Growth of World Population, GDP and GDP Per Capita before 1820
US Real Estate in Uncertain Times - Urban Land...
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US Real Estate in Uncertain Times Winners and Losers in a Weak Recovery ULI Capital Markets Conference NY Jacques Gordon Global Strategist June 2012
Transcript of US Real Estate in Uncertain Times - Urban Land...
US Real Estate in Uncertain Times Winners and Losers in a Weak Recovery ULI Capital Markets Conference NY
Jacques Gordon
Global Strategist
June 2012
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-4%
-3%
-2%
-1%
0%
1%
2%
3%
4%
5%
2007 2008 2009 2010 2011 2012 2013 2014
Com
pone
nts
of W
orld
GD
P G
row
th
Middle East & North Africa Latin America Rest of the WorldCEE Asia-Pacific ex-Japan North AmericaWestern Europe Japan 15 February 2012 Forecast
4.1%
Source: Global Insight Forecast as of 21 May 2012
US and China to Drive Modest 2012 Global Growth Risks to Growth Now to the Downside
Emerging Markets
Develope Markets 3.5% 2.9%
4.3%
-2.0%
1.6%
4.1%
3.0%
In April, the IMF revised up its 2012-13 global growth forecast by 20 bps from its January forecast, citing improved US growth and the gradual nature of the slowdowns in Asia. An escalation of the Euro crisis, however, has increased the downside risk to this forecast.
3
-2%0%2%4%6%8%
10%12%14%16%18%20%
Chi
na
Mex
ico
Aust
ralia
Can
ada
US
Japa
n
UK
Ger
man
y
Fran
ceCum
ulat
ive
2012
and
201
3 G
DP
Gro
wth
2013 GDP Growth2012 GDP GrowthGDP Growth Forecast from November 2011
Source: Global Insight Forecast as of 15 May 2012
Cumulative GDP Growth in Major Real Estate Markets Outlook Has Weakened in Europe, China But Improved in US and Mexico
Slower than expected Japanese growth in the second half of 2011 and the re-escalation of the Euro crisis has weakened the outlooks for those markets over the last six months. The US and Mexican outlooks are up modestly.
Weaker Outlook
Stronger Outlook
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1,450
1,500
1,550
1,600
1,650
1,700
1,750
1,800
1,850
1,900
1,950Ju
n-11
Jul-1
1
Aug
-11
Sep
-11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
Feb-
12
Mar
-12
Apr
-12
May
-12
Year ending 31 May 2012
Global REITs Down 6.7% in May Yet Still Up 6.4% YTD
Source: Bloomberg As of 31 May 2012 Note: The EPRA/NAREIT Global Price Index contains all publicly quoted real estate companies that meet the EPRA ground rules in 21 countries across Europe, North America, and Asia.
200 Day Moving Average
EPRA/NAREIT Global Index
2011 High: 2 May 2011 2011 Low: 3 Oct. 2011 Peak (May ‘11) to Trough Change: -23.6% Peak (May ‘11) to Current Change: -10.3%
REIT Pricing: Often a Leading Indicator of Private Equity Pricing
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Hotel, Self Storage REITs to See Outsized AFFO Growth Apartment REITs Strongest of Traditional Sectors
Source: LaSalle Investment Management Data through April 2012
-5%
0%
5%
10%
15%
20%
25%
Projected Recurring AFFO Growth - 2012
Apartment, Hotels, Self Storage – only REITs to beat projected total REIT AFFO growth
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Primary Food Groups Apartment REITs to See Strongest AFFO Growth
Source: LaSalle Investment Management Data through April 2012
-2%
0%
2%
4%
6%
8%
10%
12%
14%
Retail Regional Malls Apartments Industrial Office
Projected Recurring AFFO Growth - 2012
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Real Estate Strongest Asset Type Over Past Year
0%
2%
4%
6%
8%
10%
12%
14%
16%
NAREIT NPI ODCE S&P500 Corporate Bonds*
12-Month Return
*Corporate Bonds: Citigroup US Broad Investment Grade Corporate Bonds Source: LaSalle Investment Management Data as of 1Q:2012
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US Transaction Volume Moderately Strong for First Quarter of the Year
10 19 24 27
32 24 26 30
43 34
41 53
75
52
70 75 79
64 68 70
100 91
106
89
64
45 37 33
19 9 12
18 15 21
30
47
28
49 44
54
41
0
20
40
60
80
100
120
$ (B
illio
n)
Apartment Industrial Office Retail
Source: Real Capital Analytics Note: Excludes privatizations. Through May 2012 Only includes transactions with a grossed up value of $5 MM and greater.
