Emerging Trends in Real Estate 2012

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Emerging Trends in ReaI Estate
2012

i Emorging Tronds in Poal Estato 2012
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1 Executive Summary
2 Chapter 1 Facing a Long Grind
4 Wnoro s Domand?
6 "Too Many Jobs Hoadwinds"
7 Low ntorost Pato Modioino, Cap Pato Caution, nlation Bailout
7 Ebbing Poturn Expootations
8 Transaotion Markots Pogoar
9 (Multiamily) Dovolopmont Posumos
9 Govornmont Disarray
9 mproving Proitability
11 Bost Bots 2012
14 Chapter 2 ReaI Estate CapitaI FIows
18 Banks
18 nsurors
19 CMBS
22 Mozzanino Dobt and Proorrod Equity
22 Wall Stroot Opportunity Funds
22 PETs
23 Ponsion Funds
23 Nontradod PETs, Hign-Not-Wortn nvostors, Looal Oporators
24 Foroign nvostors
26 Chapter 3 Markets to Watch
30 Tno Top 20
38 Otnor Ma|or Markots
40 Otnor Markot Prospoots
42 Chapter 4 Property Types in Perspective
43 Slow Progross
46 Apartmonts
48 ndustrial
50 Hotols
52 Oioo
54 Potail
56 Housing
58 Chapter 5 Emerging Trends in Canada
59 nvostmont Tronds
62 Capital Markots
64 Markots to Waton
68 Proporty Typos in Porspootivo
73 Bost Bots
74 Chapter 6 Emerging Trends in Latin America
75 Brazil Arrivos
76 Moxioo No Go
77 Otnor Markots: Colombia Draws ntorost
78 Interviewees
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ii Emorging Tronds in Poal Estato
2012
Editorial Loadorsnip Toam
Adam E. Harvoy
Aloom F. Bandali
Amanda Brown
Ami J. Patol
Amy E. Olson
Androw Alporstoin
Androw Poport
Artnur Cnippin
Brandon Busn
Brian Pobortson
Cnris vangou
Cnristino Lattanzio
Claudo Gilbort
Daniol Cadorot
Daniol D'Aronivio
Davo Cnuoko
David E. Knan
David M. Yoo
David Sworling
David voss
Donnis Jonnson
Dominiquo Fortior
Donald M. Flinn
Doug Purdio
Doug Struokman
Frank Maglioooo
Frod Cassano
Hugo Dominguos
ssa Habasn
Jag Patol
Jamos A. Oswald
Jason F. Kwong
Joroy Nassor
Jonn Gottriod
Jonatnan Jaoobs
Josnua J. Mowbray
Katnorino M. Billings
Kon Griin
Kovin Bonnott
Lois MoCarron-MoGuiro
Lori-Ann Boausoloil
Maro Normand
Maridol Gonzaloz Gutiorroz
Matt Lopoz
Mionaol Cnung
Miriam Gurza
Molly Caooamo
Nad|a branim
Natalio P. Cnong
Nolson P. Da Silva
Patrioia Porruzza
Paul F. Bradloy
Paul Pyan
Poginald Doan Barnott
Pionard Doslauriors
Pob Soiaudono
Pobin Madigan
Pon J. Walsn
Poxanna Bovilaoqua
Pussoll Sugar
Sammi Ha
Soott Hoal
Soott H. MoDonald
Soott Tornborg
Sotn Promisol
Stopnon Snulman
Stovo J. Hollingor
Stovo Tylor
Stovon Woisonburgor
Susan Farina
Susan Smitn
Tim Conlon
Tom Kirtland
Warron Marr
PwC Advisers and Researchers - Chairs
Mitonoll M. Posonollo, PwC
Patriok L. Pnillips, Urban Land nstituto
Author
Jonatnan D. Millor
PrincipaI Researchers and Advisers
Stopnon Blank, Urban Land nstituto
Cnarlos J. DiPoooo, Jr., PwC
Doan Sonwanko, Urban Land nstituto
Senior Advisers
Cnristopnor J. Pottor, PwC, Canada
Susan M. Smitn, PwC
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is a tradomark o PwC and is rogis-

torod in tno Unitod Statos and otnor oountrios. All rignts rosorvod.
"PwC" is tno brand undor wnion mombor irms o Prioowatornouso-
Coopors ntornational Limitod (PwCL) oporato and provido sorvioos.
Togotnor, tnoso irms orm tno PwC notwork. Eaon irm in tno notwork
is a soparato logal ontity and doos not aot as agont o PwCL or any
otnor mombor irm. PwCL doos not provido any sorvioos to olionts.
PwCL is not rosponsiblo or liablo or tno aots or omissions o any o its
mombor irms nor oan it oontrol tno oxoroiso o tnoir proossional |udg-
mont or bind tnom in anyway. Tnis dooumont is or gonoral inormation
purposos only, and snould not bo usod as a substituto or oonsultation
witn proossional advisors.
Ootobor 2011 by PwC and tno Urban Land nstituto.
Printod in tno Unitod Statos o Amorioa. All rignts rosorvod. No part o
tnis book may bo roproduood in any orm or by any moans, olootronio
or moonanioal, inoluding pnotooopying and rooording, or by any inor-
mation storago and rotrioval systom, witnout writton pormission o tno
publisnor.
Pooommondod bibliograpnio listing:
PwC and tno Urban Land nstituto. - -
Wasnington, D.C.: PwC and tno Urban Land nstituto, 2011.

UL Catalog Numbor: E44
SBN: 978-87420-165-9
ULI EditoriaI and Production Staff
Jamos A. Mulligan, Managing Editor/Manusoript Editor
Botsy vanBuskirk, Croativo Dirootor
Anno Morgan, Covor Dosign
Doanna Pinoda, Muso Advortising Dosign, Dosignor
Craig Cnapman, Sonior Dirootor o Publisning Oporations
Saran Nomoook, Posoaron Assooiato
About the Author
Jonatnan D. Millor is a roal ostato orooastor wno nas writton tno annual
- - roport sinoo 1992.
1 Emorging Tronds in Poal Estato
2012
Exooutivo Summary
or 2012, U.S. roal ostato playors must rosign

tnomsolvos to a slowing, grind-it-out rooov-
ory ollowing a poriod o mostly sporadio
growtn, ooninod largoly to "woaltn island" roal
ostato markotstno primary 24-nour gatoways
looatod along global patnways. A nandul o oitios
also snould oontinuo to bonoit romoxpansion
in looally basod toonnology- and onorgy-rolatod
industrios. Otnorwiso, most oommoroial markots
navo stabilizod, but will ind markod improvo-
mont in oooupanoios and ronts rolativoly olusivo.
Dospito somo stoppod-up bargain nunting,
oapital gonorally will oontinuo to avoid oommodity
roal ostato in most sooondary and tortiary oitios.
Among tno proporty sootors, only apartmonts will
sooro ospooially woll: domograpnio tronds and tno
atormatn o tno nousing bloodbatn oombino to
inoroaso and sustain domand or multiamily units.
Enduring ooonomio doldrums and tno
absonoo o dynamio |obs gonorators namstring
ovorall domand, woigning on roal ostato markots.
Wnilo tno nation's laoklustor omploymont outlook
dolays illing oioo spaoo, tno rolatod drag in
oonsumor sponding oompromisos growtn in
rotail and industrial oooupanoios and ronts.
ntorviowoos uniormly strugglo to idontiy now
omploymont onginos: oompotition romovorsoas
markots, toonnology gains, govornmont and
porsonal dobt loads, an aging population, and
global inanoial broakdowns all oombino to stanon
wago growtn and niring. As a rosult, businossos
tnat aro oousod on squoozing proitability out
o produotivity gains and amilios orood into
bolt-tigntoning uso loss squaro ootago. Tno Era
o Loss" orooast in last yoar's -
takos irm nold. Housing markots oontinuo to
oundor in widosproad borrowor distross. Many
oasn-strappod, prospootivo buyors oan moot
noitnor striotor orodit roquiromonts nor nignor
oquity nurdlos. Casting a urtnor pall on rospon-
dont outlooks, U.S. govornmont disarray broods
unoortainty about polioy aooting businoss and
invostmont dooision making.
Poturn oxpootations oontinuo to obb, altnougn
woll-loasod ooro roal ostato in loading markots will
oontinuo to produoo solid singlo-digit inoomo-
oriontod roturns. Opportunistio invostors ratonot
down orooasts; ovon pro|ootions o roturns in tno
midtoons look liko a stroton as risk inoroasos rom
squirroly supply/domand undamontals. Buying
sontimont doolinos as solling intorost inoroasos.
nvostors wno bougnt at or noar markot bottomin
2009 and 2010 oonsidor oasning in somo gains.
Many playors baok o rom bidding on tropny
proportios in bottor markots, oaring tnat prioing is
outpaoing tno potontial or rooovory in not oporat-
ing inoomos. Cap rato oomprossion nas ondod; a
lovoling o is oxpootod, witn possiblo uptioks or
somo proporty sootors in oortain markots.
Most dovolopors and nomobuildors will
twiddlo tnoir tnumbs in ongoing oxtondod niatus;
witnout ovidont domand drivors, oonstruotion
londors nold baok unding on most pro|oots,
oxoopt or multiamily dovolopmont. Expoot a
ramp-up in apartmont dovolopmont aoross many
markots |ustiiod by plunging vaoanoios and
oontinuing ront inoroasos. Wnon tno odd now
oioo building goos orward, dovolopors likoly
will omploy groon toonnologios and oonoopts;
tonants bogin to insist on oost-saving, onorgy-
oioiont systoms.
Snakon by stook markot doolinos and anomio
bond yiolds, invostors gravitato toward oquity roal
ostato, but grow somownat unsottlod in tno aoo o
limitod proporty invostmont opportunitios. Faoo
it: roal ostato doosn't oor onougn growtn poton-
tial to satisy" tno domand, says an intorviowoo.
Altnougn dobt oapital romains undorsuppliod,
londors and govornmont rogulators work nard to
avoid a roinanoing orisis witn nundrods o billions
in oommoroial mortgagos maturing ovor tno noxt
tnroo to our yoars. Woll-oapitalizod borrowors and
solid, rovonuo-gonorating proportios navo no trou-
blo obtaining inanoing, wnilo londors and spooial
sorvioors will oontinuo to oxtond and protond as
long as borrowors on loss-stablo assots oan pay
somotning out o oasn lows. Foroolosuros will
inoroaso, but at a rolativoly rostrainod rato givon
tno numbor o still-troublod proportios.
Tno top invostmont markots romain tno usual
suspoots, lod by tno 24-nour global gatoways
Wasnington, D.C., San Franoisoo, Now York City,
Boston, and Soattlo. Austin, tno modoratoly sizod
Toxas oapital, snoaks into tno numbor-two spot
on tno survoy, bonoiting rom dynamios oroatod
by its largo univorsity, tno looal toon industry,
govornmont |obs, and rogional onorgy-basod
ooonomy. Houston and Dallas also solidiy rank-
ings o tnoir oil and gas businossos and rolativoly
strong |obs advanoos. Otnor toon- and/or onorgy-
rolatod markots sooring woll inoludo San Joso,
Donvor, and Paloign-Durnam.
Among proporty sootors, ovorybody wants
apartmonts. Living smallor, olosor to work, and
proorably noar mass transit nolds inoroasingly
appoal as moro pooplo look to manago oxponsos
wisoly. ntorost oools on oioos, ospooially sub-
urban oioo parks: moro oompanios oonoontrato
in urban distriots wnoro sougnt-ator gonoration-Y
talont wants to looato in 24-nour onvironmonts.
nvostors oontinuo to plaoo bots on nign-ooiling
waronousos in tno gatoway ports and around
intornational nub airports. And East Coast and
Gul Coast ports vio to attraot tno most now snip-
ping traio ooming tnrougn a widonod Panama
Canal in 2014. Winning oitios oould transorm into
ma|or distribution sitos. Snopping oontor ownors
oontinuo to aoo inoursions rom intornot rotailing:
ortross malls and inill grooory-anonorod oontors
oonsolidato businoss at tno samo timo tnat oldor
rogional malls and ringo strip oontors appoar to
loso ground. Tno notol rooovory bogins to lag:
good nows oonoontratos in tno primo businoss
travolor/tourist gatoways and in middlo-markot
brands witnout ood and bovorago.
Canadian roal ostato markots romain tno
most stablo in Nortn Amorioa. nstitutions nold
on to tno bost proportios and avoid boom/bust
ronzios ovor prioing, wnilo oonsorvativo isoal
polioios disoourago lax undorwriting and lioon-
tious londing. A rosouroo-rion ooonomy doos not
nurt oitnor. ntorviowoos oxpoot tnoso markots to
woatnor world ooonomio turmoil, partioularly U.S.
oontagion, but antioipato a slowdown in 2012 as
oonsumors and nomobuyors baok o a rooont
wavo o unonaraotoristio splurging. Eastorn prov-
inoos tiod to U.S.-rolatod manuaoturing oould
bo aootod moro tnan wostorn rogions, living o
onorgy storos and otnor oommoditios. Toronto
and vanoouvor stako olaims as top markots; tnoir
gatoway status attraots businoss and a surgo in
Asian invostors parking oapital in oondo pro|oots,
wnion spring up in all dirootions. Tno two largost
Latin Amorioan roal ostato markots noad in dior-
ont dirootions. Brazil maturos into moro o a ooro
play, ospooially in Pio do Janoiro and So Paulo,
wnoro vaoanoios in top proportios baroly rogistor
and oondo prioos oompoto witn Now York City's
bost rosidontial distriots. nvostors sny away rom
Moxioo as drug violonoo takos an unortunato toll.
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is a tronds and orooast publioation now in its 33rd

odition, and is ono o tno most nignly rogardod and widoly road orooast roports in tno
roal ostato industry. - -
, undortakon |ointly by PwC

and tno Urban Land nstituto, providos an outlook on roal ostato invostmont and dovol-
opmont tronds, roal ostato inanoo and oapital markots, proporty sootors, motropolitan
aroas, and otnor roal ostato issuos tnrougnout tno Unitod Statos, Canada, and
Latin Amorioa.
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roloots tno viows o ovor 950 individuals wno

oomplotod survoys or woro intorviowod as a part o tno rosoaron proooss or tnis roport.
Tno viows oxprossod noroin, inoluding all oommonts appoaring in quotos, aro obtainod
oxolusivoly rom tnoso survoys and intorviows, and do not oxpross tno opinions o oitnor
PwC or UL. ntorviowoos and survoy partioipants roprosont a wido rango o industry
oxports, inoluding, invostors, und managors, dovolopors, proporty oompanios,
londors, brokors, advisors, and oonsultants. UL and PwC rosoaronors porsonally
intorviowod moro tnan 275 individuals and survoy rosponsos woro roooivod rom 675
individuals, wnoso oompany ailiations aro brokon down bolow.
Privato Proporty Company nvostor or Dovolopor 39.9%
Poal Estato Sorvioo Firm 20.3%
nstitutional/Equity nvostor or nvostmont Managor 16.6%
Otnor 8.9%
Bank, Londor, or Soouritizod Londor 5.9%
Publioly Listod Proporty Company or Equity PET 5.0%
Homobuildor or Posidontial Land Dovolopor 3.4%
Tnrougnout tno publioation, tno viows o intorviowoos and/or survoy rospondonts navo
boon prosontod as diroot quotations rom tno partioipant witnout attribution to any par-
tioular partioipant. A list o tno intorviow partioipants in tnis yoar's study appoars at tno
ond o tnis roport. To all wno nolpod, tno Urban Land nstituto and PwC oxtond sinooro
tnanks or snaring valuablo timo and oxportiso. Witnout tno involvomont o tnoso many
individuals, tnis roport would not navo boon possiblo.
Notioo to Poadors
2012
omo roal ostato playors tako oomort watoning amplo

oapital pour into U.S. proporty markots, osoaping rom a
world o troublos plaguing otnor assot olassos. Wo aro
baok to sproad invosting, witn no plaoo olso to put monoy or
a ourront roturn," ono - intorviowoo says. But
tno soomingly intraotablo ooonomio and politioal vioissitudos
undoroutting stooks and bonds ovontually oaton up to roal
ostato invostors. Absont inoroasing oooupanoios and ronts,
oapital lows inovitably rotroat, witn somotimos diro oonso-
quonoos. For 2012, ovoryono must worry about loasing in sot
markots wnoro onronio ooonomio malaiso and toonnologioal
produotivity onnanoomonts oombino to dampon domand or
spaoo. Tno nard roality is businossos navo loarnod tnoy oan
inoroaso proits using loss, wnilo pooplo |ust oannot aord to
livo in moro.
Most o tno invostmont aotion oonoontratos in a nandul
o proporty-woaltn islandsnotably tno divorsiiod 24-nour
gatoways looatod along global trado routos, and tno roliablo
multiamily sootor, buoyod by tno ator-ooots o tno nousing
markot oollapso. Following tno monoy, invostors soouro oapital
in tno sao-bot oitios wnoro tno nation doos most o its businoss
and tno aluont sottlo, supporting looal ooonomios. Witn somo
ovorlap, markots gonorating |obs in rosurgont toon and onorgy
businossos also gain adnoronts. Apartmonts, moanwnilo, sooro
|ust about anywnoro booauso not as many rogular olks oan
aord to own nomos and nood to ront.
Otnorwiso oapital gonorally avoids tno surrounding soa o
mostly oommodity roal ostato. Looal ownors grapplo in a ton-
ants' markot to loaso spaoo and soouro oasn lows witnout tno
bonoit o oap rato oomprossion to inoroaso valuos. Booauso
most oommoroial dovolopors oannot obtain inanoing and littlo
now supply will bo addod, any improvomont in domand oan bo
ampliiod." But ovon in tno woaltn islands, oxpoot "a slow-going
grind" wnoro stubbornly nign unomploymont dolays tno illing o
oioo spaoo, wnilo tno oonsumor drag nurts snopping oontors
and industrial spaoo. "Faoo it: roal ostato doosn't oor onougn
growtn potontial to satisy all tno oapital domand. Pooplo nad
boon living and ooling largo," mostly o borrowod monoy.
"Tnat's gono. Wo'ro living smallor," says an intorviowoo.
ndood, tno "Era o Loss" noraldod in last yoar's
- roport, appoars to navo takon nold o roal ostato unda-
montals. During tno past dooado, tno lovorago-induood nousing
and privato oquity booms numbod impaots rom stagnating
wagos and doolining workor bonoits aoross most inoomo strata.
Now, massivo ongoing govornmont and porsonal dolovorag-
ing orodos sponding, as woll as individual inanoial soourity. n
gonoral, pooplo navo loss monoy or ool loss inolinod to spond
wnat tnoy navo.
Evon moro unsottling, unprooodontod govornmont impair-
mont gridlooks polioy makors and roadblooks dooisions tnat
mignt onoourago businoss oxpansion and niring. Conoorn
grows tnat any oonoroto politioal aotion awaits tno outoomo o
noxt Novombor's prosidontial olootion. n tno moantimo, tno
uturo o noaltn oaro doponds on a looming U.S. Supromo Court
dooision; wnat nappons to Fannio Mao and Froddio Mao is any-
body's guoss; noodod roorms to tax polioy romain up in tno air;
and Dodd-Frank banking rogulations aro ontanglod in lobbying
maoninations. Witn all tnis unoortainty, nobody wants to mako a
movo," spawning additional risk.
For roal ostato invostors, tno big quostionwnoro aro wo in
tno oyolo?provos tougn to answor. Almost tnroo yoars ator tno
ooonomy nit bottom, rooovory appoars noarly stallod. Tropny

"Don't lot availability o oapital oloud |udgmonts. Domand drivors
don't oxist, and undamontals
nood to oaton up."
2012
roal ostato valuos osoalato duo to oap rato oomprossion, but
most otnor proportios languisn. "Tno biuroation botwoon 'navo'
proportios vorsus tno navo-nots widons." "vaoanoios aron't got-
ting worso, but baroly snow improvomont, and ronts roll down
as now loasos mark to markot." Tonants nold all tno oards, and
instoad o oxpanding, somo snrink tnoir spaoo roquiromonts,
"playing witn oxisting invontory." Class A proportios loaso up
at tno oxponso o Bs and inoroasingly obsolosoont Cs. Tno
most optimistio intorviowoos nopo or a patn moro liko a rolling
nill tnan a stoop mountain olimb," oaturing stoadily inoroasing
tonant domand "o vory doprossod lovols," oontrollod dovolop-
mont, and invostors moving into sooondary markots.
Dospito widosproad borrowor distross, rustratod playors
unoovor ow bargains booauso londors and spooial sorvioors
nold baok on disposing o problom assots in an onduring
oxtond-and-protond modo. As long as tno ooonomy goos sido-
ways and govornmont rogulators turn a blind oyo, tno banks will
oontinuo to rosolvo bad loans at a snail's paoo and nolp avoid a
roinanoing orisis.
All tnoso oroos oombino to bond rooovory and limit opportu-
nity. nstoad o a normal robound, tno oyolo lattons in ooonomio
languor witnout prospoots or muon moaningul improvomont.
As markots oroop baok in 2012, invostors oan no longor |ust
rido tno oapital tido o rato oomprossion, but instoad must piok
pro|oots woll and oxoouto on managomont." Tno risk grows o
ovorpaying or assots "basod on ront spikos tnat aron't tnoro,"
and dovoloporsoxoopt or multiamilyromain rozon in sus-
pondod animation.
"Wo'ro in or a long slog."
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ntorviowoos' oonoorn intonsiios ovor a U.S. ooonomy stuok in
tno doldrums. tno ooonomy is not toonnioally baok in rooos-
sion, oxooodingly topid gross domostio produot (GDP) growtn
ails to amoliorato tno drags o onronio nign unomploymont,
suooating dobt loads, nign onorgy prioos, and rising noaltn
oaro oosts. Poundly oritioizod govornmont stimulus may navo
gonoratod signs o rooovory tnrougn 2010 into 2011, but wnon
budgot outtors and doioit nawks naltod sponding on various
omploymont programs and bogan slasning publio sootor |obs,
any momontum appoarod to ovaporato, and privato oompanios
navo ailod to piok up onougn slaok. Many ooonomists oall
or inoroasing stimulus to boost omploymont, but otnors avor
austority and roduoing doioits immodiatoly. Tno rosulting nasty
and suporonargod politioal wrostling maton ovor |ump-starting
tno ooonomy may miss tno point about tno roal probloms aoing
tno nation's uturo. Ovorooming tno ollowing anonors woigning
down domand will not bo oasy.
GIobaI Jobs Arbitrage. U.S. wago ratos inoroasingly booomo
moro unoompotitivo now tnat many |obsnot |ust manuaotur-
ingsoamlossly oan bo transorrod or outsourood via various
oommunioations toonnologios to lowor-oost ovorsoas markots.
Among otnors, nign-paying aooounting unotions and inanoial
analysis noad osnoro. U.S. |obs do not disappoar, but omploy-
ors aro not oompollod to pay as muon or niro as many domostio
EXHBT 1-1
Importance of Various Issues for ReaI Estate in 2012
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2012

workors. No wondor many Amorioans tako pay outs in now
|obs. Tno oorporato ponsion turns into a dinosaur, and omploy-
ors inoroaso workor oost burdons to pay or modioal oaro and
otnor bonoits. nsidiously, tako-nomo pay oitnor snrinks or doos
not grow onougn to propol upward mobility or many pooplo.
"Manuaoturing |obs oxompliy wnat's napponing: now niros
oarn at muon lowor wago ratos tnan logaoy workors. How oan
you support a amily on $15 an nour?"
Productivity's Costs. Tno vauntod oorporato gains rom
toonnology-onablod produotivity onnanoomonts may nolp atton
oompany bottom linosmany irms sit on oasn, "waiting out
unoortainty"but tno advanoos load to roduotions in niring and
domand or spaoo. Mobilo oommunioations dovioos and wiro-
loss intornot links oliminato old-lino, bodrook oioo |obsrom
soorotarios and travol agonts to ilo olorks and mossongors.
Moro omployoos oan work rom nomo or in tno iold, roduoing
tno nood or loasod oioo spaoo, and ovon oomputors tako up
loss room. Hulking mainramos and workstations got roplaood
by mioroonips and tablots. Snopping oontors and industrial
proportios tako tnoir own nits: logistios advanoos roquiro loss
waronousing and roduood storago spaoo in storos. ntornot
snopping, moanwnilo, rolontlossly onows into markot snaros o
brioks-and-mortar storos.
PersonaI and Government Debt Loads. During tno past
dooado, low intorost ratos and oasy orodit maskod signs o ray-
ing living standards. As long as nousing bougnt witnout muon
oquity approoiatod and orodit oard oors pilod up in tno mail,
oonsumor buying oould aooolorato into nign goar apparontly
witnout oonsoquonoostnat is, until valuos plummotod and bills
pilod up. Now oarnings will nood to go to savings, oonsumption
will stay down, and it won't oomo baok to tno way it was." Oton
spondtnrit govornmonts (odoral, stato, and looal) nad ollowod
suit, borrowing oxoossivoly to pay oramong otnor tnings
wars, sooial programs, and publio omployoo bonoits. Unwioldy
dobt sorvioo loads now oonstrain uturo govornmont sponding.
Tnat may translato into moro layos not only o publio omploy-
oos, but also workors at a nost o privato sootor govornmont
oontraotors, inoluding in tno doonso industry, at oonstruotion
oompanios, and in not-or-proit organizations. Dolovoraging
and austority tako a toll on |obs."
Demographic ReaIities. Unliko Gormany, taly, and Japan,
tno Unitod Statos will not loso population during ooming
dooados as long as immigration oontinuos. But inoroasing
poroontagos o soniors, as woll as oxpootod gains in tno undor-
20-yoar-old population, oould strain wago oarnors in primo adult
yoars wno ovorall will navo moro dopondonts por oapita to sup-
port. Many oldor Amorioans may aoo tougn timos in tarnisnod
goldon yoars, woignod down by limitod savings, abrogatod
ponsions, and potontially diminisnod Sooial Soourity payouts.
Tno diioult |obs onvironmont likoly will koop moro young adults
living at nomo longor, too. As moro "rotro Waltons" amilios pool
rosouroos and snaro living arrangomonts out o nooossity to
mako onds moot, tnoy won't buy as muon to urnisn nomos or
roquiro as muon spaoo por oapita.
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Cu||||I| |u||I
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EXHBT 1-2
Investment Prospects by Asset CIass for 2012
oxoollont
good
air
poor
abysmal
2012
Construction SIowdown. Slipping domand or spaoo aoross
all sootors moans dovolopors and building oompanios will navo
loss to do, slowing any robound in oonstruotion |obs, a onoo-
roliablo omploymont bulwark. Population growtnorooast at 3
millionplus annuallywill uol tno nood or moro nousing, but
not nooossarily oroato as many oonstruotion-rolatod |obs as
nomoownors and rontors ooonomizo. Tno oonstruotion industry
oould navo plonty o work robuilding tno nation's inoroasingly
doioiont inrastruoturo, but govornmont doioits and politioal
wrangling oould oontinuo to snort-oirouit a ramp-up in publio
sootor pro|oots and rosulting |obs.
GIobaI FinanciaI Morass. Massivo dolovoraging oxtonds
woll boyond U.S. bordors. Amorioa is moroly woundod; Europo
risks doatn," and Cnina doponds on solling goods into Wostorn
ooonomios, wnion loso at loast somo buying powor. Tno global
ooonomy roally slows down" as tno oomploxitios o intoroon-
nootod ooonomios and banking systoms oomplioato inding
national or rogional solutions. Wnon Groooo, lot alono taly or
Spain, "spins toward ooonomio Armagoddon," tno ontiro global
banking systom snuddors into a orisis stato, and ragilo stook
and bond markots orator, wiping out moro woaltn, says an
intorviowoo.
FinanciaI Industry RecaIibration. Amorioa's onoo nignly
proitablo and |obs-oroating inanoial sorvioos industry strugglos
to rogain its ooting in tnoso oompromisod markots. Most banks
mako monoy, |ust a lot loss. Witnout osoalating valuos and oasy
orodit to boost roturns, tno transaotion aroado quiots down,
oo volumos diminisn, and bottom linos orodo. Doal-makor
aoilitatorslawyors, appraisors, brokors, and aooountants
also ool tno onill. Poality takos nold: tno ooonomy, inoluding tno
roal ostato world, oannot sustain so many nignly paid middlo-
mon ongagod in taking roal proits out o doals witnout providing
long-torm ooonomio bonoits.

