2015 NCREIF CONFERENCE STATE OF THE CAPITAL MARKETS · 2015 NCREIF CONFERENCE STATE OF THE CAPITAL MARKETS This document was presented during the 2015 NCREIF Winter Conference. The

2 0 1 5 N C R E I F C O N F E R E N C E

STATE OF THE CAPITAL MARKETS

This document was presented during the 2015 NCREIF Winter Conference. The author(s) take full responsibility for all content. This posting is for informational purposes only; neither NCREIF nor its Board express any opinion of the content presented herein.

AGENDA

Current Trends in Treasuries Current Borrowing Rates CMBS Lending Status Recent Originations Capital Flows Summary/Conclusions


CURRENT TRENDS IN TREASURIES

Through the end of 2015, will Treasury Yields increase, decrease, or stay the same?


4 2015 NCREIF CONFERENCE | CBRE 4

HISTORIC 10-YEAR TREASURY



Since Q4’14 10-YEAR U.S. TREASURY

1.50%

1.70%

1.90%

2.10%

2.30%

2.50%

10-Year UST Daily Close 10-Year UST as of 1/2/15 Average 10-Year UST from 10/1/14 to 3/3/15



Actual and Q4 Philly Fed Forecasts 10-YEAR TREASURY YIELDS



10-Year Treasury TOP INVESTMENT BANK ESTIMATES

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

3.50%

3.75%

1Q '15 2Q '15 3Q '15 4Q '15 1Q '16 2Q'16

Current 10-Year Yield

Allianz

BBVA

BMO Capital

Cantor Fitzgerald

CIBC

Coamerica

Commerzbank

Freddie Mac

Goldman Sachs

Heartland Financial

HSH Nordbank

ING

MBA

Moodys Capital

Morgan Stanley

NAHB

Nomura

Standard Chartered

Wells Fargo

Average

Source: Bloomberg News Monthly Survey February 2015



Median CAPITAL MARKETS 10-YEAR UST FORECAST

2.00%

2.20%

2.40%

2.60%

2.78%

2.90%

2.20%

2.40%

2.65%

2.80% 2.85%

3.03%

1.50%

2.00%

2.50%

3.00%

3.50%

1Q '15 2Q '15 3Q '15 4Q '15 1Q '16 2Q'16

Current Median Previous Months' Median

Source: Bloomberg News Monthly Survey February 2015


CURRENT BORROWING METRICS

Through the end of 2015, will all-in commercial interest rates increase, decrease, or stay the same?


10 2015 NCREIF CONFERENCE | CBRE

CURRENT INDICATIVE RATES

Base Index Rate as of 3/3/2015 45% - 60% LTV 61% - 75% LTV

Treasuries Swaps Spread (BPS) Target Rate Range Spread (BPS) Target Rate Range

I. 5 YEAR TERM

Life Company 1.60% 125 - 175 2.85% - 3.35% 150 - 220 3.10% - 3.80%

CMBS 1.77% 200 - 250 3.77% - 4.27% 220 - 275 3.97% - 4.52%

GSE 1.60% 140 - 160 3.00% - 3.20% 190 - 210 3.50% - 3.70%

II. 7 YEAR TERM

Life Company 1.92% 120 - 170 3.12% - 3.62% 160 - 220 3.52% - 4.12%

CMBS 2.01% No bid Inefficient and thin market No bid Inefficient and thin market

GSE 1.92% 140 - 160 3.32% - 3.52% 180 - 200 3.72% - 3.92%

III. 10 YEAR TERM

Life Company 2.10% 120 - 160 3.30% - 3.70% 150 - 200 3.60% - 4.10%

CMBS 2.23% 150 - 185 3.73% - 4.08% 180 - 220 4.03% - 4.43%

GSE 2.10% 140 - 160 3.50% - 3.70% 170 - 190 3.80% - 4.00%

IV. BANKS

5 Year Fixed Rate 2.85% - 3.35% 3.10% - 3.80%

7 & 10 Year Fixed Rate 3.25% - 4.10% available for high quality and bank customers

Floating Rate Pricing range: LIBOR + 140-275 bps Average Pricing: L + 175-225 bps Debt Yield: 8.5%-9.5% for 50-65% LTV Term: 3-5+ years with extensions

