PWC Emerging Trends in Real Estate 2012


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PWC Emerging Trends in Real Estate 2012

  1. 1. Emerging Trends 20 in Real Estate ®1512 12 9 6 3 0-3
  2. 2. Emerging Trends in Real Estate® 2012A publication from:
  3. 3. EmergingTrends 20in Real Estate 12 ®Contents 1 Executive Summary 2 Chapter 1 Facing a Long Grind 4 Where Is Demand? 6 “Too Many Jobs Headwinds” 7 Low Interest Rate Medicine, Cap Rate Caution, Inflation Bailout 7 Ebbing Return Expectations 8 Transaction Markets Regear 9 (Multifamily) Development Resumes 9 Government Disarray 9 Improving Profitability11 Best Bets 201214 Chapter 2 Real Estate Capital Flows18 Banks18 Insurers19 CMBS22 Mezzanine Debt and Preferred Equity22 Wall Street Opportunity Funds22 REITs23 Pension Funds23 Nontraded REITs, High-Net-Worth Investors, Local Operators24 Foreign Investors26 Chapter 3 Markets to Watch30 The Top 2038 Other Major Markets40 Other Market Prospects42 Chapter 4 Property Types in Perspective43 Slow Progress46 Apartments48 Industrial50 Hotels52 Office54 Retail56 Housing58 Chapter 5 Emerging Trends in Canada59 Investment Trends62 Capital Markets64 Markets to Watch68 Property Types in Perspective73 Best Bets74 Chapter 6 Emerging Trends in Latin America75 Brazil Arrives76 Mexico No Go77 Other Markets: Colombia Draws Interest78 Interviewees Emerging Trends in Real Estate® 2012 i
  4. 4. Editorial Leadership Team Emerging Trends Chairs PwC Advisers and Researchers Mitchell M. Roschelle, PwC Adam E. Harvey Ken Griffin Patrick L. Phillips, Urban Land Institute Aleem F. Bandali Kevin Bennett Amanda Brown Lois McCarron-McGuire Author Ami J. Patel Lori-Ann Beausoleil Jonathan D. Miller Amy E. Olson Marc Normand Andrew Alperstein Maridel Gonzalez Gutierrez Principal Researchers and Advisers Andrew Popert Matt Lopez Stephen Blank, Urban Land Institute Arthur Chippin Michael Chung Charles J. DiRocco, Jr., PwC Brandon Bush Miriam Gurza Dean Schwanke, Urban Land Institute Brian Robertson Molly Caccamo Chris Vangou Nadja Ibrahim Senior Advisers Christine Lattanzio Natalie R. Cheng Christopher J. Potter, PwC, Canada Claude Gilbert Nelson P. Da Silva Susan M. Smith, PwC Daniel Cadoret Patricia Perruzza Daniel D’Archivio Paul F. Bradley Dave Chucko Paul Ryan David E. Khan Reginald Dean Barnett David M. Yee Richard Deslauriers David Swerling Rob Sciaudone David Voss Robin Madigan Dennis Johnson Ron J. Walsh Dominique Fortier Roxanna Bevilacqua Donald M. Flinn Russell Sugar Emerging Trends in Real Estate® is a trademark of PwC and is regis- Doug Purdie Sammi Ha tered in the United States and other countries. All rights reserved. Doug Struckman Scott Heal “PwC” is the brand under which member firms of Pricewaterhouse- Frank Magliocco Scott H. McDonald Coopers International Limited (PwCIL) operate and provide services. Fred Cassano Scott Tornberg Together, these firms form the PwC network. Each firm in the network Hugo Domingues Seth Promisel is a separate legal entity and does not act as agent of PwCIL or any Issa Habash Stephen Shulman other member firm. PwCIL does not provide any services to clients. Jag Patel Steve J. Hollinger PwCIL is not responsible or liable for the acts or omissions of any of its James A. Oswald Steve Tyler member firms nor can it control the exercise of their professional judg- Jasen F. Kwong Steven Weisenburger ment or bind them in anyway. This document is for general information Jeffrey Nasser Susan Farina purposes only, and should not be used as a substitute for consultation John Gottfried Susan Smith with professional advisers. Jonathan Jacobs Tim Conlon Joshua J. Mowbray Tom Kirtland © October 2011 by PwC and the Urban Land Institute. Katherine M. Billings Warren Marr Printed in the United States of America. All rights reserved. No part of this book may be reproduced in any form or by any means, electronic ULI Editorial and Production Staff or mechanical, including photocopying and recording, or by any infor- James A. Mulligan, Managing Editor/Manuscript Editor mation storage and retrieval system, without written permission of the Betsy VanBuskirk, Creative Director publisher. Anne Morgan, Cover Design Deanna Pineda, Muse Advertising Design, Designer Recommended bibliographic listing: Craig Chapman, Senior Director of Publishing Operations PwC and the Urban Land Institute. Emerging Trends in Real Estate® Sarah Nemecek, Research Associate 2012. Washington, D.C.: PwC and the Urban Land Institute, 2011. ULI Catalog Number: E44 About the Author ISBN: 978-87420-165-9 Jonathan D. Miller is a real estate forecaster who has written the annual Emerging Trends in Real Estate report since 1992.ii Emerging Trends in Real Estate® 2012
  5. 5. Executive SummaryF or 2012, U.S. real estate players must resign sentiment declines as selling interest increases. related markets scoring well include San Jose, themselves to a slowing, grind-it-out recov- Investors who bought at or near market bottom in Denver, and Raleigh-Durham. ery following a period of mostly sporadic 2009 and 2010 consider cashing in some gains. Among property sectors, everybody wantsgrowth, confined largely to “wealth island” real Many players back off from bidding on trophy apartments. Living smaller, closer to work, andestate markets—the primary 24-hour gateways properties in better markets, fearing that pricing is preferably near mass transit holds increasinglylocated along global pathways. A handful of cities outpacing the potential for recovery in net operat- appeal as more people look to manage expensesalso should continue to benefit from expansion ing incomes. Cap rate compression has ended; a wisely. Interest cools on offices, especially sub-in locally based technology- and energy-related leveling off is expected, with possible upticks for urban office parks: more companies concentrateindustries. Otherwise, most commercial markets some property sectors in certain markets. in urban districts where sought-after generation-Yhave stabilized, but will find marked improve- Most developers and homebuilders will talent wants to locate in 24-hour environments.ment in occupancies and rents relatively elusive. twiddle their thumbs in ongoing extended hiatus; Investors continue to place bets on high-ceilingDespite some stepped-up bargain hunting, without evident demand drivers, construction warehouses in the gateway ports and aroundcapital generally will continue to avoid commodity lenders hold back funding on most projects, international hub airports. And East Coast andreal estate in most secondary and tertiary cities. except for multifamily development. Expect a Gulf Coast ports vie to attract the most new ship-Among the property sectors, only apartments will ramp-up in apartment development across many ping traffic coming through a widened Panamascore especially well: demographic trends and the markets justified by plunging vacancies and Canal in 2014. Winning cities could transform intoaftermath of the housing bloodbath combine to continuing rent increases. When the odd new major distribution sites. Shopping center ownersincrease and sustain demand for multifamily units. office building goes forward, developers likely continue to face incursions from internet retailing: Enduring economic doldrums and the will employ green technologies and concepts; fortress malls and infill grocery-anchored centersabsence of dynamic jobs generators hamstring tenants begin to insist on cost-saving, energy- consolidate business at the same time that olderoverall demand, weighing on real estate markets. efficient