Wall Street and Commercial Real Estate Everett (Allen) Greer, SVP Director of Research Real Estate Risk Assessment January 22, 2009
Fundamentals Supply / Demand Supply Growth Development has Stopped Big Picture ties to Gross Domestic Product Office FIRE Employment, Portion of Service Employment Retail Household Formations, Income Growth Industrial Manufacturing vs Distribution Multifamily Households Hotel Corporate Travel Office Employment During the last few years, has accounted for slightly less than 40% of all commercial real estate lending. Jobs & Retail Sales Drive Supply & Demand!!! Financing Currently Most Important Fundamental 2
Financing Fundamentals Capital Markets Drive Financing CMBS / REITs are Benchmarks Capital Markets Have Dried Up Banks are in Middle of Credit Crunch Few Banks are In the Game of Lending Rates Across the Spectrum Have Risen Equity, Mezzanine, Debt Deleveraging Lower LTV / Higher DSC 3
Evolution of CDS Simple CDS = Full Coverage Buyer is Party to Credit Instrument Seller Provides Full Coverage Seller Pays (makes up) Shortfall or Seller Buys Credit Instrument from Buyer Buyer is Made Whole Buyer is Not a Part to Credit Facility, merely a speculator Sellers Provide Partial Coverage (ceiling) or Part of Credit Sellers Provide Incremental Coverage Goal is to provide Partial Credit Enhancement Ratings Are Moved (eg BB to A rating) CDS Complex Credit Multiple facilities CMBS (vertical [multi-tranche buyer] or horizontal) REITs added 4
3.78 3.78 5.44 5.44 8.42 8.42 12.43 12.43 17.10 17.10 26.00 26.00 34.40 34.40 45.46 45.46 54.60 54.60 62.20 62.20 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 2001.1 2001.2 2002.1 2002.2 2003.2 2003.3 2004.2 2004.3 2005.2 2005.3 2006.2 2006.3 2007.2 2007.3 2008.2 Credit Default Swaps $$ $$ Trillions Trillions Source: Source: ISDA ISDA Semi-Annual Semi-Annual Voluntary Voluntary Survey Survey Bank Bank of of America America - - Real Real Estate Estate Research Research 5
CMBS Yield Spreads (Spread to Swap) Jan Jan BBB- BBB- BBB BBB A AAA AAA 10Y 10Y Feb Feb Mar Mar Mar Mar Apr Apr May May Jun Jun Jun Jun Jul Jul Jul Jul Aug Aug Sep Sep Nov Nov Nov Nov Dec Dec Source: Source: CM CM Alert, Alert, Bank Bank of of America America - - Real Real Estate Estate Research. Research. Note: Note: X-axis X-axis not not to to scale. scale. Spreads Spreads are are "over "over swaps" swaps" for for 10-year 10-year Treasuries. Treasuries. Dec Dec Apr Apr 2000 2000 1800 1800 1600 1600 1400 1400 1200 1200 1000 1000 800 800 600 600 400 400 200 200 0 Jun Jun Note: Last CMBS closed was June 29, 2008 6
Commercial Real Estate Loans Source: Federal Reserve Board, Top 100 Banks, Seasonally Adjusted 7 20.00 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 1991.3 1992.3 1993.3 1994.3 1995.3 1996.3 1997.3 1998.3 1999.3 2000.3 2001.3 2002.3 2003.3 2004.3 2005.3 2006.3 2007.3 2008.3 Commercial Charge Offs Commercial Delinquencies
Synthetic CMBX Yields (Spreads to Swaps) Tranche * Yield over Swaps* Approx CMBS Rise in Yields** 1/21/09 1/2007 ** CMBX.5 AAA 680.83 20.0 660.83 CMBX.5 AAA AJ 1,621.83 35.0 1,586.83 CMBX.5 AA 2,120.50 45.0 2,075.50 CMBX.5 A 2,642.83 55.0 2,587.83 CMBX.5 BBB 3,535.33 75.0 3,460.33 CMBX.5 BBB- 3,728.67 85.0 3,643.67 CMBX.5 BB 4,484.50 105.0 4,379.50 Source: *Markit, **BAC Real Estate Research 8
