Capital Markets
U.S. RESEARCHquarterly
Spring 2011
The U.S. Economy Real GDP expanded at an estimated 3.1% annualized pace in 4Q10, up from 2.6% in the third quarter. Growth was driven by net exports and consumer and business spending which bodes well for the transition to a more robust and sustainable expansion in the second half of 2011 and 2012, although one more muted than originally anticipated in the face of recent shocks to the global economy.
Following January’s weather related pause, job growth rebounded in February and March with the Michael Gately Director of Research (860) 509-2234
Jim Clayton, Ph.D. Vice President (860) 509-2237
Ryan Ma, CFA Senior Analyst
economy adding a total of 470,000 private sector jobs. The Bureau of Labor Statistics “diffusion index" indicates about two thirds of industries added jobs.
Real GDP hit a historic high in 4Q10, surpassing the previous peak in 4Q07. In contrast, after shedding 8.8 million jobs the economy has only added about 1.5 million over the past year. With labor productivity gains diminishing, companies will need to accelerate the pace of hiring.
After surging to 3.8% early in 2011, the 10 year U.S. Treasury yield was back down near 3.2% in mid March. We expect the rate to move moderately higher this year, near 3.5% as periodic downward moves from global flight to quality episodes battle upward pressure from a growing economy, inflation, government deficit and global currency concerns, plus the expected end of QE2 this summer.
(860) 509-2286
Real Estate Investment Markets Tom Duggan Analyst
Transaction activity continues to show gradual but steady improvement. Real Capital Analytics reports
(860) 509-2235
sales activity greater than $50 billion in 4Q10, a figure 50% higher than in the third quarter and more than double 4Q09. Property sales exceeded $130 billion in 2010, double the volume traded in 2009.
Dags Chen Analyst
The Moody’s/REAL price index continues to bounce along the bottom. It fell 1.2% in January, is down
(860) 509-2239
43% from its October 2007 peak and up 4% since bottoming late in 2009. A subindex derived from larger, non-distressed properties in major markets is down 19% from peak and up about 20% over the past year. Similarly, the MIT Transactions-based index (TBI) was up 19.6% in 2010.
Real Estate Benchmark Returns NCREIF Property Index total returns measured 4.62% (1.60% income plus 3.02% appreciation) in 4Q10, marking the third consecutive quarterly increase in NPI appreciation and total returns. The total return index increased 13.1% in 2010 after falling almost 17% in 2009.
The NCREIF Open-End Diversified Core Equity (ODCE) Fund Index showed total 4Q10 returns of 4.99% (1.50% income, 3.38% appreciation), down slightly from 5.45% in the third quarter. ODCE total returns rebounded, to 16.36% in 2010 after following -29.76% in 2009.
The NAREIT Equity REIT Index surged 7.43% in the fourth quarter to finish 2010 up 27.95%, marking For subscription inquiries, please contact Sally Edson at [email protected]
the second straight year of returns near 30%. The index increased another 6.70% in the first quarter this year, with gains above 4% in both January and February.
Cornerstone Real Estate Advisers LLC
One Financial Plaza
Suite 1700
Hartford, CT 06103
www.cornerstoneadvisers.com
U.S. Economy & Real Estate Trends
2011 Q1*
1, 2
2011 Q2*
Gross Domestic Product
3.0%
3.2%
Employment Change
1.2%
1.7%
Unemployment Rate
9.0%
9.2%
Inflation (CPI)
3.0%
2.8%
Housing Starts (000s units)
540
600
Retail Sales Growth (ex Auto ex Gas) 5.4%
5.2%
10 Yr Treasury Yield
3.4%
3.5%
1 Month LIBOR
0.3%
0.3%
*Forecast
Encouraging Employment Trends RQ Chart
1,10
400
80 Employment Diffusion Index
200
70
0
60
-200
50
-400
40
-600
30
-800
20
-1000
10 2007
2008
2009
2010
2011
Page 1
Consumers and Exports Drive Growth 1,2
Employment in several Tech and Healthcare sectors is above prerecession peak levels and hiring is picking up in Business and Professional Services. Manufacturing has been a bright spot. However, other sectors lag and unemployment will continue to present challenges into 2012 as business’ reluctance to add permanent employees is compounded by the growing ranks of long-term unemployed. Home foreclosures will continue rising through mid-year, further depressing home values in many markets and weighing on consumer sentiment and spending. However, with home sales and starts at record lows, and affordability near record highs, this sector should finally begin recovering late this year.
