RENTAL HOUSING IN THE ‘ROARING ‘20S’ ULI Fall Meeting / CDC Blue October 25, 2017 Taylor Mammen, Managing Director
MACROECONOMIC & CAPITAL MARKETS OVERVIEW
EMPLOYMENT SENDS MIXED SIGNALS Job growth is positive but wages continue uneven recovery U.S. Employment Growth vs. Quarterly Wage Growth 2006-Q2 2017 1,000 1.20% 500 1.00% 0 0.80% -500 (in 000's) 0.60% -1,000 0.40% -1,500 0.20% -2,000 -2,500 0.00% Employment Growth (000s) Wage Growth Source: Moody’s Economy.com; St. Louis Federal Reserve; RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 3
HOUSEHOLD FORMATION IS STRONG The liberation from parents’ basements continues U.S. Household Formation 2000-Q2 2017 500 400 300 (in 000's) 200 100 0 -100 -200 Source: Moody’s Economy.com; RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 4
PER CAPITA SPENDING GROWING STEADILY Real per capital spending is now 9% above 2007 peak Quarterly Personal Consumption Expenditures per Capita 1990-2017 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Real PCE per Capita* Nominal PCE per Capita *Chained 2009 Dollars Source: St. Louis Federal Reserve; RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 5
REAL ESTATE EQUITY IS ABUNDANT Plentiful “dry powder,” but fundraising may be moderating Dry Powder by Region* United States RE Fundraising 250 120 300 100 200 No. of Funds 80 $ in billions 150 60 250 100 40 50 20 200 0 0 $ in billions 150 No. of Funds Capital Raised ($bn) International (Non-U.S.) RE Fundraising 100 200 50 40 150 No. of Funds $ in billions 30 50 100 20 50 10 0 0 0 Europe Rest of World North America No. of Funds Capital Raised ($bn) *Private equity cash reserves held to fund future obligations Source: Preqin; RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 6
STILL PLENTY OF OFFSHORE CAPITAL 2017 foreign capital transactions close to 2016 pace Offshore Capital in United States ($ in Billions) $120 3,500 3,000 $100 2,500 $80 Offshore Capital 2,000 Properties $60 1,500 $40 1,000 $20 500 $0 - Volume ($ in Billions) Properties Source: RCA; RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 7
REAL ESTATE DEBT SEEMS ABUNDANT, ALSO Overall, debt markets are active thanks to commercial banks & GSEs U.S. Commercial RE Debt Markets - Net Capital U.S. Commercial RE Debt Markets - Net Capital Flows - Annually 1985 - 2016 Flows - Quarterly $100 $400 $80 $300 $60 $200 $40 $ in billions $100 $20 $ in billions $0 $0 ($20) ($100) ($40) ($200) ($60) ($80) ($300) Note: Federal Reserve Data releases lag by one quarter. As of Q2 2017, the most recent data is as of Q1 2017. Source: U.S. Federal Reserve; National Association of Real Estate Investment Trusts (NAREIT); RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 8
BUT STANDARDS MAY BE TIGHTENING Continued post-recession challenge to finance anything with risk Net % of Banks Tightening Lending Standards 100% 80% 60% 40% 20% 0% (20%) (40%) Note: As of Q4 2013, the U.S. Federal Reserve separated this data into three categories (construction/development, nonfarm nonresidential, and multifamily residential), depending on the type of structure for which the loan is intended. For these time periods, the data shown on the graph represents the average of these three categories. Source: U.S. Federal Reserve; RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 9
RESULT: STRONG TRANSACTION VOLUME 2017 real estate transactions very close to 2016 pace Total Transaction Volume ($ in Billions) $700 40,000 35,000 $600 30,000 $500 25,000 Transaction Volume $400 Properties 20,000 $300 15,000 $200 10,000 $100 5,000 $0 - Volume ($ in Billions) Properties Note: Only includes transactions valued at $2.5 million or greater Source: Real Capital Analytics (RCA); RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 10
CAP RATES INCREASE Most consistent cap rate expansion since the recession 12% 10% 8% 6% 4% 2% 0% Recession 10 Year Treasury Yield Going-In Cap Rate (%) BBB Corporate Bond Yield Source: U.S. Federal Reserve; Real Estate Research Corporation (RERC); RCA; Federal Reserve Bank of St. Louis; RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 11
NCREIF RETURNS CONTINUE TO MODERATE Industrial leads total returns, while others lag more sharply NCREIF Total Returns 40% 30% 20% 10% 0% (10%) (20%) (30%) Hotel Apartment Retail Industrial Office Source: National Council of Real Estate Investment Fiduciaries (NCREIF); RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 12
