COMMERCIAL ECONOMIC ISSUES & TRENDS FORUM

Commercial Real Estate In A Global Low-Yield Environment

LAWRENCE
YUN, PhD
Chief Economist, Sr.

K.C. CONWAY,
MAI CRE
Sr. VP Credit Risk

VP
National Association
of REALTORS

Management
SunTrust Bank

WELCOME!
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Economic Issues & Trends Forum!
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LAWRENCE YUN, PhD

NATIONAL ASSOCIATION OF REALTORS
Chief Economist and Senior Vice President of Research
Lawrence Yun is Chief Economist and Senior Vice President of Research
at the NATIONAL ASSOCIATION OF REALTORS. He oversees and is
responsible for a wide range of research activity for the association
including NARs Existing Home Sales statistics, Affordability Index, and
Home Buyers and Sellers Profile Report. He regularly provides
commentary on real estate market trends for its 1 million REALTOR
members.
Dr. Yun creates NARs forecasts and participates in many economic
forecasting panels, among them the Blue Chip Council and the Harvard
University Industrial Economist Council. He appears regularly on
financial news outlets, is a frequent speaker at real estate conferences
throughout the United States, and has testified before Congress. Dr.
Yun appears often as a guest on CSPANs Washington Journal and is a
regular guest columnist on the Forbes website.
Dr. Yun received his undergraduate degree from Purdue University and
earned his Ph.D. from the University of Maryland at College Park.

Economic and Commercial

Market Outlook
By Lawrence Yun, Ph.D.
Chief Economist, National Association of REALTORS
Presentation at NAR Annual Convention
Orlando, FL
November 4, 2016

Fed Rate Hike in December 15

Next hike in December 16?
then again in

Latest GDP Growth Rate Good?

2.9% (2016 Q3 vs 2016 Q2, annualized)
1.5% (2016 Q3 from 2015 Q3)
1.5% (Likely annual 2016 from 2015)

GDP Quarterly Growth Rate

Personal Consumption Growth Rate

Business Spending Growth Rate

(Non-residential fixed investment)

Government Spending Growth Rate

Export and Import Growth Rates

Exports (Red)
Imports (Blue)

Exports and Imports

U.K. vs. U.S.

(How many Pound to $1)

China vs. U.S.

(How many Yuan to $1)

Russia vs. U.S.

(How many Rubles to $1)

Stock Market: S&P 500 Index

P/E Ratio

Lifetime Wealth at near All-Time High

$ billion

Median Household Income

(Inflation Adjusted)

Jobs
(8 million lost 15 million gained)
In thousands

Unemployment Rate
vs. Employment Rate

Employment Rate: Men vs Women

Job Leaders
Metro

% growth from one year ago to August

Salem, OR

5.7

Reno

5.3

Daytona Beach

4.6

Ogden

4.6

Provo

4.5

Orlando

4.4

Boise City

4.3

Kalamazoo

4.1

Savannah

4.0

Ann Arbor

3.9

Portland Oregon Fast Turnaround

Detroit - Comeback

Austin - Booming

Major Sports Teams in 1950

Major Sports Teams in 2015

Recession over the Horizon?

Total Job Openings

In thousands

Total Job Separations

In thousands

Initial Unemployment Insurance

Filings

Manufacturing Weekly Workhours

New Capital Orders excluding Defense

(% change from a year ago)

Consumer Confidence Index

(Conference Board)

Auto Sales
(Annualized Rate)

Single-family permits and starts

ISM Manufacturing Index

(50 = Neutral)

Probability of Recession
(NY Fed: based on interest rate spread)

Is the Economy Turning?

No strong recession signals
Softer growth momentum

Hows the Commercial

Real Estate Market?

Apartment
%

Source: CBRE via ULI

Multifamily permits and starts

Office
%

Source: CBRE via ULI

Industrial-Warehouse
%

Source: CBRE via ULI

Retail
%

Source: CBRE via ULI

Why Industrial Outperforms?

