© 2002 Society of Industrial and Office REALTORS® INVESTMENT REAL ESTATE in the 21 st Century...

© 2002 Society of Industrial and Office REALTORS®

INVESTMENT REAL ESTATE in the 21INVESTMENT REAL ESTATE in the 21stst Century Century

ROBERT J. NAHIGIAN, SIOR, CREROBERT J. NAHIGIAN, SIOR, CRE

AUBURNDALE REALTY CO.

NEWTON, MASS.

© 2002 Society of Industrial and Office REALTORS®

Why Real Estate?

• Why do people invest in real estate?

• TO MAKE MONEY?

• Really?

© 2002 Society of Industrial and Office REALTORS®

AVERAGE MILLIONAIRE

• MILLIONAIRES BET. $1-10 MILL

• AVERAGE INCOME: $120,000

• MANY BETWEEN: $50-75,000

• Source: Money Fall 2002, Millionaire Next Door/

© 2002 Society of Industrial and Office REALTORS®

Wealth BuildingWealth Building

• Biggest Consumption Category

• Income Taxes

• Lifestyle

© 2002 Society of Industrial and Office REALTORS®

Wealth BuildingWealth Building

• Income Taxes

Income FederalEarners Revenues

1% = 31%

5% = 53%

50% = 96%Source: Wall St. Journal 2/28/00

© 2002 Society of Industrial and Office REALTORS®

Wealth BuildingWealth Building

• Lifestyle

Feds 36% 39.1%

State 5 - 7 %Self-Employment $Medicaid $Deduction Phaseouts $___________

60%/92%

© 2002 Society of Industrial and Office REALTORS®

US WEALTHY PROFILE

• U.S. TOP 5% EARNED = 22.4% OF 2001 INCOME

• U.S. HIGHEST SINCE 1967

• 2001 MIDDLE-INCOME = 14.6%

• Soiurce: Boston Globe, 7/6/03

© 2002 Society of Industrial and Office REALTORS®

STATE 2000 INC. TAXES

• NY RES. EARNING $200,000+ = 50+% OF STATE PERSNL TAXES

• NY TAXES = 7.5% FOR $100,000

• CA. 44,000 MM = 1/3 OF TAXES

• CT. WANTS MM TAX = 5.9%• Barrons: May 19, 2003

© 2002 Society of Industrial and Office REALTORS®

BUILDING WEALTH

• INCOME IS NOT WEALTH

• BEING RICH IS NOT BEING WEALTHY

• CONSUMPTION vs. ACCUMULATION

© 2002 Society of Industrial and Office REALTORS®

Investing

• Discretionary Income (Surplus)

• Placing It/ Commodity

• Future Consumption

© 2002 Society of Industrial and Office REALTORS®

ReturnsReturns

Double Your Investment

• 2/10 Rule

• 14 7/8 % compounded

© 2002 Society of Industrial and Office REALTORS®

InvestingInvesting

Savings Rate

U.S.: 2000 - 1.3% LBYM

U.S.: 2002 3.9%

Japan 20% = $117,000

China 40% = $1 Trillion

Your Client: MM 15-20% MinimumSource: Barron’s 5/28/01; US New 2/10/03; 3/24/03;

© 2002 Society of Industrial and Office REALTORS®

WHO OWNS THE WEALTH?

• 2002 U.S. Average Credit Card Debt: $9,000

• 65 and Older Aver. CC Debt Since 1992 = $23,000

• Wealthiest 10% Own 90% of U.S. Financial Assets

• Source: Smart Money Oct. 2001/U.S. News 6/3/02/RERC 2003

© 2002 Society of Industrial and Office REALTORS®

WHO OWNS THE WEALTH?

• Elderly Own $4-42 Trillion

• Average American has 40% Assets in R.E.

• BabyBoomers have More Worth at Their Age and 73% own investments

© 2002 Society of Industrial and Office REALTORS®

WHO OWNS THE WEALTH?

