Commercial Real Estate in 2016: New Challenges

LAWRENCE YUN, PhD

MARK VITNER

Chief Economist, Sr. VP

National Association of
REALTORS

Managing Director, Sr. Economist

Wells Fargo Securities

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LAWRENCE YUN, PhD

NATIONAL ASSOCIATION OF REALTORS
Chief Economist and Senior Vice President of Research
Lawrence Yun is Chief Economist and Senior Vice President of Research at the NATIONAL
ASSOCIATION OF REALTORS. He oversees and is responsible for a wide range of research
activity for the association including NARs Existing Home Sales statistics, Affordability Index,
and Home Buyers and Sellers Profile Report. He regularly provides commentary on real estate
market trends for its 1.1 million REALTOR members.
Dr. Yun creates NARs forecasts and participates in many economic forecasting panels, among
them the Blue Chip Council and the Harvard University Industrial Economist Council. He appears
regularly on financial news outlets, is a frequent speaker at real estate conferences throughout
the United States, and has testified before Congress. Dr. Yun appears often as a guest on
CSPANs Washington Journal and is a regular guest columnist on the Forbes website.
Dr. Yun received his undergraduate degree from Purdue University and earned his Ph.D. from
the University of Maryland at College Park.

MARK VITNER
WELLS FARGO SECURITIES, LLC
Managing Director, Senior Economist
Mark Vitner is a managing director and senior economist at Wells Fargo, responsible for tracking U.S.
and regional economic trends. Based in Charlotte, he also writes for the companys Monthly Economic
Outlook report, the Weekly Economic & Financial Commentary, and provides regular updates on the
housing markets, commercial real estate, regional economies, and inflation. Marks commentary has
been featured in the New York Times, Wall Street Journal, Bloomberg, and many other publications.
Mark joined Wachovia (then First Union) in 1993. Before that, he spent nine years as an economist for
Barnett Banks in Jacksonville, Fla. Originally from Atlanta, Mark earned his B.B.A. in economics from
the University of Georgia, an M.B.A. from the University of North Florida, and has completed further
graduate work in economics at the University of Florida. He also completed the National Association of
Business Economics (NABE) Advanced Training in Economics program at Carnegie Mellon University.
Mark is a member of the National Association of Business Economists and co-founded its Charlotte
chapter, The Charlotte Economics Club. He serves as a distinguished lecturer and practitioner at the
University of Georgia. He is also a member of the American Economic Association, the American Real
Estate and Urban Economics Association, and the Charlotte Chapter of the Association for Corporate
Growth. Mark currently chairs the Economic Advisory Council for the California Chamber of
Commerce and serves as the chief economist for the North Carolina CCIM.

COMMERCIAL REAL ESTATE AND

ECONOMIC OUTLOOK
LAWRENCE YUN, PH.D.
CHIEF ECONOMIST
NATIONAL ASSOCIATION OF REALTORS

PRESENTATION

IN

WASHINGTON, D.C.

MAY 12, 2016

COMMERCIAL INVESTMENT SALES OF LARGE PROPERTIES

(PROPERTIES VALUED AT $2.5 MILLION AND OVER)

COMMERCIAL PROPERTY PRICE INDEX

Source: Federal Reserve

SIOR CRE INDEX

Northeast

Midwest

South

West

Industrial

160.0
140.0

140.0

120.0

120.0

100.0

100.0

80.0

80.0

60.0

60.0

40.0

40.0

20.0

20.0

0.0

0.0

Office

APARTMENT
%

OFFICE
%

INDUSTRIAL-WAREHOUSE
%

RETAIL
%

REALTOR DEAL SIZE

(NOT $2.5 MILLION PROPERTIES)

-0.1

2008.Q4
2009.Q1
2009.Q2
2009.Q3
2009.Q4
2010.Q1
2010.Q2
2010.Q3
2010.Q4
2011.Q1
2011.Q2
2011.Q3
2011.Q4
2012.Q1
2012.Q2
2012.Q3
2012.Q4
2013.Q1
2013.Q2
2013.Q3
2013.Q4
2014.Q1
2014.Q2
2014.Q3
2014.Q4
2015.Q1
2015.Q2
2015.Q3

CRE PRICES: SMALL VS. LARGE MARKETS

Sales Prices (YoY % Chg)

Real Capital Analytics CRE Markets

-0.2

-0.3

-0.4

Sources: NAR, Real Capital Analytics

REALTOR CRE Markets

0.2

0.1

-50%

2008.Q4
2009.Q1
2009.Q2
2009.Q3
2009.Q4
2010.Q1
2010.Q2
2010.Q3
2010.Q4
2011.Q1
2011.Q2
2011.Q3
2011.Q4
2012.Q1
2012.Q2
2012.Q3
2012.Q4
2013.Q1
2013.Q2
2013.Q3
2013.Q4
2014.Q1
2014.Q2
2014.Q3
2014.Q4
2015.Q1
2015.Q2
2015.Q3

CRE SALES: SMALL VS. LARGE MARKETS

Sales Volume (YoY % Chg)

Real Capital Analytics CRE Markets

-100%

Sources: NAR, Real Capital Analytics

REALTOR CRE Markets

200%

150%

100%

50%

0%

CRE FINANCING: SMALL VS. LARGE MARKETS

RCA Lending Sources ($2.5M+)

REALTOR CRE Lending Sources

100%
90%

Small Business
Administration
REITs

80%

Regional Banks

100%

Pvt/Other

90%

Reg'l/Local
Bank

80%
70%

Nat'l Bank

Public Cos.

