Angelic Real Estate presentation delivered by company president Gabriel Silverstein at the Flint Oak, Kansas real estate investment summit on 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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Angelic Real Estate 2014 Commercial Real Estate Capital Markets View
1.
Status
Report:
2014
Commercial
Real
Estate
Capital
&
Investment
Markets
Flint
Oak,
Kansas
February,
2014
Presented
by
Gabriel
Silverstein,
President,
Angelic
Real
Estate
2. 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.
3. The
fear:
large
loan
maturity
volume
in
2015-‐2017
from
peak-‐of-‐
market
loans,
parLcularly
CMBS
loans,
is
high
risk
to
market
stability
4. But
CMBS
is
Back…
(so
is
the
rest
of
the
lending
market)
New
CMBS
Issuance
Volume
7. 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
8. CMBS
Rates
vs.
10
Year
Treasuries
8.21
8
1,200
7.38
6.65
5.66
6
4
2
5.57
5.40
6.02
5.00
38
52
4.59
46
3.99
37
4.26
30
4.28
27
5.91
4.79
26
5.84
711
6.55
1,000
5.74
346
341
4.63
46
3.64
3.24
3.20
5.67
228
2.76
0
2000
2001
2002
2003
2004
2005
2006
Ave. 10-yr Conduit Loan Coupon
2007
2008
2009
Ave. 10-yr Treasury
2010
2011
5.13
4.73
190
118
2.34
1.79
2012
800
600
400
Spread (bps)
Coupon (%)
10
200
0
2013
Ave. 10-yr AAA CMBS Spread
Graph
courtesy
of
UBS
• 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
9. 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
10. Cap
Rates
Have
ConLnued
to
Fall
(even
as
interest
rates
have
increased)
11. 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
12. 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
13. 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
14. Future
Concern:
No
More
Room
to
Squeeze
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
15. 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
16. 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
17. 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)
18. 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
19. 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