CMBS/X Implied R.E. Yields Tranche Yield Spd Suboord Weight D Debt Wght T Total AAA Sr 680.83 29.76% 70.24% 75% 52.68% 5.43% AAA Jr 1621.83 12.70% 17.06% 75% 12.80% 2.52% AA 2120.50 10.63% 2.07% 75% 1.55% 0.38% A 2642.83 8.00% 2.63% 75% 1.97% 0.59% BBB 3535.33 4.72% 3.28% 75% 2.46% 0.96% BBB- 3728.67 3.68% 1.04% 75% 0.78% 0.32% BB 4484.50 2.69% 0.99% 75% 0.74% 0.36% Unrated 5200.00 0.00% 2.69% 75% 2.02% 1.12% 100.00% Class A Prop. 3700.00 100% 25% 25.00% 10.13% Swap Rate 350.00 Total 20.64% Class B Prop. 5200.00 100% 25% 25.00% 13.88% Note: Class A yield assumed BBB-, Class B assumed 1000 bps higher 9 Total 25.55%
REIT Market Capitalization 500 500 438.07 438.07 465.26 465.26 422.41 422.41 379.86 379.86 370.07 370.07 360.30 360.30 328.82 328.82 312.01 312.01 310.94 310.94 299.28 299.28 308.93 308.93 326.31 326.31 329.60 329.60 293.57 293.57 300.25 300.25 305.88 305.88 305.31 305.31 212.38 165.96 212.38 165.96 191.65 191.65 400 400 300 300 200 200 100 100 0 1990 1990 1991 1991 1992 1992 1993 1993 1994 1994 1995 1995 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007.01 2007.01 2007.Q1 2007.Q1 2007.Q2 2007.Q2 2007.Q3 2007.Q3 2007.10 2007.10 2007.11 2007.11 2007.12 2007.12 2008.01 2008.01 2008.02 2008.02 2008.03 2008.03 2008.04 2008.04 2008.05 2008.05 2008.06 2008.06 2008.07 2008.07 2008.08 2008.08 2008.09 2008.09 2008.10 2008.10 2008.11 2008.11 2008.12 2008.12 $ Billions Billions Source: Source: NAREIT, NAREIT, Bank Bank of of America America Real Real Estate Estate Research Research Note: Note: Includes Includes Equity, Equity, Debt Debt and and Hybrid Hybrid REITS REITS 10
REITs Lose $274 Billion or 59% of value 500 500 465.26 465.26 430.87 430.87 422.41 422.41 417.35 417.35 416.43 416.43 379.86 379.86 343.90 343.90 357.01 357.01 370.07 370.07 360.30 360.30 328.82 328.82 312.01 312.01 310.94 310.94 299.28 299.28 308.93 308.93 326.31 326.31 329.60 329.60 293.57 293.57 300.25 300.25 305.88 305.88 305.31 305.31 212.38 212.38 165.96 165.96 191.65 191.65 400 400 300 300 200 200 100 100 0 2007.01 2007.02 2007.03 2007.04 2007.05 2007.06 2007.07 2007.08 2007.09 2007.10 2007.11 2007.12 2008.01 2008.02 2008.03 2008.04 2008.05 2008.06 2008.07 2008.08 2008.09 2008.10 2008.11 2008.12 $ Billions Source: Source: NAREIT, NAREIT, Bank Bank of of America America - - Real Real Estate Estate Research Research Note: Note: Includes Includes Equity, Equity, Debt Debt and and Hybrid Hybrid REITS REITS 11
Benchmark Returns Changes so Fast! 50.00 50.00 25.00 25.00 0.00 0.00-25.00-25.00-50.00-50.00 34.35 34.35 REITS DJIA S&P500 16.29 16.29 6.83 6.83 15.80 15.80 3.82 3.82-6.25-6.25-6.86-6.86-12.03-12.03-17.83-17.83-33.84-33.84-37.34-37.34-37.00-37.00-75.00-75.00 Source: NAREIT, Bank of America Real Estate Research. Note: Price Only returns, excludes dividends. NASDAQ 9.81 9.81 9.52 9.52-4.44-4.44-40.54-40.54 YE YE 12/31/06 12/31/06 YE YE 12/31/07 12/31/07 YE YE 12/31/08 12/31/08 YTD YTD 1/21/09 1/21/09 12
REIT Property Type Returns Old vs. New 13-25.70-25.70-6.40-6.40-59.67-59.67-11.40-11.40-20.18-20.18-9.68-9.68-15.09-15.09-13.42-13.42 YTD YTD 1/21/09 1/21/09 YE YE 2008 2008 YE YE 2007 2007 YE YE 2006 2006-28.25-28.25-33.99-33.99-11.33-11.33-15.09-15.09 Y -12.68-12.68-11.98-11.98-16.81-16.81 Specialty Specialty Lodging Lodging Residential Residential Retail Retail Diversified Diversified Ind/Office Ind/Office Health Health Care Care 5.50 5.50 Self Self Storage Storage -75.00-50.00-25.00 0.00 25.00 50.00 Source: Source: NAREIT, NAREIT, Bank Bank of of America America Real Real Estate Estate Research. Research. Note: Note: Price Price Only Only returns, returns, excludes excludes dividends. dividends.