systems. regional malls and fringe strip centers appear toWhile the nation’s lackluster employment outlook Shaken by stock market declines and anemic lose ground. The hotel recovery begins to flag:delays filling office space, the related drag in bond yields, investors gravitate toward equity real good news concentrates in the prime businessconsumer spending compromises growth in estate, but grow somewhat unsettled in the face of traveler/tourist gateways and in middle-marketretail and industrial occupancies and rents. limited property investment opportunities. “Face brands without food and beverage.Interviewees uniformly struggle to identify new it: real estate doesn’t offer enough growth poten- Canadian real estate markets remain theemployment engines: competition from overseas tial to satisfy” the demand, says an interviewee. most stable in North America. Institutions holdmarkets, technology gains, government and Although debt capital remains undersupplied, on to the best properties and avoid boom/bustpersonal debt loads, an aging population, and lenders and government regulators work hard to frenzies over pricing, while conservative fiscalglobal financial breakdowns all combine to stanch avoid a refinancing crisis with hundreds of billions policies discourage lax underwriting and licen-wage growth and hiring. As a result, businesses in commercial mortgages maturing over the next tious lending. A resource-rich economy does notthat are focused on squeezing profitability out three to four years. Well-capitalized borrowers and hurt either. Interviewees expect these markets toof productivity gains and families forced into solid, revenue-generating properties have no trou- weather world economic turmoil, particularly U.S.belt-tightening use less square footage. “The Era ble obtaining financing, while lenders and special contagion, but anticipate a slowdown in 2012 asof Less” forecast in last year’s Emerging Trends servicers will continue to extend and pretend as consumers and homebuyers back off a recenttakes firm hold. Housing markets continue to long as borrowers on less-stable assets can pay wave of uncharacteristic splurging. Eastern prov-founder in widespread borrower distress. Many something out of cash flows. Foreclosures will inces tied to U.S.-related manufacturing couldcash-strapped, prospective buyers can meet increase, but at a relatively restrained rate given be affected more than western regions, living offneither stricter credit requirements nor higher the number of still-troubled properties. energy stores and other commodities. Torontoequity hurdles. Casting a further pall on respon- The top investment markets remain the usual and Vancouver stake claims as top markets; theirdent outlooks, U.S. government disarray breeds suspects, led by the 24-hour global gateways— gateway status attracts business and a surge inuncertainty about policy affecting business and Washington, D.C., San Francisco, New York City, Asian investors parking capital in condo projects,investment decision making. Boston, and Seattle. Austin, the moderately sized which spring up in all directions. The two largest Return expectations continue to ebb, although Texas capital, sneaks into the number-two spot Latin American real estate markets head in differ-well-leased core real estate in leading markets will on the survey, benefiting from dynamics created ent directions. Brazil matures into more of a corecontinue to produce solid single-digit income- by its large university, the local tech industry, play, especially in Rio de Janeiro and São Paulo,oriented returns. Opportunistic investors ratchet government jobs, and regional energy-based where vacancies in top properties barely registerdown forecasts; even projections of returns in the economy. Houston and Dallas also solidify rank- and condo prices compete with New York City’smidteens look like a stretch as risk increases from ings off their oil and gas businesses and relatively best residential districts. Investors shy away fromsquirrely supply/demand fundamentals. Buying strong jobs advances. Other tech- and/or energy- Mexico as drug violence takes an unfortunate toll.Notice to ReadersEmerging Trends in Real Estate® is a trends and forecast publication now in its 33rd Private Property Company Investor or Developer 39.9%edition, and is one of the most highly regarded and widely read forecast reports in the Real Estate Service Firm 20.3%real estate industry. Emerging Trends in Real Estate® 2012, undertaken jointly by PwCand the Urban Land Institute, provides an outlook on real estate investment and devel- Institutional/Equity Investor or Investment Manager 16.6%opment trends, real estate finance and capital markets, property sectors, metropolitan Other 8.9%areas, and other real estate issues throughout the United States, Canada, andLatin America. Bank, Lender, or Securitized Lender 5.9% Publicly Listed Property Company or Equity REIT 5.0%Emerging Trends in Real Estate 2012 reflects the views of over 950 individuals who ®completed surveys or were interviewed as a part of the research process for this report. Homebuilder or Residential Land Developer 3.4%The views expressed herein, including all comments appearing in quotes, are obtained Throughout the publication, the views of interviewees and/or survey respondents haveexclusively from these surveys and interviews, and do not express the opinions of either been presented as direct quotations from the participant without attribution to any par-PwC or ULI. Interviewees and survey participants represent a wide range of industry ticular participant. A list of the interview participants in this year’s study appears at theexperts, including, investors, fund managers, developers, property companies, end of this report. To all who helped, the Urban Land Institute and PwC extend sincerelenders, brokers, advisers, and consultants. ULI and PwC researchers personally thanks for sharing valuable time and expertise. Without the involvement of these manyinterviewed more than 275 individuals and survey responses were received from 675 individuals, this report would not have been possible.individuals, whose company affiliations are broken down below. Emerging Trends in Real Estate® 2012 1
  6. 6. c h a p t e r 1Facing a Long Grind“Don’t let availability of capital cloud judgments. Demand driversdon’t exist, and fundamentals need to catch up.”S ome real estate players take comfort watching ample new supply will be added, “any improvement in demand can be capital pour into U.S. property markets, escaping from a amplified.” But even in the wealth islands, expect “a slow-going world of troubles plaguing other asset classes. “We are grind” where stubbornly high unemployment delays the filling ofback to spread investing, with no place else to put money for office space, while the consumer drag hurts shopping centersa current return,” one Emerging Trends interviewee says. But and industrial space. “Face it: real estate doesn’t offer enoughthe seemingly intractable economic and political vicissitudes growth potential to satisfy all the capital demand. People hadundercutting stocks and bonds eventually catch up to real been living and feeling large,” mostly off borrowed investors. Absent increasing occupancies and rents, “That’s gone. We’re living smaller,” says an flows inevitably retreat, with sometimes dire conse- Indeed, the “Era of Less” heralded in last year’s Emergingquences. For 2012, everyone must worry about leasing in soft Trends report, appears to have taken hold of real