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Global Real Estate Research

Outlook 2010 – US

By William Hughes, Gregory Brown, Zoya Geller,

Tiffany Gherlone, Amy Holmes, Kimberly House & Brian O’Connell

Real assets, real expertise

Outlook 2010 – US

Dear Reader,

Global Real Estate Research offers its economic and real estate perspective for the United States in ‘Outlook 2010 – US.’ It
reports our general strategic framework from which we can build specific plans to meet the goals of individual portfolios.
To form the included opinions we evaluate the general economic conditions, capital markets and 65 property markets,
identified on the map below.

As anticipated a year ago, 2009 was a difficult year with the economy and capital markets searching for solid ground,
and investors facing tremendous uncertainty. The range of performance outcomes for 2010, as we start the year, is very
wide again, but we have confidence that the result will be better than that of the past 12 months. The following pages
describe in detail the reasons for our expectations.

UBS Global Asset Management, Global Real Estate has USD 43.2 billion under management with direct property
investments in Asia, Europe and the US and in publicly traded real estate securities worldwide. Our global experience in
real estate securities management, private real estate investment, commercial mortgage financing and securitization, and
risk management is invaluable to our market understanding. Experience within our US business includes 31 years
managing private equity real estate. During that time we have acquired more than 660 assets and sold more than 395.
US AUM exceeded USD 13 billion (as of September 30, 2009).

The views presented in ‘Outlook 2010 – US’ are the product of our strategy team. The Global Real Estate Research group
chairs this team by presenting data, concepts and trends. Members of the strategy team include personnel from
acquisitions, asset management, portfolio management, client service and senior management. The team debates the
presented numbers and collects the opinions of all participants to form a collective outlook. While this report is the
responsibility of the research group, it is a product of our entire strategy team.

Thank you for considering our perspective. We welcome your comments and opinions.

Sincerely,

William T. Hughes, Jr.

Head of Global Real Estate Research – US
UBS Global Asset Management
william.hughes@ubs.com

NCREIF regions
West
Midwest
South
East

Cover image: 65 property markets indicated by CBSA or division boundary.

Kifer Tech
San Jose, CA
US economy 1

Economic scenarios 4

Property sector outlook

Apartment 5
Hotel 7
Industrial 9
Office 11
Retail 13
Farmland 15

Public REITs 17

Capital markets 18

Strategy 21

Data sources and glossary 27

Contacts 28
US economy

Recession to recovery • Third quarter 2009 marks the seventh quarter since the
• Recovery is underway. recession began. The National Bureau of Economic
Research is responsible for declaring the official end of
• Maury Harris, chief US economist for UBS Securities, a recession. In some instances, many quarters pass
recently echoed this sentiment “The data is stronger before an official determination is made. Our
than expected … one more sign that recovery is well expectation is that when declared, this recession will be
underway and will be sustained.” six to eight quarters long, making it as long or longer
than any recession in the past 60 years.
• Exhibit 1 presents economic performance variables from
past recessionary periods. Blue bars represent the • A positive sign in the current cycle is the apparent peak
duration in quarters of each recession. Colored dashes or trough of each of the related variables in the seventh
identify the number of quarters from each recession’s quarter (third quarter 2009). Industrial production may
official start to the factor’s respective peak or trough. be the best indicator of a cyclical low. Its trough
coincided with the end of all of the recent recessions
except 1975.
Exhibit 1
Turning points in economy and key economic indicators
Quarters
0 1 2 3 4 5 6 7 8 9 10
4Q48-4Q49 Number of quarters in recession
Industrial production trough
2Q53-2Q54 Real retail sales trough
3Q57-2Q58 Unemployment peak
Employment trough
2Q60-1Q61 Real GDP trough
4Q69-4Q70

4Q73-1Q75

1Q80-3Q80

3Q81-4Q82

3Q90-1Q91

1Q01-4Q01

4Q07-*
*Current recession: official end date has yet to be determined.

GDP Exhibit 2
• The 2.8% real GDP growth in third quarter 2009, the General economy
first increase in over a year, probably marked the end of
the longest and most severe recession since the 1930s.
Quarterly, annualized (%) Millions of jobs
4 1.2

• Positive GDP growth does not automatically signal the 2 0.6

end of a recession, but it is a comprehensive measure of
economic strength.
0 0.0
-2 -0.6
• Looking forward, exhibit 2 shows an expectation of -4 -1.2
positive, albeit modest, GDP growth during 2010.
Real GDP growth (L)
-6 Employment growth (R) -1.8

• Although still not operating normally, the financial 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
system has stabilized. The economy must now shiW White area indicates forecast data.
from external stimulus-based growth to a sustainable-
employment and income-driven expansion.

1
Federal stimulus
• Fiscal and monetary support from the federal
government initiated the turn from recessionary decline
to stabilization. When failures of major financial and
nonfinancial institutions led investors to question the
solvency of the entire financial system, the Fed and
FDIC responded by mounting a massive and
coordinated effort to restore confidence in financial
markets and avert a catastrophic recession.
• The foundation of the federal effort includes two pieces
of landmark legislation: the Emergency Economic
Stabilization Act of 2008 (EESA) and the American
Recovery and Reinvestment Act of 2009 (ARRA). Both
are described in detail in the Capital markets section.
Corporate performance
• As shown in exhibit 3, corporations increased profits in
2009 by slashing expenses, especially inventories and
labor. Now companies must expand production to
sustain profitability.
• Inventory reductions usually measure about
one percentage point in a recession. The current cycle
reduction was 1.5 points. If domestic and international
demand improve, rebuilding depleted inventories could
lead to unexpected growth.
Exhibit 3
Corporate profits
USD trillions

• As of third quarter 2009, approximately USD 640 billion

1.8

has been spent on the two major stabilization and

1.6

stimulus programs: Troubled Asset Relief Program

1.4

(TARP) and the ARRA. Although TARP spending is

1.2

flattening out, the benefits of ARRA will continue in

1.0
2010 but at a diminishing rate. 0.8
0.6
• Even though TARP spending is winding down, two very 0.4
important components, TALF (Term Asset-Backed 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09
Securities Loan Facility) and PPIP (Public-Private
Investment Program), remain vital to rejuvenating the
asset-backed lending market. Both programs are Foreign trade
designed to increase securitized lending by enhancing • US exports should be a source of strength in the near
the value to investors. term. The recovery of major trading partners is further
along than that of the US.
• Year-end economy was supported by stimulus that will
not continue indefinitely. The end of stimulus provides • A weaker dollar, which makes US goods cheaper in
some risk to continued economic expansion. foreign markets, will encourage export growth. As
shown in exhibit 4, the benefits of a weaker currency
• Despite a number of meaningful threats, there are lag currency movement. The sharp currency drop in
enough positive factors for the recovery to evolve into a early 2008 should be supportive in the near term.
self-sustaining expansion.
• As the US recovery gains momentum, stronger import
Employment growth will reduce the contribution of foreign trade.
• Although many indicators point to recovery, job growth
is conspicuously absent. More than seven million jobs Exhibit 4
were lost during the recession. Layoffs slowed from US exports
660,000 jobs per month in the first half of the year to
199,000 in the third quarter and 61,000 in the fourth.
Export growth (%) Real US dollars index 1973=100
20
Export growth (L) 120
• Employment growth is expected sometime in 2010, as
15
Real US dollars (R)
shown in exhibit 2. Most economists agree with the
10
110
trend but vary on the timing.
5
0 100

• Firms typically increase hours of existing employees and -5

then add temporary workers, before increasing the
90
-10
permanent workforce. AWer falling continuously from a -15 80
peak in December 2006, the average workweek rose by 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
0.2 hours in November to 33.2 hours and 52,000 Shaded area indicates forecast data.
temporary jobs were added in November.

2
Exhibit 5
Consumer confidence
Index 1985=100
200

160

120

80

40

0
1Q67 2Q69 3Q71 4Q73 1Q76 2Q78 3Q80 4Q82 1Q85 2Q87 3Q89 4Q91 1Q94 2Q96 3Q98 4Q00 1Q03 2Q05 3Q07 3Q09

Consumers
• Consumer confidence leads to purchasing, which leads
to production. Production growth requires expanding
employment and growing facilities, which in turn
increases demand for commercial real estate.
• As shown in exhibit 5, the Conference Board measure
of consumer confidence remains low but increased in
October and November. During 2009, the index fell to a
point below any level since the 1960s. The slight
rebound late in 2009 may indicate a positive trend, but
the year-end value is still as low as that of any previous
period shown.
• Spending has been hampered not only by reduced
willingness, due to job losses and weak confidence, but
also by constrained ability, due to high debt levels.
• Consumers deleveraged their balance sheets over the
past year but additional improvement is warranted. The
relationship between household debt service and the
savings rate is shown in exhibit 6.
- Household debt outstanding fell for the first time in
third quarter 2008 and continued to decline through
third quarter 2009.
- With less debt and low interest rates, the percentage
• AWer declining for nearly two years, household net
worth increased by 10.2% in the second and third
quarters of 2009. The recovery in the equity market
accounted for much of the improvement, but housing
assets also rose in third quarter and higher home prices
accounted for two-thirds of the increase in assets.
• In late 2009, the savings rate rose above 4%, a level
not seen in over a decade. Combining rising net worth
with deleveraging is a positive for future consumption.
• Debt levels and debt service remain high relative to
income. However, balance sheets can be improved by
the increased savings rate, continued progress in debt
repayment, gradually rising household assets and
income growth, all without seriously impacting
spending plans.
Exhibit 6
Consumer finance
Household debt service ratio (%) Savings rate (%)
14 14
Debt service ratio (L) 12
Savings rate (R)
13
10

of disposable income required to service debt has

8
12
fallen to mid-2002 levels.
6
11 4
• It is unlikely that families will increase debt from current 2
levels, which could fuel rapid consumption growth. 10 0
However, they may slow the rate of deleveraging, 1Q80 3Q84 3Q88 3Q92 3Q96 3Q00 3Q04 3Q09
which should allow a return to modest growth.

