COMMERCIAL REAL ESTATE CYCLES AND THE CURRENT CRISIS: PREDICTIONS, SUGGESTIONS AND INDICATORS TO FOLLOW.
1.
Preamble................................................................................................................................. 3
2.
Executive Summary ................................................................................................................ 4
3.
Definition of critical indicators for the crisis and real estate downturn .................................... 9 a.
Economic periods ............................................................................................................... 9
b.
How do declines in GDP and employment affect Real Estate Prices ................................ 9
c. Which indicators were tested but are considered as not indicative of a downturn or Real Estate bubble formation? .......................................................................................................... 10 d. Which indicators were tested and are considered partly indicative of a downturn or Real Estate bubble formation? .......................................................................................................... 12 e. Which indicators were tested and are considered as indicative of a downturn or Real Estate bubble formation? .......................................................................................................... 16 f. 4.
Summary of proposed indicators to follow and how to read them ................................... 22 Definition of critical indicators for a market bottom and recovery ......................................... 23
a.
Indicators .......................................................................................................................... 23
b.
Timing for Office Building ................................................................................................. 24
c.
Timing for Retail Properties .............................................................................................. 25
d.
Price Levels ...................................................................................................................... 26
e.
Current Indicator level and trend ...................................................................................... 26
5.
Office and Retail Estate prices per MSA .............................................................................. 27 a.
Overview........................................................................................................................... 27
b.
Selected US MSA ............................................................................................................. 31
c.
North East Market – Boston ............................................................................................. 33
d.
North East Market – New-York......................................................................................... 35
e.
Mid Atlantic Market – DC.................................................................................................. 37
f.
Mid Atlantic Market – Philadelphia ................................................................................... 39
g.
South East Market – Atlanta............................................................................................. 41
h.
South East Market – Miami .............................................................................................. 43
i.
South East Market – Nashville ......................................................................................... 45
j.
Midwest Market – Chicago ............................................................................................... 47
k.
Midwest Market – Minneapolis ......................................................................................... 49
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
1/70
l.
West Market – Las Vegas ................................................................................................ 51
m.
West Market – Los-Angeles ............................................................................................. 53
n.
West Market – Sacramento .............................................................................................. 55
o.
West Market – San Diego................................................................................................. 57
p.
West Market – San Francisco .......................................................................................... 59
q.
SouthWest Market – Dallas .............................................................................................. 61
r.
SouthWest Market – Houston........................................................................................... 63
s.
SouthWest Market – Phoenix ........................................................................................... 65
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
2/70
1. Preamble This working paper has been prepared with the purpose of identifying the main crises that affect real estate financing via among other things their effects on investors and lenders behaviours, cash flow and collateral value reduction. To challenge the study it was discussed with professional bankers active in this field. Globally the document is recognized as setting indicators that may help identifying crisis and the significant decline in the value of the collateral is not disputed. On the other end, it has been questioned if this material can really be applicable for setting credit risk policy for Commercial Real Estate (CRE) activity. As rightly underlined a part of this document addresses the value of the collateral, which will have an effect on the loss severity, but no chapter specifically addresses the effect on cash flow that will trigger the default. The remark underlines the point that if an economic crisis is not severe enough then cash flow may be sustained at a level that does not affect significantly the loan payment. We could also have a situation whereby all indicators will be “green”, but with some regions witnessing a decrease in rent and occupancy, affecting significantly the risk strategy we should have when it comes to financing CRE. As such it was questioned whether rent evolution, vacancy rate evolution or banks charge offs would not be more relevant indicators. Also underlined were the somewhat astonishing discrepancies on CRE portfolio PDs’ among actors. Indeed as of December 2008, insurance companies had delinquency rate of 0.07%, 1 CMBS of 0.95% and banks of 5.36% . This implies that the way to conduct business and/or a niche approach are detrimental to the loss result even in a significant downturn. The link between the identified indicators and a risk policy is then questioned, as the issue of the collateral value addresses only a part of the problem. Also, as a matter of concern, is that indicators lag most of the time the actual evolution and attempting to set timing can prevent a bank from conducting activity in a reasonable risk environment. I understand those points and I have certainly considered that cash flow is a key issue probably not fully addressed in this study, and also that the long financing term (10 years) with strong tenants like GSA or highly rated large Corporation is not specifically addressed. Nevertheless, the primary tasks of this study, that I believe are achieved, are to set macro indicators that pertain to identifying the largest crisis we’ve seen since the 90’s, to identify how much prices have to come down and to identify recovery indicators. Why? Only because in such times it is hard to escape the negative impacts, and it is critical to be able to discuss whether risk policy should be adjusted at unusual levels. By no mean, do I pretend to address the risk attached to more minor crisis, especially the regional one, that will certainly affect the bank P&L, but not to a large extent, especially because healthy development on other regional markets should generate profits absorbing the cost of risk. These crises will be addressed by the existing monitoring on main MSA (effective rent, vacancy, etc). The 90’s or today’s crises does not give this flexibility, and looking at facts highlighted in this document, I firmly believe that Real Estate Cycle cannot be left unaffected by significant crises. Only the magnitude may differ, and may be estimated when looking at the cause of the disequilibrium. The effect of specific business approaches (banks vs. Life insurance Co.) can be addressed as well. The indicators should help identifying when the environment will be negative, pushing the cash flow down, the positive mindset of investors and lenders alike down, and ultimately the collateral valuation down. The loss severity is a significant parameter in risk management and needs to be considered. Further the loss severity tends to be underestimated at the top of the economic cycles. This is clearly underlined by LGD calculation made on any actor type by any rating agencies. The use of bank charge-offs on CRE as indicators, are lagging behind the reality and therefore can not be used to anticipate a change in environments. Likely the charge-off rate will start declining after the market 1
Moody’s release dated May 15, 2009 “Comparing Bank, US CMBS and Life Insurance Co. CRE Expected Loss and Delinquancy Rates”. Based on Trepp, American Council of Life Insurance and the Federal Reserve. Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
3/70
has bottomed up as charge-offs are mainly tight to old transaction and not to the new ones. As evidence, we can see charge-offs on CRE started to increase 4Q2007, when prices were already heading down, and roughly 2 years after primary indications from selected indicators that we were heading toward a probable collapse of the markets. With respect to the use of the vacancy and effective rents that will affect the cash flow, the fact that they are late indicators are worrisome for the purpose of risk management. Vacancy rate for the US market started to increase during 4Q2007. Effective rents for the US started declining mainly by the end of 2008. As the cash flow is tight to the economy, the use of cash flow indicators, will certainly turn red too late and green again too late. This is basically what reflects the generally accepted principle that CRE recovery lags 18-24 months behind the economic recovery. Office can recover only if employment recovers, which is always after the end of a recession, and retail can recover only after consumption has recovered. Also, a ratio Sale Price per sf/rent per sf may certainly be a good indicator of the economic disconnect. Unfortunately I could not get a long enough history to test this ratio. But what these interesting discussions address, is the clarification that the indicators are to be used as advanced indicators. They turn red well before the cash flow or the property value starts declining allowing bank management to consider necessary steps. Alternatively they are likely to turn green in advance. The CRE price bottoming/levelling is not the only factor that drives the decision to readapt the credit risk strategy. Indicators chosen in this study aim at setting a kind of time frame for the crisis and various indicators that will be used to give an indication as to the magnitude of the decrease in price, and by how much our collateral value is affected. That’s why, already, for a bank willing to do business, this should not prevent it in my opinion on a case by case basis from checking parameters of transactions. If by chance a property has declined to the expected bottom and is fully leased to strong Investment Grade (“IG”) tenants, then their may be an interest in financing it. But, as indicated later, at this point, being still largely in the crisis, the tenant analysis will matter significantly as this will drive the PD of the transaction (declining office employment and rising corporate default, will force banks to be very selective well into 2010). On the other hand, the LTV, covenants, and profitability of a new transaction will likely be satisfactory as limited participant will be in the market. But again the approach of individual financing is not the purpose of this study.
2. Executive Summary The US Economy started to slow down approximately 2-1/2 years ago. While the residential real estate market was the first casualty, the slowdown spread to commercial real estate approximately 18 months later. The first goal of this paper is to attempt to identify factors that would have been indicative of an impending market crash. The second one is to identify, from an “academic” point of view, by how much markets need to fall from their highs to return to economically justifiable valuations, valuations based not on decreasing cap rates but rather ones based on property economics. The third goal will be to determine which macro credit risk indicators to pay attention to in the future. Last, but not least, I will try to indicate the potential timing of a price recovery and indicators that may signal the return to a more favourable lending environment. As highlighted in the preamble, from a Credit Risk Management perspective, there is a strong belief that there are opportunities in having indicators in place in order to take actions to offset as much as possible the effects of economic and real estate cycles. This means slowing down an activity when a bubble is appearing, and/or taking necessary steps to protect the P&L via the often available Off Balance Sheet financial instruments, or by adapting the financing strategy (banks vs. insurance or stabilized vs. not Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
4/70
stabilized, or large vs. small loans, etc…). But also, just as importantly, we need to identify when it would make sense to kick start an activity, which ideally should be before the market has reached the bottom, at the point when risk reward is the highest, within constraints. As they will be described, those indicators are interesting, in a sense that once they have turned red, it is generally not too late to adapt one’s risk profile. Dynamic credit risk management may optimize profit if incorporated into its strategy. But this will surely be hard to achieve, as obviously it is difficult to withdraw from a booming market, as many active and experienced people will be keen to argue that the crisis is different from the previous one and that the pessimists don’t understand or capture the true nature of economic changes. But first there is a difference between understanding and accepting market conditions, and secondly this crisis, unfortunately, proves once again that the same economic disconnects seen in previous downturns are producing the same effects in this downturn. Additionally, after having been burnt, it will be still more difficult to come back into the market because of fear that the crisis may not yet be over. Hence, if this paper has little ambition, it is to show that some events can be predicted and predictive indicators incorporated into our credit risk management tools. So certainly, what this paper is not about, is to set indicators that would imply a stop and go strategy which is too much value destructive when dealing with customers and, unlike for most of the past crisis, miss the opportunity offered by the “modern finance” that provides tools to unload risk (balancing the risk attached to the new instruments of course). In this respect, decision to buy Total Return Swaps for example, before the market crashed to hedge the loan originated for securitization, has proven to have been efficient in offsetting the credit risk attached to those transactions. Even if the use of derivatives is constrained by some possible new rules aimed at having the lender/investors keeping skin in the game, there will still be various solutions to reduce the risk by adapting strategy and policies. In addition as you can read further in this document, the indicators usually turn red 2 to 3 years before we are in the crisis. This time lag provides time to find the most suitable solution balancing the risks, rewards and franchise value. Contrary to most of other companies, this is of the utmost importance in bank due to the existing inertia derived from holding MT and LT assets. Economic cycles, booms and busts, have been described by experienced economists, so I will only describe a few of the indicators that have been commonly used when analyzing the current crisis. Some are specific to real estate but not all. The data sources I used are mainly from the US FED, US Bureau of Economic Analysis, US Bureau of Labor Statistics, REIS and Real Capital Analytics (RCA), and indexes developed by MIT for external agencies. The scope of this paper primarily covers Office buildings and retail properties, but the scope is larger (all Commercial Real Estate sectors (“CRE”) + Residential Real Estate) when it comes to identifying indicators predictive of a crisis. We present the big picture along with more particular data for 17 MSAs. The commercial real estate figures per MSA (transaction prices, psf rent, cap rate, etc…) have been collected back to January 2002. The commercial and residential real estate price indexes have been collected back to 90’s. The economic data have been collected back to 1947.
a) Crisis Periods Considered Basically, the GDP has declined in 3Q2008, 4Q2008 and 1Q2009 for a cumulative percentage loss of 3.21%, an already high level, but the 1Q2009 when annualized suggests a 5.5% full year decline. During the past 60 years, each GDP decline was accompanied by an employment contraction. Based on the 90’s, 01’ and 07’ real estate crises, the real estate price declines are not a consequence of the GDP contraction, as prices have always started to decline before the GDP began to contract. The current crisis is often described as being the result of over-borrowing with loosening conditions at a time of cheap funding. An increase in borrowing cannot be, by itself, the cause of a crisis, as it is simply a necessity for the development of society. In my view it is the speed and size of the increase in borrowing that sowed the seeds of the current crisis. Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
5/70
b) Relevant Indicators for detecting a Crash Most indicators I examined had to be rejected (9x) or had to be used in combination with others (4x), but some seem relevant by themselves (5x). As part of the Credit Risk Management tools to implement, the following major indicators are considered of importance: 1- The spread between the 1-year and 10-year US Treasury rates (highly predictive of GDP evolution and Office, Apartment and Retail Index evolution based on a simple correlation factor). From the time a positively sloped curve becomes flat there is statistically 3 years to adapt the Credit Risk Policy. 2- Charge off on credit card debt for US banks. This is a good indicator of cheap money. When such credit can be easily repaid, the costs decline. Once the credit risk costs decline to 3%, the house price index is normally already declining and there is statistically just a few quarters before commercial real estate properties will be hit. The indicator is best used to detect economic peaks rather than real estate peaks. 3- Supply-Demand Index for Office, Retail and Apartments. These indices and the CRE price indices are supplied by MIT. A reading above 20 or below -20 seems to indicate excess short-term “investor” activity. The current crisis could have easily been detected when looking at excess demand boosting prices. Office properties have the highest correlation between price evolution and Supply-Demand Index: office r= 0.65; retail r= 0.47; and apartment r= 0.46). An index close to 0 or negative can be associated with stagnating or falling prices. Once the 20 mark is breached upward in volume and price increase environments there may be 2 years before commercial real estate properties are hit. Five more minor indicators for real estate and the general economy are proposed in this document to supplement the three major indicators above. (1) Turned red: Dec-2005 (2) Turned red: March-2006 (3) Turned red: June 2005 for Retail, Sept-Dec 2005 for Office and Apartments At that time all minor indicators were in the red zone. With these tools, from this point on (End 2005/early 2006), one should have investigated from where the imbalances were coming from, as it is not always the case that the magnitude in price decline is as intense as it has been since 08. For instance, should the exuberance be pushed as it was in 2000 by the tech stock bubble, when CRE prices don’t show evidence of overheating, the decline would likely be less important. With office market decline by 10% between 2000 and 2002 in average, loans with 70% LTV should in average grant immunity to banks from severe losses. This is different from office prices having increased by 106% from 2002 to 2007, while GDP growth during the same period was just 16% (between 1992 and 2002, GDP growth was 33% and price increase only 66%).
c) Relevant Indicators for a Recovery If from credit risk point of view it matters whether one can predict when it’s time to give up market share to save future profit, it should equally matter to be in a position to assess where we are in the cycle and when it makes sense to re-enter the market at a time others may still be reluctant to do so, and hence permit ourselves to re-gain lost market share at a time when we are in relatively the strongest bargaining position. Additionally, franchise value should benefit from this slight contra-cycle behaviour. Being in the market with a more cautious approach than other players the year or two before the market crash, should be less value destructive as the offer is plentiful, than it should be value creative at the time of kickstarting the activity. Indeed, such lenders can argue that their previous behaviour demonstrated their expertise, as well as offering a financing solution to new customers trapped by lack of financial options. Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
6/70
For Office Building financing, the recent periods 1985-1989, 1993-1998, and 2003-2007 met these criteria. During this phase, the starting points were: § § § §
The spread between 1-year and 10-year US Treasury rates returned to normal (2 to 3%) and started to decline (1993-2000 and 2002-2005). Supply-Demand Index, after having fallen well below the -20 mark, started to rise again. A reading above zero, is more or less a starting point for new price increases (apartment 1996-2005; office 1996-2000; office 2003-2006; and retail 1996-2005). the charge-off rate on business loans went down until it started resuming upward. After having fallen to a low level, the gap between Mortgage DS and Consumer DS rose again (from 1993 to 2003).
