Presentation at the Leadership SummitPresentation at the Leadership SummitChicago, IL -- August 18, 2005Chicago, IL -- August 18, 2005
Lawrence Yun, Ph.D., Senior EconomistLawrence Yun, Ph.D., Senior EconomistNATIONAL ASSOCIATION OF REALTORSNATIONAL ASSOCIATION OF REALTORS®®
Presentation at the Leadership SummitPresentation at the Leadership SummitChicago, IL -- August 18, 2005Chicago, IL -- August 18, 2005
Lawrence Yun, Ph.D., Senior EconomistLawrence Yun, Ph.D., Senior EconomistNATIONAL ASSOCIATION OF REALTORSNATIONAL ASSOCIATION OF REALTORS®®
Economic and Commercial Real Estate Market
Trends and Outlook
Economic and Commercial Real Estate Market
Trends and Outlook
Economy GrowingEconomy Growing
-2
-1
0
1
2
3
4
5
6
7
8
Real Gross Domestic Product (SAAR, Bil.Chn.2000$)%
Source: BEA
Decent Job Additions Decent Job Additions
-500
-400
-300
-200
-100
0
100
200
300
400
500
600
Source: BLS
Job Gains/Losses 2005 vs 2001
Job Gains/Losses 2005 vs 2001
-200
-150
-100
-50
0
50
100
150
200
Net New Jobs
-200
-150
-100
-50
0
50
100
150
200
Net New Jobs
Source: BLS
In thousands
Job Gains/Losses in the Recent 12 months
Job Gains/Losses in the Recent 12 months
-100
1020304050607080
Net New Jobs
-100
1020304050607080
Net New Jobs
Source: BLS
In thousands
Resilient Consumer Spending Resilient Consumer Spending
0
1
2
3
4
5
6
7
8
Personal Consumption Expenditure % change from a year ago
Source: BEA
Stable Consumer ConfidenceStable Consumer Confidence
50
60
70
80
90
100
110
120
130
140
150
Conference Board: Consumer Confidence (SA, 1985=100)
Despite High Oil Prices Despite High Oil Prices
0
10
20
30
40
50
60
70
Brent Crude Oil per Barrel
Source: Department of Energy
Corporate Profits are StrongCorporate Profits are Strong
0
200
400
600
800
1000
1200
1400
Corporate Profits with IVA and CCAdj (SAAR, Bil.$)
Source: BEA
Business Spending Rising at Double-Digit Pace
Business Spending Rising at Double-Digit Pace
-15
-10
-5
0
5
10
15
Non-residential fixed investment, % change from a year ago
Source: BEA
Stock Market at 3-year High Stock Market at 3-year High
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
S&P 500
Trade Deficit in Bad ShapeTrade Deficit in Bad Shape
-700
-600
-500
-400
-300
-200
-100
0
1980 1983 1986 1989 1992 1995 1998 2001 2004
Net Exports
Source: BEA
Overall Trade Increasing Overall Trade Increasing
0
500000
1000000
1500000
2000000
2500000
1980 1983 1986 1989 1992 1995 1998 2001 2004
Exports Imports
Source: BEA
$ millions
Dollar Recovering – A Bit Dollar Recovering – A Bit
100
105
110
115
120
125
130
135
Trade-weighted exchange value of dollar (1997 = 100)
Source: Federal Reserve
Inflation Building but Still Contained
Inflation Building but Still Contained
0
0.5
1
1.5
2
2.5
3
3.5
4
Core Overall CPI% change from a year ago
Source: BLS
Fed Nervous About Inflation – Forced to Tighten Credit
Fed Nervous About Inflation – Forced to Tighten Credit
0
1
2
3
4
5
6
7
Jan-0
0
Jan '0
1
Jan '0
2
Jan '0
3
Jan '0
4
Jan '0
5
Federal Open Market Committee: Fed Funds Target Rate (%)
Forecast to4.00% by Dec. 2005
Narrow Spreads Suggest Further Short-term
Fed Rate Hikes Pushing up Long-term Rates Narrow Spreads Suggest Further Short-term
Fed Rate Hikes Pushing up Long-term Rates
0
1
2
3
4
5
6
7
3-month 10-year Treasury
Economic OutlookEconomic Outlook
20052005 20062006
GDPGDP 3.6%3.6% 3.5%3.5%
Unemployment RateUnemployment Rate 5.1%5.1% 5.1%5.1%
Job AdditionsJob Additions 2.0 million2.0 million 2.2 million2.2 million
CPI InflationCPI Inflation 3.0%3.0% 2.7%2.7%
3-month Treasury3-month Treasury 3.2%3.2% 4.0%4.0%
10-year Treasury10-year Treasury 4.4%4.4% 5.0%5.0%
Commercial Real Estate Market
Commercial Real Estate Market
Commercial OutlookCommercial Outlook• Good economic fundamentalsGood economic fundamentals
