Commercial Real Estate Outlook August 2014

COMMERCIAL REAL ESTATE
George Ratiu
Director, Quantitative & Commercial Research

Economic activity rebounded from negative
territory during the second quarter. Based
on the Bureau of Economic Analysiss first
estimate, gross domestic product (GDP)
rose at an annual rate of 4.0 percent during
the second quarter of the year, after
declining 2.1 percent in the first three
months of 2014.

The GDP advance was boosted by growth
in consumer spending and business
investments. Consumer spending
advanced at an annual rate of 2.5 percent,
as consumers upped purchases of durable
goods, which jumped 14.0 percent during
the second quarter. Buoyed by warmer
weather, consumers opened their wallets
and spent more money on motor vehicles
(up 17.5 percent), furniture and household
appliances (up 13.1 percent), and
recreational goods and vehicles (up 13.4
percent). Consumer purchases of
nondurable goods rose by a more modest
2.6 percent.

Business spending growth outpaced
consumer spending, as companies
investments in equipment rose at a healthy
annual rate of 7.0 percent. Investments in
information processing and industrial
equipment rose by 21.4 percent and 20.1
percent, respectively. Investments in
intellectual property grew at a 3.5 percent
rate, while spending on structures advanced
at 5.3 percent.

International trade activity also picked up
speed during the second quarter, boosting
net absorption figures for the industrial
sector. After declining during the winter
months, exports gained 9.5 percent, while
imports rose 11.7 percent.

Government spending advanced at an
annual rate of 1.6 percent during the second
quarter, after declining 0.8 percent in the
first. With stronger balance sheets, state
and local governments increased spending
by 3.1 percent in the second quarter. At the
federal level, government spending
remained negative, declining at a rate of 0.8
percent, following cuts in nondefense
expenditures.

The relatively positive business sentiment
was mirrored in the employment figures.
Payroll employment marked a solid second
quarter, with a total of 831,000 net new jobs.
Goods-producing industries added 114,000
new jobs, while service industries provided
an additional 662,000 net new positions.
The difference to the total number came
from government employment.

(continued on page 2)
Economic Activity Boosts Demand for Commercial Spaces in Q2
NATIONAL ASSOCIATION OF REALTORS
| RESEARCH DIVISION
1.8
4.5
3.5
-2.1
4.0
2013.Q2 2013.Q3 2013.Q4 2014.Q1 2014.Q2
GDP (% Annual Chg)
Source: BEA
2
(continued from page 1)

Professional and business services added 202,000 new
jobs, while the information and financial services
industries contributed a combined 39,000 new jobs. The
employment growth in office-using industries provides a
welcome lift to demand for office space.

The industrial real estate sector received a welcome
boost from steady increases in online retail sales, as
employment growth in the warehousing and storage
industries advanced by 4.6 percent on a year-over-year
basis during the second quarter. In comparison,
employment in the retail trade industries rose by 2.2
percent yearly during the same period.

The unemployment rate declined from 6.7 percent in the
first quarter 2014 to 6.2 percent in the second quarter.
However, the labor force participation rate continued its
downward trend during the period, declining to 62.8
percent. Employee compensationadjusted for
inflationincreased by 2.6 percent during the second
quarter.

Aided by positive economic trends, consumer confidence
rose during the quarter. The Conference Boards index
rose to a value of 83.4 in the second quarter from 80.5 in
the first quarter. The index hit a value of 90.9 in July,
approaching the equilibrium point of 100.0.

The GDP outlook for the third and fourth quarters of 2014
projects stronger GDP growth rates of 2.8 and 2.9
percent, respectively. With payroll employment growth in
the latter half expected to add another 1.0 to 1.5 million
net new jobs, the unemployment rate is expected to
decline to an average 6.0 percent by year-end.

