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Transcript of Us policy econ_ggu_pres_oct_25_master_full_master_1_c
Time: 4:00 – 7:00 pm Location: 536 Mission Street, Ro om 6208-6211
The Political Philosophy and Economy of Commercial Real Estate Investment: Global, United
States, and SF Bay Area Forecast 2012-2017
Prepared for
Golden Gate University Faculty and StudentsSan Francisco Bay Area Commercial Real Estate
CommunityPrepared by
Lawrence Souza, CCIM/CRE/RICS- Johnson Souza Group, Inc.: Principal – Real Estate and Financial Economist and Broker
- Golden Gate University: Adjunct Professor – Real Estate/Finance/Economics; DBA Candidate: Bus Admin.
Thur 10/25/12 5:00 PM
• Introduction : Systematic Risks, Discount Rates and Intrinsic Values.
– Structural Risks: Budget Deficits and Total Debt
• Institutional Analysis : Historical, Philosophical, Political and Economic
• Commercial Real Estate Economic and Market Analysis– Modern Real Estate Portfolio Theory (MREPT)– Real Estate and Financial Institutional Analysis– Monetary Oversight and Re-Regulation– Economic Indicators and Employment– Technology and Venture Capital Flows– International Trade– Infrastructure Policies and Public/Private Construc tion
– Commercial Real Estate Investment, Space and Debt/E quity Markets
• Mortgage Delinquency, Distress and Security Defaults• Real Estate Investment Trusts (REITs)
– Residential Real Estate Markets
• Conclusions and Appendix : Education, Training, Certification and Networking
OutlineOutline
“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex,”
“The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic process.”
Republican President Dwight D. Eisenhower, Farwell Address, January 17, 1961.
Introduction
Political Philosophy and Economy of Commercial Real Estate
Investment
Institutional Foundations for Efficient Capital Markets
“Efficient real estate and securities capital markets require strong public and private sector cooperation, disclosure of government and corporate financial conditions, and institutional and individual investor confidence in financial and political institutions.” Lawrence Souza, 1996
Cross Sectional ApproachCommercial Real Estate Investment
“The nature of commercial real estate investment is cross-sectional in nature, taking multiple disciplines and approaches to solving the
valuation equation.”
V REt = THEOLOGY + e^ Linquistics
V REp1 = PHILOSOPHY + e^ Language
V REl = LAW + e^ Psychology
V REp2 = POLITICS + e^ f Sociology
V REtp3 = PUBLIC ADM INISTRATION + e^ Technology
V REte = ECONOM ICS + e^ Telecom
V REtf = FINANCE + e^ Cognition
V REta = ACCOUNTING + e^ Logic
Commercial Real Estate Valuation –Income Approach - CAPM
CAPM = E (r) = ie = r f + β (rm – rf)
VRE = NOIie
iRE = NOIVt
PVRE = NOI (1+g)n + NOI/(i-g)(1+i)n (1+i)n
Σ
Michael Giliberto, Real Estate in A Capital Markets Context.
i = Discount Rate = Risk Free Rate + Credit RP + i lliq RP + σP
i = Discount Rate = Opp Cost of Capital = Exp Rate o f Return =
Risk Free Rate (RR + InfExp)
+ Inflation RP
+ Credit RP
+ illiq RP
+ Maturity RP
+ Currency RP
+ Tax RP
+ Political RPPolitical RP
++ Policy RPPolicy RP
+ σRP*
Discount Rate Determination - Volatility
Institutional AnalysisHistorical-Philosophical-Political-
Economic Risk
Political-Economic Institutional Analysis“Over the past 95 years, society and the economy have witnessed great prosperity, wars, depressions, recessions and revolutions. We have just witnessed a revolution in political-economic ideological thought – from Keynesianism to Monetarism – and in its wake…..institutional deconstruction, destruction and market failure…… the question is…… what social, political and economic institutional synthesis will develop ….and how will history judge us and how will we be remembered.”
Lawrence Souza
Rise and Fall of the Great Powers : Economic Change and Military Conflict From 1500 to 2000,
by Paul Kennedy
• Over long-term, specific military expenditures correlate strongly with available resources and economic durability. Military "over- stretch“, relative decline, are consistent threats facing powers whose ambitions and security require greater resources.
http://en.wikipedia.org/wiki/The_Rise_and_Fall_of_the_Great_Powers
• The need for additional capital (natural, human, technological, land resources) – to pay for over extended military expansion and geographic presence, governments are forced to print money (hyper-inflation), issue bonds (high borrowing costs) and raise taxes (negative multiplier affect).
This eventually leads to a devaluation in sovereign currencies, inflation, negative wealth affects, social unrest, stagnation and decline.
http://www.amazon.com/Rise-Fall-Great-Powers/dp/0679720197
Interdisciplinary/Cross-Sectional Approach to Real Estate Market Analysis
The Political Philosophy and Economy of Commercial Real Estate Investment
Modern Hegelian Dialectical – Modern Application
SYNTHESIS/THESIS??
Transition (30 years)
SYNTHESIS/THESIS ANTI-THESIS(2007 -to- 2037)
Neo-Liberal Economics Financial Institutional Crisis New-KeynesianMonetarism (Friedman) Economic Dislocations Re-RegulationNeo-Classical Thought Debt Monitization Progressive Democratic Policy
Managed Markets
Transition (32 years)
SYNTHESIS/THESIS ANTI-THESIS(1975 -to- 2007)
Neo-Keynesian Neo-Liberal EconomicsCold War Capitalism Monetarism (Friedman)
Globalisation Neo-Classical Thought
Transition (30 years)
SYNTHESIS/THESIS ANTI-THESIS(1945 -to- 1975)
Democratic-Capitalism Neo-KeynesianKeynesian (FDR) Cold War Capitalism
Centrist Political Ideology GlobalisationRegulated Markets
Conflict/Wars/Transition (30 years)(1915 - 1945)
THESIS ANTI-THESISAristocracy World Wars I/II Democratic-Capitalism
Authoritarianism Korean War Keynesian (FDR)Dictatorship Cold War Centrist Political Ideology
Fascisim Proxie Wars Regulated Markets
32 Years
30 Years
30 Years
30 Years
Keynesian/Neo -Keynesian
Period
Liberal/Neo -Liberal/Monetarist
Period
Democratic Capitalism
?!?!?
“Institutional deconstruction is the dismantling of pluralistic and democratic institutions by powerful interests within society. The goal is to “deconstruct”these institutions, and replace them with new autho ritarian institutions that enforce and redistribute private property rights to privileged interests, at any cost.”
Jacques Derrida, Martin Heidegger, Friedreich Nietzs che, Larry Souza, Et.Al.
PostPost--Modern Philosophy Modern Philosophy -- Institutional DeconstructionInstitutional DeconstructionV io la t io n s P lu ra lis t ic /D e m o c ra tic In s t itu t io n a l D e c o n s tru c t io n
B ill o f R ig h ts M e d ia C e n s o rs h ip (In a b ility to R e p o rt fro m W a r Z o n e s )
M e d ia C o n s o lid a tio n o f O w n e rs h ip (V io la tio n 1 9 9 6 T e le c o m A c t)
R e p o rte r In c a rc e ra tio n (L a c k o f S h ie ld L a w s )
C itize n E a ve s d ro p p in g a n d W ire ta p p in g (S p e c ia l A g e nc ie s )
C o n s t itu t io n a l P riva te P ris o n a n d L e g a l S ys te m s (K id n a p p in g /M ilita ry C o u rts )
R ig h ts W a ve r H a b e a s C o rp u s a n d D u e P ro c e s s (N o L e g a l R e p re s e n ta tio n )
P riva tiza tio n o f P u b lic P ro p e rty a n d G o o d s (L a n d /R e d is tr ic tin g )
L a c k o f E n v iro n m e n ta l P ro te c tio n a n d P u b lic S a fe ty (F o o d /D ru g s )
A m m e n d m e n ts T a lk in g o f In d iv id u a l R ig h ts (L a te T e rm A b o rtio n /C o n tra c e p tive s )
to th e R e c la s s if ic a tio n o f R ig h ts (H e a lth c a re L im ita tio n s a n d C o ve ra g e )
C o n s titu t io n
U n ific a tio n o f C h u rc h a n d S ta te (P r iva te C h a ritie s /S o c ia l S e rv ic e s )
L a c k o f G o ve rn m e n t T ra n s p a re n c y/A c c o u n ta b ility (E x e c u tive P r iv ile g e )
T a x a tio n w ith o u t R e p re s e n ta tio n (M o n e tiza tio n o f D e b t)
The Political Philosophy and Economy of Commercial Real Estate Investment
Binary Institutional-Ideological Extremes
Interdisciplinary/Cross-Sectional Approach to Real Estate Market Analysis
Keynesian-Industrial Policy Neo-New Deal• Wage/Labor• Infrastructure• Technology• Institutions/Government• Equity/Utilitarian• Production/Manufacturing• Domestic Comparative Advantages
• Full Employment• Individual/Social Rights• Budget Surplus• Fiscal Policy• Public Goods• Regulation
Friedman-LiberalismFree Market Capitalism• Capital• Interest• Markets• Price Bubbles• Distribution• Finance• Services• Globalization• Inflation• Private Property Rights• Deregulation• Budget Deficits• Monetary Policy
“Progressive Democrats” “New Democrats/Republicans”
Vs.
• Greenspan developed a New Business Cycle that privileges financial-capital markets over labor markets.
• Major shift to preemptive monetary policy strikes toward inflation targeting, and away from full employment-real wage growth targeting (Paul Volcker -> Ben Bernanke).
• Foundation of monetary policy was deregulation, a financial boom in the stock and real estate markets and free trade, driving up consumer consumption and debt levels.
• Results : Cycle marked by deindustrialization, growing trade deficits, financial-asset market price bubbles, dollar overvaluation, L-T decline real wage growth, growing household debt levels, under investment by business in capital stock
• Risks : Fragile economy-recovery, high debt levels, under performing labor markets, exposure to financial market corrections, moral hazard –Fed intervention to rescue markets
Thomas Palley, Challenge, Nov.-Dec. 2005.
Greenspan Critique: Labor vs. CapitalGreenspan Critique: Labor vs. Capital
The Political Philosophy and Economy of Commercial Real Estate Investment
Public Choice Theory – Mean Voter Theorem
Interdisciplinary/Cross-Sectional Approach to Real Estate Market Analysis
LEFT RIGHT
Voter Spectrum
Voter Spectrum
Mean Voter (Center)
Left of Center Right of Center
Non-Voting Population
Kennedy/Johnson
NixonCarter Regan/Cable
Clinton
Bush I
Bush II/Fox News
Tea PartyRomney/ McCain/ Palin/ Christian Coalition/NRA
Obama
HomogeneousHeterogeneous/Fractured Coalitions
Back-to-Center Strategy
Split Republican Party
Rightward Shift
Policy Consensus
Roosevelt/TrumanEisenhower
Systematic Monetary Policy Risk
Yield Curve Theory and AnalysisYield Curve Theory and Analysis
-300 bsp
-300 bsp
-250 bsp
-275 bsp
-200 bsp
-225 bsp
All debt + equity securities priced off of the yiel d curve (term structure interest rates)
Although S-T Risk Free Rates near Zero (negative re al) debt/equity credit and illiquidity risk premium s still high
Inflation ExpectationsInflation ExpectationsU.S. Producer and Consumer Price Index (PPI/CPI)
http://www.bls.gov/home.htm
Sept Year-Over-Year Change: 5.5% (1950), 0.0% (1960), 3.4% (1970), 13.3% (1980), 5.9%(1990), 3.3% (2000), 3.9% (2010), +7.2% (2011), 2.2% (9/12)
-6.6%
2.5% (1950), 1.2% (1960), 5.7% (1970), 12.8% (1980), 6.2% (1990), 3.5% (2000), 1.1% (2010), 3.9% (2011), 2.0% (9/12)
-2.0%
9.8%
5.5%
http://www.federalreserve.gov/Releases/G17/Current/default.htm
2.2%
2.0%
Since 1947, Up 977%
Since 1947, Up 661%
Real Interest Rates (From 1953 to 2011)
-75%~85%
Real Yield Curve Theory and AnalysisReal Yield Curve Theory and Analysis
Real Yield Curve Inverted – Shifted Downward 2012 : rising consumer-producer price inflation-expectations (Oil Prices).
