1
Expectations & Market Realities
in Real Estate: 2007
Del Kendall,
Partner & Sr. Vice President
Real Estate Research Corporation
Presented to:
Developer’s Day Attendees,
Real Estate Center
March 2, 2007
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Capital Markets: Branching Out
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Commercial Mortgage Debt Outstanding
as a Percentage of U.S. GDP
4
U.S. Commercial Real Estate Fixed Income
Markets – Lender Composition
$2.9 Trillion
5
Commercial Mortgages by Type of Lender
6
Mortgage Interest Rates and Cap
Rates Begin to Converge
7
Delinquency Rates Continue
Downward Trends
8
Private Equity Real Estate
Returns on the Rise…For Now
9
Buyers’ Return Expectations for
Core Properties (Unleveraged)
10
Core Performance Cannot Continue
• Last 3 Decades: 10% Unleveraged Total Returns
• Last 10 Years: 12.5% Unleveraged
• Last 12 Months: 17.2% to 21% Unleveraged
• Outlook: Lower Returns for Core
Unleveraged Assets
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In Search of Alpha
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Framework for Higher Return Strategies
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Capital Market Trends
• Continued aggressive use of leverage
• Privatization and consolidation of U.S.
publicly-traded REITs
• Uneven cap rate trends
• Defined benefit plans gradually
displaced by defined contribution
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Investor Activities & Strategies
• Shift to higher risk strategies
• Rapid growth in financially-engineered
debt products
• Pruning of portfolios
• Net acquisition activity by foreign
investors down significantly
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Property Types
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Office Getting Closer to Equilibrium
Square Feet (Thousands)
Vacancy Rate
17
Supply Likely to Stay Reasonably in
Check Until Rents Increase Further
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Selected Metro Comparison –
Office Market Fundamentals
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Selected Metro Comparison –
Office Market Sales Transactions
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Selected Metro Comparison –
Office Market Avg. Price Per Sq. Ft.
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Selected Metro Comparison –
Office Market Avg. Capitalization Rates
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Industrial Vacancy Continues to Decline
Square Feet (Thousands)
Availability Rate
23
Trade Growth and
Industrial Space Demand
Trade Growth
Absorption
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Selected Metro Comparison –
Industrial Market Fundamentals
25
Select