• Like
  • Save
Emerging trends-in-real-estate-us-2013
Upcoming SlideShare
Loading in...5

Emerging trends-in-real-estate-us-2013






Total Views
Views on SlideShare
Embed Views



5 Embeds 375

http://officesearchtoronto.com 177
http://commercialofficeleasing.com 135
http://www.scoop.it 58
http://feeds.feedburner.com 4
http://flavors.me 1


Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
Post Comment
Edit your comment

    Emerging trends-in-real-estate-us-2013 Emerging trends-in-real-estate-us-2013 Document Transcript

    • 2013EmergingTrendsin Real Estate®
    • iEmerging Trends in Real Estate® 2013Contents 1 Executive Summary 2 Chapter 1 Recovery Anchored in Uncertainty 4 Emerging Trends: The Key Drivers for 2013 10 Evolving and Ongoing Trends 12 Best Bets 2013 14 Chapter 2 Real Estate Capital Flows 17 Banks Will Bide Their Time 17 Fewer Banks Drive Harder Bargains 17 Insurers Cream the Top of the Market 18 CMBS Lurching Forward 19 Another CMBS Roadblock: Special Servicer Questions 19 Searching for Yield in the Capital Stack 20 The Squeeze-Down of Opportunity Funds 20 REITs Corner the Top-Tier Market 21 High-Net-Worth Hesitation 21 Pensions in Flux 22 Safe Haven Influx 24 Chapter 3 Markets to Watch 25 Market Trends 32 The Top 20 Markets 44 Other Major Markets 44 Other Market Outlooks 46 Chapter 4 Property Types in Perspective 50 Apartments 52 Industrial 54 Retail 56 Office 58 Hotels 60 Housing 64 Chapter 5 Emerging Trends in Canada 66 Top Trends for 2013 70 Markets to Watch 80 Property Types in Perspective 84 Best Bets 86 Chapter 6 Emerging Trends in Latin America 88 Brazil 88 Mexico 88 Other Countries 90 Appendixes 92 Interviewees2013EmergingTrendsin Real Estate®
    • ii Emerging Trends in Real Estate®2013Editorial Leadership TeamAlan Migneault*Amy E. OlsonAndrew AlpersteinAleem Bandali*Andrew Popert*Aran RyanBill StaffieriBrian NessBrian RobertsonByron Carlock Jr.Chris Vangou*Christine LattanzioChristopher FernsClaude Gilbert*Dana MatsunoDaniel Cadoret*Daniel CrowleyDaniel D’Archivio*David K. BaldwinDavid Khan*David M. VossDavid Yee*Dean Walton*Deborah Dumoulin*Dennis Johnson*Dominique Fortier*Don Flinn*Doug Purdie*Doug StruckmanFrank Magliocco*Franklin YanofskyFred Cassano*Ian Gunn*James A. OswaldJames OswaldJasen Kwong*Jeff KileyJeffrey Goldfarb*Jeffrey NasserJesse Radu*Joshua Mowbray*Katherine M BillingsKen Griffin*Kevin HalfpennyKiran SandhuKristy RomoLawrence GoodfieldLori MotookaLori-Ann Beausoleil*Lorilynn McSweeneyMark WilliamsMatt LopezMaxime LessardMelissa Davies*Nadja Ibrahim*Nelson Da Silva*Nicholaos Karkas*Patricia Perruzza*Peter Kinch*Rajveer Hundal*Reginald Dean BarnettRemco LangewoutersRichard FourinerRob BertrandRob SciaudoneRon J. Walsh*Ronald P. Bidulka*Russell Sugar*Scott BermanScott CuthbertsonScott TornbergSeth PromiselShai RomirowskyStephen CairnsStephen Shulman*Steven WeisenburgerSusan Farina*Tahir Ayub*Thomas KirtlandTim ConlonVivian ChengWarren MarrWendy McCrayWendy WendebornYang Liu*Canada basedPwC Advisers and Contributing ResearchersEmerging Trends ChairsMitchell M. Roschelle, PwCPatrick L. Phillips, Urban Land InstitutePrincipal Authors and ResearchersJonathan D. MillerCharles J. DiRocco Jr., PwCPrincipal Researchers and AdvisersStephen Blank, Urban Land InstituteDean Schwanke, Urban Land InstituteSenior AdvisersChristopher J. Potter, PwC, CanadaMiriam Gurza, PwC, CanadaSusan M. Smith, PwCEmerging Trends in Real Estate®is a trademark of PwC and is regis-tered in the United States and other countries. All rights reserved.PwC firms help organizations and individuals create the value they’relooking for. We’re a network of firms in 158 countries with close to169,000 people who are committed to delivering quality in assurance,tax, and advisory services. Tell us what matters to you and find outmore by visiting us at www.pwc.com.Learn more about PwC by following us online: @PwC_LLP, YouTube,LinkedIn, Facebook, and Google +.© 2012 PricewaterhouseCoopers LLP, a Delaware limited liability part-nership. All rights reserved. PwC refers to the U.S. member firm, andmay sometimes refer to the PwC network. Each member firm is a sepa-rate legal entity. Please see www.pwc.com/structure for further details.© October 2012 by PwC and the Urban Land Institute.Printed in the United States of America. All rights reserved. No part ofthis book may be reproduced in any form or by any means, electronicor mechanical, including photocopying and recording, or by any infor-mation storage and retrieval system, without written permission of thepublisher.Recommended bibliographic listing:PwC and the Urban Land Institute. Emerging Trends in Real Estate®2013. Washington, D.C.: PwC and the Urban Land Institute, 2012.ISBN: 978-0-87420-220-5ULI Editorial and Production StaffJames A. Mulligan, Managing Editor/Manuscript EditorBetsy VanBuskirk, Creative DirectorAnne Morgan, Cover DesignDeanna Pineda, Muse Advertising Design, DesignerCraig Chapman, Senior Director of Publishing OperationsBasil Hallberg, Senior Research AssociateAbout the AuthorsJonathan D. Miller is a real estate forecaster who has written the annualEmerging Trends in Real Estate report since 1992.Charles J. DiRocco Jr. is director of real estate research at PwC andhas written chapters of the Emerging Trends reports covering the UnitedStates, Europe, and Asia Pacific since 2006.
    • 1Emerging Trends in Real Estate®2013Executive SummaryThe enduring low-gear real estate recoveryshould advance further in 2013: EmergingTrends surveys suggest that modest gainsin leasing, rents, and pricing will extend acrossU.S. markets from coast to coast and improve pros-pects for all property sectors, including housing,which finally begins to recover. Most developersand investors who seek quick wins will remain frus-trated as return expectations continue to ratchetdown to more realistic but relatively attractive levelsproviding income plus some appreciation. In fact,real estate assets will almost certainly continueto outperform fixed-income investments in theultralow-interest-rate environment induced by theFederal Reserve, as well as offer a familiar refugefrom ever-seesawing stock markets.Systemic global economic turmoil, hobbledcredit markets, and government deficits, mean-while, will continue to restrain anxious industryleaders who downplay chances for a faster-trackedupturn amid uncertainty. Investors discouragedabout stratospherically priced core proper-ties in gateway markets inevitably will “chaseyield,” stepping up activity in secondary marketsand acquiring more commodity assets. Theseplayers will need to focus prudently on currentincome–producing investments and avoid thesurfeit of properties edging toward obsolescence,especially certain suburban office parks and somehalf-empty second- or third-tier shopping centers.Most areas can sustain little if any new com-mercial construction, given relatively lacklustertenant demand and the generally weak employ-ment outlook. Only the multifamily housing sectorcontinues to offer solid development opportunities,although interviewees grow more concerned aboutpotential overbuilding in markets with low barriersto entry—probably occurring by 2014 or 2015.The real estate capital markets maintain aturtle’s pace for resolving legacy-loan problems asthe wave of maturing commercial mortgages gainsforce over the next three years. Low interest rateshave bailed out lenders and underwater borrow-ers, but interviewees warn against complacencyand recommend preparation for eventual rateincreases. Under the circumstances, low ratesand high core real estate prices lead investors tofind the best risk-adjusted returns in the middle ofthe capital stack—mezzanine debt and preferredequity. Equity pipelines will have ample capitalfrom well-positioned, cash-rich REITs; yield-hungrypension funds; and foreign players parking moneyin safe North American havens. These investorswill need to remain disciplined and sidestep riskoutside of major markets, probably partnering withlocal operators who have an edge in ferreting outthe best deals.The industry must continue to grapple withunprecedented changes in tenant demand drivenby technology and a relentless pursuit to tempercosts in a less vibrant economy. Office userssqueeze more people into less square footage, pre-ferring green buildings with operating efficiencies,while retailers reduce store size in favor of variousintegrated e-commerce strategies. The large gener-ation-Y demographic cohort orients away from thesuburbs to more urban lifestyles, and these youngadults willingly rent shoebox-sized apartment unitsas long as neighborhoods have enticing amenitieswith access to mass transit. And more intergenera-tional sharing of housing occurs to pool resourcesamong children (seeking employment), their parents(reduced wages and benefits), and grandparents(limited pensions and savings).Overall metro-area market ratings displaysignificant improvement from 2012. Investors stillshow strong interest in top properties in primarycoastal markets, as San Francisco, New York City,Boston, and Washington, D.C., remain in the topten. However, inflated prices remain a top concernin those areas, with many investors starting toadjust their market investment strategies, showingincreased interest in secondary markets as manychase tenants. Some of the top secondary citiesmentioned include Austin, Houston, Seattle, Dallas,and Orange County, all in the top ten and mostwith significant increases in ratings. Improvingprospects in cities like these are mostly drivenby consistent job growth in strong, sustainableindustries such as technology, health care, educa-tion, and energy. “American infill” locations offeringwalkability and strong transit systems continue tooutshine the others. These locations offer advan-tages to the echo boomer generation, which initself is a key demographic in the real estate inves-tor’s eye. Other metro areas scoring well includeSan Jose, Miami, Raleigh/Durham, Denver, SanDiego, Charlotte, and Nashville.In general, the economy should generateenough momentum to push greater leasing activ-ity and increase occupancies. Emerging Trendsrespondents continue to favor apartments overall other sectors, although pricing has probablypeaked and rent growth will subside in marketswith an upsurge in multifamily development activ-ity. Industrial properties and hotels will show thebiggest improvement in 2013, and downtownoffice space in gateway markets also registerssolid prospects, but power centers and suburbanoffice space score the lowest marks for investmentand development among survey respondents.Homebuilders will need to keep activity in check,but should gain confidence from stabilizing housingmarkets. Any uptick in single-family construction by2014 and 2015 should buoy the overall economyand help other property sectors.Canada will maintain its relative wealth islandstatus, free of the debilitating government debt andcredit market dislocation hamstringing most othercountries. Its real estate markets enjoy a seeminglydurable equilibrium, helped along by concertedinvestor discipline, lender controls, and govern-ment regulation motivated to ensure steady growthand dodge disagreeable corrections. Recentlyfrothy condo markets in the nation’s dominant citiestake a breather even as the country’s urbanizationwave continues. Prices may level off or declineslightly for upper-end residences, but intervieweesexpect housing to circumvent any significant down-turn, helped by ongoing immigration trends and ahistory of relatively stringent mortgage underwrit-ing. Tight office markets in Toronto, Vancouver,and Calgary offer the opportunity for select officedevelopment projects, and U.S. retailers enteringthe country will help keep occupancies high inshopping centers. Apartment investments remainhighly favored, and even hotels rebound from ananemic period. Canada’s biggest concern focuseson the condition of the U.S., European, and Chineseeconomies; its prospects could suffer if otherregions cannot boost their outlooks.Latin America’s growth track probably hitssome speed bumps as its export markets slowdown, but expanding middle-class populations inBrazil, Mexico, Colombia, and Peru offer significantopportunities to developers in for-sale housing,apartments, and shopping centers.Emerging Trends in Real Estate®, a trends and forecast publication now in its 34thedition, is one of the most highly regarded and widely read forecast reports in the realestate industry. Emerging Trends in Real Estate®2013, undertaken jointly by PwC andthe Urban Land Institute, provides an outlook on real estate investment and develop-ment trends, real estate finance and capital markets, property sectors, metropolitanareas, and other real estate issues throughout the United States, Canada, and LatinAmerica.Emerging Trends in Real Estate®2013 reflects the views of over 900 individuals whocompleted surveys or were interviewed as a part of the research process for this report.The views expressed herein, including all comments appearing in quotes, are obtainedexclusively from these surveys and interviews and do not express the opinions of eitherPwC or ULI. Interviewees and survey participants represent a wide range of industryexperts, including investors, fund managers, developers, property companies, lenders,brokers, advisers, and consultants. ULI and PwC researchers personally interviewedmore than 325 individuals and survey responses were received from over 575 individu-als, whose company affiliations are broken down here:Private Property Company Investor or Developer 35.9%Real Estate Service Firm 19.6%Institutional/Equity Investor or Investment Manager 16.1%Other 9.5%Bank, Lender, or Securitized Lender 9.0%Publicly Listed Property Company or Equity REIT 6.2%Homebuilder or Residential Land Developer 3.6%Throughout the publication, the views of interviewees and/or survey respondents havebeen presented as direct quotations from the participant without attribution to any par-ticular participant. A list of the interview participants in this year’s study appears at theend of this report. To all who helped, the Urban Land Institute and PwC extend sincerethanks for sharing valuable time and expertise. Without the involvement of these manyindividuals, this report would not have been possible.Notice to Readers
    • 3Emerging Trends in Real Estate®2013Real estate continues to meander along a slower-than-normal recovery track, behind a recuperating U.S. economy, dogged by ongoing world economic distress.But for the third-consecutive year, Emerging Trends surveysindicate that U.S. property sectors and markets will registernoticeably improved prospects compared with the previousyear, and the advances now gather some measure of momen-tum across virtually the entire country and in all property types.“Decent” though “relatively disappointing” job creation shouldbe enough to coax absorption higher and nudge down vacancyrates in the office, industrial, and retail sectors, helped by “nextto no” new supply in commercial markets. Robust demand forapartments holds up despite ramped-up new construction, andeven the decimated housing sector “turns the corner” in mostregions. Improving fundamentals eventually should prod rentsand net operating incomes onto firmer upward trajectories,building confidence about sustained—albeit tame—growth andbuttressing recent appreciation.Although these gains seem modest and out of step withrecent boom/bust cycles, restrained progress ultimately fitsreal estate’s income-oriented profile. Even though “it’s easy tobe cynical: everybody seems to want what they can’t have”(“rent spikes,” “high yields with safety,” and “fully leased build-ings”), interviewees seem to come to terms with the market’s“muddling-along pace,” expressing “cautious optimism”while abandoning hopes for “a big bounce.” Real estate’s“make-things-happen” entrepreneurs will stay “frustrated” andhamstrung in creating value—“the IRR [internal rate of return]model isn’t what it used to be”—but buying, holding, managing,and bumping up property revenues usually wins the real estategame. What’s that story about tortoises and hares? “We’re thedull sister of the investment world; earning a 5 percent to 7 per-cent return is what we do best.”Lingering doubters need to ease up just a bit: the world’sproblems “actually benefit [U.S.] real estate, even though wedon’t deserve it.” Low interest rates give the real estate industrybreathing space, and money “pours in from overseas” seekingrefuge. Real estate assets, meanwhile, continue to commandc h a p t e r 1RecoveryAnchored in Uncertainty“It’s three yards and a a cloud of dust.”-5%-3%-1%1%3%5%-40%-30%-20%-10%0%10%20%30%40%2013*2012*20092006200320001997GDPchangeIndexchangeFTSE NAREITCompositeGDPNCREIFExhibit 1-1U.S. Real Estate Returns and Economic GrowthSources: NCREIF, NAREIT, World Economic Outlook database, Emerging Trends in Real Estate2013 survey.*GDP forecasts are from World Economic Outlook. NCREIF/NAREIT data for 2012 are annualizedas of second-quarter 2012, and the forecasts are based on the Emerging Trends in Real Estate2013 survey.NAREIT totalexpected return7.52%Total expected returns in 2013NCREIF total expected return 7.39%
    • 4 Emerging Trends in Real Estate®2013attractive spreads over fixed-income investments and offerconsiderably more stability than stocks.Still, caution reasonably should rule decision making,given significantly greater potential for economic skids thanany chance for an accelerating property market rebound. Andchastened credit markets, still grappling with bloated portfoliosof legacy problems, wisely and necessarily stick to reinstituted,rigorous underwriting standards. Although anxious investorsfeel more compelled “to chase yield” as core properties in thegateway markets reach for gulp-hard price points, “there’s nopremium for taking risk” when Europe bounces from crisis tocrisis, China ebbs into an export slowdown, and the UnitedStates delays in dealing with its own debt conundrum. In con-sidering solutions, worrying about what will happen “is perfectlyappropriate.” The “uncertainty” about global economics andgovernment policy is “the industry’s biggest issue, because weare so capital intensive, and it’s totally out of anyone’s control.”All the improving signs can appear “offset by the unknown,”weighing down sentiment.This uncertainty may inhibit “exciting big-ticket projects” andconstrict enthusiasm over scaled-down profitability comparedwith the precrash days, but the industry still can find plentyof roll-up-your-sleeves enterprises to bolster recently capital-starved properties and ensure enhanced future performance,including renovation, rehabilitation, repositioning, releasing,and refinancing. Successful players “continue to adapt”: whatworked last year may not work next year. Tenants continue toshrink space requirements to improve efficiency, relying ontechnology rather than extra square feet. Office landlords shouldconsider embracing flexible design features, green technolo-gies, and Leadership in Energy and Environmental Design(LEED) systems or face the consequences. Obsolescentsuburban office space now follows nearby left-for-dead regionalmalls into value-loss oblivion: many of these properties will beconverted into something else over coming decades. Survivingshopping centers appear ripe for reinvention to integrate betterwith e-commerce and logistics supply chains, which continuetheir headlong transformation to accommodate less storage andmore direct shipping to end users.Promising signs of green shoots in desiccated and oversup-plied housing markets should not tempt homebuilders into newprojects too soon. But the potential for some measure of newhousing construction over the next two to three years is realand would be a welcome boost for the economy and other realestate sectors.Indeed, industry players must not lose sight of recentprogress while steeling themselves for an ambiguous future,requiring new visions and tamped-down expectations. “Weneed patience.” Liquidity returns, but deleveraging takes muchlonger than expected, and weighty global problems will be apersistent drag. The world debt crisis took decades to create,the housing bubble followed 15 years of unimpeded growth,and the commercial real estate collapse derived from years ofeasy credit.“It’s only reasonable [a full-blown] recovery will take moretime”—a process less than firmly anchored in all that confound-ing uncertainty.Emerging Trends:The Key Drivers for 2013The following are the most important trends and issues that willaffect U.S. real estate markets in 2013, according to an analysisof Emerging Trends interviews and surveys.Exhibit 1-2Real Estate Business Prospects for 2013Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.Architects/designersHomebuilders/residentialland developersCMBS lenders/issuersReal estate consultantsBank real estate lendersReal estate investmentmanagersPrivate local realestate operatorsReal estate brokersInsurance companyreal estate lendersREITsCommercial/multifamilydevelopers1abysmal5fair9excellent6.286.225.975.785.735.735.485.174.944.754.58
    • 5Emerging Trends in Real Estate®2013Chapter 1: Recovery Anchored in UncertaintyChasing Yield: Not EnoughProduct for Prudent InvestmentAs investors tentatively advance further along the risk spec-trum in 2013 chasing yield, they suffer queasiness about thelimitations of U.S. real estate markets: there is just “not enoughproduct” to get the yields they want. Core real estate seemsoverpriced: plowing money into top properties at sub-5 percentcap rates looks unproductive, especially if and when interestrates “inevitably” go up. “It’s not the smartest thing to do” and“could get ugly out there,” except for buyers and long-termholders of the best properties in the best locations. The numberof truly trophy assets remains somewhat static: typical marketscan sustain only so many fortress malls or Class A office build-ings as prime tenants shrink space requirements and willinglyplay leasing musical chairs. Many lodestar properties becomeirreplaceable holds unless managers undertake transactions forfees where they can command top dollar.No one can count on tenant demand to boost the pros-pects significantly for the surfeit of below-prime commercialreal estate, and the highly favored apartment sector borders onoverheated in some places with development well underway. Inthe current recovery, asset managers already teeter on “a highwire,” “feeling pressure from clients to put money out” but notfinding “prudent yields” in underwriting future rents on thesemore commodity, B and C class properties. Banks, institutionalinvestors, and real estate investment trusts (REITs) “spin out”more Class B and C product they want off their books, trying toentice bites from the unsated equity capital wave, straining tomaintain underwriting discipline. “Watch for assumption creep:buying at 9 percent or 10 percent cap rates might make sense,but at 7 percent or 8 percent in these markets, there could be aproblem when you want to exit.” In the right management andleasing hands, some of these vanilla properties may throw offdecent income returns, but realizing much appreciation seemslike a stretch.And can anyone find a lender to help leverage performanceon these “higher beta” properties? It may become somewhateasier in 2013, but not much, given rationally tight financingstandards. What is the advantage for bankers in taking outsizedchances when their portfolios continue working off legacyproblems?Traders always get in trouble when they price real estate“as a commodity.” And that is the ongoing issue for today’schastened buyers: too much product looks no better than that—commodity.Source: Emerging Trends in Real Estate 2013  survey.Private direct real estateinvestmentsPublicly listed equitiesCommercial mortgage–backed securitiesPublicly listed propertycompanies or REITsInvestment-grade bondsPublicly listed homebuildersExhibit 1-3Investment Prospects by Asset Class for 2013excellentgoodfairpoorabysmal
    • 6 Emerging Trends in Real Estate®2013Localization and the Move intoSecondary MarketsMoney slowly wends its way beyond the highly favored globalgateways into “long-neglected” secondary markets where“tighter pricing will be a true trend in 2013.” Investors “con-centrate on higher-quality assets” in “search of higher rates ofreturn,” but pickings are relatively slim. “You need much morecompelling reasons to go into secondary and tertiary markets,focusing on niches” and particular local strong suits.For the big institutional investors, venturing out of the top-tenmajor markets where they have concentrated their activity “canbe filling but not very satisfying”—historically return expecta-tions do not always pan out, and exit strategies prove moredifficult to execute. Because they have eliminated most regionalstaffing, the major money management advisers and invest-ment banks typically lack the depth and reach to understandinternally the idiosyncrasies of most medium-sized and smallermetropolitan areas. And smaller investment companies mostlyrely on third-party research reports. As they move farther afieldin 2013 hunting for yield, these investors must depend on localoperating partners to make wise investment calls in addition tomanaging and leasing decisions, or they risk major stumbles.Expected stepped-up institutional activity aside, second-and third-tier markets increasingly “become the province” oflocal high-net-worth operators, supported by regional and localbank capital. “It’s happening, but you don’t hear about it.” Thelocals “look at the micro” (tenant moves and market drivers);“nobody is talking about the macro” (the global economy). They“take more risks,” “buy at low bases,” “invest more of their ownmoney,” and they are willing to bet on their communities for thelong term rather than focus on some unachievable short-terminvestment return for investors who may never set foot in town.“These are more buy-and-hold, get-rich-slow investors.”Restrained absorption and lack of tenant depth in manyof these markets will force locals to think out of the box andabout change of use. Outside of a handful of tech- or energy-dominated markets, “they cannot expect much growth.”Transaction Volume Will Tick UpForlorn deal makers find hints of more action in 2013. Pricingcontinues to strengthen, but increases are “muted” until creditmarkets return to more normal states and transaction volumestays relatively “anemic.” The Emerging Trends barometer reflectslack of clear market direction. Buy/hold/sell sentiment continuesto track in a narrowing range with purchase appetites losing somevim in the face of higher prices, while selling interest increasesfor the same reason (exhibit 1-4). Without pressure from lenders,“truculent” owner/borrowers continue to hold out for “top dollar”while investors expect bargains. Intensified bank balance sheetclearing should “provide [more] opportunities for well-capitalized”buyers, but “very little will be available in institutional-class realestate.” “If you don’t have to sell, it’s better to hold,” althoughhungry investors will pay above replacement cost for pricey, well-leased core properties. Those buyers will have no choice except“to sit on [these acquisitions] for a while. Conditions aren’t right forflipping, and there will be no easy plays.” Action picks up in $20million-and-under properties located in suburbs and second-tiermarkets “as long as the income is there.”Perplexing Interest Rates:“the Biggest Risk”Many real estate players wonder if they have been lulled intocomplacency after consistently predicting wrongly in EmergingTrends for most of the past decade an increase in interest ratesover a five-year time horizon and perfunctorily doing so again inthis year’s survey (exhibit 1-7). Lurking ominously in their future,rates must begin to revert to the mean, and cap rates will even-tually follow. “How long can they stay down?” But the low-growtheconomy forces the Federal Reserve to print money and keepsrates at unprecedented low levels, probably at least through2015. And rock-bottom rates continue to be a boon for realestate, providing exceptionally low and attractive financing forborrowers with good credit at a time of a huge refinancing surgein commercial mortgage–backed securities—“it makes the tidalwave less serious”—in addition to turning properties into a morecompelling investment relative to fixed-income vehicles. “It’sExHIBIT 1-4Emerging Trends Barometer 2013Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.SellHoldBuyabysmalpoorgoodexcellent2013201220112010200920082007200620052004fair
    • 7Emerging Trends in Real Estate®2013Chapter 1: Recovery Anchored in Uncertaintythe most important trend—changing the investment environ-ment with different rate-of-return expectations.” Asset pricing is“modest; repricing debt is where funds will go. A 4 percent to5 percent mortgage is a pretty good deal, relieves owners withcash flow issues, and provides a decent return for lenders.”As more investors inevitably chase yields in secondarymarkets during 2013, doubts about where rates are headedperplex interviewees, especially in view of ballooning govern-ment deficits. They prefer to think any increases “could be fouror five years out: just look at Japan” where rates have remainedin the cellar for close to two decades (along, not coincidentally,with the Japanese economy). But how long can the Fed keepbuying up treasuries when other investors back off because oflow returns and U.S. debt issues? And what happens if someExhibit 1-6NCREIF Cap Rates vs. U.S. Ten-Year Treasury YieldsSources: NCREIF, Moody’s Economy.com, Federal Reserve Board, PricewaterhouseCoopers LLP.*Ten-year treasury yields based on average of the quarter; 2012 Q2 average is as of July 31, 2012.-4%-2%0%2%4%6%8%10%201220102008200620042002200019981996199419921990Spread10-year treasury*Cap rateExhibit 1-5Sales of Large Commercial PropertiesSource: Real Capital Analytics.Note: Includes transactions in the Americas for properties $10 million or greater.$0$30$60$90$120$150Billionsofdollars12Q212Q111Q411Q311Q211Q110Q410Q310Q210Q109Q409Q309Q209Q108Q408Q308Q208Q107Q407Q307Q207Q106Q406Q306Q206Q1Exhibit 1-7Inflation and Interest Rate ChangesSource: Emerging Trends in Real Estate 2013  survey.Note: Based on U.S. respondents only.2345CommercialmortgageratesLong-termrates (10-yeartreasuries)Short-termrates (1-yeartreasuries)InflationRemain stableat current levelsIncreasemoderatelyIncreasesubstantiallyNextfive years2013
    • 8 Emerging Trends in Real Estate®2013exogenous event occurs to force rates up? Can anyone be surethe Fed is the master of holding down rates indefinitely? “We’vebeen living off artificially managed cheap debt when we reallyneed demand and rental growth. Any crisis in confidence aboutthe United States, and interest rates on treasuries could esca-late,” notes an interviewee. Simply, normalizing rates “are thebiggest risk” to the industry.If rates increase suddenly, many borrowers “will be disin-termediated, unable to refinance unless property income hasgrown sufficiently to support value and repayment of an existingmortgage.” And investors would be wise not to assume exit caprates based on today’s low interest rate levels. “It could bite us.”Investors should lock in low mortgage rates, assume long-termmortgages, and hedge against rising T-bill rates. “It’s temptingto stay short because there is so little cost, but this will not last.”While interest rates remain collapsed, inflation stays undercontrol mostly because of high unemployment, low wagegrowth, deleveraging, and a resulting lack of pricing power. “Wecontinue to buy time, but don’t seem to be making much prog-ress.” Many real estate pros would like to see inflation increase,boosting net operating incomes and hard asset values whilehelping them eliminate the burden of their mortgage and cashflow constraints. “That’s probably the only way out of the debtproblems.” The “sweet spot” scenario holds for some inflationand continuing low financing rates; “it’s hard to mess up if youhave good assets.”Overbuilding Multifamily?Developers rush into multifamily, the only sector where demand“of historical proportions” and undersupply combine to justifynew construction. Lender interest and low borrowing rates(including from Fannie Mae and Freddie Mac) facilitate projectfinancing to leverage returns, and plunging cap rates on existingapartments give developers a positive spread. Smart develop-ers who bought and entitled land at the recent market bottomreally score. Bullish players forecast continued upward pressureon rents from the eventual release of pent-up demand fromgeneration Yers living with parents; many will find jobs and moveout on their own. In addition, tens of thousands of apartmentsdemolished each year will need replacing.But some interviewees raise cautionary notes and contend“it’s time to start shutting down” the construction pipeline.“There’s much more development coming on than people areadmitting. They also ponder all the funds investing in single-familyhousing, which will add to rental supply and compete againstapartments. Clearly, hidden inventory exists that people aren’tfocusing on.” Other nervous Nellies point to office developersshifting into the apartment space, “because they can get financ-ing.” “It’s hard to keep discipline and prevent overbuilding.”Cooler heads distinguish between infill markets with fewdevelopable sites, especially near mass transit stops, andtraditional hot growth areas where new commodity, garden-styleproduct can mushroom and often overshoot demand. “You seetoo much construction in easy-to-build markets. Construction isneeded where you have a 2 percent vacancy rate and it’s hardto build.” At the very least, multifamily development will “changethe tilt of the game board, moderating growth in rents andultimately returns.” When rent increases become tempered andconstruction prices increase, developers will start to back off.“You don’t want to play the game too long.”For the longer term, gen-Yers may not want to live in apart-ments indefinitely: “They will move back to the ’burbs with thebackyard and dog, renting since they may not be able to buy.NOI [net operating income] growth in apartments could tail off.”Housing Resuscitation: LiftingOther SectorsBattered homebuilders finally may register a pulse in 2013. Mostinterviewees expect a long, hard slog to recovery for the U.S.housing industry, but prices increase in more areas, the foreclo-sure process begins to be resolved in earnest, and institutionalinvestors help firm up markets by buying inventory. At somepoint, the sheer force of the expanding population (at 2 million to3 million annually) will create demand for single-family homes,and any upsurge in housing will likely ripple positively throughthe rest of the real estate industry and the entire economy.Homebuyers may then head to shopping centers to furnish andappoint their houses, and distribution facilities will need to sup-port increased movement of goods. Suburban office marketscould benefit, too: mortgage and sales brokers, title companies,and construction firms will all need to expand as lawyers andappraisers could also get a boost. Marginal improvements in2013 set the course for better days ahead.Playing It SafeThe unprecedented global financial dislocation prolongs anunwelcome hunkering down. “Everybody is operating on yellowand red flashing lights,” and “managing risk and selectivity willbe the key to any success.” Entrepreneurial tendencies remainmostly harnessed amid conditions borne of debt-related “drift”and “uncertainty.” This means investors cluster in the world’sperceived safest markets—the United States and Canada areat or near the top of their lists—and shun other places. Lenderscontinue to open doors for their highest-credit clients but placehurdles in front of other borrowers. With a few exceptions in thehandful of 24-hour cities and energy/tech markets, develop-ers cannot make a case for construction loans; only multifamily
    • 9Emerging Trends in Real Estate®2013Chapter 1: Recovery Anchored in Uncertaintybuilders manage to line up financing. Retail tenants want intoClass A malls and leave second-class centers, while just abouteveryone avoids half-empty strips and office parks. Intervieweesexpect little relief from evident market “bifurcation” “until theeconomy recovers,” and most resign themselves anxiously to“no huge change.”Getting a Grip on ReturnExpectations: Debt Beats Equity“I roll my eyes if a manager claims he can get more than a 15percent annualized return” on a commercial real estate fund,says an interviewee. “They’re picking numbers to try to meetthe market.” Such optimistic—bordering on fanciful—projec-tions cannot play out in the current environment “without a lotof leverage [hard to come by] and a lot more [downside] risk.”Individual investments may pan out, but added value andopportunistic returns pegged to precrash-era expectations justdo not appear viable, and that is bad news for all the generalpartners and high-growth managers trying to resurrect theirfund management businesses and earn generous promotesoff their optimistic appreciation scenarios. “Getting used toless can take a long time.”If they have not already, real estate players reorient toreality, understanding what property investments are built todeliver. “Remember, over time three-quarters of real estatereturns derive from income, only one-quarter from value gains.”Any return in the 6 to 10 percent range looks particularly attrac-tive in 2013 when compared to interest rates and inflation, notto mention against stocks and bonds, and well-leased realestate should produce those levels of returns for the next sev-eral years (exhibit 1-8). “It’s the best horse in the glue factory.”As deleveraging and refinancing continue to “suck up a lotof capital,” at least through mid-decade, yield expectations arechanging, and real estate looks more like “the income vehicle”it was meant to be. Within the capital stack, debt investmentsshould earn better risk-adjusted returns than equity, thanksto significant loan-to-value ratios and realistic valuations thatcombine to provide excellent downside protection. Smartlenders “should not depend on a lot of growth and [should]underwrite based on current fundamentals.”Operating in a Slow-GrowthEnvironment: Decent ProfitabilityLike other businesses, real estate firms boost profitability at themargins by keeping lean, and Emerging Trends respondentsanticipate 2013 will be a reasonably good year for bottom lines(exhibit 1-9). “Staffing-wise they’re doing nothing” after cuttingback a bit; incomes inch back toward 2007 levels. Better-capitalized firms should continue to gain market share at theexpense of other failing companies, but “the overall size of theindustry will not change.” Compensation relative to the 2007peak remains “more modest.” Only a select number of invest-ment managers secure “equity programs that will pop value”after “a lot of equity washed out.” Compensation is no longerdetermined by peer-group comparisons but by individualcompany profitability, with cash awards approaching about 70percent of peak levels and equity opportunities offering onlyabout 50 percent. “Everything had been out of balance.”Top leasing and property management executives getpaid premiums for keeping buildings filled and finding ways toreduce operating costs. Proven marketing professionals whocan raise capital also remain in high demand, given ravenouscompetition for skittish client dollars. Deal makers continueto suffer in lackluster transaction climes and freshly mintedMBA job seekers will have better success with some pastbricks-and-mortar credentials. Office developers shift intoapartments, and homebuilders gear up for new activity, but ina slow-growth mode. “It’s not very exciting.”More CEOs keep themselves up at night figuring out sce-nario planning, and many executive teams add risk strategiststo prepare for potential bolt-out-of-the-blue crises. Cushioningagainst problems takes precedence over ambitious newventures. At the same time, changing demographics, “Era ofLess” realities, and technology effects force developers andoperators to do business differently in meeting altered demandtrends. From retail and warehouse to office and apartments,Exhibit 1-8Index Returns: Real Estate vs. Stocks/BondsSources: NCREIF, NAREIT, S&P, Barclays Group.Note: 2012 data annualized from second-quarter 2012.-40%-30%-20%-10%0%10%20%30%40%20122010200820062004200220001998FTSE NAREIT CompositeNCREIFBarclays CapitalGovernment Bond IndexS&P 500
    • 10 Emerging Trends in Real Estate®2013tenants do not necessarily settle for old-school layouts anddesigns. Understanding and “staying close to the customer”becomes more important than ever.Evolving and OngoingTrendsTechnology, Job Growth, andReduced DemandEmerging Trends interviewees remain flummoxed about jobgrowth and give up on reflexive optimism about how the U.S.economy always finds its way.Some pockets of high-quality job growth do exist in energymarkets where the natural gas boom and upward-trending oilprices lift prospects, the familiar high-tech bastions, and “edsand meds” corridors around hospital centers and near majoreducation institutions. Anyplace offering a combination of theseemployment drivers and attracting a highly educated work-force, including the global gateways, positions itself relativelywell at least for the near to medium term. Also, “don’t count out”financial centers (with greater regulatory certainty, banking insti-tutions can stabilize), and manufacturing “makes a comeback.”Aside from the few bright spots, the overall jobs outlookappears chronically “sluggish,” hindered in part by recent gov-ernment cuts and the comatose construction industry. A majorityof new jobs created in the recovery are low paying, a continu-ation of the longer-term national trend of decreasing wagesand benefits. Interviewees increasingly place more blame ontechnology-related productivity gains, which also shrink ten-ant space requirements in a painful double whammy, keepingvacancies higher than desirable in commercial real estate.On the office front, companies shoehorn employees into lessspace—workbenches replace cubicles—and let more peoplework from home (avoiding commuting time and expenses) orout of the office with their laptops and smartphones in tow,reducing rents and operating expenses. Businesses relying onwi-fi can slash space once needed for filing cabinets, computerhardware, and credenzas—all that paper stuffed into manilafolders evaporates into data clouds—as fretting office landlordsjust hope they can renew leases somewhere close to exist-ing square-footage requirements. Web-embracing retailers,meanwhile, “kick in” internet selling strategies that dovetail withliberally shrinking store sizes and inventories, which also meansthey hire fewer store clerks. Fortress malls may stay full, butlesser retail locations lose tenants and value.“It’s an eye-opener what’s happening to the workplace andshopping habits”; “technology has gone from experimental tohere to stay.” Or put another way, interviewees contend con-strained job growth and reduced space per capita look likeprolonged realities.CompactnessPeople and businesses seek smaller spaces. They realize theydo not need as much room to live and work, and want to reducerents and operating expenses as they deleverage or try toenhance bottom lines in the less-than-robust economy. Gen-Ycareer builders forsake suburban lifestyles and willingly moveinto “shoebox”-sized city apartments; nearby public ameni-ties like retail districts and parks can make up for the lack ofpersonal space. In the “Waltons effect,” more grandparents, par-ents, and young-adult offspring live together to pool resources;they each put up with less personal room, too. Companiesgravitate to flexible office layouts, which facilitate cramming staffinto smaller work areas, and retailers rely on smaller store for-mats, selling more products through web-based channels. ForExhibit 1-9Firm Profitability Forecast 2013Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.Prospects for Profitability in 2013 by Percentage of Respondents5.6%Excellent19.6%Very good30.7%Good20.0%Modestlygood17.2%Fair4.6%Modestlypoor2.0%Poor0.4%Very poor
    • 11Emerging Trends in Real Estate®2013Chapter 1: Recovery Anchored in Uncertaintyreal estate owners, the move to less means slackened overalldemand growth, whereas homebuilders and apartment devel-opers need to consider new, more efficient models and relatedamenities (wi-fi is a must) for projects.Shortfalls in municipal budgets—from increasing pensioncosts, reduced federal aid, and resistance to higher taxes—forces local officials to come to terms with the economics ofplanning schemes and zoning. In retrospect, sprawl has turnedinto a loser for many suburbs; officials begin to realize howdenser development generates greater revenues at lower percapita infrastructure costs. The realization finally dawns that“creating something high quality and compact produces agreater yield for any land asset.” Sewer lines and roads ser-vicing sprawling subdivisions, originally subsidized decadesago by the then-more-revenue-rich federal and state govern-ments, now require extensive upgrades or replacements asthey approach the end of their life cycles. But insufficient localtax revenues from single-family homeowners will not cover therepair bills in most cases, and cash-strapped states and thefeds just do not have enough funds to help out.Unprecedented Transformationin Tenant DemandNever before has the real estate industry been so whipsawedby such rapid transformation in tenant requirements. Whereasonly a few years ago, office users placed a premium on scaleand quality, today they want space that can “provide efficiency”and “encourage productivity.” Practicality and collaborativeenvironments in open-space plans make more compelling brandstatements than marble finishes and skyscraper views as flexibilityand ease in moving teams within layouts take precedence overboardroom amenities and corner offices. “CEOs get compensatedfor cutting costs, not expanding,” and their corporate real estateunderlings get the message “about figuring out ways to use lessreal estate.” Tellingly, even some white-shoe law firms lose win-dowed offices and adopt more functional space schemes.Everybody caters to echo boomer tastes: “their sheer sizedeserves attention and can’t be underestimated.” These multi­tasking younger professionals crave interconnectedness andmobility, value the most up-to-date communications devicesso they can operate from just about anywhere, and downplayphysical space as well as privacy; for them social cacophonycan be energizing. They also favor green amenities. If they mustwork in close quarters, they want more fresh air and natural light,and they like the idea of working in cutting-edge buildings thatmanage energy loads to reduce environmental impacts. Fornow and at least until they start families, proximity to stimulatingurban action—living and working within reasonable distancesand using mass transit—holds more attraction for the 20-something crowd than spending time and money commutingby car to quiet suburban lanes. Apartment developers home inon echo boomers’ socialization penchant; they can build smallerunits if they supply wi-fi and provide common space like roofdecks or event rooms for texting-inspired get-togethers.The housing bust may not have destroyed homeownershipdreams, but more people across the age spectrum now feelgreater peace of mind renting while many others have no otherchoice; saddled by bad credit or lacking enough equity, they can-not afford to buy. The renter surge extends well beyond multifamilyand back into suburban single-family residential neighborhoods.Adapting the ’BurbsThe world “rethinks the suburbs” in the wake of populationgains in the major gateway markets and growth in urbanizingsuburban nodes at the expense of fringe areas. “It’s a seculartrend driven by where many young people want to live,” and itwill have a “very material impact on how real estate is used.”Some “biotech and pharmaceutical companies break up theirsuburban campuses and move back into cities because theycan’t convince PhDs to go to the suburbs.”Despite “suburban office: who wants it!” scorn, “everyoneisn’t going back to the cities,” and aside from the prominent24-hour meccas, many long-forlorn downtowns continue tostruggle. The majority of Americans, meanwhile, still live outsideurban cores or in suburban agglomerations. But developers andinvestors need to realize future success may rest in identifyingprime locations suitable for densification in suburbs and linkinginto transit-oriented hubs as more communities seek car alterna-tives to relieve traffic congestion “and avoid choking to death.”“Anything near suburban rail is gold. We’re seeing superior rentgrowth compared to buildings away from light rail; it’s no longerhypothetical.”Separating land uses from each other—housing, retail strips,office campuses and regional malls—loses traction to morecompact development with mixed-use, urban concepts. Manysuburban parcels stand ready for makeovers—whether a ghostmall, an empty formerly grocery-anchored neighborhood center,or that nearly vacant office park or low-density business park.Under any circumstances, investors wisely bet on infill,especially around the 24-hour cities where most of the nation’seconomic activity concentrates. The housing crisis pushes morefamilies into apartments from houses, spurring suburban multi-family projects. Real rental growth and population gains occur“on a more broad-based level” in the major metropolitan areasand urbanizing suburbs embedded around them. The localizedexceptions occur where urban gentrification effectively transfersendemic poverty into inner-ring suburbs.
