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					                       ameRIcas

                       INg cLaRION




                       ReseaRch aND
                       INvestmeNt stRategy




US View 2010
The Path To Recovery




www.ingclarion.com
US VIEW 2010




ING CLARION
Research & Investment Strategy
230 Park avenue
new york, ny 10169


DaviD Lynn, Ph.D.                    Jeff organiSciak
Managing Director                    Senior analyst
David.Lynn@ingclarion.com            Jeffrey.organisciak@ingclarion.com
+1.212.883.2582                      +1.212.883.2525

TiM Wang, Ph.D.                      yuSheng hao
Senior vice President                analyst
Tim.Wang@ingclarion.com              yusheng.hao@ingclarion.com
+1.212.883.2754                      +1.212.883.2769

BohDy heDgcock                       JereMy SuMPTer
Senior associate                     Project Manager
Bohdy.hedgcock@ingclarion.com        Jeremy.Sumpter@ingclarion.com
+1.212.808.2192                      +1.212.883.2537


WiTh conTriBuTionS froM

STeven BurTon, cfa                   roBerT koPchainS
Managing Director                    Managing Director
ing clarion real estate Securities   ing clarion capital
Steve.Burton@ingclarion.com          robert.kopchains@ingclarion.com
+1.610.995.8904                      +1.212.883.2692
                                                                 US VIEW 2010




Contents
The Path to Recovery
Section I   executive Summary                               02

Section 2   economic outlook                                03
            • national economic fundamentals
            • five Signs to Watch on the Path to recovery

Section 3   capital Markets                                 08
            • Strengthening credit Markets
            • Private real estate Pricing
            • federal reserve Policies

Section 4   Property Markets                                12
            • uS real estate fundamentals
            • national Property Sector overviews
                 Multifamily
                 industrial
                 office
                 retail
                 hotel
            • ncreif Performance and forecast
            • high Beta Markets and Sectors


Section 5   Public Debt                                     20
            • narrowing Spreads
            • Securitization Showing Signs of Life

Section 6   uS reiT Market                                  22
	           • Strong rebound
            • capital advantage
            • investment outlook

Section 7   Mexico Market                                   25
	           • economic overview
            • real estate outlook
                 retail
                 industrial
                 residential
                 hotel

Section 8   conclusion                                      27


                                                                         i 01
US VIEW 2010




Executive Summary
uS commercial real estate       uS commercial real estate appears to be emerging from the most serious crisis in decades. as
appears to be emerging from     the economy shows signs of improvement, ing clarion expects 2010 to be a transition year,
the most serious crisis in      moving from the steep downturn of 2009 towards recovery. Despite the prospect for a slow
decades.
                                improvement in employment and economic activity, the downward pressure on property
                                values – especially for highest-quality assets – seems to be moderating. While risks remain,
                                including large-scale deleveraging and limited financing options, investors are beginning to
                                adjust their outlook regarding the risks associated with uS real estate. This change suggests
                                that careful attention to both economic and property market fundamentals is essential in
                                order to take advantage of what may be unprecedented opportunities.

                                The highlights of our view include:

                                • The depth of the global recession will make a sharp rebound unlikely. in the uS, structural
                                   changes to the economy suggest that employment will not return to the previous peak
                                   until at least 2012.

                                • The need to deleverage in the new debt environment poses the greatest risk to recovery
                                   in the commercial property markets. While there are signs of improvement, owners will
                                   nonetheless need to recapitalize properties with additional equity and debt that is more
                                   expensive, creating increased potential for defaults, foreclosures and distressed sales.
                                   Lenders and owners continue to play the “pretend and extend” game, hoping to avoid
                                   recognizing additional value declines.

                                • value declines have been steep and quick, in contrast to previous recessions during which
                                   write-downs dragged on for several years. We believe the bulk of these declines is behind
                                   us, and pricing for the highest-quality assets in primary markets has shown tentative signs
                                   of improvement in recent months.

                                • With interest rates remaining low, income-producing core assets in primary markets with
                                   attractive yields are attracting the most attention (and capital). Demand for opportunistic
                                   and value-added properties, and for properties in secondary and tertiary market, remains
                                   low.

                                • While limited transaction volume makes tracking capitalization rates (cap rates) difficult,
                                   the spread between cap rates and the risk-free rate is well-above the long-term average
                                   for all core property sectors. historically, this has suggested that real estate may be
                                   undervalued.

                                • Transaction volumes declined to record lows but appear to be improving. Today’s buyers
                                   are well-capitalized and paying mostly with cash. improving prospects for debt financing
                                   should increase transaction volume over the next 12-18 months.

                                • construction supply pipelines are far below long-term averages. The next two years should
                                   see continued low supply, which will help bring down vacancy rates in most markets.


