Capital,
                                           Condos,
                                               and
           ...
Real Estate has Been Great the Past Few Years

           Year-Year Returns Are Good

      Transaction Volume is at Recor...
Commercial Property Transactions At A Record
                                                                             ...
Commercial Transactions Jump Across the Board
45000
               Transaction Volume ($ bil.)

40000

35000           +64...
Record New and Existing Home Sales
                                                                 New Record in Q2
     ...
Who is Buying




                Commercial
                Pension Funds
                REITs
                Foreign I...
What's Driving the Activity ?
Uncertainty.

Low Yields Elsewhere.

Easy Access to Capital.
Stocks Have Been Rangebound

            S&P 500 (Index 1941-43=10)
  1260

  1240

  1220

  1200

  1180

  1160

  1140...
Commercial Real Estate Outperforms Other Markets

        DJIA




      S&P500




     NASDAQ




MS REIT Index




NCRE...
NOI Has Contributed Nothing to Commercial Property Returns
  12
        3 Year Average, %
                10.2
  10


   8...
Originators Have Ample Capital Available,
                     and Rates Are Extremely Competitive
     800
              ...
CMBS Issuance Continues to Rise
140000
           Issuance ($ mil.)

120000


100000


 80000


 60000


 40000


 20000

...
REIT Growth Has Been Impressive

350
             REIT Industry Market Cap ($ bil.)          320.8
                       ...
- Are long-term yield levels
           still a "conundrum"?

- Can the current nationwide housing market
           be ca...
Is This a Conundrum?
Spreads Have Narrowed; The Yield Curve Has Flattened

     5   %

   4.5

     4

   3.5
            ...
Long Term Yields Aren't Moving Much Higher

 18
      %

 16

 14

 12

 10
                                     10-year T...
Mortgage Rates are About as Low as They Have Ever Been

    16   (%)

    14

    12

    10                    Average 30...
A Brief Look at Apartments and Condos
Apartment Share of Commercial Transactions
Has Grown from 22% in 2002 to About 30% in 2005

  From 2000-2005 over $130 bil...
Following the Money to Apartments

      Cap Rate (%) Q1:2005
10

9.5
                              CBD Office          Su...
Bigger is Better
Larger Properties in Larger Markets Trade at Lower Yields
  8
                            Average Cap Rat...
Condo Conversions
  Have Exceeded New Apartment Deliveries For Two Quarters
35000
               Units

30000
            ...
Sales to Condo Converters As a Share of All Apartment Sales

           Share of All Apartment Sales (%)
     35


     30...
Leading Condo Conversion Markets

    Miami

Las Vegas

San Diego

  Orlando

                                            ...
Condo Conversions are Picking Up in Denver Too

2500      Units



2000




1500




1000




 500




   0
       2003   ...
Housing Market Activity in Denver
The Denver Market Looks Like Elsewhere
45
                 Existing Single Family Home Sales (Ths., SAAR)
40

35

30

25

...
Prices Are Rising Faster in Denver

        Median Existing Home Price (Ths., SAAR)
260

240

220

200                    ...
Affordability is A Bit Less in Denver

          Affordability (Index)
 170


 160


 150
                                ...
Concerns About Current Trends
Outlook for A Strong Economy
         and Low Mortgage Rates
Suggests A Solid Owner Market for Housing
             in the...
The Share of Adjustable Rate Mortgages is Increasing

         Percent of All Mortgage Borrowers with Adjustable Rates
   ...
Homeowners Are Highly Leveraged

       Household Financial Obligations Ratio (% if Dis Income)
16.5

 16

15.5

 15

14.5...
Investor Purchases Are Increasing

10
                          % Mortgage Originations


 8




 6
                      ...
Look for Mr Greenspan to Stay the Course

                (%)
 6.5

       6

 5.5
                                       ...
Mortgage Rates Will Rise Toward Long Term Averages

        Conventional Mortgage Rates (%)
  7.5

    7
                 ...
Prices Will Continue to Rise Faster in Denver

       Median Existing Home Price ($Ths)
 300


 280


 260


 240


 220

...
Affordability will Decline

                Affordability (Index)
 130

 125

 120

 115

 110

 105

 100

     95

     ...
Sales Will Ease (hopefully) Down
40
               Existing Sales, Units (Ths., SAAR) - Denver MSA
35


30


25


20


15
...
We’ll See
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Ai August 5 2005

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Presentation on Eocnomic Trends and Real Estate Markets to the Appraisal Institute of Denver August 2005

