Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI

Transcription

1 Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI

2 What I will cover this year: What I told you last year. An economic overview of current trends, mortgage rates and capital market issues. A review of the housing market. A look at the current CoStar and Moody s RCA repeat sales indices for CRE Q&A will follow after KC Conway.

3 Last year I said: After June of 2011 interest rates would be very likely to go up based on QE2 ending. That we would start to see a value impact race between interest rates (neg) and rental growth (pos) over the next several quarters. The pricing spread for high quality occupied core property was quite high compared to property with some vacancy in the non-top tier markets. That this was a slow recovery and that the government cannot easily create jobs.

4 In 2005 Dollars GDP Annual Change, GDP Change from the Economist Survey is 2.3% for 2011 Source: U.S. Bureau of Economic Analysis Economic Recessions (Q1)

5 U.S. Employment Annual Change, Annual Data Not Seasonally Adjusted The Private sector started laying off quickly while the Gov sector kept hiring. Source: U.S. Bureau of Labor Statistics

6 U.S. Jobs Gained or Lost By Month, Thousands Seasonally Adjusted through July Source: U.S. Bureau of Labor Statistics; *data for June and July 2011 is preliminary

7 Billions U.S. Corporate Profitability Seasonally Adjusted Source: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics

8 Billions U.S. Corporate Profitability vs. Private Employment, Seasonally Adjusted Millions Source: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics

9 Billions Another Look: U.S. Corporate Profitability vs. Private Employment, (Corporate profits shifted ahead 1 year; i.e.: 1999 actual = 2000 on chart) Millions Source: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics

10 Billions U.S. Retail Sales, Seasonally Adjusted Source: U.S. Census Bureau

11 Purchasing Managers Index, Above 50 = Purchasing More Source: Institute for Supply Management

12 What about mortgage rates? Where are mortgage rates headed? What about inflation? What about spreads?

13 CPI Annualized Quarterly Change, U.S. City Average, All Items; Not Seasonally Adjusted Source: U.S. Bureau of Labor Statistics

14 16% 10-Year Treasury Bonds, % 8% Average: % 0% 01/20 01/20 01/20 01/20 01/20 01/ Source: Federal Reserve Board

15 12% 30-Year Fixed Rate Mortgages (FRM) vs. 10-Year Treasury Bonds, % 8% 6% 4% 2% 0% 01/90 07/90 01/91 07/91 01/92 07/92 01/93 07/93 01/94 07/94 01/95 07/95 01/96 07/96 01/97 07/97 01/98 07/98 01/99 07/99 01/00 07/00 01/01 07/01 01/02 07/02 01/03 07/03 01/04 07/04 01/05 07/05 01/06 07/06 01/07 07/07 01/08 07/08 01/09 07/09 01/10 07/10 01/11 30-Year FRM 10-Year Treasury Bonds Source: Freddie Mac; Federal Reserve Board

16 1-Year Adjustable Mortgage Rates vs. 1-Year Treasury Bonds, Source: Freddie Mac; Federal Reserve Board

17 Stockton Single Family Regular & REO Average Sold Price and First Mortgage Amount Watch this mortgage line when we add second mortgages

18 Stockton Single Family Regular & REO Average Sold Price and Total First & Second Mortgage Amount

19 Palmdale Single Family Regular & REO Average Sold Price and First Mortgage Amount

20 Palmdale Single Family Regular & REO Average Sold Price and First and Second Mortgage Amount

21 La Jolla Single Family Regular & REO Average Sold Price and First Mortgage Amount

22 La Jolla Single Family Regular & REO Average Sold Price and First and Second Mortgage Amount

23 Does Case-Shiller represent the typical home in America?

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25 Note: This is a two edged sword. C-S overstates the decline but also over states the increase.

26 San Diego Home Prices Mapped at Zip Plus 4

27 What about the impact of distress by market? Where will you see greater discounts between regular sales and REO sales? In markets with a lot of distress or In markets with very little distress?

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30 REO Percent of All Sales, Average of 20 Major U.S. Markets Source: Collateral Analytics

31 REO Sale Price Discounts, Percent Lower Price Than Regular Sales; Average of 19 Major U.S. Markets Source: Collateral Analytics

32 Chula Vista Spread Cardiff By the Sea Spread

33 Appraisal includes REO comps and

34 Subject 2 REO sales in red

35 Value estimate without the REO comps

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37 Subject REO sales in red

38 Prices will rebound, why?

39 Millions Single-Family Home Permits, Seasonally Adjusted Average: Source: Economy.com

40 Millions Multi-Family Home Permits, Seasonally Adjusted Average: Source: Economy.com

41 A Few CRE Price Trends

42 CoStar CCRSI August release Investment grade up 5.6% in past year

43 Volume is back to normal but does include a lot of distress

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46 Conclusions Corporate profits are up and private employment growth should be accelerating but uncertainty looms. Mortgage rates are a bargain right now and likely to go up. Future values will be a race between interest rates and rental growth. Capital is coming back but buyers remain focused on core markets and highly occupied properties. Metro market averages can be misleading, just as Case- Shiller indices are a poor representation of the typical owner in any given metro.