Summary
• It increasingly looks like the economy will continue its
gradual transition from recovery to expansion. Growth
is expected to be moderate but should accelerate as
employment begins to expand.
• Real GDP rose in the third quarter, following a period
with five out of six negative quarters.
• Government programs were badly needed in 2009 and
appear to be successful in supporting general economic
stabilization and credit market function.
• Employment is expected to grow during 2010, although
economists disagree on the exact timing.

3
Economic scenarios

The estimates in these scenario tables are provided to define the range of Exhibit 7
expectations for economic performance during 2010. Exhibit 7 is a table of 2009 market conditions
2009 year-end estimates based on data through November. Three possible
2010 economic outcomes are described at the bottom of the page in exhibit 8;
2009
each depends on the pace at which we emerge from the recent recession. The
Estimated

estimated variables are interrelated and modeled with the support of many Real GDP % -2.5
assumptions. According to the economic analysis of Moody’s Economy.com, the Inflation (CPI annual average rate) -0.3
Rebound and Relapse scenarios define an 80% confidence interval, with the
Baseline representing the highest probability outcome.
Employment annual change (millions) -5.0
Real personal income change (%) -2.4

• By all accounts 2009 was a very difficult economic year, with declines in GDP, Real retail sales (%) -5.7
employment, income, sales and returns. Commercial real estate values, as Net mortgage flow (USD billions) -63
measured by the NCREIF Property Index (NPI), fell by 19% during the first Transactions (USD billions) 47
three quarters and are expected to fall slightly during the fourth quarter. This
value decline is similar to that of most assets during the year.
Cap rates increase (bps) 107
NOI growth (%) -3
• Each of the presented scenarios—Rebound, Baseline and Relapse—suggest Income return (%) 6
improving conditions during 2010, as shown in exhibit 9. Although some Appreciation (%) -22
components may weaken further, depending on the scenario, the relative
change is always positive or less negative than that seen over the last year.
Total return (%) -17

• Focusing on the Baseline scenario, the economic figures return to positive Exhibit 9
growth in 2010, with the exception of employment. Economic change

• Our analysis, including insight from UBS Investment Bank economists,

GDP growth (%)

anticipates an earlier recovery in employment than the Moody’s

5
Rebound
Economy.com figures used in the table. We suggest that 2010 will end with
4
Baseline
an equal or greater number of employed individuals than 2009.
3 Relapse
2

• Our real estate Baseline forecasts a slight decline in NOI, offset by a lower
1

cap rate, leading to little or no value change. Property values at the end of
0
-1
2010 are generally expected to be the same as values at the end of 2009. -2
-3
• Total return for 2010 is expected to be dominated by the income return, 2009 2010
which has risen due to the value adjustments of 2009. Employment growth (millions of jobs)
2

Exhibit 8
1

2010 market scenarios

0
-1
2010 2010 2010 -2
Baseline Rebound Relapse -3
-4 Rebound
Real GDP % 2.3 4.3 0.1 Baseline
-5
Inflation (CPI annual average rate) 1.7 2.6 0.5 -6 Relapse
Employment annual change (millions) -1.1 1.3 -2.7 2009 2010
Real personal income change (%) 0.7 2.0 0.0 Income growth (%)
Real retail sales (%) 0.9 4.1 -3.3 3
Rebound
Net mortgage flow (USD billions) -50 100 0 2 Baseline
Relapse
Transactions (USD billions) 75 120 45 1
Cap rates increase (bps) -25 -50 50 0
NOI growth (%) -3 0 -10 -1
Income return (%) 6 5.5 6.5 -2
Appreciation (%) 0 7 -15 -3
Total return (%) 6 12.5 -8.5 2009 2010

4
Property sector outlook
Apartment
Current outlook • Building demand – During the recession, to save money
or by necessity, many potential renters doubled and
tripled-up with roommates or moved in with parents or
relatives. These trends will reverse as the economy
Apartment _ +
Solid blue triangle indicates 2010 outlook. Hollow yellow triangle indicates improves.
2009 outlook. Taken from exhibit 52, an all-sector outlook for 2010.
• Quick response – One-year terms that typify apartment
Our positive outlook is unchanged from last year due
leases allow the sector to respond quickly to improving
primarily to favorable demographics, declining
conditions. Following the 2001 recession, apartment
homeownership and muted supply growth. Concerns
income recovered sooner and stronger than the all-
include high unemployment, improved housing
property-type average, as seen in exhibit 11.
affordability and pricing relative to other sectors.
Exhibit 11
Positives Apartment income
• Declining homeownership rates – Housing market
difficulties are reducing the percentage of families NOI growth (%)
owning a home. Per exhibit 10, aWer peaking over 69% 15
in 2004, the homeownership rate fell to 67% by late 10
2009 and is forecast to approach 66% in 2010. Since
people require some form of shelter, fewer
5

homeowners translates into more renters. From a low

0

of 33.6 million in mid-2004, the number of renter -5

households increased to 37.5 million in 2009 and is -10 All-property type
forecast to grow to 39 million in 2010. -15
Apartment

Exhibit 10
99 00 01 02 03 04 05 06 07 08 09
2009 data is through third quarter.
Homeownership and renter population
Millions of renter households Homeownership rate (%)
• Below average construction levels – The 2010
apartment completions forecast, illustrated in exhibit
42 70

12, is 33% below the average since 1990. An

Renter households (L)
40 69
Homeownership rate (R)
38
68 increasing number of abandoned and deferred projects,
67 due to financing or owner-equity problems, will likely
detract further from an already below average forecast.
36
66
34
Exhibit 12
65

Apartment absorption, completion and vacancy

32 64
30 63
90 92 94 96 98 00 02 04 06 08 10 12 Thousands of units Vacancy rate (%)
Shaded area indicates forecast data. 250 Completions (L) 9
Absorption (L) 8
200
• Primary renter age-bracket growth – Children of baby-
Vacancy (R) 7
150 6
boomers, or echo-boomers, are now of the primary 5
ages for apartment renting. The 20 to 34 age bracket is
100
4
forecast to grow 1.5% in 2010 or 1.5 times faster than 50 3
the total population.
2
0
1
Long-term completions average (L)
• Forecast for healthy recovery in household formation –
-50 0

We expect job losses to slow in early 2010, before

90 92 94 96 98 00 02 04 06 08 10 12
Shaded area indicates forecast data.
improving during the balance of the year and into
2011. An improving job market is forecast to increase
• Access to Fannie Mae and Freddie Mac lending – As of
the annual household formation rate from 0.8% in
third quarter 2009, government sponsored enterprises
2009 to 0.9% in 2010, 1.1% in 2011 and 1.5% in
held USD 197 billion in multi-family mortgages, which
2012.
is 56% more than the amount held in third quarter
2007. Access to Fannie Mae and Freddie Mac lending is
facilitating more apartment transactions and supporting
values more than most sectors.

5
Negatives Exhibit 14
• Subpar employment conditions – When employment 2010 apartment outlook
conditions worsen, household formation slows and
renter demand weakens. More than seven million jobs Demand Supply Income Transactions Pricing
were lost during the recession. Concurrently, the annual
household formation rate slowed from 1% at the start
of the recession to 0.8% as of late 2009. A rate
reduction of 20 basis points (bps) in household

Strengthening
formation translates roughly into 230,000 fewer
households formed per year.

• Elevated vacancy – Job losses and sluggish household

formation pushed apartment vacancy from 5.4% in
2006 to 7.9% in late 2009. Exhibit 12 shows that peak

Detracting
cycle vacancy is forecast to exceed 8%, surpassing
previous highs since 1990.

• Lingering shadow supply – Vacant, for-rent homes and

condominiums will continue to detract from apartment
fundamentals in 2010. The 2.6% homeowner vacancy
rate in late 2009 is well above the 1.5% long-term
average. Shadow supply will likely be less of an issue in
2010 than 2009, as economic and housing market
conditions improve.
• Housing affordability may detract from rentals – The
housing affordability index rose from 105 at the
housing peak in mid-2006 to 169 by late 2009, which
means more households can afford the average priced
home. When the economy improves, homebuyers may
capitalize on improved affordability.
• Declining transactions and values – Exhibit 13 shows
that in the year ending third quarter 2009, transactions
totaled USD 13.6 billion, which is 85% below the 2007
annual peak. Fewer transactions and weaker
fundamentals pushed Real Capital Analytics (RCA) cap
rates from 5.8% in late 2005 to 7.1% in late 2009.
AWer appreciating 48% during the expansion, NPI
apartment values declined 29% from the peak, as of
third quarter 2009.
Demand – Homeownership declines and favorable
demographics rank apartment demand as strongest of the
five property types, despite subpar, but improving,
employment conditions.
Supply – The 8.1% 2009 year-end vacancy rate is the
lowest of any sector. The 30 bps rise in vacancy forecast
for 2010 is milder than all sectors, but hotels. Shadow
supply is lingering but dissipating.
Income – Negative 2.7% net income growth for the year
ending third quarter 2009 is less negative than all sectors
except office. Apartment income shows a propensity to
respond quickly to improving conditions.
Transactions – Although 85% below the 2007 peak, USD
13.6 billion of transactions in the year ending third quarter
2009 is more than that of the hotel, industrial and retail
sectors. Higher volume is due in large part to the
availability of government-sponsored lending.
Pricing – Cap rates are lowest of the five property types,
due in part to greater availability of debt capital.

