Emerging Trends in US Real Estate

20 13
Emerging
Trends
in Real Estate
®
Emerging
Trends 20
in Real Estate
13
®
Contents
1 Executive Summary
2 Chapter 1 Recovery Anchored in Uncertainty

4 Emerging Trends: The Key Drivers for 2013
10 Evolving and Ongoing Trends
12 Best Bets 2013
14 Chapter 2 Real Estate Capital Flows

17 Banks Will Bide Their Time
17 Fewer Banks Drive Harder Bargains
17 Insurers Cream the Top of the Market
18 CMBS Lurching Forward
19 Another CMBS Roadblock: Special Servicer Questions
19 Searching for Yield in the Capital Stack
20 The Squeeze-Down of Opportunity Funds
20 REITs Corner the Top-Tier Market
21 High-Net-Worth Hesitation
21 Pensions in Flux
22 Safe Haven Influx
24 Chapter 3 Markets to Watch

25 Market Trends
32 The Top 20 Markets
44 Other Major Markets
44 Other Market Outlooks
46 Chapter 4 Property Types in Perspective

50 Apartments
52 Industrial
54 Retail
56 Office
58 Hotels
60 Housing
64 Chapter 5 Emerging Trends in Canada

66 Top Trends for 2013
70 Markets to Watch
80 Property Types in Perspective
84 Best Bets
86 Chapter 6 Emerging Trends in Latin America

88 Brazil
88 Mexico
88 Other Countries
90 Appendixes
92 Interviewees
Emerging Trends in Real Estate® 2013 i

Editorial Leadership Team
Emerging Trends Chairs PwC Advisers and Contributing Researchers
Mitchell M. Roschelle, PwC Alan Migneault* Kiran Sandhu
Patrick L. Phillips, Urban Land Institute Amy E. Olson Kristy Romo
Andrew Alperstein Lawrence Goodfield
Principal Authors and Researchers Aleem Bandali* Lori Motooka
Jonathan D. Miller Andrew Popert* Lori-Ann Beausoleil*
Charles J. DiRocco Jr., PwC Aran Ryan Lorilynn McSweeney
Bill Staffieri Mark Williams
Brian Ness Matt Lopez
Principal Researchers and Advisers
Brian Robertson Maxime Lessard
Stephen Blank, Urban Land Institute
Byron Carlock Jr. Melissa Davies*
Dean Schwanke, Urban Land Institute
Chris Vangou* Nadja Ibrahim*
Christine Lattanzio Nelson Da Silva*
Senior Advisers Christopher Ferns Nicholaos Karkas*
Christopher J. Potter, PwC, Canada Claude Gilbert* Patricia Perruzza*
Miriam Gurza, PwC, Canada Dana Matsuno Peter Kinch*
Susan M. Smith, PwC Daniel Cadoret* Rajveer Hundal*
Daniel Crowley Reginald Dean Barnett
Daniel D’Archivio* Remco Langewouters
About the Authors David K. Baldwin Richard Fouriner
Jonathan D. Miller is a real estate forecaster who has written the annual David Khan* Rob Bertrand
Emerging Trends in Real Estate report since 1992. David M. Voss Rob Sciaudone
David Yee* Ron J. Walsh*
Charles J. DiRocco Jr. is director of real estate research at PwC and
Dean Walton* Ronald P. Bidulka*
has written chapters of the Emerging Trends reports covering the United
Deborah Dumoulin* Russell Sugar*
States, Europe, and Asia Pacific since 2006.
Dennis Johnson* Scott Berman
Dominique Fortier* Scott Cuthbertson
Don Flinn* Scott Tornberg
Emerging Trends in Real Estate® is a trademark of PwC and is regis-
Doug Purdie* Seth Promisel
tered in the United States and other countries. All rights reserved.
Doug Struckman Shai Romirowsky
PwC firms help organizations and individuals create the value they’re Frank Magliocco* Stephen Cairns
looking for. We’re a network of firms in 158 countries with close to Franklin Yanofsky Stephen Shulman*
169,000 people who are committed to delivering quality in assurance, Fred Cassano* Steven Weisenburger
tax, and advisory services. Tell us what matters to you and find out Ian Gunn* Susan Farina*
more by visiting us at www.pwc.com. James A. Oswald Tahir Ayub*
James Oswald Thomas Kirtland
Learn more about PwC by following us online: @PwC_LLP, YouTube, Jasen Kwong* Tim Conlon
LinkedIn, Facebook, and Google +. Jeff Kiley Vivian Cheng
© 2012 PricewaterhouseCoopers LLP, a Delaware limited liability part- Jeffrey Goldfarb* Warren Marr
nership. All rights reserved. PwC refers to the U.S. member firm, and Jeffrey Nasser Wendy McCray
may sometimes refer to the PwC network. Each member firm is a sepa- Jesse Radu* Wendy Wendeborn
rate legal entity. Please see www.pwc.com/structure for further details. Joshua Mowbray* Yang Liu
Katherine M Billings
© October 2012 by PwC and the Urban Land Institute. Ken Griffin* *Canada based
Printed in the United States of America. All rights reserved. No part of Kevin Halfpenny
this book may be reproduced in any form or by any means, electronic
or mechanical, including photocopying and recording, or by any infor-
mation storage and retrieval system, without written permission of the ULI Editorial and Production Staff
publisher. James A. Mulligan, Managing Editor/Manuscript Editor
Betsy VanBuskirk, Creative Director
Recommended bibliographic listing:
Anne Morgan, Cover Design
PwC and the Urban Land Institute. Emerging Trends in Real Estate® Deanna Pineda, Muse Advertising Design, Designer
2013. Washington, D.C.: PwC and the Urban Land Institute, 2012. Craig Chapman, Senior Director of Publishing Operations
ISBN: 978-0-87420-220-5 Basil Hallberg, Senior Research Associate
ii Emerging Trends in Real Estate® 2013

Executive Summary
T
he enduring low-gear real estate recovery from well-positioned, cash-rich REITs; yield-hungry ity and increase occupancies. Emerging Trends
should advance further in 2013: Emerging pension funds; and foreign players parking money respondents continue to favor apartments over
Trends surveys suggest that modest gains in safe North American havens. These investors all other sectors, although pricing has probably
in leasing, rents, and pricing will extend across will need to remain disciplined and sidestep risk peaked and rent growth will subside in markets
U.S. markets from coast to coast and improve pros- outside of major markets, probably partnering with with an upsurge in multifamily development activ-
pects for all property sectors, including housing, local operators who have an edge in ferreting out ity. Industrial properties and hotels will show the
which finally begins to recover. Most developers the best deals. biggest improvement in 2013, and downtown
and investors who seek quick wins will remain frus- The industry must continue to grapple with office space in gateway markets also registers
trated as return expectations continue to ratchet unprecedented changes in tenant demand driven solid prospects, but power centers and suburban
down to more realistic but relatively attractive levels by technology and a relentless pursuit to temper office space score the lowest marks for investment
providing income plus some appreciation. In fact, costs in a less vibrant economy. Office users and development among survey respondents.
real estate assets will almost certainly continue squeeze more people into less square footage, pre- Homebuilders will need to keep activity in check,
to outperform fixed-income investments in the ferring green buildings with operating efficiencies, but should gain confidence from stabilizing housing
ultralow-interest-rate environment induced by the while retailers reduce store size in favor of various markets. Any uptick in single-family construction by
Federal Reserve, as well as offer a familiar refuge integrated e-commerce strategies. The large gener- 2014 and 2015 should buoy the overall economy
from ever-seesawing stock markets. ation-Y demographic cohort orients away from the and help other property sectors.
Systemic global economic turmoil, hobbled suburbs to more urban lifestyles, and these young Canada will maintain its relative wealth island
credit markets, and government deficits, mean- adults willingly rent shoebox-sized apartment units status, free of the debilitating government debt and
while, will continue to restrain anxious industry as long as neighborhoods have enticing amenities credit market dislocation hamstringing most other
leaders who downplay chances for a faster-tracked with access to mass transit. And more intergenera- countries. Its real estate markets enjoy a seemingly
upturn amid uncertainty. Investors discouraged tional sharing of housing occurs to pool resources durable equilibrium, helped along by concerted
about stratospherically priced core proper- among children (seeking employment), their parents investor discipline, lender controls, and govern-
ties in gateway markets inevitably will “chase (reduced wages and benefits), and grandparents ment regulation motivated to ensure steady growth
yield,” stepping up activity in secondary markets (limited pensions and savings). and dodge disagreeable corrections. Recently
and acquiring more commodity assets. These Overall metro-area market ratings display frothy condo markets in the nation’s dominant cities
players will need to focus prudently on current significant improvement from 2012. Investors still take a breather even as the country’s urbanization
income–producing investments and avoid the show strong interest in top properties in primary wave continues. Prices may level off or decline
surfeit of properties edging toward obsolescence, coastal markets, as San Francisco, New York City, slightly for upper-end residences, but interviewees
especially certain suburban office parks and some Boston, and Washington, D.C., remain in the top expect housing to circumvent any significant down-
half-empty second- or third-tier shopping centers. ten. However, inflated prices remain a top concern turn, helped by ongoing immigration trends and a
Most areas can sustain little if any new com- in those areas, with many investors starting to history of relatively stringent mortgage underwrit-
mercial construction, given relatively lackluster adjust their market investment strategies, showing ing. Tight office markets in Toronto, Vancouver,
tenant demand and the generally weak employ- increased interest in secondary markets as many and Calgary offer the opportunity for select office
ment outlook. Only the multifamily housing sector chase tenants. Some of the top secondary cities development projects, and U.S. retailers entering
continues to offer solid development opportunities, mentioned include Austin, Houston, Seattle, Dallas, the country will help keep occupancies high in
although interviewees grow more concerned about and Orange County, all in the top ten and most shopping centers. Apartment investments remain
potential overbuilding in markets with low barriers with significant increases in ratings. Improving highly favored, and even hotels rebound from an
to entry—probably occurring by 2014 or 2015. prospects in cities like these are mostly driven anemic period. Canada’s biggest concern focuses
The real estate capital markets maintain a by consistent job growth in strong, sustainable on the condition of the U.S., European, and Chinese
turtle’s pace for resolving legacy-loan problems as industries such as technology, health care, educa- economies; its prospects could suffer if other
the wave of maturing commercial mortgages gains tion, and energy. “American infill” locations offering regions cannot boost their outlooks.
force over the next three years. Low interest rates walkability and strong transit systems continue to Latin America’s growth track probably hits
have bailed out lenders and underwater borrow- outshine the others. These locations offer advan- some speed bumps as its export markets slow
ers, but interviewees warn against complacency tages to the echo boomer generation, which in down, but expanding middle-class populations in
and recommend preparation for eventual rate itself is a key demographic in the real estate inves- Brazil, Mexico, Colombia, and Peru offer significant
increases. Under the circumstances, low rates tor’s eye. Other metro areas scoring well include opportunities to developers in for-sale housing,
and high core real estate prices lead investors to San Jose, Miami, Raleigh/Durham, Denver, San apartments, and shopping centers.
find the best risk-adjusted returns in the middle of Diego, Charlotte, and Nashville.
the capital stack—mezzanine debt and preferred In general, the economy should generate
equity. Equity pipelines will have ample capital enough momentum to push greater leasing activ-
Notice to Readers
Emerging Trends in Real Estate®, a trends and forecast publication now in its 34th Private Property Company Investor or Developer 35.9%
edition, is one of the most highly regarded and widely read forecast reports in the real Real Estate Service Firm 19.6%
estate industry. Emerging Trends in Real Estate® 2013, undertaken jointly by PwC and
the Urban Land Institute, provides an outlook on real estate investment and develop- Institutional/Equity Investor or Investment Manager 16.1%
ment trends, real estate finance and capital markets, property sectors, metropolitan Other 9.5%
areas, and other real estate issues throughout the United States, Canada, and Latin
America. Bank, Lender, or Securitized Lender 9.0%
Publicly Listed Property Company or Equity REIT 6.2%
Emerging Trends in Real Estate 2013 reflects the views of over 900 individuals who
®
completed surveys or were interviewed as a part of the research process for this report. Homebuilder or Residential Land Developer 3.6%
The views expressed herein, including all comments appearing in quotes, are obtained
Throughout the publication, the views of interviewees and/or survey respondents have
exclusively from these surveys and interviews and do not express the opinions of either
been presented as direct quotations from the participant without attribution to any par-
PwC or ULI. Interviewees and survey participants represent a wide range of industry
ticular participant. A list of the interview participants in this year’s study appears at the
experts, including investors, fund managers, developers, property companies, lenders,
end of this report. To all who helped, the Urban Land Institute and PwC extend sincere
brokers, advisers, and consultants. ULI and PwC researchers personally interviewed
thanks for sharing valuable time and expertise. Without the involvement of these many
more than 325 individuals and survey responses were received from over 575 individu-
individuals, this report would not have been possible.
als, whose company affiliations are broken down here:
Emerging Trends in Real Estate® 2013 1

c h a p t e r 1
Recovery Anchored in
Uncertainty
“It’s three yards and a a cloud of dust.”
R
eal estate continues to meander along a slower-than- dull sister of the investment world; earning a 5 percent to 7 per-
normal recovery track, behind a recuperating U.S. cent return is what we do best.”
economy, dogged by ongoing world economic distress. Lingering doubters need to ease up just a bit: the world’s
But for the third-consecutive year, Emerging Trends surveys problems “actually benefit [U.S.] real estate, even though we
indicate that U.S. property sectors and markets will register don’t deserve it.” Low interest rates give the real estate industry
noticeably improved prospects compared with the previous breathing space, and money “pours in from overseas” seeking
year, and the advances now gather some measure of momen- refuge. Real estate assets, meanwhile, continue to command
tum across virtually the entire country and in all property types.
“Decent” though “relatively disappointing” job creation should
be enough to coax absorption higher and nudge down vacancy Exhibit 1-1
rates in the office, industrial, and retail sectors, helped by “next U.S. Real Estate Returns and Economic Growth
to no” new supply in commercial markets. Robust demand for
Total expected returns in 2013
apartments holds up despite ramped-up new construction, and
NCREIF total expected return 7.39%
even the decimated housing sector “turns the corner” in most
regions. Improving fundamentals eventually should prod rents
40% NCREIF GDP FTSE NAREIT 5%
and net operating incomes onto firmer upward trajectories, Composite
building confidence about sustained—albeit tame—growth and 30%
buttressing recent appreciation. 3%
20%
Although these gains seem modest and out of step with
recent boom/bust cycles, restrained progress ultimately fits 10%
GDP change
Index change
1%
real estate’s income-oriented profile. Even though “it’s easy to 0%
be cynical: everybody seems to want what they can’t have” 1997 2000 2003 2006 2009 2012* 2013*
-10% -1%
(“rent spikes,” “high yields with safety,” and “fully leased build-
ings”), interviewees seem to come to terms with the market’s -20%
“muddling-along pace,” expressing “cautious optimism” -3%
-30% NAREIT total
while abandoning hopes for “a big bounce.” Real estate’s
expected return
“make-things-happen” entrepreneurs will stay “frustrated” and -40% 7.52% -5%
hamstrung in creating value—“the IRR [internal rate of return]
model isn’t what it used to be”—but buying, holding, managing, Sources: NCREIF, NAREIT, World Economic Outlook database, Emerging Trends in Real Estate
2013 survey.
and bumping up property revenues usually wins the real estate *GDP forecasts are from World Economic Outlook. NCREIF/NAREIT data for 2012 are annualized
game. What’s that story about tortoises and hares? “We’re the as of second-quarter 2012, and the forecasts are based on the Emerging Trends in Real Estate
2013 survey.

attractive spreads over fixed-income investments and offer are so capital intensive, and it’s totally out of anyone’s control.”
considerably more stability than stocks. All the improving signs can appear “offset by the unknown,”
Still, caution reasonably should rule decision making, weighing down sentiment.
given significantly greater potential for economic skids than This uncertainty may inhibit “exciting big-ticket projects” and
any chance for an accelerating property market rebound. And constrict enthusiasm over scaled-down profitability compared
chastened credit markets, still grappling with bloated portfolios with the precrash days, but the industry still can find plenty
of legacy problems, wisely and necessarily stick to reinstituted, of roll-up-your-sleeves enterprises to bolster recently capital-
rigorous underwriting standards. Although anxious investors starved properties and ensure enhanced future performance,
feel more compelled “to chase yield” as core properties in the including renovation, rehabilitation, repositioning, releasing,
gateway markets reach for gulp-hard price points, “there’s no and refinancing. Successful players “continue to adapt”: what
premium for taking risk” when Europe bounces from crisis to worked last year may not work next year. Tenants continue to
crisis, China ebbs into an export slowdown, and the United shrink space requirements to improve efficiency, relying on
States delays in dealing with its own debt conundrum. In con- technology rather than extra square feet. Office landlords should
sidering solutions, worrying about what will happen “is perfectly consider embracing flexible design features, green technolo-
appropriate.” The “uncertainty” about global economics and gies, and Leadership in Energy and Environmental Design
government policy is “the industry’s biggest issue, because we (LEED) systems or face the consequences. Obsolescent
suburban office space now follows nearby left-for-dead regional
malls into value-loss oblivion: many of these properties will be
Exhibit 1-2
converted into something else over coming decades. Surviving
Real Estate Business Prospects for 2013 shopping centers appear ripe for reinvention to integrate better
with e-commerce and logistics supply chains, which continue
their headlong transformation to accommodate less storage and
Commercial/multifamily 6.28 more direct shipping to end users.
developers
Promising signs of green shoots in desiccated and oversup-
REITs 6.22 plied housing markets should not tempt homebuilders into new
projects too soon. But the potential for some measure of new
Insurance company 5.97 housing construction over the next two to three years is real
real estate lenders and would be a welcome boost for the economy and other real
Real estate brokers 5.78 estate sectors.
Indeed, industry players must not lose sight of recent
progress while steeling themselves for an ambiguous future,
Private local real 5.73
estate operators requiring new visions and tamped-down expectations. “We
need patience.” Liquidity returns, but deleveraging takes much
Real estate investment 5.73
managers longer than expected, and weighty global problems will be a
persistent drag. The world debt crisis took decades to create,
Bank real estate lenders 5.48 the housing bubble followed 15 years of unimpeded growth,
and the commercial real estate collapse derived from years of
Real estate consultants 5.17 easy credit.
“It’s only reasonable [a full-blown] recovery will take more
CMBS lenders/issuers 4.94 time”—a process less than firmly anchored in all that confound-
ing uncertainty.
Homebuilders/residential 4.75
land developers
Architects/designers 4.58 Emerging Trends:

1 5 9
The Key Drivers for 2013
abysmal fair excellent The following are the most important trends and issues that will
affect U.S. real estate markets in 2013, according to an analysis
Source: Emerging Trends in Real Estate 2013 survey. of Emerging Trends interviews and surveys.
Note: Based on U.S. respondents only.
4 Emerging Trends in Real Estate® 2013

Chapter 1: Recovery Anchored in Uncertainty
Chasing Yield: Not Enough Exhibit 1-3
Product for Prudent Investment Investment Prospects by Asset Class for 2013
As investors tentatively advance further along the risk spec-

trum in 2013 chasing yield, they suffer queasiness about the excellent
limitations of U.S. real estate markets: there is just “not enough
product” to get the yields they want. Core real estate seems
overpriced: plowing money into top properties at sub-5 percent
cap rates looks unproductive, especially if and when interest
rates “inevitably” go up. “It’s not the smartest thing to do” and
“could get ugly out there,” except for buyers and long-term
good
holders of the best properties in the best locations. The number
of truly trophy assets remains somewhat static: typical markets
can sustain only so many fortress malls or Class A office build-
ings as prime tenants shrink space requirements and willingly
play leasing musical chairs. Many lodestar properties become Private direct real estate
investments
irreplaceable holds unless managers undertake transactions for
fees where they can command top dollar.
Publicly listed property
No one can count on tenant demand to boost the pros- companies or REITs
pects significantly for the surfeit of below-prime commercial
real estate, and the highly favored apartment sector borders on
overheated in some places with development well underway. In Publicly listed equities
the current recovery, asset managers already teeter on “a high
wire,” “feeling pressure from clients to put money out” but not
Publicly listed homebuilders fair
finding “prudent yields” in underwriting future rents on these Commercial mortgage–
backed securities
more commodity, B and C class properties. Banks, institutional Investment-grade bonds
investors, and real estate investment trusts (REITs) “spin out”
more Class B and C product they want off their books, trying to
entice bites from the unsated equity capital wave, straining to
maintain underwriting discipline. “Watch for assumption creep:
buying at 9 percent or 10 percent cap rates might make sense,
but at 7 percent or 8 percent in these markets, there could be a
problem when you want to exit.” In the right management and
leasing hands, some of these vanilla properties may throw off
decent income returns, but realizing much appreciation seems
like a stretch.
And can anyone find a lender to help leverage performance
poor
on these “higher beta” properties? It may become somewhat
easier in 2013, but not much, given rationally tight financing
standards. What is the advantage for bankers in taking outsized
chances when their portfolios continue working off legacy
problems? abysmal
Traders always get in trouble when they price real estate
“as a commodity.” And that is the ongoing issue for today’s Source: Emerging Trends in Real Estate 2013 survey.
chastened buyers: too much product looks no better than that—
commodity.

Localization and the Move into ExHIBIT 1-4
Secondary Markets Emerging Trends Barometer 2013
Money slowly wends its way beyond the highly favored global
gateways into “long-neglected” secondary markets where excellent
“tighter pricing will be a true trend in 2013.” Investors “con- Sell
centrate on higher-quality assets” in “search of higher rates of good Hold
return,” but pickings are relatively slim. “You need much more
compelling reasons to go into secondary and tertiary markets, Buy
focusing on niches” and particular local strong suits. fair
For the big institutional investors, venturing out of the top-ten
major markets where they have concentrated their activity “can
be filling but not very satisfying”—historically return expecta- poor
tions do not always pan out, and exit strategies prove more
difficult to execute. Because they have eliminated most regional
staffing, the major money management advisers and invest- abysmal
ment banks typically lack the depth and reach to understand 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
internally the idiosyncrasies of most medium-sized and smaller Source: Emerging Trends in Real Estate 2013 survey.
metropolitan areas. And smaller investment companies mostly Note: Based on U.S. respondents only.
rely on third-party research reports. As they move farther afield
in 2013 hunting for yield, these investors must depend on local
while investors expect bargains. Intensified bank balance sheet
operating partners to make wise investment calls in addition to
clearing should “provide [more] opportunities for well-capitalized”
managing and leasing decisions, or they risk major stumbles.
buyers, but “very little will be available in institutional-class real
Expected stepped-up institutional activity aside, second-
estate.” “If you don’t have to sell, it’s better to hold,” although
and third-tier markets increasingly “become the province” of
hungry investors will pay above replacement cost for pricey, well-
local high-net-worth operators, supported by regional and local
leased core properties. Those buyers will have no choice except
bank capital. “It’s happening, but you don’t hear about it.” The
“to sit on [these acquisitions] for a while. Conditions aren’t right for
locals “look at the micro” (tenant moves and market drivers);
flipping, and there will be no easy plays.” Action picks up in $20
“nobody is talking about the macro” (the global economy). They
million-and-under properties located in suburbs and second-tier
“take more risks,” “buy at low bases,” “invest more of their own
markets “as long as the income is there.”
money,” and they are willing to bet on their communities for the
long term rather than focus on some unachievable short-term
investment return for investors who may never set foot in town. Perplexing Interest Rates:
“These are more buy-and-hold, get-rich-slow investors.”
Restrained absorption and lack of tenant depth in many “the Biggest Risk”
of these markets will force locals to think out of the box and Many real estate players wonder if they have been lulled into
about change of use. Outside of a handful of tech- or energy- complacency after consistently predicting wrongly in Emerging
dominated markets, “they cannot expect much growth.” Trends for most of the past decade an increase in interest rates
over a five-year time horizon and perfunctorily doing so again in
this year’s survey (exhibit 1-7). Lurking ominously in their future,
Transaction Volume Will Tick Up rates must begin to revert to the mean, and cap rates will even-
Forlorn deal makers find hints of more action in 2013. Pricing tually follow. “How long can they stay down?” But the low-growth
continues to strengthen, but increases are “muted” until credit economy forces the Federal Reserve to print money and keeps
markets return to more normal states and transaction volume rates at unprecedented low levels, probably at least through
stays relatively “anemic.” The Emerging Trends barometer reflects 2015. And rock-bottom rates continue to be a boon for real
lack of clear market direction. Buy/hold/sell sentiment continues estate, providing exceptionally low and attractive financing for
to track in a narrowing range with purchase appetites losing some borrowers with good credit at a time of a huge refinancing surge
vim in the face of higher prices, while selling interest increases in commercial mortgage–backed securities—“it makes the tidal
for the same reason (exhibit 1-4). Without pressure from lenders, wave less serious”—in addition to turning properties into a more
“truculent” owner/borrowers continue to hold out for “top dollar” compelling investment relative to fixed-income vehicles. “It’s

Exhibit 1-5
Sales of Large Commercial Properties
$150
$120
Billions of dollars
$90
$60
$30
$0
06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
Source: Real Capital Analytics.
Note: Includes transactions in the Americas for properties $10 million or greater.
the most important trend—changing the investment environ- perplex interviewees, especially in view of ballooning govern-
ment with different rate-of-return expectations.” Asset pricing is ment deficits. They prefer to think any increases “could be four
“modest; repricing debt is where funds will go. A 4 percent to or five years out: just look at Japan” where rates have remained
5 percent mortgage is a pretty good deal, relieves owners with in the cellar for close to two decades (along, not coincidentally,
cash flow issues, and provides a decent return for lenders.” with the Japanese economy). But how long can the Fed keep
As more investors inevitably chase yields in secondary buying up treasuries when other investors back off because of
markets during 2013, doubts about where rates are headed low returns and U.S. debt issues? And what happens if some
Exhibit 1-6 Exhibit 1-7

NCREIF Cap Rates vs. U.S. Ten-Year Treasury Yields Inflation and Interest Rate Changes
Increase5
10% substantially
Cap rate Next

8% 10-year treasury* five years
Increase
6% moderately4
Spread
4% 2013
2% Remain stable3
at current levels
0%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
-2%
2
-4% Inflation Short-term Long-term Commercial
rates (1-year rates (10-year mortgage
treasuries) treasuries) rates
Sources: NCREIF, Moody’s Economy.com, Federal Reserve Board, PricewaterhouseCoopers LLP. Source: Emerging Trends in Real Estate 2013 survey.
*Ten-year treasury yields based on average of the quarter; 2012 Q2 average is as of July 31, 2012. Note: Based on U.S. respondents only.

exogenous event occurs to force rates up? Can anyone be sure Cooler heads distinguish between infill markets with few
the Fed is the master of holding down rates indefinitely? “We’ve developable sites, especially near mass transit stops, and
been living off artificially managed cheap debt when we really traditional hot growth areas where new commodity, garden-style
need demand and rental growth. Any crisis in confidence about product can mushroom and often overshoot demand. “You see
the United States, and interest rates on treasuries could esca- too much construction in easy-to-build markets. Construction is
late,” notes an interviewee. Simply, normalizing rates “are the needed where you have a 2 percent vacancy rate and it’s hard
biggest risk” to the industry. to build.” At the very least, multifamily development will “change
If rates increase suddenly, many borrowers “will be disin- the tilt of the game board, moderating growth in rents and
termediated, unable to refinance unless property income has ultimately returns.” When rent increases become tempered and
grown sufficiently to support value and repayment of an existing construction prices increase, developers will start to back off.
mortgage.” And investors would be wise not to assume exit cap “You don’t want to play the game too long.”
rates based on today’s low interest rate levels. “It could bite us.” For the longer term, gen-Yers may not want to live in apart-
Investors should lock in low mortgage rates, assume long-term ments indefinitely: “They will move back to the ’burbs with the
mortgages, and hedge against rising T-bill rates. “It’s tempting backyard and dog, renting since they may not be able to buy.
to stay short because there is so little cost, but this will not last.” NOI [net operating income] growth in apartments could tail off.”
While interest rates remain collapsed, inflation stays under
control mostly because of high unemployment, low wage
growth, deleveraging, and a resulting lack of pricing power. “We Housing Resuscitation: Lifting
continue to buy time, but don’t seem to be making much prog-
ress.” Many real estate pros would like to see inflation increase,
Other Sectors
Battered homebuilders finally may register a pulse in 2013. Most
boosting net operating incomes and hard asset values while
interviewees expect a long, hard slog to recovery for the U.S.
helping them eliminate the burden of their mortgage and cash
housing industry, but prices increase in more areas, the foreclo-
flow constraints. “That’s probably the only way out of the debt
sure process begins to be resolved in earnest, and institutional
problems.” The “sweet spot” scenario holds for some inflation
investors help firm up markets by buying inventory. At some
and continuing low financing rates; “it’s hard to mess up if you
point, the sheer force of the expanding population (at 2 million to
have good assets.”
3 million annually) will create demand for single-family homes,
and any upsurge in housing will likely ripple positively through
Overbuilding Multifamily? the rest of the real estate industry and the entire economy.
Homebuyers may then head to shopping centers to furnish and
Developers rush into multifamily, the only sector where demand
appoint their houses, and distribution facilities will need to sup-
“of historical proportions” and undersupply combine to justify
port increased movement of goods. Suburban office markets
new construction. Lender interest and low borrowing rates
could benefit, too: mortgage and sales brokers, title companies,
(including from Fannie Mae and Freddie Mac) facilitate project
and construction firms will all need to expand as lawyers and
financing to leverage returns, and plunging cap rates on existing
appraisers could also get a boost. Marginal improvements in
apartments give developers a positive spread. Smart develop-
2013 set the course for better days ahead.
ers who bought and entitled land at the recent market bottom
really score. Bullish players forecast continued upward pressure
on rents from the eventual release of pent-up demand from
generation Yers living with parents; many will find jobs and move
Playing It Safe
The unprecedented global financial dislocation prolongs an
out on their own. In addition, tens of thousands of apartments
unwelcome hunkering down. “Everybody is operating on yellow
demolished each year will need replacing.
and red flashing lights,” and “managing risk and selectivity will
But some interviewees raise cautionary notes and contend
be the key to any success.” Entrepreneurial tendencies remain
“it’s time to start shutting down” the construction pipeline.
mostly harnessed amid conditions borne of debt-related “drift”
“There’s much more development coming on than people are
and “uncertainty.” This means investors cluster in the world’s
admitting. They also ponder all the funds investing in single-family
perceived safest markets—the United States and Canada are
housing, which will add to rental supply and compete against
at or near the top of their lists—and shun other places. Lenders
apartments. Clearly, hidden inventory exists that people aren’t
continue to open doors for their highest-credit clients but place
focusing on.” Other nervous Nellies point to office developers
hurdles in front of other borrowers. With a few exceptions in the
shifting into the apartment space, “because they can get financ-
handful of 24-hour cities and energy/tech markets, develop-
ing.” “It’s hard to keep discipline and prevent overbuilding.”
ers cannot make a case for construction loans; only multifamily

builders manage to line up financing. Retail tenants want into to mention against stocks and bonds, and well-leased real
Class A malls and leave second-class centers, while just about estate should produce those levels of returns for the next sev-
everyone avoids half-empty strips and office parks. Interviewees eral years (exhibit 1-8). “It’s the best horse in the glue factory.”
expect little relief from evident market “bifurcation” “until the As deleveraging and refinancing continue to “suck up a lot
economy recovers,” and most resign themselves anxiously to of capital,” at least through mid-decade, yield expectations are
“no huge change.” changing, and real estate looks more like “the income vehicle”
it was meant to be. Within the capital stack, debt investments
should earn better risk-adjusted returns than equity, thanks
Getting a Grip on Return to significant loan-to-value ratios and realistic valuations that
Expectations: Debt Beats Equity combine to provide excellent downside protection. Smart
lenders “should not depend on a lot of growth and [should]
“I roll my eyes if a manager claims he can get more than a 15
underwrite based on current fundamentals.”
percent annualized return” on a commercial real estate fund,
says an interviewee. “They’re picking numbers to try to meet
the market.” Such optimistic—bordering on fanciful—projec- Operating in a Slow-Growth
tions cannot play out in the current environment “without a lot
of leverage [hard to come by] and a lot more [downside] risk.” Environment: Decent Profitability
Individual investments may pan out, but added value and Like other businesses, real estate firms boost profitability at the
opportunistic returns pegged to precrash-era expectations just margins by keeping lean, and Emerging Trends respondents
do not appear viable, and that is bad news for all the general anticipate 2013 will be a reasonably good year for bottom lines
partners and high-growth managers trying to resurrect their (exhibit 1-9). “Staffing-wise they’re doing nothing” after cutting
fund management businesses and earn generous promotes back a bit; incomes inch back toward 2007 levels. Better-
off their optimistic appreciation scenarios. “Getting used to capitalized firms should continue to gain market share at the
less can take a long time.” expense of other failing companies, but “the overall size of the
If they have not already, real estate players reorient to industry will not change.” Compensation relative to the 2007
reality, understanding what property investments are built to peak remains “more modest.” Only a select number of invest-
deliver. “Remember, over time three-quarters of real estate ment managers secure “equity programs that will pop value”
returns derive from income, only one-quarter from value gains.” after “a lot of equity washed out.” Compensation is no longer
Any return in the 6 to 10 percent range looks particularly attrac- determined by peer-group comparisons but by individual
tive in 2013 when compared to interest rates and inflation, not company profitability, with cash awards approaching about 70
percent of peak levels and equity opportunities offering only
Exhibit 1-8
about 50 percent. “Everything had been out of balance.”
Index Returns: Real Estate vs. Stocks/Bonds Top leasing and property management executives get
paid premiums for keeping buildings filled and finding ways to
reduce operating costs. Proven marketing professionals who
FTSE NAREIT Composite can raise capital also remain in high demand, given ravenous
40%
NCREIF competition for skittish client dollars. Deal makers continue
30%
to suffer in lackluster transaction climes and freshly minted
20% MBA job seekers will have better success with some past
bricks-and-mortar credentials. Office developers shift into
10%
apartments, and homebuilders gear up for new activity, but in
0% a slow-growth mode. “It’s not very exciting.”
1998 2000 2002 2004 2006 2008 2010 2012
More CEOs keep themselves up at night figuring out sce-
-10%
nario planning, and many executive teams add risk strategists
-20% Barclays Capital to prepare for potential bolt-out-of-the-blue crises. Cushioning
Government Bond Index
against problems takes precedence over ambitious new
-30%
S&P 500 ventures. At the same time, changing demographics, “Era of
-40% Less” realities, and technology effects force developers and
operators to do business differently in meeting altered demand
Sources: NCREIF, NAREIT, S&P, Barclays Group.
trends. From retail and warehouse to office and apartments,
Note: 2012 data annualized from second-quarter 2012.

Exhibit 1-9
Firm Profitability Forecast 2013
Prospects for Profitability in 2013 by Percentage of Respondents
0.4% 2.0% 4.6% 17.2% 20.0% 30.7% 19.6% 5.6%

Very poor Poor Modestly Fair Modestly Good Very good Excellent
poor good
Source: Emerging Trends in Real Estate 2013 survey.
tenants do not necessarily settle for old-school layouts and On the office front, companies shoehorn employees into less
designs. Understanding and “staying close to the customer” space—workbenches replace cubicles—and let more people
becomes more important than ever. work from home (avoiding commuting time and expenses) or
out of the office with their laptops and smartphones in tow,
reducing rents and operating expenses. Businesses relying on
Evolving and Ongoing wi-fi can slash space once needed for filing cabinets, computer
Trends
hardware, and credenzas—all that paper stuffed into manila
folders evaporates into data clouds—as fretting office landlords
just hope they can renew leases somewhere close to exist-
Technology, Job Growth, and ing square-footage requirements. Web-embracing retailers,

meanwhile, “kick in” internet selling strategies that dovetail with
Reduced Demand liberally shrinking store sizes and inventories, which also means
Emerging Trends interviewees remain flummoxed about job they hire fewer store clerks. Fortress malls may stay full, but
growth and give up on reflexive optimism about how the U.S. lesser retail locations lose tenants and value.
economy always finds its way. “It’s an eye-opener what’s happening to the workplace and
Some pockets of high-quality job growth do exist in energy shopping habits”; “technology has gone from experimental to
markets where the natural gas boom and upward-trending oil here to stay.” Or put another way, interviewees contend con-
prices lift prospects, the familiar high-tech bastions, and “eds strained job growth and reduced space per capita look like
and meds” corridors around hospital centers and near major prolonged realities.
education institutions. Anyplace offering a combination of these
employment drivers and attracting a highly educated work-
force, including the global gateways, positions itself relatively
Compactness
well at least for the near to medium term. Also, “don’t count out” People and businesses seek smaller spaces. They realize they
financial centers (with greater regulatory certainty, banking insti- do not need as much room to live and work, and want to reduce
tutions can stabilize), and manufacturing “makes a comeback.” rents and operating expenses as they deleverage or try to
Aside from the few bright spots, the overall jobs outlook enhance bottom lines in the less-than-robust economy. Gen-Y
appears chronically “sluggish,” hindered in part by recent gov- career builders forsake suburban lifestyles and willingly move
ernment cuts and the comatose construction industry. A majority into “shoebox”-sized city apartments; nearby public ameni-
of new jobs created in the recovery are low paying, a continu- ties like retail districts and parks can make up for the lack of
ation of the longer-term national trend of decreasing wages personal space. In the “Waltons effect,” more grandparents, par-
and benefits. Interviewees increasingly place more blame on ents, and young-adult offspring live together to pool resources;
technology-related productivity gains, which also shrink ten- they each put up with less personal room, too. Companies
ant space requirements in a painful double whammy, keeping gravitate to flexible office layouts, which facilitate cramming staff
vacancies higher than desirable in commercial real estate. into smaller work areas, and retailers rely on smaller store for-
mats, selling more products through web-based channels. For

real estate owners, the move to less means slackened overall something crowd than spending time and money commuting
demand growth, whereas homebuilders and apartment devel- by car to quiet suburban lanes. Apartment developers home in
opers need to consider new, more efficient models and related on echo boomers’ socialization penchant; they can build smaller
amenities (wi-fi is a must) for projects. units if they supply wi-fi and provide common space like roof
Shortfalls in municipal budgets—from increasing pension decks or event rooms for texting-inspired get-togethers.
costs, reduced federal aid, and resistance to higher taxes— The housing bust may not have destroyed homeownership
forces local officials to come to terms with the economics of dreams, but more people across the age spectrum now feel
planning schemes and zoning. In retrospect, sprawl has turned greater peace of mind renting while many others have no other
into a loser for many suburbs; officials begin to realize how choice; saddled by bad credit or lacking enough equity, they can-
denser development generates greater revenues at lower per not afford to buy. The renter surge extends well beyond multifamily
capita infrastructure costs. The realization finally dawns that and back into suburban single-family residential neighborhoods.
“creating something high quality and compact produces a
greater yield for any land asset.” Sewer lines and roads ser-
vicing sprawling subdivisions, originally subsidized decades Adapting the ’Burbs
ago by the then-more-revenue-rich federal and state govern- The world “rethinks the suburbs” in the wake of population
ments, now require extensive upgrades or replacements as gains in the major gateway markets and growth in urbanizing
they approach the end of their life cycles. But insufficient local suburban nodes at the expense of fringe areas. “It’s a secular
tax revenues from single-family homeowners will not cover the trend driven by where many young people want to live,” and it
repair bills in most cases, and cash-strapped states and the will have a “very material impact on how real estate is used.”
feds just do not have enough funds to help out. Some “biotech and pharmaceutical companies break up their
suburban campuses and move back into cities because they
Unprecedented Transformation can’t convince PhDs to go to the suburbs.”

