#1WRA 2024 Single-Family Housing and Commercial Real Estate Outlook Mark J. Eppli, Ph.D. Director, Graaskamp Center for Real Estate Wisconsin School of Business, University of Wisconsin October 2, 2023 W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE#22024 Single-Family Housing and Commercial Real Estate Outlook Single-family Housing Market I. A. Sales Volume and Months of Inventory II. B. Home Prices Single-Family Mortgage Rates and Inflation. A. Mortgage Rates B. Inflation Housing Demand and Supply III. IV. Commercial Real Estate WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE#3REALTOR data on home sales is a difficult place to start.... Weaker Home Sales - Existing-Home Sales Below Pre-COVID... Down 23% Year-to-Date 7,000,000 Seasonally adjusted annualized sale pace 6,500,000 6,000,000 5,500,000 5,000,000 4,500,000 4,000,000 3,500,000 3,000,000 2017 Jan 2017 - 2018 Jul Jan 2018 - 2019 - 2019 Jul Jan Jul 2020 Jan 2020 2021 2021 Jul Jan Jul 2022 Jan 2022 2023 - Jul Jan W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: National Association of REALTORS, Real Estate Market Outlook, August 2023.#4total housing sales are expected to stabilize to 2022 levels in 2024 ... Total Housing Sales in the U.S. (thousands) Association of Mortgage Fannie Mae Bankers Assoc. Home Builders Year Estimates Estimates Estimates 2021 6,891 6,896 6,189 2022 5,671 5,099 5,167 2023 4,915 4,990 4,524 2024 4,889 5,360 5,043 2023-2024 Change -0.5% 7.4% 11.5% W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Sources: Urban Institute, "Housing Finance at a Glance," August 2023 and Graaskamp Center.#5Wisconsin residential sales are down 23% in 2023 .. 100,000 Wisconsin Residential Sales Volume (July Y-O-Y) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: WRA and Graaskamp Center.#6W 1999 2000 2 2001 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE 4 00 8 www with 2002 2003 - 2004 2005 10 12 limited U.S. for-sale housing supply is hurting sales volume .. Months' Supply Months 14 2006 2007- 2008 2009 - 2010- Wy лил 2011- 2012- 2013 2014- 2015- 2016- 2017- 2018 2019 2020 2021 2022 2023 Source: Urban Institute, "Housing Finance at a Glance," August 2023, p. 21. 3.3#7Level . . Wisconsin's listing inventory is down 74% from 2016 levels .... FRED-Housing Inventory: Active Listing Count in Wisconsin 40,000 36,000 32,000 28,000 24,000 20,000 16,000 VIEW MAP 12,000 8,000 Aug 2023: 9,596 4,000 Jan 2017 Jul 2017 Jan 2018 Jul 2018 Jan 2019 Jul 2019 Jan 2020 Jul 2020 Jan 2021 Jul 2021 Jan 2022 Jul 2022 Jan 2023 Jul 2023 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: Federal Reserve Economic Data.#8while tight, Wisconsin's supply of housing has loosened up over the past year. Months Months Months Urban-Rural Classification Supply Price Supply Region Supply Metropolitan Counties 2.9 $0 - $124,999 2.8 Central 3.5 Micropolitan Counties 3.4 $125,000 $199,999 2.3 North 5.0 Rural State 4.8 $200,000 $349,000 3.3 $350,000 $499,999 $500,000+ State 2.6 Northeast 3.2 - 3.8 South Central 3.1 6.2 Southeast 2.9 3.3 West 3.6 State 3.3 W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: Wisconsin REALTORS Association, July 2023 Wisconsin Real Estate Report and the Graaskamp Center.#9W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Home Prices#10-2% 3% . . . National home prices have maintained increases for the last six months. . . The 10-city and 20-city indexes show minor annual increase after five months of declines 18% CoreLogic S&P Case-Shiller Index, Year-Over-Year Change 13% 8% June 2013 December 2013 June 2014 December 2014 June 2015 December 2015 June 2016 December 2016 W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE June 2017 December 2017 June 2018 December 2018 June 2019 December 2019 June 2020 December 2020 June 2021 December 2021 June 2022 December 2022 June 2025 -10-City -20-City -National July 2023 1.0% 0.1% 0.9% Source: Selma Hepp, Corelogic, Selma Hepp, US CoreLogic S&P Case-Shiller Index Switches Gears in July, Increases 1% Year Over Year, September 26, 2023.