Fall 2017 Real Estate Economic Forecast

[Music] I'm Ken Rosen and delighted to welcome you to our Uli real estate economic forecast session we have four great panelists and of course you know who they all are they're on the program but we're going to start with presentation of the Uli forecast and consensus forecast Uli does a survey it was about a month ago that we did this of 47 economists and real estate investors about what they think is gonna happen in the economy so I'm going to present not my forecast not our panels forecast but what the Uli forecast consensus forecast is and then we're going to break it into chunks we're gonna do a real economy we're gonna do capital markets and then different product types and we're gonna ask the various panelists to comment in various ways on this so we're gonna do this in chunks and then you'll have time at the end to ask questions as well so remember this is not my forecast you know that I this is the Uli consensus forecast that many of you filled out and just to give you a little more details 48 economists and analysts at 34 leading real estate organizations responded it was conducted in the in September and we do this every six months I need a Cramer are you you know do this every six months and consensus turns out last time was mostly right so we'll see if it still is so we start with the most important thing of which is the economic growth and again I say it's a three year forecast but it really is only two years because we are almost done with this 2017 seems like it's been a really long year but two more to go mm 18 and 19 I guess three more to go but the growth forecast years remain in the two percent range so it's a very modest change really no significant change two percent plus growth but not much more than that job growth slows according to the consensus view and the job growth slowing is primarily because we have used up our surplus labor so it's hard to create jobs when you have labor shortages and we do have a huge labor shortages all around the country especially in construction in other areas so I think that's the reason for the slowdown the unemployment rate is very low four point two percent you can see the forecast as it remains essentially the same we have the lowest unemployment claims first unemployment claims in 40 years so we have a red-hot labor market GDP doesn't show up but the labor markets red hot again the consensus forecast doesn't see much change in inflation thinks inflation is about two percent going to remain two percent so they don't see any acceleration at all that's the consensus view and then one final macro point is they do think interest rates are going to edge up edged up to about three percent over the next two and a half or two and a quarter years so it's a very bland forecast but when you have consensus planned as the way we go so I'm gonna go down the list of our panelists and ask them one of the time to tell us what is this their view and then what is the one shock to the system that might make this forecast more positive and one shock that might make it more negative and Melissa since you're sitting here on the immediate side we'll start with you okay sure thanks yeah I'd say it's largely in line and it's probably a little more optimistic than than I am so I bet GDP is around 2% for the next couple years I don't see the ten year moving much above you know two five to six I would find it hard to believe that hits three percent by 2019 but that's largely just because I tend to think that we're in a long term structural low interest rate environment and so I guess when you say what's the biggest positive or negative surprise so I think one of the things I think about is what if we're just in this for a long time so what if it's just you know I think everyone's saying well what I mean are we in and is their recession on the way or when does all of that happen well what if there's not and what if we're just kind of at 2% and you know these interest rates for the next 5 6 7 10 10 years right sort of means if you were waiting for if you're waiting for a recession you're rating for commercial property prices to fall probably not going to happen so if you're sort of on the sidelines you might be quite disappointed in the next 5 or 10 years if the recession doesn't happen on the upside though you know let's say I think it kind of would be a private but positive if there was some sort of economic disruption that sort of jolt us us out of 3 this sort of modest growth and this tenure that doesn't really move I actually think that would be a positive I don't know what that would be but if you know say we fell into a recession and then actually I'd be that view that kind of as a positive maybe prices fall a little more buying opportunity but then after that you actually got into a more of a growth mode than what we've seen in the last you know almost eight years now this might be thanks mr. Han's what do you think about this well I think that we're gonna have pretty widespread consensus on the panel within 50 basis points for next couple years on GDP growth so that part is not not terribly terribly interesting and as you mentioned last weekend we're on a prep call for this you're boring for commercial real estate has been fantastic for five years you know 2% rent growth low cap rates low interest rates it's been a great ride so two more years of the same will have some slowing growth we have more supply cap rates have stabilized or less likely they're more likely to be stable than significantly down but you know it's a good story what I think is most likely to bring the wheels off of this bus my personal opinion in terms of whether we'd have our recession would be a mini tech rack maybe not as bad as 2000 but you know we see a lot of firms out there tech firms that don't make money remember this is different from 20 years ago when most of the tech firms didn't make money so here we've got a minority of tech startup firms not making money unicorns without cash blow and we've seen decreasing venture capital deal flow and decreasing venture capital investment flow in the Bay Area over the last three years you know we've seen more companies trying to get to market trying to sell it's not really a great environment for that so I think we could be smelling the end of this right now in the Bay Area we see increasing sublease space availabilities in office and and my favorite is we work buying the Lord & Taylor store which just came out a few days ago and the Wall Street Journal did a really nice job on them last Friday before that was announced and you know I looked at the income of we work and it's not just it's a hundred and thirty thousand dollars for every person that comes in and rents a desk that could cancel in two months it's that it's a two to cap on property they don't own and it smells a lot like when AOL bought Time Warner the purchase of this building so I think the most likely place for this to come apart would be tech markets and most recessions are not like the last one their regional they hurt and distinct places in other parts of the country not so bad so overall even if we get into recession you know to build em Melissa's point you know it doesn't have to feel like 2009 Hans thank you just being a Bay Area person we have a hundred and sixty two unicorns these are companies that are worth over a billion dollars but don't make money and they're private and they're leasing lots of space so leasing actually in San Francisco itself actually accelerate at the last while big leases some from the Giants like a Facebook and others but we worry a lot that at least half these companies ten years from now won't be here the question does it burst this year next year the year after the main reason that's an issue is all the people they've been hiring the scale and losing money on making it up in the volume they lose it at some point they have to become profitable we could say that about Amazon and I love that Prime now delivery they lose five dollars every time it delivered me that one bottle of soda I want I but I think it's gonna be a big issue so let's now turn to two other panelists Lee does this consensus forecast look right to you and what could disrupt this yesterday when I was flying from New York and my long flight in the middle seat I was debating whether or not to take another look at these or take a nap and we talked about this because we all sort of read this and want to take a nap because it seems very boring and instead I I went and I looked at the change since the last forecast and that's six months ago and actually there's been some pretty significant differences there and and really that that