emerging trends in real estate 2011 - netforum.uli.org · emerging trends in real estate 2011...

Emerging Trends in Real Estate® 2011

Presenters:Dean Schwanke

Senior Vice President, ULI andExecutive Director, ULI Center for Capital Markets and Real Estate

Emerging Trends in Real Estate 2011

Longest published annual real estate outlook—32nd consecutive year

Most predictive industry forecast

Based on surveys/interviews with 875 industry leaders

Jointly published by PWC and ULI

Emerging Trends 2011:

Shrunken industry

Lower returns

Restrained development prospects

Reduced credit availability

Crimped profits

Recognition of substantial losses(30-50% haircuts on asset values)

Entering the Era of Less

Investment Barometer

1

5

9

2004 2005 2006 2007 2008 2009 2010 2011

Buy

Hold

Sell

Source: Emerging Trends in Real Estate 2011 survey.Note: Based on U.S. respondents only.

Abysmal

Fair

Excellent

Closing Gap

Ample Availability of Equity

Investors with dry powder have plenty of options


Substantially Undersupplied

14.9%

ModeratelyUndersupplied

20%

In Balance

10%

Substantially Oversupplied

22.5%

Moderately Oversupplied

32.7%

Real Estate Capital Market Balance Forecast 2011

Still Limited Availability of Debt


Moderately Undersupplied

32.8%

SubstantiallyUndersupplied

46.1%

ModeratelyOversupplied

5.7%

In Balance 13.7%

Real Estate Capital Market Balance Forecast 2011

SubstantiallyOversupplied

1.6%

Slack in Underwriting


Less Rigorous32.8%

Remains the Same40.6%

More Rigorous26.6%

CMBS Redux

0

50

100

150

200

250

97 99 01 03 05 07 09 11* 13*

U.S. CMBS IssuanceTotal($B)

Source: Commercial Mortgage Alert. * Issuance total through August 31, 2010.* Forecast based on Emerging Trends interviews

Delinquencies and Defaults

0

1

2

3

4

5

6

7

8

'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Delinquency

In Foreclosure

U.S. Life Insurance Company MortgageDelinquency and In-Foreclosure Rates

%

Sources: Trepp LLC, Moody’s Economy.com, American Council of Life Insurers* 2Q 2009

0%

2%

4%

6%

8%

10%

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10

Delinquency rate

Delinquency rateaverage

CMBS Delinquency Rates

“If you have a trophy property, lenders will come after you out of the woodwork. If you have a dog, you get foreclosed.”

2011: Total Return Expectations

“After a 30% to 40% loss it could take a long time to make up ground.”

-40%

-20%

0%

20%

40%

97 98 99 00 01 02 03 04 05 06 07 08 09 10*

NCREIF

NCREIF and NAREIT Returns

NAREIT

Source: NCREIF, NAREIT* Forecast

Mid-teensOpportunity:

8.2%REITs:

7.5%Core private unleveraged:

Inflation v. Deflation

Interest rates stay low, increase longer-term

Fed prints money, inflation in our future

Hard assets like real estate benefit, if demand picks up

Beware another asset bubble if rates stay down too long

“If deflation occurs we’re all in the wrong business.”

4.18

4.26

4.16

4.04

3.23

3.22

3.08

2.96

1 3 5

Long-Term Rates(Ten-Year

Treasuries)

CommercialMortgage Rates

Short-Term Rates(One-YearTreasuries)

Inflation

Increase substantiallyStable

Fall substantially

Next Five Years2011


Demand Vacuum

Source: REIS, CBRE Econometric Advisors

0

5

10

15

20

25

90 92 94 96 98 00 02 04 06 08 10*

Suburban Office

Industrial

Downtown Office

Retail

Multifamily

Vacancy %

Vacancies Peaking

Development Pipeline

“We don’t need anything new.”

0

50

100

150

200

250

300

00 02 04 06 08 10* 12*

Office

Industrial

Retail

Multifamily

MSF/Thousandsof Units

Completions by Property Type


Marketsto

Watch

Survey #1: Washington DC

6.6 6.7 6.7 6.7 6.9 6.96.6 6.7

6.1 6.2

7.0

1

3

5

7

9

01 02 03 04 05 06 07 08 09 10 11

Historical Rating

Source: Emerging Trends in Real Estate 2011 survey

Survey #2: New York

7.36.9 6.6

6.2 6.1 6.36.6

7.1

5.96.5

5.4

1

3

5

7

9

01 02 03 04 05 06 07 08 09 10 11

Historical Rating


Survey Top 520102011

5.31

5.42

5.57

5.41

6.17

6.095. Seattle

6.204. Boston

6.343. San Francisco

6.562. New York

7.011. Washington D.C.


Survey Top 10201020116.177.011. Washington D.C.5.416.562. New York5.576.343. San Francisco5.426.204. Boston5.316.095. Seattle

