The real estate market is currently in the midst of its second longest expansion following the longest historical expansion that led to the Great Recession. There is a growing sentiment that the market is in an asset bubble that will soon correct, though the timing is uncertain. Commercial property prices have begun slowing according to indices, rent growth has outpaced wage growth, and many lenders are no longer underwriting future rent growth. Multifamily construction levels are very high, which could impact future rent growth. Cap rates are expected to expand from compressed levels as foreign capital flows slow, rent growth declines, and debt costs rise.

1. Where Are We in
the Real Estate Cycle?
by Ivan Kaufman
ARBOR.COM • 1.800.ARBOR.10

2. Ivan Kaufman’s Real Estate Market Overview
• The real estate market will inevitably progress through cycle after
cycle.
• The market is currently in the midst of its second longest
expansion. This follows the longest historical expansion that led
into the Great Recession.
• There is a sentiment now that we’re in an asset bubble and that
there is going to be a correction. It’s just a matter of when and
how deep.
Key Takeaways – Market Cycle

3. Ivan Kaufman’s Real Estate Market Overview
Business and Real Estate Cycles

4. Ivan Kaufman’s Real Estate Market Overview
• The Moody’s/Real Capital Analytics Commercial Property Price
Index has been slowing and, in January, showed prices come off
their peaks.
• Many lenders are no longer underwriting rent growth.
• Rent growth has far outpaced wage growth and there has to be a
catch-up period.
Key Takeaways – Property Prices

5. Ivan Kaufman’s Real Estate Market Overview
Moody’s/RCA Commercial Property Price Index
United States, Based on Repeat Sales Transaction Pairs $2.5 Million and Larger, December 2000 = 100
80.0
120.0
160.0
200.0
240.0
280.0
Dec-00 Dec-03 Dec-06 Dec-09 Dec-12 Dec-15
All Property Apartment
Source: Arbor, Real Capital Analytics

6. Ivan Kaufman’s Real Estate Market Overview
U.S. Recession
60.0%
62.0%
64.0%
66.0%
68.0%
70.0%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Homeownership Rate (%)
Source: Arbor, U.S. Census Bureau
Historical Homeownership Rate Key Takeaway— Homeownership is at the lowest levels in decades, so there
has been a decrease in vacancy and increase in rents, without there being an increase in wages.
United States, Not Seasonally Adjusted

7. Ivan Kaufman’s Real Estate Market Overview
0
50,000
100,000
150,000
200,000
250,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Completions (Units) Completions Forecast (Units)
Completions Key Takeaway—Multifamily starts for 2016 are tremendous, which will be an issue for rent growth.
United States, Multifamily
Source: Arbor, Reis

8. Ivan Kaufman’s Real Estate Market Overview
• Cap rates and interest rates have a significant relationship. There
has been huge cap rate compression and that’s a direct result of
historically low interest rates as well as other factors.
• Expect to see cap rate expansion for the first time in a while
because of the slowing of foreign capital flows, a slowing of rent
growth and an increase in debt costs.
Key Takeaways – Cap Rates

9. Ivan Kaufman’s Real Estate Market Overview
Cap Rate vs. Treasurys
United States, Multifamily, 12-Month Rolling Average
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
4Q01 4Q02 4Q03 4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 4Q11 4Q12 4Q13 4Q14 4Q15
Cap Rate (%) 10-Year Treasury (%) Spread (%)
Source: Arbor, Real Capital Analytics, Federal Reserve