Real Estate Investment and Capital Market Perspectives An evolving and different recovery continues

Transcription

1 Real Estate Investment and Capital Market Perspectives An evolving and different recovery continues presented to: NCREIF Valuation Committee Jim Clayton, Ph.D. Vice President Research Cornerstone Real Estate Advisers LLC (860) NCREIF Summer Meeting Leesburg, VA June 25, 2014

2 The Times They Are A Changin CHICAGO

3 The Times They Are A Changin Near Term / Cyclical Global growth drivers Interest rates (and inflation) Fed QE tapering Fiscal austerity, Gov t debt Job market slack ( U6 ) Housing market recovery Others Longer Term / Structural Demographics + Technology + Globalization Nature of institutional investor capital flows + Institutional investor portfolio structures 2

4 Structural Driving Change Demographics Technology Globalization

5 Property Returns Around the Globe 2013 annual results based on local currency % pa Capital growth Income return Total return IPD Global Index (5) (10) South Africa Ireland New Zealand United States Canada UK Australia Global Korea Sweden Switzerland Japan Norway Germany France Finland Belgium Denmark Italy Hungary Portugal Netherlands Spain Source: IPD, KTI.

6 U.S. Accounts for more than 1/3 of Invested Global RE Stock IPD Global Property Index: Composition by Estimated Market Capitalization of Invested Property Americas Switzerland 3% Eurozone / EMEA Sweden 3% U.K. 7% 42% U.S. 38% 39% Asia/Pacific Canada 4% Netherlands 3% France 6% Germany 6% Australia 4% Japan 15% 19% Estimates as of the end of 2013 based on countries included in the IPD Global Property Index. Source: Investment Property Databank (IPD), Cornerstone 5 5

7 U.S. Property Attractively Priced on a Relative Global Basis DTZ Global Fair Value Index Scores, 1Q 2014* 100% % 60% 40% Hot Warm Cold 20% 0% Global Europe Asia Pacific U.S. U.K. *Figures above the bars are the DTZ Fair Value Index (FVI) scores. The higher the index value the greater the potential investment opportunity in the region or country based on a classification of individual markets as HOT, WARM or COLD. HOT markets are ones in which expected returns are forecast to exceed required returns over the next five years by more than 5%. Hence HOT markets are ones that are currently undervalued and represent the best opportunity. COLD markets are ones in which expected return is forecast to fall short of required return by more than 5% (i.e. currently overvalued markets). WARM markets fall in between the HOT and COLD extremes and are fairly valued. Figures in the bars are the number of markets within each region or country that fall into the specific category. For more details see, DTZ Fair Value Index Methodology: Solid foundations for future returns, DTZ Research, August 19, Source: Cornerstone Research, DTZ Research.

8 2 1.5 Inflation adjusted Property Price Index Property Price Index Indices (2000 = 1) CPI Source: Cornerstone, BLS, Geltner, Miller, Clayton, Eichholtz (Monthly data through December 2013)

9 Commercial Property Price Recovery Moody s/rca national all properties index and sub indices by MSA Type Indices (2002 Q1=1) Gateway San Francisco, New York, Washington DC, Boston, Los Angeles and Chicago CPPI Non Gateway Top chart shows monthly data through January Bottom chart shows quarterly data through 1Q Sources: Moody s Investor Services, Real Capital Analytics (RCA), Cornerstone Research (May 2014) 8

10 Commercial Property Price Recovery Moody s/rca national all properties index and sub indices by MSA Type and Property Type Indices (Jan. 2002=1) Gateway Apt. Other Apt. Gateway Retail Other Retail Gateway Industrial Other Industrial Gateway CBD Office Other CBD Office Gateway Sub. Office Other Sub. Office All Properties CPPI Top chart shows monthly data through January Bottom chart shows quarterly data through 4Q Sources: Moody s Investor Services, Real Capital Analytics (RCA), Cornerstone Research (April 2014) 9

11 This document was presented during the 2014 NCREIF Summer Conference. The Full Suite of CPPI Indices

12 Investment Scope Broadens as Price Recovery Evolves Non Gateway markets garner growing share of total transaction dollar volume; lagging sectors recovering % based on trailing 12 month sales $ Transaction Volume Share by Market Type 60% % in 6 Gateway ("Major") Metros* % in Non Gateway Metros 55% 50% 45% 40% *Boston, New York, Wash. D.C., Chicago, San Francisco, LA. Source: Cornerstone, RCA (through 1Q 2014). 11

13 Core Real Estate Asset Class Priced Fairly on a Relative Basis? NCREIF Cap Rate vs. Baa Corporate Bond Yield Public Equity REIT Price Index vs. Moody s/rca CPPI 10% 8% 6% 4% 2% Indices (Jan.2001=100) % Year Treasury NCREIF Cap Rate Baa Corporate Moody's/RCA Commercial Property Index (CPPI) FTSE/NAREIT Equity REIT Price Index Quarterly data through 1Q Monthly data with the property price index (CPPI) extending through April 2014 and the equity REIT index through May Sources: Cornerstone Research, NCREIF, Federal Reserve, NAREIT, Moody s Investor Services. 12

14 Public versus Private Market Pricing of Real Estate 40% 30% 20% 10% 0% 10% 20% 30% 40% 50% Green Street Sector Wide Average REIT Share Price Premium to Net Asset Value (NAV) NAV Prem/Disc LT Avg Prem/Disc 13

