Commercial Real Estate Market Cycles: How They Affect Your Local Market

Glenn R. Mueller, Ph.D.Professor

University of DenverFranklin L. Burns School of Real Estate

& Construction Management&

Real Estate Investment Strategist

Dividend Capital Research

[email protected]

Dr. Glenn Mueller• Real Estate Investment Strategist – Dividend Capital Group

Professor – University of Denver – Franklin L. Burns School of Real Estate & Construction Management

Visiting Professor – Harvard University, 2002-2012 & summer executive education semesters

Guest Lecturer – Wharton School, Yale, Berkeley, Ohio State, Indiana Univ., UNC, USC, European Business School, University of Regensburg

Previous Experience Legg Mason – Real Estate Investment Strategist – Head of REIT research group

PriceWaterhouseCoopers – National Director of Real Estate Research

Alex. Brown Kleinwort Benson – Head of Real Estate Research

Prudential Real Estate Investors – Vice President of Real Estate Research

B.S.B.A. in finance from the University of Denver

MBA from Babson College

Ph.D. in Real Estate from Georgia State University

Why Real Estate Fits a Portfolio = SIZE

Source: CoStar2010, Federal Reserve, December 2010 and The Bond Market Association, 2010. This investment is subject to real estate risks associated with operating and leasing properties. Additional risks include changes in economic conditions, interest rates, property values, and supply and demand, as well as possible environmental liabilities, zoning issues and natural disasters.

U.S. Real Estate vs. Other Asset Classes (December 2010)

Why Real Estate Fits A Portfolio = SizeU.S. Real Estate vs. Other Asset Classes - 12/10

All Real Estate = Half - 12/06

Source: Prudential Real Estate Investors, December 2006.

U.S. Real Estate Values = $33.3 Trillion

5 Key Macro Economic FactorsPopulation Growth

Demand For Real Estate Employment growth lags GDP growth by 2 to 4 quarters GDP turned positive in 3Q09 — Employment turned positive in 2Q 2010

Forecast

US Commercial Real Estate CycleFollows US Economic Cycles

3 Key Metrics:• Occupancies

• Rents• Prices

Source: Glenn Mueller, PhD

Market Cycle Analysis

Physical Cycle

Demand & Supply drive Occupancy

Occupancy drives Rental Growth

Legg Mason Real Estate Research

Market Cycle Quadrants

Declining Vaca

ncy New

Construction

No New Constructio

n

Increasing

Vacancy

Declining Vacancy

Increasing

Vacancy

More C

ompletions

New Constr

uction

Phase 1 - Recovery

Phase 2 - Expansion

Phase 4 - Recession

Demand/Supply Equilibrium Point

Long Term Vacancy Average

Occ

upan

cy

Time

Phase 3 - Hypersupply

PhysicalMarket Cycle

Characteristics

Negative Rental Growth

Below Inflation Rental Growth

Rents Rise Rapidly Toward New Construction Levels

High Rent Growth in Tight Market

Demand/Supply Equilibrium

Rent Growth Positive But Declining

-Below Inflation & Negative Rent Growth

Cost Feasible New

Construction RentsLong Term Average Occupancy

Occ

up

ancy

Time

Phase 1 - Recovery

Phase 2 - Expansion

Phase 3 - Hypersupply

Phase 4 - RecessionSource: Mueller,1995

2

54

3

89

7

10

16

15

13

1

6

11

14

1

12

0.3%

2.7%

-3.0%

-1.5%

1.7%

4.0%

6.4%

11.0%

12.5%

10.5%

6.7%

-1.0%

1.6%

3.3%

6.1%

10.0%

Historic National Office Rental Growth

30 Year Cycle - Periods 1968-1997

Long Term Average Occupancy

Occ

upan

cy

Time

2

54

3

89

7

10

16

15

13

1

6

11

14

1

12

-2.1%

Historic National Industrial Rental Growth %

0.4%

0.8%

2.8%

3.0%

4.6%

5.1%

8.3%

8.5%

6.8%

3.8%

-0.4%

0.7%

4.8%

4.6%

5.9%

30 Year Cycle - Periods 1968-1997

Long Term Avg Occupancy

Occ

upan

cy

Time

National Property Type Cycle Locations

2nd Qtr 2013

LT Average Occupancy

Source: Mueller, 2013

Phase II — Expansion

Phase I — Recovery

Phase III — Hypersupply

Phase IV — Recession

11

1467

89

10 12

13

1165421

15

Industrial — WarehouseSenior Housing

ApartmentHealth FacilityHotel — Ltd. ServiceRetail — 1st Tier Regional MallRetail — Factory Outlet+1

