Disclaimer This presentation is not intended to be and does not constitute investment advice. This is provided as an accommodation and shall not be relied upon as investment advice. This presentation includes data from third parties. No representation is made with respect to the accuracy of any such information. Slides are for entertainment only and definitely not informative. Excess laughter can be damaging to your cheek bones and is not the responsibility of Tony Pierson or his present employer. In addition, the opinions expressed here may be changed at any time.
Was it all for N 0 u g h t? February 18, 2010 UNC Kenan-Flagler Business School Center for Real Estate Development Real Estate Conference The 00 Decade and the Year Ahead Tony Pierson Cornerstone Real Estate Advisers LLC
In a nutshell Today s Topics Economy was bad. It is getting better. BUT don t t downplay the risk Aren t t you thrilled to have lived through something your grandchildren will study in history and economics? Staged recovery GDP Recovery then Employment Gains Apartments: Good relative to other property types But, still face a long recovery time! Past investment performance isn t t guaranteed Which is great given how crummy the decade was Values and transaction volume look to be bottoming, so Second decade of 21 st Century should be better than first!
For making a little financial mess out of a BIG ONE! Alan Abelson
GDP Growth Signals Recovery Ahead 8 Annualized Growth Rate % 6 4 2 0-2 -4-6 Forecast -8 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Cornerstone, Economy.com
The Purchasing Managers (ISM) Survey Points to Improving Conditions 60 Nonmanufacturing Manufacturing 50 40 30 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Source: ISM Survey
and Not Just in USA Source: WSJ
Consumer Confidence Rebounds but 150 125 100 75 50 25 Dec-09 Jun-09 Dec-08 Jun-08 Dec-07 Jun-07 Dec-06 Jun-06 Dec-05 Jun-05 Dec-04 Jun-04 Dec-03 Jun-03 Dec-02 Jun-02 Dec-01 Jun-01 Dec-00 Jun-00 Source: The Conference Board
with a Severe Employment Recession Total Employment (Millions) 138 134 130 126 6/1/2001 12/1/2000 6/1/2002 12/1/2001 6/1/2003 12/1/2002 12/1/2004 6/1/2004 12/1/2003 6/1/2006 12/1/2005 6/1/2005 12/1/2007 6/1/2007 12/1/2006 12/1/2008 6/1/2008 12/1/2009 6/1/2009 Source: U.S. Bureau of Labor Statistics
Green Shoots in Job Market? Total change in non-farm employment from previous month (000 s) 200 100 0-100 -200-300 -400-500 -600-700 -800-900 To work for what you get is the honorable thing to do; But it doesn t follow that honor is lacking if one doesn t work because the jobs aren t there. 2008 2009 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Cornerstone Research, Bureau of Labor Statistics
Jobless Claims Green Shoots? 700 Moving 4 week average (000s) 600 500 400 300 200 Feb-00 Feb-02 Feb-04 Feb-06 Feb-08 Feb-10 Source: Employment and Training Administration
Where Will Employment Recover First? Forecast quarter for initial job growth U.S.=2010Q3 2010 Q2 2010 Q3 2010 Q4 Source: Economy.com s Employment Forecast
Recovery in Job Creation 2011-2012 average annual job growth forecast (%) US Orlando Houston Raleigh Austin Dallas Charlotte Denver Seattle Los Angeles Orange County San Francisco Portland Nashville Chicago Minneapolis Atlanta San Diego Boston Washington DC New York 1.8 1.8 2.1 2.0 2.3 2.6 2.7 2.6 2.6 2.6 2.5 2.4 2.9 2.8 2.8 3.0 3.1 3.1 3.3 3.2 3.5 1 2 3 4 % Average Annual Growth Rate Source: Economy.com
The Economy hits Bottom and Recovery Begins Global recession ends U.S. employment losses cresting at historic levels Leading indicators, consumer sentiment improves Aggressive stimulus flows through world economies Flood of liquidity spurs economic growth Slack labor markets diminish near-term inflation concerns U.S. business cycle shows signs of recovery Baseline forecast: 2010 GDP recovery; 2011 employment recovery Texas and Tech markets lead; California, Florida, and Arizona lag 2008 2009 2010 2011 2012 U.S. GDP 1.1% -2.5% 2.4% 3.8% 5.1% Employment Growth -0.4% -3.7% -0.7% 1.7% 3.3% Source: Economy.com, Cornerstone Research
Major Hangovers Projected 2011 Deficit as a Percentage of GDP 12.5% 9.4% 7.6% U.K U.S. OECD
Terrorism Anxiety Keeps Morphing
