P6 Econ Pres (Larry Edit)_ARES_Denver 3

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202

Commercial Real Estate Private Equity: Capital Flows, Liquidity and Pricing

Presented by

Dr. Lawrence A. Souza, DBA/CRE/RICS/CCIMVisiting Professor – St. Mary’s College; Senior Advisor and Chief Economist; Monetarex.com; Senior

– Investment Economist/Advisor Pillar6 Advisors, LLC

Olga KorolevaPresident and Founder – Monetarex.com

Presented to

American Real Estate Society – 32nd Annual Meeting, Denver Colorado

Friday April 1st, 2016


Mavericks Surf Contest, Sat February 13th, 2010 (Half Moon Bay California)

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Outline• Hypothesis Research Questions

• Data/Methodology/Literature Review

• Fund Company Evaluation Method

• Real Estate Private Equity (REPE)

• Capital Flows (Offerings)

• Placement Filings by Industry Sector

• Total Offerings by Property Sector – State

• Deals with Commissions and Fees

• Macro Factors Driving Capital Flows• Return Expectations

• Portfolio Diversification/Concentration

• Fiscal/Monetary Policies

• Business Cycles (Real Estate)

• Employment/Economic Base Concentrations

• Technology/Venture Capital Flows

• International Trade/Infrastructure

• Market Performance/Selection

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Hypothesis/Research Questions

• What drives capital to Commercial Real Estate Private Equity (CREPE)?

• What macro-and-microeconomic factors drive CREPE flows?

• What impact does CREPE flows have on liquidity and pricing?

• What is the level and trend of CREPE capital flows?

• What is the level of CREPE capital flow commitments?

• What property sectors and states receive the most CREPE flows?

• What types of funds are the largest by property sector and state?

• What are the characteristics of the oldest funds?

• What are the characteristics of the funds with the highest commitment rates?

• What causes these funds to continue to grow?

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Data

• Portfolio Level

• Monetarex.com

• Townsend Group

• Institutional Real Estate Inc.

• National Council of Real Estate Investment Fiduciaries

• Microeconomic

• Monetarex.com

• Real Capital Analytics

• CoStar

• REIS Reports, Inc.

• Cushman & Wakefield/CB Richard Ellis/Colliers International/JLL

• Macroeconomic

• Federal Reserve Board of Governors

• US Treasury Department

• Commerce Department

• Bureau of Labor Statistics

• Census Bureau

• Nealson/Claritas/Equifax

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Methodology

• Quantitative Analysis

• Principal Components (Factor Analysis)

• Cross-Sectional/Time-Series Regression Analysis (Correlation)

• Chi-Square (Means-Testing)

• Cointegration

• Z-Scores (Weighted)

• Index Development (Performance Scores)

• Qualitative Analysis

• Survey Methods (Experts/Panel)

• Likert Scale

• Weighted Scores

• Interviews

• Hybrid Analysis

• Quantitative Analysis

• Qualitative Analysis

• l Reserve Board of Governors

• Plots

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Literature Review – Capital Flows

• Case, B. (2015). WHAT HAVE 25 YEARS OF PERFORMANCE DATA TAUGHT US ABOUT PRIVATE EQUITY REAL ESTATE? Journal of Real Estate Portfolio Management, 21(1), 1-20. Retrieved from https://stmarys-ca.idm.oclc.org/login?url=http://search.proquest.com.stmarys-ca.idm.oclc.org/docview/1721551204?accountid=25334

• Chervachidze, S., & Wheaton, W. (2013). What determined the great cap rate compression of 2000-2007, and the dramatic reversal during the 2008-2009 financial crisis? Journal of Real Estate Finance and Economics, 46(2), 208-231. doi:http://dx.doi.org.stmarys-ca.idm.oclc.org/10.1007/s11146-011-9334-z

• Clayton, J., Ling, D. C., & Naranjo, A. (2009). Commercial real estate valuation: Fundamentals versus investor sentiment. Journal of Real Estate Finance and Economics, 38(1), 5-37. doi:http://dx.doi.org.stmarys-ca.idm.oclc.org/10.1007/s11146-008-9130-6

