Commercial Economic Issues and Trends Forum

Economic Trends and Outlook in a Rising

Interest Rate Environment

Lawrence Yun, PhD

Chief Economist, National Association of REALTORS®

REALTORS® Conference & Expo Boston, MA November 2, 2018

Very Long Economic Expansion
 Annual GDP Growth Rate of 3.2% in 2018?
(Q1 at 2.2%; Q2 at 4.2%; Q3 at 3.5%)
4

0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
-1

-2

-3
 GDP Components Growth Rates
2018 Q2 2018 Q3 Upcoming
Quarters
Consumer Spending 3.8% 4.0% +2%
Business Spending 8.7% 0.8% +3%
Government 2.5% 3.3% 0%
Spending
Net Exports Slight Gain Slight Loss Slight Loss
Commercial Real +14.5% -7.9% +3%
Estate Investment
Residential Real -1.4% -4.0% +4%
Estate Investment
GDP +4.2% +3% +2.2%
Consumer Spending Growing Strongly: 4%
6.0
5.0 4.0
4.0
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
-4.0
-5.0
 100.0
120.0
140.0
160.0

20.0
40.0
60.0
80.0

0.0
2006-Jan
2006-Jul
2007-Jan
2007-Jul
2008-Jan
2008-Jul
2009-Jan
2009-Jul
2010-Jan
2010-Jul
2011-Jan
2011-Jul
2012-Jan
Source: Conference Board 2012-Jul
2013-Jan
2013-Jul
2014-Jan
2014-Jul
2015-Jan
2015-Jul
Consumer Confidence Index (1985=100)

2016-Jan
2016-Jul
2017-Jan
Animal Spirit Revival of Consumers

2017-Jul
2018-Jan
2018-Jul
138.4
 20000
40000
60000
80000

0
100000
120000
2000 - Q1
2000 - Q3
2001 - Q1 In $billion
2001 - Q3
2002 - Q1
2002 - Q3
2003 - Q1
2003 - Q3
2004 - Q1
2004 - Q3
2005 - Q1
2005 - Q3
2006 - Q1
2006 - Q3
2007 - Q1
2007 - Q3
2008 - Q1
2008 - Q3
2009 - Q1
2009 - Q3
2010 - Q1
2010 - Q3
2011 - Q1
2011 - Q3
2012 - Q1
2012 - Q3
2013 - Q1
2013 - Q3
2014 - Q1
Near Record High Wealth

2014 - Q3
2015 - Q1
2015 - Q3
2016 - Q1
2016 - Q3
2017 - Q1
2017 - Q3
2018 - Q1
2018 - Q3
Business Spending Growth Tapers Off: 0.8%
Non-Residential Investment Gr
30.0
20.0
10.0
0.8
0.0
-10.0
-20.0
-30.0
 500

0
1000
1500
2000
2500
2000 - Q1
2000 - Q3
2001 - Q1
In $billion
2001 - Q3
2002 - Q1
2002 - Q3
2003 - Q1
2003 - Q3
2004 - Q1
2004 - Q3
2005 - Q1
2005 - Q3
2006 - Q1
2006 - Q3
2007 - Q1
2007 - Q3
2008 - Q1
2008 - Q3
2009 - Q1
2009 - Q3
2010 - Q1
2010 - Q3
2011 - Q1
2011 - Q3
2012 - Q1
2012 - Q3
2013 - Q1
2013 - Q3
2014 - Q1
2014 - Q3
After-Tax Corporate Profits

2015 - Q1
2015 - Q3
2016 - Q1
2016 - Q3
2017 - Q1
2017 - Q3
2018 - Q1
 National Defense Spending Has Been
Contributing to Growth: 4.6%
15.0
10.0
4.6
5.0
0.0
-5.0
-10.0
-15.0
 2000000
4000000
6000000
8000000
10000000
12000000
14000000
16000000
18000000

