US Real Estate Outlook 2019 - UBS
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UBS Asset Management US Real Estate Outlook 2019
Contents
Page
Performance scenarios 1
Macro view 3
Property sector outlooks 7
Apartments 8
Industrial 10
Office 12
Retail 14
Farmland 16
Strategy 19
Dear Reader,
We are pleased to present our firm's US Real Estate Market Outlook 2019.
Our outlook is a study on the conditions and expectations affecting investment-quality commercial property. The complete document
results from the combined efforts of our firm's multi-disciplinary Strategy Team and data-driven Research & Strategy team.
Within these pages, we derive the story of our asset class from trends we observe in the data. You can navigate from the
macroeconomic perspective through the property sectors. The story evolves from thoughtful observations to actionable
recommendations. As we have for more than 20 years, we conclude our US Real Estate Market Outlook 2019 with investment
strategies based on the themes we see emerging in private real estate markets.
The Real Estate business of Real Estate & Private Markets within UBS Asset Management has USD 95.2 billion under
management, with direct property investments throughout Asia, Europe and the US, as well as publicly traded real estate
securities and private fund holdings worldwide. The firm’s global experience in private real estate investment, real estate
securities management, commercial mortgage financing and risk management is invaluable to our market understanding. Within
Real Estate US, our experience includes 40 years managing private equity real estate and originating participating mortgages. US
assets under management exceeded USD 33.3 billion (as of September 30, 2018).
As a new year begins, we welcome your critical thoughts and perspectives.
Sincerely,
Tiffany Gherlone
Head of Real Estate Research & Strategy - US
UBS Asset Management
tiffany.gherlone@ubs.com
Performance Scenarios
Outlook 2019 presents our Base Case expectations for Exhibit 1 – Performance scenarios for core unlevered properties
direct-investment commercial real estate, given the trends we 2018 2019
anticipate in the economy and capital markets. We believe Estimates* Downside Base Case Upside
our Base Case scenario is the most probable outcome and
3.1 GDP (%) 0.6 2.5 4.3
dedicate the rest of the document to laying out the details. It
is not, however, the only scenario we consider. 2.4 Employment -0.1 2.0 2.3
(mill. Jobs/yr)
2.4 Inflation (%) 1.7 2.0 4.0
2019 Base Case
We expect the Base Case to be the most likely outcome. In a 4.7 Retail sales (%) 3.2 4.8 7.0
quick summary of the Base Case assumptions, positive Gross 3.6 NOI growth (%) 1.1 2.9 4.5
Domestic Product (GDP) growth, a strong labor market and
5.0 Cap rate change (bps) 10 10 5
moderate inflation persist. Interest rates move up gradually,
leaving the yield curve flat and real estate spreads condensed. 4.6 Income return (%) 4.6 4.7 4.7
The Federal Reserve (Fed) continues raising interest rates on 2.4 Appreciation (%) -1.0 0.7 3.4
the short end of the curve and selling Treasury bonds on the 7.1 Total return (%) 3.6 5.4 8.0
long end of the curve. Federal government deficit rises to USD
Source: UBS Asset Management, Real Estate & Private Markets, Research & Strategy
1 trillion in 2019, 5% of GDP, which grabs headlines but does – US based on data from UBS Investment Bank, NCREIF and Moody's Analytics as of
not add downward pressure to growth until 2020. Energy prices September 2018. Economic data are expressed as fourth-quarter over fourth-quarter
remain low and stimulative. Tariffs do not interrupt growth in rates of change except for retail sales where growth is the average annual change.
*2018 Estimates based on actual data as of October 2018.
the US. In Asian economics growth is already lower and should
continue decelerating. Brexit goes smoothly, meaning the UK
stays in the custom union for goods, and negotiates free-trade Downside Scenario
deal for services and free flow of skilled workers. Initial boosts Interest rates rise faster than the economy can accommodate.
from tax policy changes fade and slower global growth leaves Brexit chaos and slower growth in Asian economies lead
economic growth in 2019 slower than 2018. to a scenario where global growth decelerates faster than
anticipated. The US economy is impacted by diminished
Implications for commercial real estate international growth. Trade tensions cause uncertainty.
Net operating income (NOI) growth maintains its current Equity markets are characterized by volatility and corrections.
trajectory, resulting in NOI growth that is positive but at a Business and consumer sentiment falls, leading to less
slower pace than 2018. Thin spreads and upward pressure on investment and consumer spending. Recession is avoided, but
interest rates lead to capital market pressures. Average cap economic growth is below 1%.
rates move up 10 basis points (bps); however, similar to the
past two years, there is enough NOI growth in the market to Implications for commercial real estate
offset the impact of higher cap rates. As a result, appreciation A Downside scenario would result in a total return below the
is positive but slower. Total return would be slightly below income return. Due to the contractual nature of real estate
long-term expectations at 5.4%, exhibit 1. leases, NOI growth would remain positive but decelerate.
Even though we would expect downward pressure on interest
Upside Scenario rates, cap rates could rise slightly responding to increased
Unexpected positives to the US economy would come from uncertainty, resulting in a higher required premium and cap
improvements in the pace of growth rather than lower interest rate change that resembles our Base Case. The net effect of
rates, as it is likely the Fed will continue to tighten monetary slower NOI growth and slightly higher cap rates would be a
policy in 2019. Unemployment would move closer to 3.0% 1% loss of value in this scenario and a positive unleveraged
and wage rates should rise. Consumer spending should total return of 3.6%.
accelerate even as the initial boost from tax changes fades.
Trade tensions de-escalate. Brexit is painless, accelerating
Eurozone growth and supporting higher oil prices. Business At our firm-level Strategy Team meeting, we ask decision
investment increases in the US. makers to imagine conditions that could be better or worse
than our Base Case. Our Upside and Downside scenarios
Implications for commercial real estate outline some of our thoughts on these alternative outcomes.
Our Upside scenario would result in a modest acceleration in the
unleveraged real estate total return from around 7% in 2018 to
8% in 2019, driven by faster NOI growth at the property-level
and little change in the capital market pressures on the sector.
2
Macro View
3
Economic summary US consumers
In 2019, we expect growth in the US economy to continue Eleven years after the start of a Global Financial Crisis (GFC), US
supporting demand for real estate. Even if the pace of growth consumers are optimistic, fueled by a tight labor market. We
in real GDP is a little slower than 2018, the momentum is see consistent growth in consumption—a key component of
positive, as shown in exhibit 2, and the labor market is strong. GDP—and higher retail sales. If interest rates continue to rise,
the upside may be limited as rising consumer debt costs and
softening housing markets would act as counterweights. Real
Exhibit 2 – Real GDP growth rate wage growth offsets some of the impact of higher interest rates.
