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Global (Real Estate) Capital Markets
The Past (2000-2007) o Prices
Owner-occupied residential Income Property
o Sources of Equity o Sources of Mortgage Debt o Where Did All the Money Come From?
Capital Market Flows Real Estate
The Present Credit Crunch
The Future
o What are the risks?
Global (Real Estate) Capital MarketsResidential Prices
House Price Appreciation Rates1999:4-2007:3
100.00
120.00
140.00
160.00
180.00
200.00
220.00
240.00
260.00
280.00
300.00
Quarter
Pri
ce I
nd
ex
Los Angeles (13.4%)
San Diego (11.3%)
US (7.6%)
Denver (4.5%)
Dallas (4.0%)
Omaha (3.6%)
Global (Real Estate) Capital MarketsResidential Prices
House Prices 2006:3-2007:3
85.00
90.00
95.00
100.00
105.00
110.00
115.00
2006:3 2006:4 2007:1 2007:2 2007:3
Quarter
Pri
ce I
nd
ex
UT (+12.9%)
TX (+6.3%)
CO (+2.2%)
US (+1.8%)
FL (-2.1%)
MA (-2.3%)
CA (-3.6%)
Global (Real Estate) Capital MarketsResidential Prices
MSANAME2006:3-2007:3
price change (%)Odessa, TX 17.5Midland, TX 17.3Wenatchee, WA 14.9Provo-Orem, UT 13.6Grand Junction, CO 13.4Ogden-Clearfield, UT 13.3Salt Lake City, UT 12.7Cumberland, MD-WV 12.3Casper, WY 12.1San Angelo, TX 11.9Lebanon, PA 11.6Idaho Falls, ID 11.2Killeen-Temple-Fort Hood, TX 10.8
Global (Real Estate) Capital MarketsResidential Prices
MSANAME2006:3-2007:3
price change (%)Vallejo-Fairfield, CA -7.3Salinas, CA -7.7Naples-Marco Island, FL -8.2Port St. Lucie, FL -8.3Sacramento-Arden-Arcade-Roseville, CA -8.7Palm Bay-Melbourne-Titusville, FL -9.2Modesto, CA -9.3Sarasota-Bradenton-Venice, FL -10.0Cape Coral-Fort Myers, FL -10.0Stockton, CA -10.4Yuba City, CA -11.6Santa Barbara-Santa Maria-Goleta, CA -12.2Punta Gorda, FL -12.4Merced, CA -13.7
Global (Real Estate) Capital MarketsResidential Prices
Colorado House Prices2006:3 to 2007:3
90.0
95.0
100.0
105.0
110.0
115.0
120.0
2006:3 2006:4 2007:1 2007:2 2007:3
Quarter
Pri
ce In
dex
Grand Jnct (+14.0%)
Boulder (+3.1%)
Co Spr (+1.6%)
Fort Collins (+0.2%)
Pueblo (+0.2%)
Denver (-0.3%)
Greeley (-0.9%)
Global (Real Estate) Capital MarketsIncome Property Cap Rates
Apartment Cap Rates
0.00%1.00%2.00%3.00%4.00%5.00%6.00%7.00%8.00%9.00%
10.00%
Month
Ra
te
10-Year T
cap rate
spread
Global (Real Estate) Capital MarketsIncome Property Cap Rates
Office Cap Rates
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
Month
Ra
te
10-Year T
cap rate
spread
Global (Real Estate) Capital MarketsIncome Property Cap Rates
Industrial Cap Rates
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
Month
Ra
te
10-Year T
cap rate
spread
Global (Real Estate) Capital MarketsIncome Property Cap Rates
(Strip) Retail Cap Rates
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
Month
Ra
tes
10-Year T
cap rate
spread
Global (Real Estate) Capital MarketsIncome Property Cap Rates
Cap Rate Spreads
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%2001:1
2001:7
2002:1
2002:7
2003:1
2003:7
2004:1
2004:7
2005:1
2005:7
2006:1
2006:7
2007:1
2007:7
Month
Sp
read
apts
industrial
office
retail
Composition of Buyersoffice, industrial, retail and multifamily properties $5 mil.+
32% 30%34%
22%
7% 12% 3%
6% 5%
3%
7%9%
14%40%
17% 13% 11%
10%
8% 8%7%
11%
17% 19% 22%13%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2005 2006 20079 mos
inst'l
foreign
reit/public
user/other
fund
syndicator
condoconverter
private
Equity CapitalSource: Real Capital Analytics
Source: Real Estate Alert
Number of Funds
0
50
100
150
200
250
300
350
400
450
2002 2003 2004 2005 2006 2007
