Newmark Group, Inc. · NASDAQ:NMRK
Newmark — Q3 2022 Earnings Presentation
64 slides from Newmark's earnings presentation, November 2022
Slide 1: The National Industrial Market: Conditions & Trends
3Q22 The National Industrial Market: Conditions & Trends
Slide 2: Market Observations
Market Observations 1. Economic Landscape Dominated by Uncertainty 2. Indicators Signal Industrial Demand Will Surprise to the Upside in the Short-Term ‒ Tightening financial conditions and persistently high inflation have impacted ‒ Warehouses are still at max capacity as inventories have ballooned
Slide 3: Table of Contents
TABLE OF CONTENTS 1. Economy 4 2. Industrial Demand Drivers 16 3. Industrial Leasing Market 31 4. Industrial Capital Markets 48 N E W M AR K 3
Slide 4: Economy
3Q22 NATIONAL INDUSTRI AL MARKET CONDITIONS & TRENDS REPORT Economy N E W M AR K
Slide 5: The Economy Is Not in A Recession (Yet)
The Economy Is Not in A Recession (Yet) Consumer spending is still above the pre-pandemic trend, though the rate of growth is rapidly decelerating. Real Personal Consumption Expenditures 20,000 15.0% 18,000 10.0% 16,000 14,000 5.0% 12,000 10,000 0.0% 8,000 -5.0% 6,000 4,000 -10.0% 2,000 0 -15.0% Oct
Slide 6: The Economy Is Not in A Recession (Yet): Labor Market
Persons in millions 0.0 5.0 10.0 15.0 20.0 25.0 Jan-05 May-05 Sep-05 Jan-06 U.S. Labor Market Dynamics May-06 Sep-06 Source: Bureau of Labor Statistics, Newmark Research Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 The
Slide 7: Labor Tight across Markets
Labor Tight across Markets Metro Area Unemployment Rate: August 2022 6.0% 5.0% 4.0% National Unemployment: 3.7% (October) 3.0% 2.0% 1.0% 0.0% Source: Bureau of Labor Statistics, Newmark Research Metros over 500,000 civilian labor force N E W M AR K 7
Slide 8: Fastest Wage Growth in Decades
Fastest Wage Growth in Decades Wage growth is broad-based, but lower income workers, service workers and those without a college degree are seeing the greatest wage growth. Even so, prices are rising faster, resulting in negative real wage growth. Median Wage Growth Highest on Record Wage Growth Hig
Slide 9: But A Recession Is Widely Anticipated
But A Recession Is Widely Anticipated Conference Board estimates a 96% chance of recession in the next 12 months. Moreover, a wide range of yield curve measures are inverted, including the three-month/10-year spread, which has predicted every recession within a year, going back to the 1960s, with no
Slide 10: Because Inflation Is Far From Where The Fed Wants It
Because Inflation Is Far From Where The Fed Wants It The October inflation print was a large positive surprise, with headline and core CPI dropping sharply. Median and trimmed mean CPI strip out effects of strong outliers and are therefore better indicators of underlying inflation pressure. These to
Slide 11: FOMC Hiking Rates Faster than Any Time in Modern History
FOMC Hiking Rates Faster than Any Time in Modern History FOMC being caught flat-footed by inflation earlier in the year now means “all gas, no brakes.” Effective Federal Funds Rate 4.5% '94 to '95 '99 to '00 '04 to '06 '15 to '18 2022 4.0% 2022 363 bps 2004-2006 8 months 396 bps Cumulative Change in
Slide 12: Tightening Financial Conditions
Tightening Financial Conditions Meanwhile, 10-year real yields, while the highest they have been in more than a decade, would have been considered normal in the mid 2000s. Similarly, the term premium on a 10- year bond, a measure of compensation for rate uncertainty, has increased sharply since bott
Slide 13: Rates Expected to Peak Next Year but Remain over 3% For Years to Come
Rates Expected to Peak Next Year but Remain over 3% For Years to Come Rate expectations remain highly data-dependent. The October inflation print surprised to the upside, leading to a sharp reduction in yields across the curve. Even so, markets expect short-term rates to peak near 5% and remain abov
