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A REPORT ON ECONOMIES IN ThE AMERICAS ANd IMPACTS ON COMMERCIAL REAL ESTATE

E CO NO M IC

2010 OUTLOOk: RECOvERY
US reAl eSTATe mArkeTS expeCTed To eNTer reCoverY lATer ThIS YeAr

ThE TIdE BEgINS TO TURN After the worst recession since the great depression, the US economy ended 2009 on a high note. US gdP increased at an annual rate of 2.2% in the third quarter of 2009, and far exceeded expectations by achieving a 5.7% growth rate in fourth quarter, the fastest pace in six years. Labor markets are stabilizing. The year 2009 saw the largest decline in US employment since the great depression with more than 4.1 million jobs lost. But the rate of decline in employment slowed dramatically as the year progressed. The fourth quarter of 2009 recorded an average of 69,000 jobs lost per month,
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well off the 199,000 per month in the third quarter and the catastrophic 691,000 in the first quarter of 2009. Other indicators of labor market activity suggest that conditions will continue to improve.

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TABLE 1: US JOB LOSS BY MONTh (thousands of persons)

5

-95

-195

-295

-395

-495

-595

-695

-795 Jan-08 mar-08 may-08 Jul-08 Sep-08 Nov-08 Jan-09 mar-09 may-09 Jul-09 Sep-09 Nov-09

• The number of layoffs has fallen sharply since the beginning of the year. The number of people Generally, when filing for unemployment averaged at about 440,000 per week in mid-January, down from a peak of nearly the number of 660,000 per week in March 2009. generally, when the number is below 400,000, payroll employment is people filing for unemployment is increasing. The economy is close to that level and moving rapidly in that direction. In the final two months below 400,000, of 2009, those filing for unemployment declined by nearly 100,000 per week. Source: 2007 Senior Care payroll employment participants Survey, Cushman & Wakefield, Inc. is increasing. The • There is hiring in the temporary help sector. historically, temp employment increases before overall economy is close payrolls. Since September 2009, employment in temporary help services increased by 146,000 jobs, the to that level and strongest three months since the government began collecting this data in 1990. In each of the past two moving rapidly in recoveries, growth in temporary help services employment has been followed by growth in total that direction.. employment and this cycle should be no different. Other indictors are looking positive. Income, sales and production, have been rising since the third quarter. The increases in income and sales are, thus far, modest, but they are occurring. These developments show that the economy shifted from contraction to expansion during the second half of 2009, most likely in the fourth quarter. The unknown is what kind of recovery this will be.

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STRENgTh ANd dURABILITY The question is no longer when the recovery will occur; it is how strong and durable will it be? Will the recovery, primed by government stimulus dollars (remember “cash for clunkers”?), be sustained once those dollars are gone? And will demand be strong enough to boost employment and become self-sustaining? The answers come down to demand growth, the business reaction to demand growth and, overarching the entire system, the availability and pricing of credit. 1. demand growth. The first thing that has to happen in any recovery is demand must increase. historically, it has been consumers who have increased demand and led the US out of recession and into recovery. That is what is happening today. In the six months to November 2009 (the latest available data), consumer spending, adjusted for inflation, increased at an annual rate of 2.3%, the strongest six months since the first half of 2007. This shows that confidence is gradually climbing out of the basement and consumers are back in stores. The holiday season, while not great, was better than a year ago. Increases in spending are a result of both pent-up demand and rising confidence, two factors we expect to gather strength. In early January, the University of Michigan’s Index of Current Consumer Conditions rose to its highest level since March 2008 suggesting that consumers are feeling better about their financial situation than at any time since the recession began.
TABLE 2: UNIvERSITY OF MIChIgAN INdEx OF CURRENT CONdITION

120

110

100

90

80

70

60

50 1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Source: University of michigan Survey research Centre

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Businesses are also starting to loosen the purse strings. In the fourth quarter of 2009, businesses increased their investment in equipment and software spending at an annualized rate of 13.3%, compared with an increase of 1.5% in the third quarter. This is good news, as recovery depends on businesses and consumers raising outlays. Where you have strong business investment, jobs and consumer confidence usually follow. The extent to which businesses boost capital outlays will be the fundamental determinant of whether this is a modest or robust recovery. 2. Employment growth. For the nascent recovery to become a sustainable long-term expansion there has to be employment growth. Rising employment will lead to rising income that will support more growth in consumer spending. This is the path to a self-sustaining economic expansion.

