High Real Estate C&I Market presentation feb. 2018
Why Consider A Real Estate Investment In The Current Market July 2009
1. Why Consider a Real Estate Investment in the Current Market Qtr 3 - 2009 Presented by: Richard Zimmerman, Founder 1031 Exchange Provider CPA Continuing Education Series
13. Occupancy & Rental Rates are on a Sharp Decline Vacancy Rate by Property Segment (%) Source: Property & Portfolio Research; BIG Year over Year Rental Growth by Property Segment (%)
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16. Past vs. Present: Diverging Perspectives REFINANCE ANYONE? Past Underwriting Present Underwriting Going In Cap Rate 5% to 6.5% 8% to 10% (or more) Loan to Value More Debt- Higher LTV ratios (75% to 85%) More Equity- Lower LTV ratios 50% to 60% Amortization 5 yrs Interest Only then 30 yr Amortization 30 yr Amortization Term 5 to 10 years 10 years Interest Rate 95 points over 10 year UST (5.65%) 525 points over the 10 year UST (8.10%) Occupancy Levels 95%+ Average Occupancy Levels 80%+ Average Occupancy Levels Rental Growth Assumptions 3% to 6% Annual Rental Growth -5% 0% Annual Rental Growth for 3 years then 3% Operating Expense Assumptions 2.5% Annual Expense Growth 3% Annual Expense Growth NOI Growth Average 8% Annual NOI Growth -5% to 0% NOI Growth for 3 years then 3% NOI Growth Tenant Retention Ratios 90% Retention of Tenants 60% Retention of Tenants Lease Downtime from Rollovers 4 to 6 months 6 to 12 months for first 3 years, 6 months thereafter Average Lease Term 5 years 2 to 3 years Refinancing Assumptions Refinancing under original loan terms Refinancing under new terms Exit Cap Rate 5% to 6.5% 8% to 10% (or more) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
17. Required ROE for levered CRE investors suggests price declines of 45% or more Source: Deutsche Bank 13.0% 12.8% 13.8% ROE 8.6% 7.4% 4.8% Cap Rate (going in) 58 68 105 Purchase Price ($MM) 60% 66% 85% Loan to Value (LTV) 23 23 16 Equity ($MM) 35 45 89 Loan Amount ($MM) 30yr 30yr IO Amortization 2.86% 2.86% 4.69% 10-year UST 25 25 50 Swap Spread 500 500 45 Credit Spread 8.11% 8.11% 5.64% All-in Rate 2.82 3.61 5.05 Yr 1 Interest Cost ($MM) 5.5 6.5 6.5 Yr 10 NOI ($MM) 1.36X 1.25X 1.00X Yr 1 DSCR 45% 35% Implied Price Decline 64 89 137 Yr 10 value 8.6% 7.4% 4.28% Cap Rate (exit) New Underwriting 15% NOI Decline New Underwriting 2007 Underwriting
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27. So, Why Invest Now? Reason One Diversification Reduces Risk and Potentially Increases Total Return
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37. Private Real Estate Has Performed Private Real Estate - compared to Public Real Estate, Stocks and Bonds – has provided the highest average returns over the past 3, 5 and 10 year periods. Source: National Council of Real Estate Investment Fiduciaries. The chart above shows the average returns of different investments. Each of the respective investments possess different features, including investors’ expectations, investment objectives, risks, costs and expenses, liquidity, safety, guarantees or insurance, fluctuation of principal, returns (if any), and tax features, which must be considered when evaluating the performance of such investments. The index returns are shown for illustrative purposes only, you cannot invest in directly in an index. Past performance is no guarantee of future results.
38. Lower Risk Levels for Privately Held Real Estate Standard Deviation 1985-2008* Source: Morningstar, Inc. * Chart Benchmarks: Direct real estate is represented by the Transactions-Based Index of Institutional Commercial Property Investment Performance (TBI) from the MIT Center for Real Estate. REITs are represented by the FTSE NAREIT Equity REIT Index, large cap stocks are represented by the S&P 500, small cap stocks are represented by the performance of the Dimensional fund Advisors, Inc. (DFA) United States Micro Cap Portfolio, and international stocks are represented by the Morgan Stanley Capital International Europe, Australasia, and Far East.(EAFE) index. The data assumes reinvestment of all income and does not account for taxes or transaction costs.
