Capital Market Update February 22, 2010 Marc Louargand, Ph.D., CRE Co-Director University of...
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Transcript of Capital Market Update February 22, 2010 Marc Louargand, Ph.D., CRE Co-Director University of...
Capital Market Update
February 22, 2010
Marc Louargand, Ph.D., CRECo-Director
University of Connecticut School of Business Center for Real Estate and Urban Economic Studies
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
• The root(s) of the problem• The scale of the problem• The CMBS and Bank Portfolios• Borrowers and Lending• Transactions and Pricing• When will demand return?• Some bright spots• Capital market outlook
A Brief Tour of the Capital Market
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
CMBS: The Root of the Problem
Shutters on the BeachSanta Monica, CA
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
• Developed as a198 room Park Hyatt begun in 1989• Acquired in bankruptcy in 1992 by Edward Thompson
& Goldman Sachs, completed in 1993• Appraised in 2004 for $128 million, $646,464 per key• 2004: $60 million A-Note, $32 million B-Note and $20
million Mezzanine piece - $10 million used for rooms re-do
• 2005: $113.9 million A-Note,$6.3 million junior trust note, $104.8 million B-Note. Total $265 million
• Appraised at $320 million - $978,543 per key
Shutters on the Beach
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
Casa del Mar
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
• New loans secured by Shutters’ 198 rooms and Casa del Mar – 129 rooms next door
• 2007: $310 million A-Note, $72 million Mezz piece• Appraised at $450 million - $1,376,147 per key• As of August, 2009 TTM DSCR = 0.88• 0.88 DSCR implies $15,004,000 EBIT/327 rooms or
$45,883 per key or a 3.33% cap rate on 2007 valuation
Shutters on the Beach
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
• Who’s not guilty?• Borrowers pumped values and withdrew multiples of
real equity• Valuers cooperated, relying on recent sales• Rating agencies cooperated and were conflicted• Lenders relied on junior lenders who relied on
lenders• Treasuries flooded us with liquidity• Reference rates fell dramatically• Risk was free because the buyers weren’t taking any
Who’s Guilty Here?
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
2003 2004 2005 2006 2007 2008 2009Q20
200
400
600
800
1,000
1,200
525.5 595.1
723.7
855.1
1,062.3 1,065.2 1,066.0
Multi-Family and Commercial Mortgages Outstanding from Agencies, GSE's and ABS Issuers
$ B
illi
on
s
Federal Reserve; Saltash Partners LLC
The Scale of the Problem: RMBS & CMBS?
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
2003 2004 2005 2006 2007 2008 2009Q20
500
1,000
1,500
2,000
2,500
1,2981,435
1,612
1,7851,933
2,078 2,078
Total Multi-family and Commercial Mortgages in Bank Port-folio Excluding GSE/Agency/ABS
$ B
illio
ns
Federal Reserve; Saltash Partners LLC
The Scale of the Problem: the Bank Portfolio
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
Banking Sector Response: Tighten
19901991
19911992
19921993
19931994
19941995
19951996
19961997
19971998
19981999
19992000
20002001
20012002
20022003
20032004
20042005
20052006
20062007
20072008
20082009
20092010
-40
-20
0
20
40
60
80
100
FRB Senior Loan Officer Opinion Survey: Net Percentage of Domestic Respondents Tightening Standards for Commercial Real Estate
LoansMeltdown
Was anyonepaying attention?
AsianLiquidityCrisis
Long TermCapital
Management
2000 Recessionand 9/11
Recessionrecovery
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
19951995
19961996
19971997
19981998
19991999
20002000
20012001
20022002
20032003
20042004
20052005
20062006
20072007
20082008
20092009
-80
-60
-40
-20
0
20
40
60
FRB Senior Loan Officer Opinion Survey: Net Percentage of Domestic Respondents Reporting Stronger Demand for Commercial Real Es-
tate Loans
Job recoveryWill drive real estate again
Borrowers Back in the Market ?
Quick recoveryBecause it was a Non-real estateproblem
Extended recoveryMatched job recovery
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
J '01 A J O J '02 A J O J '03 A J O J '04 A J O J '05 A J O J '06 A J O J '07 A J O J '08 A J O J '09 A J O0.0%
50.0%
100.0%
150.0%
200.0%
250.0%
Core Equity Risk Premium as% of T-Rate (Cap Rate - T-Rate)/T-Rate
Real Capital Analytics; Saltash Partners LLC
Were Cap Rates too Low or too High?
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
Transactions and Pricing
2001 2002 2003 2004 2005 2006 2007 2008 2009$0
$100,000,000,000
$200,000,000,000
$300,000,000,000
$400,000,000,000
$500,000,000,000
$600,000,000,000
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
10.0%
U.S. Transaction Volume and Average Cap RateTotal Sales Volume Avg Cap Rate
Real Capital Analytics
Implies 19%-20%Value decline
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
2001 2002 2003 2004 2005 2006 2007 2008 2009
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
NCREIF ODCE Total Return
NCREIF
-36.8%Change includingIncome return
Overshoot?
Recent Core Property Returns
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
When Will Demand Return?
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 3390%
91%
92%
93%
94%
95%
96%
97%
98%
99%
100%
98.6%
98.0%
Recent Post-Recession Employment Recovery1990 2001 2008
Months to Recover Peak Employment
33 48
This is now the sharpestemployment declinein the modern era
Bureau of Labor Statistics; Saltash Partners LLCEstablishment Data
January, 2010 (p)93.8% of peak
24 months and counting
Signs of a bottom?
