REAL ESTATE INVESTMENT QUARTERLY HIGHLIGHTS by qnq11541

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									    REAL ESTATE INVESTMENT
    QUARTERLY HIGHLIGHTS
    FIRST QUARTER 2009

    whAT’S InSIdE

    Real Estate Investment Quarterly Highlights
    features overviews of:
n   U.S. Real Estate Performance
n   Financial Markets
n   Apartment Markets
n   Industrial Markets
n   Office Markets
n   Retail Markets
        REAL ESTATE INVESTMENT QUARTERLY HIGHLIGHTS
        InTRodUcTIon



        oUTLooK FoR REAL ESTATE InVESTMEnT PERFoRMAncE

        Positive Forces include some evidence that the pace              n Central business district office markets are holding up
        of economic deterioration is slowing, that consumer                better than suburban markets. Average central business
        sentiment has bottomed, that corporate credit markets              district office vacancy rates were 11% in the first quarter
        are improving and the stock market firming, and that the           of 2009 versus 16.7% for suburbs. Eleven of 49 central
        Federal Reserve’s housing-related efforts are encouraging          business district markets held onto single-digit vacancy
        home mortgage refinancing and a small up-tick in home              rates in the first quarter versus only three suburban
        purchases. Moreover, the feared flu “pandemic” appears             markets. For industrial property, ten markets retained
        to be overblown.                                                   single-digit vacancy rates in the first quarter despite a
                                                                           historically high 12.2% average industrial availability rate.
    n   Imploding expectations appear to be easing. In March, all
        52 of the forecasters surveyed in the Blue Chip Economic           negative Forces include the extreme weakness in the
        Survey reported lowering their 2009 GDP forecasts to an            economy as shown in seriously negative 2009 growth
        average -2.6% from -1.9% in February. For May, half of that        expectations, ongoing massive job cuts, lengthening
        number dropped their forecasts again but only slightly to          duration of unemployment, rising bond downgrades
        average -2.8%. That decline reflects in large part the sharp       and defaults, decaying commercial real estate market
        -6.1% rate of GDP contraction in the first quarter of 2009.        fundamentals, and ongoing decline in residential and
        Prospects for the second quarter have actually become              commercial real estate values.
        less negative than earlier in the year while prospects for
        the second half remain positive though still weak. This          n U.S. economic growth expectations average a minus 2.8%
        appears to represent support for the new mantra among              for 2009, seriously weaker than the minus 1.9% experience
        policy-makers that the economic free-fall is moderating.           in 1982 which had been the post-WWII record. The first
                                                                           quarter GDP of minus 6.1% was weaker than expected.
    n   Consumer sentiment improved considerably in April, albeit
        from a historically dismal level. Retail sales perked up earlier n Payroll employment has dropped by more than 5.7 million
        in the year, retreated in March, and improved to only slightly     jobs since January 2008, with more than 2.6 million cut in
        negative in April. The stock market retraced its 2009 losses       the first four months of this year alone. The unemployment
        in recent weeks before taking a breather; earnings reports         rate reached 8.9% in April the highest since September 1983.
        are exceeding dismal expectations. New unemployment
        claims and payroll job losses are moderating.                    n Corporate bond defaults are rising with a 9.2% U.S.
                                                                           speculative grade default rate reported by Moody’s for
    n   Corporate bond spreads have retreated from year end highs          April versus 2.0% a year ago. Moody’s predicts a sharp
        even after some giveback in March. Issuance soared early           increase to a 14.5% cycle peak by year end.
        in the year to a record pace as issuers piled on to take
        advantage of the credit market thaw.                             n Home values continue to fall; the Case-Shiller index shows
                                                                           a 19% year-over-year decline in the twenty largest metro
    n   The Federal Reserve has committed to buy more than                 areas. Commercial real estate values have dropped a
        $1.0 trillion in mortgage debt, pushing the residential            similar amount year-over-year according to the Moody’s
        conforming mortgage rate down to below 5%. This is the             REAL index based on transactions.
        most attractive rate since the 1940s and refinancing
        applications jumped in March as a result. Existing home
        purchases improved above their January lows, stimulated
        by low prices as well as attractive borrowing rates. The
        long-awaited bank stress tests proved to be anticlimactic.




