Charles Wurtzebach presented on trends in commercial real estate for 2017. He discussed three main factors that will influence the industry: 1) advances in technology that have improved data and analytics, 2) potential legislative and regulatory changes under the new Trump administration, and 3) expected increases in interest rates that will impact capital markets and required investment returns. Some specific impacts mentioned include increased competition from new investors, changes in demand from office and multifamily sectors, and challenges around oversupply and maintaining pricing discipline.

2. #CAROutreach
SPEAKER
CHARLES H.
WURTZEBACH,PhD
Chair, Department of Real Estate and
Douglas and Cynthia Crocker Endowed
Director of the Real Estate Center at
DePaul University

3. Charles H. Wurtzebach, PhD
Chairman, Department of Real Estate and
Douglas and Cynthia Crocker Endowed Director,
The Real Estate Center,
DePaul University
January 12, 2017

4. 1. Technological Advances
2. Legislative Mandates
3. Capital Market Developments
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5.  Historically, imprecision of forecasting
led to higher and less variable cap rates
to compensate for vague analysis of
operational, financial, and capital market
risk
 Search process cumbersome, technology
really helping
 Data vendors married technology, data, and
advisory services; Altus Group, PPR, CoStar,
Real Capital Analytics, REIS, Megalytics, etc.
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6.  What will Trump Administration do?
Regulation/Deregulation
Federal Tax Code
 Locally not much change expected (except RE
taxes!)
Zoning
Building Codes
Eminent Domain
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7.  Capital markets respond to Legislation and Fed
policy – expect continued increase in interest rates
in 2017
 New investors with different risk/return
requirements enter market; sovereign wealth
funds, pension funds, wall street, REITs
 As Trump Administration effects change in the
current state of play, capital market players and
investors (Wall Street) will respond
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8.  Real estate competes with other assets; 200-400
Basis points over 10-year Treasury.
 So as rates go up, required return on CRE goes
up
 Investors like long-term cycle of private CRE: 12-
15 year boom, 2-3 year bust cycle: 1978-1990,
1993 –2007, 2010 - ?
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9.  Will oversupply rear its ugly head?
• Short answer, yes, although so far so good.
Starts are up, but not near previous highs.
• Recent multifamily starts rising
• Single family lags
 Will capital lose discipline in search of profits?
• As cap rates drop, prices rise, will rent continue
to rise?
• The Federal Reserve’s stance on interest rates
suggests 2-3 more rate changes in 2017 –
assuming no hiccups in the economy
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10.  Will changes in commercial tenant needs
permanently dampen demand?
• Per square foot per employee down as firms go
to open plan and office benches
• CBD versus Suburban, locally suburban market
out of favor, relative to CBD
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11.  Will millennial life style trends become as
entrenched as baby boomer’s?
• Census Bureau says homeownership rate fell
year low in 2015, to 63.9%
• All time high in 2009 of 69.4%*
• Delay marriage and child-bearing
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12.  Recently (July 2016) Green Street Advisors,
Inc., indicates that US commercial property
prices have continued to increase steadily
since the Great Recession lows recorded in
May and June 2009
 The NCREIF Property Index posted double-
digit returns for the past six years (2010–
2015), but the streak may come to an end in
2016
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13.  According to Zillow the median home value in
the United States is $189,400. US home
values have gone up 5.5% over the past year
and Zillow predicts they will rise 2.9% within
the next year.
 The median price of homes currently listed in
the United States is $239,900. The median
rent price in the United States is around
$1,525.
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14.  Calculating expected IRRs
 Marketing and Sales
 Using leverage of all types
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15.  Evaluating Risk – always tend to look in the
rear view mirror
 Intuition – “With cap rates at all time lows, the
capital market will not save us.”
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16.  Beware the extensive use of leverage – true
double-edged sword
 Beware emergence of non-bank lenders
 Beware Reverse Underwriting – Investors
target IRR, make assumptions that will result
in that IRR
 Capital Market or Pricing Discipline – Just say
NO!
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