Commercial Real Estate Market Overview October 10, 2014 Applied Research USA Realty Advisors, LLC Apartments: Will New Supply Tip the Balance? Since the beginning of the 2010 recovery, employment and overall economic growth positively affected apartment demand and net absorption. Apartment rents picked up quickly after the last recession and did not begin to atten until construction accelerated in 2013. Since 2010 asking rents increased 17.5%. CoStar Portfolio Strategy, 2014 Q2 Not adjusted for ination RERC, 2014 Q2 Deliveries for the rst two quarters of 2014 have already surpassed the level from a year ago by 43% - the highest level since records began in 1994. According to CoStar, new supply is anticipated to add over 100,000 units for the second half of 2014 and a combined 350,000 units between 2015 and 2016. Markets with the highest expected 2014 completions include Dallas, Washington DC, Austin, Houston and Denver. During the rst half of the year, construction exceeded absorption by 1.71 to 1. These new apartment units provided relief to undersupplied, high-growth markets, including the 6 major metropolitan areas*, where sales prices are now 32% above the 2007 peak. In contrast, apartment sales prices in non-major metropolitan areas are just 5% above the 2007 peak. According to recent data, apartment properties across the U.S. continue to perform well. The vacancy rate decreased 220 basis points since the beginning of the recovery and effective rents increased 2.8% from a year ago. The national apartment rent index posted 4.2% compound annual rent growth from the start of 2010. However, because of the rapidly growing supply pipeline, vacancies may rise, and rent growth may slow. Cap rate compression is more pronounced for apartments than other property types, frequently striking new all-time lows since 2011. Rising interest rates and new construction levels may introduce some resistance to further cap rate compression in coming years. *Major metros include New York City, Los Angeles, Chicago, San Francisco, Boston and Washington DC Copyright © 2014 AEGON USA Realty Advisors, LLC www.aegonrealty.com 1 Commercial Real Estate Market Overview October 10, 2014 Applied Research USA Realty Advisors, LLC OFFICE The office vacancy rate fell to 11.6% in 2014 Q2, down from 12.0% a year ago. CBD office prices are 8.8% higher than the 2007 peak. Suburban properties are 20% below the 2007 peak (Moody’s CPPI Report, September 2014). Norfolk and San Francisco were the top performing markets in the rst half of 2014. Transaction volume tripled from a year ago and asking rent was up 20% (Real Capital Analytics, Office Mid-Year Review, July 2014). Annual Data, 2014 forecasted to year end CoStar Portfolio Strategy, 2014 Q2 Top And Bottom Trending Markets (Year Over Year) Vacancy Rent ($/SF) Leaders* Norfolk San Francisco Seattle Memphis Sacramento 13Q2 12.7% 9.5% 10.5% 13.1% 15.4% 14Q2 11.2% 8.3% 9.5% 12.2% 14.5% CHANGE -1.5% -1.2% -1.0% -0.9% -0.9% 13Q2 $31.16 $26.41 $26.23 $19.60 $14.06 14Q2 $33.58 $27.67 $27.24 $20.31 $14.48 CHANGE 7.8% 4.8% 3.9% 3.6% 3.0% Laggards** Oklahoma City 8.0% 8.1% 0.1% $16.07 $15.91 -1.0% MSA Count Based on Vacancy Favorable Vacancy Trend: Unfavorable Vacancy Trend: Neutral Vacancy Trend Total MSAs: MSA Count Based on Rent 42 11 1 54 Rent Growth Above 0%: Rent Growth Below 0%: Neutral Rent: Total MSAs: CoStar Portfolio Strategy, 2014 Q2 *Leaders have a favorable vacancy trend and rent growth of 3% or higher. **Laggards have an unfavorable vacancy trend and rent growth of 0% or lower. Copyright © 2014 AEGON USA Realty Advisors, LLC www.aegonrealty.com 2 50 3 1 54 Commercial Real Estate Market Overview