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Annotated. Select View Notes in PPT to read my text.
Real Estate Outlook 2010:
No Bottom, No Net
presented to:
Seattle Chapter of the Appraisal Institute
Fall Conference
by: Jim DeLisle, Ph.D.
December 1, 2009
jrdelisle@jrdelisle.com
© JR DeLisle, Ph. D.
Presentation Overview
I: 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
© JR DeLisle, Ph. D.
Three Major Attributes of Real Estate Revisited
Three major attributes of real
estate . . .
– L,
– L,
– L.
. . . . . . . ulnerable,
. . . . . . . ulnerable,
. . . . . . . ulnerable.
The 2009 regime of real estate . . .
– D . . . . . . . istressed,
– D . . . . . . . istressed,
– D . . . . . . . istressed.
The 2010 + regime of real estate . . .
Butt, what the “L”?
L, L, L
Liability, Litigation, Liquidity (NOT!)
© JR DeLisle, Ph. D.
Commercial Real Estate: How we Got Here
25%
20%
Total Return
15%
10%
5%
Value Change
0%
-5%
-10%
-15%
© JR DeLisle, Ph. D.
How We’re Doing: Institutional Real Estate
The Good News….
It’s not as bad as it was
The “Bad News”
Implicit Cap Rates
200bp below averages
© JR DeLisle, Ph. D.
Source: NCREIF
The Three C’s of our Disconnect
• Credit 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
© JR DeLisle, Ph. D.
Spatial & Capital De-connect and Re-connect
Capital Market
BV
(Bubble Value)
Capital
Market
Bubble
Debt -20%+/Bubble
Warranted
Construction:
Expanding
Demand
Cap R -20%+/Bubble
-40-60%
Values
Market -10-20%+/Softening
Rising
Rents
Cap Rate Rise
Interest Rates/Debt Rise
Spatial Market
Vacancy Up
Rents Down
Market
Inefficiency
© JR DeLisle, Ph. D.
What Happened: Commoditization of Pricing
Market Risk/Return Long-Term
Recent: Risk/Return 5 yrs
© JR DeLisle, Ph. D.
Who Responded to the Survey?
Experience of Respondents
What Specializations?
JRD Prediction
Others: Regulator, pension advisor,
government, right-of-way, lender
appraisal department, lawyer, student
Number with Same
Company will
decline…..
Seattle MAI Respondents
© JR DeLisle, Ph. D.
When National & Seattle Markets Bottom Out?
National
Seattle
Seattle Respondents
© JR DeLisle, Ph. D.
Part II: A Growing Consensus on Economy
Seattle Respondents
© JR DeLisle, Ph. D.
Breaking News on Real Estate & the Economy
© JR DeLisle, Ph. D.
The Good News: Employment Losses Slowing
Jobless Claims Slowing?
Unemployment
Net Employment losses
10%
The glass is half-full
syndrome; wishful
but tentative….
Source: economy.com
© JR DeLisle, Ph. D.
Click for annotation
Business Cycles: An Historical Comparison
© JR DeLisle, Ph. D.
Critical Elements to Sustainable Recovery
The Future Remains Uncertain
Few degrees of freedom;
stars must stay aligned….
Seattle MAI Respondents
© JR DeLisle, Ph. D.
Federal Stimulus Funding: Pledged & Provided
© JR DeLisle, Ph. D.
US Recovery Status
© JR DeLisle, Ph. D.
Business Inventories and Business Spending
Business Inventories
Business Spending
Good News: Manufacturing up
© JR DeLisle, Ph. D.
Focus on Small Business
• Small business report
tighter credit
• Reactions
Credit Remains Tight for Business
– Cutting payrolls
– Reducing inventory
– Reducing capital
spending
• Outlook
– No near-term
improvement
Source: economy.com
© JR DeLisle, Ph. D.
Housing Activity and Delinquency Rates
Construction
Delinquency & Default
Housing Index
© JR DeLisle, Ph. D.
Residential Delinquencies, Foreclosures & Charge-Offs
Loan Charge-Off Rates to Rise
Delinquency Rates
Residential Foreclosures
Source: economy.com
© JR DeLisle, Ph. D.
Consumer Confidence, Spending & Credit
Consumers Contracting
Consumers are over 70% of
GDP….
Source: economy.com
As of October 2009, recent
uptick in retail sales on Year
over Year; partly weak 2008…
Butt…
© JR DeLisle, Ph. D.
Global and Domestic Business Confidence
U.S. Business Confidence
Some improvement….
But, deficit….
Source: economy.com
© JR DeLisle, Ph. D.
Global Recession Map
Source: economy.com
© JR DeLisle, Ph. D.
Part II Summary: The Economy
Macro-economic
Environment
• Economy showing
some signs of
turning
• Businesses
struggling, credit
tight
The Future Remains Uncertain
• Consumers
bearish
© JR DeLisle, Ph. D.