Because of severe staff reductions many companies don’t have any slack right now and if demand rises they will be forced to hire to deliver their products.

We expect job growth to be healthy in 2010, with a potential increase in payrolls in the order of 1.5 million jobs for the year. That will still be five million jobs off the 2007 peak, but it would also be the strongest increase in the first year of a recovery since 1983. The recovery in employment will be driven by the depth of the previous decline. In 2008, and especially 2009, businesses cut employment more than they ever have in the post-war era. In absolute terms, the economy lost 7.2 million jobs, or 5.2% of total payroll employment. By comparison, in the 1981-82 recession, which saw the unemployment rate soar to 10.6% total payroll, employment declined 2.8 million jobs or 3.1%. Because of severe staff reductions many companies don’t have any slack right now and if demand rises they will be forced to hire to deliver their products. One piece of evidence that businesses are getting as much as possible out of their existing work force is worker productivity. In the second and third quarters of 2009, as the recession was devastating the economy, nonfinancial corporate worker productivity increased at an annual rate of 6.7%, the strongest since 2000. This productivity boom during the depths of the recession suggests that businesses cut their workforce much more rapidly than in any previous downturn. Even as output was falling, employment was dropping even faster and workers were increasing their output per hour. Now, as demand begins to increase, businesses are not going to be able to count on getting more productivity out of the existing work force, a normal occurrence in the early stages of recovery. That leaves hiring as the only option to meet demand. 3. Credit Conditions. Conditions in credit markets remain challenging, especially for small businesses and households. The government has provided massive amounts of liquidity just to keep credit flowing.

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TABLE 3: hOUSEhOLd dEBT SERvICE PAYMENTS (as a % of after-tax income)
14.0%

13.5%

13.0%

12.5%

12.0%

11.5%

11.0%

10.5% 1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Source: Federal reserve Board, economy.com

during the coming year, much of that support is expected to end and credit markets will be forced to stand on their own. Whether there will be enough credit available to support economic growth is an open question. It appears that credit markets are in better shape than they have been in since the credit crisis first began in 2007. Credit spreads have fallen back to levels last seen in mid-2007, suggesting that
Source: 2007 Senior lenders are willing to provide As of November, Care participants Survey, Cushman & Wakefield, Inc. credit at reasonable prices. Over the same time period, consumers and businesses reduced debt. One measure, household debt service payments as a percent of income, has consumer credit outstanding was plunged to its lowest level since 2001, indicating that consumers spent most of the past year paying down $99 billion or debt. As of November, consumer credit outstanding was $99 billion or 3.9% lower than a year ago, the 3.9% lower than largest decline ever recorded. a year ago, the largest decline ever Meanwhile, business profits have increased in each of the past three quarters and companies have recorded. returned to debt markets with a vengeance. Total corporate debt issuance in 2009 topped $1.2 trillion,

the highest ever recorded. however, this was offset by a decline in bank lending due to tighter lending standards. As of early 2010, the volume of commercial and industrial loans outstanding had declined for 15 consecutive months. While the rate of decline has slowed, there is no evidence as of yet to suggest that bank lending has stopped declining. Of course, this is partly due to lower demand in a weaker business climate, but tighter lending standards continue to play a significant role, which is also suggested by the increase in debt issuance.

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Overall, the ability of businesses to obtain debt will be key to determining the pace of economic expansion in 2010. We are comfortable that with the increase in debt financing and an expected stabilizing of lending, businesses will indeed be able to obtain the credit needed to expand operations in 2010 to meet increasing demand. This, combined with improved consumer balance sheets, should support solid economic recovery in 2010. REAL ESTATE MARkET OUTLOOk This economic backdrop should lead to a lessening of the pressure on the national real estate market in 2010. Full recovery, on a national basis, will be delayed, as it always is due to the long-term nature of the transactions in the industry. vacancy is likely to rise in most cities during 2010, even as employment increases. Overall, however, we expect the lag to be much shorter in the 2010 recovery than in past cycles. The lack of significant speculative construction in most markets means that there is not the large supply overhang that typically delays recovery. In addition, real estate markets will be heavily influenced by local economic conditions. Some metropolitan areas have experienced greater job loss than others and have differing prospects for future growth. Those areas that relied heavily on residential real estate for local employment and economic growth, for example, will have dimmer prospects than those with a more diverse employment base. Some cities may enter a recovery by the second half of 2010, but the majority of the nation is unlikely to see significant improvement in real estate conditions until 2011.
TABLE 4: US OFFICE CONSTRUCTION COMPLETIONS (as a percent of inventory)