Real GDP growth (%) Consumers who expect to be able to maintain employment and
6 enjoy higher wages should be able to absorb slightly higher
inflation, including the ability to accept rental rate increases.
5
4 Interest rates
3 After four raises that moved the high end of Federal Funds
2
Rate to 2.5% by December 2018, the market is anticipating
limited interest rate hikes by the Federal Reserve in 2019,
1 consistent with a perceived need to manage expected inflation
0 and create policy flexibility for the possibility of a future
-1 downturn. At the long end of the curve, 10-year Treasury
rates moved up for most of 2018, exhibit 4. Near the end
-2
1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 of the year, equity market volatility and global uncertainty
caused some movement of investors toward long-term bonds.
Quarterly annualized Annual growth
Investor appetite, coupled with Fed balance sheet reductions
Source: Moody's Analytics as of September 2018.
in the form of bond sales, reversed some of the increase in
long-term rates.
Labor market
Strength in the labor market is an important driver of demand Exhibit 4 – 10-year Treasury rate and implied expected inflation
for real estate. In 2018, the US added an average of 200,000
jobs per month. We expect another 2.0 million jobs, or around %
165,000 jobs per month to be added in 2019. The US has 3.5
more jobs open than applicants to fill them, a situation that 3.0
should help maintain real wage growth, exhibit 3. 2.5
2.0
1.5
Exhibit 3 – Headline inflation and wage growth
1.0
Growth year-over-year (%)
0.5
6
0.0
5 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18
4 10-year Treasury rate Breakeven inflation
3
2 Source: Federal Reserve Economic Data as of December 2018.
1
0
-1
-2
1Q00 1Q03 1Q06 1Q09 1Q12 1Q15 3Q18
Wages and salaries (nominal) Inflation (CPI)
Source: Moody’s Analytics as of September 2018.
4
The term spread, as measured in exhibit 5 by the difference Exhibit 6 – Commercial real estate spread
between the two- and 10-year Treasury rates, is low. A low
term spread is indicative of a flat yield curve. There is no Basis points
obvious conclusion about commercial real estate performance 450
from the occurrence of flat yield curves. Historically, US 400
350
commercial real estate produced positive returns in a flat yield
300
curve environment for two- to five-year periods. Expectations
250
for the economy and labor market are more important drivers
200
of real estate performance. The yield curve is flat today as the
150
Fed influences short-term rates to go higher at a time when
100
market demand is helping to keep long-term rates low. 50
0
1Q97 1Q00 1Q03 1Q06 1Q09 1Q12 1Q15 3Q18
Exhibit 5 – Term spread and unlevered real estate return Spread (cap rate minus 10-year Treasury rate)
Quarterly (%) 20-year average spread
6.0
Source: NCREIF Fund Index-Open-end Diversified Core Equity and Moody's Analytics as
4.0 of September 2018.
2.0
Market performance
0.0
-2.0 Real estate, equity and bond markets
For the first time in six years, the 10-year Treasury rate escaped
-4.0
the quarterly average range of 1.6% to 2.7%, which it traded
-6.0 in since 2010, exhibit 7. The beginning of that upward trend
occurred in fourth quarter 2016, with yields increasing by 60
-8.0
bps from 2.0%, and kept roughly flat over 2017 rising by just
-10.0 10 bps, before jumping to their current rate near 3.0%.
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 3Q
89 91 93 95 98 00 02 04 07 09 11 13 16 18
NPI total return Spread 10-year minus 2-year Exhibit 7 – Asset yield comparison
Source: Federal Reserve Bank of St. Louis database and NCREIF Property Index as of
%
September 2018. Past performance is not indicative of future results. 9
Note: Spread reflects a quarterly average. Orange shaded area is between 0% and 1%. 8
Grey shaded area is negative territory. 7
6
Commercial real estate spreads 5
With little movement in cap rates, an upward move in Treasury 4
rates during 2018 condensed premiums available in US real 3
2
estate, exhibit 6. The spread between Treasury rates and cap
1
rates is below long-term expectations, representing a change 0
from the wide spreads that drew capital so quickly in the wake 2Q10 1Q11 4Q11 3Q12 2Q13 1Q14 4Q14 3Q15 2Q16 1Q17 4Q17 3Q18
of the last recession and relieving one of the pressures that S&P cap rate equivalent NFI-ODCE cap rates
had been pushing cap rates lower. 10-year Treasury
Even though cap rates appear to be holding flat near historic Source: Moody's Analytics and NCREIF as of September 2018.
lows, the real estate spread is already low enough to put
upward pressure on cap rates. There is no noticeable distress in
the market that might put more upward pressure on cap rates.
Income is growing. Debt is available. Capital expenditures are
increasing. Potential sellers can afford to be patient.
5Equities have been slower to join rising interest rates; the S&P
500 Cap Rate Equivalent was flat from mid 2016 to early 2018
then rose from 4.69% to 5.58%, which is 89 bps over the past
year, exhibit 8. Overall NCREIF Fund Index-Open-end Diversified
Core Equity (ODCE) cap rates declined through third quarter
2018 by 10 bps, with warehouse, apartments and suburban
office leading the change. Downtown office and non-mall
retail had slight increases in cap rates over this period.
Volatility in the public and fixed income markets has been
increasing as of the writing of this publication. In exhibit 8,
the S&P 500 ended third quarter 2018 up nearly 18% for the
trailing four quarters, but a fourth quarter decline diminished
these positive returns to a 6.3% total return as of November
30, 2018. The reaction in the public markets translates into
further uncertainty on cap rate movements in the private real
estate sector as the yield becomes increasingly attractive in
more liquid asset classes.
Exhibit 8 – Yield hierarchy Exhibit 9 – US transactions
Initial yields1 Total returns Transaction volume (billion USD)
Year-over-year 500
Sectors 2017 2018 change (bps)2 1-yr 3-yr 450
S&P 500 public equities3 4.69 5.58 0.89 17.9 17.3 400
Non-mall retail 4.75 4.79 0.04 5.4 7.1 350
300
Suburban office 4.89 4.76 -0.13 7.6 7.2
250
Warehouse 4.76 4.58 -0.19 14.1 13.3 200
Bbb Corporate Bonds 3.60 4.37 0.77 -0.9 4.0 150
100
Mall 4.25 4.19 -0.06 2.5 6.8
50
Apartments 4.28 4.13 -0.14 6.4 7.0 0
Downtown office 4.00 4.06 0.06 6.3 6.3
2012 2013 2014 2015 2016 2017 2018 YTD
Apartment Industrial Office Retail Hotel
10-year US Treasury 2.24 2.92 0.68 -3.0 -0.2
Source: NCREIF, S&P, St. Louis Federal Reserve. All data as of September 2018, pulled Source: Real Capital Analytics as of September 2018.
on 12/18/2018.
