Commercial Real Estate: Steady As It Goes? Presented By: Brian D. - PowerPoint PPT Presentation

Commercial Real Estate: Steady As It Goes? Presented By: Brian D. Bailey, CCIM Subject Matter Expert

The views and opinions expressed are those of the presenter and are not necessarily those of the Federal Reserve Bank of Atlanta or the Board of Governors of the Federal Reserve System.

Agenda 1. Economy 2. Commercial Real Estate Fundamentals 3. Commercial Real Estate Finance Source: Bureau of Economic Analysis, Federal Reserve Bank of Atlanta

CONTRIBUTIONS TO REAL GDP GROWTH Source: BEA, Risk Analysis Unit/Federal Reserve Bank of Atlanta 4

UNEMPLOYMENT RATES Current: 9.5% Current: 9.7% 18 Pre Crisis: 8.4% Pre Crisis: 8.4% 16 14 Unemployment Rate % 12 10 8 6 4 Current: 4.9% 2 Pre Crisis: 4.6% 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 U3 U6 Current: As of 10/2016 Source: Bureau of Labor Statistics, STL FRB FRED 7

JOB GROWTH APRIL 2016 Areas y prices Source: Bureau of Labor Statistics (Household Survey) 12

JOB GROWTH JUNE 2016 13 Source: Bureau of Labor Statistics (Household Survey)

JOB GROWTH SEPTEMBER 2016 Areas that should thrive on low energy prices 36% of the counties experienced negative job growth over the prior 12 months Source: Bureau of Labor Statistics (Household Survey)

SERIOUSLY DELINQUENT MORTGAGES HOME MORTGAGES 90+ PAST DUE AS OF 3Q 2016 Source: McDash Analytics 9

SERIOUSLY DELINQUENT MORTGAGES YEAR-OVER-YEAR CHANGE, HOME MORTGAGES 90+ PAST DUE AS OF 3Q2016 Source: McDash Analytics 10

TOTAL AUTO LOAN DELINQUENCIES AS OF 3Q2016 11 Source: FRBNY Consumer Credit Panel (2016Q3 data)

Total Auto Loan Delinquencies Change in the Last 12 Months Source: FRBNY Consumer Credit Panel (2016Q3 data)

TOTAL AUTO LOAN DELINQUENCIES AS OF 3Q2016 13 • Source: FRBNY Consumer Credit Panel (2016Q3 data)

Total Auto Loan Delinquencies Source: FRBNY Consumer Credit Panel 2016Q3 2010Q1

Economic Expansions 140 120 120 105 Average 93 months 100 92 90 80 73 Average 60 months 58 60 45 39 37 40 24 20 12 0 The longer the cycle lasts, the more risk that generally enters the marketplace 15 Source: National Bureau of Economic Research, Risk Analysis Unit/Federal Reserve Bank of Atlanta

NATIONAL CRE VACANCY RATES 16 Source: AXIOMetrics, CBRE-EA, Risk Analysis Unit/Federal Reserve Bank of Atlanta

MULTIFAMILY OCCUPANCY 12 MONTH CHANGE 17 Source: AXIOMetrics, Risk Analysis Unit/Federal Reserve Bank of Atlanta

MULTIFAMILY EFFECTIVE RENT GROWTH 12 MONTH CHANGE 18 Source: AXIOMetrics, Risk Analysis Unit/Federal Reserve Bank of Atlanta

NEW CONSTRUCTION AS A PERCENT OF STOCK Source: AXIOMetrics; Risk Analysis Unit/FRB Atlanta

Is CRE Overbuilding? Variance from Long-Term Average % of Existing Inventory Source: CBRE-EA/AXIOMetrics/FRB Atlanta Risk Analysis Unit. 20

Why CRE? Technology disruptors are impacting the industry Current Future CRE is generally one of the last sectors to embrace technology. Office densification is having a slow but significant impact. Consumers buying habits continue to shifted by E-Commerce & Virtual Reality . Source: Amazon, Google, Dailydigi.com, various 21

