Current Trends in Commercial Real
Estate - Is it Reaching a Peak?
Jeff Fisher, Ph.D. (OSU)
President, Homer Hoyt Institute
Consultant, NCREIF
Visiting Professor, Johns Hopkins Univ.
1
Annualized Returns for past 10 years
Leveraged Private Real Estate
Outperformed REITs and Stocks
Publicly Traded REITs
Private Institutional Commercial Real Estate
Stocks
‹#›
NCREIF Property Index (Unleveraged)
Returns from 1979 through 2015
Strong Double Digit Returns the Past 5 years since Recovery
Real Estate Returns
4 quarter moving average
25%
20%
15%
?
10%
5%
0%
-5%
-10%
-15%
Tech Bust & 9-11
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Recession
-20%
-25%
Great Recession
3
Columbus CBSA Followed National Trends
Real Estate Returns Columbus vs. Nation
4 quarter moving average
25%
20%
15%
10%
5%
0%
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
-5%
-10%
-15%
-20%
-25%
Nation
Columbus
‹#›
NPI Leveraged Property Analysis
Leveraged and Unleveraged Annual Total Returns
Leverage has been favorable
due to low interest rates.
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
Leveraged
Unleveraged
Implied Interest Rate
20154
20144
20134
20124
20114
20104
20094
20084
20074
20064
20054
20044
20034
20024
20014
20004
19994
19984
19974
19964
19954
19944
19934
19924
19914
19904
19894
19884
19874
19864
19854
19844
-50%
5
70%
19834
19844
19854
19864
19874
19884
19894
19904
19914
19924
19934
19944
19954
19964
19974
19984
19994
20004
20014
20024
20034
20044
20054
20064
20074
20084
20094
20104
20114
20124
20134
20144
20154
LTV
Loan-to-Value for Institutional Real Estate
Loan-to-Value (4QMA)
65%
60%
55%
50%
45%
40%
35%
30%
25%
20%
LTV relatively conservative
for institutional investors
6
Price Level
CRE Slightly above Long-term Trend Line and Pre-Recession Peak
‹#›
4Q 2015
2Q 2015
4Q 2014
2Q 2014
4Q 2013
2Q 2013
4Q 2012
2Q 2012
4Q 2011
2Q 2011
4Q 2010
2Q 2010
4Q 2009
2Q 2009
4Q 2008
2Q 2008
4Q 2007
Contributions
2Q 2007
4Q 2006
2Q 2006
4Q 2005
2Q 2005
$15.0
4Q 2004
2Q 2004
4Q 2003
2Q 2003
4Q 2002
2Q 2002
4Q 2001
2Q 2001
4Q 2000
ODCE Net Fund Flows ($Bil)
Real Estate Fund Contributions and Distributions
4Q Rolling Total as of December 31, 2015
Lots of capital
Distributions/Redemptions
$13.0
$11.0
$9.0
$7.0
$5.0
$3.0
$1.0
-$1.0
-$3.0
-$5.0
8
Q4’15 VOLUME HIT THE SAME RANGE AS 06’Q4 AND 07’Q1
US Quarterly Volume & Pricing
Portfolio
Billions
Individual
Entity
CRE Prices*
$180
225
$160
200
$140
175
$120
150
$100
125
$80
100
$60
75
$40
50
$20
25
$0
0
'02
'03
'04
'05
'06
'07
'08
'09
*Moody’s/RCA CPPI, national aggregate, December 2000 = 100
'10
'11
'12
'13
'14
'15
BUT US DEAL VOLUME TAKING A SPRING BREAK
billions
$80
$70
$60
$50
$40
$30
$20
$10
$0
'12
'13
'14
Individual
Portfolio
'15
Entity
'16
RECORD CROSS-BORDER INFLOWS INTO US
US Direct Acquisitions by Foreign Buyers
Europe
Australia
Canada
Asia
$100
Middle East
Latin America
billions
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
2015 DEAL VOLUME (EXCLUDING DEVELOPMENT SITES)
Market
2015 Sales Volume ($M)
NYC Metro
London Metro
LA Metro
Tokyo
SF Metro
Paris
DC Metro
Chicago
Dallas
Atlanta
Boston
Shanghai
So Fla
Seattle
Berlin-Brandenburg
Sydney
Hong Kong
Phoenix
Rhine-Ruhr
Houston
Melbourne
Amsterdam/Randstad
Denver
Frankfurt/Rhine-Main
San Diego
Germany other
Toronto
Austin
Sweden other
Philly Metro
$80,045
80,044,632,743
$
$57,048
$
57,048,259,816
$36,340
$
36,339,822,609
$32,816
$
32,816,064,247
$32,020
