CRE Market Dynamics. Overview and Disruption. Executive Real Estate Roundtable University of Denver October 12 th, 2017

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1 CRE Market Dynamics Overview and Disruption Presented By: Executive Real Estate Roundtable University of Denver October 12 th, 2017 Lauren Foley Financial Specialist The views expressed here are my own and do not necessarily reflect the views of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

2 AGENDA Current market dynamics Disruption in the CRE space CRE financing environment

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4 ECONOMIC EXPANSIONS Source: National Bureau of Economic Research, Risk Analysis Unit/Federal Reserve Bank of Atlanta 4

5 Source: Bureau of Labor Statistics NATIONAL EMPLOYMENT GAINS 4,000 3, months 99 months 2,000 1,000 YoY Employment Difference (000s) 0-1,000-2,000-3,000-4,000-5,000-6,000-7,

6 Source: Bureau of Labor Statistics; Risk Analysis Unit/Federal Reserve Bank of Atlanta U.S. EMPLOYMENT GAINS BY SECTOR YEAR-AGO DIFFERENCE (000S) Sector Year-Ago Difference (000s) Total Difference Average Annual Wage Aug % Change Total 2,272 2,415 1, , ,588 2,230 2,209 2,558 2,876 2,492 2,097 7,848 $53, % Nat. Resources $56, % Construction , $58, % Manufacturing , ,807 $64, % Wholesale Trade $73, % Retail Trade $30, % Transp. & Utilities $50, % Information $98, % Finance $88, % Professional Services , ,570 $69, % Educ. & Health ,462 $48, % Leisure & Hospitality ,510 $22, % Other Services $35, % Government $54, %

7 METRO JOB GROWTH AUGUST 2017 (YOY % CHANGE) Source: Bureau of Labor Statistics

8 U.S. UNEMPLOYMENT RATES AS OF AUGUST %, SA Official Unemployment Rate (U-3) Plus discouraged workers (U-4) Plus marginally attached workers (U-5) Plus marginally attached for economic reasons (U-6) Source: Bureau of Labor Statistics, STL FRB FRED, Risk Analysis Unit/Federal Reserve Bank of Atlanta

9 CRE VACANCY RATES Data through 2Q 2017 Source: AXIOMetrics, CBRE-EA, Risk Analysis Unit/Federal Reserve Bank of Atlanta

10 U.S. COMPLETIONS AS A SHARE OF EXISTING CRE STOCK * YTD2017Q2 data; last two quarters forecasted Source: SupplyTrack, Risk Analysis Unit/Federal Reserve Bank of Atlanta

11 ANALYZING THE CRE MARKET CYCLE Phase 2 - Expansion Declining vacancy New construction Rents rise rapidly toward new construction levels Long-Term Occupancy High rent growth in a tight market Demand/supply Equilibrium Point Cost feasible new construction rents Phase 3 - Mature Increasing vacancy New construction Rent growth positive but declining Rent growth < 0% Rent growth below π Rent growth below π & negative Phase 1 - Recovery Declining vacancy No new construction Phase 4 - Downturn Declining vacancy More completions Source: Mueller/Black Creek Group; Risk Analysis Unit/Federal Reserve Bank of Atlanta

12 ANALYZING THE CRE MARKET CYCLE Phase 2 - Expansion vacancy New construction Rent growth Phase 3 - Mature vacancy New construction Rent growth Warehouse Office Hotels Apartments Long-Term Occupancy Retail Phase 1 - Recovery vacancy No new construction Rent growth < 0%; < π Phase 4 - Downturn vacancy More completions Rent growth < π; < 0%

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14 OVERVIEW Moving from tradition Creativity is key = repurposing Technology Efficiency Mood retailing Experience-based

15 Number of Retail Sq. Ft. RETAIL SQUARE FEET PER CAPITA Source: ICSC, CBRE-EA, Various

16 TECHNOLOGICAL DISRUPTORS Source: Amazon, Google, Dailydigi.com, various

17 ON THE ROAD: UBER, LYFT, AND SELF- DRIVING CARS Source: Google Images, Various

18 AIRBNB VS HOSPITALITY: THE COMPETITION CONTINUES Hotel Airbnb 5 6 Source: Source: Busbud.com

19 AIRBNB VS HOSPITALITY: THE COMPETITION CONTINUES A rendering of a room in the Marriott Moxy hotel in Times Square, set to open this summer. Rooms in the hotel are 183 square feet, creating a space challenge in keeping with living in the Big Apple. -Marriott Hotel Source: Source: Google Images

20 OFFICE SPACE (NOT THE MOVIE) Source: Google Images, Wework.com

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22 FUNDING FOR TOTAL CRE MORTGAGES Source: Z.1 Financial Accounts of the United States/U.S. Board of Governors of the Federal Reserve System (FRB); Risk Analysis Unit calculations

23 Billions USD ($) CMBS ISSUANCE Source: Securities Industry and Financial Markets Association (SIFMA); Risk Analysis Unit/FRB Atlanta

24 DEPOSITORY INSTITUTIONS SHARE OF COMMERCIAL MORTGAGES Source: Z.1 Financial Accounts of the United States/U.S. Board of Governors of the Federal Reserve System (FRB); Risk Analysis Unit calculations

25 Source: Senior Loan Officer Survey/Federal Reserve; Risk Analysis Unit/FRB Atlanta BANK SENTIMENT Underwriting Net Percent of Respondents Tightening 40% 20% 0% -20% Net Percentage Reporting Increased Demand for New Loans 60% 40% 20% 0% -20% Loan Demand

26 Source: Real Capital Analytics / FRB Atlanta Risk Analysis Unit LENDING SOURCE MARKET SHARE CRE Loans

27 BANK CRE EXPOSURES Source: Bank Call Reports

28 COMMERCIAL BANK CRE GUIDELINE EXPOSURES Source: Bank Call Reports; Risk Analysis Unit/Federal Reserve Bank of Atlanta

29 Source: Real Capital Analytics; Risk Analysis Unit POTENTIALLY TROUBLED CRE BANK LOANS September 2017 (sized by relative loan amounts) Note: Includes loans > $2.5 million

30 Source: Real Capital Analytics; Risk Analysis Unit POTENTIALLY TROUBLED CRE BANK LOANS September 2017 (sized by relative loan amounts) Note: Includes loans > $2.5 million

31 Source: Real Capital Analytics; Risk Analysis Unit POTENTIALLY TROUBLED CRE BANK LOANS September 2017 (sized by relative loan amounts) Note: Includes loans > $2.5 million

32 COMMERCIAL REAL ESTATE CAP RATES Capital Markets Source: Real Capital Analytics/FRED /FRB Atlanta Risk Analysis Unit

33 Source: CoStar Portfolio Strategy CAP RATE SPREADS As of 2Q 2017

34 TAKEAWAYS National economic conditions continue to indicate modest growth which should continue to propel most CRE dynamics. Job growth conditions in some local markets are not as robust as those at the national level and may create a headwind for CRE. Conditions in the luxury apartment, limited-service hotel and retail appears to indicate enhanced risk in each sector. Heightened apartment completion rates and retailer bankruptcies continue to add risk to each sector. CRE exposure at Community and Regional Banks has generally increased since CRE Cap Rates remain an area of added risk. Especially, transactions that utilize 1031 Tax-Free Exchanges.

35 The views expressed here are my own and do not necessarily reflect the views of the Federal Reserve Bank of Atlanta or the Federal Reserve System.