navigating the narrow shoals
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Navigating the Narrow Shoals. Recession, Recovery & The Apartment Market Peter C. Burley, CRE SDCAA/CCIM - San Diego - September 30, 2010. Navigating the Narrow Shoals. - PowerPoint PPT PresentationTRANSCRIPT
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Navigating the Narrow Shoals
Recession, Recovery& The Apartment Market
Peter C. Burley, CRESDCAA/CCIM - San Diego - September 30, 2010
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Navigating the Narrow Shoals
Opinions expressed herein are those of the speaker and do not reflect those of any organization, vendor, data provider, partner, colleague, friend, or spouse. No statement should be construed as an offer or solicitation. Except as noted as source material, the speaker is solely responsible for the content herein.
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Navigating the Narrow Shoals
Data, consultation, and support graciously provided by:
Moody’s Economy.comReis, Inc.Axiometrics Inc.Real Capital AnalyticsThe Counselors of Real Estate
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Stuff Happens
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A Little Worse than Expected
2005Q12006Q1
2007Q12008Q1
2009Q12010Q1
-8
-6
-4
-2
0
2
4
6 GDP (Annualized % Change)
Source: Moody's Economy.com; BEA
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Stocks Tanked
1/3/2000 1/2/2002 12/26/2003 12/20/2005 12/17/2007 12/10/2009600
700
800
900
1000
1100
1200
1300
1400
1500
1600S&P 500 Index
Source: NYSE
Dot-Com BustFin. Meltdown
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Soaring Profits Crashed
1995Q1 1997Q3 2000Q1 2002Q3 2005Q1 2007Q3 2010Q1500
600
700
800
900
1000
1100
1200
1300
1400US Corporate Profits (after Tax, $B05, SAAR)
Source: Moody's Economy.com; BEA
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Credit Crunched and Remains Tight
2005Q2 2006Q3 2007Q4 2009Q1 2010Q2 2011Q3 2012Q4-30
-20
-10
0
10
20
30Commercial and Industrial Loans, (Bil. $, SA)
Source: Moody's Economy.com; FRB
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Employers Took Action to Cut Costs
2005Q1 2006Q1 2007Q1 2008Q1 2009Q1 2010Q10
100
200
300
400
500
600 Layoff Announcements (Ths)
Source: Challenger, Gray & Christmas, press release 9/1/2010
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2005Q12006Q1
2007Q12008Q1
2009Q12010Q1
-2.5
-2
-1.5
-1
-0.5
0
0.5
1 Change in Total Employment (Mil., SA)
Source: Moody's Economy.com; BLS
Census Hiring
Job Growth Turned South
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Unemployment Remains High
2000Q12001Q2
2002Q32003Q4
2005Q12006Q2
2007Q32008Q4
2010Q12011Q2
3
4
5
6
7
8
9
10
11 Unemployment Rate (%, SA)
Source: Moody's Economy.com
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Consumer Issues
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Consumers Have Been Shaken
2001Q12002Q2
2003Q32004Q4
2006Q12007Q2
2008Q32009Q4
2011Q12012Q2
20
30
40
50
60
70
80
90
100
110
120Consumer Confidence (Index, 1985=100, SA)
Source: Moody's Economy.com; Conference Board
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And, Consumers Remain Pinched
2001Q12002Q2
2003Q32004Q4
2006Q12007Q2
2008Q32009Q4
2011Q12012Q2
45000
50000
55000
60000
65000
70000
75000
80000
7000
8000
9000
10000
11000
12000
13000
14000
15000
16000Household Assets ($Bil)
Source: Moody's Economy.com; BEA
Household Liabilities ($Bil)
Assets (L)
Liabilities (R)
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Closed Wallets Are only Cautiously Opening
2005Q1 2006Q2 2007Q3 2008Q4 2010Q1 2011Q28700
8800
8900
9000
9100
9200
9300
9400
9500Personal Consumpton Expenditures (Bil. $05, SA)
Source: Moody's Economy.com; BEA
-$225B
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Housing Markets Are In the Well
1999Q22000Q3
2001Q42003Q1
2004Q22005Q3
2006Q42008Q1
2009Q22010Q3
2011Q44
4.5
5
5.5
6
6.5
7
7.5
8
8.5
9
New Existing
Source: Moody's Economy.com; NAR; BOC
Home Sales (Mil. Units, SAAR)
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Despite Attractive Pricing
