[User] 2 Job Growth Takes a Breather The downside-surprise March jobs report, featuring a net gain of nonfarm payrolls and downward revisions totaling 69,000 jobs in the prior two months, reinforced a loss in momentum already witnessed in other recent data, including consumer spending and manufacturing. Weakness was broad-based, including rare declines in manufacturing and construction payrolls—the first in each industry since 2013. Another notable was mining employment (which includes oil and gas extraction), which fell 11,000 (due primarily to a monthly loss of 10,000 support jobs) for the second straight month, and the loss in the industry may linger in coming quarters. For the entire first quarter, monthly job gains averaged a one-year low. The unemployment rate held at 5.5 percent as a drop in the labor force offset a weak gain in household employment. The unemployment rate averaged 5.6 percent in the first quarter, one percentage point below the level a year ago, and we expect the rate to move lower gradually, averaging 5.2 percent in the fourth quarter. The silver-lining from the report was a pickup in average hourly earnings of 0.3 percent. While the year-over year rise of 2.1 percent showed no signs of a break-out from its trend over the past two years, its three-month annualized growth ending in March surged to 4.0 percent annualized, the biggest gain yet in this expansion. Other labor market indicators have remained upbeat. The Job Openings and Labor Turnover Survey (JOLTS), reported with a one-month lag to the jobs report, showed that the job opening rate rose in February to 3.5 percent, a 14-year high. The number of unemployed workers per available position has fallen to 1.70, approaching the pre-recession low of 1.45, suggesting that employers no longer have the pick of the litter to fill open positions. Notably, the job opening rate for the construction industry surged to 2.5 percent during the month, the highest rate since March 2007. The quit rate, a gauge of workers’ confidence in the labor market, ticked down to 1.9 percent from its expansion-recession high of 2.0 percent in the prior month. The trend in a high-frequency indicator of labor market activity—initial jobless claims—also points to healthy conditions, with the four-week average in early April declining to the lowest reading in nearly 15 years. Consumer confidence remains elevated. The Conference Board Consumer Confidence Index rebounded in March, reversing half of the February drop from its expansion-high in January. According to data from the Federal Reserve Financial Accounts of the United States, household net worth—the value of assets minus liabilities—rebounded in the fourth quarter from a slight drop the previous quarter, thanks to solid gains in both financial and housing wealth. In addition, the Federal Reserve’s measure of the debt-service burden, which calculates the share of household debt service payments out of disposable personal income, remains near its record low over the 25-year history of the series. These factors should help support consumer spending going forward. Manufacturing Downshift Continues Weak global demand, the run-up in the U.S. dollar, and the West Coast port shutdown have taken a toll on the factory sector. While declining oil prices since last fall have helped reduce input prices for manufacturers, they have also led to declining drilling activity and spending on oil-related investment. Shipments of core capital goods, an input used to estimate business equipment investment, posted just a modest rise in February, suggesting another quarter of weak

[Assistant] Declining oil prices also have led to a pullback in nonresidential investment in structures spending, especially those related to oil, and this condition should continue in the current quarter. Thus, we expect weak growth in overall nonresidential investment at least through the first half of this year. Trade Deficit Narrows Those factors that have stymied manufacturing activity also impacted the trade deficit, which narrowed sizably and unexpectedly in February, as imports nosedived more than exports. While declining oil prices helped push the value of petroleum imports down to the lowest level in a decade, and weak demand abroad and a strong dollar discouraged U.S. exports, it is likely that the port disruptions played an important role in depressing overall trade volume during the month. It is difficult to assess how much of the recent weakness in manufacturing, exports, and imports stemmed from the port disruptions and how much was a result of softening underlying domestic and global demand and ongoing strengthening of the dollar. We expect export and import volumes to rebound in March as the port issue was resolved at the end of February, though we expect the real trade deficit to widen and thus net exports will likely drag on growth in 2015. Spring Selling Season Is Underway Declining homebuilding activity and private residential construction spending in February point to anemic growth in real residential investment in the first quarter. Total housing starts were flat in January and plunged in February, posting the largest monthly decline in four years, and home builders’ confidence dropped in March for the third consecutive month. Existing home sales rose modestly in February after a sharp drop in the prior month. Even as sales volumes faltered at the outset of the year, inventory remains tight, helping to support home price growth. Most home price measures continued to show solid gains. For example, the CoreLogic national home price index increased for the second consecutive month in February, rising by 1.1 percent on a non-seasonally adjusted basis. The 5.6 percent year-over- year increase in February was the largest gain in six months.


[User] 4 New home sales fared much better than existing home sales, surging in February, marking the third consecutive monthly gain. If improved new home sales volumes stick through typically large revisions, a pickup in builder confidence and building activity should follow. In addition, pending home sales, which record contract signing of existing home sales and thus act as a forward-looking indicator for existing home sales, also jumped in February, reaching the highest level since the summer of 2013, before the “taper tantrum” led to a surge in mortgage rates that restrained home sales. Following a pullback in February, purchase mortgage applications, another leading indicator of home sales, rebounded sharply, rising in early April for the third consecutive week, reaching the highest level since July 2013. The spike in purchase applications—the second one this year after a sizable surge in January—suggests a strong spring-summer buying season amid continued low mortgage rates. Following the weak March jobs report, the contract interest rate for 30-year fixed-rate mortgages fell four basis points to 3.66 percent in early April, according to the Freddie Mac weekly survey. As we mentioned earlier, a potential increase in interest rate volatility constitutes a headwind for the housing market. At the same time, the survey showed a marked deterioration in consumers’ assessment in some key areas for the housing market amid a recent dip in confidence regarding personal finances and income growth. Notably, the share of respondents who said they would buy a home if they were to move fell 5 percentage points to 60 percent—a new all-time survey low. On the bright side, the share of consumers who believe now is a good time to sell a home reached a new survey high of 46 percent, narrowing the gap with those reporting it is a good time to buy, perhaps signaling increased inventory of homes available for sale.

[Assistant] 5 Anecdotally, inventory remains very tight at the lower end of the market, making it difficult for potential first-time homebuyers. As home equity continues to recover, we may see an increased supply of entry-level homes as would-be move-up buyers become more confident that they can extract equity for their next down payment and, therefore, put their current home on the market. Increased inventories of starter homes will go a long way to help renters make a move to owning and spur organic move-up home buying activity, which has been sluggish so far. For all of 2015, we expect housing starts and home sales to rise about 13 percent and 5 percent, respectively—little- changed from the prior forecast. However, we revised higher our projected purchase originations as we downgraded our assumption of the share of cash sales. In addition, we upgraded our forecast of refinance originations due to higher incoming volume in early 2015 than we had expected, especially in the government segment. We project that total single- family mortgage originations will rise nearly 15 percent in 2015 to $1.35 trillion before declining modestly in 2016. The refinance share should fall from 45 percent in 2015 to 35 percent to 2016. Single-family mortgage debt outstanding edged up 0.2 percent annualized in the fourth quarter of 2014 from the third quarter but fell 0.2 percent from a year ago. We expect it to post a modest rise this year, the first annual gain in eight years, and pick up further in 2015. April Economic & Strategic Research (ESR) Group For a snapshot of macroeconomic and housing data between the monthly forecasts, please read ESR’s Economic and Housing Weekly Notes. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. ESR Macroeconomic Forecast Team Doug Duncan, SVP and Chief Economist Orawin T. Velz, Director Brian Hughes-Cromwick, Economist Mark Palim, VP Richard Koss, Director Hamilton Fout, Director Frank Shaw, Business Analyst


[User] 2 Lower Energy Prices = Good News for the National Economy Lower oil prices are actually a net stimulus to the national economy, particularly for energy-importing metros. Because lower fuel prices allow consumers to enjoy more immediate disposable income, Moody’s Analytics estimates that the recent oil price decline will add anywhere from 0.25 percent to 0.75 percent to this year’s Gross Domestic Product, meaning that an impressive $165 billion is now available for consumers to spend in ways other than filling up the tank.

[Assistant] Potential Winners from Low Oil Prices As seen in the chart below, the metro areas that are expected to benefit from lower oil prices are a diverse set. Some metros, including Atlanta, Philadelphia, and Boston should benefit because it will be less expensive to heat and/or cool buildings and homes. Other metros should benefit because consumers will now have more disposable income, allowing for a stimulus in tourism, in places like Phoenix, Tampa, and Orlando. Potential Losers from Low Oil Prices Among major U.S cities, Houston has the most to lose from lower oil prices and is the only primary metro in the U.S. that is expected to be negatively impacted in a meaningful way. As the energy capital of North America, its economy will be hit with the most direct impact of the shock. Fortunately, that hit is not expected to be devastating since Houston has diversified its local economy in very important ways since the oil bust a few decades ago, which should end up blunting the anticipated drag on overall job growth. 3 There are several smaller metros that may not be so lucky and are expected to encounter significant economic turbulence and out-right job losses. These metros include Williston, ND; Oklahoma City; and Midland-Odessa, TX; which have been among the fastest growing metros in the country over the past several years, as they have been riding the wave of growth related to new oil well drilling. In addition, New Orleans will likely be negatively impacted, albeit to a lesser extent. As seen in the table below, there are several metros with nominally large but proportionally small oil industry operations— like Denver, Dallas, and Williamsport, PA—that could see a negative impact on their local economies. However, the positive aspects of low oil prices, like enhanced consumer spending and marginal expansion of manufacturing due to lower energy costs, are expected to balance out any negatives in these metros. Not Much Multifamily in Impacted Metros While housing may be in for a period of decline in fundamentals in certain metros with a disproportionate dependence on oil extraction, in truth, few of these metros have any significant concentration of multifamily housing. Nationally, approximately 18 percent of housing units are in multifamily structures. As seen in the table above, of the 33 metros listed that have a higher-than-average concentration of jobs in the oil and gas industry, just six metros have a concentration of multifamily housing exceeding 18 percent. And of those six metros, the only one with both an unusually high concentration of oil and gas jobs (24.8 percent) as well as a high concentration of multifamily housing (18.1 percent) is Midland, TX. Houston is headed for a slowdown, no doubt about it. However, there is little agreement about the severity of the slowdown. Fortunately, none of the major macroeconomic and commercial real estate data providers expect the Houston economy to fall into recession. The general consensus is that Houston’s job market will slow from being one of the fastest- growing in the nation, to one that achieves just national average growth rates. For example, Moody’s Analytics is forecasting that Houston’s 2015 job growth will be about half of what was previously expected, but still viable enough to produce an estimated 63,000 new jobs in 2015. Commercial real estate data provider Axiometrics has a slightly more optimistic forecast: 73,000 new jobs in 2015, down from 93,000 prior to the oil price decline, or about 20 percent fewer jobs than previously expected.


