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This was a presentation put on by Tim Hatlestad, CCIM at the Prescott Area Association of Realtors. The slides show the timeline are very interesting.
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5/8/2009
© Tim Hatlestad, CCIM [email protected] 1
A Brief Evolution of the A Brief Evolution of the Coming Commercial Coming Commercial gg
Real Estate CrisisReal Estate Crisis
Tim Hatlestad, CCIMTim Hatlestad, CCIMRE/MAX Achievers and RE/MAX Achievers and
RE/MAX Commercial InvestmentRE/MAX Commercial Investment
5/8/2009
© Tim Hatlestad, CCIM [email protected] 3
8.00
Yield Curve
Jun‐02 Jun‐03
5.00
6.00
7.00Fed Funds Rate: 1.75
11/6/2002: to 1.25
6/25/2003: to 1.00
2.00
3.00
4.00
0.00
1.00
3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr
5/8/2009
© Tim Hatlestad, CCIM [email protected] 4
8.00
Yield Curve
Jun‐02 Jun‐04
5.00
6.00
7.006/25/2003: to 1.00
6/30/2004: to 1.25
2.00
3.00
4.00
0.00
1.00
3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr
5/8/2009
© Tim Hatlestad, CCIM [email protected] 5
8.00
Yield Curve
Jun‐02 Jun‐05
5.00
6.00
7.006/30/2004: to 1.25
6/30/2005: to 3.25 (8x.25)
2.00
3.00
4.00
0.00
1.00
3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr
5/8/2009
© Tim Hatlestad, CCIM [email protected] 6
8.00
Yield Curve
Jun‐02 Jun‐06
5.00
6.00
7.006/30/2005: to 3.25
6/29/2006: to 5.25 (8x.25)
2.00
3.00
4.00
0.00
1.00
3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr
5/8/2009
© Tim Hatlestad, CCIM [email protected] 7
8.00
Yield Curve
Jun‐02 4/2/07
5.00
6.00
7.00
2.00
3.00
4.00
7
0.00
1.00
3 mo 6 mo 1 yr 2 yr 5 yr 10 yr 30 yr
5/8/2009
© Tim Hatlestad, CCIM [email protected] 8
5/8/2009
© Tim Hatlestad, CCIM [email protected] 9
When did the Phoenix/Scottsdale Residential Market Peak?
945,000
50,000
ARMLS Total Number of Active Listings - Single Family and Condominium
25 000
30,000
35,000
40,000
10,000
15,000
20,000
25,000
0
5,000
10,000
Jan-
02
Mar
-02
May
-02
Jul-0
2
Sep-
02
Nov
-02
Jan-
03
Mar
-03
May
-03
Jul-0
3
Sep-
03
Nov
-03
Jan-
04
Mar
-04
May
-04
Jul-0
4
Sep-
04
Nov
-04
Jan-
05
Mar
-05
May
-05
Jul-0
5
Sep-
05
Nov
-05
Jan-
06
Mar
-06
May
-06
Jul-0
6
Sep-
06
Nov
-06
Jan-
07
5/8/2009
© Tim Hatlestad, CCIM [email protected] 10
1050%
60%
Year over Year Median Sale Price Delta
30%
40%
10%
20%
-10%
0%
Jan-
03
Mar
-03
May
-03
Jul-0
3
Sep-
03
Nov
-03
Jan-
04
Mar
-04
May
-04
Jul-0
4
Sep-
04
Nov
-04
Jan-
05
Mar
-05
May
-05
Jul-0
5
Sep-
05
Nov
-05
Jan-
06
Mar
-06
May
-06
Jul-0
6
Sep-
06
Nov
-06
Jan-
07
5/8/2009
© Tim Hatlestad, CCIM [email protected] 11
When did the Phoenix/Scottsdale Commercial Market Peak?