• 99.4% of U.S. Businesses are Small: Less than 20 Workers

• They produce 50% of U.S. Goods/80% of Job Growth

• Average Millionaire is a Small Entrepreneur• Source: Investors Weekly 8/12/02; 7/7/03

© 2002 Society of Industrial and Office REALTORS®

DEMOGRAPHIC IMPACT

• Seniors (pre-1938) = 35 mill/$23,048 HH

• War Babies (1938-45) = 24 mill/$44,992

• BabyBoomers (1946-64)= 83 mill/$55,729

• EchoBoomers (1965-81) = 60 mill/$38,878

© 2002 Society of Industrial and Office REALTORS®

U.S DEMOGRAPHICS

• 1970-2003

• NO. OF HOUSEHOLDS: -16%

• AVER. SIZE OF SFDU: 40%

Source: Legg Mason Fall’03

© 2002 Society of Industrial and Office REALTORS®

U.S. DEMOGRAPHICS

• POP. UNDER 18 YRS. OLD:

• 1964: 36%

• 2003: 26%

• 2020 Proj.: 24%

© 2002 Society of Industrial and Office REALTORS®

ENTRANCE STRATEGIESENTRANCE STRATEGIES

PERSONAL GOALS/OBJECTIVESPERSONAL GOALS/OBJECTIVES RISK THRESHOLDRISK THRESHOLD AGEAGE MARITAL STATUSMARITAL STATUS RETIREMENT ($1,300,000.00)RETIREMENT ($1,300,000.00) TUITION ($200,000 per child)TUITION ($200,000 per child)

© 2002 Society of Industrial and Office REALTORS®

RETIREMENT v. TUITION

• Life Expectancy 1950s = 65-68 years

• 2002: Aver. 76.2; Man = 74.4; Female = 79

• If 70, then Man = 81; Female 84

• Source: FT Winter 2002, 1060AM 10/25/02, 5/12/03

© 2002 Society of Industrial and Office REALTORS®

COLLEGE TUITION

•2001-02 Aver. College Tuition = 5.8%

•2002: $28-32,000/Year

•2017: $239,576 Private 4 Year Cost•Source: Barrons 4/21/03; Money 1/03; US News 1/01

© 2002 Society of Industrial and Office REALTORS®

BenchmarkBenchmark

• 10 Year Treasury Note

• S&P 500/FHMA: Safe?

• 1 VS. 30

• Demographic Impact

© 2002 Society of Industrial and Office REALTORS®

BENCHMARK

• Risk v. Reward

• What is Risk?

• Year 1654

• “Dead Capital”

© 2002 Society of Industrial and Office REALTORS®

REAL ESTATE OWNED

• 1999: 8.3 YEARS• 2000: 7.7 YEARS• 2001: 8.5 YEARS• 2002: 8.6 YEARS• 2003est: 8.8 YEARS

• Source: RERC Winter 2002/Winter2003

© 2002 Society of Industrial and Office REALTORS®

Risk v. RewardRisk v. Reward

• (Cash) 10 Yr. T-Note + 600/700 BP

• (Debt) Cost of Debt + 150/200 B.P.

•T-Note v. Debt Gap = 200BP (Record)

© 2002 Society of Industrial and Office REALTORS®

INVESTMENT RETURNS

• 2002: T-Note = 3.8%

• 2002 R.E.= 11.5%

• 20 Yr. Record Spread = 770BP

© 2002 Society of Industrial and Office REALTORS®

Rates of Return to BeatRates of Return to Beat

• Inflation (SURPLUS)

• Cost of Money

• Index of Goal

© 2002 Society of Industrial and Office REALTORS®

1980 - 20001980 - 2000

Required v. Realized Returns• R. E. : 12.9% v. 9.5%

• Stock Market: 11%• Stock 101 Years: 10.1%

• Housing Averages: 5-6%

Source: LM Annual 2002 Report

© 2002 Society of Industrial and Office REALTORS®

S&P 500 RETURNS

• S&P 1/’50 – 3/’03 = 3.58% aver.