First quarter 2012 transaction volume, though below the past three quarters, was still 46% above year-ago levels, indicating seasonality was likely an issue.
Transaction volume is close to its 10 year average.
10-Year Avg $46.3 Billion
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US Institutional Real Estate: Net Change in Capital Stock
Sources: LaSalle Investment Management, NAREIT, Federal Reserve, P&I, IPD, Bureau of Economic Analysis, NCREIF, RCA As of May 2012
-400
-300
-200
-100
0
100
200
300
400
500
600
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Net
cha
nge
in v
alue
(USD
, bill
ion)
.
Public Equity-REITs Private Equity Public Debt-CMBS Private Debt Total
Forecast
2011 saw capital stock in real estate start to recover as increases in equity exceeded declines in the debt segments. Appreciation was the major driver of equity increases while deleveraging is driving debt declines
The forecast is for overall capital stock to continue to increase, with deleveraging coming to end and equity increases coming more from new capital allocations than from appreciation.
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Metros with Strongest Job Growth Over Past Year
Top 10 Metros Annual Growth Houston 3.5% San Jose 3.3%
San Francisco 2.8% Austin 2.5%
Phoenix 2.4% Denver 2.1% Seattle 2.1%
Louisville 2.1% Cincinnati 2.0%
Indianapolis 2.0%
Source: Economy.com Data through April 2012
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Metros with Strongest Forecast Job Growth
Top 10 Metros 2012-2015 Growth Austin 3.1%
Riverside 2.8% Raleigh-Durham 2.7%
Denver 2.7% Phoenix 2.7% Houston 2.7% Dallas 2.6%
Fort Worth 2.5% West Palm Beach 2.4%
Charlotte 2.4%
Source: Global Insight Data through April 2012
Metros on Both Lists
Top 10 Metros 2012-2015 Growth Austin 3.1%
Riverside 2.8% Raleigh-Durham 2.7%
Denver 2.7% Phoenix 2.7% Houston 2.7% Dallas 2.6%
Fort Worth 2.5% West Palm Beach 2.4%
Charlotte 2.4%
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US Metros with the Strongest Economic Outlooks - REGI
Top 10 Large Metros Austin
Houston Dallas
Raleigh-Durham Washington, DC
San Jose Fort Worth Phoenix Charlotte Seattle
Source: Economy.com, Global Insight, LaSalle Investment Management As of 2012
Rankings taken from the LaSalle Investment Management Regional Economic Growth Index (REGI). REGI ranks 147 metros by their medium-term economic outlooks.
Top 10 Large Metros Austin
Houston Dallas
Raleigh-Durham Washington, DC
San Jose Fort Worth Phoenix Charlotte Seattle
Metros on Two Lists
Metros on All Three
Lists
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US Metros with the Strongest Economic Outlooks - REGI
Source: Economy.com, Global Insight, LaSalle Investment Management As of 2012
Texas metros dominate the rankings
Washington, DC and Seattle are the only two non-Sunbelt metros
Phoenix expected to experience strong rebound despite housing market bust
Rankings taken from the LaSalle Investment Management Regional Economic Growth Index (REGI). REGI ranks 147 metros by their medium-term economic outlooks.
Top 10 Large Metros Austin
Houston Dallas
Raleigh-Durham Washington, DC
San Jose Fort Worth Phoenix Charlotte Seattle
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US Metro Job Winners and Losers
Source: Bureau of Labor Statistics, Economy.com, LaSalle Investment Management Data through April 2012
Los Angeles
Chicago
Atlanta
Phoenix
Las Vegas
New York
Washington
Boston
Houston Dallas
San Jose
Seattle
San Francisco
Denver
Miami
-15%
-13%
-11%
-9%
-7%
-5%
-3%
0.5% 1.5% 2.5% 3.5% 4.5% 5.5% 6.5% 7.5%
Rec
essi
on: P
eak
to T
roug
h Jo
b Lo
ss
Recovery: Trough to Current Job Recovery
Red Bubble Size of peak to trough job loss.
Green Bubble Size of trough to current job recovery.
If red bubble invisible, job recovery is greater than job loss.
Absolute Loss/Recovery
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4%
6%
8%
10%
12%
14%
16%
18%
20%
Vaca
ncy
Rat
e
Office Warehouse Retail Apartments
U.S. Vacancy Rates Declining
Vacancy rates for all property types are down from their peaks.