Office — SuburbanRetail — Power Center+1

Office — Downtown+1

3

Hotel — Full-Service

Industrial — R&D FlexRetail — Neighborhood/Community+1



11

146

89

1012

115

1654321

Office Market Cycle Analysis2nd Quarter, 2013

AlbuquerqueChicagoClevelandEast BayHartfordLas VegasLong IslandLos Angeles MilwaukeeNorfolkN. New JerseySacramentoSan AntonioStamfordWilmingtonWash DC

713

CincinnatiColumbusDetroit Ft. Lauderdale+1IndianapolisKansas City+1MemphisOrange CountyPalm BeachPhoenix+1RichmondSan DiegoSt. Louis+1NATION

AtlantaBaltimore+1BostonCharlotteDallas FWDenverHoustonMiami+1 MinneapolisNew Orleans+1NashvilleOklahoma CityOrlando+1Philadelphia+1RiversideSeattle+1Tampa

AustinHonoluluNew York+1Salt Lake

PittsburghPortland+1Raleigh-Durham+1San Francisco+2

Jacksonville+1San Jose

Denver+1Salt Lake+1San Francisco+1


1467

89

10 12

13

115

1654321


Industrial Market Cycle Analysis

11

HartfordJacksonvilleLas Vegas+1

New Orleans+1Orlando

Richmond+1Stamford

Charlotte+1Kansas City+1

Memphis+1Milwaukee

Miami+1Nashville+2

New York+1 N. New JerseyOklahoma City

PhoenixNATION

Atlanta+1Boston+1BaltimoreCincinnatiClevelandColumbus+2 DetroitEast BayPhiladelphiaRaleigh-DurhamTampaWash DC

Austin+1Palm Beach+2

Portland+1San Antonio+1

Seattle+1

Long IslandNorfolkOrange CountySacramentoSt. Louis

HonoluluHoustonIndianapolisLos AngelesRiversideSan Jose

2nd Quarter, 2013

Chicago+1Dallas FW+2Ft. Lauderdale+1MinneapolisPittsburghSan Diego+1


11

1467

89

10 12

115

165421


Apartment Market Cycle Analysis

13

CharlotteCleveland

Indianapolis+1Jacksonville

Oklahoma CityOrlando

Raleigh-DurhamStamfordSt. Louis

TampaNorfolk

MemphisRichmondSan Antonio

Atlanta+1Houston Ft. LauderdaleMilwaukeeNew Orleans+1Orange County

Baltimore+1Columbus+1CincinnatiHartfordHonoluluKansas CityLos AngelesMinneapolisPhiladelphia PittsburghRiversideSacramento+1NATION

DetroitNashville

Palm Beach+1

Chicago+1East Bay

Las Vegas+1Long Island

MiamiN. New Jersey+1

Portland+1Salt Lake+1

San DiegoSeattle +5Wash DC

Boston+1Dallas FW+1DenverNew YorkPhoenix+1San Jose+1

3

AustinSan Francisco

2nd Quarter, 2013


11

1467

89 12

13

115

1654321

Retail Market Cycle Analysis

10


AtlantaChicagoCincinnatiKansas CityMilwaukeeN. New Jersey PhiladelphiaRichmondRiverside

CharlotteColumbusDallas FW+1Ft. Lauderdale+1JacksonvilleMemphisNashvilleNew Orleans+1NorfolkOklahoma City+1Orange CountyOrlandoPhoenix+1Sacramento+1St. LouisTampa

