RCLCO U.S. Real Estate Chart Book

RCLCO U.S. Real Estate Chart Book
MARCH 2014
Austin | Los Angeles | Orlando | Washington, D.C.
Contents
RCLCO
RCLCO Outlook – From the Ground Up
03
y
The Real Estate Cycle
04
Housing
05
Office
14
Retail
19
Industrial
25
Economic and Capital Market Backdrop
30
With 40 staff in four locations, RCLCO provides consulting services in
the areas of Institutional Advisory Services, Urban Development,
Community and Resort Development, Public Strategies, and
Management Consulting and Litigation. RCLCO is an employee-owned
firm that exclusively provides consulting services.
RCLCO’s Institutional Advisory Services group provides services to
commercial real estate owners in the areas of:
•
•
•
•
•
Strategic planning and investment policies
Portfolio development and manager selection
P tf li analysis
Portfolio
l i and
d monitoring
it i
Investment analysis, target markets, and hold/sell analyses
Market analysis and independent research
For questions, contact: Paige Mueller, Director of Institutional Advisory
Services, RCLCO, 233 Wilshire Blvd, Ste 370, Santa Monica, CA
90401 (310) 601-4919.
90401,
601 4919
Report Prepared by:
Paige Mueller, Managing Director
Dustin Young, Associate
2
RCLCO Real Estate Chart Book | March 2014
RCLCO Outlook
U.S. real estate markets continue to improve with generally
higher occupancy and rental rates across most property types
and markets. Capital continues to flow into the sector with
record fundraising by REITs in 2013 and banks again lending
at a pace that is faster than the number of loans that are
maturing. Pricing in secondary markets has been improving at
a similar pace as the primary markets since late 2011,
evidence of increased risk tolerance by investors. This has
also particularly benefited private equity firms and others who
have been successful in raising value-add
value add and opportunistic
funds recently.
We are encouraging clients to think through their long-term
cycle strategies now while fundamentals are generally
positive Cycle strategies should set a long
positive.
long-term
term framework
and action plan through which real estate firms can operate
successfully during all parts of the cycle. Part of this strategy
should identify key market indicators and plans that can be
enacted when those indicators begin to change / appear in
the market. The p
plan should be in effect during
g all p
phases of
the cycle—and if it does not exist, should go into effect now
as it requires some advance planning and agreement as to
action plans among senior members of the firm. We have
seen evidence from the last cycle that firms that had such
plans in place were able to invest and sell more thoughtfully
as market
k conditions
di i
b
began
to change,
h
and
d thus
h had
h d better
b
performance metrics.
For example, higher occupancy, rental rates, and pricing are
also generating more construction, and this construction is
now spreading beyond a few key markets.
markets While this is an
3
RCLCO Real Estate Chart Book | March 2014
indication of positive demand, we are already beginning to
see flattening to lower occupancy rates as a result of new
supply in a few apartment markets and in D.C. and CBD New
York office markets. While this is more of an exception than
the rule, it is the start of a more mature phase of the market
that will expand to other metro areas as the supply pipeline
continues.
In the capital markets, the 100 bp summer increase in 10year treasury yields has not reversed.
reversed While mortgage rates
moved in synch with interest rates in 2013, there was no
noticeable increase in cap rates, likely because of the
relatively wide spread that existed in 2013 between cap rates
and interest rates (but is now gone). With long-term inflation
expectations remaining just above 2%,
2% we expect that 10
10year treasury yields could rise by another 50-100 bp to the
3.5%-4+% range which could put upward pressure on cap
rates, particularly in markets or properties with limited
potential for future income growth. Thus, in addition to
downward p
pressure on income from new supply,
pp y the capital
p
markets could also put downward pressure on return
expectations going forward.
The graphs on the following pages are designed to help firms
identify key indicators that should inform their cycle plans.
Whil we still
While
ill see many interesting
i
i
i
investment
opportunities
ii
from core through new development, investors should be
carefully reviewing leverage and buy/sell strategies as part of
their cycle planning.
— Paige Mueller,
Mueller Director of Institutional Advisory Services
Construction Pipelines
p
Rising
g Across Most Property
p y Types
yp
Occupancy Low
Occupancy Rising
Occupancy Rising
Occupancy High
Occ. Above Average
Occupancy Low
Demand Improving
Demand Improving
Demand Improving
Occupancy Flattening
Occupancy Falling
Occ. Flat to Down
Rents Flat to Down
Rents Rising
Rents Rising
Rents Flattening
Rents Falling
Rents Flat to Down
No Construction
Limited Construction
Construction
Construction
Construction
No Construction
Prime** CBD Office
Multifamily
Hotel
Industrial
Suburban Office
Construction is well underway in apartments,
prime** CBD office, and some hotel markets.
While these sectors generally have high
occupancy rates and rising rents, occupancies in
some apartment markets and office markets such
as NY and DC are starting to stabilize or decline
as new supply increases.
Single-Family
Retail*
Increase Vintage
New Development
Redevelopment & Lease-Up
Short-Term Leases
Reduce Vintage
Reduce Opportunistic
Reduce Risk: B / Non-Core, Leverage
Long-Term Leases
**neighborhood
i hb h d & community
it centers
t
**includes New York, Washington DC, San Francisco, Seattle, Los Angeles, and Boston
4
RCLCO Real Estate Chart Book | March 2014
Source: RCLCO
Housing Fundamentals
5
RCLCO Real Estate Chart Book | March 2014
U.S. Apartment
p
Absorption
p
Continues to Outpace
p
Completions
p
4th Quarter 2013 apartment vacancy was down 10 bp quarter-overquarter and 50 bp year-over-year to 4.1%. Owners have pricing
power as they leverage low vacancies into rent growth for the 15th
straight quarter. Vacancies have most likely reached their cycle lows as
of year
year-end
end 2013. With projects under construction equivalent to over
2.5% of stock, vacancy may begin to creep up. The rent growth forecast
below could face some downward pressure if new construction occurs
faster than expected.
