THE ECONOMICS OF REAL ESTATE DEBT MARKETS CAPITAL MARKETS

Transcription

1 NAIOP National Forums Symposium April 2013 Chicago!! Outlook for the Real Estate Economy!! Sam Chandan PhD FRICS! President & Chief Economist Chandan Economics! Associated Faculty of Real Estate The Wharton School! THE ECONOMICS OF REAL ESTATE DEBT MARKETS CAPITAL MARKETS c

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3 Outlook for the Real Estate Economy» The Real Estate Economy The macroeconomic and capital market trends behind commercial property performance» Investment and Lending Trends Investment bifurcation and prospects for rebalancing The availability of debt for small- and mid-cap transactions Except Where Noted Copyright 2012 Chandan Economics LLC

4 National Employment Trends 1% 0% Months Following Peak in Employment -1% -2% 1990/1991 Recession 2001 Recession -3% -4% -5% -3.4% -3.0% at 58 Months 2008/2009 Recession -6% -7% Sources: Bureau of Labor Statistics; Chandan -6.4% Except Where Noted Copyright 2012 Chandan Economics LLC

5 Structural Deficiencies in the Labor Market 68% 66% 64% Labor Participation Rate Source: Bureau of Labor Statistics Spatial and Skills Dislocation and Weakly Motivated Employers 62% 60% 1.4 Employment -Dependent Ratio 58% 56% 54%

6 Structural Deficiencies in the Labor Market Beveridge Curve Source: Chandan, Bureau of Labor Statistics A Shift in the relationship between labor supply and demand? Job Vacancy Rate % 4% 5% 6% 7% 8% 9% 10% 11% Unemployment Rate

7 Vacancy Rate Trends 20% Office 19.1% 18% 16% 16.1% 17.9% 14% 12% Industrial Retail 12.9% 14.4% 12.3% 10% 8% 6% Apartment 8.6% 4% 4.7% 2% Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q Source: Chandan; Based on Secured Acquisition Financing of $1 Million or Greater

8 Economic Baseline for Late 2013 Contribution to Growth Compared to 2012 Weaker Mixed Stronger Consumer Consumers Housing Business Business Small Business Public Fiscal Monetary Source: Chandan

9 National Economic Projections BASELINE SCENARIO GDP (Real) 2.2% 2.3% 2.7% Inflation (EOY CPI) 1.7% 2.2% 2.6% Unemployment (EOY) 7.8% 7.3% 6.9% Treasury (10Y EOY) 1.8% 2.4% 3.2% Treasury (10Y) Consensus Forecast 2.3% 2.9% Source: Chandan

10 Stressing the Recovery Where Do the Sequestration Cuts Come From? Interest Source: PEW Charitable Trusts Medicare Other Mandatory Defense Discretionary Non-Defense Discretionary

11 Risks from Monetary Policy Accommodation 6% 5% 10-Year Treasury Point for Point, a Bigger Challenge for Secondary Markets 4% 3% 2% 1% 10-Year Inflation Indexed Treasury 0% % Source: Federal Reserve

12 Consumer Wealth Effects $80 $70 $60 $50 Policy-Driven Momentum in Housing Household Net Worth and Home Equity Positions In Trillions; Source: Federal Reserve; Chandan $16 $14 $12 $10 $40 $30 $20 Household Net Worth Home Equity $8 $6 $4 $10 $2 $ $0

13 Capital Markets Inflation Outlook Velocity of the Money Stock at Record Lows M2 Money Source: St Louis Fed % Source: Federal Reserve

14 National Capitalization Rates 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% Retail Industrial 9.6% 7.5% Office 7.8% 7.7% 7.0% 6.5% Apartment 7.3% 6.0% 6.1% 5.5% 5.0% Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q Source: Chandan; Based on Secured Acquisition Financing of $1 Million or Greater

15 National Capitalization Yield Spreads 7% 6% 5% Industrial Office 6.1% 6.0% 5.6% 4% Retail 4.4% 3% Apartment 2% 1% 0% Cap Rate Spreads Over Ten-Year Treasury Yield Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q Source: Federal Reserve; Chandan; Based on Secured Acquisition Financing of $1 Million or Greater

16 Capital Markets BIFURCATED CAPITAL INTENSITY 10% 9% 8% Tier 2 and 3 Assets 7% 6% 5% 4% 3% Cap Rates Across Asset Tiers Tier 1 Assets Core Assets in Cardinal Markets 2% Source: Chandan; Based on Secured Acquisition Financing of $1 Million or Greater

