the BRIEFING: September 2013


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The Briefing is a monthly piece by Transwestern that discusses the national economy, capital markets and real estate outlook at a glance. It is an aggregation by Tom McNearney, Transwestern's chief investment officer, of other articles and reports.

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the BRIEFING: September 2013

  2. 2. THE ECONOMY The Federal Reserve’s surprise decision to delay, for at least a month, its “tapering” plan shows a lack of confidence in the economy going into 4Q13. THE ENERGY BOOM CONTINUES! ƒƒ Overall job growth and retail sales continue to be anemic ƒƒ Corporate earnings growth has also moderated in the mid-single digit range ƒƒ Overall economic climate will continue to restrain hiring, business investment and retail sales in the near term Follow us | @Transwestern $12.8B 2.57M Will be invested in chemical plants in 2015, compared to $4.8 bn this year Barrels of oil Texas produced a day in 2013 compared to 1.14 million in 2010 3.9M 40% Direct and indirect jobs will be created by 2025 Increase in U.S. oil and gas job growth since 2007 vs. 1% overall private industry job growth
  3. 3. THE ECONOMY, cont. Banks are stronger than ever, the auto industry has become a major U.S. economic engine and the European economy is finally showing some signs of a thaw. The yield on 10-year Treasuries has receded back below 2.65%. ƒƒ FedEx, often seen as a bellwether, has lowered earnings expectations for the coming year by 20% ƒƒ 30-year mortgages have spiked as high as 4.80% from 3.60% at the end of April; now approximately 4.35% ƒƒ In the face of rising rates, the Mortgage Bankers Association reported mortgage applications dropped 13.5% the week of Sept. 6 ƒƒ Refinancings are down are at the lowest level since 2009, 71% from peak in May ƒƒ Home purchase applications have also fallen, but are still running 7% ahead of last year Follow us | @Transwestern
  4. 4. THE ECONOMY, cont. ƒƒ Recent improvements in rates of about 50 bps due to postponement of “tapering” should provide some relief in underwriting housing affordability ƒƒ Big companies increasingly closing their own health plans and moving retirees to exchanges created by the 2010 Affordable Care Act ƒƒ Basically transferring cost of healthcare risk to the employee ƒƒ Similar to shift from defined benefit pension plans to 401(k) plans ƒƒ About 44$ of companies plan to stop administering health plans for former employees over the next two years Follow us | @Transwestern
  5. 5. CHALLENGES As fears of tapering strengthened the dollar, foreign capital started fleeing developing countries — an estimated $400 bn — causing some fear of a replay of the Asian currency crisis of 1997-98. ƒƒ Governments are rushing to shore up their currency ƒƒ Impact has been deep and broad: Indonesia, Thailand, the Philippines, India,Brazil, Turkey, South Africa, Russia, Venezuela, Ukraine ƒƒ Emerging markets now represent approximately 50% of the world economy ƒƒ Zero rates and quantitative easing were the cause of the dollar liquidity flooding these countries ƒƒ Biggest reason why net capital flows into emerging markets doubled from $4 trillion to $8 trillion after 2008 as investors searched high and low for yield Follow us | @Transwestern
  6. 6. CAPITAL MARKETS Investors continue to be hungry for returns after several years with benchmark rates near zero. Despite the Fed’s recent postponement of “tapering,” there is a general anticipation of higher interest rates to come. ƒƒ Short run 10-year Treasury rates have fallen below 2.65%, providing some relief from an earlier spike to almost 3% ƒƒ Led to record bond sales by investment-grade companies and has also resulted in a flight from emerging market bond and stock markets ƒƒ Investment-grade companies sold $145.7 bn of corporate bonds in September, the largest amount in the 18 years that records have been kept ƒƒ Buoyed by largest corporate bond deal on record: Verizon Communications’ $49 billion bond sale Follow us | @Transwestern