11$600,000
Nationwide Commercial Transaction Volume (Trailing 12 Months in Millions)
CCIM Institute Investment Trends Quarterly (CCIM & RERC)
$300,000
$400,000
$500,000
$‐
$100,000
$200,000
Q4 2006Q1 2007
Q2 2007Q3 2007
Q4 2007Q1 2008
Office Industrial Retail Multi‐Family Hotel
5/8/2009
© Tim Hatlestad, CCIM [email protected] 12
128.0%
Nationwide Cap Rates by Property TypeCCIM Institute Investment Trends Quarterly (CCIM & RERC)
Weighted Average Trailing 12 Months Data
5.0%
6.0%
7.0%
2.0%
3.0%
4.0%
0.0%
1.0%
Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008
Office Industrial Retail Multi‐Family
5/8/2009
© Tim Hatlestad, CCIM [email protected] 13
4 0%
4.5%
Relative Return: Cap Rate Spread to 5‐Year TreasuryCCIM Institute ITQ (CCIM & RERC)
Cap Rate: Weighted Average Trailing 12 Months Data, Q End Treasury
Buy Buy
2.5%
3.0%
3.5%
4.0% LowLow
1.0%
1.5%
2.0%
SellSell
13
0.0%
0.5%
Q4 2006 Q1 2007 Q2 2007 Q3 2007 Q4 2007 Q1 2008
Office Industrial Retail Multi‐Family
Sell Sell HighHigh
5/8/2009
© Tim Hatlestad, CCIM [email protected] 14
Mortgage defaults
commence
03/00 NASDQ peaks at
5049
Fannie and Freddie buy
$81B in subprime securities
Dot Com Bubble
5049
Declining interest rates
Home ownership hits high
of 69.2%
090807060504030201009998979695
Housing prices begin
to fall
Extremely Low Interest Rates Dramatic increase in home prices
43% of first time homebuyers use “no money down” loans
14
5/8/2009
© Tim Hatlestad, CCIM [email protected] 15
Collapse of Bear Sterns 09/17
$85B bailout of AIG
02/25AIG in talks for 3rd
bailoutHousehold debt at 127% of annual
disposable income
Average US home prices 20% less than
in 2006
12MM Homeowners
have negative 02/27
US i t l
12/16 Fed Funds drop to
0.00 – 0.25%
2008 2009
07/11Oil tops $147 a
barrel
09/15Lehman Brothers
declares bankruptcy
11/10 AIG gets another
$150B
disposable income have negative equity
US acquires control of Citigroup
J F M A M J J A S O N D J F M
09/15BofA announces
purchase of Merrill Lynch
8MM homeowners
have negative equity
07/11$32B
IndyMac Bank placed h
$307B WaMu
02/17$782B American
Recovery and Reinvestment Act
09/08Federal takeover of Fannie
Mae and Freddie Mac
in conservatorship seized by OTS
10/03$700B Emergency
Economic Stabilization Act of 2008 (TARP)
signed into law
Reinvestment Act signed into law
15
5/8/2009
© Tim Hatlestad, CCIM [email protected] 16
The Capital Ratio is the percentage of a bank’s capital to its risk weighted assets
Bank Capitalization Requirements
capital to its risk-weighted assets.
16
5/8/2009
© Tim Hatlestad, CCIM [email protected] 17
•Adequately CapitalizedTier I capital ratio of at least 4%
Bank Capitalization Requirements
• Tier I capital ratio of at least 4%
• Combined Tier I and Tier II capital ratio of at least 8%
•Well Capitalized• Tier I capital ratio of at least 6%
• Combined Tier I and Tier II capital ratio of at least 10%
17
5/8/2009
© Tim Hatlestad, CCIM [email protected] 18
Mark to Market RequirementsSoft Market with few Buyers
$300k $300k $300k $300k $300k
18
Home HomeHome Home Home
5/8/2009
© Tim Hatlestad, CCIM [email protected] 19
Mark to Market RequirementsSoft Market with few Buyers
$300k $150k
$300k $300k $300k
Catastrophe forces “fire sale”
19
Home $150k Home
Home Home Home
5/8/2009
© Tim Hatlestad, CCIM [email protected] 20
Mark to Market RequirementsSoft Market with few Buyers
$150k
Catastrophe forces “fire sale”
$150k $150k $150k $150k
All assets “marked to market”
20
$150k Home
$150k Home
$150k Home
$150k Home
$150k Home
5/8/2009
© Tim Hatlestad, CCIM [email protected] 21
Actual Mark to Market Example
Expected Loss vs. Mark to Market Write-Down•Bank holds a pool of MBS totaling $3.65 billion•Underlying loans are NOT subprime•Generally good quality, 17 months of seasoning, original FICO score of 749•Subordinated collateral of $172 million exceeds worst-case loss projections
$913MM
Losses on MBS Held By Bank(in millions)
$1.8MM$100MM
21
5/8/2009
© Tim Hatlestad, CCIM [email protected] 22
“MTM accounting has destroyed well over $500 billion of capital in our financial system. Because
Mark to Market Accounting
p ybanks are able to lend up to ten times their capital, MTM accounting has also destroyed over $5 trillion of lending capacity.”