1. Initial yields represent the average yield during the first three quarters of each year.
2. Year-over-year change is 1Q18-3Q18 average yield minus 1Q17-3Q17 average yield. Commercial real estate debt markets
3. S&P 500 Initial Yield is a cap rate equivalent calculated by inverting the price- One reason transaction volume is lower for retail and office
earnings (P/E) ratio utilizing operating earnings.
properties is that lenders have a higher appetite to provide
debt for industrial and apartment assets. Real estate debt
Transactions
capital is low cost and generally available but not free-flowing,
US transaction markets remain liquid in aggregate, with total
a situation that arose prior to the last downturn. On the
sales of individual properties and portfolios at USD 473 billion
whole, US debt markets can be described as operational but
for the year ended September 2018, exhibit 9. After slowing
not excessive, which encourages development but not an
a bit in 2016 and 2017, sales volume showed signs of leveling
abundance of supply.
off during the first three quarters of 2018, with total volume
up by USD 18 billion compared to the first three quarters of
2017. Broad trends remain similar to recent years, with sales of
retail and office properties decreasing and sales of apartments,
industrial and hotels increasing.
6Property Sector
Outlooks
7Apartments
Steady as she goes
The apartment sector led real estate into recovery post- -- New construction continues at an elevated pace,
2009. A decade later, the sector is experiencing its third anticipated to remain above 20-year average through 2019.
consecutive year of above-average construction. Vacancy -- Demand remains healthy, but is unlikely to keep up with
remains steady nationally, implying that demand is strong new supply, leading to modest rise in vacancy.
enough to absorb new units, at least in aggregate. Some -- Rent growth is likely to soften, remaining positive, as
of the steadiness we observe at the national level masks landlords continue to compete for tenants.
differences between luxury and more modest apartment -- Over the past three years Apartment investment has
complexes. With so much new construction, the high- delivered healthy but diminishing NOI growth and below-
end units are facing more rent concessions. Relief will be average total returns.
limited as long as construction continues at or near the
current pace.
Apartment supply and demand dynamics have been balanced Many economic and demographic factors contribute to
over the past five years despite the continued elevated supply, demand for multifamily housing. Some of these factors are
exhibit 10. As such, vacancy has remained below 5% since either clear contributors or clear detractors. Many more are
2011. US apartments ended third quarter 2018 with a vacancy ambiguous, often depending on timing in an individual metro.
rate of 4.0%, a decline of 40 bps from the previous year. The current state of demand drivers leans toward balance,
exhibit 11, with enough tailwinds allowing demand to nearly
match the persistent elevated pace of new supply.
Exhibit 10 – Apartment demand, supply and vacancy
Percent of inventory (%) Vacancy rate (%) The national homeownership rate remains low compared
3.5 10 to historical numbers, the third-quarter 2018 rate of 64.4%
3.0 9 is below the 50-year average rate of 65.4%. However,
8 homeownership has begun a slow trend upward; the rate is
2.5
now 100 bps above the 2016 trough remaining just below the
2.0 7
2014 level.
6
1.5
5 Beginning January 2018, new supply grew at a healthy
1.0
4 pace, introducing approximately 194,000 new units through
0.5 3 September. Development is expected to peak in calendar year
0.0 2 2018 with nearly 300,000 units delivered; this full-year total
-0.5 1 is just slightly above the prior two years. Calendar year 2019
-1.0 0 construction is expected to remain in line with 2017 and 2018.
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 If construction costs continue to rise and economic growth
Demand (L) Supply (L) Vacancy (R) slows, completions could be below the long-term average in
2020, exhibit 12.
Source: CBRE-Econometric Advisors as of September 2018. Shaded area indicated
forecast data.
Exhibit 11 – Demand drivers
Household formation rising Flattening labor force participation
Retirees downsizing Slowing job growth
Rising home prices Intangibles - trends and preferences
Rising interest rates Market level rent spikes
Flat homeownership Slowing population growth
Rising income
Source: UBS Asset Management, Real Estate & Private Markets, Research & Strategy – US.
8Exhibit 12 – Completion rate Exhibit 13 – National average rent growth Rent growth by building type
Year-over-year completion rate (%) Year-over-year change (%) Year-over-year change (%)
2.5 6 8
4 6
2.0 4
2 2
1.5
0 0
1.0 -2
-2
-4
0.5 -4
-6
-6 08 10 12 14 16 3Q18
0.0
17 18 19 20 08 10 12 14 16 18 20 High Rise HR 10-yr avg
Average Rent 20-year avg Mid Rise MR 10-yr avg
Completions 20-year average 10-yr avg Garden Garden 10-yr avg
Source: CBRE-Econometric Advisors, Moody's Analytics Source: CBRE-Econometric Advisors, Moody's Analytics Source: CBRE-Econometric Advisors, Peer Select, as of
forecast scenario, as of September 2018. forecast scenario, as of September 2018. Shaded area September 2018. 3Q18 shows growth since 3Q17.
indicates forecast data.
From the 2015 peak, 2016, 2017 and 2018 have each seen a Exhibit 14 – Rent growth spread by class and style
decline in the number of multifamily permit approvals. Although
these annual totals remain above both the long-term and short- Average annual spread (bps); past three years
Class B Garden/Class A High Rise
term averages, Moody's Analytics expects 2015 to remain the
700
national peak year for permit approval. These data support the
expectation of supply easing over the next several years. 600
500
The current balance of supply and demand has not led to 400
the same stability in rent growth. Over the past five years 300
apartment rent growth has averaged a healthy 3.6% annually, 200
swinging between 4.5% and 2.3%, exhibit 13. 100
0
Much of this volatility is driven by the influx of new high-
-100
end product across the nation, leading to both increased
Riverside
San Diego
Los Angeles
Philadelphia
Houston
Baltimore
Phoenix
Seattle
Newark
Miami
Oakland
Denver
San Francisco
Chicago
San Jose
Washington DC
Tampa
Anaheim
Portland
Dallas
NATION
New York
Atlanta
Boston
Ft Lauderdale
Minneapolis
competition among landlords and jumps in metro-level rents
that may not reflect growth in existing units.