Squ
uare Feet (in milliions)
U.S. Apartment Absorption, Vacancy, Rent Growth
250
13%
200
10%
150
8%
100
5%
50
3%
0
0%
-50
0
-3%
3%
1999
2000
2001
2002
2003
2004
Completions
Source: Reis, Inc.; RCLCO
6
RCLCO Real Estate Chart Book | March 2014
2005
2006
2007
Net Absorption
2008
2009
Vacancy %
2010
2011
2012
Rent Growth %
2013 2014 (f) 2015 (f) 2016 (f)
Apartment
p
Vacancy
y Historically
y Low
Apartment vacancies remain low as most major U.S. apartment
markets are experiencing lower current vacancy than their longterm (1990-present) average. The only two markets with above-
average vacancy are Washington, D.C., and New York, although
vacancies in both markets remain low at 4.8% and 2.7%, respectively.
Apartment Current and Long-term Vacancy
14%
Max
LT Average Vacancy
12%
Va
acancy
10%
8%
6%
4%
2%
Min
Current Vacancy
NOTE: The markets in the above chart are not necessarily MSAs or central cities
cities, but are loosely defined real estate markets.
markets
Source: Reis, Inc.; RCLCO
7
RCLCO Real Estate Chart Book | March 2014
Un
nited States
Tampa-St. Petersburg
Suburb
ban Virginia
Suburba
an Maryland
Seattle
San Jose
San
n Francisco
San Diego
Phoenix
Philadelphia
P
Orlando
Oran
nge County
New York
Minneapolis
M
Miami
Los Angeles
Houston
Denver
District o
of Columbia
Green box - current vacancy < LT avg.
Red box - current vacancy > LT avg.
Dallas
Chicago
Austin
Atlanta
0%
U.S. Apartment:
p
Market Risk Indicator
Rents continue to rise in most major apartment markets, although
occupancy rates are beginning to flatten in a few markets. Due to
historically high occupancy and rent levels, construction continues to be
in full swing in most markets.
Net Absorption % Completions % of Under Constr % of
of Stock Current* Stock Current*
Stock Current*
Quarter
Quarter**
Quarter***
Occupancy****
Atlanta
0.4%
0.0%
1.4%
94.1%
Austin
1.0%
1.1%
6.7%
95.5%
Chicago
0.3%
0.4%
1.1%
96.3%
Dallas
0.8%
%
0.6%
%
4.2%
%
95.1%
%
District of Columbia
0.7%
0.7%
7.0%
95.2%
Denver
0.6%
0.4%
6.5%
96.4%
Houston
0.9%
0.5%
4.0%
94.0%
Los Angeles
0.2%
0.2%
1.6%
96.9%
Miami
0.6%
0.5%
1.8%
96.3%
Minneapolis
0 6%
0.6%
0 8%
0.8%
2 9%
2.9%
97 2%
97.2%
New York
0.2%
0.5%
4.9%
97.3%
Orange County
0.2%
0.0%
1.9%
97.1%
Orlando
0.6%
0.5%
3.8%
95.1%
Philadelphia
0.5%
0.3%
1.3%
96.7%
Phoenix
0.6%
0.3%
2.0%
94.9%
g
0.3%
0.4%
2.1%
97.4%
San Diego
Seattle
0.7%
1.1%
4.1%
95.4%
San Francisco
0.5%
0.5%
2.4%
96.9%
San Jose
0.9%
0.6%
4.4%
97.3%
Suburban Maryland
0.5%
0.1%
4.6%
96.6%
Suburban Virginia
0.0%
0.2%
5.3%
96.2%
Tampa-St. Petersburg
0.8%
0.6%
2.2%
95.7%
U it d States
United
St t
0 5%
0.5%
0 4%
0.4%
2 6%
2.6%
95 9%
95.9%
QoQ
Occupancy
Change
0.3%
-0.1%
0.0%
0.2%
%
0.1%
0.1%
0.4%
0.1%
0.2%
-0 1%
-0.1%
-0.3%
0.2%
0.2%
0.3%
0.3%
0.0%
-0.4%
0.0%
0.2%
0.4%
-0.2%
0.2%
0 1%
0.1%
YoY
Occupancy
Change
1.0%
-0.1%
0.2%
0.6%
%
-0.4%
0.4%
1.2%
0.2%
0.2%
-0 2%
-0.2%
-0.6%
0.8%
0.8%
0.3%
0.9%
0.1%
-0.4%
0.2%
0.1%
0.7%
-0.2%
1.1%
0 5%
0.5%
*Current quarter defined as Q4 2013
**Completions highlighted in Red if above 0.25% of Stock
***Under Construction highlighted in Red if above 1% of Stock
****Green if above city’s historical average since 1990
NOTE: Above data includes only market rate rentable apartment space
NOTE: The markets in the above chart are not necessarily MSAs or central cities
cities, but are loosely defined real estate markets.
markets
Source: Reis, Inc.; RCLCO
8
RCLCO Real Estate Chart Book | March 2014
QoQ Rent
Growth
1.0%
0.9%
0.7%
1.1%
%
0.1%
1.0%
1.2%
0.8%
0.5%
1 0%
1.0%
1.8%
0.5%
0.9%
0.9%
1.0%
0.8%
1.2%
1.9%
1.1%
-0.5%
-0.1%
0.9%
0 8%
0.8%
YoY Rent
Growth
3.6%
4.2%
3.1%
3.7%
%
1.6%
4.7%
4.3%
2.5%
3.2%
3 6%
3.6%
4.1%
2.8%
3.3%
2.8%
3.5%
3.5%
7.1%
5.6%
5.5%
1.5%
1.3%
2.8%
3 2%
3.2%
Apartment
p
Pricing
g and Growth Expectations
p
Investors continue to favor the low vacancy rates of the apartment
sector, with average Class A cap rates of around 5% or lower, and
some markets close to 4%. The graph below shows average Class A
cap rates and average expected NOI growth for the next five years,
including expected changes in occupancies and rents. While NOI
growth going forward is expected to be positive, new supply is putting
downward pressure on expected income growth going forward and the
combination of low cap rates and moderate rent growth results in some
of the lowest forward return expectations of all property types.