Currently, the spread between 1-year and 10-year US Treasury rates has returned to a normal 310 bps but has yet to deliver any indication of a decline. The Supply-Demand Index for Office, Retail and Apartment are all still continuing to decline (1Q2009 is the latest available) showing an unprecedented disconnect between supply and demand (Office = -72, Retail = -89, Apartment = -41). Charge offs on business loans are still going up (last released for 1Q2009) and the gap between Mortgage (debt service) DS and Consumer DS are beginning to indicate a decline. So far only one indicator has begun to signal a return to a more positive trend. This might be, on average, too early to resume lending in the CRE markets, although, as it can be seen in section 4, some MSA which price indexes peaked 2 years ago may already be close or at the bottom in term of price. Indeed, the bottom is an average. As such if it indicates the general trend in the country, what’s always useful in a business environment, it will lag behind the true recovery for some MSA that either have been less subject to exuberant price increase over the previous periods and/or which peak was reached already a reasonable time ago, and then have exhausted their potential for a decline. On the other hand, reaching the bottom does not mean there are no more risks. If arguably the lenders will benefit from a safe overcollateralization, the magnitude of the crisis could imply a long recovery, in turn increasing the volatility risk of vacancy and market rent for a specific building. So the bottom is the point in time when it matters the most to pay attention to the MSA’s economics and to the building location. Also, as already indicated, with a continuing wave of defaults among corporate, those tenants that are far less affected by economic cycles, such as GSA or local authorities should be favoured.
d) Collateral Value Recovery (Timing) It is likely that while the indicators for a recovery will have turned green, in average the bottom for price will lag a bit behind. I have tried to estimate at which point in time the price may bottom. When using simple correlations, we can estimate that the bottom may be reached between 3Q2010 and 4Q2010 depending on the property type (Office, Retail and Apartments). So, what does this mean in terms of additional price decreases? The calculation of price level is subject to many factors and can easily be pushed one way or another depending on one’s state of mind. But, using both simple linear regression and theoretical calculations based on excess cash flow and ROE for selected MSA the magnitude of the decline will be severe, with price declines expected to be in the following ranges: -
Office:
-25 to -70% per MSA (average 50%) when using ROE, Cap Rate and other transaction parameters or -55% using correlation for estimation. Prices are currently (1Q09) at roughly -24% (TBI index2) to -30% (CPPI index).
2 The MIT has developed for Moody’s 2 indexes. Both the CPPI and the TBI are based purely on transaction price data. The TBI is based on NCREIF property sales prices data, while the former is based on RCA sales prices data. Thus, the TBI is based on a smaller population of more purely institutionally held properties. The TBI is based on a hedonic regression methodology whereas the CPPI is constructed with a repeat-sales methodology. The TBI is published with history going back to 1984 but only at the quarterly frequency, and only at the national level (for the four major property types), whereas the CPPI includes monthly and annual frequencies and more geographic regional break outs. The latter is a variable-liquidity price-change (appreciation return) index, while the TBI includes total return and constant-liquidity (demand side) indexes. There is evidence that the CPPI, based on a broader market, tends to lead in time the NCREIFbased indexes.
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
7/70
-
Retail:
-15 to -65% per MSA (average 45%). when using ROE, Cap Rate and other transaction parameters or -50% using correlation for estimation. Prices are currently (1Q009) at roughly -16% (TBI index) to -23% (CPPI index).
-
Apartment: -49% using correlation for estimation (calculation per MSA yet to be done). Prices are currently (1Q09) at roughly -23% (TBI index) to -19% (CPPI index).
At the time prices reach the bottom, the Supply-Demand Index will have to be above 0 with a positive trend. At that point prices should be set for increases, and the most economically sophisticated banks, or the one active in niches will already be providing financing. Please keep in mind, that these percentages are averages, hiding the reality that some properties are already trading at levels close to the bottom (we’ve seen some properties trading at -40 to -60%), thus making refinancing with current LTVs that are by far lower (55% to 65%) could be attractive (provided, however, that the location property is suitable and is well occupied and able to absorb lease renewals at significantly lower rents, or even better a LT lease with an IG tenant is in place. This assertion is also corroborate by price expectation for some MSA (please see section 4).
e) Conclusion In conclusion, the crisis is certainly severe and has an impact on all properties. Not all indicators tracking the “safeness” of a lending environment have turned green or yellow yet. Price decline is severe and already for some MSA prices are narrowing the bottom (especially for retail properties, less obvious for office buildings). I also expect to see during the coming quarters more positive signs. At this point most of the refinancing of well located and tenanted properties with sound structure and financial covenants should permit resumption of profitable activity with reasonably low credit risk. Hence this will be critical to clearly keep in mind the distinction between existing loans granted one to three years ago, which collateral value will have most often declined below the loan dollar amount, from possible new loans with sound collaterals. Tenancy will be a critical point of attention as corporate defaults and office employment should continue to deteriorate well into 2010. As such, in addition to this document, we should study the expected loss difference along the cycles. Indeed, it sounds economically logical, and as evidenced by external rating agency studies, that at the top of a cycle PD and LGD are low comparatively to PD and LGD at a bottom of a cycle and thereafter. But PD and LGD are tight to old transactions. For new transactions the loss severity is likely to be well below. By how much is a point yet to be addressed.
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
8/70
3. Definition of critical indicators for the crisis and real estate downturn a. Economic periods The major periods of economic difficulties are listed below with their associated GDP declines and employment contractions. Since the employment number is critical for building spaces, I checked to see if if each GDP decline was accompanied by an employment decrease. Employment numbers were considered instead of the unemployment rate as the unemployment rate can be growing while demand for office space can be sustained by a still growing number of people being employed. Periods
GDP Contraction
Periods
1945-1947 1949 1954 1958 1970 1974-1975 1982 1991 2001 2008-2009
-13.0% -0.5% -0.7% -1.0% 0.2% -0.7% -1.9% -0.2% 0.8% -6% ?
1943-1945 1948-1949 1953-1954 1958 1970 1974-1975 1981-1982 1990-1991 2001-2003 2007-?
Employment contraction -10.0% -4.5% -3.4% -4.4% -1.5% -2.8% -3.1% -1.4% -2.0% -4.1%
Over the past 60 years the GDP has declined 8 times, but only once did the decline last for more than four consecutive quarters. This was right after the WWII. Unfortunately the current crisis will add a second such series. Two series of three consecutive quarterly declines in GDP occurred in 1953-1954 and 19741975. The GDP declined in 3Q2008, 4Q2008 and 1Q2009 by a cumulative 3.21%, which is an already high level, but the 1Q2009 when annualized suggests a 6% full year decline. Each decline in GDP was accompanied by an employment contraction. The employment contraction that started in 2007 is one of the longest and steepest declines in recent history.
b. How do declines in GDP and employment affect Real Estate Prices A long history of real estate prices does not exist. Using the Case-Schiller index for Home Prices and the MIT index for Commercial real estate (CRE), we have the following: Periods 1990-1991
Employment contraction -1.4%
2001-2003
-2.0%
2007-?
-3.7%
Home price Index peaked 03-1990, and declined by 9%
Index peaked 05-2005, and declined by 31% so far
Office
Retail
Apartments
NA
NA
NA
Index peaked 4Q2000 and declined by 10% so far Index peaked 3Q2007 and declined by 19% so far
Index peaked 4Q1994 and declined by 12% Index peaked 1Q1999 and declined by 12% Index peaked 1Q2007 and declined by 10% so far
Index peaked 3Q1998 and declined by 10% Index peaked 4Q2007 and declined by 17% so far
The real estate price declines are not a consequence of GDP contraction, as real estate bubbles have always started to deflate before GDP had started to contract.
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
9/70
The Home Price index peaked in early 1990 and declined by just 9%. Even though this percentage is rather small, it took the Home Price index until 1998 to recover to its 1990 level. By comparison, the decline since May 2006 looks extremely steep (-31% by February 2009). Case-Shiller index
Retail peaked 1Q-1997 (Decline ?%)
House peaked 05-2005 (Decline ?%)
250.00
10 Major MSA 20 Major MSA 200.00
Employment: -1.4% 1990-1991 150.00
GDP: +0.8% 2001
GDP: -0.2% 1991
House peaked 03-1990 (Decline -9%)
100.00
Office peaked 3Q-1997 (Decline ?%)
Employment: -2.0% 2001-2003
Apart. peaked 4Q-1997 (Decline ?%)
Apartment peaked 3Q-1998 (Decline -10%)
Retail peaked 4Q-1994 (Decline -12%)
Office peaked 4Q-2000 (Decline -10%)
Retail peaked 1Q-1999 (Decline -12%)
50.00
2009M1
2008M7
2008M1
2007M7
2007M1
2006M7
2006M1
2005M7
2005M1
2004M7
2004M1
2003M7
2003M1
2002M7
2002M1
2001M7
2001M1
2000M7
2000M1
1999M7
1999M1
1998M7
1998M1
1997M7
1997M1
1996M7
1996M1
1995M7
1995M1
1994M7
1994M1
1993M7
1993M1
1992M7
1992M1
1991M7
1991M1
1990M7
1990M1
1989M7
1989M1
1988M7
1988M1
1987M7
1987M1
0.00
During the 2001-2003 economic slow down, apartment prices were not significantly affected, but it had declined by 10% just 3 years earlier (1998-1999). Retail properties suffered the year before (2000) and office properties suffered in 2001. In the current economic downturn, prices have declined across all property types, ranging from -16% to -24% so far.
c. Which indicators were tested but are considered as not indicative of a downturn or Real Estate bubble formation?3 As long as we cannot clearly use a factor as an advance indicator, it will not serve our purpose and we excluded them from further consideration. Below are the indicators we tested that based on available data we later rejected: 1) GDP contraction is the result of the crisis not its cause 2) Bank Loans as a percentage of GDP: the ratio rises from 11.9% in 1947 to 51.1% end of 2008. No specific conclusion can be reached based on a graphic observation. 3) Real Estate Loans (Residential+CRE) as a percentage of GDP: the ratio rises from 3.1% in 1947 to 27% at the end of 2008. We can recognize some signs of exuberances in 74-75, 81-82, the 90’s and the current 2007-? crisis, but the magnitude and length are extremely different from one crisis to another. Long term growth can be 3
Graphs are presented in Appendix 1. Please refer to the end of the document.
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
10/70
4)
5)
6)
7)
8)
9)
identified because even in the 90’s, after the long standstill in price evolution, commercial banks’ real estate loans as a percentage of the GDP was at 15%, when expectation of the ratio based on linear extrapolation would have suggested only 12%-13%. Furthermore, the increase is even greater as the ratio only considers commercial bank loans that represent 27% of the global mortgage market at end of 4Q2008, a declining share compared to 31% in 2004. Consumer Loans as a percentage of GDP: the ratio rises from 4.3% in 1947 to 18.9% 4Q2002. All consumer loans are considered regardless of the holder (commercial bank, saving institution, insurance, pool of assets, etc.). Consumer loans held by commercial banks rose from 1.9% in 1947 to 7.0% 3Q1973 and then fluctuated in the 5%-7% range, declining by at least 1 percentage point in 1974-1976, 1980-1983, 1987-1993 and 1995-1999, with the ratio currently at 6.3%. Banks’ Commercial and Industrial Loans as a percentage of GDP: the ratio rises from 5.1% in 1947 to 12.5% 4Q1974 and then fluctuated in the 12%-7.5% range with declines of 2 to 3 percentage points in 1975-1977, 1987-1993 and 2001-2004. Today the ratio stands at 11.2%, but considers only loans on balance sheet of commercial banks (consolidated loans including all institutions and pool of assets not found). Home Equity Loans as a percentage of GDP: the ratio rises from 0.6% in 1987 to 4.2% at the end of 2008. No specific conclusions can be reached based on a graphic observation. Only the sharp increase between 2001Q1 and 2005Q3 can be noticed. Mortgage Debt on Non-Farm Homes: No specific conclusion can be raised based on a graphic observation. Only the sharp increase between 1995 and 2005 can be noticed, similar to that seen between 1970 and 1979 and between 1982 and 1987. Personal Saving as a percentage of GDP: the ratio rises from 5.5% in 1952 to 8.2% in 1982, then declining to 0.3% in 2005. Retrospectively, it is easy to say that the decline must end, but none of the previous downturns could have been detected, and setting a threshold at a supposedly unacceptable value would have kept us from lending, most probably for a longer than acceptable period of time. Foreign Bank Balance Sheet, Real Estate Holdings: Before the major downturns of 90’s and 07-?, the real estate holdings by foreign banks skyrocketed. Before it peaked in 02-1992, holdings increased by a factor of four (since recording began in 01-1998 by the US FED). From 02-2007 to now it has more than doubled. Perhaps this last jump is the result of the difficulty in securitizing newly originated loans that banks have been forced to keep on their balance sheets. But as far as its capacity to predict a real estate bubble, we must reject this indicator.
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
11/70
d. Which indicators were tested and are considered partly indicative of a downturn or Real Estate bubble formation? 1) Ratio Net Worth/DPI (Disposable Personal Income). This ratio used to lie in the 4.2 - 5.3 range between 1952 and 1997. It skyrocketed to 6.3 in 1999 and 6.5 in 2006.Those figures seem far above the usual levels. An economic interpretation can be that this ratio attempts to indicate that wealth is created well above what DPI would permit to afford, and hence the only way to have such level is by having an artificial bubble (dot.com bubble or real estate). But previous crises would not have been predicted using this indicator. A reading at normal levels is not an indication that a crisis will be averted, but a reading above 5.5 seems to be a signal that a bubble is underway. And, this does not necessarily indicate that a real estate bubble is forming like the 00’s demonstrate.
Dot.com bubble 2000
Ratio Net worth/DPI GDP: -0.2% 1991
House peaked 05-2005 (Decline ?%)
7
Retail peaked 1Q-2007 (Decline ?%)
Retail peaked 1Q-1999 (Decline -12%)
Apartment peaked 3Q-1998 (Decline -10%)
6.5
Current crisis
6
House peaked 03-1990 (Decline -9%)
5.5
5
Office peaked 3Q-2007 (Decline ?%)
Retail peaked 4Q-1994 (Decline -12%)
4.5
Office peaked 4Q-2000 (Decline -10%)
Apart. peaked 4Q-2007 (Decline ?%)
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
12/70
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
4
2) Ratio Net Worth of Household/GDP: see #1). A reading above 4x seems to signal that a bubble is underway. Again, this does not necessarily indicate that a real estate bubble is forming like the 00’s demonstrate.
