NAIOP National Forums Symposium April 2013 Chicago!! Outlook for the Real Estate Economy!! Sam Chandan PhD FRICS! President & Chief Economist Chandan Economics! Associated Faculty of Real Estate The Wharton School! THE ECONOMICS OF REAL ESTATE DEBT MARKETS CAPITAL MARKETS c
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Outlook for the Real Estate Economy» The Real Estate Economy The macroeconomic and capital market trends behind commercial property performance» Investment and Lending Trends Investment bifurcation and prospects for rebalancing The availability of debt for small- and mid-cap transactions Except Where Noted Copyright 2012 Chandan Economics LLC
National Employment Trends 1% 0% 0 4 8 12 16 20 24 28 32 36 40 44 48 52 Months Following Peak in Employment -1% -2% 1990/1991 Recession 2001 Recession -3% -4% -5% -3.4% -3.0% at 58 Months 2008/2009 Recession -6% -7% Sources: Bureau of Labor Statistics; Chandan -6.4% Except Where Noted Copyright 2012 Chandan Economics LLC
Structural Deficiencies in the Labor Market 68% 66% 64% Labor Participation Rate Source: Bureau of Labor Statistics Spatial and Skills Dislocation and Weakly Motivated Employers 62% 60% 1.4 Employment -Dependent Ratio 58% 56% 54% 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Structural Deficiencies in the Labor Market 4.0 3.5 3.0 2001 Beveridge Curve Source: Chandan, Bureau of Labor Statistics A Shift in the relationship between labor supply and demand? 2.5 2009 Job Vacancy Rate 2.0 1.5 2009 1.0 3% 4% 5% 6% 7% 8% 9% 10% 11% Unemployment Rate
Vacancy Rate Trends 20% Office 19.1% 18% 16% 16.1% 17.9% 14% 12% Industrial Retail 12.9% 14.4% 12.3% 10% 8% 6% Apartment 8.6% 4% 4.7% 2% Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 2005 2006 2007 2008 2009 2010 2011 2012 Source: Chandan; Based on Secured Acquisition Financing of $1 Million or Greater
Economic Baseline for Late 2013 Contribution to Growth Compared to 2012 Weaker Mixed Stronger Consumer Consumers Housing Business Business Small Business Public Fiscal Monetary Source: Chandan
National Economic Projections BASELINE SCENARIO 2012 2013 2014 GDP (Real) 2.2% 2.3% 2.7% Inflation (EOY CPI) 1.7% 2.2% 2.6% Unemployment (EOY) 7.8% 7.3% 6.9% Treasury (10Y EOY) 1.8% 2.4% 3.2% Treasury (10Y) Consensus Forecast 2.3% 2.9% Source: Chandan
Stressing the Recovery Where Do the Sequestration Cuts Come From? Interest Source: PEW Charitable Trusts Medicare Other Mandatory Defense Discretionary Non-Defense Discretionary
Risks from Monetary Policy Accommodation 6% 5% 10-Year Treasury Point for Point, a Bigger Challenge for Secondary Markets 4% 3% 2% 1% 10-Year Inflation Indexed Treasury 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-1% Source: Federal Reserve
Consumer Wealth Effects $80 $70 $60 $50 Policy-Driven Momentum in Housing Household Net Worth and Home Equity Positions In Trillions; Source: Federal Reserve; Chandan $16 $14 $12 $10 $40 $30 $20 Household Net Worth Home Equity $8 $6 $4 $10 $2 $0 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 $0
Capital Markets Inflation Outlook 2.2 2.1 2.0 Velocity of the Money Stock at Record Lows M2 Money Source: St Louis Fed 1.9 1.8 1.7 1.6 22% 1.5 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 Source: Federal Reserve
National Capitalization Rates 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% Retail Industrial 9.6% 7.5% Office 7.8% 7.7% 7.0% 6.5% Apartment 7.3% 6.0% 6.1% 5.5% 5.0% Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 2005 2006 2007 2008 2009 2010 2011 2012 Source: Chandan; Based on Secured Acquisition Financing of $1 Million or Greater
National Capitalization Yield Spreads 7% 6% 5% Industrial Office 6.1% 6.0% 5.6% 4% Retail 4.4% 3% Apartment 2% 1% 0% Cap Rate Spreads Over Ten-Year Treasury Yield Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 2005 2006 2007 2008 2009 2010 2011 2012 Source: Federal Reserve; Chandan; Based on Secured Acquisition Financing of $1 Million or Greater
Capital Markets BIFURCATED CAPITAL INTENSITY 10% 9% 8% Tier 2 and 3 Assets 7% 6% 5% 4% 3% Cap Rates Across Asset Tiers Tier 1 Assets Core Assets in Cardinal Markets 2% 2005 2006 2007 2008 2009 2010 2011 2012 Source: Chandan; Based on Secured Acquisition Financing of $1 Million or Greater
