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COMMERCIAL REAL ESTATE

OUTLOOK
Looking at the yearly economic activity as measured by gross domestic product (GDP), most major components posted positive growth. Based on the Bureau of Economic Analysiss first estimate, both consumers and businesses increased their spending over 2012. Consumer spending rose 1.9 percent during the year, driven by a 7.8 percent rise in expenditures on durable goods. Consumers spent more in 2012 on cars (up 7.7%), furnishings and household equipment (up 5.8%), as well as recreational goods and vehicles (up 10.9%). Consumers spending on services also increased, by a more modest 1.3 percent. GDP (% Annual Chg.) 1.9 2.4 1.8 2.2

Economy Advances 2.2 Percent in 2012

By Lawrence Yun
Chief Economist & Sr. Vice President

George Ratiu
Manager, Quantitative & Commercial Research

Based on early estimates, economic activity closed 2012 on a mixed note. Though gross domestic product grew at 2.2 percent for the whole year, the fourth quarter results were disappointing, showing a 0.1 percent decline. A large 22.2 percent cut in defense spending at the federal level (coming after a surprisingly high defense spending growth in the prior quarter) and a large negative change in private business inventories were key reasons for the mild contraction in the economy. The year-end brought closure to several sources of uncertainty while opening new ones. The presidential election is over and the fiscal cliff uncertainty was partially solved by allowing some provisions to revert to normal (the payroll tax returning to 6.2 percent), while kicking the can down the road on others (sequestration). The housing market continued to firm up nicely with housing starts recording 27 percent gain for the year while new home sales rose 20.0 percent from the prior year. Existing home sales grew by 9.0 percent during the year, with shrinking inventories driving up prices of existing homes. Rising homes prices elevated homeowners housing equity by $1.5 trillion over the past two years. The housing wealth gain is helping consumers to hum along at around 2 percent growth. In light of these factors, SIOR members recorded a positive fourth quarter.

-0.3 2007 2008 2009 -3.1 2010 2011 2012

Source: BEA

Private businesses, while maintaining a cautious attitude given the uncertainties present during 2012, upped their spending by 7.7 percent over the year, the second highest annual rate since the recession. This increase was welcoming given the possibility of stalling from the fiscal cliff news headlines throughout the quarter.

(continued on page 2)

COMMERCIAL REAL ESTATE

OUTLOOK
2012 Payroll Employment Gains

(continued from page 1) Spending on commercial structures rose 9.6 percent, in a positive turn for commercial real estate. Companies also spent more on equipment and software, especially transportation equipment, which increased 17.8 percent during the year. Spending on industrial equipment advanced 7.0 percent, while on information processing it grew by 3.8 percent.

Government Other Services Leisure & Hospitality

The winds of international trade blew favorably for U.S. Ed. & Health Svcs. companies during 2012. Both exports and imports increased during the year, by 3.2 percent and 2.5 percent, Prof. & Business Svcs. respectively. Benefitting from a competitive exchange rate, U.S. companies increased their exports of goods by Financial activities 4.0 percent and services by 1.3 percent. In addition, Information import of goods also rose, by 2.2 percent, providing strong demand for the industrial sector. The net exports Trade/Transp./Utilities figure was a positive $2.5 billion for the year. Government spending declined 1.7 percent, driven by budget cuts at federal, state and local levels. At the federal level, both defense and nondefense cuts added to a 2.2 percent decrease in spending. Still working through lower revenues, state and local governments continued to slash spending by 1.3 percent. On the employment front, despite a midyear slump, the overall picture was positivethe economy recorded a net 2.2 million new jobs, the strongest yearly growth in the past three years. Added to the totals from 2010 and 2011, there have been 4.9 million new jobs added postrecession. Given the 8.7 million jobs lost during the recession, it is obvious that we still have a large gap remaining. However, the trend is encouraging. The forecast is for GDP growth of 2.3 percent in 2013 with another 2 million jobs added to the economy. Though improving, the sub-par recovery performance will keep the unemployment rate well above 7.0 percent throughout this year. (continued on page 3)

Manufacturing
Construction Mining/Logging
-200 0 200 400 600

Source: Bureau of Labor Statistics

NATIONAL OFFICE INDUSTRIAL RETAIL APARTMENT

2.54% 2.17% 2.37% 2.97% 2.81%

Source: National Council of Real Estate Investment Fiduciaries

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COMMERCIAL REAL ESTATE

OUTLOOK

(continued from page 2) Commercial Real Estate With modestly improving macroeconomic conditions, commercial markets across the country notched noticeable growth. As employment in office-centered industries continued to rise, demand for office buildings advanced. For office properties, net absorption is expected to total 33.9 million square feet this year, leading to a projected 15.9 percent vacancy rate at the close of the year. The decline in vacancy is expected to be accompanied by a 2.6 percent rise in rents.