[User] Prior to the recent decline in oil prices, the apartment supply surge was well on its way in Houston.

[Assistant] After several years of apartment market tightening, Houston was already expected to see some easing in rent growth and occupancy levels this year, as new supply hits the market. Now, with the anticipated slowing down of job growth, there is likely to be a short- term oversupply of units over the next 12 to 24 months.


[User] Previous Undersupply Will Help Houston Now There are about 18,000 new apartment units underway in Houston, with expected completions occurring over the next two years. With job growth anticipated at about 2 percent, that should produce demand for about 13,000 units, which would appear to create a supply/demand imbalance. Mitigating this condition, however, is the fact that Houston has been undersupplied over the past several years: Only 22,500 units were completed since 2011 but more than jobs were added, creating estimated demand for about 50,000 multifamily rental units. Worthy of note is that sections of Houston will actually benefit from low oil prices. The metro’s east side submarket has been seeing a surge in construction of chemical and manufacturing plants that are taking advantage of low natural gas prices.

[Assistant] This is expected to continue, and possibly expand, if oil prices remain low. Now with an extended period of low oil prices, the Williston metro area and the entire state could fall into a recession. While extraction costs are estimated to be lower here than in some areas, the combined cost of construction of new wells and transportation of crude oil to refineries located on the coasts of the Gulf of Mexico and the Mid-Atlantic will likely make new investments in the area uneconomical.


[User] As seen in the chart below, as the price of oil declines, the state’s active rig count also declines—and as of February 2015, it has only worsened. The state’s active rig count has declined to 121, down from 190 a year ago, according to data from the North Dakota Department of Mineral Resources. This means that the state is now unable to produce its previous output level of about 1.2 million barrels per day. In addition, of these active rigs 115 are concentrated in just four counties—Dunn, McKenzie, Mountrail, and Williams—all of which are located in the most prolific section of the Bakken formation. 5 Williston’s Multifamily Sector Likely Impacted Williston has a fairly large multifamily inventory considering its rural setting and relatively small population size. The influx of workers coming to the oil fields has resulted in a significant housing shortage and a sizeable inventory of temporary housing. As of 2013, there were about 6,000 multifamily housing units in Williston, according to a recent City of Williston/NDHFA Housing Study. Multifamily housing, which likely includes this sizable inventory of temporary dwellings, represents 49 percent of all housing stock, with about 9 percent consisting of mobile homes and another 40 percent consisting of single-family homes.

[Assistant] Rents already appear to be declining and concessions commonplace. For instance, a review of one rental apartment website reveals concessions of $550 being offered on a $1,800 monthly rental, or about -2.5 percent—significantly above the national average of just -0.9 percent. Williston’s multifamily sector is expected to see further decreases in rent and higher concession rates if the rig counts continue declining over the next few months—a likely scenario, we believe.


[User] This has been driven by the oil economy in the region, which has accounted for an estimated 40 percent of the 45,000 jobs created since 2009. Yet, during this period, apartment development has been unexpectedly muted. Since 2009, just 10 apartment projects have come online, accounting for 2,400 units. For context, there are an estimated 20,000 multifamily units in the Midland-Odessa area. With falling oil prices, Midland-Odessa is poised for a significant slowdown, though calamitous conditions in the job and apartment markets are not expected. Moody’s Analytics estimates that job growth in the area will remain positive, slowing to a still-respectable 2.2 percent this year compared to an enviable 5.6 percent in 2014, as seen in the chart below.

[Assistant] Moody's Analytics provides an additional forecast that keeps oil prices low longer than expected, and even in that forecast Midland-Odessa’s job market is forecasted to contract by just -1.2 percent in 2015, with job growth rebounding to 2.4 percent in 2016. 6 The base forecast for Midland-Odessa’s job market results has real estate research firm Reis, Inc., anticipating that the metro’s apartment market will see vacancy rise to 7.0 percent by year-end 2015, up from 6.1 percent in 2014, and rent growth remaining positive—though slowing—to an enviable 6.8 percent for 2015, down from 7.8 percent for 2014.


[User] Keeping an Eye on Some Metros Other mid-sized metro areas that have a concentration of oil jobs and could have some more trying times ahead include Lafayette, LA; Corpus Christi, TX; Oklahoma City; Shreveport, LA; and Bakersfield, CA. All of these metro areas have seen oil drilling jobs enhance their local economies over the past several years, and are poised to see that additional job growth diminish if oil prices remain low, especially over the long-term. The fall in oil prices would be felt more acutely in just a few geographical areas and in certain local jobs. Fortunately, for most of these areas, the stimulus from oil production has simply enhanced an already healthy economy. The slowdown resulting from the drop in oil prices should not result in large-scale, metro-wide job losses, but rather should impact clusters of oil-dependent jobs.

[Assistant] Local apartment markets, many of which were already poised for a rise in vacancy and an easing of rent growth, will likely see some additional softening, but this is not expected to be a significantly negative event for the nation’s multifamily sector.


[User] 2 Inventory investment also subtracted from growth in the second quarter as it slowed slightly from the robust pace in the first quarter, but remained at an elevated pace. We see the second quarter pace of real inventory buildup of $110 billion as a negative for growth in the second half of this year.

[Assistant] Since 1947, real inventory investment exceeded $100 billion only eight times, and we believe that the unsustainable stockpiles built will come at the expense of growth in the current quarter as a potentially significant drawdown will likely occur. As a result, we trimmed our forecast of growth for the current quarter by 0.6 percentage points to 2.5 percent annualized, with consumer spending, again, being the biggest driver. Consumer Spending Expected to Be a Reliable Growth Engine While real consumer spending picked up to 2.9 percent annualized in the second quarter from 1.7 percent in the first quarter, as we had anticipated in our July forecast, the monthly trajectory suggests that our expectation of further strengthening in the current quarter may be too optimistic. While real personal income continued to grow, rising 0.2 percent in June, real consumer spending was unchanged following a 0.4 percent increase in May. Flat real consumer spending at the end of the second quarter set up a soft trajectory for consumer spending heading into the third quarter. However, auto sales were robust in July, rising 3.3 percent to 17.6 million annualized units. Sales have been at 17 million units or more in four of the past five months, suggesting that consumers remain confident enough to purchase big-ticket items. Meanwhile, consumer confidence took a hit to begin the third quarter after jumping in June. Both the Conference Board’s Consumer Confidence Index® and the University of Michigan Consumer Sentiment Index pulled back in July, with the former dropping 8.9 points to the lowest level since September 2014 and the latter falling 3.0 points. While the Conference Board noted that uncertainty and volatility in financial markets stemming from the situations in Greece and China might have played a role in eroding confidence, the University of Michigan concluded that survey results showed virtually no impact of such international events on the index. Job Creation Remains Steady Nonfarm payrolls rose in July. The increase was comparable to the average monthly gain of registered during the first half of 2015. The July total employment count was 2.7 percent above the pre-recession high and, importantly, the number of full-time workers is now just 0.2 percent shy of the previous peak. Manufacturing employment showed signs of life, as factory payrolls rose 15,000, the second biggest gain this year. Mining employment declined for the seventh consecutive month, but at a more moderate pace, suggesting fading negative impact from past declines in oil prices. However, a renewed decline in oil prices raises concerns for employment in the industry, though continued losses in the mining sector won’t have a significant impact on overall employment. Wage pressures remain muted, as average hourly earnings for all workers rose 0.2 percent from June and 2.1 percent from July 2014. Since late -month average hourly earnings growth has fluctuated within a narrow band of 1.8 percent and 2.3 percent.


[User] The estimated national vacancy level appears to have declined to an estimated 4.75 percent as of June compared with an estimated 5.0 percent at the end of 2014. Estimated effective rents increased again, at 1.5 percent since the fourth quarter of 2014, marking 21 consecutive quarterly increases, as illustrated in the chart below.

[Assistant] Despite the increase in new apartment construction starting to come online in a number of submarkets across the country, demand persists and underlying fundamentals remain healthy.


