EY Real Estate Markets Update Economic and real estate overview June 2020 Disclaimer • EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client- serving member firm of Ernst & Young Global Limited operating in the U.S. • This presentation is © 2019 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. • Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP. • This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances. • These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 1 EY Real Estate Markets Update Economic and real estate overview Mike Straneva Partner US National Director of Transaction Real Estate Ernst & Young LLP Page 2 EY Real Estate Markets Update Where are we in the cycle? Real estate recession Self-storage Multi family Office Single family Senior housing Community centers Manufactured home High-productivity malls Industrial Neighborhood centers Student housing Power centers Lodging Data centers M-RevPAF Growth Slowing M-RevPAF Growth Negative (Expansion) (Oversupply/ Low-productivity malls Cell towers Material rent growth Obsolescence) Rising/stable occupancy Rents falling New construction Occupancy falling M-RevPAF Growth M-RevPAF Growth Flat Accelerating (Bottoming) (Recovery) Rents and occupancy stabilizing Low/modest rent growth Little to no new construction Rising occupancy Little new construction Page 3 EY Real Estate Markets Update Today’s economy: the glass is broken • REITs have suffered significant price declines in most sectors • Interest rates are at historic lows but floors and increased underwriting makes lending difficult. • Inflation could be a long term problem but today’s issues relate to deflation. • The bid ask spread between buyers and sellers has chilled the market for all but a few select property types like industrial and data centers. • Wave of distressed buyers looking for asset purchases are on the sidelines while distressed debt, mezzanine and rescue capital are the flavor of the day. • Unemployment is at historic highs supressing consumer demand. • Government CARES Act and treasury intervention in the market place is unprecedented. • Business is waiting to see the results of the reopening while the results of the stimulus packages are set to burn off. • On top of all this, it’s an election year. Page 4 EY Real Estate Markets Update Economy is witnessing the highest unemployment rate since 1982 May ’20 14% Unemployment rate 13.3% 12% 10% 8% 6% 4% 2% 0% ► Surprisingly, May saw 2.5 million jobs ADDED, bringing the unemployment rate down from 14.7% in April to 13.3% in May. Source: US Bureau of Labor Statistics Page 5 EY Real Estate Markets Update This is the unequitable effect of theCoronavirus of theunequitable effect This is Page 6 Source: US Bureau of Labor Statistics 10 12 14 16 18 20 2 4 6 8 2000 2001 2002 race by (%) rate US Unemployment Total 2003 2004 2005 White 2006 2007 2008 Black 2009 2010 2011 2012 Asian 2013 2014 2015 Latino 2016 2017 2018 EY RealEstate Markets Update 2019 May-20 11 13 15 17 19 21 1 3 5 7 9 2000 level education by (%) rate US Unemployment Total 2001 2002 2003 No HS No 2004 2005 2006 HS NoCollege HS 2007 2008 2009 2010 2011 or Assoc. Deg Assoc. or College Some 2012 2013 2014 2015 2016 College + College 2017 2018 2019 May-20 What will increased government borrowing do to future USyields? future doto borrowing government What willincreased Page 7 • • 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% inject a total of $6 trillion into the financial system the financial $6trillion into of a total inject to the potential have and andcredit facilities lending programs cuts, include rate initiatives Fed’s The intheworks. more trillion, $2.3 with Act, total including theCARES packages, Stimulus Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 EY RealEstate Markets Update May-15 10 Yr Jul-15 Sep-15 Nov-15 Jan-16 5 Yr Mar-16 May-16 Jul-16 2 Yr Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Source: US Treasury, Forebes, CNBC Mar-19 May-19 