2       QUARTERLY HIGHLIGHTS
      REAL ESTATE INVESTMENT QUARTERLY HIGHLIGHTS
      InTRodUcTIon



    n Commercial real estate fundamentals continue to weaken.                 concLUSIon
      Vacancy rates are rising for all property types and most
      metro area markets. Asking rents are slipping, compounded               Commercial real estate investment performance, as
      by increasing concessions. Absorption of office space                   measured by the NCREIF-NPI index for the first quarter
      showed a sharp negative for the first quarter of 2009, the              of 2009, showed a total return of minus 7.33% for the
      first negative quarter since the end of the last downturn in            quarter, comprised of a 1.37% income component and
      early 2003. Industrial space absorption has been stuck in               a minus 8.70% appreciation component. For the year
      negative territory for five consecutive quarters but the first          ending March 31, the appreciation component has
      quarter of 2009 give-back amounted to as much space                     slipped -19.2% which is nearing the 21.5% decline
      as the give-backs in the prior four quarters combined. The              reported in the transactions-based Moody’s/REAL index.
      flow of new space has slowed considerably in response to                Our update of economic and capital market conditions,
      demand weakness and credit constraints, except for the                  commercial real estate fundamentals, and the long-wave
      ongoing elevated pace of apartment construction financed                historical pattern of NPI returns stands behind the ongoing
      by government-sponsored agencies.                                       weakness in performance. Since commercial real estate
                                                                              fundamentals lag the overall business cycle, we do not
    n The pace of commercial property transactions remains                    expect to see positive total returns take solid hold until
      moribund even though the supply of properties offered                   2010. Before recovery can occur, the larger economy
      for sale is increasing. Those properties that have sold                 needs to re-establish recovery-like confidence levels,
      show a narrowing bid-ask gap suggesting that sellers are                restore adequate credit availability, boost earnings
      accepting market realities. Distressed sales have not                   growth, and stem job losses. When that tall order is
      been numerous to date but the pool of troubled assets                   fulfilled, the foundation for a commercial real estate
      is growing. The CMBS delinquency rate reached 1.53%                     recovery will be in place.
      in March compared with a cycle low of 0.3% in January
      2008. As the aggressively underwritten CMBS collateral of
      2006–2007 reach maturity in 2010 and beyond, the pool
      of distress will expand further. So-called “distressed debt”
      funds have amassed a pile of cash to pounce.




      Real Estate Investment Quarterly Highlights: First Quarter 2009 is prepared by TIAA-CREF Asset Management and represents the views of
      TIAA-CREF’s Global Real Estate Group as of April 2009. These views may change in response to changing economic and market
      conditions. Past performance is not indicative of future results. The material is for informational purposes only and should not be regarded
      as a recommendation or an offer to buy or sell any product or service to which this information may relate. Certain products and services
      may not be available to all entities or persons. Data is as of 3/31/09 unless noted otherwise.
      Real estate investing risks include fluctuations in property values, higher expenses or lower income than expected, higher interest rates
      which affect leveraged investments, and potential environmental problems and liability.
      TIAA-CREF Asset Management is a division of Teachers Advisors, Inc., a registered investment advisor and wholly owned subsidiary of Teachers
      Insurance and Annuity Association (TIAA). TIAA-CREF® personnel in its investment management area provide investment advice and portfolio
      management services through the following entities: Teachers Advisors, Inc., TIAA-CREF Investment Management, LLC, and Teachers Insurance
      and Annuity Association® (TIAA®). TIAA, TIAA-CREF, Teachers Insurance and Annuity Association, TIAA-CREF Asset Management and FINANCIAL
      SERVICES FOR THE GREATER GOOD are registered trademarks of Teachers Insurance and Annuity Association.
      C44048 (13585)



3     QUARTERLY HIGHLIGHTS
                              REAL ESTATE INVESTMENT QUARTERLY HIGHLIGHTS
                              U.S. REAL ESTATE PERFoRMAncE oVERVIEw

                       ncREIF Returns for All Property Types                                                                   double-digit negative First Quarter Total Return and
                                                                                                                               Appreciation, but Uptick in Income Return
                        25% (4Q rolling avgs)
                                                                                                                               The NCREIF Property Index (NPI) total return for all property
                        20%
                                                                                                                               types came in at -14.67% for the four quarters ending March
                        15%
                        10%                                                                                                    2009; a continued decline from the prior four-quarter period
                          5%                                                                                                   total return of -6.46%. The capital appreciation component
                          0%                                                                                                   showed a decline of -19.15%, versus -11.12% for the prior four-
                         -5%                                                                                                   quarter period. Income return for the four quarters ending March
                       -10%                                                                                                    2009 edged up to 5.24%, from the 5.13% recorded for the prior
                       -15%                                                                                                    four-quarter period. The steady income return was not enough to
                       -20%                                                                                                    offset property value decline.
                       -25%
                           94 95 96 97 98 99 00 01 02 03 04 05 06 07 08                                          1Q09

