The Commercial Real Estate Bust:
     How Long? How Deep?
   And What Will Pull Us Out?

      Western Independent Bankers...
Today’s Agenda




        I.   Why a CRE Bubble?    Past
        II. Has it Popped?       Present
        III. Forecast  ...
Why a CRE Bubble?

I.   Equity redirected towards
     real estate from stocks
II. Debt madness

III. Economic expansion
 ...
Why a CRE Bubble?



     I.     Equity redirected towards
            real estate from stocks
          • ’01 stock marke...
Why a CRE Bubble?



      II. Debt madness
        • CMBS pyramid scheme/scam
        • Big banks become investment
     ...
Why a CRE Bubble?


       Also chasing CRE debt…

   •    Big Banks
   •    Insurance Companies/Mortgage
        REIT’s
 ...
Why a CRE Bubble?
Why a CRE Bubble?



      III. Economic expansion
           improved fundamentals
         • Increasing Corporate Profit...
Why a CRE Bubble?




 CRE was a credit driven bubble no
      different than housing
Why a CRE Bubble?
Why a CRE Bubble?


                U.S. Unemployment (’90 – ’08)




 Percentage
     of
Unemployment




               ...
Why a CRE Bubble?



     Summary of How We Got Here
                April ’07 Credit Crises

                Housing cras...
Why a CRE Bubble?


“We have seen this horror movie before,
    so the end isn’t that scary.”
Status of CRE in Western U.S.

 •   Values down by 30% - 40%
 •   Values continue to decline
 •   Unwinding of bubble
Status of CRE in Western U.S.

          All Asset Classes Plummeting
Status of CRE in Western U.S.

      Western 11 states unemployment rates
                 State          Unemployment Rat...
Status of CRE in Western U.S.



                                         Oakland, CA




Year            Owner           ...
Status of CRE in Western U.S.


   Recent retailer bankruptcies
Status of CRE in Western U.S.

 Retail – Quarterly Supply, Demand and Vacancy                           As of 2009Q1




 ...
Status of CRE in Western U.S.

     Multi Family
        •     National Housing Affordability Index
Status of CRE in Western U.S.

Apartments – Quarterly Supply, Demand and Vacancy                            As of 2009Q1

...
Status of CRE in Western U.S. - Apartment Case Study



                                       Long Beach, CA
            ...
Imports ($000,000)




            $-
                 $50,000.00
                                $100,000.00
            ...
Status of CRE in Western U.S.



                                            Vernon, CA
                                  ...
Status of CRE in Western U.S.


                        Hotel – National Rev/Par Over 10 Years
               160.0



   ...
Status of CRE in Western U.S.

  Inland Empire - Office


                            Inland Empire Supply & Demand
      ...
Status of CRE in Western U.S.
  Los Angeles County - Office
                                                   CBD Supply ...
Status of CRE in Western U.S.

  Orange County - Office

                                      CBD Supply & Demand
       ...
Status of CRE in Western U.S.
  San Francisco - Office

                                     CBD Supply & Demand
         ...
Status of CRE in Western U.S.
  Silicon Valley - Office
                                       CBD Supply & Demand

      ...
Status of CRE in Western U.S.
  Phoenix - Office
                                       CBD Supply & Demand
              ...
Status of CRE in Western U.S.

  Portland - Office

                                        CBD Supply & Demand
          ...
Status of CRE in Western U.S.

  Denver - Office
                                                          CBD
           ...
Status of CRE in Western U.S.
  Seattle - Office
                                       CBD Supply & Demand
              ...
Status of CRE in Western U.S.

  Las Vegas - Office


                          Non-CBD Supply & Demand
           6.00   ...
Price Per Square Foot




                $-
                     $50.00
                              $100.00
           ...
Price Per Square Foot




                $-
                     $10.00
                              $20.00
            ...
Status of CRE in Western U.S.



