[User] 1 Growth Stalls as Underlying Demand Stumbles Consumer and business spending as well as net exports came in below expectations in the first quarter of 2016, causing us to lower our economic growth estimate to 1.2 percent annualized. In recent years, the first quarter appears to have suffered from residual seasonality issues—the display of seasonal patterns in data that have already been seasonally adjusted. We do not view weakness in the first quarter as the start of deteriorating economic activity and expect slightly better growth this quarter.

[Assistant] Our view for growth for the rest of the year is little changed, as we expect full-year 2016 growth to register 1.9 percent. Financial conditions, which deteriorated earlier in the year, have largely reversed course, with rebounds in major stock indices and commodity prices, narrowing risk spreads, and a decline in the trade-weighted value of the dollar. Because weakness in manufacturing largely reflects the impacts of the stronger dollar and declining energy prices, these improvements, if sustained, should help turn the factory sector around. However, because of the lagged impact of the dollar on trade, even if the dollar were to continue weakening, net exports should still subtract from growth through the rest of the year. Growth Weakens Despite a Resilient Labor Market Fourth quarter annualized gross domestic product (GDP) grew at a 1.4 percent pace. Thus, over the past two quarters, the economy grew at just above stall speed. Corporate profits dropped for the second consecutive quarter, and fell 11.5 percent from the fourth quarter of 2014. Profits from domestic industries posted the largest quarterly drop since early 2011, which bodes poorly for business spending and the hiring outlook. So far this year, hiring has been solid despite weak economic activity, which underscores the ongoing problem of lackluster productivity growth. During the current expansion, annual productivity growth has averaged less than 1.0 percent, the worst performance for any expansion in the past 60 years. Our material downward revision for first quarter real GDP growth largely stemmed from a sizable downward revision in consumer spending. Income growth was higher than spending growth, pushing the saving rate up to 5.4 percent, the highest reading in a year. Incoming data for March were bearish, as auto sales dropped sharply to the weakest pace in more than a year. These developments led us to downgrade our estimate for real consumer spending for the first quarter to 1.7 percent annualized from 3.0 percent in the March forecast. However, we look for consumer spending growth to pick up somewhat over the rest of the year given healthy labor market conditions and an elevated saving rate. Full-year real spending growth is expected to moderate to 2.2 percent from 2.7 percent in 2015. Payroll employment increased by a solid in March, despite weakness in the manufacturing and mining industries. The most positive aspect of the jobs report came from the household survey, which showed the labor force participation rate reached 63 percent after the fourth consecutive monthly increase. Since last September, the participation rate has risen 0.6 percentage points, the largest six-month increase since the early 1990s, as 2.4 million people on net joined the labor force. Most of the increase in the participation rate has occurred among prime age workers, those between 25 and 54 years old, who saw a 0.7 percentage point gain over the past six months. At the same time, the unemployment rate '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 KR-CRB Spot Commodity Price Index: All Commodities (1967=100) Nominal Trade-Weighted Exch Value of US$ vs Major Currencies (Mar-73=100) Manufacturing Headwinds Should Slowly Dissipate U.S. Dollar Weighted Exchange Value Commodity Price Index (Right Axis) '48 '54 '60 '66 '72 '78 '84 '90 '96 '02 '08 '14 Corporate Profits (SAAR, $, Year-over-Year % Change) Double-Digit Declines in Profits during Expansions Are Rare 2 was just 0.1 percentage points higher. Expansion of the labor force amid solid job growth has helped arrest the decline in the unemployment rate, and, combined with anemic productivity growth, may help explain the failure of wages to accelerate more rapidly. The rise in the participation rate is consistent with Fed Chair Yellen’s view that meaningful slack remains in the labor market. This view suggests the normalization of monetary policy will be gradual. The February factory orders report included a downward revision and argued for a lower estimate for first quarter economic growth. Core capital goods shipments — a proxy for the business equipment spending component in GDP — fell more than previously estimated. The leading indicator for shipments, core capital goods orders, also received a downgrade. Since reaching an expansion high in September 2014, when crude oil prices began their descent and the dollar started to surge, core capital goods orders have fallen by 9.5 percent, sending a gloomy signal regarding the outlook for business capital spending. Recent trends in core orders suggest that business equipment spending likely declined in the first quarter for a second consecutive quarter, which would mark the first back-to-back drops since mid-2013. Results from purchasing manager surveys were more upbeat, however. The Institute for Supply Management manufacturing survey showed activity moved into expansionary territory in March for the first time in six months. The new orders component posted the biggest jump since August 2009. Despite the survey’s improving outlook, we believe that it is premature to declare that manufacturing has turned the corner. In addition to weakening consumer and business capital spending, trade, inventory, and business investment in structures likely weighed sizably on first quarter GDP. Incoming data on inventory investment also underscored the painful correction process from last year’s unsustainable inventory accumulation, but less inventory build in the first quarter also suggests better prospects for growth in the second quarter. While crude oil prices are off their lows, with West Texas Intermediate oil prices hovering near $40 per barrel at the time of this writing, non-residential investment in mining exploration, shafts, and wells will likely remain a drag on growth for some time through lingering pass-through from still low oil prices. The number of active rotary rigs fell 60.8 percent at an annual rate in the first quarter, and more declines are expected in the current quarter, albeit at a more modest pace. Combined, net exports, inventory investment, and non- residential investment in structures should shave more than 1.0 percentage point from real GDP in the first quarter. The Fed Proceeds Slowly The minutes from the March 15-16 Federal Open Market Committee meeting highlighted downside risks to global economic and financial developments as well as lower inflation expectations as reasons for a cautious approach to rate hikes. An April rate hike is off the table as several members were concerned that it would convey an inappropriate “sense of urgency.” Recent speeches by Fed officials, including the Chair and New York Fed President William Dudley, struck a '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Nondefense Capital Goods Orders ex. 3 dovish tone, noting that the risks to the outlooks for growth and inflation are tilted to the downside. The uptrend in the labor force participation rate and subdued wage pressure suggest Fed leadership feels less urgency for the second fed funds rate hike. While core inflation has picked up recently, the Fed will look for more concrete evidence that such firming will be sustained. The downward pressure on inflation from commodity prices is fading. However, the increase in the rent components of consumer prices, which were the single-biggest contributors to accelerating core inflation in the past year, should moderate going forward as new supply mitigates a shortage of rental housing. We now expect only one rate hike in 2016, most likely in September, compared with an expectation of two hikes in our March forecast. The vote on the U.K. referendum to leave the European Union, which will occur only a week after the June 14-15 Federal Open Market Committee meeting, presents meaningful event risk. Thus, we believe a June rate hike is highly unlikely given the Fed’s emphasis on global stability. Fed funds futures do not price in a 25 basis point hike until the second half of 2017. Housing Affordability Constrains Housing indicators continue to be mixed. On the negative side, existing home sales dropped sharply in February, and new home sales rebounded only modestly following a steep decline in January. Over the past year, new home sales have moved sideways after gradually trending up in the prior years. Home builders’ sentiment, which has declined from a recent peak last October, held steady in March at the lowest reading since May 2015. The forward-looking component, sales expectations over the next six months, fell sharply in March to the lowest reading in a year. On the positive side, housing starts rose in February for the first time in three months, driven by strength in the single- family segment, which has been trending up over the past year. Meanwhile, multifamily starts have been moving lower since reaching an expansion high in June 2015. Overall, the trend in the multifamily segment remains positive, especially in some of the energy-dependent metropolitan areas, which have seen elevated levels of new supply complete and come online just as some of these local economies are getting hit by lingering low oil prices. Some of the softness in home sales likely reflects the lack of supply of homes for sale, especially in the lower-priced segment. The inventory of completed new homes remains extremely low by historical standards, which may have restrained buyer traffic. While single-family housing completions have gradually trended up since reaching their lows in 2010, the increase has been concentrated in large, less affordable homes. For existing homes, inventory at the lower end is also quite lean. Listings are not keeping pace with demand, which has boosted lower-tier home prices by more than for higher-end homes, according to data from CoreLogic and Case-Shiller. '11 '12 '13 '14 '15 '16 SA, Thousands Home Builders Index SA, All Good = 100 Builders’ Outlook for Home Sales Continues to Dip as Sales Trend Sideways Single-Family Sales: Next Six Months New Single-Family Home Sales (Right Axis) Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Housing Starts (SAAR, Thousands of Units) Single-family Starts Gradually Trend Up Single-Family Mulitfamily (Right Axis) '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 '12 '15 Single-Family Housing Completions by Square Feet of Floor Area (Thous.) New Home Construction Is Skewed towards Larger Homes Under 1,600 ft. ft. ft. ft. 3,000 ft. or More 4 Despite historically low mortgage rates, strong home price appreciation is eroding home purchase affordability for potential first-time homebuyers, whose income gains lag behind home price appreciation. A great deal of pent-up housing demand exists among young adults, many of whom still live with their parents. These young adults will likely rent rather than buy when they can afford to establish their own households. We noted earlier that rent increases are poised to moderate going forward, taking some pressure out of core inflation. This is especially true for rents in Class A properties, which have a substantial supply pipeline. However, supply is tighter for more affordable Class B and Class C properties, which will likely command higher rent increases than Class A properties, especially for new tenants. Elevated rental cost burdens will hurt purchase affordability by inhibiting renters’ abilities to save for down payments. Labor market news has been positive for potential first-time homebuyers. Employment among those aged 25 to 34 years old has increased at a healthy pace, and their employment as a share of total labor force has risen to the highest reading since 2002, though part of the increase is attributable to the large number of young adults as a share of the population. A sustained increase in income among young adults, more construction of starter homes, and continued introduction of new loan products geared towards those with low down payments would go a long way toward bringing more potential homebuyers into the housing market. More first-time homebuyers should lead to more trade-up buyers, spurring organic housing demand amid declining investor and international demand. Our forecasts for mortgage rates, housing activity, and mortgage originations are little changed. We expect total mortgage originations to decline about 9.0 percent in 2016 to $1.56 trillion, with a refinance share of 40 percent. We expect total originations to decline further in 2017, as a drop in refinance originations should outpace an increase in purchase originations. We project total production volume to be $1.43 trillion in 2017 with the refinance share dropping to 31 percent. April 8, 2016 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 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Inventory of Homes by Price Tier (Year-over-Year Change, %) Housing Inventory Is Tight, Especially for Lower- Tier Homes Tier 1 Tier 2 Tier 3 Tier 4 Note: Tier 1: 0-75% of median, Tier 2: 75%-100% of median, Tier 3: of median, Tier 4: 125% + of median '00 '02 '04 '06 '08 '10 '12 '14 '16 Percent Employed Between 25 to 34 Years Old as Share of Total Labor Force Employment for Key First-time Homebuyers Group Has Recovered Well


[User] In mid-2014, a dramatic fall in oil prices brought a shock to global economic markets. Conditions stabilized with a modest price recovery through the first half of 2015, but by year’s end we saw a repeat of 2014. The cause of the most recent decline was generally the same as the cause of the initial slump. An increase in North American oil production coupled with continued high levels of output from the traditional oil-producing nations was met by a slowdown in demand from China and a lackluster world economy, producing a global oil supply glut.