22
William M. Isaac, Former Chairman, FDIC
5/8/2009
© Tim Hatlestad, CCIM [email protected] 23
•Established the FDICS d l b k f b k
Glass-Steagall Act of 1933
•Separated commercial banks from investment banks
23
5/8/2009
© Tim Hatlestad, CCIM [email protected] 24
•Gramm-Leach-Bliley Act of 1999
Repeal of the Glass-Steagall Act
24
5/8/2009
© Tim Hatlestad, CCIM [email protected] 25
Traditional Lender Model
Deposits Financing
Depositors Lender Borrower
Interest Debt Service
Loan is Retained25
5/8/2009
© Tim Hatlestad, CCIM [email protected] 26
“New” Lender Model
Deposits Financing
LenderDeposits Borrower
Interest Debt Service
Loan is Sold CMBSRMBS26
5/8/2009
© Tim Hatlestad, CCIM [email protected] 27
Residential Mortgage Backed Securities
Prime Prime Prime
Low Risk Low YieldTranche
Waterfall
$$$$
A-1
Sub-Prime
A-1
Sub-Prime
A-1
Sub-PrimeHigh Risk
Tranche
Tranche
$$
$Prime Prime Prime
High Yield
27
5/8/2009
© Tim Hatlestad, CCIM [email protected] 28
Performing Banking Relationship
20% EquityCore Capital (Equity 10%)
Property Value
Fully Capitalized
Real EstateBank
80% Debt (Performing)
Other Bank Assets:
StocksBondsLoans
$0 Loan Loss
Reserves
LoansReal Estate
28
5/8/2009
© Tim Hatlestad, CCIM [email protected] 29
Non-Performing Banking Relationship
No EquityCore Capital (Equity <10%)
Property Value
Real EstateBankUnder
Capitalized
100% Debt (Non-Performing)
Other Bank Assets:
StocksBondsLoans
$$ Loan Loss
Reserves
LoansReal Estate
29
5/8/2009
© Tim Hatlestad, CCIM [email protected] 30
Foreclosure and Real Estate Owned
Original Value
Real EstateBank
Core Capital (Equity <10%)
Under Capitalized
Foreclosed Real Estate
Other Bank Assets:
StocksBondsLoans
$$$ Loan Loss
Reserves
Appraised Value
LoansReal Estate
30
5/8/2009
© Tim Hatlestad, CCIM [email protected] 31
“New” Lender Model“Broken”