  Summary of Current CRE Markets

   •     If new construction in submarket =
         Me...
CRE Forecast
Short Term:
•   Forced sales
•   Substantial price correction
•   Massive foreclosures/
    cramdowns
•   CRE...
CRE Forecast
  CRE Forecast


     Long Term:
     •   Market will drop in excess of
         fundamentals (overshoot) due...
CRE Forecast


      Protracted/Anemic Recovery
       •       Output gap closed in 3-4
               years, CRE follows
...
CRE Forecast



         Challenges to Recovery:
         •     Political risk – taxes,
               changing rules

   ...
CRE Forecast


                   Special Servicers

               •     Inflexible
               •     Can’t work out/e...
CRE Forecast


     What’s required for a recovery
       •       Profits/Hiring
       •       Continued low IRs/low infl...
% of Disp Income
                                          19




                                    -2
                 ...
CRE Forecast

                    Corporate Profits
                          Percentage Change
                          ...
CRE Forecast

                                                    Delinquency Rates as % Total Loans
                     ...
CRE Forecast


          Indicators of Recovery:
         •     Unemployment slowdown
         •     Positive absorption

...
CRE Forecast

               MSCI Barra REIT Index
CRE Forecast



               The Good News:

• Healthcare and infrastructure spending
  will be bright spot
• The employ...
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Western Independent Bankers’ Troubled Asset Forum Presentation

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Keynote Presentation given at Western Independent Bankers’ Troubled Asset Forum 6.23.09

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Western Independent Bankers’ Troubled Asset Forum Presentation