15 Sustained and More Broad Based Rent Growth 6% 3% 0% 3% Forecast 6% 9% 12% Office CBD Industrial Multifamily Office Suburb Retail 15% Year to year % change in quarterly rent index (actual) and forecasts, 2010:1 2017:4 Source: Cornerstone based on data and forecasts from CBRE EA (as of May 2014) 14

16 Employment Picture is Improving Index (Jan = 1) Professional & Business Services Education & Health Care Total Nonfarm Financial Activities Manufacturing Construction Source: Cornerstone, BLS (monthly data as of April 2014) 15

17 U.S. Real GDP and Employment Since 1960 Indices (2000 = 1) Non Farm Employment Since 2000 GDP GDP per 0.9 worker GDP Employment Real GDP/Employment ($000s) Source: Cornerstone, BLS, BEA (Quarterly data through 4Q 2013)

18 Broad Based Job Market Recovery Remains Elusive Slow pace of labor market improvement to keep Fed funds rate low into next year. 84 Broader U6 unemployment rate* Employment to population ratio (age 25 54) Employment/Population U6 Unemployment (%) *Includes marginally attached and employed part time for economic reasons workers. Source: Cornerstone, BLS and Federal Reserve (data through the end of March for U6 rates and January 2014 for employment to population ratio. 17

19 Demographics and technology are driving productivity and utilization and the next evolution of office space use 150 Square-foot-peremployee average target density, down from 225 in % space reduction by U.S. law firms and financial services relocating 72% of global CREs plan to aggressively increase density in next 3 years 50% of the U.S. workforce was baby boomers in Gen Y will be 50% by 2020 Source: JLL Research

20 What Could Go Wrong? Risks?

21 What Could Go Wrong? Risks? Geopolitical risks Low Inflation (Deflation??) Slow Growth in China Normalization of U.S. Monetary Policy Others

22 The Big Concern

23 A History of Post Recession Fed Funds Rate Moves 20 Recession Fed Funds Rate!0 Year Treasury Yield ? 22

24 Short Term Interest Rates Near Zero into 2015 Significant slack in the broader job market supports Fed s shift towards a qualitative approach on raising rates, away from 6.5% unemployment rate threshold 66 Employment to Population Ratio 3 Month Libor Fed Funds Rate 8 Employment/Population Fed Fund & LIBOR (%) 54 0 Sources: Cornerstone Research, Federal Reserve, BLS. May

25 QE Effect to Weaken BUT Persist Fed holdings of 5 10 year maturity Treasury securities

26 Real GDP Growth 10 Year Treasury 8 16 Real GDP Growth (%) Year Treasury Yield (%) 4 0 Source: Cornerstone, Federal Reserve (Quarterly data through 4Q 2013).

27 Year Treasury Yield Yr. to Yr. % Chg. In CPI (24 month moving average) % Source: Cornerstone, Federal Reserve.

28 Core Property Cap Rates vs. Long Term Interest Rates NCREIF Property Index (NPI) cap rates do not move one to one with Treasury yields; other influences matter Cap Rate and Treasury Yield 11% 9% 7% 5% 3% Spread 10 Year Treasury Yield Cap Rate 5% 4% 3% 2% 1% 0% 1% 3% Source: Federal Reserve Board, NCREIF. 1% 2% Cap Rate to Treasury Spread Historically, relatively large upward moves in the 10 year Treasury yield have not caused similar magnitude changes in NCREIF cap rates. In fact, these periods have seen little subsequent change in cap rates, but rather adjustment via decline in the Cap Rate Spread to Treasury Yield, reflecting reduced economic and financial risk and improved rent growth prospects. The relatively large cap rate to Treasury spread today provides measure of cushion to allow long term interest rates to rise without impacting NPI average cap rates Cap rate is value weighted average of cap rates inferred from appraisals of properties held in the NPI. Treasury yield is average of end of week values during each quarter. Quarterly data through 1Q Sources: Cornerstone Research, NCREIF, Federal Reserve. 27

29 Mortgage Market Improving Though Legacy Issues Remain Net Commercial & Multifamily Mortgage Flows by Lender Type $ Billions U.S. Depository Institutions CMBS Life Insurance Companies Others GSEs Over leveraging surge in CMBS & bank lending The outstanding balance of total mortgage debt increased during 2013 for the first time since 2008, led by a resurgence in CMBS and bank lending De leveraging Change in the combined outstanding balance of commercial and multifamily mortgage loans. Annual data, Source: Cornerstone Research based on data from the Federal Reserve 4

30 Broadening of Capital Sources Helps Recovery Take Hold Bank and CMBS lending up off historical lows Commercial & Multifamily Mortgage Originations Index by Lender Type 600 CMBS Conduits Commercial Banks Life Ins. Cos. GSEs TOTAL 500 Index (2001=100) Increase in CMBS and bank lending shows market recovery gaining in depth and breadth. However, even with improvement current originations remain well off pre crisis levels and are insufficient to finance maturing loans and new transactions Quarterly data through Q Source: Cornerstone, Mortgage Bankers Association 29

31 Disclosure Statement This information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic or other decisions. This analysis does not make any recommendation about your investments, and should not be considered investment advice. Any opinions expressed herein reflect our judgment at this date and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Opinions and estimates offered herein are subject to change without notice, as are statements of market trends, which are based upon current market conditions.