Korpacz Realty Advisors
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Korpacz Realty Advisors
ANNUAL CONFERENCE VIRGINIA ASSOCIATION OF ASSESSING OFFICERS Real Estate Market Overview and Chain Drug Store Valuation Methodologies October 11, 2012 Korpacz Realty Advisors VAAO PRESENTATIONS Part I State of the U.S. Real Estate Economy…Fourth Quarter 2012 Presented October 11, 2012 By Peter F. Korpacz, MAI, CRE, FRICS President Korpacz Realty Advisors STATE OF THE U.S. REAL ESTATE ECONOMY…FOURTH QUARTER 2012 Presented To Virginia Association of Assessing Officers October 11, 2012 Peter F. Korpacz, MAI, CRE, FRICS President Korpacz Realty Advisors Korpacz Realty Advisors Contents Conclusions Economic Environment Property Sectors All Properties Office Retail Industrial Apartment Hotel Closing Remarks Addenda Korpacz Realty Advisors Conclusions • Economy – improving but vulnerable • Leasing Markets – slow improvement • Transaction Markets – prices stabilizing • November elections and the fiscal cliff hold the economy and real estate hostage Korpacz Realty Advisors Economic Environment Korpacz Realty Advisors Economic headwinds • Recession throughout Europe UK, Spain, Italy, Netherlands, Denmark, Ireland, Greece, Czech Republic, Portugal, and Solvania • GDP growth moderates in U.S. to 1.3% in 2Q12 • Weak job growth • Declining export orders • The fiscal cliff – possible huge tax increase and budget expenditure cuts Korpacz Realty Advisors Economic good news • Retail sales and durable goods order continue to be bright spots • Job growth is at least positive • The good news “housing recovery” headlines may be real Korpacz Realty Advisors GDP continues to decline in 2Q12… Annual Percentage Change in GDP 1980 – 2Q12 8.0 7/1990-3/1991 12/2007-6/2009 Percentage Change 6.0 4.0 2.0 0.0 3/2001-11/2001 -2.0 7/1981-11/1982 -4.0 Shaded areas reflect U.S. recession dates. Korpacz Realty Advisors 2Q12 2010 2007 2004 2001 1998 1995 1992 1989 1986 1983 1980 Source: Bureau of Economic Analysis Korpacz Realty Advisors Job growth continues sluggish trend Average Change in Nonfarm Employment 1980 — September 2012* 5,000 3,500 Change in Thousands 12/2007-6/2009 2,000 500 -1,000 -2,500 7/1990-3/1991 7/1981-11/1982 -4,000 3/2001-11/2001 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 -5,500 Shaded areas reflect U.S. recession dates. September’s number is preliminary . *Annual figures are based on December to December figures, while monthly figures are based on the difference from the prior month . Source: Bureau of Labor Statistics Korpacz Realty Advisors Korpacz Realty Advisors Unemployment claims…slowly declining Weekly Unemployment Claims 1990 – September 22, 2012* 700,000 12/2007-6/2009 650,000 7/1990-3/1991 3/2001-11/2001 600,000 550,000 500,000 450,000 400,000 350,000 300,000 Note: Figure for 9/22/2012 is seasonally adjusted, advanced data. Shaded areas reflect U.S. recession dates. Source: U.S. Department of Labor Korpacz Realty Advisors Korpacz Realty Advisors 9/22/2012 7/30/2011 2/20/2010 9/13/2008 4/7/2007 10/29/2005 5/22/2004 12/14/2002 7/7/2001 1/29/2000 8/22/1998 3/15/1997 10/7/1995 4/30/1994 11/21/1992 6/15/1991 1/6/1990 250,000 Unemployment rate flattens Average Annual Unemployment Rate U-3 v. U-6 Series 1994 – September 2012* 19.5 12/2007-6/2009 17.5 3/2001-11/2001 15.5 13.5 U-6 Series 11.5 9.5 7.5 5.5 * Monthly figures are actual rates. Shaded areas reflect U.S. recession dates. Sep-12 Aug-12 Jul-12 Jun-12 May-12 Apr-12 Mar-12 Feb-12 Jan-12 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 3.5 U-3 Series Source: Bureau of Labor Statistics Korpacz Realty Advisors Korpacz Realty Advisors Worker productivity erratic 10.0% 12/2007-6/2009 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% 3/2001-11/2001 -4.0% Shaded areas reflect U.S. recession dates. Source: Bureau of Labor Statistics Korpacz Realty Advisors Korpacz Realty Advisors Retail sales growth a bright spot Retail Sales Percentage Change Over Prior Year 12.25% Recession 12/2007-6/2009 9.75% 7.25% 4.75% 2.25% -0.25% -2.75% Recession 3/2001-11/2001 -5.25% -7.75% -10.25% Note: Annual percentage change refers to change in December over prior