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Overview of the US Commercial Real Estate Investment Market January 20, 2009

Overview of the US Commercial Real Estate Investment Market January 20, 2009. Current economic environment…. Economy is contracting Employment has declined for 11 consecutive months Financial Markets have collapsed Recession with a capital “R” How’d we get here??? .

leonard-gibson
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Overview of the US Commercial Real Estate Investment Market January 20, 2009

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  1. Overview of the US Commercial Real Estate Investment Market January 20, 2009

  2. Current economic environment… • Economy is contracting • Employment has declined for 11 consecutive months • Financial Markets have collapsed • Recession with a capital “R” • How’d we get here???

  3. Current account deficit has been growing… Source: Bureau of Economic Analysis, Cushman & Wakefield

  4. Federal fiscal deficit has been growing for decades… U.S. Federal Fiscal Deficit Source: Bureau of Economic Analysis, Cushman & Wakefield

  5. Until recently stock market has been steadily rising… Dow Jones Industrial Average Source: Dow Jones, Cushman & Wakefield

  6. Long-term interest rates have been falling… Source: Moody‘s Economy.com, Cushman & Wakefield

  7. Household savings has been declining… Source: Moody‘s Economy.com, Cushman & Wakefield

  8. Household debt has been growing… Aggregate Household Debt Billions of US Dollars Source: Federal Reserve Board

  9. Fed Chairman Ben Bernanke: “A global savings glut.” Mercantilist trade policies depress value of foreign currencies relative to the dollar Encouraging U.S. consumerism Discouraging U.S. savings Depressing U.S. industrial production and exports Result: Huge capital transfers from emerging to mature economies Causing run-up in asset prices What has fueled this?

  10. Massive capital transfers from emerging to mature economies Easy debt, excessive leverage, lax discipline by lenders and investors (e.g., example of residual values) Causing huge bubbles in asset prices, including residential and commercial real estate Over-leveraged financial institutions catastrophically vulnerable to pricing corrections WE ALL SAW THE BUBBLE, BUT IGNORED THE INEVITABLE IMPACT ON THE FINANCIAL SECTOR What are the results?

  11. Business is retrenching, shedding jobs… Source: US Bureau of Labor Statistics

  12. Retail sales are falling… Year-over-year change (3-month moving average) Source: U.S. Census Bureau

  13. The response – massive monetary and fiscal stimulus… Credit Crunch and RecessionPeriod: Aug-07 to ??? Cause: Residential Subprime Contagion Recession Period: Sep-01 - 02 Cause: Tech Bubble Bursts and Sept 11 Economic Slow Down Period: Jul-95 to Mar-97 Cause: S&L Crisis Credit Crunch Period: Aug-98 to Jan-99 Cause: Asian Flu Source: US Federal Reserve Board

  14. U.S. Gross Domestic Product: 1980 – 2011 Forecast Source: Moody’s Economy.com, Bank of America, Cushman & Wakefield Capital Markets Group

  15. The U.S. Real Estate Market

  16. Gateway CBDs holding up reasonably well… Q3-08 CBD VACANCY RATES

  17. Suburban markets beginning to feel the pain… Q3-08 SUBURBAN VACANCY RATES

  18. Suburban vacancies increased from year ago… Q3-08 SUBURBAN VACANCY RATES Change from One Year Ago

  19. Global investment volumes declined substantially… Global Real Estate Investment * Preliminary 2008 Volume Source: Cushman & Wakefield, PropertyData, RCA

  20. U.S. investment sales volumes returning to normal levels? * Preliminary 2008 Volume Source: Real Capital Analytics, Cushman & Wakefield Capital Markets Group

  21. The market has its challenges… • There is a crisis of confidence and a perception that markets haven’t “bottomed out” – stalling any material sales activity. • Absence of available debt is severely reducing the pool of capable buyers. • Properties with assumable financing, or with available seller financing, and reasonable remaining term (minimum three years) fare better . • Foreign investors, once looking at the U.S. as a safe haven for real estate capital, face similar if not more severe credit issues.

  22. There are now more sellers than buyers able to close… All Property Offerings & Closings* US, Monthly Credit Crunch In 2008: $250b offered $138b closed ’07 ‘08 *Excludes Privatizations Source: Real Capital Analytics, Inc.

  23. Office properties have suffered the steepest decline… * Preliminary 2008 Volume Source: Real Capital Analytics, Cushman & Wakefield Capital Markets Group

  24. Property yields returning to historic norms… * *4th Quarter Office Derived Cap Rate forecasted using RCA data. Source: NCREIF, Moody’s Economy.com, Real Capital Analytics, Cushman & Wakefield Capital Markets Group

  25. CMBS/conduit financing is essentially gone… Source: Mortgage Bankers Association

  26. Re-pricing of capital & risk translates to falling property values… Opportunistic Capital * Mezz rates include amortized up front points. Source: Cushman & Wakefield Capital Markets Group

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