[Assistant] This time around, however, oil prices are not expected to rise dramatically anytime soon. The general consensus is that oil prices will recover modestly in 2016 – from a current price of about $40 per barrel – and perhaps rise to $50 per barrel over the next 12 to 24 months. Prices below $60 levels present more of a problem for North American producers than foreign producers, because the cost of extracting oil in North America is generally higher than in traditional oil-producing nations. While lower oil prices may make many commuters happy, they do raise concerns for some parts of the economy – including U.S. multifamily investors. Declining investment in oil exploration and a contraction in the number of oil-producing rigs have brought job losses, and they present a high likelihood of more losses to come.


[User] Nationally, job market growth slowed slightly from 2.1 percent in 2014 to 2.0 percent in in 2015, according to Moody’s Analytics. Houston, the metro with the largest energy-centric economy in the country, saw a more pronounced slowdown, though it did not experience net job losses. As the chart below shows, its total job growth declined to 0.9 percent in 2015 from 3.7 percent in 2014. Moody's Annual Job Growth (Historical and Forecast) - Select Energy Metros Among the larger energy metros, only Tulsa experienced a net job loss in 2015 – a slight 0.1 percent decrease. Smaller energy metros, however, felt a greater impact. As the table on the next page shows, Lafayette, LA, lost the highest number of jobs among metros with a concentration of mining jobs. But many metros with mining job concentrations – including Houston, Dallas, and Oklahoma City – actually managed to post positive job growth results despite the impact of falling oil prices late in the year. Of the many cities whose job markets did weaken in 2015, only a small number have larger-than- average apartment markets. Nationally, about 18 percent of housing units are in buildings with five or more units. The table on the next page shows that only eight of the 50 metros with mining job concentrations have an above-average concentration of multifamily housing units. 3 National Outlook – Pain in Energy Metros, Steady National Economy Moody’s expects national job market growth to slow moderately in 2016 – to 1.7 percent, down from 2.0 percent for 2015. Even so, as they did last year, low oil prices should provide a net benefit to the national economy. They provide consumers with more disposable income every time they go to the gas pump. And in the business sector, low oil prices reduce operating costs and create a more profitable industrial production process. Moody’s expects oil prices to rise modestly during 2016. However, it says that if prices stayed at the $35-a-barrel level, the national economy would actually produce more jobs this year than if prices rose modestly. Using the general ratio of five new jobs producing demand for one additional apartment rental unit, lingering $35 per barrel oil prices could possibly increase the demand for new apartments nationally by as many as 56,000. Despite Diversification, Impact on Energy-Dependent Regions Still Negative Nevertheless, persistently low oil prices would certainly have a negative impact on several energy-dependent economies around the country. But it is important to recognize that today’s energy markets are not the same places they were during the oil bust of the 1980s. Since then, the national economy has diversified in many important ways, and so have these metros. As the table above shows, all of the states except North Dakota have seen a significant decrease in the portion of their jobs that are in the mining sector – which includes oil exploration and extraction, and the mining of coal and other natural resource, but not office support services and equipment manufacturing. Taking a closer look at Houston – the nation’s energy capital – shows that it too has seen a significant decrease over the past three decades in the importance of oil to its overall economy. For example, in 1982, mining and manufacturing jobs (including non-oil and energy-related jobs in those sectors) accounted for a combined 20 percent of Houston’s job market. At the end of 2013, that portion was just 12.5 percent. More importantly, Houston can expect continued diversification over the next decade. And Houston is not alone. Dallas has seen an even more pronounced change in its local economy. In 1982, mining and manufacturing jobs accounted for 21 percent of the jobs in the Dallas metro. By 2013, they had declined by more than half, accounting for just 9.1 percent. Overall, Texas has managed to slog through the fall in oil prices better than would have been expected. In 2015, total job growth in the state was 1.5 percent, only slightly below the 2.0 percent national rate. Texas still has very solid demographics supporting its housing markets. Its population grew 1.8 percent in 2015 – well above the 1.0 percent national average. According to Moody’s, home prices are rising in all of the state’s major metro areas. In Louisiana, by contrast, low oil and natural gas prices have weakened economic conditions. In 2015, while regional construction kept Baton Rouge steady, job markets were weak in Shreveport and Lafayette, though not as weak as in 2014.

[Assistant] 4 Lafayette’s economy swung from a 2.5 percent contraction in 2014 to a net gain of 1.0 percent in 2015. Shreveport saw more significant trouble in 2013 when natural gas prices declined precipitously and its economy contracted by 5.8 percent. The area managed to find its way back to positive territory in 2015 when it experienced 2.0 percent economic growth. The economies of both metros – as well as the state’s – is expected to continue to lag in 2016. Houston – Softening, Not Collapsing Houston is among the metros that will likely be seeing new multifamily housing supply increase significantly in 2016, just as its economy slows noticeably from recent trends. Planning for these new developments occurred when Houston was growing at twice the national average, and before declining oil prices took their toll. As a result, Houston should expect to see softening of its apartment market. This year, it is expected that Houston will have no appreciable rent growth and its vacancy rate could potentially increase by 200 basis points. Houston was already poised for a slowdown this year – even before falling oil prices muted prospects for the metro’s job market. Now, a surge in new rental supply will be coming online at a time when there is weaker-than-expected market demand. Once these conditions subside, Houston’s multifamily market is expected to start growing again – but that should occur further out in the forecast, as noted the chart above. Oklahoma – Slowing but Not Breaking Oklahoma’s two largest metropolitan areas – Tulsa and Oklahoma City – both benefitted from the oil boom, but Tulsa felt more pain from 2015’s drop in oil prices than Oklahoma City. Job growth plummeted to essentially zero last year in Tulsa from a quite healthy 2.3 percent increase in 2014. In Oklahoma City, by comparison, the slowdown was modest, with job growth falling slightly to 1.6 percent from 1.8 percent in 2014. The apartment markets in both metros are expected to remain fairly stable – with a slight increase in vacancies and positive, though slightly slower rent growth, as noted in the charts below. While the two metros face more modest growth in oil and mining jobs going forward, both are expected to see their education, health and professional and business services jobs grow at above national average rates over the next five years, supporting apartment demand.