October 10, 2014 Applied Research USA Realty Advisors, LLC APARTMENT Apartment vacancy increased to 5.5% in 2014 Q2, up from 5.3% a year ago (CoStar). Sales volume for apartment properties increased 39% from a year ago with secondary and tertiary markets experiencing the greatest growth (RCA Apartment Month in Review, September 2014). For 2014 Q2, apartment cap rates decreased to 5.1%, down from 5.5% a year ago. Annual Data, 2014 forecasted to year end CoStar Portfolio Strategy, 2014 Q2 Top And Bottom Trending Markets (Year Over Year) Vacancy Rent ($/Unit) Leaders* Sacramento Atlanta San Diego Portland Houston 13Q2 5.6% 8.7% 2.7% 5.2% 6.6% 14Q2 4.5% 7.9% 2.4% 4.9% 6.4% CHANGE -1.1% -0.8% -0.3% -0.3% -0.2% 13Q2 $973 $752 $1,608 $859 $889 14Q2 $1,005 $789 $1,658 $901 $925 CHANGE 3.4% 4.9% 3.1% 4.8% 4.0% Laggards** Stamford 6.1% 6.2% 0.1% $1,792 $1,756 -2.0% MSA Count Based on Vacancy Favorable Vacancy Trend: Unfavorable Vacancy Trend: Neutral Vacancy Trend Total MSAs: MSA Count Based on Rent 35 14 5 54 Rent Growth Above 0%: Rent Growth Below 0%: Neutral Rent: Total MSAs: CoStar Portfolio Strategy, 2014 Q2 *Leaders have a favorable vacancy trend and rent growth of 3% or higher. **Laggards have an unfavorable vacancy trend and rent growth of 0% or lower. Copyright © 2014 AEGON USA Realty Advisors, LLC www.aegonrealty.com 3 53 1 0 54 Commercial Real Estate Market Overview October 10, 2014 Applied Research USA Realty Advisors, LLC INDUSTRIAL The industrial vacancy rate dropped to 7.2% in 2014 Q2, down from 8.0% a year ago. Absorption continues to outpace new construction. Industrial property prices are up 20% from last year, but 9.7% below the 2007 peak levels. Price growth in tertiary markets in the Midwest have outperform other regions, except for San Francisco and Manhattan. Warehouse facilites continue to outperform ex. Warehouse prices are up 6% from a year ago, compared to 1% for ex properties (Real Capital Analytics, Industrial Month in Review, August 2014). Annual Data, 2014 forecasted to year end CoStar Portfolio Strategy, 2014 Q2 Top And Bottom Trending Markets (Year Over Year) Vacancy Leaders* Denver Dallas Columbus San Francisco Richmond Laggards** Hartford Rent ($/SF) 13Q2 5.6% 7.9% 9.2% 5.6% 10.6% 14Q2 3.4% 5.7% 7.0% 3.5% 8.7% CHANGE -2.2% -2.2% -2.2% -2.1% -1.9% 13Q2 $5.00 $3.94 $3.02 $9.70 $3.09 14Q2 $5.82 $4.20 $3.11 $10.93 $3.55 CHANGE 16.4% 6.6% 3.0% 12.7% 14.9% 8.3% 9.7% 1.4% $4.37 $4.17 -4.6% MSA Count Based on Vacancy Favorable Vacancy Trend: Unfavorable Vacancy Trend: Neutral Vacancy Trend Total MSAs: MSA Count Based on Rent 47 5 2 54 Rent Growth Above 0%: Rent Growth Below 0%: Neutral Rent: Total MSAs: CoStar Portfolio Strategy, 2014 Q2 *Leaders have a favorable vacancy trend and rent growth of 3% or higher. **Laggards have an unfavorable vacancy trend and rent growth of 0% or lower. Copyright © 2014 AEGON USA Realty Advisors, LLC www.aegonrealty.com 4 45 8 1 54 Commercial Real Estate Market Overview October 10, 2014 Applied Research USA Realty Advisors, LLC RETAIL Retail vacancy decreased to 6.6% in 2014 Q2, down from 6.9% a year ago. In the second quarter net completions were 8.2 million square feet, down 19.5% from 2014 Q1. Retail property sales in July decrease 15% from a year ago according to Real Capital Analytics. As of the second quarter, retail property prices in major metropolitan areas1 are 1% below the 2007 peak; and retail prices in non-major metropolitan areas are 24% below the 2007 peak (Moody’s CPPI Report, September 2014). 