[User] The global economy faced extraordinary challenges in 2025. Tariffs rose to levels we haven’t seen in nearly a century. Immigration limits tightened labor markets. Geopolitical tensions flared in multiple regions. And policymakers everywhere seemed locked in a constant debate over inflation, interest rates, and fiscal sustainability. At one point, global equity markets lost more than $12 trillion in value in just a few weeks. Recession odds spiked to nearly 50%. And yet, through all of that, the global economy kept expanding. Once all the data is finalized, global GDP is expected to have grown by 3.2% in 2025, which is just a tick below last year’s pace. Inflation eased across most regions. It drifted a bit higher in the U.S., but only modestly so far. Labor markets cooled, but unemployment remains low across most economies. And with real incomes still rising, consumers held up better than expected. In short, the world economy absorbed a historic barrage of shocks last year and continued to push forward.

[Assistant] AI as a Growth Engine One of the biggest reasons for that resilience was the AI growth engine, which really took off in 2025. Across industries, generative AI and automation began driving measurable productivity gains, new investment, and innovation. That growth spilled directly into commercial real estate (CRE), especially data centers, which are now one of the fastest-growing and most capitalized property types globally. AI’s physical footprint and its need for power, cooling, and connectivity, is driving extraordinary demand for data centers and creating new requirements for both office and industrial space. Office: Leasing activity improved in 2025 as occupiers made more decisive workplace commitments, particularly in high-quality buildings. Across most markets, one theme stood out—strong demand for modern spaces, coupled with a limited supply. Industrial: Expectations were muted going into the year because of tariff concerns, but the sector held up, continuing to absorb space. With the supply wave largely behind us, fundamentals are set to improve going forward. Retail: Fundamentals held steady, with occupancy near record highs and new construction still limited. Alternatives: Demographic and other structural forces open increasing opportunities for alternative investments, particularly in specialty housing, data centers, and medical real estate uses.


[User] From Resilience to Optimism Looking ahead to 2026, the tone is shifting—from resilience to optimism. Policy uncertainty is easing. Central banks have started to lower rates. The cost of debt is coming down. Inflation has moderated in most economies. Capital is flowing aggressively again into the property sector.

[Assistant] Investors are rediscovering that commercial real estate remains a compelling source of yield and diversification.


[User] Labor Market • GDP growth outperformed expectations in 2025 and is on pace to register a respectable 1.9%.

[Assistant] In 2026, we expect similar growth of 1.7%.


[User] • The AI boom is now contributing to growth in a meaningful way via capital investments in data centers, computing equipment, and a surging stock market. We estimate that more than half of the GDP growth in 2025 is attributed to AI-related investments. GDP Growth • Inflation remains a thorny issue. While most measures were trending toward 2.0% prior to the impact of tariffs, they are now moving in the wrong direction. • Recent messaging from the Federal Reserve suggests that, despite inflation risks, policy will become more accommodative.

[Assistant] We expect the Fed to gradually bring its policy rate down to a “neutral” rate of 3.0% by H2 2026.


[User] • Upside risks cannot be discounted either. The AI boom is generating new outlets for investors and occupiers to capitalize on. Moreover, the potential for a real productivity boom could positively impact the macroeconomy and benefit most CRE asset types. Risks & CRE 2026 ECONOMIC OVERVIEW Inflation & Rates 5 A blue arrow in a circle AI-generated content may be incorrect.

[Assistant] • Immigration reduced sharply in 2025, leading to a 4.4% decline in the foreign- born labor force since its peak in March. This is likely the predominant headwind to employment growth, a challenge that is expected to continue over the next couple of years.


[User] • On the plus side, office-using employment has turned positive and will contribute to employment gains going forward. Average hourly earnings are also outpacing consumer inflation, allowing for modest gains in real income. 7 ECONOMY CPI, Y/Y % Fed Target , Tariffs are Inflationary, but for How Long? • The expected inflationary impact from tariffs outlined in our Midpoint 2025 report is beginning to play out. Overall, inflation is expected to remain uncomfortably elevated in the mid-3% range before subsiding in H2 2026. Tariffs Keep Inflation Elevated in 2026 A blue arrow in a circle AI-generated content may be incorrect.

[Assistant] • While downside risks remain, the outlook is clearer than it was in 2025. With better visibility, pent-up leasing decisions should begin to convert, underwriting confidence should improve, and with the supply wave largely behind us, the economic backdrop supports continued firming in the property sector’s fundamentals.


[User] 9 U.S. Economic Policy Tariffs Trade policy took center stage in 2025 and continues to be a headwind to economic growth. This is driven by both the taxation impacts of tariffs and the uncertainty surrounding the path forward, including ongoing Supreme Court deliberations on the legality of country-specific tariffs under the IEEPA. At present, the average effective tariff rate is about 10%—the highest since 1934— and is estimated to reduce GDP growth by 0.5 to 0.7 percentage point in 2026, all else equal. Fiscal Policy The One Big Beautiful Bill Act that was legislated by Congress and signed by the president in July will have modest net economic benefits over the next several years, raising the level of GDP by as much as 1.0% by 2028.

[Assistant] More immediately, the 43-day government shutdown which officially ended on November 12 is expected to shave 0.6 percentage point off GDP growth in Q4 2025, much of which will be recovered in Q1 as federal spending rebounds. Immigration Restrictive immigration policy is precluding stronger economic growth, via reductions in labor supply and the knock-on effects of slower job growth and reduced consumer spending. Over the next few years, we expect annual average net migration to hover in the range, well below the 2+ million in the last several years and below the 1 million per-year long-term average.


[User] Federal Reserve Policy shifts have made the Federal Reserve’s job of assessing progress toward its dual mandate of full employment and 2% inflation more challenging. Since first cutting rates in September 2024, the Fed has cumulatively lowered its policy rate by 150 basis points (bps) as of November 2025. While our baseline forecast expects the Fed to continue easing over the coming quarters, the risk of stickier inflation is growing louder and thus could delay a smooth rate cutting cycle in H1.

[Assistant] Crucially, the expiration of Chairman Powell’s term paves the way for the Trump administration to nominate a new chair who will likely be more amenable to lowering rates. Ultimately, we expect the policy rate to settle around 3.0% in 2026 and beyond.


[User] What to Watch Each of these sources of policy uncertainty will not magically go away, but we believe policy will become less disruptive in 2026 for several reasons: 1) Tariffs are causing a temporary price-level increase, after which inflation will normalize as supply chains adjust. 2) The USMCA agreement is due for renegotiation in 2026 which may encourage the administration to seek more friendly trade policies with our largest trading partners. 3) The OBBBA provides long-term clarity on tax policy and expands pro-growth incentives. 4) Fast-approaching midterm elections will incentivize more pro-business policy initiatives such as deregulation. 5) The economy and CRE have displayed remarkable resilience in the face of drastic policy shifts. Lots Of Scenarios Still In Play 15% Probability 50% Probability 25% Probability 10% Probability SCENARIO 1 Upside SCENARIO 2 Baseline SCENARIO 4 Stagflation SCENARIO 3 Near-Term Recession • Economy continues to grow at a healthy clip, supported in part by early-stage AI-related productivity gains, with GDP growing 2.0% in 2025 and 3.2% in 2026. • The FOMC lowers Fed funds rate through 2026, despite sticky inflation and above-trend economic growth. • Economy slows in early 2026 but avoids a recession, with stronger growth in H2; GDP softens slightly in 2026 and remains under 2.0% through 2027. • Job gains total 1.0 million in 2025 and growth is essentially flat in 2026. The unemployment rate peaks at 4.9%, still low by historical standards. • The U.S. economy falls into recession in 2026. Job losses total 1.2 million and unemployment peaks at 7.2%. • Inflation reaccelerates as the economy weakens. The Fed is initially more concerned about the weakening economy and does not respond to inflation until H2 2026 when it sharply raises Fed funds, causing the economy to fall into a deep recession in 2027. • Job losses are far greater than our baseline in 2026 with a loss of 0.9 million jobs.

[Assistant] In 2027, job losses total 7.0 million. • President Trump is expected to nominate a new Fed Chair before the new year and he will be looking for a candidate who supports lowering rates, potentially substantially. This carries inflation risk, hence our consideration of a “stagflation” downside scenario.


[User] • The 10-year Treasury yield has remained within a 4.0–4.3% range for the past three months, and our baseline expects it to stay toward the upper end of this range over the next two years, influenced by competing forces—upward pressures such as inflation and deficits and modest downward pressure from slower global growth and uncertainty. • Deficit spending, inflation expectations, and growth prospects bear close watching by CRE investors to assess where yields are headed and potentially capitalize on near- term fluctuations.

[Assistant] Pricing Reset Transaction cap rates have gradually adjusted to the higher-rate environment, paving the way for neutral-to-positive leverage conditions. Property price indices have stabilized and now inflected upward in the low-single-digits on a YOY percentage basis. REIT-implied cap rates have also stabilized, suggesting modestly positive forward-looking price movement. Capital Deployment The desire to recycle and deploy capital will increasingly convert into more transactions as there is growing conviction around entering in the early vintage years of the cycle. It is notable that institutional investors have returned to the market in 2025; sales volumes were up 17% YTD through October and single-asset sales among institutions were up 50%. Private fund managers increasingly report being under allocated to real estate in 2025—a positive sign for increased deployment.


[User] 16 Light Is Growing Brighter Now The light at the end of the tunnel for office leasing is growing brighter with each passing quarter. In Q3, half of U.S. markets posted overall positive net absorption, with Class A space experiencing two consecutive quarters of sustained demand growth. While 2025 started with just a handful of markets having turned the corner, demand lately is picking up across a broader swath regionally thanks to varied growth drivers. Large portions of the markets in New York, the Bay Area, and Los Angeles experienced robust positive absorption over the past year, as did key Sunbelt hubs in Nashville, Atlanta, Tampa, Dallas, and Austin. Turning the Page Overall vacancy rates will inflect in 2026 but a rapid return to pre-pandemic norms is not in the cards. Competitively obsolescent space is likely to sit vacant for years as some owners contemplate renovation or conversion and loan restructuring. But for the in-demand segments of the market, occupancy will begin to edge higher, barring major economic shocks, helping to improve income streams and reset capital values at the same time. Office jobs Non-office jobs Total nonfarm Office Shifts to Employment Driver Source: Office Jobs Perking Up After two years of moving sideways, office job growth is poised to increase in 2026. In the baseline forecast, office-using employment will grow by in accounting for essentially all nonfarm employment gains over that two-year period. Core segments of finance and legal services are driving YTD gains in office employment, particularly among larger firms. And despite alarm that automation could reduce the need for certain white-collar jobs, there is no compelling evidence this is causing layoffs en masse presently.

