Uncertainty and Fundamentals Driving Capital Decisions - Keynote David Bitner of Cushman & Wakefield
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The document provides a summary of the U.S. economic and commercial real estate outlook from Cushman & Wakefield for April 2017. It discusses how 2017 started slowly with rising capitalization rates and decelerating price returns. U.S. investment sales volumes in the first quarter of 2017 were down 42% and 18% compared to the first quarter of 2016 for single asset and portfolio deals respectively. The summary explores reasons for the slow start to the year including general uncertainty in the economy, real estate cycle, and their interplay with politics.
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Uncertainty and Fundamentals Driving Capital Decisions - Keynote David Bitner of Cushman & Wakefield
- 1. U.S. Economic & Commercial Real Estate Outlook April 2017 David Bitner Cushman & Wakefield Head of Americas Capital Markets Research
- 2. 2017 Is Off To A Slow Start Cap rates rose, price returns broadly positive but decelerating Source: RCA, Cushman & Wakefield Research U.S. Investment Sales Volumes: Deals Over $5M Dollars in billions 0 20 40 60 80 100 120 140 160 180 2010Q1 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1 2017Q1 Down 42% vs. Q1 '16 Down 18% vs. Q1'16 Portfolio Single Asset AUDIENCE Q&A | Slido.com #5178
- 3. 3 Why?...General sense of uncertainty: economy, real estate cycle and interplay with politics AUDIENCE Q&A | Slido.com #5178
- 4. 4 U.S. Economic Outlook CRE Fundamentals Today’s Discussion Capital Markets & Investment Strategy
- 6. 6 Question 1: What is our current recession-risk? AUDIENCE Q&A | Slido.com #5178
- 7. This Is Already The Third Longest Expansion… Giving some investors pause 36 58 73 92 93 106 120 0 20 40 60 80 100 120 140 1970 1975 2001 1982 2009 1961 1991 Source: National Bureau of Economic Research, Cushman & Wakefield Research Ranking Expansions By Duration AUDIENCE Q&A | Slido.com #5178
- 8. … But Expansions Don’t Die Of Old Age Two requirements for a recession: Excesses & Triggers EXCESSES 1982-inflation 1990-Commercial Real Estate 2001-Dot Com boom 2007-Housing Bubble TRIGGERS 1982-Federal Reserve Tightening (19.5% Fed funds rate) 1990-Fed Tightening /Iraq invades Kuwait 2001-Fed tightening/Dot com bubble burst/ 9-11 2007-Financial crisis AUDIENCE Q&A | Slido.com #5178
- 9. What’s the Catalyst Today? Possible excesses that could lead to recession • Equity Markets? • Possibly…P/E is rising • Oil? • Unlikely • Fed? • Not Aggressive • Other? • The wild card may be in policies implemented by the new administration Trade? Immigration? Other? AUDIENCE Q&A | Slido.com #5178
- 10. 10 Question 2: What is the near-term economic outlook? AUDIENCE Q&A | Slido.com #5178
- 11. Growth Gets A Second Wind Source: Conference Board, Bureau of Labor Statistics, Cushman & Wakefield Research Leading Economic Indicators : January 2010 - Present 3-month % Change -1% 0% 1% 2% 3% Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Suggests continued economic acceleration AUDIENCE Q&A | Slido.com #5178
- 12. Tighter Labor Markets, Higher Wages 12 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 2000Q2 2003Q4 2007Q2 2010Q4 2014Q2 2017Q4 Unemployment Rate U.S. at Full Employment Full Employment = 5% 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 5,500 6,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Thousands Job Openings New Hires Jobs are going unfilled Wage Pressures Are Forming Source: U.S. Bureau of Labor Statistics AUDIENCE Q&A | Slido.com #5178
- 13. Broad-Based Wage Growth Accelerating Could we see the beginning of a virtuous cycle with corporate investment? 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% Source: Federal Reserve Bank of Atlanta , Cushman & Wakefield Research Atlanta Fed Median Wage Growth Tracker YoY Percent Growth (%) AUDIENCE Q&A | Slido.com #5178
- 14. 14 Question 3… AUDIENCE Q&A | Slido.com #5178