  1. 1. The Commercial Real Estate Bust: How Long? How Deep? And What Will Pull Us Out? Western Independent Bankers: Troubled Asset Forum June 23, 2009 Hilton San Francisco By: Ted Simpson, MCR Executive Director Cushman & Wakefield of California, Inc.
  2. 2. Today’s Agenda I. Why a CRE Bubble? Past II. Has it Popped? Present III. Forecast Future
  3. 3. Why a CRE Bubble? I. Equity redirected towards real estate from stocks II. Debt madness III. Economic expansion improved fundamentals
  4. 4. Why a CRE Bubble? I. Equity redirected towards real estate from stocks • ’01 stock market crash • Change in institutional investors’ asset allocation • More capital chasing real estate than available cap rate compression more capital chasing RE cap rate compression • Global liquidity flood created by central banks, oil’s rise (new wealth: Russia, Mid East, Brazil)
  5. 5. Why a CRE Bubble? II. Debt madness • CMBS pyramid scheme/scam • Big banks become investment banks • Community banks take highest risk/ highest margin loans *Risk was completely mispriced due to greed (fees), competitiveness, shareholder pressure
  6. 6. Why a CRE Bubble? Also chasing CRE debt… • Big Banks • Insurance Companies/Mortgage REIT’s • Community Banks
  7. 7. Why a CRE Bubble?
  8. 8. Why a CRE Bubble? III. Economic expansion improved fundamentals • Increasing Corporate Profits • Increasing Employment • Decreasing Vacancies
  9. 9. Why a CRE Bubble? CRE was a credit driven bubble no different than housing
  10. 10. Why a CRE Bubble?
  11. 11. Why a CRE Bubble? U.S. Unemployment (’90 – ’08) Percentage of Unemployment Source: U.S. Dept. of Labor; Bureau of Labor Statistics, 2009
  12. 12. Why a CRE Bubble? Summary of How We Got Here April ’07 Credit Crises Housing crash Consumer spending Econ fundamentals Vacancies in CRE
  13. 13. Why a CRE Bubble? “We have seen this horror movie before, so the end isn’t that scary.”
  14. 14. Status of CRE in Western U.S. • Values down by 30% - 40% • Values continue to decline • Unwinding of bubble
  15. 15. Status of CRE in Western U.S. All Asset Classes Plummeting
  16. 16. Status of CRE in Western U.S. Western 11 states unemployment rates State Unemployment Rate Apr ‘09 Arizona 7.7% California 11.0% Colorado 7.4% Idaho 7.0% Montana 6.0% Nevada 10.6% New Mexico 5.8% Oregon 12.0% Utah 5.2% Washington 9.1% Wyoming 4.5%
  17. 17. Status of CRE in Western U.S. Oakland, CA Year Owner Price 2007 Developer $2.1M ($330/SF) 3-2009 Lender $1.38M ($184/SF) 6-2009 Lender $1.315M ($175/SF) Future Value $750,000 ($100/SF)???
  18. 18. Status of CRE in Western U.S. Recent retailer bankruptcies
  19. 19. Status of CRE in Western U.S. Retail – Quarterly Supply, Demand and Vacancy As of 2009Q1 Source: Property And Portfolio Research, Retail Edition, June 2009
  20. 20. Status of CRE in Western U.S. Multi Family • National Housing Affordability Index
  21. 21. Status of CRE in Western U.S. Apartments – Quarterly Supply, Demand and Vacancy As of 2009Q1 Source: Property And Portfolio Research, Apartment Edition, June 2009
  22. 22. Status of CRE in Western U.S. - Apartment Case Study Long Beach, CA Apartment Complex Year Owner Price 2005 Local Investor $6.6M $120,000/door 2006 Local Investor $9.2M $167,000/door 2007 Lender $11M $200,000/door 2009 Lender $6.6M $120,000/door
  23. 23. Imports ($000,000) $- $50,000.00 $100,000.00 $150,000.00 $200,000.00 $250,000.00 1992 Jan 1992 Jun 1992 Nov 1993 Apr 1993 Sep 1994 Feb 1994 Jul 1994 Dec 1995 May 1995 Oct 1996 Mar 1996 Aug 1997 Jan Industrial 1997 Jun 1997 Nov 1998 Apr Status of CRE in Western U.S. 1998 Sep 1999 Feb 1999 Jul 1999 Dec ’09) U.S. Imports (’92 –US Imports 2000 May 2000 Oct 2001 Mar 2001 Aug 2002 Jan 2002 Jun 2002 Nov 2003 Apr 2003 Sep 2004 Feb 2004 Jul 2004 Dec 2005 May 2005 Oct 2006 Mar 2006 Aug 2007 Jan 2007 Jun 2007 Nov 2008 Apr 2008 Sep 2009 Feb