#11and the Midwest is leading home price increases in the U.S. . . . 90 Washington D.C. YEAR-OVER-YEAR % CHANGE < 1 1-3 3-5 5-7 7+ W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: Corelogic, US Home Price Insights, September 2023#12Wisconsin is leading the Midwest in home price growth. Wisconsin and Wisconsin Regional Median House Prices (July y-o-y) • Year Wisconsin Central North Northeast South Central Southeast West 2013 $158,000 $120,000 $125,000 $135,000 $184,000 $170,000 $154,000 2014 $159,500 $120,000 $130,000 $129,700 $182,000 $172,750 $154,700 2015 $168,000 $130,000 $139,000 $141,500 $192,000 $184,900 $162,000 2016 $174,350 $133,000 $145,000 $145,000 $208,200 $184,500 $169,692 2017 $185,000 $135,500 $150,000 $154,458 $225,000 $200,250 $185,500 2018 $195,900 $149,450 $169,450 $161,000 2019 $214,950 $155,250 $179,000 $173,040 2020 $222,500 $165,000 $190,000 $184,250 $240,000 $215,000 $260,000 $231,000 $205,000 $262,000 $240,000 $210,000 $189,750 2021 $256,000 $194,000 $225,500 $219,900 $315,000 $267,000 $256,000 2022 $279,000 $212,500 $260,000 $239,900 $330,000 $290,000 $289,900 2023 $300,000 $220,000 $260,000 $275,000 $350,000 $310,000 $287,500 One-year Growth Rate 7.5% 3.5% 0.0% 14.6% 6.1% 6.9% -0.8% 10-year Growth Rate 6.6% 6.2% 7.6% 7.4% 6.6% 6.2% 6.4% WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: WRA and Graaskamp Center.#13Wisconsin home prices were stable as interest rates doubled in 2022. . . . 145 140 135 3-year House Price Growth and Inflation 130 National 11.59% Wisconsin CPI 10.75% 125 5.20% 120 115 110 105 W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE 100 1/1/2020 3-year House Price Index for the U.S. and Wisconsin and Inflation 3/1/2020 5/1/2020 7/1/2020 9/1/2020 National House Price Index 11/1/2020 1/1/2021 3/1/2021 5/1/2021 7/1/2021 9/1/2021 11/1/2021 1/1/2022 3/1/2022 5/1/2022 7/1/2022 9/1/2022 CPI 11/1/2022 1/1/2023 -Wisconsin House Price Index Source: Federal Reserve Economic Data and Graaskamp Center.#14150 5-year House Price Growth and Inflation 140 National 8.91% Wisconsin 8.28% 130 CPI 3.95% 120 W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE 160 over the past 5-years, Wisconsin home prices doubled inflation. 5-year House Price Index for the U.S. and Wisconsin and Inflation . . 100 110 4/1/2018 7/1/2018 10/1/2018 1/1/2019 4/1/2019 7/1/2019 10/1/2019 1/1/2020 4/1/2020 7/1/2020 10/1/2020 1/1/2021 4/1/2021 7/1/2021 10/1/2021 1/1/2022 4/1/2022 7/1/2022 10/1/2022 1/1/2023 -National House Price Index Wisconsin House Price Index CPI Source: Federal Reserve Economic Data and Graaskamp Center.#15.over the past 10-years, ditto the five-year inflation comments. . 10-year House Price Index for the U.S. and Wisconsin with Inflation 220 200 10-year House Price Growth and Inflation 180 National 7.06% Wisconsin 5.95% CPI 160 2.72% 140 W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE 120 100 4/1/2013 9/1/2013 2/1/2014 7/1/2014 12/1/2014 5/1/2015 10/1/2015 3/1/2016 8/1/2016 1/1/2017 6/1/2017 11/1/2017 4/1/2018 9/1/2018 2/1/2019 7/1/2019 12/1/2019 5/1/2020 10/1/2020 3/1/2021 8/1/2021 1/1/2022 6/1/2022 11/1/2022 National House Price Index Wisconsin House Price Index -CPI Source: Federal Reserve Economic Data and Graaskamp Center.#16550 500 40-year House Price Growth and Inflation 450 National 4.33% 400 Wisconsin 4.03% CPI 2.84% 350 300 250 200 150 W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE 100 4/1/1983 ... .over 40-years housing is still a great investment. 40-year House Price Index for the U.S. and Wisconsin and Inflation 9/1/1984 2/1/1986 7/1/1987 12/1/1988 5/1/1990 10/1/1991 National House Price Index -Wisconsin House Price Index 3/1/1993 8/1/1994 1/1/1996 6/1/1997 11/1/1998 4/1/2000 9/1/2001 2/1/2003 7/1/2004 12/1/2005 5/1/2007 10/1/2008 3/1/2010 8/1/2011 1/1/2013 6/1/2014 11/1/2015 4/1/2017 CPI Source: Federal Reserve Economic Data and Graaskamp Center. 