Lancaster C & I Real Estate Market Presentation Presented By: High Real Estate Group LLC February 12, 2020
Agenda: High Real Estate Group C&I Council 8:00 – 8:30 AM Breakfast 8:30 – 9:00 AM Presentation Mark Fitzgerald Michael Lorelli President & Sr. Vice President Chief Operating Officer Commercial Asset Management 9:00 – 9:30 AM Questions and Answers Bill Boben Steve Evans Russ Urban Brad Mowbray Sr. Vice President Sr. Vice President, Managing Director President Sr. Vice President, Managing Director Sales/Leasing Retail Division High Hotels Residential Division 1
Presentation: Three Areas Of Focus Nationwide Lancaster Overall Economy Real Estate Real Estate ▪ GDP projections ▪ Acquisition/ ▪ Office ▪ Recession risks ▪ Industrial Development sentiment ▪ 10-Yr Treasury ▪ Cap Rate trends ▪ Underwriting criteria projections ▪ Real Estate cycle for each asset class 2
US Economy Projected To Continue Expansion At Moderate Rate Dashboard US GDP Growth ➢ Longest economic expansion in history 3.5% Tax Cut & Jobs Act ▪ Average GDP growth = 2.3% (June ‘09 - Jan ‘20) Historical Projected 3.0% ➢ Unemployment Rate (12/31/19) 2.5% ▪ US = 3.5% 2.0% ▪ PA = 4.5% 1.5% ➢ Job Creation ▪ US = 2,096K/175K per month 1.0% Jan '20 ▪ PA = 64.5K/5.4K per month 0.5% Jul '19 ➢ Work Force Participation Rate 0.0% ▪ US = 63.2% '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 Years 3 Source: Wall Street Journal, Survey of 60 Economists, January 2020, BLS
Risk Of Recession Is On Horizon Downside Risk Timing of Next Recession ➢ Coronavirus 35% 75% ➢ Trade war with China ➢ Messy Brexit 30% ➢ Volatility in stock market 25% ➢ Middle East oil price shock ➢ Outcome of US Election 20% 15% Upside Opportunity ➢ Phase II China trade deal 10% ➢ Increased workforce participation rate 5% (6.8M vacant jobs vs. 5.9M unemployed) ➢ Increased consumer confidence 0% ➢ Outcome of US Election 2020 2021 2022 2023 2024 2025 2028 4 Source: Wall Street Journal, Survey of 60 Economists, January 2020
Economists Expect 10-Yr Treasury Rate To Remain Near Historic Lows 10 Year Treasury 4% Historical Projected Reasons for Fed Fund Increase 3% ➢ Strong job growth 2% • 3 month average > T12 1% ➢ YOY hourly earning +3.1% Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Reasons for Fed Fund Decrease Will FOMC increase or decrease ➢ Reduce capital spending rate at next meeting? 75% ➢ Wages and salaries growth decelerating 52% 48% 50% ➢ Inflation below 2% target 25% 0% Increase Decrease 5 Source: Wall Street Journal, Survey of 60 Economists, January 2020
National Sentiment for Real Estate Acquisition / Development Is Fairly Steady Acquisitions Developments Excellent Excellent 5 5 4 4 Good Good 3 Fair 3 Fair Poor 2 2 Poor 1 Abysmal 1 Abysmal 0 0 2019 2020 2019 2020 6 Source: PWC, ULI; Emerging Trends in Real Estate 2020
National Real Estate Overview: Cap Rate Remains Stable Change 25% 2019 from Range Average 2018 BPS NOI Growth Required Apartments 3.50 – 7.00% 5.15% -1 bps 20% Industrial 3.75 – 6.40% 4.59% 3 bps Suburban Office 4.00 – 9.25% 6.39% -24 bps CBD Office 3.75 - 7.50% 5.52% 8 bps 15% Neighborhood/ 4.50 – 10.0% 6.75% 5 bps Community Centers Limited Service 7.50 – 11.0% 9.15% 0 bps 10% Hotels 4% 5% 6% 7% 8% 9% ➢ Downside risk due to increasing interest rates ➢ NOI growth required to ➢ Market fundamentals solid in most sectors maintain value if exit cap rate ➢ Equity is abundant, looking for “Core”, “Core Plus” and “Value increases by 1% above Added Opportunities” in primary, secondary, and tertiary acquisition cap rate markets 7 Source : PWC Real Estate Investor Survey 3 rd /4 th Q2019, JLL Research
2020 Underwriting Criteria: Rates Improving For Core Assets Max LTV Vacancy Cap Rate All in Rate Spread Residential 65-75% 5-7% 3.5-7.0% 3.1-4.1% 1.60-2.1% Industrial 65-75% 5-10% 3.75-6.4% 3.1-4.1% 1.60-2.1% Office Suburban 60-70% 10-15% 4-9.25% 3.25-4.25% 1.75-2.25% Retail (“Anchored”) 65-75% 7-10% 4.5-10% 3.2-4.2% 1.70-2.2% Hotel 60-65% 25-35% 7.5-11% 3.75-4.75% 2.25-2.75% ➢ Abundant supply of debt capital for acquisitions and refinancing of all asset classes ➢ Debt capital for new development will become more challenging as we move later into cycle Range for 10-year treasury projections = 1.5 – 2% 8 Data as of January 2020