VACANCY CONTINUES TO INCREASE Rent growth remains strong, but is slowing U.S. Apartment Absorption, Vacancy, Rent Growth 300,000 8.0% 250,000 6.0% 200,000 150,000 4.0% 100,000 Units 2.0% 50,000 0 0.0% (50,000) (2.0%) (100,000) (150,000) (4.0%) Completions Net Absorption Vacancy % Rent Growth % Note: Apartment criteria filtered as follows: multifamily property (secondary type is apartment), 50+ units, and a 3-star or greater CoStar rating Source: CoStar; RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 13
NEW HOUSEHOLDS OUTPACE SF STARTS Multifamily filling the gap; pent-up demand is likely growing Single-Family Housing Starts and Household Growth 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 Single-Family Housing Starts Increase in Households Note: Single-Family Housing Starts include single-family detached and single-family attached (townhomes) Source: Moody’s Analytics; RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 14
NEW HOME SUPPLY ABOVE MEDIAN Existing housing supply still below median level of inventory New and Existing Home Months Supply of Housing (1999 - June 2017) 14 12 10 Months Supply 8 6 4 2 0 Existing Home Months Supply New Home Months Supply Existing Supply Historic Median New Home Months Supply Historic Median Note: Home supply includes single-family detached, condo, and townhomes Source: National Association of Realtors (NAR); RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 15
STEADY INCREASE IN HOME SALES New home sales still significantly lag historical levels National Home Sales 8,000,000 1,600,000 7,000,000 1,400,000 6,000,000 1,200,000 5,000,000 1,000,000 Existing Home Sales New Home Sales 4,000,000 800,000 3,000,000 600,000 2,000,000 400,000 1,000,000 200,000 0 0 Existing Home Sales (L) New Home Sales (R) Note: Monthly data are seasonally adjusted annual rates Source: U.S. Census Bureau; NAR; RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 16
PRICING CONTINUES TO INCREASE New homes prices may be moderating as builders reach for the entry level Median Home Price and Case-Shiller 20-City Price Index (2000 – Q2 2017) $350,000 300 $300,000 250 $250,000 200 $200,000 150 $150,000 100 $100,000 50 $50,000 $0 0 Median New Home Price Median Existing Home Prices Case-Shilller 20-City Index Source: U.S. Census; NAR; Standard & Poor’s; Federal Reserve Bank of St. Louis; RCLCO Quarterly Chartbook Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 17
LOW-DENSITY RENTAL HOUSING
SMALLER HOUSEHOLDS ON THE RISE Smaller households in every age group U.S. Households by Size 90,000 4 80,000 3.5 70,000 3 U.S. Households (in thousands) 60,000 2.5 People per Household 50,000 2 40,000 1.5 30,000 1 20,000 0.5 10,000 0 0 1-2 person 3+ person People per household Source: U.S. Census Bureau Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 19
“DELAYED ADULTHOOD” Drives delayed household formation % of Age Group Living with Parents Average Age of First Marriage 32% 30 29 31% Baby Silent Boomers Generation start 28 starts getting getting 30% married married 27 29% 26 28% Age 25 27% 24 26% 23 25% 22 Generation X Millennials start starts getting getting married 24% 21 married 23% 20 Ages 18-34 Men Women Source: U.S. Census Bureau Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 20
DELAYED WEALTH-CREATION, ALSO “Can’t afford the downpayment” the leading reason to rent for all income groups U.S. Non-Mortgage Household Debt (in trillions) Reasons For Renting (By Income Tier) 4.500 Can't afford the downpayment 4.000 3.500 Can't qualify for a mortgage 3.000 Cheaper to rent than own 2.500 More convenient to rent 2.000 1.500 Plan on moving soon 1.000 Simply prefer to rent 0.500 Curently looking to buy 0.000 03:Q1 03:Q4 04:Q3 05:Q2 06:Q1 06:Q4 07:Q3 08:Q2 09:Q1 09:Q4 10:Q3 11:Q2 12:Q1 12:Q4 13:Q3 14:Q2 15:Q1 15:Q4 16:Q3 17:Q2 0% 10% 20% 30% 40% 50% 60% HE Revolving Auto Loan Credit Card Student Loan Other <$40,000 $40,000-$100,000 $100,000+ Source: Federal Reserve Bank of New York Consumer Credit Panel / Equifax; Demand Institute Rental Housing in the ‘Roaring ‘20s’ | 10/25/2017 | 21
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