Denver+1East BayHoustonLong Island+1 Los Angeles +1Portland+1Raleigh-Durham+1 Seattle

ClevelandDetroit

Austin+1Baltimore+1

Miami+2Minneapolis+1

San DiegoHartfordIndianapolisLas Vegas+1Palm BeachNATION+1

Boston+1New York+1

PittsburghSalt LakeWash DC

2nd Quarter, 2013

Honolulu+1San Francisco+1San Jose+1

San Antonio+1Stamford

CincinnatiHartford

Kansas CityNorfolk

Phoenix Richmond

Sacramento


1467

89 12

13

115

165

4321

1110


Hotel Market Cycle Analysis

AtlantaBaltimoreCharlotte

ClevelandDetroit+1

Orange County

Austin+1Boston+1Denver+1Houston+1Long IslandOrlandoSan DiegoWash DC

IndianapolisMemphis

MilwaukeeRiversideStamford

ColumbusDallas FWJacksonvilleLas VegasOklahoma City+1Raleigh-DurhamSt. LouisSan Antonio

PhiladelphiaSalt Lake Tampa

ChicagoLos Angeles+1Minneapolis+1

East BayNashville

New OrleansPittsburgh+1

Seattle+1NATION

HonoluluNew York

2nd Quarter, 2013

Ft. Lauderdale+1Miami

N. New Jersey+1Palm Beach+1

Portland+1San Francisco+1

San Jose+1

1970s Cycle• Factors Driving The First Half Cycle (5 Year)

• Strong Demand from the 1960s that stopped

• Recession 1974

• Capital Flow - Mortgage REITs produced oversupply

• Factors Driving The Second Half Cycle (5 Year)• Baby Boom Generation Goes to Work = Demand

• Capital Flow Shut Down = no supply = Lenders Recover

• Markets tighten and reach peak occupancy 1979 (5% vacancy)

1970s Office Demand & Supply

0%

2%

4%

6%

8%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

Demand Supply

Source: FW Dodge, CB Commercial, BLS, Mueller

Oversupply Years Baby Boomers Go To Work


• Tight market in 1979 pushes rents and prices up

• Inflation pushes real estate prices higher

• Tax Act of 1981 attracts taxable investors supply up

• Thrift Deregulation allows capital to flow

• Factors Driving The Second Half Cycle (5 Year)• Tax Act of 1986 slows taxable investors, but not tax free

• Poor stock market attracts Pension & Foreign capital

• Rising R.E. prices masks poor income returns


0%

2%

4%

6%

8%

10%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

Demand Supply


Oversupply Years


• Moderate but stable demand growth (1991 recession minor)

• Oversupply and Foreclosures shut down construction

• Excess space Absorbed – “Markets Recover”

• Factors Driving The Second Half Cycle (5 Year)• Moderate Demand growth Continues

• Oversupply Absorbed and Return Performance improves

• Construction “Constrained” causing rents & prices to rise

• More “Efficient Markets” match supply to demand


0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%19

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

Demand Supply


Oversupply Absorbed

Demand Supply

Matched

2000 - 2010 CycleDemand•

“Globalization” - creates more stable U.S. economy

• Job Growth out of “Technology Change”

• 2.8 million population growth per year for 10 years

• Baby boomers at “highest income earning” years

• second home market wave

• Echo boom children – college, first job, & renting

• Aging population not a major factor till 2014

• Employment Growth drives commercial demand

World Growth Continues

Source: World Bank — Historic GDP, Capital Economics Outlook Report — Forecasts, 3Q2011.

World GDP Shares 2011 & 2012 GDP Forecasts

U.S. Growth driven by World

Supply Constraint• Public Markets make R.E. Capital markets efficient

• Economically Driven capital - low spec construction

• 500 + Research Watchdogs – Data Available

• Constrained Supply (economically driven capital)

• construction labor harder to find

• materials costs increasing (steel, concrete)

• infrastructure problems constrain growth

• Feedback loop keeps demand and supply in better balance

• Greater transparency

• Faster reaction to demand slowdown

2000 - 2010 Cycle

Source: Property & Portfolio Research & Mueller

Commercial Real Estate Supply Growth– Lowest construction levels in 42 years

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

-3%

-2%

0%

1%

2%

3%2000's Office Demand & Supply

Demand Supply

2000s US Office Demand & Supply

Supply Reacted to Demand Slow Down

Source: Property & Portfolio Research, Grubb & Ellis, Mueller 2011.