• Doeswijk, R., Lam, T., C.F.A., & Swinkels, L. (2014). The global multi-asset market portfolio, 1959-2012. Financial Analysts Journal, 70(2), 26-41. Retrieved from https://stmarys-ca.idm.oclc.org/login?url=http://search.proquest.com.stmarys-ca.idm.oclc.org/docview/1560650489?accountid=25334

• Eichholtz, P. M., A., Gugler, N., & Kok, N. (2011). Transparency, integration, and the cost of international real estate investments. Journal of Real Estate Finance and Economics, 43(1-2), 152-173. doi:http://dx.doi.org.stmarys-ca.idm.oclc.org/10.1007/s11146-010-9244-5

• Haber, J., Braunstein, A., & Mangiero, G. (2011). The accuracy of the rates of return reported by fund managers: A test in the united states. International Journal of Management, 28(1), 169-172,199. Retrieved from https://stmarys-ca.idm.oclc.org/login?url=http://search.proquest.com.stmarys-ca.idm.oclc.org/docview/853332556?accountid=25334

• Laposa, S. (2007). Bridging gaps, building portfolios. Journal of Real Estate Portfolio Management, 13(2), 173-178. Retrieved from https://stmarys-ca.idm.oclc.org/login?url=http://search.proquest.com.stmarys-ca.idm.oclc.org/docview/197895505?accountid=25334

• Lieser, K., & Groh, A. P. (2011). The attractiveness of 66 countries for institutional real estate investments. Journal of Real Estate Portfolio Management, 17(3), 191-211. Retrieved from https://stmarys-ca.idm.oclc.org/login?url=http://search.proquest.com.stmarys-ca.idm.oclc.org/docview/918717233?accountid=25334

• Lieser, K., & Groh, A. P. (2014). The determinants of international commercial real estate investment. Journal of Real Estate Finance and Economics, 48(4), 611-659. doi:http://dx.doi.org.stmarys-ca.idm.oclc.org/10.1007/s11146-012-9401-0

• Ling, D. C., & Naranjo, A. (2002). Commercial real estate return performance: A cross-country analysis. Journal of Real Estate Finance and Economics, 24(1), 119. Retrieved from https://stmarys-ca.idm.oclc.org/login?url=http://search.proquest.com.stmarys-ca.idm.oclc.org/docview/203144976?accountid=25334

• Malkiel, B. G. (2013). Asset management fees and the growth of finance. The Journal of Economic Perspectives, 27(2), 97-108. doi:http://dx.doi.org.stmarys-ca.idm.oclc.org/10.1257/jep.27.2.97

• Mueller, G. R. (2002). What will the next real estate cycle look like? Journal of Real Estate Portfolio Management, 8(2), 115-125. Retrieved from https://stmarys-ca.idm.oclc.org/login?url=http://search.proquest.com.stmarys-ca.idm.oclc.org/docview/197821017?accountid=25334

• Pedersen, N., Page, S., & He, F., C.F.A. (2014). Asset allocation: Risk models for alternative investments. Financial Analysts Journal, 70(3), 34-45. Retrieved from https://stmarys-ca.idm.oclc.org/login?url=http://search.proquest.com.stmarys-ca.idm.oclc.org/docview/1560650311?accountid=25334

• PENNACCHI, G., & RASTAD, M. (2011). Portfolio allocation for public pension funds. Journal of Pension Economics & Finance, 10(2), 221-245. doi:http://dx.doi.org.stmarys-ca.idm.oclc.org/10.1017/S1474747211000102

• Shilling, J. D., & Wurtzebach, C. H. (2012). Is value-added and opportunistic real estate investing beneficial? if so, why? The Journal of Real Estate Research, 34(4), 429-461. Retrieved from https://stmarys-ca.idm.oclc.org/login?url=http://search.proquest.com.stmarys-ca.idm.oclc.org/docview/1314689527?accountid=25334

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Introduction

• Commercial Real Estate Private Equity Capital Flows are Driven by both Micro and Macro Economic Factors:

• Micro: Portfolio, Property, Company and Client Level.

• Macro: Fiscal (Tax) and Monetary Policy, Business Cycle, Trade, and

Performance Level.