suggests that all of us all 40 whatever of us had submitted to this 48 economists I didn't know there were that many real estate economists have have really settled into this lower for longer thesis and and and and really so you've seen the outlook for the ten year Treasury rate the this group expected it to be 3.2 percent in 2018 it's come down to 2.7 now we expected unemployment to be higher we expected GDP growth to be higher all the above so really to me that that that's a little bit interesting in that that we are buying this cycle continuing along even though it's long in the tooth without a lot of signs of a lot of disruptions and that's not inconsistent with our view but but if we look at the risks and starting with the downside risk I'm I'm hard-pressed to identify the tech one as being a risk in the sense of a major macroeconomic risk it could be a regional risk it could be a risk certainly to the tech markets but most of the larger tech companies are very integrated with the the overall economy and so the likelihood of them facing a big downturn without an economic event it's pretty slim at this point instead I would point to something that the number of things that we really haven't thought of in a lot of way there could be a banking crisis in Europe I think it's a risk that isn't on our immediate radar and then when I look at the upside risk and and and I think there is some upside risk this we would we would point to policy certainty of which there is a zero at the moment six months ago I think we had an indication around around policy taxes trade immigration all the above and and and our consensus around that was that that would be a net positive and and at the moment that policy certainty is actually weaker now than it was so if there was some sort of policy certainty that we gained over the next six months I think that that would probably probably affect these forecasts more likely on the upside than the downside okay and Bill we last what is you what do you guys think of this forecast and what's the one thing that you'd worry about and one thing you might think could make things better sure I agree with Hans and that the last seven years of sort of moderate to to two and a half percent growth with low interest rates has been great for real estate we've had seven years of double-digit decrease returns so it actually came down to single-digit last year but a great great run for real estate and as they look at the forecast it's more of the same it's two and a half percent to two two and a half percent GDP growth and you know fairly low interest rates in the scheme of things I think there's more upside to the GDP numbers than downside I think we could be you know easily be around three but the issue is that the magnitude of the upside is a lot less than the magnitude of the downside and so we could have maybe get up to high twos or threes for GDP growth but it could be a look a lot worse on the downside and the you know I don't know what's gonna cause it and I'm not a believer in this you know recessions run out of time we accorded as forecast we will set the record for the longest expansion ever so I mean expansions for in that time will set the record the longest was 120 months during the Clinton administration I think in mid-2000 nineteen we eclipsed that so we could well have the longest expansion since records were kept in the mid 1800s now Canada and Australia have had 20-year runs of no recession so if there's no rule that says you have to have one but what could change things and I look at sort of a wide range of black swans many of them not in the US so I've seen North Korea brexit China all sorts of things could go you know sideways or negative and affect the US and then we have in February a new Fed chair Lee talked about policy uncertainty we have a lot of policy uncertainty about what the Fed does and and and Fed tightening has been a cause and many in many past tenses of a recession so I view it as a lot of things that are low probability high impact hard to isolate any one of them okay well as moderator I'm gonna give you mine I think the biggest thing we don't see is that Federal Reserve and central bank policies in the world are shifting we've had the most extreme monetary policy stimulus the last seven or eight years and we've all benefited but now the central bank here the present dovish central bank has said we're going to raise short rates their consensus is by the end of the forecast period to two and three-quarters if they do that the ten-year bond isn't going to stay at three percent it just isn't today it's the 247 I think it gets the two eighty by year-end and I think we're at four percent by the end of two nineteen now that doesn't sound like a lot but that affects cap rates dramatically so I think that's our biggest risk and the risk comes from not just changing monetary policy reducing their portfolio four and a half trillion dollars of bonds of mortgages to two trillion over the next three years that's a lot the deficit running seven hundred billion a year for the next three years that's another true trillion of extra bonds so a lot of bonds coming on the market now it is true that Germany rates are 48 basis points and Japan six basis points so capital flows can keep that from rising but I think the shock to the system is going to be inflation which has been dormant for a long time 1.9 percent CPI year all of a sudden it's going to pick up we have tightest labor market we've had in a long time so wage growth and inflation will be get that three percent inflation number that's the case it's hard to suit the ten-year bond remaining at these levels so I think that's the number of one wrist the second is we have this America first policy and it's spreading globally you know brexit one example Europe the same thing trade flows and immigration are the reason that we're getting this populist things happening reason we have person in the White House we do if we go into a trade war we drop NAFTA or started imposing large tariffs on imports I think that could have a big negative effect and the other thing to say is we have had a formal proposal by the administration to cut legal immigration in half from a million a year to half a million and they put a bill in Congress the latest nativist view led by our whatever you call our president I won't use the words that Tillerson use but it's a huge mistake because half of our population growth comes from immigration illegal immigration and this is a very important thing for the housing market but for all of us in real estate we've added ten million people each decade legally and that's really been a very important source of economic growth and job creation and especially in places like California Texas Florida New York it's a big thing so I think those could upset the applecart and finally let me just say North Korea liyan want to use those words but I think it's scary and if that happens all of this happens that what it does is upset the financial markets led to a big correction in our financial markets both interest rates and of course S&P and if that happens real estate is not immune we're a derived demand so remember that derive demand all right so we'll go to the next section which is capital markets and more detail on real estate so the consensus view is that cap rates hardly move at all they move up by 30 basis points insensitive forecast is they hardly move on the other hand we've already had trans-fat the transaction volume consensus view it was down 12% actual numbers in 2016 it's actually down about 19% this year the forecast doesn't reflect that but transaction volume declining so remember in the transaction as a buyer and sell it so what's going on here we're gonna ask our panelists this question CMBS volume our consensus view is it's flat the consensus is already wrong we expect to see maybe a hundred billion dollars in 2017 it's been a surge in the market player we're going to talk about debt markets and Lee in particular he's got some good good views there the consensus view is that inflation in real estate values slows but it's still positive running three to five percent a year so if not could really consistent with rising cap rates so we want to ask that question after being double-digit for a long time so we're gonna stop at this point but then again to the fundamentals so we're gonna do capital markets and and maybe I can turn the leaf first because the debt markets are so important to real estate and there's been some dramatic changes debt funds spread compression CMBS revival so Lee maybe start with you yes I looked at this CMBS forecast which shows flat C and B s ations for the next three years