2012+ Office Demand & Supply Forecast

Source: Property & Portfolio Research, Grubb & Ellis, Mueller 2011.

2011 2012 2013 2014 2015

-1%

0%

1%

2%

3%2012+ Office Demand & Supply Forecast

Demand SupplyDemand Avg. = 1.51%Supply Avg. = 0.81%

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

84

86

88

90

92

Office Cycle

Rent Growth Occupancy

Occupancy Cycle and Rent Growth

Sources: Property and Portfolio Research, Grubb & Ellis, Mueller 2012.

AlbuquerqueBostonCincinnatiColumbusDallas FWDenverEast BayIndianapolisMemphisMiamiNorfolkPhiladelphiaPhoenix+1RichmondSan Antonio+2San DiegoNATION


11

1467

89

10 12

13

115

164321

2nd Quarter, 2014 Estimates


Office Market Cycle FORECAST

HartfordN. New JerseyStamfordWash DC

BaltimoreCharlotteHouston

MinneapolisNew Orleans

AtlantaChicago

ClevelandDetroit

Ft. LauderdaleKansas City

Las VegasLong IslandLos AngelesMilwaukeeSacramento

St. Louis

AustinHonolulu

Jacksonville+1Nashville+1Oklahoma City+2Portland+1Riverside

5 New York+1PittsburghRaleigh-DurhamSan Francisco+2

Salt Lake

Orange County+1OrlandoPalm BeachSan JoseSeattleTampa

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

88.0

89.0

90.0

91.0

92.0

93.0

94.0

95.0

96.0

Industrial Cycle





11

14

89

10 12

13

115

16531


Industrial Market Cycle FORECAST

4

Long Island

2ClevelandColumbus+1Las Vegas+1New Orleans+2NorfolkOrange CountyStamfordWash DC

RichmondSacramento

St. Louis

Atlanta+1BaltimoreBoston+1Charlotte

CincinnatiDetroit

East BayJacksonvilleKansas CityMilwaukee

Nashville+1 Orlando+1

PhiladelphiaRaleigh-Durham

Tampa

Hartford+1Memphis+1Miami+1New York+1Oklahoma CityPhoenixPittsburgh+1San DiegoNATION

Chicago+1Dallas FW+1Ft. Lauderdale+1Minneapolis+1 N. New JerseyPalm Beach+1

Austin+1Riverside San Antonio+1

HonoluluHoustonIndianapolisPortland+1Salt LakeSan FranciscoSeattle+1

76

Denver+2Los AngelesSan Jose+1




1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

0.0%

200.0%

400.0%

600.0%

800.0%

1000.0%

1200.0%

91.5

92.5

93.5

94.5

Apartment Cycle


Raleigh-Durham


11

146

89

10 12

13

115

164321


Apartment Market Cycle FORECAST

CharlotteClevelandIndianapolisMemphisOklahoma CityRichmond

Norfolk

5

Ft. LauderdaleHouston

MilwaukeeNew Orleans+1

OrlandoPalm Beach

St. LouisStamford

Tampa

Atlanta+1AustinJacksonville+1NashvilleOrange CountyRiversideSan AntonioSan JoseWash DC

Baltimore+1CincinnatiColumbus

DetroitDenver

Kansas CityMinneapolis

Seattle+3 NATION

ChicagoDallas FWHartfordHonoluluLong Island Los AngelesMiami N. New JerseyPhiladelphiaPhoenix+1PittsburghPortlandSacramento+1Salt Lake+1

