market outlook 2011 burnham – moores center for...
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PwC Real EstateMarket Outlook 2011
January 25, 2011
www.pwc.com
Burnham – MooresCenter for Real EstateUniversity of San Diego
Presented by:Mitch Roschelle
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PwC Real Estate Market Outlook 2011Topics
PwC RealEstate Investor
Survey™
Q&A
EmergingTrends In Real
Estate®
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Emerging Trends in Real Estate®2011
32nd Annual Edition600 survey participantsOver 275 intervieweesReleased: Oct 2010
5th Annual Edition150 survey participantsOver 130 intervieweesReleased: Dec 2010
8th Annual Edition339 survey participantsOver 290 intervieweesScheduled: Feb 2011
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PwC
Emerging Trends in Real Estate 2011
• Longest published annual realestate outlook—32ndconsecutive year
• “Most predictive industryforecast”
• Based on surveys/interviewswith 875 industry leaders
• Written with “quotes”
• Jointly published by PwC andULI
4
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PwC
Recent Survey Conducted by PwC of over 200Market Participants
Do You Believe the Recover is Real?
YES
NO
5
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PwC
Emerging Trends in Real Estate 2011 (cont.)
Entering the Era of Less
• Shrunken industry
• Lower returns
• Restrained developmentprospects
• Reduced credit availability
• Change in the profit model –theend of the endless refi
• Price discovery at lower levels
6
Recognition of substantial losses(30-50% haircuts on asset values)
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PwC
The Good News: In 2011 We Are Off the Bottom
• Improved prospects for allmarkets and property sectors(albeit not great)
• Cash rich investors have plentyof options
• More buying opportunities
• Strengthening lender balancesheets
• Refinancing for owners withcash flows
• Recalibrated return expectations
7
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PwC8
December 2010
1
5
9
2004 2005 2006 2007 2008 2009 2010
ET 2010 Investment Barometer – Buy / Sell / Hold
This is what it looked like last year – an all time low sell rating
Buy
Hold
Sell
Record High
Record LowAbysmal
Fair
Excellent
Source: Emerging Trends in Real Estate 2011 survey.Note: Based on U.S. respondents only.
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PwC
ET 2011 Investment Barometer – Buy / Sell / Hold
1
5
9
2004 2005 2006 2007 2008 2009 2010 2011
9
Buy
Hold
Sell
Abysmal
Fair
Excellent
Closing Gap
This year the gap closes
Source: Emerging Trends in Real Estate 2011 survey.Note: Based on U.S. respondents only.
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PwC
Flight to Quality
“A deep canyon separates ‘trophy’and ‘trash’ assets ..with a lot moretrash… The best properties havecash flow and that’s what buyersand lenders want.”
“in a low interest rate environment– all I want is a good safe coupon ”
10
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PwC
Ample Availability of Equity
Real Estate Capital Market Balance Forecast 2011
11
“Investors with dry powder have plenty of options”
Source: Emerging Trends in Real Estate 2011 survey.Note: Based on US respondents only.
SubstantiallyUndersupplied
14.9%
ModeratelyUndersupplied
20%
InBalance
10%
SubstantiallyOversupplied
22.5%
ModeratelyOversupplied
32.7%
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PwC
More Quotes……
“There’s equity out there .. but it's far from abundant”
“What does the market need? Equity to fix the capital stack”
12
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PwC
Still Limited Availability of Debt
Real Estate Capital Market Balance Forecast 2011
13
ModeratelyUndersupplied
32.8%
SubstantiallyUndersupplied
46.1%
ModeratelyOversupplied
5.7%
InBalance
13.7%
SubstantiallyOversupplied
1.6%
Source: Emerging Trends in Real Estate 2011 survey.Note: Based on US respondents only.
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PwC
Outlook for Loan Underwriting in 2011
14
Less Rigorous32.8%
Remains the Same40.6%
More Rigorous26.6%
Source: Emerging Trends in Real Estate 2011 survey.Note: Based on US respondents only.
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Underwriting Standards
Source: Emerging Trends in Real Estate 2010 survey.Note: Based on U.S. respondents only.
Very Stringent 88.30%
Moderately Stringent 9.20%
Neither Flexible nor Stringent 1.90%
Moderately Flexible 0.30%
Very Flexible 0.30%
FOGETABOUTIT!!!!
