US Real Estate Market: Well Positioned Despite Global Turbulence

Transcription

1 Section Title 1 US Real Estate Market: Well Positioned Despite Global Turbulence VCU Real Estate Trends Conference October 2015 Mary Ludgin, PhD Heitman

2 Despite an only-ok economic recovery/expansion, US real estate has delivered strong performance 2

3 Strong Returns Despite Sluggish GDP Growth Private Equity Real Estate Total Return vs. GDP Growth US (Q2) 25.0% 20.0% 15.0% 1-Yr Total Return Total 1-Yr GDP Growth (Rolling 4-Qtr Avg.) 13.2% 6.0% 4.0% 10.0% 5.0% GDP Growth 2.7% 2.0% 0.0% 0.0% -5.0% -10.0% -2.0% -15.0% -20.0% -4.0% -25.0% % Source: NCREIF; Bureau of Economic Analysis; Heitman Research 3

4 What Lies Ahead? We re Keeping an Eye on the Clock Expansions generally end when the economy overheats that is, the labor market is at full employment and businesses are operating beyond their capacity. Inflation pressures develop and interest rates surge, exposing overextended households, businesses and financial institutions. Mark Zandi, Moody s Analytics (March 2015) 75 months since the US economy hit bottom The average post-wwii recovery/expansion has lasted 61 months Historically, recessions start: Six years after LEI hits previous peak Five years after wage growth accelerates Five years after FED starts to tighten Seven years after housing starts hit 1 million (January 2015) 4

5 Cap Rate Spreads Have Room to Compress Once US Interest Rates Begin to Rise Private Equity Real Estate Yield Spreads 2015 Q3¹ 6% 5% 4% 3% 2% 1% 0% -1% -2% Ten Year Treasuries 2.16 Source: Heitman Research 1. Preliminary NCREIF Q3 Implied Cap Rate Used Ten Year TIPS Long-term CRE Debt Current LT Average 2007 Q Q Corporate Aaa Bonds Corporate Baa Bonds REIT Implied Cap Rate 5

6 Offshore Buyers Represent an Increasing Share of US Real Estate Transactions Share of US Transactions Represented by Cross-Border Investors Primary Property Types YTD 12% 10% 7.6% Average ( ) 10.7% Average ( Q2) 8% 6% 4% 2% 0% Source: Real Capital Analytics; Heitman Research 6

7 While National Growth has Disappointed, Multiple Metros Thriving Job Base Relative to Previous Peak Total Employment as of 2015 Q3 Austin San Jose Houston Dallas-Fort Worth Charlotte San Francisco Nashville Denver Seattle Richmond New York/Northern NJ United States Virginia Beach-Norfolk-Newport News Source: Moody s Analytics; Heitman Research + 208,160 new jobs +181, , , , , , , , , ,190 +2,620,700 +6,630 0% 5% 10% 15% 20% 25% 7

8 Ho-Hum Economy has Kept a Lid on Development Completions as a Percent of Stock US Primary Property Sectors¹ 3.0% 2.5% 2.0% 1.5% 25-Year Average 1.0% 0.5% 0.0% 1.6% Forecast 1.2% Source: Co Star; Axiometrics; Heitman Research Retail Completions Source: Costar; Heitman Research Industrial Source: Costar; Heitman Research Office Completions Million SF 160 Million SF 120 Million SF 1600 Thousand Units yr Avg yr Avg yr Avg yr Avg Source: Costar; Heitman Research Apartment Completions Source: US Census Bureau; Heitman Research 8

9 Lack of Development + Solid Tenant Demand = Healthy NOI Growth Across Property Types Same-Store NOI Trends by Property Type US NCREIF Properties (Q2) 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% Year-Over-Year % Change Source: NCREIF; Heitman Research Long-Term Average NOI Growth Apartments: 4.4% Retail: 3.2% Office: 2.6% Industrial: 1.4% Retail Industrial Office Apartment 9

10 Despite Highest Deliveries Since GFC Began, Apartment Rent Growth Remains Strong Institutional-Quality Apartment Deliveries vs. Rent Growth US ,000 90,000 80,000 70,000 60,000 50,000 Apartment Deliveries Effective Rent Growth Effective Rent Growth Forecast 6% 5% 4% 3% 40,000 30,000 20,000 10,000 0 Apartment Deliveries 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 2% 1% 0% Source: Axiometrics; Heitman Research 10