• Capital Flows Across Geographies Searching for the Highest Risk-Adjusted Rates of Return Over the Long Run.

• Real Estate Capital Flows have a Direct and Indirect Impact on Market Liquidity and Pricing.

• In the Long Run, Real Estate Capital Markets are Efficient, and Capital Flows to Sectors and Geographies where Public and Private Human, Physical and Economic Capital Concentrates, Aggregates, Agglomerates and Clusters.


Firm – Company Level Evaluation

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Fund/Company Evaluation

• Property/Portfolio Level

• Average Size/Dollar Value Assets

• Economic Life of Assets (Average Age)

• Total Nominal/Real/Risk-Adjusted Holding Period Returns

• Fee Adjusted (Font Load/Back-End Load)

• Waterfalls/Promotes/Participation

• Portfolio Attribution Analysis (Property Sector/Type/Selection)

• Geographic Concentration/Diversification (Primary/Secondary)

• Supply Constrained vs. Commodity Markets

• Population/Employment Concentrations (Clustering/Economic Base)

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Fund/Company Evaluation – Cont. • Operational/Firm Level

• Headquarters Location (Talent Access/Retention)

• Size of Firm (Number of Employees/Occupied Square Feet)

• Manager Style (Internally/Externally Managed)

• Organizational Structure (Functional/Product/Service Lines)

• Corporate Culture

• Leadership (Senior Level Management/Employees)

• Experience (Years/Other Firm)

• Education/Credentials/Certification/Licenses

• Application/Integration Technological Innovation/Systems

• Customer/Client/Investor Relations (Brand Management)

• Number/Diversification of Investors (Type/Class – Institutional/Accredited)

• Clear Marketing and Communications (Messaging)

• Website/Social Media Presence (Communication Channels)

• Community/Industry Network Relationships


Date Range 1/1/2013 12/31/2015

Company Revenue Range Average of years in business Average of total_offering_amount Average of total_amount_sold % Capital CommitmentChange from average (performance success)

$1 - $1,000,000 9 5,851,660 1,739,854 29.7% Lower Years In Bus/Capital Commitment Rates

$1,000,001 - $5,000,000 16 4,301,390 2,123,080 49.4% Not as Long in Business/But Successful/Middle Market

$25,000,001 - $100,000,000 17 55,639,626 16,185,425 29.1% Larger Funds/Takes Up to 18 Months to Fund

$5,000,001 - $25,000,000 18 10,938,301 7,788,727 71.2% Longest in Business/Not-Institutional/Middle Market

Over $100,000,000 17 75,927,164 17,696,636 23.3% Larger Funds/Takes Up to 18 Months to Fund

Grand Total 15 12,575,729 5,540,274 44.1%

The table above shows the dependency of company revenue range, company years in business, average fund size that these companies are launching and success in raising funds

Average: Years Company In Business = 15 YearsTotal Offering Amount = $12.6 million

Total Amount Sold = $5.5 millionCommitment Rate = 44%

Company Revenue $5.0 mil. to $25 mil.Average: Company In Business = 18 Years

Total Offering Amount = $10.9 millionTotal Amount Sold = $7.8 millionCommitment Rate = 71%

REPE Company Level Economics

Company Revenue $1.0 mil. to $5 mil.Average: Company In Business = 16 Years

Total Offering Amount = $4.3 millionTotal Amount Sold = $2.1 millionCommitment Rate = 49%


NUMBER OF DEALS PER DEAL SIZE, Q32015

In Q3’15 the average size of the private capital deal was $15 million, an increase from $12 million in the previous quarter. The change is primarily due to the fact that the dealflow in the $10 million - $15 million range almost doubled.