(Components of real GDP growth) 10 Government
Net Exports
Change in Inventories
Res. Investment
Nonres. Equip. & Software
Nonres. Structures
Personal Consumption Exp.
% quarterly (annualized) change
5
0
-5
-10 Q406
Q407
Q408
Q409
Q410
RQ Chart
Leading Index Points to Growth 1,7,11 (weekly through March 25, 2011) 4.5
140
135 4
125
3.5
120 3
115
110 2.5 105 Economic Cycle Research Institute (ECRI) Leading Index
10 Yr. Treasury Yield
100 Mar-09
2 Jun-09
Sep-09
Dec-09
Mar-10
Page 1
Jun-10
Sep-10
Dec-10
Mar-11
10 year Treasury yield (%)
130
ECRI Leading Index
Commercial real estate fundamentals are regaining their footing as the economic expansion gains momentum. Investor interest in real estate is on the rise, slowly spreading beyond well leased properties and gateway cities which attracted most investor interest last year, as investors begin to buy in anticipation of more robust growth.
Diffusion Index
Change in Private Sector Payrolls
Change in Private Employment
A
A widening array of economic indicators (retail sales, jobless claims, business investment, manufacturing activity) signal that the economy is on firmer footing and building towards a more robust self-sustaining expansion. Recovery in many regions of the U.S. will be delayed, however, owing to weakness in labor and housing markets, compounded by the fiscal urgency facing state and municipal governments. Tax increases and public sector job cuts are inevitable. Unresolved Euro zone debt issues and Middle East turmoil add uncertainty and could dampen global and U.S. growth prospects, especially if oil prices spike further.
U.S. Economic Performance Forecast
Property Type Fundamentals & Capital Markets Capital Market Highlights
Office: Vacancy 20 bps to to 16.4% in Q4. 3 Overall vacancy fell for the second straight quarter. Downtown
The depth and breadth of improvement in real estate investment
vacancy improved for the first time since Q307, falling 20 bps to
markets continue to expand as occupancies and debt stress measures
12.9%. Suburban improved by 30 bps, but remains high at 18.2%.
stabilize and the nature of equity and debt capital flows evolve. Viewing
Vacancy fell in about half of the major markets. Orlando, Tampa,
the four quadrants in the spectrum of real estate investment opportunities
Portland and Texas markets saw strong gains. Class A vacancy fell 20 bps to 15.6%, ranging from near 30% in Las Vegas, Phoenix and San Jose to below 10% in New York. Leasing fundamentals are expected
(private equity, private debt, public equity, public debt) as the pistons that drive the (real estate investment) engine, we are approaching the point at
to slowly improve through this year, but vacancy will remain above its
which the engine will begin running on all four cylinders, although not yet
15% long-term average until 2013.
at fully efficiency and still navigating around capital stack stress (deleveraging) related potholes in the road. The equity (public and private)
Apartment: Vacancy 140 bps in 2010 to 6%.3 Most major markets saw solid occupancy gains during the year owing to steady, though weak, job growth, a shift in preference away from homeownership, and limited new supply. Vacancy rates are nearing
and private debt quadrants saw strong capital flows in 2010, albeit with a quality of current lease income and major gateway market bias within all three quadrants, while the CMBS (public debt) piston was not working very
prerecession levels in Boston and Washington DC, and are below 4%
well. Contributions to core open-end, diversified real estate funds that
in several Bay Area and Florida markets. Rent concessions are being
comprise NCREIF’s ODCE index totaled $3.25 billion in 4Q10 and $9.2 billion
dialed back in many markets, though the overhang of for-sale housing
for the year. Life insurance (ACLI) commercial mortgage loan commitments
continues to challenge many Sunbelt markets. Current apartment
reached $10.4 billion in 4Q10 and totaled $30.7 billion for the year, up 115%
construction activity represents just 0.4% supply growth and the supply growth rate is less than 1% in almost all major markets, with exceptions being Austin, Norfolk and Salt Lake City.