                                Total Return              Income Return                 Appreciation




                       Pricing for All Property Types                                                                          Valuation cap Rates Jump as Appraisals catch-Up
                       15% (4Q rolling avg, except Treasury–Qtrly avg of daily rates)                                          Cap rates implied in NCREIF-NPI property valuations jumped
                                                                                                                               to 5.8% for the four quarters ending March from 5.5% during
                       10%                                                                            cap         noI 10-Yr    the prior four-quarter period. The widening represents a
                                                                                                     Rate          Gr.  Tsy    catch-up in appraisals to the shift in risk pricing that began in
                        5%                                                                            (%)         (%)   (%)    the larger capital markets in mid-2007. Real estate fundamental
                        0%                                                              94–08           7.9        3.2   5.2   performance weakening continued through March as well, with
                                                                                        03/08           5.5        4.7   3.6   NOI growth for the four quarters ending March amounting to
                        -5%                                                                                                    0.5%. While better than the -1.6% for the prior four-quarter
                                                                                        12/08           5.5       -1.6   3.2
                       -10%                                                             03/09           5.8        0.5   2.7   period, it is markedly weaker than the 3.2% long-term average
                                                                                                                               and points to the effects of recession on property performance.
                           94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

                                Cap Rate               NOI Growth               10-Yr Treasury




                       ncREIF MSA dispersion                                                                                   Market Returns weak in Almost All Markets
                       10% (rolling 4 quarters ending 3/09)                                                                    Negative performance was pervasive across markets with only
                         5%                                                                                                    three out of 91 metro area markets with reported data posting
                                                                                                                               positive total returns. This reflects a continued decline in
Capital Appreciation




                         0%                                                Greensboro
                        -5%                                                                                        Tot   cap   property values, with negative results in all markets and across
                                                                                                                   Ret   Ret   the major property types. Among the markets, Greensboro led
                       -10%
                                                                                                                   (%)   (%)   with the strongest total return of 5.4% for the four-quarter period
                       -15%
                                                                                              U.S.               -14.7 -19.2   ending March 2009. Greensboro also experienced the “best”
                       -20%
                                                                                              Best                 5.4 -1.4    capital return of -1.4%. Akron and Santa Fe followed Greensboro
                       -25%                                                                   (Greensboro, NC)                 with positive total returns, though anemic at 0.3% each. The
                       -30%                                                                   Worst              -26.1 -29.4   markets producing the weakest total returns were Palm Bay at
                       -35%    Palm Bay                                                       (Palm Bay, FL)
                                                                                                                               -26.1%, New Orleans at -25.3%, and New York at -25.0%. New
                        -35%    -30%   -25%     -20% -15% -10%      -5%    0%    5%     10%                                    Orleans experienced the weakest capital return at -29.9%.
                                                   Total Return




                       4      QUARTERLY HIGHLIGHTS                                                             Sources: Torto Wheaton Research, NCREIF, Bloomberg and TIAA Research
      REAL ESTATE INVESTMENT QUARTERLY HIGHLIGHTS
      FInAncIAL MARKETS oVERVIEw

 U.S. vs. Foreign Stocks                                                                            Stock Markets Slip Further and Spring Back
                                                                                                    During the first quarter, equity markets continued to decay but
 1400
                                                                                                    at a slower pace than in the fourth quarter of 2008. In April,
 1200                                                                                               several indicators of moderating in the pace of economic free
 1000                                                                                               fall emerged and were trumpeted as “green shoots.” Equity
                                                                                                    markets responded to the hope with solid gains. The Russell
  800                                                                                               3000 ® index rebounded 8.5% in April after dropping 14% in
  600                                                                                               the first quarter. Developed European markets rose 14% after
                                                                                                    dropping 21% in the first quarter. Emerging markets also rose
  400
                                                                                                    14% but dropped only 1.9% in the first quarter. It remains to
  200                                                                                               be seen whether the rebound is a sustainable sign of a market
                                                                                                    turnaround or a “bear rally” to be followed by another leg down.
      0
          97    98    99    00    01   02    03   04   05    06    07    08 Jan Feb Mar Apr
                                                                            09 09 09 09
          Russell 3000                 ML-Developed Mkts                 Blmbrg-Emrg Mkts