70%

Private Investors
60%

60%

Other

Int'l Bank

50%

Insurance

40%
30%

Gov't Agency

50%

National Banks

40%

Local/Comm. Banks

30%

Life Insurance Cos.

20%

International banks

10%

Credit Unions

20%

Financial

10%

CMBS

0%

2011 2012 2013 2014 2015

Source: Real Capital Analytics

CMBS

0%

2011

2012

2013

2014

2015

2016

Source: NAR

BANKS AND CRE LENDING

Does Bank Capital for CRE Remain
Obstacle to Sales?

Yes

No

Causes of Insufficient Bank Capital for CRE Lending:

100%

Other, please specify

90%

Global economic uncertainty

80%

U.S. Economic uncertainty

70%
60%

Inability of banks to dispose

of distressed assets

50%

41%

New/proposed US legislative
and regulatory initiatives

40%

59%

30%

Regulatory uncertainty for

financial institutions

20%

Slow-down in
pooling/packaging of CMBS

10%

Reduced NOI, property

values, and equity

0%

2012 2013 2014 2015 2016

Source: NAR

LOAN-TO-VALUE FINANCING TERMS

Average Loan-to-Value for CRE Transactions
100%

27%

90%

33%

30%

28%

26%
Other
100% Cash
50%
55%
60%
65%
70%
75%
80%
85%
90%

80%
70%
60%
50%
40%
30%
20%
10%
0%
2011

2012

2013

2014

2015

2016

LENDING CONDITIONS IN SMALLER CRE

MARKETS
Change in Lending Conditions over Past Year
100%
90%
80%

Eased Significantly

70%

Eased Somewhat

60%
50%

Not Changed

40%
30%

Tightened Somewhat

20%
10%

Tightened Significantly

0%
2011

2012

2013

2014

2015

2016

ECONOMIC BACKDROP

LIFETIME WEALTH AT NEAR ALL-TIME HIGH

MEDIAN HOUSEHOLD INCOME

(INFLATION ADJUSTED)

ANNUAL GDP
BELOW 3% FOR 11 STRAIGHT YEARS

SLUGGISH GDP AND GAP AFTER RECESSION

($2.5 TRILLION GAP $7,000 PER PERSON)

3% Growth Line

Slow 2% Growth Line

SLUGGISH BUSINESS SPENDING

DESPITE HIGH PROFIT

CONSUMER SPENDING GROWTH

INTERNATIONAL TRADE FALLING

$ million

TRADE BALANCE AS % OF GDP

MANUFACTURING JOBS

AVERAGE WEEKLY LABOR HOURS IN

MANUFACTURING INDUSTRY

WIDENING JOBS
MOBILE AND CHARLESTON SC

BOEING AIRPLANE MADE IN CHARLESTON

WIDENING JOBS
NASHVILLE AND MEMPHIS

WIDENING JOBS
GRAND RAPIDS AND FLINT

JOBS
(8 MILLION LOST 14 MILLION GAINED)
In thousands

UNEMPLOYED AND OUT-OF-LABOR FORCE

TOP AND BOTTOM STATES FOR JOBS

The Best

% Gain in 12
months

The Worst

% Gain in 12
months

Idaho

3.8

Wyoming

0.2

Utah

3.5

Oklahoma

0.1

Nevada

3.4

Louisiana

-0.4

Florida

3.0

West Virginia

-1.8

Washington

3.0

North Dakota

-2.0

California

2.9

South Carolina

2.9

Oregon

2.7

Arizona

2.3

STATE LEVEL EMPLOYMENT

FEDERAL DEBT CUMULATIVE

( $ MILLION; DEBT HELD BY PUBLIC EXCLUDING INTRA-GOVERNMENTAL
HOLDINGS)

QUANTITATIVE EASING

NO CPI INFLATION YET

U.S. DOLLAR
REVERSING THE DECLINE STRONGER AND STRONGER

NEGATIVE INTEREST RATES

GOOD-BYE BEN?

FED RATE HIKE IN DECEMBER

AGAIN IN JULY
AGAIN IN

NOVEMBER

AGAIN 4-TIMES IN 2017

ANOTHER 4-TIMES IN 2018

FED POLICY AND LONG-TERM RATES

Commercial Real Estate in 2016: New Challenges

LAWRENCE YUN, PhD

MARK VITNER

Chief Economist, Sr. VP

National Association of
REALTORS

Managing Director, Sr. Economist

Wells Fargo Securities

U.S. Economic Outlook

Mark Vitner, Managing Director & Senior Economist
May 12, 2016

Economic Growth Remains Relatively Sluggish

Real GDP is expected to grow 1.6 percent in 2016. Growth

Overall Outlook

is being driven by consumer spending and homebuilding,

which is offsetting sluggish global influences.

The Feds initial rate hike came late in the cycle, amid
Monetary Policy

circumstances more consistent with a rate cut and led to

a spike in volatility. The Fed will proceed cautiously.

