2009 Borrower and Investment Trends

…an editor’s perspective

PRESENTATION OVERVIEW
OVERVIEW
• Borrower Trends Survey results
• State of CMBS market
• Seniors Housing outlook
• Green Building and energy management
Borrower Trends Survey
Methodology
• Purpose of the survey was to measure the volume
of capital that respondents borrow annually and
to gauge their satisfaction with the process
• Questionnaires were mailed to 1,500 NREI
subscribers listed as commercial real estate owners
or developers
• Data for the mail survey was collected Oct. 29-
Dec. 5, 2008.
• Survey yielded 289 responses for an effective
response rate of 19.4%
Borrower Trends Survey
Highlights
• Some 62% of respondents have borrowed funds for new
development, renovation or redevelopment in the past
year. That figure is down from 72% in the prior year’s
survey.
• Overall, respondents use an average of five different
lenders or sources of debt.
• 33% expect the total commercial debt in their portfolios to
increase over the next 12 months (down from 43% in last
year’s survey)
• 26% expect their debt level to decrease over the next 12
months, (up from 17% last year)
 ONE-FOURTH OF RESPONDENTS HAVE COMMERCIAL REAL ASSETS OF
$100 MILLION OR MORE. THE MEDIAN PORTFOLIO SIZE IS $17.5 MILLION

Base: all respondents (289)

Source: 2009 NREI Borrower Trends Survey
 RESPONDENTS ARE MOST LIKELY TO BE INVOLVED IN THE
RETAIL SECTOR, FOLLOWED CLOSELY BY OFFICE AND MULTIFAMILY

Base: all respondents (289)

Source: 2009 NREI Borrower Trends Survey
 FOUR IN FIVE RESPONDENTS HAVE BORROWED FUNDS FROM
COMMERCIAL BANKS/SAVINGS INSTITUTIONS DURING THE PAST 12 MONTHS

Base: all respondents (289)

Source: 2009 NREI Borrower Trends Survey
 SIX OUT OF 10 RESPONDENTS HAVE USED CONSTRUCTION
FINANCING IN THE PAST YEAR, DOWN FROM 80% A YEAR EARLIER

* Line of credit category is new to this year’s survey

Source: 2009 NREI Borrower Trends Survey
 RESPONDENTS INDICATE THEIR LEVEL OF BORROWING FOR
NEW DEVELOPMENT AND RENOVATION IS LOWER THAN A YEAR AGO

Base: respondents indicating percentages 2009 (289); 2008 (301)

Source: 2009 NREI Borrower Trends Survey
 THE LARGEST GROUP OF RESPONDENTS INDICATES THAT
LOAN-TO-VALUES ARE IN THE RANGE OF 70%-79%; THE MEAN IS 70%

Base: all respondents (289)

Source: 2009 NREI Borrower Trends Survey
 SLIGHTLY MORE THAN HALF OF RESPONDENTS (51%)
INDICATE THEIR CURRENT DEBT IS RECOURSE VS. NON-RECOURSE

Base: respondents indicating percentage (239)

Source: 2009 NREI Borrower Trends Survey
 NEARLY ONE IN FOUR EXPECTS THE PERCENTAGE OF RECOURSE
LOANS IN THEIR PORTFOLIO TO INCREASE, WHILE 12% EXPECT IT TO FALL

Base: 289 respondents

Source: 2009 NREI Borrower Trends Survey
 NEARLY THREE IN FOUR RESPONDENTS EXPECT THEIR
USE OF LONG-TERM DEBT TO INCREASE OR STAY THE SAME

Base: All respondents in 2009 (289), 2008 (301), 2007 (315) and 2006 (354)
Source: 2009 NREI Borrower Trends Survey
 THE PROPORTION OF LONG-TERM TO SHORT-TERM DEBT
IS NEARLY 3 TO 1, UP FROM ABOUT 2 TO 1 IN PAST STUDIES

Base: Respondents indicating percentages 2009 (245); 2008 (258); 2007 (256); and 2006 (310)
Source: 2009 NREI Borrower Trends Survey
 A LARGER PERCENTAGE OF RESPONDENTS EXPECTS
LONG-TERM MORTGAGE RATES (10-YEAR) TO RISE IN THE YEAR AHEAD

Base: all respondents in 2009 survey (289); 2008 (301); 2007 (315); 2006 (354)
Source: 2009 NREI Borrower Trends Survey
 SLIGHTLY MORE THAN FOUR RESPONDENTS EXPECT SHORT-TERM
MORTAGE RATES TO BE HIGHER A YEAR FROM NOW

Base: All respondents in 2009 survey (289); 2008 (301); 2007 (315); 2006 (354)
Source: 2009 NREI Borrower Trends Survey
 SLIGHTLY MORE THAN HALF OF RESPONDENTS EXPECT THE CREDIT
CRISIS IN THE DEBT FINANCING MARKET TO IMPROVE IN THE NEXT YEAR

Base: all respondents (289)

Source: 2009 NREI Borrower Trends Survey
 THE LARGEST GROUP EXPECTS LIQUIDITY TO RETURN TO THE
CAPITAL MARKETS IN A NORMALIZED FASHION WITHIN 13 TO 18 MONTHS

Base: all respondents (289)

Source: 2009 NREI Borrower Trends Survey
 ON A SCALE OF 1 TO 5, WEAKER ECONOMIC CONDITIONS
RATE AS THE BIGGEST FACTOR AFFECTING BORROWING ACTIVITY