CRE National Lifecycle Mult ifamily High Rent Office Growt h Warehouse in Tight Market Ret ail Rent s Rapidly Rise Toward New Const . New Const ruct ion Cost Feasible Number of Unit s Long Term Average Occupancy Below Inflat ion Rent Growt h Negat ive Rent Growt h Downturn Mature Downturn Recovery Upturn Market , product t ype, locat ion all impact performance. S pecific market s and product t ypes may be at different st ages 22 Source: AXIOMetrics, CBRE-EA, REIS, Mueller, Risk Analysis Unit/Federal Reserve Bank of Atlanta

Foreign Investment in US CRE Continent of Origin (Billions of US $) Billions 4Q Rolling Sum Q3 Data as of 11/1/2016 Source: Real Capital Analytics/FRB Atlanta Risk Analysis Unit. 23

BANK S ENTIMENT Percent of Respondents Reporting Increased Demand for New Loans Underwriting Net Loan Demand Percent of Respondents Tightening • In six of the last eight quarters, a net number of respondents reported tightening underwriting standards on multifamily loans. • After a noteworthy slowdown in 2016Q1; Net Loan Demand appears to be improving in C&D and Nonfarm NonRes Source: Federal Reserve; Risk Analysis Unit/FRB Atlanta

COMMERCIAL REAL ESTATE LOANS LENDING SOURCE MARKET SHARE Source: Real Capital Analytics 25

MAJOR MARKET CRE PRICE INDICES 400 375 350 312 300 250 251 2000 = 100 210 200 150 152 100 50 - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Apartment Office Industrial Retail Suburban Office Major Markets: Boston, Chicago, Los Angeles, New York City, San Francisco, Washington D.C. Source: RCA Analytics, Risk Analysis Unit/Federal Reserve Bank of Atlanta 26

NON-MAJOR MARKET CRE PRICE INDICES 250 223 200 171 157 150 155 2000 = 100 139 100 50 - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Apartment Office Industrial Retail Suburban Office Non-Major Markets: All Markets Except the Majors (Boston, Chicago, Los Angeles, New York City, San Francisco, Washington D.C. ) Source: RCA Analytics, Risk Analysis Unit/Federal Reserve Bank of Atlanta 27

Commercial Real Estate Prices Price Growth Rates 18% 16% 14% 12% 10% 10% Annual Price Growth % 8% 7% 6% 5% 4% 2% 2% 0% RCA Major Markets RCA Non-Majors Markets 1 Year 3 Year 5 Year LT Average 1 Year Price Growth is slowing in both Major and Non-Major Markets Major Markets: Bos, Chi, LA, NYC, SF, Wash DC *RCA indices based on Property Sales > $2.5mm Source: Real Capital Analytics/FRB Atlanta Risk Analysis Unit. 28

Commercial Real Estate Prices Major vs. Non-Major Markets (Cumulative) 95% 100% 93% 80% 72% 70% 59% 60% Major 50% 47% 40% 23% 19% 20% 13% 8% 0% 0% -3% -3% -4% -20% Apartment Office Industrial Retail Suburban Office 94% 100% 80% 73% Non-Major 60% 60% 51% 51% 36% 40% 20% 10% 5% 4% 3% 3% 3% 0% -13% -1% -10% -20% Apartment Office Industrial Retail Suburban Office 1 Year 3 Year 5 Year From Pre-Downturn Peak *on Property Sales > $2.5mm Source: Real Capital Analytics/FRB Atlanta Risk Analysis Unit. 29

SUMMARY -Slowing for the Apartment Sector and sporadic Hotel markets -Declining vacancy combined with limited near-term new supply appears to indicate continued robust rent growth on the horizon for the Office and Industrial Sectors. -The amounts of future new supply in some asset classes may be impacted by the evolution of technology and the changing uses of CRE. Greater space efficiency may translate to less need for new supply in certain sectors. -As conditions improve, and in some cases deteriorate, more risk will continue to enter the marketplace. -Future refinancing risk continues to grow as some property sectors underperform and others experience outperforming dynamics. 30