Commercial Real Estate Outlook:

NOT AS BRIGHT AS THE PICTURE--BUT STILL EXPANDING

Lawrence Yun, Ph.D.
Chief Economist
NATIONAL ASSOCIATION OF REALTORS

Presentation in Washington, D.C.

May 15, 2014




GDP Contraction
in 2014 Q1
-10
-8
-6
-4
-2
0
2
4
6
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
2014
- Q1
GDP Annualized Growth Rate
But No Fresh Recession in Sight
-5
-4
-3
-2
-1
0
1
2
3
4
GDP Growth Rate from one year ago
Sluggish Growth + Gap after Great Recession
($1.5 trillion gap $4,700 per person)
10000
11000
12000
13000
14000
15000
16000
17000
18000
1998 - Q1 2000 - Q1 2002 - Q1 2004 - Q1 2006 - Q1 2008 - Q1 2010 - Q1 2012 - Q1
GDP in 2009 Dollars
Real GDP Real GDP W/O Recession
3% Growth Line
2.2% Growth Line
GDP Growth = Job Creations
(8 million lost 8 million gained)
124000
126000
128000
130000
132000
134000
136000
138000
140000
2
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0
0

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N
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v
In thousands
Local Market Job Comparisons
Fast Growing
States
1-year Growth
Rate
Nevada 3.8%
North Dakota 3.7%
Colorado 3.0%
Florida 3.0%
Oregon 2.7%
Texas 2.7%
Utah 2.6%
Delaware 2.4%
California 2.3%
Arizona 1.9%
Slow Moving
States
1-year Growth
Rate
New Mexico -0.2%
Kentucky -0.2%
New Jersey 0.0%
Virginia 0.1%
Alaska 0.2%
West Virginia 0.3%
Pennsylvania 0.3%
Maryland 0.3%
D.C. 0.4%
Mississippi 0.5%
Commercial Investment Sales of Large Properties
(Properties valued at $2.5 million and over)
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
Green Street Price Index
Charting New Highs
0
20
40
60
80
100
120
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NCREIF Price Index
(Only Apartments Setting New Highs)
0
50
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150
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300
350
2
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Apartment Industrial Office Retail
Price Increases Supported
by Rising Rents and Low Interest Rates
Cap Rates and Treasuries: Large Gap
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13
10yr UST* Cap Rate
REALTOR Markets & Deal Size
(Not $2.5 million Properties)
21%
22%
26%
17%
12%
1%
2%
< $250,000
$250,000 - $500,000
$500,000 - $1,000,000
$1,000,000 - $2,000,000
$2,000,000 - $5,000,000
$5,000,000 - $10,000,000
> $10,000,000
2013 CRE Lending Survey: Value of most recent sales transaction
Source: NAR
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


NAR Member Commercial Activity
Survey
1
st
Quarter, 2014


Sales Volume Compared with Previous Year:
Up 11%
Sales Prices Compared with Previous Year:
Up 4%
Rental Rates Compared with Previous Quarter:
Up 2%
Direction of Business Opportunities Compared
with Previous Quarter: Up 6%
Monetary Policy
Tapering Ends by the year end 2014
Fed Funds Rate hike in 2015 Q1
Earlier Move to Tighten because of Inflation
Pressure
Long-term Steady State Rate (2016 onwards)
.. 10 year Treasury at 5.0% 250 basis
points higher than current

Monetary Policy by Federal Reserve
(zero rate policy for 6 years!)
0
1
2
3
4
5
6
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Fed Funds
%
New Construction Activity - Recovering
(Not a New High Yet)
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
2
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Non-Residential Construction in $Millions
Consumer Price Inflation: Less than 2%
(% change from one year ago)
-3
-2
-1
0
1
2
3
4
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6
1
9
9
9

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CPI: Year Over Year Percent Change
All items exlcuding fuel and energy All items
Core Price Inflation: Less than 2%;
but rose at 2.5% annualized rate
(% change from one year ago)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
1
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All items exlcuding fuel and energy
Apartment Vacancy RatesHistoric Lows Now
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
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
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
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
Forecast over the next 2 years
GDP Growth near 3%
Net New Jobs about 2 million a year
Rising interest rates
10-year Treasury to reach 4% by late 2015
Cap rates rise somewhat (narrow the gap first)
Increased occupancy and falling vacancy (new
supply lacking)
Rising rents
Overall improving business opportunities



