Commercial Real Estate Analysis

1. Commercial Real Estate Outlook
Jed Smith, Managing Director Quantitative Research
National Association of REALTORS®
Lancaster County Association of REALTORS®
C&I Regional Conference, May 7, 2014
THE ECONOMY: NOT AS BRIGHT AS THE PICTURE--BUT STILL EXPANDING

2. Real Estate Outlook
Challenges: Jobs, Growth, and Confidence
• Short Term—Slow Expansion This Year.
– Job growth: Up 1.6 percent.
– GDP Growth: 2.3 percent vs. 1.9 percent last year.
– Interest Rates: 2014 up approximately .5 percent.
– Credit Easing Somewhat.
– Residential Real Estate: Sales Flat, Prices Up.
– Commercial Real Estate: Flat.
• Longer Term—Challenges.
– Jobs and Unemployment: Slow Progress, Slow Growth.
– Confidence/Discord/Unresolved problems (government debt,
excessive aversion to risk, slow expansion).
– Change: Millenials and Residential Markets
– Change: Commercial Markets.

3. U.S. Economy: Impact of The Great Recession
Great Recession—Effects Linger On Employment and GDP Issues
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
1998 -
Q1
2000 -
Q1
2002 -
Q1
2004 -
Q1
2006 -
Q1
2008 -
Q1
2010 -
Q1
2012 -
Q1
The Great Recession: Impact on GDP
GDP in 2009 Dollars
Real GDP Real GDP W/O Recession
0
20000
40000
60000
80000
100000
120000
140000
160000
1960
- Jan
1965
- Jan
1970
- Jan
1975
- Jan
1980
- Jan
1985
- Jan
1990
- Jan
1995
- Jan
2000
- Jan
2005
- Jan
2010
- Jan
Establishment Employment: 1960-2013

4. Economic Forecasting, Augury, and Fortune Telling
Can We Really See the Future?
• Based on Relationships Between Various Parts of the Economy.
– First Group of Inputs: Exogenous Factors—Monetary and Fiscal
Policy; Foreign Economies; Public Policies.
– Second Group of Inputs: Understanding of the Economy:
Relationships Between Economic Variables, Behavioral Assumptions.
– Third Group of Inputs: The Unknown Unknowns!
• Forecasts: Based on “All Other Factors Being Constant.”
– Which They Never Are!
– Best Estimates—Based on Assumptions.
– Scenario Analysis and Alternatives.
• Major Drivers of Real Estate: Jobs and GDP Growth.
– Offices—Jobs; Retail—Consumer Spending; Warehouses/Flex—
Industrial Output; Apartments– Family Formation and Economic
Growth.
– Still Presenting Major Challenges.

5. Consumer Price Inflation: Less than 2%
(% change from one year ago)
-3
-2
-1
0
1
2
3
4
5
6
1999 - Jan2001 - Jan2003 - Jan2005 - Jan2007 - Jan2009 - Jan2011 - Jan2013 - Jan
CPI: Year Over Year Percent Change
All items exlcuding fuel and energy All items

6. Interest Rates
Projected to Increase, But Not a Major Problem
0
1
2
3
4
5
6
7
8
9
2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan 2014 - Jan
30 Year Mortgage 10 Year Treasuries

7. Household Assets: Significant Recovery
But Continues to Impact Economy Overall!
(in $ Billions)
0
10000
20000
30000
40000
50000
60000
70000
80000
1999 - Q1 2001 - Q1 2003 - Q1 2005 - Q1 2007 - Q1 2009 - Q1 2011 - Q1 2013 - Q1
Household Assets
Financial Assets Real Estate

8. “It Was the Best Of Times, and the Worst of Times”
Confidence—Relatively Low. Uncertainty—Relatively High
Consumer Confidence--Mediocre: 5
Years After Recession! Difficult Getting On Job Ladder.
22.9
12.8
7.4
5.8 5.8 5.6
7.4
Unemployment Rates, 2013