Consumer spending is growing solidly but has not

Consumer

benefitted much from lower gasoline prices due to rising

healthcare and housing costs.

The rise of Millennials has raised questions about

Demographics

Global
Economy

Economic Outlook

shopping patterns. This generation faces more

constraints on discretionary spending but is also more
mobile and more apt to shop online.

Slower growth in China continues to weigh on global

economic growth, impacting commodity producers the
most. Weaker demand growth in Asia has slowed global
trade but imports into the U.S. remain strong.
48

Economic Growth

Real GDP growth has been disappointing throughout most of this recovery and has also been
unusually volatile. Much of the recent volatility is due to swings in international trade and
business inventories. Private final domestic demand is growing more solidly and consistently.
Real GDP Forecast

Real Private Final Sales

U.S. Real GDP

Real Private Final Sales to Domestic Purchasers

Bars = CAGR

Line = Yr/Yr Percent Change

Bars = CAGR

10%

10%

8%

8%

6%

Line = Yr/Yr Percent Change

8%

GDP - CAGR: Q1 @ 0.5%

8%

GDP - Yr/Yr Percent Change: Q1 @ 1.9%

6%

6%
Forecast

6%

4%

4%

4%

2%

2%

2%

2%

0%

0%

0%

0%

-2%

-2%

-2%

-2%

-4%

-4%

-4%

-4%

-6%

-6%

-6%

-6%

-8%

-8%

-8%

-8%

-10%

-10%

-12%
2000

Forecast

4%

-10%
2000

2002

2004

2006

2008

2010

2012

2014

2016

Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Economic Outlook

49

Real Priv Fin Sales to Dom. Purch. - CAGR: Q1 @ 1.2%

Real Priv Fin Sales to Dom. Purch. - Yr/Yr Pct Chg: Q1 @ 2.6%

-10%
-12%

2002

2004

2006

2008

2010

2012

2014

2016

Employment Situation

Solid month to month job gains have largely put recession fears to rest. Unemployment
continues to trend lower and is close to most measures of full employment. The Fed is taking
its queue from the strengthening labor market but taking a big picture view.
Nonfarm Employment

Unemployment Rate

Nonfarm Employment Change

Unemployment and Wage Rates

Change in Employment, In Thousands

600

600

400

400

200

200

Wages for Production & Nonsupervisory Workers, SA

12%

12%

10%

-200

-200

-400

-400

-600

-600

-800

-800

10%

8%

8%

6%

6%

4%

4%

2%

2%
Unemployment Rate: Apr @ 5.0%
Hourly Earnings - Yr/Yr % Change: Apr @ 2.5%

Monthly Change: Apr @ 160K

-1,000
2007

-1,000
2008

2009

2010

2011

2012

2013

2014

2015

0%

2016

Source: U.S. Department of Labor and Wells Fargo Securities, LLC

Economic Outlook

0%
65

50

70

75

80

85

90

95

00

05

10

15

Employment Growth of U.S. MSAs

U.S. Employment Growth by MSA

3-Month Moving Averages, March 2016
4%

Expanding

Percent of Total Employees

Less than 4%
4% to 6%

3-Month Annualized Percent Change

3%

Seattle

More than 6%

Las Vegas

Baltimore
Detroit

San Francisco

Minneapolis

2%

Washington, D.C.
Chicago

Dallas
Philadelphia

St. Louis

1%

Atlanta

Los Angeles

Phoenix
San Jose

San Diego
New York

Charlotte

Tampa
Richmond

0%
Miami
Houston

-1%

-2%
0.0%

Decelerating
0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Year-over-Year Percent Change

Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC

Economic Outlook

3.5%

4.0%

4.5%

Consumer Confidence

Consumer Confidence has fallen back a bit in recent months, reflecting growing concerns
about slower global economic conditions and financial market volatility.

Consumer Confidence

Present Situation vs. Future Expectations

Consumer Confidence Index and S&P 500

Conference Board Consumer Confidence

Conference Board

Present Situation and Expectations Index

160

2,400

140

2,100

120

1,800

100

1,500

80

1,200

60

900

40

600

20

300

250

250

Present Situation Yr/Yr % Chg: Apr @ 10.8%

Expectations Yr/Yr % Chg: Apr @ -9.0%
Present Situation: Apr @ 116.4
Expectations: Apr @ 79.3

200

200

150

150

100

100

50
Confidence: Apr @ 94.2 (Left Axis)

50

S&P 500: Apr @ 2,075.5 (Right Axis)

0

0
94

96

98

00

02

04

06

08

10

12

14

16

Source: The Conference Board, S&P and Wells Fargo Securities, LLC

Economic Outlook

0
87

52

89

91

93

95

97

99

01

03

05

07

09

11

13

15

Demographic Breakdown

U.S. Working-Age Population Distribution

Thousands

Millions of Persons in Age Group, 2014

Millennials are now the

countrys largest and most
diverse generation.

6
G.I. Gen: 1%

Millennials: 33%

Gen X: 24%

Boomers: 30%

Silent Gen: 12%

0
16

26

36

46

56

66

Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Wells Fargo Economics

53

76

86

96

U.S. Housing Market

Despite some recent setbacks, we continue to look for a gradual recovery in homebuilding.
The homeownership rate has begun to stabilize.

