Transcript George Washington University Presentation

Commercial Real Estate, Policy Intervention,
and the Mortgage Performance Outlook
December 3 2009 〆
National Association for Business Economics
Sam Chandan PhD FRICS
‣ President and Chief Economist
Real Estate Econometrics
‣ Adjunct Faculty of Real Estate
The Wharton School of the University of Pennsylvania
General Business Conditions
40
20
Growth
0
Contraction
-20
-40
Philadelphia Fed Survey General Business Index
-60
Texas Manufacturing Outlook Survey General Business Index
Empire State Manufacturing Survey General Business Conditions Index
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
-80
2007
2
2008
2009
Sources: Federal Reserve Banks of Dallas, New York, and Philadelphia
Reuters / Michigan Consumer Sentiment Index
3
100
400
90
200
80
0
70
-200
60
-400
50
-600
40
-800
2007
2008
2009
Month-to-Month Non-Farm Employment Change (Thousands)
Consumer Sentiment Tracks the Labor Market
Consumers Drag on the Economy
8%
Year-to-Year Percent Change in Income, Savings, and Spending
Source: Bureau of Economic Analysis
First Fiscal Stimulus
6%
4%
2%
0%
-2%
Personal Consumption
Personal Income
Savings Rate
-4%
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
2008
4
2009
Asset Price Adjustments
190
Moody's/REAL Property Price Indices
2000 Q4 = 100
Apartments
Industrial
Office
Retail
170
150
Final Concentration
Guidance Released
130
For Comment Concentration
Guidance Released
110
Loan Workout
Guidance Released
90
4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
2001
5
2002
2003
2004
2005
2006
2007
2008
2009
Cyclicality in Risk Aversion
140
120
Transaction Volume by Sector
Source: Real Capital Analytics
Retail
Industrial
100
Office
Apartment
80
Billions $
Final Concentration
Guidance Released
Risk is Underpriced;
Investment is Opportunistic;
Hold Periods Shorten
Risk Dominates
Pricing;
Assets Prices and
Transaction
Volumes Fall;
Price
Discovery
Slows
60
40
20
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2001
6
2002
2003
2004
2005
2006
2007
2008
2009
TALF, Credit Markets, and Credit Costs
Sources: Federal Reserve Board of Governors, British Bankers
Association, Commercial Mortgage Alert, Real Estate Econometrics
CMBS Spread / Basis Points
1,200
CMBS Spreads
10 Year AAA Spread
Over Swaps
1,000
450
400
350
300
800
250
600
200
TALF Expansion to CMBS:
Illiquidity Premium Falls,
Default Premium Does Not
400
150
100
TED Spread
200
2007 Average CMBS AAA Spread
0
7
500
50
0
2008
2009
TED Spread / Basis Points
1,400
Outflows from Commercial Real Estate
40
Change in Commercial Real Estate Mortgage Balances
35
Source: Federal Reserve (L.220)
30
Commercial and Savings Banks
25
ABS Issuers
$ Billions
20
Life Companies
15
10
5
0
-5
-10
-15
Q2
Q3
2008
8
Q4
Q1
Q2
2009
Banks’ Market Participation
New Lending and Renewals/Modifications by Largest Banks
Source: Treasury Department, Bank Filings
16
Modifications
14
New Mortgages
12
Billions $
10
8
6
4
2
0
Feb
9
Mar
Apr
May
Jun
Jul
Aug
Adjustments in Bank Credit Standards
100
Share of Banks Tightening Commercial Real Estate Lending Standards
Source: Federal Reserve
80
When do you anticipate that your bank will normalize
credit standards for commercial real estate lending for
investment-grade borrowers?
60
Year
Domestic
Banks
Foreign
Banks
2010
22.4%
28.6%
2011
20.0%
14.3%
40
20
0
-20
-40
Q1
1
0
Q2
Q3
2004
Q4
Q1
Q2
Q3
2005
Q4
Q1
Q2
Q3
2006
Q4
Q1
Q2
Q3
2007
Q4
Q1
Q2
Q3
2008
Q4
Q1
Q2
2009
Q3
Commercial Mortgage Defaults
Mortgage Performance by Asset Class
Higher commercial real estate
mortgage concentrations at
regional and community banks,
but higher default rates at
larger national institutions.
1
1
Wide variation in observable
outcomes across institutions
within different classes that is
unrelated to concentration or
geographic focus
Commercial Mortgage Defaults
6%
End-of-Year Default Rate for Commercial Mortgages
Held by Depository Institutions
Source: FDIC, Real Estate Econometrics
5%
Projection
Trend
4%
3%
2%
1%
0%
1992
1
2
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
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