• Capital flow into commercial real estate at Capital flow into commercial real estate at record levelsrecord levels
• Modest increase in interest rates not yet Modest increase in interest rates not yet impacting long term investmentsimpacting long term investments
• Job growth steadyJob growth steady
Commercial Market HighlightsCommercial Market Highlights
• Significant investment in office buildings (30% increase Significant investment in office buildings (30% increase in 2005)in 2005)
• Port and major distribution hubs leading industrial sectorPort and major distribution hubs leading industrial sector
• Commercial lending volume up, delinquencies downCommercial lending volume up, delinquencies down
• Retail – conservative investment vehicle for Retail – conservative investment vehicle for
pension fundspension funds
Commercial Real Estate Loans Performing
Commercial Real Estate Loans Performing
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Q1 '00
Q1 '01
Q1 '02
Q1 '03
Q1 '04
Commercial RE Loans Delinquency
Source: Federal Reserve
%
Commercial Property Rate of Return(Return = net operating income + capital appreciation)
Commercial Property Rate of Return(Return = net operating income + capital appreciation)
0
1
2
3
4
5
Q1 '00
Q1 '01
Q1 '02
Q1 '03
Q1 '04
Rate of Return
Source: Haver Analytics, NCREIF
Commercial Property Rates of Return by Sectors
Commercial Property Rates of Return by Sectors
-2
-1
0
1
2
3
4
5
6
7
8
Q1 '00
Q1 '01
Q1 '02
Q1 '03
Q1 '04
Apartment Industrial Office Retail
Source: Haver Analytics, NCREIF
Best performer
Commercial Construction DisciplinedCommercial Construction Disciplined
200
220
240
260
280
300
320
340
$billion (chain 2000)
Source: BEA
Office Market Office Market
• Vacancy falling, slowdown in new supplyVacancy falling, slowdown in new supply
• Rental growth gaining tractionRental growth gaining traction
• Strong investor interest (REITS and foreign Strong investor interest (REITS and foreign investors)investors)
• Strongest investment markets in the West Strongest investment markets in the West
& Northeast& Northeast
Office Job Creation Growth Office Job Creation Growth
-500
-400
-300
-200
-100
0
100
200
300
400
500
2000 2001 2002 2003 2004 2005
Office Employment Change
Source: NAR/Torto-Wheaton
In thousands
Office Market Fundamentals Office Market Fundamentals
-10,000
-5,000
0
5,000
10,000
15,000
20,000
25,000
30,000
2002
.4
2003
.1
2003
.2
2003
.3
2003
.4
2004
.1
2004
.2
2004
.3
2004
.4
2005
.1
Completion Net Absorption
In thousand square feet
Source: NAR/Torto-Wheaton
Vacancy Rate Falling Vacancy Rate Falling
14
14.5
15
15.5
16
16.5
17
17.5
2002
.4
2003
.1
2003
.2
2003
.3
2003
.4
2004
.1
2004
.2
2004
.3
2004
.4
2005
.1
Vacancy Rate%
Source: NAR/Torto-Wheaton
Office Rent - Gaining Traction Office Rent - Gaining Traction
-10
-5
0
5
10
15
1999 2000 2001 2002 2003 2004 2005
Rent Growth
Source: NAR/Torto-Wheaton
%
Industrial Market Industrial Market • Markets bifurcated by age and location Markets bifurcated by age and location
• But the pace of restocking barely keeping with shipmentsBut the pace of restocking barely keeping with shipments
• Level of obsolesce in some markets cause for high vacancyLevel of obsolesce in some markets cause for high vacancy
• Rents struggling to gain traction in some markets – rising in Rents struggling to gain traction in some markets – rising in others (Southern California)others (Southern California)
• Port markets (both traditional and inland) are outperformingPort markets (both traditional and inland) are outperforming
Business Inventory ChangeBusiness Inventory Change
-100
-50
0
50
100
150
Business Inventory Change ($billion)%
Source: BEA
Negative ???
