Looking Back, Looking Ahead 2011 National Overview Presentation to Lambda Alpha Mary Ludgin, PhD Heitman January 19, 2011
Job Creation Poised to Accelerate Historical and Forecast Employment Growth U.S. 2005-2011 jobs gained/lost % change jobs gained/lost month-over-month 400,000 forecast 3.0% 300,000 Optimistic Case 200,000 1.0% 100,000 0 -100,000 Mild Second -1.0% Recession -200,000 Scenario -300,000 -3.0% -400,000 -500,000 -5.0% -600,000 -700,000 -800,000 -7.0% J M A M J J A O N D J M A M J J A O N D J M A M J J A O N D J M A M J J A O N D J M A M J J A O N D J M A M J J A O N D J M A M J J A O N D F S F S F S F S F S F S F S 2005 2006 2007 2008 2009 2010 2011 Source: Bureau of Labor Statistics; Economy.com; Heitman Research 2
Texas Markets Leading; Chicago Not Far Behind Job Growth by Metropolitan Area Q3 2010-Q3 2011 Seattle 0.9% Virginia Beach 0.9% St. Louis 0.9% Raleigh 1.9% Birmingham 0.8% Jacksonville 1.8% Los Angeles 0.8% Chicago 1.7% Charlotte 0.8% Minneapolis-St. Paul 1.6% Hartford 0.7% Houston 3.0% Providence 1.5% San Jose 0.7% Kansas City 0.4% Orlando 2.8% Portland 1.5% Buffalo 0.6% Philadelphia 0.4% San Antonio 2.8% Memphis 1.4% Riverside 0.6% Milwaukee 0.4% Las Vegas 2.6% Louisville 1.4% Boston 0.6% San Diego 0.3% Tampa-St. Pete 2.4% New Orleans 1.3% Pittsburgh 0.6% Baltimore 0.2% Austin 2.4% Washington, DC 1.1% Cincinnati 0.6% San Francisco 0.2% Oklahoma City 2.2% Miami-Ft. Lauderdale 1.1% Indianapolis 0.5% Cleveland 0.1% Dallas-Ft. Worth 2.1% Salt Lake City 1.0% Columbus 0.5% Detroit 0.1% Nashville 2.0% Atlanta 1.0% New York 0.5% Sacramento 0.0% U.S. 2.0% Denver 1.0% Richmond 0.5% Phoenix -0.2% 2% + 1.0% - 1.9% 0.5% - 0.9% < 0.5% Source: Moody's Economy.com; Heitman Research 3
That Relationship Holds Over Five-Year Forecast Job Growth by Metropolitan Area Q3 2010-Q3 2015 Raleigh 2.9% Chicago 2.6% Denver 2.0% Jacksonville 2.6% San Diego 2.0% Tampa-St. Pete 2.5% San Jose 1.9% Birmingham 2.5% Los Angeles 1.9% Minneapolis-St. Paul 2.5% Washington, DC 1.9% Louisville 2.4% Sacramento 1.9% Providence 2.4% New York 1.9% Portland 2.4% San Francisco 1.9% Phoenix 2.3% Philadelphia 1.8% New Orleans 2.3% Kansas City 1.8% Miami-Ft. Lauderdale 2.2% Columbus 1.8% Austin 3.7% Salt Lake City 2.2% St. Louis 1.8% Milwaukee 1.6% Las Vegas 3.5% Riverside 2.2% Charlotte 1.8% Cincinnati 1.6% Atlanta 3.4% Nashville 2.2% Pittsburgh 1.8% Cleveland 1.6% San Antonio 3.4% Oklahoma City 2.2% Virginia Beach 1.8% Boston 1.6% Houston 3.3% U.S. 2.1% Indianapolis 1.8% Baltimore 1.5% Dallas-Ft. Worth 3.1% Seattle 2.1% Richmond 1.8% Hartford 1.4% Orlando 3.0% Memphis 2.1% Buffalo 1.8% Detroit 1.2% 3% + 2.1%-2.9% 1.8%-2.0% < 1.8% Source: Moody's Economy.com; Heitman Research 4
We’ve Made Some Progress on Deleveraging Consumer Debt-to-Asset Ratio and Debt-Service Burden U.S. 1980 Q1-2010 Q3 25.0 % 15.0 % 14.0 Debt-Service Burden 20.0 Right Axis 13.0 15.0 12.0 Debt-To-Asset Ratio Left Axis 11.0 10.0 10.0 5.0 9.0 0.0 8.0 1980Q1 1980Q4 1981Q3 1982Q2 1983Q1 1983Q4 1984Q3 1985Q2 1986Q1 1986Q4 1987Q3 1988Q2 1989Q1 1989Q4 1990Q3 1991Q2 1992Q1 1992Q4 1993Q3 1994Q2 1995Q1 1995Q4 1996Q3 1997Q2 1998Q1 1998Q4 1999Q3 2000Q2 2001Q1 2001Q4 2002Q3 2003Q2 2004Q1 2004Q4 2005Q3 2006Q2 2007Q1 2007Q4 2008Q3 2009Q2 2010Q1 Source: Economy.com; Heitman Research 5
But Interest Rates Will Rise with Faster Growth Ten-Year Treasury Yield U.S. 1990-2012 forecast 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Source: Economy.com; Heitman Research 6
Cap Rates Back Down For Now Current Value Cap Rates U.S. 1993-2010 (Q3) 10.0% 9.0% 8.0% Industrial 7.0% Retail 6.0% Office 5.0% 4.0% Apartments 3.0% 2.0% 1.0% 0.0% 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: NCREIF; Heitman Research Current value cap rates are derived from those NCREIF properties valued during a quarter 7
The Mixed Picture on Debt Commercial Mortgage Flows By Issuer 2000-2010 Q3 175.0 $s billions Banks & Savings Institutions ABS Issuers 125.0 Life Companies Government-Sponsored Entities Other 75.0 25.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Q3 (25.0) (75.0) (125.0) (175.0) Source: Federal Reserve Board; Heitman Research. Fraction-year numbers are seasonally adjusted annual rates. 8
