Quarterly Highlights

Transcription

1 USA Realty Advisors, LLC Quarterly Highlights The labor market continues to show signs of improvement, averaging +229 thousand jobs per month in The unemployment rate decreased to 5.8% in October, the lowest rate since July The four-week average for initial unemployment claims dipped below 300 thousand in recent months, levels not seen since As expected, the Federal Reserve ended Quantitative Easing 3 in October QE3 began in September of Year-to-date, CRE mortgage originations increased 5% from a year ago. Apartment and Industrial experienced the highest growth. Life insurance companies and commercial banks continue to be the most active lenders in the third quarter of RERC Survey respondents reported that prices were starting to outpace values in Office, Retail, and Apartment markets. National vacancies continue to decrease across all property types, except for Apartment. Retail and Industrial cap rates decreased 80 and 50 bps from a year ago. [We are] starting to see a lot more exotic property types - such as golf courses or water parks - being nanced again - Brian Stoffers, Global President of Debt & Structured Finance at CBRE Capital Markets. November 24, Self-storage has been gaining more popularity among institutional investors: Self-Storage Over the past two decades, institutional investors have expanded investment in self-storage. Currently, 17% 1 of selfstorage properties are owned by institutional investors, which means consolidation has room to continue. There are four REITS dedicated to self-storage: Public Storage, Extra Space Storage, Cube Smart, and Sovran Self Storage. Together, these four REITS have a combined $45 billion market capitalization. The top ve self-storage companies, including the four REITS plus U-Haul, own, operate and/or manage some 5,800 facilities, or about 12% of all U.S. facilities 2. Self-storage REITS have returned 29% in the 10-months ending October , compared to 24% for all REITS. In 2013, self-storage REITS returned 9.5% compared to 2.9% for all REITS. With approximately 25 million units across the U.S., and 2.5 billion SF, self-storage generated an estimated $24 billion 3 in revenue last year. In the U.S., 1 in 10 families rent a selfstorage unit; in 1995 this ratio was 1 in The tenant mix has also expanded from those who have limited income; 51% of renters have an annual household income of $50,000 or more and 15% are earning $125,000 or more 3. Construction has been disciplined since Approximately 100 facilities were constructed per year in 2013 and 2014, compared with 3,500 per year in 2004 and Annual Returns for the NAREIT US Real Estate Index Series 5 Property Type Office 9.3% 14.6% Industrial 7.4% 12.9% Retail 10.6% 20.3% Apartment 10.7% 18.7% Self-Storage 19.3% 20.5% 1 Bloomberg - Self-Storage Magnates Cash In on the Surge in Real Estate, August Storage Authority - The Facts About Self Storage, September What s In Your Self-Storage? - Aol Real Estate, September MJPartners - Self Storage Market Overview Third Quarter 2014, October NAREIT - Annual Returns for the FTSE NAREIT US Real Estate Index Series

2 OFFICE The office vacancy rate fell to 11.6% in 2014 Q3, down from 12.1% a year ago. Office prices are up 16% from a year ago, but are 1% below the 2007 peak. CBD office prices have increased 18%, and Suburban office 14% from a year ago. (Moody s CPPI Report, November 2014). CBD Office in Non-major Markets increased 4% from a year ago. Of the 20 sectors reported by Moody s/rca CPPI, CBD Office properties in Non-Major Markets had the second slowest price appreciation. For 2015, there are 61 million SF expected to be completed (CoStar). Annual Data, 2014 forecasted to year end Two of the largest office sales in October involved suburban properties in Minneapolis and Atlanta, illustrating the growing attraction of suburban properties and secondary markets (Real Capital Analytics, Office Month in Review, November 2014). Vacancy Top And Bottom Trending Markets (Year Over Year) Rent ($/SF) Leaders* 13Q3 14Q3 CHANGE 13Q3 14Q3 CHANGE San Francisco 9.6% 7.9% -1.7% $41.60 $ % San Jose 11.4% 9.7% -1.7% $31.69 $ % Nashville 8.4% 7.0% -1.4% $19.41 $ % Dallas 15.5% 14.3% -1.2% $20.66 $ % Miami 12.7% 11.5% -1.2% $27.38 $ % Laggards** Honolulu 5.0% 5.7% 0.7% $36.52 $ % MSA Count Based on Vacancy MSA Count Based on Rent Favorable Vacancy Trend: 48 Rent Growth Above 0%: 47 Unfavorable Vacancy Trend: 4 Rent Growth Below 0%: 6 Neutral Vacancy Trend 2 Neutral Rent: 1 Total MSAs: 54 Total MSAs: 54 *Leaders have a favorable vacancy trend and rent growth of 3% or higher. **Laggards have an unfavorable vacancy trend and rent growth of 0% or lower. 2