With a global economic          The path to recovery will not necessarily be smooth, but it is becoming clearer. With a global
recovery underway, we expect    economic recovery underway, we expect to see increased transaction volume and stabilizing
to see increased transaction    market fundamentals in 2010, leading eventually to rising property values.
volume and stabilizing market
fundamentals in 2010, leading
eventually to rising property
values.




i 02
                                                                                                                                             US VIEW 2010




Economic Outlook
The Beginnings of an Economic Rebound
“After declining for a year and a half, economic activity in the
United States turned up in the second half of 2009, supported by
an improvement in financial conditions, stimulus from monetary
and fiscal policies, and a recovery in foreign economies.”
                                                                                                                      Monetary Policy report to the congress
                                                                                                            Board of governors of the federal reserve System
                                                                                                                                           february 24, 2010


national economic fundamentals
The uS economy retreated from the brink of disaster in early 2009 to begin a modest, but steady                             The uS economy retreated from
rebound. The uS economic recovery gained additional strength during the second half of 2009,                                the brink of disaster in early
thanks to broad-based improvement across most business sectors and geographic regions. after                                2009 to begin a modest, but
                                                                                                                            steady rebound.
rebounding by 2.2% in the third quarter of 2009, real gross domestic product (gDP) surged 5.6%
during the last three months of the year.1 growth exceeded expectations mainly due to a jump
in business spending and inventory restocking. Several significant challenges remain, however,
including tight credit and high unemployment. Looking forward, we expect a slow recovery
process with a few bumps in the road. We believe that the fiscal and monetary policies of the
uS government and federal reserve will continue to be flexible and accommodating in 2010,
supporting economic growth of just under 3.0% over the next year (figure 1).

figure 1 : uS econoMic forecaST
                        2009                      2010f                                        2011f
                         fy        Q1        Q2           Q3      Q4      fy      Q1      Q2           Q3     Q4    fy
real gDP growth         -2.4%     2.2%       2.7%         2.8%   2.7%    2.8%    2.8%    2.5%      2.0%      1.8%   2.6%
unemployment rate       9.3%      9.8%       9.9%     10.2%      10.3%   10.1%   10.3%   10.0%     9.5%      8.9%   9.7%
inflation (cPi)         -0.3%     2.8%       3.0%         2.6%   2.2%    2.7%    1.8%    1.9%      2.0%      2.1%   2.0%

Source: ING Clarion Research & Investment Strategy, ING Wholesale Banking, Moody’s Economy.com, March 2010


although the uS is technically out of recession, the labor market continues to struggle. Since                              although the uS is technically
the beginning of the recession through february 2010, a total of 8.4 million jobs were lost                                 out of recession, the labor
nationwide.2 The national unemployment rate climbed to 10.1% in october, and though it                                      market continues to struggle.
has since receded to 9.7%, it remains at the highest level in decades.3 Despite these negative
indicators, we now see early signs of recovery in the labor market. The four-week moving
average of initial jobless claims continues to trend downward, pointing to a deceleration in
the pace of layoffs. average hourly earnings and the hiring of temporary workers, leading
indicators of employment growth, are on the rise. With many firms reporting better-than-
expected earnings and moderate sales increases over the past two quarters, we believe we will
likely see job growth before mid-2010.




1
    Bureau of Economic Analysis, March 2010
2
    Bureau of Labor Statistics, March 2010
3
    Ibid.
                                                                                                                                                        i 03
US VIEW 2010




The time required for            unfortunately, the time required for employment to recover to pre-recession levels in the uS
employment to recover to pre-    has been getting steadily longer over the past four decades. We believe this relates primarily
recession levels in the uS has   to the impacts of technology and globalization, which have reinforced a structural shift from
been getting steadily longer
over the past four decades.
                                 manufacturing to service sector employment. after the mid-1970s recession, it took about
                                 20 months for peak levels of employment to return. in the early 1980s it took about two
                                 and a half years, and after the 1990s recession it required nearly three. after the early 2000s
                                 recession, employment did not return to peaks levels for more than four years. given the steep
                                 job losses in the current recession, expectations generally call for another slow recovery this
                                 time around (figure 2).

                                 figure 2 : recovery To Peak eMPLoyMenT in MonThS




                                 Source: ING Clarion Research & Investment Strategy, Moody’s Economy.com, March 2010


uS consumers continued to        consumer spending showed encouraging signs of improvement during the fourth quarter,
increase savings and reduce      with 2009 holiday sales rising by 2.3% over the depressed levels of the same period a year
household debt in the face of    ago.4 however, uS consumers continued to increase savings and reduce household debt in
negative wealth effects.         the face of negative wealth effects. The personal savings rate spiked in the wake of increased
                                 economic uncertainty, peaking at 5.4% in mid-2009 from a low of 1.2% in 2005. While the
                                 rate has since receded to 3.3% (as of January 2010), it remains above the average over the
                                 past decade.5 We continue to believe that consumer spending will likely remain muted
                                 until the job and housing markets stabilize. The february consumer Price index (cPi) was
                                 unchanged over the previous month and increased by 2.1% year-over-year, primarily due to
                                 volatile energy prices.6 We believe that inflationary pressure should remain subdued over the
                                 next 12-18 months as a result of relatively weak demand and low capacity utilization.

                                 The combination of a government tax credit for first-time buyers and historically low
                                 mortgage rates drove increased demand for residential housing in 2009. The uS housing
                                 market showed signs of stabilization with the 20-city S&P/case-Shiller home price index
                                 climbing modestly for seven straight months from June through December.7 however, both
                                 new and existing home sales have stalled in recent months, suggesting a rather fragile
                                 housing recovery.8 There is a risk of additional home price declines in 2010 in light of the
                                 end to the government stimulus assistance, increasing foreclosures, and potentially rising
                                 mortgage rates.




