University of Denver Franklin L. Burns School of Real Estate & Construction Management. Dividend Capital Research

Transcription

1 Glenn R. Mueller, Ph.D. Professor University of Denver Franklin L. Burns School of Real Estate & Construction Management & Real Estate Investment Strategist Dividend Capital Research

2 Dr. Glenn Mueller Real Estate Investment Strategist Dividend Capital Group Professor University of Denver Franklin L. Burns School of Real Estate & Construction Management Visiting Professor Harvard University, & summer executive education semesters Guest Lecturer Wharton School, Yale, Berkeley, Ohio State, Indiana Univ., UNC, USC, European Business School, University of Regensburg Previous Experience Legg Mason Real Estate Investment Strategist Head of REIT research group PriceWaterhouseCoopers National Director of Real Estate Research Alex. Brown Kleinwort Benson Head of Real Estate Research Prudential Real Estate Investors Vice President of Real Estate Research B.S.B.A. in finance from the University of Denver MBA from Babson College Ph.D. in Real Estate from Georgia State University

3 Individual Investor Characteristics Little Cash High leverage and risk tolerance Short Time Frame Institutional Investor Characteristics Lots of Cash Lower leverage and risk tolerance Long Time Frame But - Periodic Performance Measurement

4 Investment Asset Classes Stocks Bonds Cash Real Estate (Commodities?) (Private Equity?) Domestic? Global?

5 Why Real Estate Fits a Portfolio = SIZE Why Real Estate Fits A Portfolio = Size U.S. Real Estate vs. Other Asset Classes - 12/10 U.S. Real Estate vs. Other Asset Classes (December 2010) Source: CoStar2010, Federal Reserve, December 2010 and The Bond Market Association, This investment is subject to real estate risks associated with operating and leasing properties. Additional risks include changes in economic conditions, interest rates, property values, and supply and demand, as well as possible environmental liabilities, zoning issues and natural disasters.

6 All Real Estate = Half - 12/06 U.S. Real Estate Values = $33.3 Trillion Source: Prudential Real Estate Investors, December 2006.

7 Exhibit'1 5 Key Macro Economic Factors Population Growth Exhibit'2 GDP'Growth' Employment'Growth' 5.0%' 4.0%' 3.0%' 2.0%' 1.0%' 0.0%' 1.1%$ 1.8%$ 2.5%$ 3.6%$ 3.1%$ 2.7%$ 1.9%$ 0.0%$ 2.8%$ 2.8%$ 4.4%$ 4.4%$ 3.1%$ 4.0%' 3.0%' 2.0%' 1.0%' 0.0%' )1.0%' )2.0%' 0.0%$ %1.2%$ 1.1%$ %0.3%$ 1.7%$ 1.8%$ 1.1%$ %0.6%$ %0.5%$ 1.0%$ 2.0%$ 3.3%$ 2.9%$ )1.0%' )3.0%' )2.0%' )3.0%' -2.6%$ 2001' 2002' 2003' 2004' 2005' 2006' 2007' 2008' 2009' 2010' 2011' 2012' 2013' 2014' Source:(Moody s(précis(u.s.(metro(december(2010;((bureau(of(economic(analysis((bea.gov) Exhibit'4 6.00%' 5.00%' 4.00%' 3.00%' 2.00%' 1.00%' 0.00%' 5.02%& 4.61%& 3.63%& 1.79%& 4.0%& 1.22%& 4.3%& 4.3%& 1.68%& 5.19%& 3.56%& 4.8%& 4.6%& Interest'Rates' 5.30%& 2.91%& 3.7%& 3.3%& 3.2%& 3.5%& 0.69%& 0.34%& 5.0%& 0.46%& 5.2%& 2.30%& 5.0%& 4.40%& 4.11%& 2001' 2002' 2003' 2004' 2005' 2006' 2007' 2008' 2009' 2010' 2011' 2012' 2013' 2014' 10.Year& Treasury& & 91.&Day& LIBOR&& & & & & )4.0%' )5.0%' %4.3%$ 2001' 2002' 2003' 2004' 2005' 2006' 2007' 2008' 2009' 2010' 2011' 2012' 2013' 2014' Source:(Moody s(précis(u.s.(metro(december(2010,(bureau(of(labor(statistics((bls.gov) Exhibit'3 4.0%' 3.5%' 3.0%' 2.5%' 2.0%' 1.5%' 1.0%' 0.5%' 0.0%' )0.5%' )1.0%' 2.8%% 1.6%% 2.3%% 2.7%% 3.4%% 3.2%% Infla9on'' 2.9%% 3.8%%,0.3%% 2001' 2002' 2003' 2004' 2005' 2006' 2007' 2008' 2009' 2010' 2011' 2012' 2013' 2014' 1.6%% 1.6%% 2.5%% 2.9%% 2.5%% Source:(Moody s(précis(u.s.(macro(september(2010(&(u.s.(metro(december(2010;(wsjprimerate.com/libor Source:(Moody s(précis(u.s.(macro(september(2010;(bureau(of(labor(statistics((bls.gov)

