First Quarter 2014
REAL ESTATE
sponsored by:
Welcome to Bloomberg Brief’s special edition on real estate.The pool
of investors looking to put money to work in real est...
Data: real estate prices, CMBS LOAN leverage
While home sales ended 2013 little changed,
home prices rose slightly. CMBS i...
TIAA-CREF is already one of the largest real estate
investors in the United States.1
And now, we’ve
expanded by acquiring ...
Share of mortgage loan applications related to residential home loan refinancings in the fourth quarter of 2013.
Share of ...
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AMERICAN REALTY
CAPITAL PROPERTIES
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■■ “Wall Street has found a new oppor-
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with the mortgage crisis — cheap
homes that...
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the Capital
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Last year, rising U.S. interest rates tugged mortgage rates higher, hurting demand for home loan refinancings. Rates for 3...
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Michelle Meyer, se-
nior U.S. economist
of Bank of America
Merrill Lynch, writes
that tight credit
conditions remain a
hur...
EVENTS GRI 2014
BRITISH GRI 2014
London, 29-30 April
DEUTSCHE GRI 2014
Frankfurt, 7-8 May
ESPAÑA GRI 2014
Madrid, 20-21 Ma...
New home sales likely will weather an
increase in mortgage rates better than exist-
ing home sales because buyers of exist...
CMBS data  
Agency Collateral in CMBS Hits a Record in 2013; Deals With European Debt Show Gains
0
20
40
60
80
100
120
140...
CMBS Yield Premiums Demanded by Investors Narrow Even as Supply Grows
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2006...
Any rise in cap rates
could be tempered
by readily avail-
able financing from
CMBS conduits
and portfolio lend-
ers, write...
The weighted average cap rate for office, retail and hospitality property loans resold into bonds fell in the final three ...
Loan Originator Current Balance
Delinquent
Balance
Total
Number of
Loans
Number of
Delinquent
Loans
Number of Delinquent L...
To find out how you might help, contact Jeremy Kraut-Ordover
at jkrautordover@habitat.org or visit habitat.org.
Habitat fo...
Q & A with Dwight Bostic 
The low interest rate environment has spurred
investment banks to join hedge funds and private
e...
much a collection play from a debt versus
any sort of collateral backing it up. The
banks and the other holders of that — ...
Foreclosure data  
December Commercial Mortgage Debt Foreclosure Rate at Lowest Since September 2009
0.0
0.5
1.0
1.5
2.0
2...
foreclosure data…
The credit picture for commercial real estate debt resold into commercial mortgage-backed securities sho...
Q & A WITH Russell Bernard
The U.S. real estate market has not completely
returned to health and distressed investors
like...
The revival of commercial and residential real estate spilled over into equity markets in 2013 where the number of real es...
Q & A with alexander rubin
Servicer sales of distressed real estate have
drawn buyers such as private equity firms and
hed...
Piedmont Office Realty Trust was the first office REIT to sell
unsecured bonds this year, after peers raised $2.7 billion ...
Economics ChinaBrief London (free brief)
Economics Europe Economics Asia Mergers
Hedge Funds Europe Hedge Funds Municipal ...
Apartment REIT development pipelines have grown about threefold
since early 2011 to $8 billion from $2.1 billion, due to a...
High occupancy rates in malls and shopping centers owned
by specialized real estate investment trusts will likely continue...
The well-being of
commercial real
estate such as mul-
tifamily, office and
industrial properties
is tied closely to the
he...
Employment performance has also
varied by geography. Relative to peak
employment levels, the Texan markets,
for example, h...
Bloomberg Real Estate Special Focus Q1 2014
Bloomberg Real Estate Special Focus Q1 2014
Bloomberg Real Estate Special Focus Q1 2014
Bloomberg Real Estate Special Focus Q1 2014
Bloomberg Real Estate Special Focus Q1 2014
Bloomberg Real Estate Special Focus Q1 2014
Bloomberg Real Estate Special Focus Q1 2014
Bloomberg Real Estate Special Focus Q1 2014
Bloomberg Real Estate Special Focus Q1 2014
Bloomberg Real Estate Special Focus Q1 2014
Bloomberg Real Estate Special Focus Q1 2014
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Bloomberg Real Estate Special Focus Q1 2014

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This special supplement includes insight from leading economists and market observers about the future of home sales, what higher rates mean for affordability and what regulatory changes at the U.S. housing agencies will do to long-term fixed rate mortgages. Inside you will also find unique data on commercial mortgage issuance, CMBS loan leverage, mortgage delinquencies and commercial property cap rates, as well as insight into real estate development in Manhattan.

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Bloomberg Real Estate Special Focus Q1 2014

  1. 1. First Quarter 2014 REAL ESTATE sponsored by:
  2. 2. Welcome to Bloomberg Brief’s special edition on real estate.The pool of investors looking to put money to work in real estate flowed through to the equity markets last year where initial public offerings from real estate companies hit a nine-year high.At the same time, mergers involving real estate companies were at the liveliest pace since 2007. Within the world of commercial property, credit quality of loans improved as delinquency and foreclosure rates fell to multi-year lows. The issuance of bonds backed by commercial mortgage loans — a source of financing that had all but dried up immediately after the 2008 credit crisis — rose to pre-crisis highs and borrowers seeking financing for commercial property were increas- ingly able to get mortgages that allowed them to pay only interest.At the same time, cap rates trended lower for retail, multifamily, hotel and office properties. Within the residential property markets, home prices as tracked by Case Shiller rose, but sales of pre-owned homes were little changed in 2013 from 2012. Higher borrowing costs chipped away at demand for residential home loan refinancings, a key source of profit for many lenders. Higher mortgage rates are eroding affordability for homebuyers — an issue brought up by several economists who are guest contributors in this edition of Real Estate Brief. Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch, warns that tight credit conditions and the slow healing of the U.S. jobs market have kept some consum- ers from owning a home. Douglas Duncan and Orawin Velz of Fannie Mae pick up on the theme of affordability, writing that higher borrowing costs will continue to weigh on sales of existing homes that typically attract first-time buyers. Recovery in the jobs market is not only important for residential property markets.Accord- ing to Will McIntosh, head of research at USAA Real Estate Co., the wellbeing of commer- cial properties such as multifamily, office and industrial are tied to employment growth. Another threat to the housing market comes from GSE reform. Bank analyst Dick Bove warns that mortgage market restructuring may kill off 20- and 30-year fixed-rate loans. Elsewhere, Lisa Pendergast of Jefferies offers her outlook on commercial property cap rates.And William Lie Zeckendorf tells us about who is buying apartments in Manhattan, gives the outlook for prices in the city’s market and explains why he believes NewYork can weather a downturn in housing. Finally, Michael Lewis discusses sub-prime lending and tells us that high-frequency trad- ing, examined in his best-seller “Flash Boys,” is not just in equity markets. Introduction Aleksandrs Rozens
  3. 3. Data: real estate prices, CMBS LOAN leverage While home sales ended 2013 little changed, home prices rose slightly. CMBS issuance climbed and leverage within commercial real estate finance grew last year. page 9 tighter credit conditions weigh on home sales Bank of America Merrill Lynch’s Michelle Meyer looks at how borrowers with lower credit scores are having a tougher time getting loans to buy a home. page 11 what’s limiting Home purchases by Young Adults? Student loan debt and a lack of income growth have crimped demand for housing among young adults, write Fannie Mae chief economist Doug- las Duncan and director Orawin Velz. page 13 Data: cmbs deals rely more on agency debt Use of agency debt in commercial mortgage backed securities grew to a record in 2013. AAA-five year CMBS spreads ended the year tighter from 2012 despite an increase in issu- ance. page 14-15 outlook on cap rates While cap rates likely will rise this year, investors should expect any increase to be tempered by the high level of CRE/multifamily financing available from portfolio lenders, according to Lisa Pender- gast, a debt strategist at Jefferies Group. page 16 Data: cap rates by property type The weighted average cap rate for multifamily properties rose in 2013, while cap rates for office, retail and hospitality property loans fell. page 17 Data: top underwriters of delinquent CMBS Debt Among underwriters of commercial mortgage loans resold as CMBS, Wachovia Bank NA had the highest number of delinquent mortgage loans. page 19 banks Step into distressed real estate A low rate environment has spurred invest- ment banks to invest in distressed real estate, Mission Capital’s Dwight Bostic says in an interview. page 20 Data: CMBS Loan Delinquencies, Foreclosures The credit picture of commercial property mort- gages resold into securities fell to a 51-month low in December. page 22-23 why not all Distressed real estate has been picked off Westport’s Russell Bernard explains in an interview why the U.S. real estate market has not completely returned to health and how distressed investors can find buying opportunities in proper- ties worth $50 million or less. page 24 data: real estate ipo, M&A renaissance In 2013 real estate mergers hit post-crisis high and real estate IPO issuance was at a nine-year high. page 25 who is buying real estate from servicers? Hedge funds and private equity funds have been attracted to distressed real estate sold off by servicers, Alexander Rubin, managing director at Moelis, says in an interview. page 26 focus on reits Bloomberg Industries examines how office REITs are increasingly turning to unsecured bond sales, what’s behind the jump in developments by apartment REITs and how the retail sector is weathering the spate of retailer bankruptcies page 27, 29-30 jobs picture and its impact on commercial properties The well-being of commercial real estate such as multifamily, office and industrial properties are closely tied to the health of the U.S. jobs market, writes Will McIntosh, head of research at USAA Real Estate Co. page 31-32 wealth gap and its impact on local housing markets The wealth gap isn’t just about individuals — it’s about entire communities, writes Kathy Bostjan- cic, director of macroeconomic analysis at the Demand Institute and the Conference Board. page 33 Data: Residential mortgage delinquencies; ARM Loan USE Increases Florida saw the largest decline in single family mortgage delinquency rates last year.Adjust- able rate mortgages as a percentage of all home loans processed by lenders grew to 8.18 percent in December 2013, the highest since June 2008. page 34 Americans shut out of home market threaten recovery First-time homebuyers hurt by rising prices and tighter credit standards are disappearing from the market, slowing the pace of the three-year recovery. page 36-37 Mortgage market restructuring sounds death knell for fixed-rate loans Richard Bove explains why a wind down of Fannie Mae and Freddie Mac could spell the end of 20-year and 30-year fixed rate home loans. page 38 tight supply should buffer new york market from any downturn, zeckendorf says William Lie Zeckendorf explains why he believes Manhattan’s supply of real estate is so tight that it is likely to withstand a downturn in the housing market. page 39-40 High Frequency trading in the u.s. Treasury market? Michael Lewis says the high-frequency trading in his best selling “Flash Boys” has cropped up in the U.S.Treasury market.Also, he offers his thoughts on subprime lending and the enduring popularity of “Liar’s Poker.” page 41-42 Bloomberg Brief Real Estate Supplement Newsletter Ted Merz Executive Editor tmerz@bloomberg.net 212-617-2309 Real Estate Aleksandrs Rozens Editor arozens@bloomberg.net 212-617-5211 CMBS/CRE Product Cheryl Lopez-Collins Manager clopez12@bloomberg.net 415-617-7026 CMBS Analyst Tadvana Narayanan tnarayanan1@bloomberg.net 212-617-3814 Real Estate Jennifer Prince Data Editor jprince10@bloomberg.net 212-617-4589 Contributing Jeffrey Langbaum Bloomberg jlangbaum1@bloomberg.net Industries Analyst 609-279-4658 Bloomberg News Prashant Gopal 617-210-4640 John Gittelsohn 323-782-4257 Art Director Lesia (Alexandra) Kuziw akuziw@bloomberg.net 212-617-5113 Newsletter Nick Ferris Business Manager nferris2@bloomberg.net 212-617-6975 Advertising Adrienne Bills abills1@bloomberg.net 212-617-6073 Reprints & Lori Husted Permissions lori.husted@theygsgroup.com 717-505-9701 To subscribe via the BloombergTerminal type BRIEF <go> or on the web at www.bloombergbriefs.com.To contact the editors: arozens@bloomberg.netThis newsletter and its contents may not be forwarded or redistributed without the prior consent of Bloomberg.Please contact our reprints and permissions group listed above for more information.© 2013 Bloomberg LP. All rights reserved. CONTENTS 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 3