Past Non-Store Retail

Sales

Hotel
%

Source: Smith Travel via ULI

Tom Barrack
Real Estate Market is Getting
Bubblicious

Commercial Property Price may be Bubblish

(60% gain in 5 years)

Source: Federal Reserve

Commercial Investment Sales of Large Properties

(Properties valued at $2.5 million and over)

Investor Home Sales

(% of Total Sales; 12-month average)

Rent Growth
(% change from a year ago)

Post-College Likely Renters

(Age 25 to 29)

Percentage Living with Mom

(2.5 million above Norm)

Inflation to Rise
Unless Oil Price Tumble Further

Oil Price

Big Cap and Small Cap

Real Capital Analytics
$2.5 million and over transactions

REALTOR Activity
Mostly around $500,000 to $1 million transactions

Capital seeking yield drives prices

NCREIF Cap Rates

Likely Already Hit Low
%

U.S. CRE Investment Trends:

Small cap CRE deals advance in H1.2016

Source: Boxwood Means, LLC

Capital landscape remains bifurcated

Lending conditions tighten for small cap

CRE

Bank capital remains obstacle to small cap

CRE

Commercial Realtor Survey

Commercial Realtor Survey

Commercial Realtor Survey

Commercial Realtor Survey

Forecast

Real Estate Tax Focus?

Trumps Depreciation?
1031 Exchange?

Risk to Forecast
2/3 of Members used 1031 Exchanges

Economic Forecast
2015

2016
Likely

2017
Forec
ast

2018
Forec
ast

2.6%

1.5%

2.1%

2.5%

Job Growth

+2.6
million

+2.0
million

+2.1
million

+2.4
million

CPI Inflation

0.3%

1.2%

2.5%

2.5%

GDP Growth

Commercial Real Estate Forecast 2017-2018

Vacancy

Rent

Rising
50 to 80 basis
points

Rising Slowly
3% per year

Office

Stable

2.5% per year

Industrial

Stable

4% per year

Retail

Stable

2% per year

Apartment

Rising Cap Rates and

Commercial Real Estate Prices
Steady prices in mid-tier markets
Modest price correction in big cities and
trophy properties
Green Street price index could fall 4% to 8%
over the next two years

COMMERCIAL ECONOMIC ISSUES & TRENDS FORUM

Commercial Real Estate In A Global Low-Yield Environment

LAWRENCE
YUN, PhD
Chief Economist, Sr.

K.C. CONWAY,
MAI CRE
Sr. VP Credit Risk

VP
National Association
of REALTORS

Management
SunTrust Bank

K.C. CONWAY, MAI CRE

SunTrust Banks, Inc.
Senior VP, Credit Risk Management
K.C. Conway is a Sr. VP - Credit Risk Management, with responsibilities for REVAL (Real Estate Valuation
and Environmental Services) and Market Intelligence. He has 30 years experience as an appraiser,
underwriter, lender, credit officer and economist. Prior to joining SunTrust Bank K.C. Conway held
noteworthy roles: i) Chief Economist for Colliers | U.S. (2010-2014); ii) Commercial Real Estate Risk
Specialty Officer NY Federal Reserve Bank (2009-2010); iii) CRE Subject Matter Expert Atlanta FED
(2005-2009); iv) and Director of Underwriting legacy SouthTrust Bank (1995-2005).
Mr. Conway is also a frequent lecturer and speaker on CRE markets and valuation matters for
government agencies, financial institutions, and private industry groups. Over the past 5 years he has
addressed approximately 350 real estate industry conferences, including the Appraisal Institute,
American Property Tax Council, Counselors of Real Estate, FDIC, FFIEC, IPT, NAHB, National Association
of Realtors, NAIOP, SIOR, Society of CPAs, and ULI.
Mr. Conways professional accomplishments include briefing Federal Reserve Chairman Ben Bernanke
on subprime lending & housing crisis, and the impact on the CRE industry; the Presidential Recognition
Award in 2007 by the Appraisal Institute; the 2009 Key Player Award, Federal Reserve Bank of Atlanta;
the 2010 Meritorious Service Award, Federal Financial Institutions Exam Council, for market analytics
work during the financial crisis; the Honorary Texan and Economist Extraordinaire by Colliers-Houston
for perfect economic forecast in 2013 and Colliers industry leading North American Port & Industrial
Outlook forecasts; Published research and studies on ports, industrial real estate, 3D-Printing and the
reliability of appraisals in such publications as Bloomberg, NY Times, and Real Estate Issues.
Mr. Conway is a third-generation MAI and Counselor of Real Estate. His past employers and clients
include: Deloitte, Equitable, Prudential, former SouthTrust & Wachovia banks, Wells Fargo Bank, and
Colliers International. He also held multiple roles in the Federal Reserve System - including CRE-RiskSpecialty-Officer.