3 APARTMENT Apartment vacancy increased to 4.1% in 2014 Q3, up from 4.0% a year ago (CoStar). For 2014 Q3, apartment cap rates decreased to 5.0%, down from 5.3% a year ago. Sales volume for apartment properties in the third quarter totaled $27.5 billion, up 28% from a year ago. Transactions of mid/high rise properties rose 75%, and transactions in the 6 major metros rose 60% from a year ago (RCA Apartment Quarter in Review, November 2014). Apartment prices increased 16% from a year ago, and are 18% above the 2007 peak. Apartment markets in Major Markets 1 surpassed 2007 peak levels by 35% (Moody s CPPI Report, November 2014). Annual Data, 2014 forecasted to year end 1 Major Markets: New York City, Los Angeles, Chicago, San Francisco, Boston and Washington DC. Top And Bottom Trending Markets (Year Over Year) Vacancy Rent ($/Unit) Leaders* 13Q3 14Q3 CHANGE 13Q3 14Q3 CHANGE Palm Beach County 5.5% 4.0% -1.5% $1,190 $1, % Sacramento 4.5% 3.2% -1.3% $971 $ % Fort Lauderdale 4.6% 3.4% -1.2% $1,244 $1, % Inland Empire 4.5% 3.9% -0.6% $1,073 $1, % Atlanta 5.6% 5.2% -0.4% $889 $ % Laggards** There were 0 out of 54 MSAs with unfavorable vacancy trends and negative rent growth. MSA Count Based on Vacancy MSA Count Based on Rent Favorable Vacancy Trend: 20 Rent Growth Above 0%: 54 Unfavorable Vacancy Trend: 29 Rent Growth Below 0%: 0 Neutral Vacancy Trend 5 Neutral Rent: 0 Total MSAs: 54 Total MSAs: 54 *Leaders have a favorable vacancy trend and rent growth of 3% or higher. **Laggards have an unfavorable vacancy trend and rent growth of 0% or lower. 3

4 INDUSTRIAL The industrial vacancy rate dropped to 7.0% in 2014 Q3, from 7.8% a year ago. For 2014 Q3, the Industrial sector recorded a transaction volume decline, down 13% from a year ago. The decline comes from the fact that there was less activity seen in portfolio and entity level transactions (Real Capital Analytics, Industrial Quarter in Review, October 2014). Industrial property prices are up 15% from a year ago, but are 10% below the 2007 peak (Moody s CPPI Report, November 2014). Annual Data, 2014 forecasted to year end Top And Bottom Trending Markets (Year Over Year) Vacancy Rent ($/SF) Leaders* 13Q3 14Q3 CHANGE 13Q3 14Q3 CHANGE New Orleans 8.3% 6.2% -2.1% $4.84 $ % San Francisco 5.6% 3.7% -1.9% $10.18 $ % Columbus, OH 8.4% 6.5% -1.9% $3.03 $ % Dallas 7.5% 5.8% -1.7% $4.04 $ % Richmond 10.0% 8.6% -1.4% $3.13 $ % Laggards** Indiannapolis 5.7% 7.7% 2.0% $4.10 $ % MSA Count Based on Vacancy MSA Count Based on Rent Favorable Vacancy Trend: 43 Rent Growth Above 0%: 45 Unfavorable Vacancy Trend: 9 Rent Growth Below 0%: 9 Neutral Vacancy Trend 2 Neutral Rent: 0 Total MSAs: 54 Total MSAs: 54 *Leaders have a favorable vacancy trend and rent growth of 3% or higher. **Laggards have an unfavorable vacancy trend and rent growth of 0% or lower. 4

