Emerging Trends in Real Estate 2012

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2 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

3 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

4 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

5 Facing A Long Grind

6 Don t let availability of capital cloud judgments demand drivers don t exist and fundamentals need to catch up.

7 Real Estate Compares Favorably Stocks Bonds Real Estate

8 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.

9 Where is Demand?

10 Recovery in the Era of Less If you haven t figured it out by now, this time is different.

11 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

12 Global Jobs Arbitrage

13 Productivity s Costs

14 Personal and Governments Debt Loads

15 Demographic Realities

16 Construction Slowdown

17 Global Financial Morass

18 Financial Industry Recalibration

19 Government Disarray

20 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%

21 Commercial Property Price Index All Properties National Index '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 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.

22 Interest Rates Inflation and Interest Rate Changes Increase substantially 2012 Next Five Years Increase moderately Remain stable at current levels Inflation Short-term rates (1-year treasuries) Long-term rates (10-year treasuries) Commercial mortgage rates Source: Emerging Trends in Real Estate 2012 survey.

23 Cap Rates NCREIF Cap Rates vs. U.S. Ten Year Treasury Yields 10% 8% 6% Cap Rate 4% 10-Year Treasury 2% 0% -2% Spread % 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.

24 Real Estate Barometer Excellent 9 Fair 5 Buy Hold Sell Abysmal Source: Emerging Trends in Real Estate 2012 survey.

25 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

26 Too Much Equity Equity Capital For Investing 39.1% 22.5% 14.0% 17.2% 7.3% Substantially undersupplied Moderately undersupplied In balance Moderately oversupplied Substantially oversupplied Source: Emerging Trends in Real Estate 2012 survey.

27 Too Little Debt Debt Capital For Acquisitions 43.1% 20.2% 22.9% 12.5% 1.4% Substantially undersupplied Moderately undersupplied In balance Moderately oversupplied Substantially oversupplied Source: Emerging Trends in Real Estate 2012 survey.

28 No Refinancing Emergency Maturing Loans: Preferred Strategy for Lenders Extend without mortgage modification 6% Foreclose and dispose 15% CMBS Delinquency Rates 10% 8% Delinquency rate 6% 4% 2% Delinquency rate average Extend with mortgage modification 54% Sell to a third party 25% 0% '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 Sources: Emerging Trends in Real Estate 2012 survey, Trepp LLC. * Through August 2011

29 Rigorous Underwriting Standards Equity Underwriting Standards Forecast for U.S. 46.7% 30.5% 22.8% More Rigorous Will Remain the Same Less Rigorous Source: Emerging Trends in Real Estate 2012 survey.

30 Follow the money When it looks out of control, retreat

31 CMBS Snafu U.S. CMBS Issuance Total ($M) * Source: Commercial Mortgage Alert. * Issuance total through August 31, 2011.

32 Banks and Insurers Bank Real Estate Loan Delinquency Rates U.S. Life Insurance Company Mortgage Delinquency and In-Foreclosure Rates 20% % 8 Delinquency 15% Construction and Development Loans Noncurrent Rate % 5% Multifamily Mortgages Noncurrent Rate Commercial Mortgages Noncurrent Rate In Foreclosure 0% Notes: Delinquent loans are defined here as those that are noncurrent either 90 days or more past due or in nonaccrual status. As of Q Source: FDIC. Sources: Moody s Economy.com, American Council of Life Insurers.

33 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 5.60 Public Equity REITs Very Large Decline 5 Stay the Same 9 Very Large Increase Source: Emerging Trends in Real Estate 2012 survey.

34 Pension Funds Talk: Income returns Walk: Shoot for more to fill liability gaps I need stable income returns. Denominator effect back

35 Americas Asia Australia Canada Europe (ex. Germany) Germany Middle East Other United Kingdom Foreign Investors Foreign Net Real Estate Investments US$ M Despite tenuous markets, the USA looks relatively safe Source: Real Capital Analytics Note: Net capital flows from second-quarter 2010 through second-quarter All dollars in millions.

36 Markets to Watch

37 Markets to Watch Only one of 51 surveyed markets fails to improve score over % rate fair or better prospects vs. 40% in 2011 Most markets have stopped deteriorating, but most haven t really improved.

38 Trendy Emerging Trends Standard Color Coding Feathered friend market finders

39 Markets: Emerging Trends Source: Emerging Trends in Real Estate 2012 survey

40 Top 10 Markets: 24 Hour Gateways Again Washington D.C Austin San Francisco New York Boston Seattle San Jose Houston Los Angeles San Diego Source: Emerging Trends in Real Estate 2012 survey

41 Most Walkable Cities Do Better New York City San Francisco Boston Seattle Washington D.C. San Jose Austin hour Conveniences Source: Walkability data provided by Walk Score, Notes: Scores are on a scale of 0 (car dependent) to 100 (walker s paradise). NA = not available.