• 2002 S&P = -22.6%

• S&P 6/02-6/03 = 35%

• Source: T. Rowe Investor 6/03

© 2002 Society of Industrial and Office REALTORS®

VALUATION BENCHMARKS

• T-Note 1960-02 Aver. = 7.4%

• Highest = 14.7% (10/81)

• T-Bill 1960-02 Aver. = 6.1%

• Highest = 14.3% (2/82)• Source: T. Rowe Price Fall 2002

© 2002 Society of Industrial and Office REALTORS®

U.S. 1982-2002 NACREIF

• 2002 S&P = -22.6%

• Commercial = 9.47%

• Apts. = 11.7% (best)

• Housing = 3-6%

© 2002 Society of Industrial and Office REALTORS®

2002 TOTAL INDEX RETURNS

• NCREIF SINCE 1977: 9.41%

• S&P 500 SINCE 1977: 13.73%

• 3 M. T-BILL SINCE 1977: 6.96%

• Source: RERC 2003 Outlook; SmartMoney, 2/02

© 2002 Society of Industrial and Office REALTORS®

2002 TOTAL INDEX RETURNS

• NAREIT SINCE 1984: 11.40%

• CPI SINCE 1977: 4.44%

• US HOUSE PRICE 1979-01: 4.40%

• Source: RERC 2003 Outlook; SmartMoney, 2/02

© 2002 Society of Industrial and Office REALTORS®

1982-2002 NACREIF

• Cap Rates Aver. = 9.55% (All)• Last 50 Years Caps = 9.00%

• Cash Return = 6.85% (All)

• Returns are coming down• Cheap Debt Covers Sins• Source: CRE Dallas 2002 Convention

© 2002 Society of Industrial and Office REALTORS®

U.S. HOUSING

• 1979 Housing Price: 4.4%

• 50 yr. Average Housing: 5-6% aver.

• In 1996 Prices: 5.3%

• From 1997-02 Prices: 6.2% aver.

© 2002 Society of Industrial and Office REALTORS®

U.S. HOUSING

• 2001 US Housing Prices Up = 5.5%

• 2002 US Housing Prices Up = 6.9%

• US May’02-May’03 Med. Prices = 7.7%• Source: Money, June 2003/Boston Globe 7/5/03

© 2002 Society of Industrial and Office REALTORS®

U.S. HOUSING

• 2002 U.S. Housing Ownership = 70%

• 2000 Mass Housing Ownership = 62%

• Highest U.S. Met Apprec. 10 yrs. = 9.2%

• 1982-2002 Income = 13.8% Aver. Incr.

© 2002 Society of Industrial and Office REALTORS®

HOUSEHOLD GROWTH

• 25-29 Age Group Households Down = 1.5%Per Year Since Mid-1990’S

• 25-29 Age Group Household Up = 1.8% aver. 2002-2010

• Source: Barrons 4/7/03

© 2002 Society of Industrial and Office REALTORS®

US HOUSING RETURNS

• San Jose: 1990-95 = - 13%• NYC 1989-1991 = - 3% aver.

• Boston, Hartford, NY sharply dropped in early 1990s

• Timing a housing purchase is tough

• Source: Money, June 2003/Boston Globe 7/5/03

© 2002 Society of Industrial and Office REALTORS®

US 2002 1ST TIME HOME BUYERS

• SINGLE WOMEN #1 = 18%

• SINGLE MEN = 9%

• Source: MAR Digest 7/23/03

© 2002 Society of Industrial and Office REALTORS®

BOSTON HOUSING RETURNS

• BOSTON has been Up until 2003

• 1992-02 Boston Prices = 8.9% aver.

• Boston 1999-2002 Prices = 11.67% aver.

• Experts: Boston is now due to drop• Source: Boston Globe 7/7/02; Money 10/02

© 2002 Society of Industrial and Office REALTORS®

BOSTON HOUSING

• Boston SFDU Prices: July ‘01-’02 = 20.3%

• Mass Prices: July ‘02-Jan. ‘03 = - 7.2%• Mass Prices: April ’02- April ’03 = - 10%

• SmartMoney: Boston 36% Overvalued

• Source: Inman News 4/29/03; Boston Globe 1/26/03; 7/14/02

© 2002 Society of Industrial and Office REALTORS®

U.S. HOUSING

• U.S. Bankruptcy is up 50% in last 10 yrs.