  4. 4. TIAA-CREF is already one of the largest real estate investors in the United States.1 And now, we’ve expanded by acquiring Henderson’s North American property business and launching TIAA Henderson Real Estate. By providing global access to every aspect of real estate investing, including directly- owned property, equity securities and private debt, we are able to fully meet all of our clients’ needs. WANT TO SEE OUR PORTFOLIO? CHECK OUT A GLOBE. 1 Pensions & Investments, October 28, 2013. Rankings based on institutional tax exempt assets under management as of June 30, 2013, reported by each responding asset manager. TIAA Henderson Real Estate Limited (TH Real Estate) is a real estate investment management holding company owned by Teachers Insurance and Annuity Association of America (TIAA) and Henderson Global Investors. TH Real Estate securities products distributed in North America are advised by UK-regulated subsidiaries or TIAA-CREF Alternatives Advisors, LLC, a registered investment adviser and wholly owned subsidiary of TIAA, and distributed by Teachers Personal Investors Services, Inc., member FINRA. © 2014 Teachers Insurance and Annuity Association of America – College Retirement Equities Fund (TIAA-CREF),730 Third Avenue, New York, NY 10017. C16231 Discover how over 65 years of real estate expertise can result in better outcomes at TIAA-CREF.org/AssetManagement or call 212 490-9000, ext. 23-7183. 50210054 C16231 Real Estate Print 7.5x8.8_1.indd Cyan Magenta Yellow Black 72291
  5. 5. Share of mortgage loan applications related to residential home loan refinancings in the fourth quarter of 2013. Share of loan applications for residential mortgage refinancings in the fourth quarter of 2012. Gain in S&P/Case-Shiller national home-price index in Q4 2013 from Q4 2012. Rate for 30-year fixed rate jumbo mortgage in March 2014. Rate for 30-year fixed rate jumbo mortgage five years ago. Price per square foot for Manhattan office property in March 2014, a five-year high. Expected percentage gain in non-residential construction spending in 2014. Expected gain in non-residential construction spending in 2015. Percentage of single-family home sales in California that were distressed sales in February 2014. Percentage of single-family home sales in California that were distressed sales in February 2013. 2013 recovery rate for loans in U.S. commercial mortgage backed securities. 2012 recovery rate for mortgages resold in commercial mortgage bonds. Rate for 30-year, fixed-rate home mortgage in 2013. Mortgage Bankers Association’s forecast rate for 30-year mortgages in 2014. Forecast rate for 30-year mortgages in 2015. Real estate loan rate for city property in fifth century BC Greece. Real estate loan rate for country property in fifth century BC Greece. Maturity for real estate loan in fifth century BC Greece. Real estate loan rate in 14th century Netherlands. Total one- to four-family home loans underwritten by U.S. lenders in 2013. Total home loans expected to be underwritten in 2014. Total commercial real estate collateralized debt obligations issued in 2013. Total commercial real estate CDOs assembled in 2007. Florida’s residential foreclosure rate in January 2014. Average residential foreclosure rate in the U.S. in January 2014. Florida’s residential foreclosure rate in January 2013. American Institute of Architects non-residential architectural billings index reading in December 2013. AIA non-residential architectural billings index in December 2012. Number of single family homes in the U.S. sold within six months of purchase in 2013. Increase in number of single family homes sold within six months in 2013 vs. 2012. Total value of single U.S. family homes sold within six months of purchase in 2013. Sources: California Association of Realtors,Fannie Mae,Bloomberg LP,Fitch Ratings,Mortgage Bankers Association,JP Morgan American Institute of Architects,RealtyTrac, “A History of Interest Rates,”(Fourth Edition) by Sidney Homer and Richard Sylla (John Wiley & Sons,Inc.). By the numbers 52.9% 75.9% 11.3% 4.70% 6.42% $717.97 5.8% 8.0% 15% 33% 66.5% 74.8% 4.0% 4.7% 5.2% 8% 8%-12% 1-5 Years 8%-10% $1.755 trillion $1.080 trillion $2 billion $35 billion 6.2% 2% 10.1% 48.6 51.4 122,825 20% $38 billion 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 5
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  7. 7. ■■ “Wall Street has found a new oppor- tunity amid the destruction they caused with the mortgage crisis — cheap homes that only they can buy because they have access to capital, which are then converted to rental properties that they control the price of. Now they have decided to socialize the risk by securitiz- ing the income from the rents and sell it to investors. This reminds me too much of the ‘Too Big to Fail’ schemes of the past and I’m concerned that the Ameri- can people would once again be stuck with the bill.” — Rep. Mark Takano, D-Calif., in a statement requesting Congressional hearings into single- family rental backed securities that are being de- veloped by The Blackstone Group (Jan. 23, 2014) ■■ “The housing recovery has been uneven across the nation and we are no longer able to buy in some of our west- ern markets although we remain excited about many others where we can still acquire homes at a discount to replace- ment cost and attractive rental yields. Florida, for example, leads the nation with the highest foreclosure inventory at 6.7 percent, which should provide a con- tinuing supply of distressed inventory in 2014. While we are generally quite sanguine about home price appreciation in our markets in 2014 we do expect the pace to moderate compared to 2013. — David N. Miller, President and Chief Execu- tive Officer, Silver Bay Realty Trust, Q4 2013 earnings call (March 6, 2014) ■■ “So far this year, I’ve seen an inordi- nately low success rate for bids because the supply of properties is so limited. I wish I got paid in pre-approval letters instead of closed loans.” — Jonathan Sexton, a vice president at NE Moves Mortgage LLC’s office in Cambridge, Massachusetts, in an interview with Bloomberg (March 31, 2014) ■■ “Housing starts for 2013 finished at 927,000; the starts were lower than expectations early in 2013, but still represented a 19 percent improve- ment over 2012. We expect the housing recovery in the U.S. to push ahead in 2014, with starts around 1.1 million. We believe over the next few years, U.S. housing starts will return to long-term trend levels of 1.4 million to 1.5 million. Our fourth quarter sales were just shy of $800 million, up 15 percent from the same quarter in 2012. Probably the most encouraging thing we’ve seen is existing home sales appear to be picking up, and there are fewer people under water. So the fact that home prices have moved up, typically what happens is the repair and remodel follows 12 months to 18 months after the sales of homes. So, if we continue to see the pace of the exist- ing home sales go up, we think that will be good news for repair and remodel.” — Thomas Carlile, chief executive officer, Boise Cascade, earnings call (Feb. 21, 2014) ■■ “It is not our view that all housing metrics will sustain the growth rates from 2013 going forward. This last year saw a particularly strong recovery in housing prices, but we do expect the housing recovery to continue, expect that home prices will increase even though at a lower rate and expect that affordability will support growth in the home improvement market.” — Francis Blake, chief executive officer, Home Depot, earnings call (March 25, 2014) ■■ “The buyer is becoming more accus- tomed to the current mortgage rates. If you recall back a couple of quarters ago, there was a pretty adverse reaction to the increase in mortgage rates, even though they were slight and they’re still historically low by anybody’s standards. But frankly, over the last four months to six months, the buyer has become accustomed to the mortgage rates. And I think that that will be less and less a factor, as we move into the spring sell- ing season and fiscal year 2014.” — Donald Tomnitz, chief executive officer, D.R. Horton, earnings call (Jan. 28, 2014) ■■ “There remains a production deficit of both single-family and multifamily dwellings from underproduction during the economic downturn and up to and including last year. This shortfall will continue to define the housing markets for the foreseeable future and will drive the housing recovery forward.” — Stuart Miller, chief executive officer, Lennar Corp. earnings call (March 20, 2014) ■■ “If I had a choice, I would never be in default servicing again. I would tell anyone who’s got a mortgage with us, ‘You’re 60 days late, we’re selling the mortgage, and we don’t want to do any business with you anymore.’ It’s just far too painful.” — Jamie Dimon,chairman and chief executive officer of JPMorgan Chase & Co,on mortgage ser- vicing at presentation for investors (Feb.25,2014) ■■ “The level of household formation is very depressed, has been very de- pressed for some time. There are a lot of kids who are shacking up with their families and probably would like to be going out and acquiring places of their own, whether it’s an apartment or a home. There is a lot of demographic potential there for new household forma- tion that would ultimately generate new construction, either single or multifamily, and the level of rates I think does matter. And the fact that they’re low now I think is something that should serve as a stimulus to people coming back into the housing market.” — Janet Yellen, chair of Federal Reserve, press conference (March 19, 2014) ■■ “Right now, around the world, I’d say there’s the most interest in investing in real estate in the U.S. That makes it a little more challenging than other places today.” — Jonathan Gray, global head of real estate at Blackstone, Harbor Investment Conference in New York (Feb. 13, 2014) ■■ “The interest has not really abated from the Asian or the European inves- tors. There’s a greater focus on certainty from Asia and parts of Europe. Current income is the big driver there and get- ting a 5 percent plus-or-minus current return is a very attractive element.” — Matt Khourie, chief executive officer of CBRE Global Investors Ltd., in an interview with Bloomberg (March 11, 2014) ■■ “Mortgage underwriting standards remain tight, which does limit the num- bers of qualified buyers in the market. Meanwhile Dodd-Frank continues to be clarified and adopted and proposals in Congress for GSE reform are creating an additional uncertainty for the mort- gage industry.” — Jeffrey Mezger, chief executive officer, KB Home, earnings call (March 19, 2014) real estate q1 2014: overheard 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 7
