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Global Research and Consulting Econometric Advisors CBRE Econometric Advisors Client Conference 2012 October 2, 2012 Session I | U.S. Capital Market Outlook.

Published byAlberta Richards Modified over 9 years ago

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Presentation on theme: "Global Research and Consulting Econometric Advisors CBRE Econometric Advisors Client Conference 2012 October 2, 2012 Session I | U.S. Capital Market Outlook."— Presentation transcript:

1 Global Research and Consulting Econometric Advisors CBRE Econometric Advisors Client Conference 2012 October 2, 2012 Session I | U.S. Capital Market Outlook Presented by: William Wheaton, Senior Consultant Serguei Chervachidze, Capital Markets Economist

2 CBRE | Page 2 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Cap Rates: How Do We Get There? Source: CBRE EA Investment Outlook Q2 2012, NCREIF.

3 CBRE | Page 3 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Rental Drivers of Cap Rates Source: CBRE EA Investment Outlook, Q2 2012.

4 CBRE | Page 4 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Source: CBRE Econometric Advisors, Federal Reserve. Outlook for Interest Rates

5 CBRE | Page 5 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Source: CBRE Econometric Advisors, Federal Reserve. Risk Premium: Investor Perception of Risk

6 CBRE | Page 6 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Debt Availability: Individual Components Source: CBRE Econometric Advisors, Federal Reserve.

7 CBRE | Page 7 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Source: CBRE Econometric Advisors, Federal Reserve. Debt Availability (Liquidity): Sum of Components

8 CBRE | Page 8 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Previous Model: Cap Rates Too High Source: CBRE Econometric Advisors, NCREIF. Preference for Collateralized RE Investments?

9 CBRE | Page 9 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Previous Model: Cap Rates Too High Source: CBRE Econometric Advisors, NCREIF. Preference for Collateralized RE Investments?

10 CBRE | Page 10 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Not Just One Rate: Term Structure Matters Source: CBRE Econometric Advisors, Federal Reserve.

11 CBRE | Page 11 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Why Term Structure Matters  Expectations about the future path of economy  A better representation of the true cost of capital in the aggregate vs. a single rate: Different Investors have different term horizons Investors can optimize across terms to minimize cost of capital  A better indicator of aggregate capital availability in the economy  Contemporaneous movement?  All of the above?

12 CBRE | Page 12 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Expanded Model: Term Structure Affects Pricing Source: CBRE Econometric Advisors, NCREIF.

13 CBRE | Page 13 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Term Structure Effect: How Much? Source: CBRE Econometric Advisors, Federal Reserve.

14 CBRE | Page 14 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 … A Major Effect on Pricing Source: CBRE Econometric Advisors.

15 CBRE | Page 15 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Term Structure and Pricing: Findings  Controlling for the overall interest rate level, widening the term spread (steeper the slope of yield curve) boosts asset prices  If term structure spreads had stayed at 2007 levels, valued would have dropped significantly more  Monetary policy has a plethora of complex effects (Operation Twist, QE, etc): more complex than usually perceived  Helps explain variation in cap rate spreads over 10-year Treasury

16 CBRE | Page 16 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Term Structure: Outlook Source: CBRE Econometric Advisors, Federal Reserve.

17 CBRE | Page 17 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Expanded Model: Cap Rates with Term Structure Effects Source: CBRE EA Investment Outlook Q2 2012, NCREIF.

18 CBRE | Page 18 Global Research and Consulting ● Econometric Advisors CBRE Econometric Advisors Client Conference 2012 Relative Pricing: Cap Rate Spreads Source: CBRE EA Investment Outlook Q2 2012, NCREIF.

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