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ULI North Texas

Market Overview & Forecast


October 2015

Kevin J. Thorpe, Chief Economist

Agenda
Global Capital Flows
Where Are We In the Cycle?

Dallas Market Overview & Outlook


Q&A

Global Capital Flows

IMF Cuts World Growth Outlook


Real GDP, Annualized Growth
0.6%
2.9%

2.4%
7.4%

2.5%

6.8%

-3.4%

1.5%

0.8%

2016

2.4%

UK

3.0%

Russia

Eurozone

0.8%
-0.1%

2.7%

0.1%

Brazil
-1.5%

Global GDP (w/o U.S.)


Annualized Growth
2.4%

2.2%

2014

2015

Source: International Monetary Fund

2.6%

China

Japan

Middle East
& Africa
2.4%

2.4%

Australia

Global Monetary Policy


Central Banks Ease, While U.S. Considers Tightening

Eurozone ECB launched QE in March 2015, bond-buying $66B per month;


also dropped short-term rates to effectively 0%

Japan BOJ launched new QE in October of 2014, swelling monetary base


by $650 billion per year

China PBOC cut interest rates from 4.85% to 4.6% in August 2015 has
continued to inject yuan into the economy via liquidity facilities and
decreased the required reserve ratio (RRR) at banks. PBOC is currently
considering an additional 1.2-1.5 trillion yuan stimulus.

Australia cut interest rates in May to record low of 2%

India central bank reduced its main rate by half a percentage point in
October 2015 - citing economy is far from robust

Global QE Effect
Central Banks Inject Trillions

Only 2.8% of M2 to CRE


7%

40
$38.9 T

39
38

6%
5%

37
36

4%

35

3%
2.8%

34

2%

33

Global M2 Money Supply, $trillions

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

0%

2003

2014

2013

2012

2011

2010

2009

2008

$31.8 T

2002

1%

2001

32
31

If this reverts to the


norm, $578 billion of
new demand

U.S. Sales as % of U.S. M2

Source: RCA, Federal Reserve Bank, Bank of Japan, Bank of Canada, European Central Bank, Bank of Mexico, Bank of Brazil, Bank of England

Foreign Investment in U.S. CRE


All Product Types

2015 Record Volume

Record Market Share

$90

$82.9

20%

$80

18%

$70

16%
14%

$60

$48.0

$50

12%

10%

$40

Historical Average = 9.2%

8%

$30

6%

$20

Sales Volume, $billions

Percent Foreign Buyer

2015a

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2015a

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

0%

2002

$0

2001

2%
2001

4%

$10

Source: RCA

17.2%

Investors Are Drawn to the U.S. Fundamentals


Office Rent Growth: U.S. Markets vs. Other Cities

20%
15%

-20%
-25%

Source: Cushman & Wakefield Research


*Based on legacy DTZ data

Office Rent Growth, 2015Q2 over 2014Q2 %Chg.

Moscow

-4%

Mumbai

Helsinki

Shanghai

Dallas

Atlanta

Minneapolis

Phoenix

San Jose

Houston

Denver

Boston

Paris (CBD)

San Diego

London

Charlotte

Nashville

-15%

Orange County

-10%

Oakland

-5%

San Francisco

0%

2% 1% 1% 1%
1%

Frankfurt

5%

6% 6% 6% 6% 5%
5% 5% 5% 4%
4% 4%
3%

Beijing

8% 7% 7%

Sydney

9% 8%

Berlin

10%

Madrid

15%

-21%

Source: Cushman & Wakefield Research


*Based on legacy DTZ data

Taipei

Hong Kong

Zurich

Singapore

Tokyo

London (WE)

Paris

San Francisco

New York

Stockholm

London (City)

Berlin

Munich

Frankfurt

Los Angeles

Washington, DC

Beijing

Seoul

Dallas

Shanghai

Yields Moving Towards Previous Lows

Office Cap Rates, Current = Q2 2015

12

10

8
Max

6
Current

4
Min

U.S. Cap Rates Can Go Lower


Updated September 28th 2015

8%

U.S. Real Estate


6.80%

7%
190
bps

6%

5.70%
5.10%

5%
3.80%

4%
3%
2%

7.00%

4.08%

2.12%
1.30%

1%
0%

Global 10U.S.
Global
U.S.
U.S.
U.S. Office
U.S.
U.S. Office
Year Gov't Treasury Prime Cap Corporate Apartment
CBD
Industrial Suburban
Bond Bond Yield Rates
Bond (7- Highrise
Yields
year, Baa)

Global Bond Yields: Average of Germany, Japan, France, U.K., Spain, Italy, Hong Kong
Global cap rates: Average of Beijing, Frankfurt, Paris, London, Tokyo, Hong Kong

10

Where Are We In the Cycle?

