This document discusses the current state of the commercial real estate market and outlines several challenges facing investors, including:
1) Declining cash flows from weakening tenants and falling rental rates. Unemployment has risen significantly which is weakening many tenants' ability to pay rent.
2) Changes to tax benefits such as carried interest that could reduce incentives for investment. Proposed changes may decrease development activity.
3) Rising capitalization rates and falling property values, pointing to continuing price erosion. Distressed assets are increasing and further pulling down surrounding property values.
4) Stricter lending standards with higher down payments required and interest-only loans no longer available are limiting leverage capabilities. This constraints investment activity
U.S. MarketBeats provide an overview of quarterly CRE activity and trends, a snapshot of current economic and capital market conditions as well as market-level statistics on key metrics.
The U.S. economy in 2016 was characterized by steady growth in the face of uncertainty. The year began with steep declines in global equity markets in response to concerns about a slowdown in China, the Europe replaced Asia as the focal point of global anxiety after the Brexit vote. In the fourth quarter, the U.S. unexpectedly elected Donald Trump as President. Despite uncertainty, the economy continued to add an average of 180,000 jobs per month during 2016.
Economist Intelligence Unit (EIU) white paper produced at the height of the financial crisis in January 2009 outlining the opportunities to learn from the downturn and best practice to success in a changing environment.
Growth in emerging markets is slowing. This is concerning. Senior Economist Marcus Wright considers two questions. What are the problems in emerging market economies? Why does that matter to us?
Welcome to the Cushman & Wakefield Atlas Outlook 2016,
an update on the International Investment Atlas that reviews
how the market performed last year and, more particularly,
what we should anticipate for the year ahead.
We have examined a series of questions when approaching this publication:
what are the key forces driving and transforming the global market? Who will be
the winners in this volatile environment? How should a subsequent investment
strategy be most advantageously aligned?
Of course, in a highly uncertain but fast changing world, the need for insightful
research is increased – but the task of delivering a robust and well-considered
view is made more difficult. By bringing together expert opinion from across our
capital markets, occupier and research teams around the world, we have sought
to answer this challenge and hope you agree we have delivered a concise but
thoughtful review of the state of the market and the outlook for the year ahead.
Ricardo V Lago -Interbank- Lima-22 04 2009 neiracar
Conferencia a la alta Gerencia de Intergroup en Lima el 22 de abril , 2009 sobre perspectivas de las economias mundial y peruana y oportunidades de inversion en bolsa
« Market Perspectives » est notre revue mensuelle des marchés. Elle présente de la façon la plus synthétique possible :
- notre analyse des principaux faits marquants et indicateurs macro susceptibles de dessiner les marchés sur le mois.
- notre vision sur les différentes classes d’actifs
Cette revue sera continument enrichie avec nos indicateurs quantitatifs.
La plupart de nos analyses sont disponibles sur www.finlightresearch.com
Our monthly publication “Market Perspectives” presents a synthetic view of all the asset classes we cover.
The report is composed of six sections covering Macro, Equities, FI & credit, FX, Commodities and Alternatives.
Each section is preceded by a summary of our views on the related asset class.
Most of our publications are available on our web site www.finlightresearch.com
Fasanara Capital | Investment Outlook
1. The Future Is Wide Open: Avoid The ‘Illusion Of Knowledge’ Trap
The single most dangerous thinking trap / optical illusion for investors today is to look at Trump, Brexit and Italy Referendum as non-events, buried in the past. We believe that 2017 may likely be driven by the same factors that failed to shape 2016. The non-events of 2016 are likely to be the drivers of 2017. Finally, we will get to find out if Brexit means Brexit, if Trump means Trump, if a failed Italian referendum means early elections and a membership of the EMU in jeopardy down the line.
2. Structural Shift: These Are Transformational Times
The macro outlook of the next years will be influenced the most by these structural trends:
› Protectionism, De-Globalization & De-Dollarization. In Pursuit of Inclusive Growth
› End of ‘Pax Americana’. The ascent of China. Geopolitical risks on the rise
› End of ‘Pax QE’. Markets without steroids, but still delusional.
› 4th Industrial Revolution: labor participation rate falling from 63% to 40% in 10 years?
