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October 14, 2011
presented to:
Center for Real Estate and Urban Economic Studies
CRE Capital Markets Update Amid Renewed Financial Instability
and Fear of a Global Recession
Jim Clayton, Ph.D.Vice President – Research
Cornerstone Real Estate Advisers LLC
[email protected] | (860) 509-2237
From My Presentation Here 2 Years Ago …
1
Volatility, Uncertainty … Twisting in the Wind?
2
1
1.5
2
2.5
3
3.5
4
4.5
5
5.5
600
800
1000
1200
1400
1600
1800
Treasury Yield (%)
S&P
50
0 I
nd
ex
10 Year
Treasury Yield
S&P 500
Index
Global Growth Projections Revised Downwards
3
-2
0
2
4
6
8
10
Global U.S. Euro Area Japan U.K. DevelopingAsia
LatinAmerica
Real GDP Growth (%)
2011 Projection as of September
Change from June
Source: Cornerstone Research based on forecasts from the International Monetary Fund 9-22-2011
Real GDP Growth Forecasts and Revisions Around the World
12.6
12.8
13.0
13.2
13.4
128
130
132
134
136
138
140
2007 2008 2009 2010 2011
Real GDP ($2005, Trillions)
Total Nonfarm
Payrolls (M
illions)
Employment
U.S. Economy … the Big Picture
Source: Cornerstone Research, Bureau of Labor Statistics, Bureau of Economics Analysis 9-2-2011.
Real GDP
1
5
Not a “Typical” Recovery
The Three Legs (Stages) of Economic Recovery …
Business
Investment
Consumer
Expenditure
Housing
Sector
6
Not a “Typical” Recovery
7
Not a “Typical” Recovery
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Not a “Typical” Recovery
Michael Lewis has had time to “research”, write and publish
two books on the financial crisis
March 2010 October 2011
999
*Denotes equally weighted cash flow based NCREIF appreciation return component (and not the published value weighted income-based data series).Notes: NPI and TBI are quarterly indices through 2Q11. The dashed lines are monthly interpolations. Moody’s and Green Street CPPI’s are monthly indices through July and September 2011, respectively.
Source: Cornerstone Research based on data from NCREIF, MIT Center for Real Estate, Green Street Advisors and Moody’s Investors Service.
Property Price Cycle at Bottom or Beyond
Moody’s CPPI
Green Street CPPI
NCREIF Value (NPI)
MIT (now NCREIF)
TBI
10
Source: Geltner Associates LLC, Real Capital Analytics (RCA), Cornerstone.
Sub-Indices of the Moody’s/REAL Repeat Sales CPPI Since Peak
Data through July 2011.
Non-distressed >$10m
in six markets sub-index New York, D.C., San Francisco, Los Angeles, Chicago, Boston.
Aggregate Indices Mask Divergent Pricing Dynamics
Moody’s CPPI
Distressed sub-index
U.S. Institutional Appraisal Cap Rates
11Sources: Cornerstone Research, NCREIF
U.S. Institutional Appraisal Cap Rates
12Sources: Cornerstone Research, NCREIF, Federal Reserve.
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NCREIF Space Market Dynamics … Apartments Lead
Source: Cornerstone Research, NCREIF.
By Property Type
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
NPI Apartment Office Industrial Retail
Vacancy Rate (2Q11) Vacancy Rate (Average)
NOI Growth (4 quarter total)
Debt Situation Improving But Legacy Issues Remain
Deleveraging Underway and Continuing(Debt as a Percentage of GDP)
14
151515
Mortgage Market Improving But Legacy Issues Remain
15
Net Mortgage Flows by Lender Type Life Insurance Company Mortgage
Commitments and CMBS Issuance
Annual, 1991-2010
Change in the combined outstanding balance of commercial and multifamily mortgage loans. ** Insurance co. data through 2011 Q2. CMBS data through 2011 Q3.
* 2011 data through Q2.
Source: Cornerstone Research based on data from the Federal Reserve, ACLI and Commercial Mortgage Alert.
Quarterly, 2009 Q1 – 2011 Q3**
-400
-300
-200
-100
0
100
200
300
400
500
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011*
$ B
illio
ns
Commercial BankCMBSLife Insurance CompaniesOthersGSEsSavings Institutions
0
2
4
6
8
10
12
14
16
18
2009 2010 2011
$ B
illio
ns
Life Insurance Co.
CMBS
Volatility and Growth Concerns Impact CMBS Pricing
16
0
200
400
600
800
1,000
1,200
1,400
Jun-07 Dec-07 May-08 Nov-08 Apr-09 Oct-09 Apr-10 Sep-10 Mar-11 Aug-11
Spread to Swaps (bps)
AAA CMBS (10 yr.) Spreads Baa Corporate Spreads
Source: Cornerstone Research, Trepp, Federal Reserve.
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Linking Ex Ante Total
Asset Required Returns
with Debt and Equity
Costs of Capital
+
=
V
LIRR
V
EIRRIRR
DEP
PIRR
EIRR
DIRR
In theory with financing separate (2nd) after the
investment/valuation decision …
E
LIRRIRRIRRIRR
DPPE)( −+=
+
Debt and CRE Valuation: Did we learn anything??
Disclosure Statement
� This information provided herein is believed to be obtained from sources deemed to be accurate, timely and reliable. However, no assurance is given in that respect. The reader should not rely on this information in making economic or other decisions.
� This analysis does not make any recommendation about your investments, and should not be considered investment advice. Any opinions expressed herein reflect our judgment at this date and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management's current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements.
� Opinions and estimates offered herein are subject to change without notice, as are statements of market trends, which are based upon current market conditions.
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