Commercial Real Estate Trends & Outlook April 2020 National Association of REALTORS® Research Group COMMERCIAL REAL ESTATE TRENDS & OUTLOOK April 2020 Report The Commercial Real Estate Trends & Outlook Report discusses trends in the small commercial market (transactions that are typically less than $2.5 million) based on a survey of members of the National Association of Realtors® engaged in commercial real estate about their transactions in the first quarter of 2020 and the latest publicly available data. Current conditions. This latest report shows the very early impact of the coronavirus pandemic on commercial real estate. On average, respondents reported a 1% decline in their commercial sales volume during the first quarter of 2020 compared to transactions in the same period last year. On average, respondents reported a 2% decline in the dollar volume of new leases compared to the level one year ago. Across the multifamily, industrial, office, retail, and hotel sectors, a lower fraction of respondents reported higher sales transactions and new lease volume on an annual basis in the first quarter of 2020 compared to the fraction of respondents who reported an increase in sales and leasing activity in the prior quarter. Respondents reported that commercial prices rose at a slower pace of 1% from one year ago. Other price indicators show prices are softening. The Green Street Property Price Index which is compiled from high quality properties in REITs portfolios fell slightly by less than half a percent in 2020 Q1 from the prior quarter. Respondents reported higher vacancy rates for office, 10.5%; retail, 10.1%; and multifamily, 5%. Vacancy rates in industrial properties were flat at 5%. A lower fraction of respondents reported an improvement in access to financing: 57% reported an improvement in debt financing conditions compared to one year ago, and 53% reported an improvement in equity financing conditions. Economic outlook. We expect the second quarter GDP growth to be the steepest decline in the U.S. history – likely in excess of 15% contraction on an annualized basis. What will be critical is the recovery in the second half of the year. Is it going to be sharp and quick rebound of a V- shaped or a sluggish recovery of staying low for a period before a recovery of a U-shaped? That will depend on the economy’s response to the stimulus measures and the path of virus containment. The best guess is for the second half GDP growth to be insufficient to compensate for the loss in the second quarter. Therefore, we expect GDP to have contracted around 3% to 5% for the year as a whole and net job losses totaling around 3 to 5 million. COMMERCIAL REAL ESTATE TRENDS & OUTLOOK April 2020 Report 1 | Economic Conditions.…………………………………………………………………………………………….. 4 2 |Commercial Sales…………………………………………………………………………………………………….. 5 3 | Commercial Leasing ………………………………………….…………………………………………………. 8 4 | Commercial Construction ………………………………………………………………………………….. 10 5 | Commercial Outlook…………………………………………………………………………………………….. 11 6 |Business Trends…..……………………………………………………………………………………………….…. 14 7 | About the Survey……………………….………………………………………………………………………… 17 1 | ECONOMIC CONDITIONS Fewer Jobs, Declining Wages in March 2020 Nonfarm Payroll Jobs Lost in March 2020 In March 2020, 701,000 non-farm employment -459 Leisure and Hospitality jobs were lost in all industries (2-digit level) except -76 Education and Health in the utilities, wholesale trade, information, and -52 Professional and Business Services the government sectors. Sixty-five percent of the -46.2 Retail Trade job losses were in leisure and hospitality (- -29 Construction 459,000). Professional and business services lost -24 Other Services 52,000 jobs, and retail trade shed 46,200 jobs. -18 Manufacturing -7 Mining and Logging Employment In March, the number of unemployed surged to -4.9 Transportation and Warehousing 7.14 million, from 5.79 million in February. Since -1 Financial Activities the weeks of March 21 through April 4, 15.1 million 0.8 Utilities people have already filed for unemployment Wholesale Trade insurance benefits. 0.9 2 Information Source: BLS The average weekly wage (seasonally adjusted) 12 Government has started to decline, to $978.8 in March 2020 from $980.7 in February 2020. In an effort to bolster economic activity, the Number of Unemployed as of Federal Open Market Committee reduced the March 2020 (in millions) federal funds rate to 0% on March 15 and announced an open-ended commitment to 20.0 purchase mortgage-backed securities and 15.0 investment-grade corporate debt to keep credit flowing. Under an accommodating monetary 10.0 7.14 policy, the 10-year T-note has declined to 0.87% in 5.0 March 2020. On April 9, the Federal Reserve Board 5.79 released a statement that it will provide $2.3 0.0 trillion in loans to support the flow of credit to households, businesses, and the state and local 2007-Jul 2010-Jul 2013-Jul 2016-Jul 2019-Jul governments. 