Real Yield Curve (10/24/11Real Yield Curve (10/24/11 --toto --10/23/12):10/23/12):
5 yr T-bond -72 bpts -0.66% to -1.38%
7 yr T-bond -84 bpts -0.27% to -1.11%
10 yr T10 yr T --bond bond --94 94 bptsbpts +0.23% to +0.23% to --0.71%0.71%
20 yr T20 yr T --bond bond --78 78 bptsbpts +0.77% to +0.77% to --0.01%0.01%
30 yr T30 yr T --bond bond --100 bpts+1.40% to +0.40%100 bpts+1.40% to +0.40%
Real Rate = Nominal Risk
Free Rate -Inflation
Expectations
(Negative Real Returns)
http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield
Yield 10Yield 10--Year TreasuryYear Treasury
Source: Federal Reserve Board of Governors. http://www.federalreserve.gov/
10-Year Treasury Yield down from high of 15.8% in J uly 1981. Since 2006-2007, down from high of 5.2% to 2.1% Dec 2008. Up to 4.0% in 09’, 2.4% in Oct 10’, 2.0% in Sept 11’, 2.2 % April 12’.
• Low inflation expectations (falling economic growth )• Geo-political default/oil risk (Greece, Spain, Ital y, Portugal)• Quantitative Easing/Accommodative Monetary Policy• Flight to Safety (U.S. Treasury Backed Securities)
10-Year Treasury Yields are the lowest since 1954 a t 2.3%, and forthe same time period are:
• -240 bsp 4.7% (2001)• -530 bsp 7.6% (1991) • -1,300 bsp 15.3% (1981)• -380 bsp 6.1% (1971)• -160 bsp 3.9% (1961)• -50 bsp 2.8% (1951)- 443 bsp Avg.
Decline in Velocity of Money- Global Shadow Banking- Labor Productivity/Participation- Capital/Labor Substitution- Global Jobs Outsourcing- Fed Over Accommodation- Falling Savings Rate- Rising Cash BalancesQTM = G r*I = V*M s
16.0%
6.0%
5.0%
4.0%
2.0%1960-to-1985 1985-to-2012
2012-2013F 2.0%~3.00%
Mtg Int Rt = 2.0% + 1.5% = 3.5%
Deflationists argue the decline in the velocity of money can
only lead to declining productivity, lower wages and
excess capacity
Velocity of Money – Deflationary – Downward Pressure on Rates
Inflation ExpectationsU.S. Consumer Price Index (CPI) - Monthly Volatility
Source: Bureau of Labor Statistics.http://www.bls.gov/home.htm
Volatile Price
Period
Volatile Price
Period
Stable Price
Period
9 Years14 Years11 Years
Inflation ExpectationsInflation Expectations
Oil Prices up from $11.8 in Feb 1999 to $146.2 in Jul 2008, up 1,141%
Extreme Volatility Past 7 years: speculator dominated market,
hedge against devaluation of dollar
Source: Energy Information Administration (http://www.eia.doe.gov/)
$146.2 Jul 08’
$43.6 Feb 09’
$93.55
$11.8 Feb 99’
Up 161%
Down -70%
Deflationists argue the decline in the velocity of money can
only lead to declining productivity, lower wages and
excess capacity
Philadelphia Gold/Silver Index (PHLX) From 2001 –to - 2012
Source:http://www.marketwatch.com/investing/index/XAU/charts?symb=XAU&time=20&startdate=1%2F4%2F1999&enddate=10%2F23%2F2012&freq=2&compidx=none&compind=none&comptemptext=Enter+Symbol%28s%29&comp=none&uf=7168&ma=1&maval=50&lf=1&lf2=4&lf3=0&type=2&size=2&style=1013
+233%
-71%
+250%+275%
-33%
VIX CBOE Mkt Volatility Index - From 2001 to 2012
http://bigcharts.marketwatch.com
Post-Dot Com Bust 9/11 Econ
Decline
Economic Recovery/Growth Stock/Real Estate
Market Price Appreciation
High Volatility
Falling/Low Volatiltiy
High Volatility
Highly Volatile Capital Market Environments Businesses-Consumers Hold Off on Investment- Consumption
Hold Large Precautionary Cash BalancesMaking Monetary Policy Ineffective (Liquidity Trap)
12
Extreme Capital Market
Shocks/Credit Crisis/Recession/Foreclosures/Curren
cy Crisis
Structural Fiscal Policy Risk
• $15.0 trillion public debt outstanding, $630 billio n in interest; Total Debt-to-GDP to reach ~ 100% by 2012
Crowding Out Effect ~ High Inflation Expectations and Interest Rates ~ Fiscal/Monetary Policy
Ineffectiveness ~ Devaluation of Dollar
• $1.3 trillion annual budget deficit, $640 billion Per Year for Iraq/Afghanistan Wars 10’–15’; defense budget up 40% since 2001.
• Budget deficits to total +$10 trillion over next 10 years.
• Japan and China currently own 44% of U.S. government debt (China/Japan): China $846.7 bill., Japan $821.0 bill., U.K. $374.3 bill., Hong Kong $135.2 bill., Oil Exporting $223.8 bill. U.S. Federal Reserve Buying Most Debt!!!!
US Budget DeficitsUS Budget Deficits
• $789 billion - Economic stimulus package• $280 billion - Freddie Mac/Fannie Mae (Judicial Watch/FHFA)• $200 billion - Carry-over budget from 2008• $750 billion - Troubled Assets Relief Program (TARP)• $160 billion - GW Bush stimulus tax rebates• $150 billion – AIG bailout (US 80% ownership)• $50 billion – Loan to GM (US 60% ownership)• $2.0 trillion – Federal Reserve balance sheet up from $870 billion• $3.13 trillion – Tot. Money Supply Printed less than 9 months • $8.3 trillion – Total Money Supply in Economy (Up 40% YOY)
Risks: Federal Reserve Independence, Credibility and Effectiveness ~ government default, foreign policy, tax and inflation, capital market,
accounting, private property rights, and social welfare.
Source: Tom Campbell, “Stimulating Inflation?; San Francisco Chronicle, 2009.
US Treasury Borrowing Money Printed by US Treasury Borrowing Money Printed by Federal ReserveFederal Reserve
20
30
40
50
60
70
80
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
AdvancedEmerging
Public sector debt as % GDP
Source: IMF
www.tomllewis.com
High Advanced Country Debt Burdens
Moderate Emerging Country Debt Burdens
Debt Gap
Infrastructure Policies and Public/Private Construction
$787.0 billion (Spending + Tax Cuts/Credits)
• Tax Credits/Cuts : – $275B (Co. $51B/Hlth $150B/Ed $91B)
• Infrastructure : $81B (Core $51B/Other $45B)• Energy : $61 billion• Housing : $13 billion• Science : $9 billion
Note: The ability to start and fund projects also comes from local municipal bond financing and state level block grants.
American Recovery and Reinvestment Act (2009)American Recovery and Reinvestment Act (2009)
Websites : http://www.recovery.gov/Pages/home.aspx; http://www.irs.gov/newsroom/article/0,,id=204335,00.html; http://www.sba.gov/recovery/index.html; http://www.gsa.gov/Portal/gsa/ep/contentView.do?contentType=GSA_OVERVIEW&contentId=25761; http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009
Total Public Sector Construction Value 2010 – 2015:
$20.0 billion ($4 billion per yr.)
3x = $60 billion Economic Stimulus
High Paying Union Labor JobsSupplier and Construction Companies
Major Bay Area Regional Construction ProjectsMajor Bay Area Regional Construction Projects
Source: The Registry, Large-Scale Public Const in 2010, pg. 18-19.
Financial Institutional Risk
Institutional Impact of Political Philosophy and Economic Ideology
“I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works.” Alan Greenspan, Chairman, Federal
Reserve System, House Committee on Oversight and Government
Reform Hearing, October 23, 2008.
“The housing bubble was a major cause, if not the cause, of the subprime crisis and the broader economic crisis we are now face.”
Dr. Robert Shiller, Professor of Economics, Yale University, 2008.
“Never let a serious crisis go to waste. What I mean by that is it’s an opportunity to do things you couldn’t do before.” White House Chief of Staff, Rahm
Emanuel, November 2008.
Investment
Real Estate
Industry/ Rest of
U.S.
Rating Agencies
Fannie/Freddie/RMBS/CMBS
• Dilution - Equity Issues• Gov Preferred/Convertible Stock
Purchase• RMBS/CMBS/GSE Debt/Equity
Purchases
Reserve Balances with Federal Reserve Banks
http://research.stlouisfed.org/fred2/series/RESBALNS
QE1 $800 Billion
QE2 $1.2 Trillion
QE3 $1.6 Trillion
QE0 $0 Billion
Total Assets Held by Federal Reserve Bank
http://wallstreetpit.com/16815-bernanke-on-the-feds-bloated-balance-sheet
Driven Largely by MBS and Agency Purchases
Sterilization
RMBS
SWAPS
Paying Interest on Bank Held Reserves with Fed to Limit Liquidity in System
“Fed Lender, Market Maker, and
now Portfolio Manager of Last
Resort”
Com Pap
Term Auction Credit
““ Greatest Greatest Expansion of Expansion of
Credit in HistoryCredit in History ””
““ $1.1 $1.1 triltril . . Excess reserves Excess reserves
sitting idle, sitting idle, higher interest higher interest
rates.rates.
TALF $9.3 bil.
Monetary Oversight and
Re-Regulation
• Phil Angelides (D)• Bill Thomas (R)• Brooksley Born (D)• Byron Georgiou (D)• Bob Graham (D)• Keith Hennessey (R)• Douglas Holtz-Eakin (R)• Heather Murren (D)• John Thompson (D)• Peter Wallison (R)
Financial Crisis Inquiry Commission vs. Wall StreetFinancial Crisis Inquiry Commission vs. Wall Street
• Lloyd Blankfein (Chair/CEO)Goldman Sachs
• Jamie Dimond (Chair/CEO)JP Morgan Chase
• John Mac (Chair)Morgan Stanley
• Brian Moynihan (CEO/Pres)Bank of America
• Tim Geithner (Pres)Federal Reserve Bank New York
http://www.fcic.gov/http://en.wikipedia.org/wiki/Financial_Crisis_Inquiry_Commissionhttp://www.c-span.org/Watch/Media/2010/01/13/HP/R/28350/Financial+Crisis+Panel+Questions+Big+Bank+CEOs.aspx
““We Made MistakesWe Made Mistakes”” ““Outsourced Outsourced Risk ManagementRisk Management”” ““Bonuses May Bonuses May Have Led to Excessive Risk TakingHave Led to Excessive Risk Taking””
““Sold Defective ProductSold Defective Product””““Bought InsuranceBought Insurance””
Hearings 1/13-1/14 2010
• Macro-Prudential Bank Regulator (Federal Reserve)• Improved Regulatory Oversight and Risk Management Practices• Use Monetary Policy (Orthodox/Unorthodox) Regulate Asset Price
Bubbles• Implementation of Regressive/Progressive Income and Capital Gains
Taxes (Wall Street Bonuses-Salary/Bank Leverage Fees)• Return Glass-Steagall Act (1933 – 1999) – Comm/Inv Banks
(Overruled by Gramm-Leach-Bliley Act) – Volker Rule• Bank Levy/Capital Requirements for Derivatives Trading (Book)• Required Holding of Collateral by Rating Agencies (S&P)• Increased FDIC Bank Deposit Insurance Prems (OTS/Fed/OCC)• Increased SEC/FINRA/Justice-Treasury
Dept/FBI/Congressional/State: Oversight, Investigation, Prosecution (Mtg/Securities Fraud) – Goldman Sachs (CDOs)
Goals and Objectives : Alleviate Moral Hazard, Adverse Selection, Principal-Agent Problem, Asymmetric Info rmation.
Financial ReFinancial Re --Regulation (Policy Response)Regulation (Policy Response)
• Promote financial stability by improving accountability-transparency in financial system, end to big to fail, protect taxpayers by ending bailouts, protect consumers from abusive financial services practices.
• Title I : Financial Stability (Oversight Council) by monitoring systematic risk and researching state of economy.
• Title II : Orderly Liquidation Authority (FDIC/SIPC) banks, broker dealers and insurance companies.• Title III : Transfer of Powers to Comptroller, FDIC and Fed, elimination of Office of Thrift Supervision• Title IV : Regulation of Advisors to Hedge Funds and Others, limits exclusion of financial information in
government reporting.
• Title V : Creation of Federal Insurance Office to monitor insurance industry, sales practices.• Title VI : Bank and Savings Associations Holding Company and Depository Institution Regulation
Improvements, intorducing Volcker Rule to reduce speculative investments, limits on hedge fund and private equity ownership.
• Title VII : Wall Street Transparency and Accountability in regards to OTC Credit Default SWAPs/Derivatives.• Title VIII : Payment, Clearing and Settlement Supervision Act, mitigate systematic risk, promote stability in
payment system.• Title IX : Investor Protections and Securities Reform Act, Improvements to Regulation of Securities (SEC),
fiduciary duty BDs/RIAs, whistleblower program.
• Title X : U.S. Consumer Financial Protection Bureau (Fed), regulates products and services with federal law.
• Title XI : Federal Reserve System Provisions.• Title XII : Improving Access to Mainstream Financial Institutions Act, encourage low income people to
participate in financial system.• Title XIII : :Pay It Back Act, amends Emergency Economic Stabilization Act and TARP, unused funds can
not be used for new programs, deficit reduction, spending offsets.• Title XIV : Mortgage Reform and Anti-Predatory Lending Act, organization/servicing mtg standards.