21.3%

37.4%

19.0%

16.5%

5.8%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

< 1M

1M-5M

10M-50M

5M-10M

> 50M


Commercial Real Estate Private

Equity Capital Flows


TOTAL AMOUNT OF OFFERINGS RISING (Q OVER Q)

7

8 9

7

8 8 8

10 642

752

524 572

722

795

611

668

0

100

200

300

400

500

600

700

800

900

-

2

4

6

8

10

12

Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15

Bill

ion

s

Total offering amount Number of deals

Monetarex has aggregated and reviewed the data in 668 Form D filings submitted to the SEC for the real estate industry group as of September 30, 2015, of which 401 are currently active. Total offering amount stands at approximately $10.3 billion as of September 30, 2015, with the Total recorded capital commitments of $3.2 billion (or a 31% capital commitments rate). There is a definite slowdown in the fundraising activity for the private capital. The average historical capital commitment rate has been above 50%. In Q3’15 the capital commitments lowered even further (vs. 55% in Q1'15 and vs. 38% in Q2’15).The total number of active Real Estate Private Placement filings across all sectors increased by about 10%, from 611 to 668. Average minimum investment for the quarter stands at approximately $136 thousand.


Breakdown by Real Estate

Industry Sector


BREAKDOWN BY REAL ESTATE INDUSTRY SECTOR, Q32015

Almost 40% of Private Placement filings come from the Commercial Sector representing $3.2 billion across 241 offerings. Construction activity has been robust in 2015. As a result, private capital activity in the Construction Sector has increased as well (an increase from 1% to almost 4% of total number of deals). There were 25 opportunities filed in the Construction Sector during Q3'15 representing $246 million in offerings.

36.1%

3.7%

27.5%

6.4%

26.2%

Commercial Construction Other Real Estate

REITS and Finance Residential


Total Offerings by

Property Sector - State

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202REPE Sector Level Economics

Sum of total_offering_amount 6 Qtrs

Row Labels Grand Total Rank

Hotels 5,057,854,094

CA 379,940,084 5

DC 310,526,582 6

FL 254,958,000 8

IL 492,373,100 2

MD 143,470,000 10

NY 2,210,821,147 1

OR 151,931,525 9

TX 412,525,901 4

VA 425,807,755 3

WA 275,500,000 7

Industrial 7,726,103,506 Rank

AZ 282,121,325 7

CA 2,228,428,342 1

CO 170,820,000 10

FL 192,953,000 9

IL 505,108,200 5

MA 378,677,346 6

MD 1,108,740,000 3

NY 1,895,161,678 2

TX 715,420,615 4

VA 248,673,000 8

Multifamily 13,680,779,528 Rank

AZ 579,805,000 6

CA 4,193,423,728 1

FL 515,365,000 7

IL 1,109,992,000 5

MA 399,444,343 10

MD 2,177,887,019 3

NY 2,585,646,063 2

TX 1,191,854,276 4

VA 478,315,755 8

WA 449,046,344 9

Office 8,924,459,479 Rank

AZ 272,521,325 9

CA 2,335,086,342 1

CO 219,407,370 10

DC 310,651,582 8

IL 667,366,300 5

MA 336,727,846 7

MD 1,252,750,000 3

NY 2,236,861,160 2

TX 826,765,599 4

VA 466,321,955 6

Retail 8,727,704,590 Rank

AZ 260,496,325 10

CA 1,897,867,101 2

FL 288,187,642 9

IL 618,060,600 5

MA 334,235,198 8

MD 1,383,620,000 3

NY 2,263,063,878 1

TX 818,589,891 4

VA 451,678,955 6

WA 411,905,000 7

Grand Total 44,116,901,197

SUM TOTAL OFFERINGS

Sum Total Offerings (6 Qtrs) = $44.1 billion: Multifamily $13.7 bill (31%), Office $8.9 bill (20%), Retail $8.7 bill (20%), Industrial $7.7 bill (18%), and Hotels $5.1 bill (11%).

Multifamily: CA, NY, MD; Office: CA, NY, MD; Retail: NY, CA, MD; Industrial: CA, NY, MD; Hotels: NY, IL, VA.


DEALS WITH COMMISSIONS AND FEES, Q32015

Despite the rise in popularity of crowdfunding and online investing, the use of traditional broker-dealers and placement agents still prevails. In Q3’15 17% of deals were launched through and anticipate to pay commissions on money raised to broker-dealers. The median commission is 4% assuming the raise is fully funded. In Q3’15 the commission range was 0.01%-15%.