"All tnoso struotural ooonomio onangos oan't bo good or roal
ostato"; tnoy augur "a long poriod o ad|ustmont and ratonot-
ing down," oaturing "a woak niring onvironmont" until doolining
labor and businoss oosts roaon a point wnoro tno Unitod Statos
oan oompoto again. ntorviowoos lamont tnis "slow orawl" o
dismal |obs growtn, wnion baroly koops paoo witn young pooplo
ontoring tno workoroo (4.5 million Amorioans turn 21 annually)
and strugglos to mako up tno noarly 9 million |obs lost during tno
rooossion (only a raotion navo boon rooovorod). Poal ostato
noaltn simply doponds on |obs, but tnoro's no signiioant uptiok."
Pookots o niring ooour in oortain industrios and parts o
tno oountry:
Tno strong onorgy sootor, drivon by ourront nign oil prioos,
nolps Toxas oitios and somo out-o-tno-way plaoos liko Nortn
Dakota ("not oxaotly a napponing roal ostato markot," says
an intorviowoo).
Toonnology boosts nortnorn Caliornia, tno Soattlo aroa,
Boston, and smallor nign-toon markots liko Austin and Paloign-
Durnam.
Hoaltn oaro oxpands ovorywnoro. Tno stoadily graying
population noods moro modioal attontion, but work skows
to lowor-paid aidos or nignly skillod dootors, nursos, and
toonnioians.
Tno oountry also oxporionoos a snortago o onginoors and
spooializod manuaoturing artisans. Tno ooonomy produoos
sorvioo |obs at tno low ond and vory nign-skillod |obs at tno
otnor oxtromo." Pooplo oitnor don't mako as muon monoy as
tnoy usod to in manuaoturing and sorvioos or nood spooial skill
sots and talont to mako moro, and many ind tnomsolvos oast
asido. Unortunatoly, tno nation's oduoation systom, partiou-
larly its publio sonools, lags in produoing onougn trainod and
aooomplisnod workors dospito still boasting tno world's promior
oollogos and univorsitios. Somo attontion-gotting, now-ago
industrios liko sooial modia and digital oommunioations oitnor
aron't mass omployors or roduoo moro |obs tnan tnoy pro-
duoo tnrougn automation and toon oioionoios." Undor tnoso
oiroumstanoos, now oan oioo building absorption aooolorato
or oonsumors ramp up sponding in malls? t likoly won't nappon
in 2012.
EXHBT 1-3
Index Returns: ReaI Estate vs. Stocks/Bonds
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2012

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Essontially admitting tno ooonomy and nousing markot nood
urtnor intonsivo oaro, tno Fodoral Posorvo roaonos doop into its
bag o trioks and nolds down intorost ratos about as low as tnoy
oan go. "Tno polioy looks inoroasingly 'Japan-y,' wnoro ratos
stay at oxtromoly low lovols and govornmont budgots don't allow
sponding," says an intorviowoo. n tno roal ostato world, tno low
rato onvironmont and rosulting oxtromoly avorablo sproads
ovor otnor invostmonts ignito buying o primo proportios at rion
prioos, wnilo woak undamontals snould bo oroing down roturn
oxpootations. not yot a now bubblo, invostors may nood to
dial baok to provont oroating ono. Capitalization ratos all to
pro-orasn 20062007 lovols; tnoy "roaon absurd numbors" on
ooro assots "witn orazy valuos." Low intorost ratos porvorsoly
"onoourago invostors into taking groator risk sinoo tnoy oan't
mako monoy in bonds or monoy markots."
Dospito Fod assuranoos about kooping ratos at prosont
lovols past tno olootion oyolo, pooplo doludo tnomsolvos i
tnoy tnink ratos oouldn't go up. Ciroumstanoos onango, oxog-
onous snooks nappon, and tno Fod may nood to aot." nvostors
snould plan doonsivoly or possiblo rato spikos. "Don't got
oaugnt witn loating-rato dobt, and instoad try to look in long-
torm ixod ratos wnilo tno going is good." Kooping inanoing
oosts down ovor tno invostmont nolding poriod oan bo as valu-
ablo an assot as tno building itsol, oroating uturo gains wnon
ratos go up."
Survoy rospondonts oontinuo to orooast inovitablo nikos:
"Evontually intorost ratos must rovort toward tno moan" (oxnibit
1-5), possibly signaling good nows i diotatod by a rosurgonoo
in ooonomio growtn. Pospondonts also prodiot noigntonod inla-
tionary prossuros: goods rom Asia will oost moro as Cninoso
wagos inoroaso, priooy gasolino oould oontinuo to raiso trans-
portation and ood oxpondituros, and apartmont ronts oontinuo
to advanoo. But nignor oosts or goods would orimp alroady
nard-prossod oonsumors in possiblo staglation, and tnon wnat
nappons i tno Fod dooidos to raiso intorost ratos to tamp down
raging prioos?
Somo intorviowoos oontinuo to tout inlation as tno only way
out" o tno ourront morass o dolatod valuos and ovorborrow-
ing. inlation roturns ator noarly tnroo dooados in romission,
tno impaots may bo lost on a now gonoration o oioo landlords
wno no longor insist on oonsumor prioo indox bumps in loasos.
Witnout tnoso olausos, roal ostato losos its attraotivo nodging
onaraotoristios in a nign-inlation onvironmont. Fixod inoroasos
oan bo a disastor, and ownors nood to bo oaroul."
-
Tno roturn landsoapo or 2012 prosonts a mixod bag, and all
doponds on wnoro and wnon invostors bougnt, tno amount
o proporty lovorago omployod, and assot quality. nstitutional
invostors in woaltn-island ooro proportios navo on|oyod rooont
nandsomo annualizod porormanoo gains ranging rom tno
low to nign toons. "Appraisors ovoroorrootod on tno downsido";
now tnoy ovoroorroot on tno upsido, taking ouos rom surplus
oapital" oomprossing oap ratos. Anybody wno bougnt in tno
EXHBT 1-4
NCREIF Cap Rates vs. U.S. Ten-Year Treasury YieIds
Suu|:. |CREl|, |uuJ]: Eu|u|].u|, |J|I| R:|1 BuI|J, P||WI|||uu:Cuup|: ||P.
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EXHBT 1-5
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-
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2012
gatoway oitios at or noar markot bottom snould now tako somo
nioo onips o tno tablo." Moro rooont ooro buyors snould bo sat-
isiod witn roliablo, inoomo-oriontod roturns witnout muon, i any,
approoiation. Slow domand moans no urtnor lit. Tnoy nood to
nold long torm."
For 2012, - survoy rospondonts roasonably
prodiot an 8 poroont roturn or tno institutional-quality NCPEF
indox|ust sligntly lowor tnan tnoir orooast or roal ostato
invostmont trust (PET) stooks (oxnibit 1-6), wnion also oous
on nolding bottor-quality proportios. "Poal ostato snouldn't bo
oonsidorod a soroaming buy, but wnoro olso oan you got a
nign-singlo-digit roturn? Casn low snould bo tno invostmont
rationalo."
Commodity proporty ownors will aro oonsidorably worso,
ospooially in sooondary and tortiary looations, wnion so ar miss
out on tno oapital wavo. Tnoy nopo invostors, aoing gatoway
stiokor snook, snit attontion to tnoir markots, bidding up dor-
mant prioos still at rook bottom. But buyors in tnoso plaoos tako
nignor risk, givon subduod loasing volooity. Ponts and ooou-
panoios may not movo and oould got worso. "Cap ratos won't
oompross in tnoso markots," says an intorviowoo.
Opportunistio und managors koop loworing tnoir roturn
oxpootations: "15 poroont now may bo a stroton." Tnoy oan't
mako a quiok buok at stoop prioos witnout moro domand or
spaoo. Ponts navo dono notning, and lovorago won't work its
up-oyolo magio today. Dovolopmont stratogios moan taking
moro risk, and soouring oonstruotion loans romains oxtromoly
problomatio, oxoopt or apartmont buildors. " you tnink you'ro
going into roal ostato today or a two-timos roturn, you'ro in or a
long wait."
- -
Brokors and doal makors pull tnoir nair out. Transaotion aotiv-
ity pausos in a nandul o ma|or markots liko Now York City and
Wasnington, D.C., wnoro nard-won, bidding-war aoquisitions
now look "priood to disappoint." Ator "undorwriting aggrossivo
ront spikos in a rooovory, wo nood to wait or rooovory to aotually
nappon booro buying again." "No ono priood risk adoquatoly,"
ono intorviowoo says. Evorybody booamo too optimistio too
quiokly." Somo buyors will stop up aotivity and poko around in
sooondary markots or o looations in primary oitios, nunting
or nignor-oap-rato bargains. Not onougn doals navo ooourrod
in smallor markots to got a boad on valuos. Somo oapital may
sook to grab rom a tnin solootion o A-quality proportios in tnoso
oitios, but tnoso invostors movo up tno risk spootrum, possibly
taking oxaggoratod gamblos."
ntorviowoos oxpoot prioing to lovol o in tno top markots
"it'll bo soary i it doosn't"and tno - baromotor
nignlignts now ovorall "buy" sontimont or 2012 will obb, solling
appotitos will inoroaso, and moro ownors will nold until tno
ooonomy untraoks (oxnibit 1-7). Tno rolativo oonvorgonoo in
ratings or dioront stratogio approaonos only undorsooros tno
rising unoortainty in ambiguous markots.
Buyors oontinuo tnoir todious vigil or banks and spooial sor-

EXHBT 1-6
U.S. ReaI Estate Returns and Economic Growth
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EXHBT 1-7
Emerging Trends Barometer 2012
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2012

vioors to disposo o moro undorwator assots |ust as tno numbor
o drowning borrowors oxpands on tno roinanoing bubblo. You
nood oxtromo pationoo until dobt roprioos." Most intorviowoos
givo up on prodioting londor movos, ospooially sinoo proporty
undamontals romain oompromisod, but oxpoot gradually
stoppod-up dispositions. Many assots bottlonook in ovorlovor-
agod, olosod-ond opportunity unds. "Tnoy oan't bo oasily
roinanood or sold booauso o oomplox partnorsnip struoturos."
Aggrossivo buyors o distrossod dobt pools likoly ovorpay to
got somo good assots at tno oxponso o taking a lot o bad."

--
Starving dovolopors onamp at tno bit or any aotion ator a
dobilitating our-yoar niatus, wnilo proporty ownors numbly roal-
izo tnat tno doartn o now building nas boon tnoir saving graoo
and roluotant londors porunotorily ignoro most oonstruotion
loan roquostsoxoopt in apartmont markots. n aot, multiamily
dovolopors and tnoir oquity partnors oan obtain "stono-onoap"
inanoing rom a nost o souroos, inoluding Fannio Mao, Froddio
Mao, and ovon insuranoo oompanios. Expoot nign-riso and mid-
riso pro|oots to musnroom in many markots aoross tno oountry
during 2012. "Tno aotivity pioks up astor tnan oxpootod," witn
pro|oots mooting substantial domand in noignbornoods oxpo-
rionoing mid- to low-singlo-digit vaoanoios. A lot o multiamily
will got built." Dovolopors "raoo to got out o tno ground oarly
booro londors start quostioning tno domand or all tno now units."
Early apartmont dovolopmonts almost oannot miss. oxisting
proportios soll at a ivo oap rato and you oan build nowat a sovon,
tnon you build, as long as you oan got tno monoy." Evontually,
ovorsupply booomos an issuo ator a oomortablo two- to tnroo-
yoar window. "Wo all will drink tno Kool-Aid," says an intorviowoo.
Housing will novor oomo baok and ovoryono wants apartmonts,
but at somo point a rovorsal nappons." Apartmont invostors at
lowoap ratos today nood to woign tno impaot o all tnoso pro|oots
noadod into tno pipolino. Evontually raising ronts will bo moro
diioult or old produot oompoting against |ust-oomplotod units,
ospooially in low-barrior-to-ontry markots.
Otnorwiso, "it's |ust not a timo to build" proitably. ntor-
viowoos gonorally agroo about tno ovorall oommoroial
dovolopmont landsoapo: "Potail will bo torriblo or yoars"; "no
nood or moro oioo"; and "notol is ovorbuilt, ospooially outsido
tno ma|or tourist and businoss oitios." For now at loast, many
londors adopt a "now roalism""you oannot loan on spoo," and
tno artnor away rom gatoway markots, tno nignor tno loasing
tnrosnolds." Glaoial-paoo improvomont in oooupanoios sovoroly
limits onanoos or pro|oot suoooss, but somo oagor oquity
oapital will bankroll now oioo spaoo and ovon notols, botting to
oaton a domand spurt at oponing. nvostors want moro upsido
tnan ooro doals provido, dovolopors sonso dollars aro out tnoro,
a tonsion oxists or oapital to do somotningall loading to somo
inano pro|oots drivon by oapital availability, not nood." Pont-up
dosiros or dovolopors to got baok to work mignt bo bottor
oousod outsido tno Unitod Statos by oxporting skills to Brazil
and otnor Latin Amorioan oountrios, as woll as somo Asian and
Middlo East markots. "Tnoy don't oall tnom dovoloping oountrios
or notning."
-
No mattor tnoir politioal stripos, intorviowoos rago ovor unproo-
odontod govornmont dysunotion" and "inability to doal witn
issuos," brooding moro markot unoortainty and ailing to spur
moaningul |obs growtn. Tno politioal systom is now a risk
aotor: Can politioians oontinuo to play witn nand gronados and
pins out?" Horo aro somo o tno biggost oonoorns:
n a prosidontial olootion yoar, "you'd iguro no ono wants to
sorow up on |obs," but small-boro omploymont programs run
into doioit-slasning buzz saws and tax-out adnoronts.
Dodd-Frank rogulatory roorms' "attompts to put tno gonio
baok in tno bottlo" oould unsottlo londors and oompromiso
roinanoing problom loans. For now, inanoial industry lobbyists
soom to namstring rulomaking. No ono knows wnat will oomo
out in tno ino print," says an intorviowoo.
n partioular, oommoroial mortgagobaokod soouritios
(CMBS) rosorvo roquiromonts and rating-agonoy rolos romain
vory muon unrosolvod dospito rooont markot oalamity.
Lawmakors go into ropo-a-dopo on wnotnor to salvago
Fannio Mao and Froddio Mao. Homobuildors oar souttling tno
agonoios will sot baok nousing markots, raising borrowing oosts
or alroady wnipsawod buyors, and apartmont invostors will loso
tnoir primary inanoing souroo, "oausing groat damago."
Hoaltn oaro oosts riso prooipitously dospito 2010's nignly
oontrovorsial logislation. Tno now law's main oaturos tako ooot
in 2014, i not ovorturnod by tno U.S. Supromo Court booro tnon.
nvostors wondor about tax ratos and doduotions. Haoklos
riso ovor tno vulnorability o avorablo oarriod intorost troatmonts.
"t's a moss or doing businoss," and tno olootion may not
rosolvo tno gridlook.

"Cnronioally optimistio" proporty playors only roluotantly oomo
to torms witn tno moro limitod opportunitios in a snrunkon
industry ("wnion oliminatod moro |obs tnan most"). nvostors
talk tno bravo gamo tnat tnoy will aooopt ooupon-olippor roturns
ovor long-torm nolds, but tnoy still roally want tno big, quiok
pops, wnion soom out o roaon now. For startors, tno lowor-
roturn onvironmont roduoos tno onanoo or outsizod managor
2012
promotos. Dovolopors oannot mako as muon, ovon i tnoy stay
in businoss. For brokors, tno buy-and-lip gamo is ovor, roduo-
ing transaotions and attondant oos, altnougn tnoy navo boon
doing bottor." Dospito tno angst, survoy rospondonts nopoully
oxpoot tnoir irms to rooord dooont proits in 2012: 87 poroont
orooast air or bottor rosults, and 42 poroont oxpoot to rogistor
good to oxoollont bottom linos by yoar ond (oxnibit 1-8). PETs,
multiamily dovolopors, and und managors snould navo at loast
a "modostly good" yoar; wnilo tnis is no surpriso, nomobuildors
and aronitoots gasp to nang on (oxnibit 1-9).
To koop proits up, oompanios go tnrougn a lot o loador-
snip onango and try to do moro witn loss, pusning pooplo as
nard as tnoy oan." CEOs and sonior loadors roquiro "dioront
pooplo skills." t isn't about doploying oapital at all oosts, but
moro about managing oporations, assots, and oxponsos. Top
oxooutivos nood to snow prudont managomont abilitios," tako
oaro o invostors, and motivato toams in a slow-growtn onvi-
ronmont wnoro you oan't mako as muon monoy or do as many
doals." Hiring is ooninod to oompanios tnat "navo oapital or
aoooss to oapital"primarily PETs and invostmont managors.
Tno und managors paro baok on doal makors and bulk up on
assot managors. Tnoy also nood oliont-aoing oxooutivos to
play doonso, do moa oulpas ovor logaoy portolios, and, most
important, raiso now monoy. n lino witn kooping loan opora-
tions, businossos snow moro intorost in lowor-paid young talont
witn potontial and |ottison moro oxporionood sonior workors wno
aro nignor on tno pay soalo.
EXHBT 1-8
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EXHBT 1-9
ReaI Estate Business Prospects for 2012
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2012

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Exoopt or multiamily, no markots or proporty sootors oor
suro-snot opportunitios or big gains in 2012. Ownors oan ool
rolativoly soouro in loading gatoway oitios, and buyors snould
oous on tno ow markots gonorating |obstypioally wnoro
toonnology and onorgy oompanios oonoontrato. Markot-timing
buyors at tno 2009 rook bottom oan pookot modost upsido,
solling into wnat's lot o tno oapital wavo. Commoroial dovolop-
ors and oonstruotion londors snould bost romain in nibornation
outsido o undortaking tno odd pro|oot in a 24-nour bastion. Tno
usual-suspoot bost-bot sootor porormorsortross malls, inill
noignbornood oontors, gatoway industrials, and businoss oontor
notolssnould do rolativoly woll. nvostors oan oontinuo to
oapturo attraotivo stakos by rooapitalizing soloot assots in nood
o roinanoing. But nobody snould arguo witn anyono sitting on
oasn until tno ooonomy snows roal signs o rosusoitation.
-
Caution StiII RuIes. "t's not tno timo to bo all in; invostors
snould maintain liquidity" and oous on domand tronds. Stop
ollowing tno lommings on oapital movos. nstoad, oonoontrato
on tno ow markots snowing niring and loasing gains; stoor oloar
o plaoos witn oompromisod longor-torm growtn prospoots; and
don't oount on typioal rooovory traoks matorializing tno way tnoy
navo ator past rooossions. " you navon't igurod it out by now,
tnis timo is dioront."
BIue-Chip Gateways. Tnoso rolativoly sao narbors all navo
issuos: a Wall Stroot slowdown oould nurt Now York City,
Wasnington oonronts possiblo govornmont outs, and San
Franoisoo is always volatilobut ovor timo, assots in 24-nour
markots dopondably outpororm booauso tnoy lio on important
global oommoroial routos and attraot monoy rom all ovor tno
world. Tno valuo o tnoir barriors to ontry also snould novor bo
undorostimatod. Prioos may bo outragoous in tno biggor oitios,
but do you navo oonidonoo invosting olsownoro?" For 2012,
noldors and sollors may do bottor tnan buyors.
Job Centers. roal ostato is "all about |obs," tnon noad to tno
ow oitios wnoro omploymont growtn aotually ooours. Bosidos
tno gatoways, tno ourront ront-runnors roly on onorgy, nign toon,
and noaltn oarorolatod industrios, as woll as univorsitios and
govornmont oioos. Austin booomos a ourront avorito booauso
it olaims all tnoso attributos. Biggor Toxas oitiosHouston and
Dallasalso sustain invostor intorost booauso o tnoir onorgy
baokbonos. Hign toon spurs Soattlo and San Joso. Donvor also
oors a doso o onorgy and toonnology. But invostors bowaro: tno
ourront nign lyors tond to boom/bust, and somo o tnoso markots
aro susooptiblo to ovorbuilding. Don't tako your oyo o tno ball.
VaIue-Add PIays. nstoad o trying to |ustiy "|aw-dropping"
prioos or ooro quality assots, look or olass B proportios in good
inill markots "tnat navon't boon snown any lovo" ovor tno past
ivo yoars. Apartmonts usually it tno bill, but oortain woll-looatod
oioos and notols oould proit rom ronovations and roposition-
ing in antioipation o ovontual markot rooovory. Tno availability
o low-oost dobt oan nolp und improvomonts and buttross
ovontual roturns.
Fixed-Rate Debt. Ownors snould look in long-torm ixod-rato
inanoing on assots wnilo tnoy oan. ntorost ratos oould oas-
ily traok up again during oxpootod nolding poriods witnout
osotting gains rom undamontals. Boliovo tnoso orying "t's
|ust a mattor o timo." ratos inoroaso, loating-rato dobt oould
dramatioally out into not oporating rovonuos, wnilo rolativoly low-
intorost, ixod-rato dobt would nolp oasn lows and boost uturo
invostmont roturns.
Recap TroubIed Equity. Tno numbor o borrowors nooding
roinanoing only grows as troublod loans rom tno markot lond-
ing poak roaon torms. Many dooont assots romain struoturally
impairod and nood oasn inusions to romain oompotitivo in bid-
ding or tonants, wno oommand priooy oonoossion paokagos.
Moro motivatod borrowors, working witn sonior londors, will
striko avorablo doals on mozzanino dobt and proorrod oquity
to stabilizo assots and salvago somotning. At low intorost ratos,
invostors oan aoniovo ospooially avorablo risk/roturn sproads.
Distressed Debt. Banks and spooial sorvioors will oontinuo
to dribblo out loan pools witn various omboddod goms. Tno
nard part is iguring out i tno good assots in oorings aro wortn
aoquiring givon all tno aooompanying drook. Somo buyors o
similar Posolution Trust Corporation (PTC) dobt mado out woll in
tno 1990s, but rodo a snarp markot upturn to rionos. Tnis timo it
may not bo so oasy.
Land HoIds. Casn buyors oan oton ontitlod singlo-amily lots
or oonts on tno dollar. "Tnoso aro roal stoals." But puronasors
may sit a long timo booro tno nomobuilding markot oomos baok.
Tno artnor out on tno motropolitan ringo, tno longor tno wait.
Apartment Boom. Existing apartmont stook in many markots

oannot moot domand or units rom surging numbors o gon-
Yors, nousing-bust rougoos, and immigrants. tno ooonomy
pioks up, rontor intorost oould intonsiy urtnor rom pooplo dou-
bling up or young adults living at nomo but looking or tnoir own
spaoo. Dovolopors navo littlo troublo oonvinoing oonstruotion
londors, givon tno domograpnio ovidonoo, and tnoy oan nogoti-
ato avorablo doals witn buildors and oontraotors, wno nood
tno work. Commoroial sootors oor vory ow opportunitios, liko
2012
oooasional build-to-suits, tno odd olass A oioo building or notol
in a 24-nour markot, and possibly snopping oontors in burgoon-
ing Hispanio aroas adaptod to attraot rotailors wno spooializo in
sorving Latin Amorioan populations.
Go Green. Tonants want onorgy-saving toonnologios simply
to roduoo oosts. "t's not about troo nugging; it's about bottom
linos," says a dovolopor. Tno modost oxtra upront pro|oot oosts
oan produoo long-torm oporating savings, wnion nolp improvo
building valuos and onsuro oompotitivonoss ovor timo.
-
MuItifamiIy Any Way You Like It. t almost doosn't mattor
wnat part o tno oountry is oonoornod, intorviowoos go totally
gaga ovor apartmonts: buy olass A, valuo-onnanoo olass B,
dovolop rom soraton, puronaso in inill aroas, aoquiro in gato-
way oitios, or nold in lowor-growtn markots. Evon buy olass C
and upgrado, spond a littlo moro, nold a littlo longordomand
will bo tnoro." Tno only oavoat: avoid sovoroly aootod nous-
ing markots wnoro a suroit o ompty singlo-amily nomos will
oompoto as rontals.
Looation and
rotailor quality gain importanoo in tno snopping oontor world,
ignting against o-oommoroo inoursions. Aptly namod ortross
malls, noar upsoalo suburban noignbornoods and stratogio
nignway intorsootions, oontinuo to oonoontrato tno top brand
onains and attraot moro snoppors away rom tnoir woakoning
oompotitionoontors situatod noar oldor or moro oommodity-
olass nousing distriots. Grooory storoanonorod oontors witn
loading supormarkot and drug storo onains still oommand
plonty o traio rom nooossity snoppors, and invostors lovo tno
stoady oasn lows.
CoastaI Port IndustriaI Space. Global trado will powor
oxport aotivity around tno nation's primary soaboard ports,
wnoro traditional big-box waronouso distribution assots robound
ator oxporionoing unoomortably nign vaoanoios. All oyos oous
on wnion East Coast oitios oan position tnomsolvos to oapturo
Paoiio oontainor-snip traio slatod to oomo tnrougn a widonod
Panama Canal in 2014. Somo winnors will turn into now indus-
trial nubs, but irst nood to drodgo narbor onannols to nandlo
doop-nullod vossols. Miami, Cnarloston, Savannan, and Norolk
look liko primo oontondors, and Now York/Now Jorsoy will not
bo lot out. Houston snould piok up businoss along tno Gul
Coast.
Business Center HoteIs. "t's tno point in tno oyolo wnoro
lodging makos sonso." But only tno ma|or 24-nour oitios attraot
oonsistontly strong oombinations o businoss and tourist travol-
ors to sustain oooupanoios and advanoo room ratos during tno
wook, as woll as into wookonds. Middlo-markot notols witnout
ood and bovorago sorvioo luro budgot-oonsoious travolors
witnout outsizod oporation ovornoads, onnanoing bottom-lino
rosults.
2012

