SIOR FALL CONVENTION “ LIQUIDITY AND TODAY’S COMMERCIAL REAL ESTATE MARKET” Renaissance Grand...
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Transcript of SIOR FALL CONVENTION “ LIQUIDITY AND TODAY’S COMMERCIAL REAL ESTATE MARKET” Renaissance Grand...
SIOR FALL CONVENTIONSIOR FALL CONVENTION
““LIQUIDITY AND TODAY’S COMMERCIAL REAL LIQUIDITY AND TODAY’S COMMERCIAL REAL ESTATE MARKET”ESTATE MARKET”
Renaissance Grand HotelRenaissance Grand HotelSt. LouisSt. Louis
November 9, 2007November 9, 2007
ROBERT J. NAHIGIAN, FRICS, SIOR, CREROBERT J. NAHIGIAN, FRICS, SIOR, CRE
AUBURNDALE REALTY CO.AUBURNDALE REALTY CO.
NEWTON, MASS.NEWTON, MASS.
US CBD INVESTMENTSUS CBD INVESTMENTS
One Word: Hot and more Hot !One Word: Hot and more Hot !
Values were up in 2006Values were up in 2006
Values continue to rise in 2007Values continue to rise in 2007
LAST 2 YEARSLAST 2 YEARS
It has been all about capital !It has been all about capital !
You couldn’t fail with You couldn’t fail with real estate investments real estate investments
A lot of money chasing deals and “yields”A lot of money chasing deals and “yields”
Next 2 YearsNext 2 Years
2007 looks like another banner year !2007 looks like another banner year !
Real Estate now recognized as a 4Real Estate now recognized as a 4thth Asset Asset class with bonds, stocks and cash. class with bonds, stocks and cash.
There is a new demand and a There is a new demand and a new allocation !new allocation !
Next 2 years could be very differentNext 2 years could be very different
Next 2 YearsNext 2 Years
Success based more local (micro) rather than Success based more local (micro) rather than national (macro) environmentnational (macro) environment
Difficult to find a balanced value commercial Difficult to find a balanced value commercial investment in the USinvestment in the US
People think buying now will be cheaper than People think buying now will be cheaper than tomorrowtomorrow
Next 2 YearsNext 2 YearsToday everyone is a “genius” so Today everyone is a “genius” so demand for real estate has amplified demand for real estate has amplified
Real estate growth and differences will be Real estate growth and differences will be driven by sectors, market and not uniform driven by sectors, market and not uniform growthgrowth
Investors will need to look at real estate with Investors will need to look at real estate with true due diligence evaluationtrue due diligence evaluation
We need to get back to old-fashion growth We need to get back to old-fashion growth and focus on NOIand focus on NOI
DEMAND DRIVERSDEMAND DRIVERS
EUROPE PAYS MORE PSF; GLOBAL CAP RATES EUROPE PAYS MORE PSF; GLOBAL CAP RATES ARE LOWER (More Pricey) ARE LOWER (More Pricey)
US REAL ESTATE PRICE IS STILL CHEAP US REAL ESTATE PRICE IS STILL CHEAP COMPARED TO OTHER GLOBAL PROPERTIESCOMPARED TO OTHER GLOBAL PROPERTIES
DROP OF US $ HELPSDROP OF US $ HELPS
REPRODUCTION COST IS STILL HIGH REPRODUCTION COST IS STILL HIGH
Construction Costs = 6-10% annual increasesConstruction Costs = 6-10% annual increases
Source: Sam Zell/Hugh Kelly ’05 CRE ChicagoSource: Sam Zell/Hugh Kelly ’05 CRE Chicago
US COMMERCIAL VOLUME: US COMMERCIAL VOLUME: 2005-062005-06
2006
20052005
20052005
2006
2006 2006 2006
$0$50
$100$150$200$250$300$350$400
IndustrialRetail
Apt.Offic
e
All Properties
2005 2006 In Billions Source: CPN 2/16/07
U.S. COMMERCIAL VOLUMEU.S. COMMERCIAL VOLUME
$150
$267.6$307
$401
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
2004 2005 2006 Jan.-Oct.18, 2007
Source:NAR 10/07MSNBCOct. 21, 2007Billions
PROPERTIES PURCHASED: PROPERTIES PURCHASED: 11stst Q 2007: Q 2007:Source: CPN 2007 9/1/07Source: CPN 2007 9/1/07
Sub.Office27%
Apts.23%
Retail16%
CBD Office23%
Flex3%
Industrial8%
SUMMARY ON RETURNSSUMMARY ON RETURNS
15.4 14.7 14 13.715
17.2
6.07 7.1 7.5
5.66.8 6.7 7.1
23
28
0.0
5.0
10.0
15.0
20.0
25.0
30.0
AptsSub. Office
Strip Malls
Warehouse
Harvard Endowment
Yale Endowment1995-2005 1996-20061Q 2006 2Q 2007Source: Wall St. Journal 9/27/07 CPN 10/1/07
US 10 YR. T-NOTE: ’62-’07US 10 YR. T-NOTE: ’62-’07Source: Federal ReserveSource: Federal Reserve
4.314.665.19
4.80
4.296.03
6.578.55
10.6211.43
7.997.35
4.283.95
0.002.004.006.008.00
10.0012.0014.00
1962
1965
1970
1975
1980
1985
1990
1995
2000
2005
2006
Ju
ly,2
007
Oct
. 16,
200
7N
ov. 2
, 200
7
AnnualYield
US T-Note Yields: ‘07US T-Note Yields: ‘07Source: Federal Reserve 7/07Source: Federal Reserve 7/07
4.27 4.294.80 4.65
5.04 5.19
4.31
10.410.1
9.5
6.5
0
2
4
6
8
10
12
2004 2005 2006 1-Apr-07 2Q '07 9-Jul-07 Nov. 2, 2007
T-Notes
RE Returns
IRR Average %IRR Average %Source: CRE Spring Convention 4/07Source: CRE Spring Convention 4/07
0102030405060708090
100
1977-2002
1984-2002
'96-'06
'01-'06
'03-'06 '06
1/07-6/07
NACREIFS&P
CASH-ON-SIDELINESCASH-ON-SIDELINES
Sept. 3, 2004: $ 1.9 Tril.