2011 Annual Growth Rate, % Real GDP 1.8 Nonfarm Payroll Employment 1.2 Consumer Prices 3.1 Level With growing trade, demand for industrial spaces Consumer Confidence 58.0 remained strong, as leasing activity increased in the fourth quarter. Absorption in the industrial sector is Percent expected to reach 121.8 million square feet this year, Unemployment 8.9 resulting in a 9.5 percent vacancy rate and a 2.3 percent Fed Funds Rate 0.1 rent rise. 3-Month T-bill Rate 0.1 With cautious consumers keeping spending on a Corporate Aaa Bond Yield 4.6 moderate path, the retail sector is expected to absorb a 10-Year Govt Bond 2.8 net 11.9 million square feet this year. Retail availability 30-Year Govt Bond 3.9 will likely decline to 10.6 percent for the year, and rent will
rise 1.5 percent. The apartment rental market continues to perform strongly and is expected to post good results for the year. Net absorption is expected to exceed 270,000 units this year, keeping the vacancy rate at 3.9 percent (from 5.2% in 2011). Rent is projected to rise 4.6 percent this year and an additional 4.7 percent in 2014.
Source: National Association of REALTORS

2012
2.1 1.4 2.1 69.0 8.1 0.1 0.1 3.7 1.8 2.9

2013
2.2 1.3 2.6 78.0 7.7 0.1 0.1 4.0 2.1 3.2

2014
3.0 1.8 3.7 89.0 7.4 0.1 0.2 4.6 2.7 4.0

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COMMERCIAL REAL ESTATE

OUTLOOK
2014 II 2014 III
15.7% 8,046 8,663 4,132 0.7% 15.6% 11,858 7,181 4,139 0.7%

2013 I Vacancy Rate Net Absorption ('000 sq. ft.) Completions ('000 sq. ft.) Inventory ('000,000 sq. ft.) Rent Growth
16.0% 10,268 7,220 4,096 0.6%

2013 II 2013 III 2013 IV 2014 I

15.9% 6,310 7,275 4,103 0.6% 15.7% 8,955 6,030 4,109 0.7% 15.6% 8,440 5,494 4,115 0.7% 15.6% 13,128 8,598 4,123 0.7%

2013
15.9% 33,973 26,019 4,115 2.6%

2014
15.7% 42,349 30,986 4,146 2.8%

2013 I
Vacancy Rate Net Absorption ('000 sq. ft.) Completions ('000 sq. ft.) Inventory ('000,000 sq. ft.) Rent Growth
9.6% 24,354 12,643 8,421 0.5%

2013 II 2013 III 2013 IV 2014 I

9.5% 21,919 13,448 8,435 0.6% 9.5% 38,966 8,787 8,444 0.5% 9.4% 36,531 8,362 8,452 0.7% 9.2% 20,695 18,849 8,471 0.6%

2014 II 2014 III

9.0% 18,625 20,050 8,491 0.7% 9.0%

2013
9.5%

2014
9.0%

33,112 121,770 103,475 13,101 8,504 0.7% 43,241 8,452 2.3% 64,467 8,517 2.6%

2013 I

2013 II 2013 III 2013 IV 2014 I

10.6%
2,865 1,712 2,036 0.3%

2014 II 2014 III

10.1%
3,933 2,876 2,046 0.5%

2013
10.6%
11,935 7,580 2,039 1.5%

2014
10.1%
16,387 12,735 2,053 2.1%

Vacancy Rate Net Absorption ('000 sq. ft.)