[User] 2 As it turned out, we were wrong in our economic growth projection. Instead of strengthening, real gross domestic product (GDP) growth is poised to come in about 0.5 percentage points weaker than the 2.5 percent rate in 2014. Despite lackluster output, job creation was strong. The diverging GDP and job numbers imply continued feeble productivity growth. For the housing market, employment and income trends have more weight than GDP. By the end of 2015, the unemployment rate declined five percentage points from its cyclical peak. Reduced labor market slack helped push wages and personal income higher. Combined with low inflation, real average hourly earnings and real personal income picked up in 2015 from 2014, though the trend weakened toward the end of the year. Stronger income growth over the past year helped boost household formation and housing demand. When all of the 2015 housing data come in later this month, we expect to see the best housing market since 2007, as we had projected at the start of the year. Second Half Growth Disappoints The final estimate of third quarter economic growth came in at 2.0 percent annualized following a robust 3.9 percent rate in the prior quarter. The unwinding of an unsustainable pace of inventory investment during the first half of the year was the biggest drag on GDP. However, real inventory investment remained elevated in the third quarter, and recent data suggest that the painful but necessary inventory correction continued late last year, thereby also suppressing GDP growth in the final quarter of 2015. The strong dollar and soft overseas growth also weighed on net exports. However, domestic consumer and business demand, as measured by real final sales to private domestic purchasers, grew a solid 3.2 percent annualized in the third quarter. Incoming data point to anemic headline and underlying economic growth for the fourth quarter, with consumer spending the biggest source of disappointment. So far, consumers have saved rather than spent the windfall from the decline in gasoline prices. Oil prices tumbled further in early January, with West Texas Intermediate oil declining to around $31 per barrel at the time of this writing. While this presents good news for consumers, it presages more pain for the energy sector. Real consumer spending rebounded 0.3 percent in November following a flat reading in October. Spending likely ended 2015 on a weaker note, as chain store sales data for the holiday shopping season fell short of retailers’ expectations, and auto sales declined 4.7 percent in December, the biggest drop in 2015 following three consecutive strong monthly gains. Despite the decline in December, auto sales posted a record high average pace of 17.4 million in 2015, thanks to easy access to credit and low gasoline prices. We estimate that real consumer spending came in at 2.2 percent annualized in the fourth quarter, at odds with declining gasoline prices and strong labor market conditions during the quarter. On the plus side, the buildup in savings late last year should help support spending in the near term. The December jobs report provided a much-needed strong finish for 2015. With nonfarm payrolls rising in December and positive revisions to prior months, the three-month average monthly gain of marks the strongest pace of job growth since January 2015. Notably, construction payrolls rose 45,000 following a 48,000 gain in November. The 1.4 percent jump in construction employment between October and December was the second biggest two-month gain in the past decade. The payback may come this month as the weather has returned to more normal winter patterns. The one weak link in the December jobs report was the absence of a monthly increase in average hourly earnings (not adjusted for inflation); however, the year-over-year gain of 2.5 percent was at the upper end of the range witnessed during '90 '95 '00 '05 '10 '15 Total Light Vehicle Retail Sales (Annual Average, SAAR, Mil. Units) 2015 Marks Best Year Ever for Auto Sales '12 '13 '14 '15 Change in Total Nonfarm Employment (SA, Thousands, 3-Month MA ) 3-Month Average Job Gains End the Year with the Best Showing Since January 3 the recovery, and, as noted previously, real earnings growth was relatively strong during 2015. The December unemployment rate was unchanged at 5.0 percent, but the lack of improvement was for the right reason as the labor force participation rate ticked up to 62.6 percent. However, the participation rate is little changed from a year ago and remains well below the rate of 65.7 percent registered at the start of the expansion. The employment-to-population ratio edged up to 59.5 percent in December, an expansion high but still well below the rate prior to the recession. The upbeat December jobs report should allay worries generated by other incoming data, which have been weak and have sparked concerns that the troubles in China and other emerging markets could derail the U.S. economic expansion. Both the Dow Jones Industrial Average and the S&P 500 plunged more than 6 percent during the first week of 2016, each marking the worst first five-day start of any year. Manufacturing data continued to show malaise for the sector. Factory orders fell in November for the third time in four months. Core capital goods orders—non-defense capital goods excluding aircraft—also fell during the month following a slight gain in October, suggesting business capital investment growth will weaken in the current quarter. A near-term turnaround in manufacturing appears unlikely. The Institute for Supply Management (ISM) indicated that the manufacturing sector contracted in December for the second consecutive month. The last time this occurred was when the economy was emerging from the recession in 2009. The ISM survey for the service sector showed that activity continued to expand outside of manufacturing, albeit at a slower pace. The strong dollar and weak global growth reduced exports of goods and services in November by more than 7 percent compared with a year ago, the worst performance since 2009. Imports also fell over the past year but at a more moderate rate of about 5 percent. We expect net exports to remain a drag on growth in 2016, but that the impact will be smaller than in 2015. Housing Roundup Home building activity picked up in November, as both single-family and multifamily starts surged. However, construction spending only posted a modest rise during the month, with single-family construction outlays edging up and multifamily construction spending declining. Meanwhile, existing home sales posted a double-digit drop in November, falling to the lowest level since April 2014. The new TILA-RESPA Integrated Disclosure (TRID) rule, which requires lenders to give buyers more time to review loan documents, may have delayed closings that otherwise would have occurred in November. If this is the case, we should see a sizable rebound in December. New home sales increased in November but on the heels of substantial downward revisions, putting the three-month moving average well below the recent peak of earlier this year. The poor performance of November residential construction spending, combined with weak broker commissions implied by home sales, suggests much lower residential investment growth than we had expected in the prior forecast. Leading indicators of home sales were mixed: The pending home sales index fell in November for the third time over the last four months, while purchase mortgage applications rebounded in November and rose further in December. At its December meeting, the Federal Open Market Committee (FOMC) raised the fed funds target rate 25 basis points, the first rate hike since 2006. So far, this first move has had a minimal impact on mortgage rates. In our view, the FOMC’s dovish statement and minutes confirmed our expectations of a gradual pace of monetary policy normalization. We expect three fed funds rate hikes in 2016, one more than the fed funds futures market implies, but one less than the number indicated by the median projection of the FOMC members. Given the strong December jobs report but muted inflationary pressures and a strong dollar, the next rate hike will likely occur in March 2016. Based on current Fed guidance, we expect the reinvestment of the Fed’s securities portfolio to continue for at least another year. Because of the expected slow pace of U.S. monetary policy normalization and continued easing by major central banks around the globe, we project that the 30-year fixed mortgage rate will rise from 3.90 percent in the fourth quarter of 2015 to just 4.15 percent in the final quarter of 2016. While our base forecast points to a gradual rise in mortgage rates, a rate spike remains one of the downside risks for the housing market this year. Home price appreciation remains strong. For example, the Case-Shiller national house price index rose 5.2 percent in October from a year ago, the biggest gain since July 2014. The CoreLogic national index advanced 6.3 percent in November from last year, also the biggest rise since July 2014. In addition to the overall indices, CoreLogic provides trends of four individual home-price tiers calculated relative to the median national home price. The low-price tier has appreciated most rapidly in recent months, increasing 8.2 percent year over year in November. Of the four segments, this low-price tier is the only one with prices surpassing their pre-bubble peak. Given that most potential first-time homebuyers will focus more on this segment of the market, where price gains continue to be robust and inventory is extremely lean,

[Assistant] 4 they will likely encounter more difficulty in finding a home they can afford even if mortgage rates edge up only gradually this year as we expect.


[User] However, we do expect a slowdown in net absorption levels to lead to an uptick in vacancies, and rent growth could ease slightly.

[Assistant] We expect continued demand for multifamily rental units in 2016 based on a number of key fundamentals including positive job growth, solid demographic trends, and continued renter household formations.


[User] The ongoing demand for multifamily rental units remained healthy throughout 2015, despite an estimated new units coming online, according to Dodge Data & Analytics. Rent growth was not only positive but likely ended the year at about 3.0 percent, well above the pace of inflation, which was at just 0.5 percent at the end of November 2015. Indeed, net absorption likely remained steady at an estimated units, which is down from 2014’s estimated units absorbed, according to Reis, Inc.

[Assistant] We expect net absorption in 2016 to remain positive, although at a lower level than last year, possibly falling to fewer than units absorbed based on 2015 trends. Vacancy Levels Expected to Rise National multifamily vacancies should rise as the supply from an influx of new completions outpaces demand, especially over the next few years. For example, as illustrated in the above chart, real estate research firm shows the national vacancy rate beginning to increase this year and the upward trend continuing until 2020.


[User] According to the Dodge Data & Analytics Pipeline, which distinguishes between apartment and condo units, there were around apartment unit completions in 2015, with another units underway, of which about are expected to come online in 2016. At a national level, the addition of that amount of new multifamily units to the existing stock is not unreasonable. Moody’s Analytics expects to see job growth of 1.9 percent in 2016, or the addition of 2.6 million new jobs. That amount of job growth could suggest multifamily rental demand closer to units, but we believe that amount of absorption is not likely to happen because most of the new supply is located in only about 12 metros, and most of that is further concentrated in certain submarkets. This year’s job growth and accompanying demand is not expected to be concentrated in just those 12 metros, which is why we expect supply to outpace demand.

[Assistant] Rent Growth Expected to Ease Slightly Rent growth has been exceptionally strong since 2011 and has remained in the 3.0 percent range over the past two years, only starting to slow down slightly in 2014. Rent growth is expected to be positive once again in 2016, but it is expected to ease slightly into the 2.5 to 3.0 percent range, down slightly from 2015.


[User] As seen in the chart below, multifamily concessions for all property classes remain at very low levels, which suggests that supply and demand have been out of balance for a while now. With the advent of new supply, concession rates should return to more normalized levels and to even higher levels in those metros with concentrated supply.

[Assistant] 3 Source: Axiometrics Job Growth Forecasts Mixed Depending Upon Metro Although all of the nation’s major metros are expected to see positive job growth this year, not all of them are expected to experience the same level of employment growth, as illustrated in the two charts below. Although Moody’s Analytics’ baseline 2016 forecast is for a national employment growth rate of 1.9 percent, a number of metros are not expected to come close to the national estimate, including Baltimore, Houston, Boston, and even New York and Washington, DC.


[User] of 4 Prolonged Uncertainty Weighs on the Outlook We upgraded our expectations for second quarter 2016 economic growth by three-tenths to 2.4 percent, mainly reflecting the surprisingly strong pickup in consumer spending through May. Our forecast for second-half economic growth of about 2.0 percent is the same as in the prior forecast. The full-year real gross domestic product (GDP) growth forecast is revised one-tenth higher to 1.8 percent, reflecting the slight upgrade in first quarter growth in the government’s third estimate and our improving view for the second quarter.