Jan. 30, 2005: 4.4 Tril
Aug. 1, 2006 2.16 Tril.
Nov. 11, 2006 2.27 Tril.
April 1, 2007: 2.43 Tril.
Sept. 27, 2007: 2.81 Tril.
Nov. 1, 2007: 2.93 Tril.Source: MSNBC 2/1/0/Wall Street 1/25/07, Boston Globe 4/1/07;WSJ 10/25/07
MONEY MARKET CASH-ON-HANDMONEY MARKET CASH-ON-HAND
$1.90
$4.40
2.16 2.27 2.4322.81 2.93
00.5
11.5
22.5
33.5
44.5
5
Sep
t. 3,
200
4Ja
n. 3
0, 2
005
Aug
. 1, 2
006
Nov
. 11,
200
6
Apr
il 1,
200
7S
ept.
27, 2
007
Nov
. 1, 2
007
In Trillions
CONCLUSIONCONCLUSION
CASH POSITIONS HAVE BEEN CASH POSITIONS HAVE BEEN INCREASING SINCE 2006INCREASING SINCE 2006
BUT FOR HOW LONG?BUT FOR HOW LONG?
WE MAY BE SHIFTING SIDEWAYS: WE MAY BE SHIFTING SIDEWAYS: Real Estate v. Stock Market ?Real Estate v. Stock Market ?
CONCLUSIONCONCLUSION
Debt is costing more today Debt is costing more today
And real estate prices are starting to And real estate prices are starting to dropdrop
REAL ESTATE YIELD BREAK-DOWN REAL ESTATE YIELD BREAK-DOWN V. THE DOWV. THE DOW
CONCLUSIONCONCLUSION
EUROPEANS SAVE 47% OVER U.S. EUROPEANS SAVE 47% OVER U.S. PRIME RATEPRIME RATE
JAPANESE SAVE 75% OVER U.S. JAPANESE SAVE 75% OVER U.S. PRIME RATEPRIME RATE
CONCLUSIONCONCLUSIONEURO DOLLAR WORTH 44% MOREEURO DOLLAR WORTH 44% MORE
SAVE 29-57% ON CAP RATESSAVE 29-57% ON CAP RATES
SAVE 47-75% ON BORROWING COSTSSAVE 47-75% ON BORROWING COSTS
IT’S A DISCOUNT TO BUY IN THE U.S. !IT’S A DISCOUNT TO BUY IN THE U.S. !
CONCLUSION:CONCLUSION:For the Foreign RE InvestorFor the Foreign RE Investor
U.S. IS A STABLE, SAFE AND GROWING U.S. IS A STABLE, SAFE AND GROWING MARKETMARKET
U.S. HAS LARGEST ECONOMY: GDP 3.9%U.S. HAS LARGEST ECONOMY: GDP 3.9%
U.S. $ IS CHEAP, CAP RATES ARE U.S. $ IS CHEAP, CAP RATES ARE REASONABLE AND GLOBAL PRIME RATES REASONABLE AND GLOBAL PRIME RATES ARE CHEAPARE CHEAP
ADD IT ALL UP: WINDFALL FOR ADD IT ALL UP: WINDFALL FOR THE FOREIGN INVESTOR !!!!THE FOREIGN INVESTOR !!!!
CONCLUSIONCONCLUSION
CAP RATES could increase 100 BP by the CAP RATES could increase 100 BP by the end of 2008end of 2008
The “Idiot Tax” will vanish next yearThe “Idiot Tax” will vanish next year
Focus on NOI for valueFocus on NOI for value
Liquidity is immense but not stupidLiquidity is immense but not stupid
Foreigners have an appetite but could pull Foreigners have an appetite but could pull the plug at any timethe plug at any time
HAPPINESS DEFINED:HAPPINESS DEFINED:
EXPECTATION = REALITY EXPECTATION = REALITY
OROR
REALITY IS GREATER THAN REALITY IS GREATER THAN EXPECTATIONEXPECTATION
THANK YOU !THANK YOU !SIORSIOR