Deposits Financing
Lender/ServicerDeposits Borrower
Interest Debt Service
Loan is Sold CMBSRMBS31
5/8/2009
© Tim Hatlestad, CCIM [email protected] 32
40.0
45.0 CMBS Issuances ($Bil.)($Bil.)6 per. Mov. Avg. (($Bil.))
25.0
30.0
35.0
10 0
15.0
20.0
320.0
5.0
10.0
Mar‐99 Mar‐00 Mar‐01 Mar‐02 Mar‐03 Mar‐04 Mar‐05 Mar‐06 Mar‐07 Mar‐08
5/8/2009
© Tim Hatlestad, CCIM [email protected] 33
Subprime Mortgage Crisis
Excess Housing
Housing Prices
Inability to
Mortgage Defaults &
Negative Effects on
Housing Market
Cause of the Housing
InventoryPrices
Declineto
RefinanceDefaults & Foreclosure
Effects on Economy
•Housing bubble bursts•Household wealth declines
•Poor lending and borrowing decisions•ARM adjustments
•Home building declines•Rising job l
Mortgage
Housing Bubble
losses •Household wealth declines
Mo gageCash Flow Declines
33
5/8/2009
© Tim Hatlestad, CCIM [email protected] 34
Subprime Mortgage CrisisMortgage Cash Flow
Negative Effects on
Liquidity Crunch for Bank Bank
Capital
Financial Market
Bank •Downward pressure on business
Declines
Effects on Economy
Crunch for Businesses Failures
Capital Depleted
•Harder to get loans•Higher interest ratesStiff
•Washington Mutual•Wachovia•Lehman Brothers•IndyMacM th
•Loss on mortgages retained•Loss on MBS•Impact of Mark to Market•High bank debt levels
Lossesbusiness investments•Increasing unemployment•Stock market declines•Reduced household wealth •Stiff
underwriting•Many others•Many more to come
wealth
34
5/8/2009
© Tim Hatlestad, CCIM [email protected] 35
Subprime Mortgage CrisisNegative Effects on
Central Bank
Fiscal Stimulus
HomeOwner Federal
Government & Industry Responses
Systemic
Effects on Economy
Bank Actions
Stimulus Package
Owner Assistance Bailouts
•Economic Stimulus Act of 2008
•Hope Now Alliance•Housing & Economic R A t f
•Emergency Economic Stabilization Act (TARP)P bli P i t
Rescue
•Fannie & Freddie•Bear Sterns•AIGCiti
•Lower interest rates•Increased lending
Recovery Act of 2008
•Public-Private Investment Program•Global bank recapitalization
•Citigroup
35
5/8/2009
© Tim Hatlestad, CCIM [email protected] 37
Comparing Costs of the Credit Crisis
Government Expenditure Original Cost Inflation Adjusted Cost
Marshal Plan $12.7 billion $115.3 billion
Louisiana Purchase $15 million $217 billion
Race to the Moon $36.4 billion $237 billion
S&L Crisis $153 billion $256 billionS&L Crisis $153 billion $256 billion
Korean War $54 billion $454 billion
The New Deal $32 billion $500 billion (est.)
Invasion of Iraq $551 billion $597 billion
Vietnam War $111 billion $698 billion
37
NASA $416.7 billion $851.2 billion
TOTAL : $3.92 TRILLION
Source: Bianco Research
5/8/2009
© Tim Hatlestad, CCIM [email protected] 38
How Big is the Response?
D P All d SDate Program Allocated Spent
December 2007 Term Auction Facility $600 billion $468.6 billion
February 2008 Economic Stimulus Act of 2008 $168 billion $168 billion
March 2008 Bear Sterns Bailout $29 billion $26.2 billion
March 2008 Term Securities Lending Facility $200 billion $88.6 billion
March 2008 Primary Dealer Credit Facility n/a $61.3 billion
May 2008 Student Loan Guarantees $130 billion $9 billion
September 2008 Fannie Mae and Freddie Mac Bailout $400 billion $59.8 billion
September 2008 Foreign Exchange Dollar Swaps Unlimited $327.8 billion
October 2008 FHA Housing Rescue $320 billion $20 billion+
38
October 2008 FHA Housing Rescue $320 billion $20 billion+
October 2008 Auto Industry Energy Efficiency Loans $25 billion $0
October 2008 Troubled Assets Relief Program $700 billion $323.4 billion
Source: CNNMoney.com 03/29/09
5/8/2009
© Tim Hatlestad, CCIM [email protected] 39
How Big is the Response?
