The Capital Investment Climate

Transcription

1 The Capital Investment Climate Panelists: Nicholas Pell, Managing Director, Head of Investments, Gramercy Property Trust Rusty Tamlyn, SIOR, Senior Managing Director, HFF John Thomas, Senior Managing Director, CBRE Global Investors Moderator: Mary Lang, Senior Vice President, Prologis, Inc.

2 Mary Lang, Senior Vice President Prologis, Inc. Has worked as part of Prologis' Disposition Team since joining the company in 2004, and has facilitated the disposition of over $4 billion in industrial, retail, development and land sales from Prologis' balance sheet and private capital ventures.

3 Nicholas Pell, Managing Director, Head of Investments Gramercy Property Trust Prior to joining Gramercy in July 2012, Pell was a Director in the Investment Department at W. P. Carey & Co. Prior to joining W.P. Carey, he was a Director of Business Development at Sony Pictures Entertainment and an analyst at J.P. Morgan & Co., including two years in the mergers and acquisitions group.

4 Rusty Tamlyn, SIOR, Senior Managing Director HFF Has more than 35 years of experience in commercial real estate. In his current capacity, Tamlyn is responsible for office, retail and industrial sales on behalf of private and institutional clients in the southwest U.S.

5 John Thomas, Senior Managing Director CBRE Global Investors He is the global practice leader for the company s logistics development and investment business. Thomas has over 30 years of commercial real estate and development experience. Prior to joining CBRE Global Investors, he founded Hillwood Europe.

6 Steady Transaction Activity (2015 was Unusual) Industrial Volume, by Quarter ($, billions) Industrial Volume, by Deal Type ($, billions) Q1 Q2 Q4 Source: Real Capital Analytics Portfolio Individual Asset

7 Industrial Offers Low Volatility And Projected High Returns Business and consumer confidence have improved significantly since the Global Financial Crisis Economic growth has been supported by accommodative monetary policy HISTORICAL LEVERED RETURNS BY PROPERTY TYPE 10.0% UNLEVERAGED ANNUAL TOTAL RETURN FORECASTS FOR THE NEXT FIVE YEARS 7% 9.9% Average Annual Return 9.8% 9.7% 9.6% Logistics Annualized Return (unlevered) 6% 5% 6.1% 5.8% NPI-All Properties 9.5% 7.5% 7.6% 7.7% 7.8% 7.9% 8.0% Standard Deviation of Returns 4% Logistics NPI Source: NCREIF Property Index (NPI), 1Q Data is since inception of NPI: 37 years. The NCREIF Property Index is a quarterly time series composite total rate of return measure of investment performance of a very large pool of individual commercial real estate properties acquired in the private market for investment purposes only. All properties in the NPI have been acquired, at least in part, on behalf of tax-exempt institutional investors - the great majority being pension funds. NCREIF requires that properties included in the NPI be valued at least quarterly, either internally or externally, using standard commercial real estate appraisal methodology. Each property must be independently appraised a minimum of once every three years.

8 What Do Higher Interest Rates Mean for Real Estate Pricing? The relatively few historical instances of rising rate environments have produced mixed effects on cap rates: Period Starting 10 yr.-treas. Ending 10 yr.-treas. Starting Cap Rate Ending Cap Rate Relationship Q Q % 13.20% 7.41% 7.45% Flat Q Q % 9.12% 7.35% 6.76% Inverse Q Q % 7.84% 8.12% 8.45% Direct Q Q % 6.78% 8.59% 8.19% Inverse Q Q % 6.48% 7.91% 7.73% Flat Q Q % 4.60% 7.65% 7.16% Inverse Q Q % 5.07% 6.25% 5.75% Inverse Q Q % 3.72% 6.10% 6.71% Direct Interest rates and cap rates have a.56 correlation, but this is driven by their tendency to move together as rates fall Their mixed record during periods of rising rates means a wide range of possible outcomes as interest rates rise this time Capital flows are a factor in determining the extent of re-pricing. All property types achieving NOI growth: that should provide a partial or complete offset in value if cap rates do rise. Also, the spread between cap rates and 10-year Treasury yields remains wide

9 Total Returns By Geography & Hold Period Source: National Council of Real Estate Investment Fiduciaries, as of December 31, 2015

