u.s. real estate chart book: pricing questions rclco rclco is an sec-registered, independent...

U.S. Real Estate Chart Book: Pricing QuestionsS E P T E M B E R 2 0 1 4

Austin | Los Angeles | Orlando | Washington, D.C.

Contents RCLCORCLCO is an SEC-registered, independent consulting firm thatexclusively provides real estate consulting services. With 56 staffmembers in four U.S. locations, RCLCO provides consulting services inthe areas of Institutional Advisory Services, Urban Development,Community and Resort Development, Public Strategies, and Strategic

RCLCO Outlook: Pricing Questions 3

The Real Estate Cycle 4Community and Resort Development, Public Strategies, and StrategicPlanning and Litigation Support.

RCLCO’s Institutional Advisory Services group provides services tocommercial real estate owners in the areas of:

• Portfolio analysis, investment policies, and pacing plansF d l i d l ti

U.S. Real Estate: Pricing 5

Appendix: U.S. Real Estate Market Trends

Residential Fundamentals 25 • Fund analysis and manager selection• Investment and hold/sell analyses• Asset management• Market analysis, target markets, and independent research

For questions, contact: Paige Mueller, Director of Institutional AdvisoryServices RCLCO 233 Wilshire Blvd Suite 370 Santa Monica CA

Residential Fundamentals 25

Office Fundamentals 34

Retail Fundamentals 39

Services, RCLCO, 233 Wilshire Blvd., Suite 370, Santa Monica, CA90401, (310) 601-4919.

Report Prepared by:Paige Mueller, Managing DirectorTodd Castagna Vice President

Industrial Fundamentals 45

Economic and Capital Market Backdrop 50

Todd Castagna, Vice PresidentCJ Faulwell, Associate

RCLCO U.S. Real Estate Chart Book | September 20142

RCLCO Outlook: Pricing Questionsg QHave we already or are we rapidly approaching the peak in thiscycle’s real estate values? Clients of the firm have begun toraise this question during the past few months as asset valuescontinue to rise and cap rates continue to fall. With construction

i i t k t d ll j t t

benefit—but particularly those regions where economies are tiedto technology and energy. With jobs steadily returning, office,retail, industrial, and single-family homes should all benefit.

Spreads between cap rates and 10-year treasuries remain widerramping up in most markets and across all major property types,can there still be enough upside to warrant continued investmentin real estate during this cycle? Are we in 2003, 2005, or 2007real estate market conditions? Indeed, dry powder continues toamass to record levels as investors debate these questions.

Spreads between cap rates and 10-year treasuries remain widerthan historical averages. When spreads have been at theselevels historically, the next-three-year NCREIF returns haveaveraged 10%+ annually. For most property types, our analysisindicates that even a 100 basis point increase in Treasury ratesfrom current levels would not put significant pressure on cap

Cap rates nationally for most major property types are now lowerthan at any point in the last real estate cycle. Led by apartments(which in some core markets are at sub-4% cap rates) and CBDoffice, investors have begun to move up the risk spectrum inorder to enhance yield. Heavy construction has begun in severalMSAs around the country—with Austin Denver San Jose and

rates (with the exception of apartments and CBD office).

Non-major markets have performed as well as major marketssince 2011 and this trend has continued throughout 2014. Infact, major market pricing has eclipsed 2007 peak pricing byover 8%, while non-major market pricing is still 12% lower thanMSAs around the country—with Austin, Denver, San Jose, and

Suburban Virginia all in the midst of constructing over 5% of theircurrent apartment inventory (even 1-2% would be considered arobust pipeline). This construction pipeline is likely to slow rentgrowth and stall occupancy growth in many prime apartmentlocations nationwide over the next two years.

, j p gits 2007 peak. Assets in suburban or tier 2-3 markets with goodfundamentals can still be acquired at well below replacementcost.

We are advising clients to remain patient, as good investmentopportunities with sound fundamentals still exist particularly for

Although some parts of the real estate market are facingheadwinds via uncertain supply/demand fundamentals, webelieve that significant tailwinds remain for the real estate marketoverall that indicate that we have likely not peaked but could bepoised for continued growth in the short term. In the second

opportunities with sound fundamentals still exist, particularly forclients who can take construction risk, and real growth even forcore properties is likely to persist in the short term. However,portfolios should be reviewed for property exposure tocompetition from new construction, particularly in apartment andprime CBD office markets. Additionally, investors should have ap g

quarter of 2014, banks continued to loosen lending standards ata moderate pace while the CMBS market—on pace to eclipse its2013 issuance—continued its recovery. Real GDP growth, whileunspectacular, is poised for its fifth straight year of near 2%+growth, and most regions of the country are expected to

risk monitoring system in place, including review of interest raterisk, for example, in the form of variable rate loans andrefinancing needs.

— Paige Mueller, Director of Institutional Advisory Services— Todd Castagna, Vice President


Construction Pipelines Rising Across Most Property Typesp g p y ypOccupancy Low Occupancy Rising Occupancy Rising Occupancy High Occ. Above Average Occupancy Low

Demand Improving Demand Improving Demand Improving Occupancy Flattening Occupancy Falling Occ. Flat to Down

Rents Flat to Down Rents Rising Rents Rising Rents Flattening Rents Falling Rents Flat to Down

No Construction Limited Construction Construction Construction Construction No Construction

Construction is well underway in apartments,prime** CBD office, industrial, and some hotelmarkets. While these sectors generally havehigh occupancy rates and rising rents,

MultifamilyPrime** CBD Office

H t l g p y g ,occupancies in some apartment markets andoffice markets such as NY and DC are startingto stabilize as new supply increases.

Industrial

Suburban Office

Retail*

HotelSingle-Family

Retail

* i hb h d & it t

Increase Vintage Reduce VintageNew Development Reduce OpportunisticRedevelopment & Lease-Up Reduce Risk: B / Non-Core, LeverageShort-Term Leases Long-Term Leases


*neighborhood & community centers**includes New York, Washington, D.C., San Francisco, Seattle, Los Angeles, and Boston Source: RCLCO

U.S. Real Estate: Pricing


Pricing in Major Markets Hits New Highsg j gBubble questions have been triggered again as pricing in themajor markets has surpassed the previous peak. Even averageClass A buildings in average locations in New York are fetching pricesin excess of $1,000 psf. While secondary markets are not back to peak

pricing, values have been rising just as quickly as in the primarymarkets as value-add funds have targeted these markets in the pastcouple of years, drawn by higher cap rates than the major markets andimproving occupancy rates.

225

Moody's/RCA CPPI Index (2000-June 2014)

3%

Moody's/RCA CPPI Index (2000-June 2014)

175

200

0%

1%

2%

125

150

-2%

-1%

75

100

-5%

-4%

-3%

National All-Property Major Markets

Non-Major MarketsMajor Markets Non-Major Markets


Source: RCA; Moody’s Analytics; RCLCO

REIT Prices FlattenThe U.S. REIT market, which sometimes leads the private marketby six to nine months, is starting to show some signs oftoppiness. Offerings hit an all-time high in 2013, yet so far in 2014 arenot on pace to reach 2013 levels in any part of the capital stack. The

market also showed some signs of nervousness ahead of the Fed’sSeptember interest rate guidance comments, with prices off by morethan 5% in mid-September, the biggest price adjustment of the year.