8.00%

7.00%

Total addition to inventory in previous three years: 12.6%

Total addition to inventory in previous three years: 8.6%

Total addition to inventory in previous three years: 4.0%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%

198

6

198

7

198

8

9 9 198 19

0

** 1 92 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 199 19
Source: Cushman & Wakefield research

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AMERICAS’ OvERvIEW The outlooks for the rest of the Americas are mixed, but generally cautiously optimistic. Canada faces many of the same challenges as the US, but the outlooks for Mexico and Brazil are somewhat brighter. Canada: Consumer confidence has returned to the Canadian marketplace despite a stall in job growth in december 2009, when the overall economy shed 2600 jobs. Employment has stabilized since April 2009, but remains down 323,000 jobs since the October 2008 peak. So, while the overall unemployment rate remains flat at 8.5%, the economy is expected to perform much better in 2010, with moderate growth.

A resurgence in Canada’s re-sell housing markets in the latter half of 2009 boost overall household net worth, even though some suggest that the boom is being driven by shortterm factors such as low interest rates and pent-up demand in some markets.

With a slow recovery expected in the US, demand for Canadian goods and services will remain weak. Added to this is the headwind of a strong Canadian dollar, which bites into export margins and competitiveness. The dollar remains on an appreciating trend and some camps believe parity will be achieved in the near term. domestic demand, particularly consumption, is propping up Canadian economic growth. A resurgence in the re-sell housing markets in the latter half of 2009 boost overall household net worth, even though some suggest that the boom is being driven by short-term factors such as low interest rates and pent-up demand in some markets. The recovery in residential construction has been far more subdued. given present levels of household debt and upward pressure on savings rates, consumption growth is expected to moderate in 2010. Overall, a gradual recovery in Canadian output is expected. Economic output shrunk by 2.5% in 2009; for 2010, growth of 2.5%- 3.0% is expected, with slightly better results for 2011. Although labor markets are once again experiencing neutral or positive growth, rehiring is not expected to be rapid. Canadian office markets will continue to see weak demand in the near term, and vacancy rates in most markets will rise, particularly in the first half of 2010. Still, some markets are experiencing unexpected demand resilience, with a slowing of sublet space being returned to market. There is an expectation of weak negative demand in the near-term quarters, which will change to weak positive demand as we head into the latter half of 2010. Central Calgary and Toronto will continue to see available space rise faster than other major markets, which is attributable to the completion of new office towers, not weak demand fundamentals. That said, weak natural gas prices are taking a toll on Calgary, which is spilling over to activity in office and industrial market. Markets more closely connected to US business interests, particularly in suburban vancouver and Toronto, have seen some significant space return to market, as export orders have diminished and US companies have downsized activities in Canada. Mexico: The year 2010 will see the bicentennial of Mexico’s independence, an important milestone for the country. The government and private sectors will be holding celebrations throughout the country. These events, planned for years, will lead to a significant increase in government spending, which will boost economic growth.

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The economy is projected to grow much faster than in 2009 with current estimates for growth at about 4.0% to 5.0%. Inflation will accelerate in 2010 to about 5% to 6% as the government has increased taxes. The value Added Tax and income tax are scheduled to increase by 1% and 2% respectively. Consumer spending may be impacted by the increase in taxes as well as gasoline prices. On the other hand, government spending will be strong as it ramps up for the 2012 elections. generally, infrastructure spending starts to increase about two years before a Presidential election year. Business investment is also expected to increase as global companies become more active in Mexico to take advantage of ready access to the US market.

The industrial sector will benefit from the peso devaluation, which makes mexico an attractive location for manufacturing and transshipment from Asia to the US.