Net Worth of Households as a x of GDP 5.0
Inflated by Stock price. 4Q1999=x4.4
Retail peaked 1Q-1999 (Decline -12%)
Apartment peaked 3Q-1998 (Decline -10%)
Inflated by RE price. 4Q2006=x4. 7
4.5 Average x3.3 4.0
3.5
3.0 House peaked 05-2005 (Decline ?%)
2.5 Office peaked 4Q-2000 (Decline -10%)
Retail peaked 4Q-1994 (Decline -12%)
2.0
1.5
Retail peaked 1Q-2007 (Decline ?%) Office peaked 3Q-2007 (Decline ?%)
House peaked 03-1990 (Decline -9%)
Apart. peaked 4Q-2007 (Decline ?%)
1.0
0.5 GDP: -1% 1958
GDP: -0.7% 1974-75
GDP: -1.4% 1982
GDP: -0.2% 1991
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
13/70
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
0.0
3) Household debt service payment and financial obligations as a percentage of disposable personal income. Since the 80’s this ratio and its component (consumer loan or mortgage loan burdens) have been rising. While it is clear that during the growth periods the ratio is increasing, we cannot indicate a specific level at which it becomes unsustainable for households. But it should also be noted that debt service (DS) for Consumer Loans to DPI ratio has been decreasing since 2Q2003, i.e. more than 2 years before the residential real estate market meltdown. This may suggest either that people are using mortgage loan proceeds for consumption or that a much higher proportion of households are buying homes and need to reduce the use of credit cards. The same phenomenon applied in the 90’s when the DS for Consumer Loans to DPI ratio peaked in 2Q1987. As the time lag between peaks or divergence [see figure below] and the economic downturn range between 2 to 4 years for the 2 precedent crises, this ratio can be used as a trend indicator in combination with other metrics.
Household debt service payments and financial obligations as a percentage of disposable personal income; seasonally adjusted 16 Total Mortgage Consumer Divergence Mortgage-Consumer
14
House peaked 05-2005 (Decline ?%)
12
Retail peaked 1Q-1999 (Decline -12%)
10 Apartment peaked 3Q-1998 (Decline -10%)
House peaked 03-1990 (Decline -9%)
8
Retail peaked 1Q-2007 (Decline ?%) Office peaked 3Q-2007 (Decline ?%)
Office peaked 4Q-2000 (Decline -10%)
PEAK
6 PEAK
4 Apart. peaked 4Q-2007 (Decline ?%)
Retail peaked 4Q-1994 (Decline -12%)
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
14/70
08q1
07q1
06q1
05q1
04q1
03q1
02q1
01q1
00q1
99q1
98q1
97q1
96q1
95q1
94q1
93q1
92q1
91q1
90q1
89q1
88q1
87q1
86q1
85q1
84q1
83q1
82q1
81q1
80q1
2
4) Home Equity Loans as a percentage of GDP: This ratio increased significantly from the mid 1980s until 1Q1991. It remained stable until 3Q1999 then increased by more than factor of three by 3Q2005. Exaggerated growth during several years can be used as an indicator, but unfortunately no maximum level can be determined.
Home Equity Loans as a % of GDP House peaked 05-2005 (Decline ?% / 31% so far)
4.5% Peaks in Retail, office and Apartment Indexes in 98, 99 and in 00 could not have been avoided.
4.0%
3.5%
3.0% x3.3 in 6 years Peak:3Q2005 2.5% Apartment peaked 3Q-1998 (Decline -10%)
2.0%
Retail peaked 1Q-2007 (Decline ?%)
Home Index peaked 03-1990, and declined by 9% Office peaked 3Q-2007 (Decline ?%)
1.5% x2 in 4 years Peak:1Q1991 1.0%
0.5%
Retail peaked 1Q-1999 (Decline -12%)
Retail peaked 4Q-1994 (Decline -12%)
House peaked 03-1990 (Decline -9%)
Apart. peaked 4Q-2007 (Decline ?%)
Office peaked 4Q-2000 (Decline -10%)
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
15/70
2008q2
2007q3
2006q4
2006q1
2005q2
2004q3
2003q4
2003q1
2002q2
2001q3
2000q4
2000q1
1999q2
1998q3
1997q4
1997q1
1996q2
1995q3
1994q4
1994q1
1993q2
1992q3
1991q4
1991q1
1990q2
1989q3
1988q4
1988q1
1987q2
1986q3
1985q4
0.0%
e. Which indicators were tested and are considered as indicative of a downturn or Real Estate bubble formation? 1) The spread between 1-year and 10-year US Treasury rates. The yield curve is usually positively sloped with long rates being higher than short rates 78.6% of the time since 1962 but the spread turned negative in March 1973, August 1978, January 1989, March 2000, and December 2005. This indicator is a good one for all crises.
20 1 year Treasury 10 years Treasury 10 years - 1 year
15
Crisis: 1974
Crisis: 1991
10
Crisis: 2001
Crisis: 2008
Peak: 01-1993 at 3.19 Crisis: 1982 Peak: 05-2004 at 3.05
5 Peak: 01-1972 at 1.77
Peak: 01-1988 at 1.79
Peak: 01-1976 at 2.13
0
0 Gap: 03-1973
0 Gap: 08-1978
0 Gap: 01-1989
0 Gap: 12-2005
0 Gap: 03-2000
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
16/70
01/02/08
01/02/06
01/02/04
01/02/02
01/02/00
01/02/98
01/02/96
01/02/94
01/02/92
01/02/90
01/02/88
01/02/86
01/02/84
01/02/82
01/02/80
01/02/78
01/02/76
01/02/74
01/02/72
01/02/70
01/02/68
01/02/66
01/02/64
01/02/62
-5
2) Supply-Demand Index for Apartments. These indexes, as well as the price index, are supplied by the Massachusetts Institute of Technology 4 (MIT ). An index reading above 20 or below -20 seems to reflect excess in investor behavior. The current crisis could have been detected by looking at excess investor demand boosting prices. Even though supply was high prices still increased. In 1998, this is less obvious, but then demand was weak, with relatively cheap residential real estate competing more favourably with apartment rentals.
(please see graphs next page)
4
The MIT/CRE CREDL Initiative has developed a Transactions-Based Index (TBI) of Institutional Commercial Property Investment Performance. The purpose of this index is to measure market movements and returns on investment based on transaction prices of properties sold from the NCREIF Index database. This is a new type of index that offers advantages for some purposes over the median-price or appraisalbased indexes previously available for commercial real estate in the U.S. Median price indexes are not true price-change indexes because the properties that transact in one period are different from those that transacted in the previous period. Appraisal-based indexes are based on appraisal estimates rather than actual prices of actual transactions. The type of transactions-based index being provided by MIT/CRE can often provide a more up-to-date or precise picture of movements in the real estate market than these other types of indexes, and is being provided for research purposes by the MIT Center for Real Estate as a service to the industry and academic research communities. However, it should be noted that transactionsbased indexes are statistical products that can contain estimation error. MIT makes no warranty or claim regarding the usefulness or implications of the index. Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
17/70
Apartment Index. Source : MIT Peak:4Q2005
260
50
240 220 40
200
Price Index
180
Index peaked 4Q2007 and declined by 23% so far so far
Demand - Supply
160 140
30
120 20
100 Index peaked 3Q1998 and declined by 10%
80 60
10
40 Index above 20: 3Q2005
20 0
0
-20 Index above 0 with positive trend:3Q1996
-40
-10
Index above 0 with positive trend:3Q2002
-60 -80 -100
-20
-120 -140 -30
-160 -180 -200
-40
-220 -240 -260 3Q2008
1Q2008
3Q2007
1Q2007
3Q2006
1Q2006
3Q2005
1Q2005
3Q2004
1Q2004
3Q2003
1Q2003
3Q2002
1Q2002
3Q2001
1Q2001
3Q2000
1Q2000
3Q1999
1Q1999
3Q1998
1Q1998
3Q1997
1Q1997
3Q1996
1Q1996
3Q1995
1Q1995
3Q1994
1Q1994
-50
300 Supply Index - Quarterly figures
250 200 150 100 50
2008
2008
2007
2007
2006
2006
2005
2005
2004
2004
2003
2003
2002
2002
2001
2001
2000
2000
1999
1999
1998
1998
1997
1997
1996
1996
1995
1995
1994
1994
0
Cost of renting vs DS to DPI 32
12 Rent/DPI - Left Axis Mortgage DS/DPI - Right Axis 11.5
30 11
Period of high renting cost compared to being home owner 28
10.5
26
10
9.5 24 9 22
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
0 8 q 3
0 8 q 1
0 7 q 3
0 7 q 1
0 6 q 3
0 6 q 1
0 5 q 3
0 5 q 1
0 4 q 3
0 4 q 1
0 3 q 3
0 3 q 1
0 2 q 3
0 2 q 1
0 1 q 3
0 1 q 1
0 0 q 3
0 0 q 1
9 9 q 3
9 9 q 1
9 8 q 3
9 8 q 1
9 7 q 3
9 7 q 1
9 6 q 3
9 6 q 1
9 5 q 3
9 5 q 1
9 4 q 3
20
9 4 q 1
8.5
18/70
8
3) Supply-Demand Index for Retail. These indexes and the price index are also supplied by the MIT. A reading above 20 or below -20 again seems to reflect excess in investor behavior.
Retail Index. Source : MIT 250
60 MIT Index Peak: 2Q2005
200 Price Index Demand - Supply
40
150
Index peaked 1Q2007 and declined by 16% so far
100
20 Index peaked 4Q1994 and declined by 12%
50
MIT Index above 20: 1Q2005
0
0 MIT Index above 0 with + trend: 4Q2001
MIT Index above 0 with + trend: 3Q1996
-50
-20 -100
-150 -40 -200
-250 3Q2004
1Q2005
3Q2005
1Q2006
3Q2006
1Q2007
2004
2005
2005
2006
2006
2007
3Q2008
1Q2004 2004
1Q2008
3Q2003 2003
3Q2007
1Q2003 2003
3Q2002
1Q2002
3Q2001
1Q2001
3Q2000
1Q2000
3Q1999
1Q1999
3Q1998
1Q1998
3Q1997
1Q1997
3Q1996
1Q1996
3Q1995
1Q1995
3Q1994
1Q1994
-60
250 Supply Index - Quarterly figures 200 150 100 50
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
19/70
2008
2008
2007
2002
2002
2001
2001
2000
2000
1999
1999
1998
1998
1997
1997
1996
1996
1995
1995
1994
1994
0
4) Supply-Demand Index for Office. A reading above 20 or below -20 seems to reflect excess in investor behavior. We have the best correlation for office properties, between price evolution and Supply-Demand Index: office r= 0.65; retail r= 0.47; apartment r= 0.46. An Index close to zero or negative can be associated with stagnating to falling prices.
Office Index. Source : MIT 60
350
Price Index
250
Demand - Supply
40 Index peaked 3Q2007 and declined by 24% so far
150 20 MIT Index above 20: 3Q2005
50
0 MIT Index above 0 with + trend: 1Q1996
-50
MIT Index above 0 with + trend: 3Q2003 -20
MIT Index bellow -20: probably in 1993
-150
MIT Index bellow -20: 3Q2001 -40
-250 MIT Index bellow -20: since 1Q2008 -60 3Q2008
1Q2008
3Q2007
1Q2007
3Q2006
1Q2006
3Q2005
1Q2005
3Q2004
1Q2004
3Q2003
1Q2003
3Q2002
1Q2002
3Q2001
1Q2001
3Q2000
1Q2000
3Q1999
1Q1999
3Q1998
1Q1998
3Q1997
1Q1997
3Q1996
1Q1996
3Q1995
1Q1995
3Q1994
1Q1994
-350
350 Supply Index - Quarterly figures
300 250 200 150 100 50
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
20/70
2008
2008
2007
2007
2006
2006
2005
2005
2004
2004
2003
2003
2002
2002
2001
2001
2000
2000
1999
1999
1998
1998
1997
1997
1996
1996
1995
1995
1994
1994
0
5) Credit Risk Cost for US Banks. Except for 2001-2002, when the charge-offs on credit cards went as low as 3%, low readings can be interpreted as a sign of cheap money (similar to interest rates) thus boosting the use of credit cards. The ratio made similar bottoms three other times: 3.03% in 3Q1989, 2.92% in 3Q1994 and 3.13% in 1Q2006.
Credit Risk Cost for US Banks, Source: FED 9
Office, Retail, Apart Indexes peaked between 1Q07 and 4Q07
Charge-off rate on business loans; All commercial banks Charge-off rate on consumer loans; All commercial banks
Retail peaked 1Q-1999 (Decline -12%)
8 Charge-off rate on single family residential mortgages, booked in domestic offices; All commercial banks
Retail peaked 4Q-1994 (Decline -12%)
Charge-off rate on credit card loans; All commercial banks 7
3.13% at 1Q2006
Charge-off rate on commercial real estate loans (excluding farmland); All commercial banks 6 House peaked 03-1990 (Decline -9%)
5
2.92% at 3Q1994
3.03% at 3Q1989 4
House peaked 05-2005 (Decline ?%)
Office peaked 4Q-2000 (Decline -10%)
3
2 Apartment peaked 3Q-1998 (Decline -10%) 1
0 GDP : +30% from 1983 to 1989
GDP : +33% from 1992 to 2000
GDP : +16% from 2002 to 2007
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
21/70
2009Q1
2008Q2
2007Q3
2006Q4
2006Q1
2005Q2
2004Q3
2003Q4
2003Q1
2002Q2
2001Q3
2000Q4
2000Q1
1999Q2
1998Q3
1997Q4
1997Q1
1996Q2
1995Q3
1994Q4
1994Q1
1993Q2
1992Q3
1991Q4
1991Q1
1990Q2
1989Q3
1988Q4
1988Q1
1987Q2
1986Q3
1985Q4
1985Q1
-1
f.
