SPECIAL REPORT Moody’s/RCA CPPI : Commercial and … · JUNE 12, 2012 SPECIAL REPORT COMMERCIAL...

SPECIAL REPORT

COMMERCIAL MBS JUNE 12, 2012

Table of Contents:

HIGHLIGHTS 1 NOTABLE OBSERVATIONS AND THEMES 2 MOODY’S/RCA CPPI 3

Price Changes by Sector and Market Type – Value Weighted Composite Tiers5 3 Moody’s/RCA CPPI Tiers 1 & 2: National, Apartment and Core Commercial 4 Moody’s/RCA CPPI Tier 3: Components of Core Commercial 5 Moody’s/RCA CPPI Tier 4 Indices: Sector Components in Major Markets 6 Moody’s/RCA CPPI Tier 4 Indices: Sector Components in Non-Major Markets 7 Moody’s/RCA CPPI Tier 5 Indices: Composite Major and Non-Major Markets 8

FROM THE LAB – PRICES OF DISTRESSED PROPERTIES ON UPSWING IN MAJOR MARKETS 9 APPENDIX I: TIER 4 INDICES AND SUPPLEMENTAL DATA BREAKOUTS 10 APPENDIX II: RECOVERY PROFILE OF 20 SUB-INDICES 13 APPENDIX III: REPEAT-SALES TRANSACTION VOLUME 14 APPENDIX IV: DISTRESSED TRANSACTION VOLUME 15 APPENDIX V: SCHEDULE OF CPPI REPORT RELEASES 16 APPENDIX VI: CPPI HIERARCHY 17 MOODY’S RELATED RESEARCH 18

Analyst Contacts

Tad Philipp Director – CRE Research +1.212.553.1992 [email protected]

Kevin Fagan Analyst +1.212.553.7833 [email protected]

Nick Levidy Managing Director – Structured Finance +1.212.553.4595 [email protected]

» contacts continued on the last page

Moody’s/RCA CPPI: Commercial and Apartment Prices Stall June 2012

Highlights

The Moody’s/RCA Commercial Property Price Indices (CPPI) national all-property composite was down 0.6% in April, with broad price recovery effectively stalled since Fall 2011.

All property sectors saw flat to down prices in April except for industrial, which gained 1.1%. Apartment prices in both major and non-major markets have leveled off after leading in price recovery since the financial crisis.

EXHIBIT 1

Moody’s/RCA CPPI – National All-Property Composite Index

Recent Historical

Based on data through the end of April 2012. Source: RCA and Moody’s Investors Service

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National All-Property

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Month 3-Month 12-Month Peak Trough Inception

(Apr 12) (Jan 12) (Apr 11) (Dec 07) (Jan 10) (Dec 00)

mailto:[email protected]�



COMMERCIAL MBS

2 JUNE 12, 2012 SPECIAL REPORT: MOODY’S/RCA CPPI: COMMERCIAL AND APARTMENT PRICES STALL – JUNE 2012

The Moody’s/RCA Commercial Property Price Indices measure price changes in US commercial real estate, based on completed sales of the same commercial properties over time, known as the “repeat-sales methodology.”1

Notable Observations and Themes

« Apartment prices were down 1.2% in April after increasing by 37.4% from their January 2010 trough. Apartments in major markets started their recovery 28 months ago and have since retraced 82.0% of their peak-to-trough decline, the strongest performance among the 20 sub-sectors.

« Industrial saw the only gain among the property sectors in April at 1.1% and was the biggest gainer over the last quarter at 3.9%. However, it still slightly lags the recovery of core commercial, of which it is a component. Industrial has the lowest share of distressed transactions by count among the major sectors, less than 20% over the past year.

« CBD office in non-major markets was the first sub-sector to bottom, 31 months ago, but it has yet to gain traction, retracing only 7.5% of its peak-to-trough decline.

« Suburban office in major markets has seen a significant setback to its nascent recovery, falling by 14.4% over the last 5 months. Suburban office has the highest share of distressed transactions by count among the property sectors, exceeding 30% over the past year.