[Assistant] Strong leasing activity in the Bay Area and New York nods to the possibility that AI investment could even be a net positive driver for office leasing in the near term under certain conditions.


[User] Sentiment Matters Leasing and the capital markets do not operate in isolation, and improved sentiment on either side will reinforce the other. Both are moving in the right direction, albeit gradually. According to the Q3 2025 Cushman & Wakefield office brokerage survey, more market participants indicated tenant space requirements were ‘unchanged’ or ‘increased slightly’ than at any point in two years. Expectations for vacancy and rents three years out also support more conviction around an eventual move from ‘tenant friendly’ to ‘neutral’ market conditions. On the capital side, debt and equity markets are slowly reengaging in office. Transaction volumes improved 27% in Q3 2025 compared to 2024.

[Assistant] Lenders showed more willingness to make new office loans as fundamentals stabilize, highlighted by multiple $1 billion plus refinancings of trophy NYC office assets. The office market also approached bottom in terms of pricing as indicated by upward movements in public markets, bringing would-be buyers back to the table, albeit at far-discounted pricing. Directional improvement in the capital markets should help current owners and buyers add needed value to assets, supporting the budding leasing recovery in tandem.


[User] Supply (msf) Demand (msf) Vacancy, % (RHS) Cushman & Wakefield Baseline Forecast – Industrial Source: Upside Surprise Industrial demand surprised to the upside in Q3 2025 with its strongest quarter in over a year, totaling 45 msf and bringing the YTD totals in line with the same period 2024.

[Assistant] Leasing activity broke out of its earlier slump, which had been partly tied to trade-policy uncertainty that caused some tenants to delay decisions. As a result of stronger incoming data and the improved economic outlook, we have increased our demand projections for 2026 and 2027 by a combined 70 msf relative to the Midyear 2025 forecast.


[User] Development Ramping Down The development pipeline will peak in 2025 and the pipeline ahead suggests below-trend deliveries through 2028. From we forecast that 230 msf will be brought to market per year, which is half the average rate from . Build-to-suit deliveries are rising in market share, going from 17% in 2023 to 39% in 2025. The national vacancy rate is expected to move sideways in 2026 at 7.3% as demand matches new supply but will remain elevated relative to pandemic-era lows that were in the sub-4% range.

[Assistant] Rents Retrench, Regionally Slowing rent growth has been in the spotlight in 2025 but the story is highly nuanced regionally. Nationally, average rents continue to increase on average by 1-2% and that should continue for the next couple of years. Rents in the West and Northeast regions, which are currently down 3.0% and 3.7% YOY, respectively, will weigh on national averages while inland markets have the opposite effect. Notably, national asking rents remain 60% above their pre-pandemic levels, so the mark- to-market story for upcoming renewals will remain the more relevant comparison for leasing demand.


[User] E-commerce the Mainstay Although consumer spending is under pressure, e-commerce continues to capture a growing share of retail sales, which is a plus for warehouse demand. E-commerce as a share of retail sales (excluding gas, autos, and restaurants) is nearly 30% now and rising. According to the Q3 Cushman & Wakefield Industrial Forecast Survey, 80% of the markets we track expect e-commerce to be the number one driver of leasing demand over the next three years. Supply (# units) Demand (# units) Vacancy Rate (%, RHS) Cushman & Wakefield Baseline Forecast – Multifamily Source: , MULTIFAMILY A blue arrow in a circle AI-generated content may be incorrect. Renters by Necessity (and by Choice) Many factors influence housing choice, but the economic drivers currently favor renting versus homeownership virtually everywhere in the U.S. High mortgage rates, low for-sale inventory, and general affordability issues are buttressing multifamily demand, particularly amid high employment and real wage gains, which alleviates pressure to double-up with roommates or family members. Demand has softened from its 2024 peak but is on track to exceed the 10-year average by 30% in 2025. Pipeline Shrinking Fast Record construction activity has been the chief driver of higher vacancy and softer rent growth over the last couple of years. By the end of 2025, the market will have delivered 12% of prior inventory in a compressed three-year period. Supply is drying up, fast; multifamily starts are down two-thirds from peak and at the lowest level since 2012.

[Assistant] We expect a subdued delivery schedule for several more years.


[User] Occupancy > Rent Rent growth is softening as most apartment owners adopt defensive leasing strategies focused on preserving occupancy rather than growing rents. Much of that weakness is concentrated on new leases, while renewal rents remain comparatively resilient. With the supply pipeline easing, rent growth is forecast to accelerate toward 5.0% in 2027. Stabilized vacancy remains roughly 90 bps below its historic peak, suggesting the market has absorbed much of the recent supply influx. Record construction activity has been the chief driver of higher vacancy and softer rent growth over the last couple of years. Economy Doing ‘Good Enough’ Though many renters and would-be buyers have become discouraged by affordability challenges, economic conditions are not having a drastic impact on housing tenure. The number of young adults living alone outnumbers those living with roommates; the share living at home with parents has declined, too. Employment is high and inflation-adjusted incomes are rising—all of which translates into lower household size and the ability to trade up into newly built properties. Our proprietary data shows low rates of non-renewals due to household financial issues. Immigration a Growing Concern Immigration of foreign-born workers to the U.S. was the largest source of population growth in two-thirds of metro areas across all four regions of the country in 2024. Recent declines remove a key source of multifamily demand, particularly for coastal markets which typically do not benefit from domestic in-migration or natural population increases as much as Sunbelt markets. The Harvard Joint Center for Housing Studies projects renter households will be added per year over the coming decade compared to during the prior 25-year average. 25 Cushman & Wakefield Baseline Forecast – Retail Shopping Centers Source: , Supply (MSF) Demand (MSF) Vacancy Rate (%, RHS) Source: Green Street, , NCREIF, MSCI Real Capital Analytics, Cushman & Wakefield RETAIL A blue arrow in a circle AI-generated content may be incorrect.

[Assistant] Tenant Demand: More than Meets the Eye The retail market is in the crosshairs of tariff uncertainty, but leasing has carried on with little disruption. Yes, demand is slated to be negative in 2025 for the first time since 2020, but this is more about what happened prior to tariffs. Several big- box retailers with large footprints filed for bankruptcy in 2024 and quickly vacated thousands of stores, resulting in negative YTD absorption as the spaces are backfilled. However, the news has been decidedly positive in terms of time to lease and mark-to-market rents achieved for vacated space. Demand is expected to rebound next year, even as some firms face increased margin pressures. What’s Old Is New Again Malls have quietly been one of the better performing CRE asset classes over the past year from both a leasing and capital markets perspective. New leasing among the three largest mall owners is 20% above 2019 levels; refinancing has more than doubled the average; cumulative unleveraged returns over the past four quarters totaled 6.9%; and REIT-implied cap rates have narrowed relative to other CRE assets. This all signals a recalibration of investor sentiment, positioning high-quality retail centers as resilient, income-generating asset classes for the chapter ahead.


[User] Q1 Severely delinquent credit cards, % of total (LHS) Consumer confidence index, 100=1985 (RHS) Source: Conference Board, Federal Reserve Board of Governors, Moody’s Analytics The ‘K-shaped’ Economy The concept of a “K-shaped” economy has become a central narrative for consumer spending and the retail outlook.

[Assistant] The top end of the “K” represents wealthy households— they’ve seen real estate and financial asset values increase dramatically in recent years and generally are less impacted by economic uncertainty. For everyone else—the bottom spoke of the “K” —confidence is rattled, inflation is real, and value is king. This notion is supported by bellwethers such as earnings reports, foot traffic, and property level performance. The wealthy are increasingly powering consumer spending, which leaves the economy more exposed to a correction in financial markets. We don’t expect an equity bubble to pop but it’s a growing near-term risk for consumer spending and retail CRE.


[User] Retail tenants largely followed through on expansion plans for 2025 despite macro headwinds, but the brunt of tariff impacts may ding profit margins as tariffs pass through and spending becomes more fragmented. Industry forecasts project holiday retail sales to moderate from 2024, rising between 1.0-2.0% after accounting for inflation.

[Assistant] We expect a bifurcated performance by sector, with housing-related and tariff-sensitive categories experiencing weakness. This could undermine a strong demand rebound in 2026 as firms recalibrate supply chains and pricing.


[User] Built-To-Rent Demand remains strong due to unaffordable homeownership and demographic trends, while supply is easing—setting the stage for a healthy recovery in occupancy and rent growth.

[Assistant] • Focus on the long term: Prioritize real estate with durable income streams and secular growth themes, as value appreciation typically accrues over time.


