The Global Economy and Real Estate Markets

Asieh Mansour, PhD Head of Americas Research January 2013

The Global Economy

Four Forces Shaping Global Economy

Austerity Deleveraging Monetary Reflation US Labor Market Weakness

CBRE | Page 3

Global Outlook: Still Growing Despite Europe

(Real GDP, Quarter-on-Quarter % Change, Annual Rate)
6% 4% 2% 0% -2% -4% -6% -8% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: IHS Global Insight, December 2012. 4

CBRE | Page 4

2013: Diminished Growth Expectations

A synchronized deceleration in growth

European debt crisis

Slowdown in Emerging Markets, no decoupling

Debt-ceiling and spending cliff concerns in the U.S.

.
CBRE | Page 5

2014: A Multi-Speed Global Recovery

(Real GDP, Annual % Change) 6.0% 5.0% 4.0% 5.4% 4.4% 3.4% 2.6% 1.9% 1.6% 1.0% 4.4% 3.4% 2.7%

3.0%
2.0% 1.0% 0.0% Asia-Pacific Latin America

World 2014

United States

EMEA

2013

Source: IHS Global Insight, December 2012.

CBRE | Page 6

The U.S. Economy

US Economic Outlook: Consumers More Upbeat than Business

(Annual % Change)

4%
3% 2% 1% 0% -1% -2% -3%

-4%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Real Private Consumption

Source: Global Insight, December 2012.
CBRE | Page 8

Real GDP Growth

Lackluster Employment Trends

4 12% 10% 8%

3
2

1
0

-1
-2

6%
4% 2% 0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Net Jobs (Millions), Left-Hand Side

-3
-4 -5 -6

Source: IHS Global Insight, December 2012.

CBRE | Page 9

Where will the jobs come from?

Net Job Gains (1000s)
Health Care & Social Assistance Professional & Business Services Leisure & Hospitality Retail Trade Other Services Finance & Insurance Wholesale Trade Educational Services Transportation & Warehousing Construction Information Manufacturing Real Estate Utilities
1.4% 1.2% 1.1% 1.3% 1% 0.5% 0.9% 0.2% 1% 0.6% -0.7% -0.6% 1% 2.3% 2.3% 2.7%

Natural Resources & Mining

Federal Government

-100
Source: Moodys Economy.com, January 2013.

100

200

300

400

500

CBRE | Page 10

10

Where are the jobs?

Net Job Creation in 2013 (1000s), Top 25 Markets
New York Dallas Houston Los Angeles Atlanta San Francisco Phoenix Boston Minneapolis Seattle Austin San Antonio San Diego Orlando Denver Philadelphia Washington D.C. Detroit Riverside, CA Miami Chicago Portland, OR Tampa San Jose St. Louis

20

40

60

80

100

120

140

Source: Moodys DataBuffet.com, November 2012

CBRE | Page 11

11

The Capital Markets

Real Estate Comparative Returns (Annualized Returns)

35%

33.8% 30.2%

30%

25%

20%

15%

11.5%
10%

11.0% 8.0% 8.4% 4.7% 3.0% 2.0% 2.5% 0.1%

CPI

5%

1.7%
T-Bills

0% REITs Equities Real Property 1 Year

(1) (2) (3) (4) (5) (6) NAREIT Equity REIT Index Standard & Poors 500 Index NCREIF Property Index Barclays Capital Govt Bond Consumer Price Index 90-day T-Bills

Government Bonds 10 Year

Source: NCREIF, Q3 2012. Note: Data through September 30, 2012. CBRE | Page 13

1 Year Total Returns by Country

Note: Annual results based on local currency composite; selected countries shown where data are available. Frequency of countrylevel and regional indices differ. Source: IPD, CBRE Research as of Q3 2012.