10 5% 4% Is Real Estate Fairly Priced? Cap Rate Spreads 2015 Q4¹ Current LT Average 2007Q3 1999Q % % 1% 0% % -2% (0.31) (0.44) Ten Year Treasuries Ten Year TIPS Long-term CRE Debt Corporate Aaa Bonds Corporate Baa Bonds REIT Implied Cap Rate Source: Heitman Research 1. Preliminary -1.35

11 Industrial Property Fundamentals Millions of Square Feet Supply & Demand Dynamics Completions Net Absorption Vacancy % 12% 11% 10% 9% 8% 7% 6% Vacancy NOI/SF ($) Institutional Net Operating Income $6 $5 $4 $ % 6% 4% 2% 0% 2% 4% 6% 8% Effective Rental Rates Employment & Effective Rental Rate Change Rent Per Square Foot $5 $5 $4 $4 $3 $3 $2 $2 $1 $1 $0 $4.37 $4.32 $4.27 $4.29 $4.42 $4.55 $4.70 $4.65 $4.35 $4.19 $4.18 $4.25 $4.34 $4.45 $4.55 $ YoY Change 6% 4% 2% 0% 2% 4% 6% 8% Source: Real Capital Analytics, REIS (2016 Data as of 3/31/2016) Employment Growth Effective Rental Rate Growth

12 14% 12% Offshore Buyers Represent an Increasing Share of US Real Estate Transactions Share of US Transactions Represented by Cross-Border Investors Primary Property Types % Average ( ) 10% 8% 7.5% Average ( ) 6% 4% 2% 0% Source: Real Capital Analytics; Heitman Research

13 WHAT IS DRIVING THIS PROJECTED OUTPERFORMANCE? E-commerce is blurring the line between retail and industrial/logistics E-commerce as a percentage of total sales is even higher in other major countries showing there is plenty of room for growth in the U.S. $400,000 E-COMMERCE SALES IN THE U.S. 8% E-COMMERCE AS A PERCENTAGE TOTAL SALES $350,000 U.S. Sales U.S. E-Commerce Share 7% UK 13.0% U.S. E-Commerce Sales (millions) $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 6% 5% 4% 3% 2% 1% 0% E-Commerce Share CHINA 10.1% FINLAND 9.8% NORWAY 9.7% SOUTH KOREA 9.0% DENMARK 8.6% GERMANY 7.3% UNITED STATES 6.5% *2016 Annualized as of 1Q16 Sources: Census Bureau; Moody s Analytics Source: emarketer. U.S. and UK data is as of September 2014, all other data is year end China data excludes Hong Kong.

14 Best of the Best Major Market Pricing Metrics Going In Cap Rates Unlevered IRRs Est. Residual Cap Rate Product Type Low High Δ Past 90 days Low High Δ Past 90 days Low High Δ Past 90 days Core 4.25% % 25 bps 5.50% % 25 bps 4.75% % 25 bps Core-Plus 5.50% % 7.00% % 6.50% % Value-Add 6.00% % N/A - N/A 6.50% % Billions Monthly Volume and Avg. Cap Rates $15.0 $10.0 $5.0 $ Apr May June Jul Aug Sept Oct Nov Dec Jan Feb Mar Volume Prior Year (TTM) Volume Current Year (TTM) 7.4% 7.2% 7.0% 6.8% 6.6% 6.4% 6.2% Cap Rate Millions Monthly Average Deal Size and Price/SF $20.0 $100 $15.0 $80 $10.0 $60 $40 $5.0 $20 $ $ Apr May Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Avg. Deal Size Prior Year (TTM) Avg. Deal Size Current Year (TTM) $/SF Avg. Cap Rate Prior Year (TTM) Avg. Cap Rate Current Year (TTM) Avg. Price/SF Prior Year (TTM) Avg. Price/SF Current Year (TTM) Source: HFF Research, Real Capital Analytics

15 Industrial Net Completions, Net Absorption, and Vacancy Rate U.S (f) Years Ending Q1 100,000 Net Completions Net Absorption sf x1, % Vacancy Rate 80,000 Base Case Scenario forecast 12% 10% 60,000 8% 40,000 20, % 5.9% 5.9% 6% 4% -20,000-40,000 Vacancy 2% 0% Source: CoStar Portfolio Strategy; Heitman Research