Outlook for the U.S. Commercial Real Estate Markets · 2016-02-11 · 1992-2013 Trend 2013 Actual...

Outlook for the U.S. Commercial

Real Estate Markets

CONFIDENTIAL

Must not be duplicated, shared or printed without the written consent of USAA Real Estate Company

GDP Growth Across the Globe

2

1.000

1.033

1.067

1.102

1.139

1.176

17.6%

2015-17 Forecast Avg

Forecast Vs 92-13 Trend (RE*)

Source: Bloomberg; CoStar Portfolio Strategy As of October 2015

(1%)

0%

1%

2%

3%

4%

U.S. United Kingdom Eurozone Japan World

1992-2013 Trend 2013 Actual 2014 Actual 2015 Forecast 2016 Forecast 2017 Forecast

Real GDP Growth

2.3% 2.4% 1.1% 0.8% 3.3%

CONFIDENTIAL


A Mild GDP Recovery

3

Source: NBER, Moody’s Analytics, USAA Real Estate Research

Recent Recessions

Peak to

Peak, Avg

Annual GDP

Growth

Peak to

Peak,

Cumulative

GDP

Growth

Trough to

Peak, Avg

Annual

GDP

Growth

Trough to

Peak,

Cumulative

GDP

Growth

December 1969 November 1970

November 1973 March 1975 3.4% 15.4% 4.3% 16.4%

January 1980 July 1980 2.9% 19.5% 4.5% 23.8%

July 1981 November 1982 1.3% 2.0% 4.2% 5.0%

July 1990 March 1991 3.4% 34.7% 4.0% 39.1%

March 2001 November 2001 3.4% 41.1% 3.8% 43.3%

December 2007 June 2009 2.4% 18.2% 2.6% 18.8%

Current Cycle - No Recession Yet 1.2% 10.1% 2.1% 15.1%

CONFIDENTIAL


Sustained, Elevated Job Growth

4

Source: BLS, Moody’s Analytics, USAA Real Estate Research

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

-2,500

-2,000

-1,500

-1,000

-500

0

500

1,000

Mar

-98

Sep

-98

Mar

-99

Sep

-99

Mar

-00

Sep

-00

Mar

-01

Sep

-01

Mar

-02

Sep

-02

Mar

-03

Sep

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

UR3-Month Change

(000s)

Employment Growth Unemployment Rate

CONFIDENTIAL


U.S. Demographics Still Trending Positive

5

Location

ChinaJapanBelgiumFranceGermanyIrelandItaly

PortugalSpain

United StatesChinaJapanWester EuropeUnited Kingdom

United StatesChinaJapanWestern EuropeUnited Kingdom

Source: Oxford Economics; CoStar Portfolio Strategy As of 15Q3

50

60

70

80

90

100

110

120

1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020 2024 2028 2032

United States Western Europe Japan China

Working-Age Population Growth

CONFIDENTIAL


Direct CRE Acquisitions by Foreign Capital

6

Source: RCA, USAA Real Estate Research

-

10

20

30

40

50

60

70

80

90

100

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Transaction Volume ($B)

CONFIDENTIAL


U.S. CRE Transaction Activity

$-

$100

$200

$300

$400

$500

$600

$700

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Transaction Volume ($B)

Source: Real Capital Analytics

CONFIDENTIAL


NCREIF-ODCE Market Value of Holdings

8

$-

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

1995

199

6

1997

1998

1999

2000

200

1

2002

2003

2004

2005

200

6

2007

2008

2009

2010

2011

2012

2013

2014

2015

Market Value (Bil)

Source: NCREIF

CONFIDENTIAL


Market Capitalization of U.S. REITS

9

Source: NAREIT

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

201

4

Market Value (Bil)

CONFIDENTIAL


Impact of U.S. Policy Tightening

10


CONFIDENTIAL


Oil – Depth AND Duration Matter

11

Source: U.S. Energy Information Administration

0

20

40

60

80

100

120

140

160Oil Price (WTI)

