Presented By Denise Rowe Stake, Thomas Kelley, and Frank Sataline.
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Presented By Denise Rowe Stake, Thomas Kelley, and Frank Sataline.

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  • Impact of the credit crunch is most evident in transactions activity, and the availability of financing for acquisitions and new construction. Per our data from Real Capital Analytics, Transactions activity is down 60% to 70% over the past year Pricing for quality assets remains sticky, and sellers in most cases are not stressed and may prefer to hold properties off the market for now Few closed transactions mean there’s still not a lot of clarity in pricing We continue to see Tighter underwriting standards Fewer lenders in the market Virtually no commercial construction financing for spec projects – which to my view is a good thing by limiting oversupply. Trends that became evident one year ago and still very much in play are A Flight to quality by investors, with A class assets in top tier markets seeing very little repricing Plenty of pent up capital on the sidelines, both institutional and foreign, looking for investment opportunities Some movement in cap rates – generally 50 to 100 basis points, but very few actual transactions to validate an overall trend
  • Impact of the credit crunch is most evident in transactions activity, and the availability of financing for acquisitions and new construction. Per our data from Real Capital Analytics, Transactions activity is down 60% to 70% over the past year Pricing for quality assets remains sticky, and sellers in most cases are not stressed and may prefer to hold properties off the market for now Few closed transactions mean there’s still not a lot of clarity in pricing We continue to see Tighter underwriting standards Fewer lenders in the market Virtually no commercial construction financing for spec projects – which to my view is a good thing by limiting oversupply. Trends that became evident one year ago and still very much in play are A Flight to quality by investors, with A class assets in top tier markets seeing very little repricing Plenty of pent up capital on the sidelines, both institutional and foreign, looking for investment opportunities Some movement in cap rates – generally 50 to 100 basis points, but very few actual transactions to validate an overall trend
  • COMPLETE - JML
  • COMPLETE - LONSKI
  • COMPLETE - LONSKI

Presented By Denise Rowe Stake, Thomas Kelley, and Frank Sataline. Presented By Denise Rowe Stake, Thomas Kelley, and Frank Sataline. Presentation Transcript

