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An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
An Evolution Of The Credit Crisis
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An Evolution Of The Credit Crisis

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This was a presentation put on by Tim Hatlestad, CCIM at the Prescott Area Association of Realtors. …

This was a presentation put on by Tim Hatlestad, CCIM at the Prescott Area Association of Realtors.

The slides show the timeline are very interesting.

Published in: Real Estate, Technology, Business
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  • 1. 5/8/2009 A Brief Evolution of the Coming Commercial g Real Estate Crisis Tim Hatlestad, CCIM RE/MAX Achievers and RE/MAX Commercial Investment © Tim Hatlestad, CCIM  Tim@InvestAZ.com 1
  • 2. 5/8/2009 How we got in this mess 2 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 2
  • 3. 5/8/2009 Yield Curve Jun‐02 Jun‐03 8.00 Fed Funds Rate: 1.75 7.00 11/6/2002: to 1.25 6.00 6/25/2003: to 1.00 5.00 4.00 3.00 2.00 1.00 0.00 3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr © Tim Hatlestad, CCIM  Tim@InvestAZ.com 3
  • 4. 5/8/2009 Yield Curve Jun‐02 Jun‐04 8.00 6/25/2003: to 1.00 7.00 6/30/2004: to 1.25 6.00 5.00 4.00 3.00 2.00 1.00 0.00 3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr © Tim Hatlestad, CCIM  Tim@InvestAZ.com 4
  • 5. 5/8/2009 Yield Curve Jun‐02 Jun‐05 8.00 6/30/2004: to 1.25 7.00 6/30/2005: to 3.25 (8x.25) 6.00 5.00 4.00 3.00 2.00 1.00 0.00 3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr © Tim Hatlestad, CCIM  Tim@InvestAZ.com 5
  • 6. 5/8/2009 Yield Curve Jun‐02 Jun‐06 8.00 6/30/2005: to 3.25 7.00 6/29/2006: to 5.25 (8x.25) 6.00 5.00 4.00 3.00 2.00 1.00 0.00 3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr © Tim Hatlestad, CCIM  Tim@InvestAZ.com 6
  • 7. 5/8/2009 Yield Curve Jun‐02 4/2/07 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 7 3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr © Tim Hatlestad, CCIM  Tim@InvestAZ.com 7
  • 8. 5/8/2009 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 8
  • 9. 5/8/2009 ARMLS Total Number of Active Listings - Single Family and Condominium When did the Phoenix/Scottsdale 50,000 Residential Market Peak? 45,000 9 40,000 35,000 30,000 25,000 25 000 20,000 15,000 10,000 5,000 0 Jan-02 Mar-02 Jul-02 Sep-02 Nov-02 Jan-03 Mar-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 Jul-06 Sep-06 Nov-06 Jan-07 May-02 May-03 May-04 May-05 May-06 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 9
  • 10. 10 0% -10% 10% 20% 30% 40% 50% 60% Jan-03 Mar-03 May-03 Jul-03 Sep-03 Nov-03 Jan-04 Mar-04 May-04 © Tim Hatlestad, CCIM  Tim@InvestAZ.com Jul-04 Sep-04 Nov-04 Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 Year over Year Median Sale Price Delta May-06 Jul-06 Sep-06 Nov-06 Jan-07 10 5/8/2009
  • 11. 5/8/2009 Nationwide Commercial Transaction Volume  When did the Phoenix/Scottsdale(Trailing 12 Months in Millions) CCIM Institute Investment Trends Quarterly (CCIM & RERC) Commercial Market Peak? $600,000  11 $500,000  $400,000  $300,000  $200,000  $100,000  $‐ Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Office Industrial Retail Multi‐Family Hotel © Tim Hatlestad, CCIM  Tim@InvestAZ.com 11
  • 12. 5/8/2009 Nationwide Cap Rates by Property Type CCIM Institute Investment Trends Quarterly (CCIM & RERC) Weighted Average Trailing 12 Months Data 8.0% 12 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 Office Industrial Retail Multi‐Family © Tim Hatlestad, CCIM  Tim@InvestAZ.com 12
  • 13. 5/8/2009 Relative Return:  Cap Rate Spread to 5‐Year Treasury CCIM Institute ITQ (CCIM & RERC) Cap Rate: Weighted Average Trailing 12 Months Data, Q End Treasury 4.5% Buy 4.0% 4 0% Low 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% Sell 0.5% High 0.0% Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008 13 Office Industrial Retail Multi‐Family © Tim Hatlestad, CCIM  Tim@InvestAZ.com 13
  • 14. 5/8/2009 Fannie and Freddie buy $81B in 03/00 Mortgage subprime NASDQ defaults securities peaks at commence 5049 Home Declining ownership Dot Com interest hits high Bubble rates of 69.2% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Extremely Low Interest Rates Dramatic Housing increase in prices begin home prices to fall 43% of first time homebuyers use “no money down” loans 14 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 14