    • 12 Emerging Trends in Real Estate®2013Best Bets 2013Emerging PlaysThese investment and development sentiments from EmergingTrends interviewees deserve particular attention in 2013.Concentrate acquisitions on budding infill locations. Top24-hour urban markets outperform the average, bolstered bymove-back-in trends and gen-Y appeal. But the top core districtsin these cities have become too pricey. “Find buildings wheretenants want to be,” typically in districts where hip residentialneighborhoods meet commercial areas and “not necessarily thetop, most expensive buildings.” “You can’t get enough of any-thing near mass transit stations,” especially apartments.Construct new-wave office and build to core in 24-hourmarkets. Major tenants willingly pay high rents in return for moreefficient design layouts and lower operating costs in LEED-rated, green projects. These new buildings can lure tenants outof last-generation “brown” product. Other build-to-core gambitswill work, too. “Better to develop at a seven cap rate than buyan existing building at a five.” Completed medical office andapartments should sell at nice spreads into ever-present capitaldemand. Rental apartment projects provide solid income withthe potential for future condominium conversions.Develop select industrial facilities in major hub distributioncenters near ports and international airports. In these mar-kets, “the industrial sector is where the apartment sector wastwo years ago,” driven by tremendous demand by large-scaleusers looking for specialized space and build-to-suit activity.Use caution investing in secondary and tertiary cities.Focus on income-generating properties, and partner with localoperators who understand tenant trends and can leverage theirrelationships. If you feel uneasy about overpaying, listen to yourgut and back off. Markets grounded in energy and high-techindustries show the most near-term promise (but can be vola-tile), while places anchored by major education and medicalinstitutions should perform better over time. Leading secondarymarkets include Austin, Charlotte, Nashville, Raleigh-Durham,and San Jose.Begin to back off apartment development in low-barrier-to-entry markets. These places tend to overbuild quickly,softening rent growth potential and occupancy levels probablyby 2014 or 2015.Consider single-family housing funds. Housing marketsfinally limp off bottom, and major private capital investors makea move into the sector. Concentrate investments with localplayers who know their markets and can manage day-to-dayExhibit 1-102013 Issues of Importance for Real EstateSource: Emerging Trends in Real Estate 2013  survey.Green buildingsAffordable/workforce housingNIMBYismCMBS market recoveryTransportation fundingDeleveragingFuture home pricesInfrastructure funding/developmentLand costsConstruction costsRefinancingVacancy ratesClimate change/global warmingSocial equity/inequalityImmigrationTerrorism/warEnergy pricesInflationNew federal financial regulationsState and local budget problemsEuropean financial instabilityFederal fiscal deficits/imbalancesTax policiesGlobal economic growthIncome and wage changeInterest ratesJob growthEconomic/Financial IssuesSocial/Political Issues1 2 3 4 5Real Estate/Development Issues1no importance3moderate importance5great importance4.734.124.113.863.853.723.703.653.553.493.394.033.813.773.633.623.593.493.353.
    • 13Emerging Trends in Real Estate®2013Chapter 1: Recovery Anchored in Uncertaintyproperty and leasing issues. Be prepared to wait a while beforerentals can be converted into a revived sales market. In themeantime, investors should earn good income returns.Repurpose the surfeit of obsolescent properties. Whetherabandoned malls, vacant strip centers, past-their-prime officeparks, or low-ceilinged warehouses, a surfeit of propertiesrequires a rethink, a teardown, and in many cases a new use.Creative planners and developers have myriad opportunitiesto reconsider how sites can tie into future growth tracks andintegrate into more efficient and desirable models. Many capital-depleted hotels are ripe for renovations, too.Enduring FavoritesThese investment bets have been highlighted in recentEmerging Trends reports and continue to be among intervie-wees’ leading recommendations for 2013.Recapitalize well-leased, good-quality assets, ownedby overleveraged borrowers, who are upside down finan-cially. This ongoing “feast of opportunities” has plenty of legsbecause banks continue to engage in “extend and pretend”loan strategies as more mortgages reach their maturities.“Lots of real estate has income-generation potential but hasbeen compromised by distressed capital structures.” “Look fordistressed borrowers, not distressed properties.” Mezzaninedebt and preferred equity positions will offer particularly goodrisk-adjusted returns.Lock in long-term, low-interest-rate mortgage debt. Whytempt the inevitable? “There’s no way the low-interest-rate envi-ronment lasts,” and your low-rate mortgage could be “a hugefuture asset” as soon as interest rates begin to pop. The surge inmortgage maturities seems perfectly timed for some strugglingborrowers who may be able to refinance at lower costs. Back offfloating-rate debt before you look stupid. The Fed cannot keepprinting money forever.Hold core properties in 24-hour cities. Whether office towers,prime hotels, apartments, or skyscraper condominiums, pricingtests limits, and these markets either have peaked temporarilyor could level off for a while. But premier assets should continueto outperform over time; if sold, how would you replace them?Boston, New York City, San Francisco, and Washington, D.C.,can come off the boil, but they always stay near or at the top ofinvestor lists. The Bay Area reaches the Emerging Trends rank-ing pinnacle for 2013.Buy or hold public REITs. Given their dividends and embed-ded growth, these stocks should continue to perform well.Focus on sector-dominating companies that have assembledblue-chip portfolios of the best income-producing assets inmultifamily housing, regional malls, strip centers, office build-ings, and distribution facilities.Buy nonperforming loans, and work out discounted payoffsfrom borrowers. Banks and special servicers tend to shed mort-gages on weaker assets, “but you can hit a lot of singles anddoubles” at the right price.
    • 15Emerging Trends in Real Estate®2013For 2013, the real estate capital markets throw off con-fusing, mixed signals amid significant pent-up investordemand, sluggish but mending fundamentals, andlow interest rates, as lenders continue to hold on to a slew ofunderperforming loans in a glacial deleveraging and hundredsof billions of commercial mortgages reach maturities. Four yearsafter the cyclical bottom, “many markets have not been allowedto clear and prices have not been reset,” except in the dominant24-hour cities and a handful of tech and energy regions.Expectations for returns decrease on paper, but investorsstill push for higher yields than may be possible or reasonable,especially given the insipid economy and ongoing politicalintransigence. “It’s easy to get ahead of yourself, and some[investors] will lose control of discipline.” “A crazy search foryield” in a low-interest-rate environment leads some intervie-wees to argue that sub–5 percent cap rate purchases arerational given spreads to treasuries. But they ignore what mayhappen to exit cap rates when interest rates inevitably increase,as well as the extremely checkered and unhappy history of com-pressed cap rate purchases in past market cycles. EmergingTrends survey respondents predict a moderate oversupply ofequity capital and a moderate undersupply of debt capital dur-ing the year (exhibit 2-2).Inevitably in a measured recovery more equity capital willcreep into the higher-cap-rate strata—riskier secondary marketsand lower-quality assets—unable to stomach high pricing andminimal yields in core real estate. But the prime gateway mar-kets will continue to benefit from increased flows from foreigninvestors looking for secure wealth islands to protect assets.In the debt markets, it will be “more of the same”—goodassets with solid income streams and good credit borrowers willhave no trouble attracting financing from life insurers and bankseager to choose from the pick of the litter. As markets improve,more properties will enter this worry-free zone, and rich-can-get-richer mortgagors easily lock in “exceptionally cheap money.”But players with bad credit and/or marginal assets, who needcapital infusions to keep afloat, continue to find themselvescast aside or placed in extend-and-pretend limbo. “It’s still thec h a p t e r 2Real EstateCapital Flows“Plenty of capital is available for people who can earn it.”Sources: Moody’s and Real Capital Analytics.Notes: Major markets are defined here as Boston, Chicago, Los Angeles, San Francisco, New York,and Washington, D.C. The Moody’s/RCA CPPI is based on repeat-sales transactions that occurredat any time up through the month before the current report. Updated August 2012; data through June2012.Exhibit 2-1Moody’s/RCA Commercial Property Price Index5075100125150175200225Nonmajor markets(all-property)Major markets(all-property)National(all-property)2012Jan2010Jan2008Jan2006Jan2004Jan2002Jan2000Dec
    • 16 Emerging Trends in Real Estate®2013best—and all the rest.” According to Emerging Trends respon-dents, stringent underwriting standards will harden into practicein 2013: more than 80 percent say tough loan terms will stay thesame or become even more rigorous (exhibit 2-3).Compromised CMBS issuers stagger back, unable to offermuch help to their formerly bread-and butter Class B andC–asset borrowers; the securitized debt markets still “look likea question mark” and show few signs of reclaiming much moremarket share in 2013. Most leftover CMBS quandaries remainunresolved from the crash: “They had lowered costs andspread risk tolerances around, but bond investors didn’t knowwhat they were buying and the underwriting and risks werenot clearly understood. None of that has been rectified yet,” aninterviewee said.Complicating matters, the estimated $300 billion of refinanc-ing required for maturing loans over each of the next three yearswill decrease lenders’ ability to write new commercial mortgagesand force a continuation of extend-and-pretend strategies onexisting debt. Lenders also remain extremely disciplined aboutcommercial construction lending: developers “have an easiertime finding equity investors” than financing.Further clouding analysis, the metrics of risk-adjustedinvestments get turned somewhat on their heads: usually safesenior debt yields fall toward uncomfortably low levels for lend-ers with an eye on future interest rate moves. At the same time,low yields for core real estate pricing look less appealing thanthe risk-adjusted returns for the mezzanine debt and preferredequity. Effectively, investors in these middle-of-the-capital-stacktranches can obtain “a higher-than-equity cap rate with highercash-on-cash returns and lower risk.” Interviewees expect thepricing differential to narrow between senior and mezzaninedebt during 2013.Under any circumstances, real estate attracts the attentionof enough—that is, considerable—capital activity, which helpsdeleverage fractured legacy investments and move marketsin the direction of regaining equilibrium. Financial-institutionbalance sheets “avoid taking hits,” and low interest rates helppreserve capital and encourage a deliberate, if admittedlyprotracted recovery. Frustration about limited opportunities andlowering returns logically should be tempered by evident investorappeal for the asset class as an income generator and potentialinflation hedge. Why else would so much capital prop it up?Simply, U.S. real estate, properly underwritten, remains as gooda place as any for husbanding assets in an unsettled world.Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.Exhibit 2-4Equity Underwriting Standards Forecastfor the United StatesExhibit 2-3Debt Underwriting Standards Forecastfor the United States+29.7++50.7++19.6+39.1++41.5++19.429.7%More rigorous50.7%Will remain the same19.6%Less rigorous39.1%More rigorous41.5%Will remain the same19.4%Less rigorousSource: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.+9.4++26.4++20++34.6++9.6+15.9++44.8++25.0++13.7++0.7+13.5++43.5++31.9++9++2.29.4%Substantiallyundersupplied26.4%Moderatelyundersupplied20.0%In balance34.6%Moderatelyoversupplied9.6%Substantiallyoversupplied15.9%Substantiallyundersupplied44.8%Moderatelyundersupplied25.0%In balance13.7%Moderatelyoversupplied0.7%Substantiallyoversupplied13.5%Substantiallyundersupplied43.5%Moderatelyundersupplied31.9%In balance9.0%Moderatelyoversupplied2.2%SubstantiallyoversuppliedEquity Capital for InvestingDebt Capital for AcquisitionsExhibit 2-2Real Estate Capital Market Balance Forecast for 2013Debt Capital for Refinancing
    • 17Emerging Trends in Real Estate®2013Chapter 2: Capital FlowsBanks Will Bide Their TimeThe take-it-gently deleveraging beat goes on. Buyers wait aim-lessly for banks to shed commercial property assets at cheapprices; banks maintain a slew of problem assets on their bookswhile values ratchet slowly up, reducing their potential losses;borrowers with sterling credit have no problem securing financ-ing; troubled borrowers who need refinancing capital most ofall get the cold-shoulder treatment or, more likely, receive anextend-and-pretend pass; and Federal Reserve–engineeredlow interest rates “save everyone.” The kabuki theater perfor-mance plays out ever so slowly with no one sure exactly what’shappening in the bowels of these financial institutions. Butmore than four years after Lehman, banks apparently have notbolstered their balance sheets enough to clear the market, orthe government wants them to hold back (in the case of homeforeclosures especially) for fear of shocking prices into a furtherdecline—a politically and economically risky bet. As a result,banks feel “no intense pressure” to do much of anything: manymortgages even on underwater assets may be among “theirhighest-yielding assets.” As long as loans are current, lendersare better off to extend than sell loans at discounts, foreclose andrecognize losses when markets have further room to improve,or refinance at lower rates. Under the circumstances, the samebeat essentially goes on for another year at least, although bank-ers selectively will dribble “a little more from inventory” onto themarket “and take some additional [manageable] hits.”Fewer Banks Drive HarderBargainsThe credit debacle has shrunk the banking community into “asmaller group” of active lenders. Interviewees count only twomajor U.S. money-center banks willing to lend on larger deals,and hobbled European banks, once influential players “are outof the picture.” Regional and local banks have been winnoweddown, and survivors may consolidate and merge to find econo-mies of scale needed to comply with new banking regulations.Finding fewer choices, borrowers will continue to confronttough lending terms; banks require “a lot of equity” and somerecourse. Perhaps not surprisingly, bankers appear more willingto keep these better-underwritten loans on their balance sheetsthan try to securitize them. Notes an interviewee, “Banks nowdo business the way they should have been doing business allalong—actually thinking about real estate and not about debtgetting flipped or getting paid for origination.” Refinancing takesthe breath away from the origination market; the bulk of lend-ing across all sources will continue to focus on dealing with the$300 billion in loans maturing annually through 2015.Insurers Cream the Top ofthe MarketAfter retreating from the precrash overleveraging binge and,not coincidentally, avoiding the portfolio problems of banksand CMBS originators, shrewd life insurers still “have the pick”Source: FDIC.Note: Delinquent loans are defined here as those that are noncurrent, either 90 days or more past due,or in nonaccrual status.*As of Q2 2012.Exhibit 2-5Bank Real Estate Loan Delinquency Rates0%5%10%15%20%Construction and development loansnoncurrent rateMultifamily mortgagesnoncurrent rateCommercial mortgagesnoncurrent rate2012*2010200820062004200220001998199619941992Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.Exhibit 2-6Maturing Loans: Preferred Strategy for LendersExtend withoutmortgage modification6.9%Extend withmortgage modification54.7%Sell to a third party23.6%Foreclose and dispose14.9%
    • 18 Emerging Trends in Real Estate®2013of the best senior loan deals in the absence of much competi-tion. They originate record volumes, usually with high-creditclients, and on a risk-adjusted basis conservatively achieve aconsiderable cushion with loan-to-value ratios of 65 percentor lower and “a lot of real equity ahead of us” on high-qualityassets. Interviewees claim insurers are not pushing values andbase underwriting on current cash flows. “That’s how they havestayed out of trouble” all along. Uncharacteristically, they moveinto multifamily housing and even do some mezzanine lendingand construction to permanent loan deals to get higher yields;given current markets, these risks seem reasonable. Makingtheir mark in avoiding commodity properties, insurers will not fillthe lending void in helping troubled borrowers owning Class Bor C properties. But in 2013, insurers will try to limit the terms ofloans and offer more floating-rate debt to hedge against the low-interest-rate environment. Some new insurers may also enter thereal estate lending space, but this will not be a game changerfor borrowers.CMBS Lurching ForwardNew regulatory restrictions on traditional lenders—includingBasel III and Dodd-Frank—could open the way for privateequity and hedge funds, as well as start-up lending shops, tofill some of the void or step in to resuscitate the still-flaggingconduit business. “Sputtering to life” from “a shadow of what itwas,” CMBS may have a chance to lurch back into the financingspotlight “once transaction activity increases.” Without enough“good product, you cannot create pools, and there hasn’t beenenough [good product].” The market also requires more B-piecebuyers to invest in the riskiest tranches, so originators have heldback, unwilling to warehouse loans.But the CMBS industry may need to confront bigger obstaclesin order to rebound fully. Although most interviewees contend thata properly functioning mortgage securities engine is necessaryfor liquidity in the real estate capital markets, they also expressserious concerns about failures to address evident problems inCMBS underwriting, regulation, ratings, and servicing since themarket collapse at the depths of the credit crisis. “The problemfor bond buyers remains”: the people running CMBS shopshave “shuffled around,” underwriting is only marginally better,”originators and issuers “don’t have enough skin in the game” foran alignment of interests, the ratings agencies still get paid bythe issuers, and “attitudes haven’t changed.” In short, “nothingmeaningful has happened” to correct the problems, which sentbond buyers running to the exits.Some interviewees say regulatory changes—like requiringholding a portion of each loan or delays in realizing fees andpromotes—could lower industry profitability and limit the num-ber of players willing to enter the business. Some intervieweesremain skeptical, “At first B-piece buyers will be reasonablydisciplined. Then they will gradually loosen credit standards astransactions and money come into the market” until it’s time to“revisit underwriting problems” and their consequences. In themeantime, “bond buyers cannot get the same level of detail anddisclosure we did pre-2007,” and more hedge funds, not realSources: Moody’s Economy.com, American Council of Life Insurers.Exhibit 2-7U.S. Life Insurance Company Mortgage Delinquencyand In-Foreclosure Rates0123456782012201020062002199819941990In foreclosureDelinquencyPercentageSource: Commercial Mortgage Alert.*Issuance total through August 30, 2012.Exhibit 2-8U.S. CMBS Issuance$0$50$100$150$200$250Total(millions)2012*2010200820062004200220001998
    • 19Emerging Trends in Real Estate®2013Chapter 2: Capital Flowsestate–oriented players, work the B-piece space, raising ques-tions about the quality of due diligence.In spite of continuing concerns, interviewees continue toexpect that CMBS issuance can return to a $75 billion to $90 bil-lion level over the next several years—well below its $250 billionpeak, but a rational market share.Another CMBS Roadblock:Special Servicer QuestionsWho watches out for bondholders once CMBS loans go intodefault? It was supposed to be special servicers, even thoughCMBS pioneers in the mid-1990s privately had questioned howservicers could handle a deluge of problem mortgages workingoff complex loan documents without any previous connec-tions to borrowers. The early promoters conveniently dismissedpotential problems by predicting only a small chance of massdefaults. Unfortunately, interviewees say, now-evident problemsinvolving some special servicers and their handling of tens ofbillions of dollars in troubled CMBS loans raise questions andfurther reinforce market doubts about CMBS structures andrelationships. Disparate and disaggregated, “senior bond hold-ers complain, but take no [concerted] action [yet]; somethingwill bubble up.”At the same time, borrowers continue to face hurdles inpursuing work-outs: “They have nobody to talk to.” In addition,some interviewees highlight questionable special-servicerpractices, including holding back on resolving loans to feedfee machines, side dealing, profitable trades at the expense oftrusts, and self-serving abuse of document loopholes, accord-ing to interviewees. If so, these servicers take advantage ofthe lack of any ready oversight since mechanisms were neverput in place over them to protect bondholders beyond caveatemptor. Besides the potential for lawsuits, interviewees suggestthat the industry and/or regulators must address these special-servicing issues or “the CMBS world will continue to flounder.”Some borrowers, meanwhile, just wish they had “taken a higherrate” through a traditional lender. Expect servicers to increaseauctions on their worst assets; they have reached the point ofdiminishing returns and will take almost “any price to avoid pay-ing property taxes.”Searching for Yield in theCapital StackInvestors will continue to jockey for position in the capital stackto achieve the best risk-adjusted returns, hoping for as muchupside as possible. A ton of dollars “looking for a home,”rock-bottom interest rates, and resulting low cap rates pushdown mezzanine debt quotes on core real estate into the highsingle digits (they remain in the low to mid-teens for secondarymarkets). Although disappointing for the yield hungry, thesedeals still promise a core-plus return with a downside cushionahead of core equity. Recapitalizing a high-quality, overlever-aged property and taking a preferred equity position may turnSource: Trepp, LLCNote: Through July 2012.Exhibit 2-9CMBS Mortgage Delinquency Rates0%2%4%6%8%10%12%20122011201020092008200720062005200420032002200120001999Average delinquency ratesince 1999Monthly delinquency rateExhibit 2-10Prospects by Investment Category/StrategyDevelopmentCore investmentsDistressed debtDistressed propertiesCore-plus investmentsOpportunistic investmentsValue-added investments1abysmal5fair9excellent6.166.075.775.665.665.385.17Source: Emerging Trends in Real Estate 2013 survey.
    • 20 Emerging Trends in Real Estate®2013out even better. In either case, core equity owners face lesserprospects: they assume the first loss position when cash flowsand potential future interest moves could leave them with lessgenerous return expectations unless rents escalate ahead ofmost predictions.The Squeeze-Down ofOpportunity FundsAs investment banks retreat from funds management in thewake of the expensive regulatory “compliance maze,” super-sized private equity and hedge funds—“the new nonbankbanks”—vacuum up pension fund allocations, which charac-teristically seek safety in the security of what everybody else isdoing. Managers of these multibillion-dollar funds then “pushout dollars promising big returns, which could be hard to real-ize” in current commercial markets compromised by improvingbut still questionable tenant demand. With tremendous buy-ing power, they target large portfolios and entities, looking toimprove performance and then sell down the line.In these markets where promotes will be more difficult toachieve, the megafunds can earn “huge fees on their volumes”alone, leaving hundreds of smaller “opportunity fund” competi-tors, who need promotes to profit, grasping for leftovers andvulnerable to failure. “The simple math proposition of organiza-tional expenses for smaller general partners is that without scaleand unless you get promotes, you cannot make the businesseswork.” And very few can be successful consistently. They maytime taking advantage of a narrow window for acquisitions ator near the bottom of a cycle and ride a recovery, but the cyclemay not cooperate for subsequent funds, which will miss on anysignificant value gains once recovery has played itself out. In theworst-case scenario, late-to-the-game funds buy too close tothe top and sink in any market correction. Because finding goodopportunistic investments in the current environment is difficult,more opportunity funds “will be forced into development” tohave any chance of realizing satisfactory performance bonuses,and many of these fund managers lack development expertiseunless they are fronted by experienced local operators. Plansponsors and other investors become hip to the square: theyfavor existing managers with good operating histories andwithout legacy problems. Other managers “will struggle to raisepeanuts.”REITs Corner the Top-Tier MarketSitting pretty at the top of the real estate food chain, publicREITs consolidate their holdings in core, institutional-qualityreal estate and reap the benefits of cap-rate compression onwell-leased properties as well as ongoing solid income genera-tion. Generally strong management teams can scale operations,leading to expense savings over portfolios, and leveragenational tenant relationships, especially in retail and industrialspace. They continue to sell weaker assets, deleverage higher-cost debt, grow unencumbered assets, get investment-graderatings, and float cheaper unsecured financings. Insurancecompanies and banks, meanwhile, fall all over themselvesto extend credit to these public companies: “They chase thepeople who need it the least.”Exhibit 2-11Change in Availability of Capital for Real Estatein 2013Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.Equity SourceLending Source1very largedecline5stay the same9very largeincreaseGovernment-sponsoredentitiesMortgage REITsNonbankfinancial institutionsCommercial banksSecuritized lenders/CMBSMezzanine lendersInsurance companiesNontraded REITsPublic equity REITsPrivate local investorsPrivate equity/opportunity/hedge fundsInstitutional investors/pension fundsForeign investors 6.366.096.045.795.665.575.975.925.875.855.815.494.92
    • 21Emerging Trends in Real Estate®2013Chapter 2: Capital FlowsThe stock market understandably looks favorably on allthese moves. “REITs stack up as a defensive asset with goodearnings and dividend growth”—hard to find amid otherwisechoppy equities’ performance. If worse comes to worst, manyof these companies look well positioned to ride out any prob-lems: prime holdings inevitably perform better in most marketscenarios, losing less value in down markets and appreciatingmore in recoveries. But companies concentrated in certainweak sectors like suburban office face tough sledding, and theoverall industry pushes up against the limits of supply in top-tierproperties. There are only so many to go around. When Class Aassets come to market, expect well-heeled REITs to pounce onany opportunities.High-Net-Worth HesitationHungry for capital gains and less motivated by income, high-net-worth investors temporarily display less enthusiasm forcommercial real estate. They tend to recoil from all the nega-tive “never-in-my-life-have-I-seen” economic indicators andstockpile cash. Exceptions are entrenched local real estate fami-lies, who have built up fortunes over time developing, owning,and managing properties for the long term. They remain verymuch in the game and look to take advantage of any bargains,especially in secondary markets where big players have beenrelatively scarce. They will try to use their marketplace knowl-edge and considerable local connections, including tenantrelationships, to best advantage.Pensions in FluxOn the front burner for pension funds, “serious underfunding”plagues public plan sponsors, potentially upending retirementsof aging baby boomers. “In a pure numbers game,” states andlocal governments move toward a reality check: taxpayers ulti-mately may not be able to afford the current public pension fundsystem. Over time they likely must follow the lead of corporateplan sponsors and transform defined-benefit plans into defined-contribution programs self-managed by the beneficiaries, and401(k)s, whose liquidity requirements make investment in equityreal estate unwieldy and “could diminish real estate’s role.”In the meantime, some plan sponsors downgrade real estatefrom “its own little province” into an asset-allocation categorylumped together with other real assets like infrastructure, naturalresources, and farmland. These plan sponsors “look for greaterefficiency and pricing; in theory, if timber offers better returns,then allocations to real estate may be reduced.”For pension fund managers, the handwriting is on the wall,though the ramp-down of defined-benefit plans will happengradually and not begin immediately. “With mixed results,” theycontinue to wrestle with how to put day-to-day valuation andliquidity mechanisms—cash and public REIT allocations, limita-tions on investment rights—in place for private equity real estateoptions in 401(k) plans. Then marketing real estate to benefi-ciaries presents its own challenges, competing among all thevarious stock, bond, and cash options.For now, pension funds tie themselves in knots over strate-gies and return expectations after securing “relatively good”recent real estate performance and wondering if it can continue.They need alpha to fill funding gaps, but also require steadyincome to meet current payout requirements. For most pensionfund investment managers, fundraising has been “brutal” andshould remain difficult in 2013. Uncertainty leads plan spon-sors to “write fewer and bigger checks to bigger, safer [brand]names.” And although overall allocations remain up, “gettinginvested remains an issue with queues into core funds just abouteverywhere” and other managers struggling to find product tomeet ambitious return parameters. “A lot of pension fund moneywas attracted into real estate by promises of 15 percent or betterreturns, and that’s not happening.” The biggest public funds“grow more conservative” and bring direct investment capabili-ties in house after a past round of cost cutting and sheddingstaff experts.“Open questions” abound.Source: Emerging Trends in Real Estate 2013 survey.Exhibit 2-12Percentage of Your Real Estate Global Portfolioin World Regions0% 20% 40% 60% 80% 100%20182013OtherLatin AmericaAsia PacificEuropeUnited States/Canada
    • 22 Emerging Trends in Real Estate®2013Safe Haven InfluxIn a world of economic hurt and fear, the United States still“represents good relative value” and ranks internationally as the“premier” safe real estate investment haven. Europeans copeuneasily on shaky domestic turf and seek relative stability andsome measure of yield across the pond, while wealthy Chineseand Russians park assets outside of their countries. MiddleEast investors and affluent Israelis play smart by offshoringwealth away from backyard hotspots, and nouveau riche LatinAmericans diversify fortunes into south Florida condos. Asiansovereign wealth funds are flush with cash and could pickup any slack if domestic pension funds pull back. Anticipatethat foreign money will continue ample inflows into Americanproperty markets from all compass points unless the federalgovernment fails to address the fiscal cliff. Concentrating theiractivities in the très chère gateways, most foreign sources “maynot get great returns, but with low interest rates, they’ll take theirchances.” The amount of foreign capital in New York City andWashington, D.C., is “breathtaking”; San Francisco, Miami, LosAngeles, and Boston also draw attention, but not much headselsewhere.Europe. “Scared to death” about the euro crisis and concernedabout China’s slowdown, Germans, Dutch, and the Brits espe-cially seek safe U.S. harbors and see good relative value. “Theywill be very active.” Some veteran players may even venturetentatively beyond the gateway investment model given highpricing in the 24-hour cities.Asia. The region’s bulging sovereign wealth funds view theUnited States “positively.” They like its size and stability incontrast with Europe’s problems and the volatility of emergingmarkets. And U.S. real estate certainly compares favorably withT-bill yields or other alternative investments. Chinese institutionsjust begin to look offshore under new government rules. “Theywill concentrate in the most familiar coastal markets, the one’sthey know and feel safe in.” Wealthy Chinese individuals “arerecreational investors willing to make high-risk investments” infancy homes and skyscraper condos. Chinese banks “can beextremely competitive if they choose” as Japanese and SouthKoreans also “keep their hands in the game.”Canada. Buoyed by their strong fiscal condition, Canadianslook south of the border after running out of real estate oppor-tunities in their relatively constrained markets where institutionsbuy and hold on to the best properties. “The grass is alwaysgreener,” and the amount of Canadian capital trying to find itsway into the United States “is mind-boggling.” The big publicpension funds have been joined by public vehicles and someprivate funds in the hunt for returns. Investment banks andmoney managers “crank out” new funds “like cookie cutters”with stretched yield promises and may buy inferior properties.”There’s just a ton of pent-up capital that needs to get invested.”But the institutions know the markets: “They won’t be reckless.”Middle East. Oil money focuses on “the four food groups andhotels,” but has no interest in niche or specialized propertystrategies. Business is conducted quietly with longtime part-ners. “They are willing to take outsized risk for outsized returns.”Israelis have always had close ties to the United States andincrease their activity. “It’s the most secure place for them toinvest.”Latin America. As South American economies comparativelyflourish and a wealthy class emerges, the United States naturallyattracts increasing amounts of Latin American capital. SouthFlorida pieds-á-terre or New York apartments not only makegood investment candidates for securing assets, but also arestatus builders. Expanding Hispanic demographics also makethe United States an increasingly comfortable place to invest aswell as do business.Source: Real Capital Analytics. Note: Net capital flows from second-quarter 2011 through second-quarter 2012.All dollars in millions.Exhibit 2-13Foreign Net Real Estate Investments in theUnited States by Buyer Origin-$9,000-$7,000-$5,000-$3,000-$1,000$1,000$3,000$5,000$7,000MillionsofdollarsAustraliaAmericas,excludingCanadaOtherUnitedKingdomEurope,excludingtheU.K.andGermanyMiddleEastGermanyAsiaCanada$0
    • 23Emerging Trends in Real Estate®2013Chapter 2: Capital FlowsTotal(millionsofdollars)–$2,000–$1,500–$1,000–$500$0$500$1,000$1,500HotelRetailIndustrialOfficeApartmentHotelRetailIndustrialOfficeApartmentHotelRetailIndustrialOfficeApartmentHotelRetailIndustrialOfficeApartmentHotelRetailIndustrialOfficeApartmentHotelRetailIndustrialOfficeApartmentHotelRetailIndustrialOfficeApartmentHotelRetailIndustrialOfficeApartmentHotelRetailIndustrialOfficeApartmentAustraliaAmericas,excludingCanadaOtherUnitedKingdomEurope,excludingthe U.K. andGermanyMiddle EastGermanyAsiaCanada2,886.83,206.4–5,370.5Source: Real Capital Analytics. Note: Net capital flows from second-quarter 2011 through second-quarter 2012. All dollars in millions. Exhibit 2-14Foreign Net Real Estate Investments in the U.S. by Property TypeSource: Real Capital Analytics.Note: Net capital flows from second-quarter 2011 through second-quarter 2012.Exhibit 2-15U.S. Buyers and Sellers: Net Capital Flows by Source and Property Sector-$6,000-$4,000-$2,000$0$2,000$4,000$6,000$8,000$10,000HotelRetailOfficeIndustrialApartmentUser/otherPublicPrivateNonlistedREITInstitutionalEquityfundCross-borderUser/otherPublicPrivateNonlistedREITInstitutionalEquityfundCross-borderUser/otherPublicPrivateNonlistedREITInstitutionalEquityfundCross-borderUser/otherPublicPrivateNonlistedREITInstitutionalEquityfundCross-borderUser/otherPublicPrivateNonlistedREITInstitutionalEquityfundCross-borderTotal(millionsofdollars)
    • 25Emerging Trends in Real Estate®2013In 2012, the Emerging Trends “Markets to Watch” chapteropened with the following interviewee quote: “Capital willsearch for yields beyond the overbought gateways and thefew jobs-growth markets, taking on considerably more risk.”Investment strategies conformed with Emerging Trends fore-casts through the first half of 2012, but investment slowed at thestart of the second half. This slowdown was just a sign of appre-hension over stepping outside the prime market/prime propertyinvestment strategy. The acceptance of additional real estaterisk did not seem feasible to many in view of other concernson the horizon. This “wait and see” approach is understand-able because investors must reevaluate the global economicuncertainty, a limited increase in U.S. employment, continuingproblems with housing, and a presidential election.Even though these troubles linger, the 2013 EmergingTrends forecasts display strong signals that investors will returnto accepting more risk in their portfolios in an attempt to “chasemore yield.” Overall, interviewees have a positive tone, stat-ing, “Yield is in the secondary markets,” “We like safe bets; butsecondary markets are the focus now,” and “The idea is to startmoving into second-tier markets where there’s better pricingrelative to the top-tier markets.” Secondary real estate marketswere mentioned repeatedly, comments focusing mostly on theirprice and yield advantages. “The chasing of yield started in thegateway cities [and] is now spreading to the other markets. . . .There is quite a lot of activity in the secondary city markets.”Even as riskier secondary markets show up on investors’radar, many believe the move cannot be made without concen-tration on leasing to high-quality tenants within growth industriesthat are sustainable. “Location, location, location” will always bethe key driver in real estate. However, as property prices meetor exceed prerecession levels in the ”big six”—San Francisco,New York City, Boston, Washington, D.C., Los Angeles, andChicago—the focus of markets and property investors hasshifted more to the lessee’s value, various market demograph-ics, a city’s economic production, diversification, job growth,and basically on where people want to be. As one investorstates, “Corporate occupiers may do better by following theiremployees.” Real estate investors might want to reflect on thatstrategy.Market TrendsSurvey Says . . .Because other asset classes continue to offer minimal returnsor too much volatility, investment capital’s interest in com-mercial real estate continues to increase. The 2013 EmergingTrends survey results confirm this trend: only six of the 51 marketscovered exhibited a decline in investment prospects. This year,57 percent, or 29 cities, received a rating of “modestly good” orbetter, followed by 27 percent with a rating of “fair,” and only 16percent were rated “modestly poor” or lower. Compared withlast year, investment prospect values for the big six rose by anaverage of only 0.48 points, but the rest of the field improvedits values by an average of 0.62 points. Those cities making thebiggest moves in the values, and rated “generally good” or bet-ter, were generally secondary markets and included Salt LakeCity, Charlotte, and Miami. On the other end of the spectrum,Washington, D.C., and Austin, two of the top-rated markets in lastyear’s report, saw their rating values decline, as did New Orleans.c h a p t e r 3Markets toWatch“Look where other people aren’t, and smart money will follow micro-fundamentals.”