Summary
Our outlook for apartments, detailed in exhibit 14, is the Exhibit 13
most positive of the five property types. Homeownership Apartment transactions and pricing
headwinds, support from government lending, muted
construction levels and favorable demographics justify the Transactions (USD billions) Cap rates (%)
top ranking. Subpar employment conditions and lingering
40 7.3
shadow supply are the sector’s key counterweights.
35 Transactions (L) 7.0
Cap rates (R) 6.8
30
25 6.5
6.3
20
6.0
15
5.8
10 5.5
5 5.3
0 5.0
1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09

6
Property sector outlook
Hotel
Exhibit 16
NPI returns by sector following 1991 and 2001
Current outlook
recessions
Hotel _ +
Solid blue triangle indicates 2010 outlook. Hollow orange triangle indicates Annualized total return Annualized total return
2009 outlook. Taken from exhibit 52, an all-sector outlook for 2010. 1996-2000 (%) 2004-2007(%)

Our shiW from negative to positive is due exclusively to the

Apartment 12.7 15.0
potential for compelling pricing opportunities. One-night
Hotel 18.8 17.6
leases that typify hotels will help occupancies respond Industrial 14.2 16.0
quickly to improving conditions. Office 15.4 17.7
Retail 8.7 17.4
Positives Average 12.8 16.7
• Significant value-buying opportunities – The severity of
hotel sector value declines is generating compelling and
• Hotel occupancies respond quickly in recovery – Due to
in some instances below replacement-cost acquisition
one-night stays, hotel occupancies respond quickly to
opportunities. RCA cap rates in late 2009 were the
improving economic conditions. AWer increasing a
highest of any sector, 200 bps above the cycle low in
tepid, but much improved, 1.1% in 2010, revenue per
late 2005.
available room (RevPAR) is forecast to grow by 5.1% in
2011 and 6.7% in 2012. Exhibit 16 shows that during
• Business travel and tourism are forecast to improve –
the two previous post-recession expansions, hotels
Travel is poised to stabilize in early 2010, before
experienced the highest two-period average increase in
beginning a gradual recovery late 2010 and into 2011.
total returns.
• Occupancies and room demand are stabilizing – Per
• 2009 likely set the high watermark for supply growth –
exhibit 15, occupancies are forecast to increase by two
Due to financing, demand or owner equity issues, it is
percentage points in 2010 with continued improvement
unlikely that all of the rooms planned for 2010 will be
in 2011. Room demand is expected to grow in 2010
completed. In the first three quarters of 2009, 2,300
following the steepest downturn on record.
hotel projects were abandoned or deferred, a trend
Exhibit 15 likely to continue in 2010. In 2011 and 2012, hotel
Supply trends completions are forecast to be less than half of the
long-term average.
Thousands of rooms Occupancy rate (%)
Negatives
80 70

• Elevated construction levels – Hotels are the one sector

60 68

currently experiencing above average supply growth. In

40 66
20
2010, 47,000 room completions are expected, which is
64
0
20,000 less than 2009, but 50% higher than the
62
-20
average since 2000.
-40 60
Demand (L) 58
-60
Supply (L) 56
-80
Occupancy (R)
-100 54
00 01 02 03 04 05 06 07 08 09 10 11 12
Shaded area indicates forecast data.
• Severe fundamental losses will take time to recover –
Hotel fundamentals tend to reflect prevailing economic
conditions. One hundred thousand fewer rooms were
in demand in late 2009 than in 2007. Recession-driven
declines in business, consumer and international travel
helped push occupancies back to 2001 levels. In exhibit
17 we see a similar condition to that of the 2001
recession, where year-over-year RevPAR declined 20%.
Exhibit 17
RevPAR and employment
Year over year change in Year over year change in
hotel RevPAR (%) nonfarm employment (%)
15
10
5 2
0 0
-5
-10
-15
RevPar (L)
-20
Employment (R)
-25
99 00 01 02 03 04 05 06 07 08 09 10 11 12
Shaded area indicates forecast data.
• Weak 2010 RevPAR forecast – RevPAR is forecast to
grow only 1.1% in 2010, a significant improvement
over 2009 but well below the 2.8% average rate since
1999.
• Leverage and expense – Hotels are typically the highest
leveraged sector, which adds volatility to financial
performance. The sector also requires the highest
proportion of fixed expenditure and is capital intensive.
This combination intensifies revenue variability.
• Above average sector distress – An increasing number
of hotels are failing to generate enough income to
cover their debt service, resulting in more distressed
hotel assets in 2009 than any other sector.
• Slow group business recovery anticipated – Past
recessions indicate that businesses are slow to rebook
conventions or group travel following downturns.
Forecasts anticipate that normal group business
booking conditions are unlikely to return before 2011.
• Declining transactions and values – In the year ending
third quarter 2009, USD 3 billion in hotel transactions
closed, which is 93% below the amount in 2007 and
the largest percentage decline of any property type. The
decline in transactions is having a pronounced influence
on values. AWer appreciating nearly 40% during the
expansion, NPI hotel values declined by 32% from the
sector peak to third quarter 2009, more than any other
property type.
Westin Galleria
Dallas TX
Summary
Our 2010 outlook for hotels is described in exhibit 18.
Fundamentals are in worse shape than in any other sector.
RevPAR, occupancy and demand are near record lows and
supply is above average at the worst possible time. The
critical silver lining is that the severity of price declines is
creating significant value-buying opportunities. One-night
leases will help improving fundamentals impact
performance more quickly than in most sectors.
Exhibit 18
2010 hotel outlook
6
4
Demand Supply Income Transactions Pricing
-2
-4
Strengthening
-6
-8
-10
Detracting
Demand – The recession caused severe declines in tourism
and business travel, which are reflected in fundamentals.
One-night leases allow fundamentals to respond to
improving economic conditions quickly.
Supply – Completions are delivering at an above-average
rate, because of the sector’s long development cycle.
Lenders are likely to abandon projects in planning or not
yet started. 2011 and 2012 call for muted new supply.
Income – Hotel income was decimated by the recession.
The severity of losses will take time to recover to pre-
recession levels.
Transactions – Sales are at a standstill and the lowest level
of any sector. Lending conditions are restrained due to the
poor state of fundamentals. Competition may be limited
for buyers using 100% equity.
Pricing – Hotel cap rates are higher than all property types,
which is fostering compelling acquisition opportunities.
8
Property sector outlook
Industrial
Negatives
• Elevated availability rates – Slowing trade, distribution
Current outlook
and manufacturing activity pushed the industrial
availability rate from 9.5% at the start of the recession
Industrial _ +
Solid blue triangle indicates 2010 outlook. Hollow purple triangle indicates to 13.5% as of third quarter 2009. Exhibit 19 shows
2009 outlook. Taken from exhibit 52, an all-sector outlook for 2010. that the 15.6% peak availability rate forecast is
considerably higher than peaks dating back to 1990.
Our outlook is a slight downgrade from last year due to
the severity of the recession's influence on fundamentals.
• Fundamentals were particularly hard hit – Exhibit 20
Support from trade and limited new construction are key
illustrates manufacturing employment declines of 11%
advantages.
in 2009 and transportation and warehousing
employment declines of more than 5%. AWer averaging
Positives
1.8% from 2004 to 2007, the industrial net absorption
• Inventory and capacity utilization – During the
rate declined 0.7% in 2008 and fell 2.3% further in
recession, many producers and warehouse operators
2009.
liquidated inventories to generate revenues. Inventories
are now so lean that production, and in turn Exhibit 20
warehousing, will have to increase to satisfy even weak Industrial employment and fixed non-residential
demand. Capacity utilization, which measures the investment
proportion of plant and equipment in use, is forecast to
improve from 66% in 2009 to 69% in 2010 and 71% Employment, year over year change (%) Rate (%)
in 2011. 6 15
4 10
• Industrial production is forecast to improve – The
2
5
Industrial Production Index, which measures the change
0
-2 0
in manufacturing output, is forecast to improve from 96 -4 -5
in 2009 to 101 by the end of 2010 and 105 by the end -6 Net absorption rate (R)
of 2011.
-10
-8 Manufacturing employment (L)
-10 Transportation, warehouse, wholesale (L) -15

• The global economy is beginning to stimulate trade –

-12 Fixed nonresidential investment rate (R) -20

US exports fell 13% in the year ending third quarter

90 92 94 96 98 00 02 04 06 08 10 12
Shaded area indicates forecast data.
2009 but are expected to increase to 6% in 2010 and
to 10.5% in 2011. Improving trade demand will be
• Subpar net absorption and rent shiBs – 2010 is
particularly beneficial to port-market occupancies.
expected to be another marginal year for net
absorption due to continued weakness in demand and
• Well below-average construction levels – Per exhibit 19,
rising availability. Manufacturing employment is forecast
the 2010 completions forecast is 68% below the
to decline another 4% in 2010. Transportation and
average and, if realized, would be the lowest annual
warehouse employment is forecast to decline 1.8%.
total since 1990. Muted supply will help hasten the
sector’s return to equilibrium.
• Operating income reflects weak fundamentals – Net
Exhibit 19 operating incomes and rents reflect rising availabilities
Industrial absorption, completion and vacancy and below average demand. In the year ending third
quarter 2009, net income declined by 7.7%, more
severe than any sector.
Millions of square feet Vacancy rate (%)
400 18
300 16
200 14
100 12
10
0
8
-100 6
-200 4
-300 Absorption (L) Completions (L)
2
Vacancy (R) Long-term completions average (L)
-400 0
90 92 94 96 98 00 02 04 06 08 10 12
Shaded area indicates forecast data.

Bressi Ranch Self Storage

Carlsbad, CA

9
• Declining transactions and values – As with all sectors, Exhibit 22
industrial transaction volumes slowed considerably. In 2010 industrial outlook
the year ending third quarter 2009, USD 8.4 billion of
industrial transactions closed, which is 84% below the
peak in 2007. Fewer transactions are depressing values,
Demand Supply Income Transactions Pricing

as implied in exhibit 21. Industrial RCA cap rates rose

from 6.8% in mid-2007 to 8.6% in third quarter 2009.
– NCREIF cap rates follow a similar pattern but are

Strengthening
lower due to higher-quality average assets. AWer
appreciating nearly 40% during the expansion, the
least of any property type, NPI industrial values
declined by 29% from the peak to third quarter
2009.

Exhibit 21

Detracting
Industrial transactions and pricing
USD billions Cap rates (%)
16 9

Demand – The recession pummeled distribution, trade and

14 8
7
manufacturing demand, which will take time to recover.
12
6
Exposure to global trade will be an important attribute in
10
5
recovery.
8 Transactions (L) 4
6 RCA (R)
4 NCREIF (R) 3
Supply – Completions are being delivered at the lowest
2
2
rate of any sector and are well below the sector’s long-
1
0 0
1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 term average.