CRE Issues & Trends Forum

Fortunately, I am just forecasting the Economy & R.E. - not the Politics!
Woodrow Wilson Vs SC Justice Evans

Trump Vs Clinton

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K.C. Conway, MAI, CRE

Sr. VP Credit Risk; Sr. Valuation & Market Intel. Officer - SunTrust
Kiernan.Conway@SunTrust.com (404) 813-2419

Disclaimer:

Upfront and Not in

fine print
Neither the National Association of Realtors (NAR), nor SunTrust
Bank make any representations or warranties about the accuracy or
suitability of any information in this presentation. NAR does not
guarantee, warrant, or endorse the advice or services of K.C. Conway,
MAI, CRE;
Nor is there any relationship between Conway Tweety, Tim Conway or
even KellyAnne Conway and the Trump Campaign & K.C. Conway.
This presentation consists of materials prepared exclusively by
K.C. Conway, MAI, CRE, and is provided during this conference solely
for informational purposes of Conference attendees. This presentation is
not intended to constitute legal, investment or financial advice or the
rendering of legal, consulting, or other professional services of any kind.
Page #
90

Test Your Presidential &

Economic Knowledge

Answers

Which of the BEAs 7 economic

regions of the U.S. produces the
most GDP in real US Dollars or
as a % of total GDP?
SE @ 21.5% / TrustBelt 33.5%
Has the Congress ever decided
a Presidential Election?
Twice & for the same family (Hint
Not a Bush )

Twice 1800 and 1824:

1800 John Adams Vs. Thomas Jefferson::
The Presidential Election of 1800 between John Adams and
Thomas Jefferson was one of only two elections that resulted
in the House of Representatives deciding who would be
President of the United States. It was also the only time where
there was a tie for President in the Electoral College.

And 1824 John Quincy Adams Vs. Jackson:

Although it wasn't a tie, the House of Representatives also had
to decide the President in the election of 1824, between Adams
son John Quincy Adams, and Andrew Jackson, when no
candidate reached the required majority of electoral votes.

Which President held the 1st

Televised news conference?
Page #91

John F. Kennedy was the first president to hold a

press conference on television.

 Logistics:
Andrew Jackson was the first president to ride a railroad train.

Telemarketing:
William McKinley was the first president to campaign by telephone

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Luxury MF:
STYLE

TV News:

John F. Kennedy was 1st president to hold a press conference on TV

Theodore Roosevelt was the first president to call his residence in Washington, D.C. the
"White House." Prior to his term, it had been called the Executive Mansion or the
Presidents House.

Breaking Down Racism:

Lyndon B. Johnson was the first American president to name an African American to his
cabinet.

Who Trump developed his Tweet behavior from:

Chester A. Arthur walked at night and seldom went to bed before 2 a.m.

The Character we miss and need today: Jefferson & Polk

Thomas Jefferson wrote his own epitaph never mentioning that he served as president.
His epitaph read, "Author of the Declaration of American Independence.
James K. Polk fulfilled all his campaign promises. During his administration Polk acquired
California from Mexico, settled the Oregon dispute, lowered tariffs, established a subtreasury, and retired from office after one term.
Source: KC Conway & http://www.legendsofamerica.com/ah-presidenttrivia.html

92

Before I lay out my Forecast

What could go wrong?
The FED /
Tran
sm
i
spo
r
Monetary Policy
ro
r
e
Han rtation
/T
jin
/
y
t
Sh
Ban
ri
u
c
kru ipping
Se
ptcy

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GDP / Job Growth
STYLE
Capital for R.E. and
in an era of
Bank Regulation

(HVCRE / Risk Retention)

Disruptive Technology

BRE
n&
o
i
XIT
a
t
a
U
r
r
SN
/
ig n fo ce
o
m
r
v 8 th
Im catio rkfo
Return of the
el e
Edu d Wo
Old
Testament
Hurricanes
ctio
e
l
l
ns
(Matthew), Floods, Plagues,
Ski
Pests (Zika)
Note: Nothing on Millennials.
They have already solved the Puzzle (no commute, no housing
costs, no kids, just enjoy life in the city

93

BREXIT
It aint over until Parliament approves it?

