Forums on Issues and Innovations in Real Estate (FIRE) : Forums on Issues and Innovations in Real Estate (FIRE) Issues in Global Real Estate Markets
Allgemeine HypothekenBank Rheinboden (AHBR)
January 31, 2005 Dr. Tony Ciochetti MIT Center for Real Estate
MIT Center for Real Estate (CRE) : MIT Center for Real Estate (CRE) Established 1984
Mission – “Transform the quality of the built environment and the real estate industry by providing a forum for education, research, and the exchange of ideas among the thought leaders of the global real estate community”
Products:
Master’s of Science in Real Estate Development (MSRED) program
Interdisciplinary Research Platform
Outreach Structure
CRE MSRED Program : CRE MSRED Program
Core Courses
Real Estate Economics
The Products of Real Estate Development
Real Estate Finance & Investment
Legal Issues in the Development Process
Real Estate Development
Real Estate Capital Markets
MSRED Program : MSRED Program Electives (CRE, DUSP, Architecture, CEM, Engineering, Sloan, Harvard)
Strategic Management in the Design & Construction Value Chain
Urban Design & Development
Housing and Community Development
Community Growth and Land Use Planning
Financing Economic Development
Real Estate Finance & Development Fundamentals
Urban Politics and Land Use Policy
Economic Analysis for Business Decisions
Finance Theory I
Finance Theory II
Investments
Advanced Corporate Finance
Options & Futures Markets
Advanced Topics in Real Estate Finance
MSRED Program : MSRED Program Electives
Leadership in Real Estate
Housing Markets
Housing Finance
The Impact of Globalization on the Built Environment
E-Commerce and the Internet in Real Estate & Construction
International Construction Finance
Entrepreneurship in Construction and Real Estate Development
Innovative Project Delivery in the Public & Private Sectors
Quantitative Reasoning & Statistical Methods for Planning I
Site & Urban Systems Planning
Planning for Sustainable Development.
The Law and Politics of Land Use
Housing & Human Resources
Revitalizating Urban Main Streets
Management & Policy in the Int’l Economy
Designing & Leading the Entrepreneurial Organization
Recent Employers : Recent Employers Global real estate investment banking – CS First Boston, Merrill Lynch, Goldman Sachs, Lehman Brothers, Blackstone, Morgan Stanley, JP Morgan, Deutsche Bank
Real estate investment management – AEW, GE Capital, RREEF, TA Associates, Lonestar, Colony Capital, Invesco, Fidelity, ING Clarion
Real estate finance – John Hancock, Sun Life, World Bank, Freddie Mac, Moody’s, KeyBank, Carr Capital, Prudential, , HUD, Credit Suisse, Nomura, Bank of America
Real estate development – Hines, Kravco, Leggatt & McCall, Trammell Crow, Related Companies, Tishman, Bovis-Lend Lease, Petrini, Taurus, Spaulding and Slye, HRO, Forest City Commercial
Recent Employers : Recent Employers
Publicly traded companies – Boston Properties, Catellus, Pro Logis, AMB, Federated, Cousins, AvalonBay
Commercial brokerage – CB Richard Ellis, Cushman and Wakefield, Meredith and Grew, Marcus and Millichap – corporate real estate includes Fidelity, Met Life, Boeing, Burger King, Dell, Staples
Non-profit sector – City of Portland, Maine, Oakland California Community Housing, Enterprise Foundation, City of Toronto, Urban Redevelopment Authority (Singapore), Office of Management and Budget (NYC)
CRE Research Initiatives : CRE Research Initiatives
Innovative, interdisciplinary, industry relevant
Commercial Real Estate Data Laboratory (CREDL)
New Century Cities Initiative
Housing Affordability Initiative
CRE Outreach : CRE Outreach Professional Development Courses (PDCs)
Fundamentals of Real Estate Finance
Introduction to Commercial Real Estate Development
Legal Issues in the Development Process
Real Estate Markets: Location, Product, Timing
Current Topics in Real Estate Finance and Investment
