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Revisiting the Operating Expense Database & Drilling Down Into NPI Acquisitions. Walter G. Page Director of Market Research and Portfolio Strategy. October 2008. 6/9/2014. Updated 4/4. Revisiting The Operating Expense Study. Entire NCREIF Universe = 4,878 properties

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Revisiting the Operating Expense Database & Drilling Down Into NPI Acquisitions

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Revisiting the operating expense database drilling down into npi acquisitions

Revisiting the Operating Expense Database&Drilling Down Into NPI Acquisitions

Walter G. Page

Director of Market Research and Portfolio Strategy

October 2008

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Updated 4/4

Revisiting The Operating Expense Study

  • Entire NCREIF Universe = 4,878 properties

    • Excluded properties acquired after the 4th quarter of 2002

    • Excluded properties for which were not in NCREIF’s database prior to 2004

    • Excluded properties that were not in NCREIF’s database in the second quarter of 2008.

  • Same Store Universe = 1,202 properties

    • Office = 338 properties

    • Industrial = 532 properties

    • Multifamily = 210 properties

    • Retail = 122 properties

Source: ARA Research

1

6/9/2014


Market coverage of operating database office sector

Updated 7/30/2008

Market Coverage of Operating Database – Office Sector

Source: NCREIF, Torto Wheaton, ARA Research


Market coverage of operating database industrial sector

Updated 7/30/2008

Market Coverage of Operating Database – Industrial Sector

Source: NCREIF, Torto Wheaton, ARA Research


Market coverage of operating database multifamily sector

Updated 7/30/2008

Market Coverage of Operating Database – Multifamily Sector

Source: NCREIF, Torto Wheaton, ARA Research


Market coverage of operating database retail sector

Updated 7/30/2008

Market Coverage of Operating Database – Retail Sector

Source: NCREIF, PPR, ARA Research


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Updated 7/28/08

Operating Expenses on the Rise

Annual Operating Expenses PSF

% 2004 to 2007 Change

10.5%

11.4%

8.9%

16.7%

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Updated 7/28/08

Operating Expenses on the Rise

Annual Operating Expenses Per SF

% Change 2006 to 2007

4.2%

2.5%

6.3%

8.2%

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Updated 7/29

Office: Segmentation of Operating Expenses

Insurance 4%

$0.58 PSF

Marketing 1%

$0.09 PSF

Management Fee 5%

$0.63 PSF

Average Building Operating Expenses

$13.15 PSF

Administrative 8%

$1.06 PSF

Real Estate Taxes 29%

$3.79 PSF

Other Expenses 12%

$1.64 PSF

Maintenance 23%

$3.04 PSF

Utilities 18%

$2.32 PSF

Note: Expense segmentation represents OPEX for 2007 on a same store basis. Excludes buildings acquired since 2003

Source: NCREIF, ARA Research


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

% Change

12%

21%

4%

6%

31%

4%

6%

4%

8%

Updated 7/28/08

Office Expenses by Category

Annual Operating Expenses Per SF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Updated 7/29

Industrial: Segmentation of Operating Expenses

Administrative 4%

$0.07 PSF

Marketing 0%

$0.01 PSF

Utilities 6%

$0.10 PSF

Average Building Operating Expenses

$1.69 PSF

Other Expenses 7%

$0.12 PSF

Management Fee 8%

$0.13 PSF

Real Estate Taxes 46%

$0.78 PSF

Insurance 9%

$0.15 PSF

Maintenance 20%

$0.33 PSF

Note: Expense segmentation represents OPEX for 2007 on a same store basis. Excludes buildings acquired since 2003

Source: NCREIF, ARA Research


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

% Change

22%

-1%

3%

19%

3%

29%

8%

2%

6%

Updated 7/28/08

Industrial Expenses by Category

$ Per Occupied SF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Updated 7/29

Multifamily: Segmentation of Operating Expenses

Insurance 6%

$0.34 PSF

Marketing 6%

$0.39 PSF

Average Building Operating Expenses

$6.14 PSF

Management Fee 7%

$0.46 PSF

Real Estate Taxes 27%

$1.64 PSF

Other Expenses 9%

$0.58 PSF

Utilities 11%

$0.69 PSF

Maintenance 18%

$1.08 PSF

Administrative 16%

$0.96 PSF

Note: Expense segmentation represents OPEX for 2007 on a same store basis. Excludes buildings acquired since 2003