9/1/2018 2/1/2020 7/1/2021 12/1/2022#17W Single-Family Mortgage Rates and Inflation WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE#18Percent Current mortgage rates exceed the average 6.62% rate the decade before Great Recession .... FRED-30-Year Fixed Rate Mortgage Average in the United States 20.0 17.5 15.0 12.5 10.0 7.5 5.0 30-Year Mortgage Interest Rate Thu, Sep 28, 2023: 7.31 2.5 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: Federal Reserve Economic Data.#19($ billions) 400 350 300 250 200 150 100 50 0 -50 . . the Fed stopped purchasing MBS in March 2022 and rates soared.. . ■Gross issuance ■Total Fed purchases 2002 2003 2004 2005 2006 W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: Urban Institute, "Housing Finance at a Glance," June 2023, p. 35. 94.01 -0.14#202.00 4.00 Sep-82 Sep-83 Sep-84 6.00 Sep-85 Sep-86 8.00 10.00 12.00 14.00 Sep-87 Sep-88 Sep-89 Sep-90 Sep-91 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Sep-92 7 Weeks the Fed usually reverses course quickly, don't expect so this time . . . . 14 Weeks Sep-93 Sep-94 Sep-95 Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Fed Funds Rate 1982-2023 30 Weeks Sep-07 60 Weeks 33 Weeks Sep-20 Sep-21 Sep-22 Source: Federal Reserve Economic Data.#21Fed monetary tightening is working, but they will be cautious.. Private-sector monthly payroll Personal-consumption-expenditures price index growth, three-month average* 800,000 7.5% 600,000 5.0 400,000 2.5 FED INFLATION TARGET 200,000 0 -2.5 2022 '23 2018 "19 *20 21 "22 "23 *Seasonally adjusted W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Change from year earlier Annualized rate over six months Annualized rate over three months Source: Wall Street Journal, September 11, 2023.#22Percent why the Fed caution - low unemployment rates creating wage inflation ... FRED Unemployment Rate 15.0 -Unemployment Rate in Wisconsin 12.5 10.0 7.5 5.0 2.5 U.S. Unemployment Rate Wisconsin Unemployment Rate Unemployment Rate: Unemployment Rate in Wisconsin: Aug 2023 3.8 Aug 2023 2.9 0.0 1980 1985 1990 1995 2000 2005 2010 2015 2020 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: Federal Reserve Economic Data.#23W Mortgage market Context: slide #1 of 3 Mortgage Statistics Percent of Homes with a Mortgage Average FICO Credit Score Average Mortgage Payment United States 62% 739 $1,358 Wisconsin 63% 750 $1,058 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: Federal Housing Finance Agency, National Mortgage Database, Mortgages Outstanding on June 30, 2022 and the Graaskamp Center.#24W Mortgage market context slide #2 of 3 .. Mark-to-Market Loan to Value (all mortgages in the U.S.) Percent Average Percent less Percent Percent greater than LTVR than 60% 60-70% 70-80% 80% United States 48% 78% 19% 10% 1% Wisconsin 45% 70% 9% 7% 0% WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: Federal Housing Finance Agency, National Mortgage Database, Mortgages Outstanding on June 30, 2022 and the Graaskamp Center.#25W Mortgage market context slide #3 of 3 Interest Rate at Origination (all mortgages in the U.S.) Average Interest Percent less Percent Rate than 3.0% 3.0-4.0% Percent 4.0-5.0% Percent greater than 5.0% United States 3.6% 28% 44% 19% 10% Wisconsin 3.7% 28% 43% 19% 11% WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: Federal Housing Finance Agency, National Mortgage Database, Mortgages Outstanding on June 30, 2022 and the Graaskamp Center.#26Housing Demand and Supply W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE#272500 2000 1500 Housing demand wildly exceeded expectations for the period 2019-2021 ... Average Annual Household Growth (Thousands) 1000 871 650 500 2011-2013 1,248 1,031 959 927 1,460 1,370 1,985 2,371 2,184 1,217 2013-2015 2015-2017 2017-2019 2019-2021 American Community Survey American Housing Survey JCHS Projected Rate for 2018- 2028 Housing Vacancy Survey W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: Daniel McCue, Joint Center for Housing Studies, "The Surge in Household Growth and What it Suggests about the future of Housing Demand," January 17, 2023.