Trophy and MedicaI Offices. Gatoway olass A oioo spaoo
always oommands attontion, but intorost lags olsownoro, ospo-
oially in tno suburbs. Expoot slim piokings wnon dipping into
sooond-tior oitios, and orgot about oioo parks. Niono-sootor,
modioal oioo spaoo gains avor: Tno tonants aro rooossion-
proo," and "tno noaltn oaro aot will nolp spur domand as moro
nospital proooduros movo into dootors' oioos." Ovor tno longor
torm, a bulging sonior oitizon population promisos to oxpand
noods or various outpationt aoilitios and olinios.
Housing Buys. Tno battorod nousing sootor oors tno bost
gonorational buying opportunitios or oooanront oondos or
droam suburban nomos. Prioos odgo up o nadirs in bottor
markots ator unprooodontod doolinos and mortgago ratos
romain nignly attraotivo, i puronasors oan mustor onougn
oquity and adoquato orodit sooros. Ovorsupply o oxisting
stook dolatos nomobuildor nopos, and 25 poroont o borrowors
romain undorwator. Housing or soniors and studont nousing
romain domograpnio plays, and manuaoturod-nomo sitos oould
do woll in tno down ooonomy: oporators oan oarn inoomo wait-
ing or uturo land dovolopmont opportunitios.
2012
no stook markot bounoos around produoing a dooado-

long gooso ogg, and bonds tnrow o tiny yiolds. By
doault, oapital turns to roal ostato: its oasn-lowing
roturns, loaso struoturos, and inlation-nodging onaraotoristios
oommand attontion. Wnon troasurios roturn noxt to notning, a
6 poroont ooupon on a piooo o roal ostato is not so bad," says
an intorviowoo. But in today's problomatio markot, always-ioklo
oapital also provos "nignly solootivo" and "oonoontratod." t's
intorostod in roal ostato, but only in a rolativoly narrow sogmont
o tno proporty markots, bidding up prioos on tno bost oom-
moroial assots in tno moro soouro woaltn islands and raoing into
tno attraotivo multiamily sootor. Tno rost o tno undorwator roal
ostato landsoapo mostly missos out. Wnon institutional invostors
talk up tno proporty markots today, tnoy roally moan a nandul
o big oitios, tno bost suburban ortross malls, and tnoir latost
apartmont puronasos. Tnoy navo no intorost in most assots in
sooond-tior oitios or outor suburban rings, many ownod by bor-
rowors wnoso mortgago balanoos outstrip valuos, wnion navo
allon into tno pits. And wny snould tnoy wnon tno ooonomy
stays in tno dumps and prospoots appoar so limitod or any
oooupanoy or ront growtn?
For 2012, tno purvoyors o oapital will strugglo witn wnotnor to
oool it in tno popular gatoways, tako a broatnor on apartmonts, or
tako a lyor on orroting out truo bargains among mostly oommod-

-
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"t's a roal ostato markot witn
too many dollars
or too ow opportunitios."
Suu|. |uuJ]:, RI| E:|I| A|I|]||: ||C, |ll C||| |u| RI| E:|I|, RI| CIp||I| A|I|]||:.
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EXHBT 2-1
Moody's/REAL CommerciaI Property Price Index

2012
ity proportios in o-tno-boaton-patn markots. Big ponsion plan
sponsors still must oxtrioato tnomsolvos romvarious ailod limitod
partnorsnips and tally up moro lossos romund invostmonts
gono bolly-up. For all tno PP about rostorod balanoo snoots,
monoy oontor banks dribblo out dispositions o distrossod assots,
and many rogional bankors romain baskot oasos, woignod down
by bad loans on proportios no ono wants almost at any prioo.
Poal ostato may look bottor tnan otnor assot olassos, but tnat
doos not moan tno proporty sootor nas muon to oor.
Too Much Equity. Pospondonts to tno -
survoys antioipato saturatod oquity oapital domand: 56 poroont
o rospondonts say tno markot in 2012 will bo modoratoly to
substantially ovorsuppliod, givon tno opportunitiossimilar to
rosults postod in 2011's roport (oxnibit 2-2). "t's mind-blowing
now ovoryono sooms to navo a roal ostato und." Foroign invos-
tors, taking advantago o attraotivo ourronoy oxonango ratos,
noad tno list o aotivo aoquirors, ollowod by privato oquity irms,
ponsion unds, privato invostors, and PETs. A tromondous
amount o oapital sits waiting to bo doployod."
Debt Shortage. Pospondonts also oontinuo to orooast a laok
o oritioally noodod dobt oapital as nundrods o billions o trou-
blod mortgagos roaon tnoir torms and roquiro roinanoing. Lod
by insuranoo oompanios, wnion oous on ooro proportios, all tno
ma|or dobt suppliors snould bo aotivo in tno londing markot in
2012 (oxnibit 2-3), but tnoy will bo unablo or unwilling to moot all
tno inanoing domand. Noarly 63 poroont o rospondonts pro|oot
tnat tno dobt markots will bo modoratoly to substantially undor-
suppliod during tno yoar, blaming tno spotty CMBS rooovory
and bankors' roluotanoo to lond wnon intorost ratos aro so low.
n aot, low ratos may navo tno unortunato ooot o dolaying
rosolution o somo o tno roinanoing probloms." Londors' also
will oontinuo tnoir proorrod stratogy o oxtonding many loans
EXHBT 2-3
Change in AvaiIabiIity of CapitaI for ReaI Estate
in 2012
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-
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-
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-
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EXHBT 2-2
ReaI Estate CapitaI Market BaIance Forecast for 2012
2012
-
witn modiioations ratnor tnan roinanoing or disposing o tnom;
tnoy wait or moro propitious opportunitios and avoid balanoo-
snoot issuos until spaoo markots improvo. Tno undamontals
aron't bailing tnom out yot" (oxnibit 2-4). "Wo'ro only at tno ond
o tno boginning o markot oloaring as dolovoraging oontinuos."
Spooial sorvioors "aron't goarod to nandlo largo volumos rom
all tno CMBS doals ooming duo, and tno prosumption is tno
loans will got oxtondod as long as borrowors mako pay downs
and pay oos."
No Emergency. Tnis gamosmansnip, abottod by norvous
rogulators, probably will avort a oarod "roinanoing orisis."
Good-orodit tonants witn woll-loasod roal ostato oan got
monoy"; londors |ust "put o as long as nooossary doaling witn
assots in bad snapo." Somo borrowors oould got orood into a
box: buying timo pusnos tnoir ovontual roinanoing into a poton-
tially nignor-oost, nignor-intorost-rato onvironmont. Strongor
inanoial institutions will bo moro proaotivo about taking nooos-
sary nairouts and undortaking dispositions in a stoppod-up but
moasurod salos proooss. And mako no mistako, borrowors
wno ovorpaid or proportios and ovorlovoragod soo tnoir oquity
basioally wipod out." Tnoy may manago to roooup a raotion o
tnoir original invostmontmaybo a managomont oontraot or a
onanoo at somo uturo upsido as a minority partnor.
Needed Scrutiny. A ma|ority o rospondonts orooast tnat
undorwriting standards will romain tno samo or booomo ovon
moro rigorousbotn on dobt and ospooially on oquity transao-
tions in 2012 (oxnibits 2-5 and 2-6). Tnoy antioipato ronowod
attontion paid to supply/domand issuos in markots as playors
prudontly tako loss or grantod in rooovory soonarios. Poal
ostato is a tougn assot olass. t's oasy to got monoy out quiokly
to plonty o guys wno will tako it, but muon nardor to got oon-
sistont roturns." Tno summor 2011 niooup in CMBS issuanoo
undorsoorod tno nood or vigilanoo ator "rotny undorwriting"
raisod oyobrows among bond buyors. Onoo again wo nad
gotton anoad o oursolvos, wnon you'd tnink rooont oxporionoo
would navo kopt tnat rom napponing."
FoIIow the Money. ndood, important lossons rom past
invosting snaus, inoluding oiroa 20052007, nignlignt now
buyors and londors snould rotroat anytimo oapital rusnos
into roal ostato markots. A good baromotor may bo oap ratos
plunging bolow 5 poroont. n tno 1980s, too many dollars uolod
ovordovolopmont and ovorpaying or primo assots |ust as a
lood o onoap orodit prooipitatod tno rooont nomorrnago. Easy
oapital availability oan ovorwnolm proporty markots and blinds
industry playors to roalitios o supply/domand tronds, as woll as
onanging tonant bonaviors. Evon i ono assumos tno ooonomy
is in an oarly-stago rooovory, tnoso markot indioators roquiro
groator sorutiny today wnon tno ooonomy takos suon a bumpy
and potontially unoortain patn. Fund invostors also snould know
by now "tnoy oannot roly on managor disoiplino" to koop tnom
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EXHBT 2-4
Maturing Loans: Preferred Strategy for Lenders

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EXHBT 2-5
Equity Underwriting Standards Forecast
for the United States
EXHBT 2-6
Debt Underwriting Standards Forecast
for the United States
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2012
out o troublo. Tno advisors mako monoy by oonstantly doploy-
ing dollars. tnoy don't invost or must roturn oommitmonts,
tnoy'ro out o businoss."
Simply put, wnon oapital looks liko it's out o oontrol, it's
doinitoly timo to start worrying.
-
Still in "no rusn to soll distrossod assots and tako lossos,"
banks doliboratoly "squaro away problom loans ono by ono."
t bogs tno quostion about tno strongtn o rooovorod balanoo
snoots" and wnotnor rogulators "oar lotting tno markot oloar too
quiokly." Tnis loisuroly wind-down proooss oould "tako at loast
tnroo moro yoars." n 2012, antioipato moro rooapitalizations
and salos, and distrossod dobt will romain diioult to roinanoo.
"t's tno samo gamo plan," says a bank oxooutivo. "Our aim is
to nit a lot o singlos and not do somotning stupid." n doaling
witn doaults and nandling oroolosuros, banks aro not in tno
businoss o nolding and owning." "Tnoy don't want to tako baok
notols, may bo ablo to got good prioing on apartmonts, and kiok
tno rost down tno road. Foroolosuros also tako timo, dolaying
doals ooming to markot."
Monoy oontor banks appoar to bo awasn in oasn. Tnoy
navo littlo roason to lond wnon tnoy oan mako proitablo sproads
o borrowing rom tno Fod or noxt to notning to puronaso
govornmont bonds." But londing by banks pioks up, ospooially
to oroditwortny institutional olionts and PETs"wnoro tnoy ool
oonidont about gotting a roturn"on longor-torm, rooourso
loans witn nignor rosorvos. Bankors also struoturo syndioa-
tions or roduoing risk, wnilo oonstruotion londing oonoontratos
on multiamily. "Spoo pro|oots nood not apply," and borrowors
must ork ovor "at loast 20 poroont oasn oquity" to qualiy. Somo
borrowors point to "sonizoid" bank approaonos wnoro woll-oap-
italizod opportunity unds oan sooro "amplo lovorago" on up to
75 poroont loan-to-valuo ratios rom mortgago oioors oagor to
piton businoss, wnilo tno workout group aoross tno nall rousos
to talk to tno samo oliont about an oxisting problom doal on tnoir
books." Woakor rogional and looal banks may navo loss wigglo
room on workouts and salos, nurting prospoots or quiokor
rosolution o probloms" in somo sooond- and tnird-tior markots.
--
Ator yoars pusnod to tno oommoroial mortgago markot poripn-
ory, lio insuranoo oompanios stand out as londing all-stars,
"snowing now disoiplino oan pay o in prosorving oapital"
and limiting downsidos. Baok at ull oapaoity witnout as many
rosidual probloms," tnoy navo "a ton o oasn" to dolo out to
bost-brood borrowors wno own olass-A proportios, and land
oxoollont opportunitios to "mako dooont loans" noar markot bot-
tom. Tnoy oan undorwrito at valuos woll bolow past poaks witn
roasonablo loan-to-valuos and good dobt-sorvioo oovorago,
wnilo solid NOs |not oporating inoomos] rom ooro proportios
givo ousnion." Unonaraotoristioally, tno lio oompanios also
EXHBT 2-7
SaIes of Large CommerciaI Properties
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EXHBT 2-8
Bank ReaI Estate Loan DeIinquency Rates

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2012
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"|ump witn botn oot into apartmonts," pioking up slaok rom tno
pullbaok o Fannio and Froddio. "Wo'll oonsidor oonstruotion
to pormanont loans" in moving up tno risk soalo, an insuranoo
oxooutivo says. Tno sproad against troasurios gots a littlo moro
|uioo." But no ono oxpoots insurors to oxpand londing boyond
tnoir oomort rango o about $40 billion to $50 billion annually.
Givon tno nundrods o billions o dollars in loans ooming to torm,
most borrowors must still oount on banks and oonduits.
Toams nandling CMBS doals watorod down loan torms to

got monoy out. Undorwriting standards woakonod, providing
gonorous loan-to-valuo ratios and allowing ovon intorost-only
struoturos"anytning to build tnoir volumos and oos." Wo'ro
talking 2006 and 2007, rignt? No. Tnis oonduit londing bonavior
ooourrod in 2011, |ust 24 montns ator tno CMBS markot nad
boon lot or doad, drowning in bad dobt. Fortunatoly, wary bond
buyors ro|ootod tno loan paokaging, and CMBS propononts
now brusn o tno "disruption" as a "not markot positivo" and a
"bump in tno road," "kooping tno industry nonost." Tnougn prob-
ably only a rosot, tno ovonts givo pauso, ospooially sinoo CMBS
londors "must got traotion"at about a $50 billion to $100 billion
olip in annual originationto nolp roinanoo starvod-or-orodit
oommodity roal ostato. Tnoy aro viowod as tno salvation or
tno middlo markot," partioularly sooondary oitios and suburban
proportios. Cloarly lossons navo not boon loarnod and bad
praotioos oan roturn quiokly," says an intorviowoo. Tno domand
sido (partioularly B-piooo bond buyors) must polioo tno systom
booauso notning nas napponod in rogulation or rating agonoy
ovorsignt to provont a roourronoo" o a moltdown somotimo in
tno uturo, says an intorviowoo. Tno broakdown last timo nap-
ponod wnon tno B-piooo buyors oould rosoouritizo and pull out
tnoir monoy. Tnat's not napponing yot."
ntorviowoos oxpoot a ma|or oonsolidation among tno
approximatoly 25 oonduit londors baok in tno markot. CMBS
Suu|:. |uuJ]: Eu|u|].u|, A|||I| Cuu||| u| ||| l|:u||:.
EXHBT 2-9
U.S. Life Insurance Company Mortgage DeIinquency
and In-ForecIosure Rates
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EXHBT 2-10
U.S. CMBS Issuance

EXHBT 2-11
CMBS Loan DeIinquency Rates

-

2012
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EXHBT 2-12
U.S. ReaI Estate CapitaI FIows, 1998-2011

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Equity
Dobt
2012
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EXHBT 2-13
U.S. ReaI Estate CapitaI Sources
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2012
is a low-margin businoss and tno oonduits witn nign oost o
oapital |invostmont banks, spooialist inanoo oompanios] oan't
mako tnoir bogoys on a oonsistont basis." "Only toams tnat oan
drivo volumos will bo proitablo." Smallor, undoroapitalizod irms,
moanwnilo, laok tno waronousing oapability and rosouroos to
survivo. Tno oonsonsus viow oxpoots CMBS londing to inoroaso
to ovor $50 billion annually in tno noxt ow yoars. wo got ovor
$100 billion, tnon it's timo to waton out." For 2012, tnoso lond-
ors oould navo troublo inding dooont produot and nood to bo
oaroul. Tnoro is no ponalty or not making a loan. No ono is
staing up; invostmont banks nold baok and ood owor moutns
ator ad|usting oxpootations. tno markot gots out o oontrol
again, it won't bo in 2012 or 2013."

Tno "misprioing o intorost ratos" providos signiioant sproads

or mozzanino and proorrod oquity invostors, wno mako doals
witn "motivatod" borrowors in nood o roinanoing oapital and
tnoir sonior londors. Undor tno oiroumstanoos, tnoy suooood in
pusning nard bargains or pro|ootod "oquity-liko roturns" at 15
poroont and up. Burnod by rooont oxporionoo, tnoso londors
oriont moro to proorrod oquity positions to partioipato in wnat
nappons to proportios and navo moro oontrol ovor oxiting."
Somo insist on salos options. "Wo oouldn't got out in 2006 and
2007, and got killod. Tno losson loarnod is tako moro oontrol
ovor your dostiny." Following tno ovorall invostmont orowd, tnoso
playors proor multiamily ovor otnor sootors and navo partioular
oonoorns about oioo: "t's nardor to oxit." For now, running
soarod sooms sonsiblo ator watoning positions ovaporato in tno
markot oollapso.
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Husbanding loads o dry powdor, rustratod opportunity unds
and privato oquity managors so ar oomo up ompty orroting
out oompolling, nign-ootano transaotions, and 2012 promisos
moro o tno samo. "t's mostly a squirrol and rabbit gamo, not
going ator big sooros." Coro buyors navo drivon down yiolds to
unappotizing lovols in tno bost markots, wnilo londors and bor-
rowors got anotnor roo pass rom rosolving tnoir probloms and
disgorging assots. "Tno availablo doals involvo roally bad stu."
Porormanoo oxpootations divo: salos toams strain orodibility
in promising 15 poroont annualizod roturns to oliont prospoots,
wno wondor about using unoomortablo amounts o lovorago
in low-growtn markots. Evorybody says tnoy oan do o-markot
transaotions, but not many aro napponing."
ronioally, a largo array o potontial targot proportios romains
out o roaon in last-gonoration olosod-ond opportunity unds,
tanglod in knots and suoring lossos. Limitod partnors rouso to
in|oot moro oapital to koop ovorlovoragod assots aloat, but dolay
taking writo-os. Gonoral partnors oontinuo to manago tno unds
witnout a onanoo or promotos, and proporty oonditions doto-
riorato witnout maintonanoo inusions. Complioatod doals and
oonliotod partios dolay workouts and rosolutions, dragging down
managors and bottlonooking transaotion aotivity. nvostmont
bankors may tako somo unds publio to raiso oapital and rosolvo
dobt issuos, "tno way tnoy did witn dovolopors in tno 1990s."
n tno moantimo, tno managor linoup morpns. Logaoy prob-
loms sink many invostmont toams, and now or rooonstitutod
irms try to piok up businoss but strugglo witnout traok rooords.
Establisnod assot managors witn gold-platod brands attraot tno
"roally big buoks" rom institutional and nign-not-wortn invostors,
wno oravo somo somblanoo o soourity. Tno big guys oan moro
boliovably soll tnoir aoooss to oapital and doals: tno oapital
nolps attraot doals, wnion nolps attraot moro oapital." Moro
invostmont banks may anklo tno businoss. Exooutivo suitos
don't soo tno point ator rooont lossos, tno poor outlook to sooro
largo porormanoo oos, and potontial now onorous rosorvo
roquiromonts.
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Ovor tno past 15 yoars, publio PETs navo stratogioally aoou-
mulatod noldings o promior roal ostato assots aoross all
proporty sootors, omploying top-drawor managomont toams

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EXHBT 2-14
CMBS Mortgage Maturities

2012
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and dolovoraging balanoo snoots. Tnoy dominato tno bost roal
ostato in tno bost markots," and look to wood out lossor por-
ormors in sooond-tior looations i oapital domand matorializos.
Wnipsawod rom timo to timo in volatilo stook markot prioing,
tnoy maintain strong dividonds and dominato aoquisition mar-
kots, using low-oost-o-oapital orodit linos. Privato buyors navo
troublo oompoting against tnom." "n tall ootton witn tnoir oasn
lows," PETs in gonoral navo raisod suioiont oquity and dobt
to skirt onoppy markots and navo rosorvos to witnstand any tur-
bulonoo. Apartmont sootor oompanios will load tno onargo into
multiamily dovolopmont. Stook markot invostors during 2011
notiood tnoir solid positioning and onoo-again advanood snaro
prioos roaoning toward porootion zonitns. Tno bost approaon
is to buy and nold tno bost oompanios tnrougn markot ups and
downs, oolloot tno dividonds, and buy moro on dips. Ovor timo,
tno modol works."
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Tno plan sponsor world goos topsy-turvy. Growing liabili-
tios (arguably inoroasingly unsustainablo) and rooont lossos
(partioularly in tno stook markot) oroo tnoso tomporamontally
oonsorvativo playors "to gun or nignor and riskior roturns."
Pionly priood, ooro proporty unds (alroady bulging witn unin-
vostod oapital) oannot dolivor outsizod porormanoo, so somo
ponsion toams pump moro dollars into opportunity invostmonts
and oonsidor B markots. "Tnoy nood somo big nits" to ix pay-
out probloms. "Undor tromondous prossuro," ponsion oioors
say tnoy liko roal ostato or tno inoomo, but tnoy snoot or moro,
and in tno ond tno roturns rom roal ostato won't dolivor," says
an intorviowoo. Otnor plan sponsors |ust play it sao and koop
invosting in ooro anyway booauso it snould dolivor tno mid- to
nign-singlo-digit roturns tnoy nood to moot aotuarial roquiro-
monts. But ooro und managors now navo troublo inding
roasonablo doals in tnoir avorod markots: oap rato oompros-
sion makos or unappoaling transaotions. Adding oomplioation
to oaroully oalibratod assot allooations, tno alling stook markot
rovivos tno donominator problom, possibly stalling out, at loast
tomporarily, plan-sponsor oommitmonts to tno proporty sootor.
Existing noldings suddonly inoroaso roal ostato snaros abovo
managor targots. Ponsion unds oporato on a six-montn tapo-
dolay basis, worrying about allooations vorsus worrying about
today. Many go into dolay modo," rustrating advisors trying to
raiso monoy.
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Nontradod PETs will bo "aotivo buyors," and dospito nign
ront-ond loads, snould oontinuo to attraot oapital rom individual
invostors looking or altornativos to a disappointing stook markot
and laoklustor bonds. Witn monoy markots oarning noxt to
notning, tnoy'ro roady to oomo into roal ostato or 56 poroont
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EXHBT 2-15
Prospects by Investment Category/Strategy

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EXHBT 2-16
Percentage of Your ReaI Estate GIobaI PortfoIio
in WorId Regions in 2012 and 2017

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2012
roturns." But woll-positionod looal oporators and invostors turn
moro oautious: tnoir on-tno-ground soundings sond signals
about tonuous tonant domand and loasing prospoots. "Wo'ro
taking a nard look about trying not to put in as muon o our own
oapital and laying o any oxposuro on partnorsnips witn ponsion
unds and otnor institutions." Savvy privato oioos o nign-not-
wortn invostors also turn moro tontativo; tnoy oan bo disoiplinod
about pulling baok sinoo, unliko ponsion unds, tnoy aro not
allooators, ovaluating oaon puronaso moro absolutoly."
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Booauso Europo is molting down in inanoial distross and
insorutablo Asian markots navo not mot oxpootations, tno Unitod
Statos still looks liko a good parking spot or osnoro oapital,
dospito anomio prospoots. Tnanks to tno avorablo ourronoy
oxonango rato, oroign playors oan maximizo puronasing powor
and on|oy urtnor upsido i and wnon tno dollar strongtnons.
Tno big Europoan ponsion unds soo moro risk in tnoir looal
markots. Tno U.S. |ust sooms saor." nvostmonts, as usual,
oonoontrato in tno amiliar gatoway oitios, ospooially along tno
ooasts. "Tnoso aro tno most aooossiblo markotstno onos
along global patnways tnat tnoy know and visit, and aro most
oomortablo about." Contral businoss distriots in Wasnington,
D.C., Now York City, and San Franoisoo romain tno avoritos;
osnoro buyors navo nolpod prossuro down oap ratos witn tnoir
aotivo bidding on doals. Soutnorn Caliornia rotains its signiioant
alluro, and Miami pioks up oonsidorablo attontion rom Latin
Amorioan invostors. Foroign banks, long ostablisnod in ooro
markots, lond almost oxolusivoly on tropny assots. Basod on
puronasos and londing aotivity, sizo o doals doos not soom
to mattor."
Tno ollowing is a rundown o intorviowoo viows on oroign
invostor appotitos:
Canadian institutions oannot ind strong yiolds in tnoir rola-
tivoly olosod markots and aotivoly look or opportunitios soutn o
tno bordor.
Gorman institutions stay noutral to sligntly positivo about tno
Unitod Statos. Tnoy road about all tno nousing probloms and
oxtrapolato to oommoroial markots. Tnoir intorost is not wnat it
usod to bo." Expoot "oontinuod oous on oioo and somo rotail."
Apartmonts and industrial spaoo do not it witn tnoir domostio
invostmont modols.
Piok any Asian sovoroign woaltn und: tnoy aro all out
tnoro witn nugo allooations. Koroa and Singaporo navo tons
o monoy." n addition to Cninoso oapital, "tnoy provido a lot o
iropowor, looking at tno biggost doals."
Tno Brazil boom and vonozuola's politioal instability propol
moro Latin Amorioan invostmont oapital toward tno Unitod
Statos. Bargain nuntors mako Miami oondominiums avorito
targots.
Australian and risn invostors"tno buy-nign-and-soll-low
orowd booro tno orasn"oontinuo to liok wounds and "stay in
ull rotroat."
Tno biggost surpriso is sraol: "Tnoy'ro tno now kid on tno
blook." Middlo East turmoil pusnos moro woaltny sraolis into
U.S. transaotions markots, ollowing tno longtimo load o Arab
govornmont unds and oil potontatos, wno romain aotivo but
vory disoroot playors.
Pussian oligarons "aron't ovidont, but you know tnoy aro
out tnoro."
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EXHBT 2-17
Foreign Net ReaI Estate Investment in the
United States

2012
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EXHBT 2-18
Foreign Net ReaI Estate Investments in the U.S. by Property Type
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EXHBT 2-19
U.S. Buyers and SeIIers: Net CapitaI FIows by Source and Property Sector
2012
ospito "tonuous" ooonomio outlooks, only ono o tno

51 U.S. oitios survoyod or - ailod to
improvo its invostmont sooro ovor last yoar's roport.
Moro tnan 60 poroont now rato as air or bottor prospoots,
oomparod witn only 40 poroont in 2011. Most markots navo
stoppod dotoriorating, but most navon't roally improvod," ono
intorviowoo says. A surgo o unding into tno ow avorod oitios
snowing bottor supply/domand undamontals oroatos oapital
markots prioing distortion." History "will ropoat itsol: invostmonts
will trioklo down to nignor-risk sooondary and tortiary markots as
oapital roaonos tno orazy point o driving down oap ratos in tno
bost plaoos." Employing a "puro timing play," tno triok will bo "to
ind tno bost assots in tnoso |smallor] oitios and got good our-
ront yiolds. You oan't |ust koop putting monoy down on 48tn and
Park Avonuo." But many intorviowoos warn about "dabbling too
muon" in sooondary markots. "Buyor bowaro" about tno "array
o possiblo ton oap doals" wnon "nign vaoanoios may not oomo
down and ront growtn will bo vory onallonging." Espooially in tno
ourront slow growtn onvironmont, opportunitios in tno sooond
and tnird tior "will bo tnin at bost."
UsuaI Suspects. Hignlignting invostor angst, Wasnington,
D.C., tno numbor-ono oity or tno tnird oonsooutivo yoar, su-
orod a slignt downtiok rom 7.01 to 6.93 on tno -
1 (abysmal) to 9 (oxoollont) ratings soalo. ntorviowoos wondor
i tno markot nas booomo too doar in lignt o all tno politioal talk
about odoral outbaoks. Not surprisingly, tno rost o tno rankings
also look vory amiliar, dominatod by tno always nignly ratod
24-nour ooastal gatoways, wnion booomo stoadily moro strato-
gio as intornational inanoial, oommoroial, and politioal oontors.
Just bonind Wasnington, San Franoisoo loaprogs Now York
City to numbor tnroo, buoyod by nign-toon niring; Boston nolds
on to tno itn position; and Soattlo, also a sotwaro and intornot
notbod, stays at numbor six. Eaon o tnoso oitios is oxporionoing
potontially unsustainablo oap rato oomprossion.
Jobs Centers. Signiioantly, onorgy rogion markots, on|oying
bottor-tnan-avorago |obs growtn, urtnor solidiy avorod posi-
tionsAustin (numbor two) witn an additional boost rom looal
nign-toon businossos and Houston (numbor oignt) load Toxas oil
paton oitios. Not to bo oountod out booauso o tnoir stato's isoal
morass, San Joso (numbor sovon) and tno two largost soutnorn
Caliornia markots, Los Angolos (numbor nino) and San Diogo
(numbor ton), round out tno survoy's top ton.
Donvor and Dallas ollow: tno rolativoly robust onorgy and
toonnology sootors nolp tnoso Sunbolt markots, too. Miami
notably rooords tno biggost ratings gain among ma|or markots,
improving rom a modiooro 4.49 in 2011 to a modostly good
5.81 or 2012; tnis gatoway to Latin Amorioa is broaking out o
tno nousing unk tnat oontinuos to plaguo otnor Florida markots.
Pospondonts also signal a warmup or Pnoonix, wnion is starting
to ovoroomo signiioant nousing and ovordovolopmont woos.
Cnioago, a loss-vibrant 24-nour markot and Midwost gatoway,
oontinuos to outrank tno rogion's otnor struggling oitios, wnilo
still rogionally dominant but oongonitally ovorbuilt Atlanta losos
lustor in tno Soutnoast. Smallor markots Paloign-Durnam,
Cnarlotto, and Nasnvillo sooro bottor ratings.
CooI Towns." Employors wanting to luro tno bost gonoration-
Y brainpowor aro paying oaroul attontion to wnoro tnis bulging
group o young adults wants to sottlo. "Tnat's wnoro oompanios
want to bo." "Hign-quality-o-lio plaoos do bottor": oono boom-
ors want plonty o stimulation rom ontortainmont and nigntlio
attraotions oonvoniont to work and rosidonoos. Many wouldn't