Jul-19 Sep-19 Nov-19 Jan-20 Mar-20 May-20 The dollar has slightly appreciated although the Fed Fund rate is near zero US dollar index vs Fed Funds Rate 106 3.0% US Dollar Index Fed Funds Rate 104 2.5% 102 100 2.0% 98 1.5% 96 94 1.0% 92 0.5% 90 88 0.0% 1-Jul-19 1-Jul-18 1-Jul-17 1-Oct-19 1-Oct-18 1-Oct-17 1-Feb-20 1-Apr-20 1-Feb-19 1-Apr-19 1-Feb-18 1-Apr-18 1-Feb-17 1-Apr-17 1-Jan-20 1-Jan-19 1-Jan-18 1-Jan-17 1-Jun-20 1-Jun-19 1-Sep-19 1-Dec-19 1-Jun-18 1-Sep-18 1-Dec-18 1-Jun-17 1-Sep-17 1-Dec-17 1-Dec-16 1-Mar-20 1-Mar-19 1-Mar-18 1-Mar-17 1-Nov-19 1-Nov-18 1-Nov-17 1-Nov-16 1-Aug-19 1-Aug-18 1-Aug-17 1-May-20 1-May-19 1-May-18 1-May-17 Pros: Cons: • A strong dollar makes foreign goods more affordable for • American exports are more expensive abroad. consumers. • There is less domestic demand for US-produced goods because • For large multinationals, a strong dollar means greater ability to of cheaper buy foreign goods. foreign companies. • Reduced demand for American-made products will place • A strong dollar cools inflation and economic growth, which may downward pressure on US employment. be overheating. • A stronger dollar signals that investors believe economic growth Source: The Wall Street Journal, US Federal Reserve will accelerate in the longer term. Page 8 EY Real Estate Markets Update barrel $35per to oilrecovers plunge before and rig count employment Oil prices, Page 9 $100 $120 $(40) $(20) $20 $40 $60 $80 $- Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 perbarrel) price ($ spot WTI Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 EY RealEstate Markets Update Jul-19 Oct-19 Jan-20 Apr-20 1000 100 200 300 400 500 600 700 800 900 0 Jan-13 Jun-13 Texas rig count (L) count rig Texas Nov-13 Apr-14 rigcount vs. employment Texas Sep-14 Feb-15 Jul-15 Dec-15 Texas non-farm employment YOY % Ch (R) %Ch YOY employment non-farm Texas May-16 Oct-16 Source: Bureau of Labor Statistics, Baker Hughes Mar-17 Aug-17 Jan-18 Jun-18 Nov-18 Apr-19 Sep-19 Feb-20 -10% -8% -6% -4% -2% 0% 2% 4% 6% No world economy has been spared GDP Growth Forecast 2019 vs. 2020 China 0.4% 6.1% India -3.1% 5.6% Indonesia -2.3% 5.0% Russia -6.3% 1.0% Emerging Brazil -4.8% 0.8% Mexico -5.2% 0.4% United States -7.0% 2.2% South Korea -1.0% 1.9% Australia -5.9% 1.8% Canada -10.7% 1.4% France -9.4% 1.3% 1.2% Developed United Kingdom -8.3% Japan -6.5% 0.8% Germany -6.1% 0.6% Italy -8.7% 0.1% 2019 2020 Source: Oxford Economics Page 10 EY Real Estate Markets Update Real estate funds are sitting on a record amount of dry powder Top RE PE Fund Managers by fundraising 2014-2019 Rank Manager Headquarters Capital raised ($m) 1 Blackstone New York $ 64,931 2 Brookfield Asset Management Toronto $ 29,014 3 Starwood Capital Group Miami Beach $ 16,861 4 GLP Singapore $ 16,435 5 Lone Star Funds Dallas $ 16,200 6 AEW Boston $ 12,227 7 The Carlyle Group Washington DC $ 10,860 8 Rockpoint Group Boston $ 10,741 9 BentallGreenOak New York $ 9,713 10 Angelo Gordon New York $ 9,449 Total $196,431 Source: Preqin, PERE Page 11 EY Real Estate Markets Update Frothy market multiples look to increased earnings increased multipleslookto market Frothy Page 12 Source: Factiva 100 120 140 160 180 200 220 80 4-Jan-16 4-Apr-16 4-Jul-16 4-Oct-16 performance indices market Broad 4-Jan-17 DJI 4-Apr-17 4-Jul-17 NASDAQ 4-Oct-17 4-Jan-18 4-Apr-18 4-Jul-18 S&P 500 S&P 4-Oct-18 4-Jan-19 4-Apr-19 4-Jul-19 4-Oct-19 EY RealEstate Markets Update 4-Jan-20 4-Apr-20 Source: ThomsonOne 10 15 20 25 30 35 40 45 50 0 5 1/1/1872 1/1/1879 1/1/1886 1/1/1893 Jan-00 Jan-07 PE Ratio Jan-14 Jan-21 Jan-28 ratio Shiller PE Jan-35 Jan-42 Jan-49 Long termaverage Jan-56 Jan-63 Jan-70 17.7 Jan-77 Jan-84 Jan-91 Jan-98 Jan-05 Jan-12 Oct-18 May-19 Bank regulators are accommodating lenders that make concessions to borrowers: what happens in the fall when the easy covenant waivers could end? The OCC and FDIC issued separate but overlapping bulletins recommending that banks make allowances to borrowers affected by COVID 19.