Inventory-to-Sales RatioInventory-to-Sales Ratio
1.45
1.50
1.55
1.60
1.65
1.70
Brent Crude Oil per Barrel
Source: Department of Commerce
Industrial Market Fundamentals Industrial Market Fundamentals
-20,000
-10,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2002
.4
2003
.1
2003
.2
2003
.3
2003
.4
2004
.1
2004
.2
2004
.3
2004
.4
2005
.1
Completion Net Absorption
In thousand square feet
Source: NAR/Torto-Wheaton Research
Industrial Vacancy Rate Industrial Vacancy Rate
10.2
10.4
10.6
10.8
11
11.2
11.4
11.6
11.8
2002
.4
2003
.1
2003
.2
2003
.3
2003
.4
2004
.1
2004
.2
2004
.3
2004
.4
2005
.1
Vacancy Rate%
Source: NAR/Torto-Wheaton Research
Industrial Rent Growth Industrial Rent Growth
-6
-4
-2
0
2
4
6
8
10
1999 2000 2001 2002 2003 2004 2005
Rent Growth
Source: NAR/Torto-Wheaton Research
%
Retail Market Retail Market
• Consumer spending holding steady despite modest Consumer spending holding steady despite modest interest rate increases and higher oil pricesinterest rate increases and higher oil prices
• Sizable housing wealth additions in coastal marketsSizable housing wealth additions in coastal markets
• Most new construction is strip malls and power Most new construction is strip malls and power centers.centers.
• Very active REIT market – best long term investment Very active REIT market – best long term investment return (in recent year)return (in recent year)
Retail Rent GrowthRetail Rent Growth
0
1
2
3
4
5
6
1999 2000 2001 2002 2003 2004 2005
Rent Growth
Source: NAR/Torto-Wheaton Research
%
Multi-Family MarketMulti-Family Market
• Rising mortgage rates will boost renter demandRising mortgage rates will boost renter demand
• Local concentrated job growth raises demand for Local concentrated job growth raises demand for rental apartmentsrental apartments
• Condo Conversions (70,800 units in 2004 and higher Condo Conversions (70,800 units in 2004 and higher pace in 2005) pace in 2005) – More prevalent in Miami, Northern Virginia, Las More prevalent in Miami, Northern Virginia, Las
Vegas, and San Diego Vegas, and San Diego
Multi-family Market Fundamentals Multi-family Market Fundamentals
-200,000
-150,000
-100,000
-50,000
0
50,000
100,000
150,000
200,000
2002
.4
2003
.1
2003
.2
2003
.3
2003
.4
2004
.1
2004
.2
2004
.3
2004
.4
2005
.1
Completion Net AbsorptionIn number of units
Source: NAR/Torto-Wheaton Research
Multi-family Vacancy Rate Multi-family Vacancy Rate
0
1
2
3
4
5
6
7
8
2002
.1
2002
.2
2002
.3
2002
.4
2003
.1
2003
.2
2003
.3
2003
.4
2004
.1
2004
.2
2004
.3
2004
.4
2005
.1
Vacancy Rate%
Source: NAR/Torto-Wheaton Research
Multi-family Rent Growth Multi-family Rent Growth
-1
0
1
2
3
4
5
6
7
8
1999 2000 2001 2002 2003 2004 2005
Rent Growth%
Source: NAR/Torto-Wheaton Research
Housing Affordability Slipping Housing Affordability Slipping
100
105
110
115
120
125
130
135
140
145
150
Housing Affordability Index
Source: NAR
Commercial Market Outlook Net Absorption
Commercial Market Outlook Net Absorption
20052005 20062006
Office Office ( x 1,000 sq ft)( x 1,000 sq ft) 61,000 61,000 56,00056,000
Industrial Industrial ( x 1,000 sq ft)( x 1,000 sq ft) 133,000133,000 153,000153,000
Retail Retail ( x 1,000 sq ft)( x 1,000 sq ft) 34,00034,000 29,00029,000
Multi-Family Multi-Family (units)(units) 237,000237,000 262,000262,000
(Based on 57 markets)
Source: NAR Forecast
Commercial Market Outlook Vacancy Rate
Commercial Market Outlook Vacancy Rate
20052005 20062006
Office Office 14.1%14.1% 13.2%13.2%
IndustrialIndustrial 10.3%10.3% 9.8%9.8%
RetailRetail 6.3%6.3% 6.3%6.3%
Multi-FamilyMulti-Family 6.2%6.2% 5.2%5.2%
Source: NAR Forecast
Commercial Market Outlook Rent Growth
Commercial Market Outlook Rent Growth
20052005 20062006
Office Office 2.3%2.3% 3.4%3.4%
IndustrialIndustrial 0.7%0.7% 1.8%1.8%
RetailRetail 4.4%4.4% 4.0%4.0%
Multi-FamilyMulti-Family 2.5%2.5% 3.0%3.0%
Source: NAR Forecast
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