and 87% over 2009 figures, respectively. Competitive transaction and lending environments coupled with the QE2 induced low interest rate regime helped push average NCREIF appraisal cap rates down to 6.30% and contract mortgage rates on 10 year term loans below 5%. CMBS
Recovery is well underway and building momentum. Upper upscale
issuance was minimal in the first three quarters last year, but spreads on
occupancy rose 4.1% in 2010 to 67.7%. New York, San Francisco and
legacy AAA CMBS tightened throughout the year, and the fourth quarter
Oahu hotels averaged 80%+ occupancy. Charlotte, Minneapolis,
marked an important turning point as CMBS issuance backed mostly by
Northern New Jersey and Atlanta saw double digit occupancy
new conduit loans spiked to almost $6 billion. This carried over into the first
gains. Nationally, average daily rates were
0.6% but moved up
2% in 4Q10 as more metros beyond New York and Boston reported strong rate gains. The stage is set for further improvement in 2011 as
quarter of this year with nearly $9 billion in CMBS bonds issued, a pace that is expected to increase. The return of a new and improved public debt
full service occupancy approaches its 68.7% long run average and
sector, dubbed “CMBS 2.0”, is an important element in increasing liquidity
operators regain pricing power.
and transaction activity in non-gateway markets as it will increase both
An uptick in manufacturing, global trade and consumer spending nudged availability down for a second quarter. “Large hub” distribution centers (Atlanta, Dallas, and North New Jersey) saw improvement. Chicago stabilized and Austin, Boston and Orange County reported significant occupancy gains. Los Angeles and Salt Lake City are the tightest markets in the nation. The supply pipeline is virtually closed but the slow pace of recovery implies it will be several years before occupancy levels support meaningful rent growth. West Coast and Southeast markets offer the best near-to-mid term recovery prospects.
Retail: Neighborhood/community center vacancy
↕
13%.3 Consumer spending showed solid gains that helped stabilize shopping center vacancies. Coastal barrier markets have maintained lower vacancies and showed slight improvement in the fourth quarter. Lower vacancy markets include San Francisco (6.5%), Miami (7.5%), Long Island (8%), and Los Angeles (8.3%). Atlanta, Houston, Los Angeles and Riverside all posted meaningful declines in vacancy. Sustained demand improvement will be challenging with unemployment still high. Investor interest has been piqued by improving real estate performance in select markets.
buyer interest and the propensity of owners and lenders to bring assets to the market for sale.
Strong Recovery in Legacy AAA CMBS Pricing RQ Chart March 25, 2011) (Weekly data through
1,400
AAA CMBS (10 yr.) Spreads
Baa Corporate Spreads
Equity REIT Price Index
1,200 CMBS & Corporate Bond Spreads to Swaps (bps)
Industrial: Availability 20 bps to 14.3% in Q4 but high.