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  9. 9. Last year, rising U.S. interest rates tugged mortgage rates higher, hurting demand for home loan refinancings. Rates for 30-year mort- gages, the most common home loan, ended the year at 4.80 percent, having risen as high as 4.93 percent on Sept. 6, 2013. The higher borrowing costs weighed on home sales; existing home sales ended the year at a pace of 4.88 million units, having risen to a pace of 5.38 million units in July. At the same time, sales of bonds backed by commercial real estate loans rose to a high not seen since 2007 and use of interest only and partial IO loans for commercial properties climbed to levels not seen since before the credit crisis. Real Estate Trends Existing Home Sales Little Changed, Prices Up 0 1 2 3 4 5 6 7 8 0 50 100 150 200 250 2004 2006 2008 2010 2012 2014 Millionunits S&P/Case-Shiller Composite-20 Home Price Index, Not Seasonally Adjusted (left) US Existing Homes Sales (right) Source: Case-Shiller, National Association of Realtors U.S. existing home sales ended 2013 at a seasonally adjusted rate of 4.87 million units, little changed from December 2012 when they were at a rate of 4.88 million units. At the same time, the Case Shiller home price index ended the year at a reading of 165.63, up from 146.08 in December 2012. Rise in Rates Chips Away at Refinancing Activity 0 1 2 3 4 5 6 0 1,000 2,000 3,000 4,000 5,000 6,000 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 MBA Refinance Index (left) MBA 30-Year Effective Mortgage Rate % (right) Source: Mortgage Bankers Association The Mortgage Bankers Association’s refinance index, a measure of requests for home loan refinancings, ended 2013 at a reading of 1,315.1, down from 3,528.3 at the end of 2012.At the same time, 30-year mortgage rates rose to 4.80 percent by December 2013 from 3.66 percent a year earlier. CMBS Leverage Jumps in 2013, Still Shy of 2007 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1997 1999 2001 2003 2005 2007 2009 2011 2013 Partial IO IO Balloon Fully Amort Source: Bloomberg LP Just over 51 percent of all loans resold into commercial mortgage backed securities in 2013 were interest-only mortgages or partial IO loans, the highest since 2007, when 85.16 percent of all commercial mortgage debt had such loans. 2013 U.S. CMBS Supply Up 38 Percent From 2012 0 50 100 150 200 250 300 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 DollarAmount(Billions) All US All Non-US Source: Bloomberg LP Commercial mortgage backed securities issuance in the U.S. rose 38 percent in 2013 to $162.7 billion from $117.6 billion in 2012. Issuance was its highest since 2007, when volume was $253.9 billion. Home Prices Climb as Higher Rates Erode Refi Activity and Leverage Increases in CRE 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 9
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  11. 11. Michelle Meyer, se- nior U.S. economist of Bank of America Merrill Lynch, writes that tight credit conditions remain a hurdle to a stronger housing market. A near-term concern is that demand from investors will fade without demand from first-time homebuyers coming in to replace it. Although the housing market is still far from normal, it has made significant progress. Home prices have climbed since the trough in early 2012, reversing about a third of the cumulative decline during the recession. Foreclosure inven- tory has shrunk while new delinquency rates have tumbled. The U-shaped recovery in housing construction contin- ues, albeit with bumps along the way. The missing link to a stronger housing recovery has been tight credit condi- tions, which limit the pool of potential buyers, particularly of first-time home- owners. According to the latest survey from the National Association of Real- tors (NAR), only 28 percent of sales are to first-timers. This compares to about 40 percent historically. The big question is whether the dearth of first-time homebuyers can be ex- plained by supply or demand forces. Is it that typical first-time buyers are no lon- ger interested in becoming homeowners or that they are not eligible because of the challenging credit environment? It is likely a bit of both, but we believe it is more of a supply than demand issue. First-time buyers are particularly sensi- tive to the credit environment, as 86 percent of first-time buyers finance their purchase compared to about 75 per- cent of relocation buyers and between 25 percent and 45 percent of investors and second home owners, according to the NAR. Credit has continued to tighten, which means homeownership has become restricted to a subset of the population. Using data from CoreLogic, we cre- ated a histogram of mortgage loans by credit score. We then compared this to the credit distribution of the population, based on those who request a FICO score, which admittedly biases the sam- ple toward higher credit quality house- holds. About a quarter of the population have a FICO score below 600, which makes it virtually impossible to receive a mortgage. In contrast, about 85 percent of mortgage loans are to borrowers with FICO scores between 650 and 800, but this cohort only makes up 47 percent of the population. The divergence is par- ticularly notable in the 750-800 bucket, which is the group of borrowers that banks are targeting. These households make up a much larger share of mort- gage loans than they do the population. Looking at the credit scores is only one part of the equation; buyers also need to afford the down payment. Fannie Mae and Freddie Mac mortgages, which make up about 60 percent of origination (based on dollars, not units), require a 20 percent down payment or mortgage insurance − the latter increasing the cost of borrowing. Loans backed by the Federal Housing Authority (FHA), which make up 20 percent of origination, will accept down payments between 3.5 per- cent and 10 percent. Many first-time buyers struggle with the down payment. This is particularly true today with high student debt burden and slow wage growth over the past several years. Indeed, according to the NAR’s Profile of Home Buyers and Sell- ers report, 54 percent of those reporting difficulty affording the down payment said it was due to student loans. Tight credit conditions and a slow heal- ing in the labor market mean that for many households, the dream of home- ownership is still many years away. Demand may also be a factor in the decision to rent instead of buy as percep- tions about homeownership may have changed due to the crisis. One lesson learned from the recession is that home prices can and do decline. The pain from foreclosures was felt throughout the country; many homeowners became delinquent on their mortgages and even more struggled with negative equity. Opinions have also changed in regards to housing as a store of wealth and a means for financing future expenditures. For many young adults who are search- ing for labor mobility and liquid assets, buying a home may not seem as attrac- tive as renting. Weak demand from first-time home- buyers has been partly offset by greater demand from investors, including large private equity firms. Investors have purchased distressed properties, many times in bulk, and have converted them to rental homes. This has been a good trade given the trend of young adults renting for longer. The near-term concern for the housing market is that demand from investors will fade but first-time homebuyers won’t be prepared to take market share as a result of tight credit and years of slug- gish income growth. This could lead to a hiccup in home sales and moderation in home price appreciation. Stay vigilant; we are still far from smooth sailing in these waters. guest editorial  micheLle meyer, Bank of America merrill Lynch Tight Credit, Shifting Perceptions Drive Down First-Time Homebuying Tight credit conditions and a slow healing in the labor market mean that for many households, the dream of homeownership is still many years away. 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 11
  12. 12. EVENTS GRI 2014 BRITISH GRI 2014 London, 29-30 April DEUTSCHE GRI 2014 Frankfurt, 7-8 May ESPAÑA GRI 2014 Madrid, 20-21 May BRAZIL PLANNED COMMUNITIES GRI 2014 São Paulo, 20-21 May AFRICA GRI 2014 Nairobi, 18-19 June CHINA GRI 2014 Shanghai, 10-11 September GRI EUROPE SUMMIT 2014 Paris, 17-18 September RUSSIA GRI 2014 Moscow, 22-23 September DEUTSCHE RESIDENTIAL GRI 2014 Berlin, 24-25 September GRI REAL ESTATE MARKETING 2014 São Paulo, 1-2 October INDIA GRI 2014 Mumbai, 7-8 October BRAZIL GRI 2014 Sao Paulo, 15-16 October MENA GRI 2014 Dubai, November NEW EUROPE GRI 2014 Warsaw, 26-27 November BRITISH RESIDENTIAL GRI 2014 London, 10-11 December JOIN THE REAL ESTATE LEADERS Secure your place now www.globalrealestate.org info@globalrealestate.org Tel: +44 20 7121 5060 @realestateGRI Global Real Estate Institute facebook.com/globalrealestate.org GRI meetings provide a forum for the world’s leading real estate players to develop valuable relationships, find new business partners, and strengthen their global networks. At GRI meetings there are no speakers or panellists, just informal discussions in small groups, where everyone participates equally. If building close relationships with the driving elite of the real estate industry at the most senior levels is useful, we welcome you to join us. Left - Bernd Knobloch, Board Member CITYCON Right - Van Stults, Founding Partner & MD ORION CAPITAL MANAGERS Networking Lounge at GRI Europe Summit BloombergRealEstate_AllEvents_March20.indd 1 21/03/2014 17:02:33
  13. 13. New home sales likely will weather an increase in mortgage rates better than exist- ing home sales because buyers of existing homes are more sensitive to higher rates, write Douglas Duncan, chief economist at Fannie Mae, and Orawin T. Velz, a director at Fannie Mae. Rising mortgage rates and home prices coupled with changing young- adult demographics have put a damper on home sales, especially existing home sales. February existing home sales fell for the sixth time in seven months, and pending home sales — a leading indica- tor of existing homes — fell in February for the eight consecutive month. New home sales, which record signings and not closings of new homes, have fared better. Despite the February drop, new home sales remain near recovery highs. The diverging trends in contract sign- ings between new and existing homes can be largely explained by demograph- ics. A typical new homebuyer tends to have higher income than a typical existing homebuyer. As a result, poten- tial existing homebuyers may be more sensitive to a rise in mortgage rates and an associated increase in monthly mortgage payments than those looking to buy a new home. Indeed, the existing home sales mar- ket has lost momentum since the spike in mortgage rates last summer. At the same time, home prices have continued to climb, leading to a substantial decline in overall home purchase affordability. Though affordability conditions still remain high by historical standards, this is not the case for buyers in many high- cost areas, such as the West Coast and the Northeast Corridor. In the past when affordability dropped due to a surge in mortgage rates or rapid home price gains, more borrow- ers opted for adjustable-rate mortgages (ARMs) to boost their purchasing power. For example, data from the Federal Housing Finance Agency’s Monthly Interest Rate Survey show that the ARM share of purchase loans surged to 60 percent in 1994, when the yield on 30-year fixed mortgage rates jumped by more than 2 percentage points during the course of the year. However, today’s borrowers have fewer options for affordable ARM products as they face more stringent underwriting standards. In addition, the new Qualified Mortgage rule, which took effect in Janu- ary, curtailed the availability of riskier ARMs, including interest-only products and those with balloon payments. These stricter standards and curtailments have reduced the ability of households to afford a home in today’s higher rate environment. According to data from the Mortgage Bankers Association, even though the ARM share of purchase mortgage appli- cations doubled between the end of 2012 and the end of 2013, it was still below 10 percent through the end of February. The limited ability of potential homebuyers to switch to ARMs in the face of declin- ing affordability supports our cautious outlook for existing home sales. In addition to rising rates and curtailed affordability, a difficult macroeconomic environment for young adults in par- ticular also is impacting the existing home sales market. Much of the pent-up demand for housing is in the young adult segment, as the share of young adults living at home rises to a record level. If labor market conditions improve sufficiently to allow this group to form households, they will likely opt to rent initially for a variety of reasons, includ- ing lifestyle choices, rising student loan debt burdens, poor credit scores, and a lack of income growth in recent years. First-time homebuyers are crucial to the housing sector’s recovery since investor demand is fading because of dwindling supply for bargain-priced