Economic Forecast
2011 2012 2013 2014 2015
Annual Growth Rate
Real GDP 1.8 2.8 1.9 2.2 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
3-Month Treasury 0.1 0.1 0.1 0.1 0.8
10-Year Government Bond 2.8 1.8 2.5 3.0 3.8
Commercial Forecast
OFFICE 2014 I 2014 II 2014 III 2014 IV 2015 I 2015 II 2015 III 2014 2015
Vacancy Rate 15.8% 15.8% 15.7% 15.5% 15.6% 15.5% 15.4% 15.7% 15.5%
Net Absorption ('000 sq. ft.) 10,880 10,787 11,745 11,144 11,400 12,727 13,515 44,556 50,024
Completions ('000 sq. ft.) 6,232 7,457 6,085 6,249 8,033 9,220 8,392 26,023 33,917
Rent Growth 0.5% 0.6% 0.6% 0.6% 0.7% 0.8% 0.9% 2.3% 3.2%

INDUSTRIAL 2014 I 2014 II 2014 III 2014 IV 2015 I 2015 II 2015 III 2014 2015
Vacancy Rate 9.0% 8.9% 8.9% 8.9% 8.9% 8.7% 8.6% 8.9% 8.7%
Net Absorption ('000 sq. ft.) 19,098 26,525 31,831 28,648 19,914 27,658 33,190 106,102 110,632
Completions ('000 sq. ft.) 14,865 21,943 20,527 13,449 14,383 21,233 19,863 70,784 68,492
Rent Growth 0.5% 0.6% 0.6% 0.7% 0.6% 0.7% 0.7% 2.4% 2.6%

RETAIL 2014 I 2014 II 2014 III 2014 IV 2015 I 2015 II 2015 III 2014 2015
Vacancy Rate 10.2% 10.0% 10.0% 9.8% 9.9% 9.8% 9.8% 10.0% 9.8%
Net Absorption ('000 sq. ft.) 4,045 3,417 2,590 4,591 5,776 4,880 3,699 14,643 20,910
Completions ('000 sq. ft.) 2,565 2,239 2,565 2,847 3,689 3,188 3,581 10,216 14,115
Rent Growth 0.4% 0.5% 0.5% 0.6% 0.5% 0.6% 0.6% 2.0% 2.3%

MULTI-FAMILY 2014 I 2014 II 2014 III 2014 IV 2015 I 2015 II 2015 III 2014 2015
Vacancy Rate 4.0% 4.0% 4.0% 4.1% 4.1% 4.1% 4.2% 4.0% 4.1%
Net Absorption (Units) 50,333 45,491 42,940 58,167 27,721 25,055 23,650 204,931 112,463
Completions (Units) 32,164 42,931 41,765 44,781 27,728 35,219 32,162 161,640 129,238
Rent Growth 1.4% 1.2% 1.1% 1.0% 1.0% 0.9% 0.9% 4.3% 3.5%

Sources: National Association of REALTORS / Reis, Inc.
Washington Policy Watch on
Commercial Real Estate
Facilitate Covered Bonds to help credit flow
Raise cap on holding of commercial RE loans by
credit unions
Preserve Like-Kind Exchanges
Preserve Terrorism Insurance
Preserve capital gains status on carried interest
Depreciation Rules should match economic life
Oppose lease-accounting changes
For Daily Update and Analysis


Twitter
@NAR_Research








Commercial Real Estate Outlook:
NOT AS BRIGHT AS THE PICTURE--BUT STILL EXPANDING

Lawrence Yun, Ph.D.
Chief Economist
NATIONAL ASSOCIATION OF REALTORS

Presentation in Washington, D.C.

