Glenn R. Mueller, Ph.D. Professor University of Denver Franklin L. Burns School of Real Estate & Construction Management & Real Estate Investment Strategist Dividend Capital Research glenn.mueller@du.edu
Why Real Estate Fits an Investment Portfolio = SIZE U.S. Real Estate vs. Other Asset Classes Source: Bonds = SIFMA, January 204; Equities = World Federation of Exchanges for Equities, January 204; U.S. Real Estate = Moody s Real CPPI, January 204. This investment is subject to real estate risks associated with operating and leasing properties. Additional risks include changes in economic conditions, interest rates, property values, and supply and demand, as well as possible environmental liabilities, zoning issues and natural disasters.
Exhibit 5 Key Macro Economic Factors + Population Growth Exhibit 2 GDP Growth Employment Growth 5.0% 4.0% 3.0% 2.0%.0% 0.0%.%.8% 2.5% 3.6% 3.% 2.7%.9% 0.0% 2.8% 2.8% 4.4% 4.4% 3.% 4.0% 3.0% 2.0%.0% 0.0%.0% 2.0% 0.0%.2%.% 0.3%.7%.8%.% 0.6% 0.5%.0% 2.0% 3.3% 2.9%.0% 3.0% 2.0% 2.6% 3.0% 200 2002 2003 2004 2005 2006 2007 2008 2009 200 20 202 203 204 Source: Moody s Précis U.S. Metro December 200; Bureau of Economic Analysis (bea.gov) 7.00 6.00 5.00 4.00 3.00 2.00.00 0YrTreas 0.00 /3/2 /3/2 /3/2 /3/2 /3/2 /3/2 Interest Rates 3M LIBOR /3/2 /3/2 /3/2 /3/2 /3/2 /3/2 /3/2 /3/2 /3/2 4.0% 5.0% 4.3% 200 2002 2003 2004 2005 2006 2007 2008 2009 200 20 202 203 204 Source: Moody s Précis U.S. Metro December 200, Bureau of Labor Statistics (bls.gov) Exhibit 3 Infla on 4.0% 3.4% 3.5% 3.8% 3.0% 2.9% 3.2% 2.8% 2.9% 2.5% 2.3% 2.7% 2.0%.6% 2.5% 2.5%.5%.6%.6%.0% 0.5% 0.0% 0.5% 0.3%.0% 200 2002 2003 2004 2005 2006 2007 2008 2009 200 20 202 203 204 Source: Moody s Précis U.S. Macro September 200; Bureau of Labor Statistics (bls.gov)
Positive GDP Leads Employment Recovery Recessions last a year or less - Recovery & Growth cycles can be short of long GDP & EMP Recessions Source: U.S. Bureau of Labor Statistics, December 203; U.S. Bureau of Economic Analysis, December 203; Moody s, 203.
Economic Outlook 9,000,000 Real Estate Occupancy is Demand Driven by Employment Growth Real Estate a Delayed Mirror of the Economy 8,500,000 8,000,000 7,500,000 7,000,000 6,500,000 6,000,000 5,500,000 5,000,000 4,500,000 4,000,000 Industrial Office Retail Employment Source: Property and Portfolio Research, January 204. Employment & Property Occupied Stock is the top 54 MSA s covered by PPR
Market Cycle Analysis Physical Cycle Demand & Supply drive Occupancy Occupancy drives Rental Growth
US Commercial Real Estate Cycle Follows US Economic Cycles 3 Key Metrics: Occupancies Rents Prices Source: Glenn Mueller, PhD
Market Cycle Quadrants Phase 2 - Expansion Phase 3 - Hypersupply Demand/Supply Equilibrium Point Occupancy Long Term Occupancy Average Phase - Recovery Phase 4 - Recession Source: Mueller, Real Estate Finance 995 Time
Occupancy Rents Rise Rapidly Toward New Construction Levels Long Term Average Occupancy 5 4 Below 3 Inflation 2 Rental Negative Growth Rental Growth High Rent Growth in Tight Market 6 7 8 9 Demand/Supply Equilibrium 0 Cost Feasible New Construction Rents Rent Growth Positive But 2 Declining 3 Physical Market Cycle Characteristics 4 -Below Inflation & 5 Negative Rent Growth 6 Time
Historic National Office Rental Growth.0% Occupancy 0.5% 6.% 0 2 6.4% 9 8 2.5% 3 0.0% 3.3% Long Term Average Occupancy 7.7% 6 6.7% 4 0.3% 5 5 4 4.0% -3.0% -.0% 3.6% 2 2.7% 6 30 Year Cycle - Periods 968-997 -.5% Time