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Ai August 5 2005

  1. 1. Capital, Condos, and Mr. Greenspan's Conundrum Notes on the Current and Future Real Estate Capital and Transaction Environment Peter C. Burley, CRE Vice President Market Research Simpson Housing LLLP for the Colorado Chapter of the Appraisal Institute
  2. 2. Real Estate has Been Great the Past Few Years Year-Year Returns Are Good Transaction Volume is at Record Highs Capital is Abundant All DESPITE THREE YEARS of WEAK FUNDAMENTALS
  3. 3. Commercial Property Transactions At A Record $62 bil. in Q2 70 Up 50% YTD Volume Closed Transactions ($ billions) from 2004 60 50 40 30 20 10 0 3 :1 4 :1 5 :1 00 '2 00 '2 00 '2 Source: Real Capital Analytics
  4. 4. Commercial Transactions Jump Across the Board 45000 Transaction Volume ($ bil.) 40000 35000 +64% +48% 30000 25000 +10% 20000 +88% 15000 10000 5000 0 Apartments Industrial Office Retail Source: Real Capital Analytics
  5. 5. Record New and Existing Home Sales New Record in Q2 Including an 8.54 mil Unit Rate in June Alone 8000 Units (Qtr, SAAR) 7000 6000 5000 4000 3000 New Homes 2000 Existing Homes 1000 0 Q3 Q2 Q1 Q4 Q2 02 03 04 04 05 20 20 20 20 20 Source: NAR; Bureau of Census; Economy.com
  6. 6. Who is Buying Commercial Pension Funds REITs Foreign Investors Private Companies Residential Homeowners Private Investors
  7. 7. What's Driving the Activity ?
  8. 8. Uncertainty. Low Yields Elsewhere. Easy Access to Capital.
  9. 9. Stocks Have Been Rangebound S&P 500 (Index 1941-43=10) 1260 1240 1220 1200 1180 1160 1140 1120 1100 1080 1060 3 -04 -04 -04 04 04 -05 -05 -05 ec-0 ar ay ug ct- ec- ar ay ug 0-D 2-M 4-M 5-A -O -D -M -M 2-A 3 1 2 15 28 10 20 Source: Standard & Poors; Economy.com
  10. 10. Commercial Real Estate Outperforms Other Markets DJIA S&P500 NASDAQ MS REIT Index NCREIF Index* -4 -2 0 2 4 6 8 10 12 14 16 % Return Through Mid-June 2005 Source: Urban Land Institute * Trailing 12-month through 3/31/2005
  11. 11. NOI Has Contributed Nothing to Commercial Property Returns 12 3 Year Average, % 10.2 10 8 3 Yr Return 5.8 6 4.5 4 Yield Cap Rates 2 NOI 0 -0.2 -2 Source: Torto Wheaton Research, Investment Database
  12. 12. Originators Have Ample Capital Available, and Rates Are Extremely Competitive 800 CMBS Trading Spreads above 10Yr Treasuries (bp) 700 600 500 400 300 200 100 0 4 11 13 31 31 -70 -22 -35 -100 ry - AA A AA A BB B B BB B re as u BB T - Yr 10 Source: Morgan Stanley; ULI
  13. 13. CMBS Issuance Continues to Rise 140000 Issuance ($ mil.) 120000 100000 80000 60000 40000 20000 0 2000 2001 2002 2003 2004 2005 (ytd) Source: Commercial Mortgage Alert; ULI
  14. 14. REIT Growth Has Been Impressive 350 REIT Industry Market Cap ($ bil.) 320.8 305 300 250 200 150 139 100 50 0 2000 2004 2005(ytd) Source: NAREIT
  15. 15. - Are long-term yield levels still a "conundrum"? - Can the current nationwide housing market be categorized as a bubble?
  16. 16. Is This a Conundrum? Spreads Have Narrowed; The Yield Curve Has Flattened 5 % 4.5 4 3.5 2001 3 2005 2.5 2 2002 1.5 2004 2003 1 90-Day Bill 1 Yr 2 Yr 5 Yr 10 Yr Source: Economy.com
  17. 17. Long Term Yields Aren't Moving Much Higher 18 % 16 14 12 10 10-year Treasury 8 6 4 2 Fed Funds 0 1976Q1 1981Q1 1986Q1 1991Q1 1996Q1 2001Q1 Source: Economy.com
  18. 18. Mortgage Rates are About as Low as They Have Ever Been 16 (%) 14 12 10 Average 30-Yr Conventional 8 6 Avg 1-Yr Adj 4 2 1984M1 1988M3 1992M5 1996M7 2000M9 2004M11 Source: Economy.com
  19. 19. A Brief Look at Apartments and Condos
  20. 20. Apartment Share of Commercial Transactions Has Grown from 22% in 2002 to About 30% in 2005 From 2000-2005 over $130 billion in Apartment Transactions - About 6,100 properties Hottest Markets Have Been California, Florida, Nevada, DC Metro - Represent 45% of Apartment Transactions, Up from 30% in 2002
  21. 21. Following the Money to Apartments Cap Rate (%) Q1:2005 10 9.5 CBD Office Sub'n Office 9 8.5 Malls 8 R&D 7.5 Multifamily 7 6.5 1998:4 1999:4 2000:4 2001:4 2002:4 2003:4 2004:4 2005:1 Source: RERC; ULI