[User] 2 Most Vendors’ Vacancy Estimates Show a Similar Trend Most of our data vendors’ estimates regarding vacancy directional trends showed a decline, although there was a difference of opinion regarding the amount of the decline. Only one vendor showed the vacancy rate remaining at the same level at the end of the second quarter of 2015 as that of the previous quarter. Axiometrics is one of the vendors showing a quarter-over-quarter decrease in the vacancy rate, and it was fairly significant, tumbling 50 basis points to 4.7 percent in the second quarter of 2015 from 5.2 percent in the first quarter, and down from 5.3 percent in the fourth quarter of 2014. (formerly Property & Portfolio Research) also is estimating that the multifamily vacancy rate decreased during the second quarter of 2015, but by slightly less, from 40 basis points to 3.7 percent, compared with 4.1 percent in the first quarter of 2015. CBRE Econometric Advisors estimates that vacancy levels also decreased but only by 20 basis points to 4.3 percent, compared with 4.5 percent in the first quarter of 2015. In comparison, Reis, Inc. is once again bucking the trend, estimating that the vacancy rate stayed the same as in the first quarter of 2015 at 4.2 percent, which also is the lowest level of all the data vendors. Interestingly, Reis’ estimated multifamily vacancy rate has been stuck between 4.2 percent and 4.3 percent since early 2013. Positive Net Absorption Up Reis is reporting that net absorption – the net change in occupied rental units – was estimated to be quite healthy during the first half of the year, rising by more than 77,000 units. Despite the increase in new construction and supply coming online, the pace of net absorption has held firm, reflecting ongoing demand for multifamily on a nationwide basis. While the number of completions has been slowing down over the past few months, an anticipated new units are expected to come online this year alone, a rate well above an anticipated absorption rate of units, based on year-to-date estimates. Vacancy Rates Still Declining in Some Metros, but Rising in Others Clearly, demand for rental housing of all types remained healthy in the second quarter of 2015, but there was an increase in the number of metros with rising vacancy rates, according to preliminary data from CBRE Econometric Advisors. The real estate research firm estimates that the vacancy rate fell in 43 out of 62 metros during the second quarter, compared to 51 out of 61 metros during the first quarter of 2015. Also, vacancy rates rose in 15 metros in the second quarter of 2015, compared with only seven in the first quarter. Some of the metros with the biggest declines in vacancy rates included Salt Lake City, Memphis, Richmond, Jacksonville, Las Vegas, Phoenix, Fort Worth, Orlando, and Indianapolis. The metros with the most significant increases in vacancy rates were Pittsburgh, Oklahoma City, Albuquerque, and St. Louis – all saw year- over-year increases of 50 basis points or more.

[Assistant] Multifamily Demand Expected to Remain Stable in 2015 Although the first half of 2015 has reflected strong fundamentals for the multifamily sector, some slowing ahead is expected, at least in certain submarkets where there is an abundance of supply coming online in a short period of time. Fortunately, this scenario is not anticipated to last very long. On a national level, projected employment growth coupled with solid demographic trends and low homeownership rates are expected to keep rental household formations quite healthy over the next 12-18 months. This, in turn, is expected to help the multifamily rental sector remain stable, with annualized rent growth remaining positive, likely in the 2.5 percent to 3.0 percent range for 2015.


[User] Another sign of caution among consumers in the current quarter is essentially flat revolving consumer credit (largely credit card debt) in October after a string of healthy gains. However, consumers have not shied away from borrowing for big- ticket items, as non-revolving credit (largely student and auto loans) continued to post gains similar to the average monthly increase over the past year.

[Assistant] November auto sales remained at 18.2 million annualized units for the third 2 consecutive month, thanks to positive consumer fundamentals as well as growth in the driving-age population. In addition, lending standards continued to ease, according to the latest Federal Reserve Senior Loan Officer Opinion Survey. Separately, data from the Fed on the terms of credit showed that the average maturity of new car loans rose to a record 65.5 months during the third quarter of this year. Overall, economic, demographic, and lending conditions are positive for auto sales, which are poised to post an annual record high. We expect the slowdown in consumer spending growth to be temporary. Positive fundamentals, including tightening labor market conditions and declining gasoline prices, should support consumers going forward. We expect real consumer spending growth to pick up next year from the expected 2.4 percent annualized pace in the fourth quarter, but stay below the pace seen during the third quarter. The November jobs report revealed continued upbeat news, with nonfarm payrolls increasing . Upward revisions of 35,000 total in the prior two months boosted the average job gain over the past three months to the best showing since July. The unemployment rate was unchanged at 5.0 percent amid the favorable backdrop of the first rise in the labor force participation rate since May. While the annual gain in average hourly earnings decelerated to 2.3 percent from 2.5 percent the prior month, it remains near the upper-end of the range observed over the past several years. Survey data also indicate a tightening labor market. The National Federation of Independent Business (NFIB) November survey showed that a net share of 20 percent of small businesses plan to increase compensation over the next three months, the highest reading in nine years. Meanwhile, the share reporting fewer or no qualified applicants for job openings remains elevated at 47 percent.


[User] One bump on the road for consumers was the summer’s stock market swoon. The Fed’s Financial Accounts of the United States for the third quarter showed household net worth fell from a record high in the second quarter—the first drop in four years—as the decline in stocks outweighed gains in the value of real estate and other financial assets. Stocks have regained most of their lost ground, however, so the decline in net worth is likely to be an aberration. ...Against Headwinds An increase in manufacturing output in October, the only gain in the past six months, provided a tentative sign of a manufacturing turnaround. However, surveys of purchasing managers were downbeat in November. The Institute for Supply Management (ISM) manufacturing index dipped below the 50-mark threshold, indicating contracting activity for the first time in three years. The November jobs report corroborated the weakness in the ISM index, showing that manufacturing payrolls fell for the third time over the past four months. Elsewhere in the goods-producing sector, the energy industry continued to shed jobs, with mining and logging employment declining 11,000 from October and (about 14 percent) from last November. Driven by a sharp drop in oil and gas rig counts, mining investment (which includes gas and oil extraction) continued to decline in the third quarter, weighing on overall nonresidential investment in structures. However, the pace of decline has moderated significantly over the past year. Outside of oil and gas drilling structures, investment has been strong for commercial and healthcare structures and manufacturing facilities. Business spending on equipment also has softened over the past year, but, similar to the decline in investment in structures, the weakness is concentrated in commodity-producing industries.

[Assistant] 3 Trade will likely be a drag on growth again in the fourth quarter. The real trade deficit widened in October as real exports fell more than real imports. We expect the strong dollar and lackluster growth abroad to continue to weigh on exports while stronger domestic growth should support import demand. We expect that net exports will continue to be a drag on growth through 2017, although to a diminishing extent over time. Conditions Support a Gradual Pace of Tightening, Starting Now If the Fed hikes the fed funds rate at the December Federal Open Market Committee meeting, its policy will diverge from that of other major central banks. For example, at its December meeting, the European Central Bank lowered its deposit rate and extended quantitative easing until at least March 2017. In addition, the Bank of Japan and the People’s Bank of China are expected to ease further within the next few months. How this policy divergence will impact currencies and capital flows remains to be seen. A large shock to financial markets, especially in emerging markets, similar to that experienced during the “taper tantrum” presents some risk to the outlook, but we believe the odds of a sizable disruption are small. After the liftoff is out of the way, attention will shift to the path of interest rates. Fed officials have communicated that the pace of tightening will be gradual. We expect three fed funds rate hikes in 2016 followed by two more increases in 2017. Shrinking the Fed’s balance sheet, which contains more than $4 trillion of securities, is also an important aspect of normalizing monetary policy. The Fed has said that it plans to allow its balance sheet to deflate naturally by ending its reinvestment program at some point after the first rate hike. Based on the Federal Reserve Bank of New York’s October Survey of Primary Dealers, the consensus among the Fed's primary securities dealers is that the program will end nine months after liftoff. The longer the Fed holds onto securities in its portfolio, especially Treasuries, the longer it will exert downward pressure on long-term rates. We expect to have more clarity on this issue in the near future.


[User] Housing Roundup Recent housing data support our view that residential investment will help fill the void created by other struggling segments in the economy. Private residential construction spending started the fourth quarter on a strong note, posting a solid gain in October for both the single-family and multifamily segments. However, home sales, which also affect residential investment through broker commissions, were mixed during the month. Existing home sales posted a steep drop, while new home sales rebounded sharply amid sizable downward revisions in prior months. Home price growth has continued to strengthen. For example, the CoreLogic home price index, which is the Fed’s preferred measure, showed the biggest year-over-year gain in October since last June. Strong home price appreciation has helped boost the value of home equity. The Financial Accounts of the United States showed that homeowners’ equity as a share of the value of real estate rose by 0.6 percentage points in the third quarter to 56.7 percent. While the share has risen substantially from its record low of about 37 percent in 2009, it still remains below its pre-recession peak. A limited inventory of homes for sale, which puts upward pressure on prices, may also be partially responsible for the recent softening in home sales. Inventory has been extremely low partly because of a slow supply response in the single-family segment. Several factors contribute to the sluggish single-family building activity. While builders’ access to credit has improved over the years, it remains historically tight, especially for the purchase or development of land. This has driven up the price of the remaining lot inventory and prevented large-scale speculative construction in many markets. Labor shortage also is 4 a primary factor, as many construction workers found jobs in other industries during the downturn or left the workforce altogether, resulting in a loss of many skilled workers. After reaching a record low of in July 2012, the number of new homes for sale has gradually risen, but still remains historically low. The lack of inventory is more problematic for the existing home market. The for-sale inventory has increased on a year-over- year basis only twice this year, and the drop of 4.5 percent in October was the largest in over two years. One reason for lean inventories is that institutional investors are holding housing units as rentals, thanks to high rental demand. We do not expect the inventory crunch to ease substantially next year, and the situation could get worse if geographic mobility declines or if homeowners are locked in with low interest rate mortgages in a rising rate environment. Home sales will likely remain subdued in the near term. After posting two consecutive monthly declines, pending home sales, which typically lead closings by one to two months, were little changed in October. The recent trend in purchase mortgage applications—another leading indicator of home sales—reinforces the pending home sales data, as the average monthly reading for October fell for the third time over the past four months. Despite recent volatility, home sales are poised to increase 7.4 percent this year to 5.8 million units, the best performance since 2007.