[User] • Follow the people: Target markets with strong population growth, high concentrations of prime-age workforce, as well as desirable locations for retirees, as these dynamics drive CRE demand and long-term growth. • Capitalize on supply constraints: Trophy office vacancy is tight, and the construction pipeline is the lowest in over a decade; demand is likely to trickle to the next best thing, well-located Class A space. Cushman & Wakefield Baseline Outlook* (50% Probability) U.S. Economy Real GDP (annual avg, YOY %) Nonfarm Employment (year-end diff, ths.) Office-using Employment (year-end diff, ths.) Unemployment Rate (year-end, %) Retail & Food Services Sales (annual avg, YOY %) CPI Inflation (annual avg, YOY %) Federal Funds Rate (year-end, %) -Year Treasury Rate (year-end, %) BAA Corporate Bond (year-end, %) West Texas Intermediate (year-end, $/bbl) Effective Tariff Rate (year-end, %) U.S. Economy Office Sector Industrial Sector Retail Sector Multifamily Sector *The probability can be interpreted as the economy having a 50% chance of performing as well as or better than this scenario, and a 50% chance of performing worse. , , Federal Reserve, U.S. Census Bureau, Moody’s Investor Services, U.S. Energy Information Administration, , NCREIF, Office Sector New Supply (msf) Net Absorption (msf) Vacancy (%) Effective Rent Growth (%) Industrial Sector New Supply (msf) Net Absorption (msf) Vacancy (%) Effective Rent Growth (%) U.S. Economy Office Sector Industrial Sector Retail Sector Multifamily Sector *The probability can be interpreted as the economy having a 50% chance of performing as well as or better than this scenario, and a 50% chance of performing worse. , , Federal Reserve, U.S. Census Bureau, Moody’s Investor Services, U.S. Energy Information Administration, , NCREIF, Cushman & Wakefield Baseline Outlook* (50% Probability) Retail Sector New Supply (msf) Net Absorption (msf) Vacancy (%) Effective Rent Growth (%) Multifamily Sector New Supply (ths. units) Net Absorption (ths. units) Vacancy (%) Effective Rent Growth (%) U.S. Economy Office Sector Industrial Sector Retail Sector Multifamily Sector *The probability can be interpreted as the economy having a 50% chance of performing as well as or better than this scenario, and a 50% chance of performing worse. , , Federal Reserve, U.S. Census Bureau, Moody’s Investor Services, U.S. Energy Information Administration, , NCREIF, Cushman & Wakefield Baseline Outlook* (50% Probability) *This scenario is designed to incorporate the central tendency of a range of baseline forecasts produced by various institutions. views this scenario, often dubbed as a soft landing, as an “upside scenario” relative to our baseline scenario. The probability can be interpreted as the economy having a 15% chance of performing as well as or better than this scenario, and an 85% chance of performing worse. , , Federal Reserve, U.S. Census Bureau, Moody’s Investor Services, U.S. Energy Information Administration, , NCREIF, Upside Scenario* (15% Probability) U.S. Economy Real GDP (annual avg, YOY %) Nonfarm Employment (year-end diff, ths.) Office-using Employment (year-end diff, ths.) Unemployment Rate (year-end, %) Retail & Food Services Sales (annual avg, YOY %) CPI Inflation (annual avg, YOY %) Federal Funds Rate (year-end, %) -Year Treasury Rate (year-end, %) BAA Corporate Bond (year-end, %) West Texas Intermediate (year-end, $/bbl) Effective Tariff Rate (year-end, %) U.S. Economy Office Sector Industrial Sector Retail Sector Multifamily Sector Upside Scenario* (15% Probability) Office Sector New Supply (msf) Net Absorption (msf) Vacancy (%) Effective Rent Growth (%) Industrial Sector New Supply (msf) Net Absorption (msf) Vacancy (%) Effective Rent Growth (%) U.S. Economy Office Sector Industrial Sector Retail Sector Multifamily Sector *This scenario is designed to incorporate the central tendency of a range of baseline forecasts produced by various institutions. views this scenario, often dubbed as a soft landing, as an “upside scenario” relative to our baseline scenario. The probability can be interpreted as the economy having a 15% chance of performing as well as or better than this scenario, and an 85% chance of performing worse. , , Federal Reserve, U.S. Census Bureau, Moody’s Investor Services, U.S. Energy Information Administration, , NCREIF, Retail Sector New Supply (msf) Net Absorption (msf) Vacancy (%) Effective Rent Growth (%) Multifamily Sector New Supply (ths. units) Net Absorption (ths. units) Vacancy (%) Effective Rent Growth (%) U.S. Economy Office Sector Industrial Sector Retail Sector Multifamily Sector *This scenario is designed to incorporate the central tendency of a range of baseline forecasts produced by various institutions. views this scenario, often dubbed as a soft landing, as an “upside scenario” relative to our baseline scenario. The probability can be interpreted as the economy having a 15% chance of performing as well as or better than this scenario, and an 85% chance of performing worse. , , Federal Reserve, U.S. Census Bureau, Moody’s Investor Services, U.S. Energy Information Administration, , NCREIF, Upside Scenario* (15% Probability) *This scenario represents a tail-end downside scenario wherein the economy weakens substantially more than in our baseline. views this scenario as a “downside scenario” relative to our baseline scenario. The probability can be interpreted as the economy having a 75% chance of performing as well as or better than this scenario, and a 25% chance of performing worse. , , Federal Reserve, U.S. Census Bureau, Moody’s Investor Services, U.S. Energy Information Administration, , NCREIF, Downside Scenario* (25% Probability) U.S. Economy Real GDP (annual avg, YOY %) Nonfarm Employment (year-end diff, ths.) Office-using Employment (year-end diff, ths.) Unemployment Rate (year-end, %) Retail & Food Services Sales (annual avg, YOY %) CPI Inflation (annual avg, YOY %) Federal Funds Rate (year-end, %) -Year Treasury Rate (year-end, %) BAA Corporate Bond (year-end, %) West Texas Intermediate (year-end, $/bbl) Effective Tariff Rate (year-end, %) U.S. Economy Office Sector Industrial Sector Retail Sector Multifamily Sector Downside Scenario* (25% Probability) Office Sector New Supply (msf) Net Absorption (msf) Vacancy (%) Effective Rent Growth (%) Industrial Sector New Supply (msf) Net Absorption (msf) Vacancy (%) Effective Rent Growth (%) U.S. Economy Office Sector Industrial Sector Retail Sector Multifamily Sector *This scenario represents a tail-end downside scenario wherein the economy weakens substantially more than in our baseline. views this scenario as a “downside scenario” relative to our baseline scenario. The probability can be interpreted as the economy having a 75% chance of performing as well as or better than this scenario, and a 25% chance of performing worse. , , Federal Reserve, U.S. Census Bureau, Moody’s Investor Services, U.S. Energy Information Administration, , NCREIF, Downside Scenario* (25% Probability) Retail Sector New Supply (msf) Net Absorption (msf) Vacancy (%) Effective Rent Growth (%) Multifamily Sector New Supply (ths. units) Net Absorption (ths. units) Vacancy (%) Effective Rent Growth (%) U.S. Economy Office Sector Industrial Sector Retail Sector Multifamily Sector *This scenario represents a tail-end downside scenario wherein the economy weakens substantially more than in our baseline. views this scenario as a “downside scenario” relative to our baseline scenario. The probability can be interpreted as the economy having a 75% chance of performing as well as or better than this scenario, and a 25% chance of performing worse. , , Federal Reserve, U.S. Census Bureau, Moody’s Investor Services, U.S. Energy Information Administration, , NCREIF, Stagflation Scenario* (10% Probability) U.S. Economy Real GDP (annual avg, YOY %) Nonfarm Employment (year-end diff, ths.) Office-using Employment (year-end diff, ths.) Unemployment Rate (year-end, %) Retail & Food Services Sales (annual avg, YOY %) CPI Inflation (annual avg, YOY %) Federal Funds Rate (year-end, %) -Year Treasury Rate (year-end, %) BAA Corporate Bond (year-end, %) West Texas Intermediate (year-end, $/bbl) Effective Tariff Rate (year-end, %) U.S. Economy Office Sector Industrial Sector Retail Sector Multifamily Sector *This scenario represents an extreme tail-end downside scenario wherein the economy weakens substantially more than in our baseline. views this scenario as a “downside scenario” relative to our baseline scenario. The probability can be interpreted as the economy having a 90% chance of performing as well as or better than this scenario, and a 10% chance of performing worse. , , Federal Reserve, U.S. Census Bureau, Moody’s Investor Services, U.S. Energy Information Administration, , NCREIF, Stagflation Scenario* (10% Probability) Office Sector New Supply (msf) Net Absorption (msf) Vacancy (%) Effective Rent Growth (%) Industrial Sector New Supply (msf) Net Absorption (msf) Vacancy (%) Effective Rent Growth (%) U.S. Economy Office Sector Industrial Sector Retail Sector Multifamily Sector *This scenario represents an extreme tail-end downside scenario wherein the economy weakens substantially more than in our baseline. views this scenario as a “downside scenario” relative to our baseline scenario. The probability can be interpreted as the economy having a 90% chance of performing as well as or better than this scenario, and a 10% chance of performing worse. , , Federal Reserve, U.S. Census Bureau, Moody’s Investor Services, U.S. Energy Information Administration, , NCREIF, Stagflation Scenario* (10% Probability) Retail Sector New Supply (msf) Net Absorption (msf) Vacancy (%) Effective Rent Growth (%) Multifamily Sector New Supply (ths. units) Net Absorption (ths. units) Vacancy (%) Effective Rent Growth (%) U.S. Economy Office Sector Industrial Sector Retail Sector Multifamily Sector *This scenario represents an extreme tail-end downside scenario wherein the economy weakens substantially more than in our baseline. views this scenario as a “downside scenario” relative to our baseline scenario. The probability can be interpreted as the economy having a 90% chance of performing as well as or better than this scenario, and a 10% chance of performing worse. , , Federal Reserve, U.S. Census Bureau, Moody’s Investor Services, U.S. Energy Information Administration, , NCREIF,

[Assistant] ABOUT CUSHMAN & WAKEFIELD Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in nearly 400 offices and 60 countries. In 2024, the firm reported revenue of $9.4 billion across its core service lines of Services, Leasing, Capital markets, and Valuation and other. Built around the belief that Better never settles, the firm receives numerous industry and business accolades for its award- winning culture. For additional information, visit www.cushmanwakefield.com.


[User] The Future of CRE in 2025 U.S. Research Report A year ago, economists debated the chances of a mild recession in 2024 and speculated on when the Fed would begin cutting rates — many anticipated it would happen early in the year. However, the U.S. economy was notably resilient throughout 2024. Robust consumer spending, unemployment at around 4%, and gradually decreasing inflation, toward the Fed’s 2% target, exceeded forecasts. Annual data revisions also revealed stronger-than-expected GDP growth and a higher-than-anticipated savings rate. This economic strength led the Federal Reserve to delay its first rate cut until September, followed by a modest 25-basis- point cut in November. Economic forecasts point to continued growth, supported by expansionary fiscal policies.

