U.S. Economic and Property Market Outlook 2014

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1 U.S. Economic and Property Market Outlook 214 March 27, 214 A Presentation to the UNC Real Estate Conference Will McIntosh, Ph.D. Global Head of Research RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval.

2 We are Optimistic About the U.S. Economy Strengthening Economic Fundamentals A Diminishing Fiscal Drag An Improving Housing Market Improving Private and Public Balance Sheets (Deleveraging) Well Capitalized Banks Improving Consumer Confidence RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval. 2 2

3 The U.S. economy continues to improve U.S. Real GDP Annualized % Growth U.S. Employment YOY % Change & % Change U.S. Employment: Total Nonagricultural, (Mil., SA; YOY % Change - RHS) U.S. Employment: Total Nonagricultural, (Mil., SA; % Change - LHS) U.S. Consumer Confidence Index Consumer Confidence Index, (Index 1985=1, SA) for United States U.S. Personal Income & Consumption Annualized Growth/Mo U.S. Income: Personal - Total, (Bil. $, SAAR; LHS) U.S. Personal Consumption Expenditures - Total, (Bil. $, SAAR; RHS) Source: USAA Real Estate Company Research, Moody's Analytics, RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval. 3 3

4 U.S. real estate transaction volume has been increasing and cap rates dropping... $18 $16 U.S. Transaction Volume $14 $12 $1 $8 $6 $4 $2 $- billions '7 '8 '9 '1 '11 '12 '13 9.5% U.S. Cap Rates 225 U.S. Commercial Property Price Indices 9.% 8.5% 8.% % 7.% 6.5% % 5.5% 5.% '6 '7 '8 '9 '1 '11 '12 '13 75 '7 '8 '9 '1 '11 '12 '13 Apartment Industrial Retail Apartment Industrial Retail CBD Office Suburban Office CBD Office Suburban Office Hotel Source: USAA Real Estate Company Research, Real Capital Analytics RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval. 4 4

5 The office sector recovery is on track 12, 1, 8, 6, 4, 2, U.S. Office Supply Completions SF x 1 (LHS) % of Stock (RHS).9%.8%.7%.6%.5%.4%.3%.2%.1%.% 2, 15, 1, 5, -5, -1, U.S. Office Completions, Net Absorption, Vacancy , Completions (SF x 1; LHS) Net Absorption (SF x 1; LHS) Vacancy Rate (%; RHS) Source: USAA Real Estate Company Research, CBRE-EA RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval. 5

6 The residential market continues to provide opportunities Residential & Multifamily Unit Starts Q4 1969Q4 1975Q4 1981Q4 1987Q4 1993Q4 1999Q4 25Q4 211Q4 Millions Population Change of 2-34 Age Cohort 5.% 4.% Q4 1976Q4 1982Q4 1988Q4 1994Q4 2Q4 26Q4 212Q4 218Q4 3.% 2.% 1.%.% -1.% -2.% % Change Single-Family Multifamily SF Average MF Average Change in 2-34 Cohort % Change 25, 2, U.S. Apartment Supply 2.5% 2.% 25 2 U.S. Apartment Completions, Absorption & Vacancy , 1, 1.5% 1.% Thousands ,.5% Completions Units (LHS) % of Stock (RHS).% Completions (Units/LHS) Net Absorption (LHS) Vac % (RHS) Source: USAA Real Estate Company Research, Moody's Analytics,, REIS. RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval. 6

7 The industrial market is improving as overseas and domestic demand increase U.S. Imports / Exports Y/Y % Change , 9, 8, 7, 6, 5, 4, 3, 2, U.S. Manufacturing vs. Distribution Employment 1, U.S. Imports of Goods and Services, (Index 29=1, SA; LHS) U.S. Net Exports of Goods and Services, (Index 29=1, SA; RHS) Manufacturing Emp. Distribution Emp U.S. Industrial Supply.7%.6% 4 35 Completions vs. Net Absorption (SF x 1) % 3 2 Thousands %.3%.2%.1% % Completions (LHS) % of Stock (RHS) Completions Net Absorption Source: USAA Real Estate Company Research, Moody's Analytics, CBRE-EA. RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval. 7

