Emerging Trends in Real Estate® 2009 - Urban Land Institute

Editorial Leadership TeamEmerging Trends in Real Estate ® 2009 ChairsRichard M. Rosan, Urban Land InstituteRobert K. Ruggles III, PricewaterhouseCoopersPrincipal AuthorJonathan D. Miller, Urban Land Institute ConsultantPrincipal Researchers and AdvisersStephen Blank, Urban Land InstituteChuck DiRocco, Urban Land InstituteSteven Laposa, PricewaterhouseCoopersDean Schwanke, Urban Land InstitutePublisher and Senior AdviserRachelle L. Levitt, Urban Land InstituteSenior AdvisersChris Potter, PricewaterhouseCoopersSusan M. Smith, PricewaterhouseCoopersAdvisers and Contributing ResearchersAllen Baker, PricewaterhouseCoopersAndrew Beattie, PricewaterhouseCoopersKen Griffin, PricewaterhouseCoopersRick Kalvoda, PricewaterhouseCoopersNicole Miles, PricewaterhouseCoopersJohn Rea, PricewaterhouseCoopersDoug Struckman, PricewaterhouseCoopersRick Wincott, PricewaterhouseCoopersULI Editorial and Production StaffNancy H. Stewart, Managing EditorDavid James Rose, Manuscript EditorByron Holly, Senior Graphic DesignerCraig Chapman, Director of Publishing OperationsKarrie Underwood, Administrative AssistantEmerging Trends in Real Estate is a registered trademark ofPricewaterhouseCoopers LLP.© October 2008 by ULI–the Urban Land Institute andPricewaterhouseCoopers LLP.Printed in the United States of America. All rights reserved. No partof this book may be reproduced in any form or by any means, electronicor mechanical, including photocopying and recording, or byany information storage and retrieval system, without written permissionof the publisher.Recommended bibliographic listing:ULI–the Urban Land Institute and PricewaterhouseCoopers LLP.Emerging Trends in Real Estate ® 2009. Washington, D.C.:ULI–the Urban Land Institute, 2008.ULI Catalog Number: E35ISBN: 978-0-87420-106-2ii Emerging Trends in Real Estate ® 2009

Executive SummaryThe credit crisis and ensuing recession promise to drag commercial realestate markets into a difficult period marked by value losses, rising foreclosures,and reduced property revenues. In 2009, expected total realestate private equity investment returns will likely register in negative territoryfor the first time in nearly two decades. After an unprecedented meltdown,housing values should finally hit bottom during the year, followedby later correcting commercial sectors. Cap rates continue to increase tomore historic ranges, raising yield expectations and triggering depreciation.Beginning in 2010, Emerging Trends interviewees anticipate a slowrecovery, hampered by risk aversion, constricted financing sources, anda weakened economy. REIT stock portfolios, which have already sufferedsignificant losses, will lead any rebound.Late-in-the-game investors who heavily leveraged acquisitions at peakmarket prices face significant hurdles to meeting debt-service requirementsas weakening tenant demand results in rising vacancies and slackeningrents across most property sectors. Long-term owners, employingreasonable financing strategies, should manage their way through thedownturn, suffering paper losses after significant gains over the pastdecade. Lender problems will extend from residential portfolios into commercialreal estate loans, the consequences of shoddy underwriting asmarkets became overheated.Investors need to focus on asset management and leasing strategiesto hold and attract tenants, limiting declines in property cash flows. Onceliquidity returns to credit markets, chastened lenders will force stringentrequirements on borrowers. Investors will need to reorient acquisition strategiesaway from high leverage and financial engineering, and expect moremoderate returns in any recovery. Cash investors will have the upper handand excellent opportunities will appear to buy at market lows and recapitalizestruggling owners. Significant equity capital apparently waits for sellersto capitulate and owners to mark down portfolios. Optimists suggest thesidelined capital will be enough to cushion markets against a severe downturn.But many interviewees insist that resumed debt flows will be necessaryto prop up markets and resuscitate transaction activity.Commercial developers confront a dismal year—financing evaporatesfor new construction and projects coming on line will struggle to lease up,falling short of forecasts. Emerging Trends ratings for development prospectsin most cities and sectors approach record lows. At least, commercialactivity remained relatively tempered throughout the upcycle, helpingmany markets approach supply/demand equilibrium. Already savaged,homebuilders see little hope for improvement until mortgage markets comeback and the job picture brightens—not in 2009.In a classic flight to quality, interviewees continue to favor familiarcoastal global pathway cities as investment outlooks grow bleak—ratingsuniformly decline for almost all markets. Among major metropolitan areas,Seattle and San Francisco take top rankings, followed by Washington, D.C.,New York, and Los Angeles. Houston vaults into the top ten for the first timein more than a decade, propelled by its energy industry. Denver also scoresrelatively well thanks to a strengthened downtown and an improved masstransit system. Interviewees generally view secondary and tertiary citiesas higher risk—they are less diversified and less integrated into key transportnetworks. Markets with exposure to the housing debacle—especiallyin Florida, southern California, and the Southwest—nosedive. Except forChicago, cities in the Midwest weaken further—carmaker troubles don’t help.Among property sectors, only apartments show some enduringstrength—increasing numbers of young adults and people pushed outof the housing market keep rent rolls relatively healthy. Always favored,industrial properties may weaken in the consumer downturn—fewergoods are shipped and distributed. Businesses stop expanding or downsize,hurting office. Hotels suffer as business and tourist travel is cutback in the recessionary environment. Retail really hits the skids—cashstrappedAmericans struggle with credit card debt, the mortgage mess,and gloomy employment environment.Canada’s more conservative approach to lending and investing shouldhelp buffer the country’s real estate industry against significant falloutfrom U.S. and European economic travail. Still, interviewees grow moreconcerned about a slowdown. Western energy/commodity-driven marketsare less exposed than Toronto and Montreal to lowered demand from U.S.businesses for Canadian manufactured goods. While Canadian banksseem well capitalized, interviewees expect capital availability to decline,curtailing development and limiting transaction activity. Near-record-lowoffice vacancies will increase as businesses grow more cautious andsome new projects come on line, especially in Toronto and the relativelyhot growth energy towns—Calgary and Edmonton. Housing markets ebb,but look robust compared to U.S. counterparts. Government regulatorsand stricter underwriting helped keep a lid on mortgage activity and homebuilding.Overall, Canada may get sideswiped, but should avoid the moreserious problems suffered south of its border . . . . Investment activity inLatin American real estate concentrates in Brazil and Mexico, where growingmiddle-class populations gain greater buying power in diversifyingeconomies. Difficult-to-navigate markets require local partners for foreignplayers. Interviewees warn about transparency issues and suggest that thebest near-term opportunities may have passed.PrefaceA joint undertaking of the Urban Land Institute (ULI) andPricewaterhouseCoopers, Emerging Trends in Real Estate ®is a trends and forecast publication in its 30th edition; this year, itis expanding to cover real estate markets in Latin America. It is themost highly regarded and widely read forecast report in the realestate industry. The report provides an outlook on U.S., Canadian,and Latin American real estate investment and developmenttrends, real estate finance and capital markets, property sectors,metropolitan areas, and other real estate issues.Emerging Trends in Real Estate ® 2009 presents a consensusoutlook for the future and reflects the views of more than 700individuals who completed surveys and/or were interviewed asa part of the research process for this report. Interviewees andsurvey participants represent a wide range of industry experts—investors, developers, property companies, lenders, brokers, andconsultants. ULI and PricewaterhouseCoopers researchers personallyinterviewed over 270 individuals, and survey responses werereceived from over 440 individuals whose company affiliations arebroken down as follows:Private Property Company or Developer 43.3%Real Estate Service Firm 18.6%Institutional/Equity Investor or Investment Manager 17.2%Other Entity 7.8%Bank, Lender, or Securitized Lender 4.8%Publicly Listed Property Company or REIT 4.6%Homebuilder or Residential Land Developer 3.7%A list of the interview participants in this year’s study appears atthe end of this report. To all who helped, the Urban Land Institute andPricewaterhouseCoopers extend sincere thanks for sharing valuabletime and expertise. Without the involvement of these many individuals,this report would not have been possible.Emerging Trends in Real Estate ® 2009 1

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Chapter 1: Forget the Quick FixExhibit 1-5U.S. Real Estate Returns and Economic Growth40% NAREIT GDP NCREIF35%30%25%20%15%10%5%0%-5%-10%-15%-20%199719981999200020012002Sources: NCREIF, NAREIT, Moody’s Economy.com.* 2008 data annualized from second-quarter 2007.A Punishing TimeFundamentals Deteriorate. The confluence of the creditmess and weak economy set the stage for commercial realestate markets to take some hard knocks, lagging as usualbehind the stock market, which has already suffered a bearishcorrection. As noted, problems will result from lowered demand,not overdevelopment, except in condominiums, where manymarkets added too much supply in the wider housing splurge.Not surprisingly, outlooks for shopping centers hit the skids inthe consumer retreat. Hotel forecasts also turn somber—vacationand business travel declines. Office owners find insulationin longer-term leases, but most businesses stop expanding andmany start to cut back—so vacancies will increase and rentssoften. “Everyone is afraid to deploy capital and plays defense.”Warehouse markets also suffer erosion in tenant demand asfewer goods get shipped and logistics specialists study howto reduce energy costs. Only apartment markets benefit fromhousing distress—more people can’t afford to own and need torent. Core urban markets with mass transportation alternativesto the car solidify their advantages over far-flung car-dependentsuburban areas, and more investors and developers target infilllocations for future mixed-use residential projects, especiallynear transit stops.Development Blues. In 2009, most new development activitystops in its tracks. Unless a builder presents a bullet-proof,preleased project with construction costs locked down, lenderswon’t touch large development deals. Bankers also demandthat builders have large equity stakes in projects. “It’s almost200320042005200620072008*impossible to find financing that isn’t prohibitively expensive.”Says an old pro: “Developers should put all planning on hold.For projects underway, they need to lower leverage, increasereserves for tenant improvements and marketing, relook everyassumption, and assume the worst.” In addition to problematicdemand and wary lenders, energy and construction materialcosts ratchet up budgets and squeeze profits further. Atleast labor costs abate and material costs may follow if worlddemand ebbs in a global slowdown. For most developersscheduled to open new buildings during the year, their timingcouldn’t be much worse. At least the drop in activity after aperiod of relatively controlled new construction should allowcommercial markets to recover more quickly once demandstrengthens again. That has not been the case in most housingmarkets, swamped by large inventories of unsold newhomes—the significant oversupply extends the downturn.Many homebuilders stuck with land tracts have little choice butto bail out at cents-on-the-dollar sales or let banks foreclose.Brokers Lament. While developers struggle, brokers watchcommissions vanish into the vast bid-ask chasm separatingbuyers and sellers. 2008 deal volumes are 20 percent ofthose of 2007, and 2009 may not be much better. “It’s a terribletime for transaction people” after “some incredible years.”Interviewees agree that sellers will blink first—“they need toget reality.” Underwater owners will almost certainly cavetoward buyer expectations, hoping enough dollars comeoff the sidelines to buffer pricing in bidding for distressedassets. Unlike in recent years, cash buyers will have theadvantage—leveraged buyers and financial engineers “aregone.” Opportunity funds need to reorient their formulas andexpectations—returns and promotes won’t be as high withouta boost from debt. Money will be made on riding markets backto recovery and releasing properties, not on cap rate compressionand financing structures.Without as much leverage in the market, any pricingincreases over time will be more “moderate.” “The impact oflower debt levels and more expensive debt is lower growthassumptions.” Underwriting will be based on 12-month trailingcash flows, not dreamy forward projections. “Cash-on-cashis important again.” First-stage transactions will involve ownerrecapitalizations, restructurings, and programmatic ventures—“even the best of players need equity.” But no one wants tolook stupid by buying too soon—select trophy properties withlong rent rolls get some attention from cash-rich offshore buyers,taking advantage of the limp dollar. History shows theseproperties hold value better in down periods, and appreciatefaster in recoveries. Everybody else waits out the logjam. “It’sEmerging Trends in Real Estate ® 2009 7

the worst part of the cycle when we have to be extra nice toeveryone, especially to lenders,” a broker jokes sarcastically.Rightsizing. For the first time, a whole generation of now-30 toearly-40-something real estate players faces the dispiriting realityof a depressed market after years of mounting incomes andgenerous expense accounts. “There’s just less for everyone, sothe industry must shrink.” “People got fat; now they get thin.”Developers trim staffs—“there’s no reason to carry overheadwhen you won’t be able to build for a considerable period”—and brokers “rightsize” by firing low producers (and their numbersincrease). Mortgage banks and homebuilders have alreadyundertaken major layoffs and entire CMBS shops just “vaporize.”The “blood on the streets” extends to law firms, appraisers,and accountants. For many in 2009, the best-case scenariomeans feeling good about staying employed. “There’s also beena major shift from offense to defense by real estate companies,”says a leading headhunter. “It’s happened much more quicklythan in the late 1980s, and the reallocation of human capital isunderway.” Acquisitions and dealmakers get mothballed in favorof asset managers, leasing pros, and workout specialists. Notonly will these jobs be “less sexy” than investment banking,”they also pay less. “It’s a time for patience, which means smallbonuses and little if any equity participation.” Less glamour andlower pay may have a tiny silver lining for some workers: “You’lllearn more next year than in all the previous ten years.”Tenant Retention. Keeping tenants and securing rentflows should dominate owner strategies to manage throughthe doldrums. “Do whatever it takes to get tenants to stay.”Landlords need to focus on keeping occupancies up ratherthan pushing rents—otherwise, other owners can lure tenantsaway by undercutting them, and finding replacements will bedifficult. “In this environment, you make money or lose less byout-hustling the competition—buying occupancy and defendingspace.” Office owners begin to approach tenants up forrenewals 18 to 24 months prior to expirations and attempt toink one- to two-year lease extensions on “blend-and-extend”deals. Clearly, tenants have the upper hand, but many companiesstruggle to make decisions given the murky economy andchanging real estate environment. Some stake reasonable betsthat rental rates will deteriorate over the next year and believethey’ll do better if they wait out landlord entreaties.Looking for Recovery. Everyone wonders how long it willtake for commercial markets to recover and the industry toget back in gear. Odds increase on a more extended pausethan a quick rebound. The following is what needs to happenand why nobody should hold their breath:8 Emerging Trends in Real Estate ® 2009Exhibit 1-6Index Returns: Real Estate vs. Stocks/Bonds40% S&P 500 NAREIT NCREIF LehmanGovernment35%Bond30%25%20%15%10%5%0%-5%-10%-15%-20%-25%199719981999200020012002Sources: NCREIF, NAREIT, Moody’s Economy.com.* 2008 data annualized from second-quarter 2007.Private markets need to correct: While dealmakers andintermediaries have been blasted by dismal transaction volumesand REIT stocks have suffered steep losses, the privatereal estate markets haven’t taken their beating. Lenders mustbegin to reconcile and mark to market their portfolio problemsand force distressed owners into becoming motivated sellers.Given the complexity and depth of banker problems, especiallyin rationalizing CMBS portfolios, the process will taketime. And no one really knows what to expect when CMBSspecial servicers start foreclosing except for the prospect ofwidespread litigation.Debt capital needs to flow: Government bailouts aside,wobbly lenders won’t eagerly open loan spigots again untilthey recapitalize and learn to navigate a more stringent regulatorylandscape. The left-for-dead CMBS market also mustreformulate for “normalcy” to return. Securitization structuresneed simplification, “getting back to basics,” so investorshave greater confidence about underlying assets. Lenderunderwriting and due diligence will require more documentation,loan-to-values will be lower, and debt service coveragewill be higher. In short, don’t expect a surge of new debtcapital to float markets suddenly.Regulators need to help restore confidence in the securitiesmarkets: Since rating agencies proved lame in evaluatingofferings and B-piece buyers ultimately failed at self-regulation,the government will insert itself into overseeing mortgagesecuritization markets—taxpayer losses from shoring upRMBS, CMBS, and collateralized debt obligation (CDO) lenders,not to mention Freddie Mac, Fannie Mae, and AIG willbe too massive for politicians to just twiddle their thumbs andwink at financial industry lobbyists. While resuscitating CMBS200320042005200620072008*

Chapter 1: Forget the Quick FixWhile dealmakers and intermediarieshave been blasted by dismaltransaction volumes and REIT stockshave suffered steep losses, theprivate real estate markets haven’ttaken their beating.markets, any systemic overhaul promises to keep lendersand securitizers on a short leash, leading to considerablymore measured debt flows.The economy needs to improve: On the fundamentalsside, falling demand for space won’t affect real estate marketsseverely until 2009. With prospects for a rapid economicbounce back questionable, property cash flows may diminishor at least stay under pressure well into 2010. Intervieweestrash notions of V-shaped recoveries and turn more realistic:“With every day, recovery gets stretched out further.”Housing’s condition: no better: Thanks to overdevelopment,housing tanked earlier and more severely than commercialmarkets, but shows no signs of recovering more quickly. Formortgage bankers, “the subprime mess was just the tip of theiceberg”—they threw caution aside across all lending categories.Now, stricter lending standards and the sickly economysap the homebuyer market. Speculators have disappearedunder pools of losses. “The few buyers out there look for thedeal of the century” and many prospective purchasers can’tafford more than that. Until lenders recover and Americans feelmore secure about their financial futures, homebuying staysanemic. Between the Federal Reserve and Congress, morescrews will be turned on bankers to follow stricter and moreconservative underwriting guidelines, eliminating rash practicesand forcing buyers to put up more equity. Unfortunately,many people who refinanced in the pricing spiral learn theirhomes can perform more like roulette wheels than ATMs.Homeownership still offers the American dream, but recentexperience will temper buyer enthusiasm and raise marketcaution for years to come.Forget the quick fix.Key IssuesThe listing economy—jobs, interest rate changes, energycosts, inflation—raises greatest concern among surveyrespondents in an analysis of key trends. (See Exhibit 1-7.)They increasingly downplay consequences from terrorism andthe Mideast wars—these geopolitical issues score lower rat-Exhibit 1-7Importance of Issues Affecting Real EstateInvestment and Development in 2009Economic/Financial IssuesJob growth ratesEnergy pricesInterest rate changesInflationIncome and wage growthState and local budget problemsFederal fiscal deficits/imbalancesAsian economic growthTrade deficits/imbalancesOffshoring and outsourcingEuropean economic growthSocial/Political IssuesImmigrationThreat of terrorismWar issuesSocial equity/inequalityReal Estate/Development IssuesConstruction materials costsConstruction labor costsInfrastructure funding/developmentLand costsFuture home price stagnation/deflationTransportation fundingGrowth controlsOverbuildingAffordable/workforce housingUrban redevelopmentSustainable developmentLand availability issuesNIMBYismGreen buildingsUrban design and place makingFuture home price inflationResponsible property investingClimate change/global warming0 1 2 3 4 51 = no importance, 2 = little importance, 3 = moderate importance,4 = considerable importance, 5 = great importance.Source: Emerging Trends in Real Estate 2009 survey.4.694.244.224.114.003.353.052.972.802.772.693.173.083.072.584.354.033.933.903.883.813.693.503.483.473.403.383.363.353.243.182.992.88Emerging Trends in Real Estate ® 2009 9

Exhibit 1-8Firm Profitability ForecastProspects for Profitability in 2008 by Percentage of RespondentsAbysmal to Modestly Poor 22.4%Fair 22.7% Modestly Good 16.3% Good 22.4% Very Good 14.5% Excellent 1.8%Prospects for Profitability in 2009 by Percentage of RespondentsAbysmal to Modestly Poor 15.8% Fair 23.2% Modestly Good 18.6% Good 26.7% Very Good 12.2% Excellent 3.6%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.ings than in previous years. But some interviewees expressunease about Russia’s resurgence and America’s less imposingsuperpower status. Trade deficits and market imbalancesget somewhat shorter shrift even though they relate to U.S. oildependence and inflationary pressures. Construction materialcosts remain primary concerns for developers, but land pricesand labor costs become lesser issues as prices decline andworker availability increases with fewer ongoing projects.Lower Profits. Not surprisingly, real estate firm profitabilityforecasts turn sharply more negative from last year’s report.About 45 percent of respondents expect poor to fair results in2008, with only 16 percent anticipating very good to excellentperformance. 2009 may be marginally better, if transactionvolumes increase. (See Exhibit 1-8.)Trending Green. Portfolio problems, the construction stallout,and increasing industry angst could distract from thepush to reduce buildings’ carbon footprints and install greentechnologies. But rising utility bills get everybody’s attention.Big tenants increasingly put “green” on their prioritychecklists—they want good PR for occupying environmentallycorrect space, savings from more energy-efficient systems,and improved working environments for greater productivityand to recruit and retain younger, up-and-coming employees.Some investors still question whether green attributestranslate into premium pricing. The dearth of recent dealsand falling prices limit any reasonable analysis. “It’s hard tounderstand green values since so few have traded,” says aninterviewee. “The economics haven’t been proven; it’s not adriver of rents yet.” Other owners insist that “LEED is critical.”In particular, developers of Class A office buildings realizethat LEED certification has become a competitive baseline tolure tenants out of nongreen existing space. In higher-growthdevelopment-friendly markets, developers take risks by notspending an additional 3 to 5 percent on project costs forgreen technologies. LEED also extends its application tomultifamily projects where renters have become more globalwarmingconscious, “especially the Generation Y set.” If themarket doesn’t fully embrace green for now, local governmentsmay force the issue. Major cities around the countrybegin to pressure real estate owners to reduce energy consumption,water use, waste disposal, and outdoor watering.State and local governments also provide tax abatementsand other incentives to encourage green practices.“Developers are just not thinking if they don’t go green.”Retrofitting Options. Some owners and managers tackle retrofittingexisting space to reduce energy costs and tamp downoperating expenses. “The biggest energy control is people—turning out lights, putting down blinds in summer, openingthem in winter, and turning faucets off.” Simple, relatively inexpensivechanges (“as little as $1.50 per square foot”)—lowflowtoilets, energy-saver lightbulbs, low-water landscaping,waste recycling—can result in significant savings. But existingproperties will have a tall order competing against newspace—installing under-floor air systems and window technologieswon’t pencil out. Big-box retailers, shopping center owners,and warehouse investors consider the benefits of placingsolar panels on large roof prints, particularly in sun-drenchedregions where significant HVAC bills can be reduced.10 Emerging Trends in Real Estate ® 2009

