Commercial Forum Presentation: Economic Outlook in Uncertain Times

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A look at the commercial market and the outlook.

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Commercial Forum Presentation: Economic Outlook in Uncertain Times

  1. 1. Economic Outlook in Uncertain Times Lawrence Yun, Ph.D. Chief Economist NATIONAL ASSOCIATION OF REALTORS® Presentation at NAR Annual Meeting New Orleans, LA November 5, 2010
  2. 2. Federal Reserve FOMC • Ben Bernanke (Chairman): • “Outlook remains unusually uncertain” • Alan Greenspan (former Chairman): • “If home prices start falling again, we could be facing a double-dip recession” • James Bullard (St. Louis Fed): • “The U.S. is closer to a Japanese-style deflationary outcome” • Thomas Hoenig (Kansas City Fed): • “Too rapid money creation results in eventual high inflation”
  3. 3. U.S. Private Sector Job Gains (863,000 from Jan. to Sep. 2010) -1000 -500 0 500 1000 1500 1980-Jan 1981-Apr 1982-Jul 1983-Oct 1985-Jan 1986-Apr 1987-Jul 1988-Oct 1990-Jan 1991-Apr 1992-Jul 1993-Oct 1995-Jan 1996-Apr 1997-Jul 1998-Oct 2000-Jan 2001-Apr 2002-Jul 2003-Oct 2005-Jan 2006-Apr 2007-Jul 2008-Oct 2010-Jan Month-to-month job gains in thousands
  4. 4. Total Payroll Jobs in the U.S. (same as in 2000, but with 30 million more people) 124000 126000 128000 130000 132000 134000 136000 138000 140000 2000-Jan 2000-Jul 2001-Jan 2001-Jul 2002-Jan 2002-Jul 2003-Jan 2003-Jul 2004-Jan 2004-Jul 2005-Jan 2005-Jul 2006-Jan 2006-Jul 2007-Jan 2007-Jul 2008-Jan 2008-Jul 2009-Jan 2009-Jul 2010-Jan 2010-Jul
  5. 5. How Many Years to Get Job Market Back to Normal? Jobs added per month Assumed new jobs needed for growing population per month How many years? 100,000 100,000 Treading water and never back to normal 200,000 100,000 6.3 years 300,000 100,000 3.2 years 400,000 100,000 2.1 years
  6. 6. GDP Growing, but Decelerating annualized % growth rate
  7. 7. Consumer Expenditure (Inflation adjusted in GDP accounting) 7000 7500 8000 8500 9000 9500 $ billion
  8. 8. Personal Income (Inflation adjusted, with and without government transfer payments) 7000 7500 8000 8500 9000 9500 10000 10500 2000-Q2 2000-Q4 2001-Q2 2001-Q4 2002-Q2 2002-Q4 2003-Q2 2003-Q4 2004-Q2 2004-Q4 2005-Q2 2005-Q4 2006-Q2 2006-Q4 2007-Q2 2007-Q4 2008-Q2 2008-Q4 2009-Q2 2009-Q4 2010-Q2 With Transfer Payments Without Transfer Payments $ billion
  9. 9. Savings Rate 0 2 4 6 8 10 12 14 1980-Jan 1981-Mar 1982-May 1983-Jul 1984-Sep 1985-Nov 1987-Jan 1988-Mar 1989-May 1990-Jul 1991-Sep 1992-Nov 1994-Jan 1995-Mar 1996-May 1997-Jul 1998-Sep 1999-Nov 2001-Jan 2002-Mar 2003-May 2004-Jul 2005-Sep 2006-Nov 2008-Jan 2009-Mar 2010-May
  10. 10. Corporate Profits and Business Spending 200 700 1200 1700 2200 2700 Business Spending Profits $ billion
  11. 11. U.S. Private Sector Job Gains (763,000 from Jan. to Aug. 2010) -1000 -500 0 500 1000 1500 1980-Jan 1981-Apr 1982-Jul 1983-Oct 1985-Jan 1986-Apr 1987-Jul 1988-Oct 1990-Jan 1991-Apr 1992-Jul 1993-Oct 1995-Jan 1996-Apr 1997-Jul 1998-Oct 2000-Jan 2001-Apr 2002-Jul 2003-Oct 2005-Jan 2006-Apr 2007-Jul 2008-Oct 2010-Jan Month-to-month job gains in thousands
