© jr delisle, ph. d. real estate outlook 2010: no bottom, no net presented to: seattle chapter of...

© JR DeLisle, Ph. D.

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

[email protected]

Annotated. Select View Notes in PPT to read my text.


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


Three Major Attributes of Real Estate Revisited

Three major attributes of real estate . . .

– L,– L,– L.

LL

L

. . . . . . . ulnerable,

. . . . . . . ulnerable,

. . . . . . . ulnerable.The 2009 regime of real estate . . .

– D– D– D

. . . . . . . istressed, . . . . . . . istressed, . . . . . . . istressed.

Three major attributes of real estate . . .

– L,– L,– L.

The 2010 + regime of real estate . . .

Liability, Litigation, Liquidity (NOT!)

L, L, L

Butt, what the “L”?


Commercial Real Estate: How we Got Here

Tax

Rec

over

y: A

CR

S

Der

egul

ate

Fin

Inst

.

Fore

ign

$’s

Pen

sion

$’s

Tax

Ref

orm

Rec

ord

Con

st.

RE

Col

laps

e

Thrif

ts C

olla

pse

RTC

UP

RE

ITs

CM

BS

Def

ensi

veC

apita

l $’s

9/11

Rec

essi

on

ERIS

A

Tax

Ref

orm

NC

RE

IFTotal Return

Value Change


How We’re Doing: Institutional Real Estate

Source: NCREIF

The Good News…. It’s not as bad as it was

The “Bad News”

Implicit Cap Rates 200bp below averages


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


Rising Rents

Val

ues

Spatial & Capital De-connect and Re-connect

WarrantedConstruction: Expanding Demand

CapitalMarket Bubble

MarketInefficiency

Spatial Market

Capital Market

Cap Rate RiseInterest Rates/Debt Rise

Vacancy UpRents Down

BV(Bubble Value)

Debt -20%+/-Bubble

Cap R -20%+/-Bubble

Market -10-20%+/-Softening

-40-60%


What Happened: Commoditization of Pricing

Market Risk/Return Long-Term

Recent: Risk/Return 5 yrs


Who Responded to the Survey?

Experience of RespondentsWhat Specializations?

JRD Prediction

Number with Same Company will decline…..

Others: Regulator, pension advisor, government, right-of-way, lender appraisal department, lawyer, student

Seattle MAI Respondents


When National & Seattle Markets Bottom Out?

National

Seattle Respondents

Seattle


Part II: A Growing Consensus on Economy

Seattle Respondents


Breaking News on Real Estate & the Economy


The Good News: Employment Losses Slowing

Source: economy.com

Net Employment losses

Une

mpl

oym

ent

Jobless Claims Slowing?

10%

The glass is half-full syndrome; wishful but tentative….


Business Cycles: An Historical ComparisonClick for annotation


Critical Elements to Sustainable Recovery

The Future Remains Uncertain

Few degrees of freedom; stars must stay aligned….



Federal Stimulus Funding: Pledged & Provided


US Recovery Status


Business Inventories and Business Spending

Business SpendingBusiness Inventories

Good News: Manufacturing up


• Small business report tighter credit

• Reactions– Cutting payrolls

– Reducing inventory

– Reducing capital spending

• Outlook– No near-term

improvement

Focus on Small Business

Source: economy.com

Credit Remains Tight for Business


Housing Activity and Delinquency Rates

Construction

Housing Index

Delinquency & Default


Residential Delinquencies, Foreclosures & Charge-Offs

Loan Charge-Off Rates to Rise

Source: economy.com

Delinquency Rates Residential Foreclosures


Consumer Confidence, Spending & CreditConsumers Contracting

Source: economy.com

Consumers are over 70% of GDP….

As of October 2009, recent uptick in retail sales on Year over Year; partly weak 2008…

Butt…


Global and Domestic Business Confidence

Source: economy.com

U.S. Business ConfidenceSome improvement….

But, deficit….


