Emerging Trends in Real Estate® 2011
Presenters:Dean Schwanke
Senior Vice President, ULI andExecutive Director, ULI Center for Capital Markets and Real Estate
Emerging Trends in Real Estate 2011
Longest published annual real estate outlook—32nd consecutive year
Most predictive industry forecast
Based on surveys/interviews with 875 industry leaders
Jointly published by PWC and ULI
Emerging Trends 2011:
Shrunken industry
Lower returns
Restrained development prospects
Reduced credit availability
Crimped profits
Recognition of substantial losses(30-50% haircuts on asset values)
Entering the Era of Less
Investment Barometer
1
5
9
2004 2005 2006 2007 2008 2009 2010 2011
Buy
Hold
Sell
Source: Emerging Trends in Real Estate 2011 survey.Note: Based on U.S. respondents only.
Abysmal
Fair
Excellent
Closing Gap
Ample Availability of Equity
Investors with dry powder have plenty of options
Source: Emerging Trends in Real Estate 2011 survey.Note: Based on U.S. respondents only.
Substantially Undersupplied
14.9%
ModeratelyUndersupplied
20%
In Balance
10%
Substantially Oversupplied
22.5%
Moderately Oversupplied
32.7%
Real Estate Capital Market Balance Forecast 2011
Still Limited Availability of Debt
Source: Emerging Trends in Real Estate 2011 survey.Note: Based on U.S. respondents only.
Moderately Undersupplied
32.8%
SubstantiallyUndersupplied
46.1%
ModeratelyOversupplied
5.7%
In Balance 13.7%
Real Estate Capital Market Balance Forecast 2011
SubstantiallyOversupplied
1.6%
Slack in Underwriting
Source: Emerging Trends in Real Estate 2011 survey.Note: Based on U.S. respondents only.
Less Rigorous32.8%
Remains the Same40.6%
More Rigorous26.6%
CMBS Redux
0
50
100
150
200
250
97 99 01 03 05 07 09 11* 13*
U.S. CMBS IssuanceTotal($B)
Source: Commercial Mortgage Alert. * Issuance total through August 31, 2010.* Forecast based on Emerging Trends interviews
Delinquencies and Defaults
0
1
2
3
4
5
6
7
8
'88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Delinquency
In Foreclosure
U.S. Life Insurance Company MortgageDelinquency and In-Foreclosure Rates
%
Sources: Trepp LLC, Moody’s Economy.com, American Council of Life Insurers* 2Q 2009
0%
2%
4%
6%
8%
10%
'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Delinquency rate
Delinquency rateaverage
CMBS Delinquency Rates
“If you have a trophy property, lenders will come after you out of the woodwork. If you have a dog, you get foreclosed.”
2011: Total Return Expectations
“After a 30% to 40% loss it could take a long time to make up ground.”
-40%
-20%
0%
20%
40%
97 98 99 00 01 02 03 04 05 06 07 08 09 10*
NCREIF
NCREIF and NAREIT Returns
NAREIT
Source: NCREIF, NAREIT* Forecast
Mid-teensOpportunity:
8.2%REITs:
7.5%Core private unleveraged:
Inflation v. Deflation
Interest rates stay low, increase longer-term
Fed prints money, inflation in our future
Hard assets like real estate benefit, if demand picks up
Beware another asset bubble if rates stay down too long
“If deflation occurs we’re all in the wrong business.”
4.18
4.26
4.16
4.04
3.23
3.22
3.08
2.96
1 3 5
Long-Term Rates(Ten-Year
Treasuries)
CommercialMortgage Rates
Short-Term Rates(One-YearTreasuries)
Inflation
Increase substantiallyStable
Fall substantially
Next Five Years2011
Source: Emerging Trends in Real Estate 2011 survey.Note: Based on U.S. respondents only.
Demand Vacuum
Source: REIS, CBRE Econometric Advisors
0
5
10
15
20
25
90 92 94 96 98 00 02 04 06 08 10*
Suburban Office
Industrial
Downtown Office
Retail
Multifamily
Vacancy %
Vacancies Peaking
Development Pipeline
“We don’t need anything new.”