11

Where Are We In the Cycle?


Recession-Recovery Table

Recession

Recovery/Expansion
Period

1948
1953
1957
1960
1969
1973
1980
1981
1990
2001
2007

Q1 1950 Q1 1953
Q3 1954 Q2 1957
Q3 1958 Q1 1960
Q2 1961 Q3 1969
Q1 1971 Q3 1973
Q2 1975 Q4 1979
Q4 1980 Q2 1981
Q1 1983 Q2 1990
Q2 1991 Q4 2000
Q4 2001 Q4 2007
Q3 2009 current

Average (48-01)

Source: National Bureau of Economic Research

Length of
Expansion
Following
Recession
13 qtrs
12 qtrs
7 qtrs
34 qtrs
11 qtrs
19 qtrs
3 qtrs
30 qtrs
39 qtrs
25 qtrs
24 qtrs+
19.3 qtrs

GDP Growth
During Expansion

Monthly Job Growth


During Expansion
(000s)

7.4%
4.1%
6.7%
5.1%
5.3%
3.5%
4.4%
4.4%
3.8%
2.7%
2.2%

182
115
165
169
198
239
145
233
203
146
201

4.8%

173.3

Risk of Recession
Probability U.S. Goes Into Recession Next 6 Months

16

15%

15
14

13
12
11
10
9

8
7
6

Feb-15

Source: Moodys Analytics

Mar-15

Apr-15

May-15

Jun-15

Jul-15

Aug-15

13

U.S. Fundamentals Looking Good

GDP growth shows flashes of a boom


Job growth, job openings - robust
Auto strong, housing coming on now
Oil is significant tailwind
Consumer confidence strong

3.7%
Avg. GDP growth
since mid-2013
(excluding Q1s)

7M
Net new jobs
created
since 2012

Stronger wage growth/inflation is coming


14

Consensus Forecast
NABE October 2015
2015 Forecast

2016 Forecast

Median

Five
Lowest

Five
Highest

Median

Five
Lowest

Five
Highest

Real GDP, % change, Q4/Q4

2.5

2.1

3.1

2.7

2.5

3.6

CPI, % change, Q4/Q4

0.7

0.0

1.7

2.1

1.5

3.0

Personal Consumption Expenditures Price


Index less food energy, % chg, Q4/Q4

1.5

1.2

1.7

1.8

1.3

2.4

Civilian Unemployment Rate, % annual


average

5.3

5.3

5.5

4.9

4.6

5.3

0.350

0.125

0.500

1.37

0.500

1.840

10-Yr Treasury Note Yield, % year-end

2.4

2.2

2.6

3.0

2.5

3.7

Foreign Exchange Rate, US$ per Euro,


December Average

1.13

1.08

1.15

1.13

1.01

1.30

Housing Starts, millions of units

1.12

1.03

1.2

1.28

1.10

1.50

Home Prices, FHFA, % change, Q4/Q4

4.9

3.0

6.2

4.0

2.7

6.7

Oil Prices, $ per barrel, December Average

50.0

40.9

65.0

56.5

47.0

78.5

S&P 500 Index, December 31

2025

1950

2202

2146

2011

2400

Federal Funds Target, % year-end

Source: NABE

15

U.S. Macro Forecast Table


Updated September 16th 2015
US Economy
Real GDP, %
Nonfarm Employment, ths.
Office-using Employment, ths.
Unemployment Rate, %
Retail Sales & Food Services, %
CPI Inflation, %
CCI
Fed Funds Rate, %
10-year Gov't Bond, %
ISM Manufacturing Index
West Texas Intermediate, $/bbl