5 RETAIL Retail vacancy decreased to 6.5% in 2014 Q3, down from 6.8% a year ago. Retail prices are up 5% from a year ago, but are 17% below the 2007 peak. Retail in Major Markets 1 increased 3% from a year ago. Of the 20 sectors reported by Moody s/rca CPPI, retail in Major Markets had the slowest price appreciation. CMBS continue to dominate retail loan originations, with a market share of 46%, up from 45% a year ago. Staples plans to complete closing 170 stores in 2014, and 225 in 2015 (WSJ, Staples to Speed Store Closings, November 19, 2014). Annual Data, 2014 forecasted to year end 1 Major Markets: New York City, Los Angeles, Chicago, San Francisco, Boston and Washington DC. Vacancy Top And Bottom Trending Markets (Year Over Year) Rent ($/SF) Leaders* 13Q3 14Q3 CHANGE 13Q3 14Q3 CHANGE Palm Beach County 7.7% 6.3% -1.4% $17.75 $ % Houston 6.5% 5.7% -0.8% $14.53 $ % East Bay 5.3% 4.6% -0.7% $20.74 $ % Dallas 7.7% 7.1% -0.6% $13.58 $ % Orange County 5.5% 4.9% -0.6% $22.11 $ % Laggards** Chicago 8.3% 8.5% 0.2% $15.83 $ % Salt Lake City 4.0% 4.1% 0.1% $13.40 $ % MSA Count Based on Vacancy MSA Count Based on Rent Favorable Vacancy Trend: 48 Rent Growth Above 0%: 43 Unfavorable Vacancy Trend: 4 Rent Growth Below 0%: 11 Neutral Vacancy Trend 2 Neutral Rent: 0 Total MSAs: 54 Total MSAs: 54 *Leaders have a favorable vacancy trend and rent growth of 3% or higher. **Laggards have an unfavorable vacancy trend and rent growth of 0% or lower. 5

6 CMBS DELINQUENCY The percentage of loans seriously delinquent* was 5.2% in October , down from 6.7% a year ago. The percentage of loans seriously delinquent peaked at 9.2% in July The Lodging sector was the most improved sector in October, declining 3.6% from a year ago. The Industrial sector wasn t far behind, improving 3.3% from a year ago. Retail loans only decreased 0.2% from a year ago. *Loans 60+ days delinquent, in foreclosure, REO, or non-performing balloons 1 Seriously delinquent percentage may not match Trepp s monthly report. Trepp, November 21, DAY DELINQUENCY RATES October 12 October 13 October 14 Office 9.6% 8.5% 6.2% Industrial 10.5% 10.6% 7.3% Retail 7.3% 5.9% 5.7% Apartment 9.2% 5.5% 4.3% Lodging 10.1% 8.1% 4.5% Total 8.5% 6.7% 5.2% HIGHEST AND LOWEST DELINQUENCY RATES by MSA ($ Balance in millions, includes Apartment, Retail, Industrial, and Office, top 50 MSAs, data as of November 2014) Highest Delinquent Balance 60+ Days Lowest Delinquent Balance 60+Days Jacksonville, FL $ % Salt Lake City, UT $6 0.3% Atlanta, GA $1, % San Jose, CA $21 0.5% Detroit, MI $ % Austin, TX $28 0.5% Cincinnati, OH $ % Portland, WA $18 0.6% Buffalo, NY $ % Seattle, WA $74 1.0% Cleveland, OH $ % San Antonio, TX $53 1.4% Birmingham, AL $ % Oklahoma City, OK $22 1.5% Riverside, CA $ % San Diego, CA $ % Virginia Beach, VA $ % New Orleans, LA $27 1.9% Sacramento, CA $ % Los Angeles, CA $ % 6