0
2001 - Jan
2001 - Jul
2002 - Jan
In $million

2002 - Jul
2003 - Jan
2003 - Jul
2004 - Jan
2004 - Jul
2005 - Jan
2005 - Jul
2006 - Jan
2006 - Jul
2007 - Jan
2007 - Jul
2008 - Jan
2008 - Jul
2009 - Jan
2009 - Jul
2010 - Jan
2010 - Jul
2011 - Jan
2011 - Jul
2012 - Jan
2012 - Jul
2013 - Jan
2013 - Jul
2014 - Jan
2014 - Jul
2015 - Jan
National Debt Held by Public

2015 - Jul
2016 - Jan
2016 - Jul
2017 - Jan
2017 - Jul
2018 - Jan
2018 - Jul
 100
120

0
20
40
60
80
2000 - Q1
2000 - Q3
2001 - Q1
2001 - Q3
2002 - Q1
2002 - Q3
2003 - Q1
2003 - Q3
2004 - Q1
2004 - Q3
2005 - Q1
2005 - Q3
2006 - Q1
2006 - Q3
2007 - Q1
2007 - Q3
2008 - Q1
2008 - Q3
2009 - Q1
2009 - Q3
2010 - Q1
2010 - Q3
2011 - Q1
2011 - Q3
2012 - Q1
2012 - Q3
2013 - Q1
2013 - Q3
2014 - Q1
National Debt to GDP (%)

2014 - Q3
2015 - Q1
2015 - Q3
2016 - Q1
2016 - Q3
2017 - Q1
2017 - Q3
2018 - Q1
 -40.0
-30.0
-20.0
-10.0
10.0
20.0
30.0

0.0
Q1-2008
Q3-2008
Q1-2009
Q3-2009
Q1-2010
Q3-2010
Q1-2011
Q3-2011
Q1-2012
Exports of Goods and Services Q3-2012
Q1-2013
Q3-2013
Q1-2014
Q3-2014
Q1-2015
Q3-2015
Q1-2016
Q3-2016
Q1-2017
Imports of Goods and Services
Imports Growth Outpace Exports

Q3-2017
Q1-2018
9.3

-0.6

Q3-2018
 $100
$120

$20
$40
$60
$80

$0
2010-Jan
2010-May
2010-Sep
2011-Jan
2011-May
2011-Sep
2012-Jan
2012-May
2012-Sep
2013-Jan
2013-May
2013-Sep
2014-Jan
2014-May
2014-Sep
2015-Jan
2015-May
2015-Sep
(West Texas Intermediate)

2016-Jan
2016-May
2016-Sep
2017-Jan
2017-May
2017-Sep
2018-Jan
2018-May
$70

2018-Sep
Oil Price – Bouncing Off Lows and Stabilizing
 10
20
30
40
50
60
70

0
2010-Jan
2010-May
2010-Sep
2011-Jan
2011-May
2011-Sep
2012-Jan
2012-May
2012-Sep
2013-Jan
2013-May
2013-Sep
2014-Jan

Source: ISM Institute

2014-May
2014-Sep
2015-Jan
2015-May
2015-Sep
2016-Jan
(50+: Economy is Expanding)

2016-May
2016-Sep
2017-Jan
2017-May
2017-Sep
2018-Jan
Backlog of Orders: Breaking Higher

2018-May
2018-Sep
56
 10.0
12.0

0.0
2.0
4.0
6.0
8.0
2000-Jan
2000-Sep
2001-May
2002-Jan
2002-Sep
2003-May
2004-Jan
2004-Sep
2005-May
2006-Jan
2006-Sep
2007-May
2008-Jan
2008-Sep
2009-May
2010-Jan
2010-Sep
2011-May
2012-Jan
2012-Sep
2013-May
2014-Jan
(Sept 2018 figure is lowest since 1969)

2014-Sep
Low Unemployment Rate

2015-May
2016-Jan
2016-Sep
2017-May
2018-Jan
3.7

2018-Sep
 115000
120000
125000
130000
135000
140000
145000
150000
2000-Jan 155000
in thousands

2000-Oct
2001-Jul
2002-Apr
2003-Jan
2003-Oct
2004-Jul
2005-Apr
2006-Jan
2006-Oct
2007-Jul
2008-Apr
2009-Jan
Total nonfarm payroll, SA