Historic National Industrial Rental Growth % 8.3% Long Term Avg Occupancy 3.0% 6 6.8% 0 5.% 9 8 8.5% 7 3.8% 2 5.9% 4.6% 3 4.8% 4 Occupancy 0.8% -2.% 3 2 2.8% 4 0.4% 5 5 4.6% 0.7% 30 Year Cycle - Periods 968-997 6-0.4% Time
National Property Type Cycle Locations Phase II Expansion Phase III Hypersupply Hotel Full-Service Hotel Ltd. Service Retail st Tier Regional Mall Apartment Health Facility Retail Factory Outlet Retail Neighborhood/Community Office Downtown 2 3 4 5 6 7 Industrial R&D Flex Senior Housing 8 9 Industrial Warehouse 0 2 LT Average Occupancy 3 4 5 6 Office Suburban Retail Power Center Phase I Recovery 2nd Qtr 204 Source: Mueller, 204 Phase IV Recession
Office Market Cycle Analysis 2nd Quarter, 204 Albuquerque Chicago East Bay Long Island Los Angeles Norfolk N. New Jersey San Antonio Stamford Wilmington Wash DC 2 3 Cincinnati Cleveland Kansas City Las Vegas Milwaukee Orange County St. Louis Detroit Ft. Lauderdale+ Hartford+ Houston Indianapolis Memphis Oklahoma City Orlando Palm Beach Philadelphia Phoenix Richmond Sacramento San Diego Charlotte Tampa Riverside NATION 4 5 Atlanta Baltimore Boston Columbus Dallas FW Denver Jacksonville Miami Minneapolis New Orleans Seattle 6 7 New York Pittsburgh Portland Raleigh-Durham San Jose Austin Nashville+ Salt Lake San Francisco+ 8 9 Honolulu 0 LT Average Occupancy Source: Mueller, 204 2 3 4 5 6
Norfolk Orange County Industrial Market Cycle Analysis 2ndQuarter, 204 Atlanta Baltimore Cleveland Detroit East Bay Ft. Lauderdale Memphis Milwaukee Nashville St. Louis+ Tampa+ NATION Jacksonville Richmond 6 Columbus Houston Indianapolis Kansas City Miami Minneapolis Palm Beach+ Pittsburgh Portland San Antonio San Diego 7 Austin Dallas FW Honolulu San Jose Seattle Los Angeles+ Riverside Salt Lake Denver San Francisco+ 0 2 9 8 LT Average Occupancy 3 4 2 Hartford Sacramento Stamford 3 4 Las Vegas Long Island New Orleans+ Oklahoma City Orlando Philadelphia Phoenix Wash DC 5 Boston Charlotte+ Chicago Cincinnati New York N. New Jersey Raleigh-Durham+ Source: Mueller, 204 5 6
LT Average Occupancy 2 3 4 Apartment Market Cycle Analysis 5 2nd Quarter, 204 6 Honolulu 7 Detroit Philadelphia 8 Source: Mueller, 204 Jacksonville- Las Vegas- Riverside Sacramento- 9 0 Austin Cleveland- Ft. Lauderdale+ Indianapolis- Kansas City Memphis- Orange County Orlando Atlanta Baltimore Boston Chicago Cincinnati Columbus- Dallas FW East Bay Hartford Houston Long Island Los Angeles Nashville Palm Beach Phoenix Pittsburgh Richmond Seattle Tampa- Wash DC 2 Miami Milwaukee Minneapolis New Orleans N. New Jersey New York Portland Salt Lake San Antonio- San Diego San Francisco San Jose NATION 3 Charlotte Denver Oklahoma City Raleigh-Durham Stamford St. Louis 4 5 6 Norfolk
Cleveland Richmond Retail Market Cycle Analysis 2nd Quarter, 204 Atlanta Dallas FW Las Vegas Nashville N. New Jersey Philadelphia Phoenix Riverside Sacramento 6 Denver Austin Boston East Bay+ Minneapolis Raleigh-Durham+ San Diego San Jose Baltimore Houston+ Long Island Los Angeles Portland Seattle 7 8 9 0 Miami Pittsburgh Salt Lake Wash DC Honolulu New York San Francisco 2 LT Average Occupancy 3 4 Detroit 2 3 4 Chicago Cincinnati Jacksonville Kansas City Memphis Milwaukee Norfolk Oklahoma City Orange County St. Louis 5 Palm Beach San Antonio Tampa NATION Charlotte Columbus+ Ft. Lauderdale Hartford Indianapolis New Orleans Orlando Stamford Source: Mueller, 204 5 6