Summary Income – ShiWs in net operating income were more

Our 2010 industrial outlook is broken down into key
factors in exhibit 22. We expect weak but gradually
improving fundamentals and performance. Limited new
construction, inventory replenishment and exposure to
global trade are key advantages. Peak sector vacancy is
expected before that of the office and retail sectors but
aWer the apartment and hotel sectors. It is expected to
surpass previous peaks as well. Supply-constrained port
markets are preferred to interior distribution or
manufacturing hubs. Long-term structural issues, such as
the widening of the Panama Canal, will have long-term
implications for market-sector fundamentals as well.
negative in 2009 than any sector. Due to elevated
availability rates, recovery is expected to be slow.
Transactions – Volumes are at a virtual standstill. Only
hotels experienced fewer transactions in the year ending
third quarter 2009.
Pricing – Cap rates are second highest behind hotels,
suggesting compelling acquisition opportunities may be
available.
Property sector outlook
Office
Current outlook the years leading up to the 1990-1991 recession and an
average of 96 million square feet delivered in the years
leading up to the 2001 recession. In the years preceding
the 2008 recession, an average of 50 million square
Office _ +
Solid blue triangle indicates 2010 outlook. Hollow green triangle indicates feet of office space was delivered. Furthermore, only 26
2009 outlook. Taken from exhibit 52, an all-sector outlook for 2010. million square feet are forecast for 2010 and 10 million
square feet for 2011. Forecasts for both years are well
Our office outlook is the least positive of the sectors.
below the 79 million square feet long-term average.
Elevated vacancies are poised to continue rising well into
2010, which undermines rent growth potential.
• Sustained income growth – Multi-year leases that typify
the office sector are helping net income grow despite
Positives
weak demand and declining market rents. In the year
• Severe job losses are likely past the worst – Changes in
ending third quarter 2009, office net income increased
office employment explain 80% of changes in net
by 5.5%, the most of any sector and well above the
absorption. Per exhibit 23, the recession caused
negative 1.9% all-property type average.
approximately 2 million office-using job losses. Office
jobs are forecast to decline by 335,000, which is less of
Negatives
a decline than during 2009. Recent monthly job
• Elevated vacancy rate continues to rise – The severity of
conditions suggest there is upside risk that 2010 office
office-using job losses pushed office vacancy from
jobs could be flat or slightly positive.
12.5% in mid-2007 to 16.1% in third quarter 2009.
Exhibit 23 Vacancies are forecast to continue rising in 2010 before
Office using components peaking near 19%, approaching the previous peak
reached in the early 1990s.
Thousands of jobs
• Negative rent and net absorption forecast for 2010 –
1,500

Weak demand will suppress 2010 net absorption and

1,000
500
rent shiWs but not as severely as in 2009. The 2010 net
0 absorption forecast is for negative 1%, 50 bps better
-500 than the 2009 year-end forecast. Rent shiWs are
-1,000 Information forecast to decline by 3% in 2010. Although negative,
-1,500 Financial activities this will be a notable improvement over 2009.
Business and professional services
• Multi-year leases are poised to reset at lower rates –
-2,000

When multi-year office leases reset at lower rates, we

90 92 94 96 98 00 02 04 06 08 10
Shaded area indicates forecast data.
• Improving corporate profits and business confidence –
From 2007 through third quarter 2009, corporate
profits turned negative with the recession. Profits are
forecast to turn positive over the next year, which bodes
well for office employment conditions.
12
expect office net income to decline accordingly. Office-
rent declines of approximately 10% in the year ending
third quarter 2009, foreshadow 2010 operating income
declines.
Exhibit 24
Office absorption, completion and vacancy

• Net absorption is likely past the worst – 2009 likely Millions of square feet Vacancy rate (%)
marks the cycle low point for net absorption as 150 20
described in exhibit 24. Net absorption is forecast to 100
improve but remain negative in 2010, before turning
15
positive in 2011. If office-using jobs outperform
50

forecasts, there is upside risk that net absorption will be

0 10

better than forecast. -50 Absorption (L)

Completions (L) 5
-100 Vacancy (R)
• Below average supply – A key difference between this Long term completions average (L)
recession and the prior two is the level of office
-150 0

construction preceding respective downturns: an

90 92 94 96 98 00 02 04 06 08 10 12
Shaded area indicates forecast data.
average of 121 million square feet delivered annually in

11
 9/90 Corporate Center
Framingham, MA

• Declining transactions and values – In the year ending

third quarter 2009, USD 18.5 million of office
transactions closed, which is more than any sector but
89% below the sector peak in 2007. Fewer transactions
pushed RCA cap rates from a low of 6.3% in early
2007 to 8.3% in third quarter 2009. Exhibit 25 shows
that aWer appreciating 51% during the expansion, the
second most behind retail, NPI office values declined
31% from the peak to third quarter 2009.

Exhibit 25
Current cycle value trends

Trough to peak Peak to date

appreciation (%) depreciation (%)
Apartment 48.0 (28.7)
Hotel 40.5 (31.7)
Industrial 39.7 (28.9)
Office 50.7 (30.6)
Retail 67.6 (22.5)
NPI 47.2 (28.2)

Summary
The weakness in the 2010 office sector outlook is
presented in exhibit 26. Fundamentals will likely continue
to fall, as multi-year leases reset under more strenuous
conditions. New supply is below average, which will help
prevent an even sharper correction. Notwithstanding the
muted supply growth, vacancies are poised to continue
rising during 2010, forcing landlords to lower rents to
retain or attract tenants.

Exhibit 26
2010 office outlook Demand – Through third quarter 2009, the recession
caused 2 million office-using job losses. Profits and office
Demand Supply Income Transactions Pricing employment are slowly beginning to stabilize but the
improvement will be slow.

Supply – Completions were relatively high in 2009 but are

expected to fall in the coming year; vacancy rates are
Strengthening

expected to continue rising well into 2010 in response to

weak demand.

Income – Positive net income in 2009 will likely give way in

2010, as multi-year leases reset under more strenuous
economic conditions.
Detracting

Transactions – The office sector led other property types in

transaction dollar volumes for the year ending third
quarter 2009, but levels are significantly below the sector
peak.

Pricing – Office values are poised to continue weakening

until fundamentals stabilize.

12
Property sector outlook
Retail
Current outlook • Consumer confidence is slowly improving – The
Conference Board Consumer Confidence Index (CCI),
which reflects consumers’ attitudes toward the
economy, local job markets and their financial
Retail _ +
Solid blue triangle indicates 2010 outlook. Hollow orange triangle indicates conditions, rose from 30 in first quarter 2009 to 52 in
2009 outlook. Taken from exhibit 52, an all-sector outlook for 2010. the third quarter. Though still below average, the trend
is encouraging. The CCI is forecast to improve to 85 in
Our outlook is more positive than a year ago, but still
2010.
negative, as it will take time for consumer income and
spending growth to return to normal.
• Muted construction levels – Completions are forecast to
average 11 million square feet per year in 2010 and
Positives
2011. Per exhibit 28, this rate is 56% below the long-
• Consumption, income and sales are past cycle lows –
term average and should help expedite the sector’s
The recession destroyed consumer confidence, personal
return to balanced fundamentals.
income and retail sales. However, we are likely past
respective lows with a return to growth expected in Exhibit 28
2010 and, to a greater extent, 2011, per exhibit 27. Retail absorption, completion and vacancy
Millions of square feet Vacancy rate (%)
Exhibit 27 50 14
Retail space demand drivers 40 12
30 10
Year over year change (%) 20
15 8
10
10 6
0
-10 Vacancy (R) 4
5
-20 Long-term completions average (L) 2
0 Absorption (L) Completions (L)
-30 0
-5 90 92 94 96 98 00 02 04 06 08 10 12
Shaded area indicates forecast data.
Personal consumption expenditures
-10 Personal disposable income
Total retail sales
• Retail returns have declined the least of any sector – So
-15

far, retail NPI total returns are negative 15.8% in this

00 01 02 03 04 05 06 07 08 09 10 11 12
Shaded area indicates forecast data.
cycle correction, which is the least of any property type.
• Some positive signs at end of 2009 – While 2009 total
Total return for the NPI, which includes all property
sales growth was negative, it turned positive in the third
types, is negative 22.2%.
quarter, and year over year growth was positive in the
fourth quarter.
• Sector values have declined the least of any sector – So
far, retail cap rates have increased the least of any

Exhibit 30
2010 retail outlook Demand – Confidence and sales were pummeled by the
recession but are beginning to stabilize. The recovery will
Demand Supply Income Transactions Pricing be sluggish due to severe cut-backs in consumer credit and
more conservative spending patterns.

Supply – Retail completions forecast for 2010 is well below

average and the lowest of all property types except
Strengthening

industrial.

Income – Rents and operating income reflect subpar

fundamentals due to a prolonged recession.

Transactions – As with other sectors, transactions are

Detracting

significantly less than the peak.

Pricing – Institutional retail values have adjusted the least

of any sector, continuing to defy expectations.

