Slides from the Ten-X Mid-Year US Economic and CRE Market Update webinar on September 19, 2017.

1. Outlook for the Economy,
Capital Markets, and Real Estate
Peter Muoio
EVP and Chief Economist
Ten-X Research
September 2017

2. The Backdrop
Uncertainty Surprisingly Retreating

3. US Policy Uncertainty Picked Up Following the Election, but
Has Been Subsiding of Late
Sources: Steven Davis, Scott Baker and Nicholas Bloom, Ten-X Research
Heightened Uncertainty Constrains Investment and Economic Growth
3

4. Uncertainty Has Also Eased Abroad
Sources: Bloomberg, Ten-X Research
Global Policy Uncertainty Index Recently Touched Highest Point in its History but
Has Subsided
4

5. Where Are We Now Relative to Prior US Expansions?
Sources: NBER, Ten-X Research
Current Expansion Is Now Less Than a Year Away from Becoming Second
Longest in US History
5

6. A Closer Look at the Performance of the Current Expansion
Sources: NBER, BEA, BLS, Ten-X Research
Pace of Current Expansion Much Slower Than the Average of Previous 10 Expansions
6
Expansion, Trough to Peak Duration (Months)
Avg. Annual Real
GDP Growth (%)
Avg. Annual Job
Growth (%)
Post World War II (1945 - 1948) 37 N/ A N/ A
Korean War Era (1949 - 1953) 45 7.2 4.6
Mid-50's (1954 - 1957) 39 3.9 2.5
Late 50's (1958 - 1960) 24 5.1 3.6
The 60's Boom (1961- 1969) 106 5.8 3.7
Early 70's (1970 - 1973) 36 4.9 3.5
Post-Vietnam (1975 - 1980) 58 4.4 3.8
Early 80's (1980 - 1981) 12 3.5 1.8
"Morning in America" (1982 - 1990) 92 4.8 3.1
Tech Boom (1991- 2001) 120 4.2 2.2
The Housing Bubble (2001- 2007) 73 2.9 0.9
98 2.2 1.5
Through 8/ 2017 Through 2Q17 Through 7/ 2017
58.4 4.7 3.0
Previous 11Expansions Previous 10 Expansions Previous 10 Expansions
Current Expansion (2009 to Present)
Post World War II Averages

7. Potential “Landmines” That Could Disrupt Expansion
Source: Ten-X Research
Triggered Domestically…
◆ Congress set to vote to raise the debt ceiling and agree on a budget
◆ Potential tax reform- lowering corporate tax and income tax rates
◆ Hurricane Harvey’s destruction in the Southwest and Irma in the Southeast could
have dramatic impacts on housing and retail markets
◆ CMBS market implosion due to retail struggles.
Triggered Abroad…
◆ Trade Shock: NAFTA/EU/Brexit v Trump administration.
◆ North Korea missile testing
◆ Chinese Economic Recession: Excess debt in the system, struggling with
transitioning economy, capital outflows could lead to very strict capital controls.
◆ EU Chaos: Brexit negotiations,
◆ Hot spots get hotter: Syriq/Iran/Russia…
◆ Rift in Middle East and the isolation of Qatar.
7

8. Economic Overview
Key Drivers of the Macro Landscape

9. Unemployment Low
Payroll Gains Somewhat Slower but
Remain Healthy
Labor Market and Consumer Driving Economy
Sources: BLS, Ten-X Research
Labor Market Remains Key Engine of Expansion Amid Turbulence
9

10. Wage Growth Is Beginning to Slow
Various Wage Growth Measures Slowing Despite Low
Unemployment
Sources: BLS, BEA, Atlanta Fed, Current Population Survey, Ten-X Research
ECI Growth Range-Bound Between 2 and 2.5%
Atlanta Fed’s Wage Growth Flattened
Recently but Maintains Upward Trend Overall
Despite Slowing, Average Hourly Earnings
Sustaining Healthy Pace
10

11. Home Sales Fell in the Second Quarter Due
to Tightening Inventory
Housing Prices Well Above Prior
Peaks
Single-Family Market Constrained by Low Inventory and Has
Lost Momentum
Sources: Census, NAR, HUD, FHFA, IHS, Ten-X Research
Historically Tight Inventory Levels Continue to Weigh on Sales Growth and Are
Driving Prices Higher, Eroding Affordability
11

12. Consumer Confidence Remains Elevated Consumer Spending Is Rising
Healthy Labor Market Translating into Higher Spending
Sources: BEA, Conference Board, Census, Ten-X Research
Consumer Confidence Elevated; Consumer Spending at Record High
12

13. Northwest, Southwest & Southeast Seeing Big Gains from Domestic Migration
States that Receive and Lose Domestic Migration
Sources: Census, Ten-X Research
◆ Heat map highlights 2016 population growth from domestic migration.
◆ OR, NV, ID, FL, SC had the greatest boost from domestic inflows.
◆ Majority of Northeast, Midwest, & CA among those that see outflows.
13