8 Demand For Real Estate Employment growth lags GDP growth by 2 to 4 quarters GDP turned positive in 3Q09 Employment turned positive in 2Q 2010 GDP & EMP Forecast 8.0% 6.0% % % % % GDP EMP %

9 US Commercial Real Estate Cycle Follows US Economic Cycles 3 Key Metrics: Occupancies Rents Prices Source: Glenn Mueller, PhD

10 Market Cycle Analysis Physical Cycle Demand & Supply drive Occupancy Occupancy drives Rental Growth

11 Market Cycle Quadrants Phase 2 - Expansion Phase 3 - Hypersupply Demand/Supply Equilibrium Point Long Term Vacancy Average Occupancy Phase 1 - Recovery Phase 4 - Recession Legg Mason Real Estate Research Time

12 Occupancy Rents Rise Rapidly Toward New Construction Levels Long Term Average Occupancy Below Inflation Rental Negative Growth Rental Growth High Rent Growth in Tight Market Demand/Supply Equilibrium Cost Feasible New Construction Rents Rent Growth Positive But Declining Physical Market Cycle Characteristics - Below Inflation & Negative Rent Growth Time

13 Historic National Office Rental Growth 11.0% 6.4% % % % % % Long Term Average Occupancy 1.7% % 14 Occupancy -3.0% % 0.3% % 5 4.0% 30 Year Cycle - Periods % % 1 Time

14 Historic National Industrial Rental Growth % 8.3% Long Term Avg Occupancy 3.0% 6 5.1% % 6.8% % % % % 14 Occupancy 0.8% % % 5 4.6% 30 Year Cycle - Periods % % 1 2.8% Time

15 National Property Type Cycle Locations Phase II Expansion Phase III Hypersupply 1 2 Industrial Warehouse+1 Retail Neighborhood/Community+1 Apartment+1 Health Facility Hotel Full-Service+1 Retail 1st Tier Regional Malls Hotel Ltd. Service Retail Factory Outlet+3 Senior Housing LT Average Occupancy Industrial R&D Flex Office Downtown Office Suburban Retail Power Center Phase I Recovery 1st Qtr 2012 Source: Mueller, 2012 Phase IV Recession

16 Office Market Cycle Analysis 1st Quarter, Baltimore Boston+1 Charlotte Dallas FW Denver Houston Jacksonville Miami+1 Minneapolis Nashville Oklahoma City Albuquerque Atlanta Chicago Cincinnati-1 Cleveland Columbus Detroit East Bay Ft. Lauderdale Hartford Honolulu Indianapolis Kansas City Las Vegas Long Island Los Angeles 2 3 Orange County Orlando Palm Beach Philadelphia Portland Richmond Riverside San Diego Seattle Tampa+1 Raleigh-Durham+1 San Francisco San Jose Austin+1 New York Pittsburgh+1 Salt Lake LT Average Occupancy Source: Mueller, Memphis Milwaukee New Orleans Norfolk N. New Jersey Phoenix Sacramento+1 San Antonio St. Louis Stamford Wilmington Wash DC NATION