1 Annual Data, 2014 forecasted to year end CoStar Portfolio Strategy, 2014 Q2 Major Metros: New York City, Los Angeles, Chicago, San Francisco, Boston and Washington DC. Top And Bottom Trending Markets (Year Over Year) Vacancy Rent ($/SF) Leaders* San Jose Houston Nashville Denver Fort Lauderdale 13Q2 4.9% 6.6% 7.9% 6.6% 7.2% 14Q2 4.0% 5.9% 7.4% 6.1% 6.7% CHANGE -0.9% -0.7% -0.5% -0.5% -0.5% 13Q2 $26.87 $14.49 $13.35 $14.76 $18.21 14Q2 $28.09 $14.98 $13.91 $15.29 $19.10 CHANGE 4.5% 3.4% 4.2% 3.6% 4.9% Laggards** Salt Lake City Seattle 4.1% 5.7% 4.5% 5.8% 0.4% 0.1% $13.29 $17.56 $13.06 $17.49 -1.7% -0.4% MSA Count Based on Vacancy Favorable Vacancy Trend: Unfavorable Vacancy Trend: Neutral Vacancy Trend Total MSAs: MSA Count Based on Rent 45 4 5 54 Rent Growth Above 0%: Rent Growth Below 0%: Neutral Rent: Total MSAs: CoStar Portfolio Strategy, 2014 Q2 *Leaders have a favorable vacancy trend and rent growth of 3% or higher. **Laggards have an unfavorable vacancy trend and rent growth of 0% or lower. Copyright © 2014 AEGON USA Realty Advisors, LLC www.aegonrealty.com 5 42 12 0 54 Commercial Real Estate Market Overview October 10, 2014 Applied Research USA Realty Advisors, LLC CMBS DELINQUENCY The percentage of loans seriously delinquent* was 5.3% in August 20141, down from 7.0% a year ago. The percentage of loans seriously delinquent peaked at 9.2% in July 2012. Industrial continues to experience the highest delinquency rate, but was the most improved sector in August, declining 3.1% from a year ago. The lodging sector wasn’t far behind, improving 2.9% from a year ago. *Loans 60+ days delinquent, in foreclosure, REO, or non-performing Seriously delinquent percentage may not match Trepp’s monthly report. 1 60-DAY DELINQUENCY RATES Trepp, September 30, 2014 August ‘12 August ‘13 August ‘14 9.9% 8.8% 6.5% 11.3% 10.7% 7.5% 7.5% 6.2% 5.7% Office Industrial Retail Apartment Lodging Total 9.3% 5.9% 4.2% 11.9% 7.8% 4.9% 8.9% 7.0% 5.3% HIGHEST AND LOWEST DELINQUENCY RATES by MSA ($ Balance in millions, includes Apartment, Retail, Industrial, and Office, top 50 MSAs, data as of September 2014) Highest Delinquent Balance 60+ Days $313 11.2% Salt Lake City, UT Delinquent Balance 60+Days $6 0.3% $1,307 10.7% Portland, OR $18 0.6% Jacksonville, FL $243 10.6% San Jose, CA $30 0.7% Cleveland, OH $297 10.5% Austin, TX $38 0.7% Detroit, MI $601 10.4% Seattle, WA $69 0.9% Las Vegas, NV $688 9.9% San Antonio, TX $50 1.3% Buffalo, NY $119 9.8% Oklahoma City, OK $22 1.5% Sacramento, CA $319 9.1% Rochester, NY $21 1.7% Riverside, CA $454 8.6% San Diego, CA $135 1.8% Orlando, CA $319 8.2% Dallas, TX $300 1.9% Cincinnati, OH Atlanta, GA Copyright © 2014 AEGON USA Realty Advisors, LLC www.aegonrealty.com Lowest 6 Commercial Real Estate Market Overview October 10, 2014 Applied Research USA Realty Advisors, LLC TRANSACTION VOLUME Sales of commercial real estate totaled $94.4 billion in 2014 Q2, up 26% from last year. The industrial sector was the most improved in the 2nd quarter, recording a 36% year-over-year increase in sales volume. Transaction volume for land for developement increased 45% to $28.7 billion from 2013 to present (Real Capital Analytics, Big Picture, July 2014). NUMBER OF PROPERTIES SOLD Office Real Capital Analytics, 2014 Q2 2006 Q4 (Peak) 2009 Q1 (Trough) 2014 Q2 1,464 240 987 Industrial 1,476 294 1,288 Apartment 1,821 383 1,653 Retail 1,879 344 1,394 Total 6,640 1,261 5,322 CAP RATES Cap rate compression moderated among all property types from 2014 Q1 - as investors anticipate a rise in interest and rental rates across all properties. The industrial sector had the most cap rate compression in the 1st and 2nd quarters (Real Capital Analytics, Big Picture, July 2014). CAP RATES (RERC) Office RERC, 2014 Q2 Copyright © 2014 AEGON USA Realty Advisors, LLC www.aegonrealty.com 