feds decision implications for cre 15 2015 perspective and analysis
TRANSCRIPT
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2Source: Federal Reserve Bank Presidents, Federal Open Market Committee
*The central tendency excludes the three highest and three lowest projections for each variable in each year.
Economic ProjectionsOf the Federal Reserve Board members and Bankpresidents, December 2015
MEDIAN CENTRAL TENDENCY*
2015 2016 2017 2018 Longer-Run 2015 2016 2017 2018 Longer-
Run
Change in Real GDP 2.1 2.4 2.2 2.0 2.0 2.0 2.3-2.5 2.0-2.3 1.8-2.2 1.8-2.2
Un-employment Rate 5.0 4.7 4.7 4.7 4.9 5.0 4.6-4.8 4.6-4.8 4.6-5.0 4.8-5.0
PCE inflation 0.4 1.6 1.9 2.0 2.0 0.4 1.2-1.7 1.8-2.0 1.9-2.0 2.0
Core PCE inflation 1.3 1.6 1.9 2.0 1.3 1.5-1.7 1.7-2.0 1.9-2.0
Memo: Projected appropriate policy path
Federal funds rate 0.4 1.4 2.4 3.3 3.5 0.4 0.9-1.4 1.9-3.0 2.9-3.5 3.3-3.5
September projection 0.4 1.4 2.6 3.4 3.5 0.1-0.6 1.1-2.1 2.1-3.4 3.0-3.6 3.3-3.8
3Source: Federal Reserve
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7
Dec
200
0
Aug
200
2
Apr
200
4
Dec
200
5
Aug
200
7
Apr
200
9
Dec
201
0
Aug
201
2
Apr
201
4
Dec
201
5
Federal Funds Rate, % 10-Year Treasury Yield, %
Worth remembering, the Fed does not control long-term rates
Source: Federal Reserve
0
2
4
6
8
10
12
14
16
Dec
198
1
Oct
198
4
Aug
198
7
Jun
1990
Apr
199
3
Feb
1996
Dec
199
8
Oct
200
1
Aug
200
4
Jun
2007
Apr
201
0
Feb
2013
Dec
201
5
10 Yr. Treasury Yield, %4
And let’s not forget, people who have been predicting long-term rates would rise have generally been wrong for the past 30+ years!
0.5
1
1.5
2
2.5
3
3.5
Jun
2006
Aug
200
7
Oct
200
8
Dec
200
9
Feb
2011
Apr
201
2
Jun
2013
Aug
201
4
Oct
201
5
Core CPI Core PCE
Source: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis
Fed’s 2% Target
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There has been very little inflation year-over-year.
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024
Expected Inflation
Source: Federal Reserve Bank of Cleveland
The market expects inflation to be less than 2% for the next 10 years!The market expects inflation to be less than 2% for the next 10 years!
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And little change is expected the next 10 years
Global 10-year government bond rates remain historically low, placing little upward pressure on U.S. bond yields
0.31%0.47%
0.78%1.00%
1.41% 1.49%
1.75%
2.22% 2.26%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
Japan Germany France Ireland Italy Spain U.K. U.S. Portugal
Source: Bloomberg 7
1.30%
2.22%
3.80% 3.82%
5.34%5.82%
6.64%7.04%
0%
1%
2%
3%
4%
5%
6%
7%
8%
Global 10-Year Gov't
Bond Yields
U.S. TreasuryBond Yield
Global PrimeCap Rates
U.S.Corporate
Bond (7-year,Baa)
U.S. OfficeCBD
U.S.ApartmentHighrise
U.S. Industrial U.S. OfficeSuburban
8Global Bond Yields: Average of Germany, Japan, France, U.K., Spain, Italy, Hong KongGlobal cap rates: Average of Beijing, Frankfurt, Paris, London, Tokyo, Hong Kong(Global values thru September 2015; U.S. values thru November 2015)Source: Federal Reserve Board, Real Capital Analytics, Cushman & Wakefield Research
154 bps
U.S. Real Estate
And U.S. Cap rates could go lower
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What does rising rates mean for CRE values?