[Assistant] Increased government spending, especially in the defense sector, is expected to boost GDP. The extension of the 2017 tax cuts for individuals and businesses is also projected to play a pivotal role in sustaining this growth, helping to offset potential challenges from restrictive immigration policies and higher tariffs. Although these measures may strain the labor supply and raise costs for certain industries, the expected boost from tax cuts should help sustain economic momentum and support consumer and business confidence in the near term. U.S. Economy 2 | 2025 Commercial Real Estate Outlook


[User] in 2025 Inflation to Bottom in 2025: Because the recent slowdown in the core PCE deflator indicates a loss of momentum, inflation may not fully return to the Fed’s 2% target in 2025. Moreover, economists caution that President-elect Trump’s planned immigration restrictions and broad tariff measures could potentially drive prices and inflation higher through 2026 and 2027, complicating the Fed’s task of inflation control.

[Assistant] Consumers Keep Spending: Robust household balance sheets, easing inflation, and rising wage growth are expected to bolster real disposable incomes. This is likely to support strong consumer spending, forecast to average more than 3% growth in 2025, sustaining economic activity.


[User] Consumers have maintained spending habits despite recent economic headwinds, fueled by a combination of savings from prior fiscal stimulus measures, ongoing improvements in job market conditions, and a wealth effect from rising 401k and home values.

[Assistant] Sectors like retail, travel, and hospitality are expected to benefit as consumers continue to prioritize both essential and experiential spending.


[User] Labor Force to Tighten: With the unemployment rate steady at just over 4% and an aging Baby Boomer workforce edging into retirement, president-elect Trump’s proposed immigration curbs could further strain an already tight labor market. Labor-intensive industries like construction and hospitality rely heavily on immigrant workers, and a shrinking labor supply could heighten worker competition, increase wages, and fuel inflation growth. These dynamics may challenge business operations by raising production costs and delaying new projects, which could potentially slow economic growth. Possible higher consumer prices could complicate policymakers’ efforts to balance economic stability and inflation control.

[Assistant] Overall, 2025 is expected to show continued economic resilience fueled by consumer spending and easing inflation. However, policy-driven headwinds, particularly from immigration and tariffs, could drive up inflation and tighten labor market conditions in the following years. The potential return of bond vigilantes may also constrain large-scale fiscal policy moves, underscoring policymakers’ need for careful navigation. The real estate sector’s significant headwinds in the first two-thirds of the year stemmed from delayed interest-rate cuts and election-related uncertainty, along with persistent inflation and stricter lending standards. However, after two interest-rate cuts, less political turbulence than expected, and notably more activity in multiple property types in recent months, the outlook for 2025 appears far more optimistic than it did a year ago.


[User] According to Placer.ai, office visits are still 34% below pre-pandemic levels. However, return-to- office mandates from companies like Amazon and Goldman Sachs have gradually boosted occupancy rates. While net absorption turned positive for the first time in two years during the third quarter—albeit modestly—the office sector hasn’t firmly stabilized yet. A surge in development has driven up the national industrial vacancy rate by more than 250 basis points since 2023. Nevertheless, supply and demand are expected to realign before the second half of 2025.

[Assistant] Higher interest rates, rising insurance costs, tighter lending standards, and a constrained labor market are expected to continue in 2025. But improved economic clarity is fueling optimism that the real estate sector can build on this year’s momentum and move forward confidently. U.S. CRE Market 4 | 2025 Commercial Real Estate Outlook in 2025 Fed Watch: Few industries are as sensitive to interest-rate fluctuations as real estate. For short-term loans tied to the Secured Overnight Financing Rate (SOFR), future rate cuts will align with these benchmarks and move in tandem. However, for longer-term loans — often linked to the 10-year Treasury yield —the industry will watch each Federal Reserve meeting intently, analyzing every hint of forward guidance and hoping for insights that might signal a compression in the long end of the yield curve. Alternative Capital Continues to Step Up: In recent years, traditional lenders have employed “extend and pretend” loan strategies to manage portfolios. But rising interest rates, stricter regulatory oversight, and $1.8 trillion in commercial real estate debt set to mature by 2026 will compel many to clean up their balance sheets. Private and alternative capital sources are poised to step in to bridge the gap for borrowers seeking to refinance at higher rates.


[User] Insurance Challenges Persist: Commercial property insurance costs are projected to rise another 80% by 2030, according to a recent Deloitte study, a significant challenge for property owners. Insurers are becoming increasingly selective, often imposing stringent requirements, such as banning high-risk activities like using gas grills on balconies, to mitigate their exposure. Landlords must rethink their insurance, shifting to focusing on risk management, optimizing coverage, and exploring innovations to control expenses.

[Assistant] Acceleration in Tech-Focused Spending: As businesses gain greater economic clarity and confidence in their short and long-term outlooks, many are expected to prioritize technology upgrades over the next few years. Key advancements such as AI-enabled tools, smart building technologies, enhanced data security, sustainability and energy management systems, robotics and automation, and high- speed connectivity will be at the forefront. Investing in these technologies will give companies a competitive edge, optimize workforces, boost operational efficiency, and ultimately drive profitability. in 2025 Prices Have Bottomed: The Fed has begun easing rates; however, at the time of publication, the 10-year Treasury hasn’t responded in kind with SOFR. Regardless, volume has shown clear signs of recovery, and many assets trading today are well below replacement costs. With improving or stabilizing fundamentals across asset classes, pricing is expected to rebound from here. Distress Emerges: While distress is making up a larger share of overall investment activity, the increase has been relatively mild. Office is the exception, where nearly 10% of Q3 sales were distress-driven. More deals will come to market in 2025, topping the totals seen so far in this cycle. Pricing: Conflicting data sources paint different pictures of where pricing stands today. Bid-ask spreads have narrowed, bid sheets are deeper than they have been, and institutional investors are once again active. Relative to 2024, pricing will increase in 2025 across major indices, with industrial leading the charge. Reduction in Inventory: As the market bifurcates further between haves and have-nots, more property owners will consider redevelopment the best option for underperforming assets. For many, converting into alternative property types could better align with location and demand. These buildings, often more than 60 years old and with high vacancy rates, are poised for removal from the national inventory — a shift that could positively impact market fundamentals. While many conversions are already underway or completed, this trend is expected to accelerate as tenant demand increasingly targets top-tier properties. More than 37 million SF of tracked office space is anticipated for redevelopment, 0.6% of the nation’s inventory. Limited New Construction: New construction starts will be limited to build-to-suits, as tenants show little interest in waiting two years for new space. Current headwinds including tighter lending standards with lower loan proceeds, historically high construction costs, and higher interest rates are likely to persist into 2025. Properties with near-term occupancy are expected to be highly appealing in this market. A broader resurgence in new construction is anticipated once vacancy rates in top-tier properties approach single digits. AI and the Workforce: Its full impact on the workplace remains to be seen. AI has so far been used to augment work, automate tasks, speed up data analysis, and generally reduce other mundane responsibilities. While large- scale advancements driving more transformative change haven’t materialized, leaving the broader workforce largely unaffected, rapidly advancing innovation is expected to give AI a larger role in the office workplace in the next few years. This shift aligns well with the retirement of the aging Baby Boomer generation and a shortage of younger workers to fill the void.


[User] Vacancy: The office vacancy rate hit a record high of 17.7% in 2024 and is projected to rise another 100 basis points, to near 19% by the end of 2025. However, the pace of vacancy growth is expected to slow by 2026 as certain markets begin to recover and the pipeline of new construction diminishes.

[Assistant] Lease Rates: While asking rents have risen steadily post-COVID, their rate of growth is expected to remain below 1% with isolated new development. Limited tenant demand for older buildings with fewer amenities is forcing owners to begin dropping rates to draw interest.


[User] Demand: Net absorption is anticipated to stay flat over the near term as the nation’s uneven recovery unfolds.

[Assistant] Demand will likely stagnate in the first half of the year as companies cautiously evaluate economic conditions and federal policy shifts under the new administration. Construction: New construction starts will remain on hold, hindered by elevated labor and material costs and subdued demand. Development is expected to be quiet through 2025, with project announcements for new starts in 2026.


[User] in 2025 Smaller Warehouses, Bigger Opportunities: Warehouse developers will position themselves for the next development cycle, with a growing number of construction starts expected by late 2025 in markets where supply and demand balance has returned. Although elevated construction costs and uncertainty around regulatory, fiscal, and trade policies could delay some projects, others will move forward, particularly for well-located buildings with smaller footprints.

[Assistant] Supply Chain Agility: While supply chain challenges have eased since the pandemic’s peak, pressures persist, and risks, disruptions, delays, and high costs will continue. In 2025, last-mile delivery solutions will be crucial to boosting agility by ensuring more reliable deliveries. More companies will adopt route optimization strategies and crowdsourced delivery networks to improve the last mile and adapt to unexpected delays, making the supply chain more resilient and flexible.


[User] Nearshoring & Reshoring to Continue: In the wake of the pandemic, U.S.-China trade tensions, and high inflation, supply chains have been reorganized, leading to a surge in nearshoring to Mexico and reshoring of advanced manufacturing to the United States. Expected to continue in 2025, these changes will help reduce financial and geopolitical risks. U.S. National Industrial Forecast Vacancy: Industrial vacancy in the U.S. and most markets is expected to peak by mid- 2025 as new supply and tenant demand return to equilibrium, after a period of record construction completions driven by an undersupply of modern industrial space since 2020. In markets where new supply has pushed vacancy rates into the double digits, it will take longer for vacancy to return to historical averages.

[Assistant] Lease Rates: After peaking at 20% growth in 2023, industrial rents grew by 9% year- over-year by the third quarter of 2024. While rent growth is expected to continue in 2025, it will slow to more typical levels of 3% to 6%. In certain coastal markets where rents climbed more quickly in recent years, lease rates declined in 2024, and that is expected to persist, but at a slower rate, into 2025.


[User] Demand: After nine consecutive quarters from late 2020 to 2022 when net absorption exceeded 100 million SF per quarter, demand has slowed, averaging 38 million SF per quarter in 2024. A recent increase in leasing activity and lease proposals is expected to boost net absorption in 2025, but it is unlikely to return to the levels of 2021 and 2022, when demand was exceptional.