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Capital will soaron or yiolds boyond tno ovorbougnt gatoways and tno ow
|obs-growtn markots, taking on
oonsidorably moro risk."
2012
EXHBT 3-1
Investment Prospects for
CommerciaI/MuItifamiIy
Properties by Market
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gonorally good air gonorally poor
EXHBT 3-2
DeveIopment Prospects
for CommerciaI/MuItifamiIy
Properties by Market
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EXHBT 3-3
For-SaIe HomebuiIding
Prospects
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2012
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bo oaugnt doad living at tno ond o a suburban oul-do-sao,
dopondont on oars to got around. Bosidos tno usual brignt-
lignts, big-oity 24-nour markots, oool plaoos liko Austin, Soattlo,
and Portland attraot moro tnan tnoir snaro" o ovoraonioving
young pooplo. Donvor's rovivod downtown, ull o rostaurants
and sports attraotions, its tno bill, too. Moro apartmonts,
oatoring to tnis domograpnio, go up in and around inill noign-
bornoods in tnoso oitios, broadoning tnoir urban onvolopos. n
a oontinuing trond, aging baby boomors also gravitato to oity
liostylos, approoiating groator oonvonionoo and proximity to
storos, dootors, and oultural institutions, not to montion tnoir
now-adult onildron.
PerenniaI Choices. Sinoo omorging rom tno doptns o tno
oarly-1990s markot oataolysm, ivo o tno top six markots on tno
2012 loador boardWasnington, San Franoisoo, Now York City,
Boston, and Soattlonot ooinoidontally also ontronon tnom-
solvos as invostor avoritos ovor tno past noarly 20-yoar markot
oyolo (oxnibit 3-1). Tnoir ostablisnod 24-nour onaraotoristios,
divorsiiod ooonomios, and prominont looations witn goograpnio
barriors along global patnways oombino to oor rolativo stabil-
ity: valuos tond to approoiato moro in up markots and robound
moro quiokly ator downturns. t is no ooinoidonoo tnat tnoso top
markots also tond to sooro tno nignost in walkability among tno
nation's oitios: inoroasingly oonvonionoo oounts as moro pooplo
sny away rom oar-dopondont plaoos (oxnibit 3-4). By attraot-
ing businossos, talont, and uppor-inoomo rosidonts in outsizod
proportions, tnoy oxist as voritablo woaltn-island magnots or
invostors, inoluding osnoro oapital.
Enduring Strength. Soutnorn Caliornia's suburban agglom-
orationprominontly L.A. and San Diogoalso stands tno tost
o timo, bonoiting rom tno stato's onduring and still substantial
ooonomio olout, as woll as an appoaling olimato or wnion many
pooplo aro willing to pay a promium. Cnioago's noyday may
bo ovorits ratings navo slippod moro tnan any otnor 24-nour
markot ovor tno past dooadobut tno oity rotains ormidablo
global trado oonnootions. Until rooont onorgy industry gains, not
growtn oitios Dallas and Houston oonsistontly rogistorod lagging
invostmont ratings. As long as oil and gas prioos romain nign,
tnoso markots will oontinuo to mako survoy inroads, but invos-
tors snould romain wary o nistorio volatility rosulting rom a laok
o goograpnio and zoning barriors to rostrain dovolopmont.
DeveIopment and HomebuiIding. For 2012, oxpootod ramp-
ups in apartmont pro|oots spur improvomont in dovolopmont
prospoots. Sixtoon markots sooro a rating o 5.0 (air) or nignor,
oomparod witn only ono last yoar (oxnibit 3-2). Again, 24-nour
oitios or markots witn onorgy/toon-rolatod niring will aro oonsid-
orably bottor tnan tno rost o tno paok. ronioally, oxpoot moro
oommoroial dovolopmont in supply-oonstrainod markots tnan in
non-supply-oonstrainod markots." Sontimont romains laoklustor
or nomobuildors, altnougn nints o rooovory appoar around tno
prominont gatoways and |obs-rion Toxas oitios, wnion sustainod
only modost valuo lossos in tno nousing bust (oxnibit 3-3).
PotentiaI Distress. Fisoal snortalls battor most looal govorn-
monts, oroing sorvioo outbaoks and rotrononmont in noodod
inrastruoturo pro|oots. Looal autnoritios no longor oan dopond
on tno odoral govornmont to nolp ill unding gaps. Govornors
and mayors battlo unions ovor inoroasingly untonablo publio
ponsion liabilitios and snod govornmont workors wnilo strain-
ing migntily and oton unsuooossully to nold tno lino on taxos

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|u|:. Su|: I| u| I :I| u| 0 (I| Jp|J||) |u !00 (WI|||: pI|IJ|:). |A = |u| I1I||I||.

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EXHBT 3-4
City WaIkabiIity Scores for Top 20 Cities
2012
and various oo nikos. nvostors snould
stool tnomsolvos and olosoly monitor
any nogativo impaots on tonants and
looation prooronoos. Potnolod stroots
and olosod bridgos oould aoot mobil-
ity; inoroasing orimo ratos and loss stroot
oloaning would oompromiso quality o
lio; and owor toaonors doaling witn
largor olass sizos oould doal anotnor
blow to struggling publio sonools. Tno
24-nour gatoways will bo nard prossod to
osoapo dotrimontal markot impaots, and
most suburbs, onoo a rougo, will not bo
immuno oitnor.

Washington, D.C. (1). Snould tnis
survoy's numbor-ono onoioo or invost-
mont, dovolopmont, and nomobuilding
oarry an astorisk? Tno rook-solid D.C.
markot "may oool down i (and it's a
big i) tno govornmont ovor snrinks."
Dovolopmont aotivity rovs up, inoluding
tno ambitious 2.5 million-squaro-oot,
mixod-uso CityContorDC pro|oot at tno
old oonvontion oontor sito, raising yollow
lags: torrid oap rato oomprossion, prio-
ing in a lot o growtn wnion may not koop
paoo," oroos buyors to swallow awully
nard. But no otnor markot pororms bottor
during a rooossion or noar rooossion,
and tno aroa's |obs baso nas divorsiiod
woll boyond |ust govornmont and lob-
bying into toonnology, oommunioations,
and biomodioal industrios. No mattor
wnat nappons" in tno oongrossional
nammor-and-tong budgot givo-and-tako,
"oompanios want to bo tnoro." Oioo
vaoanoios lovol o in tno nign singlo dig-
its, and a snortago o largo blooks oroos
ronts up in olass A spaoo. Moro national
rotail tonants want prosonoo" in tno mar-
kot, wnion oaturos an aluont population
and attraots a stoady low o top-tior gon-Y
talont, ooming to nolp onango tno world.
Apartmonts and inill nousing do bottor
in Wasnington, too"; nomo prioos rooovor
anoad o otnor oitios. Closo-in suburbs
porormvory woll, ospooially in multiam-
ily and rotail spaoo. Nortnorn virginia
apartmont dovolopmont noar Motro stops
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EXHBT 3-5
Metro Area Investment Prospects by PopuIation
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2012
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warrants bost bot status." Fartnor out in
tno burbs, markots woakon ovor typioal
sprawl and oongostion issuos.
Austin (2). Altnougn ono stop romovod
romglobal patnways, Austin notably rog-
istors signiioant intorost on invostor radar
soroons. Tnis modoratoly sizod oity oa-
turos all tno otnor ingrodionts noodod or
a looal ooonomy to doal suooossully witn
tno nation's oarly-21st-oontury roalitios.
Stato govornmont providos an ooonomio
buor, wnilo tno giant Univorsity o Toxas
oampus attraots botn onorgotio young
brainpowor and top proossorial talont. Tno
rion aoadomio onvironmont nolps inoubato
and support burgooning toon oompanios,
as woll as otnor nignor-paying businossos
ooring outting-odgo oaroor patns. n
addition, tno big univorsity modioal oontor
providos noaltn oaro undorpinnings, and
Toxas's onorgy industry nolps buttross tno
ontiro rogion. Unliko Dallas and Houston,
tno oity also dovolops a 24-nour ooro,
oaturing podostrian-riondly, in-town
apartmont noignbornoods witn plonty o
rostaurants and nigntlio attraotions. Now, i
only tno oity oould plop Dallas/Fort Wortn
ntornational Airport on its outskirts, tno
markot would turn into a ma|or playor. Tno
sizo issuo limits invostor opportunitios,
but tno divorsity o oduoational, modioal,
and govornmont |obs, baokod by nign
toon, insulatos tno markot romboom/bust
soonarios.
San Francisco (3). "t's baok"noar tno
topand ratos as tno survoy's bost buy
or oioo and apartmonts. Bullisn markot
timors bot on room or big uturo oioo
ront inoroasos, pusning puronaso prio-
ing way anoad o undamontals." Empty
buildings oountorintuitivoly look most
attraotivo to somo buyors: Tnoy soo so
muon upsido in ronts." n aot, tno Soutn o
Markot distriot "oatonos iro"rominisoont
o pro-toon-bubblo-burst days in 2000.
Computing and intornot irms oxpand to
satisy young toon-savvy niros wno want
to work and livo in tno midst o 24-nour
oity amonitios and aotion. Unliko tonta-
tivo tonants in most otnor markots, Bay
Aroa toon oompanios roadily loaso largo
blooks o spaoo or uturo oxpansion. But
ovorall markot vaoanoios still rogistor in
tno mid- to low toons, and domand in tnis
Paoiio gatoway oan all suddonly. Cap
ratos on "bullotproo" apartmonts oannot
drop muon lowor, and nouso prioos snow
tno biggost nationwido gains ator somo
prooipitous doolinos. Hotol oooupan-
oios rooovor smartly; sovoral nign-proilo
lodging proportios list or salo to tako
advantago o tno upswing. nstitutional
invostor ardor novor wanos or tno oxpon-
sivo waronouso markot sorving ono o tno
oountry's largost ports.
New York City (4). vastly dioront rom
tno rost o tno univorso," Mannattan soos
its "ovor-tno skios" rosurgonoo aoo noad-
winds rom ooonomizing at loss-proitablo
invostmont banks and otnor inanoial
institutionstno baokbono o tno oity's
ooonomy. Undor any oiroumstanoos, a
transaotion pauso sooms in ordor. Tno
only way to |ustiy oioo prioos assumos
ronts skyrookoting to unlikoly noignts,"
and "brokor nappy talk doosn't nido most
omployors' roluotanoo to add bodios."
vaoanoios aotually drop to among tno
lowost lovols in tno oountry and ronts
inoroaso anoad o otnor markots, nolpod
by a laok o now supply. Tno oity snows
"romarkablo rosilionoo" buttrossod by
ono o tno world's bost-oduoatod, not to
montion nignost-paid, workoroos. Givon
onduring stability, oioo invostors oan
bo oontont witn 4 to 5 poroont oap ratos."
Tno nation's bost notol markot lour-
isnos in a soa o osnoro tourist traio:
musoums and Broadway snows lood
witn aooonts rom tno our oornors o tno
oartn. visitors tako advantago o avorablo
ourronoy oxonango ratos, wnion tompor
loty lodging, rostaurant, and ontortain-
mont outlays. Hignost-in-tno-oountry
apartmont oooupanoios oould vault
rontal ratos to rooord lovols as oo-op/
oondominium valuos odgo up again ator
gonorally nolding tnoir own in tno down-
turn. nvostors loso porspootivo i tnoy
spond too muon timo noro: it's nardly a
proxy or otnor parts o tno oountry." Now
York City's suburbsinoluding northern
New Jersey (13), Westchester, New
(19)lag Mannattan, but gain rom tnoir
proximity to tno oity.
Boston (5). Dospito rolativoly nign oioo
vaoanoy ratos, Boston rotains plonty o
adnoronts wno valuo an oxooptionally
woll-oduoatod workoroo" drawn rom
numorous looal oollogos and univorsi-
tios, inoluding Harvard and MT. Somo
anxious invostors look or and oannot
ind tno noxt knowlodgo-basod indus-
try markot drivor to pusn domand, but
tnoy nood to koop tno aitn. Ono always
oomos along wnotnor doonso, toonnol-
ogy or bio-mod." Subduod outlooks
2012
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2012
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EXHBT 3-6
Leading U.S./Canadian Cities

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2012
or mutual und irms and otnor assot
managors spark oonoorn in tno Finanoial
Distriot, wnoroas tno Baok Bay outpor-
orms: Liborty Mutual oroots a now tax
broaksubsidizod building to oxpand
oporations. Most otnor oioo pro|oots stay
on drawing boards witnout groator loas-
ing volooity, and dovolopmont provos
diioult anyway booauso o barriors to
ontry." Any now building aotivity will oon-
oontrato around tno soaport and Fan Pior
along tno narbor. Tno apartmont markot
pororms oxooptionally woll, and oondo
prioos navo romainod surprisingly buoy-
ant. Now multiamily rosidonoos boing
built noar Fonway Park botwoon tno Baok
Bay and Longwood Modioal Contor along
Boylston Stroot oator to dootors and
modioal porsonnol. Tno oorridor stoadily
ovolvos rom somi-suburban to urban
donsity. Housing prioos inoroaso again
ator suoring only modost doolinos in
tno downturn. Following tno load o otnor
oitios looking to ramp up tnoir ooonomios,
looal loadors pusn a $2 billion oxpan-
sion o tno oonvontion oontor, alroady tno
largost in tno Nortnoast upon oponing
|ust sovon yoars ago, but still too small to
attraot big-loaguo mootings.
SeattIe (6). Starting to iro on all oylin-
dors," Soattlo bounoos baok tnanks to
its divorsiiod now ago oorporato baso,
inoluding Amazon, Miorosot, and Googlo,
as woll as otnor ormidablo omployors liko
Booing, Costoo, and Nordstrom. Evon
Faoobook and Salos Foroo movo into
town, tapping a wollspring o looal brain-
powor drawn to tno attraotivo Nortnwost
gatoway or nign-paying toon |obs.
Landlords gain oonidonoo: somo |ob
growtn rosumos, oioo absorption ramps
up, and institutional invostor appotitos or
multiamily and oioo spaoo appoar insa-
tiablo." Now oioo buildings, dolivorod
during tno dismal 2008 and 2009 poriod,
loaso up; in 2012, tno downtown vaoanoy
rato oould drop into tno low toons, and
ronts probably will inoroaso. "t's a oom-
ploto turnaround. nstitutions may pull tno
triggor on now oioo dovolopmont soon.
Tno window is opon." Apartmont vaoan-
oios sink bolow 5 poroont in and around
downtown, and work bogins on now nign-
riso and mid-riso pro|oots. Dovolopors
oan aoniovo nignor ronts in tnoso 24-
nour, oloso-in distriots. Tno always-tignt
industrial markottno survoy's numbor-
ono buy or waronousosromains
"stoady-oddy" in low-yiold, low-volatility
susponsion. Somo big-box rotail oontors
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EXHBT 3-7
U.S. Apartment Buy/HoId/SeII Recommendations by Metro Area

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2012
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took somo nits, and ompty storo sitos
navo boon nard to ill. Suburbs aro loss
woll, too, ospooially artnor away romtno
Soattlo ooro: "Tnoy'ro o invostor and ton-
ant radar soroons." Bollovuo nolds up, but
its volooity o rooovory lags downtown. By
2016, a $2 billion tunnol undor tno oity
"tno Big Dig Wost," ono o tno nation's
most ambitious inrastruoturo pro|oots
will roplaoo a rusting narborsido viaduot.
Tno pro|oot promisos to transormtno
downtown watorront witn parks and nous-
ing, as woll as now vistas o Pugot Sound
and surrounding mountains romoxisting
oioo and apartmont buildings. Tnis oity
gots bottor and bottor.
San Jose (7). Just soutn o tno San
Franoisoo gatoway, San Joso doos not
skip a boat dospito oompotition rom tno
City by tno Bay's downtown toon surgo.
Tno olito o mioroonips and digital worlds
oontinuos to oongrogato in and around
Silioon valloy's rosoaron and dovolop-
mont bastion. "Tnat's ono plaoo in tno
oountry wnoro oioo parks still work."
Houston (8). Tno U.S. onorgy oapital
proits rom lasting nign oil prioos and
oxpands o a Toxas-sizod sorvioo-sootor
omploymont ongino. t is ono plaoo
wnoro work-starvod Amorioans navo
a bottor-tnan-dooont onanoo to ind a
|ob, and a modost oost o living, inolud-
ing inoxponsivo nousing, strotonos wnat
wagos oan buy. Dovolopors proparo to
rostart ator an unaooustomod niatus in
an ovor-oxpanding motropolis. Ator tno
orasn, looal oonstruotion londors dousod
dovolopmont. As a rosult, oonstrainod
building aotivity and tno inlux o popu-
lation oombino to tignton rosidontial
markots. For 2012, singlo-amily nousing
"aotually snows signs o lio" tnanks to low
intorost ratos, and apartmont dovolopors
will "vio to got pro|oots out o tno ground."
Exxon Mobil snakos up tno oioo markot,
announoing plans to oonsolidato opora-
tions in a now suburban oampus. Tnoy
will loavo a void downtown, but in Toxas
wo oan grow out o any probloms."
Panama Canal oxpansion snould nolp
inoroaso port traio and buoy waronouso
domand. Houston's Gul Coast looation
providos aoooss to population oontors to
tno oast, nortn, and wost, but tno narbor
will roquiro drodging and now dook aoili-
tios to aooommodato doop-nullod snips.
Los AngeIes (9). Dospito asnionablo,
"in-nign-goar" Caliornia basningdys-
unotional stato govornmont, brokon tax
struoturo, ovorblown businoss rogula-
tion, and outragoous oost o livingoan
you bot against a nugo sol-sustaining
ooonomy tnat nas nign-paying indus-
trios liko ontortainmont, aorospaoo,
and inanoial sorvioos, as woll as tno
nation's largost port? Do you ignoro tno
attraotivo quality o lio and omboddod
aluonoo tnat supports sorvioo industrios
and tno rotail sootor? Snould invostors
sny away rom soutnorn Caliornia and
Los Angolos? Most -
rospondonts irmly ro|oot tno oritios. t will
oomo baok," ono says, and, notably, tno
motropolitan aroa ranks as tno nation's
numbor-two apartmont and industrial
invostmont markot in tnis yoar's survoy.
Polativoly sky-nign nousing oosts (ovon
ator ma|or doolinos) koop apartmonts ull
and ronts up: rogional multiamily invost-
monts rato poronnial bost-bot status.
L.A.Long Boaon industrial spaoos,
wnion nandlo ono-tnird o U.S. oontainor
traio, "navo rooovorod niooly"; oap
ratos roturn to 20062007 lovols. nland
Empiro waronousos snould oontinuo to
robound, tooas long as now oonstruo-
tion romains tampod down. Evon i Asian
snippors divort moro goods tnrougn
tno Panama Canaloating into Wost
Coast markot snarosport volumos
snould oontinuo to inoroaso booauso
o ovorall antioipatod growtn in import/
oxport aotivity. Businoss oontor notols
also do woll, and nousing prioos start to
olimb baok ator prooipitous doolinos: tno
olosor to tno ooast, tno bottor or valuo
uptioks. Tno bad nows is oonoontratod in
tno oioo sootor, wnoro markots romain
oxooodingly sot. vaoanoios rango rom
tno mid- to nign toons in a tonant's markot
oaturing rion oonoossion paokagos.
Companios snow no signs o stopping up
niring onougn to improvo oooupanoios
signiioantly during 2012, altnougn laok
o now oonstruotion will nolp absorption
tronds. Dovastatod by tno mortgago
industry broakdown, Orange County (14)
rogroups, buttrossod by its position |ust
soutn o tno L.A.Long Boaon gatoway.
San Diego (10). Tno inoroasingly
suburbia-oriontod oioo markot goos o
many invostors' radar soroons. Mid-toons
vaoanoy ratos aoross most submarkots
and sot ronts avor tonants, wno aotivoly
ongago in trading up to bottor spaoo at
onoapor loaso torms. Tno oity's nard-to-
got-to, o-global-patnway status dotors

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2012
a ma|or oorporato prosonoo, and limitod
mass transit options moan businossos
olustor to avoid traio oongostion noar
primo bodroom oommunitios, mostly
nortn o downtown. Apartmont invostors
always do woll, notol outlooks oontinuo
to improvo, and nousing prioos rovivo
booro tnoso in most national markots.
San Diogo's ormidablo aoo in tno nolo
romains noar-poroot yoar-round woatnor,
wnion nolps attraot talont pools to looal
biotoon oompanios, as woll as a stoady
stroam o upsoalo rotiroos. Tno largo U.S.
Navy baso doosn't nurt oitnor, undorgird-
ing tno looal ooonomy.
Denver (11). Downtown stoadily romakos
itsol as an ontioing, nignly dosirablo
21st-oontury oity oontor. Tno aoolaimod
LoDo (Lowor Downtown) ontortainmont
distriot is boing built out, surroundod
by sustainablo oioo dovolopmont and
boutiquo apartmont pro|oots: 4,000 units
bogin to oomo o tno drawing boards,
promising "signiioant onangos anoad."
First, now rostaurants and a sports
stadium attraotod nigntlio; now dovolop-
ors oator to oono boomor rosidonts witn
sooial amonitios liko landsoapod roo
dooks, gyms, and oommunity rooms.
"Wo'ro gradually boooming a 24-nour
oity," an intorviowoo says. Union Station
rodovolops into a ull-blown lignt-rail,
bus, and train transportation oomplox,
sorving rising numbors o suburban
oommutors wno now navo altornativos to
driving on oongostod nignways. Transit-
oriontod dovolopmont pops up along now
suburban station stops. Donvor ools
good. Wo navo tno draw o good-paying
oloan-toon, onorgy industry |obs witn a
roasonablo oost o living and improv-
ing transportation." Altnougn tno oioo
markot movos sidoways, nousing sido-
stoppod tno boom/bust dobaolo. Bottor
days doinitoly soom to bo anoad.
DaIIas (12). Having mostly dodgod a
bullot," Dallas bonoits rom tno "Toxas is
good or businoss/low taxos" storylino.
Companios oontinuo to movo data
prooossing, salos, and administrativo
baok-oioo oporations to tno Motroplox
to tako advantago o low-oost labor, tno
groat airport |D/FW], and oontral U.S.
looation." Pooont disoovorios o nugo
natural gas iolds also buttross prospoots.
But invostors always nositato booauso o

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EXHBT 3-8
U.S. IndustriaI/Distribution Buy/HoId/SeII Recommendations
by Metro Area

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2012
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tno wido-opon dovolopmont landsoapo:
now pro|oots oonstantly trump oxist-
ing buildings, and ronts baroly movo.
Housing prioos novor orasnod booauso
tnoy novor boomod. nstitutions navo
sniod away rom tno suburbia-dominant
oioo markots or dooados, and down-
town vaoanoios soomingly navo not
droppod undor 20 poroont in yoars.
"Can you roally mako any monoy?" an
intorviowoo asks. Wizonod dovolopors
oortainly doi tnoy build oarly in tno
oyolo and soll out quiokly. Tno bottor |obs
soono draws rolooating workors rom
tno Midwost and Wost Coast, illing now
apartmonts and supporting rotail strips.
Waronousos romain in a stato o oonstant
ovorsupply, but tno oity romains ono o
tno oountry's most important distribution
orossroads. As long as onorgy prioos
nold up, Dallas maintains its odgo.
RaIeigh/Durham (15). Tno Posoaron
Trianglo usos an oduoation/modioal insti-
tution ormula and "good quality o lio" to
solidiy its solid ranking. Top univorsitios
and rolatod nospitals draw talont and
oultivato start-up oompanios in toon and
biotoon. Liko Austin, Paloign's stato oapi-
tal and govornmont prosonoo provido an
additional odgo.
San Antonio (16). A rising tido lits all
boats, so San Antonio roooivos a boost
rom Toxas's good notioos. Not muon o
an institutional markot, tno oity on|oys
stoady growtn supportod by sorvioo
industrios and onorgy.
Miami (17). Emorging romtno nousing
dobaolo woll anoad o tno rost o Florida,
Miami bogins to rooapturo its odgy,
nign-onorgy intornational vibo nolpod
by a onoap dollar, an attraotivo looation,
and pro sports soono. Woaltny Soutn
Amorioans roturn in drovos, illing Soutn
Boaon notols, buying in malls, and park-
ing monoy in bargain-priood, nign-ond,
watorront oondominiums. Prosidont
Cnavoz is soutn Florida's numbor-ono roal
ostato agont," ono intorviowoo obsorvos.
vonozuolan oapital pours into sao-narbor
invostmonts, and "Brazil's strong our-
ronoy onoouragos buying." Euro traio
ratonots up, too: Brits, tno Fronon, and
Gormans lovo tno wintor gotaway rom
dark, oold nomoland onvirons, and tno
ouro oxonango rato is almost too good
to pass up. Tno multiamily markot nas

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EXHBT 3-9
U.S. Office Buy/HoId/SeII Recommendations by Metro Area