7 2011 Q2 2012 Q2 6.4% 6.2% 2013 Q2 2014 Q2 6.1% 5.7% Industrial 7.0% 6.8% 6.6% 6.1% Apartment 6.0% 5.7% 5.5% 5.1% Retail 7.1% 7.1% 6.7% 6.4% Commercial Real Estate Market Overview October 10, 2014 Applied Research USA Realty Advisors, LLC NCREIF The trailing one-year return for the NCREIF property index (NPI) was 11.9%. The NPI is a measure of unleveraged private equity returns as determined through application of an appraisal-based exit price. Annual rates (appreciation + income) NCREIF, 2014 Q2 EFFECTIVE RENTS For the rst half of the year, all property types experienced effective rent increases from the previous year. Apartment rents have been growing strongly since the start of 2010, but the pace recently started to taper due to new construction. The industrial sector reported the most growth in 2014 Q2, with effective rents 4.6% higher than last year. CoStar Portfolio Strategy, 2014 Q2 Not adjusted for ination Copyright © 2014 AEGON USA Realty Advisors, LLC www.aegonrealty.com 8 Commercial Real Estate Market Overview October 10, 2014 Applied Research USA Realty Advisors, LLC RETAIL SALES Nonstore retail (primarily internet sales) were $119 billion in the second quarter, up 7.3% from a year ago. Retail sales, excluding nonstore, were $1.2 trillion in the second quarter, up 4.2% from a year ago. 12 of 13 major retail categories had a gain in sales in the second quarter from a year ago. Motor Vehicle and Parts Dealers had the largest increase (8.8%) from a year ago; and Sporting Goods, Hobby, Book, Music Stores was the only category (-1.3%) with a year-to-year decrease. NONSTORE SHARE OF RETAIL U.S. Census Bureau, September 12, 2014 CoStar Portfolio Strategy, 2014 Q2 Nonstore (Billions) % of All Retail Sales 1999 Q2 $37 4.9% 2004 Q2 $55 5.9% 2009 Q2 $76 7.5% 2014 Q2 $119 9.0% TROUBLED ASSETS Troubled assets were $65 billion in 2014 Q2, down 57% from the peak in 2010 Q2. Since 2007, $471 billion of commercial mortgages have been troubled. As of 2014 Q2, 75% of those mortgages have been worked out. Quarterly additions to newly troubled assets increased to $5.0 billion in Q2 up from $3.5 billion in 2014 Q1 (Real Capital Analytics, September 2014). An asset is dened as “troubled” when there is a default, bankruptcy, or foreclosure pending, or some kind of lender forbearance or other restructuring of a loan. RCA reports an analysis of distressed loans by troubled status from their research into CRE title records, CMBS, and the RCA proprietary commercial transaction data. Real Capital Analytics, 2014 Q2 Copyright © 2014 AEGON USA Realty Advisors, LLC www.aegonrealty.com 9 Commercial Real Estate Market Overview October 10, 2014 Applied Research USA Realty Advisors, LLC FARMLAND The IMF Commodity Index remains 20% below the July 2008 peak. For 2014 Q2, the energy (-3.5%) and agricultural (-1.6%) indices experienced the largest declines from 2014 Q1 (International Monetary Fund, Commodity Market Monthly, September 11, 2014). Corn prices continue to drop - the U.S. Agriculture Department projected corn production for 2014 to exceed the production from last year by 14 billion bushels (Wall Street Journal, “U.S. Farmers are Up to Their Ears in Corn”, August 17, 2014). USDA, Ag Land Values and Cash Rents Annual Summary, August 2014 International Monetary Fund, Primary Commodity Price Index, September 2014 CONSTRUCTION SPENDING The annualized rate for residential construction spending in August was $352 billion, up 4% from a year ago but 48% lower than the 2006 peak. The annualized rate for non-residential construction spending in August was $333 billion, up 9% from last year but 20% lower than the 2008 peak. U.S. Census