 - 2010 Cycle Supply Constraint •Public Markets make R.E. Capital markets efficient •Economically Driven capital - low spec construction •500 + Research Watchdogs – Data Available •Constrained Supply (economically driven capital) •construction labor harder to find •materials costs increasing (steel, concrete) •infrastructure problems constrain growth •Feedback loop keeps demand and supply in better balance •Greater transparency •Faster reaction to demand slowdown
  28. 28. Commercial Real Estate Supply Growth – Lowest construction levels in 42 years Source: Property & Portfolio Research & Mueller
  29. 29. 2000s US Office Demand & Supply 2000's Office Demand & Supply 3% 2% 1% 2000 2002 2004 2006 0% Supply Reacted to Demand Slow Down -2% Demand Supply -3% Source: Property & Portfolio Research, Grubb & Ellis, Mueller 2011. 2008 2010
  30. 30. 2012+ Office Demand & Supply Forecast 3% 2012+ Office Demand & Supply Forecast 2% 1% 0% 2011 2013 Demand -1% Source: Property & Portfolio Research, Grubb & Ellis, Mueller 2011. 2015 Supply Demand Avg. = 1.51% Supply Avg. = 0.81%
  31. 31. Occupancy Cycle and Rent Growth Office Cycle 10.0% 8.0% 92 6.0% 4.0% 90 2.0% 0.0% 88 -2.0% -4.0% 86 -6.0% Rent Growth Occupancy Sources: Property and Portfolio Research, Grubb & Ellis, Mueller 2012. 2016 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 84 1982 -8.0%
  32. 32. Office Market Cycle FORECAST 2nd Quarter, 2014 Estimates Albuquerque Boston Cincinnati Columbus Dallas FW Denver East Bay Indianapolis Memphis Miami Norfolk Philadelphia Phoenix+1 Richmond San Antonio+2 San Diego NATION Atlanta Chicago Cleveland Detroit Ft. Lauderdale Kansas City Las Vegas Long Island Los Angeles Milwaukee Sacramento St. Louis 1 2 Hartford N. New Jersey Stamford Wash DC Jacksonville+1 Nashville+1 Oklahoma City+2 Austin Portland+1 Honolulu Riverside 4 Baltimore Charlotte Houston Minneapolis New Orleans 11 9 8 7 6 3 10 5 12 13 Salt Lake 14 LT Average Occupancy New York+1 Pittsburgh Raleigh-Durham San Francisco+2 Orange County+1 Orlando Palm Beach San Jose Seattle Tampa Source: Mueller, 2013 15 16 1
  33. 33. Occupancy Cycle and Rent Growth Industrial Cycle 96.0 8.0% 95.0 6.0% 94.0 4.0% 93.0 2.0% 92.0 0.0% 91.0 -2.0% 90.0 -4.0% 89.0 Rent Growth Occupancy Sources: Property and Portfolio Research, Grubb & Ellis, Mueller 2012. 2016 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 88.0 1982 -6.0%
  34. 34. Industrial Market Cycle FORECAST 2nd Quarter, 2014 Estimates Atlanta+1 Baltimore Boston+1 Charlotte Cincinnati Detroit East Bay Jacksonville Kansas City Milwaukee Nashville+1 Orlando+1 Philadelphia Raleigh-Durham Tampa Richmond Sacramento St. Louis 1 2 Hartford+1 Memphis+1 Miami+1 New York+1 Oklahoma City Phoenix Pittsburgh+1 San Diego NATION 6 3 Long Island 4 5 Cleveland Columbus+1 Las Vegas+1 New Orleans+2 Norfolk Orange County Stamford Wash DC Austin+1 Riverside San Antonio+1 Honolulu Houston Indianapolis Portland+1 Salt Lake San Francisco Seattle+1 10 11 9 8 7 Chicago+1 Dallas FW+1 Ft. Lauderdale+1 Minneapolis+1 N. New Jersey Palm Beach+1 12 Denver+2 Los Angeles San Jose+1 13 LT Average Occupancy Source: Mueller, 2013 14 15 16 1
  35. 35. Occupancy Cycle and Rent Growth Apartment Cycle 6.0% 4.0% 94.5 2.0% 0.0% 93.5 -2.0% -4.0% 92.5 -6.0% Rent Growth Occupancy Sources: Property and Portfolio Research, Grubb & Ellis, Mueller 2012. 2016 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 91.5 1988 -8.0%