and then it's kinda dough is definitely going to be wrong at least this year it may be wrong by a big magnitude in the next couple of years and I think that that's what's mirroring something that is happening in the debt markets it's one of the few big changes that we've seen in real estate capital markets overall starting with the CMBS markets the outlook was very negative last year because of some regulatory things risk retention rules that the consensus was that was going to slow issuance it turned out that investors love risk retention rules and actually have been plowing money into CMBS because of that and so that the the amount of debt that they have been providing to real estate markets continues to increase albeit it is more focused on higher quality properties in larger markets than it was then you look at banks banks are also continue to be very active lenders if anything they're facing a slightly lighter regulatory regulatory regime than they were a year ago so they continue to be very active lenders for stabilized properties they are lending on struction although the standards are tight and they're even venturing into sort of that middle ground of value out or repositioning more so than they were a year ago and then the third thing is you look at the number of debt funds that have been raised over the last few years and these debt funds have a substantial amount of money and and we've already been seeing that impact on the market where you do have this availability of debt that's a little bit higher up in the capital stack then you might have had access to 18 months ago so you put all that together and on the plus side that might loosen up transaction markets it might prolong the capital markets like a little longer may keep cap rates that that cap rate forecast may be about right on the minus side you do worry a little bit about underwriting standards and also if there's any break in construction lending any increasing that related to these more debt availability that would be something else to look for in the downside you know the Fed is still saying that construction lending is tightening based on their survey but I think you're pointing out all these other sources are loosening and getting bigger none of which are sources for construction lending per se but I think that that that pressure to put money out at some point that can filter although construction side says it's a bit bill let's ask you this question because jll is big in this business transaction volumes are declining why is that happening and what does it mean well it's from a really high base so we set a record year and couple years ago so and you know prices are high so there's a any other thing as you've got some sectors that there's there's no trade going on so regional malls power centers suburban office now you could probably sell those two years ago really hard to do today so I think combination of high prices and four core properties and then more sub property types getting into this no trade zone I think that's where you're seeing the the decline coming from so it's really a bit ass red issue that sellers may not have adjusted to the new reality of that property type isn't favored and buyers are less aggressive now let's say you guys do debt and equity bow one of the biggest players what do you how do you mate what do you make of this declining transaction volume but still strong lending sure I think there's a couple things so decline transaction volume it could be buyers whole prices are you know high whatever that means and sort of saying and I'm full in real estate my real estate allocation because I've you know loaded up on it in the last seven six seven years so I'm good I'll just sort of hang back I don't I don't need to buy so I think that's one part of it in the lending market is you know when you think about this whole cap rate discussion and where Treasuries are going and you think about the lending market because they're all sort of fixed income products I think there's one important thing to sort of like realise that a more macro picture is just sort of there's a ton of spread investors out there something about you know like we'll just take like company for example right they're spread investors and so you know when you think about well you know all this MBS rolling off of the Federal Reserve a lot of spread investors will like that stuff right it's just a little more spread II than you know what you're going to get in the government bond and you think about on commercial mortgage side as well spread investors kind of love those products too because they'll give you a spread over it certainly for commercial mortgages and certainly for higher risk commercial mortgages look at me a great spread over corporates all day long and so there's there's a really good appetite for a mortgage and I think it particularly at this point in the cycle because I think and in particular if you're a fixed income spread investor you'll say to yourself well relative to commercial equity kind of going for the next couple years I'm probably gonna get about the same total return from a mortgage as I will equity because if you look at sort of you think total returns for equity will be kind of 5% or whatever depending if you put leverage on your mortgage you could get there as well and you could say and actually taking less risk with the mortgage than the equity so I think there's like there's a lot of that kind of big macro stuff that that goes on in sort of these asset allocations so you know particularly for life codes or anyone who runs a multi portfolio I think that's really part of really live debt funds have really risen because there is that opportunity that feels like a better space in the capital stack for the moment so Hans look at this chart here our gonna see real estate values still increase it's definitely a mixed bag if you look at property types and subtypes so take high and multi-family so if you look at new construction multi-family here in LA I think there's about 4,000 units that are going to be delivering within a couple miles of this address over the course of the next two years so of them are leasing up well but with a little bit of increase in interest rates a little bit of worry about what the net effect of rents are some of these deals aren't penciling as well as you might have thought a couple years ago also in LA workforce housing bulletproof four or five percent rent growth in some areas so you know first of all I would say the averages and we can work with the math but I think what's more interesting is what's underneath it as far as is the investment scenarios yeah so that's actually good good transition let's turn the fundamentals next so when you take you through each property type we're gonna stop at each one and get your opinions the hottest property type has been industrial warehouse vacancy rates here it says seven seven seven well la is one point two so in many markets the vacancy rates are below five percent so in very tight market rent growth is happening in a big way this sector never has big rent growth but it actually is happening in the sector because the vacancy rates are very tight according to the consensus that's all going to slow down but still positive and returns its the owning product type that had double-digit returns in 2016 you can see the slowing forecast here so what do we think of warehouses and again well maybe go the other direction start with our fundamental analyst there Hans what do you what is your your view on warehouses industrials been a real surprise or for the past three years because there hasn't been as much supply as you'd think there would be the capital availability REITs have had capital availability but but they've chosen to really you know grow their Noi knock it out over their skis and do build the suits so they haven't gotten out a specular construction a lot of the local and regional players haven't had access to capital for this until recently and are always loath to put in their own money on spec so so it's been a real surprise how little supply there's been an industrial at the same time that demand growth is double GDP growth on a percentage basis historically the last 40 years percentage change in industrial demand and percentage change in GDP kind of goes hand in hand and that's true for the last two economic cycles this time it's been double because industrial is the new retail so it's just been the perfect sunny day for industrial but we expect is is over the course of the next year we'll have more supply and and if I was sitting here two years ago I would have said the same thing so supply has been stubbornly low so that there might