Real Estate: Economically Speaking

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Real Estate Economically Speaking

• Where were we?
• Where are we?
• Where are we headed?

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Where were we? ( fall 08)

• GDP Goes negative (-0.5) for third qtr.
• Unemployment 6 and going up
• Federal Dept of Insurance (AIG)
• NO Bear Stearns, WAMU, Lehman, fannie and
  freddie
• The rise of the Bank Holding company GMAC
  latest
• Banks told to take Fed money for later? Result
  Reserves higher
• TARP phase one where did it go?
• Winnie the PoohmarketMarket volatility VIXX
  _at_90

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VIX.X (CBOE), fell thru 40 on Friday
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GDP growth
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Net borrowing as of GDP
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Housing and wealth
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The news is still pessimistic

• The Conference Boards index of consumer
  confidence fell to 38, the lowest level since
  records began in 1967, from 44.7 in November, the
  New York-based private research group said today.
  The overall economic outlook remains quite
  dismal for the first half of 2009, Lynn Franco,
  director of the Conference Boards consumer
  survey, said in a statement.
• The SP/Case-Shiller home-price index of 20 U.S.
  metropolitan areas fell a record 18 percent in
  October from a year earlier, led by declines in
  Phoenix and Las Vegas.
• The average price of a gallon of regular gasoline
  dropped to 1.62 on Dec. 28, down 61 percent from
  Julys record Even so, the decline isnt enough
  to undo the damage from the loss of 1.9 million
  jobs so far this year and the record destruction
  in household wealth caused by the slump in home
  and stock prices.
• Economy to Shrink Gross domestic product
  contracted at a 0.5 percent annual pace in the
  third quarter, the worst performance in seven
  years, the Commerce Department said last week.
  Economists surveyed by Bloomberg earlier this
  month projected the economy will contract at a
  4.3 percent rate this quarter, hurt by another
  decline in consumer spending.
• The International Council of Shopping Centers
  projects this was the worst holiday shopping
  season, the most important period for retailers,
  in at least four decades. Its dismal, Patrick
  Byrne, chief executive officer of Overstock.com,
  the Internet seller of discounted brand-name
  goods, said Dec. 24 in an interview on Bloomberg
  Television. It seems the entire retail nation is
  running a going-out-of-business sale. It means
  the pricing is very competitive.
• The jobless rate could reach 8.2 percent at the
  end of next year compared with last months
  15-year high of 6.7 percent, according to the
  survey.
• GMAC was provided with a multibillion dollar
  capital infusion and given permission to become a
  bank holding company. This is a good start. GMAC
  said it would begin making loans immediately to
  borrowers with credit scores of 621 or higher, a
  significant easing from the 700 minimum score
  required two months ago

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Local news

• Southland sells for less than cost
• State University Presidents say let us determine
  our destiny
• Denver did well in Case- Schiller index only,
  -1.4 for the month!!
• Later this week unemployment reports

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Where are we?

• Oh Christmas tree, Oh Christmas tree!!!!
• Major REITs looking for Tarp funds ex GGP,
  Pro-logis
• GDP predictions 3.5 to -4.0 for 4th qtr
• 90 off sales, what a buy!!
• Bernie made off with all the money!!!
• Unemployment going to 9 before the recession is
  over
• Dow 9000 sounds better than 7,ooo ( expectations
  and Obama effect)
• Office markets are years out to stability
• What will be the truth real estate capital
  markets or main street?
• Expansion of the Federal Reserve balance sheet
  with what? ex Hilton Hotels
• Bail out nation!!! We have firms buying others to
  qualify!!

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Thanks to Hedge funds gone wild
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Wall Street starts new year with a Bang! (all
part of your perspective)
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Commercial Developers Ask Fed for Loans

• Commercial developers are facing between 160 -
  400 billion in loan defaults next year if they
  can't find banks to refinance them. Unlike home
  loans, loans for shopping centers and office
  buildings have big payments at the end of the
  term. Instead of paying off the loan, developers
  typically refinance. If funding isn't available,
  the banks must foreclose. To avoid this,
  developers are asking the Fed to guarantee that
  they will buy the refinanced loans from banks on
  the secondary market. The Fed's purchase would be
  guaranteed by part of the 700 billion TARP fund
  to do.

