Emerging Trends in Real Estate® 2011uli.org/wp-content/uploads/ULI-Documents/ETrendsPwC.pdf ·...
Transcript of Emerging Trends in Real Estate® 2011uli.org/wp-content/uploads/ULI-Documents/ETrendsPwC.pdf ·...
Emerging Trends in Real Estate 2014
• Emerging Trends is the industry’s most predictive forecast
• 35th annual outlook
• Based on over 1,000 interviews and surveys of industry leaders
• Sponsored by PwC and the Urban Land Institute
Emerging Trends Scorecard: How did we do?
2013 Trend Yes No ?
Highlighted slow recovery
Warned of continued political uncertainty
Warned of fiscal cliff
Noted beginning of move to secondary markets
Warned on multifamily overbuilding in 2015
Highlighted mezzanine and preferred equity investments
Change in tenant demand and use of office space
Highlighted reurbanization of suburbs
Emerging Trends Scorecard: How did we do?
2013 Trend Yes No ?
Noted commercial developer headwinds
Highlighted chasing yield strategy
Noted increase in transaction volume
Consider single family housing funds
Focus on infill locations
Develop “new wave” office in 24-hour cities
Develop industrial in distribution hubs
Slow multifamily development in low barrier to entry markets
Fundamentals continue to improve…slowly… across all property groups and property markets
2014 expected to continue trends in employment (modest growth) and increasing demand for space
2014 likely to be last year industry benefits from 6 years of little increase in supply
Interviewees see industry reaching an inflection point where “valuations will no longer be driven by capital markets,” leverage, and financial engineering
Interest rates universally anticipated to increase; it’s the magnitude of the increase that is uncertain
Gaining Momentum
Investment Prospects by Asset Class
4.62
4.96
5.49
5.57
5.78
6.43
1 2 3 4 5 6 7 8 9
Investment-grade bonds
Commercial mortgage backed securities
Publicly listed equities
Publicly listed property companies or REITS
Publicly listed homebuilders
Private direct real estate investments
2014 2013 2012 2011
Source: Emerging Trends in Real Estate surveys
Abysmal Fair Excellent
5.0 5.4 5.4 5.3
4.7 4.3
4.6
5.3 5.6 5.8
0
1
2
3
4
5
6
7
8
9
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Average Market Score
Investment Prospects
Excellent
Fair
Poor
Source: Emerging Trends in Real Estate surveys
Average Property Score
Source: Emerging Trends in Real Estate 2014 survey
Note: Based on US respondents only
Abysmal Fair Excellent
0 1 2 3 4 5 6 7 8 9
Retail
Office
Apartment Residential (Rental)
Hotels
Industrial/Distribution
Investment Development
Issues of importance for real estate Economic/Financial Issues
none moderate great
Source: Emerging Trends in Real Estate 2014 survey
Note: Based on US respondents only
3.50
3.60
3.61
3.68
4.11
4.46
4.63
0 1 2 3 4 5
Federal fiscal deficits/imbalances
Global economic growth
Tax policies
Inflation
Income and wage growth
Interest rates
Job growth
Issues of importance for real estate Real Estate/Development Issues
none moderate great
Source: Emerging Trends in Real Estate 2014 survey
Note: Based on US respondents only
3.58
3.58
3.59
3.85
3.99
4.03
0 1 2 3 4 5
Infrastructure funding/development
Future home prices
Refinancing
Land costs
Vacancy Rates
Construction costs
“With the economy in a position where the tailwinds are now stronger than the prevailing headwinds, 2014 should be a year when we see real estate fundamentals improve in sectors beyond the very healthy rental growth multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”
A “stubbornly high’ unemployment rate
Uncertainty over government regulation and fiscal policy
Likely increase in the cost of both equity and debt capital
Economic uncertainty in the Euro-zone
China’s moderating economic growth
Headwinds Facing the Real Estate Industry
“Good if not great” job growth in industries with high real estate utilization including: energy, technology, health care, and medical research Even education and financial services sectors are projected to support increased space needs in 2014 Increasing corporate profits Continuing recovery in the single-family housing industry
Tailwinds Benefiting the Real Estate Industry
