Economic & Real Estate Report - FTI Consulting/media/Files/us-files/... · 2016-12-15 · FTI...

FTI INSIGHTS Report

3rd Quarter 2016

CRITICAL THINKING AT THE CRITICAL TIME™

Economic & Real Estate Report

Contents

Labor Market ..................................................................................... 3

Gross Domestic Product (GDP) ......................................................... 4

Institute for Supply Management (ISM) Manufacturing Index ........ 4

Construction Spending ...................................................................... 5

The Architecture Billings Index (ABI) ........................................... 6

State of the Housing Market ............................................................. 6

Housing Sales and Inventory ....................................................... 7

PwC Real Estate Investor Survey ...................................................... 8

3Q16 Survey Highlights ............................................................... 8

PwC Real Estate Barometer ........................................................ 9

Moody’s/RCA Commercial Property Price Index (CPPI) ................... 9

Green Street Commercial Property Price Index ............................. 10

Commercial Property Sales Analysis .............................................. 10

NCREIF Property Index .................................................................... 12

NPI Annualized Returns by United States Region ................... 13

NPI Annualized Returns by Property Type ................................ 13

Equity REIT Analysis ........................................................................ 14

FTSE National Association of REITS U.S. Real Estate Index .... 14

New Real Estate GICS Sector ................................................... 14

Equity REIT vs. Leading Stock Market Indices ......................... 15

Capital Raising .......................................................................... 15

Initial Public Offerings (IPOs) .................................................... 15

Commercial Lending ....................................................................... 15

Commercial Mortgage Backed Securities (CMBS) Market ............ 16

Property Sector Overviews .............................................................. 17

Office ......................................................................................... 17

Industrial.................................................................................... 18

Retail .......................................................................................... 18

Apartment .................................................................................. 19

Hotel .......................................................................................... 19

Forecast ........................................................................................... 20

Introduction In the face of uncertainty driven by the aftermath of the United Kingdom’s Brexit vote, the U.S. election cycle, the timing of the next anticipated Federal Reserve (“Fed”) rate hike, volatile oil prices and corporate earnings, the United States economy remained resilient during the summer months. As per the advance 3Q16 GDP estimate, growth accelerated to its strongest pace in more than two years and was driven by an increase in exports, stronger inventory building and healthy consumer spending. The latest report calmed fears of a slowdown following the growth of just 1.1% recorded during the first half of the year.

Other economic indicators have led to cautious optimism. During 3Q16, the labor market added 575,000 jobs while the labor market participation rate and wages continued their slow rise. In September, consumer confidence increased to a new post-recession high and retail spending rebounded from the prior month, driven by expenditures on big ticket items such as automobiles. Despite a decline in residential starts, housing market conditions remained positive, as rising household formations and low mortgage rates fueled the continued increase in the number of first-time homebuyers and pushed builder sentiment to its highest level in six months. Activity rebounded in both the manufacturing and service sectors in September, while industrial production and factory orders increased modestly during the month.

These latest figures, in conjunction with continued steady labor growth and an uptick in inflation, have increased expectations for a December interest rate hike. At its September Federal Open Market Committee meeting, the Fed voted to hold interest rates steady. Despite expressing confidence in the economy and denoting a strengthening labor market, the Fed voiced concerns regarding inflation trending below its 2.0% benchmark and also lowered projections for GDP growth for the remainder of 2016.

Despite continued domestic and global challenges unique to each property type, the commercial property market, reflective of falling vacancies, escalating rental rates, steady absorption and healthy leasing activity, remained resilient. Investor sales activity was consistent with totals during the first half of the year and data and analysis from leading real estate indices and providers, including Green Street, CoStar and Moody’s/Real Capital Analytics (RCA), were indicative of a

FTI INSIGHTS Economic & Real Estate Report – 3rd Quarter 2016

2 · FTI Consulting, Inc. CRITICAL THINKING AT THE CRITICAL TIME™

continued increase in pricing from the prior quarter despite considerable variations by sector. Similar to the past few quarters, NCREIF reported a deceleration of capital appreciation for real estate assets. The PwC Real Estate Investor Survey and RCA reported slight declines in the capitalization rates in the majority of sectors.

Real estate debt market conditions improved during 3Q16. CMBS issuances increased ahead of the new risk retention rules set to begin in December while CMBS delinquency rates and unpaid balances further declined. Commercial and multi-family loan originations showed modest growth on a quarterly and year-over-year (YoY) basis and domestic banks reported that lending standards for commercial real estate loans of all types tightened during 3Q16. Capital raising by REITs accelerated during 3Q16 and annual totals are on pace to be the highest since 2013.

The following summarizes current, key economic indicators:

GDP Growth Accelerates. The advance estimate showed that 3Q16 U.S. GDP increased at a 2.9% seasonally adjusted annualized rate, the fastest pace since 3Q14.

Unemployment Rate Rises. The September unemployment rate increased slightly to 5.0%, driven by an increase in the labor force. YoY, the unemployment rate is down 10 basis points (BPS).

Job Openings Moved Little. Employers posted 5.5 million job openings in September, a slight increase from the prior month. The number of job openings has leveled since the beginning of the year as businesses have become more cautious.

Employment Cost Index (ECI) Rises. Total employment costs, including wages and salaries, grew 0.6% for the third consecutive quarter in 3Q16. YoY, total compensation is up 2.3%. Continued wage and salary growth is expected as the labor market tightens.

Small Business Optimism Falls. According to the National Federation of Independent Business Small Business Optimism Index, small business confidence declined in September for the second consecutive month. Still, fewer business owners expressed concern regarding future economic conditions and were optimistic that sales would increase during the next six months.

Consumer Confidence Increases. Leading indices showed that U.S. consumer confidence increased in September, as views regarding present and future conditions express optimism regarding economic conditions.

The Leading Economic Index (LEI) Rebounds. Following an August decline, the LEI jumped 0.2% in September. Improvements in initial claims for unemployment insurance, the interest rate spread and building permits were the primary drivers of growth, offsetting the fall of five components during the month.

Retail Sales Increase. U.S. retail sales jumped 0.6% in September after falling 0.6% during the prior month. The gain was primarily driven by rising gasoline prices and stronger automobile sales. During 3Q16, sales increased 2.4% YoY. The majority of retail categories posted monthly increases, including a 0.8% rise in spending at restaurants and bars, the largest gain in eight months. Gasoline station sales increased 2.4% and furniture stores sales increased 1.0% during September. Online shopping accelerated as sales at non-store retailers grew 11.0% during the first nine months of 2016 compared to this same time period last year.

Consumer Inflation Accelerates. The headline CPI increased 0.3% in September, the fastest pace in five months. Inflation was driven by a 5.8% rise in the gasoline index in addition to an increase in all major energy components during the month.

Industrial Production Slightly Rises. Driven by gains in mining and manufacturing production, industrial production increased 0.1% in September. During 3Q16, the 1.8% annualized increase in production was the strongest it has been in a year. Utilities production declined 1.0% in September due to warmer than usual weather.

Factory Orders Increase Modestly. Orders at U.S. factories jumped 0.3% in September following a 0.4% increase during the prior month. Excluding transportation, new orders have increased in six of the past seven months. This data is consistent with the slow improvement within the manufacturing sector.

Durable Goods Orders Decline Slightly. U.S. durable goods orders fell 0.1% in September, the first decrease in three months. Stronger transportation orders offset a decrease in defense spending, which fell 7.7% from the prior month. Orders for core capital goods, viewed as a key measure of business investment, fell by the largest amount since February 2016.

Producer Price Index (PPI) Increases. Driven by gains in energy and food, the PPI jumped 0.3% in September and has slowly escalated during the past year. During the past year, the PPI has risen 1.5%, the largest 12-month gain since the end of 2014.

ISM Non-Manufacturing Index Escalates. Activity outside the manufacturing sector increased to an11-month high in September. Growth in employment, business activity and new orders fueled activity, while backlogs increased the most since March.

Dodge Momentum Index (DMI) Falls. In September, the DMI, an early indicator of private non-residential construction spending, declined 4.3% from the prior month. Despite the volatility, the index is trending higher and is up 5.1% YoY. Commercial and institutional planning both declined during the month.



Labor Market The September U.S. labor market report showed modest growth as employers added 156,000 jobs, below consensus estimates, and the smallest gain since May. During 3Q16, the U.S. economy added an average of 192,000 jobs per month, similar to the monthly averages recorded at this time last year. During the first three quarters, 178,000 jobs have been created on a monthly basis, lagging last year’s average of 229,000. Although wages were stagnant in September, average hourly earnings are up 2.6% on an annual basis.

Employment gains were widespread during 3Q16, as the professional and business services (+182,000), education & health services (+128,000), trade, transportation & utilities (+96,000) and leisure and hospitality (+72,000) sectors added the most jobs. The public sector added positions (+43,000), but at a slower pace than during the first half of the year. Job losses moderated within the mining sector and job gains trended upwards within the construction sector. In contrast, the manufacturing sector trimmed 27,000 positions during the quarter.

The September ADP National Employment Report showed a gain of 154,000 non-farm private sector employment jobs. By region, the south (+74,000) generated the most new jobs, followed by the west (+41,000), Midwest (+25,000) and northeast (+14,000). During 3Q16, it was reported that 175,000 non-farm private sector employment jobs were created monthly, slightly off the pace recorded during the first half of 2016.

The unemployment rate increased 10 BPS to 5.0% in September. The number of people seeking work increased by 444,000 in September; this was the largest gain since February. The increase resulted in an uptick in the labor force participation rate to 62.9%, which still continues to linger near 40 year lows. On the positive, the labor force has increased by three million during the past 12 months, the largest gain since 2000. Despite no change in the U-6 unemployment rate during 3Q16, the September reading of 9.7% is 30 BPS lower than at this time last year.

US Non-Farm Employment by Industry Historic and Current Figures (thousands)

Source: Bureau of Labor Statistics

As shown below, September marked the 12th consecutive month that the unemployment rate registered at or below 5.0%. The unemployment rate is 160 basis points below the 6.6% average recorded between September 2011 and 2016.

