Angelic Real Estate 2014 Commercial Real Estate Capital Markets View

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Status Report: 2014 Commercial Real Estate Capital & Investment Markets Flint Oak, Kansas February, 2014 Presented by Gabriel Silverstein, President, Angelic Real Estate

description

Angelic Real Estate presentation delivered by company president Gabriel Silverstein at Flint Oak, Kansas summit February 8, 2014. The presentation includes a look back and recap of 2013, and a look forward at 2014 and beyond, including both market trend reporting and predictions and guidance. The primary focus of the presentation is commercial real estate lending and investment market activity and driving factors.

Transcript of Angelic Real Estate 2014 Commercial Real Estate Capital Markets View

Page 1: Angelic Real Estate 2014 Commercial Real Estate Capital Markets View

     Status  Report:  2014  Commercial  Real  Estate  Capital  &  Investment  Markets  

Flint  Oak,  Kansas  February,  2014  

Presented  by  Gabriel  Silverstein,    President,  Angelic  Real  Estate  

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Heard  at  the  MBA  Conference  

•  MBA  only  predicLng  7%  increase  in  lending  over  2013,  to  $300B;  Lifeco  lending  in  2013  was  a  record  $63B  

•  80%  LTV  will  probably  happen  again  in  2014  –  “Feels  like  2006”  said  one  lender  in  an  email  Tuesday.    

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The  fear:    large  loan  maturity  volume  in  2015-­‐2017  from  peak-­‐of-­‐market  loans,  parLcularly  CMBS  loans,  is  high  risk  to  market  stability  

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But  CMBS  is  Back…  (so  is  the  rest  of  the  lending  market)  

New  CMBS  Issuance  Volume  

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…And  Outstanding  CMBS  Loan    Volume  is  Actually  Shrinking…  

0   1   2   2   2   4   11   20   30  48  

82  

147  

190  221  

267  296  

350  

414  

539  

697  

867  

745  

708  669  

687  

637   625  

9.44%  

17.57%  21.53%  

24.59%   25.75%  

21.19%  24.27%  

29.33%  32.76%  

37.20%  

0%  

10%  

20%  

30%  

40%  

50%  

60%  

70%  

80%  

90%  

100%  

 $-­‐    

 $100    

 $200    

 $300    

 $400    

 $500    

 $600    

 $700    

 $800    

 $900    

1987   1989   1991   1993   1995   1997   1999   2001   2003   2005   2007   2009   2011   2013  

CMBS  

CMBS  %  Share  (CMBS+RMBS)  

Billion

s  of  Dollars  Outstanding  

CMBS  Percent  of  U

S  Non-­‐A

gency  SecuriLzed  Mortgage  Backed  Security  U

niverse  

Data  from  SecuriLes  Industry  and  Financial  Markets  AssociaLon  (SIFMA)  

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…While  Investment  Sales  Volume  Has  Returned  

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Interest  Rates  •  Long-­‐term  index  rates  (5/7/10  year  swaps,  10/30  year  

treasuries,  etc.)  will  conLnue  to  rise  in  2014,  but  not  as  sharply  or  high  as  feared,  short  term  rates  will  likely  move  lijle  unLl  2015  

•  Interest  rates,  especially  mortgage  rates,  are  sLll  near  historic  lows,  and  as  LTV  restricLons  ease,  long-­‐term  financing  is  very  ajracLve  today  

•  Bridge  financing  for  good  assets  is  cheaper  than  it  has  ever  been,  and  is  readily  available  

•  Spreads  will  conLnue  to  compress,  resulLng  in  mortgage  rate  rises  being  muted  compared  to  index  rate  increases  

•  Upward  rate  movements  will  be  felt  more  at  the  high  end  of  the  LTV  scale,  moderate  LTV  level  debt  interest  rates  will  see  smaller  increases  

•  For  leveraged  return  buyers,  LTV  increases  will  offset  rate  increases  to  maintain  leveraged  returns  without  price/cap  rate  changes  

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CMBS  Rates  vs.  10  Year  Treasuries  

•  The  10  year  treasury  in  2013  averaged  217  bps  below  2001-­‐2007  stable  averages  (average  2001-­‐2007  was  4.50%);  current  market  is  approx.  180+  bps  below  2001-­‐2007  stable  average  10  year  treasury  yield  