9. Jobs an Important Real Estate Driver
Part-Time, Unemployed, and “Missing” Workers
• Job Problems for Many
People.
– Part Time Work,
Unemployment, Discouraged
Workers.
– Mean Duration of
Unemployment at 35 weeks;
normally 20.
• Job Creation is Lagging—Why?
– Consumer Demand?
– Regulation?
– Education--Misaligned?
– Expectations?
– Other?
• Bottom Line: Jobs and Real Estate
Demand Go Together. -5000
0
5000
10000
15000
20000
25000
30000
The Jobs Problem
The Missing 12 Million
Unemployed Part Time--Economic Out of Labor Force

10. The Forecast
Relatively Low Growth—Subject to Uncertainties
-10
-8
-6
-4
-2
0
2
4
6
2006 -
Q1
2007 -
Q1
2008 -
Q1
2009 -
Q1
2010 -
Q1
2011 -
Q1
2012 -
Q1
2013 -
Q1
2014 -
Q1
GDP Growth: Actual and Projected
Actual Growth Projected Growth
2011 2012 2013 2014 2015
Annual Growth Rate
Real GDP 1.8 2.8 1.9 2.3 2.9
Employment 1.2 1.7 1.7 1.6 1.9
Unemployment 8.9 8.1 7.4 6.5 6.3
Interest Rates
30-Year Government Bond 3.9 2.9 3.4 4.0 4.8
30-Year Mortgage 4.7 3.7 4.0 4.7 5.5

11. RESIDENTAL MARKETS
• Residential—Drives the Overall Real Estate Market.
– Currently Flat in Sales, Prices Up.
– Mixed Messages.
– Consumer Concern.

12. Home Sales and Prices
• Sales: Projected Flat • Prices: Modest Increases.
0
50000
100000
150000
200000
250000
2000 -
Jan
2002 -
Jan
2004 -
Jan
2006 -
Jan
2008 -
Jan
2010 -
Jan
2012 -
Jan
2014 -
Jan
Home Prices, Actual and Projected
Price Projected Price
0
1000000
2000000
3000000
4000000
5000000
6000000
7000000
8000000
2000 -
Jan
2002 -
Jan
2004 -
Jan
2006 -
Jan
2008 -
Jan
2010 -
Jan
2012 -
Jan
2014 -
Jan
Existing Home Sales
Sales Projected Sales

13. Commercial Sector Forecast
Commercial Sector —Follows Residential, May Lag a Year or So
130
212
362
423
571
174
67
147
233
299
355
400
420 430
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Commercial Sales in Billions
Actual and Projected
Source: Urban Land Institute

14. NATIONAL LEVEL
COMMERCIAL REAL ESTATE TRENDS

15. What is the Commercial Market?
• Commercial Space: Approximately 82
Billion Square Feet.
• “On Market Space”: Offices, Warehouses,
Retail, etc. Approximately 47.5 Billion Sq.
Ft.
• “Other”: Includes education, Medical,
Religious, Public Assembly.
• Apartments: Approximately 27 Million
Units.
• Total Value
– $6-8 Trillion “On Market”; plus
– $3 Trillion of Apartments.
– Other Types of Space are not normally sold.
• Estimates are Approximations from Best
Available Data: EIA, Government, and
Other Sources.
• Majority of Buildings Relatively Small.
• Bulk of Space is in Relatively Large Buildings.
Square Foot Range Percent of Buildings Percent of Floor Space
1,001 to 5,000 53.22 10%
5,001 to 10,000 19.51 10%
10,001 to 25,000 16.67 18%
25,001 to 50,000 5.37 13%
50,001 to 100,000 3.03 14%
100,001 to 200,000 1.52 14%
200,001 to 500,000 0.54 10%
Over 500,000 0.16 11%
Billion Square Feet
2013 Floor Space, Estimated
Office 14.01
Mercantile 12.84
Warehouse and Storage 11.56
Lodging 5.85
Food Sales 1.44
Food Service 1.90
Subtotal 47.59
Other 34.62
Total 82.21

16. Commercial Real Estate
A Function of Jobs and Growth
• Commercial Building Sales.
– Market Drivers.
– Expanding After Some Difficult Years.
– Prices Rising.
– Capital Increasingly Available.
• Prices Increasing.
• Foreign Interest in U.S. Properties Continues.
• New Construction—Slow Recovery.
• Rents Increasing.