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94

Forecast of the U.S. Economy & R.E.

K.C.s views until Nov 8th - and maybe beyond
The 2016 U.S. Economy is rated E for erratic. Forecasting
2017 will be challenging.
GDP has clearly downshifted to something below 2% - maybe even
1% by Yr-End 2016 but
As
goes the national economy, the SE and Trustbelt economies will go
much better!
Housing and Personal Consumption Spending are the 2
components buoying the economy. If the FED gets interest rates
wrong, the U.S. could slip quickly into recession.
The FED will remain Dovish on interest rates another one and
done in Dec 2017?
Job growth is NOT holding up at +200k per month. The pace of job
creation is slowing. Monitor Challenger-Gray monthly Job Cuts to ID
where job growth is slowing.

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The best Job Recovery MSAs post 2009 recession are in the SE
and there is a strong correlation to seaport and inland port MSAs.
As online commerce continues to expand, more shippers, retailers
and logistics firms will seek top-quality, big-box warehouses in the
leading inland-port markets to serve as critical links in their supply
chains CBRE Aug 2016.
95
The strong U.S. Dollar is adversely impacting manufacturing &

GDP: The Global View at Mid-2016

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Only 16 countries with GDP > $1.0 Trillion

Global GDP growth is anemic (Top 25 with <2% GDP)

Only 3 countries with GDP > $10.0 Trillion

Euro region, Germany, UK, France have GDP <1%

The EU has a GDP > China.

Debt to GDP is a problem for all but China.

Canada + Mexico equates to a UK in GDP.

Source: Trading economics.com

96

U.S. GDP Trend heading into Elections

By the Numbers: 3 consecutive quarters of sub 1.5% GDP (Q2 & Q3 should be strongest)

UPDATE:
Q2 revised up to 1.4%
(still <1.5%)
WHAT?
Q3 1st guess at GDP
was +2.9%

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Real gross domestic product increased at an annual rate of 1.4 percent in Q2 2016, according to
the 3rd " estimate released by the Bureau of Economic Analysis. 1st guess at Q3 is encouraging +2.9%
In the first quarter, real GDP increased just 0.8 percent and an anemic 0.90% in Q4 2015..
The increase in real GDP in Q2 was from positive contributions from persona consumption
expenditures (PCE) and housing that were partly offset by negative contributions from private
inventory investment, state and local government spending and nonresidential fixed investment.
Imports, which are a subtraction in the calculation of GDP, increased.
GDP Growth Rate in the United States averaged 3.22 percent from 1947 until 2016.
GDP high mark was 1950 reaching an all time high of 16.90%
97
The record low of -10 percent occurred in Q1 1958.

GDP in Detail:

GDP continues on a slow growth pace <1.5%

By the Numbers: GDP, Jobs, Housing, CMBS & CRE conditions

GDP:
The U.S. economy continues on a slow growth path. The final Bureau of Economic Analysis (BEA) revisions to Q2 GDP
were released September 29th and show the U.S. economy grew at just 1.4% to an annualized level of $18.45 trillion.
While the Q2 final revision to GDP was up from the 1.1% initial revision, it is down from +2.6% in Q2 2015 and +4.0%
in Q2 2014. A first estimate on Q3 GDP wont come until the end of October. However, Q2 and Q3 GDP in each calendar
year should be stronger in +2.5% to +4.0% range due to Spring housing starts, along with back-to-school spending and
retailer stocking for Q4 holiday shopping season. An important observation from the above GDP data is that the
categories accretive to economic growth on a YOY basis all experienced a slower rate of growth between Q1 and Q2
2016. Thus, the slower growth path forecast for Q3 and Q4 2016.
..

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GDP What is still growing/accretive?

1. Personal Consumption Expenditures (Durable

goods like furniture and appliances and Non-Durable
Goods like clothing, food and energy). PCE is up overall
+3.7% from Q2 2015 and +1.6% over Q1 2016;

2. Household and Healthcare Services. These are

up +4.4% and +6.2%, respectively on a Year-over-Year
basis and just +1.5% and +2.2% respectively on a quarter
over quarter basis;
3. Intellectual Property Products or IT are up a healthy
5.9% YOY and +2.5% Qtr over Qtr; and

4. Residential Construction is up the most of any

category on a YOY basis at +9.1%, but actually
contracted in Q2 by -0.7% due to slowing in MF permit
activity, not Single family home construction.

