Economics Group Special Commentary Mark Vitner, Senior Economist mark.vitner@wellsfargo.com (74) 41-3277 Hank Carmichael, Economic Analyst john.h.carmichael@wellsfargo.com (74) 41-359 Ariana Vaisey, Economic Analyst ariana.b.vaisey@wellsfargo.com (74) 41-139 The State of CRE: Q3 Chartbook Eight and a half years of modest economic growth has brought the economy back near traditional measures of full employment. Growth appears to have picked up a notch more recently, with real GDP growth increasing to better than a 3 percent pace in the second and third quarters. The fourth quarter appears to be off to a strong start, with business investment growing solidly. Most important of all, the labor market continues to expand at a healthy clip, with employment gains reaching a broader swath of the economy. We expect the momentum to carry over into 218 and expect real GDP to grow 2.5 percent. Commercial real estate (CRE) remains in very good shape, particularly at this point of the business cycle. Development has been tightly focused in a handful of rapidly growing geographies and product types. Apartments are the most notable standout, with the move back toward large center cities and emergence of millennials setting off a wave of high-end projects. Industrial development has been another growth area, with e-commerce driving demand for distribution and fulfillment centers. Retail development remains soft, with traditional retailers and regional shopping malls under intense pressure from online competitors and neighborhood center development held back by the painstakingly slow recovery in homebuilding. Office development has also remained in slow gear, except in markets predominantly driven by technology or, earlier in the cycle, energy. The slow recovery in the U.S. and abroad has kept interest rates exceptionally low. Persistently low rates set off a search for yield that pulled investment into real estate and created a wave of funding for startups and promising business models. For real estate, the most rapid price gains have been in cities with close ties to the global capital markets. Now, with labor markets tightening and new leadership set to take over at the Federal Reserve, there is growing concern interest rates will rise more rapidly and to a higher level than previously thought. While cap rates did not fall as quickly as interest rates did, they continued to drop long after interest rates bottomed. Values appear stretched by any historic valuation measure. Commercial real estate remains in good shape, particularly at this point of the business cycle. Figure 1 Figure 2 $18 $16 CRE Transaction Volume Billions of Dollars Volume: Q3 @ $114.2B $18 $16 175 Commercial Property Price Index Index December 26 =, All Property Types Major Markets (All Property): Oct @ 1.5 Non-Major Markets (All Property): Oct @ 118.1 175 $14 $14 1 1 $12 $12 $ $ 125 125 $8 $8 $6 $6 $4 $4 75 75 $2 $2 $ 1 3 5 7 9 11 13 15 17 $ 5 6 7 8 9 1 11 12 13 14 15 16 17 18 Source: RCA Inc. and Wells Fargo Securities This report is available on wellsfargo.com/economics and on Bloomberg WFRE.
Commercial Real Estate Chartbook: Q3 Valuations reflect improved fundamentals but have been stretched somewhat by the persistance of low interest rates and inflow of capital from overseas. A related concern is what happens to growth in the tech sector once interest rates start rising. The strongest office, industrial, retail and apartment markets are often in areas of the economy where the technology sector is growing rapidly. The growth in the tech sector has largely been fueled by an influx of capital into private equity, allowing firms to employ more workers and lease more office and industrial space that their internally generated funds could support. With overall economic growth strengthening and broadening, the relative risk-adjusted rate of return on investments in startups and promising ventures will diminish and many of these businesses will need to throttle back their ambitions. The