1999Q1 2001Q3 2004Q1 2006Q3 2009Q1 2011Q3120
140
160
180
200
220
240
260
New
Existing
Median Home Price ($Ths., SA)
Source: Moody's Economy.com; NAR; BOC
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And, Despite Generationally Low Rates
1971Q21976Q2
1981Q21986Q2
1991Q21996Q2
2001Q22006Q2
2011Q22
4
6
8
10
12
14
16
18
39yr Avg=8.9%
Mortgage Interest Rates (%, NSA)
30yr Fixed
1yr Adj
Source: Moody's Economy.com; Freddie Mac
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And, the Highest Affordability We Have Seen
2000Q12001Q2
2002Q32003Q4
2005Q12006Q2
2007Q32008Q4
2010Q12011Q2
100
110
120
130
140
150
160
170
180Housing Affordability (Index, SA)
Source: Moody's Economy.com; NAR
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Commercial Property Dynamics
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“We may never go back to the kind of pricing and availability of debt we had…”
-- PwC/Korpacz Real Estate Survey, 9/16/2010
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Job Cuts a Direct Hit on All Sectors
2000 2002 2004 2006 2008 2010 2012 2014-12
-10
-8
-6
-4
-2
0
2
4
Total EmploymentOffice EmploymentIndustrial Employment
Annual Pct Change in Employment
Source: Moody's Economy.com; Reis Inc; PCB
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OfficeAbsorption 2010-13.6m sf
Vacancy Rate:Q2:10 –16.7%Q2:11 – 17.0%
Rent: 2010: -2.7%2011: -2.1%
IndustrialAbsorption 2010-31.7m sf
Vacancy Rate:Q2:2010 – 14.1%Q2:2011 – 13.7%
Rent:2010: -5.4%2011: -4.7%
RetailAbsorption 2010-2.3m sf
Vacancy Rate:Q2:2010 – 13.1%Q2:2011 – 13.1%
Rent:2010: -2.6%2011: -0.1%
Source: NAR, August 26, 2010
Job Cuts a Direct Hit on All Sectors
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Credit Remains Tight
2005Q2 2006Q3 2007Q4 2009Q1 2010Q2 2011Q3 2012Q4-10
-5
0
5
10
15
20
25
30 Commercial Real Estate Loans, (Bil. $, SA)
Source: Moody's Economy.com; FRB
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Transaction Activity has been Limited
01Q202Q2
03Q204Q2
05Q206Q2
07Q208Q2
09Q210Q2
0
20000
40000
60000
80000
100000
120000
140000 Total CRE Transactions ($Mil)
Source: Real Capital Analytics (www.rcanalytics.com)
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Commercial Properties Have Taken a Hit
1978 1983 1988 1993 1998 2003 2008-0.1
-0.08
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
0.08
NPI (All)NPI (Apt)
NCREIF Property Index
Source: NCREIF
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Commercial Property Pricing is off More than 40%
2001 2002 2003 2004 2006 2007 2008 200990
100
110
120
130
140
150
160
170
180
190
200
ApartmentIndustrialOfficeRetail
Moody's REAL CPPI (Index, 2000=100)
Source: MIT Center for Real Estate, Aug 2010
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Commercial Property Pricing is off More than 40%
2007 2007 2008 2008 2009 2009 2010110
120
130
140
150
160
170
180
190
200
ApartmentIndustrialOfficeRetail
Moody's REAL CPPI (Index, 2000=100)
Source: MIT Center for Real Estate, Aug 2010
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Apartment Fundamentals are Improving
2005:12006:1
2007:12008:1
2009:12010:1
-40000
-30000
-20000
-10000
0
10000
20000
30000
40000
50000
0
1
2
3
4
5
6
7
8
CompletionsNet AbsorptionVac %
Vac Rate (%)Completed/Absorbed (Units)
Source: Reis Inc
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Apartment Rents Reflect Somewhat Better Times
2005:1 2006:2 2007:3 2008:4 2010:1-1.5
-1
-0.5
0
0.5
1
1.5
Asking
Effective
Rent Growth (% Chg/Qtr)
Source: Reis Inc
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Concessions are Easing
Apr-08Oct-08
Apr-09Oct-09
Apr-10Aug-10
0
1
2
3
4
5
6
7
8Concessions (% of Asking Rent)
Source: Axiometrics Inc
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Distress is a Bit Lower, But…
J '0
7 F M A M J J A S O N DJ
'08 F M A M J J A S O N D
J '0
9 F M A M J J A S O N DJ
'10 F M A M J J
0
1000
2000
3000
4000
5000
6000
7000 $ M
Source: Real Capital Analytics (www.rcanalytics.com)
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Source: Real Capital Analytics (www.rcanalyics.com)