Summary of proposed indicators to follow and how to read them
As outlined in the description of the different indicators selected, very often the combination of different indicators suggest worsening conditions. A-Major indicators for Economy and Real Estate 1- the (1–years / 10-year) US Treasury spread is predictive of GDP evolution and Office, Apartment and Retail Index evolution based on a simple correlation factor. § How to use it: when it turns negative after a period of decrease, it should be determined which sector has benefitted from the cheap money. Is it stocks, is it real estate? If real estate prices have seen a significant increase then there is a higher probability of significant price decreases. § Real Estate exposure should be decreased using total return swaps, as it is unlikely that the market will permit lower LTVs… § Value of the index shall be used mainly to anticipate the magnitude the price changes § Once the curve is inverted there is statistically 3 years to adapt the Credit Risk Policy. B-Major indicators for Economy 2- Charge off on credit card for US Bank. § How to use it: because there is little to no statistical correlation between this indicator (or its evolution) and real estate prices, the indicator can be used merely as a signal for a peak when the rate declines and approaches 3%. This should be used to determine economic peaks, not real estate peaks. § Once the 3% bottom is reached, the Home Price Index is normally already declining and there is statistically just a few quarters before commercial real estate properties are negatively impacted. C-Major indicators for Real Estate 3- Supply-Demand Index for Office and Retail Properties. § How to use it: High values, especially above 20 combined with a significant increase in prices (acceleration of the increase), and high and accelerating transaction volume are signs of a bubble creation. The same lending policy applied in #1 should be applied. § Once the 20 benchmark is breached upward in a volume and price increase environment, there is statistically 2 years before commercial real estate property values decline. 4- Demand/Supply index for Apartment. § How to use it: High value, especially above 20, combined with a significant increase in price (acceleration of the increase) and high and accelerating transaction volume may be signs of a bubble creation. The bubble confirmation could be found by comparing the Cost of Renting vs. the DS cost to DPI ratio. § Once the 20 reach is breach upward in volume and price increase environment, there is statistically 2 years before Commercial properties are affected. D-Minor indicators for Real Estate and Economy 5- Household debt service payment and financial obligations as a percentage of disposable personal income: § How to use it: To be used as additional information, and as an advance indicator. § An increased gap between Mortgage DS and Consumer DS may be indicative of a coming downturn in 2 to 4 years. CRE will be hit 4 to 6 years after the gap starts rising. The indicator is tight to individual wealth. Then, it may help in detecting a global crisis that will affect
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
22/70
households and in turn may be affecting CRE (similar to the 90’s and the current crisis). Still, CRE can be affected by other events (similar to that in the 00’s). 1- Ratio Net Worth/DPI: § How to use it: To be used as additional information, and as an advanced indicator to identify peaks. § A ratio with a reading above 5.5 may be indicative of a coming downturn in 1 to 3 years. 2- Ratio Net Worth of Household/GDP: § How to use it: To be used as additional information, and as an advanced indicator to identify peaks. § A ratio with a reading above 4 may be indicative of a coming downturn in 2 to 3 years. 3- Home Equity Loans as a percentage of GDP: § How to use it: To be used as additional information, and as a trend indicator. A sharp increase during several years (4+) can be used as an indicator of increasing risk for residential real estate.
4. Definition of critical indicators for a market bottom and recovery As we are currently in the downturn phase, it is now crucial to identify the recovery signal. I have assumed for the purposes of this paper that the same ratios can be used for both bull and bear markets while considering that it is critical that those indicators come back to a normal reading. In this Section 3, I will only list the indicators considered as pertinent and will determine when and at which price level the market could bottom.
a. Indicators First, and not surprisingly, I considered that declining CRE credit losses for US banks, CRE price stabilization and a period of GDP growth are indicative of a safe environment for lending on commercial real estate. The recent periods 1985-1989, 1993-1998, and 2003-2007 met these criteria. During this phase, the starting points were: §
the spread between 1-year and 10-year US Treasury rates returned to normal (2 to 3%) and started to decline (1993-2000 and 2002-2005).
§
Supply-Demand Index after having fallen well below the -20 mark, started to rise again. A reading above zero is more or less a starting point for new price increases (apartment 19962005, office 1996-2000 and office 2003-2006, retail 1996-2005).
§
Charge-off rates on business loans decline until it starts resuming upward.
§
After falling to a low level, the gap between Mortgage DS and Consumer Loan DS is rising again (after rising between 1993 to 2003).
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
23/70
b. Timing for Office Building 1- The spread between 1–year and 10-year US Treasury rates is predictive of GDP evolution and Office, Apartment and Retail Index evolution based on a simple correlation factor. To obtain good results, we have to use the spread between the 2 rates with 15 quarterly advances for the Office and Apartment Index. So, it could be expected that the bottom of the current crises may be reached 4th quarters of 2010. But to be pointed out at the price difference between 4Q09 and 4Q10 is just -7%. 2- The bottom is an average. As such if it indicates the general trend in the country, what’s always useful in a business environment, it will lag behind the true recovery for some MSA that either have been less subject to exuberant price increase over the previous periods and/or which peak was reached already a reasonable time ago, and then have exhausted the potential for a decline. This is typically the situation portrayed in section 4 for the Philadelphia MSA for instance (prices peaked in Sept. 2006), OFFICE BUILDINGS 350
3.5
3 300 r=0.84 2.5 250 Bottom: 4Q2010
2
200
1.5
1
150
0.5 100 0 50
10y-1year put 15 quarters forward Office price index Model Calculation
-0.5
-1 10/01/97 01/01/98 04/01/98 07/01/98 10/01/98 01/01/99 04/01/99 07/01/99 10/01/99 01/01/00 04/01/00 07/01/00 10/01/00 01/01/01 04/01/01 07/01/01 10/01/01 01/01/02 04/01/02 07/01/02 10/01/02 01/01/03 04/01/03 07/01/03 10/01/03 01/01/04 04/01/04 07/01/04 10/01/04 01/01/05 04/01/05 07/01/05 10/01/05 01/01/06 04/01/06 07/01/06 10/01/06 01/01/07 04/01/07 07/01/07 10/01/07 01/01/08 04/01/08 07/01/08 10/01/08 12/31/08 F1Q200 F2Q200 F3Q200 F4Q200 F1Q201 F2Q201 F3Q201 F4Q201 F1Q201 F2Q201 F3Q201 F4Q201 F1Q201 F2Q201 F3Q201
0
3- Supply-Demand Index for Office. The trend should return positive and cross the zero. At this point in time price should be set for new increases.
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
24/70
c. Timing for Retail Properties 1- The spread between 1–year and 10-year US Treasury rates is predictive of GDP evolution and Office, Apartment and Retail Index evolution based on a simple correlation factor. To obtain good results, we have to use the spread between the 2 rates with 14 quarterly advances for the Retail Index. So, it could be expected that the bottom of the current crises may be reached the 3rd quarters of 2010. But to be pointed out at the price difference between 4Q09 and 3Q10 is just -3%. 2- The bottom is an average. As such if it indicates the general trend in the country, what’s always useful in a business environment, it will lag behind the true recovery for some MSA that either have been less subject to exuberant price increase over the previous periods and/or which peak was reached already a reasonable time ago, and then have exhausted the potential for a decline. This is typically the situation portrayed in section 4 for the following MSA: Philadelphia (prices peaked in October 2006), Atlanta (peaked in June 2007), Nashville (peaked in Dec. 2007), Mineapolis (peaked in March 2007), Sacramento (peaked in November 2007), San Diego (peaked in August 2007), Dallas (peaked in August 2007), Houston ((peaked in August 2006), Phoenix (peaked in September 2007). By opposition to the office sector, 50% of the studied MSA are narrowing the bottom if not yet reached. This is not surprising considering that retail properties were affected 2 quarters before the office buildings. This also give credential to a recovery to happen 2 quarter sooner than for the office building sector. RETAIL PROPERTIES 3.5
250
3 200
r=0.77 2.5 Bottom: 3Q2010 2
150 1.5
1 100 0.5
0
50 10y-1year put 14 quarters forward Retail price index Model Calculation
-0.5
-1 10/01/97 01/01/98 04/01/98 07/01/98 10/01/98 01/01/99 04/01/99 07/01/99 10/01/99 01/01/00 04/01/00 07/01/00 10/01/00 01/01/01 04/01/01 07/01/01 10/01/01 01/01/02 04/01/02 07/01/02 10/01/02 01/01/03 04/01/03 07/01/03 10/01/03 01/01/04 04/01/04 07/01/04 10/01/04 01/01/05 04/01/05 07/01/05 10/01/05 01/01/06 04/01/06 07/01/06 10/01/06 01/01/07 04/01/07 07/01/07 10/01/07 01/01/08 04/01/08 07/01/08 10/01/08 12/31/08 F1Q200 F2Q200 F3Q200 F4Q200 F1Q201 F2Q201 F3Q201 F4Q201 F1Q201 F2Q201 F3Q201 F4Q201 F1Q201 F2Q201 F3Q201
0
3- Supply-Demand Index for Office. The trend should return positive and cross the zero. At this point in time price should be set for new increases. Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
25/70
d. Price Levels Calculation of price levels is subject to many factors, and can easily be pushed one way or another depending on your state of mind. But, using both simple linear regression and theoretical calculations based on excess cash flow and ROE for selected MSA (see Section 4), the magnitude of the current decline is severe, with price declines expected to be in the following ranges: -
Office:
-25 to -70% per MSA (average 50%) when using ROE, Cap Rate and other transaction parameters or -55% using correlation for estimation. Prices are currently (1Q09) at roughly -24%.
-
Retail:
-15 to -65% per MSA (average 45%). when using ROE, Cap Rate and other transaction parameters or -50% using correlation for estimation. Prices are currently (1Q009) at roughly -16%
-
Apartment: -49% using correlation for estimation (calculation per MSA yet to be done). Prices are currently (1Q09) at roughly -23%
These percentages are an average, so it may be the case that some properties are already trading at levels close to the bottom (we’ve seen some properties trading at -40 to -60%), thus making refinancing with current LTVs that are by far lower (55% to 65%) attractive provided, however, that the location is suitable. Properties should still be well occupied and able to absorb lease renewals at significantly lower rents. Importantly, whether the price is calculated with cap rate, ROE, etc, or using the correlation with indicators, the outcome is coherent. For office properties, on average, we have -50% price decline with economic parameters and -55% using the correlation. For Retail properties, on average, we have -45% price decline with economic parameters and -56% using the correlation.
e. Current Indicator level and trend Level (1Q) 1y-10year Treasury spread: Demand-Supply Index Office: Demand-Supply Index Retail: Demand-Supply Index Apartment: Mortgage-Consumer DS:
311bps -72 -89 -41 5.26
Trend level off? Negative Negative Negative Decline
Indication Yellow Zone Red zone Red zone Red Zone Red Zone
Currently, the spread between 1-year and 10-year US Treasury rates has returned to normal 3.1%, but has yet to deliver any indication of decline. The Supply-Demand Index for Office, Retail and Apartment properties are still continuing to decline (1Q2009 latest available) thus showing an unprecedented disconnect between supply and demand (Office = -72, Retail = -89, Apartment = -41). Charge-offs on business loans are still going up (last release for 1Q2009) and the gap between Mortgage DS and Consumer DS indicates the beginning of a decline. So far only one indicator has started to give signs of a return to a more positive trend. This might be, on average, too early for commercial real estate, with of course few exceptions as it can be seen in section 4 for some markets in some MSA that peaked already 2 or 3 years ago.
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
26/70
5. Office and Retail Estate prices per MSA a. Overview For this section, I have used the RCA and REIS data. The goal of this section is to: §
give an estimate of the magnitude of price declines from the peak for each single MSA that had a sufficient number of transactions.
Caution on the limitation of the calculation methodology: § §
§ § § § §
because each market is specific the calculation indicates a trend in the current market, the latest transactions may be reflective of the best properties. The change in the mix of traded properties may have a significant impact. For example, an increase may be reported in terms of psf due to just one Class A building leased to high credit grade tenants on a long-term leases in the best sub-market. This is the reason why the MIT index evolution differs from RCA figures. Historical data is for the period between 01-2002 to 02-2009 assumptions have been made for average maintenance costs assumptions have been made on the LTV evolution over the past years and for the future. assumptions have been made on the spread over the 10–year US Treasury rate assumptions have been made for the 10–year US Treasury rate in 1 year
Parameters: § § § § § §
§ §
LTVs used are in the range of 70-80% for most of the historical data and is computed at 60% for the simulation Spread over 10-year US Treasury was in the range of 1%-2% declining for most of the historical data, at 4% for current transaction and is computed at 300bps for the simulation 10-year US Treasury rates are actual data and is computed at 4.5% for the simulation Cost basis for offices properties is 35% for historical data and is slightly higher at 38% for the simulation Cost basis for retail properties is 25% for historical data and is slightly higher at 27% for the simulation Considering that we are in a major crisis, I usually used for the Office building simulation either the worst observed vacancy rates available or the REIS forecast whichever is the greater. For retail properties simulation I used the REIS figures as since the 90’s nearly none of the observed MSA had to suffer a significant effective rent decline. Considering that we are in a major crisis, I have computed the rent/psf using the worst cumulative decline observed during the last peak for the simulation The ROE is calculated based on the excess cash flow after debt service payment. DS is based on a 30 year amortization, using actual or simulated 10–year US Treasury rates plus the estimated spread.
I simulated the price per square (“psf”) foot for each MSA with those parameters using the following constraints: §
ROE of 7.5% for office buildings. It could be argued that this level is too low, but due to the above remarks the rate may not be the actual value. Regardless, we should be concerned with the trend. Furthermore the 7.5% is above the 6.1% maximum return calculated for historical periods, and well above the average that is just below 1%. Another reason for the low level is that the calculation does not include the capital gain an investor can expect in a normal market. Observations of historical ROE evolution also show that for some markets the price was fuelled by the expected gain to be generated Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
27/70
§ § §
if the often expected significant rent price increase and higher occupancy actually materialized. This does not contradict either a recent profitability study carried by CBRE5 for commercial real estate properties over the period 1985 to 2008, that indicated that in average the return (including capital gain) is of 1.99% per quarter, or 8% annualized. ROE of 10% for retail properties. The ROE chosen is higher than for office properties, since historically it has been the case. ROE to reach the best observed historical ROE Price that permits us to match the worst observed Cap Rate.
The first observation for Office Buildings: § § §
§ § § §
Most of the highest Cap Rates are in the 9%-10% range, which is still above the current Cap Rate Volume is down in each single MSA, The calculations per MSA for office properties indicate potential declines from peak of as much as 30 to 70%. Some prices should revert to below a psf observed during 2002-2009 period, but some MSA will still be above their earlier lows. On average the decline from the peak could be around 50%. The MIT Index currently indicates that prices are down by 24%, so we appear to be half way through the current cycle. Peaks in CRE were often reached 12 to 24 months after residential peaks. Miami, Las Vegas, San Francisco, Dallas, San Diego MSA may be significantly affected DC MSA may be one of the least affected Nearly all buildings to refinance from now on need significant additional equity pay down, since the expected price is below the 2002 psf price (except DC)
The first observation for Retail Properties: § § §
§ § § § §
Most of the highest Cap Rates are in the 9%-10% range, which is still above the current Cap Rate Volume is down in each single MSA, The calculations per MSA for office properties indicate potential declines from peak of as much as 15 to 65%. Some prices should revert to below a psf observed during 2002-2009 period, but some MSA will still be above their earlier lows. On average the decline from the peak could be around 45%. The MIT Index currently indicates that prices are down by 16%, Peaks in CRE were often reached 12 to 24 months after residential peaks. Mineapolis, New York, Los Angeles, San Francisco, Houston, Chicago MSA may be or have already been significantly affected Southwest region likely to be the least affected contrary to housing and office markets Nearly all buildings to refinance from now on need significant additional equity pay down, since the expected price is below the 2004 psf price (except Los Angeles, CA and Nashville, TN) 9 out of 17 MSA already record a significant price decline and are about to bottom during coming quarter(s).
