Third Quarter 2013

National Overview

Commercial Market Insights

For the RE/MAX Commercial Practitioner and our Clients

Office Industrial Apartments Retail HOTEL

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 NATIONAL OVERVIEW
Economic Environment The U.S. economy grew at an annualized pace of 1.7 percent in second quarter 2013, according to the Commerce Departments Bureau of Economic Analysis (BEA), following downwardly revised growth of 1.1 percent in first quarter 2013. Some analysts noted, however, that comparing growth from first quarter to second quarter did not take into account the fact that some of the increase in second quarter growth was attributed to revisions to the data to include new categories that better capture the U.S. economy, such as research and development (R&D), entertainment, the arts, etc. Second quarter 2013 was the first time that these measures were included in the GDP, which raised the size of the current U.S. economy by $551 billion to $16.6 trillion in goods and services. According to these recalibrations, GDP expanded at a rate of 2.8 percent in 2012 instead of the previous estimate of 2.2 percent, per the BEA. The unemployment rate remained unchanged at 7.6 percent in June 2013, according to the Bureau of Labor Statistics (BLS). Total nonfarm payrolls increased by 195,000 in June, and were comparable to the increases in May and April. However, the U-6 unemployment rate jumped significantly to 14.3 percent in June 2013, as the number of discouraged workers and part-time workers increased. The housing market recovery continued at a brisk pace during second quarter 2013, thanks to an improving (albeit very slow) job market, strong investor demand, and increasing homebuyer confidence, despite higher home mortgage rates. Although short of expectations, the S&P/Case-Shiller Home Price Index showed that the 12-percent yearly gain in the 20-city composite at the end of May 2013 was the fastest pace since March 2006. However, both existing and pending home sales declined in June, according to the National Association of REALTORS (NAR). Despite improved homebuyers confidence, retail spending lost momentum during second quarter. According to the Commerce Department, total retail sales increased only 0.4 percent in June 2013, and if automobiles and gasoline sales were excluded from the total, retail sales dropped 0.1 percent. Further, restaurant spendinggenerally considered discretionary spendingfell 1.2 percent in June, the largest decline in 5 years. In the statement released at the Federal Reserves meeting on July 30-31, 2013, Chairman Ben Bernanke stated that based on information in June, economic activity expanded at a modest pace during the first half of the year (versus the moderate expansion he noted in the previous months statement). As such, the Federal Reserve elected to keep the easy money spigot open, and announced that they will continue to purchase $85 billion in securities per month. While the Feds policy remains unchanged for now, they have made clear their target range for when tapering will end (about a year from now, with unemployment around 7 percent and inflation around 2 percent). Even though tapering has not officially begun, we should expect it to commence relatively soon, as the economy moves closer toward these targets. What Does This Mean for Commercial Real Estate? Second quarter 2013 commercial mortgage origination volume increased 7 percent over second quarter 2012 volume and increased 36 percent over first quarter 2013 volume, according to the Mortgage Bankers Association (MBA). The 7-percent increase in year-over-year originations in second quarter 2013 included a 31-percent increase in the volume of multi-family property loans, a 3-percent increase for hotel property loans, a 114-percent decrease in retail property loans, and unchanged loan origination volume for office and industrial properties, per the MBA. The MBA further noted that the 36-percent increase in second quarter 2013 originations over the previous quarter was led by an 89-percent increase in hotel property originations, followed by a 75-percent increase for office properties, a 48-percent increase for retail properties, a 44-percent increase for industrial properties, and a 22-percent increase in loan origination volume for multi-family properties. As shown on the next page, RERCs institutional investment survey respondents slightly lowered their rating for the amount of capital available to 7.5 on a scale of 1 to 10, with 10 being high, during second quarter 2013. However, they also lowered their rating for the discipline of capital, and with a discipline rating of 6.3 and an availability rating of 7.5, the gap between these two ratings continues to widen. The equity markets continued their strong performance in second quarter 2013, although the stock market indices

Produced by Real Estate Research Corporation (RERC) for RE/MAX Commercial. Copyright August 2013, Real Estate Research Corporation.

 NATIONAL OVERVIEW, CONT.

RERC Historical Availability & Discipline of Capital

10 10

Rating

outperformed those for commercial real estate, including the National Council of Real Estate Investment Fiduciaries (NCREIF) Property Index, the NCREIF Open-End Diversified Core Equity (ODCE) Index, and the National Association of Real Estate Investment Trusts (NAREIT) Index. Despite the strength of stocks in second quarter, RERCs institutional investment respondents anticipate further volatility as tapering gets underway.