Slide 14: Wage/Labor Scarcity-Driven Inflation Continues to Accelerate
Wage/Labor Scarcity-Driven Inflation Continues to Accelerate Food away from home is a strong predictor of wage/labor market-driven inflation in the broader economy. Unfortunately, even as supply-side drivers of inflation have waned, the wage- driven, or “endogenous” drivers of inflation have, if any
Slide 15: The More Resilient the Economy, the Harder the Fed Will Push Rates
The More Resilient the Economy, the Harder the Fed Will Push Rates Fed Increases Rates Asset Values Fall, Demand Asset Values Fall, But Declines, Wage Growth Demand/Wage Growth Slows Remain Strong Recession / Unemployment Economy Grows, But Rises, Inflation Returns to Inflation Remains High Target F
Slide 16: Determinants of Industrial Demand
3Q22 NATIONAL INDUSTRI AL MARKET CONDITIONS & TRENDS REPORT Determinants of Industrial Demand N E W M AR K
Slide 17: Macroeconomic Forecasts Revise Downward Amid Shaky Economic Conditions
Macroeconomic Forecasts Revise Downward Amid Shaky Economic Conditions Across the board, forward-looking prognostications for short- and mid-term economic growth have been revised downward successively throughout the year, signaling the trajectory of the economy is likely heading towards a recession
Slide 18: Consumer Sentiment Has Declined, But So Have Inflation Expectations
Consumer Sentiment Has Declined, But So Have Inflation Expectations Consumer sentiment has been on a downbeat trend for over a year; recent fluctuations underscore a prevailing uncertainty about the future, which will continue to impact consumer behavior. On the positive side, consumer expectations
Slide 19: Primary Economic Driver of Industrial Demand Resilient, but Normalizing
Primary Economic Driver of Industrial Demand Resilient, but Normalizing Although consumption of goods remains well above the pre-pandemic trend as consumers demonstrate resiliency to significant economic headwinds, consumer spending is decelerating. Total spending on goods in the third quarter of 20
Slide 20: As the Holiday Season Approaches, Sales are Forecast to Increase
As the Holiday Season Approaches, Sales are Forecast to Increase Holiday shoppers are expected to drive seasonal sales 7.0% higher than last year’s volume, unadjusted for inflation. This is a moderation from 2021’s double-digit annual gains. Projections for online holiday shopping range from 6.0% to
Slide 21: Consumers are Increasingly Going into Debt to Keep Spending
But Consumers are Increasingly Going into Debt to Keep Spending Consumer revolving credit, which mostly represents outstanding credit card balances, has risen nearly 13.0% year-over-year to an all-time high of $1.162 trillion. The personal savings rate fell below the long-term pre-pandemic average o
Slide 22: Home Sales Slide Against Backdrop of Aggressive Interest Rate Hikes
Home Sales Slide Against Backdrop of Aggressive Interest Rate Hikes Home sales are a significant driver of goods consumption and therefore, industrial demand. Downward pressure on home sales caused by rising interest rates, depleted consumer spending power and general economic uncertainty will contr
Slide 23: Supply Chains Still Struggling to Find a New Normal
Supply Chains Still Struggling to Find a “New Normal,” but the Worst Delays are Over Gargantuan volumes of inventory working through the supply chain have been a primary driver of systemic challenges this year, from the point of production to final delivery of finished goods. A variety of indicators
Slide 24: Delivery Times Faster; Declining Order Backlogs
Delivery Times Faster; Declining Order Backlogs Purchasing managers’ indices and small business sector survey show the same trends. Federal Reserve District Current Delivery Times Diffusion Index Slower Delivery 50 Times 40 30 20 10 0 -10 -20 -30 -40 Faster Delivery Times Philadelphia New York Texa