NATIONAL ASSOCIATION of REALTORS
| RESEARCH DIVISION | www.realtors.org/research-and-statistics

2012 2013 2014 2015
Annual Growth Rate, %
Real GDP 2.8 1.9 1.6 2.8
Nonfarm Payroll
Employment 1.7 1.7 1.8 1.8
Consumer Prices 2.1 1.4 2.6 3.5
Level
Consumer Confidence 67 73 84 88
Percent
Unemployment 8.1 7.4 6.3 5.9
Fed Funds Rate 0.1 0.1 0.1 0.8
3-Month T-bill Rate 0.1 0.1 0.1 0.9
Corporate Aaa Bond Yield 3.7 4.3 4.4 5.2
10-Year Govt Bond 1.8 2.5 2.7 3.6
30-Year Govt Bond 2.9 3.4 3.6 4.6
Source: National Association of REALTORS
NATIONAL 2.91%
OFFICE 2.93%
INDUSTRIAL 3.26%
RETAIL 3.22%
APARTMENT 2.41%
Source: National Council of Real Estate Investment Fiduciaries
-1000
-500
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Payroll Employment Monthly Change (SA, '000s)
Source: BLS
3

OFFICE 2014 III 2014 IV 2015 I 2015 II 2015 III 2015 IV 2016 I 2014 2015 2016
Vacancy Rate 15.7% 15.7% 15.9% 15.8% 15.7% 15.7% 15.7% 16.2% 15.8% 15.6%
Net Absorption
('000 sq. ft.) 12,094 10,995 12,163 12,669 14,190 11,656 13,315 36,192 50,678 57,782
Completions ('000 sq. ft.) 6,185 6,352 10,010 11,978 9,774 10,037 10,625 26,450 41,799 44,862
Inventory ('000,000 sq. ft.) 4,099 4,105 4,115 4,127 4,137 4,147 4,158 4,105 4,147 4,192
Rent Growth 0.6% 0.6% 0.7% 0.8% 0.8% 0.9% 0.8% 2.6% 3.2% 3.6%

INDUSTRIAL
2014 III 2014 IV 2015 I 2015 II 2015 III 2015 IV 2016 I 2014 2015 2016
Vacancy Rate 8.9% 8.8% 8.7% 8.5% 8.5% 8.4% 8.3% 8.9% 8.5% 8.1%
Net Absorption
('000 sq. ft.) 27,971 24,744 18,891 26,237 31,484 28,336 18,908 107,580 104,948 105,044
Inventory ('000,000 sq. ft.) 8,452 8,468 8,482 8,504 8,524 8,537 8,550 8,468 8,537 8,598
Rent Growth 0.6% 0.7% 0.6% 0.7% 0.7% 0.8% 0.7% 2.4% 2.8% 2.9%

RETAIL
2014 III 2014 IV 2015 I 2015 II 2015 III 2015 IV 2016 I 2014 2015 2016
Vacancy Rate 9.8% 9.7% 9.8% 9.7% 9.6% 9.6% 9.6% 9.8% 9.7% 9.4%
Net Absorption
('000 sq. ft.) 4,030 3,918 5,215 4,442 3,567 6,089 6,565 11,214 19,314 24,313
Inventory ('000,000 sq. ft.) 2,033 2,035 2,036 2,039 2,042 2,046 2,050 2,035 2,046 2,062
Rent Growth 0.6% 0.6% 0.5% 0.6% 0.6% 0.7% 0.6% 2.0% 2.4% 3.0%

MULTI-FAMILY
2014 III 2014 IV 2015 I 2015 II 2015 III 2015 IV 2016 I 2014 2015 2016
Vacancy Rate 4.1% 4.0% 4.0% 4.0% 4.0% 4.0% 4.1% 4.0% 4.0% 4.2%
Net Absorption (Units) 67,429 63,595 43,399 39,969 38,106 48,590 35,778 223,421 170,065 140,128
Completions (Units) 49,475 47,123 29,143 38,899 37,843 40,576 26,257 191,481 146,461 122,381
Inventory
(Units in millions) 10.0 10.1 10.1 10.1 10.1 10.2 10.2 10.1 10.2 10.3
Rent Growth 1.0% 1.0% 1.0% 1.0% 1.0% 0.9% 1.1% 4.0% 3.9% 3.5%