13
Exhibit 29
Retail vacancy rate
2009 metro retail vacancy rate
Less than 9%
9% to 12%
Greater than 12%
NCREIF divisions
Pacific
Mountain
West North Central
East North Central
Southwest
Southeast
Mideast
Northeast
sector. AWer appreciating 48% during the expansion,
NPI retail values declined by 23% from the peak, as of
third quarter 2009, the least decline of any sector.
• Support from necessity goods – Necessity-based retail,
such as food and drug sales, have proven to be more
resilient than economically sensitive retail. “Sales at
grocery-anchored centers, which tend to feature tenant
mixes geared towards necessity-based retail, are
expected to hold up relatively well amid a slower
spending environment through 2012.” Green Street
Advisors
Negatives
• Severe retail sales losses – Real retail sales declined by
an estimated 5.7% in 2009, which contributed to the
retail vacancy rate rising from 6.5% in mid-2005 to
10.1% in third quarter 2009. Exhibit 28 shows the
severe effect the recession is having on space
fundamentals, in the form of pronounced negative net
absorption in 2009.
• Elevated sector vacancy continues to increase – The
retail vacancy rate is forecast to continue rising through
most of 2010, before peaking above 12%, exceeding
prior highs. Although elevated everywhere, retail
vacancy is relatively low along the coasts and higher in
the central cities, as shown in exhibit 29.
• Operating income reflects weak demand – Market
rents, reflecting rising availability and weak demand,
are leading to falling income. In the year ending third
quarter 2009, net income declined 5.3%. The 2009
year-end forecast is for effective rents to decline an
additional 4%.
• Poor consumer credit – Per Moody’s Economy.com,
“Household finances have crumbled during this
recession. More than 10% of balances held by
consumers are in some form of distress. More than 3%
of balances are in default.” These conditions will
continue to detract from consumer spending and slow
the overall pace of the retail recovery.
• Savings may remain above pre-recession lows – At the
peak of the economic expansion, personal savings as a
percentage of disposable income reached an all-time
low of 1.2%. The recession induced consumers to
spend less, causing the savings rate to steadily climb to
5% by mid-2009. When consumers save more, they
spend less. The savings rate is unlikely to climb higher
but is also unlikely to return to pre-recession lows any
time soon. If consumers continue to deleverage and
maintain a high savings rate, spending will likely expand
only modestly.
• Declining transactions – Transaction volumes have
slowed by 86% from their peak in 2007 and RCA cap
rates have risen from 6.6% in mid-2007 to 7.9% in
third quarter 2009.
Summary
Our outlook for the retail sector is more positive than a
year ago, as described in exhibit 30. It remains slightly
below neutral because the slow pace of the economic
recovery will hamper the pace of the retail sector recovery.
Demand is past the low point, as confidence and spending
are beginning to improve and supply is muted by historic
standards.
14
Property sector outlook
Farmland
Current outlook • Net farm income is influenced by improvements in farm
productivity and changes in underlying commodity
prices and input costs.
Farmland _ +
Solid blue triangle indicates 2010 outlook. Hollow green triangle indicates • Commodity prices in 2009 remained higher than
2009 outlook. Taken from exhibit 52, an all-sector outlook for 2010. historic norms primarily due to increased global demand
generated by improving incomes in developing
Our outlook for farmland is down slightly from last year, as
countries and the trend toward greater use of bio-fuels.
net farm income has fallen back to trend line from
The pattern of some per bushel prices is shown in
historically high levels. Farm income should benefit from
exhibit 31.
an improving global economy in future years.
Exhibit 31
Farmland investments Farm commodity prices
• Farmland is a real asset that historically has appreciated
in value faster than the rate of inflation. USD/bushel*
14
• Income can be generated each year by either leasing
Soybeans
12
Wheat
farmland to local operators or farming the land directly. 10 Corn
8
• Farm operations have very different return 6
characteristics than farmland ownership and bring 4
complicated labor, commodity, tax, accounting and cash
flow issues into play.
2
0

• We believe investors, in general, are better served by

Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Oct-09
*Not seasonally adjusted.
leasing farmland investments to local operators in
countries and regions where quality farmers are readily
• The supply response to this persistent increase in
available.
demand can only be supported at higher commodity
prices, as it requires the reliance on more expensive
• A number of well-capitalized farmers can be found in
inputs and/or the use of less efficient farmland.
all major agricultural regions around the US and they
are receptive to leasing quality farmland.
• Rents from leased farmland are intermediate to long-
term forward looking and do not exhibit the volatility of
Farmland values and commodity fundamentals
commodity prices.
• Farmland values are supported by the income that can
be produced from the land.
• Farmland rents and values in place today are generally Farmland returns
supported by commodity prices in late 2009 and never • Income returns from a diversified portfolio of leased
reflected the peak levels observed in 2008. farmland in the US have historically been in the 5% to
6% range, see exhibit 33.
• Increases in farmland values generally lead increases in
farmland rents, putting short-term pressure on income Exhibit 33
returns. Farmland total income return
%
• The recent leveling of farmland values should allow 40
rents to catch up and income returns to revert to more
normal levels.
30

Annual and permanent cropland

20

• The universe of institutional farmland investments in 10

the US is composed of approximately 80% annual
cropland (wheat and corn) and 20% permanent
cropland (apples and almonds).
• Values and rents of permanent cropland exhibit more
volatility, as crops cannot be easily changed in response
to current market conditions. Rents oWen have a
variable component to align the interests of the
operator with the interests of the owner.
• Income returns on permanent cropland compared to
annual cropland need to be higher to reflect the greater
risks. Higher capital expenditures and lower
appreciation over time, due to the depreciating trees or
vines on the land, are illustrated in exhibit 32.
Exhibit 32
Annual and permanent cropland returns
0
Total
-10 Income
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Shaded area indicates UBS Global Asset Management, Global Real Estate
Research forecast as of December 31, 2008.
• Total returns have been very competitive with other
asset classes and have exhibited strong inflation-
hedging and diversification characteristics.
• Excess appreciation has been generated in recent years,
reflecting the long-term sustainable increases in
commodity prices previously described.
• Excess appreciation, by its very definition, cannot persist
over the long-run and farmland values have recently
leveled, as the global economy has remained weak.

• The macro forces that supported the excess

NCREIF 1991-2008 (%)
Core
Leased Leased Farmland appreciation in recent years have room to rise and
should positively influence farmland returns once again
annual permanent Index
Income return 5.3 7.3 5.7
when the global economy strengthens.
Change in market value 5.9 3.4 5.8
Capital expenses (0.5) (1.3) (0.6) • A well-diversified portfolio of quality farmland in the US
Total return 10.9 9.2 10.7 should provide competitive income and total returns, as
Standard deviation of total return 4.7 8.3 5.0 it has since 1970, with additional periods of out-
CPI 2.5 2.5 2.5 performance as the global economy improves.

Real return 8.4 6.6
Components may not simply add to total return due to compounding.
• Annual cropland has out-performed permanent
cropland, particularly on a risk-adjusted basis, over the
long run and, we believe, is in position to outperform in
the near term.
• A neutral strategic weight to annual cropland in a well-
diversified farmland portfolio would be 80%. We are
tactically targeting an over-weight to 85% in the
current environment.
Summary
8.2
Our outlook for the farmland sector remains positive with
current rents and values supported by sustainably higher
commodity prices and farm income. The recent leveling of
farmland values should allow rents to catch up and income
returns to revert to more normal levels. Increasing demand
for farm commodities should resume, as the global
economy recovers and developing countries continue their
trend of improving diets. We expect farmland returns to
remain around long-term averages in the near term and
further benefit from increasing global demand in the
future.

Giffen Ranch
Fresno County, CA 16
Public REITs

Publicly traded real estate funds are similar to private funds • The total returns shown in exhibit 35 measure real
in that they primarily invest in and operate commercial real estate investment performance. Since 1978, the
estate. At the fundamental level, the information offered correlation between public and private returns is 0.25.
throughout this document applies to both fund types.
However, the investment vehicle, specifically public versus Exhibit 35
private, influences the return performance in significant Public vs. private returns
ways, allowing each form to offer unique characteristics Total return %
that may appeal to certain investors and offer 60
diversification benefits. 40

• A thoughtful comparison of attributes reveals that

20
public and private funds share common characteristics 0
and are influenced by similar forces, but they should -20
not be considered surrogates nor does performance in
one necessarily foreshadow that of the other.
-40 NCREIF Property Index
FTSE NAREIT all REIT Index
-60
• Exhibit 34 shows a price index for four asset types,
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09
including public REITs and private real estate.
Comparing the NAREIT line to the NPI line reveals some • The relationship between public and private returns
common market influences on returns but also offers diversification benefits to investors who hold
dramatic differences in cumulative values. both forms, a point developed further in the
diversification discussion in the Strategy section.

Exhibit 34 • Some of the key reasons for the low correlation

Asset value comparison between public and private real estate returns include:
Price index (1=December 1997) Liquidity—As a stock, public real estate can be
2.4 traded daily, offering greater liquidity than private
real estate.
Housing
2.2
Ownership—Private real estate is typically owned by
NAREIT
2.0 NPI
institutions with long expected holding periods,
1.8 S&P500
while public shares are held by a diverse group of
1.6

institutional and retail investors.

1.4
1.2
1.0 Structure—Public REITs are business entities with
0.8 growth expectations, and private funds are
0.6 collections of income-producing properties.
98 99 00 01 02 03 04 05 06 07 08 09 Valuation—Public real estate is valued through the
• From the chart, it is difficult to suggest that one series trade of its shares. Private real estate is valued by a
leads the other without substantial manipulation. small percentage of property trades and appraisals,
However, it is clear that the public series, in dark blue, is which require estimation from market data.
more responsive to information, occasionally Volatility—Public real estate typically has a higher
rebounding without movement in the private series, in standard deviation than private real estate. Public
dark green, and moves with greater amplitude. real estate volatility is similar to that of stocks. Private
real estate has similar volatility to that of bonds.

Exhibit 36
Implied and measured cap rates • The line in exhibit 36 represents public pricing in the
form of an implied cap rate and the columns reveal
private pricing for properties (the grey columns) and
%
Private core real estate portfolio
core portfolios (the blue columns). Both types of cap
10
NCREIF Property Index
rates began to rise during fourth quarter 2008, but the
9 Public REIT
8 public adjustment was much more dramatic. AWer
peaking in early 2009, public rates fell through the
remainder of the year, as private rates continued to rise.
7
6
5 • At the end of 2009, public and private real estate prices
4 gradually narrowed to virtually the same level.
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09