  36. 36. Apartment Market Cycle FORECAST 2nd Quarter, 2014 Estimates Baltimore+1 Cincinnati Columbus Detroit Denver Kansas City Minneapolis Seattle+3 NATION Ft. Lauderdale Houston Milwaukee New Orleans+1 Orlando Palm Beach St. Louis Stamford Tampa 6 Raleigh-Durham 1 2 Norfolk 3 4 5 Charlotte Cleveland Indianapolis Memphis Oklahoma City Richmond Atlanta+1 Austin Jacksonville+1 Nashville Orange County Riverside San Antonio San Jose Wash DC Chicago Dallas FW Hartford Honolulu Long Island Los Angeles Miami N. New Jersey Philadelphia Phoenix+1 Pittsburgh Portland Sacramento+1 Salt Lake+1 10 9 11 12 8 7 13 Boston East Bay Las Vegas+2 New York San Diego San Francisco-1 LT Average Occupancy Source: Mueller, 2013 14 15 16 1
  37. 37. Occupancy Cycle and Rent Growth Retail Cycle 6.0% 94 4.0% 93.5 2.0% 93 0.0% 92.5 -2.0% 92 -4.0% 91.5 -6.0% Rent Growth Occupancy Sources: Property and Portfolio Research, Grubb & Ellis, Mueller 2012. 2015 2013 2011 2009 2007 2005 2003 2001 1999 1997 1995 1993 1991 1989 1987 1985 91 1983 -8.0%
  38. 38. Retail Market Cycle FORECAST 2nd Quarter, 2014 Estimates Denver+2 East Bay Houston Long Island+1 Los Angeles Miami+1 Portland+1 Raleigh-Durham+1 Seattle Atlanta Chicago Detroit Kansas City Milwaukee New Orleans N. New Jersey Philadelphia Richmond Riverside Sacramento St. Louis 1 2 Hartford Indianapolis Las Vegas+1 Orlando Palm Beach San Antonio NATION 3 Cleveland Cincinnati 4 Austin+1 Baltimore+1 Boston+1 Minneapolis+1 New York San Diego Pittsburgh+1 Salt Lake Wash DC 10 Honolulu+1 San Francisco+1 San Jose+1 11 9 12 8 7 6 5 Charlotte Columbus Dallas FW+1 Ft. Lauderdale Jacksonville Memphis Nashville Norfolk Oklahoma City+1 Orange County Phoenix Tampa 13 LT Average Occupancy 14 15 Stamford Source: Mueller, 2013 16 1
  39. 39. Occupancy Cycle and Rent Growth Hotel Cycle 7.0% 69.0% 5.0% 3.0% 66.0% 1.0% -1.0% 63.0% -3.0% -5.0% 60.0% -7.0% Rent Growth Occupancy Sources: Property and Portfolio Research, Grubb & Ellis, Mueller 2012. 2016 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 57.0% 1988 -9.0%
  40. 40. Hotel Market Cycle FORECAST 2nd Quarter, 2014 Estimates Kansas City Norfolk 1 2 Long Island Nashville Oakland Philadelphia Pittsburgh Salt Lake Seattle Dallas FW Oklahoma City+1 Cincinnati Hartford Richmond Sacramento 8 7 6 3 4 5 Columbus+1 Indianapolis Jacksonville+1 Memphis Milwaukee Phoenix+1 Raleigh-Durham+1 Riverside+1 San Antonio Stamford St. Louis Atlanta Baltimore Cleveland Charlotte Detroit+1 Las Vegas Minneapolis Orange County Tampa Boston+1 Ft. Lauderdale Orlando Palm Beach +1 Portland+1 San Diego San Jose 10 Honolulu+1 New York+1 11 9 12 San Francisco+1 13 LT Average Occupancy Austin+2 Chicago Denver+1 East Bay Houston+1 Los Angeles+1 Miami New Orleans N. New Jersey Wash DC NATION 14 15 Source: Mueller, 2013 16 1
  41. 41. Market Information used to: • Determine market competition • Set lease strategies • Evaluate improvement programs • Provide knowledge
  42. 42. Real Estate Financial Cycles Capital Flows Affect Prices
  43. 43. Market Cycle Capital Flow Impact Capital Flows to Existing Properties Cost Feasible Rents Reached Hyper Supply LT Occupancy Avg. Capital Flows to New Construction
  44. 44. National Office Physical Market Cycle vs. Financial Cycle = New Permit Values 65,000 96 Physical 60,000 Financial No Lag 50,000 45,000 40,000 88 35,000 30,000 84 25,000 20,000 15,000 80 1972 1976 1980 1984 1988 Source: CB Commercial, Census Bureau Market Cycle Source: BEA, CB Commercial, Mueller 1992 1996 2000 Permit 2004 Value ($Mil) Occupancy 92 55,000
  45. 45. Flow of Funds Commercial Mortgages All Sectors (1976 - 2001) 25,000 False Price Appreciation Support 20,000 ($ Mils) 15,000 10,000 ? 5,000 0 Public Market Volatility -5,000 Source: Federal Reserve 2000Q1 1998Q1 1996Q1 1994Q1 1992Q1 1990Q1 1988Q1 1986Q1 1984Q1 1982Q1 1980Q1 1978Q1 1976Q1 1974Q1 1972Q1 1970Q1 -10,000
  46. 46. Bond Values DROP as Interest Rates Rise 10 Year Treasury Yields 1953 - 2011 Average Total Return 53-80 = 3.9% Average Total Return 80-10 = 8.6% LT Average 6.29% Average Total Return 53-70 = 1.9% * As of 2013 Source: U.S. Treasury — Federal Reserve Bank of St. Louis.