Homeownership

Owners vs. Renters

CoreLogic National Home Price Index vs.

Homeownership Rate

Millions, Year-over-Year Difference

70%

Thousands

24%

3.0

3.0
Renters: Q1 @ 0.4M
Homeowners: Q1 @ 0.2M

18%

69%

12%

68%

2.0

2.0

6%

67%

1.5

1.5

0%

66%

1.0

1.0

-6%

65%

0.5

0.5

-12%

64%

0.0

0.0

63%

-0.5

-0.5

62%

-1.0

-18%

Home Price Index Yr/Yr: Q4 @ 5.5% (Left Axis)

Homeownership Rate: Q1 @ 63.5% (Right Axis)

-24%
88

90

92

94

96

98

00

02

04

06

08

10

12

14

16

54

2.5

-1.0
02

Source: NAR, CoreLogic, U.S. Department of Commerce and Wells Fargo Securities, LLC

Wells Fargo Economics

2.5

04

06

08

10

12

14

16

Thousands

Household Formations

Gradual Recovery in Homebuilding

Housing Starts
Millions of Units

2.4

We continue to look for a

gradual recovery in
homebuilding.
Single-family construction has
been slow to come back on track
with long-held norms relative to
population and employment
growth. We look for stronger
gains this year, but
improvement will remain
excruciatingly slow.

2.1

2.4

Multifamily Starts
Multifamily Forecast
Single-family Starts
Single-family Forecast

2.1

1.8

1.8
Forecast

1.5
1.2

1.2

0.9

0.9

0.6

0.6

0.3

0.3

0.0

0.0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Economic Outlook

1.5

55

Interest Rates

Appropriate Pace of Policy Firming

Target Federal Funds Rate at Year-End

5.0%

Even after scaling back its

expectations, the FOMC still has
much more tightening in 2016
and 2017 than the financial
markets expect.
We continue to look for two
quarter-point rate hikes this
year but the timing will be tricky
for the Fed, depending on
swings in economic data in the
U.S. and overseas as well as
geopolitical events.

4.5%
4.0%

5.0%
March 2016 Median Response
December 2015 Median Response
December 2014 Median Response
Futures Market: May 6

4.5%
4.0%

3.5%

3.5%

3.0%

3.0%

2.5%

2.5%

2.0%

2.0%

1.5%

1.5%

1.0%

1.0%

0.5%

0.5%

0.0%

2016

2017

2018

Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities, LLC

Economic Outlook

56

Longer Run

0.0%

Probability of Recession

Recession Probability Based on Probit Model

Model with LEI

120%

120%
Two-Quarter Ahead Recession Probability: Q1 @ 25.7%

100%

According to our preferred

model, the probability of a
recession has ticked up.
That said, the level still suggests
very little possibility of a
recession in the near term.

100%

80%

80%

60%

60%

40%

40%

20%

20%

0%

0%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

Source: Wells Fargo Securities, LLC

Economic Outlook

57

Global Economy

Global Forecast

Real Global GDP Growth

Year-over-Year Percent Change, PPP Weights
7.5%

7.5%

6.0%

6.0%
Period Average

4.5%

Growth in the global economy

remains below its long-run
average.

WF
Forecast

3.0%

3.0%

1.5%

1.5%

0.0%

0.0%

-1.5%

-1.5%
1980

1985

1990

1995

2000

Source: International Monetary Fund and Wells Fargo Securities, LLC

Economic Outlook

4.5%

59

2005

2010

2015

Global Exports

Global Export Volumes

Year-over-Year Percent Change

Global trade has slowed over the

past year, as demand for
commodities has weakened and
developed countries are
exporting fewer capital goods.

25%

25%

20%

20%

15%

15%

10%

10%

5%

5%

0%

0%

-5%

-5%

-10%

-10%

-15%

-15%
Real Exports: Feb @ -0.2%

-20%

-20%

Average 1992-Present: 5.5%

-25%

-25%
92

94

96

98

00

02

04

Source: IHS Global Insight and Wells Fargo Securities, LLC

Economic Outlook

60

06

08

10

12

14

16

Negative Rates

3-Month Interbank Offered Rates

The effectiveness of negative

interest rates is still very much
in debate. While lower interest
rates have smoothed
adjustments in sectors
undergoing massive change,
negative interest rates may have
prolonged the process and
weakened the financial system.

3.00%

3.00%

2.50%

2.50%

2.00%

2.00%

1.50%

1.50%

1.00%

1.00%

0.50%

0.50%

0.00%

0.00%

-0.50%

-1.00%

Eurozone: May-2 @ -0.25%

Denmark: May-2 @ -0.08%
Sweden: May-2 @ -0.45%
Switzerland: Apr-29 @ -0.73%

-1.50%
2012

-1.00%
-1.50%

2013

2014

Source: Bloomberg LP and Wells Fargo Securities, LLC

Economic Outlook

-0.50%

61

2015

2016

Foreign Purchases of U.S. Securities: Still Solid

Foreign Private Purchases of U.S. Securities

12-Month Moving Sum, Billions of Dollars

Capital flows and asset

allocation by global investors
play a strong role in rate
determinations.

