Deutsche Asset & Wealth Management Real Estate Outlook

Transcription

1 Research Report Deutsche Asset & Wealth Management Real Estate Outlook First Quarter 2013 This is neither an offer to sell nor a solicitation of an offer to buy the securities described herein. An offering is made only by a prospectus to individuals who meet minimum suitability requirements. This sales literature must be read in conjunction with a prospectus in order to understand fully all the implications and risks of the offering of securities to which it relates. A copy of the prospectus must be made available to you in connection with the offering described herein. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of our securities or determined if our prospectus is truthful or complete. Neither the Attorney General of the State of New York nor any other regulatory body has passed on or endorsed the merits of this offering. Any representation to the contrary is a criminal offense. Securities offered through SC Distributors, LLC, dealer manager and member FINRA and SIPC. RREEF America LLC is RREEF Property Trust s sponsor and advisor. The report has been prepared independently by Deutsche Asset & Wealth Management. RREEF Property Trust, RREEF America LLC, and Deutsche Asset & Wealth Management are affiliated entities.

2 Economic Outlook Underpinnings of recovery take firmer hold. Housing becoming a tailwind for recovery while contracting federal expenditures remain a drag Recovery is still driven by metros with strong tech and energy components Metros with significant finance, manufacturing and federal sectors lag In our analysis, the U.S. economy continues a moderate expansion. The outlook is brightening and risks appear weighted to the upside, a sharp contrast from late last year. While our top-line forecasts of GDP and job growth have not changed appreciably in the past six months, we feel more confident that momentum is building for more robust recovery. Structurally, the economy is continuing to rebalance away from government spending and toward greater reliance on private demand and investment, which is supported by a number of factors. First, households and businesses have deleveraged and balance sheets are in better shape than they have been in nearly two decades. Given the amount of pent-up demand in the economy, credit growth is expanding, as banks are stabilizing and willing to take greater lending risks. Home prices also bottomed out during the past year and have increased by almost 10% over the last year as reported by the Case-Shiller index. Rising housing demand is fueling economic growth directly in the form of rising construction activity, as well as indirectly by supporting higher consumer confidence. With stronger credit growth and an improving housing market, private demand is expanding and likely to carry economic growth during the next two years. However, on the flip side of the rebalancing, federal government spending contraction is starting to drag on the economy. Large spending cuts in fourth quarter and first quarter weighed on GDP by an average of 1.1 percentage points (SAAR). We believe both parties in Congress seek to produce a balanced budget, even if they do not appear to be united on how to achieve this goal. Reasonably, we are likely going to see a combination of tax increases and spending cuts over the next several years. Globally, Europe appears poised to relax its austerity programs and Japan seems intent on reigniting their economy through quantitative easing. Cautiously, these actions could serve to raise the outlook for global growth and provide additional upside to the U.S. economy. Regionally, employment growth in the West and the South are outperforming the East and Midwest and likely to do so over the next few years. The oil boom is supporting strong growth in Texas and other oil-patch states, as new technology and infrastructure construction spending is allowing the U.S. to produce and export more domestic natural resources this should serve to offset the drag of reduced government spending, at least to some degree. The late recovery housing-metros in the Southeast and Southwest are finally beginning to turn around and should have more robust growth in 2014 due to higher in-migration and rising job growth. Economic growth in the Midwest and East will likely lag the national average during the next couple of years, as sequestration and the ongoing European debt crisis restrain growth. After several years of outperformance compared with the rest of the country, growth in Washington, D.C. and other Mid-Atlantic metros is slowing, partly due to government cuts. Manufacturing in the Midwest is stabilizing, but showing some weakness after several quarters of growth. Both defense spending cuts and a rising dollar will take a bite out of the Midwest during at least the near term. Additionally, limited growth in Europe is likely to slow exports from