Targeted Equity Raisein billions
$0
$50
$100
$150
$200
$250
2002 2003 2004 2005 2006 2007
The Universe of Private Equity Funds
Equity
Source: Real Capital Analytics
Sources of Equity Capital% of Acquisitions Finance by CMBS
13%
25%
54%
72%
56%
22%
32%
39%
inst'l
foreign
reit/public
fund
syndicator
pvt out ofstate
pvt instate
total
inst'l, 13%
foreign, 11%
reit/public, 10%
fund, 40%
syndicator, 2%
pvt in state, 12%
pvt out of state, 10%
Equity CapitalSource: Real Capital Analytics
Foreign
0
5
10
15
20
25
30
35
2002 2003 2004 2005 2006 2007
Bill
ions
Other
Latin America
Euro
Pac Rim
Canada
UK
Australia
Mid East
German
Foreign Acquisitions of US Property(trailing 12 months, office, industrial, apartment, retail properties)
Source: Real Capital Analytics
Global (Real Estate) Capital MarketsMortgage Debt Outstanding
Mortgage Debt Outstanding
0.0
2,000.0
4,000.0
6,000.0
8,000.0
10,000.0
12,000.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
Bill
ion
s o
f U
SD
residential
commercial
Global (Real Estate) Capital MarketsChange in Mortgage Debt Outstanding
Percent Change in Mortgage Debt
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
Pe
rce
nt
Ch
an
ge
residential
commercial
Global (Real Estate) Capital MarketsWhere Did the Money Come From?
Increases in Global Capital Flows Attributable to:
Increase in Global Wealth o US Corporate Profits o Savings by Foreigners
Chinese save 30% of income Oil producing countries
Saudi Arabia, Russia and Iran are 30% of the world’s oil production
Central Banks Increased Liquidity o Fed
Federal Funds Rate Money Supply
Global (Real Estate) Capital MarketsWhere did the money come from?
US Corp Profits
$0.0
$200.0
$400.0
$600.0
$800.0
$1,000.0
$1,200.0
$1,400.0
$1,600.0
$1,800.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
Bill
ion
s o
f U
SD
Global (Real Estate) Capital MarketsWhere did the money come from?
Percent Change in Corp Profits
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
Per
cen
t C
han
ge
Global (Real Estate) Capital MarketsThe Fed
Today (December 11, 2007), the Federal Open Markets Committee (FOMC) announced it would lower its target federal funds rate by 25 basis points to 4.25%. The federal funds rate is the rate depository institutions charge each other to borrow reserves on a very short term (e.g. overnight) basis. The Fed achieves its target by buying/selling securities in the open market.
Global (Real Estate) Capital MarketsThe Fed
US Govt Interest Rates
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
2000
:1
2000
:4
2000
:7
2000
:10
2000
:1
2000
:4
2000
:7
2000
:10
2000
:1
2000
:4
2000
:7
2000
:10
2000
:1
2000
:4
2000
:7
2000
:10
2000
:1
2000
:4
2000
:7
2000
:10
2000
:1
2000
:4
2000
:7
2000
:10
2000
:1
2000
:4
2000
:7
2000
:10
2000
:1
2000
:4
2000
:7
2000
:10
Month
Rat
e
Fed Funds
3-mo Tbills
10-yr Tbonds
Global (Real Estate) Capital MarketsThe Fed
The Money Supply
MO: physical currency plus accounts at the central bank M1: M0 + cash held in reserve + demand (checking) accts M2: M1 + savings accounts + money market accts + small CDs ( < $100,000) M3: M2 + all other CDs + Eurodollar deposits + repurchase agreements
Global (Real Estate) Capital MarketsThe Fed
Money Supply and Economic Growth in US
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
2000 2001 2002 2003 2004 2005 2006
Year
Per
cen
t C
han
ge
Growth in M2
Economic Growth
M2 - Growth
Global (Real Estate) Capital MarketsWhere Did the Real Estate Capital Come From?