  47. 47. Commercial and Residential Real Estate Bubbles[1] [1] index). S&P/Case-Shiller Housing Price Index CS-10 (residential price index); Moody’s/REAL Commercial Price Index (commercial price
  48. 48. US Commercial Property Prices Moody’s/RCA CPPI Billions Sales Volume Property Prices $160 180.00 $140 $120 160.00 $100 140.00 $80 $60 120.00 $40 100.00 $20 $- 80.00 2001Q1 2002Q1 http://www.rcanalytics.com 2003Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q1 2011Q1 2012Q1 2013Q1
  49. 49. Billions Portfolio Buyers Dominate Trades 160 140 120 100 80 60 40 20 01Q1 02Q1 03Q1 04Q1 05Q1 06Q1 Individual Source: Real Capital Analytics April 2013 07Q1 08Q1 Portfolio 09Q1 10Q1 11Q1 12Q1 13Q1
  50. 50. Property Price Movements Cap Rates Source: Real Estate Research Corporation - Chicago 8.5 8.9 8.5 9.0 8.0 Office - CBD Office - suburban Industrial - Warehouse Industrial - R&D Apartments
  51. 51. Property Price Movements 10.2 7.9 8.9 8.7 Hotels Regional Mall Power Center Neighborhood Comm. Historic Cap Rates 12 11 10 9 8 7 Hotels Regional Mall Source: Real Estate Research Corporation - Chicago Power Center Neighborhood Comm. 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 6
  52. 52. Transaction Cap Rates - RCA 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N J MM 2001 2002 2003 Apartment Avg Cap Rate 2004 2005 2006 Industrial Avg Cap Rate 2007 2008 2009 Retail Avg Cap Rate 2010 2011 2012 Office Avg Cap Rate Properties and portfolios $2.5 million and greater. Prior to 2005, RCA primarily captured sales valued at $5M and above. © Real Capital Analytics, Inc. 2013. Data believed to be accurate but not guaranteed. Last Updated: 6/27/2012 2013
  53. 53. Cap Rate SPREAD over 10 Year Treasury http://www.rcanalytics.com
  54. 54. CBD Office & Apartments Leading Price Recovery Moody’s/RCA Price Indices to 2-13 220.00 200.00 180.00 160.00 140.00 120.00 100.00 80.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Retail Office - CBD Office - Suburban http://www.rcanalytics.com Industrial Office Apartment 2010 2011 2012
  55. 55. Investors Starting to Move Beyond Major Markets Moody’s/RCA Price Indices to 2-13 220 200 180 160 140 120 100 80 2000 2001 2002 2003 Major Markets (All-Property) http://www.rcanalytics.com 2004 2005 2006 2007 National All-Property 2008 2009 2010 2011 2012 Non-Major Markets (All-Property)
  56. 56. Next Favored Tier of Markets Emerging Region/Market Boston New York Metro NYC-Manhattan NYC-Boroughs NYC-Burbs DC Metro Philly/Baltimore NEMA Others NEMA Region Miami/South Florida Tampa/Southw est Florida Orlando/Central Florida Jacksonville/North Florida Atlanta Southeast ex Florida/Atlanta Southeast Region Chicago Midw est ex Chicago Midw est Region Denver Dallas/Houston/Austin Phoenix Southw est Others Southw est Region Seattle San Francisco Metro SF-San Francisco SF-San Jose SF-Oakland Los Angeles Metro LA-CBDWest LA-OrangeCounty LA-ValleyVentura LA-InlandEmpire LA-LongBeach San Diego Sacramento/Central CA Las Vegas West Others West Region US Total Year-Over-Year Price Change 92% 94% 98% 99% 8% 23% 2% 70% -12% 97% 84% 84% 92% 77% 63% 80% 64% 63% 90% 74% 85% 68% 74% 86% 87% 57% 82% 83% 91% 89% 94% 87% 75% 75% 83% 68% 77% 62% 83% 73% 63% 4% 1% 3% 6% 16% -13% 16% 8% 5% 10% 7% 6% -1% 2% 10% 10% 24% 6% 9% 8% 9% 14% 30% -16% -4% -6% -5% 3% -18% 3% -2% 16% 12% -23% 0% 7% All Property Types. Data through Q3'12. Peak pricing benchmarked to Q4'07 http://www.rcanalytics.com Now as % of Peak -2% 37% 65% 74% 74%