DoddDodd ––Frank Wall Street Reform and Consumer Protection Ac tFrank Wall Street Reform and Consumer Protection Ac t
http://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_Consumer_Protection_Act
• Global regulatory standard on bank capital adequacy , stress testing and market liquidity risk, strengthen regulation, supervision, risk management of banking sector, developed in response to deficiencies in financial regulation revealed by late-2000s financial crisis.
• Improve sector's ability to absorb shocks from fina ncial and economic stress; risk management/governance, strengthen transparency and disclosures; target bank-level or microprudential regulation, raise resilience peri ods of stress; mitigate macroprudential, risk build up and procyclical ampl ification of risks.
• Strengthens capital requirements and regulation of liquidity and leverage: 1) require to hold 4.5% of common equity and 6% of Tier I capital of risk-weighted assets (RWA); mandatory capital conservation buffer of 2.5% and (ii) discretionary countercyclical buffer, require up to another 2.5% of capital during periods of high credit growth; minimum 3% leverage ratio and two required liquidity ratios; requires holding sufficient high-quality liquid assets to cover total net cash outflows over 30 days; and net Stable Funding Ratio requires available amount of stable funding to exceed required amount of stable funding over one-year period of extended stress.
• Add CVA (Credit Valuation Adjustment)-risk due to d eterioration counterparty credit rating; strengthen capital requirements for counter party credit exposures arising from banks’ derivatives, repo and securities financin g transactions; raise capital buffers backing these exposures; provide additional incentives to move OTC derivative contracts to central counterparties (pro bably clearing houses); provide incentives to strengthen the risk management of cou nterparty credit exposures; raise counterparty credit risk management standards by in cluding wrong-way risk.
Basel IIIBasel III : : International Bank Capital/Liquidity Standards International Bank Capital/Liquidity Standards
http://en.wikipedia.org/wiki/Basel_III; http://www.bis.org/bcbs/basel3.htm
Commercial Real Estate Commercial Real Estate Economic and Market AnalysisEconomic and Market Analysis
Modern Real Estate Portfolio TheoryModern Real Estate Portfolio Theory-- Benefits of DiversificationBenefits of Diversification --
N#
SYSTEMATIC RISK
NON-DIVERSIFIABLE
NON-SYSTEMATIC RISK
DIVERSIFIABLE
T O T A L
R I S K
σσσσ/ββββ
Modern Real Estate Portfolio TheoryModern Real Estate Portfolio Theory-- Limitations to DiversificationLimitations to Diversification --
N#
SYSTEMATIC RISK
STRUCTURAL RISK
POLITICAL RISK
ECONOMIC RISK
MARKET RISK
NON-DIVERSIFIABLE
NON-SYSTEMATIC RISKDIVERSIFIABLE
T O T A L
R I S K
σσσσ/ββββ
Modern & PostModern & Post--Modern Modern Real Estate Portfolio Theory Real Estate Portfolio Theory
(MREPT/PMREPT)(MREPT/PMREPT)
Commercial/Institutional Market SizeCommercial/Institutional Market Size
Institutional Real Estate, Inc. (IREI), Visions, Insights & Perspectives (VIP), Real Estate 101, Feb 11, 2011.
• Commercial $10.3 trillion - (30%) $33 trillion Total RE US Market.
• Institutional $3.2 trillion – (9.5%) $33.9 trillion Global RE Market.
• Compared to: Commercial Real Estate 19.3% Total Cap ital Market.
• $16.4 trillion in Equities (31.3%).
• $25.9 trillion in Debt (49.4%).
• Investment Grade Income Producing US Real Estate
• Debt and Equity $5.8 trillion.
• Total Debt $3.3 trillion (57%) – Priv $3.1 tril./Pub $245 bil.
• Total Equity $2.5 trillion (43%)- Priv $2.2 tril./Pub. $275 bil.
• Majority owned by Defined Benefit Public Pension Fu nd Plans.
Institutional Real EstateCapital Allocation Line (CAL)
E (r)
σσσσ/β
Capital Allocation/Security
Market Line (CAL/SML)
LENDING
LEVERAGE
100% High Risk/Return
Portfolio
100% Low Return/Risk
Portfolio
Market Basket
E (r)*
σσσσ*
Higher Return/Risk Real Estate Investments
Lower Risk/Return Real Estate Investments
Loan Origination
Direct Real Estate Development
MultiMulti--Asset Portfolio Management/Movements Along the Efficient FrontieAsset Portfolio Management/Movements Along the Efficient Frontierr
Rf
REAL ESTATE/ENERGYINSURANCE HEDGE
Applications In Portfolio Theory – Target
Average Standard Metro Annual Return DeviationOrange County 13.4% 7.6%SF Bay Area 15.5% 8.8%Seattle 14.3% 9.3%San Diego 13.7% 9.4%Los Angeles 14.4% 9.9%Sacramento 13.8% 11.0%Denver 12.0% 11.2%Portland 12.5% 10.0%Salt Lake City 13.0% 11.0%Phoenix 14.1% 11.4%Tucson 14.1% 11.4%Riverside 11.6% 11.9%Las Vegas 5.1% 6.6%Albuquerque 2.4% 4.4%
Sources: National Real Estate Index (NREI) and BRE Properties Research Department
Total Returns are calculated by the year-over-year change in sales price per square foot on a quarterly basis (Capital Appreciation) plus the annualized cap rate (Income Return) per quarter.
1.3
0.80.5
Risk-Adjusted Rates of Return are calculated by dividing the Total Average Annual Rate of Return by the Standard Deviation (Risk) for each metro area.The Risk-Adjusted Rate of Return measures the amount of return for each unit of risk. For example Orange County provides 1.7 units of return for each unit of risk.
1.21.21.21.0
1.41.41.31.3
1.71.71.5
Risk-Adjusted Rate of Return 1986-2000
Risk-AdjustedRate of Return
Balanced Conditions for Long Periods:
• LA/Orange County/Riverside• San Diego• Bay Area• Seattle
Modest Conditions ofOver/Under Supply:
• Sacramento• Salt Lake City• Portland• Denver
• Job Growth• In-Migration• Housing Demand• Positive Net Absorption
• Low Vacancy Rates• High Effective Rents• Prices Above
Replacement
Applications In Portfolio Theory – Target
Real Estate Supply/DemandAnalysis
Real Estate Supply and Demand Analysis
Rent Growth %
# Units
Supply
(Space Available)
Demand
(Absorption)
Market
Equilibrium
*Rent
Growth
* Existing Inventory
Inflation Rent Growth (3.5%)
Structural Vacancy Rate
(5%)
LongLong--Run Market EquilibriumRun Market Equilibrium
No Incentive to Build New
ProductRents-Prices Equal Cost of Construction
Real Estate Supply and Demand Analysis
Rent Growth %
# Units
Short-Run Supply (Fixed)
New Demand
New Market Equilibrium
Price
Rent Spikes
ShortShort--Run Supply Conditions with Employment Demand ShockRun Supply Conditions with Employment Demand Shock
* Existing Inventory
Old Demand
*Rent Growth (3.5%)
*Rent Growth (8.5%)
Frictional Vacancy Rate
(2% - 3%)
Rents-Prices Above
Replacement Costs
Incentive to Build New Product
Real Estate Supply and Demand Analysis
Prices
# Securities/Inventory
Supply
(Securities/Property)
Demand
(Securities/Property)
Market
Equilibrium
‘Prices
Q* Existing
Securities (Inventory)
LongLong--Run/Short Run Market EquilibriumRun/Short Run Market Equilibrium
S* S’
Q’
S-T L-T
D
D’
Market
Equilibrium
Supply Constrained in Short Term – By Lags in
Securities Underwriting/Issuance and
Property Construction
*Prices
Real Estate Supply and Demand Analysis
Rent Growth %
# Units
SR Supply (Fixed)
Demand
Old Market Equilibrium
Price
Rent Decline
s
LongLong--Run Supply Response in Supply Unconstrained MarketsRun Supply Response in Supply Unconstrained Markets
* Old Level Inventory
*Rent Growth (-3.5%)
Rent Growth (8.5%)
Vacancy Rate (8%)
Rents-Prices Well Below Replacement
Costs
No Incentive to Build New
Product
LR Supply (Flex)
* New Level Inventory
Rent Growth (3.5%)
Vacancy Rate (5%)
Over
Supply
Real Estate Supply and Demand Analysis
Rent Growth %
# Units
Short-Run Supply (Fixed)
Old Demand
Old Market Equilibrium
Price
Negative Rent
Spikes
LongLong --Run Supply Response with Negative Employment Demand ShockRun Supply Response with Negative Employment Demand Shock
* Existing Inventory
New Demand
Rent Growth (-3.5%)
Rent Growth (3.5%)
Structural Vacancy Rate
(5%)
Rents-Prices Well Below
Replacement Costs
No Incentive to Build New
Product
Vacancy Rate (8%)
Vacancy Rate (10%)
LR Supply (Flex)
*Rent Growth (-8.0%)
* New Level Inventory
Real Estate Derivatives Capital Market Supply and Demand
AnalysisPrices
# Property Derivative Contracts
Supply
(Property Derivatives)
Demand
(Property Derivatives)
*Prices
Q*
LongLong--Run/ShortRun/Short--Run Market EquilibriumRun Market Equilibrium
S* S’
Q’
S-T L-T
D
D’’
Market
Equilibrium
D’Supply Unconstrained
Short/Long Term (Purely Elastic Supply Curve) –
No Underlying Asset to Constrain Market
Q’’
Real Estate and Business Cycle Analysis
Real Estate Cycle Theory
E1 E2
Occupancy/ Rent Growth Line
Rent/Value Spikes
Structural Occupancy Rate/Inflation Rent Growth
Rising Delinquency and Defaults
High Delinquency and DefaultsLow Delinquency and Defaults
Falling Delinquency and Defaults
Business/Real Estate Cycles
Source: Richard Knutson, Cornish & Carey/Newmark Night Frank, Apartment Advisors.
Real GDP Output Gap (From 2000 to 2011)
Wells Fargo Securities, Economic Outlook, May 2, 2011.
Gross Domestic Product (GDP)
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
GDP = consumption + gross investment + government s pending + (exports − imports)
20092009--5.0%5.0%
http://www.bea.gov/briefrm/gdp.htm
20132013+2.0%+2.0%
20002000+5.0%+5.0%
19551955--toto --19851985+7.5%+7.5%
19471947--toto --19851985--2.5%2.5%
Gross Domestic Product (GDP)
http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
20092009--5.0%5.0%
20132013+2.0%+2.0%
20002000+5.0%+5.0%
20082008--9.0%9.0%
Source: Department of Labor Statistics, Bureau of Labor Statistics.
United States NonUnited States Non--Farm Farm Employment Growth (YOY)Employment Growth (YOY)
R
R R R
G
GG
G G
R
G
R
R R
G GG G G
G
High Probability Recession First 5 Years Every Decade, Growth Last 5
Years Every Decade
R R
G
R
Business and Real Estate Cycles
Source: Urban Land Institute Emerging Trends, 2013.
Commercial Real Estate Cycles Highly Correlated
with Overall Business Cycle
Economic Indicators
Change in Net WorthChange in Net Worth
Increasing probability of a international financial crisis.
Faster rates of capital accumulation due to foreign direct investment in manufacturing production, services, and technology sectors.
CHANGE IN NET W ORTH(end o f year to end of year)
-$14,000 .0
-$12,000 .0
-$10,000 .0
-$8,000 .0
-$6,000 .0
-$4,000 .0
-$2,000 .0
$0 .0
$2,000 .0
$4,000 .0
$6,000 .0
$8,000 .0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Since 2007 ,
U.S. Net Worth -$10 trillion
Global Net Worth -$20 trillion
Income and WagesIncome and WagesAverage Hourly Earnings of Production Workers
Source: Bureau of Labor Statistics. http://www.bls.gov(Hard to Find)
Zero Real Wage Growth
Median Weekly Pay : Women 79% of Men, Blacks/Hispanic 68% White/Asian, High School 54% of College Grads
Wage and Salary Income - 2.9% YOY, from - 8.0% in 2009. Hit 0% at bottom of prior recessions. Averages 8% YOY in mature growth phase of business cycle.
1.8% YOY
Real Income (From 1954-to-2012)
-10%-20%-50%
NonNon--Farm Productivity Farm Productivity (Output Per Hour)(Output Per Hour)
2002-2004 4.3% Ann. Avg.
1996 - 20012.5% Ann. Avg.
1993 - 19950.7% Ann. Avg.
2.2%2Q12
Source: Bureau of Labor Statistics. http://data.bls.gov/http://data.bls.gov/PDQ/servlet/SurveyOutputServlet
2009-20104.5% Ann. Avg.
2005 - 20081.3% Ann. Avg.
