THE ECONOMY AND REAL ESTATE

GARY BARAGONA
DIRECTOR, RESEARCH & ANALYSIS
JANUARY 2014
GLOBAL RESEARCH AND CONSULTING

TOPICS COVERED
U.S. Economy
Southern California Economy
Mega-Trend: Workplace Strategy
Mega-Trend: E-Commerce
U.S. Property Market Fundamentals
Los Angeles Market Fundamentals

GLOBAL RESEARCH AND CONSULTING

U.S. ECONOMY

GLOBAL RESEARCH AND CONSULTING

U.S. ECONOMY
Economic growth will strengthen in 2014

Jobs are everything

Industrial indicators are solid

Resurgent housing market

GLOBAL RESEARCH AND CONSULTING

U.S. ECONOMIC EXPANSION OUTLOOK

Annual % Change

FORECAST

Source: HIS Global Insight

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U.S. JOB GROWTH SLOW AND STEADY

U.S. Total Nonfarm Payroll, Annual Net Jobs (1000s)

FORECAST

Source: U.S. Bureau of Labor Statistics, Moodys Analytics

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RETURN TO PREVIOUS PEAK IN EARLY 2014

U.S. Total Nonfarm Payroll, (Millions of Jobs)

FORECAST

Source: U.S. Bureau of Labor Statistics, Moodys Analytics

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RECOVERY TRAILS PAST CYCLES

Monthly Job Growth Index (Business Cycle Peak=100)

Source: U.S. Bureau of Labor Statistics

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GROWTH RATE VARIES BY REGION

Monthly Job Growth Index (Dec 2007=100)

Source: U.S. Bureau of Labor Statistics

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TECH & ENERGY MARKETS LEADING

Office-Using Employment Outlook, CAGR 2013-2018

Source: U.S. Bureau of Labor Statistics (BLS): Current Employment Statistics (CES), Quarterly Census of Employment and Wages (QCEW); Moody's Analytics (ECCA) Estimates

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U.S. INDUSTRIAL PRODUCTION

Industrial production is just shy of pre-recession levels

Source: Federal Reserve

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U.S. IMPORTS & EXPORTS

Imports are stronger than they appear once oil is excluded

Source: U.S. Census Bureau

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HOUSING PRICES CONTINUE TO GROW

S&P/Case-Shiller Home Price Index

Source: S&P Case-Shiller Index

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RETAIL SALES
Housing Recovery Boosts Retail Sales

Source: U.S. Census Bureau

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SOUTHERN CALIFORNIA ECONOMY

GLOBAL RESEARCH AND CONSULTING

POSITIVE BUT LACKLUSTER JOB GROWTH

Southern California: Year-Over-Year Employment Growth

FORECAST

Source: CBRE Econometric Advisors, Economy.com

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GLOBAL RESEARCH AND CONSULTING

SOUTHERN CALIFORNIA ECONOMY

Total Employment Forecast (in Millions)

90+ MONTHS TO
REACH PREVIOUS PEAK
WE ARE ONLY
HALF WAY THERE

Source: CBRE Econometric Advisors, Economy.com

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GLOBAL RESEARCH AND CONSULTING

SOUTHERN CALIFORNIA ECONOMY

Hospitality & leisure, construction, education & health services, professional & business services &
technology will lead the way

Source: CBRE Econometric Advisors, Economy.com

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MEGA-TRENDS:
WORKPLACE STRATEGY & E-COMMERCE

GLOBAL RESEARCH AND CONSULTING

MEGA-TREND: WORKPLACE STRATEGY

Underutilized space and modern design slow occupancy growth

Source: CBRE Econometric Advisors, Moodys Analytics

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GLOBAL RESEARCH AND CONSULTING

MEGA-TREND: E-COMMERCE
E-commerce will drive demand for industrial space and continue to reshape the retail market

Source: CBRE Econometric Advisors, Moodys Analytics

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U.S. PROPERTY MARKET FUNDAMENTALS

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PROPERTY SECTOR TRAJECTORY

2013 Q4

Past Cyclic
High

Natural
Rate

Year Back to
"Natural Rate"