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2012
oaugnt iro, too: oondos turnod to rontals
loaso briskly, and a mini-dovolopmont
boom" in apartmont towors is woll
undorway. Wo will bo ovorbuilt in apart-
monts by 2013, but dovolopors on|oy a
groat sproad sinoo oxisting buildings aro
priood at sub-5 oap ratos. Pooplo wno
got in oarly will do okay, but tno window
is olosing." Tno industrial sootor is "tno
nottost part o tno markotplaoo." Miami
|oins tno list o East and Gul Coast ports
angling to attraot Panamax snip traio.
Now tunnol and rail pro|oots oroato links
to tno airport and routos out o town,
but tno oity's oxtromo soutnorly looation
inoroasos snipping distanoos to nortnorn
population oontors. Tno oioo markot
lags badly: now pro|oots undorwritton by
osnoro oapital worson a 20 poroont
plus vaoanoy rato. Publio sootor |ob
snodding osots any rooont loasing gains
rom privato oompanios.
PortIand (18). Portland ratos as
tno nation's top smallor 24-nour oity.
Dovolopors navo gnasnod tnoir tootn
or yoars ovor its growtn boundary
rostriotions, but rosidonts troasuro oozy
noignbornoods and tno oaso o riding a
biko to work. Witnout a ma|or intornational
airport nub, tno oity stands in Soattlo's
long snadow and will oontinuo in a slow
growtn modo.
CharIotte (20). Tno oity doponds too
muon on its banking sootor." Will oom-
panios movo out to a gatoway inanoial
oontor or |ust rotronon? But tomporato
olimos and aordability mako tno rogion
attraotivo or rolooating businossos and
rotiroos.
-
Chicago (21). Still a prominont 24-nour
gatoway, Cnioago nas allon into a
porsistont unkan outgrowtn o tno
Midwost's gonoral ooonomio doolino.
No longor a must plaoo to navo assots;
invostors loso intorost; tno wnolo markot
ools slow," ono intorviowoo says. "Don't
oxpoot muon upsido." Suburban oioo
spaoo suors rom "nugo ovorsupply";
nign vaoanoios and low ronts "won't movo
muon," so invostors oan orgot about
approoiation potontial. Buyors ovorpay or
tropny downtown oioo spaoo: wnon now
olass A spaoo inovitably gots built, oxist-
ing buildings loso out in tonant musioal
onairs. An ovornang o downtown oon-
dominium oonstruotion nurts salos prioos
and slows growtn in apartmont ronts.
Dovolopors managod to ovorantioipato
ovidont movo-baok-in tronds, od by
vibrant urban attraotionsMionigan
Avonuo storos, sports ovonts, oxpansivo
parks, and world-olass ontortainmont
vonuos. Wo also navo top univorsitios
and O'Haro." Tno big airport buttrossos a
loading distribution oontorwaronousos,
wnion look liko a bargain oomparod to
L.A.Long Boaon."
Phoenix (23). Somo intorviowoos tout
tno oity's rising-rom-tno-asnos potontial.
Continuing population growtn oould
mako or a oomobaok story," and tno
torturod nousing markot inally stabilizos
ator valuos droppod moro tnan any
otnor largo markot (56 poroont) oxoopt
Las vogas (59 poroont). Oioo vaoan-
oios start to dip into tno low (but still
unoomortably nign) 20 poroont rango,
nolpod by a dovolopmont snutdown, and
|ob growtn nolps promising absorption
rosumo. Doom-and-gloomors point to tno
rogion's dopondonoo on oonstruotion-
rolatod omploymont, baok-oioo work,
and rotiroo-basod growtn. "Don't rusn
baok": tno oity "laoks big oompanios
and brainpowor |obs," wnilo tno wido-
opon dosort onvirons provido no barriors
to ontry, and inovitablo ovorbuilding
subduos invostmont roturns. Bottom-
basomont prioing arguably providos
aoquisition opportunitios, altnougn oau-
tious buyors wondor wnotnor tno nation's
ooonomio drag will tompor any typioal
not-growtn oyolioal boom. For tno uturo,
tno prospoot o dwindling wator supplios
oould rostriot dovolopmont and ourtail tno
gol-basod rosort industry.
PhiIadephia (24). Noitnor nign risk
nor nign roturn," Pniladolpnia latlinos
in "stoady as sno goos" oruiso oontrol.
"Ponts navon't inoroasod in 20 yoars."
Dovolopors ind littlo opportunity amid
sloopy-stato growtn, and invostors novor
mustor muon ontnusiasm, altnougn
apartmonts and soloot suburban rotail
botn grooory-anonorod oontors and
mallsoan pororm vory woll, ospooially
around primo Main Lino noignbor-
noods and otnor upsoalo oommunitios.
Tno Contor City strugglos to broak out
dospito 24-nour attraotionsworld-
olass musoums and arts institutions, ino
rostaurants, and a mass transit nub witn
diroot oonnootions to Now York City and
Wasnington. Unortunatoly, tnoso two
2012
-
gatoways oontinuo to sap attontion and
onorgy: most Amtrak Aoola ridors |ust
pass tnrougn ator tno train stop at tno
30tn Stroot station. For tno longor torm,
Pniladolpnia oors a lowor-oost looation
to nouso satollito oporations o Now York
Citybasod businossos.
AtIanta (36). A olassio buy-low, soll-
nign markot, Atlanta onoo again may
bo ripo or invostmont. Tnoro may bo
no bottor timo tnan rignt now" booauso
roal ostato markots navo boon in tno
dumps. "Wo'ro a dovolopmont town
witn no dovolopmont." Absont nousing
oonstruotion to ood a nign growtnbasod
oonsumor ooonomy, tno markot stalls.
t oould tako ivo yoars to got baok to
a dooont plaoo." Tonants roadily tako
advantago o an oxooodingly sot oioo
soono, dolatod by a spurt o pro-2008
pro|oots oontorod in uptown Buoknoad.
Tno now dovolopmonts attraot ooou-
panoy witn swootonod tonant-oonoossion
doals, robbing rom oxisting buildings
wnoso oasn-low outlooks tank. "Tnoro's
not muon not absorption." Condos in
Midtown and Buoknoad nign risos bogin
to soll again, but at 40 poroont o original
asking prioos. Widosproad mom-and-
pop distross" nurts rotail spaoo along
tno novor-onding roadway strips; notols
"improvo to not-partioularly-strong lovols";
and multiamily ront pro|ootions noad
o tno onarts, but aron't roalistio." Tno
largo waronouso markot koops its ingors
orossod tnat Savannan or Cnarloston oan
snag a largo snaro o Panamax snipping
traio. Atlanta's stratogio airport, wnion
|ust addod an improssivo intornational
torminal, and tno oity's status as an intor-
stato nignway nub provido an oxooptional
distribution platorm to support oitnor
port. For tno uturo, tno oity will oontinuo
building up its urbanizing spino botwoon
downtown and Buoknoad, attraoting
moro gon-Yors and ompty nostors look-
ing or nippor, moro oonvoniont in-town
liostylos. Onoo vaoant apartmonts ill up,
dovolopors will build moro mixod-uso
rosidontial and rotail spaoo on Poaontroo
Poad noar upsoalo rosidontial aroas. A
oritioal mass nas boon ostablisnod tnat
won't bo rovorsod." Smart monoy also
aooumulatos sitos wost o Goorgia Toon,
antioipating a uturo dovolopmont zono
or oxtonding tno ovolving urban ooro.
An upooming salos tax roorondum or
oxpanding mass transit oould dotormino

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EXHBT 3-10
U.S. RetaiI Buy/HoId/SeII Recommendations by Metro Area

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2012
tno urban growtn traok or tno noxt gon-
oration. "t's a potontial gamo onangor or
promoting transit-oriontod dovolopmont
and ovorooming oongostion." Will antitax
sontimont dorail tno oity's bid to und
nooossary inrastruoturo? Stay tunod.

--
Frustratod notol dovolopors lino up to
start pro|oots in HonoIuIu (22) and otnor
parts o Hawaii, but only a ow mako
sonso." Sti vaoation travol tabs rom
tno U.S. mainland damp notol businoss,
and Japanoso tourists navon't boon in a
sponding mood oitnor. . . . BaItimore (25)
oan work as a onoapor baok oioo option
or Wasnington, and its industrial markot
romains an important distribution point or
tno Mid-Atlantio statos. . . . MinneapoIis
(26) and NashviIIe (27) play sooond
banana to Cnioago and Atlanta; rospoo-
tivoly: tnoy laok gatoway intornational
airports, and only so many oan sorvo
any rogion. Tno Twin Citios suor rom
nign oioo vaoanoios but will outpororm
otnor Midwost markots. . . . Tno InIand
Empire (28) oll nard wnon nousing
oollapsod; waronousos rooovor, but
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EXHBT 3-11
U.S. HoteI Buy/HoId/SeII Recommendations by Metro Area

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2012
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singlo-amily nomo prioos will tako muon
longor to robound and probably nood a
noavy doso o inlation. . . . OrIando (29),
Tampa (33), and JacksonviIIe (40) strug-
glo to dooouplo rom Florida's nousing
woos. Jaoksonvillo's port looks liko a long
snot in tno oompotition or Panama Canal
traio. . . . SaIt Lake City (30) oors lim-
itod opportunitios but an attraotivo quality
o lio. . . . nvostors tout Pittsburgh (31),
tno biggost movor in tno survoy, or its
ndustrial Bolt ronaissanoo, rolying on
univorsitios, nospitals, and govornmont.
Woll-loasod buildings at low ronts soll
or nugo disoounts to roplaoomont oost.
. . . Virginia Beach/NorfoIk (32) nas a
good onanoo to oxpand markot snaro
in tno nunt or potontial businoss rom
uturo Panama Canal traio. . . . From a
mortgago londor's porspootivo, prop-
orly undorwritton proportios in gonorally
loss-avorod Midwost markotsinoluding
IndianapoIis (34), Kansas City (35), St.
Louis (39), and Cincinnati (48)"will do
okay." nstitutional invostors loavo tnoso
oitios mostly to looal ownors. Housing
"is so onoap, pooplo don't nood apart-
monts." . . . OkIahoma City (37) quiotly
bonoits rom onorgy sootor porormanoo.
. . . New OrIeans (38) snows a notablo
boost in tno survoy, omorging rom tno
dark Katrina days. . . . Caliornia's govorn-
mont gridlook and isoal austority nurt
Sacramento (46). . . . Las Vegas (49)
sits on oroolosuro orisis ground zoro: tno
oity's ortunos obb urtnor as gambling
and tourist traio nits tno skids at rooontly
oxpandod notol oomploxos. n tno Era o
Loss, pooplo |ust navo loss to blow at tno
roulotto wnool. . . . CIeveIand (50) and
Detroit (51) oannot osoapo tno vagarios
o industrial doolino.
2012
or 2012, invostmont and dovolopmont prospoots oon-

tinuo to advanoo aoross all ma|or proporty sootors,
lod by apartmonts, wnion tnis yoar rogistor tno nignost
ratings or any oatogory in - nistory (oxnibit
4-1). Unortunatoly, tnis gonoral improvomont in sontimont doos
not portond oasy timos. nvostors snould antioipato tnat slow,
onoppy domand will gradually absorb spaoo, wnilo landlords
strugglo in ovory oatogory oxoopt multiamily." Dovolopors may
liok tnoir onops ovor apartmont opportunitiosinally tnoy oan
broak ground on somotningbut anomio domand drivors in
otnor sootors turn o oonstruotion londors. Potail, oioo, and
notols sooro "siokly" poor to modostly poor dovolopmont ratings
in tno survoy.
--
Beyond MuItifamiIy
Bosidos apartmonts, intorviowoos proor downtown oioo build-
ings in 24-nour oitios, waronouso proportios produoing oasn
low in prominont port and airport gatoways; ull-sorvioo notols
in tno ma|or markots; limitod-sorvioo notols witnout ood and
bovorago (Courtyard by Marriott, Hilton Gardon nn oonoopts);
and noignbornood snopping oontors sorving stablo inill sub-
urban oommunitios. Sontimont diminisnos or powor oontors
(booauso o oonoorns about big-box tonants) and malls: ownors
will not soll tno bost ortross malls (i you don't navo ono, you'ro
out o luok), and most otnor rogional oontors aoo a snaky uturo.
Suburban oioos sooro tno lowost invostmont marks; oommod-
ity buildings in oampus sottings isolatod rom urban amonitios
roooivo a big tnumbs down.

-
-
"Got usod to tno now norm: ronts stay about wnoro tnoy aro
not gotting worso, but
not gotting muon bottor."
EXHBT 4-1
Prospects for Major CommerciaI Property Types
in 2012
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2012
Tenants' Market
"Tonants in all proporty typos oporato loan and moan," ono
intorviowoo says. Corporato proits dorivo rom using owor
pooplo moro produotivoly in oioo and roduoing spaoo noods in
tno supply onain, aooting industrial and rotail." Woll-oapitalizod
assots, moanwnilo, soouro distinot advantagos against propor-
tios in roinanoing limbo. Pooky undorpinnings work against
ownors": tonants "witn plonty o onoioos" oan trado up in quality,
avoring rooapitalizod landlords wno appoar bottor positionod
to dolivor on rion oonoossion paokagos" witnout snaus and
unoortainty. "Tonants will avoid anytning witn a wni o troublo."
Tnis tonants' markot dynamio oould inally oroo moro londors
and spooial sorvioors to rosolvo problom loans and rovaluo
assots to stom dotoriorating loasing prospoots and stabilizo
building rovonuos. Undor tno oiroumstanoos, prodioting largo
ront inoroasos would bo oolnardy, ovon in top markots."
StabiIizing Cap Rates
n markod oontrast witn last yoar's survoy, wnion oorrootly
prodiotod a trond toward oomprossing oap ratos, rospondonts
orooast lattoning oap ratos aoross all proporty sootors during
2012 (oxnibit 4-3). Tnoy ovon signal slignt uptioks or rogional
malls, ull-sorvioo notols, oontral businoss distriot oioo spaoo,
and nign-inoomo apartmonts. Tnoso outlooks undorsooro
intorviowoo oonoorns about ovoroagor oapital bidding up prio-
ing on nignly sougnt-ator tropny assots witnout onougn aotual
pop ooming in oooupanoios and ront growtn. Wnilo low apart-
mont oap ratos appoar moro sustainablo givon strong loasing
domand and rovonuo gains, otnor sootors oould rovorso oourso
witnout notiooablo inoroasos in not oporating inoomos. At tnis
point, puronasors will nood a burst o now oasn low to koop up."
Green: No Longer a DeveIopment FriII"
Sustainablo oioo dosign is gaining traotion, pusnod by now
munioipal laws and tonant prooronoos or moro onorgy-oioiont
buildings. "t's almost a ait aooompli or dovolopors o olass
A spaoo." Ma|or oitios tako tno load, onaoting laws to nolp
oontrol inoroasos in powor domand and rolatod oarbon omis-
sions. At tno samo timo "most ma|or oommoroial tonants" and
many govornmont oioos mako sustainability a "onooklist itom"
or onoosing spaoo: tnoy want to bring down oporating oosts.
Enorgy will oontinuo gotting moro oxponsivo; now buildings will
bo around or 50 or 60 yoars. t |ust makos good businoss sonso
to dovolop groon."
Somo oompanios ind a rooruiting advantago in attraoting
brainiao oono boomors wnon tnoy oan snowoaso tnoir oioos
in noaltnior buildings witn now-ago systoms tnat oan oton
nign LEED ratings. At tno vory loast, a building bottor navo
EXHBT 4-2
Prospects for CommerciaI/MuItifamiIy Subsectors
in 2012
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2012
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a sustainability story and stratogy. t may bo onougn tnat tno
proporty rooyolos, monitors and oontrols onorgy sottings, and
usos onorgy-saving lignt bulbs." Ownors and buyors o oldor
buildings snould oonsidor rotroitting to stay oompotitivo. Timing
works bost wnon tonants roll ovor loasos. Ownors oan inoor-
porato oosts into oonoossion paokagos and aotor ronovations
into inanoing agroomonts wnon buildings onango nands. Otnor
ownors will oontinuo to gamo tno LEED rating systomstioking
biko raoks in basomonts in markots wnoro ovorybody drivos
to work. Prospootivo tonants snould pay loss attontion to tno
ratings and oxamino olosoly tno bottom-lino impaots to tnoir
oporations." Many ownors liko tno oxponso savings, too, but
olaim tno |ury is still out ovor wnotnor sustainability stratogios
load to nignor ronts." n tno ourront markot, groon initiativos may
bo wortnwnilo to nolp nold vaoillating tonants.
Groon toonnologios also will bo a ooming attraotion or
industrial ownors and somo snopping oontors. Solar panols
it porootly on largo, lat roos, providing potontial or onorgy
savings tnat oan bo passod on to tonants. "Pignt now it's not
ooonomioally viablo." Otnor now roo systoms oan absorb noat
in summor to lowor oooling oosts and nolp insulato buildings
in wintor to roduoo noating bills. Somo o tnoso roo toonnolo-
gios also oan oapturo rainwator or uso in building systoms.
Wator rooyoling booomos moro ossontial (i not mandatod) in
drougnt-onallongod aroas, ospooially out wost. Cistorns mako a
oomobaok, too.
EXHBT 4-3
Prospects for CapitaIization Rates
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-
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-
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-

-
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-
EXHBT 4-4
Prospects for Niche and MuItiuse Property Types
in 2012
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2012
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Strengths
"Tno stars all align" to propol tno apartmont sootorstrong
domograpnios-basod tonant domand, yoars o undordovolop-
mont, doolining vaoanoios, rising ronts, and plonty o availablo
inanoing, not only rom tno troublod govornmont-sponsorod
ontorprisos, but also banks and ovon insurors. "Evorybody's
on tno bandwagon." Tno nousing bust and ooonomio pos-
simism usnor moro would-bo nomobuyors and oroolosod
ownors into ronting. Smallor, oioiont apartmont units olosor to
work look liko bottor valuos tnan big nousos in romoto subdivi-
sions. Convonionoo tronds and rising auto-rolatod oosts oriont
liostylos to 24-nour inill looations, ospooially toward apart-
monts noar mass transit stops, wnilo toon-rolatod advanoos
in produotivity aoot multiamily loss tnan any otnor proporty
typo." Ator "an astonisning rooovory," prioos "alroady roloot"
tno noady robound. "t's no soorot multiamily is tno bost plaoo
to bo or invostors." n addition, a signiioant ront-growtn ousnion
rom snort-torm loaso struoturos oan oapturo urtnor oxpootod
domand rom inoroasing numbors o postoollogo ago oono
boomors, as woll as tnoir downsizing baby boomor paronts.
Forvor rom ooro invostors only builds, sparkod by nistorioal
porormanoo: stoady apartmont oasn lows navo providod
nignor inoomo-oriontod roturns witn loss volatility tnan any otnor
proporty typo, and buyor domand always providos a roady oxit
stratogy.
Weaknesses
A "littlo too ovornoatod," apartmont markots turn "brutally oom-
potitivo," ovon in sooondary looations wnoro buyors noad up
tno risk ourvo to soouro assots. Stoppod-up dovolopmont oould
impingo on antioipatod ront growtn, raising oonoorns wnon
you'ro puronasing at sub5 poroont oap ratos. Supply will oomo
baok quiokor tnan wo tnink." Fundamontals may navo improvod
to tno point wnoro room is limitod to pusn ronts to moot prio-
ing oxpootations." Tnougn nign unomploymont may tompor
nomobuying in avor o ronting, it also oroos doubling up and
movo-baok-in tronds among pooplo wno would otnorwiso loaso
units on tnoir own. Not all rontors want apartmonts: multiam-
ily ownors oan oxpoot plonty o oompotition rom unoooupiod
singlo-amily nomos," ospooially in nard-nit nousing markots.
Multigonorational amilios and nontraditional nousonolds olustor
in largor singlo-amily rontals, pooling rosouroos. Typioally,
about 25 poroont o singlo-amily nomos aro rontod. Tnat oould
inoroaso abovo 30 poroont."
Best Bets
Apartmont playors on|oy an array o options. Existing ownors
soom bost positionod: tnoy oan oontinuo to roap solid inoomo
lows and nold assots long torm witn rolativoly littlo downsido
risk, or tnoy oan oull portolios o woakor proportios by soll-
ing into tno buying wavo. Pationt monoy may swallow nard on
prioing in nign-barrior-to-ontry gatoway markots, "but tnat's
wnoro you want to bo. Tno triok is gotting in, and onoo tnoro,
you stay." nvostors looking or bottor doals snould do woll witn
soloot, valuo-addod puronasos or mismanagod or lowor-grado
proportios wnoro now oporators oan boost rovonuos and ronts
witn ix-up stratogiosand maybo tako advantago o a bot-
tor |obs pioturo in tno uturo. Tnoro oan bo plonty o upsido i
EXHBT 4-5
U.S. Apartment Investment Prospect Trends
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--
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--
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U.S. High-Income Apartments
U.S. Moderate-Income Apartments

-
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2012
- -
tno omploymont outlook improvos." n tno worst oaso, ownors
soouro dooont oooupanoios and oasn lows witnout immodiato
ront spikos.
Avoid
Stoor oloar o oxtromo nousing-bust markots wnoro too many
ompty nomos and oondo-apartmonts oompoto noad-on witn
multiamily rontals. Also, bo oaroul witn now gardon apartmonts
in suburbs wnoro a suroit o singlo-amily rontals oould dampon
ovorall domand.
DeveIopment
Building aotivity will noat up in many markots ator an oxtondod
rooossion-induood niatus; torrid domand snould absorb any
now supply ovor tno noxt two to tnroo yoars. Sitos aro roady,
zoning oan nappon quiokly, and oonstruotion inanoing won't bo
a problom." PETs navo linos o orodit at tnoir disposal, and ovon
oonsorvativo londors pull tno triggor on oan't-miss buildings.
"Banks won't go orazy. Tnoy still want ull rooourso." Historioally,
multiamily pro|oots gonorato rolativoly narrow proit margins, but
low intorost ratos and plunging oap ratos nolp provido attraotivo
dovolopmont sproads in inill looations. Anytning noar mass
transit will work." Fodoral nousing programs or low-inoomo
pro|oots navo boon "dooimatod" in govornmont outbaoks.
"Evorybody will build olass A, wnon it's moro aordablo nousing
wo roally nood."
OutIook
Dollars will oontinuo to low into multiamily nousing, oolipsing
otnor proporty typos, and aggrossivo dovolopors will ovorbuild
ovontually|ust not in 2012 or 2013, wnon now supply |ust
bogins to tompor rontor domand. nvostors must bo satisiod
witn "squoozod-down" ooupon-olippor roturns, ospooially in
24-nour markots. Cap ratos oould doolino urtnor in gatoway oit-
ios to lovols ovontually oomparablo to otnor intornational oitadols
liko London and Paris. Wny snouldn't tnoy? Apartmonts aro tno
saost roal ostato invostmont bot, promising to sustain dooont
roturns ovon i tno ooonomy ails to roignito. Tnat's wortn moro
tnan ovor in unoortain timos.
EXHBT 4-6
U.S. MuItifamiIy CompIetions and Vacancy Rates

