CRE Capital Markets Update Amid Renewed Financial Instability and Fear of a Global Recession

Transcription

1 CRE Capital Markets Update Amid Renewed Financial Instability and Fear of a Global Recession presented to: Center for Real Estate and Urban Economic Studies Jim Clayton, Ph.D. Vice President Research Cornerstone Real Estate Advisers LLC jclayton@cornerstoneadvisers.com (860) October 14,

2 From My Presentation Here 2 Years Ago 1

3 Volatility, Uncertainty Twisting in the Wind? Year Treasury Yield S&P 500 Index Treasury Yield (%) S&P 500 Index

4 Global Growth Projections Revised Downwards 10 8 Real GDP Growth Forecasts and Revisions Around the World 2011 Projection as of September Change from June Real GDP Growth (%) Global U.S. Euro Area Japan U.K. Developing Asia Latin America Source: Cornerstone Research based on forecasts from the International Monetary Fund

5 U.S. Economy the Big Picture Real GDP 13.2 Total Nonfarm Payrolls (Millions) Real GDP ($2005, Trillions) Employment Source: Cornerstone Research, Bureau of Labor Statistics, Bureau of Economics Analysis

6 Not a Typical Recovery The Three Legs (Stages) of Economic Recovery Business Investment Consumer Expenditure Housing Sector 5

7 Not a Typical Recovery 6

8 Not a Typical Recovery 7

9 Not a Typical Recovery Michael Lewis has had time to research, write and publish two books on the financial crisis March 2010 October

10 Property Price Cycle at Bottom or Beyond MIT (now NCREIF) TBI Green Street CPPI NCREIF Value (NPI) Moody s CPPI *Denotes equally weighted cash flow based NCREIF appreciation return component (and not the published value weighted income-based data series). Notes: NPI and TBI are quarterly indices through 2Q11. The dashed lines are monthly interpolations. Moody s and Green Street CPPI s are monthly indices through July and September 2011, respectively. Source: Cornerstone Research based on data from NCREIF, MIT Center for Real Estate, Green Street Advisors and Moody s Investors Service. 9

11 Aggregate Indices Mask Divergent Pricing Dynamics Sub-Indices of the Moody s/real Repeat Sales CPPI Since Peak Non-distressed >$10m in six markets sub-index New York, D.C., San Francisco, Los Angeles, Chicago, Boston. Moody s CPPI Distressed sub-index Data through July Source: Geltner Associates LLC, Real Capital Analytics (RCA), Cornerstone. 10

12 U.S. Institutional Appraisal Cap Rates Sources: Cornerstone Research, NCREIF 11

13 U.S. Institutional Appraisal Cap Rates Sources: Cornerstone Research, NCREIF, Federal Reserve. 12

14 NCREIF Space Market Dynamics Apartments Lead 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% Vacancy Rate (2Q11) NOI Growth (4 quarter total) Vacancy Rate (Average) -4% NPI Apartment Office Industrial Retail By Property Type Source: Cornerstone Research, NCREIF. 13

15 Debt Situation Improving But Legacy Issues Remain Deleveraging Underway and Continuing (Debt as a Percentage of GDP) 14

16 Mortgage Market Improving But Legacy Issues Remain Net Mortgage Flows by Lender Type Commercial Bank CMBS Life Insurance Companies Others GSEs Savings Institutions Life Insurance Company Mortgage Commitments and CMBS Issuance Quarterly, 2009 Q Q3** Life Insurance Co. CMBS $ Billions $ Billions Annual, * Change in the combined outstanding balance of commercial and multifamily mortgage loans. ** Insurance co. data through 2011 Q2. CMBS data through 2011 Q3. * 2011 data through Q2. Source: Cornerstone Research based on data from the Federal Reserve, ACLI and Commercial Mortgage Alert. 15

17 Volatility and Growth Concerns Impact CMBS Pricing 1,400 1,200 AAA CMBS (10 yr.) Spreads Baa Corporate Spreads 1,000 Spread to Swaps (bps) Jun-07 Dec-07 May-08 Nov-08 Apr-09 Oct-09 Apr-10 Sep-10 Mar-11 Aug-11 Source: Cornerstone Research, Trepp, Federal Reserve. 16

18 Debt and CRE Valuation: Did we learn anything?? Linking Ex Ante Total Asset Required Returns with Debt and Equity Costs of Capital IRR D IRR P + IRR E IRR P = IRR E E V + IRR D L V In theory with financing separate (2 nd ) after the investment/valuation decision IRRE = IRRP + ( IRRP IRRD ) L E 17

19 Thanks for your attention! Questions? 18

20 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. 19