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Home My WebLink AboutRegular 604 Real Estate Market ConditionsDate: May 26, 2010 The attached document was provided by Mr. David West, Bogdahn Consulting, LLC to the Winter Springs Board of Trustees and was discussed during Regular Agenda Item "604" at the May 26, 2010 rescheduled Regular Meeting. Real Estate Current Market Conditions Second Quarter 2010 WWW.BOGDAHNGROUP.COM THE BOGDAHN ..� GROUP simplifying your investment and fiduciary decisions ■ In Summary - Real Estate has more ground to make up than more liquid asset classes Real EstatelREITlstock prices Index level (11111990 = 100) 5 500 4 5 50 400 350 300 250 200 150 100 50 0 90 91 Source: NCREIF, Bloomberg, JPMorgan P e,rr,rr, .•,I D' „-,. +t. -Q.Q D r,nn5 1 I L` 0CITr Current Market Conditions Property Revaluation Continues Trading capitalization rates expanded dramatically over last 18 months resulting in value declines >40% Valuations depend heavily on property type, market location and asset quality Write -downs continued in 1 Q 2010 ( <5 %) but values are beginning to stabilize Transaction Activity Down Transaction volume down 90% from the level it was two years ago Market illiquidity remains an issue but expected to improve in latter half of 2010 Lenders extending & amending troubled loans - delaying foreclosure Financing More Difficult Banks and insurance companies now lending on stabilized properties with LTV's of 65 %, interest rates of 5 % -6.5% and 5 to 7 year terms Construction and land loan delinquencies are approaching 9% Real Estate Downward Valuation NCREIF -ODCE Index appreciation write -down of 43% since Q3 2008 - steeper and faster than previous cycles Driven by cap rate expansion not oversupply of new product Real Estate Appreciation Cycles 30% 20% 10% a� 0% � 1 -10% a� C -20% -30% -40% 1.5 Years — 43.2% Source: NCREIF, Bureau of Economic Analysis, Cornerstone Core Property Write Downs Slowing Quarterly change in unlevered values for properties held in core open -end commingled funds reporting to NCREIF Mar -08 Jun -08 Sep -08 Dec -08 Mar -0 Jun -0 Sep -0 Dec -0 C,of Cap Rate Expansion Equals Attractive Yields Cap rates are showing signs of stability Creates attractive time to invest in real estate io io i i io Core Cap Rate Cycles Core properties trading at near 2003 yields (prices) Approaching historical cap rate peak for institutional properties Income Yields Cyclical Behavior rr@Yi-VA Transaction Activity Showing Signs of Improvement Transaction volume (square feet), 3 month rolling average 300MM - 20MM - 200MM - 150MM - 100MM - 0MM 0MM C CD Source: RCA and JPMorgan CO CD C cl� n C C? � W W U U U U U 3 3 CO CD C Cap Rate Spread to 10 -Year Treasury Potential for total returns above long term average -0. _ 6q-'.- 5 1 1 1, 11 Year f'ui:ward total re(Lim if iuives a peak spreads 4% .......... 2°./0 . --M 1 St and --rd DeT Yi IC, .................... V3 7D f' 6C Qt ^J r- J r — iF1 tNI fV fJ r I Source: NCREIF �� Commercial Mortgage Maturities Over $1 trillion must be refinanced by 2014 Results in strong demand for debt $350 $300 $250 $200 0 C° $150 c $100 $50 $0 ■ Commercial Multifamily Source: Federal Reserve, Foresight Analytics, Invesco O +—I N M Lf 1 to I- M Oh O —q N M It U) to I" M Oh O —q N M It U') to I- M Oh O (0 O O O O O O O O O O +—I —q —q —q —q —q —q —q —q +--i N O) O O O O O O O O O O O O O O O O O O O O O +--i N N N N N N N N N N N N N N N N N N N N N Commercial Mortgage Market is Recovering Spreads are down and loan activity is increasing Commercial mortgage spread over U.S. treasury yield 600 Commercial mortgage survey deal volume 4.00 250 500 400 0 0- CO 300 200 100 0 Dec -04 Dec -05 Dec -06 Dec -07 Dec -08 Dec -09 Source: Giliberto -Levy Index, JPMorgan 3.50 3.00 2.50 F- 2.00 1.50 1.00 0.50 200 150 1-� 3 O C J 100 50 0.00 1 � , � i � , -� � 1 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 2009 Current Commercial Mortgage Terms More conservative underwriting equals lower LTVs and higher debt service coverage Illiquidity has widened spreads Source: Cushman Wakefield, IDR, GE Real Estate Capital �� l Current Market Fundamentals Vacancy and rental growth Vacancies continue to