17. Commercial Real Estate Sales
Sales Volume Recovering
$-
$20,000,000,000
$40,000,000,000
$60,000,000,000
$80,000,000,000
$100,000,000,000
$120,000,000,000
$140,000,000,000
$160,000,000,000
01Q1
01Q3
02Q1
02Q3
03Q1
03Q3
04Q1
04Q3
05Q1
05Q3
06Q1
06Q3
07Q1
07Q3
08Q1
08Q3
09Q1
09Q3
10Q1
10Q3
11Q1
11Q3
12Q1
12Q3
13Q1
13Q3
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Quarterly Commercial Sales
Offices Industrial Retail Apartments Hotel

18. A Closer Look at Sales
Industrial, Hotels, Retail—Somewhat Less---WHY?
$-
$10,000,000,000
$20,000,000,000
$30,000,000,000
$40,000,000,000
$50,000,000,000
$60,000,000,000
$70,000,000,000
$80,000,000,000
$90,000,000,000
01Q1
01Q3
02Q1
02Q3
03Q1
03Q3
04Q1
04Q3
05Q1
05Q3
06Q1
06Q3
07Q1
07Q3
08Q1
08Q3
09Q1
09Q3
10Q1
10Q3
11Q1
11Q3
12Q1
12Q3
13Q1
13Q3
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Commercial Real Estate Sales
Offices Industrial Apartments Hotel Retail

19. Commercial Real Estate
New Construction--Recovering
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan 2014 - Jan
Non Residential Construction
$--Millions

20. JOBS AND COMMERCIAL REAL ESTATE
SOURCE: REAL CAPITAL ANALYTICS
Atlanta
Dallas/Houston/Austin
Philly/Baltimore
Boston
Chicago
Denver
Jacksonville / N. FL
Las Vegas
Los Angeles Metro
Miami/S. FL
New York Metro
Orlando/Central FL
Phoenix
Sacramento/Central CA
San Diego
San Francisco Metro
Seattle
Tampa/SW FL
DC Metro
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
-30% -20% -10% 0% 10% 20% 30% 40% 50% 60%
NonfarmJobChange
Commerical Property Price Index
Trough to Current
09Q2 - 13Q1
PROPERTY PRICES VS JOBS GROWTH

21. Apartments: Construction Continues
• The Millennials.
– Student Debt.
– Unemployment.
– Family Formation.
– Residential.
– Preferences.
– Mobility.
– Financial Experience.0
10000
20000
30000
40000
50000
60000
2000 -
Jan
2002 -
Jan
2004 -
Jan
2006 -
Jan
2008 -
Jan
2010 -
Jan
2012 -
Jan
2014 -
Jan
Millions of Dollars Monthly

22. Price Index—Prices Up
0
20
40
60
80
100
120
2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan 2014 - Jan
Commercial Property Price Index
Source: Federal Reserve Board

23. Rents Increasing

24. Apartment Vacancy Rates—Low Relative to
Experience
5.7
5.3
4.9
5.2
Avg Vacancy Rates, 2003-13 Avg Vacancy Rates, Past 19 Years Vacancy Rate 2013 Forecasted Vacancy Rates, 2014-16
Apartments: Average Vacancy Rates
Source: Urban Land Institute

25. Rental Rate Changes
2.1
2.7
2.2
2.4
RR Change 2003-13 RR Change Past 18 Yrs RR Change 2013 Forecasted RR Change 2014-16
Apartments: Rental Rate Changes
Source: Urban Land Institute

26. Apartments: Fundamentals Continue to be Favorable
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
-50,000
0
50,000
100,000
150,000
200,000
250,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
SquareFeet
U.S. Apartment Fundamentals
Completions Net Absorption Vac %
Source: NAR, Reis

27. Apartment Rents
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Asking Rent $ Asking Rent % Chg
Source: Reis

28. Apartments—Regional Variations, Overall
Prices are Up
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
U.S.
DC/VA/MD
NY
LA
Chicago
Dallas
Houston
Philadelphia
Boston
Atlanta
Miami
SFOakland
Detroit
Minneapolis
Phoenix
Seattle
Apartment Sales as Percentage of Total
Commercial Sales
$60,000
$70,000
$80,000
$90,000
$100,000
$110,000
$120,000
$130,000
05Q3
06Q1
06Q3
07Q1
07Q3
08Q1
08Q3
09Q1
09Q3
10Q1
10Q3
11Q1
11Q3
12Q1
12Q3
13Q1
13Q3
Apartment Avg $/Unit