Chapter 1: Forget the Quick FixBest Bets 2009InvestmentBe Patient and Husband CashUntil sellers relent, investors should sit tight. “[Amass] asmuch capital as possible and wait” for prices that clear themarket. Opportunities will surface at significant discounts topeak pricing and patience will be rewarded. “Investmentsmade in 2009 could result in substantial future returns.”Buy Discounted LoansLenders will be offloading more loans at increasing discountsonce the pressure builds to resolve damaged balance sheets.Buyers need to focus on underlying collateral, watching forwide disparities in asset quality and resiliency. They also mustcarefully scrutinize loan positions in the capital stack—mezzanineand lower tranches of senior debt “may have no value.”Recap Distressed BorrowersSome overleveraged owners will look to lifelines from newcapital sources rather than face defaults. Investors will be inthe driver’s seat—they can get better deal structure, moreguarantees, principal paydowns, and bigger spreads. Investin maturity defaults, construction loans/bridge loans, or takemezzanine positions and equity stakes. “You can get equityreturns for debt risk.”Exhibit 1-9Real Estate Business Activity Prospects in 2009InvestmentReal Estate ServicesFinancing as a LenderCommercial/MultifamilyDevelopmentHomebuilding/ResidentialLand Development1AbysmalSource: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.5Fair5.505.194.974.562.609Excellent“Investments made in 2009 could resultin substantial future returns.”Hold CoreInvestors really have no choice—selling as vultures circlemakes no sense. Well-leased properties with manageable rolloverexposure will take paper losses after scoring years of outsizedpaper gains. Owners should step up tenant relations andleasing programs to maintain occupancies and cash flows.Buy Public REITsThese stocks have taken a major licking, already factoring inmuch of the expected declines in private markets. They mayexperience more downside when negative headlines increaseabout rising commercial defaults and foreclosures, but willlead any market recovery. Many larger companies are wellcapitalized with manageable debt loads and should navigateensuing turbulence as fundamentals falter—lowered shareprices make their dividends look more attractive again.Emerging Trends in Real Estate ® 2009 11

Focus on Global Pathway MarketsThe favored 24-hour coastal cities—D.C., San Francisco,New York, L.A., Boston, and Seattle—will hold value betterand bounce back more quickly. Core players and offshoreinvestors gravitate to these elite business and cultural centerslinked directly to Asia and Europe commercial capitals.Hot-growth Texas markets—Houston and Dallas—show temporarystrength as long as oil prices stay high.Staff Up Asset Managers, Leasing Pros,Workout Specialists“It’s time to work your asset base the best you can and realizeyou can’t stop losing some value. Do the best you can tolose less. Separate good assets from bad. It’s property triagetime. Put workout specialists on the bad assets and protectas much value as you can in disposing of them. Put the bestasset managers and leasing people on good properties toimprove cash flows and enhance future value.”DevelopmentRetrenchFinancing is limited, tenants are scarce, vacancies increase,and construction costs remain high.Reorient to Mixed Use and InfillEnergy prices and road congestion accelerate the moveback into metropolitan-area interiors as more peoplecrave greater convenience in their lives. They want to livecloser to work and shopping without the hassle of cardependence. Higher-density residential projects with retailcomponents will gain favor in the next round of building.Apartment and townhouse living looks more attractive,especially to singles and empty nesters—high utility bills,gasoline expenses, car payments, and rising property taxesmake suburban-edge McMansion lifestyles decidedly lesseconomical.Plan More Transit-Oriented DevelopmentMetropolitan areas nationwide realize they need to build orexpand mass transportation systems in order to overcome roadcongestion, which strangles economic growth and increasescarbon footprints. Increasingly, people want to drive less andseek subway, commuter railroad, or light-rail alternatives.Developers can’t miss securing project sites near rail stopsand train stations.12 Emerging Trends in Real Estate ® 2009

Chapter 1: Forget the Quick Fix“It’s time to work your asset base the best you can and realize youcan’t stop losing some value. Do the best you can to lose less.”Go GreenIf you think oil and electricity costs will plummet and globalwarming issues will disappear, then sidestepping the additionalcosts for installing green technologies may make sense.Remember how market interest in energy efficiency subsidedquickly after the late-1970s oil price crisis faded? But todaydevelopers roll the dice and buck current tenant demand, if theyredline green technologies. Cutting energy expenses should bea priority in controlling rising operating expenses. Available governmentsubsidies and rebates can reduce costs.Property SectorsBuy or Hold MultifamilyApartment investments get a boost from a host of significanttrends: increasing numbers of young adults who leave theirparents’ homes, more aging baby boomers looking to downsizefrom suburban lifestyles, and stiffer mortgage costs/requirements that make homeownership too expensive forsome prospective buyers. Increasing renter demand helpsblunt ongoing recessionary impacts and ensures solid cashflow increases when the economy improves.Buy or Hold IndustrialDespite near-term softness in availability rates, coastal gatewaysand primary international airport hubs will consolidatetheir positions as prime warehouse markets operating alongglobal pathways. Watch for distressed owners and pick offbargains in top markets.Hold OfficeLong-term leases can bridge the downturn.Hold HotelsOccupancies decline and room rates suffer—it’s no time to sell.Buy Residential Building LotsThe market collapse mauls homebuilders—increasingly, theycapitulate and give up inventoried land tracts in bankruptciesand foreclosures. Prices are cents on the dollar from marketpeaks. But investors must be prepared to hold for a while.Purchase Distressed CondosAt the right prices, these projects can be transformed intoprofitable rentals. Properties in urban areas near transit hubsmake the best bets. Once markets recover, units can be convertedback for sales.Pray for RetailMall owners hope consumers haven’t collectively shopped tillthey dropped. Neighborhood centers with stronger groceryanchors and chain drugstores should fare best: people stillneed to eat and purchase more Advil for all their headaches.Emerging Trends in Real Estate ® 2009 13

14 Emerging Trends in Real Estate ® 2009

chapter 2Real EstateCapital Flows“Liquidity is always temporary.”All that anonymous “other-people’s-money” that hadflooded unbound into U.S. real estate suddenly vanishedby fall 2007. In a Bay of Fundi moment, marketswent from inundated in capital to drastically undersupplied,especially for precious debt (see Exhibit 2-1). It took the subprimewake-up call to convince bond investors that they hadlittle or no idea about the collateral in their mortgage-backedsecurities, and suddenly everyone realized the propertymarkets had been overplayed. The credit crisis might havebeen manageable had profligate lending been confined tosubprime, but the bingeing had extended across all residentialand commercial real estate as well as corporate markets,triggering a global financial maelstrom.Low interest rates, lax regulation, untested financial instruments,and garden-variety greed conspired to upend theproperty markets even though construction lenders weremindful to control developer borrowings and keep commercialbuilding in relative check. The blame can be spreadaround: Wall Street bankers pushed the envelope on bondstructures, rating agencies “didn’t know what they weredoing,” and bond investors forgot the basic principle ofcaveat emptor. Lenders’ profits inflated due to increased volumesand offloading loans into securities, seemingly reducingtheir balance sheet risk. Borrowers kept bidding up priceson anything with a foundation, flipping their acquisitions assoon as possible to the next leveraged buyer. “Swampland inFlorida found its way into AAA securities.” All the intermediaries—bankers,lenders, rating agencies, appraisers, lawyers,and brokers—took their cut of fees at every transaction andgovernment regulators were asleep at the switch. “Shouldanyone be surprised at what happened?”Exhibit 2-1Real Estate Capital Market Balance Forecast for 2009Equity Real Estate Capital Market37.9% Moderately 16.0% In Balance 27.8% ModeratelyUndersuppliedOversupplied13.1% Substantially Undersupplied5.2% Substantially OversuppliedDebt Real Estate Capital Market34.6% Moderately Undersupplied 3.6% In Balance58.1% Substantially Undersupplied 2.6% Moderately Oversupplied1.0% Substantially OversuppliedSource: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.Where’s the Money?Make No Assumptions. For 2009, the multibillion-dollarquestions become: When will money return to the suddenlystrangled real estate markets, and who will be investingand at what levels? As markets deleverage and correct, thelength and severity of the repricing process will influence theresumption and intensity of capital flows. No one should makeassumptions too readily, especially after Wall Street’s neardeathexperience. After the 1998 Russian credit crisis, theEmerging Trends in Real Estate ® 2009 15

Exhibit 2-2Investment Prospects by Asset Class for 2009U.S. Private DirectReal Estate InvestmentsAsia Pacific Private DirectReal Estate InvestmentsCanadian Private DirectReal Estate InvestmentsEuropean Private DirectReal Estate InvestmentsAsia PacificPublicly Listed EquitiesAsia Pacific Publicly ListedProperty Companies or REITsU.S. Publicly ListedProperty Companies or REITsCanadian Publicly ListedProperty Companies or REITsEuropean Publicly ListedProperty Companies or REITsU.S./CanadianPublicly Listed EquitiesAsia PacificInvestment-Grade BondsEuropeanInvestment-Grade BondsEuropean PubliclyListed EquitiesU.S./CanadianInvestment-Grade BondsAsia Pacific CommercialMortgage–Backed SecuritiesCanadian CommercialMortgage–Backed SecuritiesEuropean CommercialMortgage–Backed SecuritiesU.S. CommercialMortgage–Backed SecuritiesEuropean RealEstate DerivativesU.S. Real Estate DerivativesU.S. Publicly ListedHomebuilders1Abysmal5FairSource: Emerging Trends in Real Estate 2009 survey.9Excellentindustry learned that CMBS markets linked to global capitalflows will not guarantee liquidity for real estate and that investmentdiversification cannot offset systemic risk. But in 2008,the lesson was reinforced with a corollary: capital flows canshut down for extended periods with dire consequences. Theinterviewee consensus nevertheless presumes that equity realestate investors will hold firm on commitments and step upinvestments once markets stabilize, primed by the opportunity5.605.515.385.245.115.115.074.934.904.794.794.684.684.664.404.334.334.273.703.483.47to buy at market bottom. They are much less sanguine aboutlenders and CMBS markets resurging quickly.No doubt, equity capital will be more restrained without debtcapital to stoke returns. Lower-leverage investors—REITs especially—maybe active, but opportunity funds will need to revisestrategies, using more cash. If losses are worse than expectedand demand for space sinks during an extended recession,always-nervous pension plan sponsors may revise allocationtargets downward and pull back. In any event, the stock marketlikely will recover before real estate—could investors get on thatbandwagon and downsize property portfolios for a while? Also,no one expects core portfolios to score upper-teen annualizedperformance again anytime soon. A reversion to the mean indicatesthat the timing may be right to sidestep real estate in thenear term, even after a correction. A research leader anticipates“a reduction in real estate allocations and modest 5 percent realreturns.” Will investors really be satisfied with bondlike returnsafter this recent round of seesaw performance?It’s quite possible that real estate’s recent heady run ofoutperformance may have solidified its asset diversificationcredentials and place in institutional portfolios no matter whattranspires in coming months. The weak dollar also shouldcontinue to encourage foreign investors to buy properties. Butthe industry shouldn’t blindly count on a restored wellspring tojump-start transactions and development. Interviewees maybe engaging in wishful thinking by ranking prospects for U.S.private real estate investments ahead of all other asset classesin 2009 (see Exhibit 2-2) or they may be simply wondering,“Where else can I place my money?” Whatever the rationales,everyone should be clear: capital markets’ dynamics havechanged dramatically.Less Capital. Not surprisingly in light of the credit cataclysm,respondents appear certain that capital availability for both debtand equity will be constrained in 2009 and investment will be“rather muted.” (See Exhibit 2-3.) In fact, overall capital availabilityratings (on a one-to-nine scale) are the lowest in the survey’shistory. Only opportunity funds and mezzanine lenders will havemore money to invest than in 2008, according to the surveys.Significantly, expectations sink for financing from commercialbanks and CMBS. Many previously active private syndicatesand tax exchange buyers without leverage leave the scene.Sidelined Equity. Interviewees in particular wonder what willhappen to the guesstimated $300 billion supposedly raised byvarious opportunity funds and investment banks at the peakof investment frenzy and in the wake of record performance.Pie-in-the-sky optimists hope that “hordes of capital,” “lookingfor a home,” will lead to a rapid recovery, even “to the pointof overcorrection in the opposite direction.” More likely, some16 Emerging Trends in Real Estate ® 2009

Chapter 2: Real Estate Capital FlowsExhibit 2-3Change in Availability of Capital forReal Estate in 2009Equity Capital fromAll SourcesPrivate Equity/Opportunity/Hedge FundsInstitutional Investors/Pension FundsPrivate PropertyCompaniesGovernment-Sponsored EnterprisesPublicly ListedProperty Companies/REITsSyndicators/TICs/1031 Exchange InvestorsDebt Capital fromAll SourcesMezzanine LendersNonbankFinancial InstitutionsInsurance CompaniesGovernment-Sponsored EnterprisesCommercial BanksSecuritizedLenders/CMBS1Very LargeDeclineSource: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.5Staythe Same9Very LargeIncreaseinvestors may pull back commitments in the wake of financialmarket earthquakes, and other interviewees counter that equityflows alone cannot turn the market in any case. “Real estate is adebt-driven business and we need debt.” The sidelined equitycapital operates off promotes, which require leverage for themanagers to make money. “Without debt to juice returns, theyhave more limited motivation.” Buying core assets at discountsdoesn’t fit the current opportunity model and targeting land lotsmeans extending investment horizons beyond current terms.Clients, meanwhile, want their dollars invested. “We’re muddlingthrough another 12 months without debt,” says an adviser.The “clock is ticking on investment periods and managers arecaught between making bad deals and losing commitments.”4.325.284.834.744.624.373.784.295.234.944.764.753.823.31Total (Millions)Exhibit 2-4U.S. CMBS Issuance$250$200$150$100$50$019971998199920002001Source: Commercial Mortgage Alert.* Issuance total through June 30, 2008.2002Reviving CMBS. As noted in last year’s report, securitization ofdebt helped “Wall Streetize” real estate over the past 15 years,funneling huge flows of diverse capital from around the worldinto U.S. property markets. Emerging from the RTC rescue ofsavings and loans in the early 1990s, CMBS reoriented andenergized real estate financing, and interviewees agree thatreviving securitized markets will be essential for restoring liquidityand speeding any real estate market recovery. But the creditcrash effectively demolished CMBS markets and clobbered WallStreet wizards—the survivors now cope with their own massiveportfolio losses, bad trading bets, and deflated stock prices.Punished and downsized, the “CMBS industry is like deercaught in the headlights, directionless with no idea where to goto find the catalyst to get back in business.” Securitized offeringsin 2008 were a small fraction of previous years (see Exhibit2-4), mirroring the collapse of overall debt markets.Before CMBS bond buyers’ appetite for new investmentsreturns, they will need to make sense of their existingholdings—a jumble of tranches with questionable collateralcaught in declining markets. For starters, banks and specialservicers must identify problem loans and markets need toclear before bond buyers have any chance to regain theirbearings. Then the industry must ensure transparency inunderlying collateral and restore confidence in bond ratings.Rating agencies proved ill-equipped to assess offerings orunderstand complicated structures. Rich fees paid to themby issuers added an untenable conflict of interest. Investors200320042005200620072008*Emerging Trends in Real Estate ® 2009 17

also had bought off on B-piece buyers’ ability to scrutinizeofferings and kick out bad loans. The cartel, however, lostcontrol in the proliferation of offerings and “house-of-cards”investment banker structures. Most interviewees now reluctantlyaccept that government regulators need to get involvedto rebuild credibility. “Everything is on the table.”Back to Basics. For all the spin about public market transparency,CMBS blurred into murky investment bets as structuresmorphed into sliced and diced tranches of mortgagescombined together in diverse pools, which were leveragedand hedged in complex swaps. Some investors wonderedwhether Albert Einstein could figure out how these collateralizeddebt obligation (CDO) bonds worked, but Wall Streetslapped on a yield and the rating agencies obliged with theirstamps of approval. That was enough for many bond buyerswho had no idea whether their investments were backedby a suburban housing tract outside Tulsa or a downtownSan Francisco office building. “The industry forgot about realestate underwriting, there was no differentiation betweenasset quality, and assumptions were juiced aggressively.”“You can never get cream from underlying junk.” Intervieweessuggest that CMBS needs to backtrack closer to its originalstructures—smaller portfolios, A/B tranches, better asset/liability matching, and reasonable loan-to-values (65 to 70percent). “Buyers will come back when spreads decline,and it may take two to three years for spreads to tighten.”Ultimately, the health of real estate fundamentals will also becrucial in reattracting investors.Repairing the CMBS machine and rebuilding investor confidencewon’t be easy.Dropping the HammerRising Defaults and Delinquencies. While housing defaultand foreclosure rates have skyrocketed to levels not experiencedsince the Great Depression, commercial delinquencieshave remained stubbornly low even as market fundamentalsebb. (See Exhibit 2-5.) In these dicey markets, lenders andservicers make allowances on covenants and grant extensionsas long as borrowers remain current. But reservesbegin to run out and many owners who bought or refinancedin 2005–2007 may now be underwater. “We will also startto see more maturity defaults and borrowers won’t be ableto get the dollars they need.” For 2009, expect commercialPercentageExhibit 2-5U.S. Life Insurance Company MortgageDelinquency and In-Foreclosure Rates8765432101988Q21990Q21992Q21994Q21996Q21998Q2DelinquencyIn ForeclosureSources: Moody’s Economy.com, American Council of Life Insurers.foreclosure rates to increase as lenders bite the bullet onworkouts and special servicers become more active. Defaultsand delinquencies will not approach levels seen in the early1990s, but could rise to 3 percent to 4 percent of outstandingloans. “Analysts, regulators, and new management willincrease pressure on bankers to clear up their portfolios.”Headhunters report that banks have started to hire workoutteams “in earnest.” Scarred veterans of the early-1990slender meltdown recall that bankers “took it easy” untilfaced with increasing volumes of problems and distress. “Acivil workout process will get more hard-edged as distressincreases—we haven’t gotten into survival mode when peoplestart to rip into each other. Courtesies will drop when fundamentalsstart to slip.” Restraining default and delinquencyrates will depend heavily on tenant demand buttressing propertycash flows. “Everything depends on the economy.”Litigation Nightmare. For years, industry players havespeculated about what happens when CMBS special servicersconfront widespread defaults and workouts. Will theyperemptorily follow loan documents and foreclose on borrowersor negotiate allowances like local bankers used to do withfavored clients? And among bondholders, which trancheswill receive proceeds and who gets cut out? In many cases,CMBS tranching and packaging has distorted “investmentsbeyond recognition.” Ensuing complications could create2000Q22002Q22004Q22006Q22008Q218 Emerging Trends in Real Estate ® 2009

Chapter 2: Real Estate Capital FlowsExhibit 2-6Underwriting Standards Forecast for the United StatesStandards Will Become More Stringent 69.1%Standards Will Remain the Same 18.2%Standards Will Become Less Stringent 12.7%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.Private InvestorsOpportunity Funds. Opportunity funds sit on boatloads ofcommitments and gnash teeth over their inability to do dealswhile markets teeter. “They want huge discounts.” Somemanagers, who moved prematurely on residential land tracts,already count losses. Funds continue to raise dollars, but “notas much as hoped” and fractured debt markets force reducedperformance expectations. “They won’t be able to get thereturns promised to clients.” Existing highly leveraged portfoliosface “markdowns” on legacy transactions and refinancingchallenges as hopes fade that markets can avert valuedeclines. Vintage funds investing over the past six years“The industry forgot about real estate underwriting, there was no differentiationbetween asset quality, and assumptions were juiced aggressively.”a litigation field day—bondholders versus special servicersversus borrowers. Special servicers “face a quagmire,” whichthey are “not equipped” to handle and attorneys “don’t havethe capacity to figure it out.” No one knows what will happen,but the moment of truth draws closer. How borrowers andinvestors fare likely will influence the future viability, acceptance,and direction of the CMBS markets.Discipline Returns. Crisis reflexively spawns discipline inreal estate markets to the point that many recently recklesslenders are now afraid to underwrite mortgages unless transactionstructures eliminate most risk. They require significantborrower equity, recourse, secure property cash flows, andlow tenant rollover exposure. No one wants to touch larger$100 million loans, even in syndications. Securitization hadbeen agnostic to location and property type—terms, requirements,loan-to-values were homogenized. Now, commercialbanks differentiate again—apartments and Class A officein 24-hour cities gain special favor, but other sectors andproperties in secondary and tertiary markets face much moredifficult financing hurdles. “They’re pulling in their horns,reserving funds for premier clients and trophy properties.”Interviewees expect stringent standards to stay in place untillenders’ balance sheets improve and real estate markets exitthe danger zone (see Exhibit 2-6). Gradually, as people startto resume making money, guidelines will loosen “and in tenyears it will be reckless and undisciplined again.”have enough early gains to show strong overall annualizedreturns despite recent stinkers—“maybe not in the mid 30s,but in the 20s,” says a portfolio manager. Now, intervieweeswonder whether all the committed capital “will show up whenit’s time to pull the trigger.” And some fund managers leavethe scene entirely in the Wall Street bloodletting.Hedge Funds. Some hedge funds jump to fill the lendinggap by extending short-term, high-interest-rate bridge loansto tide over borrowers in dire refinancing straits. They alsolook to buy discounted mortgage and CMBS portfolios. Realestate specialists continue to carp that hedge fund managerslack real estate experience and “pay too much” ondeals. “They’re fixed-income guys not looking at underlyingcollateral. They haven’t learned.” Time will tell. Active in the2005–2007 investing frenzy, hedge funds may be exposed toincreasing portfolio problems as markets correct.Syndicators, High-Net-Worth Investors, 1031 Investors.While many leveraged investor syndicates make themselvesscarce, some core-oriented funds continue “to pay up forquality.” Managers sold out at market highs and have capitalto reinvest. “They’re not getting great deals, but they areEmerging Trends in Real Estate ® 2009 19