Class A Apartment Price + Growth
12%
Price + Growth
P
10%
8%
6%
4%
2%
0%
Average Cap Rate
Average Annual NOI Growth (2014 - 2018)
Initial yield and cash flow growth over the hold period are significant contributors to unlevered total return expectations. Low cap rates should thus be accompanied
by higher growth expectations. While the above graph is an incomplete view, it does provide some indications of markets that should be particularly reviewed for
further insights. For example, markets with low bars in the graph above may have less growth than needed to offset lower yields, or the growth may be more backended in a 10-year hold. Conversely, markets with high bars may be positioned to experience significant growth as compared to current pricing, or may be markets
that are considered to be more risky and thus justify higher expected returns.
NOTE: The markets in the above chart are not necessarily MSAs or central cities,
cities but are loosely defined real estate markets.
markets
Source: Reis, Inc.; CBRE; RCLCO
9
RCLCO Real Estate Chart Book | March 2014
Household Formation is Outpacing
p
g Single-Family
g
y Starts
Single-Family Housing Starts and Household Formation
1,600,000
1,400,000
Housing Startts and Formation
ns
1,200,000
1,000,000
800,000
600,000
400,000
,
200,000
Housing Starts
RCLCO Real Estate Chart Book | March 2014
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
New Households
NOTE: Housing starts include single-family
single-family, townhomes
townhomes, condominiums
condominiums, and cooperative homes
Source: Moody’s Analytics; RCLCO
10
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
0
New Home Sales Continue to Improve
p
New home sales surpassed expectations in January, up 9.6% from
December and 2.2% from a year ago. New home sales are now
running at the fastest pace since 2008. Existing home sales slipped
in December and January, likely due to cold weather, higher mortgage
rates and prices, and low inventory levels. Assuming that mortgage
rates do not rise faster than expected, sales are expected to improve
going forward as a result of improved job growth and household
formation.
8,000,000
1,600,000
7,000,000
1,400,000
6,000,000
1,200,000
5 000 000
5,000,000
1 000 000
1,000,000
4,000,000
800,000
3,000,000
600,000
2,000,000
400,000
1,000,000
200,000
0
01/99
01/00
01/01
01/02
01/03
01/04
01/05
01/06
Existing Home Sales (L)
Source: U.S. Census Bureau; National Association of Realtors
11
RCLCO Real Estate Chart Book | March 2014
01/07
01/08
01/09
01/10
New Home Sales (R)
01/11
01/12
01/13
0
01/14
New Home Sales
Existing Home Sa
E
ales
National Home Sales
Housing
g Supply
pp y Is Near Stabilized Levels
The inventory of homes available for sale has recovered since the
downturn as a result of both fewer homes being put on the market
and a higher volume of home sales. Inventory to sales ratios
continue to stay near long-term stabilized levels which should help to
generate demand for new homes as well as support moderate
increases in home prices.
New and Existing Home - Months of Supply of Housing
14
12
Months Sup
pply
10
8
6
4
2
0
Existing Home Months Supply
NOTE: Home supply includes single-family
single-family, condo
condo, and townhomes
Source: NAR; RCLCO
12
RCLCO Real Estate Chart Book | March 2014
New Home Months Supply
Single-Family New Home Prices Recovered while Existing Prices Are Still
Belo Peak Le
Below
Levels
els
New home prices were up by approximately 5% in 2013. While
prices slipped recently, economists in the Wall Street Journal
Consensus Survey expect home prices overall to rise by another
5% in 2014.
300,000
250
250 000
250,000
200
200,000
150
$ 150,000
100
100,000
50
50,000
Median New Home Price
Median New Home Price
Case‐Shiller 20 City Index
Source: U.S. Census; National Association of Realtors; S&P; Wall Street Journal
13
RCLCO Real Estate Chart Book | March 2014
Jan‐14
Jan‐13
Jan‐12
Jan‐11
Jan‐10
Jan‐09
Jan‐08
Jan‐07
Jan‐06
Jan‐05
Jan‐04
Jan‐03
Jan‐02
Jan‐01
0
Jan‐00
0
Median Existing Home Price
Median Existing Home Price
I ndex
Home Prices
Office Fundamentals
14
RCLCO Real Estate Chart Book | March 2014
U.S. Office Vacancy
y Slowly
y Improving
p
g
Despite significant office employment growth, 4Q 2013 office
vacancy was flat quarter-over-quarter at 16.9% and down by 20 bp
year-over-year as tenants continue to absorb extra space and
decrease space usage per worker. Office absorption is expected to
outpace completions during the next three years nationally as office
jobs are growing at a faster pace than employment growth overall. The
slow forecast recovery masks regional differences. Poorly located or
configured properties are likely to face higher obsolescence risk, while
properties in prime locations are expected to experience high rent
growth in the near
near-term
term as rents recover from the downturn.
Square Feet (in millions)
U.S. Office Absorption, Vacancy, Rent Growth
200
20%
150
15%
100
10%
50
5%
0
0%
-50
-5%
-100
-10%
-150
150
-15%
15%
1999
2000
2001
2002
2003
2004
Completions
Source: Reis, Inc.; RCLCO
15
RCLCO Real Estate Chart Book | March 2014
2005
2006
2007
Net Absorption
2008
2009
Vacancy %
2010
2011
2012
Rent Growth %
2013 2014 (f)2015 (f)2016 (f)
Office Vacancy
y Generally
y Still High
g
25.3%. The only two markets with below-average vacancy are Houston
and NYC at 14.4% and 9.9%, respectively.
Most major U.S. office markets continue to experience higher
current vacancy than their long-term (1990-present) average.