US Non-Farm Employment by Industry Historic and Current Figures (thousands)

Source: Bureau of Labor Statistics

Consumer confidence indices are considered key indicators of economic conditions.

The Conference Board. In September, consumer confidence increased to its highest level in nine years, a new post-recession high, as U.S. households continued to support economic growth. The details of the report were encouraging, as consumers’ impressions of present day conditions improved due to a more favorable view of the labor market. The share of Americans describing jobs as “plentiful” increased to 27.9% in September, the highest reading since July 2007. Lynn Franco, Director of Economic Indicators at The Conference Board, commented, “Looking ahead, consumers are more upbeat about the short-term employment outlook, but somewhat neutral about business conditions and income prospects.”

University of Michigan Index. Consumer sentiment increased in September from the prior month, largely driven by a four point rise in the expectations component. The majority of sentiment has occurred among households with annual incomes above $75,000. Despite the overall increase, concerns regarding the pace of income growth led to a weaker current conditions reading. Overall, the index has moved little during the past 12 months

Below are consumer confidence trends since Sept. 2011.

Consumer Confidence Overview Historic and Current Figures (thousands)

Source: Conference Board, University of Michigan

2016 Total 2015 Total 2014 Total % ChangeEmploy. Percent Employ. Percent Employ. Percent 2015-16

Mining and Logging 681 0.5% 761 0.5% 897 0.6% -10.5%Construction 6,669 4.6% 6,597 4.6% 6,301 4.4% 1.1%Manufacturing 12,262 8.5% 12,320 8.5% 12,294 8.6% -0.5%Trade, Trans & Utilities 27,407 18.9% 27,114 18.7% 26,656 18.6% 1.1%Information 2,774 1.9% 2,763 1.9% 2,733 1.9% 0.4%Financial Activities 8,319 5.7% 8,190 5.7% 8,041 5.6% 1.6%Prof & Bus. Services 20,364 14.1% 19,981 13.8% 19,360 13.5% 1.9%Educ. & Health Services 22,800 15.8% 22,378 15.5% 21,677 15.1% 1.9%Leisure & Hospitality 15,574 10.8% 15,342 10.6% 14,901 10.4% 1.5%Other Services 5,716 3.9% 5,660 3.9% 5,595 3.9% 1.0%Government 22,181 15.3% 22,040 15.2% 21,947 15.3% 0.6%Total Nonfarm 144,747 100.0% 143,146 100.0% 140,402 100.0% 1.1%

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Gross Domestic Product (GDP) The advance estimate of GDP showed that the U.S. economy grew at an average annualized rate of 2.9% during 3Q16, the strongest growth in two years and more than double the 1.4% growth rate recorded during the prior quarter. This latest acceleration was fueled by an increase in exports and stronger inventory building. Largely driven by a surge in soybean shipments, exports increased at a 10.0% pace during 3Q16, representing the fastest pace since 4Q13. After weighing on GDP for five consecutive quarters, U.S. firms increased inventory stockpiles, which added 0.61 percentage points to GDP growth.

After a strong advance during 2Q16, consumer spending, which accounts for two-thirds of economic activity, slowed during the summer months. Personal consumption expenditures recorded a 2.1% gain after increasing 4.3% during the prior quarter. Spending on non-durable goods weakened from a 5.7% growth rate during 2Q16 to a negative 1.4% annual rate. On the positive, consumers continued to purchase big-ticket items, as durable goods spending grew at a 9.5% annual rate following a 9.8% gain during the prior quarter.

Economists are cautiously optimistic in light of the latest readings and believe that the economic recovery has regained some momentum. These latest figures will likely increase expectations for an interest rate hike in December.

Other 3Q16 GDP Key Trends

Imports, which subtract from GDP growth, increased at a 2.3% rate, up from a 0.2% pace during the prior quarter.

Business fixed investment increased at a 1.2% annualized rate. Spending on equipment and buildings fell for the fourth consecutive quarter, as non-residential fixed investment declined at a 2.7% pace. In contrast, outlays for structures, which include oil and gas well drilling rigs, rebounded from a 2.1% fall during 2Q16 and increased at a 5.4% rate, the highest in two years.

Housing remained soft during the summer months. Residential investment decreased at a 6.2% rate, following a 7.7% decline during the prior quarter.

Spending on intellectual property, inclusive of research and development and software, advanced at a 4.0% pace, a slower rate than the prior quarter. Gains have been recorded for thirteen consecutive quarters.

Overall government spending increased 0.5%, driven by a 2.5% gain in federal spending. State and local spending recorded a 0.7% decline, its second consecutive quarterly fall.

The personal savings rate registered 5.7%, the same as the prior quarter.

The following chart summarizes U.S. GDP growth since 3Q11.

Gross Domestic Product Quarter-to-Quarter Growth in Real GDP

Source: Bureau of Economic Analysis

Institute for Supply Management (ISM) Manufacturing Index The ISM index, a national survey of purchasing managers, is calculated based on a weighted average of the following five sub-indexes: new orders (30%), production (25%), employment (20%), deliveries (15%) and inventories (10%).

Following five consecutive months of expansion, the U.S. manufacturing industry contracted in August. In September, manufacturing rebounded, as the headline Purchaser’s Manufacturing Index (PMI) increased to 51.5% from the prior reading of 49.4%. Despite this two percentage point increase, just seven of the eighteen industries tracked by the ISM Index reported growth in September.

The latest PMI reading was boosted by a large increase in the new orders component, which will likely bode well for business spending during the remainder of the year. Additionally, production at factories increased and order backlogs grew 4.0 percentage points.

Of concern, the employment component fell, which shows that healthy employment within the sector has yet to materialize. Inventories have been a drag on GDP growth for the past five quarters, and the customer inventories index increased 3.5 percentage points during September from the prior month, an indication that inventories are still too high in certain industries along the supply chain.

The survey of executives found that the U.S. manufacturing industry is generally still struggling to grow amidst weak exports and soft demand. Factors still weighing on the industry include volatile global economic conditions, a strong dollar and low oil and commodity prices.

Purchasing managers were generally more upbeat during September regarding manufacturing conditions. Comments included, “Domestic and international sales moving up slightly” and “General business conditions are slowly improving with increased sales and sales leads.”

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The graph below shows fluctuations within the PMI since September 2012.

Purchasing Manager’s Index (PMI)

Source: Institute for Supply Management

The following summarizes key components of the ISM Index.

Purchasing Managers’ Index (PMI). A reading above 50.0% indicates that the manufacturing economy is generally expanding; below 50.0% indicates that it is generally contracting. Manufacturing has expanded in six of the first nine months during 2016. The PMI has averaged 50.3% during the past 12 months, ranging from 48.0% to 53.2%.

New Orders Index. A New Orders Index above 52.1%, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders. The index increased 6.0 percentage points to 55.1% in September, indicating growth following one month of contraction. Nine industries reported growth during the month.

Production Index. An index above 51.0%, over time, is generally consistent with an increase in the Fed’s industrial production figures. The index increased 3.2 percentage points in September to 52.8%. Ten industries reported growth during the month.

Employment Index. An Employment Index above 50.6%, over time, is generally consistent with an increase in manufacturing employment. An increase of 1.4 percentage points to 49.7% was recorded in September, indicating contraction for the third consecutive month. Seven industries reported growth during the month.

Inventories Index. An Inventories Index greater than 42.8%, over time, is generally consistent with expansion in the Bureau of Economic Analysis' (BEA) figures on overall manufacturing inventories. An increase of 0.5 percentage point to 49.5% was recorded in September, and eight industries reported growth during the month.

Construction Spending U.S. construction activity decreased for the second consecutive month in September, falling 0.4% from the prior month. Analysts forecasted growth of approximately 0.5% during the month. September construction spending was 0.2% lower YoY. On the positive, outlays for the first nine months of the year were 4.4% higher compared with the same period in 2015. The latest monthly decline was driven by spending decreases for non-residential projects, which fell by the largest amount in nine months.

Private Construction

Comprising 76.0% of total construction expenditures, spending decreased 0.2% in September from the prior month, as non-residential outlays fell 1.0% and residential spending increased 0.5%.

Despite the latest decline, total spending is up 2.4% YoY. Within the residential sector, spending on new multi-family projects increased 9.1% YoY, as compared to a 2.9% decrease for new single-family homes.

During the past 12 months, the office (+23.0%) and lodging (+19.9%) sectors recorded the largest YoY increases. During this period, spending on commercial projects increased 5.9%, but spending on manufacturing projects declined 6.7%.

Public Construction

Comprising 24.0% of total construction expenditures, public construction outlays fell 0.9% in September. During the past 12 months, government construction spending has fallen 7.8%.

Spending on residential projects fell 9.9% since the prior month. YoY, spending on residential projects reflected a 14.8% decline.

During the past 12 months, non-residential expenditures decreased 7.6%. Of note, spending on public office projects fell 3.6% and public commercial projects increased 5.0%.

The following chart highlights annualized residential and non-residential construction outlays (seasonally adjusted) since September 2011. Although the economic downturn initially affected the residential construction industry more significantly, spending rebounded within this sector at a faster pace than for non-residential properties. As a result, the variance in spending between the sectors fell to $199 billion in early 2014. The pace of non-residential construction then increased at a faster pace, increasing the variance to $309 billion by spring 2015. Spending has fluctuated since, but has generally stabilized within the residential sector and has declined within the non-residential sector during 3Q16.

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U.S. Construction Spending Value of Construction Put in Place Seasonally Adjusted Annual Rate

Source: U.S. Census Bureau

The Architecture Billings Index (ABI)

The Architecture Billings Index (ABI) is a diffusion index derived from the monthly Work-on-the-Boards survey, conducted by the American Institute of Architects (AIA) Economics & Market Research Group. The ABI is a leading economic indicator of non-residential construction activity, reflecting an approximate nine to twelve month lag time between architecture billings and construction spending. Any measure below 50 indicates contraction in the demand for architects' services.

