2015 REAL ESTATE ECONOMIC FORECAST

February 5, 2015

Jeanette I. Rice

The National Economy and What It Means For Real Estate

Kentucky

Chapter

National economy in great shape for 2015

• Creating excellent demand for all property markets

• Attracting lots of debt and equity capital for

commercial real estate

3

U.S. ECONOMY

4

U.S. ECONOMY - EMPLOYMENT

125

130

135

140

145

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

Mill

ions

Total Historical Employment

Source: U.S. Bureau of Labor Statistics,

seasonally adjusted data through Dec 2014

-6

-4

-2

0

2

4

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

Historical Employment – % Change Y-o-Y

US economy - four years of economic recovery/expansion.

Last May, US regained all jobs lost (numerically) during recession.

Currently +2.1% yoy (3.0 million jobs).

Dec = +252,000 jobs 2014 average = +246,000

5

U.S. ECONOMY – EMPLOYMENT GROWTH UNEVEN

Sources: CBRE Research, U.S. Bureau of Labor Analytics (data through

Dec 2014); CBRE Econometric Advisors forecasts as of Q3 2014.

1.5

1.7

2.2

2.2

2.2

2.2

2.2

2.2

2.3

2.3

2.4

2.5

2.7

2.8

2.8

2.9

3.0

3.4

3.6

3.8

Louisville

US

Denver

Atlanta

Charlotte

Indianapolis

Miami

Riverside

Phoenix

Dallas

Raleigh

Greenville

Orlando

Salt Lake City

San Antonio

Fort Worth

Fort Lauderdale

West Palm Beach

Austin

Nashville

Top Metros for Projected Annual Pct Employment Growth Over Next Two Years

-9

-6

-3

0

3

6

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

Historical Employment – % Change Y-o-Y

U.S. Detroit Austin Louisville

6

U.S. ECONOMY – 10-YEAR TREASURIES

Source: Federal Reserve Bank, data through 02.02.15.

0

2

4

6

Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

02.02.15 = 1.68%

7

U.S. ECONOMY – SECTORS TO WATCH

Source: U.S. Bureau of Census (starts data).

Housing -

Manufacturing -

Consumer Spending -

Global Economies -

Strong U.S. Dollar - -

Energy -

High Tech -

Interest Rates -

1.2 1.3 1.4

1.5 1.6

1.7

1.5

1.0

0.6

0.4 0.5 0.4 0.5

0.6 0.6

0.0

0.5

1.0

1.5

2.0

00 02 04 06 08 10 12 14

Millions

Total Single-Family Starts

Still way below

2000s peak, but

rising.

In 2014, starts rose

5% over 2013 to

an annual rate of

648,000 units.

8

U.S. ECONOMY – OUTLOOK

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

03 07 11 15

Employment Forecasts - Change Y-o-Y

2014 = 1.8%

2015 = 2.1%

About 245,000 jobs/month

GDP Outlook

2014 = 2.4%

2015 = 3.3%

2016 = 2.9%

2017 = 2.7%

2018 = 2.7%

Sources: CBRE Research (employment forecasts);

Oxford Economics (GDP forecasts as of 01.13.15).

Increased Global Capital Flows, Favorable Returns

Disciplined Debt

Capital Markets

2015 REAL ESTATE ECONOMIC FORECAST The National Economy and What It Means For Real Estate

10

CAPITAL MARKETS - IMPRESSIVE INVESTMENT GAINS

-

100

200

300

400

500

600

01 02 03 04 05 06 07 08 09 10 11 12 13 14

$ Billions

Total Direct Investment in U.S. Commercial Real Estate

Individual Portfolio Entity

Sources: Real Capital Analytics and CBRE Research..

Total 2014 direct

investment = $424

billion.

17% rise over

2013.

2014 still 26%

below prior peak

(but only 5% below

when entity sales

removed).

CBRE Research

projects a gain of

10-15% in 2015.

11

U.S. INVESTMENT VOLUMES – BY GLOBAL REGION ORIGIN

2014 Global Total = $41 Billion

Sources: Real Capital Analytics and CBRE Research. Totals

excluding transactions under contract.

Canada 25%

Norway 11%

Japan 10%

China 8% Germany

6%

Hong Kong 5%

Switzerland 5%

Singapore 4%

Australia 3%

Other 23%

12

THE SCARCITY OF CORE

13

U.S. COMMERCIAL MORTGAGE MARKET

1. Nearly all capital sources firing on

all cylinders and expected to

increase lending in 2015

2. Delinquency rates at decade low

and expected to remain there

through 2015

3. CMBS 2005-06-07 vintages coming

due, but not likely to create much

distress this year

4. Mortgage interest rates to remain

very low with favorable outlook for

2015

5. Underwriting loosening, but not

dangerously

Recovery Maturing, Continued Gains in Market Performance

Property Markets

2015 REAL ESTATE ECONOMIC FORECAST The National Economy and What It Means For Real Estate

OFFICE Changing Patterns of Demand, Continued Recovery

16

OFFICE DEMAND

-50

-25

0

25

50

75

100

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Absorption (millions of sq. ft.)