be a little upside in these numbers particularly for light industrial in film especially in major markets you can't pencil to build it it tends to be close to where the consumers are and it's very dependent on housing so yeah this is a this is a remarkably good story that's not going to be true four years from now but the next year I think the sunset the Sun still shining okay let's ask you yeah are you guys your view and then are you over or under Cala cating for the next couple of years industrial and your portfolio warehouse industrial so I think we have 27 warehouse developments under construction right now it's it's our biggest bet we've been doing that for three or four years and we have a team that just does that they use local partners we think it's the best risk-adjusted that we have right now assuming more I can hold up and pricing holds up but you know it's also a six to nine 12-month window to get in and out I mean we're getting really good pre leasing so we we've taken a lot of risk off of those developments so we think it's terrific to haunt this point of supply there is overall less supply but it really varies by market and we find the west coast almost all the West Coast markets are well below where they were and previous cycles in terms of supply new york new jersey but you go to meet Chicago Dallas Atlanta just as much supply as prior cycles because there's plenty of land so we're finally getting to some some part some markets where they're truly our land and supply constraints for the type of warehouse that you know sort of minimum two hundred thousand feet that we're looking at really hard to find those sites pretty pretty much have to take something else down which you have to cost so it's it's really it's a it's it's a tale of sort of the coasts and and central us for where there are supply constraints and we think that'll lead to much different rent growth over the next five years and Lee how about you a you under over allocated to industrial over and here's why I think there's a mismatch between where there's availability of land and the ability to construct industrial properties and and and and where that demand for those industrial properties is so they're actually supply constraints in almost every metro area for that last mile industrial where for the first time industrials competing with other land uses it used to be that the industrial would just be built further and further out from a city and you still have that and they still demand for that but what's changed is that proximity to the consumers into businesses and the need for that and so in our view it's it's likely that those those properties in the last mile closer in are probably gonna be generating a lot of that returned more than that return and a lot of that rent growth as well and Melissa last page you last year but how does GA a view industrial under or over allocated say probably under allocated however if I agree with what everyone just said and over waiting it over allocating towards it given the the fundamentals of it I tend to agree that you know the urban infill looks looks really strong I do wonder about you know you hear a lot about like the driverless trucks and that being a technology that's far ahead of driver skaars I don't know whether that's true or not but in the event that it is what that does to the industrial market I think it I think the urban infill actually does pretty well in that but I do wonder what it means for some of the bigger box stuff that's you know outer suburbs of Chicago or Houston or wherever but overall I would say I'm equally optimistic as the other panelists so let me give you the not only drive those trucks by the way if you drive in LA this looks like the trucks are driverless now so be careful but a couple of things to say NAFTA and trade well ecommerce is driving a lot of the growth NAFTA and trade are very important our ports and the large containers coming to our ports are up to five to six percent this year if we do something to disrupt trade that would not be good for the business secondly Amazon is I think sixty percent of the volume of new construction is Amazon really a credit I go back to that story again so e-commerce I think we've got a run to go and it's probably going to continue but I'd say a little bit more cautious here all the investment community this is all they want they really want this badly and they're everyone's over-allocated and I think for the next couple of years we had Hameed Moga diamond runs pro logis it still looks likely strong the next couple of years okay let's do retail the sector that no one loves retail vacancy rates are only up a little bit according to the consensus not up very much rent rates are slowing but still positive this sort of seems inconsistent with the story we're hearing out there and returns are in the five to six percent range slowing so retail is not view to do anything other than slow but not talking about the disruption and of course the financial markets have pushed the value of retail reach down 25 percent many of the big retailers JCPenney Sears are having struggling so what's the outlook here and I know there's obviously many different categories of retail so we'll start with Melissa on this one we'll go the other direction how do you guys view retail I know there's no one retail so maybe give us a little taxonomy and how you view retail and is tia/eia putting more money in retail or cutting back their allocations sure thanks yeah I'm actually quite bullish on the sector you know it just as Ken said it's not you know just one sector but so what I think here's why I'm bullish so first of all I think that everything you reading the headlines I bet the headlines get worse right so I bet more retailers continuing to file bankruptcy you know more store closings I think there's probably a whole segment of retail that exists today that either will become non institutional quality will become obsolete that's what you say is not an institutional quality somehow maybe repurposed I don't know but there's a whole segment that just it's not very good like you go into it and it's awful like everything about it's terrible like it looks bad the retailers are bad you go into the stores you can't find anything it's a disaster I think a lot of that is not a good bet then I think there is the whole other segment that will well we'll get what's going on there are retailers who are investing heavily and all the technology to compete against Amazon they're doing a good job of it investing billions of dollars think they'll be fine there's a lot of off-price that are doing really well retailers I think that'll continue and so I think then there's a whole segment of retail which will which will survive in the coming decades and will be completely fine I also think though that those that survive will look entirely different than they look today so when you go into a store when you go into a retail center today some of it can take I said can be totally disastrous and may be a decade from now you go in and it's much more curated right so retailers will know the demographics of everyone who walks into that retail center and they will tailor all their products to the demographics in that area and so you'll walk in it'll be a great experience you'll love it I mean they'll have everything you want you'll be able to find things it'll be sort of a very seamless thing it'll be much more curated it'll have the food you want the entertainment you want that and I think I think will come out of this looking retail will look much better you'll enjoy your shopping experience much more but I do think the next five or ten years is looks really rough Lee what's your view and what's your favorite type of retail that you're still both lending and investing in and what where don't you want to put a dollar okay let me just clarify did you say you were optimistic Melissa I'm optimistic about God I'm optimistic about the negative retail that continues to exist if that's not already pessimistic about these stuff that you know dies if that's if that's the optimistic scenario I'm not sure what to say here we've with the two segments I think internally the discussions we have when we talk about retail the words that we tend to come up with is a resiliency survival insulated these are all defensive words and I think that that's an environment that retail is gonna be operate again if you look at sort of either end of the barbell starting with your neighborhood and community centers with a grocery store in an area that's infill lots of wealthy people living nearby population density those centers are probably that not only are gonna do fine but probably