a new playbook megatrends · 2016-07-16 · source: delta associates; february 2014. a new playbook...

A New Playbook

MEGATRENDS

MegaTrends

• Regional Economy to Rebound

• National Economic Recovery Gaining Momentum

• Capital Flows Vary

• Demographic Shifts Impact Commercial Real Estate

• Changing Nature of Space

Source: Delta Associates; February 2014.

A New Playbook

REGIONAL ECONOMY

TO REBOUND

National Economic Recovery Poll Has the Economy Begun to Recover?

59%

39%

30%

35%

40%

45%

50%

55%

60%

65%

70%

November 2011 December 2013

No

Source: ABC News/Washington Post Polls, Delta Associates; February 2014. Excludes ‘no opinion’ responses.

Yes

MegaTrend 1:

Regional Economy to Rebound

Payroll Job Growth Washington Metro Area

-60

-40

-20

0

20

40

60

80

100

120

140

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

District of Columbia Suburban Maryland Northern Virginia

20-Year Annual Average = 42,400/Year

5-Year Projected Average = 59,300/Year

THO

USA

ND

S O

F N

EW

PAY

RO

LL J

OB

S

Source: Bureau of Labor Statistics, Dr. Stephen Fuller, Delta Associates; February 2014.

MegaTrend 1:


Job Growth Washington Metro Area | 12 Months Ending December 2013

Source: Bureau of Labor Statistics, Dr. Stephen Fuller, Delta Associates; February 2014.

(8,400)

(28,000)

62,200

-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Federal Government Procurement/Contractors All Other

JO

B G

RO

WT

H

Total = 25,800

MegaTrend 1:


Payroll Job Change By Wage Washington Metro Area

(60) (40) (20) 0 20 40 60 80

Lower Wage

Mid-Wage

Higher-Wage

Thousands

2008-2009

2010-2013

Higher-Wage

Mid-Wage

Lower-Wage

JOB CHANGE IN THOUSANDS

Source: Dr. Stephen Fuller, Delta Associates; February 2014.

MegaTrend 1:


A New Playbook

NATIONAL ECONOMIC

RECOVERY GAINING

MOMENTUM

Household Stress Index United States

-10

-5

0

5

10

15

20

25

30

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

IND

EX 20-Year Average = 4.8

Source: PNC, Delta Associates; February 2014.

MegaTrend 2:

National Economic Recovery Gaining Momentum

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13*

Source: Conference Board, Morgan Stanley Research, Federal Reserve Board, Delta Associates; February 2014.

AN

NU

AL

GR

OW

TH

IN

R

EV

OL

VIN

G C

RE

DIT

* Through November 2013.

Annual Growth in Revolving Credit Outstanding United States

MegaTrend 2:


58% 68%

57%

39%

41% 31%

42%

60%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013

Note: Totals may not add to 100% due to rounding. Data polled in October of each year. Source: PNC, Delta Associates; February 2014.

Business Owners’ Outlook on National Economy

Optimistic

Pessimistic

MegaTrend 2:

National Economic Recovery Gaining Momentum P

ER

CE

NT

AG

E O

F R

ES

PO

ND

EN

TS

-10%

-5%

0%

5%

10%

15%

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

32 months: Recession + Recovery




Percent Change in GDP Unemployment Rate

Recession Recovery

UN

EMP

LOY

MEN

T R

ATE

AN

D

AN

NU

ALI

ZED

GD

P C

HA

NG

E

Source: BLS, BEA, Center for Regional Analysis, Global Insight, Delta Associates; February 2014.

Economic Trends and Forecast United States

MegaTrend 2:


A New Playbook

CAPITAL FLOWS

VARY

EQU

ITY

INV

ESTE

D

(BIL

LIO

NS

OF

DO

LLA

RS)

$0

$10

$20

$30

$40

$50

$60

$70

$80

2007 2012

Note: 2012 data is most recent full calendar year available.

Private Real Estate Funds U.S.-Focused | Equity Invested in Commercial Real Estate

MegaTrend 3:

Capital Flows Vary

Source: Preqin, Real Estate Forum, Delta Associates; February 2014.