U.S. Capital SourcesExhibit 2-7U.S. Real Estate Capital 1998–2008Billions$600$500$400$300$200$100EquityPrivate Investors(Larger Properties)REITs (Equity & Hybrid)Pension FundsForeign InvestorsPublic Untraded FundsLife Insurance CompaniesPrivate FinancialInstitutions (REO)$01998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Billions$2,000$1,500$1,000$500$0Debt1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008Banks, S&Ls, MutualSavings BanksCommercial MortgageSecuritiesLife InsuranceCompaniesGovernment CreditAgenciesREIT Unsecured DebtPension FundsMortgage REITsPublic Untraded FundsSources: Roulac Global Places, from various sources, including American Council of Life Insurers, CMSA/Trepp Database, Commercial Mortgage Alert, Federal Reserves,FannieMae.com, IREI, NAREIT, PricewaterhouseCoopers, and Real Capital Analytics.Note: Excludes corporate, nonprofit, and government equity real estate holdings, as well as single-family and owner-occupied residences.* 2008 figures are as of second quarter, or in some cases projected through second quarter.20 Emerging Trends in Real Estate ® 2009

Chapter 2: Real Estate Capital FlowsExhibit 2-8U.S. Real Estate Capital Sources 2008U.S. Real Estate Capital:$4,757.6 Billionn Private Debt$2,489.1 Billionn Public Debt$1,109.6 Billionn Private Equity$818.3 Billionn Public Equity$340.7 BillionDebt Capital:$3,598.7 BillionPrivate Debtn Banks, S&Ls, MutualSavings Banks$1,991.2 Billionn Life InsuranceCompanies$314.5 Billionn REIT Unsecured Debt$142.5 Billionn Pension Funds$40.9 BillionPublic Debtn Commercial MortgageSecurities$921.2 Billionn Government CreditAgencies$169.6 Billionn Mortgage REITs$18.7 Billionn Public Untraded Funds$0.1 BillionEquity Capital:$1,159.0 BillionPrivate Equityn Private Investors(Larger properties)$552.4 Billionn Pension Funds$157.1 Billionn Foreign Investors$55.0 Billionn Life InsuranceCompanies$33.4 Billionn Private FinancialInstitutions (REO)$20.4 BillionPublic Equityn REITs(Equity & Hybrid)$300.0 Billionn Public Untraded Funds$40.7 BillionSources: Roulac Global Places, from various sources, including American Council of Life Insurers, CMSA/Trepp Database, Commercial Mortgage Alert, Federal Reserves,FannieMae.com, IREI, NAREIT, PricewaterhouseCoopers, and Real Capital Analytics.Note: Excludes corporate, nonprofit, and government equity real estate holdings, as well as single-family and owner-occupied residences.* 2008 figures are as of second quarter, or in some cases projected through second quarter.Emerging Trends in Real Estate ® 2009 21

uying properties with good leases and looking beyond thenear-term dip.” It helps that they don’t mark-to-market. Manyhigh-net-worth investors play it smart and back off. The 1031market disappeared with falling housing prices and the weakeconomy. Tax strategies lose luster without gains to shelter.Pension FundsPension funds “should have been queuing up to get out of coreopen-end funds two years ago” when returns were eye-poppingin the mid-to-high teens. “Now they will be taking losses in markto-marketfunds.” Many enamored plan sponsors had raisedreal estate allocation targets to 5 to 10 percent in their assetmodels, and focused new investments “up the risk spectrum”in value-add and opportunity funds. But stepped-up real estateinvestments and stock market declines combine to resurface thedreaded “denominator effect,” pushing many plans over theirallocation targets and “shutting them down” for making morecommitments. Belatedly, lines form to exit funds. “Raising moneyis like pushing a rock up a very steep hill,” says a frustratedadviser. “Plan sponsors engage in long-term strategies andallocations, but tend to miss on short-term tactics.” Investmentmanagers struggle to attract interest from existing clients in newclosed-end funds—“they want their money back from existingfunds before they reinvest.” Advisers may confront more badnews. If markets deteriorate, as expected, most plan sponsorswill keep checkbooks closed—“they don’t invest in tough times.”Public pension interviewees consider reducing the number ofmanagers and funds to facilitate oversight for budget-stretchedstaffs. The winnowing process favors top performers with “bigfootprints” in managing funds across the risk-return spectrum aswell as private/public and global markets. When markets settledown, plan sponsors “will miss the best opportunities. Theynever make the first move,” says a manager.REITsPublic REITs already suffered through price declines in thestock market tumble as “shareholders anticipated lower NAVs”(net asset values). But these stocks could take another hit iftoo many bad headlines surface about commercial market travail.Investors can count on a REIT market recovery well beforeprivate markets turn around. “2009 could be a good time tobuy.” Many companies appear well positioned—“they canbenefit from a flight to quality” and investors like their ampleExhibit 2-9Change in Availability of Capital for Real Estateby Source Location in 2009Middle EastAsia PacificJapanGermanyAustraliaEuropeUnited KingdomCanadaUnited States1Very LargeDeclineSource: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.dividends. Recent net sellers, REITs have focused operationsteams on strengthening rent rolls in anticipation of trouble, and“moderate” leverage levels should help them “ride out anyproblems” without cash flow issues. Expect REITs to be activeearly buyers when markets stabilize—“they have lines of creditto take advantage of any opportunities.”Foreign Investors5Staythe Same9Very LargeIncreaseReminiscent of the Japanese two decades ago, Middle Eastplayers trophy-hunt for prime buildings in major 24-hour cities.In a market environment where capital turns tentative,they have become “one of the few dependable sources forwriting checks.” Hardly monolithic, these investors includesovereign wealth funds, pension funds, wealthy individuals,and networks of high-net-worth investors who can pay in cashfrom all their oil earnings. “There’s a phenomenal amount ofcapital at their disposal” and “most don’t mark-to-market, sothey can take the long view.” Capital preservationists tend to6.605.575.225.155.155.034.774.754.5222 Emerging Trends in Real Estate ® 2009

Chapter 2: Real Estate Capital FlowsExhibit 2-10Foreign Net Real Estate Investments in theUnited States by Property TypeExhibit 2-11Foreign Net Real Estate Investments in theUnited StatesMillions$4,000$3,500$3,000$2,500$2,000$1,500$1,000$500$0$-500-$1,000-$1,500-$2,000-$2,500AustraliaGermanyApartmentIndustrialMiddle EastUnited KingdomOfficeRetailCanadaPacific RimEurope (except Germany)Source: Real Capital Analytics.Note: Net capital flows from second-quarter 2007 through second-quarter 2008.Other: OffshoreMillions$5,000$4,000$3,000$2,000$1,000$0-$1,000-$2,000-$3,000-$4,000AustraliaEurope (except Germany)Offshore: OtherMiddle EastGermanyCanadaPacific RimSource: Real Capital Analytics.Note: Net capital flows from second-quarter 2007 through second-quarter 2008.United Kingdomconcentrate their attention in the United States, but opportunityinvestors scour the world and have been investing inBrazil, Russia, India, and China. Survey respondents anticipatethat Middle East investors will keep spending in 2009,but some interviewees suggest they will become increasinglycareful. “Their pace is unsustainable.”European investors back off as their economies slowdown. Notably, the recently active Irish have retreated.The Germans, meanwhile, continue to wait out any marketturbulence—they got nervous early about the level of cap ratecompression and high pricing in the core properties they tendto covet. Australians may “have gotten over their skis” in asplurge of purchasing at or near market peaks, taking advantageof the weak American dollar. Canadian pension fundswant to expand U.S. holdings, but won’t hurry into decliningmarkets. Neither will Japanese and Chinese investors whowere primed to increase investments too.Banks and InsurersThe depth of the housing crisis and credit market disruptionundermines bank lending and threatens to torpedo moreinstitutions. Banks simply cannot afford to lend much moneybefore they resolve existing portfolio problems, and theirfinancial positions continue to erode despite capital infusionsand federal government interventions. More regional bankscould fail from troubled homebuilder loans and money centerinstitutions may require additional backstops. Any deteriorationin commercial real estate markets will amplify balancesheet damage. At best, 2009 offers a chance for banks tostabilize, but lending will continue to be severely constrained.“They will charge a lot to take on any risk.”Over the past decade, more conservative life insurers hadbeen shunted aside by CMBS conduits and the commercialbanks—they secured a niche making long-term permanentloans to high-credit owners. “Now they are the new sheriffs intown,” cherry-picking the very best lending opportunities. “It’srevenge of the nerds.” Says an insurance executive: “We canbe selective and focused, receiving comfortable spreads.”They concentrate on the office and warehouse sectors, generallysteering clear of retail and hotels. Fannie’s and Freddie’sdominance in apartments has kept them out of multifamily. Butinsurers will “not be saviors” and have no reason to increaseallocations. Slowing insurance policy and annuity sales limittheir ability to expand real estate lending. Insurer mortgageportfolios won’t be free of problems, either—“some borrowerswill have trouble refinancing and need more equity.”Emerging Trends in Real Estate ® 2009 23

Exhibit 2-12U.S. Buyers and Sellers: Net Capital Flows by Source and Property SectorBillions$30$25$20$15$10$5$0-$5-$10-$15-$20-$25-$30Condo Converter Cross-border Fund Institutional Private In-StatePrivate Out-of-State REIT Public Company Syndicator User/OtherApartment Industrial Office RetailUnknownSource: Real Capital Analytics.Note: Net capital flows from second-quarter 2007 through second-quarter 2008.CMBS“It took 20 years to create the securitization markets and a coupleof months to blow them up.” Most interviewees concede itmay take “several years” for markets to reinvent and resuscitate,“and we won’t have liquidity until then.” Deteriorating real estatefundamentals could increase the challenge and delay a resolution:“No one wants to catch a falling knife.” With the temporaryexit of conduit lenders, small owners in B and C markets havefew borrowing options when they need to refinance.Interviewees stress that “there was nothing wrong with the[CMBS] concept, if only loans had been properly underwrittenand structured.” B-piece buyers “made a lot of money and mostof their loans are still paying off—they will reenter the marketquickly with resumed discipline.” Other fixed-income investorsmay require some level of government oversight before theyget comfortable again since “no one trusts the rating agencies.”“Euro investors are gone and the pension funds have headedfor the hills.” A conduit executive suggests that future CMBSlending will be fixed rate, not floating, and focused on smaller $5million to $10 million loans in more secondary markets. “Insteadof securitizing $200 billion–plus a year, we should be doingabout $70 billion.” Some interviewees even predict that CDOscan make a comeback, but that may be too much for anyoneto stomach. Older vintage, properly underwritten CMBS canstill find a market, “but are hard to buy.” Newer vintage “stuff” isabundantly available (for obvious reasons).Mezzanine DebtOpportunity and hedge funds circle distressed owners, offeringborrowers enticing short-term debt infusions to buy themtime. Through high-interest-rate, loan-to-own structures, theymasquerade as mezzanine leverage. But some recapitalizationscan reap “excellent risk-adjusted returns” for lenderstaking mezzanine positions, if they carefully underwrite theirinvestments. “Not everyone knows what they’re doing—there’s a lot of dumb money running from subprime debt tohigh-yielding mezz deals.” Traditional mezzanine bankers,who invest in the 75 to 85 percent part of the capital stack,need to focus on existing portfolios, “spending lots of timeon asset management rather than new deals.” The collapseof securitization markets limits their financing sources andforces up borrowing rates to get necessary yields. Many ofthese traditional mezzanine lenders have been forced to exitthe market, at least temporarily.24 Emerging Trends in Real Estate ® 2009

Chapter 2: Real Estate Capital Flows“Not everyone knows what they’re doing—there’s a lot of dumbmoney running from subprime debt to high-yielding mezz deals.”Emerging Trends in Real Estate ® 2009 25

26 Emerging Trends in Real Estate ® 2009

chapter 3Markets toWatch“A flight to quality is underway.”Familiar U.S. global pathway cities, which have becomeinvestor favorites and global business magnets, reinforcetheir premier standings in the looming marketcorrection. Interviewees expect these 24-hour coastal centersto hold value better and recover more quickly from any downturn,and predict that investors and lenders will retreat fromsecondary and tertiary markets. Investment ratings declinemarkedly from last year for most cities in the survey—“nomarkets will outperform.” Prospects dim especially for smallercities and places dependent on for-sale housing to spurgrowth. “The major markets provide shelter” and “long-termreturns.” “They offer enhanced urban environments, whichremain attractive for the quality of life experience. Any bumpsin the road can be managed.”West Coast gateways Seattle and San Francisco reclaimtop rankings from New York, which stumbles over WallStreet’s breakdown. Washington, D.C., and Los Angeles holdtheir own, but southern California’s large suburban satellitemarkets—Riverside and Orange County—tank in mortgageand housing misery. So does San Diego, but not as dramatically.Ironically, the investment prospects for long-forlorn Texasmarkets strengthen, spurred by the nation’s flourishing energyindustry, which has its headquarters there. But cities in anotherfast-growing state, Florida, falter, with their housing marketsin utter disarray. Hot-growth desert cities—Phoenix and LasVegas—get “blown out,” while Midwest factory towns loseeven more ground—only Chicago manages to rate fair prospectsin an enduring regionwide decline.Back to the CoresInfill’s Desirability. High gas prices and utility bills, meanwhile,accelerate people’s already shifting attitudes aboutwhere they want to live. Increasingly, they seek greaterconvenience by locating closer to urban cores and infilllocations—not only because of mounting suburban congestionon aging, inadequate road systems, but also becausethe cost equation is changing in favor of less car-dependentlifestyles. Time is money, and steadily lengthening commutesin most major metropolitan areas have tested drivers’patience for more than a decade. Many suburban familiesliving in pedestrian-unfriendly communities need as manyas three or four cars so that mom, dad, and the kids can getto divergent locations without any mass transit alternatives.Gasoline that costs over $3.50 a gallon piles on top of multiplecar payments, routine maintenance costs, repair bills,and insurance premiums. People start to realize they maysave by living closer to work and stores in higher-density infilllocations—they can get rid of a car or two to pay for moreexpensive housing, and gain convenience. If electricity andheating bills continue to surge, high-ceilinged McMansions inoutlying subdivisions will become even more burdensome onpocketbooks. Smaller houses or apartment-style living suddenlylooks more attractive and economical to more people.As noted in previous reports, many empty nester baby boomersand their young adult progeny favor more urban lifestylesand move back in from the suburbs.San Francisco, California.Emerging Trends in Real Estate ® 2009 27

Exhibit 3-1U.S. Markets to Watch: Commercial/Multifamily InvestmentSeattle6.15Northern New Jersey5.07Sacramento4.23San FranciscoWashington, D.C.New YorkLos AngelesHoustonSan JoseAustinBostonDenverRaleigh/DurhamPortland, ORDallas/Fort WorthCharlotteNorthern VirginiaHonolulu, Hawaii6.126.125.905.825.745.695.645.625.525.485.425.335.335.335.16San AntonioSalt Lake CityNashvilleSan DiegoWestchester/FairfieldAtlantaPhiladelphiaOrange County, CAMinneapolis/St. PaulBaltimoreVirginia Beach/NorfolkOrlandoTampa/St. PetersburgJacksonvilleTucson5.024.984.984.924.884.674.634.604.574.494.484.454.394.304.24PhoenixInland EmpireIndianapolisKansas CitySt. LouisProvidence, RICincinnatiMemphisLas VegasPittsburghColumbusMilwaukeeNew OrleansCleveland4.144.084.073.983.923.923.803.723.593.593.563.393.333.15Chicago5.11Miami4.24Detroit2.241Abysmal5Fair9Excellent1Abysmal5Fair9Excellent1Abysmal5Fair9ExcellentSource: Emerging Trends in Real Estate 2009 survey.Exhibit 3-2U.S. Markets to Watch: Commercial/Multifamily DevelopmentSan Francisco4.79Northern New Jersey3.92St. Louis3.05New YorkSeattleWashington, D.C.AustinLos AngelesHoustonCharlotteSalt Lake CityRaleigh/DurhamHonolulu, HawaiiSan AntonioDallas/Fort WorthSan JoseBostonPortland, OR4.764.734.664.514.334.294.214.144.134.134.094.094.044.013.98Northern VirginiaNashvilleDenverChicagoVirginia Beach/NorfolkPhiladelphiaSan DiegoMinneapolis/St. PaulOrange County, CAProvidence, RIKansas CityIndianapolisNew OrleansTucsonAtlanta3.923.773.763.753.693.613.403.363.283.283.273.203.163.103.10MemphisPittsburghJacksonvilleCincinnatiColumbusOrlandoPhoenixTampa/St. PetersburgMilwaukeeClevelandSacramentoInland EmpireLas VegasMiami3.023.003.002.952.872.852.802.742.722.712.682.522.272.15Westchester/Fairfield3.98Baltimore3.07Detroit1.681Abysmal5Fair9Excellent1Abysmal5 9Excellent1Abysmal5Fair9ExcellentSource: Emerging Trends in Real Estate 2009 survey.28 Emerging Trends in Real Estate ® 2009

Chapter 3: Markets to WatchExhibit 3-3U.S. Markets to Watch: For-Sale HomebuildingSan Francisco4.79Northern New Jersey3.92St. Louis3.05New YorkSeattleWashington, D.C.AustinLos AngelesHoustonCharlotteRaleigh/DurhamHonolulu, HawaiiSalt Lake CitySan AntonioDallas/Fort WorthSan JoseBostonPortland, OR4.764.734.654.534.334.294.224.154.134.124.124.104.034.013.98Northern VirginiaNashvilleDenverChicagoVirginia Beach/NorfolkPhiladelphiaSan DiegoMinneapolis/St. PaulOrange County, CAProvidence, RIKansas CityIndianapolisNew OrleansTucsonAtlanta3.923.793.763.753.713.633.363.343.293.293.283.213.163.103.10MemphisJacksonvillePittsburghCincinnatiColumbusOrlandoPhoenixTampa/St. PetersburgMilwaukeeClevelandSacramentoInland EmpireLas VegasMiami3.033.003.002.952.872.842.792.722.712.702.662.522.262.13Westchester/Fairfield3.98Baltimore3.05Detroit1.671Abysmal5Fair9Excellent1Abysmal5Fair9Excellent1Abysmal5Fair9ExcellentSource: Emerging Trends in Real Estate 2009 survey.Overcoming Car Dependence.The 24-hour stalwarts—New York,Boston, Chicago, San Francisco, andWashington, D.C.—all benefit fromefficient hub-and-spoke mass transitsystems that may include interconnectednetworks of subways, commuter rail,buses, and ferries. Fast-growing Sunbeltcities had pooh-poohed mass transit intheir rapid expansions, enabled by interstatehighway building during the 1960sand 1970s. Virtually no one contemplatedthe consequences of car dependenceuntil populations began to overwhelmroad capacities. Now, escalatingdriving costs exacerbate concerns aboutthe economic viability of unrestrainedhorizontal development and weak urbancenters in the midst of these suburbanagglomerations. Government leadersand local planners have joined forceswith chamber of commerce interests andreal estate players to confront challengesposed by expected future growth. Theyrealize that distended sprawl developmentno longer provides a model to sustainmetropolitan area prosperity.Denver’s Lead. Cities like Denverand more recently Atlanta start to makeamends. Beginning more than a decadeago, Denver focused on reinvigoratingits sleepy 9-to-5 downtown by redevelopingits LoDo warehouse area into anattractive commercial, entertainment,and residential district anchored bysports stadiums. Backed by the state ofColorado, the municipality began buildingan extensive light-rail and commuter-railsystem leading from key suburbs intothe urban center. Major avenues weretransformed into pedestrian malls, servedby shuttle buses linked to train stations.Transit-oriented development caughton along suburban stops and the oldStapleton Airport was redeveloped intoa new urbanist community. Residentialdevelopment now begins to expand inand around downtown, creating a more24-hour environment and the center cityonce again surpasses upstart suburbancommercial nodes as the metropolitanarea’s predominant office location. Is itany coincidence that Denver consistentlyhas cracked the survey’s top ten rankingsover the past four years?Atlanta Takes Action. Atlanta hasn’tvisited the Emerging Trends top tensince 1997—in 1996, the city actuallytopped the survey in a pre-Olympicsgrowth spurt. But this vast Southeastmetro takes action to overcome theliabilities of breakneck suburban expansion,which left its downtown for deadand precipitates horrendous traffic congestionoutside the perimeter. “Hopefor the future lies in greater density.”Rescuing downtown and re-creating anurban center extending to Midtown anduptown Buckhead now takes precedence.High-rise residential streetscapesemerge, attracting younger workersEmerging Trends in Real Estate ® 2009 29

EdmontonExhibit 3-4Leading U.S./Canadian CitiesInvestmentProspectsn Goodn Modestly Goodn Fairn Modestly Poorn Poorn Very PoorDevelopmentProspectsPortlandSeattleVancouverCalgarySacramentoSan FranciscoSan JoseSalt Lake CityLas VegasDenverLos AngelesOrange CountySan DiegoInland EmpirePhoenixTucsonDallas/Ft. WorthAustinSan AntonioHoustonHonolulu30 Emerging Trends in Real Estate ® 2009

Chapter 3: Markets to WatchMontrealOttawaHalifaxMinneapolis/St. PaulKansasCityMilwaukeeChicagoSt. LouisIndianapolisDetroitCincinnatiClevelandColumbusTorontoNorthern VirginiaNorthern NewJerseyPhiladelphiaBaltimoreWashington, D.C.BostonProvidenceNew York CityVirginia Beach/NorfolkPittsburghWestchester/FairfieldNashvilleCharlotteRaleigh/DurhamMemphisAtlantaJacksonvilleNew OrleansOrlandoTampa/St. PetersburgMiamiEmerging Trends in Real Estate ® 2009 31

