Commercial Property Outlook Steady Improvement April 30, 2012 Craig Leupold, President.

Commercial Property OutlookSteady Improvement

April 30, 2012Craig Leupold, President

www.greenstreetadvisors.com © 2012, Green Street Advisors, Inc.

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2

Economic Drivers of Real Estate DemandA New Normal recovery is a decent backdrop for commercial real estate

Continued repair of consumer balance sheets → anemic spending growth

Moderate job growth is just good enough to spur tenant demand

“Rich get richer” remains a powerful secular force. Might tax increases turn the tide?

Gateway markets and/or top-tier properties are enjoying the strongest demand

Homeownership rate should fall further

3



Supply: Major Property Sector AverageConstruction at a Multi-Generational Low: This cyclical downturn has been remarkable for: 1) the lack of overbuilding that preceded it; and 2) the near-complete shutdown of the supply pipeline. As a result, occupancy gains should fall within a “normal” range even if demand growth is underwhelming.

New Completions as a % of Existing Stock

0%

1%

2%

3%

4%

5%

6%

7%

'85 '90 '95 '00 '05 '10 '15E

26-Year Avg: 2.0%

Supply growth is an equal-weighted average of the five major property sectors: apartment, industrial, mall, office, and strip center.

Supply growth this low barely exceeds obsolescence

4



Fundamentals: Occupancy, Rents, and M-RevPAF GrowthDecent Recovery Ahead: The demand/supply outlook is favorable enough to result in modest occupancy gains and decent rent growth over the next few years. Market RevPAF, a measure that combines changes in occupancy and rent, is poised to continue enjoying a respectable recovery.

Occupancy, rent growth, and market RevPAF are equal-weighted averages of the five major property sectors: apartment, industrial, mall, office, and strip center.

Occupancy and Rent Growth

4%

6%6%

-11%

3% 3% 3% 4% 4% 3%

0%-1%

92%92%

93%

91%

89% 90%

91%91%

92%92% 92% 92%

'05 '06 '07 '08 '09 '10 '11 '12E '13E '14E '15E '16E

Rent Growth

Occupancy

Market RevPAF

5%6% 6%

4% 4% 4% 4%4%

4%

-3%

-12%

1%

89

94

85 8689

9296

100

108

10097

104

'05 '06 '07 '08 '09 '10 '11 '12E '13E '14E '15E '16E

Y-o-Y Change

Indexed to 100 in '07

5



Fundamentals: NOI GrowthVery Different Outlooks: Property sectors with short-term leases (e.g., apartments) are enjoying strong NOI growth. Growth should be modestly positive in other sectors, as the rollover of leases signed at the market peak serve as a drag. With the exception of the beleaguered industrial sector, NOI in every sector is at or above all-time highs.

Indexed NOI ('08=100)

80

90

100

110

120

'04 '05 '06 '07 '08 '09 '10 '11 '12E '13E '14E '15E '16E

Apt Indust Mall Office Strip

NOI Growth (Historical and Estimated)'05 '06 '07 '08 '09 '10 '11 '12E '13E '14E '15E '16E

Apartment 3.7% 7.7% 5.8% 3.1% -4.8% -1.6% 6.9% 7.0% 4.8% 3.6% 2.6% 3.0%

Industrial 1.1% 3.0% 4.9% 2.1% -4.7% -3.6% 1.0% 0.8% 2.1% 2.4% 3.1% 2.7%

Mall 4.2% 4.6% 4.2% 0.8% -1.8% 1.1% 3.0% 2.9% 3.3% 3.4% 3.6% 3.9%

Office -0.3% 4.1% 4.9% 3.2% 0.8% -0.2% 1.4% 0.0% 1.1% 1.7% 4.1% 3.3%

Strip Center 3.5% 3.5% 3.1% 1.5% -3.5% 1.1% 1.1% 2.4% 2.2% 2.5% 2.3% 2.3%

Average 2.4% 4.6% 4.6% 2.1% -2.8% -0.6% 2.7% 2.6% 2.7% 2.7% 3.1% 3.0%

6



Private Market Valuation: Commercial Property Price IndexProperty Values Drifting Sideways: Momentum has waned over the last six months, but commercial real estate prices are up 50% since mid-'09, placing them roughly 10% below the ’07 peak. Apartments and high-quality malls have led the pack and are back to all-time highs.

Green Street Advisors Commercial Property Price Index

30

40

50

60

70

80

90

100

110

12/97 12/99 12/01 12/03 12/05 12/07 12/09 12/11

Ind

ex V

alu

e

-70%

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

Ch

ang

e from

Peak

GSA CPPI Apt Industrial Mall Office Strip

7



Private Market Valuation: Return ExpectationsWhat’s My Return? Commercial real estate is priced to deliver unlevered total returns of around 7% to a buy-and-hold investor. That looks pretty good in today’s low-yield environment.

