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Mastering the economic cycle: Boom or Bust?

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ANNUAL MARKET UPDATE: SHIFTING RISKS AND OPPORTUNITIES IN CRE
Ryan Severino, Chief Economist, JLL
Most would agree that 2017 shaped up better than many of us expected it to. The year left us with still-strong property fundamentals, continued moderation in the growth of commercial property transactions and concerns that this long-running bull market has run its course. This mid-year look at commercial real estate deal-making will highlight the market’s metro hot spots, the asset classes driving the strongest opportunities and a long-term look at the greatest risks facing the market.

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Mastering the economic cycle: Boom or Bust?

  1. 1. Mastering the economic cycle: Boom or Bust? Ryan Severino, CFA | JLL Chief Economist
  2. 2. Still going Second-longest expansion on record © Jones Lang LaSalle 2018 Sources: Bureau of Economic Analysis; JLL Research 24 36 37 39 45 58 67 73 92 106 106 120 April 1958 - April 1960 November 1970 - November 1973 October 1945 - November 1948 May 1954 - August 1957 October 1949 - July 1953 March 1975 - January 1980 Average November 2001 - December 2007 December 1982 - July 1990 February 1961 - December 1969 June 2009 - Current March 1991 - March 2001 Months
  3. 3. Heating up U.S. Economic growth continues to rebound © Jones Lang LaSalle 2018 Sources: Bureau of Economic Analysis; JLL Research 2.5 1.6 2.2 1.7 2.6 2.9 1.5 2.3 2.8 2010 2011 2012 2013 2014 2015 2016 2017 2018 Seasonally adjusted (%) Forecast
  4. 4. Business sentiment correlates with economic growth But sentiment can get carried away Sources: Bureau of Economic Analysis; JLL Research -4.0 -3.0 -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 75 80 85 90 95 100 105 110 115 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Year-Over-Year%Change IndexValue1998=100 JLL Business Sentiment Index (L) Real GDP (R)
  5. 5. How long can the current expansion last? Poll question # 1 © Jones Lang LaSalle 2018 A. Until 2019 B. Until 2020 C. Until after 2020 D. Until I say so
  6. 6. Inflation set to rebound Temporary drags appear to have ended © Jones Lang LaSalle 2018 Sources: Bureau of Economic Analysis; JLL Research -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 2010-01 2010-05 2010-09 2011-01 2011-05 2011-09 2012-01 2012-05 2012-09 2013-01 2013-05 2013-09 2014-01 2014-05 2014-09 2015-01 2015-05 2015-09 2016-01 2016-05 2016-09 2017-01 2017-05 2017-09 2018-01 Year-Over-YearChange Headline CPI Core CPI
  7. 7. © Jones Lang LaSalle 2018 Continued expansion behind rate increases Rates are still low, but headed upward 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 Rate,Percent,Annual,NotSeasonallyAdjusted 10-Year Treasury Fed Funds Forecast Sources: Bureau of Economic Analysis; JLL Research
  8. 8. -10% -5% 0% 5% 10% 15% 20% 1954 1955 1957 1958 1959 1960 1962 1963 1964 1965 1967 1968 1969 1970 1972 1973 1974 1975 1977 1978 1979 1980 1982 1983 1984 1985 1987 1988 1989 1990 1992 1993 1994 1995 1997 1998 1999 2000 2002 2003 2004 2005 2007 2008 2009 2010 2012 2013 2014 2015 Real GDP Growth (4-Qtr Rolling Average) Fed Funds Rate (Quarterly Average) Why sustained rate increases are ultimately bad Strong relationship between rate increases and slowing economic growth © Jones Lang LaSalle 2018 Sources: Federal Reserve, BEA, JLL
  9. 9. Cumulative 5-year probability distribution for recession Highest risk is in 2020 and 2021 © Jones Lang LaSalle 2018 Sources: JLL Research 0% 5% 10% 15% 20% 25% 30% 35% 2018 2019 2020 2021 2022 Probability
  10. 10. Is the Fed raising rates: Poll question # 2 © Jones Lang LaSalle 2018 A. Too quickly B. Too slowly C. At about the right pace D. I don’t know, but this presentation is awesome!!!
  11. 11. © 2018 Jones Lang LaSalle IP, Inc. All rights reserved. 11 The appetite for yield is driving fundraising efforts A resurgence in opportunistic funds closed in Q1, reaching +80.0 percent of full-year 2017 levels; A focus on value add and debt strategies expected to remain the norm this year Source: JLL Research, Preqin (Includes US-focused, closed-end funds) Opportunistic 28.4% Value add 26.5% Debt 18.2% All others 27.0% 2016 fundraising by strategy Value add 42.3% Debt 28.5% Opportunistic 15.5% All others 13.8% 2017 fundraising by strategy Opportunistic 58.9% Value add 23.0% Debt 11.6% All others 6.5% Q1 2018 fundraising by strategy
  12. 12. © 2018 Jones Lang LaSalle IP, Inc. All rights reserved. 12 Debt originations continue to rise and have now exceeded the prior peak Non-traditional lenders continue to expand presence in the debt markets, but all sources experienced growth with the exception of banks, which are tightening underwriting Source: JLL Research, Mortgage Bankers Association Originations Survey $507.7 $181.4 $82.3 $118.8 $185.6 $244.2 $358.5 $399.8 $503.8 $490.6 $530.1 $0.0 $100.0 $200.0 $300.0 $400.0 $500.0 $600.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Originations(inbillionsof$) Banks 28% Agency (Fannie/Freddie/ FHA/Ginnie)… CMBS / Conduit 21% Life Company / Pension Fund 15% All others 8% 2017
  13. 13. Market Ratio Miami 1.50 San Francisco 1.50 Portland 1.41 Dallas 1.37 Houston 1.36 New York 1.33 Philadelphia 1.33 Washington, DC 1.31 Chicago 1.30 Minneapolis 1.30 © Jones Lang LaSalle 2018 13 Priciest multifamily markets Ratio of 20-year historical mean cap rate to current cap rate
  14. 14. Market Ratio Cincinnati 1.54 Philadelphia 1.53 Los Angeles 1.52 Houston 1.49 Oakland 1.48 Inland Empire 1.47 Seattle 1.44 Orange County 1.43 Northern New Jersey 1.40 Washington, DC 1.40 © Jones Lang LaSalle 2018 14 Priciest industrial markets Ratio of 20-year historical mean cap rate to current cap rate
  15. 15. Market Ratio New York 1.70 San Francisco 1.60 Phoenix 1.54 Miami 1.54 Houston 1.53 Silicon Valley 1.53 Seattle 1.52 Orange County 1.52 Las Vegas 1.51 Los Angeles 1.50 © Jones Lang LaSalle 2018 15 Priciest retail markets Ratio of 20-year historical mean cap rate to current cap rate
  16. 16. Thank you © Jones Lang LaSalle 2018 http://www.us.jll.com/united-states/en-us/research/economy rseverino_CRE

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