Phoenix has the highest current vacancy rate of these major markets at
Office Current and Long-term Vacancy
30%
Max
Current Vacancy
25%
Va
acancy
20%
15%
10%
LT Average Vacancy
5%
Min
16
RCLCO Real Estate Chart Book | March 2014
Unitted States
an Virginia
Suburba
Seattle
San Jose
San Francisco
San Diego
S
Phoenix
Philadelphia
ge County
Orang
New York
Minneapolis
Miami
Loss Angeles
Houston
NOTE: The markets in the above chart are not necessarily MSAs or central cities
cities, but are loosely defined real estate markets.
markets
Source: Reis, Inc.; RCLCO
Suburban Maryland
Green box - current vacancy < LT avg.
Red box - current vacancy > LT avg.
District of Columbia
Denver
Dallas
Chicago
Charlotte
Boston
Austin
Atlanta
0%
U.S. Office: Market Risk Indicator
U.S. office occupancy remained unchanged qoq in 4Q 2013 as new
supply met demand, and fell by only 20 bp yoy. The sluggish
national data masks much more dynamic changes at the local level.
Atlanta
Austin
Boston
Chicago
Charlotte
Dallas
District of Columbia
Denver
Houston
Los Angeles
Miami
Minneapolis
Northern New Jersey
New York
Orange County
Philadelphia
Phoenix
San Diego
Seattle
San Francisco
San Jose
Suburban Maryland
Suburban Virginia
United States
Supply outpaced demand in New York and D.C. High growth tech and
energy markets are also now experiencing significant pipelines, while
other markets are generally lagging.
Net Absorption % Completions % of Under Constr % of
of Stock Current* Stock Current*
Stock Current*
Quarter
Quarter**
Quarter***
Occupancy****
0.2%
0.0%
0.4%
79.9%
0.2%
0.1%
4.2%
83.7%
1.2%
1.0%
2.1%
86.4%
-0.1%
0 1%
0 0%
0.0%
0 1%
0.1%
81 3%
81.3%
0.0%
0.0%
0.2%
82.2%
0.2%
0.0%
2.8%
77.1%
-0.1%
0.7%
0.8%
89.7%
0.2%
0.0%
1.2%
82.7%
0.1%
0.3%
4.1%
85.6%
0.4%
0.1%
0.4%
84.5%
-0.3%
0.0%
0.4%
82.8%
0.1%
0.1%
0.0%
82.7%
0.0%
0.0%
0.0%
81.3%
0.4%
0.6%
1.4%
90.1%
0.7%
0.5%
0.7%
83.0%
-0.1%
0.0%
0.3%
85.7%
0.3%
0.0%
0.8%
74.7%
0.5%
0.0%
1.1%
84.2%
-0.3%
0.0%
3.2%
85.9%
0.3%
0.0%
3.0%
87.1%
0.5%
0.0%
4.3%
82.0%
0.1%
0.0%
1.2%
84.9%
0.3%
0.8%
1.1%
82.6%
0 2%
0.2%
0 2%
0.2%
1 2%
1.2%
83 1%
83.1%
QoQ
Occupancy
Change
0.2%
0.1%
0.3%
0 0%
0.0%
0.0%
0.2%
-0.7%
0.2%
-0.2%
0.3%
-0.3%
0.0%
0.1%
-0.2%
0.3%
-0.2%
0.3%
0.5%
-0.4%
0.4%
0.6%
0.1%
-0.4%
0 0%
0.0%
YoY
Occupancy
Change
0.6%
0.8%
0.6%
-0.2%
0 2%
-0.5%
0.5%
-1.0%
0.8%
0.0%
0.2%
0.1%
0.8%
0.8%
0.0%
1.1%
0.4%
0.5%
0.6%
0.3%
0.9%
1.0%
-0.2%
-1.3%
0 2%
0.2%
*Current quarter defined as Q4 2013
**Completions highlighted in Red if above 0.25% of Stock
***Under Construction highlighted in Red if above 1% of Stock
****Green if above market’s historical average since 1990
NOTE; Above data does not include Medical Office
NOTE: The markets in the above chart are not necessarily MSAs or central cities
cities, but are loosely defined real estate markets.
markets
Source: Reis, Inc.; RCLCO
17
RCLCO Real Estate Chart Book | March 2014
QoQ Rent
Growth
0.5%
0.0%
1.6%
0 7%
0.7%
0.4%
1.3%
0.2%
0.4%
0.9%
0.9%
0.1%
0.1%
0.4%
1.0%
1.3%
0.3%
0.5%
1.0%
1.1%
0.3%
1.4%
0.1%
0.2%
0 7%
0.7%
YoY Rent
Growth
0.9%
1.8%
2.9%
1 3%
1.3%
1.5%
2.8%
0.5%
1.7%
3.7%
1.7%
1.1%
1.2%
0.5%
4.2%
2.8%
0.6%
1.1%
2.1%
3.0%
4.5%
5.0%
0.5%
0.9%
2 2%
2.2%
Office Pricing
g and Growth Expectations
p
Pricing varies significantly by market, with cap rates well below 6% for
Class A office buildings on average in prime markets such as Boston,
Washington, D.C., New York, and San Francisco. The graph below
shows average cap rates and average expected NOI growth for the
next five years, including expected improvements in occupancies and
rents. While NOI growth going forward is expected to be strong in
several markets, growing construction pipelines in markets such as
Washington, D.C., may limit income growth and thus return
expectations. Meanwhile, supply is lagging in many secondary markets
which are typically high yield / high construction markets. These may be
good short
short-term
term plays with occupancy gains likely in the near
near-term.
term.