Value Fundamentals CMBS Market is Effectively Broken = Opportunities CMBS/CMBX Industry Imply R.E. Yields Doubled REITS are Off more than 50% = Opportunities NCREIF is nearly Flat (down 2-3%) Market Change brings Opportunities! 14
NCREIF 08.Q3 Price Down/ Total Down 20.0% 20.0% 15.0% 15.0% 10.0% 10.0% Price Price Index Index Total Total Return Return Index Index 5.0% 5.0% 0.0% 0.0% 03Q1 03Q1 03Q2 03Q2 03Q3 03Q3 03Q4 03Q4 04Q1 04Q1 04Q2 04Q2 04Q3 04Q3 04Q4 04Q4 05Q1 05Q1 05Q2 05Q2 05Q3 05Q3 05Q4 05Q4 06Q1 06Q1 06Q2 06Q2 06Q3 06Q3 06Q4 06Q4 07Q1 07Q1 07Q2 07Q2 07Q3 07Q3 07Q4 07Q4 08Q1 08Q1 08Q2 08Q2 08Q3 08Q3-5.0% -5.0% -10.0% Source: NCREIF, MIT, MIT, BAC BAC - - Real Real Estate Estate Research 15
National Trend Vacancy 18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 Apt Off Ret Ind 2004.1 2004.3 2005.1 2005.3 2006.1 2006.3 2007.1 2007.3 2008.1 2008.3 Source: Torto-Wheaton Research, REIS, BAC Real Estate Research 16
Realized Rents 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% 2004.1 2004.3 2005.1 2005.3 2006.1 2006.3 2007.1 2007.3 Source: Torto-Wheaton Research, REIS, BAC Real Estate Research *Realized rent is area occupancy times area rent. 2008.1 2008.3 Apt Off Ret Ind 17
$65.00 $60.00 $55.00 $50.00 $45.00 $40.00 $35.00 $30.00 Industrial - - Nat'l Averages Price Price $/SF $/SF 1985 1985 1987 1987 1989 1989 1991 1991 1993 1993 1995 1995 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 18 $7.50 $7.50 $7.00 $6.50 Rent Rent $/SF/Yr The Relationship Breaks in 2003 Source: NREI, NREI, PPR, PPR, and and BAC BAC R.E. R.E. Research $7.00 $6.50 $6.00 $6.00 $5.50 $5.00 $5.50 $5.00 $4.50 $4.00 $4.50 $4.00 $3.50 $3.50
Market Trends National Rents 33 Avg of All Prop Types = 3.4% Growth is 3.3% since 2003Q1 9 8 Rent/SF (Off, Apt, Ret) 28 23 18 13 8 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 7 6 5 4 3 2 Rent/SF Ind Sources: National Real Estate Index, Property & Portfolio Research, BAC Real Estate Research Ret Apt Off Ind 19
Market Trends National Values Value/ SF SF (Off, Apt, Ret) 350 350 300 300 250 250 200 200 150 150 Avg of of All Prop Types = 8.6% Growth is is 8.8% since 2003Q1 80 80 70 70 60 60 50 50 40 40 Value/ SF SF Ind Ind 100 100 50 50 1995 1996 1997 1998 1999 2000 Sour ces: NREI,, Pr Pr operty ty & Por Por tfolio Research, BAC Real Estate Research ch 2001 2002 2003 2004 2005 2006 2007 30 30 20 20 Ret Ret Apt Apt Off Off Ind Ind 20
Growth Example Value vs. Income Year Rent RentG Ind Cap Value 2002 750,000 3.30% 7.50% $10,000,000 2003 774,750 3.30% 7.12% $10,880,000 2004 800,317 3.30% 6.76% $11,837,440 2005 826,727 3.30% 6.42% $12,879,135 2006 854,009 3.30% 6.09% $14,012,499 2007 882,192 3.30% 5.79% $15,245,598 2008 911,304 3.30% 5.49% $16,587,211 average 3.30% 8.80% Increase in value was only interest rates first 2 years. Momentum effect carried it further. 21 What happens when it stops?