17 National Investment Trends $140 $120 Commercial Property Transaction Activity $100 $80 $60 $40 Tax Policy Effects Industrial Retail Office $20 $0 Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q Apartment Source: Chandan; Based on Secured Acquisition Financing of $1 Million or Greater

18 National Investment Trends Drop From Pre-Crisis Peak Crisis Bottom to Current Pre-Crisis Peak to Current Apartment 79% + 413% + 10% Office 91% + 392% 57% Retail 85% + 334% 37% Industrial 88% + 474% 32% Source: Chandan; Based on Secured Acquisition Financing of $1 Million or Greater

19 RELA Chandan Survey of Lender Sentiment 100% 80% My institution will originate a higher volume of new loans in 2013: No 100% Demand from borrowers who meet my institution s underwriting criteria: 80% Decrease Unchanged 60% 60% 40% Yes 40% Increase 20% 20% 0% Multifamily Office Retail Industrial Hotel 0% Term Loans Construction Loans Source: Real Estate Lenders Association, Chandan

20 Bank Legacy Balance Sheet 5% 4% Default Rate for Bank Commercial and Multifamily Mortgages Source: FDIC, Bank Call Reports, Chandan 3% 2% Commercial Multifamily 1% 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q

21 Credit Shift to Exit Refinance Scenario 1 Constant Spreads Scenario 2 Spreads Narrow Sharply T10 1.7% 4.5% 1.7% 4.5% Cap Rate Spread BPS Cap Rate 5.0% 7.8% 5.0% 6.5% Annual NOI Growth to Hold Value 6.6% 3.8% Source: Chandan; Means of Credit Risk Model Results Across Exit Underwriting Scenarios

22 Financing Exit Risk Late-March 2013 Agency Securitization of 5-Year Term Loans Scenario: Constant Spread & Long-Term Average NOI Growth Rate Partial IO 26% Interest Only 36% Weighted Average Interest Rate: 3.6% Balloon 38% Early 2013 Late 2017 T10 Yield 1.8% 4.5% Mortgage Rate 3.6% 6.3% Mortgage Spread BPS Cap Rate 5.5% 8.2% Cap Rate Spread BPS NOI ($M) $1.00 $1.16 Annualized NOI Growth Rate 3.0% Value ($M) $18.2 $14.1 Change in Value -22.2% Assumptions in Green

23 Financing Exit Risk Late-March 2013 Agency Securitization of 5-Year Term Loans Partial IO 26% Balloon 38% Scenario: Constant Value Supported by NOI Growth Rate Early 2013 Late 2017 NOI ($M) $1.00 $1.49 Annualized NOI Growth Rate 8.3% Value ($M) $18.2 $18.2 Change in Value 0.0% Interest Only 36% Weighted Average Interest Rate: 3.6% Scenario: Constant Value Supported by Narrower Cap Rate Spread Early 2013 Late 2017 Cap Rate Spread BPS Annualized NOI Growth Rate 3.0% Value ($M) $18.2 $18.2 Change in Value 0.0%

24 Source of Debt for Small- and Mid-Cap Assets Other $50B+ Fewer than 25 very large banks account for 1 in 5 commercial mortgages MBS $10B to $50B Just over 100 large banks account for 1 in 4 commercial mortgages Life Companies $10B Share of Commercial Mortgages Outstanding by Capital Source Banks Tiered by Net Assets Source: Chandan; Federal Reserve

25 CMBS Conduit Sourcing $250 $225 $200 CMBS Issuance 2013 is Projected In Billions Source: Chandan, Issuer SEC Filings Hotel Other Apartment Office $175 $150 $125 Industrial $100 $75 $50 Retail $25 $ Source: SEC Filings, Chandan Except Where Noted Copyright 2012 Chandan Economics LLC

26 Outlook for the Real Estate Economy» The Real Estate Economy A modest growth outlook with primary threats from status quo fiscal policy; tightening monetary policy» Investment and Lending Trends A slow decline in risk aversion supporting small- and midcap buyers in primary adjacencies and secondary markets Rise in regional bank and CMBS volumes crucial to sustained improvement in liquidity Except Where Noted Copyright 2012 Chandan Economics LLC

27 NAIOP National Forums Symposium April 2013 Chicago!! Sam Chandan PhD FRICS! President & Chief Economist Chandan Economics! Associated Faculty of Real Estate The Wharton School!! Chandan Economics 825 Third Avenue 37 th Floor New York NY 10022! THE ECONOMICS OF REAL ESTATE DEBT MARKETS CAPITAL MARKETS c