20

State of the U.S. Economy, Capital Markets, and Commercial Real Estate

Calgary Real Estate Forum October 24, 2012

Douglas Poutasse Head of Strategy and Research Bentall Kennedy Group

1

-4

-3

-2

-1

0

1

2

3

4

5 ANATOMY OF A DELEVERAGING CYCLE

Year 1 Year 2/3 Year 4/5 Year 6+ or more?

This is where we are!

Price Discovery

Contingent Liability

Realization

Deleveraging Concludes

Repair & Recognition

Crisis Hits

Real GDP Growth

This Was Not Your Father’s Recession

State of U.S. Economy, Capital Markets, and Commercial Real Estate

2

The New Globalization

State of U.S. Economy, Capital Markets, and Commercial Real Estate

3

U.S. Fiscal Policy: Spend What You Want, Tax What You Can

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11

Outla

ys  &  Ta

xes  %

 of  G

DPOutlays Tax  Receipts

Solving U.S. fiscal problems will require a dual approach

State of U.S. Economy, Capital Markets, and Commercial Real Estate

4

Labor Market Recovery Remains Sluggish

Sources: Moody’s Analytics, Bureau of Labor Statistics

-­‐1,000

-­‐800

-­‐600

-­‐400

-­‐200

0

200

400

600

2008 2009 2010 2011 2012

Mon

thly  Change  (jo

bs,  000

s)

Goods-­‐Producing Service-­‐Producing  (Ex-­‐Government) Government Total

State of U.S. Economy, Capital Markets, and Commercial Real Estate

5

Capacity Tightening, Corporations Have Cash to Spend: But Under What Rules?

State of U.S. Economy, Capital Markets, and Commercial Real Estate

65

67

69

71

73

75

77

79

81

83

600

800

1,000

1,200

1,400

1,600

1,800

2005 2006 2007 2008 2009 2010 2011 2012

Capacity  Utiliza

tion  (%,  SA)

Corporate  Profits  ($

,  bil.,  SAA

R)

Corporate  Profits Capacity  Utilization

Sources: Federal Reserve, BEA

6

Tech & Energy Markets Leading the Recovery

State of U.S. Economy, Capital Markets, and Commercial Real Estate

-­‐15.0%

-­‐10.0%

-­‐5.0%

0.0%

5.0%

10.0%

Houston

New

 York

Washington,  D.C.

Dallas

Denver

Boston

San  Francisco

San  Jose

Baltimore

Seattle

Minne

apolis

United  States

Portland

Philade

lphia

San  Diego

Atlanta

St.  Lou

is

Miami

Chicago

Orla

ndo

Los  A

ngeles

Northern  New

 Jersey

Oakland

Orange  Co

unty

Phoe

nix

Fort  Laude

rdale

Riverside

West  P

alm

Las  V

egas

Employmen

t  Change  (%  of  p

eak)

Peak  to  Trough Trough  to  July  2012 Trough  to  July  2011 Peak  to  July  2012

Sources: Moody’s Analytics, Bureau of Labor Statistics

7

Have to Add Value Somewhere

State of U.S. Economy, Capital Markets, and Commercial Real Estate

8

High Educational Attainment Positions Metros for Stronger Growth

State of U.S. Economy, Capital Markets, and Commercial Real Estate

0

5

10

15

20

25

30

35

40

45

50

Houston

New

 York

Washington,  D.C.

Dallas

Denver

Boston

San  Francisco

San  Jose

Baltimore

Seattle

Minne

apolis

United  States

Portland

Philade

lphia

San  Diego

Atlanta

St.  Lou

is

Miami

Chicago

Orla

ndo

Los  A

ngeles

Northern  New

 Jersey

Oakland

Orange  Co

unty

Phoe

nix

Fort  Laude

rdale

Riverside

West  P

alm

Las  V

egas

%  of  P

opulation  with

 a  Bache

lor's  Degree  or  Highe

r

Avg.  of  Metros:  33.7  

Sources: Moody’s Analytics, U.S. Census Bureau

9

Tech Markets Experiencing Fastest Office Demand Growth

State of U.S. Economy, Capital Markets, and Commercial Real Estate

*Bubble Size Denotes Market Size

AtlantaBoston

Chicago

Dallas

Denver

Edison

Houston

Los  Angeles

New  York

Newark

PhiladelphiaPhoenix

San  Francisco

Seattle

Washington,  DC

San  Jose

CharlotteMiami

-­‐4.0%

-­‐2.0%

0.0%

2.0%

4.0%

6.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%

Demand  Grow

th  201

1Q2  to  201

2Q2

Vacancy  2012Q2

Sources: CBRE-EA

10

Retail Sales Rising Again but Gas and Internet Sales grabbing a Larger Share

State of U.S. Economy, Capital Markets, and Commercial Real Estate

4%

6%

8%

10%

12%

14%

16%

$100

$150

$200

$250

$300

$350

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Share  of  Sales

Retail  Sales  (billion

s)