2006-Jan 2009-Jan 2012-Jan 2015-Jan 2018-Jan 2006-Oct 2009-Oct 2012-Oct 2015-Oct 2018-Oct 2008-Apr 2011-Apr 2014-Apr 2017-Apr 10-Year Treasury Note Yield at Average Weekly Wages, Seasonally Adjusted Constant Maturity $1,000.0 $980.7 3.50 $980.0 $978.8 3.00 $960.0 2.50 2.00 $940.0 1.50 $920.0 1.00 0.87 $900.0 0.50 $880.0 0.00 Jul/2018 Jul/2019 Jan/2018 Jan/2019 Jan/2020 Sep/2018 Sep/2019 Nov/2018 Nov/2019 Mar/2018 Mar/2019 Mar/2020 May/2018 May/2019 Jul/2018 Jul/2019 Jan/2018 Jan/2019 Jan/2020 Sep/2018 Sep/2019 Nov/2018 Nov/2019 Mar/2018 Mar/2019 Mar/2020 May/2018 May/2019 NATIONAL ASSOCIATION of REALTORS® | RESEARCH GROUP | www.nar.realtor/research-and-statistics 4 2 | COMMERCIAL SALES Commercial Sales Declined 1% in 2020 Q1 Sales volume fell on average by 1% among Quarterly Sales Volume commercial members of the National Association 40% (Y/Y % Chg) of REALTORS® who responded to NAR’s 2020 Q1 20% Commercial Real Estate Quarterly Market Survey. NAR commercial members’ transactions are 0% -1% typically below $2.5 million (small commercia market). Real Capital Analytics also reported that -20% during January—February 2020, sales transactions -35% -40% volume fell by 35%. RCA tracks transactions of at least $2.5 million (middle to large commercial 2012 2013 2014 2015 2016 2017 2018 2019 market). REALTOR® CRE Markets 2020.Q1 $2.5+M Market Not all respondents reported a decline, as 42% of Sources: National Association of REALTORS®, Real Capital Analytics respondents reported increase in sales compared to one year ago. However, this share is lower than the 61% share in 2019 Q4. A higher fraction of respondents, 18%, reported a sales decline of at Distribution of Y/Y Sales Change least 20%, compared to 7% in the prior quarter. 25% Across all property types, a lower fraction of 20% respondents reported an annual gain in sales 15% volume in 2020 Q1 compared to the fraction of 10% 5% respondents who reported an annual increase in 0% 2019 Q4. For example, in the apartment class B/C properties, 35% reported higher sales from one year ago compared (44% in the prior quarter). In the office class A market, only 15% of respondents reported an increase in sales volume (22% in the prior quarter). In the retail mall class A, only 6% 2019.Q4 2020.Q1 reported an increase (12% in the prior quarter). Percent of Respondents Who Reported a Y/Y Increase in Dollar Sales Volume 50% 40% 32% 33% 35% 26% 30% 22% 25% 20% 17% 20% 15% 12% 12% 14% 6% 7% 10% 0% 2019 Q4 2020 Q1 NATIONAL ASSOCIATION of REALTORS® | RESEARCH GROUP | www.nar.realtor/research-and-statistics 5 2 | COMMERCIAL SALES Commercial Prices Rose 1% in 2020 Q1 Y/Y Change in Commercial Sales While dollar sales volume fell, commercial prices Prices rose 1% in markets where commercial members of 15% the National Association of REALTORS® are 10% engaged in. These markets are typically below $2.5 5% 6.6% million (small commercial market). 0% 0.8% -5% Among respondents, 56% reported an increase in commercial sales prices in their markets (75% in -10% the prior quarter), while 25% reported a decline (16% -15% in the prior quarter). Only 5% reported a decline in -20% prices of at least 20% (1% in the prior quarter). -25% The Green Street Commercial Price Index, which is an indicator for high-quality properties held by REITs indicates commercial property prices are REALTOR® CRE Markets $2.5M+ Market declining, although not collapsing. The index declined by 0.3% in 2020 Q1 compared to the prior quarter. Real Capital Analytics also reported that during Distribution of Y/Y Commercial January-February 2020, commercial prices rose on Price Change average by nearly 7%. The coronavirus pandemic escalated in March 2020 so the strong price growth 30% does not capture the impact of the pandemic. RCA 25% tracks transactions of at least $2.5 million (middle 20% to large commercial market). 15% 10% 5% 0% Green Street Commercial Property Price Index (August 2007=100) 2019.Q4 2020.Q1 136.00 134.00 132.00 130.00 128.00 126.00 124.00 Q1/2017 Q2/2017 Q3/2017 Q4/2017 Q1/2018 Q2/2018 Q3/2018 Q4/2018 Q1/2019 Q2/2019 Q3/2019 Q4/2019 Q1/2020 NATIONAL ASSOCIATION of REALTORS® | RESEARCH GROUP | www.nar.realtor/research-and-statistics 6 2 | COMMERCIAL SALES Cap Rates Trended Down to 6.5% Cap Rates in REALTORS® Market Cap rates for transactions in the first quarter of 2020 reported by NAR commercial member 10.0% and $2.5+M Transactions average 6.5%. The average cap rate in the large 9.0% commercial market ($2.5 million or more 8.0% transactions) reported by Real Capital Analytics 7.0% was 6.7%.