properties. However, these economic factors suggest that young adults are likely to delay becoming first-time homebuyers, implying weaker near-term organic demand for existing homes. While existing home sales languish, the performance of new home sales has gradually improved as they face less competition from distressed proper- ties. The supply of new homes has remained near historic lows, largely due to resource constrained homebuilding activity. Home builders have expressed a wide range of concerns, including difficulties in securing finished lots, materials, and skilled labor. We remain optimistic on the demand side in the new home market and expect housing starts to rise nearly 20 percent to 1.1 million units this year to meet the in- creased demand. However, our forecast of homebuilding activity faces downside risks as supply constraints may impede the ability of builders to ramp up supply. With this backdrop, we forecast dou- ble-digit gains for new home sales and housing starts in 2014, and flat existing home sales. Stronger employment and income growth in coming quarters will help buoy the sector, even as a pullback in demand in the existing home market points to moderating gains this year. Our longer-term outlook for the housing market is positive despite the weaker near-term existing home sales picture. Using the Census Bureau’s latest population projections and our forecast of headship rates by age, we expect that annual household growth will average 1.37 million in the second half of the decade, up from a sub-million pace currently. This rebound in funda- mental demand growth should support housing production of over 1.7 million units per year in the second half of the decade (including replacement and second home demand). This level of construction activity would be substan- tially above the current pace of housing production as the housing market con- tinues its journey toward recovery. The views expressed in this article reflect the personal views of the authors, and do not necessarily reflect the views or policies of any other person, including Fannie Mae.Any figures or estimates included in the article are solely the responsibility of the authors. guest editorial   douglas duncan and orawin t. velz, Fannie Mae Existing, New Home Sales on Divergent Tracks Suggest Uneven Recovery 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 13
  14. 14. CMBS data   Agency Collateral in CMBS Hits a Record in 2013; Deals With European Debt Show Gains 0 20 40 60 80 100 120 140 160 180 200 2005 2006 2007 2008 2009 2010 2011 2012 2013 HistoricalIssuanceVolume(Billions) Japanese European Large loans/Floaters Conduit Agency Source: Bloomberg LP Much of the increase in securtization of bonds pooling commercial property mortgage loans was due to an increase in agency collateral typically for multifamily properties. Of the $162.67 billion in CBMS issued last year, $69.39 billion, or 43 percent, were transac- tions pooling agency collateral, according to data compiled by Bloomberg LP. At the same time, use of European debt rose to $7.13 billion from $2.7 billion in 2012. From 2008 until 2011, no European collateral was included in CMBS issues. In 2007, deals with European collateral totaled $25.05 billion. In 2012, $56.71 billion worth of agency debt was repackaged into commercial mortgage bonds and in 2011, $30.34 billion of agency collateral was resold into CMBS. In 2007, when CMBS issuance levels were at their highest, $1.23 billion of agency collateral was repackaged into bonds. THE SKY HAS NEVER BEEN CLOSER PRAEDIUM: Your new adress for lifestyle and exclusiveness in a perfect location - like living next to Central Park Residential tower with 19 levels that aims for the sky Spacious terraces, balconies, loggias and roof gardens Secure increase in value Clever investments Exclusive fitting and classy materials Newly constructed, uniquely designed apartments in Frankfurt / M. Financial and business capital of Europe Location of the future: Europaviertel Near the exhibition center with short distances to the city center and nature Apartments from appr. 30-370 sqm. www.praedium-frankfurt.de T +49 (0) 69. 29 99 28-0 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 14 continued on next page
  15. 15. CMBS Yield Premiums Demanded by Investors Narrow Even as Supply Grows 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2006 2007 2008 2009 2010 2011 2012 2013 SpreadsVersusSwaps(BasisPoints) Legacy Spread - AAA 5-Year CMBS Source: Commercial Real Estate Direct - crenews.com On Dec. 27, 2013 AAA five-year CMBS spreads were 130 basis points over swaps; they were as narrow as 97.5 basis points on Feb. 1, 2013. Commercial mortgage backed securities spreads to swaps narrowed despite an increase in issuance as investors sought out higher returns. By year-end, AAA 5-year classes of CMBS were at a spread of 130 basis points over swaps, in from 140 basis points quoted in the clos- ing days of 2012. In February 2009 and December 2008, yield premiums for AAA, 5-year CMBS were as wide as 1,500 basis points. cmbs data… Your property project needs space to succeed. We know where and how. Properties are our world. We have 2,400 employees on three continents to help you finance your international projects. We also offer extensive services and IT solutions for the housing industry and the commercial property management sector. As one of the leading international specialists, we create the space you need to operate successfully. Let’s talk to each other. We can tell you where and how your efforts can reap the greatest rewards. Find out more at www.aareal-bank.com We create the space for success. Explore now! 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 15 continued from previous page
  16. 16. Any rise in cap rates could be tempered by readily avail- able financing from CMBS conduits and portfolio lend- ers, writes Lisa Pendergast, a debt strategist at Jeffer- ies Group Inc. A question weighing on the commer- cial real estate market is whether the benefits of more robust economic growth and any related increase in demand for commercial property will outweigh the negative effects of higher borrowing costs and rising capitalization rates that may come with tighter Federal Reserve monetary policy. While cap rates likely will rise, inves- tors should expect any increase to be tempered by the high level of CRE/mul- tifamily financing available from portfolio lenders, CMBS conduits and the GSEs. Other factors that could restrain cap rates include increased demand for commercial property space, little in the way of commercial real estate develop- ment and a more sanguine risk/reward view of value-added CRE investments. The severity of the recession and an unprecedented response by the Federal Reserve led to an environment in which base interest-rate levels became the overriding influence on cap rates. To date, commercial real estate values in many markets and asset classes have appreciated more because of capital- markets machinations and artificially low benchmark rates/capitalization rates than because of actual growth in demand for space. Appreciation in property values has been restricted largely to core markets where trophy/Class-A assets provide commercial real estate investors with long-term stable value and, conceivably, additional upside as economic growth accelerates and commercial real estate demand grows. The March 2014 Moody’s/RCA Com- mercial Property Price Index (CPPI) report noted that prices in major or core markets now exceed November 2007’s pre-crisis peak by 3 percent, while prices of properties in non-major, or non-core, markets are still mired at about 16 percent below peak. For most CRE assets in non-core mar- kets, cap rates have demonstrated little downward momentum from elevated post-crisis levels. Investors still shy away from non-core markets, many of which are still experiencing depressed eco- nomic activity. This is reflected in cap rate spreads across the post-crisis era: even though the ten-year Treasury rate fell from a high of 4.80 percent in 2006 to a low of 1.79 percent in 2012, the average capi- talization rate across asset classes fell only 46 basis points from 5.82 percent in 2006 to 5.36 percent in 2013. Why? Investors demanded an incremental risk premium or a wider cap rate spread over the ten-year Treasury rate given the perceived riskier environment. There is a silver lining to this situation as benchmark treasury rates grow more likely to rise. Currently, the CRE average cap rate spread to the ten-year risk-free rate is 310 basis points across all asset classes; this compares to a spread of 93 basis points over swaps in 2007. The wider spread today means that cap rates have some protection against a rise in benchmark rates, assuming investors are willing to reduce their risk premium from the average of 310 basis points to its long-term average of around 200 basis points. Not surprisingly, cap rates are low- est today for the multifamily sector at around 4.9 percent. Low multifamily cap rates are attributable to more stable cash flows and reduced risk associated with multifamily properties versus other commercial real estate assets. This is particularly evident since the credit crisis, and accentuated by 1) the presence of the government-sponsored enterprises Fannie Mae and Freddie Mac in the lending markets at the height of the crisis and 2) growth in demand tied to a drop in U.S. homeownership. For the future, a supply increase as multifam- ily projects proliferate — particularly in metropolitan areas in Texas, Washington, D.C., and Seattle — should stem further declines in cap rates if not nudge them slightly higher in certain markets. Meanwhile, the office sector is not far behind multifamily in terms of cap rates, averaging around 5.1 percent at the national level. When it comes to cap rates for office properties there is a major disparity between assets located in central business districts, or CBDs, and those in suburban markets. The lat- ter are significantly higher. For example, CBD trophy office assets in Manhattan are trading at cap rates in the 4 percent area, whereas office properties in subur- ban markets where there is less demand see cap rates of 7 percent or more. Among other property categories, cap rates for retail facilities differ greatly depending on market and asset type. Very limited new supply should help this sector, and it should be supported by any job growth and/or improved con- sumer confidence. Our overarching the- sis still applies: given the expectations that second-quarter economic growth will reflect considerable improvement from the first-quarter’s weather-induced doldrums, it is difficult not to expect benchmark Treasury rates to rise; as a result, retail capitalization rates could be pressured higher. guest editorial   lisa pendergast, Jefferies Group The Price You Pay: Better Economy and Higher Real Estate Cap Rates Could Go Hand in Hand The severity of the recession and an unprecedented response by the Federal Reserve led to an environment in which base interest-rate levels became the overriding influence on cap rates. 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 16
  17. 17. The weighted average cap rate for office, retail and hospitality property loans resold into bonds fell in the final three months of 2013, while weighted average cap rates for multifamily properties rose, according to data compiled by Bloomberg LP. The spread to U.S. Trea- sury rates earned by lenders for all property types fell in 2013 from 2012, suggesting investors financing property purchases were willing to earn less of a return. The biggest drop in the spread to 10-year U.S. Treasury note rates earned by lenders was seen in retail property mortgages; the smallest decline was in multifamily mortgages. CAP RATES Retail Property Loan Cap Rates Down 0 2 4 6 8 10 12 2010 2011 2012 2013 Rate(Percent) Weighted Avg. Cap Rate U.S. Treasury 10-year Yield Spread Source: Bloomberg LP The weighted average cap rate for retail property mortgages resold into bonds was at 5.59 percent in the fourth quarter of 2013, down from 6.17 percent in the fourth quarter of 2012. The spread to Treasuries earned by lenders narrowed to 2.56 percent from 4.42 percent in that time period. Multifamily Cap Rates at 6.64 Percent in Q4 2013 1 2 3 4 5 6 7 8 2010 2011 2012 2013 CapRate(Percent) Weighted Avg. Cap rate U.S. Treasury 10-year Yield Spread Source: Bloomberg LP Multifamily cap rates ended the fourth quarter of 2013 at 6.33 percent, up from 5.85 percent in the final three months of 2012. The spread to benchmark U.S. government debt earned by lenders during that period narrowed to 3.30 percent from 4.09 percent. Hospitality Cap Rates Close 2013 at 7.31 Percent 0 2 4 6 8 10 12 2010 2011 2012 2013 Rate(Percent) Weighted Avg. Cap Rate U.S. Treasury 10-year Yield Spread Source: Bloomberg LP The weighted average cap rate for hospitality mortgage debt was at 7.31 percent in the final three months of 2013, down from 7.34 percent in December 2012. Cap rates for this property type were as high as 10.34 percent in the third quarter of 2010. Office Cap Rates Fall to 5.78 Percent in Q4 2013 1 2 3 4 5 6 7 8 9 2010 2011 2012 2013 CapRate(Percernt) Weighted Avg. Cap rate U.S. Treasury 10-year Yield Spread Source: Bloomberg LP The weighted average cap rate for mortgage debt backed by office proper- ties was at 5.78 percent in the fourth quarter of 2013, down from 6.01 percent in the fourth quarter of 2012. Late last year the spread to Treasuries earned by lenders fell to 2.76 percent from 4.25 percent in December 2012. Most Commercial Property Cap Rates Trended Lower in 2013 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 17
