the economy and real estate

GLOBAL RESEARCH AND CONSULTING

THE ECONOMY AND REAL ESTATE

GARY BARAGONADIRECTOR, RESEARCH & ANALYSISJANUARY 2014

2 GLOBAL RESEARCH AND CONSULTING

TOPICS COVERED

U.S. Economy

Southern California Economy

Mega-Trend: Workplace Strategy

Mega-Trend: E-Commerce

U.S. Property Market Fundamentals

Los Angeles Market Fundamentals

GLOBAL RESEARCH AND CONSULTING

U.S. ECONOMY

4 GLOBAL RESEARCH AND CONSULTING

U.S. ECONOMY

Economic growth will strengthen in 2014

Jobs are everything

Industrial indicators are solid

Resurgent housing market

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FORECAST

U.S. ECONOMIC EXPANSION OUTLOOKAnnual % Change

Source: HIS Global Insight

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FORECAST

U.S. JOB GROWTH SLOW AND STEADYU.S. Total Nonfarm Payroll, Annual Net Jobs (1000s)

Source: U.S. Bureau of Labor Statistics, Moody’s Analytics

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FORECAST

RETURN TO PREVIOUS PEAK IN EARLY 2014U.S. Total Nonfarm Payroll, (Millions of Jobs)

Source: U.S. Bureau of Labor Statistics, Moody’s Analytics

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RECOVERY TRAILS PAST CYCLESMonthly Job Growth Index (Business Cycle Peak=100)

Source: U.S. Bureau of Labor Statistics

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GROWTH RATE VARIES BY REGIONMonthly Job Growth Index (Dec 2007=100)

Source: U.S. Bureau of Labor Statistics

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TECH & ENERGY MARKETS LEADINGOffice-Using Employment Outlook, CAGR 2013-2018

Source: U.S. Bureau of Labor Statistics (BLS): Current Employment Statistics (CES), Quarterly Census of Employment and Wages (QCEW); Moody's Analytics (ECCA) Estimates

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U.S. INDUSTRIAL PRODUCTIONIndustrial production is just shy of pre-recession levels

Source: Federal Reserve

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U.S. IMPORTS & EXPORTSImports are stronger than they appear once oil is excluded

Source: U.S. Census Bureau

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HOUSING PRICES CONTINUE TO GROWS&P/Case-Shiller Home Price Index

Source: S&P Case-Shiller Index

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RETAIL SALESHousing Recovery Boosts Retail Sales

Source: U.S. Census Bureau

GLOBAL RESEARCH AND CONSULTING

SOUTHERN CALIFORNIA ECONOMY

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Source: CBRE Econometric Advisors, Economy.com

POSITIVE BUT LACKLUSTER JOB GROWTHSouthern California: Year-Over-Year Employment Growth

FORECAST

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Source: CBRE Econometric Advisors, Economy.com

SOUTHERN CALIFORNIA ECONOMYTotal Employment Forecast (in Millions)

90+ MONTHS TOREACH PREVIOUS PEAK

WE ARE ONLYHALF WAY THERE

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Source: CBRE Econometric Advisors, Economy.com

SOUTHERN CALIFORNIA ECONOMYHospitality & leisure, construction, education & health services, professional & business services & technology will lead the way

GLOBAL RESEARCH AND CONSULTING

MEGA-TRENDS:WORKPLACE STRATEGY & E-COMMERCE

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Source: CBRE Econometric Advisors, Moody’s Analytics

MEGA-TREND: WORKPLACE STRATEGYUnderutilized space and modern design slow occupancy growth

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Source: CBRE Econometric Advisors, Moody’s Analytics

MEGA-TREND: E-COMMERCEE-commerce will drive demand for industrial space and continue to reshape the retail market

GLOBAL RESEARCH AND CONSULTING

U.S. PROPERTY MARKET FUNDAMENTALS

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Source: CBRE Research, CBRE Econometric Advisors