More than half of apartment completions in the past five years
have been Class A, often entering the market with the highest
Source: CBRE-Econometric Advisors, Peer Select, as of September 2018.
rent values. Working through lease-up at such high levels has
become a hindrance to functioning growth of Class A units.
Current opinion is that Class A High Rise rents are likely to
Class B properties have seen some benefits of lower starting
remain subdued but positive. Most of the newest product
rents, allowing healthy rent growth to remain steady.
has completed the lease-up process, shifting these new units
into the growth-trend dataset and softening the competitive
Nationally, Class A High Rise apartment rents averaged 1.3%
concessions environment, leaving room for the highest dollar-
annual growth over the past five calendar years. During the
value rents to achieve modest increases.
same period Class B Garden Style apartment rents averaged
4.5% per annum. This trend varies by market. Exhibit 14
Apartment fundamentals lead to the expectation of continued
shows the average three-year spread of Class B Garden rent
demand in 2019, albeit at a pace slightly below the still
growth over Class A High Rise rent growth in the 25 largest
elevated level of supply, resulting in a minimal uptick in the
apartment markets (by inventory).
vacancy rate. Rent growth is expected to underperform
the long-term average over the coming two years. As
homeownership rates are no longer expected to decline,
apartments will face the competition of owning-versus-renting.
9Industrial
Quality up
Industrial continues to benefit from a large appetite for -- Industrial is delivering strong NOI growth and above-
value-add investments and build-to-core strategies. The average total returns. Risks are increasing for 2019.
premium required by industrial investors is tight and -- E-commerce is changing the way tenants use industrial
getting tighter. Portfolio decision makers should take this space, resulting in both increased demand and new
opportunity to sell industrial with the goal of improving construction.
quality over quantity for long-term positioning. Rent -- After nine years of demand exceeding supply, industrial
growth should continue to outperform other sectors construction is back to its pre-recession pace, exhibit 15,
in 2019, but supply is increasing, introducing new which puts upward pressure on availability.
uncertainty to future years. -- Tariffs and trade renegotiations add uncertainty to the
sector's outlook.
-- It is a good time to sell marginal industrial assets and
strengthen the long-term position of your portfolio.
Exhibit 15 – Industrial supply, demand and availability Exhibit 16 – Rent growth
Percent of inventory (%) Availability rate (%) Rent growth (%) Million square feet
3.0 16 10 400
2.5 14 8 350
2.0 6
1.5 12 300
4
1.0 10 2 250
0.5 0 200
8
0.0
6 -2 150
-0.5
-1.0 -4
4 100
-1.5 -6
2 -8 50
-2.0
-2.5 0 -10 0
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 3Q18
Supply (L) Demand (L) Availability rate (R) Rent growth (L) Annual supply (R)
Source: CBRE-Econometric Advisors, Moody's Analytics forecast scenario, as of Source: CBRE-Econometric Advisors as of September 2018. All data are fourth-quarter
September 2018. Shaded area indicates forecast data. rolling as of September.
In our US Real Estate Outlook 2018, we suggested that Historically, rent growth led development, exhibit 16. In the
industrial availability had likely hit a low in 2017 as supply current cycle, however, developers exhibited a restrained
was expected to rise through 2019. There was a surge in response to strong rent growth. We anticipate steady
demand in late 2017, and three quarters of the way through construction should increase competition for tenants and
2018, availability is 7.2%, down 20 bps since 2017 year end. curtail the pace of future growth. Rent growth is expected to
Supply, however, continues to increase. Completions are likely remain positive even as it decelerates.
to continue at an elevated pace. CBRE-EA is currently tracking
200 million square feet of total deliveries in 2018 and over Structural changes within e-commerce and continued steady
250 million square feet in 2019, exhibit 15. consumption should positively shape demand. On the demand
side, e-commerce is a high impact driver of incremental indus-
Tenant demand remains just ahead of the pace of new supply. trial net absorption today, which has continued to be a catalyst
In the year ending September 2018, national industrial to overall performance. As ubiquitous as online shopping
inventory grew by 1.6% and was met by a 1.7% pace of appears to be, the emergent sector accounts for under 10% of
demand. Looking ahead, we believe demand will remain total retail sales in the US. See exhibit 27 in the Retail overview.
relatively high, but supply will be even higher. We anticipate a In recent years, retailers leased more warehouse space, as op-
slight imbalance in moderate rent growth. We do not expect a posed to expanding their brick and mortar retail presence.
material decline in fundamentals in 2019.
10Exhibit 17 – Manufacturing employment growth
Over the past five years, the average size of industrial buildings
has been increasing. During the first three quarters of 2018,
Change in manufacturing jobs (million jobs) 18% of all newly constructed industrial inventory was in
2.5 buildings sized over one million square feet, the largest
2.0 ever three-quarter increase of buildings this size. Exhibit 18
1.5 illustrates new construction by building size over the past five
years; 22% of national industrial inventory sized over one
1.0
million square feet was built in the past five years.
0.5
0.0
-0.5 Exhibit 19 – New construction ceiling heights
-1.0 Subset completions as percent of total completions (%)
-1.5 65
12 13 14 15 16 17 18 YTD
Food; Beverage & Tobacco Mfg. Textile; Fiber & Printing Mfg. 45
Chemicals; Energy; Plastics & Rubber Mfg. Metals & Mining Mfg.
Machinery Mfg. Electronic & Electrical Mfg.
Transportation Equipment Mfg. Furniture & Misc. Mfg. 25
Total
5
Source: Moody's Analytics as of September 2018.
91 93 95 97 99 01 03 05 07 09 11 13 15 17 18
Manufacturing added 216,000 new jobs during the first three 0-28' 29-33' 34'+
quarters of 2018, exhibit 17, the majority of gains coming
Source: CBRE-Econometric Advisors, Peer Select as of September 2018.
from the Metals & Mining Manufacturing sector followed Note: Percentages do not equal 100% with the difference attributed to other
by the Food, Beverage & Tobacco Manufacturing sector. and unknown.
Despite recent strength, Moody's Analytics anticipates total
Manufacturing employment gains to slow and ultimately Evolving tenant requirements are driving demand and
decline modestly through 2020. The historic volatility of construction trends. Despite the popularity of 32' clear height,
employment components highlights the benefits of a diverse which averaged 7.7% supply growth rate over the past three
tenant base within industrial. years, developers continue to raise the standard, as illustrated
in exhibit 19. Almost 40% of supply developed in 2017 offered
a clear height 34' or higher. The majority of existing warehouse
Exhibit 18 – Industrial supply by building size inventory has below 28' clear heights. Increased facility
Share of annual construction Last five year’s completions as share of automation and other technological advances are among the
by building size (%) total building size inventory (%) factors to consider when evaluating potential rent growth.