80,000

90,000

U.S. Historical REIT Offerings70014%

U.S. REIT Market

50,000

60,000

70,000

80,000

400

500

600

8%

10%

12%

20,000

30,000

40,000

50,000

200

300

400

4%

6%

8%

0

10,000

0,000

0

100

200

0%

2%

4%

Note: 2014 data is as of August

IPO Common Shares Preferred Equity

Unsecured Debt Secured Debt Dividend Yield (L) 10 Yr Treasury (L) Price Index (R)


Note: 2014 data is as of AugustSource: SNL; NAREIT; RCLCO

Apartment Completions at Risky Levelsp p yThe supply cycle is also heating up, particularly in the apartment sector.2014 apartment completions will reach nearly 2% of existing inventorynationwide, which is well above historical averages and even abovelevels experienced during the peak of the last real estate cycle. Despite

the pricing and supply in some sectors, parts of the market arepositioned for continued growth. Both the office and retail sectorsare experiencing positive demand in excess of new deliveries, althoughvariances exist by market (see the Appendix).

2.0%

New Completions (% of Stock)

1.4%

1.6%

1.8%

0.8%

1.0%

1.2%

0.2%

0.4%

0.6%

* Last Cycle Peak occurred in 2009 for apartments, in 2008 for office, in 2006 for retail, and in 2006 for industrial.

0.0%Apartment Office Retail Industrial

Avg 1999-2013 Last Cycle Peak* 2014


y p , , ,Source: Reis, Inc.

But Most Forecasts Are for Positive NOI GrowthAnother bright sign—with demand running ahead of construction,both occupancy and rents are expected to improve in the next fewyears in most markets. However, the outlook varies both by localityand property type. One example is the apartment sector. While

apartment occupancy remains high at 96%, it was unchanged in Q2and is expected to fall behind the fast pace of construction in the nextcouple of years.

5.0%

U.S. Occupancy Change and Rent Growth by Property Type 2014-2016

3.5%

2.0%

0.5%

-1.0%Office Retail Apt Industrial

Forecasted Occupancy Change 2014-2016 Forecast Avg Rent Growth 2014-2016


Source: Reis, Inc.

GDP Growth Expected to ContinuepThe U.S. economy continues to improve, with 4% growth in the secondquarter making up for a weather-induced slowdown in the first quarter.The Wall Street Journal’s economist survey indicates expected

growth of between 2% and 3% over the next three years. Steadyeconomic and job growth would benefit real estate investors of allproperty types.

4.0%

Annual GDP Growth; Actual and Projected

2.0%

3.0%

0.0%

1.0%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

(2.0%)

(1.0%)

(4.0%)

(3.0%)

Actual Projection


Source: Worldbank; Wall Street Journal Economist Survey Forecast

Bond Markets Also Indicate Continued Economic GrowthThe public markets also indicate expectations of positiveeconomic growth ahead. One indicator frequently associated withrecessions is a narrowing between short-term and long-term Treasury

yields. Currently, 3-Month U.S. Treasury bill yields remain well below10-Year Treasury bond rates, indicating that the bond markets arepricing in continued economic growth.

14%

16%

United States Monthly Treasury Yields During Recessions

10%

12%

4%

6%

8%

0%

2%

4%

Note: Gray portions of the graph indicate periods of recession, as defined by the NBER

10 Year Treasury Yield 3 Month Treasury Yield


ote G ay po t o s o t e g ap d cate pe ods o ecess o , as de ed by t eSource: Wall Street Journal

Interest Rates and Inflation Remain SubduedDespite rising to 3% at the end of 2013, 10-year Treasury yieldshave generally declined in 2014. Both actual and expected inflationremain low, which is giving the Fed pause in its eventual monetarytightening plans. Our estimates indicate another 50 to 150 bps+increase in 10-year Treasury yields is likely just to return to normalized

real rates. The question is when and how quickly this will happen.September 10-year Treasury yields are up by around 30 bp from a lowin August, although this could be market volatility. Cap rates areexpected to be less volatile, and are unlikely to face significant pressureuntil Treasury yields surpass 3.5%.increase in 10 year Treasury yields is likely just to return to normalized until Treasury yields surpass 3.5%.

8%

Nominal Interest Rates and Inflation2000-2014 YTD

5%

6%

7%

1%

2%

3%

4%

-2%

-1%

0%

1%

-3%

3 Mo. LIBOR CPI 10 Yr. Treasury Expected Inflation


Source: BLS; Federal Reserve, www.fedprimerate.com; RCLCO

Lending Standards Continue to EasegBanks continue to loosen commercial real estate lendingstandards, albeit not at the same pace as was seen in 2013. Bankshave indicated that they are easing standards on commercial realestate loans primarily because of more aggressive competition from

other lenders in a slow-growth, low-interest-rate environment.Continued rent and occupancy gains in most metro areas are also likelyplaying a factor.

100%

Net % of Banks Tightening Lending Standards

40%

60%

80%

0%

20%

40%

-40%

-20%

Note: As of Q4 2013, the Federal Reserve separated this data into three categories (construction/development, nonfarm nonresidential, and multifamilyresidential) depending on the type of structure for which the loan is intended. For these time periods, the data shown on the graph represents theaverage of these three categories


average of these three categories.Source: Federal Reserve; Wall Street Journal; RCLCO

Deleveraging Has Largely Endedg g g yCommercial banks, REITs, and life insurance companies are again netpositive lenders; however, the smaller pension funds and CMBS

sectors were recently net negative lenders as more loans mature thanare issued.

$300

$400

U.S. Commercial RE Debt Markets - Net Capital Flows - Annually 1985-2013

$60

$80

U.S. Commercial RE Debt Markets - Net Capital Flows - Quarterly

$100

$200

$300

lions

$0

$20

$40

$

billi

ons

-$100

$0

$ in

bil

-$60

-$40

-$20

$0

$ in

b-$300

-$200

-$80

$60

Q1

2008

Q2

2008

Q3

2008

Q4

2008

Q1

2009

Q2

2009

Q3

2009

Q4

2009

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Q3

2012

Q4

2012

Q1

2013

Q2

2013

Q3

2013

Q4

2013

Q1

2014

CMBS Unsecured REIT Debt

Commercial Banks/Savings Life Insurance Companies

Pension Funds Other

GSEs

CMBS Unsecured REIT Debt

Commercial Banks/Savings Life Insurance Companies

Pension Funds Other

GSEs


Source: Federal Reserve; NAREIT; RCLCO

CMBS Market RecoveringgThe CMBS market continues to recover, albeit slowly, withimprovements in both issuance and pricing. 2014 Issuance is ontrack to outpace 2013’s total of $80 billion, with Q3 volume expected tobe up.

After spiking a year ago, CMBS spreads have graduallydescended, reflecting generally positive property fundamentals.