7 December TRANSACTION VOLUME Sales of commercial real estate totaled $102 billion in 2014 Q3, up 11% from last year. The Apartment sector was the most improved in the third quarter, recording a 28% year-over-year increase in sales volume. The Office sector also recorded strong volume gains (20%) while Retail (-8%) and Industrial (-14%) recorded declines. For the past two quarters, total transaction volume has increased approximately $5 billion each quarter. Real Capital Analytics, 2014 Q3 NUMBER OF PROPERTIES SOLD 2006 Q4 (Peak) 2009 Q1 (Trough) 2014 Q3 Office 1, ,108 Industrial 1, ,307 Apartment 1, ,665 Retail 1, ,685 Total 6,643 1,263 5,765 CAP RATES Cap rates continue to trend lower among all property types from 2013 Q3. The Retail sector is currently seeing the most compression, declining 80 basis points from a year ago. RERC, 2014 Q3 CAP RATES (RERC) 2011 Q Q Q Q3 Office 6.4% 6.2% 6.1% 5.6% Industrial 7.1% 6.5% 6.4% 5.9% Apartment 5.9% 5.4% 5.3% 5.0% Retail 7.1% 6.7% 6.9% 6.1% 7

8 NCREIF The trailing one-year return for the NCREIF property index (NPI) increased slightly to 11.3%, compared to the 2013 return of 11.0%. The NPI is a measure of unleveraged private equity returns as determined through application of an appraisal-based exit price. Annual rates (appreciation + income) NCREIF, 2014 Q3 EFFECTIVE RENTS Rent levels in the third quarter rose modestly across all property types. The Industrial sector reported the highest growth in 2014 Q3, with effective rents 4.4% higher than a year ago. Effective Rent From a Year Ago Industrial +4.4% Office +3.7% Retail +3.1% Apartment +2.3% Not adjusted for in ation 8

9 USA Realty Advisors, LLC RETAIL SALES Nonstore retail (primarily internet sales) were $120 billion in the third quarter, up 7.2% from a year ago. Retail sales, excluding nonstore, were $1.2 trillion in the third quarter, up 4.2% from a year ago. Gasoline Stations was the only category that experienced a decline in the third quarter from a year ago (-1.6%). Motor Vehicle (+8.8%) and Food Services (+7.1%) increased the most when compared to 2013 Q3. Americans showed a willingness to spend their savings from low gasoline prices on more than just bare essentials, eating out and shopping for sporting goods (Bloomberg: Retail Sales in U.S. Showed Broad-Based Gain in October. November 14, 2014). U.S. Census Bureau, November 14, 2014 NONSTORE SHARE OF RETAIL Nonstore (Billions) % of All Retail Sales 1999 Q3 $39 5.0% 2004 Q3 $58 6.0% 2009 Q3 $78 7.6% 2014 Q3 $ % TROUBLED ASSETS Troubled assets were $58 billion in 2014 Q3, down 64% from the peak in 2010 Q2, and down 32% from a year ago. Since 2007, $476 billion of commercial mortgages have been troubled. As of 2014 Q3, 79% of those mortgages have been worked out. An asset is de ned as troubled when there is a default, bankruptcy, or foreclosure pending, or some kind of lender forbearance or other restructuring of a loan. RCA reports an analysis of distressed loans by troubled status from their research into CRE title records, CMBS, and the RCA proprietary commercial transaction data. Real Capital Analytics, 2014 Q3 9

