Developing Trends: Institutional RE Capital in 2014

Transcription

1 Developing Trends: Institutional RE Capital in 2014 Thursday, May 8, 2014 Michael J. White Executive Vice President CBRE I Capital Markets

2 The CBRE Joint Venture and Structured Capital Team is unique in the industry; they are 100% focused within this specialization and engage no other transaction profiles. As such, their expertise and knowledge of the trends, contacts and capital resources within this specialty is commensurately unparalleled. Senior team members each have over 20 years of focused expertise and relationships in this specialization, with well over $1billion of transaction credentialsidentifiedin each seniorpractitioner.theteamengages a national practice with key personal in multiple geographic locations.

3 4 Major Trends Already Rocking Your RE World!

4 BIG TREND #1: The Anomaly of Real Estate Valuations

5 Let s Begin with Two Questions: 1. When interest rates rise, what logically happens to real estate values? 2. On average, have Real Estate values gone higher or lower since last year?

6 Interest rates went UP over 100 bps in Summer of 2013!

7 CRE Values have been skyrocketing since interest rates increased in May 2013!

8 Cap rates are DROPPING as interest rates INCREASE? WHY? The reason: Mike s Maxim!

9 Mike s Maxim: The event with the greatest impact on your future will ALWAYS be the one you LEAST anticipated!

10 Reason #1: Foreign Capital!!

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12 Asian Momentum is Strong they are the NEW WAVE!

13 Why the US? Look what they pay for RE back home!!!

14 US Cities Targeted by Foreign Capital in

15 Reason #2: In the past year, domestic institutional capital has left pricey First-Tier Core Markets (the Sexy Six) to seek better yields elsewhere!

16 If Domestic Institutional Capital is being pushed out of the Coastal Crescent markets and into Secondary and Tertiary markets, what should (logically) be happening to real estate Cap Rates in the tertiary/secondary markets? Cap Rates in these markets are going DOWN!

17 BIG TREND #2: Real Estate Capital is shifting toward Longer Investment Horizons

18 10 year yields: More room in the Basement or the Attic? USA 10-year Bond Constant Maturity Yields (IGUSA10D) since1790! Green Attic: >2.7% 10 year yield Average since 1900: 4.9% Blue Basement: <2.7% 10 year yield Current Rate: 2.7%

19 Comparative Hold Required: Cap Rate Compression vs. Rent Growth Dull Mathematics as follows: $30M Project Value (6% cap rate) $1.8M NOI How long does it take you to generate a 7.5% unlevered Return? Flat Cap Rates at 2.0% annual revenue growth: 3.75 years 25 Basis Point Cap rate DROP w/ 2.0% rev. growth: 1.5 years 25 Basis Point Cap rate RISE w/ 2.0% rev growth: 6 years

20 How longer investment terms safeguard targeted IRRs

21 Four Implications of Flat to Rising Cap Rates Institutional Capital has figured this out ALREADY!! 1) Returns are going to depend more on precise operations than on cap rate compression: equity will shift from market allocation partners (funds) to operating partner profiles (direct sponsors). 2) Rent growth doesn t build value as fast as cap rate compression: IRRs will become less important than equity multiples over longer investment horizons. 3) Transaction Velocities will diminish substantively: when the grain grows more slowly, you will harvest less often! 4) Strong job and revenue growth locations (cash-flow focus) will be prioritized over institutional liquidity markets (residual focus): shift from Major Urban Core concentration to ASPIRATIONAL CITIES.

22 BIG TREND #3: Reversal: Employers are now Relocating to access Employee Demographics! Peter Drucker ca. 1959: A Knowledge Worker is defined as one who works primarily with information or one who develops, integrates or distributes knowledge in the workplace. WebDesigner AppProgrammer BioTech Renewable Energy Financial Analyst Connectivity Cloud Systems Data Integration Chemical Engineering Logistics Analysis Peer-to-Peer Networking AutoCAD Engineers 3D Rendering Systems Engineers Online Marketing Database Integration Data Mining Alternative Energy Cryogenics Geological Exploration Internet Optimization Hybrid Technologies Digital Media Computer Graphics Urban Design