1990 - 19922.5% Ann. Avg.
Personal Savings RatePersonal Savings Rate
Delveraging/Precautionary Cash Balances by Businesses and Consumers Contributing to Slow
Aggregate Demand (Consumption and Investment) Growth
http://research.stlouisfed.org/fred2/series/PSAVERT
12%-to-15%
8%-to-10%
1%-to-2%
5%-to-7%
10%-to-12%
3.7%3.7%
Consumer ConfidenceConsumer Confidence
http://www.advisorperspectives.com/dshort/updates/C onference-Board-Consumer-Confidence-Index.php
Retail SalesRetail Sales
Avg. 8%
Avg. 5%
-10.0%
Dow Jones Composite Index (From 1988 to 2012)
In Trading Range Since 1997
Up 115% Since Market Bottom in March 2009
Need Productivity Need Productivity Gains and Top Line Revenue Gains and Top Line Revenue
Growth/Aggregate Demand to Break Growth/Aggregate Demand to Break Market Out of Trading RangeMarket Out of Trading Range
Up 7.7% Per Year Since 1995
Up 8.1% Per Year Since 1987
~ 4.9% Per Year Since 2005
http://bigcharts.marketwatch.com
--57%57%
NASDQ Composite Index (From 1980 to 2012)
In Trading Range Since 1995
Up 60% Since Market Bottom in March 2009
Need Human Capital Productivity Gains, Product and Technological Innovations, Globa l
Exports Sales and Domestic Consumption and Investme nt to Pull Market Out of Trading Range
Up 6.7% Per Year Since 1995
Up 7.8% Per Year Since 1988
Up 6.0% Per Year Since 2005
http://bigcharts.marketwatch.com
EmploymentEmployment
NonNon--Farm Payroll EmploymentFarm Payroll Employment
300,000
Source: Bureau of Labor Statistics. http://www.bls.gov
Sept 12’ Total = 158,000
Total Lost Since Peak (Jan. 08’) : - 4.5 million jobs (4.8 million L-T Unemployed)
Aug 12’ Total = 142,000
Jul 12’ Total = 181,000
458,000
-820,000
-320,000
114k Oct 12’
U.S. Unemployment RateU.S. Unemployment Rate
5.0% Natural Rate (NAIRU)
Sept. 7.8%
http://data.bls.gov
Source: Bureau of Labor Statistics.
Peak ~10%, Structural 5%
2015-2016
Note: Under-employment rate double stated unemploym ent rate.
Labor Market Failure
LABOR MARKET SUPPLY GAP
International TradeInternational Trade
Global Geography – Export Market Growth(Forecast 2013)
Exposure to Fast Growing
Southeast Asian
Economies
Goods/Services Volume Trade Flows
7.7%
http://www.oecd.org
7.2%7.2%8.2%
6.4%6.4%
7.2%7.2%
6.5%6.5%
6.4%6.4%
8.3%
7.1%7.1%8.4%
8.7%
7.9%7.9%
7.9%
6.7%6.7%
5.2%5.2% UK 6.6%6.6%Germ6.1%6.1%
Fran 6.0%6.0%
Italy6.4%6.4%
Spain5.4%5.4%
100 100 ––to to –– 200 200 bspbsp Downward Downward
RevisionsRevisions
OECD Economic Outlook, Volume 2012 Issue 1 - No. 91 - © OECD 2012
Grec6.3%6.3%
California Geography
http://mapofcaliforniausa.com/
Santa Clara 1,805,861Alameda 1,525,655Sacramento 1,430,537Contra Costa 1,061,132San Francisco 814,088San Mateo 725,245Sonoma 486,479Monterey 419,710Solano 413,635Placer 355,687Marin 254,114
NorCalTotal
9,293,000
SoCal Total 20,319,000
Source: U.S. Census/CA Dept. Finance.
County 2010 TotalAnnual
Average
CALIFORNIA 2,010 5,580,255 214,625
Santa Clara 18,489 445,567 16,502
Alameda 12,248 292,167 10,821
San Francisco 8,430 270,324 10,012
San Mateo 5,111 153,853 5,698
Contra Costa 5,066 117,245 4,342
Monterey 1,824 59,045 2,187
Marin 908 23,741 879Napa 478 12,026 445
Legal Immigration 1984-2010
Population Ch.10'-11' Nt.Dom.County Number MigrationCalifornia 260,135 -154,276Santa Clara 18,308 -7,209Alameda 12,162 -6,348Sacramento 10,090 -4,607Contra Costa 8,940 -100San Francisco 6,911 -3,401San Mateo 5,663 -2,382Monterey 3,885 -2,303Santa Cruz 1,650 -539Napa 1,051 302
Transportation Flows
http://www.dot.gov/http://www.fhwa.dot.gov/environment/freightaq/appendixc.htm
Trucking carriers 64% of interregional freight tonnage, marine vessels 21%, railroads 14%. Ranked second in total intercity freight tonnage and tied for first for greatest volume of intercity truck freight.
One of Most Extensive Networks of Highways and Arterial Streets in U.S. (I-5/I-15/I-40/I-10)
Port of Oakland Container VolumePort of Oakland Container Volume
http://www.portofoakland.com/maritime/facts_cargo.asp
http://www.truckinginfo.com/news/news-detail.asp?news_id=68596Full In 2013, + 4% -to- 7%
Port/Airport FacilitiesPanama Canal - Diversion Asia/East/Gulf Coast Trade
Competing Ports : Houston/Savannah/Charleston/ Mobile/Norfolk/Baltimore/S.Carolina/Georga/Oakland/Seattle/NYCNJ/Miami/Gulfport/ Suez/LazaroCardenas/Panama/Cape ($300m)
Comparative Advantage :-Speed-To-Market-12.3days
-Ship-to-Rail (On Docks)-High Value/CustomerFashion/Tech/Demand Oriented Product Response (100 Trains)
Externalities:-Pollution/Traffic/Permits-Bureaucracy/Litigation -Business Relocation-Mgt Decisions
Construction : $5.25 billion/600 vessel tons- Widening(1.2k’)/Deepening (53’) start 2007
finish 2014. Ships to carry Avg. 15,000 containers, from 5,000 (total global 12,600)-Post PanaMax/Mega Ships (27%)
Estimated Economic Impact : 500,000 Direct/Indirect Supported by Ports
- 20% Reduction = -100,000 jobs lost- 30% Reduction = -150.000 jobs lost
Direct Occupations Impacted :- Longshoremen/Warehousing/Distribution- Trucking/Trans/Wholesale/Retail Trade- Manufacturing/Logistics/Supply Change
Policy Response :- Investment/Integrated Response ($1.8bil.)
Exchange Rates (2010) Exchange Rates (2010) ––Dollar DevaluationDollar Devaluation
http://www.x-rates.com/d/USD/EUR/graph120.html
Euro Japanese Yen
British Pound Chinese Yuans
Dollar Devaluation Against Yen
Dollar Appreciation Against Euro
Dollar Appreciation Against British Pound
Dollar Devaluation Against Yuan
+7.3%-9.5%
+4.8%-2.6%
Trade balance roughly zero from 1960 through 1981, fell to -215 bill. 06’ to -120 bill. 11’Devaluation/Exports
Balance of TradeBalance of Trade
Sources: U.S. Department of Commerce: Bureau of Economic Analysishttp://research.stlouisfed.org/fred2/series/BOPBCA/13
IMF Global Output 2011: 3.6% 2012: 4.1%U.S. 1.5% 1.8%Jap -0.5% 2.3%Ger 2.7% 1.3%China9.4% 9.0%Brazil3.7% 3.6%
http://www.portoflosangeles.org/maritime/stats.asphttp://www.polb.com/economics/stats/latest_teus.asp
http://www.imf.org/external/pubs/ft/weo/2011/02/pdf/text.pdf
http://www.census.gov/foreign-trade/statistics/state/data/ca.html
http://latimesblogs.latimes.com/money_co/2010/02/california-exports-imports-trade.html
Imports Significantly Higher than
Exports
Imports Fall
Rapidly due to
Deficient Aggregate Demand
Economic Geography
Geographies-Submarkets by Industry Sector :
• High-tech and Bio-tech Manufacturing (SF/Oak/SEA/SD)• Alternative and Clean Energy Technologies (SF/SJ/PHO)• Healthcare -Information Systems Services
(SF/SJ/SD/Oak/SEA/PHO)• Financial Services and Venture Capital (SF/SJ/SM/SEA)• Telecommunications /Networking (SJ/Marin/Den/Sea)• Multimedia and Entertainment (SF/Marin/LA)• Internet and Software Programming (SF/SJ/Oak/Sea)• International Trade & Tourism (SF/SJ/Sac/SEA/LA/Mon)• Construction and Engineering Services (SF/SJ/SEA/LA)• Education/Government Services (SF/SJ/Oak/SEA/PHO)• Defense (SJ/Sac/SEA/LA/PHO/UT/MON)• Agricultural/Timber Products (Cent Val/Port/SEA/Mon)
Commercial Demand (Economic Base)Commercial Demand (Economic Base)
• Economy in recovery/growth phase : local employment expansion/accelerating (24-to-36 month capital market/global economic volatility).
• Business-commercial real estate cycle : investment-distress secondary- tertiary market supply shocks 2013 – 2014; 2014 – 2015, rent/value spikes, current for tech
driven markets; and cycle peak 2016 – 2018.
• Commercial Markets 2012-2017 :
Northern CA – Business/Market Cycle
Target Urban-Infill/Supply-Constrained/Transit Orie nted (TOD)/Diverse-Growth Economic Base SubmarketsDowntown San Francisco/West San Jose; I-680/880
Corridors-Walnut Creek->San Ramon (UC/Nth Berkeley/Oakland Hills/Pleasanton/Fremont) ; SF Peninsula-Redwood City/Palo Alto (Marin/Santa
Cruz/Monterey ); Sacramento (Davis/CBD -State Capitol)
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8
Sources: Claritas, Inc., REIS Reports, Inc., and BRE Properties Research Department.
MODEL SCORE
SURVEY SCORE
HIGH
HIGHLOW
MARKET EVALUATION MODELSan Francisco Bay Area
HIGH
E. San Jose
Concord/Martinez
N. Alameda W. Contra Costa
San Leandro/Hayward
E. Alameda
Height Ashbury/Western
West San FranciscoNE San JoseEast Contra Costa
Civic Center/DowntownNorth Marin
North San Mateo
Central San Jose
South San Jose South of Market
Santa Clara
South Marin
Fremont/Newk/UnCty
Campbell/Los Gatos
Cupertino/Saratoga
Marina/Pacific Heights
Mountain View/Los Altos
Central San Mateo
SunnyvaleSouth San Mateo
Walnut Creek
Russian Hill/Embarcadero
S.F. Bay Area Submarket RankingsExisting BRE CommunitesA - Deer Valley (171)B - Blue Rock Village (560)C - Promontory Point (400)D - Pinnacle City Centre (192)E - Verandas (282)F - Red Hawk Ranch/Sun Pointe Village (789)G - Sharon Green (296)H - Foster’s Landing /Lakeshore Landing (798)
A
H
G
FE
D
C
B
1
2
3
4,5,6,7
8
9
10
11
17
19
18
16
15
14
13
12
26
2524
23
2221
20
2827
Submarket RankingsMountain View (12)Central San Mateo (10) (H)Marina ( 4)Cupertino (14)Sunnyvale (13)South San Mateo (11) (G)Russian Hill (5)San Ramon (25) (C)Campbell (17)Fremont (21) (E,F)South Marin (2)Santa Clara (15)South of Market (8)North San Mateo (9)West San Francisco (3)Northeast San Jose (20)South San Jose (18)Central San Jose (16)Haight Ashbury (7)North Marin (1) (A)East Contra Costa (26)Civic Center (6)East Alameda (22)Hayward (23) (D)West Contra Costa (28)North Alameda (24)Concord (27)East San Jose (19)
MF Target MarketsHousehold Income
Executive Occupations Home Prices
Education Levels Supply Constraints
CRE Inventory Renter Hhld Density
California Employment Trends
Source: CA EDD, Labor Market Information Division, LAEDC
July 2012 : CA +2.6%, +365,000 JobsAnnual Percentage Change in Nonfarm Jobs
Salinas 3.3%July YOY %
Professional (10%) +9.5%Educat/Hlth (11%) +7.5%Finance (4%) +7.1%Information (1%) +6.3%Tran/Trade (20%) +5.8%Leis/Hotel (18%) +4.3%Services (4%) +2.1%Mfg (5%) 0.0%Construct (3%) 0.0%Gov (24%) -2.9%
Unemployment Rate[15.1%][7.3%][8.8%][14.7%][9.3%][10.7%][12.7%][9.5%][13.6%][7.9%][11.9%][15.7%]
[9.4%]
[9.5%]
Aug ’10-’11 Aug (p) ’11-‘12
San Jose +2.8% +3.4%
San Francisco +1.8% +3.8%
Oakland +0.5% +2.0%
Sacramento -1.1% +2.2%
MSA Year-Over-Year Employment Growth Rates
Salinas -2.4% +3.9%
Ann.Ch.Gain/Loss
+23.8k / +29.6k
+16.6k / +36.4k
+4.9k / +18.9k
-8.5k / +17.7k
+3.0k / +4.7k
Northern California Economics
*1998 – 2008: -0.6%, -5,620 Total Non-Farm Employmen t 889,900
*1998 – 2008: -0.1%, -1,350 Total Non-Farm Employmen t 963,100
*1998 – 2008: 0.6%, 5,920 Total Non-Farm Employment 953,900
*1998 – 2008: 2.0%, 15,630 Total Non-Farm Employment 809,000
*Average annual compound growth rate, and average annual absolute change in non-farm employment.