May 15, 2014




Commercial Real
Estate:
My Favorite Graphs
Presented by:
Bob Bach
Director, Research
312.698.6754
rbach@ngkf.com
Source: CoStar, NGKF
-20
-15
-10
-5
0
5
10
15
20
25
'07 '08 '09 '10 '11 '12 '13 '14
M
i
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l
i
o
n

S
F

CBD Suburban
Office Market Absorption, CBD vs. Suburban
Suburbs Are Alive and Well
Since 2007, net
absorption in CBDs has
been negative!

Excluding quarters
with negative
absorption, suburbs
have accounted for
80% of total
absorption since 2007.
0
200
400
600
800
1,000
Original 6 CBDs Other 53 CBDs
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Office Inventory
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
Original 6 CBDs Other 53 CBDs
P
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e
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G
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s

Office Asking Rent
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Original 6 CBDs Other 53 CBDs
Office Vacancy Rate
0%
2%
4%
6%
8%
Original 6 CBDs Other 53 CBDs
Office Cap Rate
Source: CoStar, NGKF
Not All CBDs Created Equal
NY, DC, Boston, Chicago, SF, Seattle (Original 6) vs. All Others
Source: CoStar, NGKF
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4%
6%
8%
10%
12%
-75
-50
-25
0
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50
75
'07 '08 '09 '10 '11 '12 '13 '14
%

V
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A
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d
/
C
o
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l
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d

(
m
i
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l
i
o
n
s
)

SF Absorbed SF Completed % Vacant
Q1 Vacancy of 7.7% ties pre-
recession low in 2007-Q1.

Y/Y vacancy fell 200-plus bps in
Fresno, Las Vegas, Columbus,
Denver & Charlotte, more than
twice the 85-bps drop in U.S.

Construction pipeline = 94M SF,
52% of prior peak in 2007-Q3.

Q1 net absorption hit 6-year high of
47M SF, led by DFW w/4.2M SF.

Asking rent rose 5.1% Y/Y.

Recovery has spread to regional
markets with less new supply.

Industrial Market
Drivers = E-Commerce, Cap-ex, Trade, Supply Chain Optimization
Source: Trepp with Federal Reserve Flow of Funds Data, NGKF
$0
$50
$100
$150
$200
$250
$300
$350
$400
'12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22
B
i
l
l
i
o
n
s

Bank CMBS Insurance Companies Other
CRE Loans Maturing 2012-2022
CMBS Still Problematic
Maturing loans will remain
elevated for three more years.

CMBS maturations will peak in
2017.

Delinquency rates are going down
for all loan types.

With leasing market conditions
improving, there appears to be
plenty of debt capital available to
refinance the loans.

NATIONAL ASSOCIATION
OF REALTORS

The Evolution of Office Space
May 15, 2014 | Washington, DC
39
COST IS IMPORTANT
Real
Estate
Labor
Cost of Doing Business
55%
surveyed
plan reductions
Real Estate Cost Reductions
40 million sq. ft.
Price Sensitivity
225 sf
151 sf
2010 2017f
Sq. Ft. per Worker
Sources: CBRE, CoreNet Global.
40
1

