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Forums on Issues and Innovations in Real Estate FIRE

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Title: Forums on Issues and Innovations in Real Estate FIRE


1
Forums on Issues and Innovations in Real Estate
(FIRE)
  • Issues in Global Real Estate Markets
  • Allgemeine HypothekenBank Rheinboden (AHBR)
  • January 31, 2005Dr. Tony CiochettiMIT Center
    for Real Estate

2
MIT Center for Real Estate (CRE)
  • Established 1984
  • Mission Transform the quality of the built
    environment and the real estate industry by
    providing a forum for education, research, and
    the exchange of ideas among the thought leaders
    of the global real estate community
  • Products
  • Masters of Science in Real Estate Development
    (MSRED) program
  • Interdisciplinary Research Platform
  • Outreach Structure

3
CRE MSRED Program
  • Core Courses
  • Real Estate Economics
  • The Products of Real Estate Development
  • Real Estate Finance Investment
  • Legal Issues in the Development Process
  • Real Estate Development
  • Real Estate Capital Markets

4
MSRED Program
  • Electives (CRE, DUSP, Architecture, CEM,
    Engineering, Sloan, Harvard)
  • Strategic Management in the Design Construction
    Value Chain
  • Urban Design Development
  • Housing and Community Development
  • Community Growth and Land Use Planning
  • Financing Economic Development
  • Real Estate Finance Development Fundamentals
  • Urban Politics and Land Use Policy
  • Economic Analysis for Business Decisions
  • Finance Theory I
  • Finance Theory II
  • Investments
  • Advanced Corporate Finance
  • Options Futures Markets
  • Advanced Topics in Real Estate Finance

5
MSRED Program
  • Electives
  • Leadership in Real Estate
  • Housing Markets
  • Housing Finance
  • The Impact of Globalization on the Built
    Environment
  • E-Commerce and the Internet in Real Estate
    Construction
  • International Construction Finance
  • Entrepreneurship in Construction and Real Estate
    Development
  • Innovative Project Delivery in the Public
    Private Sectors
  • Quantitative Reasoning Statistical Methods for
    Planning I
  • Site Urban Systems Planning
  • Planning for Sustainable Development.
  • The Law and Politics of Land Use
  • Housing Human Resources
  • Revitalizating Urban Main Streets
  • Management Policy in the Intl Economy
  • Designing Leading the Entrepreneurial
    Organization

6
Recent Employers
  • Global real estate investment banking CS First
    Boston, Merrill Lynch, Goldman Sachs, Lehman
    Brothers, Blackstone, Morgan Stanley, JP Morgan,
    Deutsche Bank
  • Real estate investment management AEW, GE
    Capital, RREEF, TA Associates, Lonestar, Colony
    Capital, Invesco, Fidelity, ING Clarion
  • Real estate finance John Hancock, Sun Life,
    World Bank, Freddie Mac, Moodys, KeyBank, Carr
    Capital, Prudential, , HUD, Credit Suisse,
    Nomura, Bank of America
  • Real estate development Hines, Kravco, Leggatt
    McCall, Trammell Crow, Related Companies,
    Tishman, Bovis-Lend Lease, Petrini, Taurus,
    Spaulding and Slye, HRO, Forest City Commercial

7
Recent Employers
  • Publicly traded companies Boston Properties,
    Catellus, Pro Logis, AMB, Federated, Cousins,
    AvalonBay
  • Commercial brokerage CB Richard Ellis, Cushman
    and Wakefield, Meredith and Grew, Marcus and
    Millichap corporate real estate includes
    Fidelity, Met Life, Boeing, Burger King, Dell,
    Staples
  • Non-profit sector City of Portland, Maine,
    Oakland California Community Housing, Enterprise
    Foundation, City of Toronto, Urban Redevelopment
    Authority (Singapore), Office of Management and
    Budget (NYC)

8
CRE Research Initiatives
  • Innovative, interdisciplinary, industry relevant
  • Commercial Real Estate Data Laboratory (CREDL)
  • New Century Cities Initiative
  • Housing Affordability Initiative