repercussions could potentially reverberate through all corners of the comercial real estate market, but probably not in 218. For now, commercial real estate appears to be in a fairly good position. Nonresidenital construction expenditures have increased from post-recession lows but structures investment accounts for just 2.9 percent of GDP versus a post-war norm of 3.4 percent, suggesting there is still some runway left in this recovery. The slow recovery in construction spending means overbuilding is much less of a problem than it has been this far out into previous cycles. From an operational standpoint, supply and demand appear to be in fairly good balance and rents reflect the improved operating environment. Valuations also reflect improved fundamentals but have been stretched somewhat by the persistence of low interest rates and inflow of capital from overseas. We believe there is some cushion for interest rates to rise without having a materially adverse effect on cap rates, at least initially. To date, energy projects, data centers and industrial projects have comprised a disproportionate share of growth, whereas traditional office and retail development has largely lagged and been limited to energy- and tech-driven markets. Effective office rent expanded at the slowest pace since 211 in Q3-217, as completions have largely come to a standstill following a wave of new projects coming online in recent years. Retail development remains challenged by the relentless growth in e-commerce. Reports of the death of brick and mortar retailers, however, appear overdone. Demand for well-located retail locations remains solid, as town center projects, industrial re-use and transit-oriented projects continue to lease-up quickly and command premium rents. Commercial development continues to follow household growth, and population growth and job density will remain the dominant drivers for office and retail projects. The movement of millennials back toward the center city contributed to the five-year-long apartment boom. Not only has this trend been prominent in tech-driven markets like San Francisco, Seattle and Austin, but also in most large cities. Seattle, Salt Lake City and Nashville have seen the strongest effective rent growth but rents are also rising solidly in Dallas, Atlanta and Houston. Much of this new development has been confined to high-end units in a handful of submarkets in these metro areas, including areas near key employment centers, resulting in much higher rents. Rent growth appears to be waning. Effective rents for apartments have risen nationally every quarter since the Great Recession, with rent increases peaking in Q4-215. Growth decelerated during Q3-217 amid moderating absorption and a healthy pipeline of completions in many highprice markets, including San Francisco, New York City, Los Angeles and Washington, D.C. On an overall basis, vacancy rates and rents appear headed for a soft landing, unless the economy unexpectedly weakens. Apartment construction appears to be moderating in line with demand. We expect construction to pull back even further in 218, as more apartments are completed in and around the center city of many of the nation s largest metro areas. Demand for warehouse and industrial space remains a growth area. Despite a flattening in 217, the vacancy rate remains historically low. Sales prices for modern, well-located properties also continue to increase. Effective rent growth and net absorption did moderate in Q3-217. Those metrics, however, also remain at historically strong levels. Development continues to be driven by the rapid growth for e-commerce, the resurgence in international trade and re-emergence of U.S. manufacturing. The strongest growth continues to be major seaports and large population centers, including the Inland Empire, Northern New Jersey, Eastern Pennsylvania and Atlanta. Continued growth in leisure and recreation is also allowing older space to be repurposed as breweries, restaurants, and sports and entertainment venues. 2