    • 26 Emerging Trends in Real Estate®2013Exhibit 3-1U.S. Markets to Watch: Overall Real Estate ProspectsSource: Emerging Trends in Real Estate 2013  survey.Note: Numbers in parentheses are rankings for, in order, investment, development, andhomebuilding.123456789101112131415161718192021222324252627282930313233343536373839404142434445464748495051HomebuildingDevelopmentInvestmentDetroit (51/51/51)Las Vegas (46/50/50)Sacramento (45/49/49)Cleveland (49/48/48)New Orleans (50/45/47)Providence, RI (48/46/43)Memphis (47/43/45)Tucson (43/47/44)St. Louis (40/42/46)Albuquerque (44/44/39)Milwaukee (41/40/42)Columbus (42/41/37)Jacksonville (39/39/41)Cincinnati (37/38/40)Indianapolis (38/35/35)Inland Empire, CA (35/36/36)Atlanta (30/34/38)Kansas City (34/33/32)Phoenix (29/37/34)Oklahoma City (36/31/30)Baltimore (32/30/33)Pittsburgh(33/32/28)Tampa/St. Petersburg (25/29/29)Orlando (26/28/27)Philadelphia (27/26/24)Virginia Beach/Norfolk (31/27/22)Westchester,NY/Fairfield,CT(28/23/26)Chicago (20/24/31)Minneapolis/St. Paul (23/25/25)Honolulu/Hawaii (24/22/18)Salt Lake City (19/21/20)Portland, OR (17/20/23)San Antonio (22/18/17)Nashville (21/13/21)Charlotte (18/16/19)Los Angeles (14/15/14)San Diego (13/17/13)Denver (8/14/15)Northern New Jersey (16/12/12)Miami (11/11/16)Raleigh/Durham (15/10/11)Orange County, CA (9/19/9)Dallas/Fort Worth (10/7/10)Washington, DC (12/9/4)Seattle (6/8/7)Boston (4/6/8)Houston (5/5/6)Austin (7/4/5)San Jose (3/3/2)New York City (2/2/3)San Francisco (1/1/1) 7.21 6.87 6.807.14 6.76 6.426.89 6.58 6.586.71 6.40 6.266.84 6.36 6.156.85 6.31 6.056.72 6.16 6.146.43 6.11 6.306.47 6.20 5.866.48 5.57 5.916.27 5.93 5.726.47 5.89 5.446.26 5.89 5.656.49 5.77 5.456.37 5.60 5.616.35 5.69 5.496.17 5.67 5.266.03 5.79 5.165.97 5.59 5.406.19 5.52 5.096.06 5.39 5.205.79 5.37 5.335.89 5.06 4.826.05 5.12 4.545.59 5.14 4.785.36 5.00 5.145.61 5.05 4.835.64 4.97 4.775.66 4.90 4.645.32 4.66 4.665.36 4.78 4.404.98 4.76 4.555.56 4.24 4.265.27 4.37 4.425.40 4.32 3.965.20 4.26 4.054.83 4.31 4.204.96 4.18 3.884.80 4.16 3.884.56 4.04 4.004.59 4.04 3.884.48 3.88 3.904.61 4.00 3.654.53 3.71 3.834.23 3.94 3.804.23 3.77 3.834.16 3.85 3.654.19 3.39 3.654.31 3.30 3.434.30 3.00 2.943.38 2.16 2.33Expectations have risen not only for investment, but also fordevelopment prospects for 2013. Of the 51 markets covered,20 were rated “modestly good” or better for development, 12were rated “fair,” and 19 scored a “modestly poor” or worse.Development rating values were up across the board, but thebig six scored much better than rest of the field, registering anaverage 6.14, compared with the field’s 4.82 average. Says oneinterviewee, “Replacement costs are better than market pricesin larger markets, so now might be the time to build.” Accordingto survey participants, market movers in the development arenainclude Charlotte, San Francisco, and Chicago. Less interestin building was found in the Washington, D.C.; WestchesterCounty, New York; and Detroit areas.Homebuilding has started to see the light, a view docu-mented by survey results: the number of markets rated“modestly good” or better increased to 14 from only three lastyear. “The housing market has finally bottomed, and now realestate growth should follow,” says a developer. This might betrue, but homebuilding prospects will be best in the largermarkets, according to survey results. All big-six markets exceptChicago received a rating of “modestly good” or better forhomebuilding. As a total, the average value for larger mar-kets was 5.93, compared with an average of 4.71 for the rest.Housing may have bottomed out, but the markets that offer thebest homebuilding prospects are the larger ones. Accordingto survey results, top areas for homebuilding in 2013 includeSan Francisco, San Jose, and New York City. The areas withthe least attractive prospects include Detroit, Las Vegas, andSacramento.“Employment Please”Slow and limited job creation continues to be a concern in 2012,and according to Emerging Trends interviewees, the topic willbe one of the top issues in 2013. Interviewees believe, “jobs aregetting better, but won’t accelerate in 2013,” “limited job creationisn’t increasing demand,” and “we’re not sure what the engineis that will drive job growth.” Moody’s Analytics forecasts slowgrowth—a 1.1 percent increase in employment for the com-ing year. Even with these modest projections, there have beensigns of continuous job growth. Since the “technical” end of therecession in July 2012, the United States has added 2.66 millionnonfarm jobs. However, that constitutes only 36 percent of the7.4 million jobs lost during the recession. Even with those statis-tics, one optimistic interviewee forecasts “6 million new jobs bythe end of 2014, or about 250,000 a month.”Service-type positions show strong growth in numbers, butgoods-producing employment continues to struggle, down 18.7percent since the peak in 2006 (see appendix). The numberof government positions in 2013 is still expected to be down
    • 27Emerging Trends in Real Estate®2013Chapter 3: Markets to Watchfrom the 2009 peak, mostly driven by state, regional, and localreductions. Federal positions remain a concern because budgetissues may lead to major cutbacks. “Government employmentand even subcontractors should be concerned,” says one par-ticipant. Even though overall job growth is questionable, someindustries—including technology, energy, health care, andeducation—show strong signs of growth. “Energy, tech, andhealth are going to do much better than people think.”Emerging Trends survey results show a strong correlationbetween jobs and survey rankings. Some markets with strong2013 employment growth projections fared well, including anycity in Texas, New York City, Raleigh, and San Jose, to name afew. Not surprisingly, several of these markets also have a largeconcentration of work in those few industries showing growth.For example, Houston has energy, which represents 3.6 percentof the city’s employment; 16 percent of Raleigh’s jobs are ineducation; and the technology sector constitutes 25 percent ofSan Jose’s employment. These numbers show some positives,but real estate’s future is still uncertain. As an interviewee states,“It’s a horse race between NOI increases, job growth, and inter-est rate hikes.”Diversity, Production, and RankAs expected, the majority of markets with higher overall eco-nomic production scored better in this year’s survey. Measuringgross metro product (GMP) per capita—the size and productionof a metropolitan area by population—the projected averagegrowth is 1.4 percent for all of the markets covered in the report.Survey results show that 24 cities will exceed that average, and27 will fall below it next year. Comparing that to survey marketranks, seven of the top ten ET markets are considered aboveaverage producing cities, while three fall below average expec-tations. Austin (4), San Jose (1), and Dallas (9) top the GMP percapita list at 5.3 percent, 3.1 percent, and 3.0 percent growth,respectively. Economic production is a driver of real estate—and obviously of interest to interviewees and survey participants.As one states, “Economic production and revenue are influentialin our investment decisions.”A little more unexpected is the comparison of survey rank toMoody’s industrial diversity scale. Industrial diversity is a 0-to-1scale that measures a market’s business diversity comparedwith that of the United States as a whole, which is assigned aExhibit 3-2Employment Change (2007–2013)Source: Moody’s.Note: Employment for 2013 is a forecast as of September 2012. Numbers in parentheses are overall rank.-200,000 -150,000 -100,000 -50,000 0 50,000 100,000 150,000 200,000 250,000 300,000 350,000Chicago, IL (24)Detroit, MI (51)Los Angeles, CA (16)Atlanta, GA (35)Miami, FL (12)Philadelphia, PA (27)Providence, RI (46)Tampa, FL (29)Pittsburgh, PA (30)Phoenix, AZ (33)San Diego, CA (15)San Jose, CA (3)San Francisco, CA (1)Minneapolis, MN (23)Raleigh/Durham, NC (11)San Antonio, TX (19)Austin, TX (4)Washington, DC (8)Dallas/Fort Worth, TX (9)Houston, TX (5)
    • 28 Emerging Trends in Real Estate®2013value of 1. Employment diversity should be a benefit to marketrisk and output. However, when compared with survey ranks,the answers are slightly unexpected. Out of 51 Emerging Trendsmarkets, 23 received a 0.75 industrial diversity rating or better,signifying that those metropolitan areas possess a rather diversebase. Of those 23 diverse markets, however, only one, Dallas,scored a top-ten ranking in the 2013 Emerging Trends report.Of the remaining nine, six received a mark of 0.5 or higher, andthree were below 0.5. Asks one interviewee, “Diversity is a signof stability, but will stable be enough in a slow-growing econ-omy?” Recessionary times might spark investors to look to morediverse markets to weather job losses and declines. However,now, in a time of slight economic uptick, results indicate thatinvestor sentiment is focused on job-producing industries andthose markets that contain them, such as San Jose and Seattle,regardless of how diverse the businesses are that are producingthose jobs.The Housing ImpactEven as many professionals feel more comfortable sayingthe housing market has bottomed out, statistics might lead todoubts about that conclusion. At the end of August, the U.S.Census Bureau reported that the homeownership rate was 65.5percent, the lowest rate in the past 50 years (exhibit 3-4). Thisvalue does not even include the 3.9 million borrowers who are90 days or more delinquent on house payments and at risk ofdefault. Analysts often state that true homeownership is closerto 62 percent. Either way, the lending and homeownership crisiscontinues to put a big strain on commercial real estate andmany commercial real estate markets. Many interviewees agree;one says, “If the housing sector recovers, more jobs, banksfreed up, and a multiplier effect ensues.”Even if home prices have “bottomed” in places or are“starting to see a little bit of life in terms of pricing,” the roadto recovery will be slow and difficult. According to Moody’sAnalytics forecasts, in 2013 only six housing markets will bein the black compared to their peak prices. Trends data showthat these markets either did not experience such steep pricedeclines during the recession or are in areas that have bigexpectations for job growth next year. A few markets with mini-mal price movements include Pittsburgh (30) and OklahomaCity (32). But even more interesting is the boost given homeprices by increased hiring in areas such as Houston (5), Raleigh(11), and San Antonio (19).“You’re going to see the best housing markets providebetter commercial real estate options.” This statement standstrue when looking at the survey’s list of the top-ten investmentprospects and various housing statistics. For the survey’s top-ten markets, delinquency rates of 90-plus days are 30 basispoints lower than the average for those in the other 41 cities inthe survey, and delinquent loans are processed 27 days quickerin those same markets. In 2013, home completions will be 3.9percent higher in the top-ten markets than in the other marketscovered, and home sales will be 1.7 percent higher. “You’regoing to see the best markets get new housing,” says an inter-viewee. Finally, comparisons of house price declines from peaklevels are not even close: prices in the top-ten markets are down17.3 percent, compared with 23.7 percent for the rest of the field.The housing market might see another uptick in the nearfuture because many large investment groups have started toenter the housing hunt. Investors have put up large amounts ofExhibit 3-3Gross Metro Product per CapitaSources: Moody’s forecast for 2013; Emerging Trends in Real Estate 2013 survey.Note: List based on Emerging Trends markets only. Number in parentheses represents EmergingTrends 2013 total market rank.Best Worst1. Austin (4) 1. Detroit (51)2. Salt Lake City (21) 2. New Orleans (47)3. Houston (5) 3. Cleveland (48)4. San Jose (3) 4. Providence, RI (46)5. Raleigh/Durham (11) 5. Northern New Jersey (13)Sources: U.S. Census Bureau; Moody’s Analytics (forecasts).Exhibit 3-4Homeownership Rates606162636465666768697020132011200920072005200320011999199719951993Percentage
    • 29Emerging Trends in Real Estate®2013Chapter 3: Markets to Watchcapital to take advantage of low-priced and foreclosed homesavailable in markets such as Florida, California, Nevada, andArizona. The investment strategy is to purchase these typesof homes and then rent them to new residents. Though thisapproach is still fairly new and on a small scale, a privateREIT has been created to follow this home purchase and rentstrategy. Apartment rentals have risen, followed by increaseddevelopment, but if an abundance of rental homes is enteredinto the game, overbuilding could become a concern for theapartment sector.American Infill and ChasingEcho BoomersEven though the housing market is starting to improve, demandand interest in apartments in “American infill” locations remainhot. “People want to live in areas where walking and transit is allthat’s needed.” High transit and walkability scores are found inhigh-ranking Emerging Trends cities, including San Francisco(1), New York City (3), and Boston (6) (exhibits 3-5 and 3-6). Thistrend has led to a boom in apartment development: comple-tions as a percentage of total inventory in 45 markets exceedsten-year averages. This increased demand for infill apartmentrentals is overwhelming: the vacancy rate in every market is wellbelow the ten-year average. “People need to find a place tolive, and we see a cyclical move away from homeownership inmetropolitan markets.”Leading this cyclical move is the echo boom generation,which has pushed the American dream of homeownership tothe rear. As one interviewee states, “The echo boomer genera-tion is a key demographic we are focused on.” This trend isstrongly exhibited in a comparison of various markets’ demo-graphic makeup with survey results: echo boomers as a percentof the population in the top ten ranked markets totaled 15.3percent, but only 13.6 percent in the bottom ten markets (exhibit3-8). This difference is evident in both primary and secondarymarkets: New York City (2), Austin (4), Seattle (7), and Salt LakeCity (21), all have an echo boomer population that constitutesover 15 percent of the total for the metropolitan statistical area.Another key trend involving commercial real estate and echoboomers is education (exhibit 3-7). In the top five markets interms of educational achievement, echo boomers make up 15.4percent of the population, compared with only 13.8 percent inmarkets with less educational achievement.Source: Walk Score®, www.walkscore.com.Note: Number in parentheses represents Emerging Trends 2013 total market rank.0 20 40 60 80 100Orange County, CAAustinHoustonDallas/Fort WorthSan JoseSeattleWashington, D.C.BostonSan FranciscoNew York City 818074695940393633N/A(2)(1)(6)(8)(7)(3)(9)(5)(4)(10)Exhibit 3-5Public Transit System ScoresExhibit 3-6Walkability RankingsSources: Walk Score®, www.walkscore.com; Emerging Trends in Real Estate 2013 survey.Note: On a scale of 0 to 100, with 100 representing a walker’s paradise. List based on EmergingTrends markets only. Number in parentheses represents Emerging Trends 2013 total market rank.Best Worst1. New York City 85.3 (2) 1. Jacksonville 32.6 (39)2. San Francisco 84.9 (1) 2. Charlotte 34.3 (17)3. Boston 79.2 (6) 3. Oklahoma City 35.6 (32)4. Chicago 74.3 (24) 4. Indianapolis 37.4 (37)5. Philadelphia 74.1 (27) 5. Kansas City 38.1 (34)Exhibit 3-7Metro Area Education RankingsSources: Brookings Institution; U.S. Census Bureau; Emerging Trends in Real Estate 2013 survey.Notes: Rank based on percentage of population age 25 or older with a graduate degree. List basedon Emerging Trends markets only. Number in parentheses represents Emerging Trends 2013 totalmarket rank.Best Worst1. Washington, DC (8) 1. Inland Empire, CA (36)2. San Jose (3) 2. Las Vegas (50)3. Boston (6) 3. Tampa (29)4. San Francisco (1) 4. Jacksonville (39)5. Baltimore (31) 5. Memphis (45)
    • 30 Emerging Trends in Real Estate®2013Migration: Will Real Estate Follow?A look at net migration as a percentage of total population pro-duces some unexpected results and possibly a vision of whatis to come. Raleigh (11), Phoenix (29), Tucson (44), Las Vegas(50), and Austin (4), in that order, make up the top five destina-tion markets for in-migration, whereas negative net migrationcan be found in Cleveland (48), Detroit (51), and Chicago (24)(exhibit 3-9). A few interviewees expressed the importance ofmigration: “[We are] starting to focus on second-tier marketsthat have good in-migration,” and “We like cities that havegood education centers and are magnets for migration.” Evenso, higher-migration areas did not excel in survey rankings.Therefore, even if individuals move to certain markets for ajob, a lower cost of living, or lower home prices, to name a fewdraws, institutional capital might not be ready to risk investingin those markets because of the current economic uncertainty.However, with an improving housing market possibly on thehorizon, household mobility might return.Big Six versus the FieldOver the last few years, the commercial real estate market hascontinued to see a division of market interest between major andnon-major cities for investment. Many investors classify marketsize using different standards; however, in the end the splitcomes down to the “big six” versus “the field.” Even with pricingconcerns, the big six—San Francisco (1), New York City (2),Boston (6), Washington, D.C. (8), Los Angeles (16), and Chicago(24)—continued to score well in the 2013 survey. “Regardlessof prices, institutions seem to be staying in major markets,” aninvestor says. This ongoing trend has affected prices substan-tially. Since the 2007 peak, commercial real estate prices inmajor metropolitan areas are down only 11.4 percent on aver-age, compared with 29.4 percent in other metropolitan areas(exhibit 2-1). This major market price movement and cap ratecompression has elicited mixed reviews from interviewees.Some express concern, saying: “Gateway cities are fully pricedwith too much capital chasing too few properties,” and “Pricesand fundamentals don’t add up in the major markets.” Others,though, still believe “good prime properties will always be goodprime properties, and capital will flow.”While major markets remain the dominant force in commer-cial real estate and the main attraction of capital, participantsand data show that non-major markets—the field—might notbe a “bad play” moving forward. A comparison between the bigsix and the field in terms of certain macroeconomic elementsreveals some strong areas for these markets. For example,averages of GMP, industrial diversity, and ten-year echo boomergrowth all point to strength for secondary metropolitan areas.Exhibit 3-8Echo Boomer Percentage of PopulationAverage bottom 10 markets13.6%Average top 10 markets15.3%0%2%4%6%8%10%12%14%16%18%DetroitLasVegasSacramentoClevelandNewOrleansProvidence,RIMemphisTucsonSt.LouisAlbuquerqueOrangeCounty,CADallas/FortWorthWashington,DCSeattleBostonHoustonAustinSanJoseNewYorkSanFranciscoSources: Moody’s Analytics; U.S. Census Bureau.Notes: Echo boomers defined as those ages 25 to 34. Top and bottom ten are for 51 markets in Emerging Trends survey.
    • 31Emerging Trends in Real Estate®2013Chapter 3: Markets to WatchSurvey results regarding investment prospects agree: someof the largest gainers in rating values compared with 2012 areSalt Lake City, with a 0.89 increase; Tampa/St. Petersburg,0.87; and Nashville, 0.71. Even more surprising is the limitedgrowth or actual decline in rating values in big-six marketssuch as Washington, D.C., down 0.50, and Los Angeles, uponly 0.05. “Everything we’re looking at is incrementally better,meaning incrementally more capital for secondary markets asit spills out of the larger markets,” says one interviewee; saysanother, “Secondary market fundamentals haven’t been laggingsubstantially.” Secondary markets are in the crosshairs of manyinvestors looking for return and ready to take on more risk, butthe economic future as well as the availability of capital to thosemarkets will determine the final outcome.Develop or BuyThere has not been a positive outlook for development in anEmerging Trends publication in five years. Nonetheless, one keytrend for 2013 is that some construction will return. As a whole,12 more markets, for a total of 20, received a rating of “modestlygood” or better as compared with 2012. Even though secondaryor tertiary markets were the largest rating value gainers, inter-viewees were much more focused on developing in the big-sixmarkets. Say interviewees: “Besides apartments, only selectlarger markets show signs of development”; “limited develop-ment outside of core markets”; and “build-to-suit and preleaseis the way to go.” Because, apartments aside, market develop-ment has remained stable and prices in core locations are oftenovervalued, replacement costs are often below bidding prices.Therefore, selective building can be expected within the big six,whereas controlled-cost acquisitions will be the trend in second-ary markets. Survey results indicate that not much of either willtake place next year in tertiary locations.Although development will be somewhat limited, trendspoint to more environmentally friendly, sustainable buildings anda more efficient use of space. Green developers continue toembrace this pursuit and to adapt and conform to new demandsfrom consumers. Owners believe “green building is often agood investment from a ROI [return on investment] perspectiveand adds to the bottom line.” In addition to sustainability, theamount of space provided continues to be adjusted, specificallyin the office and apartment arenas. Say interviewees: “Officebuildings are exhibiting anemic real growth and are gettingserious about downsizing space per employee”; “Tenants areaccepting smaller space [smaller units] to keep amenities, qual-ity, and location”; and “People will be looking for smaller spacesgenerally, both commercial and residential. There will be anemphasis on reducing real estate operating costs.”A Few Other TrendsTwo additional market trends worth noting are organic versus inor-ganic growth, and the future for small deals. From a commercialreal estate perspective, organic growth, except in apartments, islimited as corporations continue to sit on profits without add-ing employees. However, more inorganic growth in commercialreal estate is being seen. Owners continue to look for tenants toExhibit 3-9Net Migration as a Percentage of 2013 PopulationSources: PwC, Moody’s.Note: Top ten and bottom ten for Emerging Trends metro areas.-0.5%0.0%0.5%1.0%1.5%2.0%ClevelandDetroitNewYorkCityMilwaukeeNewOrleansNewarkVirginiaBeachChicagoPhiladelphiaHonoluluTampaPortlandSanAntonioCharlotteOrlandoAustinLasVegasTucsonPhoenixRaleigh
    • 32 Emerging Trends in Real Estate®2013“steal,” offering newly structured space,often with better leases and concessions,in order to continue to show absorption intheir locations. “We can move into anotherbuilding across the street and take thesame amount of space, but with a moreefficient layout,” says one lessee. Anowner agrees: “Often the tenant you needmight be right in front of you.”Interviewees also spoke of lookingat much smaller deals—$50 million orless—that are often of no interest to largerinstitutional capital players. “There is theperception that they are too small, butthere are opportunities,” says one inves-tor; adds another: “$50 million and less isa very attractive place.” Equity for smallerdeals is a bit easier to obtain and, evenwith the additional risk, might providegood returns at current lending rates.Some areas of interest in deals like thesemight be ancillary markets near strongermarkets with job growing industries—for example, Bellevue, Washington, asmaller, growing city only a 16-minutedrive from the booming city of Seattle.Ancillary markets might not be for allinvestors, but opportunities exist in manyareas similar to Bellevue.The Top 20MarketsSan Francisco (1). In 2013, SanFrancisco steals the triple crown fromWashington, D.C., receiving top bill-ing in the Emerging Trends investment,development, and housing categories.“San Francisco is driven by growth anda strong jobs outlook, led by technologyand a structural change away from sub-urban and toward downtown.” Continuedinfill interest is supported by one of thebest transit systems in the country and acity center with walkability that is numbertwo only to New York City. “This around-the-clock city has someone pushingpaper, shopping, shipping, or sightseeingall the time.”According to 2013 forecasts fromMoody’s, San Francisco’s GMP growthwill reach 1.7 percent, and the city willadd almost 50,000 jobs from the 2007peak. This pair of growth indicatorsshould open investors’ eyes even widerto this global city. Even though industrialdiversity seems weak here, investors stillsavor its skilled personnel and the factsthat high tech accounts for 10 percentof the city’s jobs and the young demo-graphic represents over 15 percent ofthe population. Even with a questionablebusiness climate at times, San Franciscohas a mix that draws many corporationsnow and will draw them in the future.Next year, higher commercial real estateprices and supply constraints mightrestrict the number of deals, but PwC’spipeline analysis (exhibit 3-14) showscommercial real estate completions total-ing near 1 percent of total stock. “Thegreat fortunes in real estate have alwaysbeen made by having long-term vision.”A look at the Emerging Trendsbuy, hold, and sell projections showsretail space in San Francisco to be agood buy, according to 62 percent ofsurvey participants. Buy opportunitiescontinue in apartments, though ratingvalues for that sector declined almost20 percentage points from 2012. Themajority of survey participants still seebuying potential in the other three sec-tors; however, the sell rating for officespace hovers around 31 percent, up 20percentage points from the last report.Even with some concerns over pricing,San Francisco is still a market to watch.As one buyer says, “We have been andSource: Emerging Trends in Real Estate 2013 survey.Exhibit 3-10U.S. Retail Property Buy/Hold/Sell Recommendations0% 20% 40% 60% 80% 100%AtlantaPhiladelphiaPhoenixDallasHoustonChicagoWashington, DCDenverMiamiSan DiegoLos AngelesSeattleBostonNew York CitySan Francisco 62.5 25.0 12.559.5 31.1 9.551.6 39.1 9.450.6 36.0 13.547.7 38.6 13.642.7 44.0 13.340.9 50.7 8.539.8 37.4 22.937.0 45.7 17.328.3 43.5 28.327.3 56.1 16.725.8 62.1 12.125.3 48.1 26.621.3 59.0 19.717.1 64.3 18.6Buy Hold Sell
    • 33Emerging Trends in Real Estate®2013Chapter 3: Markets to Watchexpect to continue to be very active inSan Francisco.”New York City (2). New York City makesa small move this year, stepping up twospots to second-best investment pros-pect. Rating values for development andhomebuilding rose, but the city remainedin the same position for each, ranked sec-ond and third, respectively. Even with thestrong results, investors still seem con-cerned about the run-up in prices: “It’s nolonger a safe haven of parking capital bychasing compressing cap rates in NewYork City,” and “New York markets are tooexpensive to support the rental price.”Macro fundamentals for the financialcapital of the world look secure becauseemployment is expected to be back inthe black next year, topping prerecessionpeak job numbers in the latter 2000s byalmost 14,000. Demographics for the cityprevail, with 20 percent of jobs being inthe growing education and health caresectors and an important echo boomerpopulation that represents 16.5 percentof the population. Service-type jobscontinue to develop, but a lag in goods-producing jobs is a concern.Though one interviewee calls NewYork City an overpriced market, surveyparticipants disagree in regard to buy,hold, and sell suggestions for next year.Over 53 percent of interviewees givethe city a top buy rating for office space.Only 14 percent believe it is time to selloffice properties, some believing “therewill continue to be a negative impact byfinancial services fallout and shrinkinghead count.” Hotels are the sector ofmost interest, receiving the highest buyrating from 57 percent of those surveyed.One interested investor notes, “The NewYork hotel market has absorbed 5,000rooms and it is still very tight, so there isopportunity there for more developmentand growth.” Even with the spike in com-mercial real estate prices, investors seemto have the same level of interest in NewYork City, possibly attempting to “take onlease-up risk.”San Jose (3). Only an hour’s drive southof San Francisco, the San Jose technol-ogy corridor continues to be a market towatch, according to results. In 2013, SanJose and the broader Silicon Valley willcontinue to generate jobs in a variety offields, but most will be in high technol-12345678’13’11’09’07’05’03’01’99’97’95San Francisco7.2112345678’13’11’09’07’05’03’01’99’97’95New York7.14Source: Emerging Trends in Real Estate 2013 survey.Exhibit 3-11U.S. Hotel Buy/Hold/Sell Recommendations0% 20% 40% 60% 80% 100%PhoenixPhiladelphiaAtlantaDallasChicagoHoustonDenverSeattleWashington, DCSan DiegoMiamiSan FranciscoLos AngelesBostonNew York City 56.9 26.2 16.953.3 33.3 13.350.0 35.3 14.749.3 31.0 19.743.9 43.9 12.340.0 48.3 11.738.2 48.5 13.237.7 44.9 17.433.3 51.5 15.229.6 51.9 18.527.0 46.0 27.023.6 60.0 16.419.7 62.3 18.018.5 51.9 29.616.9 63.1 20.0Buy Hold SellInvestment Prospects Investment Prospects
    • 34 Emerging Trends in Real Estate®2013SMinneapolis/St. Paul23Kansas City34Oklahoma City32Dallas/Fort Worth9Austin4San Antonio19Houston5Albuquerque42Denver14Salt Lake City21Phoenix33Honolulu/Hawaii22Tucson44Las Vegas50Portland20Seattle7Inland Empire36San Diego15Orange County10Los Angeles16San Jose3San Francisco1Sacramento49Winnipeg8Vancouver4Calgary1Edmonton2Saskatoon6
    • 35Emerging Trends in Real Estate®2013Chapter 3: Markets to WatchPhiladelphia27Baltimore31Washington, D.C.8Virginia Beach/Norfolk26New York City2NorthernNew Jersey13Westchester, NY/Fairfield, CT25Providence46Boston6Raleigh/Durham11Charlotte17Atlanta35Jacksonville39Orlando28Miami12Tampa/St. Petersburg29New Orleans47St. Louis43Memphis45Nashville18Cincinnati38Columbus40Indianapolis37Chicago24Milwaukee41 Detroit51Cleveland48Pittsburgh30Halifax9Montreal7Ottawa5Toronto3ExHIBIT 3-12Leading U.S./Canadian CitiesGenerally goodFairGenerally poorOverall Real Estate ProspectsNote: Numbers represent metro area overall country rank.
