Driving the Market ULI South Carolina Capital Markets Conference - - PowerPoint PPT Presentation

ULI South Carolina Capital Markets Conference

Wednesday, September 7, 2016 9:00 AM

Key Real Estate Trends Driving the Market

ULI South Carolina Capital Markets Conference | September 7, 2016

BIOGRAPHY

EDUCATION

UCLA; BA, Economics

AFFILIATIONS

Urban Land Institute (ULI) UCLA Ziman Center for Real Estate UCLA Luskin School of Public Affairs Pension Real Estate Association (PREA) Young Presidents’ Organization (YPO)

GADI KAUFMANN MANAGING DIRECTOR / CEO

(310) 203-3033 gkaufmann@rclco.com Gadi Kaufmann is Managing Director and CEO of RCLCO (Robert Charles Lesser & Co.), a premier end-to-end solutions provider in the real estate sector around the world. The firm offers entity- and portfolio-level strategy planning, economic and market analysis advisory work, due diligence and underwriting services, workouts and restructuring work, turnkey development management services, and transaction services. Gadi joined RCLCO in 1979. He specializes in economic consulting for real estate projects and portfolios; in corporate strategy planning and management consulting at the enterprise level; in transactional and negotiation services; and in financing and capital formation strategy formulation and implementation.

ULI South Carolina Capital Markets Conference | September 7, 2016

INTRODUCTION TO RCLCO

• RCLCO’s mission is to add value to our clients by helping them make strategic, effective and

enduring decisions about real estate.

• RCLCO provides real estate economics, strategic planning, management consulting, and

implementation services to real estate investors, developers, financial institutions, public agencies, and anchor institutions.

• Headquartered in the Washington, D.C. area, with offices in California, Florida, and Texas.

ULI South Carolina Capital Markets Conference | September 7, 2016

THE U.S. REAL ESTATE CYCLE: A SNAPSHOT

ULI South Carolina Capital Markets Conference | September 7, 2016

THE CURRENT CYCLE IS QUITE LONG (86 MONTHS)

• 50% likelihood of economic downturn in 2018
• Expect a relatively mild downturn, not concentrated in property market

Source: Federal Reserve Bank of St. Louis

$0 $4,500 $9,000 $13,500 $18,000 Q1 1960 Q3 1961 Q1 1963 Q3 1964 Q1 1966 Q3 1967 Q1 1969 Q3 1970 Q1 1972 Q3 1973 Q1 1975 Q3 1976 Q1 1978 Q3 1979 Q1 1981 Q3 1982 Q1 1984 Q3 1985 Q1 1987 Q3 1988 Q1 1990 Q3 1991 Q1 1993 Q3 1994 Q1 1996 Q3 1997 Q1 1999 Q3 2000 Q1 2002 Q3 2003 Q1 2005 Q3 2006 Q1 2008 Q3 2009 Q1 2011 Q3 2012 Q1 2014 Q3 2015 Chained 2009 $ (in Billions) Recession Real GDP

Bursting of the US housing bubble Bursting of the dot-com bubble Tight monetary and fiscal policy to control inflation and close budget deficits Bursting of the energy bubble

ULI South Carolina Capital Markets Conference | September 7, 2016

Stage 5 Early Stable Stage 6 Late Stable

• Selective land &

acquisitions

• Source capital -

pipeline

• Dispositions

Refinance Create war chest

HOW WE THINK ABOUT CYCLES (6-24 MOS/STAGE)

Stage 1 Early Downturn Stage 2 Full Downturn

• Conserve capital
• Line up capital for
• pportunistic

investments

• No starts
• Acquire assets

and land

• pportunistically

Stage 3 Bottom Stage 4 Early Recovery

• Value add
• Selective starts
• Aggressive acq.
• Secure land
• Acquire to yield
• Value add and starts
• Source capital
• Increase leverage

ULI South Carolina Capital Markets Conference | September 7, 2016

• Where people live (all forms of housing, self storage, healthcare, hospitality)
• Where people work (office, industrial)
• Where people shop (all forms of retail, logistics)
• Institutions (education, government)

