The document provides an overview of the commercial real estate market downturn in the Western US. It discusses how the bubble was formed due to equity shifting to real estate, excessive debt, and improving economic fundamentals. It then summarizes the current state with values down 30-40% across all asset classes and high unemployment impacting demand. Charts show declining occupancy rates, rents, and prices across major office and apartment markets in the region. The future forecast is for further declines as the bubble unwinds and economic recovery remains uncertain.
Western Independent Bankers’ Troubled Asset Forum Presentation
1. The Commercial Real Estate Bust:
How Long? How Deep?
And What Will Pull Us Out?
Western Independent Bankers:
Troubled Asset Forum
June 23, 2009
Hilton San Francisco
By:
Ted Simpson, MCR
Executive Director
Cushman & Wakefield of California, Inc.
2. Today’s Agenda
I. Why a CRE Bubble? Past
II. Has it Popped? Present
III. Forecast Future
3. Why a CRE Bubble?
I. Equity redirected towards
real estate from stocks
II. Debt madness
III. Economic expansion
improved fundamentals
4. Why a CRE Bubble?
I. Equity redirected towards
real estate from stocks
• ’01 stock market crash
• Change in institutional investors’ asset
allocation
• More capital chasing real estate than
available cap rate compression more
capital chasing RE cap rate
compression
• Global liquidity flood created by central
banks, oil’s rise (new wealth: Russia, Mid
East, Brazil)
5. Why a CRE Bubble?
II. Debt madness
• CMBS pyramid scheme/scam
• Big banks become investment
banks
• Community banks take highest
risk/ highest margin loans
*Risk was completely mispriced due to greed (fees),
competitiveness, shareholder pressure
6. Why a CRE Bubble?
Also chasing CRE debt…
• Big Banks
• Insurance Companies/Mortgage
REIT’s
• Community Banks
11. Why a CRE Bubble?
U.S. Unemployment (’90 – ’08)
Percentage
of
Unemployment
Source: U.S. Dept. of Labor; Bureau of Labor Statistics, 2009
12. Why a CRE Bubble?
Summary of How We Got Here
April ’07 Credit Crises
Housing crash
Consumer spending
Econ fundamentals
Vacancies in CRE
13. Why a CRE Bubble?
“We have seen this horror movie before,
so the end isn’t that scary.”
14. Status of CRE in Western U.S.
• Values down by 30% - 40%
• Values continue to decline
• Unwinding of bubble
15. Status of CRE in Western U.S.
All Asset Classes Plummeting
16. Status of CRE in Western U.S.
Western 11 states unemployment rates
State Unemployment Rate Apr ‘09
Arizona 7.7%
California 11.0%
Colorado 7.4%
Idaho 7.0%
Montana 6.0%
Nevada 10.6%
New Mexico 5.8%
Oregon 12.0%
Utah 5.2%
Washington 9.1%
Wyoming 4.5%
17. Status of CRE in Western U.S.
Oakland, CA
Year Owner Price
2007 Developer $2.1M ($330/SF)
3-2009 Lender $1.38M ($184/SF)
6-2009 Lender $1.315M ($175/SF)
Future Value $750,000 ($100/SF)???
18. Status of CRE in Western U.S.
Recent retailer bankruptcies
19. Status of CRE in Western U.S.
Retail – Quarterly Supply, Demand and Vacancy As of 2009Q1
Source: Property And Portfolio Research, Retail Edition, June 2009
20. Status of CRE in Western U.S.
Multi Family
• National Housing Affordability Index
21. Status of CRE in Western U.S.
Apartments – Quarterly Supply, Demand and Vacancy As of 2009Q1
Source: Property And Portfolio Research, Apartment Edition, June 2009
22. Status of CRE in Western U.S. - Apartment Case Study
Long Beach, CA
Apartment Complex
Year Owner Price
2005 Local Investor $6.6M $120,000/door
2006 Local Investor $9.2M $167,000/door
2007 Lender $11M $200,000/door
2009 Lender $6.6M $120,000/door
23. Imports ($000,000)
$-
$50,000.00
$100,000.00
$150,000.00
$200,000.00
$250,000.00
1992 Jan
1992 Jun
1992 Nov
1993 Apr
1993 Sep
1994 Feb
1994 Jul
1994 Dec
1995 May
1995 Oct
1996 Mar
1996 Aug
1997 Jan
Industrial
1997 Jun
1997 Nov
1998 Apr
Status of CRE in Western U.S.