29. Industrial Space
Tends to be Warehouses, Flex Space
11.9
10.3
11.3
10.4
Avg Vacancy Rates, 2003-13 Avg Vacancy Rates, Past 20 years Vacancy Rate, 2013 Forecasted Vacancy Rates, 2014-16
Industrial: Average Vacancy Rates
Source: Urban Land Institute

30. Rental Rate Changes
Upswing as Economy Expands
-0.4
1.3
3.6
3.5
RR Change 2003-13 RR Change, Past 20 Yrs RR Change 2013 Forecasted RR Change 2014-16
Industrial: Rental Rate Changes
Source: Urban Land Institute

31. Industrial Fundamentals
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
-100,000,000
-50,000,000
0
50,000,000
100,000,000
150,000,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
SquareFeet
U.S. Industrial Fundamentals
Completions Net Absorption Vac %
Source: NAR, Reis

32. Industrial Rents
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
$4.30
$4.40
$4.50
$4.60
$4.70
$4.80
$4.90
$5.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Asking Rent $ Asking Rent % Chg
Source: Reis

33. Commercial Office Buildings
Vacancies Projected to Decline
14.9
14.1
14.9
13.7
Avg Vacancy Rates, 2003-13 Avg Vacancy Rate, Pst 20 Years Vacancy Rate, 2013 Forecasted Vacancy Rates, 2014-16
Offices: Average Vacancy Rates
Source: Urban Land Institute

34. Commercial Offices
Projected Rental Rate Changes
1.0
2.4
2.5
3.5
RR Change 2003-13 RR change, Past 20 Years RR Change 2013 Forecasted RR Change 2014-16
Offices: Rental Rate Changes
Source: Urban Land Institute

35. Commercial: Office Fundamentals
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
-150,000,000
-100,000,000
-50,000,000
0
50,000,000
100,000,000
150,000,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
SquareFeet
U.S. Office Fundamentals
Completions Net Absorption Vac %
Source: NAR, Reis

36. Commercial Office Space—National Trends
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
U.S.
DC/VA/MD
NY
LA
Chicago
Dallas
Houston
Philadelphia
Boston
Atlanta
Miami
SFOakland
Detroit
Minneapolis
Phoenix
Seattle
Office Sales as Percentage of Total Commercial
Sales
$100
$150
$200
$250
$300
$350
05Q3
06Q1
06Q3
07Q1
07Q3
08Q1
08Q3
09Q1
09Q3
10Q1
10Q3
11Q1
11Q3
12Q1
12Q3
13Q1
13Q3
Office Avg $/SF

37. Office Rents
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Asking Rent $ Asking Rent % Chg
Source: Reis

38. Retail: Vacancy Rates
10.5
9.8
12.0
11.1
Avg Vacancy Rates, 2003-13 Avg Vacancy Rate, Pst 20 Years Vacancy Rate, 2013 Forecasted Vacancy Rates, 2014-16
Retail: Average Vacancy Rates
Source: Urban Land Institute

39. Retail: Rental Rate Changes
0.1
1.5
-0.2
2.5
RR Change 2003-13 RR Change, Past 20 Years RR Change 2013 Forecasted RR Change 2014-16
Retail: Rental Rate Changes
Source: Urban Land Institute

40. Retail Fundamentals
0.0
2.0
4.0
6.0
8.0
10.0
12.0
-30,000,000
-20,000,000
-10,000,000
0
10,000,000
20,000,000
30,000,000
40,000,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
SquareFeet
U.S. Retail Fundamentals
Completions Net Absorption Vac %
Source: NAR, Reis

41. Retail Rents
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Asking Rent $ Asking Rent % Chg
Source: Reis

42. COMMERCIAL REAL ESTATE—INTERNATIONAL BUYERS
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
Europe Middle East Australia Asia Latin America Canada
billions
DIRECT ACQUISITONS BY CROSS-BORDER INVESTORS IN THE US
Trailing 12 month totals

43. International Transactions
Average Out to About 8 Percent of Market
0
100000
200000
300000
400000
500000
600000
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 12 13
Commercial Sales: Offices, Retail, Apartments, Warehouses
$---000
Domestic Buyer International Buyer