800

900

U.S. CMBS Spread to Treasuries250

U.S. CMBS Issuance

600

700

150

200

300

400

500

100

150

$ in

bill

ions

0

100

200

50

Note: CMBS issuance for 2014 is as of Q2

Jan-

11M

ar-1

1M

ay-1

1Ju

l-11

Sep

-11

Nov

-11

Jan-

12M

ar-1

2M

ay-1

2Ju

l-12

Sep

-12

Nov

-12

Jan-

13M

ar-1

3M

ay-1

3Ju

l-13

Sep

-13

Nov

-13

Jan-

14M

ar-1

4M

ay-1

4Ju

l-14

10yr Sr AAA AA A BBB+ BBB BBB-

0


Note: CMBS issuance for 2014 is as of Q2Source: CRE Finance Council; JP Morgan; ULI; RCLCO

Dry Powder GrowsyWhile the data is not perfect, it does back up what we are seeinganecdotally in the market, which is ample equity available to closesales. Dry powder in the real estate private equity sector increased19% in 2013 and has increased 18% YTD already in 2014. Dry powderis particularly improved outside the U.S. as investors become more

risk- tolerant. Given the relatively small amount of private equityfundraising occurring so far in 2014, this growth in dry powder is likelydue to a perceived lack of “good deals” in the market, as investors staypatient with their capital.

250

Dry Powder by Region*

is particularly improved outside the U.S. as investors become more

80100120

150200

ions

unds

United States RE Fundraising

150

200

s

020406080

050

100

$ in

bill

i

No.

of F

u

100

150

$ in

bill

ions

No. of Funds Aggregate Capital Raised ($bn)

50200

International (Non-U.S.) RE Fundraising

-

50

01020304050

050

100150200

$ in

bill

ions

No.

of F

unds

*Private equity cash reserves held to fund future obligationsNote: Dry powder and fundraising numbers for the United States and International for 2014 are as of August 2014

Europe Rest of World US No. of Funds Aggregate Capital Raised ($bn)


Note: Dry powder and fundraising numbers for the United States and International for 2014 are as of August 2014 Source: Preqin; PERE; RCLCO

Cap Rate Spreads to Treasury Yields Are Still Widep p yFrom Q2 2012 through Q2 2014, cap rate spreads to Treasuriescompressed from 5.3% to 3.9% as interest rates rose. Yet spreadscontinue to be wide by historical standards, indicating significant

breathing room between current cap rates and Treasury yields ifinterest rates would start to rise.

12%

Going-in Cap Rate Spread to Treasury

8%

10%

6%

8%

10 Year Treasury Yield

Going-In Cap Rate (%)

2%

4%

0%


Source: RERC

With Wide Cap Rate Spreads by Property Typep p y p y ypWhile cap rates for several property types, including apartment,CBD office, and warehouse, are lower than in the previous 2005-07market cycle peak, the spread to Treasury rates is much wider,indicating better leverage spreads than in the 2005-07 period. More

importantly, the wide spread to Treasury yields indicates that themarket is more disciplined and is building in some expectations ofinterest rate increases ahead. This should help cushion the marketsomewhat from slight near-term rises in interest rates.

12%

Cap Rates by Property Type 1989-2Q 2014

9%

10%

11%

5%

6%

7%

8%

Apt

Off-CBD

Off-Sub

Warehouse

2%

3%

4%

5% Warehouse

Ret-NC


0%

1%


Source: RERC

Watch Variances by Market Thoughy gOur biggest concern for markets with low cap rates are for thosemarkets in which a significant construction cycle has started.Watch these markets for NOI growth. If new construction starts to capoccupancy and rental growth, a combination of minimal NOI growth and

low cap rates would be detrimental to future return performance. Of thebig six office markets, Washington, D.C., New York, and San Franciscoall have significant construction pipelines.

12%

Office Cap Rates by Metro 2002-2Q 2014 (PwC)

10%

6%

8%DC

Boston

Chicago

Los Angeles

2%

4%New York

San Francisco


0%


Source: RERC

Total Return Expectations Are also in Line with Capital Marketsp pA more complete picture is to view total return expectations, which takeinto account both current pricing and future cash flow expectations.Historically, while not a perfect indicator, when total return expectationswere at narrow spreads to Treasury yields, actual returns in the next

three years generally underperform. While the spread between totalreturn expectations for commercial real estate to Treasuries isnarrowing, the spread is wide enough to indicate positive returnsover the next few years.

20%9%

Expected IRR Spread to Treasuries and Mortgages, 1989-2Q 2013

14%

Expected IRR and 10-Year Treasury Yields 1989-2Q 2014

10%

15%

6%

7%

8%

10%

12%

0%

5%

3%

4%

5%

6%

8%

-10%

-5%

0%

1%

2%

Q89

Q90

Q91

Q92

Q93

Q94

Q95

Q96

Q97

Q98

Q99

Q00

Q01

Q02

Q03

Q04

Q05

Q06

Q07

Q08

Q09

Q10

Q11

Q12

Q13

2%

4%

1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q 1Q

Expected IRR Spread to Treasuries ( L )

Expected IRR Spread to Mortgage Rates ( L )

Average NCREIF Total Return next 3 yrs ( R )

0%

2Q89

3Q90

4Q91

1Q93

2Q94

3Q95

4Q96

1Q98

2Q99

3Q00

4Q01

1Q03

2Q04

3Q05

4Q06

1Q08

2Q09

3Q10

4Q11

1Q13

2Q14

Expected IRR 10-yr Treas Yield


Source: RERC

Low Treasury Yields Are Not Sustainable yThe biggest imbalance in the market now is the long-term Treasuryyield. At 2.6% in mid-September, it offers bond investors very littlepositive return above inflation. Mortgage rates will likely directly followinterest rate movements. Thus, real estate investors should carefully

monitor variable rate mortgage exposure as well as refinancing needs.With expectations now for interest rate rises in mid 2015, but highlyuncertain, the big question is how much of an impact rising interestrates could have on the pricing of real estate equity interests.

16

18

10

12

14

4

6

8

0

2

4

Inflation expectation = average of previous three years inflation before 2003 and the difference between 10-yr TIPS and 10-yr Treasuries after 2003

10 Yr Treas Yield Inflation


Inflation expectation average of previous three years inflation before 2003 and the difference between 10 yr TIPS and 10 yr Treasuries after 2003Source: Federal Reserve, BLS

Some Cushion if Treasuries Rise As a first pass, we simply applied long-term average cap rate spreadsfor each property type to different Treasury yields to see what cap ratewould be expected at different Treasury rates (see below) if cap rateswere at a long-term average spread to Treasuries. Under this scenario,pricing for most property types could experience little change with 50 to

demand (in general not the current scenario for either apartments orCBD office; see the Appendix). Second, cap rate spreads could staylow at least temporarily in situations of uncertainty or distress; e.g., adisorderly or abrupt change in monetary policy for property types thatare viewed as defensive, such as those in major markets with highpricing for most property types could experience little change with 50 to

100 bp increases in 10-year Treasuries. However, one exception is theapartment sector, where cap rates are already at very low spreads toTreasuries, and to a lesser extent prime CBD office markets. Of course,cap rates do not stay at a constant spread to Treasuries. Two scenarioscould justify lower spreads while maintaining attractive total returns.First, forward income growth could be higher than usual. This would

are viewed as defensive, such as those in major markets with highoccupancy rates. This scenario does fit some prime housing and CBDoffice properties well, as both have relatively high occupancy rates andhave been early to attract both institutional and international capital.Thus, investors should review properties that are in low cap rate and/orhigh construction markets to test, first, their ability to hold up tocompetition as new properties are constructed and, second, to produce

8.5%

9.0%

First, forward income growth could be higher than usual. This wouldespecially be possible in markets with little construction and positive

competition as new properties are constructed and, second, to producecash flow growth that could offset increases in cap rates.

7.0%

7.5%

8.0%

cted

Cap

Rat

e Apartment

Warehouse

CBD Office

Suburban Office

5.0%

5.5%

6.0%

6.5%

Expe

c

Retail-Neigh/Comm

Retail-Mall

Retail-Power

Hotel

Note: The above chart indicates where cap rates would be if long-term historical average spreads were applied to varying treasury yields. For example,if 10-year treasury rates were to grow by 50 bps from current 2.5% levels, by applying long-term average spreads to a 3% treasury rate, the chartshows where cap rates would be

5.0%2.5% (Current) 3.0% 3.5% 4.0%

Treasury Yield


shows where cap rates would be.Source: RERC

Prime Markets also Experience Cap Rate Risesp pWe sometimes hear an argument that cap rates in prime markets donot experience fluctuations as in other markets. However, marketevidence indicates otherwise. The below graph shows office cap ratesfor New York, San Francisco, and Boston (reflective of “prime” markets)as compared with average suburban office cap rates. While prime

peak occupancy, prime cap rates do rise significantly in periods ofmarket distress. These periods are generally associated with lowersales volumes, but nevertheless indicate significant changes in pricing.Even if a property continues to produce cash flow and is not sold,annual valuations will reflect lower values as market cap ratesas compared with average suburban office cap rates. While prime

markets do experience significantly lower cap rates during times ofannual valuations will reflect lower values as market cap ratesclimb.

12%

CBD and Suburban Office Cap Rates

10%

11%

12%

7%

8%

9%

4%

5%

6%

Peak U.S. Occupancy Rates4%

1989

Q2

1989

Q4

1990

Q2

1990

Q4

1991

Q2

1991

Q4

1992

Q2

1992

Q4

1993

Q2

1993

Q4

1994

Q2

1994

Q4

1995

Q2

1995

Q4

1996

Q2

1996

Q4

1997

Q2

1997

Q4

1998

Q2

1998

Q4

1999

Q2

1999

Q4

2000

Q2

2000

Q4

2001

Q2

2001

Q4

2002

Q2

2002

Q4

2003

Q2

2003

Q4

2004

Q2

2004

Q4

2005

Q2

2005

Q4

2006

Q2

2006

Q4

2007

Q2

2007

Q4

2008

Q2

2008

Q4

2009

Q2

2009

Q4

2010

Q2

2010

Q4

2011

Q2

2011

Q4

2012

Q2

2012

Q4

2013

Q2

2013

Q4

2014

Q2

Manhattan/San Francisco/Boston Average US Suburban Office Average


Source: NREI; PwC; RERC; RCLCO

APPENDIX: U.S. REAL ESTATE MARKET TRENDS


Residential Fundamentals


U.S. Apartment Absorption Continues to Outpace Completionsp p p pQ2 2014 U.S. apartment vacancy was flat quarter-over-quarter butwas down 20 bps year-over-year to 4.1%. Owners have pricingpower as they leverage low vacancies into rent growth for the 17th

straight quarter.

Vacancies have most likely reached their cycle lows in the firsthalf of 2014. With projects under construction equivalent to over 2.9%of stock nationally, vacancy may begin to creep up. The rent growthforecast below could face some downward pressure if new constructionoccurs faster than expected.occurs faster than expected.

12.5%250

U.S. Apartment Absorption, Vacancy, Rent Growth

7.5%

10.0%

150

200

ions

)

2 5%

5.0%

50

100

uare

Fee

t (in

mill

i

0.0%

2.5%

0

50

Squ

-2.5%-501999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(f)2015

(f)2016

(f)

Completions Net Absorption Vacancy % Rent Growth %


Source: Reis, Inc.; RCLCO

Apartment Vacancy Historically Lowp y yApartment vacancies remain low as most major U.S. apartmentmarkets are experiencing lower current vacancy compared tolong-term (1990-present) averages. The only three markets with

above-average vacancy are Washington, D.C., New York, andSuburban Virginia, although vacancies in these markets remain low at5.7%, 2.7%, and 4.3%, respectively.

14%

Apartment Current and Long-term Vacancy

Max

Green box - current vacancy < LT avg.Red box - current vacancy > LT avg.

8%

10%

12%

LT Average Vacancy

Max

Current Vacancy

2%

4%

6%Current Vacancy

0%

2%Current VacancyMin

LT Average Vacancy

Note: The markets in the above chart are not necessarily MSAs or central cities, but are Reis-defined real estate marketsNote: “LT Average” = Long-term average, which is defined as 1990 until the present


Note: LT Average Long term average, which is defined as 1990 until the presentSource: Reis, Inc.; RCLCO

U.S. Apartment: Market Risk IndicatorpRents continue to rise in all major apartment markets, with techhubs San Francisco, San Jose, and Seattle achieving the highestq-o-q and y-o-y growth. Due to historically high occupancy and rent

levels, construction continues to be in full swing, with some marketssuch as Austin, Denver, NYC, San Jose, and Suburban Virginiaadding over 5% of inventory in the very near future.

Net Absorption % of Stock Current*

Quarter

Completions % of Stock Current*

Quarter**

Under Constr % of Stock Current*

Quarter*** Occupancy****

Q-o-Q Occupancy

Change

Y-o-Y Occupancy

ChangeQ-o-Q Rent

GrowthY-o-Y Rent

GrowthAtlanta 0.2% 0.2% 2.4% 94.3% 0.1% 0.8% 1.1% 4.1%Austin 0.9% 1.3% 7.6% 95.1% -0.4% -0.5% 0.9% 3.9%Chicago 0.2% 0.2% 1.1% 96.5% 0.1% 0.1% 0.8% 3.7%Dallas 0 5% 0 5% 4 3% 95 3% 0 0% 0 5% 0 8% 3 9%Dallas 0.5% 0.5% 4.3% 95.3% 0.0% 0.5% 0.8% 3.9%Denver 0.4% 0.6% 6.2% 96.2% -0.2% 0.0% 1.1% 4.7%District of Columbia 0.7% 1.0% 3.9% 94.3% -0.2% -1.2% 0.6% 1.3%Houston 0.6% 0.5% 4.2% 94.6% 0.1% 1.2% 1.6% 4.6%Los Angeles 0.1% 0.2% 1.7% 96.9% 0.0% 0.2% 0.5% 2.5%Miami 0.3% 0.4% 2.4% 96.0% -0.1% 0.0% 0.5% 4.3%Minneapolis 0.2% 0.5% 2.3% 97.3% -0.2% -0.4% 0.6% 4.0%pNew York Metro 0.4% 0.5% 8.2% 97.3% 0.0% -0.6% 0.8% 3.9%Orange County 0.2% 0.0% 2.3% 97.5% 0.2% 0.7% 0.5% 2.4%Orlando 0.5% 0.5% 3.8% 95.1% 0.0% 0.4% 0.7% 3.1%Philadelphia 0.4% 0.2% 1.8% 96.7% 0.2% 0.4% 1.0% 3.1%Phoenix 0.4% 0.1% 3.2% 95.3% 0.2% 0.9% 0.9% 3.4%San Diego 0.3% 0.4% 1.3% 97.4% 0.0% -0.1% 1.0% 3.4%San Francisco 0.1% 0.2% 3.3% 97.0% 0.0% 0.1% 1.8% 7.3%San Jose 0.3% 0.2% 5.3% 97.6% 0.0% 0.6% 1.9% 6.7%Seattle 0.8% 1.0% 4.1% 95.8% -0.2% -0.3% 2.0% 6.4%Suburban Maryland 0.6% 0.4% 4.2% 96.4% 0.2% 0.6% 0.9% 2.0%Suburban Virginia 0.6% 0.8% 5.2% 95.7% -0.2% -0.9% 0.6% 2.1%Tampa-St. Petersburg 0.4% 0.4% 2.4% 95.5% 0.0% 0.4% 0.7% 3.0%

*Current quarter defined as Q2 2014**Completions highlighted in Red if above 0.25% of Stock***Under Construction highlighted in Red if above 1% of Stock****Green if above city’s historical average since 1990Note: Above data includes only market rate rentable apartment spaceNote: The markets in the above chart are not necessarily MSAs or central cities but are Reis-defined real estate markets

United States 0.4% 0.3% 2.9% 95.9% 0.0% 0.2% 0.9% 3.4%


Note: The markets in the above chart are not necessarily MSAs or central cities, but are Reis-defined real estate markets.Source: Reis, Inc.; RCLCO

Apartment Pricing and Growth Expectationsp g pInvestors continue to favor the low vacancy rates of the apartmentsector, with average Class A cap rates hovering around 5% or lower,and some markets close to 4%. The graph below shows average ClassA cap rates and average expected NOI growth for the next five years(which includes expected changes in occupancies and rents).

While NOI growth going forward is expected to be positive, new supplyis putting downward pressure on expected income growth and thecombination of low cap rates and moderate rent growth results in thelowest forward return expectations of all major property types.

(which includes expected changes in occupancies and rents).

8%9%

Class A Apartment Price + Growth

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

Pric

e +

Gro

wth

0%1%2%P

Average Cap Rate Average Annual NOI Growth (2014 - 2018)

Initial yield and cash flow growth over the hold period are significant contributors to unlevered total return expectations. Low cap rates should thus be accompanied byhigher growth expectations. While the above graph is an incomplete view, it does provide some indications of markets that should be particularly reviewed for furtherinsights. For example, markets with low bars in the graph above may have less growth than needed to offset lower yields, or the growth may be more back-ended in a10-year hold. Conversely, markets with high bars may be positioned to experience significant growth as compared to current pricing, or may be markets that areconsidered to be more risky and thus justify higher expected returns.

Note: The markets in the above chart are not necessarily MSAs or central cities but are Reis-defined real estate markets


Note: The markets in the above chart are not necessarily MSAs or central cities, but are Reis-defined real estate markets.Source: Reis, Inc.; CBRE; RCLCO

Household Formation Is Outpacing Single-Family Startsp g g y

1,600,000

Single-Family Housing Starts and Household Formation

1,200,000

1,400,000

800,000

1,000,000

400,000

600,000

0

200,000

Note: Housing starts include single-family detached, townhomes, condominiums, and cooperative homes.

0

Housing Starts New Households


Note: Housing starts include single family detached, townhomes, condominiums, and cooperative homes. Source: Moody’s Analytics; RCLCO

Existing Home Sales Pick Upg pNew home sales remained unchanged between the end of the firstand second quarters of 2014 (on a seasonally-adjusted basis)despite low mortgage rates and improved weather. However, a16% increase in housing starts in July is a sign that new home salescould be poised to rise as we head into 2015.

Existing home sales increased each month of the second quarter,growing by 9.8% on a seasonally-adjusted basis. This rebound tosales levels that approach summer-fall 2013 numbers indicates that theparticularly harsh 2013-2014 winter may have been only a slight hiccupon an otherwise upward trajectory.could be poised to rise as we head into 2015. on an otherwise upward trajectory.

1,600,0008,000,000

National Home Sales

1,000,000

1,200,000

1,400,000

5,000,000

6,000,000

7,000,000

NewSa

les

600,000

800,000

, ,

3,000,000

4,000,000

, , w H

ome Sales

Exis

ting

Hom

e S

0

200,000

400,000

0

1,000,000

2,000,000

Note: Monthly data are seasonally adjusted annual rates

Existing Home Sales (L) New Home Sales (R)


Note: Monthly data are seasonally adjusted annual ratesSource: U.S. Census Bureau; National Association of Realtors

Housing Supply Is Near Stabilized Levelsg pp yThe inventory of homes available for sale has recovered since thedownturn as a result of both fewer homes being put on the marketand a higher volume of home sales. Inventory to sales ratioscontinue to stay near long-term stabilized levels, which should help togenerate demand for new homes as well as support moderate

In 2014, the supply of both existing and new homes has increased.Existing home months’ supply increased from 4.6 at the end of 2013 to5.5 by June 2014. New home months’ supply increased from 5.1 at theend of 2013 to 5.8 by June 2014.

generate demand for new homes as well as support moderateincreases in home prices.

14

New and Existing Home Months Supply of Housing (1999-June 2014)

10

12

14

ly

4

6

8

Mon

ths

Supp

l

0

2

4

Note: Home supply includes single-family detached, condo, and townhomes.

Existing Home Months Supply New Home Months Supply

Existing Home Months Supply Historic Average New Home Months Supply Historic Average


Note: Home supply includes single family detached, condo, and townhomes.Source: NAR; RCLCO

New Home Prices Recovered While Existing Home Prices Are Still B l P k L lBelow Peak LevelsNew home prices increased by 1% between the first and secondquarter of 2014, rising to levels that are 8% higher than peakprices in early 2007.

Existing home prices increased 11.2% between January and April,rebounding strongly from a depressed winter sales period.Existing home prices have not yet reached peak 2007 pricing.

300$300,000

Median Home Price and Case Shiller 20-City Price Index (2000-April 2014)

200

250

$200 000

$250,000

100

150

200

$100 000

$150,000

$200,000

50

100

$50,000

$100,000

0$0

Median New Home Price Median Existing Home Prices Case Shilller 20-City Index


Source: U.S. Census; National Association of Realtors; S&P; Wall Street Journal

Office Fundamentals


U.S. Office Vacancy Slowly Improvingy y p gDespite significant office-using employment growth, Q2 2014office vacancy remained flat quarter-over-quarter at 16.8%. Year-over-year, office vacancy declined only 20 bps as tenants continueto absorb extra space but decrease space usage per worker. Officeabsorption is expected to slightly outpace completions during the next

particularly in major urban centers. The slow forecast recovery masksregional differences. Poorly located or configured properties are likelyto face higher obsolescence risk, while properties in prime locations areexpected to experience high rent growth in the near-term as rentsrecover from the downturn.absorption is expected to slightly outpace completions during the next

three years nationally as office jobs are growing at a quick clip,recover from the downturn.