    • 36 Emerging Trends in Real Estate®2013ogy. Based on 2013 projections, theSan Jose area will generate close to atotal of 50,000 jobs since 2007, mostlyin the high-tech industry that makes upover 25 percent of its total employment.Industrial diversity is limited in San Joseand could be a concern for investors(see appendix). However, the more than6,600 technology companies based hereemploying over 255,000 people make itan area of interest. “There is risk in SanJose and technology, but established ten-ants with growth potential are a big draw.”The city improved its investmentprospect rank from seventh to third andscored its highest historical value of6.89. Its higher ranking in developmentand homebuilding is consistent withits core of young, well-educated, andhighly paid employees. San Jose is afairly supply-constrained market (exhibit3-13). However, institutional capital willbe moving toward this smaller market inan attempt to beat competitors. As oneinterviewee says, “We’re on the upswing,and the early bird catches the worm.”Austin (4). In 2013, Austin looks setto continue to impress individuals andattract institutional investors. “Austinwill be a winner next year,” and “Austin,Texas, offers a lot more job growthand possible increase in income,” areamong the comments from interviewees.In the 2013 results, Austin took a fewsteps back in its ranking for investmentprospects, from second to seventh, andin homebuilding, from second to fifth.The rating value for development rose,but the city remained fourth in rank.“Cranes are all over the place in the city,”and “Technology remains a key driver”are comments signaling that Austin willcontinue to grow.Expansion of commercial real estatein Austin looks likely with a populationincrease of 2.3 percent anticipatednext year, pushed by the echo boomerdemographic that makes up 17.3 percentof the total population and has increasedin number by over 25 percent duringthe past ten years. Completions in 2013are expected to represent 2.8 percentof Austin’s total real estate stock (exhibit3-14). Growth is good, but Austin’s pastvolatility should be a concern. Accordingto CBRE Econometrics, office vacancyExhibit 3-132013 Supply Constraints: Most and Least Constrained Metro Areas0.,NYSources: Reis Inc.; PrinREI Real Estate Research.Note: Low score represents more supply constraints.12345678’13’12’11’10’09’08’07’06’05’04’03San Jose6.89Investment Prospects
    • 37Emerging Trends in Real Estate®2013Chapter 3: Markets to Watchrates that hovered around 5.0 percentduring the dot-com bubble had jumpedabove 20 percent by 2002 after thebubble burst. Predictions place officevacancies closer to 10 percent in 2013and 2014. Even with a booming technol-ogy market, a great university, and thestate capital, Austin has an industrialdiversity rating of 0.68, only average com-pared with its peers. Great opportunitiesexist in Austin, but reviews are muchmore mixed than they were last year.“Austin has good components but is justconsidered somewhat risky.”Houston (5). “Energy, energy, energy.”Not only is energy-related employ-ment one of the driving forces behindthe Houston market, but the amountof energy expended by intervieweesexpressing their enthusiasm for the city’sreal estate outlook is overwhelming. “Youcan buy now at a higher cap rate andbenefit from growth over the hold period”;“We love the demand coming from theservice industry in the energy renais-sance”; and “Houston is a winner.” Surveyresults support these statements: thecity’s investment prospect rank jumpedfrom eighth to fifth, registering a valueof 6.84, far exceeding the city’s 20-yearsurvey average of 5.27. Developmentprospects for the area look good aswell, the rating value rising, but the city’sranking only advanced one position.The ranking for homebuilding prospects,however, fell back one place: housingstarts, completions, and sales seem mini-mal compared with those of other Texasmarkets. This slower movement might becaused by a bust in apartment interest.Multifamily vacancies are forecast tobe 6.8 percent in 2013, 2.3 percentagepoints below the city’s ten-year average.The cost ratio of renting vs. owning ahome in Houston is 1.23, signaling that itis still cheaper to purchase a house.It is no real surprise, but surveyparticipants believe the main buyingopportunities are in the industrial sec-tor. Fifty percent believe that space inHouston is worth taking a chance on.“Houston ports are very attractive” and“Panama Canal widening should help”are a few outlooks on the industrial andmanufacturing arenas. Office spacereceived a buy rating from 43 percent ofsurvey respondents, but some questionthose results: “I would be careful aboutputting office dollars there.” Apartmentsare still rated a buy overall, but 30 percentof survey participants say, instead, thatnow might be the time to sell. Surveyresults confirm that the Houston marketis worth a look in 2013: “Houston hasendured better than we thought.”Boston (6). An increase in high-tech-nology and biomedical research anddevelopment employment continues totake the lead, increasing investor interestin the Boston market. Part of the city’sstability occurs because 20 percent ofits jobs are in health care and education(see appendix). Even after combiningthe third-best walkability and transitscores with some of the best collegesand universities in the nation, the city hasshown only a limited ability to attract echoboomers, with that demographic consti-tuting only 14.2 percent of its population.Boston’s appeal may be limited by itshigh business and living costs. Still,survey results are great for the Boston12345678’13’11’09’07’05’03’01’99’97’95Houston6.8412345678’13’12’11’10’09’08’07’06’05’04’03Austin6.7112345678’13’11’09’07’05’03’01’99’97’95Boston6.85Investment Prospects Investment ProspectsInvestment ProspectsExhibit 3-14PwC Pipeline Analysis 2013Sources: PwC; CBRE; REIS.Note: Apartment unit size is estimated at 850 square feet;hotel room size is estimated at 500 square feet.Total Completions as a Percentageof Total Real Estate InventoryTop 10Austin 2.8%Charlotte 2.0%Boston 1.8%Salt Lake City 1.7%Seattle 1.6%San Antonio 1.6%Inland Empire, CA 1.6%Raleigh-Durham 1.5%Albuquerque 1.3%Denver 1.3%
    • 38 Emerging Trends in Real Estate®2013metro area. Investment prospects posteda 6.85 value, the highest since 2001, andthe city’s rank jumped one position. Itsrankings in development and homebuild-ing each advanced two spots, to sixthand eighth, respectively. “We considerthe major cities, and Boston is one of thebest we’re looking at.”According to Emerging Trends inter-views and survey results, extreme interestexists for a variety of buying opportunitiesin Boston. The majority of participantsnow believe the time has come to buyin the apartment, hotel, office, and retailsectors. Comparing these results withthose from 2012, sell recommendationsare slightly up, but nonetheless investorswant Boston apartments. Apartmentsin Boston scored the highest of all 15markets covered, with 59.7 percent ofrespondents thinking 2013 is the time tobuy. “Boston for office,” states one inves-tor, and 52 percent of participants agree,making office space a buy. Like last year,industrial is considered a hold.Seattle (7). “Seattle for the risk/rewardratio; it has diverse economies and goodquality of living.” As the global center forthe software industry, Seattle continuesto be the focus of many domestic andglobal investors. “Seattle belongs in theprimary market category,” one inves-tor states. Rankings for investment andhomebuilding remain at the sixth andseventh spot, respectively. Homebuildingmight struggle as apartment interestincreases, with “a definite suburban-to-urban movement taking place.” However,the city’s ranking for developmentdropped one place to eighth. Even withsome ranking declines, rating values foreach of the categories improved. “Seattleis experiencing terrific momentum in jobgrowth, with tech companies taking upmost of the well-located vacant space.”For 2013, job growth is projected at1.2 percent, 50 basis points above itsten-year average. The echo boomer pop-ulation has expanded 20 percent over thepast ten years, making Seattle one of thebest markets for younger adults. “Strongcompanies such as Amazon, Starbucks,Boeing, Microsoft, Nordstrom, GatesFoundation, and Costco have all beenhiring and absorbing space of late.”With this employment and officeabsorption, 47 percent of survey respon-dents recommend the purchase of officespace in 2013, while those recommendingsales fall below 38 percent. Interest is alsovery strong in industrial space, with over 51percent indicating now is the time to buy.Investors favor Seattle industrial space fora few reasons, including the “industrial-to-mixed use transition taking place for manysuburban industrial and business parksites,” as well as the city’s position “servingas the main corridor to Asia.”Washington, D.C. (8). “I think that, longterm, D.C. is going to continue to be asuper-strong market,” one intervieweesays—though survey participants did notseem to agree. For 2013, declines were12345678’13’11’09’07’05’03’01’99’97’95Seattle6.72Source: Emerging Trends in Real Estate 2013 survey.Exhibit 3-15U.S. Office Property Buy/Hold/Sell Recommendations0% 20% 40% 60% 80% 100%PhiladelphiaAtlantaWashington, DCDallasChicagoMiamiPhoenixSan DiegoDenverHoustonLos AngelesSeattleSan FranciscoBostonNew York City 53.4 31.8 14.852.5 36.3 11.347.8 20.9 31.346.8 37.6 15.644.6 43.6 11.842.9 35.2 22.041.5 44.3 14.239.2 49.5 11.338.8 42.9 18.437.9 52.9 9.236.2 39.7 24.134.5 50.6 14.931.0 38.1 31.024.7 47.4 27.811.3 53.5 35.2Buy Hold SellInvestment Prospects
    • 39Emerging Trends in Real Estate®2013Chapter 3: Markets to Watchfound in the investment, development, andhomebuilding rankings. The nation’s capi-tal has a lot on its plate in the last quarterof 2012 with the presidential election, andthe outcome will be a key determinant ofwhat follows. Practically since the reces-sion, commercial real estate prices haverisen, with investors regarding D.C. invest-ments as “recession-proof.” However,concerns about overbuilding and costscontinue to lead discussions about inter-est in D.C. Investors believe “institutionaldemand has fallen in the D.C. metro due toa politically ambiguous environment,” and“Washington, D.C., has lost demand forhigh-end space.”Only a 50-basis-point increase in thenumber of jobs is expected next year, fall-ing below D.C.’s ten-year average of 1.1percent growth. Washington’s unemploy-ment rates are far lower than the nationalaverage, but the outlook after the electionfor direct government employment andsubcontracting jobs remains in question.Washington, D.C., combined with theMaryland and northern Virginia suburbs,has seen technology and energy-relatedemployment increase; however, thatgrowth may not be enough to offsetwhat might occur in the near future.Nevertheless, the market continues tobe a hub for well-educated echo boom-ers. Its infill-focused neighborhoods,combined with walkability and extensivetransit service, are a draw for many; sayinterviewees: “We will stay active in D.C.,”and “Prices won’t turn us away fromWashington, D.C.”Buy rating values in all five propertysectors were down this year when com-pared to last year’s survey. In addition,the majority of survey respondents gavehold recommendations for the office,industrial, retail, and industrial sectors.An interesting trend was that the major-ity of participants recommended sellingin the hot, pricey apartment sector eventhough D.C. home prices are still down24 percent from their peak and apartmentrents have continued to rise. Still, someowners believe the time is right to moveon from the city’s multifamily sector andtake advantage of current gains. Basedon results, it is safe to say that D.C. “hascooled a little.”Dallas/Fort Worth (9). “What oureconomy needs is employment, andDallas has been a great market inproviding it.” Through the end of 2013,Dallas is expected to have added over230,000 jobs since 2007. Of the marketsincluded in the survey, it ranks behindonly its Texas neighbor, Houston, as ajob provider. Next year unemploymentrates are forecast to fall to 7.2 percent,1.2 percentage points lower than theU.S. rate of 8.4 percent. The Dallas/FortWorth industrial diversity index of 0.81shows that its job base is one of the mostdiversified of the 51 markets covered.With employment leading the way, surveyparticipants believe in Dallas, ranking itsinvestment prospects tenth with a valueof 6.47. Its development ranking jumpedas well, by two spots, but its value forhomebuilding did not gain as quickly asother indicators and the city’s rankingdropped two positions. A relatively low3.2 percent delinquency rate on homemortgages and a quick judicial processon foreclosures make distressed homesmore accessible for purchase if financ-ing is available. Combine this source ofhousing supply with estimated apartmentvacancy rates of 5.2 percent next year,and a decline in the homebuilding outlookis easier to understand despite the strongmarket.Even with projections of continuedgrowth, “hold” seems to be the wordregarding hotel, retail, and office space.One investor states, “Rents in Dallas havenot moved in 25 years, and efficiency inoffice space doesn’t increase develop-ment.” Similar to other markets, over 51percent of survey participants would stillsuggest buying apartments in the comingyear: “Dallas multifamily looks good tous,” and “would consider acquiring landto flip to developers.”Orange County, California (10). Withtotal population of more than 3 mil-lion, Orange County comprises 34cities. Some of the largest are SantaAna, Anaheim, Irvine, and HuntingtonBeach. California’s economy continuesto struggle, and home prices will still bedown more than 27 percent in 2013 fromtheir prerecession peak. Even with thatdecline, median home prices throughoutthe county are about $513,000. At thislevel, the rental/homeownership ratio is0.78, suggesting that people prefer torent and causing a projected decline inapartment vacancy rates to 5.8 percentnext year—2.6 percentage points belowthe ten-year average. Employmentthroughout Orange County continues to12345678’13’11’09’07’05’03’01’99’97’95Dallas/Fort Worth6.4712345678’13’11’09’07’05’03’01’99’97’95Washington, D.C.6.43Investment ProspectsInvestment Prospects
    • 40 Emerging Trends in Real Estate®2013put a strain on markets, with employmentremaining below the prerecession level.The unemployment rate is 2 percentagepoints above the ten-year average.Investors still believe in investments inOrange County, however: survey resultsshow increases in the county’s ratingvalue and ranking as an investment pros-pect. It ranks ninth in the investment andhomebuilding categories, both improve-ments from last year. However, its rankingfor development prospects dropped twospots to 19th overall.Raleigh/Durham (11). “All things arelooking good for the Raleigh area,” saysone investor. Survey participants couldnot agree more: the cities’ developmentprospect ranking moved up five spotsto tenth, and homebuilding jumped fourspots to 11th overall. Supply constraintsfor commercial real estate play a factor inthe development bump (exhibit 3-13). Themetro area’s investment prospect valuerose, but its ranking stayed at 15th.This eastern-seaboard, centrallylocated area continues to be a hub ofeducation: the city ranks fifth overallin that field. “[Raleigh/Durham is] oneof our top markets to watch next year,”states an investor. A very affordable costof living, substantial job growth, and adiverse employment base have contin-ued to stimulate the economy here. For2013, Raleigh tops the survey’s forecastfor highest ratio of net migration to totalpopulation (exhibit 3-9) and is one of thetop five in GMP per capita, indicating toinvestors that this market is “one to watch.”The importance of the housing market as abackbone for commercial real estate is vis-ible here, as home prices are expected toincrease another 1 percent next year, andRaleigh/Durham is one of the few metroareas out of the red since the recession.This situation, combined with a foreclo-sure rate just shy of 4 percent, puts thearea in a good position for future growth.Miami (12). Cranes are back in southFlorida, and the condominium market hasmoved from bust to boom. After sufferingfrom overdevelopment and cheap creditin 2007, the popular Miami condominiummarket collapsed. Five years havepassed and the demand is back again,not only from domestic capital, but alsofrom foreign investors who are swoop-ing in to take advantage of the demand.Financing does not seem to be an issuethis time around because many investorsare offering all cash. Investment plansinclude leasing to tenants who may havelost homes in a city where foreclosureforecasts exceed 18 percent. Since thestart of the recession, median homeprices are down more than 50 percent,and apartment vacancies should slipbelow 3.5 percent soon. With continuedhousing troubles, investments in apart-ment and condominium rentals seem likea wise move. “We like the pace and direc-tion of rentals here,” claims an investor.This improvement in the housingoutlook, combined with an interest inindustrial space, has sparked a newenthusiasm for Miami commercial realestate. Survey results display significantincreases in investor prospects for 2013,with the city’s ranking jumping from 17thto 11th, but even greater improvement indevelopment prospects, with the city’sranking moving from 26th and “modestlypoor” to 11th and “modestly good” thisyear. The city still ranks 16th for home-building, but the industry’s rating hasgained some ground from last year.Half those surveyed recommend buy-ing apartment properties as this sectortries to compete with condominiums fortenants. Of even more interest is industrialspace, with 52 percent of participantsbelieving now is the time to make a movein this sector. “Facilities around Miamiairport will serve well for the large volumeof perishable goods that are tradedbetween the U.S. and Latin America.”Office and retail remain a hold becausehigh unemployment and lack of jobgrowth remain a concern.Northern New Jersey (13). The northernNew Jersey market consists of a handfulof counties, with Newark being the largestcity in the market. A huge asset for the12345678’13’11’09’07’05’03’01’99’97’95Miami6.47Raleigh/Durham12345678’13’12’11’10’09’08’07’06’05’046.2712345678’13’12’11’10’09’08’07’06’05’04Orange County6.48Investment Prospects Investment Prospects Investment Prospects
    • 41Emerging Trends in Real Estate®2013Chapter 3: Markets to Watcharea is a diverse and growing number ofprofessions, including high technology,financial services, and health care. Withthis diversity, GMP forecasts are set toincrease 1.5 percent in 2013. Even withgrowth in employment slowing, northernNew Jersey is in a prime market locationthat, combined with robust infrastructure,should make it a target for real estateinvestors. Growth in household numbersremains minimal, but housing prices havenot been as hard hit as those in othermarkets. Even with controlled prices,homeownership makes more economicsense than renting, as seen by a costratio of homeownership to rentals thatslightly tops 1.0.Survey results show that northernNew Jersey’s ranking for investmentprospects has fallen three positions to16th. Development prospects moved inthe opposite direction, up four to 12th,and rating values for homebuilding rose,but the market remained stable in therankings.Denver (14). With only 4 percent ofhomes in foreclosure and 2.5 percent ofhomes sitting at 90-plus days delin-quent, “Denver wasn’t directly in thecrosshairs of the housing downturn.” Thecity’s homebuilding rating value and rankin the survey demonstrates the validityof this opinion, rising 0.94 and one spot,respectively. Denver’s economy hasremained healthy, maintaining the abilityto absorb a diverse employment base.The city’s industrial diversity rank, 0.83,is one of the highest among all metro-politan areas. A big benefit for Denveris its educated workforce, which isconcentrated in growing industries suchas high technology (6.7 percent) andenergy (0.4 percent). “Denver is attract-ing attention with energy industries,” aninvestor notes.From an investment perspective,“Denver has strong growth potential.”Results show the city moving up threespots in the investment prospects rank-ings. An attraction is the city’s centrallocation in the country’s southern andwestern regions, as well as Denver’sever-expanding international airport,which offers access to national andglobal destinations. With growing sophis-tication, Denver offers “good quality ofliving.” Although survey results showDenver growing in appeal for investment,Source: Emerging Trends in Real Estate 2013 survey.Exhibit 3-16U.S. Industrial/Distribution Property Buy/Hold/Sell Recommendations0% 20% 40% 60% 80% 100%PhiladelphiaWashington, DCPhoenixBostonChicagoSan DiegoDenverAtlantaNew YorkDallasHoustonSeattleSan FranciscoMiamiLos Angeles 70.45 19.32 10.2352.11 38.03 9.8651.72 37.93 10.3451.19 38.10 10.7150.00 34.85 15.1549.28 42.03 8.7045.71 48.57 5.7143.42 36.84 19.7440.74 44.44 14.8138.89 48.61 12.5038.46 38.46 23.0836.51 38.10 25.4036.49 36.49 27.0330.86 53.09 16.0524.19 50.00 25.81Buy Hold Sell12345678’13’11’09’07’05’03’01’99’97’95Denver6.49NorthernNew Jersey12345678’13’12’11’10’09’08’07’06’05’046.26Investment Prospects Investment Prospects
    • 42 Emerging Trends in Real Estate®2013development prospects declined threenotches.San Diego (15). The fourth of fiveCalifornia cities/regions to make theEmerging Trends top 20, San Diegoshares characteristics with the others.Home prices continue to be consider-ably lower, even though foreclosure ratesare somewhat stable. The percentageof echo boomers in the population, 15.8percent, is worth noting; however, muchof this echo boomer population consistsof lower-paid military personnel stationedin the area. The developing high-techsector is significant, but unemploymentlevels are still above the national average.Even though San Diego is not anoverly diverse city in terms of employ-ment, more than 40,000 jobs have beenfilled since the peak. Also, the city’s tour-ist traffic continues to improve, increasingrevenue for the area. With these andother attributes, investment prospectsmoved up three positions. Even withthese gains, however, the city’s rankingfor development prospects fell four spots.The only sector to receive a buy ratingis apartments, with 54 percent of surveyparticipants still seeing some opportuni-ties there. Some light interest in the retailarena also exists, but most respondentssuggest a hold in 2013.Los Angeles (16). Interviewees’ com-ments and survey results were very mixedon the Los Angeles market. On the posi-tive side, the number of households in thearea is projected to rise by over 1 percentin the coming year, and over 15 percentof the population is made up of up-and-coming echo boomers. Intervieweesprovide quotes such as, “L.A. is bul-letproof,” “we are completely positiveon L.A.,” and “opportunities abound inthe city.” Los Angeles’s constant flow ofcapital through tourism and entertainmentalways helps create interest in commer-cial real estate, as can be seen in the buy,hold, and sell recommendations. The LosAngeles industrial market dominated thebuy column: over 70 percent of surveyparticipants suggest buying industrialspace next year—18 percentage pointshigher than that for Miami. The major-ity, 59 percent, suggest buying in theapartment sector as well. The recom-mendations for office space were almostexactly split between buy and hold.Although this all sounds good, othernumbers must have been a concern forsurvey participants. Los Angeles’s jobgrowth is projected to be minimal nextyear—only a 30-basis-point increase over2012. Compared with totals from 2007,Los Angeles is still projected to be over140,000 jobs in the hole through next year.These factors and others (see appendix)might be the reason the city did not per-form well in investment, development, andhomebuilding prospect rankings and rat-ing values. The investment prospects roseonly 0.05, compared with a 0.32 averageincrease for all cities in the survey. Thisresult caused Los Angeles to fall five spotsin the investment rankings. Developmenthad a larger rating value decline and fellfive spots as well. Homebuilding was theonly sector to rise in the rankings, climb-ing from 17th to 14th. Home starts areprojected to increase 27 percent nextyear, with completions hovering around13 percent.Charlotte (17). “Going into secondary mar-kets, but only with safe bets—Charlotte.”The interest in Charlotte’s investment, devel-opment, and homebuilding prospectsposted significant improvement comparedwith 2012 results. Mostly understood as abig banking and financing town, this mar-ket has continued to expand, with a varietyof businesses relocating to Charlotte forits high quality of life, low cost of business,and world-class international airport. Since2011, 37 companies have moved to thearea, creating more than 8,000 jobs. Fromthe last peak through 2013, Charlotte isforecast to add nearly 30,000 jobs, makingit one of the stronger secondary marketsto watch. Businesses are not the onlything coming to Charlotte: net migrationas a percentage of population is expectedto be 1.5 percent in 2013, and forecastsshow a 2.5 percent increase in house-holds. Even with these growth numbers,some interviewees still have concerns:“Charlotte is subject to what banks do,”and “We see Charlotte as a risky metro inspite of a relatively strong economy, due toits dependence on two large banks.”Nashville (18). Vanderbilt University and aNissan North America manufacturing plantare only two of a large set of diversifiedemployers found in the Nashville area.These varied forms of employment helpthe market score an industrial diversityindex of 0.80. Growth in this market looksto remain slow and steady, with 2013employment growth forecast at 1.3 per-cent. “The market looks good in Nashville,12345678’13’11’09’07’05’03’01’99’97’95Los Angeles6.3512345678’13’11’09’07’05’03’01’99’97’95San Diego6.37Investment ProspectsInvestment Prospects
    • 43Emerging Trends in Real Estate®2013Chapter 3: Markets to Watchwith both population and job growth.”Retail spending in the city continues toincrease at a greater pace than in mostmarkets. Limited housing losses mightstimulate that number: prices are downonly 13 percent from their peak, andexpectations are for an additional increaseof 1.5 percent in median home prices nextyear. Even with housing remaining some-what stable, “there are a lot of apartmentsunder construction in Nashville, about halfin the core or close.” PwC analysis showsthat multifamily completions will consti-tute 1.8 percent of the total stock in 2013.Similar to the continued trend of “Americaninfill,” “there has been a huge shift towardthe more urban areas of Nashville for theapartment sector.”This growth can be seen not only in themacro trends, but also in the investment,development, and homebuilding num-bers. Investor sentiment improved, raisingNashville’s investor prospect ranking to21st from 27th. A more significant leap wasfound in the development arena, wherethe city moved up five spots to 13th. PwC’spipeline analysis indicates that over 1 per-cent of Nashville’s stock is being addednext year. Besides an influx of apartments,“a new convention center is coming online, along with four new hotels, which willboost tourism next year.” Tourism is a keycomponent of Nashville’s economy, andaccording to interviews and survey results,many investors may be packing their bagsto check out this city.San Antonio (19). It’s official, and asexpected: all four major Texas marketsmake the 2013 Emerging Trends top 20.San Antonio had the lowest total ratingvalues of the four, and its investment,development, and homebuilding numbersreflect why. This year’s values for invest-ment prospects showed a minimal gain,but not enough to keep pace with the othercities, pushing the city’s ranking down sixspots. Development dropped four places,and homebuilding fell eight positions. Evenwith declining development rating values,San Antonio continues to be a growingmarket. PwC’s forecasts show over 1.5percent of total stock being completednext year. San Antonio should have noproblems filling that space because jobgrowth is forecast to increase 2.5 percent,and close to 100,000 jobs have beenfilled since 2007. Overall economic growthlooks healthy for the city because GMPwill rise 2.6 percent, a slightly slower pacethan the ten-year average of 2.9 percent.A strong military base combined withover 15 percent employment in healthand education is a good formula for futureexpansion in this market.Portland, Oregon (20). Portland’seconomy displays stability but few signsof quick improvement. Employmentdiversity is limited, with jobs concen-trated mainly in manufacturing, health,education, and government work. Evenwith rising numbers of younger adults,Portland is still composed mostly of alimited-growth, aging population. With ahome foreclosure rate of 4.8 percent andmedian prices still 20 percent below theirpeak, regional consumer spending mightstill suffer. In 2013, apartment vacanciesare expected to reach 1.9 percent, with1.0 percent of the entire multifamily inven-tory added to the mix that year. Therefore,commercial real estate opportunities existin Portland, but investors will have to takeon more risk in their search. As for invest-ment prospects, Portland advanced onespot to 17th. Declines are forecast in theother two categories next year.Charlotte12345678’13’12’11’10’09’08’07’06’05’04’036.17Nashville12345678’13’12’11’10’09’08’07’06’05’04’036.0312345678’13’11’09’07’05’03’01Portland6.1912345678’13’12’11’10’09’08’07’06’05’04’03San Antonio5.97Investment ProspectsInvestment ProspectsInvestment ProspectsInvestment Prospects
    • 44 Emerging Trends in Real Estate®2013Other Major MarketsChicago (24). “Chicago has been pretty slow to come back.”One of the big six, Chicago’s recovery cannot compare withthat of the other five. Still a major industrial and business area,Chicago’s economy seems to have stalled. In 2013, populationgrowth will be minimal, and many current Chicago residents aremigrating away from the city. Job forecasts are negative, andthe losses will total close to 200,000 since the last peak (exhibit3-2). Manufacturing and government jobs make up over 20percent of employment, but both will struggle in the near future.As in most markets, the majority of participants rate apartmentsa buy. However, the other four property sectors should be puton hold next year. Even with those results, one interviewee is“looking to buy or develop industrial in Chicago.” Despite macroconcerns, survey participants rank Chicago one position higherfor investment and development opportunities. Commercial realestate prices might not have pushed as high here as in the othermajor markets, but taking on this amount of risk should be thebigger concern.Philadelphia (27). Survey results indicate that 2013 will be ahold period for all property sectors. Even though the apartmentsector is a hold, some disagree, stating “Philadelphia is themarket for multifamily.” Sell recommendations outnumbered buycalls for office, industrial, and hotel space, but a hold strategystill prevails. Similar to the case in Chicago, next year’s popula-tion forecast is nominal and even 60 basis points lower thanthe national forecast. Job growth remains flat, with only a 0.6percent increase expected. With a lack of jobs, no popula-tion growth, and negative net migration, Philadelphia offersfew of the macro trends real estate investors seek. The city’sranking for investment prospects fell to 27th from 24th in 2012.Surprisingly, development took two steps forward to 26th, eventhough PwC’s pipeline analyses show minimal completionsscheduled, representing only 0.8 percent of total inventory.Phoenix (33). This volatile market continues to make strides,but survey and interviewee results are mixed. For example,optimism—“We also think Phoenix is a market to watch”—is fol-lowed by pessimism—“We do not plan on investing in Phoenix.”Results indicate that opportunities exist, but doubts remain asto whether the risk-adjusted returns are worth it. Investmentprospect values rose, but the city’s ranking dropped six spotsto 29th. The ranking for development prospects moved up sixspots, and homebuilding prospects did even better, jumping tenpositions. There are still fewer jobs than during the prerecessionpeak, but next year’s projected job gains are 50 basis pointsabove the national estimate. “Phoenix economics are starting torecover.” Strong metropolitan production is contributing to therecovery, but a housing market with a 50 percent price declinecontinues to weigh heavily on investors. Of those surveyed, 49percent believe the apartment sector presents buying oppor-tunities. Views on the industrial sector are equally split betweenbuy and hold, but hold is the dominant call for all remainingsectors. One interviewee has no interest right now: “I don’t thinkit will ever be a primary market—its downtown is fractured.”Atlanta (35). Similar to the case for the other three majormarkets that failed to make the top 20, Atlanta’s loss of employ-ment and the housing collapse affect interest in commercial realestate. Median home prices in the metro area have sunk below$100,000 and are projected to decline another 60 basis pointsnext year. Even with these difficulties, job growth is showingimprovement and is projected to increase 2.6 percent. GMPlooks strong as well and is projected to rise 2.9 percent in 2013,far exceeding the city’s ten-year average. Concludes one inves-tor, “We will see more activity in Atlanta in 2013 as job growthemerges.”With signs of improvement, investment, development, andhomebuilding all make positive moves in overall rank. “Atlanta’ssize is something you have to look at for investments.” As inmany markets, apartments are one of the sectors suggestedfor purchases in Atlanta. The industrial sector registered a buyas well because increases in manufacturing, warehousing, andshipping are expected in the near future. Hold is the recommen-dation, however, for offices, hotels, and retail space.Other Market OutlooksStrong production, population, and migration are just a few ofmany positive signs for Salt Lake City (21). “Salt Lake City istertiary by size, but the recovery is far along and impressive.”A large gainer for investment prospects, Salt Lake moved from30th to 19th. “Lots of high-tech companies are looking at SLC.”Honolulu (22) provides a great quality of life, with a slow, steadyrecovery. “Job growth has stabilized,” states an interviewee.Honolulu’s housing remains expensive, but the market is notforced to battle significant loss of value. “Honolulu tourism isn’tgoing away anytime soon.” With that, Honolulu moves up indevelopment but takes a few steps back in investment pros-pects. Minneapolis/St. Paul (23) provides well-educated andskilled labor in research and high technology. Unemploymenthas not been a concern for the city, because employment hasescalated; the unemployment rate will be nearly 3 percentagepoints lower than the U.S. rate next year. “Peripheral opportuni-ties are not getting much attention here.” Continuing to moveup in the investment ranks is Virginia Beach/Norfolk (26). Themarket does not have great job diversity, but stabilized growthmakes this tertiary market worth a peek.
    • 45Emerging Trends in Real Estate®2013Chapter 3: Markets to WatchNext are two Florida cities: Orlando (28) and Tampa/St.Petersburg (29). Survey results have both cities’ investmentprospect improving in 2013, but Tampa gained slightly moreground, edging out Orlando for the 25th spot. The opposite istrue for development: participants believe Orlando has moreopportunities. To settle the tie, homebuilding goes to Orlando.Both markets continue to deal with the many economic issuesFlorida has faced. Housing continues to be in the hole, butTampa’s recovery in median prices is a bit better. However, joblosses have not been as harsh in the entertainment capital of theworld for tourists. Because Orlando wins the battle, it gets thequote: “We see it in Orlando . . . those markets are back.”Pittsburgh (30) and Baltimore (31) are two originally bluecollar–oriented towns that have been transformed in many waysover numerous decades. The Emerging Trends total rankingshows Pittsburgh edging out Baltimore by one spot this year.Baltimore has had an influx of echo boomers over a ten-yearperiod and has an industrial setting that has been great forjob growth. Pittsburgh’s appeal is not as strong to a youngergeneration, but housing stability has helped the city’s economy.Investment prospects for both cities are lower than last year’s,with Baltimore taking a bigger plunge. Development prospectshave also fallen, with Baltimore having a slightly higher rank at30th. Finally, homebuilding is all Pittsburgh, which moved for-ward two spots compared with an 11-spot loss for Baltimore.“We will see a push in one tertiary market—Oklahoma City,”and “we are seeing many companies moving from the WestCoast to Oklahoma.” As an energy industry location, OklahomaCity (32) moved up four spots in the investment prospect ranks.Not much change was seen in Jacksonville (39), butresurgence may be on the horizon because the city’s youngpeople are moving into a diverse set of industries. The lack-luster housing market in Albuquerque (41) weighs heavily onthis recession-ridden market; survey results show concern,as investment and development decline. Memphis (45) takessteps backward in all three categories, with limited industrialdiversity and questionable future growth. New Orleans (47)may have seen some slight movement; nonetheless, govern-ment and service job numbers are in decline, and the cityremains stagnant in investment and development. Economicdependence on the state government and homes at half theirprecrash value continue to hurt the Sacramento (49) market.Las Vegas (50) is still mired in the quicksand of foreclosuresand home prices declines. Problems in key Vegas industries arealso taking their toll, with education, health care, and service-related employment levels below average.Chicago and Minneapolis are top performers for theMidwest in 2013, but many cities in this region will continueto face economic and real estate challenges. “We’d be wayout in front, maybe even Middle America investing, but wehaven’t gotten near that level.” Kansas City (34) shows slightmovement, up in investment and development as a result of anumber of industrial opportunities. Indianapolis (36) showssigns of attracting interest with low business costs and soliddemographics. However, the city’s dependence on a limitednumber of employers might be a concern. Cincinnati (38)makes a considerable jump, rebounding with a multitude ofindustries involved in manufacturing, and wholesale and retailbusinesses. St. Louis (43) shows strong industry diversifica-tion but still struggles with job growth. The declining populationin Cleveland (48) is causing all sectors to struggle, with onlyeducation and health services seeing any improvement. Theeconomic woes for Detroit (51) persist, with no youth contin-gency, little diversity in employment, high unemployment, lowjob growth, and migration from the city. “The auto industry hascome back somewhat, but you can only be interested in the topbuildings in Detroit.”
    • 47Emerging Trends in Real Estate®2013In 2013, commercial and multifamily property sectorsregain generally solid Emerging Trends investment rat-ings. Categories hold their relative rankings from 2012 inthe survey, with perennial leader apartments in the catbird seatagain, though noticeably leveling off, and retail continuing to lag,but recovering. Interviewees predict “Demand for space slowlybut steadily comes back,” exhibiting “decent growth.” Industrial/warehouse and hotels show the biggest survey improvements,trailed closely by downtown office. Power centers and suburbanoffices remain investors’ least-favored subcategories. Exceptfor apartments and industrial space, development prospectsremain challenging. Interviewees note that “Despite one of thelongest stretches of basically no construction” in commercialmarkets, “pent-up demand does not exist except in selectcities.” Interviewees show mixed concerns about apartmentconstruction on a market-by-market basis, but generally concurthat “overdevelopment” will happen, just not in 2013. They alsoanticipate “more big-box industrial” development after a longpostcrash hiatus.Significantly, after the $6 trillion loss in housing values duringthe recent recession, respondents begin to express hints ofoptimism about for-sale residential properties, especially infilland in-town housing, which score modestly good ratings. Theyalso signal the need and opportunity to invest in infrastructuredevelopment and redevelopment across the country becausefacilities—roads, mass transportation systems, public buildings,sewage and water mains, airports, and rail stations—requiresubstantial overhauls, expansions, or new construction.c h a p t e r 4PropertyTypesin Perspective“Demand for space slowly but steadily comes back.”Exhibit 4-1Prospects for Major Commercial Property Typesin 2013Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.1abysmal5fair9excellentDevelopment ProspectsRetailOfficeHotelsIndustrial/distributionApartmentInvestment ProspectsRetailOfficeHotelsIndustrial/distributionApartment 6.586.176.025.725.306.875.294.853.723.64
    • 48 Emerging Trends in Real Estate®2013Core properties reach or approach pricing zeniths—apart-ments look “past peak,” central business district office spaceappears “at peak, and prime industrial may be within 10–20percent of peak.” Respondents predict cap rates will remain in anarrow range between now and year-end 2013, with most sec-tors experiencing slight increases and only industrial/warehouseshowing further tightening (exhibit 4-3). High vacancies andlimited expansion interest by tenants will likely result in leasesstill rolling off to lower market rents in offices, retail space, andsome warehouses. Demand pickup should improve, but stay insecond gear. “Commodity properties, except apartments, willcontinue to struggle to establish pricing power with tenants.”Investors like “bite-sized specialty types.” Medical office,student housing, and self-storage benefit from above-averagetenant demand drivers. The aging population requires morehealth care services—doctor visits, lab tests, and rehab facili-ties. The very large generation-Y demographic cohort shouldcontinue to support student housing in the near term. AndExhibit 4-2Prospects for Commercial/Multifamily Subsectors in 2013Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.Investment Prospects Development ProspectsPower centersSuburban officeRegional mallsR&D industrialNeighborhood/communityshopping centersLimited-service hotelsFull-service hotelsCentral city officeApartment:high incomeWarehouse industrialApartment:moderate incomePower centersSuburban officeRegional mallsR&D industrialNeighborhood/communityshopping centersLimited-service hotelsFull-service hotelsCentral city officeApartment:high incomeWarehouse industrialApartment:moderate income1abysmal5fair9excellent1abysmal5fair9excellent6.656.346. 4-3Prospects for Capitalization RatesSource: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.Property typeCap. rateAugust 2012(percent)Expectedcap. rateDecember 2013(percent)Expectedcap. rateshift(basis points)Apartment: high income 5.67 5.85 18Centralcityoffice 6.15 6.17 2Apartment: moderate income 6.11 6.27 16Regional malls 6.37 6.51 14Warehouse industrial 6.92 6.87 -5Neighborhood/communityshopping centers6.97 7.05 8Full-service hotels 7.27 7.38 11Power centers 7.42 7.63 21R&D industrial 7.62 7.64 2Suburban office 7.90 7.94 4Limited-service hotels 8.16 8.24 8
    • 49Emerging Trends in Real Estate®2013Chapter 4: Property Types in PerspectiveExhibit 4-4Prospects for Niche and Multiuse Property Types in 2013Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.1abysmal5fair9excellent1abysmal5fair9excellentInvestment Prospects Development ProspectsMaster-planned resortsResort hotelsMaster-planned communitiesLifestyle/entertainment retailMixed-use town centersData centersSelf-storage facilitiesUrban mixed-use propertiesInfrastructureMedical officeMaster-planned resortsResort hotelsMaster-planned communitiesLifestyle/entertainment retailMixed-use town centersData centersSelf-storage facilitiesUrban mixed-use propertiesInfrastructureMedical office storage fits into the move-back-into-the-cities trend wherepeople live in less space and need solutions for where to keeppossessions they cannot fit into their apartments.The following is a digest of major trends affecting the majorproperty sectors.