3. Our Baseline Scenario: Bubble Unwind, Equities and Bonds Down
Starting this 2017, our major macro convictions are as follows:
› Global Tapering to progress
› US Dollar to keep grinding higher
› European Political Instability to worsen
› US Equities to weaken
Trump100 days- Implications for the Property Markets Guy Masse
PRESIDENT TRUMP'S ADMINISTRATION & ITS IMPLICATIONS FOR THE PROPERTY MARKETS
Measuring the success of a new Administration by its first 100 days is a tradition, and President Trump reaches his first key milestone with campaign promises to overhaul Washington and jump-start the economy. This special report provides a perspective on:
How key economic indicators (inflation, job growth) and commercial real estate are performing so far
The status of key policy proposals, including trade and defense
What to watch for beyond the first 100 days
Fasanara Capital | Investment Outlook
1. Fake Markets: How Artificial Money Flows Kill Data Dependency, Affect Market Functioning and Change the Structure of the Market
Hard data ceased to be a driver for markets, valuation metrics for bonds and equities which held valid for over a century are now deemed secondary. Narratives and money flows trump hard data, overwhelmingly.
‘Fake Markets’ are defined as markets where the magnitude and duration of artificial flows from global Central Banks or passive investment vehicles have managed to overwhelm and narcotize data-dependency and macro factors. A stuporous state of durable, un-volatile over-valuation, arrested activity, unconsciousness produced by the influence of artificial money flows.
- Passive Flows: The Prehistoric Elephant In The Room
- ETFs Are Taking Over Markets
- The Impact of Passive Investors on Active Investors: the Induction Trap
- How Narratives Evolve To Cover For Fake Markets
- Defendit Numerus: There is Safety in Numbers
- What Could We Get Wrong
2. Be Short, Be Patient, Be Ready
Markets driven by Central Banks, passive investment vehicles and retail investors are unfit to price any premium for any risk. If we are right and this is indeed a bubble (both in equity and in bonds), it will eventually bust; it is only a matter of time. The higher it goes, the higher it can go, as more swathes of private investors are pulled in. The more violently it can subsequently bust.
The risk of a combined bust of equity and bonds is a plausible one. It matters all the more as 90%+ of investors still work under the basic framework of a balanced portfolio, exposed in different proportions to equity and bonds, both long. That includes risk parity funds, a leveraged version of balanced portfolio. That includes alternative risk premia funds, a nice commercial disguise for a mostly long-only beta risk, where premia is extracted from record rich markets that made those premia tautologically minuscule.
Why the next decade will shape the century!adusault
A position paper on the forces converging into the next decade, which will create more volatility. We constantly underestimate changes and resist new conditions.
The Black Swan Event: Funding in the time of Coronavirus with Mark Sustersaastr
It all begins with an idea. Maybe you want to launch a business. Maybe you want to turn a hobby into something more. Or maybe you have a creative project to share with the world. Whatever it is, the way you tell your story online can make all the difference.
Global financial crisis & its impact on INDIASaad Khan
A short presentation as well as description about the downfall also known as recession came in the U.S economy which damages the whole world financially.
5 predictions for commercial real estate, risk management and lending in 2018. Presented by Dianne Crocker, EDR Insight in her opening comments at the Environmental Bankers Association Conference in Long Beach, CA on January 15, 2018.
U.S. MarketBeats provide an overview of quarterly CRE activity and trends, a snapshot of current economic and capital market conditions as well as market-level statistics on key metrics.
The U.S. economy in 2016 was characterized by steady growth in the face of uncertainty. The year began with steep declines in global equity markets in response to concerns about a slowdown in China, the Europe replaced Asia as the focal point of global anxiety after the Brexit vote. In the fourth quarter, the U.S. unexpectedly elected Donald Trump as President. Despite uncertainty, the economy continued to add an average of 180,000 jobs per month during 2016.
Economist Intelligence Unit (EIU) white paper produced at the height of the financial crisis in January 2009 outlining the opportunities to learn from the downturn and best practice to success in a changing environment.
Growth in emerging markets is slowing. This is concerning. Senior Economist Marcus Wright considers two questions. What are the problems in emerging market economies? Why does that matter to us?
Welcome to the Cushman & Wakefield Atlas Outlook 2016,
an update on the International Investment Atlas that reviews
how the market performed last year and, more particularly,
what we should anticipate for the year ahead.
