Discussion of: Can Securitization Work? Lessons from the U.S. REIT Market

Transcription

1 Discussion of: Can Securitization Work? Lessons from the U.S. REIT Market Joseph L. Pagliari, Jr. Clinical Professor of Real Estate June 4, 2013 NAREIT Real Estate Research Conference

2 An Outline of My Thoughts 1 Omitted Variables OVERVIEW: HYPOTHESIS: Differential performance housing v. commercial real estate = f(reits civilizing influence ) COMPETING PERSPECTIVES: My focus will be on theory (not technique): equity v. debt markets GSE distortions aggressive debt in the CRE markets bridge-equity loans relative size of the domestic REIT market REITs specifically or securitization more generally? REOCs? expansion of CRE market data/vendors supply v. price/returns space- v. capital-markets risk CONCLUSION: Difficult to disentangle cause(s) & effect(s). FOOTNOTE: Did REIT investors heed the warning signals?

3 Residential v. Commercial Real Estate Appreciation Another view of the performance differential 2 Comparison of Residential v. Commercial Real Estate Appreciation for the Period $400 Key Question: What drove this disparity? Index Values $350 $300 $250 $200 $150 $100 Residential (Case-Shiller) Commercial (NCREIF) $50 $ Sources: Case-Shiller and NCREIF.

4 An Outline of My Thoughts 3 Omitted Variables OVERVIEW: HYPOTHESIS: Differential performance housing v. commercial real estate = f(reits civilizing influence ) COMPETING PERSPECTIVES: My focus will be on theory (not technique): equity v. debt markets GSE distortions aggressive debt in the CRE markets bridge-equity loans relative size of the domestic REIT market REITs specifically or securitization more generally? REOCs? expansion of CRE market data/vendors supply v. price/returns space- v. capital-markets risk CONCLUSION: Difficult to disentangle cause(s) & effect(s). FOOTNOTE: Did REIT investors heed the warning signals?

5 Residential Appreciation = f(gov t Distortions)? 4

6 Residential Recovery = f(gov t Distortions)? 5 Rescaled Index Values $400 $350 $300 $250 $200 $150 Comparison of Residential v. Commercial Real Estate Appreciation using Rescaled CRE Values for the Period Residential Recovery = f(gov't Distortions): * Tightening underwriting standards - Wider fluctuation in resi (than CRE) * Did gov't intervention create a false bottom? - Home Affordable Modification Program * What explains "dead cat" bounce? In light of: - "Quantitative Easing" - First-Time Home Buyer Tax Credit ($8,000) Rescaled CRE Values Irony: Enter: Single-Family Rental business model $100 $50 $

7 Another View of Government Distortions What explains Washington DC s superlative performance? 0% "Bubble" Growth and Subsequent Decline for Certain US Housing Markets for the Period 2000 through % Dallas Denver Net Annual Appreciation Rate of 4% Charlotte Boston Total Price Decline from Peak Prices -20% -30% -40% -50% Cleveland Atlanta Detroit Minneapolis Chicago Net Annual Appreciation Rate of 0% Portland New York Seattle Composite-10 Composite-20 San Francisco San Diego The Rate of Inflation (ρ) Tampa Phoenix Washington Los Angeles Miami -60% Las Vegas Net Annual Appreciation Rate of 2.5% -70% 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 200% Bubble Growth: Maximum Price Increase from January 2000 Source: S&P Case Schiller Index and instructor s Calculations

8 An Outline of My Thoughts 7 Omitted Variables OVERVIEW: HYPOTHESIS: Differential performance housing v. commercial real estate = f(reits civilizing influence ) COMPETING PERSPECTIVES: My focus will be on theory (not technique): equity v. debt markets GSE distortions aggressive debt in the CRE markets bridge-equity loans relative size of the domestic REIT market expansion of CRE market data/vendors REITs specifically or securitization more generally? REOCs? supply v. price/returns space- v. capital-markets risk CONCLUSION: Difficult to disentangle cause(s) & effect(s). FOOTNOTE: Did REIT investors heed the warning signals?

9 CRE Investors Are Not Immune to Aggressive Lending: 8 A particular form of aggressive CRE debt: bridge-equity loans When such debt was available, CRE investors behaved like many of the residential homeowners/borrowers While these investments ended badly, they helped propel prices in the interim

10 An Outline of My Thoughts 9 Omitted Variables OVERVIEW: HYPOTHESIS: Differential performance housing v. commercial real estate = f(reits civilizing influence ) COMPETING PERSPECTIVES: My focus will be on theory (not technique): equity v. debt markets GSE distortions aggressive debt in the CRE markets bridge-equity loans relative size of the domestic REIT market REITs specifically or securitization more generally? REOCs? expansion of CRE market data/vendors supply v. price/returns space- v. capital-markets risk CONCLUSION: Difficult to disentangle cause(s) & effect(s). FOOTNOTE: Did REIT investors heed the warning signals?

11 How Big a Segment Are Listed REITs? 10 Clearly an important market segment Listed REITs represent ~40% of the equity market Other sectors are uncivilizing forces?