17 Industrial Market Cycle Analysis 1st Quarter, 2012 Las Vegas Nashville New Orleans Austin+2 Baltimore Cincinnati Cleveland+2 Dallas FW Detroit East Bay+1 Ft. Lauderdale+1 Jacksonville+1 Memphis Milwaukee+1 New York+2 Palm Beach Philadelphia Phoenix Raleigh-Durham Stamford+2 NATION Pittsburgh Houston+2 Indianapolis+2 Riverside+1 7 Honolulu+1 Los Angeles+2 San Jose+1 Salt Lake+1 San Francisco LT Average Occupancy Atlanta Boston Charlotte Chicago Columbus Hartford Kansas City Long Island Norfolk Orlando Orange County Richmond Sacramento+1 St. Louis Tampa Wash DC+1 Denver+1 Miami+1 Minneapolis+1 N. New Jersey+2 Oklahoma City+2 Portland San Antonio+2 San Diego+1 Seattle+1 Source: Mueller, 2012

18 Atlanta Charlotte Cleveland Ft. Lauderdale Jacksonville Orlando Raleigh-Durham Salt Lake+1 Stamford St. Louis Tampa Norfolk Houston Indianapolis Memphis New Orleans Oklahoma City Palm Beach Richmond San Antonio+1 Seattle 4 5 Baltimore Columbus Cincinnati Detroit Las Vegas Nashville Sacramento Dallas FW Milwaukee Orange County Phoenix 6 Apartment Market Cycle Analysis 1st Quarter, Austin Chicago Denver+1 Hartford Honolulu Kansas City Los Angeles Miami Minneapolis N. New Jersey Philadelphia Pittsburgh Portland Riverside+1 Wash DC NATION+1 Boston+2 East Bay+1 Long Island New York+1 San Diego+1 8 San Francisco+1 San Jose Source: Mueller, LT Average Occupancy

19 1 2 Cincinnati Cleveland Detroit New Orleans Atlanta Charlotte Chicago Dallas FW Ft. Lauderdale+1 Hartford Jacksonville+1 Kansas City Las Vegas Memphis Milwaukee N. New Jersey Oklahoma City Palm Beach Philadelphia Phoenix Richmond Riverside +1 San Antonio+1 Sacramento 3 Retail Market Cycle Analysis 1st Quarter, Columbus Indianapolis Nashville Norfolk+1 Orange County Orlando St. Louis+1 Tampa NATION+1 Baltimore+1 Denver+1 Minneapolis Boston+2 East Bay+2 Houston+2 New York+2 Pittsburgh+2 Wash DC+2 Austin+2 Long Island +1 Los Angeles+1 Miami+3 Portland+1 Raleigh-Durham+1 Seattle+1 Stamford+3 Honolulu+2 Salt Lake+2 San Diego+2 San Francisco+2 San Jose Source: Mueller, LT Average Occupancy

20 Hotel Market Cycle Analysis 1st Quarter, 2012 Cincinnati Hartford Jacksonville Kansas City Norfolk Oklahoma City Phoenix Richmond Riverside Sacramento St. Louis Stamford 1 2 Cleveland Columbus Dallas FW Indianapolis+1 Memphis Milwaukee San Antonio Tampa+1 Austin Baltimore Charlotte Denver Minneapolis Nashville+1 N. New Jersey+1 Orange County Portland Atlanta Detroit Houston+1 Las Vegas Raleigh-Durham+1 Boston+1 Orlando+1 San Jose+1 7 Chicago+1 East Bay Long Island+1 Los Angeles New Orleans+1 Palm Beach+1 Philadelphia Pittsburgh Salt Lake+1 Seattle Wash DC NATION+1 8 Ft. Lauderdale+1 Honolulu+1 Miami+1 New York+1 San Diego+1 San Francisco Source: Mueller, LT Average Occupancy

