© 2002 society of industrial and office realtors® investment real estate in the 21 st century...
TRANSCRIPT
© 2002 Society of Industrial and Office REALTORS®
INVESTMENT REAL ESTATE in the 21INVESTMENT REAL ESTATE in the 21stst Century Century
ROBERT J. NAHIGIAN, SIOR, CREROBERT J. NAHIGIAN, SIOR, CRE
AUBURNDALE REALTY CO.
NEWTON, MASS.
© 2002 Society of Industrial and Office REALTORS®
Why Real Estate?
• Why do people invest in real estate?
• TO MAKE MONEY?
• Really?
© 2002 Society of Industrial and Office REALTORS®
AVERAGE MILLIONAIRE
• MILLIONAIRES BET. $1-10 MILL
• AVERAGE INCOME: $120,000
• MANY BETWEEN: $50-75,000
• Source: Money Fall 2002, Millionaire Next Door/
© 2002 Society of Industrial and Office REALTORS®
Wealth BuildingWealth Building
• Biggest Consumption Category
• Income Taxes
• Lifestyle
© 2002 Society of Industrial and Office REALTORS®
Wealth BuildingWealth Building
• Income Taxes
Income FederalEarners Revenues
1% = 31%
5% = 53%
50% = 96%Source: Wall St. Journal 2/28/00
© 2002 Society of Industrial and Office REALTORS®
Wealth BuildingWealth Building
• Lifestyle
Feds 36% 39.1%
State 5 - 7 %Self-Employment $Medicaid $Deduction Phaseouts $___________
60%/92%
© 2002 Society of Industrial and Office REALTORS®
US WEALTHY PROFILE
• U.S. TOP 5% EARNED = 22.4% OF 2001 INCOME
• U.S. HIGHEST SINCE 1967
• 2001 MIDDLE-INCOME = 14.6%
• Soiurce: Boston Globe, 7/6/03
© 2002 Society of Industrial and Office REALTORS®
STATE 2000 INC. TAXES
• NY RES. EARNING $200,000+ = 50+% OF STATE PERSNL TAXES
• NY TAXES = 7.5% FOR $100,000
• CA. 44,000 MM = 1/3 OF TAXES
• CT. WANTS MM TAX = 5.9%• Barrons: May 19, 2003
© 2002 Society of Industrial and Office REALTORS®
BUILDING WEALTH
• INCOME IS NOT WEALTH
• BEING RICH IS NOT BEING WEALTHY
• CONSUMPTION vs. ACCUMULATION
© 2002 Society of Industrial and Office REALTORS®
Investing
• Discretionary Income (Surplus)
• Placing It/ Commodity
• Future Consumption
© 2002 Society of Industrial and Office REALTORS®
ReturnsReturns
Double Your Investment
• 2/10 Rule
• 14 7/8 % compounded
© 2002 Society of Industrial and Office REALTORS®
InvestingInvesting
Savings Rate
U.S.: 2000 - 1.3% LBYM
U.S.: 2002 3.9%
Japan 20% = $117,000
China 40% = $1 Trillion
Your Client: MM 15-20% MinimumSource: Barron’s 5/28/01; US New 2/10/03; 3/24/03;
© 2002 Society of Industrial and Office REALTORS®
WHO OWNS THE WEALTH?
• 2002 U.S. Average Credit Card Debt: $9,000
• 65 and Older Aver. CC Debt Since 1992 = $23,000
• Wealthiest 10% Own 90% of U.S. Financial Assets
• Source: Smart Money Oct. 2001/U.S. News 6/3/02/RERC 2003
© 2002 Society of Industrial and Office REALTORS®
WHO OWNS THE WEALTH?
• Elderly Own $4-42 Trillion
• Average American has 40% Assets in R.E.
• BabyBoomers have More Worth at Their Age and 73% own investments
© 2002 Society of Industrial and Office REALTORS®
WHO OWNS THE WEALTH?