100 25
90 Supply-side factors, such as obsolescence and increasing
80 20 construction, weigh on our Industrial expectations, but the
70 demand-side drivers, such as e-commerce and industrial
60 15 employment, continue to grow. As more speculative industrial
50 buildings deliver, increased competition should temper asking
40 10 rent growth, but strong demand should keep rent growth
30 from going negative. In a tight labor market, tenants are likely
20 5 to face challenges finding and retaining warehouse workers.
10 The combination of these factors leads us to a positive but
0 0 increasingly cautious position on the industrial property type.
100 100-250 250-500 500-1M 1M+
2014 (L) 2015 (L) 2016 (L) 2017 (L) 2018 (L)
New built share of total (R)
Source: CBRE-Econometric Advisors, Peer Select, as of September 2018.
2018 data are actuals through September.
11Office
Play it safe
Managing an office portfolio today should include a -- We expect modest growth in Office NOI in 2019.
strategy to smooth out lumpy lease expirations or capital -- Capital expenditure requirements are increasing, putting
expenditure requirements whenever possible. Of the four pressure on cash flow.
major sectors, office is experiencing the most dramatic -- Vacancy rates are low relative to history but unlikely to go
increase in capital spending and tenant improvement lower. New construction is a drag, exhibit 20.
allowances. Some of the expenditure will be defensive. -- Demand drivers remain modest, which might seem
It is a required cost of maintaining a competitive position unexpected because unemployment is so low. Not all
or securing long-term leases, as opposed to optional traditional office-using sectors are growing as quickly as
enhancements associated with material increases in they did historically.
expected property income. Comprehensive portfolio capital
budgeting will be prudent in this competitive environment.
Exhibit 20 – Office demand, supply and vacancy
Office-using employment growth is a mixed picture; difficulties
linger in the Information sector, which includes Publishers.
Percent of inventory (%) Vacancy rate (%)
4 18 Professional & Business Service employment remains elevated,
3 16 as is employment in the Financial Activities sector, albeit at a
2 14 decelerating pace. Overall, exhibit 21 shows total office-using
1 12 employment is growing but is unlikely to accelerate in the face
10 of tight labor conditions and a shift in historical drivers.
0
8
-1 6
-2 4
Exhibit 22 – Downtown and suburban inventory
-3 2
0 Thousand square feet
00 02 04 06 08 10 12 14 16 18 20 Existing inventory
Demand (L) Supply (L) Vacancy (R) Downtown
Suburban
Source: CBRE-Econometrics Advisors, Moody's Analytics Scenario forecast, as of 1,344
September 2018. Shaded area indicates forecast data. Under construction
47
52 Downtown
On the demand side, US employment growth remains Suburban
healthy, though decelerating. Unemployment continues to 2,528
fall, a positive sign for the labor market overall, but further
compression of the labor pool makes it more difficult for
employers to fill open positions.
Source: CBRE-Econometric Advisors as of September 2018.
Exhibit 21 – Office-using employment
Year-over-year growth (%) December unemployment rate (%) Nearly 100 million square feet of office product is under
4 10 construction with completion targets through 2019 and
2 8 beyond. Even though downtown accounts for only one third
of US office space, it accounts for nearly half of the new
0 6
development, exhibit 22.
-2 4
-4 2
-6 0
07 08 09 10 11 12 13 14 15 16 17 18 19
Office-using employment (L) National unemployment (R)
Source: Moody's Analytics as of December 2018. Office-using employment is the sum
of three sectors: Professional & Business services, Financial Activities, and Information.
Shaded area indicates forecast data.
12US office continues to see persistent levels of supply. Calendar
year 2017 delivered 49 million square feet of new inventory
followed by 55 million square feet of new inventory in the first
three quarters of 2018. Vacancy has been fairly stable but is
under pressure to rise slightly in 2019. Quarterly, national office
vacancy has been within 10 bps (plus or minus) of 13% since
the end of 2015, resting at 13% as of third quarter 2018.
Exhibit 23 – Office rent breakout
Year-over-year rent growth (%) USD
20 60
15 50
10
5 40
0 30
-5 20
-10
-15 10
-20 0 Exhibit 25 – Capital improvements
07 08 09 10 11 12 13 14 15 16 17 18 19
Capital Improvements to NOI (rolling four-quarter average %)
Downtown rent level (R) Suburban rent level (R) 70
Downtown rent growth (L) Suburban rent growth (L)
60
Source: CBRE-Econometric Advisors, Baseline Forecast, as of September 2018. Shaded 50
area indicates forecast data. 40
30
Office rent growth reflects steady supply pressures and has been
20
muted since 2015, exhibit 23. The disparity in rent dollar values
has allowed Suburban rents to grow further in recent years. 10
0
3Q98 2Q00 1Q02 4Q03 3Q05 2Q07 1Q09 4Q10 3Q12 2Q14 1Q16 3Q18
Exhibit 24 – Office transactions by subset
Source: NCREIF Property Index as of June 2018.
Billion USD
160
Today, office NOI is positive but slowing. Increasing capital
140 82
costs remains an ongoing hurdle for successful investment in
82
120 65
85
office assets, exhibit 25. Construction of new office buildings
100 56 is expected to exceed the level of demand for space this year.
80 58
Even though the US job market is strong, some traditional office
60 69 tenants—like publishers, advertisers, and commercial banks—
62 62
40 51 48 are not. New space users, like high-tech firms, dominate a few
20 35
markets but are too small of a segment to fill the void in others.
0 We expect office construction will begin to subside in 2020.
13 14 15 16 17 18 YTD
Between now and then, expect pockets of weakness.
Downtown Suburban
Source: Real Capital Analytics as of September 2018. Includes entity-level transactions.
In the capital markets, office transactions continue to trend
downward from the 2015 peak, exhibit 24. There are fewer
buyers for US office buildings. Interest rates are facing upward
pressure, and capital from China and the Middle East is
diminished. With smaller spreads and fewer buyers, office cap
rates are flat and under pressure.
