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E X P E C TAT I O N S & M A R K E T R E A L I T I E S I N R E A L E S TAT E 2 0 1 7INTERSECTION OFGLOBAL CHANGEEmbracing a New EraEconomy expectedto grow in 2017Total commercial real estatereturns expected to slowPAGE 15PAGE 58Cap rate compressionlikely to reverse coursePAGE 33Secondary and tertiarymarkets should becomemore attractive to investorsPAGE 54
Expectations & Market Realities in Real Estate 2017— Intersection of Global Change: Embracing a New Era 2017 Situs, RERC LLC, Deloitte Development LLC, NATIONAL ASSOCIATION OF REALTORS .All Rights Reserved.No part of this publication may be reproduced in any form electronically, by xerography, microfilm, or otherwise, or incorporated into any database or information retrieval system, without the written permission of the copyright owners.Expectations & Market Realities in Real Estate 2017 is published by:Situs5065 Westheimer RoadSuite 700EHouston, TX 77056RERC LLC99 E. Bremer AvenueWaverly, IA 50677Deloitte111 S. Wacker DriveChicago, IL 60606NATIONAL ASSOCIATION OF REALTORS 430 North Michigan AvenueChicago, IL 60611Disclaimer: This report is designed to provide general information in regard to the subject matter covered. It is sold with the understanding that the authorsof this report are not engaged in rendering legal or accounting services. This report does not constitute an offer to sell or a solicitation of an offer to buy anysecurities, and the authors of this report advise that no statement in this report is to be construed as a recommendation to make any real estate investmentor to buy or sell any security or as investment advice. The examples contained in the report are intended for use as background on the real estate industryas a whole, not as support for any particular real estate investment or security. Neither Situs, RERC LLC, Deloitte, nor NATIONAL ASSOCIATION OF REALTORS (NAR), nor any of their respective directors, officers, and employees warrant as to the accuracy of or assume any liability for the information contained herein.As used in this document, “Deloitte” refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its networkof member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legalstructure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structureof Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.
E X P E C TAT I O N S & M A R K E T R E A L I T I E S I N R E A L E S TAT E 2 0 1 7INTERSECTION OF GLOBAL CHANGE: EMBRACING A NEW ERAD E LO I T T E N AT I O N A L A S S O C I AT I O N O F R E A LT O R S SITUS RERC
EXPECTATIONS & MARKET REALITIES IN REAL ESTATE 2017 Intersection of Global Change: Embracing a New EraSPONSORING FIRMSSitus RERC Situs is the premier global provider of strategic business solutions for the finance and commercial real estateindustries, trusted to evaluate, optimize, and manage critical assets and securities; from commercial and residential real estate, to small and medium enterprise and consumer lending. Since 1985, Situs has set the standard infinancial services for service, quality and execution. Based in Houston, TX, Situs has offices across the US, Europeand Asia and has been involved in more than 1 trillion of real estate debt and equity deals. A rated servicer withMoody’s, Fitch and Morningstar Credit Ratings, Situs has more than 160 billion of assets under management andis ranked a top 20 servicer in multiple categories by the Mortgage Bankers Association. In 2016, Situs received asecond consecutive “Advisor of the Year” award by Real Estate Finance & Investment magazine, and the “CapitalAdvisor Firm of the Year” award by Property Investor Europe. In 2017, the firm won the “Industry Contributor ofthe Year” award from Real Estate Finance & Investment magazine. DeloitteDeloitte* is a recognized leader in providing audit, tax, consulting, and financial advisory services to the real estateindustry. Our clients include top REITs, private equity investors, developers, property managers, lenders, brokerage firms, investment managers, pension funds, and leading homebuilding and engineering & constructioncompanies. Deloitte Real Estate provides an integrated approach to assisting clients enhance property, portfolio,and enterprise value. We customize our services in ways to fit the specific needs of each player in a real estatetransaction, from owners to investment advisors, from property management and leasing operators to insurancecompanies. Our multi-disciplinary approach allows us to provide regional, national and global services to ourclients. Our real estate practice is recognized for bringing together teams with diverse experience and knowledgeto provide customized solutions for all clients. Deloitte Real Estate in the United States comprises over 1,600 professionals supporting real estate clients out of offices in 50 cities; key locations include Atlanta, Boston, Chicago, Dallas, Denver, Houston, Los Angeles, Miami, New York, San Francisco, and Washington, D.C. Deloitte’s global RealEstate Services industry sector includes over 10,000 professionals located in excess of 50 countries.NATIONAL ASSOCIATION OF REALTORS The NATIONAL ASSOCIATION of REALTORS , “The Voice for Real Estate,” is America’s largest trade association, rep- resenting over 1.2 million members involved in all aspects of the residential and commercial real estate industries. NAR membership includes brokers, salespeople, property managers, appraisers, counselors and others. Approximately 80,000 REALTORS and Institute Affiliate members specializein commercial brokerage and related services, and an additional 232,000 members offer commercial realestate services as a secondary business. The term REALTOR is a registered collective membership markthat identifies a real estate professional who is a member of the NATIONAL ASSOCIATION of REALTORS and subscribes to its strict Code of Ethics. Working for America’s property owners, the National Associationprovides a facility for professional development, research and exchange of information among its membersand to the public and government for the purpose of preserving the free enterprise system and the right toown real property.As used in this document, “Deloitte” refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network ofmember firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure ofDeloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP andits subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.*4 2017 Situs RERC , Deloitte Development LLC, National Association of REALTORS . All Rights Reserved.
