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Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
Economic Outlook for 2010 - Dr. Mark Dotzour
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Economic Outlook for 2010 - Dr. Mark Dotzour

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Dr. Mark Dotzour - Chief Economist of Texas A&M University

Dr. Mark Dotzour - Chief Economist of Texas A&M University

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  • 1. Economic Outlook for 2010: Commercial Real Estate Dr. Mark G. Dotzour Chief Economist Real Estate Center @ Texas A&M College Station, Texas Brought to you by NAR Commercial
  • 2. Today’s Topics • The US and global economies and jobs • Lender appetite for real estate loans • Timeline for the CRE recovery • Outlook for CRE prices
  • 3. The U.S. and global economies and the outlook for jobs
  • 4. It’s Not So Complex, It’s Just Big (1) • Banks and other high-powered Wall Street firms made a lot of bad loans for houses, and commercial real estate` • They also made a lot of bad loans for businesses, credit cards, and M&A. • They lost more money than their equity • The losses are so big that the government can’t allow banks to take them all at once
  • 5. It’s Not So Complex, It’s Just Big (2) • They can’t auction the bad assets because it would reveal the true extent of the losses. • So they have “injected capital” so that the banks can amortize their losses over years.
  • 6. Total Net Loan Charge-offs
  • 7. Commercial and Industrial Loans at All Commercial Banks
  • 8. Real Estate Loans at All Commercial Banks
  • 9. U.S. Government Securities at All Commercial Banks
  • 10. “Extend and Pretend” The New Definition of Value – FASB 157 …fair value is the exchange price in an orderly transaction to sell the asset in the market that the reporting entity would transact for the asset that is the most advantageous market.. “Therefore, the definition focuses on the price that would be received to sell the asset, not the price that would be paid to acquire the asset.” “The notion of unobservable inputs is intended to allow for situations in which there is little, if any market activity…” However, the reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort.
  • 11. It’s Not So Complex, It’s Just Big (3) • The Fed will keep rates low for a long time until the banks “earn their way” out of the massive losses they have incurred • Savers are afraid of the market due to the high levels of risk and Madoff-style fraud • Savers buy US Treasury bonds and have created a bubble in that market driving rates low
  • 12. It’s Not So Complex, It’s Just Big (4) • Businesses are hesitant to borrow for expansion right now due to manifold political risks • So banks borrow money from the Fed for free and buy Treasuries with no risk • Rates will stay low, even when the Fed decides to “tighten”. • They will just pay interest on reserves and the banks will loan to the Fed instead of businesses and consumer. That way, CD rates stay low for a long time.
  • 13. Jan-09 Total US Non-Farm Employment Jan-07 Jan-05 Jan-03 Jan-01 Jan-99 Jan-97 Jan-95 Jan-93 Jan-91 Jan-89 Jan-87 Jan-85 Jan-83 Jan-81 140000 120000 100000 80000
  • 14. Small Business Outlook “Planning To Hire People In The Next Six Months” 25 20 Net % of Respondents 15 10 5 0 -5 -10 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 National Federation of Independent Business
  • 15. Corporate Hiring Plans: Next 6 Months Q4-09 Q3-09 Q2-09 Q1-09 More Jobs 19% 13% 6% 7% Less Jobs 31% 40% 49% 71% Updated 12/11/09 Source: Business Roundtable
  • 16. Gross Private Domestic Investment $2,300 $1,900 Billions $1,500 $1,100 $700 $300 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Source: Department of Commerce
  • 17. Unemployed Americans
  • 18. Unemployed for 27 Weeks or More
  • 19. It’s Not So Complex, It’s Just Big (5) • The FDIC funds ran low, so they refilled the gas tank with another $500 billion authorization. • The FDIC is ramping up staffing to handle the volume of failed banks coming up. • Be ready for the stream of distressed assets that will be coming onto the market in the next year.
  • 20. It’s Not So Complex, It’s Just Big (6) • American consumers spent more than they earned (“Fairyland dream”) • They maxed out credit cards and HELOCS • Businesses ramped up staffing and locations to meet Fairyland demand • All levels of government ramped up spending on Fairyland revenues
  • 21. Net Home Equity Extraction Equity Monetized by Refinancing Mortgages $800 $700 $600 $500 $400 Billions $300 $200 $100 $0 -$100 -$200 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
  • 22. Debt Service Payments as a Percent of Disposable Personal Income 15 14 Percent 13 12 11 10 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Source: Federal Reserve Board
  • 23. 1/1/2009 1/1/2007 1/1/2005 Personal Savings Rate 1/1/2003 1/1/2001 Source: Department of Commerce 1/1/1999 1/1/1997 column2 1/1/1995 1/1/1993 1/1/1991 1/1/1989 1/1/1987 1/1/1985 1/1/1983 1/1/1981 10 14 12 8 6 4 2 0 -2 Percent
  • 24. Corporate Profits (With Inventory Valuation Adjustment & Capital Consumption Adjustment) $1,300 $1,200 $1,100 $1,000 $900 Billions $800 $700 $600 $500 $400 $300 $200 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Source: Department of Commerce
  • 25. It’s Not So Complex, It’s Just Big (7) • So the Fed and Treasury are trying to replace the post- Fairyland consumers • Consumers got a tax credit in 2008, but they saved it • They are trying to prop up homeowners that bought a house they couldn’t possibly afford • They are trying to prop up businesses that need to right-size • They are trying to prop up state and local governments that need to right-size