GDP What is contracting/dilutive?

1. Motor Vehicles & Energy: Vehicles sales are down -0.9%

YOY, but are expected to remain >17 million annualized unit
sales. Energy is down -13.1% YOY basis due to lower gas prices.
2. Transportation Services have contracted -0.1% and will
likely deteriorate further in 2H2016 due to Hanjin Shipping
bankruptcy (bigger container ships mean fewer vessels); and
disruption along East-coast ports from Hurricane Matthew .
3. Equipment and non-residential construction
contracted by -1.6% and -5.0%, respectively YOY. Commercial
R.E. constr. is not robust outside multifamily & industrial.
4. National Defense has contracted by -0.3% YOY & QOQ.
5. Inventories are also contracting (an atypical occurrence
in Q2 heading into the Q3 build-up of inventories for
98
Q4 holidays.(Why? The strong US Dollar).
.

GDP: The untold story about the Southeast!

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99

GDP: SE has the Top GDP Growth Destinations!

SE produces >21.5% of U.S. $18 Trillion / SE Region #1 followed by Far West & MidEast
At State level within SE, rankings are FL #1, NC #2, GA #3, VA #4, TN #5 & SC is #8

GDP Ranking for the

7 BEA Regions of the
US:
1.SE with $3.8 Tr &
21.6%
2.Far West: $3.4 Tr &
SE
Region Rankings by
19.0%
State
3.Mid-East: $3.3 Tr(NC+SC
&
= 4% of US GDP):
18.2%
4.Gr-Lakes: $2.5Tr &
13.8%

As goes the
national
economy, the
10
SE and NC/SC 0

The TrustBelt if it were a BEA region

SE + TrustBelt totals > ($9.9 Tr) of US $18.1 Trillion in GDP!

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The TrustBelt region includes: Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan,
Minnesota, Missouri, Nebraska, North Dakota, New York, Ohio, Pennsylvania, South
Dakota and Wisconsin. The TrustBelt is owned Conway Inc. http://www.TrustBelt.com.

Supply Chain shift from West coast to East coast recognizes this
ability of East coast ports to service > US GDP
SE + TB is basis for forecast As goes national economy, .

101

RAIL TRAFFIC

Rail Traffic: The Common Sense Recession Indicator!

By the Numbers: Rail Traffic 6th consecutive month Intermodal traffic contracted YOY.

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102

JOB GROWTH:

YTD Monthly Job Growth <180k Vs 229k CY 2015?

By the Numbers: Jobs Key SE MSAs are among the Best Job Producing Markets
JOBS: Still a Slow Growth Path with <180k monthly job growth average YTD.

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The BLS released its October Jobs report this morning that once again indicated a slow growth path
in Q4. The seasonally adjusted job growth figure for September was just 161,000 jobs. That
compares with 167,000 in August and 156,000 in September- and a trailing 3 month average of just
176,000 after upward Aug & Sept revisions.
Year-to-Date, the US economy has produced a monthly average of just 178,000 or a figure that
approximates the ADP private payrolls YTD monthly average of 175,000 jobs.
Both the BLS YTD 2016 and ADP YTD monthly job growth rates compares unfavorably with the BLSs
final revised monthly job formation rate of 229,000 jobs in CY 2015 and 251,000 in CY 2014.
However, as goes the national economy with respect to job growth, the SE, South-Atlantic and
Trustbelt MSAs are performing better.
Job growth in key Southeast markets like Atlanta (+3.2% and 85k trailing 12-month job growth),
Charlotte (+3.6% and 42k annual job growth), Greenville/Spartanburg SC (+3.5% and 18k jobs),
Jacksonville FL (+3.5% and 24k jobs), Nashville TN (+5.4% and 47k annual job growth) and Orlando
FL (+4.1% and 48k jobs) are experiencing job growth rates from +3.2% (Atlanta) to +5.4%
(Nashville). .
103

ADP VS BLS

ADP Vs. BLS Monthly Job Growth

Job Trends by Charts: ADP Vs. BLS trend

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The Global take on todays BLS jobs report:

104

BEST JOB MSAs:

Best Job-Producing MSAs since 2009

Best Job Producing MSAs post 2009: Atlanta best large MSA; NC & SC with 5 MSAs / FL with 4

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14 of the top 25
job-producing MSAs
post 2009 are
located in the
Southeast.
AND
All 14 MSAs have
experienced >12%
increases in total
employment since
YE 2009.