Exhibit 3-5U.S. Apartment Residential (Rental) Buy/Hold/Sell Recommendationsby Metropolitan AreaSan FranciscoSeattleWashington, D.C.Los AngelesNew YorkDenverHoustonBostonSan DiegoDallasChicagoMiamiPhoenixAtlantaPhiladelphia62.161.360.251.648.244.141.738.035.430.427.924.121.320.016.7BuyHold0% 20% 40% 60% 80% 100%Source: Emerging Trends in Real Estate 2009 survey.who favor walkable neighborhoods andintown living. A “LoDo-ish” cultural andentertainment district springs up arounddowntown’s Olympic Park. Developerscluster new mixed-use projects nearsubway stops while the city securesproperty rights for a circumferentialgreen recreational “beltline” and considerssolutions involving light rail, shuttles,and buses to connect more districtsinside the perimeter to its increasinglypopular but limited subway system. Allthe disparate activity and ideas headAtlanta in the direction of a more viableurban landscape with 24-hour neighborhoodsand amenities to accommodateexpected population growth. But in trueAtlanta fashion, developers’ eagerness32 Emerging Trends in Real Estate ® 200937.941.244.138.949.451.948.157.435.444.051.356.7Sell29.928.028.98.110.710.810.510.611.919.412.712.721.514.740.534.728.826.7has led to significant overbuilding—many condo units go begging for now.The Vertical Wave. Other once moribundcity centers also begin to rejuvenatein the midst of new high-rise residentialconstruction. Downtown Los Angelessteadily builds more apartments and condominiums,ditto uptown Dallas, Houston(downtown and the Galleria), and evendowntown Brooklyn, St. Louis, andMilwaukee. Suburban office nodes alsofollow the model, inserting high-rise residential,service retail, and restaurants intooffice districts and around regional malls.“Urban centers will be the driving force inthe future.” “There’s a return to the coreswhere people can find a combination ofentertainment, shopping, culture, andaction.” “People want life and they find itmore now in urban environments.”The Suburban Advantage. Suburbswill continue to retain their edge amongmany families looking for better schooldistricts and child-friendly environments.But the mortgage crisis, high car-relatedcosts, and increasing property taxes roilthe suburban idyll. “People are makingincredible sacrifices to bring up theirkids.” In past decades, various federalgrants helped subsidize extensions forroads and sewers, enabling subdivisiongrowth and suburban expansion.That’s over. Shortfalls in the HighwayTrust Fund (a result of not raisinggasoline taxes) deplete federal coffers.Responsibility for improving and maintaininginfrastructure transfers to localgovernments, which often must raisetax bills to fill potholes or add turninglanes. Many homeowners struggle withthese unanticipated tax hikes in additionto higher mortgage payments.Crime and Water. The difficulteconomy, falling real estate values,and fewer property transactions hitcities and suburbs alike in their wallets.Declining tax revenues naturallylead to reduced services. Gains in theattractiveness of 24-hour cities could besquandered if cutbacks in police, fire,and sanitation result in less safe andappealing environments. Nothing wouldundermine 24-hour dynamics morequickly than rising crime rates.Water issues increasingly plague manyhot-growth Sunbelt regions. A recentdrought spotlights Atlanta’s insufficientreservoir system. Declining levels alongthe Colorado River threaten expandingcities throughout the Southwest,including Las Vegas and Phoenix, andsouthern California could face anotherChinatown moment. These areas will beunable to accommodate future populationgrowth without solving their waterneeds through increased conservationand finding new sources.

Chapter 3: Markets to WatchMajor Market ReviewSo-called smile investing remains infashion. For 2009, interviewees like thefamiliar coastal favorites—Seattle, SanFrancisco, and Los Angeles along thePacific; and New York, Boston, andWashington, D.C., to the east. Thesegateways can prosper in the evolvingglobal marketplace and “they poseless risk” in a downturn. Likewise, the“three key metros in the middle ofthe country”—Chicago, Dallas, andAtlanta—benefit from their large internationalairports, which also feed intoglobal commerce. Cities off the globalpathways will continue to be disadvantaged.Ratings fall across all regionsexcept Texas, where energy industrykingpins Houston and Dallas registerupticks. Southeast and Southwest markets,which had crested on a homebuildingwave, take some hard falls. Surveysentiment declines to record lows formany Rustbelt and heartland cities,shunted off the economic growth track.Seattle. This Northwest magnet forbrainpower industries grows into one ofAmerica’s important gateways and jobincubators. “It’s a city of great creation,new ideas, and new businesses.” Morethan just Microsoft and Boeing, Seattleboasts a diversified group of corporategiants and cutting-edge companies.But this sturdy market braces for somebuffeting. Sub–10 percent downtownoffice vacancies will rise—3.5 millionsquare feet (325,160 sq m) of new supplyplus more tepid job growth equalsflattening rental rates and more concessions.Owners scramble to find tenantsas Washington Mutual collapsesand Starbucks downsizes. Bellevuethrives in an office building splurgefilled mostly by Microsoft. This satelliteoffice market remains vulnerable toany future layoffs by the software giant.Areawide housing demand drops andprices slip, staying well above nationalExhibit 3-6U.S. Industrial/Distribution Property Buy/Hold/SellRecommendations by Metropolitan Area876543210SeattleSan FranciscoLos AngelesNew YorkChicagoWashington, D.C.DallasHoustonMiamiDenverSan DiegoPhiladelphiaBostonPhoenixAtlanta56.353.151.646.044.044.043.242.941.435.833.831.426.120.320.0BuyHoldSell32.80% 20% 40% 60% 80% 100%Source: Emerging Trends in Real Estate 2009 survey.'95'97'99Seattle'01'03'05'076.2'0940.738.746.046.748.048.245.544.350.647.152.959.447.362.510.96.29.78.19.38.08.611.714.313.619.115.714.532.417.5averages. Outer suburbs suffer greaterpricing erosion—a lack of mass transportationand high gasoline costs affectperimeter areas. Condo builders sufferagitation; sales and presales “falldramatically.” But interviewees rate themarket a strong buy for apartments—rents move up, vacancies head down,and new projects are limited. Low retailvacancies buffer shopping centers inany consumer pullback—“owners maycome down with sniffles, but no pneumonia.”Surveys rank the area’s PugetSound ports as the nation’s number-onebuy among industrial markets.Emerging Trends in Real Estate ® 2009 33

87Exhibit 3-7U.S. Office Property Buy/Hold/Sell Recommendationsby Metropolitan Area6543San Francisco6.1San FranciscoHoustonLos Angeles49.549.446.3BuyHold44.427.646.3Sell6.123.07.42Washington, D.C.44.943.911.21Boston42.444.712.90'95'97'99'01'03'05'07'09New YorkSeattle40.639.744.847.414.612.8San Francisco. The City by the Baynever strays far from the top of thesurvey, featuring a Pacific gatewaywith barriers to entry and quality oflife, comparing favorably to any other24-hour market. An expected drop inprices and values won’t be “nearly asbad” as during the 2000–2001 techwreck, when office and apartmentdevelopers overshot. “No constructionglut exists this time.” Expect the welldiversifiedlocal economy to outperformthe national average, helping all propertysectors. The city actually ranksfirst for development and homebuilding(despite scoring mediocre marks), andrates as the leading “buy” market forapartments and office. The city’s transcendentwaterside setting helps luretravelers and sustain hotels, while itsports tap into Asian trade. Lofty housingprices fall, but foreclosure distressshould remain relatively restrained,especially compared with that seen insome overbuilt southern California markets.Silicon Valley’s “energy and enthusiasmreturn,” impelled by resurgenthigh tech. Some interviewees warn thatsoftware companies won’t be immuneto the recessionary downdraft. “That’s adisaster waiting to happen.”DenverDallasSan DiegoMiamiPhoenixChicagoAtlantaPhiladelphia27.523.317.915.715.614.312.612.10% 20% 40% 60% 80% 100%Source: Emerging Trends in Real Estate 2009 survey.Washington, D.C. The ultimate holdmarket when the economy struggles, thenation’s capital always cashes in fromfederal spending—those taps never stopgushing—and the area overflows withbrainpower jobs linked to government,lobbying, defense, tech, biotech, andeducation. Downtown office vacancyshould stay below 10 percent and apartments“lease up no matter what.” Butbuilders may have overstepped northof Massachusetts Avenue and aroundthe new baseball park. Infill suburbslike Bethesda, Alexandria, and Arlingtonlook solid, but office vacancies soar innorthern Virginia from a recent buildingspree. “Look for see-throughs along51.754.457.143.442.258.352.950.0876543210'9520.922.225.041.042.227.434.537.9Washington, D.C.'97'99'01'03'05'076.1'0934 Emerging Trends in Real Estate ® 2009

Chapter 3: Markets to WatchExhibit 3-8U.S. Hotel Buy/Hold/Sell Recommendations by Metropolitan AreaNew YorkWashington, D.C.SeattleSan FranciscoLos AngelesBostonChicagoHoustonMiamiSan DiegoDenverPhoenixDallasPhiladelphiaAtlanta41.438.836.233.831.930.021.820.820.018.616.712.511.78.06.6Buy0% 20% 40% 60% 80% 100%Source: Emerging Trends in Real Estate 2009 survey.New York. Wall Street’s implosionthreatens near-term prospects for thecountry’s principal global pathwaycity—“a daisy chain” of lost investmentjobs leads to cuts in accounting, lawfirms, advertising, car dealers, co-opbrokerages, and restaurants. Puny yearend2008 bonuses for surviving tradersand bankers promise to chill the marketfurther. “But no one should countus out.” Office vacancies ramp up asa host of financial giants leaves thescene. Rents drop from stratosphericto “comfortably high levels,” althoughconcessions increase and nervouslandlords approach tenants about reuppingto forestall increasing rollover riskbeginning in 2010. Owners and investhetollway” as you head out towardReston and Herndon. The office marketin Rockville, Maryland, also softens.Condo and housing prices reverse moresteeply than na tional declines, followinga heady run of increases about doublethe national average. Emerging Trendsrespondents love area retail potential—sustained employment and wagesshould help keep people in stores. Thearea’s Achilles’ heel remains growingcongestion in poorly planned suburbs,especially in northern Virginia. Theregion desperately needs to expand itsMetro mass transit system and relievecrowded roads to facilitate futuregrowth. Any transit-oriented developmenthits “grand slams.”Hold38.647.844.851.552.248.350.960.446.255.950.046.456.764.050.8Sell20.013.419.014.715.921.727.318.933.925.433.341.131.728.042.6876543210'95'97'99New York'01'03'05'075.9'09tors take some heart from the absenceof speculative development (too manybarriers to entry), but anticipate thatcompanies will hold out for better dealsas more sublease space comes onthe market. Skeptics question plansfor massive office building at GroundZero after the unprecedented financialindustry failures and more developmentis planned over the Hudson railyards—who will fill the space? Hotelsshould not count on foreign tourists, ifoffshore economies decline further. Thecity’s recent hotel squeeze could turninto a bulge—about 50 new projectsare planned or underway. The retailfrenzy ends, but the city’s concentrationof wealth keeps Madison Avenue boutiquesin business. Co-op and condomarkets finally weaken—developersworry about flagging buyer demand.City services retrench—tax revenuesdecline off reduced property transactionvolumes as well as lowered incomes.The area’s aging mass transit systemswon’t get needed funding for upgradesand expansion. Not surprisingly, suburbanmarkets catch a nasty cold, too.Emerging Trends in Real Estate ® 2009 35

87Exhibit 3-9U.S. Retail Property Buy/Hold/Sell Recommendationsby Metropolitan Area65432Los Angeles5.8Washington, D.C.SeattleNew YorkSan Francisco40.039.134.933.7BuyHold51.855.151.860.5Sell8.25.813.35.81Houston31.947.220.80'95'97'99'01'03'05'07'09Los Angeles. Holding up the best inhousing-ravaged southern California,L.A. benefits from a well-diversifiedeconomy and dense infill environmentwith higher barriers to entry than innearby suburban markets like OrangeCounty and the Inland Empire. An officebuilding wave could weaken the marketinto 2010 after a falloff in demand—thefinancial services crash hurts prime westLos Angeles in particular. Downtowncontinues to benefit from condominiumand apartment projects, which help nurturea more 24-hour environment amidhulking office towers, but Pasadena,Glendale, and west L.A. commercialcenters still retain an upper hand closerto premier family-friendly executiveneighborhoods. Driving to downtowngets more challenging every year andgas prices increase commuting angst.Overall, multifamily has legs: “It’s almostimpossible to lose money on apartmentinvestments, if you have a five- to tenyearinvestment horizon.” Hotels benefitfrom the city’s global pathway location.But housing woes devastate homebuildersin previously high-flying SanBernardino and Riverside, where foreclo-Los AngelesBostonDallasSan DiegoChicagoDenverPhoenixPhiladelphiaMiamiAtlanta30.828.023.420.318.918.811.310.99.37.50% 20% 40% 60% 80% 100%Source: Emerging Trends in Real Estate 2009 survey.sures spiral and home values drop likerocks. The once white-hot Inland Empireindustrial market cools temporarily—asnationwide consumer contraction hitswarehouse demand near the nation’slargest port, L.A./Long Beach. “Bigboxwarehouse developers pushed toofar,” “building to the horizon.” UpscaleOrange County—“ground zero for themortgage collapse”—gets nailed byits exposure to home lenders, some ofwhich go belly up. Absorbing shadowoffice space “could take three to fouryears.” The O.C. housing picture lookseven worse—prices dive. Weak householdcredit dampens shopping centeroutlooks throughout southern California.57.154.762.356.862.258.846.352.752.061.312.117.314.323.018.922.542.536.438.731.3Houston. “Stays hot as long as energystays hot.” The U.S. capital for “Big Oil”vaults into the Emerging Trends top tenfor the first time since 1995, just as therest of the country swoons over recordhighfuel and utility prices. “It’s backto the late 1970s,” when this marketboomed during an energy crisis. “For allthe talk about becoming more diversified,”Houston needed the oil surge toallow demand for space to catch up withits propensity for rampant development.Interviewees legitimately can point toadditional market strengths: the JohnsonSpace Center, world-class medicalfacilities, a burgeoning Gulf port, andtrade with Mexico. The population keepsexpanding due to the high-octane jobengine and reasonable cost of living36 Emerging Trends in Real Estate ® 2009

Chapter 3: Markets to Watch876543210'95'97'99'01Houston'03'05'075.7'09(land is cheap and so is housing). Homeprices never escalated dramatically,so values hold better in the mortgagecrunch. Remarkably for this constructioncrazedmarket, office vacancies dropclose to 10 percent—surveys signal agood buy opportunity, but apartmentssoften—still too much new construction.Traffic congestion and a lack of masstransit inevitably will constrain sprawlinggrowth. More cars and high oil pricessignal mostly good times, helping overcomethe effects of Hurricane Ike.Boston. Beantown hangs in theredespite steadily losing financial jobs tocompany mergers and acquisitions, banktakeovers, and now Fidelity moving operationsto cheaper space in Rhode Island.The good news is plenty of investmentand money management jobs remain;health care, biotech, and education helppick up some of the slack, and the area’stop-ranked colleges and universities provideexceptional talent to seed the workforce.Limited commercial developmentin the site-constrained Financial Districtand Back Bay neighborhoods helps keepoffice space “tight,” but new harborsidehotels threaten to “hurt older product.”Suburban markets never fully bouncedback from early-decade tech-wreck reversals—theylook more vulnerable. Valueswill “back up”—housing has already takena drubbing after steep gains.876543210876543210'95'95'97'97'99Boston'01Denver'99'01'03'03'05'05'07'075.6'095.5'09Denver. Anchoring the Rocky MountainWest, the Denver area continues to enjoysteady population growth and broadeningbusiness diversification with emphasis ontechnology, telecommunications, aviation,aerospace energy, and some financialservices. “Alternative-energy businesseshave been on fire.” The Colorado statecapital and a major federal governmentpresence provide a further jobs cushionin the choppy economy. “This is not a bigmarket, but it is more stable than in thepast.” Downtown’s revival takes the edgeoff some suburban nodes, which experiencehigher vacancies. Housing supply/demand enjoys greater balance than inmany other places. Government’s empha-sis on expanding mass transit alternativesand buttressing Denver’s downtown coreas the regional hub should pay futuredividends. Some transit-oriented mixeduseresidential development along suburbanrail stops gets ahead of itself, but willoutperform eventually.Dallas. “Texas creates jobs” andDallas, like Houston, gains groundin the Emerging Trends rankings,comparing favorably to most otherhot-growth markets, which don’t getthe same boost from energy-relatedbusinesses. AT&T’s move from SanAntonio underscores the importance ofDallas/Fort Worth International Airport,which secures the city along the crosscountryglobal pathway. But let’s notget too carried away—office vacancies876543210'95'97Dallas/Fort Worth'99'01'03'05'075.3'09remain stuck around 20 percent andeven higher in the perpetually strugglingdowntown. Local developers, whochronically overbuild, may have mettheir match in the financing morass—the dearth of construction lendersshould finally slow down constructionactivity. Living styles trend more vertical:the Metroplex “no longer just buildsEmerging Trends in Real Estate ® 2009 37

Chicago, Illinois.Planos.” High-rise and mid-rise apartmentsspring up around commercialnodes. “Suddenly we like urban coresmore in Texas.” Apartment owners dowell and developers keep building—lower-income demographics providemore renters. Like everywhere else,homebuilders stagger, but single-familyvalue declines have been relativelymoderate since prices never rose toosharply. Significantly, the state and localgovernments take concerted steps tointegrate and expand Metroplex masstransit in the face of road congestion andgasoline sticker shock.Chicago. “Looks like New York,behaves more like Atlanta.” Buildings“pop up too easily” and office rentsshow little to “no rent growth” in this24-hour Midwest titan. “It’s not one ofmy favorites,” says a locally basedinvestment manager. “I know too much.”Low-teen office vacancies are boundto increase as the “uneven” economygoes sideways and new construction iscompleted, luring tenants out of olderbuildings. West Loop stays the bestsubmarket—near commuter trains.Oversupplied condos weaken—“nothingsells”—upwards of a quarter of buyershad been speculators. Many “mom andpop” investors have trouble keeping upwith mortgage payments—“there’s alot of shadow renting.” Apartments “dowell” nevertheless—younger workerswant to stay near the bright lights andaction. Exurban housing values sink.The closer homeowners live to the citycore, the better they feel about theirproperty nest eggs. O’Hare Airport andthe city’s central breadbasket location876543210'95'97'99'01Chicago'03'05'075.1'09keep industrials in the global pathwaymix. “Chicago’s not slow and not fast,nice and steady—it’s got good demographics,transportation, workforce, andinfrastructure.” The 2016 Olympics bidcontributes “positive buzz.”San Diego. The deflating housing markettorpedoes enthusiasm—what went wayup now heads way down. Investors avoidpanic mode—this southern Californiabastion for almost-ideal weather is a solidhold market, destined to rebound overtime. “San Diego has been hit hard bysubprime and housing, but not as bad876543210'95'97'99'01'03'05'074.9San Diego'0938 Emerging Trends in Real Estate ® 2009

Chapter 3: Markets to Watch887765Atlanta6544.744.63232Philadelphia110'95'97'99'01'03'05'07'090'95'97'99'01'03'05'07'09as the O.C.—flat days ahead tempergreat long-range prospects.” Office propertyflipping had “gotten out of hand” tounsustainable levels—last buyers suffer,and vacancies jump into the mid-teensas employment stagnates. Homeownerfallout—weakening consumer appetitesand lowering credit quality—unsettlesa historically superior shopping centermarket. Hotels and the convention centerwould do better if the city had a biggerairport, taking more nonstop flights fromthe East Coast and international points.LAX and the Los Angeles/Long Beachport fix the global pathway 110 miles (176km) to the city’s north.Atlanta. 2009 promises “tough times”as an overbuilding hangover and slippingdemand roil investors. The regionaleconomy depends on high growth, butlacks energy and high-tech engines thatcurrently help sustain other markets.It’s no time to buy in any of the propertysectors. Office developers “play agame of chicken” in Buckhead, where“a bloodbath is coming.” About 2.5 millionsquare feet (232,257 sq m) of specconstruction is underway in a market thattraditionally absorbs less than 500,000square feet (46,451 sq m) annually. The“goofy” activity “defies description.”Condo and apartment builders also trapthemselves in Atlanta-style irrational exuberance—constructingnew projects wellahead of demand. What do you know—industrial markets suffer from oversupply,too. This market exemplifies the “moveback in” as many baby boomers seek toescape from driving headaches outsidethe perimeter. “As soon as my 15-yearoldis out of the house, we’re movingout of East Cobb to a condo penthousein Midtown.” Besides trying to reducetraffic snarls, leaders struggle over howto increase reservoir capacity and findadditional drinking water sources. Newroads, more mass transit, and neededwater/sewer infrastructure all translateinto higher future taxes. “Ultimately, amore cosmopolitan Atlanta means a moreexpensive lifestyle.” “The reason forrelocating here will no longer be a morerelaxed, cheaper quality of life.”Philadelphia. Consistently off interviewees’radar screens, Philadelphia retainsfavorable 24-hour attributes—cultural/historic attractions, decent intown neighborhoods,medical facilities, universities,and commuter-rail lines. But the city hasnever replaced enough lost manufacturingjobs and inner-city areas have beenslow to gentrify. As a result, Philly ranksat or near the bottom of all sector buy/sell ratings. A Northeast high-speed railcorridor would help lift Philadelphia’sprospects, turning the market into amore convenient low-cost alternative toits higher-octane Northeast neighbors—New York and D.C.Miami. “All of Florida seems to bedropping into the ocean economically.”No doubt the luster is gone—housingvalues plummet in oversupply and foreclosures,insurance costs skyrocket,hurricane phobia increases, and a staterevenue gap foreshadows tax hikes.“The condo-apartment market is sobad, even vultures won’t go there” and876543210'95'97'99'01'03'05'074.2Miami'09Emerging Trends in Real Estate ® 2009 39