0
50
100
150
200
250
300
00 02 04 06 08 10* 12*
Office
Industrial
Retail
Multifamily
MSF/Thousandsof Units
Completions by Property Type
Source: REIS, CBRE Econometric Advisors
Marketsto
Watch
Survey #1: Washington DC
6.6 6.7 6.7 6.7 6.9 6.96.6 6.7
6.1 6.2
7.0
1
3
5
7
9
01 02 03 04 05 06 07 08 09 10 11
Historical Rating
Source: Emerging Trends in Real Estate 2011 survey
Survey #2: New York
7.36.9 6.6
6.2 6.1 6.36.6
7.1
5.96.5
5.4
1
3
5
7
9
01 02 03 04 05 06 07 08 09 10 11
Historical Rating
Source: Emerging Trends in Real Estate 2011 survey
Survey Top 520102011
5.31
5.42
5.57
5.41
6.17
6.095. Seattle
6.204. Boston
6.343. San Francisco
6.562. New York
7.011. Washington D.C.
Source: Emerging Trends in Real Estate 2011 survey
Survey Top 10201020116.177.011. Washington D.C.5.416.562. New York5.576.343. San Francisco5.426.204. Boston5.316.095. Seattle
5.105.215.045.135.39
5.5010. Dallas5.589. Denver5.638. San Diego 5.847. Los Angeles 6.026. Houston
Source: Emerging Trends in Real Estate 2011 survey
Markets: 2011
Source: Emerging Trends in Real Estate 2011 survey
East Coast
Boston 6.20Boston 6.20
Washington D.C.7.01
New York 6.56New York 6.56
Philadelphia 4.53
Providence 3.44Providence 3.44
Pittsburgh 3.43
Northern NJ 5.45
Westchester/Fairfield, CT
5.18
BaltimoreBaltimore4.88
Source: Emerging Trends in Real Estate 2011 survey
West Coast
Seattle 6.09Seattle 6.09
San Francisco 6.34
Los Angeles 5.84Los Angeles 5.84Orange County 5.42Orange County 5.42
San Diego 5.63San Diego 5.63
Portland 5.30Portland 5.30
San Jose 6.08San Jose 6.08
Sacramento 3.99
Inland Empire 4.11
Source: Emerging Trends in Real Estate 2011 survey
Southwest
Source: Emerging Trends in Real Estate 2011 survey
Las Vegas 3.44
Phoenix 4.10
Tucson 3.72
Albuquerque 3.95
Oklahoma City 3.74
Denver 5.58
Dallas 5.50
Houston 6.02
Austin 6.29
Salt Lake City4.93
Southeast
Atlanta 4.32
New Orleans 3.54
Charlotte 4.82
Raleigh/Durham 5.20
Nashville 4.51Memphis 3.22
Virginia Beach/Norfolk 4.32
Source: Emerging Trends in Real Estate 2011 survey
Florida
Miami 4.49
Jacksonville 4.03
Tampa 4.41
Orlando4.58
Source: Emerging Trends in Real Estate 2011 survey
Midwest
Minneapolis 4.85
Kansas City 3.84
St. Louis 3.45
Chicago 5.14
Indianapolis 3.82
Cincinnati 3.25
Columbus 3.14
Cleveland 2.65
Milwaukee 3.25 Detroit 2.0
Source: Emerging Trends in Real Estate 2011 survey
The Pittsburgh Scenario
4.1 4.13.8 3.6 3.7
4.7
1
3
5
7
9
05 06 07 08 09 10
Historical Rating
Source: Emerging Trends in Real Estate 2011 survey
Property Sector Investment Rankings
Source: Emerging Trends in Real Estate 2010 survey.Note: Based on U.S. respondents only.
Apartments
Industrial/Distribution
Hotels
Office
Retail
6.19
5.07
4.78
4.72
4.50
1Abysmal
5Fair
9Excellent
King of Core Real Estate
U.S. Multifamily Completions/Vacancy RatesThousands
of units
4
5
6
7
8
2004 2005 2006 2007 2008 2009 2010 2011
Apartment Rental: Moderate Income
U.S. Apartment Investment Prospect Trends
Apartment Rental: High Income0
50
100
150
200
250
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*11*3
6
9
Sources: Emerging Trends in Real Estate 2011 survey, REIS* Forecast
Vacancy Rate %
Completions
Vacancy Rate %
Rating
Office: CBD v. Suburbs Divide
Source: REIS, CBRE Econometric Advisors
0
5
10
15
20
25
90 92 94 96 98 00 02 04 06 08 10*
Suburban Office
CBD
Vacancy %
3
4
5
6
2004 2005 2006 2007 2008 2009 2010 2011
Suburban Office
U.S. Office Investment Prospect Trends
CBD
U.S. Office Vacancy Rates
Hotels: Bounce Back Faster
Sources: Smith Travel Research (1987 to 2009), PricewaterhouseCoopers LLP (2010 and 2011).