  7. 7. CAPITAL MARKETS, cont. ƒƒ In light of uncertainty, everything seems to be going through a re-pricing ƒƒ However, even at 3% the 10-year Treasury would be priced in the historically low range ƒƒ 10-year Treasury rates vs. inflation suggests a 10-year Treasury rate will be between 3% and 4% ƒƒ 55-year, 10-year Treasury average note about 2% over inflation ƒƒ Current inflation 0.1% monthly CPI and 1.53% annualized ƒƒ Outlook for inflation over the coming decade has come down from 2.6% to 2.1% Follow us | @Transwestern
  8. 8. COMMERCIAL REAL ESTATE CRE continues to provide an attractive return to both institutional and non-institutional investors. ƒƒ Rotation out of core into increasing tolerance for risk and search for higher yield ƒƒ Opportunistic/value-add strategies accounted for 43% of commitments in 2Q12 vs. 62% in 2Q13 ƒƒ Pledges to core strategies fell from 50% to 28% over the same period ƒƒ Overall pledges are flat at $13.5 bn for 1H13 vs. 1H12 ƒƒ 1Q13 commitments were up 23%, but 2Q13 commitments dropped significantly ƒƒ 182 commitments, up from 144 a year earlier ƒƒ Shift away from separate accounts back to closed-end commingled funds, which increased to 55% of first-half commitments from 44% for full-year 2012 Follow us | @Transwestern
  9. 9. COMMERCIAL REAL ESTATE, cont. CMBS rally with nearly $5 bn sold in first two weeks of August after a plunge in CMBS pricing slowed issuance in June and July to a standstill. Projections of total issuance for CMBS in 2013 are being revised downward from $100 bn to $70 bn. ƒƒ Prequin reports that AUM for the private equity industry has reached an all-time high of $335 bn total of invested or dry powder ƒƒ A 57% increase from $214 bn reported Dec. 2009 ƒƒ Dry powder has risen to $98 bn from $79 bn in Dec. 2012 ƒƒ AAA CMBS trading at 105 bps over swaps notes after rising to more than 125 bps ƒƒ The benchmark class of the recent Cantor-Deutsche deal priced at 128 bps over swaps well above the 72 bps low this year ƒƒ The week ending Sept. 20 saw five CMBS offerings totaling $3.8 bn ƒƒ The latest, a $1.1 bn offering by Ladder Capital, Deutsche Bank and Natixis is expected to price 103 bps over swap rates Follow us | @Transwestern
  10. 10. COMMERCIAL REAL ESTATE, cont. ƒƒ REITs remain highly active in M&A ƒƒ American Tower Corp $4.8 bn merger with Global Tower Corp ƒƒ Parkway Properties buys Thomas Properties for $1.2 bn with meaningful recap from TPG ƒƒ Cousins buys $1.1 bn portfolio in Texas ƒƒ Cabot announces sale of virtually all its $1.5 bn assets to Liberty Property Trust ƒƒ Blackstone is listing Hilton for an IPO and is also expected to list LaQuinta ƒƒ GE has agreed to sell 80 multifamily assets valued at $2.7 bn to Blackstone ƒƒ Regency Centers to sell seven shopping centers to Blackstone, $332 mm value ƒƒ Westfield sale of $1.6 bn secondary-market shopping malls to Starwood Capital ƒƒ Brookfield to buy IDI/Industrial Development International from Kajima for $1.1 bn ƒƒ ARC/American Realty International entities acquires 300 net-leased properties from Inland for $2.3 bn Follow us | @Transwestern
  11. 11. the BRIEFING THE NATIONAL ECONOMY AT A GLANCE the BRIEFING is an aggregation by Tom McNearney, Transwestern chief investment officer, of other articles and reports. Tom leads Transwestern’s capital market efforts for development and investment nationwide. Tom also serves on the firm’s investment committee and board of directors, and he directs the execution and expansion of the firm’s principal investment activities across the country. DISCLAIMER Copyright © 2013 Transwestern. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. The information contained in this report was gathered by Transwestern from various sources believed to be reliable. Transwestern, however, makes no representation concerning the accuracy or completeness of such information and expressly disclaims any responsibility for any inaccuracy contained herein.