POLITICS, ECONOMICS

& U.S. COMMERCIAL REAL ESTATE

RICHARD BARKHAM PH.D. – GLOBAL CHIEF
ECONOMIST
MAY 2018
AMERICA TAKES ON CHINA
2 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL
TRADE WARS LOOM
CHINA PRESSURES ASIA
4 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL
RUSSIA MEDDLES 5 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL
EUROPE DISUNITES 6 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL
ONE STEP FORWARD…!
7 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL
LET’S KEEP GEOPOLITICAL EVENTS IN PERSPECTIVE
G7 COUNTRIES,
11.50 UNEMPLOYMENT RATE (%)
U.S. EMBASSY IN BEIRUT
10.50 BOMBED

INDIRA GANDHI SYRIA WAR

9.50 KILLED JAPANESE TSUNAMI
FALKLANDS
WAR FALL OF THE SOVIET
8.50 GLASNOST IN UNION
USSR ISIS
MAASTRICHT TREATY EMERGES
IRAN-IRAQ WAR IRAQ INVADES KUWAIT GAZA WAR
7.50 ENDS
CRIMEA
ANNEXED

REAGAN 1ST GULF WAR RUSSO-GEORGIAN

TIANANMEN U.S. INVASION OF
6.50 SHOT SQUARE IRAQ WAR
BERLIN WALL
FALLS
5.50 MADRID TRAIN BREXIT
IRAN-IRAQ WAR BOMBING
STARTS EUROZONE
BOSNIAN WAR ENDS CREATED
9 / 11 TRUMP SIGNED TAX
4.50 REFORMPUTIN
BILL ELECTED AS
BRITISH RULE IN HONG KONG LONDON 7/7 PRESIDENT
BOMBING KIM JONG-UN CROSSES INTO
3.50 SOUTH KOREA
198019821983198419851986198719891990199119921993199419961997199819992000200120032004200520062007200820102011201220132014201520172018
Source: CBRE Research, Macrobond, IMF, WEO.

8 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

 FOR REAL ESTATE
ONLY THE BUSINESS
CYCLE MATTERS

9 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

UNEMPLOYMENT: A GOOD, CLEAR CYCLICAL INDICATOR
U3 UNEMPLOYMENT (%)
12

10

4
3y 8m 7y 7m 9y 6m 11y 6y 4m 10y+
2

Source: CBRE Econometric Advisors and Macrobond, CBRE Research.

10 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

 INTEREST RATES BRING THE CYCLE TO AN END
U.S. UNEMPLOYMENT RATE (%) (L) U.S. INTEREST RATE, DEVIATION FROM TREND (R)
12 2.5
SPIKE SPIKE
SPIKE 2.0
10
1.5
8 NO SPIKE -
YET 1.0

6 0.5

0.0
4
-0.5
2
-1.0

0 -1.5
1981 1985 1989 1993 1997 2001 2005 2009 2013 2017
Source: CBRE Research, Macrobond, April 2018.

11 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

INFLATION REMAINS WEAK
CORE CPI AND CORE PCE, (% Y/Y)
3.0

2.5

2.0

1.5

1.0

0.5
CORE CPI CORE PCE
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2018

Source: Federal Reserve Economic Data and CBRE EA Research, May 2018.

12 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

AS WAGE GROWTH FAILS TO GAIN TRACTION
GROWTH RATE, (% Y/Y, 3MA)
6

1
U.S. WAGE GROWTH AVERAGE
0

Source: Current Population Survey, Bureau of Labor Statistics, and Federal Reserve Bank of Atlanta Calculations, May 2018.

13 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

WE’RE GETTING PAYBACK FROM THE GFC
UNEMPLOYMENT RATE (%)
18
16
14 710
bps
12
10
8
350 400
6 310 bps bps
bps
4
2
U3 UNEMPLOYMENT RATE U6 UNEMPLOYMENT RATE
0
1997 1999 2001 2003 2005 2007 2008 2010 2012 2014 2016 2018

Source: Federal Reserve Bank of St. Louis, CBRE Econometric Advisors, April 2018.

14 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

 U.S. OIL PRODUCTION IS A GAME CHANGER
THOUSANDS OF BARRELS PER DAY
10,000

9,000

8,000

7,000

6,000

5,000

4,000
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Source: U.S. Energy Information Administration (EIA); Moody's Analytics Forecasted, April 2018.

15 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

THIS IS OUR MAIN WORRY
16 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL
 0
1
2
3
4
5
6
7
2000Q1
2000Q3
2001Q1
2001Q3
2002Q1
2002Q3
2003Q1
2003Q3
2004Q1
2004Q3
2005Q1
2005Q3
2006Q1
2006Q3
2007Q1
2007Q3

Fed Funds Rate

Source: Moody’s Analytics Forecasted and Macrobond, CBRE Research, Q1 2018.

2008Q1
2008Q3
2009Q1
2009Q3

17
2010Q1
2010Q3
2011Q1
2011Q3
2012Q1
2012Q3
2013Q1
INTEREST RATES ARE HEADED UP SLOWLY

2013Q3
2014Q1
10-Year Treasury Rate

2014Q3
2015Q1
FED FUNDS RATE AND 10-YEAR TREASURY RATE (%)

2015Q3
2016Q1
2016Q3
2017Q1
2017Q3
2018Q1
2018Q3
2019Q1
2019Q3
EXECUTIVE RISK COMMITTEE | CONFIDENTIAL
SO AN EXTENDED CYCLE LOOKS LIKELY
UNEMPLOYMENT (%)
11

10

3
1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Source: CBRE Econometric Advisors and Macrobond, CBRE Research, Q1 2018.