Store-­‐based Gas  Stations

Nonstore Gas  (Share)

Nonstore  (Share)

Source: U.S. Census Bureau

11

American Consumers have far more options for spreading out our shopping dollars

State of U.S. Economy, Capital Markets, and Commercial Real Estate

24

14.5

$400

$600

$0

$100

$200

$300

$400

$500

$600

$700

0

5

10

15

20

25

30

US Canada

SHOPPING CENTRE SALES AND SUPPLY

Sq.  ft.  per  capita Sales  per  sq.  ft.

sq.  ft.  per  capita $  per  sq. ft

Source:  ICSC

12

Perhaps you are following our path to profligacy…

Sources: Statistics Canada, Federal Reserve, BEA, Bentall Kennedy

80

90

100

110

120

130

140

150

160

170

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Debt  to

 Personal  Incom

e  Ratio

 (%)

U.S.  

Canada  

State of U.S. Economy, Capital Markets, and Commercial Real Estate

13

The Reality of the American Housing Bust Continues to Play Out

State of U.S. Economy, Capital Markets, and Commercial Real Estate

14

Home Prices Stabilizing (Hopefully) as Sales Volume Improves

State of U.S. Economy, Capital Markets, and Commercial Real Estate

-­‐40%

-­‐30%

-­‐20%

-­‐10%

0%

10%

20%

30%

2005 2006 2007 2008 2009 2010 2011 2012

Year-­‐over-­‐Year  Change

Case-­‐Shiller  US  Home  Prices Existing  Home  Sales

Sources: S&P/Case-Shiller, National Association of Realtors

15

Renter Households Set for Continued Strong Growth

State of U.S. Economy, Capital Markets, and Commercial Real Estate

60%

62%

64%

66%

68%

70%

72%

-­‐1.5

-­‐1.0

-­‐0.5

0.0

0.5

1.0

1.5

80-­‐84 85-­‐89 90-­‐94 95-­‐99 00-­‐04 05-­‐09 10-­‐11 12-­‐16 12-­‐16 12-­‐16 12-­‐16

U.S.  H

omeo

wne

rship  Ra

te

Renter  Hou

seho

lds  (M)

Avg.  Annual  Change  in  Renter  Households

U.S.  Homeownership  Rate

U.S.  Homeownership  Rate  (Scenarios)

Forecast  Scenarios  (12-­‐16)ApartmentRecovery

Moody'sBasecase

HO  Falls2PP

HO  Rises2PP

HO RateFlat

Downward  Arrow  Indicates Falling  Homeownership  Rate

Sources: Moody’s Analytics, U.S. Census Bureau, Bentall Kennedy Research

16

Apartment Market Experiencing Strong Rent Growth

State of U.S. Economy, Capital Markets, and Commercial Real Estate

17131557

1068

1424

119

121613

12

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0%

Demand  Grow

th  201

1Q2  to  201

2Q2

Vacancy  2012Q2  Y/Y  Rent  Growth  >4.5% Y/Y  Rent  Growth  3.5%-­‐4.5%Y/Y  Rent  Growth  2%-­‐3.4% Y/Y  Rent  Growth  <2%

Houston

DallasPhoenix

Atlanta

Los  Angeles

BostonMinneapolis

San Francisco

New  York

Distict  of  Columbia

Denver

DetroitSeattle

Orange  County

Philadelphia

ChicagoNorthern  New  Jersey

Source: REIS

17

Apartment Market is only one similar to Canadian Markets

Sources: CBRE-EA, REIS, CMHC

U.S.  Apartment

U.S.  OfficeU.S.  Retail*

U.S.  Industrial*

Canada  Office

Canada  Industrial*

Canada  Retail

Canada  Apartment

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0%

Demand  Grow

th  201

1Q2  to  201

2Q2

Vacancy  2012Q2  (*Availability  Rate)

State of U.S. Economy, Capital Markets, and Commercial Real Estate

18

Real Estate Offering Attractive Yields Versus Treasuries

State of U.S. Economy, Capital Markets, and Commercial Real Estate

-­‐200

-­‐100

0

100

200

300

400

500

600

700

800

900

1,000

-­‐2

-­‐1

0

1

2

3

4

5

6

7

8

9

10

Spread  (b

ps)

Cap  Rate/Treasury  Rate  (%

)

Cap  Rate  Spread 10-­‐Year  Treasury Cap  Rate  4  Qtr  Moving  Avg. 25-­‐Yr  Average  Spread

Sources: Federal Reserve, Moody’s Analytics, NCREIF (transaction-based cap rates)

19

“Valuation Effect” has played a Significant Role in the Rebound of CRE Performance

State of U.S. Economy, Capital Markets, and Commercial Real Estate

Sources: NCREIF, Bentall Kennedy Research

-­‐30%

-­‐25%

-­‐20%

-­‐15%

-­‐10%

-­‐5%

0%

5%

10%

15%

20%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

NCR

EIF  Re

turn

Income  Return NOI  Growth Valuation  Effect Total  Return