    • 50 Emerging Trends in Real Estate®2013ApartmentsStrengthsThe multifamily bandwagon rolls on. “It’s such a good story youhave a hard time resisting making investments,” says an intervie-wee. Positive demographics—the bulge of young adult rentersand downsizing baby boomers—supplemented by homeown-ership displacement from the housing bust create significantdemand drivers. Population shifts into infill areas and urbanizingsuburbs, especially locations near mass transit stops, favormultifamily, too. More people willingly forsake space and yardsfor greater convenience and avoiding car dependency. On thesupply side, some fallow development years have further tight-ened many markets as developers only now begin to catch up.In high-barrier-to-entry places, particularly in metropolitan areasalong the coasts, new projects may have trouble keeping upwith demand, resulting in mid- to low-single-digit vacancy rates,rent spikes, and “extremely solid” appreciation (exhibit 4-6). Solong as these trends continue, over the long term apartmentsshould continue to outperform all other property types on a risk-adjusted basis, with excellent cash flow components. Whereasother sectors must weather impacts from technology buffetingand slackened demand growth, future population increasessuggest a vibrant and expanding apartment market.Weaknesses“Inordinately large” capital flows course into the apartmentsector and raise concerns among some investors despite thesolid fundamentals. The best deals “have been picked over”and what is left has become just “too pricey.” Some intervie-wees warn to back off: “Without job creation, this [performance]growth cannot continue.” Some “scary” loan underwritingdoes not compute: “Exit caps at 4 in ten years when interestrates could be much higher” will require “a good run of valuecreation.” New projects, meanwhile, could get out of hand intraditional hot-growth, easy-to-build Sunbelt markets, as wellas in suburban areas where apartments traditionally tend tounderdeliver. Shut out of much activity in the office and retailsectors, developers of all stripes “pile into the sector” as lend-ers offer construction loans. If the housing market starts torecover and homebuyers gain confidence, apartment demandcould slacken; at some point purchasing may begin to look likea better deal than leasing if rents keep increasing. And newinvestment funds scarf up single-family homes for rental proper-ties, which could compete with multifamily units.DevelopmentDevelopers find some solace—“a lot of [apartment] supplyis needed to keep up with obsolescence as well as naturalgrowth”—and banks and insurers eagerly boost constructionfinancing volumes. Even with stepped-up activity, intervieweessay unit deliveries in 2012—about 200,000—“will come upshort” of the roughly 300,000 mark typically needed to maintainequilibrium in markets nationwide. High-barrier-to-entry urbaninfill markets around 24-hour cities cry out for new projects.Developers who can secure scarce sites and overcome typi-cal entitlement hurdles should score winners, catering to thewave of echo-boomer career builders and their empty-nesterparents. Development approaches “hinge on location andquality: at the high end, developers must provide amenitiesinside and outside” of projects. At the lower end, neighborhoodsand convenience count more. For younger, less-affluent rent-ExHIBIT 4-5U.S. Apartment Investment Prospect TrendsSource: Emerging Trends in Real Estate surveys.Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.2013 Prospects Rating RankingInvestment prospects 6.25 Modestly good 3rdDevelopmentprospects 6.69 Good 1stSell20.4%Hold35.8%Buy43.8%Expected capitalization rate, December 2013 6.3%2013 Prospects Rating RankingInvestment prospects 6.65 Good 1stDevelopmentprospects 6.47 Modestly good 2ndSell38.8%Hold33.1%Buy28.1%Expected capitalization rate, December 2013 5.9%U.S. High-Income ApartmentsU.S. Moderate-Income ApartmentsApartment rental: high incomeApartment rental: moderate income2013201220112010200920082007200620052004fairmodestly goodgoodmodestly poor
    • 51Emerging Trends in Real Estate®2013Chapter 4: Property Types in Perspectiveers, “developers can meet price points providing less space”as long as the surrounding area offers “a quality experience”defined by shops, restaurants, parks, and, most important,access to workplaces or mass transit to get to work. As light railand bus rapid transit service is expanded in many markets, con-struction opportunities will likely present themselves around newtransit stations. The “continuing urbanization” wave underwayshould give developers at least “a three- to four-year” window inmajor markets.Best BetsAt this point in the cycle, sellers under pressure and some banksshedding assets will settle for the most dependable buyer, notnecessarily the biggest offer. “Position yourself” to make dealsbecause many assets are still overleveraged. Focus on apart-ments “in the big cities with jobs growth.” Even though “a lotof money is headed” into urban infill, “[renter] demand will bethere” to support future appreciation. Value-add plays in multi-family can still be attractive. Again, concentrate on buying goodassets in good markets, then driving yields by providing modestcapital for improvements and hiring a capable property man-ager to lease up the space into renter demand. Yield chasersshould become more selective about development—centeringactivity on popular urban districts and densifying suburbannodes. Anything transit oriented should hit pay dirt.AvoidBack off the sub-6 cap rate deals on existing properties,“where you have much less room for error” should interestrates increase, and steer clear of garden apartments in subur-ban areas where new development can spring up easily andsoften returns on older product. Some of these low-barrier-to-entry places could suffer from oversupply by 2014 or 2015:“Multifamily is almost guaranteed to overdevelop,” according toone interviewee. Particularly watch out in high-foreclosure mar-kets where speculators will turn single-family homes into rentalsand compete directly against apartment owners for tenants.OutlookThe “rah-rah” multifamily story seems “a little long in the tooth”and will eventually “lose some steam” as housing rebounds, butexpect the run of increasing rents and values to continue in mostmarkets at least through 2013 and probably well into 2014. Caprates—although not out of range compared with other sectorswith higher capital costs and risks—probably have nowhereto go but up, and rent growth should moderate after a boom ininfill locations. Car-access suburban markets “will do okay, butunderperform.”Exhibit 4-6U.S. Multifamily Completions and Vacancy RatesSource: REIS.*Forecast.050100150200250Completions(thousandsofunits)2015*2013*201120092007200520032001199919971995Completions345678Vacancyrate(%)Vacancy rateExhibit 4-7U.S. Apartment Property Total ReturnsSources: NCREIF, NAREIT.*Data as of June 29, 2012.-30%-20%-10%0%10%20%30%40%50%NAREITNCREIF2012*2010200820062004200220001998199619941992
    • 52 Emerging Trends in Real Estate®2013IndustrialStrengthsThe nomenclature has changed from warehouse to distribu-tion and now logistics, but according to one interviewee theindustrial supply chain “will always be there since it’s infinitelyflexible.” Worries about e-commerce may be overblown: somespace turns obsolete faster, but the web retailers still want facili-ties mostly in the same places “where the bricks-and-mortarguys put [them] near population centers” around the gateways.Recovering at a snail’s pace and “lagging most other sectors,”top industrial markets finally experience good absorption andmoderating vacancies; rents should continue to trend “slightlypositive” or better in 2013, especially if global business accel-erates. Big blocks of space will be harder to find, leading tonew projects. Institutional investors maintain strong interest inmajor-shipping-hub, big-box space: they like the steady incomereturns, and long-term holders register solid if unspectacularappreciation. Although they continue to struggle to “scale”portfolios—morsel-sized portions of acquisitions never seem tosatisfy capital appetites—at least exit strategies pose no prob-lems to execute. What’s wrong with a classic “get-rich-slowlybusiness”? Not much.WeaknessesWorldwide economic malaise stunts the rebound at key portsand international airports; some investors “underweight indus-trial due to reduced exports.” Although “fundamentally notchanging the business,” e-commerce slows growth in overalldemand for logistics facilities: retailers tend to store less at inter-mediate points between manufacturers and customers, hurtingsecondary and tertiary locations. Demand for specialized spacetailored to distributor needs forces more old product into obso-lescence in key midcountry gateways like Dallas, Chicago, andAtlanta.DevelopmentDevelopers latch on to significant demand for build-to-suits frome-commerce companies willing to pay for customized spacewith elaborate stacking systems to accommodate pick-and-ExHIBIT 4-8Industrial/Distribution Investment Prospect TrendsSource: Emerging Trends in Real Estate surveys.Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.2013 Prospects Rating RankingInvestment prospects 6.34 Modestly good 2ndDevelopmentprospects 5.55 Fair 3rdSell8.5%Hold23.6%Buy67.9%Expected capitalization rate, December 2013 6.9%2013 Prospects Rating RankingInvestment prospects 5.20 Fair 8thDevelopmentprospects 4.32 Modestly poor 8thSell31.7%Hold45.2%Buy23.1%Expected capitalization rate, December 2013 7.6%U.S. Warehouse IndustrialU.S. R&D Industrial2013201220112010200920082007200620052004Warehouse industrialR&D industrialmodestly poorfairmodestly goodgoodExHIBIT 4-9U.S. Industrial Completions and Availability RatesSource: CBRE Econometric Advisors.*Forecasts.050100150200250300Completions(millionsf)2015*2013*2011*200920072005200320011999199719951993691215Availabilityrate(%)CompletionsAvailability rate
    • 53Emerging Trends in Real Estate®2013Chapter 4: Property Types in Perspectivepack operations, increasingly using robots and automatedequipment. A far cry from old-fashioned storage facilities, thesebuildings may require upgraded HVAC and power systems,as well as parking for large numbers of workers. REITs are wellpositioned to grab this business because they often have betteraccess to capital than the average developer. Otherwise, mostU.S. markets cannot sustain much speculative construction—although the pace picks up during 2013.Best BetsOwners should hold on to their hub gateway portfolios; thesemarkets will continue to tighten, slowly pushing up rents andreturns to healthy levels. Look for opportunities to upgrade andredevelop older product into big-box space in these same“usual suspect” markets. These projects could come on line intime to meet the steadily improving demand, and institutionsinevitably will line up to buy them.AvoidSome smaller markets may retain demand for old-style storagespace, serving local trades and merchants, but properties inmany secondary and tertiary locations lose out as distributorssidestep them for more direct channels; “Demand won’t comeback.” It’s the industrial “equivalent of suburban office parks.”OutlookIn an ongoing free-for-all, East and Gulf Coast ports will com-pete against each other for a share of Pacific shipping trafficslated to come through a widened Panama Canal, scheduled toopen by year-end 2014. These markets include Houston, NewOrleans, Mobile, Miami, Jacksonville, Savannah, Charleston,Norfolk, Baltimore, and New York–New Jersey. The winnerswill draw enough government funds and private capital to helpdredge harbors and build new facilities for offloading containersfrom massive, deep-hulled post-Panamax ships. Tens of billionsof dollars in infrastructure needs extend to expanding freightrail hubs and widening interstate highway connections. Lackinga national infrastructure strategy, the federal government letsstates, cities, and regions battle for funding. “The jury is still out,but wild-card factors in decision making could be rail access,local labor costs, taxes, and timing to key inland distributionmarkets.” Most players avoid “taking any bets.” The victors willeither expand or transform into major industrial centers, boostingtheir economies and providing significant new development andinvestment opportunities. Stay tuned: it is the biggest contestaffecting the future of U.S. industrial markets.Research and DevelopmentRelatively buoyant tech enterprises boost prospects for famil-iar R&D markets in and around brainpower centers like SanFrancisco–San Jose, Austin, Seattle, Boston, and the NorthCarolina Research Triangle; major companies expand andstartups proliferate. Reversals in stock prices for social-mediacompanies might give some pause, and R&D is notoriouslyvolatile: startups can quickly turn into shutdowns. How manyapps do we really need?Exhibit 4-10U.S. Industrial Property Total ReturnsSources: NCREIF, NAREIT.*Data as of June 29, 2012.-70%-60%-50%-40%-30%-20%-10%0%10%20%30%40%2012*2010200820062004200220001998199619941992NAREITNCREIF
    • 54 Emerging Trends in Real Estate®2013RetailStrengthsThe industry sidestepped a full-bore, over-the-cliff “death spiral.”Now, more “optimistic” investors and owners exhale in relief,crediting a significant “limitation on new supply for making thedifference.” Upscale retail roars back, especially along down-town streets in 24-hour urban districts and at the leading fortressmalls. Affluent Americans continue to shop, and chains gravi-tate to these most-favored shopping destinations where rentsincrease and vacancies decline precipitously. Some stressedpower centers manage to recoup by filling empty stores with newbig-box tenants, and basic bread-and-butter, grocery-anchoredretail in established infill markets registers solid income-orientedperformance, too. An interviewee said, “The worst is over, andwe’re seeing more upside than expected.” The big mall REITcompanies “are all doing fine”; they continue to consolidate theirpositions in the top regional centers, shedding their remain-ing stinker properties, and hold considerable leasing leverageover retailers who crave premier locations. Chains and specialtyretailers, including some offshore brands, “cannot find enoughspace in the [select] places [New York primarily] where they wantto showcase their brands.” Progress on taxing internet sales alsooffers some promise to dull inexorable e-commerce incursions.WeaknessesWithout a strong economic recovery, evident bifurcation splitsthe few strong centers from many more vulnerable ones in a“rapidly evolving” and “oversupplied” retail real estate universe.Most interviewees gird for continued industry contraction inthe face of competition from web retailers. The 99 percent“have less discretionary money,” controlling consumptionappetites, and “the middle market struggles” because manycash-strapped shoppers “go down a notch” in their spending.Operators find a dearth of creditworthy tenants, whether mallanchors, supermarkets, drugstores, local hair salons, or pizzaguys. Consolidating major chains increasingly abandon ClassB and C regional centers; financially challenged mom-and-pop stores leave half-empty strips along suburban boulevards;and many other “dead dog” commodity properties, sufferingfrom physical deterioration, face repurposing into churches,light manufacturing facilities, or whatever—just not stores. Asfor e-commerce, web sales nibble away at bricks-and-mortarmargins; retailers reduce store square footage and rely moreon clicks-and-bricks strategies than bricks alone. In a rapidlyevolving marketplace, retail flavors of the day “lose luster” morequickly, consumer preferences become “harder and harder topin down,” and profit margins become more difficult to maintain.DevelopmentForget about suburban development: no new malls or stripsrequired, and lenders restrict access to capital to only theirhighest-credit clients—advantage the REITs once again. Butretail real estate could use a heavy dose of redevelopment,particularly older (30 years plus) fortress malls, which needreconfiguring to handle retailers’ morphing in-store/onlinemarketing schemes—smaller stores, more showroom andpromotion space, and less storage. Some new, nontraditionalExHIBIT 4-11Retail Investment Prospect TrendsSource: Emerging Trends in Real Estate surveys.Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.2013 Prospects Rating RankingInvestment prospects 5.72 Modestly good 7thDevelopmentprospects 4.39 Modestly poor 7thSell19.3%Hold28.0%Buy52.7%Expected capitalization rate, December 2013 7.1%2013 Prospects Rating RankingInvestment prospects 4.50 Fair 11thDevelopmentprospects 3.11 Poor 9thSell49.7%Hold38.5%Buy11.9%Expected capitalization rate, December 2013 7.6%2013 Prospects Rating RankingInvestment prospects 4.82 Fair 9thDevelopmentprospects 2.76 Poor 11thSell29.2%Hold54.9%Buy16.0%Expected capitalization rate, December 2013 6.5%U.S. Neighborhood/Community CentersU.S. Power CentersU.S. Regional Malls2013201220112010200920082007200620052004Neighborhod/communityshopping centersRegional mallsPower centersmodestly poorpoorfairmodestly goodgood
    • 55Emerging Trends in Real Estate®2013Chapter 4: Property Types in Perspectivetenants will lease display space for promotions in higher-trafficlocations and orient shoppers to make purchases or contactsdirectly off their mobile devices as they pass by. Restaurants,movie theaters, and entertainment features will become moreimportant enticements to the mall mix as landlords “figure outhow best to compete against online selling.” Big-box formatscontinue to wrestle with how to shrink into urban streetscapesto capture business from move-back-in trends, and multifamilydevelopers similarly accommodate necessity retail compo-nents—supermarkets, drugstores, and cleaners—into their infillprojects. “Urban retail development has major potential.”Best BetsInvestments in mall REITS, which monopolize ownership of ClassA/A+–quality malls, may be the only way to get a piece of thesetop centers. These publicly traded operators would be crazy todispose of any of their fortress centers, given firmly establishedlocations in the most advantageous retailing hubs and “hugesales” volumes. Outlet mall companies also turn “very hot.”Economizing shoppers can buy specialty brands at half priceand “get a better bang for their buck.” Flagging Class B and Cregional malls feel the heat as outlets make incursions into theirhome turf, expanding from locations near tourist resort destina-tions closer to suburban backyards. The warehouse clubs alsodraw crowds looking for bargains. Neighborhood centers in goodresidential neighborhoods with barriers to entry will do well aslong as they are anchored by a dominant supermarket chain.AvoidQuestionable retail properties litter the suburban scene fromcoast to coast. Many need bulldozing and transforming intoalternative uses, including parks and light-rail stations or pos-sibly warehouse space to support e-commerce. Power centerslook more like “a crapshoot,” considering how much big-boxcommodity merchandize ultimately could be bought online.Watch out for neighborhood centers exposed to Whole Foods/Trader Joe’s or Walmart/SuperTarget forays. According to aninterviewee, “Between high-end specialty food stores anddiscount superchains, the typical grocery anchored strip is atsignificant risk. If you lose the grocery anchor, you’re sunk.”OutlookRetail real estate appears positioned to endure a very long, slow,but dramatic transformation in how and where people shop.Online approaches turn retailing into an “omnichannel” busi-ness: the winners will embrace technology and integrate it intobricks-and-mortar platforms, realizing that e-commerce/in-storecombinations beat stand-alone formats. “If you can touch it in thestore, you’ll buy more of it online.” Mall shoppers manned withapps will know what’s on sale, get coupons for discounts, andfind out about new products—potentially driving more business.Landlords and tenants need to adjust how space is priced asmarketing and promotion become more important to retailersthan just direct in-mall sales. The big-box stores all look at howto downsize, too; they may move from power centers into smallerfortress mall configurations or inner-city formats. Prime neighbor-hood retail survives: necessity shopping endures for groceriesand pharmacy items, but just about everywhere in America coulduse less store space per capita.Exhibit 4-12U.S. Retail Completions and Vacancy RatesSource: REIS.*Forecast.05101520253035Completions(millionsf)2015*2013*2011200920072005200320011999199719951993Vacancyrate6%9%12%15%CompletionsVacancy rateExhibit 4-13U.S. Retail Property Total ReturnsSources: NCREIF, NAREIT.*Data as of June 29, 2012.-50%-40%-30%-20%-10%0%10%20%30%40%50%NAREITNCREIF2012*2010200820062004200220001998199619941992
    • 56 Emerging Trends in Real Estate®2013StrengthsLagging behind other commercial property sectors, officefinally benefits from a severe, necessary, and now extendedconstruction slowdown. Absorption increases and rents tick upin the stronger 24-hour downtowns and other markets harboringexpanding high-tech and energy businesses. Investors mustfocus more than ever on location. “That means urban, dense,vibrant places,” preferably with diversity provided by universitiesand medical centers. Buildings win if they can offer tenants flex-ibility allowing cost-effective layout changes to accommodateopen-space plans and wi-fi technologies. Green buildings withhigh ratings under the Leadership in Energy and EnvironmentalDesign (LEED) program and energy-efficient systems leapfrogthe competition: tenants calculate operating savings and findthey can attract young talent who favor “cool space” and nodsby their employers to environmental correctness.Weaknesses“Secular headwinds” buffet office markets. Tenants continueto downsize space-per-capita requirements, and technologyenables more people to work away from the office or spend lesstime there. “Vacancy rates are too high nationally—low doubledigits for downtown and midteens for suburban office” (exhibit4-16) as tenant credit quality has turned “much more suspect.”Many new high-flying companies “can be here today, gonetomorrow.” Landlords “must be careful even with law firms”(whose billable hours are down from what they used to be), whileother blue-chip tenants cannot be counted on to expand theirspace requirements; financial companies and accountants con-tinue to offshore and outsource. “Value-conscious” businesses“want hyper-efficiencies, looking to take 80 percent of the spacethey used to lease and stuffing more people in.” They “seekdensity and less cost per employee,” making it extremely difficultto achieve “pricing power even in the best markets.” Investorsincreasingly worry about “how much rental growth you canexpect to offset higher cap rates down the road.” Office problemsincrease CMBS delinquencies as leases written at market peaksin 2006 and 2007 burn off at lower rental rates and often for lessspace, if tenants renew at all. Some landlords should be “scaredto death” about any pending rollovers in their tenant base.DevelopmentContraction in space use and chronically high vacancies will con-tinue to mothball most projects in many markets. In tighter 24-hourcities, new green developments, featuring layout efficienciesand “healthy” interiors, can charge premiums in siphoning bigspace users away from existing buildings. “At a macro level, officevacancies won’t get much better, but this new product will sell.”In fact, any new office building will be “some version of green,”and these projects will render “hard-to-retrofit” brown buildings,including some ten- and 20-year-old vintage towers, “increasinglyobsolete.” Prospective tenants now “check the boxes” for lowerenergy bills, better windows for more natural light, cleaner/fresherair, raised floors for under-floor wiring and HVAC systems, aswell as high-tech conference centers. “It’s like a fancy, new car:everybody wants to be in a LEED building.”Where possible, re-adapting space “will become a commonundertaking” as owners try to install new energy-efficient systemsand create more open spaces. They need to appeal to tenantmind-sets, which “rationalize” the notion of “increasing workerproductivity and wellness while reducing square footage peremployee.” Some big corporations—typically e-commerce firmsand manufacturers—“sit on lots of money” and may be willing toentertain build-to-suits.OfficeExHIBIT 4-14Office Investment Prospect TrendsSource: Emerging Trends in Real Estate surveys.Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.2013 Prospects Rating RankingInvestment prospects 6.16 Modestly good 4thDevelopmentprospects 4.53 Fair 6thSell17.5%Hold35.1%Buy47.4%Expected capitalization rate, December 2013 6.2%2013 Prospects Rating RankingInvestment prospects 4.77 Fair 10thDevelopmentprospects 2.82 Poor 10thSell29.4%Hold45.5%Buy25.1%Expected capitalization rate, December 2013 7.9%U.S. Central City OfficeU.S. Suburban OfficeCentral city officeSuburban officemodestly poorpoorfairmodestly goodgood2013201220112010200920082007200620052004
    • 57Emerging Trends in Real Estate®2013Chapter 4: Property Types in PerspectiveBest BetsFocus on well-leased buildings in top markets and protectagainst functional obsolescence. Favor LEED buildings orbuildings that can be economically adapted to meet LEEDstandards. Tune in to work attributes favored by younger hires,who place emphasis on connectivity and social interaction overprivacy and their own space. Also, pay more attention to theneighborhoods where the gen-Y crowd wants to live and work;“Their influence cannot be underestimated.” A minority viewsuggests that once unemployment drops, “all the old-style,high-finish amenities will make a comeback. “It’s an employer’smarket right now, so workers will put up with less space as longas they get a paycheck.” But don’t bet on it.Although a niche sector, medical office space presentscompelling investment opportunities as the nation’s healthcare industry balloons to take care of graying baby boomers.Undersized properties may “make it hard to put money out,” butthe demand from doctors, clinics, labs, and rehab providers is“crazy to ignore.” Landlords should not have problems leasingspace anywhere near hospital centers and medical complexes.Avoid“Severely handicapped” suburban office space remains “atrap.” Generation Y resists working in isolated office-parkcampuses, which require a car for the commute. Models forrepurposing outmoded suburban retail space may offer ideason “what to do about some of this old crappy [office] space.”Resist buying cheap Class C or off-location buildings withthe idea of riding back an eventual market rebound. Investorsunderestimate the capital expenditure requirements for main-taining these buildings, and long-term leasing and value trendspoint to subpar results. Rents have flat-lined or worse in manysuburban districts for decades.OutlookAside from modestly bullish forecasts for gateway trophies andthe few new green projects in these same markets, the officesector promises a tough road for investors, given decreaseddemand, dictated and enabled by morphing work styles andtechnology. The office as work center has become less essen-tial as more bosses choose to let more of their workers spendmore of their time operating from elsewhere. These approachesnot only register bottom-line savings, but also can encouragegreater productivity. Multinational companies can be expected tocontinue shifting work to lower-cost overseas markets, moderat-ing expansion appetites in the United States. And most obvious,today’s office users require less space than in the past to get thesame amount of work done: businesses now operate with feweradministrative personnel and need less storage. It’s a new age.Exhibit 4-16U.S. Office Vacancy RatesSources: CBRE Econometric Advisors.*Forecast.5%10%15%20%2015*2013*2011*200920072005200320011999199719951993SuburbanDowntownExhibit 4-17U.S. Office Property Total ReturnsSources: NCREIF, NAREIT.*Data as of June 29, 2012.-50%-40%-30%-20%-10%0%10%20%30%40%50%60%NAREITNCREIF2012*2010200820062004200220001998199619941992Exhibit 4-15U.S. Office New Supply and Net AbsorptionSource: CBRE Econometric Advisors.*Forecast.2015*2013*2011*200920072005200320011999199719951993020406080100120Completions(millionsf)Netabsorption(millionsf)-100-80-60-40-20020406080100120CompletionsNet absorption
    • 58 Emerging Trends in Real Estate®2013HotelsStrengthsThe hospitality sector—especially in major markets (“New Yorkpulls up everything”)—performs “quite well.” Helped by “little newdevelopment,” investors and operators realize “solid growth” inoccupancies, with rates tracking right behind, and remain “cau-tiously optimistic” as long as the economy holds together. “Morepeople stay in hotels than ever before” and “the frenzy of cutting[staffing] and lopping off expenses has ended.” The upscale andluxury categories revive in style: wealthy travelers and businesselites book cushy resorts and prime business center suites asoperators hope guests do not notice reduced manpower levelsand the absence of certain “runaway-cost” service ameni-ties. Bulk-buying corporate customers accept year-over-yearincreases in negotiated rates, and “modestly” loosen pursestrings on food and beverage–related events. Full-service hotelshave pared expenses by eliminating multiple restaurants, and“menu engineering” brings back more profitable margins.WeaknessesOperators put a brave face on “revolutionary changes” wroughtby web-based pricing transparency and internet reservationsites. Value-conscious customers can surf the web for the bestprices and secure favorable deals, hamstringing the ability toadvance rates. In a battle fought on websites and through socialmedia, the big chains try to gain an edge through rewardsprograms and have an advantage over weaker flags or indepen-dents using less-sophisticated systems and technologies. Priceshopping “forces hourly revenue management like the airlines”with “inventories controlled like bond traders.” Hotel chains haveall migrated to off-property, centralized sales and marketingfunctions. “It’s now a science, not an art.” While the meetingbusiness has recovered “after taking the pipe [during the reces-sion], it’s not where it was.” The total size of group catering perhead stays down and events remain “less elaborate.”DevelopmentGiven plenty of troubled legacy loans in portfolios and multiplecycles of burned development transactions, lenders show noinclination to bankroll hotel projects, except extremely selectdeals in prime global gateways. “The universe of locationsstrong enough for new development will remain extremelylimited”—“New York, Miami, D.C., Boston, L.A., San Francisco,and maybe energy markets.” After five years of bankruptcies,cost cutting, and holding on, many properties require overhauls.The industry will need to concentrate on upgrades and renova-tions rather than ground-up construction.Best BetsInvestors need to “change their metrics” and realize thatfew bargains exist; yields and margins will no longer satisfy“opportunistic” expectations. Opportunity players try to fer-ret out “really attractively priced,” “broken deals” that need a“white knight” and “a new flag”—“maybe a resort in Florida orArizona.” Special servicers hold “lots of product” in need ofrenovation from deferred maintenance; at some point they willtry to clear these properties from their books. Buyers will needto be selective, especially in secondary and tertiary marketswhere revenue per available room (RevPAR) growth lags. Cleanand comfortable, low-frills suites with oatmeal and scrambledeggs or muffins included in a complimentary breakfast drawExHIBIT 4-18Hotel Investment Prospect TrendsSource: Emerging Trends in Real Estate surveys.Source: Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.2013 Prospects Rating RankingInvestment prospects 5.93 Modestly good 6thDevelopmentprospects 5.10 Fair 4thSell23.0%Hold31.2%Buy45.9%Expected capitalization rate, December 2013 8.2%2013 Prospects Rating RankingInvestment prospects 6.02 Modestly good 5thDevelopmentprospects 4.64 Fair 5thSell24.2%Hold45.2%Buy30.7%Expected capitalization rate, December 2013 7.4%U.S. Hotels: Limited ServiceU.S. Hotels: Full Service2013201220112010200920082007200620052004Limited-service hotelsFull-service hotelsmodestly poorpoorfairmodestly goodgood
    • 59Emerging Trends in Real Estate®2013Chapter 4: Property Types in Perspectivebudget-conscious business travelers in droves to limited-servicehotel formats like Hilton Garden Inn, Courtyard by Marriott, andResidence Inns. Less dependent on group and catering/restau-rant business, these hotels avoid costly overheads, includinglarge food and beverage staffs. For “uncertain times, it’s the sur-est bet,” and despite decent cash flows, “a lot of [local] ownerswon’t be able to refinance maturing loans,” paving the way forattractive recapitalization plays at lower cost bases.AvoidTravel increasingly concentrates in the top 25 or so populationand business centers. Hotels a step or two removed from pri-mary transportation hubs register weaker outlooks and will havetrouble sustaining strong revenue gains. Although investors mayfind some reasonable deals, they should be extremely selective.OutlookQuietly hotels edge back into favor “and can’t be ignored. They’vebeen in rocket mode.” Expect profit growth to flatten in thehealthy mid- to high single digits as long as development remainssedated. Winners will find ways to burnish their brands and fendoff online travel agencies, which effectively commoditize pricingamong the leading flags. So far the typical hotel boom-after-bustcycle in transaction pricing has been short-circuited by slow-to-foreclose lenders, tepid debt availability, and a wide gap in bid/ask spreads. Transaction volume should gain momentum finallyas buyers capitulate in the face of strong revenue growth andlenders dispose of more foreclosed assets. The industry keeps itsfingers crossed that momentum can be sustained: any economicreversals would strike operating margins quickly. The majorhotel companies view the United States as a mature market withrelatively few expansion opportunities outside the familiar globalgateways. Their attention has shifted to overseas markets—especially Asia, India, and Latin America—where more attractivedevelopment prospects beckon.Exhibit 4-20U.S. Hotel/Lodging Property Total ReturnsSources: NCREIF, NAREIT.*Data as of June 29, 2012.-60%-50%-40%-30%-20%-10%0%10%20%30%40%50%60%70%NAREITNCREIF2012*201020082006200420022000199819961994Exhibit 4-19U.S. Hotel Occupancy Rates and RevParSources: Smith Travel Research, PricewaterhouseCoopers LLP.*Forecast. OccupancyRealRevPAR0%10%20%30%40%50%60%70%80% Higher-priced hotels (occupancy rate)All hotels2013*2012*20112010200920082007200620052004200320022001200019991998199719961995199419931992$20$40$60$80$100$120All hotelsHigher-priced hotels (RevPAR)
    • 60 Emerging Trends in Real Estate®2013StrengthsDown for so long in an excruciating bump-along-the-bottomtrough, housing finally advances and markets gain some realtraction, although struggling along the way. In a classic buy-ers’ market, institutional managers and savvy high-net-worthinvestors take the plunge with conviction. They opportunisti-cally try a “pioneering” gambit, raising hundreds of millions ofdollars in capital for funds to vacuum up single-family product atdepressed prices, rent it for income, and eventually sell in anyfull-bore recovery. Smaller players have already put togetherlocalized ventures, and prices should firm up further in mar-kets that are drawing attention. Some prime neighborhoods inaffluent enclaves escaped much damage and register modestgains, while “accelerating prices” for condominiums in “bet-ter” markets like south Florida could be “a leading indicator forrecovery.” Skyrocketing apartment rents in certain infill and gate-way markets also provide incentives to buy. Banks finally allowmore short sales and convert delinquent owners into renters,helping dent the inventory of problem loans, which weighs downmany commodity markets.WeaknessesEven with relatively low mortgage rates, home sales have lan-guished and the homeownership rate has dropped to 50-yearlows, revealing lack of pent-up demand and the depths of manyAmericans’ shaky personal finances in a problematic jobs mar-ket; they simply cannot afford to own homes. Others just do notwant to venture the risk or deal with homeownership headaches,amply documented in reams of housing-bust publicity. Rationalcredit standards, which require reasonable downpayments andgood borrowing histories, shut out some potential buyers whowould have had no trouble scoring a mortgage in the precrashlending environment. More than 10 million homeowners, mean-while, remain underwater on mortgages worth more than actualhouse values. Any distressed selling will continue to dampenprices—and what happens if interest rates increase?DevelopmentNew construction levels have never been lower in 50 years,and if the market has any chance to recover more quickly,homebuilders and lenders would be wise to show continueddiscipline. Expected population gains will eventually lift demandand push housing starts, and builders should find some oppor-tunities in markets with better employment growth. They retreatfrom traditional greenfield subdivisions at the suburban fringeand seek more infill opportunities. Instead of building cavernousMcMansions, they downsize models, consider more energy-efficient designs, and look to accommodate extended familiesin units comfortable for grandparents running out of retirementsavings and adult gen-Y children unable to cut financial ties.Best BetsFor anyone who wants to own and has the means, now isa good time to buy and lock in low long-term financing.Prices should continue to edge up, and mortgage rates arenot expected to get better absent an economic reversal.Speculators, including the new housing fund ventures, shouldHousingExhibit 4-22U.S. Single-Family Building PermitsExhibit 4-21The S&P/Case-Shiller Home Price20-City Composite IndexSource: Moody’s Economy.com.*Forecasts as of August 2012.Source: Standard & Poor’s.*As of June 29, 2012.Thousandsofunits05001,0001,5002,0002015*2013*2011*200920072005200320011999199719951993Index1001502002502012*201120102009200820072006200520042003200220012000
    • 61Emerging Trends in Real Estate®2013Chapter 4: Property Types in Perspectiveconcentrate on securing low acquisition prices on rentableproperties, which can deliver steady cash flows. “Expensivehousing markets won’t work. Rents do not support the purchaseprices,” and anyone expecting to score rapid value gains likelywill be disappointed. Fund investors need assurance that theiradvisers/general partners have the organizational infrastructureto manage and lease scores of disparate houses in differentplaces and deal with the inevitable myriad renter-related issues,from leaks and broken appliances to household damage andsecurity deposits. “There’s no playbook”; scaling up these fundsmay be “a challenge” and “could be a crapshoot.” Local inves-tors, focused on a manageable number of properties in familiardistricts and neighborhoods, may be better positioned to deliveron performance objectives. Buying land cheap, getting entitle-ments to add value, and holding until markets strengthen stillmakes sense, too.AvoidWatch out for older commodity suburbs in decline. For any loca-tion, a substandard school district and a falling tax base couldsignal an unfortunate downward home price spiral. Weekend,summer, and resort homes still can compute for folks withsignificant disposable incomes, but “do they make economicsense” for most potential buyers? “You’re so much better offrenting for three weeks” or vacationing at places where you havenever been before and escaping the ownership hassles.OutlookHousing will remain troubled until unemployment rates fall,worker earnings power recovers, the market clears its fore-closed/defaulted properties, and banks loosen up creditstandards just a bit. No one holds his or her breath, but a recov-ery finally appears underway in fits and starts. In 2013, morebuyers should gain confidence about acquisitions, and highrental rates in some markets should encourage more househunting. The nascent upswing remains extremely susceptible toany economic reversals or interest rate hikes. Given housing’ssignificance to the overall economy, the country will be backon track when homebuilders can get back in gear. But whatcomes first?Niche Housing SectorsSeniors’ housing. The sheer number of Americans aging intoretirement promises steady demand for seniors’ housing overthe next decade. At the same time, smart players realize themarket dynamics may be changing because fewer seniors willhave the savings or pensions they might have expected only afew years ago. Stock market reversals, companies abrogatingretirement plans, and losses in home values all conspire to putExhibit 4-33 (4-23)Prospects for Residential Property Types in 2013Development Prospects1abysmal5fair9excellentInvestment ProspectsGolf course communitiesSecond and leisure homesMultifamily condominiumsManufactured homecommunitiesSingle-family:high incomeSingle-family:moderate incomeAffordable housingStudent housingSeniors’/elderly housingInfill and intown housingGolf course communitiesSecond and leisure homesMultifamily condominiumsManufactured homecommunitiesSingle-family:high incomeSingle-family:moderate incomeAffordable housingStudent housingSeniors’/elderly housingInfill and intown housing 6.546.015.885.535.434.954.394.313.653.016.786.196.145.755. Emerging Trends in Real Estate 2013 survey.Note: Based on U.S. respondents only.
    • 62 Emerging Trends in Real Estate®2013many seniors in dicey financial straits. Developers start to orientprojects toward a “private-pay population” with “less income inthe midst of a weak economy.” Some “disappointed” investorsexpect “slow growth for years, with little opportunity to raiserents.” They also worry about “political uncertainty over healthcare, moves to cut health care costs, and the changing insur-ance environment.” At the same time, the desire for generationalseparation is upended by harsh economic realities: more grand-parents may be forced to move in with their children and scrapplans to live independently either in seniors’ housing projects ortheir own homes.Mobile home parks. The same demographics and incomeissues work in favor of mobile home park owners, who can siton land and earn solid income until development opportuni-ties resurface. In these constrained times, trailer living fits thelifestyle budgets of more people, old and young.Student housing. The sector remains compelling, given theshear demographic numbers of college-age young people.
