Title: Capital Markets Presentation
1Capital Markets Presentation
- Real Estate Capital Markets Outlook for 2005
Themes and Key Ideas
2REAL ESTATE CAPITAL MARKETS OUTLOOK
- Dynamics - Flow Forces
- G-I-Normous capital flow into commercial real
estate continues to propel pricing amidst
scarcity of supply of investment-grade product. - Rate and Spread Compression
- Unprecedented IRR Compression
- Historic High PSF
- IO, Open Prepay, Pre-Sales at Stabilized Value
Get the Flow Out!
3REAL ESTATE CAPITAL MARKETS OUTLOOK
IRR Compression 2001-2005 (Median Ten Year IRR)
4All Cash Yield Targets By Food Group
Grocery/Discount Anchored Retail
Office
Multi-Family
Industrial
5REAL ESTATE CAPITAL MARKETS OUTLOOK
Cap Rate Spreads to U.S. Treasury (1) (10-year
trend) Basis Points
Source NCREIF and Morgan Stanley. Notes (1) 10-y
ear U.S. Treasury Bond rates based on quarterly
average unless otherwise stated.
6Office Cap Rates
7REAL ESTATE CAPITAL MARKETS OUTLOOK
Food Groups
Food Group Ranking 1. Retail 2. Trophy
Office 2. Industrial 2. Multifamily 5. Office 6. H
otel
Trophy Market Ranking Washington, DC NYC
Metro San Diego Edge L.A. Southern Florida
Market Recovery Seattle Atlanta St. Louis
8REAL ESTATE CAPITAL MARKETS OUTLOOK
- Dynamics - Flow Forces (Contd)
- Mainstream Money Management- No Longer Fringe
Asset Class - Income-producing commercial real estate has
become favored risk-adjusted, fixed-income
investment alternative. - Lenders view real estate debt as attractive
alternative to single-credit corporate paper. - With better Corporate Junk Bonds yielding 6.5,
how is RE overpriced at 7
9REAL ESTATE CAPITAL MARKETS OUTLOOK
- Dynamics - Flow Forces (Contd)
- Allocation Trends Align with Demographic Drivers
- Retiree redemptions LOOM!! Most Important Factor
in All Investing for next Decade! - Public and private joint venturing with
tax-exempt institutions and foreign open-end
funds to lever more purchasing power - Surging syndicated equity drives pricing on the
margin - Private REITs (INLAND as icon)
10REAL ESTATE CAPITAL MARKETS OUTLOOK
- Dynamics - Flow Forces (Contd)
- Allocation Trends Align with Demographic Drivers
(Contd) - Surging syndicated equity drives pricing on the
margin (Contd) - Broker-dealer distribution and fee frenzy
- Hedge funds (Farollon land spec in Mission
Bay) - Individual and Retirement Planning RE as
Standard Diversification Product (TIAA model)
11REAL ESTATE CAPITAL MARKETS OUTLOOK
- Dynamics - Flow Forces (Contd)
- Commingled institutional equity rather than
separate account funding propels the tax-exempt
fundraising. - More Co-Invest More Discretion
- Many pension funds have raised RE allocations
significantly - Migration toward European model
12REAL ESTATE CAPITAL MARKETS OUTLOOK
- Short-term capital (LIBOR-based) has been very
stable. - Low volatility beta over last 4 years.
- Sophisticated borrowers arbing LIBOR vs.
Treasury, Spread Investing. - 50 of securitized debt is unhedged and floating
according to HFF data.
13REAL ESTATE CAPITAL MARKETS OUTLOOK
- Mezz, Mezz, Mezz!!! Structured finance,
especially mezzanine debt and preferred equity,
booming. New niches like larger loans,
longer-term mezz and aggressive, clubbed A-B
packages. Loan to Own raiders on the loose. - Who ISNT Doing Mezz
- Compressed yields
14REAL ESTATE CAPITAL MARKETS OUTLOOK
- Foreign investment capital, with weakening
dollar, expanding in 2005 - German funds under scrutiny for yield performance
- Israeli and Middle East investors are very active
and aggressive - Japanese capital returning
15REAL ESTATE CAPITAL MARKETS OUTLOOK
- MA driving REIT market which continues to
cartelize. REITs outperform SP and indexed
funds (private REITs follow suit) - Average REIT dividend yield of 4.7 vs. SP 500
of 1.7 - REITs up 70 since end of 2002.
- Real estate mutual fund flow of 7.55 B in 2004
vs. 4.5 B in 2003 (75 increase).
16REAL ESTATE CAPITAL MARKETS OUTLOOK
Top Tenant-in-Common Sponsors in 2004 Properties
purchased or under contract through Nov. 30
17REAL ESTATE CAPITAL MARKETS OUTLOOK
- TIC TAC DOUGH and Fund of Funds New Drivers
- Improving Fundamentals Too
18REAL ESTATE CAPITAL MARKETS OUTLOOK
- Pricing
- Stagress Stagnant real job growth (part-time
vs. core) yet real economic progress holds down
rates. - Oil price increase lags 12-15 months.
19Historical NCREIF Performance by Property Type
Source NCREIF
20REAL ESTATE CAPITAL MARKETS OUTLOOK
Food Groups
- Heyday for infill and edge city locations.
- Fortress mall cap rates fall to lows near 5.
(back to mid 1980s) - Power centers command premium (all cash IRR of
7.0-7.5, flat returns) for income stability and
lease term.
21Retail Trends
Major Retail Segments Cap Rate Compression
2001-2005 (Median Capitalization Rates)
22REAL ESTATE CAPITAL MARKETS OUTLOOK
Food Groups
- Secondary office market sales activity bringing
new liquidity to this large segment. - Large industrial properties are oversubscribed
and trade at trophy premium. - Multifamily, despite economic vacancy, still
command pricing power.
23REAL ESTATE CAPITAL MARKETS OUTLOOK
Food Groups
- Development sites with entitlements red hot as
entrepreneurs often with institutional capital,
seek higher returns. - Condo conversion mania
- Net lease purchasing at historic highs driven by
RELPs, syndicated equity and 1031 exchange
capital.
24REAL ESTATE CAPITAL MARKETS OUTLOOK
Food Groups
- Land Spec Fast Growing and Institutionally
Driven (JPMF in Inland Empire) - Note Sales, Loan To Own, Partner Recaps Any
Opportunity, Stupid!
25REAL ESTATE CAPITAL MARKETS OUTLOOK
Next
- Recognition of True Reproduction Costs and
Valuation - Global acquisitions/MA
- Mills/Scotland malls
- GEPT Canada
- Blackstone model/precedent
- Galileo/New Plan
- Simon/China JVs
26REAL ESTATE CAPITAL MARKETS OUTLOOK
Next
- Foreign capital surge (esp. Debt)
- New Megabank Equity
- Direct /Co-Invest
- Citicorp
- Fractionalization
- Mutual Fund R.E. (evolution from private
syndicates 401K)
27REAL ESTATE CAPITAL MARKETS OUTLOOK
Next
- Blowoffs Rates above 5.5 and LIBOR spike
- Business Week Survey of Corporate/Wall Street
Experts 5.1 T-10 Consensus - Condo conversion, presales at Stabilized Value
- Master leases