3 the Northeast, as the region is highly exposed to European demand. However, the Northeast, Washington and Chicago/Minneapolis should benefit from their highly-educated workforce and diverse economies, which should promote growth as the economy expands. Capital Markets Investor interest in commercial real estate increases More mortgage debt becomes available NOI growth outlook is strengthening for most property sectors. Commercial real estate transaction volume continues to rise. After an unusually strong fourth quarter 2012, total volume in the first quarter reached $72 billion, 35% higher than first quarter 2012 and the strongest first quarter recorded since On a year-over-year basis, apartment and industrial properties both had stronger sales, while office was relatively steady, and retail sales declined marginally due to fewer mall sales. Transaction volume was boosted by a greater supply of capital from lenders. The Federal Reserve Loan Officer Survey revealed that more banks are trying to expand lending, just as demand for capital for real estate loans is strengthening. Particular strength is seen in the securitization market. During the first quarter, total CMBS volume reached $22.8 billion, four times larger than the first quarter 2012 and the largest quarterly volume since Transaction volume will continue to get a boost from lenders looking to place debt capital throughout Real estate yields are stabilizing after declining from 2010 to 2012, but this is occurring just as NOI growth is recovering. Cap rates for CBD office and apartment properties, which were the first to recover, have mostly flattened. Income growth for apartments is strong, but investors are likely worrying about future construction and are not willing to bid yields much lower. Income growth for CBD office is still in early recovery, so cap rates probably will not go lower for most markets until rent recovery has taken hold. Cap rates for retail, industrial and suburban office also changed little throughout the year. Income growth is growing for retail and warehouse, and beginning to enter recovery for suburban office and flex industrial. Overall, we will likely continue to see stable cap rates throughout the year. Industrial Demand for industrial space takes off Vacancy declines fuel rent increases The U.S. industrial property market continues to perform well in early Industrial net absorption totalled 63 million square feet during the first quarter of 2013, exceeding the fourth quarter 2012 figure of 56.4 million square feet and more than double the pace averaged during the previous eight quarters. A greater number of markets enjoyed healthy demand and that net absorption was fairly broad across property segments. The warehouse segment continued to outperform garnering slightly more than its share of demand, although non-warehouse uses commanded a 28 percent share of new demand during the last three quarters, which is on par with trends in the 1990s The national vacancy rate fell 40 basis points to 12.3 percent in the first quarter of 2013, on top of an 80 basis point decline in The supply pipeline has been modest by historical standards during this period, but build-to-suit activity in leading markets has commenced. Effective market rents grew by an estimated 3.4 percent in 2012 and are expected to increase by about 4 percent in 2013.

4 Demand drivers support a positive outlook for the most part Limited supply will help recovery Future tenant demand should benefit from continued hiring, sustained domestic manufacturing activity, rebounding housing market dynamics, trade and broadening consumption trends. Demand drivers are strengthening, yielding improving fundamentals. However, cautious business sentiment and the limited willingness or ability to access financing still weighs on smaller businesses. Supply-side threats will remain subdued through 2014, although we do expect a gradual ramp up of industrial construction during the next few years as fundamentals improve. The national vacancy rate is forecast to stabilize in the 10 percent range in Our top markets for investment during the next few years are markets that benefit from some or all of the following: business and trade linkages to Asia, Mexico, Latin America, and Canada, larger populations with above-average growth and incomes, and large high tech, medical and energy nodes. Global gateways and inland hubs lead the recovery Demand in global gateway and top inland hub markets will continue to drive vacancy and rent recovery trends. Class A bulk warehouses in Los Angeles, Orange County, Riverside, Central New Jersey, Atlanta, Dallas, and Chicago have made solid strides, and there is still more room for occupancy and rent recovery. Well-located and functional class A and class B multi-tenant warehouses in coastal metros should begin to outperform, garnering stronger rent growth and occupancy gains in 2013 and Markets in California, the Pacific Northwest, South Florida and the Northeast are also attractive investment targets for infill multi-tenant warehouse and flex properties, as well as modern R&D and business park properties. These high-value markets have supply barriers, which will likely result in a stronger rent recovery. Multi-family After reaping the benefits of leading the real estate recovery, multi-family rent growth is slowing New supply becomes the largest force in limiting future rent performance The U.S. multi-family market continues to see stable occupancy levels, yet the pace of rent growth is slowing. In the short run, neither rising home sales nor surging multi-family construction has caused any significant shift in occupancy levels and most major markets boast rent levels well beyond the peaks achieved prior to the recession. Still, signs are mounting that landlords' leverage against tenants could be lessening as new supply is delivered and the single-family housing market heals. As the first quarter of 2013 came to a close, effective rent growth softened to its slowest pace in the past 31 months. The annualized growth rate had held fairly steady between 3.5% and 3.8% from June 2012 to February 2013, but dropped to 3.2% in March. Leading indicators now suggests vacancy rates might be nearing a bottom, although market conditions remain tight. As a result, the multi-family market is forecast to produce another year of steady results with rent growth forecast to average 3% to 4% in However, if vacancy rates start to increase we could see NOI grow at slightly lower levels than rent growth. Landlords have benefited greatly in recent years amid a combination of stable supply, as few new apartments were built, and solid demand from households unable or unwilling to buy homes. The nation s average rental rate has climbed more than 13% since bottoming in late The healthy multi-family market fundamentals and scarce new supply during the last three years have made it easier for developers to justify new apartment construction. With the March multi-family permit number at 280,418 units, annual multi-family permitting (not seasonally

