U.S. EARLY INDICATORS Q4 2019

RELATIVE VALUE IMPROVES

Through Q3 2019, the cap rate-to-corporate bond yield ratio rose to its highest level since 2013, as the relative value of commercial real estate improved as corporate bond yields fell. Elevated deal volume maintained downward pressure on cap rates through Q3 2019, remaining relatively unchanged from one year ago, while BBB corporate bond yields declined by nearly a full percentage point in comparison to 2018. Anticipated interest rate volatility will cause the ratio to fluctuate going forward.

SLOWER GROWTH AHEAD

Sources: Oxford Economics, NCREIF, Green Street, Real Capital Analytics

70

80

90

100

110

120

130

140

150

160

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Ratio

of C

ap R

ate

to C

orp.

Bon

d Y

ield

Ratio Std. Dev. Average

UNDERVALUED

FAIR

OVERVALUED

H12008

H22008

H12009

H22009

H12010

H22010

H12011

H22011

H12012

H22012

H12013

H22013

H12014

H22014

H12015

H22015

H12016

H22016

H12017

H22017

H12018

H22018

H12019

H22019

1. Spread Investing

2. U.S. CRE Returns

3. Yield Curve

4. Leading Economic Index

5. UnemploymentRate

PREPARED BY:Global Strategy & Research Team

Please note that the content of this report is for informational purposes only and should not be viewed as investment advice or an offer or solicitation. Any opinions are solely those of the Strategy & Research Team of CBRE Global Investors and are subject to change without notice, and may not be consistent with market trends or future events. This research is based on current public information that we consider reliable, but we do not represent it as accurate, updated or complete, and it should not be relied on as such.

PRINCIPAL CONTRIBUTOR:Jeremiah Lee 19:019-4

REIT-VIVALSupported by falling interest rates and healthy property fundamentals, REITs have widely outperformed the broader equity market and private real estate sector, producing close to a 30% total return through October 2019. Year-to-date returns across property sectors, except for regional malls, were buoyant, particularly for industrial, multifamily, and data center REITs. Through the first three quarters of 2019, the return for private real estate was a modest 4.8%, with income returns accounting for a dominant share of this performance.

YIELDING TO THE CURVEFollowing four months of a negative 3-month/10year Treasury spread, the yield “reverted” in October, a trend supported by signs of progress in U.S.-China trade talks, as well as a third cut to the Federal Funds target rate. Quantitative easing and the negative interest rate policy employed by central banks in Europe and Asia have clouded the picture, raising questions concerning the yield curve’s predictive capabilities. Whether or not this recent inversion is a false positive, the curve’s flattened profile reflects the growing investor pessimism and expectations for weaker growth moving forward.

DECELERATIONThe leading economic index edged upwards through late 2019 but at a significantly slower pace in comparison to earlier in the cycle. The sustained yield curve inversion and weak manufacturing sector growth offset positive signals in other sectors of the economy. Rising by just 0.4% year-over-year, the slowest rate since midyear 2016, the LEI has seemingly plateaued, an indication of more tempered growth ahead.

UNEMPLOYMENT RATE AT CYCLE LOWSThe unemployment rate maintained its downward trend through the tail-end of 2019. The U.S. economy added jobs at an average of 167,000 jobs per month through October 2019 versus an average of 223,000 jobs per month in 2018. With monthly job creation continuing at a respectable pace, the unemployment rate declined to a cycle-low in September 2019 before rising 10 bps to 3.6% in October 2019.

Source: Federal Reserve

Sources: NCREIF; NAREIT. Both indices rebased to 100 on June 30, 2006

Source: The Conference Board Index is comprised of ten economic indicators, including average production work week, initial unemployment claims, manufacturers new orders, vendor performance, supplier deliveries, building permits, stock prices, money supply, consumer expectations, and interest rate spreads.

Source: BEA

0255075

100125150175200225250275300

09 10 11 12 13 14 15 16 17 18 19

Qua

rter

ly T

otal

Ret

urn

Inde

x

NAREIT NCREIF

0%

1%

2%

3%

4%

5%

6%

7%

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

U.S

. Tr

easu

ry Y

ield

s

10-year 3-month

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19

Lea

din

g E

con

om

ic I

nd

ex (

y-o

-y%

)

0%

2%

4%

6%

8%

10%

12%

99 01 03 05 07 09 11 13 15 17 19

Un

emp

loym

ent

Rate

Unemployment Rate 12-mo. Moving Avg.