estate funda-markets where chronic economic malaise and technological mentals. During the past decade, the leverage-induced housingproductivity enhancements combine to dampen demand for and private equity booms numbed impacts from stagnatingspace. The hard reality is businesses have learned they can wages and declining worker benefits across most income strata.increase profits using less, while people just cannot afford to Now, massive ongoing government and personal deleverag-live in more. ing erodes spending, as well as individual financial security. In Most of the investment action concentrates in a handful general, people have less money or feel less inclined to spendof property-wealth islands—notably the diversified 24-hour what they have.gateways located along global trade routes, and the reliable Even more unsettling, unprecedented government impair-multifamily sector, buoyed by the after-effects of the housing ment gridlocks policy makers and roadblocks decisions thatmarket collapse. Following the money, investors secure capital might encourage business expansion and hiring. Concernin the safe-bet cities where the nation does most of its business grows that any concrete political action awaits the outcome ofand the affluent settle, supporting local economies. With some next November’s presidential election. In the meantime, theoverlap, markets generating jobs in resurgent tech and energy future of health care depends on a looming U.S. Supreme Courtbusinesses also gain adherents. Apartments, meanwhile, score decision; what happens to Fannie Mae and Freddie Mac is any-just about anywhere because not as many regular folks can body’s guess; needed reforms to tax policy remain up in the air;afford to own homes and need to rent. and Dodd-Frank banking regulations are entangled in lobbying Otherwise capital generally avoids the surrounding sea of machinations. “With all this uncertainty, nobody wants to make amostly commodity real estate. Local owners grapple in a ten- move,” spawning additional risk.ants’ market to lease space and secure cash flows without the For real estate investors, the big question—where are we inbenefit of cap rate compression to increase values. Because the cycle?—proves tough to answer. Almost three years after themost commercial developers cannot obtain financing and little economy hit bottom, recovery appears nearly stalled. Trophy Emerging Trends in Real Estate® 2012 3
  7. 7. “playing with existing inventory.” Class A properties lease up ExHIBIT 1-1 at the expense of Bs and increasingly obsolescent Cs. The Importance of Various Issues for Real Estate in 2012 most optimistic interviewees hope for “a path more like a rolling hill than a steep mountain climb,” featuring steadily increasing tenant demand “off very depressed levels,” controlled develop- 1 3 5 ment, and investors moving into secondary markets. no importance moderate importance great importance Despite widespread borrower distress, frustrated players Economic/Financial Issues uncover few bargains because lenders and special servicers hold back on disposing of problem assets in an enduring Job Growth 4.82 extend-and-pretend mode. As long as the economy goes side- Income and Wage Change 4.18 ways and government regulators turn a blind eye, the banks will Interest Rates 4.12 continue to resolve bad loans at a snail’s pace and help avoid a Global Economic Growth 3.99 refinancing crisis. Federal Fiscal Deficits/Imbalances 3.98 All these forces combine to bend recovery and limit opportu- Tax Policies 3.86 nity. Instead of a normal rebound, the cycle flattens in economic State and Local Budget Problems 3.83 languor without prospects for much meaningful improvement. New Federal Financial Regulations 3.62 As markets creep back in 2012, investors can no longer “just Energy Prices 3.55 ride the capital tide of rate compression, but instead must pick European Financial Instability 3.53 projects well and execute on management.” The risk grows of Inflation 3.51 overpaying for assets “based on rent spikes that aren’t there,” and developers—except for multifamily—remain frozen in sus- pended animation. Social/Political Issues “We’re in for a long slog.” Terrorism/War 3.07 Immigration 3.01 Social Equity/Inequality 2.55 Where Is Demand? Climate Change/Global Warming 2.22 Interviewees’ concern intensifies over a U.S. economy stuck in the doldrums. If the economy is not technically back in reces- Real Estate/Development Issues sion, exceedingly tepid gross domestic product (GDP) growth Vacancy Rates 4.10 fails to ameliorate the drags of chronic high unemployment, Refinancing 3.86 suffocating debt loads, high energy prices, and rising health Deleveraging 3.69 care costs. Roundly criticized government stimulus may have Construction Costs 3.67 generated signs of recovery through 2010 into 2011, but when Infrastructure Funding/Development 3.62 budget cutters and deficit hawks halted spending on various Future Home Prices 3.62 employment programs and began slashing public sector jobs, Land Costs 3.41 any momentum appeared to evaporate, and private companies CMBS Market Recovery 3.39 have failed to pick up enough slack. Many economists call Transportation Funding 3.29 for increasing stimulus to boost employment, but others favor NIMBYism 3.03 austerity and reducing deficits immediately. The resulting nasty Affordable/Workforce Housing 3.01 and supercharged political wrestling match over jump-starting Green Buildings 2.73 the economy may miss the point about the real problems facing 1 2 3 4 5 the nation’s future. Overcoming the following anchors weighing Source: Emerging Trends in Real Estate 2012 survey. down demand will not be easy. Global Jobs Arbitrage. U.S. wage rates increasingly become real estate values escalate due to cap rate compression, but more uncompetitive now that many jobs—not just manufactur- most other properties languish. “The bifurcation between ‘have’ ing—seamlessly can be transferred or outsourced via various properties versus the have-nots widens.” “Vacancies aren’t get- communications technologies to lower-cost overseas markets. ting worse, but barely show improvement, and rents roll down Among others, high-paying accounting functions and financial as new leases mark to market.” Tenants hold all the cards, and analysis head offshore. U.S. jobs do not disappear, but employ- instead of expanding, some shrink their space requirements, ers are not compelled to pay as much or hire as many domestic4 Emerging Trends in Real Estate® 2012