« In this month’s “From the Lab” section we explore price trends for distressed and non-distressed transactions in major and non-major markets. We note that prices of non-distressed properties in major markets have recovered to 90.9% of peak levels in nominal terms. Distressed transactions are showing price recovery in major markets, up 27.8% from the trough 19 months ago, while distressed transaction prices in non-major markets continue to languish, essentially flat since Q4 2009.

1 More information about the index, including the “2012 Moody's/RCA CPPI release paper”, is available in the “Moody’s Related Research” section at the end of this

report and at www.moodys.com.

http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_SF285594�

COMMERCIAL MBS


Moody’s/RCA CPPI

Price Changes by Sector and Market Type – Value Weighted Composite Tiers5

EXHIBIT 2

Summary – Moody’s/RCA CPPI Index Changes to April 2012 from Earlier Periods

Tier Index Month 3-Month 12-Month Higher Tier Composite1

Share of Higher Tier Composite2

1 National All-Property -0.57% -0.07% 9.11% N/A 100%

2 Apartment -1.22 -1.48 12.98 National / T1 27.0 2 Core Commercial -0.34 0.46 7.58 National / T1 73.0

3 Retail -0.02 1.88 13.43 Core Comm / T2 26.8 3 Industrial 1.07 3.86 11.92 Core Comm / T2 20.0 3 Office CBD -1.07 0.53 2.71 Core Comm / T2 26.7 3 Office Suburban -1.04 -3.73 2.87 Core Comm / T2 26.5 3 Office3 -1.06 -1.57 3.07 Standalone -

5 Major Markets4 -0.57 -0.07 9.11 Standalone 46.8 5 Non-Major Markets -1.22 -1.48 12.98 Standalone 53.2 Notes: 1 The “Tier” is the hierarchical level of the index, with the National All-Property CPPI defined as Tier 1. Tiers 1-3 and 5 are value-weighted composite

indices. Tier 4 consists of the underlying, “building block” indices, estimated as equal-weighted regressions of sector repeat-sales. 2 Composite indices in the Moody’s/RCA CPPI system are all value-weighted, based on the segments’ long-term, 10-year rolling average dollar share

of the defined composite market, similarly to typical stock market indices, which are weighted by the market capitalization of the constituent stocks. This weight is adjusted monthly according to relative returns and rebalanced yearly. Weights show are most recent rebalanced weights.

3 The “Office” segmentation is a mezzanine level index tier; in other words, the Core Commercial composite is made up of the CBD and Suburban segments.

4 The “Major Markets” (MM) are the six gateway metropolitan areas: Boston, Chicago, Los Angeles, New York, San Francisco and Washington DC. For composite Tier 5, we show major and non-major markets (NMM) as a percentage of national, for reference purposes only. They do not contribute directly to the calculation of the National All Property composite index; however, we show their respective shares of the national index.

5 Historical data for these indices is available in Excel format by clicking here. Data on the 10 building block indices are available to Moody’s or RCA subscribers by clicking here.

Source: RCA and Moody’s Investors Service

http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF288938�


COMMERCIAL MBS


Moody’s/RCA CPPI Tiers 1 & 2: National, Apartment and Core Commercial

« Price recovery has cooled off for the national composite index, as it has for its two underlying components, apartment and core commercial.

« While both apartment and core commercial saw their post-financial crisis troughs in early 2010, apartment has recovered by 37.4%, well above the 21.9% pace of core commercial.

EXHIBIT 3

Moody’s/RCA CPPI Apartment and Core Commercial Composite Indices2

Recent Historical


2 Peak and trough dates shown in report exhibits are the prior pre-financial crisis peak and post-financial crisis trough months for the highest tier index in a given exhibit.

E.g., peak and trough dates shown in exhibit 3 refer to peak and trough of the national all-property index.

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COMMERCIAL MBS


Moody’s/RCA CPPI Tier 3: Components of Core Commercial

« CBD office has been the engine driving the recovery of core commercial, and is up by 51% since its trough. However, CBD office prices have gained only 0.5% over the last three months.