  • 26. The Best Case Scenario Favorable corporate earnings 4Q09 Stocks rise about four months prior to that Consumer confidence rises with stocks More spending results in higher profits Layoffs end by the end of the 2009 “Jobless recovery” in 2010 Higher interest rates and inflation in 2010-11
  • 27. The Worst Case Scenario The securitized lending market doesn’t reopen Bad banks and businesses propped up No price discovery for “toxic” mortgages Political risk for business stays high Business / investors “sit on their hands” Unemployment goes well over 10% Commodity deflation and price deflation
  • 28. State Government Budgets • 21 states have furloughed workers • Some states are letting prisoners go on early release • Hawaii has gone to a 4-day school week • NY tax revenue has dropped 35%; they need $3 billion more budget cuts - Patterson • The loss to the states was about double the stimulus package benefits – Gov Patterson
  • 29. Where Will the Next Bubbles Be? US, Japan, China, Europe all pumping massive quantities of cheap money into the system • China’s stock market. • U.S. Stocks • Commodities • US commercial real estate
  • 30. Timeline for the commercial real estate recovery
  • 31. A Timeline for CRE Recovery 2009 •Prices fall as cap rates revert to 2002 levels •Occupancy falls a job layoffs continue •Rents fall as owners covet tenants •New construction continues to add new supply •Foreclosures increase as refinancing is precluded
  • 32. A Timeline for CRE Recovery 2010 •Prices continue to fall as price discovery continues •Occupancy falls as firms downsize staff •Layoffs end, but downsizing continues for cost savings •Rents fall to compete for smaller tenant base •New projects started in 2007-08 are completed •No new construction projects undertaken
  • 33. A Timeline for CRE Recovery 2011 •More rapid job growth increases absorption rate •No new supply delivered to the market •Rents start to rise as space starts to fill •More foreclosures from properties bought 1H07 •Property values start to increase, anticipating positive absorption and very limited new supply.
  • 34. A Timeline for CRE Recovery 2012 •More rapid job growth soaks up more space •Occupancy rate increases significantly •No new buildings delivered to the market •Prices continue to increase due to rising fundamentals and falling cap rates
  • 35. The Progression of Investors Returning to Commercial RE First buyers will be high net worth investors, buying for their own account. They can afford to miss the bottom and still make good money. Cap rates will be at their highest as buyers seek opportunistic returns. Once prices stabilize at the bottom, then institutional buyers will re-enter the market. Cap rates will start to fall as “core buyers” enter the market.
  • 36. Apartment Comp Advanced Real Estate Services Inc. has paid $23.6 million for the Courts at Artists Village, a 196-unit apartment complex in Santa Ana, Calif. The sales price results in a capitalization rate of 6.7 percent. The property, at 301 West 2nd St., includes 12,222 square feet of ground-floor retail space that is 25 percent leased to restaurants and high-end retailers, and 1,412 sf of storage and office space. The apartment portion is 86 percent occupied. Copyright ©2009 Commercial Real Estate Direct, a service of FM Financial Publishing LLC. All rights reserved
  • 37. Commercial Real Estate Value Trends Blackstone marked down its real estate portfolio by 30%in 4Q08 and another 19% in 1Q09. WSJ 5/7/2009 A Goldman Sachs biggest private real estate equity fund called Whitehall Street Global Real Estate LP 2007 invested $3.7B between May 2007 and Aug. 2008 in a portfolio of casinos, hotels and office buildings. They have since written down those assets by $2.1B and have issued a $1B capital call to LP's to cover some debt. . WSJ 5/15/2009
  • 38. CRE Value Trends • Opportunistic funds are down 52% according to the NCREIF/Townsend fund indices. • Core funds are down 36.3% from their peak by the end of 3Q09. Source: Real Estate Law and Industry, published by the Bureau of National Affairs.
  • 39. TIAA-CREF Real Estate Fund is down 37.4% from peak on April 17, 2008 Source: TIAA-CREF.org
  • 40. MIT Transactions-Based Index shows prices off 36.5% from peak Prices actually increased 4.4% in 3Q09. Source: MIT Center for Real Estate
  • 41. CRE Value Trends • MIT Transaction-Based Index shows property values have fallen 39.2% from their peak by the end of June, 2009. • Moody’s/REAL CPPI shows property values down 40.6% as of the end of August. • NACREIF Property Index indicates that it has recognized less that two-thirds of the coming right-down in property values. Source: Real Estate Law and Industry, published by the Bureau of National Affairs.
  • 42. CRE Value Trends • MIT Transaction-Based Index shows property values have fallen 39.2% from their peak by the end of June, 2009. • Moody’s/REAL CPPI shows property values down 40.6% as of the end of August. • NACREIF Property Index indicates that it has recognized less that two-thirds of the coming right-down in property values. Source: Real Estate Law and Industry, published by the Bureau of National Affairs.
  • 43. THANK YOU FOR ATTENDING! COMMERCIAL EDUCATION http://www.realtor.org/commercial/commercial_education FREE NAR COMMERCIAL WEBINARS COMMERCIAL AFFILIATE EDUCATION Dr. Mark G. Dotzour Rebecca A. Vesconte Chief Economist Manager, Member Development Real Estate Center, Texas A&M Email: rvesconte@realtors.org Email: dotzour@tamu.edu www.REALTOR.org/commercial www.recenter.tamu.edu 800-874-6500

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