Deals with

Commissions

Deals with

Commissions to total

Median

Commissions

Maximum

Commissions

Minimum Commissions

114 17.00% $132,900 $6,750,000 $800

Deals with

Finder Fees

Deals with Finder Fees

to total

Median

Fees

Maximum

Fees

Minimum

Fees

18 7.00% $35,000 $5,250,000 $1,000

In Q3’15 7% of deals will have finder fees payouts on the money raised. The median fee is 2% assuming the raise is fully funded. In Q3’15 the finder fee range was 0.1%-10%.


Web Portal



Macro Factors

Driving Commercial Real Estate

Private Equity Capital Flows

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Commercial Real Estate Valuation –

Income Approach - CAPM

CAPM = E (r) = ie = rf + β (rm – rf)

VRE = NOI

ie

iRE = NOI

Vt

PVRE = NOI (1+g)n + NOI/(i-g)

(1+i)n (1+i)nΣ

Michael Giliberto, Real Estate in A Capital Markets Context.

i = Discount Rate = Risk Free Rate + Credit RP + illiq RP + σP


i = Discount Rate = Opp Cost of Capital = Exp Rate of Return =

Risk Free Rate (RR + InfExp)

+ Inflation RP

+ Credit RP

+ illiq RP

+ Maturity RP

+ Currency RP

+ Tax RP

+ Political RP

+ Policy RP

+ σRP*

Discount Rate Determination - Volatility

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Modern Real Estate Portfolio Theory- Benefits of Diversification -

N#

SYSTEMATIC RISK

NON-DIVERSIFIABLE

NON-SYSTEMATIC RISK

DIVERSIFIABLE

T

O

T

A

L

R

I

S

K

/


Institutional Real Estate

Capital Allocation Line (CAL)

E (r)

/β

Capital

Allocation/Security

Market Line

(CAL/SML)

LENDING

LEVERAGE

100% High

Risk/Return

Portfolio

100% Low

Return/Risk

Portfolio

Market

BasketE (r)*

*

Higher Return/Risk

Real Estate

Investments

Lower Risk/Return Real

Estate Investments

Loan Origination

Direct Real Estate

Development

Multi-Asset Portfolio Management/Movements Along the Efficient Frontier

Rf

REAL ESTATE/ENERGY

INSURANCE HEDGE

45% Bonds

25% Stock

10% Insurance

10 % Real Estate

10% Alt. Energy


Applications In Portfolio Theory – Target

Average Standard Metro Annual Return Deviation

Orange County 13.4% 7.6%

SF Bay Area 15.5% 8.8%

Seattle 14.3% 9.3%

San Diego 13.7% 9.4%

Los Angeles 14.4% 9.9%

Sacramento 13.8% 11.0%

Denver 12.0% 11.2%

Portland 12.5% 10.0%

Salt Lake City 13.0% 11.0%

Phoenix 14.1% 11.4%

Tucson 14.1% 11.4%

Riverside 11.6% 11.9%

Las Vegas 5.1% 6.6%

Albuquerque 2.4% 4.4%

Sources: National Real Estate Index (NREI) and

BRE Properties Research Department

Total Returns are calculated by the year-over-year change in sales price per

square foot on a quarterly basis (Capital Appreciation) plus the annualized cap

rate (Income Return) per quarter.

1.3

0.8

0.5

Risk-Adjusted Rates of Return are calculated by dividing the Total Average

Annual Rate of Return by the Standard Deviation (Risk) for each metro area.

The Risk-Adjusted Rate of Return measures the amount of return for each unit

of risk. For example Orange County provides 1.7 units of return for each unit of

risk.

1.2

1.2

1.2

1.0

1.4

1.4

1.3

1.3

1.7

1.7

1.5

Risk-Adjusted Rate of Return 1986-2000

Risk-Adjusted

Rate of Return

Balanced Conditions for Long

Periods:

• LA/Orange County/Riverside

• San Diego

• Bay Area

• Seattle

Modest Conditions of

Over/Under Supply:

• Sacramento

• Salt Lake City

• Portland

• Denver

• Job Growth

• In-Migration

• Housing Demand

• Positive Net Absorption

• Low Vacancy Rates

• High Effective Rents

• Prices Above

Replacement


Fiscal Policy


• Promote financial stability by improving accountability-transparency in financial system, end to big to fail,protect taxpayers by ending bailouts, protect consumers from abusive financial services practices.