HOW WE THINK ABOUT REAL ESTATE

ULI South Carolina Capital Markets Conference | September 7, 2016

• Where people live, then where people shop, then where people work
• High employment growth markets, STEM locations, protected sub-markets
• Relationship to replacement cost
• Timing – economic and real estate market cycles, product cycles, demographics, and innovation

HOW WE THINK ABOUT INVESTING IN REAL ESTATE

ULI South Carolina Capital Markets Conference | September 7, 2016

HOUSING MARKET FUNDAMENTALS

ULI South Carolina Capital Markets Conference | September 7, 2016

HOW WE THINK ABOUT THE HOUSING BUSINESS

• The paradigm is shifting - "housing company" model (vs. homebuilder, multifamily developer,

land developer, etc.)

• There may be too many players in the housing business
• Customer knowledge and marketing are becoming the keys to success
• The housing business is overly fragmented
• The big will get bigger
• Access to land drives strategy
• Capital markets evolving
• The opportunity set for pure-play land developers is shrinking
• The large scale MPC model is rarely viable financially
• The entry-level segment - myth or reality?
• Watch for the disruptors

ULI South Carolina Capital Markets Conference | September 7, 2016

Atlanta Austin Naples Charlotte Denver Jacksonville Nashville Orlando Raleigh San Jose Tampa Washington, D.C. 0.5% 1.4% 2.3% 3.1% 4.0% 0.5% 1.4% 2.3% 3.1% 4.0%

2015-2020 Population Growth(%) 1990-2015 Population Growth (%)

POPULATION GROWTH SURGES IN SUNBELT

Above the Line: Projected Growth to Outperform Historical Growth Below the Line: Projected Growth to Underperform Historical Growth

ULI South Carolina Capital Markets Conference | September 7, 2016

EMPLOYMENT GROWTH FOLLOWS

Below the Line: Projected Growth to Underperform Historical Growth Above the Line: Projected Growth to Outperform Historical Growth Source: Moody’s Analytics

Atlanta Austin Charlotte Dallas /

• Ft. Worth

Houston Los Angeles Nashville Orlando Raleigh San Jose Tampa Washington DC 0.5% 1.4% 2.3% 3.1% 4.0% 0.5% 1.4% 2.3% 3.1% 4.0%

2015-2020 Job Growth(%) 1990-2015 Job Growth (%)

Above the Line: Projected Growth to Outperform Historical Growth Below the Line: Projected Growth to Underperform Historical Growth

ULI South Carolina Capital Markets Conference | September 7, 2016

STEM EMPLOYMENT HOT SPOTS

• Affordable Sunbelt, Midwest cities are benefitting from STEM employment growth, including

Atlanta, Raleigh, and Charlotte

Source: RCLCO; CapRidge

ULI South Carolina Capital Markets Conference | September 7, 2016

0.0% 0.9% 1.8% 2.6% 3.5% 20,000 35,000 50,000 65,000 80,000 95,000 110,000 125,000 140,000 Number of Households (In Thousands) 3 Year Rolling Average % Growth

HOUSEHOLDS RESUMED GROWTH

Source: Moody’s Analytics

• Household formation rates dropped during the Great Recession
• Improved economic conditions contributed to boosting of household growth

Projection

ULI South Carolina Capital Markets Conference | September 7, 2016

NEW HOUSEHOLDS OUTPACE SINGLE-FAMILY STARTS

Note: Single-Family Housing Starts include single-family detached and single-family attached (townhomes) Source: Moody’s Analytics; RCLCO

400,000 800,000 1,200,000 1,600,000

Single-Family Housing Starts and Household Growth

Single-Family Housing Starts Increase in Households

• The 2016 pace of SF starts and household growth are well above 2015 levels
• Expect continued growth as millennials and boomers impact the market
• Multifamily rentals still in shortage in select markets and locations

ULI South Carolina Capital Markets Conference | September 7, 2016

0% 100% 200% 300% 400%

Washington DC Tampa San Jose Raleigh Orlando Nashville Miami/ Ft. Lauderdale Los Angeles Jacksonville, FL Dallas / Ft. Worth Charlotte Austin Atlanta

