Marcus & Millichap, Inc. · NYSE:MMI
Marcus & Millichap — MFE 2005
48 slides from Marcus & Millichap's conference presentation, Nov 30, 2005
Slide 1: Apartment Trends: A National Multifamily Market Overview
APARTMENT RENDS A National Multifamily Market Overview | “oD = Hessam Nadji Linwood C. Thompson Marcus Millichap Managing Director Managing Director MrafCus GPMMICNAap Research Services National Multi Housing Group NATIONAL MULTI HOUSING GROUP
Slide 2: Historic Perspective – MFEEC 2002
Historic Perspective – MFEEC 2002 Panelist’s / Speaker’s Consensus: ¾ Pricing bubble in the market ¾ Cap rates would increase Marcus & Millichap Consensus ¾ Investor demand would overshadow operational weakness ¾ Pricing would remain strong ¾ Cap rates would continue to decrease
Slide 3: Historic Perspective – MFEEC 2003
Historic Perspective – MFEEC 2003 Panelist’s / Speaker’s Consensus: ¾ Pricing bubble in the market ¾ Cap rates could not decrease and would, in fact, increase Marcus & Millichap Consensus ¾ Pricing support still strong ¾ New cycle emerging ¾ Yields would continue to decrease
Slide 4: Historic Perspective – MFEEC 2004
Historic Perspective – MFEEC 2004 Panelist’s / Speaker’s Consensus: ¾ Pricing bubble in the market ¾ Condo market definitely causing a bubble ¾ Cap rates could not decrease and would, in fact, increase Marcus & Millichap Consensus ¾ No systemic bubble ¾ Investor demand to increase ¾ Yields will cont
Slide 5: Historic Perspective – MFEEC
Historic Perspective – MFEEC For three years most panelists have stated the industry was on the cusp of a pricing “bubble” Marcus & Millichap Consensus ¾ No systemic bubble ¾ Investor demand to increase ¾ Yields continue to decrease ¾ Cap rates continue to decrease
Slide 6: Marcus & Millichap Reasoning
Marcus & Millichap Reasoning Real estate “recession” was very different ¾ Fundamentals were more transparent and stronger than previous cycles ¾ Stocks, not real estate, triggered the recession ¾ Buyer demand for product exceeded supply (counter-cyclical) ¾ Financing readily available (counter-cycli
Slide 7: U.S. Apartment Property Sales Velocity YOY Comparison
U.S. Apartment Property Sales Velocity YOY Comparison YOY % $5 - $10 Million 1H 2004 1H 2005 Change # of Transactions 415 605 45.8% Dollar Volume* $ 2.9 $ 4.2 42.9% $10 - $20 Million # of Transactions 304 432 42.1% Dollar Volume* $ 4.3 $ 6.0 39.4% $20 Million + # of Transactions 326 543 66.6% Dollar
Slide 8: What Goes Up… Must Come Down
What Goes Up… Must Come Down ¾But not yet… ¾And, not too much ¾Gradual easing of “pressure” not a “burst”
Slide 9: Why Are Cap Rates So Low?
Why Are Cap Rates So Low? ¾Interest rates
Slide 10: Apartment Cap Rates and 10-year Treasury
Capital Flows Apartment Cap Rates and 10-year Treasury 16 Average Apartment Cap Rates 10-year Treasury 12 Average Rate (%) 8 4 0 19 2 19 2 19 2 19 2 19 2 19 2 19 2 19 2 19 2 19 2 19 2 19 2 19 2 19 2 19 2 19 2 19 2 19 2 19 2 20 2 20 2 20 2 20 2 20 2 20 2 2 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q
Slide 11: Why Are Cap Rates So Low?
Why Are Cap Rates So Low? Investor demand (poor alternatives)
Slide 12: Real Estate Returns Outperforming Stocks In Recent Years
12 Real Estate Returns Outperforming Stocks In Recent Years 150% 1-year 5-year 10-year 124% 118% 119% 115% 110% 100% Total Return (%) 70% 58% 56% 50% 44% 24% 17% 16% 18% 4% 0% -18% -50% S&P 500 Apartment Office Industrial Retail As of Q2 2005 Sources: Marcus & Millichap Research Services, NCREIF, St
Slide 13: Why Are Cap Rates So Low?
Why Are Cap Rates So Low? Condo conversions
Slide 14: U.S. Median Apartment Sales Price Trends
U.S. Median Apartment Sales Price Trends Apartment vs. Conversion Sales Apartment Condo Conversion $140,000 Premium 67% 53% Median Price per Unit $100,000 50% 43% $60,000 $20,000 2002 2003 2004 2005* All apartment transactions greater than $5 million Sources: Marcus & Millichap Research Services, Re
Slide 15: Why Are Cap Rates So Low?