• Title I: Financial Stability (Oversight Council) by monitoring systematic risk and researching state ofeconomy.

• Title II: Orderly Liquidation Authority (FDIC/SIPC) banks, broker dealers and insurance companies.

• Title III: Transfer of Powers to Comptroller, FDIC and Fed, elimination of Office of Thrift Supervision

• Title IV: Regulation of Advisors to Hedge Funds and Others, limits exclusion of financial information ingovernment reporting.

• Title V: Creation of Federal Insurance Office to monitor insurance industry, sales practices.

• Title VI: Bank and Savings Associations Holding Company and Depository Institution RegulationImprovements, intorducing Volcker Rule to reduce speculative investments, limits on hedge fund andprivate equity ownership.

• Title VII: Wall Street Transparency and Accountability in regards to OTC Credit DefaultSWAPs/Derivatives.

• Title VIII: Payment, Clearing and Settlement Supervision Act, mitigate systematic risk, promote stabilityin payment system.

• Title IX: Investor Protections and Securities Reform Act, Improvements to Regulation of Securities(SEC), fiduciary duty BDs/RIAs, whistleblower program.

• Title X: U.S. Consumer Financial Protection Bureau (Fed), regulates products and services with federallaw.

• Title XI: Federal Reserve System Provisions.

• Title XII: Improving Access to Mainstream Financial Institutions Act, encourage low income people toparticipate in financial system.

• Title XIII: :Pay It Back Act, amends Emergency Economic Stabilization Act and TARP, unused funds cannot be used for new programs, deficit reduction, spending offsets.

• Title XIV: Mortgage Reform and Anti-Predatory Lending Act, organization/servicing mtg standards.

Dodd–Frank Wall Street Reform and Consumer Protection Act

http://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_Consumer_Protection_Act


$787.0 billion (Spending + Tax Cuts/Credits)

• Tax Credits/Cuts: • $275B (Co. $51B/Hlth $150B/Ed $91B)

• Infrastructure: $81B (Core $51B/Other $45B)

• Energy: $61 billion

• Housing: $13 billion

• Science: $9 billion

Note: The ability to start and fund projects also comes from

local municipal bond financing and state level block

grants.

American Recovery and Reinvestment Act (2009)

Websites: http://www.recovery.gov/Pages/home.aspx;

http://www.irs.gov/newsroom/article/0,,id=204335,00.html;

http://www.sba.gov/recovery/index.html;

http://www.gsa.gov/Portal/gsa/ep/contentView.do?contentType=GSA_OVERVIEW&contentI

d=25761; http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009


Monetary Policy

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Yield Curve Theory and Analysis

-50

bsp

-100

bsp

-75

bsp

-100

bsp

-100

bsp

All debt + equity securities priced off of the yield curve (term structure interest rates)

Although S-T Risk Free Rates near Zero (negative real) debt/equity credit and illiquidity risk premiums still high

+125

bsp+125

bsp+100

bsp+50

bsp

May be the first time in modern monetary history, were the U.S.

economy falls into recession, with out the yield curve inverting first.

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Commercial Real Estate Spreads

Spreads Lowest Since 1992

Source: Urban Land Institute Emerging Trends.

Spreads At Cycle High


Business Cycles

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Business/Real Estate Cycles

Source: Richard Knutson, Cornish & Carey/Newmark Night Frank, Apartment Advisors.


Real Estate Cycle Theory

E1 E2Occupancy/ Rent

Growth/Price

Appreciation Line

Rent/Value Spikes

Structural Occupancy Rate/Inflation Rent Growth

Peak Flows/Pricing

Outflows/RedemptionsLow Private Equity Flow

(Contrarian)

Rising Private Equity Flows


Employment


Source: Department of Labor Statistics, Bureau of Labor Statistics.