20%200

U.S. Office Absorption, Vacancy, Rent Growth

10%

15%

100

150

ons)

0%

5%

0

50

are

Feet

(in

mill

i

-10%

-5%

-100

-50Squ

-15%-1502000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(f)2015

(f)2016

(f)




Office Vacancy Still Highy gMost major U.S. office markets continue to experience highercurrent vacancy than their long-term average (1990 - Q2 2014).Phoenix has the highest current vacancy rate of these major markets at

25.2%. The only two markets with below-average vacancy are Houstonand NYC at 14.4% and 10.0%, respectively.

30%

Office Current and Long-term Vacancy Green box - current vacancy < LT avg.Red box - current vacancy > LT avg.

Max

20%

25%Current Vacancy

Max

10%

15%

0%

5%LT Average Vacancy

Min

Note: The markets in the above chart are not necessarily MSAs or central cities, but are Reis-defined real estate markets.


Note: The markets in the above chart are not necessarily MSAs or central cities, but are Reis defined real estate markets.Source: Reis, Inc.; RCLCO

U.S. Office: Market Risk IndicatorTexas and the Pacific Northwest continue to construct new office,with Austin, Houston, and San Jose adding 5.9%, 6.0%, and 4.3%respectively as a percent of current inventory.

Rents in all of the below markets grew in the second quarter and year-over-year, with tech- and oil-centric economic hubs growing at fasterrates.


Quarter


Quarter**



Q-o-Q Occupancy

Change

Y-o-Y Occupancy

ChangeQ-o-Q Rent

GrowthY-o-Y Rent

GrowthAtlanta 0.0% 0.0% 0.9% 80.2% 0.1% 0.6% 0.1% 1.1%Austin 0.4% 0.3% 5.9% 84.4% 0.2% 1.5% 0.6% 1.8%Boston 0.0% 0.0% 1.8% 86.4% -0.1% 0.6% 0.5% 3.1%Charlotte -0 1% 0 0% 0 3% 82 3% -0 1% -0 1% 0 2% 1 2%Charlotte 0.1% 0.0% 0.3% 82.3% 0.1% 0.1% 0.2% 1.2%Chicago 0.1% 0.0% 0.8% 81.3% 0.0% -0.2% 0.6% 1.6%Dallas 0.1% 0.5% 2.7% 76.7% -0.3% -0.2% 1.3% 4.5%Denver 0.2% 0.2% 0.9% 82.9% 0.1% 0.6% 0.6% 2.0%District of Columbia 0.2% 0.0% 0.9% 90.5% 0.2% 0.2% 0.7% 1.6%Houston 0.3% 0.4% 6.0% 85.6% -0.1% -0.2% 2.1% 4.7%Los Angeles 0.0% 0.1% 0.5% 84.7% 0.0% 0.7% 1.1% 3.2%gMiami 0.1% 0.0% 0.4% 83.5% 0.1% 0.3% 0.4% 1.2%Minneapolis 0.0% 0.0% 1.1% 82.8% -0.1% 0.2% 0.0% 0.7%New York Metro -0.1% 0.0% 1.3% 90.0% -0.1% -0.3% 1.2% 3.9%Orange County 0.0% 0.0% 0.8% 83.2% 0.0% 0.6% 1.0% 3.8%Philadelphia -0.2% 0.0% 0.1% 86.0% -0.2% 0.1% 0.2% 1.0%Phoenix 0.1% 0.3% 2.0% 74.8% -0.1% 0.6% 0.3% 1.7%San Diego 0.6% 0.7% 1.0% 83.8% 0.1% 0.1% 1.4% 3.1%San Francisco 0.2% 0.0% 3.5% 87.4% 0.2% 1.0% 1.6% 5.2%San Jose 0.6% 1.0% 6.2% 81.9% -0.1% 0.7% 2.1% 6.5%Seattle 0.4% 0.1% 3.7% 86.6% 0.3% 0.9% 0.8% 3.0%Suburban Maryland -0.1% 0.0% 0.4% 84.2% -0.1% -0.6% 0.2% 0.7%Suburban Virginia -0.3% 0.0% 1.5% 82.7% -0.2% -0.3% 0.0% 0.6%

*Current quarter defined as Q2 2014**Completions highlighted in Red if above 0.25% of Stock***Under Construction highlighted in Red if above 1% of Stock****Green if above market’s historical average since 1990Note; Above data does not include Medical OfficeNote: The markets in the above chart are not necessarily MSAs or central cities but are Reis-defined real estate markets

United States 0.1% 0.1% 1.4% 83.2% 0.0% 0.2% 0.7% 2.5%


Note: The markets in the above chart are not necessarily MSAs or central cities, but are Reis-defined real estate markets.Source: Reis, Inc.; RCLCO

Office Pricing and Growth Expectationsg pPricing varies significantly by market, with cap rates well below6% for Class A office buildings on average in prime markets suchas Boston, Washington, D.C., New York, and San Francisco. Thegraph below shows average cap rates and average expected NOIgrowth for the next five years, including expected improvements in

several markets, growing construction pipelines in markets such asWashington, D.C., may limit income growth and influence returnexpectations. Meanwhile, supply is lagging in many secondary markets,which are typically high yield / high construction markets. These may begood short-term plays with occupancy gains likely to continue in thegrowth for the next five years, including expected improvements in

occupancies and rents. While NOI growth is expected to be strong ingood short term plays with occupancy gains likely to continue in thenear-term.

12%

Class A Office Price + Growth

4%

6%

8%

10%

rice

+ G

row

th

0%

2%

4%

Pr


Initial yield and cash flow growth over the hold period are significant contributors to unlevered total return expectations. Low cap rates should thus be accompanied byhigher growth expectations. While the above graph is an incomplete view, it does provide some indications of markets that should be particularly reviewed for furtherinsights. For example, markets with low bars in the graph above may have less growth than needed to offset lower yields, or the growth may be more back-ended in a10-year hold. Conversely, markets with high bars may be positioned to experience significant growth as compared to current pricing, or may be markets that areconsidered to be more risky and thus justify higher expected returns.




Retail Fundamentals


Retail Formats Continue to ChangegRetail sales growth remains positive overall, however salesactivity stagnated in late 2013 and into Q2 2014. Recent pressuresfrom e-commerce continue to influence brick and mortar, as retailersare changing store layouts and shifting resources to online sales

departments. eMarketer.com projects that e-commerce will continue itsdouble-digit growth rate for at least the next three years. Departmentstore sales have been in decline for most of the past 15 years.

25%

Retail Sales Growth 1993-2014 YTD

10%

15%

20%

-5%

0%

5%

-15%

-10%

*GAFO = general apparel, furniture, and other mall-type storesNote: 2014 YTD data is through June

Warehouse Clubs + Superstores Grocery Dept Stores Ex Discount Discount Dept Stores GAFO* E-Commerce


Note: 2014 YTD data is through JuneSource: U.S. Census; ICSC; RCLCO

U.S. Neighborhood/Community Retail Absorption Positive g y pThe neighborhood/community retail sector is slowly gainingmomentum as increased demand resulted in increased rentgrowth and declining vacancy rates from Q2 2013 to Q2 2014.