December; monthly percentage change refers to change over same month in prior year Source: Census Bureau Korpacz Realty Advisors Korpacz Realty Advisors Aug-12 Jul-12 Jun-12 May-12 Apr-12 Mar-12 Feb-12 Jan-12 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 -12.75% Business spending slows Annual Percent Change in Business Spending 1988 –2Q12 20.0% 12/2007-6/2009 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% 7/1990 -3/1991 -15.0% 3/2001-11/2001 2Q12 1Q12 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 -20.0% Shaded areas reflect U.S. recession dates. Source: Bureau of Economic Analysis Korpacz Realty Advisors Korpacz Realty Advisors Corporate earnings expected to fall Korpacz Realty Advisors Korpacz Realty Advisors Durable goods orders hits a snag… Durable Goods Orders February 1992 – August 2012* In Millions $250,000.00 $240,000.00 $230,000.00 $220,000.00 $210,000.00 $200,000.00 $190,000.00 $180,000.00 $170,000.00 $160,000.00 $150,000.00 $140,000.00 $130,000.00 $120,000.00 $110,000.00 In Aug-12 12/2007-6/2009 Source: Census Bureau *Note: August figure is an advanced figure. May-12 Aug-11 Nov-10 Feb-10 May-09 Aug-08 Nov-07 Feb-07 May-06 Aug-05 Nov-04 Feb-04 May-03 Aug-02 Nov-01 Feb-01 May-00 Aug-99 Nov-98 Feb-98 May-97 Aug-96 Nov-95 Feb-95 May-94 Aug-93 Nov-92 Feb-92 3/2001-11/2001 Shaded areas reflect U.S. recession dates. Korpacz Realty Advisors Korpacz Realty Advisors Home prices rebounding? Korpacz Realty Advisors Fiscal cliff ahead… Korpacz Realty Advisors Korpacz Realty Advisors Property Sectors Korpacz Realty Advisors Cap rate compression flattens… Average Cap Rates by Property Sector 10.5% 10.0% Industrial Sub - Office 9.5% 9.0% 8.5% Retail 8.0% 7.5% 7.0% 6.5% 6.0% Apartment 5.5% CBD - Office 5.0% 4.5% '01 '02 '03 '04 '05 '06 '07 '08 '09 Based on independent reports of properties and portfolios $2.5 million and greater. Source: Real Capital Analytics, Inc. as of September 26, 2012 Source: Real Capital Analytics, Inc. Korpacz Realty Advisors '10 '11 '12 Volume also flattens… Monthly Transactions billions $80 $ Volume $60 $40 $20 $0 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 Year-Over-Year % Change 200% 100% 0% -100% '01 '02 '03 '04 '05 '06 '07 '08 '09 Based on independent reports of properties and portfolios $2.5 million and greater. Source: Real Capital Analytics, Inc. as of September 26, 2012 Source: Real Capital Analytics, Inc. Korpacz Realty Advisors '10 '11 '12 Volume summary table First Half of 2012 vs First Half of 2011 Property Type Dollars in Billions Office $29.2 7% 1,200 24% Industrial $14.2 -26% 1,619 -35% Retail $24.4 5% 1,914 -1% Apartment $28.6 23% 1,986 24% Hotel $ 7.5 -17% 413 -1% Development Site $ 4.9 67% 458 96% Grand Total $108.8 4% 7,590 -1% Year-OverYear Change Number of Properties Year-OverYear Change Source: Real Capital Analytics, Inc. Mid-Year Review 2012 Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Average pricing summary table First Half of 2012 vs First Half of 2011 Property Type Dollars Per Unit or Sq. Ft. % Cap Rate Basis Point Change Office $245 12% 7.1% -30 Industrial $98 7% 7.8% -7 Retail $343 8% 7.3% -26 Apartment $139,561 1% 6.2% -16 Hotel $120,069 4% 7.8% 11 Grand Total $46,287 3% 6.9% -18 Source: Real Capital Analytics, Inc. Mid-Year Review 2012 Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Distress update By Property Type Property Type Outstanding Distress (SM) % Change Vs 2Q11 % Worked Out RR* (%) Office $43,640 -3% 57% 67% Apartment $33,044 14% 59% 70% Retail $27,340 -5% 58% 63% Industrial $12,474 6% 49% 71% Hotel $22,242 -4% 56% 66% Land $25,560 -6% 40% 56% Other $4,925 3% 40% 71% $169,225 -6% 55% 67% ALL * Recovery rate before costs and fees Source: Real Capital Analytics, Inc. Mid-Year Review 2012 Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Distress update Source: Real Capital Analytics, Inc. Mid-Year Review 2012 Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Property Types Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Office leasing markets stabilizing Completions, Net Absorptions, Vacancy Rate, and Rent Inflation U.S. Office Markets (2000 – 2017F) 2Q2012 Outlook Vacancy 18.0% 