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2 Emerging Trends in Real Estate 30 th annual forecast Industry s longest published survey Most highly regarded report Published by PricewaterhouseCoopers and The Urban Land Institute Forget the Quick Fix Worst period since Dramatic drop in values Increases in delinquencies and foreclosures Industry hit by credit crunch combined with recession. 2

3 Multiple Disconnects Some owners drowning in debt Declining values Lenders without money Unprecedented risk avoidance Declining property income Flight to quality and liquidity Reduced tenant demand People had been so focused on the credit-crisis, no one noticed the economy sneaking up to knock their legs out from under them. 3

4 (The downturn) looks like a long doubleheader. The first game is the credit crisis and we re only in the middle innings. And now we have another game to play and that s the poor economy. Every day that goes by without economic improvement increases the risk for real estate. 4

5 Minefield of Issues Credit crisis Broken financial system Recession Debtor nation status Rising unemployment Consumer capitulation Energy prices Housing crash Stock market volatility Global uncertainty Geopolitical conflict It is hard to remember when the economy faced so many negative factors at once. 5

6 Re-pricing Consequences Long-term owners: Traders, speculators: Borrowers: Lenders: Bondholders: Securitizers: Ride out the storm, suffer some writedowns Fuggetaboutit!!! High leverage = more heartache, greater refi risk Writedowns, losses Pain (recent vintage) Less pain (older vintage) Confusion what do I own? On life support Delinquency Rates Heading Higher % '88 '89 '90 '91 '92 '93 '94 Delinquency In-Foreclosure '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 Sources: Moody s Economy.com, American Council of Life Insurers 6

7 2009 Return Expectations Sink Value losses: Average 15-20% off peak Trophy properties: Less erosion B/C quality: More exposure Income: Under pressure Total returns: Negative Worst period since industry-wide depression It s hunkering down time where the winners will be companies (that) can out lease and out manage the competition. 7

8 Cap Rate Shifts Expected Dec Increase (Basis Points) Expected Unleveraged IRR* Hotels Limited Service 8.91% Power Centers 7.57% Suburban Office 7.81% Hotels Full Service 8.13% Regional Malls 6.77% R&D Industrial 7.83% Neighborhood/Community Ctrs 754% 7.54% Central City Office 6.86% Apartments Moderate Income 6.86% Apartments High Income 6.43% Warehouse Industrial 7.26% * During Holding Periods Source: Emerging Trends in Real Estate 2009 survey Buy, Sell, Hold Ratings Buy Hold Sell

9 Investment Outlook Cash and low leverage buyers: On top Surviving banks: Impose strict lending guidelines CMBS: Slowly revives, increased regulation Opportunity funds: Need a new, lower leverage investment model Confronting legacy issues Underwriting Standards Forecast 69.1% Will Become More Stringent 18.2% Remain the Same 12.7% Will Become Less Stringent Source: Emerging Trends in Real Estate 2009 survey 9

10 Capital Flows Forecast Equity 34.6% Moderately Undersupplied 27.8% Moderately Oversupplied 13.1% 1% Substantially Undersupplied 16.0% 52% 5.2% In Balance Substantially Oversupplied Source: Emerging Trends in Real Estate 2009 survey Capital Flows Forecast Debt 58.1% Substantially Undersupplied 34.6% Moderately Undersupplied 3.6% In Balance 2.6% Moderately Oversupplied 1.0% Substantially Oversupplied Source: Emerging Trends in Real Estate 2009 survey 10

11 Make No Assumptions Rumored $300 billion in equity on sidelines Will it stick through downturn? Does asset class allure hold up in reversion to the mean? Pension funds pull back Denominator effect is back Foreign investors retreat Availability of mortgage financing required Real estate depends on debt Increasing Vacancies 25% 20% 15% Suburban Office 10% 5% Downtown Office Industrial Retail Apartments 0% '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '09F Source: Torto Wheaton Research, REIS 11

12 Development Blues msf or units (000s) Apartments Industrial Office 50 Retail 0 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '09F Source: Torto Wheaton Research, REIS I m just happy to have a job. 12

13 Markets to Watch Markets to Watch Ratings decline markedly Flight to quality 24 hour cities Global pathway markets favored Secondary cities prospects dim Return to urban cores 13

14 Top Markets Seattle Boston San Francisco Los Angeles Orange County San Diego Phoenix Denver Dallas Chicago Atlanta New York Washington, DC Houston Source: Emerging Trends in Real Estate 2009 survey Miami West Coast Rankings Seattle 6.15 Portland 5.42 San Francisco 6.12 Los Angeles 5.82 Orange County 4.60 San Diego 4.92 Las Vegas

