A Light at the End of the Tunnel ?? The views expressed in this document are those of the author and do not necessarily reflect the views of the Bank of Atlanta, the Federal Reserve Board of Governors, or the Federal Reserve System.

2 Agenda

• Economic Conditions

• Market Trends

• Commercial Real Estate Momentum Index (CREMI)

• Expectations

• Risks

3 Chair, Federal Reserve

“We’re seeing now is really an economy that seems to be at an inflection point. And that’s because of widespread vaccination and strong fiscal support, strong monetary policy support.”

60 Minutes, 4/11 Unemployment Rates

25.0  Current Unemployment Rate  U-3: 6.1%  U-6: 9.9% 20.0  Within two months U-3 went from a 50-year low to a 70-year high 15.0  U-6 which represents a broader view of unemployment increased over 3X in 2 10.0 months.

 Both U-3 & U-6 have declined significantly

5.0 since the onset of the pandemic.

 Low-skilled workers have taken the brunt of

0.0 displacements. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 U3 U6

Source: BLS, FRED FRB St. Louis, Risk Analysis Unit/ of Atlanta

5 Employment Last Two Decades of Job Creation, and early 2021

Change in Thousands Job Creation (Thousands) 2,000

GFC Pandemic 1,500

1,000

500

0

-500 July October January April

Source: BLS, FRED FRB St. Louis, Risk Analysis Unit/Federal Reserve Bank of Atlanta 6 Weekly Initial Jobless Claims Employment

• 52-week average preceding COVID was 216,000 8,000,000 • In the span of 4 weeks in March 2020, claims grew 32x. (Claims increased from 211,000 to 6,867,000) 7,000,000 • Initial jobless claim dropped significantly by April 6,000,000 17th to almost half of the level seen in mid January 2021 5,000,000 • Current claims levels are almost 2.5x the 2019 52- week average. 4,000,000

• Most recent claims levels are roughly equivalent to 3,000,000 In the last month, levels seen at the end of the 2008-2009 recession. claims fell over 30%, 2,000,000 • Heightened levels of unemployment create to 498,000 (5/1) headwinds for a broad-based rebound in 1,000,000 commercial real estate, but recent declines are promising. 0 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-21 Feb-21 Mar-21 Apr-21

Source: BLS, FRB St. Louis, Risk Analysis Unit/Federal Reserve Bank of Atlanta

7 Architectural Billings

• A result below 50 indicates activity is contracting, while above 50 represents an expansion.

• Inquiries are expanding which indicate improved prospects for future activity

• Activity associated with Index Design Contracts and Billings turned positive, signaling that activity levels may have reached a point of inflection.

Source: Architectural Billing Index, Risk Analysis Unit/Federal Reserve Bank of Atlanta President and CEO, Kansas City Federal Reserve

"The financial stability implications of real estate can hardly be understated.”

"The pandemic will cause, or at least hasten, some significant structural changes in real estate.”

“Many renters and businesses could find themselves unable to meet their obligations, forcing banks to realize losses on existing loans and weighing on credit growth and broader economic activity.”

Wall Street Journal CRE Landscape

1. Hospitality -Non-work domestic traveler numbers are increasing -Conferences/group travel likely to begin returning later this year. Full-service hotels will continue to face headwinds

2. Retail -Too much space overall, especially in the B & C Mall space -Ecommerce sales continue to grow, creating headwinds for traditional retailers -Restaurant closures due to the pandemic have created headwinds and longer-term scarring

3. Office -Individuals and businesses were pivoting away from higher cost markets pre-COVID, and it is continuing -Pandemic accelerated work from home trends that have been showing up in the census data for last 10 years -Flexibility is highly valued by workers. Businesses value it because of non-monetary value.

4. Multifamily -Lack of new supply (lower-price product) led to robust rent increases and functionally full occupancy -Upper-price tier has reasonable vacancy rates due to more new deliveries. -9 million renters are behind of rents -GSEs pivoting lending toward affordable product should allow banks and non-bank lenders more opportunities in the space.

10 HOTELS A Tough Environment…but Improving % Change, Number of Leisure and Hospitality Small Business Open (Jan 2020)

February 2021 April 2021

Source: Womply, Risk Analysis Unit/Federal Reserve Bank of Atlanta

12 Travel… % Change, Versus Feb 2020

13 Hotel Occupancy Weekly Occupancy Distribution (% of hotels)

Source: STR

14 RETAIL Too Much of a Good Thing?? Global Retail Square Feet Per Capita

Number of Retail Square Feet Notable Growth Mild Growth Flat (Positive) Flat (Negative) Mild Loss Notable Loss 3%25 or More 1% to +1.9% +0.9% to +0.1% 0% to -0.9% -1% to -2.9% -3% or More 20

15

10

5

0

Data: 2019

Source: ICSC, Risk Analysis Unit/Federal Reserve Bank of Atlanta 16 Change in Retail Sales

Source: BLS, Risk Analysis Unit/Federal Reserve Bank of Atlanta

17 Mall Vacancy

• Sellers of goods continue to face significant headwinds

• COVID-19 accelerated stress at malls as roughly 45% had vacancy rates of <10% in 2021 Q1 vs. 60% in 2020 Q1

• Malls with vacancy rates >30%, have increased more than 3X since 2016.

Source: CoStar, Risk Analysis Unit/Federal Reserve Bank of Atlanta

18 The Next Domino to Fall to the E-commerce Juggernaut??

 Ecommerce providers have significantly shifted consumer buying habits in most commodity categories, except food.