44. SOME COMPARABLE CAP RATES
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
OFFICE CAP RATES IN MAJOR GLOBAL MARKETS

45. Cap Rates: A Number of Markets
8.3% 8.2%
8.5%
7.5%
8.8%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
Office Industrial Retail Apartment Hotel
Cap Rates
Major Markets (RCA) REALTOR® Markets (NAR)
Sources: NAR, Real Capital Analytics

46. NAR Commercial Activity Survey
4th Quarter, 2013
• Sales Volume Compared with Previous Quarter: Up 4%.
• Sales Volume Compared with Previous Year: Up 8%.
• Sales Prices Compared with Previous Quarter: Down 0.4%.
• Sales Prices Compared with Previous Year: Up 1%.
• Expected Inventory Availability for the Next 12 Months: Up .1%.
• Rental Volume Compared with Previous Quarter: Up .4%.
• Rental Rates Compared with Previous Quarter: Up .3%.
• Level of Rent Concessions Compared with Previous Quarter: Down
4%.
• Volume of New Construction Compared with Previous Quarter: Up
2%.
• Direction of Business Opportunities Compared with Previous
Quarter: Up 5%.

47. Lancaster Area: Overview

48. Employment Comparison
130000
132000
134000
136000
138000
140000
142000
144000
146000
148000
840
860
880
900
920
940
960
980
2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan 2014 - Jan
Employment: Lancaster Area Compared to U.S.
Lancaster Area U.S.

49. Pennsylvania Economic Activity Generally
Consistent with U.S. Economic Activity
0
20
40
60
80
100
120
140
160
180
1990 - Jan 1995 - Jan 2000 - Jan 2005 - Jan 2010 - Jan
Index of Coincident Economic Indicators
Source: Philadelphia Federal Reserve
US PA

50. Construction: Lancaster Compared to U.S.
0
20000
40000
60000
80000
100000
120000
140000
160000
180000
200000
0
100
200
300
400
500
600
700
800
900
1000
2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan 2014 - Jan
Housing Permits
Central PA U.S.

51. Lancaster Area Better In Terms of
Unemployment Rates
0
2
4
6
8
10
12
2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan 2014 - Jan
Unemployment Rates
PA U.S. Harrisburg Lancaster

52. Home Prices: Lancaster Slow
0
50
100
150
200
250
1995-Q1
1995-Q3
1996-Q1
1996-Q3
1997-Q1
1997-Q3
1998-Q1
1998-Q3
1999-Q1
1999-Q3
2000-Q1
2000-Q3
2001-Q1
2001-Q3
2002-Q1
2002-Q3
2003-Q1
2003-Q3
2004-Q1
2004-Q3
2005-Q1
2005-Q3
2006-Q1
2006-Q3
2007-Q1
2007-Q3
2008-Q1
2008-Q3
2009-Q1
2009-Q3
2010-Q1
2010-Q3
2011-Q1
2011-Q3
2012-Q1
2012-Q3
2013-Q1
2013-Q3
Trends in Home Prices
FHFA Data
Lancaster PA US

53. Estimated Commercial Sales for Lancaster Area
Includes Harrisburg, Lancaster, Reading, York
0
50
100
150
200
250
300
350
400
450
500
2005 2006 2007 2008 2009 2010 2011 2012 2013
Lancaster: Estimated Commercial Sales
Millions of Dollars
Apt/Office/Retail Other Small Commercial

54. Key Conclusions: Economy and Commercial Markets
• The Economy and Real Estate.
– Relatively Slow Recovery and Job Growth.
– We Would All Like Greater Optimism!
• Expansion: Retail Space—Probably Disappointing ; Warehouses--Mixed.
– Effects of On-line Retailing, Slow Recovery.
– Import trends.
– The General Direction of the Economy.
• Apartment Outlook.
– Continued Growth Possible.
– Millennial Generation.
– Population and Family Formation.
• Office Building Sector.
– Using Less Office Space per Worker.
– Cost, Lifestyle, Technology, Changing Nature of Work.
– Class A Buildings—Growth Projected.
• Hotels/Motels/Lodging
– Long Term Probably Growth—Affluence and Desire for Travel.