Commercial Real Estate Chartbook: Q3 The underlying trend in hotel CRE remains positive as hotel fundamentals are cyclical and generally rise and fall with the broader economic growth. Several unique events, however, had a transitory impact on the hotel market. The recent hurricanes, as well as the Great American Eclipse boosted demand for the quarter, yet fears of a public backlash from the perception of price gauging kept average room rates down. For the year, occupancy rates are down slightly from their highs, as competition for guests has increased and several new properties came to market. Real revenue per available room (RevPAR) fell for the fifth straight quarter in Q3, making the current reading the slowest rate of growth since early 21. Despite the fact that occupancy and RevPAR are down for the year, the outlook remains positive, as the strengthening U.S. economy should propel demand in 218. Figure 3 Figure 4 7% Structures Fixed Investment Percent of GDP Structures: Q3 @ 2. 7% 2. Share of Stock Under Construction Percent, 4-Quarter Moving Average Retail Under Construction Stock: Q3 @. 2. 2. 2. 1. 1. 1. 1. 3% 3%.. 1% 48 52 56 6 64 68 72 76 8 84 88 92 96 4 8 12 16 1%. 83 86 89 92 95 98 1 4 7 1 13 16. Source: U.S. Department of Commerce, CoStar and Wells Fargo Securities 3
Billions Commercial Real Estate Chartbook: Q3 CRE Property Pricing & Fundamentals 1 CRE Cap Rates vs. 1-Year Treasury Yields 1 Commercial real estate fundamentals continued to slow in Q3, with all four main property types showing slowing rent growth on a year-to-year basis. Cap rates improved in the industrial, retail and apartment sectors as commercial real estate values continue pushing past pre-recession peaks. Completions of new retail space and office buildings fell 49 percent and 36 percent, respectively, during the third quarter. Apartment activity slowed, but remains at a high level, particularly relative to single-family construction. Industrial development remains solid, particularly near major seaports and large inland distribution hubs. The Commercial Property Price Index, particularly major market CBD office, continues to increase across most property types, benefitting from a relative dearth of new construction. 1 Industrial: Q3 @ 6. Retail: Q3 @ 6. Office: Q3 @ 6. Apartment: Q3 @ 5. Hotel: Q3 @ 8.7% 1-Year Yield: Q4 @ 2. 9. 9. Cap Rate vs. 1-Year Term Premium Levels; Y= Cap Rate, X= Term Premium 1 1. 9. 1 1 1 Asking Rent 4-Quarter Moving Average, Year-over-Year Percent Change Apartment: Q3 @ 2. Office: Q3 @ 2. Retail: Q3 @ 2. Industrial: Q3 @ 6. 1 1 1 8. 8. 7. 7. 9. 8. 8. 7. 7. - - - - - - - - 6. 6. y =.615x + 6.41 R² =.547 6. 6. 5. 5. -1. -... 1. 1. 2. 2. 3. 3. 4. -1-1 96 98 2 4 6 8 1 12 14 16 18 175 1 Commercial Property Price Index Index Apartment: Oct @ 157.3 Retail: Oct @ 11.6 Industrial: Oct @ 121.5 Office - CBD: Oct @ 151.3 Office - Suburban: Oct @ 15. 175 1 $12 $ $8 Origin of Capital Going in the United States For Commercial Real Estate, Billions of Dollars Rest of World: Q2 @ $.9B Asia: Q2 @ $29.8B Canada: Q2 @ $14.4B Middle East: Q2 @ $5.1B Europe: Q2 @ $13.2B $12 $ $8 125 125 $6 $6 $4 $4 $2 $2 75 75 $ 7 8 9 1 11 12 13 14 15 16 17 $ 5 6 7 8 9 1 11 12 13 14 15 16 17 Source: RCA Inc., Reis Inc., CoStar Inc., Bloomberg LP, Federal Reserve Board and Wells Fargo Securities 4
Commercial Real Estate Chartbook: Q3 Credit Availability & Lending The Senior Loan Officer Survey reported tightening lending standards in Q3. This was driven wholly by multifamily lending practices, as nonresidential properties, construction and land development standards remained unchanged. Demand reportedly cooled as well, mostly for multifamily properties. Consistent with tighter lending standards and slowing loan demand, the growth in CRE lending has slowed, particularly in construction, land development and multifamily projects. Cautious lending has helped keep a fairly tight rein on supply throughout this recovery, which has supported property values. The low absolute level of rates has made lenders more selective and tended to favor projects in major markets and submarkets. 