Rent versus Value Growth Millions $18 $16 $14 $12 XS Value Growth Rent Growth Base Value 30+% XS V Growth $10 $8 $6 $4 $2 $0 2002 2003 2004 2005 2006 2007 2008 Source: Bank of America Real Estate Research 22
Sales Volume Trends (National) $ Billions 8 7 6 5 4 3 2 1 0 Off Ind Ret Apt Oct '06 Oct '07 Oct '08 23 Source: Real Capital Analytics CTM 11/08, Bank of America Real Estate Research
18 16 14 12 10 8 6 4 2 0 Sales Trends Ind 54% Q3 08 vs. 07 140 120 100 80 60 40 20 0 03Q1 03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4 06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 24 Source: Real Capital Analytics, Bank of America Real Estate Research Sum of Price Average of $/SF Billions
Sales Trends Office 75% Q3 08 vs. 07 Main Type Office RCA_Metros_tx (All) Billions 80 300 70 250 60 50 200 40 150 Data Sum of Price Average of $/SF 30 100 20 10 50 0 0 03Q1 03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4 06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 Yr.Qtr 25 Source: Real Capital Analytics, Bank of America Real Estate Research
25 20 15 10 5 0 Sales Trends Retail 71% Q3 08 vs. 07 350 300 250 200 150 100 50 0 03Q1 03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4 06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 Source: Real Capital Analytics, Bank of America Real Estate Research 26 Sum of Price Average of $/SF Billions
Sales Trends Apt 49% Q3 08 vs. 07 Billions 45 40 160000 140000 35 120000 30 100000 25 20 15 80000 60000 Sum of Price Average of $/Unit 10 40000 5 20000 0 0 03Q1 03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4 06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 27 Source: Real Capital Analytics, Bank of America Real Estate Research
Vacancy - Top / Bottom Markets 08Q3. U.S. Off - 13.4% Ind - 10.7% Apt - 5.8% Ret - 8.4% Hot* - 68.2% 1 New York 6.2 Los Angeles 5.4 Pittsburgh 2.7 Fairfield 3.6 San Francisco 85.4 2 Honolulu 9.2 Salt Lake City 6.3 Newark 3.4 San Jose 3.8 New York 85.0 3 San Francisco 9.7 Tucson 6.4 San Diego 3.4 Los Angeles 3.9 Seattle 81.3 4 Long Island 9.9 Houston 7.0 Oakland 3.5 Orange Cty 3.9 Long Island 79.7 5 Seattle 9.9 San Francisco 7.1 Edison 3.6 N New Jersey 4.0 Portland 77.9 5 W Palm Bch 19.2 Stamford 15.9 Dayton 8.2 Cincinnati 14.4 New Orleans 57.9 4 Dallas 20.3 Detroit 17.5 Atlanta 8.5 Columbus 14.4 Tucson 55.1 3 Phoenix 20.3 Memphis 18.5 Greensboro 8.6 Syracuse 14.8 West Palm Be 52.3 2 Edison 21.1 Trenton 19.0 Phoenix 9.8 Dayton 15.4 Phoenix 51.0 1 Detroit 22.0 Ann Arbor 21.0 Jacksonville 10.0 Birmingham 15.5 Tampa 50.1 Spread 15.8 15.6 7.3 11.9 35.3 Top Bottom Source: Torto Wheaton Research (Off, Ind, Apt, Hot), REIS (Ret) BAC-Real Estate Research; * Hotel = Occupancy 28
