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Real Estate and Economic Outlook Presentation to:

Hofstra

2014

Randy Anderson, Ph.D. CRE Griffin Capital Corporation Chief Economist and Portfolio Manager


Overall Economy

Nearing the End of the Gravy Boat Recovery Why Gravy Boat? 1. All the reasons everyone talked about + 2. Structural Change in the labor market – lead to lower labor market participation rates


Factors leading to 14-15 Growth    

Housing Market is much stronger than it has been Corporate Profit Margins are at a 15 year high Consumer Confidence is higher Business Survey’s showing firms plans to higher have increased

IN OTHER WORDS – THE HEADWINDS OF YESTERDAY ARE REALLY THE TAILWINDS FOR US IN 2014-2015…..THE ISSUE FOR REAL ESTATE IS THAT ONCE EMPLOYMENT IS “ACTUALLY STRONG” AND GDP STARTS ACCELERATING – INTEREST RATES ARE GOING TO RISE…AND EVENTUALLY SO WILL CAP RATES….

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So where is the 10-year going?

Year – end 3%-3.5%, 2016 4.25% - 4.75%

30-Year Average: 5.93%

20-Year Average: 4.60%

10-Year Average: 3.51%

Current Yield:

2.86%

(as of January 10, 2014)


Cap Rates by Product Type

Latest data as of 3Q13; 125 basis points subtracted Sources: ACLI, RCG


Cap Rate Spreads vs. 10-Year Treasury Yield Basis Points

Latest data as of 3Q13; 125 basis points subtracted Sources: ACLI, RCG


Remarks

 Spreads in recent days have been as high as 350 bps  Today they are on average > 200 bps  Long term average is closer to 125-150bps SO…..

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Remarks

SO‌.. 1. That is why Cap Rates have not headed up yet‌and there is still (for many markets and property types) some cushion in place 2. Capital flows from domestic and foreign sources is on the rise putting more demand relative to supply on the market which is likely to keep cap rates lower longer 3. Once cap rates start to expand, the elasticity is about .6

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What does that mean for Pricing “Old School Asset Selection and Management” And “Style Drift”  P = NOI/Cap Rate  Investing in 14 and 15 is all about the NOI growth. Can’t expect to grow value via cap rate compression especially in core assets and core markets.  Most funds are getting raised today for value-add opportunities  Also – investors are moving further out the risk frontier in terms of market and asset quality – this game is further along than the research reports are indicating

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Commercial Real Estate Asset Class Overview Office Multifamily Retail Hospitality Industrial

IU-NL102(512v021513)


Office Construction

Value of Construction Put-in-Place Billions (2009$)

Latest data as of 3Q13, seasonally adjusted annual rate Sources: Census, RCG


Office Availability Rates Downtown and Suburban

17.4% 13.4%

Latest data as of 3Q13 Sources: C&W, RCG


U.S. Downtown Office Rent Growth

Latest data year-to-date as of 3Q13 Sources: C&W, Grubb & Ellis, Various Local Brokers, RCG


Commercial Real Estate: Office Sector Overview

• Prime CBD low vacancy, premium pricing • New construction in certain markets • Mixed performance in other markets • Look for continued reduction in space/worker


Multifamily Rental Housing Starts Units (Thousands)

Note: 2013 through 2018 data are forecasted Sources: Census, RCG


Population Turning 18 1960-2020 Millions

Sources: Census, RCG


Young Adults Aged 18-34 Living with Parents Millions

Sources: Census, RCG


Growth in Population Aged 65+ Millions

Source: Census

% of Total


Renter Households

Proportion of Total Households

Latest data as of 3Q13 Source: Census


Household Headship Formation HH Formation (000s)

Latest data year-over-year as of December 2012 Source: Census

Annual Growth


U.S. Rental Apartment Vacancy Rate (5+ Units)

9.2% 4.6%

Latest data as of 3Q13 Sources: Census, NMHC


Commercial Real Estate:

Multifamily Sector Overview

• Multifamily housing starts accelerating • Both baby boom and eco boom provide demographic demand support • Household headship formation rate ticking up • Vacancy rates down close to peak levels


Retail Space Construction

Value of Construction Put-in-Place Billions (2009$)

Latest data as of 3Q13, seasonally adjusted annual rate Sources: Census, RCG


Real Retail Sales Growth

Nominal Monthly % Change

Excluding Autos Annual % Change

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Latest year-over-year change data as of 3Q13, monthly change is as of November 2013 Source: Census

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Super-Stores and Internet Sales Cannibalization Percentage of total sales by retail type

Grocery Stores Department Stores

Warehouse Clubs and Super-Stores

Latest data as of October 2013 Source: Census

Internet Sales


Retail Vacancy Rate

Green line is forecast Sources: Valuation International, Viewpoint, SNL, RCG


Commercial Real Estate: Retail Sector Overview

• Under attack by e-tailing – location, concept and tenancy critical factors to success • Prime regional malls have outperformed – very pricy • Secondary and low density markets are at risk • Broad retail recovery couple years off


Industrial Warehouse Construction Value of Construction Put-in-Place Billions (2009$)

Latest data as of 3Q13, seasonally adjusted annual rate Sources: Census, RCG


Industrial Vacancy Rate

2010: 2011: 1Q12: 2Q12: 3Q12: 4Q12: 1Q13: 2Q13: 3Q13: 2013f:

Latest data as of 3Q13; green line is forecast Sources: CBRE, C&W, RCG

10.3% 9.2% 9.0% 8.7% 8.5% 8.3% 8.2% 8.0% 7.8% 7.6%


Commercial Real Estate: Industrial Sector Overview

• Overall occupancy and rent trends encouraging • Still large recovery ahead to reach typical occupancy – same with most office markets • Trends that drive future direction:

• E-tailer shorter delivery demand – locate in dense areas • Integration of robotics – increase cubic utilization


Commercial Real Estate General Conclusions

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Commercial Real Estate: General Conclusions

• Market Peak in mid-2007: Prices > Replacement Cost • Market Trough in mid-2009: Prices < Replacement Cost • Recovery Phase from mid-2009 through mid- to late-2013 • Market Stabilization mid-2013 through end of 2016 • Prices approach Replacement Cost – new development ensues

• Market Peak end of 2016 – 2017…???

Real Estate and Economic Outlook  

Presentation to Hofstra 2014. Randy Anderson, Ph.D. CRE