10 FARMLAND The IMF Commodity Index is 28% below the July 2008 peak. For 2014 Q3, the energy (-6.4%) and metal (-6.2%) indices experienced the largest declines from 2013 Q3 (International Monetary Fund, Commodity Market Monthly, November 14, 2014). The Federal Reserve reports mixed agricultural conditions. Price for some crops declined, driven in part by very strong anticipated production. These lower prices for some agricultural commodities were seen as weighing on producers incomes, but bene ting those using the commodities as inputs (Federal Reserve Board of Governors Beige Book, October 2014). USDA, Ag Land Values and Cash Rents Annual Summary, August 2014 International Monetary Fund, Primary Commodity Price Index, October 2014 CONSTRUCTION SPENDING The annualized rate for residential construction spending in October was $354 billion, up 1.9% from a year ago but 48% lower than the 2006 peak. The annualized rate for non-residential construction spending in October was $339 billion, up 6.4% from last year but 18% lower than the 2008 peak. U.S. Census Bureau, December 2,

11 ORIGINATIONS Mortgage Bankers Association Quarterly Data Book, 2014 Q3 ORIGINATIONS BY PROPERTY TYPE 2012 Q Q Q3 Office 8.7% 11.4% 10.9% Industrial 6.5% 5.5% 5.7% Apartment 54.9% 44.2% 53.6% Retail 10.1% 10.3% 9.8% Other* 19.8% 28.7% 19.9% *Other includes hotel and health care ORIGINATIONS BY INVESTOR CLASS Life Cos 27.6% 21.7% 23.8% GSEs 26.3% 23.0% 20.9% Comm Bank 28.7% 26.9% 32.2% Conduits 17.4% 28.5% 23.2% Commercial loan originations in 2014 Q3 rose 16% from a year ago. CMBS originations were 10% higher in 2014 Q3 than last quarter and 46% higher than 2013 Q3. The increase in loan originations from a year ago was mainly driven by an increase in apartments and industrial originations. The increase included a 41% increase in the dollar volume of apartment properties, and a 22% increase for industrial property loans (Mortgage Bankers Association Data Book, 2014 Q3). LIFE COs ORIGINATIONS (Billions) 2006 Q3 $ Q3 $ Q3 $ Q3 $ Q3 $ Q3 $ Q3 $ Q3 $ Q3 $12.3 Mortgage Bankers Association Quarterly Data Book, 2014 Q3 11

12 REPEAT SALES INDICES The Commercial Property Price Index reported by RCA is up 13.5% in September from a year ago and has nally matched the 2007 peak. Among key drivers of the price recovery were the increased availability and decreased cost of debt and equity capital, capitalization rate compression, improving property fundamentals and a declining share of distressed transactions (Moody s CPPI Report, November 2014). The U.S. Investment Grade segment increased 16% over the past 12 months. The U.S. General Commercial Index increased 14% in September from a year ago. Real Capital Analytics/Moody s Investor Service, November 2014 CoStar Commercial Repeat-Sale Indices, November 2014 The difference between the RCA Index and the CoStar Indices is primarily the methodology weighting repeat sales, not the data sources. Commercial Property Price Index (Moody s/rca) - Index is based on property sales over $2.5 million. U.S. Investment Grade (CoStar) - This Index includes Class A and B offices with 35,000 SF or more, industrial properties with 80,000 SF or more, ex properties with 55,000 SF or more, retail properties with 25,000 SF or more, multifamily properties with 90,000 SF or more, and hotels with 125,000 SF or more. U.S. General Commercial (CoStar) - Only includes properties not meeting the Investment Grade criteria. EMPLOYMENT The October unemployment rate was 5.8%, the lowest rate since July 2008 and down from 7.3% a year ago. Total non-farm employment was million in October, and 2.6 million from a year ago. SIGNIFICANT EMPLOYMENT CHANGES Since February 2010 Trough Bureau of Labor Statistics, Employment Situation, November 7, 2014 Employment gures re ect private and government non-farm jobs Education & Health Services +1,827, % Leisure & Hospitality +1,754, % Professional Services +1,661, % Retail Trade +1,016, % Manufacturing +701, % Construction +571, % Mining & Lodging +254, % Finance & Insurance +154, % Information Government Other +19, ,000 +1,725, % -2.5% +10.6% Total +9,125, % 12