12 An Outline of My Thoughts 11 Omitted Variables OVERVIEW: HYPOTHESIS: Differential performance housing v. commercial real estate = f(reits civilizing influence ) COMPETING PERSPECTIVES: My focus will be on theory (not technique): equity v. debt markets GSE distortions aggressive debt in the CRE markets bridge-equity loans relative size of the domestic REIT market REITs specifically or securitization more generally? REOCs? expansion of CRE market data/vendors supply v. price/returns space- v. capital-markets risk CONCLUSION: Difficult to disentangle cause(s) & effect(s). FOOTNOTE: Did REIT investors heed the warning signals?

13 Securitized REITs v. Securitization Generally? 12 How do US REITs compare globally?

14 Securitized REITs v. Securitization Generally? (continued) 13 What about REOCs? How does US compare globally?

15 An Outline of My Thoughts 14 Omitted Variables OVERVIEW: HYPOTHESIS: Differential performance housing v. commercial real estate = f(reits civilizing influence ) COMPETING PERSPECTIVES: My focus will be on theory (not technique): equity v. debt markets GSE distortions aggressive debt in the CRE markets bridge-equity loans relative size of the domestic REIT market REITs specifically or securitization more generally? REOCs? expansion of CRE market data/vendors supply v. price/returns space- v. capital-markets risk CONCLUSION: Difficult to disentangle cause(s) & effect(s). FOOTNOTE: Did REIT investors heed the warning signals?

16 A Remarkable Increase in Data Quality & Availability 15 For us graybeards, it s been a quantum leap!

17 An Outline of My Thoughts 16 Omitted Variables OVERVIEW: HYPOTHESIS: Differential performance housing v. commercial real estate = f(reits civilizing influence ) COMPETING PERSPECTIVES: My focus will be on theory (not technique): equity v. debt markets GSE distortions aggressive debt in the CRE markets bridge-equity loans relative size of the domestic REIT market REITs specifically or securitization more generally? REOCs? expansion of CRE market data/vendors supply v. price/returns space- v. capital-markets risk CONCLUSION: Difficult to disentangle cause(s) & effect(s). FOOTNOTE: Did REIT investors heed the warning signals?

18 Myopic Market: Focused Only on Space-Market Risks? 17 $400 $350 NCREIF Property Index: Market Values, Rescaled NOI and Capitalization Rates Based on a $100 Investment for the Period 1978 through 2012 What about capital-market risks? Stagnant NOI v. fluctuating prices 9.5% 8.5% $ % Market Value and Rescaled NOI $250 $200 $150 $ % 5.5% 4.5% Capitalization Rate $50 3.5% $ Capitalization Rates (Right Axis) Market Values Rescaled NOI Average Capitalization Rate (Right Axis) 2.5% Sources: NCREIF and instructor s calculations.

19 Is Muted Office Development Surprising? 18 Office has been among the worstperforming property types Sources: NCREIF and instructor s calculations.

20 An Outline of My Thoughts 19 Omitted Variables OVERVIEW: HYPOTHESIS: Differential performance housing v. commercial real estate = f(reits civilizing influence ) COMPETING PERSPECTIVES: My focus will be on theory (not technique): equity v. debt markets GSE distortions aggressive debt in the CRE markets bridge-equity loans relative size of the domestic REIT market REITs specifically or securitization more generally? REOCs? expansion of CRE market data/vendors supply v. price/returns space- v. capital-markets risk CONCLUSION: Difficult to disentangle cause(s) & effect(s). FOOTNOTE: Did REIT investors heed the warning signals?

21 Concluding Thoughts 20 Omitted Variables INTERESTING HYPOTHESIS: Differential performance housing v. commercial real estate = f(reits civilizing influence ) CAVEATS: Difficult to disentangle competing hypotheses: equity v. debt markets GSE distortions aggressive debt in the CRE markets bridge-equity loans relative size of the domestic REIT market REITs specifically or securitization more generally? REOCs? expansion of CRE market data/vendors supply v. price/returns space- v. capital-markets risk CONCLUSION: Agreed REITs = civilizing influence Concerns CRE = broad/evolving/competitive market FOOTNOTE: Did REIT investors heed the warning signals?

22 An Outline of My Thoughts 21 Omitted Variables OVERVIEW: HYPOTHESIS: Differential performance housing v. commercial real estate = f(reits civilizing influence ) COMPETING PERSPECTIVES: My focus will be on theory (not technique): equity v. debt markets GSE distortions aggressive debt in the CRE markets bridge-equity loans relative size of the domestic REIT market REITs specifically or securitization more generally? REOCs? expansion of CRE market data/vendors supply v. price/returns space- v. capital-markets risk CONCLUSION: Difficult to disentangle cause(s) & effect(s). FOOTNOTE: Did REIT investors heed the warning signals?

23 Footnote: Did REIT Investors Heed the Warnings? 22 Sell signals from seasoned pros? : 31 REIT privatizations/mergers ($155 billion of GAV) Some notable transactions: AMLI Announces Morgan Stanley s Bid (8-05) Carr America Announces Blackstone s Bid (2-06) EOP Announces Blackstone s Bid (11-06) Archstone Announces T- S/ Lehman s Bid (5-07) Source: Yahoo Finance, June 3, 2013