 credit Spreads                                                                                     credit Markets Start to Thaw
 2250                                                                                               After suffering virtual paralysis during the fourth quarter of 2008,
                                                                                                    credit markets perked up in the first quarter with a surge in
 2000
                                                                                                    investment grade issuance and a down-draft in spreads across
 1750
                                                                                                    sectors and ratings. While the Fed’s active intervention in the
 1500
                                                                                                    markets explains some of the revival, there may also be some
 1250                                                                                               renewal in risk appetite promoting investor interest in asset types
 1000                                                                                               other than those with U.S. government guarantees. This renewed
  750                                                                                               appetite has been most evident in the smooth absorption of the
  500                                                                                               record volume of high grade corporate new issues in the first
  250                                                                                               quarter. Despite the volume, BBB corporate spreads declined by
                                                                                                    120 bps in the first quarter of 2009 and another 146 bps in April
      0
                                                                                                    alone. In the lower quality B-corporate segment, spreads dropped
          97    98    99    00    01    02   03   04    05   06    07    08 Jan Feb Mar Apr
                                                                            09 09 09 09             51 bps in the first quarter and another 103 in April. Emerging
                                                                                                    market bond spreads were only slightly affected with a 19 bps
          ML B              ML BBB                ML Emerging Mkts                 Swap
                                                                                                    drop in the first quarter and another 8 bps drop in April. Emerging
 * Merrill Lynch Global Indices Option-Adjusted Spreads, except 10-yr Swap which is a simple        market spreads are roughly in line with their 2003 historic highs
   spread over the 10-yr Treasury rate.                                                             while BBB and B spreads remain above their 2003 highs even
                                                                                                    after their recent declines.



 U.S. Treasury Rates                                                                                Treasury Yields Inch Up with “Green Shoots”
  8                                                                                                 Treasury yields picked up in the first quarter from December lows
                                                                                                    not seen since the 1940s. The up-drift continued through April
  7
                                                                                                    and has brought the 10-year Treasury back above the 3% mark
  6                                                                                                 and the 30-year above the 4% mark. Nonetheless, the Treasury
  5                                                                                                 curve remains entrenched at an unusually low level indicating
                                                                                                    the Fed’s ongoing efforts to pour liquidity into the capital
% 4
                                                                                                    markets. Rates should remain low until the timing of economic
  3
                                                                                                    recovery becomes clearer.
  2
  1
  0
      97       98    99    00    01    02    03   04   05    06    07    08 Jan Feb Mar Apr
                                                                            09 09 09 09
          2yr Trsy               5yr Trsy           10yr Trsy              30yr Trsy




 5    QUARTERLY HIGHLIGHTS                                                           Sources: Torto Wheaton Research, NCREIF, Bloomberg and TIAA Research
                               REAL ESTATE INVESTMENT QUARTERLY HIGHLIGHTS
                               APARTMEnT MARKET oVERVIEw

                      ncREIF Apartment Returns                                                                                   Apartment Property Posts weakest Performance
                        25% (4Q rolling avgs)                                                                                    Apartment properties produced the weakest performance among
                        20%                                                                                                      the major property types, at -16.41% for the four-quarter period
                        15%                                                                                                      ending March 2009. This is down from the -7.29% total return
                        10%                                                                                                      for the prior four-quarter period. The income return component
                          5%                                                                                                     amounted to 4.57% for the period, up minutely from 4.45%
                          0%
                                                                                                                                 for the previous four-quarter span. The capital appreciation
                         -5%
                       -10%                                                                                                      component experienced another marked decline, dropping to
                       -15%                                                                                                      -20.28% for the four quarters ending March 2009, from -11.37%
                      -20%                                                                                                       for the prior four-quarter period.
                      -25%
                            94 95 96 97 98 99 00 01 02 03 04 05 06 07 08                                          1Q09
                                 Total Return              Income Return                Appreciation


