Real Estate Trends in Central Ohio Presentation by Jung Kim December 3, 2015
The National Picture: Highlights from ULI s Emerging Trends in Real Estate
Prospects by real estate industry Abysmal Fair Excellent 1.00 2.00 3.00 4.00 5.00 Real estate brokers Private real estate owners/developers Institutional real estate owners/developers Real estate investment managers Commercial builders Homebuilders/land developers Architects/designers REITS Insurance company RE lenders Real estate consultants Commercial bank RE lenders CMBS lenders/issuers Property managers 4.02 3.98 3.85 3.81 3.80 3.70 3.67 3.67 3.61 3.61 3.55 3.52 3.44 2016 2015 2014 2013 2012
Top 10 issues for real estate in 2016 No importance Moderate importance Great importance 1.00 2.00 3.00 4.00 5.00 Job growth Construction costs Income and wage growth Land costs Interest rates Infrastructure funding/development Vacancy rates Transportation funding Global economic growth Refinancing 4.56 4.13 4.10 4.03 3.95 3.83 3.78 3.57 3.53 3.51
Underwriting standards in 2016 DEBT 2016 2015 2014 2013 2012 2011 Less rigorous Remain the same More rigorous 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 35.4% 45.7% 43.3% 19.6% 31.9% 29.8% 41.5% 35.1% 29.2% 51.7% 44.7% 39.4% 12.9% 9.6% 17.4% 39.1% 33.0% 41.0% EQUITY 2016 2015 2014 2013 2012 2011 34.0% 41.4% 30.7% 19.6% 22.8% 26.6% 52.4% 47.5% 50.8% 50.7% 46.7% 40.6% 13.6% 11.1% 18.5% 29.7% 30.5% 32.8%
Equity availability in 2016 Very large decline Stay the same Very large increase 1.00 2.00 3.00 4.00 5.00 Foreign investors Institutional investors/pension funds Private equity/opportunity/hedge funds Private local investors Private REITs Public equity REITs 3.90 3.60 3.60 3.50 3.31 3.26
Debt availability in 2016 Very large decline Stay the same Very large increase 1.00 2.00 3.00 4.00 5.00 Securitized lenders/cmbs Nonbank financial institutions Mezzanine lenders Insurance companies Commercial banks Mortgage REITs 3.65 3.59 3.58 3.48 3.44 3.33 Government-sponsored enterprises 2.91
Real estate capital market balance Oversupplied In balance Undersupplied Debt capital for acquisitions 2015 2016 38% 44% 48% 46% 14% 11% Debt capital for refinancing 2015 2016 14% 35% 56% 55% 30% 10% Debt capital for development 2015 2016 20% 25% 51% 52% 30% 23% Equity capital for investing 2015 2016 55% 64% 33% 29% 12% 8%
Next stop: the suburbs? Millennials current and desired location Current Cities 46% Suburbs 24% Rural/small towns 30% Desired Cities 37% Suburbs 29% Rural/small towns 32% Current Desired Big city 46% Big city 61% Medium-sized city 54% Medium-sized city 39% Current Desired Suburbs <20 min. 70% Suburbs <20 min. 76% Suburbs >20 min. 30% Suburbs >20 min. 24%
The Local Picture: Real Estate Trends in Central Ohio
Respondents by field Government 8% University 3% Other 5% Private Developer 32% Professional Service Firm 30% Brokerage 3% Institutional Investor 8% Builder 3% Lender 8%
Respondents by title Associate 8% Other 3% Owner 32% Director/ Manager 26% Vice President 8% EVP/COO/CFO 10% President/CEO 13%
Respondents by sector 0% 20% 40% 60% 80% 100% Residential - rental Office Retail Residential - for sale Industrial/distribution Hospitality Niche/alternative Institutional/public 28% 28% 25% 25% 22% 47% 58% 64%
Expected profitability of own business Expectations Actual Excellent 5.00 Good 4.50 4.00 4.02 4.05 4.06 3.89 3.91 3.68 4.27 3.50 Fair 3.00 2.50 Poor 2.00 Abysmal 1.50 1.00 2013 2014 2015 2016
Expected profitability of own business Excellent Good Fair Poor Abysmal 5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 2015 2016 4.27 4.28 3.98 4.09 4.06 4.14 Cleveland Columbus Indiana