  8. 8. Chapter 1: Facing a Long Grindworkers. No wonder many Americans take pay cuts in newjobs. The corporate pension turns into a dinosaur, and employ- ExHIBIT 1-2ers increase worker cost burdens to pay for medical care and Investment Prospects by Asset Class for 2012other benefits. Insidiously, take-home pay either shrinks or doesnot grow enough to propel upward mobility for many people.“Manufacturing jobs exemplify what’s happening: new hires excellentearn at much lower wage rates than legacy workers. How canyou support a family on $15 an hour?”Productivity’s Costs. The vaunted corporate gains fromtechnology-enabled productivity enhancements may help fattencompany bottom lines—many firms sit on cash, “waiting out gooduncertainty”—but the advances lead to reductions in hiring anddemand for space. Mobile communications devices and wire-less internet links eliminate old-line, bedrock office jobs—fromsecretaries and travel agents to file clerks and messengers.More employees can work from home or in the field, reducingthe need for leased office space, and even computers take up Private Direct Real Estateless room. Hulking mainframes and workstations get replaced Investmentsby microchips and tablets. Shopping centers and industrialproperties take their own hits: logistics advances require lesswarehousing and reduced storage space in stores. Internet Publicly Listed Propertyshopping, meanwhile, relentlessly chews into market shares of Companies or REITsbricks-and-mortar stores. fair Publicly Listed EquitiesPersonal and Government Debt Loads. During the pastdecade, low interest rates and easy credit masked signs of fray- Investment Grade Bondsing living standards. As long as housing bought without muchequity appreciated and credit card offers piled up in the mail, Commercial Mortgage–consumer buying could accelerate into high gear apparently Backed Securitieswithout consequences—that is, until values plummeted and billspiled up. “Now earnings will need to go to savings, consumptionwill stay down, and it won’t come back to the way it was.” Oftenspendthrift governments (federal, state, and local) had followed Publicly Listed Homebuilderssuit, borrowing excessively to pay for—among other things—wars, social programs, and public employee benefits. Unwieldydebt service loads now constrain future government spending.That may translate into more layoffs not only of public employ- poorees, but also workers at a host of private sector governmentcontractors, including in the defense industry, at constructioncompanies, and in not-for-profit organizations. “Deleveragingand austerity take a toll on jobs.”Demographic Realities. Unlike Germany, Italy, and Japan, abysmalthe United States will not lose population during comingdecades as long as immigration continues. But increasing Source: Emerging Trends in Real Estate 2012 survey.percentages of seniors, as well as expected gains in the under-20-year-old population, could strain wage earners in prime adult The difficult jobs environment likely will keep more young adultsyears who overall will have more dependents per capita to sup- living at home longer, too. As more “retro Waltons” families poolport. Many older Americans may face tough times in tarnished resources and share living arrangements out of necessity togolden years, weighed down by limited savings, abrogated make ends meet, they won’t buy as much to furnish homes orpensions, and potentially diminished Social Security payouts. require as much space per capita. Emerging Trends in Real Estate® 2012 5
  9. 9. facilitators—lawyers, appraisers, brokers, and accountants— ExHIBIT 1-3 also feel the chill. Reality takes hold: the economy, including the Index Returns: Real Estate vs. Stocks/Bonds real estate world, cannot sustain so many highly paid middle- men engaged in taking real profits out of deals without providing 40% FTSE NAREIT Composite long-term economic benefits. 30% NCREIF 20% “Too Many Jobs Headwinds” “All these structural economic changes can’t be good for real 10% estate”; they augur “a long period of adjustment and ratchet- 0% ing down,” featuring “a weak hiring environment” until declining 1997 1999 2001 2003 2005 2007 2009 2011 labor and business costs reach a point where the United States -10% can compete again. Interviewees lament this “slow crawl” of -20% dismal jobs growth, which barely keeps pace with young people Barclays Capital entering the workforce (4.5 million Americans turn 21 annually) -30% SP 500 Government Bond Index and struggles to make up the nearly 9 million jobs lost during the -40% recession (only a fraction have been recovered). “Real estate health simply depends on jobs, but there’s no significant uptick.” Sources: NCREIF, NAREIT, SP, Barclays Group. Pockets of hiring occur in certain industries and parts of *2011 data annualized from second-quarter 2010. the country: ■■ The strong energy sector, driven by current high oil prices, Construction Slowdown. Slipping demand for space across helps Texas cities and some out-of-the-way places like North all sectors means developers and building companies will have Dakota (“not exactly a happening real estate market,” says less to do, slowing any rebound in construction jobs, a once- an interviewee). reliable employment bulwark. Population growth—forecast at 3 ■■ Technology boosts northern California, the Seattle area, million–plus annually—will fuel the need for more housing, but Boston, and smaller high-tech markets like Austin and Raleigh- not necessarily create as many construction-related jobs as Durham. homeowners and renters economize. The construction industry ■■ Health care expands everywhere. The steadily graying could have plenty of work rebuilding the nation’s increasingly population needs more medical attention, but work skews deficient infrastructure, but government deficits and political to lower-paid aides or highly skilled doctors, nurses, and wrangling could continue to short-circuit a ramp-up in public technicians. sector projects and resulting jobs. The country also experiences a shortage of engineers and specialized manufacturing artisans. “The economy produces Global Financial Morass. Massive deleveraging extends service jobs at the low end and very high-skilled jobs at the well beyond U.S. borders. “America is merely wounded; Europe other extreme.” People either don’t make as much money as risks death,” and China depends on selling goods into Western they used to in manufacturing and services or need special skill economies, which lose at least some buying power. “The global sets and talent to make more, and many find themselves cast economy really slows down” as the complexities of intercon- aside. Unfortunately, the nation’s education system, particu- nected economies and banking systems complicate finding larly its public schools, lags in producing enough trained and national or regional solutions. When Greece, let alone Italy or accomplished workers despite still boasting the world’s premier Spain, “spins toward economic Armageddon,” the entire global colleges and universities. Some attention-getting, new-age banking system shudders into a crisis state, and fragile stock industries like social media and digital communications “either and bond markets crater, wiping out more wealth, says an aren’t mass employers or reduce more jobs than they pro- interviewee. duce through automation and tech efficiencies.” Under these Financial Industry Recalibration. America’s once highly circumstances, how can office building absorption accelerate profitable and jobs-creating financial services industry struggles or consumers ramp up spending in malls? It likely won’t happen to regain its footing in these compromised markets. Most banks in 2012. make money, just a lot less. Without escalating values and easy credit to boost returns, the transaction arcade quiets down, fee volumes diminish, and bottom lines erode. Deal-maker6 Emerging Trends in Real Estate® 2012