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Pro logis stock price
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NCREIF Index

• Appreciation down 2 for 3rd qtr.
• Expect worse for 4th and 1st qtr reports

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Growth Rate Analysis
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Historic debt levels as GDP
The gross national debt compared to GDP (how rich
we are) reached its lowest level since 1931 as
Reagan took office in 1981. It skyrocketed for 12
years through Bush senior. Clinton reversed it at
a peak of 67. Bush junior crossed that line on
Sept. 22 and hit 69 on Sept 30. That's the
highest it's been since 1955.
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Debt level clock

• http//www.deficitsdomatter.org/?gclidCPOS1Nqy7Jc
  CFQJNagodBUzFDg
• 10,606,000,000 as of Sunday

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Why I deserve a bailout

• To Henry Paulson, Bailout Decider, U.S.
  Treasury CC Ben Bernanke, Bailout Buddha,
  Federal Reserve CC Tim Geithner, Bailout
  Inheritor, Obama Admin
• CC Santa Claus, just in case Dear Sirs
  Please be advised that I am changing my status
  from ordinary American consumer (OAC) to
  bank-holding company (BHC) in order to qualify
  for funds from the government's Troubled Assets
  Relief Program (TARP).
• Since I couldn't find the official
  application form, I've listed my qualifications
  below

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1. I qualify as a BHC for the following reasons

• My balance sheet is a wreck.
• I have posted a sign in front of my house that
  says "Newman Bank.
• I don't actually lend money to anybody.
• I can certify that I do not employ any unionized
  workers, only an illegal immigrant, occasionally.
  

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2. I have troubled assets

• My home. I suspect that other people in my
  neighborhood have received some kind of mortgage
  relief, even though I haven't. This troubles me.
  If they've gotten something free from the
  government, then I should, too.
• My car. I have a car loan and if I refuse to
  repay it, the bank will seize my car. Thus my car
  qualifies as a collateralized debt
  obligation(CDO) and is therefore eligible for
  relief under the Emergency Economic Stabilization
  Act (EESA) of 2008.
• specifically, under the well-known "Citigroup
  provision," which stipulates that if I say so,
  you have to believe me.
• My 401(k). The trouble is, it's hard to call it
  an asset anymore.

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3. Terms of the bailout

• I'm asking for such a small amount of the TARP
  funds that nobody will notice. I figure 3
  million ought to be enough. If not, I could
  probably make due with 2 million. These will
  be low-interest government loans, at the
  prevailing rate, which I notice is getting close
  to zero. I reserve the right, at some point in
  the future, to invoke the "AIG clause" of the
  EESA by asking the government to lower the rate
  on the loans, to less than zero in this case, so
  that the government is actually paying me to take
  its money. In exchange for TARP funds, I hereby
  grant the U.S. government limited ownership
  rights to the property on which Newman Bank is
  domiciled, specifically the driveway. It needs
  shoveling, so please send somebody over. I
  will set an example by refusing to use TARP funds
  to fly the corporate jet. First-class commercial
  travel will be fine.

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4. It is in the nation's interest to bail me out.

• No promises, but I might use the bailout money
  to stimulate the economy by loaning money to
  friends or family members so they can buy
  Twinkies and Marlboros. I won't just give them
  the money, because that would be socialism.
  Instead, I'll insist they pay back the loans at a
  higher interest rate than the government is
  charging me, so that I can make a few bucks on
  the deal and stimulate the economy even more.
  Thus, the American taxpayer will enjoy a
  multiplier effect! If I don't get a bailout,
  it won't be just me who suffers. It will be
  approximately 49,642 other Americans who rely on
  me for restaurant tips, barbershop fees, positive
  reinforcement and blog entries. It will be
  catastrophic if the government fails to help them
  by turning down my bailout request. Without
  bailout funds, I will be forced to make
  irrational decisions that will irreparably harm
  the economy. This is no time to quibble over a
  few million dollars. It's a time to show
  leadership and act. So come on, give me some
  money.

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Where are we headed?

• US Debt level increasing and no end in sight
• Market operations
• Mark to market accounting will it stay?
• Will US govt become the Fin intermediary for MBS
  and other debts
• Future stimulus package 700 to 1 trillion or
  more
• TOD, I- 70, light rail
• Leads to a Fed Reserve with an enlarged balance
  sheet and federal deficit of
• Deflation or inflation? Lags in the impact of
  stimulus measures could mean deflationary news
  will linger for awhile yet. More importantly, the
  Federal Reserve has stated it is committed to
  buying Treasuries to keep interest rates low
  until the crisis and economy stabilizes. China
  too will likely be a buyer of U.S. Treasuries as
  part of its strategy of suppressing the Yuan to
  enhance the competitiveness of its exports.
• Some positive signs
• good days on bad news On Dec. 5, the unemployment
  news was really terrible and yet the market
  recovered that day, with the SP closing up 3.7
• Worst part of a Bear is the last part looks
  like we had that

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Cap rate focus, why?