$600

$600

$500

$500

$400

$400

$300

$300

$200

$200

$100

$100

$0

$0

-$100

-$100

Treasury: Feb @ $308.1 Billion

Equity: Feb @ -$123.6 Billion
Agency: Feb @ $124.8 Billion
Corporate: Feb @ $138.5 Billion

-$200

-$200

-$300

-$300
04

05

06

07

08

09

10

11

12

Source: U.S. Department of the Treasury and Wells Fargo Securities, LLC

Economic Outlook

62

13

14

15

16

China Real GDP

Chinese Real GDP Forecast

Year-over-Year Percent Change

16%

We forecast that growth in

China will slow further, but we
do not expect the economy to
completely fall apart.

16%

14%

14%

12%

12%

10%

WF
Fcst.

10%

8%

8%

6%

6%

4%

4%

2%

2%
Year-over-Year Percent Change: Q1 @ 6.7%

0%
2000

2002

2004

2006

2008

Source: Bloomberg LP and Wells Fargo Securities, LLC

Economic Outlook

63

2010

2012

2014

2016

0%
2018

Real Estate

Foreign Capital Inflow

Origin of Capital Going Into the United States

For Commercial Real Estate, In Billions
$100

$100
Europe: Q1 @ $19.3B
Canada: Q1 @$18.0B
Middle East & Africa: Q1 @$12.9B
Asia: Q1 @ $22.0B
Australia: Q1 @ $1.9B
Latin America: Q1 @ $1.4B

$90
$80
$70

The United States continues to

be perceived a safe haven for
foreign investment.

$90
$80
$70

$60

$60

$50

$50

$40

$40

$30

$30

$20

$20

$10

$10

$0

$0
01

02

03

04

05

06

07

08

Source: RCA , Inc. and Wells Fargo Securities, LLC

Economic Outlook

65

09

10

11

12

13

14

15

16

Cross-Border Investment

Over the past five years, Manhattan, Los Angeles, Boston and Dallas have been preferred
markets for foreign investors.

Top Market Destinations

Top Countries of Origin

Top Cross-Border U.S. Market Destinations

Cross-Border Capital into the U.S.

Domestic Markets
(2011-2015)

Total Number
of Properties

In Billions of U.S. Dollars

Total Volume
(In Billions)

Canada
Other

Manhattan
Los Angeles

297

$57.52

257

$14.77

Boston

160

$11.40

Norway

629
312
84
163
194
170
4,733
6,999

$10.55
$10.13
$9.64
$8.54
$6.86
$6.02
$93.30
$228.74

Germany

Dallas
Chicago
Washington, D.C.
San Francisco
Houston
Seattle
Other
Total

$17.2B

Singapore

$14.9B
$8.5B
$7.1B

China

$6.0B

UAE

$5.1B

Qatar

$4.5B

South Korea

$3.3B

Australia

$2.9B
$0

Source: RCA and Wells Fargo Securities, LLC

Economic Outlook

$24.9B

66

$5

As of 2015
$10

$15

$20

$25

$30

Nonresidential Construction

Private Nonresidential Construction Put-in-Place

Year-over-Year Percent Change
50%

Forecast

Industrial: 2015 @ 44.6%

40%

Private construction spending

continues to improve, but the
pace is moderating.

40%

Commercial: 2015 @ 6.7%

Institutional: 2015 @ 11.0%

30%

30%

20%

20%

10%

10%

0%

0%

-10%

-10%

-20%

-20%

-30%

-30%

-40%

-40%

-50%

-50%
94

96

98

00

02

04

06

08

10

Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

Economic Outlook

50%

67

12

14

16

18

Vacancy Rates

Commercial Real Estate Vacancy Rates

Percent
24%

Office and retail vacancy rates

have only modestly edged lower
in recent years, which means
there have been a fairly limited
number of opportunities for new
development.
The apartment and industrial
market have been helped by
demographic and structural
shifts that have boosted demand
in recent years.

20%

24%
Office Vacancy Rate: Q1 @ 16.1%
Industrial Vacancy Rate: Q1 @ 5.8%
Retail Vacancy Rate: Q1 @ 10.0%
Apartment Vacancy Rate: Q1 @ 4.5%

16%

16%

12%

12%

8%

8%

4%

4%

0%
0%
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: REIS, Inc., CoStar Realty Information and Wells Fargo Securities, LLC

Economic Outlook

20%

68

Effective Revenue

Effective Revenue by Property Type

Year-over-Year Percent Change
10%

10%
Forecast

Overall effective revenue

growth, which is the product of
occupied stock and effective
rent, continues to improve.

5%

5%

0%

0%

-5%

-5%

-10%

-10%

Apartment: 2016 (Projected) @ 5.8%

Office: 2016 (Projected) @ 5.5%
-15%

Retail: 2016 (Projected) @ 2.9%

-15%

Industrial: 2016 (Projected) @ 6.5%

Hotel: 2016 (Projected) @ 3.0%
-20%

-20%
2009

2010

2011

2012

2013

2014

2015

2016

Source: Reis, Inc., CoStar Realty Information, Inc. and Wells Fargo Securities, LLC

Economic Outlook

69

2017

Rent Growth

Commercial Real Estate Asking Rent Growth

Quarter-over-Quarter Percent Change

A surge in apartment deliveries

late last year has pulled
apartment rents lower.