 U.S. eGrocery lags other nations (U.S. 1%, Japan/U.K. 7%, South Korea 17%)

 Mid-tier price grocers are already experiencing increased headwinds

 New highly-automated facilities under development may disrupt the current industry method of operation.

Source: Kroger/Ocado, Risk Analysis Unit/Federal Reserve Bank of Atlanta

19 Where’s the Beef… % Change, Number of Restaurants Open (Jan 2020)

February 2021 April 2021

Source: Womply, Youtube, Risk Analysis Unit/Federal Reserve Bank of Atlanta

20 Where’s the Beef… % Change, Number of Restaurants Open (Jan 2020)

February 2021 April 2021

Source: Womply, Youtube, Risk Analysis Unit/Federal Reserve Bank of Atlanta

21 Change in Retail Vacancy

Retail Vacancy Rate (YoY Change, BPS) 2020Q4

< -100 (13) -100 - 0 (65) 0 - 100 (250) 100 - 250 (76) > 250 (19)

Source: CoStar, Risk Analysis Unit/Federal Reserve Bank of Atlanta

22 OFFICE Change in Office Vacancy

Source: CoStar, Risk Analysis Unit/Federal Reserve Bank of Atlanta

24 The Ability of Future Telework Percentage of successful workers by sector

Source: BLS, Risk Analysis Unit/Federal Reserve Bank of Atlanta

25 Future Homework? Percentage of workers working in the office by number of day(s)

2019 POST COVID-19 13%

18.2% 1% 2% 29.4% 3%

6% 5.0%

8.4%

75% 15.0% 24.0%

5 days 4 days 3 days 2 days 1 day <1 day 5 days 4 days 3 days 2 days 1 day <1 day

Source: BLS, Various surveys/CBRE, Risk Analysis Unit/Federal Reserve Bank of Atlanta Office of the Future

Areas of greater confidence  More people working remotely  Technology is enabling greater space efficiency in the workplace  Some industries will be more prone to let workers utilize alternative work  More space needed per FTE  Greater building Capex & Opex  Low cost/suburban locations appear to be thriving at the expense of high cost & density markets  Tasks requiring collaboration, cross-pollination of ideas, networking and culture are not conducted as efficiently in the virtual environment vs. in-person More opaque areas  Reemergence of the virus  Defining what constitutes a safe workplace  The new workplace and employee implications Multifamily Multifamily Occupancy Property Class Occupancy

97%

96%

95%

94%

93%

92%

91%

90%

A B C

Source: RealPage, Risk Analysis Unit/Federal Reserve Bank of Atlanta Change in Multifamily Occupancy

30 Source: CoStar, Risk Analysis Unit/Federal Reserve Bank of Atlanta Where can CREMI be found: ATLANTAFED.org

See Data and Tools Tab Commercial Real Estate Momentum Index or Search: Commercial Real Estate Denver – Office & Gainesville, FL - Multifamily Momentum Index

Source: Risk Analysis Unit/Federal Reserve Bank of Atlanta 31 Where can CREMI be found: ATLANTAFED.org

Commercial Real Estate Momentum Index See Data and Tools Tab or Office (Q2 2019 vs. Q1 2021) Search: Commercial Real Estate Momentum Index Q2 2019 Q1 2021

Source: Risk Analysis Unit/Federal Reserve Bank of Atlanta CRE Risk Premiums Spread between CAP RATES and 10YR Treasury

900 2020: Spreads widened as 10YR Yield fell 800 2021: Spreads are compressing as 700 10YR Yield rises

600 Rising 10YR Yields do not appear to be have a significant influence on Cap 500 Rates at this juncture.

Spread 400 Currently, vast amounts of liquidity remain available, which are keeping

300 Cap Rates at current levels.

200 Longer-term compression in spreads Office Industrial Retail Apartments Hotel may indicate the market is incurring Current 503 425 505 332 701 100 LT Average 434 438 418 317 578 greater risk. Difference 69 -14 88 15 123 10YR Yield= 1.61% 10 Yr T Yield = 0.93% 0 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21

Data through 1Q 2021 Office Industrial Retail Apartments Hotel Source: Real Capital Analytics, Risk Analysis Unit/Federal Reserve Bank of Atlanta 33 Jerome Powell Chair, Federal Reserve

“Over the next few months, 12- month measures of inflation will move up as the very low readings from March and April of last year fall out of the calculation.”

“These one-time increase in prices are likely to have only transient effects of inflation.“

FOMC Press Conference 3/2021 Risks to CRE

1. Pandemic related (additional strain or mutation)

2. Global weakness

3. Inflation

4. Rising interest rates

5. Rise of non-bank lenders

6. Permanent behavior changes

35 FOMC March 2021 GDP and Unemployment Projections

36 Raphael Bostic President and CEO, Atlanta Federal Reserve

“This recession was unlike anything we ever had before, so the recovery is going to be that way as well.”

CNBC Closing

1. Economic activity has improved since the early stages of COVID; about 61% of the 22 million jobs lost have been regained.

2. As the economic circumstances and situation in CRE evolve, risk will also pivot.

3. The Hotel and Retail Sectors have faced the brunt of the loss of economic activity in the CRE space. Activity in both sectors is improving; however, some property will take an extraordinary amount of time to recover and in some cases may not. Some industries are recovering nicely, some not.

4. The most sizeable fundamental risk is in the Office sector. It may continue to emerge in the short/mid-term as more employers right-size their office footprint.

38 Thank You!

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