We have examined a series of questions when approaching this publication:
what are the key forces driving and transforming the global market? Who will be
the winners in this volatile environment? How should a subsequent investment
strategy be most advantageously aligned?
Of course, in a highly uncertain but fast changing world, the need for insightful
research is increased – but the task of delivering a robust and well-considered
view is made more difficult. By bringing together expert opinion from across our
capital markets, occupier and research teams around the world, we have sought
to answer this challenge and hope you agree we have delivered a concise but
thoughtful review of the state of the market and the outlook for the year ahead.
Ricardo V Lago -Interbank- Lima-22 04 2009 neiracar
Conferencia a la alta Gerencia de Intergroup en Lima el 22 de abril , 2009 sobre perspectivas de las economias mundial y peruana y oportunidades de inversion en bolsa
« Market Perspectives » est notre revue mensuelle des marchés. Elle présente de la façon la plus synthétique possible :
- notre analyse des principaux faits marquants et indicateurs macro susceptibles de dessiner les marchés sur le mois.
- notre vision sur les différentes classes d’actifs
Cette revue sera continument enrichie avec nos indicateurs quantitatifs.
La plupart de nos analyses sont disponibles sur www.finlightresearch.com
Our monthly publication “Market Perspectives” presents a synthetic view of all the asset classes we cover.
The report is composed of six sections covering Macro, Equities, FI & credit, FX, Commodities and Alternatives.
Each section is preceded by a summary of our views on the related asset class.
Most of our publications are available on our web site www.finlightresearch.com
Fasanara Capital | Investment Outlook
1. The Future Is Wide Open: Avoid The ‘Illusion Of Knowledge’ Trap
The single most dangerous thinking trap / optical illusion for investors today is to look at Trump, Brexit and Italy Referendum as non-events, buried in the past. We believe that 2017 may likely be driven by the same factors that failed to shape 2016. The non-events of 2016 are likely to be the drivers of 2017. Finally, we will get to find out if Brexit means Brexit, if Trump means Trump, if a failed Italian referendum means early elections and a membership of the EMU in jeopardy down the line.
2. Structural Shift: These Are Transformational Times
The macro outlook of the next years will be influenced the most by these structural trends:
› Protectionism, De-Globalization & De-Dollarization. In Pursuit of Inclusive Growth
› End of ‘Pax Americana’. The ascent of China. Geopolitical risks on the rise
› End of ‘Pax QE’. Markets without steroids, but still delusional.
› 4th Industrial Revolution: labor participation rate falling from 63% to 40% in 10 years?
3. Our Baseline Scenario: Bubble Unwind, Equities and Bonds Down
Starting this 2017, our major macro convictions are as follows:
› Global Tapering to progress
› US Dollar to keep grinding higher
› European Political Instability to worsen
› US Equities to weaken
Trump100 days- Implications for the Property Markets Guy Masse
PRESIDENT TRUMP'S ADMINISTRATION & ITS IMPLICATIONS FOR THE PROPERTY MARKETS
Measuring the success of a new Administration by its first 100 days is a tradition, and President Trump reaches his first key milestone with campaign promises to overhaul Washington and jump-start the economy. This special report provides a perspective on:
How key economic indicators (inflation, job growth) and commercial real estate are performing so far
The status of key policy proposals, including trade and defense
What to watch for beyond the first 100 days
Fasanara Capital | Investment Outlook
1. Fake Markets: How Artificial Money Flows Kill Data Dependency, Affect Market Functioning and Change the Structure of the Market
Hard data ceased to be a driver for markets, valuation metrics for bonds and equities which held valid for over a century are now deemed secondary. Narratives and money flows trump hard data, overwhelmingly.
‘Fake Markets’ are defined as markets where the magnitude and duration of artificial flows from global Central Banks or passive investment vehicles have managed to overwhelm and narcotize data-dependency and macro factors. A stuporous state of durable, un-volatile over-valuation, arrested activity, unconsciousness produced by the influence of artificial money flows.
- Passive Flows: The Prehistoric Elephant In The Room
- ETFs Are Taking Over Markets
- The Impact of Passive Investors on Active Investors: the Induction Trap
- How Narratives Evolve To Cover For Fake Markets
- Defendit Numerus: There is Safety in Numbers
- What Could We Get Wrong
2. Be Short, Be Patient, Be Ready
Markets driven by Central Banks, passive investment vehicles and retail investors are unfit to price any premium for any risk. If we are right and this is indeed a bubble (both in equity and in bonds), it will eventually bust; it is only a matter of time. The higher it goes, the higher it can go, as more swathes of private investors are pulled in. The more violently it can subsequently bust.
