the economic outlook for real estate investors and decision makers - ccim live! session

Finding New Foundations

Key Tenets(CCIM Speech 2010)

• Re-set expectations

• Re-pricing vs. liquidity

• CRE versus the alternatives

• Market Bifurcation

• CRE is relatively strong for the long run

The Global Environment(CCIM Speech 2010)

• Massive asset devaluation

• Accelerated deleveraging

• Continued re-pricing

• Unprecedented times for our generation

Economic Headlines

• For Americans, recovery feels like recession

• OECD figures indicate Global economy continues to darken

• In this economy, productivity comes without hiring

• Stagnant economy biggest factor as foreclosures pile up

Economic Environment

• Unemployment rate hovering around 9% since Jan. 2010– Total employment is 7 million below

peak in 2007

• Long-term unemployed (without job for longer than 6 months) at 6 million– In 2001 recession, this figure peaked at

2 million

Economic Environment

• Downward revisions in GDP– 0.4% 1Q11, 1% 2Q11• Not strong enough for job growth

–Well below 20-year average of 2.7%

• Consumer confidence is at lowest point since spring 2009– 7th lowest level in history– Due to stock market, political

environment, unemployment, etc.

Current Housing Market

• Housing starts at 60-year low

• Home sales are struggling

• Foreclosures at historic highs

• Approximately 1/5 of homeowners with mortgages are underwater

Glimpse of Positive Housing Market

• Record-high home affordability• Rising apartment rents• Overcorrection in home price to

income and rent ratios• Unsold homes inventory is declining• 40-year low on newly constructed

inventory

Source: National Association of Realtors, Oct. 2011.

Source: National Association of Realtors, Oct. 2011.

Financial Market Headlines

• Clamping down on high-speed stock trades

• Stock market: worst quarter since 2008

• Stock market gloom spreads. Blame Greece.

• Buckle up: stock market volatility could get worse

CRE Headlines

• US property investors are more bearish• Commercial property on firm ground• Real estate investors running for safety• Property investors concentrate on

prime quality assets in core markets• Recovery slows in commercial real

estate• Commercial property values flat amid

economic fears

Financial Markets Comparison

Investment Comparisons

Availability vs. Discipline of Capital

• Most active in providing financing:

– Banks: 55%

– Insurance Companies: 26%

– REITs: 12%

– Private Equity: 7%

CCIM Members – ITQ Respondents

Capital Markets

• Increase in loans led by: health care, hotels, retail, multifamily

• Loans for CMBS increased 638% in 2Q11 compared to year earlier

• Delinquency rate for loans held in CMBS in 2Q11 reached highest level since 1997 (when started)

• During 2Q11, CRE mortgage originations outpaced paying off/down existing loans, for first time in 1 ½ years

Capital Markets

• CRE mortgage originations more than doubled in first half of 2011, compared to same period a year ago

• Life insurance companies increased loan volume by 87%

• Portfolio lending by banks increased 150%

Quarterly Commercial Mortgage Commitmentsby Life Insurance Companies

Billions of Dollars

Source: American Council of Life Insurance Companies (ACLI)a. Annual figures may not equal the sum of quarterly figures due to change in reporting.

RERC Pre-Tax Yield Rate

RERC IRR vs. 10-Year TreasurySpread

RERC Going-in Capitalization Rate

RERC Going-In Cap vs. 10-Year TreasurySpread

Vacancy Rates

Apartment Size-Weighted Average PPU (12-month trailing)

Industrial Size-Weighted Average PPSF (12-month trailing)

Office Size-Weighted Average PPSF(12-month trailing)

National Transactions(12-Month Trailing)

CCIM Members – ITQ Respondents

• Compared real estate sales activity in their areas today compared to:– 3 years ago: -21%– 1 year ago: 8%

• Expected activity:– 1 year from now: 12%– 3 years from now: 26%

Source: National Association of Realtors, REIS, Aug. 2011.

Source: National Association of Realtors, REIS, Aug. 2011.

RERC’S NCREIF Forecast

State of CRE

• Bid-ask spread is narrowing, especially in apartment properties

• Apartments are outperforming all other property types (appreciation)

• Lower cap rates: – Low interest rates– Availability of capital– Safety of CRE relative to alternatives

• Competitive bidding and low cap rates lead investors to secondary markets– Also shifting to inland metros

• Net absorption is increasing, while vacancy rates are declining

• Rents are mixed across the property types

State of CRE

38

1990s vs. this Cycle

• 1990’s: no liquidity for CRE at any price

• 1990’s: out of sync with alternatives• Excess supply with massive over-

leverage (It was like a casino) 120% LTVs

• Fundamentals were deplorable: Prices at 35% of replacement costs

• NYC almost bankrupt; 20% obsolescence in Retail

39

Key Tenets(CCIM Speech 2011)

• Re-set expectations

• Re-pricing vs. liquidity

• CRE versus the alternatives

• Market Bifurcation

• CRE is relatively strong for the long run

40

“The difficulty lies not so much in developing new ideas as in escaping from old ones.”

- John Maynard Keynes

Change Your Opinion

41

Optimist

New definition of an optimist:

“Things are so bad now they can’t get any

worse!”

Questions?

Thank You!