COMMERCIAL ECONOMIC ISSUES & TRENDS FORUM

transcript

OMNI SHOREHAM HOTEL AMBASSADOR ROOM

THURSDAY • MAY 16, 2013 • 1:00 pm – 3:00 pm

LAWRENCE YUN, PhD

Chief Economist, Sr. Vice President

National Association of REALTORS®

H. BLAINE WALKER, CRB, GRI

President & CEOWalker & Co. Real

Estate

DANIEL SIGHT, CCIM, SIOR

Vice President, Broker

Reece Commercial

RANDY SCHEIDT, MAI, CCIM, GRI

PresidentDon R. Scheidt & Co.

LINDA ST. PETER

Corporate REALTOR®Prudential Connecticut

Realty

2013: The “New Normal”Economic & CRE Trends at the Crossroads of Political Changes

How do you feel about the economy today vs. one year ago?

A) WorseB) About the sameC) A little betterD) Big improvement

REALTORS® Commercial Economic Issues & Trends Forum | May 2013 | Washington, DC

Record High Stock Prices(but only ½ of population have stock exposure)

Stock Price Index: Standard & Poor's 500 Composite

1941-43=10

1005009590858075706560

Source: Wall Street Journal /Haver Analytics 05/10/13

Falling Unemployment Rate

Civilian Unemployment Rate: 16 yr +

12111009080706050403020100Source: Bureau of Labor Statistics /Haver Analytics 05/10/13

But Very High Number of Part-time Workers

Work Part Time: For Economic Reasons: All Industry

SA, Thous

12111009080706050403020100

Source: Bureau of Labor Statistics /Haver Analytics 05/10/13

Are employers in your market expanding?

A) Yes, a lotB) A littleC) Staying the courseD) No; they are shrinking

Indiana Total Jobs

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr2500

Kansas Total Jobs

Connecticut Total Jobs

Utah Total Jobs

D.C. Metro Total Jobs

Texas Total Jobs

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr8000

Jobs in Commercial Construction and Contractors

How do you feel about the CRE markets today vs. one year ago?

2012 Global CRE Investments Rise 4%

Source: Real Capital Analytics

15 of Top 30 Global Markets are in U.S.

Source: Real Capital AnalyticsREALTORS® Commercial Economic Issues & Trends Forum | May 2013 | Washington, DC

Cross-border Capital Flows into U.S. Rise

Yes; 18%

No; 82%

2012 REALTOR® CRE Sales to International Clients/Investors

Source: REALTORS® 2012 CRE Lending Survey

U.S. Sales Rise 24% in 2012; 35% in 2013.Q1

'06 '07 '08 '09 '10 '11 '12 '12 '12 '12 '13$0

$20,000,000,000

$40,000,000,000

$60,000,000,000

$80,000,000,000

$100,000,000,000

$120,000,000,000

$140,000,000,000

$160,000,000,000

$180,000,000,000

Individual Portfolio Entity

2012: $283 B

REALTOR® Markets & Deal Size

< $250,000

$250,000 - $500,000

$500,000 - $1,000,000

$1,000,000 - $2,000,000

$2,000,000 - $5,000,000

$5,000,000 - $10,000,000

> $10,000,000

2013 CRE Lending Survey: Value of most recent sales transaction

Source: NAR

Tale of Two Commercial Markets

2008.Q4

2009.Q1

2009.Q2

2009.Q3

2009.Q4

2010.Q1

2010.Q2

2010.Q3

2010.Q4

2011.Q1

2011.Q2

2011.Q3

2011.Q4

2012.Q1

2012.Q2

2012.Q3

2012.Q4

Sales Volume (YoY % Chg)

Major CRE Markets Realtor CRE Markets

Deals < $2M +

Deals > $2M

2008.Q4

2009.Q1

2009.Q2

2009.Q3

2009.Q4

2010.Q1

2010.Q2

2010.Q3

2010.Q4

2011.Q1

2011.Q2

2011.Q3

2011.Q4

2012.Q1

2012.Q2

2012.Q3

2012.Q4

-25.0%

-20.0%

-15.0%

-10.0%

Sales Prices (YoY % Chg)

Moody’s/RCA CPPI - Major MarketsRealtor CRE Markets

Source: NAR, Real Capital AnalyticsREALTORS® Commercial Economic Issues & Trends Forum | May 2013 | Washington, DC

Low Interest Rates Encourage Lending?

A) Yes, low rates encourage more borrower to seek credit

B) No, low rates do not excite the bankers from lending

C) Unsure

Monetary Policy by Federal Reserve (zero rate policy to 2015 ?)

