GLOBAL ECONOMY, REAL ESTATE MARKETS & THE CYCLE Professor Richard Barkham, PhD MRICS CRE, Global Chief Economist April 2016
HOW CLOSE ARE WE TO THE END OF THIS CYCLE?
Jan-70 Jan-71 Jan-72 Jan-73 Jan-74 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79 Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 U.S. UNEMPLOYMENT: A GOOD, CLEAR CYCLICAL INDICATOR U3 Unemployment (%) 12 10 Full term? 8 6 4 2 0 Source: CBRE Econometric Advisors and Macrobond, CBRE Research. 3 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
Jan-70 Jan-71 Jan-72 Jan-73 Jan-74 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79 Jan-80 Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 U.S. UNEMPLOYMENT: A GOOD, CLEAR CYCLICAL INDICATOR U3 Unemployment (%) 12 10 8 6 4 2 3y8m 7y7m 9y6m 11y 6y4m 6y6m 0 Source: CBRE Econometric Advisors and Macrobond, CBRE Research. 4 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
Mar-88 Jul-89 Nov-90 Mar-92 Jul-93 Nov-94 Mar-96 Jul-97 Nov-98 Mar-00 Jul-01 Nov-02 Mar-04 Jul-05 Nov-06 Mar-08 Jul-09 Nov-10 Mar-12 Jul-13 Nov-14 VERY CORRELATED WITH WORLD EQUITY PRICES Unemployment inverted (%) Two-year price return (%) 0.0 80% 2.0 US Unemployment FTSE World Equity Index Signal? 60% 4.0 40% 20% 6.0 0% 8.0-20% 10.0-40% 12.0-60% Source: CBRE Econometric Advisors and Macrobond, CBRE Research. 5 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
GLOBAL COMPOSITE OFFICE YIELD Unemployment (%) Yield (%) 11.0 10.0 U.S. Unemployment Global office yield 8.00 9.0 7.00 8.0 7.0 6.00 6.0 5.0 5.00 4.0 3.0 4.00 Source: CBRE Econometric Advisors, ERIX and Macrobond, CBRE Research. 6 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
VERY CORRELATED WITH U.S. REAL ESTATE Vacancy and unemployment (%) 20.0 18.0 Office Vacancy Industrial Vacancy Apartment Vacancy Unemployment 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 Source: CBRE Econometric Advisors and Macrobond, CBRE Research. 7 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
Mar-90 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 U.S. OFFICE CYCLE Unemployment (%) Y-o-Y rent growth (%) 12.0 15% U.S. Unemployment TW Rent Index 10.0 10% 8.0 5% 6.0 0% 4.0-5% 2.0-10% 0.0-15% Source: CBRE Econometric Advisors and Macrobond, CBRE Research. 8 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
Mar-90 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 U.S. RETAIL CYCLE Unemployment (%) Y-o-Y rent growth (%) 12.0 10.0 U.S. Unemployment TW Rent Index 8.0% 6.0% 8.0 4.0% 6.0 2.0% 0.0% 4.0-2.0% 2.0-4.0% 0.0-6.0% Source: CBRE Econometric Advisors and Macrobond, CBRE Research. 9 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
Mar-90 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 U.S. INDUSTRIAL CYCLE Unemployment (%) Y-o-Y rent growth (%) 12.0 U.S. Unemployment TW Rent Index 15.0% 10.0 10.0% 8.0 5.0% 6.0 0.0% 4.0-5.0% 2.0-10.0% 0.0-15.0% Source: CBRE Econometric Advisors and Macrobond, CBRE Research. 10 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
U.S. MULTIFAMILY CYCLE Unemployment (%) Y-o-Y rent growth (%) 12 U.S. Unemployment TW Rent Index 10.0% 8.0% 10 6.0% 8 4.0% 2.0% 6 0.0% -2.0% 4-4.0% 2-6.0% -8.0% 0-10.0% Source: CBRE Econometric Advisors and Macrobond, CBRE Research. 11 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
WHAT COULD BRING IT TO AN END?
NORMALLY IT IS WAGE PRESSURES Unemployment (%) Y-o-Y Earnings (%) US Unemployment Private sector earnings growth 12 0.07 10 8 6 4 2 No 0.06 0.05 0.04 0.03 0.02 0.01 0 0 Source: Macrobond, CBRE Research. 13 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
PUSHING UP INFLATION Inflation (%) 3.5% Core CPI Core PCE 3.0% 2.5% Nope 2.0% 1.5% 1.0% 0.5% 0.0% Source: Macrobond, CBRE Research. 14 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
AND INTEREST RATES Unemployment (%) Interest Rate (%) Federal Funds Rate Unemployment 12 11 10 8 6 9.5% 6.5% 5.25% 10 9 8 7 4 2 0 Not happening 6 5 4 3 Source: Macrobond, CBRE Research. 15 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
SO WHAT COULD IT BE?
