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COMMERCIAL ECONOMIC ISSUES & TRENDS FORUM
Commercial Real Estate in 2016: New Challenges LAWRENCE YUN, PhD MARK VITNER Chief Economist, Sr. VP National Association of REALTORS® Managing Director, Sr. Economist Wells Fargo Securities OMNI SHOREHAM HOTEL • DIPLOMAT ROOM THURSDAY • MAY 12, • 1:00 pm – 3:00 pm
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POLLING INSTRUCTIONS Text narmidyear to You will receive a confirmation text Text your response to 2233
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LAWRENCE YUN, PhD NATIONAL ASSOCIATION OF REALTORS
Chief Economist and Senior Vice President of Research Lawrence Yun is Chief Economist and Senior Vice President of Research at the NATIONAL ASSOCIATION OF REALTORS. He oversees and is responsible for a wide range of research activity for the association including NAR’s Existing Home Sales statistics, Affordability Index, and Home Buyers and Sellers Profile Report. He regularly provides commentary on real estate market trends for its 1.1 million REALTOR members. Dr. Yun creates NAR’s forecasts and participates in many economic forecasting panels, among them the Blue Chip Council and the Harvard University Industrial Economist Council. He appears regularly on financial news outlets, is a frequent speaker at real estate conferences throughout the United States, and has testified before Congress. Dr. Yun appears often as a guest on CSPAN’s Washington Journal and is a regular guest columnist on the Forbes website. Dr. Yun received his undergraduate degree from Purdue University and earned his Ph.D. from the University of Maryland at College Park.
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MARK VITNER WELLS FARGO SECURITIES, LLC
Managing Director, Senior Economist Mark Vitner is a managing director and senior economist at Wells Fargo, responsible for tracking U.S. and regional economic trends. Based in Charlotte, he also writes for the company’s Monthly Economic Outlook report, the Weekly Economic & Financial Commentary, and provides regular updates on the housing markets, commercial real estate, regional economies, and inflation. Mark’s commentary has been featured in the New York Times, Wall Street Journal, Bloomberg, and many other publications. Mark joined Wachovia (then First Union) in Before that, he spent nine years as an economist for Barnett Banks in Jacksonville, Fla. Originally from Atlanta, Mark earned his B.B.A. in economics from the University of Georgia, an M.B.A. from the University of North Florida, and has completed further graduate work in economics at the University of Florida. He also completed the National Association of Business Economics (NABE) Advanced Training in Economics program at Carnegie Mellon University. Mark is a member of the National Association of Business Economists and co-founded its Charlotte chapter, The Charlotte Economics Club. He serves as a distinguished lecturer and practitioner at the University of Georgia. He is also a member of the American Economic Association, the American Real Estate and Urban Economics Association, and the Charlotte Chapter of the Association for Corporate Growth. Mark currently chairs the Economic Advisory Council for the California Chamber of Commerce and serves as the chief economist for the North Carolina CCIM.