    • 65Emerging Trends in Real Estate®2013In a world struggling with managing unprecedented debtlevels and economic upheaval, Canada enjoys “boring”stability, its real estate markets following along in a seem-ing state of near-perpetual equilibrium, at least compared withother volatile regions, including most obviously the UnitedStates. As uncertainty continues around the globe, “Canadasits in a sweet spot of low interest rates with [the benefit of] anatural resource/commodity–based economy.” “People liveunder the assumption that we have a profound safety net whichprovides confidence that things won’t go upside down.” FromVancouver’s Pacific gateway and Alberta’s oil sands in the westto Toronto’s global financial center and Halifax’s shipbuildingin the east, Canada is well positioned to sustain its economicconsistency. The rest of the world has taken notice. U.S. retailersare expanding into the dependable Canadian market, immigra-tion waves stoke growth in housing and condominium sales,and foreign investors try to gain footholds (most unsuccessfully)in property sectors against difficult odds: Canadians tend to buyand hold long term.But “cautiously exuberant” Canadians also struggle againstcomplacency and must remain focused on the reality of how theworld’s tenth-largest economy can be dragged down by everyoneelse. “We cannot continue to outperform economies awash in debt.The huge deficit of our largest trading partner, the U.S., will restraingrowth; energy markets and the resource sector [will] slow down.”In other words, Canada “cannot assume we’re immune” from the“gray cloud” hovering over the world’s major markets.For 2013, a balanced outlook is expected. “Compared toeveryone else, we will do very well, but growth trends will bepretty mediocre.” In fact, “mediocre” should be viewed as “thenew ‘good,’” as real estate players “need to scale back expecta-tions.” Canada has entered “a post-adrenaline phase after onlyc h a p t e r 5EmergingTrends inCanada“We’re not a bad placeto be.”Exhibit 5-1Firm Profitability ForecastSource: Emerging Trends in Real Estate 2013  survey.Note: Based on Canadian respondents only.Prospects for profitability in 2013 by percentage of respondents1.8%Excellent31.6%Very good38.6%Good14.0%Modestly good10.5%Fair3.5%Modestly poor
    • 66 Emerging Trends in Real Estate®2013a mild recession,” the economy bounced back quickly, helpedby looser-than-normal monetary policy and sales of naturalresources. “Our base is pretty solid, but we’re no longer on fire.”Interviewees point to some of the concerns threatening theCanadian economy in 2013. “Commodities can get beaten up,especially the natural gas sector.” Household debt has increasedto near-record levels, and home valuations are level or havedeclined in some places. It is nowhere near a U.S.-style melt-down, but “higher interest rates could create problems.” Thehousing slowdown affects the construction industry and retail-ers; fervent consumer buying quiets down from recent peaks.The government also “winds down” stimulus and tries to makefiscally responsible cuts. “Growth will depend on the privatesector” alone. As a result, the unemployment rate hovers northof 7 percent and wage growth has been “limited”—better thanmost global competitors, but not indicative of a vibrant jobs fore-cast. Call the economy and job growth “slow and steady.” Thereis an apparent disconnect in job opportunities and employeeresources, as increasingly new jobs are concentrating in thecommodity-rich west while the largest population centers areeast, mostly in Ontario and Quebec. The nation’s continuing immi-gration surge shifts gradually toward Alberta and Saskatchewan,heading to where the jobs are, and will continue to spur localreal estate markets in coming years—not just in Calgary andEdmonton, but also around Saskatoon and Winnipeg.All in all, “we expect nothing spectacular, but if the worldturns around, we are in an excellent position”—and not a badposition under any circumstances.Top Trends for 2013Equilibrium Maintenance. Year in year out, vacancy rateshelp tell the commercial real estate story in Canada. Theyaverage in the mid-single digits across virtually all propertytypes, keeping most markets in a healthy, near steady state,which gives landlords the opportunity to push rents and enjoymeasured, ongoing appreciation. A small group of institutionalinvestors dominates office markets in the largest cities and ownsthe best retail properties, enjoying solid income returns fromtheir holdings. Like their U.S. neighbors, asset-rich Canadianpublic pension funds wrestle in a low-interest-rate environmentwith how to meet a widening gap in funding their long-termliabilities as more beneficiaries retire. On a risk-adjusted-returnbasis, they see real estate and infrastructure investments as asolution for finding stability and low volatility with significantlybetter yields than fixed income. But exercising significantdiscipline, they also “resist firing up the domestic developmentcycle” in an attempt to boost performance and understand thatany overbuilding would only undermine values on their existingportfolios. Everyone seems to benefit from the resulting rela-tive balance in supply and demand: “They all want to see 2 to 3percent rental growth and wait for increased demand for spaceto build before they fund development, resulting in pressure onrental rates.” Although investors and developers may miss outon some opportunities, they avoid painful busts: the country’scommercial mortgage defaults remain minimal, and marketshave avoided a U.S.-style collapse. All signs point to more of thesame in 2013, with the Canadian market expected to continue tolinger in this comfortable zone.Interest Rate Benefits. As long as interest rates hold nearrock-bottom lows, commercial real estate will continue to pros-per: “It’s the attractive” alternative. “If I put dollars in the bank, I’llget next to nothing, and bonds, not much more, so I’ll load upon real estate and get a 7 to 8 percent return in markets that aregenerally not oversupplied,” notes one interviewee. Not surpris-ingly, REIT stocks benefit from the same thinking: their dividendslure a strong following of both retail and institutional investors,and refinancing at low rates should help their profit margins.Interviewees expect rates to increase only marginally, heavilyinfluenced by U.S. and European central bankers who engagein further monetary intervention to help their ailing economies,which need to produce more jobs.Uncomfortable Household Debt. On the flip side, cheapmoney has had its negative impacts, relaxing the averageCanadian’s usually well-served, conservative fiscal tenden-cies. Suddenly, “everyone is up to their eyeballs in debt; wheninterest rates went to zero, they loaded up [on credit] and fueledhomebuying with inexpensive mortgages.” HomeownershipExhibit 5-2Inflation and Interest Rate ChangesSource: Emerging Trends in Real Estate 2013  survey.Note: Based on Canadian respondents only.Next five years2012CommercialmortgageratesLong-termrates (10-yeartreasuries)Short-termrates (1-yeartreasuries)InflationRemain stableat current levelsIncreasemoderatelyIncreasesubstantially
    • 67Emerging Trends in Real Estate®2013Chapter 5: Emerging Trends in Canadaapproaches a possible saturation point near 70 percent andprices in some markets began declining in 2012 as federal regu-lators applied the brakes and imposed stricter lender guidelines,such as limiting amortizations to 25 years, resulting in increasedmonthly mortgage payments. Both house hunters and condospeculators have backed off buying sprees, and discretionarysellers decide to pull back.Interviewees say a minor correction could be healthy formarkets and appear confident that anything approaching U.S.heartache will be avoided. They point to significant differencesin the two countries’ mortgage markets: Canadian banks havealways required downpayments; never engaged in “NINJA”(no income, no job, and no assets) lending practices, let aloneoffered subprime rate financing; and hold mortgages on bal-ance sheets. Therefore, the ingredients for a subprime-drivenmortgage-backed securities environment never developed.Strict underwriting weeds out most compromised borrowers,and buyers take out insurance against defaults. Although newsupply has not outstripped demand trends, thanks to immigra-tion flows, all signs suggest the condo market needs a furthercool-down, especially for luxury units. In the meantime, lowinterest rates should help recent borrowers make payments and“hold on,” even though values could edge down further.Urbanization Continues Apace. Canadians gravitate tothe “urbanization model. It’s everywhere,” extending beyondcentral business districts to reach interconnecting urbannodes in once-suburban expanses not only around Toronto,Vancouver, Calgary, and Montreal, but also “reaching everypart of the country,” including the smaller cities. “People makea choice of where they want to live, and the shift has beenquite profound.” They increasingly choose in-town living andhigh-rise apartments or townhouses over suburban subdivi-sion, house-and-yard lifestyles. The trend is “generational,”“cultural,” and “not just economical.” Cities are more convenientand concentrate 24-hour amenities for business, recreation,and entertainment. Aging baby boomers get tired of shovelingsnow and navigating roads during harsh winters, gen-Yers areattracted to better job opportunities and a glamorous city life,Exhibit 5-4Change in Availability of Capital in 2013Source: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.1very largedecline5stay the same9very largeincreaseForeign investorsPublic equity REITsPrivate equity/opportunity/hedge fundsPrivate local investorsPrivate REITsInstitutional investors/pension fundsGovernment-sponsoredentitiesCommercial banksInsurance companiesSecuritized lenders/CMBSMortgage REITsNonbankfinancial institutionsMezzanine lenders6.075.795.715.705.695.605.795.675.625.325.095.095.00Equity sourceLending sourceSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.Exhibit 5-3Maturing Loans: Preferred Strategy for LendersExtend withoutmortgage modification8.2%Extend withmortgage modification71.3%Sell to a third party18.4%Foreclose and dispose2.0%
    • 68 Emerging Trends in Real Estate®2013and everyone wants to limit time lost in increasing suburbancongestion. Retailers “start to support” the high-rise residen-tial boom, working with developers and planners to integratestreetscape shopping into new condominium projects.Land values for “scarce” infill sites continue to increase afterhaving skyrocketed, as local governments encourage densifica-tion and developers look to maximize returns by building as highas zoning allows. Any location near mass transit stations sig-nificantly increases in value, and developers and the businesscommunity call for increased light rail and subway funding toexpand or build systems and support densification. They worrythat most municipalities lack the resources to finance infrastruc-ture projects adequately and need support from the federalgovernment, which shies away from major outlays. Existinginfrastructure, meanwhile, nears the end of life cycles, requiringexpensive upgrades or replacements. As a result, concernsgrow about how urbanizing nodes will connect to cores andeach other. Dense development patterns require mass transit toreduce traffic gridlock and attract city dwellers to urban attrac-tions. Ironically, regions moved to densification planning partlybecause of unsustainable costs related to sprawl development,including expenses for extensive road and sewer systems. “It’stime for the federal government to get more involved,” says aninterviewee.Condo Wave Curls. Toronto, North America’s largest con-dominium market, sees new apartment towers sproutinglike weeds “everywhere” in an “absolute boom.” Developershave been “building where they shouldn’t.” In recent yearsVancouver’s waterfront and hillsides underwent similar skylinemakeovers, and more recently Montreal and Calgary haveexperienced strong condo building sprees. Condo mania hasextended to other Canadian cities like Halifax and St. Johns aswell—all part of urbanization and densification trends, encour-aged by local governments and driven by significant buyer andrenter demand.All the activity finally raised alarms at the Bank of Canada,and 2013 should answer the question as to whether the bank’sactions to temper demand, including establishing higher hurdlesfor foreign buyers to obtain mortgages, were too aggressive orhelped restore a balanced market. Many interviewees wonderwhether the restrictions were necessary. “Everything seems tobe bought.” If buyers choose not to occupy, they find renters:either young professionals or immigrants help fill units andsupport relatively low mortgage carrying costs, and continuedstrong immigration should enable more development, someinterviewees argue. Others suggest that buying had progressedto unsustainable levels, especially for high-end units, drivenby an “if I don’t buy now, I’ll lose out” mentality. Concerns alsogrow about the staying power of offshore investors should theyexperience financial reversals back home.Increasingly “cautious” banks received their regulator’s mes-sage loud and clear, scrutinizing developers’ track records andproject quality more closely. Greater weight is placed on loanrequirements for reaching significant presales and downpay-ments before construction starts. “More projects will be deferredor pulled back” with possible “value flatness for the next two tothree years.” The biggest threat to the market would be higherinterest rates. That’s when buyers would walk away from prepay-ments and some unit owners would have trouble keeping upwith mortgage bills. However, interviewees see low risk of thatscenario in 2013.Reasonable Development Pipeline. Even though condodevelopers prepare for a slowdown after the robust pace ofhigh-rise construction, cranes are expected to remain visiblealong major city skylines. A steady stream of projects in thedevelopment pipeline will not be delivered for several years,and with most interviewees expecting continuing buyer demandover the medium term, this should contribute to a reasonableongoing market for new projects in “a more normalized cycle.”Any pullback in new construction should tighten already “goodsupply/demand dynamics,” based on encouraging urbaniza-tion trends, which support an increase in buying and renting asjobs and businesses cluster in and around city centers. If morestringent underwriting weeds out speculators and borderline bor-rowers, this can only translate into a more favorable balance thatwill support stable or increasing values over time. Recent stickershock on downtown projects, especially in the Greater Torontoarea (GTA)—and the Greater Vancouver area—have spurredmid-rise condo construction in infill areas, as well as homebuild-ing outside the greenbelt. “People want larger, more affordableunits suitable for families,” whereas much of the new downtownconstruction features small layouts marketable to young profes-sionals and couples, or empty nesters. What happens whengen-Y residents in these buildings decide to have kids?Development charges, passed on to buyers, become “amassive issue—up to $16 or $17 per square foot” in somejurisdictions as local governments tap into the building boom tofill their coffers. The GTA municipalities charge homebuilders upto $60,000 a door because “demand allows for it.” Intervieweesalso continue to complain about “needless” government redtape in the zoning and permitting process, which “unnecessar-ily” adds to costs and can stymie projects. Slowing constructionactivity in some markets should help “stabilize” constructioncosts, which escalated during the building boom. But budgetscould face offsetting increases from tariffs on imported con-struction materials.Typical Commercial Building Restraint. Always underrelative control, activity on the commercial side remains moreconstrained. Any new construction keeps up with increasingly
    • 69Emerging Trends in Real Estate®2013Chapter 5: Emerging Trends in Canadameasured demand and does not race ahead of it. Few primedevelopment sites remain in either Toronto or Vancouver and“stay in a few hands.” Calgary, with more available buildingsites, can generate a semblance of boom/bust cycles, but themarket never seems to stay out of kilter very long because ofgrowing energy markets. Potential approvals of controversialpipeline projects from Alberta to the United States and intoBritish Columbia would boost real estate construction prospectsfurther. Although pension funds and other institutional investorsresist speculative development, they selectively seek expansionand renovation opportunities in existing portfolio holdings inan effort to increase yields and maintain a competitive edge inaging buildings.Transforming Tenant Demands. Office developers takenotice of how changing tenant requirements—open layouts,shrinking space use per capita, hoteling and other technol-ogy impacts, as well as operating and energy efficiencypreferences—spread from the United States and force alteredapproaches to projects. They realize the need to deliver greenproduct to attract prime space users, while institutional ownerscontinue to focus on upgrading existing stock to LEED standardsin order to remain competitive. “Green is huge in office. It’sbecome an intrinsic core value for tenants and fundamental fortheir business in attracting talent.” But some interviewees raisea familiar complaint: “Tenants want it, but aren’t willing to paymore for it.” Retail development orients away from the suburbs todensifying city center residential areas—particularly integratingsupermarkets, other service retail space, and smaller versions ofbig-box chain store space into apartment complexes or conve-nient sites nearby. And every commercial developer wants to beas close to transit corridors as possible; businesses place anincreasing premium on proximity to rail and subway lines.Essential Immigration Drivers. “The trend of ‘the west isbest’ will continue.” Eastern Canada gains from its “depth” ofpopulation and diversity of businesses, including Toronto’spowerful financial industry, but western Canada benefits fromthe “dynamics” of the jobs-generating industries of oil, gas,and commodities. Flows of about 250,000 immigrants annuallyfrom overseas—mostly from Asia and the Middle East—beginto redirect to Edmonton, “the staging ground for oil sands”work. The federal government and provinces collaborate bet-ter to identify hiring needs and bring people to satisfy them.As the profile for nonimmigrant Canadians ages into grayingdemographic cohorts, immigration will remain the lifeblood forhousing demand, commercial and multifamily development,and retail sales, especially in expanding relatively high-growthwestern cities. Traditional immigration magnets—Toronto andMontreal—will continue to prosper from flows of newcom-ers along established international pathways. Newer areas ofeconomic activity, such as the Maritime Provinces, will attractgreater immigration as a result of the coastal energy boom thatwill undoubtedly create new jobs.“Leveling” Cap Rates. Investors’ proclivity to secure incomeover long-term holding periods tends to sedate deal making andhelps insulate markets from volatility, although commercial mar-kets registered record transaction volumes during 2012. Again,the Emerging Trends Canada barometer settles in a familiarpositive zone for 2013 with buy/hold/sell sentiment essentiallyaligning (exhibit 5-5). Survey respondents expect little furtherdownward movement in “low-as-you-can-go” cap rates, espe-cially for apartments, regional malls, and downtown office space(exhibit 5-6). The exceptions will be for prime development sitesin and around downtowns, especially for stores. “Land values incore districts will keep going up.” If anything, it may be a slightlybetter time to sell than buy, but then given limited investmentalternatives, owners probably are better off holding. And asnoted, that “is just what most successful Canadian investors doout of habit anyway.”Plenty of Capital, Not Enough Deals. “The stars could notbe better aligned” for attracting capital into Canada’s reliablysolid real estate markets: they look as good as any place toinvest in the world. Rational leverage levels, extremely low defaultrates, high occupancies, and low interest rates all combine toreinforce investor and lender confidence in an asset class gen-erating attractive yields. For 2013, Emerging Trends respondentsexpect balance in debt availability—meaning debt will neitherExHIBIT 5-5Emerging Trends Barometer 2013Source: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.modestly poorpoorfairgood201320122011201020092008SellHoldBuymodestly good
    • 70 Emerging Trends in Real Estate®2013be over- or undersupplied, although high-credit borrowers willhave better access, especially for condo-related construc-tion loans where lenders will be more discriminating and rejectless-experienced developers (exhibit 5-7). Already-rigorousunderwriting standards promise to turn stricter. “Adventurers andamateurs will be eliminated” in the condo arena, and ten-yearfinancing is tough to secure because life insurers want to avoidgetting caught with liability mismatches should interest rates riseas expected over the medium to long term.Ample cash positions search for yield but tend to find fewopportunities in private equity real estate: both pension fundsand “more aggressive” REITs “have capital to invest, but haven’tbeen able to achieve their investment goals.” As a result, insti-tutional investors will continue to look outside the country, andREITs may muscle into pension-fund turf, bidding on availablehigher-profile trophies, as exemplified by the recent ScotiaPlaza transaction in Toronto. Foreigners wish to enter Canadianmarkets “looking for a safety net,” although the Canadian dollaroffers no currency advantages. Foreign investors are confrontedwith various legal hurdles, which only make it more difficult tocompete with domestic players, who are naturally more adeptat maneuvering on their home turf. New sources of capital—private REITs, boutique real estate funds structured as trustsor limited partnerships, and various other money managervehicles—sprout up to attract high-net-worth investor interestin the asset class. Searching for product, and marketing five- toseven-year holding periods similar to U.S. value-add or oppor-tunity funds, these nascent vehicles may keep returns lowerin secondary markets and “the nontrophy asset tiers.” Thesevehicles could also get involved in development deals, financingborderline projects rejected by traditional lenders.Markets to Watch“Canada’s real estate market has an appetite for transactions,but it is difficult to find deals.” Even during a questionable globaleconomy, the Canadian commercial real estate market con-tinues to grow and attract capital. “Real estate concerns arereducing, even with global economic uncertainty,” an investorsays. Even with that attitude, investors still have their eyes wideopen on the European debt crisis, China’s decline, Middle Eastconflicts, and the struggling U.S. economy. In 2013, Canada’sstable economy, job growth, and alluring assets will continue tobe an attraction to both domestic and foreign capital. Equity isin abundance, and debt for acquisitions looks to be in balance.Investors need to allocate this capital, and “instead of keepingcash, they look for great assets—real estate.” Without a correc-tion in sight, there is anticipation in the industry that transactionsExhibit 5-7Real Estate Capital Market Balance Forecastfor 2013Source: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.+6++22++33++35++4+2++35++43++18++2+8++33++43++14++26.12%Substantiallyundersupplied22.45%Moderatelyundersupplied32.65%In balance34.69%Moderatelyoversupplied4.08%Substantiallyoversupplied2.04%Substantiallyundersupplied34.69%Moderatelyundersupplied42.86%In balance18.37%Moderatelyoversupplied2.04%Substantiallyoversupplied8.16%Substantiallyundersupplied32.65%Moderatelyundersupplied42.86%In balance14.29%Moderatelyoversupplied2.04%SubstantiallyoversuppliedEquity capital for investingDebt capital for acquisitionsDebt capital for refinancingExhibit 5-6Prospects for Capitalization RatesSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.Property typeCap. RateAugust 2012(percent)Expectedcap. rateDecember 2013(percent)Expectedcap. rateshift(basis points)Regional malls 5.22 5.15 –7Apartmentresidential(rental) 5.14 5.18 4Apartment: moderate income 5.38 5.36 –2Central city office 5.48 5.43 –5Warehouse industrial 6.07 6.00 –7Power centers 6.13 6.21 8Full-service hotels 6.25 6.25 0R&D industrial 6.60 6.45 –15Neighborhood/communityshopping centers6.54 6.54 0Suburban office 6.55 6.62 7Limited-service hotels 8.00 8.00 0
    • 71Emerging Trends in Real Estate®2013Chapter 5: Emerging Trends in Canadawill continue to be based on sharper, more aggressive moves.It has turned into a “professional’s market,” in which those withexceptional skills to complete deals will succeed. However, look-ing for and acquiring real estate might be slightly more difficultnext year as the hunt for quality assets continues. “Investors aremore yield challenged, and searching for good assets is tough,”states a potential buyer.The large institutional owners of high-quality assets in primemarkets make the search difficult due to their long-term invest-ment strategy. In addition, prices might seem high, but mostinterviewees think they will still rise a little more—if you can “getthe deal done.” With those struggles, and still the appetite anddesire for real estate, investors have focused on strong tenant-based properties in secondary markets, or “Class B spacein Class A markets.” Supporting this trend, interviewees arequoted as saying, “there is a demand for quality property in allmarkets,” “flight to quality for purchasers,” and “we’re movinginto secondary markets.” However, not all investors are ready totake on additional risk in secondary markets at this stage of thegame. Some interviewees state, “shy away from the secondarymarkets,” and “we tend to stay away from secondary markets asliquidity is an issue.”As investors look for quality, through investment or develop-ment assets, other “older properties” continue to wait in limbo.A quality-based division is forming as capital continues to shyaway from aged assets. Growing urbanization, transit chal-lenges, creative and efficient space design, and a growingdemand for green, energy-efficient buildings continue to shapethe real estate landscape. Interviewees note, “sustainabilityand green: it’s here forever,” “tenants continue to become morespace efficient,” and “LEED certification, more contemporarydesign; access to transit corridors is essential.” As these trendsgrow, new and next-generation companies will continue touse these features to attract and retain their best employees.Landlords looking to compete and grow should follow this direc-tion to attract valuable tenants.Overall ResultsEven with this product chase and a possible need to changeinvestment strategy, Emerging Trends in Real Estate surveyresults for investment, development, and homebuilding pros-pects managed to improve for most metro areas. Of the ninemarkets covered for commercial/multifamily investments, onewas ranked “good,” six were “modestly good,” and two were“fair.” This performance is far better than 2012, when marketswere basically split between “modestly good” and “fair.” Theaverage rating value for all markets improved as well, movingfrom a 5.85 to 5.95, with only three markets seeing declines. Thetop movers were Montreal and Winnipeg, a primary and a sec-ondary market. The larger markets such as Toronto, Montreal,Vancouver, and Calgary prevailed with an average value of6.21, but still showed a decline from last year. Smaller marketsaveraged a score of 5.73, a year-over-year increase in value of0.18 points. This is a modest indicator that investors are ready tomake some moves into secondary markets.Development prospects were even more impressive,showing positive movement with a jump to 5.74 from 5.29, or to“modestly good” from “fair.” The increase in the prospect valuewas good for both primary and secondary markets. The primarymarket average was 5.99, compared with a score of 5.55 forsecondary markets. Even so, similar to investment results, thesecondary markets had a larger increase over last year, up0.54, compared with an increase of 0.35 for primary markets.Top gainers in development included Calgary, Edmonton, andMontreal. One interviewee agrees with survey results, adding,“Development will continue to grow with ‘cross-pollination’—office/retail/residential.”The biggest mover of the three Emerging Trends catego-ries was the homebuilding arena, where average metro-areascores increased 0.65 points year-over-year to 6.20, an overallrating of “modestly good.” “The Canadian homebuildingindustry needs to be building on a continual basis, as capac-ity is needed.” Results and sentiment like those are indicationsthat strong home construction activity will be here for a while.Source: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.Source: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.Exhibit 5-8Equity Underwriting Standards Forecast for CanadaExhibit 5-9Debt Underwriting Standards Forecast for Canada+37++55++8 +49++45++637.25%More rigorous54.90%Will remain the same7.84%Less rigorous49.02%More rigorous45.10%Will remain the same5.88%Less rigorous
    • 72 Emerging Trends in Real Estate®2013Markets to watch include Edmonton, Calgary, and Saskatoon.Primary markets beat the others again, scoring on average 6.26and 6.16, respectively, for homebuilding. However, secondarymarkets saw a larger increase in their ratings values, jumping0.92, compared with 0.30 for the primary markets. The trend ofsecondary markets scoring larger increases in rating values hasbeen consistent for all three categories. The focus on second-ary markets will substantially increase this year as investorscontinue to “chase yield” and find it more difficult to find productin primary markets.Employment and HousingInterviewees expressed mixed reactions regarding the future ofcertain macroeconomic drivers, such as employment, hous-ing, and income. Optimists stated, “employment is stable,”and employment will be “slow and steady.” Pessimists counter,“unemployment is too high and will ultimately impact us,” and“higher unemployment is in the future.” The mix in responses isinteresting in view of Canada’s overall economic performance.Since 2007, the nine Canadian markets covered will have added720,000 jobs, in contrast with the United States, which will con-tinue to show a net loss of 3 million jobs from pre-crisis levels.Next year’s job forecast for the same markets shows growth inCanada exceeding 2.4 percent, while the United States is fore-cast to see only a 1.0 percent increase. Finally, unemploymentrates in Canada are below ten-year averages in five of the ninemarkets and the aggregate average is lower as well. The evi-dence indicates that unlike the United States, Canada has seenstable and slow growth in most economic indicators. A possibleexplanation for the mixed outlook in the interviews is the fear ofa negative shift in the global economy. If this were to happen,it would certainly hurt Canada’s economy and the commercialreal estate market. However, overall interviewee consensusindicates “slow and steady” growth for the economy and the realestate market in Canada.According to consensus forecasts, the housing marketlooks to maintain pace in the coming year. Forecasts from theConference Board of Canada for overall housing starts in 2012were 207,200, compared with 193,100 in 2013. Declines areusually considered a negative, but the 7 percent drop is viewedas a positive sign because Canadian housing and condo mar-kets continue to see price movements that have a few saying thegloomy word “bubble.” One interviewee’s contrasting sentimentis reflected by his comment that “the market has come off, andthe balance of sellers to buyers is healthy.” Projections show thathousing resales will increase less than 1 percent at prices 2.5percent higher than 2012. Another interviewee’s call is similar,stating “With continued low interest rates, housing prices willcontinue to rise.” The breakdown between eastern and westernprovinces shows interesting projections for 2013, as housingstarts are projected to contract in the east and to expand in thewest, excluding Saskatchewan. These forecasts are stronglysupported by job growth expectations, as western cities showaverage increases of 2.1 percent, compared with 1.4 percent inthe east. “Employment equals housing.”Emerging Trends results support these statements. Acomparison of city investment rankings to jobs shows the topfour investment markets with 2013 job growth of 2.5 percent,compared with 2.3 percent for the other five markets. A com-parison of prospective development markets yields conflictingresults, with the top four markets projected to see 2.2 percentjob growth, 40 basis points less than the five remaining markets.Prospects for homebuilding are just as would be expected:more jobs, more homes. The top four scoring markets showjob increases of 3.0 percent, while the other five are anticipatedto grow by 1.9 percent. Job growth and housing are two keydrivers of commercial real estate success, and for Canada, bothappear to be in balance, as stated by an investor: “We do nothave any U.S.-style dead zones.”Immigration, Migration, and PopulationThe need and chase for employment has led to an upward trendin immigration, a shift in migration between Canadian provincesand cities, and an increase in general population. The trend ofa migratory increase in population over natural growth has beenconsistent as the country’s birth rate declines. In 2013, net immi-gration to Canada (the total number of immigrants minus theannual number of emigrants) is expected to range from 209,600to 316,700, according to Statistics Canada. If one assumes theSource: Emerging Trends in Real Estate 2013 survey.Note: Numbers in parentheses are rankings for, in order, investment, development,and homebuilding.Exhibit 5-10Markets to Watch: Overall Real Estate Prospects123456789HomebuildingDevelopmentInvestment6.59 6.77 7.076.52 6.35 7.086.18 5.95 6.196.14 5.83 6.005.88 5.92 6.155.70 5.37 6.475.93 5.41 5.775.41 5.05 5.675.16 5.05 5.44Calgary (1/1/2)Edmonton (2/2/1)Toronto (3/3/4)Vancouver (4/5/6)Ottawa (6/4/5)Saskatoon (7/7/3)Montreal (5/6/7)Winnipeg (8/8/8)Halifax (9/8/9)
    • 73Emerging Trends in Real Estate®2013Chapter 5: Emerging Trends in Canadahigher estimate, Canada’s total population is estimated to grow1.4 percent next year, and the nine markets covered in EmergingTrends will average growth of about 1.7 percent. As the Europeanrecession lingers and U.S. economic growth remains slow, theflow of individuals remains a concern. “More immigration is goingto Saskatchewan and Alberta, bringing in more skilled labor fromIreland and Europe.” At first, increases in population are a posi-tive sign for real estate; however, without enough job support tohandle the increases, the economy could falter.Migration (the flow of permanent residents from one Canadianmarket to another) was often discussed in interviews. Calgarylooks to have the biggest jump in population, 2.3 percent, asmany move to take advantage of Calgary’s projected 2.8 per-cent increase in jobs next year. This trend is consistent acrossthe top four markets with the largest job growth in 2013, whichtogether show population increases of 1.9 percent, above thenational average of 1.4 percent. “There is a mismatch in locationof jobs versus where people are. This will change migrationpatterns.” The west versus east matchup shows similar trends.Western markets’ population looks to increase 1.8 percent, andeastern growth is 50 basis points behind at 1.3 percent. Finally,contrary to the investor demand shift toward secondary marketsfor investment-grade commercial real estate, lifestyle prefer-ences will continue to drive population growth in the four primarymarkets, which are expected to grow by 2.0 percent, comparedwith an average of 1.4 percent growth in the five remainingmarkets. Even with a flow west, “Toronto will always retain thenumber-one position for immigration and migration.”Urbanization and TransportationWith immigration and migration flows, a continuing trend isincreasing “urbanization” of metropolitan areas, as Canada’sworkers prefer to live closer to where they work. “Major urbanareas will see most of the investment capital as areas encour-age the intensification of an urban culture.” “New generationswant to walk to work” in major urban centers like Vancouver,Toronto, and Montreal. “The choice to live in cities is no longereconomic, but has now become cultural.” Moving forward, eachcity will serve as the focus, creating and preserving an “identifi-able” community. Commercial real estate will follow that trend,and “small-box retailers will move to where the people live.” Thistendency will not stop at major markets, though, as “urbanizationwill continue and will spread to smaller cities.” At least one inter-viewee notes, “Urbanization, for two or three successive years,is still continuing, and it’s everywhere, including midsized cities.”Urban growth is not necessarily stimulated by natural populationincreases, but driven by larger city benefits that draw invest-ments and an educated workforce. Corporate real estate is allabout strategic locations for success, and these urban attributesoffer everything the workforce desires.Even with capital flow to urbanized locations and an increasein density, without proper infrastructure and transit, these loca-tions will suffer. There are “inevitable requirements for improvedinfrastructure in all major cities.” Ridership on conventional transitservices has continued to increase year-over-year, supportingthe additional need for “more contemporary transit corridors.”As urban density pushes out to additional locations, the “needExhibit 5-112013 Net Migration Forecast0 20,000 40,000 60,000 80,000 100,000InterprovincialInternationalIntercityHalifaxOttawa and GatineauSaskatoonWinnipegEdmontonCalgaryMontrealVancouverToronto-40,000 -20,000Source: Canadian Conference Board.