Shift in investors' preferences (positive alphas)
o Real estate really is a separate asset class
o Households allocate more wealth to real estate
o Investors allocate more to real estate
Lower cost of debt resulted in
Lower WACC
More leverage for real estate acquisitions
o Equity Investors: Private Equity/Hedge Funds
Example: Blackstone
o Credit Markets: Wall Street Financial Engineers
Examples: CDOs
Global (Real Estate) Capital MarketsWhere did the Real Estate Capital Come From?
Securitization of real estate
o Residential Real Estate
Securitizing Subprime Mortgages
Underwriters overwhelmed
o Commercial Real Estate: more diversification (less risk?)
CMBS
CDOs
o Consequences
Higher L/Vs: more leverage
Private Equity/Hedge Funds In
Traditional Institutional Investors Out
Global (Real Estate) Capital MarketsThe Present
Consequences of the Current Credit Crunch
Credit Spreads increasing
Required DSCs decreasing
Lower L/V (zero?, but not for too long)
Cash is king (again)
Marginal investors (real property valuations) depend on WACC
OUT: Financial engineers (Wall Street); Private Equity/Hedge Funds
IN: Real estate expertise; Traditional Institutional Investors
Source: Commercial Real Estate Direct; Real Capital Analytics
CMBS Spreads to Treasuries
0
100
200
300
400
500
600
Jan‘05
Apr Jul Oct Jan‘06
Apr Jul Oct Jan‘07
Apr Jul Oct
AAA10Yr
BBB-
Global (Real Estate) Capital MarketsThe Future
Higher cost of debt
o Increase underwriting standards (especially residential)
o Lower L/Vs
More accurate risk pricing
o For high risk tranches & CDOs
o Spatial pricing of risk in credit markets
China will figure out ways to invest internally
Global (Real Estate) Capital MarketsThe Future
What Are the Risks?
US (then Global) Recession
USD Continues to get hammered in Currency Markets
US Balance of Trade Deficit
$100/barrel oil (or higher)
Political response: isolationism
Global (Real Estate) Capital MarketsCurrency Markets
USD vs EURO
0.0000
0.2000
0.4000
0.6000
0.8000
1.0000
1.2000
1.4000
Month
FX
Global (Real Estate) Capital MarketsCurrency Markets
USD vs CAD
0.9000
1.0000
1.1000
1.2000
1.3000
1.4000
1.5000
1.6000
1.7000
20
00
:1
20
00
:4
20
00
:7
20
00
:10
20
01
:1
20
01
:4
20
01
:7
20
01
:10
20
02
:1
20
02
:4
20
02
:7
20
02
:10
20
03
:1
20
03
:4
20
03
:7
20
03
:10
20
04
:1
20
04
:4
20
04
:7
20
04
:10
20
05
:1
20
05
:4
20
05
:7
20
05
:10
20
06
:1
20
06
:4
20
06
:7
20
06
:10
20
07
:1
20
07
:4
20
07
:7
20
07
:10
Month
Fx
Global (Real Estate) Capital MarketsThe Future
Balance of US Trade (Billions_of_USD)
-1,000.0
-900.0
-800.0
-700.0
-600.0
-500.0
-400.0
-300.0
-200.0
-100.0
0.0
100.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
Bill
ion
s o
f U
SD
Global (Real Estate) Capital MarketsThe Future
Balance of US Trade as a Percent of US GDP
-7.0%
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
Pe
rce
nt
of
GD
P
Global (Real Estate) Capital Markets
Global (Real Estate) Capital Markets