Despite “suburban office: who wants it!” scorn, “everyone
in Tenant Demand isn’t going back to the cities,” and aside from the prominent
24-hour meccas, many long-forlorn downtowns continue to
Never before has the real estate industry been so whipsawed
struggle. The majority of Americans, meanwhile, still live outside
by such rapid transformation in tenant requirements. Whereas
urban cores or in suburban agglomerations. But developers and
only a few years ago, office users placed a premium on scale
investors need to realize future success may rest in identifying
and quality, today they want space that can “provide efficiency”
prime locations suitable for densification in suburbs and linking
and “encourage productivity.” Practicality and collaborative
into transit-oriented hubs as more communities seek car alterna-
environments in open-space plans make more compelling brand
tives to relieve traffic congestion “and avoid choking to death.”
statements than marble finishes and skyscraper views as flexibility
“Anything near suburban rail is gold. We’re seeing superior rent
and ease in moving teams within layouts take precedence over
growth compared to buildings away from light rail; it’s no longer
boardroom amenities and corner offices. “CEOs get compensated
hypothetical.”
for cutting costs, not expanding,” and their corporate real estate
Separating land uses from each other—housing, retail strips,
underlings get the message “about figuring out ways to use less
office campuses and regional malls—loses traction to more
real estate.” Tellingly, even some white-shoe law firms lose win-
compact development with mixed-use, urban concepts. Many
dowed offices and adopt more functional space schemes.
suburban parcels stand ready for makeovers—whether a ghost
Everybody caters to echo boomer tastes: “their sheer size
mall, an empty formerly grocery-anchored neighborhood center,
deserves attention and can’t be underestimated.” These multi
or that nearly vacant office park or low-density business park.
tasking younger professionals crave interconnectedness and
Under any circumstances, investors wisely bet on infill,
mobility, value the most up-to-date communications devices
especially around the 24-hour cities where most of the nation’s
so they can operate from just about anywhere, and downplay
economic activity concentrates. The housing crisis pushes more
physical space as well as privacy; for them social cacophony
families into apartments from houses, spurring suburban multi-
can be energizing. They also favor green amenities. If they must
family projects. Real rental growth and population gains occur
work in close quarters, they want more fresh air and natural light,
“on a more broad-based level” in the major metropolitan areas
and they like the idea of working in cutting-edge buildings that
and urbanizing suburbs embedded around them. The localized
manage energy loads to reduce environmental impacts. For
exceptions occur where urban gentrification effectively transfers
now and at least until they start families, proximity to stimulating
endemic poverty into inner-ring suburbs.
urban action—living and working within reasonable distances
and using mass transit—holds more attraction for the 20-

Exhibit 1-10
2013 Issues of Importance for Real Estate
Best Bets 2013
Emerging Plays
1 3 5 These investment and development sentiments from Emerging
no importance moderate importance great importance Trends interviewees deserve particular attention in 2013.
Economic/Financial Issues Concentrate acquisitions on budding infill locations. Top

24-hour urban markets outperform the average, bolstered by
Job growth 4.73
move-back-in trends and gen-Y appeal. But the top core districts
Interest rates 4.12
in these cities have become too pricey. “Find buildings where
Income and wage change 4.11
tenants want to be,” typically in districts where hip residential
Global economic growth 3.86
neighborhoods meet commercial areas and “not necessarily the
Tax policies 3.85 top, most expensive buildings.” “You can’t get enough of any-
Federal fiscal deficits/imbalances 3.72 thing near mass transit stations,” especially apartments.
European financial instability 3.70
Construct new-wave office and build to core in 24-hour
State and local budget problems 3.65 markets. Major tenants willingly pay high rents in return for more
New federal financial regulations 3.55 efficient design layouts and lower operating costs in LEED-
Inflation 3.49 rated, green projects. These new buildings can lure tenants out
Energy prices 3.39 of last-generation “brown” product. Other build-to-core gambits
will work, too. “Better to develop at a seven cap rate than buy
Social/Political Issues an existing building at a five.” Completed medical office and
Terrorism/war 3.08 apartments should sell at nice spreads into ever-present capital
Immigration 2.95 demand. Rental apartment projects provide solid income with
the potential for future condominium conversions.
Social equity/inequality 2.53
Climate change/global warming 2.31 Develop select industrial facilities in major hub distribution
centers near ports and international airports. In these mar-
Real Estate/Development Issues kets, “the industrial sector is where the apartment sector was
Vacancy rates 4.03
two years ago,” driven by tremendous demand by large-scale
Refinancing 3.81
users looking for specialized space and build-to-suit activity.
Construction costs 3.77 Use caution investing in secondary and tertiary cities.
Land costs 3.63 Focus on income-generating properties, and partner with local
Infrastructure funding/development 3.62 operators who understand tenant trends and can leverage their
Future home prices 3.59 relationships. If you feel uneasy about overpaying, listen to your
Deleveraging 3.49 gut and back off. Markets grounded in energy and high-tech
Transportation funding 3.35 industries show the most near-term promise (but can be vola-
CMBS market recovery 3.24 tile), while places anchored by major education and medical
NIMBYism 3.13 institutions should perform better over time. Leading secondary
Affordable/workforce housing 3.06 markets include Austin, Charlotte, Nashville, Raleigh-Durham,
Green buildings 2.69 and San Jose.
1 2 3 4 5 Begin to back off apartment development in low-barrier-
Source: Emerging Trends in Real Estate 2013 survey. to-entry markets. These places tend to overbuild quickly,
softening rent growth potential and occupancy levels probably
by 2014 or 2015.
Consider single-family housing funds. Housing markets
finally limp off bottom, and major private capital investors make
a move into the sector. Concentrate investments with local
players who know their markets and can manage day-to-day

property and leasing issues. Be prepared to wait a while before multifamily housing, regional malls, strip centers, office build-
rentals can be converted into a revived sales market. In the ings, and distribution facilities.
meantime, investors should earn good income returns. Buy nonperforming loans, and work out discounted payoffs
Repurpose the surfeit of obsolescent properties. Whether from borrowers. Banks and special servicers tend to shed mort-
abandoned malls, vacant strip centers, past-their-prime office gages on weaker assets, “but you can hit a lot of singles and
parks, or low-ceilinged warehouses, a surfeit of properties doubles” at the right price.
requires a rethink, a teardown, and in many cases a new use.
Creative planners and developers have myriad opportunities
to reconsider how sites can tie into future growth tracks and
integrate into more efficient and desirable models. Many capital-
depleted hotels are ripe for renovations, too.
Enduring Favorites
These investment bets have been highlighted in recent
Emerging Trends reports and continue to be among intervie-
wees’ leading recommendations for 2013.
Recapitalize well-leased, good-quality assets, owned
by overleveraged borrowers, who are upside down finan-
cially. This ongoing “feast of opportunities” has plenty of legs
because banks continue to engage in “extend and pretend”
loan strategies as more mortgages reach their maturities.
“Lots of real estate has income-generation potential but has
been compromised by distressed capital structures.” “Look for
distressed borrowers, not distressed properties.” Mezzanine
debt and preferred equity positions will offer particularly good
risk-adjusted returns.
Lock in long-term, low-interest-rate mortgage debt. Why
tempt the inevitable? “There’s no way the low-interest-rate envi-
ronment lasts,” and your low-rate mortgage could be “a huge
future asset” as soon as interest rates begin to pop. The surge in
mortgage maturities seems perfectly timed for some struggling
borrowers who may be able to refinance at lower costs. Back off
floating-rate debt before you look stupid. The Fed cannot keep
printing money forever.
Hold core properties in 24-hour cities. Whether office towers,
prime hotels, apartments, or skyscraper condominiums, pricing
tests limits, and these markets either have peaked temporarily
or could level off for a while. But premier assets should continue
to outperform over time; if sold, how would you replace them?
Boston, New York City, San Francisco, and Washington, D.C.,
can come off the boil, but they always stay near or at the top of
investor lists. The Bay Area reaches the Emerging Trends rank-
ing pinnacle for 2013.
Buy or hold public REITs. Given their dividends and embed-
ded growth, these stocks should continue to perform well.
Focus on sector-dominating companies that have assembled
blue-chip portfolios of the best income-producing assets in

c h a p t e r 2
Real Estate
Capital Flows
“Plenty of capital is available
for people who can earn it.”
F
or 2013, the real estate capital markets throw off con- have no trouble attracting financing from life insurers and banks
fusing, mixed signals amid significant pent-up investor eager to choose from the pick of the litter. As markets improve,
demand, sluggish but mending fundamentals, and more properties will enter this worry-free zone, and rich-can-get-
low interest rates, as lenders continue to hold on to a slew of richer mortgagors easily lock in “exceptionally cheap money.”
underperforming loans in a glacial deleveraging and hundreds But players with bad credit and/or marginal assets, who need
of billions of commercial mortgages reach maturities. Four years capital infusions to keep afloat, continue to find themselves
after the cyclical bottom, “many markets have not been allowed cast aside or placed in extend-and-pretend limbo. “It’s still the
to clear and prices have not been reset,” except in the dominant
24-hour cities and a handful of tech and energy regions.
Expectations for returns decrease on paper, but investors Exhibit 2-1
still push for higher yields than may be possible or reasonable, Moody’s/RCA Commercial Property Price Index
especially given the insipid economy and ongoing political
intransigence. “It’s easy to get ahead of yourself, and some
Major markets
[investors] will lose control of discipline.” “A crazy search for 225 (all-property)
yield” in a low-interest-rate environment leads some intervie-
200 National
wees to argue that sub–5 percent cap rate purchases are (all-property)
rational given spreads to treasuries. But they ignore what may 175
happen to exit cap rates when interest rates inevitably increase,
as well as the extremely checkered and unhappy history of com- 150
pressed cap rate purchases in past market cycles. Emerging
125
Trends survey respondents predict a moderate oversupply of
equity capital and a moderate undersupply of debt capital dur- Nonmajor markets
100 (all-property)
ing the year (exhibit 2-2).
Inevitably in a measured recovery more equity capital will 75
creep into the higher-cap-rate strata—riskier secondary markets
and lower-quality assets—unable to stomach high pricing and 50
2000 2002 2004 2006 2008 2010 2012
minimal yields in core real estate. But the prime gateway mar- Dec Jan Jan Jan Jan Jan Jan
kets will continue to benefit from increased flows from foreign
Sources: Moody’s and Real Capital Analytics.
investors looking for secure wealth islands to protect assets.
Notes: Major markets are defined here as Boston, Chicago, Los Angeles, San Francisco, New York,
In the debt markets, it will be “more of the same”—good and Washington, D.C. The Moody’s/RCA CPPI is based on repeat-sales transactions that occurred
at any time up through the month before the current report. Updated August 2012; data through June
assets with solid income streams and good credit borrowers will 2012.

Further clouding analysis, the metrics of risk-adjusted
Exhibit 2-2 investments get turned somewhat on their heads: usually safe
+9.4+26.4+20+34.6+9.6
Real Estate Capital Market Balance Forecast for 2013 senior debt yields fall toward uncomfortably low levels for lend-
ers with an eye on future interest rate moves. At the same time,
Equity Capital for Investing low yields for core real estate pricing look less appealing than
the risk-adjusted returns for the mezzanine debt and preferred
equity. Effectively, investors in these middle-of-the-capital-stack
9.4% 26.4% 20.0% 34.6% 9.6% tranches can obtain “a higher-than-equity cap rate with higher
Substantially Moderately In balance Moderately Substantially cash-on-cash returns and lower risk.” Interviewees expect the
+15.9+44.8+25.0+13.7+0.7
undersupplied undersupplied oversupplied oversupplied
pricing differential to narrow between senior and mezzanine
debt during 2013.
Debt Capital for Acquisitions
Under any circumstances, real estate attracts the attention
of enough—that is, considerable—capital activity, which helps
deleverage fractured legacy investments and move markets
in the direction of regaining equilibrium. Financial-institution
15.9% 44.8% 25.0% 13.7% 0.7% balance sheets “avoid taking hits,” and low interest rates help
Substantially Moderately In balance Moderately Substantially
+13.5+43.5+31.9+9+2.2
undersupplied undersupplied oversupplied oversupplied preserve capital and encourage a deliberate, if admittedly
protracted recovery. Frustration about limited opportunities and
Debt Capital for Refinancing lowering returns logically should be tempered by evident investor
appeal for the asset class as an income generator and potential
inflation hedge. Why else would so much capital prop it up?
Simply, U.S. real estate, properly underwritten, remains as good
13.5% 43.5% 31.9% 9.0% 2.2% a place as any for husbanding assets in an unsettled world.
Exhibit 2-3
Source: Emerging Trends in Real Estate 2013 survey. Debt Underwriting Standards Forecast
+39.1+41.5+19.4
for the United States
best—and all the rest.” According to Emerging Trends respon-

dents, stringent underwriting standards will harden into practice
in 2013: more than 80 percent say tough loan terms will stay the
same or become even more rigorous (exhibit 2-3). 39.1% 41.5% 19.4%
More rigorous Will remain the same Less rigorous
Compromised CMBS issuers stagger back, unable to offer
much help to their formerly bread-and butter Class B and Source: Emerging Trends in Real Estate 2013 survey.
C–asset borrowers; the securitized debt markets still “look like Note: Based on U.S. respondents only.
a question mark” and show few signs of reclaiming much more
market share in 2013. Most leftover CMBS quandaries remain
unresolved from the crash: “They had lowered costs and
spread risk tolerances around, but bond investors didn’t know Exhibit 2-4
what they were buying and the underwriting and risks were Equity Underwriting Standards Forecast
+29.7+50.7+19.6
for the United States
not clearly understood. None of that has been rectified yet,” an
interviewee said.
Complicating matters, the estimated $300 billion of refinanc-
ing required for maturing loans over each of the next three years
will decrease lenders’ ability to write new commercial mortgages
and force a continuation of extend-and-pretend strategies on 29.7% 50.7% 19.6%
existing debt. Lenders also remain extremely disciplined about More rigorous Will remain the same Less rigorous
commercial construction lending: developers “have an easier
time finding equity investors” than financing. Note: Based on U.S. respondents only.

Chapter 2: Capital Flows
Banks Will Bide Their Time Exhibit 2-6
The take-it-gently deleveraging beat goes on. Buyers wait aim- Maturing Loans: Preferred Strategy for Lenders
lessly for banks to shed commercial property assets at cheap
prices; banks maintain a slew of problem assets on their books Extend without
while values ratchet slowly up, reducing their potential losses; mortgage modification
6.9% Foreclose and dispose
borrowers with sterling credit have no problem securing financ- 14.9%
ing; troubled borrowers who need refinancing capital most of
all get the cold-shoulder treatment or, more likely, receive an Extend with
mortgage modification
extend-and-pretend pass; and Federal Reserve–engineered 54.7%
low interest rates “save everyone.” The kabuki theater perfor-
mance plays out ever so slowly with no one sure exactly what’s
Sell to a third party
happening in the bowels of these financial institutions. But 23.6%
more than four years after Lehman, banks apparently have not
bolstered their balance sheets enough to clear the market, or
the government wants them to hold back (in the case of home
foreclosures especially) for fear of shocking prices into a further
decline—a politically and economically risky bet. As a result,
banks feel “no intense pressure” to do much of anything: many
mortgages even on underwater assets may be among “their
highest-yielding assets.” As long as loans are current, lenders
are better off to extend than sell loans at discounts, foreclose and
recognize losses when markets have further room to improve,
or refinance at lower rates. Under the circumstances, the same
Fewer Banks Drive Harder
beat essentially goes on for another year at least, although bank- Bargains
ers selectively will dribble “a little more from inventory” onto the The credit debacle has shrunk the banking community into “a
market “and take some additional [manageable] hits.” smaller group” of active lenders. Interviewees count only two
major U.S. money-center banks willing to lend on larger deals,
and hobbled European banks, once influential players “are out
Exhibit 2-5 of the picture.” Regional and local banks have been winnowed
Bank Real Estate Loan Delinquency Rates down, and survivors may consolidate and merge to find econo-
mies of scale needed to comply with new banking regulations.
Finding fewer choices, borrowers will continue to confront
20%
Construction and development loans tough lending terms; banks require “a lot of equity” and some
noncurrent rate recourse. Perhaps not surprisingly, bankers appear more willing
15%
to keep these better-underwritten loans on their balance sheets
than try to securitize them. Notes an interviewee, “Banks now
Multifamily mortgages do business the way they should have been doing business all
noncurrent rate
10% along—actually thinking about real estate and not about debt
Commercial mortgages getting flipped or getting paid for origination.” Refinancing takes
noncurrent rate
the breath away from the origination market; the bulk of lend-
5% ing across all sources will continue to focus on dealing with the
$300 billion in loans maturing annually through 2015.
0%
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012* Insurers Cream the Top of
Source: FDIC.
the Market
Note: Delinquent loans are defined here as those that are noncurrent, either 90 days or more past due, After retreating from the precrash overleveraging binge and,
or in nonaccrual status.
*As of Q2 2012. not coincidentally, avoiding the portfolio problems of banks
and CMBS originators, shrewd life insurers still “have the pick”

“good product, you cannot create pools, and there hasn’t been
Exhibit 2-7 enough [good product].” The market also requires more B-piece
U.S. Life Insurance Company Mortgage Delinquency buyers to invest in the riskiest tranches, so originators have held
and In-Foreclosure Rates back, unwilling to warehouse loans.
But the CMBS industry may need to confront bigger obstacles
8 in order to rebound fully. Although most interviewees contend that
7
a properly functioning mortgage securities engine is necessary
for liquidity in the real estate capital markets, they also express
6 Delinquency
serious concerns about failures to address evident problems in
5 CMBS underwriting, regulation, ratings, and servicing since the
market collapse at the depths of the credit crisis. “The problem
Percentage
In foreclosure
4 for bond buyers remains”: the people running CMBS shops
3 have “shuffled around,” underwriting is only marginally better,”
originators and issuers “don’t have enough skin in the game” for
2
an alignment of interests, the ratings agencies still get paid by
1 the issuers, and “attitudes haven’t changed.” In short, “nothing
meaningful has happened” to correct the problems, which sent
0
1990 1994 1998 2002 2006 2010 2012 bond buyers running to the exits.
Some interviewees say regulatory changes—like requiring
Sources: Moody’s Economy.com, American Council of Life Insurers. holding a portion of each loan or delays in realizing fees and
promotes—could lower industry profitability and limit the num-
ber of players willing to enter the business. Some interviewees
of the best senior loan deals in the absence of much competi- remain skeptical, “At first B-piece buyers will be reasonably
tion. They originate record volumes, usually with high-credit disciplined. Then they will gradually loosen credit standards as
clients, and on a risk-adjusted basis conservatively achieve a transactions and money come into the market” until it’s time to
considerable cushion with loan-to-value ratios of 65 percent “revisit underwriting problems” and their consequences. In the
or lower and “a lot of real equity ahead of us” on high-quality meantime, “bond buyers cannot get the same level of detail and
assets. Interviewees claim insurers are not pushing values and disclosure we did pre-2007,” and more hedge funds, not real
base underwriting on current cash flows. “That’s how they have
stayed out of trouble” all along. Uncharacteristically, they move
into multifamily housing and even do some mezzanine lending Exhibit 2-8
and construction to permanent loan deals to get higher yields; U.S. CMBS Issuance
given current markets, these risks seem reasonable. Making
their mark in avoiding commodity properties, insurers will not fill $250
the lending void in helping troubled borrowers owning Class B
or C properties. But in 2013, insurers will try to limit the terms of
$200
loans and offer more floating-rate debt to hedge against the low-
interest-rate environment. Some new insurers may also enter the
Total (millions)
real estate lending space, but this will not be a game changer $150
for borrowers.
$100
CMBS Lurching Forward
New regulatory restrictions on traditional lenders—including $50
Basel III and Dodd-Frank—could open the way for private
equity and hedge funds, as well as start-up lending shops, to
fill some of the void or step in to resuscitate the still-flagging $0
1998 2000 2002 2004 2006 2008 2010 2012*
conduit business. “Sputtering to life” from “a shadow of what it
was,” CMBS may have a chance to lurch back into the financing Source: Commercial Mortgage Alert.
spotlight “once transaction activity increases.” Without enough *Issuance total through August 30, 2012.

estate–oriented players, work the B-piece space, raising ques-

tions about the quality of due diligence. Exhibit 2-10
In spite of continuing concerns, interviewees continue to Prospects by Investment Category/Strategy

expect that CMBS issuance can return to a $75 billion to $90 bil-
lion level over the next several years—well below its $250 billion
Value-added investments 6.16
peak, but a rational market share.
Opportunistic investments 6.07

Another CMBS Roadblock:
Special Servicer Questions Core-plus investments 5.77
Who watches out for bondholders once CMBS loans go into

Distressed properties 5.66
default? It was supposed to be special servicers, even though
CMBS pioneers in the mid-1990s privately had questioned how
Distressed debt 5.66
servicers could handle a deluge of problem mortgages working
off complex loan documents without any previous connec-
Core investments 5.38
tions to borrowers. The early promoters conveniently dismissed
potential problems by predicting only a small chance of mass
defaults. Unfortunately, interviewees say, now-evident problems Development 5.17
involving some special servicers and their handling of tens of
billions of dollars in troubled CMBS loans raise questions and 1 5 9
further reinforce market doubts about CMBS structures and abysmal fair excellent
relationships. Disparate and disaggregated, “senior bond hold- Source: Emerging Trends in Real Estate 2013 survey.
ers complain, but take no [concerted] action [yet]; something
will bubble up.”
trusts, and self-serving abuse of document loopholes, accord-
At the same time, borrowers continue to face hurdles in
ing to interviewees. If so, these servicers take advantage of
pursuing work-outs: “They have nobody to talk to.” In addition,
the lack of any ready oversight since mechanisms were never
some interviewees highlight questionable special-servicer
put in place over them to protect bondholders beyond caveat
practices, including holding back on resolving loans to feed
emptor. Besides the potential for lawsuits, interviewees suggest
fee machines, side dealing, profitable trades at the expense of
that the industry and/or regulators must address these special-
servicing issues or “the CMBS world will continue to flounder.”
Exhibit 2-9
CMBS Mortgage Delinquency Rates Some borrowers, meanwhile, just wish they had “taken a higher
rate” through a traditional lender. Expect servicers to increase
12% auctions on their worst assets; they have reached the point of
diminishing returns and will take almost “any price to avoid pay-
10%
ing property taxes.”
8%
Monthly delinquency rate
Searching for Yield in the
6%
Capital Stack
Investors will continue to jockey for position in the capital stack
Average delinquency rate
since 1999 to achieve the best risk-adjusted returns, hoping for as much
4%
upside as possible. A ton of dollars “looking for a home,”
rock-bottom interest rates, and resulting low cap rates push
2%
down mezzanine debt quotes on core real estate into the high
single digits (they remain in the low to mid-teens for secondary
0% markets). Although disappointing for the yield hungry, these
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
deals still promise a core-plus return with a downside cushion
Source: Trepp, LLC
ahead of core equity. Recapitalizing a high-quality, overlever-
Note: Through July 2012.
aged property and taking a preferred equity position may turn

out even better. In either case, core equity owners face lesser
prospects: they assume the first loss position when cash flows Exhibit 2-11
and potential future interest moves could leave them with less Change in Availability of Capital for Real Estate
generous return expectations unless rents escalate ahead of
in 2013
most predictions.
Equity Source
The Squeeze-Down of Foreign investors 6.36
Opportunity Funds Institutional investors/ 6.09
As investment banks retreat from funds management in the pension funds
wake of the expensive regulatory “compliance maze,” super- Private equity/opportunity/ 6.04
sized private equity and hedge funds—“the new nonbank hedge funds
banks”—vacuum up pension fund allocations, which charac-
Private local investors 5.79
teristically seek safety in the security of what everybody else is
doing. Managers of these multibillion-dollar funds then “push Public equity REITs 5.66
out dollars promising big returns, which could be hard to real-
ize” in current commercial markets compromised by improving Nontraded REITs 5.57
but still questionable tenant demand. With tremendous buy-
ing power, they target large portfolios and entities, looking to
improve performance and then sell down the line. Lending Source
In these markets where promotes will be more difficult to Insurance companies 5.97
achieve, the megafunds can earn “huge fees on their volumes”
alone, leaving hundreds of smaller “opportunity fund” competi- Mezzanine lenders 5.92
tors, who need promotes to profit, grasping for leftovers and
Securitized lenders/ 5.87
vulnerable to failure. “The simple math proposition of organiza- CMBS
tional expenses for smaller general partners is that without scale
Commercial banks 5.85
and unless you get promotes, you cannot make the businesses
work.” And very few can be successful consistently. They may Nonbank 5.81
time taking advantage of a narrow window for acquisitions at financial institutions
or near the bottom of a cycle and ride a recovery, but the cycle Mortgage REITs 5.49
may not cooperate for subsequent funds, which will miss on any
Government-sponsored 4.92
significant value gains once recovery has played itself out. In the entities
worst-case scenario, late-to-the-game funds buy too close to
the top and sink in any market correction. Because finding good 1 5 9
very large stay the same very large
opportunistic investments in the current environment is difficult, decline increase
more opportunity funds “will be forced into development” to
have any chance of realizing satisfactory performance bonuses,
and many of these fund managers lack development expertise Note: Based on U.S. respondents only.
unless they are fronted by experienced local operators. Plan
sponsors and other investors become hip to the square: they
favor existing managers with good operating histories and
without legacy problems. Other managers “will struggle to raise tion. Generally strong management teams can scale operations,
peanuts.” leading to expense savings over portfolios, and leverage
national tenant relationships, especially in retail and industrial
space. They continue to sell weaker assets, deleverage higher-
REITs Corner the Top-Tier Market cost debt, grow unencumbered assets, get investment-grade
ratings, and float cheaper unsecured financings. Insurance
Sitting pretty at the top of the real estate food chain, public
companies and banks, meanwhile, fall all over themselves
REITs consolidate their holdings in core, institutional-quality
to extend credit to these public companies: “They chase the
real estate and reap the benefits of cap-rate compression on
people who need it the least.”
well-leased properties as well as ongoing solid income genera-

The stock market understandably looks favorably on all continue to wrestle with how to put day-to-day valuation and
these moves. “REITs stack up as a defensive asset with good liquidity mechanisms—cash and public REIT allocations, limita-
earnings and dividend growth”—hard to find amid otherwise tions on investment rights—in place for private equity real estate
choppy equities’ performance. If worse comes to worst, many options in 401(k) plans. Then marketing real estate to benefi-
of these companies look well positioned to ride out any prob- ciaries presents its own challenges, competing among all the
lems: prime holdings inevitably perform better in most market various stock, bond, and cash options.
scenarios, losing less value in down markets and appreciating For now, pension funds tie themselves in knots over strate-
more in recoveries. But companies concentrated in certain gies and return expectations after securing “relatively good”
weak sectors like suburban office face tough sledding, and the recent real estate performance and wondering if it can continue.
overall industry pushes up against the limits of supply in top-tier They need alpha to fill funding gaps, but also require steady
properties. There are only so many to go around. When Class A income to meet current payout requirements. For most pension
assets come to market, expect well-heeled REITs to pounce on fund investment managers, fundraising has been “brutal” and
any opportunities. should remain difficult in 2013. Uncertainty leads plan spon-
sors to “write fewer and bigger checks to bigger, safer [brand]
names.” And although overall allocations remain up, “getting
High-Net-Worth Hesitation invested remains an issue with queues into core funds just about
Hungry for capital gains and less motivated by income, high- everywhere” and other managers struggling to find product to
net-worth investors temporarily display less enthusiasm for meet ambitious return parameters. “A lot of pension fund money
commercial real estate. They tend to recoil from all the nega- was attracted into real estate by promises of 15 percent or better
tive “never-in-my-life-have-I-seen” economic indicators and returns, and that’s not happening.” The biggest public funds
stockpile cash. Exceptions are entrenched local real estate fami- “grow more conservative” and bring direct investment capabili-
lies, who have built up fortunes over time developing, owning, ties in house after a past round of cost cutting and shedding
and managing properties for the long term. They remain very staff experts.
much in the game and look to take advantage of any bargains, “Open questions” abound.
especially in secondary markets where big players have been
relatively scarce. They will try to use their marketplace knowl-
edge and considerable local connections, including tenant
relationships, to best advantage. Exhibit 2-12
Percentage of Your Real Estate Global Portfolio
in World Regions
Pensions in Flux
On the front burner for pension funds, “serious underfunding”
2013
plagues public plan sponsors, potentially upending retirements United States/Canada
of aging baby boomers. “In a pure numbers game,” states and 2018
local governments move toward a reality check: taxpayers ulti-
mately may not be able to afford the current public pension fund Europe
system. Over time they likely must follow the lead of corporate
plan sponsors and transform defined-benefit plans into defined-
contribution programs self-managed by the beneficiaries, and Asia Pacific
401(k)s, whose liquidity requirements make investment in equity
real estate unwieldy and “could diminish real estate’s role.”
In the meantime, some plan sponsors downgrade real estate Latin America
from “its own little province” into an asset-allocation category
lumped together with other real assets like infrastructure, natural
resources, and farmland. These plan sponsors “look for greater Other
efficiency and pricing; in theory, if timber offers better returns,
then allocations to real estate may be reduced.” 0% 20% 40% 60% 80% 100%
For pension fund managers, the handwriting is on the wall,
though the ramp-down of defined-benefit plans will happen Source: Emerging Trends in Real Estate 2013 survey.
gradually and not begin immediately. “With mixed results,” they

chances.” The amount of foreign capital in New York City and
Exhibit 2-13 Washington, D.C., is “breathtaking”; San Francisco, Miami, Los
Foreign Net Real Estate Investments in the Angeles, and Boston also draw attention, but not much heads
United States by Buyer Origin elsewhere.
Europe. “Scared to death” about the euro crisis and concerned
$7,000 about China’s slowdown, Germans, Dutch, and the Brits espe-
cially seek safe U.S. harbors and see good relative value. “They
will be very active.” Some veteran players may even venture
$5,000
tentatively beyond the gateway investment model given high
pricing in the 24-hour cities.
$3,000 Asia. The region’s bulging sovereign wealth funds view the
United States “positively.” They like its size and stability in
contrast with Europe’s problems and the volatility of emerging
Australia
Millions of dollars
$1,000 markets. And U.S. real estate certainly compares favorably with
$0 T-bill yields or other alternative investments. Chinese institutions
just begin to look offshore under new government rules. “They
Canada
Asia
Germany
Middle East
Other
Europe, excluding the U.K. and Germany
United Kingdom
Americas, excluding Canada
-$1,000 will concentrate in the most familiar coastal markets, the one’s
they know and feel safe in.” Wealthy Chinese individuals “are
recreational investors willing to make high-risk investments” in
-$3,000
fancy homes and skyscraper condos. Chinese banks “can be
extremely competitive if they choose” as Japanese and South
-$5,000 Koreans also “keep their hands in the game.”
Canada. Buoyed by their strong fiscal condition, Canadians
look south of the border after running out of real estate oppor-
-$7,000 tunities in their relatively constrained markets where institutions
buy and hold on to the best properties. “The grass is always
greener,” and the amount of Canadian capital trying to find its
-$9,000
way into the United States “is mind-boggling.” The big public
pension funds have been joined by public vehicles and some
Note: Net capital flows from second-quarter 2011 through second-quarter 2012.
All dollars in millions. private funds in the hunt for returns. Investment banks and
money managers “crank out” new funds “like cookie cutters”
with stretched yield promises and may buy inferior properties.”
Safe Haven Influx There’s just a ton of pent-up capital that needs to get invested.”
But the institutions know the markets: “They won’t be reckless.”
In a world of economic hurt and fear, the United States still
Middle East. Oil money focuses on “the four food groups and
“represents good relative value” and ranks internationally as the
hotels,” but has no interest in niche or specialized property
“premier” safe real estate investment haven. Europeans cope
strategies. Business is conducted quietly with longtime part-
uneasily on shaky domestic turf and seek relative stability and
ners. “They are willing to take outsized risk for outsized returns.”
some measure of yield across the pond, while wealthy Chinese
Israelis have always had close ties to the United States and
and Russians park assets outside of their countries. Middle
increase their activity. “It’s the most secure place for them to
East investors and affluent Israelis play smart by offshoring
invest.”
wealth away from backyard hotspots, and nouveau riche Latin
Americans diversify fortunes into south Florida condos. Asian Latin America. As South American economies comparatively
sovereign wealth funds are flush with cash and could pick flourish and a wealthy class emerges, the United States naturally
up any slack if domestic pension funds pull back. Anticipate attracts increasing amounts of Latin American capital. South
that foreign money will continue ample inflows into American Florida pieds-á-terre or New York apartments not only make
property markets from all compass points unless the federal good investment candidates for securing assets, but also are
government fails to address the fiscal cliff. Concentrating their status builders. Expanding Hispanic demographics also make
activities in the très chère gateways, most foreign sources “may the United States an increasingly comfortable place to invest as
not get great returns, but with low interest rates, they’ll take their well as do business.

