Transcript No Slide Title

Trends, Opportunities,
and Risks in
Commercial Real Estate
PPR
Property & Portfolio Research, Inc.
PPR
Portland State University’s Center for Real Estate
www.ppr.info
0
The U.S. Economy
PPR
Portland State University’s Center for Real Estate
1
Job Growth is Increasingly Weak
U.S. Job Growth
12-month moving average
Year-over-Year Growth
Year-over-Year Growth (%)
Month-to-Month (000s)
400
2.5%
350
300
2.0%
250
200
1.5%
150
100
1.0%
50
0
0.5%
(50)
(100)
(150)
Apr-05
Jul-05 Oct-05 Jan-06 Apr-06
Jul-06
Oct-06 Jan-07 Apr-07
Jul-07
0.0%
Oct-07 Jan-08 Apr-08
Source: U.S. Bureau of Labor Statistics
PPR
Portland State University’s Center for Real Estate
2
Houston
Raleigh
Austin
San Antonio
San Francisco
Seattle
Salt Lake City
Dallas - Fort Worth
New Orleans
Charlotte
Denver
Nashville
Hartford
Atlanta
Columbus
New York
Norfolk
Baltimore
Portland
Long Island
Minneapolis
San Jose
Kansas City
Washington - NoVA - MD
Pittsburgh
Indianapolis
Honolulu
Orlando
PPR54
Philadelphia
Richmond
Boston
Oklahoma City
Chicago
Memphis
North - Central New Jersey
Cincinnati
Stamford
Milwaukee
Sacramento
Miami
San Diego
Jacksonville
Phoenix
Las Vegas
Los Angeles
St. Louis
Cleveland
East Bay
Fort Lauderdale
Tampa
Palm Beach County
Orange County
Inland Empire
Detroit
Job Losses Concentrated in Housing Bust Markets
Percent Job Growth
Year-over-Year as of March
4%
PPR
East
Midwest
Portland State University’s Center for Real Estate
West
South
3%
2%
1%
0%
(1%)
(2%)
(3%)
Sources: Moody’s Economy.com; Bureau of Labor Statistics
3
The Severity of Market Employment Cycles Will Be Quite Different
MidWest
East
2009 Employment Growth
West
South
3.5%
Phoenix
Inland Empire
3.0%
San Antonio
Las Vegas
Sacramento
2.5%
Raleigh
Minneapolis
Orlando
Orange County
2.0%
East Bay
San Diego
Fort Lauderdale
Cincinnati
Columbus
Palm Beach County
1.5%
Long Island
Los Angeles
Boston
1.0%
Tampa
Hartford
0.5%
San Jose
Baltimore
Jacksonville
Cleveland
New York
Milwaukee
Austin
Atlanta
Denver
Charlotte
Portland
Salt Lake City
Dallas - Fort Worth
Seattle
Houston
Indianapolis
San Francisco
Honolulu
Nashville
Stamford
Oklahoma City
Richmond
Chicago
Philadelphia
Pittsburgh
Kansas City
Miami
0.0%
(0.02)
New Orleans
(0.02)
(0.01)
(0.01)
0.00
0.01
2008 Employment Growth
0.01
0.02
0.02
0.03
Sources: Moody’s Economy.com; PPR
PPR
Portland State University’s Center for Real Estate
4
Inflation is a Serious Concern
CPI (U.S. Consumer)
Year-over-Year Change
10%
PPI (U.S. Producer)
8%
6%
4%
2%
0%
(2%)
(4%)
94
95
96
97
98
99
00
01
02
Sources: BLS; Moody’s Economy.com; PPR
PPR
Portland State University’s Center for Real Estate
03
04
05
06
07
08
*As of April 2008
5
Is CPI Still a Good Measure of Inflation?