                      Apartment Property Pricing and Treasury                                                                    Valuation cap Rates Above 5% with Solid noI Growth
                                                                                                                                 Cap rates implied in NPI apartment valuations were substantially
                      15% (4Q rolling avg, except Treasury–Qtrly avg of daily rates)
                                                                                                                                 wider at 5.1% for the four quarters ending March versus 4.9% for
                      10%                                                                                                        the prior four-quarter period. The wider cap rates mirror the sharp
                                                                                                        cap        noI 10-Yr
                          5%                                                                           Rate         Gr.  Tsy     decline in the capital appreciation component of the apartment
                                                                                                        (%)        (%)   (%)     index and reflect a catch-up in pricing to the declines registered
                          0%
                                                                                              94–08        7.0     3.9     5.2   earlier in transactions pricing. NOI growth averaged 4.2% for the
                       -5%                                                                                                       four quarters ending March, an improvement from the 2.7% over
                                                                                              03/08        4.9     3.8     3.6
                      -10%                                                                                                       the prior four-quarter period. The long-term average NOI growth
                                                                                              12/08        4.9     2.7     3.2
                                                                                                                                 for apartments is 3.9% indicating that the recent path of NOI for
                      -15%                                                                    03/09        5.1     4.2     2.7
                                                                                                                                 the sector is quite solid. This is in sharp contrast to the big drop
                           94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09                                                       in NOI growth during the 2001 recession shown in the chart.
                                 Cap Rate             NOI Growth                 10-Yr Treasury

                      Apartment Vacancy Rate dispersion                                                                          Apartment Vacancy Pervasive Across Markets
                                                                                                                 The average vacancy rate across major U.S. markets as of
                       14%
                                                                                                                 March 2009 was 7.3%, up from 5.5% a year ago. Only three
                           U.S.       Markets with rising vacancy
                       12%                                                                                       out of 60 markets experienced slightly declining vacancy rates
Current Vacancy (%)




                           1Q09: 7.3%
                       10% 1Q08: 5.5%                                                                            versus a year ago, as displayed by the few dots barely below
                        8%                                                                                       the diagonal line. Among the markets above the line showing
                                                                                                                 rising year-over-year vacancy, Memphis recorded the highest
                        6%
                                                                                                                 vacancy rate at 13.3% and experienced the greatest year-over-
                        4%
                                                                                                                 year increase of 5.0%. Pittsburgh produced the lowest vacancy
                        2%                                                                                       rate at 2.6%, even though vacancy rose versus a year ago. In
                                                                                Markets with declining vacancy
                        0%                                                                                       total, 34 markets out of the 60 markets tracked had vacancy
                         0%        2%          4%            6%         8%         10%          12%          14% rates higher than the national average. Generally, apartment
                                                           Vacancy Yr Ago (%)                                    vacancies continue to be highest in southern markets where
                            Vacancy Lower than U.S.            Vacancy Higher than U.S.          U.S.            homes are most affordable.


                      Apartment construction                                                                                     Big drop in Apartment construction Pipeline
                      2.0%                                                                                                       Construction activity in the apartment sector is dropping off
                                                                                                                                 sharply in the face of the negative impact of the recession
                                                                                                                                 on demand combined with falling home prices and intensified
Completions/ Stock




                      1.5%
                                                                                                                                 competition from excess condos and single-family homes for
                      1.0%                                                                                                       rent. The stock of apartments increased by 220,000 units or
                                                                                                                                 1.6% in 2008, a pace in line with the long-term average. This
                      0.5%                                                                                                       year, the flow is expected to amount to only 140,000 units with
                                                                                                                                 59,000 in the pipeline for 2010. This decline in activity and
                      0.0%                                                                                                       planned activity will help to restore equilibrium to the apartment
                                                                                                                                 market as economic growth recovers.
                                95   96     97   98   99     00   01   02   03     04    05    06     07    08      09    10
                                                                                                                    EST   PROJ




                      6        QUARTERLY HIGHLIGHTS                                                              Sources: Torto Wheaton Research, NCREIF, Bloomberg and TIAA Research
                               REAL ESTATE INVESTMENT QUARTERLY HIGHLIGHTS
                               IndUSTRIAL MARKET oVERVIEw

                      ncREIF Industrial Returns                                                                      Industrial Performance declines, but Maintains
                        25% (4Q rolling avgs)                                                                        Strongest Income Return
                        20%                                                                                          Total return on industrial properties posted a -14.07% for the
                        15%                                                                                          four quarters ending in March, down considerably from -5.76%
                        10%                                                                                          recorded for the prior four-quarter period. Capital appreciation
                          5%
                                                                                                                     came in at -19.15%, down from -11.13% for the prior period.
                          0%
                         -5%                                                                                         Income return continues to be the strongest among the four
                       -10%                                                                                          major property types at 5.95%, up from 5.85% for the prior
                       -15%                                                                                          period. However, the strong income return still is not enough
                      -20%                                                                                           to counter the depreciating capital value component.
                      -25%
                            94 95 96 97 98 99 00 01 02 03 04 05 06 07 08                               1Q09
                                 Total Return        Income Return               Appreciation