The risk of a combined bust of equity and bonds is a plausible one. It matters all the more as 90%+ of investors still work under the basic framework of a balanced portfolio, exposed in different proportions to equity and bonds, both long. That includes risk parity funds, a leveraged version of balanced portfolio. That includes alternative risk premia funds, a nice commercial disguise for a mostly long-only beta risk, where premia is extracted from record rich markets that made those premia tautologically minuscule.
Why the next decade will shape the century!adusault
A position paper on the forces converging into the next decade, which will create more volatility. We constantly underestimate changes and resist new conditions.
The Black Swan Event: Funding in the time of Coronavirus with Mark Sustersaastr
It all begins with an idea. Maybe you want to launch a business. Maybe you want to turn a hobby into something more. Or maybe you have a creative project to share with the world. Whatever it is, the way you tell your story online can make all the difference.
Global financial crisis & its impact on INDIASaad Khan
A short presentation as well as description about the downfall also known as recession came in the U.S economy which damages the whole world financially.
5 predictions for commercial real estate, risk management and lending in 2018. Presented by Dianne Crocker, EDR Insight in her opening comments at the Environmental Bankers Association Conference in Long Beach, CA on January 15, 2018.
The Next Recession is Coming... This is Your Survival GuidePhil Argue
This presentation was presented as a webinar in July 2018 with Early Growth Financial Services and Prepared Capital. The link to the webinar (with audio) is available here: https://preparedcapital.com/blog/the-next-recession-is-coming-survival-guide/
The Financial Situation in the World by Wouter van der StokFelix Meißner
The Financial Situation in the World” by Wouter van der Stok
Mr. Van der Stok will present a brief history of the present global Economic/Financial Crisis, an analysis of future developments of this Crisis over the next 3 to10 years and how this will affect, without any exception, "me" as a person, family, business, city, nation and groups of nations
HERE YOU FIND THE RECORDING:
http://tinyurl.com/5vcl5hd
Overview of GLOBAL FINANCE CRISIS and impact with market. Impacts of the US Financial Crisis on Indian Economy. FINANCE CRISIS, Subprime Mortgage Crisis, US Financial Markets, US Unemployment and Stock Market Returns, Treasury Rates and Inflation,
On November 10, 2011, the chapter hosted Dr. Dick Stevie, Chief Economist for Duke Energy, and Dr. George Vredeveld, Alpaugh Professor of Economics at the University of Cincinnati and founder and Director of its Economics Center.
2. In Today’s Waters… What’s the Strategy?
Board a cruise ship
Rig to a battleship or
Just plain abandon ship?
3. Some of our customers are taking this approach…
4. • There is a war attacking our business. Everything we value in
real estate is being challenged:
• Cash flow potential
• Tax benefits
• Capital appreciation opportunity
• Leverage capability
• We believe an ostrich approach burying ones head in the
sand hoping to avert problems is prescription for failure.
5. Volatile market conditions require clarity, vision ,and action...not passivity.
Advantages are maximized in an environment of fear and inactivity.
Lack of clarity breeds opportunity for the discerning investor.
6. Today’s market signals are alarming…we find potential opportunity abounding..
It will take more than traditional market cycle responses. Rapid utilization of existing
financial resources can allow investors meaningful participation in what will be one of the
biggest wealth transfer cycles in modern-day history.
Adoption and implementation of the right investment strategy will determine our financial
futures, our ability to provide for our businesses, our children, and our grandchildren.
7. Real Estate battlegrounds under attack.
Market Obstacles
I. Cash Flow Integrity: Tenant Strength is weakening
Tenant base is eroding
Absolute decrease in rental rates
Influx of capital is being required to salvage income streams
II. Tax Benefits: Capital Gain treatment has been lowest in history and in question
Carried Interest Compensation Tax will be increasing
Depreciation Modifications are likely
III. Capital CAP Rates rising (Value Erosion)
Appreciation Values will fall for the next 12-36…48 months?