[Assistant] Housing demand is looking up going into next year, however. Purchase mortgage applications rose every week in November, except for one week when they fell slightly. The rebound in purchase applications supports our forecast that sales will pick up in the first quarter of next year after a slight pullback this quarter. Given our expectation of a slow pace of Fed tightening and continued monetary easing in major central banks abroad, mortgage rates should move up only slowly, with the yield on 30-year fixed-rate mortgages averaging 4.1 percent during the final quarter of 2016, the same as in our previous forecast, up from 3.9 percent this quarter. For all of 2016, we expect total home sales to rise 3.9 percent, more moderate than this year’s increase. Our 2016 sales outlook is shaped by our expectations of a gradual rise in interest rates, continued healthy home price gains, and moderate income growth. Continued easing of mortgage lending standards, combined with a positive household formation outlook, should help the housing sector to expand further. Our mortgage production forecast is the same as in the prior month. We project that total mortgage originations will rise approximately 32 percent this year to $1.71 trillion, before declining 18 percent and 1 percent in 2016 and 2017, respectively. The refinance share is expected to trend down from 46 percent this year to 32 percent in 2016 and 28 percent in 2017. December Economic & Strategic Research (ESR) Group For a snapshot of macroeconomic and housing data between the monthly forecasts, please read ESR’s Economic and Housing Weekly Notes. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. ESR Macroeconomic Forecast Team Doug Duncan, SVP and Chief Economist Mark Palim, VP Orawin T. Velz, Director Frank Shaw, Analyst Hamilton Fout, Director


[User] While these smaller investors still represent a large segment of the market, institutional investors have entered the fray and changed the single-family rental landscape. Why the sudden interest? In short: An imbalance between supply and demand. More Single-Family Renters than Multifamily Renters According to the 2014 American Community Survey, there are more than 43.2 million rental units in the U.S. The majority of these are composed of one- to four-family properties, as seen in the table to the right. Approximately 53 percent of all renter households – about 23 million – reside in one- to four-family homes. About 18.3 million households live in a multifamily rental property with five or more units, which is about 42 percent of all renter households. The remaining 5.0 percent of renter households live in either manufactured housing rental units (about 2.0 million) or in other rental housing, such as a boat, recreational vehicle, or van (about 41,000 units). Growth in Single-Family Rental Sector It is important to note that much of the growth in rental properties since 2005 has been in single-family detached structures, as illustrated below. Interestingly, despite the more than 1.6 million estimated new multifamily units added to the nation’s rental stock since 2007, its share of rental households has not changed much over that timeframe. Instead, the growth in rental housing can be attributed primarily to the large number of former homeowners who lost their homes to foreclosure since the beginning of the housing crisis.

[Assistant] And that is why we have seen the sudden interest in single-family rental properties from institutional investors and the proliferation of single-family rental real estate investment trusts (REITs). Bumpy Rent Growth for Single-Family Rentals Although 52 percent of renter households reside in single-family homes compared to just 42 percent in multifamily rentals, rent growth in the single-family sector has not kept pace with the robust rent growth experienced in the multifamily sector. As seen in the chart at the bottom right, across the U.S. single-family rents for a three-bedroom home have only grown by about 5.3 percent since 2010. This has resulted in a current average rent level of about $1,525 per month compared to $1,495 in early 2010. In contrast, rents for institutional investment-quality multifamily rental properties have surged by more than 16 percent over the same period. Ongoing demand for multifamily rentals has boosted multifamily rent growth on an uninterrupted basis each quarter since the first quarter of 2010. As a result, asking rents for multifamily properties climbed to an estimated $1,156 a month as of the second quarter of 2015, compared to just $995 as of the first quarter of 2010. Going forward, single-family rentals are expected to produce steady rent growth. Moody’s Analytics predicts that single-family rents will grow at about 3.0 percent annually over the next five years, slightly outpacing inflation. However, multifamily rent growth is expected to continue outpacing single-family rentals due primarily to anticipated demand from Millennials forming new households and preferring to rent multifamily properties.


[User] 3 Not All Markets Are Equal Not all metros will experience the same patterns of rent growth in single-family rentals. Indeed, a number of metros most likely have already seen their best single-family rent growth days. As seen in the chart below, Moody’s Analytics predicts that San Jose, Austin, and Denver – three high-tech metros that have seen tremendous job growth over the past five years – will see a significant slowdown in rent growth.

[Assistant] But other metros are expected to see improved rent growth over the next five years, including Atlanta, Las Vegas, and St. Louis. Outlook Stable for Single-Family Rentals The single-family rental sector has benefitted from the convergence of solid underlying fundamentals over the past few years. On the supply side, due to rising foreclosures, the housing bust produced cheap inventory for institutional investors to purchase. On the demand side, slow but steady job growth helped increase household formations in the rental segment, including demand for single-family housing from homeowners displaced by foreclosed, who are less likely to rent apartments. In addition, the rise of institutional investors in this segment of the rental housing market has likely helped produce better- quality and better-managed single-family homes, which in turn has made these properties more attractive for many of these displaced homeowners, as well as other renters. As Moody’s Analytics stated, institutional investors helped “professionalize the industry.” All these factors are expected to continue contributing to demand for single-family rental homes. 5 Location and Millennials Impact Outlook The level of demand for single-family rental homes is expected to differ depending upon the region of the country. Extrapolating based upon current housing rental trends, there is likely to be more demand in the western and southern regions of the country and less in the northeastern and Midwestern regions. Longer-term future demand for single-family rental housing hinges upon the Millennials. As seen in the chart below, the 20- to 34-year-old cohort, which makes up the bulk of today’s Millennials, is expected to continue increasing over the next decade or so. Then, even after a slight dip, this age cohort is expected to start picking up steam, reaching nearly 71 million people by 2040.


[User] Provided there is no major change to trade policy, a big question mark, rising supply growth will be the market’s greatest short-term risk—and not a huge one, given that vacancy rates are at historic lows.

[Assistant] U.S. e-commerce sales forecast to rise by a 9.3% annual average over the next five years RETAIL Consumer spending and e-commerce will maintain healthy growth rates in 2017. Retailers and landlords will continue to innovate in their efforts to attract customers—particularly in delivering shopping experiences centered on entertainment concepts, dining and technology. Rising demand for non- traditional brands and venues will continue to encourage new leasing structures that account for greater risk to both landlords and tenants. The strongest rent growth is expected in markets with the strongest job growth.


[User] National retail rents forecast to grow at a 1.7% annual average over the next five years MULTIFAMILY Expect slower rent growth and rising vacancy in 2017.

[Assistant] The current cycle’s development peak will likely occur in 2017, and oversupply is the market’s most prominent near-term risk. High-end development, prevalent in recent years (particularly in downtowns and gateway markets), may be approaching a turning point, as fundamentals for these newer buildings have slowed considerably. Suburban growth is outpacing urban in an increasing number of markets, resulting in strong suburban rent and occupancy growth, as well as public and private efforts to reproduce downtown amenities in the lower-cost setting. Nearly multifamily completions expected in 2017 HOTEL Economic conditions promise continued demand for the hotel industry, leaving the sector’s prospects for 2017 largely to local market fundamentals.


[User] Nationally, the year-over-year changes in supply and demand are converging, but conditions vary by market. The greater opportunity will be found in markets with significant investment in infrastructure or private capital projects, while the greater risk will be in markets facing oversupply.

[Assistant] U.S. ADR expected to grow by 3.3% in At 2:29 a.m. on November 9, 2016, the announcement that Donald Trump would be the 45th president of the United States surprised the world. The immediate reaction of global markets to Mr. Trump’s election resulted in sharply falling stock market futures, lower bond yields, higher gold prices and other indicators of negative sentiment. But by the end of first day of trading, it was business as usual, and by November 11 the mood had shifted completely from uncertainty to optimism. At least two important economic changes occurred on November 9. The first is that with the election of Mr. Trump, combined with Republican control of Congress, most economists revised their U.S. growth expectations for 2017 upward by 50 to 75 basis points (bps) because of the president-elect’s proposed policies of lower taxes, less regulation and increased infrastructure spending. While we expect to see more fiscal stimulus, increased growth of 50 to 75 bps is optimistic from our point of view due to the time it takes for Congress to enact legislation. We think the bigger impact is likely in 2018. This, combined with Mr. Trump’s expected pro-business attitude, has positively shifted growth expectations and investor sentiment.


