1. 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

2. POLLING INSTRUCTIONS
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3. 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.

4. 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.

5. 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

6. Commercial Investment Sales of Large Properties (Properties valued at $2.5 million and over)

7. Commercial Property Price Index
Source: Federal Reserve

8. SIOR CRE Index

9. Apartment %

10. Office %

11. Industrial-Warehouse%

12. Retail %

13. REALTOR® Deal Size (Not $2.5 million Properties)

14. CRE Prices: Small vs. Large Markets
Sources: NAR, Real Capital Analytics

15. CRE Sales: Small vs. Large Markets
Sources: NAR, Real Capital Analytics

16. CRE Financing: Small vs. Large Markets

17. Banks and CRE Lending

18. Loan-to-Value Financing Terms

19. Lending Conditions in Smaller CRE Markets

20. Economic Backdrop

21. Lifetime Wealth at near All-Time High

22. Median Household Income (Inflation Adjusted)

23. Annual GDP … Below 3% for 11 straight years

24. 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

25. Sluggish Business Spending Despite High Profit

26. Consumer Spending Growth

27. International Trade Falling
$ million

28. Trade Balance as % of GDP

29. Manufacturing Jobs

30. Average Weekly Labor Hours in Manufacturing Industry

31. Widening Jobs Mobile and Charleston SC

32. Boeing Airplane Made In Charleston

33. Widening Jobs Nashville and Memphis

34. Widening Jobs Grand Rapids and Flint

35. Jobs (8 million lost … 14 million gained)
In thousands

36. Unemployed and Out-of-Labor Force

37. 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

38. State Level Employment

39. Federal Debt … Cumulative ( $ million; debt held by public excluding intra-governmental holdings)

40. Quantitative Easing

41. No CPI Inflation – Yet

42. U.S. Dollar Reversing the Decline … Stronger and Stronger

43. Negative Interest Rates Good-Bye Ben?

44. Fed Rate Hike in December again in July again in November Again 4-times in 2017 Another 4-times in 2018

45. Fed Policy and Long-Term Rates

46. 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

47. Mark Vitner, Managing Director & Senior Economist May 12, 2016
U.S. Economic Outlook
Mark Vitner, Managing Director & Senior Economist
May 12, 2016

48. 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

49. 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

50. 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

51. Employment Growth of U.S. MSAs
Source: U.S. Department of Labor, U.S. Department of Commerce and Wells Fargo Securities, LLC

52. 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

53. Demographic Breakdown
Millennials are now the country’s largest and most diverse generation.
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

54. 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

55. 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

56. 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

57. 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

58. Global Economy

59. 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

60. 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

61. 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

62. 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

63. 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

64. Real Estate

65. Foreign Capital Inflow
The United States continues to be perceived a safe haven for foreign investment.
Source: RCA , Inc. and Wells Fargo Securities, LLC

66. 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

67. Nonresidential Construction
Private construction spending continues to improve, but the pace is moderating.
Source: U.S. Department of Commerce and Wells Fargo Securities, LLC

68. 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

69. 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

70. 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

71. Construction Supply
Source: CoStar Realty Information, Inc., Reis, Inc. , Property and Portfolio Research and Wells Fargo Securities, LLC

72. 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

73. 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

74. 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.

75. U.S. Forecast
Source: IHS Global Insight and Wells Fargo Securities, LLC

76. International Forecast
Source: Wells Fargo Securities, LLC 76

77. Appendix

78. 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

79. 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
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86. 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