Challenges: NOI rapidly declining
IV. Leverage: Money no longer cheap (CMBS Loans virtually non-existent)
Capability Distressed Assets plague portfolios
Eroding: $1.4 Trillion in loan maturities creating refinancing nightmares
8. I. Cash Flow Integrity of the Office Market.
How has unemployment effected the office market?
The safe tenant sectors are in education, health, and government.
= 1 employee
Office Rule:
Every 200 sf.
9. • Current Unemployment: 8.5% (5.1 Million Jobs Lost)
• 1990 recession lasted 32 months
• 2001 recession lasted 50 months
• We are in month 19 (Dec 2007-Current Day)
Early 2010 Recession Recovery Myth is in Question:
Source: CoStar 2009
Economic Outlook
Report Private Webinar
12. The Vacancy Rate is a Useless Matrix today…
The job loss total is not reflective of the negative absorption
that is in the market.
With over 5.1 million jobs lost we should have a 450 million
square foot office vacancy …not 20 million as reported.
We are projecting a national increase in vacancy by 300 basis
points from the turn of the year…to 18.2% in 2010.
• Accelerated depreciation on space has tax ramifications for tenant
• Established tenants are hoping to rehire
• Major tenants are fighting bigger fires
• Tenants are hesitant to send out signals of instability
• Owners are not eager to recognize tenant failure
• Value erosion disclosure is not a major objective of ownership
Co Star CEO Andrew Florance
Reasons for unlisted/undetected space availability:
13. Historical National Office Vacancy 1980-2009
• Vacant inventory has not been reported…leaving more value erosion to come.
• Leasing momentum is waning: “musical chair tenancy” with tenants moving from one
building to another (changing classes or location with incentives)
• Dallas Office Vacancies Rising ( 16.2 % expected 19.4% over the next year)
21. I. Cash Flow Integrity in Industrial Real Estate:
As inventory is consumed what happens to additional warehouse demand?
Warehouse appears to be vulnerable to downward pressures due to retail lull.
How will the changing costs of transportation and imports effect the industrial market?
22. Oil prices directly affect distribution cost:
• 69% jump from $32-$54 a barrel
• Mexico is the second largest supplier of crude to the US, delivering 1.2 million barrels
per day…but its production in its Cantrell Fields of offshore Yucatan are falling off a
cliff…the country will become a net importer soon.
• Credit Squeezed companies have all but stopped exploration
• Exploration is down…US rig count cut in half by less than 1000
• Buy that Prius while you can…
31. I. Cash Flow Integrity in the Retail Market
Gas and energy prices have impacted over 80% of the population.
32. Bankruptcies and store closings demonstrate the impact:
567 Circuit City
461 KB Toys
400 Ritz Camera
300 Starbucks
287 Goody's
175 Van Heusen
163 Ann Taylor (by 2010)
129 Boater's World
125 Pier One
118 Office Depot
115 Zale Corporation
100 Gap, Inc.
98 Club Libby Lu (Saks)
55 Select Comfort
50 Pacific Sunwear
50 Supervalu
50 New York & Co. (over the next five years)
48 Home Depot (Expo, YardBIRDS, Design Center, HDBath)
45 Cato
40 Kirkland's
40 Ruby Tuesday
40 Tween Brands (Limited Two, Justince)
35 Famous Footwear (Brown Shoe Co.)
30 S&K Famous Brands Inc.
30 Jo-Ann Stores
28 Yankee Candle
26 Cost Plus
25 Chico's FAS
25 Fred's
24 Blue Tulip Gift Shops
24 Sears
23 Sportsman's Warehouse
21 Z Gallerie
20 Oneida Ltd.
20 Wet Seal
19 Snyder's Drug Stores, Inc.
16 Iridesse (Tiffany & Co.)
15 Tim Horton's
13 OfficeMax
13 Stein Mart
12 Bealls
12 Kira Plastinina
11 Better Bedding Shops, Inc.
11 Filene's
11 Jimmy'Z (Aeropostale)
11 Macy's
11 Pamida
10 Bruno's
10 Bassett Home Furnishings
10 P.F. Chang's Pei Wei Restaurants
10 U.S. Cellular
8 Dillard's
8 Dominos
7 Eddie Bauer
7 Sweetbay Supermarkets
6 Rex Appliance & Electronics
5 Basha's Supermarket
5 Mark Shale
5 Borders
4 Applebees
4 Harry W. Schwartz Bookshops
4 Lucky Grocery Stores
3 Albertson's
3 Good's Furniture & Flooring
3 Lane Bryant
3 P&C Food Markets
3 Virgin Records
2 Krispy Kreme
2 L'Oreal Paris
2 Plan 9 Music
2 Storables
1 Fresh Market
1 Jewel-Osco
1 Sony PlayStation Store
1 Sony Style Store
1 Victoria's Secret
33. • Who is going to fill the anchor vacancies?