125,000 14.0% 75,000 10.0% 6.0% 25,000 2.0% -25,000 -2.0% -6.0% -75,000 -10.0% Rent Inflation -125,000 Completions Net Absorption Vacancy Rate Source: CBRE Econometric Advisors Korpacz Realty Advisors Rent Inflation 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 -14.0% All Office: cap rate & pricing trends Cap Rates Price Per Sq. Ft. Source: Real Capital Analytics, Inc. as of 9/26/2012; based on properties and portfolios $5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors All Office: volume trends Transaction Volume Year-Over-Year Change Source: Real Capital Analytics, Inc. as of 9/26/2012; based on properties and portfolios $5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Office: cap rate & pricing by category CBD Suburban Cap Rate Price Per Sq. Ft. Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Office: volume by category CBD Suburban Transaction Volume Year-Over-Year Change Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Office: local market v. national total Richmond/Norfolk vs Office Grand Total Avg. Cap Rate 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '08 '09 '10 '11 '12 Avg. PSF $350 $300 $250 $200 $150 $100 $50 $'01 '02 '03 '04 '05 '06 '07 Source: Real Capital Analytics, Inc. as of 9/26/2012; based on properties and portfolios $5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Office: local market v. Mid-Atlantic total Richmond/Norfolk vs Mid- Atlantic Total Avg. Cap Rate 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '08 '09 '10 '11 '12 Avg. PSF $450 $400 $350 $300 $250 $200 $150 $100 $50 $'01 '02 '03 '04 '05 '06 '07 Source: Real Capital Analytics, Inc. as of 9/26/2012; based on properties and portfolios $5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Industrial leasing markets stabilizing Completions, Net Absorptions, Vacancy Rate, and Rent Inflation U.S. Industrial Markets (2000 – 2017F) 2Q2012 Outlook 400,000 17.0% Vacancy 300,000 13.0% 200,000 9.0% 100,000 5.0% 0 1.0% -100,000 -3.0% -200,000 -7.0% Rent Inflation -300,000 Completions Absorption Vacancy Rent Inflation (%) Source: CBRE Econometric Advisors Korpacz Realty Advisors 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 -11.0% All Industrial: cap rate & pricing trends Cap Rates Price Per Sq. Ft. Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors All Industrial: volume trends Transaction Volume Year-Over-Year Change Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Industrial: cap rate & pricing by category Flex Warehouse Cap Rate Price Per Sq. Ft. Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Industrial: volume trends Flex Warehouse Transaction Volume Year-Over-Year Change Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Industrial: local market v. national market Richmond/Norfolk vs Industrial Grand Total Avg. Cap Rate 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '08 '09 '10 '11 '12 Avg. PSF $160 $140 $120 $100 $80 $60 $40 $20 $'01 '02 '03 '04 '05 '06 '07 Source: Real Capital Analytics, Inc. as of 9/26/2012; based on properties and portfolios $5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Industrial: local market v. Mid-Atlantic total Richmond/Norfolk vs Mid- Atlantic Total Avg. Cap Rate 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '08 '09 '10 '11 '12 Avg. PSF $160 $140 $120 $100 $80 $60 $40 $20 $'01 '02 '03 '04 '05 '06 '07 Source: Real Capital Analytics, Inc. as of 9/26/2012; based on properties and portfolios $5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Retail leasing markets stabilizing 115,000 Completions, Net Absorptions, Vacancy Rate, and Rent Inflation U.S. Retail Markets (2000 – 2017F) 2Q2012 Outlook 13.0% 100,000 85,000 10.5% Vacancy 70,000 8.0% 55,000 5.5% 40,000 3.0% 25,000 0.5% 10,000 -2.0% -5,000 Rent Inflation Completions Net Absorption Vacancy Rate Source: CBRE Econometric Advisors Korpacz Realty Advisors Rent Inflation 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 -7.0% 2002 -35,000 2001 -4.5% 2000 -20,000 All Retail: cap rate & pricing trends Cap Rates Price Per Sq. Ft. Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors All Retail: volume trends Transaction Volume Year-Over-Year Change Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Retail: cap rate & pricing by category Mall & Other Cap Rate Strip Center Price Per Sq. Ft. Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Retail: volume by category Mall & Other Transaction Volume Strip Center Year-Over-Year Change Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Retail: local market v. national total Richmond/Norfolk vs Retail Grand Total Avg. Cap Rate 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '07 '08 '09 '10 '11 '12 Avg. PSF $500 $400 $300 $200 $100 $'01 '02 '03 '04 '05 '06 Source: Real Capital Analytics, Inc. as of 9/26/2012; based on properties and portfolios $5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Retail: local market v. Mid-Atlantic total Richmond/Norfolk vs Mid- Atlantic Total Avg. Cap Rate 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '07 '08 '09 '10 '11 '12 Avg. PSF $500 $400 $300 $200 $100 $'01 '02 '03 '04 '05 '06 Source: Real Capital Analytics, Inc. as of 9/26/2012; based on properties and portfolios $5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Apartment leasing markets stabilizing Completions, Net Absorptions, Vacancy Rate, and Rent Inflation U.S. Apartment Markets (2000 – 2017F) 2Q2012 Outlook 380,000 Vacancy 7.5% 310,000 240,000 5.0% 170,000 2.5% 100,000 0.0% 30,000 -2.5% -40,000 Rent Inflation -110,000 Completions Absorption Vacancy Rent Inflation (%) Source: CBRE Econometric Advisors Korpacz Realty Advisors 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 -5.0% Apartment: cap rate & pricing trends Cap Rates Price Per Sq. Ft. Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Apartment: volume trends Transaction Volume Year-Over-Year Change Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Apartment: cap rates & pricing by category Garden Mid/High-Rise Cap Rate Price Per Unit in Thousands Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Apartment: volume by category Garden Mid/High-Rise Transaction Volume Year-Over-Year Change Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Apartment: local market v. national total Richmond/Norfolk vs Apartment Grand Total Avg. Cap Rate 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% '01 '02 '03 '04 '05 Thousands '06 '07 '08 '09 '10 '11 '12 '08 '09 '10 '11 '12 Avg. PPU (K) $160 $140 $120 $100 $80 $60 $40 $20 $'01 '02 '03 '04 '05 '06 '07 Source: Real Capital Analytics, Inc. as of 9/26/2012; based on properties and portfolios $5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Apartment: local market v. Mid-Atlantic total Richmond/Norfolk vs Mid- Atlantic Total Avg. Cap Rate 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% '01 '02 '03 '04 '05 Thousands '06 '07 '08 '09 '10 '11 '12 '08 '09 '10 '11 '12 Avg. PPU (K) $200 $150 $100 $50 $'01 '02 '03 '04 '05 '06 '07 Source: Real Capital Analytics, Inc. as of 9/26/2012; based on properties and portfolios $5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Hotel RevPar… $95.00 70.0 $90.00 68.0 $85.00 66.0 64.0 $80.00 62.0 $75.00 60.0 $70.00 58.0 $65.00 56.0 RevPar Occupancy Rate Source: CBRE Econometric Advisors Korpacz Realty Advisors 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 50.0 2006 $50.00 2005 52.0 2004 $55.00 2003 54.0 2002 $60.00 Hotels: cap rate & pricing trends Cap Rates Price Per Sq. Ft. Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Hotels: volume trends Transaction Volume Year-Over-Year Change Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Hotels: cap rates & pricing trends by category Full-Service Limited-Service Cap Rate Price Per Unit in Thousands Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Hotels: volume trends by category Full-Service Limited-Service Transaction Volume Year-Over-Year Change Source: Real Capital Analytics, Inc;. August 2012 US Capital Trends® published September 2012; based on properties and portfolios $2.5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Hotels: local market v. national total Richmond/Norfolk vs Hotel Grand Total Avg. Cap Rate 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% '05 '06 '07 Thousands '08 '09 '10 '11 '12 '10 '11 '12 Avg. PPU (K) $250 $200 $150 $100 $50 $'05 '06 '07 '08 '09 Source: Real Capital Analytics, Inc. as of 9/26/2012; based on properties and portfolios $5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Hotels: local market v. Mid-Atlantic total Richmond/Norfolk vs Mid- Atlantic Total Avg. Cap Rate 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% '05 '06 '07 Thousands '08 '09 '10 '11 '12 '10 '11 '12 Avg. PPU (K) $300 $250 $200 $150 $100 $50 $'05 '06 '07 '08 '09 Source: Real Capital Analytics, Inc. as of 9/26/2012; based on properties and portfolios $5M and greater Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Closing Remarks • Economy: struggling – Waiting on better job creation • Leasing markets: stable – Waiting on better job creation • Transaction market: soft – Waiting on better job creation • Major issues that impact all three • ELECTION RESULTS: MAY OR MAY NOT RESOLVE CONSUMER AND BUSINESS MARKET UNCERTAINTIES • FISCAL CLIFF HUGE FEDERAL TAX INCREASES and DEEP FEDERAL EXPENIDTURE REDUCTIONS Korpacz Realty Advisors Addenda Sources GDP – Bureau of Economic Analysis (www.bea.gov) Employment Information – Bureau of Labor Statistics (www.bls.gov) and U.S. Department of Labor (www.dol.gov) Retail Sales – U.S. Census (www.census.gov) Housing Information – National Association of Realtors (www.realtor.org); U.S. Census Bureau; and National Association of Home Builders (NAHB) (www.nahb.org) Capital Markets Information – Real Capital Analytics, Inc. (www.rcanalytics.com) In addition to collecting transactional information, RCA interprets the data, including capitalization rates, market trends, pricing, and sales volume. The firm publishes a series of Capital Trends reports and offers an online service that provides real-time, global transactional market information. For more information, contact 1-212-387-7103. Leasing and Capital Market Information – CBRE/Torto Wheaton Research (www.tortowheatonresearch.com) Outlook product provides detailed data and quarterly forecasts on real estate fundamentals and capital markets across five property types; custom reports are available. For more information, contact Ken O’Brien, Director, Client Services – [email protected] or 1-671-912-5200 Squawk Box on CNBC – a business news television program which airs at breakfast time. Mauldineconomics.com – John Mauldin’s free economic newsletter SeekingAlpha. Com – stock market news and financial analysis articles sent to you via email. Korpacz Realty Advisors Let’s Take a Break Source: Real Capital Analytics, Inc. Korpacz Realty Advisors VAAO PRESENTATIONS Part II Valuation Methodology for Chain Drug Store Properties Presented October 11, 2012 By Peter F. Korpacz, MAI, CRE, FRICS President Korpacz Realty Advisors Scope of research • Understand the properties to be valued • Research the chain drug store companies represented in the market area • Analyze drug store retailer industry trends • Research and verify local chain drug store sale transactions • Interview industry participants, including developers and brokers • Research appropriate literature regarding the industry and valuation methodology Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Chain drug store industry trends 2009 Statistics • Employs 3.2 million people • $800 Billion in annual sales • Ripple effect results in a $1.0 Trillion impact Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Chain drug store industry trends Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Chain drug store industry trends Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Chain drug store industry trends Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Chain drug store industry trends Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Chain drug store industry trends Source: Real Capital Analytics, Inc. Korpacz Realty Advisors The BIG three Walgreens CVS Rite Aid BBB A+ BBB+ A+ BC Revenue (millions) 2011 2010 2009 2008 $72,184 $67,420 $63,335 $59,034 $107,100 $96,413 $98,729 $87,472 $26,121 $25,215 $25,669 $26,289 Earnings Per Share 2011 2010 2009 2008 $2.94 $2.12 $2.02 $2.03 $2.59 $2.50 $2.56 $2.27 -$0.43 -$0.64 -$0.59 -$3.49 S&P Credit Rating S&P Quarterly Ranking Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Chain