will do even better over over the next few years you look at the other end of the spectrum with this sort of these large-scale mixed-use experience will retail lots of food and beverage lots of entertainment options those are actually doing quite well the commonality there is both of those are much more oriented towards selling services food non goods things everything else in the middle I think those defensive words are pretty much gonna be the the rule for the next the next five years of AC bill how about you over underweight retail and is what do you do with the B and C malls that don't work asking a really tough question well so we we've been under waiting walls for the last five or ten years and it's hurt us a lot that's been the best one of the best performing property types we think that's going to turn around and help us next five or ten years so we're underway retail underway malls I will say I would be I would love to sort of I'd rather own assignment property at a mid five cap rate than own the malls that they own which you're probably low to mid for cap rates so there's a great arbitrage right now and I think the Simon property malls are great will will survive they may require some capital to replace some tenants over time but they're great locations and you know that's that's a really good value ya know it's a tough sector the the the only place that's really hot right now is supermarket anchored centers that's still trading very dearly and institutional nesters are trying to put all their retail into that one area another sort of thing I would we follow out of the public companies and Federal Realty which I admire a lot and they've got great assets great real estate they just came out and said that you know they focus on both density and income and high incomes as they're you know try to have both they said going forward we're really going to focus on density because we think that there will be a lot of turnover among tenants and they think density will serve you better than higher income because you'll have a wider range of people that you can appeal to with either services or some touch some do retail concept so that's something we're thinking about too is trying to be more in some of the dense urban areas that we think that'll out the form and Hans what are the numbers show about retail well first of all i would say that i think melissa and leigh don't don't disagree maybe as much as it might seem at first i think that 25 percent of the retail out there i think you would agree is pretty sound stuff experiential restaurant etc you know what the numbers say we we score every every retail storefront in america according to the built environment the demographics the change in demographics the amount of office the amount of hotel you know the the rent for the office the traffic patterns and and we find that you know quite a bit of it should be reachable for something even if it's got a sears in it so and then there's probably 40 percent of the retail that you you just wouldn't touch with a ten-foot pole like it's just demolition waiting to happen and you hope you can put an apartment in there someday so I think it you know it's very dramatic but you know in this huge change there's a lot of opportunity in terms of some specific numbers to not avoid the question we had 70 million square foot of closures through the second quarter this year we had 45 million last year year-to-date and in comparison there were 28 million in the first six months of O so yeah actually there's as much closer out there as it looks like and we haven't even seen January yet that's when the big closures come so I think we're looking at about a hundred and ten million feet of closures a lot of it and B and C moles to Ken's point and it's gonna be a real you know storm but I think on the other side there's a lot of opportunity as well and I would just add from my perspective we're in the third inning of this transformation we still haven't seen the full effects yet so I think we should hold our breath and even the best best retail which is experiential our restaurants really a very good investment in credit we need them but that's another issue and the actual traffic is down for almost all retail product types and again the e-commerce growth is 14 15 percent but their penetration is still pretty small so I think again if my billion dollars is underweight even the best things grocery anchored still underweight I would say Ken one of our industrial developments was on a failed ball in Atlanta so there you can build industrial that new retail ok so let's do office the biggest sector of real estate again the consensus forecast is slight upward trend in vacancy rates new construction causing that very little rent growth on average nationally again consensus here and returns five to six percent the looks from this the second least good sector so we'll start maybe in with Hans here what is the numbers show for office and and the outlook and then we'll go again down the panel so if you talk about the 40 metropolitan areas that most of the biggest investors here would spend a lot of time in there's about say seven or eight of them they have significant amounts of supply under way and after that the percentage of inventory under way is fairly low while we may have a little bit more construction financing availability through the funds etc that Lee mentioned earlier over the course of the next two years the banks are really being told by the regulator's the OCC the Fed that they don't want construction lending on the books so overall supply is pretty stable a lot of these metros secondary and tertiary metros are not investor institutional investor favorites for new construction so it's a pretty good story overall for office only for good office four and five star office Class A office that's been about 55 percent of demand the last couple of years but only about one third of the inventory unemployment rate as was pointed out earlier in the low force one of the ways you get talent is you have a decent office this means that 1980s por ti office buildings and bad locations you know are they the B and C malls of five years from now I don't know but they're not a good story in the net worth buying so it's definitely a high-end story and there's a lot of secondary and tertiary markets where it's really their turn to shine for a couple years okay let's switch to Bill how about suburban office bill what do you think of that and what's your strategy or company strategy well we have very little suburban office which has been good recently you know we're starting to look at it the pricing is getting pretty interesting and particularly with with some amenities with some transit uber helps a lot and making these things more accessible so you know it's it's a four cap for a good New York office and it's a seven or eight cap for some of the suburbs and you just have to pick your spots so I think the between the rents the pricing and and there is still as economic activity it's not everybody's gonna be moving to a downtown office so I think we're where there may be some we may be shifting to where you know that we're at the bottom for suburban office probably how about you guys what's your his office under over-allocated going forward and office is probably still residually probably a pretty big part of your portfolio it is and we moved to an overweight about three or four years ago in anticipation of what what we expected to be was a lot of rent growth a lot of decline in vacancy all which happened that the thing that didn't happen was returns weren't that great and the reason the returns haven't been that great is that you have to put a ton of capital into these office buildings on an ongoing basis typically at this point in a cycle you should see particularly tenant improvements which is another way of saying you get tenants a bunch of money up front in exchange for it over the course of ten years usually those come down even go to zero near the end of a cycle they've stayed the same they've actually gone up in some markets and so because of that our outlook on office has really been that the recovery hasn't been as good as we expect it it hasn't hurt us but it hasn't helped us as much as we expect it and and we're pretty comfortable going to an underway because we just don't see these capital requirements coming down anytime soon and Melissa last but not least in office do you guys like office and over/under weight and suburban office yep I well I tend to agree with me on the capex argument so I tend to generally think office should be under weighted definitely at this point in the cycle when it's certainly seen a run up like this