3
1,200
1,000
1,000 800 800 600 600 400 400 200
200
0 Jun-07
0 Dec-07
May-08
Nov-08
Apr-09
Oct-09
Apr-10
Sep-10
Source: Cornerstone, Federal Reserve Yahoo Finance and Trepp. Page 1
Mar-11
RMZ REIT Index
Hotel: Occupancy to 67.7% in Q4; RevPar 5.7% in 2010.5
Capital Markets Total Returns
Market Return Comparison
Q4 2010
1-year
3-year
5-year
4.6%
13.1%
-4.2%
3.5%
7.4%
7.4%
27.9%
0.7%
3.0%
10.8%
Merrill Lynch Corp/Gov’t Bond Aggregate 8
-2.2%
6.8%
5.5%
5.5%
5.8%
MSCI EAFE 8
6.7%
8.2%
-6.5%
2.9%
3.9%
8
16.3%
26.9%
2.2%
4.5%
6.3%
S&P 500 8
10.8%
15.1%
-2.9%
2.3%
1.4%
Q3 2010
1-year average
NCREIF Property Index
Russell 2000
Q4 2010
Market Yields and Rates
2.9%
2.8%
3.2%
LIBOR - 3 month 2
0.3%
0.4%
0.3%
Merrill Lynch Gov’t/Corp Bond Yield 8
2.4%
2.3%
2.6%
NCREIF Potential Distribution (12-mo trailing) 1,4
5.0%
5.2%
5.2%
3.6%
3.8%
3.9%
Q4 2010
1-year
3-year
5-year
6.3%
18.2%
-3.3%
2.9%
7.4%
10-year Treasury Yield 2
FTSE/NAREIT-Equity Dividend Yield (12-mo trailing)
private
9
4
NCREIF Property Sub-Types Index Total Return
Real Estate Performance Summary
10-year
FTSE/NAREIT - Equity Index 9
4
Apartment Hotel
3.4%
9.0%
-7.7%
2.8%
5.2%
Industrial
3.4%
9.4%
-5.4%
2.6%
6.8%
Office
3.9%
11.7%
-5.7%
3.8%
6.4%
Retail
4.8%
12.6%
-1.3%
4.3%
10.0%
NCREIF Property Index
4.6%
13.1%
-4.2%
3.5%
7.4%
Q4 2010
1-year
9
FTSE/NAREIT Total Returns
public
Office/Industrial
10-year
3-year
5-year
10-year
7.8%
17.0%
-9.1%
-2.3%
6.1%
Retail
10.1%
33.4%
-4.3%
-1.0%
13.2%
Residential
10.4%
46.0%
12.8%
8.3%
11.2%
Lodging
19.9%
42.8%
-1.3%
-0.9%
5.2%
Healthcare
1.2%
19.2%
9.3%
14.1%
19.2%
Diversified
0.6%
23.8%
1.3%
2.2%
10.3%
FTSE/NAREIT Equity Index
7.4%
27.9%
0.7%
3.0%
10.8%
Real Estate Pricing Property Value and Transaction Price Indices
Endnotes and Primary Data Sources
Property Value and Transaction Price Indices
1, 4, 6, 12
NCREIF Transaction Cap Rate and 10 Yr Treasury Yield 4,11 NCREIF Transaction Cap Rate and 10 Yr. Treasury Yield
1 Cornerstone Research 2 3
Moody's Economy.com
2.3
CBRE Econometric Advisors 4 5
11%
NCREIF Property Index (NPI)* MIT Transaction-Based Index (TBI)
NCREIF
Moody's/REAL Commercial Property Price Index (CPPI)
2.0
Smith Travel Global
Ibbotson 9
10
NAREIT
Bureau of Labor Statistics 11
Federal Reserve Board
12
MIT Center for Real Estate
Indices (Jan. 2002 =1)
8
Cap Rate
9%
6
Moody's Investor Services 7 Economic Cylce Research Institute
10 Year Treasury Yield
10%
8%
1.8
7%
1.5 6%
1.3
5%
(*Denotes Forecast)
4%
1.0
3%
The Research Quarterly is published quarterly as a service for clients and prospective clients by Cornerstone Real Estate Advisers LLC. Copyright © December 2010 All rights reserved.
0.8
2%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Commentaries on the economy and financial markets contained in this publication are based on information believed to be reliable, although there can be no guarantee as to its accuracy. They reflect the current opinion of Cornerstone, which is subject to change based on changes in the economy and financial markets, and to access to and reliability of relevant data. The commentaries should not be relied upon as investment advice.
