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© JR DeLisle, Ph. D. Lecture 4 (a): Reflecting on the Future for Real Estate: Leaner, Meaner, Cleaner and Greener by James R. DeLisle, Ph.D. firstname.lastname@example.org January 14, 2010
© JR DeLisle, Ph. D. Presentation Overview –I: Macroeconomic Impact on Real Estate –II: Capital Flows & Real Estate –III: Real Estate Market Fundamentals –IV: Implications for Seattle Real Estate
© JR DeLisle, Ph. D. Part 1 Prelude: Three Major Attributes of Real Estate Three major attributes of real estate... – L, – L. L L L....... ulnerable,....... ulnerable. The 2009 regime of real estate... – D....... istressed,....... istressed. Three major attributes of real estate... – L, – L. The 2010 + regime of real estate... Liability, Litigation, Liquidity (NOT!) L, L, L Butt, what the “L”?
© JR DeLisle, Ph. D. Part I: Economic Environment for Real Estate 2009 Outlook Economy in recession; painful and long Businesses struggling, stocks volatile Consumers & CEOs bearish 2010 Outlook Recession over; slow recovery; some downside risk Big businesses okay, Small struggling, stock market up Consumers guarded; CEOs hopeful
© JR DeLisle, Ph. D. Breaking News on Real Estate & the Economy
© JR DeLisle, Ph. D. The Good News: Employment Losses Slowing Source: economy.com Net Employment losses Unemployment Jobless Claims Slowing? 10%
© JR DeLisle, Ph. D. Business Confidence Source: economy.com U.S. Business Confidence Some improvement…. But, deficit…. 9/12/08 9/12/09
© JR DeLisle, Ph. D. Small business report tighter credit Reactions –Cutting payrolls –Reducing inventory –Reducing capital spending Outlook –No near-term improvement Focus on Small Business Source: economy.com Credit Remains Tight for Business
© JR DeLisle, Ph. D. Housing Market Indicators Housing Starts Housing Index Delinquency & Default Homebuilder Confidence
© JR DeLisle, Ph. D. First-time Homebuyer –Tax credit of up to $8,000 for first-time home buyers –Before April 2010, close before June 30. –2009: income max $75,000 for individualsand $150,000 couples –2010: income limits $125,000 individuals, $225,000 for couples –Max price: $800,000 Existing Homebuyers –Tax credit of $6,500 for repeat buyers –If owned five consecutive years out of the prior eight years Repay if not used as principal residence within three years Housing Stimulus Efforts
© JR DeLisle, Ph. D. Consumer Confidence, Spending & Credit Consumers Contracting Source: economy.com Consumers are over 70% of GDP…. As of October 2009, recent uptick in retail sales on Year over Year; partly weak 2008… Butt…
© JR DeLisle, Ph. D. When National & Seattle Markets Bottom Out? National Seattle Sources: JRDeLisle, IREM Survey Respondents
© JR DeLisle, Ph. D. Critical Elements to Sustainable Recovery The Future Remains Uncertain Sources: JRDeLisle, IREM Survey Respondents
© JR DeLisle, Ph. D. Part II: Real Estate Capital Markets 2009 Capital Market Wavering, delayed investor demand Rising Cap rates, declining values Challenge in de- levering asset class 2010 Capital Market Tentative, waiting to pounce, new players & rules Rising Cap rates, declining values de-capitalizing Challenges re- levering; credit crunch for asset class
© JR DeLisle, Ph. D. Rising Rents Values Spatial & Capital De-connect and Re-connect Warranted Construction: Expanding Demand Capital Market Bubble Market Inefficiency Spatial Market Capital Market Cap Rate Rise Interest Rates/Debt Rise Vacancy Up Rents Down BV (Bubble Value) Debt -20%+/- Bubble Cap R -20%+/- Bubble Market -10-20%+/- Softening -40-60%
© JR DeLisle, Ph. D. How We’re Doing: Commercial Real Estate The Good News…. It’s not as bad as it was Private Equity
© JR DeLisle, Ph. D. Trends in Capital Flows
© JR DeLisle, Ph. D. Institutional Equity Capital Flows Investment Preferences –Search for Value/Clean –Eschew risk –Fewer products/structures Timing –Patient; waiting for bottom –Indecisive; slower to act Decreased capital flows –Rising Return/Yield hurdle –Denominator effect Opportunities –Off-market, quiet deals –Bank REO, asset Takeovers –Structured finance, sales –Convertible positions –Public/Private Ventures Source: 2009 Emerging Trends
© JR DeLisle, Ph. D. Emergence of Two-Tiered Pricing System Apartments/Unit Suburban Office/SF Core Value-add Core Value-add
© JR DeLisle, Ph. D. Commercial Mortgage Capital Tightened Credit –DCRs: pressure on income –LVs: Reduced; equity risk exposures –Risk Rebirth: recourse debt Outlook –Impending Crisis –Flight to quality –Tighter; increased equity and recourse –Meaner; more aggressive foreclosures Opportunities –Selective, lower risk, seasoned assets –Creative financing: convertible debt
© JR DeLisle, Ph. D. Capital Market Clouds: Distressed Assets Distressed and Resolved Assets Downstream risk of a flood….