• How are landlords going to handle the smaller tenants who
have contractual agreements as anchor tenants bail?
• We believe there is going to be a huge shift as a new
demographic emerges to fill these vacancies.
34. I. Retail Cash Flow Integrity: (Circuit City Case Study)
November 2008:
• 150 leases broken
• 155 stores closed
January 2009:
• 567 Stores Closed
Co-Tenancy Issues:
• 192 of 388 were co-tenant with Verizon Wireless
• Smaller tenants have not even began to feel the full effects
47. Housing Market Collapse Results:
• Average 25% Home-Equity Loss
• Add the 50% Loss in the Stock Market
• Add rising energy prices….job losses…etc.
• Triple whammy for the American consumer
• Severe implications for the CRE market
48. • Many of the buyers of houses in this bubble had less than 25% equity in
their homes, and some with 3.5%.
• The result of all this was numerous bank failures including
the following once familiar entities.
• As of February 7.5% of FHA Loans are seriously delinquent as of 2/28/09
• According to First American Core Logic 10,500,000 households
had negative or near negative equity in December of 2008.
How the Housing Market Effects CRE:
• Lack of equity affects consumer confidence, impacting spending
• Consumer spending impacts corporate earnings
• Earnings dramatically impact commercial real estate.
52. I. Cash Flow Integrity in Multi-family Sector:
New multi-family construction and increasing market vacancies
makes it difficult to accurately forecast rental rate erosion.
53. How is this going to effect apartments?
• Effective rents across the nation have dropped 1.5%-3%
• Dallas is adding an additional 13,000 units (from a projected 20,000 units)
to an already oversaturated market
• Sellers achieving less then 90% of there asking price
54. Institutional investors have increased as a proportion of
sales to 20% since the peak.
Cross-Border investors were not major apartment
buyers but pressure to sell US assets has chiefly come
from a few Australian firms that were active at the peak.
Public REIT’s were not major buyers bug significant
sellers at the market peak. Falling share and property
prices are pressuring many to de-lever quickly,
especially since September
Equity Funds were not as active for apartments as other
property types but those that were, acquired properties
using high leverage at the peak, making them
particularly vulnerable in the downturn.
Private investors include a number of developers condo
converters and TIC’s indicates that are quickly falling
into trouble in addition to those that simply have the
misfortune of having a mortgage.
Source: Real Capital Analytics
55. II. The Tax Benefit Attack:
Carried Interest Compensation
Treats payments to managers of funds (hedge,
development) as capital gains (15%)
Currently designed to incentivize performance of managers
New Administration wants to treat these payments as
regular taxes (39.6%)
Presidents Obama’s proposed budget “Would have a broad
devastating impact on commercial real estate development.”
-Thomas J. Bisacquino
President of the National Commercial Real Estate Development Association
March 6,
2009: Suvapedia: A Journal of Land Surveying News and
Information
56. According to Mr. Bisacquino, many developments will not be
undertaken if this proposal becomes law, because of the tax effect it
will have on developers.
• The old (Bush) Senate already voted down a bill to increase, but a
new majority is poised to change the tax law.
• Obama and the Democratic majority will increase capital gains tax to
20% as promised in 2010.
57. Recession Comparisons:
2001-2003
Tech Bust
Slow job growth
Stock Market Meltdown
September 11th
Pro-Forma Underwriting
2008-???
Housing Market Bust
Credit Market Collapse
CMBS Market Implosion
Record Unemployment
Energy Costs
Stock Market Meltdown
Wall Street Vacating CRE
Lender Spread Widened
Underwriting on Actuals
Tenants due-diligence on owners?
DISTRESSED ASSETS
Rising CAP Rates (Value Erosion)
Treasury Rates 0% (Complete Change in Monetary Policy)
Federal Take Over of Banks, Auto….Healthcare?