[User] In this 2017 U.S. Market Outlook, we balance this post-election market optimism with the understanding that market conditions have softened for many major asset classes. Old-school notions of commercial real estate supply and demand still matter and are the primary driver of our forecasts. Neither do we ignore the massive secular changes that are underway, especially with respect to technological advances that impact job growth.

[Assistant] Market optimism and the prospect of stronger economic growth have recently led to a substantial spike in interest rates, which raises the specter of rising cap rates. At the time of this writing in early December, the market has shown some immediate concern, manifested by lower loan-to-value ratios, some owners delaying refinancing decisions, and additional buyer-seller negotiation on price. We will track changes in interest rates closely in 2017 and have taken these factors into consideration in our forecasts.


[User] Please read on and learn more from our 2017 market forecast. We encourage you to reach out to your local CBRE professionals for their up-to-the minute view of market conditions, which, as the events of the past month have demonstrated, can change at any moment.

[Assistant] 2017 ECONOMY The election of Donald Trump as the 45th U.S. president has the potential to change the economic landscape for years to come. Until Mr. Trump has settled into office, it will be difficult to know the exact form his policies will take or how the Republican Congress will react to his proposals. Several of his campaign proposals have the potential to give the economy a boost later in the year, just as growth may be slowing. Others are more concerning and may manifest drags on growth over the longer term.


[User] 2017 ECONOMY POTENTIAL GROWTH: INFRASTRUCTURE Among Mr. Trump’s campaign proposals, higher investment in infrastructure holds the greatest potential to benefit the economy. It has been several decades since the country has upgraded and replaced aging infrastructure at a sufficient pace to keep things running smoothly. Mr. Trump has promised to spend a trillion dollars over a decade to fix, repair and update many of these structurally deficient areas. If this spending is done in a well-considered manner—contrasting the rushed transportation bill passed by Congress during the financial crisis of —it has the potential to raise GDP growth by 50 to 75 basis points (bps) annually. If Congress and the president take the time to do this properly, the spending won’t contribute to GDP growth until 2018, just when the economy may be slowing. This would boost GDP without causing inflationary pressures, since the economy would have begun to slow. President-elect Trump has promised to simplify the tax code while cutting tax rates. Several members of Congress have also addressed this issue. If this is done well, a simpler tax code with lower rates has the potential to boost GDP growth. Any tax reform takes time, so this likely wouldn’t go into effect until 2018, just as the economy might be poised to slow. The added spending power it would grant consumers might be just what is needed for the economy.

[Assistant] 2017 RISKS: TRADE POLICY AND IMMIGRATION Two potential risks to the economy are trade policy and immigration. As the president has considerable latitude on trade and immigration policy, Mr. Trump could cancel or suspend compliance with NAFTA and the World Trade Organization, as he has promised. During the campaign, Mr.


[User] Trump called for the imposition of tariffs on imports from Mexico and China, but he has moderated his position since then. Were he to move forward on trade policy as he has proposed, it could negatively impact GDP growth by 50 to 75 bps over the next few years. Mr. Trump’s election and the recent U.K. vote on Brexit have shined a light on the concerns many people have about free trade’s impact on domestic jobs. The Trans-Pacific Partnership (TPP), which might have boosted GDP growth by 25 bps, will not be submitted for congressional approval. If Mr. Trump follows through with his tariff promises, we would expect higher prices on foreign-made goods and U.S.-made goods made largely of foreign parts. There also is the potential for retaliation in the trading sphere, particularly from China, dampening U.S. exports and possibly resulting in a trade war. A change in the EB-5 program could raise the cost of capital for certain projects, or prevent them from getting financing.

[Assistant] This could impact construction job growth, cap rates and movement of skilled labor into the U.S. 2017 CAPITAL MARKETS The 2017 outlook for the U.S. capital markets—encompassing debt and equity investment activity, pricing and performance, as well as investment strategy—is largely favorable. Acquisitions activity should remain high, if slightly lower than 2016. International capital flows into the U.S. will likely remain very strong, with China again the leading source. Most types of debt capital should remain widely available. As asset appreciation abates, investment returns are likely to decline, but nevertheless still achieve favorable levels. The year is likely to start slowly as buyers and sellers await the new administration’s policies. 2017 INTEREST RATES AND CAP RATES The interest rate environment is one of the largest influences on the capital markets. With the U.S. economy continuing to expand, the Federal Reserve Board is likely to engage in two rounds of monetary tightening, increasing short-term rates in 2017. Longer-term interest rates, however, should remain stable or increase only modestly, as they have already jumped nearly 50 bps in the two weeks since the election. The 10-year Treasury yield will likely remain between 2.25% and 2.75% throughout 2017. Investor demand for the inherent safety of U.S. debt should continue to offset upward pressure on long-term yields from the Fed and the prospect of higher inflation. Slightly higher bond yields will have a limited impact on capitalization rates, thanks to strong economic and commercial real estate fundamentals, in addition to solid demand from foreign investors. The spread between cap rates and Treasurys—a proxy for the additional returns commercial real estate is expected to yield relative to low-risk government bonds—is wide enough that the incremental moves the Fed appears poised to make will not necessarily result in higher cap rates. We expect CRE cap rates to remain steady in the markets where fundamentals are still improving. Similarly, commercial real estate values should remain steady during this period.


[User] FOREIGN CAPITAL Although accommodative monetary policy has kept bond yields low relative to their historical levels, a comparatively strong economy and a scarcity of high returns elsewhere has kept the U.S. a favorite destination for foreign capital.

[Assistant] This is particularly true of commercial real estate, which has performed well during the current economic expansion. As of Q3 2016, total deal volume for all CRE property types was down 2% from a year earlier; however, the volume of foreign capital remains robust, with more than $80 billion invested in U.S. CRE in the past 12 months. Plans for expansionary fiscal policy with the incoming presidential administration have raised expectations for economic growth and inflation, both of which make investment in real assets like CRE more attractive. As a result, we expect foreign institutional investors and sovereign wealth funds to increasingly look to the U.S. to fill their real estate portfolios in 2017. The preference for liquidity will keep highly sought-after properties in gateway markets popular, but secondary markets such as Dallas/Ft. Worth and Atlanta are poised to attract a greater portion of foreign capital as investors become more comfortable investing outside of premium core product. For example, foreign investors in multifamily may look to secondary markets with better fundamentals, since rental growth has turned negative in some gateways, such as San Francisco and New York. DEBT CAPITAL ABUNDANT; SOME CLOUDS ON THE HORIZON Capital for financing commercial real estate in the U.S. (where debt, on average, represents roughly two-thirds of total investment) should continue to be widely available in 2017. CAPITAL MARKETS We expect CRE cap rates to remain steady in the markets where fundamentals are still improving. Similarly, commercial real estate values should remain steady during this period. 2017 The CMBS market fell in 2016. Volatility in the bond markets during Q1 and a changing regulatory environment led to substantially lower levels of issuance (about $75 billion, versus 2015’s $101 billion) and a smaller number of CMBS shops. The CMBS industry will likely adapt adequately to the risk-retention rules taking effect in late 2016; however, the new rules will add costs to the conduit lenders, and it is not yet clear how those costs will be absorbed. Another 2017 challenge for CMBS— though it is difficult to predict—might be periods of high volatility in the bond market. Such volatility can create pricing uncertainty in CMBS, and make conduit loans less attractive to borrowers. 2017 OFFICE CONSTRAINED EMPLOYMENT TO SLOW DEMAND The U.S. office market is poised for a moderate slowdown in 2017, due to a combination of softer tenant demand and an increase in new supply. Firms are finding it increasingly difficult to find qualified workers, which is reflected in the low unemployment rate, the near-record number of job openings, a steady increase in the number of “quits” (an indicator of worker confidence), and real wage growth. Given the labor force constraints, we expect 2017 to register a lower net gain in office-using jobs: —down from 2016’s anticipated and the annual average of . Meanwhile, we expect more than 50 million sq. ft. of office space completions in 2017—the most since 2009. Though this will be low compared to previous cycles, the introduction of new product at a time of anticipated slow demand will likely result in a modest increase in the vacancy rate (our forecast indicates 30 bps, to 13.3% from 2016’s 13.0%). Rents will likely increase by about 1.5% over the year, continuing to slow from the rates of 4.0% to 4.5%, the current cycle’s fastest growth.


[User] Metro Office Supply and Demand Completions and Net Absorption (MSF) Vacancy Rate (%) Completions (L) Net Absorption (L) Vacancy Rate (R) Source: CBRE Econometric Advisors, Q3 2016. Absorption Completions Vacancy Forecast DOWNTOWN MARKETS TO SOFTEN The suburban office market, which has lagged the downtown market during this cycle, will likely outperform in 2017, although this will vary significantly according to each submarket’s unique demand drivers, quality of office product and live-work-play environment.

[Assistant] We expect the suburban vacancy rate to increase by just 10 bps in 2017, to 14.5%, with rent growth to exceed 2%. With demand in some of the largest downtown office markets beginning to slow in 2016, the national downtown market will likely soften further in 2017, due in part to nearly twice as much new supply coming online in 2017 as did in 2016. We expect the vacancy rate to increase by 30 bps for a second consecutive year, to 10.9%—still well below the suburban vacancy rate.


[User] Downtown rent growth is expected to slow further as higher vacancy shifts bargaining power in the direction of tenants.