V. MEZZ LENDERS

Loan to Value: Up to 80%-85% Interest Rate: 6% - 12%



CBRE Debt Originations (includes both Agency and non-Agency loans) COUPON RATE ANALYSIS

0%

10%

20%

30%

40%

50%

2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5

Perc

ent o

f Tot

al

Dist

ribut

ion

< 10 mil >= 10 Mil

0%

10%

20%

30%

40%

50%

2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5

Perc

ent o

f Tot

al

Dist

ribut

ion

< 10 mil >= 10 Mil

Q4 2014

Q3 2014

0%

10%

20%

30%

40%

50%

2 2.5 3 3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5< 10 mil >= 10 mil

Q2 2014

Perc

enta

ge o

f Tot

al

Dist

ribut

ion

Source: CBRE Research



AVERAGE LTV - CBRE DEBT ORIGINATIONS Well Below 2007 Peak

50

55

60

65

70

75

80

Q1

2003

Q2

2003

Q3

2003

Q4

2003

Q1

2004

Q2

2004

Q3

2004

Q4

2004

Q1

2005

Q2

2005

Q3

2005

Q4

2005

Q1

2006

Q2

2006

Q3

2006

Q4

2006

Q1

2007

Q2

2007

Q3

2007

Q4

2007

Q1

2008

Q2

2008

Q3

2008

Q4

2008

Q1

2009

Q2

2009

Q3

2009

Q4

2009

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Q3

2012

Q4

2012

Q1

2013

Q2

2013

Q3

2013

Q4

2013

Q1

2014

Q2

2014

Q3

2014

Q4

2014

Commercial Multifamily-Related

Average LTV %

This is the average LTV for deals with fixed rate permanent debt.




LOAN METRICS - CBRE DEBT ORIGINATIONS Debt Service Coverage Ratio Loan Constant

Percentage of Loans with Interest-Only Terms Average Debt Yield and Cap Rate


1.52

1.20

1.25

1.30

1.35

1.40

1.45

1.50

1.55

1.60

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014

6.4%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014

52%

13%

0%

10%

20%

30%

40%

50%

60%

70%

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014

Partial Interest-Only Full Interest-Only

10.3%

6.6%

4%

5%

6%

7%

8%

9%

10%

11%

Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014

Debt Yield Cap Rate


CMBS LENDING STATUS

Compared to 2014, will CMBS do more or less in terms of loan volume in 2015?



($ billions) COMMERCIAL & MULTIFAMILY ORIGINATIONS

Source: Mortgage Bankers Association



($ billions) COMMERCIAL & MULTIFAMILY ORIGINATIONS

$86

$94

$110

$0

$20

$40

$60

$80

$100

$120

2013 2014 2015Forecast

CMBS Volume

Source: Mortgage Bankers Association

Note: 2015 Forecast shown totaling $110 billion is the low-end forecast. High-end forecast is $125 billion.



WHO'S LENDING ON COMMERCIAL PROPERTIES?

Source: CBRE DSF

Other: REITs, Funds, Credit Companies, SBA, etc.

0%

5%

10%

15%

20%

25%

30%

35%

40%

Banks Life Companies CMBS Other

Q4 2013

Q4 2014



WHO’S LENDING ON MULTIFAMILY PROPERTIES?

Source: CBRE DSF

0%

10%

20%

30%

40%

50%

60%

70%

Agency Banks Life Company Conduit Other

Q4 2013

Q4 2014


RECENT ORIGINATIONS



APOLLO WORLD HEADQUARTERS $91,500,000, 5 year term, full term I/O, 50.0% LTV, Fixed Rate of 3.66%



CAMELBACK SQUARE $26,568,000, 3 year term, full term I/O, 65.0% LTV, Floating Rate of 2.45%



RANCHO TEMECULA TOWN CENTER $28,000,000, 12 year term, full term I/O, 46.7% LTV, Fixed Rate of 4.18%


CAPITAL FLOWS

Through the end of 2015, will capital flows into the U.S. increase, decrease, or stay the same?