Cincinnati Hartford Norfolk 2 Richmond+ Riverside Sacramento Stamford 3 Hotel Market Cycle Analysis 2nd Quarter, 204 Cleveland Detroit Indianapolis Memphis+ Milwaukee Oklahoma City+ Orange County 4 5 Columbus Jacksonville Kansas City+ Phoenix Raleigh-Durham San Antonio New Orleans 6 7 Baltimore+ Dallas FW St. Louis Salt Lake Atlanta+ Houston Los Angeles Minneapolis N. New Jersey Philadelphia+2 Tampa+ 8 9 Charlotte+ Chicago Las Vegas+ Nashville Pittsburgh Wash DC NATION Austin Boston Denver East Bay Ft. Lauderdale Miami Orlando Portland San Diego+ San Francisco San Jose Seattle 0 Source: Mueller, 204 Honolulu+ New York Palm Beach 2 Long Island 3 LT Average Occupancy 4 5 6
970s Cycle Factors Driving The First Half Cycle (5 Year) Strong Demand from the 960s that stopped Recession 974 Capital Flow - Mortgage REITs produced oversupply Factors Driving The Second Half Cycle (5 Year) Baby Boom Generation Goes to Work = Demand Capital Flow Shut Down = no supply = Lenders Recover Markets tighten and reach peak occupancy 979 (5% vacancy)
8% 970s Office Demand & Supply Demand Supply 6% 4% 2% 0% Oversupply Years Baby Boomers Go To Work 970 97 972 973 974 975 976 977 978 979 Source: FW Dodge, CB Commercial, BLS, Mueller
980s Cycle Factors Driving The First Half Cycle (5 Year) Tight market in 979 pushes rents and prices up Inflation pushes real estate prices higher Tax Act of 98 attracts taxable investors supply up Thrift Deregulation allows capital to flow Factors Driving The Second Half Cycle (5 Year) Tax Act of 986 slows taxable investors, but not tax free Poor stock market attracts Pension & Foreign capital Rising R.E. prices masks poor income returns
0% 8% 6% 4% 2% 0% 980s Office Demand & Supply Demand Oversupply Years Supply 980 98 982 983 984 985 986 987 988 989 Source: FW Dodge, CB Commercial, BLS, Mueller
990s Cycle Factors Driving The First Half Cycle (5 Year) Moderate but stable demand growth (99 recession minor) Oversupply and Foreclosures shut down construction Excess space Absorbed Markets Recover Factors Driving The Second Half Cycle (5 Year) Moderate Demand growth Continues Oversupply Absorbed and Return Performance improves Construction Constrained causing rents & prices to rise More Efficient Markets match supply to demand
3.0% 2.5% 2.0%.5%.0% 0.5% 0.0% 990s Office Demand & Supply Demand Oversupply Absorbed Supply Demand Supply Matched 990 99 992 993 994 995 996 997 998 999 Source: FW Dodge, CB Commercial, BLS, Mueller
2000s Cycle Demand Globalization - creates more stable U.S. economy Job Growth out of Technology Change 2.8 million population growth per year for 0 years Baby boomers at highest income earning years second home market wave Echo boom children college, first job, & renting Aging population not a major factor till 204 Employment Growth drives commercial demand
2000s Cycle Supply Constraint Public Markets make R.E. Capital markets efficient Economically Driven capital - low spec construction 500 + Research Watchdogs Data Available Constrained Supply (economically driven capital) construction labor harder to find materials costs increasing (steel, concrete) infrastructure problems constrain growth Feedback loop keeps demand and supply in better balance greater transparency Faster reaction to demand slowdown
Stock Growth Beginning to Increase Stocks growth started to increase in 203 from a 42 year low Source: Property and Portfolio Research, August 203.
