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Real Estate Outlook 2010: No Bottom, No Net presented to: SeattleChapter of the Appraisal Institute Fall Conference by: Jim DeLisle, Ph.D. Annotated. Select View Notes in PPT to read my text. December 1, 2009 jrdelisle@jrdelisle.com |
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Presentation OverviewI: Outlook 2010 Prelude II: Economic and Capital Markets III: Real Estate Capital Markets IV: Commercial Real Estate Market Update V: Implications for Seattle Real Estate Market |
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Butt, what the “L”Three Major Attributes of Real Estate Revisited L, L, L Liability, Litigation, Liquidity (NOT!) Three major attributes of real estate . . . L, L, L. Three major attributes of real estate . . . L, L, L. . . . . . . . ulnerable, . . . . . . . ulnerable, . . . . . . . ulnerable. The 2009 regime of real estate . . . D D D . . . . . . . istressed, . . . . . . . istressed, . . . . . . . istressed. The 2010 + regime of real estate . . . |
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Commercial Real Estate: How we Got HereTotal Return Defensive Capital $’s |
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How We’re Doing: Institutional Real EstateThe Good News…. It’s not as bad as it was The “Bad News” Implicit Cap Rates 200bp below averages Source: NCREIF |
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The Three C’s of our DisconnectCredit Crisis Easy Credit Cheap Credit Plentiful Credit Crisis of Confidence Consumer Confidence Corporate Confidence Crisis of Collateral Value attributable to delinking spatial market/capital market Values correction as “marked to market” Re-pricing of Risk |
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Spatial & Capital De-connect and Re-connectValues Capital Market BV (Bubble Value) Debt -20%+/- Bubble Cap Rate Rise Interest Rates/Debt Rise Spatial Market Cap R -20%+/- Bubble Market -10-20%+/- Softening Vacancy Up Rents Down -40-60% Capital Market Bubble Warranted Construction: Expanding Demand Rising Rents Market Inefficiency |
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What Happened: Commoditization of PricingMarket Risk/Return Long-Term Recent: Risk/Return 5 yrs |
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Who Responded to the SurveyExperience of Respondents What Specializations? JRD Prediction Number with Same Company will decline….. Others: Regulator, pension advisor, government, right-of-way, lender appraisal department, lawyer, student Seattle MAI Respondents |
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When National & Seattle Markets Bottom OutNational Seattle Seattle Respondents |
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Part II: A Growing Consensus on EconomySeattle Respondents |
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Breaking News on Real Estate & the Economy |
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The Good News: Employment Losses SlowingNet Employment losses Jobless Claims Slowing? Unemployment 10% The glass is half-full syndrome; wishful but tentative…. Source: economy.com |
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Business Cycles: An Historical ComparisonClick for annotation |
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Critical Elements to Sustainable RecoveryThe Future Remains Uncertain Few degrees of freedom; stars must stay aligned…. Seattle MAI Respondents |
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Federal Stimulus Funding: Pledged & Provided |
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US Recovery Status |
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Business Inventories and Business SpendingBusiness Inventories Business Spending Good News: Manufacturing up |
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Focus on Small BusinessSmall business report tighter credit Reactions Cutting payrolls Reducing inventory Reducing capital spending Outlook No near-term improvement Credit Remains Tight for Business Source: economy.com |
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Housing Activity and Delinquency RatesConstruction Delinquency & Default Housing Index |
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Residential Delinquencies, Foreclosures & Charge-OffsLoan Charge-Off Rates to Rise Delinquency Rates Residential Foreclosures Source: economy.com |
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Consumer Confidence, Spending & CreditConsumers are over 70% of GDP…. Butt… As of October 2009, recent uptick in retail sales on Year over Year; partly weak 2008… Consumers Contracting Source: economy.com |
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Global and Domestic Business ConfidenceU.S. Business Confidence Some improvement…. But, deficit…. Source: economy.com |
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Global Recession MapSource: economy.com |