$
32,020,330,907
$26,904
26,904,007,887
$
$22,415
$
22,414,661,294
$19,882
$
19,882,374,086
$17,389
$
17,389,340,121
$15,627
$
15,627,363,537
$15,576
$
15,575,697,241
$15,417
$
15,417,451,167
14,247,585,997
$ $14,248
$ $13,119
13,119,322,368
$ $12,395
12,394,817,287
$ $11,828
11,828,131,295
11,753,773,415
$ $11,754
$ $10,779
10,778,911,771
$ $10,378
10,377,724,647
$ $10,357
10,357,447,520
$ $9,991
9,991,364,611
$ $9,309
9,309,099,496
$ $9,285
9,285,305,639
$ $9,157
9,156,980,868
$ $8,265
8,264,584,392
$ $8,216
8,216,226,670
$ $7,304
7,303,806,133
$ $7,223
7,222,948,013
$ $6,968
6,968,369,643
$$6,613
6,612,718,297
YOY Change
38%
29%
26%
-20%
20%
6%
55%
48%
32%
27%
20%
89%
33%
75%
43%
-17%
-13%
65%
13%
6%
2%
49%
26%
9%
49%
-30%
13%
15%
3%
11%
38%
29%
26%
-20%
20%
6%
55%
48%
32%
27%
20%
89%
33%
75%
43%
-17%
-13%
65%
13%
6%
2%
49%
26%
9%
49%
-30%
13%
15%
3%
11%
US has 7 of Top
10 Cities
Worldwide for
Deal Volume
Foreign Buyers a Potential Structural Shift
Lots of interest in apartments –
perhaps late to the game.
Cross-Border Acquisitions of US Apartments
Europe
Australia
Canada
Asia
$18
Middle East
Latin America
billions
$16
$14
$12
$10
$8
$6
$4
$2
$0
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
Total NPI Returns by Property Type
Annual Returns Over Last Five Years
Industrial has taken the lead
in returns.
Apartments best
returns coming out of
recession
Apartment
Hotel
Industrial
Office
Retail
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
4Q 2011
4Q 2012
4Q 2013
4Q 2014
4Q 2015
14
NPI Annual Rental Income Growth by Property Type
Period Ending Fourth Quarter 2015
Although apartments still
experiencing strong rent growth.
May have been already been
anticipated in returns.
8%
7%
6%
5%
4%
7.0%
3%
5.7%
4.8%
2%
3.8%
1%
1.4%
0%
Apartment
Hotel
Industrial
Office
Retail
15
92.0%
5.0%
91.5%
4.5%
91.0%
4.0%
90.5%
3.5%
90.0%
3.0%
4Q 2015
Rental Income Growth (4Q Rolling)
4Q 2015
5.5%
3Q 2015
92.5%
1Q 2015
6.0%
3Q 2015
93.0%
2Q 2015
6.5%
1Q 2015
93.5%
2Q 2015
Fundamentals still good
2015 Year-End Summary: Space Market Observations
Quarterly Occupancy Rate
NOI Growth (4Q Rolling)
Cash Flow Growth (4QMA)
5.0%
7.0%
6.0%
4.5%
5.0%
4.0%
4.0%
3.0%
2.0%
3.5%
1.0%
4Q 2015
3Q 2015
2Q 2015
4Q 2015
3Q 2015
2Q 2015
1Q 2015
1Q 2015
0.0%
3.0%
16
2001 Q2
2001 Q4
2002 Q2
2002 Q4
2003 Q2
2003 Q4
2004 Q2
2004 Q4
2005 Q2
2005 Q4
2006 Q2
2006 Q4
2007 Q2
2007 Q4
2008 Q2
2008 Q4
2009 Q2
2009 Q4
2010 Q2
2010 Q4
2011 Q2
2011 Q4
2012 Q2
2012 Q4
2013 Q2
2013 Q4
2014 Q2
2014 Q4
2015 Q2
2015 Q4
Rent Growth
Driving Returns
Rental Income Growth vs NPI (Rolling Four Quarters)
Rent growth
NPI
6%
4%
10%
5%
2%
0%
0%
-5%
-10%
-2%
-4%
NPI (rolling 4Q)
8%
2001 Q2
2001 Q4
2002 Q2
2002 Q4
2003 Q2
2003 Q4
2004 Q2
2004 Q4
2005 Q2
2005 Q4
2006 Q2
2006 Q4
2007 Q2
2007 Q4
2008 Q2
2008 Q4
2009 Q2
2009 Q4
2010 Q2
2010 Q4
2011 Q2
2011 Q4
2012 Q2
2012 Q4
2013 Q2
2013 Q4
2014 Q2
2014 Q4
2015 Q2
2015 Q4
Rent Growth (rolling 4Q)
NPI Rental Income Growth
8%
Rolling Four Quarters
6%
4%
2%
0%
-2%
-4%
25%
20%
15%
-15%
-20%
-25%
17
6.0%
4.0%
19784
19794
19804
19814
19824
19834
19844
19854
19864
19874
19884
19894
19904
19914
19924
19934
19944
19954
19964
19974
19984
19994
20004
20014
20024
20034
20044
20054
20064
20074
20084
20094
20104
20114
20124
20134
20144
20154
19784
19794
19804
19814
19824
19834
19844
19854
19864
19874
19884
19894
19904
19914
19924
19934
19944
19954
19964
19974
19984
19994