5.105.215.045.135.39

5.5010. Dallas5.589. Denver5.638. San Diego 5.847. Los Angeles 6.026. Houston


Markets: 2011


East Coast

Boston 6.20Boston 6.20

Washington D.C.7.01

New York 6.56New York 6.56

Philadelphia 4.53

Providence 3.44Providence 3.44

Pittsburgh 3.43

Northern NJ 5.45

Westchester/Fairfield, CT

5.18

BaltimoreBaltimore4.88


West Coast

Seattle 6.09Seattle 6.09

San Francisco 6.34

Los Angeles 5.84Los Angeles 5.84Orange County 5.42Orange County 5.42

San Diego 5.63San Diego 5.63

Portland 5.30Portland 5.30

San Jose 6.08San Jose 6.08

Sacramento 3.99

Inland Empire 4.11


Southwest


Las Vegas 3.44

Phoenix 4.10

Tucson 3.72

Albuquerque 3.95

Oklahoma City 3.74

Denver 5.58

Dallas 5.50

Houston 6.02

Austin 6.29

Salt Lake City4.93

Southeast

Atlanta 4.32

New Orleans 3.54

Charlotte 4.82

Raleigh/Durham 5.20

Nashville 4.51Memphis 3.22

Virginia Beach/Norfolk 4.32


Florida

Miami 4.49

Jacksonville 4.03

Tampa 4.41

Orlando4.58


Midwest

Minneapolis 4.85

Kansas City 3.84

St. Louis 3.45

Chicago 5.14

Indianapolis 3.82

Cincinnati 3.25

Columbus 3.14

Cleveland 2.65

Milwaukee 3.25 Detroit 2.0


The Pittsburgh Scenario

4.1 4.13.8 3.6 3.7

4.7

1

3

5

7

9

05 06 07 08 09 10

Historical Rating


Property Sector Investment Rankings


Apartments

Industrial/Distribution

Hotels

Office

Retail

6.19

5.07

4.78

4.72

4.50

1Abysmal

5Fair

9Excellent

King of Core Real Estate

U.S. Multifamily Completions/Vacancy RatesThousands

of units

4

5

6

7

8

2004 2005 2006 2007 2008 2009 2010 2011

Apartment Rental: Moderate Income

U.S. Apartment Investment Prospect Trends

Apartment Rental: High Income0

50

100

150

200

250

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*11*3

6

9

Sources: Emerging Trends in Real Estate 2011 survey, REIS* Forecast

Vacancy Rate %

Completions

Vacancy Rate %

Rating

Office: CBD v. Suburbs Divide


0

5

10

15

20

25

90 92 94 96 98 00 02 04 06 08 10*

Suburban Office

CBD

Vacancy %

3

4

5

6

2004 2005 2006 2007 2008 2009 2010 2011

Suburban Office

U.S. Office Investment Prospect Trends

CBD

U.S. Office Vacancy Rates

Hotels: Bounce Back Faster

Sources: Smith Travel Research (1987 to 2009), PricewaterhouseCoopers LLP (2010 and 2011).

3

4

5

6

7

8

2004 2005 2006 2007 2008 2009 2010 2011

Limited-Service Hotels

U.S. Hotel Investment Prospect Trends

Full-Service Hotels

U.S. Hotel Occupancy Rates and RevPAR

0%

20%

40%

60%

80%

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*11*$30

$40

$50

$60

$70

$80Occupancy %

RevPAR

Industrial: Record Vacancies

Source: CBRE Econometric Advisors

4

5

6

7

8

2004 2005 2006 2007 2008 2009 2010 2011

R&D Industrial

U.S. Industrial Investment Prospect Trends

Warehouse Industrial

U.S. Industrial Completions/Availability

0

50

100

150

200

250

300

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*11*6

9

12

15Completions Vacancy Rate

(msf) %

Retail: Darwin Rules

Source: REIS

3

4

5

6

7

8

2004 2005 2006 2007 2008 2009 2010 2011

Power Centers

U.S. Retail Investment Prospect Trends

Neighborhood/Comm Centers

U.S. Retail Completions/VacancyTop 50 Markets

0

5

10

15

20

25

30

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*11*6

8

10

12

Completions Vacancy Rate(msf) %

Regional Malls

Property Sector Development Rankings


Apartments

Industrial/Distribution

Hotels

Office

Retail

1Abysmal

5Fair

9Excellent

4.85

3.12

2.33

2.06

2.26

In the “Era of Less”

Less becomesmore.