[Assistant] Heightened uncertainty and financial volatility associated with Brexit, as well as the uncertainty ahead of the U.S. presidential election, point to elevated downside risks to our forecast and will likely reinforce the Fed’s cautious stance. Brexit’s Direct Economic Impact on the U.S. Is Likely Limited Financial markets were surprised and reacted swiftly to the U.K.’s decision to leave the European Union (EU). Global stock indices plummeted, risk spreads widened, market volatility indices surged, and the dollar appreciated sharply against the British pound and, to a lesser extent, against the euro. Strong safe-haven flows into Treasuries led to a decline in long-term yields. This has been reinforced by the decline in short-term rates resulting from the expected slower path of Fed hikes and by investors’ search for yield amid low and negative rates in Europe and Japan. The 10-year Treasury yield fell to a record low intra-day of 1.32 percent on June 6 and closed at 1.37 percent. The 10-year yield was little changed after the surprisingly strong June jobs report on July 8, but moved up to slightly more than 1.5 percent at the time of this writing. Increasingly flat yield curves are another reflection of investors’ concerns. The spread between the 10-year and the 2-year Treasury yields is at its narrowest since 2007. Investment-grade U.S. corporate bond yields and mortgage rates have declined as well. Some of the adverse conditions have since unwound, but some, including the depreciation of the British pound and downward pressure on long-term Treasury yields, have persisted. Because the U.K.’s actual exit from the EU will occur in 2019, the two-year window for negotiations will result in heightened uncertainty in the financial markets regarding the economic impact of the exit. In terms of Brexit’s economic impact, a moderate recession in the U.K. is likely as the resulting uncertainty affects businesses’ hiring and investment decisions. This is especially important for large multinational companies and financial institutions that use London as a base of operations to serve the EU market. Some of these organizations are now likely to relocate their activities to cities on the Continent. Economic growth in the Eurozone, which is about 30 percent of the world economy, will likely slow as well. Countries around the globe are also adjusting the amount of credit exposure they will have in the U.K. Moody’s estimates that the U.S. banking system's total exposure to the U.K. is $920 billion, which dwarfs its exposure to other major European countries, including France and Germany.


[User] From a direct trade perspective, the economic impact of the U.K.’s exit on the U.S. should be limited because the U.K. accounts for less than 5.0 percent of U.S. exports. However, the Eurozone accounts for 15 percent of U.S. exports, making it the third biggest market behind Canada and Mexico. Slower global growth, combined with a stronger dollar, suggests worsening net exports; however, exports account for only about 12 percent of U.S. GDP. Barring concerns that will lead to a significant tightening of financial conditions, the negative impact of Brexit on the U.S. economy will likely be small.

[Assistant] of 4 One of the downside risks of Brexit is the potential instability in the Chinese Yuan. The currency depreciated 1.5 percent during the last week of June and the first week of July to the lowest level since November 2010. So far, China’s financial markets have responded reasonably well compared to the stock market turmoil of last August, but there is evidence that capital flight has accelerated. The biggest risk of Brexit may be that other countries might be emboldened to leave the EU as well. It is also possible that Scotland will push for a referendum in 2019 before the U.K. formally leaves the EU and vote to leave the U.K. Other risks include tensions in the Italian and German financial sectors, which have come under more pressure since Brexit. Estimates of loan delinquencies in the Italian banking sector run to 17 percent. At least one German bank is at risk. EU troubled bank treatment rules will get a test.


[User] Fed Keeps Target Rate Low for Longer Prior to the U.K. referendum, concerns regarding the marked slowdown in job growth and the outcome of the Brexit vote contributed to the Fed’s decision to remain on hold in June. Post-referendum, global headwinds from increased financial- market volatility and heightened uncertainty have reinforced the case for a cautious approach in the removal of monetary policy accommodation, which has been reflected by more dovish recent Fed communication. Prior to the Brexit vote, our expectation had been that the Fed would raise interest rates once this year, with the timing likely in September. However, in the aftermath of the vote, the risks are skewed toward an even slower rate hiking cycle.

[Assistant] We now believe that the next rate hike will likely be in June 2017. The fed funds futures market is not fully pricing in an increase until the end of 2018. Major central banks, including the European Central Bank and those in Japan, the U.K., New Zealand, Australia, China, and India, are in easing mode. Many other central banks abroad will likely engage in additional quantitative easing and monetary stimulus. About 13 trillion U.S. dollars equivalent of global debts now have negative rates, and this total will likely grow substantially during the second half of the year. Near-term monetary tightening in the U.S. would lead to increased divergence between the Fed and central banks in other advanced economies, which would strengthen the dollar again after its downtrend earlier in the year. This Fed is unlikely to want to increase the force of that headwind.


[User] The headline and core personal consumption expenditures (PCE) deflators, the Fed’s favored measures of inflation, showed muted price pressures in May, supporting the Fed’s gradual approach amid increased downside risks. The core PCE, which excludes food and energy, was up 1.6 percent on a year-ago basis, the same as the prior month’s gain.

[Assistant] Spending may have cooled in June, however, as auto sales dropped 4.5 percent, putting second quarter sales below the first quarter’s pace. Even with the drop in auto sales, real consumer spending growth likely accelerated to 4.2 percent '09 '10 '11 '12 '13 '14 '15 '16 Personal Consumption Expenditures (SAAR, Chn.2009$, M-o-M % Change) Solid Gains in Consumer Spending Help Lift Q2 2016 Economic Growth ¥6.00 ¥6.10 ¥6.20 ¥6.30 ¥6.40 ¥6.50 ¥6.60 ¥6.70 ¥6.80 ¥6.90 '10 '11 '12 '13 '14 '15 '16 Price of 1 $USD in Yuan (Inverse Scale) The Chinese Yuan Depreciates to a Six-Year Low against the U.S. Dollar


[User] of 4 from the lackluster 1.5 percent annualized in the first quarter. This would be only the fourth time during this expansion that real spending growth has exceeded 4.0 percent.

[Assistant] We expect real consumer spending growth to moderate to about 2.3 percent in the second half of the year, with labor market conditions key to the forecast.


[User] Strong Rebound in Payrolls Isn’t a Game Changer The sharp rebound in nonfarm payroll employment, which rose in June, helped to allay recession worries but has not changed the outlook. The large gain came on the heels of a downward revision to May payrolls to a gain of just 11,000. While the hiring trend picked up in June, with the three-month moving average rising to from in May, it has slowed substantially from at the start of the year. The household survey showed the unemployment rate rose two- tenths to 4.9 percent, as a large increase in the labor force outpaced a small increase in household employment. For the second quarter, it appears that consumer and government spending contributed to GDP while net exports was neutral. Business investment, inventory investment, and housing should be a drag, with the latter likely to be a payback from a very strong performance in the first quarter. The last time residential investment subtracted from GDP was in the first quarter of 2014. For all of 2016, consumer spending is expected to drive growth, with some support from government spending and residential investment. Nonresidential investment, inventory investment, and net exports will drag on growth. Housing Roundup Brexit should be a positive for the housing and mortgage market in the near term because it has helped bring down U.S. long-term interest rates. Home sales through May point to continued modest housing expansion. New home sales pulled back 6.0 percent from April, but the drop was a payback from a double-digit surge in the prior month, with the end result being that May sales remained elevated at the second-best level of the expansion. Existing home sales rose 1.8 percent from April to the highest level in more than nine years. The number of homes for sale fell 5.7 percent from a year ago, marking the largest year-over-year drop since last October. of 4 Year-to-date new and existing home sales through May were 7.1 percent and 5.6 percent, respectively, higher than sales over the same period in 2015. Leading indicators for existing home sales presented a mixed picture of sales in the summer. Pending home sales fell 3.7 percent in May from a decade high reached in April and posted a year-over-year drop for the first time in almost two years. On the other hand, after a drop in May, average purchase mortgage applications for June rose to the highest monthly reading since April 2010, boosted by the surge during the first week of the month. Purchase applications dropped in the last three weeks of June but rebounded during the first week of July.

[Assistant] One downside risk for housing is single-family homebuilding, which appears to have lost momentum in the second quarter. Spending on new single-family construction fell in May for the third consecutive month, and single-family permits declined for the second time over the last three months. By contrast, multifamily permits rose in May for a second consecutive month. Without relief from new construction, single-family housing inventory will likely remain tight, boosting home prices and constraining affordability.


[User] Census Bureau Starts Up but Expected to Slow The Census Bureau’s estimated multifamily starts – which include condominiums – were up 10 percent year-over-year as of May 2016, compared to 1.3 percent in April. Starts in May were at an annualized rate of units. Moody's forecasts that multifamily starts (2+ units) will increase in 2017 to about units and dip slightly in 2018 to about units. The overall level of multifamily construction starts continues to be well above the historical average annual rate of units, but it remains well below the record 1 million multifamily starts in 1973 and more than starts in 1985.

[Assistant] Austin is also concerning. The vast majority of its new stock is for Millennial high-tech workers who want to live downtown. But some of the new jobs the local economy generates in the next few years may not be in the high-tech sector and may not pay enough to support Austin’s escalating asking rent levels. As a result, its apartment market is expected to see some volatility, and a decline in occupancy levels and rents – especially if there is a slowdown or disruption in the high-tech sector. Estimated Multifamily Units Completed and Underway – Select Metros Thousands Apartments Condos - Thousands Beyond National Condo and Apartment Completions and Units Underway Source: Dodge Data & Analytics, June 2016 * Anticipated completions Source: Dodge Data & Analytics, June 2016