39. Non-Correlation to Other Asset Classes Real Estate Vs. Equities 1985-2008 * Chart Benchmarks: Direct real estate is represented by the Transactions-Based Index of Institutional Commercial Property Investment Performance (TBI) from the MIT Center for Real Estate. REITs are represented by the FTSE NAREIT Equity REIT Index, large cap stocks are represented by the S&P 500, small cap stocks are represented by the performance of the Dimensional fund Advisors, Inc. (DFA) United States Micro Cap Portfolio, and international stocks are represented by the Morgan Stanley Capital International Europe, Australasia, and Far East.(EAFE) index. The data assumes reinvestment of all income and does not account for taxes or transaction costs. 1.00 0.59 0.74 0.44 0.21 Int’L Stocks (MSCI) 1.00 0.80 0.64 0.26 Small CAP Stocks (Russell 2000) 1.00 0.53 0.29 Large CAP Stocks (S&P 500) 1.00 0.33 Publicly Traded REITS 1.00 Direct Real Estate Int’l Stocks (MSCI) Small CAP Stocks (Russell 2000) Large CAP Stocks (S&P 500) Publicly Traded REITS Direct Real Estate
40. Real Estate may be able to Lower Risk and Increase Returns Hypothetical Portfolio Allocation 1989-2008 Source: Morningstar (Data as of 12/31/08 – This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Stocks are represented by the S&P 500, which is an unmanaged group of securities and considered to be representative of the stock market in general. Bonds are represented by the 5-yr US Govt. Bond, Treasury bills by the 30-day US Treasury bill, and direct real estate by the Transactions-Based Index of Institutional Commercial Property Investment Performance (TBI) from the MIT Center for Real Estate. The average return and risk are represented by the arithmetic average return and standard deviation respectively. Standard deviation measures the fluctuation of returns around the arithmetic average return of the investment. The higher the standard deviation, the greater the variability and thus risk of the investment returns. WITH NO REAL ESTATE HOLDINGS WITH 10% REAL ESTATE HOLDINGS WITH 20% REAL ESTATE HOLDINGS Return 8.3% Risk 8.2% Return 8.4% Risk 7.6% Return 8.5% Risk 7.1% Stocks Bonds T-Bills Real Estate
41. Why Invest Now Reason Two Recovery is Poised to Create Greater Demand
42. Space Demand Will Outpace Supply Source: Property & Portfolio Research Apartment Forecast Office Forecast
43. Space Demand Will Outpace Supply Source: Property & Portfolio Research Retail Forecast Industrial/Warehouse Forecast
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45. Why Invest Now Reason Three There is Blood in the Streets
46. Investors Cycle of Market Emotions We Are Here Optimistic “ Time to buy” Greatest Potential Risk Greatest Potential Opportunity “ Time to sell” “ Time to evaluate” Excited Elated Concerned Nervous Frightened Relieved Optimistic “ This is only temporary”
48. Savvy Investors Cycle of Market Timing We Are Here “ This is only Temporary” Optimistic “ Time to evaluate” Greatest Potential Risk Greatest Potential Opportunity “ Time to Buy” “ Time to Buy” Concerned Nervous Relieved Optimistic Excited Elated Optimistic “ Time to Sell”
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59. Thank you Richard Zimmerman, Founder 1031 Exchange Provider (866) 590-9858
Notas do Editor
This Chart shows how private commercial real estate has performed compared to other asset classes during the last 3, 5 and 10 years. Historically private real estate has performed better on the upside than the other comparable asset classes.
It could be said that real estate investing is an art and science. Different types of real estate have various benefits and features for just about every client. Financial advisors need to consider what works best for their clients and their practice. By incorporating non-traded, directly owned real estate into a client portfolio, financial advisors may be able to lower risk and increase returns because real estate is not directly correlated to the daily fluctuations of the broader markets. This chart illustrates 3 hypothetical portfolios. The first portfolio consists of a blend of stocks, bonds and 30-day T-Bills (as represented by the S&P 500, the Lehman Bros. Bond Index and T-bill yields). The average annual return from 1989 to 2008 is 8.3% with a standard deviation of 8.2% The second and third portfolios illustrate that by including real estate to the portfolio (10% and 20% of the respectively) the average yield increased and the standard deviation decreased. Source: Morningstar (Data as of 12/31/08) – This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Stocks are represented by the S&P 500, which is an unmanaged group of securities and considered to be representative of the stock market in general. Bonds are represented by the 5-yr US Govt. Bond, Treasury bills by the 30-day US Treasury bill, and direct real estate by the Transactions-Based Index of Institutional Commercial Property Investment Performance (TBI) from the MIT Center for Real Estate. The average return and risk are represented by the arithmetic average return and standard deviation respectively. Standard deviation measures the fluctuation of returns around the arithmetic average return of the investment. The higher the standard deviation, the greater the variability and thus risk of the investment returns.