20052006

20072008

20092010

20112012

2013 foreca

2014 foreca

2015 foreca

Fed Funds %

Federal Reserve Balance Sheet from Quantitative Easing

1-Aug-0

7-Nov-0

13-Feb-08

21-May

27-Aug-0

3-Dec-0

11-Mar-

17-Jun-09

23-Sep-09

30-Dec-0

7-Apr-1

14-Jul-1

20-Oct-

26-Jan-11

10-Aug-1

16-Nov-1

22-Feb-12

30-May

5-Sep-12

500000

1000000

1500000

2000000

2500000

3000000

3500000

Total Assets

$ million

Feeling Inflationary Pressure? Particularly in Property Management

A) Virtually No inflationB) Rents rising modestly, though faster than

Costs of operationC) Rents rising modestly, but slower than Costs

of operation D) Both Rents and Costs are rising; Inflation is

building

Consumer Price Inflation Less than 2%(% change from one year ago)

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr

Core Overall

Rising Renters’ and Homeowners’ Rent Growth (Above 2% and On the Way to 3%)

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr

Owners' Equivalent Rent Renters' Rent

Natural Gas Price(100% increase from one year ago)

2011 - Jan

2011 - Mar

2011 - May

2011 - Jul

2011 - Sep

2011 - Nov

2012 - Jan

2012 - Mar

2012 - May

2012 - Jul

2012 - Sep

2012 - Nov

2013 - Jan

2013 - Mar

Federal Government Tax Revenue and Spending

1970 - Jan1976 - Jan1982 - Jan1988 - Jan1994 - Jan2000 - Jan2006 - Jan2012 - Jan0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

Revenue Spending

12-month tally in $ million

10-Year Treasury Yields

1970 - Jan 1975 - Jul 1981 - Jan 1986 - Jul 1992 - Jan 1997 - Jul 2003 - Jan 2008 - Jul0

How is the Credit Availability for Commercial Deals?

A) Not a ProblemB) Not good but better than a year agoC) Extremely difficult to obtain

Big Banks getting Bigger

1970 1980 1990 2000 20120%

60%54%

Top 10 Banks' Share of Total Deposits

Source: Janicki and Prescott, BankRate.com

1% 11%

3%Current sources of financing for commercial deals

National banks (“Big four”)

Regional banks

Local banks

Credit unions

Life insurance companies

Private investors

Public companies

Small Business Administration

Other, please specify

Source: NAR

Small Banks Important to REALTORS®

Causes of Bank Capital Availability

Reduced net operating income, property values, and equity

A slow-down in the pooling and packaging of CMBS by financial institutions

Regulatory uncertainty for financial institutions

New and proposed US legislative and regulatory initiatives

Inability of banks to dispose of distressed assets

European debt crisis

The most relevant cause for lack of sufficient bank capital available for commercial lending

Source: NAR, 2013 CRE Lending Survey

Legislative/Regulatory Issues

> Dodd–Frank Wall Street Reform and Consumer Protection Act

> Patient Protection and Affordable Care Act (Obamacare)

> Basel III

> Qualified Commercial Real Estate Mortgage• Securitizers must hold 5% of CMBS issued unless:

– 65% loan-to-value (60% if cap rate < 10-year swap + 300bp)– Debt service coverage ratio of 1.5x (stable history) to 1.7x or higher – Amortization period ≤ 20 years– 10-year minimum loan term– 80% of tenants must pay rent + taxes + insurance + maintenance– Borrower credit and income verification along with 2-year forecast– Collateral restriction limits subordinate financing– Securitizer must buy back bad loans in order to retain QCRE status

– Just 0.4% of CMBS ever issued would qualify for first 3 stipulations

Legislative/Regulatory Impacts

Decrease the flow of capital into U.S. real estate

Have no effect on the flow of capital into U.S. real estate, but change the way in which transactions or loans are structured

Have no effect on the flow of capital into U.S. real estate

Increase the flow of capital into U.S. real estate

Impacts of new/proposed U.S. legislative and regulatory initiatives

What is HOT in your market?