13 CONSUMER CONFIDENCE The Consumer Con dence Index fell in November to 88.7, but is up 26% from a year ago. November s reading declined from a seven-year high (94.1) since October The Consumer Sentiment Index rose to 89.4 in November, the highest level since July 2007, and up from 75.1 one year ago. A stronger labor market and cheap gas prices are brightening consumers spirits as the busiest time of the year for retailers gets under way (Bloomberg, Consumer Sentiment in U.S. Increases More Than Forecast. November 14, 2014). Reuters/University of Michigan Consumer Sentiment Index, November 14, 2014 The conference Board Consumer Con dence Index, November 25, 2014 ADDITIONAL OBSERVATIONS Commercial Mortgage Alert, November 21, Investment-grade bond buyers are turning up the pressure on regulators to curb ratings shopping by conduit shops. While securitization programs have long played rating agencies against one another to win more-favorable subordination levels, investors complain they have pushed the tactic to a new level this year. Their ire is focused on the growing practice of hiring Moody s, which is widely viewed as having the toughest stance on conduit deals, to rate only some invest ment-grade classes, bypassing its grades on other tranches. Investors contend that the maneuver is aimed at gaining the Moody s approval needed by some institutional buyers on the most-senior tranches, while avoiding the tougher stand that the agency presumably would take on subordinate investment-grade classes. Commercial Mortgage Alert, November 21, In a pre-thanksgiving feast for investors, dealers this week marketed 10 securitizations totaling $7.7 billion. The barrage was led by three conduit deals totaling $3.4 billion and three pooled oating-rate transactions adding up to $1.6 billion. Rounding out the mix were two single-borrower deals totaling $1.9 billion, a collateralized loan obligation and a single-family rental offering. The activity resulted in one of the busiest weeks since the nancial crisis. The conduit deals appeared to be holding up relatively well amid the strong supply. Real Estate Alert, November 19, Sales of Manhattan hotels are soaring amid stepped-up demand from foreign investors, who are increasingly willing to look beyond trophy properties. Overseas investors have long set their sights on New York s best hotels, such as luxury properties lining Central Park or in Times Square. While continuing to chase those, they ve broadened their scope this year to include select-service hotels and properties in other Manhattan neighborhoods. Commercial Mortgage Alert, November 7, A late surge of issuance has put the U.S. commercial mortgage backed securities market within striking distance of the $100 billion mark for the year. With less than two months to go, another $18.5 billion of transactions are still in the pipeline. When added to the $79.3 billion of deals that have already priced, that would lift the full-year total to $97.8 billion. And there is rumbling that one or two large transactions could be added to the calendar by year end. Commercial Real Estate Direct Weekly, October 24, Federal regulators this week approved nal rules regarding the retention of risk in asset-backed securities, including CMBS. Because they impose what could be a hefty cost to investors in deals most subordinate classes, the rules are expected to increase borrowing costs for securitized commercial mortgages by 20 to 30 basis points. The new rules, which are part of the Dodd-Frank Wall Street Reform and Consumer Act that was signed into law in 2010, go into effect in The rules require a risk piece of every CMBS transaction, totaling 5 percent of a deal s market value, as opposed to its face, or par value, to be shared by up to two investors on a pari passu, or equal basis. In addition, they d have to retain the investment for a minimum of ve years. Report prepared by: Don Guarino, Will Pattison, Monica Aragon For questions or comments, please contact Will Pattison at wpattison@aegonusa.com or