Industry profitability expected to continue to improve
Interest rates anticipated to increase
Dependence on cap rate compression to drive increase in value to be replaced by emphasis on asset management
Markets are expected to be “well supplied” with both equity and debt capital
Emerging Trends: Key Drivers for 2014
Opportunities to develop property finally appear in sectors other than multifamily
Industry begins to notice and understand needs of both Gen Y and the baby boomers
Needs of end users of commercial space continue to evolve
The single family housing market continues to make a positive contribution to the overall economy
Emerging Trends: Key Drivers for 2014
Prospects for profitability by percentage of respondents
0%
10%
20%
30%
40%
50%
60%
70%
80%
2010 2011 2012 2013 2014
Abysmal to Poor
Modestly Poor toModestly Good
Good to Excellent
Source: Emerging Trends in Real Estate surveys
Note: Based on US respondents only
The beginning of the “middle innings” of the “recovery from the recovery”
Use of financial structuring and leverage as means to create value will be replaced by property operating skills
Focus will continue to shift from “solely core in gateway 24-hour” markets to overlooked markets and property sectors as well as value-added strategies including repositioning, re-leasing, re-tenanting, renovation, and the like
2014 Condensed
Capital markets
Prospects by Investment Category/Strategy
4.80
4.99
5.53
5.95
6.13
6.15
6.32
0 1 2 3 4 5 6 7 8 9
Distressed Debt
Distressed Properties
Core Investments
Core-plus Investments
Opportunistic Investments
Development
Value-added Investments
Abysmal Fair Excellent
Source: Emerging Trends in Real Estate 2014 survey
Note: Based on US respondents only
Change in Availability of Capital for Real Estate in 2014
5.38
5.70
6.00
6.12
6.18
6.43
0 1 2 3 4 5 6 7 8 9
Public Equity REITs
Private REITs
Private Local Investors
Private Equity/Opportunity/Hedge Funds
Institutional Investors/Pension Funds
Foreign Investors
Very large decline Stay the Same Very large increase
Equity source
Source: Emerging Trends in Real Estate 2014 survey
Note: Based on US respondents only
Change in Availability of Capital for Real Estate in 2014
4.55
5.54
5.95
6.00
6.03
6.12
6.24
0 1 2 3 4 5 6 7 8 9
Government Sponsored Enterprises
Mortgage REITs
Non-Bank Financial Institutions
Mezzanine Lenders
Insurance Companies
Commercial Banks
Securitized Lenders/CMBS
Very large decline Stay the Same Very large increase
Lending source
Source: Emerging Trends in Real Estate 2014 survey
Note: Based on US respondents only
Index Returns: Real Estate vs. Stocks/Bonds
-50.00%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
FTSE NAREIT
NCREIF
S&P 500 Barclays Capital
Government Bond Index
Source: NCREIF, NAREIT, S&P, Barclays Group
Note: 2013 data annualized from second-quarter 2013
NCREIF Cap Rates vs. U.S. Ten-Year Treasury Yields
Source: NCREIF, Moody’s Analytics, Federal Reserve Board
*Ten-year Treasury yields based on average of the quarter, 2013Q2 average is as of July 2013
Note: Cap rate based on four-quarter moving average of current-value cap rate
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
19
90Q
1
19
90Q
3
19
91Q
1
19
91Q
3
19
92Q
1
19
92Q
3
19
93Q
1
19
93Q
3
19
94Q
1
19
94Q
3
19
95Q
1
19
95Q
3
19
96Q
1
19
96Q
3
19
97Q
1
19
97Q
3
19
98Q
1
19
98Q
3
19
99Q
1
19
99Q
3
20
00Q
1
20
00Q
3
20
01Q
1
20
01Q
3
20
02Q
1
20
02Q
3
20
03Q
1
20
03Q
3
20
04Q
1
20
04Q
3
20
05Q
1
20
05Q
3
20
06Q
1
20
06Q
3
20
07Q
1
20
07Q
3
20
08Q
1
20
08Q
3
20
09Q
1
20
09Q
3
20
10Q
1
20
10Q
3
20
11Q
1
20
11Q
3
20
12Q
1
20
12Q
3
20
13Q
1
Cap Rate
10-Year Treasury*
Spread
Capital flows outlook Real estate capital market balance forecast for 2014
4.4%
26.0%
43.4%
23.5%
2.7%
1.8%
17.1%
26.9%
40.5%
13.7%
Substantially undersupplied
Moderately undersupplied
In balance
Modestly oversupplied
Substantially oversupplied
Equity capital for investing Debt capital for acquisitions
Source: Emerging Trends in Real Estate 2014 survey
Note: Based on US respondents only
Debt capital for specific uses
3.1%
24.1%
52.2%
17.2%
3.4%
15.9%
42.9%
30.2%
10.4%
0.7%
Substantially undersupplied
Moderately undersupplied
In balance