  • 15. 5/8/2009 Average US home 12/16 prices 20% less than Fed Funds drop to in 2006 0.00 – 0.25% 02/25 Collapse of AIG in talks for 3rd 09/17 Bear Sterns bailout $85B bailout Household debt at 12MM of AIG 127% of annual Homeowners 02/27 disposable income have negative US acquires control i tl 09/15 equity of Citigroup Lehman Brothers declares bankruptcy 07/11 11/10 Oil tops $147 a AIG gets another barrel $150B 2008 2009 J F M A M J J A S O N D J F M 8MM 09/15 02/17 07/11 homeowners BofA announces $782B American $32B have negative purchase of Merrill $307B Recovery and IndyMac Bank placed equity Lynch WaMu Reinvestment Act in conservatorship h seized by signed into law 09/08 OTS 10/03 Federal takeover of Fannie $700B Emergency Mae and Freddie Mac Economic Stabilization Act of 2008 (TARP) signed into law 15 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 15
  • 16. 5/8/2009 Bank Capitalization Requirements The Capital Ratio is the percentage of a bank’s capital to its risk weighted assets risk-weighted assets. 16 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 16
  • 17. 5/8/2009 Bank Capitalization Requirements Capitalized •Adequately Tier I capital ratio of at least 4% • Combined Tier I and Tier II capital ratio of at least 8% • Capitalized •Well Tier I capital ratio of at least 6% • Combined Tier I and Tier II capital ratio of at least 10% • 17 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 17
  • 18. 5/8/2009 Mark to Market Requirements Soft Market with few Buyers $300k $300k $300k $300k $300k Home Home Home Home Home 18 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 18
  • 19. 5/8/2009 Mark to Market Requirements Soft Market with few Buyers Catastrophe forces “fire sale” $300k $300k $300k $300k $150k Home Home Home Home Home 19 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 19
  • 20. 5/8/2009 Mark to Market Requirements Soft Market with few Buyers Catastrophe forces “fire sale” All assets “marked to market” $150k $150k $150k $150k $150k Home Home Home Home Home 20 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 20
  • 21. 5/8/2009 Actual Mark to Market Example Expected Loss vs. Mark to Market Write-Down •Bank holds a pool of MBS totaling $3.65 billion •Underlying loans are NOT subprime •Generally good quality, 17 months of seasoning, original FICO score of 749 •Subordinated collateral of $172 million exceeds worst-case loss projections Losses on MBS Held By Bank (in millions) $913MM $100MM $1.8MM 21 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 21
  • 22. 5/8/2009 Mark to Market Accounting “MTM accounting has destroyed well over $500 billion of capital in our financial system. Because p y banks are able to lend up to ten times their capital, MTM accounting has also destroyed over $5 trillion of lending capacity.” William M. Isaac, Former Chairman, FDIC 22 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 22
  • 23. 5/8/2009 Glass-Steagall Act of 1933 the FDIC •Established •Separated commercial banks from investment banks S d lb k f bk 23 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 23
  • 24. 5/8/2009 Repeal of the Glass-Steagall Act Act of 1999 •Gramm-Leach-Bliley 24 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 24
  • 25. 5/8/2009 Traditional Lender Model Deposits Financing Depositors Lender Borrower Interest Debt Service Loan is Retained 25 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 25
  • 26. 5/8/2009 “New” Lender Model Deposits Financing Deposits Lender Borrower Interest Debt Service RMBS Loan is Sold CMBS 26 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 26
  • 27. 5/8/2009 Residential Mortgage Backed Securities Waterfall Low Risk Low Yield Prime Prime Prime $$$$ Tranche A-1 A-1 A-1 Tranche $$ Sub- Sub- Sub- $ High Risk Tranche Prime Prime Prime High Yield 27 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 27
  • 28. 5/8/2009 Performing Banking Relationship Real Estate Bank Fully Property Capitalized Value Core Capital 20% Equity (Equity 10%) Other Bank $0 Loan Assets: Loss Reserves 80% Debt Stocks (Performing) Bonds Loans Real Estate 28 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 28
