5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 1

A Brief Evolution of the A Brief Evolution of the Coming Commercial Coming Commercial gg

Real Estate CrisisReal Estate Crisis

Tim Hatlestad, CCIMTim Hatlestad, CCIMRE/MAX Achievers and RE/MAX Achievers and

RE/MAX Commercial InvestmentRE/MAX Commercial Investment

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 2

How we got in this mess

2

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 3

8.00

Yield Curve

Jun‐02 Jun‐03

5.00

6.00

7.00Fed Funds Rate: 1.75

11/6/2002: to 1.25

6/25/2003: to 1.00

2.00

3.00

4.00

0.00

1.00

3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 4

8.00

Yield Curve

Jun‐02 Jun‐04

5.00

6.00

7.006/25/2003: to 1.00

6/30/2004: to 1.25

2.00

3.00

4.00

0.00

1.00

3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 5

8.00

Yield Curve

Jun‐02 Jun‐05

5.00

6.00

7.006/30/2004: to 1.25

6/30/2005: to 3.25 (8x.25)

2.00

3.00

4.00

0.00

1.00

3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 6

8.00

Yield Curve

Jun‐02 Jun‐06

5.00

6.00

7.006/30/2005: to 3.25

6/29/2006: to 5.25 (8x.25)

2.00

3.00

4.00

0.00

1.00

3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 7

8.00

Yield Curve

Jun‐02 4/2/07

5.00

6.00

7.00

2.00

3.00

4.00

7

0.00

1.00

3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 8

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 9

When did the Phoenix/Scottsdale Residential Market Peak?

945,000

50,000

ARMLS Total Number of Active Listings - Single Family and Condominium

25 000

30,000

35,000

40,000

10,000

15,000

20,000

25,000

0

5,000

10,000

Jan-

02

Mar

-02

May

-02

Jul-0

2

Sep-

02

Nov

-02

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep-

03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Sep-

04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-0

5

Sep-

05

Nov

-05

Jan-

06

Mar

-06

May

-06

Jul-0

6

Sep-

06

Nov

-06

Jan-

07

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 10

1050%

60%

Year over Year Median Sale Price Delta

30%

40%

10%

20%

-10%

0%

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep-

03

Nov

-03

Jan-

04

Mar

-04

May

-04

Jul-0

4

Sep-

04

Nov

-04

Jan-

05

Mar

-05

May

-05

Jul-0

5

Sep-

05

Nov

-05

Jan-

06

Mar

-06

May

-06

Jul-0

6

Sep-

06

Nov

-06

Jan-

07

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 11

When did the Phoenix/Scottsdale Commercial Market Peak?

11$600,000 

Nationwide Commercial Transaction Volume (Trailing 12 Months in Millions)

CCIM Institute Investment Trends Quarterly (CCIM & RERC)

$300,000 

$400,000 

$500,000 

$‐

$100,000 

$200,000 

Q4 2006Q1 2007

Q2 2007Q3 2007

Q4 2007Q1 2008

Office Industrial Retail Multi‐Family Hotel

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 12

128.0%

Nationwide Cap Rates by Property TypeCCIM Institute Investment Trends Quarterly (CCIM & RERC)

Weighted Average Trailing 12 Months Data

5.0%

6.0%

7.0%

2.0%

3.0%

4.0%

0.0%

1.0%

Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008

Office Industrial Retail Multi‐Family

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 13

4 0%

4.5%

Relative Return:  Cap Rate Spread to 5‐Year TreasuryCCIM Institute ITQ (CCIM & RERC)