2000s US Office Demand & Supply 4.0% Office Demand & Supply 3.0% 2.0%.0% 0.0% -.0% 2000 2002 2004 2006 2008 200 202-2.0% -3.0% Supply Reacted to Demand Slow Down Source: Property & Portfolio Research, Grubb & Ellis, Mueller 2009.
National Property Type Cycle Forecast Phase II Expansion Phase III Hypersupply Industrial Warehouse Retail Neighborhood/Community Retail Factory Outlet Hotel Full-Service Hotel Ltd. Service Retail st Tier Regional Malls Retail Power Center 2 3 Office Suburban Health Facility Industrial R&D Flex 4 5 6 7 Office Downtown Senior Housing 8 0 9 2 LT Average Occupancy Apartment 3 4 5 6 Phase I Recovery 2nd Qtr 205 ESTIMATE Source: Mueller, 204 Phase IV Recession
Occupancy Cycle and Rent Growth Office Source: Property and Portfolio Research, Grubb & Ellis, Mueller August 203.
Office Market Cycle FORECAST 2nd Quarter, 205 Estimates Chicago Long Island Los Angeles Milwaukee St. Louis Wash DC 2 3 Albuquerque Cincinnati Detroit East Bay Hartford+2 Kansas City Norfolk San Antonio 4 N. New Jersey Atlanta Stamford Cleveland Denver Ft. Lauderdale+ Houston Indianapolis Las Vegas+ Memphis Orange County Baltimore Boston Dallas FW Jacksonville Minneapolis New Orleans 6 7 5 Charlotte Columbus Miami Palm Beach Philadelphia Phoenix Richmond Sacramento San Diego San Jose Seattle Tampa NATION Oklahoma City Orlando Pittsburgh Riverside New York Portland Raleigh-Durham San Francisco+ 8 9 Austin Honolulu Nashville+ Salt Lake 0 Source: Mueller, 204 2 3 LT Average Occupancy 4 5 6
Occupancy Cycle and Rent Growth Industrial Source: Property and Portfolio Research, Grubb & Ellis, Mueller August 203.
Industrial Market Cycle FORECAST 2nd Quarter, 205 Estimates 2 3 Richmond Long Island 4 Hartford Milwaukee New Orleans+ Oklahoma City Orlando Philadelphia Phoenix Wash DC 5 6 Norfolk Orange County Sacramento Stamford Charlotte+ Cincinnati Columbus- Ft. Lauderdale+ Miami Minneapolis Pittsburgh NATION 7 8 Atlanta Boston Baltimore Chicago Cleveland Detroit East Bay Jacksonville Kansas City Las Vegas Memphis+ Nashville New York Raleigh-Durham St. Louis+ Tampa Houston Indianapolis N. New Jersey San Antonio San Diego 9 0 Austin Dallas FW Honolulu Portland Riverside Seattle Denver Los Angeles+ Palm Beach+ Salt Lake San Francisco+ San Jose 2 Source: Mueller, 204 3 4 LT Average Occupancy 5 6
Occupancy Cycle and Rent Growth Apartment Source: Property and Portfolio Research, Grubb & Ellis, Mueller August 203.