4 3 2 1-1 -2-3 CRE Lending All Commercial Banks, Year-over-Year Percent Change Construction and Land Development: Q2 @ 1. Income producing: Q2 @ 9. Multifamily Residential Real Estate: Q2 @ 1. -4 8 9 1 11 12 13 14 15 16 17 Commercial & Multifamily Mortgages Outstanding Percent of Total, Q2 217 4 3 2 1-1 -2-3 -4 1 8 6 Banks Tightening Standards for CRE Loans Net Percent of Banks 1 8 6 Agency, GSE and MBS, 1 Other, 13% Banks and Thrifts, 41% 4 2 4 2 Life insurance, 1 CMBS, CDO and other ABS, 1-2 -2 Total CRE (Series Ends in 213): Q3 @ -19. -4 Nonfarm Nonresidential: Q3 @ 9.3% Multifamily Residential: Q3 @ 18. Construction & Land Development: Q3 @ 17.3% -6 6 Demand for CRE Loans Net Percent of Banks Reporting Stronger Demand -4-6 6 $12 $1 Loans & Leases Decomposition Billions of Dollars, Gross Loans and Leases, All Commercial Banks Farm Loans: 217 @ $76M Total Other Loans & Leases: 217 @ $1,117M Loans to Individuals: 217 @ $1,433M Commercial & Industrial: 217 @ $1,912M All Real Estate: 217 @ $4,213M $12 $1 4 4 $8 $8 2 2 $6 $6-2 -2 $4 $4-4 -6 Total CRE (Series Ends in 213): Q3 @ 47. -8 Construction & Land Development: Q3 @ -9.3% Nonfarm Nonresidential: Q3 @ -2. Multifamily Residential: Q3 @ -7. -1-4 -6-8 -1 $2 $ 213 214 215 216 217 Source: FDIC, FRB, Mortgage Bankers Association and Wells Fargo Securities $2 $ 5
Quarterly Annualized Percent Change Commercial Real Estate Chartbook: Q3 Apartments 6. Apartment Effective Rent Growth Quarter-over-Quarter Percent Change 2. Apartment vacancy rates rose by 1 bps to 4.5 percent in the third quarter. This marks the fourth consecutive quarterly gain and highest level since Q4-212. The higher vacancy rate is primarily due to increased completions, although absorption has also clearly moderated. Effective rent growth decelerated during the third quarter. Despite the moderation, more markets saw positive rent growth in Q3 compared to Q2. Washington, D.C., Lexington, Charlotte and Salt Lake City led rent gains, helped by a slew of new high-priced deliveries. Apartment construction appears to be moderating in line with demand. Vacancy rates and rents appear headed for a soft landing, unless the economy weakens unexpectedly. 5. 4. 3. 2. 1.. -1. -2. -3. Quarter-over-Quarter: Q3 @. (Right Axis) -4. Year-over-Year: Q3 @ 3.3% (Left Axis) -5. 6 7 8 9 1 11 12 13 14 15 16 17 Apartment Supply & Demand Percent, Thousands of Units 2. 1. 1.... -. -. -1. -1. -2. 2 1 1 Apartment Effective Revenue Growth: Q3 217 Year-over-Year Percent Change, Quarterly Annualized Percent Change; Sorted by Stock Recovering New York Metro Cincinnati Suburban Maryland Oakland Philadelphia Houston Detroit Cleveland Baltimore Orange County Boston Washington D.C. Columbus Kansas City San Jose St. Louis Portland Atlanta Austin Orlando Los Angeles Dallas Miami Fort Worth Minneapolis Raleigh-Durham Denver Seattle Charlotte Central New Jersey Stock Size Indianapolis Chicago More than 2, Units - Riverside 1,-2, Units Tampa Phoenix Less than 1, Units San Francisco San Diego Las Vegas Contracting Northern New Jersey Decelerating - - 1 1 1 Year-over-Year Percent Change Apartment Cap Rate vs. 1-Year Treasury Yield Expanding 1 7% 3% Apartment Net Completions: Q3 @ 47,271 Units (Right Axis) Apartment Net Absorption: Q3 @ 31,254 Units (Right Axis) Apartment Vacancy Rate: Q3 @ 4. (Left Axis) 5 6 7 8 9 1 11 12 13 14 15 16 17 9 8 7 NMHC Apartment Tightness Index National Multi Housing Council, Diffusion Index NMHC Market Tightness Index: Q4 @ 43 75 25-25 - -75 9 8 7 6 6 4 4 3 3 2 2 1 1 Apartment: Q3 @ 5. 1-Year Yield: Q4 @ 2. 2 22 24 26 28 21 212 214 216 Source: Reis Inc., RCA Inc., NMHC, FRB and Wells Fargo Securities 6