How to use the figures § §
§
Calculated psf levels cannot be used to assess whether or not financing a property is too expensive because the calculation is based on an average (property A, B, C, different age, etc...). If we consider a refinancing, the expected calculated decline can be used to compare the potential decrease in value by an appraiser between now and 2 or 3 years ago. For example, a property that would trade 40% lower than 2 years ago will be, in most markets, a low risk (provided tenancy is of high quality with reasonably LT lease, as companies bankruptcy will continue to escalate, paving the way for higher vacancy and lower rents). Historical cap rate highs can be used as a stress test as well.
5
CBRE: “advantages of investing in Commercial Real Estate”, April 2009
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
28/70
Table presenting the calculation per MSA for Office building price evolution Most of the MSA in which prices could come back below the minimum price are in the West or Southeast Regions, and Dallas in the Southwest region may be affected as well. The region least affected is the Mid-Atlantic (DC, Philadelphia). 02-09 Hist. Sale price psf MSA Nashvile Atlanta Miami Philadelphia DC Mineapolis Chicago Boston New York Las Vegas Sacramento San Diego Los Angeles San Francisco Phoenix Houston Dallas RCA - US MSA
Dec-07
$
272
High
Low
Current Sale Price psf
Cap rate
Simulation parameters
Vacancy
Rent psf
ROE
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
170 197 326 189 374 143 215 331 569 288 214 375 322 383 228 177 182
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
77 91 106 100 196 85 147 135 235 125 114 154 150 173 115 88 96
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
157 189 326 129 365 117 203 311 531 242 195 338 278 278 219 177 177
7.6% 8.3% 6.4% 6.6% 6.3% 7.3% 7.7% 7.5% 4.9% 6.9% 6.5% 6.1% 5.9% 6.8% 6.9% 6.9% 6.9%
10.9% 17.1% 13.7% 12.3% 8.5% 17.4% 16.5% 13.8% 10.2% 19.8% 17.2% 16.2% 11.5% 12.8% 20.6% 13.0% 23.1%
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
16.27 17.57 25.64 20.07 43.64 17.27 22.17 32.40 52.21 20.09 20.09 25.71 28.76 32.60 19.39 20.84 16.21
2.9% 0.4% -1.1% 10.1% 5.7% 7.7% 2.7% 2.5% 2.2% -1.3% 1.7% -1.8% 2.8% 4.5% -0.7% 4.5% -0.7%
$
272
$
158
$
265
6.0%
15.3% $
24.08
0.4%
Vacancy 14.5% 20.9% 15.9% 15.0% 11.0% 20.0% 19.9% 16.4% 11.9% 24.0% 20.5% 18.0% 14.5% 17.0% 23.0% 18.0% 27.0%
Rent psf
Expected 7.5% ROE Sale Price psf
Cap rate
Best ROE observed 2002-2009
Decline From Peak
Sale Price psf
Cap rate
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
14.31 15.41 23.86 18.55 40.59 14.27 19.54 24.70 49.44 18.50 19.01 23.07 25.18 25.20 19.27 17.71 12.87
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
94 94 155 121 277 87 120 159 335 108 116 145 165 161 114 112 72
8.1% 8.0% 8.0% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.1% 8.0% 8.1%
-28% -49% -52% -36% -23% -39% -44% -48% -37% -62% -46% -61% -49% -58% -49% -27% -58%
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
60 92 126 90 198 65 131 106 244 112 90 167 163 180 115 81 63
12.6% 8.2% 9.9% 10.9% 11.3% 10.9% 7.4% 12.1% 11.1% 7.8% 10.4% 7.0% 8.2% 7.2% 8.0% 11.1% 9.2%
18.2% $
20.59
$
129
8.1%
-53% $
139
7.5%
Decline From Peak -54% -50% -61% -52% -45% -55% -39% -65% -54% -61% -58% -55% -49% -53% -48% -47% -63%
Highest Cap Rate observed 2002-2009 Sale Price psf 65 77 121 97 246 67 108 135 333 81 92 128 153 137 96 89 57
11.7% 9.8% 10.3% 10.1% 9.1% 10.5% 9.0% 9.5% 8.1% 10.8% 10.2% 9.2% 8.7% 9.5% 9.6% 10.1% 10.3%
-51% -58% -63% -49% -32% -53% -50% -56% -37% -72% -57% -66% -52% -64% -57% -42% -67%
-49% $
115
9.1%
-58%
$600
$500
$500
PeakPrice
RCA - US MSA
Dallas
Houston
Phoenix
San Francisco
Los Angeles
San Diego
Sacramento
$Las Vegas
$New York
$100
Boston
$100
Chicago
$200
Mineapolis
$200
DC
$300
Philadelphia
$300
Miami
$400
Atlanta
$400
Copyright April 2009 29/70 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
Decline From Peak
$ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $
$600
Francois Pineau
Cap rate
- OFFICE BUILDINGS Bars are the Current and Peak sale price psf "stock graph" represents psf @7.5% ROE / psf @Best ROE / psf @Highest Cap rate
Current Price (1Q09)
Nashvile
Southeast Southeast Southeast Mid-Atlantic Mid-Atlantic Midwest Midwest Northeast Northeast West West West West West Southwest Southwest Southwest
Sale price at peak date Jul-07 $ 131 Oct-06 $ 184 Feb-09 $ 326 Sep-06 $ 189 4Q-2007 $ 362 Aug-08 $ 143 May-08 $ 215 Jun-07 $ 306 Jan-08 $ 532 May-08 $ 287 Jan-08 $ 214 Mar-08 $ 375 Mar-08 $ 322 Feb-08 $ 382 Mar-08 $ 223 Jul-08 $ 154 2nd/3rd Q08 $ 170 Peak Date Used
Table presenting the calculation per MSA for Retail properties price evolution Most of the MSA in which prices could come back below the minimum price are in the West or Southwest Regions (Sacramento, San Diego, Phoenix, Dallas) Chicago in the Midwest region may be affected as well. The region least affected is the Mid-Atlantic (DC, Philadelphia). 02-09 Hist. Sale price psf
Nashvile Atlanta Miami Philadelphia DC Mineapolis Chicago Boston New York Las Vegas Sacramento San Diego Los Angeles San Francisco Phoenix Houston Dallas
Dec-07 Jun-07 Mar-07 Oct-07 Mar-07 Jan-08 Apr-08 Jul-08 Mar-08 Nov-07 Aug-07 Nov-07 Feb-08 Sep-07 Aug-06 Aug-07
$ $ $ $ $ $ $ $ $ $ $ $
255 255 225 434 348 248 335 376 331 196 181 173
$ $ $ $ $ $ $ $ $ $ $ $
255 313 236 434 524 248 335 383 390 273 181 179
$ $ $ $ $ $ $ $ $ $ $ $
92 98 82 127 100 90 114 131 109 94 72 76
$ $ $ $ $ $ $ $ $ $ $ $
129 196 223 407 385 197 233 299 380 267 113 139
7.4% 7.2% 7.0% 6.9% 6.9% 6.6% 5.5% 5.9% 6.1% 6.6% 7.7% 7.1%
RCA US MSA
Oct-07
$
190
$
195
$
103
$
188
7.0%
MSA
High
Sale Price psf
Low
Cap rate
$450
Simulation parameters
Vacancy
Rent psf
ROE
Vacancy
Rent psf
Expected 10% ROE Sale Price psf
Best ROE observed 2002-2009
Decline From Peak
Cap rate
Sale Price psf
Cap rate
Decline From Peak
Highest Cap Rate observed 2002-2009 Sale Price psf
Cap rate
243 182 272 250
$ $ $ $
55 91 88 79
$ $ $ $
243 166 249 201
6.9% 7.4% 6.6% 7.6%
6.9% 11.6% 6.5% 7.2%
$ $ $ $
13.56 15.51 21.19 17.71
-2.4% 3.4% 2.8% 3.2%
9.9% 14.7% 9.2% 9.9%
$ $ $ $
12.91 15.10 19.96 18.86
$ $ $ $
94 104 146 137
9.0% 9.0% 9.1% 9.1%
-11% -43% -41% -45%
$ $ $ $
45 86 97 104
18.9% 10.9% 13.6% 11.9%
-58% -53% -61% -58%
$ $ $ $
83 95 144 124
10.2% 9.9% 9.2% 10.0%
-21% -48% -42% -50%
10.4% 10.7% 5.5% 4.9% 9.6% 9.8% 5.9% 5.0% 3.7% 8.8% 13.5% 12.8%
$ $ $ $ $ $ $ $ $ $ $ $
15.66 17.37 19.78 22.99 20.37 19.51 25.83 26.42 31.08 16.72 13.66 14.30
8.3% 2.7% 3.6% -2.0% -3.1% 4.6% 7.4% 3.6% 2.7% -1.4% 7.5% 4.7%
14.0% 13.8% 8.4% 7.5% 12.7% 12.4% 7.1% 6.7% 6.1% 11.4% 16.9% 15.9%
$ $ $ $ $ $ $ $ $ $ $ $
14.89 16.39 18.47 21.90 19.90 18.45 24.00 25.00 29.00 15.70 12.90 13.80
$ $ $ $ $ $ $ $ $ $ $ $
103 114 136 162 140 130 179 188 219 112 86 93
9.1% 9.0% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1% 9.1%
-60% -55% -40% -63% -60% -48% -47% -50% -34% -43% -52% -46%
$ $ $ $ $ $ $ $ $ $ $ $
90 79 76 138 95 92 150 133 138 109 67 99
10.4% 13.1% 16.3% 10.7% 13.3% 12.8% 10.9% 12.8% 14.4% 9.3% 11.7% 8.6%
-65% -69% -66% -68% -73% -63% -55% -65% -58% -44% -63% -43%
$ $ $ $ $ $ $ $ $ $ $ $
92 119 124 159 135 122 160 187 211 104 82 86
10.2% 8.7% 10.0% 9.3% 9.4% 9.7% 10.2% 9.1% 9.4% 9.8% 9.6% 9.8%
-64% -54% -45% -63% -61% -51% -52% -50% -36% -47% -55% -50%
9.5% $
17.09
3.3%
12.6% $
16.20
$
114
9.1%
-40% $
101
10.2%
-47% $
109
9.5%
-43%
- RETAIL PROPERTIES Bars are the current sale price and peak price psf "stock graph" represents psf @10% ROE / psf @Best ROE / psf @Highest Cap rate
$600 $500
$400 $350
$400
PeakPrice
$300 $250
$300
$200 $200
$150 $100
$100
$50 $-
Copyright April 2009 30/70 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
RCA US MSA
Dallas
Houston
Phoenix
San Francisco
Los Angeles
San Diego
Sacramento
Las Vegas
New York
Boston
Chicago
Mineapolis
DC
Philadelphia
Miami
Atlanta
$-
Francois Pineau
Decline From Peak
$ $ $ $
Current Price (1Q09)
$500
Nashvile
Southeast Southeast Southeast Mid-Atlantic Mid-Atlantic Midwest Midwest Northeast Northeast West West West West West Southwest Southwest Southwest
Current
Sale price at peak date $ 106 $ 182 $ 248 $ 250
Peak Date Used
b. Selected US MSA • Office buildings: The MIT Index peaked in 3Q2007 instead of December 2007 based on transactions collected by RCA. At that time the volume of transactions started to decline. The net absorption is now significantly negative. The REIS net absorption forecast is positive for 2011 with improvement expected in 2010, which could mean positive absorption by 2010 year end. This seems in line with our assessment using a different set of data to predict a recovery. Office Building - US market (main MSA tracked by RCA) - Peak Dec. 2007 300
9.0%
Market Price psf Cap Rate ROE
7.0%
240
180
5.0% 139 129 115
120
3.0% 60 1.0% 0
-1.0% -60
7.5ROE BestROE WorstCapRate
-3.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
-120
Office Building - Transaction Volumes - (million USD)
250,000 200,000 150,000 100,000 50,000
7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0
Office Stock and its impact on price 80,000,000
4.0%
60,000,000
3.0%
40,000,000
2.0%
20,000,000
1.0%
0
0.0%
-20,000,000 -40,000,000 -60,000,000 -80,000,000
-1.0% Net Absorption Growth of ratio Effective Rent/Asking Rent
-2.0% -3.0%
Office employment growth
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
-4.0%
31/70
• Retail Properties: The MIT Index peaked in 1Q2007 instead of October 2007 based on transactions collected by RCA. Until the end of 2007, positive absorption, strong population and revenue growth were supporting the retail sector. Retail properties - US market (main MSA tracked by RCA) - Peak October 2007
12.0%
Market Price psf 180
Cap Rate ROE
10.0%
8.0% 120
114 109 101 6.0%
4.0% 60
2.0%
0.0% 7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Retail Properties - Transaction Volumes - (million USD)
100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
Retail properties, Population and income drivers (forcast from REIS) 80,000,000
4.0%
60,000,000
3.0% 2.0%
40,000,000
1.0%
20,000,000
0.0% -1.0%
0 Net Absorption
-20,000,000
-2.0%
Population growth
-3.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
32/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
-4.0% 4Q05
3Q05
2Q05
2004
-40,000,000
1Q05
Housold Income Growth
c. North East Market – Boston • Office buildings: nd The Boston office market peaked in June 2007. Some of the highest psf numbers existed during the 2 rd and 3 quarters of 2008, but these were based on low volumes. Only 151 property trades have been reported by RCA in 2007, and just 54 in 2008. The change in building class and/or sub-market can significantly affect the average price when volumes are low. As evidence, the median price is 1/3 below the average and the figures for the past 12 months indicated an average price decrease of 17% with the median price going down by 8%. Vacant stock has just begun to grow and represents 13.8% of 1Q09 inventory. Noteworthy is to say that the worst price achieved, using the best ROE, imply a cap rate of 12.1%. The best ROE was achieved in Boston in 2003, at the lowest price point psf, just after the 00’s decline. Reported figure was also low compared to previous and following quarter. Using the average Q-1 and Q+1, the ROE would have been just 10%, corresponding to $145 psf. The then most likely scenario is price around $175-$135 psf.
