Real Estate Values:Real Estate Values:Have We Hit Bottom Yet?Have We Hit Bottom Yet?

John G. Ellis, MAI, CRE, FRICS

IRWA Chapter 12009 Annual Fall Seminar

October 20, 2009

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1. What is the current state of the market?

2. How did we get to where we are now?

3. What are the trends looking forward?

4. Have we hit bottom yet?

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Current State of the MarketCurrent State of the Market

• Actually multiple submarkets– Geography– Property type

• But in most submarkets– Sales volumes are down– Rents are lower– Cap rates are higher– Sale prices are lower

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Is This Because ofIs This Because of……

1. Real estate fundamentals?

2. Changes in the capital markets?

3. Overall economic recession?

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Commercial Mortgages OutstandingCommercial Mortgages Outstanding($Millions)(Excluding HUD/Gov’t) at 3/31/09, Total $3.0 Trillion

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Toxic Overhang?Toxic Overhang?Loans in Special Servicing as % of CMBS Outstanding

Source: Realpoint

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Toxic Overhang?Toxic Overhang?

Loans in Special Servicing by Property Type

Source: Realpoint

(Total $47.9 Billion)

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Deleveraging Will ForceDeleveraging Will ForceSales and RecapitalizationsSales and Recapitalizations

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10 Universal City Plaza10 Universal City Plaza

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Los Angeles Office Cap RatesLos Angeles Office Cap Rates

Source: Real Capital Analytics

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Los Angeles Office Price PSFLos Angeles Office Price PSF

Source: Real Capital Analytics

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Absorption, Delivery, VacancyAbsorption, Delivery, VacancyLos Angeles County Los Angeles County –– OfficeOffice

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Los Angeles Retail Cap RatesLos Angeles Retail Cap Rates

Source: Real Capital Analytics

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Los Angeles Industrial Cap RatesLos Angeles Industrial Cap Rates

Source: Real Capital Analytics

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Los Angeles Industrial Price PSFLos Angeles Industrial Price PSF

Source: Real Capital Analytics

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Absorption, Delivery, VacancyAbsorption, Delivery, VacancyLos Angeles County Los Angeles County –– IndustrialIndustrial

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Los Angeles Apartment Cap RatesLos Angeles Apartment Cap Rates

Source: Real Capital Analytics

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Los Angeles Apartment Unit PricesLos Angeles Apartment Unit Prices

Source: Real Capital Analytics

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Investment RecommendationsInvestment Recommendations

Source: Urban Land Institute, 2009

Los Angeles County Buy/Hold/Sell Recommendations

30.8%

31.9%

46.3%

51.6%

51.6%

57.1%

52.2%

46.3%

38.7%

37.9%

12.1%

15.9%

7.4%

9.7%

10.5%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Retail

Hotel

Office

Industrial

Apartment

Prop

erty

Typ

e

Percentage

BuyHoldSell

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Land Value: Residual ExampleLand Value: Residual Example

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Loan Maturities Will Pose a Challenge!Loan Maturities Will Pose a Challenge!

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Aggressive UnderwritingAggressive UnderwritingWill Compound the ChallengeWill Compound the Challenge

CMBS Maturities by Loan Vintage

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Potential Government Assistance: TALFPotential Government Assistance: TALF

• Provides reasonable cost senior debt to our market

• Restarts CMBS market• Facilitates fixed income capital back to

our market• Initially most helpful to low leverage

borrowers with unencumbered assets• Facilitates liquidity, but does not solve

over leverage issues• Expires 6/30/2010

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PublicPublic--Private Investment Program: Private Investment Program: Legacy Loan ProgramLegacy Loan Program

• FDIC to facilitate financing through a debt guarantee of up to 6:1 leverage.

• PPIP’s purchase price based upon the highest bid for the 50% equity contribution by the private investor

• Similar to RTC N-Series Structure

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Other Government StimuliOther Government Stimuli

• Federal infrastructure spending

• Small Business Administration

When will we see recovery in the commercial real estate markets?

Have we hit bottom yet?