Boston East BayLas Vegas+2New YorkSan DiegoSan Francisco-1

7


1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

91

91.5

92

92.5

93

93.5

94Retail Cycle





11

147

910 12

13

115

164321

LT Average

Retail Market Cycle FORECAST

6Occupancy

AtlantaChicago

DetroitKansas CityMilwaukee

New OrleansN. New Jersey

PhiladelphiaRichmondRiverside

SacramentoSt. Louis

CharlotteColumbusDallas FW+1Ft. LauderdaleJacksonvilleMemphisNashvilleNorfolkOklahoma City+1Orange CountyPhoenixTampa

Stamford

ClevelandCincinnati

Denver+2East BayHouston

Long Island+1Los Angeles

Miami+1Portland+1

Raleigh-Durham+1 Seattle

Austin+1Baltimore+1 Boston+1Minneapolis+1New YorkSan Diego

Pittsburgh+1Salt LakeWash DC

HartfordIndianapolis

Las Vegas+1 Orlando

Palm BeachSan Antonio

NATION

5

8


Honolulu+1San Francisco+1San Jose+1

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

-9.0%

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

7.0%

5700.0%

6000.0%

6300.0%

6600.0%

6900.0%

Hotel Cycle




CincinnatiHartfordRichmondSacramento LT Average Occupancy


11

1467

89

10 12

13

115

1654321

Hotel Market Cycle FORECAST

Dallas FWOklahoma City+1

Columbus+1 IndianapolisJacksonville+1MemphisMilwaukeePhoenix+1Raleigh-Durham+1Riverside+1San AntonioStamfordSt. Louis

AtlantaBaltimoreClevelandCharlotte Detroit+1Las VegasMinneapolisOrange CountyTampa

Kansas CityNorfolk

Boston+1Ft. LauderdaleOrlandoPalm Beach +1Portland+1San DiegoSan Jose

Long IslandNashvilleOaklandPhiladelphiaPittsburghSalt LakeSeattle

Austin+2ChicagoDenver+1East BayHouston+1 Los Angeles+1MiamiNew OrleansN. New JerseyWash DC NATION

Honolulu+1New York+1


San Francisco+1

Market Information

used to:• Determine market competition• Set lease strategies• Evaluate improvement programs• Provide knowledge

Real Estate Financial Cycles

Capital Flows

Affect Prices

Hyper Supply

LT Occupancy Avg.

Market Cycle Capital Flow Impact

Capital Flows to Existing Properties

Capital Flows to New Construction

Total Capita

l Flow CycleProperty M

arket Cycle

Cost Feasible Rents Reached

National Office Physical Market Cycle vs. Financial Cycle = New Permit Values

80

84

88

92

96

1972 1976 1980 1984 1988 1992 1996 2000 2004

Oc

cu

pa

nc

y

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

Va

lue

($M

il)

Market Cycle PermitSource: CB Commercial, Census Bureau

Physical

Financial

Source: BEA, CB Commercial, Mueller

6 year lag

No Lag

-10,000

-5,000

0

5,000

10,000

15,000

20,000

25,000

1970

Q1

1972

Q1

1974

Q1

1976

Q1

1978

Q1

1980

Q1

1982

Q1

1984

Q1

1986

Q1

1988

Q1

1990

Q1

1992

Q1

1994

Q1

1996

Q1

1998

Q1

2000

Q1

Flow of Funds Commercial MortgagesAll Sectors (1976 - 2001)

False Price AppreciationSupport

?

($ M

ils)

Source: Federal Reserve

Public MarketVolatility

Bond Values DROP as Interest Rates Rise

10 Year Treasury Yields 1953 - 2011

* As of 2013Source: U.S. Treasury — Federal Reserve Bank of St. Louis.

LT Average 6.29%

Average Total Return 80-10 = 8.6%



Commercial and Residential Real Estate Bubbles[1]

[1] S&P/Case-Shiller Housing Price Index CS-10 (residential price index); Moody’s/REAL Commercial Price Index (commercial price index).