Source: U.S. Department of Labor. www.bls.gov. Note: Non-farm employment growth rates are not seas onally adjusted.
*1998 – 2008: 0.9%, 1,018 Total Non-Farm Employment 125,700
Source: U.S. Department of Labor. www.bls.gov. Note: Non-farm employment growth rates are not seas onally adjusted.
Aug ’10-’11 Aug (p) ’11-‘12
Los Angeles +0.1% +2.0%
Orange Co. +0.7% +2.1%
Inland Empire +0.3% +2.3%
San Diego -0.2% +2.5%
Southern California EconomicsMSA Year-Over-Year Employment Growth Rates
California* +0.7% +2.1%
Ann.Ch.Gain/Loss
+ 2.0k / + 74.0k
+ 9.5k / + 29.0k
+ 3.8k / + 25.4k
- 2.7k / + 30.3k
+ 93.0k / + 398.7k
*Average annual compound growth rate, and average annual absolute change in non-farm employment.
*1998 – 2008: 0.0%, 14 Total Non-Farm Employment 3,826,1 00
*1998 – 2008: 1.3%, 18,570 Total Non-Farm Employment 1,391,5 00
*1998 – 2008: 3.4%, 35,430 Total Non-Farm Employment 1,143,2 00
*1998 – 2008: 1.7%, 19,920 Total Non-Farm Employment 1,261,0 00
*1998 – 2008: 1.0%, 148,400 Total Non-Farm Employment 14,199, 000
San Francisco San Francisco –– Oakland Oakland –– Fremont, CAFremont, CA
Source: Bureau of Labor Statistics.
Forecast
(Highest Since May 2000)
Three Month Net Change in Non-Farm Employment
2013
35k –to- 45k
San FranciscoSan Francisco--OaklandOakland--Fremont, CAFremont, CA
Source: Bureau of Labor Statistics.http://data.bls.gov/PDQ/servlet/SurveyOutputServlet
Monthly % Year-Over-Year Non-Farm Employment Growth Rates
+2.2% YOY
Mar 12’(42.0k)
1.9% YOY
Jun.06 (+38.6k)
Wst. +1.3%CA +1.3%
SJ +3.4%OAK +1.6%
Mar YOY 11’+14,200
-7.2% YOY
Aug 09’(-146.6k)
Mar YOY 12’+42,000
Ann. Avg. 50.0k-to-60.0k
Mar (p) YOY %Serv +8.1%Prof/Bus +5.8%Infor +4.8%Ed/Hlth +3.3%Leis/Hosp +2.8%Tran/Trade +1.6%Mfg -0.3%FinActiv -1.1%Gov -1.7%
-2.3% YOY
Feb.92’(-42.0k)
4.3% YOY
Aug.00’(+88.8k)
-5.6% YOY
Mar.02 (-120.5k)
San FranciscoSan Francisco--San MateoSan Mateo--Redwood City, CARedwood City, CA
http://data.bls.gov/
Source: Bureau of Labor Statistics.
Job Growth, Labor Force Contraction
Peak ~10%, Structural 5.0%
2015-2016
Note: Under-employment rate double stated unemploym ent rate.
Unemployment Rate
5.0% Natural Rate (NAIRU)
Aug. 7.0%
U.S. Labor Participation Rate
63.6%, 30 Year Low.New Structural
Old Structural
San JoseSan Jose--SunnyvaleSunnyvale--Santa Clara, CASanta Clara, CA
Source: Bureau of Labor Statistics.
Forecast
Net Positive 3Net Positive 3--Mth Net Job Growth May 2010 Mth Net Job Growth May 2010 –– 18,700, Highest Since 200618,700, Highest Since 2006’’-- 20072007’’
November 2010/2011: 19.4k 3-mth Net(Highest Since December 2000)
Three Month Net Change in Non-Farm Employment
San JoseSan Jose--SunnyvaleSunnyvale--Santa Clara, CASanta Clara, CA
http://data.bls.gov/
Source: Bureau of Labor Statistics.
Job Growth, Labor Force Contraction
Peak ~12%, Structural 5.0%
2015-2016
Note: Under-employment rate double stated unemploym ent rate.
Unemployment Rate
5.0% Natural Rate (NAIRU)
Unemployment Rate 25 Yr High: U.S. (8.2%). Calif (11 .0%), SF Bay (8.9%), San Jose (9.3%), SF/SM (7.7%), Sac (11.6%), LA (11.9%), ORG (8.1%), RIV (12.7%)
Mar. 9.3%New Structural
Old Structural
San JoseSan Jose--SunnyvaleSunnyvale--Santa Clara, CASanta Clara, CA
Source: Bureau of Labor Statistics.http://data.bls.gov/PDQ/servlet/SurveyOutputServlet
Monthly % Year-Over-Year Non-Farm Employment Growth Rates
+3.4% YOY
Mar 12’(+29.4k)
2.7% YOY
May.06 (+23.7k)
Wst. +1.3%CA +1.3%
SF/SM +2.9%OAK +1.6%
YOY Mar 11’+23,100
-8.6% YOY
Aug 09’(-78.7k)
YOY Mar 12’+29,400
Ann. Avg. 30.0k-to-50.0k
Mar YOY %Const +12.6%Information +10.2%Educ/Hlth +5.6%ProfBusServ +4.5%TradeTrans +3.3%Leas/Hosp +2.0%Manufactring +1.2%Services 0.4%Government -1.3%
-3.6% YOY
Feb.92’(-29.1k)
7.2% YOY
Dec.00’(+72.5k)
-11.7% YOY
Feb.02 (-124.2k)
Technology/Venture CapitalTechnology/Venture Capital
Not Important
Average Importance
Highly Important
Note: IT accounts for 10.5% of U.S. Employment
The Importance of IT Industries
Silicon Valley GeographySilicon Valley Geography
Silicon Valley GeographySilicon Valley Geography
Major Employment Clusters Major Employment Clusters Santa Clara County (+850 Employees)Santa Clara County (+850 Employees)
• Worldwide IT spending is forecast to surpass $3.7 t rillion in 2013, a 3.8% increase from 2012 projected spending of $3.6 trillion.
• By 2015, 4.4 million IT jobs globally will be creat ed to support big data, generating 1.9 million IT jobs in the United States.
• Worldwide sales semiconductors reached $24.1 billio n April 2012, 3.4% increase from the prior month; largest month-over-month growth since May 2010; 7.2% growth 2013 ($322 billion) and 4.4% 2014 ($337 billion).
• Big data to drive $28 billion worldwide IT spending 2012; 2013, big data to drive $34 billion IT spending.
• India IT services forecast to reach $10.2 billion 2 013, 12% increase from $9.1 billion 2012; mobile device sales reach 251 million units in 2013 , 13.5% over 2012 sales 221 million units, expect growth through 2016, sales surpass 326 milli on units; IT spending projected total $71.5 billion 2013, 7.7% increase from $66.4 billio n 2012.
• Worldwide PC Shipments Declined 8 Percent in Third Quarter of 2012 as the Market Prepares for the Launch of Windows 8.
• Worldwide wafer fab equipment (WFE) spending is on p ace to total $31.4 billion in 2012, a decline of 13.3% from 2011 spending of $36.2 billio n.
• Public cloud services market forecast to grow 19.6% 2012, $109 billion worldwide; business process services largest segment, 77% total market, infrastructure fastest-growing segment public cloud services, expected to grow 45.4% 2012.
Technology
Sources: Gartner Research and the Semiconductor Industry Association (SIA).http://www.sia-online.org http://www.gartner.com/it/section.jsp
NonNon--Residential Fixed InvestmentResidential Fixed Investment
Source: http://research.stlouisfed.org/fred2/series/PNFI
Business/Commercial Equipment
2012:Q2: 1,614.1 Billions of Dollars2012:Q2: 1,614.1 Billions of Dollars2012:Q2: 1,614.1 Billions of Dollars2012:Q2: 1,614.1 Billions of Dollars
7.2% Ann.Gth.
6.1%
2.7%
Corporate ProfitsCorporate Profits
Source: http://www.bea.gov/briefrm/corpprof.htm
Retained Earnings/Cash Balances Available for Investment/Payout
Over $1.0
Worldwide Semiconductor Revenues Worldwide Semiconductor Revenues YearYear--toto --Year Percent Change 1996 Year Percent Change 1996 -- 20122012
Source: World Semiconductor Trade Statistics (http: //wsts.org)
Worldwide Semiconductor Billings (US$) per 12 month s Worldwide Semiconductor Billings (US$) per 12 month s Rolling Average and WSTS Semiconductor ForecastRolling Average and WSTS Semiconductor Forecast
Source: World Semiconductor Trade Statistics (http://wsts.org)
Worldwide Semiconductor Market to reach $302 bill. 2011, up up 2.6% in 20122.6% in 2012 , ,
and and 5.8% in 20135.8% in 2013, to top $328 bill.
Month-Over-MonthGlobal Sales
Asia Pacific $13.3 bil (+5.8%)Americas $4.6 bil (2.2%)
Europe/Japan $6.2 bil (-1.6%)
Venture Capital Flows
https://www.pwcmoneytree.com/MTPublic/ns/index.jsp D eloitte and Clean Tech Group.
Silicon Valley +50.2% 1Q12 - 2Q12 +4.4% 2Q12 YOY
2Q/2012 Total: Software industry again number one industry for investment, up 37% YOY to$2.3 bill.; Industrial Energy second up 20% to $914 mil.; Medical Divices Equip down 17% to $700 mill.; Biotechnology down 52% to $697 mill.; Media & Entertainment down 8% to $671 mill.; IT Services down 29% to $548 mill.; Semiconductors down 4.2% to $341 mill.; Telecommunications up 26% to $248 mill.; Computer Products down 53% to $199 mil.
California +58% of U.S. Total VC Funding
Global/Institutional Commercial Real Estate
Investment Market
Global Capital Value and Rental ClocksGlobal Capital Value and Rental Clocks
Source: Jones Lang LaSalle
Retail and Industrial Rental ClocksRetail and Industrial Rental Clocks
Source: Jones Lang LaSalle
Source: DTZ Research
Core office markets are more expensive globally as yields tighten, but there remain several attractive markets
Ranking of prominent global office markets
Ranking Market Attractiveness
1 San Francisco HOT
2 Beijing HOT
3 Los Angeles HOT
4 Singapore HOT
5 Shanghai HOT
6 New York WARM
7 Tokyo WARM
8 London WE WARM
9 Sydney WARM
10 London City WARM
Ranking Market Attractiveness
11 Berlin WARM
12 Chicago WARM
13 Brussels WARM
14 Frankfurt WARM
15 Munich WARM
16 Madrid WARM
17 Barcelona COLD
18 Paris CBD COLD
19 Milan COLD
20 Hong Kong COLD
Robert Peto, RICS Global President, Global Property Outlook, 2011-2012.
Global/Asia Office Rental Growth CycleGlobal/Asia Office Rental Growth Cycle
Source: CBRE Market View, 2Q12.
North America/Europe Global Office North America/Europe Global Office Rental Growth CycleRental Growth Cycle
Source: CBRE Market View, 2Q12.
Global Office Rental/Value GrowthGlobal Office Rental/Value Growth
Source: Jones Lang LaSalle
Global Office Net Absorption/Supply PipelineGlobal Office Net Absorption/Supply Pipeline
Source: Jones Lang LaSalle
Global Office Vacancy RatesGlobal Office Vacancy Rates
Source: Jones Lang LaSalle
Capital Value GrowthCapital Value Growth
Source: Jones Lang LaSalle
Global Office Rent/Capital Value GrowthGlobal Office Rent/Capital Value Growth
Source: CBRE Market View, 2Q12.
Global Industrial/Retail Rent GrowthGlobal Industrial/Retail Rent Growth
Source: CBRE Market View, 2Q12.
Global Office Rent GrowthGlobal Office Rent Growth
Source: Jones Lang LaSalle
Regional Transaction VolumeRegional Transaction Volume
Source: CBRE Market View, 2Q12.
