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RERC © REAL ESTATE REPORT - THE NATIONAL REAL ESTATE AUTHORITY RERC SCOPE AND METHODOLOGY Report Methodology The RERC Real Estate Investment Survey summarizes the required rates of return (ex-ante), property selection criteria, and investment outlook of a representative sample of large institutional investors and regional respondents throughout the United States. We survey both regional and institutional investors across the nation quarterly, questioning them on specific investment criteria in their local marketplace and trends across the country. The results are collected, averaged, and then displaced in our quarterly report. Published quarterly, the data provides timely insight into yields, return criteria, and risk adjustments that institutional investors rely on when making acquisitions. The survey data is used by investors, developers, appraisers, and financial institutions to monitor changing market conditions and to estimate financial performance. Findings reflect ex-ante required returns, or goals, of investors contemplating acquisitions. Thus, the RERC survey acts as a barometer of current market perceptions and confidence among the nation’s top professionals. Readers should also recognize that underwriting assumptions and practices, as well as underlying definitions of key terms, will vary slightly among survey respondents. Therefore, the greatest benefit to an investor who is interpreting survey results over time is an appreciation of the trends of various measuring devices and contemplation of the relationship of one measuring device to another. It is equally important to keep in mind that the investment survey reports required returns, not actual or historical performance. Performance data is available from other sources. RERC Definitions Basis Point Spread (bps): The difference between the yield (as defined) and an alternative investment with a comparable life (10-Year Treasurys, Moody’s Baa, Moody’s Aaa). Going-In (Overall) Capitalization Rate: Going-in capitalization rate is usually defined as the first year NOI (before capital items of tenant improvements and leasing commissions and debt service but after real estate taxes) divided by present value (or purchase price). Holding period: Average period of time that a property type is held for investment. Marketing Time: The period of time between the offering of a property for sale and securing a bona fide buyer. Pre-tax Yield (IRR, Discount Rate): The pre-tax yield is the rate of interest that discounts the pre-income tax cash flows received on an unleveraged investment back to a present value that is exactly equal to the amount of the original equity investment. (It is in effect a 66 WWW.RERC.COM WINTER 2012 | VOL 40 | NO 4 time-weighted average return on equity and, as used here, is synonymous with the term “yield.”) Renewal Probability: Percentage probability that is expected for an existing tenant to renew their lease after the expiration date. RERC Estimate vs. Survey Rates: In addition to the survey responses (survey rates) that RERC receives and analyzes each quarter, RERC also developed a model that incorporates unemployment, vacancy rates, and other financial and space market data. This modeled information, combined with the data received from the survey responses, is the RERC Estimate. RERC Portfolio Index (RPI): The RPI is RERC’s required return utilizing a weighted average based on the NCREIF Property Index. Reserves: Amount allocated for periodic replacement of long-lived building components during a property’s economic life. Terminal (Residual) Capitalization Rate: Terminal cap rate is the rate used to estimate resale or reversion value at the end of the holding period. Typically, it is the NOI in the year following the last year of the holding period that is capitalized. Similar to the going-in capitalization rate, but applied at the end of the holding investment period. Down Time: Number of months a space remains unleased at the expiration of a vacating tenant. Vacancy Loss: Percentage of total revenue uncollected due to space that remains vacant over a typical holding period. RERC Defined Regions West: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming Midwest: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin South: Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Oklahoma, Tennessee, Texas East: Connecticut, Delaware, Kentucky, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, Washington D.C., West Virginia Note of Caution: It is imperative to exercise caution when interpreting required rates of return. RERC national return data shows a normal range of expected returns from all categories of investment-grade properties. Obviously, properties with greater investment risk will be at the high end of the scale. Rates obtained from this survey are not directly applicable to non-investment grade properties. We also note that investors generally strive to achieve a diversified portfolio; this motivation partially explains the variation in IRR requirements. Ranges and other data reflect the central tendencies of respondents, and unusually high and low responses have been eliminated. © 2012 REAL ESTATE RESEARCH CORPORATION. ALL RIGHTS RESERVED.
WINTER 2012 | VOL 40 | NO 4 REAL ESTATE RESEARCH CORPORATION It was in 1931 – with the Great Depression well underway – that Real Estate Research Corporation (RERC) was founded. Recognized for monitoring key sections of the economy that influenced the real estate industry, RERC worked with some of the nation’s most well-known industrialists and government agencies involved with post-Depression and World War II building. Today we offer clients the following services. Independent Fiduciary Services - As a registered investment adviser with the Securities and Exchange Commission (SEC) and with its nearly 80 years of research, valuation, and consulting experience, RERC is ideally suited to provide a variety of real estate-related services for institutions that manage real estate assets for others: n Independent fiduciary services for a 180-property investment manager with gross asset values exceeding $12 billion. n Fairness opinions on dozens of major acquisitions totaling over $1 billion. n Valuation consultant for the second largest pension fund in the U.S. Valuation and Consulting Services - As one of its core businesses, RERC performs property-level, independent valuations and analyses founded in thoroughly researched market fundamentals. RERC’s valuation and consulting services feature: n Valuation and consulting expertise with office buildings, industrial properties, retail properties, apartments, hotels and hospitality-related property, and multiuse properties in all major U.S. markets. n Appraisal management services to include assisting with third-party appraiser selection, developing an approved vendor list, and coordinating appraisal assignments and rotations. Management and Valuation Information Systems - RERC’s management information system (MIS) and valuation management system (VMS) offer completely customizable technology solutions that offer clients real-time data and reporting to help manage their portfolios, track and store important files, and maintain information security. RERC’s web-based systems manage a variety of equity portfolios valued in excess of $50 billion. Research & Publications n The RERC DataCenter is a proprietary database that provides current and historical survey-based and transaction-based investment criteria, property volume and pricing averages, and library and querying functions. n The RERC Real Estate Report has been published for 40 years and is considered “the National Real Estate Authority.” The report is best known for its surveybased capitalization and pre-tax yield rates and expectations for 10 major property types on an institutional, regional, and metro basis. © 2012 REAL ESTATE RESEARCH CORPORATION. ALL RIGHTS RESERVED. RERC © REAL ESTATE REPORT - THE NATIONAL REAL ESTATE AUTHORITY LEADERSHIP Kenneth P. Riggs, Jr. CFA, CRE, MAI, FRICS, CCIM Chairman & President 312.587.1900 riggs@rerc.com Richard A. Hanson Chief Executive Officer 312.587.1800 rhanson@rerc.com Del H. Kendall, CRE, MAI Managing Director 713.661.8880 dkendall@rerc.com Donald A. Burns, CRE, MAI Managing Director 770.623.4922 dburns@rerc.com Kent D. Steele, CRE, FRICS, MAI Managing Director 630.430.3865 ksteele@rerc.com William L. Corbin, MAI Managing Director 310.734.1401 wcorbin@rerc.com Steven W. Thompson, MAI Managing Director 713.661.8880 sthompson@rerc.com Brian T. Velky, CFA Managing Director 515.309.7600 bvelky@rerc.com Real Estate Research Corporation 205 North Michigan Avenue Suite 2200 Chicago, I L 60601 312.587.1800 www.rerc.com WWW.RERC.COM 67
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