Transactions Happening Again; More to Come Commercial Property Transaction Volume U.S. 2001-2010 Commercial Property Transaction Volume Billions of Dollars in Gross Transaction Volume Billions of Dollars in Gross Transaction Volume $550 502.6 $500 $450 $400 351.6 $350 305.9 $300 $250 208.8 $200 144.5 $150 123.9 116.0 116.0 101.8 $100 79.5 54.6 $50 $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Real Capital Analytics; Heitman Research 9
Vacancy Has Peaked Across All Sectors Vacancy Rates by Property Type U.S. 1990-2010 (Q3) 20.0% 18.0% 16.6% 16.0% 14.0% Office 14.0% Industrial 12.0% 10.2% 10.0% Apartment 8.0% 6.6% 6.0% Retail 4.0% 2.0% 0.0% 1 2341 234 1234 12 3 41 23 412 3412 34 123 41 23 4 12 34123 41 2341 234 12 34 1234123 412 34 12 3412341234123 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: CBRE Econometric Advisors; NCREIF; Axiometrics; CoStar; Heitman Research. The apartment series reflects NCREIF data through 1996Q1 and Axiometrics data thereafter. The retail series reflects NCREIF data through 2006Q1 and CoStar data thereafter. The industrial series reflects the availability rate rather than the vacancy rate. 10
But NOI A Different Story NOI Index By Property Type 1993-2010 180.0 Apartment 1993 Q3 = 100 170.0 Retail 160.0 Office 150.0 140.0 Industrial 130.0 120.0 110.0 100.0 90.0 19933 19941 19943 19951 19953 19961 19963 19971 19973 19981 19983 19991 19993 20001 20003 20011 20013 20021 20023 20031 20033 20041 20043 20051 20053 20061 20063 20071 20073 20081 20083 20091 20093 20101 20103 Source: National Council of Real Estate Investment Fiduciaries; Heitman Research 11
Apartments Leading the Recovery Apartment Effective Rent vs. Occupancy U.S. April 2008-November 2010 $980 94.0% Effective Rent Up 6.0% from bottom $970 93.6% 6.6% annualized $970 93.5% 93.3% Occupancy $960 $957 (right axis) 93.0% Effective Rent (left axis) $950 92.5% $940 92.0% $930 91.6% 91.5% $920 91.0% $910 $903 $900 90.5% Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Source: Axiometrics Research; Heitman Research 12
Solid Improvement Relative to 2009 Apartment Effective Rent vs. Vacancy U.S. 1996-2010 (Q3) 9.0% Average Vacancy (%) 7.0% 5.0% 3.0% 1.0% 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 -1.0% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -3.0% -5.0% Effective Rent (% change from -7.0% four quarters prior) Source: Axiometrics; Heitman Research 13
U.S. Demographic Landscape Favors Apts Annual Change in the Age Group Most LIkely to Rent Apartments 1995-2030 800,000 Year-Over-Year Growth/Decline in Population Aged 25-34 600,000 400,000 200,000 0 -200,000 -400,000 -600,000 -800,000 -1,000,000 Source: U.S. Bureau of the Census; Heitman Research 14
Demographics/Economics Favor Student Housing Too College Enrollment Rates and Employment Growth U.S. Universities’ Full -Time Students 18 to 24 Years Old 30.0% 6.0% Enrollment Rate Employment Growth (In blue/red) (In gold) 5.0% Recessions in Red 25.0% 4.0% 20.0% 3.0% 2.0% 15.0% 1.0% 10.0% 0.0% -1.0% 5.0% -2.0% 0.0% -3.0% 2002 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2004 Source: National Center for Education Statistics, U.S. Census Bureau, Economy.com; Heitman Research 15
Industrial Vacancy Has Peaked Industrial Completions, Net Absorption, and Availability U.S. 1990-2013 Years Ending Q3 sf x1,000 forecast 300,000 16.0 14.1 14.0 14.0 200,000 13.4 13.5 11.6 12.0 11.2 12.4 10.7 11.0 10.1 10.2 100,000 10.7 9.6 10.6 10.0 9.4 8.9 9.5 9.1 8.0 7.7 7.9 7.5 0 8.0 7.5 6.6 6.0 Completions -100,000 Net Absorption Availability Rate 4.0 CBRE-EA Base CaseAvailability Forecast -200,000 CBRE-EA Downside Availability Forecast 2.0 CBRE-EA Upside Availability Forecast Availability Rate (%) -300,000 0.0 Source: CBRE Econometric Advisors; Heitman Research 16
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