17
Capital markets

Government programs
• The Emergency Economic Stabilization Act of 2008 TALF-eligible issues. Of that amount, USD 49 billion of
(EESA) and American Recovery and Reinvestment Act of securities were purchased with TALF loans. Since the
2009 (ARRA) are two congressional acts quickly peak of the credit crisis, spreads for eligible assets have
developed to support the US financial system and declined by more than 60%.
encourage general economic stability. Several programs
under each act are summarized in exhibit 37. • TALF provided loans to purchase USD 4.1 billion in
legacy CMBS (issued before January 1, 2009) and
• The Troubled Asset Relief Program (TARP), established encouraged the first new CMBS issue of the year in
as part of EESA, is one of the cornerstones of the November.
government effort to stabilize credit markets. TARP’s
objective is to stabilize illiquid markets through direct • As of November, eight private fund managers were
investment or asset purchase. USD 700 billion was selected to participate in the PPIP program. If all of the
authorized, of which approximately USD 470 billion has managers receive the full allocation from Treasury, the
been committed and about USD 370 billion paid out, as total purchasing power will be USD 40 billion; USD 10
of third quarter 2009. billion in private capital and USD 30 billion in federal
equity and debt.
• TALF and PPIP support credit markets through
investment in Asset-Backed Securities (ABS), including • ARRA was designed to boost domestic demand with
Commercial Mortgage-Backed Securities (CMBS). USD 787 billion in tax cuts and additional government
spending. At roughly 6% of GDP, it is the boldest
• By providing equity and debt capital, these programs countercyclical fiscal action in US history.
support asset-backed lenders by making collateralized
securities more valuable to investors. • Through September 2009, approximately USD 360
billion of the ARRA funds was authorized and USD 176
• From March 2009 to October 2009, there were eight billion was distributed. The sharp increase in spending
ABS subscriptions worth nearly USD 86 billion of provided a major boost to the economy and helps to
explain the return to growth in third quarter GDP.
Exhibit 37
Stimulus programs
Commitments through
EESA TARP programs Purpose 3Q09 (USD billions) Notes
Automotive industry support Provide debt to GM, Chrysler, 81 Treasury holds 10% of new Chrysler,
their suppliers and finance arms 61% of GM and 35% of GMAC
MHA Making Homes Affordable Stabilize housing market 27 Provides up to USD 50 billion in TARP funds;
USD 25 billion to Fannie and Freddie
to adjust mortgages to affordable levels
CPP Capital Purchase Program Equity Investments in viable 205 Preferred Stock, plus warrants- 5% dividend
financial institutions for first 5 years, 9% thereaer
CAP Capital Assistance Program Capital adequacy of 19 largest banks Funds available if institutions are unable
to raise capital independently
SSFI Systemically Significant Failing Institutions Capital for institutions integral 70 USD 40 billion in preferred plus USD 30 billion
to the financial system equity line facility for AIG
TIP Targeted Investment Program Capital for institutions integral 40 Equity investment-8% dividend
to the financial system Citigroup, Bank of America
AGP Asset Guarantee Program Insurance against losses that 5 Partial insurance for Citigroup against
pose a risk to market confidence losses in a high risk portfolio
TALF Term Asset-Backed Securities Loan Facility Loans backed by these securities 20 FRBNY non-recourse loans for purchase of asset
PPIP Public-Private Investment Program Support valuation of troubled 20 Treasury provides equity and debt to private
loans and securities by making the investment funds to purchase troubled
assets more marketable mortgage backed securities

ARRA stimulus
Infrastructure 14 Transportation, water, etc.
Transfers to governments 52 Medicaid, education & other programs
Transfers to persons 49 Unemployment, food stamps, COBRA
Individual Tax Cuts 19 Excluding AMT exemption
Business Tax Cuts 40

18
• Roughly one third of the two-year total ARRA
authorizations were paid in 2009. Only 20% of the
infrastructure authorizations has been spent, suggesting
that the bulk of that impact will be felt next year.
Exhibit 38 shows the escalating spending during 2010.
• TARP investment will likely slow over the coming year,
due to the success of the program. ARRA funds should
continue to escalate during 2010, as these funds are
focused on spending rather than market support.
Exhibit 38
Cumulative spending—major government programs
USD billions
• Government financial stabilization and stimulus
programs have steadied credit markets and narrowed
spreads from peak levels.
• The September 2008 to May 2009 period caused great
concern because credit was high-priced, causing the
low volume of issuance.
• During the second half of 2009, credit spreads
narrowed, leading to relatively normal market operation
as we enter 2010.
• Because of the success of the first TALF-eligible CMBS
issue, brought to market in November, and the success
in securing eight private investment funds to participate

in the PPIP program, several other originators

1,100
1,000 TARP commitments
900 ARRA authorizations announced plans to issue new non-TALF CMBS.
800
700
• CMBS issuance will probably have reached USD 3 billion
by the close of 2009. This is a steep drop from the
600

already depressed level of 12 billion in 2008. Although

500

several successful single-borrower CMBS deals were

400
300
200
4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
Shaded area indicates forecast data.
Credit markets
• The TALF impact on debt issuance is revealed in
exhibit 39. New issues virtually stopped aWer the failure
of Lehman Brothers but were reignited in March 2009,
following the February TALF launch.
recently completed and two conduits have restarted
and are quoting rates as low as 7.0%, the CMBS
market has a way to go to restore equilibrium in the
market that provided over USD 150 billion per year in
commercial loans prior to the crisis.
Real estate activity
• Annual transaction volume fell 71% through October
2009 versus the same period in 2008.

• TALF restarted the ABS market by offering liquidity.
Standard issuance rebounded along with eligible
issuance, where fewer than the available federal dollars
were employed.
• AWer the initiation of the TALF loan facility, ABS
issuance averaged USD 14 billion per month compared
to USD 1.6 billion in the six months prior.
• All of the property sectors posted similar declines, with
hotels experiencing the steepest declines (negative
80%) and retail the smallest (negative 62%).
• On a positive note, US investment activity posted its
first increase in two years in second quarter 2009, rose
again in third quarter and is likely to post another
modest gain in fourth quarter.

Exhibit 39
The impact of TALF on ABS issuance
USD billions
25
Standard Average pre-TALF Average post-TALF
20 TALF eligible Sep-08 - Feb-09 Mar-09 - Oct-09

15

10

0
2007 avg Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09

19
Exhibit 40 largest financial institutions had sufficient capital to
US commercial property transaction volumes weather a “worst case” scenario.

• All targeted institutions secured the required capital

USD billions USD billions

privately, without TALF funds, so the program funds

600 100
Annual (L)
500 Quarterly (R) 80 could potentially be shiWed to smaller “at-risk”
400
60
institutions.
300

Exhibit 42
40
200
100 20 Commercial and multifamily mortgage delinquency
0 0 rates
01 02 03 04 05 06 07 08 1Q08 3Q08 1Q09 3Q09 %
12
• Transactions were negatively affected by the falling CMBS 30+ days
volume of commercial mortgage debt. Exhibit 40 shows
10 Residential
a precipitous decline in sales from 2007 to 2008 along 8 Commercial

with the quarterly pattern in 2008 and 2009. 6

• CMBS lending stopped in 2008, as seen in exhibit 41.

4

Negative values imply that the level of new origination

2

is less than the level of principal repayment. 0

1Q00 3Q00 3Q01 3Q02 3Q03 3Q04 3Q05 3Q06 3Q07 3Q08 3Q09
Cap rates
Exhibit 41 • There are various measures of capitalization (cap) rates
Net commercial mortgage flows that imply different market pricing. NCREIF transaction
USD billions cap rates and rolling-average data reported by RCA
400 continued to rise in the third quarter, while appraisal
cap rates leveled. These rates are compared to Treasury
Other Life Cos
yields in exhibit 43.
300 CMBS Commercial bank
200
100 • Although the range of the cap rates has widened, this
0 change is minor compared to the unanimously
-100 increasing spread of all rates over the treasury rate.
-200 • Limited transaction volume and credit uncertainty make
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09
this a very difficult time to measure market pricing. All
• Rising CMBS default and upcoming maturity appear to rates indicate that year-end pricing is similar to 2003-
offer risk. However, new issues at year-end 2009 give 2004 pricing, which is a significant value reduction (or
hope that the market will return. cap rate increase) from the peak of 2007.

• All commercial mortgage lenders were deleveraging

during mid-2009, which put stress on investors seeking Exhibit 43
new acquisition or refinancing. Market cap rates by source

• Apartment mortgages are omitted because government

%
10
sponsored enterprises, such as Fannie Mae and Freddie 9 NPI appraisal RCA all types
Mac, expanded lending as part of the stimulus. 8
NPI transaction 10-yr Treasury
7
• The apparent reason for lender reluctance is the sharp 6
rise in delinquency rates, as shown in exhibit 42. 5
4
• Rising delinquency increases the risk that financial 3
institutions will have to boost capital to reserve against 2
future losses. The TALF CAP (Capital Assistance 1Q00 3Q00 3Q01 3Q02 3Q03 3Q04 3Q05 3Q06 3Q07 3Q08 3Q09
Program) stress tests were designed to ensure that the

20
Strategy

Perspective
• Last year we presented the diagram shown in exhibit 44
describing the possible changes in Risk/Reward
requirements of investors over time.

• Over the past year we have witnessed the cycle

suggested by this graphic, and we now see initial The Bernardin
Chicago, IL
progression back to equilibrium.
– During 2007 the relationship between risk and
required return resembled Line 1 in the exhibit. Very Exhibit 44
little premium was required to induce investors to Risk premium
accept incremental risk.
– During 2009, the relationship shiWed dramatically to Reward
something like Line 2, where investors required
Equilibrium
excessive risk premiums leading to very limited equity
Low risk premium

and debt transactions.

Extreme risk aversion

– As 2010 approaches, we see early signs of economic 2

improvement and anticipate investors’ requirements
will reflect movement back to equilibrium, Line 3.
3

• The risk/reward relationship is not yet in equilibrium as

the year starts. Rather, we are hopeful that the
economic stabilization described in the US economy 1

section and the improving liquidity described in the

Capital markets section will guide a sustainable
investment relationship as the year progresses. Risk

Sector returns
• The NCREIF Property Index combines the performance
of five property sectors. Exhibit 45 shows the overall
index return, in grey, as well as the performance of
each individual sector.
• Over the years, as few as one sector has outperformed
the total index and as many as four sectors have
outperformed it.
• It is clear that no single sector dominates performance
over time, emphasizing the value of property-type
diversification.
• Following the credit market collapse that became
evident in September 2008, all sectors’ returns turned
negative, indicating the expansive impact of capital loss
and uncertainty.