14. Northeast Standing its Ground; Midwest With Weakest Outlook
Current Momentum Strongest in the Southeast, Southwest,
and West
Sources: Ten-X Research
◆ Economy ratings range from 1 (very strong) to 6 (very weak) based on our analysis
of current and near-term economic momentum.
◆ Individual box size is based on market population.
14

15. Capital Markets
Overview

16. Sources: RCA, Ten-X Research
US CRE Deal Volume Looks to Be Recovering From 1st Quarter
Slump
Volume Down About 5% from a Year Ago
◆ Deal volume across all asset classes measured about $109 billion in the second
quarter.
16

17. Sources: Situs/RERC, Google, Ten-X Research
Ten-X August CRE Nowcasts Show Pricing Moving Sideways
All Property Nowcast Fell 0.1% on the Month in August, Marking Its Fourth
Consecutive Decline
◆ The Ten-X CRE Nowcast shows that pricing remains weak, falling for the fourth
consecutive month in August. These continued declines have brought the Nowcast
up just 5.8% from a year ago.
17

18. Sources: RCA, Ten-X Research
All Property Cap Rates Rose Again in Second Quarter, Capping
Off Three Straight Increases
Spreads Wider as Treasuries Dipped
◆ Overall cap rate spreads rose to 405 bps, as the 10-year US treasury rate fell to
2.2% in the second quarter.
◆ Caps for all sectors, except hotel and apartment, remain in the 6% range.
◆ Lower investor confidence, as a result of the current political climate and its fiscal
uncertainty is causing yields to fall.
18
0
100
200
300
400
500
600
700
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
'10 '11 '12 '13 '14 '15 '16 '17
10yr UST* Cap Rate Spread (bps)

19. Retail and Hotel were Only Sectors to See
Cap Rates Rise in the Second Quarter
Cap Spreads Remain Well Below Their 10-Year
Average, Except for Hotel Sector
Sources: RCA, Ten-X Research
A Closer Look at Cap Rates and Cap Spreads by Sector
Cap Rates Fell Slightly Most Sectors in the 2nd Quarter, as Treasury Yields Declined 30
bps; Cap Spreads Have Widened Adding a Cushion to Additional Rate Hikes
19

20. CRE Segments

21. Apartment Segment
• Increased development will cause
a rise in vacancies, which would
be exacerbated in the event of a
downturn.
• Millennials living at home
represent untapped demand
source, sustaining great long-
term prospects.
• Single family affordability
trending downward, but remains
stronger than apartment.

22. Homeownership Improving from its
2016 Trough, but Remains Very Low
Household Formations Healthy
Sources: Census, Ten-X Research
Strong Apartment Demand Dynamics Continue
to Prevail
Low Homeownership Rates Continue to Support Renter Households in
Conjunction With Healthy Household Formations
22

23. Although Slowing, Supply Continues to
Outpace Demand Through 2017
US Effective Apartment Rents
Continue to Soar
Sources: Reis, Ten-X Research
Apartment Market Remains on Solid Footing but in Late Cycle
Vacancies Have Been in the Low-4% Range Since Late 2013 though They Are
Beginning to Tick Up
23

24. However Many Millennials Living at Home Represent Pent-Up Demand
Falling Youth Unemployment Helping to
Generate Household Formations
Millennial Age Cohort Is Now the Largest in the US
Yet Nearly One-Third of 18-34 Year Olds
Are Still Living With Their Parents
Sources: Census, BLS, National Vital Statistics Report, Ten-X Research
Millennials Slowly Beginning to Feed into Apartment Demand
24

25. Apartment Vacancies Will Approach 6% in
2020 at Height of Downturn
Rents Set to Reach New Highs Through
2021, Even Amid Cyclical Stress Test
Sources: Reis, Ten-X Research forecasts
Vacancies Set to Rise, But Rents Keep Growing
Overwhelming Supply Pipeline Will Push Vacancies Near 6%, Before Demand Picks
Up In 2021
25
*Forecasts included in this presentation do not account for the effects of hurricanes
Harvey or Irma.

26. Several Key Markets Face Massive Influxes of New Supply
Sources: Ten-X Research
Many Apartment Markets Still Holding Up, but the Sector’s
Transition into Later Cycle Phase Continues
◆ Our forward view of segment fundamentals on scale of 1/dark green (very strong)
to 6/dark red (very weak).
◆ Individual box size is based on market apartment inventory.
26

27. Office Segment
• Lukewarm US-level recovery is
masking metro-level bifurcations.
• Strong office markets have
compensated for markets barely
out of downturn but many of
them now face increased supply.
• Cyclical and secular risks
becoming more prominent.
Demand is constrained by a
nearly full labor market and
shrinking space per worker.

