LIQUIDITY AND THE 2010 COMMERCIAL REAL ESTATE MARKET: Connecting the Dots with Today’s Global Capital Flow ROBERT J. NAHIGIAN, FRICS, SIOR, CRE ROBERT J. NAHIGIAN, FRICS, SIOR, CRE October October 30, 2009 30, 2009 AUBURNDALE REALTY CO. AUBURNDALE REALTY CO. Toronto Toronto NEWTON (Boston), MASS. NEWTON (Boston), MASS.
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ROBERT J. NAHIGIAN, FRICS, SIOR, CREOctober 30, 2009 AUBURNDALE REALTY CO.Toronto
LIQUIDITY AND THE 2010 COMMERCIAL REAL ESTATE MARKET: Connecting the Dots with Today’s Global Capital Flow. ROBERT J. NAHIGIAN, FRICS, SIOR, CREOctober 30, 2009 AUBURNDALE REALTY CO.Toronto NEWTON (Boston), MASS. PREDICTION DISCLAIMERS. GOVERNMENT INTERVENTION INFLATION CHAOS. - PowerPoint PPT Presentation
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LIQUIDITY AND THE 2010 COMMERCIAL REAL ESTATE MARKET:
Connecting the Dots with Today’s Global Capital Flow
ROBERT J. NAHIGIAN, FRICS, SIOR, CREROBERT J. NAHIGIAN, FRICS, SIOR, CRE October 30, 2009October 30, 2009AUBURNDALE REALTY CO.AUBURNDALE REALTY CO. TorontoTorontoNEWTON (Boston), MASS.NEWTON (Boston), MASS.
PREDICTION DISCLAIMERS
1. GOVERNMENT INTERVENTION
2. INFLATION
3. CHAOS
OTHER DISCLAIMERSThe information presented reflects the personal opinions of Robert J. Nahigian based on sources and data believed to be reliable but he does not guarantee its accuracy or completeness. This information is for private use and educational purposes only and neither the author, the sponsor nor the instructor are providing advice, legal or otherwise and such advise should be dependent on the facts and circumstances of any particular situation. There is no obligation to update or supplement this information at any time or in any way.
Robert J. Nahigian is not a registered investment advisor and as a further full disclaimer he does sit on the Advisory Committee of NERA, an American Stock Exchange Boston real estate investment entity in the business of purchasing and selling commercial properties. He is in no way recommending the purchase or disposition of any specific stock of any kind at any time.
The material presented may be inaccurate or may be improper for any business decision and some examples in this presentation are good examples of practices that would be better to avoid.
CCIM Chicago: Jan. ‘08• LET’S LOOK BACK TO THAT
PRESENTATION: Where were we?
• CAN WE CONNECT THE DOTS MOVING FORWARD?
U.S. CBD INVESTMENTS: Jan. ‘08
• One Word: Hot and more Hot !
• Values were up in 2006
• Values continued to rise in 2007
LAST 2 YEARS: ’06-’07LAST 2 YEARS: ’06-’07
• It has been all about capital !