9
CRE Outreach
  • Professional Development Courses (PDCs)
  • Fundamentals of Real Estate Finance
  • Introduction to Commercial Real Estate
    Development
  • Legal Issues in the Development Process
  • Real Estate Markets Location, Product, Timing
  • Current Topics in Real Estate Finance and
    Investment
  • Introduction to Portfolio and Asset Management
  • Topics in Real Estate Development
  • Affordable Housing VS Housing Affordability
  • Executive/Custom Education

10
CRE Membership
  • Two-tier Membership
  • Supporting Member (10K)
  • Sustaining Member (20K)

11
CRE Membership
  • Benefits for Supporting Members
  • Research
  • Students (Thesis and Placement)
  • PDCs
  • Executive/Custom Education
  • FIRE
  • MITREX
  • Annual Conference
  • International Connetions

12
CRE Membership
  • Additional Benefits for Sustaining Member
  • Advisory Board
  • Private Dinner with an MIT Luminary
  • MSRED Guest Lecturer
  • Additional Representative Participation in
    Seminars and Annual Conference

13
2004 Returns Look Great!
Source TWR Investment
14
Transaction Volume up 47!Equity Real Estate
15
Prices per SF Trending Up!Year Over Year
Source Real Capital Analytics
16
Prices per SF Trending Up!Year Over Year
Source Real Capital Analytics
17
TWR Market Portfolio 3yr Total Return(Office,
Industrial, Multi-Housing, Retail NCREIF
Weighted)
18
This Ratio Screams Weaker Currency, Higher
Interest Rates
Source TWR Investment
19
Foreign Investors Contributing As Never Before

bil
Source TWR Investment
20
All Property Types Are Improving YoY
Source TWR Outlook XL Platform
21
Too Much Capital Means Continued Supply
Multi-housing
Source TWR Investment
22
Market Conditions Vary (Gross Income)
Source TWR Investment
23
Multi-Housing Market Portfolio Total Return
(unleveraged)
24
The Office Sector is Improving
Source TWR Investment
25
Todays Tenants Seek Real Estate Productivity
2004 Per sqft
Occupied sqft Per Worker
Forecast
Source TWR Investment
26
The National Industrial Market Continues
Improvement, Albeit At A Slow Pace
Source TWR Investment
27
TWR Market Portfolio Total Return(Office,
Industrial, Multi-Housing, Retail NCREIF
Weighted)
28
Retail Market Portfolio Total Return
(unleveraged)
29
TWR Market Portfolio Total Return(Office,
Industrial, Multi-Housing, Retail NCREIF
Weighted)
30
Office Market Portfolio Total Return
(unleveraged)
31
Industrial Market Portfolio Total Return
(unleveraged)
32
Prices Up Substantially!
15
Source Real Capital Analytics
33
Cap Rates Continued Falling
Sub 8
Apts. at 6
Source NCREIF
34
Its About Relative Yield
NCREIF income return
35
Employment Is Almost Back
Source TWR Investment
36
Wide Regional Job Differences
Northeast
Source TWR Outlook Xl Platform
37
All Property Types Are Improving (YoY)
Source TWR Outlook XL Platform
38
Rents Have a Way to Go!
Source TWR Outlook XL Platform
39
. . . Subordination Levels are Plummeting . . .
40
Tangent Alert!
41
Tangent Alert!
42
Tangent Alert!
43
A Record-Breaking Year
Market Volume
Up 45 In 2004
Up 30 In 2004
Office, industrial, apartment and retail
properties 5 million and greater
Source Real Capital Analytics
44
Falling Cap Rates, Rising Prices
Source Real Capital Analytics
45
Its All Relative (to Interest Rates)
Historic Cap Rate Spread Over Treasuries
Source Real Capital Analytics
46
Its All Relative (to Replacement Cost)
Source RCA, PPR, RS Means
47
A Growing Disparity in Pricing
Apartment Cap Rates
Source Real Capital Analytics
48
The Major Market Makers
Source Real Capital Analytics
49
A Huge, Fragmented Universe of Buyers
750 buyers made acquisitions in at least 3 of the
last 4 years 1,250 buyers made acquisitions in 2
of the last 4 years 8,000 buyers made only a
single acquisition over the past 4 years
One-Third of all buyers in 2004 were also
sellers 10 of properties sold in 2004 (25
billion) were held for 4 years or less
Source Real Capital Analytics
50
Classifying The Capital
Source Real Capital Analytics
51
Composition of Buyers by Property Type
Source Real Capital Analytics
52
Influences Outlook
Market Fundamentals Interest Rates Capital
Flows Cap Rates Asset Prices
?
Source Real Capital Analytics
53
The Markets
Office
Volume (billion)
Price Per Sq. Ft.
Cap Rate
Source Real Capital Analytics
54
The Markets
Apartments
Volume (billion)
Price Per Unit (000s)
Cap Rate
Source Real Capital Analytics
55
The Markets
Industrial/Flex
Volume (billion)
Price Per Sq. Ft.
Cap Rate
Source Real Capital Analytics
56
The Markets
Strip Shopping Centers
Volume (billion)
Price Per Sq. Ft.
Cap Rate
Source Real Capital Analytics
57
Real Estate Capital Markets Debt
  • Commercial Banks