Office Building - Boston - Peak June 2007
10.0%
Market Price psf Cap Rate ROE
300
9.0% 8.0%
250 7.0% 200
6.0% 159
150
5.0% 135 4.0%
106 3.0%
100
2.0% 50 1.0% 0
-50
7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0.0%
-100
-1.0% -2.0% -3.0%
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Office Building - Transaction Volumes - (million USD)
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
Office Stock and its impact on price - (Forecast from REIS) 1,500,000 1,000,000 500,000 0 -500,000 -1,000,000 -1,500,000 -2,000,000 -2,500,000
3.0% 1.0% -1.0% Net Absorption Growth of ratio Effective Rent/Asking Rent Office employment growth
-3.0% -5.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
-7.0%
33/70
• Retail Properties: The retail properties seem to have peaked beginning of 2008. Volumes were already declining since 4Q2007. While positive absorption is still expected for 2009, this will not be the case anymore in 2010. Further the population growth is not expected to support the awaited by retails, customers demanded. Household income growth is declining, and unfortunately the REIS expectation is certainly too ambitious. The price calculated with the best ROE is somewhat certainly exaggerated, as it implies a 16% cap rate, well above the 10% worst observed, and a 27% ROE. This is certainly due to the rough figure available in 2002 and 2003. Expected price range is more $135-$125 psf. Retail Properties - Boston - Peak April 2008
250
20.0% 19.0%
Market Price psf Cap Rate
18.0% 17.0%
ROE
16.0%
200
15.0% 14.0% 13.0% 12.0%
150 136
11.0% 124
10.0% 9.0% 8.0%
100
7.0%
76
6.0% 5.0% 4.0%
50
3.0% 2.0% 1.0% 0.0% 7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Retail properties - Transaction Volumes - (million USD)
2,500 2,000 1,500 1,000 500 0
Retail properties, Population and income drivers - (Forecast from REIS) 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 -200,000 -400,000
Net Absorption
6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0%
Population growth
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
34/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Housold Income Growth
d. North East Market – New-York • Office buildings: nd The peak was hit in January 08. Albeit slightly below the price of some transaction recorded during 2 rd and 3 quarter, January 08 is the latest observation point with significant volumes. There is a huge negative net absorption (-14.5 million sf.) that may be a handicap for a price increase in the future. The 2008 and 1Q09 negative net absorption corresponds to the positive absorption from 2005 through 2007! Office employment growth is and will remain significantly negative during at least 2009. Noteworthy is to mention that the calculation based on the best ROE of 11.1% imply a Cap Rate well above the maximum 8.1% cap rate observed. The best ROE was achieved in 2005 at a time interest rates were low and LTV high. This configuration should not be seen again before years. As such the most likely event is a decrease in price by 40% ($350-$300 psf in average).
Office Building - New York - Peak January 2008
600
16.0%
Market Price psf Cap Rate
14.0%
ROE
500
12.0% 400 10.0% 335 333 300
8.0% 244 6.0%
200 4.0% 100 2.0%
0 7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0.0%
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Office Building - Transaction Volumes - (million USD)
60,000 50,000 40,000 30,000 20,000 10,000 0
Office Stock and its impact on price - (Forecast from REIS) 4,000,000
2.0%
2,000,000
1.0%
0
0.0%
-2,000,000
-1.0%
-4,000,000
-2.0%
-6,000,000
-3.0% -4.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
35/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
-5.0% 4Q06
3Q06
2Q06
1Q06
2Q05
1Q05
2004
-10,000,000
4Q05
-8,000,000
3Q05
Net Absorption Growth of ratio Effective Rent/Asking Rent Office employment growth
• Retail properties: Based on RCA figures, the peak could be set at different period in time. As the volume in 2008 were still high, July 08 was chosen. Unlike the office market, there should be no significant negative absorption, although 2010 will be a very weak market. Declining population and not surprising household income decline will put additional pressure on retailer, definitely more keen to renegotiate downward their lease or to file for bankruptcy. Retail Properties - New York - Peak July 2008
500
8.0%
Market Price psf 450
Cap Rate
6.0%
ROE 400 4.0% 350 2.0%
300
250
0.0%
200 162 159
-2.0%
138
150
-4.0% 100 -6.0%
50
0 7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
-8.0%
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09 Net Absorption
Population growth
7.5ROE BestROE WorstCapRate
Retail Properties - Transaction Volumes - (million USD)
6,000 5,000 4,000 3,000 2,000 1,000 0
Retail properties, Population and income drivers - (Forecast from REIS)
400,000
8.0%
Housold Income Growth
300,000
6.0%
200,000
4.0%
100,000
2.0%
0
0.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
36/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
-4.0% 1Q05
-2.0%
-200,000 2004
-100,000
e. Mid Atlantic Market – DC • Office buildings: The DC metro might be one of the least affected markets. The peak was reached during 4Q07, as the prices achieved at the end of 2008 and during 1Q09 were based on very low volume. Negative net absorption is not as critical as in other MSAs, and the office employment figures will hold up better than in other MSA, which should support effective rents. The median price is not far from the average and vacant stock is the lowest of the MSA observed with just 8% of inventory. For this metro as well, the calculation based on the best ROE of 15.6% imply a Cap Rate well above the maximum 9.1% cap rate observed. This is certainly due to the rough figure available in 2002 and 2003. As such the most likely event is a decrease in price by 30% ($250-$275 psf in average) Office Building - Washington DC - Peak 4Q2007
400
14.0%
Market Price psf Cap Rate
350
12.0%
ROE 300 277
10.0% 246
250
8.0% 198
200
6.0% 150 4.0% 100
2.0%
50
0.0% 7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0
Office Building - VOLUMES - (million USD)
25,000 20,000 15,000 10,000 5,000
7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0
Office Stock and its impact on price - (Forecast from REIS) 4,000,000
4.0%
3,000,000
3.0%
2,000,000
2.0%
1,000,000
1.0%
0
0.0% -1.0% -2.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
37/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
-3.0% 4Q06
3Q06
2Q06
1Q06
2Q05
1Q05
2004
-3,000,000
4Q05
-2,000,000
3Q05
Net Absorption Growth of ratio Effective Rent/Asking Rent Office employment growth
-1,000,000
•
Retail properties:
NA.
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
38/70
f.
Mid Atlantic Market – Philadelphia
• Office buildings: The Philadelphia MSA was affected early in this crisis. The ROE has returned to an acceptable level, thanks to price declines. Vacancy rates, although increasing, have always be in the low double-digit figures. There is no evidence of a price bubble during the period between 2001 and 2007 (+42%). The office employment situation is less critical than in other MSAs. The median price is close to the average price, even-though the median price has declined more sharply over the past 12 months (-18%, compared to -2% in average). This MSA should bottom soon (if not already achieved) but price recovery is likely to be gradual with no extravagance. Office Building - Philadelphia - Peak Sept. 2006
200
14.0%
Market Price psf 180
Cap Rate 12.0%
ROE 160
10.0%
140 121 120
8.0% 97
100
90 6.0%
80 60
4.0%
40 2.0% 20 0 7.5% ROE Best ROE histo. Highest Cap Rate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0.0%
Office Building - VOLUMES - (million USD)
2,500 2,000 1,500 1,000 500
7.5% ROE Best ROE histo. Highest Cap Rate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0
Office Stock and its impact on price - (Forecast from REIS) 2,000,000 1,500,000 1,000,000 500,000 0 -500,000 -1,000,000 -1,500,000 -2,000,000
4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
39/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Net Absorption Growth of ratio Effective Rent/Asking Rent Office employment growth
• Retail properties: The market peaked in October 2007. Except a kind of irrational market between 2Q-2007 to 2Q-2008, prices have fluctuated in a range close to forecasted price, once volume will have resume. Forecast for demographic factor and income growth fair well in comparison of many MSA. Bottom is probably either reached or closed to. Retail Properties - Philadelphia - Peak October 2007
300
20.0%
Market Price psf 18.0%
Cap Rate ROE
250
16.0% 14.0% 200 12.0% 150
10.0%
137 124 104
8.0%
100 6.0% 4.0% 50 2.0% 0 7.5% ROE Best ROE histo. Highest Cap Rate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0.0%
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5% ROE Best ROE histo. Highest Cap Rate
Retail Properties - VOLUMES - (million USD)
1,600 1,400 1,200 1,000 800 600 400 200 0
Retail properties, Population and income drivers - (Forecast from REIS) 1,000,000 800,000 600,000 400,000 200,000 0 -200,000 -400,000 -600,000
5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
40/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Net Absorption Population growth Housold Income Growth
g. South East Market – Atlanta • Office buildings: This peak is more difficult to determine. We can probably set it in at the end of 2006 when volumes were high. After a phase of decline, prices went up again but on lower volumes, although volumes were not so far from volumes existing in 04-05. So the peak could also be Sept. 08, when prices were not significantly higher than in October 06. ROE is low, and a significant negative net absorption is expected due to completed buildings coming on the market in 2009-2010. Decline in office employment, being relatively moderate, has supported an also moderate gap between asking and effective rents, but the vacant stock is high at 17% of the inventory. This will pressure rental rates. The vacancy ratio is expected to go up from 17% to 21%. If we extract the 2008 period when prices went up again, and pursue the trend started end of 2006, the forecasted prices may not be so far from being achieved.
240
Office Building - Atlanta - peak October 2006
Market Price psf Cap Rate ROE
200
9.0% 8.0% 7.0%
160
6.0% 5.0%
120 4.0%
94 92 77
80
3.0% 2.0%
40 1.0% 0
0.0% -1.0%
-40 -2.0%
7.5ROE BestROE WorstCapRate
-3.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
-80
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRat
Office Building - Transaction Volumes - (million USD)
10,000 8,000 6,000 4,000 2,000 0
Office Stock and its impact on price - (Forecast from REIS) 2,000,000
4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0%
1,000,000 0 -1,000,000 -2,000,000
Net Absorption
-3,000,000
Growth of ratio Effective Rent/Asking Rent Office employment growth
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
-4,000,000
41/70
• Retail properties: nd The market peaked in June 2007. If we extract the 2 half of 2008 period when prices went up again, and pursue the trend started mid of 2007, the forecasted prices may not be so far from being achieved. Coming 3 years will suffer from a negative net absorption what will most probably keep property prices low.
200
Retail Properties - Atlanta - peak June 2007
Market Price psf
14.0%
Cap Rate ROE
13.0% 12.0% 11.0%
150 10.0% 9.0% 8.0% 104 95 7.0%
100 86
6.0% 5.0% 4.0% 50 3.0% 2.0% 1.0%
7.5ROE BestROE WorstCapRate
0.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRat
Retail Properties - Transaction Volumes - (million USD)
5,000 4,000 3,000 2,000 1,000 0
Retail properties, Population and income drivers- (Forecast from REIS) 2,000,000
6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0%
1,500,000 1,000,000 500,000 0 Net Absorption
-500,000
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
42/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
2Q05
1Q05
2004
3Q05
Population growth Housold Income Growth
-1,000,000
h. South East Market – Miami • Office buildings: Volume traded in 2008 has somewhat decreased but is still higher than in 2004, 2005 and 2006. The peak may still be today. Since 2Q2006 there is negative absorption implying a vacant stock equal to 14% of inventories, but office building inventories do not represent a high number. Office employment has just slightly declined so far, which may explain the good standing of the market price, although it is expected to drop for the full year 2009. The gap between effective and asking rents is still limited. The median and the average prices do not show disconnected evolution and have evolved at the same rapid pace seen during the past 12 months. But the office market, contrary to other MSA observed during this crisis, is still rising 30 months after the residential market crashed severely in Florida. This seems unsustainable. Further, with ROE now below 0 and office employment forecasted downward, prices may crash soon unless some other particular factors not captured here explain the apparently still rising price! REIS, contrary to RCA, indicated that prices have decreased. Office Building - Miami - peak Today
350
14.0%
Market Price psf Cap Rate ROE
300
12.0%
250
10.0%
200
8.0% 155
150
6.0% 126121
100
4.0%
50
2.0%
0
0.0%
7.5ROE BestROE WorstCapRate
-2.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
-50
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRat
Office Building - Transaction Volumes - (million USD)
3,000 2,500 2,000 1,500 1,000 500 0
Office Stock and its impact on price - (Forecast from REIS) 1,000,000 800,000 600,000 400,000 200,000 0 -200,000 -400,000 -600,000 -800,000 -1,000,000
5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0%
Net Absorption
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Growth of ratio Effective Rent/Asking Rent Office employment growth
43/70
• Retail properties: Market peak is not as easy to determine. Surprisingly in 2006, and especially during the first half of it, the transacted volume fall to a level equivalent to today’s one.This was before the home market peaked in Dec. 2006. As the volume resume to a more normal volume we captured the price achieved in March 2007 as the peak. If we extract the 2008-2009 period when prices went up again, and pursue the trend started 3Q2006, the forecasted prices may not be so far from being achieved. For this metro as well, the calculation based on the best ROE of 21.4% imply a Cap Rate (13.6%) well above the maximum 9.2% cap rate observed. This is certainly due to the rough figure available in 2002 and 2003. As such the most likely event is a decrease in price from peak by 40% ($150-$140 psf in average), off which a significant part of the decline may already be done. There is no such surprising price as for the office building market. Retail Properties - Miami - Peak March 2007
300
25.0%
Market Price psf Cap Rate ROE
240
20.0%
180
15.0% 146 144
120
10.0% 97
60
5.0%
0
0.0%
7.5ROE BestROE WorstCapRate
-5.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
-60
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRat
Retail Properties - Transaction Volumes - (million USD)
1,600 1,400 1,200 1,000 800 600 400 200 0
Retail properties, Population and income drivers - (Forecast from REIS) 400,000 300,000 200,000 100,000 0 -100,000 -200,000 -300,000 -400,000
6.0% 4.0% 2.0% 0.0% Net Absorption
-2.0%
Population growth Housold Income Growth
-4.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
44/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
-6.0%
i.
South East Market – Nashville
• Office buildings: The volume of transactions is tiny. Prices have been relatively stable over the period and, as of end of 2008, prices seem to reflect an exceptionally strong market but based on a low volume. Nevertheless it is remarkable that the median price of the transactions closed during the past 12 months is higher than the average one, though the later has been rising more rapidly (+33% vs. +22%). The peak was set in July 2008. The vacant stock is limited to 11% of inventories, which will limit the pressure on rents and prices. We can expect that prices will come down by 20-40% from the more reasonable (2004-2007) levels.
Office Building - Nashville - peak July 2007
180
20.0%
Market Price psf Cap Rate
160
18.0%
ROE 16.0%
140
14.0% 120 12.0% 100
94 10.0%
80 65 8.0% 60 60 6.0% 40
4.0%
0
0.0% 7.5ROE BestROE WorstCapRate
2.0%
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
20
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRat
Office Building - Transaction Volumes - (million USD)
600 500 400 300 200 100 0
Office Stock and its impact on price - (Forecast from REIS) 600,000
5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0%
400,000 200,000 0 -200,000 -400,000
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
45/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Growth of ratio Effective Rent/Asking Rent Office employment growth
2Q06
Net Absorption
-600,000
• Retail properties: If we extract the 2009 period the forecasted prices may not be so far from being achieved. For this metro as well, the calculation based on the best ROE of 35% imply a Cap Rate (18.9%) well above the maximum 10.2% cap rate observed. The best ROE was achieved in 2005 at a time prices were low, interest rate low and LTV high, a combination of factors that we may not seen for years. As such a most likely event is a decrease in price from peak by 20% ($80 psf in average), off which a significant part of the decline may already be done. Retail Properties - Nashville - peak December 2007
280
35.0%
Market Price psf Cap Rate
240
30.0%
ROE
200
25.0%
160
20.0%
120
15.0% 94 83 10.0%
80 45 40
5.0%
0
0.0%
7.5ROE BestROE WorstCapRate
-5.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
-40
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRat
Retail Properties - Transaction Volumes - (million USD)
700 600 500 400 300 200 100 0
Retail properties, Population and income drivers - (Forecast from REIS) 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 -100,000 -200,000 -300,000
7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0%
Net Absorption
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
46/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Population growth Housold Income Growth
j.