  10. 10. Chapter 1: Facing a Long GrindLow Interest Rate Medicine, ExHIBIT 1-5Cap Rate Caution, Inflation Bailout Inflation and Interest Rate ChangesEssentially admitting the economy and housing market need Increase5further intensive care, the Federal Reserve reaches deep into its substantiallybag of tricks and holds down interest rates about as low as they Nextcan go. “The policy looks increasingly ‘Japan-y,’ where rates five yearsstay at extremely low levels and government budgets don’t allow Increase 4 moderatelyspending,” says an interviewee. In the real estate world, the lowrate environment and resulting extremely favorable spreadsover other investments ignite buying of prime properties at rich 2012prices, while weak fundamentals should be forcing down return Remain stable 3expectations. If not yet a new bubble, investors may need to at current levelsdial back to prevent creating one. Capitalization rates fall topre-crash 2006–2007 levels; they “reach absurd numbers” oncore assets “with crazy values.” Low interest rates perversely 2“encourage investors into taking greater risk since they can’t Inflation Short-term Long-term Commercial rates (1-year rates (10-year mortgagemake money in bonds or money markets.” treasuries) treasuries) rates Despite Fed assurances about keeping rates at present Source: Emerging Trends in Real Estate 2012 survey.levels past the election cycle, “people delude themselves if Note: Based on U.S. respondents only.they think rates couldn’t go up. Circumstances change, exog-enous shocks happen, and the Fed may need to act.” Investors 1-5), possibly signaling good news if dictated by a resurgenceshould plan defensively for possible rate spikes. “Don’t get in economic growth. Respondents also predict heightened infla-caught with floating-rate debt, and instead try to lock in long- tionary pressures: goods from Asia will cost more as Chineseterm fixed rates while the going is good.” Keeping financing wages increase, pricey gasoline could continue to raise trans-costs down over the investment holding period “can be as valu- portation and food expenditures, and apartment rents continueable an asset as the building itself, creating future gains when to advance. But higher costs for goods would crimp alreadyrates go up.” hard-pressed consumers in possible stagflation, and then what Survey respondents continue to forecast inevitable hikes: happens if the Fed decides to raise interest rates to tamp down“Eventually interest rates must revert toward the mean” (exhibit raging prices? Some interviewees continue to tout inflation as “the only way ExHIBIT 1-4 out” of the current morass of deflated values and overborrow- NCREIF Cap Rates vs. U.S. Ten-Year Treasury Yields ing. If inflation returns after nearly three decades in remission, the impacts may be lost on a new generation of office landlords 10-Year Treasury* who no longer insist on consumer price index bumps in leases. 10% Cap Rate Without these clauses, real estate loses its attractive hedging 8% characteristics in a high-inflation environment. “Fixed increases can be a disaster, and owners need to be careful.” 6% 4% Spread Ebbing Return Expectations 2% The return landscape for 2012 presents a mixed bag, and all depends on where and when investors bought, the amount 0% of property leverage employed, and asset quality. Institutional 1990 1993 1996 1999 2002 2005 2008 2011 investors in wealth-island core properties have enjoyed recent -2% handsome annualized performance gains ranging from the low to high teens. “Appraisers overcorrected on the downside”; -4% now they overcorrect on the upside, taking cues from “surplus Sources: NCREIF, Moody’s, Federal Reserve Board, PricewaterhouseCoopers LLP. *Ten-year treasury yields based on average of the quarter; 2011Q2 average is as of August 31, 2011. capital” compressing cap rates. Anybody who bought in the Emerging Trends in Real Estate® 2012 7
  11. 11. gateway cities at or near market bottom should now “take some nice chips off the table.” More recent core buyers should be sat- ExHIBIT 1-7 isfied with reliable, income-oriented returns without much, if any, Emerging Trends Barometer 2012 appreciation. “Slow demand means no further lift. They need to hold long term.” excellent For 2012, Emerging Trends survey respondents reasonably Sell predict an 8 percent return for the institutional-quality NCREIF index—just slightly lower than their forecast for real estate Hold investment trust (REIT) stocks (exhibit 1-6), which also focus on holding better-quality properties. “Real estate shouldn’t be Buy considered a screaming buy, but where else can you get a fair high-single-digit return? Cash flow should be the investment rationale.” Commodity property owners will fare considerably worse, especially in secondary and tertiary locations, which so far miss out on the capital wave. They hope investors, facing gateway abysmal sticker shock, shift attention to their markets, bidding up dor- 2004 2005 2006 2007 2008 2009 2010 2011 2012 mant prices still at rock bottom. But buyers in these places take Source: Emerging Trends in Real Estate 2012 survey. higher risk, given subdued leasing velocity. Rents and occu- Note: Based on U.S. respondents only. pancies may not move and could get worse. “Cap rates won’t compress in these markets,” says an interviewee. Opportunistic fund managers keep lowering their return more risk, and securing construction loans remains extremely expectations: “15 percent now may be a stretch.” They can’t problematic, except for apartment builders. “If you think you’re make a quick buck at steep prices without more demand for going into real estate today for a two-times return, you’re in for a space. Rents have done nothing, and leverage won’t work its long wait.” up-cycle magic today. Development strategies mean taking Transaction Markets Regear ExHIBIT 1-6 Brokers and deal makers pull their hair out. Transaction activ- U.S. Real Estate Returns and Economic Growth ity pauses in a handful of major markets like New York City and Washington, D.C., where hard-won, bidding-war acquisitions Total Expected Returns in 2012 now look “priced to disappoint.” After “underwriting aggressive NCREIF Total Return (core, unleveraged return) 7.88% rent spikes in a recovery, we need to wait for recovery to actually FTSE NAREIT Composite happen before buying again.” “No one priced risk adequately,” 40% one interviewee says. “Everybody became too optimistic too NCREIF quickly.” Some buyers will step up activity and poke around in 30% GDP secondary markets or off locations in primary cities, hunting 20% for higher-cap-rate bargains. Not enough deals have occurred in smaller markets to get a bead on values. Some capital may 10% seek to grab from a thin selection of A-quality properties in these 0% cities, but “these investors move up the risk spectrum, possibly 1997 1999 2001 2003 2005 2007 2009 2011* 2012* taking exaggerated gambles.” -10% Interviewees expect pricing to level off in the top markets— -20% “it’ll be scary if it doesn’t”—and the Emerging Trends barometer -30% NAREIT Total Return highlights how overall “buy” sentiment for 2012 will ebb, selling Index 8.29% appetites will increase, and more owners will hold until the -40% economy untracks (exhibit 1-7). The relative convergence in Sources: NCREIF, NAREIT, World Economic Outlook database. ratings for different strategic approaches only underscores the *GDP forecasts are from World Economic Outlook. NCREIF/NAREIT data for 2011 are annualized rising uncertainty in ambiguous markets. from second-quarter 2010, and the forecast for 2012 is based on the Emerging Trends in Real Estate 2012 survey. Buyers continue their tedious vigil for banks and special ser-8 Emerging Trends in Real Estate® 2012