Class A Office Price + Growth
12%
Pric
ce + Growth
10%
8%
6%
4%
2%
0%
Average Cap Rate
Average Annual NOI Growth (2014 - 2018)
Initial yield and cash flow growth over the hold period are significant contributors to unlevered total return expectations. Low cap rates should thus be accompanied
by higher growth expectations. While the above graph is an incomplete view, it does provide some indications of markets that should be particularly reviewed for
further insights. For example, markets with low bars in the graph above may have less growth than needed to offset lower yields, or the growth may be more backended in a 10-year hold. Conversely, markets with high bars may be positioned to experience significant growth as compared to current pricing, or may be markets
that are considered to be more risky and thus justify higher expected returns.
NOTE: The markets in the above chart are not necessarily MSAs or central cities,
cities but are loosely defined real estate markets.
markets
Source: Reis, Inc.; CBRE; RCLCO
18
RCLCO Real Estate Chart Book | March 2014
Retail Fundamentals
19
RCLCO Real Estate Chart Book | March 2014
Retail Formats Continue to Change
g
Retail sales growth remains positive overall and is finally
beginning to generate demand for new retail space. However, the
retail sector continues to evolve in light of growing competition from ecommerce and changing retail platforms as evidenced by the recent
closure or sale of large grocers in some markets. While top malls
continue to maintain high occupancy and rental growth, department
store closures in non-strategic locations by key anchors such as JC
Penney and Sears are also an indication of the struggling department
store segment, and likely evolution of Class B/C malls into uses with
lower sales volumes.
Retail Sales Growth
1993-2013
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
Warehouse Clubs + Superstores
Grocery
Dept Stores Ex Discount
Discount Dept Stores
GAFO*
E-Commerce
*GAFO = general apparel, furniture, and other mall-type stores
NOTE: 2013 YTD data is through November
Source: U.S. Census; ICSC; RCLCO
20
RCLCO Real Estate Chart Book | March 2014
U.S. Retail Absorption
p
Positive
The retail sector is slowly gaining momentum with 2013 demand
up by 8% from 2012 levels and at the highest level since 2007,
although still well below the pace of the past decade. Neighborhood
and Community Center (N/C) vacancy fell by 10 bp qoq and 30 bp yoy
to 10.4% in 4Q 2013 with rents up by 0.5% qoq.
Square Feet (in millions)
U.S. Retail Absorption, Vacancy, Rent Growth
60
12%
45
9%
30
6%
15
3%
0
0%
-15
-3%
-30
30
-6%
6%
1999
2000
2001
2002
2003
2004
Completions
Source: Reis, Inc.; RCLCO
21
RCLCO Real Estate Chart Book | March 2014
2005
2006
2007
Net Absorption
2008
2009
Vacancy %
2010
2011
2012
Rent Growth %
2013 2014 (f)2015 (f)2016 (f)
Retail Vacancy
y Generally
y Still High
g
are only slightly less occupied than normal. Occupancies should
continue to improve given the limited construction pipeline.
All of the major U.S. retail markets are experiencing higher current
vacancy than their long-term (1990-present) average except for
Houston. Atlanta and Orlando are above their long-term averages by
the widest margins, while Miami and Southern California retail markets
Retail Current and Long-term Vacancy
25%
Current Vacancy
20%
Vacanc
cy
Max
15%
10%
5%
Min
LT Average Vacancy
NOTE: The markets in the above chart are not necessarily MSAs or central cities
cities, but are loosely defined real estate markets.
markets
Source: Reis, Inc.; RCLCO
22
RCLCO Real Estate Chart Book | March 2014
United Stattes
Seatttle
San Diego
nix
Phoen
Orlando
Orange Coun
nty
Minneapo
olis
Mia
ami
Los Angelles
Green box - current vacancy < LT avg.
Red box - current vacancy > LT avg.
Houstton
Denvver
Dalllas
Chicago
Atlan
nta
0%
U.S. Retail: Market Risk Indicator
The retail sector is slowly improving with rising occupancy and
rental rates. While occupancy is still generally lower than long-term
Atlanta
Chicago
Dallas
Denver
Houston
Los Angeles
Miami
Minneapolis
Orange County
Orlando
Phoenix
San Diego
Seattle
United States
average rates, new construction is beginning to pick up, particularly in
markets such as Chicago, Dallas, Los Angeles, and Orange County.
Net Absorption % Completions % of Under Constr % of
of Stock Current* Stock Current*
Stock Current*
Quarter
Quarter**
Quarter***
Occupancy****
0.4%
0.2%
0.1%
86.3%
0.3%
0.0%
1.4%
89.1%
0.6%
0.0%
1.1%
87.2%
0 5%
0.5%
0 0%
0.0%
0 0%
0.0%
88 8%
88.8%
0.0%
0.1%
0.4%
87.9%
0.4%
0.3%
1.4%
94.0%
0.0%
0.0%
0.5%
92.9%
-0.3%
0.0%
0.5%
88.8%
0.1%
0.0%
1.0%
94.5%
0.5%
0.2%
0.6%
87.7%
0.3%
0.0%
0.0%
89.4%
0.0%
0.2%
0.7%
93.6%
1.1%
1.3%
0.2%
93.1%
0.2%
0.1%
0.7%
89.6%
QoQ
Occupancy
Change
0.2%
0.3%
0.6%
0 5%
0.5%
-0.1%
0.1%
0.0%
-0.3%
0.1%
0.4%
0.3%
-0.2%
-0.1%
0.1%
YoY
Occupancy
Change
0.6%
0.6%
1.0%
0 8%
0.8%
0.3%
0.2%
0.0%
0.3%
0.1%
1.6%
1.0%
-0.1%
0.1%
0.3%
QoQ Rent
Growth
0.1%
0.6%
0.4%
1 0%
1.0%
0.6%
0.4%
0.3%
0.8%
0.6%
0.9%
0.7%
0.7%
0.5%
0.5%
*Current quarter defined as Q4 2013
**Completions highlighted in Red if above 0.25% of Stock
***Under Construction highlighted in Red if above 1% of Stock
****Green if above city’s historical average since 1990
NOTE: Above data includes only Neighborhood/Community centers; does NOT include power centers, regional malls, or lifestyle retail centers
NOTE: The markets in the above chart are not necessarily MSAs or central cities, but are loosely defined real estate markets.