Top 10 Sources over the Last 3 Years

FOREIGN CAPITAL INFLOWS

Top 10 Sources in 2014

Total foreign direct investment in U.S. real estate totaled $41 billion in 2014.



Top 10 Sources over the Last 3 Years FOREIGN CAPITAL INFLOWS

• The direct effects of a stronger U.S. dollar on commercial real estate fundamentals are likely to be overall positive. A possible downside is that the rising dollar might diminish capital flows from countries experiencing the “double whammy” of both falling oil prices and depreciating currencies. However, domestic capital is still abundant.

• Industrial and “bread-and-butter” retail (as opposed to luxury) assets will benefit the most as

consumers, flush with the “oil dividend”, take advantage of the cheaper prices of goods. • According to Real Capital Analytics, the total volume of U.S. properties sold over the last three

years is approximately $1.1 trillion, and foreign investors accounted for only 10.9% of that total. This represents 39 countries and no country, except for Canada, accounts for as much as 10% of all foreign investments into U.S. commercial real estate.

• Capital flows into the U.S. are deep and diverse. • The fact that the U.S. is the only growth story in town will mean that overseas investment

interest will remain high.


SUMMARY/CONCLUSIONS



2015 OUTLOOK

Return of financial market volatility

Underlying fundamentals continue to improve

Market sentiment remains positive

Attention to slowing economic growth outside the U.S.



LENDERS IN 2015

• Life Company volume in 2015 expected to equal or exceed 2014 volume by 5% to 10%

• Large loans and portfolio loans are in demand

• More conservative, but great execution

• Forwards returning and some offering higher yielding mezzanine debt

• The cost of locking a forward rate is free for the first 3 months, then 2 to 4 bps per month for up to 9 additional months

• Many have instituted rate floors that start around 3.5% for a 10-yr term

• Increasing willingness to do deals in secondary markets

• CMBS increased dramatically in 2014 ($94B, up from $86B in 2013)

• Average prediction for 2015 production is $110-125 B. Off to a strong start in 2015

• With approximately 35 CMBS lenders, competition is fierce

• Higher LTV’s and more aggressive underwriting returning to the market. Compete on I/O & proceeds

• Majority of deals are 10-year terms, but 5- and 7-year terms are available

• Full-term I/O loans are available at 65% LTV

• Actively using the balance sheet again, local banks filling a void

• Attractive rates, particularly LIBOR-based floaters that can be swapped

• Most active in 3-7 year terms, competitive in local markets

• Can be very competitive with conduits, life companies and GSE’s

• Basel III capital requirements may cause some banks to become more conservative in 2015

• As year goes one, may see banks increase pricing to offset new risk retention rules

(FREDDIE & FANNIE)

• 2014 volume of $56B up slightly from 2013

• Great execution in primary through tertiary markets

• Market share increased in Q3 and Q4 2014 as new head of regulator FHFA has encouraged new products (affordable, small balance loans and manufactured housing) and excluded them from production volume limits.

• 2015 volume expectation of well over $60B indicates an increase of approximately 10% over 2014 volume

• Dominant lenders for the apartment segment

• Both Fannie and Freddie are tweaking their ARM products, will be rolling out more competitive interest rate cap structures

BANKS GSE LIFE COMPANIES CMBS



Strong Liquidity and Low Rates COMMERCIAL MORTGAGE DEBT MARKET

• There is tremendous liquidity in the commercial mortgage markets leading to continued strong competition amongst lenders.

• Continued attractive interest rates both short- and long-term. • There will be a gradual easing of underwriting standards as the competitive landscape

increases. This will include higher LTVs, more interest-only components and increased lending activity in secondary markets.

• The industry seems very comfortable that there is sufficient debt capital to fund the 2015 deals,

including the “wall of maturities”. • Given the competition, it is difficult to predict which lender will win a given deal. Most deals

should be widely marketed into the debt capital markets in order to capture the best available loan structure and economics. It remains a borrower’s market for 2015.


QUESTIONS?


Documents

2015 NCREIF CONFERENCE STATE OF THE CAPITAL MARKETS · 2015 NCREIF CONFERENCE STATE OF THE CAPITAL MARKETS This document was presented during the 2015 NCREIF Winter Conference. The