Bureau, October 1, 2014 Copyright © 2014 AEGON USA Realty Advisors, LLC www.aegonrealty.com 10 Commercial Real Estate Market Overview October 10, 2014 Applied Research USA Realty Advisors, LLC ORIGINATIONS ORIGINATIONS BY PROPERTY TYPE 2012 Q2 2013 Q2 2014 Q2 Office 8.7% 9.3% 6.6% Industrial 3.7% 3.3% 3.0% Apartment 31.6% 25.3% 17.2% Retail 11.9% 10.7% 7.3% Other* 44.1% 51.4% 66.0% *Other includes hotel and health care ORIGINATIONS BY INVESTOR CLASS Mortgage Bankers Association Quarterly Data Book, 2014 Q2 2011 2012 2013 Life Cos 24.6% 18.2% 19.7% GSEs 28.6% 30.3% 21.4% Comm Bank 25.7% 28.8% 32.8% Conduits 21.1% 22.7% 26.1% Commercial loan originations in 2014 Q2 fell 2% from last year. After a slow rst quarter, CMBS originations were 45% higher in 2014 Q2 than last quarter and 16% higher than 2013 Q2. Fannie Mae and Freddie Mac continue to wind down their portfolios, originating 13% fewer loans than one year ago (Mortgage Bankers Association Data Book, 2014 Q2). LIFE COs ORIGINATIONS (Billions) Mortgage Bankers Association Quarterly Data Book, 2014 Q2 Copyright © 2014 AEGON USA Realty Advisors, LLC www.aegonrealty.com 11 2006 Q2 $7.6 2007 Q2 $6.5 2008 Q2 $4.7 2009 Q2 $2.2 2010 Q2 $5.4 2011 Q2 $10.1 2012 Q2 $11.2 2013 Q2 $12.9 2014 Q2 $11.0 Commercial Real Estate Market Overview October 10, 2014 Applied Research USA Realty Advisors, LLC REPEAT SALES INDICES The Commercial Property Price Index reported by RCA is up 14.0% in August from a year ago and remains 2% below the 2007 peak. The Investment Grade Index reported by CoStar is up 11.3% from a year ago. The index remains 16% below the 2007 peak. The General Commercial segment increased 12% over the past 12 months. The U.S. Composite Index increased 11.9% in July from a year ago, supported by investors interest in secondary and tertiary markets. Real Capital Analytics/Moody’s Investor Service, September 2014 CoStar Commercial Repeat-Sale Indices, September 2014 Commercial Property Price Index - Uses repeat-sale regression analytics to measure price changes in U.S. commercial real estate. U.S. Composite - Entire CRE market U.S. Investment Grade - Class A and B offi ces with 35,000 SF or more, industrial properties with 80,000 SF or more, ex properties with 55,000 SF or more, retail properties with 25,000 SF or more, multifamily properties with 90,000 SF or more, and hotels with 125,000 SF or more. U.S. General Commercial- Represents all other property types. EMPLOYMENT The September unemployment rate was 5.9%; down from 7.2% a year ago. Total non-farm employment was 139.4 million in September, up 248,000 from a month ago and 2.5 million from a year ago. 2014 has averaged 213,000 jobs per month. SIGNIFICANT EMPLOYMENT CHANGES Since February 2010 Trough Bureau of Labor Statistics, Employment Situation, October 3, 2014 Employment gures re ect private and government non-farm jobs Copyright © 2014 AEGON USA Realty Advisors, LLC www.aegonrealty.com 12 Education & Health Services +1,827,000 9.2% Leisure & Hospitality +1,754,000 13.6% Professional Services +1,661,000 9.4% Retail Trade +1,016,000 7.1% Manufacturing +701,000 6.1% Construction +571,000 10.4% Mining & Lodging +254,000 37.7% Finance & Insurance +154,000 2.7% Information +19,000 0.7% Government -557,000 -2.5% Other +1,725,000 +10.6% Total +9,125,000 7.0% Commercial Real Estate Market Overview October 10, 2014 Applied Research USA Realty Advisors, LLC CONSUMER CONFIDENCE The Consumer Condence Index fell in September to 86.0, but is up 7% from a year ago. Consumer condence is at the lowest level since May 2014. The Consumer Sentiment Index rose to 84.6 in September, up from 77.5 one year ago. According to the