2014
Q4

Q1

Q2

2015
Q3

Q4

Q1

2016
Q2

2014

Annual
2015

2016

2.1
850
230
5.7
1.9
-0.9
93
0.1
2.3
56.9
73

0.7
778
205
5.6
-4
-3.1
101
0.1
2
52.6
49

3.7
610
219
5.4
6.9
3
96
0.1
2.2
52.6
58

2.6
702
246
5.2
5.6
0.5
96
0.3
2.3
51.3
47

3.6
650
195
5.1
5.9
1.7
103
0.5
2.4
54.5
49

2.1
685
206
5
5.3
1.9
98
0.8
2.6
51
52

3.5
830
250
4.9
6.2
2.1
108
1.25
3
55.6
55

2.4
2,629
700
6.2
3.9
1.6
87
0.1
2.5
55.7
93

2.5
2,740
865
5.3
3.6
0.1
99
0.3
2.2
52.8
51

3.2
2,531
734
4.9
5.4
2
104
1.5
2.5
54
55

Office Sector
Net Absorption, msf
Vacancy
Asking Rents

24.3
11.4
14.50% 14.40%
$22.58 $22.73

20.9
14.20%
$22.92

24.9
14.00%
$23.12

21.2
13.90%
$23.34

12.3
13.80%
$23.57

22.8
13.60%
$23.81

71.3
14.90%
$22.35

78.4
14.10%
$23.03

81
13.50%
$23.93

Industrial Sector
Net Absorption, msf
Vacancy
Asking Rents

52.5
7.70%
$5.29

40.1
7.50%
$5.34

46.1
7.30%
$5.42

49.5
7.10%
$5.50

53
7.00%
$5.60

35.1
6.90%
$5.72

41.2
6.80%
$5.85

162.5
8.00%
$5.21

189
7.20%
$5.47

155.2
6.80%
$5.83

Retail Sector*
Net Absorption, msf
Vacancy
Asking Rents

31.2
6.10%
$15.52

15.1
6.10%
$15.59

21.2
6.00%
$15.70

28.3
5.90%
$15.81

24
5.80%
$15.90

17.1
5.80%
$16.03

22.4
5.70%
$16.08

96.1
6.40%
$15.56

88.6
6.00%
$15.75

83
5.65%
$16.10

Apartment Sector**
Net Absorption, ths
Vacancy
Asking Rents

43.3
4.30%
$1,173

39.2
4.20%
$1,181

44.5
4.20%
$1,194

48.1
4.30%
$1,208

37.8
4.40%
$1,221

34.3
4.50%
$1,234

38
4.70%
$1,248

164.8
4.30%
$1,117

169.6
4.30%
$1,201

146.8
4.80%
$1,258

16

Oil & Texas

17

Texas Now Being Put to the Test


Energy a Major Driver

Oil Plunges, Now What?

11,000

80

220

70

2014

2012

2010

140

2008

9,000

2006

9,500

180

2004

90

260

10,500
10,000

100

60
50
40

2015

300

2014

11,500

110

2013

340

2012

12,000

Total Nonfarm for Texas (left scale, 000's)


Natural Resources and Mining for Texas (right scale,
000's)
Source: BLS, WTI

West Texas Intermediate, Spot Price, USD per Barrel

History Working Against Texas


1980s Oil Glut

TX Goes Into Recession

40

9.5

35

Unemployment Spikes to 9%

8.5

30

25

7.5
20

15

West Texas Intermediate, ($ per Bbl)

Source: BEA, WTI

TX Unemployment Rate

1990

1989

1988

1987

1986

1985

1989

1988

1987

1986

1985

1984

1983

1982

1981

1980

10

6.5

Then Again, Todays Texas Is More Diversified


Diversity Reduces Texas Volatility

Texas Economic DNA

Industrial Diversity Index, U.S. = 1


Manufacturing
Healthcare
Financial Center
Affordable
Prof & Business
Services

Distribution
Center

Technology
Energy

92% of Texas economy has nothing


Source: Moodys Analytics, BLS

to do with energy

Feds View

This year job growth is likely to moderate to


2.0%-2.5%, about 259,000 jobs 149,000 fewer
than 2014. The bottom line is Texas likely to
continue to grow but not nearly as strong as last
year.
-Federal Reserve Bank of Dallas, January 2015

