Directors Message Hampton Roads Real Estate Market Review and - PDF document

3/12/2009 Old Dominion University Director’s Message Hampton Roads Real Estate Market Review and Forecast John R. Lombard, PhD 2009 Associate Professor, Department of Urban Studies and Public Administration, College of Business and Public Administration Director, E. V. Williams Center for Presented by: Real Estate and Economic E.V. Williams Development Center for Real Estate and Economic Development Industry Professional Advisors A Message from the Dean to the Center (IPAC) Jeff Ainslie, Ainslie-Widener G. Robert Aston, Jr. , TowneBank Ramon W. Breeden, Jr., The Breeden Companies Nancy Bagranoff, DBA Sandy M. Cohen, Divaris Real Estate, Inc. Craig Cope, Liberty Property Trust Dean, College of Business D C ll f B i Cecil V. Cutchins, Olympia Associates Cecil V Cutchins Olympia Associates Robert L. Dewey, Willcox & Savage, PC & Public Administration, Thomas M. Dillon, Fulton Bank N. Joseph Dreps, BB&T Old Dominion University Pamela J. Faber, LeClair Ryan Joel Flax, Goodman & Company David M. Gianascoli, Gee’s Group Real Estate John Gibson, Ellis-Gibson Warren Harris, City of Virginia Beach Economic Development Aubrey L. Layne, Jr., Great Atlantic Management, LLC Miles B. Leon, S.L. Nusbaum Realty Co. Michael W. McCabe, Harvey Lindsay Commercial Real Estate Industry Professional Advisors Save The Date to the Center (IPAC) CREED Annual Business Meeting and Michael Newsome, Clark Whitehill Corp. Luncheon Harrison Perrine, Perrine Investments Don Perry, Continental Development Tuesday, June 2, 11:30 AM – 1:00 PM Victor L. Pickett, Grandbridge Real Estate Capital, LLC Thomas E. Robinson, Robinson Development Group Jim V Rose Rose and Womble Realty Co Jim V. Rose, Rose and Womble Realty Co., LLC LLC Brad Sanford, Dominion Realty Advisors Burrell F. Saunders, CMSS Architects, PC Featured Speaker Reese Smith, Reese Smith & Associates Tony Smith, Robinson Development Group Frank Nothaft Deborah Stearns, GVA Advantis Richard Thurmond, William E. Wood Chief Economist, Freddie Mac Jon S. Wheeler, Wheeler Investments Robert T. Williams, Tri-City Developers, LLC Rod Woolard, City of Norfolk Economic Development Steven Wright, City of Chesapeake Economic Development 1

3/12/2009 Executive Committee Executive Committee Research Committee Chair: Tom Dillon Albert Duncan Executive Director: John Lombard Brian Dundon, Brian J. Dundon & Assoc. Vice Chair: Brad Sanford Programs Chair: Stephanie Sanker Beth Hancock, City of Norfolk Publications Chair: Publications Chair: Brian Dundon Brian Dundon J Joy Learn, Fulton Bank L F l B k Membership Chair: Craig Cope Sandi Prestridge, City of Norfolk Curriculum Co-Chairs: John Crunkleton, Brad Sanford Maureen Rooks, Thalhimer/Cushman & Wakefield Sponsorship Chair: Fred Facka By-Laws Chair: Andrew Keeney Bradley Sanford, Dominion Realty Advisors Past Chair: Joyce Hartman Lane Shea, Harbor Group At Large: Jonathan Guion Kristi Sutphin, Isle of Wight County Billy King Aubrey Layne REAL ESTATE INVESTMENT Special thank you to MARKET UPDATE Inside Business for their sponsorship Presented by: over the past six years. Jordan E. Slone, Chairman & CEO 10 HOUSING VS COMMERCIAL REAL ESTATE Current Real Estate Cycle 3 Key Reasons this is a Housing Recession and not a Commercial Real Estate Recession 1. 1. Residential construction doubled over 5 year Residential construction doubled over 5 year period from 2001 to 2006 2. Over-reliance of residential boom on • Market is headed to the bottom of the current real estate cycle with exuberance ending and speculative investors fundamentals dominating. 3. Residential lending practices allowed “no • Capital market moved out of line with property level money down” fundamentals and was further exaggerated by the leverage markets. 11 12 Source: Real Capital Analytics, October 2008 2