National Investment Trends $140 $120 Commercial Property Transaction Activity $100 $80 $60 $40 Tax Policy Effects Industrial Retail Office $20 $0 Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4 2005 2006 2007 2008 2009 2010 2011 2012 Apartment Source: Chandan; Based on Secured Acquisition Financing of $1 Million or Greater
National Investment Trends Drop From Pre-Crisis Peak Crisis Bottom to Current Pre-Crisis Peak to Current Apartment 79% + 413% + 10% Office 91% + 392% 57% Retail 85% + 334% 37% Industrial 88% + 474% 32% Source: Chandan; Based on Secured Acquisition Financing of $1 Million or Greater
RELA Chandan Survey of Lender Sentiment 100% 80% My institution will originate a higher volume of new loans in 2013: No 100% Demand from borrowers who meet my institution s underwriting criteria: 80% Decrease Unchanged 60% 60% 40% Yes 40% Increase 20% 20% 0% Multifamily Office Retail Industrial Hotel 0% Term Loans Construction Loans Source: Real Estate Lenders Association, Chandan
Bank Legacy Balance Sheet 5% 4% Default Rate for Bank Commercial and Multifamily Mortgages Source: FDIC, Bank Call Reports, Chandan 3% 2% Commercial Multifamily 1% 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2007 2008 2009 2010 2011 2012
Credit Shift to Exit Refinance Scenario 1 Constant Spreads Scenario 2 Spreads Narrow Sharply 2012 2019 2012 2019 T10 1.7% 4.5% 1.7% 4.5% Cap Rate Spread BPS 330 330 330 200 Cap Rate 5.0% 7.8% 5.0% 6.5% Annual NOI Growth to Hold Value 6.6% 3.8% Source: Chandan; Means of Credit Risk Model Results Across Exit Underwriting Scenarios
Financing Exit Risk Late-March 2013 Agency Securitization of 5-Year Term Loans Scenario: Constant Spread & Long-Term Average NOI Growth Rate Partial IO 26% Interest Only 36% Weighted Average Interest Rate: 3.6% Balloon 38% Early 2013 Late 2017 T10 Yield 1.8% 4.5% Mortgage Rate 3.6% 6.3% Mortgage Spread BPS 180 180 Cap Rate 5.5% 8.2% Cap Rate Spread BPS 370 370 NOI ($M) $1.00 $1.16 Annualized NOI Growth Rate 3.0% Value ($M) $18.2 $14.1 Change in Value -22.2% Assumptions in Green
Financing Exit Risk Late-March 2013 Agency Securitization of 5-Year Term Loans Partial IO 26% Balloon 38% Scenario: Constant Value Supported by NOI Growth Rate Early 2013 Late 2017 NOI ($M) $1.00 $1.49 Annualized NOI Growth Rate 8.3% Value ($M) $18.2 $18.2 Change in Value 0.0% Interest Only 36% Weighted Average Interest Rate: 3.6% Scenario: Constant Value Supported by Narrower Cap Rate Spread Early 2013 Late 2017 Cap Rate Spread BPS 370 185 Annualized NOI Growth Rate 3.0% Value ($M) $18.2 $18.2 Change in Value 0.0%
Source of Debt for Small- and Mid-Cap Assets Other $50B+ Fewer than 25 very large banks account for 1 in 5 commercial mortgages MBS $10B to $50B Just over 100 large banks account for 1 in 4 commercial mortgages Life Companies $10B Share of Commercial Mortgages Outstanding by Capital Source Banks Tiered by Net Assets Source: Chandan; Federal Reserve
CMBS Conduit Sourcing $250 $225 $200 CMBS Issuance 2013 is Projected In Billions Source: Chandan, Issuer SEC Filings Hotel Other Apartment Office $175 $150 $125 Industrial $100 $75 $50 Retail $25 $0 199119931995199719992001200320052007200920112013 Source: SEC Filings, Chandan Except Where Noted Copyright 2012 Chandan Economics LLC
Outlook for the Real Estate Economy» The Real Estate Economy A modest growth outlook with primary threats from status quo fiscal policy; tightening monetary policy» Investment and Lending Trends A slow decline in risk aversion supporting small- and midcap buyers in primary adjacencies and secondary markets Rise in regional bank and CMBS volumes crucial to sustained improvement in liquidity Except Where Noted Copyright 2012 Chandan Economics LLC
NAIOP National Forums Symposium April 2013 Chicago!! Sam Chandan PhD FRICS! President & Chief Economist Chandan Economics! Associated Faculty of Real Estate The Wharton School!! Chandan Economics 825 Third Avenue 37 th Floor New York NY 10022! 888 650 8650 www.chandan.com @chandanomics!! dsc@chandan.com @samchandan THE ECONOMICS OF REAL ESTATE DEBT MARKETS CAPITAL MARKETS c