The Volume of Distressed Properties Has Not Subsided
J '0
7 F M A M J J A S O N DJ
'08 F M A M J J A S O N D
J '0
9 F M A M J J A S O N DJ
'10 F M A M J J
-10000
0
10000
20000
30000
40000
50000
60000
TroubledREORestructuredResolved
$ Millions
Source: Real Capital Analytics (www.rcanalytics.com)
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Apartment Transactions
J FMAMJ JASONDJ FMAMJ JASONDJ FMAMJ JASONDJ F M A MJ J ASON D J FM A M J J ASON D J FM A M J J A0
2
4
6
8
10
12
closedoffered
2005 2006 2007 2008 2009 2010
Apartment Property Trades ($Bil)
Source: Real Capital Analytics (www.rcanalytics.com)
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A Quick Look at the San Diego Economy
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San Diego took a Big Hit in 2009
2001Q12002Q1
2003Q12004Q1
2005Q12006Q1
2007Q12008Q1
2009Q12010Q1
2011Q12012Q1
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
-2
-1.5
-1
-0.5
0
0.5
1
1.5
GMPEmpl't Growth
Gross Metro Product (% Chg) Total Empl't (% Chg)
Source: Moody's Economy.com; BEA; BLS
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Growth Has Generally Outpaced the USBut the Contraction was Steeper
1995Q1 1997Q3 2000Q1 2002Q3 2005Q1 2007Q3 2010Q1100
105
110
115
120
125
130
135
140Relative Employment Growth (Index, 1995Q1=100)
Source: Moody's Economy.com; Burley
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Like Much of California, Joblessness Remains High
1990Q11992Q3
1995Q11997Q3
2000Q12002Q3
2005Q12007Q3
2010Q12
3
4
5
6
7
8
9
10
11SD
US
Unemployment Rate (%)
Source: Moody's Economy.com; BLS
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Spending is Down Sharply
2000Q12001Q2
2002Q32003Q4
2005Q12006Q2
2007Q32008Q4
2010Q12011Q2
30
32
34
36
38
40
42
44
46
48Retail Sales ($Bil., SAAR)
Source: Moody's Economy.com; BOC
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Home Sales Have Improved
2000Q12001Q1
2002Q12003Q1
2004Q12005Q1
2006Q12007Q1
2008Q12009Q1
2010Q12011Q1
2012Q10
5
10
15
20
25
30
35
40
45
50 Existing Home Sales (Ths., SAAR)
Source: Moody's Economy.com; NAR; BOC
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Home Prices Have Struggled
2000Q12001Q2
2002Q32003Q4
2005Q12006Q2
2007Q32008Q4
2010Q12011Q2
250
300
350
400
450
500
550
600
650Median Existing Home Price ($Ths., SA)
Source: Moody's Economy.com; NAR
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Never a Very Affordable Market
2000Q1 2001Q2 2002Q3 2003Q4 2005Q1 2006Q2 2007Q3 2008Q4 2010Q140
60
80
100
120
140
160
180Housing Affordability (Index)
Source: Moody's Economy.com; NAR; BOC; BEA
SD
US
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Foreclosures Have Spiked to New Highs
Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-100
2
4
6
8
10
12
14Notice of Trustee's Sale (#/1000, NSA)
Source: Moody's Economy.com; RealtyTrac
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New Housing Stock Looks for a New Bottom
2001Q12002Q1
2003Q12004Q1
2005Q12006Q1
2007Q12008Q1
2009Q12010Q1
2011Q12012Q1
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
MultifamilySingle Family
Housing Completions (Units, SAAR)
Source: Moody's Economy.com; BOC
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The San Diego Apartment Market
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A Recent Employment Recovery has Contributed to “Stronger” Absorption
2006:12006:2
2006:32006:4
2007:12007:2
2007:32007:4
2008:12008:2
2008:32008:4
2009:12009:2
2009:32009:4
2010:12010:2
-1500
-1000
-500
0
500
1000
1500
-30
-25
-20
-15
-10
-5
0
5
10Absorption (Units) Empl't Change (1000s)
Absorption (L)
Employment (R)
Source: Reis, MEDC, Burley
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Relatively Limited New Supply and Absorption has Begun to Recover
2006:12006:2
2006:32006:4
2007:12007:2
2007:32007:4
2008:12008:2
2008:32008:4
2009:12009:2
2009:32009:4
2010:12010:2
2010:2-1500
-1000
-500
0
500
1000
1500
3.2
3.4
3.6
3.8
4
4.2
4.4
4.6
4.8
5
Completions Net Absorption Vac %
Completions/Absorption (Units) Vacancy (%)
Source: Reis Inc
