Bay Area Real Estate Outlook 2014 Oakland, CA September 12, 2013
Capital Markets Overview Dennis Williams Managing Director NorthMarq Capital September 2013
Key Themes of 2013 CMBS Delinquency has leveled off. Originations have picked up pace significantly and the market appears more stable. This sector remains highly hl vulnerable to market shocks. Total delinquency rate remains at around 9%. Defaults likely to increase when aggressive originations from 2005-07 mature. New underwriting standards and projected loan volumes still not sufficient to rollover debt maturities (but getting closer). 2013 has seen heightened activity from life insurance cos., commercial banks and value add lenders. Expect more of the same in 2014. Underwriting more aggressive and strike zone continues to widen.
Banks Hold a Majority of CRE Loans Commercial Outstanding ($ Billion) Fed, State & Local Gov't $81.5 4% CMBS/ABS $498.1 22% Other $30.7 1% Finance Cos/REITS $84.8 4% Life Cos/Pensions $280.4 13% Banks/S&Ls $1,253.4 Source: Federal Reserve Flow of Funds Report 2013 56%
CMBS Fixed Rate Maturities Fixed-Rate Conduit/Fusion Maturity Schedule (Excludes Defeased Loans) 10,000 140 Lo oan Count 7,500 5,000 2,500 Outstanding Bl Balance ($B) Loan Count 120 100 80 60 40 20 Loa an Curr. Ba al. ($B) - 0 Source: Jefferies & Co. Excluding Defeased Loans. *as of 11/12
Commercial Mortgage Underwriting 2007 to Present 2007 Underwriting 2009 Underwriting 2013 Underwriting With 5% NOI Decline NOI $5,000,000 $5,000,000 $4,750,000 Purchase Price $83,300,000 $62,500,000 $79,200,000 Lender Cap Rate 600% 6.00% 800% 8.00% 600% 6.00% Loan to Value 80% 55% 65% Loan Amount $66,670,000 $34,400,000 $51,500,000 Equity $16,630,000 $28,100,000 $27,700,000 Interest Rate 5.50% 7.00% 4.00% Amortization I/O 30 30 Debt Yield 7.5% 14.5% 9.2%
Looking Ahead: 1. Agencies a Bit Less Reliable: Terms remain attractive, but higher h pricing i and lending more conservatively. 2. Rebirth of Life Companies and Banks: In 2013 most life companies in the market originating at or above 2007 levels. Most large banks remain active, while regional banks starting to lend again. 3. CMBS Increasingly Active: Rates have dropped from the high h 5 s to high h 4 s, up to 75% LTV, all property types. 4. Underwriting: riting Special attention to rollover. Single tenant problematic. LTV: 50-70% on real cap rate DSC: 1.30x 1.50x. Debt Yield of 9% on Comm. and 7-8% on Multi-Family.
Analysis. Answers An Economic Outlook: What s Next for the Real Estate Market Jordan G. Levine Economist & Director of Economic Research Beacon Economics Beacon Economics, LLC
Analysis. Answers An Economic Outlook: What s Next for the Real Estate Market Jordan G. Levine Economist & Director of Economic Research Beacon Economics Beacon Economics, LLC Analysis. Answers. Bay Area Real Estate Outlook 2014 pg
Things are getting better. The US economy is finishing its fourth year of expansion Average growth 2.2% 2% Unemployment has fall by 1.5% in the last two years Per capital real GDP is #1 among the largest 30 nations California has led the nation, and Bay Area Drives CA Employment is growing across the Bay Area East Bay projected to pick up steam Strategic Location Business Investment holding steady, corporate profits solid Generates demand for new commercial construction permits up Apartment market is hot, but future depends on home ownership Potential Risks Rising Interest rates, implications for affordability Psychology and the Federal Reserve s move to unwind monetary policy Analysis. Answers. Bay Area Real Estate Outlook 2014 pg 11
Employment Growing, Adds Demand for Commercial East Bay San Francisco San Jose YoY Change YoY Change YoY Change Industry Jul-13 (%, SA) Jul-13 (%, SA) Jul-13 (%, SA) Farm 1.5-0.8 2.1 0.1 4.8 1.5 Total Nonfarm 989.5 0.9 1,023.9 2.4 927.7 2.3 Construction 53.5 3.3 37.5 5.0 38.7 10.9 NR/Mining 12 1.2 02 0.2 01 0.1 03 0.3 02 0.2-0.6 06 Manufacturing 80.0-0.4 35.6-0.7 155.7-1.6 Wholesale Trade 44.8 3.1 27.0 3.2 36.4 3.6 Retail Trade 103.9 0.9 90.3 1.5 84.5 0.5 Logistics 34.1 3.8 38.9 4.3 13.2 2.4 Information 21.2-3.4 47.3 2.9 52.0 4.8 Financial Activities 47.6-1.7 80.4 2.2 34.2 0.6 Prof Sci and Tech 87.7 0.7 149.6 2.0 122.7 3.3 Management 27.4 0.8 22.4 0.2 10.9 4.2 Admin Support 52.1 2.0 65.55 9.2 58.6 11.8 Education/Health 143.5 1.6 115.5 1.3 120.9 2.3 Leisure/Hospitality 95.7 4.1 140.1 5.3 85.7 4.2 Other Services 34.7-4.4 40.9 1.2 24.2-3.1 Government 162.2-0.6 132.9-1.4 89.6-1.3 Unemployment Rate 7.3-1.8 5.5-1.6 6.9-1.8 Analysis. Answers. Bay Area Real Estate Outlook 2014 pg 12