Completions ('000 sq. ft.) Inventory ('000,000 sq. ft.) Rent Growth

10.7%
4,297 1,981 2,034 0.2%

10.6%
1,910 1,923 2,038 0.5%

10.5%
2,865 1,964 2,039 0.5%

10.4%
5,899 3,328 2,043 0.5%

10.0%
2,622 3,231 2,049 0.5%

2013 I Vacancy Rate Net Absorption (Units) Completions (Units) Inventory (Units in millions) Rent Growth
4.0% 64,954 31,851

2013 II 2013 III 2013 IV 2014 I

3.9% 67,661 40,457 3.9% 56,835 36,945 3.8% 81,193 39,205 3.9% 60,759 36,251

2014 II 2014 III

4.0% 63,290 46,045 4.0%

2013
3.9%

2014
4.0%

53,164 270,643 253,161 42,047 148,458 168,962

9.9
1.0%

9.9
1.1%

10.0
1.2%

10.0
1.3%

10.1
1.2%

10.1
1.2%

10.2
1.2%

10.0
4.6%

10.2
4.7%

Source: National Association of REALTORS / Reis, Inc.

NATIONAL ASSOCIATION of REALTORS | RESEARCH DIVISION | www.realtors.org/research-and-statistics

COMMERCIAL REAL ESTATE

OUTLOOK
Retail
10.9 14.1 6.9 6.7 14.6 6.8 13.7 9.8 11.6 9.7 13.1 11.2 13.5 14.6 15.2 11.2 15.5 13.4 15.8 12.0 11.6
4.2 10.5 12.5 11.3 13.8 9.7 12.1 15.0 12.3 11.3 10.5 12.9 8.5 12.2 5.3

Source: NAR, Reis, Inc.

Office
NM GA TX MD AL MA NY NJ SC NC TN IL OH OH CO SC OH TX OH CO MI DC CT FL TX NC SC CT TX IN FL MO TN NV KY AR NY 17.2 20.6 16.4 16.7 12.3 14.2 14.6 22.5 16.3 17.1 14.9 18.5 19.8 20.6 19.3 17.4 17.5 23.2 26.3 17.5 25.7 9.4 20.8 19.6 16.8 20.7 19.4 20.1 14.0 19.8 20.7 17.7 15.4 25.9 14.7 12.1 13.4

Industrial
14.5 12.5 12.6 19.1

Multifamily
3.8 6.5 4.7 3.7 5.6 3.3 3.5 2.7 5.1 5.2 2.8 3.8 3.9 3.2 4.7 6.9 5.0 5.5 4.3 3.5 3.9 3.9 4.2 3.9 5.1 6.6 4.9 2.9 6.9 4.9 7.0 4.5 5.4 5.9 5.2 5.5 3.0

Albuquerque Atlanta Austin Baltimore Birmingham Boston Buffalo Central New Jersey Charleston Charlotte Chattanooga Chicago Cincinnati Cleveland Colorado Springs Columbia Columbus Dallas Dayton Denver Detroit District of Columbia Fairfield County Fort Lauderdale Fort Worth Greensboro/Winston-Salem Greenville Hartford Houston Indianapolis Jacksonville Kansas City Knoxville Las Vegas Lexington Little Rock Long Island

12.8 8.9 7.8 8.3

8.9 12.3

7.8 11.6

9.2 10.6

7.7 9.0 7.3 10.2

6.5

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COMMERCIAL REAL ESTATE

OUTLOOK
Retail
6.1 10.0 12.5 7.0 12.3 11.2 8.6 12.6 10.9 10.0 5.4 6.2 13.4 8.4 5.2 13.5 11.7 9.2 11.3 7.7 8.4 13.1 9.2 9.7 12.7 12.1 12.5 11.3 9.6 6.1 3.5 6.1 6.9 12.2

Source: NAR, Reis, Inc.

Office
CA KY TN FL WI MN TN CT LA NY VA NJ CA OK NE CA FL FL PA AZ PA OR RI NC VA NY CA UT TX CA CA CA CA WA MO 15.6 15.4 23.0 17.0 19.2 17.8 13.5 18.1 12.7 9.6 14.8 19.5 18.2 16.5 15.4 17.5 18.3 19.2 14.3 25.3 15.6 15.0 16.7 15.2 15.1 16.4 20.6 17.3 18.5 23.7 15.7 13.6 18.2 13.8 17.9