Part III: Real Estate Capital Markets
© JR DeLisle, Ph. D.
Current and Future National-Level Cap Rates
Most common: modes
Seattle MAI Respondents
© JR DeLisle, Ph. D.
Current and Future Seattle-Area Cap Rates
Seattle MAI Respondents
© JR DeLisle, Ph. D.
CBA: Properties for Sale Output
© JR DeLisle, Ph. D.
Seattle Capital Market: Agree/Not
Seattle MAI Respondents
© JR DeLisle, Ph. D.
Capital Markets & Capital Flows
Positives
• Investment Preferences
– Core assets at distressed
prices
– Major markets, strong assets
Negatives
• Decreased capital flows
– Investors still frozen
– Debt limited sources & tighter
– Access & yield for equity
• Timing
– Still waiting for bottom
– Indecisive; slower to act
• Opportunities
– Cash
– Distress
– Takeovers
• Capital Market Challenges
–
–
–
–
–
Refinancing: volume & status
Weakening fundamentals
Surge in distressed assets
Valuations & mark-to-market
Growing pressure to act..
© JR DeLisle, Ph. D.
Commercial Leverage: Problems & Implications
• Tightened 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
© JR DeLisle, Ph. D.
Bid/Ask Spread: Trends and Value Pressures
• Bid/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
© JR DeLisle, Ph. D.
Distressed Asset Recovery by Source & Terms
© JR DeLisle, Ph. D.
Players in Distressed Asset Market
• REITs
– 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
© JR DeLisle, Ph. D.
REITs: Back to the Future?
• Changing Game?
– Through June, raised
$12 billion in stock
– Who?
• Challenges
– Existing Leverage
– Eroding Fundamentals
– Falling Property Values
• Office: Boston Properties,
Vornado Realty Trust
• Retail: Regency Centers,
Simon Property Group
Accretive?
Buy at 8-10,
payout 4-6
© JR DeLisle, Ph. D.
REIT Snapshot
© JR DeLisle, Ph. D.
REIT Stock Prices: Retail and Office
© JR DeLisle, Ph. D.
Apartment, Hotel and Diversified REITs
© JR DeLisle, Ph. D.
Part III Summary: Real Estate Capital Markets
Macro-economic
Environment
Real Estate Capital
Market
• Economy showing
some signs of
turning
• Still shut down;
some activity
increasing
• Businesses
struggling, credit
tight
• Rising Cap rates,
tighter credit,
picky sources
• Consumers
bearish
• Major challenge
in de-levering
© JR DeLisle, Ph. D.
Part IV: Spatial Market
• Components of Spatial Market
– Demand
– Supply
Market Balance
© JR DeLisle, Ph. D.
Commercial Market Fundamentals
Vacancy Rates
25%
Suburban
Office
20%
Downtown
Office
15%
Industrial
Retail
10%
Development (msf)
Apartments
300
5%
250
0%
'90
'92
'94
'96
'98
'00
'02
'04
'06
'08
200
150
Apartments
100
Industrial
Office
50
Retail
0
'90
'92
'94
'96
'98
'00
'02
'04
Source: Torto Wheaton Research, REIS, 2009 Emerging Trends
'06
'08
© JR DeLisle, Ph. D.
NCREIF Property Type Return Overview
© JR DeLisle, Ph. D.
Risk/Return by Property Type by Regime
© JR DeLisle, Ph. D.
Office Real Estate
• Overview
–
–
–
–
–
–
Corporations giving back space
Sublease activity increasing
Vacancy rates rising
Rents softening
Credit will be tightening
Construction declining
• Opportunities
–
–
–
–
–
Abandoned Projects
Entitled Projects
Capital Needs Projects
Asset Takeovers
Distressed Owners/REO
• Areas of Concern
–
–
–
–
–
Speculative projects
Commodity product
Capital Needs: Cap X, TI’s
Second and third tier markets
Emerging sub-markets
© JR DeLisle, Ph. D.
Retail Real Estate
• Overview
–
–
–
–
–
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
–
–
–
–
–
–
• Opportunities
– Projects with Lost Anchors
•
•
•
•
Entitled/Spec Projects
Capital Needs Projects
Asset Takeovers
Distressed Owners & REO
New unproven & unopened stores
Underperforming existing units
Unanchored Life-style centers
Tenant Bankruptcies
Mixed-use in marginal markets
Niche Oversaturation
© JR DeLisle, Ph. D.
Industrial Real Estate
• Overview
–
–
–
–
–
Absorption slowing
Rents softening
Construction moderating
Changing Logistics Models
Globalization
• Opportunities
– Projects w/ Lost Tenants
• Capital Needs Projects
• Changing H&B Use
• Distressed Owners & REO
• Areas of Concern
–
–
–
–
Overbuilt markets
Functionally obsolescence
Office Showroom/Flex
Exports in Global Recession
© JR DeLisle, Ph. D.