PROPERTY SECTOR TRAJECTORY

    2013 Q4Past Cyclic

High“Natural Rate”

Year Back to "Natural Rate"

Office Vacancy Rate 15.0 16.8 / 2010 13 to 15 2013

Industrial Availability Rate 11.5 14.5 / 2010 9 to 10 2015

Retail Availability Rate 12.0 13.2 / 2011 9 to 10 2016

Multifamily Vacancy Rate 5.3 7.4 / 2009 5 to 6 2010

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PROPERTY SECTOR TRENDS

OFFICE• Urbanization & densification• Impact of workplace strategy• Investor interest in suburban, non-gateway markets• Tech markets leading the way

INDUSTRIAL• Supply chain efficiencies• Peak manufacturing productivity• Impact of e-commerce• More speculative construction but still in check

RETAIL• High-street retail still strong• E-commerce growing impact• Omni channel strategies• Shrinking retail footprints

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S

L

M

N

AC

D

D

L

P

P

SW

A

B

D

N

S

H

San Diego

Orange County O

Atlanta

Dallas (Suburban)

Boston

Seattle

U.S. OFFICE RENT CYCLE Q4 2013

Source: CBRE Research

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RENT GROWTH LED BY TECH MARKETS5-Year Annualized Rent Growth (%), Largest 20 Office Markets

Source: CBRE Econometric Advisors

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Source: CBRE Research, CBRE Econometric Advisors

Completions, Net Absorption & Vacancy Rate

OFFICE OUTLOOK

FORECAST

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Completions, Net Absorption & Availability Rate

FORECAST

INDUSTRIAL OUTLOOK

Source: CBRE Research, CBRE Econometric Advisors

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Completions, Net Absorption & Availability Rate

FORECAST

RETAIL OUTLOOK

Source: CBRE Research, CBRE Econometric Advisors

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REAL ESTATE INVESTMENT TRENDS

Increased global interest in U.S. markets

2013 saw the beginning of interest rate increases. In 2014, look for the end of cap rate compression and a new era of NOI growth.

Expect improved economic performance to correspond with interest rate increase

Expect spreads to between primary & secondary markets to compress

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Sales Volume ($ Billions)

NATIONAL INVESTMENT SALES

Source: Real Capital Analytics

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U.S. Ten Year Treasury Bonds

INTEREST RATE

Source: Federal Reserve

FORECAST

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Q2 Survey of economists places the 10-year treasury at 3.5% at the end of 2014

A RANGE OF OPINIONS

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

2013.3 2013.4 2014.1 2014.2 2014.3 2014.4 2015.1 2015.2 2015.3 2015.4

Ten Year Treasury, %

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Average CAP rates in all product types will remain flat in the near term

FORECAST

CAP RATE FORECAST

Source: CBRE Econometric Advisors, NCREIF

GLOBAL RESEARCH AND CONSULTING

LOS ANGELES MARKET FUNDAMENTALS

36 GLOBAL RESEARCH AND CONSULTING

Source: CBRE Research, CBRE Econometric Advisors

Vacancy Rate & Avg Asking Lease Rate

LOS ANGELES OFFICE OUTLOOK

FORECAST

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LOS ANGELES OFFICEMarket dynamics vary greatly on the submarket area

Source: CBRE Research

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LOS ANGELES OFFICEMarket dynamics vary greatly on the submarket area

Source: CBRE Research

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Source: CBRE Research, CBRE Econometric Advisors

Availability Rate & Avg Asking Lease Rate

LOS ANGELES INDUSTRIAL OUTLOOK

FORECAST

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Source: CBRE Research, CBRE Econometric Advisors

Availability Rate & Avg Asking Lease Rate

LOS ANGELES RETAIL OUTLOOK

FORECAST

GLOBAL RESEARCH AND CONSULTING

THE ECONOMY AND REAL ESTATE

GARY BARAGONADIRECTOR, RESEARCH & ANALYSISJANUARY 2014