EXHIBIT 4

Moody’s/RCA CPPI - Core Commercial Sector Composite Indices

Recent Historical


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Moody’s/RCA CPPI Tier 4 Indices: Sector Components in Major Markets

« Major market apartments, which had set a new peak level two months ago, have since declined by 4.1%.

« Suburban office in major markets has seen a significant setback in its nascent recovery, falling by 14.4% over the last 5 months.

EXHIBIT 5

Moody’s/RCA CPPI – Major Market Sector Indices


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COMMERCIAL MBS


Moody’s/RCA CPPI Tier 4 Indices: Sector Components in Non-Major Markets

« The recovery of individual property sectors in non-major markets lags that of their counterparts in major markets and remains more tightly clustered

« While apartments set the pace in non-major markets with 31.7% cumulative appreciation since December 2000, they considerably lag the gains of apartments in major markets, which are up by 112.6% over the same time period.

EXHIBIT 6

Moody’s/RCA CPPI – Non-Major Market Sector Indices


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COMMERCIAL MBS


Moody’s/RCA CPPI Tier 5 Indices: Composite Major and Non-Major Markets

« Prices in both major and non-major markets have been essentially flat for the last month and quarter.

« Since the post-crisis trough, prices in major markets have recovered more than twice as quickly as those in non–major markets, up 37.1% compared to 17.5%.

EXHIBIT 7

Moody’s/RCA CPPI - Major Markets Lead Non-Majors in Recovery

Recent Historical


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COMMERCIAL MBS


From the Lab – Prices of Distressed Properties on Upswing in Major Markets

« Prices of non-distressed properties in major markets have recovered to 90.9% of peak levels in nominal terms.

« Major markets have seen a lower share of distressed transactions on a dollar volume basis than non-major markets, peaking at 15% versus 19% and presently at 12% versus 14%. The disparity is much greater on a count basis, with major markets seeing about half the level of distress of non-major markets (16% versus 33%).

« Distressed transactions are showing price recovery in major markets, up 27.8% after hitting a trough in September 2010, while distressed transaction prices in non-major markets continue to languish, essentially flat since Q4 2009.

EXHIBIT 8

Moody’s/RCA CPPI – Distressed Transactions in Major Markets Show Price Recovery3

Based on data through the end of March 2012. Source: RCA and Moody’s Investors Service

EXHIBIT 9

Moody’s/RCA CPPI – Distressed Transaction Prices Languish in Non-Major Markets

Based on data through the end of March 2012. Source: RCA and Moody’s Investors Service

3 Percentage distressed shown in exhibits in this section are 12-month rolling averages of the dollar volume of distressed transactions. Note that a different methodology is

used for these distressed indices than for the Moody’s/RCA CPPI composites due to data limitations. Also, because of the few distressed transactions in the run-up to the peak, the distressed indices begin in March 2008.

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COMMERCIAL MBS


Appendix I: Tier 4 Indices and Supplemental Data Breakouts

EXHIBIT 10

Tier 4 – Moody’s/RCA CPPI Index Changes from to April 2012 from Prior Year4

Tier Index 12 Month Mar 2011

Major/Non-Major5 Ratio from Incept.

Higher Tier Composite

Share of Higher Tier Composite

4 Apartment – Major 9.60% 1.61 Apartment / T2 37.7%

4 Apartment – Non-Major 14.96 Apartment / T2 62.3

4 Retail – Major 16.65 1.58 Retail / T3 31.6

4 Retail – Non-Major 11.96 Retail / T3 68.4

4 Industrial – Major 17.83 1.24 Industrial / T3 41.4

4 Industrial – Non-Major 7.80 Industrial / T3 58.6

4 CBD Office – Major 4.49 1.67 Office CBD / T3 76.3

4 CBD Office – Non-Major -2.97 Office CBD / T3 23.7

4 Suburban Office – Major -0.22 1.19 Office Sub / T3 47.2

4 Suburban Office – Non-Major 4.99 Office Sub / T3 52.8

5 Major Markets Aggregate 8.34 1.48 Standalone 46.8

5 Non-Major Markets Aggregate 9.78 Standalone 53.2

Property Sector Performance History by Major and Non-Major Markets

EXHIBIT 11

Moody’s/RCA CPPI – Major Market Apartments Pull Back From Recent Peak Level


4 The building block indices below represent the actual experiences of investors during the reference periods but are more subject to idiosyncratic dispersion of property