Total (millions of dollars) Total (millions of dollars)
Exhibit 2-14
Exhibit 2-15
-$4,000
$0
$2,000
$4,000
$6,000
$8,000
-$6,000
$10,000
–$2,000
–$1,500
–$1,000
–$500
$0
$500
$1,000
$1,500
-$2,000
Apartment
Cross-border Office
2,886.8

Equity fund Industrial
Canada
Institutional Retail
3,206.4
Hotel
Nonlisted REIT

Private Apartment
Apartment
Public Office
User/other Industrial
Asia
Retail
Hotel
Cross-border
Apartment
Equity fund Office
Institutional Industrial
Nonlisted REIT Retail Germany
Hotel
Note: Net capital flows from second-quarter 2011 through second-quarter 2012.
Private
Industrial
Public Apartment
User/other Office
Industrial
Retail
Middle East
Cross-border Hotel
Note: Net capital flows from second-quarter 2011 through second-quarter 2012. All dollars in millions.
Equity fund Apartment
Institutional Office
Nonlisted REIT Industrial
Europe,
Retail
Germany
Office
excluding
Private
the U.K. and
Hotel
Public
Foreign Net Real Estate Investments in the U.S. by Property Type
User/other Apartment
Office
Industrial
United
Cross-border Retail
Kingdom
Hotel
Equity fund
U.S. Buyers and Sellers: Net Capital Flows by Source and Property Sector
Institutional Apartment
Nonlisted REIT Office
Industrial
Retail
Private
Other
Retail
Public
Hotel
User/other
Apartment
Office
Cross-border Industrial
Canada
Retail
excluding
Equity fund
Americas,
Hotel
Institutional
Nonlisted REIT Apartment
Hotel
Private Office
Public Industrial
Retail
Australia
User/other
–5,370.5
Hotel
Emerging Trends in Real Estate® 2013

23
c h a p t e r 3
Markets toWatch
“Look where other people aren’t, and smart money
will follow micro-fundamentals.”
I
n 2012, the Emerging Trends “Markets to Watch” chapter or exceed prerecession levels in the ”big six”—San Francisco,
opened with the following interviewee quote: “Capital will New York City, Boston, Washington, D.C., Los Angeles, and
search for yields beyond the overbought gateways and the Chicago—the focus of markets and property investors has
few jobs-growth markets, taking on considerably more risk.” shifted more to the lessee’s value, various market demograph-
Investment strategies conformed with Emerging Trends fore- ics, a city’s economic production, diversification, job growth,
casts through the first half of 2012, but investment slowed at the and basically on where people want to be. As one investor
start of the second half. This slowdown was just a sign of appre- states, “Corporate occupiers may do better by following their
hension over stepping outside the prime market/prime property employees.” Real estate investors might want to reflect on that
investment strategy. The acceptance of additional real estate strategy.
risk did not seem feasible to many in view of other concerns
on the horizon. This “wait and see” approach is understand-
able because investors must reevaluate the global economic
uncertainty, a limited increase in U.S. employment, continuing
Market Trends
problems with housing, and a presidential election.
Even though these troubles linger, the 2013 Emerging
Survey Says . . .
Trends forecasts display strong signals that investors will return Because other asset classes continue to offer minimal returns
to accepting more risk in their portfolios in an attempt to “chase or too much volatility, investment capital’s interest in com-
more yield.” Overall, interviewees have a positive tone, stat- mercial real estate continues to increase. The 2013 Emerging
ing, “Yield is in the secondary markets,” “We like safe bets; but Trends survey results confirm this trend: only six of the 51 markets
secondary markets are the focus now,” and “The idea is to start covered exhibited a decline in investment prospects. This year,
moving into second-tier markets where there’s better pricing 57 percent, or 29 cities, received a rating of “modestly good” or
relative to the top-tier markets.” Secondary real estate markets better, followed by 27 percent with a rating of “fair,” and only 16
were mentioned repeatedly, comments focusing mostly on their percent were rated “modestly poor” or lower. Compared with
price and yield advantages. “The chasing of yield started in the last year, investment prospect values for the big six rose by an
gateway cities [and] is now spreading to the other markets. . . . average of only 0.48 points, but the rest of the field improved
There is quite a lot of activity in the secondary city markets.” its values by an average of 0.62 points. Those cities making the
Even as riskier secondary markets show up on investors’ biggest moves in the values, and rated “generally good” or bet-
radar, many believe the move cannot be made without concen- ter, were generally secondary markets and included Salt Lake
tration on leasing to high-quality tenants within growth industries City, Charlotte, and Miami. On the other end of the spectrum,
that are sustainable. “Location, location, location” will always be Washington, D.C., and Austin, two of the top-rated markets in last
the key driver in real estate. However, as property prices meet year’s report, saw their rating values decline, as did New Orleans.

Expectations have risen not only for investment, but also for
Exhibit 3-1 development prospects for 2013. Of the 51 markets covered,
U.S. Markets to Watch: Overall Real Estate Prospects 20 were rated “modestly good” or better for development, 12
were rated “fair,” and 19 scored a “modestly poor” or worse.
Investment Development Homebuilding Development rating values were up across the board, but the
1 San Francisco (1/1/1) 7.21 6.87 6.80 big six scored much better than rest of the field, registering an
2 New York City (2/2/3) 7.14 6.76 6.42
average 6.14, compared with the field’s 4.82 average. Says one
3 San Jose (3/3/2) 6.89 6.58 6.58
4 Austin (7/4/5) 6.71 6.40 6.26 interviewee, “Replacement costs are better than market prices
5 Houston (5/5/6) 6.84 6.36 6.15 in larger markets, so now might be the time to build.” According
6 Boston (4/6/8) 6.85 6.31 6.05 to survey participants, market movers in the development arena
7 Seattle (6/8/7) 6.72 6.16 6.14 include Charlotte, San Francisco, and Chicago. Less interest
8 Washington, DC (12/9/4) 6.43 6.11 6.30
in building was found in the Washington, D.C.; Westchester
9 Dallas/Fort Worth (10/7/10) 6.47 6.20 5.86
10 Orange County, CA (9/19/9) 6.48 5.57 5.91 County, New York; and Detroit areas.
11 Raleigh/Durham (15/10/11) 6.27 5.93 5.72 Homebuilding has started to see the light, a view docu-
12 Miami (11/11/16) 6.47 5.89 5.44 mented by survey results: the number of markets rated
13 Northern New Jersey (16/12/12) 6.26 5.89 5.65 “modestly good” or better increased to 14 from only three last
14 Denver (8/14/15) 6.49 5.77 5.45
15 San Diego (13/17/13) 6.37 5.60 5.61 year. “The housing market has finally bottomed, and now real
16 Los Angeles (14/15/14) 6.35 5.69 5.49 estate growth should follow,” says a developer. This might be
17 Charlotte (18/16/19) 6.17 5.67 5.26 true, but homebuilding prospects will be best in the larger
18 Nashville (21/13/21) 6.03 5.79 5.16 markets, according to survey results. All big-six markets except
19 San Antonio (22/18/17) 5.97 5.59 5.40
Chicago received a rating of “modestly good” or better for
20 Portland, OR (17/20/23) 6.19 5.52 5.09
21 Salt Lake City (19/21/20) 6.06 5.39 5.20 homebuilding. As a total, the average value for larger mar-
22 Honolulu/Hawaii (24/22/18) 5.79 5.37 5.33 kets was 5.93, compared with an average of 4.71 for the rest.
23 Minneapolis/St. Paul (23/25/25) 5.89 5.06 4.82 Housing may have bottomed out, but the markets that offer the
24 Chicago (20/24/31) 6.05 5.12 4.54 best homebuilding prospects are the larger ones. According
25 Westchester, NY/Fairfield, CT (28/23/26) 5.59 5.14 4.78
26 Virginia Beach/Norfolk (31/27/22) 5.36 5.00 5.14
to survey results, top areas for homebuilding in 2013 include
27 Philadelphia (27/26/24) 5.61 5.05 4.83 San Francisco, San Jose, and New York City. The areas with
28 Orlando (26/28/27) 5.64 4.97 4.77 the least attractive prospects include Detroit, Las Vegas, and
29 Tampa/St. Petersburg (25/29/29) 5.66 4.90 4.64 Sacramento.
30 Pittsburgh(33/32/28) 5.32 4.66 4.66
31 Baltimore (32/30/33) 5.36 4.78 4.40
32
33
Oklahoma City (36/31/30)
Phoenix (29/37/34)
4.98
5.56
4.76
4.24
4.55
4.26
“Employment Please”
34 Kansas City (34/33/32) 5.27 4.37 4.42 Slow and limited job creation continues to be a concern in 2012,
35 Atlanta (30/34/38) 5.40 4.32 3.96
and according to Emerging Trends interviewees, the topic will
36 Inland Empire, CA (35/36/36) 5.20 4.26 4.05
37 Indianapolis (38/35/35) 4.83 4.31 4.20 be one of the top issues in 2013. Interviewees believe, “jobs are
38 Cincinnati (37/38/40) 4.96 4.18 3.88 getting better, but won’t accelerate in 2013,” “limited job creation
39 Jacksonville (39/39/41) 4.80 4.16 3.88 isn’t increasing demand,” and “we’re not sure what the engine
40 Columbus (42/41/37) 4.56 4.04 4.00 is that will drive job growth.” Moody’s Analytics forecasts slow
41 Milwaukee (41/40/42) 4.59 4.04 3.88
growth—a 1.1 percent increase in employment for the com-
42 Albuquerque (44/44/39) 4.48 3.88 3.90
43 St. Louis (40/42/46) 4.61 4.00 3.65 ing year. Even with these modest projections, there have been
44 Tucson (43/47/44) 4.53 3.71 3.83 signs of continuous job growth. Since the “technical” end of the
45 Memphis (47/43/45) 4.23 3.94 3.80 recession in July 2012, the United States has added 2.66 million
46 Providence, RI (48/46/43) 4.23 3.77 3.83 nonfarm jobs. However, that constitutes only 36 percent of the
47 New Orleans (50/45/47) 4.16 3.85 3.65
48 Cleveland (49/48/48) 4.19 3.39 3.65 7.4 million jobs lost during the recession. Even with those statis-
49 Sacramento (45/49/49) 4.31 3.30 3.43 tics, one optimistic interviewee forecasts “6 million new jobs by
50 Las Vegas (46/50/50) 4.30 3.00 2.94 the end of 2014, or about 250,000 a month.”
51 Detroit (51/51/51) 3.38 2.16 2.33 Service-type positions show strong growth in numbers, but
Source: Emerging Trends in Real Estate 2013 survey. goods-producing employment continues to struggle, down 18.7
Note: Numbers in parentheses are rankings for, in order, investment, development, and percent since the peak in 2006 (see appendix). The number
homebuilding.
of government positions in 2013 is still expected to be down

Chapter 3: Markets to Watch
Exhibit 3-2
Employment Change (2007–2013)
-200,000 -150,000 -100,000 -50,000 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000
Houston, TX (5)
Dallas/Fort Worth, TX (9)
Washington, DC (8)
Austin, TX (4)
San Antonio, TX (19)
Raleigh/Durham, NC (11)
Minneapolis, MN (23)
San Francisco, CA (1)
San Jose, CA (3)
San Diego, CA (15)
Phoenix, AZ (33)
Pittsburgh, PA (30)
Tampa, FL (29)
Providence, RI (46)
Philadelphia, PA (27)
Miami, FL (12)
Atlanta, GA (35)
Los Angeles, CA (16)
Detroit, MI (51)
Chicago, IL (24)
Source: Moody’s.
Note: Employment for 2013 is a forecast as of September 2012. Numbers in parentheses are overall rank.
from the 2009 peak, mostly driven by state, regional, and local
reductions. Federal positions remain a concern because budget
Diversity, Production, and Rank
issues may lead to major cutbacks. “Government employment As expected, the majority of markets with higher overall eco-
and even subcontractors should be concerned,” says one par- nomic production scored better in this year’s survey. Measuring
ticipant. Even though overall job growth is questionable, some gross metro product (GMP) per capita—the size and production
industries—including technology, energy, health care, and of a metropolitan area by population—the projected average
education—show strong signs of growth. “Energy, tech, and growth is 1.4 percent for all of the markets covered in the report.
health are going to do much better than people think.” Survey results show that 24 cities will exceed that average, and
Emerging Trends survey results show a strong correlation 27 will fall below it next year. Comparing that to survey market
between jobs and survey rankings. Some markets with strong ranks, seven of the top ten ET markets are considered above
2013 employment growth projections fared well, including any average producing cities, while three fall below average expec-
city in Texas, New York City, Raleigh, and San Jose, to name a tations. Austin (4), San Jose (1), and Dallas (9) top the GMP per
few. Not surprisingly, several of these markets also have a large capita list at 5.3 percent, 3.1 percent, and 3.0 percent growth,
concentration of work in those few industries showing growth. respectively. Economic production is a driver of real estate—
For example, Houston has energy, which represents 3.6 percent and obviously of interest to interviewees and survey participants.
of the city’s employment; 16 percent of Raleigh’s jobs are in As one states, “Economic production and revenue are influential
education; and the technology sector constitutes 25 percent of in our investment decisions.”
San Jose’s employment. These numbers show some positives, A little more unexpected is the comparison of survey rank to
but real estate’s future is still uncertain. As an interviewee states, Moody’s industrial diversity scale. Industrial diversity is a 0-to-1
“It’s a horse race between NOI increases, job growth, and inter- scale that measures a market’s business diversity compared
est rate hikes.” with that of the United States as a whole, which is assigned a

Gross Metro Product per Capita Homeownership Rates
Best Worst 70
1. Austin (4) 1. Detroit (51) 69
2. Salt Lake City (21) 2. New Orleans (47) 68
3. Houston (5) 3. Cleveland (48)
67
4. San Jose (3) 4. Providence, RI (46)
66
Percentage
5. Raleigh/Durham (11) 5. Northern New Jersey (13)
65
Sources: Moody’s forecast for 2013; Emerging Trends in Real Estate 2013 survey.
64
Note: List based on Emerging Trends markets only. Number in parentheses represents Emerging 63
Trends 2013 total market rank.
62
61
value of 1. Employment diversity should be a benefit to market 60
risk and output. However, when compared with survey ranks, 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
the answers are slightly unexpected. Out of 51 Emerging Trends
Sources: U.S. Census Bureau; Moody’s Analytics (forecasts).
markets, 23 received a 0.75 industrial diversity rating or better,
signifying that those metropolitan areas possess a rather diverse
base. Of those 23 diverse markets, however, only one, Dallas,
Even if home prices have “bottomed” in places or are
scored a top-ten ranking in the 2013 Emerging Trends report.
“starting to see a little bit of life in terms of pricing,” the road
Of the remaining nine, six received a mark of 0.5 or higher, and
to recovery will be slow and difficult. According to Moody’s
three were below 0.5. Asks one interviewee, “Diversity is a sign
Analytics forecasts, in 2013 only six housing markets will be
of stability, but will stable be enough in a slow-growing econ-
in the black compared to their peak prices. Trends data show
omy?” Recessionary times might spark investors to look to more
that these markets either did not experience such steep price
diverse markets to weather job losses and declines. However,
declines during the recession or are in areas that have big
now, in a time of slight economic uptick, results indicate that
expectations for job growth next year. A few markets with mini-
investor sentiment is focused on job-producing industries and
mal price movements include Pittsburgh (30) and Oklahoma
those markets that contain them, such as San Jose and Seattle,
City (32). But even more interesting is the boost given home
regardless of how diverse the businesses are that are producing
prices by increased hiring in areas such as Houston (5), Raleigh
those jobs.
(11), and San Antonio (19).
“You’re going to see the best housing markets provide
The Housing Impact better commercial real estate options.” This statement stands
true when looking at the survey’s list of the top-ten investment
Even as many professionals feel more comfortable saying
prospects and various housing statistics. For the survey’s top-
the housing market has bottomed out, statistics might lead to
ten markets, delinquency rates of 90-plus days are 30 basis
doubts about that conclusion. At the end of August, the U.S.
points lower than the average for those in the other 41 cities in
Census Bureau reported that the homeownership rate was 65.5
the survey, and delinquent loans are processed 27 days quicker
percent, the lowest rate in the past 50 years (exhibit 3-4). This
in those same markets. In 2013, home completions will be 3.9
value does not even include the 3.9 million borrowers who are
percent higher in the top-ten markets than in the other markets
90 days or more delinquent on house payments and at risk of
covered, and home sales will be 1.7 percent higher. “You’re
default. Analysts often state that true homeownership is closer
going to see the best markets get new housing,” says an inter-
to 62 percent. Either way, the lending and homeownership crisis
viewee. Finally, comparisons of house price declines from peak
continues to put a big strain on commercial real estate and
levels are not even close: prices in the top-ten markets are down
many commercial real estate markets. Many interviewees agree;
17.3 percent, compared with 23.7 percent for the rest of the field.
one says, “If the housing sector recovers, more jobs, banks
The housing market might see another uptick in the near
freed up, and a multiplier effect ensues.”
future because many large investment groups have started to
enter the housing hunt. Investors have put up large amounts of


Public Transit System Scores Walkability Rankings
New York City (2) 81 Best Worst

1. New York City 85.3 (2) 1. Jacksonville 32.6 (39)
San Francisco (1) 80
2. San Francisco 84.9 (1) 2. Charlotte 34.3 (17)
Boston (6) 74 3. Boston 79.2 (6) 3. Oklahoma City 35.6 (32)
Washington, D.C. (8) 69 4. Chicago 74.3 (24) 4. Indianapolis 37.4 (37)
5. Philadelphia 74.1 (27) 5. Kansas City 38.1 (34)
Seattle (7) 59
San Jose (3) 40 Sources: Walk Score®, www.walkscore.com; Emerging Trends in Real Estate 2013 survey.
Dallas/Fort Worth (9) 39 Note: On a scale of 0 to 100, with 100 representing a walker’s paradise. List based on Emerging
Trends markets only. Number in parentheses represents Emerging Trends 2013 total market rank.
Houston (5) 36
Austin (4) 33
Leading this cyclical move is the echo boom generation,
Orange County, CA (10) N/A
which has pushed the American dream of homeownership to
0 20 40 60 80 100 the rear. As one interviewee states, “The echo boomer genera-
Source: Walk Score®, www.walkscore.com. tion is a key demographic we are focused on.” This trend is
Note: Number in parentheses represents Emerging Trends 2013 total market rank. strongly exhibited in a comparison of various markets’ demo-
graphic makeup with survey results: echo boomers as a percent
of the population in the top ten ranked markets totaled 15.3
capital to take advantage of low-priced and foreclosed homes percent, but only 13.6 percent in the bottom ten markets (exhibit
available in markets such as Florida, California, Nevada, and 3-8). This difference is evident in both primary and secondary
Arizona. The investment strategy is to purchase these types markets: New York City (2), Austin (4), Seattle (7), and Salt Lake
of homes and then rent them to new residents. Though this City (21), all have an echo boomer population that constitutes
approach is still fairly new and on a small scale, a private over 15 percent of the total for the metropolitan statistical area.
REIT has been created to follow this home purchase and rent Another key trend involving commercial real estate and echo
strategy. Apartment rentals have risen, followed by increased boomers is education (exhibit 3-7). In the top five markets in
development, but if an abundance of rental homes is entered terms of educational achievement, echo boomers make up 15.4
into the game, overbuilding could become a concern for the percent of the population, compared with only 13.8 percent in
apartment sector. markets with less educational achievement.
American Infill and Chasing

Echo Boomers Exhibit 3-7
Metro Area Education Rankings
Even though the housing market is starting to improve, demand
and interest in apartments in “American infill” locations remain
hot. “People want to live in areas where walking and transit is all Best Worst
that’s needed.” High transit and walkability scores are found in 1. Washington, DC (8) 1. Inland Empire, CA (36)
high-ranking Emerging Trends cities, including San Francisco 2. San Jose (3) 2. Las Vegas (50)
(1), New York City (3), and Boston (6) (exhibits 3-5 and 3-6). This 3. Boston (6) 3. Tampa (29)
trend has led to a boom in apartment development: comple- 4. San Francisco (1) 4. Jacksonville (39)
tions as a percentage of total inventory in 45 markets exceeds 5. Baltimore (31) 5. Memphis (45)
ten-year averages. This increased demand for infill apartment
rentals is overwhelming: the vacancy rate in every market is well Sources: Brookings Institution; U.S. Census Bureau; Emerging Trends in Real Estate 2013 survey.
Notes: Rank based on percentage of population age 25 or older with a graduate degree. List based
below the ten-year average. “People need to find a place to on Emerging Trends markets only. Number in parentheses represents Emerging Trends 2013 total
live, and we see a cyclical move away from homeownership in market rank.
metropolitan markets.”

Exhibit 3-8
Echo Boomer Percentage of Population
18% Average top 10 markets

15.3% Average bottom 10 markets
16% 13.6%
14%
12%
10%
8%
6%
4%
2%
0%
Co r t h
as
CA
ue
is
on
ov phis
ns
S a a nd
L a to
it
co
n
to n
le
N e e, R
r
os
s ti
t ro
s to
,D
ou
at t
n
Yo
eg
le a
e rq
cis
cs
o
us
me
ty,
nJ
Au
el
De
tW
.L
em
Se
Bo
to n
nc
sV
Tu
w
r an
Or
ev
Ho
qu
un
cr a
Sa
Ne
St
ide
M
or
g
Cl
bu
w
nF
hin
/F
Al
Sa
ge
as
Pr
lla
W
an
Da
Or
Sources: Moody’s Analytics; U.S. Census Bureau.

Notes: Echo boomers defined as those ages 25 to 34. Top and bottom ten are for 51 markets in Emerging Trends survey.
Migration: Will Real Estate Follow? size using different standards; however, in the end the split
comes down to the “big six” versus “the field.” Even with pricing
A look at net migration as a percentage of total population pro- concerns, the big six—San Francisco (1), New York City (2),
duces some unexpected results and possibly a vision of what Boston (6), Washington, D.C. (8), Los Angeles (16), and Chicago
is to come. Raleigh (11), Phoenix (29), Tucson (44), Las Vegas (24)—continued to score well in the 2013 survey. “Regardless
(50), and Austin (4), in that order, make up the top five destina- of prices, institutions seem to be staying in major markets,” an
tion markets for in-migration, whereas negative net migration investor says. This ongoing trend has affected prices substan-
can be found in Cleveland (48), Detroit (51), and Chicago (24) tially. Since the 2007 peak, commercial real estate prices in
(exhibit 3-9). A few interviewees expressed the importance of major metropolitan areas are down only 11.4 percent on aver-
migration: “[We are] starting to focus on second-tier markets age, compared with 29.4 percent in other metropolitan areas
that have good in-migration,” and “We like cities that have (exhibit 2-1). This major market price movement and cap rate
good education centers and are magnets for migration.” Even compression has elicited mixed reviews from interviewees.
so, higher-migration areas did not excel in survey rankings. Some express concern, saying: “Gateway cities are fully priced
Therefore, even if individuals move to certain markets for a with too much capital chasing too few properties,” and “Prices
job, a lower cost of living, or lower home prices, to name a few and fundamentals don’t add up in the major markets.” Others,
draws, institutional capital might not be ready to risk investing though, still believe “good prime properties will always be good
in those markets because of the current economic uncertainty. prime properties, and capital will flow.”
However, with an improving housing market possibly on the While major markets remain the dominant force in commer-
horizon, household mobility might return. cial real estate and the main attraction of capital, participants
and data show that non-major markets—the field—might not
be a “bad play” moving forward. A comparison between the big
Big Six versus the Field six and the field in terms of certain macroeconomic elements
Over the last few years, the commercial real estate market has reveals some strong areas for these markets. For example,
continued to see a division of market interest between major and averages of GMP, industrial diversity, and ten-year echo boomer
non-major cities for investment. Many investors classify market growth all point to strength for secondary metropolitan areas.

Exhibit 3-9
Net Migration as a Percentage of 2013 Population
2.0%
1.5%
1.0%
Virginia Beach
New York City

New Orleans
Philadelphia
0.5%
Milwaukee
Cleveland
Honolulu
Chicago
Newark
Detroit
0.0%
Raleigh
Las Vegas
Phoenix
Tucson
Orlando
San Antonio
Portland
Tampa
Austin
Charlotte
-0.5%
Sources: PwC, Moody’s.

Note: Top ten and bottom ten for Emerging Trends metro areas.
Survey results regarding investment prospects agree: some overvalued, replacement costs are often below bidding prices.
of the largest gainers in rating values compared with 2012 are Therefore, selective building can be expected within the big six,
Salt Lake City, with a 0.89 increase; Tampa/St. Petersburg, whereas controlled-cost acquisitions will be the trend in second-
0.87; and Nashville, 0.71. Even more surprising is the limited ary markets. Survey results indicate that not much of either will
growth or actual decline in rating values in big-six markets take place next year in tertiary locations.
such as Washington, D.C., down 0.50, and Los Angeles, up Although development will be somewhat limited, trends
only 0.05. “Everything we’re looking at is incrementally better, point to more environmentally friendly, sustainable buildings and
meaning incrementally more capital for secondary markets as a more efficient use of space. Green developers continue to
it spills out of the larger markets,” says one interviewee; says embrace this pursuit and to adapt and conform to new demands
another, “Secondary market fundamentals haven’t been lagging from consumers. Owners believe “green building is often a
substantially.” Secondary markets are in the crosshairs of many good investment from a ROI [return on investment] perspective
investors looking for return and ready to take on more risk, but and adds to the bottom line.” In addition to sustainability, the
the economic future as well as the availability of capital to those amount of space provided continues to be adjusted, specifically
markets will determine the final outcome. in the office and apartment arenas. Say interviewees: “Office
buildings are exhibiting anemic real growth and are getting
serious about downsizing space per employee”; “Tenants are
Develop or Buy accepting smaller space [smaller units] to keep amenities, qual-
There has not been a positive outlook for development in an ity, and location”; and “People will be looking for smaller spaces
Emerging Trends publication in five years. Nonetheless, one key generally, both commercial and residential. There will be an
trend for 2013 is that some construction will return. As a whole, emphasis on reducing real estate operating costs.”
12 more markets, for a total of 20, received a rating of “modestly
good” or better as compared with 2012. Even though secondary
or tertiary markets were the largest rating value gainers, inter- A Few Other Trends
viewees were much more focused on developing in the big-six Two additional market trends worth noting are organic versus inor-
markets. Say interviewees: “Besides apartments, only select ganic growth, and the future for small deals. From a commercial
larger markets show signs of development”; “limited develop- real estate perspective, organic growth, except in apartments, is
ment outside of core markets”; and “build-to-suit and prelease limited as corporations continue to sit on profits without add-
is the way to go.” Because, apartments aside, market developing employees. However, more inorganic growth in commercial
ment has remained stable and prices in core locations are often real estate is being seen. Owners continue to look for tenants to

“steal,” offering newly structured space, According to 2013 forecasts from commercial real estate completions total-
often with better leases and concessions, Moody’s, San Francisco’s GMP growth ing near 1 percent of total stock. “The
in order to continue to show absorption in will reach 1.7 percent, and the city will great fortunes in real estate have always
their locations. “We can move into another add almost 50,000 jobs from the 2007 been made by having long-term vision.”
building across the street and take the peak. This pair of growth indicators A look at the Emerging Trends
same amount of space, but with a more should open investors’ eyes even wider buy, hold, and sell projections shows
efficient layout,” says one lessee. An to this global city. Even though industrial retail space in San Francisco to be a
owner agrees: “Often the tenant you need diversity seems weak here, investors still good buy, according to 62 percent of
might be right in front of you.” savor its skilled personnel and the facts survey participants. Buy opportunities
Interviewees also spoke of looking that high tech accounts for 10 percent continue in apartments, though rating
at much smaller deals—$50 million or of the city’s jobs and the young demo- values for that sector declined almost
less—that are often of no interest to larger graphic represents over 15 percent of 20 percentage points from 2012. The
institutional capital players. “There is the the population. Even with a questionable majority of survey participants still see
perception that they are too small, but business climate at times, San Francisco buying potential in the other three sec-
there are opportunities,” says one inves- has a mix that draws many corporations tors; however, the sell rating for office
tor; adds another: “$50 million and less is now and will draw them in the future. space hovers around 31 percent, up 20
a very attractive place.” Equity for smaller Next year, higher commercial real estate percentage points from the last report.
deals is a bit easier to obtain and, even prices and supply constraints might Even with some concerns over pricing,
with the additional risk, might provide restrict the number of deals, but PwC’s San Francisco is still a market to watch.
good returns at current lending rates. pipeline analysis (exhibit 3-14) shows As one buyer says, “We have been and
Some areas of interest in deals like these
might be ancillary markets near stronger
Exhibit 3-10
markets with job growing industries—
U.S. Retail Property Buy/Hold/Sell Recommendations
for example, Bellevue, Washington, a
smaller, growing city only a 16-minute
drive from the booming city of Seattle. Buy Hold Sell
Ancillary markets might not be for all
investors, but opportunities exist in many San Francisco 62.5 25.0 12.5
areas similar to Bellevue. New York City 59.5 31.1 9.5
Boston 51.6 39.1 9.4
The Top 20 Seattle 50.6 36.0 13.5
Markets Los Angeles 47.7
San Diego 42.7

38.6
44.0
13.6
13.3
San Francisco (1). In 2013, San
Miami 40.9 50.7 8.5
Francisco steals the triple crown from
Washington, D.C., receiving top bill- Denver 39.8 37.4 22.9
ing in the Emerging Trends investment, Washington, DC 37.0 45.7 17.3
development, and housing categories.
“San Francisco is driven by growth and Chicago 28.3 43.5 28.3
a strong jobs outlook, led by technology Houston 27.3 56.1 16.7

and a structural change away from sub-
Dallas 25.8 62.1 12.1
urban and toward downtown.” Continued
infill interest is supported by one of the Phoenix 25.3 48.1 26.6
best transit systems in the country and a Philadelphia 21.3 59.0 19.7
city center with walkability that is number
Atlanta 17.1 64.3 18.6
two only to New York City. “This around-
the-clock city has someone pushing 0% 20% 40% 60% 80% 100%
paper, shopping, shipping, or sightseeing
all the time.”

head count.” Hotels are the sector of

8 Investment Prospects Investment Prospects most interest, receiving the highest buy
8
7.21 rating from 57 percent of those surveyed.
7 7 7.14 One interested investor notes, “The New
6 6 York hotel market has absorbed 5,000
rooms and it is still very tight, so there is
5 5 opportunity there for more development
4 San Francisco 4 and growth.” Even with the spike in com-
mercial real estate prices, investors seem
3 3 to have the same level of interest in New
2 New York York City, possibly attempting to “take on
2
lease-up risk.”
1 1
San Jose (3). Only an hour’s drive south
’95 ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’13 of San Francisco, the San Jose technol-
’95 ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’13
ogy corridor continues to be a market to
watch, according to results. In 2013, San
expect to continue to be very active in Only 14 percent believe it is time to sell Jose and the broader Silicon Valley will
San Francisco.” office properties, some believing “there continue to generate jobs in a variety of
New York City (2). New York City makes will continue to be a negative impact by fields, but most will be in high technol-
a small move this year, stepping up two financial services fallout and shrinking
spots to second-best investment pros-
pect. Rating values for development and Exhibit 3-11
homebuilding rose, but the city remained U.S. Hotel Buy/Hold/Sell Recommendations
in the same position for each, ranked sec-
ond and third, respectively. Even with the
Buy Hold Sell
strong results, investors still seem con-
cerned about the run-up in prices: “It’s no
New York City 56.9 26.2 16.9
longer a safe haven of parking capital by
chasing compressing cap rates in New Boston 53.3 33.3 13.3
York City,” and “New York markets are too Los Angeles 50.0 35.3 14.7
expensive to support the rental price.”
Macro fundamentals for the financial San Francisco 49.3 31.0 19.7
capital of the world look secure because Miami 43.9 43.9 12.3
employment is expected to be back in
San Diego 40.0 48.3 11.7
the black next year, topping prerecession
peak job numbers in the latter 2000s by Washington, DC 38.2 48.5 13.2
almost 14,000. Demographics for the city Seattle 37.7 44.9 17.4
prevail, with 20 percent of jobs being in
Denver 33.3 51.5 15.2
the growing education and health care
sectors and an important echo boomer Houston 29.6 51.9 18.5
population that represents 16.5 percent
Chicago 27.0 46.0 27.0
of the population. Service-type jobs
continue to develop, but a lag in goods- Dallas 23.6 60.0 16.4
producing jobs is a concern. Atlanta 19.7 62.3 18.0
Though one interviewee calls New
Philadelphia 18.5 51.9 29.6
York City an overpriced market, survey
participants disagree in regard to buy, Phoenix 16.9 63.1 20.0
hold, and sell suggestions for next year. 0% 20% 40% 60% 80% 100%
Over 53 percent of interviewees give
the city a top buy rating for office space. Source: Emerging Trends in Real Estate 2013 survey.

Edmonton
2
Saskatoon
6
Vancouver Calgary
4 1
Winnipeg
8
Seattle
7
Portland
20
Minneapolis/
St. Paul
23
Sacramento Salt Lake City

49 21
San Francisco
1
San Jose Kansas City

3 34
Denver S
Las Vegas 14
50
Inland Empire Albuquerque

Los Angeles 36 42 Oklahoma City
16 Phoenix 32
33
Orange County San Diego
10 15
Tucson
44 Dallas/Fort Worth
9
Honolulu/Hawaii
22 Austin
4
Houston
5
San Antonio
19

Halifax
Montreal 9
7
Ottawa
5
Boston
Toronto 6
3 Providence
46
Milwaukee
41 Detroit Northern Westchester, NY/Fairfield, CT
51 New Jersey 25
13 New York City
Cleveland 2
Chicago Pittsburgh
48 30 Philadelphia
24
Indianapolis 27
37 Columbus Baltimore
40 31
St. Louis Washington, D.C.
Cincinnati 8
43 38
Virginia Beach/Norfolk
26
Nashville Raleigh/Durham
18 Charlotte
17 11
Memphis
45
ExHIBIT 3-12
Atlanta Leading U.S./Canadian Cities
35
Overall Real Estate Prospects
Generally good
Jacksonville Fair
39
Generally poor
New Orleans
47 Orlando Note: Numbers represent metro area overall country rank.
28
Tampa/
St. Petersburg
29 Miami
12

6,600 technology companies based here among the comments from interviewees.
Investment Prospects employing over 255,000 people make it In the 2013 results, Austin took a few
8
an area of interest. “There is risk in San steps back in its ranking for investment
7 6.89 Jose and technology, but established ten- prospects, from second to seventh, and
6 ants with growth potential are a big draw.” in homebuilding, from second to fifth.
The city improved its investment The rating value for development rose,
5 prospect rank from seventh to third and but the city remained fourth in rank.
4 scored its highest historical value of “Cranes are all over the place in the city,”
San Jose 6.89. Its higher ranking in development and “Technology remains a key driver”
3 and homebuilding is consistent with are comments signaling that Austin will
2 its core of young, well-educated, and continue to grow.
highly paid employees. San Jose is a Expansion of commercial real estate
1 fairly supply-constrained market (exhibit in Austin looks likely with a population
3-13). However, institutional capital will increase of 2.3 percent anticipated
’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 be moving toward this smaller market in next year, pushed by the echo boomer
an attempt to beat competitors. As one demographic that makes up 17.3 percent
ogy. Based on 2013 projections, the interviewee says, “We’re on the upswing, of the total population and has increased
San Jose area will generate close to a and the early bird catches the worm.” in number by over 25 percent during
total of 50,000 jobs since 2007, mostly Austin (4). In 2013, Austin looks set the past ten years. Completions in 2013
in the high-tech industry that makes up to continue to impress individuals and are expected to represent 2.8 percent
over 25 percent of its total employment. attract institutional investors. “Austin of Austin’s total real estate stock (exhibit
Industrial diversity is limited in San Jose will be a winner next year,” and “Austin, 3-14). Growth is good, but Austin’s past
and could be a concern for investors Texas, offers a lot more job growth volatility should be a concern. According
(see appendix). However, the more than and possible increase in income,” are to CBRE Econometrics, office vacancy
Exhibit 3-13
2013 Supply Constraints: Most and Least Constrained Metro Areas
3.0
2.5
2.0
1.5
1.0
0.5
0.0
San Francisco
New York
San Jose
Los Angeles
Boston
Seattle
Orange County
Miami
Baltimore
Jacksonville
Orlando
Las Vegas
Westchester County, NY
Phoenix
Nashville
Detroit
Salt Lake City
Raleigh-Durham
Indianapolis
Sacramento
Sources: Reis Inc.; PrinREI Real Estate Research.