September marked the second consecutive month of declining demand for design activity at architectural firms, the first such occurrence since 2012. The ABI decreased 1.3 points to 48.4.

The weak September billings mirrored flat readings in construction starts and the DMI during the month.

On the positive, architectural firms reported that the value of new design contracts increased in September despite increased caution among clients due to the presidential election.

Two regions reported billings in expansion territory, including the South (53.4) and Midwest (50.1). After recovering during the first half of 2016 from declining and soft billings recorded during the prior year, billings have now declined for four consecutive months in the Northeast (44.0). Softness was also present in the West (49.5) during September.

Billings were primarily flat at firms of all specializations in September. The commercial/industrial sector was the strongest (50.4), followed by the institutional (49.0) and residential (48.8) sectors.

In the last year, 20% of architecture firms reported that they have considered or gone through with merger or acquisition activity, similar to findings reported at this time last year.

The following graph shows fluctuations within the ABI since September 2012.

Architectural Billings Index (ABI)

Source: The American Institute of Architects

State of the Housing Market Despite rising prices and tight inventories, underlying demand within the U.S. housing market remains strong, driven in part by record-low mortgage rates, rising household formation and increasing wage growth. In September, the National Association of Realtors (NAR) reported that annualized existing home sales increased 3.2% to a seasonally adjusted annual rate of 5.47 million. YoY, existing home sales have increased 0.6%. Median existing home prices are up 5.6% YoY as of September, marking the 55th consecutive month of YoY price gains.

Lawrence Yun, NAR Chief Economist, commented, "The home search over the past several months for a lot of prospective buyers, and especially for first-time buyers, took longer than usual because of the competition for the minimal amount of homes for sale. Inventory has been extremely tight all year and is unlikely to improve now that the seasonal decline in listings is about to kick in."

Below are several key points pertaining to the housing market.

As per ATTOM Data Solutions, September foreclosure filings decreased 24.0% YoY to the lowest quarterly level since December 2005.

As of the release of this document, it was reported that foreclosure filings spiked 27.0% in October from September, the largest monthly increase since August 2007. 28 states, as well Washington D.C., experienced YoY increases in foreclosure activity. The loans that appear to be most susceptible to foreclosure are those such as FHA and VA with low down payments.

In September, new home sales increased 3.1% to a seasonally adjusted annualized rate of 593,000 units. Through the first nine months of 2016, new home sales have increased 13.0% YoY, driven by a 33.0% increase in the Northeast region.

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Above 50 indicates positive demand for design services



The NAR pending home sales index increased 1.5% in September from the prior month, hinting that existing home sales will rise in the upcoming months.

According to Freddie Mac, the average commitment rate for a 30-year, conventional, fixed-rate mortgage increased for the first time since March to 3.46% in September. The average commitment rate for all of 2015 was 3.85%.

The S&P/CoreLogic Case-Shiller U.S. National Home Price Index posted a month-over-month increase of 0.6% in August and is up 5.3% over the past year. The largest YoY price appreciation was concentrated in western and southern cities including Portland, Seattle, Denver, Dallas, Tampa, Miami and San Francisco.

The CoreLogic Home Price Index showed that U.S. home prices increased 6.3% YoY in September. Home price growth is projected to increase 5.2% YoY from September 2016 to September 2017. Excluding distressed sales, Washington, Oregon, Colorado, Utah and New York registered the largest YoY home price appreciation.

Below is a breakdown of single- vs. multi-family housing starts since September 2006.

Housing Starts

Source: U.S. Census Bureau

Residential housing starts decreased 9.0% in September from the prior month to an adjusted annual pace of 1.05 million units.

Single-family starts increased 8.1% to a 783,000-unit pace, the highest level since February.

In contrast, multi-family starts fell by 39.0% to a 250,000-unit pace, its lowest level since June 2013. The fall in apartment building drove overall homebuilding activity to an 18-month low.

In September, building permit activity, an indicator of future construction activity, increased 6.3% from the prior month to its highest level since November 2015.

Permit issuance for multi-family buildings with five or more units jumped about 17.0% to a 10-month high, bettering the 0.4% monthly gains in single-family permit issuance.

The following is a historical chart comparing the NAHB/Wells Fargo Housing Market Index and single-family starts.

NAHB/Wells Fargo Housing Market Index

Source: NAHB/Wells Fargo; U.S. Census Bureau

In September, builder confidence in the market for newly-built, single-family homes surged six points to its highest level since October 2015. All three HMI components (current sales conditions, sales expectations and the buyer traffic) increased in September. The three-month moving averages jumped in three out of the four regions. The West recorded a four point gain, the Northeast and South each recorded one-point gains and the Midwest was unchanged.

NAHB Chief Economist, Robert Dietz remarked, “With the inventory of new and existing homes remaining tight, builders are confident that if they can build more homes they can sell them. Though solid job creation and low interest rates are also fueling demand, builders continue to be hampered by supply-side constraints that include shortages of labor and lots.”

Housing Sales and Inventory

Below are key housing market statistics as of September 2016.

Regionally, YoY existing home sales increased 2.3% in the Midwest and 1.6% in the West. No change was recorded in the Northeast and a 0.9% decline was recorded in the South.

The median price of an existing home was highest in the West ($345,400), followed by the Northeast ($261,600), South ($204,000) and the Midwest ($184,500). YoY price appreciation ranged from 2.1% in the Northeast to 8.1% in the West.

The median time on the market for an existing home was 39 days, down considerably from 49 days a year ago.

It was estimated that 44.0% of the homes sold were on the market for less than one month.

The total inventory of existing homes available for sale increased 1.5% YoY to 2.04 million units, representing a 4.5-month supply.

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Housing StartsHousing Market Index

Housing Market Index Single-Family Starts



Below is a breakdown of existing annualized housing sales vs. supply during the past year.

Housing Sales Existing Annualized Housing Sales vs. Monthly Supply

Source: National Association of Realtors

PwC Real Estate Investor Survey Institutional and private investors surveyed for the 3Q16

PwC Real Estate Investor Survey reported that overall cap rates (OARs) declined in nineteen, held steady in eight and increased in seven of the survey’s 34 tracked markets. Collectively, OAR’s declined 2 BPS across the major property types since 2Q16. Overall cap rates declined 10 BPS from 3Q15 to 3Q16.

Terminal cap rates decreased to 6.56% in 3Q16, marking the 18th consecutive quarterly decline. The average decline was 1 BPS across nearly all major property types since 2Q16. Terminal cap rates declined 11 BPS from 3Q15 to 3Q16.

Discount rates (IRR) decreased 2 BPS since 2Q16 to 7.50% in 3Q16. During the prior quarter, an increase was recorded following eight consecutive monthly declines. Discount rates declined 10 BPS from 3Q15 to 3Q16.

3Q16 Survey Highlights

OARs decreased in four of the major property sectors during 3Q16, with the warehouse (17 BPS) and flex (5 BPS) sectors recording the largest decreases. The regional mall sector increased 5 BPS and the power center and suburban office sectors recorded no change.

As of 3Q16, flex/R&D properties had the highest average OARs at 7.10%, followed by the suburban office (6.43%) and power center (6.35%) sectors. The lowest average OARs were recorded in the warehouse (5.21%), apartment (5.25%) and CBD-office (5.57%) sectors. The simple average OAR across all sectors was 6.03%.

Terminal capitalization rates decreased in five of the major commercial property sectors during 3Q16. The largest decreases were recorded within the warehouse (8

BPS) and strip center (6 BPS) sectors. The power center sector recorded an 11 BPS increase and no change was recorded within the suburban office sector.

As of 3Q16, flex/R&D properties had the highest terminal capitalization rate at 7.38%, followed by the suburban-office (7.28%) sector. The lowest terminal capitalization rates were recorded within the apartment (5.74%) and CBD-office (6.05%) sectors. The simple average terminal capitalization rate across all sectors was 6.56%.

IRRs increased from the prior quarter in five of the major commercial property sectors during 3Q16. The largest decreases were recorded in the power center (12 BPS) and flex/R&D (10 BPS) sectors. The regional mall sector recorded a 10 BPS increase and no change was recorded within the suburban office sector.

As of 3Q16, flex/R&D properties had the highest IRR at 8.13%, followed by the power center (7.67%) sector. The lowest IRR’s were recorded within the warehouse (6.88%) and CBD-office (7.23%) sectors, and the simple average across all sectors was 7.50%.

Additional 3Q16 Report Insights/Findings

Due to the high volume of new supply, many investors were concerned regarding the growth in value and pricing within the apartment sector.

Investors are increasingly seeking value-add and opportunistic deals in cities where strong economic fundamentals exist.

When the next downturn occurs, the majority of survey participants believe the commercial real estate industry will undergo a pricing correction rather than a large decline. Less construction activity than in previous cycles, stricter lending requirements and enhanced due diligence among investors is expected to “soften the landing"

Survey participants expressed a near-term positive outlook for the industry, but are still concerned about interest rate increases and market corrections.

Manhattan had the lowest overall office capitalization rate at 4.98%, followed by Washington D.C. (5.33%), San Francisco (5.36%), Los Angeles (5.75%) and Seattle (5.81%). San Francisco recorded the largest quarterly decline at 35 BPS.

Philadelphia had the highest overall capitalization rate at 7.48%, followed by Chicago (7.33%), Suburban Maryland (7.28%), Houston (7.21%), SE Florida (7.08%) and Atlanta (7.08%). Overall rates jumped 16 BPS in Houston during the quarter, the largest increase among the major areas tracked.

3.7

4.0

4.3

4.6

4.9

5.2

5.5

4,700,000

4,800,000

4,900,000

5,000,000

5,100,000

5,200,000

5,300,000

5,400,000

5,500,000

5,600,000

Sep-15

Oct-1

5

Nov-15

Dec-15

Jan-16

Feb-16

Mar-16

Apr-16

May-1

6

Jun-16

Jul-16

Aug-16

Sep-16

Months SupplyAnnualized Housing Sales

Existing Annualized Home Sales Months Supply



Simple averages of overall capitalization, terminal capitalization and discount rates are presented in the following table. The averages reflect the following property types: industrial (flex/R&D, warehouse), office (central business district (CBD) office, suburban office), apartment and retail (strip center, regional malls and power centers).