Spring 2011
The U.S. Economy Real GDP expanded at an estimated 3.1% annualized pace in 4Q10, up from 2.6% in the third quarter. Growth was driven by net exports and consumer and business spending which bodes well for the transition to a more robust and sustainable expansion in the second half of 2011 and 2012, although one more muted than originally anticipated in the face of recent shocks to the global economy.
Following January’s weather related pause, job growth rebounded in February and March with the Michael Gately Director of Research (860) 509-2234
Jim Clayton, Ph.D. Vice President (860) 509-2237
Ryan Ma, CFA Senior Analyst
economy adding a total of 470,000 private sector jobs. The Bureau of Labor Statistics “diffusion index" indicates about two thirds of industries added jobs.
Real GDP hit a historic high in 4Q10, surpassing the previous peak in 4Q07. In contrast, after shedding 8.8 million jobs the economy has only added about 1.5 million over the past year. With labor productivity gains diminishing, companies will need to accelerate the pace of hiring.
After surging to 3.8% early in 2011, the 10 year U.S. Treasury yield was back down near 3.2% in mid March. We expect the rate to move moderately higher this year, near 3.5% as periodic downward moves from global flight to quality episodes battle upward pressure from a growing economy, inflation, government deficit and global currency concerns, plus the expected end of QE2 this summer.
(860) 509-2286
Real Estate Investment Markets Tom Duggan Analyst
Transaction activity continues to show gradual but steady improvement. Real Capital Analytics reports
(860) 509-2235
sales activity greater than $50 billion in 4Q10, a figure 50% higher than in the third quarter and more than double 4Q09. Property sales exceeded $130 billion in 2010, double the volume traded in 2009.
Dags Chen Analyst
The Moody’s/REAL price index continues to bounce along the bottom. It fell 1.2% in January, is down
(860) 509-2239
43% from its October 2007 peak and up 4% since bottoming late in 2009. A subindex derived from larger, non-distressed properties in major markets is down 19% from peak and up about 20% over the past year. Similarly, the MIT Transactions-based index (TBI) was up 19.6% in 2010.
Real Estate Benchmark Returns NCREIF Property Index total returns measured 4.62% (1.60% income plus 3.02% appreciation) in 4Q10, marking the third consecutive quarterly increase in NPI appreciation and total returns. The total return index increased 13.1% in 2010 after falling almost 17% in 2009.
The NCREIF Open-End Diversified Core Equity (ODCE) Fund Index showed total 4Q10 returns of 4.99% (1.50% income, 3.38% appreciation), down slightly from 5.45% in the third quarter. ODCE total returns rebounded, to 16.36% in 2010 after following -29.76% in 2009.
The NAREIT Equity REIT Index surged 7.43% in the fourth quarter to finish 2010 up 27.95%, marking For subscription inquiries, please contact Sally Edson at [email protected]
the second straight year of returns near 30%. The index increased another 6.70% in the first quarter this year, with gains above 4% in both January and February.
Cornerstone Real Estate Advisers LLC
One Financial Plaza
Suite 1700
Hartford, CT 06103
www.cornerstoneadvisers.com
U.S. Economy & Real Estate Trends
2011 Q1*
1, 2
2011 Q2*
Gross Domestic Product
3.0%
3.2%
Employment Change
1.2%
1.7%
Unemployment Rate
9.0%
9.2%
Inflation (CPI)
3.0%
2.8%
Housing Starts (000s units)
540
600
Retail Sales Growth (ex Auto ex Gas) 5.4%
5.2%
10 Yr Treasury Yield
3.4%
3.5%
1 Month LIBOR
0.3%
0.3%
*Forecast
Encouraging Employment Trends RQ Chart
1,10
400
80 Employment Diffusion Index
200
70
0
60
-200
50
-400
40
-600
30
-800
20
-1000
10 2007
2008
2009
2010
2011
Page 1
Consumers and Exports Drive Growth 1,2
Employment in several Tech and Healthcare sectors is above prerecession peak levels and hiring is picking up in Business and Professional Services. Manufacturing has been a bright spot. However, other sectors lag and unemployment will continue to present challenges into 2012 as business’ reluctance to add permanent employees is compounded by the growing ranks of long-term unemployed. Home foreclosures will continue rising through mid-year, further depressing home values in many markets and weighing on consumer sentiment and spending. However, with home sales and starts at record lows, and affordability near record highs, this sector should finally begin recovering late this year.