Phoenix, Arizona.30 percent–plus house-price declinespound homebuilders while speculators“get massacred.” By comparison,the office sector rates a solid hold andindustrial properties near the supplyconstrainedairport always sustain strongdemand. Hotels have peaked aftera strong run—there’s less reason foreveryone to party along South Beach.Phoenix. This “dynamic” high-growthhot bed will need to rise again fromthe ashes after residential and apartmentdevelopers went overboard inthe desert. “Office is on its butt,” too.“Everybody piled into the market and87654321Phoenix4.10'95'97'99'01'03'05'07'09gets beat up.” Prices drop dramatically,“but now may be the time to invest whenthe market is flat on its back” and banksturn off construction lending. Populationgrowth will continue and businesses likethe lower-cost environment. In a placewhere volatility is the name of the game,opportunity investors with cash shouldstart to circle. In the meantime, localsneed to temper sprawl, deal with waterissues, and fund mass transit. Suburbanagglomeration problems begin to surfacein spades.40 Emerging Trends in Real Estate ® 2009

Chapter 3: Markets to WatchSmaller MarketProspectsThe ongoing flight to quality steers investorsaway from smaller markets, sittingoff global pathways with less diversifiedeconomies. “They can’t get growth.”Recent airline flight cutbacks by carriersspotlight their second- and third-tier status,making business travel more difficultand expensive. Investors fear that anymajor employer downsizing can knockout market prospects. And exit optionsbecome limited as capital reflexivelywithdraws. In general, the consensusview is that many of these markets willsuffer greater value declines and recovermore slowly.Austin scores well in the Texasupsurge—state government and theUniversity of Texas plus a swell ofhigh-tech businesses make for a goodstory. “It’s a shining star . . . relatively.”But developers “need to slow down;too much multifamily construction isunderway.” The center city transformsskyward with more mid- and high-riseresidences. Nearby San Antonio alsobenefits from the Lone Star halo effect. . . . Raleigh/Durham and Charlottecontinue to grow—the Carolinas providea low-cost alternative to the Northeastand Florida with a pleasant Goldilocksclimate. But Charlotte “shivers in itsboots” over Wachovia’s demise. “Thatmarket depends on two banks and apower company.” Portland prospersin Seattle’s shadow, but increasinglyplays second fiddle . . . . Honoluluneeds to worry that Asian travel doesn’tslip. Domestic business already dipsdue to rising airline rates and consumerbelt-tightening . . . . For now, Salt LakeCity draws fewer Californians movingeast to its cheaper cost of living . . . .Nashville benefits from an expandingentertainment industry around its countrymusic empire. Many stars and theirfans buy residences—“high-end apartmentsare a best bet.” In the Midwest,Minneapolis and St. Paul manageto hold their own, relying on a diversifiedeconomy not wedded to manufacturing. . . . Tampa, Orlando, andJacksonville suffer in the Florida downturn.Excess condos and homebuildingmire these markets, but Orlandostill gets a boost from foreign tourismthanks to Disney (as long as the dollarstays weak) and Jacksonville’s expandingport is a prime asset. Retail is“overheated” statewide. “There may beopportunity in the repricing.” California’sstate government presence buoysSacramento, but a questionable leveesystem raises concerns in the event ofan earthquake . . . . Las Vegas “crapsout,” building way too much of everything.Casino owners overplayed theirhands . . . . Automaker-ravaged citiesin the Rustbelt can’t get investor traction. . . . New Orleans dodged anotherhurricane, but can’t attract back majorbusinesses lost to Houston, Atlanta, andDallas over the past quarter century.Emerging Trends in Real Estate ® 2009 41

42 Emerging Trends in Real Estate ® 2009

chapter 4Property Typesin PerspectiveFor 2009, Emerging Trends interviewees expect decliningperformance among property sectors, operatingin a problematic economy and coping with slackeningdemand. “Owners will try to keep occupancies as high as possiblethrough concessions and free rent periods.” Some sectorswill be considerably weaker than others. Already dismal housingprospects worsen and bottom out at record survey lows, whileinvestment outlooks for retail sink to discomfiting “modestlypoor” levels. Hotels slide into the “fair to poor” range, office dipsto “fair,” and industrial warehouse registers somewhat better“fair to modestly good” marks. Interviewees forecast the bestinvestment performance for apartments—they sustain a “modestlygood” rating. (See Exhibit 4-1.) Development prospectsare worse than investment prospects, and development will beextremely limited in all sectors, except apartments and maybeindustrial, which manage fair prospects for new projects.n Apartments and distribution/warehouse continue to hopscotchfor top ranking. In 2009, apartments reclaim thenumber-one position. Demographics (more young adults)and the housing market collapse boost the number of renters,keeping apartment occupancies high and firming up rates.High-end apartments may face softening in markets, withfailed condo projects morphing into rentals.n Industrial remains an investor favorite for its steady cashflows, but the consumer downturn could mean lowered inventoriesand less shipping activity. R&D industrial holds up—high-tech companies outperform the overall economy.n Downtown office should weather any leasing falloff betterthan suburban markets. Investors gravitate to higher-qualitycore product in major business centers over office parks andExhibit 4-1Prospects for Major Property Types in 2009ApartmentResidential (Rental)Industrial/DistributionOfficeHotelsRetailFor-Sale ResidentialInvestment ProspectsDevelopment Prospects1AbysmalSource: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.5Fair5.895.335.515.075.144.034.473.994.263.953.632.689ExcellentEmerging Trends in Real Estate ® 2009 43

Exhibit 4-2Prospects for Property Subsectors in 2009Exhibit 4-3Prospects for Capitalization Rates andInternal Rates of ReturnApartment Rental:Moderate IncomeWarehouse IndustrialCentral City OfficeApartment Rental:High IncomeR&D IndustrialNeigh./CommunityShopping CentersInvestment ProspectsDevelopment Prospects5.775.485.665.155.514.335.505.065.044.854.674.08Expected ExpectedCap Rate Cap RateCap Rate December Shift ExpectedJuly 2008 2009 (Basis Unleveraged(Percent) (Percent) Points) IRR*Hotels: Limited Service 8.18 8.91 +73 11.65Power Centers 6.91 7.57 +66 10.29Suburban Office 7.18 7.81 +62 10.45Hotels: Full Service 7.54 8.13 +59 11.27Regional Malls 6.19 6.77 +59 9.68R&D Industrial 7.31 7.83 +52 10.70Neighborhood/Community Centers 7.01 7.54 +52 10.46Central City Office 6.34 6.86 +52 9.77Apartments: Moderate Income 6.38 6.86 +48 10.10Apartments: High Income 5.95 6.43 +47 9.88Warehouse/Industrial 6.83 7.26 +42 10.10Source: Emerging Trends in Real Estate 2009 survey.* During holding periodNote: Based on U.S. respondents only.Full-Service HotelsSuburban OfficeLimited-Service HotelsPower CentersRegional Malls1Abysmal5Fair4.663.964.563.594.474.004.063.503.893.119Excellentn Retail had a great run, but it’s over. Consumers tap out oncredit as unemployment numbers rise. The housing messshakes confidence and gas prices sap in-store spending.Fortress malls and neighborhood shopping centers in highincomeinfill areas remain solid investments, but B- andC-quality product suffers.n Everybody waits for housing prices to stabilize and mortgagebankers to normalize lending. Interviewees anticipateanother difficult year marked by more foreclosures and distressedsales, which help to clear the market and work downhomebuilder inventories. Lenders may take a long time torevive and no one expects a sudden rebound in values.Source: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.projects in suburban nodes where development is easier,vacancies track higher, tenants play more musical chairs,and rent growth is more difficult to sustain.n Volatile hotels react to economic pressures, which canquickly reduce occupancies and room rates in recessionaryenvironments. More companies penny-pinch travel budgetsand vacationers stay closer to home or don’t go at all. Fullservicehotels in major markets will outperform limited-servicebrands in suburban areas and along interstate cloverleaves.Top Buys/Holds/Sells. Not surprisingly, the surveys scoremoderate-income apartments, warehouses, and downtownoffice as best buys and holds among the property sectors—these sectors retain their value better and throw off steadiercash flows. Regional malls and power centers rate the lowestbuy scores—interviewees have tuned out retail—while hotelsand suburban office register the highest sell signals. Overallsentiment leans heavily toward holding onto properties throughthe rough patch—selling makes little sense when buyers wantopportunistic pricing.Cap Rates. After several years of significant cap rate compressionto near-record lows, respondents predict continuingrate hikes through 2009, ranging from 42 basis points44 Emerging Trends in Real Estate ® 2009

Chapter 4: Property Types in Perspectivefor warehouse/industrial to 73 basis points for limited-servicehotels. (See Exhibit 4-3.) “We’re seeing a return to more historiclevels.” Following a pattern, retail centers and hotels showthe sharpest increases, industrials and apartments the lowest.Survey cap rates, which registered in the 5 to 7.5 percentrange in 2007, advance into a 6 to 9 percent band for 2009.Expected unleveraged IRRs uniformly rise above 10 percent,with all sectors showing increases over last year’s report.Development Skid. Straitjacketed by parsimonious lendersand hamstrung by falling demand as well as stubbornly highmaterial costs, developers resign themselves to a disconcertinglyquiet 2009. Construction financing for major projects isvirtually impossible to obtain, homebuilding is redlined, andretail makes lenders especially nervous. Only rental apartmentand some warehouse projects have much chance toregister profits worth the risk, according to surveys. The firmlid on construction raises hopes that markets can recovermore quickly and pent up demand will generate a round ofsustained development activity after 2010.ApartmentsStrengthsOver time, apartments solidify their position as the best riskadjustedcore real estate investments. Demand from theburgeoning Generation Y/young adult population kicks intogear just as housing woes push defaulting homeowners intorentals and tougher mortgage underwriting prevents somerenters from buying homes. “Owning doesn’t look like areasonable option for many people.” As folks marry later inlife, they stay in apartments longer, too. More empty nestersand retirees, meanwhile, give up suburban homes for easierupkeep and the convenience of apartment living in infillareas. “Apartments are a bright spot.” No wonder institutionalinvestors never tire of buying these properties—“you almostalways have an exit strategy.”WeaknessesLandlords can’t give away multifamily units in Florida,Phoenix, and Las Vegas, where builders went into overdriveand vacant condos convert into rentals, softening highincomeapartments in particular. The shaky economy andrising unemployment numbers lead to lower tenant qualityin weaker markets, affecting rent levels and net operatingincomes. High energy and utility bills raise operatingexpenses, squeezing bottom lines. “You need a better economyto really move rents.” If the job picture deteriorates fur-Exhibit 4-4U.S. Moderate-Income Apartments2009 Prospects Rating RankingInvestment Prospects Modestly Good 5.77 1stDevelopment Prospects Fair 5.48 1stExpected Capitalization Rate, December 2009 6.9%Expected Unleveraged IRR During Holding Period 10.1%Buy Hold Sell48.1% 41.8% 10.2%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.Exhibit 4-5U.S. High-Income Apartments2009 Prospects Rating RankingInvestment Prospects Modestly Good 5.50 4thDevelopment Prospects Fair 5.06 5thExpected Capitalization Rate, December 2009 6.4%Expected Unleveraged IRR During Holding Period 9.9%Buy Hold Sell28.6% 53.3% 18.2%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.ther, more people will start to double up and recent grads willmove back in with parents, slowing demand. The governmenttakeover of Freddie Mac and Fannie Mae raises questionsabout their backstopping the financing of apartment investments,especially for affordable housing. “We need theirliquidity; they hold up a house of cards.”Best BetsEverybody likes value-add plays, rehabbing older productinto workforce housing where demand is strong. Possiblegovernment subsidies can provide a bonus. “You put $5,000to $10,000 into each unit and can convert B-/C+ product intoB/B+ and sell to core investors at a premium.”Owners need to focus on hiring the “right” managers whocan enhance leasing activity and retain tenants.Emerging Trends in Real Estate ® 2009 45

Exhibit 4-6U.S. Apartment Investment Prospect TrendsExhibit 4-8U.S. Apartment Property Total ReturnsCompletions (Thousands of Units) Rating7.06.56.05.55.0250200150100500Apartment Rental: Moderate IncomeApartment Rental: High Income2004 2005 2006 2007 2008 20093 = poor, 4 = modestly poor, 5 = fair, 6 = modestly good, 7 = good.Source: Emerging Trends in Real Estate surveys.Exhibit 4-7U.S. Multifamily Completions and Vacancy Ratesn Completions (Thousands of Units) — Vacancy Rate %199419951996199719981999200020012002200320042005200620072008*2009*2010*2011*Source: REIS (sum of top markets).* Forecast.86420Vacancy Rate %40%35%30%25%20%15%10%5%0%-5%-10%-15%-20%-25%-30%NCREIFNAREIT19861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008*Sources: NCREIF, NAREIT.* Data as of June 30, 2008.Begin to target overbuilt hot-growth markets for bargains—failed projects can rebound quickly when demand revives.AvoidUpscale apartments in “overbaked” condo markets remainvulnerable to failed projects converting into rentals and increasingsupply. It’s no time to consider new projects where developerswent on a bender. Think twice about investments inproperties located in totally car-dependent areas away fromcommercial centers.DevelopmentResidential projects near mass transit stops can be nobrainers.Focus on infill areas in suburban markets with trafficproblems. Mixed-use construction in urbanizing suburbannodes almost always includes residential components tohelp create more attractive 24-hour environments and feedsdemand for retail. In high-cost 24-hour cities, local governmentswill continue to force affordable housing requirementson developers in return for approvals on more profitableoffice and condo projects.OutlookIn the face of adverse economic metrics, apartment valuesshould hold up, “but don’t expect increases.” Investorsshould not complain—treading water with multifamily beatsbeing submerged in other sectors. At least cash flows can46 Emerging Trends in Real Estate ® 2009

Chapter 4: Property Types in Perspectiveoffset anticipated cap rate advances. As the population edgesback to infill markets and suburban metros evolve into morevertical environments, apartment demand and developmentwill only intensify.IndustrialStrengthsInstitutional investors’ appetite never subsides for big-boxwarehouse properties located near leading gateway ports andprimary international airports. Solid core-style investments, theyproduce steady cash flows and avoid sharp pricing swings.Values get cushioned in downturns: “Everyone wants to buy,but there is not much to go around.” Short construction leadtimes keep markets from getting too overbuilt—developers canpull back more easily when tenant demand diminishes. That’sgood—since demand drivers wane in 2009.WeaknessesSlumping consumer buying leads to declining import traffic,slowing warehouse activity. Vacancies begin to rise especiallyat the Pacific seaports, geared to Asian manufacturersthat pump cheap goods into U.S. markets. Stepped-upU.S. exports don’t make up the difference. Markets tied tohomebuilding also show softness—homebuilders stop buyingconstruction materials and fewer new homeowners meanreduced overall spending to fill houses with stuff. “Slowingorders for products push inventories down.” High gasolineprices force shippers to reconsider logistics and shippingroutes, using more trains and fewer trucks. “Everyone is onhold.” Port bottlenecks along the West Coast bring potentialnew competition from Mexico, which will require moreadvanced rail infrastructure to ship goods into the UnitedStates. Portfolio investors struggle to build holdings throughmultiple acquisitions of smaller, disparate properties—“transaction costs mount.”Best BetsDespite dipping short-term prospects attributable to the economicslowdown, premier coastal markets will continue toshoulder ever-increasing import/export activity in the burgeoningglobal marketplace. Growth constraints on supply will challengeL.A./Long Beach, San Francisco, and Seattle to keep upwith anticipated future demand from Asian shippers. The NewYork/New Jersey area faces similar capacity issues on theEast Coast, creating opportunities for Charleston, Savannah,Exhibit 4-9U.S. Warehouse/Industrial2009 Prospects Rating RankingInvestment Prospects Modestly Good 5.66 2ndDevelopment Prospects Fair 5.15 2ndExpected Capitalization Rate, December 2009 7.3%Expected Unleveraged IRR During Holding Period 10.1%Exhibit 4-10U.S. R&D IndustrialBuy Hold Sell47.8% 44.3% 8.0%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.2009 Prospects Rating RankingInvestment Prospects Fair 5.04 5thDevelopment Prospects Fair 4.85 3rdExpected Capitalization Rate, December 2009 7.8%Expected Unleveraged IRR During Holding Period 10.7%Buy Hold Sell29.2% 54.6% 16.2%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.Jacksonville, and Houston. But these ports need deep-enoughharbors to handle new oversized container ships.AvoidInvestors should take care placing early wagers on potentialshipping hubs in Texas markets and places like Kansas City,Memphis, and Columbus. Indeed, some of these marketscould transform into major distribution centers over time. Newintermodal transport corridors will become a 21st-centurynecessity, replacing or enhancing the interstate system andaging rail lines. But the federal government needs to joinforces with states, shippers, and railroads to plan these nextgenerationnetworks for maintaining national competitiveness.Although costly infrastructure revamping won’t happen immediately,any changes will determine winner and loser markets.Emerging Trends in Real Estate ® 2009 47

Exhibit 4-11U.S. Industrial/Distribution InvestmentProspect TrendsExhibit 4-13U.S. Industrial Property Total ReturnsRating8765Warehouse IndustrialR&D Industrial4-20%change warehousing priorities. Texas markets could benefit ifn Completions (msf) — Availability Rate % more Asian goods move through Mexico. Likewise, heartland30012markets will become more strategic for intermodal transport,2004 2005 2006 2007 2008 2009Sources: NCREIF, NAREIT.3 = poor, 4 = modestly poor, 5 = fair, 6 = modestly good, 7 = good.* Data as of June 30, 2008.Source: Emerging Trends in Real Estate surveys.OutlookNo other real estate sector faces the potential for greaterExhibit 4-12adjustment and transformation of its markets. Investors needU.S. Industrial Completions and Availability Ratesto monitor how high fuel prices shift shipping patterns and25010 if shippers rely less on gas-guzzling trucks and more on railroadsfor cross-country runs. The widening of the Panama2008 Canal will make Gulf and East Coast ports more accessibleto Asian manufacturers in coming years, reducing pressure1506 on West Coast ports. But the sheer volume of increased tradeanticipated in the ever-globalizing economy ensures growing1004need for new types of distribution facilities and steadily502increasing demand at the major gateways. At some point, thecountry will be forced to address its increasingly inadequate00 infrastructure and figure out more efficient transport systems.Completions (Thousands of Units)1990199119921993199419951996199719981999200020012002200320042005200620072008*2009*Source: Torto Wheaton research.* Forecasts.DevelopmentBuilders need to back off. Rising vacancies, high constructioncosts, and limited financing take a toll on near-termplans. “Everything shuts down” for now.Vacancy Rate %40%35%30%25%20%15%10%5%0%-5%-10%-15%NCREIFNAREIT1984198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008*Research & DevelopmentVolatile cousins to warehouse and distribution facilities, R&Dproperties look like a safe harbor. They probably can skatethrough the current economic turmoil without significantdownside as long as overall global demand holds up for techrelatedproducts and services. In this cycle, R&D could beinsulated from problems more concentrated in housing andfinancial sectors. Most high-tech, software, and biotech businesseshad strengthened after overextending and crashing in48 Emerging Trends in Real Estate ® 2009

Chapter 4: Property Types in Perspectivethe 2000–2001 tech wreck. These properties rate strong holdsfrom interviewees, with sizable buy sentiment also evidenced.High tech helps Seattle and San Francisco area markets,including San Jose, rank at the top of investor surveys.OfficeStrengthsLong leases protect office owners after markets crest andlimited development activity, especially in most downtownmarkets, should help buffer against any serious investordislocation. “We can weather this storm.” The credit crunchkeeps planned projects from breaking ground—“when recoverycomes, rents may recover quickly.” During the recentupcycle, most businesses tempered leasing requirements—they didn’t anticipate growing into extra space—and hiredconservatively, maintaining lean staffs and squeezing downspace per capita to its limits (about 180 square feet/16.7square meters). “No one has been looking for bigger officesExhibit 4-14U.S. Central City Office2009 Prospects Rating RankingInvestment Prospects Modestly Good 5.51 3rdDevelopment Prospects Modestly Poor 4.33 4thExhibit 4-15U.S. Suburban Office2009 Prospects Rating RankingInvestment Prospects Fair 4.56 8thDevelopment Prospects Modestly Poor 3.59 7thExpected Capitalization Rate, December 2009 7.8%Expected Unleveraged IRR During Holding Period 10.4%Buy Hold Sell14.4% 53.8% 31.8%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.Exhibit 4-16U.S. Office Investment Prospect TrendsRating6 Central City OfficeSuburban Office54Expected Capitalization Rate, December 2009 6.9%Expected Unleveraged IRR During Holding Period 9.8%Buy Hold Sell38.7% 52.8% 8.5%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.32004 2005 2006 2007 2008 20093 = poor, 4 = modestly poor, 5 = fair, 6 = modestly good, 7 = good.Source: Emerging Trends in Real Estate surveys.and younger workers like collaborative, open-space environments.”As a result, interviewees expect more measured layoffsand less sublease vacancy than during previous marketbottoms. Energy and high-tech markets could even sustainmodest growth tracks.WeaknessesLeasing slows, leading to more concessions and possiblerent erosion, especially in markets with concentrations offinancial and investment firms. “It’s turning into a tenants’ market.”Development activity and fewer barriers to entry leavesome suburban-oriented metropolitan areas more vulnerableto higher vacancies and tenant hopping. Phoenix, OrangeCounty, Buckhead, outlying northern Virginia, and Las Vegashead off the cliff. Higher utility and fuel costs shave net operatingincomes as rents flatten. Long-term demand trends pointto slower growth. Companies continue to focus relentlessly onexpense reductions, outsourcing more work overseas and toconsultants, who don’t receive costly benefits or need cubicles.Technology lets them work from home.Emerging Trends in Real Estate ® 2009 49