Source: Reis, Inc.; RCLCO
23
RCLCO Real Estate Chart Book | March 2014
YoY Rent
Growth
1.0%
1.4%
1.8%
2 4%
2.4%
2.5%
1.6%
1.0%
2.7%
2.0%
2.9%
1.2%
2.2%
2.0%
1.4%
Neighborhood/Community
g
y Retail Pricing
g and Growth Expectations
p
Pricing variation by geographic market in retail is not as differentiated
as in other property types, as retail yields vary more by property type
and strength of the location and retailers. The graph below shows
average cap rates and average expected NOI growth for the next five
years, including expected improvements in occupancies and rents. NOI
growth for most markets is expected to be moderate as retail
occupancies and rents did not fall in the downturn as much as
some property types, and also reflects reluctance of retailers to
increase space needs amid strong e-commerce competition.
Neighborhood/Community Retail Price + Growth
12%
Pric
ce + Growth
10%
8%
6%
4%
2%
0%
Average Cap Rate
Average Annual NOI Growth (2014 - 2018)
Initial yield and cash flow growth over the hold period are significant contributors to unlevered total return expectations. Low cap rates should thus be accompanied
by higher growth expectations. While the above graph is an incomplete view, it does provide some indications of markets that should be particularly reviewed for
further insights. For example, markets with low bars in the graph above may have less growth than needed to offset lower yields, or the growth may be more backended in a 10-year hold. Conversely, markets with high bars may be positioned to experience significant growth as compared to current pricing, or may be markets
that are considered to be more risky and thus justify higher expected returns.
NOTE: The markets in the above chart are not necessarily MSAs or central cities
cities, but are loosely defined real estate markets.
markets
Source: Reis, Inc.; CBRE; RCLCO
24
RCLCO Real Estate Chart Book | March 2014
Industrial Fundamentals
25
RCLCO Real Estate Chart Book | March 2014
U.S. Industrial Absorption
p
Remains Strong
g
Industrial absorption returned quickly after the downturn and has
remained near the peak levels of the previous cycle, helped in
large part by demand from e-commerce users. Vacancy rates have
improved from previous peak levels, dropping to under 10% in the
previous quarter. Rent growth is expected to continue to be positive,
although the supply pipeline is rising in several markets.
Square Feet (in m
S
millions)
U.S. Industrial Absorption, Vacancy, Rent Growth
150
15%
100
10%
50
5%
0
0%
-50
-5%
-100
-10%
1999
2000
2001
2002
2003
2004
Completions
Source: Reis, Inc.; RCLCO
26
RCLCO Real Estate Chart Book | March 2014
2005
2006
2007
Net Absorption
2008
2009
Vacancy %
2010
2011
2012
Rent Growth %
2013 2014 (f)2015 (f)2016 (f)
Industrial Vacancy
y Falling
g
were higher than their historical average. New construction has
started to pick up, but is not keeping pace with demand in most
markets, so vacancy continues to fall.
Most major U.S. industrial markets are experiencing slightly lower
current vacancy than their long-term (1990-present) average,
which represents a change from just a year ago, when vacancies
Industrial Current and Long-term Vacancy
30%
Max
25%
Current Vacancy
V
Vacancy
20%
15%
10%
5%
Min
LT Average Vacancy
NOTE: The markets in the above chart are not necessarily MSAs or central cities
cities, but are loosely defined real estate markets.
markets
Source: Reis, Inc.; RCLCO
27
RCLCO Real Estate Chart Book | March 2014
United States
Seattle
San Francisco
San Diego
San Bernardino/Riverside
Green box - current vacancy < LT avg.
Red box - current vacancy > LT avg.
Phoenix
Orange County
Oa
akland-East Bay
North
hern New Jersey
Miami
Memphis
Los Angeles
Indianapolis
Houston
Fort Lauderdale
Denver
Dallas
Chicago
Cen
ntral New Jersey
Boston
Baltimore
Atlanta
0%
U.S. Warehouse: Market Risk Indicator
While rental levels continue to improve in most major warehouse
markets and vacancy remains in check, supply pipelines are
rising, particularly for e-commerce companies that are competing for
retail dollars. Given the quick construction times and sparse pre-leasing
Atlanta
Baltimore
Boston
Central New Jersey
Chicago
Dallas
Denver
Fort Lauderdale
Houston
Indianapolis
Los Angeles
Memphis
Miami
Oakland-East Bay
O
Orange
County
C
t
Phoenix
San Bernardino/Riverside
San Diego
San Francisco
Seattle
United States
of new industrial construction, occupancy rates can begin weakening
when new supply is delivered. Demand has been high in both highgrowth local markets as well as some big distribution markets such as
Dallas.