2009-Oct
2010-Jul
2011-Apr
2012-Jan
2012-Oct
2013-Jul
(19.8 million gained from Feb 2010)

2014-Apr
2015-Jan
2015-Oct
2016-Jul
Job Gains for 103 straight months

2017-Apr
2018-Jan
 Net Jobs Generated by Industry
(Oct 2017-Sept 2018, in thousands)
in thousands
600 560
500 453
400 315 296 278
300
173.8
200 118 94.1
100 69 61 55.5
0
-100 -3.2 -17
 Recent Employment Growth
(year over year % growth from August 2017 to August 2018)
Many Metros Have Over 3% Job Growth
2015 Q2‒ 2018 Q2
 5000
0
10000
15000
20000
in thousands
2001-Jan
2001-Sep
2002-May
2003-Jan
2003-Sep
2004-May
2005-Jan
2005-Sep
2006-May
2007-Jan
2007-Sep
2008-May
Job Openings

2009-Jan
2009-Sep
2010-May
(in thousands)

2011-Jan
2011-Sep
2012-May
Job Seekers

2013-Jan
2013-Sep
2014-May
2015-Jan
2015-Sep
2016-May
2017-Jan
2017-Sep
2018-May
5,964
6,939
More Job Openings Than Job Seekers
 2000
4000
6000
8000

0
10000
In thousands

2000-Jan
2000-Oct
2001-Jul
2002-Apr
2003-Jan
2003-Oct
2004-Jul
2005-Apr
2006-Jan
2006-Oct
7,718

2007-Jul
2008-Apr
2009-Jan
2009-Oct
(in thousands)

2010-Jul
2011-Apr
2012-Jan
2012-Oct
2013-Jul
2014-Apr
2015-Jan
2015-Oct
2016-Jul
2017-Apr
Construction Workers Still Below Peak

2018-Jan
7,286
 0.00
1.00
2.00
3.00
4.00
5.00
6.00
2010-Jan
2010-May
2010-Sep
2011-Jan
2011-May
2011-Sep
2012-Jan
2012-May
2012-Sep
2013-Jan
2013-May
All private

2013-Sep
2014-Jan
2014-May
2014-Sep
2015-Jan
2015-May
Construction

2015-Sep
(year over year % growth)

Production and non-supervisory nonfarm employees

2016-Jan
2016-May
2016-Sep
2017-Jan
2017-May
2017-Sep
Construction Job Wage Increase

2018-Jan
2018-May
2018-Sep
 Interest Rates On the Rise
FOMC Target and 30-Year Mortgage Rate (as of Oct 2018)
8.0
6.0
4.83
4.0
2.0 2.1250
0.0

2018-Jun
2015-Jul
2013-Jun
2010-Jul
2008-Jun

2018-Jan
2013-Jan
2008-Jan

2017-Aug
2014-Apr
2012-Aug
2009-Apr

2014-Sep
2015-Feb
2009-Sep
2010-Feb

2015-Dec
2010-Dec

2013-Nov
2008-Nov

2016-May

2017-Mar
2016-Oct
2011-May

2012-Mar
2011-Oct
Federal Open Market Committee: Fed Funds Target Rate (EOP, %)
FHLMC: 30-Year Fixed-Rate Mortgages: U.S. (%)
 1000
2000
3000
4000
5000
6000
7000
8000

0
2000-Jan
2000-Oct
2001-Jul
2002-Apr
2003-Jan
2003-Oct
2004-Jul
2005-Apr
2006-Jan
2006-Oct
2007-Jul
2008-Apr
2009-Jan
2009-Oct
Existing home sales ('000)

2010-Jul
2011-Apr
2012-Jan
2012-Oct
2013-Jul
2014-Apr
Slower Home Sales:

2015-Jan
30-yr fixed rate

2015-Oct
2016-Jul
2017-Apr
2018-Jan
4.83

2018-Oct
0.00
2.00
4.00
6.00
5150 8.00
10.00
Mix of Rising Interest Rates and Rising Prices
Home Prices Still Rising in the West
Metros With Largest Population Increase, 2014-2017
Commercial Economic Issues and Trends Forum

