An overview of quantitative easing and U.S. bond markets, why interest rates matter, and what future policy moves and global developments mean for U.S. capital inflows going forward.

1. 1
CRE Capital Markets Review:
How Important Are
Bond Markets For
Commercial Real Estate?
Heidi Learner

2. Presentation Overview
2
QE and Bond Market Overview Interest Rates and the Linkage to
Commercial Real Estate
The Range of Outcomes

3. Anatomy of a Crisis: Part I
Prices rarely move in one direction
3

4. Anatomy of a Crisis: Part II
The great reflation: coming to an end?
4

5. QE Recap
What is quantitative easing?
5
Quantitative Easing:
“A nonconventional policy… in which the central bank provides additional support for the
economy and the financial system by expanding the monetary base, for example, through the
purchase of long-term securities.” -Chairman Bernanke, 5/25/2010
The Fed’s Balance Sheet Over Time

6. Timeline of QE in the U.S.
“Once is never enough”
6
QE I: December 2008 to March 2010
• $600B in agency mortgage-backed securities (MBS) and agency debt.
• Expansion March 2009: addl $750B in MBS and agency debt; $300B in USTs.
QE II: November 2010 to June 2011
• $600B of longer-dated treasuries ($75B per month).
Operation Twist: September 2011
• Purchase $400B of bonds with maturities > 6 years; sale of bonds with
maturities < 3 years.
• Extension with additional $267B in purchases through 2012.
QE III: September 2012
• Open-ended purchase commitment for $40B in agency MBS until the labor
market improves "substantially."
• Expansion December 2012; up to $40B in agency MBS per month and $45B of
longer-term USTs.
Taper: December 2013
• Purchases scaled back to $10B at each meeting; program ends October 2014.

7. Significant Rate Volatility Despite Stable Short Rates
7
Fed Funds target in August 2007 = 5.25%
Fed Funds target in December 2008 = 0 – 25 bps

8. The Bond Market By Country of Issuer
The U.S. vastly dominates the debt market
8

9. The US: Very Much A Culture of Debt
September YTD 2015 total issuance is up 10.2% vs. September YTD 2014
9

10. 10
Interest Rates and the Linkage on Commercial Real Estate

11. Why Do Bond Markets Matter to Real Estate?
Impact is not limited to domestic purchasers
11
Benchmark
• Government yields set a risk-free benchmark for returns
Financing
• CMBS and bank loan spreads are often a function of government
yields/ swap spreads
Currency Impact
• Relative bond yields between countries may influence currency
appreciation
Liquidity
• Shifts in the liquidity of government debt (and corporate debt)
may influence the attractiveness of other long-term assets

12. CRE Volume in the Americas: Half of All Activity
12
Global Volume by Region
(office, industrial, retail, apartments and hotels)

13. One Reason U.S. Debt Remains Attractive
The global search for yield is still on
13

14. Cap Rates: Tumbling With Treasury Yields
14

15. The Fed: The Only Rate Hike In Sight?
15

16. The Strong Dollar Has Not Hampered Global Inflows
16
Cross-Border Investment in U.S.
Office, Industrial and Retail Properties
U.S. Investment Activity
By Buyer Type

17. 17
What (and Where) Are the Potential Hazards?

18. A China Phenomenon?
18
Direction Acquisitions by Cross-Border Investors in the U.S.
Rolling Four Quarters
Source: Real Capital Analytics

19. Cross-Border Activity (office, industrial and retail)
No, It’s Not All About China
19Source: Real Capital Analytics
Source
2012 Volume
($M)
2013 Volume
($M)
2014 Volume
($M)
2015 YTD
Volume ($M)
Canada 7,424.5 7,491.0 6,047.0 8,717.5
Norway n/a 1,982.8 4,356.9 9,168.4
Singapore 847.3 417.8 1,303.3 8,614.7
Germany 1,805.6 2,250.7 2,246.1 2,926.7
Australia 1,137.6 1,027.3 880.6 2,736.1
Hong Kong 916.8 512.7 1,885.5 1,491.2
China 84.4 2,274.6 1,521.5 747.4
Switzerland 561.3 1,546.9 824.5 1,572.9
South Korea 1,059.7 1,568.2 541.0 903.2
Israel 910.8 1,485.7 1,057.6 534.6
All Others 5,559.2 5,239.8 5,541.5 5,659.1

20. Who Owns U.S. Debt?
Japan is no longer in top place…
20

21. China Estimated Capital Flow
Inflows = FX purchases by banks + change in FX deposits
Outflows = Monthly trade balance + direct investment balances
21
Example capital outflow
An exporter who chooses to
keep FX earnings offshore

22. What Could Stop the Flow?
Capital Controls
22
BEIJING—29 September
China has capped the amount of money Chinese holders of bank and
credit cards can withdraw outside the country, in its latest effort to
discourage people from moving badly needed capital offshore.
China’s foreign-exchange regulator put a new annual cap on overseas
cash withdrawals using China UnionPay Co. bank cards, a UnionPay
official said on Tuesday. Under the new rules, UnionPay
cardholders can withdraw up to 50,000 yuan ($7,854) overseas
during the last three months of this year, and the amount will be
capped at 100,000 yuan for all of next year, the official said.
The new cap is in addition to an existing 10,000 yuan daily withdrawal
limit, part of China’s curbs on how much money can flow across its
borders.

23. Will Chinese Sell Its U.S. Treasuries for Dollars?
23
China Monthly Foreign Exchange Reserves

24. U.S. and Global Risks
A range of outcomes
24
Low interest rates
“Reach for yield”
encourages
purchases of
riskier assets
“Too much money
chasing too few
goods”
Fundamentals are
unchanged
Aggregate demand
is still weak
Inflation
Deflation

25. Further USD Appreciation
On the one hand…
25
USD Strength: Hurting U.S. Earnings
 S&P 500: % of sales to foreign countries: 47.8% in 2014
 Scarce capital investment despite “cash-rich” corporate balance sheets
USD Strength: Helping U.S. Hard Assets
 Fear of another devaluation: may prompt more capital flight out of China
 Will US owners be net sellers?
 US CBD office prices up 40% since pre-recession peak
 Q2 2011 - Q2 2015, San Francisco office rents up 87%; prices up 121%

26. Eventual Rate Hikes by the Fed
On the one hand…
26
Time for a Recession?
 The U.S. economy is entering its 7th year of recovery.
 Employment gains and housing price gains: beginning to slow.
Rate Hikes Widely Telegraphed
 An eventual rate hike by the Fed: should be no surprise
 Prior periods where rates have risen have been accompanied by
positive returns in many cases (REITS)
 Could further strengthen bank profitability

27. Questions?
27
Heidi Learner
Chief Economist
hlearner@savills-studley.com
(212) 326-8648