[Assistant] 2017 OFFICE TECH REMAINS A CRITICAL DRIVER Growth in the tech sector will be critical for continued office- using job growth and demand. The high-tech industry accounts for nearly one-fifth of the major office leasing activity since 2014. As CBRE’s Tech Thirty 2016 report notes, however, tech employment growth slowed to 4.0% in 2016, significantly below the past five years’ annual average of 7.3%. As the pool of high-tech workers shrinks, the industry relies more heavily on recent graduates and foreigners on work visas. With competition for talent particularly acute in the tech industry, finding skilled labor will be critically important to the tech sector’s continued expansion and to office demand, both in established tech hubs such as the San Francisco Bay Area and Manhattan and in emerging, lower-cost markets such as Phoenix, Atlanta and Portland. The promotion of innovation and an entrepreneurial spirit are cornerstones of the U.S. tech sector, and this is true of startups and established companies alike. Expanding STEM program enrollment, facilitating the flow of high-skilled tech workers into the U.S. and fostering an environment that supports innovation will reinforce the U.S. high-tech sector’s global strength and thus support demand for office space domestically. Given the uncertainty in the wake of the recent U.S. presidential election, we will continue to monitor policy actions that relate to these growth drivers and to report on their potential impact on the tech sector and office demand.


[User] 2017 SHRINKING TENANT FOOTPRINTS We expect markets in the South and West to see the strongest office-using job growth in 2017; these include many that have been slower to recover during this cycle, such as those in Florida. Many of these have little or no new supply underway, which will limit options for tenants interested in the most desirable submarkets and the highest-quality buildings, and give owners greater leverage. These markets may offer attractive development and investment opportunities as tight market conditions push rents up further.

[Assistant] Tenants’ increasing efficiency in their use of space is a trend that will continue to broadly affect demand, yielding less absorption for each job created than occurred in previous cycles. Many tenants are using their greater space efficiency to trade a larger footprint for higher-quality space, offering employees a more appealing work environment. This will become increasingly important as the competition for talent intensifies. Buildings whose infrastructure is capable of handling higher employee headcounts will likely benefit from this trend, while older, non-renovated buildings in less desirable locations will struggle. 2017 DEMOGRAPHICALLY DRIVEN DEMAND As an asset class, medical office buildings (MOB) are recession- resistant. Their tenant demand is fueled by demographic trends, rather than economic growth. Throughout the current cycle, MOB has been a strong segment, and a bright spot in many markets where improvement in other office-using sectors has been slower. Within the broader U.S. office market, it should remain an attractive niche in 2017 and through the long term, benefitting from demographic trends, increased healthcare utilization and spillover from ongoing expansion in the life sciences industry.


[User] Investment volume has trended down slightly over the past year, but the 2016 average through Q3 is still 45% above the 10-year quarterly average, according to Real Capital Analytics (RCA).

[Assistant] Moreover, competition for quality MOB investments remains high, and cap rates have fallen to record lows this year. Cross- border investment has been a growing source of capital in this segment, and MOB assets are well-positioned to capture more foreign dollars in 2017 as buyers seek out higher-yield—but still relatively safe—investment opportunities. The healthcare industry continued to see marked consolidation activity in 2016, including mergers among major health systems, hospitals acquiring physician and specialist practices, and small physician groups combining their practices to save on real estate and overhead costs. This trend will continue in 2017 as providers of all sizes stay focused on cost-cutting in the face of declining reimbursement rates from both Medicare and private insurance companies. On the whole, this should be a net positive for real estate investors, as the credit profile for medical tenants strengthens in line with their growth and diversity. 2017 CONSOLIDATION DRIVES CONSTRUCTION Consolidation has been the major driver of new MOB construction in recent years, as many markets have lacked the necessary large blocks of space to meet the requirements of newly expanded healthcare providers, particularly in proximity to hospitals. With merger and acquisition activity expected to increase, tenant demand for smaller medical office space is likely to weaken. This market dynamic will benefit MOBs that can accommodate large practices, and will likely improve tenant retention.


[User] Over the long term, the wave of aging baby boomers will drive rising demand for healthcare services, irrespective of any regulatory changes. U.S. Growth in this sector correlates strongly with expected population growth, particularly of older residents.

[Assistant] Among large metros, the strongest EHS employment growth is expected in the South and West, whose markets, with their moderate climates and affordable costs of living, are attractive places for relocating retirees and working professionals. The metros with the weakest expected EHS employment growth are in the East and Midwest—big cities whose retirees tend to move to warmer climates. However, many of these slow-growth metros also have the highest concentrations of healthcare employment relative to the total employment base, and their well-established healthcare networks and infrastructure will remain appealing to both landlords and investors.


[User] Growth in Healthcare Employment (%) (MSF) MOB Space Under Construction Healthcare Job Growth Source: CBRE EA/Dodge Pipeline, BLS, Moody’s Analytics, 2016. Location Quotient, Bottom 10 (R) Top 10 Markets by Forecast Job Growth in Education and Health Services Bottom 10 Markets by Forecast Job Growth in Education and Health Services

[Assistant] 2017 COMPETITION FOR TALENT DRIVES INNOVATION Attracting and retaining talent remain leading enterprise priorities, though the enduring slow economic growth has prompted many occupiers to renew their focus on containing costs. We believe this focus will persist through 2017 as companies are likely challenged further, given continued economic uncertainty across industries. Talent attraction and engagement will continue rising in importance as demographic shifts affect in-demand skillsets. Although millennials are the largest and fastest-growing contingent of the workforce, it is important to recognize that they, Gen Xers and baby boomers each make up roughly one-third of the workforce. Occupiers will continue to consider this diverse workforce as they implement workplace enhancements that maximize their competitiveness. Today’s highly skilled and flexible workforce values a well-designed workplace; space for private, focused work; and services and amenities that align with their lifestyle. 2017 solutions. Activity-based floor plates are currently among occupiers’ most piloted efforts; we believe their adoption will likely increase. Alongside the trend toward creating more modern, user- focused work environments, increasing workplace amenities has become the norm. Occupiers now aim to provide more than a pleasing aesthetic; the goal is a multi-faceted environment that provides users with an unmatched experience, connecting their personal and professional personas and improving their well-being. Many office workers now expect the workplace to incorporate wellness considerations and experiences, such as access to green space. Responding to this trend, 91% of corporate real estate executives expect their level of engagement in health and wellness to increase. Health and wellness is no longer an afterthought; rather, how it might be built into a workplace is deliberated as early as the site-selection stage. Significant advancement in CRE technology has dramatically raised the efficiency and effectiveness of a mobile workforce, and real estate strategies are now being devised in response. Technology is affecting not just how occupiers use space, but how they manage it. Real estate technology firms are growing rapidly in both number and value as a consequence. The trend is pervasive, affecting everyone from brokers to CRE executives, to everything from office to residential. Effective use of occupier-related applications will allow managers to produce and collate data that can be instrumental in more efficiently assessing and deploying real estate strategies. From smart buildings to space utilization, technology’s uses and implications for real estate are boundless. 2017 A VERY STRONG YEAR Entering 2016, the general expectation for the U.S. industrial & logistics real estate market was that it would transition into a slower-growth phase. This was based on a combination of broad economic uncertainty and the inevitability of a slowdown after such a long period of expansion. The market has continued to confound expectations, however, with a year that has been among the strongest in a decade. From a capital markets perspective, the sector is favored, with record-level acquisition pricing and widespread low cap rates. For both users and investors, pricing is at record highs across the board. New entrants to the market should expect rents to continue rising next year at roughly the same rate as the past few years. For investors, the news is that cap rates and investment prices are showing signs of stabilization.


[User] Our view, however, is resolutely positive: Industrial market conditions will remain favorable through 2017. Our position is rooted in how the industrial sector is uniquely positioned to benefit from both cyclical and structural changes throughout the coming year. On the cyclical side, although a global economic downturn and Brexit rattled the U.S. outlook, perceived economic risks have dissipated over the course of the year. The industrial sector handled the early-2016 slowdown in trade and manufacturing without a hitch, thanks to unwavering consumer demand with household confidence and spending near post-recession highs. These tailwinds bode well for both traditional retailers and distributors, as well as those focused on e-commerce. TECHNOLOGY CONTINUES TO INCREASE DEMAND On the structural side, new technologies continue to reshape the logistics landscape. In particular, e-commerce continues to have far-reaching implications, prompting manufacturers, suppliers and distributors to adapt their supply chains to meet the new service demands it creates. U.S. e-commerce sales are forecast to rise by 9.3% annually over the next five years, to $523 billion in 2020, according to research firm Forrester. For industrial real estate, this growth represents a huge opportunity. E-commerce users require three times more space on average than traditional warehouse users. Further, growth in e-commerce sales causes growth in demand for additional warehouse and distribution space: For every $1 billion in new e-commerce sales, an additional 1 million sq. ft. of new distribution space is needed, according to CBRE’s Global Supply Chain Practice. Given current forecasts of e-commerce growth, this translates to an annual average of 40 million sq. ft. The supply side is growing in response to user demand. One of the most notable features of the current cycle has been the relatively tepid development market, adding new logistics product at a slow pace. Since 2010, for example, demand in the United States (as measured by net absorption) has outpaced supply by a factor of two, despite rapidly growing rents and shrinking vacancy. On the whole, the discipline shown by developers has been healthy and has allowed for steady rental growth, bringing many markets to or near full recovery. Industrial Rent vs. Prior Peak ($) F 2017 F Actual Prior Peak Source: CBRE Econometric Advisors, Q3 2016. 2017 supply side also represents the greatest risk to the market. If demand were to slow at a greater rate than expected, or if the economy were to experience an unexpected shock, the sudden addition of new, vacant space could slow growth more than any slowdown imposed by external economic forces. However, while this risk is real, the overall impact of such a slowdown would be tempered by the fact that vacancy rates are at historic lows, both at a national level and at the local level in many major markets. The addition of new space would be a welcome change in key markets such as Los Angeles and Oakland, both of which have vacancy rates below 2%. TRADE POLICY The biggest external concern for industrial expansion is the potential impact of changes in federal government policy on international trade. Congress has granted presidents considerable latitude on trade policy, and President-elect Trump’s stated desire to unilaterally cancel existing trade deals like NAFTA may be the biggest wild card in determining the trajectory of the U.S. and global economies. During the campaign, Mr. Trump called for the imposition of tariffs on imports from Mexico and China; combined, the two countries accounted for more than $735 billion in trade with the U.S. Industrial Supply and Demand As a percentage of stock (%) Completions Net Absorption Source: CBRE Econometric Advisors, Q3 2016.