prices than the composite indices over a short horizon. We expect this effect to dissipate over the 12 month horizon as additional observations have been included in the data set, as reflected in the table above.

5 This metric is the ratio of the current major markets index level to the current non-major markets index level. All indices in the CPPI suite are set to a value of 100 at Dec 2000 inception.

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Apartment Major Apt Non-Major Apt

COMMERCIAL MBS


EXHIBIT 12

Moody’s/RCA CPPI - Retail by Market Classification


EXHIBIT 13

Moody’s/RCA CPPI - Industrial by Market Classification


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EXHIBIT 14

Moody’s/RCA CPPI - Office CBD Results Driven by Major Markets


EXHIBIT 15

Moody’s/RCA CPPI - Suburban Office by Market Classification


EXHIBIT 16

Moody’s/RCA CPPI – CBD Office Outpaces Suburban


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01

Mar

02

Jun

02Se

p 02

Dec

02

Mar

03

Jun

03Se

p 03

Dec

03

Mar

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04Se

p 04

Dec

04

Mar

05

Jun

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p 05

Dec

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Mar

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Jun

06Se

p 06

Dec

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Mar

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p 07

Dec

07

Mar

08

Jun

08Se

p 08

Dec

08

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09

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p 09

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09

Mar

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Jun

10Se

p 10

Dec

10

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11

Jun

11Se

p 11

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11

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12

Off-CBD Major Off-CBD Non-Major Off-CBD

80

90

100

110

120

130

140

150

160

170

180

Dec

00

Mar

01

Jun

01Se

p 01

Dec

01

Mar

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p 02

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03Se

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p 04

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04

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p 05

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05

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Jun

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p 06

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06

Mar

07

Jun

07Se

p 07

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07

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08

Jun

08Se

p 08

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08

Mar

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Jun

09Se

p 09

Dec

09

Mar

10

Jun

10Se

p 10

Dec

10

Mar

11

Jun

11Se

p 11

Dec

11

Mar

12

Off-Sub Major Off-Sub Non-Major Off-Sub

80

100

120

140

160

180

200

220

Dec

00

Mar

01

Jun

01Se

p 01

Dec

01

Mar

02

Jun

02Se

p 02

Dec

02

Mar

03

Jun

03Se

p 03

Dec

03

Mar

04

Jun

04Se

p 04

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04

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05

Jun

05Se

p 05

Dec

05

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06Se

p 06

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06

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p 07

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07

Mar

08

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08Se

p 08

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09Se

p 09

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Office Off-CBD Off-Sub

COMMERCIAL MBS


Appendix II: Recovery Profile of 20 Sub-Indices

The following is a rank order of all 20 CPPI sub-indices by percentage of the nominal peak-to-trough value loss that has been recovered.

« Apartment in major markets started its recovery 28 months ago and has since retraced 82.0% of its peak-to-trough decline, the strongest performance among the 20 sub sectors.

« CBD office in non-major markets was the first to bottom, 31 months ago, but has yet to gain traction, retracing only 7.5% of its peak-to-trough decline.