    • 74 Emerging Trends in Real Estate®2013for good connectivity to downtown” isgoing to intensify. Many intervieweessay they will follow: “We will be buildingmore residential rental buildings on high-public-transit locations,” and “[We willsee] continued urbanization and build-ing near existing transit lines and futuretransit lines.” Whatever way you look at it,“tenants want to walk or be near publictransit.” Markets that offer both optionswill succeed.Metro Market TrendsCalgary (1). Growth, growth, growthis in Calgary’s future, as evidenced byeconomic fundamentals, commercialreal estate volume, and Emerging Trendssurvey results. An expanding economyis requiring a larger and more highlyskilled workforce, and numbers showthat this trend will continue. Employmentforecasts indicate growth of 2.8 percentnext year and 2.9 percent in 2014. Thisgrowth, driven mostly by the oil andgas industry, has made it challengingto acquire high-quality real estate in thismarket. Absorption of prime propertieshas reached record levels, and rentsare continuing to be pushed due tolimited supply. “It’s harder to bid on localCalgary-area ‘A’-quality assets.” In 2013,this absorption and lack of space looksto continue, especially within office-type and industrial employment spacebecause job numbers in these areas areexpected to increase 3.6 percent and2.6 percent, respectively. Constructionwill increase in the housing and nonresi-dential arenas, but will be nowhere nearpre-crisis levels. Calgary has impressive results andrankings in this year’s survey, register-ing first in investment prospects, first indevelopment prospects, and secondin homebuilding prospects. This is nota surprise for many participants, whomaintain that “Calgary is heating up” and“Calgary is the best.” The city’s invest-ment prospect ranking moved from thirdto first in 2013, receiving the only “good”designation of the nine markets in thesurvey. High-quality opportunities mightbe difficult to find in this area, but inves-tors will continue to hunt regardless ofprice. Calgary development had the larg-est gain in its rating value, up 1.1 points,moving into first as well. Demand willremain high and development is needed:total construction output will increaseonly 3.0 percent this year and 4.7 percentnext. Calgary could not get the trifectathis year, though, as homebuilding in themarket placed second to its northernneighbor, Edmonton. Housing startsshould crack 10,000 in 2013, registeringa marginal 4.4 percent increase year-over-year.The buy, hold, and sell strategiesshow a majority of participants rec-ommending a buy in three of the fiveproperty sectors. With over 56 percent ofrespondents recommending purchasing,industrial leads the focus, a 12 percent-age point increase in this market over lastyear’s results. Apartments are a sectorto buy as well, according to 55 percentof survey participants. One intervieweedisagrees, though, stating “Calgary: notso good for residential sectors. It is a cityof homeowners.” Retail properties chalkup a buy, too, as retail sales increasedclose to 10 percent this year, and a 7.0percent increase is expected next year.Results for office look great for owners, as45 percent of interviewees recommend ahold for now. The lack of space, climbingrents, and anticipated cap rate compres-sion put landlords in control in Calgary’soffice environment.Edmonton (2). Only about a three-and-a-half-hour drive from Calgary,Edmonton “is looking great” as well.012345678201320122011201020092008Calgary6.59Source: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.Exhibit 5-12Industrial/Distribution Buy/Hold/Sell RecommendationsBuy Hold Sell0% 20% 40% 60% 80% 100%MontrealTorontoVancouverCalgary 56.25% 34.38% 9.38%43.33% 40.00% 16.67%37.84% 43.24% 18.92%18.52% 48.15% 33.33%Industrial/distributionInvestment Prospects
    • 75Emerging Trends in Real Estate®2013Chapter 5: Emerging Trends in CanadaStrong consumer spending pushesthe city’s expected increase in 2012gross domestic product slightly over3.0 percent, increasing in 2013 to 4.0percent. Employment growth has beencontinuous, as around 100,000 jobshave been created or filled since 2007.Unemployment forecasts predict arespectable 4.7 percent next year, butstill 30 basis points below the ten-yearaverage. With over 1.2 million residents,Edmonton continues to see populationgrowth as many see the city as “the placeto be.” As Edmonton’s energy-rich sectorthrives, manufacturing follows with futureexpansion. Confidence in current andfuture oil prices provides a nice outlookfor this oil-rich area. Say investors, “theworld believes that oil is up for good,”and “Edmonton is so small, and the oilindustry finds it attractive.”Emerging Trends survey results andreal estate investors predict a good 2013for Edmonton investment prospects: itsrating value added 0.28 points, mov-ing this market up two spots to second.Edmonton is an example that supportsthe trend to secondary markets in searchof high-quality real estate investments instrong economic locations. “As a resultof hard-to-purchase, quality ‘A’ proper-ties, we have more willingness to goto another market such as Edmonton,Saskatoon, and Regina.” With this growthcomes development, and Edmonton hada 0.87 increase in its rating value, movingto second from fourth. Nonresidentialconstruction dominated, as projects likeexpansion of the Edmonton InternationalAirport and Commonwealth Stadium’srecreation center were completed.Housing starts statistics and surveyresults send mixed messages, as only a1.1 percent increase in the number of newhomes is forecast, but participants rankEdmonton as the number-one homebuild-ing area. Homebuilding prospects inEdmonton jumped three positions, andthe city had the highest change in ratingvalue of all nine markets. Regardless ofthe homebuilding outcome, Edmonton isa market on investors’ radar. “Edmontonwill outperform the others.”Toronto (3). The number-one marketto watch in the 2012 Emerging Trendsreport, Toronto delivered mixed resultsand responses for 2013. Overall, thisinternational market is still a top-threecity, and capital will continue to flow tothe area. “Toronto was my choice. Peopleare renting by choice, occupancy rateis always good, employment is stable.”Forecasts support this statement, asjob growth is expected to increase 3.0percent, gross domestic product shouldgain 3.5 percent, and the city’s educatedworkforce is expected to see its personalincome grow another 3.6 percent. Lowerinterest rates and continued interest inhigh-quality assets drove residential andnonresidential construction higher overthe past two to three years. Constructionoutput in those sectors looks to be slightlylower this year, but government infrastruc-ture support should continue to add valueto the Toronto market. As is the casein other primary markets, high-qualityassets are difficult to obtain, and pricesstill look likely to escalate. Foreign capitalwill continue to focus on Toronto’s assets,but, an interviewee predicts, “Sovereignfunds will come to Canada when Europegets worse. And when they do, they willfocus on Toronto.”Survey results show Toronto takingsteps back in all three categories thisyear. Investment prospect values fell0.52 points to 6.18, and the city’s rankwent from first to third among the ninemarkets. Interestingly, the investmentprospect value for 2013 is exactly equalto the Emerging Trends historical aver-age for Toronto. Even though EmergingTrends values are survey driven, thismay be a sign that the Toronto marketas a whole is in a state of equilibrium.Development is the only category whereToronto improved its prospects, but notenough to keep the second spot, andthe city dropped to third. Still, manylarge projects are set for completion in2012 and in the years to come. Buildingmakes sense because “it’s the Torontointernational market; everything can besold quickly.” Homebuilding continues tobe a hot topic, but survey results forecasta slowing in 2013, landing the marketin fourth. Toronto’s rising home pricescontinue to be a concern, as expressedby many interviewees. “The Toronto andVancouver housing markets, especiallycondos, have come off a bit, but interestrates are low, and the Bank of Canadaand the Canadian government haveintroduced some fear, but not panic.”“Multifamily starts will slow, but vacancyrates will continue to decline, reaching 1.3percent in 2013. Mixed use–style proper-ties, combining residential, commercial,and especially retail space, are a trendto watch for as additional properties areadded to Toronto’s inventory.The decline in apartment vacancyrates and need for additional units is seenin the buy, hold, sell results. The only buyrecommendation is found in the apart-ment sector, where the largest share ofinterviewees—48 percent—will con-tinue to look at multifamily investments.“Toronto equals ‘oversupplied’ in high-rise development, but ‘undersupplied’ inlow rise.” Hold suggestions dominate inthe remaining four property types. Eventhough the largest share of participants012345678201320122011201020092008Edmonton6.52Investment Prospects
    • 76 Emerging Trends in Real Estate®2013suggests hold, over 37 percent wouldbuy retail commercial real estate inToronto. Say interviewees: “new retailersneed extra development capacity, espe-cially around the Toronto area,” and “retailunderserviced by urban retail [i.e., malls]in Toronto; it is a closed market [i.e., a fewdevelopers controlling urban retail space]so retailers are being pushed away.”Toronto may have taken a few steps backin survey results, but comments such as“the city has strong fundamentals” and “itis a landlord’s market over the next 12 to24 months,” suggest that the city still hasstrong positive investor sentiment.Vancouver (4). Vancouver’s economyhas sharpened up and will look to continuethat trend into 2013. Gross domestic prod-uct forecasts show growth of 2.5 percentin 2012, followed by a spike of 3.7 percentin 2013. The increase in production isdriven by an expected increase in employ-ment of 2.3 percent, exceeding ten-yearaverage growth by 36 basis points. Morethan 72,000 jobs have been added to thismarket since the employment slowdownin 2009. With a slightly lower cost of living(with the exception of housing) than thecountry, Vancouver has seen consumerspending be a key driver of the economy.This trend looks to continue, with retailsales projected to increase another 4.8percent in the coming year. These statis-tics are all great support for real estate, assome interviewees believe, “Vancouveris still positive and the place to be,” and“Vancouver is attractive.”Some interviewees still believe inopportunities in Vancouver, but EmergingTrends survey results show declinesin all three categories. The investmentprospect value for Vancouver declined0.47 points, and the rank dropped fromsecond to fourth. An interviewee notes,“overbuilt Vancouver is flat. Lots of sup-ply.” Development prospects showedsimilar movement—down in value andrank, falling from first last year to fifthin 2013. Vancouver’s government redtape continues to make it more dif-ficult to develop real estate every year.Homebuilding prospects also do notlook as strong year-over-year—down bya value of 0.50 points, from first to sixth.Housing start forecasts look to be justshy of 18,000 next year. “Less high-endproduct is moving in Greater Vancouver.Sellers are dropping prices. Lower-pricedproduct continues to move.”Even with a decline in rating values,prospects still exist in Vancouver. Buy/hold/sell recommendations suggest buy-ing office, apartment, and industrial, inthat order. Interviewees agree: “multiresi-dential is strong in Vancouver,” and “mypersonal choice is to live in Vancouver.”Office and apartment results are similarto 2012, but industrial saw a 6.5 percentspike in buy suggestions. The gradualsign of manufacturing growth is a keycontributor to the increased interest inindustrial space. The 2012 forecastsfor manufacturing suggest 2.5 percentgrowth, marking the third-straight posi-tive year.Source: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.Exhibit 5-13Apartment Buy/Hold/Sell RecommendationsBuy Hold Sell0% 20% 40% 60% 80% 100%MontrealVancouverTorontoCalgary 55.16% 34.22% 10.63%48.00% 30.10% 21.90%47.36% 33.14% 19.49%32.08% 45.85% 22.06%Apartment012345678201320122011201020092008Vancouver6.14Investment Prospects012345678201320122011201020092008Toronto6.18Investment Prospects
    • 77Emerging Trends in Real Estate®2013Chapter 5: Emerging Trends in CanadaOttawa (5). In 2013, the economicoutlook for Ottawa looks weak. Populationwill increase only 0.8 percent, 90 basispoints less than the average of the mar-kets included in this report. Employmentchange does not look strong either, asprojections show only a 1.0 percentincrease, 35 basis points below the city’sten-year average. One buyer recom-mends, “stay out of Ottawa.” The futureof Ottawa’s large number of governmentemployees is questionable as federalcuts to balance the budget are underway.Employment in the public administrationsector will decline 2.4 percent this yearand an additional 1.5 percent next year.Economic slowdowns will affect residen-tial and nonresidential construction, asdeclines in both areas are expected. Withthis decline in development, an investorsays the “Ottawa market is very tight andwill be difficult to enter.”Yet despite the challenging economictimes, survey participants still believein some opportunities in this market.Development prospects were rated“modestly good,” up from “fair” last year,and moved from sixth to fourth overall.Even with a continuing slide in hous-ing starts expected to last until 2015,homebuilding remained stable in fifthposition, with a slight increase in ratingvalue. Investment prospects for Ottawadeclined, dropping one position to sixth.Responses covering various sectorsseemed uninviting: “vacancies have beenhigh due to impact of technology sector’spoor performance,” “Ottawa: seeingsome consolidation of office space,” and“the industrial market is expected to befair at best.”Saskatoon (6). A large amount of inter-est is heard from interviewees and surveyparticipants regarding the smallest mar-ket of the nine covered. With an estimatedpopulation possibly reaching 285,000,based on a 2.0 percent growth rate,Saskatoon is continuing to attract interestfrom commercial real estate investorsand developers. Investment prospectsfor the city increased to “modestly good,”from “fair,” but its rank dropped one spotto seventh. Employment statistics showcontinued growth driven by strong miningand housing construction sectors, as wellas an improving manufacturing sector.This expansion is attracting capital, as“many are starting to participate in invest-ments in the Saskatoon area.”Still, as the market strengthens, thefuture of further development remainsquestionable. Development prospectsdeclined, but remain “fair.” The citydropped from fifth to seventh rank on thismeasure, according to 2013 results. Oneinterviewee disagrees, though, and planson “land banking throughout Saskatoonfor future development.” Housing startsare forecast to slow in 2013 and beyond.However, homebuilding survey resultsdiffer, as Saskatoon jumps from sixth tothird, receiving a “modestly good” rat-ing. “Small growth in these areas is biggrowth.”Montreal (7). “Montreal’s outlookis good, but maybe not very good.”Emerging Trends survey results recom-mend a hold strategy in all five propertysectors. Apartment and hotel were theonly two sectors where some participantsare looking to buy, as both cracked 30percent, but the majority of respondentsstill suggest investors sit on what theyhave. Sell signals are fairly strong in theindustrial sector, as one-third say it mightbe time to exit this area.In 2013, economic development ismoderate as gross domestic productforecasts display only 2.2 percent growth.Employment gains this year were zero,but some expansion—around 2.0 per-012345678201320122011201020092008Ottawa5.88Source: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.Exhibit 5-14Office Buy/Hold/Sell RecommendationsBuy Hold Sell0% 20% 40% 60% 80% 100%MontrealTorontoCalgaryVancouver 48.57% 40.00% 11.43%40.00% 45.71% 14.29%35.00% 55.00% 10.00%22.58% 61.29% 16.13%OfficeInvestment Prospects
    • 78 Emerging Trends in Real Estate®2013cent—is projected for next year. “Majorprojects in infrastructure will continue andhave an impact on availability of skilledworkers.” Population in the market looksto remain consistent, increasing around1.3 percent. However, interviewees say,“Montreal’s immigrants are not as wealthyas they may be in other Canadian cities,”and “Montreal does not benefit as muchas it could from this influx of population.”In spite of moderate economic driv-ers, the city’s investment prospects rankmoved two spots higher to fifth overall.Development prospect results weresimilar, shifting from eighth to sixth thisyear. A developer notes, “We are involvedin a large number of prestigious Montrealdevelopment projects.” Homebuildingprospects improved, but settled into theseventh spot for the second year in arow. “Montreal benefits from a diversi-fied economy [e.g., sectors health care,universities, life sciences/pharmaceuti-cal, video, professional firms, aerospace,etc.], and outlook is optimistic over thelong term.”Winnipeg (8). In 2013, Winnipeg’smanufacturing sector looks to grow afterhaving two years of severe declines.The economy has produced a steadyrecovery since contraction in 2009, asgross domestic product should increase2.6 percent next year. With an increasein manufacturing and production comesan increase in employment, which isexpected to gain 2.0 percent, exceedingits ten-year average by 80 basis points.With these components in place, “to usWinnipeg seems like a steady market ofopportunities.” The city has outperformedthe other covered markets in job changesince 2007, as 229,000 positions werefilled over those five years. However, pop-ulation growth is minimal, only increasing1.3 percent, 40 basis points below theaverage of the other markets. “We thinkthe market is good, but it really dependson price,” states an investor.Winnipeg’s favorite number mustbe eight, as it managed to secure thatposition in all three categories. Withmanufacturing and job-growth driversincreasing, investment prospects forthe market increased as well. Winnipegreceived the eighth position in invest-ment prospect rank, moving up 0.41points in value. Development showedthe same movement, up one spot toeighth. Homebuilding, which was eighthin 2012, stayed in that position in 2013.Housing starts have displayed continuousincreases, and that trend will continue,with a jump of 6.7 percent expected.Construction output has strengthened,both in residential and nonresidential,as absorption and inventories remainin check. Says one investor, “Winnipegwill outperform in the retail sector,” butanother claims, “the city will underper-form in the industrial sector.”Halifax (9). “[For] commercial real estatein Halifax, lease rates continue to bedepressed.” Economic drivers are posi-tive, but slower than many of the otherCanadian markets. Gross domestic prod-uct and employment projections show 2.2012345678201320122011201020092008Halifax5.16012345678201320122011201020092008Montreal5.93Source: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.Exhibit 5-15Hotel Buy/Hold/Sell RecommendationsBuy Hold Sell0% 20% 40% 60% 80% 100%VancouverTorontoMontrealCalgary 42.90% 45.02% 12.08%30.27% 48.90% 20.83%18.16% 54.96% 26.88%14.82% 59.67% 25.52%HotelInvestment ProspectsInvestment Prospects
    • 79Emerging Trends in Real Estate®2013Chapter 5: Emerging Trends in Canadapercent and 2.1 percent growth, respec-tively. Population is just over 400,000and growth is only 1.1 percent, 60 basispoints lower than the nine-market aver-age. Manufacturing growth should pickup next year, as a $25 billion contractfor supplying combat ships is underway.Says an interviewee, “Halifax will be avery strong location for investment for thenext five years due to the shipbuildingcontract.” Still, it is difficult to buy assetsin this market due to its small size.Investment, development, and home-building prospect values all increased inyear-over-year comparisons. However,the gain in investment prospects was notenough to get Halifax out of ninth place.Development fared a little better, movingto eighth in a tie with Winnipeg, up fromninth in 2012. A decline in housing startslooks likely to continue in 2013, as only2,235 are projected. Emerging Trendssurvey results agree, as Halifax stays inlast position for homebuilding. Halifaxis an attractive market, due to cost.However, one interviewee believes “thelayers of bureaucracy and time neededto get buildings constructed and occu-pied make it a very difficult location to dobusiness.”Source: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.Exhibit 5-16Retail Buy/Hold/Sell RecommendationsBuy Hold Sell0% 20% 40% 60% 80% 100%MontrealTorontoVancouverCalgary 53.13% 43.75% 3.13%40.63% 50.00% 9.38%37.84% 54.05% 8.11%21.43% 60.71% 17.86%Retail
    • 80 Emerging Trends in Real Estate®2013Property Types in PerspectiveEmerging Trends surveys highlight “modestly good” investmentand development prospects across most property sectors for2013 (exhibit 5-17), reflective of expected solid supply demandfundamentals in commercial categories. Housing sectors alsoscore favorable marks, except for second and leisure homes.Apartments. The recent condo buildup has not softenedmultiresidential markets; “they’re stronger than ever.” Like “bondinvestments,” landlords reliably can increase rents, supportedby high occupancies and steady appreciation. Confident lend-ers extend financing “for next to nothing,” and cap rates reach“shockingly low levels” in some markets. With development con-centrated on units in higher-end-market condo towers (whichmany buyers rent out), existing apartment stock in middle-market urban neighborhoods meets ample leasing demand forSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.Exhibit 5-17Prospects for Major Commercial Property Typesin 2013HotelsIndustrial/DistributionOfficeRetailApartmentHotelsIndustrial/DistributionOfficeRetailApartmentInvestment ProspectsDevelopment Prospects1abysmal5fair9excellent6.186.115.875.825.505.186.175.775.474.00Exhibit 5-18Prospects for Commercial Subsectors in 2013Source: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.R&D industrialPower centersSuburban officeLimited-service hotelsFull-service hotelsRegional mallsApartment: high incomeNeighborhood/communityshopping centersApartment:moderate incomeWarehouse industrialCentral city officeR&D industrialPower centersSuburban officeLimited-service hotelsFull-service hotelsRegional mallsApartment: high incomeNeighborhood/communityshopping centersApartment:moderate incomeWarehouse industrialCentral city officeInvestment ProspectsDevelopment Prospects1abysmal5fair9excellent6.346.
    • 81Emerging Trends in Real Estate®2013Chapter 5: Emerging Trends in Canadalower-cost options, especially from career starters and newlyarrived immigrants. In older districts, many buildings requireoverhauls or replacement. Investors looking for value-addopportunities can upgrade units. “It’s a broken record: multiresis always a good bet.”Office. Rents and values “keep going up,” reaching replace-ment-cost levels as a handful of new towers readily lease up inmajor markets, paving the way for additional new construction.Developers will look to take advantage of strong tenant appetitefor efficient layouts in sought-after green projects, which housemore workers in less space and can reduce operating costs.“They are head and shoulders above older buildings.” Brokersare starting to make headway on sales pitches for higher rentsin these new-generation towers, highlighting offsets from lowerexpenses. “Everybody wants to maximize everything. They likemore output for less space.” This “inexorable” march towardefficiency is “a normal course of business”; it is as importantto office markets as urbanization trends, and more owners ofexisting skyscrapers must undertake “surprisingly” expensiveretrofits to stay competitive or risk dropping to B-quality sta-tus. In the unlikely event overbuilding occurs, “it will be at theExhibit 5-19Prospects for Niche and Multiuse Property Typesin 2013Development Prospects1abysmal5fair9excellentInvestment ProspectsMaster-planned resortsResort hotelsData centersLifestyle/entertainment retailSelf-storage facilitiesMedical officeMaster-planned communitiesInfrastructureUrban mixed-use propertiesMixed-use town centersMaster-planned resortsResort hotelsData centersLifestyle/entertainment retailSelf-storage facilitiesMedical officeMaster-planned communitiesInfrastructureUrban mixed-use propertiesMixed-use town centers8.007.507.507. Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.Exhibit 5-20Apartments—Moderate IncomeSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.2013 Prospects Rating RankingInvestment prospects 6.10 Modestly good 3rdDevelopmentprospects 5.00 Fair 6thSell33.3%Hold33.3%Buy33.3%Expected capitalization rate, December 2013 5.4%Exhibit 5-21Apartments—High IncomeSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.2013 Prospects Rating RankingInvestment prospects 5.90 Modestly good 5thDevelopmentprospects 5.00 Fair 6thSell25.0%Hold41.7%Buy33.3%Expected capitalization rate, December 2013 5.2%
    • 82 Emerging Trends in Real Estate®2013expense of older buildings with obsolete space.” A transforma-tion in medical practice and an aging population in need ofincreased health care services lift prospects for medical officespace. Hospitals “decant nonessential services,” and more doc-tors are forming multiple-practitioner clinics. Space near hospitalcenters commands a premium; cap rates in some marketsdecline to 6 percent. Doctors and lab operations seek “largefloor plates” and “flatter buildings” that provide patients withdedicated medical environments.Retail. Already-tight markets will tighten further as U.S. retail-ers expand into Canada, led by Target, Nordstrom, and Lowe’s.The entry of new chains precipitates “a dynamic moving aroundof tenants” and “sounds the death knell” for some weakerdomestic brands in “the most Darwinian of property sectors.”Owners revel in the activity as the U.S. interlopers find difficultysecuring sites and force out struggling competition by takingtheir space, often at higher rates. The sector’s small club ofdevelopers, meanwhile, continues to work “hand in glove” withretailers to meet their needs and “keep supply from getting outof whack.” Zoning restrictions and ever-vigilant lenders alsokeep a check on new development. But owners must begin tocontend with integrating e-commerce platforms and dealingwith retailers’ locational strategies. Given high occupancies andstrong demand, the expected preference of tenants for smallerstore layouts should not undermine property revenue streams orvalues. All the chains fight for good sites in undersupplied urbancenters. The wave of new condo residents demands convenientExhibit 5-22Central City OfficeSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.2013 Prospects Rating RankingInvestment prospects 6.34 Modestly good 1stDevelopmentprospects 6.22 Modestly good 1stSell23.3%Hold33.3%Buy43.3%Expected capitalization rate, December 2013 5.4%Exhibit 5-23Suburban OfficeSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.2013 Prospects Rating RankingInvestment prospects 5.48 Fair 9thDevelopmentprospects 5.03 Fair 5thSell29.0%Hold54.8%Buy16.1%Expected capitalization rate, December 2013 6.6%Exhibit 5-25Power CentersSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.2013 Prospects Rating RankingInvestment prospects 5.47 Fair 10thDevelopmentprospects 5.21 Fair 4thSell5.0%Hold75.0%Buy20.0%Expected capitalization rate, December 2013 6.2%Exhibit 5-26Regional MallsSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.2013 Prospects Rating RankingInvestment prospects 5.85 Modestly good 6thDevelopmentprospects 5.00 Fair 6thSell10.0%Hold60.0%Buy30.0%Expected capitalization rate, December 2013 5.2%Exhibit 5-24Neighborhood/Community CentersSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.2013 Prospects Rating RankingInvestment prospects 6.00 Modestly good 4thDevelopmentprospects 5.95 Modestly good 2ndSell15.0%Hold30.0%Buy55.0%Expected capitalization rate, December 2013 6.5%
    • 83Emerging Trends in Real Estate®2013Chapter 5: Emerging Trends in Canadashopping at familiar brand-name stores, and developers look toaccommodate: they pay up for land, but can charge premiumrents. Older suburban centers make prime candidates for rede-velopment into new shopping formats. Unlike the United States,Canada is not oversupplied with retail space. Interviewees reg-ister only minor concern about whether more subdued housingmarkets and high household debt could affect store sales.Industrial. Warehouse vacancies have declined and investorslike the steady cash flows, but the sector seems mired in com-paratively “slow growth,” hampered by the strong currency andrelated exchange-rate issues, especially around Toronto andMontreal. Import/export flows remain somewhat compromisedby south-of-the-border turbulence. “It’s difficult to find pocketsof real growth with auto and aerospace industries still off.” Atleast supply is not an issue because developers have backedaway in the face of generally “weak leasing markets,” with rentsbelow replacement cost, but “creeping up.” Not surprisingly,smaller western distribution markets perform considerably bet-ter, boosted by commodities activity; owners can register rent“leaps” on new leases. Generally, a widening gap in the level ofinvestor demand develops between more favored new, high-ceilinged distribution space—where tenants tend to concentrateleasing activity—and increasingly obsolete older warehouses,which suffer noticeably higher vacancies.Hotels. Prospects for hotels should continue to improve.Occupancies and room rates crawl back to 2007 peaks in thebig cities, and RevPAR is not far behind. Outside of Calgary,interviewees see little room for much new development, with theexception of adding popular all-suite limited-service brands,catering to business travelers, in certain downtown markets.Housing. Housing markets appear primed to hold relative val-ues, and population inflows from overseas almost guaranteesteady future demand for new homes. Respondents appearmodestly bullish about prospects for condo (high rise and midrise) and home construction, especially in urban and infillareas, as well as town centers. Increasingly steep prices forhousing closer to urban cores should create greater demandfor more affordable single-family homes in outer suburbs.Expensive high-end condo units lose some luster as demandtails off; affluent offshore buyers become less active.Exhibit 5-27Warehouse IndustrialSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.2013 Prospects Rating RankingInvestment prospects 6.13 Modestly good 2ndDevelopmentprospects 5.67 Modestly good 3rdSell6.3%Hold56.3%Buy37.5%Expected capitalization rate, December 2013 6.0%Exhibit 5-28R&D IndustrialSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.2013 Prospects Rating RankingInvestment prospects 5.13 Fair 11thDevelopmentprospects 4.80 Fair 9thSell25.0%Hold62.5%Buy12.5%Expected capitalization rate, December 2013 6.5%Exhibit 5-29Hotels—Limited ServiceSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.2013 Prospects Rating RankingInvestment prospects 5.67 Modestly good 7thDevelopmentprospects 3.33 Poor 11thHold66.7%Buy33.3%Expected capitalization rate, December 2013 8.0%Exhibit 5-30Hotels—Full ServiceSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.2013 Prospects Rating RankingInvestment prospects 5.67 Modestly good 7thDevelopmentprospects 3.67 Modestly poor 10thSell33.3%Hold66.7%Expected capitalization rate, December 2013 6.3%
    • 84 Emerging Trends in Real Estate®2013Best BetsHold Core Real Estate in Major Markets. For institutions,only five or six cities—“the traditional suspects”—offer opportu-nities to place money, and they happily dominate these markets,enjoying consistent payoffs from solid income-producing trophyproperties across all property categories.Develop Green Office in Downtowns. Major tenants wantthis more efficient space and will move from older buildings intolayouts with operating-system advantages.Land Bank in Western Markets. In Canada, the beckoningof “go west, young man” (and women, too) still applies, andopportunities for real estate investors and developers to takeadvantage of escalating inflows of workers for available jobswill continue, with an obvious caveat to unexpected reversalsin energy and commodity markets. Buy and hold sites in andaround the larger cities should see values escalate nicely, andinfill sites will score development projects more quickly.Secure Infill Sites. Any low-rise inner-city real estate “hasgot intensification written all over it,” especially if located any-where near mass transit. “Go for the sure-shot redevelopmentcapital play.”Develop Housing Away from Urban Cores. Soaringcondo pricing and family-unfriendly units create an opening forhomebuilders to meet the underserved market for larger layouts,which can better accommodate children.Buy Luxury Condos in the Dip. With urbanization baked intofuture demand, upscale space in the best downtown locationswill reclaim any lost value quickly.Exhibit 5-31Prospects for Residential Property Types in 20131abysmal5fair9excellentInvestment ProspectsGolf course communitiesSecond and leisure homesManufacturedhome communitiesStudent housingSingle-family:high incomeAffordable housingMultifamily condominiumsSingle-family:moderate incomeSeniors’/elderly housingInfill and intown housingGolf course communitiesSecond and leisure homesManufacturedhome communitiesStudent housingSingle-family:high incomeAffordable housingMultifamily condominiumsSingle-family:moderate incomeSeniors’/elderly housingInfill and intown housing ProspectsSource: Emerging Trends in Real Estate 2013 survey.Note: Based on Canadian respondents only.
    • 87Emerging Trends in Real Estate®2013Latin American countries—led by Brazil, as well asMexico, Colombia, Peru, and Chile—provide continuingopportunities for real estate developers and investors ifthey can manage to master local markets and find suitable localpartners. Three key trends drive growth:Favorable demographics. Young populations should propel■■markets for the foreseeable future. “All these 20- to 30-year-oldsentering the workforce are reminiscent of the leading edge ofbaby boomers in the U.S. after World War II,” and fuel a prodi-gious housing boom.Diversifying economics. Expanding middle-class populations■■also help broaden business activity beyond exports into service-based industries, which focus on domestic consumption.Increasing access to capital. Strengthened economic foot-■■ings, firmer government credit ratings, and augmented foreigninvestments lead to development of more sophisticated financialsystems and greater availability of mortgage capital, whichfoster increasing real estate investment.But in 2013, enduring global recessionary impacts will con-tinue to dampen previously outsized growth, lowering regionaleconomic expansion from the mid- to high single digits to themid- to low-single-digit range. These countries “cannot decou-ple” from the rest of the world “and they will not do as well.”Lagging transportation infrastructure also hampers develop-ment activity outside of major cities. “Roads are bad,” intercityrail is limited, and secondary airports are sketchy. “It’s hard toget from point A to point B, and that gums up the works.” As aresult, capital tends to steer clear of “underserved” smaller mar-kets, where pent-up demand and “micro-opportunities” exist.In the near term, unmet housing demand and retail expan-sion will dominate the attention of real estate developers andinvestors. Builders have no trouble finding buyers for apartmentsas an “exploding middle class” absorbs units. In turn, residentshunger to furnish homes and head to stores. The internationalshopping center industry “wakes up to the potential” andlaunches major retail development projects. Leading U.S. mallcompanies shut out of activity back home compete againstor join forces with Brazilian and Chilean companies, who alsoexport their project skills into neighboring nations. “Regionalmalls attract a lot of capital,” including from U.S. and Canadianpension funds that see they can capture “a low-volatility pre-mium and outsized returns” on long-term holds, especially forwell-located centers in Brazil and Mexico.Lack of transparency, frustrating government “idiosyncra-sies,” and a dose of underlying corruption can pose ongoingc h a p t e r 6EmergingTrends inLatinAmericaThese countries “cannot decouple” from the rest of the world.Exhibit 6-12013 Latin America General IndicatorsSources: International Monetary Fund, World Economic Outlook database, April 2012;Moody’s Economy.com.Unemployment (%) Inflation (%)Argentina 10.3 6.3Brazil 5.0 6.5Chile 3.0 6.9Colombia 3.1 10.5Ecuador 4.5 6.2Mexico 3.1 4.6Peru 2.3 7.5Uruguay 6.0 6.0Venezuela 28.7 8.1