• Traditionally looked at spread to 10 yr
• Then cap rate compression happened
• Why and how long will it go on?
• Why access to debt and competing buyers
• Come to the alter after the dot.com crash wipe
  out
• Now, Welcome to Cap rate expansion!! If cap
  rates up 150 BP then value down 19 . If no rent
  growth. But we have had expansion with rent
  growth saving us from the worst case scenario,
  right ?
• Are we there yet?

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CAP RATES COMPRESSION TO EXPANSION
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Cap rates and potential price declines

• According to data released this week by research
  firm Property and Portfolio Research, or PPR, NOI
  cap rates in the top 54 U.S. markets have
  increased from 4.8 to 5.8 since the late 2006
  peak in values.
• Absent NLI growth, this basis point increase
  would have resulted in a 20 decline in asset
  values. However, property NLIs were up 7.8
  during this period of time indicating that the
  net impact has been about a 10 decline in
  values. Our sale experience to date has been
  generally consistent with this data. Looking
  forward, PPR is projecting an additional 20 basis
  point increase in cap rates from the third to
  fourth quarter from 5.8 to 6, which when offset
  by the expected increase in NOI is projected to
  result in a 3 decline in asset values

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DOW Wilshire Index
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TIAA CREF real estate fund (Property), 15 drop
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TIAA-Cref real estate securities fund ( 50 drop)
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Vanguard VNQ Reit ETF
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Credit got us here, credit to deliver us out?

• Ultimately, for a robust recovery to begin,
  credit markets must be returned to good health.
  Higher employment will help, because people with
  jobs qualify for more credit than unemployed
  people. But the financial sector must be healthy
  enough to resume lending. The government programs
  now in place will help some, but ultimately it is
  the bankers who will have to come on board. In
  this respect, it is a psychological problem as
  much as financial.

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How do we know credit is betterWhen starring
at CNBC

• There is no single variable that will be a
  reliable indicator of a recovering financial
  system. But, there are three, which taken
  together, will provide a good snapshot of the
  health of credit markets. Keep an eye on these
  three variables and you will have a good idea of
  the stage of recovery.
• First, short-term Treasuries need to come off the
  zero level. Yields are so low because of the
  flight to quality that has occurred all over the
  world as the price of U.S. Treasuries was bid up.
  When investor confidence begins flowing back into
  commercial loans, the short-term Treasury rates
  will nudge up. That will be a good sign.

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3 MONTH TREASURY YIELD
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THE TED SPREAD

• The Ted Spread, shown below, is also a good
  indicator of investor confidence in the business
  lending world. This marks the spread in interest
  rates between Treasury Bills (90-day Treasuries)
  and the three month LIBOR. Historically, this
  spread has been about 25 basis points. As you can
  see from the chart, it is now closer to 150 bp.
  Although this is substantially lower than it was
  in October, it still needs to come down by about
  half to two thirds. Look for a narrowing as a
  good sign that credit confidence in business
  lending is strengthening.
• little lending between banks at a 48 annualized
  rate (libor at 4)

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THE TED SPREAD( 3 MO TREASURY VS. 3 MO LIBOR)
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30 day commercial paper

• Finally, the 30-day commercial paper rate is also
  a good indicator of lender confidence in the
  business world. For now, the 30-day rate is
  around .35. This annualizes at 4.2, about four
  times higher than similar maturities for
  government obligations. Look for a fall in this
  spread as a good sign that things will be getting
  better. This variable is also something of the
  inverse of the short-term Treasury rate. As
  lenders open up to business borrowers, they will
  necessarily short their position on Treasury
  obligations

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30 DAY COMMERICAL PAPER
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Future Expectations

• Slow improvement in access in capital
• Infrastructure projects at some point, how do we
  parlay that for real estate light rail
  acceleration?
• Bifurcated market Walls street vs. main street.
  Are the REIT prices right? Or is the market the
  market
• cap rate expansion continues as return
  expectations increase (risk perception remain)
  coupled with conservative lending and sluggish
  rental rates especially if REIT property sales
  create added supply.
• Commercial real estate re pricing
• Future debt funding? Vs the world
• Price deflation or inflation? Commodities
  deflate now, future inflating and interest rate
  increases at some point ( 2 yrs) which means what
  for real estate returns ( the return of the
  inflation hedge instrument!
• Likely buyers private ownership

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Doing Business Getting it done

• Not the end of the world and deals can be done
• Taking advantage of where we are in the economy
• What do we do to explain to clients how to use
  the current the scenario?
• What are their choices
• What are their expectations vs. reality
• Can they withstand potential price
  deflation/inflation
• Or is their a niche with solid returns compared
  to the alternatives?
• Panel to give insights to getting things done