• You couldn’t fail with real estate investments
• A lot of money chasing deals and “yields”
Next 2 Years: ’08-’09Next 2 Years: ’08-’09
Success based more local (micro) Success based more local (micro) rather than national (macro) rather than national (macro) environment environment
Difficult to find a balanced value Difficult to find a balanced value commercial investment in the US commercial investment in the US
People think buying now will be cheaper People think buying now will be cheaper than tomorrow than tomorrow
Next 2 Years:’08-09Next 2 Years:’08-09
2007 everyone was a “genius” so 2007 everyone was a “genius” so demand for real estate was amplified demand for real estate was amplified
In 2008, investors will need to look at real estate with In 2008, investors will need to look at real estate with true due diligence evaluation true due diligence evaluation
We need to get back to “old-fashion” growth and focus We need to get back to “old-fashion” growth and focus on NOI on NOI
• CAP RATES could increase 100 BP by the CAP RATES could increase 100 BP by the end of 2008 end of 2008
Jan. ’08 PROJECTION FOR ’08-’09Jan. ’08 PROJECTION FOR ’08-’09
• The “Idiot Tax” will vanish in 2008The “Idiot Tax” will vanish in 2008
• Liquidity is immense but not stupidLiquidity is immense but not stupid
• Foreigners have an appetite but could pull Foreigners have an appetite but could pull the plug at any time the plug at any time
Oct. 30, 2009: 2010 CONCLUSION
• U.S. companies have run down inventory
• Re-stocking is up and so is manufacturing
• March 9, 2009: Stocks hit bottom
• June, 2009: Housing hits near bottom
• Commercial loan defaults will damage banks in ’10-’11
• Now it’s time for commercial, lagging
Oct. 30, 2009: 2010 CONCLUSION
• The Feds are forcing everyone to swallow more risk and invest
• Money Market interest rates are worthless! “Curse on Cash”
• Be Ready to Buy in ’10-’11 or keep holding: It may be a life-time opportunity
• Rents means dividends !
Oct. 30, 2009:TROJAN HORSE
• U.S. is leaving GAAP for IFRS in 2011 or 2014. Watch out! Be ready to “Rock and Roll”!
• FASB 13: More parts are now capitalized; no more rents as operating lease expense
• Companies may pursue purchasing
REAL ESTATE CYCLESSECTORAL
PEAK U.S 7-10 yrs. PEAK Hyper-supply
Hyper-supply
“DENIAL PHASE”BID-ASK SPREADS
Expansion Recovery “Yield Chasers”
Commercial 4th/5th Inning
Recession Early Recovery
BOTTOM
Residential BUY LOW/SELL HIGH
THE FEDS INFLUENCE ON COMMERCIAL
U.S. UNEMPLOYMENT RATESeasonally Adjusted
Source: Bureau of Labor Stats, CBO
7.60
9.509.40 9.70 9.80 10.20
5.80
4.60
0
2
4
6
8
10
12
'07
Yr.
'08
Yr.
Jan.
'09
June
'09
July
'09
Aug
. 30,
200
9
Sep
t. '0
9
2010
Pro
j.
Millions
Jobs = Space Demand
U.S. Average Percent Change in Jobs Per Decade
38%
25%
31%28%
20% 20%
0%0%
5%
10%
15%
20%
25%
30%
35%
40%
1940's 1950's 1960's 1970's 1980's 1990's 2000's
Percent Change Resource: Doug Poutasse
Federal Total Revenues and Outlays as Percent of GDPSource: CBO
19.5%23%
18.5% 17.5% 21%
26%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
1969 1982 1999 2000 2008 2009est.
of GDP
Highest
U.S. FEDERAL BUDGETSource: WSJ
-4
-3.5
-3
-2.5
-2
-1.5
-1
-0.5
0
0.5
F'80 F'93 F'00 F'08 F'09 F'10
In Trillions
U.S. FEDERAL DEFICIT v. GDPSource: CBO
-12
-10
-8
-6
-4
-2
0
2
4
1965 1977 1992 1998 2002 2004 2008 2009est.
2019proj.
Percent
INFLATION?
U.S. PERSONAL SAVINGS RATESource: Federal Reserve
6.9%
0%2%4%6%8%
10%12%14%16%
Jan. '
5919
6119
69
Sept.
'75 1975
1985
1993
Jan. '
9820
0220
05
Aug.'08
Dec.'0
8
April '0
9
May
'09
Discretionary Savings
U.S. TOTAL CONSUMER CREDITDEMAND
Source: Federal Reserve In Billions (Trillions)
2191.5
2519.52559.1
2509 2493.7 2474.7
2462.7
2000.0
2100.0
2200.0
2300.0
2400.0
2500.0
2600.0
Deleveraging
CONCLUSION
• It’s all about jobs for commercial real estate!
• Deficit grows, income is down and people aren’t spending
• Look for inflation within 24 months. Bernanke admits interest rates might rise (week of Oct. 10, 2009)
U.S. HOUSING AS AN INVESTMENT LEADS TO THE
COMMERCIAL DEBT CRISIS
WHAT IS PRICE v. VALUE?