Source: NCREIF, ARA Research


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

% Change

10%

3%

5%

-12%

4%

4%

4%

3%

2%

Updated 7/28/08

Multifamily Expenses by Category

$ Per Occupied SF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Updated 7/29

Retail: Segmentation of Operating Expenses

Marketing 5%

$0.44 PSF

Insurance 4%

$0.37 PSF

Average Building Operating Expenses

$9.55 PSF

Administrative 7%

$0.71 PSF

Management Fee 8%

$0.77 PSF

Real Estate Taxes 31%

$2.94 PSF

Utilities 9%

$0.86 PSF

Other Expenses 12%

$1.20 PSF

Maintenance 24%

$2.26 PSF

Note: Expense segmentation represents OPEX for 2007 on a same store basis. Excludes buildings acquired since 2003

Source: NCREIF, ARA Research


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

% Change

8%

-1%

15%

2%

9%

-2%

2%

6%

4%

Updated 7/28/08

Retail Expenses by Category

$ Per Occupied SF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

% Change 2004 to 2007

50.7%

68.6%

-10.0%

20.7%

Updated 7/28/08

CapEx Rising Rapidly For Consumer-Driven Real Estate

Annual Capital Expenditures PSF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Updated 7/30/08

CapEx Breakdown - Office

Annual Capital Expenditures PSF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Updated 7/30/08

CapEx Breakdown - Industrial

Annual Capital Expenditures PSF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Updated 7/30/08

CapEx Breakdown - Multifamily

Annual Capital Expenditures PSF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Updated 7/30/08

CapEx Breakdown – Retail

Annual Capital Expenditures PSF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Cumulative% Change (’04-’07)

17.4%

18.7%

6.3%

10.4%

Updated 7/30/08

NOI Growth Strongest For Consumer-Driven Sectors

Annual Net Operating Income PSF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Cumulative% Change (’04-’07)

13.0%

13.7%

3.6%

13.1%

Updated 7/30/08

Base Rent is Steadily Rising—Except for Industrial

Base Rent PSF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Cumulative% Change (’04-’07)

11.7%

21.0%

10.3%

10.4%

Updated 7/30/08

Income Breakdown - Office

$ PSF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Cumulative% Change (’04-’07)

3.7%

22.3%

1.5%

6.3%

Updated 7/30/08

Income Breakdown - Industrial

$ PSF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Cumulative% Change (’04-’07)

13.7%

39.4%

42.7%

18.6%

Updated 7/30/08

Income Breakdown - Multifamily

$ PSF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Cumulative% Change (’04-’07)

13.0%

17.2%

26.7%

17.4%

Updated 7/30/08

Income Breakdown - Retail

$ PSF

Source: NCREIF, ARA Research

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Updated 4/4

Drilling Down into NPI by Year of Acquisition

  • What is Known About NPI

    • Appraisal Lag Of About 6 to 8 Quarters

    • NPI Transaction Cap Rate is An Early Indicator of Value

    • Open Ended Fund Index Adjusts Faster than the Overall Index

  • What is Known About Acquisitions

    • Are Valued in Today’s Market

    • Most of the Return is From Income

Source: ARA Research

27

6/9/2014


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Updated 7/22/08

Looking At Past Periods of Market Stress

Cumulative 3 Year Total Return

  • In each case total returns on new investments outpaced that of existing investments, to average nearly 18% more than the market average over the next three years

Year

Source: NCREIF, ARA Research


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Updated 7/22/08

Why Invest Now?

  • During past downturns, new acquisition performance has usually outperformed the overall market

Percent Annual Total Return

Forecast

Returns Favor New Acquisitions

Source: NCREIF, ARA Research


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Why New Acquisitions Should Exceed NPI In Today’s MarketTransaction Cap Rates Have Moved Up but Appraised Cap Rates Have Lagged

Greatest Difference in Cap Rates Since 1990’s

Trailing NCREIF Cap Rate

Long Term Average

8.6%

8.2%

Source: NCREIF, ARA Research


F fwresearchpresentations 2008 quarterly briefing 2q2008 final

Cap Rates Relative to Alternative Investments

Transaction Cap Rates Are Now at Long-Term Spread to 10 Year T Bill

% Difference in Cap Rate to 10 Yr T Bill

Long Term Average

2.7%

2.3%

Source: NCREIF, ARA Research


Revisiting the operating expense database drilling down into npi acquisitions1

Revisiting the Operating Expense Database&Drilling Down Into NPI Acquisitions

Walter G. Page

Director of Market Research and Portfolio Strategy

October 2008

6/9/2014


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