For the real estate sector, there has been increased interest in Mexican property, particularly office and retail. The hospitality sector is starting to see more activity, but it is still sluggish. Overall, there is likely to be more investment activity in 2010 than in 2009. The decline in the value of the peso by nearly 30% in the past year against the dollar and even more against other currencies has helped make Mexico an attractive investment location. This peso decline and a general global recovery should help the hospitality sector. In other real estate sectors, retail was heavily affected by the dismal economy in 2009. We expect 2010 to be slightly better. The unemployment rate is peaking and will begin to decline in 2010, helping to spur increased spending, even in a higher-tax environment. The industrial sector will benefit from the peso devaluation, which makes Mexico an attractive location for manufacturing and transshipment from Asia to the US. One important concern will be the level of protectionism in the US. If this increases, it could hurt the industrial sector. however, we believe that the coming year will see Mexico reinforce its position as an important production location. Overall, 2010 will be a better year than 2009. Recovery began in late 2009 when several large US and global companies made commitments to Mexico. We expect the combination of a recovering US economy and the cheaper peso to boost the Mexican real estate market in 2010. Brazil: Brazil seems to be poised for a successful first quarter in 2010 and possibly an outstanding year. general sentiment abroad and locally is extremely positive. From a general business perspective, Brazil is seen as a top destination for foreign investment. Its robust foreign reserves, low and declining foreign-currency denominated debt; its strong internal demand, resulting from the upward migration in the social and economical scales of its population; its stable legal framework, where contracts can be effectively enforced; and, the clear rule of law, not subject to capricious government decisions, all place the county in an extremely favorable position compared to many other emerging markets as well as many developed countries. In addition to these positive general business conditions, Brazil still commands high returns of 12%-plus annual inflation adjustments. higher than most markets, these returns are supported by the ability to obtain positive local leverage via local capital markets. Major infrastructure investments are expected to take place in the next few years as a result of being selected to host the FIFA World Soccer Cup in 2014, as well as the Olympic games in 2016.

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In addition to positive business conditions, Brazil still commands high returns of 12%-plus annual inflation adjustments. higher than most markets, these returns are supported by the ability to obtain positive local leverage via local capital markets.

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Commercial real estate remains a major area of opportunity in the main CBds, but given the extremely high foreign interest to invest, as well as strong interest from local players, cap rates are starting to compress and may rapidly compress through 2010. The main risk is for Class A properties in Sao Paolo, where we expect a large amount of new construction to enter the market in the next three years, which could translate into higher vacancies. Industrial real estate is still relatively untapped; there is still substantial pent-up demand for space that will likely grow in the next few years unless a there is an increase in investment. The industrial market still allows unleveraged returns above 13%. The retail market, particularly for large formats, shopping malls, seems to be crowded by new players, but it only represents 30% of the total market. Smaller formats, as well as strip malls and open malls, are still relatively untapped. CONCLUSION The US economic recovery has begun. In our view the recovery will be robust with substantial job growth in 2010. Even so, it will be several years before the US economy regains all the jobs lost in the 2008-09 recession, the worst in nearly 80 years. We are optimistic that the expansion will be healthy and sustainable. A better economic environment will help the real estate sector bottom out and enter into recovery mode late in 2010.

Cushman & Wakefield is known the world-over as an industry knowledge leader. Through the delivery of timely, accurate, high-quality research reports on the leading trends, markets around the world and business issues of the day, we aim to assist our clients in making property decisions that meet their objectives and enhance their competitive position. In addition to producing regular reports such as global rankings and local quarterly updates available on a regular basis, Cushman & Wakefield also provides customized studies to meet specific information needs of owners, occupiers and investors. Cushman & Wakefield is the world’s largest privately-held commercial real estate services firm. Founded in 1917, it has 230 offices in 58 countries and 15,000 employees. The firm represents a diverse customer base ranging from small businesses to Fortune 500 companies. It offers a complete range of services within four primary disciplines:Transaction Services, including tenant and landlord representation in office, industrial and retail real estate; Capital markets, including property sales, investment management, valuation services, investment banking, debt and equity financing; Client Solutions, including integrated real estate strategies for large corporations and property owners, and Consulting Services, including business and real estate consulting. A recognized leader in global real estate research, the firm publishes a broad array of proprietary reports available on its online knowledge Center at www.cushmanwakefield.com. For more information about C&W Research, contact: kenneth J. McCarthy managing director, US research Ser vices 212.698.2502 ken.mcCar thy@cushwake.com Maria T. Sicola executive managing director, US research Services 415.773.3542 maria.Sicola@cushwake.com

Published by Corporate Communications. For more market intelligence and research reports, visit Cushman & Wakefield’s Knowledge Center at www.cushmanwakefield.com c o r p c o m m @ c u s h w a ke . c o m © 2010 Cushman & Wakefield, Inc. All rights reserved. printed in USA. Cushman & Wakefield, Inc. 1290 Avenue of the Americas New York, NY 10019-6178

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This report has been prepared solely for information purposes. It does not purport to be a complete description of the markets or developments contained in this material. The information on which this report is based has been obtained from sources we believe to be reliable, but we have not independently verified such information and we do not guarantee that the information is accurate or complete.

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