Midwest Market – Chicago
• Office buildings: The Chicago MSA reached its peak in May 2008. The office employment number is expected to decrease significantly in 2009, continuing a negative trend that started at the end of 2007. The vacant stock is relatively large at 16.5% of the inventory, but not far from the 16.4% average since 1990. Effective rents are expected to decline and vacancies are expected to rise from 16.5% to 20%. With these parameters, but with a still positive and reasonable ROE, prices are expected to fall less sharply than the US average (-39% to -50% depending on the scenario).
Office Building - Chicago - Peak May 2008
9.0%
Market Price psf
240
8.0%
Cap Rate ROE
7.0%
180
6.0%
5.0% 131 120 4.0% 108
120
3.0%
60
2.0%
1.0%
-60
7.5ROE BestROE WorstCapRate
0.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0
-1.0%
-2.0%
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Office Building - VOLUMES - (million USD)
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0
Office Stock and its impact on price - (Forecast from REIS) 3,000,000 2,000,000 1,000,000 0 -1,000,000 -2,000,000 -3,000,000 -4,000,000
4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
47/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Net Absorption Growth of ratio Effective Rent/Asking Rent Office employment growth
• Retail properties: The peak has been set in January 2008, albeit it represents a significantly higher price compared to the previous quarter. Nevertheless, high volume sustained during the first half of 2008 with prices in the same nd range. The 2 half is more exuberant. The prices are expected to fall quite significantly, back to 2003 prices.
Retail Properties - Chicago - Peak January 2008
320
20.0%
Market Price psf Cap Rate ROE
240
15.0%
160
10.0% 114 119 79
80
-80
7.5ROE BestROE WorstCapRate
0.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0
5.0%
-160
-5.0%
-10.0%
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Retail Properties - VOLUMES - (million USD)
3,500 3,000 2,500 2,000 1,500 1,000 500 0
Retail properties, Population and income drivers - (Forecast from REIS) 2,000,000 1,500,000 1,000,000 500,000 0 -500,000 -1,000,000 -1,500,000
8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
48/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Net Absorption Population growth Housold Income Growth
k. Midwest Market – Minneapolis • Office buildings: The Minneapolis MSA probably reached a peak in August 2008. Volumes are currently close to nonexistent and prices have already decreased to a level not far from the bottom. August 08 is nevertheless 28 months after the residential real estate market peaked, an unusually long period. The peak could also be set at the end of 2007, a time when prices were not so different from the August figures. The vacant stock is high at 17%, but this is typical for this market (average is 15.2%, thanks to low figures during the 94 to 00 period only). Prices have been stable since 2001 (+23% from the end of 2001 through the end of 2007) and the somewhat high ROE may limit the extent of further price decreases. Office Building - Mineapolis - Peak Aug. 2008
160
16.0%
Market Price psf Cap Rate ROE
140
14.0%
120
12.0%
100
10.0% 87
80
8.0% 65 67
40
4.0%
20
2.0%
0
0.0% 7.5ROE BestROE WorstCapRate
6.0%
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
60
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Office Building - VOLUMES - (million USD)
2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
Office Stock and its impact on price - (Forecast from REIS) 2,000,000 1,500,000
4.0% 3.0%
1,000,000 500,000
2.0% 1.0%
0 -500,000
0.0% -1.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
49/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
-2.0% -3.0% 4Q06
3Q06
2Q06
1Q06
4Q05
2Q05
1Q05
2004
-1,000,000 -1,500,000
3Q05
Net Absorption Growth of ratio Effective Rent/Asking Rent Office employment growth
• Retail properties: The market peaked in March 2007, in high volumes and high prices. Except this 2 years period 4Q2006 to 4Q2007 when high prices were supported by high volume for the MSA, the prices have came down recently to prices close to 2004-2005 period. As such most of the price decline seems to have been achieved. The further decline is expected due to the current economic environment implying no demand at all for retail properties (thus significant negative absorption), but not carried by dramatic demographic evolution or household income decline.
Retail Properties - Mineapolis - Peak March 2007
300
15.0%
Market Price psf Cap Rate
250
ROE 200
10.0%
150 103 9092 5.0%
100
50
0
-50
7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0.0%
-100
-5.0%
-150
-10.0%
-200
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Retail Properties - VOLUMES - (million USD)
2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
Retail properties, Population and income drivers - (Forecast from REIS) 1,000,000 800,000 600,000 400,000 200,000 0 -200,000 -400,000 -600,000 -800,000
5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
50/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Net Absorption Population growth Housold Income Growth
l.
West Market – Las Vegas
• Office buildings: The Las Vegas MSA reached a peak in May 2008. Since the summer of 2008, volumes have not been significant. During 2008 the vacant stock grew rapidly from 13% to 19%, and is expected to continue growing. This has put effective rents under pressure. These changes imply that prices have to come down quite significantly. Office Building - Las Vegas - Peak Mai 2008
10.0%
Market Price psf 240
Cap Rate
8.0%
ROE 6.0% 160 112 108
4.0%
81 80 2.0%
0
0.0%
-2.0% -80 -4.0% -160 -6.0%
-240 7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
-8.0%
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Office Building - Transaction Volumes - (million USD)
1,200 1,000 800 600 400 200 0
Office Stock and its impact on price - (Forecast from REIS) 1,400,000 900,000 400,000 -100,000 -600,000 -1,100,000
4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
51/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Net Absorption Growth of ratio Effective Rent/Asking Rent Office employment growth
• Retail properties: Not easily the market peaked has been set in March 2008, when volumes were still existent. I expect a significant decline in price, but perhaps the market prices observed are affected by few large transactions, for a market that is finally not gigantic. Still, based on ROE, if capital gain for transaction cannot be anymore expected, prices have to come down. Economically this would not be surprising neither that retail properties suffer, as Las Vegas is a prime destination for corporate meetings and individual relaxation. Retail Properties - Las Vegas - Peak March 2008
600
10.0%
500 400 5.0%
300 200
140 135 95
100 0
0.0%
-100 -200 -300
-5.0%
-400 -500 Market Price psf
-600
-10.0%
Cap Rate -700
ROE
-800 7.5ROE BestROE WorstCapRate
-15.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
-900
Retail Properties - Transaction Volumes - (million USD)
2,500 2,000 1,500 1,000 500
7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0
Retail properties, Population and income drivers - (Forecast from REIS) 1,400,000
6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0%
700,000 0
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
52/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
3Q05
2Q05
1Q05
2004
4Q05
Net Absorption Population growth Housold Income Growth
-700,000
m. West Market – Los-Angeles • Office buildings: After continuous growth, the market peaked in March 2008, with volumes nearly 4 times greater than the prior 4 years. The current transaction volume is much smaller and the market is suffering from huge negative absorption. 2009 will lack the capacity to absorb nearly 5 million sf., being added to the 21 million sf. of existing vacant stock at the end of 4Q2008. The vacant stock will increase to 14%/15%, but just slightly above the past 19 year average while significantly below rates we saw in the early 90’s. The office employment number is expected to decrease significantly, putting pressure on rents. On a positive note, ROE seems to have increased since June 2006. In 2006 and 2007, prices only increased by 34%, below the average of all MSAs (37%), but with rents psf increasing by 23% vs. 5% on average, it may explain the ROE recovery (still, prices have increased from end of 2001 to end of 2007 by 85%).
Office Building - Los Angeles - Peak March 2008
320
240
8.0%
Market Price psf
7.0%
Cap Rate ROE
6.0% 5.0% 165 163 153
160
4.0% 3.0%
80
2.0% 1.0%
0
0.0% -1.0%
-80
-2.0% -3.0%
-160
-4.0% -5.0%
-240 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
-6.0%
Office Building - Transaction Volumes - (million USD)
25,000 20,000 15,000 10,000 5,000
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
0
Office Stock and its impact on price - (Forecast from REIS) 4,000,000 3,000,000 2,000,000 1,000,000 0 -1,000,000 -2,000,000 -3,000,000 -4,000,000 -5,000,000
3.8% 1.8% -0.3% -2.3% -4.3%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
-6.3% 4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Net Absorption Growth of ratio Effective Rent/Asking Rent Office employment growth
53/70
• Retail properties: The market peaked in November 2007. Since then the volumes have significantly declined and recorded prices are significantly down. The forecasted prices are then not far from being reached, nearly 2 years after the decline started. The price simulated with the best ROE (19%) implies a Cap rate of 12.8%, significantly above the worst observed cap rate of 9.1%. As such a most likely event implies a price decrease from its peak by 50% ($190 psf). If observable prices are relevant, the decline is already 2/3 done. Retail Properties - Los Angeles - Peak November 2007
400
350
20.0%
Market Price psf
19.0%
Cap Rate
18.0%
ROE
17.0% 16.0%
300
15.0% 14.0% 13.0%
250
12.0% 11.0% 188 187 10.0% 9.0%
200
8.0%
150
133
7.0% 6.0% 5.0%
100
4.0% 3.0%
50
2.0% 1.0% 0.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
0
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Retail Properties - Transaction Volumes - (million USD)
6,000 5,000 4,000 3,000 2,000 1,000 0
Retail properties, Population and income drivers - (Forecast from REIS) 2,000,000
4.0%
1,500,000
3.0%
1,000,000
2.0%
500,000
1.0%
0
0.0% Net Absorption
-500,000
Population growth
-1.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
54/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
-2.0% 1Q06
4Q05
3Q05
1Q05
2004
2Q05
Housold Income Growth
-1,000,000
n. West Market – Sacramento • Office buildings: Prices in Sacramento have remained stable over the past 4 years. But this is expected to change as 2008/2009 will deliver negative absorption. ROE, after recording a low point at the beginning of 2006, rose until the beginning of 2007 and has started to decline. Price decreases are expected as vacant stock was high at 17% at the end of 1Q2009, a rising figure since 2007 and well above the 13% historic average.
Office Building - Sacramento - Peak January 2008
250
10.0%
Market Price psf Cap Rate
200
8.0%
ROE 150
6.0% 116
100
9092 4.0%
50
2.0%
0
0.0%
-2.0%
-100
-4.0%
-150
-6.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
-50
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Office Building - Transaction Volumes - (million USD)
3,500 3,000 2,500 2,000 1,500 1,000 500 0
Office Stock and its impact on price - (Forecast from REIS) 1,000,000 800,000 600,000
5.0% 4.0% 3.0%
Net Absorption Growth of ratio Effective Rent/Asking Rent Office employment growth
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
55/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
-2.0% -3.0% 4Q05
-400,000 -600,000 3Q05
0.0% -1.0%
2Q05
0 -200,000
1Q05
2.0% 1.0%
2004
400,000 200,000
• Retail properties: The market peaked in November 2007. Since then the volumes have significantly declined and recorded prices are significantly down, except the 2009 transaction reported in inexistent volumes. The forecasted prices are then not far from being reached (if not yet the case), nearly 2 years after the decline started. Market Price psf Cap Rate
250
Retail Properties - Sacramento - Peak November 2007
20.0%
ROE 18.0% 16.0%
200
14.0% 12.0%
150 130
122 10.0% 100
92
8.0% 6.0% 4.0%
50
2.0% 0.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
0
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Retail Properties - Transaction Volumes - (million USD)
900 800 700 600 500 400 300 200 100 0
Retail properties, Population and income drivers - (Forecast from REIS) 1,200,000 1,000,000 800,000
6.0% Net Absorption
Population growth 4.0%
Housold Income Growth
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
56/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
-2.0% 2Q05
0.0%
-200,000 -400,000 1Q05
2.0%
200,000 0
2004
600,000 400,000
o. West Market – San Diego • Office buildings: Prices peaked in March 2008 on already declining volumes. Volume is now nearly nonexistent. Significant negative absorption, office employment decrease, and declining effective rents will pressure property values significantly. ROE, albeit constantly low during the 2004-2008 period, may need to increase to attract investors, and cap rate increases may catch up as well. As such we expect a significant price decrease from its peak, which still needs to go through.
Office Building - San Diego - peak March 2008
400
10.0%
Market Price psf Cap Rate ROE
320
8.0%
240
6.0%
160
167 145 4.0% 128
80
2.0%
0
0.0%
-160
-4.0%
-240
-6.0%
-320
-8.0% 7.5ROE BestROE WorstCapRate
-2.0%
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
-80
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRat
Office Building - Transaction Volumes - (million USD)
7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
Office Stock and its impact on price - (Forecast from REIS) 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 -200,000 -400,000 -600,000 -800,000 -1,000,000
5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
57/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Net Absorption Growth of ratio Effective Rent/Asking Rent Office employment growth
• Retail properties: The market peaked in August 2007. Since then the volumes have significantly declined and recorded prices are significantly down. The forecasted prices are then not far from being reached 2 years after the decline started. Retail Properties - San Diego - peak August 2007
350 Market Price psf
12.0%
Cap Rate ROE 300
10.0%
250 8.0% 200 179 160 150
6.0%
150 4.0% 100
2.0%
50
0 7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0.0%
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRat
Retail Properties - Transaction Volumes - (million USD)
1,600 1,400 1,200 1,000 800 600 400 200 0
Retail properties, Population and income drivers - (Forecast from REIS) 800,000
5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0%
600,000 400,000 200,000 0 -200,000
Net Absorption
Population growth
-400,000
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
58/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
1Q05
2004
-600,000
2Q05
Housold Income Growth
p. West Market – San Francisco • Office buildings: Prices peaked in February 2008 on already declining volumes. Volume is now nearly nonexistent. Until the end of 2007, the market consistently absorbed the volume of new properties as construction was limited (3.4 million sf. from 2005 to 2008, to be compared with 3.5 million sf. during 2002, 4.7 million sf. during 2001, 3 million sf. during 2000). As a result, the vacant stock is still reasonable at 12.8% (average of 12.2% since 1990). Prices have declined significantly (-25%) and cap rates and ROE have increased, but prices still need to decline, by probably the same percentage as we are nearly half way. Market Price psf
400
Office Building - San Francisco - peak February 2008
10.0%
Cap Rate ROE 320
8.0%
240
6.0%
160
180 161 137 4.0%
80
2.0%
0
0.0%
-160
-4.0%
-240
-6.0% 7.5ROE BestROE WorstCapRate
-2.0%
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
-80
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRat
Office Building - Transaction Volumes - (million USD)
25,000 20,000 15,000 10,000 5,000 0
Office Stock and its impact on price - (Forecast from REIS) 2,000,000 1,500,000 1,000,000 500,000 0 -500,000 -1,000,000 -1,500,000 -2,000,000 -2,500,000
4.0% 2.0% 0.0% -2.0%
Net Absorption Growth of ratio Effective Rent/Asking Rent
-4.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
59/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
-6.0% 2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Office employment growth
• Retail properties: The market peaked in February 2008. Since then the prices have increased but in inexistent volumes. The price simulated with the best ROE (23%) implies a Cap rate of 14.4%, significantly above the worst observed cap rate of 9.4%. As such a most likely event implies a price decrease from its peak by 35% ($210-$220 psf).