Jan-80 Nov-80 Sep-81 Jul-82 May-83 Mar-84 Jan-85 Nov-85 Sep-86 Jul-87 May-88 Mar-89 Jan-90 Nov-90 Sep-91 Jul-92 May-93 Mar-94 Jan-95 Nov-95 Sep-96 Jul-97 May-98 Mar-99 Jan-00 Nov-00 Sep-01 Jul-02 May-03 Mar-04 Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10 Nov-10 Sep-11 Jul-12 May-13 Mar-14 Jan-15 Nov-15 GEOPOLITICAL EVENTS HAVE NO IMPACT Unemployment (%) 10.5 US Embassy in Beirut bombed 9.5 8.5 7.5 6.5 5.5 4.5 3.5 Iran-Iraq war starts Reagan shot Falklands war Indira Gandhi killed Iran-Iraq war ends Glasnost in USSR Bosnian war starts 1st Gulf war Iraq invades Kuwait Berlin Wall falls Pan Am 103 downed over Lockerbie Fall of the Soviet Union Bosnian war ends British rule in Hong Kong 9 / 11 Eurozone created Gaza war Russo-Georgian war US Invasion of Iraq Madrid train bombing London 7 / 7 bombing Syria war Japan Tsunami - Fukushima Isis Crimea Annexed Paris bombing Source: Macrobond, CBRE Research. 17 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 SOME SIGNS OF STABILISATION IN CHINA China activity indicator Index = 0 2 0-2 -4 Source: Macrobond, CBRE Research. 19 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
CHINA S POLICY DIRECTION IS NOT CLEAR Currency, indexed 135 Real Effective Exchange Rate Index, CPI Based, Broad 130 Nominal Effective Exchange Rate Index, Broad 125 120 115 110 RMB Overvaluation? 105 100 95 90 Source: Macrobond, CBRE Research. 20 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 A SERIOUS SLOWDOWN IN U.S. MANUFACTURING U.S. Institute of Supply Managers Indicators Manufacturing and services activity (over 50 = expansion) 65 Manufacturing Non-Manufacturing 60 55 50 45 40 35 30 Source: Macrobond, CBRE Research. 22 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 CAUSED BY THE RISE OF THE U.S. $ U.S. $ Index 120 115 US $ Real Effective FX Rate (LHS) Manufacturing ISM (RHS) Manufacturing Activity 65 60 110 105 100 95 55 50 45 90 40 Source: Macrobond, CBRE Research. 23 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
CONSUMERS ARE IN ROBUST GOOD HEALTH
CONSUMER CONFIDENCE IS EXTREMELY HIGH Index US Consumer Confidence (Nielsen) Global Consumer Confidence (Nielsen) 110 100 90 80 9 year high 70 2009 2010 2011 2012 2013 2014 2015 Source: Macrobond, CBRE Research. 25 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
RETAIL SALES VOLUMES ARE GROWING STRONGLY U.S. Retail Volumes Y-o-Y Change (%) 12% 10% 8% 6% 4% 6.8% 2% 0% Source: Macrobond, CBRE Research. 26 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
Jan 1995 Jan 1996 Jan 1997 Jan 1998 Jan 1999 Jan 2000 Jan 2001 Jan 2002 Jan 2003 Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018 PROJECTING UNEMPLOYMENT SUGGESTS LATE 2018 FED funds rate and U3 unemployment Fed Funds Rate (%) Unemployment (%) 8 Fed funds U.S. forecast (Oxford) Fed dots Forward curve Unemployment 11 Unemployment (forecast) 10 6 4 2 9 Cyclical low last 20 years 8 7 6 5 4 0 3 2 Source: Atlanta Federal Reserve, Bureau of Labor Statistics, Macrobond, CBRE Research. 27 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
THE U3 U6 GAP IS DROPPING SHARPLY Unemployment rate (%) 20 18 U6 Unemployment U3 Unemployment U3 Unemployment forecast U6 Unemployment forecast 16 14 12 10 8 6 4 2 0 Source: Atlanta Federal Reserve, Bureau of Labor Statistics, CBRE Research. 28 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
Jan 1995 Jan 1996 Jan 1997 Jan 1998 Jan 1999 Jan 2000 Jan 2001 Jan 2002 Jan 2003 Jan 2004 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jan 2013 Jan 2014 Jan 2015 Jan 2016 Jan 2017 Jan 2018 PROJECTING THE U3-U6 SPREAD SUGGESTS MID 2018 Fed Funds Rate (%) 8 U6 - U3 Spread U6 - U3 Spread forecast Unemployment Spread (%) 6 4 Lowest cyclical point of 1999/2000 2 Source: Atlanta Federal Reserve, Bureau of Labor Statistics, Macrobond, CBRE Research. 29 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 RATES WILL BITE AT A MUCH LOWER LEVEL Interest Rate (%) 6 5 4 3 2 Peak of the last cycle Forecast U.S. UK 1 Eurozone 0 Source: Oxford Economics, Macrobond, CBRE Research. 30 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
U.S. OFFICE CAPITALIZATION RATES WILL SPIKE NOT DRIFT UP Cap Rate (%) 10 Office 10 yr T-Bond Econometric forecast 10 yr T-Bond forecast Trend-cycle forecast 8 6 4 2 0 Source: NCREIF and Oxford Economics, CBRE Research. 31 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
THREE THINGS WE KNOW 1. There is a real estate cycle 2. It is the same as the economic cycle 3. It rarely lasts more than nine years 32 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
THREE THINGS WE DON T 1. Whether the Chinese leadership will hold its nerve 2. How quickly the Fed. will raise rates 3. The precise timing of the next downturn 33 CBRE GLOBAL ECONOMY & REAL ESTATE MARKETS
THANK YOU
Richard Barkham, PhD MRICS, Global Chief Economist DDI +44 (0)20 7182 2665 Richard.Barkham@cbre.com