EXHIBIT 17

Moody’s/RCA CPPI – Sub-Indices Peak / Trough Detail6

Index Peak-to-Trough

Peak-to-Current

Percent Peak-to-Trough Loss

Regained 7 Peak

Month Trough Month

Months Since Recovery Start

Apartment – Major -22.5% -4.1% 82.0% (Dec 07) (Dec 09)

CBD Office – Major -49.8 -16.0 67.9 (Jul 08) (Nov 09)

Major Markets Aggregate -37.2 -13.9 62.6 (Dec 07) (Jan 10)

Apartment -38.0 -14.9 60.9 (Nov 07) (Dec 09)

Office CBD -48.2 -21.8 54.8 (Dec 07) (Nov 09)

Apartment – Non-Major -46.9 -22.6 51.7 (Oct 07) (Nov 09)

Retail – Major -37.2 -18.0 51.7 (Oct 07) (May 10)

Industrial – Major -32.7 -15.9 51.5 (Nov 07) (Jan 10)

National All-Property -38.6 -22.6 41.4 (Dec 07) (Jan 10)

Office -44.6 -27.3 38.8 (Dec 07) (Nov 09)

Core Commercial -38.8 -25.4 34.5 (Dec 07) (Jan 10)

Suburban Office – Major -47.0 -31.9 32.1 (Dec 07) (Apr 10)

Industrial -33.2 -23.2 30.1 (Nov 07) (Jun 11)

Retail -40.2 -28.2 29.9 (Aug 07) (Nov 10)

Industrial – Non-Major -39.6 -29.0 26.8 (Mar 08) (Jun 11)

Non-Major Markets Aggregate

-40.2 -29.8 26.0 (Oct 07) (Mar 10)

Retail – Non-Major -42.7 -33.0 22.6 (Jun 07) (Jun 11)

Office Suburban -43.6 -34.3 21.4 (Dec 07) (Apr 10)

Suburban Office – Non-Major -43.4 -37.3 14.0 (Oct 07) (Aug 11)

CBD Office – Non-Major -50.5 -46.7 7.5 (Jan 08) (Sep 09)


6 In this table, peaks and troughs are pre-crisis peaks (2007-2008) and post-crisis troughs (2009-2010). Major market apartments set a new peak level in Feb. 2012. 7 The “Percent Peak-to-Trough Loss Regained” column is the percentage of the nominal post-crisis loss of value that has since been recovered, calculated as: % Recovered

= Peak-to-Current / Peak-to-Trough - 1.

28

29

27

28

29

29

23

27

27

29

27

24

10

17

10

25

10

24

8

31

COMMERCIAL MBS


Appendix III: Repeat-Sales Transaction Volume

EXHIBIT 18

Moody’s/RCA CPPI - Quarterly Volume by Count

Based on data through the end of April 2012.