(Components of real GDP growth) 10 Government
Net Exports
Change in Inventories
Res. Investment
Nonres. Equip. & Software
Nonres. Structures
Personal Consumption Exp.
% quarterly (annualized) change
5
0
-5
-10 Q406
Q407
Q408
Q409
Q410
RQ Chart
Leading Index Points to Growth 1,7,11 (weekly through March 25, 2011) 4.5
140
135 4
125
3.5
120 3
115
110 2.5 105 Economic Cycle Research Institute (ECRI) Leading Index
10 Yr. Treasury Yield
100 Mar-09
2 Jun-09
Sep-09
Dec-09
Mar-10
Page 1
Jun-10
Sep-10
Dec-10
Mar-11
10 year Treasury yield (%)
130
ECRI Leading Index
Commercial real estate fundamentals are regaining their footing as the economic expansion gains momentum. Investor interest in real estate is on the rise, slowly spreading beyond well leased properties and gateway cities which attracted most investor interest last year, as investors begin to buy in anticipation of more robust growth.
Diffusion Index
Change in Private Sector Payrolls
Change in Private Employment
A
A widening array of economic indicators (retail sales, jobless claims, business investment, manufacturing activity) signal that the economy is on firmer footing and building towards a more robust self-sustaining expansion. Recovery in many regions of the U.S. will be delayed, however, owing to weakness in labor and housing markets, compounded by the fiscal urgency facing state and municipal governments. Tax increases and public sector job cuts are inevitable. Unresolved Euro zone debt issues and Middle East turmoil add uncertainty and could dampen global and U.S. growth prospects, especially if oil prices spike further.
U.S. Economic Performance Forecast
Property Type Fundamentals & Capital Markets Capital Market Highlights
Office: Vacancy 20 bps to to 16.4% in Q4. 3 Overall vacancy fell for the second straight quarter. Downtown
The depth and breadth of improvement in real estate investment
vacancy improved for the first time since Q307, falling 20 bps to
markets continue to expand as occupancies and debt stress measures
12.9%. Suburban improved by 30 bps, but remains high at 18.2%.
stabilize and the nature of equity and debt capital flows evolve. Viewing
Vacancy fell in about half of the major markets. Orlando, Tampa,
the four quadrants in the spectrum of real estate investment opportunities
Portland and Texas markets saw strong gains. Class A vacancy fell 20 bps to 15.6%, ranging from near 30% in Las Vegas, Phoenix and San Jose to below 10% in New York. Leasing fundamentals are expected
(private equity, private debt, public equity, public debt) as the pistons that drive the (real estate investment) engine, we are approaching the point at
to slowly improve through this year, but vacancy will remain above its
which the engine will begin running on all four cylinders, although not yet
15% long-term average until 2013.
at fully efficiency and still navigating around capital stack stress (deleveraging) related potholes in the road. The equity (public and private)
Apartment: Vacancy 140 bps in 2010 to 6%.3 Most major markets saw solid occupancy gains during the year owing to steady, though weak, job growth, a shift in preference away from homeownership, and limited new supply. Vacancy rates are nearing
and private debt quadrants saw strong capital flows in 2010, albeit with a quality of current lease income and major gateway market bias within all three quadrants, while the CMBS (public debt) piston was not working very
prerecession levels in Boston and Washington DC, and are below 4%
well. Contributions to core open-end, diversified real estate funds that
in several Bay Area and Florida markets. Rent concessions are being
comprise NCREIF’s ODCE index totaled $3.25 billion in 4Q10 and $9.2 billion
dialed back in many markets, though the overhang of for-sale housing
for the year. Life insurance (ACLI) commercial mortgage loan commitments
continues to challenge many Sunbelt markets. Current apartment
reached $10.4 billion in 4Q10 and totaled $30.7 billion for the year, up 115%
construction activity represents just 0.4% supply growth and the supply growth rate is less than 1% in almost all major markets, with exceptions being Austin, Norfolk and Salt Lake City.