                                 4
                                     Moody’s Economy.com, January 2010
                                 5
                                     Bureau of Economic Analysis, December 2009
                                 6
                                     Bureau of Labor Statistics, March 2010
                                 7
                                     S&P Case-Shiller Home Price Index, February 2010
                                 8
                                     Moody’s Economy.com, January 2010
i 04
                                                                                                                          US VIEW 2010




five Signs to Watch on the Path to recovery
The return to positive gDP growth in the second half of 2009 was a welcome sign of a
tentative recovery in the uS economy. although gDP captures headlines as the most-watched
indicator of economic health, we believe that other measures of the economy are also
important, not only for their impact on the economy as a whole, but also for their relationship
to the performance of commercial real estate.

groSS DoMeSTic ProDucT
fundamentally, commercial real estate values are driven by the demand for space from                     fundamentally, commercial
businesses, consumers and government. as such, real estate prices have historically tended               real estate values are driven
to rise and fall along with economic output.                                                             by the demand for space from
                                                                                                         businesses, consumers and
                                                                                                         government. as such, real
as shown in figure 3, real estate capital values as measured by the national council of real             estate prices have historically
estate investment fiduciaries Property index (ncreif nPi or nPi) have roughly tracked real               tended to rise and fall along
gDP growth since 1990, but with a lag.                                                                   with economic output.


figure 3 : gDP anD ncreif vaLueS




Source: ING Clarion Research & Investment Strategy, NCREIF, US Bureau of Economic Analysis, March 2010


uneMPLoyMenT
There is also a strong link between employment and the demand for commercial space. as
unemployment rises, fewer people are working in offices, warehouses, and stores, and fewer
people are renting apartments and hotel rooms. as the demand for goods and services
declines, companies reduce space and vacancy rises. We see a clear relationship between
the unemployment rate and the vacancy rate in the various property sectors (figure 4). The
recent decline in the unemployment rate suggests that we may also see positive absorption
and stabilizing vacancy rates in 2010.




                                                                                                                                     i 05
US VIEW 2010




                                   figure 4 : uneMPLoyMenT anD vacancy raTeS




                                   Source: ING Clarion Research & Investment Strategy, US Bureau of Labor Statistics, CBRE-EA, March 2010


                                   reTaiL SaLeS
facing negative wealth effects,    historically, there has been a strong correlation between retail sales and retail absorption,
slowing income growth, and         as shown in figure 5. facing negative wealth effects, slowing income growth, and excessive
excessive debt levels, consumers
                                   debt levels, consumers have been increasing savings and reducing spending. after rising
have been increasing savings
and reducing spending.             steadily on an annual basis every year since 1965, total retail sales fell sharply in 2008 and
                                   even further in 2009. The retail sector is struggling given this historic decline, with negative
                                   18.5 million square feet of net absorption in neighborhood and community centers in 2009.9

                                   figure 5 : reTaiL SaLeS anD reTaiL aBSorPTion




                                   Source: US Department of Commerce, CBRE-EA, March 2010




                                   9
                                       CoStar, January 2010
i 06
                                                                                                                        US VIEW 2010




inTernaTionaL TraDe
There has historically been a positive relationship between rising imports and exports and             Prospects for improving import
demand for industrial space. figure 6 shows the relationship between industrial sector                 and export volumes in concert
absorption and the change in the total value of import and export goods, with absorption               with the global economic
                                                                                                       recovery bode well for
closely tracking trade activity, but with a lag. We believe that prospects for improving
                                                                                                       increasing warehouse demand.
import and export volumes in concert with the global economic recovery bode well for
increasing warehouse demand.

figure 6 : inDuSTriaL aBSorPTion anD iMPorT/eXPorT acTiviTy




Source: US Department of Commerce, CBRE-EA, March 2010


houSing
We believe that the housing market must stabilize before we experience a sustained                     as the housing market
economic recovery. over the past several decades, declining residential investment has                 reaches bottom, an increase in
generally been a reliable leading indicator of a coming recession. conversely, an uptick in            residential investment will help
                                                                                                       to drive gDP, while improving
residential investment has been a fairly consistent signal of a turning point (figure 7). as
                                                                                                       home prices will help to buoy
the housing market reaches bottom, an increase in residential investment will help to drive            consumer confidence and,
gDP, while improving home prices will help to buoy consumer confidence and, ultimately,                ultimately, personal spending.
personal spending.

figure 7 : reSiDenTiaL inveSTMenT aS a PercenTage of gDP




Source: ING Clarion Research & Investment Strategy, National Bureau of Economic Research, March 2010
Note: Grey color indicates recession. The recent recession began in December 2007.


Both new and existing home sales have stalled in recent months, suggesting that the long-
awaited resurgence in home construction will be further delayed. on the other hand, the
lack of new supply should help to bring inventory levels of new homes down further and
provide a stabilizing effect on prices.



