2010 Market Update 2010 Market Update Headwinds in Headwinds in Commercial Investment Commercial Investment Real Estate Real Estate 2010 v.02
Dec 27, 2015
2010 Market Update2010 Market Update
Headwinds in Headwinds in Commercial Investment Commercial Investment
Real EstateReal Estate
2010v.02
OverviewOverview
About M&MAbout M&MMarket ForecastsMarket ForecastsBrokerage BusinessBrokerage BusinessOther TopicsOther Topics
Who is M&M?Who is M&M?
Largest Investment Sales Largest Investment Sales BrokerageBrokerage
Private Client MarketPrivate Client Market SpecializationSpecialization
Who Am I?Who Am I?
South Florida BSMESouth Florida BSME University of Florida MBAUniversity of Florida MBA 10yrs Distressed Real Estate10yrs Distressed Real Estate
Principal, Partnerships, BrokeragePrincipal, Partnerships, Brokerage Creation of Special Assets Creation of Special Assets
Services DivisionServices Division
CommentaryCommentary
““Hope is not an exit strategy”Hope is not an exit strategy”
– – Stacey Berger, Midland Loan ServicesStacey Berger, Midland Loan Services
Where’s the Where’s the Juice?Juice?
ConsumersConsumers Make money from investing & workingMake money from investing & working
BusinessesBusinesses Provide goods & services in exchange Provide goods & services in exchange
for moneyfor money Pay rent to RE OwnersPay rent to RE Owners Employ ConsumersEmploy Consumers
Where’s the Where’s the Juice?Juice?
RE OwnersRE Owners Make money from tenantsMake money from tenants Raise money from investorsRaise money from investors Pay money to banks for loansPay money to banks for loans Hire businesses to perform servicesHire businesses to perform services
BanksBanks Receive payments on loansReceive payments on loans Pay interest to investorsPay interest to investors
GrowthGrowth
Entire system designed to work Entire system designed to work well ONLY with constant growthwell ONLY with constant growth
Growth dependent upon Growth dependent upon confidenceconfidence
No perpetual motionNo perpetual motion Leverage used to “fake” returnsLeverage used to “fake” returns
Faking ReturnsFaking Returns
$1mm investment at 10%$1mm investment at 10% $100k cash flow per year$100k cash flow per year
Assume 8% interest, 50% LTVAssume 8% interest, 50% LTV $500k loan with $40k debt service$500k loan with $40k debt service
$60k cash flow on $500k = 12%$60k cash flow on $500k = 12% Financial EngineeringFinancial Engineering
Risk?Risk? Where did the 10% come from?Where did the 10% come from?
Is it always 10%?Is it always 10%?
Appraisal IssuesAppraisal Issues
Cost – IrrelevantCost – Irrelevant Comps – No VelocityComps – No Velocity Income Capitalization (net lease)Income Capitalization (net lease)
Still requires compsStill requires comps Doesn’t tell the whole storyDoesn’t tell the whole story
All backwards-lookingAll backwards-looking Volatile Market – Never AccurateVolatile Market – Never Accurate
Disc Cash FlowsDisc Cash Flows
DCF is only real way to valueDCF is only real way to valueRequires deal dataRequires deal data
Bid/ask gapBid/ask gapDemand characteristicsDemand characteristics
Fluctuates with the marketFluctuates with the marketSimilar to corporate bondsSimilar to corporate bonds
Maturing Loans
* ForecastSources: Marcus & Millichap Research Services, Standard & Poors
$0
$30
$60
$90
$120
2008
*
2009
*
2010
*
2011
*
2012
*
2013
*
2014
*
2015
*
2016
*
2017
*
2018
*
Post 2
018*
0
3
6
9
12
Maturing Loan Balance Number of Loans
Mat
uri
ng
Lo
an B
alan
ce (
bill
ion
s)N
um
ber o
f Lo
ans (000s)
Perils of Pro Perils of Pro FormaForma
Current ActualCurrent Actual 75% occ / $35 / 8% cap / 80% LTV75% occ / $35 / 8% cap / 80% LTV
““Opportunity” NumbersOpportunity” Numbers 90% occ / $45 / 7% cap / 80% LTV90% occ / $45 / 7% cap / 80% LTV
Unfolding RealityUnfolding Reality 60% occ / $25 / 10% cap / 65% LTV60% occ / $25 / 10% cap / 65% LTV
Halo EffectHalo Effect
"We vastly underestimate the "We vastly underestimate the extent to which success happens extent to which success happens because of things the individual because of things the individual has nothing to do with.”has nothing to do with.”
- Malcolm - Malcolm GladwellGladwell
Loss AversionLoss Aversion
Loss aversion (emotional Loss aversion (emotional attachment) is one of the attachment) is one of the strongest influences any strongest influences any investment decisioninvestment decision
Riding the market downRiding the market down
CommentaryCommentary
"One of the misconceptions people "One of the misconceptions people have in investing is that I have to have in investing is that I have to make it back in the same asset I make it back in the same asset I lost it in.”lost it in.”
- John Merrill, Tanglewood Wealth - John Merrill, Tanglewood Wealth ManagementManagement
The CIRE ParadoxThe CIRE Paradox
If the economy improves, capital If the economy improves, capital flows shift from debt to equity flows shift from debt to equity causing interest rates to rise, which causing interest rates to rise, which lowers CIRE prices (inflation)lowers CIRE prices (inflation)
If the economy worsens, cash flows If the economy worsens, cash flows from consumers to businesses drop from consumers to businesses drop leaving interest rates low but leaving interest rates low but lowering asset prices (deflation)lowering asset prices (deflation)
Brokerage Brokerage BusinessBusiness
Types of propertyTypes of property Types of ownersTypes of owners Sales cycleSales cycle How different segments How different segments
operateoperate
Brokerage Brokerage BusinessBusiness
Long hoursLong hours Hard workHard work Long lead time before $Long lead time before $ Uncertain futureUncertain future Lumpy cash flowsLumpy cash flows
Typical DayTypical Day
Plan DayPlan Day Plan CallsPlan Calls Outbound CallsOutbound Calls Send Emails to Follow-upSend Emails to Follow-up Check MessagesCheck Messages Return CallsReturn Calls More Outbound CallsMore Outbound Calls
Typical NightTypical Night
DatabaseDatabase Research MarketResearch Market Prepare ProposalsPrepare Proposals Compile CompsCompile Comps Marketing CampaignsMarketing Campaigns Track PipelineTrack Pipeline
Why Bother?Why Bother?
MoneyMoneyBarriers to EntryBarriers to EntryFreedomFreedomHigh Net Worth ClienteleHigh Net Worth Clientele
Sophisticated Business Sophisticated Business ExperienceExperience
Other TopicsOther Topics
Special AssetsSpecial AssetsLoan SalesLoan SalesAdvanced PricingAdvanced PricingDeal StoriesDeal Stories