Industrial
3.6 14.8 5.6 7.6 8.1

Multifamily
3.3 4.3 8.6 3.5 3.4 2.5 4.0 2.0 6.4 2.1 3.9 3.3 2.8 6.4 3.7 3.3 4.9 4.9 3.4 5.5 3.0 2.9 3.3 4.5 4.7 2.9 3.3 3.6 6.2 3.5 2.6 3.0 3.2 4.2 5.0

Los Angeles Louisville Memphis Miami Milwaukee Minneapolis Nashville New Haven New Orleans New York Norfolk/Hampton Roads Northern New Jersey Oakland-East Bay Oklahoma City Omaha Orange County Orlando Palm Beach Philadelphia Phoenix Pittsburgh Portland Providence Raleigh-Durham Richmond Rochester Sacramento Salt Lake City San Antonio San Bernardino/Riverside San Diego San Francisco San Jose Seattle St. Louis

9.0

3.6 11.2 7.2 10.0 10.7 8.7 7.7 16.5 15.2 12.4 7.6 7.2 6.6 11.1 16.0 6.0 6.4

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COMMERCIAL REAL ESTATE

OUTLOOK
Retail
8.6 6.8 15.2 12.0 11.2 9.5 16.6 9.2 8.0 12.6

Source: NAR, Reis, Inc.

Office
MD VA NY WA FL AZ OK CA NY KS 14.8 15.9 15.5 17.1 20.5 16.0 17.3 16.2 17.4 16.0

Industrial
10.6 10.1

Multifamily
3.7 3.6 2.5 4.2 5.1 5.4 5.4 3.1 3.4 4.7

Suburban Maryland Suburban Virginia Syracuse Tacoma Tampa-St. Petersburg Tucson Tulsa Ventura County Westchester Wichita

7.9

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COMMERCIAL REAL ESTATE

OUTLOOK
Average Price ($/Sq. Ft.)
$236 $123 $332 $138 $162 $295 6.7% 8.1% 6.4% 7.9% 7.6% 6.6%

Office Sales
Billions

$40 $30 $20 $10 $-

Region
Mid-Atlantic Midwest Northeast Southeast Southwest West 11Q4 12Q1 12Q2 12Q3 12Q4 Industrial Sales

OFFICE Average Cap Rate

Billions

$15 $10 $5 $-

Region
Mid-Atlantic Midwest Northeast Southeast Southwest West 11Q4 12Q1 12Q2 12Q3 12Q4 Retail Sales

INDUSTRIAL Average Cap Rate

7.9% 8.4% 7.9% 8.0% 7.9% 7.1%

Average Price ($/Sq. Ft.)

$62 $38 $86 $44 $59 $90

Billions

$20 $15 $10 $5 $-

Region
Mid-Atlantic Midwest Northeast Southeast Southwest West 11Q4 12Q1 12Q2 12Q3 12Q4 Apartment Sales

RETAIL Average Cap Rate

7.2% 7.5% 6.9% 7.7% 7.4% 6.9%

Average Price ($/Sq. Ft.)

$144 $141 $427 $139 $145 $214

Billions

$30 $20 $10 $-

Region
Mid-Atlantic Midwest Northeast Southeast Southwest West

MULTI-FAMILY Average Cap Rate

6.6% 7.2% 5.8% 6.6% 6.6% 5.6%

Average Price ($/Unit)

$131,207 $78,763 $218,357 $73,659 $83,135 $152,605
Note: Data as of 1/23/2013 Source: Real Capital Analytics

11Q4 12Q1 12Q2 12Q3 12Q4

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COMMERCIAL REAL ESTATE

OUTLOOK

The Research Division of the National Association of REALTORS monitors and analyzes monthly and quarterly economic indicators, including retail sales, industrial production, producer price index, gross domestic product and employment data which impact commercial markets over time. In addition, the Research Division provides several products covering commercial real estate: Commercial Real Estate Quarterly Market Survey Commercial Real Estate Lending Survey Commercial Member Profile

If you have questions or comments regarding this report or any other commercial real estate research, please contact George Ratiu, Manager, Quantitative & Commercial Research, at gratiu@realtors.org. Although the information presented in this report has been obtained from reliable sources, NAR does not guarantee its accuracy, and such information may be incomplete. This report is for information purposes only. All opinions, assumptions and estimates constitute NARs judgment as of the date of this publication and are subject to change and evolving events. Actual results may vary from forecast results. For more information, please visit us:

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