5 adjusted) has now been above 200,000 units for 13 consecutive months. After 77,000 units were delivered in 2012, the country's 52 largest metropolitan markets should see about 150,000 new units completed this year, followed by an additional 365,000 combined in 2014 and More recent statistics from the government indicate that permitting activity has reached 409,000 units, which is ahead of a normal pace of 325,000 to 350,000 units. Cap rates remain low where demand drivers show continued strength With yields tight, groundup investment is an attractive alternative Despite concerns about overbuilding, cap rates for Class A communities in prime markets remain at historic lows. Accordingly, investors should take a tactical approach with respect to timing together with market and asset selection. Investors can outperform by acquiring high-quality communities in prime, low-vacancy districts that enjoy strong demand drivers. Markets expected to outperform in the near term include Boston, Denver, Fort Lauderdale, Orange County, San Diego, San Francisco Bay Area, Seattle, and West Palm Beach. A Build-to-Core strategy provides an investor the opportunity to own modern luxury product in the prime residential markets at a more attractive basis. Target prime urban districts located in gateway and knowledge-based cities popular with the Millennials, along with select suburban markets that enjoy highly-rated schools, high-median home prices, upscale amenities and proximity to mass transit. Additional opportunities may exist in repositioning older communities in high-barrier markets. Expensive for-sale housing and lower construction levels will allow investors to create value in these projects. Coastal Northern and Southern California, along with South Florida, may provide repositioning opportunities. Office Absorption remains tepid, but metros with solid tech and energy sectors doing best Demand growth should turn the corner in 2014, while supply remains mostly constrained Recovery expected to soon expand beyond limited markets Lackluster absorption has pervaded the U.S. office market during the past three years, especially in first quarter of each year, and this past quarter was no exception: net absorption occurred at half of last year s rate, and vacancy decreased only 10 bps to 15.3%. The technology and energy centers continue to perform well. Austin, Dallas and Orange County were among the top metros in total absorption, while Austin also led in percentage of inventory absorbed. Washington, D.C. achieved no net gains in occupancy, and with new office product completed, market vacancy ticked up 10 bps. On a year-over-year basis, vacancy rates in Washington have increased by 200 bps, whereas most other markets witnessed a decline. Demand should finally begin accelerating more broadly later this year, with recovery solidifying by New deliveries will double in 2013 but are coming off near-record low levels, and major additions are still years away. Houston, New York, and Washington, D.C. will account for half of completions scheduled for 2013, but San Jose and Boston will contribute more than a million square feet each. Projects underway in downtowns Chicago and San Francisco should be completed in 2014 and beyond. New York has strong long-term drivers, although financial sector job reductions remain a short-term drag, and vacancy notched up 20 bps in the first quarter. Washington, D.C., while also having strong long-term drivers, is expected to underperform in the near term due to job cuts at the Federal level. CBDs remain the focus for investment but select close-in suburban nodes are one year closer to accelerated rent recovery. Austin, Boston, San Francisco, San Jose, and Houston are turning in strong performances, and these metros should

