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U.S. Commercial Real EstateOverview and Outlook
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U.S. Economic PerspectiveSince 2007 – The Height of the Last Cycle
25.5 Million
10.6 Million
12.2 Million
100 bps
3.2 Million
$6.2 Trillion
170 bps
140 bps
Increase in Population Since 2007
More Households Than 2007
More Jobs Than 2007
Decline of Unemployment Rate to 4.0%
More Job Openings Than 2007 (7.3M)
GDP Growth Since 2007 (2x UK Total)
Decline in Inflation Rate (PCE) to 1.7%
Decrease in 10-Yr. Treasury Yield to 2.7% Sources: Marcus & Millichap Research Services, BEA, BLS, U.S. Census Bureau, Federal Reserve
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* Through January 2019Sources: Marcus & Millichap Research Services, BLS
-2.7
-1.8
-0.9
0.0
0.9
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Qua
rterly
Job
Gro
wth
(Mill
ions
)
+8.3 Million +20.9 Million*
-8.7 Million
100 Months of Continuous Gains*Monthly Average: 202,000 Jobs
Employment Growth Durable and Remarkably Stable
2017 Total: 2,153,0002018 Total: 2,674,0002019 Forecast: 2,000,000
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National Employment Rank by MetroY-O-Y Absolute Change Through December 2018
Top 10Metros
Absolute Change
PercentChange
Dallas-Fort Worth 117,900 3.2%
Houston 111,100 3.6%
Phoenix 79,700 3.9%
Atlanta 69,900 2.5%
Seattle-Tacoma 67,200 3.3%
New York 67,100 1.5%
Chicago 59,000 1.3%
Los Angeles 55,500 1.2%
Philadelphia 54,400 1.9%
Washington, D.C. 54,300 1.6%
U.S. Total 2,674,000 1.8%
Bottom 10Metros
Absolute Change
PercentChange
Orange County -4,300 -0.3%
Milwaukee 6,400 0.7%
San Antonio 8,500 0.8%
Detroit 13,400 0.7%
Jacksonville 13,800 2.0%
Sacramento 15,900 1.6%
Kansas City 16,200 1.5%
Fort Lauderdale 16,500 2.0%
West Palm Beach 16,500 2.7%
St. Louis 18,700 1.4%
U.S. Total 2,674,000 1.8%
Sources: Marcus & Millichap Research Services, BLS
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Impact of Tax Reform
Significant reduction of corporate and personal tax rate should spur investment and expansion = More Inflation Pressure
Key tax provisions critical to commercial real estate retained 1031 Exchange, Mortgage Interest Deduction, Depreciation
Pass-through entity 20% deduction increases after tax yield, could boost market liquidity
Reduced corporate taxes and accelerated depreciation could boost commercial real estate space demand
Unfavorable for residential housing and high-tax states
Opportunity Zone program has potential to bring influx of new investment capital to commercial real estate
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There Are Risks – Despite Favorable Economic Backdrop
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* Unemployed through January 2019; job openings through December 2018Sources: Marcus & Millichap Research Services, BLS
0
4
8
12
16
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18* 19*
Job Openings Unemployed
Job
Ope
ning
s/Un
empl
oyed
(Mill
ions
)U.S. Has More Job Openings Than People
Seeking Work – Challenge of Skills Mismatch
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* Through March 06Sources: Marcus & Millichap Research Services, Federal Reserve
-500
-250
0
250
500
55 59 63 67 71 75 79 83 87 91 95 99 03 07 11 15 19*Spre
ad: 1
0yr N
ote
and
3mth
Bill
(Bps
)Long-Term Yield Spread –
An Indication of Recession?