•  AAA  CMBS  spreads  in  2013  were  80  bps  above  stable  averages  of  the  same  era  (118  bps  vs.  38  bps  -­‐  38  bps  was  average  spread  even  looking  back  to  1998)  

•  Spread  compression  will  mute,  but  not  completely  offset  rises  in  interest  rate  indices  

Graph  courtesy  of  UBS  

8.21 7.38

6.65 5.66 5.57 5.40 5.91 5.84

6.55 5.74 5.67 5.13 4.73

6.02 5.00 4.59 3.99 4.26 4.28

4.79 4.63

3.64 3.24 3.20 2.76 1.79

2.34 38 52 46 37 30 27 26 46

341

711

346 228

190 118

0

200

400

600

800

1,000

1,200

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Spread (bps) C

oupo

n (%

)

Ave. 10-yr Conduit Loan Coupon Ave. 10-yr Treasury Ave. 10-yr AAA CMBS Spread

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Cap  Rates  vs.  Interest  Rates  

•  Cap  rates  sLll  at  relaLve  high  spreads  vs.  treasuries  •  Interest  rate  rises  will  not  increase  cap  rates  (on  mulL-­‐

tenant  properLes),  cap  rates  could  even  conLnue  to  fall  

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Cap  Rates  Have  ConLnued  to  Fall  (even  as  interest  rates  have  increased)  

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Short-­‐Term  Commentary  •  CMBS  (and  all  loan)  delinquencies  are  down  •  Extend  and  pretend  worked,  sort  of  •  InflaLon  will  remain  tame  at  least  through  2014,  job  

growth  will  remain  slow  •  Headline  unemployment  will  fall  slowly  but  steadily,  real  

unemployment  rate  is  much  higher  than  published  rate  •  Affordable  Care  Act  will  not  ruin  the  economy,  but  it  will  

require  major  overhaul,  for  now  it  will  be  most  impacqul  as  a  tax  on  the  middle  class  and  entrepreneurs  

•  2014  elecLons  will  clear  up  nothing  –  voters  are  too  disenchanted  and  will  remain  apatheLc  unLl  it  is  too  late  

•  Sale/Leaseback  market  will  become  more  acLve  in  2014  •  CMBS  will  surprise  on  the  upside  again,  >$150B?  •  Lifeco  and  GSE  lending  will  both  remain  strong  

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Long-­‐Term  Commentary  •  Commodity  and  raw  material  prices  will  rise  faster  than  other  costs  of  producLon  over  the  next  decade  

•  Capital  market  pricing  inputs  should  remain  relaLvely  stable,  cap  rates  will  be  held  low  by  the  prospect  of  rent  growth  (finally),  offsetng  the  negaLve  impact  of  rising  interest  rates  

•  The  US  Dollar  is  in  jeopardy  of  losing  its  global  relevance  •  LEED-­‐designed  will  substanLally  overshadow  LEED-­‐cerLfied  (and  Energy  Star).    An  alternaLve  self-­‐cerLficaLon  brand  will  emerge  in  the  market.    Users  will  focus  on  actual  cost  saving  results,  not  just  being  “green”  for  appearances  

•  This  market  cycle  should  peak  in  2017-­‐2018,  downturn  in  2019-­‐2020  

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Long-­‐Term  Commentary  (cont.)  •  More  posiLons  will  become  directly  compensated  relaLve  to  revenue  producLon  and  profitability  

•  ImmigraLon  reform  needed,  in  doubt  for  2014  •  Emerging  markets  could  see  large  volaLlity  as  they  strive  for  maturity,  US  benefits  from  perceived  stability  

•  Structural  unemployment  will  conLnue  to  irk  technology  firms  and  other  new-­‐era  economic  drivers  in  the  US,  educaLon  system  failure  is  a  brewing  super-­‐storm  

•  United  States  reLrement  planning  is  a  disaster  that  will  only  worsen  as  the  Baby  Boomer  generaLon  ages,  where  expectaLons  and  realiLes  are  incongruent  

•  US  infrastructure  is  rapidly  aging  and  generally  well  over  design  capacity  

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Graph  created  using  US  Treasury  Dept.  website  

Beware!:    key  index  rates  conLnue  to  trend  downward  in  all  economic  cycle  stages  and  the  Federal  Reserve  has  lijle  room  to  move  rates  down  in  the  future  to  counter  negaLve  economic  headwinds  –  there  is  no  extra  gas  in  the  tank  