Introduction to Portfolio and Asset Management
Topics in Real Estate Development
Affordable Housing VS Housing Affordability
Executive/Custom Education
CRE Membership : CRE Membership
Two-tier Membership
Supporting Member (10K)
Sustaining Member (20K)
CRE Membership : CRE Membership
Benefits for Supporting Members
Research
Students (Thesis and Placement)
PDCs
Executive/Custom Education
FIRE
MITREX
Annual Conference
International Connetions
CRE Membership : CRE Membership
Additional Benefits for Sustaining Member
Advisory Board
Private Dinner with an MIT Luminary
MSRED Guest Lecturer
Additional Representative Participation in Seminars and Annual Conference
2004 Returns Look Great! : 2004 Returns Look Great! Source: TWR Investment
Transaction Volume up 47%! Equity Real Estate : Transaction Volume up 47%! Equity Real Estate
Prices per SF Trending Up! Year Over Year % : Prices per SF Trending Up! Year Over Year % Source: Real Capital Analytics
Prices per SF Trending Up! Year Over Year % : Prices per SF Trending Up! Year Over Year % Source: Real Capital Analytics
Slide17 : TWR “Market Portfolio” 3yr Total Return (Office, Industrial, Multi-Housing, Retail; NCREIF Weighted)
This Ratio Screams Weaker Currency, Higher Interest Rates : This Ratio Screams Weaker Currency, Higher Interest Rates Source: TWR Investment
Foreign Investors Contributing As Never Before : Foreign Investors Contributing As Never Before % $ bil Source: TWR Investment
All Property Types Are Improving YoY : All Property Types Are Improving YoY Source: TWR Outlook XL Platform
Too Much Capital Means Continued Supply Multi-housing : Too Much Capital Means Continued Supply Multi-housing Source: TWR Investment
Market Conditions Vary (Gross Income) : Market Conditions Vary (Gross Income) Source: TWR Investment
Multi-Housing “Market Portfolio” Total Return (unleveraged) : Multi-Housing “Market Portfolio” Total Return (unleveraged)
The Office Sector is Improving : The Office Sector is Improving Source: TWR Investment
Today’s Tenants Seek Real Estate Productivity : Forecast Today’s Tenants Seek Real Estate Productivity Occupied sqft Per Worker 2004$ Per sqft Source: TWR Investment
Slide26 : The National Industrial Market Continues Improvement, Albeit At A Slow Pace Source: TWR Investment
TWR “Market Portfolio” Total Return (Office, Industrial, Multi-Housing, Retail; NCREIF Weighted) : TWR “Market Portfolio” Total Return (Office, Industrial, Multi-Housing, Retail; NCREIF Weighted)
Retail “Market Portfolio” Total Return (unleveraged) : Retail “Market Portfolio” Total Return (unleveraged)
TWR “Market Portfolio” Total Return (Office, Industrial, Multi-Housing, Retail; NCREIF Weighted) : TWR “Market Portfolio” Total Return (Office, Industrial, Multi-Housing, Retail; NCREIF Weighted)
Office “Market Portfolio” Total Return (unleveraged) : Office “Market Portfolio” Total Return (unleveraged)
Industrial “Market Portfolio” Total Return (unleveraged) : Industrial “Market Portfolio” Total Return (unleveraged)
Prices Up Substantially! : Prices Up Substantially! Source: Real Capital Analytics 15%
Cap Rates Continued Falling : Cap Rates Continued Falling Source: NCREIF Sub 8 Apts. at 6
It’s About Relative Yield : It’s About Relative Yield NCREIF income return
Employment Is Almost Back : Employment Is Almost Back Source: TWR Investment
Wide Regional Job Differences : Wide Regional Job Differences Source: TWR Outlook Xl Platform Northeast
All Property Types Are Improving (YoY) : All Property Types Are Improving (YoY) Source: TWR Outlook XL Platform
Rents Have a Way to Go! : Rents Have a Way to Go! Source: TWR Outlook XL Platform
. . . Subordination Levels are Plummeting . . . : . . . Subordination Levels are Plummeting . . .
Tangent Alert! : Tangent Alert!
Tangent Alert! : Tangent Alert!
Tangent Alert! : Tangent Alert!
