Navigating in the New Age of Real Estate

Transcription

1 Navigating in the New Age of Real Estate K.C. Conway, MAI, CRE ACRE Director of Research & Corporate Engagement CCIM Chief Economist February 7, 2018

2 ACRE History: 18 Years Strong! Do you recall ACRE 2008 or 2009? Thank You Grayson, Sam Addy, Corp. Cabinet & Trustees, Leadership Council ACREcom 2008 ACREcom 2009: On Jan 30, 1930 Mazda makes its 1st Automobile ACREcom 2017 Feb 10, 1996 World chess champion Garry Kasparov loses the first game of a six-game match against Deep Blue, an IBM computer 2

3 The Economy has come a LONG way! Period Period Economy: GDP: 2017 had 2 back-to-back Qtrs >3% GDP: Contracted >8% at trough Jobs: Recovered 22million civilian from Jobs: Lost 8.7mm Vs 2.8mm (r) 2009 low (138mm to 160mm empl) Longest Recession post 1945 (18 mos.) 3rd longest recovery post WWII (102 mos) Housing: Housing: Builder HMI all-time low of 8 in Jan 2009 Builder 74: Highest since 12/1998 Subprime Mtg - Foreclosures & Short Sale Shortage of Housing Inventory SF Starts recovered to just shy of 900k SF Starts plummet to <200k/year 2009 HPA rising >6% / Housing Affordability? Homes Decline in Value 25%-45% Homeownership is rising Now above 64% (64.2% Homeownership drops to 62.9% Banking: Banking: Dodd-Frank; Stress Tests & >500 failures Record Profits / Regulatory Relief ahead HVCRE, Risk Retention & CECL new terms TARP, TALF & CFPB the new acronyms Just 5 Bank Failures in 2016 & 8 in Bank Failures in period CRE Conditions: CRE Conditions: CMBS shuts down 2009/Wall of Maturities CMBS DQT drops from >10% 2012 to <5% Auto Bailout / Start of Retail Store Closings Store closings rise from <4k/yr. to >10k Office contraction & Cap Rates rise 200bp MF vacancy <5% & Industrial the Star Cap Rates at record lows (avg. <6%) 3

4 GDP: The Global Perspective i) Only Three economies produce more than $10 trillion in annual GDP (U.S., European Region, and China); ii) Only Eight economies in the world that produce between $1.5 and $5.0 trillion in annual GDP led by Japan and Germany and rounded out by Brazil and Canada with $1.8 and $1.5 trillion, respectively; and iii) Only Seventeen nations produce $1.0 trillion or more in annual GDP with Mexico and Indonesia at the bottom of this ranking. The U.S. remains the dominant global economy despite the Great Recession with a population (324 million) smaller than both the European region (341 million) and China (1.379 billion). 4

5 GDP: The long-term and short-term perspectives The 10-Year Perspective on U.S. GDP Why 10-Yr Tr rise now Vs The 2-Year Perspective on U.S. GDP So now we believe GDP growth >2.5% is sustainable? 5

6 GDP: Where is the Strength (Biz Investment joins PCE & Housing) PCE/Consumer Spending is strong especially Nondurable Goods Bus. Investment is now catching up with PCE & strength of Housing 6

7 GDP: The Golden Triangle It s All about Logisitics! Remaking the Supply-Chain The GDP Golden Triangle The Golden Mfg & Logistics Triangle: SE + SW + Great lakes 47% US GDP 7

8 Job Growth: ADP Vs. BLS 2018 is on track to be the eighth consecutive year in which the economy creates over 2 million jobs. ADP Tr-12 month average is +210,000/month U-6 Unemployment rate at 8.2% says we have labor capacity 8

9 Housing It s a Good Story: NAHB HMI & Homeownership From a historic low of 8-9 in 2009 to 74 Dec 2017 (2nd highest since 1998) Homeownership is Recovering Millennials are Buyers (62.9% low in 2016 to 64.2% Q4 2017) 64.2% is the level that Homeownership has risen to after falling to post 1965 low of 62.9 percent in

10 History of FOMC Rate Hikes & 10-Yr Treasury Coming off QE to Q-Normal History of FOMC Rate Hikes (16 hikes leading to Q History of 10-Yr. Treasury (5% Q2 2006) 2004 Q rate hikes 10