Year-over-Year Growth
30%
Basket Index
CPI
25%
20%
15%
10%
5%
0%
(5%)
Ja
n0
Ap 1
r01
Ju
l-0
O 1
ct
-0
Ja 1
n0
Ap 2
r02
Ju
l-0
O 2
ct
-0
Ja 2
n0
Ap 3
r03
Ju
l-0
O 3
ct
-0
Ja 3
n0
Ap 4
r04
Ju
l-0
O 4
ct
-0
Ja 4
n0
Ap 5
r05
Ju
l-0
O 5
ct
-0
Ja 5
n0
Ap 6
r06
Ju
l-0
O 6
ct
-0
Ja 6
n0
Ap 7
r07
Ju
l-0
O 7
ct
-0
Ja 7
n0
Ap 8
r08
(10%)
Basket includes a dozen eggs, a gallon of milk, a loaf of bread, a pound of ground beef, and a gallon of gas
Source: Bureau of Labor Statistics; PPR
PPR
Portland State University’s Center for Real Estate
6
What Happens When Investors Demand a Real Rate of Return?
10-Year Treasury Rate
18%
CPI Inflation
16%
14%
12%
10%
8%
6%
4%
2%
0%
71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Sources: Federal Reserve; U.S. Census Bureau
PPR
Portland State University’s Center for Real Estate
7
Forecast for the Economy is Not Pretty
• 2007 was not a great year and 2008 likely to be worse
 2008 GDP will fall under 2% for the year
 Housing and credit crunch will continue to weigh on broader economic
growth
 Only a couple hundred thousand job gains in 2008
• Risks are mainly on the downside
 Housing has had limited impact on broader consumption to date, but is
impacting retail sales growth
 Foreclosures and resets will continue to be an issue
 Inflation
• 2008 will be tale of two halves
 Much like liquidity in 2007
 Contracting GDP growth in first half to begin recovering in second
 Policy stimulus will prevent prolonged downturn
 But recovery contingent on global financial market stability by summer
PPR
Portland State University’s Center for Real Estate
8
Capital and Debt Markets
PPR
Portland State University’s Center for Real Estate
9
Fears are Easing
TED Spread
Basis Points
300
250
200
150
100
50
0
5/4/2007
4/4/2007
7/4/2007
6/4/2007
9/4/2007
8/4/2007
11/4/2007
10/4/2007
1/4/2008
12/4/2007
3/4/2008
2/4/2008
5/4/2008
4/4/2008
Sources: Federal Reserve Board; Daily Press
PPR
Portland State University’s Center for Real Estate
10
Loans ARE Still Performing Well
(Including foreclosure and REO)
Delinquency 60+
Days Percentage
2002
2003
2004
2005
2006
2007
50
60
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
0
10
20
30
40
70
Deal Age
Source: Trepp
PPR
Portland State University’s Center for Real Estate
11
Private Lenders Have Some Free Time
Number of Loans
Dollar Volume ($ Millions)
1,000
12,000
900
10,000
800
700
8,000
600
6,000
500
400
4,000
300
2,000
200
100
0
12/31/2000
12/31/2001
12/31/2002
12/31/2003
12/31/2004
12/31/2005
12/31/2006
12/31/2007
Source: Giliberto-Levy
PPR
Portland State University’s Center for Real Estate
12
Few Deals Getting Done
Monthly Transaction Volume
Warehouse
$ Billions
Retail
Office
Apartment
CMBS Issuance
70
60
50
40
30
20
10
0
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Sources: RCA; Trepp; PPR
PPR
Portland State University’s Center for Real Estate
13
NCREIF Spreads over 10-Year Treasury
(1993Q1–2008Q1)
Basis Points
500
450
350
300
250
200
Mean Plus 2 Std. Devs.
Mean Plus 1 Std. Dev.