  • 29. 5/8/2009 Non-Performing Banking Relationship Real Estate Bank Under Property Capitalized Value Core Capital No Equity (Equity <10%) Other Bank $$ Loan Assets: Loss Reserves 100% Debt Stocks (Non-Performing) Bonds Loans Real Estate 29 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 29
  • 30. 5/8/2009 Foreclosure and Real Estate Owned Real Estate Bank Under Original Capitalized Value Core Capital (Equity <10%) Other Bank Appraised $$$ Loan Assets: Value Loss Reserves Stocks Foreclosed Real Bonds Estate Loans Real Estate 30 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 30
  • 31. 5/8/2009 “Broken” Lender Model “New” Deposits Financing Deposits Lender/Servicer Borrower Interest Debt Service RMBS Loan is Sold CMBS 31 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 31
  • 32. 5/8/2009 CMBS Issuances      ($Bil.) 45.0 ($Bil.) 6 per. Mov. Avg. (($Bil.)) 40.0 35.0 30.0 25.0 20.0 15.0 10.0 10 0 5.0 0.0 32 Mar‐99 Mar‐00 Mar‐01 Mar‐02 Mar‐03 Mar‐04 Mar‐05 Mar‐06 Mar‐07 Mar‐08 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 32
  • 33. 5/8/2009 Subprime Mortgage Crisis Housing Market Cause of Excess Housing Inability Negative Mortgage the Housing Prices to Effects on Defaults & Housing Foreclosure Inventory Decline Refinance Economy Bubble •Housing bubble •Poor lending and •Home bursts borrowing building •Household decisions declines wealth declines •ARM adjustments •Rising job Mo gage Mortgage losses l Cash Flow •Household Declines wealth declines 33 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 33
  • 34. 5/8/2009 Subprime Mortgage Crisis Mortgage Cash Flow Declines Financial Market •Downward Negative Liquidity Bank pressure on Bank Bank Effects on Crunch for Capital business Failures Losses investments Depleted Economy Businesses •Increasing unemployment •Stock market •Harder to get •Washington Mutual •Loss on mortgages retained declines loans •Wachovia •Loss on MBS •Reduced •Higher interest •Lehman Brothers •Impact of Mark to Market household rates •IndyMac •High bank debt levels wealth •Stiff Stiff •Many others M th underwriting •Many more to come 34 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 34
  • 35. 5/8/2009 Subprime Mortgage Crisis Negative Effects on Government & Industry Economy Responses Central Fiscal Home Federal Systemic Bank Stimulus Owner Bailouts Rescue Actions Package Assistance •Lower interest •Economic •Hope Now •Fannie & •Emergency rates Stimulus Act of Alliance Freddie Economic •Increased 2008 •Housing & •Bear Sterns Stabilization Act lending Economic •AIG (TARP) Recovery A t of R Act f •Citigroup Citi •Public-Private P bli P i t 2008 Investment Program •Global bank recapitalization 35 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 35
  • 36. 5/8/2009 The government’s response 36 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 36
  • 37. 5/8/2009 Comparing Costs of the Credit Crisis Government Expenditure Original Cost Inflation Adjusted Cost Marshal Plan $12.7 billion $115.3 billion Louisiana Purchase $15 million $217 billion Race to the Moon $36.4 billion $237 billion S&L Crisis $153 billion $256 billion Korean War $54 billion $454 billion The New Deal $32 billion $500 billion (est.) Invasion of Iraq $551 billion $597 billion Vietnam War $111 billion $698 billion NASA $416.7 billion $851.2 billion TOTAL : $3.92 TRILLION Source: Bianco Research 37 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 37
  • 38. 5/8/2009 How Big is the Response? Date D Program P Allocated All d Spent S December 2007 Term Auction Facility $600 billion $468.6 billion February 2008 Economic Stimulus Act of 2008 $168 billion $168 billion March 2008 Bear Sterns Bailout $29 billion $26.2 billion March 2008 Term Securities Lending Facility $200 billion $88.6 billion March 2008 Primary Dealer Credit Facility n/a $61.3 billion May 2008 Student Loan Guarantees $130 billion $9 billion September 2008 Fannie Mae and Freddie Mac Bailout $400 billion $59.8 billion September 2008 Foreign Exchange Dollar Swaps Unlimited $327.8 billion October 2008 FHA Housing Rescue $320 billion $20 billion+ October 2008 Auto Industry Energy Efficiency Loans $25 billion $0 October 2008 Troubled Assets Relief Program $700 billion $323.4 billion Source: CNNMoney.com 03/29/09 38 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 38
