UNC Kenan-Flagler 2014 RE Conference

March 27, 2014 – Chapel Hill, NC


Douglas Linde, Boston Properties, President

Office Market (and real estate) changing due to: (where and how buildings are positioned)
– Technology
– Cost pressures from clients
– Regulatory pressures
– Macro economy
– Demographics (where do people want to live)

How people are living, working … Where do they want to live and work? Change is happening quicker today than ever in the past.

Physical layout of space is different:
• e.g. look at an old law firm set up, now – scaling all offices – sharing of admins; no library (850 – 500 sq ft per person)
• e.g. look at banking – then – smaller perimeter offices; now – shared workspace

Today all about the amenities – space dedicated to gathering places; conversation areas; fresh prepared food; relaxation, workout, retail services (hair cut).

How will you market yourself to the non-typical user now?
Example of San Mateo County outside of San Francisco in 2000 had 1% vacancy rate. Today it is the weakest market in the San Fran region—a hole in the donut—demographics and employment trends are changing where people work. All about growth in the technology business—moving into traditional buildings, non- traditional demand.

Boston Market—hottest area is Cambridge-center for life sciences and bio tech—Aventis, Pfizer. In the financial district—PWC is moving to the seaport district from 300,000 ft. to 275,000 ft. with smaller employment base. Large law firm moving from 400,000 ft. to 300,000 ft.—what happens to buildings they are leaving? They are not functionally obsolete—they are inefficient and cost is a factor.

Creating density (use less space/more efficiently) in the office space as well as outside the office space.

Financing—3 components of valuations per Boston Properties:
– Interest rates (impacts leverage)
– Rental rates (where are they)
– Amount of capital in market

They amount of capital looking for high value buildings is huge—larger buildings are getting more play.
Non-publicly traded REIT’s are a big player today—raising new capital in the billions! Sovereign wealth funds are back in the game in a large way. Lots of Far East $, valuations are higher today than in 2006. On the suburban side, things are different. Overall returns are well below where they were in 2005 and 2006.

When looking at market report, today you have to look at the submarkets – can’t just look at the market as a whole . . . careful of generalizations. Need to be more thoughtful and smarter on location decisions – think about the changing of office use when deciding. People and the times are changing quickly.

Will McIntosh, Ph.D., USAA Real Estate Company, Global Head of Research
US Economic and Property Market Outlook 2014

Optimistic about the US Economy
Strengthening fundamentals, improving housing market, Fed deficit being reduced, well capitalized banks, improving consumer confidence, deleveraging—improving balance sheets-both public and private.
– Should see GDP to go up to around 3% in 2015
– Employment – to grow of 200,000 per month (which should be enough to push down unemployment rate) – 6.5% this year; maybe 6.3% in 2015
– Consumer Confidence – more spending in households; households are borrowing money again – at the highest point sense the recession (bodes real well for RE industry)

Transaction Volume – Up 19% from 2012. Risk is back on. Capital flowing to the gateway markets. Cap rates are dropping and more investors are looking for yield.

Office Market – Very interesting asset class.
Seeing office employment growing – but demand for space is different, market is more efficient. Looking for specific qualities – e.g. open space. Thinks there is an opportunity for new office in next few years—keep the tenant in mind. Vacancy trends are headed in the right direction. In next couple of years, demand will exceed supply. Need to think about the unique needs (be thoughtful about how you play it). $38B of new capital (1/2 from Canada) – US looks like a “safe place” to put their $$

Residential Market – SF & MF
MF – Need 1.7 million starts per year. We are getting almost a million.
Housing market is coming back gradually.
Strong absorption of MF but supply has picked up significantly and in 2015 supply will exceed demand. You need to make sure you are looking by submarkets – because it depends. Rates are up and it may impact growth. Growth in rents is slowing.

Retail Market
Retails up 4.2% last year – good amount coming from online. (Online growing faster than in store). Little construction in retail around the country. Net absorption is exceeding supply. Retail is not over built – it is under demolished. Space is going to be different from the past – need to modify formats to accommodate ecommerce and other changes in industry. Cap rate spreads have narrowed but remain above historical averages. When Fed raises short term rates, we will still have some cushion. With next round of raising interest rates, cap rates will not increase that much.

Top and bottom 10 employment recovery markets
Top 10 Markets – Austin, San Antonio, Houston, DFW, Nashville, DC, OK City, Pittsburgh, SLC, Columbus, OH

Bottom 10 Markets – New Orleans, Cleveland, Memphis, Las Vegas, Riverside- San Bernardino, Sacramento, Providence, Milwaukee, St. Louis, Detroit

Industries of interest: High tech, energy, health care, university

Factors driving continued strength in commercial real estate market
– Improving fundamentals
– Positive demographic trends
– Supply remains near historically low levels
– Capital market conditions and relative attractive of CRE

USAAs view of the year ahead
– Strong economy and RE market in 2014
– A year of price uncertainty
– More attractive opportunities may exist in secondary markets
– Cautious approach to acquisitions
– Focus on value-add, development, debt, and recapitalizations
– Focus on value creation

Investment Challenges for 2014
– Possible higher interest rates and higher cap rates
– Development yields on cost have hit historic lows
– Increasing level so f investment capital keeping pressure on cap rates
– MF deliveries are rising rapidly

Byron Carlock, Jr., PWC, National Partner
Real Estate 2020 – Building the Future

Follow-up to Emerging Trends in Real Estate

As confidence returns to real estate, the industry faces a number of fundamental shifts that will shape its future.

Mega Trends
1. Demographic Shifts
2. Economic Power Shift (to emerging markets)
3. Accelerating Urbanization (72% increase in urbanization)
4. Climate change and resource scarcity
5. Technological break thrus

New Era of RE investments
– Growth of infrastructure funding! Investment will drive development.
– With a fast-growing population, by 2030 we’ll need:

  • 50% more energy
  • 40% more water
  • 35% more food

Changes are intuitive and game changing.
– Impact of infrastructure
– Sustainability assessment – meeting needs of changing audience

A new paradigm change in serving customers, users and government.


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