Exhibit 4-17U.S. Office New Supply and Net AbsorptionExhibit 4-19U.S. Office Property Total ReturnsNew Supply (msf)12010080604020025%20%15%10%5%n New Supply — Net Absorption 120100806040200-20-40-60-80-20%-1001990199119921993199419951996199719981999200020012002200320042005200620072008*2009*2010*2011*Source: Torto Wheaton research.* Torto Wheaton forecast.Exhibit 4-18U.S. Office Vacancy RatesSuburbanDowntown1990199119921993199419951996199719981999200020012002200320042005200620072008*2009*2010*2011*Source: Torto Wheaton research.* Torto Wheaton forecast.Net Absorption (msf)50%40%30%20%10%0%-10%NCREIFNAREIT1990199119921993199419951996199719981999200020012002200320042005200620072008*Sources: NCREIF, NAREIT.* Data as of June 30, 2008.Best BetsLandlords must court tenants aggressively to sustain occupanciesthrough the downturn—“it may make sense to tradeconcessions for better credit.” Larger tenants need to considerlimiting how much space they put back on the marketfor subleasing. If they give up too much space in 24-hourcentral business districts (CBDs), they may lose control ofcontiguous blocks, which can limit their growth options in arecovery. You’ve read this old chestnut before—higher-qualityproperties in 24-hour markets will hold value better andrebound more quickly.AvoidSecondary and tertiary cities prepare for steeper value losses ina capital flight to quality. The entire market quakes when a bigemployer downsizes. “They always turn out to be more volatile.”DevelopmentConstruction lenders remained relatively disciplined throughoutthe recent cycle—institutional memories from the late1980s kept projects in check. Now, the severe credit rollbackapplies a coup de grâce—most developers might as welltake the year off and those with projects coming on line needto brace for leaner bottom lines.50 Emerging Trends in Real Estate ® 2009

Chapter 4: Property Types in PerspectiveOutlookOwners can’t escape value corrections and flattening rents.They hope the economy improves enough to steady demandand limit exposure to future rollover risk. Trophy hunters whobagged dearly priced acquisitions in 2006–2007 take morelumps in high-profile flameouts. Top markets shouldn’t straytoo far from equilibrium, allowing rents to jump-start aftercompanies begin hiring again in 2010 or 2011.HotelsStrengthsMajor coastal cities should continue to attract offshore euroand yen visitors who flock along global pathways to these U.S.destinations as long as the weak dollar makes them bargains.New York, Los Angeles, Orlando, and San Francisco should“stay in the game” while other markets struggle. But anxietyincreases even in the top lodging markets—interviewees questionthe durability of the foreign tourist blitz when internationaleconomies may be following the U.S. slide. Upscale luxurysegments and mid-scale hotels without food and beveragehistorically perform better in souring demand scenarios.Occupancies decline off record highs and RevPAR growthfinally flattens after a healthy four-year “boomlet.” Industrypros reluctantly accept the reality of their business—a lousyeconomy impacts hotels earlier and harder than most otherproperty sectors, but hotels can rebound more quickly toosince room rates adjust on a nightly basis.WeaknessesDomestic travel turns south—CFOs tell their bean countersto slash travel and convention budgets, consumers curtailspending and eliminate vacations, and airlines reduce flightsoutside prime business markets, including those to manyleisure destinations. The airline cutbacks hit secondary andtertiary cities disproportionately hard—now fewer people willtravel to them. Even Las Vegas and popular Florida marketsprepare for a chill. Suburban limited-service product typicallygets overbuilt in upswings—the past few years havebeen no different. New supply comes on line just as demandfalls off. Interstate cloverleaf hotels and motels see occupanciesdecline as drivers limit travel to save on gasoline costs.Rising cap rates mean lowering values when cash flows can’tkeep up. “We’re at an inflection point.”Exhibit 4-20U.S. Full-Service Hotels2009 Prospects Rating RankingInvestment Prospects Fair 4.66 7thDevelopment Prospects Modestly Poor 3.96 9thExpected Capitalization Rate, December 2009 8.1%Expected Unleveraged IRR During Holding Period 11.3%Buy Hold Sell16.2% 46.5% 37.4%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.Exhibit 4-21U.S. Limited-Service Hotels2009 Prospects Rating RankingInvestment Prospects Modestly Poor 4.47 9thDevelopment Prospects Modestly Poor 4.00 8thExpected Capitalization Rate, December 2009 8.9%Expected Unleveraged IRR During Holding Period 11.7%Buy Hold Sell15.3% 50.2% 34.6%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.Best BetsThe big hotel companies will start offering enticements tokeep more rooms filled—bonus nights, free meals, and complimentarymassages at the spa. For investment and developmentopportunities, they go overseas to expanding markets inthe Middle East and Asia. In the United States, investors havelittle choice but to hold onto hotel assets. Buying opportunitieswill emerge from bad development timing—specificallyEmerging Trends in Real Estate ® 2009 51

Exhibit 4-22U.S. Hotel Investment Prospect TrendsExhibit 4-24U.S. Hotel/Lodging Property Total ReturnsRatingConstruction (Billions $)87654335302520151050Full-Service HotelsLimited-Service Hotels2004 2005 2006 2007 2008 20093 = poor, 4 = modestly poor, 5 = fair, 6 = modestly good, 7 = good.Source: Emerging Trends in Real Estate surveys.Exhibit 4-23U.S. Hotel Construction and Occupancy Ratesn Construction (Billions $) — Occupancy Rate % -60%1993199419951996199719981999200020012002200320042005200620072008*2009*2010*2011*Sources: U.S. Bureau of the Census, Moody’s Economy.com, Torto Wheaton research.* Forecasts.80706050Occupancy Rate %50%40%30%20%10%0%-10%-20%-30%-40%-50%Sources: NCREIF, NAREIT.* Data as of June 30, 2008.involving distressed owners who can’t service debt on newlyopened properties in markets walloped by airline/driver fuelcost fallout. You play the odds that oil prices moderate andtravelers eventually regain their footing.AvoidUntil the market shakes out, most markets and lodgingsegments don’t offer any upside. All you can say aboutLas Vegas is “ouch.”DevelopmentForget about it!NCREIFNAREIT199419951996199719981999200020012002200320042005200620072008*OutlookThe lodging sector presents a “real mixed bag”—New Yorkand Los Angeles full-service hotels could sustain occupanciesand revenues. Airport hub business centers will generallyfare much better than connector cities, while some more“off-the-beaten track” metropolitan areas and suburbanmarkets could “face bloodbaths.” The length of the economictrough will determine whether average industry benchmarksshow little to no growth or serious declines.52 Emerging Trends in Real Estate ® 2009

Chapter 4: Property Types in PerspectiveRetailStrengthsMonopolistic fortress malls, owned mostly by REITs, andhigh-income-area neighborhood shopping centers shouldweather the ongoing consumer retreat better than other retailsegments. Interviewees remain relatively positive about urbanretail in the prime 24-hour markets.WeaknessesShopping centers turn “high risk.” Inflation and energy costseat into retail sales, while the unsettling jobs picture andhousing woes unnerve most shoppers. Retailers “land onExhibit 4-26U.S. Power Centers2009 Prospects Rating RankingInvestment Prospects Modestly Poor 4.06 10thDevelopment Prospects Modestly Poor 3.50 10thExpected Capitalization Rate, December 2009 7.6%Expected Unleveraged IRR During Holding Period 10.3%Buy Hold Sell11.4% 53.1% 35.6%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.Exhibit 4-25U.S. Neighborhood/Community Centers2009 Prospects Rating RankingInvestment Prospects Fair 4.67 6thDevelopment Prospects Modestly Poor 4.08 6thExpected Capitalization Rate, December 2009 7.5%Expected Unleveraged IRR During Holding Period 10.5%Buy Hold Sell29.8% 50.0% 20.3%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.Exhibit 4-27U.S. Regional Malls2009 Prospects Rating RankingInvestment Prospects Modestly Poor 3.89 11thDevelopment Prospects Poor 3.11 11thExpected Capitalization Rate, December 2009 6.8%Expected Unleveraged IRR During Holding Period 9.7%Buy Hold Sell6.8% 67.9% 25.3%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.their backsides” in “a long-overdue correction” after REITswere “pressured by shareholders to show growth,” and otherdevelopers “built some unnecessary projects.” “It’s a disasterwaiting to happen: too much square footage and consumersdon’t have their pocketbooks.” Interviewees see “moreretailer bankruptcies on the horizon.” Some chains wouldhave failed sooner had they not been propped up by easyfinancing (sound familiar?). Now they go dark in the badeconomy. After a decade-plus boom, “the retail bone yardfills up again.” The “Darwinian environment” means retailerswill once again concentrate stores in the top centers, leav-ing some B and C malls behind—half empty and teetering.Failing mom-and-pop stores will hurt some neighborhoodcenters and leisure/power centers face a big-box liquidationshakeout. “You need anchor tenants with strong credit tooffer any comfort.” Interviewees wonder, “Do all these drugstoresin strip centers make sense? We said the same thingabout Starbucks and look what happened.” More and morepeople are buying discounted drugstore items at the bigwholesale clubs.Emerging Trends in Real Estate ® 2009 53

Exhibit 4-28U.S. Retail Investment Prospect TrendsExhibit 4-30U.S. Retail Property Total ReturnsRating8 Neighborhood/Community Shopping CentersPower Centers7Regional Malls6550%40%30%20%10%NAREITNCREIFCompletions (msf)43353025201510502004 2005 2006 2007 2008 20093 = poor, 4 = modestly poor, 5 = fair, 6 = modestly good, 7 = good.Source: Emerging Trends in Real Estate surveys.Exhibit 4-29U.S. Retail Completions and Vacancy Rates:Top 50 Marketsn Completions (msf) — Vacancy Rate % -20%199119921993199419951996199719981999200020012002200320042005200620072008*2009*2010*2011*121086Vacancy Rate %0%-10%198519861987198819891990199119921993199419951996199719981999200020012002200320042005200620072008*Sources: NCREIF, NAREIT.* Data as of June 30, 2008.Best BetsBuy or hold mall REIT stocks—these companies marshalleverage over retailers to keep stores in their portfolios,dominated by fortress malls. They may suffer further hits,but most damage has been factored into share prices.Consumers crave bargains—outlet centers and discountclubs, and big boxes hold their own. Well-located strip centers,anchored by top supermarket chains, will continue todraw necessity shoppers.AvoidLifestyle centers’ original concept concentrated projectsin upscale neighborhoods near fortress malls. But recentdevelopment in lower-income areas at suburban edges “getsslammed.” Expect the return of “ghost malls”—older B-minusand C regional shopping centers wither into potential landplays for mixed-use developments.Source: REIS (sum of top markets).* Forecasts.DevelopmentNot happening! REITs shed land they targeted for newprojects. Second ring road shopping centers, fearing thirdring road development, don’t need to worry anymore—“theywon’t be leapfrogged.” Some older “underutilized and underexploited”centers in prime infill areas could make futureenhancement plays. We underscore “future.” Over time, residential/retail/officemixed-use concepts will expand into infillareas, providing more 24-hour-style convenience.54 Emerging Trends in Real Estate ® 2009

Chapter 4: Property Types in Perspective“In previous generations,people bought homes to livein and didn’t look at them aswealth generators. Thatchanged recently and peopleoverreached. Homebuyingwas oversold as a path tofinancial freedom”OutlookShopping center owners brace for value losses and decliningoperating incomes. Replacing lost tenants will prove difficultas retailers retrench. Until job growth resumes and gasolinecosts moderate, consumers’ enthusiasm lags. Higher interestrates and lower housing values present further hurdles.Overleveraged Americans also need to rein in credit cardand mortgage debt as well as lingering student and autoloans before they can feel comfortable about mall sprees.Retail stays down for a while.HousingStrengthsDespite the most significant declines in housing prices sincethe Great Depression, most long-term homeowners, whomortgaged rationally, should retain significant value gainsfrom many years of steady appreciation. “In previous generations,people bought homes to live in and didn’t look at themas wealth generators. That changed recently and peopleoverreached. Homebuying was oversold as a path to financialfreedom” and speculators using easy leverage bid up themarket. Finally, a price bottom approaches—probably by late2009—as foreclosures and fire sales increase, and homebuilderinventories slowly sell off at significant discounts. “Theworst is over.”Exhibit 4-31Prospects for For-Sale Housing in 2009Infill and Intown HousingManufactured HomeCommunitiesDetached Single-Family:Hi gh IncomeDetached Single-Family:Moderate IncomeSecond and Leisure HomesAttached Single-FamilyGolf Course CommunitiesMultifamily CondominiumsTimeshare Properties1AbysmalInvestment ProspectsDevelopment ProspectsSource: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.5.395.304.093.803.823.003.612.793.553.053.542.993.252.693.202.573.142.955Fair9ExcellentWeaknessesDevastation visits land developers, who lose all equity ontheir building lots and may be personally liable on gobsof leverage—some borrowed upwards of 95 percent. Now“people who bought land as values dropped are sorry theydid”—prices continue to fall. Homebuyers and sellers won’thave a meeting of the minds until distressed assets movethrough the system. Problems extend well beyond subprimeto all pricing segments—affluent buyers overreached onjumbo mortgages, too. “We need to move back to pricinglevels from 2003–2004 before a floor establishes.” Whilesticker prices nose-dive into more palatable ranges, home-Emerging Trends in Real Estate ® 2009 55

Exhibit 4-32U.S. Single-Family Building PermitsExhibit 4-33The S&P/Case-Shiller Home Price Index2,000250Thousands of Units1,5001,000200150100500198019811982198319841985198619871988198919901991199219931994199519961997199819992000200120022003200420052006200720082009*2010*2011*Source: U.S. Census Bureau, Moody’s Economy.com.* Forecast.501999 2000 2001 2002 2003 2004 2005 2006 2007 2008*Source: Standard & Poor’s.* Data as of June 30, 2008.buying may become more difficult for the average purchaser.Shellacked mortgage lenders won’t back off higher equityrequirements and stricter covenants. Rising interest ratespromise higher mortgage rates. “We’ve got to have more jobsand wage gains and I don’t see that in 2009.” “Every sale is astruggle—even in New York City.” Indeed, the worst may beover, “but there is more pain to come.”Best BetsHomes closer to prime commercial cores will outperform.“People realize they don’t need 3,000 square feet [278 sq m]and four cars anymore.” At some point, those high-end Miamicondos overlooking the Atlantic will be good buys. “In 1975,we had 30,000 unsold units in south Florida, the same in 1988,and now again.” Ocean views always find a market.AvoidOuter-ring suburbs and exurban areas will register greaterlosses as market demand shifts toward infill neighborhoods.McMansion subdivisions in the sticks take a doublewhammy—rising heating/cooling bills for these expansivehomes work against sellers already struggling to overcomeresistance to car commuting expenses.DevelopmentHa. Ha.OutlookAs markets stabilize, attitudes about homebuilding, homebuying,and home lending will undergo a radical back-to-thefuturereadjustment. People learn that there is more to owninga home than just debt service—“you have all sorts of otherexpenses and need ample reserves.” And the idea that homevalues have nowhere to go but up has evaporated. Realitysets in that the American dream can easily turn into a nightmare.For all the political rhetoric, some people “can’t affordto be homeowners and shouldn’t be.” Surviving homebuilderswill refocus on infill concepts—denser communities withmixed uses and town center elements. Chastened lenders,prodded by regulators, realize they need to reinforce underwritingstandards and scrutinize buyers’ credit at the expenseof loan volumes. The country figures out again that too muchof a good thing—low-cost leverage—can be disastrous.Expect a slow, lurching recovery.Niche MarketsInterest in niche and mixed-use sectors dissipates—investorshave “too many problems to look under rocks for yields. Youdon’t hear boo about them.” Interviewees complain about56 Emerging Trends in Real Estate ® 2009

Chapter 4: Property Types in Perspectivethe inability “to deploy much money” in these generally “thin”market segments. “It’s too hard to price uncertainty andthere is not enough volume to make it worth the time andresources.” Niche appeal fades from several years ago whencore investors shut out of primary food group sectors bypricing spirals sought better value in alternative categories,primarily medical office, student housing, and self-storage.Returns have been spotty (better for medical office and selfstorage)—“caprates increase more quickly than for the majorproperty sectors.” “Numbers haven’t panned out for deals.”Survey respondents continue to tout the student housing,medical office, and seniors’ housing markets as demographicplays. (See Exhibit 4-34.) Infrastructure also showspromise—the United States requires significant investmentto upgrade roads, mass transit, water-sewage systems,and electric grids. Growing demand for workforce housingkeeps tax credit apartments strong. Mixed-use developmentand planned community concepts short-circuit in the housingmarket morass and credit meltdown.Student Housing. A pure demographic bet—the GenerationY cohort crowds into college campuses, which have troublesqueezing everyone into residence halls.Medical Office. An equally large baby boomer cohort agesinto more sickness and infirmity. “The older you get, the moretime you spend visiting doctors and hospitals.”Infrastructure. The United States spends about $140 billionannually on roads and mass transit, but the governmentestimates that necessary projects require upwards of $240billion to keep the nation competitively moving people andgoods. Private investors could fill some of the enormous gapif more state and local governments could get comfortablewith financing arrangements and imposing more and higheruser fees on drivers.Tax Credit Housing. Severe shortages of reasonable rentalhousing hobble many cities that price out lower-income workers.Fannie and Freddie subsidies had supported new projects,but will funding continue when the government decideshow to reconstitute these failed entities?Seniors’ Housing. The numbers remain compelling—agraying population will increase demand significantly for variousforms of adult communities—over-55 subdivisions andapartment residences, assisted living communities, and nursinghomes.Exhibit 4-34Prospects for Niche and Multiuse PropertyTypes in 2009Student HousingMedical OfficeInfrastructureSeniors’/Elderly HousingUrban Mixed-Use PropertiesApartmentRental: Tax CreditMixed-UseTown CentersSelf-Storage FacilitiesNew UrbanistCommunitiesLifestyle/Entertainment RetailResort HotelsMaster-PlannedCommunitiesMaster-PlannedResorts1AbysmalInvestment ProspectsDevelopment Prospects5FairSource: Emerging Trends in Real Estate 2009 survey.Note: Based on U.S. respondents only.6.095.665.845.525.685.575.595.515.595.305.455.165.294.935.065.094.654.314.544.034.443.834.003.453.943.539ExcellentUrban Mixed Use. People want convenience and headback in the direction of urban cores. The hot-growth Sunbeltsuburban agglomerations, meanwhile, start to encourageincreased densification in infill areas to enable future growth.Mixed-use projects sit in the sweet spot, but financing will behard to attract in the short term.Self-Storage. Upended housing markets force more dispossessedand downsizing homeowners to squirrel awayall those sofas and bar stools that didn’t get bought in yardsales or go to relatives.Master-Planned Communities, New Urbanist, Resorts.Anything involving development and housing has limited appeal.Emerging Trends in Real Estate ® 2009 57

58 Emerging Trends in Real Estate ® 2009

chapter 5Emerging Trends inCanada“Expect a tough slog, but not as bad as in the United States.”Less volatile Canadian real estate markets cannotavoid shockwaves emanating from “the big elephantin the room” next door. The U.S. credit morass, theweak U.S. dollar, falling U.S. demand for Canadian products,and the “stuck in a rut” U.S. economy have helped underminereasonably robust momentum and soften solid supply/demand fundamentals. Interviewees turn more cautious,uncertain, and pessimistic—“brace yourself for mediocrity” in2009. “Expect a tough slog, but not as bad as in the UnitedStates.” Respondents worry in particular about a deep orlengthy U.S. recession broadening any market downturn inCanada, but anticipate more of a “slowdown,” “not a disaster.”“We know we are not an island and are vulnerable.”Canada’s split-personality economy—“the West versus theEast”—faces headwinds, particularly in Ontario and Quebec,which falter somewhat from declines in manufacturing precipitatedby a combination of the poor U.S. economy andstrong Canadian dollar—U.S. buyers slow imports andindustrial markets suffer from automakers’ distress. Westernenergy markets led by Calgary and Edmonton have experiencedrapid growth thanks to skyrocketing oil and naturalgas prices, “but may be getting ahead of themselves” as theworld economic slowdown affects energy pricing. The “strongresource sector helps us dodge a bullet” and consumershaven’t overleveraged, but “overall the 2009 economic outlookis not that good.”Investment ProspectsUnderwriting Nerve. While U.S. lenders lost their discipline,Canadian banks and government regulators maintained conservativeunderwriting standards—pricing in housing andcommercial markets avoided frothy levels. “We never gotoverextended with 80 to 90 percent leverage here” or adopted“exotic” loan structures. Canada’s Big Five office markets—Toronto, Montreal, Calgary, Edmonton, and Vancouver—allboast healthy single-digit vacancies, and other sectors tracknear equilibrium. “Our transaction markets stay relativelycontrolled—they lack the deal-making intensity you see in theStates.” Institutional-quality core real estate concentrates inthe portfolios of a handful of major pension funds that don’tengage in buying and flipping. Values don’t escalate asmuch—“we can get frustrated when we see big gains acrossthe border in boom times, but we are much more comfortablein tough times.” Development also has been restrained exceptin hot-growth energy boom towns—Calgary and Edmonton—where markets show signs of overheating. “It’s night and daybetween today and the early 1990s during the last criticaldownturn, when risky large-scale office buildings were constructedwithout preleasing.”Toronto, Canada.Emerging Trends in Real Estate ® 2009 59