28. Sources: BLS, CoreNet Global, Ten-X Research
Office Job Growth Continues but Major Market Divergence
Modern Floor Plans Trending Toward Condensed Desk Layouts and Less On-Site
Storage Decreasing Space per Worker
◆ No more file cabinets (medical office, legal, all offices).
◆ The “cloud” eliminates servers; work remotely, “hoteling”.
◆ Enclosed offices à Cubicles à Trading floor style.
Technological evolutions dovetailing with shifting work lifestyles, constraining office
demand:
Year
Average Square
Feet Per Worker
2010 225
2012 176
2017 151
*Projected
*
Metro by Metro Divergence Occurring Under
the Surface of US Level Office Job Growth Office Space Per Employee Shrinking
28

29. Absorption Continues to Weaken in the Second
Quarter, Overwhelmed by New Supply
Year Over Year Effective Rent Growth Has Now
Decelerated for Five Consecutive Quarters
Sources: Reis, Ten-X Research
Office Fundamentals Soft So Far in 2017
Vacancies Flat, While Rent Growth Still Decelerating
29

30. Vacancies Look to Remain Well Above Previous
Cycle Lows Rents Pressured by Weak Fundamentals
Sources: Reis, Ten-X Research forecasts
Office Fundamentals Will Improve Slowly in Near Term
Risk of a Cyclical Downturn Escalates as the Business Cycle Ages
30

31. Gap Between CBD and Suburban Office Space is
Narrowing Again
Highly Walkable Suburban Pricing
Elevated Relative to Other Suburban
Pricing
Sources: Reis, Ten-X Research forecasts
There is Strength in Some Suburban Office Pricing
Although CBD Office Pricing Continues to Hold Above Suburban, Walkable Suburban
Office Pricing is Strong
31
◆ Not all suburban office pricing is weak. When broken down by walkability, highly
walkable suburban office pricing is much stronger than somewhat walkable and
car-dependent pricing.

32. Very Few Markets Face Moderate Prospects, Portland is Only Metro with Positive
Outlook
Sources: Ten-X Research
Office Sector Weakness of Two Kinds: Anemic Demand and
Increased Supply
◆ Our forward view of segment fundamentals on scale of 1/dark green (very strong)
to 6/dark red (very weak).
◆ Individual box size based on market office inventory.
32

33. Retail Segment
• Brick & mortar continues to be
hurt by the accelerating growth
of e-commerce and shift in
spending toward experiences.
• Strong economic and
demographic conditions in the
Southwest and Southeast have
helped offset the effects of e-
retail.

34. Effective Rents Up a Mere 2.6%
Above Prior Cyclical Peak
Supply Additions Far Outweighed Demand in the
Second Quarter, Pushing Vacancies to 10%
Sources: Reis, Ten-X Research
Retail Segment Fundamentals Worsened Again in Mid-2017
Vacancies Still Just 110 bps Below Their Cyclical Peak
34

35. Sources: Census, Reis, Ten-X Research
E-Retail Share of Total Sales Continues Secular Rise
Bricks & Mortar Retail Sales Growing at a Substantially Slower Pace Than E-Retail
E-Retail Sales Growth Remains an Impressive
11% Annually, Traditional Weakening
E-Retail Now Comprises More Than 14%
of Non-Auto Retail Sales
Uninterrupted Decline in Retail Space
Per Person Persists
35

36. Sources: S&P Capital IQ, S&P Global Market Intelligence, Credit Analytics, Bloomberg, Credit Suisse, Ten-X Research
Malls Feeling the Most Heat, as Traditional Anchor Tenants Are
Bearing the Brunt of the Bricks and Mortar Fallout
Department Store Sales Down 37% from 2001 Peak
Department Store Sales Languishing
at Lowest Level in Over 25 Years
… A Trend Not Boding Well for Common Mall Tenants,
Which Carry the Highest Risk of Default
Retailers Are Filing for Bankruptcy at a
Record Pace in 2017…
36

37. Modest Further Vacancy Improvement
Retail Effective Rents Will Rise
Moderately in Near Term
Sources: Reis, Ten-X Research forecast
Retail Market Will Remain Under Pressure with Modest Short-
Term Improvement
A Cyclical Downturn Would Greatly Exacerbate the Pressures Already on the
Segment
37

38. Southwest Retail Markets Strongest; Midwest and Northeast Markets Weakening
Source: Ten-X Research
Retail Remains Under Tremendous Pressure; Markets with
Stronger Demographics Somewhat Better
◆ Our forward view of segment fundamentals on scale of 1/dark green (very strong)
to 6/dark red (very weak).
◆ Individual box size based on market retail inventory.
38

39. Industrial Segment
• New demand drivers benefitting
the sector: e-commerce, cloud
computing and legalized
cannabis.
• Traditional demand drivers are
improving: Industrial production is
approaching cyclical highs in
response to stabilization in the
energy industry.
• Supply not a major threat yet.