2 Discipline Availability 0

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20

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2Q

2Q

2Q

2Q

2Q

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2Q

2Q

2Q

Ratings are based on a scale of 1 to 10, where 1 is poor and 10 is excellent. Source: RERC Institutional Investment Survey, 2Q 2013.

What Do the Financial Markets Tell Us?

Compounded Annual Rates of Return as of 6/30/2013 Market Indices
Consumer Price Index1 10-Year Treasury Bond2 Dow Jones Industrial Average NASDAQ Composite3 NYSE Composite3 S&P 500 NCREIF Property Index NCREIF ODCE NAREIT Index (Equity REITS)
1 2

YTD4
0.85% 1.97% 15.20% 12.71% 7.93% 13.84% 5.51% 5.80% 5.79%

1-Year
1.89% 1.82% 18.87% 15.95% 16.80% 20.60% 10.73% 11.29% 10.21%

2Q

20

13

For more information about RERCs research, please go to www.rerc.com.

3-Year
2.40% 2.33% 18.23% 17.29% 12.10% 18.45% 13.14% 14.66% 18.46%

5-Year
1.39% 2.74% 8.64% 8.22% 1.02% 7.01% 2.79% -0.31% 7.72%

10-Year
2.44% 3.57% 7.92% 7.69% 5.17% 7.30% 8.60% 6.86% 10.96%

15-Year
2.42% 4.09% 5.86% 3.98% 2.69% 4.24% 8.99% 7.88% 9.67%

Based on the published data from the Bureau of Labor Statistics (Seasonally Adjusted). Based on Average End of Day T-Bond Rates. 3 Based on Price Index, and does not include the dividend yield. 4 Year-to-date (YTD) averages are not compounded annually. Sources: BLS, Federal Reserve Board, S&P, Dow Jones, NCREIF, NAREIT, compiled by RERC.

Produced by Real Estate Research Corporation (RERC) for RE/MAX Commercial. Copyright August 2013, Real Estate Research Corporation.

 NATIONAL TRANSACTION ANALYSIS

Transaction Analysis Total transaction volume declined to $71.02 billion in second quarter 2013 from $74.31 billion in the previous quarter on a quarterly basis according to Real Capital Analytics (RCA). However, volume for the individual property types (with the exception of the apartment sector) increased on a quarterly basis. In addition, on a year-over-year basis, the total volume increased in second quarter 2013, along with the volume for each property type (except for the apartment sector). The year-over-year volume for the hotel and office sectors increased quite significantly compared to the volume for the other property sectors.

On a quarterly basis, the average price per square foot/ unit increased for the office, retail, and hotel sectors in second quarter 2013, while the price for the industrial sector remained unchanged and the price for the apartment sector declined, according to RCA. Although average prices for the retail, office, and apartment sectors spiked in fourth quarter 2012, prices have come back down to what investors have come to expect in the past few years. However, on a year-over-year basis, the average price per square foot/unit increased for each property type in second quarter, and particularly for the hotel sector.

Transaction Volume and Price

2Q 2013 YOY Change
13% 36% 3% 9% -7% 83% 2% 13% 5% 3% 48%

1Q 2013
$74,309 $17,434 $7,363 $9,014 $31,146 $5,694 $208 $63 $153 $114,341 $116,401

YOY Change
37% 9% 23% -30% 130% 55% 2% -3% -4% 8% -15%

4Q 2012
$110,620 $31,743 $16,754 $21,109 $28,163 $7,709 $231 $63 $230 $122,505 $123,590

YOY Change
64% 50% 94% 77% 54% 62% 10% 5% 30% 17% 9%

3Q 2012
$71,021 $17,841 $8,314 $9,338 $27,716 $4,992 $209 $63 $148 $105,696 $121,565

YOY Change
25% 6% 12% 3% 80% -19% -4% 19% -23% -1% -6%

Volume (Mil)
Total Office Industrial Retail Apartment Hotel $71,017 $21,001 $9,710 $13,498 $16,991 $7,145 $215 $63 $175 $103,928 $136,645

Average PPSF/PPU
Office Industrial Retail Apartment Hotel

Source: Real Capital Analytics, 2Q 2013. A special thanks to Real Capital Analytics (RCA) for sharing their national volume and pricing trends with RERC and for allowing us to reproduce them here for the convenience of RERCs subscribers.

