1. CRE & Financing Trends SNJDC Seminar
Melissa J. Govette
Vice President, Commercial Real Estate
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2. Trends to Watch in CRE Finance
Multi-Family Construction – Supply/demand check
3Q Business Owner Outlook
CMBS Market – “The Wave” + Dodd Frank
Balance Sheet Banks – Redevelopment Underwriting
South Jersey Market Fundamentals
Questions?

3. Multi-Family Construction
Concerns About Over-Supply
U.S. Multi-family housing starts in 2015 are the highest since the 80s
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4. Multi-Family Demand
Permanent Paradigm Shift for Millennials & Baby Boomers?
Mobility & Amenities are key drivers for both groups
Millennials: average debt per student of $37k for class of 2016, 70% of 2016 graduates have student loan debt
(Source: WSJ)
Baby Boomers: “over housed” and bored
Housing bubble has made them rethink staying invested
Empty nesters are bored with the suburbs
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5. 2016 3Q Business Owner Outlook
M&T Bank Footprint, Economic Outlook Survey
Mid-sized companies are less optimistic in 2016 vs. 2015
1 in 3 firms report that the uncertainty surrounding the presidential election is negatively affecting business plans
Federal Reserve interest rate hikes a factor
20% of CRE firms expect the national economy to improve over the next 6 months, down from 47% in 3Q 2015
37% of CRE firms expect transaction volume to decrease vs. just 4% in 3Q 2015
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6. CMBS Maturity “Wave” Source: Commercial Mortgage Alert
Disruption: aggressively underwritten 06/07 deals maturing + shorter remaining lease term + tighter CMBS structures
The “Wave”, CMBS Originations by Year (approx.)
$100 billion
$190 billion
$240 billion
$270 billion
$21 billion
Dodd-Frank Risk Retention rules for CMBS lenders
If not CMBS, who will refinance? Life Companies, Commercial Banks, Funds?
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7. Balance Sheet Banks – Redevelopment Underwriting
Sponsor Expertise
Redevelopment projects are complex
Large focus on Sponsor’s experience in completing similar projects
Property Cash Flow is Key
Underwriting will sensitize interest rates, revenue and vacancy
PILOT/Tax Abatements have large cash flow impact upfront
Cash Equity Investment Was Always Important
It is now federally regulated (HVCRE)
Additional Equity Sources to Consider:
Federal Historic Tax Credits
New Market Tax Credits
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8. South Jersey Office Market
New Jersey’s Unemployment Rate moved higher for the first time in more than a year, coming in at 4.9%. South Jersey hovering ~6%.
Office Vacancy is 13-14%, slowing 2016 vs. 2015
Class A at 10.5%, Class B at 16+%
Net absorption thru June = ~18k SF
Limited new construction is a positive
Brandywine Realty Trust and Liberty Property Trust are shedding suburban assets, focusing on urban locations
Sources: Wolf CRE, Colliers, REIS, Co-Star, NJ Dept of Labor & Workforce Development
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9. South Jersey Retail Market
Retail Vacancy: Still High at ~11%
Neighborhood strip centers remain weakest at 15%+ vacancy
Sports Authority bankruptcy resulted in closing of 7 regional stores, 3 were in South Jersey
Nationwide, food & beverage spending is the fastest growing retail sector. Millennials consider eating out a necessity, not a luxury.
Restaurants are becoming the new shopping center “anchor”. Note PREIT’s strategy at its South Jersey malls where more than 15% of non-anchor space is occupied by restaurants.
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10. South Jersey Industrial Market
“Warehouse is the New Lifestyle Retail”
Spec Construction and Build to Suit are trending: “Just In Time” distribution strategies: smaller shipments required, more often
Average Distribution Center Size has increased by 20% in the past 3 years to 570k SF (Source: Axiumsolutions.com)
South Jersey is a big player: 105MM SF inventory, vacancy decreased to 9.5% in 2Q, 2MM SF completed YTD ‘16 + 3MM SF under construction
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11. QUESTIONS?
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