                      Industrial Property Pricing and Treasury                                                       wider cap Rates and Shrinking noI Plague Industrial
                      15% (4Q rolling avg, except Treasury–Qtrly avg of daily rates)                                 Market
                                                                                                                     Industrial property cap rates implied in NCREIF valuations
                      10%                                                                        cap    noI 10-Yr    widened to 6.1% for the four quarters ending in March. This
                                                                                                Rate     Gr.  Tsy    is compared to 5.9% for the prior four quarters. The cap rate
                          5%                                                                     (%)    (%)   (%)    widening indicates transmission of valuation declines from
                          0%                                                           94–08     8.1     2.0   5.2   property transactions to appraisals. The cap rate widening has
                                                                                       03/08     5.9    -0.8   3.6   been accompanied by material weakening in industrial property
                       -5%                                                                                           NOI. A 3.0% decline was recorded for the four quarters ending
                                                                                       12/08     5.9    -5.9   3.2
                      -10%                                                             03/09     6.1    -3.0   2.7   March somewhat milder than the -5.9% for the prior period.
                          94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
                                 Cap Rate          NOI Growth              10-Yr Treasury
                                                                                                                     Industrial Vacancy Rate Increases continue
                      Industrial Vacancy Rate dispersion                                                          The average vacancy rate for industrial properties rose to
                                                                                                                  12.2% for the first quarter, up from 9.8% for the same quarter
                      30%
                           U.S.          Markets with rising vacancy                                              last year. Rising vacancy rates occurred in 54 of 58 metro area
                      25% 1Q09: 12.2%
Current Vacancy (%)




                                                                                                                  markets. The highest vacancy rates occurred in Ann Arbor, at
                           1Q08: 9.8%                                                                             25.7% and Trenton at 20.0%, the only two showing vacancy at or
                      20%
                                                                                                                  above 20%. Tucson and Los Angeles were at the opposite end
                      15%
                                                                                                                  showing the lowest vacancies at 7.3% and 6.5%, respectively. Of
                      10%                                                                                         the 58 markets tracked, there were an almost even number of
                                                                                                                  markets with vacancies above and below the national average;
                       5%
                                                                                 Markets with declining vacancy   and except for the outliers identified above, most were clustered
                       0%
                                                                                                                  around the U.S. average. Demand for industrial space closely
                         0%          5%            10%             15%          20%            25%            30%
                                                                                                                  tracks the pace of economic growth which determines the flow of
                                                           Vacancy Yr Ago (%)                                     goods through the economy. Clearly, the economic downturn is
                         Vacancy Lower than U.S.            Vacancy Higher than U.S.          U.S.                weighing heavily on industrial space markets.


                      Industrial construction                                                                        Industrial Space construction higher than Prior Estimates
                      2.5%                                                                                           Deliveries of industrial space for 2009 are now estimated to
                                                                                                                     amount to roughly 81msf, up from the 67msf estimated in our
 Completions/ Stock




                      2.0%                                                                                           last report. Construction in 2010 is estimated to drop to the
                      1.5%                                                                                           60 msf range but lead times for industrial are relatively short
                                                                                                                     making construction forecasting difficult. While still the lowest
                      1.0%                                                                                           delivery since the early 1990s, the increase suggests that
                                                                                                                     construction is not as moribund as it appeared. This added flow
                      0.5%
                                                                                                                     might prolong the recovery process for industrial markets in light
                      0.0%                                                                                           of record high availability and rent pressures.
                                90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
                                                                                                          EST PROJ




                      7        QUARTERLY HIGHLIGHTS                                                Sources: Torto Wheaton Research, NCREIF, Bloomberg and TIAA Research
                             REAL ESTATE INVESTMENT QUARTERLY HIGHLIGHTS
                             oFFIcE MARKET oVERVIEw

                      ncREIF office Returns                                                                             office Properties Performance in Third Place
                      25%     (4Q rolling avgs)                                                                         Total return on office properties clocked in at -16.32% for the
                       20%                                                                                              four quarters ending in March 2009, slightly beating apartment
                      15%                                                                                               properties performance. The capital return component
                       10%                                                                                              experienced the heftiest depreciation among the four major
                        5%
                                                                                                                        property types, at -20.61% for the current four-quarter period,
                        0%
                       -5%                                                                                              down from -11.77% for the prior period. Income return for office
                      -10%                                                                                              properties was 5.07%, up slightly from 4.91% for the prior period.
                      -15%
                      -20%
                      -25%
                             94 95 96 97 98 99 00 01 02 03 04 05 06 07 08                                 1Q09