21 1970s Cycle Factors Driving The First Half Cycle (5 Year) Strong Demand from the 1960s that stopped Recession 1974 Capital Flow - Mortgage REITs produced oversupply Factors Driving The Second Half Cycle (5 Year) Baby Boom Generation Goes to Work = Demand Capital Flow Shut Down = no supply = Lenders Recover Markets tighten and reach peak occupancy 1979 (5% vacancy)

22 1970s Office Demand & Supply 8% 6% Oversupply Years Demand Baby Boomers Go To Work Supply 4% 2% 0% Source: FW Dodge, CB Commercial, BLS, Mueller

23 1980s Cycle Factors Driving The First Half Cycle (5 Year) Tight market in 1979 pushes rents and prices up Inflation pushes real estate prices higher Tax Act of 1981 attracts taxable investors supply up Thrift Deregulation allows capital to flow Factors Driving The Second Half Cycle (5 Year) Tax Act of 1986 slows taxable investors, but not tax free Poor stock market attracts Pension & Foreign capital Rising R.E. prices masks poor income returns

24 10% 8% 6% 4% 2% 0% 1980s Office Demand & Supply Demand Oversupply Years Supply Source: FW Dodge, CB Commercial, BLS, Mueller

25 1990s Cycle Factors Driving The First Half Cycle (5 Year) Moderate but stable demand growth (1991 recession minor) Oversupply and Foreclosures shut down construction Excess space Absorbed Markets Recover Factors Driving The Second Half Cycle (5 Year) Moderate Demand growth Continues Oversupply Absorbed and Return Performance improves Construction Constrained causing rents & prices to rise More Efficient Markets match supply to demand

26 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 1990s Office Demand & Supply Demand Oversupply Absorbed Supply Demand Supply Matched Source: FW Dodge, CB Commercial, BLS, Mueller

27 Demand Cycle Globalization - creates more stable U.S. economy Job Growth out of Technology Change 2.8 million population growth per year for 10 years Baby boomers at highest income earning years second home market wave Echo boom children college, first job, & renting Aging population not a major factor till 2014 Employment Growth drives commercial demand

28 World Growth Continues U.S. Growth driven by World World GDP Shares 2011 & 2012 GDP Forecasts Source: World Bank Historic GDP, Capital Economics Outlook Report Forecasts, 3Q2011.

29 Cycle Supply Constraint Public Markets make R.E. Capital markets efficient Economically Driven capital - low spec construction Research Watchdogs Data Available Constrained Supply (economically driven capital) construction labor harder to find materials costs increasing (steel, concrete) infrastructure problems constrain growth Feedback loop keeps demand and supply in better balance Greater transparency Faster reaction to demand slowdown

30 Commercial Real Estate Supply Growth Lowest construction levels in 40 years Source: Property & Portfolio Research & Mueller

31 2000s US Office Demand & Supply 3% 2000's Office Demand & Supply 2% 1% -1% -2% Supply Reacted to Demand Slow Down Demand Supply -3% Source: Property & Portfolio Research, Grubb & Ellis, Mueller 2011.

32 2012+ Office Demand & Supply Forecast 3% Office Demand & Supply Forecast 2% 1% 0% -1% Demand Supply Demand Avg. = 1.51% Supply Avg. = 0.81% Source: Property & Portfolio Research, Grubb & Ellis, Mueller 2011.

33 National Property Type Cycle Forecast Phase II Expansion Phase III Hypersupply Industrial R&D Flex Office Downtown Apartment+1 Hotel Full-Service+1 Retail 1st Tier Regional Malls Office Suburban Retail Power Center Phase I Recovery Health Facility Hotel Ltd. Service+1 Industrial Warehouse+1 Retail Factory Outlet+1 Retail Neighborhood/Community+1 Senior Housing st Qtr 2013 ESTIMATE Source: Mueller, LT Average Occupancy Phase IV Recession 1

34 Sources: Property and Portfolio Research, Grubb & Ellis, Mueller Occupancy Cycle and Rent Growth Office Cycle 10.0% 8.0% % 4.0% % 0.0% % -4.0% % Rent Growth Occupancy -8.0%