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PwC
Yet Loan Maturates Continue to Hang Over theMarket
16
“The mountain of maturities keeps me up at night”
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PwC
Delinquencies and Defaults
CMBS Delinquency Rates U. S. CRE Loan Origination
17
Source: RCA
%
Delinquency rate
Delinquency rateaverage
Source: Trepp LLC
The era of EXTEND and PRETEND is over – it's nowAMMEND and EXTEND
0%
2%
4%
6%
8%
10%
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10*
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
1Q
01
3Q
01
1Q
02
3Q
02
1Q
03
3Q
03
1Q
04
3Q
04
1Q
05
3Q
05
1Q
06
3Q
06
1Q
07
3Q
07
1Q
08
3Q
08
1Q
09
3Q
09
1Q
10
Billio
ns
of
$in
Ori
gin
ati
on
s
Quarter
Total Apartment Industrial Office Retail
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PwC
Prospects Obtaining (Re)Financing
Cash Rich Investors/Class A Very Good
Credit Stretched Owners/Class B+Good andimproving
Underwater Borrowers/Class B/B- Problematic
Underwater Borrowers/Class C Ouch
18
“The better your collateral –
the more proceeds you can finance”
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PwC
CMBS Redux ????
US CMBS Issuance
0
50
100
150
200
250
97 99 01 03 05 07 09 11* 13*
19
Total($M)
Source: Commercial Mortgage Alert. * Issuance total through August 31, 2010.* Forecast based on Emerging Trends interviews
Wishful thinking?
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PwC
Return Outlook
“After a 30% to 40% loss it could take a long time to make upground.”
20
The NCREIF Property Index (NPI)
Core private unleveraged: 7.5%
REITs: 8.2%
Opportunity: Mid-teens
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“It’s very hard to get 15% to 20% ratesof return without more risk and moreleverage . The Real Estate Business today ismore about cash flow and keeping assetsleased.”
“After a decade of anemic stock marketreturns – high single digits in Real Estatearen't so bad”
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PwC
Doubting US Economy
• Outsized personal andgovernment debt
• High unemployment
• Stagnating wages
• Consumption down,savings up
22
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PwC
According to Those Surveyed – The Shape ofRecovery
23
“Regardless of the shape, the [recovery] will be jobless”
No Way Hopefully Probably Help
V U Reverse DD
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PwC
“It’s All About Jobs”
• Global competition: America’s high cost labor market loses to lowercost places
• Internet/Telcom: Manufacturing jobs losses now extend to serviceand tech sectors
• Firms learn to operate profitably - with fewer workers in less space
• Jobs shift to lower paying right to work states
• Technology eliminates many traditional middle class jobs
• States/local government cut workers to balance budgets
24
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PwC
Real Estate Demand Formula
Less jobs = Less demand for space
•Absorption will be slow
•Thankfully the days of spec construction are over
25
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PwC
Inflation v. Deflation
• Interest rates stay low, increaselonger-term
• As Fed prints money, inflation isin our future
• Hard assets like real estatebenefit, if demand picks up
• Beware another asset bubble, ifrates stay down too long – the“bubblette”
4.18
4.26
4.16
4.04
3.23
3.22
3.08
2.96
1 3 5
Long-Term Rates (Ten-YearTreasuries)
Commercial Mortgage Rates
Short-Term Rates (One-YearTreasuries)
Inflation
26
“If deflation occurs we’re all in the wrong business.”
IncreasesubstantiallyStable
Fallsubstantially
Next Five Years2011
Source: Emerging Trends in Real Estate 2011 survey.Note: Based on US respondents only.