                               Total Return            Income Return                Appreciation


                      office Property Pricing And Treasury                                                              office Property Valuation cap Rates Rise with Solid
                      20%     (4Q rolling avg, except Treasury–Qtrly avg of daily rates)                                noI Growth
                      15%                                                                                               The cap rate implied in NCREIF office property valuations
                                                                                                    cap    noI 10-Yr    widened to 5.7% on average for the four-quarter period ending
                      10%                                                                          Rate     Gr.  Tsy
                                                                                                    (%)    (%)   (%)    March. These represent the highest office cap rates in two years.
                       5%
                                                                                                                        NOI growth over the period averaged 4%, reversing the -0.3%
                       0%                                                                  94–08    8.0     3.4   5.2   pace for the prior four-quarter period. When viewed together, the
                       -5%                                                                 03/08    5.3     7.7   3.6   widening cap rates and solidly growing NOI suggest that the risk
                      -10%                                                                 12/08    5.4    -0.3   3.2   re-pricing that began in financial markets in mid-2007 is catching
                      -15%                                                                 03/09    5.7     4.0   2.7   up to office properties but the negative impact of the recession
                          94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09                                               has not yet been fully expressed in property NOIs.

                               Cap Rate             NOI Growth                10-Yr Treasury
                                                                                                                        office Vacancy Rate Increases Persist
                                                                                                                The national office market vacancy rate for the first quarter came
                      office Vacancy Rate dispersion                                                            in at 14.7%, up from 12.9% a year ago. Most markets experienced
                      25%                                                                                       rising vacancy as displayed by the clustering of dots above the
                           U.S.        Markets with rising vacancy                                              diagonal line, with 33 out of 57 office markets showing vacancy
Current Vacancy (%)




                      20% 1Q09: 14.7%                                                                           rates above the 14.7% national average. At the high end, seven
                           1Q08: 12.9%                                                                          markets experienced vacancy rates above 20%, most in markets
                      15%
                                                                                                                which continue to be heavily affected by the housing crisis. This
                      10%                                                                                       category includes Phoenix at 23.0%, Detroit at 22.8%, and West
                                                                                                                Palm Beach at 21.0%. At the low end, only three markets have
                       5%                                                                                       vacancy rates below double-digits including Long Island at 9.9%
                                                                               Markets with declining vacancy   and Honolulu at 9.3%; while New York continues to occupy the
                       0%
                         0%             5%                 10%             15%            20%               25% lowest spot with a 7.4% vacancy rate. Finally, 11 of the 57 office
                                                                                                                markets reported declining vacancy rates for the first quarter of
                                                            Vacancy Yr Ago (%)
                                                                                                                2009 versus a year ago. Office has the largest number of markets
                        Vacancy Lower than U.S.       Vacancy Higher than U.S.    U.S.                          with declining vacancy among the four primary property types.


                      office construction                                                                               office construction Pipeline Shrinking
                      4.0%                                                                                              The inflow of new office supply expected for 2009 amounts to
                                                                                                                        1.7% of stock, slightly less than expected in our last report three
Completions/ Stock




                      3.0%                                                                                              months ago. The office construction cycle peaked in 2008 with
                                                                                                                        the delivery of 2.25% of stock which represents the only 2+%
                      2.0%                                                                                              annual addition in the current cycle. In the last cycle, deliveries
                                                                                                                        exceeded 2% for every year between 1999 and 2002 with the
                      1.0%                                                                                              peak delivery posted in 1999 at 3.5%. The construction pipeline
                                                                                                                        taking shape for deliveries in 2010 and beyond is shrinking
                      0.0%                                                                                              rapidly to proportions last seen in the mid-1990s.
                              90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
                                                                                                             EST PROJ