not the suburban office but most other types of office have and then you've got to put on all the capex into it and so your return just it will not be very good at this point in the cycle if you could buy it on and dip sure I think you could you could do okay with it if suburban office it could be an interesting play in very select regions you know to Bill's point it's well located not the commodity be stuff out in suburban locations I think that could that might be a play I wonder what you know in the sector you hear a lot about what are the structural changes happening and for office space so came across my desk the other day was you know what happened if we work were to become such a large tenet and you know they came back to landlords and said okay well you know we're like X percent of your office space and you know you need to cut our rent 50 percent okay I mean I don't know what I mean it was a hypothetical hypothetical scenario so there's there's stuff like that that makes me wonder about what are the structural long-term implications of office and it also makes me you know even less bullish about it and not that I was very bullish about to begin with so yeah there's just say it there yeah and then I just also wonder with you know the headcount are sort of you know more people in less space I don't I don't know that that you know that probably stays for quite a while so over on just generally bearish or the problem with office I think is this adaptive review stuff has really done quite well but it's hard to find those buildings to do that with now suburban tells you get that money in cash flow it's all about cash flow after capex these returns an increase by the way do not take into account capex remember that so it's really all about cash flow and I want 80 85 90 percent of my return sure cash flow don't think you're gonna get a cap rate compression in the Class A office that's not gonna happen anymore Class B you get a high-yield going in finance it lock it and that's how you make your money all right let's switch to my favorite property type the consensus is that the apartment market is seeing rising vacancy rates but not dramatically but edging up the rent growth is slowing dramatically it already slowed in 2016 especially for some of the big urban areas class I and class luxury apartments they haven't running about two percent a year the consensus which is down from four to five percent a year and returns again in the five percent range so their view in apartments is still good but not as good and so let me start with Hans on numbers is this consistent with your view on apartments and have we leased in Class A apartments you already talked about that but let's talk about as B and C they the working person's apartments is there an affordability issue there you know I appreciate you bringing up and I spent a lot of time researching workforce housing into the paper with the Terwilliger center here at Uli last year and I think it's what surprised me about as we delved into the numbers was not just that it's the right thing to do but that's been sober enumerative workforce housing if you look at Class C housing you could argue that inventory growth is negative you can definitely see that the rent growth is positive and there isn't enough supply overall to upset the applecart that far underneath the you know if if the four and five star over here at the at the top of the ocean where the waves happen you know the Class C workforce housing is down here where it's pretty still so that we found is pretty resilient in Class B very similar an insulating factor here which is why we're pretty bullish on on the sector is that average Millennials 27 years old and there's a big wide range it's kind of a wide demographic cohort but what do you do when you turn 35 you buy a condo you buy a house right so we've been surfing this demographic where the tide can go out and the person who buys a house lives in a four and five star apartment they don't live in workforce housing those people unfortunately are never gonna buy a house so you know I think apartment yeah we got we've got about 30 basis points increase in vacancies the next six quarters or so you know most of that is felt at the high end and the middle low end disability so so we have so give you the data homeownership rates are at have dropped dramatically for that household under 35 they drop 10 and 12 percentage points overall homeownership rates are just up off of a 50-year low it is tight credit preference to the Millennials delaying marriage delaying having kids wanting to be in that urban core but is it gonna change are these many goals maybe going to become more like their parents so I'll start asking you that Melissa since you're just barely above a millennial compared to our other panelists FairPoint yes so it's a good question um so what do I think so yeah for the Millennials that have the income and this is an important point yeah I think they'll go buy a house and move the suburbs and have kids and all that I think most of my cohort has now done that they don't continue to live in the city it's just too expensive right so you have kids and cities most cities across the u.s. the public school are definitely not very good boss you're in New York metropolitan area so that is a certainly true yeah right and so and and so that you do have that whole group but but it's sort of an income thing and and so if you're a higher income and to begin with as millennial you lived in the urban areas if you weren't high income you're probably always in the suburban area anyway renting and to hans point you'll probably just continue renting although what could happen is so you have the say the Millennials who are sort of higher income I think they'll go buy homes fine and all that then I think you have the Millennials you you don't have the income either you move from the kind of the really expensive places right New York San Francisco Boston and you go to a Raleigh a Charlotte a Denver where it's just cheaper you probably go by home maybe you rent if you really can't afford it but that's probably how this plays out over the next kind of 5-10 years so uh Lee let me ask you the question in California many of you know happened two days ago there's going to be a ballot proposition to eliminate something called cost to Hawkins which is a state law that allows vacancy decontrol and exempts all new construction after 1995 develop proposition is to eliminate cost of hawkins would you guys invest in California if this disappeared you know I'm not I'm not sure that any regulatory change is gonna change the picture for California it's gonna be under housed and that that's going to possibly affect the rental markets really really up and down the coast so I wouldn't see that as a as a big needle mover either way to be honest with you I would however look and I think this echoes Melissa's point at that the divergence between the urban core and the quote-unquote suburban areas and where we see the best amman going forward potential mismatch and unit sizes so how many studio one-bedroom apartments do you need as Millennials get older and you can expect to see some backfilling of that of baby boomers but are they gonna fill the studios mm probably not as much so so you see that mismatch and then you're gonna see and this is already happening by the way in utilize documented this it's a mismatch it it's a misconception that Millennials all live in the cities the vast majority of Millennials already live in the suburbs and continue to move to the suburbs so if you want a big secret for apartment investing figure out what the schools look like next to the apartment you'd be probably gonna be making a pretty good bet okay in this last we bill very quickly over underway departments we're overweight and I think that's a lot of institutional investors think that way the two big things are tends to do very well on a downturn or tends out perform in a downturn and in our view it's the least susceptible to technological disruption it's it's you know it's not going to demand will be based on demographics not based on some app or something something that changes you know the underlying demand structure I will say that one one problem we've seen recently is that municipalities been very aggressive in increasing property taxes and increasing assessments you know and we're fighting them all the way but that's been a big miss in terms of our underwriting and you know we're trying to think you know will that continue but that's municipalities need money and and this is a good place for them to get it okay and it goes you know obviously it's a gross rent so just two more things in