[Assistant] Construction: After peaking at 711 million SF during the fourth quarter of 2022, total space under construction has dropped by 53%, to 331 million SF. It is expected to fall below 300 million SF by early 2025, in line with pre-pandemic development.


[User] “Balance is expected to return to the U.S. industrial market in 2025, with vacancy rates peaking as new supply and tenant demand reach equilibrium and rent growth stabilizes. While some markets are already ahead of the curve, others will follow suit in the coming year as the market gears up for its next growth cycle.” Stephanie Rodriguez National Director, Industrial Services | U.S. & Executive Managing Director | Florida Colliers U.S. Research Report | 11 in 2025 Space Crunch: Elevated construction costs, now 30%–40% above pre-pandemic levels, are limiting new retail developments. In 2025, less than 20 million square feet of retail space will be delivered, well below historical averages. Despite strong demand, these cost pressures challenge developers to justify new investments, and instead push retailers to optimize and innovate within existing spaces.

[Assistant] Adaptive Solutions: Most consumers are expected to maintain or reduce retail spending compared to the previous year, by a projected 10 basis points by the end of 2025. In response, retailers are investing in automation to meet customer demand more efficiently and adopting omnichannel solutions to lower service costs. As they also leverage AI and machine learning to create adaptable supply chains that can anticipate disruptions, consumers will be able to shop confidently yet cautiously within their budgets.


[User] Prioritization of Value: Consumers are becoming increasingly selective, driven by financial concerns continuing into 2025. Forty-seven percent feel pessimistic about finances, while record-high credit card debt and soaring interest rates are driving more deliberate spending.

[Assistant] With 60% of consumers spending more on groceries due to inflation, discretionary spending is expected to decline. To adapt, retailers should highlight savings opportunities and create bundled offerings for cost-conscious shoppers.


[User] Vacancy: Vacancy rates are forecast to remain steady throughout 2025, demonstrating the market’s resilience. Less new retail construction is balancing supply with consistent demand. However, in specific segments, particularly freestanding retail locations, vacancy rates may rise as thousands of pharmacies and discount retailers close, partially offsetting the lower rates in other retail subtypes.

[Assistant] Lease Rates: Market asking rents are projected to rise by approximately 2% in 2025, continuing the momentum from 2024’s record-high rents. That reflects the sustained strength of retail real estate, as landlords capitalize on steady demand and limited new construction to maintain rental growth even amid broader economic uncertainties.


[User] Demand: Demand for retail space is expected to remain strong because of the ongoing need for strategic physical locations. Net absorption may decline slightly but is still likely to stay positive for both malls and shopping centers. This dip reflects the reduced number of new retail completions and a potential slowdown in leasing due to market stabilization.

[Assistant] Construction: New retail construction is expected to drop sharply, by 45%, with significantly fewer new space deliveries in 2025. Limited new supply will play a critical role in maintaining stable vacancy rates and sustaining strong demand for existing space. However, the shrinking pipeline also reflects the higher construction costs and economic uncertainties. NOI Erosion: Operational expenses have surged for multifamily properties, and insurance is just one part of the equation. Labor, materials, and utilities are all on the rise. Given the wave of development and decline in occupancy, particularly in Sunbelt markets, NOI has been under pressure. Stabilizing fundamentals will begin to turn the tide in 2025.


[User] EXECUTIVE SUMMARY EXECUTIVE SUMMARY 1 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY HOUSING RECOVERY SCORECARD By many measures, the US housing market has recovered sub- stantially from the crash. According to CoreLogic estimates, nominal home prices were back within 6 percent of their previ- ous peak in early 2016, although still down nearly 20 percent in real terms. The uptick in nominal prices helped to reduce the number of homeowners underwater on their mortgages from 12.1 million at the end of 2011 to 4.3 million at the end of 2015. Delinquency rates also receded, with the share of loans entering foreclosure down sharply as well. Now in its seventh year, the US economic recovery shows signs of flagging in the face of a strong dollar, a weakening global economy, and low energy prices. But as household growth continues to gain momentum, the housing sector should be an engine of growth. Factoring in the need to replace older units and meet demand for vacation homes and other uses, housing construction should average at least 1.6 million units a year over the next decade. This level of activity would provide an important spur to the economy. Indeed, residential fixed invest- ment (including homeowner improvements) has accounted for just 2.8 percent of annual GDP so far this decade, significantly less than the 4.3 percent share averaged in the 1980s and 1990s, leaving plenty of room for growth. With household growth finally picking up, housing should help boost the economy. Although homeownership rates are still falling, the bottom may be in sight as the lingering effects of the housing crash continue to dissipate. Meanwhile, rental demand is driving the housing recovery, and tight markets have added to already pressing affordability challenges. Local governments are working to develop new revenue sources to expand the affordable housing supply, but without greater federal assistance, these efforts will fall far short of need. Although completed forfeitures have slowed considerably, they remain elevated at or about twice the annual average before the downturn. In addition, Mortgage Bankers Association (MBA) data indicate that the share of loans that are seriously delinquent (90 or more days past due or in foreclosure) has also fallen sharply, but is still nearly double the average in the first half of the 2000s. Given the current rate of recovery, foreclo- sures are likely to keep downward pressure on homeownership rates for the next two years.

[Assistant] In short, the near-term direction of the US homeownership rate will depend more on whether households can finance their pur- chases than whether they have the desire to own. Over the next few years, homeownership will continue to face the headwinds created by a backlog of homes in foreclosure, tight credit, weak income growth, and impaired credit histories. But as these pres- sures ease, there is every reason to expect homeownership rates to show some increase.


[User] RENTAL MARKET STRENGTH The rental market continues to drive the housing recovery, with over 36 percent of US households opting to rent in 2015—the largest share since the late 1960s. Indeed, the number of renters increased by 9 million over the past decade, the largest 10-year gain on record. Rental demand has risen across all age groups, income levels, and household types, with large increases among older renters and families with children. Notes: Rents are from the CPI rent index for primary residence. Changes in vacancy rates are based on a four-quarter trailing average. Source: JCHS tabulations of US Bureau of Labor Statistics, Consumer Price Indexes and Census Bureau, Housing Vacancy Surveys. THE STATE OF THE NATION’S HOUSING 2016 4 Although conversion of formerly owner-occupied single- family homes to rentals met much of the initial surge in demand, construction of multifamily units is now taking on a growing share. But even with these additions to sup- ply, rental vacancy rates have fallen steadily since 2010, dropping to just 7.1 percent by the end of 2015. When adjusted for inflation, it has been three decades since either of these measures registered such tightness in the rental market. A growing supply of new housing in the pipeline may help ease these conditions, although most new units are intended for the upper end of the market. The median asking rent on new apartments was $1,381 per month in 2015, well out of reach for the typical renter earning $35,000 a year. High rents reflect several market conditions, including a limited supply of land zoned for multifamily use and a complex approval process that adds to development costs. Perhaps most important, however, is growing demand from higher-income households. COST-BURDENED RENTERS AT HISTORIC HIGHS The divergence between the rental and owner-occupied mar- kets is evident in the number of cost-burdened households in each segment. On the owner side, the number of households facing cost burdens (paying more than 30 percent of income for housing) has fallen steadily as high foreclosure rates have pushed out many financially strained owners, low interest rates have allowed remaining owners to reduce their housing costs, and fewer young households have moved into homeownership. As of 2014, the number of cost-burdened owners stood at 18.5 million, down 4.4 million since 2008. The decline has occurred across all age groups, but especially among younger homeowners. Homeowners age 75 and over, however, are among the most cost-burdened groups, with their share at 29 percent compared with 24 percent for households under age 45. With the aging baby boomers swelling the ranks of older homeowners and larger shares of households carrying mortgage debt into retirement, the problem of housing cost burdens among the elderly is likely to grow. On the renter side, the number of cost-burdened households rose by 3.6 million from 2008 to 2014, to 21.3 million. Even more troubling, the number with severe burdens (paying more than 50 percent of income for housing) jumped by 2.1 million to a record 11.4 million. The severely burdened share among the nation’s 9.6 million lowest-income renters (earning less than $15,000) is particularly high at 72 percent. While nearly universal among lowest-income households, cost burdens are rapidly spreading among moderate-income households as well, espe- cially in higher-cost coastal markets.

[Assistant] The lack of a strong federal response to the affordability crisis has put new pressure on state and local governments to act. A number of cities have now developed plans to expand afford- able housing options for a broad spectrum of renters, from those facing homelessness up to middle-income households. In addition to federal funds, these plans draw on a range of resources that include linkage fees on new commercial devel- opment, tax-increment financing, taxes on real estate transac- tions, and the use of publicly owned land.


[User] Housing cost burdens also expose renters to the risk of eviction, with all its damaging impacts on household finances, employ- ment prospects, and school performance. Meanwhile, about renters had been threatened with eviction in the previous three months, with nearly eight out of ten of these threats associated with a failure to pay rent or other lease violations. But efforts to broaden the availability of affordable housing in better communities must be viewed within the context of growing segregation by income in the private housing market. According to the Lincoln Institute of Land Policy, more than 500 local jurisdictions have implemented inclusionary housing poli- cies, but the scale and intensity of these programs vary widely and have yet to reach the scale of federal programs. THE OUTLOOK While the rental market continues to expand at a robust pace, the owner-occupied market is still in the process of recovery. Home prices have rebounded sharply in several markets, but they also remain depressed in other areas, leaving millions of owners still underwater on their mortgages. Foreclosures have fallen steadily, but the share of owners seriously delinquent on their loans remains roughly twice what it was before the down- turn. Household credit and balance sheets will take more time to fully heal. Growth in homeowner demand is therefore likely to remain moderate over the next few years as these headwinds finally abate.

[Assistant] But with household growth projected to average over 1.3 million annually over the coming decade, housing construction should continue to climb and help keep the overall economy on solid footing. In addition, the homeownership rate should at least stabilize in the next few years as foreclosures ebb, mortgage credit conditions improve, and household incomes rise.