CONFIDENTIAL


Relative Pricing Advantage Has Disappeared

12


(500)

(400)

(300)

(200)

(100)

-

100

200

300

400

500

19

92

Q1

19

92

Q4

19

93

Q3

19

94

Q2

19

95

Q1

19

95

Q4

19

96

Q3

19

97

Q2

19

98

Q1

19

98

Q4

19

99

Q3

20

00

Q2

20

01

Q1

20

01

Q4

20

02

Q3

20

03

Q2

20

04

Q1

20

04

Q4

20

05

Q3

20

06

Q2

20

07

Q1

20

07

Q4

20

08

Q3

20

09

Q2

20

10

Q1

20

10

Q4

20

11

Q3

20

12

Q2

20

13

Q1

20

13

Q4

20

14

Q3

20

15

Q2

Spread (BPs)

Spread vs 10yr Spread vs BBB Corporate Avg Spread vs 10yr Avg Spread vs BBB

CONFIDENTIAL


REIT Premium/Discount to NAV

13

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

OfficeAverage

Mall Average IndustrialAverage

ApartmentAverage

Health CareAverage

Strip CenterAverage

Premium/Discount to NAV

Source: Green Street, as of 2/1/2016

CONFIDENTIAL


Commercial Real Estate Debt Outstanding

14

Source: Federal Reserve, Moody’s Analytics, USAA Real Estate Research

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

0%

5%

10%

15%

20%

25%

19

77

Q4

19

78

Q4

19

79

Q4

19

80

Q4

19

81

Q4

19

82

Q4

19

83

Q4

19

84

Q4

19

85

Q4

19

86

Q4

19

87

Q4

19

88

Q4

19

89

Q4

19

90

Q4

19

91

Q4

19

92

Q4

19

93

Q4

19

94

Q4

19

95

Q4

19

96

Q4

19

97

Q4

19

98

Q4

19

99

Q4

20

00

Q4

20

01

Q4

20

02

Q4

20

03

Q4

20

04

Q4

20

05

Q4

20

06

Q4

20

07

Q4

20

08

Q4

20

09

Q4

20

10

Q4

20

11

Q4

20

12

Q4

20

13

Q4

20

14

Q4

20

15

Q3

Outstanding ($B)Debt/GDP

CRE Debt Outstanding CRE Debt/GDP

CONFIDENTIAL


CRE Construction Activity Muted in Many Markets

15

Source: REIS, CBRE-EA, CoStar Portfolio Strategy, USAA Real Estate Research

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

-

50,000

100,000

150,000

200,000

250,000

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

% of StockUnits Apartment

Units % of Stock

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

0.8%

0.9%

1.0%

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

% of StockSF (000s) Office

SF (000s) % of Stock

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

% of StockSF (000s) Retail


0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0.6%

0.7%

-

50,000

100,000

150,000

200,000

250,000

300,000

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

% of StockSF (000s) Industrial


CONFIDENTIAL


Sources: USAA Real Estate Company Research, Axiometrics, REIS, Moody’s Analytics

Multifamily Trends

16

• Demographic tailwinds have overcome increased supply thus far

• National vacancy rates are at 4.2%, near all-time lows

• Trailing four-quarter effective rent growth is over 5%, no signs of slowing down

• Average rent/SF for Class A in top six MSAs now over $3.00/SF

• Rent-to-median household income ratio on upward trend

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%Annual Effective Rent Growth

Top 6 MSAs - Class A National - Class A National - Class B/C

25.0%

27.0%

29.0%

31.0%

33.0%

35.0%

37.0%

Effective Rent to Median HH Income Ratio - Top 6 MSAs

CONFIDENTIAL


U.S. Births by Year

17

Average annual birth rate:

Silent generation – 2.6M

Baby boomer – 4.0M

Generation X – 3.4M

Millennial – 3.9M

Post-Millennial – 4.1M

Millennial Generation Still

Growing

Averaged immigration of

980K/year in 1990s,

1.04M in 2000s, 990K

this decade

Tailwind for both

multifamily and single-

family housing

Source: U.S. Census

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

1910

1914

1918

1922

1926

1930

1934

1938

1942

1946

195

0

1954

1958

1962

1966

1970

1974

1978

1982

1986

1990

1994

1998

200

2

2006

2010

2014

Births (000s) Millennials

(66.1 million)

Baby Boomers

(76.2 million)

CONFIDENTIAL


U.S. Homeownership Rate

18

Source: U.S. Census

60

61

62

63

64

65

66

67

68

69

70

1965

1967

1969

1971

1973

1975

1977

197

9

1981

198

3

1985

198

7

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Homeownership Rate (%)

CONFIDENTIAL


U.S. Homeownership Rate by Age Cohort

19

Source: U.S. Census

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Under 35 years 35 to 44 years 45 to 54 years 55 to 64 years 65 years andover

Current Max Min Average

CONFIDENTIAL


Transition of the Millennials

20

Source: USAA Real Estate Company, Calculated Risk

CONFIDENTIAL


U.S. Renter Households (Million)

21

Source: Harvard Joint Center for Housing Studies, U.S. Census, USAA Real Estate Research

2015 Households by Age

Under 35

years

35 to 44

years

45 to 54

years

55 to 64

years

65 years

and over Total Renters

26.9 21.2 23.6 23.9 29.7

HO Rate 34.7% 59.3% 70.1% 75.2% 79.3% 45.3

2020 Households by Age

Under 35

years

35 to 44

years

45 to 54

years

55 to 64

years

65 years

and over

27.6 22.2 22.1 25 34.8

Current 34.7% 59.3% 70.1% 75.2% 79.3% 47.1

Average 39.6% 65.7% 74.7% 79.6% 80.0% 41.9

Max 43.6% 70.1% 77.4% 82.4% 81.8% 37.9

CONFIDENTIAL


Increased Attractiveness of Urban Living

22

CBD

Suburban

Sources: U.S. Census Bureau; CoStar Portfolio Strategy As of 15Q2

(10%)

(5%)

0%

5%

10%

15%

20%

25%

30%

35%

Households Per Sq. Mile Real Median HH Income Per Sq. Mile

CBD Semi-Urban/Premier Suburban Suburban

Cumulative Change 2000-2015

CONFIDENTIAL


Sources: USAA Real Estate Company Research, CBRE-EA, CoStar

Office Trends

23

• Projecting office-using job growth of over 900,000 in 2015 – highest since 1999

• Net absorption of 94 million SF over past 12 months, 64% in Class A product

• Only 30% of existing stock is Class A

• Average completions of 127 million SF annually from 1996 to 2008, 36 million SF from 2010-2014

• Vacancy rates are lower for modern (built since 2000), infill product

• Aging & increasingly obsolescent stock creates opportunity

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

(2,000,000)

(1,500,000)

(1,000,000)

(500,000)

-

500,000

1,000,000

1,500,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Office-Using Employment Growth

OUE Growth OUE Growth (%)

4%

6%

8%

10%

12%

14%

16%

18%Office Vacancy Rates by Product Type

CONFIDENTIAL


Sources: USAA Real Estate Company Research, Moody’s Analytics

Office-Using Employment Change –

2007 to 2015

24

135.8 98.7

86.7 84.4

80.7 70.7

63.8 47.1

44.2 41.0 40.3

39.1 37.5 37.0

31.2 28.5 28.2

26.9 24.9

21.3 20.5 20.4

18.9 18.5

17.3 17.1

7.1 1.9

(0.1)(27.4)

(40.0) (20.0) - 20.0 40.0 60.0 80.0 100.0 120.0 140.0

DallasSan Francisco

San JoseNew York

AtlantaHouston

AustinNashville

BostonSan Antonio

SeattleWashington, DC

MinneapolisCharlotte

ColumbusPortland

RaleighDenver

BaltimoreIndianapolis

CincinnatiChicagoPhoenix

MiamiPittsburgh

TampaSan Diego

PhiladelphiaLas Vegas

Los Angeles

Office-Using Employment Change (000s)

Less is More

CONFIDENTIAL


Sources: USAA Real Estate Company Research, RCA, CoStar. Transaction activity is trailing four quarter.

