Smooth Sailing Ahead

1
Smooth Sailing Ahead
The Commercial Real Estate Market
Lawrence Yun, Ph.D. Senior Economist NATIONAL
ASSOCIATION OF REALTORS
Economic Issues Commercial Real Estate
Business Trends Forum Washington, DC -- May 2007
2
Commercial Real Estate Normalizing

• Record-high 306.8 billion commercial investment
  activity in 2006 continuing strong figures in
  2007 Q1
• Residential Down Commercial Up
• Slowing Economy Weakens Commercial Outlook
• Property Prices Maxed Out
• Vibrant Office Market Cool Retail Market

3
Improving Commercial Fundamentals
Source NAR/Torto-Wheaton
4
New Supply Impacting Commercial Fundamentals
Source NAR/Torto-Wheaton
5
The Economy
6
Sub-Par Economic Growth

Source BEA
7
Residential Construction

Source BEA
8
Commercial Construction

Source BEA
9
Construction Jobs

Source NAR
10
Consumer Spending Still Healthy

Source BEA
11
Wage Growth Picking Up

Source BLS
12
No Savings

Source BEA
13
Record Household Wealth
trillion
Source Federal Reserve
14
Business Spending Weakening

Source BEA
15
Record Corporate Profits
Source BEA
16
Corporate Profits by Industries
billion
Source BEA
17
Record Dow JonesIndustrial Average
Source NYSE
18
Government Showing Discipline
change from a year ago
Source BEA
19
Government Deficit
change from a year ago
Source BEA
20
Net Exports - Stabilizing
billion (2000)
Source BEA
21
Growing International Trade
billion (2000)
Source BEA
22
Expanding World Economy

Source World Bank
23
U.S. vs Foreign Currencies
Source Federal Reserve
24
Steady U.S. Job Gains2 Million in Past 12 months
Payroll job changes in thousands
Source BLS
25
Top Job-Creating Markets in Last 12 months
In thousands
Source BLS
26
Unemployment At or Below Natural Rate

Source BLS
27
Stubbornly High Oil Prices

Source Department of Energy
28
Core Inflation Still Worrisome
change from a year ago
Source BLS
29
Fed Policy
30
Construction Cost Inflation
change from a year ago
Source BLS, Census
31
Stable Interest RatesKeeping Cap Rates Low

32
Economic Outlook
The Fed cuts rate in early 2008
33
Commercial Real Estate Market
34
Commercial Market Highlights

• New supply impacting many markets
• Office continues to be the sector of choice for
  real estate investors
• Retail demand is still soft
• Distribution/Warehouse space still fueling
  industrial markets
• Commercial lending volume up, delinquencies down

35
Major Events in Commercial Real Estate so far
into 2007

• Equity Office Properties (EOP) sale to Blackstone
  for 39 billion
• Blackstones EOP spin offs
• Pricing continues to go up and cap rates fall
• Condo conversion market -- a by-gone
• Stock market perspective
• SP500 up 13.9 from May 06 to May 07
• Commercial real estate stocks up 29.9 over same
  time

36
Commercial Real Estate Delinquency Rates Edging
Up

Source Federal Reserve
37
Commercial Property Rate of Return
()
Source NCREIF
38
Commercial Property Rate of Return by Sectors
Moderating

The Fall of Retail
Source Haver Analytics, NCREIF
39
Property Price Index
Source MIT Center for Real Estate
40
Office Market

• Vacancy rates in most major markets continue to
  fall but rise overall nationally
• A record 71 billion worth of office properties
  traded in first quarter
• New supply impacting markets
• Investors like office properties in New York,
  Boston, Los Angeles and Chicago

41
Office Market Absorption Lagging New Completions
In thousand square feet
Source NAR/Torto-Wheaton
42
Vacancy Rate Edges Up

13.2
Source NAR/Torto-Wheaton
43
Office Rent - Still Positive

Source NAR/Torto-Wheaton
44
Industrial Market

• Markets near major ports continue to have lowest
  vacancy
• Los Angeles 4.6
• West Palm Beach 4.7
• Orange County (Long Beach) 5.0
• New state-of-the-art facilities being built
  supply of older buildings boosting availability
  in some markets
• West and Midwest most active for industrial
  investment
• Sales of industrial properties up 10 from last
  year.

45
Low Retail Inventory/SalesNeed to Restock Need
More Space

Source Census
46
Same for Wholesale Inventory

Source Census
47
Orders for Durable Goods Halted
million
Source Census
48
Industrial Market Impacted by New Supply
In thousand square feet
Source NAR/Torto-Wheaton Research
49
Industrial Vacancy Rate

9.6
Source NAR/Torto-Wheaton Research
50
Industrial Rent Growth

Source NAR/Torto-Wheaton Research
51
Retail Market

• Sluggish retail sales means less demand for
  retail space.
• Only sector experiencing significant increases in
  vacancy and declining rental rates
• Investment volume up 22 as retail portfolios
  trade hands

52
Consumer Confidence Falling
Source Conference Board
53
Retail Sales Decelerating

Source BEA
54
Retail Rent Slow Growth

Source NAR/Torto-Wheaton Research
55
Multi-Family Market

• Slowing housing market keeping some in rentals
• Planned condo conversions being returned to
  rental markets
• Investor interest in multi-family waning down
  29 so far in 2007
• Condo conversions no longer popular

56
Tumbling Home Sales (Existing-Home Sales 2006
Q4 vs 2005 Q4)
Source NAR
57
Renters Beginning to Get Squeezed U.S.
Source Torto-Wheaton Research
58
Markets Like Phoenix Strong in Jobs but Weak
in Housing Really Feel the Squeeze
Source Torto-Wheaton Research
59
Multi-family Market Fundamentals
In number of units
Source NAR/Torto-Wheaton Research
60
Multi-Family Vacancy Rate

5.9
Source NAR/Torto-Wheaton Research
61
NARs Commercial Leading Indicator
Source NAR
62
Commercial Market Outlook Net Absorption
Source NAR
63
Commercial Market Outlook Vacancy Rate
Source NAR
64
Commercial Market Outlook Rent Growth
SourceNAR
65
Smooth Sailing Ahead
The Commercial Real Estate Market
Lawrence Yun, Ph.D. Senior Economist NATIONAL
ASSOCIATION OF REALTORS
Economic Issues Commercial Real Estate
Business Trends Forum Washington, DC -- May 2007