  12. 12. Chapter 1: Facing a Long Grindvicers to dispose of more underwater assets just as the number than core deals provide, developers sense dollars are out there,of drowning borrowers expands on the refinancing bubble. “You a tension exists for capital to do something—all leading to someneed extreme patience until debt reprices.” Most interviewees inane projects driven by capital availability, not need.” Pent-upgive up on predicting lender moves, especially since property desires for developers to get back to work might be betterfundamentals remain compromised, but expect gradually focused outside the United States by exporting skills to Brazilstepped-up dispositions. Many assets bottleneck in overlever- and other Latin American countries, as well as some Asian andaged, closed-end opportunity funds. “They can’t be easily Middle East markets. “They don’t call them developing countriesrefinanced or sold because of complex partnership structures.” for nothing.”Aggressive buyers of distressed debt pools “likely overpay toget some good assets at the expense of taking a lot of bad.” Government Disarray(Multifamily) Development No matter their political stripes, interviewees rage over “unprec- edented government dysfunction” and “inability to deal withResumes issues,” breeding more market uncertainty and failing to spur meaningful jobs growth. “The political system is now a riskStarving developers champ at the bit for any action after a factor: Can politicians continue to play with hand grenades anddebilitating four-year hiatus, while property owners humbly real- pins out?” Here are some of the biggest concerns:ize that the dearth of new building has been their saving grace ■■ In a presidential election year, “you’d figure no one wants toand reluctant lenders perfunctorily ignore most construction screw up on jobs,” but small-bore employment programs runloan requests—except in apartment markets. In fact, multifamily into deficit-slashing buzz saws and tax-cut adherents.developers and their equity partners can obtain “stone-cheap” ■■ Dodd-Frank regulatory reforms’ “attempts to put the geniefinancing from a host of sources, including Fannie Mae, Freddie back in the bottle” could unsettle lenders and compromiseMac, and even insurance companies. Expect high-rise and mid- refinancing problem loans. For now, financial industry lobbyistsrise projects to mushroom in many markets across the country seem to hamstring rulemaking. “No one knows what will comeduring 2012. “The activity picks up faster than expected,” with out in the fine print,” says an interviewee.projects meeting substantial demand in neighborhoods expe- ■■ In particular, commercial mortgage–backed securitiesriencing mid- to low-single-digit vacancies. “A lot of multifamily (CMBS) reserve requirements and rating-agency roles remainwill get built.” Developers “race to get out of the ground early very much unresolved despite recent market calamity.before lenders start questioning the demand for all the new units.” ■■ Lawmakers go into rope-a-dope on whether to salvage Early apartment developments almost cannot miss. “If existing Fannie Mae and Freddie Mac. Homebuilders fear scuttling theproperties sell at a five cap rate and you can build new at a seven, agencies will set back housing markets, raising borrowing coststhen you build, as long as you can get the money.” Eventually, for already whipsawed buyers, and apartment investors will loseoversupply becomes an issue after a comfortable two- to three- their primary financing source, “causing great damage.”year window. “We all will drink the Kool-Aid,” says an interviewee. ■■ Health care costs rise precipitously despite 2010’s highly“Housing will never come back and everyone wants apartments, controversial legislation. The new law’s main features take effectbut at some point a reversal happens.” Apartment investors at in 2014, if not overturned by the U.S. Supreme Court before then.low cap rates today need to weigh the impact of all these projects ■■ Investors wonder about tax rates and deductions. Hacklesheaded into the pipeline. Eventually raising rents will be more rise over the vulnerability of favorable carried interest treatments.difficult for old product competing against just-completed units, “It’s a mess for doing business,” and the election may notespecially in low-barrier-to-entry markets. resolve the gridlock. Otherwise, “it’s just not a time to build” profitably. Inter-viewees generally agree about the overall commercialdevelopment landscape: “Retail will be terrible for years”; “noneed for more office”; and “hotel is overbuilt, especially outside Improving Profitability “Chronically optimistic” property players only reluctantly comethe major tourist and business cities.” For now at least, many to terms with the more limited opportunities in a shrunkenlenders adopt a “new realism”—“you cannot loan on spec,” and industry (“which eliminated more jobs than most”). Investors“the farther away from gateway markets, the higher the leasing talk the brave game that they will accept coupon-clipper returnsthresholds.” Glacial-pace improvement in occupancies severely over long-term holds, but they still really want the big, quicklimits chances for project success, but some eager equity pops, which seem out of reach now. For starters, the lower-capital will bankroll new office space and even hotels, betting to return environment reduces the chance for outsized managercatch a demand spurt at opening. “Investors want more upside Emerging Trends in Real Estate® 2012 9
  13. 13. ExHIBIT 1-8 Firm Profitability Forecast 2012 Prospects for Profitability in 2012 by Percentage of Respondents 1.6% 1.3% 4.7% 6.1% 23.5% 20.8% 26.0% 11.0% 4.9% Abysmal Very Poor Poor Modestly Fair Modestly Good Very Good Excellent Poor Good Source: Emerging Trends in Real Estate 2012 survey. Note: Based on U.S. respondents only. promotes. Developers cannot make as much, even if they stay in business. For brokers, the buy-and-flip game is over, reduc- ExHIBIT 1-9 ing transactions and attendant fees, “although they have been Real Estate Business Prospects for 2012 doing better.” Despite the angst, survey respondents hopefully expect their firms to record decent profits in 2012: 87 percent forecast fair or better results, and 42 percent expect to register REITs 5.88 good to excellent bottom lines by year end (exhibit 1-8). REITs, multifamily developers, and fund managers should have at least Insurance Company 5.79 a “modestly good” year; while this is no surprise, homebuilders Real Estate Lenders and architects gasp to hang on (exhibit 1-9). Commercial/Multifamily 5.66 To keep profits up, “companies go through a lot of leader- Developers ship change and try to do more with less, “pushing people as hard as they can.” CEOs and senior leaders require “different Real Estate Investment 5.43 Managers people skills.” It isn’t about deploying capital at all costs, but more about managing operations, assets, and expenses. “Top Real Estate Brokers 5.31 executives need to show prudent management abilities,” take care of investors, and “motivate teams in a slow-growth envi- Private Local Real 5.11 ronment where you can’t make as much money or do as many Estate Operators deals.” Hiring is confined to companies that “have capital or Bank Real Estate Lenders 4.97 access to capital”—primarily REITs and investment managers. The fund managers pare back on deal makers and bulk up on Real Estate Consultants 4.80 asset managers. They also need client-facing executives to play defense, do mea culpas over legacy portfolios, and, most important, raise new money. In line with keeping lean opera- CMBS Lenders/Issuers 4.39 tions, businesses show more interest in lower-paid young talent with potential and jettison more experienced senior workers who Architects/Designers 3.76 are higher on the pay scale. Homebuilders/Residential 2.98 Land Developers 1 5 9 abysmal fair excellent Source: Emerging Trends in Real Estate 2012 survey. Note: Based on U.S. respondents only.10 Emerging Trends in Real Estate® 2012