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10Source: Federal Reserve, Moody’s Analytics/Real Capital Analytics
0
1
2
3
4
5
6
90100110120130140150160170180190
Aug
200
1
May
200
3
Feb
2005
Nov
200
6
Aug
200
8
May
201
0
Moody's/RCA Commercial Property Price Index Federal Funds Rate, %
Federal funds rate starts rising in July 2004
CRE values rise by 50% over next 3 years
History shows that the last time the Fed raised rates, CRE values increased by 50%
Growth Rate from 2004-2007
MARKET GROWTH RATE MARKET GROWTH RATE
New York 142% Baltimore 37%
Long Island 120% Kansas City 37%
Denver 82% Dallas 26%
Charlotte 73% Sacramento 25%
DC – VA 69% Cincinnati 24%
Los Angeles 61% Atlanta 21%
Phoenix 57% Minneapolis 20%
Orange County 54% St. Louis 19%
San Francisco 53% Boston 18%
East-Bay 53% Chicago 14%
San Diego 50% Houston 10%
Raleigh/Durham 46% Nashville 7%
San Jose 42% DC – MD 4%
Columbus 41% Indianapolis 1%
DC 37%
U.S. Average = 51% 11
Office values soared the last time the Fed raised rates
Source: Real Capital Analytics
MARKET GROWTH RATE MARKET GROWTH RATE
Kansas City 154% San Jose 29%
Columbus 116% St. Louis 25%
Phoenix 111% Denver 24%
Sacramento 90% Indianapolis 23%
Charlotte 62% Nashville 21%
Inland Empire 32% Northern NJ 20%
East Bay 61% Baltimore 12%
Raleigh/Durham 59% San Francisco 11%
Cincinnati 55% DC 11%
Minneapolis 40% DC – VA 2%
Chicago 32% DC – MD 0%
U.S. Average = 38%
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Growth Rate from 2004-2007
Industrial values also soared the last time the Fed raised rates
Source: Real Capital Analytics
74%
76%
78%
80%
82%
84%
86%
88%
90%
92%
94%
0
1
2
3
4
5
6
7
8
9
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Federal Funds Rate, % U.S. Office Occupancy
Source: Federal Reserve, Cushman & Wakefield Research
When rates rise, so does occupancy…
0%
2%
4%
6%
8%
10%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
1986
1990
1994
1998
2002
2006
2010
2014
NCREIF - All Property Types 10-Year Yield Treasury Yield
Correlation = -0.18 (weak)
Source: NCREIF, Federal Reserve 14
There’s virtually no relationship between rising interest rates and CRE returns
Yr/Yr % Change in the 10-Year Treasury rate vs Unlevered NCREIF Returns
-4%
-2%
0%
2%
4%
6%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
1986
1990
1994
1998
2002
2006
2010
2014
NCREIF - All Property Types GDP
Yr/Yr % Change in Real GDP vs Unlevered NCREIF ReturnsCorrelation = 0.66 (solid)
Source: NCREIF, U.S. Bureau of Economic Analysis 15
Economic growth matters more
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3
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6
2007
Q1
2008
Q3
2010
Q1
2011
Q3
2013
Q1
2014
Q3
2016
Q1
2017
Q3
2019
Q1
Federal Funds Rate, % 10-Year Treasury Yield, %
Forecast 2014 2015 2016 2017 2018
Oxford 2.5 2.2 2.6 3.1 3.5
Moody’s 2.5 2.2 3.1 4.1 4.2
NABE 2.5 2.5 3.1 * *
C&W 2.5 2.1 2.6 2.9 3.5
Avg. 2.5 2.3 2.9 3.4 3.7
10-YR RATE BELOW 3% THRU 201610-YR RATE FORECAST COMPARISON
Source: Federal Reserve, Oxford Economics, Moody’s Analytics, NABE, Cushman & Wakefield Research 16
U.S. Interest Rate Forecast
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Tighter monetary policy does typically signal steps towards the next recession
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ECB launched QE in March 2015, bond-buying $66B per month; also dropped short-term rates to effectively 0%
EUROZONE
Then again, global monetary policy still simulative
BOJ launched new QE in October of 2014, swelling monetary base by $650 billion per year
JAPAN
PBOC cut interest rates from 4.85% to 4.6% in August 2015– has continued to inject yuan into the economy via liquidity facilities and decreased the required reserve ratio (RRR) at banks. PBOC is currently considering an additional 1.2-1.5 trillion yuan stimulus.
CHINA
Cut interest rates in May to record low of 2%
AUSTRALIA
Central bank reduced its main rate by half a percentage point in October 2015 - citing economy is “far from robust”
INDIA
No guarantee long-term interest rates are going to rise. Inflation is the key metric to watch, not the Fed Funds Rate
If they do rise, that typically means CRE values will also rise (in general) as stronger economic growth drives NOI higher
The bottom line on interest rates & CRE values
If they do rise, value-add is the hot play as it has more upside from improving leasing fundamentals
If they do rise, core assets with long-term leases in place are the most exposed, but then again, no shortage of demand for these assets
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