3
4
5
6
7
8
2004 2005 2006 2007 2008 2009 2010 2011
Limited-Service Hotels
U.S. Hotel Investment Prospect Trends
Full-Service Hotels
U.S. Hotel Occupancy Rates and RevPAR
0%
20%
40%
60%
80%
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*11*$30
$40
$50
$60
$70
$80Occupancy %
RevPAR
Industrial: Record Vacancies
Source: CBRE Econometric Advisors
4
5
6
7
8
2004 2005 2006 2007 2008 2009 2010 2011
R&D Industrial
U.S. Industrial Investment Prospect Trends
Warehouse Industrial
U.S. Industrial Completions/Availability
0
50
100
150
200
250
300
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*11*6
9
12
15Completions Vacancy Rate
(msf) %
Retail: Darwin Rules
Source: REIS
3
4
5
6
7
8
2004 2005 2006 2007 2008 2009 2010 2011
Power Centers
U.S. Retail Investment Prospect Trends
Neighborhood/Comm Centers
U.S. Retail Completions/VacancyTop 50 Markets
0
5
10
15
20
25
30
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10*11*6
8
10
12
Completions Vacancy Rate(msf) %
Regional Malls
Property Sector Development Rankings
Source: Emerging Trends in Real Estate 2011 survey.Note: Based on U.S. respondents only.
Apartments
Industrial/Distribution
Hotels
Office
Retail
1Abysmal
5Fair
9Excellent
4.85
3.12
2.33
2.06
2.26
In the “Era of Less”
Less becomesmore.
November 30, 2010
William R. EmmonsAssistant Vice President and Economist
Federal Reserve Bank of St. Louis
These comments do not necessarily reflect the views of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.
Will Real Estate Drag Us Back Into Recession?
Emerging Trends Outlook 2011Urban Land Institute St. Louis
1
Will Real Estate Drag Us Back Into Recession?
The US economy is recovering slowly from a severe recession and financial crisis caused by an historic boom and bust in housing markets.
Rebounding consumer spending has been supported by massive government stimulus and stock-market gains.
Necessary real-estate price corrections and balance-sheet deleveraging are likely to continue through 2011.
Unless private-sector job growth accelerates soon, the ongoing real-estate and balance-sheet corrections could drag the economy back into recession and/or deflation.
The St. Louis region faces a less-severe real-estate hangover than elsewhere, albeit with weaker growth fundamentals. Our recovery is at risk, too. 2
Inflation-Adjusted Per-Capita Private Residential ConstructionThousands of 2005 dollars, seasonally adjusted annual rate
Inflation-Adjusted Per-Capita Private Non-Residential ConstructionThousands of 2005 dollars, seasonally adjusted annual rate
1510050095908580757065Source: Haver Analytics
2.5
2.0
1.5
1.0
0.5
0.0
2.5
2.0
1.5
1.0
0.5
0.0 3
Thousands of 2005 dollars
2000-10: Perhaps The Largest Residential Building Boom And Bust In US History
Source: Bureau of the Census Quarterly through Q3.2010
Q3.2000$1,539
Q1.2006$2,151(+40% since
Q3.2000)
Q3.2010$736
(-66% since Q1.2006)
Note that non-residential construction outlays did not boom like housing did.
Inflation-adjusted per-capita private residential construction
Inflation-Adjusted Per-Capita Disposable Personal IncomeInflation-Adjusted Per-Capita Personal Consumption Expenditures
Inflation-Adjusted Per-Capita Personal Income Before Taxes and Transfers
15100500Source: Haver Analytics
120
115
110
105
100
95
90
120
115
110
105
100
95
90 4
Index values equal 100 in
2000 (expressed in 2005 dollars)
Consumer Spending Has Rebounded Due To Massive Tax Cuts and Govt. Transfers...
Sources: Bureau of Economic Analysis; Census Bureau Quarterly through Q3.2010
Disposable personal incomePersonal
consumption expenditures
Personal income before taxes and transfers
Net federal transfers to households during 2000 were -$589 per person, or -2% of personal income before taxes and transfers (in other words, taxes paid were 102% of transfers received)
Net federal transfers to households during Q3.2010 were at a rate of $3,296 per person, or 11% of personal income before taxes and transfers(in other words, taxes paid were 89% of transfers received)
The “consumer bailout” has been running at about $1 trillion annually for the last 18 months.