400
150
100
50
0
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
Sources: NCREIF; PPR
PPR
Portland State University’s Center for Real Estate
14
Values Will Take Their Biggest Hit This Year
Apartment
Office
Retail
Warehouse
Value Growth
20%
15%
10%
5%
0%
(5%)
(10%)
2004
2003
2005
2006
2007
2008
2009
2010
2011
2012
Source: PPR
PPR
Portland State University’s Center for Real Estate
15
Housing
PPR
Portland State University’s Center for Real Estate
16
Housing Affordability Looks More Promising For Buyers
Affordability Index
Afford. Index
140
30-year Mortgage Rate
30-year Mort. Rate (%)
11
130
10
120
9
110
8
100
7
90
6
80
5
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
Source: Moody’s Economy.com
PPR
Portland State University’s Center for Real Estate
17
The Credit Spigot Continues To Tighten For Housing
Net % of Banks With Tighter Prime Mortgage Loan Standards
Net % of Banks With Tighter Subprime/Non-Traditional Loan Standards
New Home Sales
(‘000 SAAR)
100
1,400
80
1,200
60
1,000
40
800
20
600
0
400
(20)
200
(40)
1992Q1
1991Q1
1994Q1
1993Q1
1996Q1
1995Q1
1998Q1
1997Q1
2000Q1
1999Q1
2002Q1
2001Q1
2004Q1
2003Q1
2006Q1
2005Q1
0
2008Q1
2007Q1
Sources: Federal Reserve; Census Bureau; PPR
PPR
Portland State University’s Center for Real Estate
18
Decline in Home Sales is Accelerating
Existing SF
Year-over-Year
Change (%)
Existing Condo
New SF
30
20
10
0
(10)
(20)
(30)
(40)
(50)
Jan-00 Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08
Sources: NAR; U.S. Census Bureau
PPR
Portland State University’s Center for Real Estate
*As of April 2008
19
Unprecedented Foreclosure Activity Further Adding to Inventory
Homeownership Rate (%)
Percent of Loans Entering Foreclosure
70
0.90
69
0.80
68
0.70
67
66
0.60
65
0.50
64
63
0.40
62
0.30
61
60
0.20
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Source: MBA; U.S. Census Bureau (Thru 07Q4)
PPR
Portland State University’s Center for Real Estate
20
Falling Home Prices ≠ Dramatic Spike In Apartment Demand
Year-over-Year % Change in Existing SF Median Prices
Net Apartment Absorption (PPR54)
20
90,000
80,000
15
70,000
60,000
10
50,000
40,000
5
30,000
20,000
0
10,000
0
(5)
(10,000)
(10)
(20,000)
1984Q1
1986Q1
1988Q1
1990Q1
1992Q1
1994Q1
1996Q1 1998Q1
2000Q1
2002Q1
2004Q1
2006Q1
2008Q1
Source: NAR; PPR
PPR
Portland State University’s Center for Real Estate
21
Apartment Market Under Some Pressure
Quarterly Change in Demand
Quarterly Change in Supply
Vacancy Rate
Demand & Supply (Units)
Percentage Vacant
70,000
20
60,000
18
16
50,000
14
40,000
12
30,000
10
20,000
8
10,000
6
0
4
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
(10,000)
2
(20,000)
0
Source: PPR (08Q1)
PPR
Portland State University’s Center for Real Estate
22
U.S. Homeowner Vacancy Rate
Vacancy Rate (%)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: U.S. Census Bureau
PPR
Portland State University’s Center for Real Estate
23
Falling Treasuries Helping to Keep Cap Rates Low Despite Rising Spreads
Spread
10-Year Treasury Rate
PPR54 Apartment Spreads vs. Rent Growth
Quarterly Rent Growth
6.5%
2.0%
Forecast
6.0%
1.5%
5.5%
1.0%
5.0%
0.5%
4.5%
0%
4.0%
3.5%
0.5%
3.0%
Mar-03
(1.0%)
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Mar-12
Sources: PPR; Moody's Economy.com
PPR
Portland State University’s Center for Real Estate
24
Retail
PPR
Portland State University’s Center for Real Estate
25