Apartment Markets A Year Ago: A Mixed Bag 2008Q4 Apartment Occupancy Change Versus Rent Growth 10% Rents Rise and Rents and Occupancy Rise 5% Occupancy Drops Houston Rent Change 0% -5% Salt Lake City Charlotte Phoenix US Raleigh Riverside, CA -10% -15% DANGER ZONE -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% Occupancy Change Rents Drop and Occupancy Rises Source: Axiometrics, Cornerstone Research
Apartment Markets Show Wear and Tear 2009Q3 Apartment Occupancy Change Versus Rent Growth 10% 5% Rent Change 0% -5% -10% -15% DANGER ZONE Las Vegas US Charlotte Seattle Raleigh Riverside -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% Occupancy Change Source: Axiometrics, Cornerstone Research
Apartment Markets - Signs of Recovery? 2009Q4 Apartment Occupancy Change Versus Rent Growth 10% 5% Rent Change 0% -5% -10% -15% US Providence, RI Raleigh Houston Charlotte Las Vegas Seattle Rents Drop and Occupancy Rises -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% 5% Occupancy Change Source: Axiometrics, Cornerstone Research
Office Markets also a Mixed Bag a Year Ago 2008Q4 Office Occupancy Change Versus Rent Growth 20% Houston 10% Charlotte % Rent Change 0% -10% Riverside US Raleigh Toledo Pittsburgh -20% -30% -10% -5% 0% 5% 10% % Occupancy Change Source: CBRE-EA, Cornerstone Research
Office Markets today: Sharp Deterioration 2009Q4 Office Occupancy Change Versus Rent Growth 20% Rents and Occupancy Rise 10% % Rent Change 0% -10% -20% -30% San Jose DANGER ZONE Charlotte San Francisco US Raleigh Hartford Rents Drop and Occupancy Rises -10% -5% 0% 5% 10% % Occupancy Change Source: CBRE-EA, Cornerstone Research
A Crazy Decade for Investment Returns 30% Total Returns Ending 4 th Quarter 2009 Past Performance is no Guarantee of Future Results Thank Heavens for That! 20% 10% 0% -10% -20% Real Estate Stocks Bonds 1-Year 3-Year 5-Year 10-Year Source: NCREIF
Apartment Returns Lose some of their Luster Rank of all One-Year Returns 1999 Q4 to 2009 Q4 Apartments Industrial Office Retail First 4 3 14 20 Second 17 21 2 1 Third 13 16 6 6 Fourth 7 1 19 14 Source: NCREIF
Metro Area Ten Year Apartment Returns period ending 2009 Q4 The Best! Washington, DC San Diego, CA Bethesda, MD Santa Ana, CA Ft. Lauderdale, FL USA The Worst! Denver, CO Kansas City, MO Atlanta, GA Raleigh, NC Charlotte, NC Return 11.6% 10.6% 10.5% 10.3% 9.9% 6.9% 5.6% 5.0% 4.6% 3.7% 3.3% Rank 1 2 3 4 5 25 26 27 28 29 Source: NCREIF, Cornerstone Research
Commercial Real Estate Sales Activity Monthly Sales Volume By Property Type 75 Billions of US$ 50 25 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Apartments Industrial Office Retail Hotel Source: Real Capital Analytics
Equity Transactions Billions of $ Apartments 2001 21 Peak 2007 101 2008 38 2009 14 Industrial 14 53 22 8 Office 32 206 53 16 Retail 13 63 21 12 Total 79 502 145 52 Source: Real Capital Analytics
Mortgage Maturities May Lead to Opportunity 350 300 250 Historical maturities Increasing pressure on distressed owners to sell Decreasing pressure may accommodate real estate recovery 200 $ Billions 150 100 50 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 Source: Federal Reserve Board, Foresight Analytics, Cornerstone Research. *Includes both multifamily and commercial mortgages originated by banks, insurance companies and CMBS lenders.
Real Estate Investment Dynamics: Pricing Property Valuations and Transaction Prices Down Sharply 2.3 NCREIF Property Index (NPI)* 2.0 MIT Transaction-Based Index (TBI) Indices (Jan. 2002 =1) 1.8 1.5 1.3 Moody's/REAL Property Price Index 1.0 NCREIF decline slowing, TBI index hints at bottoming 0.8 2002 2003 2004 2005 2006 2007 2008 2009 * Denotes equally weighted cash flow based NCREIF appreciation return component. Notes: NCREIF and TBI are quarterly indices through 3Q09. Moody s/real is a monthly index extending through September 2009. Sources: Cornerstone Research based on data from NCREIF, MIT Center for Real Estate, and Moody s Investors Service.
So in Conclusion : Recession ended during the second half of 2009 GDP recovery first then Employment Gains Employment encourages Migration and Household Formation New Supply is constrained Pricing is close to bottom and financing is available So, Apartments Recover First and Attract Investors who anticipate 2012 income growth But, given experience of the last decade we need to acknowledge great risk to forecasts (and Economists)