Vacancy rates for all property types will continue to decline even with weak absorption due to anemic levels of new construction.
Recessions Forecast
Source: CBRE-EA (Sum of Markets), PPR (Top 54), LaSalle Investment Management, Jones Lang LaSalle As of 1Q:2012
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12%
13%
14%
15%
16%
17%
-20
-15
-10
-5
0
5
10
15
20
25
30
1Q 0
52Q
05
3Q 0
54Q
05
1Q 0
62Q
06
3Q 0
64Q
06
1Q 0
72Q
07
3Q 0
74Q
07
1Q 0
82Q
08
3Q 0
84Q
08
1Q 0
92Q
09
3Q 0
94Q
09
1Q 1
02Q
10
3Q 1
04Q
10
1Q 1
12Q
11
3Q 1
14Q
11
1Q 1
2
Vaca
ncy
Rat
e
Squa
re F
eet (
Milli
ons)
Completions Absorption Vacancy
Office Sector Recovering Gradually
Source: CBRE-EA Data as of 1Q:2012 Based on Sum of Markets
Markets seeing the biggest vacancy rate decreases in the last year include many of the highest vacancy rate markets as tenants take advantage of weak market conditions.
Quarterly Supply, Demand and Vacancy Rate
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-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
% C
hang
e, y
ear-o
ver-y
ear
U.S. Employment and Apartment Demand, % Change Year-Over-Year
Employment Occupied Units
Employment is the Major Driver of Apartment Demand Apartment Demand Return 3 Quarters Before Positive Job Growth
Source: US Census, PPR Data Through 4Q 2011
Apartment Demand Recovered Ahead of Jobs This Recession Due to Falling Homeownership
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Bundling-Effect Beginning to Unwind Children Who Moved in with Parents, Those Who Doubled Up, Now Separating
During the recession, children moved back in with parents and many others moved in with roommates as a result of the weak job market. This slowed overall household formation and led to a decline in single-person households.
In 2011, the number of single person households increased more than in any of the last ten years and the bundling effect began to unwind – driving strong new demand for apartments.
Source: US Census, LaSalle Investment Management Research and Strategy Latest Data as of February 2012
Change in Households
(1,000)
(500)
-
500
1,000
1,500
2,000
2,500
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Annu
al C
hang
e in
Hou
seho
lds,
000
s
Multi-persion Households One-Person Households
Bundling Effect: Single Person Households Decline Multi-person Households Increase
Unbundling Begins: Single Person Households Up Multi-person Households Decline
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-50
0
50
100
150
200
%
Cumulative Total Return (Gross Dividends)
Bloomberg REIT Apartment Index Bloomberg REIT Index S&P 500
Apartment Returns Strong Apartment REITs Outperform Other REITs, S&P
Source: Bloomberg Latest Data as of 30 May 2012
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9%
10%
11%
12%
13%
14%
15%
16%
-75
-50
-25
0
25
50
751Q
200
5
3Q 2
005
1Q 2
006
3Q 2
006
1Q 2
007
3Q 2
007
1Q 2
008
3Q 2
008
1Q 2
009
3Q 2
009
1Q 2
010
3Q 2
010
1Q 2
011
3Q 2
011
1Q 2
012
Avai
labi
lity
Rat
e
Squ
are
Feet
(Mill
ions
)
Completions Absorption Availability Rate
Warehouse: Improvement Steady
Source: CBRE Econometric Advisors (Sum of Markets) Data as of 1Q:2012
Warehouse vacancy has been steadily declining over the past seven quarters due to a dearth of new construction.
Quarterly Supply, Demand and Availability Rate
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* REIT vacancy is based on the weighted average vacancy rate of the six largest open-air REITs (KIM, FRT, DDR, REG, EQY, WRI). Some of the spread between these centers and PPR is undoubtedly quality-driven. Also, REIT vacancy includes power centers while the REIS figure does not. Power center vacancy has improved ahead of smaller centers.
Source: PPR Top 54, LaSalle Investment Management As of 1Q:2012
4%
5%
6%
7%
8%
9%
10%
11%S
ep-0
7
Dec
-07
Mar
-08
Jun-
08
Sep
-08
Dec
-08
Mar
-09
Jun-
09
Sep
-09
Dec
-09
Mar
-10
Jun-
10
Sep
-10
Dec
-10
Mar
-11
Jun-
11
Sep
-11
Dec
-11
Vac
ancy
REIT Shopping Center Vacancy* Neighborhood and Community Center Average Vacancy (PPR)
REIT portfolios generally hold above-average quality assets.
