the BRIEFING: January 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: January 2013

  2. 2. THE ECONOMY Although many thought 2012 would be the year that the global economy finally recovered some vigor, the three largest economies, the U.S., China and Japan, all struggled again in 2012.ƒƒ Recovery going to be choppy and uneven due to excessive debt, anemic hiring and partisan bickeringƒƒ Record-low interest rates, lower gas prices, a Fed now injecting $85 bn per month in stimulus, a weak dollar and continued low inflation rate – should broaden the economy and make it less susceptible to shocks and reversalƒƒ The International Monetary Fund estimates the global economy grew 3.3% in 2012, down from 3.8% in 2011 and 5.1% in 2010.
  3. 3. THE ECONOMY, cont.However, despite considerable headwinds, the U.S. economy keptrocking along and showed very real, albeit moderate, gains in both jobgrowth and GDP.ƒƒ Initial December employment number 155,000ƒƒ U.S. is neck-and-neck with Russia and closing in on Saudi Arabia in crude oil production; on pace to top Saudi Arabia within 2 years ƒƒ U.S. producing 10.14 million barrels a day vs. Saudi Arabia at 11.15 million barrels ƒƒ Biggest one-year gain in production since 1951 due to horizontal drilling and fracking
  4. 4. Housing Continues to show signs of real recovery.ƒƒ 30-year home mortgage rate is 3.35% – a 60-year record lowƒƒ New home sales climbed 3.6% as inventories fell to 142,000, lowest level since 1963ƒƒ December sales of existing homes dropped 1% from Novemberƒƒ December existing home prices up 11.5% from December 2011ƒƒ Inventory of existing homes is at an 11-year lowƒƒ The “shadow” overhang of properties headed to foreclosure has fallen to 3.4 million from 4.7 million in 2009
  5. 5. Taxation Last minute deal to avoid the fiscal cliff only deferred budget cut discussions and debt ceiling talks for another six weeks.ƒƒ Carried interest was spared in the fiscal cliff deal primarily because of complications in determining whether this tax hike would help raise additional revenue or hurt by prompting investors to scale back their activityƒƒ Long-term capital gains and dividends raised from 15% to 20%ƒƒ Healthcare surcharge still expected to add 3.8% to LTC gains and dividend rates in the second quarter $120 bn Annual payroll tax deductions up 39.6% Income tax raised from 35%
  6. 6. THE HEADWINDS The U.S. economy is poised to grow and waiting for our politicians to put us on the glide path to a balanced budget and sustained growth.ƒƒ Federal Reserve increased monthly security purchases to $85 bn in Decemberƒƒ December retail sales rose 0.5% from November and 4.7% year-over-yearƒƒ U.S. banks continue to show signs of improvement: Goldman Sachs reports earnings tripled for record profits of $2.83 bn in 4Q12, and JPMorgan Chase posted record 2012 net income of $21.3 bnƒƒ Weekly jobless claims dropped to 351,750, the lowest since 2008ƒƒ Student loans saw the biggest quarterly increase since 2006 – up $42 bn $956 bn Total federal student debt 11.0% Spike in student loan delinquencies in 3Q12
  7. 7. THE HEADWINDS, cont.Global economies also face various challenges and setbacks.ƒƒ World’s third-largest economy, Japan, is sinking ƒƒ Debt-to-GDP ratio an outrageous 240% ƒƒ Outstanding debt to shortly reach 1 quadrillion yen ($11 trillion US)ƒƒ Despite unprecedented stimulus, the EU is in recession ƒƒ Jobless rate of 11.7% and could reach 13% before stabilizing ƒƒ European Central Bank spent $1.38 trillion in loans to commercial banks to stem 2012 crisisƒƒ Germany’s economy shrank by about 0.5% in 4Q12 ƒƒ Total year increase of 0.7% compared to over 3.0% GDP the past 2 years
  8. 8. CAPITAL MARKETS 2012 is best characterized as the year when money managers, hedge funds, individual investors and universities all scrambled for yield as central banks continued handing out free money. This insatiable hunt for yield is likely to intensify in 2013.ƒƒ Wall Street is complying with junk bonds, CMBS, business development corporations (essentially publicly-traded venture capital funds that pay out most of their income), master limited partnerships, high-yield real estate investment trusts and other higher yielding investments.ƒƒ Even collateralized loan obligations (pools of risky loans to corporations) made a comeback in 2012 after being virtually shut down after the near world financial meltdown.
  9. 9. CAPITAL MARKETS, cont.ƒƒ 10-year Treasuries are at approximately 1.87%ƒƒ Morningstar corporate bond spreads for high-grade corporate bonds around 150 bps, leaving investors with virtually no real return after taxes and inflationƒƒ Investors have given junk bonds a record-breaking year for new issuance in 2012, hitting $350 bn. Junk bonds are already off to a record start in 2013 ƒƒ The average yield on junk bonds broke through 6.0% barrier for the first time ever, falling to 5.9%, down from an average of 8.1% 12 months earlierƒƒ CMBS closed $16.1 bn in 4Q12, more than 300% increase from 1Q12ƒƒ 2012 saw $44.14 bn of private-label U.S. CMBS, a 47% increaseƒƒ CMBS saw $21.2 bn issued by Freddie Mac, raising the 2012 total to nearly $65.5 bnƒƒ Projections are that lower rates enabled by tighter spreads will lead to $75 bn in CMBS issuance in 2013
  10. 10. 2013 REAL ESTATE FORECAST CRE continues to provide an attractive return to both institutional and non-institutional investors.ƒƒ CRE fundamentals, occupancy and rents have shown some real signs of improvement, although some evidence of improvement stalling in select areas such as Manhattan officeƒƒ Trend of buying and selling partial interests of large core assets continuesƒƒ More than 822 funds actively seeking to raise more than $250 bn and estimated active allocations of just $37 bn looking for a homeƒƒ $19 bn of private-label CMBS already in the queue for 1Q13
  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.DISCLAIMERCopyright © 2013 Transwestern. All rights reserved. No part of this work may be reproduced or distributedto third parties without written permission of the copyright owner. The information contained in this reportwas gathered by Transwestern from various sources believed to be reliable. Transwestern, however, makesno representation concerning the accuracy or completeness of such information and expressly disclaims anyresponsibility for any inaccuracy contained herein.