Quarterly Annualized Percent Change Commercial Real Estate Chartbook: Q3 Office Effective office rent growth slowed to essentially zero with no change year-to-year in Q3, the slowest pace since 211. Completions have fallen so far this year but remain above absorption, so vacancies rose slightly. Office completions topped out in 215, as a wave of projects came online in energy-driven and tech-centric markets. This is particularly true for top (4&5 star) properties, for which vacancies are highest and rising fastest. Northeast and Midwest metros have some of the lowest effective rent growth and a few areas are in negative territory. These regions are contending with out-migration and slower economic growth, reducing demand for office space. Opportunity is shifting to secondary markets in the South and West, such as Charlotte, Austin and Seattle. 16. 12. 8. 4.. -4. -8. Office Effective Rent Growth Quarter-over-Quarter Percent Change Quarter-over-Quarter: Q3 @.3% (Right Axis) Year-over-Year: Q3 @. (Left Axis) -12. 6 7 8 9 1 11 12 13 14 15 16 17 21% Office Supply & Demand Percent, Millions of Square Feet 4. 3. 2. 1.. -1. -2. -3. 3 Office Effective Revenue Growth: Q3 217 Year-over-Year Percent Change, Quarterly Annualized Percent Change; Sorted by Stock 1 2 1 Recovering Expanding 1 1 1 1 3% Washington D.C. Houston Fairfield County Cincinnati Central New Jersey New York Metro San Francisco Miami Philadelphia Suburban Virginia Boston Sacramento Orange County Los Angeles Indianapolis Oakland Tampa Dallas Phoenix Charlotte Raleigh Atlanta Kansas City Austin Portland Denver Stock Size Detroit Baltimore More Than Million Sq. Ft. -3% Minneapolis Pittsburgh Chicago Orlando Million- Million Sq. Ft. San Jose Suburban Maryland St. Louis Less than Million Sq. Ft. San Diego Long Island Cleveland Contracting Northern New Jersey Decelerating - - 1 Year-over-Year Percent Change Office Cap Rate vs. 1-Year Treasury Yield Seattle 1 1 3% Office Net Completions: Q3 @ 6.7M SF (Right Axis) Office Net Absorption: Q3 @ 5.6M SF (Right Axis) Office Vacancy Rate: Q3 @ 16.1% (Left Axis) 5 6 7 8 9 1 11 12 13 14 15 16 17 1 1 1 Office Vacancy Rates By Type, Percent -1-2 -3-4 1 1 1 13% 13% 1 1 11% 11% 1 1 Office: Q3 @ 6. 1-Year Yield: Q4 @ 2. All: Q3 @ 1. 1 & 2 Star: Q3 @ 7.1% 7% 3 Star: Q3 @ 1. 4 & 5 Star: Q3 @ 12.1% 1 3 5 7 9 11 13 15 17 Source: Reis Inc., RCA Inc., FRB and Wells Fargo Securities 7% 7
Quarterly Annualized Percent Change Commercial Real Estate Chartbook: Q3 Retail 1 The retail sector had a quiet Q3, with vacancies holding steady at 1 percent and absorption again significantly below completions and growing at the slowest pace in over five years. While store closures have been highly scrutinized in the retail space, it appears they have not affected neighborhood centers as much as regional malls. Community centers have seen vacancies remain mostly constant this year, while vacancies in malls rose.5 percentage points year-to-date and rents moderated. Over half of the metros tracked by REIS had negative net absorption in Q3. Tech-centric metros and areas with rapid net in-migration such as Seattle, Salt Lake City and Nashville saw some of the strongest rent growth nationally. Retail Effective Revenue Growth: Q3 217 Year-over-Year Percent Change, Quarterly Annualized Percent Change; Sorted by Stock Recovering Chicago Kansas City Norfolk Columbus Phoenix Minneapolis Cleveland Sacramento Jacksonville Cincinnati Orange County Seattle St. Louis Raleigh-Durham Orlando Los Angeles Fort Lauderdale Tampa Miami Houston San Bernardino Philadelphia Palm Beach Oakland Dallas Denver Suburban Virginia Portland Baltimore San Antonio Stock Size - Boston Las Vegas More Than 4 Million ft. Detroit Suburban Maryland 28.5 Million-4 Million ft. San Diego Long Island Less Than 28.5 Million ft. Contracting Central New Jersey Charlotte Fort Worth Decelerating - -1% 1% 3% Year-over-Year Percent Change Expanding Atlanta 6. 4. 2.. -2. -4. Retail Effective Rent Growth Quarter-over-Quarter Percent Change Quarter-over-Quarter: Q3 @. (Right Axis) Year-over-Year: Q3 @. (Left Axis) -6. 6 7 8 9 1 11 12 13 14 15 16 17 1 1 1 Retail Supply & Demand Percent, Millions of Square Feet Retail Net Completions: Q3 @ 1.6M SF (Right Axis) Retail Net Absorption: Q3 @.6M SF (Right Axis) Retail Vacancy Rate: Q3 @ 1. (Left Axis) 5 6 7 8 9 1 11 12 13 14 15 16 17 Commercial Real Estate Asking Rent Growth Year-over-Year Percent Change 1.... -. -. -1. 2 16 12 8 4-4 -8 1 Retail Cap Rate vs. 1-Year Treasury Yield 1 1 1 Retail: Q3 @ 6. 1-Year Yield: Q4 @ 2. - All Retail: Q3 @ 2. - Neighborhood Center: Q3 @ 2. - Mall: Q3 @ 3. - Power Center: Q3 @ 2. General Retail: Q3 @ 1.3% - - 7 8 9 1 11 12 13 14 15 16 17 18 Source: Reis Inc., RCA Inc., CoStar Inc., FRB and Wells Fargo Securities 8
