US Commercial Real Estate Outlook

Transcription

1 Real Estate Team, Manulife Asset Management Private Markets ManulifeAM.com

2 217 Healthy, 218 Looking Good GDP in the third quarter of 217 remained healthy, increasing at a 3.3% quarterly annualized rate, and more recent economic data generally imply continued strength. 1 Some of the improvement was due to hurricane-related distortions (vehicle sales, housing activity, and manufacturing all increased markedly), but underlying those distortions was evidence of more broad-based acceleration. While housing has been boosted by weather-related events, housing market fundamentals are healthy and we expect continued growth in the sector. Consumption remains consistently positive, with recent data showing evidence of healthy growth. At this stage, leading indicators of industrial production broadly point to acceleration over the course of 218, which in turn bodes well for S&P 5 earnings growth. The labor market continues to add jobs, however wage growth has remained subdued and not contributed to inflation. Our long-term outlook remains stable: we continue to expect the US economy will grow at moderate rates over our fiveyear forecast period, and do not see a recession as imminent; the low inflation environment is expected to persist. We expect that the new tax bill could add between.2% - 3% to GDP growth over the next couple of years, but this could prove to be a conservative estimate if a meaningful increase in business investment were to materialize. At this stage, we expect continued monetary policy stability. The labor market continues to improve and there is little evidence of inflationary concerns on the horizon. Consequently, the Fed remains in the comfortable position of being able to remove stimulus without being compelled to do so, allowing for minimal disruption to the financial markets. There is one caveat: there will be significant turnover in the Federal Open Market Committee (FOMC) over the next few months, which could lead to some shift in the current philosophy. Exhibit 1- Retail Sales 8 6 Percentage (%) Retail Sales ex-auto & Gas Total Retail Sales Source: Bloomberg, as of December 31, Bloomberg, as of September 3, For Institutional Use Only. Not for use with the General Public.

3 REAL ESTATE MARKET OUTLOOK, Investment Markets Transaction volumes continued to decline in 217 for second year in a row, with the total value of deals for Office, Industrial, Retail, and Apartment decreasing by 13% yearover-year in 217. All asset types experienced slower market activity, except Industrial, which increased by 8% (Exhibit 2). The slowdown in activity was in both domestic and foreign investment which declined by 13% and 19% respectively. 2 However, despite slowdown in volumes, prices continue to grow. Apartment, Industrial, Office, and Retail average prices were up year-over-year by.2%, 9.8%, 4.1%, and 3.7% respectively (Exhibit 3). Strong market fundamentals, competitive yield spread, and foreign investment are among the main drivers of the price appreciation, which we believe will continue through 218. Overall transaction cap rates in 217 were at 6.2%, down by 7 basis points relative to 216. Industrial and Apartment enjoyed the strongest cap rate contraction of 35 and 13 basis points reaching 6.5% and 5.6% respectively, while cap rates for Office and Retail ended up flat to slightly above relative to last year, at 6.6% and 6.5% respectively. Debt markets remained conservative throughout 217 with average market Loan to Value (LTV) near 6% and mortgage rate spreads to the -year Treasury bond yield of above 2.%. This contrasts with 27,when average LTV reached above 7% and mortgage spreads stood below 1.%. We expect the rise in Treasury yields over the next few years to be partly absorbed in the spread, and mortgage rates remain competitive. Exhibit 2- Transaction Volume, trailing 4Qtr Volume, US$ Billion $25 $2 $15 $ $5 $ Q4 '5 Q4 '7 Q4 '9 Q4 '11 Q4 '13 Q4 '15 Q4 '17 Office Industrial Retail Apartment Source: Real Capital Analytics, Manulife Asset Management, as of December 31, 217. Exhibit 3- RCA Commercial Property Price Index (CPPI) YoY change as of Nov Percentage (%) Apartment Industrial Office Retail Source: Real Capital Analytics, Manulife Asset Management, as of December 31, All investment market data on this page, including transaction volumes, cap rate, and mortgage data are from Real Capital Analytics, as of December 31, For Institutional Use Only. Not for use with the General Public.