apartments we have nationally 4.2 million people per year turning age 18 over the next seven years so still a big input but again in some of the key markets like California Houston Florida roughly 25 to 30% of all apartment renters are non citizen foreign-born individuals so remember if they really slash legal immigration they start deporting large numbers of people this is a big issue and a lot of trumps big supporters own this stuff which I have made clear to him and can to build on that point if you were to include this sort of steady state immigration we've had the 25 to 29 year old age court a little older than what what Kim's describing is pretty flat the next five years so all these people that have been driving the changes the last 10 years etc they got older and so there's a lot of growth in 30 to 34 and they don't do exactly the same things so you know if the tide goes out with immigration as Ken says it'll be even more dramatic in this fresh out of college bunch and because all of the Millennials are getting a bit older right and so and that note we're gonna turn to our last section single family and you can see the consensus is that single family reduction continues to rise for the next three years still below equilibrium long-run average and below demographic needs but it's been a very slow recovery for this sector of the marketplace and I guess we only have that there were a few others are missing but house prices again the consensus forecast as house price growth slowing so is there any institutional investment in single-family land or a single some B at all mortgages will just go down I'm starting to - you Melissa is it something you guys do at all no no I mean the way you invest in this is you get a platform that's a big enough scale to actually rent out single-family homes or you do spectat land development I don't think that's most of our business there are people so you don't do land or there's single family rental business no but I would connect can i redirect a little bit yeah talk about cuz we're about apartment first of all this is one reason to be more bullish about apartments and that structurally housing is undersupplied in many parts of the US but we've been talking about affordable housing they were talking about workforce housing we haven't talked about manufactured housing manufactured housing is a segment that's become variously there's a lot of discussions about how to provide affordable housing to people this type of housing already exists and it's becoming an institutional property type so if you're an institutional investor looking to participate in that that's probably an easier way to do than to build up a platform to service tens of thousands of single-family houses well yeah we don't really play in that but I did I do notice that a lot of the home builder stocks are up a lot recently so there's something positive going on you know so I'm actually giving the keynote speech a week from Friday at the National Association of Realtors and the emphasis there is how do we get credit available for that first time buyer credit has been constrained by dodd-frank by the what I call post foreclosure stress syndrome that is lenders got killed by all the put backs and all the government policies and there's no question that that has to be changed and not happen again FHA still hasn't normalized itself so a lot of the big lenders aren't working with them so credit availability is a key thing but also many of the Millennials saw their parents lose their house and there's stress from them I was sitting next to one in the airplane who had clearly had the income everything else she said but my parents lost their money I'm not gonna buy a house I'm just gonna stick with my Apple stock so I think there is a portion of Millennials who are scarred and aren't there finally the supply of available things to buy is constrained that's why prices continue to rise there's a shortage of supply of existing homes all over the country so that's why prices still rise double or triple the inflation rate so the single-family sector does have institutional investment capabilities obviously single-family for rent but also the land development business at the right point in the cycle people make a lot of money they're clearly institutional investors have been reluctant after the last cycle which was caused by the housing downturn so that's our last consensus slide so now I'm gonna ask our panel one more question and then we'll to open the floor to questions what is the one thing if you one thing that would upset the forecast not only macro but real estate one just one thing it's a lightning round and so on maybe we'll start with you what one thing would upset the applecart well I mentioned the mini tech wreck earlier I think that's the most likely just to kind of have some fun and throw it out there you know tax reform could be an upside I think it's more likely that we could get weird and stupid tax reform and that's a big risk so you know wouldn't it be convenient for somebody in office to say that you can expense all your real estate purchases in the first year and have forever tax deductions so that happens the market comes apart everybody buys real estate the same year values shoot up construction shoots up and we have the RTC crisis again in five years not likely but you know we've seen a lot of crazy things last and we do have a person who claims to be a real estate person as president so possible the whole markets built on low low interest rates so if interest rates go up 200 basis points that changes the whole pricing structure thank you bill you're listening to my forecast they said since we're this forecast is about the us of my mind Kessler said it's something that happens outside of the US and then this could emanate from Europe you could emanate from Asia but I can't find one thing in the US it's likely to upset the applecart as you put it yeah yeah yeah well it's actually what you've been driving home ken is the whole immigration if there's a change to immigration policy and they could fairly dramatically affect the commercial property okay all right well we've got about ten minutes for questions from the audience and I think we have microphones I see one two in the middle so we'll be happy to have some questions we haven't even mentioned the name Trump really very much at all so we'd be happy to give any of our inside views or what he might do and I actually know bob Corker so I can give you his views he's a real estate guy by the way so I'd be happy to give any views so love to have you come up to okay that good question of the question is we didn't survey about niche sectors but a lot of people are going to these sectors like senior housing data centers student housing AG land so maybe we should go down the line because I know some of you your companies have done that so Melissa what what have you done any thing in these niches and which ones do you like not a whole note my company's not done a whole lot in the niche sectors but yes I do think there's some very good demographic plays to be made in student senior potentially student data centers outside of that if you're asking about farmland or something okay London let me answer what the public markets are saying the public markets are saying that the private markets are over valuing real estate in the core property types and undervaluing real estate and the niche property type so and while I think the magnitude of that is exaggerated we actually do see value in sectors like manufactured housing and senior high and senior housing okay yeah yes Lee was saying Oh almost over half the cap rate of the may rate is is especially property types as they call it so it's very big in the public market chief attract all sorts of data on on all the different sectors and I will say that self storage has become the second the biggest property type the niche property type in the native world its surpassed hotels so self storage is popular amongst institutions but you know medical office truck terminals there's a whole range of things people are trying to get into because it's higher yields with growing sustainable income and that's that's what that's what we're all looking for and how as an analyst is there one nish niche that you like well I think 55-plus age-restricted low service housing is the next thing and with regards to the person's question you know if you institutionalize anything and create more research and make it and you know okay for an institution to buy the cap rates go down and the definition of what acceptable real estate is just keeps getting broader so and the second part and I think this applies to a lesser extent of