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LIQUIDITY AND THE 2010 COMMERCIAL REAL ESTATE MARKET: Connecting the Dots with Today’s Global Capital Flow. ROBERT J. NAHIGIAN, FRICS, SIOR, CRE October 30, 2009 AUBURNDALE REALTY CO. Toronto NEWTON (Boston), MASS. PREDICTION DISCLAIMERS. GOVERNMENT INTERVENTION INFLATION CHAOS.
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LIQUIDITY AND THE 2010 COMMERCIAL REAL ESTATE MARKET:Connecting the Dots with Today’s Global Capital Flow ROBERT J. NAHIGIAN, FRICS, SIOR, CRE October 30, 2009 AUBURNDALE REALTY CO. Toronto NEWTON (Boston), MASS.
PREDICTION DISCLAIMERS • GOVERNMENT INTERVENTION • INFLATION • CHAOS
OTHER DISCLAIMERS The information presented reflects the personal opinions of Robert J. Nahigian based on sources and data believed to be reliable but he does not guarantee its accuracy or completeness. This information is for private use and educational purposes only and neither the author, the sponsor nor the instructor are providing advice, legal or otherwise and such advise should be dependent on the facts and circumstances of any particular situation. There is no obligation to update or supplement this information at any time or in any way. Robert J. Nahigian is not a registered investment advisor and as a further full disclaimer he does sit on the Advisory Committee of NERA, an American Stock Exchange Boston real estate investment entity in the business of purchasing and selling commercial properties. He is in no way recommending the purchase or disposition of any specific stock of any kind at any time. The material presented may be inaccurate or may be improper for any business decision and some examples in this presentation are good examples of practices that would be better to avoid.
CCIM Chicago: Jan. ‘08 • LET’S LOOK BACK TO THAT PRESENTATION: Where were we? • CAN WE CONNECT THE DOTS MOVING FORWARD?
U.S. CBD INVESTMENTS: Jan. ‘08 One Word: Hot and more Hot ! Values were up in 2006 Values continued to rise in 2007
LAST 2 YEARS: ’06-’07 • It has been all about capital ! • You couldn’t fail with real estate investments • A lot of money chasing deals and “yields”
Next 2 Years: ’08-’09 • Success based more local (micro) rather than national (macro) environment • Difficult to find a balanced value commercial investment in the US • People think buying now will be cheaper than tomorrow
Next 2 Years:’08-09 • 2007 everyone was a “genius” so demand for real estate was amplified • In 2008, investors will need to look at real estate with true due diligence evaluation • We need to get back to “old-fashion” growth and focus on NOI • CAP RATES could increase 100 BP by the end of 2008
Jan. ’08 PROJECTION FOR ’08-’09 • The “Idiot Tax” will vanish in 2008 • Liquidity is immense but not stupid • Foreigners have an appetite but could pull the plug at any time
Oct. 30, 2009: 2010 CONCLUSION • U.S. companies have run down inventory • Re-stocking is up and so is manufacturing • March 9, 2009: Stocks hit bottom • June, 2009: Housing hits near bottom • Commercial loan defaults will damage banks in ’10-’11 • Now it’s time for commercial, lagging
Oct. 30, 2009: 2010 CONCLUSION • The Feds are forcing everyone to swallow more risk and invest • Money Market interest rates are worthless! “Curse on Cash” • Be Ready to Buy in ’10-’11 or keep holding: It may be a life-time opportunity • Rents means dividends !
Oct. 30, 2009:TROJAN HORSE • U.S. is leaving GAAP for IFRS in 2011 or 2014. Watch out! Be ready to “Rock and Roll”! • FASB 13: More parts are now capitalized; no more rents as operating lease expense • Companies may pursue purchasing
REAL ESTATE CYCLESSECTORAL PEAK U.S 7-10 yrs. PEAK Hyper-supply Hyper-supply “DENIAL PHASE” BID-ASK SPREADS Expansion Recovery “Yield Chasers” Commercial 4th/5th Inning Recession Early Recovery BOTTOM Residential BUY LOW/SELL HIGH
U.S. UNEMPLOYMENT RATESeasonally AdjustedSource: Bureau of Labor Stats, CBO Jobs = Space Demand
Federal Total Revenues and Outlays as Percent of GDP Source: CBO Highest
U.S. FEDERAL DEFICIT v. GDPSource: CBO INFLATION?
U.S. TOTAL CONSUMER CREDITDEMANDSource: Federal Reserve In Billions (Trillions) Deleveraging
CONCLUSION • It’s all about jobs for commercial real estate! • Deficit grows, income is down and people aren’t spending • Look for inflation within 24 months. Bernanke admits interest rates might rise (week of Oct. 10, 2009)
U.S. HOUSING AS AN INVESTMENT LEADS TO THE COMMERCIAL DEBT CRISIS
WHAT IS PRICE v. VALUE? • PRICE IS WHAT YOU PAY • VALUE IS WHAT YOU GET • Source: Ben Graham
U.S. HOMES UNDER CONSTRUCTION Working off inventory
COMMERCIAL REAL ESTATE: Where We Have Been and Where We Are Headed
COMMERCIAL BANKS WITH RE DELINQUENCIESSource: Federal Reserve Bank
SECURITIZED COMMERCIAL LOAN DELINQUENCIES Source: WSJ 3/26/09; Deutsche Bank
TOTAL U.S. INVESTMENT SALESSource: Deutsche Bank, Real Capital Analytics ?
COMMERCIAL RE DEBT MATURITIES (INCLUDING SECURED AND UNSECURED DEBT) Source: Chip Rodgers, RER 30% won’t qualify for refi
U.S. COMMERCIAL MORTGAGE MATURIES: Life Ins., CMBS, CDO, ABS, GSE, and Other Credit Source: AEW, CRE Fall Convention ‘09
COMMERCIAL BANKS IN TROUBLE: Commercial and Multi-Family Debt Source: CRE Fall Convention ‘09 45% with commercial banks
Apartment Development Activity: 4 Sample National CompaniesSource: David Gleeson, CRE
FUTURE COMMERCIAL MORTGAGE DELINQUENCIESSource: Deutsche Bank • Loans are maturing from 5 years ago • New Appraisals are 30- 40% lower • Lack of Owner Equity Available: Partners are saying • “Enough is enough” • Delinquency rate for partial IO loans are twice that of other loans • Over $ 2 Trillion commercial mortgages will mature by 2013 and 33% will not qualify for refinancing
FUTURE COMMERCIAL MORTGAGE DELINQUENCIES • MF construction permits will most likely end at 2009 • Over 1,000 commercial banks fail in the next 24 months • Would you be in a rush to buy if waiting was worth a big • discount? • Bottom feeders will wait 2 years to the bank collapse • Look for 2010-11 for deeper commercial foreclosures
REAL ESTATE YIELD BREAK-DOWN V. THE DOW