capital markets overview and outlook how did we get here? where are we going? 2009 review / 2010...

CAPITAL MARKETS OVERVIEW and OUTLOOK

How Did We Get Here?Where Are We Going?

2009 Review / 2010 Preview

Presented by:Michael Balan, Associate DirectorMarcus & Millichap Capital Corp.

The Most Reliable Financing - The Most Competitive

RatesThe Most Reliable Financing - The Most Competitive

Rates

How Did We Get Here?

1. Abundant, cheap credit during years 2005 to 2007 fuels real estate expansion – values increase in an unprecedented manner

2. Credit analysts identified sub-prime mortgage deterioration in spring of 2008

3. This realization and resulting concern over real estate and credit markets froze structured finance (CMBS, ABS, RMBS, CDO, etc,)

4. Sudden halt in structured finance crippled secondary loan market,commercial banks and life companies

5. Deterioration of commercial banks resulted in significant pull-back of consumer credit and spending

6. Pull-back in consumer spending negatively impacts real estate over time



Rates

No More ATM!



Rates

What Happened in 2009?

A whole lot of nothing! Deal velocity off 69% from ’08, which was off 62% YOY Gov’t stimulus DID NOT stimulate deal velocity Gov’t stimulus DID stave off a run on banks

140 U.S. banks failed (26 failed in 2008 and 3 in 2007) Investors focused on saving assets not buying new ones

TREASURY HAD THEIR FOOT ON THE GAS (TARP, TALF, PPIP, bailouts, reversed mark to market, allowed servicers to anticipate defaults). YAY!

REGULATORS HAD THEIR FOOT ON THE BRAKES! Hired more auditors, stepped up bank audits, consistently criticized banks handling of valuations and writedowns. BOO!



Rates

The Most Reliable Financing - The Most Competitive Rates

U.S. Commercial Real Estate Investment Trends Dollar Volume by Property Type

$0

$100

$200

$300

$400

$500

00 01 02 03 04 05 06 07 08 09*

Apartment Office Retail Industrial

To

tal D

olla

r V

olu

me

(bill

ion

s)

* Preliminary Estimate

U.S. Sales $1 million and aboveSources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics

-85%

% From ‘07 Peak


Sources of Acquisition Financingby Dollar Volume Through 3Q

29%

11%

7%

8%

12%10%

30%

26%

13%

7%

14%

3%15%

6%

16% 16%

15%

28% 27%

1%4%

1%

0%

25%

50%

75%

100%

2007 2008 2009*

Assumed Debt

Regional/Local Bank

Seller Financed

Government Agency

Bank -nat'l, int'l, inv bnk

Financial

Insurance

CMBS

* Through 3QSources: Marcus & Millichap Research Services, Real Capital Analytics

Per

cen

t



Rates

Where Are We Today?

1. Delinquencies remain low by historical standards; however…

2. Assets moved to special servicing increasing rapidly: CMBS special servicing 8.17 percent of total outstanding


CMBS Special Servicing Exposure by Unpaid Balance Rising Significantly

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

May

-05

Nov-0

5

May

-06

Nov-0

6

May

-07

Nov-0

7

May

-08

Nov-0

8

May

-09

Nov-0

9

% o

f O

uts

tan

din

g C

MB

S

Nov-09, 8.17%

Jan-09, 1.71%Jan-08, 0.52%Jan-07, 0.52%

Jan-06, 1.00%

Sources: Marcus & Millichap Research Services, Real Point



Rates

Where Are We Today? (cont.)

1. Financing generally constrained with underwriting extremely tight:

1. Deals are getting done with primarily local and regional banks with some limited life company participation

2. Lenders scrutinizing global cash flow, personal credit, contingent liabilities and running background checks

3. Closer attention being paid to maturing leases, tenant viability and location (remember location, location, location?) It’s the main thing but not the only thing!

2. Lenders face two overriding concerns:1. Property fundamentals continue to deteriorate

2. Property valuation is foggy at best

3. Significant volume of maturing debt


Estimated Commercial Debt Maturities by Lender Type

$0

$100

$200

$300

$400

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

CMBS Commercial Banks/Thrifts

Fannie, Freddie, FHA and Ginnie Mae Credit Companies, Warehouse, and Other

Life Insurance Companies

Bill

ion

s $

Sources: Marcus & Millichap Research Services, Foresight Analytics



Rates

CAPITAL MARKETS OUTLOOKWhere Are We Headed?

1. Commercial banks’ market participation will be choppy

2. Life insurance are re-entering the market – capacity limited

3. TALF extension should help start a correction phase for CMBS

Wide market impact will be limited for some time

4. Banks poised to sell more notes and REO

5. Mortgage rates will be range bound with underwriting staying tight as lenders remain conservative

What strategy should I employ as a borrower with a loan that is maturing, or a property that is now underperforming:

Hand back the keys? Sell the property to preserve what equity I may still have? Work with the existing lender to gain some relief?



Rates

CAPITAL MARKETS OUTLOOKWhere Are We Headed?

Interest rates increasing

Lenders looking for a way to be profitable

Lenders are looking to take in deals they are confident can get done

65% LTV is the new 80% LTV!

Borrowers are starting to be more realistic about what is available in the market

Regulators continue to focus on bank capital levels

Smaller deals, credit tenant and sensible deals getting done.


10-Year Treasury Rate

2%

3%

4%

5%

6%

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

Ten-Year Treasury

Rat

e

Sources: Marcus & Millichap Research Services, Federal Reserve

CAPITAL MARKETS OVERVIEW and OUTLOOK

How Did We Get Here?Where Are We Going?

2009 Review / 2010 Preview

Presented by:Michael Balan, Associate DirectorMarcus & Millichap Capital Corp.

capital markets overview and outlook how did we get here? where are we going? 2009 review / 2010...

Documents

reliable financing

competitive ratesthe

competitive ratesu

competitive ratesno

competitive rateshow

competitive rateswhere

competitive rateswhat

real pointthe