6 see the highest peak-to-peak rent gains through Outside of top-tier urban markets, metros that appear poised to begin outperforming in rent recovery include Los Angeles, Orange County, and San Diego, the latter two of which experienced vacancy declines of 90 and 40 basis points during first quarter We also like Seattle, particularly in the downtown, which benefits from strong technology drivers. Oakland/East Bay is forecast to benefit as neighboring Silicon Valley and San Francisco fill up and as back office operations move to the East Bay for cost savings. Miami is another cyclical metro to watch, and had a slight vacancy decline for the quarter, although growth there will be more delayed here. While demand should accelerate, several headwinds remain While the sector s outlook is beginning to look more promising, challenges facing demand recovery arise from shadow space lingering in empty cubicles, tenants using space more efficiently, continued financial sector retrenchments, and federal fiscal woes. Retail The retail sector struggles to kick into recovery gear Rents nationally still not gaining traction Signs point to improvement around the corner Strongest performance from centers least vulnerable to e-commerce The retail sector registered another quarter of modest improvement in the first quarter of 2013, with leasing just outpacing the minimal additions to supply, but the bigger story continues to be the split between thriving and struggling markets. The vacancy rate for shopping centers overall fell a trivial 10 basis points since fourth quarter 2012 to 8.9%, down less than 100 basis points from its peak in early The pockets of relative strength continue to broaden. Of the 142 metros tracked by CoStar, 92 had positive absorption in the past quarter, up from 81 recorded six month ago. Nonetheless, vacancies remain higher today than at the beginning of 2010 in almost a third of metros. Overall momentum is positive, with occupancy gains in each of the past four quarters following three consecutive quarters without improvement. Meanwhile, rents continue to fall despite hints of stabilization in early 2012 that could not be sustained. CoStar data shows that shopping center rents have fallen 4% since fourth quarter 2011, and dropped 2% in the past half year for a total decline of close to 20% since the market peak, as vacancies remain well above historical norms. We affirm our recent forecasts of gradual recovery in the near term in line with recent trends, with accelerating gains in the following years. Economic and consumer fundamentals continue to strengthen, which should support greater tenant demand for space. Consumer confidence, incomes, job growth, and retail spending are all tracking in the right direction, while retailers are financially stronger. Nominal retail sales are up 3.5% over the past 12 months and are above prior peak levels. Yet market conditions have not improved commensurately due to changing property dynamics, as retailers focus more on profitability and space productivity at the expense of market share and growth at any price. Together with the expanding threats from e-commerce, retailers are reducing their store sizes and counts, focusing on the top centers in the best markets. The retail recovery is proving to be decidedly uneven, with superior markets and shopping centers thriving while their inferior counterparts struggle or fail. More markets are beginning to turn the corner to improvement and supply remains constrained, but demand and occupancy recovery is occurring only gradually. Look for outperformance in traditionally strong markets with high incomes and population density coupled with restrained construction pipelines. Among retail

7 subsectors, we see greater strength in centers least vulnerable to e-commerce sales erosion including high-street retail, dominant regional malls, and welllocated community centers anchored by regionally-dominant grocers. Beware of secondary space and submarkets, particularly with retailers selling commodity goods, such as power centers.

8 Important Information RISKS An investment in shares of RREEF Property Trust, Inc. common stock involves significant risks and is intended only for investors with a long-term investment horizon and who do not require immediate liquidity or guaranteed income. You should purchase shares only if you can afford a loss of some or all of your investment. You should carefully consider the information set forth in the "Risk Factors" section of the prospectus for a discussion of material risk factors relevant to an investment in RREEF Property Trust. Some of the more significant risks relating to an investment in shares of our common stock include those listed below. (1) We are a newly formed corporation and have no operating history. There is no assurance that we will achieve our investment objectives. (2) This is a "blind pool" offering and you will not be able to evaluate our investments before we make them. (3) Our shares should be considered as having only limited liquidity and at times may be illiquid. Since we are a perpetual-life investment vehicle and there is no public trading market for shares of our common stock, redemption of shares by us will likely be the only way for you to dispose of your shares. Our redemption plan contains limitations on the number of shares we will redeem in any calendar quarter. Our board of directors has the right to modify or suspend our redemption plan. (4) The amount of distributions we may pay, if any, is uncertain. We may pay distributions from sources other than cash flow from operations, including, without limitation, the sale of assets, borrowings or offering proceeds, and we have no limits on the amounts we may pay from such sources. If we do, it may negatively impact the value of the investment. (5) The purchase and redemption price for shares of our common stock will be based on the NAV of each class of common stock and will not be based on any public trading market. Because valuation of properties is inherently subjective, our NAV may not accurately reflect the actual price at which our assets could be liquidated on any given day. (6) We are dependent upon our advisor, which will face conflicts of interest as a result of, among other things, time constraints, allocation of investment opportunities and the fact that we will pay substantial fees to our advisor. (7) If we are not able to raise a substantial amount of capital in our offering, our ability to achieve our investment objectives could be adversely affected. (8) Our use of financial leverage increases the risk of your investment and could hinder our ability to pay distributions to our stockholders. (9) Our board of directors may change certain of our investment and operational policies without stockholder approval, which could alter the nature of your investment. (10) If we fail to qualify as a REIT and no relief provisions apply, our NAV per share and cash available for distribution to our stockholders could materially decrease.

9 (11) Data is provided as of March 31, 2013 and is subject to change. There is no guarantee these trends will continue. FORWARD LOOKING STATEMENTS This presentation contains forward-looking statements relating to the business and financial outlook of RREEF Property Trust that are based on management s current expectations, estimates, forecasts and projections and are not guarantees of future performance. Actual results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any such statements. A number of important factors could cause actual results to differ materially from the forward-looking statements contained in this presentation. Forward-looking statements in this presentation speak only as of the date on which such statements were made, and RREEF Property Trust undertakes no obligation to update any such statements that may become untrue because of subsequent events. Prepared by Deutsche Asset & Wealth Management, based on multiple sources and proprietary analyses.