Quarterly Annualized Percent Change Commercial Real Estate Chartbook: Q3 Industrial Industrial effective rent growth moderated in Q3 to 6.1 percent year to year, which is not far off the cycle peak of 6.6 percent reached in Q2-216. The rise of e-commerce has driven strong rent increases for logistics, warehouse and distribution spaces. Vacancy rates flattened over the past year, following seven years of steady declines. The leveling off in vacancy rates is due to some moderation in net absorption. Industrial vacancy rates remain historically low, however, at just 4.9 percent. Transaction volume increased 32 percent in Q3, led by the West and Mid-Atlantic. Demand is strong for land-constrained industrial markets near seaports and bordering major population centers, including the Inland Empire and eastern Pennsylvania. 2 2 1 1 Industrial Effective Revenue Growth: Q3 217 Year-over-Year Percent Change, Quarterly Annualized Percent Change; Sorted by Stock Recovering Stock Size More than 3 Million Sq. Ft. 2-3 Million Sq. Ft. Less than 2 Million Sq Ft. Washington D.C. Kansas City Milwaukee Tampa Greensboro Saint Louis Miami Dallas Phoenix Cincinnati Charlotte Orlando Northern New Jersey Boston Nashville Memphis Columbus East Bay Detroit Orange County Sacramento Inland Empire New York Los Angeles Expanding 1 - - Industrial Asking Rent Growth Quarter-over-Quarter Percent Change Industrial Asking Rent: Q3 @ 1. (Right Axis) Year-over-Year: Q3 @ 6.1% (Left Axis) - 6 7 8 9 1 11 12 13 14 15 16 17 1 3. Q3 217 Vacancy Rates & Asking Rent Growth By Type, Sorted by Stock Size, Percent Vacancy Asking Rent Growth Yr/Yr Change 6. 6. 6. 5. 6. 2. 6. 4.1% 6.7% 2. 2. 1. 1... -. -1. -1. 1 Houston Atlanta Chicago Seattle San Diego - Cleveland Denver Philadelphia Indianapolis Baltimore Portland Louisville Pittsburgh Contracting Minneapolis Grand Rapids Long Island Decelerating - - - 1 1 2 2 Year-over-Year Percent Change 1 Total light industrial Total logistics Warehouse (<K SF) Light manufacturing Industrial Supply & Demand Percent, Millions of Square Feet Distribution (<2 SF) 8 Industrial Cap Rate vs. 1-Year Treasury Yield 11% 6 1 1 1 4 2 7% -2-4 Industrial Net Completions: Q3 @ 53.9M SF (Right Axis) Industrial Net Absorption: Q3 @ 49.1M SF (Right Axis) Industrial Vacancy Rate: Q3 @ 4. (Left Axis) 5 6 7 8 9 1 11 12 13 14 15 16 17-6 -8 Industrial: Q3 @ 6. 1-Year Yield: Q4 @ 2. Source: CoStar Inc., RCA, Inc., FRB, Bloomberg LP and Wells Fargo Securities 9
Commercial Real Estate Chartbook: Q3 Hotel 1 Real RevPAR vs. Real ADR Seasonally Adjusted, Year-over-Year Percent Change 1 Seasonally adjusted real revenue per available room (RevPAR) fell.1 percent in the third quarter on a year-to-year basis, marking the fifth straight quarter of deceleration. RevPAR growth is now the slowest it has been since Q1-21. Hotel occupancy rates ticked up slightly in the third quarter, but are down slightly overall in 217 after peaking in Q4-216. Competition for guests has intensified, as new properties have come on market. Real room rates fell.6 percent on the year in Q3. Third quarter occupancy was influenced by several unique factors. The Great American Eclipse and hurricanes boosted demand during the quarter, but room rates did not rise as much as hotel operators tried not to avoid the perception of price gauging. - -1-1 -2 Real RevPAR: Q3 @ -.1% Real Room Rate: Q3 @ -. -2 88 92 96 4 8 12 16 8 Lodging Construction Spending Year-Over-Year Percent Change - -1-1 -2-2 8 6 6 6 Occupancy Rate Cycles Seasonlly Adjusted, Percent Peak: 1994Q4 @ 65. Peak: 26Q1 @ 64.1% Peak: 216Q4 @ 66. 