  • GLOBAL FINANCIAL CRISIS IMPACT ON COMMERCIAL REAL ESTATE University of Connecticut Center for Real Estate Alumni Panel Discussion November 19, 2008
  • Alumni Presenters
    • Denise Rowe Stake
      • Vice President, Portfolio Management
      • Cornerstone Real Estate Advisors
      • UConn Class of 1990 (BS), 1997 (MA)
    • Thomas Kelley
      • Managing Director
      • Babson Capital Management, LLC
      • UConn Class of 1977 (BS)
    • Frank Sataline
      • Senior Managing Director
      • Cigna Investment Management
      • UConn Class of 1983 (BS), 1998 (MBA)
  • Real Estate Equity Denise Rowe Stake
  • Why Invest in Real Estate? September 30, 2008 Investment Total Returns Past performance is a bsolutely no guarantee of future performance, especially in the short-term and maybe not in the long-term
  • Top 200 Pension Fund Allocations Real Estate Allocation to Total Assets Uh-oh! * 2008 is estimated based on a 20% decline in total assets and constant real estate dollars allocated Source: Pensions and Investments, UBS Research, Cornerstone Research
  • Commercial Real Estate Sales Activity Monthly Sales Volume by Property Type Source: Real Capital Analytics, Cornerstone Research 8-28-2008 Portfolio deals, REIT buyouts fueled peak activity in 2007, transactions fall to 5-year low in 2008
  • Commercial Real Estate Valuation Cap Rates Disconnect Source: NCREIF, Cornerstone Research 8-28-2008
    • Office: 2008Q3: 13.5% vacancy, up 30 basis points for quarter
      • Suburban vacancy up 40bp to 15.5%, CBD steady at 9.7%
      • Financial sector job cuts will push up CBD vacancy
    • Industrial: 2008Q3 10.7% availability, up from 10.3% in Q2
      • Supply should react quickly to slower demand
    • Multifamily: 94.3% occupancy in Q3, down from 94.4% in Q2
      • Reflecting weak employment and shadow supply in some markets
    • Hotels: Full Service Chain occupancy near 70% but is stressed
      • Leisure/transient business travel were sharply off this summer
      • Diminished airlift and corporate travel cuts will challenge 2009
    • Retail: Most challenged sector near-term
      • Weak October retail sales a precursor to disappointing holiday sales
      • Accelerated retail chain consolidation hurts marginal players and locations
    Real Estate Fundamentals
  • Real Estate Debt Thomas Kelly
  • Increasing Leverage, Decreasing Coverage through 2007 Vintage Source: Rating Agency Presales (**) Fitch Stressed DSCR is calculated based by using a blend of the Fitch term DSCR (Fitch NCF/Actual Debt Service) and Fitch constant DSCR (Fitch NCF/Fitch Constant Debt Service) (****) Moody’s Stressed DSCR = Moody's NCF / 9.25% Stressed Rate X Loan Balance (***) Moody’s Stressed LTV = Current Balance / (Moody's NCF / Moody's Cap Rates) (*) Fitch Stressed LTV = Current Balance / (Fitch NCF / Fitch Stressed Cap Rates) This presentation is provided for informational purposes only and should not be considered investment advice or an offer for a particular security or securities. The views and opinions expressed by the speaker are his own and do not necessarily represent the views of Babson Capital Management, LLC.  Please consult your tax or financial advisor for additional information concerning your specific situation
  • Subordination Levels As of 10/4/06 12.01% 9.98% 7.45% 4.19% 2.32% 1.50% (*) 10-Yr AAA subordination level is derived from the junior ‘AAA’ tranche to facilitate comparisons to recent structural changes. As of 10/9/07 12.08% 10.04% 7.59% 4.21% 2.45% 1.64% Source: Rating Agency Presales As of 10/9/08 13.55% 11.31% 8.56% 5.22% 3.14% 2.22% This presentation is provided for informational purposes only and should not be considered investment advice or an offer for a particular security or securities. The views and opinions expressed by the speaker are his own and do not necessarily represent the views of Babson Capital Management, LLC.  Please consult your tax or financial advisor for additional information concerning your specific situation
  • Loan Maturity Risk This presentation is provided for informational purposes only and should not be considered investment advice or an offer for a particular security or securities. The views and opinions expressed by the speaker are his own and do not necessarily represent the views of Babson Capital Management, LLC.  Please consult your tax or financial advisor for additional information concerning your specific situation
  • This presentation is provided for informational purposes only and should not be considered investment advice or an offer for a particular security or securities. The views and opinions expressed by the speaker are his own and do not necessarily represent the views of Babson Capital Management, LLC.  Please consult your tax or financial advisor for additional information concerning your specific situation
  • This presentation is provided for informational purposes only and should not be considered investment advice or an offer for a particular security or securities. The views and opinions expressed by the speaker are his own and do not necessarily represent the views of Babson Capital Management, LLC.  Please consult your tax or financial advisor for additional information concerning your specific situation
  • Real Estate Portfolio Management Frank Sataline
  • Overview
      • Answer the question, “Why real estate?”
      • How real estate fits into CIGNA’s investment strategies and portfolio
      • Where do we go from here?
  • Why Real Estate?
    • PPR’s August ’08 Publication:
    • Why Real Estate Now ?
    • Long-term considerations
      • Market neutral
      • Return enhancement
      • Risk reduction
      • Cash flow
      • Hedging
  • Investment Strategy (Fixed Income)
      • Maximize after tax returns
      • Produce high/stable investment income
      • Minimize impact of credit losses
      • Maintain appropriate asset liability mgmt.
      • Pursue primarily through “buy and hold”
      • Bottom-up, relative value driven investment selection
      • Portfolio diversification
      • Emphasize private asset classes
  • Risky Asset Investment Strategy
    • Maximize economic returns
    • Optimize risk-adjusted net investment income
    • Leverage CIM’s underwriting and sourcing capabilities in core asset classes
  • Real Estate in CIGNA’s Portfolio?
    • Employee Benefits Portfolio
      • $15.6 billion
    • Predominantly a fixed income investor
      • plus real estate mezzanine and equity and private mezzanine and private equity
    • Commercial mortgages
      • $3.5 billion or 22% of assets - at target
    • Equity real estate
      • $.4 billion or 2.5% of assets - at only 1/3 of target
  • Where Do We Go From Here?
    • Commercial real estate is a lagging indicator
    • Prices going lower through ’09, volume off 75-80% YTD!
    • Searching for a bottom. Hit it in 2010?
    • Down 20-30% from peak
    • What’s attractive now? Best relative value?
      • Cash (i.e. capital preservation)?
      • High yield public bonds
      • AAA CMBS, REIT bonds?
      • Real estate debt vs. equity
  • QUESTIONS? Thank you alumni speakers. All are invited to a reception! University of Connecticut Center for Real Estate Alumni Panel Discussion November 19, 2008