and 87% over 2009 figures, respectively. Competitive transaction and lending environments coupled with the QE2 induced low interest rate regime helped push average NCREIF appraisal cap rates down to 6.30% and contract mortgage rates on 10 year term loans below 5%. CMBS
Recovery is well underway and building momentum. Upper upscale
issuance was minimal in the first three quarters last year, but spreads on
occupancy rose 4.1% in 2010 to 67.7%. New York, San Francisco and
legacy AAA CMBS tightened throughout the year, and the fourth quarter
Oahu hotels averaged 80%+ occupancy. Charlotte, Minneapolis,
marked an important turning point as CMBS issuance backed mostly by
Northern New Jersey and Atlanta saw double digit occupancy
new conduit loans spiked to almost $6 billion. This carried over into the first
gains. Nationally, average daily rates were
0.6% but moved up
2% in 4Q10 as more metros beyond New York and Boston reported strong rate gains. The stage is set for further improvement in 2011 as
quarter of this year with nearly $9 billion in CMBS bonds issued, a pace that is expected to increase. The return of a new and improved public debt
full service occupancy approaches its 68.7% long run average and
sector, dubbed “CMBS 2.0”, is an important element in increasing liquidity
operators regain pricing power.
and transaction activity in non-gateway markets as it will increase both
An uptick in manufacturing, global trade and consumer spending nudged availability down for a second quarter. “Large hub” distribution centers (Atlanta, Dallas, and North New Jersey) saw improvement. Chicago stabilized and Austin, Boston and Orange County reported significant occupancy gains. Los Angeles and Salt Lake City are the tightest markets in the nation. The supply pipeline is virtually closed but the slow pace of recovery implies it will be several years before occupancy levels support meaningful rent growth. West Coast and Southeast markets offer the best near-to-mid term recovery prospects.
Retail: Neighborhood/community center vacancy
↕
13%.3 Consumer spending showed solid gains that helped stabilize shopping center vacancies. Coastal barrier markets have maintained lower vacancies and showed slight improvement in the fourth quarter. Lower vacancy markets include San Francisco (6.5%), Miami (7.5%), Long Island (8%), and Los Angeles (8.3%). Atlanta, Houston, Los Angeles and Riverside all posted meaningful declines in vacancy. Sustained demand improvement will be challenging with unemployment still high. Investor interest has been piqued by improving real estate performance in select markets.
buyer interest and the propensity of owners and lenders to bring assets to the market for sale.
Strong Recovery in Legacy AAA CMBS Pricing RQ Chart March 25, 2011) (Weekly data through
1,400
AAA CMBS (10 yr.) Spreads
Baa Corporate Spreads
Equity REIT Price Index
1,200 CMBS & Corporate Bond Spreads to Swaps (bps)
Industrial: Availability 20 bps to 14.3% in Q4 but high.