  12. 12. Total Payroll Jobs in the U.S. (same as in 2000, but with 30 million more people) 124000 126000 128000 130000 132000 134000 136000 138000 140000 2000-Jan 2000-Jul 2001-Jan 2001-Jul 2002-Jan 2002-Jul 2003-Jan 2003-Jul 2004-Jan 2004-Jul 2005-Jan 2005-Jul 2006-Jan 2006-Jul 2007-Jan 2007-Jul 2008-Jan 2008-Jul 2009-Jan 2009-Jul 2010-Jan 2010-Jul
  13. 13. How Many Years to Get Job Market Back to Normal? Jobs added per month Assumed new jobs needed for growing population per month How many years? 100,000 100,000 Treading water and never back to normal 200,000 100,000 6.3 years 300,000 100,000 3.2 years 400,000 100,000 2.1 years
  14. 14. Local Job Market Differences Metro Job Changes from 12-months ago Boston +36,600 Dallas – Ft. Worth +28,700 Washington +20,500 Detroit -31,700 San Francisco -42,000 Chicago -71,600
  15. 15. 3500 4000 4500 5000 Source: BLS In thousands Total Payroll Jobs in Michigan
  16. 16. 2000 2200 2400 2600 Source: BLS) In thousands Total Payroll Jobs in Washington D.C. Metro
  17. 17. Weekly 1st time Unemployment Claims: Need to Fall Further 0 100 200 300 400 500 600 700 2000-Feb 2000-Jul 2000-Dec 2001-May 2001-Oct 2002-Mar 2002-Aug 2003-Jan 2003-Jun 2003-Nov 2004-Apr 2004-Sep 2005-Feb 2005-Jul 2005-Dec 2006-May 2006-Oct 2007-Mar 2007-Aug 2008-Jan 2008-Jun 2008-Nov 2009-Apr 2009-Sep 2010-Feb 2010-Jul In thousands
  18. 18. $- $50 $100 $150 $200 $250 $300 J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J 2008 2009 2010 Billions Cumulative Distress Commercial Loans Troubled REO Restructured Resolved Source: Real Capital Analytics
  19. 19. Real Estate Price 1.0 1.2 1.4 1.6 1.8 2.0 2001-Jan 2001-Jun 2001-Nov 2002-Apr 2002-Sep 2003-Feb 2003-Jul 2003-Dec 2004-May 2004-Oct 2005-Mar 2005-Aug 2006-Jan 2006-Jun 2006-Nov 2007-Apr 2007-Sep 2008-Feb 2008-Jul 2008-Dec 2009-May 2009-Oct 2010-Mar Residential: Case-Shiller Commercial: MIT
  20. 20. - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 J 06 M M J S N J 07 M M J S N J 08 M M J S N J 09 M M J S N J 10 M M J S Commercial Mortgage Backed Security Issuance Monthly CMBS Issuance ($ Mil) Source: Commercial Mortgage Alert
  21. 21. 0 50 100 150 200 250 300 350 400 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 2009.Q2 2009.Q3 2009.Q4 2010.Q1 2010.Q2 Origination Volume Index (2001 Qtr Avg=100) Source: Mortgage Bankers Association
  22. 22. - 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 J 06 F M A M J J A S O N D J 07 F M A M J J A S O N D J 08 F M A M J J A S O N D J 09 F M A M J J A S O N D J 10 F M A M J J A S Public Equity Monthly US REIT Equity Issuance ($ Mil) Source: NAREIT
  23. 23. 14.0% 14.5% 15.0% 15.5% 16.0% 16.5% 17.0% 17.5% -15000 -10000 -5000 0 5000 10000 15000 2009.4 2010.1 2010.2 2010.3 2010.4 2011.1 2011.2 SquareFeet('000s) Office Fundamentals Completions Absorption Vacancy Source: NAR / CBRE-EA
  24. 24. 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% Office Vacancies: 2010.Q3 Source: NAR / CBRE-EA