Why Are Cap Rates So Low? Mortgage spreads
Slide 16: Fixed Rate Mortgage Spreads
Fixed Rate Mortgage Spreads 2Q-'04 2Q-'05 180 165 158 155 Average Basis Point Spread 149 140 117 107 110 100 95 60 Apartment Office Retail Industrial Data as of 1Q 05 Sources: Marcus & Millichap Research Services, American Council of Life Insurance
Slide 17: Why Are Cap Rates So Low?
Why Are Cap Rates So Low? ¾Investors have uncoupled from cap rates and are underwriting IRRs
Slide 18: Why Are Cap Rates So Low?
Why Are Cap Rates So Low? ¾Interest rates ¾Investor demand (poor alternatives) ¾Condo conversions ¾Mortgage spreads ¾Investors have uncoupled from cap rates and are underwriting IRRs
Slide 19: Key Observations 2006
Key Observations 2006 ¾Operation recovery strengthens and offsets minimal interest rate increase ¾No systemic “pricing bubble” ¾Investor demand for apartments will remain strong (no erosion) ¾Velocity increases during 1st half of ’06 ¾Cap rates will be relatively “flat”
Slide 20: Why Do We Remain Optimistic?
Why Do We Remain Optimistic? ¾Supply / demand balance is improving
Slide 21: U.S. Vacancy Cycle Recovery Well Entrenched
U.S. Vacancy Cycle Recovery Well Entrenched Multi-Family Completions Vacancy Completions (Thousands of Units) 200 10% 160 8% Vacancy 120 6% 80 4% 40 2% 90 92 94 96 98 00 02 04 06* *Forecast Sources: Marcus & Millichap Research Services, Reis, U.S. Census Bureau
Slide 22: Why Do We Remain Optimistic?
Why Do We Remain Optimistic? Positive Absorption 2003-2006
Slide 23: U.S. Job Growth Will Generate Renter Demand
U.S. Job Growth Will Generate Renter Demand Multi-Family Absorption Employment 250,000 5% Y-O-Y Change in Jobs 200,000 4% Absorption 150,000 3% 100,000 2% 50,000 1% 0 0% -50,000 -1% 90 92 94 96 98 00 02 04 06* *Forecast Sources: Marcus & Millichap Research Services, Economy.com, Reis
Slide 24: Why Do We Remain Optimistic?
Why Do We Remain Optimistic? Fundamentals improving Asking rents Economic rents Occupancies
Slide 25: U.S. Apartment Vacancy and Rent Trends
U.S. Apartment Vacancy and Rent Trends $950 Effective Rent Vacancy Rate 8% Average Effective Rent Vacancy Rate $900 6% $850 4% $800 2% 00 01 02 03 04 05* 06* *Forecast Sources: Marcus & Millichap Research Services, Reis
Slide 26: Why Do We Remain Optimistic?
Why Do We Remain Optimistic? ¾Investor demand remains strong (still edgy)
Slide 27: S&P P/E Multiple
S&P P/E Multiple 10 /2 / 10 198 0 10 20 30 40 50 /2 9 / 10 199 /2 0 / 10 199 /2 1 / 10 199 /2 2 / 10 199 /2 3 / 10 199 /2 4 / 10 199 /2 5 / 10 199 /2 6 / 10 199 /2 7 / 10 199 /2 8 / 10 199 /2 9 / 10 200 /2 0 Price-Earnings Multiple / 10 200 /2 1 / 10 200 /2 2 / 10 200 /2 3 / Stock Market Did Not Ove
Slide 28: S&P Earnings Growth Slowing
S&P 500 Earnings Growth Slowing 40% 20% YOY Change 0% -20% -40% 95 96 97 98 99 00 01 02 03 04 05 * 06 Sources: Marcus & Millichap Research Services, Standard & Poor’s Investment Services
Slide 29: Why Do We Remain Optimistic?
Why Do We Remain Optimistic? ¾Minimal pressure on interest rates for most of 2006
Slide 30: Short-Term Rate Increases to Continue, Long-Term Rates On Gradual Upswing
Short-Term Rate Increases to Continue, Long-Term Rates On Gradual Upswing 10% Fed Funds Target Rate 10-Year Treasury 8% Interest Rate 6% 4% 2% 0% 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05* *As of 10/7/05 Sources: Marcus & Millichap Research Services, BLS, Economy.com, Federal Reserve
Slide 31: Why Do We Remain Optimistic?