[User] of 5 Outlook Remains Firm, But With Rising Downside Risks We previously forecasted that economic growth would slow moderately in the first quarter before picking up during the rest of the year, resulting in full-year 2018 growth of 2.8 percent. However, we now estimate that first quarter growth slowed to 1.7 percent annualized compared to our previous forecast of 2.1 percent. At the same time, the government revised higher its final estimate of fourth quarter real gross domestic product (GDP) growth four-tenths to 2.9 percent. Despite the marked deceleration in first quarter economic growth, we still expect activity to pick up substantially during the rest of the year, and thus have lowered our projected GDP growth for all of 2018 by just one tick to 2.7 percent. Fundamentals support our strong outlook. Income growth remains healthy, consumers and businesses are optimistic, and fiscal stimulus from the tax cut and new federal budget should help boost demand through the rest of the year. While our 2018 growth forecast is little changed, downside risks are rising. The Administration has pledged to cut the U.S. trade deficit, which widened sharply in recent months to the worst showing since October 2008 in February and likely dragged on first quarter economic growth for the second consecutive quarter. Earlier this month, the Administration announced a 25 percent tariff on $46 billion of Chinese imports, on top of the steel and aluminum tariffs imposed in March. After China announced retaliatory tariffs of equal size, the Administration raised the possibility of levying tariffs on another $100 billion of Chinese imports. It is uncertain how much of the proposed tariffs are simply a negotiating tool and how much will actually go into effect. Negotiations might result in an agreement that preempts tariff imposition by either country; however, even Treasury Secretary Mnuchin conceded that there is the “potential of a trade war.” The increasingly heated rhetoric on trade has already led to volatile movements in stock prices over the past month. If the threats and counter-threats on trade continue, they could also lead to a significant loss in consumer and business confidence. If the United States actually deploys trade restrictions and China responds with aggressive retaliations (e.g., reciprocal tariffs, a reduction in Treasury bond holdings, restrictions on services trade and market access for U.S. companies), the trade war could reverse much of the positive impacts of the fiscal stimulus or could trigger an even worse outcome—recession. The marked growth slowdown during the first quarter was not alarming per se. Since the end of the recession, economic growth has usually slowed between the fourth and first quarters because of lingering seasonality issues, before strengthening during the remainder of the year. Between 2010 and 2017, the average increase in real GDP in the first quarter was 1.2 percent annualized, at least one percentage point below the average growth during the other three quarters of the year. We expect this pattern to continue this year. Consumer Spending Is Poised to Rebound We had expected first quarter real consumer spending growth to slow from an unsustainable pace in the fourth quarter, which was partly boosted by replacement demand for vehicles damaged by the hurricanes. However, actual spending was even worse than expected. Real consumer spending was flat in February, and January’s data were revised lower by one-tenth to show a 0.2 percent decline. Meanwhile, real personal income rose 0.2 percent in February, and the nominal disposable personal income gain outpaced the nominal consumer spending increase for the second consecutive month, pushing the saving rate up two-tenths to 3.4 percent—a six-month -$70 -$65 -$60 -$55 -$50 -$45 -$40 -$35 -$30 -$25 -$20 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Trade Balance: Goods and Services (BOP Basis, SA, Bil.$) The Trade Deficit Widens Substantially Over the Past Year '11 '12 '13 '14 '15 '16 '17 '18 Dow Jones Industrial Average Close Price (Thous.) Dow Jones Industrial Average Index Shows Heightened Volatility Q1 Q2 Q3 Q4 Real Annualized GDP Growth (Quarterly Average, Economic Growth Tends to Decelerate During the First Quarter We expect consumer spending to improve in March and in coming months. By March, tax refunds had caught up to historical norms and most households had realized lower withholdings due to the Tax Act. Consumers also appeared to loosen their purse strings in March, as auto sales rose 2.4 percent, marking the first rise in three months from February’s six-month low. Sales of light trucks, which include sport utility vehicles, were solely responsible for the gain, as they rose to a 12-year high amid a sixth consecutive monthly drop in car sales to an eight-year low. Even with a rebound in spending in March, we expect real consumer spending growth to moderate to just 1.1 percent annualized in the first quarter from 4.0 percent in the fourth quarter before strengthening to nearly 3.0 percent in the second quarter. Labor Market Is Not Immune to Volatility The March jobs report stepped back from many of the strengths of the prior month, showing that labor market conditions were not immune to the volatility seen lately in other sectors. Nonfarm payrolls increased the worst showing since last September, following an upwardly revised gain of in February, the biggest monthly rise since October 2015. However, job gains were revised sharply lower for January, resulting in a downward revision for the prior two months of 50,000, on net. Despite the net downgrade, the monthly gain during the first quarter averaged well above the average monthly gain of in 2017. Weather may have played a role in the February-March hiring swing, as evidenced by weather-sensitive industries. For example, after increasing by a decade-best 65,000 in February, construction employment fell in March by 15,000, the largest drop in three years. Retail trade payrolls also swung substantially, declining 4,000 in March following a gain of 47,000 in February. Weather didn’t tell the whole story, however. Generally, the average workweek drops during a period with significant weather disruptions, but the March workweek held on to February’s increase, remaining at 34.5 hours. Average hourly earnings, which is closely watched as an indicator of wage inflation, picked up 0.3 percent from February, while the annual increase of 2.7 percent remained within the narrow band seen since late 2017. However, the annual wage increase for nonsupervisory workers, who account for roughly 80 percent of the private workforce, remained unchanged at 2.4 percent for the fourth consecutive month. of 5 Without broad-based increases, wage gains are unlikely to surge in the near term. In addition, the National Federation of Independent Business (NFIB) Small Business Economic Trends Survey showed that the net share of small business owners planning to raise worker compensation fell in March for the second consecutive month to the lowest reading since last November, although the level remains elevated. The household survey component of the March jobs report showed that the unemployment rate remained at 4.1 percent for the sixth straight month as the labor force participation rate fell one tick to 62.9 percent, the first drop since last October. The broadest measure of labor underutilization, the U-6 unemployment rate, fell two-tenths and returned to its expansion low of 8.0 percent, thanks to a decline in the number of discouraged workers and others marginally attached to the labor force. Business Investment Remains Key to the Outlook One key factor underlying our outlook is strong business equipment investment growth, which would help spur productivity growth and keep unit labor costs and inflation contained amid ongoing fiscal stimulus. Recent trends in core (nondefense excluding aircraft) capital goods shipments, a proxy for capital investment, and core orders, a forward-looking indicator, suggested a slowdown in business capital investment growth in the first quarter, albeit from a strong average pace of roughly 11 percent annualized during the second half of 2017. Recent business surveys have raised concerns over whether robust capital expenditures growth will continue this year. The Survey of Business Executives (SBE) conducted in February by the Atlanta Fed in conjunction with academics showed that roughly three-quarters of executives made no changes to their capital expenditures plans in either 2018 or 2019 in response to the passage of the Tax Act. Comparing results from the February 2018 survey for 218 firms that also responded to a similar survey in November 2017, it appears that firms have revised lower their capital expenditures plans for 2018. Results from the March NFIB survey were in line with the SBE survey. The share of small businesses planning capital expenditures fell in March, erasing the improvement seen since November 2017. '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Total Nonfarm Employment Construction (SA, MoM Change, Thous.) Weather Likely Caused Recent Wild Swings in Construction Employment '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 Average Hourly Earnings (SA, Year-over-Year % Change) Annual Wage Gains for Nonsupervisory Workers Have Moved Sideways Total Private Industries Production and Nonsupervisory Industries '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 NFIB Small Business Survey (SA, %) The Net Share of Small Businesses Planning to Raise Worker Compensation Declined Sharply Net Share Planning to Raise Worker Compensation in Next 3 Months Share of Respondents Who Said Capital Expenditures Would... of 5 The Fed Expected to Raise Rates in June The Summary of Economic Projections released at the March Federal Open Market Committee (FOMC) meeting indicates that the Fed is more optimistic about economic growth and employment in 2018 while its view on inflation is unchanged. However, the statement following the meeting shows that the Fed appears more confident that inflation will move toward the 2-percent target, noting that members expect that annual inflation will move up “in coming months,” as opposed to “this year” in the prior statement. In February, the annual increase in the Fed’s favored measure of inflation—the Personal Consumption Expenditures (PCE) deflator— picked up to 1.8 percent after holding at 1.7 percent for three consecutive months. Following an increase of 1.5 percent for four straight months, the annual rise in Core PCE (excluding food and energy) accelerated one tick to 1.6 percent, boosted by health care service prices, which jumped 2.2 percent from last February, the biggest annual gain since 2010. Annual PCE inflation likely strengthened in March, as a result of the base effect. That is the plunge in communication services prices (i.e., cellphone contracts) last March is no longer weighing down the change in the index. With inflation trending up toward the target amid continued labor market improvements, we expect the Fed to raise interest rates for the second time this year in June before hiking once more later this year. In the prior forecast, we noted that risks tilted toward four rate increases this year. However, with headwinds from trade protectionism emerging over the past month, we can’t rule out that the Fed may ultimately raise rates only twice this year. At his first press conference, Fed Chair Powell said that several FOMC members had voiced concerns over trade policy, and he noted that trade has become a bigger downside risk to the outlook. Housing Roundup Incoming data support our view that real residential investment declined during the first quarter following strong 12.8 percent annualized growth in the fourth quarter. New home sales fell in February for the third consecutive month, while existing home sales partially recovered from January’s drop. Total home sales during the first two months of the year were flat compared with the same period last year. Total housing starts fell in February, while nominal residential construction spending posted an anemic gain in February for the second consecutive month. Main measures of home prices—the S&P CoreLogic Case-Shiller, CoreLogic, and Federal Housing Finance Agency home price indices—continued to show strong annual home price gains of 6.1 percent to 7.3 percent for the nation in January. The near-term outlook for home sales is mixed. While pending home sales rebounded in February, partly regaining the sharp drop in January, purchase mortgage applications fell sizably in February and only partially recovered in March. We continue to expect total home sales to rise nearly three percent in 2018 amid increasing household income, a gradual rise in mortgage rates, and continued lean inventory. The for-sale inventory of existing homes continued to decline from year- ago levels. While the number of new homes for sale has continued to trend up, the increase has been concentrated in incomplete units. Ongoing tightness in the inventory of completed new homes for sale should continue to restrain sales.

[Assistant] of 5 Our mortgage rate and mortgage volume forecasts for 2018 are essentially the same as in our March forecast. We expect total mortgage originations to fall about 8 percent from 2017 to $1.69 trillion in 2018, with a refinance share of 29 percent, nearly 10 percentage points below the share in 2017. 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.


[User] Key stat: U.S. cap rates have compressed by 5 to 20 bps over the past year (Q3 2017) OFFICE U.S. office market growth should continue in 2018, but at a slower pace, due to higher completions and the tight labor market’s impact on tenant demand. Older buildings lacking the amenities preferred by today’s workforce and the infrastructure to handle evolving technologies could struggle, particularly in markets where large volumes of high-quality product are being delivered. Meanwhile, suburban submarkets that offer a range of housing choices and urban amenities—including retail and restaurant options, public transit and walkability—are well positioned to capture demand from the maturing millennials.