• 99.4% of U.S. Businesses are Small: Less than 20 Workers
• They produce 50% of U.S. Goods/80% of Job Growth
• Average Millionaire is a Small Entrepreneur• Source: Investors Weekly 8/12/02; 7/7/03
© 2002 Society of Industrial and Office REALTORS®
DEMOGRAPHIC IMPACT
• Seniors (pre-1938) = 35 mill/$23,048 HH
• War Babies (1938-45) = 24 mill/$44,992
• BabyBoomers (1946-64)= 83 mill/$55,729
• EchoBoomers (1965-81) = 60 mill/$38,878
© 2002 Society of Industrial and Office REALTORS®
U.S DEMOGRAPHICS
• 1970-2003
• NO. OF HOUSEHOLDS: -16%
• AVER. SIZE OF SFDU: 40%
Source: Legg Mason Fall’03
© 2002 Society of Industrial and Office REALTORS®
U.S. DEMOGRAPHICS
• POP. UNDER 18 YRS. OLD:
• 1964: 36%
• 2003: 26%
• 2020 Proj.: 24%
© 2002 Society of Industrial and Office REALTORS®
ENTRANCE STRATEGIESENTRANCE STRATEGIES
PERSONAL GOALS/OBJECTIVESPERSONAL GOALS/OBJECTIVES RISK THRESHOLDRISK THRESHOLD AGEAGE MARITAL STATUSMARITAL STATUS RETIREMENT ($1,300,000.00)RETIREMENT ($1,300,000.00) TUITION ($200,000 per child)TUITION ($200,000 per child)
© 2002 Society of Industrial and Office REALTORS®
RETIREMENT v. TUITION
• Life Expectancy 1950s = 65-68 years
• 2002: Aver. 76.2; Man = 74.4; Female = 79
• If 70, then Man = 81; Female 84
• Source: FT Winter 2002, 1060AM 10/25/02, 5/12/03
© 2002 Society of Industrial and Office REALTORS®
COLLEGE TUITION
•2001-02 Aver. College Tuition = 5.8%
•2002: $28-32,000/Year
•2017: $239,576 Private 4 Year Cost•Source: Barrons 4/21/03; Money 1/03; US News 1/01
© 2002 Society of Industrial and Office REALTORS®
BenchmarkBenchmark
• 10 Year Treasury Note
• S&P 500/FHMA: Safe?
• 1 VS. 30
• Demographic Impact
© 2002 Society of Industrial and Office REALTORS®
BENCHMARK
• Risk v. Reward
• What is Risk?
• Year 1654
• “Dead Capital”
© 2002 Society of Industrial and Office REALTORS®
REAL ESTATE OWNED
• 1999: 8.3 YEARS• 2000: 7.7 YEARS• 2001: 8.5 YEARS• 2002: 8.6 YEARS• 2003est: 8.8 YEARS
• Source: RERC Winter 2002/Winter2003
© 2002 Society of Industrial and Office REALTORS®
Risk v. RewardRisk v. Reward
• (Cash) 10 Yr. T-Note + 600/700 BP
• (Debt) Cost of Debt + 150/200 B.P.
•T-Note v. Debt Gap = 200BP (Record)
© 2002 Society of Industrial and Office REALTORS®
INVESTMENT RETURNS
• 2002: T-Note = 3.8%
• 2002 R.E.= 11.5%
• 20 Yr. Record Spread = 770BP
© 2002 Society of Industrial and Office REALTORS®
Rates of Return to BeatRates of Return to Beat
• Inflation (SURPLUS)
• Cost of Money
• Index of Goal
© 2002 Society of Industrial and Office REALTORS®
1980 - 20001980 - 2000
Required v. Realized Returns• R. E. : 12.9% v. 9.5%
• Stock Market: 11%• Stock 101 Years: 10.1%
• Housing Averages: 5-6%
Source: LM Annual 2002 Report
© 2002 Society of Industrial and Office REALTORS®
S&P 500 RETURNS
• S&P 1/’50 – 3/’03 = 3.58% aver.
