2011 RALEIGH-DURHAM MARKET FORECAST Investment Sales. Jeff Glenn CB Richard Ellis Wednesday, March 16, 2011

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1 2011 RALEIGH-DURHAM MARKET FORECAST Investment Sales Jeff Glenn CB Richard Ellis Wednesday, March 16, 2011

2 TOPICS I. National Perspective II. Raleigh-Durham Sales III. A Closer look at Multi-Family CB Richard Ellis Page 2

3 National Perspective

4 Key Themes Sales transaction volume expected to reach pre-peak 2003/2004 levels as activity improves Lenders will play harder ball in the coming months driving more distressed sales activity Huge compression in debt spreads over the past quarter, underwriting standards relaxed, fundamentals stabilized Investors still like commercial real estate (REIT s raising huge amounts of capital, foreign buyers active) Opportunistic investors looking at low basis and stabilized return on cost Note value and real estate value very similar Scarcity Premium exists for trophy assets (Hock Plaza/Quintiles) Low debt cost may compress cap rates further on high quality real estate CB Richard Ellis Page 4

5 The Wave of Refinancings: Short-Term Problems Loom $500 Billions Represents Core CRE loans on income-producing properties. An additional $400 Billion of construction and real estate development loans are on bank and thrift books. $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Matured Later CMBS, CDO and ABS Commercial Banks/Thrifts Agencies Credit Companies, Other Life Insurance Companies Note: Bank/thrift survey covers $113 billion of $821 billion in total income-producing commercial and multifamily loans. Estimates are based on profile of MBA series. Source: MBA Loan Maturity Survey, CBRE-EA calculations CB Richard Ellis Page 5

6 The Boom n Bust Led by CMBS Issuance Billions $ ($615 Billion total Volume) Seven years of business in three years! $200 $150 Vintage Loans: High % Interest Only High LTV Lower DCR $100 $50 $7.2B YTD $ YTD 2010 CB Richard Ellis Page 6 Source: Commercial Mortgage Alert October 2010

7 Value Bounce Snapshot 200,000 SF CLASS A OFFICE DECEMBER 2007 MARCH 2009 MARCH 2011 Asset Value 38,500,000 29,000,000 (75% of peak) 32,200,000 (84%) Cap Rate 6.49% 8.62% 7.76% Price Per Foot $193 $145 $161 Net Operating Income 2,500,000 2,500,000 2,500,000 Treasury 4.60% 2.95% 3.60% Spread 1.20% 4.25% 2.25% Rate 5.80% 7.20% 5.85% Years of Amortization Constant 5.80% 8.15% 7.10% Minimum Coverage 1.15x 1.30x 1.25x Proceeds 30,800,000 17,400,000 22,540,000 Max Loan to Value 80% 60.00% 70.00% Equity Required 7,700,000 11,600,000 9,660,000 Free Cash Flow After DS 713,600 1,082,690 1,006,399 Cash on Cash Return 9.27% 9.33% 9.36% CB Richard Ellis Page 7

8 Distress Across the US The commercial real estate market is improving at a modest pace, but newly troubled properties continue to enter the distress pool. Source: RCA Troubled Assets Radar, December 2010 Bubbles are sized to relative distress values CB Richard Ellis Page 8

9 Raleigh is Better Than Most HIGH GROWTH MARKETS =======> Employment Growth (5-Year Forecast=2.0% avg. annual) Raleigh Austin Nashville Tucson Charlotte San Antonio Salt Lake City Cincinnati St. Louis Denver SF Metro Chicago Pittsburgh Philadelphia Los Angeles Toledo Hartford Cleveland Oklahoma City Detroit Orlando Portland Atlanta San Diego 2.5 Indianapolis Dallas/Ft. Worth Sacramento Minneapolis Washington, DC Jacksonville 2 Albuquerque Houston Seattle Columbus Kansas City Tampa Boston Phoenix New York Fresno South Florida Relative Distress Index Good Markets = Low Distress, High Growth Las Vegas Honolulu Problem Markets? High Distress, Low Growth Source: CBRE-EA and RCA, December 2010 CB Richard Ellis Page 9

10 Transactions Signs of Recovery Billions $600 $500 $400 $300 US Sales Volume US CMBS $200 $100 $ Source: Real Capital Analytics, Commercial Mortgage Alert Thru December 2010 CB Richard Ellis Page 10

11 National Sales Trends Apartments Source: Real Capital Analytics, Q CB Richard Ellis Page 11

12 National Sales Trends Office Source: Real Capital Analytics, Q CB Richard Ellis Page 12

13 National Sales Trends Industrial Source: Real Capital Analytics, Q CB Richard Ellis Page 13

14 National Sales Trends Retail Source: Real Capital Analytics, Q CB Richard Ellis Page 14

15 Cap Rate Forecast by Property Type Cap Rate, % Forecast Retail Multifamily Industrial Office Hotel: Full Service Source: CBRE Econometric Advisors, Q CB Richard Ellis Page 15

16 When and Where is Equilibrium NATIONAL VACANCY RATES Q42010 PEAK/YEAR PREVIOUS PEAK YEAR "NATURAL RATE" YEAR BACK TO "NATURAL RATE" RALEIGH-DURHAM OFFICE 16.4% 17/ / to INDUSTRIAL 14.4% 13.5/ / to RETAIL 13% 12.6/ / to MULTI-FAMILY 6.0% 7.4/ / to Sources: CBRE-EA Winter 2011 Outlook Reports and KARNES Report CB Richard Ellis Page 16