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Part II Summary: The EconomyMacro-economic Environment Economy showing some signs of turning Businesses struggling, credit tight Consumers bearish The Future Remains Uncertain |
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Part III: Real Estate Capital Markets |
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Current and Future National-Level Cap RatesMost common: modes Seattle MAI Respondents |
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Current and Future Seattle-Area Cap RatesSeattle MAI Respondents |
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CBA: Properties for Sale Output |
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Seattle Capital Market: Agree/NotSeattle MAI Respondents |
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PositivesNegatives Capital Markets & Capital Flows Investment Preferences Core assets at distressed prices Major markets, strong assets Timing Still waiting for bottom Indecisive; slower to act Opportunities Cash Distress Takeovers Decreased capital flows Investors still frozen Debt limited sources & tighter Access & yield for equity Capital Market Challenges Refinancing: volume & status Weakening fundamentals Surge in distressed assets Valuations & mark-to-market Growing pressure to act.. |
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Commercial Leverage: Problems & ImplicationsTightened Credit Higher DCRs and LVs Hard valuations, less financial engineering Recourse debt Real equity positions Outlook for Commercial Debt Limited supply; flight to quality Tighter; increased equity and recourse Refinancing Crisis No obvious sources of debt Banks struggling with carry-over problems No CMBS resurgence |
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Bid/Ask Spread: Trends and Value PressuresBid/Ask De-Compression Distressed Sellers will have to act Distressed Assets will face melt-down risks Mark-to-Market Accounts NCREIF - 35% w/o Distressed Sales Going Forward: Three Strikes Comps Down as Assets Dumped NOI Erosion, Vacancy & Rents Debt & Equity Yields Up Appraisals under increasing scrutiny |
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Distressed Asset Recovery by Source & Terms |
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Players in Distressed Asset MarketREITs Have reversed downward spiral Significant new capital raised through Sept 2009 Low Dividends suggest accretive opportunities Global Investors Western European Middle East Asia/Australia Domestic Funds Significant growth in US New Opportunity Funds New Value-Plus Funds |
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REITs: Back to the FutureChanging Game? Through June, raised $12 billion in stock Who? Office: Boston Properties, Vornado Realty Trust Retail: Regency Centers, Simon Property Group Challenges Existing Leverage Eroding Fundamentals Falling Property Values Accretive? Buy at 8-10, payout 4-6 |
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REIT Snapshot |
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REIT Stock Prices: Retail and Office |
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Apartment, Hotel and Diversified REITs |
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Part III Summary: Real Estate Capital MarketsMacro-economic Environment Economy showing some signs of turning Businesses struggling, credit tight Consumers bearish Real Estate Capital Market Still shut down; some activity increasing Rising Cap rates, tighter credit, picky sources Major challenge in de-levering |
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Part IV: Spatial MarketComponents of Spatial Market Demand Supply Market Balance |
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Commercial Market FundamentalsVacancy Rates Development (msf) Suburban Office Downtown Office Industrial Retail Apartments Apartments Industrial Office Retail Source: Torto Wheaton Research, REIS, 2009 Emerging Trends |
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NCREIF Property Type Return Overview |
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Risk/Return by Property Type by Regime |
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Office Real EstateOverview Corporations giving back space Sublease activity increasing Vacancy rates rising Rents softening Credit will be tightening Construction declining Areas of Concern Speculative projects Commodity product Capital Needs: Cap X, TI’s Second and third tier markets Emerging sub-markets Opportunities Abandoned Projects Entitled Projects Capital Needs Projects Asset Takeovers Distressed Owners/REO |
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Retail Real EstateOverview Retail sales tepid Inventories will be lean Credit tight, local and regional players Retailer contraction; unit profitability Defensive capital to protect markets Areas of Concern New unproven & unopened stores Underperforming existing units Unanchored Life-style centers Tenant Bankruptcies Mixed-use in marginal markets Niche Oversaturation Opportunities Projects with Lost Anchors Entitled/Spec Projects Capital Needs Projects Asset Takeovers Distressed Owners & REO |