#28from 2000-2007 housing was overbuilt by 2.5 million units and since underbuilt by 5.6 million units. . . . FRED New Privately-Owned Housing Units Started: Total Units 2,800 Thousands of Units 2,400 2,000 1,600 1,200 800 Average 1.433 million = Aug 2023: 1,283 400 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: Federal Reserve Economic Data.#29new household formation (demand) in Wisconsin averages 15,494 per year for the period 2010-2021. .... 2,500,000 2,450,000 2,400,000 2,350,000 2,300,000 2,250,000 2,200,000 Households in Wisconsin 2,150,000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: WRA, Census and Graaskamp Center.#30W 15,000 10,000 5,000 1994 25,000 limited new platted lots is hurting new home construction . . . 20,000 1994-2007 average = 14,229 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Total Platted Lots in Wisconsin 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2008-2022 average = 3,584 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: WRA and Graaskamp Center.#31housing demand outpaced lot supply by 6,300 units per year since 2011. 50,000 40,000 30,000 20,000 10,000 Supply of Finished Lots and Demand for Single-Family Homes in Wisconsin 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 -10,000 W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Platted Lots Household Growth (65% homeownership) Source: WRA, Census and Graaskamp Center.#32The single-family housing market in 2024 The Fed will keep short-term interest rates high through mid 2024 Long-term mortgage interest rates will fall to the mid-6% range by mid-year and to the upper-5% to low-6% range at year end 2024 High rates will hurt buyer demand for the next six months Buyer demand will return in second half of 2024 with the market acceptance of 6% mortgage rates Mortgage credit markets are in great shape Long-term housing demand remains robust Inventory of for-sale homes will remain tight. Summary: Transaction volume will remain weak at roughly current levels, with flat home prices through mid-2024 and increase 2-3% in the second half of 2024 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE#33Commercial Real Estate W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE#34Commercial real estate transaction volume is down 60% YOY. . . Monthly Transaction Volume and Pricing $200b 180 180 160 140 120 100 80 50 60 40 20 '18 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE '19 '20 "21 Individual Portfolio '22 '23 Entity RCA CPPI 160 140 120 100 80 60 40 00 20 20 Source: Real Capital Analytics, "The Big Picture," August 2023.#35Dry Power - Real Estate Equity Raised Residential . . $612 billion in equity "dry powder" awaits opportunity, Industrial Niche $63 which is focused on Office $27 residential and industrial property. . . Hotels $26 . WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Retail $15 $135 $325 $0 $50 $100 $150 $200 $250 $300 $350 Source: Newmark Research, "The National Industrial Market: Trends and Conditions," p. 58.#36. . . however ... INFLATION THWAK AKITHWACKITA ६५ THE FED WWW TAWACK THE BANKING WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: Economist, March 16, 2023.#37W FRED Percent 80 100 80 60 40 20 0 -20 .... banks are dramatically tightening lending standards. ... · Net Percentage of Domestic Banks Tightening Standards for Commercial Real Estate Loans with Construction and Land Development Purposes Net Percentage of Domestic Banks Tightening Standards for Commercial and Industrial Loans to Small Firms Percent of Banks tightening C&I lending standards Percent of Banks tightening CRE lending standards -40 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Q1 2017 Q1 2018 Q1 2019 Q1 2020 Q1 2021 Q1 2022 Q1 2023 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMt of Banks