Petree Hall (Dean Schwanke) - ULI fall meeting - 102711

Emerging Trends in Real Estate 2012 Longest published annual real

estate outlook—33rd consecutive year

Most predictive industry forecast

Based on surveys/interviews with 950 industry leaders

Jointly published by PWC and ULI

“Nothing lasts forever. No more easy money”

“Recent high leveraged buyers could get hammered”

“Real estate players must steel themselves for a difficult, much slower

than normal comeback”

“Nothing lasts forever. No more easy money”

Emerging Trends Fall 2006

“Recent high leveraged buyers could get hammered”

Emerging Trends Fall 2007

“Real estate players must steel themselves for a difficult, much slower

than normal comeback” Emerging Trends Fall 2009

Emerging Trends in Real Estate® 2012

Presenters:Jonathan D. Miller

Author

Stephen BlankULI, Senior Fellow

Charles DiRoccoDirector, PricewaterhouseCoopers

More rent, please.

Facing A Long Grind

“Don’t let availability of capital cloud judgments –

demand drivers don’t exist and fundamentals need to

catch up.”

Real Estate Compares Favorably

Stocks Bonds Real Estate

The Wealth Island Phenomenon(aka Follow the Money)

24-hour gateways

Energy and tech markets

Apartments

The rest of the landscape is mostly under water.

Where is Demand?

Recovery in the “Era of Less”

“If you haven’t figured it out by now, this time is

different.”

Obstacles to Real Estate Rebound

Global jobs arbitrage

Productivity’s costs

Personal and governments debt loads

Demographic realities

Construction slowdown

Global financial morass

Financial industry recalibration

Global Jobs Arbitrage

Productivity’s Costs

Personal and Governments Debt Loads

Demographic Realities

Construction Slowdown

Global Financial Morass

Financial Industry Recalibration

Government Disarray

Ebbing Return Expectations

2010 Core: Take chips off the table

2011 Core: Mid to high single digits

REITS: Mid to high single digits

Commodity properties: Flat to low single digits

Legacy opportunity: 0%+

Opportunity: High risk, slipping expectations <15%

Commercial Property Price Index

All Properties—National Index

Source: Moody’s, Real Estate Analytics LLC, MIT Center for Real Estate, Real Capital Analytics.Note: This index is a periodic same-property round-trip investment price change index of the U.S. commercial investment property market. The index is based on the Real Capital Analytics database,which attempts to collect price information for every commercial property transaction in the United States over $2.5 million in value.

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Interest RatesInflation and Interest Rate Changes

Source: Emerging Trends in Real Estate 2012 survey.

Inflation Short-term rates(1-year

treasuries)

Long-term rates(10-year

treasuries)

Commercialmortgage rates

Increasesubstantially

Increasemoderately

Remain stable

at current levels

2012 Next Five Years

Cap RatesNCREIF Cap Rates vs. U.S. Ten Year Treasury Yields

Sources: NCREIF, Moody’s Economy.com, Federal Reserve Board, PricewaterhouseCoopers LLP.*Ten-year treasury yields based on average of the quarter; 2011Q2 average is as of August 31, 2011.

-4%

-2%

0%

2%

4%

6%

8%

10%

1992 1995 1998 2001 2004 2007 2010

Cap Rate

10-Year Treasury

Spread

Real Estate Barometer


2004 2005 2006 2007 2008 2009 2010 2011 20121

2

3

4

5

6

7

8

9

Sell

Buy

Hold

Post-recession

Pre-recession

Transaction Activity Restrained Gateways: Priced to disappoint, recovery needs to

catch up

Secondary markets: Looking for relative bargains, finding higher risk

Apartments: Everybody goes gaga

Distressed debt: Slim pickings

Too Much EquityEquity Capital For Investing


7.3%

22.5%

14.0%

39.1%

17.2%

Substantiallyundersupplied

Moderatelyundersupplied

In balance Moderatelyoversupplied

Substantiallyoversupplied

Too Little DebtDebt Capital For Acquisitions


20.2%

43.1%

22.9%

12.5%

1.4%

Substantiallyundersupplied

Moderatelyundersupplied

In balance Moderatelyoversupplied

Substantiallyoversupplied

No Refinancing Emergency

Foreclose and dispose

15%

Extend without

mortgage modification

6%

Sell to a third party

25%

Extend with mortgage

modification54%

Maturing Loans: Preferred Strategy for Lenders

Sources: Emerging Trends in Real Estate 2012 survey, Trepp LLC.* Through August 2011

0%

2%

4%

6%

8%

10%

'99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Delinquency rate

Delinquency rate average

CMBS Delinquency Rates

Rigorous Underwriting Standards

Equity Underwriting Standards Forecast for U.S.