Exhibit 45
NCREIF Property Index total returns by property type
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009*
Performance
14.4 12.5 12.4 14.9 12.5 6.0 4.6 1.7 8.7 12.1 16.5 29.0 30.5 19.6 12.7 14.1 9.4 13.7 17.1 23.0 21.2 23.6 20.5 -4.1 -15.8
Top

12.2 8.7 9.9 10.3 8.8 5.8 -1.4 -2.2 7.1 7.6 12.3 13.6 17.9 16.2 12.2 14.0 9.3 8.8 9.0 14.5 20.3 19.2 18.1 -5.8 -22.1

11.6 8.3 8.0 9.9 8.7 4.5 -1.9 -2.3 4.8 6.4 11.7 13.6 15.9 15.9 11.7 13.0 7.3 7.6 8.9 13.0 20.1 17.0 15.8 -6.5 -22.4

11.2 7.1 6.9 9.6 7.8 2.3 -3.9 -4.3 1.4 6.0 7.5 11.5 13.9 15.8 11.6 12.3 6.7 6.7 8.2 12.1 20.0 16.6 14.9 -7.3 -23.0

9.0 5.7 5.8 6.0 4.1 2.0 -5.6 -4.5 -0.8 5.5 7.2 10.3 12.9 14.1 11.4 7.8 6.2 6.7 6.1 12.0 19.5 14.6 13.5 -7.3 -24.5

3.5 -1.4 4.0 3.2 -1.3 -1.1 -11.4 -8.0 -3.9 3.9 4.0 4.9 8.5 12.9 9.5 7.6 -3.6 2.8 5.7 10.2 19.0 13.4 11.4 -9.4 -26.5 Bottom

Apartment Industrial Office Retail Hotel NCREIF Property Index total return
*2009 data represent year-to-date total returns as of September 30, 2009.

21
Exhibit 46
Expanding portfolios

Mid-point Efficient allocations

allocations with constant risk*
Representative
allocation Stocks, bonds & Stocks, bonds & Include real Include
Asset class ranges (%) international (%) international (%) estate (%) REITs (%)
Bonds 20.0 – 60.0 40.0 39.7 23.9 21.0
International 5.0 – 15.0 10.0 14.9 13.0 12.2
Large stocks 22.5 – 67.5 45.0 37.8 40.6 36.8
Small stocks 2.5 – 7.5 5.0 7.5 7.5 7.5
Real estate 5.0 – 15.0 -- -- 15.0 15.0
REITs 2.5 – 7.5 -- -- -- 7.5
Portfolio mean return 11.0 11.1 11.3 11.5
Portfolio standard deviation 11.2 11.2 11.2 11.2
* Constraints imposed at the upper and lower end of representative allocation ranges. Columns may not sum to 100% due to rounding.

Diversification • As described in the previous section, both public and

• Each year we focus on the diversification benefits
obtained by adding real estate to a stock and bond
portfolio. While the past year exhibited a decline in
virtually every asset class, the value of diversification is
revealed over long periods of time.
• The mixed-asset portfolio described in exhibit 46 shows
the positive impact of including real estate.
• Holding risk constant at 11.2% standard deviation, the
portfolio return improves with the addition of private
real estate and the incremental addition of public REITs.
private real estate improve the efficiency of a portfolio,
even if added together.
• The diversification benefit arises from the fact that real
estate returns are less than perfectly correlated with
stock and bond returns.
• Ranging from negative one to positive one, correlations
close to zero offer the greatest benefit to a portfolio. As
shown in exhibit 47, private real estate has a very low
correlation with all forms of stocks and bonds. Public
real estate offers similar benefits.

Exhibit 47
Correlations between major US investment returns

Mean Std dev Correlations

Nominal (%) Real (%) Nominal (%) CPI Bonds Int’l Lg stock Sm stock REITs RE
CPI 4.0 - 3.0 1.00
Bonds 8.4 4.4 7.2 (0.22) 1.00
International 10.1 6.1 23.3 0.06 0.04 1.00
Lg stocks 10.8 6.8 17.5 0.14 0.26 0.63 1.00
Sm stocks 13.1 9.1 21.4 0.28 0.06 0.45 0.69 1.00
REITs 11.9 7.9 18.1 0.19 0.15 0.38 0.51 0.74 1.00
Real estate (RE) 9.7 5.7 6.9 0.47 (0.21) 0.35 0.27 0.18 0.25 1.00
Means are annualized returns consistent with methodology used by NCREIF. Standard deviations and correlations are based on December ending annual
returns.

22
Investment themes
Remember the basics
• Reflect on the key reasons why real estate is valuable to
a mixed-asset portfolio.
• Real estate attributes, such as diversification, income
and inflation hedge, are as valuable today as they were
years ago. It was easy to overlook these characteristics
when all asset values were growing rapidly and
investors could focus on unusually high appreciation.
• Property operations will likely reemerge as an important
factor in performance. When the entire market was
rising, weak operations could be overlooked because
market growth dominated returns. We expect leasing,
expense control, capital investment and property
management to separate poor operators from good
ones during the next few years. The latter will
measurably enhance performance.
Income is gold
• Properties that have it are valuable; properties that need
it are struggling.
• Assets with existing leases that have at least an
intermediate term remaining (two years or more) may
not suffer from recent market adjustments.
• Vacant space may take longer to lease and receive less-
than-expected rent for some time, as 2010 will likely be
a tenants’ market. Occupiers trying to lease significant
space should have great power when negotiating rent
and lease terms during the coming year.
• Current mortgage markets are not only tighter than
2007 but also tighter than normal. Commercial
mortgage origination volume is very low and lender
Exhibit 48
Pricing
Appreciation (%)
15
10
5 5
0 0
-5
-10
-15
-20
-25
-30
Year-ending
3Q06 3Q07 3Q08 3Q09
23
requirements are unusually restrictive. This condition
may relax in 2010, but investors should actively manage
financing needs.
• On average, we expect a slight reduction in income
over the year, but adjustment should be far milder than
that of the spot market. Income did not reach the peaks
of new leasing and it will not reset completely, as many
past leases will extend beyond the year.
From growth to value
• We refer to value investing not in the sense of the
value-added style but rather in the attention to current
value as opposed to the growth mode that was so
successful while cap rates compressed.
• From 2004 to 2007 investors became increasingly
attracted to appreciation potential. Appreciation is an
important component of total return, but it became the
overwhelming factor during these years.
• During 2010, a renewed focus on current and planned
income should reward investors, as this is expected to
again be the major component of return.
Don’t confuse the markets
• There are three “markets” to consider: Pricing, Leasing
and Income.
– Pricing refers to the value of property, which is based
on expectations of future performance. The pricing
market adjusted rapidly when the credit market
collapsed in September 2008, as describe in exhibit
48. Since that time commercial real estate values
have fallen by an average 28%, despite the fact that
income has dropped only minimally (less than 2%).
Exhibit 49
Leasing
Net rent growth (%)
15
10
-5
-10
-15
-20
-25
-30
Year-ending
3Q06 3Q07 3Q08 3Q09
 Champions at Norwood
Colorado Springs, CO

– Leasing can be referred to as the “spot-market” as it

reflects the changes in negotiations for current
contracts. This market is a little less volatile than the
pricing market but adjusts continuously and quickly.
The most recent changes in the market are shown in
exhibit 49, which can be directly compared to exhibit
48. In response to the recession, vacancy increased
for all property types in most markets. This condition
led to falling rents for contracts being negotiated
today. Thus, expectation of future income has
already adjusted downward (despite minimal
reduction in current income) and may begin to rise in
the near-term.

– Income reflects the level of collections among typical

properties in current operation. This is the “market
fundamental” that can be described as lagging.
Exhibit 50 shows more modest recent adjustment
than the previous two markets. Income is affected by
the loss of current contract rents (due to default or
maturity) and the gain of new contract rents in the
spot-market. If a property is fully occupied, its
income will not be affected by changes in market
rents until a current lease terminates. A building with
significant vacancy will be highly affected by the
leasing market as much of its income will come from
newly negotiated leases. This “market” is expected
to fall modestly (perhaps 3% to 5%) over the
coming year, as landlords look to the weakened
leasing market for new tenants.

• Each “market” must be put into perspective when

evaluating investment choices. Pricing, spot-market
conditions and existing lease terms may move in
different directions and all should be considered when
assessing a transaction.

Exhibit 50
Income
NOI growth (%)
15
10
5
0
-5
-10
-15
-20
-25
-30
Year-ending
3Q06 3Q07 3Q08 3Q09
Investment style
• Investors seeking various levels of risk and expected
return should be confident that the markets are
working as financial theory predicts, as shown in
exhibit 51. This chart shows that the risk/reward
relationship holds consistently for Core, Value-Added
and Opportunistic investments.
• The past 20 years offered multiple periods of growth
and decline, with the past 5 years being unique.
Through these changing market conditions, Core funds
provided a 5.8% average annual return, while Value-
Added funds delivered 6.0% and Opportunistic funds
produced 8.8%.
• One should note that the data for these styles is not
equally transparent since 100% of the Core funds are
open-end, more than 50% of Value-Add funds are
closed-end and 100% of Opportunistic funds are
closed-end.
• The years between 2008 and 2009 were difficult years
for all styles, producing negative returns, but
opportunities exist in each sector.
• Core investments are more widespread, while successful
Value-added and Opportunistic projects will need to be
much more tactical.

• These returns came with corresponding levels of

volatility or risk.

Exhibit 51
Total returns
%
50
40
30
20
10
0
-10
-20 Core
-30 Value added
-40 Opportunistic
-50
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
2009 is year to date as of June 30, 2009.

Corporate Center Pasadena

Pasadena, CA

25
Outlook
• The sliding scales in exhibit 52 display our relative
performance expectation by sector. The triangles
indicate our view of the appropriate level of
aggressiveness or conservativeness investors should
employ when underwriting these sectors during 2010.
• The perspective in the sliding-scale chart is one of
relative return performance over the next three years.
• In a diversified portfolio, all sectors should be
considered. We suggest only an increased weighting or
more aggressive position in the sectors where the
triangle is to the right of center and caution or
Exhibit 52
2010 strategy for core real estate portfolio
conservative underwriting for sectors where the triangle
is to the leW of center.
• The three sectors with a relatively optimistic outlook—
apartment, hotel and farmland—hold these positions
for very different reasons.
– Apartments offer an expectation of demand growth.
– Hotel’s near-term operations may be difficult, but
good pricing may become available.
– Farmland has been the steady performer through
these volatile times.
• Retail continues to be the surprise sector, repeatedly
performing better than expectation.