rise as absorption remains low Rental growth remains weak in all property types Supply of new construction is low New supply below 20 -year historic average Traditional lenders reluctant to provide construction financing Current transactions trading at 30% or greater discounts to replacement cost Real estate pricing has yet to rebound Most asset classes have experienced a partial recovery U.S. core appraised real estate is still experiencing write downs and is expected to be flat for remainder of 2010 Vacancy Rates y Vacancy Rates have Risen Above Long -Term Averages y Decreased Demand for Space Causing Downward Pressure on Rents Vacancy By Property Type 20 18 16 14 F 12 e 10 c� ,r. 4 2 0 19514 19934 19954 19974 19994 24414 20034 24054 20074 20054 1934# 19924 1994 19944 19984 20004 20024 20044 24044 24084 Source: NCREIF. Ap$rkment Indu5trw — Office — Retail New Supply Analysis Most U.S markets do not have oversupply issues Construction material and labor costs are steadily increasing Financing is difficult to obtain and expensive 3.5% 3.0% 2.5% 0 � 2,0% t 1.5% 1.0% 0.5% 0.0% ■ Long-term Average 3 -Yr. Forecast Offi oe Industrial Retail Hotel Note: Long -Term Average Represents 20 Year Average l� Apartme nts Most Ma rke is have Partially Rebounded — Not Real Es to to Most other asset classes have experienced a partial recovery U.S. appraised core real estate is still experiencing write downs Valuations expected to be flat for remainder of 2010. Peaky trough t al return O dH -4 a -2O -]O -]7 ƒ -]O n -40 GG GB -SO -BH -51 -7O e e r e m e g ° e M ƒ CD / f § / m s \ o o CO g ± ± _ = e 0- = y o / / / » ƒ§ a < % D a < / 2 « 2 ¥ . 7 y f 7 ® 3 2 Trough to year-end tot al return Bn m 70 BH 55 y Sn ]g / 40 ƒ ]H 16 20 ]] ]O ] O O m LL) ® ° 1201 m m ± ƒ (D ) f / § / g r ± o o CID g ± Y = m E 7 = y o \ / / * ° 2 ° �/ 2 D % 2 < / 4 2 ¥ . g 2 f / 3 3 2 Source. Barc XCREIF, .c m,&mm :z<a _Vote: il v 7mGC¢ � Summary of Investment Strategies Core Operating, substantially leased ( >80 %) properties with lower leverage ( <30 %), experienced significant re- pricing (NPI write -down of 41% since 3Q 2008), NCREIF income 6% currently and current transaction cap rates 8.0 -8.5 %. Value -Added Higher use of leverage (30% to 65 %), purchase at below replacement cost, greater risk associated with capital raising, leasing newly refurbished space and final exit strategy. Multifamily strategies show promise. Opportunistic Highest risk strategies due to use of leverage, capital raising and execution. Often include large complex Wall St. based or distressed transactions that create execution and exit risk especially given current economic and illiquid conditions. Distressed sellers exist but are not being forced to sell by an agency (RTC) and banks are amending and extending loan terms instead of foreclosing. Potential for high returns, but existing risk remains high. Debt Increasing demand for refinancing creating an supply imbalance resulting in attractive lending terms for first mortgage origination: floating rate structure, lower LTV's, and wider spreads. REITs REITs trade like small cap stocks. REITs raised significant equity last year to improve balance sheets but many remain highly leveraged. Sector priced at implied 6.0 -6.5% cap rate and 15% premium to NAV, more expensive than private commercial real estate. IB Real Estate Risk Spectrum Real estate supply /demand fundamentals and development needs impact the risk and return potential of the asset class. Core Plus — Value Added — Core — Lower Risk I Additional Risk I Higher Risk 4%-6% Real Return Y Operating assets substantially leased ➢ Traditional property types and markets Y Leverage <25% Y Operating sssets Y Traditional property types and tertiary markets Y Leverage 25 -40% 9%-11% Real Return Y Was repositioning, Now is distressed debt ➢Includes alternative property types (e.g.; medical office, student housing) Y Leverage 40 -60% Z£6L'ObZ'999 ZOZ£S uisuoosiM `3331nempW 0081 alinS OAy ursuoOsrM 'g OSZ IISZ£ ep«oi3 `opurlio 009 olinS `peo'd pueTau'A 106p 0puL)IJ0 SSS09 SiOU ` OOZ of ?nS pea21 PIOIJPu ?M OZ£b aaInunniiw suouajap 'C.wranpffpuv xuauusaauz �noCBuupdruu Ahh� d nox1) NHVCIDOq JH1, otivoiig0