30.5%

46.7%

22.8%

More Rigorous Will Remain the Same Less Rigorous

Follow the money

When it looks out of control, retreat

CMBS Snafu

0

50

100

150

200

250

97 99 01 03 05 07 09 11*

U.S. CMBS Issuance

Total($M)

Source: Commercial Mortgage Alert. * Issuance total through August 31, 2011.

Banks and Insurers

0

1

2

3

4

5

6

7

8

90 93 96 99 02 05 08 11

U.S. Life Insurance Company Mortgage Delinquency and In-Foreclosure Rates

Sources: Moody’s Economy.com, American Council of Life Insurers.

%Delinquency

In Foreclosure

Bank Real Estate Loan Delinquency Rates

Construction and Development Loans Noncurrent Rate

0%

5%

10%

15%

20%

91 94 97 00 03 06 09

Notes: Delinquent loans are defined here as those that are noncurrent—either 90 days or more past due or in nonaccrual status. As of Q2 2011.Source: FDIC.

Multifamily MortgagesNoncurrent Rate

Commercial MortgagesNoncurrent Rate

Equity Players

Change in Availability of Capital for Real Estate in 2012


Foreign Investors

Private Equity/Opportunity/Hedge Funds

Institutional Investors/Pension Funds

Nontraded REITs

Private Local Investors

6.23

6.00

5.95

5.65

5.60

1Very LargeDecline

5Stay the Same

9Very Large

Increase

Public Equity REITs 5.56

Pension Funds

Talk: Income returns

Walk: Shoot for more to fill liability gaps

Denominator effect back

I need stable income returns.

Hig

her

Ris

k

Foreign InvestorsForeign Net Real Estate Investments

Source: Real Capital AnalyticsNote: Net capital flows from second-quarter 2010 through second-quarter 2011.All dollars in millions.

-1000

-500

0

500

1000

1500US$ M

Despite tenuous markets, the USA looks relatively safe

Am

eri

cas

Asia

Can

ad

a

Eu

rop

e (

ex.

Germ

an

y)

Germ

an

y

Mid

dle

East

Oth

er

Un

ited

Kin

gd

om

Marketsto

Watch

Markets to Watch

Only one of 51 surveyed markets fails to improve score over 2011

Prospects continue to improve for markets across the country

“Most markets have stopped deteriorating, but most haven’t really improved.”

Trendy Emerging Trends

Feathered–friendmarket finders

StandardColor

Coding

Source: Emerging Trends in Real Estate 2012 survey

Markets: 2011 Emerging TrendsMarkets: 2012 Emerging Trends

Top 10 Markets: 24 Hour Gateways Again

2012 2011

1. Washington D.C. 6.93 7.01

2. Austin 6.92 6.29

3. San Francisco 6.92 6.34

4. New York 6.85 6.56

5. Boston 6.60 6.20

6. Seattle 6.60 6.09

7. San Jose 6.58 6.08

8. Houston 6.46 6.02

9. Los Angeles 6.30 5.84

10. San Diego 6.17 5.63


Most Walkable Cities Do Better

“24-hour Conveniences”

0 20 40 60 80 100

Washington D.C.

Austin

San Francisco

New York City

Boston

Seattle

San Jose

Source: Walkability data provided by Walk Score®, www.walkscore.com.Notes: Scores are on a scale of 0 (car dependent) to 100 (walker’s paradise). NA = not available.

Energy and Tech Markets Excel

2. Austin

3. San Francisco

5. Boston

6. Seattle

7. San Jose

8. Houston

11. Denver

12. Dallas

13. Raleigh-Durham


So Bigger is Better?Population > 3

Mill.2.0 – 2.9 Million Population < 2

Mill.


Boston 6.60

Washington DC6.93

New York 6.85

Providence 4.20

Pittsburgh 5.16

Philadelphia 5.44

Northern NJ 6.10

Westchester/Fairfield, CT 5.74

Baltimore 5.44

East Coast

Washington DC

6.6 6.7 6.7 6.7 6.9 6.96.6 6.7

6.1 6.2

7.0 6.9

1

3

5

7

9

01 02 03 04 05 06 07 08 09 10 11 12

Historical Rating



Seattle 6.60

San Francisco 6.92

Los Angeles 6.30

Portland 5.81

San Jose 6.58

Sacramento 4.20

Inland Empire 5.30Orange County 6.01

San Diego 6.17

Honolulu 5.47

West Coast

Los Angeles

6.66.3 6.3 6.4 6.3

6.5 6.5 6.6

5.8 5.86.3

5.4

1.0

3.0

5.0

7.0

9.0

01 02 03 04 05 06 07 08 09 10 11 12

Historical Rating


Southwest


Las Vegas 3.91

Phoenix 5.45

Tucson 4.21

Albuquerque 4.43

Oklahoma City 4.61

Denver 6.16

Dallas 6.10

Houston 6.46

Austin 6.92

San Antonio 5.83

Salt Lake City 5.17

Southeast


Atlanta 4.65

New Orleans 4.54

Charlotte 5.58

Raleigh/Durham 5.96

Nashville 5.32Memphis 4.22

Virginia Beach/Norfolk 4.93

Florida


Miami 5.81

Jacksonville 4.48

Tampa 4.79

Orlando5.19


Minneapolis 5.38

Kansas City 4.73

St. Louis 4.48

Chicago 5.57

Indianapolis 4.76

Cincinnati 3.97

Columbus 4.03

Cleveland 3.48

Milwaukee 4.33 Detroit 2.88

Midwest

Best Bets

Caution Rules

“It’s not the time to be all in—investors should maintain liquidity.”