7

Major Business Drivers for Alternative Workplaces
ITS NOT ALL ABOUT COST
1


Cost
Savings

76%
2


Work-Life
Balance

66%
3


Productivity

64%
4


Business
Agility

61%
5


Employee
Attraction/
Retention

59%
6


Collaboration

47%
7


Sustainability

41%
Source: NewWOW.
2011 Survey
4


Cost
Savings

58%

Work-Life
Balance

70%
2


Productivity

69%
5


Business
Agility

56%
3


Employee
Attraction/
Retention

60%
6


Collaboration

49%

Sustainability

29%
2013 Survey
41
CBRE Downtown Los Angeles
FLEXIBILITY & CHOICE
42
Clustering of Tech Talent
ATTRACTING TALENT
Sources: BLS, CBRE Research.
43
Demographics Impact the Workplace
THE NEXT GENERATION
THE TRADITIONALISTS
(BABY BOOMERS, GEN X)
THE NEW GENERATION
(GEN Y OR MILLENNIALS)
Dedicated Space Choice in where we work
Face-to-face interactions Face-to-face + collaboration & media tools
Stationary technology Mobile technology
Independence & hard work Collaboration & team work
Work is about obligation and challenges Work is about fulfillment
Health & retirement benefits Work-life balance
Top down or consensus driven decision making Speedy decision making
Source: CBRE Workplace Strategies.
44
Wellbeing & Health
SUSTAINABILITY 2.0
JEFFREY KOTTMEIER
DIRECTOR, RESEARCH & ANALYSIS
T +1 202 783 8200
Jeffrey.Kottmeier@cbre.com
May 2014
Economic & Commercial
Real Estate Outlook
Kevin J. Thorpe, Chief Economist
NABEs Consensus Forecast
Released: March 2014
2014 Forecast 2015 Forecast
Media
n
Five
Lowest
Five
Highest
Median
Five
Lowest
Five
Highest
Real GDP, % change, Q4/Q4 2.7 1.5 3.5 3.2 2.3 3.8
CPI, % change, Q4/Q4 1.9 1.4 2.4 2.0 1.2 2.8
Civilian Unemployment Rate, % annual
average
6.4 6.3 6.8 6.1 5.5 6.6
Federal Funds Target, % year-end 0.125 0.125 0.500 .750 0.125 2.000
10-Yr Treasury Note Yield, % year-end 3.30 2.72 3.75 3.80 2.95 4.44
Housing Starts, millions of units 1.07 0.91 1.20 1.30 0.99 4.50
Home Prices, FHFA, % change, Q4/Q4 5.0 1.8 9.3 4.0 1.3 6.7
Oil Prices, $ per barrel, December Average 99 90 105 100 85 111
S&P 500 Index, December 31 1950 1800 2028 2047 1800 2318
Springing Back
Job Growth
Home Sales
Auto Sales
ISM
+288k
(April)
+3.4%
(March)
16.4M
(March)
54.9
(April)
(Mth/Mth)
(PHI, Monthly)
(Monthly)
CRE Demand Metrics
0
20
40
60
80
100
120
140
160
180
Retail (msf) Office(msf) Industrial (msf) Apartments, 000's
2007 2013 Pre-Recession Average
Source: Cassidy Turley Research, Reis
U.S. Net Absorption in 2013 vs. Pre-recession Annual Averages
CRE Fraught With Nuances
Tenants Signing For Less Space
Changes In Office SF Per Worker
225
164
151
150
160
170
180
190
200
210
220
230
2010 2011 2012 2013 2014 2015 2016 2017
Source: CoreNet Global
Office space per worker, sf
High Quality Is King
-20
0
20
40
60
80
2011 2012 2013
M
S
F

Class A Net Abs. Class B Net Abs. Total Pre-Crisis Average
Source: Cassidy Turley Research
U.S. Office Sector
Is Multifamily Overbuilding?
0
50,000
100,000
150,000
200,000
250,000
#

o
f

U
n
i
t
s

Completions
Forecast
Recovery
Absorption
Historical
Absorption
Source: Reis, Cassidy Turley Research
Industrial Is Underbuilding
Industrial: Spread between current vacancy & historical average
Source: Cassidy Turley Research
Raleigh
Columbus
Austin
Charlotte
Dallas
Louisville
Pittsburgh
Indianapolis
Baltimore
Denver
Minneapolis
San Diego
Central NJ
Atlanta
Milwaukee
Cincinnati
Sub MD
Chicago
Houston
Philadelphia
Saint Louis
Nashville
-500 -400 -300 -200 -100 0 100
Prime Retail Rents Surging
2%
6%
8%
10%
17%
19%
22%
31%
32%
42%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Los Angeles (West)
St. Louis (Clayton)
San Diego (Del Mar)
Bethesda, MD
Chicago (N. Mich Ave)
DC (Georgetown)
Atlanta (Buckhead)
NY City (Midtown)
San Fran (Downtown core)
Nashville (Downtown)
Rent Growth, 2013 over 2012
Source: Cassidy Turley Research, Costar
What Could Go Wrong?
Eurozone deflation
China hard landing
Monetary policy fuels hyperinflation
Interest Rates Spike
Russia/Ukraine Crisis Global Panic