  18. 18. Loan Originator Current Balance Delinquent Balance Total Number of Loans Number of Delinquent Loans Number of Delinquent Loans that Had Borrowers Filing For Bankruptcy Court Protection 1 Wachovia Bank NA 42,951,934,457 6,680,083,262 3,503 221 10 2 Column Financial 26,343,251,643 2,292,324,922 6,442 215 8 3 LaSalle Bank National Association 15,706,071,678 2,088,200,503 5,159 200 14 4 JPMorgan Chase & Co. 56,677,236,277 2,430,220,626 4,925 141 7 5 Lehman Brothers 20,238,268,322 1,644,960,318 4,031 131 5 6 Bank of America, NA 37,965,237,929 2,829,229,425 4,254 129 3 7 Greenwich Capital 17,678,730,549 3,118,232,805 1,863 122 7 8 CRF 9,026,773,488 1,115,742,080 1,297 93 6 9 CIBC 10,641,584,744 1,213,095,780 1,854 90 7 10 German American Capital 26,055,040,777 2,271,672,660 1,857 82 5 10 Merrill Lynch & Co. Inc. 12,282,912,986 2,237,262,238 2,306 82 7 12 UBS AG 21,725,319,210 2,032,556,947 2,420 76 3 13 Wells Fargo Bank, NA 35,970,924,646 579,442,802 5,642 73 2 13 Morgan Stanley Mortgage Capital Holding 19,352,348,341 924,741,462 1,845 73 3 15 PNC 11,378,060,855 678,149,447 1,849 72 5 16 CGM 11,774,159,280 1,407,135,230 1077 70 2 17 General Electric Capital Corp. 7,921,250,427 820,150,333 2,876 69 4 18 Bridger Commercial Funding 2,502,663,052 391,906,816 966 65 0 19 Goldman Sachs 28,642,172,877 1,708,624,863 1,674 61 1 20 Washington Mutual Bank 1,328,650,840 77,491,596 2,573 60 5 21 Bear Stearns Co. Inc. 15,118,024,303 1,345,707,419 2,401 48 2 22 Barclays 8,382,006,634 800,707,523 792 39 2 23 Artesia Mortgage Capital Corporation 2,696,903,754 288,121,857 937 36 2 23 NCCI 5,230,898,831 552,777,242 963 36 2 23 KeyBank NA 6,973,747,666 569,482,197 1,434 36 1 Source: Bloomberg LP real estate q1 2014   Wachovia, Column and LaSalle Are Top Underwriters of Delinquent CMBS Property Loans Among underwriters of commercial mortgage loans resold as CMBS, Wachovia Bank NA had the biggest number of delinquent mortgage loans as of January 2014, according to data compiled by Bloomberg LP. Wachovia, acquired by Wells Fargo in 2008, had 221 delinquent loans for commercial real estate properties and 10 of these loans involved borrowers that filed for bankruptcy court protection. Column Financial was the number two underwriter of problem loans — 215 of its mortgages were delinquent — and LaSalle was the third biggest. Two hundred of the 5,159 loans underwritten by LaSalle were delinquent. 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 18
  19. 19. To find out how you might help, contact Jeremy Kraut-Ordover at jkrautordover@habitat.org or visit habitat.org. Habitat for Humanity. We build. STEFFANHACKER Habitat for Humanity believes that housing is a critical foundation for breaking the cycle of poverty. We build, renovate and repair homes throughout the United States and in more than 70 other countries around the world. Through technical support; access to resources; and affordable, no-profit loans, Habitat helps families who cannot qualify for conventional financing find hope and opportunity for brighter futures. This “hand up” philosophy can benefit families for generations to come. In the process, stronger communities emerge for everyone.
  20. 20. Q & A with Dwight Bostic  The low interest rate environment has spurred investment banks to join hedge funds and private equity firms to buy distressed real estate, Dwight Bostic, managing director at Mission Capital, tells Bloomberg Brief’s Aleksandrs Rozens. Q: Who is buying distressed real estate debt these days? A: In the last few years there’s been sig- nificant capital raised and there have been participants that exited the market during the significant downturn that have moved back in – probably most notably the investment banks. Then, there are hedge funds and private equity. It’s a pretty broad market when it comes to investing in distressed assets these days. Q: What kind of paper is it – Fannie and Freddie mortgage debt or non- conforming mortgages? A: It is mostly assets that would have been originated in 2006 and 2007 and into 2008. From a legacy standpoint on the Investment Banks Eager for Yield Return to Real Estate, Mission’s Bostic Says distressed side, there is still a significant amount of non-performing and troubled debt, restructured re-performing assets that sit on balance sheets of the deposi- tory institutions. Some of the structured sales that the FDIC ran in 2008 and 2009 have kind of played out and have gotten to the point where they can be liquidated. We are seeing some funds enter their wind-down phase — some of the early acquisitions that were made in the market. It’s not purely depository institutions that have been sellers. It has been some of the funds as well. Q: What’s behind the renewed inter- est by investment banks? Are they restarting conduits for commercial and residential mortgages? A: Today while there have been some banks willing to get back into new origina- tion in conduit, that hasn’t really taken off because the securitization market has not really taken off. The banks are look- ing at taking down the distressed side or re-performing assets in this rate environ- ment as something they are willing to hold and earn the yield. Sometimes they have private investors behind them and they create investment vehicles for private equity groups or investors. They are really focused on the higher yield, distressed side of the market. The banks are also extending warehouse lines now to buyers in distressed markets. That’s been a boon to overall pricing. Q: What’s your impression of the sec- ond lien home equity market? Is any- one buying home equity loans? What does that say about how people feel about the return in value of housing? A: The second-lien home equity space has been very thin. While the housing appreciation we have seen has been more favorable than we thought it would be at this stage, it really has not resulted in some of 2006, 2007 and 2008 vintages coming back to a point where the second liens have equity in them. So it’s still very To advertise in future editions of Bloomberg Brief Real Estate or any other of our 18 titles contact us today. Contact: Adrienne Bills abills1@bloomberg.net / +1-212-769-0480 Visit bloombergbriefs.com/advertising for more information. 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 20 continued on next page
  21. 21. much a collection play from a debt versus any sort of collateral backing it up. The banks and the other holders of that — the execution they are going to get on that is pennies on the dollar. The operational capacity that it relieves from them doing is not that significant. That market is very thin right now and given some of the regu- latory oversight and regulations that have been put in place, I don’t think that market is going to come back for a while. Q: What happens to the market when Fannie and Freddie are unwound? Does this mean the end of 20- and 30- year mortgages? A: That’s one of the big concerns as to whatever sort of reform comes out of this: How do you preserve the 30-year fixed-rate mortgage for people? And, what sort of role does the government have in ensuring that that type of financing is available? I don’t think anybody knows the resolution that’s going ultimately pass. I know that’s a very important part of this unwinding process and the future role of government in the mortgage space — and that is to not push the market to purely a balloon or adjustable rate environment. Q: From what I recall, FHA loans saw a high rate of defaults and delinquen- cies. Are you doing anything in that space in terms of FHA or VA paper? A: HUD has been actively selling non- performing loans for the last couple of years. All indications are that they will continue to be active sellers for the fore- seeable future, call it three to five years. We are pursuing that market. Really there is the direct involvement with HUD and then there is the potential for individual banks and other holders of that paper to buy loans out of the Ginnie Mae securi- ties — its called early buy out — and sell them. But the current rate environment is not really conducive to that trade. I think the majority of the trades will be direct through the HUD where HUD actually takes a bank out of the asset, pays off the claim and sells that uninsured asset into the secondary market. We are pursuing that business and I think that will be the majority of the HUD FHA and VA loan sales over the next several years. Age: 49 Education: West Virginia University Professional Background: Has worked for Pru Home Mortgage, Ocwen Financial, Donaldson Lufkin & Jenrette and Credit Suisse. Joined Mission Capital when it was founded in 2002. Family: Married, two daughters. Hobby: Avid tennis player. Use discountcode BLO O M BERG for 10% off KEY TOPICS THAT WILL BE COVERED: • New Market Outlook for 2014 • Changing Opportunities in Mezzanine Financing including New Investments in Real Estate, Construction, and Secondary & Tertiary Markets • Increasing Ownership Rates and the Changing Relationship Between the Senior Lender and the Mezzanine Lender • Expanding Construction and Development throughout the Country and Beyond • Blending Deals with Structural Changes in Mezzanine Financing and Preferred Equity, and Expanding Investment Opportunities Beyond Large Real Estate • Understanding the Changing Legal Structures in Mezzanine Financing Today • Finding Potential in Multi-family Housing in an Increasingly Competitive Marketplace / REGISTER TODAY AT www.iglobalforum.com/mezz5 MAY 8th , 2014 | NEW YORK 5th Real Estate Mezzanine F I N A N C I N G S U M M I T Q&A… 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 21 continued from previous page
  22. 22. Foreclosure data   December Commercial Mortgage Debt Foreclosure Rate at Lowest Since September 2009 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 2007 2008 2010 2011 2013 DelinquencyRate(Percent) 30D 60D 90D+ Foreclosure Source: Bloomberg LP Foreclosures of commercial property mortgages resold into securities fell to a 51-month low in December. The rate of commercial mortgage debt foreclosures involving all property types in December was 0.53 percent, the lowest since September 2009 when it was at 0.57 percent. Foreclosures of commercial mortgage debt peaked in July 2011 when they hit a rate of 1.92 percent. The 30-day delinquency rate of commer- cial mortgage debt involving all property types was at 0.28 percent in December. That’s a low not seen since October 2008 when the 30-day delinquency rate was 0.17 percent. Thirty-day delinquency rates of com- mercial property debt hit a peak of 1.33 percent in June 2009. Commercial mortgage debt delinquent 60 days was at a rate of 0.15 percent, down from 0.18 percent in November. Sixty-day delinquency rates, which were as high as 0.72 percent in April 2010, were at 0.13 percent in October 2013. Ninety-day delinquencies of commercial mortgage debt rose to 1.08 percent in De- cember from 1.07 percent in November. — Aleksandrs Rozens www.globalrealestate.org/Europe2014 GRI meetings provide a forum for the world’s leading real estate players to develop valuable relationships, find new business partners, and strengthen their global networks. Join Europe’s most senior-level real estate investors, developers & lenders Please visit website for up-to-date participant list and many more... Adam Metz MD & Head of International Real Estate CARLYLE GROUP Cristina Garcia-Peri Managing Director AZORA David Gillerman Managing Director OCH-ZIFF Gianluca Muzzi MD, Head of Real Estate DEUTSCHE ASSET & WEALTHMANAGEMENT Jonathan M. Lurie Managing Director BLACKSTONE Paul A. Brundage EVP, Senior MD Europe OXFORD PROPERTIES Van J. Stults MD & Founding Partner ORION CAPITAL MANAGERS Wolfgang G. Behrendt Managing Director DEKA IMMOBILIEN PARIS 17-18 SEPTEMBER The 17th Annual GRIEUROPE SUMMIT 2014 Bloomberg_EuropeAd_April17.indd 1 17/04/2014 16:30:20 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 22 continued on next page continued on next page