2015 SF Permits vs. Historical Average 2015 MF Permits vs. Historical Average

MULTIFAMILY PERMITS EXCEED HISTORICAL PACE, WHILE SINGLE-FAMILY LAGS

Source: Moody’s Analytics

Outperforming

ULI South Carolina Capital Markets Conference | September 7, 2016

RENT GROWTH CONTINUES DESPITE NEW SUPPLY

• Absorption and occupancy will level out in the near-term as more millennials transition to for-sale

housing in the face of a rising multifamily pipeline

Source: Axiometrics

• 8%
• 4%

0% 4% 8% 12% Vacancy % Rent Growth %

Projection

ULI South Carolina Capital Markets Conference | September 7, 2016

DEMOGRAPHICS AND HOUSING : A SHIFTING LANDSCAPE

ULI South Carolina Capital Markets Conference | September 7, 2016

MILLENNIALS & BOOMERS DRIVE HOUSING MARKET

Source: U.S. Census Bureau

BM TO UPDATE

1,250 2,500 3,750 5,000

Number of People (000s) Age

Millennials 35% of home sales GenX 25% of home sales Baby Boomers 31% of home sales Silent Generation 9% of home sales

 Millennials: 24% of population; 35% of home purchases, but characterized by the “Great

Delay” - lower headship rates, delayed marriage, and delayed childbirth.

 Baby Boomers: 23% of population; responsible for 31% of home purchases. Aging but not

retiring; characterized by the highest spending power.

ULI South Carolina Capital Markets Conference | September 7, 2016

HOUSING NEEDS SHIFT AS GENERATIONS MOVE THROUGH LIFE STAGES

• Millennials will become primary buyers of entry-level, move-up for-sale housing
• Gen X will begin moving into vacation / 2nd home market
• Boomers will likely downsize as they plan for retirement retirement housing

HOUSING NEEDS: 2016 2021 2026 Student Rentals Millennials Gen Z / Millennials Gen Z Single/Roommate Rentals Millennials Millennials Gen Z / Millennials Young Couple Rentals Millennials Millennials Gen Z / Millennials Buy Entry Level Gen X / Millennials Millennials Millennials Buy Upgrade / Move-Up Home Gen X / Baby Boomers Gen X / Baby Boomers / Millennials Millennials / Gen X Buy 2nd Home Gen X / Baby Boomers Gen X / Baby Boomers Millennials / Gen X Buy Empty Nester Home Baby Boomers Gen X / Baby Boomers Gen X / Baby Boomers Buy Retirement Housing Baby Boomers / Silents Baby Boomers Baby Boomers

ULI South Carolina Capital Markets Conference | September 7, 2016

THE YOUNG HOMEBUYER’S PROBLEM

ULI South Carolina Capital Markets Conference | September 7, 2016

“GREAT DELAY” IN HOUSEHOLD FORMATION WILL NOT LAST FOREVER

Millennials are getting married and buying home later than previous generations. However, they will have children at historic rates, later in life, which will create need for family housing.

Source: US Census PUMS; RCLCO

20 23 25 28 30 Age Men Women Silent Generation starts getting married Baby Boomers start getting married Gen X starts getting married Millennials start getting married

ULI South Carolina Capital Markets Conference | September 7, 2016

• 11%
• 9%
• 7%
• 5%
• 3%
• 1%

1% 3% 5% 7% $40,000 $42,500 $45,000 $47,500 $50,000 $52,500 $55,000 $57,500

% Difference in Income < 34 years Median Income

All Ages 15-34 Percent Difference

MEDIAN INCOME OF YOUNG ADULTS

Source: Moody’s Analytics

ULI South Carolina Capital Markets Conference | September 7, 2016

THE SUBURBS ARE NOT DEAD

• Millennial, Boomers and Gen X buyers are largely choosing the suburbs
• Walkable suburban areas with mix of housing, retail appeal to all groups

Source: RCLCO 2016 Survey

0% 10% 20% 30% 40% City – near a mix of offices, apartments, and shops City – mostly residential neighborhood Suburban neighborhood with a mix of houses, shops and businesses Suburban neighborhood with only residential uses Small town Rural area Rented Bought

Preference of Home Location of Millennial Renters vs. Owners

ULI South Carolina Capital Markets Conference | September 7, 2016

BABY BOOMERS: WHAT’S COMING?