- 15. 15 Now What? AUDIENCE Q&A | Slido.com #5178
- 16. Trump Policies And Timing Uncertain.. …but represent an upside option to economy and CRE TAX REFORM PROPOSALS Next on the Agenda? Reduce Corporate income tax from 35% to 15% Top income tax bracket reduced from 39.6% to 33%, number of brackets from 7 to 3 Leave capital gains tax at 20% Repeal the estate tax and eliminate the alternative minimum tax Advocated for a one-off 10% tax rate on repatriated corporate earnings REGULATION POLICIES Executive Orders Dismantle Dodd-Frank law Repeal & Replace Obamacare (Put off?) End the war on coal American energy dominance declared strategic priority Keystone Pipeline Permitted SPENDING PROPOSALS No Update Spend $1 trillion on infrastructure over 10 years much of it privately funded Eliminate the sequester on defense spending (boost troop levels, number of ships, aircrafts and bolster missile defense system Eliminate government waste and budget gimmicks Halt new trade deals like the Trans-Pacific Partnership Enforce existing trade treaties more strictly Potentially renegotiate existing treaties like NAFTA Strengthen U.S. stance against currency manipulation TRADE AND GLOBALIZATION Executive Orders Least clear impact near-term AUDIENCE Q&A | Slido.com #5178
- 17. Trump And The Economy: Stronger Growth Likely Most businesses will benefit from stronger consumer and business spending growth 1.6% 2.1% 1.7% 1.5% 1.6% 2.3% 3.0% 2.0% 2016 2017 2018 2019 Pre-Election Baseline Post-Election baseline Source: Cushman & Wakefield C&W U.S. Real GDP Growth Forecast AUDIENCE Q&A | Slido.com #5178
- 19. 1 9 Office
- 20. Supply Pipeline Increasing, but Still Very Disciplined 20 0 20 40 60 80 100 120 140 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Office Completions, msf Completions Completions as % of Inventory 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Completions as % of Inventory Source: Cushman & Wakefield Research AUDIENCE Q&A | Slido.com #5178
- 21. Where the Construction Is Happening 21 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% U/C as % of Inv U.S. Average: 1.9% Most at Risk Areas of Opportunity Source: Cushman & Wakefield Research AUDIENCE Q&A | Slido.com #5178
- 22. Who’s Overbuilding/Underbuilding 70% of New Construction Happening in These Markets 22 Market U/C next 2 years Total Absorption 2015-16 Market Notes Clearest Opportunities 1 San Jose, CA 6,553,828 6,455,024 About right, but absorption is slowing 2 Dallas/Fort Worth, TX 5,668,473 8,090,071 Underbuilding 3 Denver, CO 4,569,201 1,736,594 Overbuilding 4 Northern VA 4,134,642 614,505 Overbuilding, but demand is rebounding 5 Seattle, WA 4,092,123 6,708,283 Underbuilding 6 San Francisco, CA 4,085,515 1,467,832 Overbuilding 7 Washington, DC 4,080,760 2,670,498 Overbuilding, but demand is rebounding 8 Atlanta, GA 3,674,415 4,510,170 Underbuilding 9 Austin, TX 3,258,552 4,637,833 Underbuilding 10 Boston, MA 2,942,260 1,985,292 Overbuilding by a little 11 New York – Midtown 2,574,509 5,562,073 Underbuilding 12 New York – Downtown 2,491,861 -15,642 Overbuilding, but banks are poised to grow 13 Nashville, TN 2,355,673 2,625,819 About right 14 New York – Brooklyn 2,119,100 -1,989,526 Overbuilding, but needs new product 15 Orange County, CA 2,001,103 2,450,033 About right 16 Chicago, IL 1,993,950 6,952,727 Underbuilding 17 Charlotte, NC 1,907,798 3,422,808 Underbuilding 18 Raleigh/Durham, NC 1,897,480 2,894,671 Underbuilding 19 Salt Lake City, UT 1,740,064 1,786,772 About right 20 Los Angeles Metro 1,664,463 6,023,442 Underbuilding Source: Cushman & Wakefield Research AUDIENCE Q&A | Slido.com #5178
- 23. 2 3 Multifamily
- 24. Vacancies To Remain Low Despite New Supply 0 50,000 100,000 150,000 200,000 250,000 300,000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F Net Absorption, units Deliveries, units 0% 2% 4% 6% 8% 10% 2001 2003 2005 2007 2009 2011 2013 2015 2017F 2019F Vacancy Rate U.S. Net Absorption U.S. Vacancy Rate Historical average = 5.3% Source: Reis, Cushman & Wakefield Research AUDIENCE Q&A | Slido.com #5178