  57. 57. Next Favored Tier of Markets Emerging RCA CPPI Rebounding Still Challenged 225 225 200 200 Seattle Miami 175 175 Phila 150 Dallas 150 Houston 125 125 100 100 Phoenix Atlanta Las Vegas http://www.rcanalytics.com '12 '11 '10 '09 '08 '07 '06 '05 '04 '03 '02 '01 '12 '11 '10 '09 '08 '07 '06 '05 '04 50 '03 50 '02 75 '01 75
  58. 58. Composition of CRE Buyers 30% 31% 30% 37% 37% 43% 50% 14% 17% 12% 25% 10% 10% 5% 6% 7% 5% 3% 9% 9% 15% 10% 17% 18% 7% 8% 10% 14% 24% 9% 9% 9% 8% 9% 7% 20% 3% '07 NT REITs http://www.rcanalytics.com 13% 13% 14% 10% 6% 6% 8% '08 '09 '10 Instit Cross-Border 17% 12% 5% 5% 5% '11 '12 H1 '13 REITs User/Other Eq Fund Private
  59. 59. Lending Composition & Owner Changes ALL Property Type Lenders Originations by Volume 2012 All Property Buyers 2012 Net Change To Portfolio Holdings 1% Public/REIT 22% 23% Private Gov't Agency Non-Listed REIT User/Other Financial Insurance Int'lBank 10% 6% Equity Fund National Bank Reg'l/Loc Bank CMBS 14% Cross-Border Private Institutional 16% -$10 7% Source: Real Capital Analytics, 2013 -$5 $0 $5 $10 Billions
  60. 60. Debt Capital: Credit Conditions Improving Composition of Lenders http://www.rcanalytics.com
  61. 61. US Distress – Past The Peak Total Outstanding Distress Troubled REO Restructured Monthly Additions -Workouts -Net Change Resolved $25 $450 $20 $400 $15 $350 $10 $300 $250 $5 $200 $0 $150 -$5 $100 -$10 $50 $0 J '08 J '09 http://www.rcanalytics.com J '10 J'11 J'12 J'13 -$15 J '08 J '09 J '10 J'11 J'12 J'13
  62. 62. 250 CMBS Issuance $ Billions 200 150 100 50 Source: Commercial Mortgage Alert 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 0
  63. 63. Slowing Transactions A Common Trend AMERICAS http://www.rcanalytics.com EMEA ASIA PAC
  64. 64. Global Trade Routes http://www.rcanalytics.com
  65. 65. 2008 Physical and Financial Cycle 2013 Physical Cycle  Demand & Supply affect occupancies  drives rental growth  GDP growth resumed 3Q 2009. Employment growth followed 2Q 2010  RE Demand growth resumed 2Q 2010 Home building employment less than 2% of all U.S. labor  Supply growth slowest in 42+ years — potential absorption jump in 2013?  Recovery phase 2011-2014 - growth phase starts 2014, 2015, 2016? 2012 Financial Cycle  Capital flows affect prices — stock market recovering, volatile in 2013?  Real estate was safest investment alternative 2000-2007, pushing prices up  Real estate prices dropped 2008, 2009 now buying opportunities in 2010 – 2014?  Debt financing hard in 2012 - creating buying opportunity for Cash Buyers  Differentiate residential versus commercial real estate to your investors!
  66. 66. Conclusions • Real estate is a separate asset class – Historically Stable Earnings and price growth – Positive Diversification benefits – Public and Private investment available – Equity and Debt investment available – Fundamentals declined 08, 09 recovering 10-13 – Market & Property Selection Important – Maturing Loans provide buying opportunity
  67. 67. For an electronic copy of the Real Estate Market Cycle Monitor email gmueller@dividendcapital.com

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