Industrial Trends

31

• Vacancy rates at lowest level since 2000

• Construction completions are rebounding

• Large Bulk Industrial (350K+ SF) makes up 22.4% of SF in U.S., yet has accounted for 58% of new construction deliveries since 2012

• Class A has outperformed

• Transaction activity and pricing have surpassed previous peaks

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

(150,000)

(100,000)

(50,000)

-

50,000

100,000

150,000

200,000

250,000

300,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

VacancySF (000s)

Completions Net Absorption Vacancy

$-

$10

$20

$30

$40

$50

$60

$70

$80

$-

$10

$20

$30

$40

$50

$60

$70

Dec

-00

Jun

-01

Dec

-01

Jun

-02

Dec

-02

Jun

-03

Dec

-03

Jun

-04

Dec

-04

Jun

-05

Dec

-05

Jun

-06

Dec

-06

Jun

-07

Dec

-07

Jun

-08

Dec

-08

Jun

-09

Dec

-09

Jun

-10

Dec

-10

Jun

-11

Dec

-11

Jun

-12

Dec

-12

Jun

-13

Dec

-13

Jun

-14

Price/SF ($)Volume ($B) Industrial Transaction Activity

Volume Price/SF

CONFIDENTIAL


E-Commerce Continues to Gain Market Share

Sources: USAA Real Estate Company Research, IMS Worldwide

7%8% 8% 9% 10%

11% 12%14% 16%

18%20% 22% 23%

25%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

$ (Billions)

U.S. Retail Store Sales Total U.S. Online Sales

Forecast

CONFIDENTIAL


Sources: USAA Real Estate Company Research, RCA, Moody’s Analytics, NCREIF. Superzip transaction activity is trailing four quarter.

Retail Trends

33

• Occupancy rates improving• Other subtypes finally catching up

to grocery-anchored centers

• National same-store NOI growth of 4.6% over the past 12 months

• “Superzips” screen for areas of the U.S. with strongest demographics (top zip codes by density, growth, income, education).

• Retail transaction activity increasingly focused in these

areas.

0

100

200

300

400

500

600

700

800

900

1000

-

5

10

15

20

25

20

02

Q4

20

03

Q2

20

03

Q4

20

04

Q2

20

04

Q4

20

05

Q2

20

05

Q4

20

06

Q2

20

06

Q4

20

07

Q2

20

07

Q4

20

08

Q2

20

08

Q4

20

09

Q2

20

09

Q4

20

10

Q2

20

10

Q4

20

11

Q2

20

11

Q4

20

12

Q2

20

12

Q4

20

13

Q2

20

13

Q4

20

14

Q2

20

14

Q4

20

15

Q2

Price/SF ($)Volume ($B) Superzip Transaction Activity

Transaction Volume Price/SF

84.0%

86.0%

88.0%

90.0%

92.0%

94.0%

96.0%

98.0%

100.0%

Mar

-00

Sep-

00M

ar-0

1Se

p-01

Mar

-02

Sep-

02M

ar-0

3Se

p-03

Mar

-04

Sep-

04M

ar-0

5Se

p-05

Mar

-06

Sep-

06M

ar-0

7Se

p-07

Mar

-08

Sep-

08M

ar-0

9Se

p-09

Mar

-10

Sep-

10M

ar-1

1Se

p-11

Mar

-12

Sep-

12M

ar-1

3Se

p-13

Mar

-14

Sep-

14M

ar-1

5

Occupancy by Subtype

Mall Neighborhood/Community Power Center Grocery

CONFIDENTIAL


CONFIDENTIAL


Outlook for the U.S. Commercial Real Estate Markets · 2016-02-11 · 1992-2013 Trend 2013 Actual...

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