tightening CENTER for REAL ESTATE C&I lending standards PercentSofuBankStighteningerve Economic Data. CRE lending standards#38refinance activity is crowding out new construction lending market . . CRE Lending: Small and Medium Banks 45% Commercial Mortgage Maturities $ Billions $600 Bank 40% 35% 30% 25% 20% 15% 10% 5% Insurance CMBS $500 GSE Debt Fund Other $400 $300 $200 $100 Over $1 Trillion 0% <$100M $100M-$1B $1-$10B $10-$250B > $250B 50 Bank Assets "18 '19 20 "21 '22 '23 '24 '25 Source: Goldman Sachs Data as of 3/1/2023. WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE#39. • property values have declined broadly over the past year. Change in Commercial Property Values 5% 0% 0.0% -5% -10% -15% -20% -11.6% -15.9% Past Month Past 12 Months From Recent Peak WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Change in Property Values Source: Green Street, August 4, 2023.#40• . property values fell in late 2022/early 2023 but have stabilized. . . . Cumulative Change in CPPIⓇ: Past Seven Years 125% 100% 75% 50% 25% 0% Indust Man Home Self-Storage -Apartment -Lodging Health Care Net Lease Strip Retail -25% -Office Mall -50% 7/17 7/18 7/19 7/20 7/21 7/22 7/23 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Source: Green Street, data through August 4,2023.#4130.0% 20.0% property income growth has favored industrial and apartment... NCREIF NOI Growth (2010-2023Q2) 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% 20101 20103 20111 20113 20121 20123 20131 20133 20141 20143 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE 20151 20153 20161 20163 20171 20173 20181 20183 20191 20193 20201 20203 20211 20213 -Apartment Industrial -Office Retail 20221 20223 20231 Source: Real Capital Analytics and Graaskamp Center.#4212.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 20101 cap rates compressed from 2010-2022Q2 but have expanded since ... NCREIF Cap Rates by Property Type (2010-2023Q2) 20103 20111 20113 20121 20123 20131 20133 20141 20143 20151 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE -Apartment 20153 20161 20163 20171 -Industrial 20173 20181 20183 Office 20191 20193 20201 20203 20211 Retail 20213 20221 20223 20231 Source: Real Capital Analytics and Graaskamp Center.#4312.00% 10.00% 8.00% 6.00% 4.00% Spread Average = 1.02% 2.00% 0.00% -2.00% -4.00% 19973 negative leverage is limiting transaction volume. Cap Rates, Bond Yields and Cap Rate-Bond Yield Spread 19982 19991 19994 20003 20012 20021 20024 20033 20042 20051 20054 20063 20072 20081 20084 20093 20102 WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE Cap Rate to Bond Yield Spread 20111 20114 20123 20132 20141 20144 20153 20162 20171 20174 BBB Bond Yields Cap Rate 20183 20192 20201 20204 20213 20222 Source: NCREIF, Federal Reserve Economic Data and Graaskamp Center. 20231 Current Spread = -0.38%#44Commercial Real Estate Outlook Commercial Real Estate Transaction Volume Negative leverage will limit transaction volume through mid-2024 Debt availability will limit transaction volume through mid-2024 Price discovery around normalized cap rates and interest rates will spur transaction volume in the second half of 2024 We do not have a systemic banking crisis emerging Equity remains plentiful for multifamily and industrial however, retail and especially office will remain equity capital constrained. Commercial Real Estate Prices (a story of haves and have-nots Apartment and industrial fundamentals remain strong Limited retail supply will create great investment opportunities Office fundamentals and capital flows are very difficult WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE#45WRA 2024 Single-Family Housing and Commercial Real Estate Outlook Mark J. Eppli, Ph.D. Director, Graaskamp Center for Real Estate Wisconsin School of Business, University of Wisconsin October 2, 2023 W WISCONSIN SCHOOL OF BUSINESS UNIVERSITY OF WISCONSIN-MADISON TOGETHER FORWARD® JAMES A. GRAASKAMP CENTER for REAL ESTATE