47 Thank you

48 As the market conditions and the U.S. debt crisis change at a FAST pace, the response from the capital markets and regulatory regime is FURIOUS. The Fast & Furious What does it all mean for Commercial Real Estate? K.C. Conway, MAI, CRE Executive Managing Director, Real Estate Analytics Colliers International KC.Conway@Colliers.com 48

49 THE DISCLAIMER: The Appraisal Institute (AI) makes no representations or warranties about the accuracy or suitability of any information in this presentation. The AI does not guarantee, warrant, or endorse the advice or services of Colliers International Valuation & Advisory Services (CIVAS). This presentation consists of materials prepared by CIVAS, and is provided during this conference solely for informational purposes of conference attendees. This presentation is not intended to constitute legal, investment or financial advice or the rendering of legal, consulting, or other professional services of any kind. 49

50 It s The Economy! As Norm Miller pointed out regarding residential real estate, we need to understand how what we have been doing the past decade impacts us in the decade ahead. 50

51 It s The Spending! The U.S. has reached 100% of GDP & 100% of Household Income in terms of total debt. That is why the U.S. AAA debt rating was downgraded! Americans owe $98,141,000,000,000 or $319,587 per man, woman and child. 51

52 Decade Job Growth (millions) % Ch 1940s % 1950s % 1960s % 1970s % 1980s % Rollin 10-Yr.Change in Total Employment 50% 40% 30% 20% 10% 0% -10% America s Lost Decade of Job Growth! 1990s % Nov-50 Nov-53 Nov-56 Nov-59 Nov-62 Nov-65 Nov-68 Nov-71 Nov-74 Nov-77 Nov-80 Nov-83 Nov-86 Nov-89 Nov-92 Nov-95 Nov-98 Nov-01 Nov-04 Nov-07 Nov s % Source: U.S. BLS Implication: Less construction lending; More focus on Perm & ReFi R.E. Investing As a result, regulators want banks on a Land and R.E. diet! What is the value of R.E. without credit? Def of Market Value? 52

53 Maybe LESS CONSTRUCTION isn t such a bad thing! 1. Construction mis-management Actual photos from appraisals by banks with Impaired CRE 2. Two Key Questions for Appraisers: 1. As these sell, how are they used as comps in appraisals? 2. Is there a Cost to Fix or complete adjustment? 3. 53

54 What happened in the Market? Misread Demand Drivers! 54

55 What happened in the Capital Markets and Banks? #1: US Financial Institutions OVER-LEVERAGE 50% / $1.6 Trillion #2: CMBS 20% / $640 billion < 1/2 that of US Banks Q. What was the total outstanding CRE debt in 1998? A. $800 billion We did not quadruple the physical amount of US Real Estate in 12 years. This crisis is an OVERLEVERAGE event. $3.15 Trillion Total Outstanding CRE Debt end of Q Source: Federal Reserve Bank of New York 55

56 Commercial Residential Construction Construction NOT all Banks are created alike! 1 : What are the types of CRE Debt in Banks? 2 : Is CRE debt the same for all of our Bank clients? Investor Commercial Mortgage Owner Occupied Commercial Mortgage Multi family Residential 1-4, HELOC < $1 Bil 6,179 Banks $1-$50 Bil 512 Banks $50-$160Bil 17 Banks $160Bil - $1.5Tr 10 Banks Why the mortgage put-backs 56 are so material to the large banks 10