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
1970
1970
1971
1972
1972
1973
1974
1974
1975
1976
1976
1977
1978
1978
1979
1980
1980
1981
1982
1982
1983
1984
1984
1985
1986
1986
1987
1988
1988
1989
1990
1990
1991
1992
1992
1993
1994
1994
1995
1996
1996
1997
1998
1998
1999
2000
2000
2001
2002
2002
2003
2004
2004
2005
2006
2006
2007
2008
2008
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
HH-Establishment as % of HH
Jan. '73-May '75Apr. '80 - Aug. '83 Jun. '85 - Jun. '86
Jan. '91 - Jul. '92
Oct. '99 - Nov. '03
Feb. '70 - Nov. '71
Household Share grows in Recession
NBER Business Cycle Trough
Watch for the “Household Yawn”
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
• New York 105,000 • Fairfield County 17,800• New Haven 2,500• Hartford 9,800 • Includes Financial/Insurance Service,
Information, Real Estate, Professional Technical Services and Administrative Support
• * existing supply at 90% occupancy
Office Jobs Needed to Regain a Robust Market*
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
• Job Loss is slowing, likely turning positive now or soon
• Deep cuts may have caused capacity constraint– Caterpillar called back 600 workers last week– Other recalls announced
• Office employment is a much bigger part of the economy than it was in the past
Bright Spots
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
• $100 - $200 billion raised to buy distressed assets and mortgages
• Multiple “Blank Check” IPO’s registered with SEC
• Weak transactions flow continues $44 billion in 2009 down from $500 billion in 2007
• REITs have lowered debt burden to 60%• A familiar refrain…………………………………………
Massive Blind Pools on the Sidelines
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
• Too much money chasing too few deals!
• Bidders are already reaching• So far only the FDIC is offering huge
bargains• The floor is in, let the fun begin!
A Familiar Refrain
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
• Needs requirement is 1.2 to 1.5 million units per year• Completions have fallen to 380,000 annual pace in
2009• Unsold inventory of new homes down to 6 month
supply (some say 7)• Pending Sales Index of existing homes up 11% in U.S.
year over year, Northeast up 15%• Many CT towns showing YoY price increases Central
CT more so than Fairfield County
Housing Shortfall is around the Corner
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
Connecticut Housing Picture is Mixed
WEST-HARTFO
RD
MADISO
N
HAMDEN
HARTFORD
STAMFO
RD
DARIEN
MO
NRO
E
TORRIN
GTON
WESTPO
RT
TOLLAN
D
BETHEL
VERNO
N
NO
RWALK
LEDYARD
GREENW
ICH
GROTO
N
FAIRFIELD
NEW
-CANAAN
NEW
TOW
N
DANBURY
NEW
-MILFO
RD
NEW
-FAIRFIELD
-25
-20
-15
-10
-5
0
Continuing pain in many areasnotably Fairfield County
Center for Real Estate, UCONN
2009 Q3 (preliminary) Constant Quality Home Price Change Percent (High Series)
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
0
1
2
3
4
5
6
7
8
9
7.91 7.9 7.86
6.1
5.25 5.154.7 4.67
4.423.88
2.842.58 2.57
2.09 1.94 1.84 1.711.46
1.040.720000000000001
2009 Q3 (preliminary)Constant Quality Home Price Change Percent (High Series)
Central Connecticut showing positive signs
Center for Real Estate, UCONN
Connecticut Housing Picture is Mixed
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
Look for Housing Market Changes
19731974
19751976
19771978
19791980
19811982
19831984
19851986
19871988
19891990
19911992
19931994
19951996
19971998
19992000
20012002
20032004
20052006
20072008
0
500
1,000
1,500
2,000
2,500
3,000
1,725 sq.ft.3.0 persons
2,570 sq.ft.2.6 persons
New Single Family Homes Built for Sale: Average Square Feet
72% growth per person
Census Bureau
Post-Recession Periods
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
• Units will be smaller as in previous recoveries• Size will be reduced further for aging Boomers• The “Small House” movement will encourage more small
houses• The Green revolution and interest in sustainable
development will increase construction activity• The “New Urbanism” (now 30+ years old) will continue to
focus on inner cities, especially those with colleges in their downtowns
• Replacement/New style construction will be higher than in the past cycles
Look for Housing Market Changes
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
Capital Market Outlook
4 week 1 year 5 year 7 year 10 year 2o year 30 year0.00
1.00
2.00
3.00
4.00
5.00
6.00
200120022006200720082009
History doesn’t repeat itself,but it does rhyme
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
• Fed has raised the Federal Funds rate• Fed has signaled higher rates in the future• Banking system is coming under increased oversight
and regulation• Commercial mortgages are seen as the primary
problem by regulators• Good banks will be working out bad bank loans
– Marco Community Bank failure –FDIC Loss sharing arrangement is back but doesn’t save the agency much
• Real estate will be in the doghouse for a while
Capital Market Outlook
University of Connecticut School of BusinessCenter for Real Estate and Urban Economic Studies
• Back to Blocking and Tackling• Basic value underwriting
– Current rents– Current occupancies– conservative LTV’s and DCR’s– Modest growth assumptions
• Recourse loans at higher levels• Keeping tenants happy• Practicing basic real estate• Channel 1994
Capital Market Outlook