• 2002 S&P = -22.6%
• S&P 6/02-6/03 = 35%
• Source: T. Rowe Investor 6/03
© 2002 Society of Industrial and Office REALTORS®
VALUATION BENCHMARKS
• T-Note 1960-02 Aver. = 7.4%
• Highest = 14.7% (10/81)
• T-Bill 1960-02 Aver. = 6.1%
• Highest = 14.3% (2/82)• Source: T. Rowe Price Fall 2002
© 2002 Society of Industrial and Office REALTORS®
U.S. 1982-2002 NACREIF
• 2002 S&P = -22.6%
• Commercial = 9.47%
• Apts. = 11.7% (best)
• Housing = 3-6%
© 2002 Society of Industrial and Office REALTORS®
2002 TOTAL INDEX RETURNS
• NCREIF SINCE 1977: 9.41%
• S&P 500 SINCE 1977: 13.73%
• 3 M. T-BILL SINCE 1977: 6.96%
• Source: RERC 2003 Outlook; SmartMoney, 2/02
© 2002 Society of Industrial and Office REALTORS®
2002 TOTAL INDEX RETURNS
• NAREIT SINCE 1984: 11.40%
• CPI SINCE 1977: 4.44%
• US HOUSE PRICE 1979-01: 4.40%
• Source: RERC 2003 Outlook; SmartMoney, 2/02
© 2002 Society of Industrial and Office REALTORS®
1982-2002 NACREIF
• Cap Rates Aver. = 9.55% (All)• Last 50 Years Caps = 9.00%
• Cash Return = 6.85% (All)
• Returns are coming down• Cheap Debt Covers Sins• Source: CRE Dallas 2002 Convention
© 2002 Society of Industrial and Office REALTORS®
U.S. HOUSING
• 1979 Housing Price: 4.4%
• 50 yr. Average Housing: 5-6% aver.
• In 1996 Prices: 5.3%
• From 1997-02 Prices: 6.2% aver.
© 2002 Society of Industrial and Office REALTORS®
U.S. HOUSING
• 2001 US Housing Prices Up = 5.5%
• 2002 US Housing Prices Up = 6.9%
• US May’02-May’03 Med. Prices = 7.7%• Source: Money, June 2003/Boston Globe 7/5/03
© 2002 Society of Industrial and Office REALTORS®
U.S. HOUSING
• 2002 U.S. Housing Ownership = 70%
• 2000 Mass Housing Ownership = 62%
• Highest U.S. Met Apprec. 10 yrs. = 9.2%
• 1982-2002 Income = 13.8% Aver. Incr.
© 2002 Society of Industrial and Office REALTORS®
HOUSEHOLD GROWTH
• 25-29 Age Group Households Down = 1.5%Per Year Since Mid-1990’S
• 25-29 Age Group Household Up = 1.8% aver. 2002-2010
• Source: Barrons 4/7/03
© 2002 Society of Industrial and Office REALTORS®
US HOUSING RETURNS
• San Jose: 1990-95 = - 13%• NYC 1989-1991 = - 3% aver.
• Boston, Hartford, NY sharply dropped in early 1990s
• Timing a housing purchase is tough
• Source: Money, June 2003/Boston Globe 7/5/03
© 2002 Society of Industrial and Office REALTORS®
US 2002 1ST TIME HOME BUYERS
• SINGLE WOMEN #1 = 18%
• SINGLE MEN = 9%
• Source: MAR Digest 7/23/03
© 2002 Society of Industrial and Office REALTORS®
BOSTON HOUSING RETURNS
• BOSTON has been Up until 2003
• 1992-02 Boston Prices = 8.9% aver.
• Boston 1999-2002 Prices = 11.67% aver.
• Experts: Boston is now due to drop• Source: Boston Globe 7/7/02; Money 10/02
© 2002 Society of Industrial and Office REALTORS®
BOSTON HOUSING
• Boston SFDU Prices: July ‘01-’02 = 20.3%
• Mass Prices: July ‘02-Jan. ‘03 = - 7.2%• Mass Prices: April ’02- April ’03 = - 10%
• SmartMoney: Boston 36% Overvalued
• Source: Inman News 4/29/03; Boston Globe 1/26/03; 7/14/02
© 2002 Society of Industrial and Office REALTORS®
U.S. HOUSING
• U.S. Bankruptcy is up 50% in last 10 yrs.