  23. 23. foreclosure data… The credit picture for commercial real estate debt resold into commercial mortgage-backed securities showed further improvement last year. Thirty-day, 60-day and 90-day delinquency rates for mortgages on retail properties, offices, industrial warehouses and hospitality declined in 2013 from 2012, according to Bloomberg data. Foreclosures of all property showed improvement from the previous year. Hotel Foreclosures Lowest Since May 2009 0 2 4 6 8 10 12 14 16 2007 2008 2009 2010 2011 2012 2013 2014 DelinquencyRate(Percent) 30 Day 60 Day 90 Day-plus Foreclosure Source: Bloomberg LP Foreclosures of mortgages backed by hotel properties fell in December 2013 to their lowest since May 2009.The foreclosure rate for hospitality mortgage debt was 0.31 percent in December 2013, down from 2.61 in December 2012. In May 2009, hospitality foreclosure rates were at 0.17 percent. 60-Day Industrial Delinquencies Lowest Since ’08 0 1 2 3 4 5 6 2007 2008 2009 2010 2011 2012 2013 2014 DelinquencyRate(Percent) 30 Day 60 Day 90 Day-plus Foreclosure Source: Bloomberg LP Industrial warehouse mortgage debt 60 days delinquent fell in December 2013 to its lowest level since November 2008. This property type saw a drop in foreclosure activity last year; in December foreclosures were at 0.86 percent, down from 0.94 percent in December 2012. 30-Day Retail Loan Delinquencies at 5-Year Low 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 2007 2008 2010 2011 2013 DelinquencyRate(Percent) 30D 60D 90D+ Foreclosure Source: Bloomberg LP Thirty-day delinquencies for retail property mortgages ended the year at 0.25 percent, the lowest since October 2008 when they were at 0.19 per- cent. Retail property foreclosures were at 0.75 percent in December 2013, a low not seen since December 2009 when they were at 0.74 percent. 30-Day Office Delinquencies at Five-Year Low 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 2007 2008 2009 2010 2011 2012 2013 2014 DelinquencyRate(Percent) 30D 60D 90D+ Foreclosure Source: Bloomberg LP Thirty-day delinquencies for office property loans, which rose to as high as 1.38 percent in May 2012, were at 0.32 percent in December 2013, their lowest since December 2008. Office property foreclosures were at 1.21 percent in December 2013, a low not seen since January 2011. Delinquency, Foreclosure Rates for All Property Types Trended Lower in 2013 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 23 continued from previous page
  24. 24. Q & A WITH Russell Bernard The U.S. real estate market has not completely returned to health and distressed investors likely will find buying opportunities in proper- ties that are worth $50 million or less, Russell Bernard, managing principal at Westport Capital Partners LLC, tells Bloomberg Brief’s Aleksandrs Rozens. Q: How does this post-crisis era com- pare to previous ones for a real estate investor? A: For a distressed investor, the best time to buy distressed assets was 2008-2009 when the real estate markets were at their worst. That was the best time to find value. We are now five or six years into the recovery and it’s clear that the recovery is stronger in markets like New York and San Francisco and not as strong in other parts of the country. To evaluate today’s opportunity, the standard example I use is to look at banks. If you look at 2013, when the stock market was at an all time high, there were still 25 or so community and regional banks that went out of business. And what put those banks out of business was probably their real estate loans. It was not Latin America debt or derivatives. It was probably real estate. Those 25 bank closures — not counting the Resolution Trust Corp. days in the late 1980s and 1990s or this last crisis — were among the top 10 percent of bank closures since the 1930s. So if banks are still failing, to me that means the banking and liquidity systems are not fully functioning. In that scenario, you can’t have a completely healthy real estate market, even though the situation is improving, and there are opportunities for investors. Q: Some property types in New York are richer than where they were prior to the crisis. A: Yes, residential construction for in- stance. If you want to make money build- ing a new building in Manhattan, it has to be a luxury project selling at $2,000 or $3,000 per square foot. Before the crisis most projects were significantly under that. Part of that is because land prices to- day have more than doubled — from $300 Real Estate Not Entirely Healthy and That Makes for Good Buying Opportunities: Bernard Age: 56 Education: Cornell University, B.S. in Business Management and Marketing Favorite Charity: USC Shoah Foundation Professional Background: Previously Principal at Oaktree and portfolio man- ager for Oaktree’s real estate funds. Managing director and Portfolio manager at TCW Special Credits Distressed Mortgage Fund. Partner at Win Properties Inc. Current Favorite Book: “The Hard Thing About Hard Things,” by Ben Horowitz a square foot to $700 or $800 a square foot. And interest rates are certainly half of what they were before. Now, throw in the general costs of owning an apartment in New York City. So, are interest rates or demand or taxes driving current pricing? Obviously it is a little of everything. But what happens if interest rates double? That’s not a big stretch. They won’t double immediately, but what happens when they double? Will property prices fall by half? All those risk factors come into play. Q: Is there any distressed real estate left? A: Distressed debt sold by banks is hard to find at sufficiently discounted prices. Very few loans offer yields that would in- terest a distressed real estate investor. So I don’t think buying non-performing loans is as attractive as it was in 2008-09. But I do believe there are pockets of opportuni- ties in REO — real estate owned by spe- cial servicers or banks. They just probably are not in Manhattan or San Francisco, but in smaller cities and suburbs outside of the spotlight. Q: REO — if you see value in it, what’s the common denominator? What kind of property is it? What gives it value? A: There is value in all types of property. I think the best opportunities are at $50 million dollars and under. A property can be residential, it can be office, it can be retail. It can be land. It can be hospitality. It’s probably not in what people would call core markets. It’s probably in secondary or tertiary markets that you find the best value for the least amount of risk. Q: How do you go about buying this property? Do you go to 363 bankrupt- cy auction sales or do you go through an agent? A: We get some opportunities through direct inquiries and others from bidding on the court house steps. Some interest comes from brokers scanning the Internet. We have a variety of different sources, which is why for us the deal flow is plenti- ful. When deal flow is plentiful for assets that need liquidity, that makes me feel that the market has not fully stabilized yet, out- side of certain places. It’s moving in the right direction and, eventually, stability will come unless something on the horizon knocks it off. More liquidity is coming back but it’s not easy to get a bank loan. Q: How do these properties end up REO? Is it because their owners can- not get the money to pay down a bal- loon payment? A: There is usually a maturity default or payment default and lenders either foreclose or the borrower hands in the keys. When a lender takes back an asset, it obviously does not solve the problem. A bank is in the lending business, not the real estate business. They want to get the property off of their balance sheet, espe- cially when it needs a capital injection for upkeep or repair. Over the last five years lenders with REO have had the opportu- nity to write down the value of their loans over time. They’ve taken a little pain every year, so they hope they can now dispose of a property at a market clearing price, or possibly hold on until the value rebounds. 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 24
  25. 25. The revival of commercial and residential real estate spilled over into equity markets in 2013 where the number of real estate companies taken public rose to a nine-year high, according to data compiled by Bloomberg LP. At the same time, mergers and acquisitions of real estate businesses rose to a level not seen since 2007 and most of the transactions involved U.S. companies. Three hundred and ninety-three mergers valued at $96.4 billion were unveiled in 2013, up from 307 deals in 2012 worth $64 billion. CAP MARKETS Real Estate Mergers Hit Post-Crisis High in ’13 0 100 200 300 400 500 600 700 800 $0 $20 $40 $60 $80 $100 $120 $140 $160 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ← Annualized rate (B) ← Volume (B) Deal Count → Source: Bloomberg While real estate mergers in 2013 are up from 2012, they are shy of 2007 levels when 638 transactions worth $147.9 billion were assembled by bankers. The largest deal of 2013 was American Realty Capital Proper- ties’ acquisition of Cole Real Estate Investments, a provider of real estate investment services. U.S. Companies Drive Real Estate Mergers Real Estate IPO Issuance at Nine-Year High 0 5 10 15 20 25 30 35 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Total IPO value (millions) Number of IPOs Source: Bloomberg LP Sixteen initial public offerings for real estate companies were completed in 2013, raising $4.9 billion in equity markets. That’s the most since 2004, when 29 real estate companies were taken public, raising $6.9 billion. In 2012, nine real estate IPOs raised $3.02 billion. BAML Captures 21 Percent Share of RE IPOs 0 5 10 15 20 25 Barclays Raymond James & Associates Inc UBS Deutsche Bank AG Wells Fargo & Co Citi JP Morgan Morgan Stanley Goldman Sachs & Co Bank of America Merrill Lynch Source: Bloomberg LP BAML was lead underwriter of seven real estate company IPOs in 2013, giv- ing it a 21 percent market share, while Goldman underwrote five such trans- actions, giving it a 15.5 percent market share. BAML underwrote the largest real estate IPO of the year — Empire State Realty’s $1.1 billion offering. Target Country Acquirer Value ($M) Deal Status Cole Real Estate Investment Inc US American Realty Capital Properties Inc 9,846 Completed SM Land Inc PH SM Prime Holdings Inc 7,330 Pending BRE Properties Inc US Essex Property Trust Inc 5,936 Completed Brookfield Office Properties Inc US Brookfield Property Partners LP 5,037 Pending GSW Immobilien AG DE Deutsche Wohnen AG 4,532 Completed Corporate Prop- erty Associates 16 - Global Inc US WP Carey Inc 4,367 Completed Primaris Retail Real Estate Investment Trust CA H&R Real Estate Invest- ment Trust 4,106 Completed Colonial Properties Trust US Mid-America Apartment Communities Inc 4,042 Completed Cole Credit Property Trust II Inc/Old US Spirit Realty Capital Inc 3,663 Completed CommonWealth REIT US Corvex Management LP, Related Fund Manage- ment LLC 2,898 Pending Source: Bloomberg LP Real Estate Renaissance Spills Into Equity Markets With IPOs, M&A Activity 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 25