Rece
ssio
ns
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Exports: Major Force in the U.S. EconomyAs Measured by Contribution to GDP
0%
4%
8%
12%
16%
50 54 58 62 66 70 74 78 82 86 90 94 98 02 06 10 14 18
Con
tribu
tion
to G
DP
Long-Term Average: 7.0%
13.6%
Sources: Marcus & Millichap Research Services, BEA
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Offsetting Strengths Hard to Ignore
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Months
Expa
nsio
n C
ycle
Per
iods
Expansion Cycle Duration Percent Job Growth
Percent Growth
Average Average
* Through JanuarySources: Marcus & Millichap Research Services, BLS
Current Employment Expansion Cycle Longer Than Average But Still not Record-Setting
12
22
32
43
44
53
59
90
107
109117
0 35 70 105 140
1980 to 1981
1958 to 1960
1954 to 1957
1950 to 1953
1970 to 1974
2003 to 2008
1975 to 1980
1983 to 1990
2010 to 2019*
1961 to 1970
1991 to 2001
2%
6%
8%
9%
12%
16%
16%
19%
23%
24%
33%
0% 10% 20% 30% 40%
1980 to 1981
2003 to 2008
1958 to 1960
1954 to 1957
1970 to 1974
2010 to 2019*
1950 to 1953
1975 to 1980
1991 to 2001
1983 to 1990
1961 to 1970
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* Corporate profits through 3Q; Fixed investment in equipment through 4Q** Trailing 12-month averageSources: Marcus & Millichap Research Services, BEA
Corporate Profits ElevatedInvestment Growth Positive
-40%
-20%
0%
20%
40%
$0
$150
$300
$450
$600
99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18*
Corporate Profits** Fixed Invesment in Equipment
Y-O-Y C
hange in Investment
Cor
pora
te P
rofit
s ($
Bil.
)
+5.8%
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U.S. Core Retail Sales Building SteadyMomentum - Growth Supporting Economy
Trailing 12-month average; adjusted for inflation using core PCECore retail sales excludes auto and gasoline salesSources: Marcus & Millichap Research Services, U.S. Census Bureau, BEA
$250
$280
$310
$340
$370
02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Reta
il Sa
les
(Bil.
Dec
. 201
8 Do
llars
)
+17%
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* Through March 06Sources: Marcus & Millichap Research Services, Federal Reserve
0%
4%
8%
12%
16%
1875 1887 1899 1911 1923 1935 1947 1959 1971 1983 1995 2007 2019*
10-Y
ear T
reas
ury
Rate
Long-Term 10-Year Treasury Trends
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0.0
0.5
1.0
1.5
2.0
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19*
Single-Family Completions Multifamily Completions Household Growth
Com
plet
ions
/Hou
seho
ld G
row
th (M
il.)
Housing Market Provides Solid Economic Support Due to Drop in New Construction
* ForecastTrailing 24-month average for household growthSources: Marcus & Millichap Research Services, U.S. Census Bureau, RealPage, Inc.
2000-2007 Oversupply: 2.6M2008-2019* Undersupply: 2.0M
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0%
5%
10%
15%
20%
* ForecastSources: Marcus & Millichap Research Services, RealPage, Inc., CoStar Group, Inc., STR, Inc., Union Realtime LLC, NIC MAP® Data Service
Vaca
ncy
Rate
Apartment
U.S. Commercial Real Estate: Healthy Supply/Demand Despite 9th Year of Recovery
Retail Office Industrial
4.7% 4.7%
13.3%
4.5%
0%
25%
50%
75%
100%
Occ
upan
cy R
ate
Seniors Housing HotelSelf-Storage
10.3%
88.5%
66.5%
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$0
$40
$80
$120
$160
$0
$75
$150
$225
$300
Includes sales $1 million and greater; $2.5 million and greater for hotels; ST=Single Tenant; MT=Multi-TenantSources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics
Avg
. Pric
e pe
r Uni
t (00
0s)
Apartment
U.S. Average Price Trends
ST-RetailSeniors Housing
Self-Storage
Avg
. Pric
e pe
r Sq.
Ft.