Modestly oversupplied
Substantially oversupplied
Debt capital for development Debt capital for refinancing
Source: Emerging Trends in Real Estate 2014 survey
Note: Based on US respondents only
Equity Underwriting Standards Forecast
26.6%
30.5%
29.7%
18.5%
40.6%
46.7%
50.7%
50.8%
32.8%
22.8%
19.6%
30.7%
2011
2012
2013
2014
More rigorous Remain the same Less rigorous
Source: Emerging Trends in Real Estate 2014 survey
Note: Based on US respondents only
Debt Underwriting Standards Forecast
29.8%
33.0%
39.1%
17.4%
29.2%
35.1%
41.5%
39.4%
41.0%
31.9%
19.4%
43.3%
2011
2012
2013
2014
More rigorous Remain the same Less rigorous
Source: Emerging Trends in Real Estate 2014 survey
Note: Based on US respondents only
Top Real Estate Capital Markets Trends
Emerging trends barometer 2014
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Buy
Sell Hold
Source: Emerging Trends in Real Estate surveys
Note: Based on US respondents only
Excellent
Poor
Fair
Abysmal
Good
Real Estate Capital Flows
Survey participants anticipate an increase in both equity and debt capital
Equity investors will continue to expand search for yield, turning focus from solely core in 24-hour markets to a wider geography and range of asset classes
Lender’s return to corporate profitability “allows them to get back in the game”
For both investors and lenders, real estate provides an increasingly attractive investment alternative
Increase in Availability of Debt Capital
Respondents expect an increase in availability of debt capital from five sources
CMBS (securitized) market
Commercial banks
Life insurance companies
Mezzanine lenders
Non-bank financial institutions
CMBS Revival Continues
Survey participants ranked CMBS first in terms of change in availability of capital for real estate in 2014
2013 transaction volume expected to exceed $80 billion; 2014 originations anticipated to exceed $100 billion
CMBS lenders continue to fill the gaps left by conventional lenders in terms of deal size (under $25 million) and property location (secondary versus solely primary locations)
Commercial Banks
Expected increases in interest rates (and profitability) will make real estate lending increasingly attractive
Regional and local banks are expected to become increasingly active as real estate lending returns to become a major part of their business model
National banks, searching for opportunities, will increasingly compete on a regional and local basis
Development and construction loans will become increasingly available for borrowers with strong credentials and track records, and properties with substantial pre-leasing
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2,013
Construction and development loans noncurrent rate
Multifamily mortgages noncurrent rate
Commercial mortgages noncurrent rate
Bank Real Estate Loan Delinquency Rates
Source: Federal Deposit Insurance Corp.
Note: Delinquent loans defined her as those that are noncurrent, either 90 days or more past due or in noncurrent status
*as of second quarter 2013
Dealing with problem loans
12.9%
25.9%
56.7%
4.5%
14.9%
23.6%
54.7%
6.9%
14.8%
25.4%
53.5%
6.3%
Foreclose and dispose
Sell to a third party
Extend with mortgage modification
Extend without mortgage modification
Preferred strategy for lenders
2012
2013
2014
Source: Emerging Trends in Real Estate 2014 survey
Note: Based on US respondents only
0
1
2
3
4
5
6
7
8
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Delinquency
Life insurers mortgage delinquency and in-foreclosure rates
Source: Moody’s Analytics, American Council of Life Insurers
In-foreclosure
%
Mezzanine Financing
Interviewees and survey participants seem of two minds regarding the roll of mezzanine financing in 2014
“The biggest question on mezzanine is where the returns are going to be. If mezzanine rates don’t increase enough and we don’t feel we’re getting paid enough, we’ll stop. At a 200 [basis point] difference, we don’t think we’re getting paid for the risk.”
Other interviewees predict an “increase in B-piece, mezzanine, and debt funds to fill gaps in transaction structure” and “an increase in the use of mezzanine financing combined with higher-cost senior debt.”