Consumer Condence Survey, concerns about employment and economic growth are having a negative impact on consumers. Reuters/University of Michigan Consumer Sentiment Index, September 26, 2014 The conference Board Consumer Con dence Index, September 30, 2014 ADDITIONAL OBSERVATIONS Commercial Mortgage Alert, October 3, 2014 - U.S. commercial MBS issuance surged in the third quarter, putting the sector on track to exceed last year’s total, although activity is still likely to fall shy of the $100 billion mark. Some $28 billion of CMBS priced in the U.S. from July to September, the highest quarterly total since 2007. That far eclipsed the $20.4 billion average in the rst two quarters and lifted nine-month issuance to $68.9 billion. The total was up 14% from a year earlier, reversing an 8% decline in the rst half. Roughly $21 billion of transactions are already in the queue for the fourth quarter. Commercial Mortgage Alert, October 3, 2014 - The volume of commercial MBS loans in special servicing declined in September for a second consecutive month, erasing an upswing in the preceding two months. The net aggregate balance of securitized commercial mortgages in the hands of special servicers was $39.4 billion on Sept. 30, down $1.1 billion from a month earlier. There are now 2,296 loans on the list. The volume of CMBS debt managed by special servicers has been shrinking steadily since February 2012 — except for this past June and July, when it grew by a combined $631 million due to the transfer of several large loans. Commercial Mortgage Alert, September 19, 2014 - Commercial MBS trading in the secondary market picked up sharply this week, as many investors sought to free up cash so they could bid on a wave of fresh paper. More than $1 billion of bonds were put up for grabs on Monday and Tuesday alone, prompting dealers to speculate that the week’s bid-list volume might exceed $1.8 billion. That would mark a big jump from about $800 million last week and the recent average of roughly $1.2 billion per week. Commercial Mortgage Alert, September 12, 2014 - Brushing aside industry concerns, federal regulators have decided that big banks must hold liquid assets against the monthly payments to bondholders in mortgage-backed securitizations. The requirement is part of a nal rule adopted last week aimed at ensuring that large banks keep enough high-quality liquid assets on hand to meet their obligations in case of economic stress. The rule extends to the cash outows of any “special-purpose entities” that issue securities. But representatives of the securitization industry were surprised that no exception was made for term securitizations, such as commercial MBS. Real Estate Alert, July 30, 2014 - After a dip last year, sales of big retail properties jumped to their highest rst-half level since the market peak in 2007, as activity continued to spread beyond top locales. With investor condence in the sector rising and a healthy number of big offerings in the market, retail pros expect a strong nish to the year. Some $10.7 billion of retail properties changed hands from January through June, according to Real Estate Alert’s Deal Database, which tracks sales worth at least $25 million. That was up 23% over the same period last year. The jump came on the heels of the most-active fourth quarter since the database began tracking sales in 2001. Report prepared by: Don Guarino, Bryan Goddard, Will Pattison, Monica Aragon For questions or comments, please contact Will Pattison at [email protected] or 319-355-5432 Copyright © 2014 AEGON USA Realty Advisors, LLC www.aegonrealty.com 13
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