Industrial
+45%
+23%
+11%
+10%
+25%
+12%
MT-Retail OfficeHotel
+52%
+23%
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0%
2%
4%
6%
8%
U.S. CREYield
U.S.Treasury
S&P 500Dividend
CanadianTreasury
UK Treasury FrenchTreasury
GermanTreasury
JapaneseTreasury
As of March 06, 2019Treasury rates for 10-year treasuriesApartment yield (cap rate) includes sales $1 million and greaterSources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics, Standard & Poor’s, Federal Reserve
Ave
rage
Yie
ld (C
ap R
ate)
U.S. Commercial Real Estate Offers Competitive Yields Compared to Alternatives
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Ave
rage
Rat
e
* Through DecemberIncludes apartment, retail, office, and industrial sales $1 million and greaterSources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics, Federal Reserve
430 bps
480 bps 480 bps200 bps
580 bps 350 bps
Commercial Real Estate Avg. Yield vs10-Year Treasury – Spread Indicates “Buy” Window
440 bps
0%
3%
6%
9%
12%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18*
Average Cap Rate 10-Year Treasury
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* Estimate** As of 2016; allocations for Fortune 1000 pension plans; other category includes hedge funds, derivatives, and interest rate swaps; cash category includes cash equivalents and money market instruments; debt category includes insurance instrumentsSources: Marcus & Millichap Research Services, Cornell/Hodes Weill Allocations Monitor, Willis Towers Watson
Debt 44.4%
Equity 41.2%
Other 7.9%
Real Estate 3.3% Cash 3.2%
Debt Equity Other Real Estate Cash
Real Estate Has Become Mainstream Investment Vehicle for Institutions, But Still Under-Allocated
Institutional Target Allocations to Real Estate U.S. Pension Funds Asset Allocations**
$22.5 Trillion8.9%
9.3%
9.6%
9.9%10.1%
10.3%
13 14 15 16 17 18*
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Real Estate Under-Allocated by Private InvestorsPercent of Households Holding Assets High-Probability Target Market
64.8%
20.0%
8.0% 7.5%
PrimaryResidence
Stocks Other RealEstate
RentalProperty
Homeownership rate as of 4Q 2018; other data as of 2013Sources: Marcus & Millichap Research Services, U.S. Census Bureau
23.9%
10.7%
25.5%
11.4%
Net Worth $500K+ Net Worth $250K-$500K
Rental Property Other Real Estate
(21.5M Households) (15.5M Households)
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$1M-$10M 32%
$10M-$20M 14%
$20M+ 54%
$1M-$10M $10M-$20M $20M+
As of 2018Includes apartment, retail, office, and industrial sales $1 million and greaterSources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics
Commercial Real Estate Sales by Price TrancheMove-Up Equity from Private Investors a Key Driver
Sales Dollar Volume
$1M-$10M 84%$10M-$20M 8%
$20M+ 8%
$1M-$10M $10M-$20M $20M+
$448 Billion56,200 Deals
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Navigating the Zones: Pain vs. OpportunityA Time of Profound Change
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Demographic Trends Provide Triple-Wave of Opportunity
* ForecastSources: Marcus & Millichap Research Services, U.S. Census Bureau, Moody’s Analytics
40
60
80
100
120
08 12 16 20* 24* 28* 08 12 16 20* 24* 28* 08 12 16 20* 24* 28*
10-Year Forecast-966 Thousand
10-Year Forecast6.6 Million
10-Year Forecast14.8 Million
20 to 34 Year Olds 35 to 55 Year Olds 55+ Year Olds
Popu
latio
n (M
illio
ns)
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Wealth Transfer, Quest For Yield = CRE Capital Flows U.S. 2019 Population by Age
Sources: Marcus & Millichap Research Services, U.S. Census Bureau
3.0
3.5
4.0
4.5
5.0
18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64
Popu
latio
n (M
illio
ns)
Age
$$$$68+ Trillion Wealth Transfer Over the Next 25 Years
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$0
$16
$32
$48
$64
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Grocery Stores Bars and Restaurants
Consumers Spend More on Dining Out Than on Groceries
Tota
l Sal
es (B
illio
ns)
Sources: Marcus & Millichap Research Services, U.S. Census Bureau, “Outlook on the Millennial Consumer 2014” report, The Heartman Group, Pew Research, Morgan Stanley
Eat Out at Least Once Per Week:
35%
43%
49%
Boomers
Gen X
Millennials
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Aging Baby Boomers Seeking Yield Boost CRE Investment - Single-Tenant Deals a Good Proxy
Includes sales $1 million and greaterSources: Marcus & Millichap Research Services, U.S. Census Bureau, CoStar Group, Inc., Real Capital Analytics
60
70
80
90
100
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Popu
latio
n (M
illio
ns)
55+ Year Olds
0
3
6
9
12
03040506070809101112131415161718
Tran
sact
ion
Act
ivity
(000
s)
Single-Tenant Transactions
+60%
10-Year Forecast+14.8 Million
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Includes apartment, retail, office, and industrial sales $1 million and greaterSources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics
Ave
rage
Cap
Rat
eCommercial Real Estate
Cap Rate Trends by Market Type
5%
6%
7%
8%
9%
10%
04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Primary Secondary Tertiary
60 bps220 bps
130 bps
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U.S. Commercial Real EstateOverview and Outlook