ULI South Carolina Capital Markets Conference | September 7, 2016

OLDER AMERICANS WILL DRIVE MARKET DYNAMICS

Source: US Census

29% 32% 34% 36% 38% 41% 43% 45 90 135 180 225 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049 2051 2053 2055 2057 2059

Millions Americans Age 50+ % of US Total Number of American Adults Aged 50+, 2015 – 2060

ULI South Carolina Capital Markets Conference | September 7, 2016

WEALTH CONCENTRATED AMONG OLDER HOUSEHOLDS

$0 $100,000 $200,000 $300,000 $400,000 Single with child(ren) Single, no child, age less than 55 Single, no child, age 55 or more Couple with child(ren) Couple, no child

Median Net Worth by Life Stage

1998 2001 2004 2007 2010 2013 Single, non-family households have far less wealth $0 $100,000 $200,000 $300,000 $400,000 Less than 35 35–44 45–54 55–64 65–74 75 or more

Median Net Worth by Age

1998 2001 2004 2007 2010 2013 Millennial & Gen X households far less wealthy than Boomers / Silents

ULI South Carolina Capital Markets Conference | September 7, 2016

0% 11% 23% 34% 45% Definitely Own Most Likely Own, But Would Consider Renting Likely/Definitely Rent Less than 800 sf 800 sf - 1,200 sf 1,200 sf - 1,500 sf 1,500 sf - 2,000 sf 2,000 sf - 2,500 sf Over 2,500 sf

Many Empty Nesters desire to live in homes that are smaller than their current homes, as shown below.

59% OF BOOMERS MOVING WITHIN 5 YEARS AND ARE CONSIDERING DOWNSIZING OR EVEN RENTING (35%)

Source: RCLCO 2016 Survey

Not Planning to Move in the Next Five Years 41% Definitely Own 59% Most Likely Own, But Would Consider Renting 35% Planning to Move in the Next Five Years 59%

Plus, many plan to move

• ver near-term.

ULI South Carolina Capital Markets Conference | September 7, 2016

WHERE WILL EMPTY NESTERS RENT?

Source: RCLCO

• High Interest:
• Charlotte, NC (78%)
• Minneapolis, MN (71%)
• Tampa, FL (60%)
• Baltimore, MD (56%)
• St. Louis, MO (54%)
• DFW, TX (48%)
• Chicago, IL (46%)
• Low Interest:
• Denver, CO (8%)
• Portland, OR (23%)
• Boston, MA (29%)
• Phoenix, AZ (31%)
• Atlanta, GA (33%)
• Los Angeles, CA (35%)
• US Average 41%

ULI South Carolina Capital Markets Conference | September 7, 2016

VACATION HOMES

ULI South Carolina Capital Markets Conference | September 7, 2016

• Vacation property transactions have nearly doubled since the bottom of the Great Recession
• GenX and Millennials represent great potential demand pool for 2nd home market
• The Carolinas are strongly positioned to capture this demand

VACATION PROPERTY MARKET OUTLOOK

Residential Sales Volume (Existing and New) by Use Pattern: United States

2,250 4,500 6,750 9,000 PRIMARY RESIDENCE VACATION PROPERTIES INVESTMENT PROPERTIES TOTAL Sales Volume (Thousands) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: NAR; RCLCO

ULI South Carolina Capital Markets Conference | September 7, 2016

INTENT TO PURCHASE VACATION HOME REBOUNDING

Expressed Intent to Purchase a Second Home in the Next 12 Months Top 10% of U.S. Households by Wealth