Multifamily Real Estate
• Overview
–
–
–
–
–
Modal Shift: Rent vs. Own
Concessions increasing
Absorption slowing
Vacancy rates rising
Rents softening
• Opportunities
– Projects in pre-development
–
–
–
–
Entitled but unfunded
Repositioning
Conversion (future)
Distressed Owners & REO
• Areas of Concern
–
–
–
–
–
Homogenized Product
Product Positioning
Re-apartmenting
Density as an End vs. Means
Parking: Shared
© JR DeLisle, Ph. D.
Hotels
• Overview
–
–
–
–
–
High risk/return profile
Travel down
Companies down-scaling
Occupancy falling
Rates slipping
• Opportunities
– Projects in development: not
finished
– Entitled: not started
– Reflagging existing
– Distressed Owners & REO
• Areas of Concern
–
–
–
–
Homogenized Product
Poor Product Positioning
Hotel/Apartment/Condo Hybrids
Weak flags
© JR DeLisle, Ph. D.
Growth in Distressed Assets by Property Type
© JR DeLisle, Ph. D.
What’s Happening on the Distressed RE Front?
Status and Location
Growth & Build-up
© JR DeLisle, Ph. D.
Source: Real Capital Analytics
Distressed Asset Spillover: Why it Matters
Phipps 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
© JR DeLisle, Ph. D.
Sources: RCA, WSJ 4/21/2009
Distressed Loan Recovery by Property Type
Office
53%
Industrial
66%
Retail
72%
Hotel
65%
Apartment
63%
Development
Land
32%
45%
Overall
60%
© JR DeLisle, Ph. D.
Part IV Summary: The Spatial Markets
Spatial Market
Macro-economic
Environment
Real Estate Capital
Market
• Economy showing
some signs of
turning
• Still shut down;
some activity
increasing
• Fundamentals
continue to erode
lagging economy
• Businesses
struggling, credit
tight
• Rising Cap rates,
tighter credit,
picky sources
• Vacancy rates
rising, rents falling
• Consumers
bearish
• Major challenge
in de-levering
• Stagnant demand,
leasing sluggish
© JR DeLisle, Ph. D.
Total Returns: Seattle vs. US
© JR DeLisle, Ph. D.
How Seattle Cap Rates Compare to US?
Not as different
as we thought
Challenge:
Remove Volatility
© JR DeLisle, Ph. D.
Seattle Institutional Returns by Property Type
© JR DeLisle, Ph. D.
What’s Happening in Seattle? What’s it all About?
© JR DeLisle, Ph. D.
Seattle Real Estate Fundamentals: Yay/Nay?
Statement
Opportunistic $'s Target Seattle
Distressed Assets flood SEA
Cap Flows Stagnant
Comm'l Debt Plentiful
Transactions picking up
Values fall 15-20%
Negative talk on SEA hype
Leasing picking up
Owners will walk
Condo bottom mid-2010
Strongly
Agree
13%
4%
2%
0%
0%
5%
0%
0%
5%
0%
Agree
42%
53%
66%
0%
21%
41%
9%
16%
50%
25%
Neither Disagree
24%
20%
18%
24%
23%
9%
17%
69%
37%
42%
20%
30%
23%
50%
26%
49%
30%
16%
20%
52%
Seattle MAI Respondents
Strongly
Disagree
0%
0%
0%
14%
0%
5%
18%
9%
0%
2%
© JR DeLisle, Ph. D.
Additional Insights on Seattle Market
Statement
Vacancy dramatically increasing
Developers on sidelines
Tenants rule 'til 2011
Opp Funds snapping assets
Local market on par with US
Values fall 15-20%`
Housing crisis ends mid-2010
Fundamentals are ok; just hype
Vacancy rate records possible
We'll avoid the national downturn
Strongly
Agree
2%
11%
9%
0%
0%
2%
0%
2%
7%
0%
Agree
35%
67%
74%
34%
61%
44%
41%
11%
43%
9%
Neither Disagree
33%
28%
9%
13%
11%
7%
36%
27%
14%
25%
20%
29%
20%
39%
20%
61%
22%
24%
11%
66%
Seattle MAI Respondents
Strongly
Disagree
2%
0%
0%
2%
0%
4%
0%
5%
4%
14%
© JR DeLisle, Ph. D.
Seattle Market Risks: Significant/Not
Seattle MAI Respondents
© JR DeLisle, Ph. D.
Issues and Risks in Seattle
Issues
Risks
Seattle MAI Respondents
© JR DeLisle, Ph. D.
Part V. “Real” Opportunities in Seattle RE
Seattle MAI Respondents
© JR DeLisle, Ph. D.
Other Challenges: Players and Products
• Players
–
–
–
–
Emergence of new players will create further problems
Many naïve 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
© JR DeLisle, Ph. D.
Challenges to Appraisers
• Personal
– 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
© JR DeLisle, Ph. D.
Conclusion: What to do? Back 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
© JR DeLisle, Ph. D.