Shadow Banking
Shadow banking is commercial lending outside of the regulated universe of insured depository institutions and life insurance companies
While not the “lender of last resort”, borrowers in the shadow banking market will find themselves dealing with a “hodge-podge “ of well capitalized private funds, wealthy individuals, family offices, refugees from other lending markets and the like who are in this market solely because the spreads are attractive
Equity Sources
Foreign investors
Private equity funds
Pension funds
Equity REITs
Markets to watch
More markets begin to look attractive
The lack of new supply has allowed the steady nature of the economic recovery to drive improvement in real estate
41%
16%
6%
57%
39%
28%
65%
47%
59%
0%
10%
20%
30%
40%
50%
60%
70%
Investment Prospects Development Prospects Homebuilding Prospects
Percent of markets ranked moderately good or better
2012
2013
2014
Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only
Changing positions Best and worst
-15
-10
-5
0
5
10
15
20 La
s V
eg
as
Sa
cr
am
en
to
Atla
nta
Inla
nd
Em
pir
e
Ph
oe
nix
St. L
ou
is
Ind
ian
ap
olis
Ta
mp
a/S
t. Pe
ter
sb
ur
g
Na
sh
ville
Sa
n A
nto
nio
Alb
uq
ue
rq
ue
Milw
au
ke
e
Ba
ltimo
re
Ra
leig
h/D
ur
ha
m
Ho
no
lulu
/Ha
wa
ii
Vir
gin
ia B
ea
ch
/No
rfo
lk
We
stc
he
ste
r/F
air
field
Ok
lah
om
a C
ity
No
rth
er
n N
ew
Je
rs
ey
Wa
sh
ing
ton
, DC
Rank Change from 2013
Position change
Source: Emerging Trends in Real Estate surveys Note: Based on US respondents only
Outlook improves for more markets
Markets with Investment Prospects of Good or Better
2011 2012 2013 2014
New York City Austin Austin Austin
Washington D.C. Boston Boston Boston
New York City Houston Dallas/Ft. Worth
San Francisco New York City Houston
San Jose San Francisco Miami
Seattle San Jose New York City
Washington D.C. Seattle Orange County
Portland
San Francisco
San Jose
Seattle
7.0
7.0
6.8
6.8
6.8
6.8
6.7
6.6
6.6
6.6
6.9
6.6
6.7
6.6
6.4
6.4
6.3
6.4
6.4
6.2
7.7
7.5
7.4
7.2
7.4
7.2
7.3
7.1
6.9
6.9
1. San Francisco
2. Houston
3. San Jose
4. New York
5. Dallas/Ft. Worth
6. Seattle
7. Austin
8. Miami
9. Boston
10. Orange County, CA
Top 10 total rank 2014
Investment Development Homebuilding
Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only
6.5
6.5
6.5
6.3
6.5
6.4
6.3
6.4
6.5
6.3
6.1
6.2
6.2
6.1
5.9
5.9
5.9
6.0
5.9
6.3
6.8
6.8
6.7
6.8
6.7
6.8
6.8
6.5
6.3
5.9
11. Denver
12. Nashville
13. Los Angeles
14. San Antonio
15. San Diego
16. Charlotte
17. Raleigh/Durham
18. Salt Lake City
19. Portland, OR
20. Minneapolis/St. Paul
Next 10 markets 2014
Investment Development Homebuilding
Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only
The impact of uncertainty Impact on the outlook for Washington, DC
0
5
10
15
20
25
30
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Rank Score
The outlook for Washington, DC succumbs to fed fatigue
Market Rank Investment Score
Excellent
Fair
Poor
Source: Emerging Trends in Real Estate surveys
Note: Based on US respondents only
Top 10 investment markets
2014 2013 Rank
Change
1. Houston 7.00 6.84 +4
2. San Francisco 6.98 7.21 -1
3. New York 6.84 7.14 -1
4. Seattle 6.83 6.72 +2
5. San Jose 6.78 6.89 -2
6. Dallas/ Fort Worth 6.76 6.47 +4
7. Austin 6.69 6.71 -
8. Boston 6.64 6.85 -4
9. Orange County, CA 6.60 6.48 -
10. Miami 6.57 6.47 +1
Top 10 development markets
2014 2013 Rank
Change
1. San Francisco 6.88 6.87 -
2. San Jose 6.75 6.58 +1
3. Houston 6.64 6.36 +2
4. New York 6.58 6.76 -2
5. Miami 6.38 5.89 +6
6. Dallas/Fort Worth 6.37 6.20 +1
7. Seattle 6.36 6.13 -1
8. Boston 6.35 6.31 -2
9. Minneapolis/St. Paul 6.27 5.06 +16
10. Austin 6.25 6.40 -6
Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only
Top 10 homebuilding markets
2014 2013 Rank
Change
1. San Francisco 7.74 6.80 -
2. Houston 7.48 6.15 +4
3. San Jose 7.40 6.58 -1
4. Dallas/Fort Worth 7.36 5.86 +6
5. Austin 7.34 6.26 -
6. New York 7.19 6.42 -3
7. Seattle 7.19 6.14 -
8. Miami 7.06 5.44 +8
9. Boston 6.87 6.05 -1
10. Orange County, CA 6.85 5.91 -1
Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only
Markets: 2014 emerging trends Markets: 2
East coast
Boston 6.6
Washington DC 5.9
New York 6.8