Forecast

Source: CBRE Econometric Advisors,

4Q 2014. Forecasts as of 3Q 2014.

17

OFFICE SUPPLY, DEMAND, VACANCY OUTLOOK

0

3

6

9

12

15

18

-50

-25

0

25

50

75

100

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Completions Net Absorption Vacancy (4Q)

Completions and Absorption (millions of sq. ft.)

Vacancy

Forecast

Source: CBRE Econometric Advisors,

4Q 2014. Forecasts as of 3Q 2014.

Net absorption far

outpacing new supply.

In 2014, demand rose

46% reaching 53

million sq. ft. This was

the highest level since

2007.

New supply also rising

(+22% in 2014), but far

below demand at 22

million sq. ft.

2014 construction was

concentrated in a few

metros: Houston, NYC,

Washington, Dallas,

San Fran, San Diego,

and Pittsburgh.

Together, they

accounted for 72% of

the U.S. total..

18

MARKET FUNDAMENTALS – RENT GROWTH

Source: CBRE Econometric Advisors, Q3

2014. Historical average = 1.0%

3.3 3.3 3.4 4.5

-16

-12

-8

-4

0

4

8

12

00 02 04 06 08 10 12 14 16 18

Annual Rent Change

19

SQUARE FOOTAGE REDUCTION, CHANGING STYLE

20

OFFICE TRANSACTIONS – PRICING METRICS

Sources: Real Capital Analytics and CBRE Research. For all office

transactions > $2.5 million and all classes of space. Through Q4 2014.

6%

7%

8%

9%

04Q1 06Q1 08Q1 10Q1 12Q1 14Q1

Average Cap Rates

$100

$150

$200

$250

$300

04Q1 06Q1 08Q1 10Q1 12Q1 14Q1

Average Price PSF

INDUSTRIAL Shift to Light Industrial?

22

INDUSTRIAL DEMAND

-300

-200

-100

0

100

200

300

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Absorption (millions of sq. ft.)

Forecast

Source: CBRE Econometric Advisors, 4Q 2014.

23

INDUSTRIAL SUPPLY, DEMAND, VACANCY OUTLOOK

-3

0

3

6

9

12

15

-300

-200

-100

0

100

200

300

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Completions Net Absorption Vacancy (4Q)

Completions and Absorption (millions of sq. ft.)

Vacancy

Forecast

Source: CBRE Econometric Advisors, 4Q 2014.

Completions – 117

million sq. ft. in 2014

Net Absorption –

226 million sq. ft.

Availability – 10%,

favorable 1 point

drop in 2014

24

MARKET FUNDAMENTALS – RENT GROWTH

Source: CBRE Econometric Advisors, Q3

2014. Historical rent change = 0.3%

4.7 5.1 4.9

-12

-8

-4

0

4

8

00 02 04 06 08 10 12 14 16 18

Annual Rent Change

25

E-commerce sales have risen by

16.2% in year ending Q3 2014,

compared to all retail which is up 4.2%.

E-COMMERCE

-15%

0%

15%

30%

45%

02 04 06 08 10 12 14

E-Commerce Retail Sales - YOY Change

All Retail

E-Commerce

Source: U.S. Census Bureau, data through Q3

2014. Data are seasonally adjusted.

6.6%

0%

2%

4%

6%

8%

02 04 06 08 10 12 14

E-commerce as % of All Retail Sales

26

LARGEST U.S. CONTAINER PORTS

Sources: CBRE Research, American Association of Port

Authorities; market share based on total 2013 TEUs

Los Angeles

18%

Long Beach 15%

NY/NJ 12%

Savannah 7% Oakland

5%

Norfolk 5%

Houston 4%

Tacoma 4%

Charleston 4%

Seattle 4%

All Others 22%

Los Angeles and Long Beach combined =

33% of all US container traffic.

The top 10 ports account for nearly 80%.

East Coast ports container volume

+5.9% ytd through November

vs. West Coast at +3.7%

27

INDUSTRIAL TRANSACTIONS – PRICING METRICS

Sources: Real Capital Analytics and CBRE Research. For all industrial

transactions > $2.5 million and all classes of space. Through Q4 2014.

6%

7%

8%

9%

04Q1 06Q1 08Q1 10Q1 12Q1 14Q1

Average Cap Rates

$40

$50

$60

$70

$80

04Q1 06Q1 08Q1 10Q1 12Q1 14Q1

Average Price PSF

Investment volume –

9% increase, 2014

CBRE Research

forecasts industrial

investment volumes

to rise 10-15% in

2015.

In 2015, there will be

greater % of “light

industrial”

acquisitions.