13Retail
Diamonds in the coal mines
Despite the dire headlines—or arguably because of -- Steady increase in capital expenditures, especially at
them—there are opportunities in the retail sector. The regional malls, suggests renovations and transitions to
consumer is strong. Retail is a diverse asset class by new formats.
property size, location and tenancy. Today, we are looking -- E-commerce remains as the fastest growing share of retail
for diamonds in the coal mine, such as retail centers sales, shifting some of the benefits of traditional retail
with strong locations, great demographics and attractive demand drivers to industrial.
pricing. Don’t overspend but do analyze the performance -- Minimal new retail construction, allowing demand to
of the retailers carefully. Investors are still exploring the outpace supply for six of the past seven years.
effectiveness of various retail repositioning strategies. -- Ongoing mall and department store woes overshadowed
Even retail experts need to be agile enough to plan for the slow recovery of the power center and neighborhood
changing consumer preferences in the future. property-level performance.
-- Transition. Transition! Transition?
US retail investors are navigating through an ambiguous Traditional demand drivers continue to increase; retail sales
transitionary stage. The landscape of retail is changing, as are up from a year ago and income growth remains on a
traditional tenant mixes are approaching obsolescence and steady upward path. Historically, retail sales growth has served
consumer preferences are evolving, evident by allocation of as a proxy for healthy demand, but over the past two years,
consumer dollars. Transition has not led to a downturn for retail sales and space available for lease increased. Exhibit 27
all retail types, and may present new opportunities for select compares trends in availability rates across three categories:
retailers. Once again, 2018 consisted of headline bankruptcies lifestyle & mall centers, power centers, and neighborhood,
and store closings; the next couple of years are expected to community & strip centers.
endure similar trends as the ongoing tenant shuffle continues.
Minimal retail development is expected to remain in place, as Exhibit 27 – Retail sales and availability rates
the pace of supply has fallen from the post-recession heights, Retail sales: year-over-year growth(%)
exhibit 26. In the early 2000's, US retail inventory flooded Availability: year end (%)
markets increasing inventory by 2% to 3% on an annual 15
basis. In 2018, supply expectations are at a 20-year low, and
10
landlords continue to make adjustments to the changing
retail environment. 5
0
Exhibit 26 – Retail supply growth -5
Percent of inventory (%)
3.0 -10
08 09 10 11 12 13 14 15 16 17 18
2.5 YTD
Total retail sales growth Neighborhood, community & strip avail.
2.0
Lifestyle & mall avail. Power centers avail.
1.5
Source: CBRE-Econometric Advisors as of September 2018.
1.0
0.5
E-commerce as a share of retail sales continues to make strong
0.0 gains, but it is important to note that brick and mortar sales
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 have also increased in select areas. The shift in consumer
Source: CBRE-Econometric Advisors as of September 2018. Shaded area indicates
spending has tilted preference away from large square footage
forecast data. occupants and will drive the efforts of identifying the next
wave of retailers. Exhibit 28 highlights the gains in retail
sectors over the past two decades.
14Exhibit 28 – Retail market share
5.4% 10.2%
2.9%
1998 2008 2018
Grocery, liquor, restaurants Warehouse clubs Gas and fuel Health and beauty Other e-commerce
Source: Moody's Analytics as of October 2018.
Over the course of 2018, 45,000 retail jobs were added to the The tide has shifted over the past five years. Retail was the
economy, more than replacing the 13,500 jobs lost in 2017. highest performing sector in 2012, 2013 and 2015 but is
However, the reoccurrence of retail employment expansion, now a drag on overall returns, with malls as the main culprit.
similar to previous years, is unlikely as secular growth has The three major subtypes have seen positive (although below
reached its threshold. index) total returns, with power centers and neighborhood,
community and strip centers performing better than malls,
E-commerce giants tend to occupy large square footage see exhibit 29.
of warehouse space instead of physical retail stock rooms.
However, as a measure to solve the complexity of the last
mile, expect trends, like in store pickup, intraday delivery and Exhibit 30 – Capital expenditures allocation
cashier-less stores, which should move some e-commerce % %
retailers to lease traditional store space, especially retailers with 35 14
membership programs. 30 12
25 10
Mixed-use redevelopment will be an essential element to
20 8
retail survival. Underutilized retail is well located but is likely to
incorporate new uses like converted office and apartment de- 15 6
velopments. Consumers gravitate toward experiential retail and 10 4
convenience, and mixed use maximizes both of these platforms. 5 2
0 0
Since Inception Pre 2009 2010-2014 2015-2018
Exhibit 29 – Retail sector returns Capex as a % of NOI (L) Average annual return (R)
Annual return, rolling four-quarters (%)
18 Source: NCREIF Property Index as of September 2018. Past performance is not
indicative of future results.
16
14
12 US retail endured another year of substantial store closings,
10
8 sending a message to traditional retailers. Landlords shifted
6 their focus to attract the next wave of retailers and are
4 increasingly distributing capital to repurpose large vacancies,
2
0 exhibit 30. The short-term expectation is continued attrition of
1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q18 3Q18 tenants that inefficiently occupy buildings and disenfranchise
NCREIF Property Index Neighborhood, community & strip their target demographic.
Lifestyle & malls Power centers
Source: NCRIEF as of September 2018. Past performance is not indicative of future results.
15Farmland
Exhibit 32 – US agricultural exports
Trade anxiety
Farmland values are generally stable while farm income Billion USD
remains well below recent highs due to lower commodity 160
140
and product prices. Financial stress has not emerged to 120
any material level; however, there's considerable anxiety 100
over pending trade negotiations with China and Europe. 80
Exports are a key driver of the farm economy. The sooner 60
40
trade agreements are made, the sooner farm prices and
20
income levels will recover. 0
70 73 76 79 82 85 88 91 94 97 00 03 06 09 12 15 18
Source: USDA as of August 2018. 2018 is forecasted by the USDA. Data is based on
Fiscal Year.
Our 2019 outlook for farmland remains unchanged from US agricultural exports have been one of the fundamental
2018. Net Farm Income declined in 2018 and is expected to driving forces in the profitability and stability of the US farm
decline slightly again in 2019, as commodity prices have come economy. Exhibit 32 illustrates that export sales increased
down and stabilized from record levels in prior years. slightly in 2018 by about 2.7%. The current trade stalemate
with China and tariffs on agricultural products are a cause
for anxiety in the farm sector. It is hopeful that this will be a
Exhibit 31 – Net farm income 1970-2018 short-lived period of pain that will yield long-term gains for the
Billion USD agricultural sector.
140
120 While exports declined in 2009 to USD 96.4 billion due to the
100 global financial crisis, current USDA forecasts call for exports to
80 reach to USD 144 billion in 2018.
