Download Key Dynamics for the Economy, Real Estate Fundamentals and

Key Dynamics for the Economy, Real Estate Fundamentals and Capital Markets
February 2012
Uncertainty Is the Enemy of Growth: Last Year’s Turbulence Has Been Ebbing
Fearing Fear Itself but things Have Calmed Down Recently
“This paper builds on the theory of irreversible choice under uncertainty to give an explanation of
cyclical investment fluctuations. The key observation is that, when individual projects are
irreversible, agents must make investment timing decisions that trade off the extra returns from
early commitment against the benefits of increased information gained by waiting. In an
environment in which the underlying stochastic structure is itself subject to random change,
events whose long-run implications are uncertain can create an investment cycle by temporarily
increasing the returns to waiting for information. “
–Ben Bernanke, “Irreversibility, Uncertainty, and Cyclical Investment”
Or…
When people are uncertain about the future, they wait and do nothing.
Equity Market Volatility Has Returned
PIIGS CDS Have Eased
to Normal
Sources: Bloomberg, Yahoo Finance, Maximus Advisors
2
When Is a Recovery Not a Recovery?
Employment Barely Off the Floor
Sources: BLS, Maximus Advisors
3
Dr. Jekyll/Mr. Hyde Consumers
Consumer Spending Gyrating as Consumers Respond to Economic Winds;
Retailers Appear to Be Thinking About Expansion Again
Weekly Chain Store Leading Index Shows Wide
Swings in Spending from Month to Month
Sources: ISCS, BLS, Maximus Advisors
Retail Employment Growth Suggests Retailers
Are Starting to Think About Expansion
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Economic Headwinds Remain
Consumer Being Buffeted by Housing and Financial Market
Stock Market Sell-Off Hurt Household Wealth, Again
Does Drop in Savings Rate and …
Sources: Federal Reserve, NAR, BEA, Maximus Advisors
… Renewed Increases in Consumer Credit Indicate Stress?
5
Business Sector Holding Up So Far
Potential for Fall-Off Amid Global Slowing, Erratic Consumer and
Regulatory/Tax Uncertainty
Industrial Production Has Been Stop and Go; Most
Recently on the Upswing Again
New Orders Healthy but Off Peaks Recently
Investment Spending Increasing
According to a recent Fitch
study, capital expenditures
increased 14.8% LTM
September versus 2010.
Fitch expects capex to
decline 2.2% in 2012
compared to 2011, reflecting
continued slow revenue
growth without increased
confidence for material
demand growth.
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Exports Growth Has Been a Key Ingredient of Recovery
Exports Hit Record High Early this Year, Wobbled in Summer, Recovered, Now Off
Again; Global Slowdown a Concern
US Exports Have Been Strong but Can the
Growth Be Maintained?
Sources: Census, Maximus Advisors
Global Growth Is Slowing
7
Government Shifting to Exerting a Drag on Economy
State & Local Fiscal Squeeze Squeezing the Recovery, Is Federal Government Next?
Sources: BLS, Maximus Advisors
8
US Economic Outlook
We Dodged a Bullet
•
Recovery survived the turmoil of last summer and appears to be strengthening again.
•
We start 2012 much as we started 2011, recovery seemingly in place, capital markets becoming more accommodative.
•
In a world of known unknowns and unknown unknowns, we have a lot of known unknowns that could once again break up the party:
Euro‐mess.
 DC dysfunction.
 Slowing global economy.
 Iran tensions.
And that does not count the unknown unknowns, meaning that a replay of 2012 is easily imagined.

•
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Tale of Two Recoveries Fundamentals
Robust Apartment and Hotel Recoveries; Other Major Food Groups Awaiting Sustained
Demand
Apartment Absorption Strong, Supply Quiet
and Vacancies Dropping Rapidly
Office & Retail Supply and Demand Both Quiescent
so Vacancies Hovering Near Highs
Office & Retail Absorption & Completions, MSF
40
40
Absorption
Completions
20
20
0
0
-20
-20
Through
3q11
-40
Sources: Reis, Maximus Advisors
07
08
09
10
11
-40
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Tale of Two Recoveries: Valuations
Valuation Increases Have Been Centered in Top Cities/Properties, Broader
Measure Range-Bound Around Lows, Distressed Still Trending Down
Sources: Moody’s, RCA, Maximus Advisors
11
CMBS Market Hijacked by Bigger Issues
Like Other Risk Assets, Pricing Being Driven by Global Liquidity
CMBS 1.0 Spreads Reflected SegmentSpecific and Broad Trends
Sources: CM Alert, Dow Jones, Maximus Advisors
CMBS 2.0 Spreads an Adjunct to Overall Capital
Market Moves
12
Financing Gap Building
Lower Valuations and More Stringent Underwriting Leading to Growing Gap
Sources: Federal Reserve, MBA, Trepp, Maximus Advisors
13
What Is the New Normal for CMBS?
We Keep Looking Back to Peak Issuance but What Should We Really Expect
in Coming Years?