Deflation…coming soon: INFLATION
58. III. The Appreciation Assault
During the 1990’s we saw CAP rates with a range of 8-10%
In the “Turn and Burn” years of 2005-2007 CAP compressed to 6%-7.5%
We are now moving for CAP rates with a range of 9-12%
59.
60. Legendary hedge fund manager billionaire
and left-wing activist George Soros told a
Congressional committee (3/26/2009) that
commercial real estate values will fall by at
least 30%.
“Right now we are in a period of deflation,
but it could easily tip over, where you are
facing inflation,” Soros said. “You are then
faced with the prospect of draining money
supply as fast as credit is created.”
61. “Estimates assume that declines in commercial property
values of 35%-45% from the peak of 2007.
That would exceed the price drops in the downturn of
the 1990’s.”
Reported on 3/26/2009:
62. What else is causing value degradation…
DISTRESSED ASSETS:
Establishing a new basis near YOU.
Since December 2008 To Feb 2009:
Troubled
Lender REO
Current Distressed
Increased from: 1043 Assets to 2293
$25.7 billion to $49.2 billion
$117.570 Billion
$ 11.980 Billion
$129.551 Billion
63. A View of the Sixty Billion Dollar Trouble Asset Class
64.
65. Foreclosures are quick to pull
down surrounding property
values in both the residential
and commercial marketplace.
New property owners who enter the market on a much lower basis WILL
undercut rents to establish a strong tenant base….and destroy the ability for
rental increases for some time.
Cash will remain king…giving TREMENDOUS opportunity for investors with
liquidity to enter these markets…but poses a serious threat for those who are
currently in the market.
67. Snapshot of other Markets:
The graph illustrates both the estimated dollar value of the
distressed situations (bars) as well as the relative size of the
distress compared to the size of each market (diamonds).
Distressed volume is scaled by comparing it to total
transaction volume from 2005-2008 in each market.
68. Financing Practices Before the Credit Crunch:
• 70-90% LTV
• Non-recourse
• Interest Only Loans
• CMBS existed = loose underwriting
• Pro-forma Rents acceptable
• Minimal equity requirements
• Minimal Reserve requirements
• Banks extensions based on these standards
Pre-Crisis Valuation 2007
NOI (Year 1 $6,000,000
Growth Rate 3%
Hold Period 7 Years
LTV 70%
Interest Rate 5%
Going-in-Cap Rate 6%
Exit Cap Rate 6%
Levered IRR 15.6%
Building Value $100,000,000
IV. Leverage Capability Erosion:
69. Current Loan Underwriting
• 50%-65% Loan to Value
• Full recourse generally required
• Interest Only Loans: RARELY EXIST
• CMBS is DEAD-may return in another form
• Underwriting actual project cash flow
• Bank seeking maximum equity contribution
• More reserves to cover risks/exposure
• Banks extensions based on these standards
Post-Crisis Valuation 2009
NOI (Year 1 $6,000,000
Growth Rate 1%
Hold Period 7 Years
LTV 50%
Interest Rate 7%
Going-in-Cap Rate 9.3%
Exit Cap Rate 8.3%
Levered IRR 15.6%
Building Value $64,000,000
% Increase / (Decrease) (36%)
Financing Practices After the Credit Crunch:
71. There is no one available to step up and fund these loans:
72. Two Potential Scenarios:
Even if there is adequate capital to keep existing loan inventory afloat, this
inventory will saturate potential loan capacity restricting both future real
estate development and growth …
Source: Foresight Analytics
If loans go to default, future loan maturity pressures are alleviated.
Significant devaluation will occur as these REO assets re-enter the market.
Option 1: Loan Foreclosure:
Option 2: Loan Modification / Restructure
…for the next decade.
73. Deutsche Bank: Of the $154.5 Billion of securitized commercial
mortgages coming due between now and 2012, about two-thirds
likely won’t qualify for refinancing.
The bank estimates the default rate of the $700 billion of CMBS
could hit at least 30%, and loss rates which figure in the amounts
recovered could reach more then 10%.
Source: Wall Street Journal
Debt Eats Equity in the Deleveraging Cycle
74. Matthew Anderson partner of Foresight Analytics:
“Besides securities backed by commercial real-estate loans, about $524.5
billion of whole commercial mortgages held by U.S. banks and thrifts are
expected to come due between this year and 2012. Nearly 50% wouldn’t
qualify for refinancing in a tight credit environment, as they exceed 90% of
the properties value.”