Moody’s/RCA CPPI

http://www.rcanalytics.com

US Commercial Property Prices

$-

$20,000,000,000

$40,000,000,000

$60,000,000,000

$80,000,000,000

$100,000,000,000

$120,000,000,000

$140,000,000,000

$160,000,000,000

80.00

100.00

120.00

140.00

160.00

180.00

Sales Volume Property Prices

01Q1

01Q3

02Q1

02Q3

03Q1

03Q3

04Q1

04Q3

05Q1

05Q3

06Q1

06Q3

07Q1

07Q3

08Q1

08Q3

09Q1

09Q3

10Q1

10Q3

11Q1

11Q3

12Q1

12Q3

13Q1

-

20,000,000,000

40,000,000,000

60,000,000,000

80,000,000,000

100,000,000,000

120,000,000,000

140,000,000,000

160,000,000,000

Individual Portfolio

Portfolio Buyers Dominate Trades

Source: Real Capital Analytics April 2013

Property Price MovementsCap Rates

Source: Real Estate Research Corporation - Chicago

8.5 Office - CBD8.9 Office - suburban8.5 Industrial - Warehouse9.0 Industrial - R&D8.0 Apartments

Property Price Movements

Source: Real Estate Research Corporation - Chicago

10.2 Hotels7.9 Regional Mall8.9 Power Center8.7 Neighborhood Comm.

19

89

19

89

19

90

19

91

19

92

19

92

19

93

19

94

19

95

19

95

19

96

19

97

19

98

19

98

19

99

20

00

20

01

20

01

20

02

20

03

20

04

20

04

20

05

20

06

20

07

20

07

20

08

20

09

20

10

20

10

20

11

6

7

8

9

10

11

12Historic Cap Rates

Hotels Regional Mall Power Center Neighborhood Comm.

Transaction Cap Rates - RCA

Properties and portfolios $2.5 million and greater. Prior to 2005, RCA primarily captured sales valued at $5M and above.© Real Capital Analytics, Inc. 2013. Data believed to be accurate but not guaranteed. Last Updated: 6/27/2012

F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D F A J A O D F A2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

Apartment Avg Cap Rate Industrial Avg Cap Rate Retail Avg Cap Rate Office Avg Cap Rate


Cap Rate SPREAD over 10 Year Treasury

CBD Office & Apartments Leading Price Recovery


Moody’s/RCA Price Indices to 2-13

200020012001200220022003200320042004200520052006200620072007200820082009200920102010201120112012201280.00

100.00

120.00

140.00

160.00

180.00

200.00

220.00

Retail Industrial Office - CBD Office - Suburban Office

Apartment


Investors Starting to Move Beyond Major MarketsMoody’s/RCA Price Indices to 2-13

2000 2001 2002 2002 2003 2004 2004 2005 2006 2006 2007 2008 2008 2009 2010 2010 2011 2012 201280

100

120

140

160

180

200

220

Major Markets (All-Property) National All-Property Non-Major Markets (All-Property)


Next Favored Tier of Markets EmergingRegion/Market Year-Over-Year Price Change Now as % of Peak

BostonNew York Metro

NYC-ManhattanNYC-BoroughsNYC-Burbs

DC MetroPhilly/BaltimoreNEMA Others

NEMA RegionMiami/South FloridaTampa/Southw est FloridaOrlando/Central FloridaJacksonville/North FloridaAtlantaSoutheast ex Florida/Atlanta

Southeast RegionChicagoMidw est ex Chicago

Midwest RegionDenverDallas/Houston/AustinPhoenixSouthw est Others

Southwest RegionSeattleSan Francisco Metro

SF-San FranciscoSF-San JoseSF-Oakland

Los Angeles MetroLA-CBDWestLA-OrangeCountyLA-ValleyVenturaLA-InlandEmpireLA-LongBeach