35 Office Market Cycle FORECAST 1st Quarter, 2013 Estimates Atlanta+1 Chicago Cincinnati Columbus Ft. Lauderdale Honolulu Kansas City Las Vegas Long Island Los Angeles Memphis Milwaukee New Orleans Phoenix Sacramento St. Louis NATION 1 2 Cleveland-1 Detroit Hartford N. New Jersey San Antonio Stamford Wash DC-1 3 Albuquerque Boston Dallas FW Denver East Bay Indianapolis Jacksonville Miami+1 Minneapolis Norfolk Oklahoma City Orange County Palm Beach Philadelphia Portland Richmond Riverside San Diego Seattle Tampa Austin+1 New York+1 Pittsburgh+1 6 Baltimore Charlotte Houston Nashville Orlando+1 Raleigh-Durham+1 San Francisco San Jose+1 7 Salt Lake LT Average Occupancy Source: Mueller,

36 Occupancy Cycle and Rent Growth Industrial Cycle % % % % % % % Rent Growth Occupancy % Sources: Property and Portfolio Research, Grubb & Ellis, Mueller 2012.

37 Industrial Market Cycle FORECAST 1st Quarter, 2013 Estimates 1 Atlanta Boston Columbus Hartford Nashville New York+1 Orlando Richmond St. Louis Tampa Wash DC+1 3 Long Island New Orleans Sacramento Austin Cincinnati Ft. Lauderdale+1 Jacksonville+1 Miami+1 Minneapolis+1 Phoenix Portland San Antonio+2 San Diego Baltimore 6 Charlotte Chicago Cleveland+2 Dallas FW Detroit+1 East Bay+1 Kansas City Las Vegas Memphis+1 Milwaukee+1 Norfolk Orange County Palm Beach Philadelphia Raleigh-Durham Stamford+2 NATION Denver Oklahoma City+3 Pittsburgh Seattle Houston+1 Indianapolis+4 N. New Jersey+4 Honolulu+1 Los Angeles Riverside+1 Salt Lake+1 San Francisco+2 San Jose Source: Mueller, LT Average Occupancy

38 Occupancy Cycle and Rent Growth Apartment Cycle 6.0% 4.0% % 0.0% % -4.0% % Rent Growth Occupancy -8.0% Sources: Property and Portfolio Research, Grubb & Ellis, Mueller 2012.

39 Apartment Market Cycle FORECAST 1st Quarter, 2013 Estimates 1 2 Norfolk Atlanta Charlotte Ft. Lauderdale Houston Jacksonville Milwaukee Orlando St. Louis-1 Salt Lake Stamford 3 4 Cincinnati Columbus Detroit Kansas City-1 Las Vegas Nashville Sacramento 5 6 Baltimore Dallas FW Cleveland Orange County Indianapolis Phoenix Memphis Riverside-1 New Orleans San Antonio Oklahoma City Wash DC Palm Beach Raleigh-Durham-1 Richmond Seattle Tampa 7 Austin Chicago Denver+1 Hartford Honolulu Long Island Los Angeles Miami Minneapolis N. New Jersey+4 Philadelphia Pittsburgh Portland NATION Boston+1 East Bay+1 New York San Diego San Jose+1 San Francisco LT Average Occupancy 15 Source: Mueller,

40 Sources: Property and Portfolio Research, Grubb & Ellis, Mueller Occupancy Cycle and Rent Growth 6.0% Retail Cycle % % % -2.0% % % Rent Growth Occupancy %

41 Retail Market Cycle FORECAST 1st Quarter, 2013 Estimates 1 Atlanta Chicago Dallas FW Detroit Hartford Jacksonville+2 Kansas City Las Vegas Memphis Milwaukee N. New Jersey Oklahoma City Philadelphia Phoenix Richmond Riverside+1 Sacramento San Antonio St. Louis 2 3 Cleveland Cincinnati New Orleans 4 6 Charlotte Columbus+1 Ft. Lauderdale+1 Indianapolis Nashville Norfolk+1 Orange County Palm Beach Tampa Boston+1 East Bay+1 Houston+1 Los Angeles+1 Minneapolis+1 Pittsburgh+1 Denver+1 Orlando+1 NATION Austin+2 Baltimore+1 Long Island+1 Miami+3 Portland Raleigh-Durham+1 Seattle+1 Stamford+3 Honolulu+1 New York+1 Salt Lake+1 San Diego+1 San Jose+1 Wash DC San Francisco+2 LT Average Occupancy Source: Mueller,