PwC Real Estate Investor Survey Historical Results Investment Rate Analysis

PwC Real Estate Barometer

The PwC Real Estate Barometer was introduced as a system for analyzing historical/forecasted commercial real estate data within the four major property sectors.

The barometer indicates where a major property type is positioned within the real estate cycle. The real estate cycle consists of the following four phases:

Contraction: Softening market conditions following the market peak.

Recession: Following contraction, a period of very low demand, high vacancies and negative rental growth.

Recovery: Tightening market conditions following the market bottom.

Expansion: Following recovery, a period of strong demand, low vacancies and robust rental growth.

Approximately 61.0% of the tracked U.S. office markets are in the expansion phase, similar to last quarter. Through the end of the year, fundamentals are forecasted to stay positive, driven by sustained employment gains and leasing activity.

About 80.0% of the tracked U.S. retail markets are in the recovery and expansion phases, down from the prior quarter. Despite the increased impact of e-commerce, the majority of retail markets, driven by income growth and a strong single-family housing sector, are projected to benefit the sector during the next several quarters.

Approximately 60.0% of the tracked U.S. industrial markets are in the recovery or expansion phase, up from last quarter. PWC reports that abundant new supply will likely increase vacancy rates and raise capitalization

rates, which will transition more metro areas into the contraction phase during the next several quarters.

The majority of U.S. multi-family markets are in the contraction phase due to softening market conditions resulting primarily from new supply. Still, strong market demand for apartment units has allowed for increased absorption across many major markets.

Below is a snapshot of each major property type as of 3Q16.

Moody’s/RCA Commercial Property Price Index (CPPI) The Moody’s/RCA Commercial Property Price Index (CPPI) is a periodic same-property investment price change index of the U.S. commercial investment market based on Real Capital Analytics (RCA) data. RCA collects price information for every commercial property transaction in the U.S. that is over $2,500,000. The index tracks same-property realized round-trip price changes based purely on the documented prices in completed, contemporary property transactions. The methodology is an extension of market-accepted regression-based, repeat-sales indices and uses no appraisal valuations.

The National All-Property Composite Index (“the Index”) increased 2.2% during 3Q16, slower than the 3.1% growth recorded during the prior quarter. This latest increase was driven by a 2.8% gain in apartment pricing.

Within the core commercial sectors, the CBD office sector gained 4.5% during 3Q16, followed by the industrial (+2.8%) and suburban office (+1.5%) sectors. The retail (-0.6%) sector witnessed a price decline.

Price appreciation was stronger in major markets (+2.5%) versus non-major markets (+1.9%) during 3Q16.

During the past 12 months, apartment (+13.5%) was the best performing sector, outperforming the Index return of 7.8%. Steady returns occurred within the industrial (+8.3%) sector.

6.00%

6.25%

6.50%

6.75%

7.00%

7.25%

7.50%

7.75%

8.00%

8.25%

8.50%

8.75%

4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Terminal Cap Rate Discount Rate Overall Cap Rate

Overall Cap Rate Avg Terminal Cap Rate Avg Discount Rate Avg

61%12%

4%

23%

Office

Expansion RecoveryRecession Contraction

62%4%

34%

Industrial

Expansion RecoveryContraction

29%

3%

12%

56%

Multi-Family

Expansion Recovery

Recession Contraction

23%

56%

3%18%

Expansion Recovery

Recession Contraction

Retail



Performance within the CBD office (+6.9%), retail (+4.5%) and suburban office (+2.9%) sectors lagged behind the Index average during the past 12 months.

Pricing increased faster within non-major markets (+8.1%) versus the major markets (+7.5%) during the past 12 months.

Hotel assets, although not part of the Index, recorded a 6.7% price gain during the past 12 month period.

The Index has gained 101% since January 2010, more than doubling its financial crisis trough.

Since the November 2007 pre-crisis peak, prices are approximately 21.0% higher. Apartment prices are up 50.0%, outperforming core commercial sectors (+11.0%).

CBD office prices have exceeded pre-crisis peaks by 42.0%, outpacing gains within the industrial (+9.9%) sectors.

Suburban office and retail assets are 8.5% and 0.8%, respectively, below pre-crisis peak levels.

Gains within major markets (+37.5%) have outpaced non-major markets (+7.0%).

Below is a graph detailing changes within the CPPI since September 2006.

Moody’s/RCA Commercial Property Price Index National Index – All Properties

The following chart illustrates cumulative price returns for the primary sectors in the CPPI from three months to five years.

Green Street Commercial Property Price Index Green Street’s Commercial Property Price Index is a time series of unleveraged U.S. commercial property values that captures the prices at which commercial real estate transactions are currently being negotiated and contracted. Features that differentiate this index are its timeliness, emphasis on institutional quality properties, and ability to capture changes in the aggregate value of the commercial property sector.

The Green Street Commercial Property Price Index was unchanged in September and moved little during 3Q16. After increasing 10.0% in 2015, property value appreciation has moderated, increasing 3.0% so far in 2016. During the past year, property values have increased 5.0%, ranging from a 12.0% decrease in the lodging sector to a 7.0% increase in the industrial sector. Peter Rothemund, senior analyst with Green Street Advisors, remarked, “For the most part, it’s been an uneventful year for property pricing — cap rates haven’t really moved and fundamentals continue to hum along. There have been notable movements in certain sectors, however. Pricing in the niche self-storage and manufactured home sectors has been hot this year, while lodging and senior housing have seen prices weaken a bit.”

Below is a graph detailing changes since September 2006.

Green Street Commercial Property Price Index National Index – All Properties

Commercial Property Sales Analysis Investment sales activity stayed relatively consistent with volume recorded during the first two quarters of 2016 and during 3Q15. Real Capital Analytics (RCA) reported that sale volume registered $111.0 billion (excluding commercial land) during 3Q16. During the summer months, deal volume increased nearly 18.0% YoY in tertiary markets, but fell 8.0% YoY in major metropolitan areas and 1.0% YoY in secondary markets.

100

110

120

130

140

150

160

170

180

190

200

210

220

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

May-09

Sep-09

Jan-10

May-10

Sep-10

Jan-11

May-11

Sep-11

Jan-12

May-12

Sep-12

Jan-13

May-13

Sep-13

Jan-14

May-14

Sep-14

Jan-15

May-15

Sep-15

Jan-16

May-16

Sep-16

Average Sept. 06 - Sept. 16

3 Month

6 Month

12 Month

3 Year

5 Year

Industrial 2.8% 6.4% 8.3% 42.5% 61.0%

Office 3.1% 5.0% 5.0% 40.1% 69.2%

CBD 4.5% 7.5% 6.9% 43.9% 88.5%

Suburban 1.5% 2.4% 2.9% 35.8% 51.1%

Retail -0.6% 1.5% 4.5% 31.0% 59.6%

Apartment 2.8% 8.2% 13.5% 53.3% 94.3%

Major Markets 2.5% 6.6% 7.5% 45.1% 77.6%

Non-Major Markets 1.9% 4.4% 8.1% 40.0% 69.0%

National All-Property 2.2% 5.4% 7.8% 42.4% 73.0%

* Represents data as of September 30, 2016

Moody's/RCA CPPI

Cumulative Returns by Sector/Type

100 - Aug 2007

61.7 - June 2009

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100

110

120

130

Sep-06

Mar-0

7

Sep-07

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8

Sep-08

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9

Sep-09

Mar-1

0

Sep-10

Mar-1

1

Sep-11

Mar-1

2

Sep-12

Mar-1

3

Sep-13

Mar-1

4

Sep-14

Mar-1

5

Sep-15

Mar-1

6

Sep-16

126.5- Sept. 2016



Sales activity through the first three quarters of 2016 registered approximately $330 billion, lagging the output at this time last year by 8.5%. RCA attributed much of the lower activity to a pullback in portfolio and entity-level transactions (defined as megadeals by RCA), which decreased 32.0% YoY, as investors were generally more risk averse. Single asset sales recorded little change YoY. Despite reduced sale volume, RCA reported that cap rates have continued to decline for most major property types, with the largest decreases recorded within the industrial and apartment sectors.

Below are the top buyers of commercial real estate through the first nine months of 2016 as per RCA.

Below are the top sellers of commercial real estate through the first nine months of 2016 as per RCA.

Below we take a look at sales activity, as per RCA, by product type.

Apartment. Nearly $37 billion of apartment sales activity occurred during 3Q16, a YoY increase of 7.0%. Driving activity, single asset sales grew 24% YoY, the fastest quarterly pace in two years. Through the first three quarters of 2016, sales volume is up 11.3% YoY. Deal

volume for garden apartment transactions increased 14.0% YoY in contrast to a 6.0% decline for mid/high-rise assets. Despite accounting for a small proportion of deals, transaction volume within the student housing sector recorded the largest YoY increase in activity. Annualized sales volume is projected to reach $148 billion in 2016, a 12.0% decrease from last year.

Retail. Sales of retail assets totaled about $18.4 billion during 3Q16, a 10.0% YoY decrease. Through the first three quarters of 2016, volume is nearly 14.0% behind the pace set last year at this time. Driving the decline was a 30% fall in portfolio and entity-level transactions and to a lesser degree, a 5.0% lag in single asset deals. During this period, investment activity in the centers sector fell 10.0% as compared to a 20.0% decline in the shops sector. On the positive, the regional mall market posted a 30.0% YOY gain in total volume through the first nine months of 2016. Annualized sales are projected to decrease 13.1% from 2015 to $76 billion.