105

Cant end Outlook on Economy without Interest Rates

I have it from a High Authority FED to remain Dovish.

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March 5th before March FOMC mtg. (Lilburn, GA)

And yes the Dove was real & nobody shot at it.
106

R.E. OUTLOOK

CRE Conditions Know where in Life Cycle

CRE Life Cycle: Retail is actually moving counter-clockwise & Houston is worse than 1H206

MF & Industrial
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TO
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MASTER
TITLE
Top-25
Job
Gr MSAs
STYLE
since 2009
SF Housing

Office:
A slow expansion

Hotel & Houston

Retail: Moving
Counter-Clockwise
back to Contraction

107

Housing Activity is at 35-year lows

HPA rise is far from played-out !

Home
Inventory 4Sale is <2%
of
Households

Page #

Housing Affordability
Only a problem in CA not so much in FL

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109

Housing Affordability call MetroStudy

Whose HPA? Case-Shiller may be understating it!

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110

MF HOUSING

MF Housing Student Housing in Focus

By the Numbers: Multifamily Houston, Nashville, DC & Miami still < 5:1 Jobs:Permits
MF Housing: On the other side of the housing story is multifamily. New completions and starts have ramped up in the
past 2 years surpassing 450,000 annual new units in response to both job growth driven demand, as well as investor
demand for this CRE property type. Overbuilding risk has become elevated as additions to new supply are expected to
peak in 2H2016 or 1H 2017. Rental growth rates are still positive (+2.5% range national average according to
September Axiometrics MF Housing Outlook report), but have cooled by 50% from the national average of +5% in 2014
and 2015.

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The Jobs to Permits ratio is a reliable metric to assess multifamily overbuild risk. Where this ratio falls below 5:1,
overbuild risk is indicated. This ratio is below 5:1 in markets like Houston, Nashville, Washington DC, and Miami. It is
still above a 5:1 ratio in markets like Atlanta, Orlando, Greenville/Spartanburg SC, Memphis TN and Jacksonville FL.
In the final Q2 GDP data by the BEA, residential domestic investment contracted for the first time since 2014 to
-0.7% due solely to a pullback in multifamily construction.
Multifamily housing is experiencing self-induced market discipline that will likely keep rents from going net
negative, and a material development of nonperforming construction loans.
Investor demand remains strong for stabilized new construction in both primary and secondary MSAs. 1H2016 has seen
multifamily transactions occur at sub 6% Cap Rates in markets like Birmingham AL and Richmond VA. Banks are
exhibiting consistent lending discipline for new multifamily construction.
A MF Sector to Monitor: Student Housing - All the credit alarms are being tripped (Sept. Green Street Spotlight)
Revenue growth slowing from 3% annual range to 1% range due to elevated new supply and slowing enrollment (online)
New supply continues to come at a rapid pace at 5% of existing inventory rate.
Construction Lending is tightening with LTVs dropping to 60% range in recognition of overbuilding risks.
Cap Rate Risk: Acquisitions to build market share and influx of foreign capital from countries like Russia and Asia are
skewing Cap Rates low and can reverse quickly.
Legislative barriers to public-private partnerships that previously constrained new supply are being disabled in growth
states like FL and MI. The On-Campus vs Off-Campus debate is far from resolved.
111

MF & OVERBUILDING RISK:

CRE Conditions (MF) STI Market Monitors: Northern & Central FL NOT a concern

Multi-Family: The Key Metric is Jobs to Permits

<5:1 Overbuilt / >5:1 Balanced

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Overbuilt MSAS with

Jobs : Permits < 5:1

MSA with Jobs :

Permits > 5:1
Savannah
Knoxville
Chattanooga
San Antonio
Richmond
Columbia SC

Houston <1:1
Nashville <4:1
NYC <3:1
Austin <4:1
Sarasota <3:1
Charlotte & MIA

Jobs to MF Permits Ratio for SC MSAs:

Orlando:
Tampa: > 8:1
Jacksonville:

> 5:1 at 5.6:1

> 5:1 at 7.5:1
112

#1 CRE CONCERN?