• PRICE IS WHAT YOU PAY
• VALUE IS WHAT YOU GET
Source: Ben Graham
U.S. EXISTING ALL HOMES FOR SALE
Source: NAR; Standard & Poors Homes on
marketMonths Est. to sell
Annualized Purchases of all Homes
Median Price of SFDU
Jan. ‘05 2.15 M 3.6 7.08 M $195,400
Nov. ‘06 3.81 M 7.3 6.25 M $217,300
April’07 4.22 M 8.4 6.01 M $219,800
July ‘07 4.56 M 9.1 5.73 M $228,700
Nov. ‘07 4.27 M 10.3 5.00 M $210,200
Feb. ‘08 5.09 M $195,900
Oct. ‘08 4.23 M 10.2 5.05 M $183,000
April ‘09 10.1 4.68 M $ 166,600
June ‘09 3.8 M 9.4 4.89 M $ 181,800
July ‘09 3.3 M 8.5 5.24 M $ 181,700
Aug ‘09 3.87 M 8.2 5.1 M $ 177,300
Sept. ‘09 3.63 M 7.8 5.57 M $ 174,900
U.S. NEW HOMES FOR SALE
Source: NAR WashPost US Commerce; HUD; MSNBC; Standard&Poors
Tot. New Homes on market
Months Est. to sell
New Home Sales
Median Price
Nov. ‘06 545,000 6.5 987,000 $251,700
April’07 547,000 7.4 907,000 $229,100
Nov. ‘07 505,000 9.3 647,000 $239,100
Feb. ‘08 471,000 9.8 590,000 $244,100
Oct. ‘08 791,000 11.4 $ 220,000
April ‘09 10+ 352,000 $ 209,700
June ‘09 8.4 426,000 $ 212,600
Aug. ‘09 262,000 7.3 429,000 $ 195,200
U.S. HOMES UNDER CONSTRUCTION
Source: MSNBC 9/17/09; Standard & Poors, Dept. of Commerce
SFDU and Apts
SFDU construction
Applications for all residential building permits
Sept. ‘08 806,000
June ‘09 590,000 478,000 570,000
July ‘09 581,000 494,000 560,000
Aug. ‘09 587,000 482,000 580,000
Sept. ‘09 590,000 501,000 573,000
Working off inventory
U.S. HOME LOAN DELINQUENCIESSource: MSNBC; Real Estate Forum Dec. ’07; Standard&Poors; WSJ
All Home Mortgages
ARM: Sub-Prime
Late
2nd Q ‘07 5.12%
Aug. ‘07
Sept ‘07
3rd Q ‘07 5.59 18.8%
4th Q ‘07 5.82% 20.2%
3rd Q ’08 6.41% 18.67%
April ‘09 12%
1Q ‘09 9.12% 24.95%
2Q ‘09 9.24% 25.35%
U.S. MORTGAGE FORECLOSURES
Source: MSNBC 12/6/07; 3/19/08; Standard&Poors All Mortgages Sub-Prime
ARMs
2Q ‘07 0.65% 3.84%
3Q ‘07 0.78% 4.72%
4Q ‘07 5.29%
1Q ‘09 1.34% 4.55%
2Q’09 1.47% 4.49%
NEXT HOUSING FORECLOSURE WAVE
0
10
20
30
40
50
60
2007 2008 2009 2010 2011
In Thousands Resource: MSNBC
COMMERCIAL REAL ESTATE: Where We Have Been and Where We Are Headed
SEPTEMBER 30, 2009: WSJ
COMMERCIAL BANKS WITH RE DELINQUENCIESSource: Federal Reserve Bank
2.75%
5.47%
6.93% 7.67%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
4Q '07 4Q'08 1Q'09 2Q'09
3000
4100
5200
0
1000
2000
3000
4000
5000
6000
Office Multi-Family Retail
Dec.'08 June '08 May '09 Source: CPN 9/09 In millions