Future  Concern:  No  More  Room  to  Squeeze  

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MulL-­‐Family  Market  Trends  

•  Younger  generaLon  household  creaLon  will  remain  a  rental  user,  at  least  for  a  while  

•  Federal  government  will  conLnue  to  promote  poor  consumer  living  decisions  (i.e.  rent  vs.  buy),  which  will  exacerbate  next  downturn…again  

•  Single  family  home  building  will  conLnue  to  strengthen,  compleLons  will  increase  moderately  in  2014,  but  will  not  badly  impact  rental  stock  

•  Secondary  and  terLary  markets  will  see  new  development  increase,  but  not  as  much  rent  growth  as  primary  markets  

•  Freddie/Fannie  quesLons  remain  and  are  the  single  biggest  risk  of  market  dislocaLon,  which  could  raise  cap  rates  

•  The  investment  market  will  taper  in  2014  for  mulL-­‐family  

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Hotel  Market  Trends  

•  The  market  has  struggled  to  regain  pricing  power,  but  will  finally  do  so  in  2014    

•  A  new  hybrid  of  limited  service  and  full  service  hotels  will  flourish  this  cycle  (Yotel,  The  Five,  Alov,  etc.)  

•  Full  service  hotels  will  no  longer  be  able  to  charge  for  wi-­‐fi  and  similar  services  within  five  years,  if  not  sooner  

•  Supply  increases  will  remain  minimal,  well  below  long-­‐term  market  averages  

•  Investor  interest  will  increase  with  broad  RevPAR  growth  in  2014,  Blackstone  IPOs  demonstrate  underlying  investor  bullishness    

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Retail  Market  Trends  •  Medical  will  conLnue  to  trend  upward  as  a  retail  user  base  

•  Retailers  will  start  following  roovops  again,  but  not  in  2014  (probably  in  2015)  

•  Showrooming  and  same-­‐day  delivery  for  sales  from  e-­‐commerce  site  will  conLnue  to  reshape  the  face  of  the  asset  class  –  shiving  storage  to  display  square  footage  raLos,  keeping  store  footprints  smaller,  etc.  

•  Regional  malls  may  not  all  be  dead,  but  most  sLll  need  to  be  reinvented  

•  Strong  rent  growth  to  come  for  infill  retail  space  •  Investors  are  back  into  retail  in  force  in  2014  and  cap  rates  will  conLnue  to  fall  (except  on  single  tenant  buildings  where  they  are  at  a  floor)  

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Industrial  Market  Trends    •  Cap  rates  will  level  and  remain  stable  •  Spec  building  returns  across  most  markets  •  Panama  Canal  impact  misunderstood  •  E-­‐commerce  fulfillment  dominates  big  BTS  headlines,  but  remains  a  BTS  driver,  not  a  spec  building  driver    

•  Clear  heights  will  keep  going  up:  36’  is  the  new  32’;  40’  will  start  to  become  widespread  this  cycle  

•  Most  bulk  distribuLon  will  want  to  be  on  the  metro  perimeter,  not  infill,  because  of  increasing  metro  traffic  costs  

•  DomesLc  manufacturing  growth  will  help  backfill  smaller,  otherwise  obsolete  product  –  for  now…  

•  Maybe(?)  insLtuLonal  investors  will  begin  to  realize  that  today’s  metal  buildings  are  not  the  metal  buildings  of  50  years  ago  

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Office  Market  Trends  •  Office  BTS  market  will  become  acLve  again  in  2014  

•  Technology  infrastructure  investment  will  conLnue  to  become  more  and  more  demanding  on  office  owners  and  will  make  more  buildings  obsolete  

•  Older  stock  will  conLnue  to  be  converted  to  alternaLve  uses  •  Younger  generaLons  redefining  not  only  what’s  inside  the  box,  

layouts  and  use,  but  shiving  demand  to  urban  core  and  mini-­‐core  locaLons,  parLcularly  with  public  transportaLon  infrastructure  

•  Yield  chasing  investors  will  finally  move  to  secondary  and  terLary  markets  in  2014  but  core  investors  will  conLnue  to  be  cauLous  

•  Spec  office  building  will  begin  in  earnest  in  2014  in  major  markets  

•  AlternaLve  working  strategies  will  conLnue  to  proliferate  but  will  not  cause  the  demise  of  the  enLre  office  market  

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The  End  

(or  is  it  just  the  beginning?