23 Basic Idea: Knowledge Worker (USA) vs. Process Worker (outsourced)

24 The Future of Real Estate: Why Millennials will shape RE function & demand!

25 The Millennials are the largest demographic EVER in US history! 29 Source: New MediaandMarketing.com, The Millenmial Generation, David Burstein

26 Ignore this DEMOGRAPHIC at your EXTREME peril!

27 What s different about the Millennials?

28 This is why retailing is shifting to the Internet! If you are building anything without imbedded fiber-optic Gigabyte connectivity you are building Class B product by definition. Tim Perry, CEO, North American Properties - April 29, 2014

29 Millennials will define the US workforce in 10 years!

30 What they want: Millennial Lifestyle Priorities are QUALITATIVELY oriented! Objective

31 Millennials Aggregate in SPECIFIC Locations focused by: Quality of Life

32 Fact: High-Growth Cities are the SAME Cities with the Highest Millennial Population Demographics!!

33 Compare these Maps: Do you see a Lifestyle Choice correlation?

34 Institutional RE Capital is increasingly focusing on Aspirational Cities! 2. DENVER, CO 5 Defining Features of Aspirational Cities : Collaborative: Connected Urban, Work & Social Environments Transit Savvy: Light Rail, easy access, short commutes, no SMOG! New Economy Focus: Media-Digital-Energy-Technology-Computer-Leisure-Services Lifestyle Friendly: Planned spaces, diverse recreation, cultural & social venues $-Quality Benefit: Less personal income spent on Housing-Transportation-Taxes-

35 Employers are Relocating to these cities to access Employees! (not to Miami, Chicago, NY, Boston, LA or San Francisco! ) Momentum Job Growth Markets

36 Which is why: In the past year, domestic institutional capital has left the pricey First-Tier Core Markets (the Sexy Six) to seek better yields elsewhere!

37 BIG TREND #4: The Urban Bubble Has 5 Years Left!

38 The Largest Increase in Renter Demographics is the Millennials

39 Where are Millennials Going? To Urban Lifestyle Locations!

40 This migration concentration caused urban metro rents to soar!

41 Compare the 6%+ Urban rent growth stats in 2011 to. Urban Core Rent Growth July 2011 (U.S. Peak) Urban submarkets averaged > 6% annual effective rent growth. Source: Axiometrics Inc. 2014

42 less than 2% Urban rent growth NOW in the SAME markets! Urban Core Rent Growth March 2014 The average has dropped to 1.8%, which is below the U.S. benchmark of 3.1%. Source: Axiometrics Inc. 2014

43 National Effective Rent Growth: Urban vs. Suburban What happened to the Urban Core? 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% Urban core submarkets are currently underperforming suburban submarkets, but they significantly outperformed earlier in the recovery/expansion period. Apr-09 Jul-09 Oct-09 Jan-10 Annual Effective Rent Growth Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Source: Axiometrics Inc. Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Urban Core Suburban Source: Axiometrics Inc. 2014

44 Urban Residential demographics are already SHIFTING! Ouch!

45 Historically, renter profiles shift to homeownership in their 30 s! Rent>Buy Transition occurs in 30 s!

46 Millennials have the highest education demographic in history: 63% have College Degrees! They re having children in their 30 s, not 20 s! Source:

47 The American Suburban Single Family Homeowner Aspiration is still alive it s just been pushed back 10 years for most Millennials!

48 Key Factors that are now pushing Millennials back into the Suburbs! Low Quality of Inner-City Urban Schools Traffic-Noise, Night-club ambiance, Balcony-Babies? Proximity/Accessibility of age-equivalent playmates Security/monitoring benefits of enclosed backyard

49 The Big Question Will aging baby-boomer empty nesters exchange places with the Urban Millennials and thereby sustain future urban lifestyle demand?

50 Boomer Migration to scenic locales has tripled in the last 20 years! They re leaving the metro-urban concentrations in droves!

51 The attraction of young people to urban lifestyles is inverted in Empty Nesters who migrate to non-metro scenic areas after the kids leave!

52 Empty Nesters once migrated prefer to age in their retirement place! They don t go Urban. That s why the Urban Bubble is flattening. The Bubble has 5 millennial years left before it starts to fade! Source: AARP Survey Home and Community Preferences of the 45+ Population, November 2010

53 Thank You for Being a Great Audience!