Slide43 : Up 45%
In 2004 Up 30%
In 2004 A Record-Breaking Year Market Volume Office, industrial, apartment and retail properties $5 million and greater Source: Real Capital Analytics
Slide44 : Falling Cap Rates, Rising Prices Source: Real Capital Analytics
Slide45 : Historic Cap Rate Spread Over Treasuries Its All Relative (to Interest Rates) Source: Real Capital Analytics
Slide46 : Source: RCA, PPR, RS Means Its All Relative (to Replacement Cost)
Slide47 : A Growing Disparity in Pricing Apartment Cap Rates Source: Real Capital Analytics
Slide48 : The Major Market Makers Source: Real Capital Analytics
Slide49 : 750 buyers made acquisitions in at least 3 of the last 4 years
1,250 buyers made acquisitions in 2 of the last 4 years
8,000 buyers made only a single acquisition over the past 4 years One-Third of all buyers in 2004 were also sellers
10% of properties sold in 2004 ($25 billion) were held for 4 years or less A Huge, Fragmented Universe of Buyers Source: Real Capital Analytics
Slide50 : Classifying The Capital Source: Real Capital Analytics
Slide51 : Composition of Buyers by Property Type Source: Real Capital Analytics
Slide52 : Market Fundamentals
Interest Rates
Capital Flows
Cap Rates
Asset Prices ? Influences & Outlook Source: Real Capital Analytics
Slide53 : Volume
($billion) Price
Per Sq. Ft. Cap Rate The Markets Office Source: Real Capital Analytics
Slide54 : Volume
($billion) Price
Per Unit (000’s) Cap Rate The Markets Apartments Source: Real Capital Analytics
Slide55 : Volume
($billion) Price
Per Sq. Ft. Cap Rate The Markets Industrial/Flex Source: Real Capital Analytics
Slide56 : Volume
($billion) Price
Per Sq. Ft. Cap Rate The Markets Strip Shopping Centers Source: Real Capital Analytics
Real Estate Capital Markets: Debt : Real Estate Capital Markets: Debt Commercial Banks
Real Estate Capital Markets: Debt : Real Estate Capital Markets: Debt
Source: Federal Reserve
Real Estate Capital Markets: Debt : Commercial Mortgage Loan Delinquency Rates Real Estate Capital Markets: Debt 0 Source: ACLI % Delinquent 1Q65 4Q69 2Q76 4Q81 2Q92 2Q03 7.53% 26 22 42 42 0.35%
Real Estate Capital Markets: Debt : Real Estate Capital Markets: Debt Source: ACLI Why such good performance?
Source: ACLI
Real Estate Capital Markets: Debt : Real Estate Capital Markets: Debt Where are we now?
Real Estate Capital Markets: Debt : Real Estate Capital Markets: Debt
Summary
Credit availability – excellent
Short term rates - +75-150 bp
Long term rates - +50-100 bp
Mortgage spreads – slight/moderate uptick
Real Estate Capital Markets: Equity : Real Estate Capital Markets: Equity Real Estate Return Performance
Source: NCREIF, LaSalle Investment Management Research
Real Estate Capital Markets: Equity : Real Estate Capital Markets: Equity Property Capitalization Rates
Source: SSR Realty Advisors, NCREIF
Real Estate Capital Markets: Equity : Real Estate Capital Markets: Equity
Where will the capital come from?
Private REITs ($8 to 10 billion)
1031 Exchange Buyers ($2 to 3 billion)
US Pension Funds ($12 to $15 billion)
Public REITs ($8 to 10 billion)
Endowments and Foundations ($2 to 3 billion)
Source: LaSalle Investment Management
Real Estate Capital Markets: Equity : Real Estate Capital Markets: Equity Historic US Real Estate Returns -> Future Returns?
Average Annual Returns
Source: NAREIT (Equity REITs), NCREIF, Bloomberg, LaSalle Investment Management
Real Estate Capital Markets: Equity : Real Estate Capital Markets: Equity
Georgescu-Roegen, 1958
Many idle controversies involving the nature of expectation could be avoided by recognizing at the outset that man’s conscious actions are the reflection of his beliefs and of nothing else.
Source: Torto Wheaton Research
Real Estate Capital Markets: Equity : Real Estate Capital Markets: Equity
Forrest Gump, 1994
Stupid is as stupid does.