4 Office Markets While overall office vacancy has remained near historic lows through 217, the wave of supply coming to market over the next six months is expected to slightly push up vacancy levels from.1% to.3%. 3 With overall job growth expected to moderate over the next few years and more options available for tenants to choose from, we expect overall market fundamentals to marginally soften over the next few years. However, expected supply remains restrained and concentrated in few markets. Total office under construction was 119 million sq ft, equivalent to 1.5% of existing stock as of end of 217. In contrast, the construction activity peaks in 2 and 27 reached 3.4% and 2.2% of stock respectively. Furthermore, the top five markets of New York, Washington, San Francisco, Dallas, and Seattle account for almost half of total projects under construction. Accordingly, we expect quality assets as well as those located in desired locations to continue to operate at high occupancy levels. Exhibit 4- Office Fundamentals Million Sq Ft Forecast.4.3 Q2 216 Q3 216 Q4 216 Q1 217 Q2 217 Q3 217 Q1 218 Q2 218 Q3 218 Q4 218 Q1 219 Q2 219 Q3 219 Q4 219 Net Absorption Net Completions Vacancy Source: CoStar, Preliminary Q4 Forecast, as of December 31, Vacancy (%) Rents continued to increase through 217, with asking rents going up by 1.6%. However, the growth rates have clearly decelerated from the peak in 215, when rent growth were close to 6.%. If the demand continues to moderate we expect rent growth remain at current level for the next couple of years. 3 All market statistics in the remainder of this document, including supply, demand, vacancy, rent growth and construction activities are from CoStar, as of December 31, For Institutional Use Only. Not for use with the General Public.

5 Industrial Markets Industrial occupancy gains and rent growth outperformed all other asset types by a significant margin over the past few years. Demand for Industrial space has historically been linked to overall economic growth. However, acceleration in e-commerce and the resultant requirement for logistics space has driven demand significantly above overall economic growth over recent years. In response to strong demand, construction activity peaked upwards over the past few years and as of stands at 145 million square feet. Construction is concentrated in major logistics hubs, with Inland Empire, Dallas, Atlanta, Chicago, and New York, accounting for 28% of total projects. Deliveries in 218 are expected to temporarily push vacancies higher, but the additional supply is forecasted to be fully absorbed by end of the next year. Despite a healthy construction pipeline, overall industrial vacancies continued to decline in 217, with total demand matching supply at 177 million square feet. Rent growth remained strong at annual rate of 6.8% in 217, slightly below this cycle s peak rate of 7.2% in 216. As transformation of logistics network to accommodate e-commerce matures and supply increases, we expect overall rent growth to moderate over the next three years. Exhibit 5- Industrial Fundamentals 7 6 Million SF Forecast Q2 216 Q3 216 Q4 216 Q1 217 Q2 217 Q3 217 Q1 218 Q2 218 Q3 218 Q4 218 Q1 219 Q2 219 Q3 219 Q4 219 Net Absorption Net Completions Vacancy Source: CoStar, Preliminary Q4 Forecast, as of December 31, Vacancy (%) 5 For Institutional Use Only. Not for use with the General Public.

6 Multifamily Markets Strong fundamentals and lower perceived risk attracted record investments into multifamily asset class in recent years, but as yields on existing assets continue to fall investment flow is shifting to construction. For the full year in 217, supply and demand remained relatively in balance with net absorption of 224 thousand units against new supply of 232 thousand units. However, with construction activity at an elevated 52 thousand units, supply is forecasted to outpace demand by a larger margin, pushing up national vacancies. National average figures though can mask the wide differences between markets, and with multifamily demand being highly localized, many submarkets remain undersupplied. National rent growth continues to moderate with annual growth at 2.2% for 217. Affordable markets have outperformed in rent growth, with Orlando, Sacramento, Inland Empire, Phoenix, and Tampa being the top 5 markets. Going forward we believe markets with favorable job growth and cost of living to continue to perform well. Exhibit 6- Multifamily Fundamentals Thousand Units Forecast 6.4 Q2 216 Q3 216 Q4 216 Q1 217 Q2 217 Q3 217 Q1 218 Q2 218 Q3 218 Q4 218 Q1 219 Q2 219 Q3 219 Q4 219 Net Absorption Net Completions Vacancy Source: CoStar, Preliminary Q4 Forecast, as of December 31, Vacancy (%) 6 For Institutional Use Only. Not for use with the General Public.

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