November 30, 2010

William R. EmmonsAssistant Vice President and Economist

Federal Reserve Bank of St. Louis

These comments do not necessarily reflect the views of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

Will Real Estate Drag Us Back Into Recession?

Emerging Trends Outlook 2011Urban Land Institute St. Louis

1

Will Real Estate Drag Us Back Into Recession?

The US economy is recovering slowly from a severe recession and financial crisis caused by an historic boom and bust in housing markets.

Rebounding consumer spending has been supported by massive government stimulus and stock-market gains.

Necessary real-estate price corrections and balance-sheet deleveraging are likely to continue through 2011.

Unless private-sector job growth accelerates soon, the ongoing real-estate and balance-sheet corrections could drag the economy back into recession and/or deflation.

The St. Louis region faces a less-severe real-estate hangover than elsewhere, albeit with weaker growth fundamentals. Our recovery is at risk, too. 2

Inflation-Adjusted Per-Capita Private Residential ConstructionThousands of 2005 dollars, seasonally adjusted annual rate

Inflation-Adjusted Per-Capita Private Non-Residential ConstructionThousands of 2005 dollars, seasonally adjusted annual rate

1510050095908580757065Source: Haver Analytics

2.5

2.0

1.5

1.0

0.5

0.0

2.5

2.0

1.5

1.0

0.5

0.0 3

Thousands of 2005 dollars

2000-10: Perhaps The Largest Residential Building Boom And Bust In US History

Source: Bureau of the Census Quarterly through Q3.2010

Q3.2000$1,539

Q1.2006$2,151(+40% since

Q3.2000)

Q3.2010$736

(-66% since Q1.2006)

Note that non-residential construction outlays did not boom like housing did.

Inflation-adjusted per-capita private residential construction

Inflation-Adjusted Per-Capita Disposable Personal IncomeInflation-Adjusted Per-Capita Personal Consumption Expenditures

Inflation-Adjusted Per-Capita Personal Income Before Taxes and Transfers


120

115

110

105

100

95

90

120

115

110

105

100

95

90 4

Index values equal 100 in

2000 (expressed in 2005 dollars)

Consumer Spending Has Rebounded Due To Massive Tax Cuts and Govt. Transfers...

Sources: Bureau of Economic Analysis; Census Bureau Quarterly through Q3.2010

Disposable personal incomePersonal

consumption expenditures

Personal income before taxes and transfers

Net federal transfers to households during 2000 were -$589 per person, or -2% of personal income before taxes and transfers (in other words, taxes paid were 102% of transfers received)

Net federal transfers to households during Q3.2010 were at a rate of $3,296 per person, or 11% of personal income before taxes and transfers(in other words, taxes paid were 89% of transfers received)

The “consumer bailout” has been running at about $1 trillion annually for the last 18 months.

Note: Deficit-financed Bush transfers (2002-08) were $2 trillion; deficit-financed Obama transfers (2009-10) another $2 trillion so far.

Federal Reserve Credit OutstandingBillions of dollars (left scale)

Wilshire 5000 Stock-Market IndexBillions of dollars (right scale)


2500

2000

1500

1000

500

0

16000

14000

12000

10000

8000

6000 5

Federal Reserve credit

outstanding (billions of

dollars)

... Pump-Priming By the Federal Reserve, and A Buoyant Stock Market

Sources: Federal Reserve Board; Dow Jones Weekly through Nov. 17, 2010

Federal Reserve balance sheet (left) Wilshire 5000 Stock-Market Index (billions

of dollars)

Market value of US stocks (right)

$1.4 trillion

$5.5 trn

-

1

2

3

4

5

6

7

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Average Ratio of House Prices To Per-Capita Income

6

Ratio

Housing Valuations Have Returned Almost To Pre-Bubble Levels...

Sources: Zillow.com; Bureau of Economic Analysis Quarterly through Q3.2010

US

St. Louis metro area

Ratio of Household Debt to Personal Income Before Taxes and Transfers

Ratio


1.50

1.25

1.00

0.75

0.50

0.25

0.00

1.50

1.25

1.00

0.75

0.50

0.25

0.00 7

Ratio

But Household Balance-Sheet Deleveraging Has Barely Begun

Sources: Bureau of Economic Analysis; Federal Reserve Board Quarterly through Q2.2010

Debt-to- earned income ratio

Delinquency Rate of Residential Real-Estate Loans at US Commercial Banks Percent of loan balances

Delinquency Rate of Commercial Real-Estate Loans at US Commercial Banks Percent of loan balances