18 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

WHERE DOES THIS LEAVE U.S. REAL ESTATE?
19 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL
OFFICE CYCLE – WEAKER THAN NORMAL

UNEMPLOYMENT RENT GROWTH Y-O-Y %

10 15
9
10
8
5
7
6 0
5
(5)
4
(10)
3
U.S. UNEMPLOYMENT
2 (15)
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Source: CBRE Econometric Advisors and Macrobond, May 2018.

20 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL
HELD BACK BY INDUSTRY DISRUPTION
OFFICE SPACE ABSORPTION PER JOB ADDED (SF PER NEW JOB)
600

500

400

300

200

100

0
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: CBRE Econometric Advisors and Macrobond, CBRE Research.

21 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

RETAIL CYCLE – SUBDUED

UNEMPLOYMENT RATE RENT GROWTH Y-O-Y %

10 8
9 6
8
4
7
2
6
0
5
(2)
4
3 (4)
Unemployment Rate TW Rent Growth
2 (6)
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Source: CBRE Econometric Advisors and Macrobond, May 2018.

22 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL
DUE TO GROWTH IN E-COMMERCE
E-COMMERCE: GROWTH VS. SHARE OF RETAIL SALES
E-COMMERCE SALES GROWTH
(%)
STORE SALES GROWTH
30

20

10

(10)

(20)

Source: Census Bureau, Q4 2017.

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 INDUSTRIAL CYCLE: BOOSTED BY E-COMMERCE

UNEMPLOYMENT RATE RENT GROWTH Y-O-Y %

10 15
9
10
8
5
7
6 0
5
(5)
4
(10)
3
Unemployment TW Rent Growth
2 (15)
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Source: CBRE Econometric Advisors and Macrobond, May 2018. 24 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL
 MULTIFAMILY CYCLE – BOOSTED BY SOCIAL CHANGE
UNEMPLOYMENT RATE RENT GROWTH Y-O-Y %
10 10

9 8
6
8
4
7 2
6 0

5 (2)
(4)
4
(6)
3 (8)
UNEMPLOYMENT
2 (10)
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Source: CBRE Econometric Advisors and Macrobond, May 2018.

25 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL
THE SHIFT FROM OWNERSHIP
U.S. HOMEOWNERSHIP RATE (%)
70
69
68
67
66
65
64
63
62
1997 1998 2000 2001 2003 2004 2006 2007 2009 2010 2012 2013 2015 2016 2018

Source: Federal Reserve Bank of St. Louis, CBRE EA, May 2018.

26 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

MILLENNIALS ARE BUYING
HOMEOWNERSHIP BY AGE GROUP AND INCOME
(%) 3 YEARS AGO 2018Q1
90

80

70

60

50

40

30
<35 35-44 45-54 55-64 65+

Source: U.S. Census Bureau, Current Population Survey/Housing Vacancy Survey, CBRE EA, May 2018.

27 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

TAX CHANGES MAY FAVOR MULTI FAMILY
TOTAL DEDUCTIBLE SALT AND INTEREST
70,000 LOSS FROM NEW TAX PLAN
2018 STANDARD DEDUCTION
60,000

50,000

40,000

30,000

20,000

10,000

Source: Federal Reserve Bank of St. Louis, CBRE Research, April 2018.

28 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

WHAT ABOUT NEW
SUPPLY?
Need an image of commercial buildings under construction

29 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

SUPPLY IS INCREASING, BUT NOT SO MUCH
COMPLETIONS INDEX (2002 = 100 TOTAL) OFFICE INDUSTRIAL APARTMENT RETAIL
120

100

80

60

40

20

0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: CBRE Econometric Advisors, February 2018.

30 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

STILL RIDING THE WAVE OF CAPITAL

31 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL

 10

5
7
9

4
6
8
%
1988.1
1988.4
1989.3
1990.2
1991.1

Source: CBRE Research, NCREIF

1991.4
1992.3
1993.2
1994.1
1994.4
1995.3
1996.2
1997.1
1997.4

APARTMENT
1998.3
1999.2
2000.1
2000.4
2001.3
2002.2
OFFICE

32
2003.1
2003.4
2004.3
2005.2
BUT CAP RATES HAVE HIT BOTTOM

2006.1
2006.4
2007.3
INDUSTRIAL

2008.2
2009.1
2009.4
2010.3
2011.2
RETAIL

2012.1
2012.4
U.S. CAPITALISATION RATES - NOI AS % OF APPRAISED VALUE

2013.3
2014.2
2015.1
2015.4
2016.3
2017.2
2018.1
EXECUTIVE RISK COMMITTEE | CONFIDENTIAL
CONCLUSIONS

• IGNORE GEOPOLITICS – IT LOOKS LIKE AN EXTENDED CYCLE

• COMMERCIAL REAL ESTATE IS BUOYANT
• SUPPLY IS BROADLY IN BALANCE WITH DEMAND
• INTEREST RATES ARE RISING AND WILL PEAK AT A LOWER LEVEL
• CAP RATES HAVE BOTTOMED
• CAPITAL MARKETS ACTIVITY IS STABLE FOR NOW

33 EXECUTIVE RISK COMMITTEE | CONFIDENTIAL