  22. 22. Bigger is Better Larger Properties in Larger Markets Trade at Lower Yields 8 Average Cap Rate (%) 7 6 5 Third Tier Markets Secondary Markets Primary Markets 4 3 2 1 0 $30 mil + $15-30 mil $5 - 15 mil Source: Real Capital Analytics
  23. 23. Condo Conversions Have Exceeded New Apartment Deliveries For Two Quarters 35000 Units 30000 New Completions Conversions 25000 20000 15000 10000 5000 0 3:01 3:02 3:03 3:04 4:01 4:02 4:03 4:04 5:01 5:02 Source: Reis Inc
  24. 24. Sales to Condo Converters As a Share of All Apartment Sales Share of All Apartment Sales (%) 35 30 25 20 15 10 5 2003:1 :2 :3 :4 2004:1 :2 :3 :4 2005:1 :2 Source: Real Capital Analytics
  25. 25. Leading Condo Conversion Markets Miami Las Vegas San Diego Orlando 2004 Tampa 2005 (ytd) DC Metro Phoenix Chicago LA 0 2000 4000 6000 8000 10000 12000 Units Source: Real Capital Analytics
  26. 26. Condo Conversions are Picking Up in Denver Too 2500 Units 2000 1500 1000 500 0 2003 2 3 4 2004 2 3 4 2005 2 Source: Reis Inc
  27. 27. Housing Market Activity in Denver
  28. 28. The Denver Market Looks Like Elsewhere 45 Existing Single Family Home Sales (Ths., SAAR) 40 35 30 25 20 15 10 5 0 2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q 94 1995 1995 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 19 Source: Economy.com
  29. 29. Prices Are Rising Faster in Denver Median Existing Home Price (Ths., SAAR) 260 240 220 200 Denver 180 US 160 140 120 100 1995Q1 1996Q2 1997Q3 1998Q4 2000Q1 2001Q2 2002Q3 2003Q4 2005Q1 Source: Economy.com
  30. 30. Affordability is A Bit Less in Denver Affordability (Index) 170 160 150 US 140 130 Denver 120 110 5Q 1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 9 96 97 98 00 01 02 03 05 19 19 19 19 20 20 20 20 20 Source: NAR; BOC; BEA; Economy.com
  31. 31. Concerns About Current Trends
  32. 32. Outlook for A Strong Economy and Low Mortgage Rates Suggests A Solid Owner Market for Housing in the Near Term However, Buyer and Investor Leverage Pose Some Downside Risk
  33. 33. The Share of Adjustable Rate Mortgages is Increasing Percent of All Mortgage Borrowers with Adjustable Rates 60 55 50 45 40 35 30 25 20 15 10 5 1995M1 1996M9 1998M5 2000M1 2001M9 2003M5 2005M1 Source: FHFB; Economy.com
  34. 34. Homeowners Are Highly Leveraged Household Financial Obligations Ratio (% if Dis Income) 16.5 16 15.5 15 14.5 14 13.5 13 1980Q1 1985Q1 1990Q1 1995Q1 2000Q1 2005Q1 Source: Economy.com
  35. 35. Investor Purchases Are Increasing 10 % Mortgage Originations 8 6 Second Homes Investor Purchases 4 2 0 2001 2004 2005 (Thru April) Source: LoanPerformance; Economy.com
  36. 36. Look for Mr Greenspan to Stay the Course (%) 6.5 6 5.5 10-year Treasury 5 4.5 Fed Funds Rate 4 3.5 3 2.5 2 Q 4 Q 2 Q 4 Q 2 Q 4 Q 2 Q 4 Q 2 Q 4 Q 05 05 06 06 07 07 08 08 09 09 20 20 20 20 20 20 20 20 20 20 Source: FRB; Economy.com
  37. 37. Mortgage Rates Will Rise Toward Long Term Averages Conventional Mortgage Rates (%) 7.5 7 30yr Fixed 6.5 6 5.5 ARM 5 4.5 4 2005M6 2006M4 2007M2 2007M12 2008M10 2009M8 Source: Freddie Mac; Economy.com
  38. 38. Prices Will Continue to Rise Faster in Denver Median Existing Home Price ($Ths) 300 280 260 240 220 200 180 5Q 1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 0 05 06 06 07 07 08 08 09 09 20 20 20 20 20 20 20 20 20 20 Source: NAR; Economy.com
  39. 39. Affordability will Decline Affordability (Index) 130 125 120 115 110 105 100 95 90 Q 1 5 Q3 6 Q1 6 Q3 7 Q1 7 Q3 8 Q1 8 Q3 9 Q1 9 Q3 05 00 00 00 00 00 00 00 00 00 20 2 2 2 2 2 2 2 2 2 Source: Economy.com
  40. 40. Sales Will Ease (hopefully) Down 40 Existing Sales, Units (Ths., SAAR) - Denver MSA 35 30 25 20 15 10 5 0 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 05Q 005Q 005Q 006Q 006Q 006Q 006Q 007Q 007Q 007Q 007Q 008Q 008Q 008Q 008Q 009Q 009Q 009Q 009Q 20 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 Source: NAR; Economy.com
  41. 41. We’ll See

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