42 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 Source: Emerging Trends in Real Estate 2012 survey

43 So Bigger is Better? Population > 3 Mill Million Population < 2 Mill.

44 East Coast Westchester/ Fairfield, CT 5.74 Boston 6.60 Providence 4.20 Northern NJ 6.10 New York 6.85 Pittsburgh 5.16 Baltimore 5.44 Philadelphia 5.44 Washington DC 6.93 Source: Emerging Trends in Real Estate 2012 survey

45 Washington, DC Historical Rating Source: Emerging Trends in Real Estate 2012 survey

46 New York Historical Rating Source: Emerging Trends in Real Estate 2012 survey

47 West Coast Seattle 6.60 Portland 5.81 Sacramento 4.20 San Francisco 6.92 Honolulu 5.47 San Jose 6.58 Los Angeles 6.30 Orange County 6.01 San Diego 6.17 Inland Empire 5.30 Source: Emerging Trends in Real Estate 2012 survey

48 Southwest Salt Lake City 5.17 Denver 6.16 Las Vegas 3.91 Phoenix 5.45 Tucson 4.21 Albuquerque 4.43 Dallas 6.10 Austin 6.92 Oklahoma City 4.61 San Antonio 5.83 Houston 6.46 Source: Emerging Trends in Real Estate 2012 survey

49 Southeast Virginia Beach/Norfolk 4.93 Raleigh/Durham 5.96 Charlotte 5.58 Memphis 4.22 Nashville 5.32 Atlanta 4.65 New Orleans 4.54 Source: Emerging Trends in Real Estate 2012 survey

50 Florida Jacksonville 4.48 Orlando 5.19 Tampa 4.79 Miami 5.81 Source: Emerging Trends in Real Estate 2012 survey

51 Midwest Minneapolis 5.38 Milwaukee 4.33 Chicago 5.57 Detroit 2.88 Cleveland 3.48 Kansas City 4.73 St. Louis 4.48 Indianapolis 4.76 Cincinnati 3.97 Columbus 4.03 Source: Emerging Trends in Real Estate 2012 survey

52 Best Bets

53 Caution Rules It s not the time to be all in investors should maintain liquidity.

54 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.

55 Job Centers

56 Value-Add Plays B-quality apartments in good infill markets that haven t been shown any love

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

58 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.

59 Distressed Debt The hard part is figuring out if the good assets in offerings are worth acquiring given all the accompanying stuff

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

61 Apartment Building Boom

62 Go Green It s not about tree hugging, it s about bottom lines.

63 Property Sectors Investment Prospects Apartments 6.75 Industrial/Distribution 5.49 Hotels 5.36 Office 5.10 Retail Abysmal 5 Fair 9 Excellent Source: Emerging Trends in Real Estate 2012 survey

64 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. Apartment Investment Prospect Trends Rating 8 7 Apartment Rental: Moderate Income U.S. Multifamily Completions/Vacancy Rates Thousands of units Completions Vacancy Rate % Vacancy Rate % Apartment Rental: High Income * 14* 4 3 Sources: Emerging Trends in Real Estate 2012 survey, REIS * Forecast

65 Fortress Malls/Infill Shopping Centers 8 U.S. Retail Investment Prospect Trends U.S. Retail Completions/Vacancy (msf) Completions Vacancy Rate % Regional Malls Neighborhood/ Comm Centers Power Centers * 12* 14* 9 6 Sources: Emerging Trends in Real Estate 2012 survey, REIS * Forecast

66 Coastal Port Industrial U.S. Industrial Investment Prospect Trends Warehouse Industrial R&D Industrial Source: Emerging Trends in Real Estate 2012 survey.

67 Business Center Hotels It s the point in cycle where lodging makes sense -- only the major 24-hour U.S. Hotel Investment Prospect Trends U.S. Hotel Occupancy Rates and RevPAR 8 80% Occupancy % RevPAR $ Full-Service Hotels 60% 40% $70 $ Limited-Service Hotels 20% $50 $ % * $30 Sources: Emerging Trends in Real Estate 2012 survey. Smith Travel Research (1987 to 2010), PricewaterhouseCoopers LLP (2011 and 2012).

68 Trophy and Medical Office

69 Suburban Office 8 U.S. Office Investment Prospect Trends U.S. Office Vacancy Rates Vacancy % Suburban Office 6 CBD 15 5 CBD 4 3 Suburban Office * 14* Sources: Emerging Trends in Real Estate 2012 survey, CBRE Econometric Advisors. * Forecast

70 Dream Houses

71 Improving Profitability Prospects for Profitability in 2012 by Percentage of Respondents 1.6% Abysmal 3.0% 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 Source: Emerging Trends in Real Estate 2012 survey

72 Facing A Long Grind

73 Los Angeles Historical Rating Source: Emerging Trends in Real Estate 2012 survey

74 Atlanta Historical Rating Source: Emerging Trends in Real Estate 2012 survey

75 Miami Historical Rating Source: Emerging Trends in Real Estate 2012 survey

76 Chicago Historical Rating Source: Emerging Trends in Real Estate 2012 survey