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ROBERT J. NAHIGIAN, FRICS, SIOR, CRE October 30, 2009 AUBURNDALE REALTY CO. Toronto

LIQUIDITY AND THE 2010 COMMERCIAL REAL ESTATE MARKET: Connecting the Dots with Today’s Global Capital Flow. ROBERT J. NAHIGIAN, FRICS, SIOR, CRE October 30, 2009 AUBURNDALE REALTY CO. Toronto NEWTON (Boston), MASS. PREDICTION DISCLAIMERS. GOVERNMENT INTERVENTION INFLATION CHAOS.

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ROBERT J. NAHIGIAN, FRICS, SIOR, CRE October 30, 2009 AUBURNDALE REALTY CO. Toronto

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  1. LIQUIDITY AND THE 2010 COMMERCIAL REAL ESTATE MARKET:Connecting the Dots with Today’s Global Capital Flow ROBERT J. NAHIGIAN, FRICS, SIOR, CRE October 30, 2009 AUBURNDALE REALTY CO. Toronto NEWTON (Boston), MASS.

  2. PREDICTION DISCLAIMERS • GOVERNMENT INTERVENTION • INFLATION • CHAOS

  3. OTHER DISCLAIMERS The information presented reflects the personal opinions of Robert J. Nahigian based on sources and data believed to be reliable but he does not guarantee its accuracy or completeness. This information is for private use and educational purposes only and neither the author, the sponsor nor the instructor are providing advice, legal or otherwise and such advise should be dependent on the facts and circumstances of any particular situation. There is no obligation to update or supplement this information at any time or in any way. Robert J. Nahigian is not a registered investment advisor and as a further full disclaimer he does sit on the Advisory Committee of NERA, an American Stock Exchange Boston real estate investment entity in the business of purchasing and selling commercial properties. He is in no way recommending the purchase or disposition of any specific stock of any kind at any time. The material presented may be inaccurate or may be improper for any business decision and some examples in this presentation are good examples of practices that would be better to avoid.

  4. CCIM Chicago: Jan. ‘08 • LET’S LOOK BACK TO THAT PRESENTATION: Where were we? • CAN WE CONNECT THE DOTS MOVING FORWARD?

  5. U.S. CBD INVESTMENTS: Jan. ‘08 One Word: Hot and more Hot ! Values were up in 2006 Values continued to rise in 2007

  6. LAST 2 YEARS: ’06-’07 • It has been all about capital ! • You couldn’t fail with real estate investments • A lot of money chasing deals and “yields”

  7. Next 2 Years: ’08-’09 • Success based more local (micro) rather than national (macro) environment • Difficult to find a balanced value commercial investment in the US • People think buying now will be cheaper than tomorrow

  8. Next 2 Years:’08-09 • 2007 everyone was a “genius” so demand for real estate was amplified • In 2008, investors will need to look at real estate with true due diligence evaluation • We need to get back to “old-fashion” growth and focus on NOI • CAP RATES could increase 100 BP by the end of 2008

  9. Jan. ’08 PROJECTION FOR ’08-’09 • The “Idiot Tax” will vanish in 2008 • Liquidity is immense but not stupid • Foreigners have an appetite but could pull the plug at any time

  10. Oct. 30, 2009: 2010 CONCLUSION • U.S. companies have run down inventory • Re-stocking is up and so is manufacturing • March 9, 2009: Stocks hit bottom • June, 2009: Housing hits near bottom • Commercial loan defaults will damage banks in ’10-’11 • Now it’s time for commercial, lagging

  11. Oct. 30, 2009: 2010 CONCLUSION • The Feds are forcing everyone to swallow more risk and invest • Money Market interest rates are worthless! “Curse on Cash” • Be Ready to Buy in ’10-’11 or keep holding: It may be a life-time opportunity • Rents means dividends !

