Table of Contents
Looking Through theDownturn toDeveloping Opportunities . 3Are We There Yet: HowClose to Trough IsCommercial Real Estate? . 3National PropertySegment Outlook ............. 7How Does ValuationRecovery OutlookCompare with the Past? ... 9Regional AnalysisOffice Segment .............. 15Apartment Segment ....... 18Retail Segment ............... 39Appendix Table Tables ... 47
Peter Muoio, Ph.D.
Senior Principal1 646-352-9510
pmuoio@maximusadvisors.com
Frank Nitschke
Principal1 646-352-9511
fnitschke@maximusadvisors.com
Tim Gunthel
Principal1 646-352-9512
tgunthel@maximusadvisors.comwww.maximusadvisors.com
EXECUTIVE SUMMARY
•
With the commercial property downturn well underway and the landscape of the decline for both fundamentals and valuations becoming clearer, MaximusAdvisors believes it is an opportune time to shift focus to the next stage of theUS real estate cycle – the shape of the early recovery.
•
We have analyzed how the future recoveries in vacancies, rents and NOI,combined with the eventual easing of capital market conditions, and with themcap rate compression, will likely play out across the office, retail and multifamilyproperty segments across the top 50 or so major markets. The outlook for regional office, retail and apartment valuations vary considerably over the nextfew years in terms of timing and degree. This reflects the different pace of fundamentals improvement that we expect for each property segment as wellas the very different impact that the capital markets implosion has had on eachproperty segment.
•
US commercial property valuations are eroding in the face of not only thisdeterioration in property fundamentals, but also because of the capital marketscrisis, which has dried up financing, increased commercial mortgage spreads,increased investor uncertainty and diminished risk tolerance. MaximusAdvisors has estimated that property prices will fall between 42% and 52%when all is said and done in this down-cycle, implying that the market has nowseen approximately 75% to over 90% of its expected valuation decline. Thedecline in values is leading fundamentals, which are some 40-60% of the waytoward the eventual trough depending on the sector.
•
Apartment valuation declines will tail-off sooner – in 2010 by our estimates --compared to the other property segments, and will see a faster pace of recovery in 2011. By contrast, national office and retail valuations will beconstrained into 2011. However, our expectation is that as capital marketsimprove from crisis levels and commercial real estate credit re-emerges, theimpact on retail and office segments will be more significant than on apartmentproperties since multifamily has benefited from continuing financing by theGSEs, which has limited the cap rate expansion in that sector compared to theother property sectors.
•
For our full report, which includes our more detailed analysis of metroarea and property segment “pop” potential, our forecasts under twoalternative – optimistic & pessimistic – scenarios, and our time-line for full recovery to previous valuation peaks for each segment, pleasecontact Maximus Advisors.October 2009
Real Estate Research
Confidential: For Internal Use Only
Real Estate Valuation “Pop” Potential
Identifying Regional & Property Segment Opportunities in Coming Years
October 2009 Real Estate Valuation “Pop” Potential
Maximus Advisors 3
Looking Through the Downturn to Developing Opportunities
With the commercial property downturn well underway and the landscape of the decline for both fundamentals and valuations becoming clearer, MaximusAdvisors believes it is an opportune time to shift focus to the next stage of theUS real estate cycle – the shape of the early recovery. To that end, we haveanalyzed how the future recoveries in vacancies, rents and NOI, combinedwith the eventual easing of capital market conditions, and with them cap ratecompression, will likely play out across the office, retail and multifamilyproperty segments across the top 50 or so major markets.Each downturn has its own particular characteristics that feed into the localeconomies and property segments of specific markets in different ways.Similarly, markets will vary in the timing and speed of economic recovery,renewed property development and return to vacancies that sustain rentincreases and NOI gains. The following analysis provides insights into thetiming and degree of the “pops” in valuations in each of those three broadproperty segments and how each of the major markets looks to fare throughthe initial stage of the next expansion cycle through 2013.
Are We There Yet: How Close to Trough Is Commercial RealEstate?
Maximus Advisors regularly analyzes the economies, real estate demandfactors and existing and planned development activity to forecast the outlookfor fundamentals across the property segments of each of the major USmarkets. We also input these projections and likely capital marketsconditions into our valuation model to project market-by-market, segmentappreciation and depreciation over coming years. For some time now, our focus has been on what the impact of recession on property marketfundamentals and valuations would be: how high vacancies would get inspecific markets, how much rents looked to decline, how high cap rates wouldrise, and how far valuations would decline. Recent news headlines regardingthe commercial property market downturn are finally catching up with our research and forecasts from over 18 months ago.
We project market-by- market, segment appreciation and depreciation over coming years.
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