United States Non-Farm

Employment Growth (YOY)

R

RR

R

G

GG

G G

R

G

R

R R

G GG G G

G

High Probability Recession First 5

Years Every Decade, Growth Last 5

Years Every Decade

R R

G

R


Geographies-Submarkets by Industry Sector:

• High-tech and Bio-tech Manufacturing (SF/Oak/SEA/SD)

• Alternative and Clean Energy Technologies (SF/SJ/PHO)

• Healthcare-Information Systems Services (SF/SJ/SD/SAC/Oak/SEA/PHO)

• Financial Services and Venture Capital (SF/SJ/SM/SEA)

• Telecommunications/Networking (SJ/Marin/Den/Sea)

• Multimedia and Entertainment (SF/Marin/LA)

• Internet and Software Programming (SF/SJ/Oak/Sea)

• International Trade & Tourism (SF/SJ/Sac/SEA/LA/Mon)

• Construction and Engineering Services (SF/SJ/SAC/SEA/LA)

• Education/Government Services (SF/SJ/Oak/SAC/SEA/PHO)

• Defense (SJ/Sac/SEA/LA/PHO/UT/MON)

• Agricultural/Timber Products (Cent Val/SAC/Port/SEA/Mon)

Commercial Demand (Economic Base)


Technology/Venture Capital Flows


Not Important

Average Importance

Highly Important

Note: IT accounts for 10.5% of U.S. Employment

The Importance of IT Industries

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Venture Capital Flows

http://www.pwc.com/us/en/technology/moneytree.html

Silicon Valley -46.0% 3Q15 - 4Q15 -39.0% 4Q15 YOY

Silicon Valley $4.3 bil. / 38% of $11.4 bil U.S.

California $5.7 bil/ 50% of U.S. Total VC Funding

U.S. VC Funding Peaked at $17.3 bill. 2Q/2015

Down 34% to $11.4 bill in 4Q/2015

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Venture Capital Flows

https://www.pwcmoneytree.com/MTPublic/ns/index.jsp


International Trade/Infrastructure


Global Geography – Export Market GrowthForeigners Bought a Net $57 billion of U.S. Real Estate Last Year

64% Foreign Investors to Increase Allocation to CRE

60% Believe U.S. Most Stable/Secure Country

Exposure to Faster

Growing Southeast

Asian Economies

Goods/Services

Volume Trade Flows

7.7%

http://www.oecd.org

7.2%

8.2%

6.4%

7.2%

6.5%

6.4%

8.3%

7.1%8.4%

8.7%

7.9%

7.9%

6.7%

5.2% UK

6.6%

Germ

6.1%

Fran

6.0%

Italy

6.4%

Spain

5.4%

100 –to – 200

bsp Downward

Revisions

OECD Economic Outlook, Volume 2012 Issue 1 - No. 91 - © OECD 2012

Grec

6.3%

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Transportation Flows

http://www.dot.gov/ http://www.fhwa.dot.gov/environment/freightaq/appendixc.htm

Trucking carriers 64% of interregional freight tonnage, marine vessels

21%, railroads 14%. Ranked second in total intercity freight tonnage

and tied for first for greatest volume of intercity truck freight.

One of Most Extensive

Networks of Highways

and Arterial Streets in

U.S. (I-5/I-15/I-40/I-10)


Commercial Real Estate Market

Performance and Selection

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Oakland CBD


Source: DTZ Research

Core office markets are more expensive globally as yields tighten, but

there remain several attractive markets

Ranking of prominent global office markets

Ranking Market Attractiveness

1San Francisco HOT

2 Beijing HOT

3 Los Angeles HOT

4 Singapore HOT

5 Shanghai HOT

6 New York WARM

7 Tokyo WARM

8 London WE WARM

9 Sydney WARM

10 London City WARM

Ranking Market Attractiveness

11 Berlin WARM

12 Chicago WARM

13 Brussels WARM

14 Frankfurt WARM

15 Munich WARM

16 Madrid WARM

17 Barcelona COLD

18 Paris CBD COLD

19 Milan COLD

20 Hong Kong COLD

Robert Peto, RICS Global President, Global

Property Outlook.


Top Markets Based on Total Return Forecast

ING/Clarion Partners Research & Investment Strategy.