Base varies between 256 and 266

Source: 2009 NREI Borrower Trends Survey
 ON A SCALE OF IMPORTANCE FROM 1 TO 6, CERTAINTY OF EXECUTION
RANKS HIGHEST WITH BORROWERS WHEN SEEKING A LENDER

Base varies from 266 to 278

Source: 2009 NREI Borrower Trends Survey
 ON THE SATISFACTION SCALE, RESPONDENTS ARE MOST
SATISIFED WITH CERTAINTY OF EXECUTION AND THEIR LENDERS

Base varies from 266 to 278

Source: 2009 NREI Borrower Trends Survey
CMBS Outlook
A look at the Three Ps
• Pricing
• Performance
• Production
CMBS Outlook
Pricing:
• AAA spreads in mid January at 975 BP
over swaps, up 1,075% from a year ago.
• Prices on investment-grade bonds down
by more than half since January 2008.
• Experts expect more spread-widening
reactions as defaults make headlines
 SPREADS ON AAA-RATED CMBS ROSE NEARLY 900 BASIS POINTS
IN 2008, REFLECTING BOND INVESTORS’ HEIGHTENED CONCERNS

Source: Barclay’s Capital

CMBS Outlook
Performance:
• CMBS delinquency rate at 0.88% in December, double the
0.44% of August 2008, according to Fitch Ratings. Previous peak
was 2.72% in December 2003.
• Recent vintage loans (with pro forma underwriting) fail to meet
rent growth projections and miss mortgage payments.
1. August 2008: Riverton apartments in Harlem, N.Y., $225
million loan from 2007, goes to special servicing.
2. November 2008: Two of the largest loans securitized in 2008
go to special servicing: $209 million loan for Westin hotels in
Tucson, Ariz. and Hilton Head, S.C.; also $125.2 million loan for
the Promenade Shops at Dos Lagos, Corona, Calif.
CMBS Outlook
Production:
• 2008 U.S. issuance $12.1 billion, down
95% from $230 billion in 2007.
• No issuance since July 2008.
• Wide spreads make lending rates
unpalatable for borrowers, so no
production expected until spreads
contract.
 GLOBAL ISSUANCE OF CMBS SLOWED TO A TRICKLE IN 2008
WHILE DOMESTIC ISSUANCE CEASED COMPLETELY AFTER JUNE

Source: Commercial Mortgage Alert

Seniors Housing Overview
State of Seniors Housing
• Financing is still available through Fannie Mae and
Freddie Mac. HUD also recently streamlined its loan
processing.
• Long-term demographics are favorable.
• Construction starts have dropped significantly,
which bodes well for owners when the credit crunch
ends.
• Investors have a strong appetite for the asset class,
particularly needs-based facilities such as assisted
living and nursing homes.
 AFTER A DRAMATIC GROWTH PERIOD IN THE MID- TO LATE 1990s,
SENIORS HOUSING DEVELOPMENT HAS MODERATED.

Rate of Growth in Seniors Housing

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Independent Living Assisted Living Memory Care Nursing Care

Sources: NIC, American Seniors Housing Association

 IN THE DECADES AHEAD, SENIORS HOUSING
DEMAND WILL GROW SUBSTANTIALLY

Source: U.S. Census Bureau, Decennial Census, Population Estimates and Projections
 SENORS HOUSING CONSTRUCTION STARTS TAPER OFF IN 2007-2008

Source: NIC Map Data & Analysis Service

Green Building Outlook
Energy Retrofits Will be the Big Push in 2009
• Investors flee sustainable development for less risky
energy-efficient retrofits.
• Energy service companies, known as ESCOs, are now
moving out of the public sector and offering their
services to the private commercial real estate sector.
• We’re seeing new business models to address energy
retrofits emerging.
• Corporations and developers are stepping up efforts to
make existing properties more energy efficient.
Green Building Outlook
2008 Green Building Survey
• How many of our readers owned or leased green
buildings
• What future plans were to own or lease green
buildings
• If landlords could charge higher rents for green
buildings and if corporate users were willing to pay
more
• If there was special financing available for these
projects
• What part government at all levels played in
promoting green projects including incentives and
regulation
 FOUR OUT OF 10 DEVELOPERS AND CORPORATE
USERS PLAN TO RETROFIT BUILDINGS FOR ENERGY EFFICIENCY

Source: 2008 NREI Green Building Survey

 MOST RESPONDENTS SAY THEY WILL OWN, LEASE OR
MANAGE SOME GREEN BUILDINGS IN THE NEXT 5 YEARS

Source: 2008 NREI Green Building Survey

 MOST RESPONDENTS SAID CAP AND TRADE LEGISLATION STOOD
A BETTER CHANCE OF PASSING UNDER OBAMA THAN MCCAIN

Source: 2008 NREI Green Building Survey

 A STUDY OF 355 LEED-CERTIFIED BUILDINGS SHOWS HIGHER
OCCUPANCY RATES OVER TIME THAN NON-GREEN BUIILDINGS

Source: CoStar Group

 TOP 10 METROPOLITAN AREAS FOR GREEN BUILDING

Source: CoStar Group

Green Building Outlook
Green Building Issues for the Future
• “Carbon Neutral”
• Benchmarking
• Green leases
• The new “Green Economy”
• LEED certification
“Every cycle is the worst as you’re going
through it, but 1973-1975 was much worse.”

– Peter Linneman, founder of the Wharton

School of Business at the University of
Pennsylvania