                                                                                                                                   i 07
US VIEW 2010




Capital Markets
Continued Improvement

“We have witnessed a remarkable improvement in the
functioning of short-term credit markets and an impressive
recovery in the stability of large financial firms.”
                                                                                                Brian Sack, executive vice President
                                                                                                 federal reserve Bank of new york
                                                                                                                      March 8, 2010


                                  Strengthening credit Markets
Several positive developments     Several positive developments are emerging in the real estate capital markets, providing a
are emerging in the real estate   glimpse of optimism as investor sentiment begins to rebound. Many public reiTs, especially
capital markets, providing a      those with strong balance sheets, have been able to raise large amounts of equity, as well
glimpse of optimism as investor   as secured and unsecured debt. Surprisingly, costs of debt have come down significantly
sentiment begins to rebound.
                                  since the first quarter of 2009. as of March 2010, the average commercial mortgage rate
                                  was approximately 6.8-7.0%, with spreads over the 10-year Treasury narrowing to 340-
                                  400 bps from 430-500 bps in mid-2009.10 Mortgage spreads for core retail, warehouse, and
                                  office properties contracted by about 70 bps. Spreads for apartment and hotel properties
                                  remained essentially unchanged over the same period. Several public and private specialty
                                  lending firms such as Starwood Property Trust have emerged. on the commercial mortgage
                                  backed securities (cMBS) front, all tranches have rallied appreciably. Spreads on the aaa
                                  cMBX index have narrowed by over 100 bps over the past six months.11 We believe that both
                                  mortgage and cMBS spreads will continue to drift downward, albeit at a slow pace, as real
                                  estate fundamentals continue to stabilize over the next twelve months.

                                  The uSD 400.0 million sale of new commercial mortgage bonds by uS mall owner Developers
                                  Diversified realty (DDr) in early november 2009 was met with strong investor demand.
                                  This issuance was the first transaction sold under the federal reserve’s Term asset-Backed
                                  Securities Loan facility (TaLf), which aims to lower funding costs for issuers by offering
                                  investors funding for the purchase of the securities. The deal was actually priced below
                                  existing levels for the cMBS issues. its uSD 323.0 million aaa-rated five-year notes came to a
                                  yield of 3.8%, at a 140 bps premium to the five-year interest rate swap benchmark. The tight
                                  spreads demonstrate that the market may have a strong appetite for well-structured and
                                  transparent cMBS products of this nature. a total of uSD 3.0 billion of cMBS was issued in
                                  2009.12 We believe that this success could mark the beginning of a modest recovery for the
                                  private cMBS securitization market, which has been essentially nonexistent since June 2008.

Despite some improvements in      Despite some improvements in the capital markets, commercial mortgage debt remains both
the capital markets, commercial   expensive and difficult to obtain. We believe that the lending environment will continue to
mortgage debt remains both        improve in 2010, including an increasing volume of cMBS originations. Those improvements
expensive and difficult to
                                  will not, however, likely be enough to fully accommodate the uSD 1.1 trillion of commercial
obtain.
                                  real estate debt that will mature in 2010-2012. With underwriting requirements remaining
                                  tight, traditional balance sheet lenders under stress and reluctant to lend and regional bank
                                  failures rising, we expect a continuing financing gap in the market in 2010. according to
                                  real capital analytics (rca), distressed assets in the uS, including those in foreclosure or
                                  default, surged to uSD 203.0 billion as of December 2009. We expect the amount of distress
                                  to grow considerably as more loans mature over the next two to three years. There may be
                                  excellent opportunities for well-priced and/or distressed investments in 2010-2011.




                                  10
                                       Kearny Capital Partners, March 2010
                                  11
                                       ING Clarion Capital, March 2010
                                  12
                                       Commercial Mortgage Alert, January 2010
i 08
                                                                                                                                     US VIEW 2010




Private real estate Pricing
on average, real estate cap rates have risen by approximately 250 bps since the beginning of                        The current spread between cap
the market downturn. The current average cap rate, according to real capital analytics, for                         rates and the 10-year Treasury
core real estate assets is about 7.5-7.8%, matching our forecast in uS view 2009. The current                       yield, which can serve as a
                                                                                                                    rough gauge of the relative
spread between cap rates and the 10-year Treasury yield, which can serve as a rough gauge
                                                                                                                    value of the real estate market,
of the relative value of the real estate market, suggests that commercial real estate may be                        suggests that commercial real
under-valued (over-sold) relative to historic standards (figure 8). as the capital markets and                      estate may be under-valued
real estate fundamentals continue to improve, we expect cap rates to drift downward, albeit                         relative to historic standards .
at a slow pace, over the next 18-24 months.

figure 8 : aLL core ProPerTy TyPeS caP raTe To TreaSury SPreaD




Source: ING Clarion Research & Investment Strategy, Real Capital Analytics, March 2010
Note: Long-term average based on Jan. 2001 through Jan. 2010 cap rate data as reported by Real Capital Analytics.