6 6 6 6 4 2 6 4 2 6 6 6 Trough: 1991Q1 @ 6. 6-2 -2 5 5 Trough: 21Q4 @ 57. 5 5-4 -6-4 -6 5 Trough: 29Q2 @ 54.1% 5 Average Occupancy (1987-217): 62. Occupancy: Q3 @ 65. 5 87 89 91 93 5 5 5 Lodging Spending: Oct @ 12.3% -8 3 5 7 9 11 13 15 17-8 1 Real RevPAR Growth by Chain Scale Yr/Yr Percent Change of a 3-Month Moving Avg. 1 1 Hotel Cap Rate vs. 1-Year Treasury Yield 1 1 1 1 1 - - -1-1 -1-1 -2-2 Hotel: Q3 @ 8.7% 1-Year Yield: Q4 @ 2. 5 6 7 8 9 1 11 12 13 14 15 16 17 18-2 Economy & midscale: Oct @ 1.7% Upscale & luxury: Oct @ -2.1% -3 6 7 8 9 1 11 12 13 14 15 16 17 Source: STR, U.S. Department of Commerce, FRB and Wells Fargo Securities -2-3 1
Wells Fargo Securities Economics Group Diane Schumaker-Krieg Global Head of Research, Economics & Strategy (74) 41-181 (212) 214-7 diane.schumaker@wellsfargo.com John E. Silvia, Ph.D. Chief Economist (74) 41-3275 john.silvia@wellsfargo.com Mark Vitner Senior Economist (74) 41-3277 mark.vitner@wellsfargo.com Jay H. Bryson, Ph.D. Global Economist (74) 41-3274 jay.bryson@wellsfargo.com Sam Bullard Senior Economist (74) 41-328 sam.bullard@wellsfargo.com Nick Bennenbroek Currency Strategist (212) 214-5636 nicholas.bennenbroek@wellsfargo.com Eugenio J. Alemán, Ph.D. Senior Economist (74) 41-3273 eugenio.j.aleman@wellsfargo.com Azhar Iqbal Econometrician (74) 41-327 azhar.iqbal@wellsfargo.com Tim Quinlan Senior Economist (74) 41-3283 tim.quinlan@wellsfargo.com Eric Viloria, CFA Currency Strategist (212) 214-5637 eric.viloria@wellsfargo.com Sarah House Economist (74) 41-3282 sarah.house@wellsfargo.com Michael A. Brown Economist (74) 41-3278 michael.a.brown@wellsfargo.com Jamie Feik Economist (74) 41-3291 jamie.feik@wellsfargo.com Erik Nelson Currency Strategist (212) 214-5652 erik.f.nelson@wellsfargo.com Michael Pugliese Economic Analyst (74) 41-3156 michael.d.pugliese@wellsfargo.com Harry Pershing Economic Analyst (74) 41-334 harry.pershing@wellsfargo.com Hank Carmichael Economic Analyst (74) 41-359 john.h.carmichael@wellsfargo.com Ariana Vaisey Economic Analyst (74) 41-139 ariana.b.vaisey@wellsfargo.com Abigail Kinnaman Economic Analyst (74) 41-157 abigail.kinnaman@wellsfargo.com Shannon Seery Economic Analyst (74) 41-1681 shannon.seery@wellsfargo.com Donna LaFleur Executive Assistant (74) 41-3279 donna.lafleur@wellsfargo.com Dawne Howes Administrative Assistant (74) 41-3272 dawne.howes@wellsfargo.com Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A., Wells Fargo Clearing Services, LLC, Wells Fargo Securities International Limited, Wells Fargo Securities Asia Limited and Wells Fargo Securities (Japan) Co. Limited. Wells Fargo Securities, LLC. ("WFS") is registered with the Commodities Futures Trading Commission as a futures commission merchant and is a member in good standing of the National Futures Association. Wells Fargo Bank, N.A. ("WFBNA") is registered with the Commodities Futures Trading Commission as a swap dealer and is a member in good standing of the National Futures Association. WFS and WFBNA are generally engaged in the trading of futures and derivative products, any of which may be discussed within this publication. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company 217 Wells Fargo Securities, LLC. Important Information for Non-U.S. Recipients For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited ("WFSIL"). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Conduct Authority. The content of this report has been approved by WFSIL a regulated person under the Act. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 27. The FCA rules made under the Financial Services and Markets Act 2 for the protection of retail clients will therefore not apply, nor will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the "Materials") are provided for general informational purposes only. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE