12 trends for 2012 final locked[2]

January 2012

CBRE Econometric Advisors

SPECIAL REPORT

12 Trends for 2012

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TABLE OF CONTENTS

TREND #1PAGE 3

TREND #2PAGE 4

TREND #3PAGE 6

TREND #4PAGE 8

TREND #5PAGE 10

TREND #6PAGE 12

TREND #7PAGE 13

TREND #8PAGE 15

TREND #9PAGE 18

TREND #10PAGE 19

TREND #11PAGE 21

TREND #12PAGE 23

HOUSING SEARCHES FOR BALANCE

Rising Rents Help to Stabilize Home Prices

SUBURBAN OFFICE WILL CONTINUE TO TAKE PART IN THE RECOVERY

Busting the Myths Suggesting the Death of Suburban Offi ce

CAPITAL FLOWING, BUT ONLY TO THE RIGHT OPPORTUNITIES

Global Picture Shows Eastern European Growth

EMPLOYMENT GROWTH WILL CONTINUE TO MUDDLE THROUGH

Balance Sheets Prevent Level of Growth Needed

SHORTAGES IN LARGE WAREHOUSE SPACE WILL ACCELERATE

Large Warehouses Recovering Faster than Overall Industrial

HOTEL ROOM DEMAND GROWTH WILL SLOW

Overseas Slowdown will Contribute

DEBT MARKET DISTRESS MOVES PAST PEAKS BUT REMAIN HIGH

A Widening Window of Investment Opportunity?

CONSTRUCTION MAY RETURN SOONER THAN YOU THINK

Single Tenant and Delayed Projects Bring Back New Building

RETAIL RENTS FINALLY SEE BOTTOM

Lagging Behind Other Property Types, Last Pieces Fall in Place

MOVEMENT FROM TRUCKS TO TRAINS WILL BE INCREMENTAL

Rise of Rail Inevitable but Slow

IN SPITE OF CAPITAL MARKETS VOLATILITY, FINANCE JOB CUTS TO END BY MID-YEAR 2012

Many Finance Sub-categories Have Seen Losses Level Off

CAP RATE COMPRESSION WILL END

Cap Rates Flat or Worse in the Next Two Years

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TREND #1EMPLOYMENT GROWTH WILL CONTINUE TO MUDDLE THROUGHBalance Sheets Prevent Level of Growth Needed

Productivity Now More Likely to Precede Job Growth

Source: CBRE Econometric Advisors, BLS

EmploymentGDP

ProductivityYoY Growth (%)

10

8

4

2

6

0

-2

-4

-6

1984

Q1

1985

Q1

1986

Q1

1987

Q1

1988

Q1

1989

Q1

1990

Q1

1991

Q1

1992

Q1

1993

Q1

1994

Q1

1995

Q1

1996

Q1

1997

Q1

1998

Q1

1999

Q1

2000

Q1

2001

Q1

2002

Q1

2003

Q1

2004

Q1

2005

Q1

2006

Q1

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Q1

2012

Q1

2013

Q1

2012 will mark the third consecutive year that employment

fails to generate much growth. That we begin this period with

a high level of unemployment makes it all the more painful,

and that the upcoming year will again make little progress

in reducing unemployment is frustrating for everyone.

Availability of labor generally encourages businesses to hire,

so unemployment remaining high is surprising; yet what

should be surprising among economists and business leaders

is widely accepted. It is worth examining why there has been

acceptance of high unemployment in this business cycle.

The connection between output and employment is a factor

in this acceptance. That the difference between output

growth and employment growth is productivity, is effectively

a mathematical identity. As such, productivity is part of the

answer to the lack of professional surprise for forecasts

of moderate employment growth in 2012. Output, as

measured by Gross Domestic Product, is our best measure of

demand for work, but increases in output are not suffi cient to

generate jobs because work can sometimes be accomplished

by stretching existing resources, rather than employing new

ones. At no time has this been truer than the recent cycle.

Economists think about productivity both as an important

long-term factor for the economy and also as it relates to

cyclical employment growth. Over longer periods, higher

productivity growth is one of the best things an economy can

produce. It is the foundation of sustainable wage growth

(or at least an expanding pie). Within a cycle, however,

productivity is not always as welcome, as higher productivity

means that businesses can expand without hiring. In recent

cycles, productivity has been highest as output has started to

rebound, with companies fi rst fi nding effi ciencies that would

allow their current workers to accomplish more and only later

resorting to hiring as demand continues to expand. In the

early stages of this expansion, year-over-year productivity

growth was even higher than usual.

In determining where productivity (and therefore employment)

is going in the next year or two, judgments are made. First,

what is the level of productivity growth we should expect in

this expansion, and second, what cyclical effects can we

expect next year? The former question is interesting because

the last three expansions have seen such different levels of

productivity growth. The 1980s and the period from 2004

to 2008 were marked by low productivity growth, while the

1990 tech boom led to growth rates often above 3%.

The slowdown in GDP in 2011—averaging 1.2% in the fi rst

three quarters—affects our views on the cycle of productivity

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TREND #2CAPITAL IS FLOWING, BUT ONLY TO THE RIGHT OPPORTUNITIESGlobal Picture Shows Eastern European Growth

We will look back on 2011, fondly or not, as a year

full of economic and fi nancial shocks that reverberated

throughout the global economy. Volatile global fi nancial

markets, solvency concerns throughout the European

Union, and the combination of sluggish U.S. job growth

and political gridlock in America’s capital led to a drop in

optimism following a number of positive indicators and

reports that characterized the global economic recovery

in early 2011. This uncertainty has dampened both the

already-weak recovery in advanced economies and the

more robust expansion in emerging markets. Meanwhile,

Western Europe is fl irting with yet another recession.

And while the current high level of uncertainty puts any

projection at risk, we expect the pattern of a two-speed

global economic recovery, with pockets of economic

and commercial real estate growth in select regions and

markets, to continue as we head into 2012.

in 2012. Such slowdowns are indeed a setback for the

employment recovery, quite literally. In contrast to similar

stages in the past two cycles, in the past year productivity was

brought down more by slowing output than by improving

employment growth. This puts us back to where we were

some time ago; so, while it won’t be at the magnitude of

2009, we expect to see a period of productivity increase

before we see hiring pick up. As a result, even as we see

GDP improving in 2012 over 2011, it will take much of the

year for this to translate into signifi cant new hiring.

Looking at these factors from another angle, output growth

needs to be exceptionally high to restore the unemployment

situation to normal. To take some round numbers: if we are

around 9% unemployment today, and 5% is more in keeping

with full employment, we need 2% employment growth

above the annual labor force growth of around 1% just to

reduce the unemployment growth within two years. But in

order to obtain the 3% employment growth target we just

arrived upon, we need GDP growth to be 2 percentage points

faster, to overcome the expected increases in productivity.

In short, growth rates need to be routinely 4% to 5% over

many quarters to see the type of job recovery that has been

more typical in the post-war era.

So while there is some relief when GDP growth makes it

above 2%, this is more about the economy having what it

takes to avoid dipping back into recession, than it is about

the economy improving in any way that the average citizen

will appreciate. Indeed, recent job gains, retail sales, and

industrial production have increased enough to make us

comfortable that a recession is not imminent. Unfortunately,

we also believe that output growth will stay in the 2% range

for much of 2012.

The reasoning has to do with to the differences between

more typical recessions and what some have called the

“balance sheet recession” we are seeing today. The distinct

feature of the recent recession is the high level of debt and

the need across much of the economy to deleverage from

those high levels. If we are to achieve 5% GDP growth, a

good anchor would be for consumers to spend at a similar

pace. This has happened in the past as consumers have

made up for delayed purchases, but the necessity to pay

down debts has placed a limit on how fast consumers are

willing to increase spending. We could turn to investment,

but the overhang of housing means that the major category

of residential investment will be moribund for a few more

years. Net exports were previously a hope for an increase

in GDP, but the European crisis closed off this avenue in

2011. Government is the last remaining category and one

need look no farther than the September debt ceiling crisis to

become dispirited about any assistance being offered there.

What has not been discussed enough is how the rise of the

fi libuster suggests that the future will insure no assistance as

well, regardless of the results of this November’s elections.

Until these conditions change—say, after debt is better paid

down or housing has begun its recovery—it is hard to see

enough aggregate demand coming through to change the

employment situation in the way we all would like. This

explains why there are very few optimists expecting anything

more than “muddling through” over the next few years.

On the brighter side, trends have been seeing gradual

improvement in all the underlying constraints mentioned

in the above paragraph, so expectations for a return to

recession remain rare among economists. From this

standpoint there is contentment with “muddling through”,

as it is better than the next most likely alternative.

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Source: IHS Global Insight as of Q3 2011.

The Multi-Speed Economic Recovery Continues

Real GDP, YoY % Change

8

10

2

4

6

0

-2

-6

-4

-8

2005

Q1

2007

Q1

2006

Q1

2009

Q1

2010

Q1

2014

Q1

2008

Q1

2013

Q1

2011

Q1

2012

Q1

Western EuropeUnited States

Asia Pacifi cWorld

The Investment MarketDespite a backdrop of deteriorating European economic

and fi nancial market indicators, property investment held

up well in 2011. Globally, commercial property transactions

(excluding land sales) in the fi rst three quarters of 2010

increased by 40.3% compared to the same time period

during the previous year. Regionally, growth was strongest

in the Americas (+71.6%) followed by EMEA (+31.2%) and

Asia Pacifi c (+16.8%).

Recent surveys point to continued investment in commercial

property—transactions remain below their pre-recession

peaks, but volumes continued to recover in 2011.

Transaction volume is expected to remain steady in 2012,

even in Europe; according to the European Central Bank,

approximately a third of outstanding commercial property

mortgages are expected to mature by 2013. Prevailing

Global Transaction Volume Continues to Recover

Source: Real Capital Analytics

2007

Q1

2008

Q120

08Q2

2008

Q3

2010

Q3

2007

Q2

2009

Q120

09Q3

2011

Q220

11Q1

2008

Q420

09Q1

2010

Q4

2007

Q320

07Q4

2009

Q420

10Q1

2010

Q2

2011

Q3

Quarterly Transaction Volume by Region, billions

$140

$120

$80

$100

$60

$40

$20

0

Asia Pacifi cEMEA

Americas

commercial property prices remain below their pre-

downturn peaks, exposing investors to high refi nancing

risks, which may increase property sales as investors seek

to raise capital.

Can We Find Growth Anywhere?Europe presents a prime case of how demand drivers for

real estate exist even in the face of economic uncertainty.

The early days of the economic recovery were marked by

strong investor interest in prime assets in prime markets,

with trophy offi ce buildings in major markets such as London

and Paris experiencing great interest and bidding activity.

Germany and France—traditionally real estate investment

magnets, both of which have so far outperformed the

overall Eurozone in terms of economic growth—attracted

a great deal of capital targeting their commercial property

sectors. But with the economic recovery waning as a result

of sovereign debt concerns, investors are searching for

properties beyond traditional hotspots. This is evidenced

by recent acceleration in cross-border activity targeting

the commercial property sector. According to Real Capital

Analytics, in the third quarter of 2011, the percentage of

trading volume involving cross-border capital reached its

highest point in three years. And while the usual markets

in U.S., France, Germany and the UK continue to attract

capital, yields in these markets have fallen and cross-border

investors are shifting to other areas of Europe despite

concerns over the future of the European Union. Investors

have begun to look at other areas, such as Poland, Russia

and Turkey. Recent surveys show a marked increase in cross-

border transactions in Central Eastern European markets,

where governments are not straddled with the overarching

debt issues of many of their larger neighbors.

The increased investor interest in Central and Eastern

Europe refl ects growth in the demand for certain classes of

commercial property. Of the fi fteen global offi ce markets

with the strongest growth in occupied offi ce stock over

the past year, nine are located in the region. Warsaw, for

example, was the only EU nation to avoid a recession in

2009, and experienced a 6.5% increase in occupied offi ce

space during the past four quarters. Other markets in the

region recording similarly strong performance include

Moscow, Kyiv, St. Petersburg, and Prague.

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Offi ce Hotspots in 2011

MarketGrowth in Occupied

Offi ce Stock (Q3 2010 - Q3 2011)

Abu Dhabi 25.8%

Guangzhou 19.2%

Shanghai 15.2%

Beijing 14.5%

Kyiv 12.6%

Moscow 11.7%

Bucharest 11.1%

Mexico City 10.5%

St. Petersburg 9.9%

Sofi a 9.5%

Belgrade 8.8%

Warsaw 6.5%

San Jose 4.5%

Bratislava 5.4%

Prague 4.6%

Source: CBRE Research

These markets are enjoying demand for offi ce space from

international as well as domestic occupiers. Healthier

government balance sheets, relatively low labor costs,

and high rates of education have attracted a number of

international companies, both from continental Europe

and beyond.

SummaryThe outlook for the coming year is very dependent on

governmental policy responses—which makes the level of

uncertainty high. Policy responses have been inadequate

and slow across the globe, and this shows no signs of

changing. Commercial property data, however, point to a

number of markets that have experienced positive growth in

occupier and investment demand—even in Europe—despite

the uncertainty. That economic momentum remains uneven

will continue to drive investment activity both within and

across borders.

TREND #3HOUSING SEARCHES FOR BALANCERising Rents Help to Stabilize Home Prices

Can housing fi nally fi nd a bottom in 2012? There are

some good reasons to think that it can, as long as one

looks at the whole market, rather than just the for-sale

segment. Total household growth and new construction

should strengthen as the economy adds more jobs and

the unemployment rate drops. It is important to see the

two sides of this trend, however—their interaction is what

ultimately drives the housing recovery.

Owner-occupied units account for about two thirds of

the nation’s housing demand. Given the still-high rate of

foreclosures and their negative impact on home prices and

sales, it is likely that owner demand will continue to struggle,

although perhaps not as much as it did last year. At the

same time, rental demand is expanding at a near-record

pace that is well ahead of supply. As a result, vacancy is

falling and rents are rising in every region of the country—a

key building block for an eventual recovery in home prices.

The housing market is being shaped by many countervailing

forces. The costs of buying a home now are record-low

relative to both household incomes and rents, which

makes pursuing homeownership today an opportunity of

a generation. At some point, this high and rising housing

affordability should unleash pent-up demand, leading to

rising sales and prices. The chart below illustrates this,

displaying the ratio of monthly principal and interest

payments on a median-priced home, to rent. This ratio is

computed historically using the all-transaction home price

and apartment rent index. In 2011, for example, with a

4.9% interest rate, the cost of owning a $250,000 home

purchased with a 20% down payment comes to about

$1,100 a month—which is very close to the current national

average rent. It turns out that the current ratio is not only

more than 20% below the historical average; it is also at

a record low over this period.

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Housing Affordability is at a Record High

Ration of monthly principal and interest to rent, 2011Q3=1

1.7

1.6

1.4

1.3

1.5

1.2

1.1

1.0

0.9

1986

1994

1996

2010

1988

2002

2004

1998

2000

1990

1992

2006

2008

2006-2011 average

Sources: Federal Reserve, FHFA, MPF Research, CBRE Econometric Advisors.

Whether it does unleash demand ultimately depends on

households' view of homeownership in this fragile market.

This view is being shaped by three factors. First, with

hundreds of thousands of homes entering foreclosure

every month, some buyers expect further declines in home

prices, or are uncertain about the fair market value of

homes. Second, the labor market is still too weak to boost

confi dence much and with the unemployment rate high, it

takes a person longer to fi nd a job today than it did in the

past. In such an environment, households have to be able

to move quickly to where jobs are. Being that it takes time

to sell and buy a house, mobility and homeownership are at

odds with one another. A third factor is buyers' expectations

for building equity while owning homes. With property taxes

and maintenance costs high and home price appreciation

yet to resume, home ownership does not yet look like the

sure investment it used to be. Another key impediment to

home ownership is that higher mortgage down payment

requirements, combined with depleted household savings,

are making it much harder for households to qualify for

loans. As long as unemployment remains high, rebuilding

credit will be a slow process for most households, and

will be particularly challenging for those who are near

retirement.

Foreclosures remain a major drag on housing appreciation,

and progress in stemming them has been slow. While rates

of foreclosure starts and completions have declined from

the peak, the share of mortgages in foreclosure remains

near its record high of 4.5%. Distress is likely to continue

to affect home sales and prices during 2012’s spring

and summer home-buying season, considering that the

labor market is not expected to gain much traction until

the second half of the year. At the same time, this impact

should be less negative than in 2011, if the economy does

show steady improvement in the fi rst half and the so-called

“strategic defaults” do not intensify. Under this more

optimistic scenario, almost 0.5 million households will still

lose homes, which would push the homeownership rate

down by another 30-50 basis points. As a result, prices

will still decline, but probably by only 1-2%, as compared

to the 3-4% in 2011, when the losses to owner demand

were also more severe.

The U.S. Homeownership Rate is Likely to Continue Declining in 2012

Sources: Bureau of the Census (Housing Vacancy Survey), CBRE Econometric Advisors

Homeownership RateRenter Households

Homeownership Rate, % Renter Households, Millions

7170

68

66

64

62

4240

3638

32

28

24

34

26

2220

67

69

65

63

6160

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

30

The silver lining to this is the accompanying expansion in the

number of renter households: combined with demographic

growth, the shift from owning to renting should yield over

0.7 million new renters. As a result, growth in rental

demand will exceed supply next year, although not by

as much as one might expect. While new completions

intended for rent will be low by historical standards—near

0.2 million units—rental stock will also add over 0.4

million units through conversions from owner-occupied

and vacant for-sale units. More than 4 million units

have been converted to rentals since 2004, signifi cantly

constraining improvement in the rental vacancy rate—and

conversions will remain a signifi cant headwind, especially if

owner demand falls. Considering this, rent growth should

approach its long-term average of about 3%, but a much

stronger infl ation will prove challenging.

Home prices remain under pressure from a major

imbalance brought about by the housing boom and bust

of the last decade: there are about 2.5 million more

vacant units than there were prior to the correction. Of this

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on their way to gradually becoming a thing of the past, as

individuals are choosing more central, urban locations with

easy access to mass transit, restaurants, cultural activities

and their places of work. Such a trend would not only have

a major impact on residential real estate, but it would also

present a signifi cant challenge to the sustainability of the

nation’s suburban offi ce markets.

The problem with the argument for the de-suburbanization

(or re-urbanization) of America to this point is that it is less

theory than it is a hypothesis that has yet to be fully tested.

The story of a population base shifting from suburban to

city locations sounds plausible, but the lack of empirical

evidence thus far makes it hard to defend. While data

from the most recent decennial Census show that cities are

indeed growing, they also show that they are not growing

any faster in most cases than their suburban counterparts.

None of this matters, however. If a story gains enough

traction, it can take on a life of its own—even without the

research or data to back up the argument. For their part,

commercial real estate investors appear to have bought into

the argument for the renaissance of center cities, and are

adopting strategies to divest themselves of suburban assets.

Transaction data have shown that over the past year an

increasing share of deals has been based in downtowns,

as investors view these assets to be more liquid, and are

willing to buy yields below 5% in markets like New York.

But investor behavior does not fully support the argument

that the suburban offi ce market is dead as much as it

reveals something about investor appetite for risk at this

stage in the recovery. Investment activity has been focused

largely on core assets in high-profi le locations in markets

like New York, Boston and San Francisco; the reasoning

is that prime downtown locations offer a buffer against

downside risk by way of increased liquidity, when compared

with suburban locations. This is nothing new, however, as

investment typically picks up for well-located core assets

fi rst during a recovery, then spreads beyond downtowns and

into suburban locations as investors grow more willing to

take on more risk to expand their portfolios.

Another way to look at this argument is through property

fundamentals. If a secular shift is occurring away from

suburbs and toward downtowns, surely this should manifest

itself in the property data. We can start by looking at

demand for offi ce space, which should reveal location

inventory, only 0.5 million units are on the market, however,

and this has a direct impact on prices. Current household

growth is 0.7 million per year (half the historical average)

and with home demolitions of 0.3 million, new demand

must be close to a million units and well ahead of the 0.6

million in new completions. Household growth is a largely

a function of labor market conditions, and with a stronger

pace of recovery, virtually all of the excess supply for rent

and for sale could be absorbed by the end of next year. The

negative effect that the glut of vacant homes on the market

is having on prices would subside as a result.

It is much harder to foresee how many of the homes now in

the “shadow” inventory might be put up for sale next year.

Historically, the share of these units entering the market has

increased when buyer demand and prices were strong—

which will not be the case in the near term. At the same

time, many of these units are non-primary residences, so

it is possible that more owners will decide to strategically

default on their mortgages this time around—especially in

areas were home prices are still down by more than 20%.

Investors’ views of the market will play a major role in

shaping their decisions.

In summary, U.S. housing should see a slight improvement

in price trends along with moderate rent growth in 2012,

preparing ground for a more sustained recovery later.

Rising rents can help to stabilize home prices but any

real progress can only take place when households have

trust and confi dence in the economy—including a more

robust job market and an expectation of building home

equity—and enough resources to qualify for mortgages.

Foreclosures remain the major wild card and as such the

outlook will depend on how quickly they are being resolved.

In this regard, 2012 can be viewed as a transition year for

the U.S. housing market.

TREND #4SUBURBAN OFFICE WILL CONTINUE TO TAKE PART IN THE RECOVERYBusting the Myths that Suggest the Death of Suburban Offi ce

There has been no shortage of discussion lately about the

death of the suburbs as an American institution. Some

metropolitan population pundits suggest that suburbs are

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preferences for businesses. Historically, net absorption in

absolute terms has favored suburban markets, but in recent

decades this has largely been a function of the relative

size of the suburban offi ce market, which today makes up

roughly two-thirds of the nation’s offi ce market. Looking at

the net absorption rate, which accounts for the relative size

of the market, allows for a more fair comparison.

When these series are graphed, we can see the relative

demand trends for downtown and suburban offi ce space.

What we see is that the recession’s demand fallout was

far more severe for downtowns, and that they still have a

great deal of ground to make up. Moreover, there is not

a discernible difference between downtown and suburban

offi ce demand in the period since the recovery began,

despite the perception that most of the improvement has

been in core locations.

One might even argue that suburban offi ce has outperformed

downtown, in terms of demand. With respect to core

performance in downtowns, just a handful of markets are

showing solid performance. New York is perhaps the best

and largest example of this type of improvement, but it

also skews the results. By itself, New York has accounted

for nearly half of all downtown demand year-to-date, and

a comparison of downtown versus suburban offi ce without

New York produces a very different result, and a different

view of relative performance.

Source: CBRE Econometric Advisors.

Are Suburbs Lagging or Leading in the Recovery?DowntownSuburban

Downtown ex-New YorkOccupied Stock, YoY % Chg.

4

3

1

2

0

-1

-2

-3

2007

.1

2008

.120

08.2

2010

.1

2007

.2

2009

.120

09.2

2010

.3

2008

.320

08.4

2010

.2

2007

.320

07.4

2009

.320

09.4

2010

.420

11.1

2011

.220

11.3

2011

.420

12.1

2012

.220

12.3

2012

.4

Leasing decisions in markets like New York are usually

refl ective of corporate conditions and planning rather than

outright business formation and job growth. Without this,

the picture of strong downtowns emerging and leading

the offi ce market recovery simply does not hold up across

the board. In fact, we see a picture that suggests that the

strength of the offi ce market recovery is more focused on

submarkets outside of the nation’s CBDs. In itself this is

not all that surprising; historically, demand for suburban

offi ce space has outpaced that of downtown locations. What

might be surprising at this point, then, is that demand in

downtown offi ce markets has managed to keep pace with

the broader trend.

But this also highlights an important distinction between

submarkets and markets. When we talk about downtown

versus suburban markets, we are comparing many

different and diverse submarkets within cities and broader

metropolitan areas, respectively. It is entirely possible for

pockets of strength to lead to more robust results for a

particular market. In New York’s downtown submarkets, for

example, this can be seen by looking at Sixth/Park Avenue

and perhaps World Financial Center (WFC), where vacancy

rates are well below market average and are outperforming

their suburban counterparts. While these may be attractive

submarkets, investors will also have to pay a price for such

prime locations, in the way of lower yields.

Another argument for downtown offi ce investment has to do

with rent and vacancy. True, vacancy rates in the suburbs

tend to run higher than downtown markets, and tighter

leasing markets support rent growth, which drives income

and returns. But vacancy rates don’t in themselves dictate

rent growth—it’s the market or submarket equilibrium

vacancy rate level that is important. To that point, both

downtown and suburban vacancy remains elevated and

above what would support rent growth on par with broader

infl ationary measures. But this is changing and the rent

cycle has shifted from correction to recovery.

Downtown offi ce rents have historically grown faster during

upswings, which can attract investors when the market is

on the way up—but they fall faster during corrections.

Because downtown rent cycles see such wide oscillations,

average growth between downtown and suburban offi ce

markets is statistically diffi cult to distinguish over the past

20 years—something that will not change anytime soon.

While rent growth in downtowns has picked up faster than

in the suburbs, much of this can be attributed to a very

small core of markets—and submarkets. Once landlords

regain a measure of pricing power in downtown markets

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they tend to move more aggressively in order to maximize

operating income during the upswing. Again, excluding

New York gives us a much different perspective that shows

that rent growth across most markets is roughly the same.

Also, those investors who bought at the height of the market

in downtown locations, thinking they were hedging their

bets, are now facing the threat of diminished cash fl ows

as those leases are starting to roll. This is something worth

considering even in a market like New York, or perhaps San

Francisco, where rents dropped in excess of 20%, peak to

trough, before beginning to rebound. Building owners in

these markets will need every bit of that accelerated growth

to cover leases signed at the top of the market.

The offi ce market continues to face a lengthy recovery

and after a transition in 2011, next year will be another

important step on the road back. The talk about the

downtown renaissance and suburban demise will likely

continue, but you won’t hear it from us—at least not as part

of an argument on permanent trends. Sure, downtown core

assets will continue to trade at a premium and rent growth

will likely outpace its suburban counterpart; that won’t be

by much, however, and performance will be mixed, with the

best downtown submarkets leading improvements. There is

also little evidence that demand for offi ce space in suburban

business parks is likely to evaporate any time soon.

The point in all of this is not that 2012 will be the year of

the suburbs or that investors should alter their investment

strategies and divest themselves of downtown assets.

Investors like downtowns for a number of valid reasons,

including longer lease length, access to capital for liquidity

and potential for NOI growth in an up market. Rather, our

aim is to shed light on a debate that has gained a great

deal of traction in the press without having a good deal

of supporting data. For their part, investors should be

conscious of whether their decisions are based on headlines

and perceptions of new urban theory, and they should look

to how much empirical evidence exists to support their

perceptions.

TREND #5SHORTAGES IN LARGE WAREHOUSE SPACE WILL ACCELERATELarge Warehouses Recovering Faster Than Overall Industrial

It comes as no shock to property investors to hear that the

recent recession ravaged the industrial sector. The sour

economy, falling trade and inventories, and plunging

industrial production conspired to push the availability

rate in the nation’s industrial sector to a record high. With

the recession now over and many of the sectors’ primary

demand drivers recovering nicely, industrial property has

reported healthy demand every quarter for the past year.

Looking deeper, however, it becomes clear that 2011 will

go down as a year of consolidating and upgrading by

occupiers.

Lots of available space combined with very low rent

levels has provided great opportunities for occupiers to

consolidate space or upgrade to higher-quality space.

Consolidation is being reported in markets all over the

country, with fi rms consolidating multiple smaller facilities

into fewer larger ones in a constant drive to reduce


Demand for Large Buildings Held Up Comparatively Well During the Recession


Little Difference in Rent GrowthDowntownSuburban

Downtown Ex-New YorkTW Rent Index, YoY % Chg.

20

15

5

10

0

-10

-5

-15

-20

2000

.1

2002

.120

02.3

2006

.1

2000

.3

2004

.120

04.3

2007

.1

2003

.120

03.3

2006

.3

2001

.120

01.3

2005

.120

05.3

2007

.320

08.1

2008

.320

09.1

2009

.320

10.1

2010

.320

11.1

2011

.320

12.1

2012

.3

SmallBigAbsorption Rate

1.2

1.0

0.6

0.2

-0.2

0.4

0.8

0

-0.4

-0.6

-0.8

2000

.1

2002

.120

02.3

2006

.1

2000

.3

2004

.120

04.3

2007

.1

2003

.120

03.3

2006

.3

2001

.120

01.3

2005

.120

05.3

2007

.320

08.1

2008

.320

09.1

2009

.320

10.1

2010

.320

11.1

2011

.3

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expenses. This has led to above-average demand for larger

facilities during the past year. For almost the entire recession

and specifi cally for the last four quarters, the nation’s largest

industrial facilities—those of more than 500,000 sf—have

been experiencing positive demand.

The recession offi cially started during the fourth quarter of

2007, and large buildings have reported comparatively

robust demand since the beginning, with average quarterly

demand of nearly 4 msf, compared to -5.9 msf for smaller

facilities. For the past year, large buildings have been

responsible for 18% of all the absorption in the nation’s

industrial sector, yet large buildings account for only

13% of the nation’s stock of industrial space. This strong

absorption has allowed the large building segment to

see its availability rate fall 100 bps since the peak of the

recession, to 12.5%; the country’s smaller buildings have

seen a decrease of 90 bps over the same period, to 14%.

While those two fi gures are not dramatically different, the

availability decrease among large buildings is impressive

when you consider that large buildings also accounted for

44% of all construction during the period—a far greater

share than we’ve seen at any point in our history. But though

the share of total construction is high, absolute levels of new

construction remain very low, currently running at about half

of what is being demanded. Over the past four quarters,

the construction rate for large buildings has been 0.16%,

while the absorption rate has been 0.39%.

Record-high construction of large buildings during the early

stages of the recession, combined with weakening demand

as the economy soured, led to a rapid rise in the availability

rate of large buildings. The large building availability rate,

which historically has been several percentage points below

the overall sector, rose faster and sooner than that of all

buildings early in the recession, until it was essentially in

line with the overall industrial sector. The recession caused

new construction to pull back dramatically for all types of

buildings, even as demand for large buildings remained

positive during most quarters. This allowed the segment’s

availability rate to stabilize sooner, and to drop faster, than

that of the overall industrial sector.

Although nationally the demand for large buildings has

certainly outpaced demand for small buildings, availability

rates are comparable, due to relatively high large building

construction. In some markets the difference is far greater,

however, and shortages are being reported in places.

Austin, for example—a smaller industrial market where

larger buildings comprise just under 10% of industrial

space—has no available space in its largest buildings.

Houston and Riverside, two of the largest markets we cover,

with great infrastructure and transportation networks, are

both reporting availability rates below 5% among their

largest buildings, versus double-digit rates for the market

as a whole.


Shortages Now Bring Reported in Some Markets

Current Availability Rates (%)

Market Large Buildings Market Level

Austin 0.0 14.4

Houston 4.5 10.2

Riverside 4.8 12.1

Minneapolis 7.0 11.4

Denver 8.2 12.7

Chicago 12.5 15.4

Atlanta 15.1 18.1

Nation 12.5 13.7

As the economy continues to recover and the industrial

recovery spreads, 2012 will see more of these spot shortages

show up, as rents still are too low to justify substantial new

construction. In Atlanta, where the recovery has been slower

than the nation’s, and where there currently isn’t a shortage

of any type or size of space, the large building segment is

now showing signs of strength. The large building segment

in Atlanta has seen availability rates fall 330 bps from their

recessionary peaks, compared to a decline of 140 bps for


Availability Rates Stabilized Sooner for Large Buildings

SmallBigAvailability Rate, %

16

12

8

14

10

6

4

2

2000

.1

2002

.120

02.3

2006

.1

2000

.3

2004

.120

04.3

2007

.1

2003

.120

03.3

2006

.3

2001

.120

01.3

2005

.120

05.3

2007

.320

08.1

2008

.320

09.1

2009

.320

10.1

2010

.320

11.1

2011

.3

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2TREND #6HOTEL ROOM DEMAND GROWTH WILL SLOWOverseas Slowdown will Contribute

This hotel recovery has been one for the record books.

After a near-halting of business and leisure travel during

the recession brought a signifi cant decline in demand for

rooms in 2008 and 2009, the hotel industry has witnessed

dramatic demand improvement since the economy has

begun to show signs of recovery. A rapid increase in

international tourism helped to fuel the demand recovery in

the U.S., but as global unbalance has plagued travelers in

recent months, international tourism has dropped. Another

the market overall. Similar trends are starting to show in

Dallas, where a massive large-building boom that lasted

through the early parts of the recession pushed availability

rates of large buildings above 22%, while the market as a

whole registered 17.1%. Since the recession has ended,

however, the availability rate has fallen much faster for the

large building segment, with its current availability rate now

comparable to the market’s overall 15.3% rate.

Looking to 2012, as the economy continues to steadily

recover and hopefully even to accelerate, it is clear that we

will start to see increased spot shortages—particularly of

the largest industrial assets. The economy-of-scale benefi ts

expected from building super-large assets have historically

been constrained by the technological diffi culties of heating

and cooling those assets, such that taking advantage of

their immense size in a cost effective way has been diffi cult.

However, recent technological improvements have allowed

for more of these buildings to be built and for occupiers to

benefi t from their scale. Larger buildings that are now cost

effective to run and manage will lead to more consolidation

among fi rms that currently use several smaller facilities.

And with supply chains increasingly dependent on cheap

and reliable transportation systems, recent rail investments

also have the potential to encourage fi rms to consolidate

multiple facilities into a single one located near a strong

intermodal network, reducing the high costs associated

with truck shipments. With minimal new construction

and fewer buildings available to be leased up, in 2012

this consolidating trend will have only shortages of large

buildings to constrain it.

The rapid recovery in demand for hotel rooms, which

began as early as mid-2009, was historic. Reaching

growth rates of 10% on a year-over-year basis, the rate

of rebound well surpassed the recovery that followed the

2001 recession, despite the fact that the demand declines

during this recession were slightly less severe than in 2001.

Since that historic 10% growth, the demand growth rate has

decelerated consistently and currently reads around 5%.

The pattern is similar to what we witnessed following the

demand spike in 2004, when the pace of demand growth

fell consistently until 2006, even declining for a couple of

quarters before stabilizing at around 0.5% in 2007. The

more recent sharp improvement in hotel room demand

helped us achieve expansion by the end of 2010. Demand

growth will likely stabilize in the coming quarters.

During the recent hotel recovery, the boost in demand has

come from international, rather than domestic, travelers.

Just as demand growth was reaching 10%, international

tourism growth was achieving nearly the same growth

figures, while domestic travel remained much lower.

International travelers were most likely taking advantage

of the low room rates, but rates have risen since then

and the global crisis is creating international tourism


Robust Demand Recovery UnderwayDemand Growth (R)

4 Qtr. Moving Avg. Demand

SF x 1000 Demand Growth, YoY (%)

1500

1400

15

10

5

0

-5

-10

-15

1200

1300

1100

1000

900

800

1988

.1

1992

.119

93.1

2000

.1

1989

.1

1996

.119

97.1

2002

.1

1994

.119

95.1

2001

.1

1990

.119

91.1

1998

.119

99.1

2003

.120

04.1

2005

.120

06.1

2007

.120

08.1

2009

.120

10.1

2011

.120

12.1

2013

.120

14.1

factor in boosting the demand recovery in its early phase

was that room rates fell to historically low rates during

the downturn; ADRs remaining low well beyond the start

of the demand recovery has only compounded the effect.

Though the hotel recovery has remained resilient, growth

has diminished a bit and factors will arise in the coming

quarters to diminish growth even further.

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The severity of the recent downturn caused room rates to

record historic, severe declines. When room rates stopped

declining at the end of 2009—at levels recorded in mid-

2006—the downturn had taken almost three years worth of

pricing power away from hotel owners. Unlike in the 2001

recession, when demand declines were less pronounced,

hotel owners slashed room rates in order to keep demand

from sliding even further into the red. This has translated

into rates that are still 8% below their previous peak, even

following several quarters of growth. Hoteliers were quick

to start increasing rates again soon after there was proof

that the hotel demand recovery had legs. Over the coming

quarters, hoteliers are going to continue to trade away

accelerating demand growth for ADR growth, which is

another reason we will see demand growth for hotel rooms

continue to diminish.

Several factors, then, will cause demand growth to continue

to diminish in 2012. The historic demand growth rate

of 10% at the onset of the hotel recovery was, of course,

unsustainable, and with growth having diminished for the

past several quarters, there is momentum toward further

slowing in 2012. A European economic crisis could put a

signifi cant damper on already-weakened international travel

to the U.S., which has been a driving force through much of

this hotel demand recovery, and accelerating growth in room

rates will only compound the issue. But demand fl attening

out in 2012 does not mean the end to the demand recovery;

demand for rooms will continue to expand, just not at the

boosted rates recorded coming out of the recession.

DomesticInternational

Hotel DemandPassenger Enplanements: Yr/Yr Growth (%)

30

10

20

0

-10

-20

-30

1997

1999

1999

2003

1997

2001

2001

2004

2000

2000

2003

1998

1998

2002

2002

2004

2005

2005

2006

2006

2007

2007

2008

2008

2009

2009

2010

2010

2011

Source: CBRE Econometric Advisors, BTA.

Domestic or International Travel Causing Boost in Demand?


Occupancy Growth Gives Way to ADR Growth

APR Growth (R)4 Qtr. Moving Avg. ADR APR Growth, YoY (%)

$140

$130

$120

15

10

5

0

-5

-10

-15

$100

$110

$90

$80

$70

$60

1988

.1

1992

.119

93.1

2000

.1

1989

.1

1996

.119

97.1

2002

.1

1994

.119

95.1

2001

.1

1990

.119

91.1

1998

.119

99.1

2003

.120

04.1

2005

.120

06.1

2007

.120

08.1

2009

.120

10.1

2011

.120

12.1

2013

.120

14.1

TREND #7DEBT MARKET DISTRESS MOVES PAST PEAKS, BUT REMAINS HIGHA Widening Window of Investment Opportunity?

As 2012 unfolds, equity investors may continue to be wary

of the competition and high prices paid for core assets, and

some may rethink their strategy and risk/return parameters.

However, debt investors that have capital to deploy may be

well positioned to take advantage of growing opportunities

to fi nance fi rst mortgages and strategically re- capitalize

maturing loans that are backed by quality properties. While

uncertainty regarding future upward movement in interest

rates is a concern for debt and equity investors alike, those

in the debt world may see an opportunity to earn favorable

risk-adjusted returns—especially under a scenario where

growth in property values stalls from downward pressure

on net operating income. Permanent fi rst mortgage and

mezzanine lenders will continue to benefi t from a growing

pipeline of loan maturities that will be in need of “gap”

fi nancing.

uncertainties, which will most likely have a negative effect

on hotel demand growth in coming quarters, particularly

as the UK, Germany and France are three of the top ten

tourist generating countries for the U.S., in terms of the

number of arrivals, according to the Offi ce of Travel and

Tourism Industries. Domestic travel did witness a slight

surge in 2010, but since that time it has diminished. The

demand growth witnessed so far in the hotel recovery is

not sustainable, given these trends in travel.

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What are some of the important trends that have emerged

in recent months that will set the stage for the real estate

debt capital markets in 2012?

Debt availability continues to improve, but the progress

remains decidedly uneven. The CBRE Debt Momentum

index indicates that lending volume almost doubled for

the year ended in the third quarter of 2011. Despite

the gains, lending volume remains at less than one-

half of 2007’s peak level. The life companies and

lending agencies (Fannie Mae, Freddie Mac) have

contributed disproportionately to this year’s gains

and are likely to remain reliable sources of fi nancing

in 2012. Bank lending also revived substantially over

the course of 2011; lending conditions are likely to

remain constrained in secondary and tertiary markets,

however, as local and regional banks continue to

work through their distressed commercial real estate

portfolios.

The CMBS pipeline thinned this fall due to spread-

widening and uncertainty in the capital markets. The

withdrawal of a few key lenders from the CMBS sector

has also raised additional concerns about future

market growth. As a result, some observers fear that

2012 CMBS origination volume will struggle to surpass

the approximately $31 billion originated in 2011.

CMBS lending will be critical to improving liquidity in

2012, especially in secondary markets and among

B-quality properties.

Less competition has caused loan spreads to become

more favorable to lenders: while quoted spreads on

commercial fi xed-rate permanent loans appear to

have tightened slightly from this year’s highs recorded

in August, they are still anywhere from some 40-75

bps wider than May’s lows, depending on property

type and loan-to-value ratio, according to Trepp. This

largely follows the pattern in CMBS spreads which

evolved over the course of the year. At the same time,

with the downward shift in the yield curve, borrowers

now benefi t from lower all-in borrowing costs.

Underwriting parameters appear to have stabilized:

after a fl urry of CMBS origination in the fi rst half

of 2011, CMBS investors began to object to lower

subordination levels amid looser underwriting

standards and the reappearance of interest-only loans.

However, overall underwriting parameters appear

to have stabilized in recent months. CBRE Capital

Markets tracks the average loan-to-value (LTV) on

new-issue, permanent, fi xed-rate loans. (Exhibit 1)

After a period of tight underwriting standards that

lowered average commercial LTVs signifi cantly during

the recession, LTVs recovered markedly during 2010

and then stabilized over the course of 2011. Given

the sluggish recovery in real estate fundamentals,

lenders are likely to remain generally risk averse; as

a result, it appears that underwriting standards will be

maintained in the near future.

Distressed loan resolutions and loan sales have risen

over the course of 2011, which could continue to exert

downward pressure on distressed property prices, which

have been fl at to declining over most of 2011. (Exhibit


Exhibit 1: Loan-to-Value Rations Stabilize

Non-HousingHousing-RelatedAverage LTV %

80

70

75

65

60

55

50

2003

.1

2005

.120

05.3

2009

.1

2003

.3

2007

.120

07.3

2010

.1

2006

.120

06.3

2009

.3

2004

.120

04.3

2008

.120

08.3

2010

.320

11.1

2011

.3

Average LTV for deals with fi xed rate permanent debt


Exhibit 2: More Downward Pressure on Distressed Property Prices to Come?

CPPI Distressed Property Price IndexNet Qtrly Distressed Property Resolutions ($ Bil.) (R)

Repeat Sales Price Index

250

150

200

100

50

0

Oct-0

7

Jun-

08Au

g-08

Oct-0

9

Dec-0

7

Feb-

09Ap

r-09

Oct-0

8De

c-08

Dec-0

9

Feb-

08Ap

r-08

Jun-

09Au

g-09

Oct-1

0

Apr-1

0

Dec-1

0

Apr-1

1Fe

b-11

Jun-

11Au

g-11

Jun-

10Au

g-10

Property Resolutions, $ Bil.

25

15

20

10

5

0

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TREND #8CONSTRUCTION MAY RETURN SOONER THAN YOU THINKSingle Tenant and Delayed Projects Bring Back New Building

The recent downturn in the commercial property markets

was largely a demand-driven phenomenon, with businesses

failing and returning empty space to the market. By

contrast, the commercial real estate downturn of the late

1980s and early 1990s was heavily supply-driven, with an

excessive quantity of new construction sitting as an anchor

around the neck of property market performance for much

of the early 1990s. Many investors are banking on the fact

that there is no such anchor holding back the commercial

property markets today, and anticipating performance to

rebound sharply once demand returns.

We think that these investors are right to assume that the

shutdown of new supply will have an impact on property

market performance. All other things equal, any short-

term interruption of supply will push up rents for existing

properties as tenants scramble to fi nd suitable space.

This said, we do believe that some investors are being

overoptimistic in this regard. Some assume that our

2) With some $80 billion specially serviced loans in

need of resolution, and the prospect of additional

defaults among bank development deals, it’s likely

that we’ll see growing demand for opportunistic

capital to resolve the pipeline of distressed deals.

For example, the demand for refi nancing previously

matured CMBS loans and future 2012 maturities is

expected to reach $70 billion—far above estimates

of CMBS new-issue origination. Even with a fairly

generous estimate that 50% of 2012 CMBS maturing

loans may be able to fully refi nance, the pipeline of

unresolved loans will grow. Surely, many lenders

will be forced to extend loans, but many others may

require some form of modifi cation or disposition. In

particular, nearly $15 billion of maturing CMBS loans

from the 2007 vintage—according to Trepp—could

prove troublesome. These 5-year loans were highly

levered and interest-only; many were underwritten

to weak standards and rents at market peak levels.

The one aspect of the fi nancial markets that will remain

diffi cult to navigate will be the prospect of continued

volatility and uncertainty related to the European debt crisis.

This will require additional patience and fl exibility on the

part of lenders, as borrowers are likely to pause frequently

to re-evaluate strategies and bids in light of volatile capital

markets. In addition, the heightened competition between

life companies and banks for the best quality deals in the

primary markets is likely to remain in place. Risk aversion

will remain an important theme among fi rst mortgage

lenders in 2012, creating opportunities for mezzanine

lenders that provide gap refi nancing, as well as those that

seek to re-fi nance deals in secondary markets.

Several trends would seem to indicate that the debt markets

are moving past a period characterized by distress, to an

era where re-capitalization is the dominant theme. A recent

plateau in CMBS and bank commercial loan delinquencies,

sales of several international banks’ distressed U.S. lending

portfolios, the gradual resolution of construction and

development loan problems, and faster CMBS resolutions

would seem to indicate that a period of peak distress

may soon pass. Meanwhile, a modest recovery in values

would indicate that borrowers and lenders are increasingly

focused on re-capitalizing performing deals. However,

it appears that 2012 will be yet another transition year

for real estate debt capital markets. With only modest

improvement in market rents and occupancies expected,

45

40

35

30

25

20

15

5

10

0

2009

2013

2011


Single-Tenant Construction Returns First HistoricallyMulti-Tenant, Vacancy Rate, %

Single-Tenant Share

Multi-Tenant Vacancy Rate, % Single-Tenant Construction as a Share of Total %

25

20

15

10

5

0

1985

1993

1995

1987

2001

2003

1997

1999

1989

1991

2005

2007

highly leveraged loans and development deals are likely

to remain under a signifi cant amount of pressure, which

may result in the continuation of high loan delinquencies,

especially among CMBS issuers and banks.

16

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situation is such that will never see major new construction

over the life of the target holding periods of many funds.

The fact is that there are a number of potential construction

projects out there which might return quickly.

Over the years, an economy demands new construction.

Firms grow and need to consolidate operations into a single

location. Tastes and technologies change, and fi rms want

to consolidate into open fl oor-plans or LEED buildings.

Even in high-vacancy markets, such changing patterns of

tenant demand can lead to new construction. In the Dallas

offi ce market for instance, even with vacancy rates in the

low 20 percent range in the four years from 2006 to 2009,

construction averaged 2.7 million square feet per year. The

high vacancy was focused on assets that were functionally

obsolete and new construction was needed to facilitate the

demands of tenants in a growing economy.

Still, tenant demand alone is insuffi cient to drive major

new construction. The fi nancial markets are the issue

today, with speculative development problematic, given

a lack of easily accessible capital to bring these projects

to conclusion. Among investors, there has been a move

toward risk aversion; this is especially true of lenders. This

is not the same as saying that there is no capital available

for development; in fact, fi rms that might otherwise be

tenants in commercial properties might in the end opt out

of the rental market altogether.

As shown in the preceding chart, the share of all offi ce

construction that is purpose-built for single-tenants tends to

rise when the market is otherwise facing slack conditions.

When vacancy was high in the mid-1990s, the early

2000s and in this recent downturn, new construction was

shutting down and the share of new construction that was

purpose-built, single-tenant space was rising. When the

development market shuts down, the corporate tenants

who need new space will need to step up to the plate and

take on more fi nancial responsibility for the space needed

for their operations.

The one period for which this relationship does not hold is

in the period from 1985 to 1992, when vacancy was very

high and single-tenant construction was low. In that time

Source: CBRE Econometric Advisors, Real Capital Analytics, November 2011

The Inventory of Failed Developments Valued $100 Million and Greater Might Come Back from the Dead

“Value” Square Feet x 1,000 Units No. of Projects RCA Sales 2011

Total Apartments 129,208,548,469 1.8 849,091 548 41,733,328,214

Hotel 50,954,310,621 22,789 230 16,764,794,592

Offi ce 112,084,652,513 456,154 444 47,806,932,109

Retail 76,500,860,668 428,534 379 33,355,959,515

Warehouse 12,356,392,682 203,303 65 23,118,055,411

Abandoned Apartments 73,002,614,560 479,735 281 41,733,328,214

Hotel 25,961,451,002 113,512 105 16,764,794,592

Offi ce 49,003,727,698 199,432 198 47,806,932,109

Retail 47,217,655,107 264,499 220 33,355,959,515

Warehouse 6,194,322,444 101,917 30 23,118,055,411

Deferred Apartments 56,205,933,908 369,356 267 41,733,328,214

Hotel 24,992,859,619 109,277 125 16,764,794,592

Offi ce 63,080,924,816 256,722 246 47,806,932,109

Retail 29,283,205,562 164,036 159 33,355,959,515

Warehouse 6,162,070,237 101,386 35 23,118,055,411

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frame, fi rms looking for new space would have needed

a compelling reason to allocate capital to purpose-built

facilities when developers were still building and in some

cases practically giving away the properties for free.

By contrast, with developers and lenders in the current

market so risk averse and hesitant to commit capital to new

construction, corporations may end up committing capital to

such projects. Many corporations are carrying heavy cash

balances on their books, and some may opt to put some of

this capital to work in purpose-built single-tenant projects.

If fi rms opt to pursue this path, their ability to undertake new

single-tenant projects will be aided by the sheer inventory of

failed development projects that currently litter the market.

The preceding table, drawn from our CBRE EA/Dodge

Pipeline report, highlights the fact that there is a substantial

inventory of failed major development projects that never

reached completion during the recent market boom. These

projects include many for which entitlements are already in

place and only a source of capital is needed to bring them

back from the dead, so to speak.

To compile the list, we estimated a current “value” for each

project, using the product of the inventory of space or units

in the project and the average national sales price for assets

built since 2000, according to sales data published by Real

Capital Analytics. Included in the table are those projects

that were either abandoned or deferred in recent years and

came in at $100 million or greater.

In the offi ce sector so far in 2011, there were about 30%

more projects deferred—i.e., put on hold until conditions

improve—than there were office buildings sold. The

potential overhang is even greater in the hotel sector, where

deferments were roughly 50% higher than all transactions

through November of 2011. Warehouses are relatively

under-represented here, owing to the short lead times

needed for construction.

Faced with mounting costs and limited sources of

construction and fi nancing, the developers behind some of

these failed projects will either default outright or reduce

their stakes by bringing on other capital partners—if the

market works properly. As the interests in these projects

trade hands, one investor will be taking a loss and the actual

input cost of the development will be falling for that next

investor. History shows us that funny things can happen

when the commercial property markets come out of an

extended downturn, and relative prices change.

Our CBRE colleagues in Tokyo tell us of what was termed,

“The 2003 Problem”—when, after years of unwinding

some of the excesses from the 1980s’ property bubble, the

massive reduction in land costs made development projects

fi nancially feasible, even if market vacancy and new tenant

demand were not calling for construction. The development

boom that ensued added roughly 12 million square feet to

the 23 wards of Central Tokyo in a single year. Again, the

market itself did not need the space; tenants were simply

moved from one building to another as new investors ended

up with old development sites at a lower going-in cost. As

investors pursue yield in the U.S. today, does the market

here face a similar risk?

Our $100 million cutoff for the list above was not just an

attempt to refl ect the large projects that a single corporate

tenant might take on for its own use. Given that investors

are still hungry for yield in the current market and that there

is some new tenant demand, some of what happened in

Tokyo could happen in the U.S. While this would not likely

be to the same degree as in Tokyo—where the stock of

offi ce space grew 6% in a single year (“normal” growth was

closer to 2-3%)—there is the risk that, as failed development

projects trade hands, the reduction in development costs

will allow new projects to move forward, despite the dearth

of construction lending.

Many investors are counting on the fact that the current

shutdown of new competitive supply will help to boost

property income in the short term. Again, we agree with

that thinking, and the forecasts presented in our Outlook

platform hold to this view over the next year or two.

However, over a more extended period—one typical of the

holding periods for most funds in the U.S.—this convergence

of views erodes. Some investors are making investments

today, thinking that no new construction will come in over

fi ve- or even ten-year horizons. These assumptions cannot

hold over such a time horizon, given the sheer quantity of

failed development projects out there. At some price-point,

these projects will trade hands—such that the new owners

will not need construction fi nancing to move forward.

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with retailers remaining circumspect about the consumer

recovery.

The impact of the recent recession on retail sales is apparent

when current levels are compared to pre-recession levels—

particularly for the housing-related sales segments. All

of the three major retail sales categories—necessities,

housing-related and discretionary—declined in 2009

as consumers curtailed their spending. With consumers

least likely to dramatically alter their spending on daily

necessities, that category is the most stable; it wasn’t

immune, however, and necessity-based spending dropped

in 2008Q4 and 2009Q1. Drops were more substantial

in discretionary sales (which, in 2009Q2, was down 11%

from its 2007Q4 peak) and housing-related sales (which,

in 2009Q4, was down 35% from its 2006Q1 peak).

All of the retail sales categories have passed their troughs

and have begun to recover. Having experienced a less

severe drop, necessity spending returned to expansion at

the end of 2009, and as of the third quarter of 2011, the

discretionary sales category has begun expanding as well.

The housing-related sales sector has been recovering, but

at a slightly rocky pace, and sales remain 19% below their

previous peak. With consumers still unsure about the future

of housing values, they seem unwilling to invest in their

houses at the pace they did prior to the housing crisis. Don’t

expect the sector to regain its previous peak within the next

several quarters; consumers won’t be fi lling new houses with

big ticket housing-related items in 2012. That said, recent

spending increases in private residential construction are

concentrated in renovations and improvements (according


Availability Rates Stabilizing in 2011

Lifestyle & MallN&C&SPowerChange in Availability (%)

1.4

1.2

0.8

0.2

0.4

0.6

1.0

0.0

-0.2

-0.4

-0.6

2006

.1

2007

.120

07.2

2009

.1

2006

.2

2008

.120

08.2

2009

.3

2007

.320

07.4

2009

.2

2006

.320

06.4

2008

.320

08.4

2009

.420

10.1

2010

.220

10.3

2010

.420

11.1

2011

.220

11.3


All Retail Sales Segments Expanding, Except for Housing

RecessionHousing

DiscretionaryNecessities

Index, 2004 Q1 = 100

140

130

110

90

120

80

70

100

60

2000

.1

2002

.120

02.3

2006

.1

2000

.3

2004

.120

04.3

2007

.1

2003

.120

03.3

2006

.3

2001

.120

01.3

2005

.120

05.3

2007

.320

08.1

2008

.320

09.1

2009

.320

10.1

2010

.320

11.1

2011

.3

TREND #9RETAIL RENTS FINALLY SEE BOTTOMLagging Behind Other Property Types, Last Pieces Fall in Place

The recent recession’s impact on the retail industry was

deep and lasting. Retail sales suffered as consumers pulled

back on their spending to focus mainly on purchases of

necessity goods. For retail centers, this translated into

historic absorption drops and availability rate increases,

and no center seemed immune. The retail demand recovery

was slow to begin and has had a rocky start, but it has

begun. Availability rates stabilized in 2011, but there is

still a long way to go to reverse the damage done by the

recession. With the demand recovery just getting underway,

we will need to see a couple of quarters of strong decline

in availability rates in order to see upward movement for

rents. Fortunately, such declines are anticipated in 2012,

and in the latter half of the year we expect to see the fi rst

rent growth since the recession began.

Leading up to and during the recent economic downturn,

retail center availability rates increased signifi cantly. As

the housing crisis hit, retail centers saw the fi rst signs

of consumers pulling back on spending; and once the

retailers began to suffer, demand for space began to

decline. Availability rates were increasing by nearly whole

percentage points by 2009Q1. Those increases continued

until consumer spending showed signs of recovery, and

in 2011, availability rates at all three center subtypes

stabilized. Demand momentum has been insuffi cient

to bring a huge downward shift for availability rates,

however, and this lack of momentum will continue in 2012,

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to the Census), and a continuation of this trend should help

to boost sales of building materials and other housing-

related merchandise. It will take a while for housing-related

sales to work their way out of such a deep trough and back

to their pre-housing crisis levels, but it looks like trends

and momentum have them moving in the right direction.

These factors have forced a period of rent declines more

severe than any in our almost 20-year retail history. With

the exception of 2008Q2, retail rents have consistently

declined each quarter since the beginning of 2008, and

are expected to continue on this path for the majority of

2012. This trend’s reversal is anticipated in 2012Q3,

spurred by absorption gaining momentum in 2012 as the

economic recovery becomes more robust. Many retail

center owners have been faced with high availabilities

over the past couple of years, and have been forced to

lower rents in order to gain tenants. In some cases this

has worked to the advantage of retailers; with higher-end

space more affordable than in years past, some have seized

the opportunity to upgrade their space. By the time the

fi nal quarter of rent declines is recorded, rent levels will be

15% below their previous peak and comparable to levels

recorded in 2002q4.

Unfortunately, much ground remains to be made up,

and the rent recovery will not lead to rent expansion until

2016/2017. This was a historic recession for the retail

industry and although the necessity and discretionary

segments have recovered faster than housing-related,

all retail center types shared in the severity of the impact.

With an expected slower and muted demand recovery,

availability rates will remain close to their new peaks in

TREND #10MOVEMENT FROM TRUCKS TO TRAINS WILL BE INCREMENTALRise of Rail Inevitable, but Slow

These past two years saw an impressive fl ow of eye-catching

reports highlighting signifi cant commitments made by both

the federal government and some states to redevelop our

railroad infrastructure. The initiatives are mostly geared

towards improving our passenger train system, not the rail

freight system, with the goal of reducing the overall cost of

commuting in and out of cities.

Some of the investments include the development of

high-speed train systems to be built over the next two

decades across 13 corridors, including Orlando-Tampa

and Chicago-St. Louis. The Federal Government is

expected to provide around $8 billion in funds, most

of it to improve existing services. California has its own

ambitious $42 billion plan (to be partially funded by the

federal government) to connect its major cities through a

high-speed railroad network.

As we move into 2012, the question is whether these

investments will be enough to force a shift from truck

shipment—currently the dominant method of transporting

goods—toward trains, and whether warehouse demand

will be affected at all. The answer is more intricate than

one may suspect and requires several layers of analysis.

The first issue is regulatory. Up until the 1930s,

transshipments in the U.S. relied heavily on trains to move

everything from natural resources to high value-added

merchandise. Beginning in the late 1940s, however,

excessive regulation and the coming of age of the trucking

industry—with bigger trucks running on cheap gas and

door-to-door delivery—undercut the rail industry, bringing

it to its knees by the early 1980s.

The deregulation set forth by the Staggers Rail Act in 1980,

enacted in response to the state of affairs at the time,


Rent Growth by 2012Q3

Rent Growth (L)Rent Level (R)Rent Growth, % Rent Level, $

1.5 $21.00

$20.50

$20.00

$19.50

$19.00

$18.50

$18.00

$17.00

$17.50

$16.50

0.5

1.0

0

-1.0

-0.5

-1.5

-2.0

2006

.1

2007

.1

2009

.1

2008

.1

2009

.3

2007

.3

2006

.3

2008

.3

2010

.1

2010

.3

2012

.1

2013

.1

2011

.1

2012

.3

2013

.3

2011

.3

Lowest Rent Since 2002Q4, Down 15% from 08Q1 Peak

2012, declining only slightly. Retail center owners will gain

some leverage by mid-2012, and in 2012Q3 we expect

that rents will grow for the fi rst time in four years, and the

retail rent recovery will fi nally be underway.

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the expansion in passenger train demand will likely clog

the transshipment network in most urban centers as well,

worsening existing traffi c conditions in and out of major

markets. In Los Angeles, one of the busiest rail transport

destinations in the country, the Alameda Corridor, an

expressway rail for transshipments only, was completed

in 2002 in order to bypass around 200 grade crossings

(interceptions formed by rail tracks and roads or paths) in

and out of the ports of Long Beach and L.A. This type of

expressway is not the norm, however.

The second question is that of effi ciency. Rail shipments’

great advantage—and their biggest weakness—is size. On

average, one transport train can carry a load equivalent

to that of around 280 trucks. This signifi cantly reduces

the per-unit fi xed cost of transshipments, thus allowing

trains to transport goods with high economies of scale.

The longer the distance that goods are shipped, the lower

the fi xed costs and thus, the more competitive that trains

become. The downside for trains is that other modes of

distribution, such as trucks, are typically more competitive

over short distances.

Concomitantly, trucks are bound by the highway system,

which prioritizes connectivity between cities, not the

brought about a 180 degree turn for the rail transport

industry. The legislation paved the way for consolidations,

allowed owners to drop routes that weren’t profi table, and

enabled them, by and large, to run the system as they

saw fi t, as long as Amtrak continued to have access to the

network. Rail norms were also eliminated for most cargoes,

as long as the shipments could also be transported by road.

Over time, the changes in the regulatory framework led to

signifi cant improvements in productivity among the biggest

operators, increases in return to capital, and consistent

drops in rates for over 20 years. Currently, the U.S. rail

shipment system is considered the best in the world—a fact

not to be taken lightly, given the enormous sums invested

in rail systems overseas. As one would expect, the U.S. rail

system runs through most of our major industrial markets.

The much-needed improvements to our passenger railroad

system, however, could end up hindering the future of

the transshipment rail network, mainly for two reasons.

First, an estimated $15 billion train-control system will

have to be implemented in order to monitor the expected

increase in passenger train traffi c, especially around major

urban centers. Such a regulatory mandate will likely raise

transport rates further, beyond the increases witnessed

since the price of oil began to escalate in 2006. Second,

U.S Railway SystemIndustrial Occupied Stock SqFt

Less than 136,481136,481 - 340,749Greater than 340,749U.S. Railway

Source: U.S. Department of Transportation, Federal Highway Administration, Freight Analysis Framework, version 3.1, 2010.

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The impact of distances travelled is compelling. Trucks

are by and large the chosen mode of transportation for

short-distance deliveries. As distances increase, trains

progressively become the preferred mode of shipments

covering anywhere from 500 to 1,500 miles (to put it in

context, transshipments leaving L.A. would be just short

of St. Louis after 1,500 miles; those leaving Miami would

end up in Boston). Goods transported for more than

1,500 miles are relatively few in terms of tons, moved

mainly by trucks and essentially exclude commodities.

Interestingly, train and truck represent basically the same

proportion (40.2% and 40.1% respectively) of total tons-

miles distributed throughout the U.S., in spite of the fact

that trucks distribute signifi cantly more tons than trains do.

Markets that operate on regional distribution axes for

medium-to-long-range supply routes may witness an

increase in warehouse demand, given ongoing investments,

if two conditions are met: (i) that the price of oil remains

around $100 a barrel and (ii) that improved effi ciency and

capacity in passenger trains increases resident population

Source: U.S. Census Bureau.

Ton-Miles by Mode of Transportation as Percentage of Total

TrainTruck

All Other ModesAverage Train, Truck

T-M by Mode of Transp / T-M by All Modes (%)

100

80

60

40

20

0

Less

than

50

mile

s

50-9

9 m

iles

100-

249

mile

s

250-

499

mile

s

500-

749

mile

s

750-

999

mile

s

1,000

-1,49

9 m

iles

1,500

-2,00

0 m

iles

More

than

2,0

00 m

iles

in and around urban centers. In other words, warehouse

demand will expand if the price of gasoline keeps the cost

of commuting high, and faster, more effi cient trains boost

demographic trends near urban centers.

Finally, we estimated the potential impact on warehouse

demand by looking at the correlations between train and

truck transshipments and occupied warehouse stock. Our

study found the presence of train shipments across major

markets to be signifi cantly correlated with occupied stock

and to be, on average, significantly more correlated

than with trucks. This makes sense: trucks tend to pick

up merchandise from distribution centers—many times

supplied by rail shipments—to make customized deliveries

to individual businesses over relatively short distances.

The ultimate impact of current rail investment on warehouse

demand is still unclear. In the near term, 2012 will not

witness any radical switch in the way we ship goods around

the country. What was delivered by trucks and trains last

year will likely be delivered through the same modes in

2012. Moreover, constrained economic growth next year

will keep overall migration patterns to urban centers in

check. Until this is reversed, demographic trends will

not meet the thresholds in consumer and passenger train

demand necessary to expand, in turn, warehouse demand.

Nonetheless, the secular shift towards urban centers will go

on, albeit slowly, as labor demand in agricultural wanes and

higher wages continue to be made in and around cities. The

switch to trains will not be a matter of if but rather of when.

TREND #11IN SPITE OF CAPITAL MARKET VOLATILITY, FINANCE JOB CUTS TO END BY MID-YEAR 2012Many Finance Sub-categories Have Seen Losses Level Off

Despite steady improvement in occupancies and total

offi ce-using employment growth, the two categories of

offi ce-using jobs produced mixed results in 2011. While

total offi ce-using employment grew by 1% through the

fi rst three quarters, it was mostly due to stronger hiring in

the offi ce-using services category—mainly in companies

providing high-tech and professional and business services,

as fi nancial services providers continued to hand out pink

shortest route between end points. As a result, trains tend

to travel shorter distances. To capture the difference that

routing imposes, ton-miles—the tonnage transshipped

times the miles it travels—provides a more accurate

measure of transshipments by modes of transportation that

tonnage does. As distances increase, the per-unit cost of

transporting loads by train drops, allowing bigger loads

to be shipped, and vice-versa—shorter distances lead to

increasingly ineffi cient rail shipments.

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slips for the fi fth consecutive year. While offi ce-using services

jobs grew by 1.5%, offi ce-using fi nancial activities jobs fell

by 0.3%. There were many headwinds facing banks and

fi nancial institutions in 2011, which included volatile global

markets amid sovereign rating downgrades (in Europe

and the U.S.), a sluggish domestic housing recovery and

regulatory changes from the Dodd-Frank Act. Will these

events of 2011 continue to affect hiring trends at fi nancial

fi rms in 2012? Or will improvements in the domestic

economy be enough to fi nally halt job losses for the sector,

irrespective of global uncertainty and regulatory changes?

Despite downside risks from Europe, the U.S. domestic

economic expansion should continue in 2012, helping

payroll expansion in the more cyclical employment

categories of fi nance like Real Estate, Credit Intermediation

and Insurance. Total credit growth (for both businesses and

consumers) has improved since April of 2011, and future

improvements in home sales activity should be a boon for

real estate lenders and brokers, as well as home insurers.

Real Estate employment, which accounts for 20% of total

fi nancial activities employment, will slightly outperform

the rest of the subcategories of fi nance in 2012. The other

subcategories’ respective shares are as follows: Credit

Intermediation and Related Activities—36%, Securities,

Commodity Contracts and other Financial Investment and

Related Activities—12%, Insurance Carriers and Related

Activities—31%, and Funds, Trusts and Other Financial

Employment—1%.

By some estimates, global job cuts in the fi nancial services

totaled over 200,0001 in 2011. Though Europe was the

hardest hit region, layoffs were announced at U.S. banks

as well, and include the likes of Goldman Sachs, Citigroup,

Bank of America and Morgan Stanley. Q3 2011 results for

large investment banks were the worst since the subprime

crisis, as revenues fell due to cutbacks in proprietary

trading and capital-raising activity. Fortunately for offi ce

investors though, this hasn’t resulted in announcements of

banks shedding space, as took place in 2008 and 2009.

In December more cuts were announced at Citigroup

(4,500) and Morgan Stanley (1,600), though, with eventual

reductions to occur in 2012.

Despite a sour year in terms of revenue, we expect payroll

cuts at fi nancial fi rms to be nearing an end. Even with the

recent announcements, the rate of decline for offi ce-using

fi nancial activities employment has eased since 2009. We

expect year-on-year job growth for offi ce-using fi nancial

activities to begin in the second half of 2012. The sector will

continue to underperform offi ce-using services, however,

with annual growth of only 1.4% in 2012, compared to

2.6% for services.

Even if job growth at fi nancial services fi rms disappoints

in 2012 as it did in 2011, investors can take solace from

the fact that offi ce markets have been able to adjust

to a long-term trend of the financial services sector

underperforming the offi ce-using services sector. For the

Source: CBRE Econometric Advisors, Economy.com.

Despite Recent Announcements, Financial Job Cuts are Nearing an End

Credit Intermediation & Related ActivitiesSecurities, Commodity Contracts & Other Financial Investments and Related Activities

Funds , Trusts & Other Financial EmploymentInsurance Carriers & Related Activities

Real Estate

Subcategories of Financial Activities Employment, YoY % Change54

2

-2

-4

-6-7

-1

1

3

0

-3

-5

-8

2007

Q1

2009

Q1

2009

Q3

2007

Q3

2011

Q1

2011

Q3

2010

Q1

2010

Q3

2008

Q1

2008

Q3

2012

Q1

2012

Q3


In 2012, Finance to Underperform Services Again

Offi ce -Using ServicesOffi ce-Using Financial ActivitiesOffi ce Job Growth, YoY % Change

6

2

4

0

-2

-4

-6

-8

2007

.1

2009

.1

2009

.3

2007

.3

2011

.1

2013

.1

2011

.3

2013

.3

2010

.1

2010

.3

2008

.1

2008

.3

2012

.1

2014

.1

2012

.3

2014

.3

1 http://www.bloomberg.com/news/2011-11-22/wall-street-unoccupied-with-200-000-job-cuts.html#

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All is not lost for fi nance, however! Banks and investment

fi rms will continue to play a signifi cant role in many markets

and submarkets, especially as the economy gains strength

and the need for fi nancial intermediation picks up speed.

Although employment in the sector has underperformed

offi ce-using services during the recovery and remains

exposed to both external and internal risks, the more cyclical

subcategories of fi nance should see payroll growth in 2012

and beyond as the overall national economy and housing

market improves.

TREND #12CAP RATE COMPRESSION WILL ENDCap Rates Flat or Worse in the Next Two Years

Over the past five quarters, capitalization rates for

commercial properties in the U.S. have experienced

signifi cant compression across all property sectors. After

their 2010 peak, cap rates have seen a steady downward

trend during this period, driven by a recovery in portfolio

values. The value growth of these last fi ve quarters has led

many investors to hope that, rather than being a simple

correction, this bounce represents a driver of future asset

value increases.

We argue that this optimistic view is incorrect, and that the

cap rate compression (and the attendant growth in values

stemming from it) has come to an end. Furthermore, we

argue that cap rates will remain fl at for the next two to three

years, and that there is even a risk of a modest increase in

cap rates in certain markets and sectors.

Why would we take such a position, especially in view of

the continuing low interest rate environment? It boils down

to the expected behavior of the fundamental factors that

drive asset pricing, over the next three years. Let’s consider

these one at a time, starting with rental income.

As the chart below shows, Net Operating Incomes (NOIs)

are expected to either remain fl at or drop slightly in the

next three years, under our base case scenario. This weak

performance will be driven by continued weakness in many


Signifi cance of Finance Has Eased Over the Years

199020002010Financial Activities as % of Total Offi ce-Using Employment

45

40

30

20

25

35

15

10

5

0New York Boston San

FranciscoLos

Ange-Chicago Philadelphia Sum of

Markets

Source: CBRE Econometric Advisors, NCREIF.

NCREIF Cap Rate Forecast

NCREIF Cap Rate %

12

11

9

6

4

8

10

7

5

3

2

1999

.4

2004

.4

2006

.1

2014

.4

2001

.1

2009

.4

2011

.1

2007

.2

2008

.3

2002

.2

2003

.3

2012

.2

2013

.3

RetailMultifamily

IndustrialOffi ce

Recession

sum of markets, fi nancial activities’ share of total-offi ce

using employment has fallen from 35% in 1990 to 28% in

2010. This was especially evident in large markets that are

considered to be fi nancial hubs, such as New York, Boston

and San Francisco. Headcounts in total fi nancial services

for New York and San Francisco are 11% and 23% lower

than they were in 1990. Technological innovation, bank

consolidation and shifting of back-offi ce jobs to smaller

markets have meant that fi nancial sector employment and

its share of total offi ce-using employment have declined

even in markets considered to be financial hubs. Yet

offi ce occupancies have continued to grow there, as fi rms

providing high-tech and professional and business services

have played a more signifi cant role in hiring and in leasing

offi ce space. In 2011, many of the largest leases signed in

New York, San Francisco and Boston were from industries

other than financial services—software companies,

healthcare and consulting fi rms among them—and the

same can be expected in 2012 and beyond.

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While we do not forecast a drop in rents and increases

in vacancies for a majority of markets (rather, we expect

slow recovery, with the speed of the bounceback varying by

property sector and market), the lease rollover effect will be

strong enough in many cases to depress NOI performance

for the next couple of years. As a result, expected rental

income—one of the fundamental drivers of asset pricing—

will likely remain weak on average in the next three years

(with the notable exception of multifamily, which will have

a stronger recovery).

While weak rental fundamentals will play a role in the

end of cap rate compression, the primary drivers of asset

valuation will be capital market effects. On the positive

side of asset pricing, we expect interest rates to remain low

over the next three years. Given current uncertainty around

the fallout from the Euro Zone crisis and the slow pace of

economic recovery, the Fed is likely to continue its current

accommodative monetary policy during this period. This

low interest rate environment will prevent cap rates from

rising signifi cantly, even in spite of uncertainty around the

capital markets.

This capital markets uncertainty, however, will likely

manifest itself in other ways. One such manifestation will

likely be subdued risk appetite on the part of investors

(and the degree of risk aversion is known to be a strong

factor in asset pricing). Corporate bond spreads over U.S.

Treasurys—one metric that measures risk aversion—remain

high by historic norms and are expected to remain high,

under our base case scenario. As a result, further increases

in asset values (and hence, drops in cap rates) are fi ghting

against investors’ fl ight to assets that are safer than real

estate. It could even be argued that high risk premiums

could cause cap rates to perk up higher, depending on

the exact interplay between the interest rate effects, risk

aversion, and capital availability. This could happen and we

explore its implications under our fi nancial crisis scenario,

which calls for a severe shock from Europe (although not

a complete disintegration of the Euro Zone), constraining

capital markets, denting economic growth and causing a

temporary upward adjustment in cap rates.

Another way to look at this phenomenon is to view

commercial real estate in context of other markets—most

notably, the rest of fi xed income instruments. As spreads

on other asset classes begin to widen again in response to

the investors’ renewed worry about medium-term prospects

for the economy, even high quality “core” real estate assets

will not be immune to the adjustment of expectations by

investors.

The third major capital markets effect that we expect will

have a negative impact on asset pricing is credit availability.

Credit availability was severely affected during the fi nancial

crisis. There has been signifi cant recovery in debt since

then, but the economy as a whole is still deleveraging.

Our research indicates that debt availability is one of the

strongest factors in determining asset pricing, and, as a

result, the expected path of recovery in debt availability

in the next three years will be instrumental in determining

the behavior of asset prices and cap rates during that

period. We expect a relatively slow recovery in leverage in

the economy, which will contribute to the end of cap rate

compression (and a possible temporary cap rate reversion)

in 2012.

While our short-term outlook calls for lackluster performance

of commercial real estate, our medium-term view is more

positive. We forecast that commercial real estate will deliver

decent returns in the 5-year period, comparing favorably to

most other investment alternatives. A large portion of that

return will come from income returns, since appreciation

returns will either not contribute to, or subtract from, the

total return metric in the next two years. Subsequently,

values will start to recover, contributing to investment

2013

.3


Net Operating Income Index: History and Forecast

RetailMultifamily

IndustrialOffi ce

Recession1997 Q4 = 100%

180%

160%

130%

110%

150%

170%

140%

120%

100%

90%

1999

.4

2004

.4

2006

.1

2001

.1

2009

.4

2011

.1

2007

.2

2008

.3

2002

.2

2003

.3

2012

.2

rental markets and property types, and by the expiration

of leases signed at higher rates between 2006 and 2008,

replaced with leases signed at current lower spot rates.

© 2012, CBRE, Inc.

Specia

l Rep

ort: 1

2 Tre

nd

s for 2

012

January 201

2


5-Year Average NCREIF Returns: Forecast

Average Return, % History (2011.4 - 2016.4)

20

18

14

10

6

12

16

8

4

2

0Offi ce Industrial Multifamily Retail

Appreciation ReturnYield

Total Return

performance. The bottom line is that while CRE will not post

spectacular results in the short-term, it will still be a viable

investment option, given the expected poor performance

of alternative asset classes.

26

© 2012, CBRE, Inc.

Specia

l Rep

ort: 1

2 Tre

nd

s for 2

012

January 201

2

Jon SouthardDirector of Forecasting, Econometric Advisors and Director, CBRE Global Research and Consulting+1 617 912 [email protected]

Jim CostelloManaging Director, Americas Research and Director, Global Research and Consulting+1 617 912 [email protected]

Serguei ChervachidzeCapital Markets Economist, Econometric Advisors+1 617 912 [email protected]

Mark GallagherSenior Strategist, Americas Research+1 617 912 [email protected]

Diego IribarrenSenior Economist, Industrial, Econometric Advisors+44 20 7182 [email protected]

Arthur JonesSenior Managing Economist, Offi ceEconometric Advisors+1 617 912 [email protected]

CBRE GLOBAL RESEARCH AND CONSULTING

This was report was prepared by CBRE Econometric Advisors, which forms part of CBRE Global Research and Consulting—a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe.

CBRE Econometric Advisors

CBRE Econometric Advisors (CBRE EA), as part of CBRE’s global research platform, provides commercial real estate research, advisory services and forecasting products to clients. CBRE EA's products and services cover the U.S. and a constantly expanding selection of global regions, as well as all spheres of the real estate market, including public, private, debt and equity.

For more information regarding this report, or to fi nd out more about any aspect of our services, please contact:

Gleb NechayevSenior Managing Economist, Multi-housingEconometric Advisors+1 617 912 [email protected]

Abigail RosenbaumSenior Economist, Hotel and Retail,Econometric Advisors+1 617 912 [email protected]

Umair ShamsEconomist, Offi ceEconometric Advisors+1 617 912 [email protected]

Jared SullivanEconomist, IndustrialEconometric Advisors+1 617 912 [email protected]

Luciana SuranSenior Economist, GlobalEconometric Advisors+1 617 912 [email protected]

Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verifi ed it and make no guarantee, warranty or representation about it. It is your responsibility to confi rm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE Econometric Advisors.

12 trends for 2012 final locked[2]

Documents

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level of growth demand

forecastsemployment

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cyclical employment

hotel room demand growth

business cycle