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Angelic Real Estate presentation delivered by company president Gabriel Silverstein at Flint Oak, Kansas summit February 8, 2014. The presentation includes a look back and recap of 2013, and a look forward at 2014 and beyond, including both market trend reporting and predictions and guidance. The primary focus of the presentation is commercial real estate lending and investment market activity and driving factors.
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Status Report: 2014 Commercial Real Estate Capital & Investment Markets
Flint Oak, Kansas February, 2014
Presented by Gabriel Silverstein, President, Angelic Real Estate
Heard at the MBA Conference
• MBA only predicLng 7% increase in lending over 2013, to $300B; Lifeco lending in 2013 was a record $63B
• 80% LTV will probably happen again in 2014 – “Feels like 2006” said one lender in an email Tuesday.
The fear: large loan maturity volume in 2015-‐2017 from peak-‐of-‐market loans, parLcularly CMBS loans, is high risk to market stability
But CMBS is Back… (so is the rest of the lending market)
New CMBS Issuance Volume
…And Outstanding CMBS Loan Volume is Actually Shrinking…
0 1 2 2 2 4 11 20 30 48
82
147
190 221
267 296
350
414
539
697
867
745
708 669
687
637 625
9.44%
17.57% 21.53%
24.59% 25.75%
21.19% 24.27%
29.33% 32.76%
37.20%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
$-‐
$100
$200
$300
$400
$500
$600
$700
$800
$900
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
CMBS
CMBS % Share (CMBS+RMBS)
Billion
s of Dollars Outstanding
CMBS Percent of U
S Non-‐A
gency SecuriLzed Mortgage Backed Security U
niverse
Data from SecuriLes Industry and Financial Markets AssociaLon (SIFMA)
…While Investment Sales Volume Has Returned
Interest Rates • Long-‐term index rates (5/7/10 year swaps, 10/30 year
treasuries, etc.) will conLnue to rise in 2014, but not as sharply or high as feared, short term rates will likely move lijle unLl 2015
• Interest rates, especially mortgage rates, are sLll near historic lows, and as LTV restricLons ease, long-‐term financing is very ajracLve today
• Bridge financing for good assets is cheaper than it has ever been, and is readily available
• Spreads will conLnue to compress, resulLng in mortgage rate rises being muted compared to index rate increases
• Upward rate movements will be felt more at the high end of the LTV scale, moderate LTV level debt interest rates will see smaller increases
• For leveraged return buyers, LTV increases will offset rate increases to maintain leveraged returns without price/cap rate changes
CMBS Rates vs. 10 Year Treasuries
• The 10 year treasury in 2013 averaged 217 bps below 2001-‐2007 stable averages (average 2001-‐2007 was 4.50%); current market is approx. 180+ bps below 2001-‐2007 stable average 10 year treasury yield
• AAA CMBS spreads in 2013 were 80 bps above stable averages of the same era (118 bps vs. 38 bps -‐ 38 bps was average spread even looking back to 1998)
• Spread compression will mute, but not completely offset rises in interest rate indices
Graph courtesy of UBS
8.21 7.38
6.65 5.66 5.57 5.40 5.91 5.84
6.55 5.74 5.67 5.13 4.73
6.02 5.00 4.59 3.99 4.26 4.28
4.79 4.63
3.64 3.24 3.20 2.76 1.79
2.34 38 52 46 37 30 27 26 46
341
711
346 228
190 118
0
200
400
600
800
1,000
1,200
0
2
4
6
8
10
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Spread (bps) C
oupo
n (%
)
Ave. 10-yr Conduit Loan Coupon Ave. 10-yr Treasury Ave. 10-yr AAA CMBS Spread
Cap Rates vs. Interest Rates
• Cap rates sLll at relaLve high spreads vs. treasuries • Interest rate rises will not increase cap rates (on mulL-‐
tenant properLes), cap rates could even conLnue to fall
Cap Rates Have ConLnued to Fall (even as interest rates have increased)
Short-‐Term Commentary • CMBS (and all loan) delinquencies are down • Extend and pretend worked, sort of • InflaLon will remain tame at least through 2014, job
growth will remain slow • Headline unemployment will fall slowly but steadily, real
unemployment rate is much higher than published rate • Affordable Care Act will not ruin the economy, but it will
require major overhaul, for now it will be most impacqul as a tax on the middle class and entrepreneurs
• 2014 elecLons will clear up nothing – voters are too disenchanted and will remain apatheLc unLl it is too late
• Sale/Leaseback market will become more acLve in 2014 • CMBS will surprise on the upside again, >$150B? • Lifeco and GSE lending will both remain strong
Long-‐Term Commentary • Commodity and raw material prices will rise faster than other costs of producLon over the next decade
• Capital market pricing inputs should remain relaLvely stable, cap rates will be held low by the prospect of rent growth (finally), offsetng the negaLve impact of rising interest rates