58
Real Estate Capital Markets Debt

Source Federal Reserve
59
Real Estate Capital Markets Debt
  • Commercial Mortgage Loan Delinquency Rates

Delinquent
26
22
42
42
7.53
0
0.35
1Q65
4Q69
2Q76
4Q81
2Q92
2Q03
Source ACLI
60
Real Estate Capital Markets Debt
  • Why such good performance?

Source ACLI
Source ACLI
61
Real Estate Capital Markets Debt
  • Where are we now?

62
Real Estate Capital Markets Debt
  • Summary
  • Credit availability excellent
  • Short term rates - 75-150 bp
  • Long term rates - 50-100 bp
  • Mortgage spreads slight/moderate uptick

63
Real Estate Capital Markets Equity
  • Real Estate Return Performance

Source NCREIF, LaSalle Investment Management
Research
64
Real Estate Capital Markets Equity
  • Property Capitalization Rates

Source SSR Realty Advisors, NCREIF
65
Real Estate Capital Markets Equity
  • Where will the capital come from?
  • Private REITs (8 to 10 billion)
  • 1031 Exchange Buyers (2 to 3 billion)
  • US Pension Funds (12 to 15 billion)
  • Public REITs (8 to 10 billion)
  • Endowments and Foundations (2 to 3 billion)
  • Source LaSalle Investment Management

66
Real Estate Capital Markets Equity
  • Historic US Real Estate Returns -gt Future
    Returns?
  • Average Annual Returns

Source NAREIT (Equity REITs), NCREIF, Bloomberg,
LaSalle Investment Management
67
Real Estate Capital Markets Equity
  • Georgescu-Roegen, 1958
  • Many idle controversies involving the nature of
    expectation could be avoided by recognizing at
    the outset that mans conscious actions are the
    reflection of his beliefs and of nothing else.

Source Torto Wheaton Research
68
Real Estate Capital Markets Equity
  • Forrest Gump, 1994
  • Stupid is as stupid does.

Source Torto Wheaton Research
69
Real Estate Capital Markets Equity
  • Summary
  • Equity capital availability good/excellent
  • Expected performance
  • Cap rates trend up slightly/moderately
  • Income yield down slightly
  • Total returns down moderately/significantly

70
Space Markets Office
  • Impact of Office re-engineering

Occupied sqft Per Worker
220
40
215
38
210
36
205
34
200
32
195
30
190
28
185
26
180
24
175
22
170
20
165
18
160
16
155
14
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
Occupied Square Feet Per Worker
Real Rent
Source Torto Wheaton Research
71
Space Markets Office
  • Measured Recovery