60
40 Farmland values were up slightly in 2018. Rents remained
20 unchanged. The average value of cropland, as reported by
0 the USDA, has increased by 173.5% over the period from
70 74 78 82 86 90 94 98 02 06 10 14 18
2001 to 2018 from USD 1,510 per acre to USD 4,130 per
Source: USDA as of August 2018. 2018 is forecasted by the USDA. acre, exhibit 33.
Net Farm Income is forecast to be USD 65.7 billion by the end
of 2018, a decrease of 13% from 2017. Net Farm Income Exhibit 33 – Average cropland value
has weakened considerably since its record level in 2013, as USD per acre
illustrated in exhibit 31. The forecast is for farm cash receipts 4,500
to remain stable in 2018 Production expenses are expected to 4,000
increase in 2018. 3,500
3,000
2,500
2,000
1,500
1,000
500
0
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Source: USDA, National Agricultural Statistics Service as of August, 2018. All data
represents beginning of year estimates.
16Overall, rent per acre of cropland (shown in exhibit 34) is up The US Department of Agriculture (USDA) predicts that farm
since 2008, showing a total gain of 61.4%, a rise from an sector equity will increase by about 1% in 2018. If so, this
average of USD 85.50 per acre to USD 138 per acre. While would be the third year in a row that equity has increased.
rents dipped slightly in 2015 and were flat in 2016 and 2017,
rents increased in the past year. Debt in the farm sector remains low with a Debt-to-Equity
ratio of 15.5 cents of debt for each 1.00 dollar of equity.
Total farm sector debt has increased in the past year by
Exhibit 34 – Average cropland rent approximately USD 13.9 billion or 3.5%. The non-real estate
USD per acre debt (crop production loans and equipment financing)
145 increased by about 2.2% while farm real estate debt increased
135 about 4.4%, USD 10.4 billion.
125
115 Rental increases have not kept pace with farmland value gains.
105 While rents have been rising the rate of increase has been
95 slower than the rate of increase in farmland values. The result
85 is lower current yields or cap rate compression.
75
65 On a national scale, using the USDA cropland data, the
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 nominal rent-to-value ratio declined from 4.7% in 2001 to
3.3% in 2018.
Source: USDA, National Agricultural Statistics Service as of August 2018. All data
represents beginning of year estimates.
The dearth of investment-grade properties available for sale is a
Most observers believe that cropland rents will slip a little in challenge for deploying investment capital. The overall strength
2019 given the outlook for income to farm operators. of the US farm economy, with solid farmland values and income
returns, provide little, if any, motivation for farmland owners
Productivity of US agriculture continues to rise. Gains in to liquidate their land holdings. Moreover, there are very few
productivity have also been one of the driving forces in US alternative investments that offer equal or more attractive long-
agricultural prosperity. The development of new technology term potential returns if one were to sell farmland.
has been the source of most of the improved productivity.
Examples of new technology would be GPS-based farming When the absence of any significant financial stress in the
systems and improved plant genetics resulting in higher yields sector is added to this, the result is very few attractive farmland
and reduced chemical usage. buying opportunities. Investors seeking to deploy capital into
farmland must be patient in this challenging market.
While income returns to farmers has declined since 2013,
there is no evidence of any significant financial stress in the US
agricultural sector.
1718
Strategy
19Strategic Insight
When we build this outlook from observable data trends Exhibit 35 – NPI NOI growth forecast
toward actionable investment themes (page 21), we establish
NOI growth (annual %)
a baseline expectation for stabilized, income-producing assets
10
that can be extended to guide broader strategies seeking
8
higher risk and positions in niche opportunities as well.
6
Strategies with higher risk-return expectations are viewed as
complementary to baseline investing, not substitutes. 4
2
Despite evolution of the market economy, the diversification 0
benefits of including core real estate investment strategies -2
2018 2019 2020
in a mixed-asset portfolio is unchanged. Strong cash flow
Apartments Industrial Office Retail Total
as a result of contractual income and relatively low price
volatility are characteristics that real estate exhibits in all typical Source: NCREIF Property Index trends report and UBS REPM Research & Strategy – US as
environments. When growth is slow and yields are low, there of September 2018. Market NOI represents the weighted average of the four property
is a tendency to make investment changes: either avoid risk types using our proprietary inventory model allocations: Apartments 36%, Industrial 15%,
Office 22% and Retail 28%.
altogether or chase returns up the risk curve. To take either of
these actions makes a statement that one knows more about
In exhibit 36, we show an underwriting guide based on the
the future than the market overall.
fundamental outlooks for the property types on pages 7 to 15.
Arrows to the left of neutral imply conservative positioning.
The current level of slow growth may persist for years,
Arrows to the right imply more aggressive growth rates, lease-
inflating the opportunity cost of staying out of the market.
up and occupancy expectations relative to long-term averages.
Alternatively, the possible loss exposure of a higher risk
strategy could become a reality in the event of an unforeseen
shock. Holding a position in a core real estate strategy is a
Exhibit 36 – Fundamental trends
hedge against these extremes, allowing investors to collect
current income regardless of the next pricing shock.
Apartments
Exhibit 37 reminds us each of the four major property types
had its time as the highest returning sector and as the lowest
Conservative
Aggressive
Industrial
performer. Income trends and expectations are driving total
return today, rather than capital market-driven appreciation as
Office
occurred between 2010 and 2015.
Our expectations for future trends in property-level income Retail
growth are given in exhibit 35. We anticipate convergence,
which is a reasonable outcome during a long expansion
Source: UBS REPM Research & Strategy – US as of December 2018. Estimates represent a
when the forces of supply and demand have time to move point in time and are subject to change.
toward equilibrium.
Exhibit 37 – NCREIF Property Index total returns by property type
%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*
Performance
19.6 12.2 14.1 9.4 13.7 17.1 23.0 21.2 19.2 20.5 -4.1 -11.0 18.2 15.5 11.6 12.9 13.4 15.3 12.3 13.1 14.3 Top
16.2 11.7 14.0 9.3 8.8 9.0 14.5 20.3 17.0 15.8 -5.8 -16.9 13.1 14.6 11.2 12.3 13.1 14.9 9.0 7.0 7.1
15.9 11.7 13.0 7.3 6.8 8.9 13.0 20.1 16.6 14.9 -6.5 -17.5 12.6 14.3 10.7 11.0 11.8 13.3 8.0 6.1 6.9
14.1 11.4 12.3 6.7 6.7 8.2 12.1 20.0 14.6 13.5 -7.3 -17.9 11.7 13.8 10.5 10.4 11.5 12.5 7.3 6.0 6.3
12.9 9.5 7.8 6.2 2.8 5.7 12.0 19.5 13.4 11.4 -7.3 -19.1 9.4 13.8 9.5 9.9 10.3 12.0 6.2 5.7 3.5
Bottom
Apartment Industrial Office Retail NCREIF Property Index total return
Source: NCREIF Property Index as of September 2018. 2018 values are year-to-date annualized. Past performance is not indicative of future results.