  25. 25. 12.0% 12.5% 13.0% 13.5% 14.0% 14.5% -40000 -30000 -20000 -10000 0 10000 20000 30000 40000 2009.4 2010.1 2010.2 2010.3 2010.4 2011.1 2011.2 SquareFeet('000s) Industrial Fundamentals Completions Absorption Vacancy Source: NAR / CBRE-EA
  26. 26. Imports and Exports 0 500 1000 1500 2000 2500 3000 1980-Q1 1981-Q2 1982-Q3 1983-Q4 1985-Q1 1986-Q2 1987-Q3 1988-Q4 1990-Q1 1991-Q2 1992-Q3 1993-Q4 1995-Q1 1996-Q2 1997-Q3 1998-Q4 2000-Q1 2001-Q2 2002-Q3 2003-Q4 2005-Q1 2006-Q2 2007-Q3 2008-Q4 2010-Q1 $ billion
  27. 27. U.S. Dollar Strength 0 20 40 60 80 100 120 140 1980-Feb 1981-Feb 1982-Feb 1983-Feb 1984-Feb 1985-Feb 1986-Feb 1987-Feb 1988-Feb 1989-Feb 1990-Feb 1991-Feb 1992-Feb 1993-Feb 1994-Feb 1995-Feb 1996-Feb 1997-Feb 1998-Feb 1999-Feb 2000-Feb 2001-Feb 2002-Feb 2003-Feb 2004-Feb 2005-Feb 2006-Feb 2007-Feb 2008-Feb 2009-Feb 2010-Feb Federal Reserve Board’s Trade Weighted Exchange Value of $
  28. 28. 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Industrial Vacancies Source: NAR / CBRE-EA
  29. 29. 11.0% 11.5% 12.0% 12.5% 13.0% 13.5% -3000 -2000 -1000 0 1000 2000 3000 4000 2009.4 2010.1 2010.2 2010.3 2010.4 2011.1 2011.2 Percentage(%) SquareFeet(000's) Retail Fundamentals Completions Absorption Vacancy Source: NAR / CBRE-EA
  30. 30. Retail Sales (Raw nominal dollar figures) 250000 270000 290000 310000 330000 350000 370000 390000 2000-Jan 2000-Jul 2001-Jan 2001-Jul 2002-Jan 2002-Jul 2003-Jan 2003-Jul 2004-Jan 2004-Jul 2005-Jan 2005-Jul 2006-Jan 2006-Jul 2007-Jan 2007-Jul 2008-Jan 2008-Jul 2009-Jan 2009-Jul 2010-Jan 2010-Jul $ million
  31. 31. Retail Sales (adjusted for inflation) 0.85 0.90 0.95 1.00 1.05 1.10 1.15 2000-Jan 2000-Jun 2000-Nov 2001-Apr 2001-Sep 2002-Feb 2002-Jul 2002-Dec 2003-May 2003-Oct 2004-Mar 2004-Aug 2005-Jan 2005-Jun 2005-Nov 2006-Apr 2006-Sep 2007-Feb 2007-Jul 2007-Dec 2008-May 2008-Oct 2009-Mar 2009-Aug 2010-Jan 2010-Jun 5% higher From 2000
  32. 32. 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% Retail Vacancies Source: NAR / CBRE-EA
  33. 33. 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% -100000 -50000 0 50000 100000 150000 200000 2009.4 2010.1 2010.2 2010.3 2010.4 2011.1 2011.2 Percent(%) #ofUnits Multi-Family Fundamentals Completions Absorption Vacancy Rate Source: NAR / CBRE-EA
  34. 34. Homeownership Rate 60 61 62 63 64 65 66 67 68 69 70 1980-Q1 1981-Q2 1982-Q3 1983-Q4 1985-Q1 1986-Q2 1987-Q3 1988-Q4 1990-Q1 1991-Q2 1992-Q3 1993-Q4 1995-Q1 1996-Q2 1997-Q3 1998-Q4 2000-Q1 2001-Q2 2002-Q3 2003-Q4 2005-Q1 2006-Q2 2007-Q3 2008-Q4 2010-Q1
  35. 35. 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% Multifamily Vacancies: 2010.Q3 Source: NAR / CBRE-EA
  36. 36. -7.0% -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 2009.1 2009.2 2009.3 2009.4 2010.1 2010.2 2010.3 2010.4 2011.1 2011.2 National Rents OFFICE INDUSTRIAL RETAIL MULTIFAMILY Source: NAR / CBRE-EA
  37. 37. 57% 43% Did you complete a commercial sales transaction? Yes No 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Current ChallengesOther Pricing Gap between Buyers and Sellers National Economy Local Economy Financing Distress Source: NAR REALTORS® Commercial Activity: 2010.Q2