The current spread between property sector cap rates and the 10-year Treasury yield are also
well above their long-term averages (figure 9).

figure 9 : SPreaD BeTWeen currenT caP raTe anD 10-year TreaSury




Source: ING Clarion Research & Investment Strategy, Real Capital Analytics, March 2010




                                                                                                                                                i 09
US VIEW 2010




                               national transaction volume across all five property sectors totaled uSD 18.1 billion in the
                               fourth quarter of 2009, improving from uSD 13.0 billion in the third quarter but down from
                               uSD 20.1 in the fourth quarter of 2008.13 The average transaction cap rate for all properties
                               over uSD 5.0 million rose 20 bps to 8.1% in the fourth quarter of 2009, up 80 bps from the
                               same period a year ago.14

our review of a wide variety   our review of a wide variety of market metrics suggests that commercial real estate
of market metrics suggests     transaction volume may be bottoming out (figure 10). We expect to see more transactions
that commercial real estate    over the next several quarters as an increasing number of investors look for distressed or
transaction volume may be
                               undervalued opportunities in commercial real estate. once asset pricing is stabilizing or
bottoming out.
                               improving, more investors should be willing to buy and invest. as prices begin to improve,
                               we should also see an increase in the number of willing sellers. owners who purchased
                               before the steep run up in prices that began around 2004 may be willing to take their
                               profits in order to reinvest. The wild card in the market is how lenders, who to this point
                               have been reluctant to foreclose on properties or sell at discounts, will act going forward.
                               We now expect to see a trickle of these properties into the market, rather than the flood
                               most observers were anticipating one year ago.

                               figure 10 : QuarTerLy TranSacTion voLuMe




                                             2001         2002        2003        2004         2005        2006         2007         2008   2009


                               Source: ING Clarion Research & Investment Strategy, Real Capital Analytics, Q1 2010
                               Note: Includes Apartment, Office, Industrial, and Retail property types; Hotel included starting in 2004.




                               13
                                    Real Capital Analytics, February 2010
                               14
                                    Ibid.
i 10
                                                                                                                  US VIEW 2010




federal reserve Policies
at the federal open Market committee (foMc) meeting on March 16, 2010, the federal                The federal reserve and the
reserve pledged to keep interest rates near zero for an extended period. The fed stated           uS government are facing a
that economic activity has continued to strengthen and that the labor market is stabilizing.      delicate balance today.
household spending is expanding at a moderate rate but remains constrained by high
unemployment, modest income growth, lower housing wealth and tight credit. We do not
expect any interest rate increases during the first three quarters of 2010. We believe that
the federal reserve and the uS government are facing a delicate balance today – they need
to maintain adequate stimulus in the system to facilitate the on-going economic recovery
while trying not to ignite inflationary pressures or significantly increase budget deficits.
any misstep in their exit strategies could pose a risk to the continued revival of the capital
markets.

We believe that the federal reserve’s explicit support for housing-related government-
sponsored enterprises (gSes) – fannie Mae, freddie Mac, ginnie Mae, and the federal home
Loan Banks – has helped avert a more severe fall in housing values. it has also helped to
bolster multifamily lending and capital values. The fed’s uSD 1.25 trillion mortgage debt
purchase program will end in March. it may be difficult for the private sector to step in
to fill in this financing gap at a very low cost. This policy shift could negatively impact the
availability and cost of debt for single family and multifamily properties.




                                                                                                                                i 11
US VIEW 2010




Property Markets
Real Estate Fundamentals
“The worst seems to be over … as investors suggest that the
bottom is near, if not here, particularly for better-positioned
markets and assets.”
                                                                                                                     Susan Smith, editor-in-chief
                                                                                                              korpacz real estate investor Survey
                                                                                                                                  March 16, 2010



                                uS real estate fundamentals
commercial real estate          commercial real estate performance generally lags economic growth by about four to six
performance generally lags      quarters. as the uS economy rebounds from the great recession, we expect commercial real
economic growth by about        estate fundamentals to stabilize during 2010. But with vacancy rates high, financing limited,
four to six quarters. as the    and rents below levels necessary to justify new construction, supply pipelines are far below
uS economy rebounds from
                                long-term averages (figure 11). The next three years should see a limited amount of new
the great recession, we
expect commercial real estate   deliveries, which will help bring down vacancy rates in most markets. rent growth is forecast
fundamentals to stabilize       to resume in late 2010 or 2011 depending on the property sector and market.
during 2010.
                                figure 11 : SuPPLy PiPeLine WeLL BeLoW hiSToric averageS




                                Source: ING Clarion Research & Investment Strategy, CBRE-EA, Reis, Smith Travel Research, March 2010




i 12
                                                                                                                                                             US VIEW 2010




national Property Sector overviews
MuLTifaMiLy
Multifamily vacancy rates reached a record high during the fourth quarter of 2009 as rising                                                 We expect multifamily
unemployment continued to reduce rental demand. The unemployment rate for workers aged                                                      vacancy to bottom out during
19-35 years old, who are more likely to rent than own, is almost twice as high as the national                                              the second half of 2010,
                                                                                                                                            responding to stabilization in
average. new supply was the highest since 2003, with nearly 122,000 units delivered to the                                                  the labor market.
market.15 as a result, the national average multifamily vacancy rate rose to 8.0%, which is 140
bps higher than the same period one year ago. Both asking and effective rents declined over
the quarter as landlords were forced to offer concessions and lower asking rents to compete
for tenants. We expect multifamily vacancy to bottom out during the second half of 2010,
responding to stabilization in the labor market.