Smaller Regional Banks are NOT immune from toxic assets:
In contrast to home mortgages –the majority of which were made by only
10 or so giant institutions –hundreds of small and regional banks loaded up
on commercial real estate. As of Dec. 31, 2008 more than 300% of their
risk-based capital is in commercial real-estate loans, including both
commercial mortgages and construction loans.
This means there will less banks in the future to offer loans.
75. William C Dudley, president and CEO of the New York Fed explained to the Council on Foreign
Relations in New York this month how bankers have become adverse to even lending to
creditworthy lenders. “Essentially it is going to be like this,” Dudley said even if you think you are
a good credit , I am not going to lend to you, because others may not share the same opinion. The
problem is, if no one else thinks you are good, I may not be able to get my money back if I need it.
Bankers are resistant to making loans to anybody.
76. What are banks trying to do right now?
• Empty their loan portfolios of non-cash flowing assets.
• Limit risk exposure rather than expand their loan portfolios
• Cash available for commercial real estate is shrinking…not expanding
• Debt cost is increasing…as is the value of liquidity
• Future CMBS Loan Maturities further exacerbates this recovery
• Bank’s current risk intolerance makes a 2010 recovery unlikely
77. Real Estate battlegrounds under attack.
Market Obstacles
I. Cash Flow Integrity: Tenant Strength is weakening
Tenant base is eroding
Absolute decrease in rental rates
Influx of capital is being required to salvage income streams
II. Tax Benefits: Capital Gain treatment has been lowest in history and in question
Carried Interest Compensation Tax will be increasing
Depreciation Modifications are likely
III. Capital CAP Rates rising (Value Erosion)
Appreciation Values will fall for the next 12-36…48 months?
Challenges: NOI rapidly declining
IV. Leverage: Money no longer cheap (CMBS Loans virtually non-existent)
Capability Distressed Assets plague portfolios
Eroding: $1.4 Trillion in loan maturities creating refinancing nightmares
78. Questions and Considerations:
• What investment return did you expect from your property?
• Which of these four pillars seem secure enough to reach your objectives?
• How secure do you feel about your equity?
• Is your current real estate advisor informing you of these implications?
• Based on your position, how should you address the marketplace to
maximize the opportunity ahead?
79. How to Survive in a Downward Market (2/1/2009)
Idea in Brief:
These days business competition feels much like boxing arena, where
punches come from different directions, strategies change blow by blow and
another challenger is always waiting to take you on.
Compare the boxing match between Muhammad Ali and George Forman,
two boxers who illustrate two fundamental approaches in mastering the
uncertainty of today’s environment.
80. Agile firms: The Ali’s:
quickly spot and exploit
emerging business
opportunities.
Ali won the famous “Rumble in the Jungle,” and the fight
made clear just how great Ali was at taking a punch and also
highlights the different, perhaps dangerous, change that Ali
had made in his fighting style, by adopting the “rope-a-dope”,
instead of his former style that emphasized movement.
81. Absorptive firms: The Forman’s
Have the strength and stamina to
weather market shifts.
George Forman became the oldest
man ever to win a major heavyweight
title when, at 45, he knocked out 26-
year-old Michael Moore in the 10th
round.
89. Getting Ready…
Are your advisors giving you vital
information to best position your
investment assets?
Which one of your properties is the
weakest link?
The Agile Position: Get your
properties prepared for the 2nd
and
3rd
waves of the storms ahead.
TAKE ADVANTAGE of the greatest
wealth asset transfer in your lifetime!!!
91. Court Bradley
Commercial Real Estate Advisor
DataVest | Sperry Van Ness
979.777.7505
court.bradley@svn.com
Bruce Marshall
Managing Director
DataVest | Sperry Van Ness
214.261.6310
bruce.marshall@svn.com
99. The question I ask you if you are going to
make a move in this market is your current
broker maximizing your asset value with
information, a national marketing
platform and a pro-active willingness to
split fees to his detriment but to your asset
value maximization?
100. A train’s a-Coming!
• Success Ratio’s on Sales Offerings Today @ 25%
• Market Prices Down 21% since Peak in 2005
• Debt Capital Sources Evaporating
• Cap Rates are rising at 15 Basis Points a Month
• No Positive Debt Leverage Availability
• Existing Loan Capacity used up on Existing Loans