CRE Debt Capital now >50% in Banks

CMBS By The Numbers: #1 CRE Concern remains source of Perm Capital to ReFi construction

Banks hold <50% of CRE

Debt once again
(Regulator Concern)

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Risk Retention Rules

impact in 2H to continue
as full implementation
not until Yr-End 2016.

113

REIT RETURNS

RARs for Core Property Types still >5%

By The Numbers: CRE Returns:

REIT Returns by CRE Property Type still attractive (Monitor MH, Self-Stor & StHousing

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114

PROPERTY VALUES

CRE Values All CRE types see less increase

Property Values: Hotel declined by 12%; MF has slowed from +7% to -1% (Rents/NOI slowing)

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115

PROPERTY VALUES

Green Street Nov CPPI: CRE Values YOY

Property Values: Hotel declined by 12%; MF has slowed (+5% YOY). WHY? Rents/NOI slowing

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116

CRE OUTLOOK

CRE Conditions Know where in Life Cycle

CRE Conditions: There are some supply imbalances, but no fall-off-cliff scenario ahead
Commercial real estate growth is driven primarily by job growth. Therefore, as goes the national economy, CRE
conditions will do better in the Southeast & STI primary footprint where job growth materially exceeds the national rate
or those 14 of top 25 Best Job Growth MSAs since 2009 (Atlanta, Charleston, Nashville, Orlando, etc.)

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There are still supply imbalances in office and retail CRE that will continue to limit new construction in these two
property types to pre-leased projects. Office absorption is being adversely impacted by the tenant trend toward
Densification (more workers in less space), while retail absorption is being adversely impacted by the growth in ecommerce (retailers are selling more through an Omni-channel platform and not so much through traditional stores).
Industrial warehouse demand is being fueled by a shift in the supply chain from one concentrated in southern
California to one paralleling the East coast ports. As functionally obsolete warehouses built in the 1980s and 1990s with
<24-foot clear ceiling heights and inadequate 115-foot tractor trailer courtyards lose tenants to modern warehouses with
at least 30-foot clear ceiling heights and 150-foot tractor trailer courtyards, the East coast inland and port markets in FL,
GA, SC, VA and TN will be the beneficiaries. The growth in both new industrial warehouse supply and absorption is
particularly noteworthy in Atlanta, Memphis, Greenville/Spartanburg SC, Charlotte NC and Orlando/Lakeland FL.
Multifamily real estate faces overbuilding risk in energy markets, like Houston, or MSAs with a Jobs to permits ratio
below 5:1, such as Nashville, Washington DC and Miami. The peak in new multifamily supply is expected in 2H2016 and
1H2017. This peak in new supply is slowing pace of rent growth from a 5%+ annual rate nationwide to half that (+2.5%).
Hotel CRE is viewed as the most risky property type from both the risk of a business recession in Spring 2017 and
overbuilding. RevPar peaked at 8% in 2015 and has slowed to 2%-3% range just as new supply is coming online in 2017.
Overall, though, no fall-off-the-cliff scenario is envisioned for commercial real estate. Yields on commercial real
estate remain healthy and above alternative investments in equities or bonds. That feature will keep investment
capital flowing into commercial real estate. The latest overall returns form the respective CRE property types were
recently updated by Green Street and appear on previous slide.
A caveat to the aforementioned is Hurricane Matthew. It impacted the region of the US that produces 21.5%
of national GDP across 5 states from FL to VA. This storm will adversely impact
Q4 GDP and job creation in a number of the Best Job Recovery MSAs since 2009, such as Orlando,
Jacksonville, and Charleston SC. Rebuilding investment will mitigate the impact to some degree in 2017.

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Commercial R.E. Outlook

Green Street Aug 2016 has it right!

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3 Game-Changers to Dial-Into
Rail & ACT Designations, NCMM Export growth & USDA Pilot program to import Fruits & Vegetables.