Current outlook
Declining homeownership supports renting
Apartment _ Demographic shis favor renter household growth
+ The only sector benefiting from Fannie Mae & Freddie Mac lending
Severity of value declines is creating significant buying opportunities
Hotel _ One-night leases allow quicker response to improving demand
+ RevPAR decline and occupancy losses have been extreme
Distribution and trade demand are slowly recovering
Industrial _ Net absorption and rent shis remain below average
+ Limited new supply will help sector recovery
Office employment conditions are weak
Office _ Business confidence is slowly improving from historic lows
+ Fundamentals are poised to remain below average in 2010
Consumer confidence and consumption are slowly improving
Retail _ Retail sales are beginning to grow
+ Spending habits will take time to recover
Farm sector has shown less volatility than commercial real estate
Farmland _ Value is supported by commodity prices
+ Bio-fuels and emerging markets are adding to incremental demand

Outlook 2010 – US

Summary
The preceding pages offer our economic and real
estate perspective for the United States in 2010. We
evaluated general economic conditions, capital
markets and our 65 primary investment markets to
form a general strategic framework. From this
blueprint, we are building specific strategies to meet
the goals of individual portfolios. The range of
performance outcomes for 2010 is wide, but we are
confident that the result will be better than 2009.
Our cover photograph is a quiet reminder of the
importance of reflecting on the unprecedented
circumstances of the recent past as we embark on a
brighter future.

26
Data sources and glossary

Data sources:
UBS Global Asset Management, Global Real Estate Research based on data obtained from:

Exhibit 1 Moody’s Economy.com as of December 2009 Exhibit 33 Ibbotson Associates (1970-1990) and the Core Farmland Index
Exhibit 2 Moody’s Economy.com as of December 2009 (1991-2008) as of December 2008.
Exhibit 3 Moody’s Economy.com as of September 2009 Exhibit 34 Case Shiller, Morningstar Encorr and NCREIF as of September
Exhibit 4 Moody’s Economy.com as of November 2009 2009. Fourth quarter housing data quarterized from the first
Exhibit 5 Moody’s Economy.com as of November 2009 two months of the quarter.
Exhibit 6 Moody’s Economy.com as of October 2009 Exhibit 35 NCREIF and Morningstar as of September 2009
Exhibit 7 Moody’s Economy.com as of December 2009 Exhibit 36 NCREIF and Green Street Advisors as of September 2009
Exhibit 8 Moody’s Economy.com as of December 2009 Exhibit 37 Office of the Special Inspector General for the Troubled Asset
Exhibit 9 Moody’s Economy.com as of December 2009 Relief Program Quarterly reports to Congress; The Economic
Exhibit 10 Moody’s Economy.com as of September 2009 Impact of the American Recovery and Reinvestment Act of
Exhibit 11 NCREIF as of September 2009 2009, first quarterly report, Council of Economic Advisors,
Exhibit 12 Reis Reports as of September 2009 September 2009
Exhibit 13 Real Capital Analytics as of September 2009 Exhibit 38 Written Testimony of Mark Zandi Before the Joint Economic
Exhibit 14 UBS Global Asset Management, Global Real Estate Research as Committee The Impact of the Recovery Act on Economic
of December 2009 Growth, October 2009; Office of the Special Inspector General
Exhibit 15 CBRE Econometric Advisors as of September 2009 for the Troubled Asset Relief Program Quarterly reports to
Exhibit 16 NCREIF as of September 2009 Congress; US Treasury Monthly Report to Congress pursuant to
Exhibit 17 CBRE Econometric Advisors and Moody’s Economy.com as of EESA Act of 2008, November 2009.
September 2009 Exhibit 39 Markets Room, US Treasury Department October 2009
Exhibit 18 UBS Global Asset Management, Global Real Estate Research as Exhibit 40 Real Capital Analytics as of October 2009
of December 2009 Exhibit 41 Moody’s Economy.com as of September 2009
Exhibit 19 CBRE Econometric Advisors as of September 2009 Exhibit 42 Moody’s Economy.com as of September 2009; Mortgage
Exhibit 20 CBRE Econometric Advisors and Moody’s Economy.com as of Bankers Association’s (MBA) Commercial/Multifamily
September 2009 Delinquency Report 3Q2009
Exhibit 21 NCREIF and Real Capital Analytics as of September 2009 Exhibit 43 NCREIF, Real Capital Analytics and Moody’s Economy.com as of
Exhibit 22 UBS Global Asset Management, Global Real Estate Research as September 2009
of December 2009 Exhibit 44 UBS Global Asset Management, Global Real Estate Research as
Exhibit 23 Moody’s Economy.com as of September 2009 of December 2009
Exhibit 24 CBRE Econometric Advisors as of September 2009 Exhibit 45 NCREIF as of September 2009
Exhibit 25 NCREIF as of September 2009 Exhibit 46 Morningstar Encorr, Bar-Cap Aggregate Bond Index, EAFE
Exhibit 26 UBS Global Asset Management, Global Real Estate Research as International Index, S&P 500 Stock Index, IA SBBI US Small
of December 2009 Stock Index, NAREIT Equity Index, NCREIF Property Index as at
Exhibit 27 Moody’s Economy.com as of September 2009 December 2008.
Exhibit 28 Reis Reports as of September 2009 Exhibit 47 Morningstar Encorr, the Bar-Cap Aggregate Bond Index, EAFE
Exhibit 29 Reis Reports as of September 2009 International Stock Index, S&P 500 Stock Index, IA SBBI US
Exhibit 30 UBS Global Asset Management, Global Real Estate Research as Small Stock Index, NAREIT and the NCREIF Property Index as of
of December 2009 December 2008.
Exhibit 31 Moody’s Economy as of October 2009, Agriculture Statistics Exhibit 48 CBRE Econometric Advisors, Reis Reports and Axiometrics as of
Board September 2009
Exhibit 32 NCREIF as of December 2008. Source of CPI: Bureau of Labor Exhibit 49 CBRE Econometric Advisors, Reis Reports and Axiometrics as of
Statistics. During the first quarter of 2009 NCREIF expanded September 2009
their farmland data base to include properties held for taxable Exhibit 50 CBRE Econometric Advisors, Reis Reports and Axiometrics as of
investors. These properties have been acquired, managed and September 2009
valued on a basis consistent with all properties in the database. Exhibit 51 NCREIF as of December 2009
The NFI and CFI have been restated back through 2Q2006 to Exhibit 52 UBS Global Asset Management, Global Real Estate Research as
reflect the expanded set of properties. of December 2009

Glossary

ABS Asset-Backed Securities FDIC Federal Deposit Insurance Company

ARRA American Recovery and Reinvestment Act Fed Federal Reserve
AUM Assets Under Management FRBNY Federal Reserve Bank of New York
bps Basis points GDP Gross Domestic Product
CBSA Core Business Statistical Area NAREIT National Association of Real Estate Investment Trusts
CCI Consumer Confidence Index NCREIF National Counsel of Real Estate Investment Fiduciaries
CFI Core Farmland Index: composed of all annual and permanent NFI NCREIF Farmland Index
cropland investments in the NFI that are leased. For a more NOI Net Operating Income
market-neutral benchmark, UBS AgriVest excluded investments NPI NCREIF Property Index
that are owner/operated and re-weighted NFI returns to 80% PPIP Public-Private Investment Program
annual cropland and 20% permanent cropland. RCA Real Capital Analytics
CMBS Collateralized Mortgage-Backed Securities REIT Real Estate Investment Trust
CPI Consumer Price Index – An inflationary indicator of the TALF Term Asset-Backed Securities Loan Facility
standard of living in the US. It is also referred to as the cost-of- TALF CAP Term Asset-Backed Securities Loan Facility Capital Assistance
living index. Program
EESA Emergency Economic Stabilization Act TARP Troubled Asset Relief Program

27
Contacts
Global Real Estate Research
Global
Russell Chaplin
Global Real Estate Strategist
Tel +44-20-7901 5801
russell.chaplin@ubs.com
Global Real Estate
Head of Global Real Estate
Paul W. Marcuse
Tel +44-20-7901 5000
paul.marcuse@ubs.com
Business Development
Global Head of Business
Development
Andreas Mondovits
Tel +852-2971 8700
andreas.mondovits@ubs.com
Continental Europe
Roberto Varandas
Tel +44-20-7901 5060
roberto.varandas@ubs.com
UBS Global Asset Management
Chairman & CEO
John Fraser
+44-20-7901 6200
john.fraser@ubs.com
Elisabeth Troni
Global Real Estate Economist
Tel +44-20-7901 5534
elisabeth.troni@ubs.com
Global Head of Real Estate
Fund of Funds & Securities
Roddy Sloan
Tel +1-44-20-7901 6060
roddy.sloan@ubs.com
Americas
Thomas Anathan
Tel +1-860-616 9128
thomas.anathan@ubs.com
Germany & Austria
Tilman Hickl
Tel +49-89-206 095 120
tilman.hickl@ubs.com
Americas
Kai Sotorp
Head of Americas
Tel. +1-312-525 7100
kai.sotorp@ubs.com
EMEA ex Switzerland
Tim Blackwell
Tel +33-1-4953 20 97
tim.blackwell@ubs.com
Americas Europe
William Hughes Gunnar Herm
Head of Global Real Estate Head of Global Real Estate
Research – US Research – Europe
Tel +1-860-616 9133 Tel +49-69-1369 5317
william.hughes@ubs.com gunnar.herm@ubs.com
Head of Global Real Estate – US
Matthew H. Lynch
Tel +1-860-616 9015
matthew.lynch@ubs.com
Asia Pacific
Andreas Mondovits
Tel +852-2971 8700
andreas.mondovits@ubs.com
Switzerland UK
Dominic von Felten Anthony Shayle
Tel +41-44-234 60 21 Tel +44-20-7901 5908
dominic.von-felten@ubs.com anthony.shayle@ubs.com
Asia Pacific
Christof Kutscher
Head of Asia Pacific
Tel. +852-2971 8888
christof.kutscher@ubs.com
Switzerland
Andreas Schlatter
Tel +41-44-234 80 94
andreas.schlatter@ubs.com
28
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these views are not intended to predict or guarantee the future performance of any individual security,
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otherwise: UBS Global Asset Management. The views expressed are as of January 29, 2010 and are a
general guide to the views of UBS Global Asset Management. All information as at December 30,
2009 unless stated otherwise. Published January 29, 2010. Approved for AU, CA, CEMEA, DE, HK, JP,
SG, TW, UK, US

© UBS 2010. The key symbol and UBS are among the registered and unregistered trademarks of UBS.
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