Global Research and Consulting

CBRE | Page 14

National Investment Sales

(Sales Volume, in Billions)
$160 $140 $120 $100 $80 $60 $40 $20 $0
2005
Hotel

2006

2007
Apartment

2008

2009
Retail

2010
Industrial

2011

2012
Office

Source: Real Capital Analytics, Q3 2012

CBRE | Page 15

Cap Rate Forecast by Property Type

10%

9%

8%

7%

6%

5%
2005 2006 Office 2007 Industrial 2008 2009 Retail 2010 Apartment 2011 2012 Hotel

Source: Real Capital Analytics, Q3 2012

CBRE | Page 16

US Market Fundamentals

Property Sector Trajectory

2011.4

2012Q4 Office Vacancy Rate Industrial Availability Rate Retail Availability Rate Multifamily Vacancy Rate Full Service Hotels Vacancy Rate 15.4% 12.8% 12.8% 5.0% 33.7%*

Past Cyclic High

16.9 / 2010 14.5 / 2010 13.2 / 2011 7.44 / 2009 43 / 2009

Natural Rate
13 to 15 9 to 10 9 to 10 5 to 6 34 to 38

Year Back to "Natural Rate"

2013 2015 2016 2010 2010

*Q3 2012 data. Source: CBRE Econometric Advisors, Q4 2012

CBRE | Page 18

Property Fundamentals: Uneven Recovery

Apartment market is back in equilibrium Office, industrial, retail sectors affected by overhang of vacant space Over-building has not been an issue for all property sectors this cycle Some speculative construction is coming back for apartments and industrial Job growth will ultimately determine real estate market performance
CBRE | Page 19

2013 US Office Supply & Demand Outlook Remains Tepid

(SF x Million) (Vacancy Rate, %)

100 80 60 40 20 0 -20 -40 -60

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Completions (SF x Million) Net Absorption (SF x Million)

18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Vacancy Rate (%)

Source: CBRE EA, Q3 2012.

CBRE | Page 20

20

US Multifamily Housing Supply & Demand Outlook

(Units x 1000) (Vacancy Rate, %)

400 300 200 100 0 -100 -200

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Rentable Completions (Units x 1000) Vacancy Rate (%)
Source: CBRE EA, Q3 2012.
CBRE | Page 21

8% 7% 6% 5% 4% 3% 2%

1%
0%
Net Absorption (Units x 1000)

21

Americas Office Market Rent Cycle, Q3 2012

Rental Decline Accelerating

Rental Decline Slowing

Rental Growth Accelerating

Rental Growth Slowing

B D M P S

Buenos Aires Denver Miami New York Panama City San Diego

Calgary

R N T V A
Austin

Rio de Janeiro Sao Paulo

S
Toronto

Vancouver

M S

Mexico City San Francisco

A
Orange County

Atlanta Dallas

Philadelphia

N Northern New P Jersey L P Phoenix L S

Santiago

B C H

Boston Chicago Houston Lima

Los Angeles
Montreal Seattle

Washington D.C.

M S

Source: CBRE Research, Q3 2012.

Global Research and Consulting

CBRE | Page 22

Implication for Investors and Occupiers

Highest probability is for the North American economy to continue modest growth.

Debt markets remain open

Interest rates remain low for now. Global equity markets remain highly volatile. Demand for core assets is strong. Investors searching for yield are beginning to fan out to secondary markets and non-core assets. Investors have begun to focus on development and build-to-core strategies as well. Occupiers should lock in long-term leases while investors want to shorten duration. Rents have begun to rise across certain markets.
CBRE | Page 23

Los Angeles: Market Fundamentals

Occupancy Levels by Property Type

100%

95%

90%

85%

80%

75%
2005 2006 Office 2007 2008 Industrial 2009 Retail 2010 2011 2012 Apartment

Source: CBRE Research, Q4 2012. Note: Apartment data from CBRE EA, Q3 2012.
CBRE | Page 25

YOY Rent Growth by Property Type

30% 20% 10% 0% -10% -20% -30%
2005 2006 Office 2007 2008 Industrial 2009 Retail 2010 2011 Apartment 2012

Source: CBRE Research, Q4 2012. Note: Apartment data from CBRE EA, Q3 2012.
CBRE | Page 26