Global Recession Map

Source: economy.com


Part II Summary: The Economy

Macro-economic Environment

• Economy showing some signs of turning

• Businesses struggling, credit tight

• Consumers bearish

The Future Remains Uncertain


Part III: Real Estate Capital Markets


Current and Future National-Level Cap Rates

Most common: modes



Current and Future Seattle-Area Cap Rates



CBA: Properties for Sale Output


Seattle Capital Market: Agree/Not



Capital Markets & Capital Flows

• Investment Preferences– Core assets at distressed

prices

– Major markets, strong assets

• Timing– Still waiting for bottom

– Indecisive; slower to act

• Opportunities– Cash

– Distress

– Takeovers

• Decreased capital flows– Investors still frozen

– Debt limited sources & tighter

– Access & yield for equity

• Capital Market Challenges– Refinancing: volume & status

– Weakening fundamentals

– Surge in distressed assets

– Valuations & mark-to-market

– Growing pressure to act..

Positives Negatives


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


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


Distressed Asset Recovery by Source & Terms


• 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

Players in Distressed Asset Market


REITs: Back to the Future?

• Changing Game?– Through June, raised

$12 billion in stock

– Who? • Office: Boston Properties,

Vornado Realty Trust

• Retail: Regency Centers, Simon Property Group

• Challenges– Existing Leverage

– Eroding Fundamentals

– Falling Property Values

Accretive? Buy at 8-10,

payout 4-6


REIT Snapshot


REIT Stock Prices: Retail and Office


Apartment, Hotel and Diversified REITs


Part III Summary: Real Estate Capital Markets





Real Estate Capital Market

• Still shut down; some activity increasing

• Rising Cap rates, tighter credit, picky sources

• Major challenge in de-levering


Part IV: Spatial Market

• Components of Spatial Market– Demand

– SupplyMarket Balance


Commercial Market Fundamentals

Downtown Office

Suburban Office

Industrial

Apartments

Source: Torto Wheaton Research, REIS, 2009 Emerging TrendsSource: Torto Wheaton Research, REIS, 2009 Emerging Trends

Retail

Vacancy Rates

Office

Industrial

Retail

Apartments

Development (msf)

0%

5%

10%

15%

20%

25%

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08

0

50

100

150

200

250

300

'90 '92 '94 '96 '98 '00 '02 '04 '06 '08


NCREIF Property Type Return Overview


Risk/Return by Property Type by Regime


Office Real Estate

• Overview– Corporations giving back space

– Sublease activity increasing

– Vacancy rates rising

– Rents softening

– Credit will be tightening

– Construction declining

• Areas of Concern– Speculative projects

– Commodity product

– Capital Needs: Cap X, TI’s

– Second and third tier markets

– Emerging sub-markets

• Opportunities– Abandoned Projects

– Entitled Projects

– Capital Needs Projects

– Asset Takeovers

– Distressed Owners/REO


• 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– New unproven & unopened stores

– Underperforming existing units

– Unanchored Life-style centers

– Tenant Bankruptcies

– Mixed-use in marginal markets

– Niche Oversaturation

Retail Real Estate

• Opportunities– Projects with Lost Anchors

• Entitled/Spec Projects

• Capital Needs Projects

• Asset Takeovers

• Distressed Owners & REO


• Overview– Absorption slowing

– Rents softening

– Construction moderating

– Changing Logistics Models

– Globalization

• Areas of Concern– Overbuilt markets

– Functionally obsolescence

– Office Showroom/Flex

– Exports in Global Recession

Industrial Real Estate

• Opportunities– Projects w/ Lost Tenants

• Capital Needs Projects

• Changing H&B Use

• Distressed Owners & REO


• Overview– Modal Shift: Rent vs. Own– Concessions increasing– Absorption slowing– Vacancy rates rising– Rents softening

• Areas of Concern– Homogenized Product– Product Positioning– Re-apartmenting– Density as an End vs. Means– Parking: Shared