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Site Designations will

redefine the type Industrial in Demand

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CSX introduced the Select Site program in 2012 to better serve new or existing customers on its network. CSX
partners with The Austin Company, a nationally-known site selection consulting firm, to screen candidate sites and
assist communities with the application and certification process.
To receive CSX Select Site designation, the location must meet a rigorous list of criteria, including infrastructure and
utility availability, environmental reviews, appropriate zoning and entitlement, rail serviceability, proximity to
highways or interstates, and other attributes. Once certified, the sites are featured on a new user-friendly web portal
that includes press releases, promotional materials and direct marketing to site selection professionals.
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NCMM Middle Market Companies

This is a $ Trillion+ port growth opportunity

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Food-Supply Chain & USDA Pilot Program

Eat Healthy + Organic + Automation = SE ports

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Initiated in 2013, the US Department of Agricultures pilot program for importing fruits and vegetables from Latin America changed the
trajectory of Americas perishable food supply chain, allowing southern ports to have a seat at the table for the first time.

The perishable food supply chain, traditionally clustered in the north because of regulations meant to safeguard against the problem
of fruit flies and other infestations, needed a safety valve to address mounting challenges as consumer demand for fresh produce grew.
The delayed distribution from north to south sometimes led to spoilage and days-old produce for consumers, and decreased profitability for
exporters and grocers.
Southern ports, which were in the midst of rebuilding their infrastructure, viewed cold storage and food distribution as an untapped
opportunity to expand their services and resolve the distribution problems for the regions rapidly expanding population. What started out
as a conversation about food distribution and regulatory changes between the USDA and the Florida Perishables Trade Coalition has
morphed into a pilot program that encompasses a majority of the Souths major ports.

So how did we get here? The Panama Canal expansionwas the impetus for many southern ports to question the regions supply chain and
complete the transformation from military seaports to technologically advanced commercial ports. Simultaneously, Americans were
migrating toward a healthier lifestyle marked by an increase in organic food consumption. Seeing a wider adoption among consumers
for chemical-free fruits and vegetables, as well as a need for quicker turnaround times for freight transportation, southern port officials
seized upon a chance to invest in refrigerated terminal space. This aided in their efforts to become ports of entry for imported produce.

The new healthy eating trend and Panama Canal expansion, coupled with the ports technological advancements and a modernized
supply chain network, created the perfect storm that helped carve out an opportunity for the South. While the USDA pilot program is
still in the early stages, it has the ability to sustain long-term success because of the regions comparatively inexpensive electric grid
and extensive intermodal transport system, which includes a superior Class I railroad network.

Looking ahead, the programs success will rely upon the ability of southern ports to continue to add refrigerated capacity, at a rate
commensurate with consumer appetite. Currently, refrigerated cargo represents 10 percent of all containerized units in the south. That
number could easily double within two to three years. To support this increased activity, ports will need to build more than 1 million square
feet of refrigerated space. This will be at great cost, as cold storage is very expensive to build. While many in the financial industry
still
123
view cold storage as a niche business and are determining financing risks, it is important for all parties to work together.

Food-Supply Chain & USDA Pilot Program

What K.C. wrote & Submitted see Reefer in title?

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CONCLUSION:
Be careful climbing around out there. The CRE Ropes Course is 89 months long & challenging.

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K.C. Conway, MAI, CRE
Economist | Counselor of Real Estate
Sr. VP Credit Risk Management - SunTrust
KCmaicre@gmail.com
Kiernan.Conway@SunTrust.com
(404) 813-2419

125

COMMERCIAL ECONOMIC ISSUES & TRENDS FORUM

Commercial Real Estate In A Global Low-Yield Environment

LAWRENCE
YUN, PhD
Chief Economist, Sr.

K.C. CONWAY,
MAI CRE
Sr. VP Credit Risk

VP
National Association
of REALTORS

Management
SunTrust Bank

COMMERCIAL ECONOMIC ISSUES & TRENDS FORUM

Commercial Real Estate In A Global Low-Yield Environment

LAWRENCE
YUN, PhD
Chief Economist, Sr.

K.C. CONWAY,
MAI CRE
Sr. VP Credit Risk

VP
National Association
of REALTORS

Management
SunTrust Bank

COMMERCIAL ECONOMIC ISSUES & TRENDS FORUM

Commercial Real Estate In A Global Low-Yield Environment

LAWRENCE
YUN, PhD
Chief Economist, Sr.

K.C. CONWAY,
MAI CRE
Sr. VP Credit Risk

VP
National Association
of REALTORS

Management
SunTrust Bank