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Rents Begin to Recover
2006:1 2006:3 2007:1 2007:3 2008:1 2008:3 2009:1 2009:3 2010:1-1.5
-1
-0.5
0
0.5
1
1.5
2Quarterly Rent Growth (%)
Source: Reis Inc
Asking
Effective
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Concessions are Off Their Highs
Apr-08
Oct-08Apr-0
9Oct-09
Apr-10
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
SD
Concessions (% of Asking Rent)
Source: Axiometrics Inc
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San Diego is Sometimes A Tale of Two Markets (Occupancy)
Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-100.925
0.93
0.935
0.94
0.945
0.95
0.955
0.96
0.965
0.97Coastal NonCoastal MSA
Occupancy Rate (Avg %)
Source: Axiometrics Inc
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San Diego is Sometimes A Tale of Two Markets (Rents)
Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-101350
1400
1450
1500
1550
1600
1650
1700
1750Coastal NonCoastal MSA
Effective Rents (Avg $/Mo)
Source: Axiometrics Inc
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San Diego is Sometimes A Tale of Two Markets (Rents)
-7 -6 -5 -4 -3 -2 -1 0 1 2 3
Coastal
NonCoastal
MSA
2009
YTD 2010
Effective Rent Growth (%)
Source: Axiometrics Inc
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Transactions are Down Sharply
Q1 '01 Q1 '060
0.5
1
1.5
2
2.5
3rolling 12-mo. totalquarterly vol.
Transaction Volume ($Bil.)
Source: Real Capital Analytics (www.rcanalytics.com)
Q2 '10
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Transactions on the “Floppy Bottom”Q
1 '0
1 2 3 4Q
1 '0
2 2 3 4Q
1 '0
3 2 3 4Q
1 '0
4 2 3 4Q
1 '0
5 2 3 4Q
1 '0
6 2 3 4Q
1 '0
7 2 3 4Q
1 '0
8 2 3 4Q
1 '0
9 2 3 4Q
1 '1
0 2
0
0.2
0.4
0.6
0.8
1
1.2
Garden Mid/Highrise
Transaction Volume ($Bil)
Source: Real Capital Analytics (www.rcanalytics.com)
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Private Investors, REITs Dominate BuyersPensions, REITs, Privates the Sellers
San Diego US
55%
34%
7%
30%
0.11
26% 11%
7%
7%3%
2%7%
inst'l
foreign
reit/public
user/other
condo converter
syndicator
fund
pvt out of state
pvt in state
San Diego US
44%34%
2%
2%22%
19%
32%23%
19%
2%
Buyers Sellers
Source: Real Capital Analytics (www.rcanalytics.com)
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New Pricing Realities ?
Q1 '01 Q1 '064
4.5
5
5.5
6
6.5
7
7.5
8
8.5
San Diego 12-mo. avgSan Diego quarterly avgUS quarterly avg
Cap Rate (%)
Source: Real Capital Analytics (ww.rcanalytics.com)
Q2 '10
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An Outlook
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“We're still in a recession. We're not gonna be out of it for a while, but we will get out.”
-- Warren Buffett
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Stuff Could Still Happen
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Stuff Could Still Happen(An Alternate Scenario)
2005Q12006Q1
2007Q12008Q1
2009Q12010Q1
2011Q1-8
-6
-4
-2
0
2
4
6
Forecast
GDP (Annualized % Change)
Source: Moody's Economy.com; BEA
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The Focus is on Jobs
2005Q12006Q2
2007Q32008Q4
2010Q12011Q2
2012Q32013Q4
2015Q1128
130
132
134
136
138
140
142
144
146Current ConsensusMild Second RecessionAborted Recovery
'08:Q1 '12:Q4 '13:Q2
'14:Q4
Total Employment (NonAg, Mil., SA)
Source: Moody's Economy.com
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The Focus is on Jobs in San Diego Too
2005Q12006Q2
2007Q32008Q4
2010Q12011Q2
2012Q32013Q4
2015Q11180
1200
1220
1240
1260
1280
1300
1320
1340
1360Current ConsensusMild 2nd RecessionAborted Recovery
Total Employment (Ths., SA)
Source: Moody's Economy.com; BLS
'07Q3
'13Q4 '14Q2
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Balance First, Improvement Later
2006 2007 2008 2009 2010 2011 2012 2013 2014-1000
-500
0
500
1000
1500
2000
2500
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Completions (L)Net Absorption (L)
Completions/Absorption (Units) Vac %
Source: Reis Inc
Vacancy Rate (R)
forecast
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photo: www.sandiegocoastlife.com