3%

3%

2%

2%

1%

1%

0%

0%

-1%

-1%

-2%

-2%

-3%

Apartment Asking Rent Growth: Q1 @ 0.4%

-3%

Retail Asking Rent Growth: Q1 @ 0.5%

-4%

Office Asking Rent Growth: Q1 @ 0.9%

-4%

Industrial Asking Rent Growth: Q1 @ 1.5%

-5%
-5%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: REIS, Inc., CoStar Realty Information and Wells Fargo Securities, LLC

Economic Outlook

70

Construction Supply
Completions as a Percent of Inventory
Percent

10%

10%

Apartment: 2016 (Projected) @ 2.4%

Office: 2016 (Projected) @ 1.0%
Retail: 2016 (Projected) @ 0.5%
Industrial: 2016 (Projected) @ 1.6%
Hotel: 2016 (Projected) @ 2.2%
Aggregate: 2016 (Projected) @ 1.5%

Avg. '85-'89=4.8%

8%

6%

8%

6%
Avg. '97-'01=2.5%

4%

4%

Avg. '04-'08=1.3%
Avg. '12-'16F=0.98%

2%

2%

0%

0%

-2%

-2%
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

Apartment

3- Yr.
Supply
Growth

New York Metro

17.5%

New York

15.9%

Inland Empire

14.5%

Oklahoma C ity

C harlotte

4.5%

Nashville

13.0%

C leveland

10.5%

Atlanta

10.1%

Nashville

8.3%

Richmond

4.4%

C harlotte

10.6%

Miami

10.3%

Dallas - Fort Worth

9.2%

Austin

8.1%

Raleigh-Durham

3.7%

C harleston

10.5%

Boston

9.8%

Las Vegas

8.4%

Dallas

7.9%

Kansas C ity

3.6%

Seattle

10.2%

Palm Beach C ounty

9.1%

Austin

8.4%

Houston

6.2%

C incinnati

3.6%

Hotel Metro

3- Yr.
Supply
Growth

Warehouse

3- Yr.
Supply
Growth

Office

3- Yr.
Supply
Growth
11.3%

Retail

3- Yr.
Supply
Growth

District of C olumbia

9.9%

Austin

9.0%

Phoenix

7.5%

C harlotte

5.3%

Austin

3.3%

C hattanooga

9.6%

Houston

8.6%

San Antonio

6.8%

Kansas C ity

4.6%

Winston-Salem

3.2%

Miami

8.7%

Denver

8.6%

Oklahoma C ity

6.3%

C harleston

4.4%

Baltimore

3.1%

Austin

8.6%

Minneapolis

8.5%

Nashville

6.1%

Milwaukee

4.4%

San Francisco

3.1%

Greenville

7.9%

Nashville

8.4%

Washington D.C .

5.8%

Denver

4.0%

Northern New Jersey

5.0%

National

6.1%

National

National

4.7%

National

Note: Supply growth is the cumulative supply expected to be added through 2018 as a percentage of current inventory.

Source: CoStar Realty Information, Inc., Reis, Inc. , Property and Portfolio Research and Wells Fargo
Securities, LLC

Economic Outlook

71

3.5%

National

3.0%
2.1%

Hotel Real Revenue Per Available Room

Although real RevPAR is still improving, the pace began slowing noticeably in the fourth
quarter of 2015 and continued to moderate in the first quarter. Moreover, the rate of real
RevPAR growth for lower-end hotels, fell into negative territory in the first quarter.
Real RevPAR vs. Real ADR

Occupancy Rate

Occupancy Rate Cycles

Real RevPAR vs. Real ADR

Seasonlly Adjusted, Percent

Seasonally Adjusted, Year-over-Year Percent Change

10%

68%

10%

Peak:
1994Q4 @ 65.2%

66%
5%

Peak?:
2015Q4 @ 65.9%

5%

Peak:
2006Q1 @ 64.1%

64%
0%

62%
Trough:
1991Q1 @ 60.9%

60%
-5%

66%

64%

62%

0%

68%

60%

-5%

58%
-10%

-10%

-15%

-15%

58%
Trough:
2001Q4 @ 57.5%

56%
54%

Real ADR: Q1 @ 2.2%

-20%
90

92

94

96

98

00

02

04

06

08

10

12

14

50%
87

16

Source: Smith Travel Research and Wells Fargo Securities, LLC

Economic Outlook

52%

50%

-20%
88

54%

Trough:
2009Q2 @ 54.1%

52%

Real RevPAR: Q1 @ 1.4%

56%

72

89

91

93

95

97

99

01

03

05

07

09

11

13

15

Bank Lending

The net percentage of lenders reporting stronger demand for construction loans has been
edging lower in recent quarters, while the proportion of banks tightening their lending
standards has gradually edged higher. Multifamily projects have led the way.
Demand

Tightening Standards
Net Percent of Banks Tightening Standards

Net Percent of Banks Reporting Stronger Demand

Commercial Real Estate Loans

Commercial Real Estate Loans

60%

60%

100%

40%

40%

80%

80%

20%

20%

60%

60%

0%

40%

40%

-20%

-20%

20%

20%

-40%

-40%

0%

-60%

-60%

-20%

0%

Total CRE (Series Ends in 2013): Q3 @ 47.9%

Nonfarm Nonresidential: Q1 @ 9.9%
Multifamily Residential: Q1 @ 8.5%
Construction & Land Development: Q1 @ 8.5%