Why Do We Remain Optimistic? No post-recession GDP or employment growth spikes
Slide 32: Economic Conditions Still Favorable
Economic Conditions Still Favorable: GDP & Job Growth In-Line with Long-Term Trend 8% U.S. GDP 8% U.S. Employment ’04 = 4.2 20-yr Avg. 6% ’05 = 3.6 6% GDP Growth: 3.3% ’06 = 3.3 20-yr Avg. Job Growth: 1.9% 4% 4% 2% 2% 0% 0% -2% -2% 01 02 03 04 05* 06* 01 02 03 04 05* 06* *Forecast Sources: Marcus &
Slide 33: Why Do We Remain Optimistic?
Why Do We Remain Optimistic? Oil prices are providing a “brake” to GDP growth
Slide 34: Record Oil Prices a Natural Brake (For Now)
Record Oil Prices a Natural Break (For Now) Inflation Pressures Building Gradually $75 Crude Oil (WTI) Core CPI CPI 12% Crude Oil (price per barrel) Year-Over-Year % Change $50 8% $25 4% $0 0% 95 96 97 98 99 00 01 02 03 04 05* *Forecast Sources: Marcus & Millichap Research Services, BLS, Economy.com
Slide 35: Why Do We Remain Optimistic?
Why Do We Remain Optimistic? Demographics / immigration are in the industry’s favor for 10 to 15 years
Slide 36: U.S. Renter Demographics
U.S. Renter Demographics 10% Change in Population 5% 0% -5% -10% 1990-95 1995-00 2000-05* 2005-10* 2010-15* Ages 20-24 Ages 25-29 Ages 30-34 * Forecast Sources: Marcus & Millichap Research Services, Economy.com
Slide 37: Why Do We Remain Optimistic?
Why Do We Remain Optimistic? ¾Households have money for rent ¾Households have money for ancillary services (and will pay for them) ¾Significant house payment premium compared to rent
Slide 38: U.S. Single-Family Home Price to Apartment Rent Premium
U.S. Single-Family Home Price to Apartment Rent Premium 250 U.S. Single-Family Home Price to Apartment Rent Premium Home Price to Apartment Rent Ratio 230 210 20-Year Average (1981-2001) 190 170 150 81 83 85 87 89 91 93 95 97 99 01 03 05* *Forecast Sources: Marcus & Millichap Research Services, Econ
Slide 39: Why Do We Remain Optimistic?
Why Do We Remain Optimistic? There is still significant “inefficiency” in the multi- family marketplace ¾ Out-dated units / complexes ¾ Inefficient property / asset management ¾ Disorganization from consolidation ¾ Inflexible debt (locked-in conduit loans) ¾ Maturing investor base Retirement Shi
Slide 40: Why Do We Remain Optimistic?
Why Do We Remain Optimistic? Emerging / expanding trends ¾ Urbanization ¾ Traffic congestion ¾ Demographics (echo boomers) ¾ Immigration ¾ Conversions have reduced “supply” more than “demand” ¾ Renter by “economic choice” ¾ Lack of “in-fill” development sites
Slide 41: Central Phoenix 1969
Central Phoenix 1969 100 Unit+ Assets 19 # of Units 3,516 Units per Sq. Mile 103
Slide 42: Central Phoenix 1989
Central Phoenix 1989 100 Unit+ Assets 135 # of Units 27,525 Units per Sq. Mile 810
Slide 43: Central Phoenix 2004
Central Phoenix 2004 100 Units+ Assets 171 # of Units 37,261 Units per Sq. Mile 1,096
Slide 44: Phoenix MSA 100+ Units Development 2002-2005 YTD
Phoenix MSA 100+ Units Development 2002- 2005 YTD Apartment Construction # of Units # of Projects 2002 7,052 33 2003 4,667 18 2004 5,370 25 2005 2,952 12
Slide 45: Central Phoenix Land Depleted
6 Projects in Pipeline, Only 2 Are 100 Units+ Central Phoenix Land DEPLETED ! UNDERWAY (2) PLANNED (4) VACANT (1)
Slide 46: Apartments Have Been Fundamentally Re-priced
Apartments Have Been Fundamentally Re-priced ¾Long-term cap rate trend line was 8.13 ¾Apartments now viewed differently ¾Transparency ¾Resiliency ¾Flexibility ¾Liquidity ¾Stability
Slide 47: Apartments Have Been Fundamentally Re-priced
Apartments Have Been Fundamentally Re-priced ¾2 years ago…. 25 to 50 basis points ¾1 year ago…… 50 to 100 basis points ¾Today………… 75 to 125 basis points 75 bps = new long term trend of 7.38 100 bps = new long term trend of 7.13 125 bps = new long term trend of 6.88
Slide 48: Apartment Trends: A National Multifamily Market Overview
APARTMENT RENDS A National Multifamily Market Overview | “oD = Hessam Nadji Linwood C. Thompson Marcus Millichap Managing Director Managing Director MrafCus GPMMICNAap Research Services National Multi Housing Group NATIONAL MULTI HOUSING GROUP