  38. 38. 0 20 40 60 80 100 120 140 SIOR Commercial Real Estate Index Source: SIOR, NAR
  39. 39. $0 $20 $40 $60 $80 $100 $120 $140 Billions U.S. Sales Volume: Properties valued over $2.5 million Apartment Industrial Office Retail Source: Real Capital Analytics 2010.Q3: UP 115% Y-o-Y
  40. 40. 1% 2% 8% 13% 22% 54% Over $10 M Between $5 M and $10 M $2 M and $5 M Between $1 M and $2 M Between $500K and $1 M Under $500K Dollar amount of last transaction Source: NAR REALTORS® Commercial Activity: 2010.Q2
  41. 41. REALTORS® Commercial Activity – 2010.Q2 Sales Volume Compared with Previous Year Down 16% Sales Prices Compared with Previous Year Down 18% Expected Inventory Availability for the Next 12 Months Up 13% Rental Volume Compared with Previous Quarter Down 6% Rental Rates Compared with Previous Quarter Down 10% Level of Rent Concessions Compared with Previous Quarter Up 9% Direction of Business Opportunities Compared with Previous Quarter Down 4%
  42. 42. 5% 6% 7% 8% 9% 10% Cap Rates Apartment Industrial Office Retail Source: Real Capital Analytics
  43. 43. 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% J '01 A J O J '02 A J O J '03 A J O J '04 A J O J '05 A J O J '06 A J O J '07 A J O J '08 A J O J '09 A J O J '10 A J All Core Properties 10-Year Treasury Avg Cap rate Source: Real Capital Analytics 483489
  44. 44. 10-Year Treasury impacted by Inflationary Expectations
  45. 45. Inflationary Pressure ? Indicator % change from one year ago Consumer Price Index 1.2% Producer Price Index (Finished Product) 3.0% Producer Price Index (Intermediate Product) 5.0% Producer Price Index (Crude Product) 18.2% Dow Jones Commodity Spot Price Index 21.1% Gold Price Record High Price
  46. 46. U.S. Budget Deficit -1,600,000 -1,400,000 -1,200,000 -1,000,000 -800,000 -600,000 -400,000 -200,000 0 200,000 400,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: CBO, NAR estimate
  47. 47. Baseline Outlook • Moderate GDP Expansion 2 to 2.5% in the next 2 years (historical average is 3%) • 1.5 million annual job additions in the next 2 years • Unemployment rate of 8% in 2012 … and normal 6% in 2015
  48. 48. Baseline Outlook Cont. • Commercial lending to steadily improve … because of record high bank profits • Net absorption steadily improve … because of recovering job market • Rents stabilize (but no meaningful increase) … because of very low newly built inventory • Cap rate falls … price floor established and because of improved investor confidence (to move money out of low yielding Treasuries)
  49. 49. Alternative Outlooks • High inflation … people desire tangible investment like real estate, but interest rate will be higher • Deflation … investors hold back for better price … holds back economy • Budget deficit tipping point … higher interest rate and sharp cut back in standard of living • Sharp 4% to 5% GDP growth … business spending returns in line with profits … faster job creation … faster commercial market recovery

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