  14. 14. Chapter 1: Facing a Long GrindBest Bets 2012 Value-Add Plays. Instead of trying to justify “jaw-dropping” prices for core quality assets, look for class B properties in goodExcept for multifamily, no markets or property sectors offer infill markets “that haven’t been shown any love” over the pastsure-shot opportunities for big gains in 2012. Owners can feel five years. Apartments usually fit the bill, but certain well-locatedrelatively secure in leading gateway cities, and buyers should offices and hotels could profit from renovations and reposition-focus on the few markets generating jobs—typically where ing in anticipation of eventual market recovery. The availabilitytechnology and energy companies concentrate. Market-timing of low-cost debt can help fund improvements and buttressbuyers at the 2009 rock bottom can pocket modest upside, eventual returns.selling into what’s left of the capital wave. Commercial develop- Fixed-Rate Debt. Owners should lock in long-term fixed-rateers and construction lenders should best remain in hibernation financing on assets while they can. Interest rates could eas-outside of undertaking the odd project in a 24-hour bastion. The ily track up again during expected holding periods withoutusual-suspect best-bet sector performers—fortress malls, infill offsetting gains from fundamentals. Believe those crying “It’sneighborhood centers, gateway industrials, and business center just a matter of time.” If rates increase, floating-rate debt couldhotels—should do relatively well. Investors can continue to dramatically cut into net operating revenues, while relatively low-capture attractive stakes by recapitalizing select assets in need interest, fixed-rate debt would help cash flows and boost futureof refinancing. But nobody should argue with anyone sitting on investment until the economy shows real signs of resuscitation. Recap Troubled Equity. The number of borrowers needing refinancing only grows as troubled loans from the market lend-Investment ing peak reach terms. Many decent assets remain structurally impaired and need cash infusions to remain competitive in bid-Caution Still Rules. “It’s not the time to be all in; investors ding for tenants, who command pricey concession packages.should maintain liquidity” and focus on demand trends. Stop More motivated borrowers, working with senior lenders, willfollowing the lemmings on capital moves. Instead, concentrate strike favorable deals on mezzanine debt and preferred equityon the few markets showing hiring and leasing gains; steer clear to stabilize assets and salvage something. At low interest rates,of places with compromised longer-term growth prospects; and investors can achieve especially favorable risk/return spreads.don’t count on typical recovery tracks materializing the way theyhave after past recessions. “If you haven’t figured it out by now, Distressed Debt. Banks and special servicers will continuethis time is different.” to dribble out loan pools with various embedded gems. The hard part is figuring out if the good assets in offerings are worthBlue-Chip Gateways. These relatively safe harbors all have acquiring given all the accompanying dreck. Some buyers ofissues: a Wall Street slowdown could hurt New York City, similar Resolution Trust Corporation (RTC) debt made out well inWashington confronts possible government cuts, and San the 1990s, but rode a sharp market upturn to riches. This time itFrancisco is always volatile—but over time, assets in 24-hour may not be so dependably outperform because they lie on importantglobal commercial routes and attract money from all over the Land Holds. Cash buyers can fetch entitled single-family lotsworld. The value of their barriers to entry also should never be for cents on the dollar. “These are real steals.” But purchasersunderestimated. “Prices may be outrageous in the bigger cities, may sit a long time before the homebuilding market comes back.but do you have confidence investing elsewhere?” For 2012, The farther out on the metropolitan fringe, the longer the wait.holders and sellers may do better than buyers.Job Centers. If real estate is “all about jobs,” then head to the Developmentfew cities where employment growth actually occurs. Besidesthe gateways, the current front-runners rely on energy, high tech, Apartment Boom. Existing apartment stock in many marketsand health care–related industries, as well as universities and cannot meet demand for units from surging numbers of gen-government offices. Austin becomes a current favorite because Yers, housing-bust refugees, and immigrants. If the economyit claims all these attributes. Bigger Texas cities—Houston and picks up, renter interest could intensify further from people dou-Dallas—also sustain investor interest because of their energy bling up or young adults living at home but looking for their ownbackbones. High tech spurs Seattle and San Jose. Denver also space. Developers have little trouble convincing constructionoffers a dose of energy and technology. But investors beware: the lenders, given the demographic evidence, and they can negoti-current high flyers tend to boom/bust, and some of these markets ate favorable deals with builders and contractors, who needare susceptible to overbuilding. Don’t take your eye off the ball. the work. Commercial sectors offer very few opportunities, like Emerging Trends in Real Estate® 2012 11
  15. 15. occasional build-to-suits, the odd class A office building or hotel chains and attract more shoppers away from their weakening in a 24-hour market, and possibly shopping centers in burgeon- competition—centers situated near older or more commodity- ing Hispanic areas adapted to attract retailers who specialize in class housing districts. Grocery store–anchored centers with serving Latin American populations. leading supermarket and drug store chains still command plenty of traffic from necessity shoppers, and investors love the Go Green. Tenants want energy-saving technologies simply steady cash flows. to reduce costs. “It’s not about tree hugging; it’s about bottom lines,” says a developer. The modest extra upfront project costs Coastal Port Industrial Space. Global trade will power can produce long-term operating savings, which help improve export activity around the nation’s primary seaboard ports, building values and ensure competitiveness over time. where traditional big-box warehouse distribution assets rebound after experiencing uncomfortably high vacancies. All eyes focus on which East Coast cities can position themselves to capture Property Sectors Pacific container-ship traffic slated to come through a widened Panama Canal in 2014. Some winners will turn into new indus- Multifamily Any Way You Like It. It almost doesn’t matter trial hubs, but first need to dredge harbor channels to handle what part of the country is concerned, interviewees go totally deep-hulled vessels. Miami, Charleston, Savannah, and Norfolk gaga over apartments: buy class A, value-enhance class B, look like prime contenders, and New York/New Jersey will not develop from scratch, purchase in infill areas, acquire in gate- be left out. Houston should pick up business along the Gulf way cities, or hold in lower-growth markets. “Even buy class C Coast. and upgrade, spend a little more, hold a little longer—demand will be there.” The only caveat: avoid severely affected hous- Business Center Hotels. “It’s the point in the cycle where ing markets where a surfeit of empty single-family homes will lodging makes sense.” But only the major 24-hour cities attract compete as rentals. consistently strong combinations of business and tourist travel- ers to sustain occupancies and advance room rates during the Fortress Malls, Infill Shopping Centers. Location and week, as well as into weekends. Middle-market hotels without retailer quality gain importance in the shopping center world, food and beverage service lure budget-conscious travelers fighting against e-commerce incursions. Aptly named fortress without outsized operation overheads, enhancing bottom-line malls, near upscale suburban neighborhoods and strategic results. highway intersections, continue to concentrate the top brand12 Emerging Trends in Real Estate® 2012