• The US Dollar is in jeopardy of losing its global relevance • LEED-‐designed will substanLally overshadow LEED-‐cerLfied (and Energy Star). An alternaLve self-‐cerLficaLon brand will emerge in the market. Users will focus on actual cost saving results, not just being “green” for appearances
• This market cycle should peak in 2017-‐2018, downturn in 2019-‐2020
Long-‐Term Commentary (cont.) • More posiLons will become directly compensated relaLve to revenue producLon and profitability
• ImmigraLon reform needed, in doubt for 2014 • Emerging markets could see large volaLlity as they strive for maturity, US benefits from perceived stability
• Structural unemployment will conLnue to irk technology firms and other new-‐era economic drivers in the US, educaLon system failure is a brewing super-‐storm
• United States reLrement planning is a disaster that will only worsen as the Baby Boomer generaLon ages, where expectaLons and realiLes are incongruent
• US infrastructure is rapidly aging and generally well over design capacity
Graph created using US Treasury Dept. website
Beware!: key index rates conLnue to trend downward in all economic cycle stages and the Federal Reserve has lijle room to move rates down in the future to counter negaLve economic headwinds – there is no extra gas in the tank
Future Concern: No More Room to Squeeze
MulL-‐Family Market Trends
• Younger generaLon household creaLon will remain a rental user, at least for a while
• Federal government will conLnue to promote poor consumer living decisions (i.e. rent vs. buy), which will exacerbate next downturn…again
• Single family home building will conLnue to strengthen, compleLons will increase moderately in 2014, but will not badly impact rental stock
• Secondary and terLary markets will see new development increase, but not as much rent growth as primary markets
• Freddie/Fannie quesLons remain and are the single biggest risk of market dislocaLon, which could raise cap rates
• The investment market will taper in 2014 for mulL-‐family
Hotel Market Trends
• The market has struggled to regain pricing power, but will finally do so in 2014
• A new hybrid of limited service and full service hotels will flourish this cycle (Yotel, The Five, Alov, etc.)
• Full service hotels will no longer be able to charge for wi-‐fi and similar services within five years, if not sooner
• Supply increases will remain minimal, well below long-‐term market averages
• Investor interest will increase with broad RevPAR growth in 2014, Blackstone IPOs demonstrate underlying investor bullishness
Retail Market Trends • Medical will conLnue to trend upward as a retail user base
• Retailers will start following roovops again, but not in 2014 (probably in 2015)
• Showrooming and same-‐day delivery for sales from e-‐commerce site will conLnue to reshape the face of the asset class – shiving storage to display square footage raLos, keeping store footprints smaller, etc.
• Regional malls may not all be dead, but most sLll need to be reinvented
• Strong rent growth to come for infill retail space • Investors are back into retail in force in 2014 and cap rates will conLnue to fall (except on single tenant buildings where they are at a floor)
Industrial Market Trends • Cap rates will level and remain stable • Spec building returns across most markets • Panama Canal impact misunderstood • E-‐commerce fulfillment dominates big BTS headlines, but remains a BTS driver, not a spec building driver
• Clear heights will keep going up: 36’ is the new 32’; 40’ will start to become widespread this cycle
• Most bulk distribuLon will want to be on the metro perimeter, not infill, because of increasing metro traffic costs
• DomesLc manufacturing growth will help backfill smaller, otherwise obsolete product – for now…
• Maybe(?) insLtuLonal investors will begin to realize that today’s metal buildings are not the metal buildings of 50 years ago
Office Market Trends • Office BTS market will become acLve again in 2014
• Technology infrastructure investment will conLnue to become more and more demanding on office owners and will make more buildings obsolete
• Older stock will conLnue to be converted to alternaLve uses • Younger generaLons redefining not only what’s inside the box,
layouts and use, but shiving demand to urban core and mini-‐core locaLons, parLcularly with public transportaLon infrastructure
• Yield chasing investors will finally move to secondary and terLary markets in 2014 but core investors will conLnue to be cauLous
• Spec office building will begin in earnest in 2014 in major markets
• AlternaLve working strategies will conLnue to proliferate but will not cause the demise of the enLre office market
The End
(or is it just the beginning?