The Unleveraged Total Returns Currently Available on Real Estate vs. Baa Rate

7.1%6.9%

7.6%

6.5%

7.1%

5.3%

7.0%

4%

5%

6%

7%

8%

Apartment Industrial Mall Office Strip Center Average Baa Rate

About the Long-term growth assumptions:

• Long-term inflation assumption: 2.25%

• No sector keeps up – Historic record (NCREIF) shows that NOI growth can only keep up with inflation if heavy cap-ex is incurred

• Variances in long-term growth across sectors are discussed at length in Sector Allocation for the Long Run, 12/4/11

• Malls, gateway office and apartments have historically offered a superior NOI growth/cap-ex profile

The Components of ReturnNominal Economic Projected NOI Growth

Sector Cap Rate Cap Rate '12-'16 (ann.) Long Term

Apartment 5.5% 5.0% 4.2% 1.8%

Industrial 6.8% 6.0% 2.2% 0.5%

Mall 6.0% 5.3% 3.4% 2.0%

Office 5.9% 4.9% 2.0% 1.4%

Strip Center 6.8% 6.1% 2.3% 0.7%

Average 6.2% 5.5% 2.8% 1.3%

8



Private Market Valuation: Expected Returns vs. Bonds

Unlevered Return Expectations on Real Estate vs. Investment-grade Bond Yields

177 bpAverage: 146 bp

-100 bp

0 bp

100 bp

200 bp

300 bp

400 bp

1/86 1/88 1/90 1/92 1/94 1/96 1/98 1/00 1/02 1/04 1/06 1/08 1/10 1/12

Return Premium is Adequate: The spread between real estate returns and investment-grade corporate bond yields is wider than normal, which makes commercial real estate look attractive on a relative basis.

Assuming interest rates stay constant, a reversion of return premiums on real estate to long term norms will involve a change in…

+7%+7%

Values

-31 -31 bpbp

Cap Rates

9



Private Market Valuation: Signals from the Public MarketWhat Does the Public Market Say? Premiums-to-unlevered asset value in the public market have proven to be highly predictive of future changes in property values. REIT investors are currently sending a signal that commercial real estate values, particularly for retail properties, are likely to move higher.

4%

-1%

3%

8%

4%

7%

Apt Indust Mall Office Strip Avg

Current Premium to Unleveraged Asset Value

-30%

-20%

-10%

0%

10%

20%

12/97 12/99 12/01 12/03 12/05 12/07 12/09 12/11

REIT Asset Value Premium

Property Appreciation (next 6 months)

REIT Premiums and Subsequent Private-Market Returns

10



Private Market Valuation: Commercial Property Price ForecastSignal Strength: Green Street’s Commercial Property Price Forecast has good predictive power with regard to the direction of property prices six months hence. Limitation: predictions for the magnitude of pricing changes are best used as a sign of signal strength, rather than a precise estimate of what lies ahead.

6%

-30%

-20%

-10%

0%

10%

20%

1/97 1/99 1/01 1/03 1/05 1/07 1/09 1/11

Actual Appreciation (next 6 months)

Forecasted Appreciation

Commercial Property Price Forecast Back-TestThe current signal is strong enough to warrant 4:1 odds that prices will rise.



11

Public Market ValuationREITs are trading at NAV premiums

REITs remain attractively priced vs. corporate bonds

REIT valuations look scary compared to the S&P; is this part of a New Normal?

Comparisons with the bond market deserve more weight in a New Normal world

REITs are priced at the high-end of a fair range

Relative sector valuations: office REITs are expensive; mall REITs are cheap

12



Public Market Valuation: REIT Fair Value vs. Fixed IncomeREITs Attractive vs. Bonds: Despite trading at a premium to underlying asset value, REITs still look attractive relative to bonds.

Fair Value of the RMZ Relative to Fixed Income

+7%

4%

+5%

+3%

RMZ Value Today 860

Expected Change +5%

Fair Value 907

Factoring in Leverage REIT Share Prices Should

Change by

An Expected Change in REIT Asset Values of

Warranted Change in Private-Market Real Estate

Values

Observed REIT Premium to Asset Value

Leverage

13



Public Market Valuation: RMZ Fair Value RangeReconciling different signals: REITs are attractively priced vs. bonds; expensive vs. stocks. More weight should be put on the bond signal because: 1) it has worked better in the past; and 2) yield-heavy assets (e.g., REITs) should be accorded improved pricing relative to stocks in a low-growth, New Normal world. Ascribing a two-thirds/one-third weighting to the bond/stock signals shows that REITs are trading at the high-end of a fair range.

Fair Value of the MSCI US REIT Index (RMZ)

526

907

Cheap Overpriced

300 400 500 600 700 800 900 1000 1100 1200

vs. Stocks

vs. Corporate Bonds

Fair Value Range

RMZ 860

Fair Value Range

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Commercial Property Outlook Steady Improvement April 30, 2012 Craig Leupold, President.

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