11 Bulls Vs. Bears Outlook 1-month into 2018 The Bull Market isn t Over; It s adjusting to QN What s to like? GDP: +2.5% (Bus. Investment now supplements PCE Job Growth: ADP is >200k per month / BLS is 200k/month What s NOT to like? Relatively quick rise in 10-Yr Treasury Inflation Risks: Wages (+2.9%); Energy ($70/barrel oil; Constr. Costs >5% Housing: NAHB >70 off 74 reading in Dec (highest since 1998; Loan Payoff Ratio: Drops to low not seen since 2010 (Trepp: no Subprime artificial stimulus; Inventory shortage (1.1 25% / Large Loans) million units Vs 1.7 million in 2006). 11

12 What are Best R.E. Markets to Invest? ULI Updated for of top 5 MSAs in TX (Austin & Dallas) Carolinas and FL make strong Top 20 showing. Birmingham makes Top-50 Port Markets 40% of Top 20 E-commerce & Remaking Supply-Chain. Secondary MSAs like Charleston Raleigh,Nashville make Top-10 ahead of Boston, Miami, DC, Atlanta. Cap Rates are falling in these Secondary MSAs Does it hold in a rising interest rate Env.?. Why does AL rank so low in ULI? What MSA did ULI miss in AL? Huntsville <1.0mm population But more Housing Starts than B ham in st small MSA to get a Top-Golf? Just had Toyota-Mazda plant announcement 12

13 Amazon HQ2 The 20 Finalists CCIM / ACRE Amazon HQ2 Paper The tech goliath whittled 238 proposals down to a selection of 20 metro areas across North America, including major East Coast markets like Boston, New York City, Newark, Washington, D.C., Atlanta and Miami. KC Conway, the new chief economist at CCIM Institute a global real estate organization recognized throughout the industry for its real estate designations said though the site selection for HQ2 is about talent acquisition and expanding Amazon s presence across the country, a number of business benefits will also factor into Amazon s decision. Below are three reasons Amazon is strongly considering the East Coast for its second headquarters, which will house 50,000 Amazon employees and involve an estimated $5B investment, according to the company. In case you missed this. Here s Saturday Night Live Amazon HQ2 pick 13

14 Navigation Tips: K.C. s 5 & Some of what you will pick-up today Beware of the It s Different for Me advice! And now Groundhog Day! Monitor Forward-Looking indicators (NAHB HMI, Loan Payoff Ratio, etc.) Develop your own Bulls : Bears Scoreboard Dust-Off How to function in Rising Interest Rate environment tools (Band-of-Inv. Always be Building Relationships: Who can you call upon when bleep happens? What IRR really means Retail Disruption Yes / Retail Apocalyse No Ports are ImPORTant 14

15 Navigation Tip: Beware of It s different for me advice! The real estate cycle is very different from the business cycle 15

16 Navigation Tip: Monitor Forward-Looking Indicators Forward-Looking measures, such as: i) ADP & JOLTS Vs BLS (BLS-L=BS); ii) NAHB HMI; and iii) Loan Payoff Ratio (A drop from >60% to 25% warrants some questions) 16

17 Navigation Tip: Develop your own Bulls : Bears Scoreboard What s to like? What s NOT to like? Pick your Forward-Looking metrics Know where to get the intel for What you don t know. ACRE is always a Resource and phone call away! 17

18 Navigation Tip: Dust off How to Survive in Rising Rate Env. tools How do we avoid repeating the hangover? Cap Rates in a Rising Interest Rate Env.? 10-Yr Tr >2.5% >3.0% >4.0% Loan Losses Market Change Easy Money An example is bank s classifying more CRE lending as RETAC such as Sr. Housing or Aging Services. Subprime & CMBS nonrecourse; then FED QE with low interest rate monetary policy now being followed by FED GSEs (Freddie & Fannie in MF) and Aging Services. Misread of Demand Drivers & Concentration Erosion in Band-of-Investment: Get Underwriting Reacquainted Why haven t Cap Rates increased with 10-Yr Tr moving from 2% to 2.8% over past 100 days? 18

19 Get ready; Get Set; GO ACREcom 2018 Navigation Plan! Chris Lee: What s ahead Over the Horizon? CRE C-Suite Panel: Hear from those that do-it! Retail Disruption: Culverhouse College Kathy Deck Why ports are important: Port of SC Jim Newsome Stay for the Afternoon: Tax Credits, Tax Bill on CRE 19