  26. 26. Q & A with alexander rubin Servicer sales of distressed real estate have drawn buyers such as private equity firms and hedge funds, Alexander Rubin, managing director at Moelis & Co., tells Bloomberg Brief’s Aleksandrs Rozens. Q:There’s more going in the equity mar- kets related to real estate businesses. A: Some of the larger companies — for example, the collection of Blackstone’s stakes in private businesses — it was pretty clear those were going to come at least on a dual track basis if not getting done ultimately in the public market.They have been structured well, priced correctly. For the most part, those deals have traded pretty well. Q: How are these deals trading after they have come to market? A: Most have traded up. In all of these deals sponsors are generally not initially selling down their stake.They are actually raising primary capital of the company, demonstrat- ing ongoing commitment to the business. Q:Are you seeing more M&A on the back of the pickup in real estate IPOs? A: There is a reasonably demonstrable backdrop of increasing corporate con- fidence in the boardroom expressed by CEOs and their boards of directors.That certainly is a function of general liquidity in equity and fixed income capital markets. But there are two additional trends contributing to this.There are elevated levels of share- holder activism coming into the REIT space. That is not something we have seen in a meaningful way before relatively recently. The second is the utilization of various spin off or split off technology by some of the larger companies to simplify their busi- nesses and give shareholders opportunity for more of a pure play in the various com- ponent businesses.That’s everything from what Simon Property has done with their shopping center and B mall business on the one hand and Northstar on the other hand with a successful example of spinning out of their asset management business. Both of those deals are likely to be completed in the second quarter. Servicer Sales of Real Estate Draw PE, Hedge Fund Interest, Says Moelis’s Rubin Professional Background: Managing Director in Global Real Estate Invest- ment Banking Group at Citigroup, M.D. and Co-Head of European Real Estate Investment Banking at UBS, Managing Director at Merrill Lynch Education: B.A. degree from Cornell University Family: Married, three children Q: Does the shareholder activism kick up property sales or portfolio sales of properties? A: It certainly could. In other instances it prompts, perhaps, a more thorough review of a strategic alternatives. In some cases it results in selective board representation; in other cases it can result in a full restacking of the board of directors and leadership of the firm. Q: How does any wind down of Fannie Mae and Freddie Mac impact financial sponsor investments in real estate? A: It is not clear whether or not Congress will actually back away from Fannie and Freddie, or if they do, whether or not private solutions don’t emerge to provide some of that same secondary market support for the single family mortgage product. If availability of credit in the single family mortgage business were to be impacted or curtailed through some disruption to the GSE template as it currently exists such that some segment of homeowners that have otherwise relied on mortgage financing to buy their homes — if that becomes more challenging and you tip the scales so that you are increasing the number of renters, that could arguably play well to two groups of real estate owners: the multi-family sec- tor, whether public or private, as well as sponsors or public companies that have aggregated portfolios of single family homes and are offering them for rent. Q:What are you seeing in terms of sales of distressed property from banks? A: What there has been more of more recently in the U.S. have been some size- able liquidations by special servicers in the CMBS market where they are selling some of their nonperforming portfolio — whether it is a loan that has defaulted or if they have actually gone through and perfected their interest in the underlying real estate.There have been some reasonably sizeable deals by each of the major special servicers. Unlike the period in the early financial crisis when there was limited liquidity, the markets today are far more functional and, as a result, you are seeing reasonable if not elevated dispositions by special servicers. Q:Who are the buyers? Private equity, hedge funds? A: All of the above. Private real estate owners, public companies. Offshore capital has been a major source of demand for practically all manner of real property in major cities. Q:What is private equity’s next play in real estate? A: We will experience a period of elevated activity in the GP space broadly defined — the actual managers of private equity for commercial real estate.That could take a number of forms.That could be GPs merg- ing with each other.You could see some of these firms explore IPOs to the extent they have successful track records, sufficient scale, diverse strategies and critical mass as far assets under management.There could be a good reception for some of the successful names in the public market.You could see some LPs narrowing the number of relationships that they currently man- age to deploy larger volumes of investment dollars across a narrower portfolio of GP relationships.The state of New Jersey last year sold off a portfolio of 25 LP interests in underlying real estate funds.Then the state redeployed that money across a narrower collection of their GP relationships. 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 26
  27. 27. Piedmont Office Realty Trust was the first office REIT to sell unsecured bonds this year, after peers raised $2.7 billion in 2013. Piedmont sold $400 million in bonds priced at 178 basis points over the 10-year Treasury, for a coupon of 4.45 percent. Tightening bond spreads may encourage the use of unsecured debt as a source of capital for office REITs during the balance of 2014. Office REITs have a total of $5.3 billion of debt scheduled to mature in 2014, led by Brookfield Office’s $2.1 billion of property-level debt. Kilroy Realty Corp. and Brandywine Realty Trust have the most unsecured debt maturities scheduled among office REITs in 2014. Kilroy has said it intends to issue new debt to address its maturities. Kilroy Realty has $256 million of unsecured debt maturing in 2014, including $83 million in August with a 6.45 percent cou- pon and $172.5 million of convertible debt at a 4.25 percent coupon (7.1 percent GAAP interest rate). Kilroy Realty noted during its fourth quarter earnings call that it plans to issue debt to repay its 2014 maturities, which have a blended GAAP interest rate of 6.9 percent. According to the referenced curve, a new 10-year issue for Kilroy may price 160 basis points below that. Even those office REITs without immediate liquidity needs might look to the bond markets as a source of capital in 2014 given the 30-basis point year to date drop in the 10-year Treasury yield and tighter spreads. Brandywine Realty Trust has the next largest office REIT unsecured debt maturity, $232 million in November with a 5.4 percent coupon. It has sufficient cash to repay its maturities. Bloomberg Industries analysis of Office REITS is available on the termi- nal at BI OFCR <GO>. Office REITs  Jeffrey langbaum, bloomberg industries analyst Piedmont’s Unsecured Bond Sale Shows Alternative to Equity Financing 0 100 200 300 400 500 600 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Bond Principal Term Loan Revover Available Revolver Outstanding Source: Bloomberg LP 0 1 2 3 4 5 6 7 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Years Kilroy Yield Curve Source: Bloomberg LPSource: Bloomberg LPSource: Bloomberg LP 3 5 7 10 20 Current Coupon on Maturing 10-Year Bond Kilroy Maturities Shows 2014 Refinancing Need Kilroy Current Yields Suggest Refinancing Gain Office REIT Bond 2013 Issuance Issuer Name Issue Date Amount (Millions of Dollars) Coupon Maturity Date Boston Properties LP 6/27/2013 700 3.8 2/1/2024 Corporate Office Properties LP 9/16/2013 250 5.25 2/15/2024 Mack-Cali Realty LP 5/8/2013 275 3.15 5/15/2023 Boston Properties LP 4/11/2013 500 3.125 9/1/2023 Corporate Office Properties LP 8/28/2013 350 3.6 5/15/2023 Kilroy Realty LP 1/14/2013 300 3.8 1/15/2023 Piedmont Operating Partnership LP 7/17/2013 350 3.4 6/1/2023 Bankers Hall LP 11/18/2013 288 4.377 11/20/2023 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 27
  28. 28. Economics ChinaBrief London (free brief) Economics Europe Economics Asia Mergers Hedge Funds Europe Hedge Funds Municipal Market Financial Regulation Private Equity Leveraged Finance Structured Notes Technical Strategies Clean Energy & Carbon Bankruptcy & Restructuring Oil Buyer’s Guide
  29. 29. Apartment REIT development pipelines have grown about threefold since early 2011 to $8 billion from $2.1 billion, due to a 100 to 150 bp yield advantage over acquisitions. Apartment construction and leas- ing can take 24 to 36 months, so earnings from the initial development spike may support apartment REIT year-over-year funds from opera- tions comparisons in 2014. AvalonBay, Equity Residential, Camden Property Trust and UDR are the largest apartment REIT developers. Apartment property sales in the first quarter by REITs topped ac- quisitions at $637 million versus $397 million. Equity Residential led buyers at $229 million, bucking the sectorwide trend. Brookfield led sellers at $137 million, followed by Home Properties ($110 million). REITs continue to take advantage of high apartment prices to monetize assets, though dispositions hurt near-term earnings before proceeds are re-invested. Essex Property Trust’s consensus FFO estimate has declined following its just-completed acquisition of BRE Properties and its late-quarter issuance of $76 million of equity. Essex’s adjusted FFO per share is expected to increase by 4.4 percent in the first quarter, below the 11.4 percent growth of fiscal 2013. Bloomberg Industries analysis of apartment REITS can be found on the terminal at BI APTR <GO>. Apartment REITs  Jeffrey langbaum, bloomberg industries analyst Construction Yields More Profits Than Acquisitions 0 1 2 3 4 5 6 7 8 9 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 2006 2007 2008 2009 2010 2011 2012 2013 BillionsofDollars Units Apartment Units Under Development (L1) Total REIT Spending on Apartment Development (R1) Source: Bloomberg Industries, Company Filings Development Pipeline Is Growing 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000 2006 2007 2008 2009 2010 2011 2012 2013 NumberofUnits U.S.Dollars Purchase Price per Unit (Left Axis) Units Acquired (Right Axis) Source: Real Capital Analytics Acquisitions by Apartment REITs Declined in ’13... 0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 2006 2007 2008 2009 2010 2011 2012 2013 NumberofUnits U.S.Dollars Sales Price per Unit (Left Axis) Units Sold (Right Axis) Source: Real Capital Analytics ...With Higher Deal Value Than Dispositions First Quarter Apartment REIT Investment Deals Acquisitions Company Amount (US$, Mlns) No. of Units Price/Unit Equity Residential $229 1,018 $224,951 Washington REIT $73 216 $337,963 MAA $38.8 377 $103,044 Brookfield Asset Mgmt $25 753 $33,201 BRT Realty Trust $18.8 400 $47,000 Almco $12 40 $300,000 Source: Bloomberg Industries Dispositions Company Amount (US$, Mlns) No. of Units Price/Unit MAA $10.6 285 $37,135 Brookfield Asset Mgmt $137.2 2,098 $65,396 Almco $32 404 $79,208 Home Properties $110 864 $127,315 BRE $95.4 508 $187,795 AvalonBay $67.4 369 $182,656 Associated Estates $60 352 $170,455 UDR $48.7 264 $184 Winthrop Realty Trust $31.7 324 $97,840 Camden Property Trust $30 318 $94,340 Essex Property Trust $14.4 106 $135,535 Source: Bloomberg Industries 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 29