20Investment Themes
Focus on income Apartment - Steady as she goes
Some version of the “Focus on Income” theme appeared The apartment sector led real estate into recovery post-2009.
in each of our last four Annual Outlook publications. A decade later, the sector is experiencing its third consecutive
This theme still matters. Over the long run, real estate year of above-average construction. Vacancy remains steady
derives most of its return from income. The US is in a nationally, implying that demand is strong enough to absorb
long economic expansion, and real estate is three years new units, at least in aggregate. Some of the steadiness
into a period of stable performance that resembles our we observe at the national level masks differences between
long-run expectation. Supply and demand are finding luxury and more modest apartment complexes. With so
relative balance in most sectors, which should keep the much new construction, the high-end units are facing more
NOI expectation near a long-run equilibrium rate. It sounds rent concessions. Relief will be limited as long as construction
easy, but it is not. Older real estate assets must contend continues at or near the current pace.
with the competition from shiny new buildings. Driving
NOI growth is getting more difficult as leases signed Industrial - Quality up
during the momentum of recovery turn over into a slower Industrial continues to benefit from a large appetite for
phase of growth. value-add investments and build-to-core strategies. The
premium required by industrial investors is tight and
Operations win the day getting tighter. Portfolio decision makers should take this
Capital expenditures (CapEx) are increasing, which opportunity to sell industrial with the goal of improving
reduces the cash flow from the properties. For some quality over quantity for long-term positioning. Rent
assets, CapEx will be defensive, a requirement to maintain growth should continue to outperform other sectors
the status quo cash flow in future periods. For others, in 2019, but supply is increasing, introducing new
capital spending will reposition an asset to outperform uncertainty to future years.
its peers. Capital budgeting at the portfolio level will be
imperative for the remainder of this expansion. Operations Office - Play it safe
teams that can maximize return for CapEx outlays are Managing an office portfolio today should include a
likely to perform better. strategy to smooth out lumpy lease expirations or capital
expenditure requirements whenever possible. Of the four
Modest leverage major sectors, office is experiencing the most dramatic
Interest rates moved higher in recent years. Cap rates increase in capital spending and tenant improvement
are not expected to move much higher, which means allowances. Some of the expenditure will be defensive.
the cost of debt is now closer to the average market cap It is a required cost of maintaining a competitive position
rate. NOI growth moderated over the past three years. or securing long-term leases, as opposed to optional
Some additional cash flow will likely be needed for capital enhancements associated with material increases in
expenditure. It might be easy to borrow to finance this expected property income. Comprehensive portfolio capital
spending, but there is an aspect of debt strategy investors budgeting will be prudent in this competitive environment.
should consider other than loan-to-value ratios and the
cost of debt: flexibility. Maintaining a buffer for flexibility Retail - Diamonds in the coal mines
allows portfolio teams more freedom in decision making if Despite the dire headlines—or arguably because of them—
conditions slow or interest rates move unexpectedly. there are opportunities in the retail sector. The consumer
is strong. Retail is a diverse asset class by property size,
Put your gloves on location and tenancy. Today, we are looking for diamonds
The vast majority of commercial real estate investment in the coal mine, such as retail centers with strong
is plain old core. Yet, as yields shrink and capital locations, great demographics and attractive pricing. Don’t
requirements increase, a lot of investors are competing for overspend, but do analyze the performance of the retailers
a relatively small pool of value-add opportunities. When carefully. Investors are still exploring the effectiveness of
bidding for value-add opportunities, be sure to have a various retail repositioning strategies. Even retail experts
solid understanding of how the real estate will change need to be agile enough to plan for changing consumer
with your incremental investment and a realistic outlook preferences in the future.
on the opportunity to grow the income. Capital markets
are not likely to bail out marginal projects the way they Farmland - Trade anxiety
did when cap rates were falling. The competition is fierce. Farmland values are generally stable while farm income
"Put Your Gloves On" should not be interpreted as a call remains well below recent highs due to lower commodity
to underwrite more aggressively, but rather as a warning and product prices. Financial stress has not emerged to
to resist the inclination to increase the risk level of an any material level; however, there's considerable anxiety
investment without commensurate increased reward. over pending trade negotiations with China and Europe.
Exports are a key driver of the farm economy. The sooner
trade agreements are made, the sooner farm prices and
income levels will recover.
21This publication is not to be construed as a solicitation of an offer to
buy or sell any securities or other financial instruments relating to
Real Estate Research & Strategy – US UBS AG or its affiliates in Switzerland, the United States or any other
jurisdiction. UBS specifically prohibits the redistribution or reproduction of
this material in whole or in part without the prior written permission of UBS
and UBS accepts no liability whatsoever for the actions of third parties in this
William Hughes, Tiffany Gherlone
respect. The information and opinions contained in this document have been
Brandon Best, Christopher DeBerry, compiled or arrived at based upon information obtained from sources believed
Kurt Edwards, Samantha Hartwell, to be reliable and in good faith but no responsibility is accepted for any errors
Amy Holmes, Jim McCandless or omissions. All such information and opinions are subject to change without
notice. Please note that past performance is not a guide to the future. With
& Joshua Rome investment in real estate (via direct investment, closed- or open-end funds) the
underlying assets are illiquid, and valuation is a matter of judgment by a valuer.
The value of investments and the income from them may go down as well as
up and investors may not get back the original amount invested. Any market
or investment views expressed are not intended to be investment research.
The document has not been prepared in line with the requirements of
any jurisdiction designed to promote the independence of investment
research and is not subject to any prohibition on dealing ahead of the
dissemination of investment research. The information contained in this
For more information please contact document does not constitute a distribution, nor should it be considered a
recommendation to purchase or sell any particular security or fund. A number
of the comments in this document are considered forward-looking statements.
UBS Realty Investors LLC Actual future results, however, may vary materially. The opinions expressed are a
10 State House Square reflection of UBS Asset Management’s best judgment at the time this document
Hartford, CT 06103 is compiled and any obligation to update or alter forward-looking statements
as a result of new information, future events, or otherwise is disclaimed.
Furthermore, these views are not intended to predict or guarantee the future
1-860-616 9000 performance of any individual security, asset class, markets generally, nor are
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views expressed are as of February 8, 2019 and are a general guide to the
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