Cap Rate: Weighted Average Trailing 12 Months Data, Q End Treasury

Buy Buy

2.5%

3.0%

3.5%

4.0% LowLow

1.0%

1.5%

2.0%

SellSell

13

0.0%

0.5%

Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008

Office Industrial Retail Multi‐Family

Sell Sell HighHigh

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 14

Mortgage defaults

commence

03/00 NASDQ peaks at

5049

Fannie and Freddie buy

$81B in subprime securities

Dot Com Bubble

5049

Declining interest rates

Home ownership hits high

of 69.2%

090807060504030201009998979695

Housing prices begin

to fall

Extremely Low Interest Rates Dramatic increase in home prices

43% of first time homebuyers use “no money down” loans

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 15

Collapse of Bear Sterns 09/17

$85B bailout of AIG

02/25AIG in talks for 3rd

bailoutHousehold debt at 127% of annual

disposable income

Average US home prices 20% less than

in 2006

12MM Homeowners

have negative 02/27

US i t l

12/16 Fed Funds drop to

0.00 – 0.25%

2008 2009

07/11Oil tops $147 a

barrel

09/15Lehman Brothers

declares bankruptcy

11/10 AIG gets another

$150B

disposable income have negative equity

US acquires control of Citigroup

J F M A M J J A S O N D J F M

09/15BofA announces

purchase of Merrill Lynch

8MM homeowners

have negative equity

07/11$32B

IndyMac Bank placed h

$307B WaMu

02/17$782B American

Recovery and Reinvestment Act

09/08Federal takeover of Fannie

Mae and Freddie Mac

in conservatorship seized by OTS

10/03$700B Emergency

Economic Stabilization Act of 2008 (TARP)

signed into law

Reinvestment Act signed into law

15

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 16

The Capital Ratio is the percentage of a bank’s capital to its risk weighted assets

Bank Capitalization Requirements

capital to its risk-weighted assets.

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 17

•Adequately CapitalizedTier I capital ratio of at least 4%

Bank Capitalization Requirements

• Tier I capital ratio of at least 4%

• Combined Tier I and Tier II capital ratio of at least 8%

•Well Capitalized• Tier I capital ratio of at least 6%

• Combined Tier I and Tier II capital ratio of at least 10%

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 18

Mark to Market RequirementsSoft Market with few Buyers

$300k $300k $300k $300k $300k

18

Home HomeHome Home Home

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 19

Mark to Market RequirementsSoft Market with few Buyers

$300k $150k

$300k $300k $300k

Catastrophe forces “fire sale”

19

Home $150k Home

Home Home Home

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 20

Mark to Market RequirementsSoft Market with few Buyers

$150k

Catastrophe forces “fire sale”

$150k $150k $150k $150k

All assets “marked to market”

20

$150k Home

$150k Home

$150k Home

$150k Home

$150k Home

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 21

Actual Mark to Market Example

Expected Loss vs. Mark to Market Write-Down•Bank holds a pool of MBS totaling $3.65 billion•Underlying loans are NOT subprime•Generally good quality, 17 months of seasoning, original FICO score of 749•Subordinated collateral of $172 million exceeds worst-case loss projections

$913MM

Losses on MBS Held By Bank(in millions)

$1.8MM$100MM

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 22

“MTM accounting has destroyed well over $500 billion of capital in our financial system. Because

Mark to Market Accounting

p ybanks are able to lend up to ten times their capital, MTM accounting has also destroyed over $5 trillion of lending capacity.”

22

William M. Isaac, Former Chairman, FDIC

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 23

•Established the FDICS d l b k f b k

Glass-Steagall Act of 1933

•Separated commercial banks from investment banks

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 24

•Gramm-Leach-Bliley Act of 1999

Repeal of the Glass-Steagall Act

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 25

Traditional Lender Model

Deposits Financing

Depositors Lender Borrower

Interest Debt Service

Loan is Retained25

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 26

“New” Lender Model

Deposits Financing

LenderDeposits Borrower

Interest Debt Service

Loan is Sold CMBSRMBS26

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 27

Residential Mortgage Backed Securities

Prime Prime Prime

Low Risk Low YieldTranche

Waterfall

$$$$

A-1

Sub-Prime

A-1

Sub-Prime

A-1

Sub-PrimeHigh Risk

Tranche

Tranche

$$

$Prime Prime Prime

High Yield

27

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 28

Performing Banking Relationship

20% EquityCore Capital (Equity 10%)

Property Value

Fully Capitalized

Real EstateBank

80% Debt (Performing)

Other Bank Assets:

StocksBondsLoans

$0 Loan Loss

Reserves

LoansReal Estate

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 29

Non-Performing Banking Relationship

No EquityCore Capital (Equity <10%)

Property Value

Real EstateBankUnder

Capitalized

100% Debt (Non-Performing)

Other Bank Assets:

StocksBondsLoans

$$ Loan Loss

Reserves

LoansReal Estate

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 30

Foreclosure and Real Estate Owned

Original Value

Real EstateBank

Core Capital (Equity <10%)

Under Capitalized

Foreclosed Real Estate

Other Bank Assets:

StocksBondsLoans

$$$ Loan Loss

Reserves

Appraised Value

LoansReal Estate

30

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 31

“New” Lender Model“Broken”

Deposits Financing

Lender/ServicerDeposits Borrower

Interest Debt Service

Loan is Sold CMBSRMBS31

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 32

40.0

45.0 CMBS Issuances      ($Bil.)($Bil.)6 per. Mov. Avg. (($Bil.))

25.0

30.0

35.0

10 0

15.0

20.0

320.0

5.0

10.0

Mar‐99 Mar‐00 Mar‐01 Mar‐02 Mar‐03 Mar‐04 Mar‐05 Mar‐06 Mar‐07 Mar‐08

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 33

Subprime Mortgage Crisis

Excess Housing

Housing Prices

Inability to

Mortgage Defaults &

Negative Effects on

Housing Market

Cause of the Housing

InventoryPrices

Declineto

RefinanceDefaults & Foreclosure

Effects on Economy

•Housing bubble bursts•Household wealth declines

•Poor lending and borrowing decisions•ARM adjustments

•Home building declines•Rising job l

Mortgage

Housing Bubble

losses •Household wealth declines

Mo gageCash Flow Declines

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5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 34

Subprime Mortgage CrisisMortgage Cash Flow

Negative Effects on

Liquidity Crunch for Bank Bank

Capital

Financial Market

Bank •Downward pressure on business

Declines

Effects on Economy

Crunch for Businesses Failures

Capital Depleted

•Harder to get loans•Higher interest ratesStiff

•Washington Mutual•Wachovia•Lehman Brothers•IndyMacM th

•Loss on mortgages retained•Loss on MBS•Impact of Mark to Market•High bank debt levels

Lossesbusiness investments•Increasing unemployment•Stock market declines•Reduced household wealth •Stiff

underwriting•Many others•Many more to come

wealth

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5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 35

Subprime Mortgage CrisisNegative Effects on

Central Bank

Fiscal Stimulus

HomeOwner Federal

Government & Industry Responses

Systemic

Effects on Economy

Bank Actions

Stimulus Package

Owner Assistance Bailouts

•Economic Stimulus Act of 2008

•Hope Now Alliance•Housing & Economic R A t f

•Emergency Economic Stabilization Act (TARP)P bli P i t

Rescue

•Fannie & Freddie•Bear Sterns•AIGCiti

•Lower interest rates•Increased lending

Recovery Act of 2008

•Public-Private Investment Program•Global bank recapitalization

•Citigroup

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 36

The government’s response

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 37

Comparing Costs of the Credit Crisis

Government Expenditure Original Cost Inflation Adjusted Cost

Marshal Plan $12.7 billion $115.3 billion

Louisiana Purchase $15 million $217 billion

Race to the Moon $36.4 billion $237 billion

S&L Crisis $153 billion $256 billionS&L Crisis $153 billion $256 billion

Korean War $54 billion $454 billion

The New Deal $32 billion $500 billion (est.)

Invasion of Iraq $551 billion $597 billion

Vietnam War $111 billion $698 billion

37

NASA $416.7 billion $851.2 billion

TOTAL : $3.92 TRILLION

Source: Bianco Research

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 38

How Big is the Response?

D P All d SDate Program Allocated Spent

December 2007 Term Auction Facility $600 billion $468.6 billion

February 2008 Economic Stimulus Act of 2008 $168 billion $168 billion

March 2008 Bear Sterns Bailout $29 billion $26.2 billion

March 2008 Term Securities Lending Facility $200 billion $88.6 billion

March 2008 Primary Dealer Credit Facility n/a $61.3 billion

May 2008 Student Loan Guarantees $130 billion $9 billion

September 2008 Fannie Mae and Freddie Mac Bailout $400 billion $59.8 billion

September 2008 Foreign Exchange Dollar Swaps Unlimited $327.8 billion

October 2008 FHA Housing Rescue $320 billion $20 billion+

38

October 2008 FHA Housing Rescue $320 billion $20 billion+

October 2008 Auto Industry Energy Efficiency Loans $25 billion $0

October 2008 Troubled Assets Relief Program $700 billion $323.4 billion

Source: CNNMoney.com 03/29/09

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 39

How Big is the Response?