0% 3% 6% 9% 12%

Plans to Buy Existing Vacation Home Plans to Buy/Build New Vacation Home Total

Source: American Affluence Research Center/RCLCO Annual Survey

• Interest in purchasing a second vacation home is on the rise
• Anticipate trend to continue as millennials see gains from wage growth

ULI South Carolina Capital Markets Conference | September 7, 2016

SECOND HOME BUYERS GETTING YOUNGER

• Younger buyers enter vacation home market, driven by younger Gen X and older millennials

Vacation Home Sales by Age Cohort; 2006 – 2013

44 46 46 46 49 50 47 43 40 42 44 46 48 50 52 0% 15% 30% 45% 60% 2006 2007 2008 2009 2010 2011 2012 2013 Under 45 45 to 54 55+ Median Age

Source: NAR; RCLCO

ULI South Carolina Capital Markets Conference | September 7, 2016

2ND HOME DEMAND – LIFESTYLE AND PREFERENCES

Vacation Home Type and Price Preference Among U.S. Households with $1M+ Net Worth; 2015

0% 25% 50% 75% 100% Vacation Home Home site to build vacation home in the future Vacation condominium Destination club membership Timeshare Private Residence Club membership Hotel Condominium 0% 25% 50% 75% 100% <$500,000 500,000 to $1,000,000 $1,000,000 to $2,000,000 2,000,000 to $5,000,000 $5,000,000+

• Product interest varied by lifestyle and spending power
• 15%-25% price to wealth pattern holding
• Demographics favor fractional ownership options

Source: Resonance Report

ULI South Carolina Capital Markets Conference | September 7, 2016

RCLCO “MARKET HOTNESS” INDEX – RESORT MARKETS MOST DYNAMIC SMALL ECONOMIES IN THE U.S.

ULI South Carolina Capital Markets Conference | September 7, 2016

LOOKING AHEAD AND TAKEAWAYS

ULI South Carolina Capital Markets Conference | September 7, 2016

NEAR-TERM OUTLOOK FOR REAL ESTATE

POTENTIAL CURVEBALLS

• Brexit: Though it has triggered much uncertainty, it has

resulted in increased foreign direct investment & REITs

• Energy spikes
• Deceleration in China
• Spot overbuilding in U.S. real estate
• Asset pricing bubble fueled by low interest rates

POSITIVE INDICATORS

• Real estate is an established asset class for institutional

investors

• Strong fundamentals – economic and demographic winds in

the right direction

• Stricter lending standards should prevent overbuilding
• Low inflation risk
• Strong savings rates
• Absence of credit-fueled speculative activity
• High consumer confidence
• Real estate demand outpaces construction
• US real estate is a favored asset class for global investors

ULI South Carolina Capital Markets Conference | September 7, 2016

• Be prepared for an economic downturn in the next 3 years.
• The South is expected to flourish.
• Think STEM.
• The “Great Delay” is just that, a delay. millennials will have children at rates similar to previous

generations.

• Challenges in saving for downpayment, relatively low incomes, greater need for mobility, and

better rental options will keep millennials in rentals for longer.

• Don’t believe the urban hype – the re-urbanization of the U.S. is being driven primarily by wealthy

singles and childless couples – the suburbs are alive and well.

• As wages continue to improve, millennials will continue to fill out first-time buyer pools and begin

thinking about 2nd homes and move-up homes.

• Boomers will transition into new housing as their children move out.
• 60% of boomers plan on moving in the next 5 years.
• Boomers are looking to downsize in terms of cost and size.
• Expressed interested in “being closer to the grandkids” means that some downsizing boomers

are moving to high growth, employment centers over traditional retirement destinations.

• The housing business model is changing.
• The next 15 years will see substantial growth in housing demand in high job growth markets.
• As younger GenXers and millennials prosper, expect a surge in demand for vacation homes.
• The 21st century vacation home business model is different from the 20th century version.

KEY TAKEAWAYS

ULI South Carolina Capital Markets Conference | September 7, 2016

QUESTIONS?

ULI South Carolina Capital Markets Conference

Wednesday, September 7, 2016 9:00 AM

Key Real Estate Trends Driving the Market