Vacancy Performance - 08Q3 Prop Type 08Q3 National 08Q3 San Diego SD Rank Office * 13.4% 17.7% 51 : 58 Industrial * 10.7% 10.6% 29 : 59 Retail ** 8.4% 4.3% 7 : 80 Apartment * 5.8% 3.4% 3 : 60 Hotel * 68.2% 77.0% 7 : 53 Source: * Torto Wheaton Research, **REIS, BAC-Real Estate Research Note: Hotel = Occupancy 29
Vacancy - Top / Bottom Submarkets 08Q3. Top Bottom SD Off - 17.7% Ind - 10.6% Apt - 3.4% Ret - 4.3% Hot* - 77.0% 3 West San Diego Beach 3.4 1 Point Loma 0.3 Central 4.7 West San Diego 1.8 La Jolla / 2 La Jolla 4.8 Central Suburban 5.3 University City 2.5 South County 3.9 North Beach Outer San Diego Cities 5.7 East County 5.4 4 Old Town 5.7 Hwy-78 Corridor 10.2 5 Rose Canyon / Sea World / Oldtown / Airport 76.2 San Diego Downtown 75.4 County 2.6 Mission Valley 74.2 Lemon Grove / National City 2.7 Morena 7.3 El Cajon 2.8 5 Miramar 25.7 4 Governor Park 25.7 I-15 Corridor 11.6 3 San Marcos / Intown / Coronado 3.4 Santee / Lakeside / Poway 3.5 San Diego NE / Escondido 70.0 San Diego / La Jolla 69.8 Vista 26.3 North City 10.6 Mission Valley 3.5 North County Carlsbad / 2 Temecula 29.1 West 18.0 North San Diego 4.2 Northwest County 4.7 1 Carlsbad 29.5 South Bay 15.0 North County 4.3 Northeast County 5.3 Spread 29.2 10.3 2.5 1.9 10.1 Source: Torto Wheaton Research (Off, Ind, Apt, Hot), REIS (Ret) 30 BAC-Real Estate Research; * Hotel = Occupancy Note: Downtown Office = 15.4%, Ind, Ret & Hot have <10 mkts Oceanside 67.4 San Diego South & East 66.1
Quote of the Day prediction is very difficult, especially when it's about the future... NY Yankee #8, Yogi Berra Niels Bohr Nobel Laureate, 1922 31
Conclusions CMBS Market Spreads 10-50x Higher R.E. Yields Double CMBS - New Business Model will Come REIT Industry Down 60+ Percent NACREIF Mixed Signals Many Lenders have Closed or Reduced Lending Volume Financing Costs Have Risen; Capitalization / Yield Rates CASH IS KING Value Growth (appreciation) will Lag Rent Growth Rents/Vacancies will remain better than early 1990s Value(s) Will Undergo Correction..see next slide! 32
Greer - 3 Year Forecast as of 1/2009 Borrowing Rates for Commercial Real Estate will Rise Margins (to Treasury) for Commercial RE Loans will rise 200 bps 2008-09, will settle to 300± 50bps over 10 year Treas. Rent Growth will lag CPI by 0 to 5% Value Growth will lag Rent Growth 30-35% over 2-3 years Values (National Average) will Fall 5-15% per year for next 2-3 years. Individual market performance will vary widely, with extreme markets performing several times better (or worse) compared to the National Average. Capitalization Rates will Rise 2.0-3.0% over next 3 years (eg 5.0% become 7.25% = 30%+/- decline in value) Declines: #1 Retail, #2 Industrial & Office, then Apartment Change Creates OPPORTUNITIES!!!!! 33
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