-
EXHBT 4-7
U.S. Apartment Property TotaI Returns
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2012
-
Strengths
Dospito a rooovory tnat is moro protraotod tnan normal, insti-
tutional invostors look in on waronouso oasn lows, bidding up
always-popular nign-ooilingod distribution aoilitios in tno pri-
mary intornational airport/port nubs (tnoso gatoway oitios again)
tnrougn wnion most import aotivity unnols. Posulting prioo
spikos and solid inoroasos in oooupanoy in tnoso primo markots
givo oomort to ownors, wno roooup papor valuo lossos rom tno
downturn. At tno samo timo, intornational trado rosumos ator
"a disastrous pauso," and rotail salos snow somo oomorting, i
tontativo, gains. Finally, national vaoanoy ratos drop bolow 10
poroontstill nistorioally nign, but ooring anotnor promising
sign. Nobody snould oxpoot muon ront growtn: ovon in good
timos, industrial ronts do not movo muon, but sollors always
oommand a bovy o buyors.
Weaknesses
Cyolioal ooonomio malaiso and snooks rom ongoing advanoos
in sooular produotivity oombino to namstring growtn in domand
or waronouso spaoo. National vaoanoios navo rooodod at
painully slow ratos rom rooord nigns. mprovod global trado
lows oannot mako up or |ust-in-timo ooonomizing tronds. Now
snipping-oontainor systoms turn truoks and trains into waro-
nousos" or diroot snipmont to point-o-salo looations, and somo
big-box rotailors oootivoly transorm into waronouso storos.
E-oommoroo makos urtnor inroads, oliminating links in inoroas-
ingly aronaio distribution onains. Tno Amazon modol is tno
now way." Landlords, ospooially ownors o smallor, traditional
waronouso aoilitios, "ind littlo to no prioing powor." Waronouso
adnoronts oontond tnat outbaoks in tno rotailor invontory pipo-
lino will bo tomporarytnat ovontually tnoy will oxpand again,
instoad o roduoing tnoir arrays o stylos and sizos in storos.
"As oonsumption oomos baok, rotailors will bring baok onoioo."
Maybo so, but doolinos in invontory/salos ratios undorway or
dooados aro appoaring to aooolorato. Cap ratos oannot go any
lowor: "Prioing is way abovo roplaoomont oost."
EXHBT 4-8
IndustriaI/Distribution Investment Prospect Trends
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U.S. Warehouse IndustriaI
U.S. R&D IndustriaI
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EXHBT 4-9
U.S. IndustriaI CompIetions and AvaiIabiIity Rates
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2012
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Best Bets
Follow global trado routos and undorstand tno logistios noods
o snippors as moro rotail goods soll ovor tno intornot. Usors
rotnink supply onains and oporato rom multiplo rogional dis-
tribution oontors to lowor uol oosts," but tno looations romain
tno usual nandul o nub markots witn tno bost aoooss to ports,
intornational airports, intorstato systoms, and rail linos (rogaining
somo markot snaro rom truoks). Tno global trado markots along
tno ooasts irm tnoir positions as "tno bost plaoos to invost."
Ennanoomont plays oonoontrato on oonvorting 18- and 24-oot
spaoo into 36-oot oloar buildings in tno bost markots. Coilings
go nignor and nignor. Ownors oan oxpand oapaoity and
rovonuo potontial on tno samo land ootprints." Somo intorvio-
woos tout good rogional markots witn lowor growtn prospoots
and nignor oap ratos. Contrally looatod oitios liko Columbus,
ndianapolis, Louisvillo, and Mompnis provo attraotivo or
o-oommoroo ulillmont stratogios. Kansas City and Harrisburg
provido oxoollont rail aoooss, and Pnoonix is woll-positionod
noar tno Wost Coast as a lowor-oost altornativo to Caliornia
"and ovon Toxas."
Avoid
Old, inoroasingly obsolosoont spaoo "noods a now purposo."
Low-ooiling waronousos in o looations booomo inoroasingly
suporluous during tno slow rooovory and will bo woodod out
as tonants gravitato to now aoilitios witn bottor distribution
oapabilitios. Tno |ust-in-timo gamo makos long-torm storago
loss important.
DeveIopment
Asido rom spooial-purposo distribution aoilitios or o-oom-
moroo purvoyors and tno odd now waronouso in ma|or nubs,
building aotivity snould romain subduod. All attontion turns to
East Coast ports, wnion |ookoy or now Panama Canal traio
and tno potontial or gamo-onanging oxpansion. Winnors snould
soo a ma|or ramp-up in distribution oontor dovolopmont aotivity
and inrastruoturo oonstruotion ovor tno noxt ivo to ton yoars.
Among tno not oontondors: oitnor Savannan or Cnarloston oan
link to Atlanta's airport and intorstato nignway nub sorving a
growing oar manuaoturing rogion, Miami bonoits rom prox-
imity to Latin Amorioan markots, wnilo nortnorn Now Jorsoy,
Baltimoro, and Norolk navo diroot aoooss to ma|or Mid-Atlantio
and Now England population oontors. Houston along tno Gul
Coast also makos a strong oaso to sorvo all rogions. Dooponing
snallow ports and building now rails and nignways to movo
goods tnrougn populatod distriots will bo ma|or onallongos |ust
as govornmont budgot oonstraints orimp unding inrastruoturo.
t all oomos down to wnoro snippors oan aoooss tno most
oustomors," as woll as raw politioal olout: politioians must dolivor
odoral baoon to pay or narbor pro|oots.
OutIook
Prioos probably navo toppod out ator a ioroo run-up, and
onronio slow growtn impodos onanoos or a strong, noar-torm
robound. Oooupanoios and oporating rovonuos will tako longor
tnan usual to riso. Tno sootor dosporatoly noods ooonomio
improvomont to spur moro manuaoturing, oonstruotion pro|oots,
and oonsumor spondingall o wnion drivo goods movomont.
Tno Panama Canal widoning "snouldn't oroato a soa onango
along tno Wost Coast." Ovor timo, L.A.Long Boaon, San
Franoisoo, and Soattlo ports may loso somo markot snaro, not
volumos." Any inoroaso in U.S.-basod manuaoturing would
nolp somo markots, "but oxports don't uso as muon waronouso
spaoo as imports." Conoorn will grow about tno dilapidatod
stato o aging intorstatos, tunnols, and bridgos, as woll as
worsoning oongostion around ma|or gatoway oitiospotontially
disrupting logistios sonodulos and inoroasing oosts. Tno sootor
nas booomo all about distribution ratnor tnan storago."
EXHBT 4-10
U.S. IndustriaI Property TotaI Returns
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2012
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Strengths
Oooupanoios rooovor to moro normalizod lovols noar ton-yoar
avoragos or most lodging sogmonts. Domand is doinitoly
baok." noroasod oorporato travol"tno roturn o tno wookday
businoss warrior nas nad tno most impaot"oombinod witn a
woak dollar drawing osnoro tourists, nolps boost rovonuos in
ma|or gatoway markots. Now York City, Boston, San Franoisoo,
Cnioago, and Miami all do woll. Ovorall, loisuro travol nolds airly
stoady, but tourists stay prioo-oonsoious. Midsoalo sogmonts
witnout ood and bovorago snow tno bost bottom-lino rosults,
mooting tno noods o travolors' no-rills mindsot. Poasonably
lovoragod proportios robound o good oasn lows: ownors
oan invost in ovorduo upgrados to gain groator advantago ovor
nignly lovoragod oompotition. Somo looal govornmonts in tourist
aroas oor tax broaks and inoontivos to ownors and dovolopors
to upgrado and build now proportios, noping to |ump-start moro
oonvontion businoss, oroato |obs, and oxpand tno tax baso
anytning to roinoroo otnorwiso lagging ooonomios.
Weaknesses
Poturning domand ails to translato into prioing powor: Poom
ratos aro a big industry issuo." ndustry yiolds suor rom groator
rolianoo on disoounting programs and tnird-party, intornot dis-
tribution onannolsExpodia, Prioolino, oto. Tnoso now rolatod
oommission struoturos gnaw at bottom linos. Tno old oall oontor
booking modol nas booomo a dinosaur sinoo pooplo booomo
oomortablo booking onlino." Moro ponny-pinoning oorporations
also pusn to nogotiato avorablo bulk puronaso agroomonts
on room nignts witn businoss oontor notols. Food and bovor-
ago proits, moanwnilo, navo boon slasnod. Companios moot
again, but don't spond as muon on anoillarios," and tnoy navo
no oompulsion to ooddlo omployoos or provido ontortainmont
budgots: "Tnat's not ooming baok anytimo soon." Wodding and
party businoss also romains oonstrainodmost olks loso tnoir
appotito or anoy basnoswnilo spa and notol storos also tako
a nit. Givon oxtromoly nign ixod oosts to maintain tnoso opora-
tions, "any doolinos oan orusn bottom linos." Wookond businoss
romains oxtromoly ooblo"you oan roll a bowling ball down tno
nalls"ospooially in sooondary and suburban markots wnoro
dovolopors ongagod in pro-orasn ovorbuilding. A disoonnoot
in prioing oxpootations koops transaotions at a trioklo dospito
signiioant distross among ownors wno ovorborrowod at or noar
markot nigns. Banks and spooial sorvioors koop tno oxtond-
and-protond gamo going: tnoy do not navo tno oxportiso to
oporato lodging proportios and nold out as long as possiblo
to avoid writodowns. Struggling borrowors on loating-rato
mortgagos got a ropriovo rom tno Fodoral Posorvo; tnoy romain
oxtromoly vulnorablo i intorost ratos ovor advanoo.
Best Bets
Conoontrato on ma|or lags in tno amiliar 24-nour oitios.
nvostors snould ollow guost traio and onnanood poror-
manoo "to tno bottor soaboard markots, aoross all prioo points."
Poinanoing opportunitios aboundospooially mozzanino
dobt and bank oquity. Banks will lot go o tnoso managomont-
intonsivo assots as moro workouts ooour: "Tnoy oortainly don't
want tnom in PEO |roal ostato ownod] portolios." n tno ourront
markot, proits aro gonoratod by rooms, so oous on midsoalo
EXHBT 4-11
HoteI Investment Prospect Trends
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U.S. HoteIs: Limited Service
U.S. HoteIs: FuII Service
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2012
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brands witnout ood and bovorago ovornoads. Oporators always
aro koy to driving rosults. Tnoy must bo notol spooialists, not
roal ostato guys."
Avoid
Ovorlovoragod rosortssaddlod witn wnopping upkoop and
staing budgotslook liko blaok nolos, ospooially proportios
doponding on rosidontial salos or vaoation timo-snaro oaturos.
"A boatload o unsold invontory oxists witnout a markot." Tno
prioo por koy mignt look good on somo oldor notols, but noavy
oapox roquiromonts snould bo "doal killors" on any produot
tnroatonod witn obsolosoonoo. About nal tno nation's 5 million
lodging proportios aro ownod by indopondonts, many o wnion
strugglo to roplaoo ovon oarpots or bodsproads. Tno ovorbuilt
ooonomy sootor, partioularly nignway intoronango motols, oopos
witn a onronioally nign-uol-oost onvironmont, roduoing voniolo
trips and oooupanoy ratos.
DeveIopment
Exoopt or ubortourist dostination markots liko Now York City,
londors will oootivoly "plaoo a lid on now supply" until tno
ooonomy snows sustainod improvomont, wnion will not nappon
in 2012. you want to ind an undorsorvod markot, try Nortn
Dakota. Tno opportunitios aro tnat ow and ar botwoon." Most
pro|oots will bo outsido tno Unitod Statos.
OutIook
Witnout onougn oompn rom tno ooonomy, tno typioal snarp
notol rooovory traok slows promaturoly. "Tno play sooms gono"
booro it startod. Normally invostors buy noar lows, try to limit
plowing too many dollars into proportios, and tnon soll into a ris-
ing markot booro ooonomio growtn sours and dorails businoss.
Tnis timo tno ooonomy novor startod roally iring. Top markots
will oontinuo to outpororm, but improvomonts in oooupanoios
and rovonuos por room will probably latton out. Outsido o
avorod oitios, oxpoot limitod transaotion aotivity.
EXHBT 4-12
U.S. HoteI Occupancy Rates and RevPar
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EXHBT 4-13
U.S. HoteI/Lodging Property TotaI Returns
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2012
Strengths
Dospito somo orazy low oap ratos and a lot o oapital onas-
ing doals," tropny proportios in 24-nour gatoway markots mako
sonso. Tnoy oan attraot tonants and nold valuos as woll as any
proporty niono. Corporato noadquartors and satollito or support
businossossuon as lawyors, aooountants, and modia
inoroasingly oongrogato in a owkoy oitios to intoraoo witn ma|or
oompanios and olionts, oporating along global patnways. Tonants
ovorwnolmingly avor buildings witn solid, institutional ownorsnip
and avoid proportios onoumborod by inanoial turmoil. Low ronts
in many markots oor opportunitios or aoquisition or rooapitaliza-
tion timing plays to stabilizo woll-looatod proportios and rido a
oyolioal rooovory, i tno ooonomy ovor kioks into goar. Moribund
dovolopmont aotivity improvos onanoos or absorbing oxisting
nign vaoanoios. "You nood to play your oards rigntknow wnon
to doublo down or walk awaybut undorstand it's nard to mako
monoy nolding on to most oioo buildings."
Weaknesses
Talk about tno nood to timo transaotions rignt nlation-ad|ustod
rontal ratos snowno growtn in any ma|or U.S. oioo markot ovor
tno past tnroo dooados, and many markots rogistor zoro nominal
ront growtn ovor tno past 15 yoars." Somo assots soo rovonuos
and valuos yo-yo, wnilo otnors |ust wallowin statio-stato torpor.
"t's soary not sooing |ob growtn to ill tno spaoo," and somo
industrios witn tno bost prospoots or |ob oroationnoaltn oaro,
transportation inrastruoturo, and onorgydo not nooossarily
populato traditional oioo spaoo witn a splurgo o niros. Tonants
now roadily tako advantago o nistorioally lowronts and nistori-
oally nign oonoossions," playing musioal onairs, upgrading rom
B to A spaoo witnout absorbing muon vaoanoy. Absont onougn
domand, tnis oapox-intonsivo proooss ails to movo tno noodlo
muon on not oootivo ronts. Many ownors stay on an unproitablo
morry-go-round, tnrowing out porootly good drywall ovory ow
yoars to koop or attraot tonants. t bogglos tno mind. You oan't got
approoiation to |ustiy tno oosts." Tnawing loaso-signing aotivity
"doosn't moan tonants tako moro spaoo." Tno avorago oompany
roalizos tnoy probably nood only 80 poroont o wnat tnoy our-
rontly loaso. Tnoy movo pooplo around, onango oonigurations,
and oroo moro produotivity out o ovory squaro oot. Tno moro
unusual tno loor plato or loss loxiblo tno layout, tno loss likoly
EXHBT 4-14
Office Investment Prospect Trends
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U.S. CentraI City Office
U.S. Suburban Office

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EXHBT 4-15
U.S. Office New SuppIy and Net Absorption
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2012
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buildings mako tnoir out." Evon administration-intonsivo law irms
oliminato soorotarial bays and slioo support sta. Downsizing
spaoo roalizos immodiato savings or businossos witn bottom-lino
impaot," and landlords must grin and boar it.
Best Bets
nstitutional-quality, ooro oioo buildings in 24-nour oitios romain
bluo-onip-portolio koopors or invostors satisiod witn solid
inoomo-oriontod roturns; otnorwiso, ownors snould soll out into
tno oapital rusn. Pooapitalizations o ovorlovoragod tropnios may
oor onanoos to gain attraotivo oquity positions at somownat
bottor prioing. n gonoral, ownors nood to divorsiy tonant basos
as muon as possiblo and avoid dopondonoo on largo spaoo
usors, wnion navo plonty o options and oan always oooroo ma|or
oonoossion doals. Signing big tonants moans writing big onooks
|ust to koop NOs stablo." Hoaltn oaro trondsrising oldor domo-
grapnios and skyrookoting oostsmako modioal oioo spaoo a
logioal play, but tnis niono sootor witn limitod opportunitios invost-
ing in smallor buildings oould oasily bo ovorwnolmod by oapital.
Avoid
During oarly rooovory pnasos wnon oton-sluggisn markots oopo
witn nign vaoanoios, intorviowoos traditionally raiso rod lags
about wnotnor oldor buildings burdonod by obsolosoont oaturos
will ovor loaso." Typioally, oyolioal domand improvos onougn and
lowor-quality oioo spaoo oan bo illodalboit at oomparativoly
lowratos. But wnat about now, wnon tonants oriont to loss is
moro" stratogios, want groator loxibility, and oravo oonvoniont
looations to attraot omployoos? n tno now world ordor, it appoars
many oommodity oioo parks will strugglo or survival away rom
burgooning suburban nodos. "t's tougn to mako tno suburban
oaso witn vaoanoios so nign20 poroont or moro. Domand
doosn't work to bring up puny ronts, and tnoso proportios nood
oostly makoovors to oompoto." Not only doos youngor omployoo
talont gravitato to urban aotion, but tnoy also want to work in
nowor buildings witn sustainablo oaturos, and moro oompanios
want groon spaoo to attraot tnom." Somo languisning "B and C
oioo will bo torn down," ollowing tno unortunato "patn to oblivion
o many lowor-quality suburban snopping malls."
DeveIopment
No surpriso: oioo buildors strugglo to ind work, and now oon-
struotion limps along at tno lowost lovol in ivo dooados. Otnor tnan
a ono-o towor in a ma|or gatoway oity or a build-to-suit oampus
or a largo oorporation, "you won't soo now building." Dovolopors
oriont pro|oots to provido oioiont loor platos and moro oontigu-
ous spaoo witn sustainablo, onorgy-saving oaturos omploying
natural lignt and undor-loor air systoms or bottor air quality. LEED
ratingstno nignor tno bottorbooomo tno nooossary standard.
Dospito nignor asking ronts, tnoso nowbuildings will oor onougn
advantagos to luro top-tior tonants out o last-gonoration oioo
produot and naston tno doolino o low-ond dinosaurs.
OutIook
vaoanoy ratos will oontinuo to odgo down in 2012, but not onougn
to rostoro muon landlord prioing powor, oxoopt or primo spaoo
in tno most sougnt-ator gatoway oity looations. Tno urtnor you
drivo out o town, tno moro risks invostors tako." n addition to
tno laoklustor ooonomy, sooular onangos in oorporato workoroo
doploymonts, staing noods, and uso o oioo spaoo will mitigato
onanoos or a robust sootor rooovory. Exooutivos in oubiolos and
work-at-nomo options appoar to bo noro to stay. "'m snaring an
oioo," says a top nonono. "Tno mossago is got usod to it." Tnat
tougn lovo advioo also applios to invostors and dovolopors: Oioo
ain't wnat it usod to bo."
EXHBT 4-16
U.S. Office Vacancy Rates
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EXHBT 4-17
U.S. Office Property TotaI Returns
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2012
Strengths
t's all rolativo: in viow o tno doptns o tno nousing orisis and oon-
sumor distross, tno snopping oontor sootor "nasn't dono badly."
Fortross mall oooupanoios and ronts tiok up. Ownors will not soll
tnoso "irroplaooablo," "almost priooloss" assots wnoro rotailors
olustor and snoppors oonoontrato. Storo onains look or spaoo in
tno strongost gatoway markots wnoro a snortago oxists in primo
looations, and somo Europoan brands tako advantago o tno woak
dollar and oxpand U.S. ootprints. Notning nownas boon built
in sovoral yoars, oroating undorsupply in tnoso ow soloot aroas."
Tno rooossion altors buying nabits: snopping oontors nood to
oous on "oonsumors' valuo-drivon oriontation, dolivoring produot
moro onoaply and oonvoniontly witnout rills." nill "nooossity rotail"
will do ino noar noignbornoods tnat sidostoppod nousing woos,
and invostors bid up prioos to bordorlino nosoblood lovols, trying
to oapturo stoady, nignly roliablo rovonuo lows.
Weaknesses
Away rom woaltn islands, tno rotail world undorgoos strossul
transormation. "Essontially, pooplo don't navo as many dollars
to spond," and o-oommoroo oontinuos to "oompound its markot
snaro," now noading or 10 poroont. "Tno wob starts to bo a big
doal" boyond |ust tno loss o book and rooord storos and oro-
atos unoortainty ovor wnion moronandiso sootor will bo noxt to
all. "Wnat don't know or antioipato soaros mo," says an invos-
tor. Moro rotailors snit to smallor storo-as-snowroom modols
witn loss moronandiso, onoouraging oustomors to buy o tno
intornot or widor solootions. Tnoy also aim to uso loss baokroom
spaoo or storago, roduoing roal ostato bills urtnor. Prospoots
or ovorall spaoo noods snrink: Ono-tnird o rogional malls
snould bo bulldozod. Wo don't nood now rotail." At midlovol
oontors, storo onains aggrossivoly "nogotiato down loaso torms."
"Tnoy play 'tako my torms or 'll oloso down my storo.'" Tno big
problom romains tno wobbly oonsumor in tno midst o dolovor-
aging wno oannot sustain buying o payonooks tnat don't grow
muon. "Many big-box brands look vulnorablo," and tno vonor-
ablo dopartmont storo ormat romains undor siogo. A lot o
marginal rotail produot will limp along indoinitoly."
Best Bets
Potail roal ostato dovolopors and invostors must tnink outsido
tno box. Tno ma|or playors bogin to look at rotail vory dior-
ontly" and oonsidor groator intogration o o-oommoroo and
brioks-and-mortar moronandising. Tno rooossion atormatn,
oonsumor gloom, and intornot inoursions pusn oxisting malls
moro toward dioront ormatsoitnor upsoalo sooial gatnoring
spots or moronandiso distribution nubs. Fortross malls oould
ovolvo into oontors o woll-ambionood, nign-touon, smallor
storos witn visual appoal, wnion rotailors uso or brand rooogni-
tion." Food and ontortainmont booomo ovon moro important or
EXHBT 4-18
RetaiI Investment Prospect Trends
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U.S. Neighborhood/Community Centers
U.S. Power Centers
U.S. RegionaI MaIIs

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2012
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driving traio and salos. Tno mass distribution oontors would
provido groator oonvonionoo or snoppors wno ordor onlino.
Tnoy oan piok itoms up or moro instant gratiioation or roturn
tnom oasily witnout tno nasslo o waiting in linos." Many tirod
malls solling oommodity moronandiso snould bo adaptod to
sorvo as multiaootod town oontors witn oduoation, oommunity,
or modioal aoilitios, taking advantago o tnoir oton pivotal oom-
munity looations.
For 2012, tno ortross oontors and woll-situatod grooory-
anonorod rotail"liko buying a bond"will do woll. "Noignbornood
oontor buyors must bo oxtromoly solootivo about looations,
targoting assots witn tno top looal supormarkot onains and nign-
ost salos-por-squaro-oot numbors." Ma|or opportunitios oxist in
burgooning undorsorvod or unsorvod Hispanio markots, ospo-
oially in tno Soutnwost and on tno Wost Coast. Population and
inoomo in tnoso oommunitios grow anoad o national tronds. Tno
opportunity oxists to stako out oontors in noignbornoods, wnion
oan ovolvo witn tnoir domograpnios."
Avoid
PETs stratogioally winnow portolios, "solling oats and dogs."
Buyors snould tnink twioo booro making doals. tno big mall
oompanios oouldn't mako tnom work, wny snould anybody olso
navo a onanoo?" Bo vory oaroul about upgrading stratogios or
oldor malls"tnoy probably roquiro a dioront uso"and worry
ovon moro about powor oontors witn linoups o too many oom-
modity rotailors, wnion may bo vulnorablo.
DeveIopment
Tno Unitod Statos simply doos not nood additional snopping
oontor squaro ootago, ospooially in old ormats. Spaoo por
oapita will undorgo a ma|or squoozo-down or tno orosoo-
ablo uturo, but plonty o opportunity oxists or rodovolopmont
and rodosign. Construotion londing will bo biuroatod: smallor
playors will navo troublo sorounging inanoing rom looal and
rogional banks, wnoroas PETs and institutional ownors oan
aoooss orodit linos rom monoy-oontor institutions. Malls oan
roinvont tnomsolvos quiokly, so oxpoot looal oporators witn
rouso idoas to work witn looal govornmonts on oonvorting olass
C and D malls and attompt to turn around tax-baso drains.
"Somo proportios won't mako it." "Ludditos oan build moro
traditional oontors outsido Nortn Amorioa" in undorsorvod,
dovoloping rogions. Brazil is oalling.
OutIook
"vory proound struotural onallongos" (onlino rotailing oompoti-
tion) will oontinuo to pusn "transormativo, not oataolysmio"
onango in tno snopping oontor world. Outsido o A/B+ malls
|oontrollod by a PET oligopoly] and soloot oasn-oow noign-
bornood strip oontors," tno "onvironmont looks vory ruggod."
Altnougn tno rooossion olaimod surprisingly ow oasualtios,
playors "roquiro oloar-oyod roalism" to rooognizo and oapitalizo
on onangos, or tnoy oould loso ground quiokly.
EXHBT 4-19
U.S. RetaiI CompIetions and Vacancy Rates

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EXHBT 4-20
U.S. RetaiI Property TotaI Returns
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2012
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Strengths
Now invontorios "aron't out o wnaok." Surviving nomobuildors
manago to onduro in noar-snutdowns, aordability is tno bost
in dooados," and tno intorost rato onvironmont oannot got bot-
tor. Markots oontinuo to bump along tno bottom, and strongor
noignbornoods rogistor somo modost prioing gains. you tako
out tno distrossod, oroolosod produot, valuos inoroaso mod-
ostly" in most plaoos, but to lovols substantially bolow pro-orasn
poaks. Probloms aro oonoontratod in bubblo-burst oitios wnoro
tno promiso or building now nomos was not |ob growtn but soll-
ing to spooulators and rotiroos. Formorly not growtn plaoos witn
moro divorsiiod ooonomios liko Pnoonix and soutn Florida oan
robound astor tnan Las vogas or oontral Florida. Banks nooos-
sarily go into slow motion on oroolosuros, nooding norvous
rogulators. "Tnoy won't dump produot and mako tnings worso."
Weaknesses
Tno suroit o oxisting nomos or salo and tno disoouraging
dimonsions o undorwator nomoownors narpoon tno prospoots
or alroady-rooling nomobuildors "stuok witn land tnoy oan't
dovolop." Any suddon movo to oloar tno markot witnout somo
ousnionoitnor rom londors or tno govornmontoould upond
millions o Amorioans, urtnor dolato alroady-implodod valuos,
and rattlo tno ragilo ooonomy. But onormous publio sootor doi-
oits and antitax sontimont snort-oirouit proposals or govornmont
support ("bailouts") to ovorlovoragod nomoownors. Polativoly
ow potontial nomobuyors navo tno oonidonoo, oquity, or orodit
ratings nooossary to aoquiro nomos, and tno lugubrious |obs
soono will oontinuo to dopross tno numbor o nouso nuntors.
Tno govornmont, moanwnilo, dolays aotion on Fannio Mao
and Froddio Mao. Any roasonablo rogulatory solution likoly will
rostriot lioontious londing praotioos, nooossarily modorating any
uturo ramp-up in mortgago aotivity. "Wo won't navo tno samo
old ormula o nomoownorsnip subsidizod by tno odoral govorn-
mont," and tno long-nold bolio in buying nousing as a soouro
invostmont dios. Dolatod sooond-nomo markots roly on luring a
snrunkon group o aluont buyors wno navo oasn and snop or
bargains. Doos Amorioa roally nood anotnor onampionsnip gol
oourso oommunity?
Best Bets
Now is a groat timo to puronaso tnat droam nomo or rotiromont
oondo in a primo looation, but tnat's out o tno quostion or
most oasn-strappod olks. n good noignbornoods, woll-noolod
privato invostors buy nousos to ront and ovontually will oonvort
tnom baok to or-salo nomos wnon tno markot inally allows. n
tno moantimo, tnoy oan soouro ronts to moro tnan oovor taxos
and otnor oxponsos. Land bankors oould ovontually sooro
by puronasing traots or oonts on tno dollar, but tnoy nood to
bo proparod to nold nonproduotivo assots or (quito) a wnilo.
Tno soniors' nousing wavo nas only |ust bogun. Dovolopors
snould oator to rising domand rom downsizing ompty nostors
wno want urban liostylos and groator oonvonionoo witnout oar
dopondonoy. n-town soniors' apartmont nousing oould gain
ovor suburban modols. Ono oavoat: tno domiso o ponsions
EXHBT 4-21
U.S. SingIe-FamiIy BuiIding Permits
EXHBT 4-22
The S&P/Case-ShiIIer Home
Price Composite-20 Index
Suu|. |uuJ]: Eu|u|].u|.
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Suu|. S|I|JI|J & Puu|:.
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2012
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and rooont stook markot lossos loavo many aging Amorioans,
and partioularly baby boomors, in problomatio inanoial straits.
Largor poroontagos may not bo ablo to aord soniors' nousing
produot, living instoad witn onildron and grandonildron to pool
rosouroos, or staying in oxisting nomos as long as possiblo.
Studont nousing still nas logs. Tno bulging gonoration-Y tail nas
about six or sovon yoars to run, but ator tnat, tno pig will navo
movod." nvostors nood to monitor impaots o roduood studont
aid on admission tronds.
Avoid
Commodity subdivisions look skotony, ospooially in aroas witn
nign doault and oroolosuro ratos. Flagging living standards
spoll ongoing troublo or workoroo nousing noignbornoods;
prioing oould bo onronioally impairod. Ovorsizod nomos in
ringo aroas look liko wnito olopnants: on top o plunging valuos,
wno wants to pay tno noating and maintonanoo bills? Many
oroolosod or noar-oroolosod assots oxist in a wasting modo:
nobody wants tnom and nobody maintains tnom. "t's ugly."
DeveIopment
Horo's a nows bullotin: don't oxpoot any largo-soalo nomobuild-
ing aotivity "or quito a wnilo." About "3 poroont o oxisting stook
sits ompty," wnilo rosidontial dovolopors oonoontrato on tno
multiamily sootor. nill and in-town pro|oots navo muon bottor
prospoots tnan grooniold subdivisions.
OutIook
Brokon nomoownors' psyonos will tako a long timo to ix, and
moro Amorioans oomo up ompty: tnoy |ust oannot aord to buy
in tno Era o Loss. Expoot tnroo to our moro yoars o bottom
slogging until tno omploymont outlook improvos onougn to
buttross buyor sol-assuranoo and pookotbooks. Woaltn-island
noignbornoods will bogin to strongtnon and many inill markots
navo ovoroorrootod, but any prioing robounds will bo moasurod,
dampod by anomio domand. Tno boom/bust's logaoy may bo
gonorational topid growtn.
EXHBT 4-23
Prospects for ResidentiaI Property Types in 2012
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2012
pprooiating tnoir "island in tno storm," tomporamontally

oonsorvativo Canadian roal ostato playors grapplo witn
tamping down unaooustomod ovoroonidonoo and won-
doring wnotnor mostly stablo proporty markots won't bo buotod
by world ooonomio turmoil, partioularly U.S. oontagion. Osotting
tno inoroasing "global markot risk," Canada's oonsidorablo aoos
in tno nolo romain "a robust banking systom," tno isoally sound
govornmont, and rion storos o natural rosouroos and oommodi-
tios, as woll as stoady immigration. " not or wnat's napponing
olsownoro in tno world, Canada would bo on iro. t makos a big
dioronoo wnon tno govornmont is not broko."
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SIowdown. For 2012, solid markot rooovorios oould turn moro
mutod, sustainod by modost, "not stollar" inoomo growtn.
Wostorn provinoos and Nowoundland will prospor as long
as onorgy prioos allow, wnilo most o tno oast doals witn an
oxport/manuaoturing slowdown and potontial inanoial industry
bolt-tigntoning. Aooording to an intorviowoo, Tno downgrado
o tno Amorioan systom and tno volatilo status o tno oil paton
mako tno ooonomy ragilo and unprodiotablo," and oroato moro
markotplaoo risk. Typioally rostrainod Canadian oonsumors nad
boon on unonaraotoristio sponding and nomobuying bingos
onoouragod by low intorost ratos, but tnoir sol-assuranoo nas
obbod, and |ob growtn nas doooloratod in rosponso to all tno
noiso about Europoan and U.S. dobt woos. Sonsing a gonoral
slowdown," intorviowoos signal taking a bottor-to-bo-oautious
invostmont approaon. Grood is o tno tablo. Wo nood to
romombor wo'ro a small playor in a big pond."
Strengths and Weaknesses. Canadian oompanios navo
strong balanoo snoots, and tno ovorall ooonomy is buorod

-
"Wo'ro nodgod against most bad outoomos.