20004
20014
20024
20034
20044
20054
20064
20074
20084
20094
20104
20114
20124
20134
20144
20154
Cap Rate Compression
also Helping to Drive
Returns
Spread
4QMA Value Weighted Cap Rate
NPI Capitalization Rates: Long-Term Trend
9.0%
Implied Appraisal Cap Rates
8.5%
Cap Rate
2.0%
0.0%
20Y Avg
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
4.0%
Spread to 10-year U.S. Treasuries
20Y Avg
But high spread to
Treasuries (over 200 bp)
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
18
Yet starting to see warnings in headlines
4/18
Apartment Markets Mixed in the April NMHC Quarterly Survey
Construction financing less available
‹#›
FIRST MONTHLY DECLINE IN PRICES IN 6 YEARS: FEB TOO
Moody’s/RCA Commercial Property Price Indices
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Apr
Jul
Oct
Jan
Monthly Percentage Change in Prices
4.0
'10
'11
'12
'13
'14
RCA tracks transactions over $2.5 million
'15
'16
NCREIF Quarterly Returns
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
15-1
15-2
15-3
15-4
16-1
Returns have been dropping – but back to long term average
‹#›
Columbus CBSA
Total Return (Unleveraged)
4.50%
4.00%
Columbus also down
1st quarter of 2016
although still quite
strong for past four
quarters.
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
15-1
15-2
15-3
15-4
16-1
Approx. $750 billion
‹#›
PREA CONSENSUS SURVEY
Institutional Investors and Plan Sponsors expect
returns to continue to drop through 2019.
‹#›
LOAN ORIGINATIONS IN ‘06 & ‘07 WHAT HAPPENS IN ’16 & ‘17?
Key Property Sectors, Office, Industrial, Retail, Apartment
450
$ Billions
400
350
300
250
200
150
100
50
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
CMBS
Non-CMBS
HEADWIND: UPCOMING WAVE OF MATURITIES/OPPORTUNITIES
Refinancing the 2006 and 2007Originations
Outlook under Baseline Moody’s Forecast of RCA Market CPPI’s
Due to tighter lending standards
many loans will require more
equity when refinanced.
National Return by Property Type 2016-1
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Apartment
Hotel
Industrial
Office
Retail
28
Columbus vs. Nation
Last 5 quarters
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
15-1
15-2
15-3
Columbus
15-4
16-1
National
‹#›
Total NPI Returns: Top 10 Markets by Market Value
Capital has been moving
beyond the top 10 markets
Top 10 Markets versus Other Markets
4.0%
Top 10 Markets
New York City
Washington DC
Los Angeles
Chicago
San Francisco
Seattle
Houston
Dallas
Boston
Riverside
3.5%
3.0%
2.5%
3.69%
2.67%
0.5%
0.0%
Other Markets
Top 10 Markets and NPI
Columbus here 4th qtr of 2015
Seattle
NPI
Boston
Los Angeles
Riverside
Dallas
San Francisco
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Houston
Top 10 Markets
Washington DC
1.0%
New York City
1.5%
Chicago
2.0%
$
$
$
$
$
$
$
$
$
$
MV ($Bil)
51.80
40.10
37.32
29.89
23.77
20.30
19.93
18.21
16.26
12.39
30
“From Great to Good”
• Despite edging lower over the past 5 quarters, total returns remain healthy
relative to long term averages.
• CRE remains a strong relative performer across asset classes, supporting capital
flows into the sector
• Low interest rates in US and globally keep cap rates at historic lows
• NOI growth has slowed but still above historic average
• Occupancy can’t get much higher – always “frictional vacancy”
• May be in the 9th inning but likely to go into some “extra innings.”
• Money still talks – but nervous about current price levels.
31