Commercial Real Estate Trends

 100.0
150.0
200.0
250.0
300.0
350.0

50.0
0.0
2000-Q1
2000-Q3
2001-Q1
2001-Q3
2002-Q1
2002-Q3
2003-Q1
2003-Q3
2004-Q1
2004-Q3
2005-Q1
2005-Q3
2006-Q1
2006-Q3
2007-Q1
2007-Q3
2008-Q1
2008-Q3
2009-Q1
2009-Q3
2010-Q1
2010-Q3
2011-Q1
Source: Federal Reserve Board Commercial Real Estate Price Index
(93% gain in 8 years)

2011-Q3
2012-Q1
2012-Q3
2013-Q1
2013-Q3
2014-Q1
2014-Q3
2015-Q1
Commercial Property Prices

2015-Q3
2016-Q1
2016-Q3
2017-Q1
2017-Q3
2018-Q1
294.4
Prices Rose More Strongly in Major Markets* than
in Non-Major Markets
180.00
160.00 Major Markets Non-Major Markets 153.13
140.00
120.00 123.52
100.00
80.00
60.00
40.00
20.00
0.00
2000
2001
2002
2002
2003
2004
2004
2005
2006
2006
2007
2008
2008
2009
2010
2010
2011
2012
2012
2013
2014
2014
2015
2016
2016
2017
2018
* Major Markets: NY, Boston, DC, Chicago, SF, LA; Source: Real Capital Analytics
 NCREIF Cap Rates –
Likely Already Hit Cyclical Low
8 %
6.9
7 6.1 6.3
5.7 6.0 6.0 5.9 5.7
6 5.6 5.5
5.1 5.1 5.1 5.1
5
4
3
2
1
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
 Prices Moving Sideways
among Transactions above $2.5 million
Cap Rates RCA CPPI™ - Year-Over-Year Change
Off Ret Ind Apt Htl 20%
9.0%
Off Ret Ind Apt Htl
15%

8.0%
10%

7.0%
5%

6.0% 0%

-5%
5.0%
'13 '14 '15 '16 '17 '18
Source: Real Capital Analytics
 REALTORS® Cap Rates Experiencing Upward
Pressure
REALTORS® Commercial Capitalization Rates Cap Rates - 2018.Q2
12.0% Office Industrial Retail Multifamily Hotel RCA Markets REALTOR® Markets
8.0%
11.0%
7.0%
10.0%
6.0%
9.0% 5.0%
8.0% 4.0%

7.0% 3.0%

6.0% 2.0%

1.0%
5.0%
0.0%
Office Industrial Retail Apartment
Source: National Association of Realtors® Sources: National Association of REALTORS®, Real Capital Analytics
Commercial Investment Sales of Large Properties
(Properties valued at $2.5 million and over)
571 547
470 489
423 424 450
362 355
299
212 233
174 147
130
67

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
 Percent Change, year-over-year

10%
20%
30%

-50%
-40%
-30%
-20%
-10%
0%
2008.Q4
2009.Q1
2009.Q2
2009.Q3
2009.Q4
2010.Q1
2010.Q2
2010.Q3
2010.Q4
2011.Q1
2011.Q2
2011.Q3
2011.Q4
2012.Q1
2012.Q2
2012.Q3
Sales Volume

2012.Q4
2013.Q1
2013.Q2
2013.Q3
2013.Q4
Sales Prices

2014.Q1
2014.Q2
2014.Q3
2014.Q4
2015.Q1
2015.Q2
2015.Q3
2015.Q4
Investment Momentum in 2018

2016.Q1
2016.Q2
2016.Q3
2016.Q4
2017.Q1
REALTORS® Reported Rising but Slowing

2017.Q2
2017.Q3
2017.Q4
2018.Q1
2018.Q2
Source: National Association of Realtors®
 -0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2010-Jan
2010-Apr
2010-Jul
2010-Oct
2011-Jan
2011-Apr
2011-Jul
2011-Oct
2012-Jan
2012-Apr
2012-Jul
2012-Oct
2013-Jan
2013-Apr
2013-Jul
2013-Oct
2014-Jan
2014-Apr
2014-Jul
2014-Oct
2015-Jan
2015-Apr
2015-Jul
2015-Oct
2016-Jan
2016-Apr
2016-Jul
2016-Oct
2017-Jan
2017-Apr
2017-Jul
2017-Oct
2018-Jan
Rent Growth – Broadly Tapering