15.0

16.8 / 2010

13 to 15

2013

Industrial Availability Rate

11.5

14.5 / 2010

9 to 10

2015

Retail Availability Rate

12.0

13.2 / 2011

9 to 10

2016

5.3

7.4 / 2009

5 to 6

2010

Office

Multifamily

Vacancy Rate

Vacancy Rate

Source: CBRE Research, CBRE Econometric Advisors

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GLOBAL RESEARCH AND CONSULTING

PROPERTY SECTOR TRENDS

OFFICE

Urbanization & densification

Impact of workplace strategy
Investor interest in suburban, non-gateway markets
Tech markets leading the way

INDUSTRIAL

Supply chain efficiencies

Peak manufacturing productivity
Impact of e-commerce
More speculative construction but still in check

RETAIL

High-street retail still strong

E-commerce growing impact
Omni channel strategies
Shrinking retail footprints
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GLOBAL RESEARCH AND CONSULTING

U.S. OFFICE RENT CYCLE Q4 2013

Atlanta

Dallas (Suburban)

Orange County

San Diego

A
C
D
D
L
M
O
P
P
S

A
N
S
S
B

Seattle

Boston

D
H

L
N

Source: CBRE Research

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RENT GROWTH LED BY TECH MARKETS

5-Year Annualized Rent Growth (%), Largest 20 Office Markets

Source: CBRE Econometric Advisors

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OFFICE OUTLOOK
Completions, Net Absorption & Vacancy Rate

FORECAST

Source:

CBRE Research, CBRE Econometric Advisors

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GLOBAL RESEARCH AND CONSULTING

INDUSTRIAL OUTLOOK
Completions, Net Absorption & Availability Rate

FORECAST

Source:

CBRE Research, CBRE Econometric Advisors

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RETAIL OUTLOOK
Completions, Net Absorption & Availability Rate

FORECAST

Source:

CBRE Research, CBRE Econometric Advisors

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GLOBAL RESEARCH AND CONSULTING

REAL ESTATE INVESTMENT TRENDS

Increased global interest in U.S. markets
2013 saw the beginning of interest rate increases. In
2014, look for the end of cap rate compression and a
new era of NOI growth.
Expect improved economic performance to correspond
with interest rate increase
Expect spreads to between primary & secondary
markets to compress

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NATIONAL INVESTMENT SALES

Sales Volume ($ Billions)

Source: Real Capital Analytics

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GLOBAL RESEARCH AND CONSULTING

INTEREST RATE
U.S. Ten Year Treasury Bonds

FORECAST

Source: Federal Reserve

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A RANGE OF OPINIONS
Q2 Survey of economists places the 10-year treasury at 3.5% at the end of 2014

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CAP RATE FORECAST

Average CAP rates in all product types will remain flat in the near term

FORECAST

Source: CBRE Econometric Advisors, NCREIF

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LOS ANGELES MARKET FUNDAMENTALS

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LOS ANGELES OFFICE OUTLOOK

Vacancy Rate & Avg Asking Lease Rate

FORECAST

Source: CBRE Research, CBRE Econometric Advisors

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LOS ANGELES OFFICE

Market dynamics vary greatly on the submarket area

Source: CBRE Research

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GLOBAL RESEARCH AND CONSULTING

LOS ANGELES OFFICE

Market dynamics vary greatly on the submarket area

Source: CBRE Research

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GLOBAL RESEARCH AND CONSULTING

LOS ANGELES INDUSTRIAL OUTLOOK

Availability Rate & Avg Asking Lease Rate

FORECAST

Source: CBRE Research, CBRE Econometric Advisors

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GLOBAL RESEARCH AND CONSULTING

LOS ANGELES RETAIL OUTLOOK

Availability Rate & Avg Asking Lease Rate

FORECAST

Source: CBRE Research, CBRE Econometric Advisors

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GLOBAL RESEARCH AND CONSULTING

THE ECONOMY AND REAL ESTATE

GARY BARAGONA
DIRECTOR, RESEARCH & ANALYSIS
JANUARY 2014
GLOBAL RESEARCH AND CONSULTING