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PwC
Marketsto
Watch
27
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PwC
Survey #1: Washington DC
Historical Rating
28
6.6 6.7 6.7 6.76.9 6.9
6.6 6.7
6.1 6.2
7.0
1
3
5
7
9
01 02 03 04 05 06 07 08 09 10 11
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PwC
Survey #2: New York
Historical Rating
29
7.36.9
6.66.2 6.1 6.3
6.67.1
5.95.4
6.5
1
3
5
7
9
01 02 03 04 05 06 07 08 09 10 11
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PwC
Survey Top 10
30
2011 2010
1. Washington D.C. 7.01 6.17
2. New York (4th in 2010) 6.56 5.41
3. San Francisco (2nd in 2010) 6.34 5.57
4. Boston (3rd in 201o) 6.20 5.42
5. Seattle (6th in 2010) 6.09 5.31
6. Houston (5th in 2010) 6.02 5.39
7. Los Angeles (9th in 2010) 5.84 5.13
8. San Diego (10th in 2010) 5.63 5.04
9. Denver (7th in 2010) 5.58 5.21
10. Dallas (8th in 2010) 5.50 5.10
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PwC
Our Color Coding
• Green = Not So Bad
• Yellow = Not so Good
• Red = Really Bad
31
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PwC
Markets: 2010 and 2011 Emerging Trends
32
Source: Emerging Trends in Real Estate 2010 and 2011 surveys
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PwC
West Coast
33
Seattle 6.09
San Francisco 6.34
Los Angeles 5.84
Orange County 5.42San Diego 5.63
Portland 5.30
San Jose 6.08
Sacramento 3.99
Inland Empire 4.11
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PwC
Southwest
34
Source: Emerging Trends in Real Estate 2011 survey
Las Vegas 3.44
Phoenix 4.10
Tucson 3.72
Albuquerque 3.95
Oklahoma City 3.74
Denver 5.58
Dallas 5.50
Houston 6.02
Austin 6.29
Salt Lake City4.93
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PwC
East Coast
35
Boston 6.20Boston 6.20
Washington D.C.7.01
New York 6.56New York 6.56
Philadelphia 4.53
Providence 3.44Providence 3.44
Pittsburgh 3.43
Northern NJ 5.45
Westchester/Fairfield, CT
5.18
BaltimoreBaltimore4.88
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PwC
Southeast
36
Atlanta 4.32
New Orleans 3.54
Charlotte 4.82
Raleigh/Durham 5.20
Nashville 4.51
Memphis 3.22
Virginia Beach/Norfolk 4.32
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PwC
Florida
37
Miami 4.49
Jacksonville 4.03
Tampa 4.41
Orlando4.58
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PwC
Midwest
38
Minneapolis 4.85
Kansas City 3.84
St. Louis 3.45
Chicago 5.14
Indianapolis 3.82
Cincinnati 3.25
Columbus 3.14
Cleveland 2.65
Milwaukee 3.25 Detroit 2.0
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PwC
Property Sector Investment Rankings
39
Source: Emerging Trends in Real Estate 2010 survey.Note: Based on US respondents only.
Apartments
Industrial/Distribution
Hotels
Office
Retail
6.19
5.07
4.78
4.72
4.50
1Abysmal
5Fair
9Excellent
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PwC
Best Bets: Investments
• Temper expectations
• Lock-in leverage (if you can)
• Provide debt and recap equity
• Focus on global gateways,24-hour markets
• Favor infill over fringe
• Buy or hold REITs
• Buy land
• Exercise caution on distressedloan pools
40
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PwC
Best Bets: Development
• Apartments—increasing activityin tightening infill markets
• The odd warehouse
• Select build-to-suit officeprojects
• Demand for premium productthree to five years out
• Housing—need to absorb excesssupply from overbuilding,foreclosures
• Export talent
• Build green
41
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PwC
Less Space
• Housing
- Inter-generational living together
- Less reliance on cars
• Office
- Downsizing space per capita
- Outsourcing to domesticfreelancers and overseas, morehoteling
• Retail
- Smaller stores, best locations,more e-commerce
• Industrial
- Fewer links in distribution chains
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PwC Real Estate Investor Survey™
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PwC
PwC Real Estate Investor Survey ™
Formerly known as “Korpacz Survey”
In its 24th year – longest runningquarterly Real Estate Market Forecast
Covers 31 national, regional, and city –specific markets
Encompasses , office, retail, industrialand apartment properties
Survey participants are asked to lookforward NOT backwards
Strong base of recurring surveyparticipants of more than 125 (each quarter)
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PwC
PwC Real Estate Investor SurveyNational Highlights – Fourth Quarter 2010
• Investors signal signs that the USeconomy is likely to evade a double-dip recession.
• Supply-demand dynamics of thefrail commercial real estate industryhave mostly bottomed.
• Increased willingness to look forbuying opportunities beyond coremarkets, trophy assets or vastlydistressed properties.
• Both investors and lenders are gainingmore confidence in the performanceof the economy and the industryas a whole.
• Investors are looking to wideninvestment parameters and take onadditional risk.