Office Real Estate Cycle Major Trends Third Quarter 2019 ➢ How we work is going through Phase II - Expansion Phase III - Hypersupply fundamental shift: Lancaster 2019: (0) ▪ Less formality ▪ More collaboration space Philadelphia 2019: (+1) ▪ Increased amenities 9 National 2019: (+2) 8 ➢ Design/functionality/sustainability is driving talent acquisition/retention ➢ Use of coworking space increasing (variable vs fixed cost) Phase I - Recovery Phase IV - Recession ➢ Access to transportation and YOY National Change workforce housing is driving location 2019 2020 decisions ➢ Increased demand for medical office Occupancy 2.4% 0% ➢ Higher construction costs keep Rents 2.4% 2.1% supply growth constrained Source: University of Denver – Real Estate Market Cycles; Lancaster: High Real Estate Group LLC; PWC; Urban Land Institute 2020; CBRE Research, Real Estate Market Outlook 2020 9
Industrial Real Estate Cycle Major Trends Third Quarter 2019 ➢ Fulfillment/warehouse preferred asset class Phase II - Expansion Phase III - Hypersupply for investment/development driven by: ▪ Growth in E-commerce Philadelphia 2019: (0) ▪ National 2019: (0) Increased service level (last mile) 11 Lancaster 2019: (0) 10 ▪ Trade tension ➢ Supply is constrained by: ▪ Available land ▪ Increased regulation ▪ Increased construction costs ➢ New supply is lagging demand, driving Phase I - Recovery Phase IV - Recession rents up in strongest markets YOY National Change ➢ Spread between existing lease rents and 2019 2020 market rents is widening Occupancy 0.4% 0% ➢ Refrigerated warehousing is fast growing Rents 4.4% 4.1% segment 10 Source: University of Denver – Real Estate Market Cycles; Lancaster: High Real Estate Group LLC; PWC; Urban Land Institute 2020; CBRE Research, Real Estate Market Outlook 2020
Retail Real Estate Cycle Major Trends Third Quarter 2019 ➢ Drive toward omni-channel strategies is Phase II - Expansion increasing: Phase III - Hypersupply ▪ Online moving to brick and mortar Philadelphia 2019: (0) ▪ New stores require new format National 2019: (0) 11 Lancaster 2019: (0 ) 12 ➢ Merchandising mix is changing towards experimental formats: ▪ Entertainment ▪ Food and beverage ▪ Health and fitness ▪ Services ➢ Consumer preferences and technology are Phase I - Recovery Phase IV - Recession intensifying transformation YOY National Change ➢ Legacy malls/retailers will continue to decline 2019 2020 ➢ Deal making has become longer and more Occupancy -0.25% 0.5% complex Rents -0.6% 1.0% ➢ E-commerce potential threat to grocery anchored projects 11 Source: University of Denver – Real Estate Market Cycles; Lancaster: High Real Estate Group LLC; PWC; Urban Land Institute 2020; ICSC/NCREIF All Shopping Centers
Multi-Family Real Estate Cycle Third Quarter 2019 Major Trends ➢ Demand is expected to exceed supply Phase II - Expansion Phase III - Hypersupply for next 10 years driven by: ▪ Increased household formation Philadelphia 2019: (-1) 11 Lancaster 2019: (0) ▪ Fundamental shift in household composition 12 National 2019: (0) ▪ Barriers to home ownership ▪ Impact of Tax Cut and Job Act ➢ Wage growth < rent growth driving need for more quality workforce housing Phase I - Recovery Phase IV - Recession ▪ 55% households pay > 30% income for rent ➢ Strongest occupancy is in B and C YOY National Change properties 2019 2020 ➢ Supply constraints Occupancy 0.3% 0.2% ▪ State and local regulations Rents 2.4% 2.0% ▪ Low availability of zoned land ▪ Increased cost (materials and labor) 12 Source: University of Denver – Real Estate Market Cycles; Lancaster: High Real Estate Group LLC; PWC; Urban Land Institute 2020; CoStar
Premium Select Service Hotel Real Estate Cycle Second Quarter 2019 Phase II - Expansion Major Trends Phase III - Hypersupply ➢ Deceleration in top-line revenue Philadelphia 2019: (-1) growth 11 National 2019: (0) Lancaster 2019: (+1) 13 ▪ Major brands (Marriott/Hilton) in expansion mode ▪ VRBO/Airbnb adding to supply ➢ Labor shortage impacting operations (i.e. housekeeping) Phase I - Recovery Phase IV - Recession ➢ Labor cost rising ˃ ADR growth, YOY National Change compressing gross operating margin 2019 2020 Occupancy -0.2% -0.3% Rate 1.1% 0.3% RevPAR 0.9% 0% 13 Source: University of Denver – Real Estate Market Cycles; Lancaster: High Real Estate Group LLC, PWC, Urban Land Institute 2020, STR and Tourism Economics
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