57 >90% was ADC, CRE or Residential 57

58 No BANK FAILURES - 63 Bank Name State Closing Date 63 Bank of Whitman WA 5-Aug Bank of Shorewood IL 5-Aug Integra Bank National Assoc. IN 29-Jul BankMeridian, N.A. SC 29-Jul Virginia Business Bank VA 29-Jul Bank of Choice CO 22-Jul LandMark Bank of Florida FL 22-Jul Southshore Community Bank FL 22-Jul Summit Bank AZ 15-Jul First Peoples Bank FL 15-Jul High Trust Bank GA 15-Jul One Georgia Bank GA 15-Jul Signature Bank CO 8-Jul Colorado Capital Bank CO 8-Jul First Chicago Bank & Trust IL 8-Jul Mountain Heritage Bank GA 24-Jun First Commercial Bank of Tampa FL 17-Jun McIntosh State Bank GA 17-Jun Atlantic Bank and Trust SC 3-Jun First Heritage Bank WA 27-May Summit Bank WA 20-May First Georgia Banking Company GA 20-May Bank Failures YTD Vs. 534 in 1989 & 3,625 in Habersham Bank GA 18-Feb Canyon National Bank CA 11-Feb Badger State Bank WI 11-Feb Peoples State Bank MI 11-Feb Sunshine State Community Bank FL 11-Feb Community First Bank Chicago IL 4-Feb North Georgia Bank GA 4-Feb American Trust Bank GA 4-Feb First Community Bank NM 28-Jan FirsTier Bank CO 28-Jan-11 9 Evergreen State Bank WI 28-Jan-11 8 The First State Bank OK 28-Jan-11 7 United Western Bank CO 21-Jan-11 6 The Bank of Asheville NC 21-Jan-11 5 CommunitySouth Bank & Trust SC 21-Jan-11 4 Enterprise Banking Company GA 21-Jan-11 3 Oglethorpe Bank GA 14-Jan-11 2 Legacy Bank AZ 7-Jan-11 1 First Commercial Bank of Florida FL 7-Jan-11 Source: FDIC Thru Aug 5 th 58

59 GA still leads with 16 followed by FL (9), IL (6) & CO (5) 2011 BANK FAILURES BY STATE No. Bank Name State Closing Date High Trust Bank GA 15-Jul-11 Superior Bank AL 15-Apr-11 One Georgia Bank GA 15-Jul-11 2 Nexity Bank AL 15-Apr-11 Mountain Heritage Bank GA 24-Jun-11 Summit Bank AZ 15-Jul-11 2 Legacy Bank AZ 7-Jan-11 San Luis Trust Bank, FS CA 18-Feb-11 Charter Oak Bank CA 18-Feb-11 3 Canyon National Bank CA 11-Feb-11 Bank of Choice CO 22-Jul-11 Signature Bank CO 8-Jul-11 Colorado Capital Bank CO 8-Jul-11 FirsTier Bank CO 28-Jan-11 5 United Western Bank CO 21-Jan-11 LandMark Bank of Florid FL 22-Jul-11 Southshore Community FL 22-Jul-11 First Peoples Bank FL 15-Jul-11 First Commercial Bank o FL 17-Jun-11 Coastal Bank FL 6-May-11 Cortez Community Bank FL 29-Apr-11 First National Bank of Ce FL 29-Apr-11 Sunshine State Commun FL 11-Feb-11 9 First Commercial Bank o FL 7-Jan-11 McIntosh State Bank GA 17-Jun-11 First Georgia Banking C GA 20-May-11 Atlantic Southern Bank GA 20-May-11 The Park Avenue Bank GA 29-Apr-11 First Choice Community GA 29-Apr-11 New Horizons Bank GA 15-Apr-11 Bartow County Bank GA 15-Apr-11 Citizens Bank of Effingha GA 18-Feb-11 Habersham Bank GA 18-Feb-11 North Georgia Bank GA 4-Feb-11 American Trust Bank GA 4-Feb-11 Enterprise Banking Com GA 21-Jan Oglethorpe Bank GA 14-Jan-11 Bank of Shorewood IL 5-Aug-11 First Chicago Bank & Tr IL 8-Jul-11 Western Springs Nationa IL 8-Apr-11 The Bank of Commerce IL 25-Mar-11 Valley Community Bank IL 25-Feb-11 6 Community First Bank C IL 4-Feb-11 1 Integra Bank National As IN 29-Jul-11 Community Central Bank MI 29-Apr-11 2 Peoples State Bank MI 11-Feb-11 1 Rosemount National Ban MN 15-Apr-11 1 Heritage Banking Group MS 15-Apr-11 1 The Bank of Asheville NC 21-Jan-11 1 First Community Bank NM 28-Jan-11 1 Nevada Commerce Bank NV 8-Apr-11 First National Bank of Da OK 11-Mar-11 2 The First State Bank OK 28-Jan-11 BankMeridian, N.A. SC 29-Jul-11 Atlantic Bank and Trust SC 3-Jun-11 3 CommunitySouth Bank & SC 21-Jan-11 1 Virginia Business Bank VA 29-Jul-11 Bank of Whitman WA 5-Aug-11 First Heritage Bank WA 27-May-11 3 Summit Bank WA 20-May-11 Legacy Bank WI 11-Mar-11 Badger State Bank WI 11-Feb-11 3 Evergreen State Bank WI 28-Jan-11 Source: FDIC Thru Aug 5 th 59

60 Key Note: 23,674 banks were closed (We only have 7,575 banks & 7,800 credit unions today, or a total of 15,375 financial institutions). 3,625 banks have been closed 1934-July ,369 banks closed during the S&L Crisis banks have been closed during this Financial Crisis 2008-July