The Good News About Retail
This Page Intentionally Left Blank
PPR
Portland State University’s Center for Real Estate
26
PPR54 Retail Market Fundamentals
Quarterly Change in Demand
Quarterly Change in Supply
Vacancy Rate
Demand & Supply (000 SF)
Percentage Vacant
100,000
25
80,000
20
60,000
15
40,000
20,000
10
0
90
91
92
93
94 95
96
97
98
99
00
01
02
03
04 05
06
07
08
09
10
11
12
5
(20,000)
(40,000)
0
Source: PPR (08Q1)
PPR
Portland State University’s Center for Real Estate
27
Office
PPR
Portland State University’s Center for Real Estate
28
The Market Is Weakening
Quarterly Change in Demand
Quarterly Change in Supply
Vacancy Rate
Demand & Supply (000 SF)
Percentage Vacant
60,000
30
40,000
25
20,000
20
0
15
90
91
92
93
94
95
96
97
98 99
00
01
02 03
04
05
06
07
08
09
10
11
12
(20,000)
10
(40,000)
5
(60,000)
0
Source: PPR
PPR
Portland State University’s Center for Real Estate
29
(5%)
Houston
Raleigh
Austin
San Francisco
Kansas City
Dallas - Fort Worth
Columbus
Charlotte
New Orleans
St. Louis
Indianapolis
Denver
Memphis
Jacksonville
Seattle
Atlanta
Salt Lake City
Miami
Stamford
Chicago
New York
Washington - NoVA - MD
San Jose
San Antonio
Pittsburgh
Philadelphia
Orlando
Cincinnati
Norfolk
San Diego
Palm Beach County
Sacramento
Oklahoma City
Boston
Nashville
Cleveland
Richmond
Honolulu
Phoenix
Inland Empire
Minneapolis
Long Island
Portland
Hartford
Milwaukee
North - Central New Jersey
Tampa
Los Angeles
Fort Lauderdale
East Bay
Baltimore
Detroit
Las Vegas
Orange County
Some Important Markets Are Seeing Weak Growth
Percent Office-Using Job Growth
Year-over-Year as of March 08
4%
PPR
East
Midwest
Portland State University’s Center for Real Estate
West
South
3%
2%
1%
0%
(1%)
(2%)
(3%)
(4%)
Sources: Moody’s Economy.com; BLS
30
But Definitely Not the Dot-Com Bust
2001 Recession Peak To Trough Employment 3/31/2001–9/30/2002
Forecasted/Current Peak To Trough Employment 12/31/2007–9/30/2008
4%
2%
0%
(2%)
(4%)
(6%)
(8%)
(10%)
(12%)
(14%)
Source: Moody's Economy.com, PPR
PPR
Portland State University’s Center for Real Estate
Phoenix
North - Central
New Jersey
San Diego
Orange County
Philadelphia
Atlanta
Houston
Dallas - Fort Worth
Seattle
San Francisco
Boston
Chicago
Los Angeles
Washington NoVA -MD
New York
(16%)
*Top 15 U.S. Office Markets
31
Two Years of Flat Rents
PPR54 Recent History and Forecast - Office Rent Change
Rent Growth
10%
8%
6%
4%
2%
0%
(2%)
(4%)
(6%)
(8%)
(10%)
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: PPR
PPR
Portland State University’s Center for Real Estate
32
Houston
San Francisco
Seattle
San Jose
Salt Lake City
Portland
Boston
Denver
Honolulu
East Bay
Chicago
San Antonio
Minneapolis
New Orleans
Dallas - Fort Worth
North - Central New
Oklahoma City
St. Louis
Charlotte
Indianapolis
Raleigh
Orlando
PPR54
Sacramento
Washington - NoVA - MD
Atlanta
Richmond
Jacksonville
Cincinnati
Baltimore
Columbus
Memphis
Philadelphia
Tampa
Pittsburgh
Stamford
Fort Lauderdale
Milwaukee
Nashville
Los Angeles
Norfolk
Long Island
New York
Kansas City
Inland Empire
Miami
Hartford
Austin
Cleveland
San Diego
Palm Beach County
Las Vegas
Detroit
Orange County
Phoenix
2008 Rent Growth by Metro
11.1%
East
PPR
Midwest
West
Portland State University’s Center for Real Estate
South
8%
6%
4%
2%
0%
(2%)
(4%)
(6%)
Source: PPR
33
Cap Rates Rising Across the Board
Median Cap Rate By Quarter
Primary
Secondary
Tertiary
11.0%
10.5%
10.0%
9.5%
