Transcript Document

Overview of the
US Commercial Real Estate Investment Market
January 20, 2009
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Current economic environment…
 Economy is contracting
 Employment has declined for 11 consecutive months
 Financial Markets have collapsed
2
 Recession with a capital “R”
How’d we get here???
Current account deficit has been growing…
3
Source: Bureau of Economic Analysis, Cushman & Wakefield
Federal fiscal deficit has been growing for decades…
U.S. Federal Fiscal Deficit
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Source: Bureau of Economic Analysis, Cushman & Wakefield
Until recently stock market has been steadily rising…
Dow Jones Industrial Average
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Source: Dow Jones, Cushman & Wakefield
Long-term interest rates have been falling…
6
Source: Moody‘s Economy.com, Cushman & Wakefield
Household savings has been declining…
7
Source: Moody‘s Economy.com, Cushman & Wakefield
Household debt has been growing…
Billions of US Dollars
Aggregate Household Debt
Source: Federal Reserve Board
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What has fueled this?
■ Fed Chairman Ben Bernanke: “A global savings glut.”
■ Mercantilist trade policies depress value of foreign currencies
relative to the dollar
- Encouraging U.S. consumerism
- Discouraging U.S. savings
- Depressing U.S. industrial production and exports
■ Result: Huge capital transfers from emerging to mature economies
- Causing run-up in asset prices
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What are the results?
■ Massive capital transfers from emerging to mature economies
■ Easy debt, excessive leverage, lax discipline by lenders and
investors (e.g., example of residual values)
■ Causing huge bubbles in asset prices, including residential and
commercial real estate
■ Over-leveraged financial institutions catastrophically vulnerable to
pricing corrections
■ WE ALL SAW THE BUBBLE, BUT IGNORED THE INEVITABLE
IMPACT ON THE FINANCIAL SECTOR
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Business is retrenching, shedding jobs…
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Source: US Bureau of Labor Statistics
Retail sales are falling…
Year-over-year change (3-month moving average)
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Source: U.S. Census Bureau
The response – massive monetary and fiscal stimulus…
Economic Slow Down
Period: Jul-95 to Mar-97
Cause: S&L Crisis
Credit Crunch
Period: Aug-98 to Jan-99
Cause: Asian Flu
Recession
Period: Sep-01 - 02
Cause: Tech Bubble Bursts
and Sept 11
Credit Crunch and Recession
Period: Aug-07 to ???
Cause: Residential Subprime
Contagion
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Source: US Federal Reserve Board
Forecast
U.S. Gross Domestic Product: 1980 – 2011
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Source: Moody’s Economy.com, Bank of America, Cushman & Wakefield Capital Markets Group
The U.S. Real Estate Market
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Gateway CBDs holding up reasonably well…
Q3-08 CBD VACANCY RATES
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Suburban markets beginning to feel the pain…
Q3-08 SUBURBAN VACANCY RATES
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Suburban vacancies increased from year ago…
Q3-08 SUBURBAN VACANCY RATES
Change from One Year Ago
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Global investment volumes declined substantially…
Global Real Estate Investment
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* Preliminary 2008 Volume
Source: Cushman & Wakefield, PropertyData, RCA
U.S. investment sales volumes returning to normal levels?
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* Preliminary 2008 Volume
Source: Real Capital Analytics, Cushman & Wakefield Capital Markets Group
The market has its challenges…
• There is a crisis of confidence and a perception that markets
haven’t “bottomed out” – stalling any material sales activity.
• Absence of available debt is severely reducing the pool of capable
buyers.
• Properties with assumable financing, or with available seller
financing, and reasonable remaining term (minimum three years)
fare better .
• Foreign investors, once looking at the U.S. as a safe haven for real
estate capital, face similar if not more severe credit issues.
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There are now more sellers than buyers able to close…
All Property Offerings & Closings*
Credit Crunch
US, Monthly
In 2008:
$250b offered
$138b closed
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’07
*Excludes Privatizations
Source: Real Capital Analytics, Inc.
‘08
Office properties have suffered the steepest decline…
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* Preliminary 2008 Volume
Source: Real Capital Analytics, Cushman & Wakefield Capital Markets Group
Property yields returning to historic norms…
Derived Office Cap Rate Spread to Treasuries
14%
Average 10YR Treasury
Yield:
93q4-08q4 Average: 5.25%
90q1-08q4 Average: 5.68%
12%
10%
*
8%
*4th Quarter Office Derived Cap Rate forecasted using RCA data.