8 Expectations for retail fundamentals are encouraging U.S. Retail Sales and Food Services, (Bil. $, SAAR) U.S. CPI Total & Core YOY % U.S. CPI: Urban Consumer - All Items, (Index =1, SA; LHS) U.S. CPI: Urban Consumer - All Items less Food and Energy, (Index =1, SA; RHS) 4, Retail Supply 2.% U.S. Retail Completions, Net Absorption, Vacancy Thousands 35, 3, 25, 2, 15, 1, 5, Completions (LHS) % of Stock (RHS) 1.8% 1.6% 1.4% 1.2% 1.%.8%.6%.4%.2%.% Thousands 5, 4, 3, 2, 1, -1, -2, -3, Completions (LHS) Net Absorption (LHS) Vac % (RHS) Source: USAA Real Estate Company Research, Moody's Analytics, REIS. RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval. 8

9 Supply Is Projected to Remain Low for Non- Multifamily Sectors 25 Apartment Supply Office Supply Completions % of Stock Completions % of Stock Retail Supply Industrial Supply Completions % of Stock Completions % of Stock Sources: USAA Real Estate Company Research, CBRE-EA. REIS RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval. 9 9

10 Cap Rate Spreads Have Narrowed but Remain Above Historical Averages 1.% 9.% 8.% 7.% 6.% 5.% 4.% 3.% 2.% 1.%.% Cap Rate Spread (BPs) Cap Rate Spread to 1-yr Treasury Spread to BBB Corporate Sources: USAA Real Estate Company Research, Moody s Analytics, RCA RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval. 1

11 Top and Bottom 1 Employment Recovery Markets Top 1 Markets Austin 467% San Antonio 33% Houston 31% Dallas-Fort Worth 217% Nashville 197% Washington, DC 187% Oklahoma City 187% Pittsburgh 166% Salt Lake City 159% Columbus, OH 156% Bottom 1 Markets New Orleans 2.9% Cleveland 23% Memphis 26% Las Vegas 31% Riverside-San Bernardino 31% Sacramento 31% Providence 36% Milwaukee 39% St. Louis 4% Detroit 41% Source: Moody s Analytics RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval. 11

Capital Market Conditions and Relative Attractiveness of Commercial Real Estate

12 Factors Driving Continued Strength in the Commercial Real Estate Market Improving Fundamentals Positive Demographic trends Supply Remains Near Historically Low Levels Capital Market Conditions and Relative Attractiveness of Commercial Real Estate RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval. 12

USAA s View of the Year Ahead Strong economy and real estate market in 214 A year of price uncertainty More attractive opportunities may exist in secondary markets Cautious approach to

13 USAA s View of the Year Ahead Strong economy and real estate market in 214 A year of price uncertainty More attractive opportunities may exist in secondary markets Cautious approach to acquisitions Focus on value-add, development, debt, and recapitalizations Focus on value creation RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval. 13

Capital Keeping Pressuring on Cap Rates Multifamily Deliveries are Rising Rapidly

14 Investment Challenges in 214 Possible Higher Interest Rates and Higher Cap Rates Development Yields on Cost Have Hit Historic Lows Increasing Levels of Investment Capital Keeping Pressuring on Cap Rates Multifamily Deliveries are Rising Rapidly RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval. 14

15 Questions & Answers... RESTRICTED: Must not be duplicated, shared, or printed without USAA Real Estate Company approval. 15

CBRE Cap Rate SURVEY. second Half 2014. A CBRE RESEARCH Publication

CBRE Cap Rate SURVEY. second Half 2014. A CBRE RESEARCH Publication CBRE Cap Rate SURVEY A CBRE RESEARCH Publication United States Overview Key National Observations Commercial real estate in the U.S. continues to be very attractive. The investment landscape also remains