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Commercial Real Estate and Economic Outlook Lawrence Yun, Ph. D
Commercial Real Estate and Economic Outlook Lawrence Yun, Ph.D. Chief Economist NATIONAL ASSOCIATION OF REALTORS® Presentation in Washington, D.C. May 12, 2016
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Commercial Investment Sales of Large Properties (Properties valued at $2.5 million and over)
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Commercial Property Price Index
Source: Federal Reserve
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SIOR CRE Index
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Apartment %
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Office %
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Industrial-Warehouse
%
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Retail %
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REALTOR® Deal Size (Not $2.5 million Properties)
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CRE Prices: Small vs. Large Markets
Sources: NAR, Real Capital Analytics
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CRE Sales: Small vs. Large Markets
Sources: NAR, Real Capital Analytics
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CRE Financing: Small vs. Large Markets
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Banks and CRE Lending
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Loan-to-Value Financing Terms
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Lending Conditions in Smaller CRE Markets
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Economic Backdrop
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Lifetime Wealth at near All-Time High
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Median Household Income (Inflation Adjusted)
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Annual GDP … Below 3% for 11 straight years
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Sluggish GDP and Gap after Recession ($2
Sluggish GDP and Gap after Recession ($2.5 trillion gap … $7,000 per person) 3% Growth Line Slow 2% Growth Line
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Sluggish Business Spending Despite High Profit
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Consumer Spending Growth
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International Trade Falling
$ million
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Trade Balance as % of GDP
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Manufacturing Jobs
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Average Weekly Labor Hours in Manufacturing Industry
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Widening Jobs Mobile and Charleston SC
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Boeing Airplane Made In Charleston
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Widening Jobs Nashville and Memphis
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Widening Jobs Grand Rapids and Flint
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Jobs (8 million lost … 14 million gained)
In thousands
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Unemployed and Out-of-Labor Force
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Top and Bottom States for Jobs
The Best % Gain in 12 months Idaho 3.8 Utah 3.5 Nevada 3.4 Florida 3.0 Washington California 2.9 South Carolina Oregon 2.7 Arizona 2.3 The Worst % Gain in 12 months Wyoming 0.2 Oklahoma 0.1 Louisiana -0.4 West Virginia -1.8 North Dakota -2.0
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State Level Employment
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Federal Debt … Cumulative ( $ million; debt held by public excluding intra-governmental holdings)
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Quantitative Easing
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No CPI Inflation – Yet
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U.S. Dollar Reversing the Decline … Stronger and Stronger
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Negative Interest Rates Good-Bye Ben?
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Fed Rate Hike in December again in July again in November Again 4-times in 2017 Another 4-times in 2018
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Fed Policy and Long-Term Rates
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COMMERCIAL ECONOMIC ISSUES & TRENDS FORUM
Commercial Real Estate in 2016: New Challenges LAWRENCE YUN, PhD MARK VITNER Chief Economist, Sr. VP National Association of REALTORS® Managing Director, Sr. Economist Wells Fargo Securities OMNI SHOREHAM HOTEL • DIPLOMAT ROOM THURSDAY • MAY 12, • 1:00 pm – 3:00 pm
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Mark Vitner, Managing Director & Senior Economist May 12, 2016
U.S. Economic Outlook Mark Vitner, Managing Director & Senior Economist May 12, 2016
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Economic Growth Remains Relatively Sluggish
Overall Outlook Real GDP is expected to grow 1.6 percent in Growth is being driven by consumer spending and homebuilding, which is offsetting sluggish global influences. Monetary Policy The Fed’s initial rate hike came late in the cycle, amid circumstances more consistent with a rate cut and led to a spike in volatility. The Fed will proceed cautiously. Consumer Consumer spending is growing solidly but has not benefitted much from lower gasoline prices due to rising healthcare and housing costs. Demographics The rise of Millennials has raised questions about shopping patterns. This generation faces more constraints on discretionary spending but is also more mobile and more apt to shop online. Global Economy Slower growth in China continues to weigh on global economic growth, impacting commodity producers the most. Weaker demand growth in Asia has slowed global trade but imports into the U.S. remain strong. Economic Outlook
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Real Private Final Sales
Economic Growth Real GDP growth has been disappointing throughout most of this recovery and has also been unusually volatile. Much of the recent volatility is due to swings in international trade and business inventories. Private final domestic demand is growing more solidly and consistently. Real GDP Forecast Real Private Final Sales Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 49 49 Economic Outlook
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Employment Situation Solid month to month job gains have largely put recession fears to rest. Unemployment continues to trend lower and is close to most measures of “full employment.” The Fed is taking its queue from the strengthening labor market but taking a big picture view. Nonfarm Employment Unemployment Rate Source: U.S. Department of Labor and Wells Fargo Securities, LLC 50 50
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Employment Growth of U.S. MSAs
Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC
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Present Situation vs. Future Expectations
Consumer Confidence Consumer Confidence has fallen back a bit in recent months, reflecting growing concerns about slower global economic conditions and financial market volatility. Consumer Confidence Present Situation vs. Future Expectations Source: The Conference Board, S&P and Wells Fargo Securities, LLC 52 52
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Demographic Breakdown
Millennials are now the country’s largest and most diverse generation. Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
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The homeownership rate has begun to stabilize.