Conditions are improving incrementally, with pent-up demand startingto drive new construction in a few prime areas. Expectations are thatgrowth overall will remain well below levels of the past decade.

12.0%60

U.S. Retail Absorption, Vacancy, and Rent Growth

6.0%

9.0%

30

45

mill

ions

)

0.0%

3.0%

0

15

Squa

re F

eet (

in m

-3.0%-15

S

Note: Above data is for neighborhood & community centers only.

-6.0%-301999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(f)2015

(f)2016

(f)



Note: Above data is for neighborhood & community centers only.Source: Reis, Inc.; RCLCO

Retail Vacancy Generally Still Highy y gAll of the major U.S. retail markets are experiencing higher currentvacancy than their long-term (1990-present) average except forHouston. Atlanta, Chicago, and Orlando are above their long-termaverages by the widest margins, while Miami and Southern California

retail markets are only slightly less occupied than normal. Occupanciesshould continue to improve given the limited construction pipeline.

25%

Retail Current and Long-term Vacancy Red box - current vacancy > LT avg.Green box - current vacancy < LT avg.

15%

20%

Current Vacancy

Max

10%

0%

5%

MinLT Average Vacancy

Note: The markets in the above chart are not necessarily MSAs or central cities, but are Reis-defined real estate markets


Note: The markets in the above chart are not necessarily MSAs or central cities, but are Reis defined real estate marketsSource: Reis, Inc.; RCLCO

U.S. Retail: Market Risk IndicatorGiven relatively high vacancy rates vs. historical averages andother sectoral changes to the retail industry, there is very littleretail construction currently in the pipeline. Texas markets, given

strong household and employment growth, are currently enhancingtheir supply at a greater rate than other cities where new demand isfocused on a few prime sites.


Quarter


Quarter**



Q-o-Q Occupancy

Change

Y-o-Y Occupancy

ChangeQ-o-Q Rent

GrowthY-o-Y Rent

GrowthAtlanta 0.0% 0.0% 0.3% 86.6% 0.0% 0.6% 0.0% 1.0%Chicago 0.3% 0.0% 0.8% 87.3% 0.3% -1.5% 0.2% 1.5%gDallas -0.1% 0.0% 1.6% 87.0% -0.1% 0.6% 0.5% 2.0%Denver 0.1% 0.0% 0.6% 89.2% 0.1% 0.7% 0.0% 2.6%Houston -0.1% 0.0% 0.8% 88.1% -0.1% 0.1% 0.8% 3.2%Los Angeles 0.3% 0.1% 0.7% 94.2% 0.2% 0.2% 0.7% 2.1%Miami 0.2% 0.3% 0.0% 92.8% -0.1% 0.0% 0.9% 2.3%Minneapolis 0.4% 0.0% 0.7% 89.2% 0.4% 0.3% 0.6% 2.3%Minneapolis 0.4% 0.0% 0.7% 89.2% 0.4% 0.3% 0.6% 2.3%Orange County 0.0% 0.0% 0.1% 94.7% 0.0% 0.2% 0.9% 1.5%Orlando 0.4% 0.2% 0.5% 87.9% 0.3% 1.0% 0.9% 2.8%Phoenix 0.1% 0.0% 0.1% 89.6% 0.1% 0.8% 0.4% 2.1%San Diego 0.6% 0.7% 0.4% 93.7% 0.0% -0.1% 0.8% 2.7%Seattle 0.2% 0.1% 0.1% 92.9% 0.2% -0.2% -0.1% 1.7%United States 0 1% 0 1% 0 8% 89 7% 0 1% 0 2% 0 5% 1 8%

*Current quarter defined as Q2 2014**Completions highlighted in Red if above 0.25% of Stock***Under Construction highlighted in Red if above 1% of Stock****Green if above city’s historical average since 1990Note: Above data includes only Neighborhood/Community centers; does NOT include power centers, regional malls, or lifestyle retail centersNote: The markets in the above chart are not necessarily MSAs or central cities, but are Reis-defined real estate markets.

United States 0.1% 0.1% 0.8% 89.7% 0.1% 0.2% 0.5% 1.8%

y ,Source: Reis, Inc.; RCLCO


Neighborhood/Community Retail Pricing and Growth Expectationsg y g pPricing variation by geographic market in retail is not asdifferentiated as in other property types, as retail yields vary moreby sub-category and strength of the location. The graph belowshows average cap rates and average expected NOI growth for thenext five years, including expected improvements in occupancies and

rents. NOI growth for most markets is expected to be moderate asretail occupancies and rents did not fall in the downturn as muchas some property types, and also reflects reluctance of retailers toincrease space needs amid strong e-commerce competition.

next five years, including expected improvements in occupancies and

12.0%

Neighborhood/Community Retail Price + Growth

6.0%

8.0%

10.0%

e +

Gro

wth

0.0%

2.0%

4.0%

Pric

e


Initial yield and cash flow growth over the hold period are significant contributors to unlevered total return expectations. Low cap rates should thus be accompanied byhigher growth expectations. While the above graph is an incomplete view, it does provide some indications of markets that should be particularly reviewed for furtherinsights. For example, markets with low bars in the graph above may have less growth than needed to offset lower yields, or the growth may be more back-ended in aten-year hold. Conversely, markets with high bars may be positioned to experience significant growth as compared to current pricing, or may be markets that areconsidered to be more risky and thus justify higher expected returns.




Industrial Fundamentals


U.S. Industrial Absorption Remains Strongp gIndustrial absorption recovered strongly from the depths of thedownturn, and net absorption continues to outpace completions.The strong demand for industrial space is due in large part to significantincreases in e-commerce activity, which has enhanced the need forlarge warehouse space. Vacancy has also improved relative to the

previous market cycle, as rates have dropped to less than 10% and areprojected to continue their downward trend. Rent growth is expected tocontinue to be positive, although the supply pipeline is rising in severalmarkets.

large warehouse space. Vacancy has also improved relative to the

15%150

U.S. Industrial Absorption, Vacancy, Rent Growth

10%100

ons)

0%

5%

0

50

uare

Fee

t (in

mill

i

-5%-50

Squ

-10%-1002000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (f)2015 (f)2016 (f)




Industrial Vacancy Fallingy gMost major U.S. industrial markets continue to experiencedeclining vacancies, and vacancy rates in most markets arecurrently lower than their long-term averages (1990-present).

New construction has started to pick up, but is not keeping pace withdemand in most markets. Consequently, vacancy rates are projected tocontinue on a downward trend, and rents are projected to increase bynearly 3% in 2014.

30%

Industrial Current and Long-term Vacancy

Max

Green box - current vacancy < LT avg.Red box - current vacancy > LT avg.

20%

25%

Current Vacancy

5%

10%

15%

0%

Min LT Average Vacancy

Note: The markets in the above chart are not necessarily MSAs or central cities, but are Reis-defined real estate markets


Note: The markets in the above chart are not necessarily MSAs or central cities, but are Reis defined real estate marketsSource: Reis, Inc.; RCLCO

U.S. Warehouse: Market Risk IndicatorWhile rent levels continue to improve in the major warehousemarkets and vacancy remains in decline, supply pipelines areincreasing significantly. Given the quick construction times andsparse pre-leasing of new industrial construction, construction data can

change quickly. Demand has been high in both high-growth localmarkets and some big distribution markets, such as Dallas and Atlanta.