151005009590Sources: Federal Reserve Board /Haver Analytics

14

12

10

8

6

4

2

0

14

12

10

8

6

4

2

0 8

Percent

Banks‘ CRE Delinquency Rate Lower Than Early ’90s; But Residential is Higher

Quarterly through Q3.2010

Residential real-estate loans

Commercial real-estate

loans

MIT All-Properties National Commercial Real-Estate Price IndexUS Residential Property Median Price Per Square Foot

St. Louis Metro Area Residential Property Median Price Per Square Foot

15100500Sources: MIT Center for Real Estate, Zillow.com /Haver Analytics

200

180

160

140

120

100

80

60

40

20

0

200

180

160

140

120

100

80

60

40

20

0 9

CRE: Price index equals 100 in 2000;

Home values: Dollars per square foot

Near-Term Pressures On Residential and Commercial RE Prices Remain Downward

Sources: MIT Center for Real Estate; Zillow.com Quarterly through Q3.2010

National CRE price index

St. Louis metro area home values per square foot

US home values per square foot

Key To Recovery: Millions of Financially Distressed Households Must Find Relief

Approximately 23% of US homeowners with mortgage debt have negative homeowners’ equity—almost 14,000,000 households (according to Zillow.com, Q3.2010) Approx. 22% in St. Louis are underwater—about 140,000 Approx. 33% in Chicago are underwater—over 500,000

Ongoing foreclosures drive down house prices, destroy household wealth, hurt banks and local governments

Three ways out Good: House prices rise, incomes grow. Bad: Government bailout (for example: Large-scale debt

forgiveness; another bank bailout; a burst of inflation). Ugly: Foreclosure crisis continues—household deleveraging occurs

primarily through defaults. Of these, “Ugly” seems most likely. 10

October 2005

11

Share of Mortgages 30+ Days Delinquent or in Foreclosure: Oct. 2005

Source: Lender Processing Services (LPS)

12



October 2006

13



October 2007

14



October 2008

15



October 2009

16



October 2010



St. Charles County

St. Louis County

City

Madison County

St. Clair County

Jersey County

Monroe County

Jefferson County

Warren County

Franklin County

Lincoln County

Washington County

In Sum: Will Real Estate Drag Us Back Into Recession?

The economic recovery is very fragile, so renewed weakness in real-estate markets could tip us back into recession in 2011.

Government intervention and stimulus may be reaching their limits.

Real-estate prices are likely to fall further, as deleveraging continues.

St. Louis cannot escape the national recession, but we are in better shape than some areas because our real-estate boom and bust were not as severe.

23

Total St. Louis MSA Nonfarm EmploymentAverage level in 1990 equals 100

St. Louis MSA PopulationAverage level in 1990 equals 100

1005009590Sources: BLS, CENSUS /Haver

130

125

120

115

110

105

100

95

90

130

125

120

115

110

105

100

95

90

Total US Nonfarm EmploymentAverage level in 1990 equals 100

US PopulationAverage level in 1990 equals 100

1005009590Sources: BLS, CENSUS /Haver

130

125

120

115

110

105

100

95

90

130

125

120

115

110

105

100

95

90

24

Appendix: St. Louis Employment Tracks Our Relatively Slow Population Growth

Employment: Quarterly through Q3.2010; Population: Annual through 2009.All series set equal to 100 at average 1990 levels.

St. Louis MSA employment

US employment

US population (1.1% annual average

growth since 1990)St. Louis MSA population(0.5% annual average growth since 1990)

Federal Reserve Projections of the US Unemployment Rate

Percent (during fourth quarter of each year)

201510050095Source: Federal Reserve Board /Haver Analytics

10

9

8

7

6

5

4

3

2

1

0

10

9

8

7

6

5

4

3

2

1

0 25

Percent

Appendix: Federal Reserve Projections Imply Almost A Decade of Excess Unemployment (2008-16)

Sources: Bureau of Economic Analysis; Federal Reserve Board Projections as of Nov. 2010

Approximate “full-employment level” of the US unemployment rate

Nov. 2010 Fed projections

Actual data

Core Inflation: Personal Consumption Expenditures Chain-Type Price Index Ex F&E

Percent change from year ago

1211100908070605Source: Bureau of Economic Analysis /Haver Analytics

3.0

2.5

2.0

1.5

1.0

0.5

0.0

3.0

2.5

2.0

1.5

1.0

0.5

0.0 26

Percent

Appendix: Disinflationary Pressures Remain Strong; A Period of Deflation Is Possible

Sources: Bureau of Economic Analysis Monthly through Oct. 2010

Core inflation rate

emerging trends in real estate 2011 - netforum.uli.org · emerging trends in real estate 2011...

Documents