  24. 24. Status of CRE in Western U.S. Vernon, CA 91,674 SF • Lender carried back paper • Listed at $120/SF • Price drop to $109/SF • Then to $99/SF • Sold for $70/SF • Previously sold 7/1/2003 for $57.43/SF
  25. 25. Status of CRE in Western U.S. Hotel – National Rev/Par Over 10 Years 160.0 140.0 120.0 100.0 RevPar Index 80.0 60.0 40.0 20.0 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Year
  26. 26. Status of CRE in Western U.S. Inland Empire - Office Inland Empire Supply & Demand 2.00 32.0% 1.50 24.0% 1.00 16.0% 0.50 8.0% 0.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 -0.50 -8.0% Absorp Cnst. Vacancy
  27. 27. Status of CRE in Western U.S. Los Angeles County - Office CBD Supply & Demand 1.2 24.0% 0.9 18.0% 0.6 12.0% 0.3 6.0% 0.0 0.0% 01 02 03 04 05 06 07 08 09 10 11 -0.3 -6.0% -0.6 -12.0% Absorp Cnst. Vacancy Non-CBD Supply & Demand 2.00 24.0% 1.50 18.0% 1.00 12.0% 0.50 6.0% 0.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 -0.50 -6.0% -1.00 -12.0% Absorp Cnst. Vacancy
  28. 28. Status of CRE in Western U.S. Orange County - Office CBD Supply & Demand 3.00 24.0% 2.25 18.0% 1.50 12.0% 0.75 6.0% 0.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 -0.75 -6.0% -1.50 -12.0% Absorp Cnst. Vacancy Non-CBD Supply & Demand 3.00 24.0% 2.25 18.0% 1.50 12.0% 0.75 6.0% 0.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 -0.75 -6.0% -1.50 -12.0% Absorp Cnst. Vacancy
  29. 29. Status of CRE in Western U.S. San Francisco - Office CBD Supply & Demand 6.00 24.0% 4.50 18.0% 3.00 12.0% 1.50 6.0% 0.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 -1.50 -6.0% -3.00 -12.0% Absorp Cnst. Vacancy Non-CBD Supply & Demand 3.00 32.0% 2.25 24.0% 1.50 16.0% 0.75 8.0% 0.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 -0.75 -8.0% -1.50 -16.0% Absorp Cnst. Vacancy
  30. 30. Status of CRE in Western U.S. Silicon Valley - Office CBD Supply & Demand 1.00 28.0% 0.75 21.0% 0.50 14.0% 0.25 7.0% 0.00 0.0% -0.25 01 02 03 04 05 06 07 08 09 10 11 -7.0% -0.50 -14.0% Absorp Cnst. Vacancy Non-CBD Supply & Demand 6.00 28.0% 4.50 21.0% 3.00 14.0% 1.50 7.0% 0.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 -1.50 -7.0% -3.00 -14.0% Absorp Cnst. Vacancy
  31. 31. Status of CRE in Western U.S. Phoenix - Office CBD Supply & Demand 1.00 24.0% 0.75 18.0% 0.50 12.0% 0.25 6.0% 0.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 -0.25 -6.0% -0.50 -12.0% Absorp Cnst. Vacancy Non-CBD Supply & Demand 8.00 32.0% 6.00 24.0% 4.00 16.0% 2.00 8.0% 0.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 -2.00 -8.0% -4.00 -16.0% Absorp Cnst. Vacancy
  32. 32. Status of CRE in Western U.S. Portland - Office CBD Supply & Demand 1.00 24.0% 0.75 18.0% 0.50 12.0% 0.25 6.0% 0.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 -0.25 -6.0% -0.50 -12.0% Absorp Cnst. Vacancy Non-CBD Supply & Demand 2.00 24.0% 1.50 18.0% 1.00 12.0% 0.50 6.0% 0.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 -0.50 -6.0% -1.00 -12.0% Absorp Cnst. Vacancy
  33. 33. Status of CRE in Western U.S. Denver - Office CBD $40.00 25.0% $35.00 20.0% $30.00 15.0% $25.00 10.0% $20.00 5.0% $15.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 Rent Vacancy Non-CBD $30.00 25.0% $26.00 20.0% $22.00 15.0% $18.00 10.0% $14.00 5.0% $10.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 Rent Vacancy
  34. 34. Status of CRE in Western U.S. Seattle - Office CBD Supply & Demand 3.00 24.0% 2.25 18.0% 1.50 12.0% 0.75 6.0% 0.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 -0.75 -6.0% -1.50 -12.0% Absorp Cnst. Vacancy Non-CBD Supply & Demand 1.00 28.0% 0.75 21.0% 0.50 14.0% 0.25 7.0% 0.00 0.0% 01 02 03 04 05 06 07 08 09 10 11 -0.25 -7.0% -0.50 -14.0% Absorp Cnst. Vacancy
  35. 35. Status of CRE in Western U.S. Las Vegas - Office Non-CBD Supply & Demand 6.00 28.0% 4.50 21.0% 3.00 14.0% 1.50 7.0% 0.00 0.0% 2004 2005 2006 2007 2008 2009 -1.50 -7.0% -3.00 -14.0% Absorp Cnst. Vacancy