Note: Low score represents more supply constraints.

opportunities are in the industrial sec-

Investment Prospects Investment Prospects tor. Fifty percent believe that space in
8 8
Houston is worth taking a chance on.
7
6.71 7 6.84 “Houston ports are very attractive” and
6 6
“Panama Canal widening should help”
are a few outlooks on the industrial and
5 5 manufacturing arenas. Office space
4 4 received a buy rating from 43 percent of
survey respondents, but some question
3 Austin 3 those results: “I would be careful about
Houston
2 2 putting office dollars there.” Apartments
are still rated a buy overall, but 30 percent
1 1 of survey participants say, instead, that
now might be the time to sell. Survey
’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’95 ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’13 results confirm that the Houston market
is worth a look in 2013: “Houston has
rates that hovered around 5.0 percent Houston (5). “Energy, energy, energy.” endured better than we thought.”
during the dot-com bubble had jumped Not only is energy-related employ- Boston (6). An increase in high-tech-
above 20 percent by 2002 after the ment one of the driving forces behind nology and biomedical research and
bubble burst. Predictions place office the Houston market, but the amount development employment continues to
vacancies closer to 10 percent in 2013 of energy expended by interviewees take the lead, increasing investor interest
and 2014. Even with a booming technol- expressing their enthusiasm for the city’s in the Boston market. Part of the city’s
ogy market, a great university, and the real estate outlook is overwhelming. “You stability occurs because 20 percent of
state capital, Austin has an industrial can buy now at a higher cap rate and its jobs are in health care and education
diversity rating of 0.68, only average com- benefit from growth over the hold period”; (see appendix). Even after combining
pared with its peers. Great opportunities “We love the demand coming from the the third-best walkability and transit
exist in Austin, but reviews are much service industry in the energy renais- scores with some of the best colleges
more mixed than they were last year. sance”; and “Houston is a winner.” Survey and universities in the nation, the city has
“Austin has good components but is just results support these statements: the shown only a limited ability to attract echo
considered somewhat risky.” city’s investment prospect rank jumped boomers, with that demographic consti-
from eighth to fifth, registering a value tuting only 14.2 percent of its population.
of 6.84, far exceeding the city’s 20-year Boston’s appeal may be limited by its
Exhibit 3-14
PwC Pipeline Analysis 2013 survey average of 5.27. Development high business and living costs. Still,
prospects for the area look good as survey results are great for the Boston
well, the rating value rising, but the city’s
Total Completions as a Percentage
of Total Real Estate Inventory ranking only advanced one position.
Top 10 The ranking for homebuilding prospects, Investment Prospects
8
Austin 2.8% however, fell back one place: housing
Charlotte 2.0% starts, completions, and sales seem mini- 7 6.85
Boston 1.8% mal compared with those of other Texas
6
Salt Lake City 1.7% markets. This slower movement might be
Seattle 1.6% caused by a bust in apartment interest. 5
Boston
San Antonio 1.6% Multifamily vacancies are forecast to
4
Inland Empire, CA 1.6% be 6.8 percent in 2013, 2.3 percentage
Raleigh-Durham 1.5% points below the city’s ten-year average. 3
Albuquerque 1.3% The cost ratio of renting vs. owning a
2
Denver 1.3% home in Houston is 1.23, signaling that it
is still cheaper to purchase a house. 1
Sources: PwC; CBRE; REIS.
Note: Apartment unit size is estimated at 850 square feet;
It is no real surprise, but survey
hotel room size is estimated at 500 square feet. participants believe the main buying ’95 ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’13

Exhibit 3-15 Investment Prospects
8
U.S. Office Property Buy/Hold/Sell Recommendations
7
6.72
Buy Hold Sell 6
New York City 53.4 31.8 14.8 5
Boston 52.5 36.3 11.3 4 Seattle

San Francisco 47.8 20.9 31.3 3
Seattle 46.8 37.6 15.6 2
Los Angeles 44.6 43.6 11.8 1
Houston 42.9 35.2 22.0

’95 ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’13
Denver 41.5 44.3 14.2
San Diego 39.2 49.5 11.3 dropped one place to eighth. Even with
Phoenix 38.8 42.9 18.4 some ranking declines, rating values for
each of the categories improved. “Seattle
Miami 37.9 52.9 9.2
is experiencing terrific momentum in job
Chicago 36.2 39.7 24.1 growth, with tech companies taking up
Dallas 34.5 50.6 14.9 most of the well-located vacant space.”
For 2013, job growth is projected at
Washington, DC 31.0 38.1 31.0 1.2 percent, 50 basis points above its
Atlanta 24.7 47.4 27.8 ten-year average. The echo boomer pop-
ulation has expanded 20 percent over the
Philadelphia 11.3 53.5 35.2
past ten years, making Seattle one of the
0% 20% 40% 60% 80% 100% best markets for younger adults. “Strong
companies such as Amazon, Starbucks,
Boeing, Microsoft, Nordstrom, Gates
Foundation, and Costco have all been
metro area. Investment prospects posted respondents thinking 2013 is the time to
hiring and absorbing space of late.”
a 6.85 value, the highest since 2001, and buy. “Boston for office,” states one inves-
With this employment and office
the city’s rank jumped one position. Its tor, and 52 percent of participants agree,
absorption, 47 percent of survey respon-
rankings in development and homebuild- making office space a buy. Like last year,
dents recommend the purchase of office
ing each advanced two spots, to sixth industrial is considered a hold.
space in 2013, while those recommending
and eighth, respectively. “We consider Seattle (7). “Seattle for the risk/reward sales fall below 38 percent. Interest is also
the major cities, and Boston is one of the ratio; it has diverse economies and good very strong in industrial space, with over 51
best we’re looking at.” quality of living.” As the global center for percent indicating now is the time to buy.
According to Emerging Trends inter- the software industry, Seattle continues Investors favor Seattle industrial space for
views and survey results, extreme interest to be the focus of many domestic and a few reasons, including the “industrial-to-
exists for a variety of buying opportunities global investors. “Seattle belongs in the mixed use transition taking place for many
in Boston. The majority of participants primary market category,” one inves- suburban industrial and business park
now believe the time has come to buy tor states. Rankings for investment and sites,” as well as the city’s position “serving
in the apartment, hotel, office, and retail homebuilding remain at the sixth and as the main corridor to Asia.”
sectors. Comparing these results with seventh spot, respectively. Homebuilding
those from 2012, sell recommendations Washington, D.C. (8). “I think that, long
might struggle as apartment interest
are slightly up, but nonetheless investors term, D.C. is going to continue to be a
increases, with “a definite suburban-to-
want Boston apartments. Apartments super-strong market,” one interviewee
urban movement taking place.” However,
in Boston scored the highest of all 15 says—though survey participants did not
the city’s ranking for development
markets covered, with 59.7 percent of seem to agree. For 2013, declines were

transit service, are a draw for many; say shows that its job base is one of the most
8 Investment Prospects interviewees: “We will stay active in D.C.,” diversified of the 51 markets covered.
and “Prices won’t turn us away from With employment leading the way, survey
7
Washington, D.C.” participants believe in Dallas, ranking its
6 6.43 Buy rating values in all five property investment prospects tenth with a value
sectors were down this year when com- of 6.47. Its development ranking jumped
5
pared to last year’s survey. In addition, as well, by two spots, but its value for
4 the majority of survey respondents gave homebuilding did not gain as quickly as
Washington, D.C. hold recommendations for the office, other indicators and the city’s ranking
3
industrial, retail, and industrial sectors. dropped two positions. A relatively low
2 An interesting trend was that the major- 3.2 percent delinquency rate on home
ity of participants recommended selling mortgages and a quick judicial process
1
in the hot, pricey apartment sector even on foreclosures make distressed homes
though D.C. home prices are still down more accessible for purchase if financ-
’95 ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’13
24 percent from their peak and apartment ing is available. Combine this source of
rents have continued to rise. Still, some housing supply with estimated apartment
found in the investment, development, and owners believe the time is right to move vacancy rates of 5.2 percent next year,
homebuilding rankings. The nation’s capi- on from the city’s multifamily sector and and a decline in the homebuilding outlook
tal has a lot on its plate in the last quarter take advantage of current gains. Based is easier to understand despite the strong
of 2012 with the presidential election, and on results, it is safe to say that D.C. “has market.
the outcome will be a key determinant of cooled a little.” Even with projections of continued
what follows. Practically since the reces- Dallas/Fort Worth (9). “What our growth, “hold” seems to be the word
sion, commercial real estate prices have economy needs is employment, and regarding hotel, retail, and office space.
risen, with investors regarding D.C. invest- Dallas has been a great market in One investor states, “Rents in Dallas have
ments as “recession-proof.” However, providing it.” Through the end of 2013, not moved in 25 years, and efficiency in
concerns about overbuilding and costs Dallas is expected to have added over office space doesn’t increase develop-
continue to lead discussions about inter- 230,000 jobs since 2007. Of the markets ment.” Similar to other markets, over 51
est in D.C. Investors believe “institutional included in the survey, it ranks behind percent of survey participants would still
demand has fallen in the D.C. metro due to only its Texas neighbor, Houston, as a suggest buying apartments in the coming
a politically ambiguous environment,” and job provider. Next year unemployment year: “Dallas multifamily looks good to
“Washington, D.C., has lost demand for rates are forecast to fall to 7.2 percent, us,” and “would consider acquiring land
high-end space.” 1.2 percentage points lower than the to flip to developers.”
Only a 50-basis-point increase in the U.S. rate of 8.4 percent. The Dallas/Fort Orange County, California (10). With
number of jobs is expected next year, fall- Worth industrial diversity index of 0.81 total population of more than 3 mil-
ing below D.C.’s ten-year average of 1.1 lion, Orange County comprises 34
percent growth. Washington’s unemploy- cities. Some of the largest are Santa
ment rates are far lower than the national Investment Prospects Ana, Anaheim, Irvine, and Huntington
8
average, but the outlook after the election Beach. California’s economy continues
for direct government employment and 7 to struggle, and home prices will still be
subcontracting jobs remains in question. 6.47
6
down more than 27 percent in 2013 from
Washington, D.C., combined with the their prerecession peak. Even with that
Maryland and northern Virginia suburbs, 5 decline, median home prices throughout
has seen technology and energy-related the county are about $513,000. At this
4
employment increase; however, that Dallas/Fort Worth level, the rental/homeownership ratio is
growth may not be enough to offset 3 0.78, suggesting that people prefer to
what might occur in the near future. rent and causing a projected decline in
2
Nevertheless, the market continues to apartment vacancy rates to 5.8 percent
be a hub for well-educated echo boom- 1 next year—2.6 percentage points below
ers. Its infill-focused neighborhoods, the ten-year average. Employment
combined with walkability and extensive ’95 ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’13 throughout Orange County continues to

Investment Prospects Investment Prospects Investment Prospects
8 8 8
7 7 7
6.48 6.47
6.27
6 6 6
5 5 5
4 4 4
Raleigh/Durham
3 3 3
2 2 2
Orange County
1 1 1 Miami
’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’95 ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’13
put a strain on markets, with employment for highest ratio of net migration to total ment and condominium rentals seem like
remaining below the prerecession level. population (exhibit 3-9) and is one of the a wise move. “We like the pace and direc-
The unemployment rate is 2 percentage top five in GMP per capita, indicating to tion of rentals here,” claims an investor.
points above the ten-year average. investors that this market is “one to watch.” This improvement in the housing
Investors still believe in investments in The importance of the housing market as a outlook, combined with an interest in
Orange County, however: survey results backbone for commercial real estate is vis- industrial space, has sparked a new
show increases in the county’s rating ible here, as home prices are expected to enthusiasm for Miami commercial real
value and ranking as an investment pros- increase another 1 percent next year, and estate. Survey results display significant
pect. It ranks ninth in the investment and Raleigh/Durham is one of the few metro increases in investor prospects for 2013,
homebuilding categories, both improve- areas out of the red since the recession. with the city’s ranking jumping from 17th
ments from last year. However, its ranking This situation, combined with a foreclo- to 11th, but even greater improvement in
for development prospects dropped two sure rate just shy of 4 percent, puts the development prospects, with the city’s
spots to 19th overall. area in a good position for future growth. ranking moving from 26th and “modestly
Raleigh/Durham (11). “All things are Miami (12). Cranes are back in south poor” to 11th and “modestly good” this
looking good for the Raleigh area,” says Florida, and the condominium market has year. The city still ranks 16th for home-
one investor. Survey participants could moved from bust to boom. After suffering building, but the industry’s rating has
not agree more: the cities’ development from overdevelopment and cheap credit gained some ground from last year.
prospect ranking moved up five spots in 2007, the popular Miami condominium Half those surveyed recommend buy-
to tenth, and homebuilding jumped four market collapsed. Five years have ing apartment properties as this sector
spots to 11th overall. Supply constraints passed and the demand is back again, tries to compete with condominiums for
for commercial real estate play a factor in not only from domestic capital, but also tenants. Of even more interest is industrial
the development bump (exhibit 3-13). The from foreign investors who are swoop- space, with 52 percent of participants
metro area’s investment prospect value ing in to take advantage of the demand. believing now is the time to make a move
rose, but its ranking stayed at 15th. Financing does not seem to be an issue in this sector. “Facilities around Miami
This eastern-seaboard, centrally this time around because many investors airport will serve well for the large volume
located area continues to be a hub of are offering all cash. Investment plans of perishable goods that are traded
education: the city ranks fifth overall include leasing to tenants who may have between the U.S. and Latin America.”
in that field. “[Raleigh/Durham is] one lost homes in a city where foreclosure Office and retail remain a hold because
of our top markets to watch next year,” forecasts exceed 18 percent. Since the high unemployment and lack of job
states an investor. A very affordable cost start of the recession, median home growth remain a concern.
of living, substantial job growth, and a prices are down more than 50 percent, Northern New Jersey (13). The northern
diverse employment base have contin- and apartment vacancies should slip New Jersey market consists of a handful
ued to stimulate the economy here. For below 3.5 percent soon. With continued of counties, with Newark being the largest
2013, Raleigh tops the survey’s forecast housing troubles, investments in apart- city in the market. A huge asset for the

politan areas. A big benefit for Denver

Investment Prospects Investment Prospects is its educated workforce, which is
8 8
Northern concentrated in growing industries such
7 New Jersey 7
as high technology (6.7 percent) and
6.26 6.49
6 6 energy (0.4 percent). “Denver is attract-
ing attention with energy industries,” an
5 5
investor notes.
4 4 From an investment perspective,
Denver “Denver has strong growth potential.”
3 3
Results show the city moving up three
2 2 spots in the investment prospects rank-
ings. An attraction is the city’s central
1 1
location in the country’s southern and
western regions, as well as Denver’s
’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’95 ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’13
ever-expanding international airport,
which offers access to national and
area is a diverse and growing number of remained healthy, maintaining the ability global destinations. With growing sophis-
professions, including high technology, to absorb a diverse employment base. tication, Denver offers “good quality of
financial services, and health care. With The city’s industrial diversity rank, 0.83, living.” Although survey results show
this diversity, GMP forecasts are set to is one of the highest among all metro- Denver growing in appeal for investment,
increase 1.5 percent in 2013. Even with
growth in employment slowing, northern
Exhibit 3-16
New Jersey is in a prime market location
U.S. Industrial/Distribution Property Buy/Hold/Sell Recommendations
that, combined with robust infrastructure,
should make it a target for real estate
investors. Growth in household numbers Buy Hold Sell
remains minimal, but housing prices have
not been as hard hit as those in other Los Angeles 70.45 19.32 10.23
markets. Even with controlled prices, Miami 52.11 38.03 9.86

homeownership makes more economic
San Francisco 51.72 37.93 10.34
sense than renting, as seen by a cost
ratio of homeownership to rentals that Seattle 51.19 38.10 10.71
slightly tops 1.0. Houston 50.00 34.85 15.15
Survey results show that northern
Dallas 49.28 42.03 8.70
New Jersey’s ranking for investment
prospects has fallen three positions to New York 45.71 48.57 5.71
16th. Development prospects moved in
Atlanta 43.42 36.84 19.74
the opposite direction, up four to 12th,
and rating values for homebuilding rose, Denver 40.74 44.44 14.81
but the market remained stable in the San Diego 38.89 48.61 12.50
rankings.
Chicago 38.46 38.46 23.08
Denver (14). With only 4 percent of
homes in foreclosure and 2.5 percent of Boston 36.51 38.10 25.40
homes sitting at 90-plus days delin- Phoenix 36.49 36.49 27.03

quent, “Denver wasn’t directly in the
Washington, DC 30.86 53.09 16.05
crosshairs of the housing downturn.” The
city’s homebuilding rating value and rank Philadelphia 24.19 50.00 25.81
in the survey demonstrates the validity 0% 20% 40% 60% 80% 100%
of this opinion, rising 0.94 and one spot,
respectively. Denver’s economy has Source: Emerging Trends in Real Estate 2013 survey.

development prospects declined three homebuilding prospect rankings and rat-
notches. Investment Prospects ing values. The investment prospects rose
8
San Diego (15). The fourth of five only 0.05, compared with a 0.32 average
7 increase for all cities in the survey. This
California cities/regions to make the
6.35 result caused Los Angeles to fall five spots
Emerging Trends top 20, San Diego 6
shares characteristics with the others. in the investment rankings. Development
5 had a larger rating value decline and fell
Home prices continue to be consider-
ably lower, even though foreclosure rates 4 five spots as well. Homebuilding was the
are somewhat stable. The percentage only sector to rise in the rankings, climb-
3 ing from 17th to 14th. Home starts are
of echo boomers in the population, 15.8
percent, is worth noting; however, much 2 Los Angeles projected to increase 27 percent next
of this echo boomer population consists year, with completions hovering around
1 13 percent.
of lower-paid military personnel stationed
in the area. The developing high-tech Charlotte (17). “Going into secondary mar-
’95 ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’13
sector is significant, but unemployment kets, but only with safe bets—Charlotte.”
levels are still above the national average. The interest in Charlotte’s investment, devel-
Even though San Diego is not an on the Los Angeles market. On the posi- opment, and homebuilding prospects
overly diverse city in terms of employ- tive side, the number of households in the posted significant improvement compared
ment, more than 40,000 jobs have been area is projected to rise by over 1 percent with 2012 results. Mostly understood as a
filled since the peak. Also, the city’s tour- in the coming year, and over 15 percent big banking and financing town, this mar-
ist traffic continues to improve, increasing of the population is made up of up-and- ket has continued to expand, with a variety
revenue for the area. With these and coming echo boomers. Interviewees of businesses relocating to Charlotte for
other attributes, investment prospects provide quotes such as, “L.A. is bul- its high quality of life, low cost of business,
moved up three positions. Even with letproof,” “we are completely positive and world-class international airport. Since
these gains, however, the city’s ranking on L.A.,” and “opportunities abound in 2011, 37 companies have moved to the
for development prospects fell four spots. the city.” Los Angeles’s constant flow of area, creating more than 8,000 jobs. From
The only sector to receive a buy rating capital through tourism and entertainment the last peak through 2013, Charlotte is
is apartments, with 54 percent of survey always helps create interest in commer- forecast to add nearly 30,000 jobs, making
participants still seeing some opportuni- cial real estate, as can be seen in the buy, it one of the stronger secondary markets
ties there. Some light interest in the retail hold, and sell recommendations. The Los to watch. Businesses are not the only
arena also exists, but most respondents Angeles industrial market dominated the thing coming to Charlotte: net migration
suggest a hold in 2013. buy column: over 70 percent of survey as a percentage of population is expected
participants suggest buying industrial to be 1.5 percent in 2013, and forecasts
Los Angeles (16). Interviewees’ com-
space next year—18 percentage points show a 2.5 percent increase in house-
ments and survey results were very mixed
higher than that for Miami. The major- holds. Even with these growth numbers,
ity, 59 percent, suggest buying in the some interviewees still have concerns:
Investment Prospects apartment sector as well. The recom- “Charlotte is subject to what banks do,”
8
mendations for office space were almost and “We see Charlotte as a risky metro in
7 exactly split between buy and hold. spite of a relatively strong economy, due to
6.37 Although this all sounds good, other its dependence on two large banks.”
6
numbers must have been a concern for
Nashville (18). Vanderbilt University and a
5 survey participants. Los Angeles’s job
Nissan North America manufacturing plant
growth is projected to be minimal next
4 are only two of a large set of diversified
year—only a 30-basis-point increase over
employers found in the Nashville area.
3 2012. Compared with totals from 2007,
These varied forms of employment help
Los Angeles is still projected to be over
2 the market score an industrial diversity
140,000 jobs in the hole through next year.
index of 0.80. Growth in this market looks
1 San Diego These factors and others (see appendix)
to remain slow and steady, with 2013
might be the reason the city did not per-
employment growth forecast at 1.3 per-
’95 ’97 ’99 ’01 ’03 ’05 ’07 ’09 ’11 ’13 form well in investment, development, and
cent. “The market looks good in Nashville,

next year. San Antonio should have no

Investment Prospects Investment Prospects problems filling that space because job
8 8
growth is forecast to increase 2.5 percent,
7 7 and close to 100,000 jobs have been
6 6.17 6 6.03 filled since 2007. Overall economic growth
looks healthy for the city because GMP
5 5 will rise 2.6 percent, a slightly slower pace
4 4 than the ten-year average of 2.9 percent.
Charlotte A strong military base combined with
3 3 over 15 percent employment in health
Nashville
2 2 and education is a good formula for future
expansion in this market.
1 1
Portland, Oregon (20). Portland’s
economy displays stability but few signs
’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13
of quick improvement. Employment
diversity is limited, with jobs concen-
with both population and job growth.” many investors may be packing their bags trated mainly in manufacturing, health,
Retail spending in the city continues to to check out this city. education, and government work. Even
increase at a greater pace than in most San Antonio (19). It’s official, and as with rising numbers of younger adults,
markets. Limited housing losses might expected: all four major Texas markets Portland is still composed mostly of a
stimulate that number: prices are down make the 2013 Emerging Trends top 20. limited-growth, aging population. With a
only 13 percent from their peak, and San Antonio had the lowest total rating home foreclosure rate of 4.8 percent and
expectations are for an additional increase values of the four, and its investment, median prices still 20 percent below their
of 1.5 percent in median home prices next development, and homebuilding numbers peak, regional consumer spending might
year. Even with housing remaining some- reflect why. This year’s values for invest- still suffer. In 2013, apartment vacancies
what stable, “there are a lot of apartments ment prospects showed a minimal gain, are expected to reach 1.9 percent, with
under construction in Nashville, about half but not enough to keep pace with the other 1.0 percent of the entire multifamily inven-
in the core or close.” PwC analysis shows cities, pushing the city’s ranking down six tory added to the mix that year. Therefore,
that multifamily completions will consti- spots. Development dropped four places, commercial real estate opportunities exist
tute 1.8 percent of the total stock in 2013. and homebuilding fell eight positions. Even in Portland, but investors will have to take
Similar to the continued trend of “American with declining development rating values, on more risk in their search. As for invest-
infill,” “there has been a huge shift toward San Antonio continues to be a growing ment prospects, Portland advanced one
the more urban areas of Nashville for the market. PwC’s forecasts show over 1.5 spot to 17th. Declines are forecast in the
apartment sector.” percent of total stock being completed other two categories next year.
This growth can be seen not only in the
macro trends, but also in the investment,
development, and homebuilding num- Investment Prospects Investment Prospects
8 8
bers. Investor sentiment improved, raising
Nashville’s investor prospect ranking to 7 7
21st from 27th. A more significant leap was
Portland
6 5.97 6
6.19
found in the development arena, where
the city moved up five spots to 13th. PwC’s 5 5
pipeline analysis indicates that over 1 per-
4 4
cent of Nashville’s stock is being added
next year. Besides an influx of apartments, 3 3
“a new convention center is coming on San Antonio
2 2
line, along with four new hotels, which will
boost tourism next year.” Tourism is a key 1 1
component of Nashville’s economy, and
according to interviews and survey results, ’03 ’04 ’05 ’06 ’07 ’08 ’09 ’10 ’11 ’12 ’13 ’01 ’03 ’05 ’07 ’09 ’11 ’13

Other Major Markets
continues to weigh heavily on investors. Of those surveyed, 49
percent believe the apartment sector presents buying oppor-
tunities. Views on the industrial sector are equally split between
Chicago (24). “Chicago has been pretty slow to come back.”
buy and hold, but hold is the dominant call for all remaining
One of the big six, Chicago’s recovery cannot compare with
sectors. One interviewee has no interest right now: “I don’t think
that of the other five. Still a major industrial and business area,
it will ever be a primary market—its downtown is fractured.”
Chicago’s economy seems to have stalled. In 2013, population
growth will be minimal, and many current Chicago residents are Atlanta (35). Similar to the case for the other three major
migrating away from the city. Job forecasts are negative, and markets that failed to make the top 20, Atlanta’s loss of employ-
the losses will total close to 200,000 since the last peak (exhibit ment and the housing collapse affect interest in commercial real
3-2). Manufacturing and government jobs make up over 20 estate. Median home prices in the metro area have sunk below
percent of employment, but both will struggle in the near future. $100,000 and are projected to decline another 60 basis points
As in most markets, the majority of participants rate apartments next year. Even with these difficulties, job growth is showing
a buy. However, the other four property sectors should be put improvement and is projected to increase 2.6 percent. GMP
on hold next year. Even with those results, one interviewee is looks strong as well and is projected to rise 2.9 percent in 2013,
“looking to buy or develop industrial in Chicago.” Despite macro far exceeding the city’s ten-year average. Concludes one inves-
concerns, survey participants rank Chicago one position higher tor, “We will see more activity in Atlanta in 2013 as job growth
for investment and development opportunities. Commercial real emerges.”
estate prices might not have pushed as high here as in the other With signs of improvement, investment, development, and
major markets, but taking on this amount of risk should be the homebuilding all make positive moves in overall rank. “Atlanta’s
bigger concern. size is something you have to look at for investments.” As in
many markets, apartments are one of the sectors suggested
Philadelphia (27). Survey results indicate that 2013 will be a
for purchases in Atlanta. The industrial sector registered a buy
hold period for all property sectors. Even though the apartment
as well because increases in manufacturing, warehousing, and
sector is a hold, some disagree, stating “Philadelphia is the
shipping are expected in the near future. Hold is the recommen-
market for multifamily.” Sell recommendations outnumbered buy
dation, however, for offices, hotels, and retail space.
calls for office, industrial, and hotel space, but a hold strategy
still prevails. Similar to the case in Chicago, next year’s popula-
tion forecast is nominal and even 60 basis points lower than
the national forecast. Job growth remains flat, with only a 0.6
Other Market Outlooks
percent increase expected. With a lack of jobs, no popula- Strong production, population, and migration are just a few of
tion growth, and negative net migration, Philadelphia offers many positive signs for Salt Lake City (21). “Salt Lake City is
few of the macro trends real estate investors seek. The city’s tertiary by size, but the recovery is far along and impressive.”
ranking for investment prospects fell to 27th from 24th in 2012. A large gainer for investment prospects, Salt Lake moved from
Surprisingly, development took two steps forward to 26th, even 30th to 19th. “Lots of high-tech companies are looking at SLC.”
though PwC’s pipeline analyses show minimal completions Honolulu (22) provides a great quality of life, with a slow, steady
scheduled, representing only 0.8 percent of total inventory. recovery. “Job growth has stabilized,” states an interviewee.
Phoenix (33). This volatile market continues to make strides, Honolulu’s housing remains expensive, but the market is not
but survey and interviewee results are mixed. For example, forced to battle significant loss of value. “Honolulu tourism isn’t
optimism—“We also think Phoenix is a market to watch”—is fol- going away anytime soon.” With that, Honolulu moves up in
lowed by pessimism—“We do not plan on investing in Phoenix.” development but takes a few steps back in investment pros-
Results indicate that opportunities exist, but doubts remain as pects. Minneapolis/St. Paul (23) provides well-educated and
to whether the risk-adjusted returns are worth it. Investment skilled labor in research and high technology. Unemployment
prospect values rose, but the city’s ranking dropped six spots has not been a concern for the city, because employment has
to 29th. The ranking for development prospects moved up six escalated; the unemployment rate will be nearly 3 percentage
spots, and homebuilding prospects did even better, jumping ten points lower than the U.S. rate next year. “Peripheral opportuni-
positions. There are still fewer jobs than during the prerecession ties are not getting much attention here.” Continuing to move
peak, but next year’s projected job gains are 50 basis points up in the investment ranks is Virginia Beach/Norfolk (26). The
above the national estimate. “Phoenix economics are starting to market does not have great job diversity, but stabilized growth
recover.” Strong metropolitan production is contributing to the makes this tertiary market worth a peek.
recovery, but a housing market with a 50 percent price decline

Next are two Florida cities: Orlando (28) and Tampa/St. haven’t gotten near that level.” Kansas City (34) shows slight
Petersburg (29). Survey results have both cities’ investment movement, up in investment and development as a result of a
prospect improving in 2013, but Tampa gained slightly more number of industrial opportunities. Indianapolis (36) shows
ground, edging out Orlando for the 25th spot. The opposite is signs of attracting interest with low business costs and solid
true for development: participants believe Orlando has more demographics. However, the city’s dependence on a limited
opportunities. To settle the tie, homebuilding goes to Orlando. number of employers might be a concern. Cincinnati (38)
Both markets continue to deal with the many economic issues makes a considerable jump, rebounding with a multitude of
Florida has faced. Housing continues to be in the hole, but industries involved in manufacturing, and wholesale and retail
Tampa’s recovery in median prices is a bit better. However, job businesses. St. Louis (43) shows strong industry diversifica-
losses have not been as harsh in the entertainment capital of the tion but still struggles with job growth. The declining population
world for tourists. Because Orlando wins the battle, it gets the in Cleveland (48) is causing all sectors to struggle, with only
quote: “We see it in Orlando . . . those markets are back.” education and health services seeing any improvement. The
Pittsburgh (30) and Baltimore (31) are two originally blue economic woes for Detroit (51) persist, with no youth contin-
collar–oriented towns that have been transformed in many ways gency, little diversity in employment, high unemployment, low
over numerous decades. The Emerging Trends total ranking job growth, and migration from the city. “The auto industry has
shows Pittsburgh edging out Baltimore by one spot this year. come back somewhat, but you can only be interested in the top
Baltimore has had an influx of echo boomers over a ten-year buildings in Detroit.”
period and has an industrial setting that has been great for
job growth. Pittsburgh’s appeal is not as strong to a younger
generation, but housing stability has helped the city’s economy.
Investment prospects for both cities are lower than last year’s,
with Baltimore taking a bigger plunge. Development prospects
have also fallen, with Baltimore having a slightly higher rank at
30th. Finally, homebuilding is all Pittsburgh, which moved for-
ward two spots compared with an 11-spot loss for Baltimore.
“We will see a push in one tertiary market—Oklahoma City,”
and “we are seeing many companies moving from the West
Coast to Oklahoma.” As an energy industry location, Oklahoma
City (32) moved up four spots in the investment prospect ranks.
Not much change was seen in Jacksonville (39), but
resurgence may be on the horizon because the city’s young
people are moving into a diverse set of industries. The lack-
luster housing market in Albuquerque (41) weighs heavily on
this recession-ridden market; survey results show concern,
as investment and development decline. Memphis (45) takes
steps backward in all three categories, with limited industrial
diversity and questionable future growth. New Orleans (47)
may have seen some slight movement; nonetheless, govern-
ment and service job numbers are in decline, and the city
remains stagnant in investment and development. Economic
dependence on the state government and homes at half their
precrash value continue to hurt the Sacramento (49) market.
Las Vegas (50) is still mired in the quicksand of foreclosures
and home prices declines. Problems in key Vegas industries are
also taking their toll, with education, health care, and service-
related employment levels below average.
Chicago and Minneapolis are top performers for the
Midwest in 2013, but many cities in this region will continue
to face economic and real estate challenges. “We’d be way
out in front, maybe even Middle America investing, but we

c h a p t e r 4
Property Types
in Perspective
“Demand for space slowly but steadily comes back.”
I
n 2013, commercial and multifamily property sectors
Exhibit 4-1
regain generally solid Emerging Trends investment rat-
Prospects for Major Commercial Property Types
ings. Categories hold their relative rankings from 2012 in
in 2013
the survey, with perennial leader apartments in the catbird seat
again, though noticeably leveling off, and retail continuing to lag, Investment Prospects
but recovering. Interviewees predict “Demand for space slowly
but steadily comes back,” exhibiting “decent growth.” Industrial/ Apartment 6.58
warehouse and hotels show the biggest survey improvements,
Industrial/distribution 6.17
trailed closely by downtown office. Power centers and suburban
offices remain investors’ least-favored subcategories. Except Hotels 6.02
for apartments and industrial space, development prospects
remain challenging. Interviewees note that “Despite one of the Office 5.72
longest stretches of basically no construction” in commercial

Retail 5.30
markets, “pent-up demand does not exist except in select
cities.” Interviewees show mixed concerns about apartment
Development Prospects
construction on a market-by-market basis, but generally concur
that “overdevelopment” will happen, just not in 2013. They also Apartment 6.87
anticipate “more big-box industrial” development after a long
Industrial/distribution 5.29
postcrash hiatus.
Significantly, after the $6 trillion loss in housing values during Hotels 4.85
the recent recession, respondents begin to express hints of
optimism about for-sale residential properties, especially infill Office 3.72
and in-town housing, which score modestly good ratings. They
Retail 3.64
also signal the need and opportunity to invest in infrastructure
development and redevelopment across the country because
1 5 9
facilities—roads, mass transportation systems, public buildings, abysmal fair excellent
sewage and water mains, airports, and rail stations—require
substantial overhauls, expansions, or new construction. Note: Based on U.S. respondents only.

Exhibit 4-2
Prospects for Commercial/Multifamily Subsectors in 2013
Investment Prospects Development Prospects

Apartment: 6.65 Apartment: 6.47
moderate income moderate income
Warehouse industrial 6.34 Warehouse industrial 5.55
Apartment: 6.25 Apartment: 6.69
high income high income
Central city office 6.16 Central city office 4.53
Full-service hotels 6.02 Full-service hotels 4.64
Limited-service hotels 5.93 Limited-service hotels 5.10

Neighborhood/community 5.72 Neighborhood/community 4.39
shopping centers shopping centers
R&D industrial 5.20 R&D industrial 4.32
Regional malls 4.82 Regional malls 2.76
Suburban office 4.77 Suburban office 2.82
Power centers 4.50 Power centers 3.11
1 5 9 1 5 9
abysmal fair excellent abysmal fair excellent

Exhibit 4-3
Core properties reach or approach pricing zeniths—apart-
Prospects for Capitalization Rates
ments look “past peak,” central business district office space
Expected Expected appears “at peak, and prime industrial may be within 10–20
Cap. rate cap. rate cap. rate percent of peak.” Respondents predict cap rates will remain in a
August 2012 December 2013 shift
Property type (percent) (percent) (basis points) narrow range between now and year-end 2013, with most sec-
Apartment: high income 5.67 5.85 18
tors experiencing slight increases and only industrial/warehouse
Central city office 6.15 6.17 2 showing further tightening (exhibit 4-3). High vacancies and
Apartment: moderate income 6.11 6.27 16 limited expansion interest by tenants will likely result in leases
Regional malls 6.37 6.51 14 still rolling off to lower market rents in offices, retail space, and
Warehouse industrial 6.92 6.87 -5 some warehouses. Demand pickup should improve, but stay in
Neighborhood/community 6.97 7.05 8 second gear. “Commodity properties, except apartments, will
shopping centers
continue to struggle to establish pricing power with tenants.”
Full-service hotels 7.27 7.38 11
Power centers 7.42 7.63 21 Investors like “bite-sized specialty types.” Medical office,
R&D industrial 7.62 7.64 2 student housing, and self-storage benefit from above-average
Suburban office 7.90 7.94 4 tenant demand drivers. The aging population requires more
Limited-service hotels 8.16 8.24 8 health care services—doctor visits, lab tests, and rehab facili-
ties. The very large generation-Y demographic cohort should
Note: Based on U.S. respondents only. continue to support student housing in the near term. And

Chapter 4: Property Types in Perspective
Exhibit 4-4
Prospects for Niche and Multiuse Property Types in 2013
Investment Prospects Development Prospects
Medical office 6.21 Medical office 5.61
Infrastructure 6.08 Infrastructure 6.36
Urban mixed-use properties 6.07 Urban mixed-use properties 5.50
Self-storage facilities 5.80 Self-storage facilities 4.84
Data centers 5.60 Data centers 5.08
Mixed-use town centers 5.54 Mixed-use town centers 4.57
Lifestyle/entertainment retail 4.97 Lifestyle/entertainment retail 4.03
Master-planned communities 4.52 Master-planned communities 3.69
Resort hotels 4.50 Resort hotels 2.96
Master-planned resorts 4.15 Master-planned resorts 2.59
1 5 9 1 5 9
abysmal fair excellent abysmal fair excellent
public storage fits into the move-back-into-the-cities trend where

people live in less space and need solutions for where to keep
possessions they cannot fit into their apartments.
The following is a digest of major trends affecting the major
property sectors.

Apartments
Strengths supply side, some fallow development years have further tight-
The multifamily bandwagon rolls on. “It’s such a good story you ened many markets as developers only now begin to catch up.
have a hard time resisting making investments,” says an intervie- In high-barrier-to-entry places, particularly in metropolitan areas
wee. Positive demographics—the bulge of young adult renters along the coasts, new projects may have trouble keeping up
and downsizing baby boomers—supplemented by homeown- with demand, resulting in mid- to low-single-digit vacancy rates,
ership displacement from the housing bust create significant rent spikes, and “extremely solid” appreciation (exhibit 4-6). So
demand drivers. Population shifts into infill areas and urbanizing long as these trends continue, over the long term apartments
suburbs, especially locations near mass transit stops, favor should continue to outperform all other property types on a risk-
multifamily, too. More people willingly forsake space and yards adjusted basis, with excellent cash flow components. Whereas
for greater convenience and avoiding car dependency. On the other sectors must weather impacts from technology buffeting
and slackened demand growth, future population increases
suggest a vibrant and expanding apartment market.
ExHIBIT 4-5
U.S. Apartment Investment Prospect Trends
Weaknesses
“Inordinately large” capital flows course into the apartment
sector and raise concerns among some investors despite the
solid fundamentals. The best deals “have been picked over”
good and what is left has become just “too pricey.” Some intervie-
Apartment rental: moderate income wees warn to back off: “Without job creation, this [performance]
growth cannot continue.” Some “scary” loan underwriting
modestly good does not compute: “Exit caps at 4 in ten years when interest
rates could be much higher” will require “a good run of value
creation.” New projects, meanwhile, could get out of hand in
fair traditional hot-growth, easy-to-build Sunbelt markets, as well
Apartment rental: high income as in suburban areas where apartments traditionally tend to
underdeliver. Shut out of much activity in the office and retail
modestly poor sectors, developers of all stripes “pile into the sector” as lend-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 ers offer construction loans. If the housing market starts to
Source: Emerging Trends in Real Estate surveys. recover and homebuyers gain confidence, apartment demand
could slacken; at some point purchasing may begin to look like
a better deal than leasing if rents keep increasing. And new
U.S. High-Income Apartments
investment funds scarf up single-family homes for rental proper-
2013 Prospects Rating Ranking ties, which could compete with multifamily units.
Investment prospects 6.25 Modestly good 3rd
Development prospects 6.69 Good 1st Development
Buy Hold Sell Developers find some solace—“a lot of [apartment] supply
43.8% 35.8% 20.4%
is needed to keep up with obsolescence as well as natural
Expected capitalization rate, December 2013 6.3% growth”—and banks and insurers eagerly boost construction
financing volumes. Even with stepped-up activity, interviewees
U.S. Moderate-Income Apartments say unit deliveries in 2012—about 200,000—“will come up
short” of the roughly 300,000 mark typically needed to maintain
2013 Prospects Rating Ranking
equilibrium in markets nationwide. High-barrier-to-entry urban
Investment prospects 6.65 Good 1st infill markets around 24-hour cities cry out for new projects.
Development prospects 6.47 Modestly good 2nd Developers who can secure scarce sites and overcome typi-
Buy Hold Sell cal entitlement hurdles should score winners, catering to the
28.1% 33.1% 38.8%
wave of echo-boomer career builders and their empty-nester
Expected capitalization rate, December 2013 5.9% parents. Development approaches “hinge on location and
quality: at the high end, developers must provide amenities
inside and outside” of projects. At the lower end, neighborhoods
and convenience count more. For younger, less-affluent rent-

transit stations. The “continuing urbanization” wave underway

Exhibit 4-6 should give developers at least “a three- to four-year” window in
U.S. Multifamily Completions and Vacancy Rates major markets.
250 8 Best Bets

Completions
At this point in the cycle, sellers under pressure and some banks
Vacancy rate
200 7 shedding assets will settle for the most dependable buyer, not
necessarily the biggest offer. “Position yourself” to make deals
Completions (thousands of units)
because many assets are still overleveraged. Focus on apart-
Vacancy rate (%)

150 6
ments “in the big cities with jobs growth.” Even though “a lot
of money is headed” into urban infill, “[renter] demand will be
100 5 there” to support future appreciation. Value-add plays in multi-
family can still be attractive. Again, concentrate on buying good
4 assets in good markets, then driving yields by providing modest
50
capital for improvements and hiring a capable property man-
ager to lease up the space into renter demand. Yield chasers
0 3
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013* 2015* should become more selective about development—centering
activity on popular urban districts and densifying suburban
Source: REIS.
*Forecast. nodes. Anything transit oriented should hit pay dirt.
Avoid
ers, “developers can meet price points providing less space” Back off the sub-6 cap rate deals on existing properties,
as long as the surrounding area offers “a quality experience” “where you have much less room for error” should interest
defined by shops, restaurants, parks, and, most important, rates increase, and steer clear of garden apartments in subur-
access to workplaces or mass transit to get to work. As light rail ban areas where new development can spring up easily and
and bus rapid transit service is expanded in many markets, con- soften returns on older product. Some of these low-barrier-to-
struction opportunities will likely present themselves around new entry places could suffer from oversupply by 2014 or 2015:
“Multifamily is almost guaranteed to overdevelop,” according to
one interviewee. Particularly watch out in high-foreclosure mar-
Exhibit 4-7 kets where speculators will turn single-family homes into rentals
U.S. Apartment Property Total Returns and compete directly against apartment owners for tenants.
50% Outlook
The “rah-rah” multifamily story seems “a little long in the tooth”
NAREIT
40% and will eventually “lose some steam” as housing rebounds, but
expect the run of increasing rents and values to continue in most
30%
markets at least through 2013 and probably well into 2014. Cap
rates—although not out of range compared with other sectors
20% NCREIF
with higher capital costs and risks—probably have nowhere
10%
to go but up, and rent growth should moderate after a boom in
infill locations. Car-access suburban markets “will do okay, but
0% underperform.”
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012*
-10%
-20%
-30%
Sources: NCREIF, NAREIT.
*Data as of June 29, 2012.

