Presented toAmerican Society of

Professional Estimators

April 21, 201412 Noon

Builders Exchange

ASPE Annual Economic Forecast

2

1. Rules to Remember

2. National Trends

3. California

4. Bay Area

5. Local Trends

Table of Contents

Economic Forecasting

The only function of economic forecasting is to make astrology

look respectable.

John Kenneth Galbraith

3

3 Rules to Remember

• Construction is one the last industries to go into a recession and one of the last to come out.

• Real Estate and Construction are Dance Partners-what one industry does affects the other

• Overall employment is a key indicator for the health of the construction industry

4

Annual Rate of Construction Spending US (Billions)1

Public ($) Private ($) Total ($)

2005 256.3 904.3 1160.6

2006 280.9 896.8 1177.7

2007 297.8 842.4 1140.2

2008 319.6 737.1 1053.7

2009 309.6 593.0 902.5

2010 301.0 486.9 787.9

2011 286.6 529.7 816.4

2012 270.1 614.9 885.0

2013 275.0 659.4 934.4

5

1Numbers come from December Annual Construction Report for the US Census Bureau, except for 2013 numbers which came from the November Report.

United States Construction Starts

In billons 2012Actual

2013Estimate

2014Forecast

% change 12-13 % change 13-14

Total Construction 485,296 508,050 555,300 +4.7% +9.0%

Residential 165,965 207,500 254,250 +25% +23%

Single Family 125,791 159,525 201,125 +26.8% +26.0%

Multifamily 40,174 47,975 53,125 +19.4% +11.0%

Nonresidential 157,581 163,250 176,700 +3.6% +8.0%

Nonbuildings 161,750 137,300 124,350 -15.1% -9.0%

6ENR Magazine, December 2/9 2013, p2

AIA 2014 Consensus Construction Forecast

Forecast 2014 % Change 2015% Change

Non Residential Total 5.8 8.0

Commercial Total 10.3 10.8

Office 9.2 10.8

Retail & Other Commercial 10.5 11.5

Hotel 13.1 9.2

Industrial Total 7.8 8.7

Institutional Total 7.8 8.7

Health 5.2 7.8

Education 2.8 5.8

Religious -1.7 1.3

Public Safety -0.2 3.1

Amusement/Recreation 9.9 7.57

Dodge ConstructionUS Outlook-2014

• Total Construction up 9% in dollars• Multi Family Housing up 11% in dollars• Single Family Housing up 26% in dollars• Commercial Buildings up 17% in dollars• Public Works down -5% in dollars• Electric Utilities down 33% in dollars• Institutional Buildings up 2% in dollars

8Door and Window Magazine, website

California Housing Starts (in thousands)

Housing Starts0

20406080

100120140160180

70.687.5

124.9

151.7 157.1 161.4

2013 2014 2015 2016 2017 2018

9

Eberhardt School of Business, January 2014, Metro Forecast

Residential Building Permits-Bay Area

Counties New Bldg. Perm. Jan-Oct 2013

Change from Jan- Oct 2012

New Bldg. Perm. Jan-Oct 2013

Change from Jan-Oct 2012

San Francisco, San Mateo and Marin

418 39.8% 5513 82.5%

Santa Clara, San Benito

1,686 35% 4,310 24.6%

Alameda, Contra Costa

2,295 18.8% 1,944 -4.5%

TOTALS 4,399 26% 11,767 38%

10

1”Young Couples Seek Townhouses and condos with an urban feel”, San Jose Mercury News, December 17, 2013 P. A1

Single-Family Units Multi-Family Units

Santa Clara County Residential Building Permits

Year 2007 2008 2009 2010 2011 2012 2013

Buildings 1,938 1,051 618 841 991 1,528 1,933

Units 4,001 3,273 1,024 4001 3,001 5,433 7,511

Construction cost (in millions)

952 618 295 699 680 1,035 1,596

11

US Census Bureau Statistics

Office Vacancy Rates4Q 2014

12

Cornish & Carey Silicon Valley Market Summary, page 2 4th Q 2013

Region Inventory Vacancy Rate (%)

Campbell 2,220,503 10.25%

Cupertino 4,049,215 1.21%

Los Altos 1,163,097 8.57

Los Gatos 1,866,232 5.76%

Milpitas 1,113,735 16.75%

Mountain View 6,925,964 3.03%

Palo Alto 8,075,997 4.51%

San Jose 27,696,775 16.03%

Santa Clara 11,497,211 18.6%

Saratoga 345,231 1.3%

Sunnyvale 10,486,115 6.83%

Summary 75,440,075 10.71%

Santa Clara County Real Estate Trends-Retail

• Construction activity 450,000 sq. ft. in 2013.