Open-Air Center Fundamentals
Retail: Best Centers Recovering Faster Vacancy 150 bps Below Peak in Best Centers vs. Just 40 bps on Average
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Retail: Malls Outperform Open-Air Centers
Source: NCREIF, Green Street NPI data as of Q1:2012; REIT data as of 17 March 2012
Open Air Centers* Malls NPI Open Air to
NPI Spread 1Y 11.7% 14.3% 13.4% -1.7%
3Y 6.3% 8.0% 6.0% 0.3%
5Y 2.6% 6.1% 2.9% -0.3%
10Y 9.5% 12.3% 8.2% 1.3%
20Y 8.8% 9.0% 8.2% 0.6%
SI 8.6% 10.5% 9.1% -0.5% *Open Air includes Community, Fashion/Specialty, Neighborhood, & Power Centers.
NPI Total Returns
2006 2007 2008 2009 2010 2011 YTD 2012 CAGR*
Strip Center 35% -18% -39% -2% 31% -1% 15% 0%
Malls 24% -16% -61% 63% 35% 22% 13% 3%
NAREIT Equity REIT Index 35% -16% -38% 28% 28% 8% 9% 5%
REIT Total Returns
*CAGR since 2006.
Historically, retail properties have outperformed the NPI, however that has changed in recent years, especially for open-air properties.
Although malls have generally out-performed open-air centers, the divergence between returns for open air centers and malls in the NPI has increased in recent years.
Malls have also outperformed open air centers in the public market.
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1
2
3
4
5
6
7
8
9
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ope
ratin
g M
argi
n, %
(Ope
ratin
g In
com
e/S
ales
)
Kroger Safeway Supervalu Whole Foods Target Walmart
Retail: Gap Between Grocer Types Widens Traditional Grocer Operating Margins Have Declined Since 2000
Source:Gallup Daily Tracking Data through Year End 2011
Operating Margins of Publicly Traded Grocers
Traditional Grocers
Non-Traditional Grocers
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Traditional Grocers Are Struggling
Altman Z”-Score* Operating Margin Market Cap ($B)
Supervalu Fiscal Danger 2.5% 1.26
Kroger Neutral 1.4% 13.07
Safeway Neutral 2.5% 5.24
Costco Financially sound 2.7% 37.66
Whole Foods Market Financially sound 5.9% n/a
Family Dollar Financially sound 7.6% 7.83
Publix Financially sound 7.9% n/a
Dollar General Financially sound 10.1% 15.83
Source: Bloomberg, Cred Risk Monitor Data most recent as of 1 May 2012
Only one of the four publicly traded traditional grocers is considered “financially sound” using the Altman Z”-Score.
A&P, another traditional grocer, just emerged from bankruptcy protection in first quarter 2012. A&P was also considered to be in “fiscal danger” before the company went private in first quarter.
The Altman Z”-score is a composite of four key financial ratios from company balance sheets and income statements.
Trad
ition
al G
roce
rs
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Walk Score® Description
90 – 100 Walker’s Paradise – Daily errands do not require a car
70 – 89 Very Walkable – Most errands can be accomplished on foot
50 – 69 Somewhat Walkable – Some amenities within walking distance
25 – 49 Car-Dependent – A few amenities within walking distance
0 – 24 Car-Dependent – Almost all errands require a car
Assessing a Site’s Walkability
Source: Walkscore.com As of May 2012
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CBDs are Walkable & Transit-oriented
Microsoft Campus Walk Score: 52 Transit Score: 54
Aon Center, Chicago Walk Score: 95 Transit Score: 100 345 California St., San
Francisco Walk Score: 98 Transit Score: 100
60 State St, Boston Walk Score: 94 Transit: 100
Source: Walkscore.com, CoStar As of May 2012
Research Triangle Park Walk Score: 26 Transit Score: n/a
Merck Campus, Whitehouse Station, NJ Walk Score: 6 Transit: n/a
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5%
10%
15%
20%Q
1 20
03
Q1
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Offi
ce V
acan
cy R
ate
Prime CBDs
Town Centers
Rest of Suburbs
Rest of CBDs
Suburban Town Centers Have Lower Vacancies
Source: CBRE EA, CoStar, NCREIF, LaSalle Investment Management As of 30 May 2012
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Suburban Town Centers are Not Created Equal
Walkable Automobile-oriented
Evanston, IL Walk Score®:98 Transit Score: n/a
Schaumburg, IL Walk Score®: 55 Transit Score: n/a
Las Colinas, TX Walk Score®: 57 Transit Score: n/a
Bethesda, MD Walk Score®:97 Transit Score: 68
Santa Monica, CA Walk Score®: 97 Transit Score: n/a
University Town Center, CA Walk Score®: 64 Transit Score: 40
Source: Walkscore.com As of May 2012
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Walk Score® Has Limitations
• Walk Score is based on amenities, and does not factor in sidewalks or transit.