[User] HOUSING MARKETS 7 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY After a mixed year in 2014, the national housing recovery gained traction in 2015. Residential construction continued to climb as single-family starts revived. On the multifamily side, all key construction measures rose by double digits. Growth in multifamily starts topped 10 percent for the fifth consecutive year in 2015, reaching a 27-year high of units. With single-family construction still recovering, 2015 was the fourth consecutive year that multifamily units accounted for more than 30 percent of housing starts, compared with 20 percent on average between 1990 and 2010. Signaling further expansion, multifamily permits rose 18.2 percent last year, to units. THE DEVELOPMENT LANDSCAPE The gradual recovery in single-family construction largely reflects weak demand in the face of sluggish income growth and tight mortgage credit. But constraints on land, labor, and lend- ing may also play a role. Metrostudy data show that the supply of construction-ready land (vacant developed lots) in 50 metro areas shrank by 30 percent from 2008 to 2013, before settling just above levels posted in the early 2000s. Labor shortages could also be a damper on construction activity. More than 2 million workers left the industry between 2007 and 2013, reducing the construction workforce to 80 percent of its 2007 peak. According to a Census Bureau analysis, only 40 percent of those who lost their jobs between 2006 and 2009 had returned to their previous positions or to other jobs in the industry. Of the remaining displaced workers, more than half found work outside construction and the rest did not return to the formal labor force. Dollar values are adjusted for inﬂation by the CPI-U for All Items. Sources: US Census Bureau, New Residential Construction and New Residential Sales data; National Association of Realtors®, Existing Home Sales; Bureau of Economic Analysis, National Income and Product Accounts. Meanwhile, development financing is recovering from a sharp drop-off during the recession. According to NAHB, residential construction loan volumes were up 4.5 percent in the fourth quarter of 2015, marking 11 consecutive quarters of increases. While growing nearly 19 percent for the year as a whole, the residential construction loan stock remained 70 percent below the 2008 peak. Other types of acquisition, development, and construction loans have recovered more fully and now stand 51 percent below peak. Credit may be tightening, however. NAHB financing surveys indicate that credit easing slowed at the end of 2015, while the Federal Reserve Board’s Senior Loan Officer Opinion Survey on Bank Lending Practices reported some tight- ening of lending criteria for construction and development loans in late 2015 and early 2016. STRENGTHENING HOME SALES After a slow year in 2014, sales of new single-family homes rose by a robust 14.6 percent in 2015. Sales of existing homes also rebounded from their 2014 decline, up 6.3 percent to just under 5.3 mil- lion units. Although the rollout of new mortgage disclosure regulations in October led to a temporary dip, existing home sales closed 2015 on a strong note. Encouragingly, sales of non-distressed properties are driving growth. CoreLogic reports that real-estate owned (REO) and short sales fell by 10–11 percent in 2015, while non-distressed resales rose by 7.6 percent. With this shift, distressed sales accounted for just over 12 percent of existing home sales in 2015, down from 14 percent a year earlier and 28 percent at the peak in 2009–2011. In addition, cash sales (often to inves- tors) accounted for about a third of home purchases last year, the lowest share since 2008 but still well above the pre-crisis average of 25 percent. Meanwhile, the National Association of Realtors (NAR) reports that the first-time buyer share of home sales slipped for the third straight year to 32 percent, its lowest level since 1987. Sources: JCHS tabulations of NAR, Existing Home Sales and US Census Bureau, New Residential Sales data. THE STATE OF THE NATION’S HOUSING LOW INVENTORIES AND VACANCY RATES The stock of existing homes for sale declined 1.9 percent last year, to 2.1 million units. In contrast, the inventory of new homes for sale climbed 8.2 percent, ending the year at units. But even with three years of significant growth, the supply of new homes slipped to just 5.2 months. One factor keeping first-time homebuyers on the sidelines is that the stock of affordable homes for sale is extremely limited. According to Zillow, inventories of metro area homes in both the bottom- and middle-value tiers shrank by more than 38 per- cent in 2010–2015, while those in the top tier fell by 31 percent. In 2014–2015 alone, bottom- and middle-tier inventories were each down 9 percent, while top-tier inventories declined by 3 percent. As a result, less than 20 percent of existing homes for sale in some of the nation’s largest metros—including Dallas, Denver, Nashville, Phoenix, and Raleigh—were in the most affordable value tier for their areas. The number of vacant units for sale also declined 1.7 percent from 2014, to 1.4 million. Vacant units for rent were down 3.7 percent, to 3.3 million, adding to rental market tight- ness. The number of vacant units held off market, however, remained elevated at 7.2 million, or 55 percent of all year- round vacant homes. Over half of these vacant units are clas- sified as “other.” According to the Housing Vacancy Survey, about 7 percent of these “other” units were in foreclosure while another 5 percent were involved in other legal actions. Overall vacancy rates for both for-sale and for-rent homes are low. After hovering between 2.4 percent and 2.9 percent in 2006–2011, the vacancy rate for owner units fell back in line with longer-term averages in 2015, standing at 1.8 percent for the year. In contrast, the rental vacancy rate plunged from the double-digits in the mid-2000s to a 30-year low of just 7.1 per- cent last year. PROPERTY PRICES ON THE RISE Home prices continued to climb last year. NAR reports that the median price of existing homes rose for the fourth straight year, to —a 6.6 percent increase in real terms from 2014 and the highest level since 2007. Meanwhile, nominal home prices reached a new peak in 2015. The CoreLogic, S&P/Case-Shiller, and OFHEO indexes, which are less affected than the median price by the mix of homes sold, show that prices of repeat sales were up 5.3–5.7 percent through the end of last year. Home prices in all 20 metro areas tracked by S&P/Case-Shiller were up last year, with increases ranging from under 3 percent in Chicago, Cleveland, and Washington, DC, to about 10 percent in Portland, San Francisco, and Seattle. In Los Angeles and Las Vegas, where significant house price inflation in the mid-2000s was followed by sharp declines, pric- es are again rising rapidly. In the case of Denver, home prices rose only moderately in the first decade of the 2000s but have now climbed to a new high. And in Detroit, where price appre- ciation was modest but the ensuing drop was large, home prices reached an eight-year high last year. 11 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY also averaged at least 70 percent in every tier, with values in 93 percent of zip codes at new peaks in 2015. The recovery in Las Vegas is more mixed, with values up an average of 53 percent in the top tier, 47 percent in the middle tier, and 31 percent in the bottom tier. And in Detroit, top-tier values rose 15 percent on average over this period, while middle-tier values edged up just 2 percent and bottom-tier values fell 22 percent. Thus, while the housing recovery has reached much of the country, neighbor- hoods hit especially hard by the crash and the recession are still struggling to rebound. According to CoreLogic data, the broad uptick in home prices reduced the number of homeowners underwater on their mortgages from 5.3 million in the fourth quarter of 2014 to 4.3 million in the fourth quarter of 2015. While this is a far cry from the 12.1 million peak at the end of 2011, the share of homeowners with high loan-to-value (LTV) ratios remains elevated. Of the homeowners that were still underwater last year, 20 percent had LTV ratios of 100–105, 44 percent had LTVs of 105–125, and 38 percent had LTVs of 125 or higher. However, another 1 million homeowners had less than 5 per- cent equity at the end of 2015, leaving them at risk if home prices decline. HOUSING AND THE ECONOMY Residential fixed investment (RFI), which includes both new construction and homeowner improvement spending, is a critical component of the economy. RFI also contributed 10 percent or 0.35 per- centage point to real GDP growth last year, providing a lift far exceeding its relative size in the economy. Meanwhile, homeowner improvement spending accounted for just over a third of residential construction spending last year, down from about half during the worst of the housing crisis in 2011. Before the crash, homeowners devoted about 40 percent of their remodeling budgets to replacement projects, about 40 percent to discretionary projects such as kitchen and bath remodels, and the remaining 20 percent to property improve- ments and disaster repairs. After cutting back sharply when the crisis hit, homeowners are now undertaking more discretionary projects. At last measure in 2013, discretionary spending was Source: JCHS tabulations of S&P/Case-Shiller House Price Indexes. DEMOGRAPHIC DRIVERS 13 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY UPTURN IN HOUSEHOLD GROWTH After years of weakness, growth in the number of US house- holds has begun to strengthen. According to the Housing Vacancy Survey, household growth averaged just annually in 2007–2013. The pace of growth has now picked up, rising from in 2013 to 1.0 million in 2014 and then to 1.3 million in 2015—marking the largest single-year increase in a decade. Although monthly counts from this survey show household growth moderating in early 2016, persistently tight housing markets amid rising construction volumes suggest that household formations are still on the increase.

[Assistant] Household headship rates rise from about 25 percent for adults in their early 20s to about 50 percent for those in their 30s. As they move further into these age groups, millennials are expected to form well over 2 million new households each year on average, raising their numbers from 16 million in 2015 to a projected 40 million in 2025.


