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State of Commercial Real Estate in the United States “As Bad As It Gets?”

State of Commercial Real Estate in the United States “As Bad As It Gets?”. Fuqua School of Business, Duke University. April 22, 2009. U.S. Macro Environment: Fundamentals Weak. GDP and Employment have rapidly deteriorated over the past several months

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State of Commercial Real Estate in the United States “As Bad As It Gets?”

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  1. State of Commercial Real Estate in the United States“As Bad As It Gets?” Fuqua School of Business, Duke University April 22, 2009

  2. U.S. Macro Environment:Fundamentals Weak • GDP and Employment have rapidly deteriorated over the past several months • Forecasts have underestimated decline in economic activity; e.g., 4Q08 GDP consensus forecast was -3.8%, actual -6.2% Source: Bureau of Economic Analysis, US Department of Commerce Source: Bureau of Labor Statistics

  3. Difficult Macro Environment = Weak RE Fundamentals

  4. Debt Markets Virtually Shut

  5. Plentiful, Cheap Debt Drove Valuations Way Up

  6. Real Estate Valuations: Large Decrease Publicly Traded REIT implied cap rates

  7. Values Peaked in early 2007

  8. Few Private Market Transactions, but Public REIT Valuations Cratered • US Mall REITs have lost approximately 78% of their equity value since the beginning of 2008, driven by investor concerns on retail environment and the ability of the mall companies to meet their near term debt maturities

  9. When Do Times Get Better? Hotel View Source: HVS

  10. When Do Times Get Better? NYC Office View

  11. Strong Headwinds; Opportunities?

  12. Opportunities? • Buy RE Debt @ large discounts to face • Secured Debt: YTMs of 20%+ in some cases at very “safe” position in capital structure • Unsecured Debt of Public REITs: Example - Buy senior convertible notes (convert option way out of money) at YTM of c. 30% • Buy Positions in Public REITs • Have / Have Nots in REIT universe today • Some REITs raising new equity, despite the cost, over the past month (e.g., Simon, Kimco, Vornado) • What if the problem is too big to fix? GGP • Buy Assets or JV with Existing Property Owners • Most buyers and sellers are currently on the sidelines (lack of imminent distress, large bid-ask spreads, new debt expensive if available at all, no new equity allocations) • But, industry players think that 2010 will see distressed sales as existing debt matures

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