Exhibit 5-1Firm Profitability ForecastProspects for Profitability in 2008 by Percentage of RespondentsAbysmal to Modestly Poor 11.1%Fair 7.4% Modestly Good 18.5% Good 37.0% Very Good 25.9%Prospects for Profitability in 2009 by Percentage of RespondentsAbysmal to Modestly Poor 3.7% Fair 22.2% Modestly Good 11.1% Good 37.0% Very Good 22.2% Excellent 3.7%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.Exhibit 5-2Emerging Trends Barometer 20095.79 6.07 5.81BuyCap Rates Rise. Buy/hold/sell sentiment evens out, suggestingthat markets have reached an inflection point. Buyratings increase over last year’s report, sell ratings declineslightly, and holds increase (see Exhibit 5-2). In general,interviewees predict lowered prices for B and C product,especially in secondary and tertiary markets. Trophy space—downtown office buildings and “iconic” regional malls—should hold values. Owned by the large pension funds, theseClass A properties rarely trade anyway. According to surveys,cap rates will rise modestly, between 20 and 45 basispoints (see Exhibit 5-3). Malls, apartments, and downtownoffice will experience the smallest increases; power centers,suburban office, and hotels will register the largest. “CapHold5 = fair, 6 = modestly good, 7 = good.Source: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.SellExhibit 5-3Prospects for Capitalization Rates and InternalRates of ReturnExpected ExpectedCap Rate Cap RateCap Rate December Shift ExpectedJuly 2008 2009 (Basis Unleveraged(Percent) (Percent) Points) IRR*Power Centers 6.45 6.90 +45 7.96Suburban Office 6.75 7.17 +42 8.75Hotels: Limited Service 7.97 8.38 +41 9.64Hotels: Full Service 8.08 8.48 +40 9.86R&D Industrial 6.97 7.36 +38 8.57Neighborhood/Community Centers 6.84 7.20 +36 9.72Warehouse Industrial 6.70 7.02 +33 8.03Central City Office 6.12 6.44 +32 8.30Apartments: Moderate Income 5.95 6.18 +23 7.86Apartments: High Income 5.55 5.78 +23 7.61Regional Malls 5.82 6.02 +20 7.50Source: Emerging Trends in Real Estate 2009 survey.* During holding period.rates are returning to a more normal range above 7 percentto attract capital and with rents holding steady, some valueerosion will occur, with B/C feeling it more.”More Caution. Transaction volumes fell off in 2008 from theactive 2005–2007 period when prices escalated, becauseof stepped-up deal making by leveraged buyers aping theirU.S. counterparts. Canadian lenders have become morecautious in reaction to U.S. credit problems, pushing most60 Emerging Trends in Real Estate ® 2009

Chapter 5: Emerging Trends in CanadaExhibit 5-4Real Estate Capital Market Balance Forecast for 2009Equity Real Estate Capital MarketExhibit 5-5Change in Availability of Capital forReal Estate in 2009ModeratelyUndersupplied 17.9%In Balance 53.6% ModeratelyOversupplied 21.4%Substantially Undersupplied 3.6%Substantially Oversupplied 3.6%Debt Real Estate Capital MarketModerately Undersupplied 46.4% In Balance 39.3%Substantially Undersupplied 10.7%Moderately Oversupplied 3.6%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.Equity Capital fromAll SourcesPrivate PropertyCompaniesGovernment-Sponsored EnterprisesSyndicators/TICs/1031 Exchange InvestorsPublicly ListedProperty Companies/REITsPrivate Equity/Opportunity/Hedge FundsInstitutional Investors/Pension FundsDebt Capital fromAll Sources4.035.114.724.714.364.304.144.19debt-dependent investors out of the markets. “Banks don’twant to increase their exposure to real estate right now” andlimit lending through exposure caps, pricing, and covenants.Favored borrowers can wangle 65 to 70 loan-to-values, butspreads and costs increase, and bankers want recourse. Amajority of survey respondents forecast that debt markets willbe substantially or moderately undersupplied in 2009, whileequity markets will be in better balance (see Exhibit 5-4).Less Capital. Capital availability will decline from all sourcesexcept private property companies, according to surveys. (SeeExhibit 5-5.) In addition to more stingy commercial banks, thedemise of CMBS markets crimps debt flows. The big pensionfunds hold onto their premier domestic assets and shift attentionfor new investments outside Canada “to find more pop.”REITs “continue to languish,” especially smaller-cap stocksthat have trouble raising capital. “Some could be toast,” vulnerableto takeovers and consolidations into bigger companies.“When real estate comes back in favor, the larger-cap REITswill rebound,” “but not for a while.” Foreigners encounter a difficultinvestment climate—high transfer taxes and governmentregulations create hurdles. Middle Eastern players, flush withmoney to burn, will be the most active among offshore sources(see Exhibit 5-6), while the weak U.S. dollar leaves Americanswithout their traditional currency advantage. In general, cashbuyers wait for better deals and are happy that the smaller,leveraged buyers are gone. Owners, meanwhile, back offMezzanine LendersInsurance CompaniesNonbank FinancialInstitutionsGovernment-SponsoredEnterprisesCommercial BanksSecuritized Lenders/CMBS1Very LargeDeclineSource: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.5Staythe Same9Very LargeIncreasesales “unless they can get yesterday’s prices.” In 2009, intervieweesexpect the all-cash crowd to find opportunities amongincreased numbers of motivated sellers—typically, undercapitalizedowners and smaller REITs struggling in the more difficultborrowing environment.Development Drop. Development activity should slackennoticeably in 2009. Higher financing costs plus expensivematerials and a tight market for construction workers ratchetup project budgets to “risky” levels while demand for space4.684.684.644.223.542.92Emerging Trends in Real Estate ® 2009 61

Exhibit 5-6Change in Availability of Capital for Real Estateby Source Location in 2009Exhibit 5-7Real Estate Business Activity Prospects in 2009Middle East6.39Financing as a Lender6.11Canada5.32Real Estate Services5.85Asia Pacific5.05Investment5.63GermanyEuropeJapan5.005.004.91Commercial/Multifamily DevelopmentHomebuilding/ResidentialLand Development5.294.79Australia4.911Abysmal5Fair9ExcellentUnited KingdomUnited States4.674.11Source: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.1Very LargeDeclineSource: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.5Staythe Same9Very LargeIncreaseebbs in the slowing economy. “Some projects may bedelayed,” and smaller developers get sidelined when banksfreeze them out of financing. “Canadian financial institutionstake advantage of U.S. problems to increase their margins,”says a developer. But landowners are “well capitalized,” soprices won’t drop precipitously. Green building gets “plenty oflip service.” Developers are divided, but leaning toward implementingmore energy-efficient technologies and approaches.Energy conservation and operating cost reductions gaingreater attention as heating costs spike. Many builders seemarketing advantages, but other developers view green initiativesas an added expense that eats into profit margins. “Themarketplace hasn’t shown the competitive advantage yet andgreen hasn’t translated into higher reversions.”Markets to WatchAlthough Canada is one of the world’s least densely populatedcountries, Canadians concentrate in a handful of majormetropolitan areas. Toronto, Montreal, and Vancouver inparticular feature strong 24-hour cores and globally cosmopolitanenvironments, while Calgary grows into a prominenturban center. Other major cities also evolve along the moretraditional core/suburban ring model, avoiding distendedsuburban agglomeration configurations. Formidable gasolinetaxes have always made driving more expensive than in theUnited States, but recent fuel price hikes reinforce the benefitsof infill lifestyles, including access to mass transportation.In particular, Toronto boasts one of the highest percentagesof apartment living in North America, accentuated by arecent wave of condominium construction in and around thevibrant downtown astride Lake Ontario. “We will continue tosee more movement by people and businesses back into thecores because of suburban congestion and higher gasolineexpenses.” “Any office or residential near subway stops isbound to benefit.” Outer suburbs suffer, and secondary andtertiary markets lose favor.62 Emerging Trends in Real Estate ® 2009

Chapter 5: Emerging Trends in CanadaExhibit 5-8Canadian Markets to WatchProspects for Commercial/Multifamily Investment and DevelopmentVancouverCalgaryEdmontonTorontoOttawaMontrealHalifax1AbysmalInvestment ProspectsDevelopment Prospects5FairSource: Emerging Trends in Real Estate 2009 survey.6.756.326.465.776.075.335.855.245.314.594.824.393.953.679ExcellentProspects for Canadian metros cool across all regions in2009—ratings decline geographically moving from west toeast. (See Exhibit 5-8.) Vancouver leapfrogs to the surveypinnacle over Calgary and Edmonton, last year’s top choices.Not surprisingly, Toronto dominates in the East, followed byOttawa, Montreal, and Halifax in the Maritimes.Vancouver. “Off the boil,” this supply-constrained urban jewelmaintains high office and apartment occupancies—the 2010Olympic Games provide a boost. Industrials do well aroundthe nation’s major Pacific port. But condo sales ebb—housingprices stabilize after strong advances—and tourism declines.Mills and mining industries in the hinterlands endure somereversals, which “filter back” regionally. Limited developmentopportunities and smaller-than-average center city buildingstock make it difficult for investors to gain market footholds.The large Canadian plan sponsors hoard most institutionalqualityproperties for themselves. The interviewee consensusrates the city as a “strong hold.”Calgary. Canada’s hot-growth juggernaut peaks after torridvalue gains in the midst of a development spree. Either “it’s timeto take a healthy step back” or else “days of reckoning are coming.”Developers now build 7 million square feet (650,321 sq m)of new office space in a market with a total of 38 million squarefeet (3.5 million sq m)—“that’s a lot!” Housing demand subsidesas homes get “too pricey” in “an avalanche of supply.” Investorstake comfort in “the ton of wealth” generated by Alberta’senergy industry, but the market definitely turns higher risk.Edmonton. Not long ago, office rents had been in the singledigits, now they approach $50. This metropolitan area hitsthe jackpot from squeezing dollars out of tar sands—oilcompanies expand like crazy. But values “look too high.”Interviewees predict: “Here comes a dip.” Like Houston,Edmonton is a pure energy wager.Toronto. Canada’s “ultimate bellwether” and premier 24-hourcity, Toronto concentrates the nation’s corporate headquartersand manufacturing industries. “If you’re doing business inCanada, you need to be based here unless you’re in energy.”Weakness in the financial and manufacturing sectors dampensenthusiasm. New office, mostly preleased, will add about 5percent to the city’s inventory and may increase vacancies tothe high single digits. B and C owners “should worry.” Condosales soften after a building blitz of high-rise residences anddevelopers wisely postpone some projects. “It’s not Miami, butthe for-sale ads go on and on in the newspapers.” Housingvalues become more vulnerable further away from the core.Apartments and industrial remain solid plays. Over time, investorsscore in this global gateway.Ottawa. Buffered by its wellspring of federal jobs, this governmenttown offers slow growth and stability. Local investorscan take greater comfort when the economy slumps.Montreal. Downtown office vacancies recently declined tomid-single digits, surprising some interviewees. “It’s doingamazingly well.” High tech, regional corporate headquarters,Emerging Trends in Real Estate ® 2009 63

Exhibit 5-9Prospects for Major Property Types in 2009Exhibit 5-10Canadian Industrial/DistributionIndustrial/DistributionInvestment ProspectsDevelopment Prospects6.436.072009 Prospects Rating RankingInvestment Prospects Modestly Good 6.43 1stDevelopment Prospects Modestly Good 6.07 1stApartmentResidential (Rental)OfficeFor-Sale ResidentialRetail6.134.505.504.675.274.835.274.93Expected Capitalization Rate, December 2009 7.1%Expected Unleveraged IRR During Holding Period 8.1%BuyHold46.2% 53.8%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.Hotels1AbysmalSource: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.5Fair5.004.209ExcellentExhibit 5-11Canadian Industrial/Distribution Property Buy/Hold/Sell Recommendations by Metropolitan Areaand government offices help fill space, but the market “has noability to push rents.” “It’s a major city where nothing seemsto happen.” Respondents of Montreal cite as benefits cheapelectricity and less expensive cost of living compared to thatavailable in Toronto. A strong flow of immigrants helps firmapartment occupancies and condo construction stays undercontrol. “The market doesn’t have much downside.” Investorscan register unexciting, respectable “bondlike returns.”Halifax. This Maritimes center benefits from recent offshoreoil finds and military bases. Waterfront properties comecheap. But isolated from the nation’s economic engines andbypassed under jetways from Europe to the United States,the city lacks dynamism and growth potential. Local playerscan do well, but institutional investors find slim pickings.Other Markets. Smaller markets in Manitoba and Saskatchewanreceive boosts from the overall strength of the West tiedto increased global demand for commodities. Besides oil,wheat, and other crops, potash for fertilizer becomes a majorregional export. Winnipeg enjoys lowered vacancies andrenewed vigor . . . . Windsor falls on hard times related tocarmaker ills. “It doesn’t matter what you paid there, youpaid too much.” Quebec City stands off the beaten track inMontreal’s shadow.VancouverCalgaryToronto67.6% 32.4%51.0% 36.7% 12.2%30.6% 52.8% 16.7%Montreal 11.8% 58.8% 29.4%0% 20% 40% 60% 80% 100%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.Property SectorsBuyHoldInterviewees predict weakening supply/demand scenariosacross most property sectors—industrial and apartmentshave “modestly good” prospects. Other categories—office,housing, retail, and hotels—trend toward “fair” outlooks (seeExhibit 5-9). Performance flattens for A-quality properties aftersolid value and income gains in recent years, but returnscould slump for B and C assets. “A dichotomy develops inpricing.” Prime downtown office buildings and fortress mallsessentially won’t trade—institutional owners will husbandstrong income flows from dependable rent rolls in these cashmachines. Some deterioration in pricing will appear in lowerqualityreal estate as cap rates increase and tenant demandSell64 Emerging Trends in Real Estate ® 2009

Chapter 5: Emerging Trends in CanadaExhibit 5-12Canadian Apartment Residential (Rental)Exhibit 5-14Canadian Office2009 Prospects Rating RankingInvestment Prospects Modestly Good 6.13 2ndDevelopment Prospects Fair 4.50 4thExpected Capitalization Rate, December 2009 6.1%Expected Unleveraged IRR During Holding Period 7.3%Buy Hold Sell40.0% 50.0% 10.0%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.2009 Prospects Rating RankingInvestment Prospects Modestly Good 5.50 3rdDevelopment Prospects Fair 4.67 3rdExpected Capitalization Rate, December 2009 6.8%Expected Unleveraged IRR During Holding Period 8.5%Buy Hold Sell33.3% 60.0% 6.7%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.Exhibit 5-13Canadian Apartment Residential (Rental) Property Buy/Hold/Sell Recommendations by Metropolitan AreaExhibit 5-15Canadian Office Property Buy/Hold/SellRecommendations by Metropolitan AreaVancouver51.4% 31.4% 17.1%Vancouver46.0% 40.5% 13.5%CalgaryToronto50.0% 39.5% 10.5%37.9% 51.7% 10.3%BuyHoldSellCalgaryToronto32.0% 44.0% 24.0%28.6% 60.0% 11.4%BuyHoldSellMontreal25.9% 55.6% 18.5%0% 20% 40% 60% 80% 100%Montreal 13.9% 58.3% 27.8%0% 20% 40% 60% 80% 100%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.Source: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.subsides. The limp economy and absence of leveraged buyersmake lesser-grade properties more vulnerable—somecash-strapped owners may be forced to sell to purchasershunting for bargains.Industrial. High costs to build new warehouse space inOntario, the nation’s manufacturing heartland, keep supplytight. Expensive land around Toronto stymies developeractivity. Most interviewees anticipate that diminished demandwill push up vacancies marginally, “but not more than a fewcracks appear.” If the economy slows more than expectedand exports into the United States don’t bounce back, thewarehouse picture may look less rosy.Apartments. “Buy in any city.” Multifamily demand linksmore to demographics—immigrant flows, aging baby boomers,and younger adults—than to the economy. All thesecohorts grow and all want to live in and around urban cores.Vacancy rates never edge much above the 2 to 3 percentrange. “It’s the most stable asset class.” The recent condoboom drives up land prices and makes apartment developmentless profitable. Although some failed condo projectsmay be converted into apartments, any problems in for-salehousing should help overall apartment demand. Oil pricesalso push people back into cities and apartment living forgreater convenience closer to work. Renters moving fromhouses find another benefit: cheaper apartment heating bills.Emerging Trends in Real Estate ® 2009 65

Exhibit 5-16Canada: Downtown Office Vacancy—Class A PropertiesExhibit 5-18Canadian Retail15%12%9%6%3%0%MontrealTorontoVancouverCalgary2001 2002 2003 2004 2005 2006 2007 1Q08 2Q082009 Prospects Rating RankingInvestment Prospects Fair 5.27 4thDevelopment Prospects Fair 4.93 2ndExpected Capitalization Rate, December 2009 6.9%Expected Unleveraged IRR During Holding Period 9.8%BuyHold33.4% 66.6%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.Source: CB Richard Ellis.Exhibit 5-19Canadian Retail Property Buy/Hold/SellRecommendations by Metropolitan AreaExhibit 5-17Canadian Markets to WatchVancouver43.2% 46.0% 10.8%Prospects for For-Sale HomebuildingVancouver6.06CalgaryToronto33.3% 52.1% 14.6%21.2% 69.7% 9.1%BuyHoldSellCalgaryEdmonton5.605.39Montreal 12.1% 66.7% 21.2%0% 20% 40% 60% 80% 100%TorontoOttawa5.345.13Source: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.MontrealHalifax1Abysmal5FairSource: Emerging Trends in Real Estate 2009 survey.4.684.339ExcellentOffice. Vacancy rates in the mid- to low-single digits have“never been lower,” but will edge up in most markets. Torontogets choppy with new projects delivering and Calgary willneed to absorb substantial space. Slowing job growth couldhurt demand and rent growth stops or backs up in somemarkets. Suburban areas will be more exposed to a falloff indemand than downtown cores.Housing. Prices crest and drop slightly overall. “Don’texpect anywhere near a free fall, but bidding wars are over.”Again, suburban areas will experience more deteriorationthan neighborhoods closer to city centers, where valuesshould hold steady. Western markets do better than easternones, except for softness in the overbuilt Calgary and66 Emerging Trends in Real Estate ® 2009

Chapter 5: Emerging Trends in CanadaExhibit 5-20Canadian Hotel2009 Prospects Rating RankingInvestment Prospects Fair 5.00 5thDevelopment Prospects Modestly Poor 4.20 5thExpected Capitalization Rate, December 2009 8.5%Expected Unleveraged IRR During Holding Period 8.9%Buy Hold Sell18.2% 45.6% 36.2%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.Exhibit 5-21Canadian Hotel Property Buy/Hold/SellRecommendations by Metropolitan Areauncertainty clears. Future development opportunities willfocus on mixed-use concepts around existing regional mallsand intown retailing.Hotels. “Flat at best.” Cities have too many rooms unlessconventions come to town. “Toronto could use more upscaleproduct, but land is too expensive to build, and it’s hard toincrease rates.” Motels and resorts get short-changed by thestrong Canadian dollar—U.S. vacationers stay home, andmore Canadians go to the States. Bankers begin to steerclear, and buyers “have trouble getting credit.” Some borrowersface pressure.Best Betsn Buy or hold apartments.n Hold onto center city investments.n Conserve cash for emerging opportunities.n Live in Vancouver.VancouverCalgaryToronto28.1% 46.9% 25.0%25.0% 52.8% 22.2%17.2% 55.2% 27.6%BuyHoldSellMontreal3.7% 55.6% 40.7%0% 20% 40% 60% 80% 100%Source: Emerging Trends in Real Estate 2009 survey.Note: Based on Canadian respondents only.Edmonton metropolitan areas. Homebuilding slows down—“the bloom is off.” Banks get cautious and “put the kibosh on40-year mortgages.” Borrowers go through more hoops, andmany potential buyers head to the sidelines. Condos facelower sales volumes with speculators out of the market. Aweakening jobs scenario means more trouble.Retail. Any new development focuses mostly on urban infilland Costco/Wal-Mart superstores. Lifestyle centers never gotgoing here—outdoors concepts don’t work as well in wintryclimes—and new regional mall development is nil. Powercenters “beat the pants off” smaller Class C malls. Consumerspending trails off in central and eastern provinces whererent growth weakens. Tenants stop expanding until economicEmerging Trends in Real Estate ® 2009 67

68 Emerging Trends in Real Estate ® 2009

chapter 6Emerging Trends inLatin America“What made Latin America unsafe for investment has mitigated.”This year’s Emerging Trends makes an initial foray intoevaluating Latin American markets—sounding outinterviewees for their opinions and analysis. Next year,the report plans to undertake regional surveys to expand itsproperty markets’ coverage of this important and growingeconomic region.Over the past two decades, Americans and Europeanshave ventured repeatedly into Latin America looking foropportunities and analyzing how to gain footholds in underservedreal estate markets with large populations andincreasing pockets of wealth. Investors’ and developers’ tentativeinitiatives typically foundered in confronting a potpourriof daunting challenges. For starters, they were repeatedlydiscouraged by precarious economies rocked by explosiveinflation, high interest rates, debt-laden governments,and pervasive poverty. Political instability, corruption, lackof transparency, and various regulatory hurdles hamperedtransacting business. In addition, finding reliable local partnersproved difficult.Growth and Opportunity. Although impediments remain,the property investment landscape in Latin America appearssomewhat more inviting and stable: high commodity pricesenergize regional economies; Brazil and Peru gain investment-gradecredit ratings, joining Mexico and Chile; newcredit policies power growth in consumer spending andhomebuying; expanding retail activity increases demandfor industrial space; and manufacturers (automakers andaerospace) build factories and create more jobs, takingadvantage of cheap labor. Major office markets—SãoExhibit 6-1Latin America General IndicatorsUnemploymentInflationArgentina 9.2% 8.5%Brazil 9.3% 4.5%Chile 7.8% 7.8%Colombia 11.1% 5.0%Costa Rica 5.5% 10.8%Ecuador 7.5% 3.3%Mexico 3.7% 3.5%Panama 7.2% 4.2%Peru 8.0% 3.9%Uruguay 9.2% 8.5%Venezuela 7.2% 22.5%Source: Cushman & Wakefield.Paulo, Mexico City, Buenos Aires—lack Class A space,have extremely high occupancies, and experience solid rentgrowth from increasing demand. So once again, relatively lowprices and high yields lure back offshore real estate players,who start investing selectively in certain markets and propertysectors. “What made Latin America unsafe for investment hasmitigated—we don’t face as much economic volatility or currencyproblems,” says an interviewee.Sao Paulo, Brazil.Emerging Trends in Real Estate ® 2009 69