-80%

97

99

01

03

05

07

09

11

13

-40%
-60%

95

15

Source: Federal Reserve Board and Wells Fargo Securities, LLC

Economic Outlook

-20%
Total CRE (Series Ends in 2013): Q3 @ -19.2%
Nonfarm Nonresidential: Q1 @ 5.6%
Multifamily Residential: Q1 @ 22.5%
Construction & Land Development: Q1 @ 12.7%

-60%

-100%
95

0%

-40%

-80%

-100%

100%

73

97

99

01

03

05

07

09

11

13

15

Five Critical Key Takeaways

The economy should weather the global slowdown.

Economic Outlook

Weaker Global
Growth

Exports have clearly decelerated. We expect real GDP to

rise about 1.6 percent in 2016 and 2.2 percent in 2017.

Weaker global growth continues to pull at industries

closely tied to it, creating a disinflationary undertow that
is squeezing corporate profits and capital spending.

The Federal Reserve has begun to normalize interest

Interest Rates

The Housing
Recovery

The Mix of Growth

is Shifting

Economic Outlook

rates amid a challenging backdrop. Policymakers will

likely move very gradually and cautiously.

Demand for single-family homes is reviving, with firsttime homebuyers beginning to come back into the
market. Apartment construction is close to peaking.

The economy is better for consumers than producers.

Regions exposed to agriculture, energy, mining and
manufacturing are seeing conditions weaken.

74

U.S. Forecast

Wells Fargo U.S. Economic Forecast

Actual
2015

Real Gross Domestic Product

Personal Consumption
Inflation Indicators
PCE Deflator

2013

Actual
2014

2015

Forecast
2016
2017

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

0.6

3.9

2.0

1.4

0.5

1.4

2.6

2.5

1.5

2.4

2.4

1.6

2.2

1.8

3.6

3.0

2.4

1.9

2.8

2.7

2.6

1.7

2.7

3.1

2.6

2.5

0.2

0.3

0.3

0.5

1.0

0.9

1.1

1.4

1.4

1.4

0.3

1.1

1.9

-0.1

0.0

0.1

0.4

1.1

1.1

1.3

1.7

1.5

1.6

0.1

1.3

2.2

-1.9

-2.7

1.5

-3.3

-2.2

-0.8

1.9

2.5

1.9

2.9

0.3

-0.9

2.0

Consumer Price Index

Industrial Production

Corporate Profits Before Taxes

Trade Weighted Dollar Index
Unemployment Rate
Housing Starts

Forecast
2016

Quarter-End Interest Rates 5

Federal Funds Target Rate

4.6

0.6

-5.1

-11.5

-3.3

-0.7

1.9

1.9

2.0

1.7

-3.1

-0.1

1.7

92.1

90.0

92.3

94.5

89.8

88.3

88.3

90.0

75.9

78.4

91.1

89.1

93.7

5.6

5.4

5.2

5.0

4.9

4.9

4.8

4.7

7.4

6.2

5.3

4.8

4.5

0.98

1.16

1.16

1.14

1.13

1.22

1.23

1.24

0.92

1.00

1.11

1.23

1.28

0.25

0.25

0.25

0.50

0.50

0.50

0.75

1.00

0.25

0.25

0.27

0.69

1.38

Conventional Mortgage Rate

3.77

3.98

3.89

3.96

3.69

3.84

3.89

3.95

3.98

4.17

3.85

3.84

4.18

10 Year Note

1.94

2.35

2.06

2.27

1.78

1.89

1.95

2.02

2.35

2.54

2.14

1.91

2.30

Forecast as of: May 11, 2016

1
C ompound Annual Growth Rate Quarter-over-Quarter
2

Year-over-Year Percentage C hange

Federal Reserve Major C urrency Index, 1973=100 - Quarter End

Millions of Units

Annual Numbers Represent Averages

Source: IHS Global Insight and Wells Fargo Securities, LLC

Economic Outlook

75

International Forecast

Wells Fargo International Economic Forecast

(Year-over-Year Percent C hange)

GDP

CPI

2015

2016

2017

2015

2016

2017

Global (PPP Weights)

Global (Market Exchange Rates)

3.0%
2.8%

2.8%
2.5%

3.1%
2.9%

2.6%
n/a

3.2%
n/a

3.5%
n/a

Advanced Economies 1
United States
Eurozone
United Kingdom
Japan
Korea
Canada

1.9%
2.4%
1.5%
2.3%
0.5%
2.6%
1.2%

1.7%
1.6%
1.7%
1.7%
0.0%
2.6%
1.9%

2.1%
2.2%
2.0%
1.9%
0.7%
2.9%
2.4%

0.3%
0.1%
0.0%
0.0%
0.8%
0.7%
1.1%

0.8%
1.3%
0.2%
0.8%
0.3%
0.9%
1.3%

1.8%
2.2%
1.2%
1.5%
1.0%
1.9%
1.9%

Developing Economies 1
China
India2
Mexico
Brazil
Russia

4.0%
6.9%
7.2%
2.5%
-3.9%
-3.7%

3.8%
6.4%
7.5%
2.8%
-4.0%
-0.6%

4.0%
5.8%
7.2%
3.1%
-0.9%
2.1%

4.7%
1.4%
6.0%
2.7%
9.0%
15.6%

5.5%
2.0%
4.9%
2.9%
9.0%
7.2%

5.1%
1.9%
4.7%
2.8%
7.2%
5.9%

Forecast as of: May 11, 2016

1

Aggregated Using PPP Weights

Forecasts Refer to Fiscal Year

Source: Wells Fargo Securities, LLC

Economic Outlook

76

Appendix

Economic Outlook Group Publications

A Sampling of Our Recent Special, Regional & Industry Commentary
Selected Recent Economic Reports
Date