101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202S.F. Bay Area Submarket Rankings

Existing BRE Communites

A - Deer Valley (171)

B - Blue Rock Village (560)

C - Promontory Point (400)

D - Pinnacle City Centre (192)

E - Verandas (282)

F - Red Hawk Ranch/Sun

Pointe Village (789)

G - Sharon Green (296)

H - Foster’s Landing /Lakeshore

Landing (798)

A

H

G

F

E

D

C

B

1

2

3

4,5,6,7

8

9

10

11

17

19

18

16

15

14

13

12

26

25

24

23

22

21

20

2827

Submarket RankingsMountain View (12)

Central San Mateo (10) (H)

Marina (4)

Cupertino (14)

Sunnyvale (13)

South San Mateo (11) (G)

Russian Hill (5)

San Ramon (25) (C)

Campbell (17)

Fremont (21) (E,F)

South Marin (2)

Santa Clara (15)

South of Market (8)

North San Mateo (9)

West San Francisco (3)

Northeast San Jose (20)

South San Jose (18)

Central San Jose (16)

Haight Ashbury (7)

North Marin (1) (A)

East Contra Costa (26)

Civic Center (6)

East Alameda (22)

Hayward (23) (D)

West Contra Costa (28)

North Alameda (24)

Concord (27)

East San Jose (19)

Home Values

Population/Houeholds

Supply Constraints

Household Income

Executive Occupations

Rent Growth

Occupancy Rates

Zoning

Public Private Goods

Amenities

101 Montg o m ery Stree t , Suite 1350 Sa n Fra nc isc o , CA 94104 P: 877.PILLAR6 F: 415.494.8202Conclusion

• Commercial Real Estate Private Equity Capital Flows are Driven by both Micro and Macro Economic Factors:

• Micro: Portfolio, Property, Company and Client Level.

• Macro: Fiscal (Tax) and Monetary Policy, Business Cycle, Trade, and

Performance Level.

• Capital Flows Across Geographies Searching for the Highest Risk-Adjusted Rates of Return Over the Long Run.

• Real Estate Capital Flows have a Direct and Indirect Impact on Market Liquidity and Pricing.

• In the Long Run, Real Estate Capital Markets are Efficient, and Capital Flows to Sectors and Geographies where Public and Private Human, Physical and Economic Capital Concentrates, Aggregates, Agglomerates and Clusters.


Thank You


Questions/Answers


Dr. Lawrence A. SouzaContact Information:

www.Monetarex.com and www.Pillar6.com

www.the-commercial-group.com

[email protected]

Cell Direct: (415) 713-0213

http://www.monetarex.com/

http://www.pillar6.com/

mailto:[email protected]


Dr. Lawrence Souza brings to his clients over 25 years of experience in real

estate economic and financial research experience. Mr. Souza has held senior

positions as Managing Director-Index Services, Charles Schwab Investment

Management (CSIM); Chief Real Estate Economist and Director of Index

Services, Global Real Analytics (GRA); Director of Research for BRE

Properties, Inc. (REIT) in San Francisco and holding Senior Market/Research

Analyst positions at Metric Institutional Realty Advisors and Mellon-

McMahan/MacFarlane Realty Advisors, and market research positions at Norris,

Beggs and Simpson and Grubb & Ellis commercial brokerage. Dr. Souza at

Monetarex and Pillar6, combines traditional fundamental real estate economic

and market research with fundamental and technical financial and capital

market research and investment strategy. This combined approach allows for

the tracking and forecasting of economic, real estate and financial cycles and

efficient portfolio construction, optimization and risk management.

Dr. Souza has degrees in Economics (BA) and Business Administration

(BS/DBA) with concentrations in Accounting, Finance, Banking and Real Estate;

and holds master’s degrees in Applied Economics (MA), Finance/Investments

(MS), Public Administration (MPA), Information Systems (MSIS), and Political

Science (MA). Mr. Souza has been teaching Modern Real Estate Principles and

Finance since 1996 with an emphasis on real estate in a modern and post-

modern portfolio and capital markets context; and the institutionalization,

securitization, internationalization and technologization of real estate markets

and products.

Documents

P6 Econ Pres (Larry Edit)_ARES_Denver 3