9.0%
8.5%
8.0%
7.5%
7.5%
7.0%
7.0%
6.5%
5.7%
6.0%
5.5%
5.0%
4.5%
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Sources: PPR; Real Capital Analytics
PPR
Portland State University’s Center for Real Estate
34
Overview of the U.S. Warehouse Market
PPR
Portland State University’s Center for Real Estate
35
PPR54 Warehouse Market Fundamentals
Quarterly Change in Demand
Quarterly Change in Supply
Vacancy Rate
Demand & Supply (000 SF)
Percentage Vacant
25
50,000
45,000
40,000
20
35,000
30,000
15
25,000
20,000
10
15,000
10,000
5
5,000
0
(5,000) 90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
0
Source: PPR (08Q1)
PPR
Portland State University’s Center for Real Estate
36
The Demand Forecast Has Some Upside
Wholesale Trade Inventory Growth
Total Import/Export Growth
Wholesale Trade Sales Growth
Year-Over Growth (%)
Warehouse Net Absorption
Net Absorption
(million SF)
20%
80
15%
60
10%
40
5%
20
0%
0
(5%)
(20)
(10%)
(40)
(15%)
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
(60)
0
Sources: U.S. Census Bureau; Moody’s Economy.com; PPR
PPR
Portland State University’s Center for Real Estate
37
Annual Warehouse Supply as % of Inventory
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
PPR
Portland State University’s Center for Real Estate
38
National Distribution Hubs Are More Volatile
Local Rent Growth
Regional Rent Growth
National Rent Growth
8%
Forecast
6%
4%
2%
0%
(2%)
(4%)
(6%)
1989 1990 1991 1993 1994 1996 1997 1999
2000 2002 2003 2005 2006 2008 2009
2011
2012
Source: PPR
PPR
Portland State University’s Center for Real Estate
39
Warehouse NOI Growth vs. Cap Rate Increase (%)
Annual NOI Growth
Annual Cap Rate Change (%)
Value Appreciation
5%
4%
3%
2%
1%
0%
(1%)
(2%)
(3%)
2008
PPR
2009
2010
Portland State University’s Center for Real Estate
2011
2012
Average
40
Warehouse Markets Are Inefficiently Priced
Forecast Cumulative NOI Growth
(08Q2–12Q4)
30%
Regional
National
Local
Cheap, relatively speaking, and a
strong NOI growth forecast!
Strong NOI growth forecast,
but expensive.
Orange County
Los Angeles
25%
Salt Lake City
San Francisco
Minneapolis
East Bay
Inland Empire
20%
Raleigh
Tampa
Seattle
Chicago
15%
Baltimore
Miami
New York
Washington - NoVA - MD
Memphis
Boston
San Diego
Indianapolis
Norfolk
Orlando
Las Vegas
Charlotte
Hartford
Cincinnati
Houston
Honolulu
5%
Stamford
Nashville Columbus
Richmond
Portland
San Jose
10%
Sacramento
Denver
Atlanta
Philadelphia
Oklahoma City
Cleveland
North - Central New Jersey
Kansas City
Phoenix
Palm Beach County
San Antonio
Fort Lauderdale
Dallas - Fort Worth
0%
Low NOI growth and too expensive!
Milwaukee
Austin
Jacksonville
Pittsburgh
New Orleans
Cheap, but not a lot of upside in NOI.
St. Louis
Detroit
(5.0%)
(1.5%)
(1.0%)
(0.5%)
0.0%
0.5%
1.0%
1.5%
2.0%
08Q2 Going-in Cap Rate Relative to Average
PPR
Portland State University’s Center for Real Estate
41
What to Do?
PPR
Portland State University’s Center for Real Estate
42
Conclusions
• Short-term Keys to Success (2008)
 Market selection and asset/risk management
 Investor communication
 Patience
• Mid-term (2009)
 Be a buyer of risk and a provider of liquidity
 Have faith in the U.S. economy
 Look for signs of improvement and be ready to move quickly
• Longer-term (2010-12)
 Participate in early development opportunities
 But be wary of next supply wave
PPR
Portland State University’s Center for Real Estate
43