Industrial
Strengths moderating vacancies; rents should continue to trend “slightly
The nomenclature has changed from warehouse to distribu- positive” or better in 2013, especially if global business accel-
tion and now logistics, but according to one interviewee the erates. Big blocks of space will be harder to find, leading to
industrial supply chain “will always be there since it’s infinitely new projects. Institutional investors maintain strong interest in
flexible.” Worries about e-commerce may be overblown: some major-shipping-hub, big-box space: they like the steady income
space turns obsolete faster, but the web retailers still want facili- returns, and long-term holders register solid if unspectacular
ties mostly in the same places “where the bricks-and-mortar appreciation. Although they continue to struggle to “scale”
guys put [them] near population centers” around the gateways. portfolios—morsel-sized portions of acquisitions never seem to
Recovering at a snail’s pace and “lagging most other sectors,” satisfy capital appetites—at least exit strategies pose no prob-
top industrial markets finally experience good absorption and lems to execute. What’s wrong with a classic “get-rich-slowly
business”? Not much.
ExHIBIT 4-8
Weaknesses
Industrial/Distribution Investment Prospect Trends
Worldwide economic malaise stunts the rebound at key ports
and international airports; some investors “underweight indus-
trial due to reduced exports.” Although “fundamentally not
changing the business,” e-commerce slows growth in overall
good demand for logistics facilities: retailers tend to store less at inter-
mediate points between manufacturers and customers, hurting
secondary and tertiary locations. Demand for specialized space
modestly good Warehouse industrial tailored to distributor needs forces more old product into obso-
lescence in key midcountry gateways like Dallas, Chicago, and
Atlanta.
fair R&D industrial
Development
Developers latch on to significant demand for build-to-suits from
modestly poor e-commerce companies willing to pay for customized space
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 with elaborate stacking systems to accommodate pick-and-
Source: Emerging Trends in Real Estate surveys.
U.S. Warehouse Industrial ExHIBIT 4-9

U.S. Industrial Completions and Availability Rates
Investment prospects 6.34 Modestly good 2nd
Availability rate
Development prospects 5.55 Fair 3rd 300 Completions 15
Buy Hold Sell
67.9% 23.6% 8.5% 250
Expected capitalization rate, December 2013 6.9%
200 12
Completions (million sf)
Availability rate (%)
U.S. R&D Industrial

150
Investment prospects 5.20 Fair 8th 100 9
Development prospects 4.32 Modestly poor 8th
Buy Hold Sell 50
23.1% 45.2% 31.7%
Expected capitalization rate, December 2013 7.6% 0 6
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011* 2013* 2015*
Source: Emerging Trends in Real Estate 2013 survey. Source: CBRE Econometric Advisors.
Note: Based on U.S. respondents only. *Forecasts.

pack operations, increasingly using robots and automated

equipment. A far cry from old-fashioned storage facilities, these Exhibit 4-10
buildings may require upgraded HVAC and power systems, U.S. Industrial Property Total Returns
as well as parking for large numbers of workers. REITs are well
positioned to grab this business because they often have better NAREIT
40%
access to capital than the average developer. Otherwise, most
U.S. markets cannot sustain much speculative construction— 30%
NCREIF
although the pace picks up during 2013. 20%
10%
Best Bets
Owners should hold on to their hub gateway portfolios; these 0%
1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012*
markets will continue to tighten, slowly pushing up rents and -10%
returns to healthy levels. Look for opportunities to upgrade and
-20%
redevelop older product into big-box space in these same
“usual suspect” markets. These projects could come on line in -30%
time to meet the steadily improving demand, and institutions -40%
inevitably will line up to buy them.
-50%
Avoid -60%
Some smaller markets may retain demand for old-style storage -70%
space, serving local trades and merchants, but properties in Sources: NCREIF, NAREIT.
many secondary and tertiary locations lose out as distributors *Data as of June 29, 2012.
sidestep them for more direct channels; “Demand won’t come
back.” It’s the industrial “equivalent of suburban office parks.”
Research and Development

Outlook
Relatively buoyant tech enterprises boost prospects for famil-
In an ongoing free-for-all, East and Gulf Coast ports will com-
iar R&D markets in and around brainpower centers like San
pete against each other for a share of Pacific shipping traffic
Francisco–San Jose, Austin, Seattle, Boston, and the North
slated to come through a widened Panama Canal, scheduled to
Carolina Research Triangle; major companies expand and
open by year-end 2014. These markets include Houston, New
startups proliferate. Reversals in stock prices for social-media
Orleans, Mobile, Miami, Jacksonville, Savannah, Charleston,
companies might give some pause, and R&D is notoriously
Norfolk, Baltimore, and New York–New Jersey. The winners
volatile: startups can quickly turn into shutdowns. How many
will draw enough government funds and private capital to help
apps do we really need?
dredge harbors and build new facilities for offloading containers
from massive, deep-hulled post-Panamax ships. Tens of billions
of dollars in infrastructure needs extend to expanding freight
rail hubs and widening interstate highway connections. Lacking
a national infrastructure strategy, the federal government lets
states, cities, and regions battle for funding. “The jury is still out,
but wild-card factors in decision making could be rail access,
local labor costs, taxes, and timing to key inland distribution
markets.” Most players avoid “taking any bets.” The victors will
either expand or transform into major industrial centers, boosting
their economies and providing significant new development and
investment opportunities. Stay tuned: it is the biggest contest
affecting the future of U.S. industrial markets.

Retail
Strengths
ExHIBIT 4-11
The industry sidestepped a full-bore, over-the-cliff “death spiral.”
Retail Investment Prospect Trends
Now, more “optimistic” investors and owners exhale in relief,
crediting a significant “limitation on new supply for making the
difference.” Upscale retail roars back, especially along down-
town streets in 24-hour urban districts and at the leading fortress good
malls. Affluent Americans continue to shop, and chains gravi-
tate to these most-favored shopping destinations where rents Power centers
modestly good
increase and vacancies decline precipitously. Some stressed
Neighborhod/community
power centers manage to recoup by filling empty stores with new shopping centers
big-box tenants, and basic bread-and-butter, grocery-anchored fair
retail in established infill markets registers solid income-oriented
performance, too. An interviewee said, “The worst is over, and modestly poor
we’re seeing more upside than expected.” The big mall REIT Regional malls
companies “are all doing fine”; they continue to consolidate their
positions in the top regional centers, shedding their remain-
poor
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
ing stinker properties, and hold considerable leasing leverage
over retailers who crave premier locations. Chains and specialty
retailers, including some offshore brands, “cannot find enough U.S. Neighborhood/Community Centers
space in the [select] places [New York primarily] where they want 2013 Prospects Rating Ranking
to showcase their brands.” Progress on taxing internet sales also
Investment prospects 5.72 Modestly good 7th
offers some promise to dull inexorable e-commerce incursions.
Development prospects 4.39 Modestly poor 7th
Weaknesses Buy Hold Sell

52.7% 28.0% 19.3%
Without a strong economic recovery, evident bifurcation splits
the few strong centers from many more vulnerable ones in a
“rapidly evolving” and “oversupplied” retail real estate universe. U.S. Power Centers
Most interviewees gird for continued industry contraction in 2013 Prospects Rating Ranking
the face of competition from web retailers. The 99 percent Investment prospects 4.50 Fair 11th
“have less discretionary money,” controlling consumption Development prospects 3.11 Poor 9th
appetites, and “the middle market struggles” because many
Buy Hold Sell
cash-strapped shoppers “go down a notch” in their spending. 11.9% 38.5% 49.7%
Operators find a dearth of creditworthy tenants, whether mall
anchors, supermarkets, drugstores, local hair salons, or pizza
guys. Consolidating major chains increasingly abandon Class U.S. Regional Malls
B and C regional centers; financially challenged mom-and- 2013 Prospects Rating Ranking
pop stores leave half-empty strips along suburban boulevards; Investment prospects 4.82 Fair 9th
and many other “dead dog” commodity properties, suffering Development prospects 2.76 Poor 11th
from physical deterioration, face repurposing into churches, Buy Hold Sell
light manufacturing facilities, or whatever—just not stores. As 16.0% 54.9% 29.2%
for e-commerce, web sales nibble away at bricks-and-mortar Expected capitalization rate, December 2013 6.5%
margins; retailers reduce store square footage and rely more
on clicks-and-bricks strategies than bricks alone. In a rapidly Note: Based on U.S. respondents only.
evolving marketplace, retail flavors of the day “lose luster” more
quickly, consumer preferences become “harder and harder to
highest-credit clients—advantage the REITs once again. But
pin down,” and profit margins become more difficult to maintain.
retail real estate could use a heavy dose of redevelopment,
particularly older (30 years plus) fortress malls, which need
Development reconfiguring to handle retailers’ morphing in-store/online
Forget about suburban development: no new malls or strips marketing schemes—smaller stores, more showroom and
required, and lenders restrict access to capital to only their promotion space, and less storage. Some new, nontraditional


U.S. Retail Completions and Vacancy Rates U.S. Retail Property Total Returns
35 15% 50%
Completions
30 40%
Vacancy rate 30%

25 NAREIT
12%
20%
Vacancy rate
20 NCREIF
10%
15
0%
9% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012*
10
-10%
5 -20%
0 6% -30%
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013* 2015*
Source: REIS. -40%
*Forecast.
-50%
tenants will lease display space for promotions in higher-traffic *Data as of June 29, 2012.
locations and orient shoppers to make purchases or contacts
directly off their mobile devices as they pass by. Restaurants, alternative uses, including parks and light-rail stations or pos-
movie theaters, and entertainment features will become more sibly warehouse space to support e-commerce. Power centers
important enticements to the mall mix as landlords “figure out look more like “a crapshoot,” considering how much big-box
how best to compete against online selling.” Big-box formats commodity merchandize ultimately could be bought online.
continue to wrestle with how to shrink into urban streetscapes Watch out for neighborhood centers exposed to Whole Foods/
to capture business from move-back-in trends, and multifamily Trader Joe’s or Walmart/SuperTarget forays. According to an
developers similarly accommodate necessity retail compo- interviewee, “Between high-end specialty food stores and
nents—supermarkets, drugstores, and cleaners—into their infill discount superchains, the typical grocery anchored strip is at
projects. “Urban retail development has major potential.” significant risk. If you lose the grocery anchor, you’re sunk.”
Best Bets Outlook

Investments in mall REITS, which monopolize ownership of Class Retail real estate appears positioned to endure a very long, slow,
A/A+–quality malls, may be the only way to get a piece of these but dramatic transformation in how and where people shop.
top centers. These publicly traded operators would be crazy to Online approaches turn retailing into an “omnichannel” busi-
dispose of any of their fortress centers, given firmly established ness: the winners will embrace technology and integrate it into
locations in the most advantageous retailing hubs and “huge bricks-and-mortar platforms, realizing that e-commerce/in-store
sales” volumes. Outlet mall companies also turn “very hot.” combinations beat stand-alone formats. “If you can touch it in the
Economizing shoppers can buy specialty brands at half price store, you’ll buy more of it online.” Mall shoppers manned with
and “get a better bang for their buck.” Flagging Class B and C apps will know what’s on sale, get coupons for discounts, and
regional malls feel the heat as outlets make incursions into their find out about new products—potentially driving more business.
home turf, expanding from locations near tourist resort destina- Landlords and tenants need to adjust how space is priced as
tions closer to suburban backyards. The warehouse clubs also marketing and promotion become more important to retailers
draw crowds looking for bargains. Neighborhood centers in good than just direct in-mall sales. The big-box stores all look at how
residential neighborhoods with barriers to entry will do well as to downsize, too; they may move from power centers into smaller
long as they are anchored by a dominant supermarket chain. fortress mall configurations or inner-city formats. Prime neighbor-
hood retail survives: necessity shopping endures for groceries
Avoid and pharmacy items, but just about everywhere in America could
Questionable retail properties litter the suburban scene from use less store space per capita.
coast to coast. Many need bulldozing and transforming into
Office
Strengths the competition: tenants calculate operating savings and find
Lagging behind other commercial property sectors, office they can attract young talent who favor “cool space” and nods
finally benefits from a severe, necessary, and now extended by their employers to environmental correctness.
construction slowdown. Absorption increases and rents tick up
in the stronger 24-hour downtowns and other markets harboring Weaknesses
expanding high-tech and energy businesses. Investors must “Secular headwinds” buffet office markets. Tenants continue
focus more than ever on location. “That means urban, dense, to downsize space-per-capita requirements, and technology
vibrant places,” preferably with diversity provided by universities enables more people to work away from the office or spend less
and medical centers. Buildings win if they can offer tenants flex- time there. “Vacancy rates are too high nationally—low double
ibility allowing cost-effective layout changes to accommodate digits for downtown and midteens for suburban office” (exhibit
open-space plans and wi-fi technologies. Green buildings with 4-16) as tenant credit quality has turned “much more suspect.”
high ratings under the Leadership in Energy and Environmental Many new high-flying companies “can be here today, gone
Design (LEED) program and energy-efficient systems leapfrog tomorrow.” Landlords “must be careful even with law firms”
(whose billable hours are down from what they used to be), while
other blue-chip tenants cannot be counted on to expand their
ExHIBIT 4-14
space requirements; financial companies and accountants con-
Office Investment Prospect Trends
tinue to offshore and outsource. “Value-conscious” businesses
“want hyper-efficiencies, looking to take 80 percent of the space
they used to lease and stuffing more people in.” They “seek
good density and less cost per employee,” making it extremely difficult
to achieve “pricing power even in the best markets.” Investors
Suburban office increasingly worry about “how much rental growth you can
modestly good
expect to offset higher cap rates down the road.” Office problems
Central city office
increase CMBS delinquencies as leases written at market peaks
fair in 2006 and 2007 burn off at lower rental rates and often for less
space, if tenants renew at all. Some landlords should be “scared
modestly poor to death” about any pending rollovers in their tenant base.
Development
poor
Contraction in space use and chronically high vacancies will con-
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
tinue to mothball most projects in many markets. In tighter 24-hour
cities, new green developments, featuring layout efficiencies
U.S. Central City Office and “healthy” interiors, can charge premiums in siphoning big
2013 Prospects Rating Ranking space users away from existing buildings. “At a macro level, office
vacancies won’t get much better, but this new product will sell.”
Development prospects 4.53 Fair 6th
In fact, any new office building will be “some version of green,”
and these projects will render “hard-to-retrofit” brown buildings,
Buy Hold Sell
47.4% 35.1% 17.5% including some ten- and 20-year-old vintage towers, “increasingly
obsolete.” Prospective tenants now “check the boxes” for lower
energy bills, better windows for more natural light, cleaner/fresher
U.S. Suburban Office air, raised floors for under-floor wiring and HVAC systems, as
2013 Prospects Rating Ranking well as high-tech conference centers. “It’s like a fancy, new car:
Investment prospects 4.77 Fair 10th
everybody wants to be in a LEED building.”
Development prospects 2.82 Poor 10th Where possible, re-adapting space “will become a common
undertaking” as owners try to install new energy-efficient systems
Buy Hold Sell
25.1% 45.5% 29.4% and create more open spaces. They need to appeal to tenant
mind-sets, which “rationalize” the notion of “increasing worker
productivity and wellness while reducing square footage per
employee.” Some big corporations—typically e-commerce firms
and manufacturers—“sit on lots of money” and may be willing to
entertain build-to-suits.
Exhibit 4-17
U.S. Office Property Total Returns
60%
Exhibit 4-15
50% NAREIT
U.S. Office New Supply and Net Absorption NCREIF
40%
120 120 30%
Net absorption
100 20%
100 Completions 80 10%
0%
Net absorption (million sf)

60
80
40 -10% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012*
20 -20%
60
0 -30%
-20 -40%
40
-40 -50%
20 -60
*Data as of June 29, 2012.
-80
0 -100
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011* 2013* 2015* care industry balloons to take care of graying baby boomers.
Source: CBRE Econometric Advisors. Undersized properties may “make it hard to put money out,” but
*Forecast. the demand from doctors, clinics, labs, and rehab providers is
“crazy to ignore.” Landlords should not have problems leasing
space anywhere near hospital centers and medical complexes.
Exhibit 4-16
U.S. Office Vacancy Rates
Avoid
“Severely handicapped” suburban office space remains “a
20% Suburban trap.” Generation Y resists working in isolated office-park
campuses, which require a car for the commute. Models for
repurposing outmoded suburban retail space may offer ideas
15%
on “what to do about some of this old crappy [office] space.”
Resist buying cheap Class C or off-location buildings with
10% the idea of riding back an eventual market rebound. Investors
Downtown
underestimate the capital expenditure requirements for main-
taining these buildings, and long-term leasing and value trends
5%
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011* 2013* 2015* point to subpar results. Rents have flat-lined or worse in many
Sources: CBRE Econometric Advisors. suburban districts for decades.
*Forecast.
Outlook
Best Bets Aside from modestly bullish forecasts for gateway trophies and
Focus on well-leased buildings in top markets and protect the few new green projects in these same markets, the office
against functional obsolescence. Favor LEED buildings or sector promises a tough road for investors, given decreased
buildings that can be economically adapted to meet LEED demand, dictated and enabled by morphing work styles and
standards. Tune in to work attributes favored by younger hires, technology. The office as work center has become less essen-
who place emphasis on connectivity and social interaction over tial as more bosses choose to let more of their workers spend
privacy and their own space. Also, pay more attention to the more of their time operating from elsewhere. These approaches
neighborhoods where the gen-Y crowd wants to live and work; not only register bottom-line savings, but also can encourage
“Their influence cannot be underestimated.” A minority view greater productivity. Multinational companies can be expected to
suggests that once unemployment drops, “all the old-style, continue shifting work to lower-cost overseas markets, moderat-
high-finish amenities will make a comeback. “It’s an employer’s ing expansion appetites in the United States. And most obvious,
market right now, so workers will put up with less space as long today’s office users require less space than in the past to get the
as they get a paycheck.” But don’t bet on it. same amount of work done: businesses now operate with fewer
Although a niche sector, medical office space presents administrative personnel and need less storage. It’s a new age.
compelling investment opportunities as the nation’s health
Hotels
Strengths operators hope guests do not notice reduced manpower levels
The hospitality sector—especially in major markets (“New York and the absence of certain “runaway-cost” service ameni-
pulls up everything”)—performs “quite well.” Helped by “little new ties. Bulk-buying corporate customers accept year-over-year
development,” investors and operators realize “solid growth” in increases in negotiated rates, and “modestly” loosen purse
occupancies, with rates tracking right behind, and remain “cau- strings on food and beverage–related events. Full-service hotels
tiously optimistic” as long as the economy holds together. “More have pared expenses by eliminating multiple restaurants, and
people stay in hotels than ever before” and “the frenzy of cutting “menu engineering” brings back more profitable margins.
[staffing] and lopping off expenses has ended.” The upscale and
luxury categories revive in style: wealthy travelers and business Weaknesses
elites book cushy resorts and prime business center suites as Operators put a brave face on “revolutionary changes” wrought
by web-based pricing transparency and internet reservation
sites. Value-conscious customers can surf the web for the best
ExHIBIT 4-18
prices and secure favorable deals, hamstringing the ability to
Hotel Investment Prospect Trends
advance rates. In a battle fought on websites and through social
media, the big chains try to gain an edge through rewards
programs and have an advantage over weaker flags or indepen-
dents using less-sophisticated systems and technologies. Price
good
shopping “forces hourly revenue management like the airlines”
Limited-service hotels with “inventories controlled like bond traders.” Hotel chains have
modestly good all migrated to off-property, centralized sales and marketing
Full-service hotels functions. “It’s now a science, not an art.” While the meeting
fair business has recovered “after taking the pipe [during the reces-
sion], it’s not where it was.” The total size of group catering per
head stays down and events remain “less elaborate.”
modestly poor
Development
poor Given plenty of troubled legacy loans in portfolios and multiple
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 cycles of burned development transactions, lenders show no
Source: Emerging Trends in Real Estate surveys. inclination to bankroll hotel projects, except extremely select
deals in prime global gateways. “The universe of locations
U.S. Hotels: Limited Service strong enough for new development will remain extremely
limited”—“New York, Miami, D.C., Boston, L.A., San Francisco,
and maybe energy markets.” After five years of bankruptcies,
Investment prospects 5.93 Modestly good 6th cost cutting, and holding on, many properties require overhauls.
Development prospects 5.10 Fair 4th The industry will need to concentrate on upgrades and renova-
Buy Hold Sell tions rather than ground-up construction.
45.9% 31.2% 23.0%
Expected capitalization rate, December 2013 8.2% Best Bets
Investors need to “change their metrics” and realize that
U.S. Hotels: Full Service few bargains exist; yields and margins will no longer satisfy
2013 Prospects Rating Ranking “opportunistic” expectations. Opportunity players try to fer-
ret out “really attractively priced,” “broken deals” that need a
“white knight” and “a new flag”—“maybe a resort in Florida or
Arizona.” Special servicers hold “lots of product” in need of
Buy Hold Sell renovation from deferred maintenance; at some point they will
30.7% 45.2% 24.2%
try to clear these properties from their books. Buyers will need
Expected capitalization rate, December 2013 7.4% to be selective, especially in secondary and tertiary markets
where revenue per available room (RevPAR) growth lags. Clean
and comfortable, low-frills suites with oatmeal and scrambled
eggs or muffins included in a complimentary breakfast draw

Exhibit 4-19
U.S. Hotel Occupancy Rates and RevPar
80% Higher-priced hotels (occupancy rate) Higher-priced hotels (RevPAR) $120

All hotels All hotels
70%
$100
60%
50% $80
Real RevPAR
Occupancy
40%
30% $60
20%
$40
10%
0% $20
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013*
Sources: Smith Travel Research, PricewaterhouseCoopers LLP.

*Forecast.
budget-conscious business travelers in droves to limited-service reversals would strike operating margins quickly. The major
hotel formats like Hilton Garden Inn, Courtyard by Marriott, and hotel companies view the United States as a mature market with
Residence Inns. Less dependent on group and catering/restau- relatively few expansion opportunities outside the familiar global
rant business, these hotels avoid costly overheads, including gateways. Their attention has shifted to overseas markets—
large food and beverage staffs. For “uncertain times, it’s the sur- especially Asia, India, and Latin America—where more attractive
est bet,” and despite decent cash flows, “a lot of [local] owners development prospects beckon.
won’t be able to refinance maturing loans,” paving the way for
attractive recapitalization plays at lower cost bases.
Exhibit 4-20
Avoid U.S. Hotel/Lodging Property Total Returns
Travel increasingly concentrates in the top 25 or so population
and business centers. Hotels a step or two removed from pri- 70%
mary transportation hubs register weaker outlooks and will have 60% NAREIT
trouble sustaining strong revenue gains. Although investors may 50%
find some reasonable deals, they should be extremely selective.
40%
30% NCREIF
Outlook
20%
Quietly hotels edge back into favor “and can’t be ignored. They’ve
been in rocket mode.” Expect profit growth to flatten in the 10%
healthy mid- to high single digits as long as development remains 0%
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012*
sedated. Winners will find ways to burnish their brands and fend -10%
off online travel agencies, which effectively commoditize pricing -20%
among the leading flags. So far the typical hotel boom-after-bust -30%
cycle in transaction pricing has been short-circuited by slow-to-
-40%
foreclose lenders, tepid debt availability, and a wide gap in bid/
-50%
ask spreads. Transaction volume should gain momentum finally
as buyers capitulate in the face of strong revenue growth and -60%
lenders dispose of more foreclosed assets. The industry keeps its Sources: NCREIF, NAREIT.
fingers crossed that momentum can be sustained: any economic *Data as of June 29, 2012.

Housing
Strengths
Exhibit 4-22
Down for so long in an excruciating bump-along-the-bottom
U.S. Single-Family Building Permits
trough, housing finally advances and markets gain some real
traction, although struggling along the way. In a classic buy-
2,000
ers’ market, institutional managers and savvy high-net-worth
investors take the plunge with conviction. They opportunisti-
cally try a “pioneering” gambit, raising hundreds of millions of
1,500
dollars in capital for funds to vacuum up single-family product at
Thousands of units
depressed prices, rent it for income, and eventually sell in any
full-bore recovery. Smaller players have already put together
1,000
localized ventures, and prices should firm up further in mar-
kets that are drawing attention. Some prime neighborhoods in
affluent enclaves escaped much damage and register modest
500
gains, while “accelerating prices” for condominiums in “bet-
ter” markets like south Florida could be “a leading indicator for
recovery.” Skyrocketing apartment rents in certain infill and gate-
0
way markets also provide incentives to buy. Banks finally allow 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011* 2013* 2015*
more short sales and convert delinquent owners into renters, Source: Moody’s Economy.com.
helping dent the inventory of problem loans, which weighs down *Forecasts as of August 2012.
many commodity markets.
amply documented in reams of housing-bust publicity. Rational
Weaknesses credit standards, which require reasonable downpayments and
Even with relatively low mortgage rates, home sales have lan- good borrowing histories, shut out some potential buyers who
guished and the homeownership rate has dropped to 50-year would have had no trouble scoring a mortgage in the precrash
lows, revealing lack of pent-up demand and the depths of many lending environment. More than 10 million homeowners, mean-
Americans’ shaky personal finances in a problematic jobs mar- while, remain underwater on mortgages worth more than actual
ket; they simply cannot afford to own homes. Others just do not house values. Any distressed selling will continue to dampen
want to venture the risk or deal with homeownership headaches, prices—and what happens if interest rates increase?
Development
Exhibit 4-21
New construction levels have never been lower in 50 years,
The S&P/Case-Shiller Home Price
and if the market has any chance to recover more quickly,
20-City Composite Index
homebuilders and lenders would be wise to show continued
discipline. Expected population gains will eventually lift demand
250
and push housing starts, and builders should find some oppor-
tunities in markets with better employment growth. They retreat
from traditional greenfield subdivisions at the suburban fringe
and seek more infill opportunities. Instead of building cavernous
200
McMansions, they downsize models, consider more energy-
efficient designs, and look to accommodate extended families
Index
in units comfortable for grandparents running out of retirement

savings and adult gen-Y children unable to cut financial ties.
150
Best Bets
For anyone who wants to own and has the means, now is
100 a good time to buy and lock in low long-term financing.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* Prices should continue to edge up, and mortgage rates are
Source: Standard & Poor’s. not expected to get better absent an economic reversal.
*As of June 29, 2012. Speculators, including the new housing fund ventures, should

concentrate on securing low acquisition prices on rentable

properties, which can deliver steady cash flows. “Expensive Exhibit 4-33 (4-23)
housing markets won’t work. Rents do not support the purchase Prospects for Residential Property Types in 2013
prices,” and anyone expecting to score rapid value gains likely
will be disappointed. Fund investors need assurance that their
advisers/general partners have the organizational infrastructure Investment Prospects
to manage and lease scores of disparate houses in different
places and deal with the inevitable myriad renter-related issues, Infill and intown housing 6.54
from leaks and broken appliances to household damage and
Seniors’/elderly housing 6.01
security deposits. “There’s no playbook”; scaling up these funds
may be “a challenge” and “could be a crapshoot.” Local inves-
Student housing 5.88
tors, focused on a manageable number of properties in familiar
districts and neighborhoods, may be better positioned to deliver Affordable housing 5.53
on performance objectives. Buying land cheap, getting entitle-
ments to add value, and holding until markets strengthen still Single-family: 5.43
moderate income
makes sense, too.
Single-family: 4.95
high income
Avoid Manufactured home 4.39
Watch out for older commodity suburbs in decline. For any loca- communities
tion, a substandard school district and a falling tax base could Multifamily condominiums 4.31
signal an unfortunate downward home price spiral. Weekend,
summer, and resort homes still can compute for folks with Second and leisure homes 3.65
significant disposable incomes, but “do they make economic
sense” for most potential buyers? “You’re so much better off Golf course communities 3.01
renting for three weeks” or vacationing at places where you have
never been before and escaping the ownership hassles. Development Prospects
Infill and intown housing 6.78

Outlook
Housing will remain troubled until unemployment rates fall, Seniors’/elderly housing 6.19
worker earnings power recovers, the market clears its fore-
closed/defaulted properties, and banks loosen up credit Student housing 6.14
standards just a bit. No one holds his or her breath, but a recov-
ery finally appears underway in fits and starts. In 2013, more Affordable housing 5.75
buyers should gain confidence about acquisitions, and high
Single-family: 5.28
rental rates in some markets should encourage more house moderate income
hunting. The nascent upswing remains extremely susceptible to Single-family: 5.02
any economic reversals or interest rate hikes. Given housing’s high income
significance to the overall economy, the country will be back Manufactured home 4.16
on track when homebuilders can get back in gear. But what communities
comes first? Multifamily condominiums 4.14
Niche Housing Sectors Second and leisure homes 2.88
Seniors’ housing. The sheer number of Americans aging into Golf course communities 2.36
retirement promises steady demand for seniors’ housing over
the next decade. At the same time, smart players realize the 1 5 9
market dynamics may be changing because fewer seniors will abysmal fair excellent
have the savings or pensions they might have expected only a
few years ago. Stock market reversals, companies abrogating Source: Emerging Trends in Real Estate 2013 survey.
retirement plans, and losses in home values all conspire to put Note: Based on U.S. respondents only.

many seniors in dicey financial straits. Developers start to orient
projects toward a “private-pay population” with “less income in
the midst of a weak economy.” Some “disappointed” investors
expect “slow growth for years, with little opportunity to raise
rents.” They also worry about “political uncertainty over health
care, moves to cut health care costs, and the changing insur-
ance environment.” At the same time, the desire for generational
separation is upended by harsh economic realities: more grand-
parents may be forced to move in with their children and scrap
plans to live independently either in seniors’ housing projects or
their own homes.
Mobile home parks. The same demographics and income
issues work in favor of mobile home park owners, who can sit
on land and earn solid income until development opportuni-
ties resurface. In these constrained times, trailer living fits the
lifestyle budgets of more people, old and young.
Student housing. The sector remains compelling, given the
shear demographic numbers of college-age young people.

c h a p t e r 5
Emerging Trends in
Canada
“We’re not a bad place to be.”
I
n a world struggling with managing unprecedented debt and foreign investors try to gain footholds (most unsuccessfully)
levels and economic upheaval, Canada enjoys “boring” in property sectors against difficult odds: Canadians tend to buy
stability, its real estate markets following along in a seem- and hold long term.
ing state of near-perpetual equilibrium, at least compared with But “cautiously exuberant” Canadians also struggle against
other volatile regions, including most obviously the United complacency and must remain focused on the reality of how the
States. As uncertainty continues around the globe, “Canada world’s tenth-largest economy can be dragged down by everyone
sits in a sweet spot of low interest rates with [the benefit of] a else. “We cannot continue to outperform economies awash in debt.
natural resource/commodity–based economy.” “People live The huge deficit of our largest trading partner, the U.S., will restrain
under the assumption that we have a profound safety net which growth; energy markets and the resource sector [will] slow down.”
provides confidence that things won’t go upside down.” From In other words, Canada “cannot assume we’re immune” from the
Vancouver’s Pacific gateway and Alberta’s oil sands in the west “gray cloud” hovering over the world’s major markets.
to Toronto’s global financial center and Halifax’s shipbuilding For 2013, a balanced outlook is expected. “Compared to
in the east, Canada is well positioned to sustain its economic everyone else, we will do very well, but growth trends will be
consistency. The rest of the world has taken notice. U.S. retailers pretty mediocre.” In fact, “mediocre” should be viewed as “the
are expanding into the dependable Canadian market, immigra- new ‘good,’” as real estate players “need to scale back expecta-
tion waves stoke growth in housing and condominium sales, tions.” Canada has entered “a post-adrenaline phase after only
Exhibit 5-1
Firm Profitability Forecast
Prospects for profitability in 2013 by percentage of respondents
3.5% 10.5% 14.0% 38.6% 31.6% 1.8%

Modestly poor Fair Modestly good Good Very good Excellent
Note: Based on Canadian respondents only.