Office. Nearly $34 billion of office sales transpired during 3Q16, which represents a 4.0% YoY decrease. Through the first three quarters of 2016, sales volume was 7.0% lower than at this time last year. Lower volume since 2015 was driven by less portfolio and entity-level transactions, which declined 32.0% versus a 2.0% increase in single asset deals. During this time period, investment activity fell 9.0% YoY in the suburbs, as compared to a 6.0% YoY increase within CBD markets. Tertiary markets have posted the sharpest declines in activity. Annualized, sales are projected to reach $132 billion in 2016, 11.0% less than 2015 output.

Industrial. Sales volume escalated from average quarterly volume transacted during the first half of the year. The $14.2 billion in sales activity during 3Q16 represented a 3.0% YoY increase. During the first three quarters of 2016, sales volume is still 20.0% lower than this time last year, primarily due to a 51.0% decline in portfolio and entity-level deals. Since 2015, volume for flex assets has increased 13.0% in contrast to a 30.0% decline for warehouse properties. Annualized sales volume is projected to reach $55 billion in 2016, a 30.0% decrease from 2015 levels.

Hotel. Sales volume increased during 3Q16 relative to quarterly totals recorded during the first half of the year. The $7.6 billion in volume was 2.0% higher YoY, driven by a 24.0% increase in full-service hotel transactions. Still, since 2015, volume has lagged behind totals recorded at this time last year by 41.0%. This decline was primarily due to a 74.0% fall in portfolio and entity-level transactions. Full-service hotels accounted for 68.0% of hotel sales volume since 2015, but sales activity still declined 41.0% YoY. Annualized sales volume is projected to reach almost $28 billion, a 43.5% decline from 2015 activity.

Office Industrial Retail Blackstone Blackstone Brookfield AM

RXR Realty Industrial Prop. Trust PGIM Real Estate

Qatar Invest. Authority Ventas BlackstoneCalPERS Gramercy Prop. Trust DRA Advisors

Commonwealth Partners Clarion Partners Invesco RE

Citigroup Cabot Properties TIAA-CREF

Douglas Emmett Realty Google Simon Property Group

Apartment Hotel OverallStarwood Capital Group Marriott Blackstone

Harrison Street RE Capital Mirae Asset Financial Starwood Capital Group

Greystar RE Partners Carey Watermark 2 PGIM Real Estate

GIC (Govt of Singapore) Blackstone Brookfield AM

CPP Investment Board Cindat Invesco RE

Scion Group Hyatt Hotels TIAA-CREF

Bascom Group Union Investment RXR Realty

Top Buyers (Largest to Smallest)YTD Investment Volume

Office Industrial Retail Blackstone BioMed Realty Trust Rouse Properties

BioMed Realty Trust Prologis Inland Real Estate Corp

AXA Group Blackstone RioCan REITJP Morgan TA Realty GGP

SL Green AEW Capital Macerich

Beacon Capital Partners Norges Bank MGM Resorts Int'l

Hines Brookfield AM Dubai World

Apartment Hotel OverallEquity Residential Starwood Blackstone

Fairfield Residential Blackstone BioMed Realty Trust

Landmark ATA Rockwood Capital Equity Residential

Campus Crest Masterworks Development JP Morgan

InvenTrust Hersha Hospitality Trust AXA Group

FPA Multifamily Lowe Enterprises SL Green

Greystar RE Partners Garrison Investment Group Rouse Properties

Top Sellers (Largest to Smallest)YTD Investment Volume



2014 to 2016 sales activity by property type is summarized below.

Investment Sales Activity Dollar Value of Sales Transactions by Property Type

Source: Real Capital Analytics: 2016 volume annualized based on 3Q16 data

In addition to the preceding data, we have also analyzed RCA historical sales activity by buyer type.

Private buyers continued as the most active buyers of real estate since 2015, acquiring $161 billion of commercial real estate assets. This represented 47.0% of total transaction volume.

Acquisition volume totaled $92 billion from institutional/equity buyers during the first nine months of 2016, representing 27.0% of total sales activity and similar to levels posted last year at this time.

After averaging nearly $15 billion in quarterly acquisitions last year, volume slowed to around $7.6 billion per quarter for listed funds/REITs during 2016. As a result, their market share declined from 11.0% in 2015 to 6.5%.

International investment for U.S. commercial real estate assets increased slightly from the prior quarter as nearly $17 billion of transaction volume occurred during 3Q16. In 2015, foreign investment totaled a record $98 billion, driven by investors in Canada, Singapore and China.

3Q12 to 3Q16 sales activity by property type is summarized below.

Investment Sales Activity Summary of Transactions by Buyer

Source: Real Capital Analytics

Significant 3Q16 Sales Transactions

The following tables summarize noteworthy sales executed during 3Q16 in the major commercial real estate sectors as per CoStar.

NCREIF Property Index The NCREIF (National Council of Real Estate Investment Fiduciaries) Property Index (NPI) is a quarterly time series composite total rate of return measure of investment performance of individual commercial real estate properties acquired in the private market for investment purposes only. Properties in the NPI are accounted for using market value accounting standards. NCREIF requires that properties included in the NPI be valued at least quarterly using standard commercial real estate appraisal methodology. Each property must be independently appraised a minimum of once every three years. The capital value component of return is predominately the product of property appraisals. When entering the NPI, properties must be 60.0% occupied; investment returns are reported on a non-leveraged basis and properties must be owned/controlled by a qualified tax-exempt institutional investor or its designated agent.

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Apartment Retail Office Industrial Hotel

(millions)

2014 Dollar Volume 2015 Dollar Volume 2016 Dollar Volume

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$100$110$120$130$140$150$160$170

3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

($ Billions)

Crossborder Inst'l/Equity Fund Listed Funds/REITs Private User/other Unknown

Address/Name City, State Size (SF) Sale Price ($ mil)

Buyer(s)

1001 4th Avenue - Safeco Plaza Seattle, WA 793,679 $387.0 Vestas Investment Management321 N Clark Street Chicago, IL 896,502 $340.1 Diversified Real Estate Capital285 Madison Avenue New York, NY 510,232 $334.1 RFR Holding LLC800 Scudders Mill Rd - Novo Nordisk NA HQ Plainsboro, NJ 761,824 $305.0 Hana Financial Group100 Montgomery Street San Francisco, CA 431,407 $284.0 Vanbarton Group285 Madison Avenue New York, NY 336,000 $273.0 RPW Group, Inc.12100 Wilshire Boulevard Chicago, IL 365,000 $225.0 Douglas Emmett, Inc.


Buyer(s)

190-210-230 West Tasman Drive (3) San Jose, CA 287,371 $122.0 Milken InstitutePinole Point Distribution Center (2) Richmond, CA 476,529 $78.7 JLL Income Property Trust6835 West Buckeye Road Phoenix, AZ 1,009,351 $74.8 Seera Investment Bank43-01 22nd Street Long Island City, NY 180,000 $62.1 Olmstead Properties, Inc.16920 West Commerce Lane Goodyear, AZ 820,384 $56.2 Hines Global REIT II7295 San Gorgonio Dr - Alesandro Bus. Ctr Riverside, CA 582,772 $49.8 Industrial Property Trust4199 and 4201 Gibraltar Court Stockton, CA 779,917 $46.3 Highridge Provender


Buyer(s)

3200 Las Vegas Blvd. S - Fashion Show Las Vegas, NV 1,900,000 $1,250.0 TIAAThe Palms at Town & Country (13) Kendall/Miami, FL 667,757 $285.0 Weingarten Realty InvestorsShops at University Station (2) Westwood, MA 400,000 $205.7 American Realty AdvisorsThe Crosslands and Cinque Terre (12) Kissimmee, FL 529,200 $121.0 The Hampshire Companies, LLCAlameda Landing (13) Alameda, CA 166,674 $100.0 AFL-CIO Building Investment TrustProgress Ridge TownSquare (10) Beaverton, OR 213,849 $98.2 Donahue Schriber Commercial Real EstateKentlands Market Square (9) Gaithersburg, MD 250,222 $95.0 Kimco Realty Corporation

Name City, State Units Sale Price ($ mil)

Buyer(s)

630 Lenox Ave - Savoy Park New York, NY 1,790 $315.0 Fairstead CapitalThe Enclave Silver Spring Silver Spring, MD 1,195 $209.0 Hampshire PropertiesLIV Apartments Bellevue, WA 456 $172.0 Kennedy-Wilson Properties, Ltd.Axion Tustin Tustin, CA 628 $163.6 Raintree PartnersEnclave at Adobe Creek Petaluma, CA 492 $144.5 JRK Property HoldingsThe Residence Buckhead Atlanta Atlanta, GA 370 $136.5 Simpson HousingAvana Stoneridge Pleasanton, CA 354 $130.0 Greystar Real Estate Partners

Name City, State RoomsSale Price

($ mil)Buyer(s)

Aliante Casino Hotel and Spa Las Vegas, NV 200 $380.0 Boyd Gaming CorporationHomewood Suites New Yok Midtown New York, NY 293 $167.1 Al Duwaliya Hospitality Company IncMarriott San Jose San Jose, CA 510 $154.0 Carey Watermark Investors 2, Inc.Aloft South Beach Miami Beach, FL 235 $105.0 Rockpoint Group LLCRoyal Palms Phoenix, AZ 119 $88.3 Hyatt Hotels CorporationNine Zero Hotel Boston, MA 189 $85.1 Thayer Lodging Group, Inc.Courtyard Marriott Seattle, WA 250 $84.5 Washington Real Estate Holdings LLC

Hospitality Sale Transactions

Office Sale Transactions

Industrial/Flex/Data Center Sale Transactions

Retail Sale Transactions

Multi-Family Sale Transactions



NPI General Recap

Total returns continued to slow during 3Q16. The NPI total return was 1.77%, comprised of a 1.16% income return and a 0.60% capital appreciation return. 3Q15 total returns registered 3.09%, comprised of a 1.22% income return and a 1.87% capital appreciation return.

With appreciation slowing, the income return has accounted for a higher percentage of total returns (66.0% during 3Q16 vs. 39.0% during 3Q15). Total one-year returns have registered 9.2%, approximately 430 BPS lower than at this time last year.

It was reported that market fundamentals were generally stable during 3Q16.