Providence 4.3
Pittsburgh 5.5
Philadelphia 5.6
Northern NJ 5.9
Westchester/ Fairfield, CT 5.5
Baltimore 5.1
West coast
Seattle 6.8
San Francisco 7.0
Los Angeles 6.5
Portland 6.5
San Jose 6.8
Sacramento 5.0
Inland Empire 5.9
Orange County 6.6
San Diego 6.5
Honolulu 5.7
Southwest
Las Vegas 5.5
Phoenix 6.1
Tucson 5.1
Albuquerque 4.6
Oklahoma City 4.8
Denver 6.5
Dallas 6.8
Houston 7.0
Austin 6.7
San Antonia 6.3
Salt Lake City 6.4
Southeast
Atlanta 6.1
New Orleans 4.5
Charlotte 6.4
Raleigh/Durham 6.3
Nashville 6.5
Memphis 4.5
Virginia Beach/Norfolk 5.2
Florida
Miami 6.6
Jacksonville 5.0
Tampa 6.0
Orlando 5.9
Midwest
Minneapolis 6.3
Kansas City 5.3
St. Louis 5.2
Chicago 6.1
Indianapolis 5.3
Cincinnati 5.0
Columbus 4.9
Cleveland 4.2
Milwaukee 4.8 Detroit 3.1
Property type outlook
Industrial leads the pack
Industrial takes the top spot
5.72
5.76
6.14
6.23
6.45
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00
Retail
Office
Apartment Residential (Rental)
Hotels
Industrial/Distribution
Prospects for major commercial property types in 2014
Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only
Abysmal Fair Excellent
Subsector outlook shows diversity of recovery
4.93
4.95
5.29
5.72
5.92
6.00
6.08
6.11
6.17
6.30
6.56
0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00
Suburban Office
Power Centers
Regional Malls
R&D Industrial
Apartment Rental--high-income
Neigh./Community Shopping Ctrs.
Central City Office
Full-Service Hotels
Limited-Service Hotels
Apartment Rental--moderate-income
Warehouse Industrial
Prospects for commercial subsectors in 2014
Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only
Abysmal Fair Excellent
Subsectors with the most promise
Good
Fair
Poor
Source: Emerging Trends in Real Estate surveys Note: Based on US respondents only
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Central City Office Full-Service Hotels Limited-Service Hotels Warehouse Industrial
Excellent
Abysmal
Middle of the pack subsectors
Good
Fair
Poor
Source: Emerging Trends in Real Estate surveys Note: Based on US respondents only
Excellent
Abysmal 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
R&D Industrial Apartment, High Income
Apartment,Moderate Income Neigh./Community Shopping Ctrs.
Trailing subsectors
Good
Fair
Poor
Source: Emerging Trends in Real Estate surveys Note: Based on US respondents only
Excellent
Abysmal 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Suburban Office Power Centers Regional Malls
Commercial development begins to look up
4.58
4.63
5.31
5.52
6.74
0 1 2 3 4 5 6 7 8 9
Office
Retail
Hotels
Apartment Residential (Rental)
Industrial/Distribution
Prospects for major commercial property types in 2014
Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only
Abysmal Fair Excellent
Development prospects reflect where market is strongest
3.43
3.55
3.92
4.96
5.11
5.14
5.23
5.52
6.00
6.25
6.44
0 1 2 3 4 5 6 7 8 9
Regional Malls
Suburban Office
Power Centers
Full-Service Hotels
R&D Industrial
Central City Office
Neigh./Community Shopping Ctrs.
Limited-Service Hotels
Apartment Rental--moderate-income
Apartment Rental--high-income
Warehouse Industrial
Prospects for commercial subsectors in 2014
Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only
Abysmal Fair Excellent
Some changes in what investors want to buy Investment recommendation of survey respondents
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
Power Centers
Regional Malls
Apartment Rental--high-income
Suburban Office
R&D Industrial
Apartment Rental--moderate-income
Full-Service Hotels
Central City Office
Neigh./Community Shopping Ctrs.
Limited-Service Hotels
Warehouse Industrial
Sell
Hold
Buy
Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only
Wrap up
Emerging Trends Scorecard: How will we do?
2014 Trend Yes No ?
Industry profitability continues to improve
Interest rates rise
More emphasis on property management and less on financial engineering
More capital expected to be available
Development opportunities outside of multifamily increase
Industry changes to meet generational needs
Needs of end users of space continue to change
Single family home market continues to improve