2018-Apr
2018-Jul
3.6
Rental Vacancy Rates in 75 Largest Metros, 2018 Q1
(red areas: below 7%)
 -20.0
-15.0
-10.0
10.0
15.0
20.0

-5.0
0.0
5.0
2000-Jan
2000-Jul
2001-Jan
2001-Jul
2002-Jan
2002-Jul
2003-Jan
2003-Jul
2004-Jan
2004-Jul
2005-Jan
2005-Jul
2006-Jan
2006-Jul
2007-Jan
2007-Jul
2008-Jan
2008-Jul
2009-Jan
2009-Jul
2010-Jan
2010-Jul
2011-Jan
2011-Jul
2012-Jan
(year over year % change)

2012-Jul
2013-Jan
Source: U.S. Census Bureau; retail sales, not seasonally adjusted

2013-Jul
2014-Jan
2014-Jul
2015-Jan
2015-Jul
2016-Jan
2016-Jul
Retail Sales—Growing Strongly

2017-Jan
2017-Jul
2018-Jan
2018-Jul
6.3
 E-commerce Retail Sales
(growing more than 2 times as fast as traditional retail sales)
% change from one year ago
45.0
40.0
35.0
30.0
25.0
20.0 15.4
15.0
10.0
5.0
0.0
2002-Q1
2002-Q3
2003-Q1
2003-Q3
2004-Q1
2004-Q3
2005-Q1
2005-Q3
2006-Q1
2006-Q3
2007-Q1
2007-Q3
2008-Q1
2008-Q3
2009-Q1
2009-Q3
2010-Q1
2010-Q3
2011-Q1
2011-Q3
2012-Q1
2012-Q3
2013-Q1
2013-Q3
2014-Q1
2014-Q3
2015-Q1
2015-Q3
2016-Q1
2016-Q3
2017-Q1
2017-Q3
2018-Q1
-5.0
-10.0
Source: U.S. Census Bureau, retail e-commerce sales, not seasonally adjusted
Long-run Fundamentals Still Solid
OFFICE
• Office demand strong, due to rising
employment (15.5MSF in Q2)
• Mobile workforce; increased telecommuting
• Flexible space layouts
• Moderate supply (11.1MSF in Q2) leads to
13% vacancy & 1.3% rent growth
RETAIL
• Department stores lose ground
• Malls close/redevelop; soft absorption
• Small/discount grocery stores heat up: Aldi
• Amazon moves into grocery space with Whole
Foods
• Completions remain low (7.0MSF in Q2)
• Rents experience solid growth (5.1% Q2)
INDUSTRIAL
• Increased trade & rising e-commerce place
industrial sector on hot streak
• “Last mile” distribution + Intermodal logistics
• Panama Canal; East coast ports
• Net absorption remains strong (58.8MSF in Q2)
• Net rent growth reaches record ($7.1PSF in Q2)
APARTMENT
• Mixed-use urban development; live/work/play
• Class A supply; small floorplans; amenities
• Demand remains robust; 12-mo net absorption:
249,000 units
• 12-mo Completions: 276,000 units
• Vacancy moves up to 4.7%; moderates rent
growth (2.0% YoY in Q2.18)
Commercial Economic Issues and Trends Forum

2018 Commercial Member Profile

Highlights
Sales Transactions Volume Trending Upwards:
$3.87 Million in 2017
Median Dollar Value of Sales Trending Upwards:
$602,500 in 2017
Pacific Region: Highest Median Sales at $926,500
Lease Transactions Volume Trending Upwards:
$705,500 in 2017
But Median Lease Value Slightly Dipped:
$215,400 in 2017
Multi-family: Nearly 50 Percent of Commercial
Investment Transactions in 2017
Median Gross Personal Income Trending Upwards:
$150,700 in 2017
Commercial Economic Issues and Trends Forum