Blue Chip Gateways

“Prices may be outrageous in the bigger cities, but do you have confidence investing elsewhere?”

Holders and sellers may do better than buyers.

Job Centers

Value-Add Plays

B-quality apartments in good infill markets “that haven’t been shown any love”

Fixed Rate Debt

Lock-in long-term fixed-rate financing on assets, while interest rates stay low.

Recap Troubled Equity

The number of borrowers with decent assets needing refinancing only grows as troubled loans from the

market lending peak reach terms.

At low interest rates, investors can achieve especially favorable risk-return spreads.

Distressed DebtThe hard part is figuring out if the good assets in

offerings are worth acquiring given all the accompanying stuff

?

Land

“These are real steals but purchasers must be prepared to wait before homebuilding comes back.”

Apartment Building Boom

Go Green

“It’s not about tree hugging, it’s about bottom lines.”

Property Sectors

Apartments

Industrial/Distribution

Hotels

Office

Retail

6.75

5.49

5.36

5.10

4.75

1Abysmal

5Fair

9Excellent

Investment Prospects


4

5

6

7

8

2004 2005 2006 2007 2008 2009 2010 2011 2012

Multifamily Any Way You Like It“Even buy class C and upgrade, spend a little more, hold a little

longer, demand will be there.”

U.S. Multifamily Completions/Vacancy RatesThousands

of units

Apartment Rental: Moderate Income

U.S. Apartment Investment Prospect Trends

Apartment Rental: High Income

0

50

100

150

200

250

94 96 98 00 02 04 06 08 10 12* 14*3

4

5

6

7

8

Vacancy Rate %

Completions

Vacancy Rate %

Rating

Sources: Emerging Trends in Real Estate 2012 survey, REIS* Forecast

3

4

5

6

7

8

2004 2005 2006 2007 2008 2009 2010 2011 2012

Fortress Malls/Infill Shopping Centers

Power Centers

U.S. Retail Investment Prospect Trends

Neighborhood/Comm Centers

U.S. Retail Completions/Vacancy

0

5

10

15

20

25

30

35

96 98 00 02 04 06 08 10* 12* 14*6

9

12

15Completions Vacancy Rate(msf) %

Regional Malls

Sources: Emerging Trends in Real Estate 2012 survey, REIS* Forecast

4

5

6

7

8

2004 2005 2006 2007 2008 2009 2010 2011 2012

Coastal Port Industrial

R&D Industrial

U.S. Industrial Investment Prospect Trends

Warehouse Industrial


3

4

5

6

7

8

2004 2005 2006 2007 2008 2009 2010 2011 2012

Business Center Hotels“It’s the point in cycle where lodging

makes sense”-- only the major 24-hour

Sources: Emerging Trends in Real Estate 2012 survey.Smith Travel Research (1987 to 2010), PricewaterhouseCoopers LLP (2011 and 2012).

Limited-Service Hotels

U.S. Hotel Investment Prospect Trends

Full-Service Hotels

U.S. Hotel Occupancy Rates and RevPAR

0%

20%

40%

60%

80%

96 98 00 02 04 06 08 10 12*$30

$40

$50

$60

$70

$80Occupancy %

RevPAR

Trophy and Medical Office

5

10

15

20

25

92 94 96 98 00 02 04 06 08 10 12* 14*

3

4

5

6

7

8

2004 2005 2006 2007 2008 2009 2010 2011 2012

Suburban Office

Suburban Office

CBD

Vacancy %

Suburban Office

U.S. Office Investment Prospect Trends

CBD

U.S. Office Vacancy Rates

Sources: Emerging Trends in Real Estate 2012 survey, CBRE Econometric Advisors.* Forecast

Dream Houses

Improving Profitability

Prospects for Profitability in 2012 by Percentage of Respondents

1.6%Abysmal

1.3%Very Poor

4.7%Poor

6.1%Modestly

Poor

23.5%Fair

20.8%Modestly

Good

26.0%Good

11.0%Very Good

4.9%Excellent


Facing A Long Grind

Emerging Trends in Real Estate® 2012Panel Discussion

Moderator:Douglas Poutasse

Executive Vice President Bentall Kennedy

Panelists:

Diana ReidExecutive Vice President

PNC Real Estate

Michael CovarrubiasChairman and CEO

TMG Partners

David LynnManaging DirectorClarion Partners

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