Note: Deficit-financed Bush transfers (2002-08) were $2 trillion; deficit-financed Obama transfers (2009-10) another $2 trillion so far.
Federal Reserve Credit OutstandingBillions of dollars (left scale)
Wilshire 5000 Stock-Market IndexBillions of dollars (right scale)
11100908Source: Haver Analytics
2500
2000
1500
1000
500
0
16000
14000
12000
10000
8000
6000 5
Federal Reserve credit
outstanding (billions of
dollars)
... Pump-Priming By the Federal Reserve, and A Buoyant Stock Market
Sources: Federal Reserve Board; Dow Jones Weekly through Nov. 17, 2010
Federal Reserve balance sheet (left) Wilshire 5000 Stock-Market Index (billions
of dollars)
Market value of US stocks (right)
$1.4 trillion
$5.5 trn
-
1
2
3
4
5
6
7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Average Ratio of House Prices To Per-Capita Income
6
Ratio
Housing Valuations Have Returned Almost To Pre-Bubble Levels...
Sources: Zillow.com; Bureau of Economic Analysis Quarterly through Q3.2010
US
St. Louis metro area
Ratio of Household Debt to Personal Income Before Taxes and Transfers
Ratio
151005009590858075706560Source: Haver Analytics
1.50
1.25
1.00
0.75
0.50
0.25
0.00
1.50
1.25
1.00
0.75
0.50
0.25
0.00 7
Ratio
But Household Balance-Sheet Deleveraging Has Barely Begun
Sources: Bureau of Economic Analysis; Federal Reserve Board Quarterly through Q2.2010
Debt-to- earned income ratio
Delinquency Rate of Residential Real-Estate Loans at US Commercial Banks Percent of loan balances
Delinquency Rate of Commercial Real-Estate Loans at US Commercial Banks Percent of loan balances
151005009590Sources: Federal Reserve Board /Haver Analytics
14
12
10
8
6
4
2
0
14
12
10
8
6
4
2
0 8
Percent
Banks‘ CRE Delinquency Rate Lower Than Early ’90s; But Residential is Higher
Quarterly through Q3.2010
Residential real-estate loans
Commercial real-estate
loans
MIT All-Properties National Commercial Real-Estate Price IndexUS Residential Property Median Price Per Square Foot
St. Louis Metro Area Residential Property Median Price Per Square Foot
15100500Sources: MIT Center for Real Estate, Zillow.com /Haver Analytics
200
180
160
140
120
100
80
60
40
20
0
200
180
160
140
120
100
80
60
40
20
0 9
CRE: Price index equals 100 in 2000;
Home values: Dollars per square foot
Near-Term Pressures On Residential and Commercial RE Prices Remain Downward
Sources: MIT Center for Real Estate; Zillow.com Quarterly through Q3.2010
National CRE price index
St. Louis metro area home values per square foot
US home values per square foot
Key To Recovery: Millions of Financially Distressed Households Must Find Relief
Approximately 23% of US homeowners with mortgage debt have negative homeowners’ equity—almost 14,000,000 households (according to Zillow.com, Q3.2010) Approx. 22% in St. Louis are underwater—about 140,000 Approx. 33% in Chicago are underwater—over 500,000
Ongoing foreclosures drive down house prices, destroy household wealth, hurt banks and local governments
Three ways out Good: House prices rise, incomes grow. Bad: Government bailout (for example: Large-scale debt
forgiveness; another bank bailout; a burst of inflation). Ugly: Foreclosure crisis continues—household deleveraging occurs
primarily through defaults. Of these, “Ugly” seems most likely. 10
October 2005
11
Share of Mortgages 30+ Days Delinquent or in Foreclosure: Oct. 2005
Source: Lender Processing Services (LPS)
12
Share of Mortgages 30+ Days Delinquent or in Foreclosure: Oct. 2006
Source: Lender Processing Services (LPS)
October 2006
13
Share of Mortgages 30+ Days Delinquent or in Foreclosure: Oct. 2007
Source: Lender Processing Services (LPS)
October 2007
14
Share of Mortgages 30+ Days Delinquent or in Foreclosure: Oct. 2008
Source: Lender Processing Services (LPS)
October 2008
15
Share of Mortgages 30+ Days Delinquent or in Foreclosure: Oct. 2009
Source: Lender Processing Services (LPS)
October 2009
16
Share of Mortgages 30+ Days Delinquent or in Foreclosure: Oct. 2010