A) Office Investment SalesB) Industrial Investment SalesC) Retail Investment SalesD) Are you kidding? Nothing is hot

Apartments Gain Market Share

Office - CBD14%

Office - Sub13%

Flex4%

Warehouse9%

Mall & Other11%

Strip7%

Garden19%

Mid/Highrise11%

Full-Service5%

Limited Service2%

Land4%

Office $77.6BIndustrial $36.9BRetail $52.8BApartment $84.6BHotel $19.6BLand $11.8B

Prices Advance – Apartments Lead20

110.00

130.00

150.00

170.00

190.00

210.00

Moody’s/RCA CPPI

Apartment Retail Industrial Office

Renter Households

1980 - Q1 1984 - Q2 1988 - Q3 1992 - Q4 1997 - Q1 2001 - Q2 2005 - Q3 2009 - Q425,000

27,000

29,000

31,000

33,000

35,000

37,000

39,000

41,000In thousands

Large Spread between Cap Rates and Treasuries

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '121%

10yr UST* Cap Rate Spread (bps)

Apartments and CBD Office Attracting investors as evidenced by low cap rates

'06 '07 '08 '09 '10 '11 '12'12'12'12'135.0%

Suburban Office

Industrial

CBD OfficeApartment

Retail

What is HOT in your market?

A) Office LeasingB) Industrial LeasingC) Retail LeasingD) Are you kidding? Nothing is hot

Commercial Fundamentals – Apartments

Commercial Fundamentals – Office

Commercial Fundamentals – Retail

Who is buying CRE in your market?

A) Institutional/REIT InvestorsB) Private local investorsC) National BanksD) Regional/Local BanksE) No one has any money to buy

Cross-Border Inst'l/Eq Fund Listed/REITs Private User/other

$50,000,000,000

$100,000,000,000

$150,000,000,000

$200,000,000,000

$250,000,000,000

$300,000,000,000

Who Is Buying?

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '120%

Lending Environment

Commercial Mortgage Rates

Commercial Multifamily

Fixed rate loans with 7-10 year terms; 3 mo. avg.

Tightened significantly

Tightened somewhat

Not changed

Eased somewhat

Eased significantly

Credit Availability

2012 2011

Source: NAR

Lending Environment – REALTOR® Markets

Financing: 90% LTV

Financing: 85% LTV

Financing: 80% LTV

Financing: 75% LTV

Financing: 70% LTV

Financing: 65% LTV

Financing: 60% LTV

Financing: 55% LTV

Financing: 50% LTV

100% Cash

CRE Financial Terms

Source: NAR, 2013 CRE Lend-ing Survey

Yes; 52%No; 48%

Sales transaction fail during past 12 months due to lack of financing?

Who Is Lending for Large Deals?

Secondary

Tertiary

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Lender Composition ($2.5M+)

CMBSFinancialGov't AgencyInsuranceInt'l BankNat'l BankReg'l/Local BankPvt/Other

Who Is Lending in REALTOR® Markets?

National banks (“Big four”)

Regional banks

Local banks

Credit unions

Life insurance companies

Private investors

Public companies

Small Business Administration

2013 REALTORS® Commercial Real Estate Lending Survey

Source: NAR

For CRE investors, how is the debt market?

A) Doing deals (a lot more paperwork)B) Still hard, but you can find itC) Not availableD) I am trying to get rid of all my debt

Net Operating Income

Increased 1% - 4%

Increased 5% - 9%

Increased 10% - 15%

No Change

Decreased 10% - 19%

Decreased 20% - 24%

Decreased 25% - 29%

Decreased 30% - 34%

Decreased 35% - 39%

Decreased 40% - 49%

Decreased 50% - 75%

0% 5% 10% 15% 20% 25% 30%

How did net operating income ($/SF) of sold/leased properties change from the 2007 to 2012?

Valuation = Appraisals and/or BPOs

Yes; 36%

No; 64%

Sales transaction fail during past 12 months due to appraisals?

Current valuation issues

Impact of distressed properties

Valuation of “high risk” business models

How optimistic are you about the CRE markets in 2014?

Apartments Markets

Office Markets

Retail Markets

Commercial Fundamentals – Industrial

Is there new development in your market?

A) Yes, best in many yearsB) Only few projectsC) What is development?

Commercial Construction/Development

2000 - Q1

2000 - Q3

2001 - Q1

2001 - Q3

2002 - Q1

2002 - Q3

2003 - Q1

2003 - Q3

2004 - Q1

2004 - Q3

2005 - Q1

2005 - Q3

2006 - Q1

2006 - Q3

2007 - Q1

2007 - Q3

2008 - Q1

2008 - Q3

2009 - Q1

2009 - Q3

2010 - Q1

2010 - Q3

2011 - Q1

2011 - Q3

2012 - Q1

2012 - Q3

2013 - Q1

Real Private Nonresidential Investment: Structures (% Chg Annual Rate)

Source: BEA

Value of Construction Put-in-Place

2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan0

100000

OfficeCommercial

CRE REOs: How active are banks and special servicers in your market?