Sources: National Association of REALTORS / Reis, Inc.
4

Source: NAR, Reis, Inc.
Office Industrial Retail Multifamily
Albuquerque NM 17.5 11.5 2.7
Atlanta GA 19.5 13.6 13.2 5.7
Austin TX 15.7 10.9 6.5 6.2
Baltimore MD 16.3 11.6 6.1 3.4
Birmingham AL 13.4 13.2 6.3
Boston MA 13.2 18.4 6.5 4.2
Buffalo NY 16.2 13.5 3.4
Central New Jersey NJ 21.3 9.8 2.9
Charleston SC 14.1 10.7 6.8
Charlotte NC 17.3 12.7 10.4 6.4
Chattanooga TN 15.7 14.9 4.5
Chicago IL 18.6 8.9 12.0 3.4
Cincinnati OH 20.6 8.6 12.5 3.5
Cleveland OH 22.6 8.8 14.8 3.0
Colorado Springs CO 18.0 15.1 4.3
Columbia SC 17.6 10.4 6.6
Columbus OH 19.3 9.5 16.0 4.7
Dallas TX 23.1 12.5 13.0 5.4
Dayton OH 26.2 15.7 5.3
Denver CO 16.8 7.6 10.4 4.7
Detroit MI 25.3 11.4 11.5 3.0
District of Columbia DC 9.3 7.4
Fairfield County CT 21.7 3.9 5.3
Fort Lauderdale FL 19.4 8.6 9.9 4.1
Fort Worth TX 15.9 10.0 12.1 4.7
Greensboro/Winston-Salem NC 21.2 11.6 5.9
Greenville SC 18.8 14.1 5.4
Hartford CT 19.7 10.0 2.5
Houston TX 14.7 8.0 11.8 5.9
Indianapolis IN 19.6 9.6 15.1 6.2
Jacksonville FL 20.9 8.0 12.6 6.7
Kansas City MO 16.2 10.2 11.5 4.7
Knoxville TN 14.4 11.1 5.1
Las Vegas NV 25.9 11.6 5.1
Lexington KY 16.3 8.2 5.1
Little Rock AR 11.5 11.7 6.3
Long Island NY 13.0 5.2 2.7
5
Los Angeles CA 15.0 3.8 5.7 3.3
Louisville KY 15.2 9.2 5.9
Memphis TN 23.4 14.5 11.4 8.8
Miami FL 16.0 6.1 7.2 3.9
Milwaukee WI 18.5 12.6 3.6
Minneapolis MN 16.9 7.2 10.6 2.8
Nashville TN 13.1 8.1 8.2 5.5
New Haven CT 16.8 13.7 2.5
New Orleans LA 12.7 11.6 5.6
New York NY 9.6 3.0
Norfolk/Hampton Roads VA 16.0 9.4 5.5
Northern New Jersey NJ 18.6 5.6 4.2
Oakland-East Bay CA 17.7 9.3 6.2 2.6
Oklahoma City OK 16.6 3.5 13.1 4.8
Omaha NE 14.5 9.0 3.8
Orange County CA 16.9 5.3 2.2
Orlando FL 17.5 11.0 11.8 4.9
Palm Beach FL 17.2 6.6 10.6 4.8
Philadelphia PA 13.6 9.7 9.3 3.3
Phoenix AZ 24.8 10.9 10.2 4.8
Pittsburgh PA 16.2 8.9 7.7 3.8
Portland OR 13.3 8.0 8.0 3.1
Providence RI 15.5 12.2 2.2
Raleigh-Durham NC 14.7 14.7 9.2 5.8
Richmond VA 14.4 12.8 9.5 4.9
Rochester NY 17.0 12.3 2.6
Sacramento CA 20.4 11.8 11.0 2.2
Salt Lake City UT 17.4 11.9 4.1
San Antonio TX 17.4 7.3 10.9 5.4
San Bernardino/Riverside CA 23.2 6.9 10.2 3.0
San Diego CA 15.7 6.7 6.1 2.6
San Francisco CA 12.4 10.9 3.5 3.3
San Jose CA 18.2 16.6 4.6 3.1
Seattle WA 13.0 5.9 7.0 4.1
St. Louis MO 17.2 7.0 12.2 4.6

