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Real Estate 2009
America’s Lost Decade of Growth:
What Happened and Where Do We Go From Here
NABE RE/Construction Teleconference
December 3, 2009
Presented By
Douglas M. Poutasse
Executive Director
NCREIF
[email protected]
1
Real Estate 2007:
“Any Landing You Walk Away From Is A Good Landing”
10/2/2006
Real Estate 2008: Risk is B A C K!
3
The Lost Decade of Growth
10 Year Job Growth
50%
Decad
e
Job
Growth
(millions
)
%
Change
1940s
11.927
38%
1950s
10.744
25%
45%
40%
35%
30%
25%
20%
1960s
16.902
31%
1970s
19.624
28%
10%
1980s
18.351
20%
5%
1990s
21.630
20%
0%
2000s
0.200
0%
Source: Moody’s Economy.com: Feb 2009 Forecast
4
Jan-12
Jan-09
Jan-06
Jan-03
Jan-00
Jan-97
Jan-94
Jan-91
Jan-88
Jan-85
Jan-82
Jan-79
Jan-76
Jan-73
Jan-70
Jan-67
Jan-64
Jan-61
Jan-58
Jan-55
Jan-52
Jan-49
15%
The Lost Decade of Growth by State
State Total Employment
10 Year Growth Rates (January to January)
120%
110%
Massachusetts
100%
California
Florida
90%
Arizona
80%
70%
60%
50%
40%
30%
20%
10%
0%
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955
1953
1951
1949
-10%
Source: BLS
5
The Lost Decade of Growth by State
State Total Employment
10 Year Growth Rates (January to January)
120%
110%
Massachusetts
100%
90%
California
Florida
Arizona
80%
70%
60%
50%
40%
30%
20%
10%
0%
19
49
19
51
19
53
19
55
19
57
19
59
19
61
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
-10%
Source: BLS,NCREIF Projection
6
VACANCIES ARE NEARING A PEAK
PPR54 VACANCY RATES
25%
Forecast
20%
15%
10%
5%
0%
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
12
14
Source : PPR
Apartment
Office
Retail
Warehouse
page 7
What to Expect for NOI Growth
The
economy is
worse in
this cycle
and the
property
markets will
be weaker
Must
assume
that NOI
declines will
be greater
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PEAK-TO-TROUGH DECLINE IN PROPERTY NOI
EARLY 1990s
EARLY 2000s
To 2009Q3
APARTMENTS
(10%)
(13%)
(3%)
INDUSTRIAL
(11%)
(14%)
(10%)
OFFICE
(20%)
(16%)
(4%)
RETAIL
(5%)
(3%)
(9%)
TOTAL
(12%)
(12%)
(4%)
AEW Real Estate Market Outlook
NCREIF Property Index Total Return (4 Quarter Rolling)
9
NCREIF Property Index Cap Rates (Quarterly)
10
Impact of NOI and Cap Rate Changes on
Value
CAP RATE INCREASE FROM NCREIF 2008 Q4 LEVEL OF 5.5%
(BASIS POINTS)
11
POTENTIAL
NOI DECLINE
25
50
75
100
150
200
250
(15%)
(19%)
(22%)
(25%)
(28%)
(33%)
(38%)
(42%)
(10%)
(14%)
(18%)
(21%)
(24%)
(29%)
(34%)
(38%)
(5%)
(9%)
(13%)
(16%)
(20%)
(25%)
(30%)
(35%)
(0%)
(4%)
(8%)
(12%)
(15%)
(21%)
(27%)
(31%)
AEW Real Estate Market Outlook
Debt Drives Real Estate Pricing
Capital
flows drive
pricing
FOUR QUARTER MOVING AVERAGE OF DEBT FLOWS AND CAP RATES
Availability
more
important
than cost
More debt
= lower
yields
$400
10.0%
$350
9.5%
$300
9.0%
$250
8.5%
$200
8.0%
$150
7.5%
$100
7.0%
$50
6.5%
$0
6.0%
-$50
5.5%
-$100
5.0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
As of 2008Q4
Source: Federal Reserve, NCREIF
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AEW Real Estate Market Outlook
Excessive Leverage in the Commercial Mortgage Market
Commercial & Multifamily Mortgages Outstanding as % of GDP
% of GDP
35%
30%
25%
20%
15%
10%
5%
0%
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Sources: Federal Reserve; Moody's Economy.com
PPR
13
The Effect of Leverage on Real Estate Investment Performance
Equity: $865.3
21.7%
Debt:
$3,120.6
78.3%
NCREIF / Townsend Fund Indices
14
NCREIF/Townsend Fund Indices: Rolling 4 Quarter Performance
15
NCREIF/Townsend Fund Indices: Comparative Performance
Gross Returns
thru 2009Q2
Core OpenEnd
Value Add
Closed-End
Opportunistic
Closed End
One Year Return
-30.4%
-34.4%
-50.3%
Five Year Return
4.4%
6.1%
8.4%
Five Year Std Dev
11.21%
14.52%
22.21%
Five Year Individual
Fund Performance
Core
Value Add
Opportunistic
Count
16
38
Top Quartile Break
5.8%
10.2%
22.3%
Median
4.4%
4.0%
10.7%
Bottom Quartile Break
2.5%
-0.2%
Dispersion
1.93%
8.63%
89
-1.0%
21.84%
16
Mixing Illiquid and Liquid Investments in a Strategy
• The great lesson of the Crash of 2008: LIQUIDITY MATTERS!
• Conventional Wisdom: Public Market investments more liquid than
private market
• Was BBB CMBS more liquid than a whole loan held in portfolio?
It depends on what you mean by liquid!
• Hard to hold to your strategy when you have to liquidate your REITs
to get cash to meet your opportunity fund capital calls!
• Lesson to Learn: Mixing strategies with vastly different liquidity
profiles must be done very carefully.
• Oh, and LIQUIDITY MATTERS
2008Q3-2009Q2
Contributions
Core Value Add Opportunistic
2,331
4,661
19,219
Distributions
4,441
($ Millions)
1,784
621
17