                      8      QUARTERLY HIGHLIGHTS                                                     Sources: Torto Wheaton Research, NCREIF, Bloomberg and TIAA Research
                             REAL ESTATE INVESTMENT QUARTERLY HIGHLIGHTS
                             RETAIL MARKET oVERVIEw

                      ncREIF Retail Returns                                                                              Retail Property Returns Sill the Least weak
                       30% (4Q rolling avgs)                                                                             Retail properties reported a -9.5% total return for the four-
                       25%                                                                                               quarter period ending March 2009, down from -4.1% for the
                       20%                                                                                               prior four-quarter period. Retail property performance continues
                       15%                                                                                               to hold up the best among the four major property types. The
                       10%
                                                                                                                         capital component showed the least decline at -14.7% for the
                         5%
                         0%                                                                                              period, from -9.5% for the prior period. Income return on retail
                        -5%                                                                                              properties moved up slightly to 5.8% for the current period, from
                      -10%                                                                                               5.7% for the prior period and again represented the second
                      -15%                                                                                               strongest income return behind industrial properties.
                      -20%
                            94 95 96 97 98 99 00 01 02 03 04 05 06 07 08                                   1Q09

                               Total Return             Income Return                Appreciation


                      Retail Property Pricing and Treasury                                                               Retail Property Valuation cap Rates highest As
                      15%     (4Q rolling avg, except Treasury–Qtrly avg of daily rates)                                 noI Shrinks
                                                                                                                         Cap rates implied in NCREIF valuation of retail properties
                      10%                                                                            cap    noI 10-Yr    widened to 6.2% for the four-quarter period ending March. This
                                                                                                    Rate     Gr.  Tsy    is the widest for the sector since 2006 and the widest among
                                                                                                     (%)    (%)   (%)    the four primary property types. At the same time, NOI growth
                      5%
                                                                                           94–08     8.1     3.9   5.2   for retail properties dropped at a 2.7% rate for the four-quarter
                      0%                                                                   03/08     5.9     5.7   3.6   period, the weakest performance since 9/11 which kept
                                                                                           12/08     6.0    -0.9   3.2   shoppers home in the third quarter of 2001.
                      -5%                                                                  03/09     6.2    -2.7   2.7
                            94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
                               Cap Rate              NOI Growth               10-Yr Treasury


                      Retail Vacancy Rate dispersion                                                                     Retail Vacancy Rates Rise Across Markets
                      20%                                                                                           Vacancy rates for neighborhood and community center
                              U.S.       Markets with rising vacancy                                                properties represented in TWR data rose to 11.2% in the first
Current Vacancy (%)




                      16%     1Q09: 11.2%                                                                           quarter, up from 9.0% a year ago. Forty-eight out of the 53
                              1Q08: 9.0%                                                                            metro area retail markets tracked by TWR are experiencing rising
                      12%
                                                                                                                    vacancy rates as displayed by the dots above the diagonal line.
                       8%                                                                                           The dispersion of retail vacancy rates is noticeably wide ranging
                                                                                                                    from a high of 18.1% in Columbus to a low of 4.3% in Honolulu.
                       4%                                                                                           Vacancy rates are almost exactly evenly distributed above and
                                                                                   Markets with declining vacancy   below the national average. Rising vacancies reflect ongoing
                       0%
                         0%                   4%              8%             12%              16%               20% weakness in the retail sector as stores struggle to make up
                                                                                                                    for the lackluster holiday season sales at year end 2008. First
                                                             Vacancy Yr Ago (%)
                                                                                                                    quarter consumer spending did grow, however, only after big
                          Vacancy Lower than U.S.         Vacancy Higher than U.S.     U.S.
                                                                                                                    declines in the third and fourth quarter of 2008.



                      Retail construction                                                                                construction of neighborhood centers dwindles
                      5.0%                                                                                               Delivery of new neighborhood retail centers in 2009 is
                                                                                                                         expected to amount to 0.72% of stock, the lowest at least since
Completions/ Stock




                      4.0%                                                                                               1988 when the TWR database began. Construction plans for
                                                                                                                         2010 and beyond suggest that additions will total less than
                      3.0%
                                                                                                                         1% of stock per year through the next several years continuing
                      2.0%                                                                                               the retrenchment in the sector. The pace of development is
                                                                                                                         influenced by the health of home building which remains mired
                      1.0%                                                                                               in a historic slump.
                      0.0%
                              90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
                                                                                                              EST PROJ




                      9      QUARTERLY HIGHLIGHTS                                                      Sources: Torto Wheaton Research, NCREIF, Bloomberg and TIAA Research

								
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