- 25. Millennials Nearing Prime Home Buying Years Change in Population, Millions 25 2015 2020 Prime Renter Surge Prime Buyer Surge BY 2020, AN ADDITIONAL 3.3 MILLION PEOPLE WILL ENTER PRIME HOME BUYING AGES Source: Census Bureau, Cushman & Wakefield Research -3 -2 -1 0 1 2 3 4 5 6 7 -3 -2 -1 0 1 2 3 4 5 6 7 AUDIENCE Q&A | Slido.com #5178
- 26. 2 6 Industrial
- 27. Historic Demand Conditions Have Outstripped Supply… 27 Rank Market Net Absorption 2008-2010 Net Absorption 2011-2016 1 Inland Empire 7,607,093 94,759,223 2 Chicago -22,309,349 83,347,357 3 Dallas/Ft. Worth 2,962,888 70,756,426 4 Atlanta 7,262,608 60,319,162 5 PA I-81/I-78 Corridor 10,153,291 54,572,822 6 Central New Jersey -5,118,967 39,463,722 7 Phoenix -244,262 39,093,911 8 Houston 176,076 36,067,254 9 Los Angeles -34,371,295 31,844,287 10 Indianapolis 13,988,987 27,269,539 11 Philadelphia -2,090,745 29,669,222 12 Cincinnati 1,110,435 24,313,248 13 Nashville -4,917,825 24,307,103 14 Memphis 1,361,364 22,702,878 15 Detroit -3,851,095 19,674,105 16 Denver 3,165,751 19,259,395 17 Kansas City -1,415,858 19,000,351 18 East Bay/Oakland -6,560,335 16,939,151 19 Louisville 5,732,067 15,892,966 20 Northern New Jersey -16,758,281 13,925,722 226 235 265 244 243 205 272 270 283 0 50 100 150 200 250 300 350 Strongest Runs on Record (Net Absorption, msf) Demand: 727 Supply: 631 Spec: 474 Demand: 693 Supply: 575 Spec: 438 Demand: 826 Supply: 550 Spec: 339 Source: Cushman & Wakefield Research AUDIENCE Q&A | Slido.com #5178
- 28. 0% 1% 2% 3% 4% 5% 6% 7% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% UCas%ofInventory VacancyRate Vacancy Under Construction (as % of Inventory) 28 Top 20 Industrial Markets: Warehouse Vacancy and Construction Percent (%) …Low Vacancies Across Markets, But Construction Remains Constrained As Well Source: Cushman & Wakefield Research U.S. avg. vacancy: 5.6% U.S. avg. UC: 2.3% AUDIENCE Q&A | Slido.com #5178
- 29. 2 9 Capital Markets & Investment Strategy
- 30. 2016 Was The Third Largest Year For Transactions Volumes In U.S. History…And Predict 2017 Will Be Fourth Or Fifth 30 U.S. Investment Sales Volumes Dollars in billions 0 100 200 300 400 500 600 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F Individual Asset Portfolio Entity 1 2 3 4 56 7 Source: Cushman & Wakefield Research, Real Capital Analytics AUDIENCE Q&A | Slido.com #5178
- 31. Mountain Of Capital Targeting CRE Assets Fundraising momentum for debt and opportunistic funds 31 Dry Powder: Close-end U.S. Real Estate Funds Dollars in billions 16 22 25 26 36 55 70 84 84 92 78 92 79 114 102 134 133 141 0 20 40 60 80 100 120 140 160 53% above previous cycle peak Source: Cushman & Wakefield Research, Preqin AUDIENCE Q&A | Slido.com #5178
- 32. Institutions Upping Real Estate Allocations Secular increase in capital to the market 32 Institutional Real Estate Allocations Monitor: Average Target Allocation to Real Estate Percent (%) 8.9% 9.3% 9.6% 9.9% 10.3% 2013 2014 2015 2016 2017E Source: Cushman & Wakefield Research, Cornell Baker – Hodes Weill 2016 Institutional Real Estate Allocations Monitor AUDIENCE Q&A | Slido.com #5178
- 33. 33 And yet…the market is changing as it becomes ever harder to deploy capital AUDIENCE Q&A | Slido.com #5178
- 34. We Have Been Living In A “Beta Bonanza” As Cap Rates Have Compressed RCA/Moody's U.S. All-Property CPPI vs. U.S. All Property Cap Rate Growth of a dollar ($), cap rate (%) 6.0% 6.2% 6.4% 6.6% 6.8% 7.0% 7.2% 7.4% 7.6% 7.8% $0.80 $1.00 $1.20 $1.40 $1.60 $1.80 $2.00 $2.20 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 U.S. All-Property CPPI U.S. All Property Cap Rate $2.05 Source: Cushman & Wakefield Research, Real Capital Analytics AUDIENCE Q&A | Slido.com #5178
- 35. Market returns will moderate because there are “fewer ways to win” – it’s the end of the easy times…but not the end of the good times 35AUDIENCE Q&A | Slido.com #5178