The federal reserve has been aggressively purchasing the direct obligations and mortgage-
backed securities guaranteed by the gSes over the past year and a half. according to the fed,
the action was taken to reduce the cost and increase the availability of credit for the purchase
of homes, which was expected to support housing markets and foster improved conditions in
financial markets more generally. The program, which wrapped up in March 2010, purchased
about uSD 175.0 billion worth of agency debt and uSD 1.25 trillion worth of mortgage-backed
securities.

While the fed’s program was designed to hold down home loan costs and stimulate the
economy, research suggests that it has had the ancillary effect of increasing the availability
and reducing the cost of credit for the purchase of multifamily residential properties. The
agency apartment mortgage rate is approximately 150 bps lower than that of other core
property sectors. as the outstanding gSe multi-family residential mortgage debt increased
from the end of the third quarter of 2008 through the end of the fourth quarter of 2009, the
cost of that debt decreased, with the interest rate on freddie Mac’s five-year fixed-rate loans
declining by 90 bps, from 6.4% to 5.5% (figure 12).


figure 12 : gSe MorTgage DeBT ouTSTanDing anD MorTgage raTeS
                                                                                                   DaTa noT avaiLaBLe aT TiMe of PrinTing




Source: ING Clarion Research & Investment Strategy, CBRE, Federal Reserve Flow of Funds, 2009 Q4




15
     Reis, March 2010
                                                                                                                                                                        i 13
US VIEW 2010




                                These attractive financing terms are a key reason that multifamily deals accounted for
                                almost 30% of all property transactions during the fourth quarter of 2009.16 Developers can
                                still obtain construction loans if projects meet the gSe’s conservative underwriting criteria.

                                inDuSTriaL

Weak consumer spending,         Weak consumer spending, record low levels of business inventory, and reduced international
record low levels of business   trade continue to weigh on demand for industrial space. During the fourth quarter of 2009,
inventory, and reduced          the national average industrial vacancy rate increased by 40 bps to 13.9%, marking the
international trade continue    ninth consecutive quarter of rising vacancy rates and the highest vacancy rate since 1989.17
to weigh on demand for
                                all three property sub-types – warehouse, manufacturing, and r&D/flex – experienced
industrial space.
                                increases in vacancy, though the rate of increase is clearly moderating. We expect national
                                industrial vacancy to peak during the second half of 2010.

                                industrial supply is constrained in most markets, which should help to counter-balance
                                vacancy over the mid-term. We expect an average of 57.0 million square feet of warehouse
                                space to enter the market annually from 2010 to 2012, which is less than one-third of the
                                average over the previous ten-year period.

We continue to prefer           Driven by inventory restocking and new orders, the manufacturing sector grew for the fifth
coastal gateway markets and     consecutive month in December 2009 as the Purchasing Managers index (PMi) rose to 55.9%,
intermodal hubs serving the     its highest reading since april 2006.18 Meanwhile, international trade continued to improve.
global supply chains that can   november uS imports and exports expanded by 6.9% and 5.6% respectively compared to
capitalize on the improving
volume of import and export
                                the monthly average of the third quarter.19 We expect both imports and exports to recover
goods.                          by 2011-2012, benefiting uS warehouse demand. With stronger economic growth overseas,
                                uS exports should pick up strength. We continue to prefer coastal gateway markets and
                                intermodal hubs serving the global supply chains that can capitalize on the improving
                                volume of import and export goods.

                                figure 13 : MaJor gLoBaL gaTeWay MarkeTS anD inTerMoDaL huBS




                                Source: ING Clarion Research and Strategy, March 2010




                                16
                                     Real Capital Analytics, March 2010
                                17
                                     CBRE-EA March 2010
                                18
                                     Institute for Supply Management, March 2010
                                19
                                     US Bureau of Economic Analysis, March 2010
i 14
                                                                                                                 US VIEW 2010




office
The uS has lost 2.0 million office-using jobs since the beginning of this downturn.20 The        The number of office-using
number of office-using jobs lost to date is nearly twice the amount lost during the previous     jobs lost to date is nearly
recession (figure 14). With a deeper hole to dig out of, this recovery cycle is likely to be     twice the amount lost during
                                                                                                 the previous recession.
longer than the last one. nonetheless, some markets, including Washington, Dc and new
york city, which have disproportionally benefited from the government bailouts, could
recover more quickly than the rest.

office fundamentals continued to weaken in the fourth quarter of 2009, though at a slower
pace, as fewer companies are downsizing and returning sublease office space to the market.
new sublease space listings have slowed down significantly since the summer of 2009 with
a total of 76.7 million square feet of vacant sublease space currently available, representing
approximately 0.9% of total stock.21

figure 14 : office-uSing eMPLoyMenT




Source: ING Clarion Research & Investment Strategy, Moody’s Economy.com, March 2010


During the fourth quarter of 2009, the national average office vacancy rate rose 20 bps to
16.3%, a 15-year high.22 This marks the eighth consecutive quarterly vacancy increase since
the beginning of 2008. We expect weakened fundamentals and limited financing availability
to continue to deter development projects. new office construction is expected to average
just 22.0 million square feet annually from 2010-2013, less than half of the annual average
rate over the past ten years. We believe this should help mitigate the overall effect on
vacancies over the next few years. nonetheless, national asking rents and effective rents
continue to fall, as property owners increase concessions in an attempt to maintain building
occupancy. We expect to see stabilization in effective rents in the strongest office markets
over the course of 2010, as owners begin to reduce those concessions.