LT Average Occupancy 2 3 Apartment Market Cycle FORECAST 2nd Quarter, 205 Estimates 4 5 6 Detroit 7 Las Vegas Honolulu 8 9 Source: Mueller, 204 Baltimore Cincinnati East Bay Milwaukee New York Sacramento- San Diego- 0 Riverside+3 Atlanta Boston Chicago Columbus- Dallas FW Hartford Jacksonville Long Island Los Angeles Miami 2 Charlotte Cleveland Ft. Lauderdale Houston Indianapolis Kansas City Memphis Minneapolis Nashville New Orleans- N. New Jersey Philadelphia Pittsburgh Portland Richmond Salt Lake San Jose NATION 3 Austin Denver Orlando Raleigh-Durham Seattle Wash DC Norfolk 4 5 6 Oklahoma City Orange County Palm Beach Phoenix San Antonio San Francisco Stamford St. Louis Tampa
Occupancy Cycle and Rent Growth Retail Source: Property and Portfolio Research, Grubb & Ellis, Mueller August 203.
Retail Market Cycle FORECAST 2nd Quarter, 205 Estimates Atlanta Columbus+ Dallas FW Las Vegas Milwaukee Nashville N. New Jersey Philadelphia Phoenix Sacramento Cleveland Detroit St. Louis 2 3 4 5 New Orleans+ Orlando Palm Beach Tampa+ NATION 6 Chicago Cincinnati Kansas City Memphis Norfolk Oklahoma City Orange County Richmond Riverside 7 Denver Portland Charlotte Ft. Lauderdale Hartford Indianapolis Jacksonville San Antonio Stamford Baltimore Houston+ Long Island Los Angeles Raleigh-Durham Seattle Austin East Bay+ Minneapolis Pittsburgh San Diego San Jose Wash DC 0 2 9 8 LT Average Occupancy Source: Mueller, 204 Boston Honolulu Miami New York Salt Lake San Francisco 3 4 5 6
70 65 60 55 Occupancy Cycle and Rent Growth US Hotel 8% 4% 0% 4% 8% 2% 982 983 984 985 986 987 988 989 990 99 992 993 994 995 996 997 998 999 2000 200 2002 2003 2004 2005 2006 2007 2008 2009 200 20 202 203 204 205 206 207 208 Hotel Occ Hotel Rent Growth
Norfolk 2 3 Cincinnati Hartford Richmond 4 Hotel Market Cycle FORECAST 2nd Quarter, 205 Estimates 5 Columbus Jacksonville Riverside Sacramento San Antonio Stamford Dallas FW Oakland St. Louis Salt Lake Kansas City+ Memphis Oklahoma City Phoenix Raleigh-Durham 6 7 Baltimore Cleveland Detroit Indianapolis Milwaukee Orange County Charlotte+ Las Vegas+ Nashville New Orleans Wash DC NATION 8 9 0 2 LT Average Occupancy N. New Jersey Philadelphia Atlanta+ Chicago Houston Los Angeles Minneapolis Tampa+ Austin Boston Denver East Bay Ft. Lauderdale Honolulu Orlando Pittsburgh+3 Portland San Diego+ San Francisco San Jose Seattle Long Island Miami New York Palm Beach Source: Mueller, 204 3 4 5 6
Financial Cycle Capital Flows affect Prices
Market Cycle Capital Flow Impact Capital Flows to Existing Properties Cost Feasible Rents Reached Hyper Supply LT Occupancy Avg. Capital Flows to New Construction
Bond Values DROP as Interest Rates Rise Bond Values DROP as Interest Rates Rise 0 Year Treasury Yields 953-203e 0-Year Treasury Yield Average Total Return 953-98Peak = 3.9% Average Total Return 98-203 = 8.7% Average Yield = 6.% Average Total Return 953-973 =.9% Source: U.S. Treasury Federal Reserve Bank of St. Louis, April 204; Moody s Forecast, 204.
U.S. Commercial Property Prices U.S. Transaction Volume Source: Real Capital Analytics, Inc., 204.