D P All d SDate Program Allocated Spent

October 2008 Money Market Guarantees $659 billion $15 billion

October 2008 Commercial Paper Funding Facility $1.4 trillion $241.3 billion

November 2008 Unemployment Benefit Extensions $9 billion $8 billion

November 2008 Citigroup Loan Loss Backstop $245 billion $0

November 2008 Term Asset-Backed Securities Loan Facility (TALF)

$1 trillion $4.7 billion

November 2008 GSE Mortgage-Backed Securities Purchases

$1.25 trillion $236.2 billion

November 2008 GSE Debt Purchases $100 billion $50.4 billion

November 2008 FDIC Temporary Liquidity Guarantee $1 5 trillion $297 1 billion

39

November 2008 FDIC Temporary Liquidity Guarantee $1.5 trillion $297.1 billion

2008 FDIC Bank Takeovers n/a $18.5 billion

February 2009 Foreclosure Prevention $25 billion $0

Source: CNNMoney.com 03/29/09

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 40

How Big is the Response?

D P All d SDate Program Allocated Spent

January 2009 Bank of America Loan-Loss backstop $97 billion $0

January 2009 Credit Union Deposit Insurance Guarantees

$80 billion $0

January 2009 US Central Federal Credit Union Capital Injection

$1 billion $1 billionp j

February 2009 American Recovery and Reinvestment Act

$787.2 billion n/a

March 2009 AIG $182 billion 129.3 billion

March 2009 US Government Bond Purchases $300 billion $7.5 billion

2009 FDIC Bank Takeovers n/a $1.9 billion

40

TOTAL: $10.5 TRILLION $2.6 TRILLION

Source: CNNMoney.com 03/24909

Does not include $500 billion - $1 trillion for Public-Private Investment Program

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 41

Commercial Property Outlook

41

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 42

•Losses in job market continue to reduce demand.

Vacancies to rise to 16 7% in 3Q09

Office

•Vacancies to rise to 16.7% in 3Q09.•Annual rent is expected to decline 4.2% in 2009.•Negative absorption of (77.4) million SF in 57 markets.

•> Sublease Space to compete with Direct Space

42Source: NAR Commercial Real Estate Outlook , 12/08

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 43

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 44

•Reduced demand for exports starting to impact industrial.

Vacancies are forecast to rise to 12 2% in 3Q09

Industrial

•Vacancies are forecast to rise to 12.2% in 3Q09.•Annual rent is estimated to decline 4.1% in 2009.•Negative absorption of (148.1) million SF in 58 markets.

•Very little new construction is anticipated.

44Source: NAR Commercial Real Estate Outlook , 12/08

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 45

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5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 46

•Sluggish consumer spending has hit retail hard.

Vacancies will rise from 9 8% to 13 4% in 3Q09

Retail

•Vacancies will rise from 9.8% to 13.4% in 3Q09.•Average rents expected to fall 9.0% in 2009.•Negative absorption of (49.8) million SF in 2009.

•Very limited new construction.

46Source: NAR Commercial Real Estate Outlook , 12/08

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 47

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 48

•Financing and investment fundamentals are out of balance.•Some areas experiencing modest stability.

Investments

Some areas experiencing modest stability.•Risk premiums are raising interest rates and lowering prices.•Expect lower loan-to-value ratios.•Increasing debt service coverage ratios.

48

•Shorter loan durations.•Heightened tenant scrutiny and underwriting.

Source: NAR Commercial Real Estate Outlook , 12/08

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 49

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 50

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© Tim Hatlestad, CCIM  Tim@InvestAZ.com 51

•Auctions (IRS, Treasury, banks, others)L

Transaction Opportunities

•Leasing•Sealed bids•Traditional brokerage•Loan acquisitions

51

Loan acquisitions•Private lending

Source: NAR Commercial Real Estate Outlook , 12/08

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 52

• CCIM 101 Financial Analysis Course

Scottsdale Area Association of REALTORS®

OPPORTUNITIES

• Scottsdale Area Association of REALTORS®• August 10-14, 2009• Go To CCIM.com to Register

52

5/8/2009

© Tim Hatlestad, CCIM  Tim@InvestAZ.com 53

Tim Hatlestad, CCIMRE/MAX Achievers and RE/MAX Commercial Investment

Questions & Answers

RE/MAX Achievers and RE/MAX Commercial Investment

Tim@InvestAZ.com480-922-2850

53