Net Absorption % Completions % Under Constr
QoQ
of Stock Current* of Stock Current* % of Stock
Occupancy
Year
Quarter**
Current*** Occupancy****
Change
0.2%
0.1%
0.5%
85.6%
0.2%
-0.3%
0.0%
1.3%
89.6%
-0.4%
0.2%
0.0%
0.0%
89.1%
0.2%
0.2%
0.3%
0.9%
89.4%
0.0%
0.4%
0.1%
0.3%
85.9%
0.3%
0.5%
0.8%
3.1%
86.7%
-0.1%
0.4%
0.4%
0.4%
90.3%
0.1%
0.3%
0.8%
0.4%
89.7%
-0.4%
0 2%
0.2%
0 3%
0.3%
1 7%
1.7%
91 7%
91.7%
-0
0.1%
1%
-0.2%
0.0%
0.7%
89.1%
-0.2%
0.1%
0.0%
0.0%
92.7%
0.1%
0.3%
0.2%
0.5%
83.8%
0.1%
0.2%
0.0%
0.7%
92.5%
0.2%
0.6%
0.2%
0.5%
89.7%
0.5%
0 1%
0.1%
0 2%
0.2%
0 0%
0.0%
91 4%
91.4%
0 0%
0.0%
0.7%
0.7%
1.0%
82.9%
0.2%
0.1%
0.2%
0.9%
89.4%
-0.1%
-0.3%
0.0%
0.2%
89.0%
-0.2%
0.7%
0.0%
0.0%
91.6%
0.7%
0.2%
0.0%
0.3%
91.1%
0.2%
0.2%
0.2%
0.6%
88.4%
0.0%
YoY
Occupancy
Change
0.6%
0.9%
0.3%
0.0%
1.0%
0.6%
0.8%
0.0%
0 6%
0.6%
0.0%
0.6%
0.7%
0.4%
1.1%
0 7%
0.7%
-0.5%
0.6%
0.4%
1.4%
1.0%
0.5%
*Current quarter defined as Q4 2013
**Completions highlighted in Red if above 0.25% of Stock
***Under Construction highlighted in Red if above 1% of Stock
****Green if above city’s historical average since 1990
NOTE: Above data includes only Warehouse’s; does NOT include other industrial buildings
NOTE The
NOTE:
Th markets
k t in
i the
th above
b
chart
h t are nott necessarily
il MSA
MSAs or central
t l cities,
iti
b
butt are lloosely
l d
defined
fi d reall estate
t t markets.
k t
Source: Reis, Inc.; CoStar; RCLCO
28
RCLCO Real Estate Chart Book | March 2014
QoQ Rent
Growth
1.3%
0.0%
0.2%
0.0%
1.3%
0.8%
0.9%
0.9%
0 9%
0.9%
-0.6%
0.7%
0.9%
0.3%
1.1%
0 3%
0.3%
1.5%
1.0%
-0.1%
0.5%
0.3%
0.5%
YoY Rent
Growth
2.9%
1.3%
0.6%
0.9%
2.9%
2.5%
1.8%
1.8%
4 2%
4.2%
1.2%
2.7%
3.2%
1.6%
2.4%
1 2%
1.2%
2.1%
4.3%
0.1%
1.4%
1.5%
1.6%
Industrial Pricing
g and Growth Expectations
p
Pricing varies significantly by market, with cap rates below 6% on
average in port-oriented markets such as Los Angeles and Miami.
The graph below shows average cap rates and average expected NOI
growth for the next five years, including expected improvements in
occupancies and rents. West Coast cap rates are generally lower, but
are not always accompanied by higher expected cash flow growth.
Pricing in the big five distribution markets (ATL, DAL, NNJ, CHI, and
RIV) is split, with Riverside and Northern New Jersey at low cap rates
and the other three moderately priced.
Industrial Price + Growth
12%
Price + Growth
10%
8%
6%
4%
2%
0%
Average Cap Rate
Average Annual NOI Growth (2014 - 2018)
Initial yield and cash flow growth over the hold period are significant contributors to unlevered total return expectations. Low cap rates should thus be accompanied
by higher growth expectations. While the above graph is an incomplete view, it does provide some indications of markets that should be particularly reviewed for
further insights. For example, markets with low bars in the graph above may have less growth than needed to offset lower yields, or the growth may be more backended in a 10-year hold. Conversely, markets with high bars may be positioned to experience significant growth as compared to current pricing, or may be markets
that are considered to be more risky and thus justify higher expected returns.
NOTE: The markets in the above chart are not necessarily MSAs or central cities
cities, but are loosely defined real estate markets.
markets
Source: Reis, Inc.; CBRE; RCLCO
29
RCLCO Real Estate Chart Book | March 2014
Economic and Capital Market Backdrop
30
RCLCO Real Estate Chart Book | March 2014
Widespread
p
Economic Growth
Our economic Hot Spot map measures short-term historic and forecast
economic and job growth as well as structural factors such as income
and the proportion and growth of the working population. Economic
growth is currently widespread, with particularly high growth in
Source: BLS; RCLCO
31
RCLCO Real Estate Chart Book | March 2014
technology and energy markets. Parts of the Midwest and Northeast
are still struggling, although markets such as Minneapolis, Indianapolis
and Nashville rank highly.
Interest Rates and Inflation Remain Subdued
10-year treasury yields continue to remain just under 3% and
approximately 100 bp higher than the low in mid 2013. Both actual
and expected inflation remain low, which combined with recent slowing
in the housing market are giving the Fed some room to delay monetary
tightening. While unemployment fell to 6.6% in January, labor force
participation rates are 300 bp lower than in 2007. Our estimates
indicate another 50 to 100 bps+ increase in 10-year treasury yields is
likely just to return to normalized real rates. The question is when and
how quickly this will happen. Cap rates are expected to be less volatile,
and are unlikely to face significant pressure until treasury yields
surpass 3.5%.
Nominal Interest Rates and Inflation
2000-2013
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
3 Mo. LIBOR
Source: BLS; Federal Reserve, www.fedprimerate.com; RCLCO
32
RCLCO Real Estate Chart Book | March 2014
CPI
10 Yr. Treasury
Expected Inflation
Lending
g Standards Easing
g
Banks continue to loosen commercial real estate lending
standards following improving occupancy and rental rates.
Net % of Banks Tightening Lending Standards
100%
80%
60%
40%
20%
0%
-20%
-40%
Source: Federal Reserve; RCLCO
33
RCLCO Real Estate Chart Book | March 2014
Lending
g Improving,
p
g, but Lagging
gg g the Improvement
p
in Property
p y Values
Net lending volumes are rising as property values improve.
Despite the recent rise in interest rates, we expect lending to continue
to increase as a result of improving occupancy and rental rates which
should help boost prices and sales volumes.