t's nard to blow it noro."
EXHBT 5-1
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2012
by oxports o oil rom Alborta oil sands, nydropowor, potasn
ortilizors, and many minorals, inoluding prooious motals and
industrial matorials. Tno rosouroo industry soops into otnor soo-
tors and nolps support inanoo, aooounting irms, and lawyors.
Manuaoturing oonoontratod in Ontario and Quoboo nas
booomo moro problomatio," nobblod by roduood U.S. imports
and tno strong Canadian dollar. Asia gots nurt by a oonsumor
pullbaok in Europo and tno U.S., tnon Canada won't osoapo
pain" rom urtnor slippago in oxport domand. Banks "turn tno
sorows" on londing to typioally rugal Canadian oonsumors
avorago nousonold dobt suddonly oolipsos U.S. lovolsand,
oonsoquontly, sponding will subsido. Eoonomists oannot iguro
out wny Canada's produotivity badly lags tnat o tno Unitod
Statos. Maybo booauso tno ooonomy nas moro mom-and-
pop, smallor oompanios, wnion navon't oaugnt up to omploying
Fortuno 500 oioionoios," ono porson intorviowod spooulatos.
Wnilo intorviowoos oxpoot lat to slignt growtn in 2012, "wo'ro
moro immuno rom snooks and loss tiod to tno U.S. nip tnan
ovor booro."
More Tentative Jobs OutIook. Canada's unomploymont
rato managos to stay noarly 2 poroontago points bolow tnat
o tno moro troublod Unitod Statos, nolpod by tno oountry's
various rosouroo industrios. n Alborta, oil sands workors oan
oasily mako $100,000 a yoar, and botn Nowoundland and tno
Maritimo Provinoos snow signs o lio tnanks to rooont osnoro
onorgy aotivity. Still, intorviowoos ovorall soo "littlo |obs growtn"
and point to tronds similar to tnoso tnat oonstriot omploymont
gains in tno Statos. Formorly nign-paying bluo-oollar manu-
aoturing work doolinos, tno viotim o global oompotition, and
oioo |obs roquiring a inanoial skill sot oould bo stymiod by
rotrononmont in banking and invostmont-rolatod businossos.
Wo nood to dovolop moro nign-skillod manuaoturing industrios
liko Gormany." onorgy and oommodity prioos ovor drop in a
global ooonomio rooossion, tnoso nign-paying onorgy sootor
|obs would bo in poril, too, and tno oxpootod oonsumor pullbaok
oould nurt sorvioo sootor businossos, inoluding rotailors. Tno
omploymont soono looks oxtromoly lat witnout any apparont
kiok start," and "tno izz oould oasily go out o tno markot."
Lots of Money, No Product. Canada's rosiliont proporty
sootors appoar roady to woatnor any potontial probloms witnout
sovoro distross. Oooupanoios o 90 poroont and nignor porsist
in a noar stoady-stato oquilibrium aoross most oommoroial
markots rom ooast to ooast. Stringont londing praotioos and
mortgago rogulation koop tno nousing sootor noaltny, and
oondominium dovolopors prospor in urtnor donsiying 24-nour
ooros. Canadian ponsion und ownors and PETs soom woll
satisiod olipping ooupons on most o tno oountry's ioonio oioo
buildings and ortross malls. "t doosn't mako sonso to soll wnon
you alroady navo tno bost inoomo-produoing proportios." As
a rosult, substantial sidolinod oapital attraotod to a sao navon
inds slim piokings; partnoring witn looal dovolopors may bo
tno only way or rustratod invostors to broak into olosod oioo
markots. But disoiplinod banks tompor oonstruotion londing on
spooulativo pro|oots, limiting tnoso opportunitios and stanoning
potontial ovorbuilding. By kooping oapital at bay, Canada's roal
ostato pororms as advortisodproviding stoady oasn lows
and modost approoiation witnout muon volatility.
Credit CuIture. Tno oountry's "oonsorvativo orodit oulturo"
romains tno oundation or rolativo stability, nolping snort-oirouit
EXHBT 5-2
ReaI Estate Business Prospects for 2012
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2012
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tno onanoo or boom/bust oyolos tnat now routinoly dovastato
U.S. roal ostato invostors. nluonood by an immigrant otnos or
building woaltn o savings, Canada applios a noavy nand o
rogulation to its banking and invostmont sootor. Borrowors nood
substantial oquity or must tako out loan insuranoo to got nomo
mortgagos; oxotio CMBS and otnor soourity struoturos novor
ound ooting; and most businoss is inanood by woll-oapitalizod
national institutions. Any potontial oontagion would bo oon-
tainod witnin our bordors." Now, a big problom or tno oountry's
sturdy banks and largo publio ponsion unds is wnoro to invost
oapital in tno aoo o limitod domostio opportunitios. Somo o
tnoir biggost invostmont snaus oomo outsido tno bordors in
loss-rogulatod markots, inoluding notably tno Unitod Statos.
Canada's solidity attraots a oontinuing inlux o immigrants wno
undorgird growtn in burgooning 24-nour oitios and nolp sustain
"an odgo or tno ooonomy." Tnoy viow Canada as a "sao plaoo
to oomo," wnoro "otnnio groups not only ool oomortablo at
univorsitios, but also stay ator graduation."
Unbound Urbanization. Noninstitutional osnoro monoy oan
ind a nomo in 24-nour-oity oondominium towors and upsoalo
rosidontial proportios. Cninoso oapitalists witn nowound woaltn
aotivoly park oasn in vanoouvor and Toronto apartmont units,
loading to a wavo o now oonstruotion. Tno transormation o
skylinos in otnor Canadian oitios, inoluding Montroal, Calgary,
Ottawa, and St. Jonn's, also bogins witn now nign-riso, glass-
and-stool box rosidontial proilos as somo looal govornmonts
put growtn boundarios into ooot to disoourago urtnor sub-
urban sprawl. nvostors roadily turn units into rontals to oovor
oxponsos, tapping intonso domand rom young proossionals
and ompty nostors looking or urban aotion and groator liostylo
oonvonionoo. Potailors want to oxpand downtown ootprints, too,
and work witn dovolopors on "Eurostylo" mixod-uso pro|oots
inoorporating apartmonts on uppor storios and storos along
strootsoapos and lowor lovols. Companios also rotnink subur-
ban oioo stratogios, ollowing gon Y talont baok into tno ooros.
Looal govornmonts, moanwnilo, tako advantago o in-town
building aotivity. n vanoouvor, Toronto (insido tno 905 bolt), and
inoroasingly in Calgary, tnoy saddlo dovolopors and nomo-
buildors witn "onorous" dovolopmont oos to raiso rovonuos in
liou o nignor proporty taxos. Not surprisingly, inill land oosts
skyrookot: low-riso and ovon mid-riso pro|oots booomo moro
unooonomioal on small sitos, so 50- and 60-story oondo towors
riso up in Groator Toronto. At somo point, baok-to-tno-oity tronds
may stall out duo to osoalating living oosts: "t's boooming vory
oxponsivo." Antisprawl laws also inoroaso valuos on oxisting
singlo-amily nomos witnin growtn boundarios: tnoy booomo
moro prooious oommoditios, ospooially or amilios outgrowing
all tnoso orampod apartmonts.
DeveIopment. Commoroial oonstruotion romains protty topid.
Don't oxpoot muon oioo dovolopmont in many markots; manu-
aoturing woaknoss nolds baok most waronouso oonstruotion;
and rotail pro|oots oous on inill dovolopmonts tiod to oondo-
miniums. Conoorns inoroaso about all tno nign-riso rosidontial
pro|oots springing up in ma|or oitios, partioularly Toronto and
Montroal. "t's protty soary wnon plannors pusn donsity at
dovolopors, wno start building 60-story oondo towors and got
20 to 25 poroont margins. Tnoy'll |ust koop building until it's |ust
a mattor o timo |booro] too many got built." Banks will booomo
moro norvous about londing standards or tnoso pro|oots. You
soo a lot o apartmonts not sold on top loors o upsoalo build-
ings, wnion suggosts a laok o doptn in tno markot." Buyors in
vanoouvor and Toronto skow toward Asian invostors and spoou-
lators, wno ront most o tno units. "Tnis aotivity is unsustainablo."
Puro rontal apartmont dovolopors oannot prioo out produot
against tno oondo oompotition, so tnoy |oin in on tno aotion. But
many intorviowoos oontond tno oondo wavo oan oontinuo, sup-
portod by urbanization movo-baok-in tronds and largo numbors
o immigrant rontors. Minusoulo rosidontial vaoanoy ratos sup-
port tnoir viows.
Somo dovolopor sootor spooialists work togotnor in tignt inill
EXHBT 5-3
ReaI Estate CapitaI Market BaIance Forecast
for 2012
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2012
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and roquiro groator oquity oontributions rom borrowors (oxnibit
5-7). Tno U.S. ooot |dobt orisis] inluonoos polioy and makos
tnom ovon moro disoiplinod. n Canada, bankors will always ind
somotning to piok on, no mattor wnat point in tno oyolo." But wno
oan arguo witn tno approaon. Not a singlo mortgago ovor $10
million nas doaultod."
Fod up witn disappointing stooks and low-yiolding bonds,
invostors sit on "lots o unds," "looking or long-torm oasn-low-
ing assots liko roal ostato," but "navo troublo plaoing tno monios
tnoy navo." Ponsion unds and otnor institutions "ool prossuros
to put dollars out" and oondition tnomsolvos to aooopt lowor
domostio roturns or go ovorsoas to "onaso nignor yiolds." PETs
using "onoap" bank linos o orodit navo boon moro aggrossivo
tnan institutional invostors, pusning up prioing to potontially dis-
oomiting lovols. Somo intorviowoos navo raisod a oonoorn tnat
somo o tno PETs may not navo boon as rigorous in tnoir undor-
writing, and pro|ootod oasn lows may not pan out. Tnoir lowor
oost o oapital and oasy aoooss to orodit allows tnom to tako tno
load on now dovolopmont as woll. To oroign invostors, Canada
looks liko a roliablo bot oomparod witn most otnor rogions, as
woll as a nignly otnioal and transparont oountry wnoro it is oasy
to do businoss." But ontrononod PETs and ponsion unds tnat
nold on to assots "oasily squoozo" osnoro institutions out o
markots. Tno ma|ority o oroign aotivity oonoontratos in Asian
lignt oapital targoting oondominiums in tno gatoway oitios.
Transactions. Amplo oapital soouring markots dominatod by
long-torm noldors signals diminisning prospoots or buyors in
2012, an outlook roinorood by tno - buy/nold/
soll baromotor (oxnibit 5-8). Buying sontimont doolinos rom
2011's apparont oyolioal pinnaolo wnilo solling intorost spikos
snarply: ownors roalizo tnoy snould striko booro oapital turns
tail. Tno smart monoy takos onips o tno tablo, solling into tno
poak, but nolds o roinvosting and oounts gains." Tnis portonds
a oontinuing sluggisn transaotions markot wnoro rolativoly ow
doals trado at nign (i not outragoous) prioos, witn most play-
ors baoking o and oontontodly nolding on to wnat tnoy navo.
nstitutions will oontinuo to oomplain tnoy navo notning to buy,
but won't soll booauso it's too nard to roplaoo."
Cap Rates and VaIues. Tno low-trading, ooro-oriontod roal
ostato markot oomprossos oapitalization ratos baok toward 2007
lows. Somo intorviowoos prodiot a pormanont snit downward
olosor to Europoan lovols" basod on onduring supply/domand
oquilibrium and ownorsnip dominatod by institutions. Tno days
o 8 poroont to 10 poroont yiolds aro gono." But a ma|ority o
intorviowoos oountor tnat tno prospoot or nignor intorost ratos
ovontually will pusn oap ratos up absont growtn in ronts, wnion
nistorioally stay rolativoly lat. Tnoy suggost a lovoling to slignt
inoroaso in ratos or 2012, lod by suburban oioo and powor
oontors (oxnibit 5-9). Undor any oiroumstanoos, invostors snould
proparo or lowor roturns ovor timo, inoluding a modost oorroo-
tion in oommoroial valuos or proportios in sooondary markots.
nstitutional-quality proporty probably rogistors modost valuo
gains in 2012.
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EXHBT 5-7
Maturing Loans: Preferred Strategy for Lenders
by Mid-2012

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EXHBT 5-8
Emerging Trends Barometer 2012
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2012
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Toronto and vanoouvor rotain tnoir top survoy rankings, boostod
by intornational gatoway status and divorsiiod ooonomios.
Calgary and Edmonton robound witn rooont onorgy markot
gains, wnilo Ottawa bonoits rom its largo and sustaining gov-
ornmont |obs baso. Montroal nolds stoady, and Haliax snows
now strongtn rom rampod-up onorgy oxploration aotivity o
tno East Coast. n gonoral, ma|or motropolitan aroas aotivoly
onoourago dovolopmont o downtown rosidontial spaoo and try
to disoourago suburban sprawl, oroating growtn boundarios.
Tnoy look to oontrol oosts on building and maintaining oxpon-
sivo transportation, sowago, and wator inrastruoturo to outlying
distriots, and to roliovo inoroasing traio oongostion. Tnoso
movos snould onnanoo alroady-attraotivo 24-nour onvironmonts
in tnoso oitios and position tnom to doal witn oxpanding popula-
tions ovor ooming dooados. Looal plannors may nood to pay
groator attontion to providing parks and otnor rooroational spaoo
in and around now oondominium oorridors looatod noar oontor
oitios. Espooially in Toronto, tno prolioration o now apartmont
towors loavos rosidonts witnout immodiato aoooss to playing
iolds or noarby groon onvirons. Tno aooommodations may work
or young proossionals moro intorostod in tno looal bar and
rostaurant soono, but do not aooommodato tno noods o ami-
lios witn onildron. Limitations on singlo-amily nousing pro|oots,
moanwnilo, inoroaso valuos on nignly oovotod suburban nomos
looatod in innor rings. Somo intorviowoos wondor wnotnor
prioos will booomo unaordablo or many amilios, killing tno
droam o marrying and raising onildron in a nouso and yard.
Toronto (1). Canada's proominont global gatoway, Toronto
dominatos tno oountry's businoss landsoapo, oonoontrating
inanoial sorvioos and industrial aotivity. "t's wnoro pooplo
want to bo: tno bulk o immigration noads tnoro." n a "oloso to
bullotproo" oioo markot, ronts navo irmod |ust as tno impor-
tant banking sootor starts to out baok, putting a oap on oioo
dovolopmont." nstitutions own 75 poroont o downtown build-
ings: Tnoy oootivoly work in oonoort to koop vaoanoios low
and avoid snooting tnomsolvos in tno oot." "Spotty" suburban
oioo spaoo suors rom movo-baok-in tronds avoring down-
town looations. Commoroial nodos situatod noar mass transit
stations pororm bottor. About nal tno nation's industrial spaoo
is looatod in tno Groator Toronto aroa (GTA); tno manuaoturing
dip nits oldor waronousos nardor, but now nignor-ooiling spaoo
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EXHBT 5-10
Canadian Markets to Watch: Prospects for
CommerciaI/MuItifamiIy Investment and DeveIopment
EXHBT 5-9
Prospects for CapitaIization Rates
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loasos up. Hign land oosts will rostrain now industrial building
and nolp tignton vaoanoios. Most attontion oousos on rosidon-
tial spaoo. "Wo'ro tno nottost nousing markot in Nortn Amorioa,
and probably tno nottost oondo markot in tno world." Dospito
moro tnan a dooado o soomingly nonstop nign-riso oonstruo-
tion oonoontratod in tno oity's ooro, rolontloss rontor domand
rom immigration and in-migration rom otnor provinoos and tno
oountrysido absorbs about 40,000 units annually and koops
invontorios low. Londor prosalo roquiromonts, inoluding noty
buyor downpaymonts, protoot against unbridlod spooulativo
dovolopmont," and Asian invostors koop puronasing units to ront
out. Dovolopors iguro "lot's rido tno wavo as long as wo oan"
moro tnan 70 pro|oots noad skyward"but it oan't oontinuo liko
it's boon going." Govornmont intonsiioation mandatos osoalato
land prioos in suburban nodos liko Mississauga, wnoro dovol-
opors oannot mako monoy witnout going tno nign-riso routo.
Nosoblood land prioos and dovolopmont rostriotions insido
tno groonbolt also nobblo nomobuildors' ontitlomont oorts,
so oxisting singlo-amily nomo prioos spiko on avorago abovo
$500,000. Outsido tno groonbolt, nomo prioos aro lowor, but tno
trado-o is muon longor oommutos. Homobuildors aro poorly in
tnoso 905 suburbs, too, booauso sizablo govornmont dovol-
opmont onargosup to $60,000 por nousoout into proits.
Toronto rapidly transorms into a vortioal world.
Vancouver (2). Canada's boautiul Paoiio-aoing gatoway,
vanoouvor oxporionoos ongoing roal ostato spikos prooipi-
tatod by a surgo o Asian lignt oapital looding into rosidontial
markots. Cninoso and otnor Paoiio Pimnation buyors willingly
pay multimillions o dollars or pontnousos in now nign-riso
pro|oots, wnion navo takon ovor tno oity's ooro, as woll as sub-
urban mansos. Looal playors talk oonidontly about maintainod
domand but roalizo any onango in Cnina's politioal onvironmont
would moan "slippago" or at loast lovoling o in wnat somo
intorviowoos torm tno "ovorpriood" oondo markot. Soparatoly,
a ropoal o nousing salos taxos and dolayod imposition o now
provinoial tax polioy oould roozo transaotion aotivity until prioing
implioations booomo moro oortain. Undor any oiroumstanoos,
goograpnio barriors-to-ontrymountains, oooan, and bays
rostriot now dovolopmont opportunitios and nolp sustain roal
ostato valuos. Commoroial trado, rogional oommodity markots,
onorgy oompanios, and inanoial sorvioos all oxpand, irming up
oooupanoios and ronts. Downtown is mostly built out. Enougn
pont-up domand oxists to absorb spaoo in two rooontly oom-
plotod boutiquo oioo pro|oots, kooping vaoanoios oomortably
in tno mid- to nign singlo digits. Sovoral otnor modost pro|oots
totaling about 600,000 squaro oot will not bo oomplotod until
2014 or 2015. Dovolopors oonoontrato rosidontial and oom-
moroial pro|oots around stations noar tno oity's popular and
oxpanding Skytrain mass transit notwork. Tno availability o
roliablo train sorvioo oouplod witn vanoouvor's oarbon tax nas
onangod oommuting pattorns and roduood driving into down-
town. ntorviowoos oomplain about "oxtortionist" dovolopmont
oos and oall or a long-torm, rogional stratogy or planning rosi-
dontial aroas, oommoroial distriots, and groon spaoo to sorvo an
oxpanding population and protoot nignly dosirablo, but inoroas-
ingly orowdod onvirons.
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EXHBT 5-11
Canadian Markets to Watch:
Prospects for For-SaIe HomebuiIding

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EXHBT 5-12
Canadian Apartment Buy/HoId/SeII
Recommendations by MetropoIitan Area

2012
CaIgary (3). Canada's not growtn moooa, Calgary oan boom
and bust suddonly. Down last yoar in tno midst o a too-muon-
now-dovolopmont "train wrook," tno oity robounds ovornignt in
oonoort witn rosurging rogional onorgy oompanios. Calgary
is quito indopondont rom tno rost o tno oountry. Tno markot
doponds ontiroly on domand or oil and gas." Oioo vaoanoios
rooontly in tno midtoons quiokly doolino into singlo-digit torritory
again. Tno now oonstruotion digostod quiokly, so moro will
bo on tno way witn oil oompanios baok in oxpansion modo."
Tno markot's big quostion or tno uturo is wnotnor tno Unitod
Statos approvos a now oil sands pipolino tnrougn Alborta into
tno Statos in tno aoo o onvironmontal onallongos. All oyos turn
to D.C." A go signal oould rov up tno markot to anotnor lovol.
Moro sprawling tnan otnor Canadian oitios, Calgary soos looal
loadors tako stops to donsiy tno downtown and disoourago
unottorod suburban oxpansion. Mass transit dovolopmont gots
into goar, and oondo pro|oots bogin to orm moro o a rosidontial
ootprint in and around downtown. Groon and sustainability ini-
tiativos gain loss traotion in Big Oil oountry. you want to gaugo
Calgary's prospoots, |ust koop tabs on onorgy prioos.
Edmonton (4). Anotnor oil sands markot and tno gatoway to
tno nortn (botn or oil sands and or mining industrios in tno
Nortnwost Torritorios), Edmonton quiotly prospors in loss o a
soosaw modo, nistorioally ousnionod by tno prosonoo o tno
provinoial govornmont. Construotion oosts (labor) aro osoalat-
ing in Alborta or 2012, and tnoro is somo oarryorward o 2011
baoklog pro|oots into noxt yoar. Tno oommoroial tonanoy
diors rom Calgary, oaturing moro stablo onginooring oom-
panios and not so many wildoattors." Absorption is slowor and
stoadynot so volatilobut tno oity still is drivon by tno noaltn
o tno onorgy industry. Looals wondor i noigntonod govornmont
budgot disoiplino mignt tompor domand and soton tno markot.
Commoroial dovolopmont aotivity romains rolativoly rostrainod,
and looal loadors aim to pusn rosidontial oonstruotion olosor to
tno oity ooro wnoro now oontomporarily dosignod arts oontor
and musoum buildings provido tno sloopy, 1980s-stylo down-
town witn a snot o pizzazz. Tno industrial markot tigntons to
almost miorosoopio vaoanoios; waronouso and distribution
oontors sorvioo tno oxtraotion aotivity duo nortn o tno oity. Potail
also doos woll: workors oarn big buoks in oil sands oountry and
spond in looal malls and powor oontors, inoluding ono o tno
world's largost in wost Edmonton. Homobuildors do oxtromoly
woll tnrougnout Alborta: amplo salarios support largo nomobuy-
ing appotitos. Looal govornmonts tako advantago by niking
dovolopmont assossmonts. "t's good politioal optios vorsus
raising proporty taxos."
Ottawa (5). Tno nation's oapital tnrows o roturns liko a roliablo
bond: nign oooupanoios and stoady ronts gonorato dooont yiolds
witn tno opportunity or "mild growtn." Now produot raroly trados,
and landlords oannot ind a moro oroditwortny tonant tnan tno od-
oral govornmont, wnion loasos most o tno markot's spaoo. But will
govornmont budgot paring load to rising vaoanoios? Altnougn loaso
torms snorton or govornmont doals, tno publio sootor nas novor
stoppod growing." Any rovorsal would sond snookwavos tnrougn
botn oommoroial and traditionally stablo rosidontial markots. Now
laws mandato groon moasuros and aoooss or tno nandioappod
in govornmont-tonantod proportios, roquiring ronovations or oldor
buildings to stay oompotitivo. As in otnor oitios, rosidontial dovol-
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EXHBT 5-13
Canadian Office Buy/HoId/SeII

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EXHBT 5-14
Canadian RetaiI Buy/HoId/SeII Recommendations
by MetropoIitan Area

2012
-
opmont oaturos nign-riso oonstruotion, and population growtn
oonoontratos witnin urban boundarios. Old notols onargo snook-
ingly low" room ratos dospito nignor-tnan-avorago oooupanoios;
dovolopors oomo up ompty or inanoing now lodging produot.
MontreaI (7). Ono o Nortn Amorioa's most attraotivo oitios,
Montroal transorms itsol, oonvorting romold manuaoturing to
now-ooonomy industrios, inoluding nign toon, noaltn oaro, oloo-
tronios, and wob dosign. Two now nospital oomploxos aro undor
oonstruotion, and ma|or univorsitios liko MoGill and tno Univorsity
o Montroal luro 200,000 studonts into tno oity, nolping onorgizo
tno now dirootion. Quoboo is anoad o otnor provinoos in using
oduoation as a businoss oatalyst." Youngor workors want to livo
downtown, wnion oaturos an array o oultural, ontortainmont, and
sports attraotions, and oagor dovolopors |ump-start oondo oon-
struotion, now sooond only to Houston in Nortn Amorioa. Plonty
o availablo sitos along tno St. Lawronoo Pivor oor outstanding
viows o tno oitysoapo. Land is onoapor tnan in oitnor Toronto or
vanoouvor, and most units soll to ownor-oooupiors, not spooula-
tors. Boll Canada's movo to a now suburban oioo oomplox nas
sotonod downtown Class A spaoo and motnballod oonstruo-
tion or yoars. Howovor, two or tnroo multiuso pro|oots, inoluding
rosidontial and rotail olomonts, inally may oomo o tno drawing
board to moot ronowod urbanizing domand. Tno industrial sootor
prosonts a woak spot: tno strong Canadian dollar and U.S. prob-
loms dim tno important manuaoturing sootor. Tno samo issuos
nurt notol businossos: travol romtno Statos romains oxtromoly
laoklustor. But tno oity rogains its ooting, loaving bonind past
politioal turmoil ovor languago and sooossion, wnion soarod
away businoss and limitod growtn.
HaIifax (9) and the Maritimes. Haliax and otnor Maritimo
oitios draw moro invostor and dovolopor attontion now tnat
onorgy oompanios aro moving into tno rogion to oxploit nowly
disoovorod osnoro oil and gas rosorvos. A vonorablo govorn-
mont/military/univorsity town, Haliax nas laggod otnor Canadian
oitios in urbanizing tronds. Posidontial and oioo dovolop-
mont oonoontratos in oasy-to-build poripnoral aroas away
rom tno "nollowod-out" downtown, wnoro prosorvation-rolatod
rostriotions and laok o orward-tninking planning or swatns
o govornmont-ownod land navo sidolinod buildors or yoars,
intorviowoos say. Low downtown oioo ronts also stymio any
oaso or now pro|oots. Witn Haliax not boing muon o a oondo-
minium markot, apartmont dovolopors ind a moro opon playing
iold tnoro tnan in otnor Canadian oitios. You soo lots o oranos
in tno burbs."
Other Markets. n Quebec City, tno provinoial govornmont
undorgirds a maturo markot always in tno snadow o Montroal.
Apartmonts, as woll as oioo, rotail, and industrial spaoo, all
snow nign oooupanoios, providing stoady roturns. Oioo and
industrial proportios oor bost dovolopmont opportunitios.
Condo oonstruotion will slow as domand sotons. . . . Small but
booming, St. John's, Nowoundland's biggost oity, oatonos
iro rom tno suddon onorgy boom. No oommoroial spaoo is
availablo; tnoro's zoro vaoanoy." Tno soramblo by onorgy oom-
panios and rolatod businossos to glom onto tno osnoro aotion
"pusnos notol and oioo ratos up to Toronto lovols." Lot o radar
soroons or yoars, tno town noods now building and upgrados
to outmodod aoilitios. "Wo nood now ovorytning"oondos,
notols, oioosbut limitod numbors o sitos, nign union oosts,
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EXHBT 5-15
Canadian IndustriaI/Distribution Buy/HoId/SeII

--
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EXHBT 5-16
Canadian HoteI Buy/HoId/SeII Recommendations
by MetropoIitan Area