Source: NCREIF, Moody’s Economy.com, Real Capital Analytics, Cushman & Wakefield Capital Markets Group
08q1
07q1
06q1
Spread
05q1
04q1
03q1
02q1
01q1
00q1
10-yr Treasury Yield
98q1
97q1
96q1
95q1
88q1
87q1
86q1
85q1
84q1
83q1
-6%
94q1
Derived Office Transaction Cap Rate
99q1
-4%
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93q1
-2%
Average Cap Rate to
Treasury Spread:
93q4-08q4 Average: 2.87%
90q1-08q4 Average: 2.57%
92q1
0%
91q1
2%
90q1
4%
Average Cap Rate from
NCREIF:
93q4-08q4 Average: 8.12%
90q1-08q4 Average: 8.25%
89q1
6%
CMBS/conduit financing is essentially gone…
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Source: Mortgage Bankers Association
Re-pricing of capital & risk translates to falling property values…
Opportunistic Capital
Assumptions
Post Credit Crunch
Jun 25
2007
Scenario
Property Cost
Year 1 NOI
NOI Annual Increases
Initial Cap Rate
Reversion Year 11 Cap Rate
First Mortgage LTV
Mezz LTV
First Mortgage Loan Term
Mezz Loan Term
First Mortgage Amort Term
Mezz Amort Term
10 Year Treasury
Spread to First Mortgage Rate
First Mortgage Rate
Mezz Rate
Year 11 NOI
Residual Value
Reversion Costs
Leveraged Equity Return Hurdle
$ 100.00
$
5.89
3.00%
5.89%
6.89%
75.00%
5.00%
10 years
10 years
Interest Only
20 years
5.09%
127 bps
6.36%
9.00%
$
7.91
$ 114.87
1.50%
Oct 3 2007
$
$
83.95
5.89
3.00%
7.01%
7.50%
65.00%
15.00%
10 years
10 years
30 years
20 years
4.51%
293 bps
7.44%
11.00%
$
7.91
$ 105.46
1.50%
Jan 22 '08
no mezz
Jan 23 '08
w/mezz
Sep 16 '08
no mezz*
Sep 16 '08
w/mezz*
Theoretical
Dec 3 '08
no mezz
Theoretical
Dec 3 '08
w/mezz
$
$
$
$
$
$
$
$
$
$
$
$
76.63
5.89
3.00%
7.68%
7.75%
60.00%
N/A
10 years
10 years
30 years
20 years
3.54%
331 bps
6.85%
13.00%
$
7.91
$ 102.05
1.50%
77.77
5.89
3.00%
7.57%
7.75%
60.00%
15.00%
10 years
10 years
30 years
20 years
3.54%
331 bps
6.85%
13.00%
$
7.91
$ 102.05
1.50%
$
$
63.46
5.89
0/0/0/3
9.27%
8.00%
60.00%
0.00%
10 years
10 years
30 years
N/A
3.31%
365 bps
6.96%
15.00%
7.46
93.19
1.50%
63.46
5.89
0/0/0/3
9.27%
8.00%
60.00%
0.00%
10 years
10 years
30 years
N/A
3.31%
365 bps
6.96%
15.00%
$
7.46
$ 93.19
1.50%
$
$
54.82
5.89
0/0/0/3
10.74%
8.50%
60.00%
0.00%
10 years
10 years
30 years
N/A
2.70%
580 bps
8.50%
15.00%
7.46
87.71
1.50%
$
$
54.82
5.89
0/0/0/3
10.74%
8.50%
60.00%
0.00%
10 years
10 years
30 years
N/A
2.70%
580 bps
8.50%
15.00%
7.46
87.71
1.50%
10.50%
12.50%
14.50%
14.50%
18.00%
18.00%
20.00%
20.00%
CHANGE IN VALUE
-16.1%
-23.4%
-22.2%
-36.5%
-36.5%
-45.2%
-45.2%
Debt Terms Price Change Component
-9.0%
-14.3%
Equity Cost Increase/ Reduced NOI Growth Component
-15.9%
-13.4%
* Mezz rates include amortized up front points.
Source: Cushman & Wakefield Capital Markets Group
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