3/12/2009 PERCEPTION IS IS REALITY 13 14 Appreciation/Depreciation in Property Values Where have all the Lenders gone? US CMBS Issuance 250 200 Total ($ Millions) 150 100 50 •As of December 2008, Commercial Property Values have declined 14.9% - 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 over the last year. • After posting huge increases over the last three years, 2008 US •Apartments have dropped by –13.6%, followed by Office at –13.5%, CMBS issuance dropped to volumes not seen in over a decade. Industrial at -13.9% and Retail at –8.5% • Assets purchased in 2007 will require an increase in NOI to overcome the increase in capitalization rate in order to retain value. 15 16 • Assets purchased in the early 2000’s have still appreciated. Source: Moody’s Investor Services, data through December Source: Commercial Mortgage Alert 2008 The first step in a correction: Sales volume slows as bid/offer widens Key Themes for 2009: The Bad News Sales volume changes between 4Q 2008/2007 • Deteriorating economy is exacerbating the decline of Number Total $ Avg. PSF/PPU CRE fundamentals: Properties Volume – Cap rate compression assumptions unwinding Sold – Pro-forma underwriting assumptions no longer hold Office CBD -74% -88% -2% – Rating agency assumptions that resulted in lower Suburban -81% -70% -3% subordination levels are being revisited, which has led to Total -80% -80% -12% wide-sweeping ratings changes Retail Retail Mall and Other Mall and Other -73% 73% -80% 80% -45% 45% Strip -71% -81% -22% • Commercial real estate values expected to decrease Total -72% -81% -22% roughly 30-35% peak-to-trough given tighter underwriting Apt Mid/High Rise -55% -77% -11% standards, less available liquidity and higher cost of capital Garden -40% -59% -20% Total -42% -62% -22% Hotel Full-Service -60% -86% -25% • Rating agency downgrades have and will continue to Source: Real Capital Analytics Limited Svc. -76% -79% -16% affect bonds issued in 2005-2007 Total -68% -85% -25% 17 18 3

3/12/2009 Harbor Group’s Outlook and Expectations Key Themes for 2009: The Good News General • Significant governmental intervention: • TARP bail out funds have not had any immediate effect on • Agency MBS banks lending abilities. Banks need to use the funds to • $500bn “buy” program from the Fed cover losses and operations, little will trickle into real • $20bn/month from Treasury • TARP, TALF, TAF, etc. liquidity for new lending • $787bn stimulus package • Loan extensions • TALF 1.0 to be directed at the consumer (e.g. autos, student loans, TALF 1 0 to be directed at the consumer (e g autos student loans cards, small business). Subsequent rounds (TALF 2.0) to address • 2009 – Big money to be made buying debt CMBS and private-label (prime) RMBS • Gap between buyer and seller expectations is expected to • Limited CMBS refinance risk in 2009 narrow and transaction volume expected to increase • $17 billion of fixed-rate and $1.5 billion of floating-rate securitized loans need to refinance in 2009 • Second six months of 2009 and 2010 – Great opportunities • Insurance company and commercial bank whole loans due to be to buy real estate refinanced in 2009 were originated years ago, which allowed them to build equity • Loan extensions 19 20 Harbor Group’s Outlook and Expectations Harbor Group’s Outlook and Expectations Office Multi-Family • Transaction volume down for large assets due to lack of • Owners who do not need to sell, hold assets so as to not financing sources. Hard to sell unless assumable debt is take a hit on pricing due to bottom feeding in the market. included. • Owners who do not need to sell, hold assets so as to not Owners who do not need to sell hold assets so as to not • Freddie Mac and Fannie Mae continue to be more take a hit on pricing due to bottom feeding in the market. conservative with their debt and are unable to finance • Smaller assets continue to trade as banks have some acquisitions of distressed assets. Agency financing money to lend; however, banks want to be able to available to refinance stabilized assets. diversify that pool of funds across assets. • Asset management key to retaining value. • Vultures with cash feasting on bank REOs. 21 22 ODU/CREED 2008 Industrial Market Overview ODU/CREED 2008 Industrial Market Overview MARCH 11TH, 2009 MARCH 11TH, 2009 INDUSTRIAL OVERVIEW INDUSTRIAL OVERVIEW Bill Throne Thanks owed to the Reporters : Ron Biesecker Thalhimer/Cushman and Wakefield Christine Kaempfe Thalhimer/Cushman and Wakefield Pat Mumey Thalhimer/Cushman and Wakefield Scott Wermers Scott Wermers Thalhimer/Cushman and Wakefield Thalhimer/Cushman and Wakefield Abe Ellis Thalhimer/ Cushman and Wakefield Bobby Phillips Thalhimer/Cushman and Wakefield Worth Remick CB Richard Ellis Charles Dickenson Harvey Lindsay Billy King Harvey Lindsay Bobby Beasley Harvey Lindsay Chip Worley Harvey Lindsay Clay Culbreth GVA Advantis Brian Baker GVA Advantis Stephanie Sanker GVA Advantis 4