• Transit Score is only available in certain markets due to data limitations.
• Distance is measured as the crow flies. A new version, now in beta, will use street networks instead.
• The Tyson’s Corner office scores a “very walkable” 82, despite an interstate barrier and indoor mall. Downtown Bellevue, WA scores 81.
• Walk Score is most relevant in multi-family and office context.
Walk Score: 82
Source: Walkscore.com, Google As of May 2012
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-1%
0%
1%
2%
3%
4%Ja
n-00
Apr
-00
Jul-0
0O
ct-0
0Ja
n-01
Apr
-01
Jul-0
1O
ct-0
1Ja
n-02
Apr
-02
Jul-0
2O
ct-0
2Ja
n-03
Apr
-03
Jul-0
3O
ct-0
3Ja
n-04
Apr
-04
Jul-0
4O
ct-0
4Ja
n-05
Apr
-05
Jul-0
5O
ct-0
5Ja
n-06
Apr
-06
Jul-0
6O
ct-0
6Ja
n-07
Apr
-07
Jul-0
7O
ct-0
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n-08
Apr
-08
Jul-0
8O
ct-0
8Ja
n-09
Apr
-09
Jul-0
9O
ct-0
9Ja
n-10
Apr
-10
Jul-1
0O
ct-1
0Ja
n-11
Apr
-11
Jul-1
1O
ct-1
1Ja
n-12
Apr
-12
Spr
ead
to 1
0 Ye
ar U
S T
reas
ury,
P
erce
ntag
e P
oint
s
The spread between long term municipal bonds, as tracked by Moody’s, and the 10Y US Treasury rate has averaged about 0 since 1990.
Between 1970 to 2009, the default rate for municipal borrowers was 2.9%. This rate doubled in 2010 and 2011 to 5.5%.
US Municipal Bond Yield Spread Elevated Default Rate Among Municipal Borrowers Has Doubled in Last Two Years
Source: Bloomberg , Moody’s As of 30 May 2012
Municipal (State and Local) Bond Spread to Treasuries
31
City Deficit Through 2012 ($MM)
FY 2012 Budget ($Billions)
Annual Budget Shortfall
Chicago $636 $8.2 7.7%
New York City $4,580 $65.7 7.0%
Los Angeles $457 $6.9 6.6%
San Francisco $380 $6.8 5.5%
Washington D.C. $322 $9.6 5.1%
Honolulu $100 $1.93 5.1%
Detroit $155 $3.11 5.0%
Cincinnati $60 $1.2 5.0%
San Jose $115 $2.5 4.6%
San Diego $56.70 $2.8 2.0%
Source: Business Insider, News reports 1 May 2012
The Nation’s Largest Cities are in Financial Trouble Tax Increases and Service Cuts Likely in Many Markets
32
Some Municipalities Have Defaulted in 2012 Others were Downgraded and Have Speculative Ratings
Status Municipality Moody’s Rating Population (2010)
Default
Stockton, CA Ba2 (Under review) 292,000
Harrisburg, PA Rating withdrawn 49,528
Hercules, CA Not Rated 24,060
Downgraded & Speculative Grade
Detroit, MI B2 (Under review) 713,777
Pontiac, MI Caa2 59,515
Riverdale, IL B1 15,055
Downgraded Providence, RI Baa1 178,042
There were 21 municipal defaults totaling $978 million this year through March 20, versus 28 defaults totaling $522 million over the same period in 2011.
Source: Moody’s, News reports As of May 2012
33
This information is intended to assist professional investors in deciding whether they wish to consider the investment further. The information does not constitute an offer to invest and is subject to correction, completion and amendment without notice. Any such offer, if made, will only be made by means of a confidential private placement memorandum. All information obtained from third party sources is believed to be reliable and current, but accuracy cannot be guaranteed and we do not undertake to update any information contained in this document. All assumptions, figures and calculations contained in the information must be independently verified by the professional investor.
Copyright © LaSalle Investment Management 2012. All rights reserved. No part of this publication may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior permission of LaSalle Investment Management.