-5%

0%

5%

10%

15%

20%

25%

30%

35%

To

tal R

etu

rn/Y

ear

U.S. REAL ESTATE

STOCKS

BONDS

S&P 500

NCREIF Property Index

Barclays Capital

Government Bond

Source: NCREIF, Delta Associates; February 2014.

Investment Alternatives as of Year-End 2013 Commercial Real Estate vs. Stocks vs. Bonds

AN

NU

AL

RET

UR

N

MegaTrend 3:

Capital Flows Vary

10-Year 1-Year

Source: Real Capital Analytics, graphic by Delta Associates; February 2014.

U.S. Investment Sales of Office Buildings

BIL

LIO

NS

OF

DO

LLA

RS

$0

$20

$40

$60

$80

$100

$120

2008 2009 2010 2011 2012 2013

MegaTrend 3:

Capital Flows Vary

$0

$5

$10

$15

$20

03 04 05 06 07 08 09 10 11 12 13*

Flex/Industrial

Retail

Office

Apartment

BIL

LIO

NS

OF

DO

LLA

RS


Investment Sales Washington Metro Area

MegaTrend 3:

Capital Flows Vary

*Excludes Archstone’s divestiture.

0%

5%

10%

15%

Retail Industrial Apartment Office

TOTA

L O

NE-

YEA

R R

ETU

RN

Washington Metro

U.S.

Source: NCREIF, Delta Associates; February 2014.

Total Investment Returns in 2013 Core Commercial Real Estate | U.S. vs. Washington Metro Area

MegaTrend 3:

Capital Flows Vary

4%

5%

6%

7%

8%

9%

07 08 09 10 11 12 13 07 08 09 10 11 12 13 07 08 09 10 11 12 13 07 08 09 10 11 12 13

Office Grocery-

Anchored SC Apartments Flex/Industrial

AV

ERA

GE

CA

P R

ATE

– A

LL C

LASS

ES

Source: Delta Associates’ Market Maker Surveys; February 2014.

Year-End Cap Rates Washington Metro Area

MegaTrend 3:

Capital Flows Vary

$235

$471

$0

$100

$200

$300

$400

$500

2009 2010 2011 2012 2013

SALE

S P

RIC

E P

ER U

NIT

(I

N T

HO

USA

ND

S)


National Average

$88

$215

Apartment Pricing – Class A Washington Metro Area

Garden/Low-Rise

Mid/High-Rise

MegaTrend 3:

Capital Flows Vary

A New Playbook

DEMOGRAPHIC SHIFTS

IMPACT COMMERCIAL

REAL ESTATE

-1%

0%

1%

2%

3%

4%

5%

6%

25-34 35-44 45-54 55+

( ≈ B a b y B o o m e r s )

Source: U.S. Census, GMU CRA, Delta Associates, February 2014.

AV

ERA

GE

AN

NU

AL

CH

AN

GE

A G E R A N G E

Population Change By Age Group Washington Metro Area | 2006 - 2011

( ≈ M i l l e n n i a l s )

MegaTrend 4:

Demographic Shifts Impact Commercial Real Estate

54%

20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Millennials Baby Boomer

Source: 2013 ULI/BRS National Survey, Delta Associates; February 2014.

PER

CEN

T O

F G

ENER

ATI

ON

Own vs. Rent Residence United States

Own Rent

MegaTrend 4:


500

520

540

560

580

600

620

640

660

2005 2010 2013

PO

PU

LATI

ON

IN T

HO

USA

ND

S

Source: U.S. Census, Delta Associates; February 2014.

Population District of Columbia

MegaTrend 4:



-10

-8

-6

-4

-2

0

2

4

6

8

10

Class A Class B/C

District

SubMD

NoVA

NET

AB

SOR

PTI

ON

(M

ILLI

ON

S O

F SQ

UA

RE

FEET

)

District

Office Net Absorption By Class of Space Washington Metro Area | 2011 - 2013

MegaTrend 4:


SubMD

NoVA

Inventory of Class B/C Office Space in Need of Renovation Washington Metro Area | Year-End 2013

0

50

100

150

200

250

300

Class B/C

INV

ENTO

RY

(M

ILLI

ON

S O

F SQ

UA

RE

FEET

)


MegaTrend 4:


District

SubMD

NoVA

Amazon Delivery Drone Prototype

MegaTrend 4:


A New Playbook

CHANGING NATURE

OF SPACE

175

180

185

190

195

200

2000 2005 2010 2015 2017

AV

ERA

GE

REN

TAB

LE

SQU

AR

E FE

ET


Average Square Feet Leased Per Office Worker Washington Metro Area

MegaTrend 5:

Changing Nature of Space

Office

MegaTrend 5:


878

851

771

750

800

850

900

2000 2010 2013

AV

ERA

GE

UN

IT S

IZE

(SQ

UA

RE

FEET

)

Class A High-Rise Apartments Average Unit Size District of Columbia


MegaTrend 5:


Apartments

MegaTrend 5:


E-C

OM

MER

CE

SALE

S (I

N B

ILLI

ON

S O

F D

OLL

AR

S)

Source: eMarketer, Delta Associates; February 2014.

$259

$434

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

2013 2014 2015 2016 2017

E-Commerce Sales Forecast United States

MegaTrend 5:


Retail

MegaTrend 5:


Industrial

MegaTrend 5:


Property Sectors

Washington Metro Area | Inventory at Year-End 2013

• Office: 422 million SF

• Flex/Industrial: 405 million SF

• Apartment: 554,000 units

• Condominium: 124,000 units

• Grocery-Anchored Shopping Center: 316 centers


A New Playbook

THE WASHINGTON

AREA OFFICE MARKET

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18-3

0

3

6

9

12

15

18

MIL

LIO

NS

OF

SQU

AR

E FE

ET

10-Year Trailing Average


The Washington Area Office Market

Office Space Net Absorption

10.3

7.1

4.4

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18-3

0

3

6

9

12

15

18


Office Space Net Absorption

12 mil/yr 10 mil/yr 8 mil/yr 5 mil/yr

Average Absorption Per Annum During Expansion Cycles


MIL

LIO

NS

OF

SQU

AR

E FE

ET

0

2

4

6

8

10

12

14

16

Northern Virginia Suburban Maryland District of Columbia

26.5 million SF =

Demand

Total = 19.8 million SF

Under construction: 6.4 million SF

Planned and may deliver by 12/18: 13.4 million SF

Deliveries

=

=

Office Space Demand and Deliveries Five Years Ending December 2018


MIL

LIO

NS

OF

SQU

AR

E FE

ET


4%

6%

8%

10%

12%

14%

16%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Overall Vacancy Rate

OV

ERA

LL V

AC

AN

CY

RA

TE

13.4%

11.6%


Rent Equilibrium Zone = 10.2% - 10.4%

Rent Equilibrium Zone = 12.4% to 12.6%

Source: Historical data is Delta Associates’ analysis of CoStar data; projections and rent equilibrium zone are by Delta Associates; February 2014.

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Effective Rent Change

EFFE

CTI

VE

REN

T C

HA

NG

E

Average Since 1970 = 3.0%



A New Playbook

WASHINGTON/BALTIMORE

FLEX/INDUSTRIAL MARKET

-4

-2

0

2

4

6

8

10

99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

15-Year Average = 3.8 million SF

MIL

LIO

NS

OF

SQU

AR

E FE

ET

Flex/Industrial Net Absorption

The Washington/Baltimore Flex/Industrial Market


0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Washington Metro Baltimore Metro

7.5 million SF =

Demand

Total = 5.6 million SF

Under construction: 4.7 million SF

Planned and may deliver by 12/2014: 0.9 million SF

Deliveries

=

= MIL

LIO

NS

OF

SQU

AR

E FE

ET

Flex/Industrial Space Demand and Deliveries 12 Months Ending December 2014



6%

8%

10%

12%

14%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

OV

ERA

LL V

AC

AN

CY

RA

TE Rent Equilibrium Zone = 10.1% to 10.3%

8.1%

Overall Vacancy Rate

8.7%


Source: Historical data is Delta Associates’ analysis of CoStar data; projections and rent equilibrium zone are by Delta Associates; February 2014.

-5%

0%

5%

10%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Long-Term Average = 3.0%

ASK

ING

REN

T C

HA

NG

E

Asking Rent Change


Source: Historical data is Delta Associates’ analysis of CoStar data; projections are by Delta Associates; February 2014.