© JR DeLisle, Ph. D. REITs –Have reversed downward spiral –Significant new capital raised through Sept 2009 –Low Dividends suggest accretive opportunities Global Investors –Western European –Middle East –Asia/Australia Domestic Funds –Significant growth inUS –New Opportunity Funds –New Value-Plus Funds Players in Distressed Asset Market
© JR DeLisle, Ph. D. Part III: Spatial Market Fundamentals 2009 Spatial Market Fundamentals continue to weaken mirroring economy Vacancy rates rising, rents softening Stagnating demand, tempered recovery 2010 Spatial Market Still weakening, negative absorption; more downside risk Vacancy rates pushing records, rents declining Negative absorption, lagged recovery
© JR DeLisle, Ph. D. Commercial Market Trends Downtown Office Suburban Office Industrial Apartments Source: Torto Wheaton Research, REIS, 2009 Emerging Trends Retail Vacancy Rates Office Industrial Retail Apartments Development (msf) Cap Rates
© JR DeLisle, Ph. D. Distressed Assets: Region and Property Type Regional Share Property Type Share National: $170 b
© JR DeLisle, Ph. D. CMBS Delinquency Rates by Property Type Rates could hit 12% Trends
© JR DeLisle, Ph. D. Office Real Estate Overview –Negative absorption –Subleasing increase –Vacancy rates rising –Rents declining –Market freezing Opportunities –Abandoned Projects –Entitled Projects –Capital Needs Projects –Asset Takeovers –Distressed Owners/REO
© JR DeLisle, Ph. D. Retail Real Estate Overview –Vacancy rising –Retail sales soft –Inventories leaner –Credit tight –Retailer contraction moderating Opportunities –Projects with Lost Anchors Entitled/Spec Projects Capital Needs Projects Asset Takeovers Distressed Owners & REO
© JR DeLisle, Ph. D. Industrial Real Estate Overview –Absorption tepid –Vacancy rising –Rents falling –Continued Globalization Opportunities –Projects w/ Lost Tenants Capital Needs Projects Changing H&B Use Distressed Owners & REO
© JR DeLisle, Ph. D. Multifamily Real Estate Overview –Rent vs. Own –Affordable Housing –Negative absorption –Vacancy rates rising –Rents down, concessions up Opportunities –Projects i n pre-development –Entitled but unfunded –Repositioning –Conversion (future) –Distressed Owners & REO
© JR DeLisle, Ph. D. Hotels Overview –Occupancy down –Room rates down –Revenues down –Rising distress Opportunities –Projects abandoned –Entitled: not started –Reflagging existing –Distressed Owners & REO
© JR DeLisle, Ph. D. Part IV: The Seattle Real Estate Scene Recent slip from top Source: 2010 Emerging Trends Top InvestmentsTop Development
© JR DeLisle, Ph. D. Seattle Cap Rates Sources: JRDeLisle, IREM Survey Respondents
© JR DeLisle, Ph. D. Seattle Transactions and Cap Rates vs. National? Not as different as we thought Seattle Transaction Volume: 2009 Seattle Cap vs. National by Property Type
© JR DeLisle, Ph. D. Seattle Distressed Asset Profile Outlook……
© JR DeLisle, Ph. D. Distressed Assets in Seattle A Relative Picture Total Dollars (millions)
© JR DeLisle, Ph. D. Housing Price Index: Seattle MSA FHFA Index Case-Shiller Housing Index
© JR DeLisle, Ph. D. Implications for Seattle? Key Success Factor: Patience & Collaboration –Buyers & sellers not adjusted –Relationships and commitments strained Players –Some will drop out –Some will be shaken out or forced out –Some will swoop in Activities –Development frozen –Entitlement push, follow-through drag Projects –Focus on Green (economics) –Innovative & forward looking stalled Source: DeLisle November Survey: Washington State Commercial Association of REALTORS®
© JR DeLisle, Ph. D. So, we’ll be “Leaner, meaner, cleaner and greener” Will you be in the game or on the sidelines? Reflecting on the Future… –Experience, critical thinking and survival instincts will rule… –If you don’t have that, there’s always school… Reflecting on the Future….. http://jrdelisle.com
© JR DeLisle, Ph. D. Economic, Capital and Real Estate Outlook 2010 presented to: IREM 2010 Forecast by: Jim DeLisle, Ph.D. December 4, 2009
© JR DeLisle, Ph. D. Real Estate Outlook 2010: No Bottom, No Net presented to: Seattle Chapter of the Appraisal Institute Fall Conference by: Jim DeLisle,
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