42 Sources: Property and Portfolio Research, Grubb & Ellis, Mueller Occupancy Cycle and Rent Growth Hotel Cycle 7.0% 5.0% 69.0% 3.0% 66.0% 1.0% -1.0% 63.0% -3.0% -5.0% 60.0% -7.0% Rent Growth Occupancy -9.0% 57.0%

43 Hotel Market Cycle FORECAST 1st Quarter, 2013 Estimates Kansas City Norfolk Richmond Riverside 1 2 Cincinnati Columbus-1 Hartford Indianapolis+1 Jacksonville Oklahoma City Phoenix Raleigh-Durham Sacramento Stamford St. Louis Cleveland Dallas FW Memphis+1 Milwaukee San Antonio+1 Tampa+1 Atlanta Detroit Houston+1 Minneapolis 6 7 Chicago+1 East Bay Los Angeles+2 Oakland Palm Beach +1 Philadelphia Pittsburgh Salt Lake+1 San Jose Seattle Wash DC NATION+1 Austin Baltimore Charlotte Denver Las Vegas Long Island-1 Nashville New Orleans+1 N. New Jersey+1 Orange County Portland LT Average Occupancy Boston+1 Miami Orlando Ft. Lauderdale+2 Honolulu+1 New York+1 San Diego+1 San Francisco+1 Source: Mueller,

44 Market Information used to: Determine market competition Set lease strategies Evaluate improvement programs Provide knowledge

45 Real Estate Financial Cycles Capital Flows Affect Prices

46 Market Cycle Capital Flow Impact Capital Flows to Existing Properties Cost Feasible Rents Reached Hyper Supply LT Occupancy Avg. Capital Flows to New Construction

47 Occupancy National Office Physical Market Cycle vs. Financial Cycle = New Permit Values Physical Financial Source: BEA, CB Commercial, Mueller 6 year lag Source: CB Commercial, Census Bureau Market Cycle Permit No Lag 65,000 60,000 55,000 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 Value ($Mil)

48 25,000 20,000 15,000 ($ Mils) 10,000 5, ,000-10, Q1 Flow of Funds Commercial Mortgages All Sectors ( ) 1972Q1 1974Q1 1976Q1 1978Q1 1980Q1 1982Q1 1984Q1 1986Q1 1988Q1 1990Q1 False Price Appreciation Support 1992Q1 1994Q1 Public Market Volatility 1996Q1 1998Q1 2000Q1? Source: Federal Reserve

49 Bond Values DROP as Interest Rates Rise 10 Year Treasury Yields Average Total Return = 3.9% Average Total Return = 8.6% Yield J-53 J-55 J-57 J-59 J-61 J-63 J-65 J-67 J-69 J-71 J-73 J-75 J-77 J-79 J-81 J-83 J-85 J-87 J-89 J-91 J-93 J-95 J-97 J-99 J-01 J-03 J-05 J-07 J-09 J-11 LT Average 6.29% Average Total Return = 1.9% * As of February 4, Source: U.S. Treasury Federal Reserve Bank of St. Louis.