Central Ohio relative to other markets Much Somewhat About the Somewhat Much worse worse same better better 1.00 2.00 3.00 4.00 5.00 REITs Real estate investment management Private local real estate owners Commercial bank real estate lenders CMBS lenders/issuers Insurance company real estate lenders Real estate brokers Architects, designers Real estate consultants Commercial developers Multifamily developers Homebuilders/residential land developers 3.30 3.09 3.42 3.29 3.75 3.42 3.50 3.23 3.30 3.27 3.30 3.43 3.46 3.22 3.46 3.09 3.39 3.26 3.42 3.54 3.22 3.58 3.21 3.35 2016 2015
Central Ohio relative to other markets "Overall, Columbus is healthy and doing well compared to its peers." "Columbus across the board is good. For industrial, we are top 5 in second tier markets in rent growth, absorption, and delivery." Central Ohio compares very, very favorably, especially with the technology industry."
Central Ohio 2016 issues: Economy No importance 2016 2015 Moderate Great importance 1.00 2.00 3.00 4.00 5.00 Job growth Income and wage growth Interest rates Inflation Energy prices State and local budget problems 4.22 3.95 4.03 3.95 4.00 3.65 3.51 3.10 3.19 3.30 3.38 3.18
Central Ohio 2016 issues: Development 2016 2015 Low High priority Moderate priority 1.00 2.00 3.00 4.00 5.00 Better building and zoning regulations More economic growth More workforce for construction and skilled trades Better public transportation Better parking in downtown/ Short North Greater availability of sites for development 3.67 3.24 4.03 4.14 4.14 3.86 3.78 4.14 3.56 3.62 3.63 3.17
Central Ohio 2016 issues "Every sub trade has the same issue of finding qualified workforce." "Material costs for the most part have stayed pretty level, but labor costs are going up quite a bit." "Sites are going to be a challenge due to zoning regulations."
Investment Recommendation: INDUSTRIAL Sell Hold Buy 0% 50% 100% All industrial Bulk/distribution space General industrial R&D industrial Self-storage Cleveland Columbus "Industrial is huge for us right now" and "will continue to stay strong." Industrial is "very attractive on a national scale," but Central Ohio performs well "even as it relates to other markets around the country." Indiana
Investment Recommendation: OFFICE Sell Hold Buy 0% 50% 100% All office CBD office Suburban office Medical office Cleveland Columbus "The number of people per square foot has changed and are downsizing." "Trend of people wanting to locate in an urban area for their workforce, more so than we have seen over the past 20 or 30 years." Indiana
Investment Recommendation: RETAIL All retail Regional malls Power centers Neighborhood/ community Sell Hold Buy Cleveland Columbus Indiana 0% 50% 100% Development "very flat," but "financially, retail is very strong." "Downsizing and consolidation of tenants caused by online distribution channels." With omnichannel, stores are "trying to do more or the same in smaller spaces."
Investment Recommendation: RENTAL Sell Hold Buy 0% 50% 100% All apartments Luxury apartments Moderate apartments Tax credit apartments Student housing Cleveland Columbus "I don't see anything on the horizon slowing the activity down." "Multifamily might slow down a little bit, but the demand is still out there." "There is a really strong push to downsize and want the quality of life downtown can provide." Indiana
Investment Recommendation: FOR SALE "The market is hot for residential for sale." "Residential sales have been very good." "Land is getting tougher and tougher to find." "I don t think the for-sale model will be as frothy as the early 2000 s, but we are seeing a growing demand for buyers."