17 Raleigh-Durham Sales

18 Raleigh Durham Historical Transaction Volume Millions of Dollars Source: CB Richard Ellis CB Richard Ellis Page 18

19 Raleigh Durham Top 10 Sales Transactions Name Type Price Total SF PSF Hock Plaza I OFC $98,000, ,060 $ Research Tri-Center IND $76,726,667 1,530,000 $50.15 Quintiles HQ OFC $75,800, ,531 $ Woodbridge / Hidden Oaks APT $40,500, ,788 $61.20 Colonial at Brier Creek (formerly Villas at B.C.) APT $38,200, ,060 $95.01 Meadowmont APT $37,000, ,000 $ Alta Verde APT $37,000, ,728 $ Perimeter Park OFC $35,300, ,073 $ Apartments of Stonehenge APT $35,000, ,872 $73.39 Preston's Reserve APT $34,000, ,286 $79.95 The Hue APT $33,600, ,711 $ Source: CB Richard Ellis CB Richard Ellis Page 19

20 Raleigh Durham Apartment Transaction Volume Millions of Dollars Source: CB Richard Ellis CB Richard Ellis Page 20

21 Apartment Highlights 712 Tucker, Raleigh DATE August 2010 SELLER BUYER Crosland JP Morgan Investment Management SF 158,111 YEAR BUILT 2009 SALE PRICE $30,000,000 PRICE/SF $ The Hue, Raleigh DATE August 2010 SELLER BUYER istar Financial Mid-America Apartments SF 185,711 YEAR BUILT 2009 SALE PRICE $33,600,000 PRICE/SF $ CB Richard Ellis Page 21

22 Raleigh Durham Office Transaction Volume Millions of Dollars Source: CB Richard Ellis CB Richard Ellis Page 22

23 Office Highlights Hock Plaza, Durham DATE September 2010 SELLER BUYER Brickman and Associates Hines Global REIT SF 334,996 YEAR BUILT 2004 SALE PRICE $97,875,000 PRICE/SF $ Quintiles Headquarters, Durham DATE March 2011 SELLER BUYER Principal Financial Franklin Street Properties SF 259,531 YEAR BUILT 2009 SALE PRICE $75,800,000 PRICE/SF $ CB Richard Ellis Page 23

24 Raleigh Durham Retail Transaction Volume Millions of Dollars Source: CB Richard Ellis CB Richard Ellis Page 24

25 Retail Highlights Hope Valley Commons, Durham DATE August 2010 SELLER BUYER Bob Hughes & Associates Weingarten Realty SF 81,429 YEAR BUILT 2008 SALE PRICE $11,500,000 PRICE/SF $ CB Richard Ellis Page 25

26 Raleigh Durham Warehouse/Flex Transaction Volume Millions of Dollars Source: CB Richard Ellis CB Richard Ellis Page 26

27 Industrial/Warehouse Highlights Research Tri Center, Durham DATE May 2010 SELLER BUYER Grosvenor International OBO ISPT Northwoods Investors SF 1,530,000 YEAR BUILT 1988 SALE PRICE $76,726,666 PRICE/SF $50.15 CB Richard Ellis Page 27

28 A Closer Look at Multifamily

29 CB Richard Ellis Page 29 Triangle Apartment Report by KARNES

30 CB Richard Ellis Page 30

31 CB Richard Ellis Page 31

32 Raleigh-Durham Market Forecast Survey Surveyed Organizations Bell Partners Capital Advisors CBRE Appraisal CBRE Capital Markets Crescent Resources Crosland Dilweg Dominion Realty Partners Drucker & Falk Epoch FortCap Gingko Greystar Grubb Properties Hawkins-Dixon Hawthorne Medalist Capital Mid-America NorthLand Partners Profitt Capital The Residential Group Robinson Development Stoddard Group Woodfield Investments York Properties CB Richard Ellis Page 32

33 What is Your Favorite Submarket for New Development? West Raleigh 3% SW Durham North Raleigh 3% 3% RTP 3% NW Raleigh 9% Chapel Hill 9% ITB/Downtown Raleigh 44% Downtown Durham 13% Cary 13% CB Richard Ellis Page 33

34 What is Favorite Submarket for Acquisitions? All of Raleigh 4% Triangle-wide 4% RTP 4% Morrisville 4% West Raleigh 3% NW Raleigh 3% Downtown Durham 7% ITB/Downtown Raleigh 26% North Raleigh 15% Cary 15% Chapel HIll 15% CB Richard Ellis Page 34

35 Where Is The Optimum Source of Debt Today for Refinance? HUD 8% CMBS 4% Life 16% Agency 72% CB Richard Ellis Page 35

36 Where Is The Optimum Source of Debt Today for New Construction? HUD Moving to Traditional 4% HUD 33% Traditional 63% CB Richard Ellis Page 36

37 What Is Your Recommendation in 2011 for Class A Assets? Buy, Hold, or Sell? Buy 4% Sell 39% Hold 57% CB Richard Ellis Page 37

38 What Is Your Recommendation in 2011 for Class B Assets? Buy, Hold or Sell? Buy 18% Hold 41% Sell 41% CB Richard Ellis Page 38