50 Commercial and Residential Real Estate Bubbles [1] 200" 180" 160" Price"Index:"2000"Q4=100" 140" 120" 100" 80" 60" 40" 20" 0" 1987"Q1" 1988"Q1" 1989"Q1" 1990"Q1" 1991"Q1" 1992"Q1" 1993"Q1" 1994"Q1" 1995"Q1" 1996"Q1" 1997"Q1" 1998"Q1" 1999"Q1" 2000"Q1" 2001"Q1" 2002"Q1" 2003"Q1" 2004"Q1" 2005"Q1" 2006"Q1" 2007"Q1" 2008"Q1" 2009"Q1" 2010"Q1" Commercial"Real"Estate"Price"Index" ResidenAal"Real"Estate"Price"Index" index). [1] S&P/Case-Shiller Housing Price Index CS-10 (residential price index); Moody s/real Commercial Price Index (commercial price

51 Property Price Movements Historic Cap Rates 8.5 Office - CBD 8.9 Office - suburban 8.5 Industrial - Warehouse 9.0 Industrial - R&D 8.0 Apartments Office - CBD Office - suburban Industrial - Warehouse Industrial - R&D Apartments Source: Real Estate Research Corporation - Chicago

52 Property Price Movements 10.2 Hotels 7.9 Regional Mall 8.9 Power Center 8.7 Neighborhood Comm. 12 Historic Cap Rates Hotels Regional Mall Power Center Neighborhood Comm. Source: Real Estate Research Corporation - Chicago

53 Transaction Cap Rates - RCA 11.00% 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 OFF Cap Rate IND Cap Rate RET Cap Rate APT Cap Rate HOT Cap Rate Properties and portfolios $2.5 million and greater. Prior to 2005, RCA primarily captured sales valued at $5M and above. Real Capital Analytics, Inc Data believed to be accurate but not guaranteed. Last Updated: 6/27/2012

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57 Capital Markets: Transac(on ac(vity has only recently revived Prices star(ng to firm as credit crunch eases, but improvements selec(ve $160 Quarterly Commercial Real Estate Investment CRE Sales CRE Prices $140 $120 $100 $80 CRE Prices Down 42% Peak to Trough $60 $40 $20 $0 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 sources: CRE Sales: Real Capital Analytics, office, industrial, retail, multi-family properties $5mil+ CRE Prices: Moody's/REAL CPPI National Aggregate Index

58 NCREIF Property Price Movements

59 WIDE YIELDS ATTRACTING CAPITAL 59

60 Major Markets & Trophy Focus Commercial Property Price Trends Major Markets, Major Assets All Properties Distressed Major Market, Major Assets: properties values $10 million and greater in NY, DC, SF, LA,Boston, Chicago, Distressed: properties sold by or on behalf of creditors Sources: Real Capital Analytics,Geltner & Associates, Moody's/REAL CPPI National Aggregate Index

61 Risk- averse capital driving up prices of trophy proper(es Prices unchanged for most other proper(es; Distress a con(nuing drag

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63 Source: Real Capital Analytics, Diversified Buyer Group Composition of Equity Buyers (office, industrial, retail and multifamily properties $5+ million)

64 HETEROGENOUS LENDER POOL 64

65 2008 Physical and Financial Cycle 2012 Physical Cycle Demand & Supply affect occupancies à drives rental growth GDP growth resumed 3Q Employment growth followed 2Q 2010 RE Demand growth resumed 2Q 2010 Home building employment less than 2% of all U.S. labor Supply growth slowest in 40+ years potential absorption jump in 2013? Recovery phase 2011, 2012, 2013, growth phase in 2014, 2015,, 2016? 2012 Financial Cycle Capital flows affect prices stock market recovering, volatile in 2012? Real estate was safest investment alternative , pushing prices up Real estate prices dropped 2008, 2009 now buying opportunities in ? Debt financing still hard in creating buying opportunity for Cash Buyers Differentiate residential versus commercial real estate to your investors!

66 Conclusions Real estate is a separate asset class Historically Stable Earnings and price growth Positive Diversification benefits Public and Private investment available Equity and Debt investment available Fundamentals declined 08, 09 recovering Market & Property Selection Important Maturing Loans provide buying opportunity

67 For an electronic copy of the Real Estate Market Cycle Monitor Go to dividendcapital.com

68 Investment Allocation Case How Institutional Investors Pick Their Markets Data Available Demand, Supply, Absorption, Vacancy, Rent Selection Pick 4 different markets in EACH Year Restrictions MUST stay in a market for at least 4 years Input using #s 1,2,3,4 NOTHING else