Dallas Metro:
Historic Boom

22

Dallas Low Exposure to Energy Sector

Only 2% of Dallas office market is leased to oil and gas

Energy-related jobs BLS doesnt report for Dallas because


number is so small

Indirect exposure is a concern if Houston goes down hard it


will impact Dallas

U.S. Employment

Dallas Employment

Total Nonfarm: 141.2 million

Total Nonfarm: 2.36 million

Consturction & Mining


Manufacturing

Wholesale Trade
Retail
Transportation/
Warehousing
Real Estate & Leasing
Business & Professional
Services
Education & Health
Arts & Entertainment
Government
Other
Source: BLS

Dallas Record-Setting Job Growth


Dallas-Fort Worth-Arlington Metro Area

150
112 117

100

10-Year Avg = 51,000

50
0
-50

Source: BLS, Cushman & Wakefield Research

2015F

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1992

1991

-150

1993

Total Nonfarm, 000's

-100

Dallas Recent Employment Trends

By Sector

No Let Up in Dallas
3,410

Office-using

3,390
3,370

Education and healthcare

3,350
3,330
3,310

Leisure and hospitality


Oil prices
began to
fall here

Transportation and
warehousing

3,290

Retail

3,270

Total Nonfarm Employment, 000's


Source: BLS

Aug 2015

Jun 2015

Apr 2015

Feb 2015

Dec 2014

Oct 2014

Government
Aug 2014

3,250

Construction
0

10

20

30

Job Growth, 000's

40

% Increase
4%

3%

1%

Source: BLS
*Jan-Aug 2015 over Jan-Aug 2014

3.0%

3.0%

3.0%

3.0%

3.1%

3.1%

3.1%

3.1%

3.3%

3.3%

3.3%

3.3%

3.4%

3.5%

3.6%

3.6%

3.7%

4.0%

2%
4.2%

5%
35

38

41

43

46

47

49

51

51

56

57

63

66

71

73

75

85

117

144

146

160
140
120
100
80
60
40
20
0

5.6%

Job Growth, 000s

Top 20 Job Growth Markets

YTD 2015

6%

US =
1.8%

0%

26

Dallas Office Sector Trends


Demand (Net Absorption)

Supply (Vacancy)
24%

8.0

6.0

Historical Avg. = 1.4 msf

4.5 msf

Equilibrium = 22.8

22%

2.0

21%

0.0

-2.0

20%

-4.0

Net Absorption

Source: Cushman & Wakefield Research


*Based on legacy DTZ data

Forecast

Dallas

2014

2013

2012

2011

18%

2010

2015 YTD

2012

2009

2006

2003

2000

-6.0

18.8

19%

2015

MSF

4.0

23%

Industrial Trends
Top 20 U.S. Industrial Markets Ranked by Net Absorption

Inland Empire

Recession
2008-2010
6,257,105

Dallas-Fort Worth

(6,804,594)

42,341,171

Chicago

(11,208,812)

36,248,838

Atlanta

(6,473,865)

31,384,339

Phoenix

951,000

29,488,917

Houston

(780,765)

26,640,527

Milwaukee

625,220

19,717,683

Indianapolis

5,348,861

19,617,739

Nashville

(5,056,358)

17,929,702

10

Los Angeles

(12,228,393)

16,231,622

11

Cincinnati

(123,682)

15,476,044

12

Denver

1,828,225

15,371,986

13

Kansas City

(2,862,823)

12,416,419

14

Baltimore

(5,873,572)

12,183,637

15

Oakland-East Bay

(4,237,679)

12,128,779

16

Seattle

(6,494,992)

11,896,701

17

Central New Jersey

1,070,760

11,863,582

18

Charlotte

(2,598,528)

10,867,676

19

Columbus

1,946,870

10,286,897

20

Dayton

(1.089,860)

9,360,409

Rank

Markets

Source: Cushman & Wakefield Research


*Based on legacy DTZ data

Recovery
2011-2015
55,719,747

Dallas 2015
Ecommerce
Leasing

7.3 msf

Net Absorption YTD

8.1%
Current Vacancy

2.6 msf
Under Construction

Dallas Forecasts Remain Bullish


% Change in GMP
7
6
5
4
3
2
1
0

U.S.

2013

2014

2015

2016

2017

2016

2017

% Change in Employment
4
3
2
1
0
Source: Moodys Analytics

2013

2014

2015

ULI North Texas


Market Overview & Forecast
October 2015

Kevin J. Thorpe, Chief Economist