  16. 16. Chapter 1: Facing a Long GrindTrophy and Medical Offices. Gateway class A office spacealways commands attention, but interest flags elsewhere, espe-cially in the suburbs. Expect slim pickings when dipping intosecond-tier cities, and forget about office parks. Niche-sector,medical office space gains favor: “The tenants are recession-proof,” and “the health care act will help spur demand as morehospital procedures move into doctors’ offices.” Over the longerterm, a bulging senior citizen population promises to expandneeds for various outpatient facilities and clinics.Housing Buys. The battered housing sector offers the bestgenerational buying opportunities for oceanfront condos ordream suburban homes. Prices edge up off nadirs in bettermarkets after unprecedented declines and mortgage ratesremain highly attractive, if purchasers can muster enoughequity and adequate credit scores. Oversupply of existingstock deflates homebuilder hopes, and 25 percent of borrowersremain underwater. Housing for seniors and student housingremain demographic plays, and manufactured-home sites coulddo well in the down economy: operators can earn income wait-ing for future land development opportunities. Emerging Trends in Real Estate® 2012 13
  17. 17. c h a p t e r 2Real EstateCapital Flows“It’s a real estate market withtoo many dollars for too few opportunities.”T he stock market bounces around producing a decade- estate landscape mostly misses out. When institutional investors long goose egg, and bonds throw off tiny yields. By talk up the property markets today, they really mean a handful default, capital turns to real estate: its cash-flowing of big cities, the best suburban fortress malls, and their latestreturns, lease structures, and inflation-hedging characteristics apartment purchases. They have no interest in most assets incommand attention. “When treasuries return next to nothing, a second-tier cities or outer suburban rings, many owned by bor-6 percent coupon on a piece of real estate is not so bad,” says rowers whose mortgage balances outstrip values, which havean interviewee. But in today’s problematic market, always-fickle fallen into the pits. And why should they when the economycapital also proves “highly selective” and “concentrated.” It’s stays in the dumps and prospects appear so limited for anyinterested in real estate, but only in a relatively narrow segment occupancy or rent growth?of the property markets, bidding up prices on the best com- For 2012, the purveyors of capital will struggle with whether tomercial assets in the more secure wealth islands and racing into cool it in the popular gateways, take a breather on apartments, orthe attractive multifamily sector. The rest of the underwater real take a flyer on ferreting out true bargains among mostly commod- ExHIBIT 2-1 Moody’s/REAL Commercial Property Price Index 2.0 All Properties—National Index 1.9 1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Moody’s, Real Estate Analytics LLC, MIT Center for Real Estate, Real Capital Analytics. Note: This index is a periodic same-property round-trip investment price change index of the U.S. commercial investment property market. The index is based on the Real Capital Analytics database, which attempts to collect price information for every commercial property transaction in the United States over $2.5 million in value. Emerging Trends in Real Estate® 2012 15
  18. 18. ity properties in off-the-beaten-path markets. Big pension plan sponsors still must extricate themselves from various failed limited ExHIBIT 2-3 partnerships and tally up more losses from fund investments Change in Availability of Capital for Real Estate gone belly-up. For all the PR about restored balance sheets, in 2012 money center banks dribble out dispositions of distressed assets, and many regional bankers remain basket cases, weighed down Equity Capital from by bad loans on properties no one wants almost at any price. Foreign Investors 6.23 Real estate may look better than other asset classes, but that does not mean the property sector has much to offer. Private Equity/Opportunity/ 6.00 Hedge Funds Too Much Equity. Respondents to the Emerging Trends surveys anticipate saturated equity capital demand: 56 percent Institutional Investors/ 5.95 Pension Funds of respondents say the market in 2012 will be moderately to substantially oversupplied, given the opportunities—similar to Nontraded REITs 5.65 results posted in 2011’s report (exhibit 2-2). “It’s mind-blowing how everyone seems to have a real estate fund.” Foreign inves- Private Local Investors 5.60 tors, taking advantage of attractive currency exchange rates, head the list of active acquirers, followed by private equity firms, Public Equity REITs 5.56 pension funds, private investors, and REITs. “A tremendous amount of capital sits waiting to be deployed.” Debt Capital from Debt Shortage. Respondents also continue to forecast a lack Insurance Companies 5.98 of critically needed debt capital as hundreds of billions of trou- Nonbank 5.76 Financial Institutions ExHIBIT 2-2 Commercial Banks 5.65 +7+23+14+39+17 Real Estate Capital Market Balance Forecast for 2012 Mezzanine Lenders 5.61 Equity Capital for Investing Securitized Lenders/ 5.48 CMBS Mortgage REITs 5.37 7.3% 22.5% 14.0% 39.1% 17.2% Substantially Moderately In balance Moderately Substantially Government-Sponsored 4.42 Entities +20+43+23+13+1 undersupplied undersupplied oversupplied oversupplied 1 5 9 Debt Capital for Acquisitions very large stay the same very large decline increase Source: Emerging Trends in Real Estate 2012 survey. Note: Based on U.S. respondents only. 20.3% 43.1% 22.9% 12.5% 1.4% Substantially Moderately In balance Moderately Substantially bled mortgages reach their terms and require refinancing. Led +17+42+31+9+1 undersupplied undersupplied oversupplied oversupplied by insurance companies, which focus on core properties, all the Debt Capital for Refinancing major debt suppliers should be active in the lending market in 2012 (exhibit 2-3), but they will be unable or unwilling to meet all the financing demand. Nearly 63 percent of respondents project that the debt markets will be moderately to substantially under- supplied during the year, blaming the spotty CMBS recovery 16.5% 42.4% 31.2% 9.2% 0.8% Substantially Moderately In balance Moderately Substantially and bankers’ reluctance to lend when interest rates are so low. undersupplied undersupplied oversupplied oversupplied In fact, “low rates may have the unfortunate effect of delaying resolution of some of the refinancing problems.” Lenders’ also Source: Emerging Trends in Real Estate 2012 survey. Note: Based on U.S. respondents only. will continue their preferred strategy of extending many loans16 Emerging Trends in Real Estate® 2012