D P All d SDate Program Allocated Spent
October 2008 Money Market Guarantees $659 billion $15 billion
October 2008 Commercial Paper Funding Facility $1.4 trillion $241.3 billion
November 2008 Unemployment Benefit Extensions $9 billion $8 billion
November 2008 Citigroup Loan Loss Backstop $245 billion $0
November 2008 Term Asset-Backed Securities Loan Facility (TALF)
$1 trillion $4.7 billion
November 2008 GSE Mortgage-Backed Securities Purchases
$1.25 trillion $236.2 billion
November 2008 GSE Debt Purchases $100 billion $50.4 billion
November 2008 FDIC Temporary Liquidity Guarantee $1 5 trillion $297 1 billion
39
November 2008 FDIC Temporary Liquidity Guarantee $1.5 trillion $297.1 billion
2008 FDIC Bank Takeovers n/a $18.5 billion
February 2009 Foreclosure Prevention $25 billion $0
Source: CNNMoney.com 03/29/09
5/8/2009
© Tim Hatlestad, CCIM [email protected] 40
How Big is the Response?
D P All d SDate Program Allocated Spent
January 2009 Bank of America Loan-Loss backstop $97 billion $0
January 2009 Credit Union Deposit Insurance Guarantees
$80 billion $0
January 2009 US Central Federal Credit Union Capital Injection
$1 billion $1 billionp j
February 2009 American Recovery and Reinvestment Act
$787.2 billion n/a
March 2009 AIG $182 billion 129.3 billion
March 2009 US Government Bond Purchases $300 billion $7.5 billion
2009 FDIC Bank Takeovers n/a $1.9 billion
40
TOTAL: $10.5 TRILLION $2.6 TRILLION
Source: CNNMoney.com 03/24909
Does not include $500 billion - $1 trillion for Public-Private Investment Program
5/8/2009
© Tim Hatlestad, CCIM [email protected] 42
•Losses in job market continue to reduce demand.
Vacancies to rise to 16 7% in 3Q09
Office
•Vacancies to rise to 16.7% in 3Q09.•Annual rent is expected to decline 4.2% in 2009.•Negative absorption of (77.4) million SF in 57 markets.
•> Sublease Space to compete with Direct Space
42Source: NAR Commercial Real Estate Outlook , 12/08
5/8/2009
© Tim Hatlestad, CCIM [email protected] 44
•Reduced demand for exports starting to impact industrial.
Vacancies are forecast to rise to 12 2% in 3Q09
Industrial
•Vacancies are forecast to rise to 12.2% in 3Q09.•Annual rent is estimated to decline 4.1% in 2009.•Negative absorption of (148.1) million SF in 58 markets.
•Very little new construction is anticipated.
44Source: NAR Commercial Real Estate Outlook , 12/08
5/8/2009
© Tim Hatlestad, CCIM [email protected] 46
•Sluggish consumer spending has hit retail hard.
Vacancies will rise from 9 8% to 13 4% in 3Q09
Retail
•Vacancies will rise from 9.8% to 13.4% in 3Q09.•Average rents expected to fall 9.0% in 2009.•Negative absorption of (49.8) million SF in 2009.
•Very limited new construction.
46Source: NAR Commercial Real Estate Outlook , 12/08
5/8/2009
© Tim Hatlestad, CCIM [email protected] 48
•Financing and investment fundamentals are out of balance.•Some areas experiencing modest stability.
Investments
Some areas experiencing modest stability.•Risk premiums are raising interest rates and lowering prices.•Expect lower loan-to-value ratios.•Increasing debt service coverage ratios.
48
•Shorter loan durations.•Heightened tenant scrutiny and underwriting.
Source: NAR Commercial Real Estate Outlook , 12/08
5/8/2009
© Tim Hatlestad, CCIM [email protected] 51
•Auctions (IRS, Treasury, banks, others)L
Transaction Opportunities
•Leasing•Sealed bids•Traditional brokerage•Loan acquisitions
51
Loan acquisitions•Private lending
Source: NAR Commercial Real Estate Outlook , 12/08
5/8/2009
© Tim Hatlestad, CCIM [email protected] 52
• CCIM 101 Financial Analysis Course
Scottsdale Area Association of REALTORS®
OPPORTUNITIES
• Scottsdale Area Association of REALTORS®• August 10-14, 2009• Go To CCIM.com to Register
52
5/8/2009
© Tim Hatlestad, CCIM [email protected] 53
Tim Hatlestad, CCIMRE/MAX Achievers and RE/MAX Commercial Investment
Questions & Answers
RE/MAX Achievers and RE/MAX Commercial Investment
53