• US ‘02 Record Foreclosures = 1.8 % of all home loans
• US 3RD Q’02 Foreclosures = 1.18%
• US 1st Q’03 Foreclosures = 1.20 %• New Record• Source: Inman News 4/29/03; Boston Globe 1/26/03; 7/14/02
© 2002 Society of Industrial and Office REALTORS®
MASS HOME FORECLOSURES
• Mass ’02 Foreclosures on U.S. Backed Loans = 2.2%
• Mass 1st Half ’02 = 2,409 (4,506 tot. ’02)• Mass 1st Half ’03 = 2,241 (total ’03?)
• Mass Foreclosure Recent Record ’91 =12,750
• Source: Inman News 4/29/03; Boston Globe 1/26/03; 7/14/02
© 2002 Society of Industrial and Office REALTORS®
MASS HOME SALES
• Mass ’01-’02 Home Prices Up = 18.6%
• Mass Home Sales Jan– May’03 to 2002 = - 9%
• Mass 4/02-4/03 Home Prices Down = -10%
• Mortgages Rates Fell ’01 TO ’03 = 7%
• Source: Inman News 4/29/03; Boston Globe 1/26/03; 7/14/02; Realtor Digest 6/24/03
© 2002 Society of Industrial and Office REALTORS®
“CRYSTAL BALL?”
• January, 2001-2002 U.S. Housing Up = 10.2%
• US Home Sales 4/03-5/03 Up = 12.5% annually adjusted (New US Record of Total Sales)
• US May’02-May’03 Med. Price Up = 7.7%
• Source: Inman News 4/29/03; Boston Globe 1/26/03; 7/14/02; Realtor Digest 6/24/03;USA Today.com 6/30/03
© 2002 Society of Industrial and Office REALTORS®
“CRYSTAL BALL”
• Mass Unemployment May’02 - May ’03 = UP 5.1% TO 5.5%
• US Dispos. Inc. ’03-’04 Est.= 2.6%-3.7%
• US/Mass House Borrowers Exceed 36% Debt to Income
• Source: Inman News 4/29/03; Boston Globe 1/26/03; 7/14/02; Realtor Digest 6/24/03;USA Today.com 6/30/03; NAR7/03
© 2002 Society of Industrial and Office REALTORS®
U.S. HOUSING
• U.S. BabyBoomers Housing Owners = 76%
• Will They Be the Positive Catalyst?
• Smart Money: A House is An Expense• Source: NAR 7/03
© 2002 Society of Industrial and Office REALTORS®
Why Real Estate?Why Real Estate?
• Inflation - Hedge
• Cost of Capital
• Leases in Place
• Expenses
• Escalators
© 2002 Society of Industrial and Office REALTORS®
WHY REAL ESTATE?
• Stable Return
• Diversification
• Hard Assets vs. Financial
• High Yields
• No Scandals
© 2002 Society of Industrial and Office REALTORS®
WHY REAL ESTATE?
• It is Trust-Worthy
• Easy to Understand
• Positive Leverage
• Other Choices Stink Right Now• Source: CRE Dallas Convention-2002
© 2002 Society of Industrial and Office REALTORS®
WHY REAL ESTATE?
• No Taxes on Appreciation
• Less Volatile
• It is Cyclical: Bubbles
• It is not a Growth Commodity
© 2002 Society of Industrial and Office REALTORS®
DOWNSIDE FOR 2003
• Too Many Buyers
• Seeking 8% Returns
• Driving Values Up and Rates To Perhaps 4% Returns
© 2002 Society of Industrial and Office REALTORS®
Commercial Lease Yield Model: 14.5% (DEFLAT.)
– Cash Flow 44/80%
– Mort. Reduction (13%)
– Tax Benefits 6%
– Appreciation 63/20%
–Source: Herb Krunsick, SIOR, CRE, CCIm
© 2002 Society of Industrial and Office REALTORS®
BOIBOI
Band of Investment Approach
NOI/ Cap Rate = Value
• Japan: 4%
• Brazil: 150%
© 2002 Society of Industrial and Office REALTORS®
SIOR THANKS YOU