2010 Market Update2010 Market Update

Headwinds in Headwinds in Commercial Investment Commercial Investment

Real EstateReal Estate

2010v.02

OverviewOverview

About M&MAbout M&MMarket ForecastsMarket ForecastsBrokerage BusinessBrokerage BusinessOther TopicsOther Topics

Who is M&M?Who is M&M?

Largest Investment Sales Largest Investment Sales BrokerageBrokerage

Private Client MarketPrivate Client Market SpecializationSpecialization

Who Am I?Who Am I?

South Florida BSMESouth Florida BSME University of Florida MBAUniversity of Florida MBA 10yrs Distressed Real Estate10yrs Distressed Real Estate

Principal, Partnerships, BrokeragePrincipal, Partnerships, Brokerage Creation of Special Assets Creation of Special Assets

Services DivisionServices Division

CommentaryCommentary

““Hope is not an exit strategy”Hope is not an exit strategy”

– – Stacey Berger, Midland Loan ServicesStacey Berger, Midland Loan Services

Where’s the Where’s the Juice?Juice?

ConsumersConsumers Make money from investing & workingMake money from investing & working

BusinessesBusinesses Provide goods & services in exchange Provide goods & services in exchange

for moneyfor money Pay rent to RE OwnersPay rent to RE Owners Employ ConsumersEmploy Consumers

Where’s the Where’s the Juice?Juice?

RE OwnersRE Owners Make money from tenantsMake money from tenants Raise money from investorsRaise money from investors Pay money to banks for loansPay money to banks for loans Hire businesses to perform servicesHire businesses to perform services

BanksBanks Receive payments on loansReceive payments on loans Pay interest to investorsPay interest to investors

GrowthGrowth

Entire system designed to work Entire system designed to work well ONLY with constant growthwell ONLY with constant growth

Growth dependent upon Growth dependent upon confidenceconfidence

No perpetual motionNo perpetual motion Leverage used to “fake” returnsLeverage used to “fake” returns

Personal SavingsPersonal Savings

Deleveraging?Deleveraging?

Faking ReturnsFaking Returns

$1mm investment at 10%$1mm investment at 10% $100k cash flow per year$100k cash flow per year

Assume 8% interest, 50% LTVAssume 8% interest, 50% LTV $500k loan with $40k debt service$500k loan with $40k debt service

$60k cash flow on $500k = 12%$60k cash flow on $500k = 12% Financial EngineeringFinancial Engineering

Risk?Risk? Where did the 10% come from?Where did the 10% come from?

Is it always 10%?Is it always 10%?

Return TrendsReturn Trends

Vacancies RisingVacancies Rising

VelocityVelocity

Local VelocityLocal Velocity

Local VelocityLocal Velocity

Local Local ForeclosuresForeclosures

Appraisal IssuesAppraisal Issues

Cost – IrrelevantCost – Irrelevant Comps – No VelocityComps – No Velocity Income Capitalization (net lease)Income Capitalization (net lease)

Still requires compsStill requires comps Doesn’t tell the whole storyDoesn’t tell the whole story

All backwards-lookingAll backwards-looking Volatile Market – Never AccurateVolatile Market – Never Accurate

Disc Cash FlowsDisc Cash Flows

DCF is only real way to valueDCF is only real way to valueRequires deal dataRequires deal data

Bid/ask gapBid/ask gapDemand characteristicsDemand characteristics

Fluctuates with the marketFluctuates with the marketSimilar to corporate bondsSimilar to corporate bonds

CMBS Refi CMBS Refi HorizonHorizon

Maturing Loans

* ForecastSources: Marcus & Millichap Research Services, Standard & Poors

$0

$30

$60

$90

$120

2008

*

2009

*

2010

*

2011

*

2012

*

2013

*

2014

*

2015

*

2016

*

2017

*

2018

*

Post 2

018*

0

3

6

9

12

Maturing Loan Balance Number of Loans

Mat

uri

ng

Lo

an B

alan

ce (

bill

ion

s)N

um

ber o

f Lo

ans (000s)

Perils of Pro Perils of Pro FormaForma

Current ActualCurrent Actual 75% occ / $35 / 8% cap / 80% LTV75% occ / $35 / 8% cap / 80% LTV

““Opportunity” NumbersOpportunity” Numbers 90% occ / $45 / 7% cap / 80% LTV90% occ / $45 / 7% cap / 80% LTV

Unfolding RealityUnfolding Reality 60% occ / $25 / 10% cap / 65% LTV60% occ / $25 / 10% cap / 65% LTV

Halo EffectHalo Effect

"We vastly underestimate the "We vastly underestimate the extent to which success happens extent to which success happens because of things the individual because of things the individual has nothing to do with.”has nothing to do with.”

- Malcolm - Malcolm GladwellGladwell

House PricesHouse Prices

House PricesHouse Prices

The Future?The Future?

2012?2012?

Loss AversionLoss Aversion

Loss aversion (emotional Loss aversion (emotional attachment) is one of the attachment) is one of the strongest influences any strongest influences any investment decisioninvestment decision

Riding the market downRiding the market down

CommentaryCommentary

"One of the misconceptions people "One of the misconceptions people have in investing is that I have to have in investing is that I have to make it back in the same asset I make it back in the same asset I lost it in.”lost it in.”

- John Merrill, Tanglewood Wealth - John Merrill, Tanglewood Wealth ManagementManagement

Or This?Or This?

Interest Rates?

The CIRE ParadoxThe CIRE Paradox

If the economy improves, capital If the economy improves, capital flows shift from debt to equity flows shift from debt to equity causing interest rates to rise, which causing interest rates to rise, which lowers CIRE prices (inflation)lowers CIRE prices (inflation)

If the economy worsens, cash flows If the economy worsens, cash flows from consumers to businesses drop from consumers to businesses drop leaving interest rates low but leaving interest rates low but lowering asset prices (deflation)lowering asset prices (deflation)

Brokerage Brokerage BusinessBusiness

Types of propertyTypes of property Types of ownersTypes of owners Sales cycleSales cycle How different segments How different segments

operateoperate

Brokerage Brokerage BusinessBusiness

Long hoursLong hours Hard workHard work Long lead time before $Long lead time before $ Uncertain futureUncertain future Lumpy cash flowsLumpy cash flows

Typical DayTypical Day

Plan DayPlan Day Plan CallsPlan Calls Outbound CallsOutbound Calls Send Emails to Follow-upSend Emails to Follow-up Check MessagesCheck Messages Return CallsReturn Calls More Outbound CallsMore Outbound Calls

Typical NightTypical Night

DatabaseDatabase Research MarketResearch Market Prepare ProposalsPrepare Proposals Compile CompsCompile Comps Marketing CampaignsMarketing Campaigns Track PipelineTrack Pipeline

Why Bother?Why Bother?

MoneyMoneyBarriers to EntryBarriers to EntryFreedomFreedomHigh Net Worth ClienteleHigh Net Worth Clientele

Sophisticated Business Sophisticated Business ExperienceExperience

Other TopicsOther Topics

Special AssetsSpecial AssetsLoan SalesLoan SalesAdvanced PricingAdvanced PricingDeal StoriesDeal Stories

Any More?Any More?

Questions?Questions?