[Assistant] Key Stat: 32 million sq. ft. of positive net absorption is expected in 2018 OCCUPIER Labor remains the primary challenge facing corporations. Even as they lower their space requirements, many occupiers are reinventing or adapting their workplace standards to meet employee demand for amenity-focused, flexible, technology- driven work environments. Activity-based workplace design is a popular approach to achieving greater space efficiency without impacting functionality. Agility is also a concern, and occupiers are showing clear interest in flexible-serviced agreements and shorter- term offerings. CBRE RESEARCH 4 2018 U.S. THE OUTLOOK FOR 2018 UNITED STATES INDUSTRIAL & LOGISTICS Although we are well along in the economic cycle, in the e-commerce/omnichannel cycle we are not, so demand for high-quality, well-located industrial real estate should not wane anytime soon. In most markets, a lack of quality space options is challenging those seeking to expand their supply chains. Record- level rents are a concern, but the compromises tenants must make on location decisions, which can affect supply chain costs profoundly, are the real issue. As location is paramount, rising rents are not expected to curb demand as long as users continue to find options. Fortunately, supply growth has begun to increase, which should lower the risk of short supply suppressing demand. Key stat: For the first time, industrial real estate is global institutional investors’ most preferred asset class—the top choice for more than a third of respondents in CBRE’s most recent survey of global investors RETAIL Changing demographics, consumer expectations and omnichannel retailing will continue to reshape retail and its real estate environment in 2018. The consumer trend toward off-price and discount retail will continue, with mid-range retailers seeking new ways to limit share losses to lower-priced players. A growing performance gap between prime retail assets and others will create opportunities for investors to capture assets with medium- and long-term growth potential at lower prices. Across retail segments, landlords and retailers will strike up new partnerships to drive traffic and sales. Non-gateway markets should see solid rent growth over the next five years, with urban core redevelopment, a rise in suburban mixed-use projects and strong employment and population growth making these markets especially attractive. Major gateway markets are expected to see rents grow more moderately. Key stat: Annual rent growth of 1.9% expected for neighborhood, community and strip centers in 2018 HOTEL Forecasts for continued U.S. economic expansion portend a favorable year ahead for the U.S. lodging industry, with forecasts of income and employment growth—coupled with slowing supply growth— promising increased demand for hotels. Prospects for the sector in 2018 will depend largely on local market fundamentals and property-specific demand mix. With household income and balance sheets strengthening across several demographic strata, the dominant hotel guest profile is being reshaped from one of business to one of leisure. Over the medium term, profitable hotel investment opportunities will generally favor properties that cater largely to leisure travelers. A few important city markets must contend with elevated risk from exposure to fluctuations in international travel. CBRE RESEARCH 5 2018 U.S. THE OUTLOOK FOR 2018 UNITED STATES DATA CENTERS The U.S. wholesale data center market continues to thrive, with sustained record-setting absorption levels for the past three years. Our outlook for data center demand remains bullish, fueled by ever-increasing data consumption, storage, compute power and the rapid evolution of technology—from self-driving vehicles, to networked homes, to advancements in mobile, interconnectivity and content delivery. Transformation and flexibility are the key themes in the multi-tenant data center space in 2018. Key Stat: Across the primary data center markets tracked by CBRE, nearly 300 megawatts are scheduled for delivery in 2018 LIFE SCIENCES The greater health care needs of an aging population and quickening advancement in software and computing power have prompted strong biotech employment growth, with demand surges in most major markets and double-digit rent growth in some. But with the unsustainable rise in health care costs, the industry is under pressure to identify new, more effective, less costly solutions. The sector’s vibrancy in any given market is largely a function of the depth and caliber of the local scientific talent pool, and of the market’s access to capital. Fundamentals are strong, but growing supply in the hottest markets should be closely monitored, as should the flow of venture capital, which recently plateaued. Key Stat: Approximately 25% of all NIH funding goes to California and Massachusetts, contributing to the premier status of lab centers in Cambridge and San Francisco MEDICAL OFFICE The direction of health care policy and payment mechanisms may remain uncertain, but rapid growth in the older population will remain a significant tailwind for medical-office demand in the years ahead. This will be particularly important in smaller, slower-growth markets where “eds and meds” are likely to be the primary growth driver over the next decade. The bigger risk may be from large health care systems continuing to acquire smaller physician groups and solo practices, potentially dampening demand for smaller medical office buildings and condos. Employment trends reflect the movement of health care services into lower-cost locations to reduce costs and to improve accessibility. Investment trends reflect strong medical-office market fundamentals and a broadening pool of interested investors. Key Stat: An aging U.S. population will continue to fuel demand for medical office space SENIORS HOUSING The seniors housing market improved modestly in 2017 and is set to improve further in 2018, largely due to lower construction levels. For the most part, the traditional segments of seniors housing—independent living, assisted living, memory care and nursing care—are not yet benefiting from baby boomer demand. However, the active adult segment will play an increasing and exciting role in the seniors housing industry in the coming years, as seniors housing continues to evolve. Property-level operating costs are investors’ primary concern, and investor appetite for this type of property is strong. CBRE RESEARCH 6 2018 U.S. Despite continued economic growth, the outlook for commercial real estate in 2018 is cloudy as the cycle enters its late stages, with policy uncertainty—particularly regarding corporate tax reform and the direction of interest rates—looming large. In times like these, “agility” is more important than ever for investors and occupiers. INDUSTRIAL: AGILE BY ASSET TYPE Big-box warehouses are in their golden era, from tenant and capital demand perspectives. The good news is that all megatrends point to this continuing, but it has gotten to be very expensive to build or buy big-box. The better news is that the golden era of industrial is now expanding into smaller, last-mile facilities near high-density urban centers, and this opportunity is only now garnering institutional attention. Institutional-grade industrial real estate doesn’t have to be big-box anymore. It can be a strategically located box and, with omnichannnel, it may not be “industrial” at all, but a hybrid retail/ industrial facility.


[User] OCCUPIER: AGILE BY PORTFOLIO FLEXIBILITY Large occupiers need to think about agility in both individual-market and portfolio terms, including the length of leases, options to expand or contract space, and the availability of talent. Double down on commercial real estate in those submarkets where you expect to attract, retain and create pools of talent for your business. The current labor shortage in the U.S. is only going to get worse. The very low national unemployment rate is 50% lower in many of the high-skill trades. While agility protects your downside risk/cost overall, don’t put all your eggs in the “save money” basket. Rather, put many of your scarce resources into the “make money” basket of markets with deep talent pools.

[Assistant] CBRE RESEARCH 7 2018 U.S. ECONOMY CBRE RESEARCH 8 2018 U.S. ECONOMY Despite all the noise from Washington, our forecast hasn’t changed significantly from a year ago. We still expect moderate economic growth with slowing employment gains in 2018, and an economic slowdown in 2019 brought on by minor supply/ demand imbalances throughout the economy. Our alternative economic scenarios are particularly relevant at present, given the wider range of possible economic outcomes.1 Below are several factors that could lead to greater or lesser economic growth in 2018.


[User] POTENTIAL GROWTH: TAX REFORM, INFRASTRUCTURE, CAPITAL SPENDING Corporate tax reform, which appears likely to be enacted, could stimulate the economy overall, but not necessarily in 2018. A lot depends on how corporations, which are the primary beneficiaries of the current bill, spend the money from tax savings and tax repatriation. Infrastructure policy is more likely to produce significant growth in the near term. It has been several decades since the country upgraded and replaced its aging infrastructure at a pace sufficient to spur economic growth. If Congress and the president were to craft an infrastructure spending bill that is well-considered—unlike the rushed transportation bill passed by Congress during the 2008 financial crisis—it could potentially raise GDP growth by 50 to 75 bps annually. GDP Growth (%) Baseline Upside Downside Severe Downside See our Insights articles for more detail.

[Assistant] CBRE RESEARCH 9 2018 U.S. looking at multilateral pacts rather than bilateral agreements, so getting them to prioritize negotiations with the U.S. may be challenging.


[User] Just as important to the economy is immigration. Without immigration, U.S. population and labor force growth are barely positive. In the House and Senate, there are currently several proposals to cut current immigration levels in half, which could lower GDP by 50 to 75 bps and exacerbate the current skills mismatch in the labor market. This might encourage tech firms to grow in Canada, rather than the U.S.

[Assistant] CAPITAL MARKETS CAPITAL MARKETS easing stance and a “flight to safety” increases the U.S.-bound flow of global capital. Once growth resumes, rates begin to normalize, with yields on the 10-year slowly increasing to around 3% by 2027. • Under these conditions, cap rates slowly adjust to higher interest rates in 2018 and then continue to increase during the slowdown, driven by widening risk premiums and lower expectations for net operating income (NOI) growth. Growth then resumes and cap rates increase by 30 to 120 bps by the end of 2023, with the exact magnitude varying by market and property type. Rising uncertainty in the macroeconomy has widened the range of potential outcomes facing the capital markets. With sustained growth or an economic slowdown both being plausible scenarios, what can we expect of the U.S. economy, interest rates, CRE cap rates and asset prices in the years ahead?


[User] GDP growth continues in 2018, followed by a short slowdown in 2019. Growth of the economy begins accelerating again in 2020.