drug store: historical pricing trends Source: Real Capital Analytics Trends & Trades: Drug Store RET United States Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Chain drug store: historical pricing trends Source: Real Capital Analytics Trends & Trades: Drug Store RET United States Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Chain drug store: capital flows Source: Real Capital Analytics Trends & Trades: Drug Store RET United States Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Sale verifications/industry interviews Designed to determine the answers to several important questions, including ‒ Do chain drug store improvements constitute custom-built properties exclusive to the use by the original tenant? Are criteria available in highest and best use analysis to distinguish between viable chain drug store use and alternative uses? Do chain drug store developers, companies, and investors overpay in the transaction market for sites, rentals, and improved properties? How does first- v. second-generation space concepts impact chain drug store valuation methodology? Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Custom-built issue • Built to specific chain drug store company specifications • But not custom-built exclusive to original tenant • Can be sued by a host of other retailers, including other chain drug store companies Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Highest & best use: 2 possible conclusions 1. If the site, improvements, and/or the neighborhood (trade area) demographics meet chain drug store company criteria, the highest and best use conclusion will likely be continued chain drug store use. Comparable chain drug store site, rental, and improved sales would be the appropriate comparable data to use in the valuation process. 2. If the site, improvements, and/or the neighborhood (trade area) demographics do not meet chain drug store company criteria, the highest and best use will likely be for alternative use through conversion, demolition and redevelopment, or some other modification. In that case, comparable data reflecting that highest and best use should be used. Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Overpayment issue Buyers (mostly developers and chain drug store companies) do not overpay for freestanding drug store sites • Larger-than-normal corner sites (very limited supply) • Have to pay up for the best location • High traffic volume with high residential presence • Often requires sites next to dominant grocery chain store Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Overpayment issue Chain drug store companies do not overpay in rent • Rents determined on projected drug store sales (typical of most retail properties) • Cost of occupancy analysis supports this opinion Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Cost of occupancy analysis COST OF OCCUPANCY ANALYSIS CHAIN DRUG STORES Drug Store Lowest Indication(1) Highest Indication(2) 9.64% 2.18% 20.40% N/A ― ― Super community/community shopping centers(3) 3.32% 3.48% 15.89% Neighborhood shopping centers(3) 3.50% 2.76% 17.89% Open air shopping centers(3) 3.39% 3.39% 17.77% Enclosed shopping centers(3) Comparable Sale No. 14 Comparable sales 2, 3, 6, and 7 (average) 8.73% 6.16%(4) 2.86%(4) 2.18% ― ― 20.32% ― ― Superregional malls(3) Regional malls(3) (1) (2) (3) (4) Lowest indication from all space categories, excluding financial and offices Highest indication from all space categories, excluding financial and offices Source: Dollars & Cents of Shopping Centers®/The SCORE® 2008, published by ULI – The Urban Land Institute and the International Council of Shopping Centers, Inc. Reflects contract rent only Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Overpayment issue Buyers do not overpay for improved properties • Typical purchasers include – Wealthy individuals seeking long-term, secure income/safe yields – Chain drug store companies Source: Real Capital Analytics, Inc. Korpacz Realty Advisors First v. second generation space First-generation space definition: A building or space designed to be functionally and economically efficient for an original tenant or class of replacement tenants over a period of time, during which the space retains its original utility and desirability.1 (1) Definition by Peter F. Korpacz, MAI, CRE, FRICS and Richard Marchitelli, MAI, CRE, FRICS Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Highest and best use • The foundation upon which the valuation process is constructed • Two important questions often ignored 1. If the property were vacant and available for lease, what type of tenant would be the most likely to rent the property? 