Title

Authors

U.S. Macro

To view any of our past research

please visit:
http://www.wellsfargo.com/
economics
To join any of our research
distribution lists please visit:
http://www.wellsfargo.com/
economicsemail

May-02

Hispanics Still Behind the Curve in Education

Alemn

April-26

How "Durable" is Rising Core Inflation?

Silvia & House

April-26

Recession Risk Remains Elevated: 26 Percent Probability

Silvia, Iqbal & Pugliese

April-13

Light at the End of the Tunnel of Oncoming Train?

Quinlan, House & Nelson

April-01

Employment Costs: A Bend in the Trend?

House & Causey

April-21
April-15
April-15
April-15
April-15

U.S. Regional
Charlotte Continues to See Strong Gains
Cleveland Retools Its Economy
California Employment Conditions: March 2016
New York Employment Conditions: March 2016
North Carolina Employment Conditions: March 2016

Vitner
Vitner & Feik
Vitner & Batcheller
Vitner
Vitner & Batcheller

May-02

Taiwanese Economy Essentially Stagnant in Q1 2016

Bryson

April-29

Eurozone GDP Growth Tops Expectations in Q1

Bryson & Nelson

April-29

Mexican Economy Surprises in Q1 2016

Alemn

April-28

Bank of Japan's Latest Surprise: Inaction

Quinlan

April-27

U.K. GDP Growth Downshifted in Q1 2016

Bryson

Interest Rates/Credit Market

An Evolving Interest Rate Framework: The Rise of Uncertainty
Breaking Down the Market Model: When Imperfection Rules
Net Treasury Issuance: A Longer-Term View
Corporate Interest Coverage Holding Up Despite Weaker Sales
Households Appear Ready for Higher Rates

Silvia
Silvia
Silvia & Brown
Silvia & Nelson
Silvia & Moehring

April-29

Real Estate
Is the Housing Market Finally Becoming Unstuck?

Vitner, Khan & Batcheller

April-29

Residential Investment Provides Boost to Q1 GDP

Vitner & Batcheller

April-26

Is the Hotel Cycle Near the End?

Khan & Iqbal

April-20

Will U.S. Mortgage Rates Retest Historical Lows?

Vitner, Khan & Iqbal

Housing Chartbook: March 2016

Vitner, Khan & Batcheller

Global Econom y

April-27
April-20
April-13
April-06
March-30

March-31

Economic Outlook

78

Wells Fargo Securities, LLC Economics Group

Global Head of Research and Economics

Economists

Diane Schumaker-Krieg
.diane.schumaker@wellsfargo.com
Global Head of Research & Economics

Azhar Iqbal, Econometrician azhar.iqbal@wellsfargo.com

Eric J. Viloria, Currency Strategist

Sarah House, Economist

Chief Economist

Michael A. Brown, Economist

John E. Silvia

......................

john.silvia@wellsfargo.com

sarah.house@wellsfargo.com
michael.a.brown@wellsfargo.com

Economic Analysts

Senior Economists
Mark Vitner, Senior Economist..... .

eric.viloria@wellsfargo.com

Erik Nelson, Economic Analyst

Alex Moehring, Economic Analyst

mark.vitner@wellsfargo.com

Misa Batcheller, Economic Analyst

erik.f.nelson@wellsfargo.com
alex.v.moehring@wellsfargo.com
misa.n.batcheller@wellsfargo.com

Jay H. Bryson, Global Economist .... .jay.bryson@wellsfargo.com

Michael Pugliese, Economic Analyst

michael.d.pugliese@wellsfargo.com

Sam Bullard, Senior Economist

Julianne Causey, Economic Analyst

julianne.causey@wellsfargo.com

sam.bullard@wellsfargo.com

Nick Bennenbroek, Currency Strategist nicholas.bennenbroek@wellsfargo.com

Anika R. Khan, Senior Economist

Administrative Assistants

. anika.khan@wellsfargo.com

Eugenio J. Alemn, Senior Economist eugenio.j.aleman@wellsfargo.com

Donna LaFleur, Executive Assistant.

donna.lafleur@wellsfargo.com

Dawne Howes, Administrative Assistant

dawne.howes@wellsfargo.com

Tim Quinlan, Senior Economist . .tim.quinlan@wellsfargo.com

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Economic Outlook

79

Commercial Real Estate in 2016: New Challenges

LAWRENCE YUN, PhD

MARK VITNER

Chief Economist, Sr. VP

National Association of
REALTORS

Managing Director, Sr. Economist

Wells Fargo Securities