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The Global Outlook

CBRE Econometric Advisors Around the Bend The Shape of the Recovery U.Conn, November 11, 2009 William Wheaton Professor, Department of Economics MIT. The Global Outlook. The rest of the world does not have Housing and Debt market woes quite like the US

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The Global Outlook

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  1. CBRE Econometric AdvisorsAround the Bend The Shape of the RecoveryU.Conn, November 11, 2009 William Wheaton Professor, Department of Economics MIT

  2. The Global Outlook • The rest of the world does not have Housing and Debt market woes quite like the US • The rest of the world is recovering sooner and likely stronger than the US. • But with expanded trade, the world can only go so far without the US. • Property markets outside of the US already show signs of mending. • Long term good news: high global Savings = Plentiful Capital • Long term concern: slowing demographics

  3. GDP Growth, G-8 vs. EM: Continued Synchronization? Y/Y ? Forecast Source: IHS Global Insight, August 2009

  4. Consumption growth, G-8 vs. EM Y/Y Forecast Source: IHS Global Insight, September 2009

  5. Savings Rates (total), G-8 vs. EM: Plenty of Capital % Forecast Source: IHS Global Insight, August 2009

  6. Hence Long Term Rates remain low Forecast % Source: IHS Global Insight, August 2009

  7. Trade (I + M) as % of GDP: increasing “openness” % Forecast Source: IHS Global Insight, August 2009

  8. Slowing/negative Population Growth Rates Y/Y Forecast Source: IHS Global Insight, September 2009

  9. Office Vacancy Rates stabilizing: except for US Source: CB Richard Ellis, July 2009

  10. Office Rents show a bottom in A-P, not US, EU Rent Index 100 = 2001.1 Pacific Asia EU North America Source: CBRE Research and Consulting, July 2009

  11. Cap Rates Starting to fall : except for continued US rise Source: Real Capital Analytics, Oct 2009

  12. So Capital Values stabilizing: except for the US Index, 100=2001.2 Source: CB Richard Ellis July 2009

  13. The US Economic Outlook in more detail • Trade, exports, low dollar – are big recovery drivers • Business Investment and Inventories – also big recovery driver. • Housing – surprise – a huge recovery driver. • The big question is consumption. Will consumers save more or spend less? • Another jobless recovery – why?

  14. US Trade Flows are Turning positive Change from previous month (Millions of $) Source: BEA

  15. Business Investment + Clunkers + stimulus =3.5% Contribution to Headline GDP Growth (%) Source: BEA and CBRE Econometric Advisors

  16. Housing GDP Contribution Turns Positive Next Year HH growth + demolitions + 2nd homes = 1.3m units! Housing starts increase from 570 ths in 2009 to 1250 in 2012 Sources: Bureau of the Census, BEA, CBRE Econometric Advisors

  17. “Jobless Recoveries”: getting worse Sources: Bureau of Labor Statistics, CBRE-EA.

  18. But a Labor Force shortage still looms with BB Retirees Sources: BLS, BOC, CBRE-EA

  19. The Outlook for Consumer Driven Real Estate • Retail sales recover – but more slowly – with consumer balance sheet issues • Internet competition threatens traditional shopping. • Housing Rents and Prices move together not apart! • Why haven’t apartments benefited from housing’s foreclosure misery?

  20. 2009:Worst Year ever for retail Absorption SQFT X 1,000 % Source: CBRE Econometric Advisors

  21. Internet Sales: recovering fastest, LT threat Yr/Yr Growth (%) Source: BOC

  22. Rents follow Home Prices: Always Why won’t apartments benefit from foreclosures? Sources: Bureau of the Census, CBRE Econometric Advisors

  23. Dramatic movements Homeownership 1995-2011 1996-2005: 1m renter household decline 2006-2011, 5m increase Sources: Bureau of the Census, CBRE Econometric Advisors

  24. Homeownership change explains Rental Demand Sources: Bureau of the Census, CBRE Econometric Advisors

  25. But Conversions (supply) moves with demand Sources: Bureau of the Census, CBRE Econometric Advisors

  26. Sales Duration Points to stabilizing price (and rents) Sources: BOC, S&P Case Shiller, FHFA

  27. The Outlook for Business driven Real Estate • Rebuilding Inventories and trade gives industrial a shot in the arm. • But we have way too much (obsolescent) industrial space. • But Financial job growth is slowing dramatically – why? • Any financial jobs are dispersing out of the traditional money centres. • At least Office is not overbuilt (as in the 1980s).