2. If offered for sale, which type of buyer would be the most likely purchaser? Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Applicable rule and definitions Standard Rule 1-3 of the Uniform Standards of Professional Appraisal Practice (USPAP) states – “When necessary for credible assignment results in developing a market value opinion, an appraiser must: a. identify and analyze the effect on use and value of existing land use regulations, reasonably probable modifications of such land use regulations, economic supply and demand, the physical adaptability of the real estate, and market area trends; and Comment: An appraiser must avoid making an unsupported assumption or premise about market area trends, effective age, and remaining life. b. develop an opinion of the highest and best use of the real estate.”1 Comment: An appraiser must analyze the relevant legal, physical, and economic factors to the extent necessary to support the appraiser’s highest and best use conclusion(s). 1 Uniform Standards of Professional Appraisal Practice 2010-2011 Edition©, published by the Appraisal Standards Board of The Appraisal Foundation Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Land as if vacant Four criteria tests are usually employed – 1. Legally permissible 2. Physically possible 3. Financially feasible 4. Maximally productive Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Land as improved Highest and best use decision involves two considerations 1. The value of the property as improved is compared to the value of the land (as if vacant) at its highest and best use, less demolition and possession costs (if any). If the “as improved” value is less than the land value (less demolition and possession costs), then the highest and best use is for demolition and redevelopment of the land. If the “as improved” value is the higher of the two, then the existing use is the highest and best use. 2. If the “as improved” value is greater, then the second consideration involves an examination of any remaining development potential (or reuse) of the existing property with respect to the four factors (legal, physical, financial, and highest present value). Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Likely buyer • Determination of highest and best use come first • Then, research likely buyers for that use ‒ analyze recent transactions and ‒ pricing methodologies • For chain drug store properties ‒ Investors, both as individuals and in small groups ‒ Chain drug store companies Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Approaches to value Cost approach • Rarely used by investors • Very relevant to chain drug store companies Income capitalization approach • Direct capitalization preferred by investors • Yield capitalization rarely used by buyers Sales comparison approach • Of minimal use to buyers Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Extraction of cap rates (OARs) from sales • Most direct technique, firmly rooted in market behavior • Requires a robust verification process • Must understand motivations and verify pricing methodology • It is not just price and cap rate, thanks, and goodbye • And, it is definitely not using comp sale providers comp sheets without further verification Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Fee simple v. leased fee issues • All leased property sales are leased fee estates • Contract to market rent relationship very important – Develop fee simple cap rate proxies – Sales where rents/NOI are at market – Use cap rate direction indication from above or below market rent