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Capital Markets Update Rob Stiles EVP & Principal Head of Western Region Cushman & Wakefield Sonnenblick Goldman. Property & Finance Update Capital Drought or Capital Bubble – Depends on Where You Stand?. Post Triage – Two Worlds Emerge Changing Equity Markets
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Capital Markets Update Rob Stiles EVP & Principal Head of Western Region Cushman & Wakefield Sonnenblick Goldman
Property & Finance Update Capital Drought or Capital Bubble – Depends on Where You Stand? • Post Triage – Two Worlds Emerge • Changing Equity Markets • Changing Debt is Back – Really? • Resultant Imbalance of Equity Capital Raised to Investment Opportunities • So What Will it Take Looking Forward?
Post Triage – Two Worlds Emerge • Enter REITVILLE • Better Asset Pricing • Cheaper & Higher Leverage Debt • Ability to Price on 3 – 4 Year Forward 7 – 10% returns on Cost • Hard to Get Visas • Enter Realityville • Buyers Want Distress • Lenders Want Coverage!? • People Know How to Spell Recourse • Fewer Optimists
Changing Equity Markets • Plenty of Capital – But Why the Increasing Appetite for Hotels? • No Good Alternatives Outside Real Estate • Within Real Estate – Only Hotel NOI Has Bottomed • Public REITS, Private REITS, PE Funds, Domestic and International HNWs • Two Minds of Buyers: • Cycle Buyers Who Believe We Have Bottomed Out • Buyers Focused on Deep Discounts
Hotel (31%, 23%) Confidence in Future Fundamentals2012 NOI Expectations Source: Green Street Advisors
Domestic Sales Transaction Volume (Deals >$25mm)(in $ Billions) • YTD 2010 Annualized Totals Source: Real Capital Analytics
Maximize Value REITs vs. Private Market Real EstatePublic Markets are Anticipating an Improvement • Current premium on asset pricing is 13.8% on an unlevered basis. Source: Green Street Advisors, As of 09-03-10
Debt is Back – Really?In One of the Two Worlds Anyway • Lack of Debt or Lack of Cash Flow • Starting to Look Forward Again! • Data is Supportive • Yield is Delicious Relative to Options • (3.75 – 4.25%/Year Fixed for Core Office) • CMBS 2.0 or 1.2? $6.3 Billion 4th Qtr Pipeline • General Debt Parameters • Leverage • Coverage / Debt Yield • Pricing • Term
Will Resultant Imbalance of Equity Capital Raised Make Sales Happen? • Voluntary Opportunistic Sellers Come Out of the Woods • The Surge is Visible (Off a Terribly Low Base) • Suddenly, underwater Owners Have Equity! (But they still can’t refinance their debt) • Surging Confidence Among Lenders Leads to Action • Recovery Values move above Marked Loan Values • Lenders are in a Better Position to Get Aggressive
So What Will it Take Looking Forward? • Debt Costs to Remain Low and Begin to Tighten on the Borders • Prospects of Sustained Lower Debt Costs to Push Valuations • Lack of Alternatives Will Continue to Attract Capital - $60 Billion of Capital Raised by REITS in 2009 and YTD 2010 • Hotels to Become Increasingly Favorable Class (In Reitville) • Ability to Compete – Buy on Forward Stabilized Return on Cost • Nerves to Play in the Other World (Realityville): • DPOs • Structured Transactions • Note Sales • In the End – Its All About the Loathing of Writing Checks • Think Long Term –- or Duck