[User] GROWING INCOMES BUT GROWING INEQUALITY Low incomes also prevent young adults from living on their own, so the recent pickup in income growth is good news for housing demand. With employment rising for the 67th consecu- tive month in April 2016, job growth has slowly translated into measurable income gains. Real median income for all workers age 15 and over edged up 1.0 percent in 2014, the third year of increases. While back above recent lows, the real median personal incomes for these age groups are still 9–18 percent below previous peaks. Meanwhile, the real median income of US households inched up 1.2 percent in 2014, the second consecutive year of growth. At $53,700, however, real median income was still 6 percent below the 2007 peak and lower than any pre-recession level dat- ing back to 1996. Moreover, income disparities have increased sharply over the past few decades, with the average real income of households in the bottom decile down 18 percent in 1980– 2014 (from $7,700 to $6,300) and that of households in the top decile up 66 percent (from to . Average real incomes for the middle two deciles grew a modest 6 percent over this period. As a result, the average top-decile household now makes 40 times the income of the average household in the bottom decile and 4.7 times that of the average household in the middle deciles. Reflecting the uneven growth in incomes, households earning under $25,000 per year were the fastest-growing segment in 2005–2015. Indeed, their numbers rose by 21 percent over the decade. As a result, this low-income group accounted for 44 percent of the nation’s net growth in households. DISPARITIES IN HOUSEHOLD WEALTH Along with income, wealth is increasingly concentrated in the hands of the few and the numbers of households with little or no assets continue to increase. The Survey of Consumer Finances indicates that the share of wealth held by households in the top income decile jumped from 53 percent in 1992 to 62 percent in 2013. Meanwhile, the share of wealth held by households in the bottom half of the income distribution declined from 15 percent to 10 percent. Over three-quarters of the households with less than $25,000 in wealth are renters, underscoring the close link between wealth and homeownership. At last measure in 2013, the typical home- owner had in net household wealth while the typical renter had just $5,400. Households with traditionally low home- ownership rates—minority and low-income households—are therefore at a significant disadvantage. Indeed, the substantial white-minority homeownership gap has left the median net household wealth of blacks ($11,000) and Hispanics ($13,700) at roughly one-tenth that of whites (. And for those able to make the transition to homeownership, home equity makes up a disproportionately large share of net wealth. In 2013, home equity accounted for more than 80 percent of the net wealth of low-income homeowners and well over 50 percent of the net wealth of minority homeowners. REBOUND IN IMMIGRATION Immigration, another major driver of household growth and housing demand, is starting to pick up steam. From a low of in 2011, net international immigration climbed to an estimated 1.15 million last year. This shift largely reflects a falloff in immigration from Mexico as well as an increase in outmigration from the US to Mexico. The Pew Research Center reports that the number of Mexican immigrants fell from 2.9 million in 1995–2000 to in 2009–2014, while emigration of US residents to Mexico increased from to 1.0 million, resulting in a net population loss of . Immigrants have been an important source of household growth for decades. According to the Current Population Survey, the foreign-born contributed just over a third of the increase in households in 1994–2015, or about house- holds per year. Indeed, just when the large baby-boom gen- eration was moving out of the prime household formation years, immigrants bolstered the ranks of the smaller gener- ation-X population (born 1965–1984), changing the composi- tion of that generation and stabilizing housing demand. The foreign-born thus accounted for nearly a fifth of household heads aged 30–49 in 2015. After falling 48 percent in 2007–2013, net population growth in the South rebounded to a post-recession high of last year, led by the Sunbelt states of Florida, North Carolina, and Texas. Meanwhile, net population losses in the Northeast and Midwest—led by Illinois and New York—increased to their pre-recession levels. One of the most noteworthy changes in mobility patterns after the Great Recession was slower population growth in suburban areas and faster population growth in urban areas. Weaker migration to the Sunbelt was one factor, given that metros in that region are much less compact than in the North. The sharp falloff in single-family construction also contributed since much of that type of housing is developed in suburban and exurban locations. As domestic migration resumes and single- family construction picks up, however, suburban growth rates are likely to rebound. In fact, a 2015 analysis by the Brookings Institution indicates that the turnaround has already begun, with population growth in suburban counties exceeding that in urban core counties for the first time since 2009. But there is no question that the recent strength of urban population growth is driven in part by growing demand for city living. However, the 2015 Demand Institute Consumer Housing Survey indicates that the majority of US households prefer to eventually settle in suburban or exurban communities. Among households expecting to move in the next five years, 69 percent intended to live outside of city centers. This share rises to 78 percent of those planning to move into homes they own. Even among respondents under age 35, fully 63 percent of future movers intended to live outside of a city center, including 71 percent of those planning to own. THE OUTLOOK Growth in the adult population will support significant house- hold growth over the next decade and beyond. According to pre- liminary JCHS projections, demographic forces alone will drive the addition of more than 13 million households in 2015–2025. Much of this growth will occur among the retirement-aged population, with the number of households age 70 and over projected to soar by over 8 million, or more than 40 percent. These increases will lift the share of older households from 16 percent in 2015 to about 21 percent in 2025.

[Assistant] THE STATE OF THE NATION’S HOUSING share of remodeling spending, but will also increase demand for different types of projects, such as accessibility improvements. Third, the older households that do move will likely seek units that are smaller and less costly to maintain—the same types of housing young adults want to rent or buy as their first homes. And finally, the number of older single persons living alone will climb, implying a significant increase in the need for in-home healthcare and supportive services. The racial and ethnic diversity of this huge generation will drive up the number and share of minority households. Indeed, minorities are expected to account for roughly 75 percent of household growth over the next 10 years. The growing minor- ity share in housing markets is likely to boost demand for units that accommodate multigenerational households, given that young minority adults are more likely than young white adults to live with their parents and older minority adults are much more likely than older white adults to live with their children. More importantly, however, rapid growth in minority house- holds brings new urgency to the need to reduce white-minority gaps in household income, wealth, and homeownership. Failure to make progress in this realm could have increasingly large impacts on the shape of future housing demand.


[User] The persistent decline reflects the lack of growth in the number of homeowner households at a time of robust growth in the number of renter households. According to the Housing Vacancy Survey, the number of renter households hit 42.6 million last year, an increase of 1.4 million from 2014 and some 9.3 million from 2004. Meanwhile, the number of homeowner households slipped to 74.7 million in 2015, down 87,000 from 2014 and up just from 2004. With mortgage credit still tight and foreclosures relatively high, the national homeownership rate continued to trend downward in 2015. Although low inventories of homes for sale are keeping prices on the rise, homeownership in many metropolitan areas remains affordable by historical standards and most Americans continue to believe that owning a home is a sound financial investment. The ongoing recovery in the economy may reinvigorate demand for homeownership, although how quickly a rebound might occur remains an open question. THE STATE OF THE NATION’S HOUSING FORECLOSURES BACKLOG AND SLUGGISH HOMEBUYING The overhang of foreclosures has contributed to the continued slump in homeownership. According to CoreLogic data, the total number of foreclosure completions, short sales, and deed-in-lieu of foreclosure transactions for one- to four-family properties averaged 55,900 per month in 2015. By comparison, foreclosure-related sales ran at just 19,900 per month from 2000 to 2005. With foreclosures on the decline, the future trajectory of the homeownership rate depends largely on the speed of recov- ery in home purchases, particularly among first-time buyers. According to NAR data, the share of sales that were first- time purchases dipped from 33 percent in 2014 to 32 percent in 2015, down from 40 percent in 2003–2005. While this measure has trended upward in each age group since 2013, the speed of recovery in coming years remains uncertain. Note: Data are four-quarter rolling averages. Source: JCHS tabulations of US Census Bureau, Housing Vacancy Surveys. 21 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY The slowdown in homebuying does not appear to be due to household attitudes or perceptions of risk, as most Americans still believe that homeownership is a sound financial choice. According to a 2015 Demand Institute survey, 78 percent of household heads agreed with the statement “I think home- ownership is an excellent investment,” while only 6 percent disagreed. Although renters were somewhat less favorable, more than 67 percent agreed that homeownership is an excel- lent investment, and just 10 percent disagreed. Younger renter households were especially positive on this point, with 75 per- cent of renters below age 40 agreeing about the financial value of homeownership. AFFORDABILITY OF HOME PRICES While home prices have rebounded from their 2011 lows, they are still affordable by historical standards. The real median sales price of existing homes climbed 6.6 percent in 2015 to while the real median price of new single-family homes rose 4.7 percent to . Despite this increase, the NAR Housing Affordability Index—comparing median household income to the mortgage payment on a median-priced home—suggests that affordability declined only slightly last year. At the metropolitan level, however, affordability varies dra- matically. At one extreme, the ratio of median home price to median household income in the Rockford (Illinois) metropoli- tan area was just 1.8 in 2014, compared with 3.9 for the nation as a whole. But at the other extreme, the price-to-income ratio in Honolulu was 9.1 in 2014. This range illustrates the sharply different market conditions that would-be homebuyers face depending on their location. STUDENT LOAN DEBT AND DOWNPAYMENT PRESSURES Although home prices remain generally affordable, rising stu- dent loan debt has eroded the amount of income that house- holds have to spend on a home purchase. According to the Notes: Home purchases are equal to the number of homeowners that moved in the preceding year. Data are three-year trailing averages. Source: JCHS tabulations of US Census Bureau, Current Population Surveys. THE STATE OF THE NATION’S HOUSING Survey of Consumer Finances, the share of all US households with outstanding student loan debt increased from 12 percent in 2001 to 20 percent in 2013. At the same time, the median outstanding loan balance rose from $10,500 to $17,000, with 36 percent of borrowers in 2013 owing more than $25,000 and 17 percent owing more than $50,000. TIGHT MORTGAGE MARKET CONDITIONS The number of first-lien mortgage originations for owner- occupied home purchases increased only incrementally from its 2011 low, reaching 2.8 million in 2014. Home prices are adjusted using the CPI-U for All Items less shelter. Monthly mortgage payments include principal and interest, and assume a 30-year, ﬁxed-rate mortgage with a 20% downpayment. Source: JCHS tabulations of NAR, Single-Family Existing Home Prices; Moody’s Economy.com, Median Family Incomes; and Freddie Mac, Primary Mortgage Market Surveys. Meanwhile, mortgage credit remains tight for borrowers unable to meet strict underwriting standards. The Urban Institute’s Housing Credit Availability Index indicates that credit conditions changed very little in 2015 and were only slightly looser than at their post-recession trough. Similarly, the MBA’s Mortgage Credit Availability Index does not show a clear trend in 2015 and confirms that market conditions remain relatively tight. As a result, lending to households with less than perfect credit histories has fallen off. CoreLogic data indicate that loans to homebuyers with observed credit scores below 700 declined from 33 percent of first-lien mortgages in 2010 to just 27 percent in 2014. Taken together, these trends suggest that recent growth in the number of conventional mortgage originations has been primarily to low-risk borrowers.

[Assistant] The aging of the large millennial generation has the potential to produce millions of new homeowners in the coming years. A 2015 Demand Institute survey found that 83 percent of respondents expected to own homes in the future. Among renters, 52 percent expected to own homes, including 28 percent who anticipated buying a home with their next move, and 24 percent who expected to buy “someday.” Moreover, especially large shares of younger renters expect to become homeowners, including 85 percent of those under age 30 and 69 percent of those aged 30–39.