- 36. 3 6 Four Frameworks For Investing Beyond The “Beta Bonanza”
- 38. Prime product in prime markets have been “goldilocks” assets for investors… 38AUDIENCE Q&A | Slido.com #5178
- 39. 39 …but all fairytales end. Going forward, investors will need to look further afield (and take more risk) to earn superior returns AUDIENCE Q&A | Slido.com #5178
- 40. Risk / Return Relationship Will Reassert Itself As Cycle Continues Driving Liquidity Into New Assets And Markets Pension / LifeCo Fixed Income Substitute Safety Returns Illiquid Liquid Public Vehicles Family Offices / HNW Endowment / Foundation Pension / LifeCo Return Driver Private Equity Real Estate Owner / Operator Developer Sovereign Wealth Funds Foreign Capital Major Markets Secondary Markets Class A Product Class B Product CBD Office / Apartment Suburban Office / Apartment Core Strategies Core-Plus Strategies Value-Add Strategies Opportunistic Strategies Tertiary Markets Most deceleration in returns Greater opportunities…even in a down cycle AUDIENCE Q&A | Slido.com #5178
- 41. 41 Look for pockets of value where there are still “more ways to win” #2
- 42. Capital will migrate to “risk-adjacent” assets, narrowing excessively wide cap rate spreads between and within various markets 42AUDIENCE Q&A | Slido.com #5178
- 43. Performance Differential Excessive Represents Opportunity For Left-Behind 43 50 100 150 200 250 300 Dec2000 Apr2002 Aug2003 Dec2004 Apr2006 Aug2007 Dec2008 Apr2010 Aug2011 Dec2012 Apr2014 Aug2015 Dec2016 Gateways Core Non-Major Markets Suburban Office Source: RCA, Cushman & Wakefield Gateway Markets = NY, LA, Boston, DC, Chicago, San Francisco RCA/Moody’s Commercial Property Price Index December 2000 = 100 AUDIENCE Q&A | Slido.com #5178
- 44. Investors Overlooking A Fundamental Imbalance Recent Office transactions have targeted CBD, but… 44 68% of office inventory is in the suburbs… 74% of office jobs are in the suburbs... 84% of *new* office jobs were in the suburbs in 2016… 72% of office absorption has been in the suburbs since 2012… Fundamental Imbalance Cannot Persist Indefinitely Opportunity in Suburban Office Source: BLS, Cushman & Wakefield Research 1.2% Vacancy spread – down from 4-5% earlier in cycle (2.8% decline since 2015)… 60% Suburban rents relative to CBD versus 74% pre- crisis… AUDIENCE Q&A | Slido.com #5178
- 45. Look for Markets Where You Are Rewarded For Taking Fundamental Risk Source: Cushman & Wakefield Research, Real Capital Analytics U.S. Metros With The Largest Spreads Between Suburban And CBD Office Cap Rates Bubble size = Relative Suburban Transaction Volume 2014 - 2016 Raleigh/Durham Boston Metro Cincinnati Chicago DC Metro SF Metro St Louis Baltimore Seattle NYC Metro 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 Suburban-OfficeCapRateSpread Historical Suburban - CBD Cap Rate Spread Z-Score Spread Larger Than It Has Been Historically - Potential For Compression AUDIENCE Q&A | Slido.com #5178
- 46. 46 Take advantage of secular tailwinds #3
- 47. Pricing Hasn’t Caught Up To Long-Term Opportunity 47 Data Centers Medical Office Office Sunbelt Markets Class A Suburban Retail Suburban Apartments Medium Distribution Warehouse • Cloud adoption is expected to double over the next 5 years • Healthcare has been the fastest growing sector in U.S. for last two decades • Pedestrian-friendly, convenient, transient-oriented development is in high demand in suburbs across the U.S. • Job growth is robust, spreads at all-time high • Rising single-family home prices and rising mortgages rates challenge single-family housing affordability • Medium distribution warehouse (<250K SF) critical to service level migration and supply additions are constrained Technology Demography AUDIENCE Q&A | Slido.com #5178
- 48. 48 It’s all about Alpha #4
- 49. Lower returns to beta alpha becomes more important. In fact… 49AUDIENCE Q&A | Slido.com #5178
- 50. …it will become the great differentiator 50AUDIENCE Q&A | Slido.com #5178
- 51. Happy Hunting!