Commercial Net Debt Investment and Values
$400
30%
Net Debtt Investment (in b
billions)
18%
$200
12%
$
$100
6%
0%
$0
(6%)
$100
-$100
(12%)
-$200
(18%)
-$300
-$400
1986
(24%)
(30%)
1989
1992
1995
1998
2001
Net Debt Investment - Commercial / MF RE (L)
Source: Federal Reserve; NCREIF; RCLCO
34
RCLCO Real Estate Chart Book | March 2014
2004
2007
Commercial RE Values (R)
2010
2013
% Change in Commercial R
RE Values
24%
$300
Deleveraging
g g has Ended
In 2009 to 2012, more loans were issued than matured. The trend is
finally reversing in 2013. GSEs, including Fannie Mae and Freddie
Mac, public debt markets, banks and life insurance companies, are net
positive lenders.
U S Commercial RE Debt Markets - Net Capital Flows
U.S.
- Annually 1985 - 2012
U S Commercial RE Debt Markets - Net Capital
U.S.
Flows - Quarterly
$80
$400
$60
$300
$40
$ in
n billions
$ in b
billions
$200
$100
$0
$20
$0
-$20
-$40
-$100
-$60
-$200
Q1 2008
Q2 2008
Q3 2008
Q4 2008
Q1 2009
Q2 2009
Q3 2009
Q4 2009
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
-$80
-$300
CMBS
U
Unsecured
d REIT D
Debt
b
U
Unsecured
d REIT D
Debt
b
Commercial Banks/Savings Life Insurance Companies
Commercial Banks/Savings Life Insurance Companies
Pension Funds
Pension Funds
Other
GSEs
*2013
2013 is through Q3
Source: Federal Reserve; NAREIT; RCLCO
35
CMBS
RCLCO Real Estate Chart Book | March 2014
GSEs
Other
Fundraising
g in Domestic and Higher
g
Risk Vehicles
Capital Concentrated with Private Equity Managers
United States RE Fundraising
200
120
90%
100
70%
60%
50%
40%
150
80
100
60
40
$ in billions
80%
No. of Funds
Perc
cent of Capital Rais
sed/
Under Managementt
U
100%
50
30%
20
20%
10%
0
0
0%
2008
Real Estate Managers
Private Equity
2012
REITs
Investment Banks
No. of Funds
Dry Powder by Region*
International (Non-U.S.) RE Fundraising
$200
s
No. of Funds
$ in billions
$150
$100
$50
$0
Europe
Rest of World
US
*Private
Private equity cash reserves held to fund future obligations
Source: Preqin; RCLCO
36
RCLCO Real Estate Chart Book | March 2014
Aggregate Capital Raised ($bn)
200
180
160
140
120
100
80
60
40
20
0
45
40
35
30
25
20
15
10
5
0
No. of Funds
Aggregate Capital Raised ($bn)
$ in billions
2004*
REIT Offerings
g At All-Time High
g
REIT capital raising reached an all-time high in 2013, surpassing
even 2012 levels, with a noticeable rise in IPOs. Prices overall came
close to reaching the all-time high, but are now recovering from the
summer downturn which occurred in conjunction with a fast rise in
treasuries. Nevertheless, some REITs are currently trading at all-time
high prices.
U.S. Historical REIT Offerings
90,000
U.S. REIT Market
12%
700
80,000
600
10%
70,000
500
60,000
8%
400
50,000
6%
40,000
300
30,000
4%
200
20,000
2%
100
10,000
0
0%
IPO
Secondary Equity
Unsecured Debt
Secured Debt
Preferred Equity
Source: SNL; NAREIT; RCLCO
37
RCLCO Real Estate Chart Book | March 2014
0
Dividend Yield (L)
10 Yr Treasury (L)
Price Index (R)
CMBS Market Slowly
y Recovers
The CMBS market continues to recover, albeit slowly, with
improvements in both issuance and pricing. After spiking in the
summer, CMBS spreads have moved downward again, reflecting
generally positive property fundamentals. CMBS issuance is expected
to approach $90 million in 2014.
U.S. CMBS Spread to Treasuries
U.S. CMBS Issuance
250
900
800
200
700
$ in billions
600
150
500
400
100
300
200
50
100
10yr Sr AAA
Source: CRE Finance Council; JP Morgan; ULI; RCLCO
38
RCLCO Real Estate Chart Book | March 2014
AA
A
BBB+
BBB
BBB-
01/07//14
11/07//13
09/07//13
07/07//13
05/07//13
03/07//13
01/07//13
11/07//12
09/07//12
07/07//12
05/07//12
03/07//12
01/07//12
11/07//11
09/07//11
07/07//11
05/07//11
03/07//11
0
01/07//11
0
Retail Leads Returns
Hotels, not surprisingly, were the hardest-hit sector during the
downturn of 2008-2009, but perhaps the most surprising asset
class is retail, having not dropped as precipitously during the
downturn and maintaining solid growth during the rebound. This
is primarily a reflection of Class A malls in the database.
NCREIF Total Returns
35%
25%
15%
5%
-5%
-15%
-25%
25%
Hotel
Source: NCREIF; RCLCO
39
RCLCO Real Estate Chart Book | March 2014
Apartment
Retail
Industrial
Office
Price Recovery
y Focused in Major
j Markets
While major markets have consistently sold at a premium to nonmajor markets since the turn of the cycle, most of the
outperformance occurred right before and after the downturn.
Secondary market prices have been moving in line with the major
markets since late 2011, evidence of investor higher risk tolerance and
willingness to undertake leasing risk as the markets improve.
Moody's/RCA CPPI Index
Moody's/RCA CPPI Index
225
4%
200
2%
QoQ Grow
wth
175
150
0%
-2%
125
-4%
100
75
-6%
National All-Property
Major Markets
Non-Major Markets
Source: RCA; Moody’s Analytics; RCLCO
40
RCLCO Real Estate Chart Book | March 2014
Major Markets
Non-Major Markets
RCLCO
233 Wilshire Blvd.
Suite 370
Santa Monica, CA 90401
Phone: (310) 914-1800
Fax: (310) 914-1810
www.rclco.com

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