Macroeconomic Forecast for 2018-2019

 -1.00
0.00
1.00
2.00
3.00
4.00
5.00
2000-Jan
2000-Jul
2001-Jan
2001-Jul
2002-Jan
2002-Jul
2003-Jan
2003-Jul
2004-Jan
2004-Jul
2005-Jan
2005-Jul
2006-Jan
2006-Jul
2007-Jan
2007-Jul
2008-Jan
2008-Jul
2009-Jan
2009-Jul
2010-Jan
2010-Jul
2011-Jan
2011-Jul
2012-Jan
2012-Jul
2013-Jan
2013-Jul
2014-Jan
2014-Jul
2015-Jan
and 30-Year Treasuries

2015-Jul
2016-Jan
2016-Jul
2017-Jan
2017-Jul
2018-Jan
2018-Jul
0.98
Narrowing Yield Spread Between 3-Month
 10
15
20
25
30
35
40
45

0
5
2008-Jan
2008-May
2008-Sep
2009-Jan
2009-May
2009-Sep
2010-Jan
2010-May
2010-Sep
2011-Jan
2011-May
2011-Sep
2012-Jan
2012-May
2012-Sep
2013-Jan
2013-May
2013-Sep
2014-Jan
2014-May
2014-Sep
2015-Jan
2015-May
2015-Sep
2016-Jan
2016-May
2016-Sep
2017-Jan
(NY Fed: based on interest rate spread)

2017-May
2017-Sep
2018-Jan
2018-May
Low Probability of a Recession

2018-Sep
2019-Jan
2019-May
2019-Sep
14
Old Economic Forecast
(as of May 2018)
 New Economic Forecast
U.S. ECONOMIC OUTLOOK — October 2018
2016 2017 2018 2019
Annual Growth Rate, %
Real GDP 1.5 2.3 3.0 2.6
Nonfarm Payroll Employment 1.8 1.4 1.6 1.4
Consumer Prices 1.3 2.1 2.9 2.7
Level
Consumer Confidence 100 120 130 128
Percent
Unemployment 4.9 4.4 3.9 3.9
Fed Funds Rate 0.4 1.0 1.8 2.6
3-Month T-bill Rate 0.3 1.0 2.0 2.7
Prime Rate 3.5 4.1 4.9 5.6
10-Year Gov’t Bond 1.8 2.3 3.0 3.5
30-Year Gov’t Bond 2.6 2.9 3.2 3.7

Source: National Association of REALTORS®

 Commercial Real Estate Forecast
Commercial Real Estate Vacancy Forecast (%)
2017.Q2 2017.Q3 2017.Q4 2018.Q1 2018.Q2 2018.Q3 2018.Q4 2019.Q1 2019.Q2 2019.Q3 2019.Q4 2020.Q1 2017 2018 2019

Office 12.7 12.7 12.0 12.7 12.4 13.2 13.2 13.1 13.0 12.8 12.8 12.7 12.8 12.9 12.9
Industrial 9.1 8.9 7.8 7.4 7.7 7.5 7.4 7.2 6.9 6.7 6.5 6.7 8.8 7.5 6.8
Retail 10.4 12.1 11.4 12.0 12.0 12.0 12.1 12.1 11.9 12.1 12.3 11.7 11.8 12.0 12.1
Multifamily 5.8 5.3 5.0 5.5 6.1 6.3 6.4 6.3 6.4 6.5 6.6 5.4 5.5 6.1 6.4
Source: National Association of REALTORS®
CRE Spreads: Cap Rates to 10-Yr. T-Notes (bps)

1200 RCA Cap Rates REALTORS® Cap Rates

1000
800
600
400
200
0
10Q1 10Q3 11Q1 11Q3 12Q1 12Q3 13Q1 13Q3 14Q1 14Q3 15Q1 15Q3 16Q1 16Q3 17Q1 17Q3 18Q1
Sources: National Association of REALTORS®, Real Capital Analytics
Commercial Economic Issues and Trends Forum

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