10 Largest Recipient Cities 10 Largest Recipient Cities Cross Border InvestmentCross Border Investment
Source: Jones Lang LaSalle
Domestic Commercial Real Estate Investment Market
Commercial Real Estate IndicesCommercial Real Estate Indices
Values Lowest in Seven Years
-42%
+90%
+55%
Commercial Real Estate IndicesCommercial Real Estate Indices
-42%
+113%
Values Lowest in Seven Years
-40%
Source: Urban Land Institute Emerging Trends, 2013.
Commercial Property Sales Volume (From 2001 to 2012 )
http://www.mbaa.org/files/Research/DataBooks/1Q12QuarterlyDataBook.pdf
-90%
+500%$60 bil.
$140 bil.
Commercial Property Sales Prices (From 2001 to 2012 )
http://www.mbaa.org/files/Research/DataBooks/1Q12QuarterlyDataBook.pdf
Divergent Pricing TrendsDivergent Pricing Trends
Real Capital Analytics (RCA), US Capital Trends, March 2011.
Average Cap RatesAverage Cap Rates
Source: CRE Finance Council.
-75-to-125 bsp
Commercial Real Estate SpreadsCommercial Real Estate Spreads
Spreads Lowest Since 1992
Source: Urban Land Institute Emerging Trends, 2013.
Spreads At Cycle High
http://www.rcanalytics.com
Top Markets – Majority CA/West
Commercial Real Estate MarketsCommercial Real Estate Markets
Source: Urban Land Institute Emerging Trends, 2013.
Top Markets Based on Total Return Forecast
ING/Clarion Partners Research & Investment Strategy, Feb 2011.
National Commercial Real Estate Space Market
Commercial ConstructionCommercial Construction
Commercial DevelopmentCommercial Development
Commercial Vacancy RatesCommercial Vacancy Rates
Source: CRE Finance Council.
ApartmentVacancy, Rents and Completions (1995 to 2012)
Source: REIS Reports, Inc.
Excess DemandLow Supply
Supply Gap
Office Net Absorption, Vacancy and Rents (2007 to 2012)
Source: REIS Reports, Inc.
Low DemandLow Supply
Supply Gap
IndustrialVacancy, Net Absorption, and Rents (2010 to 2012)
Source: REIS Reports, Inc.
Rising DemandLow Supply
Supply Gap
Retail Net Absorption and Vacancy Rates (2007 to 2012)
Source: REIS Reports, Inc.
Supply Gap
Hotel Occupancy Rates and RevPar (1992 to 2013)
Source: Urban Land Institute Emerging Trends, Smith Travel.
Local/Regional Commercial Real Estate
Space Markets
Office Industrial
Los Angeles 17.1% 6.9%SF Bay Area 12.1% 13.8%
Santa Clara 14.0% 9.3%Sacramento 23.7% 16.7%Riv.-San Co. 22.8% 12.5%Orange Co 15.0% 7.8%San Diego 16.6% 15.4%Seattle 17.1% 10.5%Portland 14.5% 10 .6%
Source: CB Richard Ellis, MarketView, First Quarter , 2012.
Office and Industrial Vacancy/Availability Rates
Commercial Market Comparison
SF Bay Area Commercial
Vacancy Rates Reaching Structural
Levels, Causing Asking Rents to Rise At or Well
Above Local Inflation Rates
Office MarketOffice Market
http://www.rcanalytics.com
Cap Rate Trends for CBD Office12-months trailing average
Drop 220
bsp
1. San Fran. Peninsula2. San Francisco, CA3. Orange Co., CA4. Phoenix, AZ5. Oakland-E. Bay, CA6. San Jose, CA7. New York City8. Austin, TX9. Las Vegas, NV10.Seattle, WA
G&E Class A Office Rent AppreciationTop 10 Markets, 2010 to 2015
Source: Grubb & Ellis
Source: CBRE Research Reports, First Quarter 2012.
San Francisco Office
Rapid Vacancy Rate Decline, Asking Rent Growth, Net Positive
Absorption
Source: CBRE MarketView: San Francisco Office, First Quarter 2012.
San Francisco Office SubmarketsSan Francisco Office Submarkets
North Waterfront
15.6%
San Francisco Overall
Availability Rate14.1%
Union Square9.8%
Fin Dist Nth12.9%
Van Ness Corridor
29.1%
San Francisco Q1 Net Absorption
867,000 SF
Fin Dist Sth11.6%
YerbaBuena17.2%South of
Market Wst
24.3%Potrero
Hill19.9%
Mission Bay/China
Basin26.5%
MultiMedia Gulch10.3%
Rincon SthBch4.4%
San Francisco Top Office Leases
Source: Cassidy/Turley.
Source: CBRE Research Reports, First Quarter 2012.
San Francisco Peninsula Office
Rapid Vacancy Rate Decline, Asking Rent Growth, Net Positive
Absorption
Source: CBRE MarketView: San Francisco Peninsula Office, First Quarter 2012.
San Francisco Peninsula Office SubmarketsSan Francisco Peninsula Office Submarkets
2.6%10.6%
San Francisco Peninsula Office
Overall Availability Rate
13.9%
32.0%
17.3%
48.2%
10.1%
10.6%
13.5%
16.2%
12.2%
17.1%
6.2%
22.5%
Source: CBRE Research Reports, First Quarter 2012.
Oakland Office
Vacancy Rate Decline, Slow Asking
Rent Growth, Net Positive Absorption
Source: CBRE MarketView: Oakland Office, First Quarter 2012.
Oakland Office SubmarketsOakland Office Submarkets
Richmond30.6%
Oakland Office Overall
Availability Rate18.9%
Emeryville17.9%
Berkeley10.6%
Q1 Net Absorption
21,000 SF
Oakland15.7%
Alameda26.9%
Oakland Airport 27.7%
San Leandro7.7%
Source: CBRE Research Reports, First Quarter 2012.
Contra Costa Office
Rapid Vacancy Rate Decline, Asking Rent Growth, Net Positive
Absorption
Source: CBRE MarketView: Contra Costa Office, First Quarter 2012.
Contra Costa Office SubmarketsContra Costa Office Submarkets
24.4%
Contra Costa Overall
Availability Rate18.8%
10.1%
20.9%
13.2% 14.1%
15.3%
11.0%
22.6%19.6%
31.8%
11.0%
15.7%
Contra Costa Q1 Net Absorption
760,000 SF
East Bay Top Office Leases
Source: Cassidy/Turley.
Source: CBRE Research Reports, First Quarter 2012.
Silicon Valley Office
Rapid Vacancy Rate Decline, Rental Rate
Acceleration, Net Positive Absorption
Source: CBRE MarketView: Silicon Valley Office, First Quarter 2012.
Silicon Valley Office SubmarketsSilicon Valley Office Submarkets
18.6%
16.6%
Greater Silicon Valley Overall
Availability Rate13.8%
Silicon Valley
362,000 Net Absorption
2.1%
6.9%
12.1% 22.4%
12.6%
11.8%
6.2%
Top Office Leases
Source: Cassidy/Turley.
Source: CBRE Research Reports, Second Quarter 2012.
Sacramento Office
Vacancy Rate and Rental Rate
Stabilization, Net Positive Absorption
Source: CBRE MarketView: Oakland Office, Second Quarter 2012.
Sacramento Office SubmarketsSacramento Office Submarkets
Roseville/Rocklin 32.3%
Sacramento Office Overall
Availability Rate27.0%
North Gate/ Natomas
29.3%
Citrus Heights/Orangevale10.6%
Q2 Net Absorption/Under Construction
58,200/171,000 SF
Folsom15.7%
Elk Grove22.8%
Highway 50 Corridor
29.0%
West/South Sacramento
25.0% South Sacramento
29.4%
Carmichael/Fair Oaks
16.7%Downtown
22.0%
Sacramento Office
Industrial MarketIndustrial Market
http://www.rcanalytics.com
Cap Rate Trends for Industrial12-months trailing average
Drop 130
bsp
Source: CBRE Research Reports, First Quarter 2012.
Oakland Industrial
Vacancy Rate Decline, Rental Rate and Net Absorption
Stabilization
Source: CBRE MarketView: Silicon Valley Office, First Quarter 2012.
Oakland/TriOakland/Tri --Valley Industrial SubmarketsValley Industrial Submarkets
14.7%
7.2%
Oakland Overall Availability Rate
11.8%
18.6%
Oakland 234k SF Net
Absorption
157,000 SF Under
Construction
8.3%
Pleasanton 13.1%
11.5%
8.1%
9.6%
6.6%
5.6%
15.5%
Tri-County Overall
Availability Rate17.2%
Dublin 18.3%
San Ramon 9.5%
East Bay Top Industrial/R&D/Mfg Leases
Source: Cassidy/Turley.
Source: CBRE Research Reports, First Quarter 2012.
Silicon Valley Industrial
Vacancy Rate, Rental Rate and Net
Absorption Stabilization
Source: CBRE MarketView: Silicon Valley Office, First Quarter 2012.
Silicon Valley Industrial SubmarketsSilicon Valley Industrial Submarkets
13.2%
5.1%
Greater Silicon Valley Overall
Availability Rate9.3%
5.7%
Santa Clara County
100k SF Net Absorption
10.0%7.5% 10.8%
10.0%
3.9%5.7%
8.2%
Silicon Valley Top Industrial Leases
Source: Cassidy/Turley.
Source: CBRE Research Reports, First Quarter 2012.
Sacramento Industrial
Vacancy Rate and Rental Rate
Stabilization, Net Positive Absorption
Source: CBRE MarketView: Sacramento Industrial, First Quarter 2012.
Sacramento Industrial SubmarketsSacramento Industrial Submarkets
Lincoln 22.0%
Sacramento Industrial
Availability Rate16.7%
Woodland22.2%
Roseville/Rocklin22.0%
Q1 Net Absorption/Under
Construction-271,000/401,000 SF
El Dorado Hills9.3%
Folsom 9.3%Davis
22.2%
Elk Grove/Laguna
15.7%
Carmichael/Fair Oaks
9.5%South/North
EastSacramento7.7%
Northgate/Natomus20.6%
Auburn/ Newcastle
19.4%
Rancho Cordova/ Hwy 50 16.6%
Sacramento Industrial
Source: Cassidy Turley BT Commercial.
MONTEREY COUNTRY INDUSTRIAL/OFFICE MARKET
RetailRetail
Northern California Northern California -- RetailRetail
Commercial Real Estate Debt and Equity Markets
Commercial Mortgage Backed Securities (CMBS)
Commercial Mortgage Flows
http://www.mbaa.org/files/Research/DataBooks/1Q12QuarterlyDataBook.pdf
-$60 Bil.
+$100 Bil.
-$46 Bil. From Banks/CMBS
Commercial Mortgage Debt Exposure
http://www.mbaa.org/files/Research/DataBooks/1Q12QuarterlyDataBook.pdf
Continued Bank Balance Sheet, Capital Market, and Tax Payer
and Default Risk Exposure
$1.4 trillion Outstanding: Banks (34%), CMBS (24%) = 58%
and Foresight Analytics.
Commercial Mortgage Back Securities (CMBS) Issuance
http://www.mbaa.org/files/Research/DataBooks/1Q12 QuarterlyDataBook.pdf
-93%
Monthly Cumulative Distress VolumeMonthly Cumulative Distress Volume
Real Capital Analytics (RCA), US Capital Trends, March 2011.
Restructured and Resolved
Since 2007, $200 bil. distressed worked out
(50% total).
+50% workouts resolved
Sales of Associated Distress VolumeSales of Associated Distress Volume
Real Capital Analytics (RCA), US Capital Trends, 3Q/2012.
Since 2007, $200 bil. distressed worked out
(50% total).
Commercial Mortgage Backed SecuritiesDelinquencies by Property Type
Source: CRE Finance Council.
Commercial/Multifamily Mortgage Delinquency Rates Among Major Property Types – 12 Mth Trailing
Source: Morningstar, CRE Finance Council.
Office
Retail Multi-Family
Hotel
Industrial
Commercial/Multifamily Mortgage Delinquency Rates Among Major Institutional Investor Groups
Life Insurance Companies
Bank & Thrifts CMBS
FINNIE/FRDDIE
http://www.mbaa.org/files/Research/DataBooks/1Q12QuarterlyDataBook.pdf
BBB/BBB- +14,000
+6,000
Significant Widening of Spreads (Credit/Liquidity Risk)
Commercial Mortgage Backed Securities (CMBS) - Spreads Over SWAP Rates -
Worthless
+200+1,450
Bank Real Estate Loan Delinquency Rates 1992 - 2012
Continued Tight Credit Conditions
FDIC and Banks Continue to Unload Commercial Real Estate Notes, Loans
and REO Properties 2012-2013
Source: Urban Land Institute Emerging Trends, 2013.
Commercial Mortgage Loan Maturity
http://nreionline.com/news/cre_debt_threatens_economy_0212/Sources: Foresight Analytics.
$1.2 tril. Com. RE Debt Due 7 yrs.
