INVESTMENT STRATEGY & COMMERCIAL REAL ESTATE OUTLOOK · 1947 1952 1957 1962 1967 1972 1977 1982...

FOR FINANCIAL ADVISOR USE ONLY. | ©2014 Cole Capital Advisors. All Rights Reserved. 1Cole Capital: An American Realty Capital Properties CompanyCole Capital: An American Realty Capital Properties Company

INVESTMENT STRATEGY & COMMERCIAL REAL ESTATE OUTLOOK

Kevin White, CFA, SVP, Investment Strategy and Research

THE VIEWS EXPRESSED IN THIS PRESENTATION ARE THOSE OF THE PRESENTER AS OF THE DATE OF THE PRESENTATION AND ARE SUBJECT TO CHANGE. THE FORWARD-LOOKING STATEMENTS IN THIS PRESENTATION ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES, FORECASTS AND PROJECTIONS, AND ARE NOT GUARANTEES OF FUTURE PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN THESE FORWARD-LOOKING STATEMENTS, AND YOU SHOULD NOT PLACE UNDUE RELIANCE ON ANY SUCH STATEMENTS.

FOR FINANCIAL ADVISOR USE ONLY. | ©2014 Cole Capital Advisors. All Rights Reserved. 2

THE CRISIS IS FINALLY OVER!

Joseph Interpreting Pharaoh's Dream (Arthur Reginald, 1894)


Consumers Spend

Hiring

CorporateProfits

CorporateInvestment

THE VIRTUOUS CIRCLE

Saving

Taxes


-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

TOTA

L BA

NK

CRED

IT (

YEAR

-OVE

R-YE

AR,

12-M

ON

TH M

OVI

NG

AVE

RAG

E)

Sources: Bank Credit (Federal Reserve); Inflation (BLS); ARCP calculationsData as of July 31, 2014

BANKS ARE LENDING AGAIN


HOUSEHOLD DEBT BURDENS ARE LOW

Source: Federal ReserveData as of March 31, 2014

14%

15%

16%

17%

18%

19%

60%

70%

80%

90%

100%

110%

120%

130%

140%

1980 1984 1988 1992 1996 2000 2004 2008 2012

HO

USE

HO

LD F

INAN

CIAL

OBL

IGAT

ION

S RA

TIO

(%

OF

DIS

POSA

BLE

INCO

ME)

HO

USE

HO

LD D

EBT

(% O

F D

ISPO

SABL

E IN

COM

E)

Household DebtFinancial Obligations Ratio


Sources: Federal Reserve (Household Net Worth); Bureau of Economic Analysis (Personal Savings Rate)Data as of March 31, 2014

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

400%

450%

500%

550%

600%

650%

700%

1993 1998 2003 2008 2013

PERS

ON

AL S

AVIN

GS

RATE

HO

USE

HO

LD N

ET W

ORT

H (

% O

F D

ISPO

SABL

E IN

COM

E)

Net WorthSavings Rate

HOUSEHOLD FINANCES ARE IN DECENT SHAPE


FEDERAL FINANCES ARE IMPROVING

Source: Congressional Budget OfficeData as of August 27, 2014

0%

10%

20%

30%

40%

50%

60%

70%

80%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

FED

ERAL

DEB

T H

ELD

BY

TE P

UBL

IC (

% O

F G

DP)

FED

ERAL

DEF

ICIT

(%

OF

GD

P)

DeficitDebt

Forecast


Source: Bureau of Economic Analysis (Profits)Data as of June 30, 2014

CORPORATE PROFITS HAVE REBOUNDED

6%

7%

8%

9%

10%

11%

12%

13%

14%

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

CORP

ORA

TE P

ROFI

TS (

% O

F G

DP)


JOB CREATION HAS BEEN HEALTHY

Fuels Consumer Spending Demand for commercial real estate


THE ECONOMY SHOULD PICK UP IN 2015

Source: Moody's AnalyticsData as of July 31, 2014

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

2000 2002 2004 2006 2008 2010 2012 2014 2016

GD

P G

RO

WTH

Forecast


EXPANSIONS SINCE WORLD WAR II

0 2 4 6 8 10

1980 - 1981

1958 - 1960

1945 - 1948

1970 - 1973

1954 - 1957

1949 - 1953

1975 - 1979

Avg Since 1938

2009 - 2014

2001 - 2007

1938 - 1944

1982 - 1990

1961 - 1969

1991 - 2000

EXPANSION LENGTH (YEARS)

EXPANSIONS SINCE WORLD WAR II

Source: Moody's AnalyticsData as of June 30, 2014

CURRENT


-800

-600

-400

-200

0

200

400

600

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

YIEL

D C

URV

E (1

0-YE

AR T

REAS

URY

YIE

LD M

INU

S FE

DER

AL F

UN

DS

RATE

, BP

S)

RecessionSpread

YIELD CURVE SIGNALS NO RECESSION IN SIGHT

Source: Moody's AnalyticsData as of June 30, 2014; Pink dots indicate inverted yield curve preceding recession; yellow dots indicate inverted yield curve and recession false alarm


FOR COMMERCIAL REAL ESTATE, THE ECONOMY IS ONLY HALF THE STORY

Sources: NCREIF Property Index (Commercial Real Estate Total Returns); Bureau of Economic Analysis (GDP)Data as of June 30, 2014; Past performance is no guarantee of future results.