20
     US Bureau of Labor Statistics, March 2010
21
     CoStar National Office Market Report, January 2010
22
     CBRE-EA, March 2010
                                                                                                                            i 15
US VIEW 2010




                                    reTaiL

We believe that the worst           uS retailers experienced a better-than-expected christmas season as consumers let loose
period for retail sales is          some pent-up demand and retailers carefully managed inventories and promotions. retail
probably over, but do not           sales rose 3.4% in December compared to a very weak December in 2008.23 combined with
expect a quick rebound.             a 0.9% gain in november, holiday retail sales rose 2.3% year-over-year to uSD 509.3 billion
                                    for the two-month holiday period.24 nonetheless, uS consumers are still facing several
                                    significant headwinds, including high unemployment, modest income growth, deleveraging,
                                    and reduced household wealth. We believe that the worst period for retail sales is probably
                                    over, but do not expect a quick rebound. We believe that consumer spending will likely
                                    remain constrained in the near future and retail fundamentals could continue to weaken,
                                    albeit at a slower pace, into 2011.

With ongoing deleveraging,          There is also the larger question of long-term household buying power. With ongoing
slow job recovery, and lackluster   deleveraging, slow job recovery, and lackluster income growth, we may be at the early
income growth, we may be at         stages of structurally lower retail expenditures. given these factors, we believe that retail
the early stages of structurally
                                    spending is likely to shift to more necessity and less discretionary retail. The savings rate,
lower retail expenditures.
                                    which had declined steadily from a peak near 12% during the early-1980s recession to a low
                                    of just 1.2% in early 2008, has since increased back to more than 5% (figure 15). The higher
                                    savings rate is a direct response to households paying down consumer debt (deleveraging)
                                    and shifting more wealth to cash (savings) due to higher perceived risk factors.

                                    figure 15 : SavingS aS a PercenTage of DiSPoSaBLe incoMe




                                    Source: ING Clarion Research & Investment Strategy, Bureau of Economic Analysis, March 2010


value centers, neighborhood/        neighborhood and community shopping centers experienced negative 3.5 million square
necessity retail, and well-         feet of net absorption during the fourth quarter of 2009 with vacancy rising to 10.6%.
positioned malls in high income     Both asking rents and effective rents for neighborhood and community shopping centers
and growth markets continue         continued to decline as property owners faced vacant space and less favorable lease
to outperform the overall retail
market.
                                    negotiations. Deterioration in fundamentals was also pervasive in regional and super
                                    regional malls, with vacancy rising 20 bps to 8.8% and asking rents falling further over
                                    the fourth quarter. Same-store sales and corporate reporting suggest that value centers,
                                    neighborhood/necessity retail, and well-positioned malls in high income and growth markets
                                    continue to outperform the overall retail market.




                                    23
                                         US Census Bureau, March 2010
                                    24
                                         Ibid.
                                    25
                                         CBRE-EA, March 2010
i 16
                                                                                                                   US VIEW 2010




hoTeL
The hotel sector is extremely sensitive to the general economy. it was the first sector to turn   The hotel sector is extremely
down, but should also be the first sector to experience an upturn. The uS hotel industry          sensitive to the general
Leading indicator, a composite indicator that leads the lodging industry’s business activity      economy. it was the first sector
by four to five months, increased 1.8% in December 2009, the ninth consecutive monthly            to turn down, but should also
                                                                                                  be the first sector to experience
increase.26 The industry has shown positive signs of stabilization with 11 of 25 top hotel        an upturn.
markets experiencing gains in occupancy during the fourth quarter.27 The Luxury segment
in particular reported increases in all three key performance metrics (occupancy, aDr and
revPar). nonetheless, compared to the same period one year ago, all three metrics remained
weak, as room supply still substantially outweighed room demand. in year-over-year metrics,
the industry’s occupancy dropped 4.4% to 50.6%, aDr fell 7.6% to uSD 95.8, and revPar
decreased 11.7% to uSD 48.5.28

Looking forward into 2010, we believe the lodging industry should face improving year-
over-year comparisons, and strengthening economic conditions may increase the propensity
for both business and leisure travel. as revPar starts to accelerate, we expect hotel owners
will benefit from positive operating leverage due to significant cost containment actions
implemented over the past 18 months. With supply growth slowing in 2010-2011, room
demand should also bounce back with the broader economic recovery (figure 16).

figure 16 : hoTeL SuPPLy, DeManD, anD occuPancy




Source: ING Clarion Research & Investment Strategy, Smith Travel Research, March 2010




26
     Smith Travel Research, March 2010
27
     Ibid.
28
     Ibid.
                                                                                                                               i 17
US VIEW 2010




                                     ncreif Performance and forecast
as more investment capital           The ncreif Property index (nPi) total return declined by 16.8% in 2009, the worst annual
flows into the commercial real       performance in the 32-year history of the index.29 This is slightly better than the -17.5%
estate sector, it is possible that   projection that we made at the beginning of the year. The income portion of the return was
the nPi could achieve double-
digit annual total returns in
                                     resilient at 6.2%, but capital values declined by 22.0%, a much steeper drop than during
2011-2014.                           previous real estate downturns. Looking ahead, we forecast a positive total return for the nPi
                                     in 2010 as slightly negative appreciation will likely be more than offset by income return. as
                                     more investment capital flows into the commercial real estate sector, it is possible that the nPi
                                     index could achieve double-digit annual total returns in 2011-2014 (figure 17).