Source: Lender Processing Services (LPS)
October 2010
Share of Mortgages 30+ Days Delinquent or in Foreclosure: Oct. 2005
Source: Lender Processing Services (LPS)
St. Charles County
St. Louis County
City
Madison County
St. Clair County
Jersey County
Monroe County
Jefferson County
Warren County
Franklin County
Lincoln County
Washington County
Share of Mortgages 30+ Days Delinquent or in Foreclosure: Oct. 2006
Source: Lender Processing Services (LPS)
St. Charles County
St. Louis County
City
Madison County
St. Clair County
Jersey County
Monroe County
Jefferson County
Warren County
Franklin County
Lincoln County
Washington County
Share of Mortgages 30+ Days Delinquent or in Foreclosure: Oct. 2007
Source: Lender Processing Services (LPS)
St. Charles County
St. Louis County
City
Madison County
St. Clair County
Jersey County
Monroe County
Jefferson County
Warren County
Franklin County
Lincoln County
Washington County
Share of Mortgages 30+ Days Delinquent or in Foreclosure: Oct. 2008
Source: Lender Processing Services (LPS)
St. Charles County
St. Louis County
City
Madison County
St. Clair County
Jersey County
Monroe County
Jefferson County
Warren County
Franklin County
Lincoln County
Washington County
Share of Mortgages 30+ Days Delinquent or in Foreclosure: Oct. 2009
Source: Lender Processing Services (LPS)
St. Charles County
St. Louis County
City
Madison County
St. Clair County
Jersey County
Monroe County
Jefferson County
Warren County
Franklin County
Lincoln County
Washington County
Share of Mortgages 30+ Days Delinquent or in Foreclosure: Oct. 2010
Source: Lender Processing Services (LPS)
St. Charles County
St. Louis County
City
Madison County
St. Clair County
Jersey County
Monroe County
Jefferson County
Warren County
Franklin County
Lincoln County
Washington County
In Sum: Will Real Estate Drag Us Back Into Recession?
The economic recovery is very fragile, so renewed weakness in real-estate markets could tip us back into recession in 2011.
Government intervention and stimulus may be reaching their limits.
Real-estate prices are likely to fall further, as deleveraging continues.
St. Louis cannot escape the national recession, but we are in better shape than some areas because our real-estate boom and bust were not as severe.
23
Total St. Louis MSA Nonfarm EmploymentAverage level in 1990 equals 100
St. Louis MSA PopulationAverage level in 1990 equals 100
1005009590Sources: BLS, CENSUS /Haver
130
125
120
115
110
105
100
95
90
130
125
120
115
110
105
100
95
90
Total US Nonfarm EmploymentAverage level in 1990 equals 100
US PopulationAverage level in 1990 equals 100
1005009590Sources: BLS, CENSUS /Haver
130
125
120
115
110
105
100
95
90
130
125
120
115
110
105
100
95
90
24
Appendix: St. Louis Employment Tracks Our Relatively Slow Population Growth
Employment: Quarterly through Q3.2010; Population: Annual through 2009.All series set equal to 100 at average 1990 levels.
St. Louis MSA employment
US employment
US population (1.1% annual average
growth since 1990)St. Louis MSA population(0.5% annual average growth since 1990)
Federal Reserve Projections of the US Unemployment Rate
Percent (during fourth quarter of each year)
201510050095Source: Federal Reserve Board /Haver Analytics
10
9
8
7
6
5
4
3
2
1
0
10
9
8
7
6
5
4
3
2
1
0 25
Percent
Appendix: Federal Reserve Projections Imply Almost A Decade of Excess Unemployment (2008-16)
Sources: Bureau of Economic Analysis; Federal Reserve Board Projections as of Nov. 2010
Approximate “full-employment level” of the US unemployment rate
Nov. 2010 Fed projections
Actual data
Core Inflation: Personal Consumption Expenditures Chain-Type Price Index Ex F&E
Percent change from year ago
1211100908070605Source: Bureau of Economic Analysis /Haver Analytics
3.0
2.5
2.0
1.5
1.0
0.5
0.0
3.0
2.5
2.0
1.5
1.0
0.5
0.0 26
Percent
Appendix: Disinflationary Pressures Remain Strong; A Period of Deflation Is Possible
Sources: Bureau of Economic Analysis Monthly through Oct. 2010
Core inflation rate