- 52. U.S. Economic & Commercial Real Estate Outlook April 2017 David Bitner Cushman & Wakefield Head of Americas Capital Markets Research
Notas del editor
- Volume declines led by multifamily, CBD office Industrial, hotel, suburban office and retail all down but less-so Cap rates: only MF declined in 1Q Price returns: suburban office, still returns strong (14.4%)
- 24
- National warehouse vacancy rates dropped 70 bps YOY to 5.5%. Construction activity is subdued, with industrial space under construction amounting to 2.4% of inventory. A handful of markets are expanding rapidly, however, with significant construction underway in Kansas City, Inland Empire, the PA I-81/I-78 Corridor and Indianapolis.
- Sales volumes are down but dry powder remains just off all-time highs – 45% above previous cycle peak!
- If you bought a diversified portfolio of commercial real estate in January 2010, you would have experienced a capital appreciation return of 11% per annum through 2016…unlevered, amounting to slightly over a 2x multiple. Adding leverage and including current yield, your total return would have been significantly higher. If you focused on the major markets, your returns would have been even higher: 12.7% CAGR and a 2.3x multiple These returns were driven by two forces: 1) growing rents in-line with the economic recovery and 2) declining cap rates We can compare this to EPS growth and multiple expansion in equity markets, and in both markets, we have reached the point where the force of cap rate compression (or multiple expansion) has essentially been spent as a force driving market or “beta” returns [Going forward, while we do not see cap rates increasing meaningfully, the balance of risks has shifted]
- Expect every investor, wherever they are currently on the risk spectrum to move to risk-adjacent assets where expected returns should be higher This means more capital for secondary markets and ultimately tertiary markets, for suburban office and MF properties, for value-add strategies more generally This migration of capital will ultimately narrow cap rate spreads as well as improve liquidity in these various risk-adjacent assets / strategies It is quite possible that in the event of a downturn, goldilocks assets cap rates could rise while higher yield assets (our risk-adjacent assets) cap rates could stay roughly unchanged due to the already advanced concentration of capital during this cycle. In other words, if the cycle continues, spreads come in from capital migration and in a down cycle, risk-adjacent assets likely offer higher yields, superior opportunities for alpha-driven strategies and equal or LESS cap rate risk
- This framework suggest that we look for markets that not only offer large cap rate spreads versus the national average…but one’s that are also large relative to that markets history. This chart plots the current spread for 20 different US office markets versus how many standard deviations it is above it’s usual spread The size of the bubbles reflect the transaction volume in 2016 and so act as an indicator of liquidity The markets circled in red all offer relatively attractive yield spreads and should be a “buy” to the extent that those spreads are not justified by fundamentals. Houston has been battered by the decline in oil prices, but there is an argument to be made that the market should make an inflection point along with oil prices and once again rising rig counts. The tertiary southeast has strong population and by extension employment growth – similarly secondary markets such as Orlando A wide swath of the Midwest is offering attractive yields from Chicago to St. Louis, Columbus, Cincinnati and the Tertiary Midwest – Pittsburgh is arguably part of this complex. Do economic and construction fundamentals suggest that such spreads should persist. Again, if not, there are assets that offer relatively “more ways to win” versus fully-valued assets.
- 51