Sources: CM Alert, Maximus Advisors
14
Apartment Segment
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Apartment Supply-Demand Dynamics
Recent Demand Driver Dynamics and the Start of the Next Development Cycle
Hiccup in Homeownership Decline
Household Formations Picking Up Again
Unprecedented Window of Limited Multifamily Supply but
Development Showing Signs of Re-Starting
16
Sources: Census,, Maximus Advisors
Apartment Fundamentals Improving Rapidly
Vacancies Are Already Down 270 bps from Peak; Rents Up 4.7% from Trough
Absorption Strong, Supply Diminishing
and Vacancies Dropping Rapidly
Sources: Reis, Maximus Advisors
Effective Rents Up For Eighth Consecutive
Quarter to New High
17
Strong & Rapid Apartment Recovery
Apartment Segment Is a Standout
Vacancies Look to Drop Sharply to Levels Not Seen
Since 1990s
Sources: Reis, Maximus Advisors forecasts
Strong Rent Gains Ahead
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Robust Apartment Recovery Apparent Across Markets
Average Apartment Rating Improved to 1.84 from 2.16
Sources: Maximus Advisors
19
Office Segment
20
Office Fundamentals at Trough
Underlying Office Demand Drivers Re-Emerging
Office Jobs Have Been Recovering but Wobbled During
the Summer
Supply-Demand Has Come Into Balance
Sources: BLS, Reis, Maximus Advisors
Office Rents Edging Up
21
Office Fundamentals at Trough
Vacancies Have Peaked, Rents Nearing Trough; Key to the Next Chapter Is Whether
the Recovery Stays on Track and the Pace of Job Creation
Slow Initial Office Recovery
Sources: Reis, Maximus Advisors forecasts
Office Rent Recovery Lags Employment
Recovery by About 1½ -2 Years
22
Office Recovery in Suspended Animation Leaving Most Markets Awaiting Gains
Average Office Rating Improved to 3.27 from 3.57
Sources: Maximus Advisors
23
Retail Segment
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Key Retail Dynamics Are Not Just Cyclical
Internet Shopping, Home-Related Spending and Format Preferences Key Issue for
Retail Property Owners and Lenders
E-Retail Grabbing Higher Share of Sales and
Changing Retail Formats
Spending on Housing-Related Goods Still Soft
Value Oriented Consumers Looking to Warehouse Clubs and
Superstores to Stretch Their Budgets; Department Stores Stagnant
25
Retail Supply-Demand Dynamics Improving
Vacancies Have Stabilized but High; Rents Have Also Stabilized
Retail Demand Picked up in 4th Quarter;
Development Pipeline Dry
Sources: Reis, Maximus Advisors
Effective Rents Bottoming
26
Retail Recovery Ahead
High Current Level of Vacancies Means Excess Availability Will Persist Even
With Recovery
Absence of Development Will Assist the Retail
Recovery but Economy Must Cooperate
Sources: Reis, Maximus Advisors forecasts
Rents Will Be Slow to Recover Amid High Availability
27
Regional Retail Markets Slowly Recovering
Average Score of 3.92 vs 4.14 Previously Showing Improvement;
Coastal and Tech Markets Have Strongest Prospects
Sources: Maximus Advisors
28
Industrial Segment
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Drivers of Warehouse/Distribution Are Stronger
Underlying Industrial Demand Drivers Re-Emerging
Trade Flows Have Made a Solid Comeback
but a Stall in Global Growth Would Hurt
RR Traffic Has Been Increasing; Seasonal Fall-Off
Capacity Utilization Emerging from Depths of Recession but Still Low
Sources: Census, AAR, Federal Reserve, Maximus Advisors
30
Industrial Fundamentals Set to Begin to Recover
Vacancies at Peak, Rents Nearing Trough
Limited Supply and Re-Emerging Demand Will
Kick-Start Warehouse Recovery
Sources: Reis, Maximus Advisors forecasts
Warehouse Rents Will Recover with a Lag
31
Regional Industrial Markets Shifting Into Recovery
Average Industrial Score of 3.60 vs. 3.93 Previously
Sources: Maximus Advisors
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Hospitality Segment
33
Hospitality Recovering but Depends on Cooperating Economy
Demand Increasing on All Fronts
Hotel Revenue Is Tracking the Ebb & Flow of GDP
Consumer Spending on Hotels Reflects Broader
Stop-Go Pattern
Foreign Travel to US Still Growing but Must Watch for Impact of Slowing Europe and Stronger Dollar
Sources: BEA, ITA, Maximus Advisors
34
Hospitality Recovering
Demand Up, Supply Slowing, Occupancies Healthier
Occupancies Up Nicely
Sources: STR, Maximus Advisors
Rising Room Rates + Higher Occupancy =
Stronger RevPAR
35
Regional Hotel Markets Show Continued Improvement
Average Hotel Score of 2.67 vs. 3.03 Previously
Sources: Maximus Advisors
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Peter Muoio, Ph.D.
646‐352‐9510
[email protected] www.maximusadvisors.com
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