Portfolio Buyers Dominate Trades Billions 60 40 20 00 80 60 40 20-0Q 02Q 03Q 04Q 05Q 06Q 07Q 08Q 09Q 0Q Q 2Q 3Q Individual Portfolio Source: Real Capital Analytics April 203
250 200 50 00 50 0 988 990 992 994 996 998 2000 2002 2004 2006 2008 200 202 Debt Capital Flows CMBS Issuance $ Billions Source: Commercial Mortgage Alert
Property Price Cycle Recovering Real Capital Analytics Real Commercial Property Price Index 235.00 205.00 Current Price Recovery to 2007 Peak % CBD Office 08% 75.00 Apartment 6% Retail 84% 45.00 5.00 85.00 Industrial 90% Suburban Office 80% Major Markets = 08% Secondary Markets = 89% Source: Real Capital Analytics, Inc., May 204.
Next Favored Tier of Markets - getting capital Rebounding RCA CPPI Still Challenged 230 230 20 20 90 90 70 70 50 50 30 30 0 0 90 90 70 50 SEA MIA PHILA TXS 70 50 2000-2 200-09 2002-06 2003-03 2003-2 2004-09 2005-06 2006-03 2006-2 2007-09 2008-06 2009-03 2009-2 200-09 20-06 202-03 202-2 203-09 204-06 2000-2 200-09 2002-06 2003-03 2003-2 2004-09 2005-06 2006-03 2006-2 2007-09 2008-06 2009-03 2009-2 200-09 20-06 202-03 202-2 203-09 204-06 PHX ATL LAS http://www.rcanalytics.com
Property Price Cycle Recovering Historic Cap Rates Source: Real Estate Research Corporation Chicago, April 204.
Wide Yields Attracting Capital Spread Between Cap Rates and 0-Year Treasury by Sector Source: Real Capital Analytics, Q 204.
Composition of CRE Buyers 00% 90% Cross-Border Inst'l/Eq Fund Listed/REITs Private User/other 8% 9% 6% 8% 0% 9% 0% 6% 80% 70% 45% 23% 7% 27% 32% 28% 24% 60% 9% 7% 4% 9% 50% 8% 40% 0% 53% 30% 20% 33% 47% 37% 34% 4% 40% 0% 0% 4% 9% 9% 3% 6% 7% 5% '07 '08 '09 '0 ' '2 '3 http://www.rcanalytics.com
Debt Capital: Credit Conditions Improving Composition of Lenders Office Industrial Retail Apartment Hotel 00% 0% 90% 7% 5% 3% 0% 3% 80% 50% 2% 2% 0% 7% 2% 70% 0% 60% 50% 3% 46% 6% 33% 7% 3% 4% 3% 20% 4% 40% 5% 2% 2% 30% 30% 20% 0% 22% 29% 2% 3% 2% 8% 25% 4% 4% 2% 0% 0% CMBS Financial Gov't Agency Insurance Int'l Bank Nat'l Bank Reg'l/Local Bank Pvt/Other http://www.rcanalytics.com
Slowing Transactions A Common Trend AMERICAS EMEA ASIA PAC http://www.rcanalytics.com
Global Trade Routes Capital Flows Coming from Around the World Source: Real Capital Analytics, December 203.
2008 Physical and Financial Cycle 204 Physical Cycle Demand & Supply affect occupancies drives rental growth Employment growth resumed 2Q 200 RE Demand growth resumed 2Q 200 Supply growth slowest in 43+ years (203 the bottom) supply increases in 204? RE moving to growth 204-206 (depending on market & property type) 204 Financial Cycle Capital flows affect prices stock market rebound 203, volatile in 204? Real estate was safest investment alternative 2000-2007, pushing prices up Real estate prices dropped 2008, 2009 = buying opportunities 200 206 Debt financing hard in 204 - creating buying opportunity for Cash Buyers Differentiate residential versus commercial real estate to your investors!
Economic Fundamentals 5 key Macro Economic Indicators Economic Base Analysis Real Estate Physical Cycle Fundamentals Demand for Real Estate Supply of Real Estate Occupancy Cycles Rent Cycles Real Estate Financial Cycle Fundamentals Capital Flows Prices Cap Rates Interest Rates