A New Playbook

THE WASHINGTON AREA

APARTMENT MARKET

0

2,000

4,000

6,000

8,000

10,000

03 04 05 06 07 08 09 10 11 12 13 14 15 16

The Washington Area Apartment Market

Annual Average = 7,500

Long-Term Average = 5,648

Average Since 2008 = 6,342


CLA

SS A

APA

RTM

ENT

UN

ITS

Class A Apartment Absorption

-4%

-2%

0%

2%

4%

6%

8%

10%

2009 2010 2011 2012 2013 2013

U.S.

EFFE

CTI

VE

REN

T G

RO

WTH

Annual Class A Apartment Effective Rent Growth

Source: MPF, Delta Associates; February 2014.

-3.0%


0

2

4

6

8

10

12

14

16

District of Columbia Suburban Maryland Northern Virginia

Net Absorption: 7,500/Year = 22,500

Demand

Deliveries

Planned and may deliver by 12/16: 6,031 units

Under construction: 33,091 units

Total = 39,122 units

Projected Stabilized Vacancy at December 2016

4.8% Metro-Wide

MA

RK

ET R

ATE

UN

ITS

(IN

TH

OU

SAN

DS)

Class A Apartment Demand and Delivery Projections Three Years Ending December 2016


5.1% 5.4% 4.3%


-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Long-Term Average = 4.2%

Class A Apartment Rent Growth

EFFE

CTI

VE

REN

T G

RO

WTH



A New Playbook

THE WASHINGTON AREA

CONDOMINIUM MARKET

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2007 2008 2009 2010 2011 2012 2013

NU

MB

ER O

F U

NIT

S

3,308


New Condominiums Actively Marketing or Under Construction Washington Metro Area at Each Year-End

The Washington Area Condominium Market

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014


AN

NU

AL

EFFE

CTI

VE

PR

ICE

CH

AN

GE


New Condominium Effective Price Change

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2007 2008 2009 2010 2011 2012 2013 2014

1,907


2,000

NU

MB

ER O

F N

EW U

NIT

S SO

LD


Past and Projected New Condominium Unit Sales

A New Playbook

THE WASHINGTON

AREA RETAIL MARKET

OV

ERA

LL V

AC

AN

CY

RA

TE

0%

2%

4%

6%

8%

10%

12%

14%

Was SF Bos NY LA/OC Den Hou DFW Chi Atl Phx

4.9%

National Rate = 8.6%

Shopping Center Vacancy Rate – All Types Select Metro Areas | Year-End 2013

Source: Delta Associates’ analysis of CoStar data; February 2014.

The Washington Area Retail Market

Average Retail Spending Per Household Select Metro Areas | 2012

$0

$5,000

$10,000

$15,000

$20,000

$25,000

Was Bos SF Phx Hou DFW LA Chi NY Atl Mia

AV

ERA

GE

RET

AIL

SP

END

ING

Source: Bureau of Labor Statistics, Delta Associates; February 2014.

$21,084


Note: Excludes auto, auto parts and gas.

Annual Rent Increase – Grocery-Anchored Shopping Centers 2013

0%

1%

2%

3%

4%

5%

Inside the Beltway Outside the Beltway

AN

NU

AL

REN

T IN

CR

EASE



12%

22%

66%

Shopping Center Age Distribution 2013

Source: Delta Associates’ analysis of CoStar data; February 2014.


10 Years or Younger

11-25 Years

26 Years or Older

A New Playbook

OPPORTUNITIES

1. Improve revenues: Renovate and reposition

2. Reduce costs: Invest in enhanced asset performance

3. Sustain net cash flow: Finance while interest rates

are low

A New Playbook

Opportunities Washington Metro Area


4. Repurpose obsolete assets

5. Leverage demographic shifts: Invest in seniors

housing, medical office, and retail

6. Seize market opportunities: Selectively invest in and

develop industrial and condominium projects

7. Acquire and position sites for next cycle of office

and apartment development

A New Playbook

Opportunities Washington Metro Area


a new playbook megatrends · 2016-07-16 · source: delta associates; february 2014. a new playbook...

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