[User] A DECADE OF BROAD-BASED DEMAND As measured by the Housing Vacancy Survey, the number of renter households soared by nearly 9 million from 2005 to 2015—the largest increase over any 10-year period on record. Moreover, 2015 marked the largest single-year jump in net new renter households, up 1.4 million, with most of the gains posted in the first half of the year. Much of the jump in rental demand has come from middle-aged households. Current Population Survey data indicate that the number of renter households in their 50s and 60s rose by 4.3 Rental housing markets across the country tightened again in 2015. While multifamily construction ramped up for the fifth consecutive year, demand continued to outstrip supply, pushing down vacancy rates and pushing up rents. Although renter household growth is likely to slow from its current pace, rental demand should remain strong over the coming decade, keeping markets under pressure— particularly at the low end. THE STATE OF THE NATION’S HOUSING million in 2005–2015, driven by both the aging of baby-boomer renters and declines in homeownership rates among this age group. Renter households age 70 and over also increased by more than over the decade. Meanwhile, households in their 30s and 40s accounted for 3 million net new renters despite the dip in population in this age group. Households under age 30, however, made up only 1 million net new renters, reflecting the steep falloff in headship rates among the millen- nial generation following the Great Recession. In contrast, new construction was responsible for much of the growth in the multifamily stock. Indeed, the number of mul- tifamily starts intended for rent climbed from a low of about 92,000 units in 2009 to units in 2015, the highest level since the 1980s. Given the relatively long multifamily develop- ment timeline, starts remain well ahead of rental completions, which increased to units last year. According to the Survey of Market Absorption, new multifamily units have fewer bedrooms on average than those built over the past two decades. More than half of the unfurnished, market- rate rentals in structures with five or more units that were completed in 2014 were either studios or one-bedroom apart- ments—the largest share in history, and well above the 36 per- cent average share in the 1990s and early 2000s. Only 7 percent of apartments added in 2014 had three or more bedrooms, down from about 13 percent in earlier periods. Construction was also more concentrated in urban areas, with 57 percent of comple- tions in the past two years located in principal cities compared with an annual average of 45 percent dating back to 1970. At the other end of the market, growth in the low-rent supply is largely driven by downward filtering of older units. For example, fully 15 percent of units renting for less than $800 per month in 2013 had rents above this cutoff in 2003 (in inflation-adjusted terms). At the same time, however, many low-rent units were upgraded to higher rents. Factoring in other changes to the stock, the number of low-cost units rose only 11.2 percent over the decade—less than half the increase in higher-rent units and far below the growing number of low-income renters for which these low-cost units would be affordable. PERSISTENT MARKET TIGHTENING The inability of supply to keep up with the rapid rise in demand has led to the longest period of rental market tightening since the late 1960s. Starting in late 2010, the national rental vacancy rate fell for five consecutive years, hitting just 7.1 percent in 2015—its lowest point since 1985. In 2014–2015 alone, the vacancy rate for multifamily buildings with five or more units edged down another 0.9 percentage point while that for single- family rentals slipped 0.2 percentage point. This is a marked departure from the long-run trend, with rent increases averaging slightly below general inflation since the 1960s. Nominal rents continued their climb through March 2016, with annual rates of increase pushing 3.7 percent. 29 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY At the metro level, rent inflation ranged from under 2.0 percent in Cleveland, Philadelphia, and Washington, DC, to 6.0 percent or more in Houston, San Francisco, and Seattle. The professionally managed apartment sector remains tight in most major markets, with MPF Research reporting a vacancy rate of just 4.2 percent in the first quarter of 2016—a 30 basis- point decline from a year earlier. Much of the recent tightening occurred within the two lower tiers (Class B and C) of the mar- ket. Overall vacancy rates varied widely from 3.0 percent or less in Los Angeles, Miami, Minneapolis, New York, Portland, and Sacramento, to more than 6.0 percent in Houston, Indianapolis, and Memphis. While more than two-thirds of the 94 metro areas that MPF Research tracks reported lower vacancies in the first quarter of 2016, a few major markets—such as Denver, Houston, and Pittsburgh—saw an uptick in rates from a year earlier. Nationwide, rents in the professionally managed apartment sector rose by a strong 5.0 percent in the first quarter of 2016, up from 4.5 percent a year earlier. Increases were widespread, with rents in nearly all 94 metro markets on the rise. At the same time, however, rent growth slowed in a few areas, including Denver and Houston. In 18 of the nation’s 25 largest markets, rent increases in the middle tier (Class B) outstripped those in the upper tier (Class A). STRONG MULTIFAMILY PERFORMANCE Investor returns on rental properties continued to climb last year.

[Assistant] The National Council of Real Estate Investment Fiduciaries reports that net operating income for commercial-grade apart- ments increased for the fifth consecutive year in 2015, up nearly 11 percent from 2014. The annual rate of return on rental prop- erty investments rose to 12 percent, driven in large part by price appreciation. This strong performance has attracted investor demand, pushing capitalization rates for apartment properties down to 4.8 percent by year-end—the lowest level since the third quarter of 2008. According to Moody’s/RCA Commercial Property Price Index, prices for apartment properties rose 13 percent in 2015, mark- ing the sixth consecutive year of double-digit growth. As of March 2016, apartment property prices stood 39 percent above their previous peak in late 2007. By comparison, the CoreLogic index indicated that single-family prices remained 5 percent below their pre-recession high. Prices for apartment properties in highly walkable central business districts increased the most last year (19 percent), while those in car-dependent suburbs rose somewhat more slowly (13 percent). Multifamily loans held in commercial mortgage-backed secu- rities (CMBS) posted a sharp drop in what had previously been relatively high delinquency rates. According to Moody’s Delinquency Tracker, the share of CMBS loans that were 60 or more days past due, in foreclosure, or in the lender’s possession peaked at nearly 16 percent in early 2011 before steadily retreat- ing to about half that share at the end of 2015. The share then fell to 2.1 percent in early 2016, but still more than double the 0.9 percent average in 2001–2007. Unusually strong market conditions and historically low inter- est rates helped to propel a sharp rise in multifamily loan origi- nations last year. The MBA Originations Index indicates that the dollar volume of multifamily loans originated increased 31 percent in 2015. Meanwhile, total loans outstanding (including Source: Moody’s Investors Service and Real Capital Analytics, Commercial Property Price Index for Apartments. THE OUTLOOK Rental demand is expected to remain robust over the next decade as the youngest members of the millennial genera- tion reach their 20s and begin to form their own households. Moreover, if homeownership rates for households in their 30s and 40s continue to slide, rental demand will be stronger still. For their part, the aging baby-boom generation will boost the number of older renters, ultimately pushing up demand for accessible units. It is unknown whether high-income households will continue to fill the growing inventory of higher-end rentals or make the transition to homeownership. Regardless, expanding the rental supply through new market-rate construction should provide some slack to tight markets as older units slowly filter down from higher to lower rents. Once high-end demand is sated, developers in some areas may turn their attention to middle- market rentals, although high development costs mean that building new units affordable to even moderate-income house- holds is difficult without government subsidies.


[User] HOUSING CHALLENGES 31 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY PREVALENCE OF COST BURDENS After three consecutive years of declines, the total number of housing cost-burdened households (paying more than 30 per- cent of income for housing) ticked up to 39.8 million in 2014. More than a third of US households faced cost burdens, includ- ing 16.5 percent with severe burdens (paying more than 50 per- cent of income for housing). Cost burdens remain nearly universal among lowest-income households (earning under $15,000), with 83 percent paying more than 30 percent of their incomes for housing in 2014. Most of these households were severely burdened, including 72 per- cent of renters and 66 percent of owners. But households with moderate incomes are also burdened by high housing costs. Indeed, the cost-burdened rate among rent- ers earning $30,000–44,999 edged up from 47 percent in 2010 to 48 percent in 2014, while the cost-burdened rate among renters earning $45,000–74,999 held at the 2010 peak of 21 percent. Moreover, in the 10 metros with the highest median housing costs, three-quarters of renter households earning $30,000–44,999 and half of those earning $45,000–74,999 were cost burdened in 2014. While easing among home- owners, housing cost burdens are a fact of life for a growing number of renters. These burdens put households at risk of housing instability and homelessness, particularly in the nation’s high- cost cities. Meanwhile, growing income inequality and the concentration of poverty have fueled an increase in residential segregation. With dwindling federal subsidies, state and local governments are struggling to preserve and expand the supply of good-quality affordable housing in all neighborhoods. THE STATE OF THE NATION’S HOUSING CONSEQUENCES OF HIGH HOUSING COSTS After paying large shares of their incomes for housing, cost- burdened households cut back spending on other vital needs. According to the 2014 Consumer Expenditure Survey, severely burdened households in the bottom expenditure quartile (a proxy for low income) had just $500 left over to cover all other monthly expenses, while otherwise similar households living in affordable housing had more than twice that amount to spend. As a result, severely cost-burdened households spent 41 percent less on food and 74 percent less on healthcare than their coun- terparts living in housing they could afford. To avoid cost burdens, low-income households often trade off location for affordability. In consequence, low-income house- holds living in housing they can afford spend nearly three times more on transportation than households with severe burdens. 33 JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY those without vouchers to remain stably housed. Accordingly, President Obama has proposed $11 billion in mandatory funding in his FY2017 budget for a new 10-year initiative to end home- lessness among families with children, significantly expanding housing choice vouchers and rapid rehousing assistance. With demand far outstripping supply, competition for housing assistance is intense. The waiting lists for housing vouchers managed by local public housing authorities (PHAs) are years long or even closed. According to HUD’s Picture of Subsidized Households, a renter household that used a voucher in 2015 had waited more than two years on average to move into a unit, with the wait time in the San Diego metro area as long as seven years. Faced with shrinking federal resources, state and local govern- ments are attempting to fill the financing gaps. A report by the Technical Assistance Collaborative found that 30 states offered some form of state-funded rental assistance in 2014, with annu- al funding ranging from about $5 million in Delaware to $83 million in Massachusetts.

[Assistant] At the local level, cities have turned to a variety of alternative financing methods, such as taxes on real estate transactions, tax-increment financing, and linkage fees on commercial development.