Source: Torto Wheaton Research
Real Estate Capital Markets: Equity : Real Estate Capital Markets: Equity
Summary
Equity capital availability – good/excellent
Expected performance
Cap rates – trend up slightly/moderately
Income yield – down slightly
Total returns – down moderately/significantly
Space Markets: Office : Impact of Office re-engineering
Space Markets: Office Occupied sqft Per Worker 155 160 165 170 175 180 185 190 195 200 205 210 215 220 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 14 16 18 20 22 24 26 28 30 32 34 36 38 40 Occupied Square Feet Per Worker Real Rent Source: Torto Wheaton Research
Space Markets: Office : Space Markets: Office Measured Recovery
-140 -100 -60 -20 20 60 100 140 1988 1991 1994 1997 2000 2003 2006 2009 6 8 10 12 14 16 18 20 Construction Absorption Vacancy Absorption and Construction, sqft x 1,000,000 Vacancy Rate, % Includes non-market trends from 9/11 Source: Torto Wheaton Research
Space Markets: Office : Space Markets: Office Problem: R.I.P. vs. Market
Rent NOI TW Rent Index ($ per square foot) TW NOI Index ($ per square foot) Source: Torto Wheaton Research
Space Markets: Industrial : Space Markets: Industrial Lackluster Growth
-140 -100 -60 -20 20 60 100 140 180 220 260 300 340 1989 1992 1995 1998 2001 2004 2007 6 7 8 9 10 11 12 Construction Absorption Availability Absorption and Construction, sqft x 1,000,000 Availability Rate, % Source: Torto Wheaton Research
Space Markets: Industrial : Space Markets: Industrial Rent Recovery, but NOI drop
Source: Torto Wheaton Research
Space Markets: Industrial : Space Markets: Industrial
Implications
Uptake slow
Rents
Etc.
Overall returns to sector down
Space Markets: Retail : Space Markets: Retail Retail Sales
Space Markets: Retail : Space Markets: Retail Why?
Space Markets: Retail : Space Markets: Retail Modest Retail Rent Growth
17.0 17.5 18.0 18.5 19.0 19.5 20.0 20.5 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 TW Rent Index ($ per square foot, 2004$) Source: Torto Wheaton Research
Space Markets: Retail : Space Markets: Retail Until Supply Kicks In
20 22 24 26 28 30 32 34 36 38 40 2004 2005 2006 2007 2008 2009 8.0 8.2 8.4 8.6 8.8 9.0 9.2 9.4 9.6 Construction Absorption Availability Absorption and Construction, sqft x 1,000,000 Availability rate, %
Space Markets: Retail : Space Markets: Retail Summary
Current yield good
NOI growth down, but position
Cap rates flat
Returns down only slightly
Space Markets: Multifamily : Space Markets: Multifamily Source: Department of Housing and Urban Development
Space Markets: Multifamily : Space Markets: Multifamily Supply Overhang
0 40 80 120 160 200 240 280 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 0 1 2 3 4 5 6 7 Completions ( L ) Absorption ( L ) Vacancy Rate ( R ) Forecast Units Thousands Vacancy Rate Percent Source: Torto Wheaton Research
Space Markets: Multifamily : Space Markets: Multifamily Slow Rent Growth
Space Markets: Multifamily : Space Markets: Multifamily Summary
Condo conversion, product demand aggressive pricing?
Interest rates
Concessions soften, rents firming NOI growth
Cap rates up slightly
Returns good relative basis
Economic Wildcards : Economic Wildcards Federal Deficit
Economic Wildcards : Economic Wildcards Trade Balance
Economic Wildcards : Economic Wildcards Personal Saving Rate
Economic Wildcards : Economic Wildcards Federal Debt Held by Foreigners
Economic Wildcards : Economic Wildcards Exchange Rate
Economic Wildcards: Summary : Economic Wildcards: Summary
Trade and Federal Deficits – 7-9% of GDP
Personal savings rate ~ 2%
High foreign investment in US
Weakening dollar
Toss in election, middle east, energy
….potential for increasing inflation
Implications for Commercial Real Estate : Implications for Commercial Real Estate
Plenty of debt/equity capital
Debt rates up slightly
Cap rates flat to down slightly
Space markets
Office
Warehouse
Retail
Multi-family
Where does this leave us?
Summary : Summary Forrest Gump, 1994
Life is like a box of chocolates, you never know what you’re
going to get.
US CMBS Issuance : US CMBS Issuance 1985 – 2004P $Bn Actual Projected 1$77.3 billion priced as of November 12, 2004
Does not include Agency CMBS or resecuritizations.
Source: Morgan Stanley Estimates, Commercial Mortgage Alert
85 87 89 91 93 95 97 99 01 86 88 90 92 94 96 98 00 02 03 04P1
CMBS Delinquencies1 by Property Type : CMBS Delinquencies1 by Property Type Source: Morgan Stanley, Intex 0.95 1.13 130/60/90/Foreclosure/REO 0.80 1.73 1.56