Occupancy rates held steady at roughly 93.0% within the five major sectors, a 15-year high. Industrial had the highest occupancy and office had the lowest occupancy.

Trailing year NOI growth of 5.4% was recorded during 3Q16, ranging from gains of 4.0% for office assets to 7.8% for apartment assets.

NPI Annualized Returns by United States Region

Compared to last quarter, 3Q16 returns decreased in all regions.

Price appreciation in the East was 1.49% during 3Q16. One-year returns registered 7.3%, the lowest among the regions.

Similar to the past several quarters, property returns were strongest in the West. Still, the 2.19% gain during 3Q16 was 27 BPS lower than the prior quarter. One year returns of 11.5% are the highest among the regions.

Since posting a return of 2.21% during 1Q16, price appreciation in the South declined to 1.77% and 1.56%, respectively, during the following two quarters.

Property returns in the Midwest decreased 53 BPS points from the prior quarter to 1.46%, the largest quarterly decline among the regions. One year returns registered 8.2%, 460 BPS lower than the one-year return recorded at this time last year.

Below is a graph illustrating total returns by region since 2011. The 2016 returns are annualized based on 3Q16 data.

NCREIF: Regional Total Returns

NPI Annualized Returns by Property Type

Spreads between the best and worst performing asset types increased during 3Q16, registering 154 BPS (2.89% vs. 1.35%). The spread was 144 BPS (2.90% vs. 1.46%) last quarter.

Similar to last quarter, the industrial sector recorded the strongest price appreciation (+2.89%) during 3Q16. Its one-year return of 12.5% was 150 BPS higher than the next strongest property sector.

Since the prior quarter, total returns within the retail sector declined by 19 BPS to 1.98%. The 11.0% one-year return is the second highest among the sectors.

Office sector returns fell 48 BPS from the prior quarter to 1.26%, the lowest quarterly appreciation during 3Q16. The one-year return of 7.5% is significantly lower than the 13.1% return posted last year.

Price appreciation continued to moderate within the apartment sector, as a 1.72% return was recorded during 3Q16. The one-year return of 8.5% is 350 BPS lower than totals recorded at this time last year.

Total quarterly returns registered 1.35% within the hotel sector, more than 40 BPS below the NPI total 3Q16 return. The one-year return of 7.2% is the lowest among the property sectors.

Below is a graph showing total returns by property type since 2011. The 2016 returns are annualized based on 3Q16 data.

NCREIF: Property Type Total Returns

Property Type Region Office 36.6% West 37.9%Apartment 24.8% East 33.2%Retail 23.4% South 19.9%Industrial 14.1% Midwest 9.0%Hotel 1.0%

NCREIF Composition by Market Value

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

2011 2012 2013 2014 2015 2016

South West Midwest East

4.0%

6.0%

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16.0%

2011 2012 2013 2014 2015 2016

Apartment Industrial Office Retail Hotel



Equity REIT Analysis FTSE National Association of REITS U.S. Real Estate Index

Comprised of 166 REITS, the Financial Times of London and London Stock Exchange (FTSE) NAREIT All Equity REITs Index (“The Index”) fell 1.4% during 3Q16 following a 13.7% return during the first half of 2016. Year-to-date (YTD), the Index has increased 12.3%, reversing the 4.5% decrease recorded at this time last year. Following a 3.9% gain in July, the Index declined 3.3% in August and fell another 1.3% in September. It is speculated that the recent struggles within the REIT sector were primarily driven by concerns regarding the pending interest rate hike.

Still, experts like Brad Case, NAREIT’s senior vice president for research and industry information, are still bullish on REITs and believe REITs are not at the end of their bull market cycle. He pointed out that the spread between dividend yields of equity REITs and the yields of U.S. treasury securities were “abnormally high” at the end of September, which is a leading indicator of outperformance for REITs and historically, a very good indicator of future performance.

Below is a brief overview of selected commercial real estate sector performance.

Apartment REITs posted a 1.3% loss during 3Q16 following a 2.4% gain during the first half of 2016. The 1.1% gain as of 3Q16 represents the lowest return among the major sectors. In 2015, the sector provided a 16.5% return to investors, the highest among the major sectors. Investors have expressed concern regarding rising supply pipelines and rental rate growth.

After returning 16.1% during the first half of 2016, investors cooled on retail REITs during the summer months as the sector posted a 3.0% decline during 3Q16. Although freestanding retail REITs have posted a 34.5% return so far in 2016, the highest among all major property types, little change was recorded during 3Q16. Year-to-date gains of 13.3% for shopping centers and 7.9% for regional malls are considerably lower.

Following momentum generated last quarter, office REITs posted a 3.5% return during 3Q16. After a 0.3% return within the sector during 2015, the lowest among the major property types, rising investor sentiment led to a 12.5% total return during the first nine months of the year. Analysts are encouraged due to continued labor market strength.

Investors were again bullish on industrial REITs during 3Q16 as the sector posted an 8.0% gain. The 31.1% total return through the first three quarters of 2016 is the highest among the major property types. Last year, just a 2.6% return was achieved. Analysts are upbeat on the

sector due to robust demand for state-of-the-art big box distribution warehouse facilities resulting from the continuous growth of online retailing.

Despite a negative 9.1% return during September, returns in the lodging/resorts sector edged up during 3Q16. The 3.3% return is better than the 24.4% negative return that was recorded during 2015. The sector’s sluggish performance is thought to be tied to weakness in business travel and spending and to a lesser degree, the growing impact of the “sharing economy”, which includes services such as Airbnb and its competitors.

Below is a graph illustrating total returns by property sector since 2013.

FTSE NAREIT REIT Performance by Sector

New Real Estate GICS Sector

After the close of trading on September 16, equity REITs and other publicly traded real estate companies were officially elevated into the 11th headline sector of the Global Industry Classification Standard (GICS) sector. This move is expected to generate more interest among investors and is recognition of the importance that REITs have gained over decades of growth. Still, many analysts believe that the creation of the sector is unlikely to have impact on near-term returns.

The addition of the real estate sector is the first since the creation of the GICS structure in 1999 and will provide the newest sector with greater visibility within investment indices. The new real sector includes REITs, real estate management companies and development companies and will comprise roughly 3.0% of the market capitalization of the S&P 500. There will be roughly 2,600 companies in the Real Estate GICS Sector, comprised of 700 companies in Equity REITs and nearly 1,900 companies in the real estate management and development category. By market cap, each category will comprise about half of the newly formed real estate sector.

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Industrial Office Retail Apartments Lodging/Resorts

2013 2014 2015 2016

Equity REITS Real Estate Management & Development

Diversified REITs Health Care REITs Diversified Real Estate Activities

Industrial REITs Residential REITs Real Estate Operating Companies

Hotel & Resort REITs Retail REITs Real Estate Development

Office REITs Specialized REITs Real Estate Services

Real Estate - The 11th GICS Sector



Equity REIT vs. Leading Stock Market Indices

REITs have outperformed the Dow Jones industrial average (DJIA), NASDAQ and the Standard and Poor’s (S&P) 500 indices through the first three quarters of 2016. During 3Q16, markets were generally resilient despite volatility. The DJIA gained 2.8%, the S&P 500 was up 3.9% and the NASDAQ delivered a 10.0% return.

Despite uncertainty caused by Brexit in late June/early July, the three leading indices each reached record high levels during the quarter.

The ten primary economic sectors comprising the S&P 500 Index exhibited considerable differences in performance during 3Q16.

The strongest performing sectors, information technology, financials and industrials, recorded gains of 12.9%, 4.6% and 4.1%, respectively. The utilities, telecommunications services, and consumer staples sector posted losses of 5.9%, 5.6% and 2.6%, respectively.

Of concern, analysts believe that valuations in the stock and bond markets are rich by historical standards.

Below is a chart highlighting the annual returns of Equity REITs in comparison to several of the leading stock indices.

Source: Yahoo Finance: 2016 data as of September 30, 2016

Capital Raising

After raising nearly $38.0 billion during the first half of 2016, REIT capital raising escalated to $21.2 billion during 3Q16. Last year, about $62 billion was raised. SNL Financial reported that the majority of capital raised during 2016 occurred via senior debt. Specialty REITs have raised the largest amount of capital since 2015, followed by health care, retail, office, residential, self-storage, diversified REITs.

Below is a graph showing the capital raised by REITs since 2006.

Total Capital Raised by REITs (in billions)

Source: NAREIT/ SNL Financial

Initial Public Offerings (IPOs)

According to SNL Financial and NAREIT, three REIT IPOs were priced during the first three quarters of 2016.

In April, MGM Growth Properties (MGP), a spin-off from MGM Resorts, went public with a $1.05 billion IPO. This REIT owns numerous hotel properties on the Las Vegas Strip (Luxor, Excalibur, Mandalay Bay, The Park, Monte Carlo and Mirage) in addition to other regional assets.

In June, Global Medical REIT (GMRE), a Bethesda, Maryland-based health care REIT with a portfolio of 12 licensed, state-of-the-art, purpose-built healthcare facilities, went public within a $130 million IPO.

At the end of September, MedEquities Realty Trust (MRT), a Nashville, Tennessee-based self-managed and self-administered REIT that invests in a diversified mix of healthcare properties and healthcare-related real estate debt investments, went public with a $228 million IPO.

Commercial Lending The Mortgage Bankers Association’s (MBA) Quarterly Survey of Commercial/Multi-Family Mortgage Bankers Originations reported that 3Q16 commercial and multi-family mortgage loan originations increased 5.0% from the same period last year and 7.0% from the prior quarter. The latest increases were fueled by escalating property values, low interest rates and solid property fundamentals, which have supported robust lending activity. Since the prior quarter, loans for multi-family, office, industrial and health care properties each increased between 18.0% and 20.0%. In contrast, loans for hotels fell 44.0%.

Jamie Woodwell, MBA’s Vice President of Commercial Real Estate Research, commented, “Originations for bank balance sheets, life companies and Fannie Mae and Freddie Mac are all running ahead of last year’s record paces. And after a slow start to the year, the commercial mortgage backed securities market also saw a pick-up in the third quarter.”