A) Selling a lotB) They already sold itC) They are in a holding patternD) I just got a new toaster to buy a bank REO

CRE Debt Maturities Peak

Source: Trepp, LLC

When will CRE markets be HOT again?

A) Beginning to feel HOT this yearB) In 1 to 3 yearsC) In 4 to 5 yearsD) Never again (I am going to sell cars)

Vehicle Sales

22 In million units annualized

Green Street Advisor Price Index(Class-A Expensive Properties for REITs)

1998 - Jan 2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan0

Secondary Markets in Spotlight

How optimistic are you about the economy in 2014?

Economic Forecast

2011 2012 2013Forecast

2014Forecast

GDP Growth +1.8% +2.1% +2.1% 3.0%

Net New Jobs 1.6 million 2.2 million 2.0 million 2.4 million

CPI Inflation 3.1% 2.1% 2.3% 3.4%

10-year Treasury

2.8% 1.8% 2.0% 2.7%

Fed Funds Rate 0.1% 0.1% 0.1% 0.1%

Government Spending Growth

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

StateFederal

Corporate Profits($ billion)

2000 - Q1

2000 - Q4

2001 - Q3

2002 - Q2

2003 - Q1

2003 - Q4

2004 - Q3

2005 - Q2

2006 - Q1

2006 - Q4

2007 - Q3

2008 - Q2

2009 - Q1

2009 - Q4

2010 - Q3

2011 - Q2

2012 - Q1

Consumer and Business Spending Growth

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Business Consumer%

U.S. Coal Production(Reaching 20-year Low)

1990 - Jan 1993 - Jul 1997 - Jan 2000 - Jul 2004 - Jan 2007 - Jul 2011 - Jan70000000

75000000

80000000

85000000

90000000

95000000

100000000Short tons; 12-month average

Shrinking Trade Deficit($ billion in 2005 dollars)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Commercial ForecastOFFICE 2013 I 2013 II 2013 III 2013 IV 2014 I 2013 2014Vacancy Rate 16.0% 15.9% 15.7% 15.6% 15.6% 15.9% 15.7%Net Absorption ('000 sq. ft.) 10,268 6,310 8,955 8,440 13,128 33,973 42,349Completions ('000 sq. ft.) 7,220 7,275 6,030 5,494 8,598 26,019 30,986Rent Growth 0.6% 0.6% 0.7% 0.7% 0.7% 2.6% 2.8%

INDUSTRIAL 2013 I 2013 II 2013 III 2013 IV 2014 I 2013 2014Vacancy Rate 9.6% 9.5% 9.5% 9.4% 9.2% 9.5% 9.0%

Net Absorption ('000 sq. ft.) 24,354 21,919 38,966 36,531 20,695 121,770 103,475Completions ('000 sq. ft.) 12,643 13,448 8,787 8,362 18,849 43,241 64,467Rent Growth 0.5% 0.6% 0.5% 0.7% 0.6% 2.3% 2.6%

RETAIL 2013 I 2013 II 2013 III 2013 IV 2014 I 2013 2014Vacancy Rate 10.7% 10.6% 10.6% 10.5% 10.4% 10.6% 10.1%Net Absorption ('000 sq. ft.) 4,297 2,865 1,910 2,865 5,899 11,935 16,387Completions ('000 sq. ft.) 1,981 1,712 1,923 1,964 3,328 7,580 12,735Rent Growth 0.2% 0.3% 0.5% 0.5% 0.5% 1.5% 2.1%

MULTI-FAMILY 2013 I 2013 II 2013 III 2013 IV 2014 I 2013 2014Vacancy Rate 4.0% 3.9% 3.9% 3.8% 3.9% 3.9% 4.0%Net Absorption (Units) 64,954 67,661 56,835 81,193 60,759 270,643 253,161Completions (Units) 31,851 40,457 36,945 39,205 36,251 148,458 168,962Rent Growth 1.0% 1.1% 1.2% 1.3% 1.2% 4.6% 4.7%

Sources: National Association of REALTORS® / Reis, Inc.REALTORS® Commercial Economic Issues & Trends Forum | May 2013 | Washington, DC

Will China overtake the U.S. in GDP?It depends on Singapore

19291934

19391944

19491954

19591964

19691974

19791984

19891994

19992004

20092014

20192024

U.S. (growing 3%) China (growing 8%)

If you had $10 Million, what would you buy?

A) OfficeB) IndustrialC) RetailD) MultifamilyE) OtherF) If I had $10M, I’d move to Hawaii and hang it up

Research Resources

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