Year


Year**

Under Constr % of Stock Current***

Quarter Occupancy****

Q-o-Q Occupancy

Change

Y-o-Y Occupancy

ChangeQ-o-Q Rent

GrowthY-o-Y Rent

GrowthAtlanta 1.3% 0.8% 0.7% 86.2% 0.2% 1.0% 0.3% 3.2%Baltimore 3.1% 3.1% 3.4% 90.0% 0.3% 0.9% 0.4% 1.7%Boston 0 3% 0 0% 0 0% 89 4% -0 1% 0 2% 0 0% 0 6%Boston 0.3% 0.0% 0.0% 89.4% 0.1% 0.2% 0.0% 0.6%Central New Jersey 1.9% 0.9% 1.9% 90.5% 0.5% 0.8% 0.7% 2.0%Chicago 0.9% 0.2% 1.0% 86.6% 0.3% 0.8% 1.0% 3.6%Dallas 3.0% 3.9% 4.4% 86.3% 0.0% 0.6% 0.5% 3.0%Denver 0.9% 0.6% 0.8% 90.7% 0.1% 0.3% 0.7% 2.5%Fort Lauderdale 1.1% 0.4% 0.5% 90.5% 0.6% 0.2% 0.5% 1.6%Houston 2.2% 3.2% 1.8% 91.2% -0.1% 0.2% 1.1% 4.6%Indianapolis 1.1% 1.6% 1.6% 88.8% -0.3% -0.4% 1.1% 0.9%Los Angeles 0.7% 0.2% 0.4% 93.2% 0.2% 0.5% 1.2% 3.0%Memphis 0.6% 0.8% 0.9% 83.8% 0.4% 0.6% 0.4% 3.2%Miami 0.5% 0.3% 1.1% 92.6% 0.1% 0.0% 0.3% 1.3%Northern New Jersey 1.5% 0.8% 0.9% 88.7% 0.3% 0.7% 0.6% 1.6%Oakland-East Bay 0.3% 1.3% 0.3% 88.8% -0.3% 0.4% 0.4% 2.4%Orange County 1.1% 0.9% 1.5% 91.8% 0.1% 0.9% 0.3% 1.6%Phoenix 1.1% 0.5% 0.9% 83.6% 0.3% 0.7% 0.4% 2.5%San Bernardino/Riverside 2.3% 2.7% 3.3% 89.4% 0.5% -0.3% 0.8% 4.0%San Diego 1.2% 0.2% 0.3% 89.9% 0.0% 0.1% 0.3% 0.7%San Francisco 0.6% 0.0% 0.0% 92.1% -0.3% 1.2% 0.3% 1.5%Seattle 1.0% 0.5% 0.2% 91.7% 0.1% 0.8% 0.6% 2.1%

*Current quarter defined as Q2 2014; current year defined as 2014. Current year figures are projections for full year 2014**Completions highlighted in Red if above 1% of Stock***Under Construction highlighted in Red if above 1% of Stock****Green if above city’s historical average since 1990Note: Above data includes only Warehouse’s; does NOT include other industrial buildingsNote: The markets in the above chart are not necessarily MSAs or central cities but are Reis defined real estate markets

United States 1.2% 1.0% 0.5% 88.8% 0.2% 0.5% 0.5% 2.1%


Note: The markets in the above chart are not necessarily MSAs or central cities, but are Reis-defined real estate markets.Source: Reis, Inc.; CoStar; RCLCO

Industrial Pricing and Growth Expectationsg pPricing varies significantly by market, with cap rates below 6% onaverage in port-oriented markets such as Los Angeles and Miami.The graph below shows average cap rates and average expected NOIgrowth for the next five years, including expected improvements inoccupancies and rents. West coast cap rates are generally lower, but

are not always accompanied by higher expected cash flow growth.Pricing in the big five distribution markets (ATL, DAL, NNJ, CHI, andRIV) is split, with San Bernardino/Riverside and Northern New Jerseyat low cap rates and the other three moderately priced.

occupancies and rents. West coast cap rates are generally lower, but

10 0%

12.0%

Industrial Price + Growth

2 0%

4.0%

6.0%

8.0%

10.0%

Pric

e +

Gro

wth

0.0%

2.0%


Initial yield and cash flow growth over the hold period are significant contributors to unlevered total return expectations. Low cap rates should thus be accompanied byhigher growth expectations. While the above graph is an incomplete view, it does provide some indications of markets that should be particularly reviewed for furtherinsights. For example, markets with low bars in the graph above may have less growth than needed to offset lower yields, or the growth may be more back-ended in aten-year hold. Conversely, markets with high bars may be positioned to experience significant growth as compared to current pricing, or may be markets that areconsidered to be more risky and thus justify higher expected returns.



Note: The markets in the above chart are not necessarily MSAs or central cities, but are Reis-defined real estate marketsSource: Reis, Inc.; CBRE; RCLCO

Economic and Capital Market Backdrop


Widespread Economic GrowthpOur economic Hot Spot mapmeasures short-term historic andforecast economic and job growthas well as structural factors suchas income and the proportion andas income and the proportion andgrowth of the working population.Economic growth is currentlywidespread, with particularlyhigh growth in technology andenergy markets. Parts of theMidwest and Northeast are stillMidwest and Northeast are stillstruggling, although markets suchas Minneapolis, Indianapolis, andNashville rank highly.


Source: BLS; RCLCO

Lending Improving, but Lagging the Improvement in Property Valuesg p g, gg g p p yNet lending volumes are rising as property values improve. Weexpect lending to continue to increase as a result of improving

occupancy and rental rates, which should help boost prices and salesvolumes.

24%

30%$400

Commercial Net Debt Investment and Values (1986-2014)

12%

18%

24%

$100

$200

$300

l RE

Valu

es

n bi

llion

s)

(6%)

0%

6%

-$100

$0

$100

e in

Com

mer

cial

bt In

vest

men

t (in

(24%)

(18%)

(12%)

-$300

-$200

% C

hang

Net

Deb

Note: 2014 data is based off the annualized Q1 2014 recorded figures.

(30%)-$4001986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Net Debt Investment - Commercial / MF RE (L) Commercial RE Values (R)


Note: 2014 data is based off the annualized Q1 2014 recorded figures.Source: Federal Reserve; NCREIF; RCLCO

Retail Leads Returns, Hotel Lags, gPremiere institutionally-owned retail assets continue tooutperform all other major property types driven by aconcentration of Class A malls in the database, with industrial notfar behind. Hotel returns were the hardest hit during the downturn, yet

had the weakest recovery among major property types and continue tounderperform. Apartment returns have crept downwards in recentquarters and had the worst second quarter of any of the major propertytypes (albeit returns were still positive).

40%

NCREIF Total Returns

20%

30%

10%

0%

10%

-30%

-20%

-10%

Note: 2014 is a rolling four quarter average of Q3 2013 through Q2 2014

-30%

Hotel Apartment Retail Industrial Office


Note: 2014 is a rolling four quarter average of Q3 2013 through Q2 2014Source: NCREIF; RCLCO

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