  • 39. 5/8/2009 How Big is the Response? Date D Program P Allocated All d Spent S October 2008 Money Market Guarantees $659 billion $15 billion October 2008 Commercial Paper Funding Facility $1.4 trillion $241.3 billion November 2008 Unemployment Benefit Extensions $9 billion $8 billion November 2008 Citigroup Loan Loss Backstop $245 billion $0 November 2008 Term Asset-Backed Securities Loan $1 trillion $4.7 billion Facility (TALF) November 2008 GSE Mortgage-Backed Securities $1.25 trillion $236.2 billion Purchases November 2008 GSE Debt Purchases $100 billion $50.4 billion November 2008 FDIC Temporary Liquidity Guarantee $1.5 $1 5 trillion $297.1 $297 1 billion 2008 FDIC Bank Takeovers n/a $18.5 billion February 2009 Foreclosure Prevention $25 billion $0 Source: CNNMoney.com 03/29/09 39 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 39
  • 40. 5/8/2009 How Big is the Response? Date D Program P Allocated All d Spent S January 2009 Bank of America Loan-Loss backstop $97 billion $0 January 2009 Credit Union Deposit Insurance $80 billion $0 Guarantees January 2009 US Central Federal Credit Union $1 billion $1 billion Capital Injection p j February 2009 American Recovery and Reinvestment $787.2 billion n/a Act March 2009 AIG $182 billion 129.3 billion March 2009 US Government Bond Purchases $300 billion $7.5 billion 2009 FDIC Bank Takeovers n/a $1.9 billion TOTAL: $10.5 TRILLION $2.6 TRILLION Does not include $500 billion - $1 trillion for Public-Private Investment Program Source: CNNMoney.com 03/24909 40 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 40
  • 41. 5/8/2009 Commercial Property Outlook 41 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 41
  • 42. 5/8/2009 Office in job market continue to reduce demand. •Losses •Vacancies to rise to 16.7% in 3Q09 Vacancies 16 7% 3Q09. •Annual rent is expected to decline 4.2% in 2009. •Negative absorption of (77.4) million SF in 57 markets. •> Sublease Space to compete with Direct Space Source: NAR Commercial Real Estate Outlook , 12/08 42 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 42
  • 43. 5/8/2009 43 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 43
  • 44. 5/8/2009 Industrial demand for exports starting to impact industrial. •Reduced •Vacancies are forecast to rise to 12.2% in 3Q09 Vacancies 12 2% 3Q09. •Annual rent is estimated to decline 4.1% in 2009. •Negative absorption of (148.1) million SF in 58 markets. •Very little new construction is anticipated. Source: NAR Commercial Real Estate Outlook , 12/08 44 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 44
  • 45. 5/8/2009 45 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 45
  • 46. 5/8/2009 Retail consumer spending has hit retail hard. •Sluggish •Vacancies will rise from 9.8% to 13 4% in 3Q09 Vacancies 9 8% 13.4% 3Q09. •Average rents expected to fall 9.0% in 2009. •Negative absorption of (49.8) million SF in 2009. •Very limited new construction. Source: NAR Commercial Real Estate Outlook , 12/08 46 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 46
  • 47. 5/8/2009 47 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 47
  • 48. 5/8/2009 Investments and investment fundamentals are out of balance. •Financing •Some areas experiencing modest stability. Some •Risk premiums are raising interest rates and lowering prices. •Expect lower loan-to-value ratios. •Increasing debt service coverage ratios. •Shorter loan durations. •Heightened tenant scrutiny and underwriting. Source: NAR Commercial Real Estate Outlook , 12/08 48 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 48
  • 49. 5/8/2009 49 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 49
  • 50. 5/8/2009 50 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 50
  • 51. 5/8/2009 Transaction Opportunities (IRS, Treasury, banks, others) •Auctions L •Leasing bids •Sealed •Traditional brokerage •Loan acquisitions Loan •Private lending Source: NAR Commercial Real Estate Outlook , 12/08 51 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 51
  • 52. 5/8/2009 OPPORTUNITIES CCIM 101 Financial Analysis Course • Scottsdale Area Association of REALTORS® • August 10-14, 2009 • Go To CCIM.com to Register • 52 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 52
  • 53. 5/8/2009 Questions & Answers Tim Hatlestad, CCIM RE/MAX Achievers and RE/MAX Commercial Investment Tim@InvestAZ.com 480-922-2850 53 © Tim Hatlestad, CCIM  Tim@InvestAZ.com 53

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