2012 Global Market report - NAI Global

55% (1.1 million) owning and 45% (865,000) renting. The rental proportion for the pentup
households is relatively high, due to the relatively young age of pent-up households.
This is on top of the 3.95 million households that will form as the result of population
growth of 9 million over the next three years (based upon the historical marginal
household size of 2.28 people per household). Of these households, about two-thirds
(2.6 million households) will be single-family buyers and one third (1.3 million) will rent.
Hence, over the next three years, we anticipate 3.8 million new single family households
and 2.3 million renter households.
Based upon our statistical forecasts, we anticipate that about 1.8 million (~600,000 per
year) single-family and about 800,000 (~270,000 per year) multifamily home starts will
occur over the next three years. The net result will be that we burn through the excess
inventory, even if household formation rates remain muted. Low single-family inventory
levels will create strong upward pressure on home values, restoring some lost confidence
in homes as an investment. In fact, a crazy but true research result is that many people
use the past year’s home price increase to estimate future annual appreciation. This
means that as home prices stabilize, so too will the belief in long-term appreciation.
Office
In Q3 2011, the national office vacancy rate dropped to 14.6%, 50 and 90 bp decreases
from the previous quarter and year, respectively, according to NCREIF. However, this puts
US office vacancy above the “natural rate” of roughly 10%. Severe job losses have
resulted in increasing shadow or sublease space, along with tenant inducements. These
availabilities are expected to increase through 2011.
The Linneman Real Estate Index (LREI), which compares the fundamental demand for
space with the supply of real estate capital, reversed course in Q3 2009, after a 12-
year run-up. The supply of real estate capital (the numerator) is proxied by the
aggregate flow of commercial real estate debt, while the demand for space (the
denominator) is proxied by nominal GDP. Excluding the net real estate equity flows
from the numerator slightly understates an oversupplied market and overstates an
undersupplied market. That is, this index tends to understate capital oversupply
situations. The index equaled 100 in 1982, when the supply of real estate capital was
roughly in balance with demand.
In Q2 2011 (latest available at print), the Linneman Real Estate Index (LREI) declined
to 145, from its Q1 level of 147. This was also a year-over-year decrease from 156 in
Q2 2010. The current LREI level indicates that the balance of commercial mortgage
debt in the market exceeds demand for the space financed by that debt by 45%. The
LREI indicates that commercial real estate debt is still significantly above historical
standards. Since 1985, CRE mortgage debt to GDP averaged 18%. Today it stands
at 21%. Depending on GDP growth assumptions, this 300-bp spread indicates that
the industry should deleverage by $300 to $500 billion.
We have long said that property markets are over-leveraged on a national level. The index
has been increasing steadily since 1997, when it stood at 91. At that time, the market
had a capital shortage and vacancies were declining steadily. Previously, we indicated
that the LREI would fall in the face of the current credit crisis. In fact, commercial debt
outstanding has fallen precipitously, but given the weak economy, corresponding GDP
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