  12. Oct. 30, 2009:TROJAN HORSE • U.S. is leaving GAAP for IFRS in 2011 or 2014. Watch out! Be ready to “Rock and Roll”! • FASB 13: More parts are now capitalized; no more rents as operating lease expense • Companies may pursue purchasing

  13. REAL ESTATE CYCLESSECTORAL PEAK U.S 7-10 yrs. PEAK Hyper-supply Hyper-supply “DENIAL PHASE” BID-ASK SPREADS Expansion Recovery “Yield Chasers” Commercial 4th/5th Inning Recession Early Recovery BOTTOM Residential BUY LOW/SELL HIGH

  14. THE FEDS INFLUENCE ON COMMERCIAL

  15. U.S. UNEMPLOYMENT RATESeasonally AdjustedSource: Bureau of Labor Stats, CBO Jobs = Space Demand

  16. U.S. Average Percent Change in Jobs Per Decade

  17. Federal Total Revenues and Outlays as Percent of GDP Source: CBO Highest

  18. U.S. FEDERAL BUDGETSource: WSJ

  19. U.S. FEDERAL DEFICIT v. GDPSource: CBO INFLATION?

  20. U.S. PERSONAL SAVINGS RATESource: Federal Reserve

  21. U.S. TOTAL CONSUMER CREDITDEMANDSource: Federal Reserve In Billions (Trillions) Deleveraging

  22. CONCLUSION • It’s all about jobs for commercial real estate! • Deficit grows, income is down and people aren’t spending • Look for inflation within 24 months. Bernanke admits interest rates might rise (week of Oct. 10, 2009)

  23. U.S. HOUSING AS AN INVESTMENT LEADS TO THE COMMERCIAL DEBT CRISIS

  24. WHAT IS PRICE v. VALUE? • PRICE IS WHAT YOU PAY • VALUE IS WHAT YOU GET • Source: Ben Graham

  25. U.S. EXISTING ALL HOMES FOR SALE

  26. U.S. NEW HOMES FOR SALE

  27. U.S. HOMES UNDER CONSTRUCTION Working off inventory

  28. U.S. HOME LOAN DELINQUENCIES

  29. U.S. MORTGAGE FORECLOSURES

  30. NEXT HOUSING FORECLOSURE WAVE

  31. COMMERCIAL REAL ESTATE: Where We Have Been and Where We Are Headed

  32. SEPTEMBER 30, 2009: WSJ

  33. COMMERCIAL BANKS WITH RE DELINQUENCIESSource: Federal Reserve Bank

  34. COMMERCIAL RE DELINQUENCIES:May ‘09

  35. SECURITIZED COMMERCIAL LOAN DELINQUENCIES Source: WSJ 3/26/09; Deutsche Bank

  36. U.S. COMMERCIAL MORTGAGE DEFAULTSSource: Cohen Steers

  37. CMBS ISSUANCESOURCE: Commercial Mortgage Alert; CMSA

  38. TOTAL U.S. INVESTMENT SALESSource: Deutsche Bank, Real Capital Analytics ?

  39. Real Estate Value Change: 2009

  40. U.S. AVERAGE COMMERCIAL RE MORTGAGES MATURING

  41. COMMERCIAL RE DEBT MATURITIES (INCLUDING SECURED AND UNSECURED DEBT) Source: Chip Rodgers, RER 30% won’t qualify for refi

  42. U.S. COMMERCIAL MORTGAGE MATURIES: Life Ins., CMBS, CDO, ABS, GSE, and Other Credit Source: AEW, CRE Fall Convention ‘09

  43. COMMERCIAL BANKS IN TROUBLE: Commercial and Multi-Family Debt Source: CRE Fall Convention ‘09 45% with commercial banks

  44. Percent Change in Construction StartsSource: CPN July ‘09

  45. Apartment Development Activity: 4 Sample National CompaniesSource: David Gleeson, CRE

  46. FUTURE COMMERCIAL MORTGAGE DELINQUENCIESSource: Deutsche Bank • Loans are maturing from 5 years ago • New Appraisals are 30- 40% lower • Lack of Owner Equity Available: Partners are saying • “Enough is enough” • Delinquency rate for partial IO loans are twice that of other loans • Over $ 2 Trillion commercial mortgages will mature by 2013 and 33% will not qualify for refinancing

  47. FUTURE COMMERCIAL MORTGAGE DELINQUENCIES • MF construction permits will most likely end at 2009 • Over 1,000 commercial banks fail in the next 24 months • Would you be in a rush to buy if waiting was worth a big • discount? • Bottom feeders will wait 2 years to the bank collapse • Look for 2010-11 for deeper commercial foreclosures

  48. REAL ESTATE YIELD BREAK-DOWN V. THE DOW

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