61 CMBS Delinquencies Hit All Time High in July Q2 2011: 9.88% vs Q4 2010: 9.20% Dec - 09 CMBS Issues: 1. ReFI Maturity Defaults There is seasonality to DQT Vintage Interest Only to mature S&P reviewing DSCR calculations / halted ratings 61

62 2011 CMBS Mkt: $50 billion goal $30.5 billion YTD 21.2 billion Private 9.3 billion Gov. $30.5 billion YTD 26.7 billion Conduit 3.8 billion SingleAsset Sources: FDIC TREPP Freddie Mac Fed Reserve Bank of NY 62

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64 LIFE COMPANY R.E. PERFORMANCE 2008: % 2009: % 2010: % The Overall return was fueled by both Income and Price appreciation return. It wasn t just Cap Rate Compression. 64

65 So where are me at Mid-2011? What s ahead? 65

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71 Office R.E will outperform in education centers Boston NC & VA Note re TX vs CO: Pop dispersion and size are the diff btw green shading. 71 Returning Intellectual Property Mfg is seeking the education centers!

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78 Appraisal Discussion Items: KC s Top 11 for 2011 Competency Fair Value Vs. Market Value DCF Assumptions Rents are Declining to Flat Expenses are Rising Fee Simple Vs. Leased Fee Sensitivity Analysis Highest & Best Use Cap Rate derivation Mtg Equity Abstracting Leases again NNN Lease to Modified Gross Property Inspections Value Impact from a BK MSA 78

79 Competency Fair Value Vs. Market Value Q. How much experience does a 15-yr practicing MAI have with valuing distressed Commercial R.E.? A. Get some before your deposition! 79

80 Property Interest Appraised Fee Simple Vs. Leased Fee We still see another 15%-20% decline in value on existing leased CRE as contract rents roll to market. So what is masking it? Cap Rate Compression! 80

81 Highest & Best Use What is Maximally Productive? It s time to go back to Con-Ed on how to do a proper H&B Use analysis. Every TDR and land deal is a H&B Use assignment! 81

82 Arizona Land Sells for 8% of Price Calpers Group Paid at Peak By John Gittelsohn - May 27, :07 PM ET Bloomberg A 10,200-acre (4,100-hectare) desert site in Arizona sold for $32.5 million this week, five years after a group with investors including the California Public Employees Retirement System paid $400 million for the land. Arcus Property Solutions LLC, a private-equity fund with about $100 million under management, paid cash for the property in Goodyear, about 60 miles (97 kilometers) southwest of Phoenix. The site, now called Amaranth Land LLC, had been planned for a 42,000-home community. The deal shows how property investors are taking advantage of a plunge in values after the real estate bubble burst in Arizona. Five, six years ago, people were spending $200 million or $300 million or $400 million, Garrett said in a telephone interview. This just sold for about eight cents on the dollar. Q. Why H&B Use Study? A. To understand how a $400 million piece of land purchased in 2006 could be worth just $32.5 million 5 years later. CalPers had written the value completely off by end of 2010, and is recovering $0.08 of their investment. Note: These were sophisticated investors CalPers and Weyerhauser. The 2006 buyers were a joint venture of MW Housing Partners III LP, a real estate fund with money from Calpers and Weyerhaeuser Co. (WY); and Scottsdale, Arizona-based Montage Land LLC, according to Arizona Corporation Commission records. The deal was funded by a $250.1 million loan and $150 million in cash, according to Terry McDonnell, publisher of Business Real Estate Weekly of Arizona in Scottsdale. 82

83 Sensitivity Analysis Land 83

84 Mortgage Equity Technique R = LTV * DSCR * Mc 84

85 DCF Assumptions Rents are Declining to Flat Expenses are Rising 85

86 NNN Lease to Modified Gross LEASE STRUCTURE & VALUE EROSION by Pat Craig & NY CIVAS: A 29% Hit to Value The industrial market in the NY CBSA has over 1.1 billion square feet of space within nearly 30,000 buildings. Lease structures within this market vary from gross leases to triple net leases, depending on the owner s preference and the tenant s tolerance for paying expense reimbursements. In the last 18 months, it has become a tenant s market, and in many cases tenants have squawked at paying the tax reimbursement. When a market transitions from a triple net market, to a double net or modified-gross rent market (no tax pass through), there can be a significant loss in value. As an example, as the pro-forma below attests, with all things being equal except the tax reimbursement, the change in lease structure will cause value erosion of 29%. 86

87 Property Inspections The Wei Metric for MF in

88 A Case Study Vallejo, CA Value Impact from a BK MSA 88

89 Conclusion: You have to be nice to snakes. 89