Interest rates Expected change next 3 years Increase Substantially 3% Fall Moderately 3% Remain Stable 19% Response to rate rise Cleveland Columbus Indiana Obtain financing or refinancing now 0% 20% 40% 60% 80% 100% Adjust portfolio Increase Moderately 75% Reduce development activity Scale back risk
Interest rates "Certainly, interest rates have not gone up as soon as people thought they would, but hopefully it will happen in a thoughtful manner." "Slight increases 50 to 75 basis points." Financing strategies include "putting in hedges and interest rate caps and swaps" and "locking our rates for existing assets at sub-5% rates."
Capital availability Availability through 2016 Expected change in availability Undersupplied 24% Substantially Undersupplied 3% Oversupplied 18% No Change 56% Some Decline 9% Some Increase 35% In Balance 55%
Capital availability "The banks have been more aggressive than they were even in 2013 and 2014, so that has freed up capital to get deals done." "For every dollar of equity needed, there are $4 or $5 chasing deals." "Blocking and tackling is more difficult" as investors "require evidence that there is a market for the projects they are financing."
Prospects for Central Ohio submarkets North Delaware 3.50 (+0.08) Color Score Union 3.34 (+0.06) Powell 3.80 (+0.03) Polaris 3.94 (+0.02) Licking 3.07 (+0.31) 5 = Excellent 4.0 to 4.5 Dublin 4.21 (+0.21) Worthington 3.75 (+0.33) Westerville 3.73 (+0.08) New Albany 4.12 (-0.15) 4 = Good 3.5 to 4.0 UA/Grandview 4.27 (+0.39) Cbus North 3.50 (-0.32) Easton 4.26 (-0.11) Gahanna/CMH 3.66 (+0.22) 3.0 to 3.5 3 = Fair Madison 2.74 (-0.06) Hilliard 3.41 (-0.18) Cbus West 2.72 (+0.22) Downtown4.33 (+0.12) Cbus South 2.44 (+0.12) Cbus East 2.81 (+0.17) Reynoldsburg 2.91 (+0.26) 2.5 to 3.0 2.0 to 2.5 2 = Poor Grove City 3.34 (+0.15) Groveport/Obetz 3.13 (-0.06) Fairfield 3.07 (+0.23) 1 = Abysmal Pickaway 2.70 (-0.10)
Prospects for Central Ohio submarkets "Downtown is at a place it s probably never been. Tremendous amount of momentum and on its way to becoming a great neighborhood." "Anything urban is hot." "It will be interesting to see the willingness of further out suburban communities to urbanize."
Hot Topics: Housing Affordability To what extent do you agree or disagree with the following statements? Strongly disagree Disagree Neutral Agree Strongly agree Development is in line with demographic trends and market demand There has been too much focus on high-end rental units Much of the new rental product is too small to continue to be competitive in the market as millennials age 0% 20% 40% 60% 80% 100% "Vacancy rate downtown is pretty low, so I think the market is able to satisfy the creation of these luxury apartments." "No better time to mix in affordable housing as you are doing larger scale developments." "Affordable works, but only with subsidies. We need more focus on how to do that."
Hot Topics: Job Access Level of support for job access solutions More affordable housing near employment centers Better COTA service Employer contribution to transportation alternatives 38% 62% 53% "The New Albany Smart Ride program is up from seven people when we launched to 2,000 today really needed for economic development." "We have to come together with a real transportation plan." "How we handle transit will have everything to do with the success of our city."
Five Takeaways for 2016 1. Great expectations: 2016 business prospects at highest score ever in Real Estate Trends in Central Ohio. 2. O skilled tradesman, where art thou?: Workforce shortages a major pain point, leading to higher development costs and prices. 3. Doing more with less (space): Retail, office, and rental housing maximizing value with smaller spaces. 4. Fed said dovish, so did our survey: Small and gradual rises in interest rates. 5. Downtown takes the reins: Downtown Columbus ranks as top Central Ohio submarket for 2016.