15 East Coast Rankings Boston 5.62 New York 5.90 Philadelphia 4.63 Washington, DC 6.12 Raleigh/Durham 5.48 Charlotte 5.33 Florida Rankings Jacksonville 4.30 Tampa/ St. Petersburg rg 4.39 Orlando 4.45 Miami

16 Sunbelt Rankings Denver 5.52 Nashville 4.98 Atlanta 4.67 Phoenix 4.14 Dallas 5.33 Austin 5.64 New Orleans 3.33 San Antonio 5.02 Houston 5.74 Midwest Rankings Minneapolis/St. Paul 4.57 Milwaukee 3.39 Detroit 2.24 Chicago 5.11 Cleveland 3.15 St. Louis 3.92 Indianapolis

17 Smaller Markets Suffer Harder to reach Airlines reduce routes More vulnerable to corporate downsizings Investor concerns: Economic drivers In-migration Exit strategy Infill: Move Back-in Continues High gas prices, utility bills New equation: Car costs v. convenience Overcoming car dependency Vertical wave 17

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19 Property Sector Investment Rankings Apts: Moderate Warehouses CBD Office Apts: High Income R&D Neigh./Comm. Shopping Ctrs. Full Service Hotels Suburban Office Limited-Service Hotels Power Centers Regional Malls 1 Abysmal Fair Excellent Source: Emerging Trends in Real Estate 2009 survey Property Sector Development Rankings Apts: Moderate Warehouses Apts: High Income R&D CBD Office Neigh./Comm. Shopping Ctrs. Limited Service Hotels Limited-Service Hotels Suburban Office Power Centers Regional Malls 1 Abysmal Fair 9 Excellent Source: Emerging Trends in Real Estate 2009 survey 19

20 Best Bets Investments Be patient and husband cash Buy discounted loans Recap distressed loans Hold core Buy public REITs Focus on global pathway markets Staff up asset managers, leasing pros, workout specialists Best Bets Development At a standstill Reorient to mixed-use and infill Plan more transit-oriented development Go green 20

21 Best Bets Property Sectors Buy or hold multifamily Buy or hold industrial Hold office Hold hotels Buy residential building lots Purchase distressed condos Pray for retail For Sale Housing The worst is over Crisis is ending but more pain to come Pricing levels need to revert to levels Expect bottom in late 2009 Slow, lurching recovery follows 21

22 Recovery Track Private markets need to correct: Investors need to take their beating Debt capital needs to flow Regulators must help restore confidence The economy needs to improve New jobs engine must surface REITs will lead Forget the Quick Fix 2009: 2010: 2011: A downer Floundering around Slowly recovering All depends on the economy: We need a jolt! 22

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24 Canada Worried about the big elephant in the room next door Canada 2009 Outlook Less volatile More regulated, conservative Consumers haven t overleveraged Robust momentum stalled Greater uncertainty, more caution Expect a tough slog We know we are not an island and are vulnerable 24

25 Capital Pullback - Equity All Sources 4.03 Private Property Companies Govt. Sponsored Enterprises Syndicators/ 1031 Exchange Investors Public REITs Opportunity/Hedge Funds Pension Funds 1 Very Large Decline Source: Emerging Trends in Real Estate 2009 survey Stay the Same 9 Very Large Increase Capital Pullback - Debt All Sources Mezzanine Lenders Non-Bank Financial Institutions Insurance Companies Govt. Sponsored Enterprises Commercial Banks Securitized Lenders/CMBS 1 Very Large Decline Source: Emerging Trends in Real Estate 2009 survey Stay the Same 9 Very Large Increase 25

26 Split Personality: West v. East Economy faces headwinds d East hurt by manufacturing declines, weak U.S. dollar West vulnerable to energy reversals Downtown Office Vacancy 15% 12% 9% 6% 3% Toronto Montreal Vancouver 0% Q08 Calgary 26

27 Markets to Watch Calgary 6.46 Vancouver 6.75 Edmonton 6.07 Montreal Ottawa Halifax 3.95 Toronto 5.85 Property Sector Investment Outlook Industrial/Distribution 6.43 Apartments Office For-Sale Residential Retail Hotels 1 Abysmal Fair Excellent Source: Emerging Trends in Real Estate 2009 survey 27

28 Canada - Best Bets Buy or hold apartments Hold onto center city investments Conserve cash for emerging opportunities Live in Vancouver Latin America Overview Focus on Brazil and Mexico Growing middle class populations Need everything: especially apartments and retail Corruption, transparency remain issues Increasing opportunities 28

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