Majority Bank/Thrift
Fixed Rate
CMBS
Int Rt/Credit Spreads
Real Estate Investment Trusts Real Estate Investment Trusts (REITs)(REITs)
REIT Equity Stock Index Performance – Wilshire
http://bigcharts.marketwatch.com
+226% from
Bottom
http://www.reit.com/
Mkt.Equity Cap = $514 bil.
MF high leverage Fannie Mae/Freddie Mac (Mezz).
Debt/Equity Capital Raised : $54.3 bill. 2012 YTD vs.
$51.3 bill. 2011
Total Annual Return -37.3% +27.5% +27.6 +7.3% +17.6%
10 Yr. Tot. Ann. Ret = 10.8%
Avg. Daily Trading Volume = $3.8 bill.
-78.0% from Peak
Investment Performance by Property Sector/Subsector
REIT Equity Stock Index Performance – Dividend Yield Spreads
http://www.reit.com/Media/~/media/PDFs/October2010MediaUpdate.ashx
+700 bsp
+375 bsp
-200 bsp
+200 bsp
http://bigcharts.marketwatch.com http://finance.yahoo.com
Trading Range (Consolidation Phase) - 4 Yrs.
+50% from Bottom
0.0% 2-Yr. Ann. Return
EV/Revenue = 35.9x Price/Sales = 8.8xROA = 2.7%/ROE = 15.9% Div Yld = 6.8% Curr Ratio = 36.9x
Enterprise Value = $4.67 bil.Beta = 0.8x Forward P/E = 10.09x
-86% from Peak
0.0% 7-Yr. Ann. Return
REIT Equity Stock Index Performance – Redwood Trust (RWT)
+367% from Bottom50.0% 4-Yr. Ann. Ret.
http://bigcharts.marketwatch.com http://finance.yahoo.com
+328% from Bottom43.9% 4-Yr. Ann. Ret.
+200% from Bottom
+73.2% 2-Yr. Ann. Return
EV/EBITDA = 23.5x Profit Margin = 9.3%ROA = 1.2%/ROE = -0.23% Div Yld = 4.1% Curr Ratio = 1.8x
Enterprise Value = $7.46 bil.Beta = 2.02x Forward P/E = 20.4x
REIT Equity Stock Index Performance – Equity Office (EQR)
-86% from Peak
0.0% 7-Yr. Ann. Return
http://bigcharts.marketwatch.com http://finance.yahoo.com
+328% from Bottom43.9% 4-Yr. Ann. Ret.
+200% from Bottom
+73.2% 2-Yr. Ann. Return
EV/EBITDA = 23.5x Profit Margin = 9.3%ROA = 1.2%/ROE = -0.23% Div Yld = 4.1% Curr Ratio = 1.8x
Enterprise Value = $7.46 bil.Beta = 2.02x Forward P/E = 20.4x
REIT Equity Stock Index Performance – AMB Prop Co (AMB)
-86% from Peak
0.0% 7-Yr. Ann. Return
http://bigcharts.marketwatch.com http://finance.yahoo.com
+328% from Bottom+43.9% 4-Yr. Ann. Return
+221% from Bottom
+79.3% 2-Yr. Ann. Return
EV/EBITDA = 26.7x Profit Margin = 24.8%ROA = 2.1%/ROE = 2.2% Div Yld = 3.6% Curr Ratio = 1.6x
Enterprise Value = $12.9 bil.Beta = 1.4x Forward P/E = 26.2x
REIT Equity Stock Index Performance – Avalon Bay (AVB)
-77% from Peak
19.3% 7-Yr. Ann. Return
REIT Equity Stock Index Performance – Digital Realty (DLR)
http://bigcharts.marketwatch.com http://finance.yahoo.com
-67% from Peak
+253% from Bottom
EV/EBITDA = 17.3x Profit Margin = 12.5%ROA = 3.3%/ROE = 5.1% Div Yld = 3.3% Curr Ratio = 2.6x
Enterprise Value = $7.2 bil.Beta = 1.1x Forward P/E = 15.6x
+223% from Bottom+47.9% 4-Yr. Ann. Ret.
+87.9% 2-Yr. Ann. Ret.
28.7% 5-Yr. Ann. Return
Residential Residential Real Estate MarketsReal Estate Markets
Change in Renter and Owner-Occupied Rental Units
Renter Demand 1.5 Mil.
New Housing StartsNew Housing Starts
Source. United States Census Bureau. http://www.census.gov/briefrm/esbr/www/esbr020.html
- 80% from Peak March
2006
Homebuilder sentiment drops.
2.1 million at Peak
1.8 million at Peak
600,000 at Trough
http://www.census.gov/const/C30/totsa.pdf
Total Const. YOY +6.5%Residential +16.1%Office +30.3%Power +11.5%Manufacturing +6.3%Highway/Streets +3.8%Commercial +2.5%
Realtor Confidence IndexRealtor Confidence Index
http://www.realtor.org/reports/realtors-confidence-index
Time One MarketTime One Market
http://www.realtor.org/reports/realtors-confidence-index
Distressed SalesDistressed Sales
http://www.realtor.org/reports/realtors-confidence-index
National Home PricesNational Home Prices
Housing Market – Price Declines
http://www.standardandpoors.com/home/en/us www.zillow.com
- 20% YOY
Up 4% YOY
Down -4%
YOY
+ 20% YOY
+ 12% YOY
Housing Market – Price Declines
http://www.standardandpoors.com/home/en/us
California, August 2012: 3.2 Months
San FranciscoSan Francisco--OaklandOakland--FremontFremont
http://www.realtor.org/reports/local-market-reports
Home Prices Aug 11’ Aug 12’ Y-O-Y % Ch.
San Francisco $632,270 $692,980 +9.6%Marin $806,550 $806,450 0.0%San Mateo $742,000 $777,500 +4.8% Santa Clara $595,000 $666,750 +12.1%Contra Costa $607,310 $628,290 +3.5%
Monterey $252,000 $317,500 +26.0% San Luis Obispo $352,310 $386,180 +9.6%
Santa Barbara $421,430 $515,240 +22.3%Santa Cruz $490,000 $540,000 +10.2%California $297,660 $343,820 +15.5%
Source: California and National Associations of Realtors. http://www.car.org/ ; National Association of Realtors, http://www.realtor.orgMedian Home Prices
Housing Market
CA Housing Affordability% OF HOUSEHOLDS THAT CAN BUY
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®
Affordability 2Q/2011 2Q/2012 Y-O-Y % Ch.
San Francisco 24% 24% 0.0%Marin 24% 27% +12.5% San Mateo 22% 23% +16.7%Santa Clara 32% 32% 0.0%Contra Costa 26% 26% 0.0%
Monterey 56% 55% -1.8%San Luis Obispo 37% 41% +10.8% Santa Barbara 34% 32% -5.9%Santa Cruz 32% 34% +6.3%California 51% 51% 0.0%
Source: California Association of Realtors. http:// www.car.org/
Housing Affordability Index - TraditionalHousing Market
Multifamily Permits, Starts and Completions
http://www.mbaa.org/ResearchandForecasts
-200,000 Units Supply GapAggregate Demand
Aggregate Supply
Source: Cassidy Turley BT Commercial.
Source: Cassidy Turley BT Commercial.
ConclusionsConclusions
Economic/Employment SummaryStrengths Risks
• Global Economy Growing, focus on Asian, Emerging Europe, and Latin American Economies.
• Retail Sales Growth, Confidence and Investment Levels Recover.
• Large Multinational/Tech Firm Corporate Cash Holdings (Retained Earnings or Dividend Payout).
• Import/Export Trade flows.
• Inflation (Oil/Gas/Food Prices) and Interest Rate Volatility; Sovereign Defaults
• Uncertainty Business and Consumer Confidence:
• Middle East Unrest• Government Shut Down• State/Muni Budget Cuts.
• Rising Costs of Living: Food, Housing, Healthcare,Education, Utilities, and Taxes.
• Industry (Finance) Consolidation, Increased (M&A), LitigationActivity/ Re-Regulation.
Commercial Real Estate Market Summary
Strengths Risks
• Job Growth (Supply Constraints)
• Recovery and Growth in International Trade, and Retail Sales.
• Rising Occupancy Rates/Net Absorp.
• Rising Values/Rental Rates.
• Job Losses Government, Defense, Education, Finance Sectors.
• Rising Business Costs
(Federal/State/Local
Taxes and Fees.
• Business Consolidation.
• Rising Traffic Congestion.
• Rising Transportation Costs.
• Labor Strikes/Trade Disputes.
Thank YouThank You
Questions/AnswersQuestions/Answers
Educational, Training, Certification and Networking
• David Skeel, The New Financial Deal : Understanding the Dodd-Frank Act and its Unintended Consequences.
• Peter Ingersoll , Real Estate Tsunami Survivors Guide .• Gretchen Morgenson , Reckless Endangerment .• Satyajit Das , Extreme Money : Masters of the Universe and Cult of Risk.• Damon Vickers , The Day After the Dollar Crashes .• John Mauldin, Endgame : End of the Super Debt Cycle.• Diane Coyle , The Economics of Enough : How to Run an Economy as if the Future
Matters.• Barry Eichengreen, Exorbitant Privilege : The Rise and Fall of the Dollar and the
Future of the International Monetary System.• Dambisa Moyo, How the West was Lost : Fifty Years of Economic Folly – and the
Stark Choices Ahead.• Carmen Reinhart-Ken Rogoff , This Time is Different : Eight Centuries of Financial
Folly.• Glenn Hubbard, Seeds of Destruction : Why the Path to Economic Ruin Rugs
Through Washington, and How to Reclaim American Prosperity .• Robert Barbera, The Cost of Capitalism : Understanding Market Mayhem and
Stabilizing our Economic Future.• Paul Muolo, Chain of Blame : How Wall Street Caused the Mortgage and Credit
Crisis.• Manfred Max-Neef, From the Outside Looking In : Experiences in Barefoot
Economics.• Abhijit Banerjee-Esther Duflo , Poor Economics .• Edmund Phelps, Structural Slumps and Rewarding Work .
Recommended ReadingsRecommended Readings
• Randall Lane , The Zeros: My Misadventure in the Decade Wall Stree t Went Insane .
• David Brooks , Bobos in Paradise : The New Upper Class And How They Got There.
• Dambisa Moyo, How the West Was Lost : Fifty Years of Economic Folly, and the Stark Choices Ahead.
• Andrew Napolitano , A Nation of Sheep .• Paul Krugman , The Return of Depression Economics and the Crisis o f
2008.• Robert Reich, Aftershock : The Next Economy and America’s Future. Robert
Scheer, The Great American Stickup : How Reagan Republicans and Clinton Democrats Enriched Wall Street and Mugged Main Street.
• Joseph E. Stiglitz, Freefall : America, Free Markets and the Sinking of the World Economy.
• William Holstein , The Next American Economy : Blue Print for a Real Recovery.
• Suzanne McGee, Chasing Goldman Sachs : How they Melted.• Michael Lewis, The Big Short : Inside the Doomsday Machine.• Simon Johnson, 13 Bankers : The Wall Street Takeover and Next Financial
Meltdown.• Andrew Ross Sorkin, Too Big To Fail .• Gary Stern, Too Big To Fail : Hazards of Bank Bailouts.• Paul Sperry , The Great American Bank Robbery : The Unauthorized Report
About What Really Caused the Great Recession.
Recommended ReadingsRecommended Readings
• Nicole Gelinas , After the Fall : Saving Capitalism from Wall Street and Washington.
• Frank Portnoy, FIASCO : Blood in the Water on Wall Street.• Liaquat Ahamed, Lords of Finance .• Steve Fraser, Wall Street : Americas Dream Palace.• Roger Lowenstein, The End of Wall Street .• Justin Fox , The Myth of the Rational Market : A History of Risk,
Reward and Delusion on Wall Street.• George Cooper , The Origins of Financial Crisis : Central Banks,
Credit Bubbles.• Charles Kindleberger , Manias, Panics and Crashes : The History
of Financial Crises.• Harry Dent , The Great Depression Ahead .• William Bonner , The Empire of Debt : the Rise and Fall of an Epic
Financial Bubble.• John Bogle , The Battle for the Soul of Capitalism .• John Cassidy , How Markets Fail : The Logic of Economic
Calamities.• David Harvey , The Enigma of Capital and the Crisis of
Capitalism .
Recommended ReadingsRecommended Readings
• Mark Zandi, Financial Shock : A 360° Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Cris is.
• Robert Shiller, Animal Spirits : How Human Psychology Drives the Economy and Why It Matters for Global Capitalism; and The Subprime Solution : How Today's Global Financial Crisis Happened, and What to Do about It.