RERC Required Going-In Capitalization Rates1 2Q 2013 Office Industrial Retail Apartment
Weighted Avg. (%)2 BPS Change
1 2

Hotel
8.0 0

6.7 0

6.7 0

6.5 -10

5.3 0

This survey was conducted in April, May, and June 2013 and reflects expected returns for Second Quarter 2013 unleveraged investments. Weighting based upon 2Q13 NCREIF Portfolio market values. 3 Change (+/-) in basis points (BPS) from quarter immediately preceding current rate. Definition for Going-in capitalization rate: The first year NOI (before capital items of tenant improvements and leasing commissions and debt service but after real estate taxes) divided by present value (or purchase price). Source: RERC, 2Q 2013. Produced by Real Estate Research Corporation (RERC) for RE/MAX Commercial. Copyright August 2013, Real Estate Research Corporation.

REGIONAL PRE-TAX YIELD RATES*

11.5 2Q 2012 11.0 10.5 2Q 2013

11.5 11.0 10.5 10.0

Percent

11.0 West Region 2Q 2013 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0
al l rC tr Ho Al te lP l ro p Ty pe s gh /C om m Ap ar tm en t Of c. Su b d. W ho us e In d. R& D Of c. CB D d. Fle x eg .M t. R t. P In w

11.0 U.S. Average 2Q 2013 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0

West

10.0
Percent

9.5 9.0 8.5 8.0 7.5

Of c. Su b d. W ho us e In d. R& D Of c. CB D al l rC tr /C om m Ap ar tm en t d. Fle x Ho Al te lP l ro p Ty pe s eg .M t. P In w t. R gh

9.5 9.0 8.5 8.0 7.5

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11.5 2Q 2012 11.0 10.5 2Q 2013

11.5 11.0 10.5 10.0

Percent

11.0 Midwest Region 2Q 2013 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0
Ho Al te lP l ro p Ty pe s tr l m ub d. W ho us e In d. R& D d. Fle x rC Of c. C Of c. S eg .M /C om t. P In Ap a t. R gh rtm w en t BD al

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In

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11.0 U.S. Average 2Q 2013 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0

Midwest

10.0
Percent

9.5 9.0 8.5 8.0 7.5

ub d. W ho us e In d. R& D d. Fle x rC /C om en t BD te l al eg .M Of c. C Of c. S t. P In rtm w Al lP ro p Ap a t. R gh Ty p Ho es tr m l

9.5 9.0 8.5 8.0 7.5

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t. N ei

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11.5 2Q 2012 11.0 10.5 2Q 2013

11.5 11.0 10.5 10.0

Percent

11.0 South Region 2Q 2013 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0
In d. Fle x eg .M al Re l t. P Re w t. N rC tr ei gh /C om m Ap ar tm en t Ho Al te lP l ro p Ty pe s BD ub In d. W ho us e In d. R& D Of c. C Of c. S Re t. R

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In

In

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11.0 U.S. Average 2Q 2013 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0

South

10.0
Percent

9.5 9.0 8.5 8.0 7.5

In d. Fle x eg .M a ll Re t. P Re w t. N rC tr ei gh /C om m Ap ar tm en t ub In d. W ho us e In d. R& D BD te l Of c. C Of c. S Al lP ro p t. R Ty p Ho es

9.5 9.0 8.5 8.0 7.5

Re

11.5 2Q 2012 11.0 10.5 10.0 2Q 2013

11.5 11.0 10.5 10.0

Percent

11.0 East Region 2Q 2013 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0
In d. Fle x eg .M al Re l t. P Re w t. N rC tr ei gh /C om m Ap ar tm en t Ho Al te lP l ro p Ty pe s ub In d. W ho us e In d. R& D BD Of c. C Of c. S t. R

11.0 U.S. Average 2Q 2013 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0

East

Percent

9.5 9.0 8.5 8.0 7.5

In d. Fle x eg .M a ll Re t. P Re w t. N rC tr ei gh /C om m Ap ar tm en t BD ub In d. W ho us e In d. R& D te l Of c. C Of c. S Al lP ro p t. R Ty p Ho es

9.5 9.0 8.5 8.0 7.5

Source: RERC, 2Q 2013. *Figures represent rates for first-tier investment properties. Definition for Pre-tax Yield (IRR, Discount Rate): The pre-tax yield is the rate of interest that discounts the pre-income tax cash flows received on an unleveraged investment back to a present value that is exactly equal to the amount of the original equity investment. (It is in effect a time-weighted average return on equity and, as used here, is synonymous with the term yield.)

Produced by Real Estate Research Corporation (RERC) for RE/MAX Commercial. Copyright August 2013, Real Estate Research Corporation.

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