3
1,200
1,000
1,000 800 800 600 600 400 400 200
200
0 Jun-07
0 Dec-07
May-08
Nov-08
Apr-09
Oct-09
Apr-10
Sep-10
Source: Cornerstone, Federal Reserve Yahoo Finance and Trepp. Page 1
Mar-11
RMZ REIT Index
Hotel: Occupancy to 67.7% in Q4; RevPar 5.7% in 2010.5
Capital Markets Total Returns
Market Return Comparison
Q4 2010
1-year
3-year
5-year
4.6%
13.1%
-4.2%
3.5%
7.4%
7.4%
27.9%
0.7%
3.0%
10.8%
Merrill Lynch Corp/Gov’t Bond Aggregate 8
-2.2%
6.8%
5.5%
5.5%
5.8%
MSCI EAFE 8
6.7%
8.2%
-6.5%
2.9%
3.9%
8
16.3%
26.9%
2.2%
4.5%
6.3%
S&P 500 8
10.8%
15.1%
-2.9%
2.3%
1.4%
Q3 2010
1-year average
NCREIF Property Index
Russell 2000
Q4 2010
Market Yields and Rates
2.9%
2.8%
3.2%
LIBOR - 3 month 2
0.3%
0.4%
0.3%
Merrill Lynch Gov’t/Corp Bond Yield 8
2.4%
2.3%
2.6%
NCREIF Potential Distribution (12-mo trailing) 1,4
5.0%
5.2%
5.2%
3.6%
3.8%
3.9%
Q4 2010
1-year
3-year
5-year
6.3%
18.2%
-3.3%
2.9%
7.4%
10-year Treasury Yield 2
FTSE/NAREIT-Equity Dividend Yield (12-mo trailing)
private
9
4
NCREIF Property Sub-Types Index Total Return
Real Estate Performance Summary
10-year
FTSE/NAREIT - Equity Index 9
4
Apartment Hotel
3.4%
9.0%
-7.7%
2.8%
5.2%
Industrial
3.4%
9.4%
-5.4%
2.6%
6.8%
Office
3.9%
11.7%
-5.7%
3.8%
6.4%
Retail
4.8%
12.6%
-1.3%
4.3%
10.0%
NCREIF Property Index
4.6%
13.1%
-4.2%
3.5%
7.4%
Q4 2010
1-year
9
FTSE/NAREIT Total Returns
public
Office/Industrial
10-year
3-year
5-year
10-year
7.8%
17.0%
-9.1%
-2.3%
6.1%
Retail
10.1%
33.4%
-4.3%
-1.0%
13.2%
Residential
10.4%
46.0%
12.8%
8.3%
11.2%
Lodging
19.9%
42.8%
-1.3%
-0.9%
5.2%
Healthcare
1.2%
19.2%
9.3%
14.1%
19.2%
Diversified
0.6%
23.8%
1.3%
2.2%
10.3%
FTSE/NAREIT Equity Index
7.4%
27.9%
0.7%
3.0%
10.8%
Real Estate Pricing Property Value and Transaction Price Indices
Endnotes and Primary Data Sources
Property Value and Transaction Price Indices
1, 4, 6, 12
NCREIF Transaction Cap Rate and 10 Yr Treasury Yield 4,11 NCREIF Transaction Cap Rate and 10 Yr. Treasury Yield
1 Cornerstone Research 2 3
Moody's Economy.com
2.3
CBRE Econometric Advisors 4 5
11%
NCREIF Property Index (NPI)* MIT Transaction-Based Index (TBI)
NCREIF
Moody's/REAL Commercial Property Price Index (CPPI)
2.0
Smith Travel Global
Ibbotson 9
10
NAREIT
Bureau of Labor Statistics 11
Federal Reserve Board
12
MIT Center for Real Estate
Indices (Jan. 2002 =1)
8
Cap Rate
9%
6
Moody's Investor Services 7 Economic Cylce Research Institute
10 Year Treasury Yield
10%
8%
1.8
7%
1.5 6%
1.3
5%
(*Denotes Forecast)
4%
1.0
3%
The Research Quarterly is published quarterly as a service for clients and prospective clients by Cornerstone Real Estate Advisers LLC. Copyright © December 2010 All rights reserved.
0.8
2%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Commentaries on the economy and financial markets contained in this publication are based on information believed to be reliable, although there can be no guarantee as to its accuracy. They reflect the current opinion of Cornerstone, which is subject to change based on changes in the economy and financial markets, and to access to and reliability of relevant data. The commentaries should not be relied upon as investment advice.