• Thomas Sowell , The Housing Boom and Bust .• Roman Frydman, Beyond Mechanical Markets : Asset Price Swings, Risk and
the Role of the State.• Eric Weiner, The Shadow Market : How Wealthy Nations/Investors Secretly
Dominate the World.• Raghuram Rajan, Fault Lines : Hidden Fractures Still Threaten the World
Economy.• Barry Eichengreen, Exorbitant Privilege : The Rise and Fall of the Dollar and
the Future of the International Monetary System.• Clyde Prestowitz, The Betrayal of American Prosperi ty. • Pat Choate, Saving Capitalism : Keeping America Strong.• Judge Richard Posner, A Failure of Capitalism .• Kim Phillips-Fein, Invisible Hands .• Jerome Corsi, America for Sale .• Timothy Carney, Obamanomics .• Naomi Klein, The Shock Doctrine .• Daniel Yergin, The Prize : The Epic Quest for Oil, Money and Power.• Anthony Downs, Real Estate and the Financial Crisis .
Recommended ReadingsRecommended Readings
• David Harvey, The New Imperialism .• Paul Kennedy, Rise and Fall of the Great Powers .• Noam Chomsky, Failed States , Necessary Illusions , and
Manufacturing Consent .• V.S. Soloviev, Politics, Law and Morality ; Michel Foucault,
Power/Knowledge .• Arthur Miller, Death of a Salesman , The Crucible , A View from the
Bridge , Timebends , and A Life .• Susan Casey, The Devil’s Teeth: Great White Obsessi on/Survival .• Stephen Breyer, Making Our Democracy Work .• Garber Mate: Scattered Minds: A New Look at Origins and Healing
of ADD .• Max Weber, The Protestant Ethic and the Spirit of C apitalism .• Friedrich Nietzsche, The Will to Power .• David Ricardo, The Principals of Political Economy and Taxation .
Recommended ReadingsRecommended Readings
Books - www.amazon.com - www.irei.com
• Real Estate Finance & Investments 12th Ed, William B. Brueggeman, Jeffrey D. Fisher, 2005.
• Commercial Real Estate Analysis and Investments (2nd Ed), David Geltner, Norman G. Miller, 2007.
• Income Property Valuation (2nd Ed), Jeffrey D. Fisher, Robert S. Martin, 2004.
Recommended ReadingsRecommended Readings
- Argus Valuation (Investment/Development) Softwarewww.argussoftware.com
- Loop Net http://www.loopnet.com/- CoStar/Comps http://www.comps.com/comps.asp- Real Capital Analytics (RCA) www.rcanalytics.com- FW Dodge http://www.fwdodge.com/- Marshall & Swift http://www.marshallswift.com/- MP/F Research/Yield Star (Apartment Data)
http://www.realpage.com/yieldstar/- REIS Research, Inc. http://www.reisreports.com/- CB Richard Ellis http://www.cbrichardellis.com/- Marcus & Millichap http://www.mmreibc.com/- SNL Financial http://www.snl.com
Online DataOnline Data
Certifications/Designations/Education- Counselors of Real Estate (CRE)
http://www.cre.org- Royal Institute of Chartered Surveyors (RICS)
http://www.rics.org- Appraisal Institute (AI) – MAI
http://www.appraisalinstitute.org- Certified Commercial Investment Member (CCIM)
http://www.ccim.com- Institute of Real Estate Management (IREM) – CPM
http://www.irem.org/- Urban Land Institute (ULI) – Development
http://www.uli.org/
OrganizationsOrganizations
Professional
- Building Owner Management Association (BOMA)http://www.boma.org
- Commercial Real Estate Women (CREW)http://www.crew.org/
- National Association of Industrial and Office Professionals (NAIOP)http://naiop.org/
- National Association of Realtors – Commercial Division http://www.realtor.org/commercial/
- Society of Industrial and Office Realtorshttp://www.sior.com/
OrganizationsOrganizations
Institutional
- National Association Real Estate Investment Management (NAREIM)http://www.nareim.org/
- National Council of Real Estate Investment Fiduciaries (NAREIF)http://www.ncreif.org/
- National Association of Real Estate Investment Trusts (NAREIT)http://www.nareit.com/
- Pension Real Estate Association (PREA)http://www.prea.org/
OrganizationsOrganizations
AppendixAppendix
Lawrence Souza brings to his clients over 20 years of experience in real estate economic and financial research experience. Mr. Souza has held senior positions as Managing Director-Index Services, Charles Schwab Investment Management (CSIM); Chief Real Estate Economist and Director of Index Services, Global Real Analytics (GRA); Director of Research for BRE Properties, Inc. (REIT) in San Francisco and holding Senior Market/Research Analyst positions at Metric Institutional Realty Advisors and Mellon-McMahan/MacFarlane Realty Advisors, and market research positions at Norris, Beggs and Simpson and Grubb & Ellis commercial brokerage. Mr. Souza combines traditional fundamental real estate economic and market research with fundamental and technical financial and capital market research and investment strategy. This combined approach allows for the tracking and forecasting of economic, real estate and financial cycles and efficient portfolio construction, optimization and risk management.
Mr. Souza has undergraduate degrees in Economics (BA) and Business Administration (BS) with concentrations in Accounting, Finance, Banking and Real Estate; and holds master’s degrees in Applied Economics (MA), Finance/Investments (MS), Public Administration (MPA), Information Systems (MSIS), and Political Science (MA). Mr. Souza has been teaching Modern Real Estate Principles and Finance since 1996 with an emphasis on real estate in a modern and post-modern portfolio and capital markets context; and the institutionalization, securitization, internationalization and technologization of real estate markets and products.
Lawrence A. SouzaLawrence A. SouzaContact Information: Contact Information:
www.thewww.the--commercialcommercial--group.comgroup.comLsouza@[email protected]
Cell Direct: (415) 713Cell Direct: (415) 713--0213 Fax: (415) 8260213 Fax: (415) 826--22162216
www.fullermoney.com
0
2
4
6
8
10
12
2009 2010 2011
GermanyFranceUKPortugalSpainRepublic of Ireland
%
Source: Reuters
10 year government bonds
As a result, the cost of borrowing in ‘peripheral’ E uropean economies has rocketed, which is likely to impair growth
Robert Peto, RICS Global President, Global Property Outlook, 2011.
Spain +200 bsp Spread
Portugal +200 bsp Spread
Ireland +600 bsp Spread
Semiconductor Sales RevenueSemiconductor Sales Revenue
http://wsts.org/
Default Rate Commercial Mortgages 1992 - 2012
-75%~85%
More than 180 federally insured national banks closed in last two years, $30 billion of loans to sell.
Continued Tight Credit Conditions
FDIC and Banks Looking to Unload Commercial Real Estate
Notes, Loans and REO Properties 2011-2013
2010 Acquisition Financing2010 Acquisition Financing
Real Capital Analytics (RCA), US Capital Trends, March 2011.
28%28%28%28%
http://www.GreerAdvisors.com
Implied Discount Rates Commercial Real Estate (Debt/Equity)
24%
CMBS Spreads vs. 10 Yr. Treasury YieldsImputed Discount Rate – Band of Investments
http://www.crefc.org/uploadedFiles/CMSA_Site_Home/Industry_Resources/Research/Industry_Statistics/CMSA_Compendium.pdf
Spreads Over 10 Year T-Bills (6/01/10)AAA + 250 bps (2.5%), 1400 bsp peakAA + 2,500 (25.0%), 4000 bsp peakA + 3,250 (33.0%), 5000 bsp peak
BAA2/BBB + 5,500 (55.0%)
IRR* = WACC* = 15% -to - 25%
[25% -to- 35% Imputed Debt Cost of Capital] * 50% + [5% -to- 15% Imputed Equity Cost of Capital] * 50%
Compression in Spreads from Peak
Institutional Sector – Total Returns
National Council of Real Estate Investment Fiduciaries (NCREIF),Press Release, First Quarter 2011, April 25, 2011.
Regional – Total Returns
National Council of Real Estate Investment Fiduciaries (NCREIF),Press Release, First Quarter 2011, April 25, 2011.
CMBS Delinquency Rate 1Q03 –to- 1Q10
Market driven by small group willing to take first risk of default in exchange for outsized returns.
Loans backed by strong balance sheets. Low LTVs, more equity. Better underwriting, ridged approval process, better oversight by rating agencies, alignment between senior piece
buyers and special services, and financial interest by all parties (5% “Skin in Game Requirement).
http://www.crefc.org/uploadedFiles/CMSA_Site_Home/Industry_Resources/Research/Industry_Statistics/CMSA_Compendium.pdf
CMBS Delinquency vs. Residential 1Q03 –to- 2Q10
http://www.crefc.org/uploadedFiles/CMSA_Site_Home/Industry_Resources/Research/Industry_Statistics/CMSA_Compendium.pdf
Prime Residential 10%
Sub-Prime Residential 40%Alt-A Residential 35%
CMBS 8%
GDP barely rose Advanced economies over past 5 year s due to credit crunch, Emerging economies strong -- capital -- gains to cont inue (Source: IMF)
0
2.5
5
7.5
10
Euro area Japan UK US Brazil Russia India China
2011 2012
Source: IMF
Annual % change, GDP
Robert Peto, RICS Global President, Global Property Outlook, 2011.
GDP Growth 7% -to- 10%
GDP Growth 4% -to- 5%
GDP Growth 1.5% -to- 3%
The trend in Europe is improving in most countries
-100
-80
-60
-40
-20
0
20
40
60
80
100
2008 2009 2010
RussiaUKEmerging EuropeFranceGermany
Net balance %
Source: RICS Global Commercial Property Survey
Capital value expectations Capital Values are
rising
Capital Values are
falling
Robert Peto, RICS Global President, Global Property Outlook, 2011.
Capital Values Rising : Russia, Germany, Emerging Europe and France.
Capital Values Falling : United Kingdom.
However, the global trend is such that it shows the recovery is most pronounced in emerging economies
-100
-80
-60
-40
-20
0
20
40
60
80
100
2008 2009 2010
RussiaUKEuro areaBrazilChina
Net balance %
Source: RICS Global Commercial Property Survey
Capital value expectations Capital Values are
rising
Capital Values are
falling
Robert Peto, RICS Global President, Global Property Outlook, 2011.
Capital Values Falling or Slow : United Kingdom and Euro Area.
Capital Values Rising : Russia, Germany, Brazil and China.
0
10
20
30
40
50
60
70
80
90
100
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Global Asia Pacific
EU UK
'Fair Value'
More markets
rated COLD
More markets
rated HOT
Fair Value Index score
Source: DTZ Research
All property 'fair value'
Downward trend emerging
Prime property in general in Europe and the UK has rebounded to the extent that it can no longer be deemed to be of ‘fair valu e’
Robert Peto, RICS Global President, Global Property Outlook, 2011.
0
2
4
6
8
10
12
2009 2010 2011
GermanyFranceUKPortugalSpainRepublic of Ireland
%
Source: Reuters
10 year government bonds
As a result, the cost of borrowing in ‘peripheral’ E uropean economies has rocketed, which is likely to impair growth
Robert Peto, RICS Global President, Global Property Outlook, 2011.
Spain +200 bsp Spread
Portugal +400 bsp Spread
Ireland +600 bsp Spread
High Sovereign Bond Credit Default Risk
Summary Summary –– Capital Raise ActivityCapital Raise ActivityGeographic Focus and Investment StyleGeographic Focus and Investment Style
Institutional Real Estate, Inc. (IREI), Fund Tracker, First Quarter 2011.
U.S. Property Sales (2005U.S. Property Sales (2005--2012)2012)
Real Capital Analytics (RCA), US Capital Trends, March 2011.
11 12
2011-2013: $190-to-$250 bil.
2012-2014: $300-to-$400 bil.
Annual Forecast
Most Active Markets : New York, Wash DC, San Francisco; Hotels, Office, Apartments
2010 Top Lenders2010 Top Lenders
Real Capital Analytics (RCA), US Capital Trends, March 2011.
Sector Level – Total Returns
Investment Property Databank (IPD), US Quarterly: Fourth Quarter, 2011.
-30%
+10%
+20% -to- 25%
Institutional Sector – Total Returns
National Council of Real Estate Investment Fiduciaries (NCREIF),Press Release, First Quarter 2011, April 25, 2011.
Regional – Total Returns
National Council of Real Estate Investment Fiduciaries (NCREIF),Press Release, First Quarter 2011, April 25, 2011.
Commercial Real Estate IndicesCommercial Real Estate Indices
http://web.mit.edu/cre/research/credl/rca.html
+70% Since 2004
-33%+200%
Since 1994
Commercial Real Estate IndicesCommercial Real Estate Indices
-42%
Moody ’s REAL –Commercial Property Price Index (CPPI) -Repeat Sales
+93%
http://web.mit.edu/cre/research/credl/rca.html
Values Lowest in Seven Years
Apts -35%
Commercial Real Estate IndicesCommercial Real Estate Indices
http://web.mit.edu/cre/research/credl/tbi.html
MIT Transaction Based Index
Positive (capital) appreciation rates in 2010, East/West Coast appreciating first.
Points to Appreciation