Exhibit 5-2 Top Trends for 2013
Inflation and Interest Rate Changes
Equilibrium Maintenance. Year in year out, vacancy rates
help tell the commercial real estate story in Canada. They
Increase
substantially average in the mid-single digits across virtually all property
types, keeping most markets in a healthy, near steady state,
which gives landlords the opportunity to push rents and enjoy
Increase Next five years measured, ongoing appreciation. A small group of institutional
moderately investors dominates office markets in the largest cities and owns
the best retail properties, enjoying solid income returns from
2012 their holdings. Like their U.S. neighbors, asset-rich Canadian
Remain stable
public pension funds wrestle in a low-interest-rate environment
at current levels with how to meet a widening gap in funding their long-term
liabilities as more beneficiaries retire. On a risk-adjusted-return
basis, they see real estate and infrastructure investments as a
solution for finding stability and low volatility with significantly
Inflation Short-term Long-term Commercial better yields than fixed income. But exercising significant
rates (1-year rates (10-year mortgage discipline, they also “resist firing up the domestic development
treasuries) treasuries) rates
cycle” in an attempt to boost performance and understand that
any overbuilding would only undermine values on their existing
portfolios. Everyone seems to benefit from the resulting rela-
tive balance in supply and demand: “They all want to see 2 to 3
a mild recession,” the economy bounced back quickly, helped
percent rental growth and wait for increased demand for space
by looser-than-normal monetary policy and sales of natural
to build before they fund development, resulting in pressure on
resources. “Our base is pretty solid, but we’re no longer on fire.”
rental rates.” Although investors and developers may miss out
Interviewees point to some of the concerns threatening the
on some opportunities, they avoid painful busts: the country’s
Canadian economy in 2013. “Commodities can get beaten up,
commercial mortgage defaults remain minimal, and markets
especially the natural gas sector.” Household debt has increased
have avoided a U.S.-style collapse. All signs point to more of the
to near-record levels, and home valuations are level or have
same in 2013, with the Canadian market expected to continue to
declined in some places. It is nowhere near a U.S.-style melt-
linger in this comfortable zone.
down, but “higher interest rates could create problems.” The
housing slowdown affects the construction industry and retail- Interest Rate Benefits. As long as interest rates hold near
ers; fervent consumer buying quiets down from recent peaks. rock-bottom lows, commercial real estate will continue to pros-
The government also “winds down” stimulus and tries to make per: “It’s the attractive” alternative. “If I put dollars in the bank, I’ll
fiscally responsible cuts. “Growth will depend on the private get next to nothing, and bonds, not much more, so I’ll load up
sector” alone. As a result, the unemployment rate hovers north on real estate and get a 7 to 8 percent return in markets that are
of 7 percent and wage growth has been “limited”—better than generally not oversupplied,” notes one interviewee. Not surpris-
most global competitors, but not indicative of a vibrant jobs fore- ingly, REIT stocks benefit from the same thinking: their dividends
cast. Call the economy and job growth “slow and steady.” There lure a strong following of both retail and institutional investors,
is an apparent disconnect in job opportunities and employee and refinancing at low rates should help their profit margins.
resources, as increasingly new jobs are concentrating in the Interviewees expect rates to increase only marginally, heavily
commodity-rich west while the largest population centers are influenced by U.S. and European central bankers who engage
east, mostly in Ontario and Quebec. The nation’s continuing immi- in further monetary intervention to help their ailing economies,
gration surge shifts gradually toward Alberta and Saskatchewan, which need to produce more jobs.
heading to where the jobs are, and will continue to spur local
Uncomfortable Household Debt. On the flip side, cheap
real estate markets in coming years—not just in Calgary and
money has had its negative impacts, relaxing the average
Edmonton, but also around Saskatoon and Winnipeg.
Canadian’s usually well-served, conservative fiscal tenden-
All in all, “we expect nothing spectacular, but if the world
cies. Suddenly, “everyone is up to their eyeballs in debt; when
turns around, we are in an excellent position”—and not a bad
interest rates went to zero, they loaded up [on credit] and fueled
position under any circumstances.
homebuying with inexpensive mortgages.” Homeownership

Chapter 5: Emerging Trends in Canada
approaches a possible saturation point near 70 percent and a choice of where they want to live, and the shift has been
prices in some markets began declining in 2012 as federal regu- quite profound.” They increasingly choose in-town living and
lators applied the brakes and imposed stricter lender guidelines, high-rise apartments or townhouses over suburban subdivi-
such as limiting amortizations to 25 years, resulting in increased sion, house-and-yard lifestyles. The trend is “generational,”
monthly mortgage payments. Both house hunters and condo “cultural,” and “not just economical.” Cities are more convenient
speculators have backed off buying sprees, and discretionary and concentrate 24-hour amenities for business, recreation,
sellers decide to pull back. and entertainment. Aging baby boomers get tired of shoveling
Interviewees say a minor correction could be healthy for snow and navigating roads during harsh winters, gen-Yers are
markets and appear confident that anything approaching U.S. attracted to better job opportunities and a glamorous city life,
heartache will be avoided. They point to significant differences
in the two countries’ mortgage markets: Canadian banks have
Exhibit 5-4
always required downpayments; never engaged in “NINJA”
Change in Availability of Capital in 2013
(no income, no job, and no assets) lending practices, let alone
offered subprime rate financing; and hold mortgages on bal-
ance sheets. Therefore, the ingredients for a subprime-driven Equity source
mortgage-backed securities environment never developed. Institutional investors/ 6.07
Strict underwriting weeds out most compromised borrowers, pension funds
and buyers take out insurance against defaults. Although new
supply has not outstripped demand trends, thanks to immigra- Private REITs 5.79
tion flows, all signs suggest the condo market needs a further
cool-down, especially for luxury units. In the meantime, low Private local investors 5.71
interest rates should help recent borrowers make payments and
“hold on,” even though values could edge down further. Private equity/opportunity/ 5.70
hedge funds
Urbanization Continues Apace. Canadians gravitate to
the “urbanization model. It’s everywhere,” extending beyond Public equity REITs 5.69
central business districts to reach interconnecting urban
nodes in once-suburban expanses not only around Toronto, Foreign investors 5.60
Vancouver, Calgary, and Montreal, but also “reaching every
part of the country,” including the smaller cities. “People make
Lending source
Mezzanine lenders 5.79

Exhibit 5-3
Maturing Loans: Preferred Strategy for Lenders
Nonbank 5.67
financial institutions
Extend without
mortgage modification Foreclose and dispose Mortgage REITs 5.62
8.2% 2.0%
Extend with Sell to a third party

18.4% Securitized lenders/ 5.32
mortgage modification CMBS
71.3%
Insurance companies 5.09
Commercial banks 5.09
Government-sponsored 5.00
entities
1 5 9
very large stay the same very large
decline increase
Source: Emerging Trends in Real Estate 2013 survey. Source: Emerging Trends in Real Estate 2013 survey.
Note: Based on Canadian respondents only. Note: Based on Canadian respondents only.

and everyone wants to limit time lost in increasing suburban Increasingly “cautious” banks received their regulator’s mes-
congestion. Retailers “start to support” the high-rise residen- sage loud and clear, scrutinizing developers’ track records and
tial boom, working with developers and planners to integrate project quality more closely. Greater weight is placed on loan
streetscape shopping into new condominium projects. requirements for reaching significant presales and downpay-
Land values for “scarce” infill sites continue to increase after ments before construction starts. “More projects will be deferred
having skyrocketed, as local governments encourage densifica- or pulled back” with possible “value flatness for the next two to
tion and developers look to maximize returns by building as high three years.” The biggest threat to the market would be higher
as zoning allows. Any location near mass transit stations sig- interest rates. That’s when buyers would walk away from prepay-
nificantly increases in value, and developers and the business ments and some unit owners would have trouble keeping up
community call for increased light rail and subway funding to with mortgage bills. However, interviewees see low risk of that
expand or build systems and support densification. They worry scenario in 2013.
that most municipalities lack the resources to finance infrastruc-
Reasonable Development Pipeline. Even though condo
ture projects adequately and need support from the federal
developers prepare for a slowdown after the robust pace of
government, which shies away from major outlays. Existing
high-rise construction, cranes are expected to remain visible
infrastructure, meanwhile, nears the end of life cycles, requiring
along major city skylines. A steady stream of projects in the
expensive upgrades or replacements. As a result, concerns
development pipeline will not be delivered for several years,
grow about how urbanizing nodes will connect to cores and
and with most interviewees expecting continuing buyer demand
each other. Dense development patterns require mass transit to
over the medium term, this should contribute to a reasonable
reduce traffic gridlock and attract city dwellers to urban attrac-
ongoing market for new projects in “a more normalized cycle.”
tions. Ironically, regions moved to densification planning partly
Any pullback in new construction should tighten already “good
because of unsustainable costs related to sprawl development,
supply/demand dynamics,” based on encouraging urbaniza-
including expenses for extensive road and sewer systems. “It’s
tion trends, which support an increase in buying and renting as
time for the federal government to get more involved,” says an
jobs and businesses cluster in and around city centers. If more
interviewee.
stringent underwriting weeds out speculators and borderline bor-
Condo Wave Curls. Toronto, North America’s largest con- rowers, this can only translate into a more favorable balance that
dominium market, sees new apartment towers sprouting will support stable or increasing values over time. Recent sticker
like weeds “everywhere” in an “absolute boom.” Developers shock on downtown projects, especially in the Greater Toronto
have been “building where they shouldn’t.” In recent years area (GTA)—and the Greater Vancouver area—have spurred
Vancouver’s waterfront and hillsides underwent similar skyline mid-rise condo construction in infill areas, as well as homebuild-
makeovers, and more recently Montreal and Calgary have ing outside the greenbelt. “People want larger, more affordable
experienced strong condo building sprees. Condo mania has units suitable for families,” whereas much of the new downtown
extended to other Canadian cities like Halifax and St. Johns as construction features small layouts marketable to young profes-
well—all part of urbanization and densification trends, encour- sionals and couples, or empty nesters. What happens when
aged by local governments and driven by significant buyer and gen-Y residents in these buildings decide to have kids?
renter demand. Development charges, passed on to buyers, become “a
All the activity finally raised alarms at the Bank of Canada, massive issue—up to $16 or $17 per square foot” in some
and 2013 should answer the question as to whether the bank’s jurisdictions as local governments tap into the building boom to
actions to temper demand, including establishing higher hurdles fill their coffers. The GTA municipalities charge homebuilders up
for foreign buyers to obtain mortgages, were too aggressive or to $60,000 a door because “demand allows for it.” Interviewees
helped restore a balanced market. Many interviewees wonder also continue to complain about “needless” government red
whether the restrictions were necessary. “Everything seems to tape in the zoning and permitting process, which “unnecessar-
be bought.” If buyers choose not to occupy, they find renters: ily” adds to costs and can stymie projects. Slowing construction
either young professionals or immigrants help fill units and activity in some markets should help “stabilize” construction
support relatively low mortgage carrying costs, and continued costs, which escalated during the building boom. But budgets
strong immigration should enable more development, some could face offsetting increases from tariffs on imported con-
interviewees argue. Others suggest that buying had progressed struction materials.
to unsustainable levels, especially for high-end units, driven
Typical Commercial Building Restraint. Always under
by an “if I don’t buy now, I’ll lose out” mentality. Concerns also
relative control, activity on the commercial side remains more
grow about the staying power of offshore investors should they
constrained. Any new construction keeps up with increasingly
experience financial reversals back home.

measured demand and does not race ahead of it. Few prime economic activity, such as the Maritime Provinces, will attract
development sites remain in either Toronto or Vancouver and greater immigration as a result of the coastal energy boom that
“stay in a few hands.” Calgary, with more available building will undoubtedly create new jobs.
sites, can generate a semblance of boom/bust cycles, but the
“Leveling” Cap Rates. Investors’ proclivity to secure income
market never seems to stay out of kilter very long because of
over long-term holding periods tends to sedate deal making and
growing energy markets. Potential approvals of controversial
helps insulate markets from volatility, although commercial mar-
pipeline projects from Alberta to the United States and into
kets registered record transaction volumes during 2012. Again,
British Columbia would boost real estate construction prospects
the Emerging Trends Canada barometer settles in a familiar
further. Although pension funds and other institutional investors
positive zone for 2013 with buy/hold/sell sentiment essentially
resist speculative development, they selectively seek expansion
aligning (exhibit 5-5). Survey respondents expect little further
and renovation opportunities in existing portfolio holdings in
downward movement in “low-as-you-can-go” cap rates, espe-
an effort to increase yields and maintain a competitive edge in
cially for apartments, regional malls, and downtown office space
aging buildings.
(exhibit 5-6). The exceptions will be for prime development sites
Transforming Tenant Demands. Office developers take in and around downtowns, especially for stores. “Land values in
notice of how changing tenant requirements—open layouts, core districts will keep going up.” If anything, it may be a slightly
shrinking space use per capita, hoteling and other technol- better time to sell than buy, but then given limited investment
ogy impacts, as well as operating and energy efficiency alternatives, owners probably are better off holding. And as
preferences—spread from the United States and force altered noted, that “is just what most successful Canadian investors do
approaches to projects. They realize the need to deliver green out of habit anyway.”
product to attract prime space users, while institutional owners
Plenty of Capital, Not Enough Deals. “The stars could not
continue to focus on upgrading existing stock to LEED standards
be better aligned” for attracting capital into Canada’s reliably
in order to remain competitive. “Green is huge in office. It’s
solid real estate markets: they look as good as any place to
become an intrinsic core value for tenants and fundamental for
invest in the world. Rational leverage levels, extremely low default
their business in attracting talent.” But some interviewees raise
rates, high occupancies, and low interest rates all combine to
a familiar complaint: “Tenants want it, but aren’t willing to pay
reinforce investor and lender confidence in an asset class gen-
more for it.” Retail development orients away from the suburbs to
erating attractive yields. For 2013, Emerging Trends respondents
densifying city center residential areas—particularly integrating
expect balance in debt availability—meaning debt will neither
supermarkets, other service retail space, and smaller versions of
big-box chain store space into apartment complexes or conve-
nient sites nearby. And every commercial developer wants to be
ExHIBIT 5-5
as close to transit corridors as possible; businesses place an
Emerging Trends Barometer 2013
increasing premium on proximity to rail and subway lines.
Essential Immigration Drivers. “The trend of ‘the west is

best’ will continue.” Eastern Canada gains from its “depth” of
population and diversity of businesses, including Toronto’s
good Hold
powerful financial industry, but western Canada benefits from
Buy
the “dynamics” of the jobs-generating industries of oil, gas,
and commodities. Flows of about 250,000 immigrants annually modestly good
from overseas—mostly from Asia and the Middle East—begin
to redirect to Edmonton, “the staging ground for oil sands” fair Sell
work. The federal government and provinces collaborate bet-
ter to identify hiring needs and bring people to satisfy them.
As the profile for nonimmigrant Canadians ages into graying
modestly poor
demographic cohorts, immigration will remain the lifeblood for
housing demand, commercial and multifamily development, poor
and retail sales, especially in expanding relatively high-growth 2008 2009 2010 2011 2012 2013
western cities. Traditional immigration magnets—Toronto and
Montreal—will continue to prosper from flows of newcom- Source: Emerging Trends in Real Estate 2013 survey.
ers along established international pathways. Newer areas of Note: Based on Canadian respondents only.

Prospects for Capitalization Rates Real Estate Capital Market Balance Forecast
+6+22+33+35+4
for 2013
Expected Expected
Cap. Rate cap. rate cap. rate Equity capital for investing
August 2012 December 2013 shift
Property type (percent) (percent) (basis points)
Regional malls 5.22 5.15 –7
Apartment residential (rental) 5.14 5.18 4 6.12% 22.45% 32.65% 34.69% 4.08%
Apartment: moderate income 5.38 5.36 –2 undersupplied undersupplied oversupplied oversupplied
+2+35+43+18+2
Central city office 5.48 5.43 –5
Warehouse industrial 6.07 6.00 –7
Debt capital for acquisitions
Power centers 6.13 6.21 8
Full-service hotels 6.25 6.25 0
R&D industrial 6.60 6.45 –15
Neighborhood/community 6.54 6.54 0
shopping centers 2.04% 34.69% 42.86% 18.37% 2.04%
Suburban office 6.55 6.62 7 Substantially Moderately In balance Moderately Substantially
+8+33+43+14+2
Limited-service hotels 8.00 8.00 0

Debt capital for refinancing
be over- or undersupplied, although high-credit borrowers will

have better access, especially for condo-related construc- 8.16% 32.65% 42.86% 14.29% 2.04%
tion loans where lenders will be more discriminating and reject Substantially Moderately In balance Moderately Substantially
less-experienced developers (exhibit 5-7). Already-rigorous
underwriting standards promise to turn stricter. “Adventurers and
amateurs will be eliminated” in the condo arena, and ten-year Note: Based on Canadian respondents only.
financing is tough to secure because life insurers want to avoid
getting caught with liability mismatches should interest rates rise
as expected over the medium to long term. in secondary markets and “the nontrophy asset tiers.” These
Ample cash positions search for yield but tend to find few vehicles could also get involved in development deals, financing
opportunities in private equity real estate: both pension funds borderline projects rejected by traditional lenders.
and “more aggressive” REITs “have capital to invest, but haven’t
been able to achieve their investment goals.” As a result, insti-
tutional investors will continue to look outside the country, and Markets to Watch
REITs may muscle into pension-fund turf, bidding on available “Canada’s real estate market has an appetite for transactions,
higher-profile trophies, as exemplified by the recent Scotia but it is difficult to find deals.” Even during a questionable global
Plaza transaction in Toronto. Foreigners wish to enter Canadian economy, the Canadian commercial real estate market con-
markets “looking for a safety net,” although the Canadian dollar tinues to grow and attract capital. “Real estate concerns are
offers no currency advantages. Foreign investors are confronted reducing, even with global economic uncertainty,” an investor
with various legal hurdles, which only make it more difficult to says. Even with that attitude, investors still have their eyes wide
compete with domestic players, who are naturally more adept open on the European debt crisis, China’s decline, Middle East
at maneuvering on their home turf. New sources of capital— conflicts, and the struggling U.S. economy. In 2013, Canada’s
private REITs, boutique real estate funds structured as trusts stable economy, job growth, and alluring assets will continue to
or limited partnerships, and various other money manager be an attraction to both domestic and foreign capital. Equity is
vehicles—sprout up to attract high-net-worth investor interest in abundance, and debt for acquisitions looks to be in balance.
in the asset class. Searching for product, and marketing five- to Investors need to allocate this capital, and “instead of keeping
seven-year holding periods similar to U.S. value-add or oppor- cash, they look for great assets—real estate.” Without a correc-
tunity funds, these nascent vehicles may keep returns lower tion in sight, there is anticipation in the industry that transactions

will continue to be based on sharper, more aggressive moves. Overall Results

It has turned into a “professional’s market,” in which those with Even with this product chase and a possible need to change
exceptional skills to complete deals will succeed. However, look- investment strategy, Emerging Trends in Real Estate survey
ing for and acquiring real estate might be slightly more difficult results for investment, development, and homebuilding pros-
next year as the hunt for quality assets continues. “Investors are pects managed to improve for most metro areas. Of the nine
more yield challenged, and searching for good assets is tough,” markets covered for commercial/multifamily investments, one
states a potential buyer. was ranked “good,” six were “modestly good,” and two were
The large institutional owners of high-quality assets in prime “fair.” This performance is far better than 2012, when markets
markets make the search difficult due to their long-term invest- were basically split between “modestly good” and “fair.” The
ment strategy. In addition, prices might seem high, but most average rating value for all markets improved as well, moving
interviewees think they will still rise a little more—if you can “get from a 5.85 to 5.95, with only three markets seeing declines. The
the deal done.” With those struggles, and still the appetite and top movers were Montreal and Winnipeg, a primary and a sec-
desire for real estate, investors have focused on strong tenant- ondary market. The larger markets such as Toronto, Montreal,
based properties in secondary markets, or “Class B space Vancouver, and Calgary prevailed with an average value of
in Class A markets.” Supporting this trend, interviewees are 6.21, but still showed a decline from last year. Smaller markets
quoted as saying, “there is a demand for quality property in all averaged a score of 5.73, a year-over-year increase in value of
markets,” “flight to quality for purchasers,” and “we’re moving 0.18 points. This is a modest indicator that investors are ready to
into secondary markets.” However, not all investors are ready to make some moves into secondary markets.
take on additional risk in secondary markets at this stage of the Development prospects were even more impressive,
game. Some interviewees state, “shy away from the secondary showing positive movement with a jump to 5.74 from 5.29, or to
markets,” and “we tend to stay away from secondary markets as “modestly good” from “fair.” The increase in the prospect value
liquidity is an issue.” was good for both primary and secondary markets. The primary
As investors look for quality, through investment or develop- market average was 5.99, compared with a score of 5.55 for
ment assets, other “older properties” continue to wait in limbo. secondary markets. Even so, similar to investment results, the
A quality-based division is forming as capital continues to shy secondary markets had a larger increase over last year, up
away from aged assets. Growing urbanization, transit chal- 0.54, compared with an increase of 0.35 for primary markets.
lenges, creative and efficient space design, and a growing Top gainers in development included Calgary, Edmonton, and
demand for green, energy-efficient buildings continue to shape Montreal. One interviewee agrees with survey results, adding,
the real estate landscape. Interviewees note, “sustainability “Development will continue to grow with ‘cross-pollination’—
and green: it’s here forever,” “tenants continue to become more office/retail/residential.”
space efficient,” and “LEED certification, more contemporary The biggest mover of the three Emerging Trends catego-
design; access to transit corridors is essential.” As these trends ries was the homebuilding arena, where average metro-area
grow, new and next-generation companies will continue to scores increased 0.65 points year-over-year to 6.20, an overall
use these features to attract and retain their best employees. rating of “modestly good.” “The Canadian homebuilding
Landlords looking to compete and grow should follow this direc- industry needs to be building on a continual basis, as capac-
tion to attract valuable tenants. ity is needed.” Results and sentiment like those are indications
that strong home construction activity will be here for a while.
+37+55+8 +49+45+6
Equity Underwriting Standards Forecast for Canada Debt Underwriting Standards Forecast for Canada
37.25% 54.90% 7.84% 49.02% 45.10% 5.88%

More rigorous Will remain the same Less rigorous More rigorous Will remain the same Less rigorous

explanation for the mixed outlook in the interviews is the fear of
Exhibit 5-10 a negative shift in the global economy. If this were to happen,
Markets to Watch: Overall Real Estate Prospects it would certainly hurt Canada’s economy and the commercial
real estate market. However, overall interviewee consensus
Investment Development Homebuilding indicates “slow and steady” growth for the economy and the real
estate market in Canada.
1 Calgary (1/1/2) 6.59 6.77 7.07
According to consensus forecasts, the housing market
2 Edmonton (2/2/1) 6.52 6.35 7.08
looks to maintain pace in the coming year. Forecasts from the
3 Toronto (3/3/4) 6.18 5.95 6.19 Conference Board of Canada for overall housing starts in 2012
4 Vancouver (4/5/6) 6.14 5.83 6.00 were 207,200, compared with 193,100 in 2013. Declines are
5 Ottawa (6/4/5) 5.88 5.92 6.15 usually considered a negative, but the 7 percent drop is viewed
6 Saskatoon (7/7/3) 5.70 5.37 6.47 as a positive sign because Canadian housing and condo mar-
7 Montreal (5/6/7) 5.93 5.41 5.77 kets continue to see price movements that have a few saying the
gloomy word “bubble.” One interviewee’s contrasting sentiment
8 Winnipeg (8/8/8) 5.41 5.05 5.67
is reflected by his comment that “the market has come off, and
9 Halifax (9/8/9) 5.16 5.05 5.44
the balance of sellers to buyers is healthy.” Projections show that
housing resales will increase less than 1 percent at prices 2.5
Note: Numbers in parentheses are rankings for, in order, investment, development, percent higher than 2012. Another interviewee’s call is similar,
and homebuilding. stating “With continued low interest rates, housing prices will
continue to rise.” The breakdown between eastern and western
provinces shows interesting projections for 2013, as housing
Markets to watch include Edmonton, Calgary, and Saskatoon. starts are projected to contract in the east and to expand in the
Primary markets beat the others again, scoring on average 6.26 west, excluding Saskatchewan. These forecasts are strongly
and 6.16, respectively, for homebuilding. However, secondary supported by job growth expectations, as western cities show
markets saw a larger increase in their ratings values, jumping average increases of 2.1 percent, compared with 1.4 percent in
0.92, compared with 0.30 for the primary markets. The trend of the east. “Employment equals housing.”
secondary markets scoring larger increases in rating values has Emerging Trends results support these statements. A
been consistent for all three categories. The focus on second- comparison of city investment rankings to jobs shows the top
ary markets will substantially increase this year as investors four investment markets with 2013 job growth of 2.5 percent,
continue to “chase yield” and find it more difficult to find product compared with 2.3 percent for the other five markets. A com-
in primary markets. parison of prospective development markets yields conflicting
results, with the top four markets projected to see 2.2 percent
Employment and Housing job growth, 40 basis points less than the five remaining markets.
Interviewees expressed mixed reactions regarding the future of Prospects for homebuilding are just as would be expected:
certain macroeconomic drivers, such as employment, hous- more jobs, more homes. The top four scoring markets show
ing, and income. Optimists stated, “employment is stable,” job increases of 3.0 percent, while the other five are anticipated
and employment will be “slow and steady.” Pessimists counter, to grow by 1.9 percent. Job growth and housing are two key
“unemployment is too high and will ultimately impact us,” and drivers of commercial real estate success, and for Canada, both
“higher unemployment is in the future.” The mix in responses is appear to be in balance, as stated by an investor: “We do not
interesting in view of Canada’s overall economic performance. have any U.S.-style dead zones.”
Since 2007, the nine Canadian markets covered will have added
720,000 jobs, in contrast with the United States, which will con- Immigration, Migration, and Population
tinue to show a net loss of 3 million jobs from pre-crisis levels.
The need and chase for employment has led to an upward trend
Next year’s job forecast for the same markets shows growth in
in immigration, a shift in migration between Canadian provinces
Canada exceeding 2.4 percent, while the United States is fore-
and cities, and an increase in general population. The trend of
cast to see only a 1.0 percent increase. Finally, unemployment
a migratory increase in population over natural growth has been
rates in Canada are below ten-year averages in five of the nine
consistent as the country’s birth rate declines. In 2013, net immi-
markets and the aggregate average is lower as well. The evi-
gration to Canada (the total number of immigrants minus the
dence indicates that unlike the United States, Canada has seen
annual number of emigrants) is expected to range from 209,600
stable and slow growth in most economic indicators. A possible
to 316,700, according to Statistics Canada. If one assumes the

higher estimate, Canada’s total population is estimated to grow Urbanization and Transportation
1.4 percent next year, and the nine markets covered in Emerging With immigration and migration flows, a continuing trend is
Trends will average growth of about 1.7 percent. As the European increasing “urbanization” of metropolitan areas, as Canada’s
recession lingers and U.S. economic growth remains slow, the workers prefer to live closer to where they work. “Major urban
flow of individuals remains a concern. “More immigration is going areas will see most of the investment capital as areas encour-
to Saskatchewan and Alberta, bringing in more skilled labor from age the intensification of an urban culture.” “New generations
Ireland and Europe.” At first, increases in population are a posi- want to walk to work” in major urban centers like Vancouver,
tive sign for real estate; however, without enough job support to Toronto, and Montreal. “The choice to live in cities is no longer
handle the increases, the economy could falter. economic, but has now become cultural.” Moving forward, each
Migration (the flow of permanent residents from one Canadian city will serve as the focus, creating and preserving an “identifi-
market to another) was often discussed in interviews. Calgary able” community. Commercial real estate will follow that trend,
looks to have the biggest jump in population, 2.3 percent, as and “small-box retailers will move to where the people live.” This
many move to take advantage of Calgary’s projected 2.8 per- tendency will not stop at major markets, though, as “urbanization
cent increase in jobs next year. This trend is consistent across will continue and will spread to smaller cities.” At least one inter-
the top four markets with the largest job growth in 2013, which viewee notes, “Urbanization, for two or three successive years,
together show population increases of 1.9 percent, above the is still continuing, and it’s everywhere, including midsized cities.”
national average of 1.4 percent. “There is a mismatch in location Urban growth is not necessarily stimulated by natural population
of jobs versus where people are. This will change migration increases, but driven by larger city benefits that draw invest-
patterns.” The west versus east matchup shows similar trends. ments and an educated workforce. Corporate real estate is all
Western markets’ population looks to increase 1.8 percent, and about strategic locations for success, and these urban attributes
eastern growth is 50 basis points behind at 1.3 percent. Finally, offer everything the workforce desires.
contrary to the investor demand shift toward secondary markets Even with capital flow to urbanized locations and an increase
for investment-grade commercial real estate, lifestyle prefer- in density, without proper infrastructure and transit, these loca-
ences will continue to drive population growth in the four primary tions will suffer. There are “inevitable requirements for improved
markets, which are expected to grow by 2.0 percent, compared infrastructure in all major cities.” Ridership on conventional transit
with an average of 1.4 percent growth in the five remaining services has continued to increase year-over-year, supporting
markets. Even with a flow west, “Toronto will always retain the the additional need for “more contemporary transit corridors.”
number-one position for immigration and migration.” As urban density pushes out to additional locations, the “need
Exhibit 5-11
2013 Net Migration Forecast
Intercity International Interprovincial
Toronto
Vancouver
Montreal
Calgary
Edmonton
Winnipeg
Saskatoon
Ottawa and Gatineau
Halifax
-40,000 -20,000 0 20,000 40,000 60,000 80,000 100,000
Source: Canadian Conference Board.

for good connectivity to downtown” is designation of the nine markets in the
going to intensify. Many interviewees survey. High-quality opportunities might 8 Investment Prospects
say they will follow: “We will be building be difficult to find in this area, but inves- 7
more residential rental buildings on high- tors will continue to hunt regardless of 6.59
public-transit locations,” and “[We will price. Calgary development had the larg- 6
see] continued urbanization and build- est gain in its rating value, up 1.1 points,
5
ing near existing transit lines and future moving into first as well. Demand will
transit lines.” Whatever way you look at it, remain high and development is needed: 4
“tenants want to walk or be near public total construction output will increase
3
transit.” Markets that offer both options only 3.0 percent this year and 4.7 percent
will succeed. next. Calgary could not get the trifecta 2
this year, though, as homebuilding in the Calgary
1
Metro Market Trends market placed second to its northern
neighbor, Edmonton. Housing starts 0
Calgary (1). Growth, growth, growth should crack 10,000 in 2013, registering 2008 2009 2010 2011 2012 2013
is in Calgary’s future, as evidenced by a marginal 4.4 percent increase year-
economic fundamentals, commercial over-year. of homeowners.” Retail properties chalk
real estate volume, and Emerging Trends The buy, hold, and sell strategies up a buy, too, as retail sales increased
survey results. An expanding economy show a majority of participants rec- close to 10 percent this year, and a 7.0
is requiring a larger and more highly ommending a buy in three of the five percent increase is expected next year.
skilled workforce, and numbers show property sectors. With over 56 percent of Results for office look great for owners, as
that this trend will continue. Employment respondents recommending purchasing, 45 percent of interviewees recommend a
forecasts indicate growth of 2.8 percent industrial leads the focus, a 12 percent- hold for now. The lack of space, climbing
next year and 2.9 percent in 2014. This age point increase in this market over last rents, and anticipated cap rate compres-
growth, driven mostly by the oil and year’s results. Apartments are a sector sion put landlords in control in Calgary’s
gas industry, has made it challenging to buy as well, according to 55 percent office environment.
to acquire high-quality real estate in this of survey participants. One interviewee
market. Absorption of prime properties disagrees, though, stating “Calgary: not Edmonton (2). Only about a three-
has reached record levels, and rents so good for residential sectors. It is a city and-a-half-hour drive from Calgary,
are continuing to be pushed due to Edmonton “is looking great” as well.
limited supply. “It’s harder to bid on local
Calgary-area ‘A’-quality assets.” In 2013,
this absorption and lack of space looks Exhibit 5-12
to continue, especially within office- Industrial/Distribution Buy/Hold/Sell Recommendations
type and industrial employment space
because job numbers in these areas are
Industrial/distribution Buy Hold Sell
expected to increase 3.6 percent and
2.6 percent, respectively. Construction
Calgary 56.25% 34.38% 9.38%
will increase in the housing and nonresi-
dential arenas, but will be nowhere near
pre-crisis levels. Vancouver 43.33% 40.00% 16.67%
Calgary has impressive results and
rankings in this year’s survey, register-
Toronto 37.84% 43.24% 18.92%
ing first in investment prospects, first in
development prospects, and second
in homebuilding prospects. This is not Montreal 18.52% 48.15% 33.33%
a surprise for many participants, who
maintain that “Calgary is heating up” and 0% 20% 40% 60% 80% 100%
“Calgary is the best.” The city’s invest-
ment prospect ranking moved from third
to first in 2013, receiving the only “good”

comes development, and Edmonton had Survey results show Toronto taking
8 Investment Prospects a 0.87 increase in its rating value, moving steps back in all three categories this
7 to second from fourth. Nonresidential year. Investment prospect values fell
6.52 construction dominated, as projects like 0.52 points to 6.18, and the city’s rank
6 expansion of the Edmonton International went from first to third among the nine
Airport and Commonwealth Stadium’s markets. Interestingly, the investment
5
recreation center were completed. prospect value for 2013 is exactly equal
4 Housing starts statistics and survey to the Emerging Trends historical aver-
results send mixed messages, as only a age for Toronto. Even though Emerging
3 Edmonton
1.1 percent increase in the number of new Trends values are survey driven, this
2 homes is forecast, but participants rank may be a sign that the Toronto market
Edmonton as the number-one homebuild- as a whole is in a state of equilibrium.
1 ing area. Homebuilding prospects in Development is the only category where
0 Edmonton jumped three positions, and Toronto improved its prospects, but not
2008 2009 2010 2011 2012 2013 the city had the highest change in rating enough to keep the second spot, and
value of all nine markets. Regardless of the city dropped to third. Still, many
Strong consumer spending pushes the homebuilding outcome, Edmonton is large projects are set for completion in
the city’s expected increase in 2012 a market on investors’ radar. “Edmonton 2012 and in the years to come. Building
gross domestic product slightly over will outperform the others.” makes sense because “it’s the Toronto
3.0 percent, increasing in 2013 to 4.0 international market; everything can be
Toronto (3). The number-one market
percent. Employment growth has been sold quickly.” Homebuilding continues to
to watch in the 2012 Emerging Trends
continuous, as around 100,000 jobs be a hot topic, but survey results forecast
report, Toronto delivered mixed results
have been created or filled since 2007. a slowing in 2013, landing the market
and responses for 2013. Overall, this
Unemployment forecasts predict a in fourth. Toronto’s rising home prices
international market is still a top-three
respectable 4.7 percent next year, but continue to be a concern, as expressed
city, and capital will continue to flow to
still 30 basis points below the ten-year by many interviewees. “The Toronto and
the area. “Toronto was my choice. People
average. With over 1.2 million residents, Vancouver housing markets, especially
are renting by choice, occupancy rate
Edmonton continues to see population condos, have come off a bit, but interest
is always good, employment is stable.”
growth as many see the city as “the place rates are low, and the Bank of Canada
Forecasts support this statement, as
to be.” As Edmonton’s energy-rich sector and the Canadian government have
job growth is expected to increase 3.0
thrives, manufacturing follows with future introduced some fear, but not panic.”
percent, gross domestic product should
expansion. Confidence in current and “Multifamily starts will slow, but vacancy
gain 3.5 percent, and the city’s educated
future oil prices provides a nice outlook rates will continue to decline, reaching 1.3
workforce is expected to see its personal
for this oil-rich area. Say investors, “the percent in 2013. Mixed use–style proper-
income grow another 3.6 percent. Lower
world believes that oil is up for good,” ties, combining residential, commercial,
interest rates and continued interest in
and “Edmonton is so small, and the oil and especially retail space, are a trend
high-quality assets drove residential and
industry finds it attractive.” to watch for as additional properties are
nonresidential construction higher over
Emerging Trends survey results and added to Toronto’s inventory.
the past two to three years. Construction
real estate investors predict a good 2013 The decline in apartment vacancy
output in those sectors looks to be slightly
for Edmonton investment prospects: its rates and need for additional units is seen
lower this year, but government infrastruc-
rating value added 0.28 points, mov- in the buy, hold, sell results. The only buy
ture support should continue to add value
ing this market up two spots to second. recommendation is found in the apart-
to the Toronto market. As is the case
Edmonton is an example that supports ment sector, where the largest share of
in other primary markets, high-quality
the trend to secondary markets in search interviewees—48 percent—will con-
assets are difficult to obtain, and prices
of high-quality real estate investments in tinue to look at multifamily investments.
still look likely to escalate. Foreign capital
strong economic locations. “As a result “Toronto equals ‘oversupplied’ in high-
will continue to focus on Toronto’s assets,
of hard-to-purchase, quality ‘A’ proper- rise development, but ‘undersupplied’ in
but, an interviewee predicts, “Sovereign
ties, we have more willingness to go low rise.” Hold suggestions dominate in
funds will come to Canada when Europe
to another market such as Edmonton, the remaining four property types. Even
gets worse. And when they do, they will
Saskatoon, and Regina.” With this growth though the largest share of participants
focus on Toronto.”

24 months,” suggest that the city still has
8 Investment Prospects strong positive investor sentiment. 8 Investment Prospects
7 Vancouver (4). Vancouver’s economy 7
6 6.18 has sharpened up and will look to continue 6 6.14

that trend into 2013. Gross domestic prod-
5 uct forecasts show growth of 2.5 percent 5
in 2012, followed by a spike of 3.7 percent
4 4
in 2013. The increase in production is
3 driven by an expected increase in employ- 3
ment of 2.3 percent, exceeding ten-year
2 2
average growth by 36 basis points. More
Toronto than 72,000 jobs have been added to this
Vancouver
1 1
market since the employment slowdown
0 0
2008 2009 2010 2011 2012 2013 in 2009. With a slightly lower cost of living 2008 2009 2010 2011 2012 2013
(with the exception of housing) than the
country, Vancouver has seen consumer
suggests hold, over 37 percent would spending be a key driver of the economy. prospect value for Vancouver declined
buy retail commercial real estate in This trend looks to continue, with retail 0.47 points, and the rank dropped from
Toronto. Say interviewees: “new retailers sales projected to increase another 4.8 second to fourth. An interviewee notes,
need extra development capacity, espe- percent in the coming year. These statis- “overbuilt Vancouver is flat. Lots of sup-
cially around the Toronto area,” and “retail tics are all great support for real estate, as ply.” Development prospects showed
underserviced by urban retail [i.e., malls] some interviewees believe, “Vancouver similar movement—down in value and
in Toronto; it is a closed market [i.e., a few is still positive and the place to be,” and rank, falling from first last year to fifth
developers controlling urban retail space] “Vancouver is attractive.” in 2013. Vancouver’s government red
so retailers are being pushed away.” Some interviewees still believe in tape continues to make it more dif-
Toronto may have taken a few steps back opportunities in Vancouver, but Emerging ficult to develop real estate every year.
in survey results, but comments such as Trends survey results show declines Homebuilding prospects also do not
“the city has strong fundamentals” and “it in all three categories. The investment look as strong year-over-year—down by
is a landlord’s market over the next 12 to a value of 0.50 points, from first to sixth.
Housing start forecasts look to be just
shy of 18,000 next year. “Less high-end
Exhibit 5-13
product is moving in Greater Vancouver.
Apartment Buy/Hold/Sell Recommendations Sellers are dropping prices. Lower-priced
product continues to move.”
Even with a decline in rating values,
Apartment Buy Hold Sell prospects still exist in Vancouver. Buy/
hold/sell recommendations suggest buy-
Calgary 55.16% 34.22% 10.63% ing office, apartment, and industrial, in
that order. Interviewees agree: “multiresi-
Toronto 48.00% 30.10% 21.90% dential is strong in Vancouver,” and “my
personal choice is to live in Vancouver.”
Office and apartment results are similar
Vancouver 47.36% 33.14% 19.49% to 2012, but industrial saw a 6.5 percent
spike in buy suggestions. The gradual
Montreal 32.08%
sign of manufacturing growth is a key
45.85% 22.06%
contributor to the increased interest in
0% 20% 40% 60% 80% 100% industrial space. The 2012 forecasts
for manufacturing suggest 2.5 percent
Source: Emerging Trends in Real Estate 2013 survey. growth, marking the third-straight posi-
tive year.