transactions Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Comp sales with market contract rents • Typical market growth potential • The best proxy for a fee simple cap rate • Requires no adjustment Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Comp sales with above market contract rents • Limited upside NOI potential • Requires downward cap rate adjustment to reflect fee simple market rent characteristics Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Comp sales with below-market rents • Have upside NOI potential • An upward adjustment is required to reflect fee simple market rent characteristics Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Investor surveys • Available for 25+ years • Especially useful when market conditions are changing • Also useful in times of distress or anytime when comps are limited Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Band of investment technique • Reflects a leveraged transaction • Mortgage component info is usually readily available • Equity dividend rate is problematic Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Source of equity dividend rates • Leveraged-comparable sales • Built-up rate – where is the market support? • Personal investor surveys Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Relevance of the band of investment • Credibility relies on extracting market-supported equity dividend rates • Fee simple vs. leased fee issue also must be addressed – Comp sale rents at market rent, or – Above or below market rents • Does subject valuation premise reflect all cash or leverage? Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Sales comparison approach • Price per leasable square foot – the usual unit of comparison • Property/tenant types should match up with the subject – Highest and best use conclusion • Fee simple vs. leased fee issue must be addressed – Rents at market, or – Above or below Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Sales comparison adjustment • The usual cast of characters Financing terms Market conditions Location Physical characteristics Etc. • Significant focus on fee simple vs. leased fee property estates Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Fee simple vs. leased fee adjustments • Look for fee simple proxies – Buyer users – Sale property rents/NOI at market level • Get price direction for subject from – Sales with rents/NOI above or below market levels Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Additional handouts • Comparable sale examples • Industry interviews Source: Real Capital Analytics, Inc. Korpacz Realty Advisors Addenda Sources National Association of Chain Drug Stores (NACDS) – Chain Pharmacy Industry Profile: 2010-2011; founded in 1933, NACDS works to provide the chain drug industry with a unified voice necessary for growth and success. (www.nacds.org) CoStar – Drug Stores Trump Most Retail Categories on New Store Additions and Property Sale Transactions, October 14, 2009; commercial real estate information company (www.costar.com) Annual Reports or 10-K Reports of CVS, Rite Aid, and Walgreens – these reports are available on line at the respective company websites or through the Securities and Exchange Commission’s (SEC) EDGAR database . (www.sec.gov/edgar/searchedgar/company) Standard & Poor’s (S&P) – a stock market index based on the common stock prices of 500 top publicly traded American companies, as determined by S&P (www.standardandpoors.com) Real Capital Analytics (RCA) – In addition to collecting transactional information, RCA interprets the data, including capitalization rates, market trends, pricing, and sales volume. The firm publishes a series of Capital Trends reports and offers an online service that provides real-time, global transactional market information. For more information, contact 1-212-387-7103. (www.rcanalytics.com) Korpacz Realty Advisors ANNUAL CONFERENCE VIRGINIA ASSOCIATION OF ASSESSING OFFICERS Real Estate Market Overview and Chain Drug Store Valuation Methodologies October 11, 2012 Presented by Peter F. Korpacz, MAI, CRE, FRICS 3121 Glen Abbey Drive Mt. Airy, MD 21771 301.829.3770 (p); 866.213.3772 (f) [email protected] Korpacz Realty Advisors