Corporate Income & Local Investment Corporate Profits as % National Income Venture Capital Investment by Region ($ Millions) Difference 16.0% County 2012 2013 (YoY, %) 15.0% Sonoma 3.7 23.1 523.0 Alameda 139.1 186.9 34.3 14.0% San Francisco 637.1 842.44 32.22 13.0% Contra Costa 6.7 7.3 9.0 12.0% Santa Clara 754.7 685.7-9.1 11.0% San Mateo 526.5 5 473.5 35-10.1 10.0% 9.0% 8.0% 7.0% 6.0% 982I II III IV 991I II III IV 000I II III IV 009I II 1 1 2 2 Los Angeles 211.3 147.1-30.4 Orange 249.3 158.9-36.3 San Diego 357.1 178.3-50.1 Santa Cruz 5.3 2.0-61.5 Marin 3.1 1.1-62.9 Santa Barbara 98.0 31.7-67.7 Other 19.99 03 0.3-98.7 California 3,011.9 2,738.2-9.1 Analysis. Answers. Bay Area Real Estate Outlook 2014 pg 13
Commercial Starting to Turn the Corner Metro Apartments (Q2-13) Apartment Change (YoY, %) Offices (Q2-13) Office Change (YoY, %) Retail (Q2-13) Retail Change (YoY, %) Cost of Rent Oakland (MD) 1,450 3.3 26.21 1.2 27.99 0.2 San Francisco (MD) 2,070 4.0 43.13 7.0 33.06 0.8 San Jose 1,698 4.1 31.45 4.7 31.22 1.7 Los Angeles (MD) 1,472 2.6 32.65 1.4 29.40 1.3 Vacancy Rate Oakland (MD) 2.8-0.5 18.2-0.1 6.4 0.3 San Francisco (MD) 3.3 0.2 13.6-0.3 3.9 0.0 San Jose 3.0 0.5 18.8-1.1 6.0 0.1 Los Angeles (MD) 3.2-0.4 16.0 0.5 6.0-0.3 Analysis. Answers. Bay Area Real Estate Outlook 2014 pg 14
Economy Driving New Commercial Construction California New Nonresidential Building Permits by Type ($ Millions) Permit Type 2012 2012 YTD 2013 YTD Change (%) New Commercial 3,213 1,839 2,405 30.8 Office 1,451 703 618-12.2 Retail 916 721 1,027 42.4 Hotel 160 99 177 79.2 Industrial 1,408 617 467-24.4 Other Nonres. 1,458 903 2,593 187.0 Nonres. Alts./Adds. 7,799 4,667 5,581 19.6 Total Nonres. 13,878 8,027 11,046 37.6 Analysis. Answers. Bay Area Real Estate Outlook 2014 pg 15
Home Ownership & Implications for Rentals Potential Risks? 70 69 68 Home Ownership Rate Renter Households 46,000 44,000 42,000 of Households Number of Households s (000s) 67 66 65 64 63 62 61 60 40,000 38,000 36,000 34,000 32,000 30,000 Percent Q1-85 Q2-87 Q3-89 Q4-91 Q1-94 Q2-96 Q3-98 Q4-00 Q1-03 Q2-05 Q3-07 Q4-09 Q1-12 Q2-14 Q3-16 Q4-18 Q1-85 Q3-87 Q1-90 Q3-92 Q1-95 Q3-97 Q1-00 Q3-02 Q1-05 Q3-07 Q1-10 Q3-12 Q1-15 Q3-17 Q1-20 Returns to "Normal" Stays As-Is Middle Scenario Housing Bubble Returns to "Normal" Stays As-Is Middle Scenario Housing Bubble Analysis. Answers. Bay Area Real Estate Outlook 2014 pg
Analysis. Answers. Bay Area Real Estate Outlook 2014 pg 17
Bay Area Real Estate Outlook Oakland Marriott Oakland, CA September 12, 2013 Bay Area Real Estate Outlook 2014 September 12, 2013 Market knowledge. Insight on trends. Expert forecasts.
Investor Appetite. National Demand Rankings 1. Multifamily (ALL) 2. Office (CBD) 3. Shopping Centers (Trophy) 4. Retail (CBD or Net Leased) 5. R&D/Flex (Tech Occupancy) 6. Industrial (Distribution Centers) Source: Cassidy Turley Research, Costar Group, Real Capital Analytics
San Francisco Office Market Vacancy & Average Asking Rate (FSG) Trend 25% 20% 15% 10% 5% 0% Avg Asking Rent of $47.69 PSF is up 51% from Recession Low in 2009 $80.00 $70.00 $60.00 $50.0000 $40.00 $30.00 $20.00 $10.00 $0.00 Vacancy Avg. Asking (FSG) Source: Cassidy Turley Research
San Francisco Office Investment Average Price Per Square Foot (PPSF) & Cap Rate Trend 900 800 700 600 500 400 300 200 100 0 48%A 4.8% Average Cap Rate Rt $344 Average PPSF 10% 9% 8% 7% 6% 5% 4% 3% 2% Average PPSF Average Cap Rate Source: Cassidy Turley Research
2014 San Francisco Office Outlook
Bay Area (Five County) Multifamily Market Vacancy & Average Asking Rent Trend 5% 4% 3% 2% 1% $2,022 31% 3.1% $2,100 $2,000 $1,900 $1,800 $1,700 $1,600 $1,500 $1,400 0% Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 $1,300 Vacancy Avg. Asking Rent Source: Cassidy Turley Research RealFacts
Multifamily Development on Fire! Units Delivered 2012 Units Delivered Thru July 2013 Units Under Construction Units in Proposal Stage
2014 Multifamily Outlook