Ottawa (5). In 2013, the economic Saskatoon (6). A large amount of inter-
outlook for Ottawa looks weak. Population 8 Investment Prospects est is heard from interviewees and survey
will increase only 0.8 percent, 90 basis 7 participants regarding the smallest mar-
points less than the average of the market of the nine covered. With an estimated
kets included in this report. Employment 6 5.88 population possibly reaching 285,000,
change does not look strong either, as based on a 2.0 percent growth rate,
5
projections show only a 1.0 percent Saskatoon is continuing to attract interest
increase, 35 basis points below the city’s 4 from commercial real estate investors
ten-year average. One buyer recom- Ottawa and developers. Investment prospects
3
mends, “stay out of Ottawa.” The future for the city increased to “modestly good,”
of Ottawa’s large number of government 2 from “fair,” but its rank dropped one spot
employees is questionable as federal to seventh. Employment statistics show
1
cuts to balance the budget are underway. continued growth driven by strong mining
Employment in the public administration 0 and housing construction sectors, as well
sector will decline 2.4 percent this year 2008 2009 2010 2011 2012 2013 as an improving manufacturing sector.
and an additional 1.5 percent next year. This expansion is attracting capital, as
Economic slowdowns will affect residen- ing starts expected to last until 2015, “many are starting to participate in invest-
tial and nonresidential construction, as homebuilding remained stable in fifth ments in the Saskatoon area.”
declines in both areas are expected. With position, with a slight increase in rating Still, as the market strengthens, the
this decline in development, an investor value. Investment prospects for Ottawa future of further development remains
says the “Ottawa market is very tight and declined, dropping one position to sixth. questionable. Development prospects
will be difficult to enter.” Responses covering various sectors declined, but remain “fair.” The city
Yet despite the challenging economic seemed uninviting: “vacancies have been dropped from fifth to seventh rank on this
times, survey participants still believe high due to impact of technology sector’s measure, according to 2013 results. One
in some opportunities in this market. poor performance,” “Ottawa: seeing interviewee disagrees, though, and plans
Development prospects were rated some consolidation of office space,” and on “land banking throughout Saskatoon
“modestly good,” up from “fair” last year, “the industrial market is expected to be for future development.” Housing starts
and moved from sixth to fourth overall. fair at best.” are forecast to slow in 2013 and beyond.
Even with a continuing slide in hous- However, homebuilding survey results
differ, as Saskatoon jumps from sixth to
third, receiving a “modestly good” rat-
ing. “Small growth in these areas is big
Exhibit 5-14 growth.”
Office Buy/Hold/Sell Recommendations
Montreal (7). “Montreal’s outlook
is good, but maybe not very good.”
Office Buy Hold Sell Emerging Trends survey results recom-
mend a hold strategy in all five property
Vancouver 48.57% 40.00% 11.43%
sectors. Apartment and hotel were the
only two sectors where some participants
Calgary 40.00% 45.71% 14.29% are looking to buy, as both cracked 30
percent, but the majority of respondents
still suggest investors sit on what they
Toronto 35.00% 55.00% 10.00% have. Sell signals are fairly strong in the
industrial sector, as one-third say it might
Montreal 22.58% 61.29% 16.13%
be time to exit this area.
In 2013, economic development is
0% 20% 40% 60% 80% 100% moderate as gross domestic product
forecasts display only 2.2 percent growth.
Source: Emerging Trends in Real Estate 2013 survey. Employment gains this year were zero,
but some expansion—around 2.0 per-

Development prospect results were filled over those five years. However, pop-
8 Investment Prospects similar, shifting from eighth to sixth this ulation growth is minimal, only increasing
7 year. A developer notes, “We are involved 1.3 percent, 40 basis points below the
in a large number of prestigious Montreal average of the other markets. “We think
6 5.93 development projects.” Homebuilding the market is good, but it really depends
prospects improved, but settled into the on price,” states an investor.
5
seventh spot for the second year in a Winnipeg’s favorite number must
4 row. “Montreal benefits from a diversi- be eight, as it managed to secure that
fied economy [e.g., sectors health care, position in all three categories. With
3
universities, life sciences/pharmaceuti- manufacturing and job-growth drivers
2 cal, video, professional firms, aerospace, increasing, investment prospects for
etc.], and outlook is optimistic over the the market increased as well. Winnipeg
1 Montreal long term.” received the eighth position in invest-
0 ment prospect rank, moving up 0.41
2008 2009 2010 2011 2012 2013 Winnipeg (8). In 2013, Winnipeg’s
points in value. Development showed
manufacturing sector looks to grow after
the same movement, up one spot to
having two years of severe declines.
cent—is projected for next year. “Major eighth. Homebuilding, which was eighth
The economy has produced a steady
projects in infrastructure will continue and in 2012, stayed in that position in 2013.
recovery since contraction in 2009, as
have an impact on availability of skilled Housing starts have displayed continuous
gross domestic product should increase
workers.” Population in the market looks increases, and that trend will continue,
2.6 percent next year. With an increase
to remain consistent, increasing around with a jump of 6.7 percent expected.
in manufacturing and production comes
1.3 percent. However, interviewees say, Construction output has strengthened,
an increase in employment, which is
“Montreal’s immigrants are not as wealthy both in residential and nonresidential,
expected to gain 2.0 percent, exceeding
as they may be in other Canadian cities,” as absorption and inventories remain
its ten-year average by 80 basis points.
and “Montreal does not benefit as much in check. Says one investor, “Winnipeg
With these components in place, “to us
as it could from this influx of population.” will outperform in the retail sector,” but
Winnipeg seems like a steady market of
In spite of moderate economic driv- another claims, “the city will underper-
opportunities.” The city has outperformed
ers, the city’s investment prospects rank form in the industrial sector.”
the other covered markets in job change
moved two spots higher to fifth overall. since 2007, as 229,000 positions were Halifax (9). “[For] commercial real estate
in Halifax, lease rates continue to be
depressed.” Economic drivers are posi-
Exhibit 5-15
tive, but slower than many of the other
Hotel Buy/Hold/Sell Recommendations Canadian markets. Gross domestic prod-
uct and employment projections show 2.2
Hotel Buy Hold Sell

8 Investment Prospects
Calgary 42.90% 45.02% 12.08%
7
6
Montreal 30.27% 48.90% 20.83%
5 5.16
Toronto 18.16% 54.96% 26.88% 4
3
Vancouver 14.82% 59.67% 25.52%
Halifax
2
0% 20% 40% 60% 80% 100% 1
Source: Emerging Trends in Real Estate 2013 survey. 0
Note: Based on Canadian respondents only. 2008 2009 2010 2011 2012 2013

percent and 2.1 percent growth, respec-

tively. Population is just over 400,000 Exhibit 5-16
and growth is only 1.1 percent, 60 basis Retail Buy/Hold/Sell Recommendations

points lower than the nine-market aver-
age. Manufacturing growth should pick Retail Buy Hold Sell
up next year, as a $25 billion contract
for supplying combat ships is underway. Calgary 53.13% 43.75% 3.13%
Says an interviewee, “Halifax will be a
very strong location for investment for the
Vancouver 40.63% 50.00% 9.38%
next five years due to the shipbuilding
contract.” Still, it is difficult to buy assets
in this market due to its small size. Toronto 37.84% 54.05% 8.11%
Investment, development, and home-
building prospect values all increased in
year-over-year comparisons. However, Montreal 21.43% 60.71% 17.86%
the gain in investment prospects was not
0% 20% 40% 60% 80% 100%
enough to get Halifax out of ninth place.
Development fared a little better, moving Source: Emerging Trends in Real Estate 2013 survey.
to eighth in a tie with Winnipeg, up from Note: Based on Canadian respondents only.
ninth in 2012. A decline in housing starts
looks likely to continue in 2013, as only
2,235 are projected. Emerging Trends
survey results agree, as Halifax stays in
last position for homebuilding. Halifax
is an attractive market, due to cost.
However, one interviewee believes “the
layers of bureaucracy and time needed
to get buildings constructed and occu-
pied make it a very difficult location to do
business.”

Property Types in Perspective Exhibit 5-18
Emerging Trends surveys highlight “modestly good” investment Prospects for Commercial Subsectors in 2013
and development prospects across most property sectors for
2013 (exhibit 5-17), reflective of expected solid supply demand
Investment Prospects
fundamentals in commercial categories. Housing sectors also
score favorable marks, except for second and leisure homes. Central city office 6.34
Apartments. The recent condo buildup has not softened Warehouse industrial 6.13
multiresidential markets; “they’re stronger than ever.” Like “bond
Apartment: 6.10
investments,” landlords reliably can increase rents, supported moderate income
by high occupancies and steady appreciation. Confident lend- Neighborhood/community 6.00
ers extend financing “for next to nothing,” and cap rates reach shopping centers
“shockingly low levels” in some markets. With development con- Apartment: high income 5.90
centrated on units in higher-end-market condo towers (which
Regional malls 5.85
many buyers rent out), existing apartment stock in middle-
market urban neighborhoods meets ample leasing demand for Full-service hotels 5.67
Limited-service hotels 5.67

Exhibit 5-17
Prospects for Major Commercial Property Types Suburban office 5.48
in 2013
Power centers 5.47
Investment Prospects R&D industrial 5.13
Apartment 6.18
Retail 6.11
Central city office 6.22
Office 5.87 Warehouse industrial 5.67
Apartment: 5.00
Industrial/Distribution 5.82 moderate income
Neighborhood/community 5.95
Hotels 5.50 shopping centers
Apartment: high income 5.00
Development Prospects Regional malls 5.00
Apartment 5.18 Full-service hotels 3.67
Retail 6.17 Limited-service hotels 3.33
Suburban office 5.03

Office 5.77
Power centers 5.21
Industrial/Distribution 5.47
R&D industrial 4.80
Hotels 4.00
1 5 9
abysmal fair excellent
1 5 9


Prospects for Niche and Multiuse Property Types Apartments—Moderate Income
in 2013
Investment Prospects Investment prospects 6.10 Modestly good 3rd

Mixed-use town centers 8.00
Buy Hold Sell
33.3% 33.3% 33.3%
Urban mixed-use properties 7.50
Infrastructure 7.50
Master-planned communities 7.00
Medical office 6.25
Self-storage facilities 6.25 Exhibit 5-21

Apartments—High Income
Lifestyle/entertainment retail 6.00
Data centers 5.25
Resort hotels 4.75 Development prospects 5.00 Fair 6th
Buy Hold Sell
Master-planned resorts 4.75 33.3% 41.7% 25.0%
Mixed-use town centers 6.00
Urban mixed-use properties 5.75

lower-cost options, especially from career starters and newly
Infrastructure 5.00 arrived immigrants. In older districts, many buildings require
overhauls or replacement. Investors looking for value-add
Master-planned communities 5.00 opportunities can upgrade units. “It’s a broken record: multires
is always a good bet.”
Medical office 4.50
Office. Rents and values “keep going up,” reaching replace-
Self-storage facilities 4.50 ment-cost levels as a handful of new towers readily lease up in
major markets, paving the way for additional new construction.
Lifestyle/entertainment retail 4.67 Developers will look to take advantage of strong tenant appetite
for efficient layouts in sought-after green projects, which house
Data centers 3.75
more workers in less space and can reduce operating costs.
Resort hotels 2.75 “They are head and shoulders above older buildings.” Brokers
are starting to make headway on sales pitches for higher rents
Master-planned resorts 3.00 in these new-generation towers, highlighting offsets from lower
expenses. “Everybody wants to maximize everything. They like
1 5 9 more output for less space.” This “inexorable” march toward
abysmal fair excellent efficiency is “a normal course of business”; it is as important
to office markets as urbanization trends, and more owners of
Source: Emerging Trends in Real Estate 2013 survey. existing skyscrapers must undertake “surprisingly” expensive
Note: Based on Canadian respondents only. retrofits to stay competitive or risk dropping to B-quality sta-
tus. In the unlikely event overbuilding occurs, “it will be at the

Central City Office Neighborhood/Community Centers
2013 Prospects Rating Ranking 2013 Prospects Rating Ranking

Investment prospects 6.34 Modestly good 1st Investment prospects 6.00 Modestly good 4th
Development prospects 6.22 Modestly good 1st Development prospects 5.95 Modestly good 2nd
Buy Hold Sell Buy Hold Sell
43.3% 33.3% 23.3% 55.0% 30.0% 15.0%
Expected capitalization rate, December 2013 5.4% Expected capitalization rate, December 2013 6.5%

Suburban Office Power Centers

Investment prospects 5.48 Fair 9th Investment prospects 5.47 Fair 10th
Development prospects 5.03 Fair 5th Development prospects 5.21 Fair 4th
Buy Hold Sell Buy Hold Sell
16.1% 54.8% 29.0% 20.0% 75.0% 5.0%
expense of older buildings with obsolete space.” A transforma-

tion in medical practice and an aging population in need of Exhibit 5-26
increased health care services lift prospects for medical office Regional Malls
space. Hospitals “decant nonessential services,” and more doc-
tors are forming multiple-practitioner clinics. Space near hospital 2013 Prospects Rating Ranking
centers commands a premium; cap rates in some markets
decline to 6 percent. Doctors and lab operations seek “large
floor plates” and “flatter buildings” that provide patients with
Buy Hold Sell
dedicated medical environments. 30.0% 60.0% 10.0%
Retail. Already-tight markets will tighten further as U.S. retail- Expected capitalization rate, December 2013 5.2%
ers expand into Canada, led by Target, Nordstrom, and Lowe’s.
The entry of new chains precipitates “a dynamic moving around
of tenants” and “sounds the death knell” for some weaker
domestic brands in “the most Darwinian of property sectors.”
keep a check on new development. But owners must begin to
Owners revel in the activity as the U.S. interlopers find difficulty
contend with integrating e-commerce platforms and dealing
securing sites and force out struggling competition by taking
with retailers’ locational strategies. Given high occupancies and
their space, often at higher rates. The sector’s small club of
strong demand, the expected preference of tenants for smaller
developers, meanwhile, continues to work “hand in glove” with
store layouts should not undermine property revenue streams or
retailers to meet their needs and “keep supply from getting out
values. All the chains fight for good sites in undersupplied urban
of whack.” Zoning restrictions and ever-vigilant lenders also
centers. The wave of new condo residents demands convenient

shopping at familiar brand-name stores, and developers look to ceilinged distribution space—where tenants tend to concentrate
accommodate: they pay up for land, but can charge premium leasing activity—and increasingly obsolete older warehouses,
rents. Older suburban centers make prime candidates for rede- which suffer noticeably higher vacancies.
velopment into new shopping formats. Unlike the United States,
Hotels. Prospects for hotels should continue to improve.
Canada is not oversupplied with retail space. Interviewees reg-
Occupancies and room rates crawl back to 2007 peaks in the
ister only minor concern about whether more subdued housing
big cities, and RevPAR is not far behind. Outside of Calgary,
markets and high household debt could affect store sales.
interviewees see little room for much new development, with the
Industrial. Warehouse vacancies have declined and investors exception of adding popular all-suite limited-service brands,
like the steady cash flows, but the sector seems mired in com- catering to business travelers, in certain downtown markets.
paratively “slow growth,” hampered by the strong currency and
Housing. Housing markets appear primed to hold relative val-
related exchange-rate issues, especially around Toronto and
ues, and population inflows from overseas almost guarantee
Montreal. Import/export flows remain somewhat compromised
steady future demand for new homes. Respondents appear
by south-of-the-border turbulence. “It’s difficult to find pockets
modestly bullish about prospects for condo (high rise and mid
of real growth with auto and aerospace industries still off.” At
rise) and home construction, especially in urban and infill
least supply is not an issue because developers have backed
areas, as well as town centers. Increasingly steep prices for
away in the face of generally “weak leasing markets,” with rents
housing closer to urban cores should create greater demand
below replacement cost, but “creeping up.” Not surprisingly,
for more affordable single-family homes in outer suburbs.
smaller western distribution markets perform considerably bet-
Expensive high-end condo units lose some luster as demand
ter, boosted by commodities activity; owners can register rent
tails off; affluent offshore buyers become less active.
“leaps” on new leases. Generally, a widening gap in the level of
investor demand develops between more favored new, high-

Warehouse Industrial Hotels—Limited Service

Investment prospects 6.13 Modestly good 2nd Investment prospects 5.67 Modestly good 7th
Development prospects 5.67 Modestly good 3rd Development prospects 3.33 Poor 11th
Buy Hold Sell Buy Hold
37.5% 56.3% 6.3% 33.3% 66.7%

R&D Industrial Hotels—Full Service

Investment prospects 5.13 Fair 11th Investment prospects 5.67 Modestly good 7th
Development prospects 4.80 Fair 9th Development prospects 3.67 Modestly poor 10th
Buy Hold Sell Hold Sell
12.5% 62.5% 25.0% 66.7% 33.3%

Exhibit 5-31 Best Bets
Prospects for Residential Property Types in 2013
Hold Core Real Estate in Major Markets. For institutions,
only five or six cities—“the traditional suspects”—offer opportu-
Investment Prospects nities to place money, and they happily dominate these markets,
enjoying consistent payoffs from solid income-producing trophy
Infill and intown housing 6.11 properties across all property categories.
Seniors’/elderly housing 6.00 Develop Green Office in Downtowns. Major tenants want
this more efficient space and will move from older buildings into
Single-family: 5.79
moderate income layouts with operating-system advantages.
Multifamily condominiums 5.65 Land Bank in Western Markets. In Canada, the beckoning
of “go west, young man” (and women, too) still applies, and
Affordable housing 5.58 opportunities for real estate investors and developers to take
advantage of escalating inflows of workers for available jobs
Single-family: 5.33
high income will continue, with an obvious caveat to unexpected reversals
in energy and commodity markets. Buy and hold sites in and
around the larger cities should see values escalate nicely, and
Manufactured 4.82 infill sites will score development projects more quickly.
home communities
Secure Infill Sites. Any low-rise inner-city real estate “has
Second and leisure homes 3.53
got intensification written all over it,” especially if located any-
Golf course communities 3.17 where near mass transit. “Go for the sure-shot redevelopment
capital play.”
Develop Housing Away from Urban Cores. Soaring

condo pricing and family-unfriendly units create an opening for
Infill and intown housing 6.30 homebuilders to meet the underserved market for larger layouts,
which can better accommodate children.
Seniors’/elderly housing 5.47
Buy Luxury Condos in the Dip. With urbanization baked into
Single-family: 5.90 future demand, upscale space in the best downtown locations
moderate income
will reclaim any lost value quickly.
Multifamily condominiums 5.61
Affordable housing 5.37
Single-family: 5.10
high income
Manufactured 4.59
home communities
Second and leisure homes 3.60
Golf course communities 2.95
1 5 9


c h a p t e r 6
Emerging Trends in
Latin America
These countries “cannot decouple”
from the rest of the world.
L
atin American countries—led by Brazil, as well as investors. Builders have no trouble finding buyers for apartments
Mexico, Colombia, Peru, and Chile—provide continuing as an “exploding middle class” absorbs units. In turn, residents
opportunities for real estate developers and investors if hunger to furnish homes and head to stores. The international
they can manage to master local markets and find suitable local shopping center industry “wakes up to the potential” and
partners. Three key trends drive growth: launches major retail development projects. Leading U.S. mall
■■ Favorable demographics. Young populations should propel companies shut out of activity back home compete against
markets for the foreseeable future. “All these 20- to 30-year-olds or join forces with Brazilian and Chilean companies, who also
entering the workforce are reminiscent of the leading edge of export their project skills into neighboring nations. “Regional
baby boomers in the U.S. after World War II,” and fuel a prodi- malls attract a lot of capital,” including from U.S. and Canadian
gious housing boom. pension funds that see they can capture “a low-volatility pre-
■■ Diversifying economics. Expanding middle-class populations mium and outsized returns” on long-term holds, especially for
also help broaden business activity beyond exports into service- well-located centers in Brazil and Mexico.
based industries, which focus on domestic consumption. Lack of transparency, frustrating government “idiosyncra-
■■ Increasing access to capital. Strengthened economic foot- sies,” and a dose of underlying corruption can pose ongoing
ings, firmer government credit ratings, and augmented foreign
investments lead to development of more sophisticated financial
Exhibit 6-1
systems and greater availability of mortgage capital, which 2013 Latin America General Indicators
foster increasing real estate investment.
But in 2013, enduring global recessionary impacts will con-
tinue to dampen previously outsized growth, lowering regional Unemployment (%) Inflation (%)
economic expansion from the mid- to high single digits to the Argentina 10.3 6.3
mid- to low-single-digit range. These countries “cannot decou- Brazil 5.0 6.5
ple” from the rest of the world “and they will not do as well.” Chile 3.0 6.9
Lagging transportation infrastructure also hampers develop- Colombia 3.1 10.5
ment activity outside of major cities. “Roads are bad,” intercity Ecuador 4.5 6.2
rail is limited, and secondary airports are sketchy. “It’s hard to Mexico 3.1 4.6
get from point A to point B, and that gums up the works.” As a Peru 2.3 7.5
result, capital tends to steer clear of “underserved” smaller mar- Uruguay 6.0 6.0
kets, where pent-up demand and “micro-opportunities” exist. Venezuela 28.7 8.1
In the near term, unmet housing demand and retail expan-
Sources: International Monetary Fund, World Economic Outlook database, April 2012;
sion will dominate the attention of real estate developers and Moody’s Economy.com.

challenges in some jurisdictions; that is why partnering with “It won’t be perfect; a lot rides on getting it done.” New related
“reliable,” “well-connected” locals remains “essential” for for- infrastructure—roads, high-speed rail, and airports—should
eign investors. But relative to bedraggled Western economies help support future economic growth.
and other volatile emerging markets, many Latin American
countries look downright dynamic. Some—Brazil in particular—
hold potential for world leadership as the 21st century continues Mexico
to unfold and they energetically leave third world vestiges Drug-violence headlines “scare” away foreign capital.
behind them. “Institutional investors won’t take a hard look at Mexico.” But
fundamentals should continue to improve as long as the U.S.
Brazil economy does not move sideways. Manufacturing led by the

auto industry “makes a comeback,” boosting prospects for
South America’s powerhouse hits the brakes after a heady run. border cities especially. Internal capital from pension fund
Commodity and natural resource exports to Europe and Asia allocations helps pick up some of the financing slack, stabiliz-
slow, and the country settles into a more tepid growth mode, ing property markets in the absence of outside investments.
helped along by expanding domestic consumer spending and Because competitors have pulled out, remaining players can
a relatively modest government debt load. Compared with many benefit from a “more open playing field.” The market is “not
global alternatives, Brazil looks like “a safe haven,” and the booming, but you can selectively find good projects.”
country seems “easier to invest in than either India or China.” Mexico City, the country’s mainstay citadel, and other
The few institutional-grade office and residential properties large cities appear “more insulated” from the gangster-related
in site-constrained São Paulo and Rio de Janeiro have been warfare. Developers move to fill a housing deficit—trying to
“priced to perfection,” while all asset categories remain under- meet the expanding middle-class demand for units with modern
supplied across the country. “The consensus is 15 to 20 years amenities, particularly security. “People move back from the
of growth lie ahead.” suburbs into mid- and high-rise apartments that can provide a
Offshore investors will continue to want exposure to this greater sense of safety.” Resort areas suffer “significant distress”
emerging market that may have already arrived. But to realize from a glut of second homes. The one-two punch of tapped-out
the pop of an emerging-market return, they will probably need U.S. buyers and constant news of drug-cartel mayhem turns off
to “move beyond Rio and São Paulo to 20 other cities with 1 demand despite low prices for choice locations. “Every master-
million or more in population”; these places need everything planned resort on the Mexican coast still has hair on it, and it
from apartment buildings and tract housing to shopping centers may take a long time to turn around.”
and offices. “They can provide decent risk-adjusted returns,” Institutional-quality office space remains in short supply,
if investors can get comfortable outside the familiar places. whereas industrial space is overbuilt in many areas. Retail
On the housing front, where a huge supply deficit exists at the property presents considerable opportunity: many markets lack
middle- and lower-income levels, the government works with small to medium-sized shopping centers.
banks to encourage the availability of 30-year mortgage capital
for buyers and provide development incentives. But commercial
projects require “substantial equity”: capital markets have not Other Countries
evolved to provide much financing. That is where major inter- Colombia is a “coming attraction” and positions itself as the
national mall companies and offshore institutional capital can next Brazil with a boost from a new U.S. trade agreement. The
make inroads with Brazilian mall operators looking for funding. country has “come a long way” since its drug-war days. More
They can join forces to “go after the expanding consumer base institutional investors make trips to Bogotá to check out the
as disposable incomes rise.” Logistics properties to support landscape, discovering a severe housing and office shortage,
retail expansion “lease up immediately.” Virtually no Class A which hearkens back to Brazil a decade ago, with many of the
industrial space is available. “You build even in a halfway-decent same compelling demographic drivers in place. Although some
location and they [tenants] will come.” Cap rates for office interviewees point to “a better business climate than Brazil”—
space in the top markets “can’t compress further,” and rents hit the government is less bureaucratic and labor laws are less
the stratosphere. “Tenants may start to push back” and seek demanding—others say “it’s hard to break in,” and there are still
alternative options in secondary locations where developers can relatively few opportunities and “not as many available partners.”
find sites. Peru looks like another “up-and-comer,” with recent eco-
Meanwhile, the country focuses on completing construction nomic growth topping 6 percent. “The middle class increases
for the World Cup in 2014 and the Summer Olympics in 2016. [in size], and that fuels real estate opportunities.” An undercur-

Chapter 6: Latin America
Exhibit 6-2
Latin America Economic Growth
Percentage real GDP growth
2007 2008 2009 2010 2011* 2012* 2013* 2014* 2015*

Argentina 8.7 6.8 0.8 9.2 8.9 4.2 4.0 4.2 4.3
Brazil 5.7 5.1 -0.6 7.5 2.7 3.0 4.2 4.0 4.1
Chile 4.7 3.7 -1.7 6.1 5.9 4.3 4.5 4.5 4.5
Colombia 7.5 2.4 1.5 4.0 5.9 4.7 4.4 4.5 4.5
Ecuador 2.5 7.2 0.4 3.6 7.8 4.5 3.9 3.7 3.5
Mexico 3.3 1.5 -6.1 5.5 4.0 3.6 3.7 3.8 3.3
Peru 8.9 9.8 0.9 8.8 6.9 5.5 6.0 6.0 6.0
Uruguay 7.6 8.5 2.6 8.9 5.7 3.5 4.0 4.0 4.0
Venezuela 8.4 4.8 -3.3 -1.5 4.2 4.7 3.2 3.1 3.2
Sources: International Monetary Fund, World Economic Outlook database, April 2011.
* Projections.
rent of “political uncertainty” and lingering “banana republic

feel” deter many investors for now. They take the safer route to
Rio or São Paulo, not Lima.
Argentina struggles to attract interest, caught in Brazil’s
shadow. Investors fret about a lack of political and monetary
stability. Institutional investors generally steer clear: the country
registers a bad rap for inflation, hostility to business, currency
controls, and difficulty in taking money out. “Buenos Aires
needs everything new. They have trouble maintaining old build-
ings,” but financing any deal proves difficult.
Foreign investors find Chile difficult to penetrate and “not
worth the effort.” It’s a relatively small market with most real
estate held by locals—long-term owners interested in capturing
traditional income-oriented core returns. Offshore players seek-
ing emerging market–style payoffs must look elsewhere.

Appendix A: Economy
2013 Echo Boomers 2013 GMP per Job Types Changes Peak
2013 MSA Population (25-34) Capita 2013 Jobs Unemployment % Employment – Key Industries to 2013
10-year Bus.
Total % of Total 10-yr 2013 GMP Avg Industrial 2013 10-year Chg Since 10-Year & Pro. Educ. & Goods Service
Rank (Million) Change Population Growth per Capita Change Diversity Change Avg Chg 2007 2013 Avg Srvcs. Health Energy Const. Prod. Jobs Gov't
U.S. 314.2 1.0% 13.6% 9.7% 1.00 1.1% 0.2% (2,998,495) 8.4% 6.5% 13.6% 15.5% 0.6% 4.1% -18.7% 1.7% -2.6%
16 Los Angeles, CA* 13.2 1.0% 15.2% 1.5% 1.2% 1.6% 0.55 0.3% -0.4% (141,144) 9.7% 7.2% 15.4% 13.6% 0.1% 3.1% -31.0% -2.0% -9.2%
2 New York, NY 11.8 0.6% 16.5% 8.1% 1.1% 1.9% 0.62 1.2% 0.5% 13,432 8.5% 6.7% 16.0% 19.8% 0.0% 3.0% -32.1% 2.0% -5.8%
24 Chicago, IL 9.6 0.6% 14.5% 2.9% -0.3% 0.9% 0.81 -0.4% -0.3% (195,405) 9.7% 7.0% 16.8% 15.6% 0.0% 2.7% -31.8% -1.1% -3.7%
9 Dallas/Fort Worth, TX 6.8 2.1% 14.9% 13.6% 3.0% 3.1% 0.81 2.3% 1.0% 235,934 7.2% 6.1% 15.4% 12.6% 0.4% 4.9% -15.1% 2.3% 2.1%
5 Houston, TX 6.3 2.0% 15.2% 21.3% 2.2% 3.1% 0.61 2.3% 1.6% 309,508 7.5% 6.1% 14.3% 12.8% 3.6% 6.4% -1.7% 2.3% 0.6%
27 Philadelphia, PA 6.0 0.4% 13.4% 8.0% 0.2% 1.2% 0.75 0.6% -0.1% (62,195) 8.4% 5.9% 15.7% 21.5% 0.2% 3.3% -30.1% 1.3% -5.2%
8 Washington, DC 5.9 1.2% 15.9% 19.2% 1.0% 2.9% 0.45 0.5% 1.1% 190,939 5.7% 4.2% 22.8% 12.8% 0.1% 4.7% -21.8% 0.7% 0.4%
12 Miami, FL 5.8 1.3% 13.1% 9.1% 1.1% 1.3% 0.63 0.2% 0.2% (62,781) 9.3% 6.5% 15.4% 16.1% 0.0% 3.3% -42.6% -1.9% -5.7%
35 Atlanta, GA 5.5 1.4% 14.3% 5.7% 2.9% 1.6% 0.81 2.1% 0.4% (66,282) 9.2% 6.2% 18.0% 12.7% 0.1% 3.7% -26.6% 1.7% -5.4%
6 Boston, MA 4.6 0.6% 14.2% 7.2% 1.7% 2.0% 0.65 1.0% 0.1% (1,101) 7.0% 5.4% 17.6% 20.2% 0.1% 3.1% -31.1% 1.6% -2.3%
1 San Francisco, CA 4.5 0.9% 15.5% 7.6% 1.7% 1.3% 0.60 0.4% -0.5% 48,248 8.4% 6.4% 19.3% 13.4% 0.1% 4.0% -30.5% -2.4% -8.9%
33 Phoenix, AZ 4.4 2.7% 14.2% 13.7% 2.7% 2.5% 0.79 1.6% 1.0% (47,825) 8.0% 5.8% 16.4% 15.0% 0.2% 4.9% -33.8% -0.5% -8.2%
36 Inland Empire, CA 4.4 1.2% 14.2% 9.4% 1.7% 2.2% 0.80 1.0% 0.8% (41,239) 12.7% 8.1% 12.0% 12.6% 0.1% 4.7% -41.1% -2.6% -6.3%
51 Detroit, MI 4.3 0.0% 12.0% -12.6% 0.4% -1.1% 0.55 0.4% -1.4% (182,707) 11.2% 8.8% 18.7% 16.4% 0.1% 3.1% -40.7% -5.2% -21.1%
Quartile 1 & 2 Avgs 6.7 1.1% 14.5% 8.2% 1.5% 1.7% 0.67 1.0% 0.3% (187) 8.8% 6.5% 16.7% 15.4% 0.4% 3.9% -29.3% -0.3% -5.6%
7 Seattle, WA 3.6 1.2% 15.9% 20.2% 2.7% 2.6% 0.39 1.2% 0.7% 31,917 8.3% 6.4% 14.1% 13.1% 0.0% 4.7% -11.7% 1.0% -0.4%
23 Minneapolis, MN 3.4 1.1% 15.0% 13.5% 0.8% 1.4% 0.78 1.6% 0.1% 53,301 5.5% 5.1% 15.4% 16.9% 0.1% 2.8% -23.9% 2.5% -3.8%
15 San Diego, CA 3.2 1.4% 15.8% 14.1% 1.3% 2.1% 0.64 0.9% 0.1% 40,863 9.0% 6.2% 17.5% 12.6% 0.0% 4.3% -23.9% -0.1% -2.1%
10 Orange County, CA 3.1 1.1% 14.7% 20.1% 1.0% 2.1% 0.67 0.8% -0.1% (19,470) 7.6% 5.6% 18.4% 11.7% 0.0% 4.5% -23.2% -2.6% -9.7%
29 Tampa, FL 2.9 1.3% 12.5% 13.3% 1.3% 1.2% 0.86 0.4% 0.2% (52,431) 10.1% 6.5% 17.1% 16.7% 0.0% 4.0% -38.5% -2.6% 0.7%
43 St. Louis, MO 2.9 0.4% 13.4% 8.7% 0.1% 0.6% 0.86 0.0% -0.3% (29,413) 8.6% 6.6% 15.3% 18.1% 0.1% 4.2% -31.0% -0.1% -5.1%
31 Baltimore, MD 2.8 0.6% 14.3% 16.3% 0.6% 2.3% 0.84 0.1% 0.4% 11,043 7.7% 5.3% 15.3% 20.0% 0.1% 5.2% -21.8% 0.7% 0.5%
14 Denver, CO 2.7 1.2% 15.6% 14.2% 1.3% 1.7% 0.83 1.3% 0.6% 1,666 8.7% 6.0% 17.6% 12.7% 0.4% 5.6% -21.3% 1.7% -0.8%
30 Pittsburgh, PA 2.4 -0.1% 12.2% 5.8% 0.8% 1.2% 0.78 0.7% 0.1% (47,825) 8.0% 5.8% 14.6% 21.8% 0.8% 3.9% -22.8% 2.0% -5.3%
20 Portland, OR 2.3 1.8% 15.2% 14.5% 1.7% 6.5% 0.68 0.9% 0.6% 36,051 9.1% 7.4% 13.6% 14.8% 0.1% 4.7% -14.6% 0.4% -0.1%
19 San Antonio, TX 2.3 2.0% 14.1% 23.3% 2.6% 2.9% 0.82 2.5% 1.4% 92,672 7.3% 5.6% 11.6% 15.6% 0.4% 5.1% -5.4% 2.6% 1.0%
28 Orlando, FL 2.3 2.2% 14.4% 18.5% 2.3% 2.9% 0.30 1.4% 1.3% (20,893) 9.7% 6.2% 15.3% 12.3% 0.0% 4.1% -41.2% -0.4% 0.8%
Quartile 3 Avgs 2.8 1.2% 14.4% 15.2% 1.4% 2.3% 0.70 1.0% 0.4% 8,123 8.3% 6.0% 15.5% 15.5% 0.2% 4.4% -23.3% 0.4% -2.0%
49 Sacramento, CA 2.2 1.3% 13.9% 14.0% 0.7% 1.2% 0.68 0.7% -0.3% (27,553) 10.3% 7.2% 12.9% 13.5% 0.1% 4.0% -38.7% -6.2% -6.2%
13 Northern New Jersey 2.2 0.3% 12.3% -1.0% 1.5% 0.6% 0.74 0.6% -0.5% (27,493) 9.4% 6.1% 17.2% 15.4% 0.1% 3.2% -33.8% -0.9% -5.8%
38 Cincinnati, OH 2.2 0.5% 13.1% 3.3% -0.5% 0.5% 0.83 0.4% 0.0% (31,444) 8.5% 6.2% 15.7% 15.1% 0.1% 3.4% -19.9% -0.1% -6.0%
34 Kansas City, MO 2.1 1.0% 14.2% 10.9% 0.3% 1.3% 0.86 0.4% 0.3% 16,875 7.2% 6.3% 16.0% 13.8% 0.1% 3.0% -21.9% 1.2% -2.7%
50 Las Vegas, NV 2.1 2.5% 14.8% 17.1% 2.3% 3.0% 0.23 2.7% 1.2% 13,637 12.4% 7.4% 12.1% 9.0% 0.0% 4.4% -59.4% -2.4% -9.1%
48 Cleveland, OH 2.1 -0.3% 11.9% -4.2% -1.4% -0.2% 0.77 0.0% -0.8% (21,312) 8.1% 6.5% 13.4% 19.6% 0.1% 2.9% -30.1% -3.6% -12.5%
25 Westchester/Fairfield 2.0 0.4% N/A N/A 2.5% 1.5% N/A 1.2% 0.0% N/A N/A N/A 14.9% 19.2% 0.0% 3.8% N/A N/A N/A
3 San Jose, CA 1.9 0.9% 15.4% 5.0% 3.1% 4.4% 0.23 1.2% -0.1% 43,598 9.0% 7.4% 19.6% 13.7% 0.0% 3.8% -31.9% 1.6% -12.5%
40 Columbus, OH 1.9 0.8% 15.0% 6.2% 0.1% 0.6% 0.75 0.8% 0.2% 4,168 7.5% 5.8% 16.5% 15.2% 0.1% 2.6% -33.2% 1.6% -4.8%
4 Austin, TX 1.9 2.7% 17.1% 25.7% 5.3% 4.7% 0.68 3.2% 2.2% 111,734 6.5% 5.3% 15.1% 11.7% 0.2% 4.8% -19.7% 3.3% 3.2%
17 Charlotte, NC 1.9 2.3% 14.3% 15.4% 2.9% 2.2% 0.77 1.4% 0.8% 29,970 10.1% 7.1% 17.0% 10.6% 0.1% 4.4% -31.6% 1.9% -1.6%
37 Indianapolis, IN 1.8 1.4% 14.2% 9.4% 1.2% 1.8% 0.80 0.8% 0.4% (7,973) 7.4% 5.6% 15.2% 14.8% 0.1% 4.9% -18.2% 1.0% -0.6%
11 Raleigh/Durham, NC 1.8 2.8% 13.9% 20.2% 2.7% 4.3% 0.76 1.7% 1.5% 61,301 15.3% 11.1% 16.1% 16.0% 0.2% 4.2% -22.9% 2.3% -3.7%
26 Virginia Beach, VA 1.7 0.5% 14.7% 12.0% 1.1% 1.5% 0.37 0.7% 0.1% 23,512 6.6% 4.7% 13.3% 13.7% 0.1% 4.4% -22.6% -1.8% 0.1%
18 Nashville, TN 1.7 1.4% 14.8% 16.5% 1.7% 2.7% 0.80 1.3% 1.0% 40,514 7.6% 5.6% 14.9% 16.1% 0.1% 4.2% -19.6% 1.4% -1.5%
46 Providence, RI 1.6 0.3% 12.3% -3.2% 0.5% 0.8% 0.76 0.4% -0.5% (60,594) 11.8% 7.1% 11.0% 21.8% 0.1% 3.0% -37.6% -2.8% -6.5%
41 Milwaukee, WI 1.6 0.3% 13.7% 7.5% 1.5% 1.1% 0.67 0.2% -0.3% (21,730) 7.6% 6.1% 13.8% 18.6% 0.0% 3.1% -23.5% -2.6% -6.5%
39 Jacksonville, FL 1.4 1.3% 13.8% 15.0% 0.1% 1.5% 0.79 0.6% 0.6% (5,672) 9.0% 6.0% 16.0% 15.1% 0.0% 3.9% -39.9% -0.7% -2.0%
45 Memphis, TN 1.3 0.8% 13.6% 4.0% 1.2% 1.2% 0.55 0.7% -0.2% (1,957) 9.7% 6.9% 14.0% 14.5% 0.1% 3.5% -22.8% -3.9% -2.6%
32 Oklahoma City, OK 1.3 1.2% 14.7% 20.1% 1.6% 2.3% 0.73 1.3% 0.8% 18,809 5.9% 4.8% 13.6% 13.4% 3.3% 4.2% -2.6% 1.6% -1.2%
47 New Orleans, LA 1.2 0.3% 14.6% -4.5% 1.1% 0.4% 0.62 0.3% -1.2% 16,908 7.9% 5.6% 13.3% 14.9% 1.3% 5.1% -24.2% -10.0% -21.3%
21 Salt Lake City, UT 1.2 1.5% 16.1% 11.0% 2.4% 3.5% 0.73 0.9% 1.3% (5,475) 6.1% 5.1% 16.3% 10.7% 0.3% 6.4% -7.0% 1.4% -0.2%
44 Tucson, AZ 1.0 2.2% 12.9% 11.0% 1.9% 1.8% 0.63 1.7% 0.5% 842 8.4% 5.9% 13.4% 16.1% 0.5% 5.1% -19.2% -1.8% -7.2%
22 Honolulu, HI 1.0 0.7% 14.9% 14.9% 0.7% 2.1% 0.47 1.2% 0.7% 14,226 5.8% 4.0% 13.8% 13.5% 0.1% 4.6% -20.0% -0.6% 0.4%
42 Albuquerque, NM 0.9 1.1% 14.1% 20.2% 2.0% 2.5% 0.68 1.5% 0.3% (16,780) 8.4% 5.5% 15.3% 15.9% 0.1% 4.9% -31.7% -2.4% -2.4%
Quartile 4 Avgs 1.7 1.1% 14.2% 10.3% 1.5% 1.9% 0.66 1.0% 0.3% 7,005 9.1% 6.6% 14.8% 14.9% 0.3% 4.1% -26.3% -0.9% -4.7%
Sources: PwC, Moody’s Analytics, Bureau of Economic Analyis, U.S. Census Bureau.
Notes: Quartiles based on MSA total population. * Quartile 1 (Los Angeles) combined with quartile 2. 2013 calculations based on forecasts acquired September 2012.