Slide 25: Warehouses are Still Stuffed to Capacity Amid Record Low Vacancy
Warehouses are Still Stuffed to Capacity Amid Record Low Vacancy Supply chain delays are receding, but warehouses are still contending with an excess amount of inventory, driving utilization rates higher and leaving less space for new, incoming deliveries. This dynamic will buoy industrial demand fr
Slide 26: Containerized Imports Decline from Lofty Heights
Containerized Imports Decline from Lofty Heights Monthly U.S. retail imports are decelerating from pandemic-era heights and are forecasted to continue declining through the final quarter of the year and into 2023 as many firms brought in inventory ahead of “peak season” to avoid delays or are signif
Slide 27: Import Market Share is Shifting from the West to the East
Import Market Share is Shifting from the West to the East Major U.S. Gulf and Eastern seaports have invested billions to dredge their harbors and update infrastructure to accommodate larger container vessels. Moreover, Southeastern ports in particular have land for expanded warehouse development. As
Slide 28: E-Commerce Will Continue to Be a Secular Growth Engine
E-Commerce Will Continue to Be a Secular Growth Engine (at Moderating Rates) During the pandemic, e-commerce sales soared, growing in two years what pre-pandemic trends signaled would take four. Uncertainty around the “stickiness” of consumer behavior has cleared; as spending normalizes back to mixi
Slide 29: Manufacturing a Bright Spot Despite Lower Mid-Term Demand
Manufacturing a Bright Spot Despite Lower Mid-Term Demand for Finished Goods Manufacturers are increasingly looking to produce either in the U.S. or nearby to mitigate supply chain issues and reduce geopolitical risk. Recently passed legislation – Infrastructure Investment and Jobs Act, CHIPS and Sc
Slide 30: Industrial Employment is Plateauing
Industrial Employment is Plateauing; Finding Workers is Still a Primary Issue for Many After an unprecedented surge in workforce growth during the pandemic, transportation and warehousing firms are reacting to a shifting economic landscape and adjusting labor needs. However, finding quality talent i
Slide 31: Industrial Leasing Market
3Q22 NATIONAL INDUSTRI AL MARKET CONDITIONS & TRENDS REPORT Industrial Leasing Market N E W M AR K
Slide 32: Industrial Leasing Activity Softening; Still Strong
Industrial Leasing Activity Softening; Still Strong Fueled by strong consumer spending, industrial leasing activity likely reached a cyclical high of 293.7 million square feet in the second quarter of 2021. Leasing continues to be strong but has trended downward each quarter since the peak. Coming o
Slide 33: Industrial Leasing Trends by Sector
Industrial Leasing Trends by Sector Faced with a glut of inventory, many consumer goods companies and retailers are increasingly turning to third-party logistics to solve storage and fulfillment issues. This is the third consecutive quarter with logistics & distribution/3PLs in the top spot, followe
Slide 34: Vacancy Setting New Record Lows Amid Continued Strong Demand
Vacancy Setting New Record Lows Amid Continued Strong Demand Demand has outpaced supply additions for eight consecutive quarters, squeezing vacancy to record lows. This trend is poised to reverse as deliveries accelerate over the coming quarters, bringing some measure of relief to a strained market.
Slide 35: United States Industrial Demand Rankings
United States Industrial Demand Rankings For the sixth consecutive quarter, net absorption exceeded 100.0 million square feet. Since reaching a peak in the third quarter of 2021, net absorption has declined each quarter, but remains 65.0% above the trailing three-year pre-pandemic quarterly average.