11 Only a Handful of Metros Seeing Apartment Rents Grow by Less Than Pace of Inflation Effective Rent Growth US September 2014 September 2015 Portland 14.20% Oakland 13.10% San Francisco 11.30% Sacramento 10.00% San Jose 9.70% Denver 8.80% Orlando 8.40% San Diego 8.30% Seattle 7.90% Riverside 7.70% Phoenix 7.40% West Palm Beach 7.10% Los Angeles 7.00% Chicago 3.40% Nashville 6.70% Columbus 3.30% Ft. Worth 6.60% Houston 3.10% Atlanta 6.60% Minneapolis 3.00% Charlotte 6.60% Baltimore 3.00% Tampa 6.50% Kansas City 2.90% Cleveland 4.90% Jacksonville 6.40% Richmond 2.70% Providence 4.70% Dallas 6.00% Cincinnati 2.50% Miami 4.30% Raleigh 6.00% Camden, NJ 2.30% New York 4.20% Salt Lake City 6.00% Indianapolis 1.30% Louisville 2.20% Long Island, NY 4.20% Ft. Lauderdale 6.00% Birmingham 1.00% Bethesda, MD 2.20% Orange County, CA 4.10% Las Vegas 5.90% Virginia Beach 0.80% Washington 2.20% Philadelphia 4.00% Boston 5.40% Oklahoma City 0.40% Memphis 2.20% St. Louis 3.80% US 5.20% Hartford 0.30% Lake County, IL 1.60% San Antonio 3.60% Austin 5.00% 1.5% or less 1.5% - 3.4% 3.5% - 4.9% 5.0% or more Source: Axiometrics; Heitman Research 11

12 US Industrial Market Hasn t Peaked Yet Industrial Market Conditions US (f) Years Ending Q sf x 1, % 10.0% Completions Net Absorption Vacancy forecast vacancy rate 12.0% 10.0% % 7.5% 6.3% 6.1% 6.6% 8.0% 6.0% 4.0% % % Source: CoStar Portfolio Strategy; Heitman Research 12

13 Improvement in Office Market Finally Picking Up Pace Office Completions, Net Absorption, and Vacancy US Years Ending Q3 140, , ,000 80,000 60,000 40,000 sf x1, % Completions Net Absorption Vacancy Rate 13.4% 18.0% 16.0% 14.0% 12.0% 10.0% 20, ,000-40,000-60,000-80,000 Vacancy Rate (%) 8.0% 6.0% 4.0% 2.0% 0.0% Source: PPR/Co-Star, Heitman Research 13

14 Retail Vacancy Elevated Relative to Pre-GFC Levels, But Better-Quality Centers Stronger Than Ever Vacant Retail Space Top 50 Markets (Q3) Centers with over 20% vacancy Centers with less than 20% vacancy vacant space (millions of sf) overall vacancy rate 10% 9% 400 8% 350 7% 300 6% 250 5% 200 4% 150 3% 100 2% 50 1% % Source: CoStar; Heitman Research 14

15 Investment Themes Keep an eye on the clock. Recession is not imminent but we are closer to the end of cycle than the beginning In buying office and industrial, pick highest-quality assets/locations with long weighted-average lease terms Short-lease sectors (apartments, self-storage) still have strong NOI growth prospects and they offer defensive characteristics Multiple cities showing break-out growth, setting up significant CRE demand Take advantage of minimal construction in many markets and property types Renovate Class-B apartments; repurpose older/well-located assets for creative office space; renovate underutilized industrial or retail properties for selfstorage; redeploy excess land in retail assets for complimentary uses Develop Class-A apartments in urban infill 24/7 locations, medical office leased to credit-worthy hospitals/major MD groups, expansion of Class-A retail assets But focus on strategies that can deliver in the next months 15

16 Investment Themes To hedge risk, focus on demographic trends and locational shifts Focus on demographically based strategies; their demand drivers don t tend to move with the macro-economic cycle Build or buy senior housing, acquire student housing and apartments targeted on renters by choice and seek out high-street retail in emerging residential locations Identify locations poised for market-share gains (transit-served vs. car-oriented office) Portfolio construction is key Diversify portfolio exposure to specific economic sectors Invest across a wide array of metros with emphasis on minimizing exposure to any one economic driver The geography of the next recession will be narrower than that of the GFC; some metros will avoid recession 16