YoY, loans originated for industrial and multi-family assets recorded healthy increases, offsetting large drops in volume for retail, hotel and healthcare properties. Among investor types, loans originated for government sponsored enterprises (GSEs – Fannie Mae and Freddie Mac) increased 82.0% YoY, in contrast to decline for loans originated CMBS/conduits, commercial banks and life insurance companies.

According to the October 2016 Senior Loan Officer Opinion Survey on Bank Lending Practices, lending standards for commercial real estate loans of all types tightened during 3Q16, specifically non-farm non-residential properties, construction and land development loans and loans secured by multi-family properties.

Index 2010 2011 2012 2013 2014 2015 2016 2010-2015 avg

Equity REIT 28.0% 8.3% 19.7% 2.9% 28.0% 2.8% 12.3% 14.9%NASDAQ 26.9% -4.2% 14.6% 12.1% 13.4% 5.7% 6.1% 11.4%S&P 500 16.9% -1.8% 15.9% 38.3% 11.4% -0.7% 6.1% 13.3%DJIA 15.1% 2.1% 13.4% 29.6% 7.5% -2.2% 5.1% 10.9%

$10$15$20$25$30$35$40$45$50$55$60$65$70$75$80

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

proj

ectio

n



The following chart summarizes lending activity by property and investor type.

Source: Mortgage Bankers Association

Below is a graph depicting the frequency of commercial/multi-family loan originations since 3Q11.

Commercial/Multi-Family Mortgage Bankers Origination Index 2001 Quarterly Average = 100

Source: Commercial Mortgage Bankers Association

Commercial Mortgage Backed Securities (CMBS) Market The revitalization of the CMBS market continues as a vital action for the recovery of the commercial real-estate market, with owners and developers receiving the majority of their financing during the past decade through the securities market.

CMBS Issuances

Following fallout during the first half of 2016, driven by stock market volatility and global economic worries, participants were more active during the summer months. According to data from Commercial Mortgage Alert (CMA), CMBS issuances registered about $19.0 billion during 3Q16, up from the $15.5 billion quarterly average registered during the first half of 2016. Still, through the first nine months of 2016, CMBS volume, registering $49.9 billion, is down 36.0% compared to the same period during 2015, driven downward by volatility in

capital markets, wide spreads and added uncertainty related to looming risk retention guidelines. It was reported that 71 U.S. transactions occurred during the first half of 2016.

New Risk Retention Rules

According to CMA, CMBS issuance is expected to remain steady throughout the rest of 2016 as lenders seek to “clean out their loan warehouses” before new risk retention rules go into effect on December 24. It is estimated that nearly $19.0 billion of new issuance is projected for October and November, well above the $5.6 billion monthly average through the first three quarters of 2016.

Briefly, these new risk rentention regulations are expected to increase the cost of securitization and lenders do not want to hold onto mortgages originated at prices based on pre-risk retention costs.

Legislated under the Dodd-Frank Act, these new requirements will mandate that CMBS lenders keep 5.0% of all loans in-house starting in 2017, which will tighten underwriting standards and instill self-discipline among lenders.

J.P. Morgan executed approximately $7.6 billion of transactions since 2015, edging Wells Fargo as the top bookrunner. Other firms underwriting more than $5 billion since 2015 included Citigroup, Goldman Sachs and Deutsche Bank.

U.S. CMBS Issuance

Source: Commercial Mortgage Alert

Type % Change since % Change since3Q 2015 2Q 2016

Property Type Industrial 32.0% 20.0%Multi-Family 26.0% 18.0%Office -5.0% 18.0%Retail -23.0% 8.0%Hotel -30.0% -44.0%Health Care -59.0% 19.0%

Investor Type

CMBS/Conduits -4.0% 96.0%Commercial Banks -9.0% -25.0%Life Insurance Co. -3.0% -4.0%GSE's (FNMA/FHLMC) 82.0% 35.0%

Overall 5.0% 7.0%

Lending Activity 3Q 2016

0

30

60

90

120

150

180

210

240

270

300

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

3Q

13

4Q

13

1Q

14

2Q

14

3Q

14

4Q

14

1Q

15

2Q

15

3Q

15

4Q

15

1Q

16

2Q

16

3Q

16

$0

$40

$80

$120

$160

$200

$240

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

($ Billions)

2000 - 2015 Annual Average

FirmIssuance

($Mil)Market

ShareJ.P. Morgan $7,640 15.3%

Wells Fargo $7,592 15.2%

Citigroup $6,571 13.2%

Goldman Sachs $5,496 11.0%

Deutsche Bank $5,469 11.0%

Morgan Stanley $3,793 7.6%

Bank of America $3,083 6.2%

Credit Suisse $2,865 5.7%

Barclays $2,608 5.2%

Cantor Fitzgerald $2,027 4.1%

UBS $1,593 3.2%

Societe Generale $1,052 2.1%

Source: Commercial Mortgage Alert

Top U.S. CMBS Underwriters

Average 3Q11 to 3Q16



CMBS Delinquency

CMBS market delinquent balances and percentages continue to remain at low levels despite slight fluctuations during the past several months. As per Morningstar, the U.S. CMBS delinquency rate as of September 2016 registered 2.9%, which is 59 BPS lower YoY.

The delinquent unpaid balance for CMBS totaled $23.1 billion in September 2016, the second consecutive monthly fall, and lower than the $27.9 billion recorded at this time last year.

By property type, multi-family properties had the lowest delinquency rates (0.5%), followed by hotel (3.1%), industrial (4.6%), retail (5.4%) and office (5.7%) assets.

Multi-family loan delinquencies, accounting for 7.7% of total CMBS delinquencies, declined by 3.6 billion or 67.0% YoY to $1.8 billion. Similar to last quarter, this represented the largest percentage decline among the property types.

Industrial loan delinquencies, representing 4.8% of total CMBS delinquencies, declined by $277 million or 19.9% YoY to $1.1 billion.

Retail loan delinquencies, at 35.9%, have been the greatest contributor to CMBS delinquencies during the past 12 months, but have declined $497 million or 5.7% YoY to $8.3 billion.

Office loans, representing 34.3% of CMBS delinquencies, declined 4.5% or $371 million YoY to $7.9 billion.

Hotel loan delinquencies, representing 9.9% of total CMBS delinquencies, declined by nearly $107 million or 4.4% YoY to $2.4 billion.

As of September, the top three states ranked by exposure, Virginia, California and New York, accounted for a combined 24.2% of all CMBS delinquencies.

Below is a chart depicting monthly CMBS delinquencies since September 2011.

CMBS Delinquency Balance vs. Percentage

Source: Morningstar

Property Sector Overviews Office

According to several data providers and brokerages, office market fundamentals were positive during 3Q16, characterized by tightening vacancy rates and upward pressure on rental rates. Reis, Inc. reported that vacancy rates remained unchanged during 3Q16 after a 20 BPS decrease during the first half of the year.

Reis, Inc. reported that net absorption decelerated during 3Q16 from the pace set during the first half of the year and increased at its lowest level since 2Q14. It is speculated that global and political uncertainty has temporarily slowed/delayed corporate expansions.

Asking and effective rental rates both increased during the first half of 2016, marking the 23rd consecutive quarter of rental growth.

Office Market: Rents vs. Vacancy Rates

Source: Reis, Inc.

Roughly 210,000 jobs were created in office-using employment sectors during 3Q16, up 22.0% YoY. Through the first nine months of 2016, approximately 523,000 new office-using employment jobs were added, off nearly 8.0% from this time last year.

New construction activity continues to slow. As per Reis, Inc., new development declined for the third consecutive quarter during 3Q16. Other data providers and brokerage firms have reported a leveling off of construction.

Below is a ranking of key market indicators among the largest office market metropolitan areas.

2.00%

2.50%

3.00%

3.50%

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5.00%

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$20

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Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16

($ Billiions)

CMBS Delinquency Balance CMBS Delinquency %

Delinquency Balance Average: $30.3 billion

Delinquency % Average: 3.95%

12.0%

13.0%

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15.0%

16.0%

17.0%

18.0%

$26.00

$27.00

$28.00

$29.00

$30.00

$31.00

$32.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2Q16Asking Rent Overall Vacancy Rate

YTD Net Absorption

Vacancy RateYTD Construction

DeliveriesHigh to Low Low to High High to Low

Boston Boston HoustonDallas/Ft Worth New York City Dallas/Ft WorthLos Angeles Philadelphia BostonPhiladelphia Los Angeles New York City

Northern NJ Atlanta Los AngelesHouston Chicago ChicagoAtlanta Northern NJ Washington DCWashington DC Dallas/Ft Worth Northern NJChicago Houston PhiladelphiaNew York City Washington DC AtlantaSource: CoStar

3Q16 Top 10 Office Markets Comparison



Industrial

Market fundamentals remain strong for industrial product, driven by persistent demand for warehouse space by retailers to shorten the supply chain and deliver goods to consumers faster.

Still, concerns exist as a strong U.S. dollar continues to negatively impact exports and excess inventories have slowed the movement of goods along select places along the supply chain.

According to CoStar, the national industrial vacancy rate, at historically low levels, decreased 20 BPS since last quarter to 5.8% as of 3Q16 and is down 40 BPS since 2015. Vacancy rates were lower for warehouse properties (5.4%) than flex properties (7.8%).

Steady demand from logistics and big-box users continued to drive up rental rates during 3Q16. CoStar estimated that asking rental rates now exceed peak levels set in 2008, with the strongest growth occurring in major distribution locales and port cities.

In response to increased demand, developers delivered 81.5 million sf of new product and the market absorbed nearly 112 million sf during 3Q16. These totals were both considerably higher than the quarterly averages recorded during the first half of 2016 according to CoStar. Build-to-suit and speculative development continued to increase.