San DiegoSacramento/Central CALas VegasWest Others

West RegionUS Total

All Property Types. Data through Q3'12. Peak pricing benchmarked to Q4'07

-2%8%

23%2%

-12%4%

1%3%

6%16%

-13%16%

8%5%

10%7%6%

-1%2%

10%10%

24%6%

9%8%9%

14%30%

-16%-4%

-6%-5%

3%-18%

3%-2%

16%12%

-23%0%

7%

92%94%

98%99%

70%97%

84%84%

92%77%

63%80%

64%63%

90%74%

85%68%

74%86%87%

57%82%83%

91%89%94%

87%75%75%

83%68%

77%62%

83%73%

63%37%

65%74%74%

Miami

Phila

Seattle

Dallas Houston

50

75

100

125

150

175

200

225

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

PhoenixAtlanta

Las Vegas

50

75

100

125

150

175

200

225

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12


Next Favored Tier of Markets Emerging

Rebounding Still Challenged

RCA CPPI


Composition of CRE Buyers

'07 '08 '09 '10 '11 '12 H1 '13

3% 6% 6% 8%5% 5% 5%

20% 13%10%

13%14%

17%12%

9%9%

7%

8% 10%8%

9%

10%9%

7%

17% 18% 14% 24%

3% 9%

15%

10% 6%7%

5%

25%

10%

5%

14% 17%

12%9%

31%

43%50%

30% 30%

37% 37%

NT REITs Instit Cross-Border REITs User/Other Eq Fund Private

Institutional

Private

Equity Fund

Cross-Border

User/Other

Non-Listed REIT

Public/REIT

-$10,000,000,000 $0 $10,000,000,000

All Property Buyers2012 Net Change To Portfolio Holdings

1%

23%

6%

14%

7%

16%

10%

22%

ALL Property Type Lenders Originations by Volume 2012

Private

Gov't Agency

Financial

Insurance

Int'lBank

National Bank

Reg'l/Loc Bank

CMBS

Lending Composition & Owner Changes

Source: Real Capital Analytics, 2013

Composition of Lenders


Debt Capital: Credit Conditions Improving


US Distress – Past The Peak

J '08

FMAMJJASONDJ '09

FMAMJJASONDJ '10

FMAMJJASONDJ'11

FMAMJJASONDJ'12

FMAMJJASONDJ'13

FMAM

$0

$50,000,000,000

$100,000,000,000

$150,000,000,000

$200,000,000,000

$250,000,000,000

$300,000,000,000

$350,000,000,000

$400,000,000,000

$450,000,000,000

Total Outstanding Distress

Troubled REO Restructured Resolved

J '08

FMAMJJASONDJ '09

FMAMJJASONDJ '10

FMAMJJASONDJ'11

FMAMJJASONDJ'12

FMAMJJASONDJ'13

FMAM

-$15,000,000,000

-$10,000,000,000

-$5,000,000,000

$0

$5,000,000,000

$10,000,000,000

$15,000,000,000

$20,000,000,000

$25,000,000,000

Monthly Additions -Workouts -Net Change

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

0

50

100

150

200

250

CMBS Issuance $ Billions

Source: Commercial Mortgage Alert

EMEA ASIA PACAMERICAS


Slowing Transactions A Common Trend

Global Trade Routes


2008 Physical and Financial Cycle2013 Physical Cycle Demand & Supply affect occupancies drives rental growth

GDP growth resumed 3Q 2009. Employment growth followed 2Q 2010

RE Demand growth resumed 2Q 2010

Home building employment less than 2% of all U.S. labor

Supply growth slowest in 42+ years — potential absorption jump in 2013?

Recovery phase 2011-2014 - growth phase starts 2014, 2015, 2016?

2012 Financial Cycle Capital flows affect prices — stock market recovering, volatile in 2013?

Real estate was safest investment alternative 2000-2007, pushing prices up

Real estate prices dropped 2008, 2009 now buying opportunities in 2010 – 2014?

Debt financing hard in 2012 - creating buying opportunity for Cash Buyers

Differentiate residential versus commercial real estate to your investors!

Conclusions• Real estate is a separate asset class

–Historically Stable Earnings and price growth–Positive Diversification benefits–Public and Private investment available–Equity and Debt investment available–Fundamentals declined 08, 09 recovering 10-13–Market & Property Selection Important–Maturing Loans provide buying opportunity

For an electronic copy of the

Real Estate Market Cycle Monitoremail

[email protected]

Commercial Real Estate Market Cycles: How They Affect Your Local Market

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