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Industrial Real EstateOpportunities Projects w/ Lost Tenants Capital Needs Projects Changing H&B Use Distressed Owners & REO Overview Absorption slowing Rents softening Construction moderating Changing Logistics Models Globalization Areas of Concern Overbuilt markets Functionally obsolescence Office Showroom/Flex Exports in Global Recession |
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Multifamily Real EstateOverview Modal Shift: Rent vs. Own Concessions increasing Absorption slowing Vacancy rates rising Rents softening Areas of Concern Homogenized Product Product Positioning Re-apartmenting Density as an End vs. Means Parking: Shared Opportunities Projects in pre-development Entitled but unfunded Repositioning Conversion (future) Distressed Owners & REO |
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HotelsOpportunities Projects in development: not finished Entitled: not started Reflagging existing Distressed Owners & REO Overview High risk/return profile Travel down Companies down-scaling Occupancy falling Rates slipping Areas of Concern Homogenized Product Poor Product Positioning Hotel/Apartment/Condo Hybrids Weak flags |
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Growth in Distressed Assets by Property Type |
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What’s Happening on the Distressed RE FrontStatus and Location Growth & Build-up Source: Real Capital Analytics |
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Distressed Asset Spillover: Why it MattersPhipps Tower: Crescent/Manulife Wells Fargo Lead, Regions Follows Two Alliance Center: Tishman 3630 Peachtree: Duke/Pope & Land Bank of America Lead Regions Lead Terminus 200: Cousins Sources: RCA, WSJ 4/21/2009 |
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Distressed Loan Recovery by Property TypeOffice 53% Industrial 66% Retail 72% Hotel 65% Apartment 63% Development 32% Land 45% Overall 60% |
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Part IV Summary: The Spatial MarketsMacro-economic Environment Economy showing some signs of turning Businesses struggling, credit tight Consumers bearish Real Estate Capital Market Still shut down; some activity increasing Rising Cap rates, tighter credit, picky sources Major challenge in de-levering Spatial Market Fundamentals continue to erode lagging economy Vacancy rates rising, rents falling Stagnant demand, leasing sluggish |
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Total Returns: Seattle vsUS |
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How Seattle Cap Rates Compare to USNot as different as we thought Challenge: Remove Volatility |
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Seattle Institutional Returns by Property Type |
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What’s Happening in SeattleWhat’s it all About? |
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Seattle Real Estate Fundamentals: Yay/NaySeattle MAI Respondents |
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Additional Insights on Seattle MarketSeattle MAI Respondents |
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Seattle Market Risks: Significant/NotSeattle MAI Respondents |
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Issues and Risks in SeattleIssues Risks Seattle MAI Respondents |
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Part V. “Real” Opportunities in Seattle RESeattle MAI Respondents |
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Other Challenges: Players and ProductsPlayers Emergence of new players will create further problems Many na?ve buyers will clog up the system Intermediaries will raise capital but struggle to deploy Infrastructure not in place to deal with sheer volume of deals New Funds Expect a spate of new funds, some with experience others not Closed-end fund structures will be popular Off-shore investors will be a major target for money managers Products A spate of new products will be introduced to lay off risk New Partnership arrangements will match expertise with capital Seattle MAI Respondents |
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Challenges to AppraisersPersonal Showing value of services Survival Low fees and lower respect Valuation Determining market value Determining when distressed prices are the market Confirming details of all transactions Staying on top of market and explaining it Dealing with diverse leases and transactions Seattle MAI Respondents |
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Conclusion: What to doBack to School? So, To Walk, To Talk, To Walk the Talk???That is the question…. There is no one answer…. Critical thinking and survival instincts will rule… If not, there’s always school…. Back to the Future….. http://jrdelisle.com |
«Real Estate Outlook 2010: No Bottom, No Net presented to: Seattle Chapter of the Appraisal Institute Fall Conference by: Jim DeLisle, Ph» |
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