[Assistant] CAPITAL MARKETS through Q3 2019, as robust economic growth is priced in, but then slowly increase as expectations adjust to slowing growth. By 2023, prevailing cap rates for office, industrial and retail are 50 to 60 bps above current levels. • Apartment cap rates stay relatively flat over this period, with economic growth supporting continued growth in already- high rents. slowdown and robust-growth scenarios, we forecast some degree of upward cap rate movement. Under the stagnation scenario, interest rates and cap rates stay roughly flat. Under none of the scenarios is income growth expected to fully offset the effect of cap rate adjustment. Our analysis implies that CRE values will either remain relatively flat or temporarily decline mildly or moderately, depending on which scenario plays out. Rather, the steady income returns that CRE is likely to generate over the period provide a solid basis for such strategy as investors simply wait out the asset value fluctuations. Our analysis deals with national trends, so a substantial variation in cap rates and asset prices may occur across markets and among individual assets in those markets. • Under this scenario, cap rates either stay flat or increase by 3 to 50 bps over five years, as robust growth expectations dissipate and slow growth is priced in by investors.


[User] Commercial real estate will remain an attractive investment over the period and, versus other asset classes, CRE’s steady income-generating/inflation-hedging characteristics may prove very attractive. Once the adjustment is over, asset price growth likely will return and investors can rebalance their strategies accordingly.

[Assistant] OFFICE should continue in 2018. Office-using job growth is expected to decelerate, however, slowing net absorption to a projected 32.1 million sq. ft. in 2018—down from 2017’s 50.1 million sq. ft.


[User] The scarcity of available qualified workers, reflected in October’s unemployment rate of 4.1% (the lowest since December 2000),2 is a factor.

[Assistant] Unemployment will likely remain low next year.


[User] Improved U.S. office market fundamentals should continue in 2018, but at a slower pace due to higher completions and the tight labor market’s impact on tenant demand. Older buildings lacking the amenities preferred by today’s workforce and the infrastructure to handle evolving technologies could struggle, particularly in markets where large volumes of high-quality product are being delivered. Meanwhile, suburban submarkets that offer a range of housing choices along with urban amenities—including retail and restaurant options, public transit and walkability—are well positioned to capture demand from the maturing millennials. As firms have focused on maximizing efficiency and productivity in their portfolios, net absorption has been more muted in recent years than in past expansions. s) (%) Office-Using Jobs Added (L) Office-Using Job Growth (R) Forecast or those with a bachelor’s degree or higher, the rate was just 2.0%.

[Assistant] Several lagging sectors have increased their shares of office leasing activity in 2017—a positive indicator of demand coming from a wider range of industries. Specifically, prospects for reduced financial industry regulation and oil price stabilization have fueled optimism in the financial services and energy sectors, and markets with concentrations of these industries, such as New York and Houston, should benefit. TECH SECTOR TO REMAIN TOP OCCUPIER The tech sector has been responsible for nearly 20% of major office leasing activity in recent years. In leading tech markets like the San Francisco Bay Area and Seattle, as well as emerging, lower-cost tech hubs like Charlotte and Phoenix, it will likely remain a primary demand driver in 2018. ft. each quarter for the 54 markets tracked by CBRE Research. Source: CBRE Research, Q3 2017.


[Assistant] Completions are expected to outpace net absorption for a second straight year in 2018, driving a modest 20-bps increase in the vacancy rate to 13.2%—only slightly above the cyclical- low of 12.9% in Q3 2017. Given this modest increase in vacancy, we expect overall rent growth to decelerate to 2.0% in 2018 from 2.4% in 2017. The strongest gains in employment, occupancy and rents will likely occur where recovery has lagged during this cycle, and where there is little or no construction underway, including many former housing-bubble markets in the South and West. NEW CONSTRUCTION DELIVIERIES TO FALL IN 2018 Development activity has been limited in recent years, due to an abundance of available space following the 2008 recession, modest rent growth in many markets and high construction costs. We estimate that deliveries will peak at 61 million sq. ft. in 2017, and decrease to 47 million sq. ft. With significant construction activity occurring in Manhattan, San Francisco, Seattle, Washington, D.C. and other large downtown markets, city centers are expected to account for a disproportionate share of new supply in 2018. OCCUPIER OCCUPIER THE AGILITY MANDATE Although there has not been a material shift away from long-term leased office space, occupiers are showing clear interest in flexible-serviced agreements. A spectrum of shorter- term offerings is available to occupiers today—from traditional serviced offices, to enterprise co-working models, to on- demand space offerings. A recent CBRE survey on agility, in collaboration with CoreNet Global, found that while only 16% of respondents consider themselves “highly agile” in their portfolio strategy, 67% believe that “portfolio agility” is critical to their future success.7 The strategies most commonly employed by self-described “agile” companies were shorter- term lease options and use of third-party service space.


[User] Corporate policy aside, personal devices and cloud technology have made employees more mobile and have rendered the physical office an optional place to work. This has led employees to seek more choice in workplace locations and employers to pursue greater flexibility in reducing long-term commitments in an uncertain business environment.

[Assistant] We expect corporations’ interest in shorter-term leases and third-party space aggregation to grow as these models are more widely tested and understood. LEADING WITH LABOR Labor remains the primary challenge facing corporations, with cyclical low unemployment, technology-driven competition and a widening skills gap. Occupiers are taking a balanced approach to real estate strategy, continuing to pursue space efficiency while reinvesting savings into workplace enhancements that will attract and retain employees. Eighty-six percent of the respondents to CBRE’s 2017 Americas Occupier Survey are either reinventing or adapting workplace standards to meet employee demand for more amenity-focused, flexible and technology-driven environments.4 Occupiers in the financial and technology sectors are leading this charge, but more conservative industries—like legal—are adopting these principles as well. U.S. law firms have lowered their space requirements by an average of 27% over the past 18 months; many have moved into prime office space and implemented improved workplace design.5 These new standards create an attractive destination for employees and foster a sense of place, balancing the additional expenses that some of them create. INDUSTRIAL & LOGISTICS INDUSTRIAL & LOGISTICS From a capital markets perspective, industrial has become institutional investors’ favorite asset type, and the flood of investment capital into the sector is reflected in record-level asset pricing and widespread low cap rates. For users and occupiers, pricing is at record highs across the board. Over the next year, new market entrants can expect rents to continue rising at roughly the rate of the past few years. Investors should be aware that cap rates and investment prices have stabilized, with the pricing gap between Class A and Class B narrowing.


[User] The industrial & logistics market remains on solid footing and continues to expand. Demand has slowed a bit from its well-above-average run between 2013 and 2016, but 2017’s quarterly average net absorption of 52.9 million sq. ft. is right in line with the quarterly average over the cycle that began in 2010. Consistent demand for all types of warehouse space, steadily declining availability and a steady rise in rents have been this cycle’s hallmarks, resulting in some impressive milestones: 30 consecutive quarters of positive net absorption, availability at its lowest since 2001, and 24 consecutive quarters of rent growth. The challenge for tenants in this market is obvious: A lack of quality choices in most markets has put users seeking to expand their supply chains in a difficult spot. While record-level rents are a concern, the compromises tenants must make on location decisions—either at the market or submarket level— are the real issue. These decisions can have a profound impact on overall supply chain costs, which are heavily influenced by transportation (both inbound and outbound) and labor costs.

[Assistant] On the horizon are new technologies like automated trucks and robotics; these will influence transportation and labor costs and, in turn, change site selection decisions. This will affect all markets and will likely bring less expensive land and real estate into play—sites, on the outskirts of major or secondary markets, that are currently too distant from population hubs. In theory, automated trucks have a one- or two-day service radius—much wider than a non-automated vehicle—that would allow users to operate from farther-flung locations without compromising service quality. This is likely a mid- to long-term change and doesn’t impact our short-term outlook for the market. In our view, although the economic cycle is a bit extended, we are still at a very early stage in the e-commerce and omnichannel cycle. With this type of user requiring up to three times more space than a traditional retail supply chain user, and with e-commerce sales forecast to grow by 10% annually and to top $500 billion by 2020, demand for high-quality, well-located industrial real estate should not wane anytime soon.


[User] U.S. demand (as measured by net absorption) has outpaced supply by nearly 2-to-1, despite rapidly growing rents and declining vacancy. In general, the discipline shown by developers has been healthy and has allowed for steady rent growth that has virtually all markets at full recovery. Although the gap between supply and demand narrowed in 2017 to near-equilibrium for the first time in more than a decade, the inability of the supply side to meet demand remains a problem. Users in the last mile of the supply chain are struggling to find adequate prime infill space. Development of traditional warehouse space in infill locations is difficult due to the high costs of building in cities and the lack of large sites that can support warehouses. In response to this problem, a style of warehouse that is common in Asia and Europe—the multi-story warehouse—has begun to emerge in the U.S. Essentially three or more warehouses stacked on each other, with ramps providing trucks access to the upper units, this type of facility allows Class A distribution space to be developed on small sites that could not otherwise support such facilities. The addition of such space would be a welcome change in key markets like Los Angeles, Orange County and Oakland, where vacancy rates are below 2% and last-mile users are trying reach massive urban populations.

[Assistant] Effective, precise location decisions are paramount—so much so that users, to this point, have accepted record-high occupancy costs to secure locations from which they can operate efficiently. Location is especially critical within the last mile, where users look to reach their customers as quickly as possible. Ideal locations tend to be urban and infill—close to population clusters, but often devoid of industrial real estate.


[User] Intense competition for the real estate that does exist in these areas has driven local availability rates down and rents up, but neither has slowed demand in these prime infill locations. We believe that rising rents, while not ideal for the tenant, are unlikely to curb demand as long as options remain in the primary and better secondary markets and submarkets. In the near term, the greatest risk to a market is an erosion of demand due to a lack of supply. The current fundamental drivers of demand—economic growth, consumer consumption and a growing omnichannel supply chain—are not likely to change next year. However, a lack of quality choices could force users to delay their decisions and could have a material impact on overall net absorption in the market.