EXPECTATIONS & MARKET REALITIES IN REAL ESTATE 2017 Intersection of Global Change: Embracing a New EraFOREWORDFebruary 2017Dear Readers,Situs RERC, Deloitte, and the National Association of REALTORS have once again partnered together to provide you withinsight into the commercial real estate market. The year 2016 was certainly filled with surprises, but commercial real estatewas able to withstand the external pressures and offer solid risk-adjusted returns. As many investors continue to take a morerisk-averse approach, commercial real estate is expected to continue to provide a safe haven for investment in 2017.The economy grew at a sluggish to moderate pace in 2016, and commercial real estate retreated from the active pace set in 2015.Transaction volumes were weak in the beginning of 2016, but gained momentum as the year progressed. Fundamentals werestrong in 2016; increased demand for most property types led to low vacancy rates and rising rent growth. In 2017, commercialreal estate growth is expected to be more moderate and even flat for some property types. According to Situs RERC institutional investment survey respondents, the market is fully-priced and a correction is looming. However, because of PresidentTrump’s expected positive influence on economic growth, the correction is likely to be staved off for a couple more years.As 2017 gets underway, it is increasingly evident that global uncertainty is the new normal. The implementation and execution of Brexit, acts of terrorism and uncertainties surrounding the policies of the new presidential administration will keepinvestors on their toes in 2017. Navigating these waters will be a difficult task, but with this edition of Expectations & MarketRealities in Real Estate 2017 – Intersection of Global Change: Embracing a New Era, we will provide you with analysis andinsight to help you steer ahead.We would like to extend our gratitude to all who contributed to this report. This includes the data providers, survey respondents, economists, researchers and analysts, and reviewers and business colleagues, without whom this report would not havebeen possible. We also would like to thank our clients, subscribers and consultants for their continued support of this annualpublication.Best wishes for a prosperous 2017.Sincerely,Matthew G. Kimmel, CRE, FRICS, MAIPrincipal & US Real Estate Services LeaderDeloitte Transactions and Business Analytics LLPKenneth P. Riggs, Jr., CFA, CRE, MAI, FRICSPresidentSitus RERCLawrence Yun, PhD.Sr. Vice President, Chief EconomistNATIONAL ASSOCIATION OF REALTORS 2017 Situs RERC , Deloitte Development LLC, National Association of REALTORS . All Rights Reserved. 5
EXPECTATIONS & MARKET REALITIES IN REAL ESTATE 2017 Intersection of Global Change: Embracing a New EraACKNOWLEDGEMENTSSPONSORING FIRMS & CHAIRSMatthew G. Kimmel, CRE , FRICS, MAIPrincipal, Deloitte Transactions and Business Analytics LLPKenneth P. Riggs, Jr., CFA, CRE, MAI, FRICS President of Situs RERCLawrence Yun, PhD Chief Economist, NATIONAL ASSOCIATION OF REALTORS CONTRIBUTING AUTHORSTodd J. Dunlap, MAI, MRICS, Senior ManagerDeloitte Transactions and Business Analytics LLPJacey Heuer, Assistant Vice President Situs RERCKenneth W. Kapecki, CRE, FRICS, MAI, DirectorDeloitte Transactions and Business Analytics LLPSurabhi Kejriwal, Research Leader, Real EstateDeloitte Support Services India Pvt. Ltd.Lindsey Kuhlmann, Analyst Situs RERCMatt Lamers, Senior ConsultantDeloitte Transactions and Business Analytics LLPSaurabh Mahajan, Research Leader, Real EstateDeloitte Support Services India Pvt. Ltd.Andy J. Miller, Senior Manager Deloitte Transactions and Business Analytics LLPJen Rasmussen, PhD, Assistant Vice President, Editor-in-Chief Situs RERCGeorge Ratiu, Director NATIONAL ASSOCIATION OF REALTORS Ye Thway, CAIA, Senior CRE Financial Analyst Situs RERCNellie Tiggelaar, Consultant Deloitte Transactions and Business Analytics LLPMorgan Westpfahl, Director Situs RERCDESIGN & LAYOUTJustin Brewer, Associate SitusJeff Carr, Associate Situs RERCOTHER DISTINGUISHED CONTRIBUTORSJeffrey Havsy CBRE Econometric AdvisorsRonald Johnsey Axiometrics, Inc.Robert Mandelbaum CBRE Hotels’ Americas ResearchRobert M. White Real Capital AnalyticsR. Mark Woodworth CBRE Hotels’ Americas Research6 2017 Situs RERC , Deloitte Development LLC, National Association of REALTORS . All Rights Reserved.
EXPECTATIONS & MARKET REALITIES IN REAL ESTATE 2017 Intersection of Global Change: Embracing a New EraCONTENTS1 INTRODUCTIONIntersection of Global Change: Embracing a New Era.82 THE ECONOMYLikely to Pick Up Speed.
Estate Services industry sector includes over 10,000 professionals located in excess of 50 countries. NATIONAL ASSOCIATION OF REALTORS The NATIONAL ASSOCIATION of REALTORS , "The Voice for Real Estate," is America's largest trade asso-ciation, rep- resenting over 1.2 million members involved in all aspects of the residential and commer-