50% increase over 2012.• Development pipeline-2 million sq. ft. in San Jose.

(650,000 sq. ft. at Valley Fair)

13

Marcus & Millichap San Jose Metro Area Retail Research Report 3rd Quarter 2013

Santa Clara County Real Estate Trends-Commercial

• Vacancy rate 12.7% in 2nd Q lowest since 2008.• 3,200,000 sq. ft. under way (80% preleased)• 2,100,000 sq. ft. delivered in 2013.• 1,600,000 sq. ft. to be completed in 2014• 5,500,000 sq. ft. planned (1,000,000 for Nvidia)

14

Marcus & Millichap San Jose Metro Area Commercial Research Report 3rd Quarter 2013

Santa Clara County Real Estate Trends-Apartments

• 6,600 units are being built now (6,000 MktRt)• 3,700 units in the pipeline.• 2013-3,500 come online-expanding inventory

by 1.4%-(2012-1,500)• Development expected to accelerate slightly

in 2014

15

Marcus & Millichap San Jose Metro Area Apartment Research Report 4th Quarter 2013

So far in 2014

As of the end of February 2014, contracts have been awarded for $173.7 million worth of future commercial projects in Santa Clara and San Benito County. That is a 72% increase over the same period last year.

16

“McCarthy Construction to open San Jose Office, San Jose Business Journal, April 8, 2014

17

Santa Clara County-ConstructionEmployment Statistics by Month-

Jan.07-Nov.13

Peak Employment- September 2000, 52,200 November 2013 Employment 41,400

05000100001500020000250003000035000400004500050000

Axi

s Titl

e

Employment

Employment

Santa Clara County Construction Employment-Annual Average

In Thousands

44.441.6 43.0 44.5 46.8 47.2

44.2

34.4 32.2 31.434.7

38.8

0.0

10.0

20.0

30.0

40.0

50.0

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

18

Bureau of Labor Statistics-San Jose, Santa Clara, Sunnyvale Statistical Area

Bay Area Forecast-Unemployment (%)

Metro Area 2013 2014 2015 2016 2017

San Francisco 5.5 5.0 4.7 4.3 3.8

San Jose 6.9 6.4 5.9 5.3 4.6

Oakland 7.4 6.9 6.5 5.8 5.1

Santa Cruz 9.2 8.6 8.0 7.3 6.7

Vallejo 8.3 8.0 7.6 6.6 5.7

California 8.9 8.5 8.0 7.3 6.4

19

Eberhardt School of Business, January 2014, Metro Forecast

20

Plans in Online Plan Room By Month (2009-2013)

1142

143 165

220

221

272

216

244

148

148

138 152

109

144

183

176

233

197

165 176

147

119

109

188

124 138

174 191

218 235

175 185

143

141

131 153

136 16

1

211

202

248

254

211

196

159 181

159

150172

167 185

288

257

220

207

170

163

201

158

204

050100150200250300350400450

2392 plans posted in 2013

21

A few notes about Public Works Construction

• Public Works construction is the last construction sector to go into a recession and last to come out of the recession.

• The Builders Exchange received 30% less CalTrans Plans than in 2013• A new highway bill in Congress should provide at ten-fold increase in

funding of Transportation Infrastructure.1

• 75% of tax revenues are based on property taxes-it takes 3 years between changes in home prices and local construction spending activity. 1

• Many cities are still struggling with the elimination of redevelopment.• Because the government is employing fewer workers now than at the start

of the recession, total employment—private sector plus government workers—is still a half million jobs short of its peak before the recession.2

1“The US Cement Industry:Economic Clouds are Lifting” ,www.worldcement.com San Francisco Federal Reserve Board, Fed Views, April 10, 2014

22

Other Trends

•While speculation fueled the last Internet boom, companies are now profitable indicating a more sustainable, growing economy. 1

•About 280,000 new Construction Jobs are expected to be created over the next four years, about one quarter of the 1.1 million jobs California will add by 2017. Despite leading the state in job growth over the next four years, there will still be fewer construction jobs than before the recession. 2

•Construction Employment forecast employment growth of 29% from 2012-20222

•Construction Employment growth of 1.6 million jobs from 2012-2022 in United States2

• Several corporate campuses underway will return space to market in 2015-2016, but the commercial market should remain strong in 2014. 4

1 Marcus and Millichap Apartment Market Report, 4th Q, 2013 2Eberhard School of Business, Metro Forecast, September 20133 Department of Labor-Labor Projections, Winter 2013-20144 Marcus and Millichap Commercial Market Report, 1st Q 2014