[Assistant] RETAIL RETAIL medium- and long-term growth potential at lower prices. GROWTH IN RETAILER-LANDLORD PARTNERSHIPS Partnerships between retailers and landlords will increase in 2018. Several factors will contribute to this trend: retailers demanding more flexibility in lease lengths and terms, landlords looking for ways to ensure the long-term viability of their tenants, and both sides seeking new ways to drive traffic and sales in brick-and-mortar stores. As omnichannel continues to evolve in 2018, retailers and landlords will realize that working together through shared data, marketing and other initiatives is more effective than working apart. We expect to see new and more prominent examples of this partnership trend next year, with landlords investing more in new retail concepts through incubator initiatives. Data sharing between retail tenants and landlords—especially in the mall segment— in key areas like traffic and sales will increase, as both sides seek to improve revenue and marketing effectiveness.


[User] STRONG RENT GROWTH EXPECTED FOR SOME NON-GATEWAY MARKETS Non-gateway markets like Atlanta, Houston, Nashville and Denver should see rent growth of at least 2.5% over the next five years, as demand outpaces supply. Successful redevelopment in the urban core and a rise in mixed-use projects in the suburbs, together with strong employment and population growth, make these markets especially attractive to investors.

[Assistant] Major gateway markets like Washington, D.C. and Chicago, where demographic and demand growth are steady but less robust, are expected to see rents grow, but at a more moderate pace. Changing demographics, consumer expectations and omnichannel retailing will continue to reshape retail and its real estate environment in 2018. As consumer demand for low prices increases, growth in the off-price and discount sector will mark the online and offline retail environments. In the brick-and-mortar space, a growing performance gap between “prime” and “non-prime” assets, driven in part by some increases in retail vacancy, will create opportunities for bullish investors to obtain well-located assets at reduced prices. Across retail segments, the evolving relationship between landlords and retailers will generate new partnerships to drive traffic and sales. Partially insulated from exposure to e-commerce, grocery stores and building material & garden supply centers should continue to perform better than other segments. Topping the national list for forecast rent growth are dynamic, high-population-growth and low- unemployment markets in the South and West, where demand will outpace supply. CONTINUED GROWTH IN DISCOUNT AND OFF-PRICE RETAIL The consumer trend toward off-price and discount retail will continue in 2018, with mid-range retailers seeking new ways to limit share losses to lower-priced players. Since the 2008 recession, greater consumer access to lower-priced goods— especially in key soft-goods categories like apparel and with the expansion of key discount and value retail brands—has shifted consumer spending among all age groups toward lower-priced options. This has placed significant pricing pressures on retailers in the mid-price range, who struggle to compete with the quality and brand cachet of luxury brands and the value offered by low-price players. In 2018, we anticipate many of these mid-range brands to focus on lower prices and discounting in a bid to retain customer share and adapt to new price expectations of consumers. OPPORTUNITIES TO REPOSITION FLAGGING RETAIL CENTERS The performance gap between well-located, prime retail assets and those considered “non-prime” (primarily B markets and below) will continue to grow in 2018, reflected in both rent levels and cap rates. In some markets, however, price declines will create opportunities for investors to capture assets with segments with weak employment-growth forecasts include apparel, sporting goods and electronics, while healthy employment growth is expected for grocery stores and building materials & garden supply stores.


[User] Potential demand for each retail center type can be forecast using local retail employment growth projections.

[Assistant] Due largely to closures, department store employment dropped by 3% in the past year—a trend that is expected to continue. HOTEL HOTEL weekday ADRs, $120.87 to $118.54. This is not a startling shift, but one that points to leisure travel’s growing importance. The oversized growth in leisure demand is partially explained by shifts in the hotel guest profile and in the spending habits of U.S. age cohorts. In 2015, well-heeled, travel-happy senior citizens contributed the largest share of total spending on lodging. Spending by seniors will likely continue to increase as the last cohort of baby boomers enters the seniors age group. room nights sold. In four other cities—Oahu, San Francisco, Los Angles and Orlando—the contribution from international travel is 25% or more. MULTIFAMILY MULTIFAMILY As of December 2017, nearly 23% of all units under construction in U.S. markets are in urban cores. In the long term, urban core multifamily will perform well, but for the short term, market statistics indicate that the best development opportunities are in the suburbs.


[User] New suburban development will focus on areas with a strong live-work-play environment. These are submarkets located outside of the urban core that have characteristics similar to downtowns (e.g., concentrated employment, retail and entertainment amenities, etc.). This focus will bring higher- density, upscale apartment living to the suburbs, and with more millennials starting families, developers are factoring access to superior schools into their site-selection process.

[Assistant] Starts will continue to slow in 2018, as banks have scaled back development lending over the past two years. While other sources of development capital have emerged (e.g., debt funds) or reemerged (e.g., HUD financing), the climate for financing new development should remain more conservative, and debt capital costs more expensive. The availability and cost of labor are additional challenges driving the significant rise in building costs. • “Knowledge hubs” that have strong concentrations of employment in high-skill industries; these markets also tend to have a strong academic presence (e.g., Austin, Nashville and Denver).


[User] • Emerging low-cost urban hubs like Dallas and Atlanta that continue to post some of the nation’s largest net in-migration numbers.

[Assistant] Knowledge hubs seem to have the strongest fundamentals currently, but while their industry mixes draw well-educated workers and their favorable cost of living is a boon for employment and population growth, many are also facing significant headwinds from the supply side. Demand drivers are strong in the proximate secondary markets too, but the demographic mix in these markets might be less conducive to high-end, high-priced product. Low-cost urban hubs offer strong fundamentals but also face supply challenges like many of the country’s largest cities. Ultimately, to achieve outsized late-cycle returns, today’s investment strategy must find balance among all these trends.


[User] Migration drivers fall into one of two categories: push factors or pull factors.9 As push factors work to drive certain demographics out of bigger markets, pull factors draw populations inward from around the country. Together, these dynamics are highly correlated with recent years’ clear outperformance in mid-sized markets and suburban submarkets —a trend that will persist in 2018 and beyond.

[Assistant] DATA CENTERS DATA CENTERS For both multi-national enterprise users and hyperscale cloud service providers, data center requirements continue to stretch around the world, with single users often simultaneously focusing on far-flung locations like Tokyo, Portland, Chicago and Amsterdam. To keep up with cloud adoption demand, hyperscale CSPs will continue their focus on cost-competitive solutions to keep cloud pricing low. However, their need to expand rapidly and in multiple markets will continue to fuel their own builds as well as their deployments with third-party data center operators. Perhaps more than any other real estate asset type, the data center sector has emerged as one of the most globally focused.


[User] Nearly 300 megawatts are scheduled for delivery next year in the primary data center markets that CBRE tracks.10 We do not foresee any risk of oversupply, since key markets like Chicago, Northern Virginia and Silicon Valley currently have vacancy rates near or below 5%. Furthermore, pre-leasing levels remain high, with nearly 50% of oncoming capacity already committed.

[Assistant] DATA SECURITY There have been a significant number of headline-grabbing, data-related outages and breaches in the past year, several of which contributed to third-party data center leases in several markets as concerns about mitigating data security risks reached the C-suite level. We expect this will continue contributing to demand in 2018, particularly as many enterprise users become increasingly sensitive to the risk in owning and operating their own data center facilities, outside of their core business. LIFE SCIENCES LIFE SCIENCES Over the four years ending September 2017, U.S. employment in biotechnology research surged 27.1%, versus 7.2% for all jobs. A staggering pace of technological advancement and an aging population are generating immense opportunity and acute risk in the life sciences industry, which roughly encompasses the pharmaceutical, biotechnology and medical device sectors. Commercial real estate plays a front-and-center role as the industry addresses these dynamic changes, particularly in laboratory space, where the bulk of the industry’s innovation occurs. scrambling to identify solutions that are more effective and less costly. Cost pressures have driven the industry to focus on operating in markets with greater concentrations of scientific talent, and this is reflected in the market dynamics for laboratory space throughout the country. depth of scientific talent, as well as access to capital, have created diverging degrees of vibrancy across markets.


[User] Other life sciences markets are more exposed to consolidation in their outsized pharmaceutical and medicine manufacturing bases (New Jersey, Philadelphia, Chicago), but are still experiencing exceptionally strong momentum in select submarkets.

[Assistant] As a result, these markets will continue to strengthen, but also reconcile with legacy industry properties.


[User] Moreover, the surge of venture capital, which drives significant demand for lab space, has plateaued and therefore also warrants close monitoring.

[Assistant] OPPORTUNITIES AND RISKS FOR CRE IN THE LIFE SCIENCES SECTOR Strong demand drivers, rapid technological advances and plentiful capital have most life sciences clusters around the nation experiencing strengthening fundamentals in their laboratory markets. MEDICAL OFFICE MEDICAL OFFICE medical-office demand in the years ahead. Medical providers highly value locations near large patient populations and are willing to sign long-term leases for such properties—another attractive feature for investors. Employment in U.S. education and health services (EHS), of which health care represents nearly 70%, is projected to increase by 1.1% in 2018—a net gain of approximately jobs. The sector is expected to add nearly 1 million jobs over the next five years— the second-highest total among the major employment sectors. Employment trends also reflect the movement of health care services into lower-cost locations, including retail centers, to reduce costs and make these services more easily accessible to The population aged 65 and above is expected to increase by 1.7 million (3.3%) in 2018 and by 9.2 million (18.0%) over the next five years, driving strong short- and long-term demand for medical services. As markets with high concentrations of older residents (many in the North and Midwest) or with fast-growing overall and older populations (many in the South and West) are expected to benefit, this growth will generate opportunities for investment in medical office buildings throughout the U.S. For several years, investment in this product type has been increasing in tandem with the aging population, the insured population and the historical stability of medical office buildings relative to many other types of commercial real estate.