U.S. Housing Market Despite some recent setbacks, we continue to look for a gradual recovery in homebuilding. The homeownership rate has begun to stabilize. Homeownership Owners vs. Renters Source: NAR, CoreLogic, U.S. Department of Commerce and Wells Fargo Securities, LLC 54 54
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Gradual Recovery in Homebuilding
We continue to look for a gradual recovery in homebuilding. Single-family construction has been slow to come back on track with long-held norms relative to population and employment growth. We look for stronger gains this year, but improvement will remain excruciatingly slow. Source: U.S. Department of Commerce and Wells Fargo Securities, LLC 55
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Interest Rates Even after scaling back its expectations, the FOMC still has much more tightening in 2016 and 2017 than the financial markets expect. We continue to look for two quarter-point rate hikes this year but the timing will be tricky for the Fed, depending on swings in economic data in the U.S. and overseas as well as geopolitical events. Source: Federal Reserve Board, Bloomberg LP and Wells Fargo Securities, LLC
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Probability of Recession
According to our preferred model, the probability of a recession has ticked up. That said, the level still suggests very little possibility of a recession in the near term. Source: Wells Fargo Securities, LLC
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Global Economy
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Growth in the global economy remains below its long-run average.
Global Forecast Growth in the global economy remains below its long-run average. Source: International Monetary Fund and Wells Fargo Securities, LLC 59
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Global Exports Global trade has slowed over the past year, as demand for commodities has weakened and developed countries are exporting fewer capital goods. Standard inst Source: IHS Global Insight and Wells Fargo Securities, LLC
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Negative Rates The effectiveness of negative interest rates is still very much in debate. While lower interest rates have smoothed adjustments in sectors undergoing massive change, negative interest rates may have prolonged the process and weakened the financial system. Standard inst Source: Bloomberg LP and Wells Fargo Securities, LLC
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Foreign Purchases of U.S. Securities: Still Solid
Capital flows and asset allocation by global investors play a strong role in rate determinations. Standard inst Source: U.S. Department of the Treasury and Wells Fargo Securities, LLC
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China Real GDP We forecast that growth in China will slow further, but we do not expect the economy to completely fall apart. Source: Bloomberg LP and Wells Fargo Securities, LLC 63
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Real Estate
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Foreign Capital Inflow
The United States continues to be perceived a safe haven for foreign investment. Source: RCA , Inc. and Wells Fargo Securities, LLC
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Cross-Border Investment
Over the past five years, Manhattan, Los Angeles, Boston and Dallas have been preferred markets for foreign investors. Top Market Destinations Top Countries of Origin Source: RCA and Wells Fargo Securities, LLC 66 66
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Nonresidential Construction
Private construction spending continues to improve, but the pace is moderating. Source: U.S. Department of Commerce and Wells Fargo Securities, LLC
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Vacancy Rates Office and retail vacancy rates have only modestly edged lower in recent years, which means there have been a fairly limited number of opportunities for new development. The apartment and industrial market have been helped by demographic and structural shifts that have boosted demand in recent years. Source: REIS, Inc., CoStar Realty Information and Wells Fargo Securities, LLC 68
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Effective Revenue Overall effective revenue growth, which is the product of occupied stock and effective rent, continues to improve. Source: Reis, Inc., CoStar Realty Information, Inc. and Wells Fargo Securities, LLC
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Rent Growth A surge in apartment deliveries late last year has pulled apartment rents lower. Source: REIS, Inc., CoStar Realty Information and Wells Fargo Securities, LLC 70
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Construction Supply Source: CoStar Realty Information, Inc., Reis, Inc. , Property and Portfolio Research and Wells Fargo Securities, LLC