According to CoStar, Amazon continued to aggressively expand operations into distribution and fulfillment centers across the U.S. and signed eight of the twenty largest industrial leases since 2015. Wayfair and NFI Industries Inc. were also active, signing five of the twelve largest deals during the past nine months.

Industrial Market: Rents vs. Vacancy Rates

Source: Costar (reflects select markets)

Below is a brief ranking of key market indicators among the largest industrial market metropolitan areas.

Retail

U.S. consumers felt more confident to end the summer. Total U.S. retail sales increased 0.6% YoY in September. Through the first nine months of 2016, retail sales are 2.9% higher than at this time last year. During this period, sales at non-store retailers increased 11.0%, motor vehicle sales escalated 3.2% and sales at food service and drinking places grew 6.4%.

Despite continued headwinds such as the increased number of store closings, retail consolidations and bankruptcies, and the growth of e-commerce, vacancy rates within neighborhood and community centers, which comprise about 70% of U.S. retail inventory, have moved little and continue to trend near 10.0% as per Reis, Inc.

Grocery-anchored centers have tended to perform the best and are considered the most “e-commerce resistant.”

Regional malls continued to experience considerable bifurcation as high-end malls in primary locations continued to perform well.

In contrast, older Class B/C malls continue to have high vacancies and closures. Savvy developers have continued to redevelop and reposition this aging inventory with alternative uses.

New development of retail product remains generally limited, as cautious developers are increasingly selective to choose locales with the strongest demographic profiles. The majority of retail product being delivered is in single-tenant formats.

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

$5.40

$5.50

$5.60

$5.70

$5.80

$5.90

$6.00

$6.10

$6.20

$6.30

$6.40

$6.50

$6.60

2007 2008 2009 2010 2011 2012 2013 2014 2015 3Q16

Asking Rent Overall Vacancy Rate

YTD Net Absorption

Vacancy RateYTD Construction

DeliveriesHigh to Low Low to High High to Low

Dallas/Ft Worth Los Angeles Inland Empire Inland Empire Detroit Dallas/Ft WorthChicago Inland Empire AtlantaPhiladelphia Houston ChicagoAtlanta Northern NJ HoustonNorthern NJ Dallas/Ft Worth PhiladelphiaHouston Boston Northern NJDetroit Philadelphia BostonBoston Chicago Los AngelesLos Angeles Atlanta DetroitSource: CoStar

3Q16 Top 10 Industrial Markets Comparison



Retail Market: Rents vs. Vacancy Rates

Source: Reis, Inc. (reflects neighborhood and community centers)

As retailers respond to shifting lifestyle habits and the impact of e-commerce, the retail landscape continues to undergo dramatic changes. Discounters, dollar stores, niche grocery concepts, off-price apparel and modern food concepts are fueling growth and expansion.

Traditional brick and mortar retailers are increasingly repositioning stores by reducing their physical presence and closing and/or scaling back operations. It is reported that by 2017, Amazon will overtake Macy’s and become the largest U.S. apparel retailer.

During 2016, national retailers closing or announcing the closure of a significant number of stores included Sports Authority (bankruptcy), Office Depot, Barnes & Noble, Children’s Place, Walgreens, Aeropostale, Walmart, American Eagle Outfitters, Macy’s, Sears/Kmart, Ralph Lauren, Pier One and Chico’s.

Apartment

The apartment market continues to remain strong, driven by consumer preference for flexibility in their lifestyle, increased demand from millennials and baby boomers, tightened bank requirements for home mortgages and credit issues for consumers.

As per Reis, Inc., vacancy rates declined 10 BPS from the prior quarter to 4.4% during 3Q16. It was reported that the majority of available units are concentrated within more expensive, new developments rather than Class B/C properties.

During 3Q16, net absorption totaled approximately 37,750 units, up from the 35,500 quarterly pace recorded during the first half of 2016. Last year, nearly 181,000 units were absorbed.

Apartment Market: Rents vs. Vacancy Rates

Source: Reis, Inc.

The slowdown in rental growth continued as both asking and effective rental rates grew by 0.9% during 3Q16, lagging the 1.7% quarterly growth rate recorded at this time last year according to Reis, Inc.

After developers delivered approximately 93,500 units during the first half of 2016, Reis, Inc. reported that new construction deliveries fell to about 38,000 units during 3Q16. During the past 12-month period, developers delivered nearly 194,000 units, the highest 12-month total since 1999.

Hotel

Hotel demand, which is driven by increased corporate travel and steady leisure travel, has helped the U.S. hotel sector continue its recovery.

Compared with September 2015, RevPAR increased 5.6%, the 79th consecutive month with a YoY increase in this metric.

YoY, Smith Travel Research (STR) reported that the U.S. hotel industry’s occupancy remained steady at approximately 71.0%, the average daily rate increased 3.4% to $127 and RevPAR improved 3.3% to $90 during 3Q16.

Lodging Market: RevPAR, ADR & Occupancy

Source: Smith Travel Research; 3Q16 data three months ending as of Sept.

Among the Top 25 Markets, Minneapolis/St. Paul, posted the largest YoY increases in ADR and RevPAR, while markets such as New Orleans, Orlando, Phoenix; Los Angeles/Long Beach, Atlanta, Washington, D.C.-Maryland and San Diego all posted YoY double-digit increases in RevPAR.

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

$18.60

$18.90

$19.20

$19.50

$19.80

$20.10

$20.40

2007 2008 2009 2010 2011 2012 2013 2014 2015 3Q16


4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

$900

$950

$1,000

$1,050

$1,100

$1,150

$1,200

$1,250

$1,300

2007 2008 2009 2010 2011 2012 2013 2014 2015 3Q16


50%52%54%56%58%60%62%64%66%68%70%72%74%

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

2007 2008 2009 2010 2011 2012 2013 2014 2015 3Q16

OccupancyRevPAR, ADR

RevPAR ADR Occupancy %



Forecast Economic

A lack of defined economic policy regarding taxation and regulations is likely to create political uncertainty regarding economic growth and stability, which may impact the commercial real estate market.

As labor markets near full employment, the pace of job creation is expected to slow in the upcoming quarters.

Despite healthy consumer spending and continued wage gains, economic growth during 4Q16 is likely to be weaker than 3Q16 output, as it is believed that export strength will subside and macroeconomic worries will continue.

A promising advance 3Q16 GDP report, continued wage and labor growth and indications of higher inflation are projected to lead the Fed to boost the federal funds rate by 0.25 percentage point at its December 13-14 meeting.

Residential housing starts are expected to escalate in the upcoming months as the level of housing permit activity continues to outpace housing starts across the nation.

General Property

Fierce competition will continue for trophy assets in top markets, pushing buyers to be very competitive in submitting bids.

Increasing flows of international capital are forecasted to move into U.S. commercial real estate assets, as investors increasingly look for safety and stability.

REITs are anticipated to generate more interest among investors and achieve greater visibility within investment indices after being reclassified into a new GICS sector this past September.

If trends mirror the past several years, sales volume is projected to ramp up during 4Q16, as the highest quarterly volume during the year has typically occurred during this time. Similar to prior quarters, sales will be driven by steady demand, low-interest rates and the flight to safety for U.S. assets.

Capitalization rate movement is expected to be minimal, but sustained investor demand, the pursuit of higher yields and appetite for risk will continue to compress rates within select markets.

Property Sector

Retail: Steady wage growth is expected to support retail spending. E-commerce will continue to capture a greater percentage of monthly sales and challenge the “brick and mortar” store model. Closings and consolidations from major retail will continue to burden the market with excess inventory.

Apartment: Despite more first time homebuyers accounting for existing home purchases, demand for rentals is expected to remain strong in the near future as millennials are expected to increase household formations and more empty-nester baby boomers seek to downsize from owned housing into rental units. Robust construction activity is expected to moderate as supply catches up with demand and as new expensive units struggle to lure renters who cannot afford the high prices.

Office: Views regarding sector performance are generally mixed. Market fundamentals are generally expected to remain positive in the near term with investors still gravitating towards CBD assets versus suburban assets; as the economy nears full employment and job growth slows, office absorption is projected to weaken in numerous markets.

Industrial: Fueled by the explosive growth of e-commerce and requirements for advanced supply chains, strong tenant demand is expected to place upward pressure of rental rates and push vacancy rates. Major metropolitan distribution markets will continue to be viewed as the most coveted locales, and U.S. port cities will begin reaping benefits from the $5 billion Panama Canal expansion in late June 2016.

Hotel: There is increasing concern regarding lodging performance in the upcoming quarters. The sector continues to face mounting competition from the rise of home sharing sites, such as Airbnb, and other short-term rental websites, in addition to a flattening of growth in corporate travel.

Below is a 20-year historical average and property forecast for the major property types through 2018, which was published by the Urban Land Institute as of October 2016.

20-Yr Avg1996-2015 2016 2017 2018

Vacancy Rate 13.50% 12.80% 12.60% 12.80%

Rental Rate Change 2.50% 2.80% 2.90% 2.20%

20-Yr Avg1996-2015 2016 2017 2018

Vacancy Rate 10.40% 8.70% 8.60% 8.70%


20-Yr Avg1996-2015 2016 2017 2018

Vacancy Rate 9.80% 10.80% 10.60% 10.70%


20-Yr Avg1996-2015 2016 2017 2018

Vacancy Rate 5.50% 4.70% 5.00% 5.30%


20-Yr Avg1996-2015 2016 2017 2018

Occupancy Rate 61.60% 65.50% 65.20% 65.00%

RevPAR Change 3.30% 4.00% 3.10% 3.00%

HOTEL FORECAST

FORECAST

FORECAST

OFFICE

INDUSTRIAL

RETAIL FORECAST

FORECASTAPARTMENT

FTI INSIGHTS Economic & Real Estate Report –3rd Quarter 2016

CRITICAL THINKING

AT THE CRITICAL TIME™

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Economic & Real Estate Report - FTI Consulting/media/Files/us-files/... · 2016-12-15 · FTI...

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Transcript of Economic & Real Estate Report - FTI Consulting/media/Files/us-files/... · 2016-12-15 · FTI...