40. Sources: Census, Federal Reserve, Ten-X Research
Traditional Industrial Demand Drivers Picking Up, but Still
Constrained Due to Low Oil
Industrial Output and Capacity Utilization Historically the Primary Drivers for
Industrial Space
Capacity Utilization on the Upswing
Total Trade Flows and Capital Goods
Orders Improving
Industrial Production Rising
40

41. However, Tenants Are Now Looking Toward Light
Industrial Space to Get Closer to the Urban Cores
Sources: JLL, CBRE, Ten-X Research
E-Commerce Ushering in a New Era for Industrial Space
Big-Box Warehouse Still King for E-Retailers, but the Preference for Speedy Delivery
Is Spurring Demand in Light Industrial “Last Mile” Facilities
E-Retailers Represent the Largest Average
Tenant Size of Big-Box Space by a Wide Margin
41

42. Absorption Rates in the Top US Data Center
Markets Reached Record Highs in 2016
Data Center Sales Volume Saw a Strong
Rebound in 2016 and Is Expected to Accelerate
Sources: JLL, CBRE, RCA, Ten-X Research
As Tech Consumer’s Appetite for Cloud Computing Grows, So
Does Demand for Data Center Space
The Secular Movement Toward the Cloud Expected to Keep Data Center Absorption
Healthy, Even Amid a Possible Broader Cyclical Downturn
42

43. Strong Demand Will Push Industrial Vacancies
Down into the Mid-7% Range by 2018
Rents Expected to Hold at All-Time Peak of $5
PSF From 2019 Onwards
Sources: Reis, Ten-X Research forecasts
Strong Absorption Will Push Vacancies to a Record Low
by 2018, Moderate Vulnerability to Cyclical Downshift
Tightening Availability Will Bring Rents to All-Time Peak
43

44. Despite the Various Demand Tailwinds, the Continued Emphasis of Our 2019-20
Cyclical Stress Test Is Weighing on Many Markets
Source: Ten-X Research
Most Industrial Markets Possess Decent Outlook
◆ Our forward view of segment fundamentals on scale of 1/dark green (very strong)
to 6/dark red (very weak).
◆ Individual box size based on market industrial inventory.
44

45. Hospitality Segment
• Fundamentals remain healthy, as
growing room demand mitigates
the effects of new supply at a
national level.
• The sector faces high cycle risk,
owing to its tight correlation to
GDP growth.
• Airbnb is bigger threat than
admitted (implicit supply, pricing
power, business travel is next).

46. Consumer Spending on Hotels and Motels
Strong
Business Travel Continues to Oscillate
Between Expansion and Contraction
Sources: BEA, US Travel Association, Ten-X Research
Consumer Spending on Lodging Continues to Rise in
Jagged Fashion, While Business Travel Range-Bound
Strong Labor Market is Bolstering Consumer Confidence, Generating Higher
Spending
46

47. After Stalling, Foreign Travel Spending
in the US Is Picking Up Again
US Dollar Value Has Been Falling For Past
Six Months
Sources: ITA, Federal Reserve, Ten-X Research
Recent Weakening of US Dollar Is Invigorating Foreign Travel
Demand
Foreign travel spending has recovered so far in 2017
47

48. Sources: STR, Ten-X Research
Demand Growth Slowed in the Second Quarter, as the Pace
of Supply Gains Held Steady
Supply and Demand Fairly Evenly Balanced
48

49. Occupancies Still Hovering Within
Healthy Range
RevPAR Growth Considerably Slower Than
Peak Rates Earlier in the Cycle
Sources: STR, Ten-X Research
Hotel Expansion Losing Momentum
Occupancies Holding Up, but Room Rates and RevPAR Continue Seeing Slower
Growth
49

50. Occupancies Will Climb at a Slower Pace
Through 2018, Then Fall Sharply Amid Stress Test
After Slowing Considerably in 2016, RevPAR Growth
Looks to Accelerate Marginally Through 2018
Sources: STR, Ten-X Research forecasts
Outlook for Operating Conditions
A Decelerating Market Will Remain Healthy, Before Potential Cyclicality Emerges
50

51. Source: Ten-X Research
While Fading Strength of Hotel Expansion Evident, Some
Strong Metros Still Exist in Southeast
Largest High Profile Markets Face Combined Threat of Traditional and
Non-Traditional Supply Additions
◆ Our forward view of segment fundamentals on scale of 1/dark green (very strong)
to 6/dark red (very weak).
◆ Individual box size based on market hotel inventory.
51

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Peter Muoio, Ph.D.
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