Real
Estate
Boot
Camp
John A. Isakson
Chief Investment Officer
Preferred Apartment Communities
Real Estate and The Economy:
What is important and why?
• What are the primary economic factors that
drive real estate?
• What are they doing today?
• Why is real estate an economic hedge
against inflation? What does that mean?
• What is happening in individual sectors of
real estate today?
• How is the environment in Washington
affecting the economy?
• What could the government do that would
impact the economy further?
Why are these things important
for Real Estate?
• Inflation = What is happening to
Prices
• Interest Rates =
Return on/Cost of money
• GDP = How is the economy
growing generally
• Employment = How many people
are working
The Economy Today:
What are these measures doing?
Inflation:
1.5% (Aug. 2013 NSA)
Unemployment:
7.3% (Aug. 2013)
GDP:
2.5% (Q2 2013)
Interest Rates:
2.64% (10yr UST 10/4/13)
Trends in the Economy Today:
Inflation and Interest Rates
Trends in the Economy Today:
Inflation and Interest Rates
• Why is inflation so low when the Fed has been
printing money at such a high rate (to buy US
Treasuries/Quantitative Easing)?
• Typically Fed increases in money supply/bond
buying leads to excess reserves at bank.
• Fed required certain % of reserves on bank
deposits, excess reserves didn’t earn interest.
• Now excess reserves earn interest (2008 rule
change)
Trends in the Economy Today:
Inflation and Interest Rates
Trends in the Economy Today:
Employment and Real GDP
Trends in the Economy Today:
Employment and Real GDP
Trends in the Economy Today:
Inflation and Employment
Trends in the Economy Today:
GDP Growth Comparisons
Trends in the Economy Today:
GDP Growth Comparisons
Trends in the Economy Today:
GDP Growth Comparisons
Trends in the Economy Today:
Employment and Real GDP
• Unemployment has improved tepidly in the
last five years for several reasons:
• Companies are keeping higher cash
reserves rather than expand.
• Lack of leadership and uncertain
regulatory environment have kept
expansion down.
Trends in the Economy Today:
Conclusions
• Inflation is inevitable but the timing is very
difficult to gauge
• Interest Rates are headed up and sooner
rather than later
• GDP growth is being restrained
systemically and by lack of corporate
growth
• Unemployment is better but improvement
is anemic compared to years past
Why is Real Estate a Hedge
Against Inflation?
A rise in inflation causes a reduction in
purchasing power and a decrease in the
value of currency.
People can purchase less with the same
amount of income.
Assets with intrinsic value increase in value.
Real estate along with precious metals,
natural resources and other commodities
have intrinsic value.
Why is Real Estate a Hedge
Against Inflation?
Why is Real Estate a Hedge
Against Inflation?
Why is Real Estate a Hedge
Against Inflation?
Why is Real Estate a Hedge
Against Inflation?
Why is Real Estate a Hedge
Against Inflation?
• As inflation rises so does the value of real
estate.
• Landlords have a greater ability to raise
rents.
• Effect is somewhat offset by potential
increases in interest rates and increases in
cost of operating assets.
Why is Real Estate a Hedge
Against Inflation?
Why is Real Estate a Hedge
Against Inflation?
• Portfolio
diversification
includes
allocation into hard assets as a
hedge against inflation and a
complement
to
fixed
income
strategies.
• Real Estate provides income and
appreciation upside in inflationary
environments and insulates against
erosion of values in cash and fixed
income products
What is happening in specific
sectors of the commercial real
estate market?
Why is Real Estate a Hedge
Against Inflation?
What is happening in specific
sectors of the commercial real
estate market?
• Transaction volume in residential and
commercial real estate has rebounded
significantly in the last 3 years.
• Pricing has increased due to three primary
factors
• Increased Cash flow from rebounding
rental rates
• Low interest rates on debt
• Compressed CAP rates due to
increased demand for property
What is happening in specific
sectors of the commercial real
estate market?
What is happening in specific
sectors of the commercial real
estate market?
There is a wide variance in pricing by property type which primarily
reflects occupancy trends. While apartment cap rates have surpassed
levels of the previous peak in pricing and CBD office cap rates are back
to peak levels, pricing for suburban office in particular is lagging.
What is happening in specific
sectors of the commercial real
estate market?
• Because apartments have been a popular
investment over the past several years, there is
also a relatively low spread between apartment
cap rates and mortgage interest rates.
• Employers are fitting more employees into the
same or fewer square feet.
• Internet sales of consumer goods have risen
astronomically in the last ten years.
What is happening in specific
sectors of the commercial real
estate market?
What is happening in specific
sectors of the commercial real
estate market?
• How to invest in real estate companies?
• Strong management team with deep
operational experience.
• Diverse portfolio geographically
• Strong financial structure
What is Washington DC doing
and why?
• What is happening?
• Ideological brinksmanship, bright lines
in the sand(box).
• Redistricting has created very safe
seats.
• Frustration over partisanship and lack
of ability/willingness to negotiate
creating roadblocks.
What is Washington DC doing
and why?
• How can Washington help?
• Get out of the way.
• Consistent regulatory policy evenly
administered.
• Tax reform and consistent tax policy
with favorable treatment for offshore
earnings.
What is Washington DC doing
and why?
• When is the shutdown going to end and
why?
• Egos get under control on both sides
• October 17-25 is the real D-Day
• Both sides “lose” something, both sides
“win” something.
• Public outcry becomes so deafening on
both sides that congress and
administration are forced to
compromise.