Source: RCA and Moody’s Investors Service

EXHIBIT 19

Moody’s/RCA CPPI - Quarterly Volume by Dollar


0

100

200

300

400

500

600

700

800

900

1000

2000

Q4

2001

Q1

2001

Q2

2001

Q3

2001

Q4

2002

Q1

2002

Q2

2002

Q3

2002

Q4

2003

Q1

2003

Q2

2003

Q3

2003

Q4

2004

Q1

2004

Q2

2004

Q3

2004

Q4

2005

Q1

2005

Q2

2005

Q3

2005

Q4

2006

Q1

2006

Q2

2006

Q3

2006

Q4

2007

Q1

2007

Q2

2007

Q3

2007

Q4

2008

Q1

2008

Q2

2008

Q3

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

Apartment Retail Industrial Office CBD Office Sub

$0

$5

$10

$15

$20

$25

$30

2000

Q4

2001

Q1

2001

Q2

2001

Q3

2001

Q4

2002

Q1

2002

Q2

2002

Q3

2002

Q4

2003

Q1

2003

Q2

2003

Q3

2003

Q4

2004

Q1

2004

Q2

2004

Q3

2004

Q4

2005

Q1

2005

Q2

2005

Q3

2005

Q4

2006

Q1

2006

Q2

2006

Q3

2006

Q4

2007

Q1

2007

Q2

2007

Q3

2007

Q4

2008

Q1

2008

Q2

2008

Q3

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

Billi

ons

Apartment Retail Industrial Office CBD Office Sub

COMMERCIAL MBS


Appendix IV: Distressed Transaction Volume

EXHIBIT 20

Moody’s/RCA CPPI – Percentage Distressed of Market Types by Count


EXHIBIT 21

Moody’s/RCA CPPI – Percentage Distressed of Property Types by Count


0%

5%

10%

15%

20%

25%

30%

35%

40%

2007

Q1

2007

Q2

2007

Q3

2007

Q4

2008

Q1

2008

Q2

2008

Q3

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

National All-Property Major Markets Non-Major Markets

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2007

Q1

2007

Q2

2007

Q3

2007

Q4

2008

Q1

2008

Q2

2008

Q3

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

National All-Property Apt Ret Ind OffC OffS

COMMERCIAL MBS


Appendix V: Schedule of CPPI Report Releases

The Moody’s/RCA CPPI is based on repeat-sales (RS) transactions that occurred at any time up through the month, two calendar months prior to the current report. This June CPPI report covers RS transactions on or before the final day of April, and we process the data from such transactions through the end of May.

Because CPPI allows for backward revisions and incorporates any new data we receive subsequent to publishing, future indices will reflect adjustments due to additional transaction data.

Future CPPI releases will be during the second week of each month.

COMMERCIAL MBS


Appendix VI: CPPI Hierarchy

Construction of the CPPI Suite

We calculate the CPPI suite with a repeat-sales regression methodology using a “Two-stage Annual-to-Monthly Frequency Conversion” (ATM) technique.8 ATM enhances accuracy and versatility given the comparatively small datasets typical of commercial real estate transactions.

This first step in the process is to generate the most granular underlying indices in the index suite, which we have labeled as Tier 4 in Exhibit 22 Tier 4 indices are equal-weighted, meaning each verified repeat-sale constitutes the same contribution to the index calculations. The higher-tier indices, Tiers 1 through 3, are based on value-weighted roll-ups of the underlying indices. The value-weighting of Tiers 1-3 is similar to that in a buy-and-hold portfolio in which each component is weighted annually by the dollar share of total stock outstanding.9

The CPPI methodology makes advantageous use of both equal- and value-weighting. Equal-weighting at the underlying/Tier 4 level is important, primarily to prevent any singular property sale or small market segment from skewing the CRE market picture. The value-weighted roll-up of the underlying/Tier 4 indices to the higher Tier 1-3 levels appropriately allows a market segment to influence composite indices in correct proportion to its market share of dollar-based transaction volume.

EXHIBIT 22

Moody’s/RCA CPPI Suite - Hierarchy of Composite Indices

*Note: We also report CBD and Suburban Office as an “Office” composite roll-up. Tier 5 is for information only. Source: RCA and Moody’s Investors Service

8 More information about the index, including the 2012 Moody's/RCA CPPI announcement paper, is available in the “Moody’s Related Research” section at the end of

this report and at www.moodys.com. 9 For the CPPI, the annual weighting of the index segments is based on a 10-year rolling average share. Most actively traded commercial properties typically turn over

within 10 years; thus, we infer that the 10-year rolling average of total trading volume as tracked by Real Capital Analytics is an appropriate proxy for the relative value of the outstanding stock of the corresponding sub-index properties.


COMMERCIAL MBS


Moody’s Related Research

Below are links to publications from Moody’s related to the indices and underlying trends:

CPPI Related:

« US CMBS: Moody's to Publish State-of-the-Art Commercial Property Price Indices, May 2012 (SF285594)

« Prior month report: Moody's/RCA CPPI: Recovery Decelerates - May 2012 (SF286091)

Commercial Real Estate Related:

« “US CMBS: Moody's Delinquency Tracker”, June 2012 (SF287489)

« US CMBS Q1 2012 Review: Q2 Poised to See More Highly Leveraged Collateral Pools, Increased Subordination Levels (SF281819)

« “CMBS: Red – Yellow – Green® Update, First Quarter 2012 Quarterly Assessment of U.S. Property Markets”, April 2012 (SF281858)

« “US CMBS Loss Severities, Q1 2012 Update”, March 2011 (SF285658) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients.

Moody’s publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck.











COMMERCIAL MBS


Report Number: SF287734

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