• US ‘02 Record Foreclosures = 1.8 % of all home loans

• US 3RD Q’02 Foreclosures = 1.18%

• US 1st Q’03 Foreclosures = 1.20 %• New Record• Source: Inman News 4/29/03; Boston Globe 1/26/03; 7/14/02

© 2002 Society of Industrial and Office REALTORS®

MASS HOME FORECLOSURES

• Mass ’02 Foreclosures on U.S. Backed Loans = 2.2%

• Mass 1st Half ’02 = 2,409 (4,506 tot. ’02)• Mass 1st Half ’03 = 2,241 (total ’03?)

• Mass Foreclosure Recent Record ’91 =12,750

• Source: Inman News 4/29/03; Boston Globe 1/26/03; 7/14/02

© 2002 Society of Industrial and Office REALTORS®

MASS HOME SALES

• Mass ’01-’02 Home Prices Up = 18.6%

• Mass Home Sales Jan– May’03 to 2002 = - 9%

• Mass 4/02-4/03 Home Prices Down = -10%

• Mortgages Rates Fell ’01 TO ’03 = 7%

• Source: Inman News 4/29/03; Boston Globe 1/26/03; 7/14/02; Realtor Digest 6/24/03

© 2002 Society of Industrial and Office REALTORS®

“CRYSTAL BALL?”

• January, 2001-2002 U.S. Housing Up = 10.2%

• US Home Sales 4/03-5/03 Up = 12.5% annually adjusted (New US Record of Total Sales)

• US May’02-May’03 Med. Price Up = 7.7%

• Source: Inman News 4/29/03; Boston Globe 1/26/03; 7/14/02; Realtor Digest 6/24/03;USA Today.com 6/30/03

© 2002 Society of Industrial and Office REALTORS®

“CRYSTAL BALL”

• Mass Unemployment May’02 - May ’03 = UP 5.1% TO 5.5%

• US Dispos. Inc. ’03-’04 Est.= 2.6%-3.7%

• US/Mass House Borrowers Exceed 36% Debt to Income

• Source: Inman News 4/29/03; Boston Globe 1/26/03; 7/14/02; Realtor Digest 6/24/03;USA Today.com 6/30/03; NAR7/03

© 2002 Society of Industrial and Office REALTORS®

U.S. HOUSING

• U.S. BabyBoomers Housing Owners = 76%

• Will They Be the Positive Catalyst?

• Smart Money: A House is An Expense• Source: NAR 7/03

© 2002 Society of Industrial and Office REALTORS®

Why Real Estate?Why Real Estate?

• Inflation - Hedge

• Cost of Capital

• Leases in Place

• Expenses

• Escalators

© 2002 Society of Industrial and Office REALTORS®

WHY REAL ESTATE?

• Stable Return

• Diversification

• Hard Assets vs. Financial

• High Yields

• No Scandals

© 2002 Society of Industrial and Office REALTORS®

WHY REAL ESTATE?

• It is Trust-Worthy

• Easy to Understand

• Positive Leverage

• Other Choices Stink Right Now• Source: CRE Dallas Convention-2002

© 2002 Society of Industrial and Office REALTORS®

WHY REAL ESTATE?

• No Taxes on Appreciation

• Less Volatile

• It is Cyclical: Bubbles

• It is not a Growth Commodity

© 2002 Society of Industrial and Office REALTORS®

DOWNSIDE FOR 2003

• Too Many Buyers

• Seeking 8% Returns

• Driving Values Up and Rates To Perhaps 4% Returns

© 2002 Society of Industrial and Office REALTORS®

Commercial Lease Yield Model: 14.5% (DEFLAT.)

– Cash Flow 44/80%

– Mort. Reduction (13%)

– Tax Benefits 6%

– Appreciation 63/20%

–Source: Herb Krunsick, SIOR, CRE, CCIm

© 2002 Society of Industrial and Office REALTORS®

BOIBOI

Band of Investment Approach

NOI/ Cap Rate = Value

• Japan: 4%

• Brazil: 150%

© 2002 Society of Industrial and Office REALTORS®

SIOR THANKS YOU