Slide 36: Industrial Demand and Supply at Near-Equilibrium
Industrial Demand and Supply at Near-Equilibrium The supply and demand imbalance of the last two years neared equilibrium in the third quarter of 2022, which is the closest the two metrics have come since the fourth quarter of 2020. With the amount of square footage under construction – 689.4 millio
Slide 37: Leasing Activity Highest in Buildings Under 300,000 SF
Leasing Activity Highest in Buildings Under 300,000 SF While leasing activity is down by an average of 22.2% across all building size ranges since the third quarter of 2021, it is important to note that leasing remains strong by recent historical standards. The average leasing activity in the third
Slide 38: Industrial Supply Pipeline Expands to New Heights
Industrial Supply Pipeline Expands to New Heights The construction pipeline is at an historically high level, 260.0% higher than the pre-pandemic three-year annual average, as developers responded to strong tenant demand, low vacancy, and escalating rents. While many construction projects are still
Slide 39: Costs for New Warehouse Construction Appear to Plateau
Costs for New Warehouse Construction Appear to Plateau After a rapid rise in new warehouse construction costs from 2021 to 2022 – with land, labor and materials all contributing to the increase – the Producer Price Index for New Warehouse Building Construction appears to be plateauing. Higher costs
Slide 40: Oversupply? A Nuanced, Market-Specific Issue
Oversupply? A Nuanced, Market-Specific Issue Comparing recent historical demand to the unleased construction pipeline reveals some markets have more than twice the annual average absorption delivering soon. With national leasing activity continuing to decelerate as high inflation outstrips earnings,
Slide 41: Industrial Sublease Volume Hovers at Long-Term Historical Average
Industrial Sublease Volume Hovers at Long-Term Historical Average (For Now) Sublease volume was in line with pre-pandemic historical levels in the third quarter of 2022 and significantly less than volume charted during the height of the pandemic, but the rate at which subleases were added to the mar
Slide 42: United States Industrial Vacancy Rankings
United States Industrial Vacancy Rankings Both the lowest vacancy and largest vacancy decline rankings continue to largely be port-serving markets and strong population-growth Sunbelt markets, as well as some regionally significant inland markets. Vacancy is likely at a cyclical low and will rise ov
Slide 43: Buildings Under 100,000 SF Have the Lowest Vacancy
Buildings Under 100,000 SF Have the Lowest Vacancy of Any Size Segment All 49 industrial markets tracked continue to experience single-digit vacancy with only 10 of those markets seeing an increase in vacancy year-over-year. The 0 to 100,000-square-foot segment represents the largest share of total
Slide 44: United States Industrial Asking Rent Rankings
United States Industrial Asking Rent Rankings Robust rent growth continues nationally with port-serving markets or markets within a one-day truck drive seeing the largest increases. With ebbing consumer demand, occupiers may be more willing to choose markets that offer substantial discounts in terms
Slide 45: Annual Industrial Asking Rent Growth Breaks Record
Annual Industrial Asking Rent Growth Breaks Record Asking rent grew by an impressive 15.1% year over year, supported by low vacancy, pent-up occupier demand, rising construction costs and construction delivery delays. Rent growth is expected to be more muted nationally as a wave of new construction
Slide 46: Industrial Rent Growth Varies Significantly Across Markets
Industrial Rent Growth Varies Significantly Across Markets The Southern California port-serving markets of the Inland Empire and Los Angeles and markets within a one-day truck drive (Las Vegas and Phoenix) are experiencing the strongest year-over-year rent growth. A global supply chain reshuffling w
Slide 47: Green Street Industrial Asking Rent Forecast
Green Street Industrial Asking Rent Forecast With numerous economic headwinds, the U.S. industrial market is entering into a period of uncertainty. Green Street is projecting much lower industrial rent growth for the top 50 industrial markets combined than seen in the last two years of the current e
Slide 48: Industrial Capital Markets
3Q22 NATIONAL INDUSTRI AL MARKET CONDITIONS & TRENDS REPORT Industrial Capital Markets N E W M AR K
Slide 49: Industrial Debt Originations Down 45% YoY in Q3 2022
Industrial Debt Originations Down 45% YoY in The Third Quarter of 2022 Year-to-date, debt originations are essentially flat with 2021, but this is a product of extremely strong activity in the first half of the year. Industrial Debt Origination Volume* 120.0 100.0 36.4 80.0 Dollars in billions 24.4
Slide 50: Origination Activity Has Decelerated Sharply Since May
Origination Activity Has Decelerated Sharply Since May While origination volumes are likely to be revised upwards as the data matures, it will almost certainly continue to show a sharp decline both sequentially and relative both to the 2021 and pre-pandemic. Refinancing activity has become uneconomi