6
Suburban Maryland MD 15.7 10.9 7.9 3.9
Suburban Virginia VA 17.1 10.5 5.4 5.1
Syracuse NY 14.7 13.8 3.1
Tacoma WA 16.6 12.9 3.3
Tampa-St. Petersburg FL 20.8 7.8 10.9 4.6
Tucson AZ 16.6 9.9 5.6
Tulsa OK 16.9 16.3 5.6
Ventura County CA 18.1 8.7 2.6
Westchester NY 18.9 8.0 2.9
Wichita KS 16.9 14.0 3.7

7

2014.Q2 Cap Rates
Office 8.9%
Industrial 8.4%
Retail 8.2%
Multifamily 8.1%
Hotel 8.0%
Development 8.9%
-50%
-40%
-30%
-20%
-10%
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10%
20%
30%
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Sales Volume Sales Prices
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Direction of Business Opportunity
Source: National Association of Realtors

5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
11.0%
12.0%
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REALTORS Commercial Capitalization Rates
Office Industrial Retail Multifamily Hotel
Source: National Association of Realtors

0%
20%
40%
60%
80%
100%
2014.Q2 2014.Q1
REALTORS Most Pressing Challenges
Other
Pricing Gap: Buyers vs
Sellers
National Economy
Local Economy
Financing
Distress
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REALTORS Commercial Transaction Closing Rate
8
The Research Division of the National Association of REALTORS monitors and
analyzes monthly and quarterly economic indicators, including retail sales, industrial
production, producer price index, gross domestic product and employment data which
impact commercial markets over time. In addition, the Research Division provides
several products covering commercial real estate:

Commercial Real Estate Quarterly Market Survey
Commercial Real Estate Lending Survey
Commercial Member Profile
Expectations and Market Realities in Real Estate 2014
CCIM Quarterly Market Trends
SIOR Commercial Real Estate Index

For questions or comments, please contact George Ratiu, Director, Quantitative &
Commercial Research, at gratiu@realtors.org.

Although the information presented in this report has been obtained from reliable
sources, NAR does not guarantee its accuracy, and such information may be
incomplete. This report is for information purposes only. All opinions, assumptions and
estimates constitute NARs judgment as of the date of this publication and are subject
to change and evolving events. Actual results may vary from forecast results.

For more information:

Copyright 2014 NATIONAL ASSOCIATION OF REALTORS
. Reproduction, reprinting or
retransmission in any form is prohibited without written permission. For questions regarding
this matter please e-mail eresearch@realtors.org.
500 New Jersey Avenue, NW Washington, DC 20001 2020
800.874.6500 www.REALTOR.org
www.facebook.com/narresearchgroup
twitter.com/#!/NAR_Research
REALTOR.org/research-and-statistics
economistsoutlook.blogs.realtor.org
www.ccim.com/resources/itq
www.siorprofessionalreport-digital.com

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COMMERCIAL REAL ESTATE

| RESEARCH DIVISION | www.realtors.org/research-and-statistics

| RESEARCH DIVISION | www.realtors.org/research-and-statistics

| RESEARCH DIVISION | www.realtors.org/research-and-statistics

| RESEARCH DIVISION | www.realtors.org/research-and-statistics

| RESEARCH DIVISION | www.realtors.org/research-and-statistics

| RESEARCH DIVISION | www.realtors.org/research-and-statistics

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