  28. Trade is recovering, and growing in the long term But Inventories are shrinking from Logistic efficiency Exports, Imports, and Inventory as % of GDP as % of GDP Source: U.S. Bureau of Economic Analysis.

  29. Inventories are best predictor of Industrial RE Demand Change in Bus. Inventories (billions 2005 $) Industrial Net Absorption (millions sf) Correlation=0.769 *Statistically significant at 0.001 level Source: Bureau of Economic Analysis; Industrial Outlook XL, Fall 2009.

  30. Record vacancy pushes the start of recovery into 2011 Net Absorption, Completions (millions sf) Availability Rate Forecast

  31. Finance is now a declining share of US Jobs Major US financial Centers loosing market share Financial Employment as a Share of Total Employment Source: Bureau of Labor Statistics.

  32. Hence Office demand increasingly from Services Job Growth in the Office Market will come from Service Sector Recovery, ie, positive job growth, comes in early 2010 for services, late 2010 for finance. Expansion, ie, growth beyond the previous peak, comes in 2012 for services, not over next ten years for finance. Source: Office Outlook XL, Fall 2009

  33. Current Crisis not a Construction Crisis (whew!) Sources: McGraw Hill, CBRE Econometric Advisors.

  34. Will the recovery in rents will be as slow as from 2001 (and 1992)? Does sharper current drop = sharper recovery? 15 qtrs 9 qtrs Source: CBRE Econometric Advisors

  35. The Outlook for Capital, and Asset Values • Fundamentals hit hard in 2010-2014 as current rents roll into NOI. • A renewed appetite for risk will help curtail the rise in cap rates. • Some debt is now available, but is it enough? • So much of the rise in cap rates is based on the fear of a (forthcoming) debt rollover crisis. • But there are lots of Alternative solutions: • Re-ignite CMBS (2 big new TALF deals) • Use public debt markets (REITS) • Equity –for- Debt!

  36. Cap Rates hurt Values now, NOI declines loom Cap rates have a strong initial impact, NOI declines through 2015. Source: CBRE-EA, Investment Outlook Fall 2009, NCREIF; Base Case Scenario

  37. Cap Rate Outlook: Stop rising in 2010, why? How high will institutional cap rates trend? Source: CBRE-EA, Investment Outlook Fall 2009, NCREIF

  38. Investor Appetite for Risk is returning Spread between corporate bonds and ten year treasury are fallingcorporate bond sales globally are brisk Source: CBRE Econometric Advisors, Federal Reserve

  39. The Net growth of the stock of Debt is stuck The crunch in debt requires a deleveraging of the economy & property. Source: CBRE Econometric Advisors, Federal Reserve

  40. Institutional Asset Values: back to the 1990s Almost a decade before we are back to peak values. Source: CBRE-EA, Investment Outlook Fall 2009, NCREIF

  41. Real Estate Round Table, Aggregate CRE Value: - 30% 2008q1: 3.2Trillion equity, 3.5 Trillion Debt Capital Stack: Debt and Equity $ 2008q1 Values 55% LTV Value Falls 30% Equity 2009-2010 Values 80% LTV 66% Equity loss CMBS CMBS Other Debt Other Debt

  42. How will CRE Market be Refinanced at Rollover? Market Capital needs at Rollover Capital Stack: Debt and Equity $ 2008q1 Values Value Falls 30% Remaining Equity = $15 Equity Equity Re-Cap Gap = $16.5 CMBS New 55% LTV Debt Plenty without CMBS! Other Debt

  43. The “rollover crisis” is really an Equity Gap • Looks like lots of equity forming on the sidelines to purchase “A” properties at 30-40% distressed sale prices. • The problem is that “A” properties are not for sale at those prices! At least yet. • Current sales are “thin” and based mostly on problem properties. • MIT TBI index says that demand (purchases) are more willing, while supply (sellers) are less. Hence adjusting for Liquidity, prices actually rose a bit in 3q! • Maybe we will escape the crisis

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