  36. 36. Price Per Square Foot $- $50.00 $100.00 $150.00 $200.00 $250.00 $300.00 $350.00 Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Status of CRE in Western U.S. Mar-04 Jun-04 Sep-04 Dec-04 Date Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 National Historic Office Prices Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09
  37. 37. Price Per Square Foot $- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 $80.00 $90.00 Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Status of CRE in Western U.S. Jun-04 Sep-04 Dec-04 Date Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 National Historic Warehouse Prices Mar-09 Jun-09
  38. 38. Status of CRE in Western U.S. Summary of Current CRE Markets • If new construction in submarket = Meltdown • Very slow leasing • Rapid rent deflation • Mostly “forced” sales
  39. 39. CRE Forecast Short Term: • Forced sales • Substantial price correction • Massive foreclosures/ cramdowns • CRE default rate should double
  40. 40. CRE Forecast CRE Forecast Long Term: • Market will drop in excess of fundamentals (overshoot) due to forced sales by troubled owners/lenders. • This will create HUGE OPPORTUNITIES FOR THE BRAVE (AND RICH). Cash is king. • 10 years cycle – 5 up, 5 down (we only have 7 year memories, so always overshoot) • New, entrepreneurial companies will sprout
  41. 41. CRE Forecast Protracted/Anemic Recovery • Output gap closed in 3-4 years, CRE follows • 2% annual GDP growth in 2010 • Wall Street flat, removes fuel from corporate growth • CRE debt financing difficult to obtain
  42. 42. CRE Forecast Challenges to Recovery: • Political risk – taxes, changing rules • State budgets • High inventory levels • Permanently decreased corporate footprints (Starbucks) • Special Servicers
  43. 43. CRE Forecast Special Servicers • Inflexible • Can’t work out/extend • Causes foreclosures • Resultant fire sales drop market
  44. 44. CRE Forecast What’s required for a recovery • Profits/Hiring • Continued low IRs/low inflation • Lending • CMBS spreads drop 300 bps • TALF? No closed deals • Consumer Spending
  45. 45. % of Disp Income 19 -2 -1 0 1 2 3 4 5 6 7 8 9 90 19 -I 90 -I 19 II 91 19 -I 91 -I 19 II 92 19 -I 92 -I 19 II 93 19 -I 93 -I CRE Forecast 19 II 94 19 -I 94 -I 19 II 95 19 -I 95 -I 19 II 96 19 -I 96 -I 19 II 97 19 -I 97 -I 19 II 98 19 -I 98 -I 19 II 99 19 -I 99 -I 20 II 00 20 -I 00 -I US Personal Savings Rate 20 II 01 20 -I 01 -I 20 II 02 20 -I 02 -I 20 II 03 20 -I 03 -I 20 II 04 20 -I 04 -I 20 II U.S. Personal Savings Rate 05 20 -I 05 -I 20 II 06 20 -I 06 -I Need consumers to spend again: 8% 20 II 07 20 -I 07 -I 20 II 08 20 -I 08 -I 20 II 09 -I
  46. 46. CRE Forecast Corporate Profits Percentage Change Percentage Change 20% 15% 10% 5% 0% -5% -10% 03 04 05 05 06 07 08 08 99 99 00 01 02 02 4/ 3/ 2/ 1/ 4/ 3/ 2/ 1/ 4/ 3/ 2/ 1/ 1/ 4/ Q Q Q Q Q Q Q Q Q Q Q Q Q Q • U.S. firms end streak of quarterly declines (6 quarters) • No hiring without profits • Profits key to recovery
  47. 47. CRE Forecast Delinquency Rates as % Total Loans 14.00 12.00 Delinquency % Total Loans 10.00 8.00 6.00 4.00 2.00 0.00 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Res. RE CRE Total RE Consumer loans C&I loans Source: Federal Reserve, through 1Q09
  48. 48. CRE Forecast Indicators of Recovery: • Unemployment slowdown • Positive absorption • Continued low interest rates • CMBS spreads narrow to 250 bps from current 450-550 • Sales volume uptick • Equity raises • Public company share prices
  49. 49. CRE Forecast MSCI Barra REIT Index
  50. 50. CRE Forecast The Good News: • Healthcare and infrastructure spending will be bright spot • The employment of the currently unemployed will point way to recovery • Natural economic process • Watch them! They will point the way!

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