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Hotel Real Revenue Per Available Room
Although real RevPAR is still improving, the pace began slowing noticeably in the fourth quarter of 2015 and continued to moderate in the first quarter. Moreover, the rate of real RevPAR growth for lower-end hotels, fell into negative territory in the first quarter. Real RevPAR vs. Real ADR Occupancy Rate Source: Smith Travel Research and Wells Fargo Securities, LLC 72 72
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Bank Lending The net percentage of lenders reporting stronger demand for construction loans has been edging lower in recent quarters, while the proportion of banks tightening their lending standards has gradually edged higher. Multifamily projects have led the way. Demand Tightening Standards Source: Federal Reserve Board and Wells Fargo Securities, LLC 73 73
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Five Critical Key Takeaways
Economic Outlook The economy should weather the global slowdown. Exports have clearly decelerated. We expect real GDP to rise about 1.6 percent in 2016 and 2.2 percent in 2017. Weaker Global Growth Weaker global growth continues to pull at industries closely tied to it, creating a disinflationary undertow that is squeezing corporate profits and capital spending. Interest Rates The Federal Reserve has begun to ‘normalize’ interest rates amid a challenging backdrop. Policymakers will likely move very gradually and cautiously. The Housing Recovery Demand for single-family homes is reviving, with first-time homebuyers beginning to come back into the market. Apartment construction is close to peaking. The Mix of Growth is Shifting The economy is better for consumers than producers. Regions exposed to agriculture, energy, mining and manufacturing are seeing conditions weaken.
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U.S. Forecast Source: IHS Global Insight and Wells Fargo Securities, LLC
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International Forecast
Source: Wells Fargo Securities, LLC 76
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Appendix
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Economic Outlook Group Publications
A Sampling of Our Recent Special, Regional & Industry Commentary To view any of our past research please visit: economics To join any of our research distribution lists please visit: economics
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Wells Fargo Securities, LLC Economics Group
Diane Schumaker-Krieg ………………… Global Head of Research & Economics Global Head of Research and Economics Azhar Iqbal, Econometrician………………… Eric J. Viloria, Currency Strategist Sarah House, Economist …………… ………… Michael A. Brown, Economist ……………… … Economists Chief Economist John E. Silvia … … Mark Vitner, Senior Economist……………....………. . Jay H. Bryson, Global Economist …………………....…… Sam Bullard, Senior Economist Nick Bennenbroek, Currency Strategist Anika R. Khan, Senior Economist … Eugenio J. Alemán, Senior Economist… Tim Quinlan, Senior Economist …………… ……………. Economic Analysts Senior Economists Erik Nelson, Economic Analyst Alex Moehring, Economic Analyst Misa Batcheller, Economic Analyst Michael Pugliese, Economic Analyst Julianne Causey, Economic Analyst Administrative Assistants Donna LaFleur, Executive Assistant. Dawne Howes, Administrative Assistant 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 Advisors, 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. Wells Fargo Securities, LLC does not compensate its research analysts based on specific investment banking transactions. Wells Fargo Securities, LLC’s research analysts receive compensation that is based upon and impacted by the overall profitability and revenue of the firm which includes, but is not limited to investment banking revenue. 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 © 2016 Wells Fargo Securities, LLC. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE 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. For purposes of the U.K. Financial Conduct Authority’s rules, this report constitutes impartial investment research. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive The FCA rules made under the Financial Services and Markets Act 2000 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. 79 79 79
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COMMERCIAL ECONOMIC ISSUES & TRENDS FORUM
Commercial Real Estate in 2016: New Challenges LAWRENCE YUN, PhD MARK VITNER Chief Economist, Sr. VP National Association of REALTORS® Managing Director, Sr. Economist Wells Fargo Securities OMNI SHOREHAM HOTEL • DIPLOMAT ROOM THURSDAY • MAY 12, • 1:00 pm – 3:00 pm
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