Multifamily Real Estate

• Opportunities– Projects in pre-

development

– Entitled but unfunded

– Repositioning

– Conversion (future)

– Distressed Owners & REO


• Overview– High risk/return profile– Travel down– Companies down-scaling– Occupancy falling– Rates slipping

• Areas of Concern– Homogenized Product– Poor Product Positioning– Hotel/Apartment/Condo Hybrids– Weak flags

Hotels

• Opportunities– Projects in development: not

finished

– Entitled: not started

– Reflagging existing

– Distressed Owners & REO


Growth in Distressed Assets by Property Type


What’s Happening on the Distressed RE Front?

Source: Real Capital Analytics

Status and LocationGrowth & Build-up


Distressed Asset Spillover: Why it Matters

Terminus 200: Cousins

Phipps Tower: Crescent/Manulife

3630 Peachtree: Duke/Pope & Land

Two Alliance Center: Tishman

Bank of America Lead

Regions Lead

Wells Fargo Lead,Regions Follows

Sources: RCA, WSJ 4/21/2009


Distressed Loan Recovery by Property Type

Office 53%

Industrial 66%

Retail 72%

Hotel 65%

Apartment 63%

Development 32%Land 45%

Overall 60%


Part IV Summary: The Spatial Markets





Real Estate Capital Market

• Still shut down; some activity increasing

• Rising Cap rates, tighter credit, picky sources

• Major challenge in de-levering

Spatial Market

• Fundamentals continue to erode lagging economy

• Vacancy rates rising, rents falling

• Stagnant demand, leasing sluggish


Total Returns: Seattle vs. US


How Seattle Cap Rates Compare to US?

Not as different as we thought

Challenge:Remove Volatility


Seattle Institutional Returns by Property Type


What’s Happening in Seattle? What’s it all About?


Seattle Real Estate Fundamentals: Yay/Nay?


StatementStrongly Agree Agree Neither Disagree

Strongly Disagree

Opportunistic $'s Target Seattle 13% 42% 24% 20% 0%Distressed Assets flood SEA 4% 53% 18% 24% 0%Cap Flows Stagnant 2% 66% 23% 9% 0%Comm'l Debt Plentiful 0% 0% 17% 69% 14%Transactions picking up 0% 21% 37% 42% 0%Values fall 15-20% 5% 41% 20% 30% 5%Negative talk on SEA hype 0% 9% 23% 50% 18%Leasing picking up 0% 16% 26% 49% 9%Owners will walk 5% 50% 30% 16% 0%Condo bottom mid-2010 0% 25% 20% 52% 2%


Additional Insights on Seattle Market


StatementStrongly Agree Agree Neither Disagree

Strongly Disagree

Vacancy dramatically increasing 2% 35% 33% 28% 2%Developers on sidelines 11% 67% 9% 13% 0%Tenants rule 'til 2011 9% 74% 11% 7% 0%Opp Funds snapping assets 0% 34% 36% 27% 2%Local market on par with US 0% 61% 14% 25% 0%Values fall 15-20%` 2% 44% 20% 29% 4%Housing crisis ends mid-2010 0% 41% 20% 39% 0%Fundamentals are ok; just hype 2% 11% 20% 61% 5%Vacancy rate records possible 7% 43% 22% 24% 4%We'll avoid the national downturn 0% 9% 11% 66% 14%


Seattle Market Risks: Significant/Not



Issues and Risks in Seattle


Issues

Risks


Part V. “Real” Opportunities in Seattle RE



• 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

Other Challenges: Players and Products



• 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

Challenges to Appraisers



• 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…..

Conclusion: What to do? Back to School?

http://jrdelisle.com

© jr delisle, ph. d. real estate outlook 2010: no bottom, no net presented to: seattle chapter of...

Documents

jr delisle

jim delisle

real estate outlook

regime of real estate

yrs slide

annotation slide

real estate capital

repricing of risk slide