Retail Properties - San Francisco - peak February 2008
Market Price psf
400
25.0%
Cap Rate ROE 350 20.0% 300
250
15.0% 219
211
200
10.0% 150
138
100 5.0% 50
0.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
0
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRat
Retail Properties - Transaction Volumes - (million USD)
3,500 3,000 2,500 2,000 1,500 1,000 500 0
Retail properties, Population and income drivers - (Forecast from REIS) 250,000 200,000 150,000 100,000 50,000 0 -50,000 -100,000 -150,000
Net Absorption
5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0%
Population growth
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
60/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Housold Income Growth
q. SouthWest Market – Dallas • Office buildings: Prices peaked around August/September 2008 when volumes were already significantly down but still well above 2004 and 2005 volumes. Significant negative net absorption is expected and will add to the elevated 23% vacant stock ratio. More than ¼ of building spaces will be vacant by the end of 2009. Effective rents will probably decline significantly. Cap Rates have just slightly increased and ROE is historically low, which cannot be sustained. A sharp decrease in price is expected from its peak (-60 to 70%). Office Building - Dallas - Peak End 2nd/beginning 3rd quarter 08
12.0%
Market Price psf Cap Rate ROE
180
10.0%
8.0% 130 6.0% 80
72 63
57
4.0%
2.0%
30
0.0% -20 -2.0%
-4.0% 7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
-70
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Office Building - Transaction Volumes - (million USD)
7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
Office Stock and its impact on price - (Forecast from REIS) 3,000,000 2,000,000
4.0% 2.0%
1,000,000 0
0.0%
-1,000,000 -2,000,000
-2.0% -4.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
61/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
-6.0% 4Q06
3Q06
2Q06
1Q06
4Q05
2Q05
1Q05
2004
-3,000,000 -4,000,000
3Q05
Net Absorption Growth of ratio Effective Rent/Asking Rent Office employment growth
• Retail properties: The market peaked in August 2007. Since then prices and volumes have decreased. A slight negative absorption is expected in 2009 and 2010, and the demographic figures as well as the expected household incomes for 2009 should support the retail properties. If end of 2008, beginning of 2009 prices are relevant, the decline since peak is already of -20%, for an expected decline by -35%. So the bottom might not be far away 2 years after the peak date. 200
Retail Properties - Dallas - Peak August 2007
Market Price psf Cap Rate ROE
10.0%
160
8.0%
120
6.0% 99 93
86
80
4.0%
40
2.0%
0
0.0%
-40 7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
-2.0%
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Retail properties - Transaction Volumes - (million USD)
3,000 2,500 2,000 1,500 1,000 500 0
Retail properties, Population and income drivers - (Forecast from REIS) 1,000,000 800,000
Net Absorption
600,000 400,000
7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0%
Population growth
Housold Income Growth
200,000 0
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
62/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
-200,000 -400,000
r. SouthWest Market – Houston • Office buildings: The Houston MSA market peaked in July 08, as prices achieved in the current environment seem to be more the result of a change in the mix of the traded properties. The median price is well below the average of $134/sf. It has increased by just 4% during the past 12 months compared to 34% for the all MSA average! Cap Rates and ROE are both expected to increase. Prices have declined and should continue to do so, despite what the graph suggests. Significant 2009 office building completion will add to the vacant space inventory (13%), but comparatively the office employment number decrease will be moderate (the only positive factor). We saw no exuberant price increased during the period 2004-mid 2008. Hence the price is expected to decline by a moderate 35%.
Office Building - Houston - Peak: July 2008
210
14.0%
Market Price psf Cap Rate ROE
180
12.0%
150
10.0%
120
8.0%
112 89
90
81
6.0%
60
4.0%
30
2.0%
0
0.0%
7.5ROE BestROE WorstCapRate
-2.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
-30
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Office Building - Transaction Volumes - (million USD)
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0
Office Stock and its impact on price - (Forecast from REIS) 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 -500,000 -1,000,000 -1,500,000
Net Absorption
4.5%
Growth of ratio Effective Rent/Asking Rent
3.5%
Office employment growth
2.5% 1.5% 0.5% -0.5% -1.5%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
63/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
-2.5%
• Retail properties: The market peaked in August 2006. Since then prices have decreased and volumes have been up and down. Reasonable negative absorption is expected in 2009 and 2010, and the demographic figures as well as the expected household incomes for 2009 should not be detrimental to the retail properties. If end of 2008, beginning of 2009 prices are relevant, the decline since peak is already of -40%, for an expected decline by -50%. So the bottom might not be far away 3 years after the peak date.
Retail Properties - Houston - Peak: August 2006
210
15.0%
Market Price psf Cap Rate ROE 10.0%
140
86
82 67
70
5.0%
0.0%
0
-5.0% 7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
-70
Retail Properties - Transaction Volumes - (million USD)
2,500 2,000 1,500 1,000 500
7.5ROE BestROE WorstCapRate
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
0
Retail properties, Population and income drivers - (Forecast from REIS) 2,000,000
6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0%
Net Absorption Population growth
1,500,000
Housold Income Growth
1,000,000 500,000 0 -500,000
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
64/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
-1,000,000
s. SouthWest Market – Phoenix • Office buildings: The Phoenix MSA peaked in March 08. Cap Rates have just started to increase. ROE is dramatically negative, albeit having recovered from its 2Q2006 lows. There has been significant negative absorption in 2008, to be repeated in 2009. As a result, the vacant stock has dramatically increased from 4Q2007’s 13.9% to 20.6% at the end of 1Q2009. Nearly one-fourth of the office space is expected to be vacant during the coming 2 years. Effective rents will suffer (expected -13% until 2011). As a result, the prices should drop dramatically.
Office Building - Phoenix - Peak: March 2008
250
10.0%
Market Price psf Cap Rate
200
8.0%
ROE 150
6.0% 114115 96
100
4.0%
50
2.0%
0
0.0%
-2.0%
-100
-4.0%
-150
-6.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
-50
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Office Building - Transaction Volumes - (million USD)
3,500 3,000 2,500 2,000 1,500 1,000 500 0
Office Stock and its impact on price - (Forecast from REIS) 2,000,000
4.0% 3.0%
1,500,000 1,000,000
2.0% 1.0% 0.0% -1.0% -2.0% -3.0%
500,000 0 -500,000
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
65/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
1Q05
2004
-1,500,000
2Q05
Net Absorption Growth of ratio Effective Rent/Asking Rent Office employment growth
-1,000,000
• Retail properties: The market peaked in September 2007. Since then volumes have decreased. The 2009 price transactions are not relevant. Retail Properties - Phoenix - Peak: September 2007
300
12.0%
Market Price psf Cap Rate
10.0%
ROE
240
8.0% 180 6.0%
112 109 104 4.0%
120
2.0% 60 0.0% 0 -2.0%
-4.0% 4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
-60
4Q04 4Q04 4Q04 1Q05 1Q05 1Q05 2Q05 2Q05 2Q05 3Q05 3Q05 3Q05 4Q05 4Q05 4Q05 1Q06 1Q06 1Q06 2Q06 2Q06 2Q06 3Q06 3Q06 3Q06 4Q06 4Q06 4Q06 1Q07 1Q07 1Q07 2Q07 2Q07 2Q07 3Q07 3Q07 3Q07 4Q07 4Q07 4Q07 1Q08 1Q08 1Q08 2Q08 2Q08 2Q08 3Q08 3Q08 3Q08 4Q08 4Q08 4Q08 1Q09 1Q09
7.5ROE BestROE WorstCapRate
Retail Properties - Transaction Volumes - (million USD)
2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0
Retail properties, Population and income drivers - (Forecast from REIS) 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 -200,000 -400,000 -600,000
6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0%
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
66/70
2012F
2011F
2010F
2009F
1Q09
4Q08
3Q08
2Q08
1Q08
4Q07
3Q07
2Q07
1Q07
4Q06
3Q06
2Q06
1Q06
4Q05
3Q05
2Q05
1Q05
2004
Net Absorption Population growth Housold Income Growth
APPENDIX 1 – DOES NOT EXPLAIN THE CRISIS USA GDP
GDP: -0.2% 1991
GDP: +0.8% 2001
14,000.0
Retail peaked 1Q-2007 (Decline ?%)
12,000.0
House peaked 05-2005 (Decline ?%)
Office peaked 4Q-2000 (Decline -10%)
Retail peaked 1Q-1999 (Decline -12%)
10,000.0
Apartment peaked 3Q-1998 (Decline -10%)
USD
8,000.0
6,000.0
Office peaked 3Q-2007 (Decline ?%)
House peaked 03-1990 (Decline -9%)
4,000.0
Apart. peaked 4Q-2007 (Decline ?%)
Retail peaked 4Q-1994 (Decline -12%)
2007
2005
2003
2001
1999
1997
1995
1993
1991
1989
1987
1985
1983
1981
1979
1977
1975
1973
1971
1969
1967
1965
1963
1961
1959
1957
1955
1953
1951
1949
1947
1945
1943
1941
1939
1937
1935
1933
1931
0.0
1929
2,000.0
Bank Loans as a % of GDP Retail peaked 1Q-2007 (Decline ?%)
60.0% Office peaked 4Q-2000 (Decline -10%)
50.0%
Apartment peaked 3Q-1998 (Decline -10%)
Retail peaked 4Q-1994 (Decline -12%)
40.0%
House peaked 05-2005 (Decline ?%)
30.0% Retail peaked 1Q-1999 (Decline -12%)
Office peaked 3Q-2007 (Decline ?%)
20.0% House peaked 03-1990 (Decline -9%)
Apart. peaked 4Q-2007 (Decline ?%)
10.0% GDP: +0.8% 2001
GDP: -0.2% 1991
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
67/70
2008q2
2006q3
2004q4
2003q1
2001q2
1999q3
1997q4
1996q1
1994q2
1992q3
1990q4
1989q1
1987q2
1985q3
1983q4
1982q1
1980q2
1978q3
1976q4
1975q1
1973q2
1971q3
1969q4
1968q1
1966q2
1964q3
1962q4
1961q1
1959q2
1957q3
1955q4
1954q1
1952q2
1950q3
1948q4
1947q1
0.0%
Real Estate Loans as a % of GDP
Retail peaked 1Q-1997 (Decline ?%)
Office peaked 4Q-2000 (Decline -10%)
30.0%
House peaked 05-2005 (Decline ?%)
25.0%
20.0%
Apartment peaked 3Q-1998 (Decline -10%)
Retail peaked 4Q-1994 (Decline -12%)
15.0% Office peaked 3Q-1997 (Decline ?%) Retail peaked 1Q-1999 (Decline -12%)
10.0%
Apart. peaked 4Q-1997 (Decline ?%)
House peaked 03-1990 (Decline -9%)
5.0%
GDP: -0.2% 1991
GDP: +0.8% 2001
Real Estate Loans as a % of GDP
2008q2
2006q3
Retail peaked 1Q-2007 (Decline ?%)
Office peaked 4Q-2000 (Decline -10%)
30.0%
2004q4
2003q1
2001q2
1999q3
1997q4
1996q1
1994q2
1992q3
1990q4
1989q1
1987q2
1985q3
1983q4
1982q1
1980q2
1978q3
1976q4
1975q1
1973q2
1971q3
1969q4
1968q1
1966q2
1964q3
1962q4
1961q1
1959q2
1957q3
1955q4
1954q1
1952q2
1950q3
1948q4
1947q1
0.0%
House peaked 05-2005 (Decline ?%)
25.0%
20.0%
Apartment peaked 3Q-1998 (Decline -10%)
Retail peaked 4Q-1994 (Decline -12%)
15.0% Office peaked 3Q-2007 (Decline ?%) Retail peaked 1Q-1999 (Decline -12%)
10.0%
Apart. peaked 4Q-2007 (Decline ?%)
House peaked 03-1990 (Decline -9%)
5.0%
GDP: -0.2% 1991
GDP: +0.8% 2001
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
68/70
2008q2
2006q3
2004q4
2003q1
2001q2
1999q3
1997q4
1996q1
1994q2
1992q3
1990q4
1989q1
1987q2
1985q3
1983q4
1982q1
1980q2
1978q3
1976q4
1975q1
1973q2
1971q3
1969q4
1968q1
1966q2
1964q3
1962q4
1961q1
1959q2
1957q3
1955q4
1954q1
1952q2
1950q3
1948q4
1947q1
0.0%
Commercial and Industrial Loans as a % of GDP Apartment peaked 3Q-1998 (Decline -10%)
14.0%
Office peaked 4Q-2000 (Decline -10%)
Retail peaked 1Q-2007 (Decline ?%)
12.0%
10.0%
8.0%
Retail peaked 1Q-1999 (Decline -12%) House peaked 03-1990 (Decline -9%)
6.0%
House peaked 05-2005 (Decline ?%)
Retail peaked 4Q-1994 (Decline -12%)
Office peaked 3Q-2007 (Decline ?%)
4.0%
Apart. peaked 4Q-2007 (Decline ?%)
2.0% GDP: -0.2% 1991
GDP: +0.8% 2001
2008q2
2006q3
2004q4
2003q1
2001q2
1999q3
1997q4
1996q1
1994q2
1992q3
1990q4
1989q1
1987q2
1985q3
1983q4
1982q1
1980q2
1978q3
1976q4
1975q1
1973q2
1971q3
1969q4
1968q1
1966q2
1964q3
1962q4
1961q1
1959q2
1957q3
1955q4
1954q1
1952q2
1950q3
1948q4
1947q1
0.0%
Mortgage Debt on non farm Home (net increase + / decrease -) GDP: -0.2% 1991
GDP: +0.8% 2001
1200
House peaked 05-2005 (Decline ?%)
1000
Retail peaked 1Q-1999 (Decline -12%)
800
Office peaked 4Q-2000 (Decline -10%)
Apartment peaked 3Q-1998 (Decline -10%) Retail peaked 1Q-2007 (Decline ?%)
600 House peaked 03-1990 (Decline -9%)
400
200
Office peaked 3Q-2007 (Decline ?%) Apart. peaked 4Q-2007 (Decline ?%)
0 Retail peaked 4Q-1994 (Decline -12%)
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
69/70
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
1952
-200
Foreign Bank Balance Sheet : Real Estate holding (bn USD), source FED
Office, Retail, Apart Indexes peaked between 1Q07 and 4Q07
Home Index peaked 05-2005, and declined by 31% so far
60
House peaked 03-1990 (Decline -9%)
50
Retail peaked 1Q-2007 (Decline ?%) Retail peaked 1Q-1999 (Decline -12%)
40
House peaked 05-2005 (Decline ?%)
Retail peaked 4Q-1994 (Decline -12%)
30
20
Office peaked 3Q-2007 (Decline ?%)
10
Office peaked 4Q-2000 (Decline -10%)
Apartment peaked 3Q-1998 (Decline -10%)
Apart. peaked 4Q-2007 (Decline ?%)
Francois Pineau Copyright April 2009 Commercial Real Estate Cycles And the Current Crisis: Predictions, Suggestions and Indicators to Follow
70/70
01/2009
06/2008
11/2007
04/2007
09/2006
02/2006
07/2005
12/2004
05/2004
10/2003
03/2003
08/2002
01/2002
06/2001
11/2000
04/2000
09/1999
02/1999
07/1998
12/1997
05/1997
10/1996
03/1996
08/1995
01/1995
06/1994
11/1993
04/1993
09/1992
02/1992
07/1991
12/1990
05/1990
10/1989
03/1989
08/1988
01/1988
0