    • 88 Emerging Trends in Real Estate®2013challenges in some jurisdictions; that is why partnering with“reliable,” “well-connected” locals remains “essential” for for-eign investors. But relative to bedraggled Western economiesand other volatile emerging markets, many Latin Americancountries look downright dynamic. Some—Brazil in particular—hold potential for world leadership as the 21st century continuesto unfold and they energetically leave third world vestigesbehind them.BrazilSouth America’s powerhouse hits the brakes after a heady run.Commodity and natural resource exports to Europe and Asiaslow, and the country settles into a more tepid growth mode,helped along by expanding domestic consumer spending anda relatively modest government debt load. Compared with manyglobal alternatives, Brazil looks like “a safe haven,” and thecountry seems “easier to invest in than either India or China.”The few institutional-grade office and residential propertiesin site-constrained São Paulo and Rio de Janeiro have been“priced to perfection,” while all asset categories remain under-supplied across the country. “The consensus is 15 to 20 yearsof growth lie ahead.”Offshore investors will continue to want exposure to thisemerging market that may have already arrived. But to realizethe pop of an emerging-market return, they will probably needto “move beyond Rio and São Paulo to 20 other cities with 1million or more in population”; these places need everythingfrom apartment buildings and tract housing to shopping centersand offices. “They can provide decent risk-adjusted returns,”if investors can get comfortable outside the familiar places.On the housing front, where a huge supply deficit exists at themiddle- and lower-income levels, the government works withbanks to encourage the availability of 30-year mortgage capitalfor buyers and provide development incentives. But commercialprojects require “substantial equity”: capital markets have notevolved to provide much financing. That is where major inter-national mall companies and offshore institutional capital canmake inroads with Brazilian mall operators looking for funding.They can join forces to “go after the expanding consumer baseas disposable incomes rise.” Logistics properties to supportretail expansion “lease up immediately.” Virtually no Class Aindustrial space is available. “You build even in a halfway-decentlocation and they [tenants] will come.” Cap rates for officespace in the top markets “can’t compress further,” and rents hitthe stratosphere. “Tenants may start to push back” and seekalternative options in secondary locations where developers canfind sites.Meanwhile, the country focuses on completing constructionfor the World Cup in 2014 and the Summer Olympics in 2016.“It won’t be perfect; a lot rides on getting it done.” New relatedinfrastructure—roads, high-speed rail, and airports—shouldhelp support future economic growth.MexicoDrug-violence headlines “scare” away foreign capital.“Institutional investors won’t take a hard look at Mexico.” Butfundamentals should continue to improve as long as the U.S.economy does not move sideways. Manufacturing led by theauto industry “makes a comeback,” boosting prospects forborder cities especially. Internal capital from pension fundallocations helps pick up some of the financing slack, stabiliz-ing property markets in the absence of outside investments.Because competitors have pulled out, remaining players canbenefit from a “more open playing field.” The market is “notbooming, but you can selectively find good projects.”Mexico City, the country’s mainstay citadel, and otherlarge cities appear “more insulated” from the gangster-relatedwarfare. Developers move to fill a housing deficit—trying tomeet the expanding middle-class demand for units with modernamenities, particularly security. “People move back from thesuburbs into mid- and high-rise apartments that can provide agreater sense of safety.” Resort areas suffer “significant distress”from a glut of second homes. The one-two punch of tapped-outU.S. buyers and constant news of drug-cartel mayhem turns offdemand despite low prices for choice locations. “Every master-planned resort on the Mexican coast still has hair on it, and itmay take a long time to turn around.”Institutional-quality office space remains in short supply,whereas industrial space is overbuilt in many areas. Retailproperty presents considerable opportunity: many markets lacksmall to medium-sized shopping centers.Other CountriesColombia is a “coming attraction” and positions itself as thenext Brazil with a boost from a new U.S. trade agreement. Thecountry has “come a long way” since its drug-war days. Moreinstitutional investors make trips to Bogotá to check out thelandscape, discovering a severe housing and office shortage,which hearkens back to Brazil a decade ago, with many of thesame compelling demographic drivers in place. Although someinterviewees point to “a better business climate than Brazil”—the government is less bureaucratic and labor laws are lessdemanding—others say “it’s hard to break in,” and there are stillrelatively few opportunities and “not as many available partners.”Peru looks like another “up-and-comer,” with recent eco-nomic growth topping 6 percent. “The middle class increases[in size], and that fuels real estate opportunities.” An undercur-
    • 89Emerging Trends in Real Estate®2013Chapter 6: Latin Americarent of “political uncertainty” and lingering “banana republicfeel” deter many investors for now. They take the safer route toRio or São Paulo, not Lima.Argentina struggles to attract interest, caught in Brazil’sshadow. Investors fret about a lack of political and monetarystability. Institutional investors generally steer clear: the countryregisters a bad rap for inflation, hostility to business, currencycontrols, and difficulty in taking money out. “Buenos Airesneeds everything new. They have trouble maintaining old build-ings,” but financing any deal proves difficult.Foreign investors find Chile difficult to penetrate and “notworth the effort.” It’s a relatively small market with most realestate held by locals—long-term owners interested in capturingtraditional income-oriented core returns. Offshore players seek-ing emerging market–style payoffs must look elsewhere.Exhibit 6-2Latin America Economic GrowthSources: International Monetary Fund, World Economic Outlook database, April 2011.* Projections.Percentage real GDP growth2007 2008 2009 2010 2011* 2012* 2013* 2014* 2015*Argentina 8.7 6.8 0.8 9.2 8.9 4.2 4.0 4.2 4.3Brazil 5.7 5.1 -0.6 7.5 2.7 3.0 4.2 4.0 4.1Chile 4.7 3.7 -1.7 6.1 5.9 4.3 4.5 4.5 4.5Colombia 7.5 2.4 1.5 4.0 5.9 4.7 4.4 4.5 4.5Ecuador 2.5 7.2 0.4 3.6 7.8 4.5 3.9 3.7 3.5Mexico 3.3 1.5 -6.1 5.5 4.0 3.6 3.7 3.8 3.3Peru 8.9 9.8 0.9 8.8 6.9 5.5 6.0 6.0 6.0Uruguay 7.6 8.5 2.6 8.9 5.7 3.5 4.0 4.0 4.0Venezuela 8.4 4.8 -3.3 -1.5 4.2 4.7 3.2 3.1 3.2
    • 90 Emerging Trends in Real Estate®2013Appendix A: EconomySources: PwC, Moody’s Analytics, Bureau of Economic Analyis, U.S. Census Bureau.Notes: Quartiles based on MSA total population. * Quartile 1 (Los Angeles) combined with quartile 2. 2013 calculations based on forecasts acquired September 2012.2013 MSA2013PopulationEcho Boomers(25-34)2013 GMP perCapita 2013 Jobs Unemployment % Employment – Key IndustriesJob Types Changes Peakto 2013RankTotal(Million) Change%ofTotalPopulation10-yrGrowth2013GMPperCapita10-yearAvgChangeIndustrialDiversity2013Change10-yearAvgChgChgSince2007 201310-YearAvgBus.&Pro.Srvcs.Educ.&Health Energy Const.GoodsProd.ServiceJobs GovtU.S. 314.2 1.0% 13.6% 9.7% 1.00 1.1% 0.2% (2,998,495) 8.4% 6.5% 13.6% 15.5% 0.6% 4.1% -18.7% 1.7% -2.6%16 LosAngeles,CA* 13.2 1.0% 15.2% 1.5% 1.2% 1.6% 0.55 0.3% -0.4% (141,144) 9.7% 7.2% 15.4% 13.6% 0.1% 3.1% -31.0% -2.0% -9.2%2 NewYork,NY 11.8 0.6% 16.5% 8.1% 1.1% 1.9% 0.62 1.2% 0.5% 13,432 8.5% 6.7% 16.0% 19.8% 0.0% 3.0% -32.1% 2.0% -5.8%24 Chicago,IL 9.6 0.6% 14.5% 2.9% -0.3% 0.9% 0.81 -0.4% -0.3% (195,405) 9.7% 7.0% 16.8% 15.6% 0.0% 2.7% -31.8% -1.1% -3.7%9 Dallas/FortWorth,TX 6.8 2.1% 14.9% 13.6% 3.0% 3.1% 0.81 2.3% 1.0% 235,934 7.2% 6.1% 15.4% 12.6% 0.4% 4.9% -15.1% 2.3% 2.1%5 Houston,TX 6.3 2.0% 15.2% 21.3% 2.2% 3.1% 0.61 2.3% 1.6% 309,508 7.5% 6.1% 14.3% 12.8% 3.6% 6.4% -1.7% 2.3% 0.6%27 Philadelphia,PA 6.0 0.4% 13.4% 8.0% 0.2% 1.2% 0.75 0.6% -0.1% (62,195) 8.4% 5.9% 15.7% 21.5% 0.2% 3.3% -30.1% 1.3% -5.2%8 Washington,DC 5.9 1.2% 15.9% 19.2% 1.0% 2.9% 0.45 0.5% 1.1% 190,939 5.7% 4.2% 22.8% 12.8% 0.1% 4.7% -21.8% 0.7% 0.4%12 Miami,FL 5.8 1.3% 13.1% 9.1% 1.1% 1.3% 0.63 0.2% 0.2% (62,781) 9.3% 6.5% 15.4% 16.1% 0.0% 3.3% -42.6% -1.9% -5.7%35 Atlanta,GA 5.5 1.4% 14.3% 5.7% 2.9% 1.6% 0.81 2.1% 0.4% (66,282) 9.2% 6.2% 18.0% 12.7% 0.1% 3.7% -26.6% 1.7% -5.4%6 Boston,MA 4.6 0.6% 14.2% 7.2% 1.7% 2.0% 0.65 1.0% 0.1% (1,101) 7.0% 5.4% 17.6% 20.2% 0.1% 3.1% -31.1% 1.6% -2.3%1 SanFrancisco,CA 4.5 0.9% 15.5% 7.6% 1.7% 1.3% 0.60 0.4% -0.5% 48,248 8.4% 6.4% 19.3% 13.4% 0.1% 4.0% -30.5% -2.4% -8.9%33 Phoenix,AZ 4.4 2.7% 14.2% 13.7% 2.7% 2.5% 0.79 1.6% 1.0% (47,825) 8.0% 5.8% 16.4% 15.0% 0.2% 4.9% -33.8% -0.5% -8.2%36 InlandEmpire,CA 4.4 1.2% 14.2% 9.4% 1.7% 2.2% 0.80 1.0% 0.8% (41,239) 12.7% 8.1% 12.0% 12.6% 0.1% 4.7% -41.1% -2.6% -6.3%51 Detroit,MI 4.3 0.0% 12.0% -12.6% 0.4% -1.1% 0.55 0.4% -1.4% (182,707) 11.2% 8.8% 18.7% 16.4% 0.1% 3.1% -40.7% -5.2% -21.1%Quartile 1 & 2 Avgs 6.7 1.1% 14.5% 8.2% 1.5% 1.7% 0.67 1.0% 0.3% (187) 8.8% 6.5% 16.7% 15.4% 0.4% 3.9% -29.3% -0.3% -5.6%7 Seattle,WA 3.6 1.2% 15.9% 20.2% 2.7% 2.6% 0.39 1.2% 0.7% 31,917 8.3% 6.4% 14.1% 13.1% 0.0% 4.7% -11.7% 1.0% -0.4%23 Minneapolis,MN 3.4 1.1% 15.0% 13.5% 0.8% 1.4% 0.78 1.6% 0.1% 53,301 5.5% 5.1% 15.4% 16.9% 0.1% 2.8% -23.9% 2.5% -3.8%15 SanDiego,CA 3.2 1.4% 15.8% 14.1% 1.3% 2.1% 0.64 0.9% 0.1% 40,863 9.0% 6.2% 17.5% 12.6% 0.0% 4.3% -23.9% -0.1% -2.1%10 OrangeCounty,CA 3.1 1.1% 14.7% 20.1% 1.0% 2.1% 0.67 0.8% -0.1% (19,470) 7.6% 5.6% 18.4% 11.7% 0.0% 4.5% -23.2% -2.6% -9.7%29 Tampa,FL 2.9 1.3% 12.5% 13.3% 1.3% 1.2% 0.86 0.4% 0.2% (52,431) 10.1% 6.5% 17.1% 16.7% 0.0% 4.0% -38.5% -2.6% 0.7%43 St.Louis,MO 2.9 0.4% 13.4% 8.7% 0.1% 0.6% 0.86 0.0% -0.3% (29,413) 8.6% 6.6% 15.3% 18.1% 0.1% 4.2% -31.0% -0.1% -5.1%31 Baltimore,MD 2.8 0.6% 14.3% 16.3% 0.6% 2.3% 0.84 0.1% 0.4% 11,043 7.7% 5.3% 15.3% 20.0% 0.1% 5.2% -21.8% 0.7% 0.5%14 Denver,CO 2.7 1.2% 15.6% 14.2% 1.3% 1.7% 0.83 1.3% 0.6% 1,666 8.7% 6.0% 17.6% 12.7% 0.4% 5.6% -21.3% 1.7% -0.8%30 Pittsburgh,PA 2.4 -0.1% 12.2% 5.8% 0.8% 1.2% 0.78 0.7% 0.1% (47,825) 8.0% 5.8% 14.6% 21.8% 0.8% 3.9% -22.8% 2.0% -5.3%20 Portland,OR 2.3 1.8% 15.2% 14.5% 1.7% 6.5% 0.68 0.9% 0.6% 36,051 9.1% 7.4% 13.6% 14.8% 0.1% 4.7% -14.6% 0.4% -0.1%19 SanAntonio,TX 2.3 2.0% 14.1% 23.3% 2.6% 2.9% 0.82 2.5% 1.4% 92,672 7.3% 5.6% 11.6% 15.6% 0.4% 5.1% -5.4% 2.6% 1.0%28 Orlando,FL 2.3 2.2% 14.4% 18.5% 2.3% 2.9% 0.30 1.4% 1.3% (20,893) 9.7% 6.2% 15.3% 12.3% 0.0% 4.1% -41.2% -0.4% 0.8%Quartile 3 Avgs 2.8 1.2% 14.4% 15.2% 1.4% 2.3% 0.70 1.0% 0.4% 8,123 8.3% 6.0% 15.5% 15.5% 0.2% 4.4% -23.3% 0.4% -2.0%49 Sacramento,CA 2.2 1.3% 13.9% 14.0% 0.7% 1.2% 0.68 0.7% -0.3% (27,553) 10.3% 7.2% 12.9% 13.5% 0.1% 4.0% -38.7% -6.2% -6.2%13 NorthernNewJersey 2.2 0.3% 12.3% -1.0% 1.5% 0.6% 0.74 0.6% -0.5% (27,493) 9.4% 6.1% 17.2% 15.4% 0.1% 3.2% -33.8% -0.9% -5.8%38 Cincinnati,OH 2.2 0.5% 13.1% 3.3% -0.5% 0.5% 0.83 0.4% 0.0% (31,444) 8.5% 6.2% 15.7% 15.1% 0.1% 3.4% -19.9% -0.1% -6.0%34 KansasCity,MO 2.1 1.0% 14.2% 10.9% 0.3% 1.3% 0.86 0.4% 0.3% 16,875 7.2% 6.3% 16.0% 13.8% 0.1% 3.0% -21.9% 1.2% -2.7%50 LasVegas,NV 2.1 2.5% 14.8% 17.1% 2.3% 3.0% 0.23 2.7% 1.2% 13,637 12.4% 7.4% 12.1% 9.0% 0.0% 4.4% -59.4% -2.4% -9.1%48 Cleveland,OH 2.1 -0.3% 11.9% -4.2% -1.4% -0.2% 0.77 0.0% -0.8% (21,312) 8.1% 6.5% 13.4% 19.6% 0.1% 2.9% -30.1% -3.6% -12.5%25 Westchester/Fairfield 2.0 0.4% N/A N/A 2.5% 1.5% N/A 1.2% 0.0% N/A N/A N/A 14.9% 19.2% 0.0% 3.8% N/A N/A N/A3 SanJose,CA 1.9 0.9% 15.4% 5.0% 3.1% 4.4% 0.23 1.2% -0.1% 43,598 9.0% 7.4% 19.6% 13.7% 0.0% 3.8% -31.9% 1.6% -12.5%40 Columbus,OH 1.9 0.8% 15.0% 6.2% 0.1% 0.6% 0.75 0.8% 0.2% 4,168 7.5% 5.8% 16.5% 15.2% 0.1% 2.6% -33.2% 1.6% -4.8%4 Austin,TX 1.9 2.7% 17.1% 25.7% 5.3% 4.7% 0.68 3.2% 2.2% 111,734 6.5% 5.3% 15.1% 11.7% 0.2% 4.8% -19.7% 3.3% 3.2%17 Charlotte,NC 1.9 2.3% 14.3% 15.4% 2.9% 2.2% 0.77 1.4% 0.8% 29,970 10.1% 7.1% 17.0% 10.6% 0.1% 4.4% -31.6% 1.9% -1.6%37 Indianapolis,IN 1.8 1.4% 14.2% 9.4% 1.2% 1.8% 0.80 0.8% 0.4% (7,973) 7.4% 5.6% 15.2% 14.8% 0.1% 4.9% -18.2% 1.0% -0.6%11 Raleigh/Durham,NC 1.8 2.8% 13.9% 20.2% 2.7% 4.3% 0.76 1.7% 1.5% 61,301 15.3% 11.1% 16.1% 16.0% 0.2% 4.2% -22.9% 2.3% -3.7%26 VirginiaBeach,VA 1.7 0.5% 14.7% 12.0% 1.1% 1.5% 0.37 0.7% 0.1% 23,512 6.6% 4.7% 13.3% 13.7% 0.1% 4.4% -22.6% -1.8% 0.1%18 Nashville,TN 1.7 1.4% 14.8% 16.5% 1.7% 2.7% 0.80 1.3% 1.0% 40,514 7.6% 5.6% 14.9% 16.1% 0.1% 4.2% -19.6% 1.4% -1.5%46 Providence,RI 1.6 0.3% 12.3% -3.2% 0.5% 0.8% 0.76 0.4% -0.5% (60,594) 11.8% 7.1% 11.0% 21.8% 0.1% 3.0% -37.6% -2.8% -6.5%41 Milwaukee,WI 1.6 0.3% 13.7% 7.5% 1.5% 1.1% 0.67 0.2% -0.3% (21,730) 7.6% 6.1% 13.8% 18.6% 0.0% 3.1% -23.5% -2.6% -6.5%39 Jacksonville,FL 1.4 1.3% 13.8% 15.0% 0.1% 1.5% 0.79 0.6% 0.6% (5,672) 9.0% 6.0% 16.0% 15.1% 0.0% 3.9% -39.9% -0.7% -2.0%45 Memphis,TN 1.3 0.8% 13.6% 4.0% 1.2% 1.2% 0.55 0.7% -0.2% (1,957) 9.7% 6.9% 14.0% 14.5% 0.1% 3.5% -22.8% -3.9% -2.6%32 OklahomaCity,OK 1.3 1.2% 14.7% 20.1% 1.6% 2.3% 0.73 1.3% 0.8% 18,809 5.9% 4.8% 13.6% 13.4% 3.3% 4.2% -2.6% 1.6% -1.2%47 NewOrleans,LA 1.2 0.3% 14.6% -4.5% 1.1% 0.4% 0.62 0.3% -1.2% 16,908 7.9% 5.6% 13.3% 14.9% 1.3% 5.1% -24.2% -10.0% -21.3%21 SaltLakeCity,UT 1.2 1.5% 16.1% 11.0% 2.4% 3.5% 0.73 0.9% 1.3% (5,475) 6.1% 5.1% 16.3% 10.7% 0.3% 6.4% -7.0% 1.4% -0.2%44 Tucson,AZ 1.0 2.2% 12.9% 11.0% 1.9% 1.8% 0.63 1.7% 0.5% 842 8.4% 5.9% 13.4% 16.1% 0.5% 5.1% -19.2% -1.8% -7.2%22 Honolulu,HI 1.0 0.7% 14.9% 14.9% 0.7% 2.1% 0.47 1.2% 0.7% 14,226 5.8% 4.0% 13.8% 13.5% 0.1% 4.6% -20.0% -0.6% 0.4%42 Albuquerque,NM 0.9 1.1% 14.1% 20.2% 2.0% 2.5% 0.68 1.5% 0.3% (16,780) 8.4% 5.5% 15.3% 15.9% 0.1% 4.9% -31.7% -2.4% -2.4%Quartile 4 Avgs 1.7 1.1% 14.2% 10.3% 1.5% 1.9% 0.66 1.0% 0.3% 7,005 9.1% 6.6% 14.8% 14.9% 0.3% 4.1% -26.3% -0.9% -4.7%
    • 91Emerging Trends in Real Estate®2013Chapter 6: Latin AmericaAppendix B: HousingSources: PwC, Moody’s Analytics, Bureau of Economic Analyis, U.S. Census Bureau, RealtyTrac.Notes: Quartiles based on MSA total population. * Quartile 1 (New York) combined with quartile 2. 2013 calculations based on forecasts acquired September 2012.2013 MSA Households Median Home Prices2013 Single-Family HomesChangesRent/Home State System Foreclosures Apt. Vacancy Apt. CompletionsRank 2013Total Change Prices2013Change FromPeak Starts Completions Sales 2013Ratio JudicialNon-JudicialProcessTime(Days) Rate90+DaysDelinquent 201310-yearAvg2013Comp/Inv.10-yrAvgComp/Inv.U.S. 41,639.0 0.9% 41,639.00 0.9% 0.9% 0.9% 0.9% 0.9% 1.59 4.2% 6.4% 0.6% 1.1%2 NewYork,NY* 4,397.7 0.5% $437.3 0.6% -18.6% 17.7% 5.7% 19.2% 1.75 * 445 8.2% 3.5% 1.8% 2.7% 2.3% 1.2%16 LosAngeles,CA 4,389.8 1.2% $349.0 -0.2% -41.1% 27.0% 13.5% 21.0% 1.04 * * 117 4.8% 3.6% 3.1% 3.9% 0.7% 0.4%24 Chicago,IL 3,545.6 0.6% $179.1 0.7% -34.5% 39.5% 4.1% 11.2% 1.55 * 300 9.1% 3.4% 3.6% 5.4% 1.1% 0.3%9 Dallas/FortWorth,TX 2,474.7 2.2% $152.1 -0.8% -0.8% 39.0% 29.9% 14.0% 1.43 * * 27 3.6% 3.2% 5.2% 8.2% 1.8% 1.1%27 Philadelphia,PA 2,290.6 0.5% $212.3 1.0% -9.0% 45.4% 15.3% 25.6% 1.27 270 6.0% 3.7% 3.5% 4.6% 1.2% 1.1%5 Houston,TX 2,223.0 2.1% $165.5 0.1% 0.1% 18.9% 17.0% 10.3% 1.24 * * 27 3.2% 2.9% 6.8% 9.1% 1.3% 1.2%8 Washington,DC 2,171.5 1.3% $326.5 -2.1% -24.2% 32.5% 14.3% 21.3% 1.16 * 47 3.5% 3.5% 3.9% 4.6% 3.3% 0.7%12 Miami,FL 2,167.4 1.3% $179.5 -4.1% -52.1% 31.0% -8.7% 8.5% 1.56 * 135 18.7% 4.3% 3.4% 4.8% 0.5% 1.1%35 Atlanta,GA 2,040.9 1.8% $92.4 -0.6% -46.0% 72.8% 56.4% 8.9% 2.33 * * 37 5.4% 4.9% 6.1% 9.1% 1.1% 0.4%6 Boston,MA 1,807.5 0.9% $337.1 -0.3% -17.4% 42.7% 13.7% 11.7% 1.33 * 75 3.6% 3.3% 3.4% 5.1% 2.1% 0.7%51 Detroit,MI 1,693.5 0.3% $61.0 8.9% -62.7% 34.3% 33.4% 37.6% 3.55 * 60 5.2% 4.6% 3.9% 6.6% 0.4% 0.2%1 SanFrancisco,CA 1,682.5 1.1% $589.6 0.7% -30.0% 28.2% 30.3% 22.1% 0.86 * * 117 3.7% 2.6% 2.8% 4.2% 1.6% 0.4%33 Phoenix,AZ 1,634.7 2.7% $129.5 -1.6% -51.5% 42.8% 38.9% -10.3% 1.53 * * 90 5.8% 3.7% 5.6% 8.6% 1.2% 0.5%Quartile 1 & 2 Avgs $2,501.5 1.3% $247.0 0.2% -29.8% 36.3% 20.3% 15.5% 1.58 134 6.2% 3.6% 4.1% 5.9% 1.4% 0.7%7 Seattle,WA 1,415.7 1.4% $291.4 2.8% -24.3% 2.1% 4.9% 13.3% 0.94 * * 135 3.5% 5.9% 4.4% 5.6% 3.3% 0.5%36 InlandEmpire,CA 1,367.2 1.6% $176.9 -1.6% -55.9% 137.3% 136.8% 20.7% 1.53 * * 117 6.5% 5.3% 4.7% 8.5% 1.7% 0.9%23 Minneapolis,MN 1,339.6 1.5% $158.5 -1.2% -31.8% 34.4% 29.4% 33.2% 1.61 * 95 3.3% 1.8% 2.6% 4.5% 1.3% 0.7%29 Tampa,FL 1,191.2 1.2% $139.4 0.0% -38.2% 31.7% 41.3% 4.4% 1.56 * 135 16.2% 3.8% 5.2% 7.2% 1.4% 0.7%43 St.Louis,MO 1,158.4 0.9% $124.8 1.2% -15.2% 15.0% 0.9% 16.3% 1.51 * * 60 4.6% 3.2% 4.9% 7.5% 0.2% 0.4%15 SanDiego,CA 1,131.5 1.5% $371.4 -0.4% -38.4% 55.7% 10.4% 23.4% 0.93 * * 117 4.2% 3.2% 2.3% 3.8% 0.7% 0.6%31 Baltimore,MD 1,062.1 0.9% $235.6 0.0% -17.2% 26.1% 1.0% 15.8% 1.11 * 46 4.8% 5.0% 3.6% 4.9% 1.7% 0.9%14 Denver,CO 1,060.1 1.5% $228.2 -2.1% -8.6% 29.7% 18.4% 14.7% 1.05 * * 145 4.0% 2.5% 3.8% 7.5% 1.7% 0.7%10 OrangeCounty,CA 1,028.7 1.2% $513.8 0.3% -27.4% 48.3% 46.9% 33.1% 0.78 * * 117 4.8% 3.6% 5.8% 8.4% 0.7% 0.6%30 Pittsburgh,PA 1,008.1 0.3% $128.9 1.7% 1.7% 28.7% -1.7% 19.2% 1.69 * 270 5.0% 2.7% 3.0% 5.6% 0.8% 0.8%20 Portland,OR 927.1 2.0% $230.1 3.0% -21.9% 26.4% 16.8% 18.8% 0.97 * * 150 4.8% 3.0% 1.9% 5.0% 1.0% 0.8%38 Cincinnati,OH 849.8 0.8% $125.6 0.1% -13.5% 10.2% -18.3% 16.4% 1.49 * 217 6.6% 3.3% 4.1% 7.4% 0.8% 1.0%Quartile 3 Avgs $1,128.3 1.2% $227.1 0.3% -24.2% 37.1% 23.6% 18.8% 1.26 134 5.7% 3.6% 3.9% 6.3% 1.3% 0.7%25 Westchester/Fairfield 873.6 1.2% $873.6 1.2% -2.3% N/A N/A N/A 0.54 * N/A N/A N/A 3.0% 4.0% 1.1% 0.7%28 Orlando,FL 845.6 2.1% $124.0 -3.1% -53.9% 21.7% -0.2% 6.3% 1.83 * 135 15.7% 4.3% 5.2% 7.4% 1.9% 1.2%48 Cleveland,OH 843.9 -0.3% $101.2 0.4% -27.3% -22.4% -31.2% 16.2% 1.86 * 217 8.4% 4.3% 3.1% 6.0% 0.0% 0.3%34 KansasCity,MO 834.3 1.4% $136.1 -0.4% -12.3% 36.5% 3.8% 23.7% 1.34 * * 60 4.3% 3.1% 4.7% 7.3% 0.9% 0.7%19 SanAntonio,TX 819.1 2.1% $161.0 0.0% 0.0% 45.0% 39.2% 10.3% 1.17 * * 27 3.1% 2.8% 6.0% 7.5% 2.4% 1.4%49 Sacramento,CA 818.2 1.2% $173.0 0.4% -53.8% 84.6% 61.0% 23.2% 1.39 * * 117 5.2% 3.9% 3.1% 5.6% 0.5% 0.7%13 NorthernNewJersey 777.7 0.1% $366.8 3.4% -17.2% 39.6% 8.5% 22.7% 1.06 * 270 8.2% 3.5% 3.1% 4.0% 0.8% 0.6%50 LasVegas,NV 761.3 2.5% $115.4 -6.2% -63.6% 12.3% 8.8% 15.9% 1.76 * * 116 10.7% 8.4% 5.4% 6.8% 1.1% 1.1%40 Columbus,OH 748.1 1.0% $129.6 -0.7% -13.6% 31.9% 9.0% 18.1% 1.38 * 217 6.7% 3.6% 5.2% 7.9% 0.7% 0.7%17 Charlotte,NC 727.1 2.5% $211.0 -0.3% -0.3% 53.0% 34.0% 10.9% 1.00 * * 110 5.1% 3.2% 3.4% 5.1% 2.1% 0.7%4 Austin,TX 719.4 2.8% $205.7 -0.3% -0.3% 24.3% 24.6% 13.1% 1.13 * * 27 1.9% 1.9% 4.8% 7.7% 3.7% 1.5%37 Indianapolis,IN 713.0 1.6% $124.7 -1.3% -1.3% 25.9% 0.3% 13.4% 1.44 * * 261 6.8% 3.2% 4.7% 8.5% 1.7% 0.9%11 Raleigh/Durahm,NC 689.3 2.7% $411.0 1.0% 0.5% 46.2% 42.8% 12.2% 0.52 * * 110 3.7% 2.5% 3.2% 5.5% 1.0% 0.5%18 Nashville,TN 653.7 1.7% $158.9 1.5% -13.0% 36.1% 25.0% 18.3% 1.23 * 45 4.5% 3.5% 4.2% 6.5% 1.8% 0.8%26 VirginiaBeach,VA 644.3 0.8% $195.2 3.2% -20.0% 44.8% 21.6% 15.8% - * * 45 3.6% 3.1% N/A N/A N/A N/A3 SanJose,CA 643.0 1.2% $583.7 0.4% -30.2% 28.2% 40.7% 18.9% 0.72 * * 117 3.5% 2.5% 2.8% 4.3% 2.0% 0.6%41 Milwaukee,WI 633.3 0.7% $192.6 2.7% -12.5% -0.7% -0.6% 19.8% 1.13 * * 290 5.8% 3.2% 3.0% 4.8% 1.0% 0.4%46 Providence,RI 625.8 0.0% $226.2 2.0% -22.6% 40.7% 3.0% 3.5% 1.36 * * 62 6.2% 4.6% 3.1% 6.0% 1.1% 0.7%39 Jacksonville,FL 546.2 1.7% $123.0 3.0% -36.1% -0.3% -21.5% 5.0% 1.66 * 135 12.5% 4.7% 7.4% 8.6% 0.9% 1.2%32 OklahomaCity,OK 513.3 1.5% $148.2 1.8% 1.8% 6.5% 11.9% 17.6% 0.98 * * 186 4.4% 2.5% 5.8% 8.4% 0.7% 0.6%45 Memphis,TN 509.6 1.2% $117.1 1.5% -17.6% 80.4% 85.1% 36.5% 1.51 * 40 8.6% 6.8% 7.8% 10.5% 1.0% 0.5%47 NewOrleans,LA 465.7 0.6% $158.1 0.5% -8.3% 47.9% 38.1% 13.2% 1.41 * 180 5.9% 3.9% 6.4% 6.7% 1.2% 1.1%44 Tucson,AZ 407.1 2.3% $146.1 2.3% -40.3% 46.4% 27.4% 8.5% 1.17 * * 90 4.6% 3.0% 4.2% 7.2% 0.3% 0.3%21 SaltLakeCity,UT 393.9 1.5% $198.8 4.3% -14.2% 28.3% 28.9% 16.3% 0.98 142 4.9% 3.6% 3.8% 5.7% 2.8% 0.7%42 Albuquerque,NM 358.4 1.1% $178.6 1.9% -10.0% -8.4% -13.1% 19.1% 1.02 * 180 5.2% 2.3% 3.7% 5.7% 1.4% 0.7%22 Honolulu,HI 321.9 1.2% $655.5 0.8% 0.8% -6.8% -15.3% 6.5% - * * 220 5.1% 2.1% N/A N/A N/A N/AQuartile 4 Avgs $649.5 1.4% $239.0 0.8% -18.0% 26.4% 17.8% 15.3% 1.14 136 6.2% 3.6% 4.5% 6.6% 1.3% 0.8%
    • 92 Emerging Trends in Real Estate®2013IntervieweesAbu Dhabi Investment AuthorityThomas R. ArnoldAckman-Ziff Real Estate Group LLCGerald S. CohenPatrick HanlonRussell SchildkrautSimon ZiffAEW Capital ManagementRichard BraceMarc DavidsonAIMCOErnie FreedmanAllied Properties Real Estate Investment TrustMichael EmoryThe Alterra Group of CompaniesRobert CooperAmacon GroupBob CabralPatrick UyAmerican Realty AdvisorsStanley IezmanAPG Asset Management US Inc.Steve HasonApollo Global ManagementJoseph AzrackARA FinanceThomas MacManusArmco Capital Inc.George ArmoyanRob MacPhersonThe Armour Group LimitedScott McCreaArtemis Advisors, LLCDale Anne ReissASB Real Estate InvestmentsRobert BellingerAspac Developments Ltd.Gary WongAspen Properties Ltd.Scott HutchesonGreg GuattoAXA EquitableTimothy WelchAyer CapitalV. RajaBank of America Merrill LynchJeffrey D. HorowitzBank of MontrealGreg VriendBarclays CapitalP. Sheridan SchechnerRoss SmotrichBaruch CollegeDavid ShulmanBasis Investment Group LLCMark K. BhasinBay Hollow AssociatesAlice ConnellBentall Kennedy (Canada) LPPaul ZemlaBentall Kennedy (US) LLPChuck BurdDouglas PoutasseBioMed Realty Trust Inc.Greg N. LubushkinBorden Ladner Gervais LLPMark LewisBoston PropertiesMike LaBelleBPG Properties, Ltd.Daniel M. DiLella Sr.Arthur P. PasquarellaBrandywine Realty TrustGeorge HaseneczJerry SweeneyBRE PropertiesConstance B. MooreThe Bristol GroupJames CurtisBrookfield Asset Management, Inc.Dennis FriedrichBrookfield Office PropertiesMichael McNamaraBull RealtyMichael BullBuzz McCoy Associates, Inc.Bowen H. “Buzz” McCoyCabot PropertiesHoward B. Hodgson Jr.Andrew EbbottCachet Estate HomesDesi AucielloCadillac Fairview CorporationCathal O’ConnorCalloway Real Estate Investment TrustAl MawaniCalPERSTed EliopoulosCampus Apartments, Inc.David J. AdelmanJames SmithCanadian Apartment Properties Real EstateInvestment TrustThomas SchwartzCanderelDaniel D. PeritzCapright Property Advisors LLCJay MarlingCarey Watermark Investors IncorporatedMichael MedzigianCBREAsieh MansourRoss Moore (Canada)Bob SulenticWilliam C. YowellCBRE Econometric AdvisorsJon SouthardCB Richard EllisRoelof van DijkRaymond WongCB Richard Ellis LimitedJohn O’BryanChampion PartnersJeff SwopeCitiStates GroupPeter KatzColliers InternationalDylan TaylorColony Capital, LLCRichard B. SaltzmanCompatriot CapitalPaul E. Rowsey IIIConnecticut Retirement Plans and Trust FundsCherie Santos-WuestCornerstone Real Estate AdvisersJim ClaytonDavid J. ReillyCRE Finance CouncilStephen M. RennaCrescent Real Estate Equities, LPJason AndersonJohn C. GoffCrescent Resources LLCTodd W. MansfieldCRL Senior LivingDouglas CameronCrombie Real Estate Investment TrustDonald ClowCrow HoldingsHarlan CrowAnne RaymondCushman & WakefieldJames CarpenterThe Daniels CorporationJim AirdDCT IndustrialTom WattlesDesjardins Asset ManagementMichel BédardDiamond CorporationStephen DiamondDLC Management Corp.William (Bill) Comeau
    • 93Emerging Trends in Real Estate®2013Donahue SchriberLawrence P. CaseyDorsay Development CorporationGeoffrey GrayhurstDRA AdvisorsPaul McEvoy Jr.Dundee International Real Estate Investment TrustJane GavanDundee Real Estate Investment TrustMichael CooperDundee Realty CorporationJason LesterEmpire Communities GroupPaul Golini, Jr.Andrew GuizzettiDaniel GuizzettiEpic Realty PartnersGordon ThompsonEquity Group Investments, LLCSam ZellExeter Property GroupWard FitzgeraldFairview InvestmentsBarry ClarkeFares Developments Inc.Francis FaresFasken Martineau LLPDavid MartinFelCor Lodging Trust IncorporatedAndy WelchFirm Capital Properties Inc.Eli DadouchFirst Capital Realty Inc.Dori SegalKaren WeaverFirst Niagara BankChristopher P. TerlizziFlagler DevelopmentEric SwansonThe Flynn CompanyDavid M. RicciFonds de placement immobilier CominarMichel DallaireFonds immobilier de solidarité FTQClaude MeunierForest City Commercial GroupJames RatnerFortis PropertiesNora DukeJamie RobertsFoulger–PrattCameron PrattFPL AdvisoryWilliam FergusonFulcrum Hospitality LLCSteven AngelGE Real EstateThomas CurtainGIDRobert DeWittBrian O’HerlihyThad PalmerWilliam RobertsGinkgo ResidentialPhilip PayneGlenborough Realty TrustAlan ShapiroGoff Capital PartnersJohn GoffGoldman, Sachs & Co.Jeffrey A. BarclayAlan KavaPat TriboletMichael WattsGraywood Developments Ltd.Great Gulf Group of CompaniesDavid GerofskyJerry PatavaGreat Point InvestorsJoseph VersaggiGreenOak Real EstateSonny KalsiGreenpark Group of CompaniesCarlo BaldassarraGrosvenor AmericasAndrew BibbyGuggenheim PartnersKieran QuinnHarbert Management CorporationJon-Paul MomsenJ. Travis PritchettMichael P. WhiteHarbor Group InternationalLane SheaHartman Income REITJulian KwokHawkeye Partners LPBret R. WilkersonHeitmanRichard KateleyHersha Hospitality TrustAshish ParikhJay ShahHilton WorldwideChristopher J. NassettaHinesKurt HartmanKen HubbardHomefed CorporationPaul BordenHopewell Development CorporatioinKevin PshebniskiHopewell Residential CommunitiesLesley ConwayHSBC Bank CanadaBruce ClarkeGarth StollHunt CompaniesChris HuntHyde Street Holdings, LLCPatricia R. HealyICSCMichael KerchevalInstitutional Real Estate, Inc.Geoffrey DohrmannIntergulf Development CorporationHareesh SaraIntracorp Projects Ltd.Don ForsgrenInvesco Real EstateNicholas BussScott DennisMichael SobolikiStar FinancialGeorge PuskarITC Construction GroupDoug MacFarlaneIvanhoe Cambridge Inc.Sylvain FortierWilliam R.C. TreshamJamestown LPChristoph A. KahlJohn Buck CompanyCharles BeaverSteve ShiltzJones Lang LaSalleJames L. KosterJ.P. Morgan Asset ManagementJean AndersonJoseph AzelbyWayne ComerMike KellyEllen KerrJulie NegronElizabeth ProppKensington Realty AdvisorsKelley SmithKeyBank Real Estate CapitalE.J. BurkeKEYreitTeresa NetoKevin SalsbergKimco Realty CorporationMilton CooperDavid HenryScott OnufreyMichael V. Pappagallo
    • 94 Emerging Trends in Real Estate®2013KingSett Capital Inc.Jon LoveKMK Capital Inc.Kevin KingKorpacz Realty AdvisorsPeter KorpaczLachman AssociatesLeanne LachmanLadder Capital Finance LLCGreta GuggenheimLandmark PartnersChad S. AlfeldRobert J. DombiGregory F. LombardiLaSalle Investment ManagementRichard KleinmanLynn ThurberLaSalle Investment Management–CanadaZelick AltmanLedcor Properties Inc.Chris BourassaLehman Brothers Holding Inc.Owen ThomasLEM Mezzanine LLCHerb MillerLiberty Property TrustMichael T. HaganLinneman Associates and American Land FundPeter LinnemanMadison HomesMiguel SingerManulife FinancialJoseph D. ShawManulife Real Estate FundsConstantino ArgimonCatherine BarbaroDavid ShawTed WilcocksThe Maple Hill CompaniesAdam RaboyMartekCharlie OliverThe Mathews CompanyBert MathewsMattamy Homes LimitedBrian JohnstonMelcor Developments Ltd.Ralph YoungMenkes Developments Ltd.Peter MenkesMetLifeMark WilsmannThe Metrontario GroupLawire LubinMonarch GroupSteven J. PaullMoody’s Investors ServicesMerrie FrankelMorgan StanleyJohn KloppNational Association of Real EstateInvestment TrustsSteven WechslerNew Boston FundsMichael DohertyGary HofstetterJames KelleherTimothy MedlockJames RappaportNewTower Trust CompanyBrent PalmerPatrick MayberryNorth Ridge Development CorporationWally MahNorthwestern MutualDavid ClarkNorthWest HealthCare Properties Real EstateInvestment TrustPeter RigginNorthwood InvestorsJohn KukralOrr Development CorporationAlex OrrTim OrrEddie PapazianOtéra CapitalAlfonso GraceffaOxford PropertiesBlake HutchesonPacific Investment Management Company LLC(PIMCO)John HaymesPaladin Realty PartnersFrederick GortnerJames WormsPan-Canadian Mortgage Group Inc.Joel McLeanParkway PropertiesCurt OwenPearlmark Real Estate PartnersStephen R. QuazzoPenney Group Inc.Gail FowlowPennsylvania Real Estate Investment TrustAndrew IoannouPM Realty GroupJohn S. DaileyPNC Real Estate FinanceWilliam G. LashbrookPortfolio AdvisorsHarry PierandriPrincipal Financial GroupAndy WarrenPrincipal Real Estate InvestorsMichael J. LaraProfimex Ltd.El RosenheimPrologisGuy JaquierHamid MoghadamWalter C. RakowichNina TranTracy WardPrudential Real Estate InvestorsJ. Allen SmithPublic Sector Pension Investment BoardNeil CunninghamPure Industrial Real Estate TrustFrancis TamQuadrant Real Estate AdvisorsThomas MattinsonRamius Capital GroupMichael BoxerRBC Capital MarketsCarolyn BlairDouglas McGregorGary MorassuttiReal Capital AnalyticsRobert WhiteThe Real Estate RoundtableJeffrey DeBoerRealNet Canada Inc.George CarrasReal Property Association of CanadaPaul MorseRealty IncomeGreg FaheyRedbourne GroupMichel BouchardAndré ShareckThe Related Companies LPMichael J. BrennerResort Finance America, LLCAndy MitchellRioCan Real Estate Investment TrustEdward SonshineFrederic WaksRiverOak Investment Corp., LLCSteve DeNardoRockefeller Group Investment Management Corp.Dennis R. IrvinJohn D. BottomleyPeggy L. DaSilvaPeter Davidson
    • 95Emerging Trends in Real Estate®2013Rohit Group of CompaniesRussell DaukRosen Consulting GroupKenneth RosenRREEFScott KoenigKurt W. RoeloffsRXR RealtyFrank PatafioSabra Health Care REIT, Inc.Harold Andrews Jr.Salem Realty Capital LLCAndrew M. SternliebSares-Regis GroupJohn S. HagestadGeoffrey L. StackSentinel Real EstateDavid WeinerSeven Hills PropertiesLuis A. BelmonteShea PropertiesElizabeth CobbSilverpeak Real Estate PartnersRodolpho AmbossBrad LebovitzSonnenblick-Eichner CompanyDavid SonnenblickThe Sorbara GroupEdward SorbaraSouthwest Properties LimitedGordon LaingStag IndustrialBen ButcherStarwood Capital GroupJeffrey G. DishnerChristopher D. GrahamJerome C. SilveyStarwood Hotels & Resorts Worldwide, Inc.Kirk ReedState of Virginia Retirement SystemField GriffithState Teachers Retirement System of OhioStanton WestStockBridge Investments B.V.Kees F.W. BrüggenSun Life Financial Inc.Philip GillinSunstone Hotel InvestorsJohn ArabiaRobert C. SpringerTalon Private Capital LLCGabe LevinThibault Messier Savard & AssociésMartin GalarneauTishman SpeyerTodd RichToronto Port Lands CompanyMichael KraljevicT.R. Engel GroupThomas EngelTrepp, LLCMatt AndersonTrilyn Investment ManagementMark AntoncicTriovest Realty AdvisorsDavid RobinsTurner Construction CompanyDarin PostmaUBS Global Asset Management (Americas) Inc.Lee S. SaltzmanUBS Realty Investors LLCMatthew LynchUniversity of Denver, Dividend Capital GroupGlenn MuellerUrban AmericaThomas KennedyVillarboit Development CorporationPaul SimcoxVornado Realty TrustMichael FascitelliWalton Development and Management (USA), Inc.Walton International Group (USA), Inc.Rob LeinbachEd SteffelinWashington Real Estate Investment TrustThomas RegnellWatson Land CompanyBruce ChoateWells FargoCharles H. “Chip” Fedalen Jr.Westbank GroupJudy LeungWestbrook PartnersSush TorgalkarWestport Capital Partners LLCRussel S. BernardWheelock Street CapitalMerrick (Rick) KleemanWhite Stone AssociatesSteve LeBlancWright Runstad & CompanyGreg Johnson
    • 98 Emerging Trends in Real Estate®2013PwC real estate practice assists real estate investment advisers, realestate investment trusts, public and private real estate investors, cor-porations, and real estate management funds in developing real estatestrategies; evaluating acquisitions and dispositions; and appraising andvaluing real estate. Its global network of dedicated real estate profes-sionals enables it to assemble for its clients the most qualified andappropriate team of specialists in the areas of capital markets, systemsanalysis and implementation, research, accounting, and tax.Global Real Estate Leadership TeamKees HageGlobal Real Estate LeaderLuxembourg, LuxembourgUwe StoschekGlobal Real Estate Tax LeaderEuropean, Middle East & Africa Real Estate LeaderBerlin, GermanyR. Byron Carlock Jr.National Real Estate Practice LeaderDallas, Texas, U.S.A.Mitchell M. RoschelleNational Real Estate Advisory Practice LeaderNew York, New York, U.S.A.Timothy ConlonNational Real Estate Assurance LeaderNew York, New York, U.S.A.Paul RyanNational Real Estate Tax LeaderNew York, New York, U.S.A.K.K. SoAsia Pacific Real Estate Tax LeaderHong Kong, Chinawww.pwc.comThe mission of the Urban Land Institute is to provide leadership in theresponsible use of land and in creating and sustaining thriving com-munities worldwide. ULI is committed toBringing together leaders from across the fields of real estate and■■land use policy to exchange best practices and serve communityneeds;Fostering collaboration within and beyond ULI’s membership through■■mentoring, dialogue, and problem solving;Exploring issues of urbanization, conservation, regeneration, land■■use, capital formation, and sustainable development;Advancing land use policies and design practices that respect the■■uniqueness of both built and natural environments;Sharing knowledge through education, applied research, publishing,■■and electronic media; andSustaining a diverse global network of local practice and advisory■■efforts that address current and future challenges. Established in 1936, the Institute today has nearly 30,000 membersworldwide, representing the entire spectrum of the land use and devel-opment disciplines. ULI relies heavily on the experience of its members.It is through member involvement and information resources that ULIhas been able to set standards of excellence in development practice.The Institute has long been recognized as one of the world’s mostrespected and widely quoted sources of objective information on urbanplanning, growth, and development.Patrick L. PhillipsChief Executive Officer, Urban Land InstituteULI Center for Capital Markets and Real EstateDean SchwankeSenior Vice President and Executive Directorwww.uli.org/capitalmarketscenterUrban Land Institute1025 Thomas Jefferson Street, NWSuite 500 WestWashington, DC 20007202-624-7000www.uli.orgSponsoring Organizations
    • www.pwc.comISBN: 978-0-87420-220-5www.uli.orgI S B N 978-0-87420-220-59 7 8 0 8 7 4 2 0 2 2 0 55 4 9 9 5Emerging Trends in Real Estate®2013What are the best bets for investment and develop-ment in 2013? Based on personal interviews withand surveys from more than 900 of the most influen-tial leaders in the real estate industry, this forecastwill give you a heads-up on where to invest, whichsectors and markets offer the best prospects, andtrends in the capital markets that will affect realestate. A joint undertaking of PwC and the UrbanLand Institute, this 34th edition of Emerging Trendsis the forecast you can count on for no-nonsense,expert insight.Highlightsn Tells you what to expect and where the bestopportunities are.n Elaborates on trends in the capital markets, includingsources and flows of equity and debt capital.n Indicates which property sectors offer opportunitiesand which ones to avoid.n Provides rankings and assessments of a variety ofspecialty property types.n Reports on how the economy and concerns aboutcredit issues are affecting real estate.n Discusses which metropolitan areas offer the mostand least potential.n Describes the impact of social and political trendson real estate.n Explains how locational preferences are changing.