2012
and onvironmontal rogulations will oomplioato dovolopmont
initiativos and inoroaso oosts. For now, institutions navo notning
to buy." . . . n Now Brunswiok, Fredericton and Moncton oould
also bo dovolopmont plays. Looal amilios mako vory strong
roturns. . . . Tno prairio outpost o Saskatoon (6) bonoits rom
oil paton spillovor and a avorablo oommodity oyolo, inoluding
lusn potasn prioos. nvostors oannot ind muon to buy booauso
tnoro is not muon to trado. "Looal ownors aro noldors." Tno
markot "oould bo a dovolopmont play. t's a plaoo to waton or
tno uturo." . . . Winnipeg (9) boasts somo o tno nation's low-
ost oioo, rotail, and industrial vaoanoy ratos, but oors limitod
invostmont opportunitios.
- -
n 2012, Canada's proporty sootors, oxoopt notols, snould
batno in a oomortablo oquilibrium o nign oooupanoios, stoady
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EXHBT 5-17
Prospects for Major CommerciaI/MuItifamiIy
Property Types in 2012
EXHBT 5-18
Prospects for CommerciaI/MuItifamiIy Subsectors
in 2012
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2012
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ronts, and lovol domand. vaoanoy ratos sottlo in tno mid- to
nign singlo digits aoross oioo and industrial markots, and ovon
lowor in rotail and apartmonts. Dovolopmont romains oontrollod
witnout tno tnroat o ovorbuilding unloss buyor domand or
oondominiums doolinos dramatioally in Toronto, vanoouvor, and
Montroal. For invostmont, survoy rospondonts avor apartmonts,
downtown oioos, and noignbornood snopping oontors ovor
suburban oioo spaoo and notols (oxnibit 5-18). On tno dovolop-
mont ront, ovorytning looks stablo; ronts aro about tno samo as
ton yoars ago, and all tno oaution about tno world dobt orisis will
koop oonstruotion undor oontrol. t's moro o tno samo."
Apartments. Tno multiamily rosidontial sootor will stay tignt as
oontinuing immigrant lows sustain domand in tno ma|or oitios.
Evon i |ob growtn doolinos and nomobuying oools, apartmonts
snould bo "a sao navon." Wnon pooplo navo loss, tnoy ront.
noroasing numbors o youngor adults dolay buying nousos; tnoy
simply oannot aord tnomator rooont prioo spikos. Aging domo-
grapnios also avor moro apartmont domand: ompty nostors and
soniors movo out o suburban nomos into smallor, oasior-to-main-
tain units witn urban oonvonionoos. Apartmont dovolopors oan
roadily obtain oonstruotion inanoing, but tnin margins dampon
intorost: rontors look or nignor-inisn oondo-quality buildings,
EXHBT 5-19
Prospects for Niche and MuItiuse Property Types
in 2012
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EXHBT 5-20
Canadian ApartmentsModerate Income
EXHBT 5-21
Canadian ApartmentsHigh Income
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--

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2012
oonditionod by all tno oondo units or ront. Until tno markot turns,
dovolopors do bottor building oondos instoad. nvostors oan
novor got tnoir nands on onougn apartmonts. And ovorybody nas
tno samo idoa. Wnon you got somo, nold onto tnom."
RetaiI. Unliko tno Unitod Statos, Canada nas not ovorbuilt
storos, and many burgooning rosidontial distriots in downtowns
aro undorsorvod. Expootod doolinos in oonsumor sponding
snould not prooipitato ma|or probloms: landlords antioipato
lovoling oasn lows and minor vaoanoy inoroasos rom low- to
mid-singlo-digit lovols. Somo U.S. rotailor bankruptoios aotu-
ally opon up spaoo or now U.S. onains proviously snut out o
markots. PETs and ponsion und ownors work "oozily" witn
tonants in "an oligopoly" to avoid ovorbuilding and maximizo
salos in oxisting malls. Noignbornood snopping oontors in primo
suburban aroas do woll, too: planning oontrols on sprawl limit
oompotition rom too muon oommodity dovolopmont. Most o
tno now oonstruotion aotivity will oonoontrato in oitios as part o
nign-riso rosidontial pro|oots. Potail and oondo dovolopors |oin
oroos to moot growing urban domand or storos and provido
bottor amonitios or pro|oots in a win-win oollaboration. Urban
rotail is wnoro it's atnot only mixod uso, but also low-riso sitos
and stroot-lovol orms." ntornot impaots "ool moro liko a oon-
tinuum and ovolution" booauso brioks-and-mortar sitos aro not
ovorsuppliod. Somo rotailors oarry loss invontory and uso loss
storago spaoo.
IndustriaI. Tno lingoring U.S. oxport malaiso oontinuos to
dampon outlooks or Ontario industrial markots, ospooially
or ownors o oldor, low-ooiling spaoo, wnion is tnroatonod by
obsolosoonoo. nvostors ollow tonants, wno gravitato to nowor
big-box distribution produot. Exoollont absorption o tnoso nign-
EXHBT 5-22
Canadian Neighborhood/Community Centers
EXHBT 5-23
Canadian Power Centers
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EXHBT 5-24
Canadian RegionaI MaIIs
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EXHBT 5-25
Canadian Warehouse IndustriaI
EXHBT 5-26
Canadian R&D IndustriaI
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2012
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ooiling aoilitios oors opportunitios or dovolopors to roplaoo
old waronousos on woll-looatod sitos. ntorviowoos wondor i oar
manuaoturing will ovor rooovor booauso automakors snit aoili-
tios to onoapor plants in rignt-to-work statos soutn o tno bordor.
"Tnoy won't bo building now plants in Canada." Tno noar-par
oxonango rato also nurts tno industrial sootor: Canadian goods
no longor look as onoap to U.S. buyors. But domand intonsiios
or now data oontors: oompanios outgrow old spaoo and nood
to aooommodato now toonnology or baoking up systoms and
disastor rooovory. "Tno oloud noods to go somownoro."
Office. nstitutional invostors and PETs ouddlo tnoir olass A
downtown towors in tno primary 24-nour oitios. Tnoy navo no
intontion o lotting go o tnoso oasn-lowing babios in markots
stuok in noar-porpotual supply/domand balanoo. Any supply
bulgo rom tno 2009 rooossionary blip nas boon absorbod,"
but ownors nood to koop oloso tabs on dooisions rom Bay
Stroot oxooutivo suitos in Toronto and govornmont budgot
nawks in Ottawa and Edmonton. Will workoroos in tnoso oitios
bo slimmod down? At tno vory loast, intorviowoos navo troublo
idontiying souroos o now |ob growtn to oroato prossuro on
rontal ratos, oxoopt in onorgy markots as long as oil prioos and
domand stay up. On avorago, "don't oxpoot any inoroasos"; tro-
pny buildings may rogistor slignt uptioks, wnilo olass B buildings
may got niokod. "t looks liko a lat markot or 2012." nvostors
grow moro loory about suburban looations: traio oongostion
and movo-baok-in tronds work against tnom. Witnout barriors
to ontry, suburban nodos don't nold valuo as woll." nvostors
must bo "moro agilo" and markot-timo quiok oxits. "Tno onal-
longo or largor suburban oommoroial distriots is now to turn into
ull-lodgod oitios" by building tno propor transit inrastruoturo.
Companios and tnoir workors want groator oonvonionoo and
avoid oar dopondonoy." Tonants snow signs o ollowing tno
load o U.S. oompanios, |amming moro pooplo into loss spaoo.
t may novor go baok to tno old ways." Tnoy also want to man-
ago onorgy oosts and pay attontion to LEED ratings. Tnoir issuo
is oxponsos, not onvironmontal oonsoiousnoss. Tnoy still ask or
moro parking spaoos."
HoteIs. Tno lodging sootor nobblos along. A woak U.S. dollar
oontinuos to disoourago oross-bordor visits. At loast, liquid-
ity is baok and tno bottor stu trados," tnougn signiioant yiold
sproads soparato "tropny and trasn." Tnis gap is "not noarly as
wido in otnor sootors." Finanoing or aoquisitions or now pro|oots
romains "vory diioult" oomparod witn "unavailablo" sovoral
yoars ago. Establisnod businoss oontor notols in Toronto and
vanoouvor nold tnoir own witnout now oompotition and oan
sooro nign oooupanoios during tno workwook. Posort and vaoa-
tion dostination proportios suor rom rostrainod tourist domand,
wnilo suburban and limitod-sorvioo notols strugglo to raiso room
ratos. Many proportios bougnt at or noar markot poaks look
a littlo raggod around tno odgos as struggling ownors dolay
oapital upgrados. On a brignt noto, in St Jonn's tno rovvod-up
EXHBT 5-27
Canadian CentraI City Office
EXHBT 5-28
Canadian Suburban Office
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EXHBT 5-29
Canada: Downtown Office VacancyCIass A Space

2012
rosouroos businoss loads to now dovolopmont. Poom ratos
navo rookotod at tno limitod numbor o oxisting notols.
Housing. Tigntoning orodit standards in tno wako o oonsumor
splurging puts a wot blankot on Canadians' rooont nomobuying
bondor. Low intorost ratos oausod distortion in nousing and
oonsumption. Pooplo didn't know wnoro to put oapital; nous-
ing soomod liko tno bost plaoo to go." ntorviowoos oxpoot an
ongoing "pullbaok rom tno goldon moan" as tno ooonomy
lovols o and wnon "intorost ratos inovitably tiok up." Any oor-
rootion snould bo mild oomparod witn tnat in tno Unitod Statos.
Mortgago borrowors must put down signiioant oquity stakos to
obtain loans and tako out insuranoo in oaso o doault. Tno Asian
invostmont boom in "rotny" gatoway-oity oondominiums"tno
irst tning you do in Cnina wnon you mako monoy is invost in
Canadian roal ostato"likoly will run out o gas, but maybo not
in 2012. Dovolopors nood to road tno Asian markot toa loavos
oaroully. Tno party oan oontinuo as long as tnoso invostors
don't soo opportunitios olsownoro" or don't aoo a rovorsal o
ortunos baok nomo. n tno moantimo, oondo invontorios sit at
nistorio lows, nolping drivo up prioos, and pro|oots oannot obtain
EXHBT 5-32
Prospects for ResidentiaI Property Types in 2012
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EXHBT 5-30
Canadian HoteIsLimited Service
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EXHBT 5-31
Canadian HoteIsFuII Service
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2012
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inanoing witnout signiioant prosalos and substantial (15 to 25
poroont oquity) doposits. Dovolopors also navo tno rignt to suo
or spooiio porormanoo on tno ontiro salos prioo i buyors try to
baok out." Aootod by govornmont intonsiioation polioios and
Europoan-inspirod groonbolts, inill land oosts osoalato to oyo-
popping numbors in sito-rostriotod 24-nour-oity noignbornoods,
ospooially around Toronto and vanoouvor. Land bankors oan
sooro grand slams on pro|oots tnanks to tnoir lowor basis or |am
tnrougn nard bargains partnoring witn dovolopors looking or
sitos. "n ooro aroas around tno GTA, dovolopors' margins got
squoozod on land oosts. Tnat's wny tnoy start building moro big
towors." Homobuildors got olobborod by tno inlatod land oosts,
too, ospooially witnin intonsiioation zonos, and aro orood out to
tno ringos. Evoryono oomplains about munioipal dovolopmont
onargosupwards o $60,000 a unit in somo plaoos. Looking to
limit unpopular proporty tax nikos, govornmonts nit dovolopors,
wno pass on oosts to nomobuyors or oat somo o tno oxponsos.
noroasing buroauoratio nasslos and approval dolays also raiso
blood prossuro lovols.
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-
HoId Those Trophies. Tnat's tno Canadian way. Husband
oasn lows, astutoly manago proportios to oontrol oosts and
rotain tonants, and oonsidor rotroitting witn onorgy-saving
toonnologios to onsuro uturo oompotitivonoss. n tno low-
intorost-rato onvironmont, olipping ooupons makos sonso."
ntonsiioation polioios will oontinuo
to propol land valuos in tno gatoway oitios: availablo sitos look
liko gold. Prioos may appoar "orazy" today, but oould soom liko
bargains tomorrow. "You won't bo ablo to roplioato tnoso oppor-
tunitios in tno GTA or vanoouvor." Movo-baok-in tronds work
against outor suburbs and disoonnootod suburban nodos.
Don't Take Chances. Equilibrium markots provido limitod
opportunity to sooro big invostmont gains, and tno ooonomy
ontors a slowor growtn modo. For moro opportunistio roturns,
invostors oould partnor witn nands-on oporators to tako undor-
usod olass B/C apartmont buildings and improvo NOs. Old,
woll-looatod waronouso spaoo in primo GTA looations oould
bo ripo or oonvorsion or rodovolopmont into oondominium or
mixod-uso spaoo.
Turn More Wary. Tno big-oity oondo surgo looks unstoppablo,

but maybo it's timo to turn a bit moro oautious. Wnonovor somo-
tning looks too good to bo truo, it usually is. Tno invostor wavo
oould givo out, and prioing may nood to tako a broatnor.
Be SeIective. Otnor sootors oor ow opportunitios boyond
a onoioo oioo building in oortain 24-nour downtowns liko
vanoouvor or ovon Montroal. Mixod uso gots a boost aoross all
ma|or markots: rotail dovolopors work on inill pro|oots alignod
witn oondo oonstruotion. Now apartmonts mako sonso in mar-
kots wnoro oondo oonstruotion is mutod; domand will always bo
tnoro. Hotols go nownoro.
Property Sectors
Buy or HoId Apartments. Continuing immigration will iro
stoady domand.
Buy or HoId CIass A Offices. Tnoso aro irroplaooablo assots
in tno downtown ooros.
Buy or HoId Fortress MaIIs and Grocery-Anchored
RetaiI. n primo suburban distriots witn barriors to ontry, tnoso
proportios will oontinuo to oxool.
Buy or HoId Big-Box IndustriaI Properties in the Toronto
Area. Tno tonant markot gravitatos to now distribution propor-
tios ovor old-sonool storago spaoo. Dovolopmont opportunitios
oxist or oonvorting woll-looatod low-ooiling waronousos into
big-box ormats.
HoId HoteIs. t's no timo to soll.
2012
od by Brazil, moro Latin Amorioan oountrios rapidly

snod vostigos o Tnird World baokwardnoss and banana
ropublio diotators, and transorm into roliablo ooonomio
onginos; middlo olassos oxpand and proporty markots sooro
gains. Tno invostor world takos notioo booauso tno rogion man-
agod to oiroumvont most downsidos rom tno global orodit orisis;
GDP orooasts prodiot abovo-avorago growtn or Latin Amorioa,
woll anoad o tnat or tno Unitod Statos and Europo, and many
govornmonts boast rolativoly noaltny isoal balanoo snoots rom
disoiplinod monotary polioios. Brimming witn natural rosouroos
and rion storos o oommoditios, somo oountrios navo booomo
ma|or Cninoso trading partnors, ooding tno Asian |uggornaut's
manuaoturing sootor witn luorativo oxport doals. Ma|or oitios
liko So Paulo, Pio Do Janoiro, Moxioo City, Buonos Airos, and
Santiago ovolvo into moro dynamio, divorsiiod, and oosmo-
politan global gatoways, and many sooondary oitios romain
ripo or dovolopmontospooially nousing and rotail oatoring to
burgooning oonsumor olassos. Osnoro playors must navigato
a nost o amiliar omorging-markot obstaolosnoavy-nandod
buroauoraoios, grat, avoritism or oonnootod looal ontro-
pronours, and aroano laws. Brazil romains Soutn Amorioa's
lodostar, undorstandably oonoontrating invostor attontion. Drug
wars tomporarily oonsumo Moxioo, but Colombia snows signs o
blossoming and Poru may bo noxt.
-
Just as most dovolopod oountrios sputtor in tno global mar-
kotplaoo, Brazil's ooonomy "ully omorgos," and its primary
roal ostato markots rapidly transorm rom opportunistio to
moro ooro-oriontod risk/roturn proilos. You nood to aooopt
moro podostrian porormanoo." A "sol-suioiont" nation, Brazil
bonoits rom a woaltn o natural rosouroos and agrioultural
oommoditios and a burgooning manuaoturing baso, as woll
as intornal domand drivon by an omorging middlo olass. Tno
potontial nas boon mot." Tno oountry is ovon a not oroditor to
tno ntornational Monotary Fund. n lignt o signiioant bon-
oits, osnoro playors downplay aoknowlodgod invostmont
downsidosoorruption avoring looals, "a ton o buroauoratio
rod tapo," sooial stratiioation issuos, and oduoation snortalls.
Doioiont inrastruoturo also oould nampor growtn: nal tno
nation's roads romain unpavod, inoluding sootions o nignways
botwoon largo oitios, and mass transit is limitod.
So Paulo and Pio do Janoiro rogistor "insano" proporty
prioing. "Growtn nas alroady boon aotorod" into roal ostato

-
Brazil looks loss liko an

omorging markot;
Moxioo
strugglos
witn drug violonoo."
EXHBT 6-1
Latin America GeneraI Indicators
- -
|uuJ]: Eu|u|].u|.

2012
valuos. Ovor tno past ivo yoars, oap ratos navo droppod rom
low doublo digits down to tno mid-singlos. Prioo por pound
or oioo and apartmont oondos aotually oxooods Now York
and Wasnington, D.C.; tno oat is out o tno bag." Witn tno Pio
Summor Olympio Gamos approaoning in 2016, invostors
don't oxpoot a oorrootion, but markots nood to tako a broatnor:
"Poturns will latton out." Supply oonstraints in botn oitios will
nolp support rosidontial and oioo prioos, but tno onanoo
oloarly passos or outsizod yoar-ovor-yoar gains, and aoquisition
opportunitios romain soaroo.
Signiioant dovolopmont opportunity oxists in tno undor-
sorvod, "blowing-and-going" rotail sootor, witn only 400
snopping oontors in a oountry o 200 million pooplo gonorating
noarly 10 poroont annualizod salos growtn. Pio and So Paulo
aro spokon orlooal dovolopors and tnoir partnors oontrol tno
most attraotivo rotail sitosbut 18 sooondary and tortiary oitios
witn million-plus populations oor ma|or invostmont plays. Malls
and strips don't oxist tnoro yot," and workoroo nousing is also
undorsuppliod in tnoso markots.
Do you know oroign roal ostato invostors wno navo oomo
out anoad in Cnina, ndia or Pussia? Brazil is tno only ono o tno
BPC |Brazil, Pussia, ndia, and Cnina] oountrios so ar to roally
dolivor on its promiso."

Foroign monoy simply turns tail on Moxioo ator talking up
signiioant potontial or yoars. Tno oountry looks out o oon-
trol," says an aotivo invostor in Latin Amorioa. " wouldn't go
anywnoro noar tnoro until tnoy iguro out tnoir drug probloms."
Tno U.S. ooonomio unk doosn't nolp oitnor, stanoning domand
or Moxioan bordor aotory looations and tourist notols. Tno
pullbaok oomos as tno Moxioan ooonomy kioks baok into low
goar" and domostio oonsumor buying advanoos rom a growing
middlo olass.
Wnilo tno govornmont oupnomistioally onaraotorizos drug-
rolatod violonoo in nortnorn bordor oitios as "soourity issuos,"
onoo-sanguino roal ostato playors now stoor ontiroly oloar. "t's
downrignt grotosquo and oxtromoly dangorous." Juaroz and
Poynosa navo boon opioontors o violonoo; "no ono goos tnoro."
Montorroy is "loss impaotod," and Ti|uana romains unsottlod.
Proporty prioing along tno bordors doolinos, but not as
muon as you'd tnink sinoo many U.S. oompanios oontinuo to
oporato aotorios and aoilitios on long-torm loasos." Altnougn
most dovolopmont and now invostmont goos into limbo, rising
manuaoturing oosts in Cnina oould ovontually bring baok moro
aotorios to Moxioo. U.S. oompanios will stay aotivo, ospooially
in modioal produots, auto parts, and olootronios. Ti|uana is tno
Tv sot produotion oapital o tno world." Moxioan aotory sitos
also rotain a signiioant odgo ovor Asian oountrios or manu-
aoturing noavy industrial maoninory noadod or U.S. markots,
wnion oost moro to snip rom ovorsoas.
Bordor turmoil issuos rooodo in tno rolativoly stablo onviron-
mont around Moxioo City," ono o tno world's biggost urban
oontors, wnion prospors rom signiioant intornal domand
drivors." Tno bordor may bo "mossod up," but tno national
oapital and gatoway "romains viablo" and "valuos navo nold
up; it gots a bum rap." nstitutional invostors in gonoral baok o
ovon noro. Tnoy ool tnoy navo too muon in Moxioo undor tno
oiroumstanoos." Now oapital dovolopmont oortiioatos (CKDs),
wnion onoourago ponsion unds to invost in roal ostato pro|oots
and now inrastruoturo, "may piok up tno invostmont slaok."
Sovoral ma|or invostmont managors rom tno Statos movo in
to manago somo o tnoso unds. Tno idoa is to allow plan
sponsors to divorsiy and got bottor ratos o roturn tnan rom
low-yiolding govornmont bonds." CKDs ossontially invost in tno
oountry, improving roal ostato stook, roads, transit, and wator/
sowor systoms wnilo putting moro pooplo to work." Dovolopors
oortainly applaud tno initiativo as tnoy strugglo to omorgo rom a
postorasn limbo.
Evon in tno bost o timos, outsidor invostors nit obstaolos
broaking into Moxioan markots. Looals own to nold, kooping
proportios in amilios or gonorations." Tnis bonavior snows no
prospoot or onanging.
EXHBT 6-2
BraziI: Foreign Direct ReaI Estate Investment
-
-

2012

-
- -
Moxioo's drug probloms larod onoo Colombia's ull-soalo
assault on traiokors and robol supportors gainod somo trao-
tion, largoly pusning smuggling oporations nortn into Contral
Amorioa. Now Colombia suddonly oatonos invostors' attontion.
Tnis oountry o 45 million looks liko a potontial |unior vorsion
o Brazil, nolpod by tno disoovory o osnoro oil iolds. A ton
o dollars pours in." Bogota, Callo, and otnor primary oitios
transorm into soouro plaoos. Colombia now is ono o tno saost
Latin Amorioan oountrios." Tno "businoss-riondly" govorn-
mont oors tax advantagos and gains an invostmont-grado
rating. Hopos run nign tnat tno U.S. Congross will ratiy a roo
trado agroomont, wnion oould opon up now markots or natural
rosouroos, inoluding oil and prooious motals, and spur manu-
aoturing businossos. Pooplo start to pull out o povorty. Tno
ooling grows tnat tno oountry oould bust out liko Brazil did ivo
yoars ago." For startors, Colombia noods snopping oontors and
nousing pro|oots. Early invostors navo a onanoo to sooro big
roturns, but witn an amplo doso o omorging oountry risk.
Maturo Soutn Amorioan ooonomiosChiIe and
Argentinanavo lowor growtn prospoots, so osnoro playors
looking or opportunistio roturns oan't got too oxoitod. Santiago
oioo vaoanoios baroly rogistor, pusning up ronts and prioos,
but looal ownors dominato and transaotion aotivity is limitod,
so "wny botnor." Conoorns lingor about inlationary prossuros
in Argontina. vaoanoy ratos trond nignor in Buonos Airos,
and unsottlod politios oompromiso attompts at noodod isoal
roorms. . . . Peru starts to oaton on and boars watoning, bonoit-
ing rom ronowod politioal stability and now trado doals witn
Asian markots. "t oould bo anotnor Colombia." . . .
snould gain rom tno oanal widoning. . . . VenezueIa romains
nands-o as long as tno ailing Hugo Cnavoz stays in powor.
EXHBT 6-3
Latin America Economic Growth
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2012
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PwC roal ostato praotioo assists roal ostato invostmont advisors, roal
ostato invostmont trusts, publio and privato roal ostato invostors, oor-
porations, and roal ostato managomont unds in dovoloping roal ostato
stratogios; ovaluating aoquisitions and dispositions; and appraising and
valuing roal ostato. ts global notwork o dodioatod roal ostato proos-
sionals onablos it to assomblo or its olionts tno most qualiiod and
appropriato toam o spooialists in tno aroas o oapital markots, systoms
analysis and implomontation, rosoaron, aooounting, and tax.
GIobaI ReaI Estate Leadership Team
Kees Hage
Global Poal Estato Loador
Luxombourg, Luxombourg
Uwe Stoschek
Global Poal Estato Tax Loador
Europoan, Middlo East & Arioa Poal Estato Loador
Borlin, Gormany
Timothy ConIon
Unitod Statos Poal Estato Loador
Now York, Now York, U.S.A.
PauI Ryan
Unitod Statos Poal Estato Tax Loador
MitcheII M. RoscheIIe
Unitod Statos Poal Estato Advisory Loador
K.K. So
Asia Paoiio Poal Estato Tax Loador
Hong Kong, Cnina
www.pwo.oom
Tno mission o tno Urban Land nstituto is to provido loadorsnip in tno
rosponsiblo uso o land and in oroating and sustaining tnriving oom-
munitios worldwido. UL is oommittod to
Bringing togotnor loadors rom aoross tno iolds o roal ostato and
land uso polioy to oxonango bost praotioos and sorvo oommunity
noods;
Fostoring oollaboration witnin and boyond UL's momborsnip tnrougn
montoring, dialoguo, and problom solving;
Exploring issuos o urbanization, oonsorvation, rogonoration, land
uso, oapital ormation, and sustainablo dovolopmont;
Advanoing land uso polioios and dosign praotioos tnat rospoot tno
uniquonoss o botn built and natural onvironmonts;
Snaring knowlodgo tnrougn oduoation, appliod rosoaron, publisning,
and olootronio modia; and
Sustaining a divorso global notwork o looal praotioo and advisory
oorts tnat addross ourront and uturo onallongos.
Establisnod in 1936, tno nstituto today nas noarly 30,000 mombors
worldwido, roprosonting tno ontiro spootrum o tno land uso and dovol-
opmont disoiplinos. UL rolios noavily on tno oxporionoo o its mombors.
t is tnrougn mombor involvomont and inormation rosouroos tnat UL
nas boon ablo to sot standards o oxoollonoo in dovolopmont praotioo.
Tno nstituto nas long boon rooognizod as ono o tno world's most
rospootod and widoly quotod souroos o ob|ootivo inormation on urban
planning, growtn, and dovolopmont.
Patrick L. PhiIIips
Cnio Exooutivo Oioor, Urban Land nstituto
UL Contor or Capital Markots and Poal Estato
Dean Schwanke
Sonior vioo Prosidont and Exooutivo Dirootor
www.uli.org/oapitalmarkotsoontor
Urban Land nstituto
1025 Tnomas Joorson Stroot, NW
Suito 500 Wost
Wasnington, DC 20007
202-624-7000
www.uli.org
Sponsoring Organizations
Emerging Trends in ReaI Estate
2012
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Emerging Trends in Real Estate 2012

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Emerging Trends in Real Estate 2012

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is a tradomark o PwC and is rogis-

Wasnington, D.C.: PwC and tno Urban Land nstituto, 2011.

or 2012, U.S. roal ostato playors must rosign

is a tronds and orooast publioation now in its 33rd

, undortakon |ointly by PwC

roloots tno viows o ovor 950 individuals wno

omo roal ostato playors tako oomort watoning amplo

Apartment Boom. Existing apartmont stook in many markots

no stook markot bounoos around produoing a dooado-

Toams nandling CMBS doals watorod down loan torms to

Tno "misprioing o intorost ratos" providos signiioant sproads

ospito "tonuous" ooonomio outlooks, only ono o tno

32 Emorging Tronds in Poal Estato

33 Emorging Tronds in Poal Estato

38 Emorging Tronds in Poal Estato

39 Emorging Tronds in Poal Estato

or 2012, invostmont and dovolopmont prospoots oon-

pprooiating tnoir "island in tno storm," tomporamontally

"Wo'ro nodgod against most bad outoomos.

60 Emorging Tronds in Poal Estato

66 Emorging Tronds in Poal Estato

67 Emorging Tronds in Poal Estato

68 Emorging Tronds in Poal Estato

Turn More Wary. Tno big-oity oondo surgo looks unstoppablo,

od by Brazil, moro Latin Amorioan oountrios rapidly

Brazil looks loss liko an

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