Chapter 6: Latin America
Appendix B: Housing
2013 Single-Family Homes Rent/

2013 MSA Households Median Home Prices Changes Home State System Foreclosures Apt. Vacancy Apt. Completions
Process 2013 10-yr Avg
2013 Non- Time 90+ Days 10-year Comp/ Comp/
Rank 2013 Total Change Prices Change From Peak Starts Completions Sales 2013 Ratio Judicial Judicial (Days) Rate Delinquent 2013 Avg Inv. Inv.
U.S. 41,639.0 0.9% 41,639.00 0.9% 0.9% 0.9% 0.9% 0.9% 1.59 4.2% 6.4% 0.6% 1.1%
2 New York, NY* 4,397.7 0.5% $437.3 0.6% -18.6% 17.7% 5.7% 19.2% 1.75 * 445 8.2% 3.5% 1.8% 2.7% 2.3% 1.2%
16 Los Angeles, CA 4,389.8 1.2% $349.0 -0.2% -41.1% 27.0% 13.5% 21.0% 1.04 * * 117 4.8% 3.6% 3.1% 3.9% 0.7% 0.4%
24 Chicago, IL 3,545.6 0.6% $179.1 0.7% -34.5% 39.5% 4.1% 11.2% 1.55 * 300 9.1% 3.4% 3.6% 5.4% 1.1% 0.3%
9 Dallas/Fort Worth, TX 2,474.7 2.2% $152.1 -0.8% -0.8% 39.0% 29.9% 14.0% 1.43 * * 27 3.6% 3.2% 5.2% 8.2% 1.8% 1.1%
27 Philadelphia, PA 2,290.6 0.5% $212.3 1.0% -9.0% 45.4% 15.3% 25.6% 1.27 270 6.0% 3.7% 3.5% 4.6% 1.2% 1.1%
5 Houston, TX 2,223.0 2.1% $165.5 0.1% 0.1% 18.9% 17.0% 10.3% 1.24 * * 27 3.2% 2.9% 6.8% 9.1% 1.3% 1.2%
8 Washington, DC 2,171.5 1.3% $326.5 -2.1% -24.2% 32.5% 14.3% 21.3% 1.16 * 47 3.5% 3.5% 3.9% 4.6% 3.3% 0.7%
12 Miami, FL 2,167.4 1.3% $179.5 -4.1% -52.1% 31.0% -8.7% 8.5% 1.56 * 135 18.7% 4.3% 3.4% 4.8% 0.5% 1.1%
35 Atlanta, GA 2,040.9 1.8% $92.4 -0.6% -46.0% 72.8% 56.4% 8.9% 2.33 * * 37 5.4% 4.9% 6.1% 9.1% 1.1% 0.4%
6 Boston, MA 1,807.5 0.9% $337.1 -0.3% -17.4% 42.7% 13.7% 11.7% 1.33 * 75 3.6% 3.3% 3.4% 5.1% 2.1% 0.7%
51 Detroit, MI 1,693.5 0.3% $61.0 8.9% -62.7% 34.3% 33.4% 37.6% 3.55 * 60 5.2% 4.6% 3.9% 6.6% 0.4% 0.2%
1 San Francisco, CA 1,682.5 1.1% $589.6 0.7% -30.0% 28.2% 30.3% 22.1% 0.86 * * 117 3.7% 2.6% 2.8% 4.2% 1.6% 0.4%
33 Phoenix, AZ 1,634.7 2.7% $129.5 -1.6% -51.5% 42.8% 38.9% -10.3% 1.53 * * 90 5.8% 3.7% 5.6% 8.6% 1.2% 0.5%
Quartile 1 & 2 Avgs $2,501.5 1.3% $247.0 0.2% -29.8% 36.3% 20.3% 15.5% 1.58 134 6.2% 3.6% 4.1% 5.9% 1.4% 0.7%
7 Seattle, WA 1,415.7 1.4% $291.4 2.8% -24.3% 2.1% 4.9% 13.3% 0.94 * * 135 3.5% 5.9% 4.4% 5.6% 3.3% 0.5%
36 Inland Empire, CA 1,367.2 1.6% $176.9 -1.6% -55.9% 137.3% 136.8% 20.7% 1.53 * * 117 6.5% 5.3% 4.7% 8.5% 1.7% 0.9%
23 Minneapolis, MN 1,339.6 1.5% $158.5 -1.2% -31.8% 34.4% 29.4% 33.2% 1.61 * 95 3.3% 1.8% 2.6% 4.5% 1.3% 0.7%
29 Tampa, FL 1,191.2 1.2% $139.4 0.0% -38.2% 31.7% 41.3% 4.4% 1.56 * 135 16.2% 3.8% 5.2% 7.2% 1.4% 0.7%
43 St. Louis, MO 1,158.4 0.9% $124.8 1.2% -15.2% 15.0% 0.9% 16.3% 1.51 * * 60 4.6% 3.2% 4.9% 7.5% 0.2% 0.4%
15 San Diego, CA 1,131.5 1.5% $371.4 -0.4% -38.4% 55.7% 10.4% 23.4% 0.93 * * 117 4.2% 3.2% 2.3% 3.8% 0.7% 0.6%
31 Baltimore, MD 1,062.1 0.9% $235.6 0.0% -17.2% 26.1% 1.0% 15.8% 1.11 * 46 4.8% 5.0% 3.6% 4.9% 1.7% 0.9%
14 Denver, CO 1,060.1 1.5% $228.2 -2.1% -8.6% 29.7% 18.4% 14.7% 1.05 * * 145 4.0% 2.5% 3.8% 7.5% 1.7% 0.7%
10 Orange County, CA 1,028.7 1.2% $513.8 0.3% -27.4% 48.3% 46.9% 33.1% 0.78 * * 117 4.8% 3.6% 5.8% 8.4% 0.7% 0.6%
30 Pittsburgh, PA 1,008.1 0.3% $128.9 1.7% 1.7% 28.7% -1.7% 19.2% 1.69 * 270 5.0% 2.7% 3.0% 5.6% 0.8% 0.8%
20 Portland, OR 927.1 2.0% $230.1 3.0% -21.9% 26.4% 16.8% 18.8% 0.97 * * 150 4.8% 3.0% 1.9% 5.0% 1.0% 0.8%
38 Cincinnati, OH 849.8 0.8% $125.6 0.1% -13.5% 10.2% -18.3% 16.4% 1.49 * 217 6.6% 3.3% 4.1% 7.4% 0.8% 1.0%
Quartile 3 Avgs $1,128.3 1.2% $227.1 0.3% -24.2% 37.1% 23.6% 18.8% 1.26 134 5.7% 3.6% 3.9% 6.3% 1.3% 0.7%
25 Westchester/Fairfield 873.6 1.2% $873.6 1.2% -2.3% N/A N/A N/A 0.54 * N/A N/A N/A 3.0% 4.0% 1.1% 0.7%
28 Orlando, FL 845.6 2.1% $124.0 -3.1% -53.9% 21.7% -0.2% 6.3% 1.83 * 135 15.7% 4.3% 5.2% 7.4% 1.9% 1.2%
48 Cleveland, OH 843.9 -0.3% $101.2 0.4% -27.3% -22.4% -31.2% 16.2% 1.86 * 217 8.4% 4.3% 3.1% 6.0% 0.0% 0.3%
34 Kansas City, MO 834.3 1.4% $136.1 -0.4% -12.3% 36.5% 3.8% 23.7% 1.34 * * 60 4.3% 3.1% 4.7% 7.3% 0.9% 0.7%
19 San Antonio, TX 819.1 2.1% $161.0 0.0% 0.0% 45.0% 39.2% 10.3% 1.17 * * 27 3.1% 2.8% 6.0% 7.5% 2.4% 1.4%
49 Sacramento, CA 818.2 1.2% $173.0 0.4% -53.8% 84.6% 61.0% 23.2% 1.39 * * 117 5.2% 3.9% 3.1% 5.6% 0.5% 0.7%
13 Northern New Jersey 777.7 0.1% $366.8 3.4% -17.2% 39.6% 8.5% 22.7% 1.06 * 270 8.2% 3.5% 3.1% 4.0% 0.8% 0.6%
50 Las Vegas, NV 761.3 2.5% $115.4 -6.2% -63.6% 12.3% 8.8% 15.9% 1.76 * * 116 10.7% 8.4% 5.4% 6.8% 1.1% 1.1%
40 Columbus, OH 748.1 1.0% $129.6 -0.7% -13.6% 31.9% 9.0% 18.1% 1.38 * 217 6.7% 3.6% 5.2% 7.9% 0.7% 0.7%
17 Charlotte, NC 727.1 2.5% $211.0 -0.3% -0.3% 53.0% 34.0% 10.9% 1.00 * * 110 5.1% 3.2% 3.4% 5.1% 2.1% 0.7%
4 Austin, TX 719.4 2.8% $205.7 -0.3% -0.3% 24.3% 24.6% 13.1% 1.13 * * 27 1.9% 1.9% 4.8% 7.7% 3.7% 1.5%
37 Indianapolis, IN 713.0 1.6% $124.7 -1.3% -1.3% 25.9% 0.3% 13.4% 1.44 * * 261 6.8% 3.2% 4.7% 8.5% 1.7% 0.9%
11 Raleigh/Durahm, NC 689.3 2.7% $411.0 1.0% 0.5% 46.2% 42.8% 12.2% 0.52 * * 110 3.7% 2.5% 3.2% 5.5% 1.0% 0.5%
18 Nashville, TN 653.7 1.7% $158.9 1.5% -13.0% 36.1% 25.0% 18.3% 1.23 * 45 4.5% 3.5% 4.2% 6.5% 1.8% 0.8%
26 Virginia Beach, VA 644.3 0.8% $195.2 3.2% -20.0% 44.8% 21.6% 15.8% - * * 45 3.6% 3.1% N/A N/A N/A N/A
3 San Jose, CA 643.0 1.2% $583.7 0.4% -30.2% 28.2% 40.7% 18.9% 0.72 * * 117 3.5% 2.5% 2.8% 4.3% 2.0% 0.6%
41 Milwaukee, WI 633.3 0.7% $192.6 2.7% -12.5% -0.7% -0.6% 19.8% 1.13 * * 290 5.8% 3.2% 3.0% 4.8% 1.0% 0.4%
46 Providence, RI 625.8 0.0% $226.2 2.0% -22.6% 40.7% 3.0% 3.5% 1.36 * * 62 6.2% 4.6% 3.1% 6.0% 1.1% 0.7%
39 Jacksonville, FL 546.2 1.7% $123.0 3.0% -36.1% -0.3% -21.5% 5.0% 1.66 * 135 12.5% 4.7% 7.4% 8.6% 0.9% 1.2%
32 Oklahoma City, OK 513.3 1.5% $148.2 1.8% 1.8% 6.5% 11.9% 17.6% 0.98 * * 186 4.4% 2.5% 5.8% 8.4% 0.7% 0.6%
45 Memphis, TN 509.6 1.2% $117.1 1.5% -17.6% 80.4% 85.1% 36.5% 1.51 * 40 8.6% 6.8% 7.8% 10.5% 1.0% 0.5%
47 New Orleans, LA 465.7 0.6% $158.1 0.5% -8.3% 47.9% 38.1% 13.2% 1.41 * 180 5.9% 3.9% 6.4% 6.7% 1.2% 1.1%
44 Tucson, AZ 407.1 2.3% $146.1 2.3% -40.3% 46.4% 27.4% 8.5% 1.17 * * 90 4.6% 3.0% 4.2% 7.2% 0.3% 0.3%
21 Salt Lake City, UT 393.9 1.5% $198.8 4.3% -14.2% 28.3% 28.9% 16.3% 0.98 142 4.9% 3.6% 3.8% 5.7% 2.8% 0.7%
42 Albuquerque, NM 358.4 1.1% $178.6 1.9% -10.0% -8.4% -13.1% 19.1% 1.02 * 180 5.2% 2.3% 3.7% 5.7% 1.4% 0.7%
22 Honolulu, HI 321.9 1.2% $655.5 0.8% 0.8% -6.8% -15.3% 6.5% - * * 220 5.1% 2.1% N/A N/A N/A N/A
Quartile 4 Avgs $649.5 1.4% $239.0 0.8% -18.0% 26.4% 17.8% 15.3% 1.14 136 6.2% 3.6% 4.5% 6.6% 1.3% 0.8%
Sources: PwC, Moody’s Analytics, Bureau of Economic Analyis, U.S. Census Bureau, RealtyTrac.
Notes: Quartiles based on MSA total population. * Quartile 1 (New York) combined with quartile 2. 2013 calculations based on forecasts acquired September 2012.

Interviewees
Abu Dhabi Investment Authority Basis Investment Group LLC Carey Watermark Investors Incorporated
Thomas R. Arnold Mark K. Bhasin Michael Medzigian
Ackman-Ziff Real Estate Group LLC Bay Hollow Associates CBRE
Gerald S. Cohen Alice Connell Asieh Mansour
Patrick Hanlon Ross Moore (Canada)
Russell Schildkraut Bentall Kennedy (Canada) LP Bob Sulentic
Simon Ziff Paul Zemla William C. Yowell
AEW Capital Management Bentall Kennedy (US) LLP CBRE Econometric Advisors
Richard Brace Chuck Burd Jon Southard
Marc Davidson Douglas Poutasse
CB Richard Ellis
AIMCO BioMed Realty Trust Inc. Roelof van Dijk
Ernie Freedman Greg N. Lubushkin Raymond Wong
Allied Properties Real Estate Investment Trust Borden Ladner Gervais LLP CB Richard Ellis Limited
Michael Emory Mark Lewis John O’Bryan
The Alterra Group of Companies Boston Properties Champion Partners
Robert Cooper Mike LaBelle Jeff Swope
Amacon Group BPG Properties, Ltd. CitiStates Group
Bob Cabral Daniel M. DiLella Sr. Peter Katz
Patrick Uy Arthur P. Pasquarella
Colliers International
American Realty Advisors Brandywine Realty Trust Dylan Taylor
Stanley Iezman George Hasenecz
Jerry Sweeney Colony Capital, LLC
APG Asset Management US Inc. Richard B. Saltzman
Steve Hason BRE Properties
Constance B. Moore Compatriot Capital
Apollo Global Management Paul E. Rowsey III
Joseph Azrack The Bristol Group
James Curtis Connecticut Retirement Plans and Trust Funds
ARA Finance Cherie Santos-Wuest
Thomas MacManus Brookfield Asset Management, Inc.
Dennis Friedrich Cornerstone Real Estate Advisers
Armco Capital Inc. Jim Clayton
George Armoyan Brookfield Office Properties David J. Reilly
Rob MacPherson Michael McNamara
CRE Finance Council
The Armour Group Limited Bull Realty Stephen M. Renna
Scott McCrea Michael Bull
Crescent Real Estate Equities, LP
Artemis Advisors, LLC Buzz McCoy Associates, Inc. Jason Anderson
Dale Anne Reiss Bowen H. “Buzz” McCoy John C. Goff
ASB Real Estate Investments Cabot Properties Crescent Resources LLC
Robert Bellinger Howard B. Hodgson Jr. Todd W. Mansfield
Andrew Ebbott
Aspac Developments Ltd. CRL Senior Living
Gary Wong Cachet Estate Homes Douglas Cameron
Desi Auciello
Aspen Properties Ltd. Crombie Real Estate Investment Trust
Scott Hutcheson Cadillac Fairview Corporation Donald Clow
Greg Guatto Cathal O’Connor
Crow Holdings
AXA Equitable Calloway Real Estate Investment Trust Harlan Crow
Timothy Welch Al Mawani Anne Raymond
Ayer Capital CalPERS Cushman & Wakefield
V. Raja Ted Eliopoulos James Carpenter
Bank of America Merrill Lynch Campus Apartments, Inc. The Daniels Corporation
Jeffrey D. Horowitz David J. Adelman Jim Aird
James Smith
Bank of Montreal DCT Industrial
Greg Vriend Canadian Apartment Properties Real Estate Tom Wattles
Investment Trust
Barclays Capital Thomas Schwartz Desjardins Asset Management
P. Sheridan Schechner Michel Bédard
Ross Smotrich Canderel
Daniel D. Peritz Diamond Corporation
Baruch College Stephen Diamond
David Shulman Capright Property Advisors LLC
Jay Marling DLC Management Corp.
William (Bill) Comeau

Donahue Schriber Fulcrum Hospitality LLC Hopewell Development Corporatioin
Lawrence P. Casey Steven Angel Kevin Pshebniski
Dorsay Development Corporation GE Real Estate Hopewell Residential Communities
Geoffrey Grayhurst Thomas Curtain Lesley Conway
DRA Advisors GID HSBC Bank Canada
Paul McEvoy Jr. Robert DeWitt Bruce Clarke
Brian O’Herlihy Garth Stoll
Dundee International Real Estate Investment Trust Thad Palmer
Jane Gavan William Roberts Hunt Companies
Chris Hunt
Dundee Real Estate Investment Trust Ginkgo Residential
Michael Cooper Philip Payne Hyde Street Holdings, LLC
Patricia R. Healy
Dundee Realty Corporation Glenborough Realty Trust
Jason Lester Alan Shapiro ICSC
Michael Kercheval
Empire Communities Group Goff Capital Partners
Paul Golini, Jr. John Goff Institutional Real Estate, Inc.
Andrew Guizzetti Geoffrey Dohrmann
Daniel Guizzetti Goldman, Sachs & Co.
Jeffrey A. Barclay Intergulf Development Corporation
Epic Realty Partners Alan Kava Hareesh Sara
Gordon Thompson Pat Tribolet
Michael Watts Intracorp Projects Ltd.
Equity Group Investments, LLC Don Forsgren
Sam Zell Graywood Developments Ltd.
Invesco Real Estate
Exeter Property Group Great Gulf Group of Companies Nicholas Buss
Ward Fitzgerald David Gerofsky Scott Dennis
Jerry Patava Michael Sobolik
Fairview Investments
Barry Clarke Great Point Investors iStar Financial
Joseph Versaggi George Puskar
Fares Developments Inc.
Francis Fares GreenOak Real Estate ITC Construction Group
Sonny Kalsi Doug MacFarlane
Fasken Martineau LLP
David Martin Greenpark Group of Companies Ivanhoe Cambridge Inc.
Carlo Baldassarra Sylvain Fortier
FelCor Lodging Trust Incorporated William R.C. Tresham
Andy Welch Grosvenor Americas
Andrew Bibby Jamestown LP
Firm Capital Properties Inc. Christoph A. Kahl
Eli Dadouch Guggenheim Partners
Kieran Quinn John Buck Company
First Capital Realty Inc. Charles Beaver
Dori Segal Harbert Management Corporation Steve Shiltz
Karen Weaver Jon-Paul Momsen
J. Travis Pritchett Jones Lang LaSalle
First Niagara Bank Michael P. White James L. Koster
Christopher P. Terlizzi
Harbor Group International J.P. Morgan Asset Management
Flagler Development Lane Shea Jean Anderson
Eric Swanson Joseph Azelby
Hartman Income REIT Wayne Comer
The Flynn Company Julian Kwok Mike Kelly
David M. Ricci Ellen Kerr
Hawkeye Partners LP Julie Negron
Fonds de placement immobilier Cominar Bret R. Wilkerson Elizabeth Propp
Michel Dallaire
Heitman Kensington Realty Advisors
Fonds immobilier de solidarité FTQ Richard Kateley Kelley Smith
Claude Meunier
Hersha Hospitality Trust KeyBank Real Estate Capital
Forest City Commercial Group Ashish Parikh E.J. Burke
James Ratner Jay Shah
KEYreit
Fortis Properties Hilton Worldwide Teresa Neto
Nora Duke Christopher J. Nassetta Kevin Salsberg
Jamie Roberts
Hines Kimco Realty Corporation
Foulger–Pratt Kurt Hartman Milton Cooper
Cameron Pratt Ken Hubbard David Henry
Scott Onufrey
FPL Advisory Homefed Corporation Michael V. Pappagallo
William Ferguson Paul Borden

KingSett Capital Inc. Monarch Group Portfolio Advisors
Jon Love Steven J. Paull Harry Pierandri
KMK Capital Inc. Moody’s Investors Services Principal Financial Group
Kevin King Merrie Frankel Andy Warren
Korpacz Realty Advisors Morgan Stanley Principal Real Estate Investors
Peter Korpacz John Klopp Michael J. Lara
Lachman Associates National Association of Real Estate Profimex Ltd.
Leanne Lachman Investment Trusts El Rosenheim
Steven Wechsler
Ladder Capital Finance LLC Prologis
Greta Guggenheim New Boston Funds Guy Jaquier
Michael Doherty Hamid Moghadam
Landmark Partners Gary Hofstetter Walter C. Rakowich
Chad S. Alfeld James Kelleher Nina Tran
Robert J. Dombi Timothy Medlock Tracy Ward
Gregory F. Lombardi James Rappaport
Prudential Real Estate Investors
LaSalle Investment Management NewTower Trust Company J. Allen Smith
Richard Kleinman Brent Palmer
Lynn Thurber Patrick Mayberry Public Sector Pension Investment Board
Neil Cunningham
LaSalle Investment Management–Canada North Ridge Development Corporation
Zelick Altman Wally Mah Pure Industrial Real Estate Trust
Francis Tam
Ledcor Properties Inc. Northwestern Mutual
Chris Bourassa David Clark Quadrant Real Estate Advisors
Thomas Mattinson
Lehman Brothers Holding Inc. NorthWest HealthCare Properties Real Estate
Owen Thomas Investment Trust Ramius Capital Group
Peter Riggin Michael Boxer
LEM Mezzanine LLC
Herb Miller Northwood Investors RBC Capital Markets
John Kukral Carolyn Blair
Liberty Property Trust Douglas McGregor
Michael T. Hagan Orr Development Corporation Gary Morassutti
Alex Orr
Linneman Associates and American Land Fund Tim Orr Real Capital Analytics
Peter Linneman Eddie Papazian Robert White
Madison Homes Otéra Capital The Real Estate Roundtable
Miguel Singer Alfonso Graceffa Jeffrey DeBoer
Manulife Financial Oxford Properties RealNet Canada Inc.
Joseph D. Shaw Blake Hutcheson George Carras
Manulife Real Estate Funds Pacific Investment Management Company LLC Real Property Association of Canada
Constantino Argimon (PIMCO) Paul Morse
Catherine Barbaro John Haymes
David Shaw Realty Income
Ted Wilcocks Paladin Realty Partners Greg Fahey
Frederick Gortner
The Maple Hill Companies James Worms Redbourne Group
Adam Raboy Michel Bouchard
Pan-Canadian Mortgage Group Inc. André Shareck
Martek Joel McLean
Charlie Oliver The Related Companies LP
Parkway Properties Michael J. Brenner
The Mathews Company Curt Owen
Bert Mathews Resort Finance America, LLC
Pearlmark Real Estate Partners Andy Mitchell
Mattamy Homes Limited Stephen R. Quazzo
Brian Johnston RioCan Real Estate Investment Trust
Penney Group Inc. Edward Sonshine
Melcor Developments Ltd. Gail Fowlow Frederic Waks
Ralph Young
Pennsylvania Real Estate Investment Trust RiverOak Investment Corp., LLC
Menkes Developments Ltd. Andrew Ioannou Steve DeNardo
Peter Menkes
PM Realty Group Rockefeller Group Investment Management Corp.
MetLife John S. Dailey Dennis R. Irvin
Mark Wilsmann John D. Bottomley
PNC Real Estate Finance Peggy L. DaSilva
The Metrontario Group William G. Lashbrook Peter Davidson
Lawire Lubin

Rohit Group of Companies Tishman Speyer
Russell Dauk Todd Rich
Rosen Consulting Group Toronto Port Lands Company
Kenneth Rosen Michael Kraljevic
RREEF T.R. Engel Group
Scott Koenig Thomas Engel
Kurt W. Roeloffs
Trepp, LLC
RXR Realty Matt Anderson
Frank Patafio
Trilyn Investment Management
Sabra Health Care REIT, Inc. Mark Antoncic
Harold Andrews Jr.
Triovest Realty Advisors
Salem Realty Capital LLC David Robins
Andrew M. Sternlieb
Turner Construction Company
Sares-Regis Group Darin Postma
John S. Hagestad
Geoffrey L. Stack UBS Global Asset Management (Americas) Inc.
Lee S. Saltzman
Sentinel Real Estate
David Weiner UBS Realty Investors LLC
Matthew Lynch
Seven Hills Properties
Luis A. Belmonte University of Denver, Dividend Capital Group
Glenn Mueller
Shea Properties
Elizabeth Cobb Urban America
Thomas Kennedy
Silverpeak Real Estate Partners
Rodolpho Amboss Villarboit Development Corporation
Brad Lebovitz Paul Simcox
Sonnenblick-Eichner Company Vornado Realty Trust
David Sonnenblick Michael Fascitelli
The Sorbara Group Walton Development and Management (USA), Inc.
Edward Sorbara Walton International Group (USA), Inc.
Rob Leinbach
Southwest Properties Limited Ed Steffelin
Gordon Laing
Washington Real Estate Investment Trust
Stag Industrial Thomas Regnell
Ben Butcher
Watson Land Company
Starwood Capital Group Bruce Choate
Jeffrey G. Dishner
Christopher D. Graham Wells Fargo
Jerome C. Silvey Charles H. “Chip” Fedalen Jr.
Starwood Hotels & Resorts Worldwide, Inc. Westbank Group
Kirk Reed Judy Leung
State of Virginia Retirement System Westbrook Partners
Field Griffith Sush Torgalkar
State Teachers Retirement System of Ohio Westport Capital Partners LLC
Stanton West Russel S. Bernard
StockBridge Investments B.V. Wheelock Street Capital
Kees F.W. Brüggen Merrick (Rick) Kleeman
Sun Life Financial Inc. White Stone Associates
Philip Gillin Steve LeBlanc
Sunstone Hotel Investors Wright Runstad & Company
John Arabia Greg Johnson
Robert C. Springer
Talon Private Capital LLC
Gabe Levin
Thibault Messier Savard & Associés
Martin Galarneau

Sponsoring Organizations
PwC real estate practice assists real estate investment advisers, real The mission of the Urban Land Institute is to provide leadership in the
estate investment trusts, public and private real estate investors, cor- responsible use of land and in creating and sustaining thriving com-
porations, and real estate management funds in developing real estate munities worldwide. ULI is committed to
strategies; evaluating acquisitions and dispositions; and appraising and ■■ Bringing together leaders from across the fields of real estate and
valuing real estate. Its global network of dedicated real estate profes- land use policy to exchange best practices and serve community
sionals enables it to assemble for its clients the most qualified and needs;
appropriate team of specialists in the areas of capital markets, systems ■■ Fostering collaboration within and beyond ULI’s membership through
analysis and implementation, research, accounting, and tax. mentoring, dialogue, and problem solving;
■■ Exploring issues of urbanization, conservation, regeneration, land
Global Real Estate Leadership Team use, capital formation, and sustainable development;
■■ Advancing land use policies and design practices that respect the
Kees Hage uniqueness of both built and natural environments;
Global Real Estate Leader
■■ Sharing knowledge through education, applied research, publishing,
Luxembourg, Luxembourg
and electronic media; and
Uwe Stoschek ■■ Sustaining a diverse global network of local practice and advisory
Global Real Estate Tax Leader
efforts that address current and future challenges.
European, Middle East & Africa Real Estate Leader
Berlin, Germany Established in 1936, the Institute today has nearly 30,000 members
worldwide, representing the entire spectrum of the land use and devel-
R. Byron Carlock Jr.
opment disciplines. ULI relies heavily on the experience of its members.
National Real Estate Practice Leader
Dallas, Texas, U.S.A. It is through member involvement and information resources that ULI
has been able to set standards of excellence in development practice.
Mitchell M. Roschelle
The Institute has long been recognized as one of the world’s most
National Real Estate Advisory Practice Leader
New York, New York, U.S.A. respected and widely quoted sources of objective information on urban
planning, growth, and development.
Timothy Conlon
National Real Estate Assurance Leader
New York, New York, U.S.A. Patrick L. Phillips
Chief Executive Officer, Urban Land Institute
Paul Ryan
National Real Estate Tax Leader
New York, New York, U.S.A.
K.K. So
Asia Pacific Real Estate Tax Leader ULI Center for Capital Markets and Real Estate
Hong Kong, China Dean Schwanke
Senior Vice President and Executive Director
www.uli.org/capitalmarketscenter
www.pwc.com
Urban Land Institute

1025 Thomas Jefferson Street, NW
Suite 500 West
Washington, DC 20007
202-624-7000
www.uli.org

Emerging Trends in Real Estate® 2013 Highlights
What are the best bets for investment and develop- n Tells you what to expect and where the best
ment in 2013? Based on personal interviews with opportunities are.
and surveys from more than 900 of the most influen-
tial leaders in the real estate industry, this forecast n Elaborates on trends in the capital markets, including
will give you a heads-up on where to invest, which sources and flows of equity and debt capital.
sectors and markets offer the best prospects, and
trends in the capital markets that will affect real n Indicates which property sectors offer opportunities
estate. A joint undertaking of PwC and the Urban and which ones to avoid.
Land Institute, this 34th edition of Emerging Trends
is the forecast you can count on for no-nonsense, n Provides rankings and assessments of a variety of
expert insight. specialty property types.
n Reports on how the economy and concerns about

credit issues are affecting real estate.
n Discusses which metropolitan areas offer the most

and least potential.
n Describes the impact of social and political trends

on real estate.
n Explains how locational preferences are changing.
ISBN: 978-0-87420-220-5
I S B N 978-0-87420-220-5
54995
9 780874 202205
www.pwc.com
www.uli.org

Emerging Trends in US Real Estate

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20 13

2 Chapter 1 Recovery Anchored in Uncertainty

14 Chapter 2 Real Estate Capital Flows

24 Chapter 3 Markets to Watch

46 Chapter 4 Property Types in Perspective

64 Chapter 5 Emerging Trends in Canada

86 Chapter 6 Emerging Trends in Latin America

Emerging Trends in Real Estate® 2013 i

ii Emerging Trends in Real Estate® 2013

Emerging Trends in Real Estate® 2013 1

Emerging Trends in Real Estate® 2013 3

Architects/designers 4.58 Emerging Trends:

4 Emerging Trends in Real Estate® 2013

Chasing Yield: Not Enough Exhibit 1-3

As investors tentatively advance further along the risk spec-

Emerging Trends in Real Estate® 2013 5

Secondary Markets Emerging Trends Barometer 2013

6 Emerging Trends in Real Estate® 2013

Exhibit 1-6 Exhibit 1-7

Cap rate Next

Emerging Trends in Real Estate® 2013 7

8 Emerging Trends in Real Estate® 2013

Emerging Trends in Real Estate® 2013 9

Prospects for Profitability in 2013 by Percentage of Respondents

0.4% 2.0% 4.6% 17.2% 20.0% 30.7% 19.6% 5.6%

Technology, Job Growth, and ing square-footage requirements. Web-embracing retailers,

10 Emerging Trends in Real Estate® 2013

Unprecedented Transformation can’t convince PhDs to go to the suburbs.”

Emerging Trends in Real Estate® 2013 11

Economic/Financial Issues Concentrate acquisitions on budding infill locations. Top

12 Emerging Trends in Real Estate® 2013

Emerging Trends in Real Estate® 2013 13

Emerging Trends in Real Estate® 2013 15

best—and all the rest.” According to Emerging Trends respon-

16 Emerging Trends in Real Estate® 2013

Banks Will Bide Their Time Exhibit 2-6

Emerging Trends in Real Estate® 2013 17

18 Emerging Trends in Real Estate® 2013

estate–oriented players, work the B-piece space, raising ques-

In spite of continuing concerns, interviewees continue to Prospects by Investment Category/Strategy

Opportunistic investments 6.07

Who watches out for bondholders once CMBS loans go into

Emerging Trends in Real Estate® 2013 19

20 Emerging Trends in Real Estate® 2013

Emerging Trends in Real Estate® 2013 21

Americas, excluding Canada

22 Emerging Trends in Real Estate® 2013

Source: Real Capital Analytics.

Source: Real Capital Analytics.

Emerging Trends in Real Estate® 2013

Emerging Trends in Real Estate® 2013 25

26 Emerging Trends in Real Estate® 2013

Emerging Trends in Real Estate® 2013 27

28 Emerging Trends in Real Estate® 2013

Exhibit 3-5 Exhibit 3-6

New York City (2) 81 Best Worst

American Infill and Chasing

Emerging Trends in Real Estate® 2013 29

18% Average top 10 markets

Sources: Moody’s Analytics; U.S. Census Bureau.