student housing is that it became accepted the cap rates went down that doesn't make it intelligent I think there's a lot of losses to be seen in some of these sector - ok questions right there thank you what sectors so manufacturing I want to take that what's the outlook for manufacturing in the US and what sectors of the country might benefit from from that for manufacturing yeah so you know if you look at the big the big blue wall in the Midwest that that elected Trump they are the people who this is one of the few areas of the country where you could say if we put up protectionist barriers where don't you have job losses and I think that's that's potentially there but a little bit more in the non-union southeast so so that could happen otherwise you know job losses have been happening in China and manufacturing we've had them for 60 years so output is up but that doesn't mean it's going to translate into a lot of jobs I think the real industrial stories around housing you know housing production eats up a lot of light industrial space and that's very good for that market which feels like you bought an industrial building one area that's blooming right now in manufacturing is right around the Tesla plant in in East Bay area so all sorts of suppliers are leasing space doing assembly so that's that's an area where you know it's manufacturers driven that that sort of southern part of the East Bay anyone else you don't have to unless you have something I mean there's a little bit of uncertainty in that question around the NAFTA negotiations having having said that that that either means that under the current NAFTA structure the manufacturing activity continues to move into the u.s. slowly rather than move out but that's very highly automated manufacturing but that manufacture or it moves in a little bit faster but again very highly automated manufacturing activity it does that's not jobs yeah and it doesn't necessarily it doesn't lead into a lot of industrial demand it's important to say that that we have 1/2 million less manufacturing jobs than before the Great Recession but we're reducing more output those robots really work next question all right how do we repurpose that B&C mall or other things we've had a little bit of answer already anyone want to take a shot at that yeah I mean it could be you know bill already alluded to the industrial property being put on the see mall but it could be in a multi-family I it could be industrial I mean I think it's anyone's guess it's really gonna depend on the location of that retail property is you when if it was actually a good location should probably not you're not gonna put probably industrial property but it's largely an independent means it's a lot of hard work to make you know make it to medical office apartments other things it just depends on location locations really it but we have a couple of our audience who specialized in that it's a lot of hard work it's a basically adaptive reuse in a dramatic way so any more questions in the audience we have one in front of one back there first and then I can get back in the microphone that'd be great yes what are you define that a little bit better are we talking about suburban office it's more a note of high-rise it's just kind of off some freeways or a transit oriented node or more of a sprawling Business Park and maybe to talk a little bit about some of the tenants that would be in that are we talking large tenants that fill up most buildings or an entire campus or more of a small tenant local you know type of type of businesses and you wouldn't want to take a shot of that I could I could start bill brought up than we he doesn't know a lot of suburban office we also think that we don't own a lot of suburban office a lot of this is definitional there's a lot of office that is owned by institutional investors that is classified as suburban it's a very geographically specified definition based on zip codes and and so the disparity the difference between a well amenitized suburban building in a dense location with transit and and good access is completely different from the traditional isolated suburban office building and the there is an opportunity to invest in suburban office that the issue is is that a lot of the lower quality office buildings are what Bill mentioned are available at seven eight and twelve percent cap rates you don't actually know what you're capping when you buy that it's a little uncertain whereas the the higher quality trades much more in line with the way the traditional CVD office so that arbitrage is a little bit difficult to execute yeah you have to really put to put it figure out the amenity package in terms of gyms and common areas and a decent you know eating experience you know we've all seen that cafe and the in the base of suburban office buildings that you know after the third time you don't want to go there so I think that's that's hard I mean and you need that cap you need to put a lot of capital in but you know it's um you know if you do it right there tenants and and you know most of it as we said most Millennials live in the suburbs most company and most of employments in the suburbs it's not all coming to downtown Chicago it's like it's staying outlook you know in where where it's its owners and it's and it's in its current workers or have been for years over there and then two quick questions we've got about two two minutes so quick thank you Ken just two points one the young man asked about reimagining B&C malls it's the answer is idiosyncratic each one is different and as you mentioned can very time-consuming there was a question raised before about why is the is the volume of transactions off 19 percent you sort of answered it there's a lot of debt options so people come to the market with their property and don't get a price they like and they just refinances thank you all right one more last year's meeting ten years was the only session that I attended that even touched on politics particularly in advance of the election you seem to have intimated that you'd like to express yourself in that regard and given given your Rex Tillerson has said it all yeah well given your Berkeley perspective I for one at least would love to give an opportunity from Berkeley to speak okay I can't speak for Berkeley that's for sure I'm the type of person who went to the Romney meetings and stuff so but I think the problem is is that the pro-business agenda appealed to a lot of people and I think we have not seen any of it get through except for the deregulatory types of things I think we do have a need to have tax reform no question but with this basically the way it is now unlikely to get anything other than tax cuts which will increase the deficit so it's full employment I wouldn't do it I wouldn't do I would not have extreme fiscal stimulus and monetary stimulus when you're at full employment it just isn't right but it's very hard to communicate with the people in Washington now it's really not a group of people you can talk to so I'm quite worried that both on a foreign policy point of view and but it's not just here it's happening all over the globe this populist movement anti global ISM essentially so I think it's a big worry and if you're a student of history and read what happened in Europe and the 20s if we got a huge stock market crash and big turmoil could lead to some really bad things I don't know how the economy he's claiming credit for it but I'd say that isn't really just a little bit of his D regulatory policy but 95 percent was already in place so as long as we don't screw it up I think we're okay if we do have deep tax cuts I think that will give us more inflation and higher interest rates and in the end we'll create that recession scenario two or three years down the road the sugar high basically but I'll let you guys say anything else you'd like to say on policy we won't go into personality was just do policy well I completely agree with your take on a situation by the way I grew with each year points and I think you know as Melissa alluded to earlier it's the immigration policy that really scares me as a real estate person you know we as as Bobby Jindal said you know we got a really low fence and a high gate you can get in here illegally and mow my lawn but you can't stay here legally after you graduate and pay taxes and nobody's talking about fixing that situation that's what really fills buildings or grows the economy thank you all for being here [Music]

Channel: Urban Land Institute

Views: 4,931

Rating: 4.6363635 out of 5

Keywords: ULI, land use, real estate, cities

Id: LaMrEb2lbIE

Length: 73min 39sec (4419 seconds)

Published: Tue Nov 14 2017