RETAIL Are Rumors of Brick-and-Mortar’s Demise Greatly Exaggerated?

29

RETAIL SALES – YEAR-OVER-YEAR CHANGE

4.2%

-12%

-8%

-4%

0%

4%

8%

02 04 06 08 10 12 14

Source: U.S. Census Bureau, data through Q3

2014. Data are seasonally adjusted.

Yes, 93% of retail

sales still occur out of

brick and mortar

space.

Retail sales +4.2%

year-over-year as of

Q3 2014.

December + 3.2% over

prior year.

30

RETAIL DEMAND

-40

-20

0

20

40

60

80

100

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Absorption (millions of sq. ft.)

Forecast

Source: CBRE Econometric

Advisors, as of 3Q 2014.

31

RETAIL SUPPLY, DEMAND, VACANCY OUTLOOK

0

2

4

6

8

10

12

14

-40

-20

0

20

40

60

80

100

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Completions Net Absorption Vacancy (4Q)

Completions and Absorption (millions of sq. ft.)

Vacancy

Forecast

Source: CBRE Econometric

Advisors, as of 3Q 2014.

Net absorption far

outpacing new supply.

Practically no retail

space built for several

years or in the

pipeline. Only about 13

msf in 2014.

Net absorption - 29

msf, highest since ’07

Availability rate

dropping steadily.

Q4 2014 = 11%, down

0.6 point in 2014.

32

MARKET FUNDAMENTALS – RENT GROWTH

Source: CBRE Econometric Advisors, Q3 2014.

1.3

3.8

4.9 5.7

-6

-4

-2

0

2

4

6

8

00 02 04 06 08 10 12 14 16 18

Annual Rent Change for Neighborhood & Community Centers

33

THE GREAT AND THE NOT-SO-GREAT

Some keys to

success today are

centers which offer

some combination

of:

luxury goods

service

entertainment

an experience.

34

RETAIL TRANSACTIONS – PRICING METRICS

Sources: Real Capital Analytics and CBRE Research. For all retail

transactions > $2.5 million. Through Q4 2014.

6%

7%

8%

9%

04Q1 06Q1 08Q1 10Q1 12Q1 14Q1

Average Cap Rates

All Retail

Malls

Non Mall Centers

$50

$100

$150

$200

$250

04Q1 06Q1 08Q1 10Q1 12Q1 14Q1

Average Price PSF

Investment volume

rose 33% in 2014.

Has the Multifamily Sector Peaked?

MULTIFAMILY

36

MULTIFAMILY DEMAND

-200

-100

0

100

200

300

400

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Absorption (units)

Forecast

Source: CBRE Econometric

Advisors, as of 3Q 2014.

37

MULTIFAMILY SUPPLY, DEMAND, VACANCY OUTLOOK

-4

-2

0

2

4

6

8

-200

-100

0

100

200

300

400

04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Completions Net Absorption Vacancy (4Q)

Completions and Absorption (units)

Vacancy

Forecast

Source: CBRE Econometric

Advisors, as of 3Q 2014.

Completions reached

about 276,000 in 2014,

highest in over a

decade.

Net absorption totaled

about 235,000, slightly

under new supply.

Vacancy – 4.4% as of

4Q, down 0.5 point in

2014.

Vacancy almost down

to the prior low of 4.3%

in 2006.

38

MARKET FUNDAMENTALS – RENT GROWTH

Source: CBRE Econometric Advisors, Q3 2014.

3.0 2.5 2.5

-6

-3

0

3

6

9

00 02 04 06 08 10 12 14 16 18

Annual Rent Change

39

Forecast

NO SIGNIFICANT MOVE TO HOMEBUYING YET

Tenure shift and demographics continue to support fundamentals

Sources: CBRE Research, U.S. Census Bureau. Data through Q4 2014.

30.8

36.0

30

32

34

36

38

Q1 1965 Q1 1975 Q1-1985 Q1 1995 Q1 2005 Q1 2015

Rental Tenure - % of Renter Households to Total

1965-2014

Average = 34.6%

Q4 85 – Q2 94

Average = 36.0%

40

MULTIFAMILY TRANSACTIONS – PRICING METRICS

Sources: Real Capital Analytics and CBRE Research. For all multifamily

transactions > $2.5 million and all classes of space. Through Q4 2014.

5.8%

5%

6%

7%

8%

04Q1 06Q1 08Q1 10Q1 12Q1 14Q1

Average Cap Rates

$126,680

$70,000

$90,000

$110,000

$130,000

04Q1 06Q1 08Q1 10Q1 12Q1 14Q1

Average Price Per Unit

In short….

An excellent 2015

Jeanette I. Rice CRE®

Americas Head of Investment Research

CBRE | CBRE Research

2100 McKinney Avenue, Suite 700 | Dallas, TX 75201

T 214 979 6169 | C 817 412 0709

jeanette.rice@cbre.com | www.cbre.com