  30. 30. High occupancy rates in malls and shopping centers owned by specialized real estate investment trusts will likely continue to insulate them from announced store closings. With occupancy rates at almost 95 percent on average, a record high for the peer group, REITs have pricing power. As long-term leases with below-market rents expire, new leases are being signed with double-digit rent increases. Mall, outlet and shopping center REITs, especially those with better-quality assets, have been able to overcome risks of e-commerce. REIT portfolios generated 3.5 percent average same-store net operating income growth in 2013. Overall retail vacancy rates fell to 10.4 percent by the end of last year from 10.5 percent in the third quarter of 2013, according to real estate information firm REIS. Rent growth (per square foot) rose to 1.4 percent year over year from 1.1 percent in the third quarter. Overall store rents will increase 2.3 percent in 2014 and 3 percent in 2015, REIS forecasts. Retail completions increased 48.4 percent from the third quarter and remained below net absorption for the ninth consecutive quar- ter. Completions will rise 74.3 percent in 2014 and 38.2 percent in 2015, yet remain below net absorption, REIS forecasts. Occupancy rates tend to be higher at malls and shopping centers selected to be included in REIT portfolios. Occupancy rates at the end of 2013 reached 95 percent for both segments. Shopping center REIT occupancy has been rising since 2010 and rental rate spreads have been consistently positive since 2011. With limited vacancy putting a premium on high-quality real estate, shopping center REITs have generated double- digit rent increases on leasing activity in recent quarters, which may continue. Store closings by retailers such as Staples and Radio Shack have a limited effect on REIT portfolios, as new tenants are paying 20 percent more, on average, than the retailers they replace. Higher rents have allowed REITs to generate same-store net operating income growth even as struggling retailers announce store closings. Mall REITs with higher productivity centers are poised to outperform. The group’s net operating income aver- aged 3.5 percent in the last quarter of 2013. Shopping centers ability to generating high rent spreads on low in-place rents helped the group to push net operating income growth to 3.4 percent for the same period. Tenant sales growth rates have been shrinking, which could eventually limit the ability of mall REITs’ to raise base rents or collect percentage rents, which are based on sales. So far, with occupancy rates at record high levels and occupancy costs low, mall landlords retain pricing power, especially for higher productivity centers. Even with pending closures from retailers such as J.C. Penney and Abercrombie & Fitch, mall REIT same-store net operating income growth appears poised to rise. Bloomberg Industries analysis of retail REITS can be found on the termi- nal at BI RETR <GO>. Retail REITs  Jeffrey langbaum, bloomberg industries analyst Retail REITs Shrug Off Store Closings as High Occupancy Rates Support Rent Increases BINASHPV Index (BI North America Shopping Centers - REIT Valuation Peers) BINASHPV Index (BI North America Shopping Centers - REIT Valuation Peers) BINAMALV Index (BI North America Regional Malls - REIT Valuation Peers) BINAMALV Index (BI North America Regional Malls - REIT Valuation Peers) The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and BLOOMBERG Order Management Systems (the “Services”) are owned and distributed locally by Bloomberg Finance L.P. (“BFLP”) and its subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the “BLP Countries”). 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Bloomberg ®Charts 1 - 1 Occupancy Rates Rise, Support Rents BINASHPV Index (BI North America Shopping Centers - REIT Valuation Peers) BINASHPV Index (BI North America Shopping Centers - REIT Valuation Peers) The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and BLOOMBERG Order Management Systems (the “Services”) are owned and distributed locally by Bloomberg Finance L.P. (“BFLP”) and its subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the “BLP Countries”). BFLP is a wholly-owned subsidiary of Bloomberg L.P. (“BLP”). BLP provides BFLP with all global marketing and operational support and service for the Services and distributes the Services either directly or through a non-BFLP subsidiary in the BLP Countries. The Services include electronic trading and order-routing services, which are available only to sophisticated institutional investors and only where necessary legal clearances have been obtained. BFLP, BLP and their affiliates do not provide investment advice or guarantee the accuracy of prices or information in the Services. Nothing on the Services shall constitute an offering of financial instruments by BFLP, BLP or their affiliates. BLOOMBERG, BLOOMBERG PROFESSIONAL, BLOOMBERG MARKET, BLOOMBERG NEWS, BLOOMBERG ANYWHERE, BLOOMBERG TRADEBOOK, BLOOMBERG BONDTRADER, BLOOMBERG TELEVISION, BLOOMBERG RADIO, BLOOMBERG PRESS and BLOOMBERG.COM are trademarks and service marks of BFLP, a Delaware limited partnership, or its subsidiaries. Bloomberg ®Charts 1 - 1 Shopping Centers Get 20% Raise on New Leases BINASHPV Index (BI North America Shopping Centers - REIT Valuation Peers) BINASHPV Index (BI North America Shopping Centers - REIT Valuation Peers) BINAMALV Index (BI North America Regional Malls - REIT Valuation Peers) BINAMALV Index (BI North America Regional Malls - REIT Valuation Peers) The BLOOMBERG PROFESSIONAL service, BLOOMBERG Data and BLOOMBERG Order Management Systems (the “Services”) are owned and distributed locally by Bloomberg Finance L.P. (“BFLP”) and its subsidiaries in all jurisdictions other than Argentina, Bermuda, China, India, Japan and Korea (the “BLP Countries”). BFLP is a wholly-owned subsidiary of Bloomberg L.P. (“BLP”). BLP provides BFLP with all global marketing and operational support and service for the Services and distributes the Services either directly or through a non-BFLP subsidiary in the BLP Countries. The Services include electronic trading and order-routing services, which are available only to sophisticated institutional investors and only where necessary legal clearances have been obtained. BFLP, BLP and their affiliates do not provide investment advice or guarantee the accuracy of prices or information in the Services. Nothing on the Services shall constitute an offering of financial instruments by BFLP, BLP or their affiliates. BLOOMBERG, BLOOMBERG PROFESSIONAL, BLOOMBERG MARKET, BLOOMBERG NEWS, BLOOMBERG ANYWHERE, BLOOMBERG TRADEBOOK, BLOOMBERG BONDTRADER, BLOOMBERG TELEVISION, BLOOMBERG RADIO, BLOOMBERG PRESS and BLOOMBERG.COM are trademarks and service marks of BFLP, a Delaware limited partnership, or its subsidiaries. Bloomberg ®Charts 1 - 1 REIT’s Same Store Sales Outperform Retailers Source: Bloomberg Industries, Company Filings Source: Bloomberg Industries, Company Filings Source: Bloomberg Industries, Company Filings 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 30
  31. 31. The well-being of commercial real estate such as mul- tifamily, office and industrial properties is tied closely to the health of the U.S. jobs market, writes Will McIntosh, head of research at USAA Real Estate Co. One of the most important economic indicators and a major demand driver for real estate is employment growth. The more workers earn, the more they buy, propelling the economy and the demand for real estate forward. As a result, news of robust employment growth can stimu- late the real estate market by boosting expectations of higher sales and profits. At the same time, little or no growth in employment is generally viewed as a negative for the real estate markets by keeping would-be homeowners on the sidelines and reducing their incentive to invest and expand. National total employment trends are a powerful indicator of the health of the commercial real estate markets and are likely to retain increased impor- tance over the next few years given that supply is projected to remain well below historical levels for most major sectors and markets. Over the past 25 years, a 1 percent increase in employ- ment has translated, on average, to net absorption rates across the major property sectors between 0.52 percent (multifamily) and 0.88 percent (office). Regressing employment against net absorption suggests that changes in employment explain between 44 percent (multifamily) and 77 percent (industrial) of the variation in net absorption. The relationships are even stronger if we use subsets of the employment data that are more closely tied to each sector (ex. office-using employment and office net absorption). With employment and net absorption so closely correlated, an analysis of the jobs market can provide invaluable insight into the health of the real estate guest editorial  Will Mcintosh, USAA Real estate co. Employment Recovery Is Missing Piece in Real Estate Puzzle sector. As of the fourth quarter of 2013, total employment in the U.S. stood at 136.7 million after adding 2.28 million jobs in 2013. This level remains 0.9 per- cent below the peak employment of 138 million reached during the first quarter of 2008. According to Moody’s Analytics, the U.S. will recover all of the employ- ment losses from the Great Recession by the second quarter of 2014. However, the change in employment rates has not been even across all sec- tors. Private sector employment fell 7.5 percent during the recession from its peak of 115.6 million in the fourth quar- ter of 2007; it has since recovered most of these losses and currently stands just 0.6 percent below peak levels. Govern- ment jobs, on the other hand, fell only 3.1 percent from their peak of 22.6 million as of the second quarter of 2009, but have made almost no recovery, excluding the temporary impact from Census hiring in the second quarter of 2010. They remain 3.1 percent below their peak levels. In the private sector, the top employ- ment performers since 2007 have been natural resources, education and health services, professional and business services, and leisure and hospitality. The worst performers have been construc- tion, manufacturing, information and financial activities, though all of these sectors saw some employment gains nationally in 2013. Employment Trends Drive Commercial Property Absorption Rates -6% -4% -2% 0% 2% 4% 6% 1988Q4 1991Q4 1994Q4 1997Q4 2000Q4 2003Q4 2006Q4 2009Q4 2012Q4 % Change (Y/Y) Employment Office Industrial Multifamily Retail Source: USAA While there has been a bit of a slowdown in the monthly employment numbers re- cently, we attribute this in large part to the severe winter weather experienced in many parts of the country. In many cases, the top performing employment markets over the past few years are expected to continue to outperform over the near term, with Charlotte, Las Vegas and Phoenix mov- ing up the list as well. 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 31 continued on next page
  32. 32. Employment performance has also varied by geography. Relative to peak employment levels, the Texan markets, for example, have seen outsized per- formance since the recession, lending credence to the statement that “every- thing is bigger in Texas.” On a relative basis, Nashville and Denver have also posted strong performance over the past five years. Commercial real estate returns are generated from both income and capital appreciation. Over the past 10 years, income has accounted for more than 70 percent of the returns from real estate (it is closer to 80 percent for the past 30 years). As such, occupancy is a significant driver of the overall return, and the relationship between employ- ment and occupancy is strong. Across the office sector markets, since 2010, the change in vacancy compared to the change in employment has a correla- tion of -0.47, which is strong considering that shadow space and some new supply also impacted leasing trends over this period. Employment gains over the next several years should continue to impact net absorption even more strongly than they have historically, at least for the non-multifamily sectors, as construction deliveries are projected to remain muted. As such, employment increases will pro- vide a strong tailwind to vacancy and rent performance over the next couple years. Our forecast calls for national employ- ment growth to accelerate over the next two years. While there has been a bit of a slowdown in the monthly employ- ment numbers recently, we attribute this in large part to the severe winter weather experienced in many parts of the country. In many cases, the top performing employment markets over the past few years are expected to con- tinue to outperform over the near term, with Charlotte, Las Vegas and Phoenix moving up the list as well. Technology, health care and energy focused markets have outperformed in recent years, and these trends are expected to continue. The relationship between performance over the previous two years and that forecast over the coming couple years is robust. Mcintosh… Make an IMpact wIth BlooMBerg BrIef contentBloomberg Briefs provide dedicated licenses to reuse our content to help your business. We offer a full suite of products and services ranging from hardcopy and electronic reprints to plaques, permissions/licensing and photocopies. To find the solution that is right for you, contact us today at: 800 290 5460 x 100, email: bloombergbriefreprints@theygsgroup.com MaxIMIze your MarketIng wIth custoM reprInts for: • Direct Mail • Online enhancements, branding and client awareness • Literature for sales or marketing • Conference, trade show and corporate handouts • Professional, educational training & recruitment materials 04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 32 continued from previous page

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