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

PR

IVA

TE C

OM

ME

RC

IAL

RE

AL

ES

TATE

TO

TAL

RE

TUR

NS

(YE

AR

-OV

ER

-Y

EA

R)

GD

P G

RO

WTH

(YE

AR

-OV

ER

-YE

AR

)

GDP

Commercial RealEstate Total Returns


COMMERCIAL CONSTRUCTION IS NEAR ITS LOWEST LEVEL IN DECADES

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0

50

100

150

200

250

1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

COM

MER

CIAL

CO

NST

RUCT

ION

(SH

ARE

OF

GD

P)

REAL

CO

MM

ERCI

AL R

EAL

ESTA

TE C

ON

STRU

CTIO

N (

2009

$B

SAAR

)

Commercial ConstructionShare of GDP

Source: Bureau of Economic AnalysisData as of June 30, 2014. Includes commercial and health-care buildings.


RENT GROWTH IS RETURNING

-6%

-4%

-2%

0%

2%

4%

6%

8%

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

REN

T G

ROW

TH (

YEAR

-OVE

R-YE

AR)

Average of Retail, Office, Industrial

RENT GROWTH IS RETURNING

Source: REIS; Cole CapitalData as of June 30, 2014.


Sources: S&P 500 (Stocks); Barclays U.S. Aggregate (Bonds); NCREIF Property Index (Commercial Real Estate); average income yield = 2013 monthly average (stocks/bonds) and 2013 quarterly weighted average (commercial real estate)Data as of December 31, 2013. Past performance is no guarantee of future results.

2013 Average Income Yield

Historical Volatility

(1994-2013)

Correlation With Inflation (1994-2013)

CRE 5.8% 8.3% 0.58

Bonds 3.2% 4.9% 0.16

Stocks 2.0% 19.3% 0.01

COMMERCIAL REAL ESTATE OFFERS YIELD, RELATIVE STABILITY, AND THE POTENTIAL TO HEDGE INFLATION


HIGHER INTEREST RATES CORRELATED WITH HIGHER RETURNS

Sources: NCREIF (NCREIF Total Returns); Federal Reserve (10-Year Treasury)Data as of June 30, 2014; Past performance is no guarantee of future results.

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

NCR

EIF

TOTA

L RE

TURN

S (Y

EAR-

OVE

R-YE

AR)

NCREIF Total Returns

Period of Rising Interest Rates

Correlation to 10-Year-Treasury = 0.21


E-COMMERCE IS,AS OF YET, ONLY A MINOR HEADWIND

Source: U.S. Census BureauData as of June 30, 2014

0%

1%

2%

3%

4%

5%

6%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

E-CO

MM

ERCE

SH

ARE

E-Commerce Share


E-COMMERCE IS TAKINGA BIGGER PIECE OF A GROWING PIE

Source: U.S. Census BureauNote: Billions. Data as of June 30, 2014

Brick-and-MortarE-Commerce

$75

$1,240

$826

$8

20012014


JOB CREATION IS OFFICE-INTENSIVE

98

100

102

104

106

108

110

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

JOB

IND

EX (

2003

=100

)

Office JobsNon Office Jobs

JOB CREATION IS OFFICE INTENSIVE

Source: U.S. Bureau of Labor StatisticsData as of June 30, 2014.


INVENTORIES ARE IN CHECK

1.2

1.25

1.3

1.35

1.4

1.45

1.5

1.55

1.6

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

INVE

NTO

RY-T

O-S

ALES

RAT

IOINVENTORIESARE IN CHECK

Source: U.S. Bureau of Labor StatisticsData as of June 30, 2014; black lines used to show trend


Sources: NCREIF (Price); Engineering News-Record (Construction Costs)Data as of June 30, 2014.

70

80

90

100

110

120

130

1979 1983 1987 1991 1995 1999 2003 2007 2011

REAL

PRI

CE IN

DEX

(AD

JUST

ED F

OR

CON

STRU

CTIO

N C

OST

S)

Real Price IndexAverage

REAL CRE PRICES ARE SLIGHTLY ABOVE THEIR LONG-RUN AVERAGE


COMMERCIAL PROPERTY PRICE INDICES

Source: Real Capital AnalyticsData as of June 30, 2014; (indexed to 100 as of December 2000)

70

90

110

130

150

170

190

210

230

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

PRIC

E IN

DIC

ES (

2000

=100

)

Apartment

Retail

Industrial

Office


MAJOR VERSUS NON-MAJOR MARKET PRICES

Sources: Real Capital AnalyticsData as of June 30, 2014; (indexed to 100 as of December 2000)

70

90

110

130

150

170

190

210

230

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

PRIC

E IN

DIC

ES (

2000

=100

)

Major Markets (All-Property)

Non-Major Markets (All-Property)


SECONDARY MARKETS OFFER COMPELLING YIELDS

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

CAP

RATE

S

Major Markets

Non-Major Markets

SECONDARY MARKETS OFFER COMPELLING YIELDS

Source: Real Capital AnalyticsData as of June 30, 2014. Cap rates are equal-weighted across the office, industrial and retail sectors.


States With Strong Demographics

Sources: Census Bureau; Cole CapitalData as of June 30, 2014. Areas in green are preferred, in red are disfavored, and in yellow are viewed with caution.

SECONDARY TECH, ENERGY, AND POPULATION-DRIVEN MARKETS

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INVESTMENT STRATEGY & COMMERCIAL REAL ESTATE OUTLOOK · 1947 1952 1957 1962 1967 1972 1977 1982...

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