• Flight to quality .focus remains
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PwC
Overall cap rate trendsStrong buyer interest, debt availability, and low interest rates continueto compress overall cap rates for core assets.
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Recession
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PwC
Overall cap rate trendsWhile averages have dipped for national markets (except flex/R&D)over the past year, they remain above 2007 levels.
47
Over next six (6) monthsmarket participants expect
cap rates to hold steady
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PwC
Overall cap rate trends - ApartmentsRates have expanded and compressed the most in the Survey’s nationalapartment market.
48
Recession
Apartments lead the recovery
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PwC
Overall cap rate trends - ApartmentsCap rate trends have changed significantly in the Survey’s nationalapartment market over the past 20 years.
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Recessions
200 BPdecline
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PwC
Overall cap rate trends - OfficeOffice markets -- quarterly declines have not been uniform during 2010.
(100)
(80)
(60)
(40)
(20)
-
20
Basis Point Change From 1Q10 to 4Q10
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PwC
Overall cap rate trends – OfficeA 23-year look at the Manhattan Office Market
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Recessions
Investor confidence was
not strong during
the 90’s
50 BP fromhistorical low
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PwC
Commercial Real Estate Loan OriginationsSource: RCA
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$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
Billio
ns
of
$in
Ori
gin
ati
on
s
Quarter
Total Apartment Industrial Office Retail
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PwC
PwC Real Estate Investor SurveyNational Highlights – Fourth Quarter 2010
• Investors continue to useconservative underwritingassumptions.
• The “Year 1” market rent growth isnegative for 10 of the Survey’s 31markets this quarter.
• A year ago, 20 markets reportednegative Year 1 rent growth.
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Markets with Negative Year 1Rent Growth1. National power center2. National suburban office3. Atlanta office4. Boston office5. Chicago6. Denver office7. Phoenix office,8. San Diego office9. SE Florida office10. SE Region apartment
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PwC
Market rent growth rate trends – nationallyYear 1 rent growth has declined dramatically in each sector since thepeak of the cycle.
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Average Market Rent Growth Expectations
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PwC
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
Average Initial-Year Market Rent Growth Rate Assumption
Market rent growth rates – office marketsFor the 18 city-specific office markets -rent growth expectations haveplummeted and are rising very slowly.
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Recession
522 BPdrop in 24
months
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PwC
-7.00%
-5.00%
-3.00%
-1.00%
1.00%
3.00%
5.00%
7.00%
9.00%
Manhattan Los Angeles Boston Atlanta San Francisco Washington, DC
Market rent growth rates – select office marketsGrowth rate assumptions have expanded and contracted the most inManhattan and have been steady in the DC.
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Recessions
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Upcoming Research from PwC’s RealEstate Practice
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PwC
Upcoming Research
•Much of our Research at PwC is survey –based
•We recently took the opportunity to poll the audience ofmore than 200 real estate market participants
•The questions and results follow
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PwC
Polling question
In the coming year, in what area are you more willing (likely)to take on additional risk?
1. Location
2. Property type
3. Tenancy
4. Leverage
5. Properties with deferred maturities
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PwC
In 2011 – In what area are you willing to take onmore risk?
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PwC
Polling question
How do you intend to fix “out-of-balance” loans?
1. Principal pay-down or discounted payoff
2. Principal forgiveness from lender without borrower pay-down
3. Extend maturity and wait for market to improve
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37.1%
6.7%56.2%
Principal paydown orDPB
Pricipal forgiveness w/opaydown
Extend maturity andwait for market toimprove
How do you intend to fix an out of balance loan?
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PwC
Polling question
What property types are you looking to invest in 2011?
1. Office
2. Apartment
3. Industrial/Distribution
4. Hotel
5. Retail
6. Other
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PwC
What property types are you looking to invest in2011?
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Q & A
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Contact Information
© 2010 PwC. All rights reserved. "PwC" and "PwC US" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a memberfirm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. This document is for general informationpurposes only, and should not be used as a substitute for consultation with professional advisors.
Mitchell RoschellePwCNational Practice LeaderReal Estate Advisory(646) [email protected]
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www.pwc.com
© 2011 PricewaterhouseCoopers LLP. All rights reserved. “PwC” refers toPricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the contextrequires, the PricewaterhouseCoopers global network or other member firms of the network,each of which is a separate and independent legal entity. This document is for generalinformation purposes only, and should not be used as a substitute for consultation withprofessional advisors.