Vacancy Rate,
Absorption and Construction, sqft x 1,000,000
140
20
100
18
60
16
20
14
-20
12
-60
10
Includes non-market
trends from 9/11
-100
8
-140
6
1988
1991
1994
1997
2000
2003
2006
2009
Construction
Absorption
Vacancy
Source Torto Wheaton Research
72
Space Markets Office
  • Problem R.I.P. vs. Market

TW Rent Index ( per square foot)
TW NOI Index ( per square foot)
Rent
NOI
Source Torto Wheaton Research
73
Space Markets Industrial
  • Lackluster Growth

Availability Rate,
Absorption and Construction, sqft x 1,000,000
340
12
300
260
11
220
180
10
140
100
9
60
20
8
-20
-60
7
-100
-140
6
1989
1992
1995
1998
2001
2004
2007
Construction
Absorption
Availability
Source Torto Wheaton Research
74
Space Markets Industrial
  • Rent Recovery, but NOI drop

Source Torto Wheaton Research
75
Space Markets Industrial
  • Implications
  • Uptake slow
  • Rents
  • Etc.
  • Overall returns to sector down

76
Space Markets Retail
  • Retail Sales

77
Space Markets Retail
  • Why?

78
Space Markets Retail
  • Modest Retail Rent Growth

TW Rent Index ( per square foot, 2004)
20.5
20.0
19.5
19.0
18.5
18.0
17.5
17.0
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
Source Torto Wheaton Research
79
Space Markets Retail
  • Until Supply Kicks In

Absorption and Construction, sqft x 1,000,000
Availability rate,
40
9.6
38
9.4
36
9.2
34
9.0
32
30
8.8
28
8.6
26
8.4
24
8.2
22
20
8.0
2004
2005
2006
2007
2008
2009
Construction
Absorption
Availability
80
Space Markets Retail
  • Summary
  • Current yield good
  • NOI growth down, but position
  • Cap rates flat
  • Returns down only slightly

81
Space Markets Multifamily
Source Department of Housing and Urban
Development
82
Space Markets Multifamily
  • Supply Overhang

Units
Vacancy Rate
Thousands
Percent
Forecast
280
7
240
6
200
5
160
4
120
3
80
2
40
1
0
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Completions ( L )
Absorption ( L )
Vacancy Rate ( R )
Source Torto Wheaton Research
83
Space Markets Multifamily
  • Slow Rent Growth

84
Space Markets Multifamily
  • Summary
  • Condo conversion, product demand ? aggressive
    pricing?
  • Interest rates
  • Concessions soften, rents firming ? NOI growth
  • Cap rates up slightly
  • Returns good relative basis

85
Economic Wildcards
  • Federal Deficit

86
Economic Wildcards
  • Trade Balance

87
Economic Wildcards
  • Personal Saving Rate

88
Economic Wildcards
  • Federal Debt Held by Foreigners

89
Economic Wildcards
  • Exchange Rate

90
Economic Wildcards Summary
  • Trade and Federal Deficits 7-9 of GDP
  • Personal savings rate 2
  • High foreign investment in US
  • Weakening dollar
  • Toss in election, middle east, energy
  • .potential for increasing inflation

91
Implications for Commercial Real Estate
  • Plenty of debt/equity capital
  • Debt rates up slightly
  • Cap rates flat to down slightly
  • Space markets
  • Office
  • Warehouse
  • Retail
  • Multi-family
  • Where does this leave us?

92
Summary
  • Forrest Gump, 1994
  • Life is like a box of chocolates, you never know
    what youre
  • going to get.

93
US CMBS Issuance
1985 2004P
Bn
85
87
89
91
93
95
97
99
01
86
88
90
92
94
96
98
00
02
03
04P1
Actual
Projected
177.3 billion priced as of November 12,
2004 Does not include Agency CMBS or
resecuritizations. Source Morgan Stanley
Estimates, Commercial Mortgage Alert
94
CMBS Delinquencies1 by Property Type

1.73
1.56
1.13
0.95
0.80
130/60/90/Foreclosure/REO
Source Morgan Stanley, Intex
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