1998 Sep
1999 Feb
1999 Jul
1999 Dec
’09)
U.S. Imports (’92 –US Imports
2000 May
2000 Oct
2001 Mar
2001 Aug
2002 Jan
2002 Jun
2002 Nov
2003 Apr
2003 Sep
2004 Feb
2004 Jul
2004 Dec
2005 May
2005 Oct
2006 Mar
2006 Aug
2007 Jan
2007 Jun
2007 Nov
2008 Apr
2008 Sep
2009 Feb
24. Status of CRE in Western U.S.
Vernon, CA
91,674 SF
• Lender carried back paper
• Listed at $120/SF
• Price drop to $109/SF
• Then to $99/SF
• Sold for $70/SF
• Previously sold 7/1/2003 for $57.43/SF
25. Status of CRE in Western U.S.
Hotel – National Rev/Par Over 10 Years
160.0
140.0
120.0
100.0
RevPar Index
80.0
60.0
40.0
20.0
0.0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Year
26. Status of CRE in Western U.S.
Inland Empire - Office
Inland Empire Supply & Demand
2.00 32.0%
1.50 24.0%
1.00 16.0%
0.50 8.0%
0.00 0.0%
01 02 03 04 05 06 07 08 09 10 11
-0.50 -8.0%
Absorp Cnst. Vacancy
27. Status of CRE in Western U.S.
Los Angeles County - Office
CBD Supply & Demand
1.2 24.0%
0.9 18.0%
0.6 12.0%
0.3 6.0%
0.0 0.0%
01 02 03 04 05 06 07 08 09 10 11
-0.3 -6.0%
-0.6 -12.0%
Absorp Cnst. Vacancy
Non-CBD Supply & Demand
2.00 24.0%
1.50 18.0%
1.00 12.0%
0.50 6.0%
0.00 0.0%
01 02 03 04 05 06 07 08 09 10 11
-0.50 -6.0%
-1.00 -12.0%
Absorp Cnst. Vacancy
35. Status of CRE in Western U.S.
Las Vegas - Office
Non-CBD Supply & Demand
6.00 28.0%
4.50 21.0%
3.00 14.0%
1.50 7.0%
0.00 0.0%
2004 2005 2006 2007 2008 2009
-1.50 -7.0%
-3.00 -14.0%
Absorp Cnst. Vacancy
36. Price Per Square Foot
$-
$50.00
$100.00
$150.00
$200.00
$250.00
$300.00
$350.00
Sep-00
Dec-00
Mar-01
Jun-01
Sep-01
Dec-01
Mar-02
Jun-02
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
Status of CRE in Western U.S.
Mar-04
Jun-04
Sep-04
Dec-04
Date
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
National Historic Office Prices
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
37. Price Per Square Foot
$-
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$80.00
$90.00
Sep-00
Dec-00
Mar-01
Jun-01
Sep-01
Dec-01
Mar-02
Jun-02
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
Mar-04
Status of CRE in Western U.S.
Jun-04
Sep-04
Dec-04
Date
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
National Historic Warehouse Prices
Mar-09
Jun-09
38. Status of CRE in Western U.S.
Summary of Current CRE Markets
• If new construction in submarket =
Meltdown
• Very slow leasing
• Rapid rent deflation
• Mostly “forced” sales
40. CRE Forecast
CRE Forecast
Long Term:
• Market will drop in excess of
fundamentals (overshoot) due to forced
sales by troubled owners/lenders.
• This will create HUGE OPPORTUNITIES
FOR THE BRAVE (AND RICH). Cash is
king.
• 10 years cycle – 5 up, 5 down (we only have
7 year memories, so always overshoot)
• New, entrepreneurial companies will
sprout
41. CRE Forecast
Protracted/Anemic Recovery
• Output gap closed in 3-4
years, CRE follows
• 2% annual GDP growth in
2010
• Wall Street flat, removes fuel
from corporate growth
• CRE debt financing difficult to
obtain
42. CRE Forecast
Challenges to Recovery:
• Political risk – taxes,
changing rules
• State budgets
• High inventory levels
• Permanently decreased
corporate footprints (Starbucks)
• Special Servicers
43. CRE Forecast
Special Servicers
• Inflexible
• Can’t work out/extend
• Causes foreclosures
• Resultant fire sales drop
market
44. CRE Forecast
What’s required for a recovery
• Profits/Hiring
• Continued low IRs/low inflation
• Lending
• CMBS spreads drop 300 bps
• TALF? No closed deals
• Consumer Spending
45. % of Disp Income
19
-2
-1
0
1
2
3
4
5
6
7
8
9
90
19 -I
90
-I
19 II
91
19 -I
91
-I
19 II
92
19 -I
92
-I
19 II
93
19 -I
93
-I
CRE Forecast
19 II
94
19 -I
94
-I
19 II
95
19 -I
95
-I
19 II
96
19 -I
96
-I
19 II
97
19 -I
97
-I
19 II
98
19 -I
98
-I
19 II
99
19 -I
99
-I
20 II
00
20 -I
00
-I
US Personal Savings Rate
20 II
01
20 -I
01
-I
20 II
02
20 -I
02
-I
20 II
03
20 -I
03
-I
20 II
04
20 -I
04
-I
20 II
U.S. Personal Savings Rate
05
20 -I
05
-I
20 II
06
20 -I
06
-I
Need consumers to spend again: 8%
20 II
07
20 -I
07
-I
20 II
08
20 -I
08
-I
20 II
09
-I
50. CRE Forecast
The Good News:
• Healthcare and infrastructure spending
will be bright spot
• The employment of the currently
unemployed will point way to recovery
• Natural economic process
• Watch them! They will point the way!