[Assistant] 2017 CONSUMER SPENDING GROWTH TO CONTINUE APACE Consumer spending in 2017 is expected to repeat the growth it recorded in 2016, with retail and food-service sales (excluding motor vehicles and gasoline) forecast to rise by 4% to 5%.


[User] Although the new presidential administration brings the potential for significant legislative changes, the fundamental metrics driving consumer spending—job growth, wage growth and consumer confidence—are unlikely to change in the next 12 months. Luxury retailing is more dependent on global economic forces and will face challenges from the strong U.S.

[Assistant] dollar and lower tourist spending by Asian and Latin American luxury shoppers. E-commerce retail sales are expected to grow by an additional 15.5%—on pace with recent years—and to account for approximately 9.2% of total retail sales by the end of 2017. INVESTING IN EXPERIENCES Categories and retailers that focus on a brick-and-mortar experience are expected to benefit from an increasing share of spending growth. Recent growth in the food & beverage category, and increased tenant demand for entertainment concepts, will continue. In slower-growing soft goods categories like apparel, both new and established retailers will seek to expand their in-store experience offer through workshops, new technologies and services. As more retail sales shift to e-commerce, success in physical retail will increasingly depend on the experience and services offered to customers. 2017 ”ROGUE RETAILING” DRIVING DEMAND FOR NEW LEASE TERMS The rapid rise of non-traditional retail brands and venues— such as pop-ups, food trucks and other formats that operate outside of typical retail real estate spaces—is driving changes in leasing structures. Although landlords have historically preferred long-term leases with creditworthy national or multi-national brands, there is a growing willingness to work with shorter-term and non-national tenants. The greater financial risk associated with such agreements is driving more flexibility in lease terms and, in some cases, deeper financial partnerships between landlords and tenants. These partnerships may take the form of equity stakes, percentage rent or greater contributions to store fit-outs. As 2016 saw a strong rise in rogue retailing for brands both large and small, 2017 will see much more integration of these concepts in traditional mall and real estate spaces, where efforts to deliver experiences may benefit from their flexibility. RENT GROWTH CONCENTRATED IN JOB-GROWTH MARKETS Over the next five years, we expect national retail rents for neighborhood, community & strip centers to grow at an annual average rate of around 1.7%, with large variation across markets. For markets that have historically shown strong growth in both employment and rent, we expect continued rent growth: San Francisco and Denver, for example, with annual rent growth of 4%. Markets that have shown strong employment growth over the past five years, but that have lagged in rent growth, are expected to catch up over the next five years: Orlando and Atlanta, for example, with annual rent growth of 3% or higher. The rest of the top 30 U.S. 2017 A QUESTION OF BALANCE Hotels’ financial performance depends upon leisure and business travelers having the resources and the comfort level to travel. Income and wealth determine the former, and absence of fear the latter; both conditions will be met in 2017, notwithstanding any unforeseen political and economic disturbances. Among households and most businesses, balance sheets appear sound, and although profit growth is thin, corporations have plenty of cash. Working households are experiencing stronger wage growth each year and the probability of recession remains low.


[User] We expect to see year-over-year growth rates for the demand and supply of U.S. hotel rooms come into balance in 2017. Across the six market segments, six location types and 60 city markets covered in CBRE’s Hotel Horizons forecast, the two are balanced in varying degrees; where there is imbalance, some locations present opportunity while others carry excessive risk.

[Assistant] 2017 IMBALANCE—OPPORTUNITY IN 2017 Notwithstanding new proposals for infrastructure spending, fixed capital investment is increasing in cities across the U.S. Airports are a good example: Placing new airports in major metropolitan areas creates economic realities that give rise to large-scale airport expansion projects. The city of Atlanta and Delta Airlines will invest $6 billion into a variety of terminal, runway and maintenance facility improvements over the next 10 years, for instance. Opportunities to own and operate hotel real estate around many such ongoing airport expansions will become increasingly available in 2017. Private investment has Nashville, Charleston and Reno ripe with hotel real estate opportunity. Nashville is transforming into a regional center with strong professional employment growth, due in large part to the expansion of automobile manufacturing in the region. Charleston’s economy will be a direct beneficiary of automobile-manufacturing-plant development. In Reno, sparks of growth are apparent 20 miles east of the city. Hotels positioned in the path of growth created by large private capital placements should be considered one of 2017’s dominant hotel investment themes.


[User] Occupancy and Change in Supply and Demand, Q1 2006 – Q2 2016 Y-o-Y Change (%) Occupancy Level (%) Supply Change Demand Change Occupancy (4-Quarter Moving Average) Source: CBRE Hotels’ Americas Research, STR, Q3 2016.

[Assistant] 2017 IMBALANCE—RISKS IN 2017 Local oversupply is currently the biggest risk to profitable hotel investment. Markets deemed oversupplied—such as Seattle, Charleston and San Jose—are those where the number of new rooms slated to come into service during 2017 exceeds the number forecast to be needed. Some notable markets— such as Philadelphia, Minneapolis and Orlando—will receive too few new hotel rooms in 2017, given their fundamentals. The implications of these conditions for dividend growth and potential appreciation are apparent.


[User] The current cycle’s up-phase may have a gray beard, but nowhere has it been proven that downturns occur a certain number of years into a recovery and expansion. U.S. hotel markets could continue to expand for an extended period.

[Assistant] Hotel income and appreciation growth are slowing, but investors’ ability to place capital in hotel real estate for excess returns will persist as long as local supply growth remains in check. Deals involving upscale hotel property around selected airport locations and within growth corridors created by large-scale public and private investment should be carefully screened over the coming year. 2017 As the multifamily sector has progressed in this cycle, a few market dynamics have taken center stage: the supply pipeline, rental affordability and the emergence of what we call the “quiet giants”—suburban multifamily markets. 2017 SUPPLY CHALLENGE Supply will be the most prominent near-term challenge for the U.S. multifamily market. Completions outpaced demand in 2016 for the first time since the recession, and we expect the same in 2017. These two years will likely be the peak of this development cycle, and 2018 should bring noticeably fewer deliveries.


[User] Although market conditions remained healthy in 2016, strong supply numbers have affected markets across the U.S., moderating rent growth and reversing the downward movement in vacancy. These trends are expected to continue through 2017, with annual rent growth projected to slow to 1.2% and vacancy expected to rise 80 bps to 5.5%. Multifamily Outlook Units (000s) (%) Completions (L) Net Absorption (L) Vacancy (R) Source: CBRE Research, CBRE Econometric Advisors, Q3 2016.

[Assistant] 2017 MULTIFAMILY HOW MUCH MORE CAN TENANTS AFFORD?


[User] As the trend in high-end development continues to rise nationwide, renters’ budgets are feeling the squeeze and landlords—especially those in gateway markets—are asking “How much more can our tenants afford?” Half of renter-occupied households in the U.S. are now cost-burdened, according to the National Low Income Housing Coalition. That is, they spend more than 30% of their household income on rent—and the numbers are worsening.

[Assistant] For the assets built over that period, fundamentals have slowed considerably, with properties built since 2011 consistently experiencing lower rent growth and occupancy and higher concessions than any cohort of older buildings. 2017 MULTIFAMILY SUBURBAN GROWTH The 2014 American Community Survey of the U.S. Census (the most recently available annual data) shows that 2.8 million people moved from the suburbs to urban cores that year, while 4.6 million people moved from urban cores to suburbs. The trend was consistent across age cohorts, levels of educational attainment and professions.


[User] Broad-based migration to the suburbs has helped fuel strong rent and occupancy growth in suburban apartment markets, particularly in recent years. The percentage of markets with annual suburban rent growth exceeding their respective urban rates by more than 100 bps has consistently increased—from 22% in Q2 2012 to 63% in Q3 2016.1 For most of the past two years, the suburbs have significantly outperformed urban cores in more than half of these markets—a pattern that we haven’t seen in the past.

[Assistant] With strong development pipelines squarely focused on downtown Class A product, lack of affordability is expected to remain a challenge for the overall apartment market, especially in the more urban areas. As such, the shift toward the suburbs is projected to continue, and suburban apartment markets will likely continue to perform well relative to urban cores.


[User] 1CBRE Econometric Advisors tracks 51 markets that have both urban and suburban apartment submarkets.