Slide 51: Record Debt Maturities in Next Several Years
Record Debt Maturities in Next Several Years 83% of the debt maturing in 2023 was originally issued in 2020 at record low debt costs. Industrial Loan Maturities* 60 4 50 3 3 40 3 8 Dollars in billions 4 30 13 30 16 10 2 11 4 20 3 11 3 5 3 2 4 3 2 6 10 3 2 25 1 5 2 23 10 18 1 18 7 16 2 13 11 10 1 8 6
Slide 52: Borrowers Will Face Starkly Higher Costs as Loans Mature
Borrowers Will Face Starkly Higher Costs as Loans Mature Higher debt costs on refinancing will lower return for all and will give rise to a range of reactions within the market. Some borrowers will choose to pay down their debt, especially if the asset has appreciated meaningfully. Others will refin
Slide 53: Strong Price Appreciation Will Protect Against Industrial Distress
Strong Price Appreciation Will Protect Against Industrial Distress Industrial values have risen tremendously since 2015. As a result, most recent loan vintages have organically deleveraged even when accounting for the recent reduction in market values. That said, industrial loans originated in 2021
Slide 54: Industrial Sales Volume Decelerating
Industrial Sales Volume Decelerating (Though Still Historically High) Third-quarter 2022 deal volume dropped 18.0% from the same period last year. Acquisitions have become more challenging to finance amid upward pressure on interest rates, with no clarity yet on the size or frequency of future rate
Slide 55: Primary Markets See Outsized Investment; Secondary Markets See Biggest Growth
Primary Markets See Outsized Investment; Secondary Markets See Biggest Growth Despite the tumultuous economic climate, vast volumes of capital are still flowing into industrial assets across the country; 21.0% of the rolling 12-month sales volume went into just three regions: Southern California, Da
Slide 56: Industrial Buyer Composition Shifts
Industrial Buyer Composition Shifts Cross-border investors and users have cooled acquisition activity more dramatically than other types of buyer profiles. Users have largely been priced out of opportunities year-to-date and the strong dollar has dissuaded some potential cross-border investment. All
Slide 57: Record Levels of Capital Waiting on the Sidelines
Record Levels of Capital Waiting on the Sidelines to Be Deployed Fundraising has led to an incredible amount of dry powder to be deployed for commercial real estate acquisition; investor allocation to industrial product will remain high, along with multifamily. Numerous funds are being raised for al
Slide 58: Dry Powder with Leverage
Dry Powder with Leverage The $214 billion in dry powder raised for equity investments, not including dry powder raised for debt strategies, equates to a leveraged purchasing power of $612 billion, using a 65% loan-to-value ratio. We estimate that over half of this capital is targeted at residential
Slide 59: Increasing Cost of Debt Placing Pressure on Cap Rates
Increasing Cost of Debt Placing Pressure on Cap Rates Transaction cap rates on institutional grade industrial properties have continued to compress in recent quarters even as debt costs have skyrocketed, resulting in negative leverage. This is not sustainable, and in fact, these transaction cap rate
Slide 60: Public Markets Provide A More Accurate Picture
Public Markets Provide A More Accurate Picture Yield Movement Public markets have moved more quickly to reflect changing valuations. The change in corporate bond yields led the movement, suggesting that value adjustments thus far have mostly been due to general financial conditions, rather than any
Slide 61: Industrial REITs Have Sold Off Dramatically Year-to-Date
Industrial REITs Have Sold Off Dramatically Year-to-Date Extremely low industrial cap rates left the sector highly sensitive to changes in financial conditions. YTD ChartTotal TitleReturn by NAREIT Sector -11% -15% -21% -27% -31% -33% -33% -35% Lodging/Resorts Retail Commercial Financing Self Storag
Slide 62: Industrial Has Consistently Outperformed All Other Sectors
Industrial Has Consistently Outperformed All Other Sectors Industrial generated a 25.8% annualized return in the first three quarters of 2022—beating all other sectors by a significant margin as well as its own 10-year average. NCREIF National Property Index Total Return Office Industrial Retail Mul
Slide 63: Returns Are Now Rapidly Decelerating Even in The Private Market
However, Returns Are Now Rapidly Decelerating Even in The Private Market There remains a large gap between public and private market performance, which is not unusual, but the seismic changes in the macroeconomic backdrop are coming to be felt. NCREIF and other measures of private market pricing are
Slide 64: For more information
For more information: Lisa DeNight Rich Lachowsky David Bitner Jonathan Mazur Managing Director, Director, Executive Managing Director, Executive Managing Director, National Industrial Research SLC Research and National Industrial Global Head of Research National Research t 215-246-2725 t 801-578-55