Exhibit 6-2Latin America Economic GrowthPercentage Real GDP Growth2008* 2007 2006South America and Mexico 4.3 5.6 5.3Peru 7.0 9.0 7.6Argentina 7.0 8.7 8.5Chile 4.5 5.0 4.0Colombia 4.6 7.0 6.8Ecuador 2.9 1.9 3.9Uruguay 6.0 7.0 7.0Brazil 4.8 5.4 3.8Venezuela 5.8 8.4 10.3Mexico 2.0 3.3 4.8Source: World Bank (annual percent change).* Projections.Choosey Investing. Opportunity funds concentrate particularlyon Brazil, now the world’s ninth-largest economyand seventh-largest consumer market, as part of BRIC(Brazil, Russia, India, China) strategies, pegged to garneroutsized risk-adjusted returns in emerging growth regions.Mexico also gets more attention: spurred by a manufacturingboom to serve U.S. markets, a mushrooming middle classspends more in stores and wants better housing. “When youlook at Brazil and Mexico, it’s a basic real estate supply/demand equation—demand is increasing and supply hasbeen limited.” “Peru and Chile are already more expensive,smaller, more mature, and don’t need us.” Investors findunsettled politics in Argentina—“It’s difficult to make inroads.”Venezuela (Hugo Chávez) and Colombia (rebel insurgentsand drug trafficking) stay off radar screens. Most governmentsimpose high interest rates to control inflation—“thecapital markets can appear haywire to Americans.” Even inBrazil interest rates track near 15 percent.Caution Required. For now, the investment focus remainsprudently narrow and relatively limited, belying increasedenthusiasm. Interviewees tap five top cities for investmentconsideration led by São Paulo (Brazil’s business capital andsource of about 30 percent of its GDP) and Mexico City (“forits shear size”). Rio de Janeiro, Buenos Aires, and Monterey(Mexico’s base for factories serving the United States)receive considerably less attention. “Overall, a big culturaldivide remains” and the economies are opaque—“you needto be prepared to work back channels.” Don’t even thinkabout doing business in these countries without local partners.“It’s still difficult to get concrete information, everythingis based on personal relationships, and all business is conductedface to face.” And don’t kid yourself, Mexico can bedangerous—drug lords and violence are not going away.“You need bodyguards if you go to certain places.”Brazil Ascendant. Brazil may have “finally arrived—we’vebeen waiting for decades.” Interviewees express “cautiousoptimism” about improving government oversight, strongcommodities, and excellent growth rates. Inflation rates havebeen tamed from a stratospheric 2,500 percent in 1990 toabout 5 percent today and the economy avoids energy costspirals by producing flex fuels from its vast interior biomass.The nation’s currency, the real—once a basket case—recently has increased in value against both the U.S. dollarand euro. Now, an investment-grade credit rating lowers thenation’s borrowing costs and advances a more credit-basedeconomy. The increased availability of financing enablesdevelopment, which had been hamstrung by the lack of capitalacross all property sectors for the past quarter century.For developers, opportunity potentially abounds:n By some estimates, the country needs 8 million new housingunits to meet pent-up demand.n Only 400 shopping centers exist in a nation of nearly 200million.n Neither Rio de Janeiro nor São Paulo has any Class Aoffice space.n Warehouse space is limited and obsolete.The best opportunities in Brazil for offshore investors liein housing and the most difficult sector to break into is retail.Many more Brazilians can afford to buy homes or apartmentssince the recent introduction of 30-year mortgages andupwards of 70 percent loan-to-values. Historically, sellers hadprovided only 50 percent financing at seven-year amortizations.As a result of the more liberal mortgage market, homebuildingand condominium construction “go gangbusters.”“Eight hundred–unit projects can sell out in a weekend.” Asmall group of major retail owners, meanwhile, “controls”shopping center tenants, so new players have no chance to70 Emerging Trends in Real Estate ® 2009

Chapter 6: Emerging Trends in Latin AmericaUSD in MillionsExhibit 6-3Brazil: Foreign Direct Real Estate Investment$5,000$4,000$3,000$2,000$1,000$02008* 2007 2006 2005 2004 2003 2002Source: Capright Property Advisers, LLC.* Projection.break into the retail market without a very connected partner.“It’s a bit like the Wild West.” For office investors, the “priceper pound of an office building in São Paulo or Rio is becomingcomparable to Boston.” Multiownership entities and airrights conundrums often make clearing titles “nightmarish” andextremely costly. Shoehorning new high-rise developments intodense infill areas can balloon project budgets.investors in the near term as American consumers tightenbelts. The country’s petroleum industry, a mainstay of recentgrowth, also sets off alarms—reserves fall dramatically in itsoffshore oil fields. But higher labor costs in China and otherAsian manufacturing centers shift more work back to Mexico,closer to American export markets. European manufacturersalso see advantages from producing goods in Mexico boundfor the United States, including reduced shipping costs(higher oil prices make shorter routes less expensive).Too Late? Some interviewees warn that Latin Americanemerging markets “could hit speed bumps or potholes.” Anadviser notes: “The cat is already out of the bag” in bothBrazil and Mexico as a rush of investors has bid up pricing.Early players will do better than 2009 entrants. Returns werein the high 20s; they now fall into the high teens, with enduringcapital market and political risk part of the investmentequation. Newfound credit appetites in these countries canset the stage for future problems. How borrowers managepaying down loans bears watching, considering these countries’pervasive high interest rates and proclivity for economicinstability and reversals. The stalwart United States serves asan example of what can happen when too many loans suddenlygo bad in an unsustainable pricing environment.Mexico’s Appetites. Mexico “needs everything” to satisfydemand from its expanding middle class and, like inBrazil, consumer credit takes hold, fueling shopping fervor.International retailers, including American discounters, enterthe market—more than $6 billion in various mall projectsare underway. Shopping center investors must realize thatrelatively few local markets can realistically accommodatetraditional center formats—most people in Mexico and LatinAmerica don’t own cars and malls need to be pedestrianaccessible. That’s one reason why investors should focuson Mexico City, which has modern infrastructure and moredrivers. The government also focuses major infrastructureoverhauls (including mass transit) in and around the nation’scapital, providing greater opportunities for developers.Homebuilding—particularly low- and middle-income developmentsin suburban rings—also gets a boost from theincreased availability of mortgage financing. Mexico’s economicdependence on exports to the United States worriesEmerging Trends in Real Estate ® 2009 71

IntervieweesAckerman & Co.Kris MillerAckman-Ziff Real Estate Group LLCGerald CohenPatrick HanlonArti HartJason KraneAdam SteinbergSimon ZiffAEW Capital ManagementMichael J. ActonMarc L. DavidsonRobert J. PlumbAGN Realty Partners LLCGregory N. SenkevichAllied Properties Real Estate Investment TrustMichael Reid EmoryAM Connell Associates, LLCAlice ConnellArizona Real Estate CenterJay Q. ButlerAspac Developments Ltd.Gary WongAviva Capital ManagementEdward M. CasalBabcock & Brown ResidentialPhilip PayneBarclays CapitalP. Sheridan SchechnerBarratt AmericanMichael D. “Mick” PattinsonbcIMC Hospitality Group(Formerly CHIP Hotels REIT)Edward PitoniakBerkshire Income Realty, Inc.David C. QuadeBioMed Realty Trust, Inc.Kent GriffinGreg LubushkinMatthew McDevittBlackRockJay AlexanderCathy BernsteinJohn ChangKeaton EdwardsCraig EstremWilliam FinelliShelton GetterTed KorosMike Krier72 Emerging Trends in Real Estate ® 2009Shawana McGeeLarry MohrKevin SchererElysia TseMichael YurinichBarry ZieringRon ZuzackBoston Properties, Inc.Michael LaBelleBuzz McCoy Associates, Inc.Bowen H. “Buzz” McCoyCaisse de Dépôt et Placement du QuébecFernand PerreaultCalloway Real Estate Investment TrustSimon NyilassyCanadian Apartment Properties Real EstateInvestment TrustThomas SchwartzCapmark FinanceJohn CannonCapright Property Advisors, LLCJay MarlingCB Richard Ellis, Inc.Dan CalihanRaymond WongCB Richard Ellis, Inc.Tyler AndersonE.M. Blake HutchesonMindy KorthCenterPoint Properties TrustPaul FisherChampion Partners, Ltd.Jeff SwopeChartwell Seniors Housing Real EstateInvestment TrustStephen A. SuskeChaseMark SnowChurchill Commercial CapitalCindy HammondCitigroup Property InvestorsLawrence EllmanColliers InternationalRoss MooreColony Capital, LLCRichard B. SaltzmanColumn Financial, Inc.Kieran QuinnCommercial Mortgage AlertDonna KnippCommercial Mortgage Securitization AssociationDorothy CunninghamContinuum PartnersMark FalconeCornerstone Real Estate Advisors LLCGraham J. BondTony PiersonDavid J. ReillyCousinsTad LietheadCrown Realty PartnersMichael A. PittanaCushman & WakefieldJames CarpenterMark DetmerBruce FickeCushman & Wakefield of ArizonaSteven R. GraggCushman & Wakefield Sonnenblick-GoldmanMark GordonSteven KohnThomas MacManusDCT IndustrialPhil HawkinsDeloitteDorothy L. AlpertDeRito Partners Development Inc.Andy KrootDonahue SchriberLawrence P. CaseyPatrick S. DonahueDTZ RockwoodCraig CallawayMatthew JordanAlex RayJason SpicerBrian WaldmanDundee Real Estate Investment Trust andDundee Realty CorporationMichael CooperEastdil SecuredChristopher CaseyEmigrant Savings BankPatricia GoldsteinEmpire CommunitiesPaul Golini, Jr.Andrew GuizzettiDaniel Guizzetti

Equity ResidentialDavid NeithercutErnst & YoungDale Anne ReissEverest HoldingsC. Joseph BlackbournFirst Capital Realty Inc.Dori J. SegalFirst Industrial Realty Trust, Inc.David HarkerBob HubbardFlorida State Board of AdministrationDouglas BennettForest City Commercial GroupJames RatnerFPL AdvisoryBill FergusonGE Real EstateRonald PressmanGID Investment AdvisersWilliam P. ChiassonWilliam H. RobertsGray DevelopmentMike CrowGreat Point InvestorsJoseph VersaggiGriffin Realty AdvisorsJames RyanGWL Realty Advisors Inc.Paul FinkbeinerHeitmanRichard KateleyHendricks PartnersMark ForresterHeron Group of CompaniesHugh HeronHIGroup, LLCDouglas CameronHinesKurt HartmanKen HubbardBill OlsonHomeFed CorporationPaul J. BordenChris FoulgerHospitals of Ontario Pension PlanMichael CatfordHost Marriott CorporationDexter WoodHoulihan LokeyJonathan G. GeanakosHyde Street HoldingsPatricia R. HealyIMH Real Estate PartnersShane AlbersING ClarionStephen J. FurnaryStephen B. HansenDavid J. LynnING Real Estate CanadaLou J. MarounInstitutional Real Estate, Inc.Geoffrey DohrmannInStorage Real Estate Investment TrustJames TadesonInvestcorpHerb MyersPeter PetronBrian RosenThe Irvine CompanyRick FrommCraig JonesPeter KoenigRussell H. LoweThomas G. MillerKim Ernest ToblerIvanhoé CambridgeRené TremblayJamestownMatt BronfmanJ.E. Robert CompaniesMichael E. PralleJ.P. Morgan Investment Management Inc.Jean AndersonWayne ComerKevin FaxonMichael GilibertoLewis JonesEllie KerrAnne S. PfeifferFrederick SheppardJames WalshMichael WinterThe John Buck CompanyCharles BeaverSteve SchiltzJohn Hancock Financial Services, Inc.Joseph ShawJones Lang LaSalleBill ArgeropoulosJohn PiersonKBS Real Estate AdvisorsCharles J. Schreiber, Jr.Kennedy WilsonStephen PyhrrKeystone Property GroupMatthew SigelKillam Properties Inc.Philip FraserKingSett Capital Inc.Jon LoveKingswood Capital CorporationJoseph SegalLachman AssociatesLeanne LachmanLand Advisors OrganizationSteve LaTerraLarco GroupAmin LaljiLaSalle Investment ManagementRichard W. KleinmanLynn ThurberLauthDave CarderLazard Real Estate Partners, LLCRobert C. LarsonLee AssociatesCraig CappolaLehman BrothersMichael McNamaraLEM Mezzanine, LLPHerb MillerLincoln PropertyDavid KrumwiedeMack Cali Realty LPMitchell HershMadison HomesMiguel SingerManulife FinancialConstantino ArgimonIan R.E. BeverleyTed WillcocksMattamy HomesPeter E. GilganEmerging Trends in Real Estate ® 2009 73

MCAP – Groupe Financement ImmobilierAlfonso GraceffaBenoît HoudeThe McNaughton GroupMark HuppertMcWhinneyChad McWhinneyMetzlerJames NealMKA Capital Group Advisors LLCMichael AbrahamGeorge BakerGregory ContilloJason SugarmanMMA Realty Capital Inc.Frank CreamerMonarch GroupSarah Kruer JagerSteven J. PaullMoody’s Investors ServiceMerrie FrankelMorgan StanleyScott BrownJay H. MantzNathan & Associates, Inc.Nate NathanNational Association of Real EstateInvestment TrustsSteven A. WechslerNational Council of Real EstateInvestment FiduciariesDouglas PoutasseNew Boston Fund, Inc.Jonathan D. GillmanDavid H. KeiranJames P. KelleherJerome L. Rappaport, Jr.NewTower Trust CompanyBrent A. PalmerNichols PartnershipRandy NicholsOpus WestPhillip HamiltonPacific Office Properties Trust, Inc.Dallas E. LucasPacific Real Estate Partners, Inc.Stuart WilliamsPerseusPaul DohertyPhoenix Commercial AdvisorsGreg LaingPiedmont Office Realty TrustDon MillerPNC Real Estate FinanceWilliam G. LashbrookPrincipalSteve WalkerPrincipal Real Estate InvestorsMichael J. LaraProLogisWalt RakowichProperty & Portfolio Research, Inc.Bret R. WilkersonPrudentialAlyce De JongGary KauffmanYouguo LiangRoger PrattKevin SmithPrudential Real Estate InvestorsJ. Allen SmithPSP InvestmentsNeil CunninghamRamiusMichael D. BoxerRBC Capital MarketsCarolyn A. BlairDoug MacGregorReal Capital Analytics, Inc.Robert M. White, Jr.The Real Estate RoundtableJeffrey DeBoerReal Property Association of Canada (REALpac)Michael BrooksRedcliff Realty AdvisorsPatrick LaiRetail Property SolutionsDaryl ManganRosen ConsultingKenneth RosenRREEFCharles B. LeitnerSares•Regis GroupJohn S. HagestadGeoffrey L. StackScott’s Real Estate Investment TrustEvelyn SutherlandSeven Hills PropertiesLuis A. BelmonteShidler GroupDanny SwanceyShorenstein PropertiesRobert S. UnderhillSL GreenIsaac ZionThe Sorbara GroupLeith MooreEdward SorbaraJoseph SorbaraSpring Creek DevelopmentFrederick R. UngerSTRS of OhioStanton A. WestSunbelt HoldingsHeidi KimballSuncorSteve BettsTIAA-CREF Global Real EstateChris BurkDerek LandryTimbercreek Asset Management Inc.R. Blair TamblynTranswestern Investment CompanyJames H. KammertReagan PrattStephen R. QuazzoTrilyn LLCMark AntoncicTrinity Real Estate, Inc.Richard LeiderTriyarMike MahoneyUBS Realty Investors LLCMatthew LynchUrban AmericaRichmond McCoyUrban Renaissance GroupPat Callahan74 Emerging Trends in Real Estate ® 2009

Advisory Board for 2009Verde RealtyJeanette RiceVestar Development CompanyLee HanleyVornado Realty TrustMichael D. FascitelliWarnick & CompanyBob HaywardWashington REITThomas RegnellWatson Land CompanyBruce A. ChoateWCB PropertiesSean M. TaborTerry W. ThompsonWells FargoCharles H. (“Chip”) Fedalen, Jr.WestcorScott NelsonWestfield LLCGavin QuinnRandall J. SmithWhiterock Real Estate Investment TrustJason UnderwoodWright Runstad & CompanyGreg JohnsonJoseph AzrackApollo Global Real EstateNew York, New YorkJohn C. Cushman IIICushman & Wakefield, Inc.Los Angeles, CaliforniaMark EppliMarquette University College of Business AdministrationMilwaukee, WisconsinStephen J. FurnaryING Clarion PartnersNew York, New YorkDavid GeltnerMIT Center for Real EstateDepartment of Urban Studies and PlanningMassachusetts Institute of TechnologyCambridge, MassachusettsJacques GordonLaSalle Investment ManagementChicago, IllinoisJoseph GyourkoZell/Lurie Real Estate CenterThe Wharton SchoolUniversity of PennsylvaniaPhiladelphia, PennsylvaniaSusan Hudson-WilsonHawkeye Partners, LPChebeague Island, MaineMike MilesGuggenheim Real EstateChapel Hill, North CarolinaJames O’KeefeUBS Global Asset ManagementHartford, ConnecticutKen RosenFisher Center for Real Estate and Urban EconomicsHaas School of BusinessUniversity of California at BerkeleyBerkeley, CaliforniaRichard B. SaltzmanColony Capital, LLCNew York, New YorkC.F. SirmansUniversity of ConnecticutStorrs-Mansfield, ConnecticutJames R. WebbJames J. Nance College of BusinessCleveland State UniversityCleveland, OhioEmerging Trends in Real Estate ® 2009 75

Sponsoring OrganizationsThe mission of the Urban Land Institute is to provide leadership inthe responsible use of land and in creating and sustaining thrivingcommunities worldwide. ULI is committed ton Bringing together leaders from across the fields of real estateand land use policy to exchange best practices and serve communityneeds;n Fostering collaboration within and beyond ULI’s membershipthrough mentoring, dialogue, and problem solving;n Exploring issues of urbanization, conservation, regeneration, landuse, capital formation, and sustainable development;n Advancing land use policies and design practices that respect theuniqueness of both built and natural environments;n Sharing knowledge through education, applied research, publishing,and electronic media; andn Sustaining a diverse global network of local practice and advisoryefforts that address current and future challenges.Established in 1936, the Institute today has more than 40,000members worldwide, representing the entire spectrum of the landuse and development disciplines. ULI relies heavily on the experienceof its members. It is through member involvement and informationresources that ULI has been able to set standards of excellencein development practice. The Institute has long been recognizedas one of the world’s most respected and widely quoted sources ofobjective information on urban planning, growth, and development.Senior ExecutivesRichard M. RosanPresident, ULI WorldwideCheryl CumminsPresident, ULI AmericasWilliam P. KistlerPresident, ULI EMEA/IndiaRachelle L. LevittExecutive Vice President, Global Information GroupULI–the Urban Land Institute1025 Thomas Jefferson Street, N.W.Suite 500 WestWashington, D.C. 20007202-624-7000www.uli.orgPricewaterhouseCoopers real estate group assists real estate investmentadvisers, real estate investment trusts, public and private realestate investors, corporations, and real estate management fundsin developing real estate strategies; evaluating acquisitions and dispositions;and appraising and valuing real estate. Its global networkof dedicated real estate professionals enables it to assemble forits clients the most qualified and appropriate team of specialists inthe areas of capital markets, systems analysis and implementation,research, accounting, and tax.Global Real Estate Leadership TeamMarc SaluzziGlobal Investment Management & Real Estate Group LeaderLuxembourg, LuxembourgUwe StoschekGlobal Real Estate Tax LeaderBerlin, GermanyHenrik SteinbrecherGlobal Real Estate LeaderStockholm, SwedenK.K. SoAsia Pacific Real Estate Tax LeaderHong Kong, ChinaJames DunningAsia Pacific Real Estate Assurance LeaderSydney, AustraliaJohn ForbesEuropean Real Estate LeaderLondon, United KingdomTimothy ConlonUnited States Real Estate LeaderNew York, New York, U.S.A.Robert GromeAsia Pacific Investment Management and Real Estate LeaderHong Kong, ChinaPaul RyanUnited States Real Estate Tax LeaderNew York, New York, U.S.A.Mitchell M. RoschelleUnited States Real Estate Business Advisory Services LeaderNew York, New York, U.S.A.www.pwc.com76 Emerging Trends in Real Estate ® 2009

Emerging Trends in Real Estate ® 2009 77

Emerging Trends in Real Estate ® 2009What are the best bets for investment and developmentin 2009? Based on personal interviewswith and surveys from more than 700 of the mostinfluential leaders in the real estate industry, thisforecast will give you the heads-up on where toinvest, what to develop, which markets are hot, andtrends in capital flows that will affect real estate. Ajoint undertaking of PricewaterhouseCoopers andthe Urban Land Institute, this 30th edition of EmergingTrends is the forecast you can count on for no-nonsense,expert advice.Highlightsn Tells you what to expect and where the best opportunitiesare.n Elaborates on trends in the capital markets, includingsources and flows of equity and debt capital.n Advises you on those metropolitan areas that offerthe most potential.n Indicates which property sectors offer opportunitiesand which ones you should avoid.n Provides rankings and assessments of a variety ofspecialty property types.n Reports about how the economy and concerns aboutcredit issues are affecting real estate.n Describes the impact of social and political trends onreal estate.n Explains how locational preferences are changing.ULI Order Number: E35ISBN: 978-0-87420-106-2www.uli.orgwww.pwc.com