[Assistant] 2017 WILL CLOUD SERVICE PROVIDER DEMAND CONTINUE? Globally over the past two years, cloud service providers (CSPs) have largely replaced colocation providers2 as the largest consumers of multi-tenant wholesale data-center space in core data-center markets.3 In the U.S., absorption in 2016 is on pace to equal or match the previous year’s record occupancy gains, though a large portion of this activity dates back several quarters to pre-leasing of yet-to-be-completed projects. Leasing volume has showed signs of slowing in the second half of 2016, which sets the sector up for potential oversupply in 2017. There will be a lot riding on the accuracy of hyperscale CSPs4 internal forecasts of customer demand, and how they have provisioned capacity to align with these projections. With most hyperscale providers leasing space while also building their own facilities, there is a short-term risk that they will pivot away from multi-tenant leasing in the near-term if their demand forecasts prove to have been too high. If projections prove to be accurate, subdued leasing volume will likely result in less absorption than the past two years’ historically high levels. With added scrutiny from investors who are new to evaluating and understanding the fundamentals of the asset class and data center REITs, there is a risk that such a slowdown would be perceived as a pullback—potentially affecting access to capital and investment opportunities. 2017 IS THERE RISK OF OVERSUPPLY?


[User] However, several core markets—Silicon Valley, Ashburn/ Northern Virginia and Chicago in particular—are currently extremely supply-constrained, with vacancy rates for existing/ commissioned capacity ranging from 4% to 6%. While demand from enterprise users is unlikely to match the recent size of CSP deployments, the commissioning of new high-quality facilities will likely help facilitate market activity and increase deal flow in many markets that recently have been supply-constrained or underserved by existing inventory. In certain markets, the next 12 months will also see an increase in legacy corporate data centers becoming available at or below replacement costs. While these assets don’t pose any imminent supply-side risk to the multi-tenant market, the appetite for DATA CENTERS them during 2017 could go a long way toward predicting momentum in data center investment trends over the next few years. There is already enormous demand for sale-leaseback opportunities in facilities with in-place tenants and longer lease terms; however, to date, interest in legacy assets in non-strategic locations or with high vacancy has been limited.

[Assistant] For the foreseeable future, corporate demand for computing power and information storage will continue to grow at nearly double-digit rates annually. However, a transformative shift is underway that will have a meaningful impact on demand in the sector. 2017 Historically, enterprise computing and storage needs were satisfied in facilities owned and operated by the user. Today, most enterprise users are shutting down their owned facilities and migrating their requirements to cloud and third-party colocation providers, who can handle considerations like security, compliance standards, and physical proximity and access to network and cloud providers with greater cost efficiency. Typical enterprise demand will likely evolve to require smaller, hybrid solutions that incorporate elements of wholesale and retail data center leasing as well as public and private (on-premise) cloud solutions, and will prove to be a strong, steady growth channel for data center operators going forward.


[User] Demand is also being re-shaped by a growing need among large enterprises and content and cloud providers to locate some IT infrastructure as near as possible to “the edge” of the network or to end users in order to reduce latency, better manage data traffic and provide the best user experiences. As a consequence, interconnectivity is emerging as a key growth engine, and data center operators developing their network/connectivity and cloud services offerings are poised to capture significant demand.

[Assistant] Moreover, with the increased adoption of latency- sensitive, data-intensive technologies—running the gamut from mobility (devices, wireless networks, etc.), the Internet of Things and content delivery/distribution to future technologies like self-driving cars and augmented/virtual reality applications—well-connected real estate near critical population centers is poised to enjoy above-average demand and pricing. 2017 LIFE SCIENCES With its companies developing everything from over-the-counter medications to gene therapy cures, life sciences is among the world’s most impactful industries. And like most industries in today’s ever-changing world, it is undergoing significant changes. Heated competition among these companies for both talent and specialized lab space has become an important determinant of the type, quality and location of commercial real estate that this industry demands. Cost too remains a factor; the industry’s subdued demand for manufacturing and conventional office space persists as life sciences companies seek lower-cost alternatives. 2017 CHANGING SPACE NEEDS AND MARKET CLUSTERING The traditional large-scale pharmaceutical campus is increasingly unrepresentative of the industry’s current state. As firms seek to acquire brands and product innovations via mergers and acquisitions, they are also divesting their capital infrastructure holdings in order to become more efficient and agile. It was typical of larger entities to control product chains from concept to realization, marketing and distribution, but now many components of product development and distribution are being outsourced to companies that specialize in specific parts of the process. This allows life science firms to concentrate on the competencies they know best, while minimizing labor and occupancy costs. This trend toward specialization is observed not only among established firms, but also newer companies exploring the cutting edge of medical science. Development of multi-tenant facilities with specialized lab build-outs has begun in the hottest markets. These buildings are specifically geared toward smaller companies that do not wish to own their real estate, but also do not want to be stand-alone lab-oriented occupiers in a sea of regular office users. Established firms are also seeing a new wave of talent that does not mind sharing lab space and being more collaborative. The sharing of equipment not only lowers the required footprint, but also significantly lowers costs for furniture, fixtures and equipment, which outpace occupancy costs substantially.


[User] Despite the estimated national vacancy level increasing slightly, it remains near its historic low level. Estimated effective rents appear to have increased again, albeit it at a slightly slower pace, making for 19 consecutive quarters of increases as illustrated in the chart below.

[Assistant] Despite new apartment construction starting to come online in a number of submarkets across the country, demand persists, with underlying fundamentals remaining healthy. Vendors’ Vacancy Estimates Trending Upward With just one exception, data vendor estimates regarding vacancy directional trends showed an increase. The amount of quarterly movement ranged from no change to an increase of 50 basis points during the last quarter of the year. Axiometrics has one of the higher-range estimates, with an anticipated quarter-over-quarter increase of 30 basis points in its estimated national multifamily vacancy rate, climbing to 5.2 percent as of the fourth quarter of 2014 compared to 4.9 percent as of the third quarter, but still down from 5.6 percent a year ago (as of the fourth quarter of 2013). CBRE Econometric Advisors is estimating that vacancy levels also increased, but only by 10 basis points to an estimated vacancy rate of 4.4 percent in the fourth quarter, compared to 4.3 percent in the third quarter. That is still far below CBRE Econometric Advisors’ estimate of 5.0 percent in the fourth quarter of 2013. (formerly Property & Portfolio Research) also estimates that the multifamily vacancy rate increased during the fourth quarter of 2014, but with the largest increase among the vendors at 50 basis points – bringing its estimated vacancy rate to 5.1 percent, compared to a revised 4.6 percent as of the third quarter of 2014. In addition, is one of two data vendors estimating a year-over-year increase from the fourth quarter of 2013. ’s estimated vacancy rate for the fourth quarter of 2013 was 4.7 percent, resulting in a year-over year increase of 40 basis points. In comparison, Reis, Inc. is bucking the trend, estimating that there was no quarterly change in the national multifamily vacancy rate during the fourth quarter, staying at 4.2 percent. In addition, Reis estimates a slight year-over-year increase of just 10 basis points from the estimated level of 4.1 percent in the fourth quarter of 2013. Positive Net Absorption Surged at Year End Reis reports that net absorption – the net change in occupied rental units – was quite healthy again during the fourth quarter of 2014, rising by about 45,027 units, which was the most units absorbed in a quarter since the fourth quarter of 2013. It brings the year’s total to an estimated units absorbed, which is the highest total since 2011. Rental Demand Positive but Slowing None of the data vendors reporting rent estimates seem to agree on the directional trend of rents. Reis estimates an increase of just 0.6 percent during the fourth quarter of 2014, bringing the total for the year to 3.5 percent. is estimating no real change in rents again – the same as in the third quarter – with the 2014 total rent growth estimated at just 2.6 percent. But it is Axiometrics that is showing an actual decrease in rent, with a negative turn of -0.3 percent during the fourth quarter of 2014, but with an annual rent growth of 4.7 percent – the highest by far among the data vendors. Lastly, CBRE Econometric Advisors estimates a fourth quarter 2014 year-over-year rent growth of 2.8 percent. Vacancy Rates Ticking Up in Some Metro Areas Clearly, demand for rental housing of all types was quite healthy in 2014. Despite the increase in new multifamily construction, with about new multifamily units expected to have come online in 2014, fundamentals for rental demand remain stable – for the most part. Unsurprisingly, vacancy rates are starting to inch up in some metros that have had ever-increasing multifamily construction pipelines for the past few years. For example, according to preliminary data from CBRE Econometric Advisors, some of the metros that have started to see an increase in their vacancy rates include Austin, with an increase of 20 basis points during just the fourth quarter of 2014 alone, although its estimated vacancy rate remains a very low 4.3 percent. New York was another example, also with an increase of 20 basis points, bringing its estimated vacancy rate to a higher-than-average 5.4 percent – but that is for the greater New York metro area, not just the five boroughs. 3 While some markets and submarkets are likely to experience a slowdown in rent growth and an increase in vacancy levels during 2015, it is not expected to be long-lasting. For example, Washington, DC saw its estimated rent growth turn positive in 2014, reversing a negative trend experienced in late 2013, despite a plethora of new apartment rentals coming on the market during last year. On a national level, projected employment growth coupled with solid demographic trends and low homeownership rates is expected to keep rental household formations quite healthy over the next 12-18 months. This, in turn, is expected to help the multifamily rental sector remain stable, with annualized rent growth remaining positive, but with a projected slight increase in vacancy levels during 2015.