                                     figure 17: ncreif ProPerTy inDeX ToTaL reTurnS hiSTory anD forecaST




                                     Source: ING Clarion Research & Investment Strategy, NCREIF, March 2010


                                     high Beta Markets and Sectors
compared to the nPi, returns         unsurprisingly, real estate pricing is a function of supply and demand. Since each market has
for some markets and property        different underlying demand drivers and supply constraint characteristics, investment returns
sectors are historically more        vary. compared to the nPi, returns for some markets and property sectors are historically more
volatile than others.                volatile than others. Market volatility, defined as beta, is not necessarily a negative feature as
                                     markets with higher volatility often out-perform the nPi in an upturn of the real estate cycle.
                                     however, like leverage, this characteristic can accentuate a market decline.

                                     Looking back, different property sectors behaved differently through the expansion and
                                     contraction cycles. During contraction periods, retail, apartment, and to a lesser extent
                                     industrial have been better-performing sectors; office and hotel have had relatively poor
                                     performance. conversely, during expansion periods, office, hotel, and to a lesser extent
                                     industrial tend to be better-performing sectors, while apartment and retail generally lag.

                                     We believe these distinctions make sense based on the volatility (beta) of the property sectors.
                                     The retail sector, for example, has the lowest beta over the past 20 years, while office and
                                     hotel have the highest. however, high beta property sectors such as office and hotel tend to
                                     outperform the benchmark, sometimes by a large margin, during expansion periods.




                                     29
                                          NCREIF, February 2010
i 18
                                                                                                                     US VIEW 2010




understanding beta behavior may be useful in identifying opportunistic markets as well as in        understanding beta behavior
managing portfolio risk. an investment strategy focused on beta would seek higher returns           may be useful in identifying
by timing the real estate market cycle and taking on calculated market risk, with the goal          opportunistic markets as well as
of out-performing the market benchmark nPi (figure 18). The strategy requires a thorough            in managing portfolio risk.
understanding of market fundamentals and an estimate of future market performance. in the
early part of an upturn cycle, it may be desirable to overweight high beta sectors/markets to
maximize portfolio returns. as the market moves towards a peak, the portfolio would shift to
overweight low beta sectors/markets, in order to minimize potential losses during a downturn.


figure 18 : hyPoTheTicaL BeTa inveSTMenT STraTegy




Source: ING Clarion Research & Investment Strategy



in anticipation of the coming real estate recovery, we believe that a portfolio that is carefully   in anticipation of the coming
overweighted in high-beta sectors and markets may out-perform the benchmark nPi over the            real estate recovery, we
next few years.                                                                                     believe that a portfolio that is
                                                                                                    carefully overweighted inhigh-
                                                                                                    beta sectors and markets may
of course, a portfolio with higher beta will inherently also have higher risk, which could          out-perform the benchmark nPi
negatively impact portfolio returns. in addition, calculated betas are derived from historic data   over the next few years.
and may not be an accurate predictor of future performance.




                                                                                                                                i 19
US VIEW 2010




Public Debt
Decline in the Risk Premium

“The market appears willing to accept very conservatively
underwritten commercial mortgages backed by strong
sponsors.”
                                                                                                         The Wall Street Journal
                                                                                                             november 16, 2009


The weakening of commercial     The weakening of commercial real estate fundamentals has taken a significant toll on
real estate fundamentals has    mortgage debt. in the fourth quarter of 2009 for example, the commercial Mortgage-
taken a significant toll on     Backed Securities (cMBS) conduit delinquency rates rose to 5.8% - up from 4.4% at the
mortgage debt.
                                end of September and 1.2% from a year earlier.30 Mortgages originated in 2006 and 2007
                                – years known for aggressive underwriting standards that often used unreliable pro-forma
                                assumptions – have been particularly hard hit.

                                narrowing Spreads
The cMBS market generally       Surprisingly, despite these worsening fundamentals, the cMBS market generally improved
improved over the fourth        over the fourth quarter, buoyed by various governmental programs and the rally in the
quarter of 2009, buoyed by      equities markets. in the first half of october, spreads on both Term asset-Backed Securities
various governmental programs   Loan facility (TaLf) eligible and non-TaLf eligible Super Senior cMBS tightened approximately
and the rally in the equities
markets.
                                100 bps as investors increased their allocations to the sector at the start of the new quarter
                                and dealers added to their inventories in anticipation of further spread tightening. By the
                                end of october, however, it became clear that much of the expected Public Private investment
                                Program (PPiP) buying of non-TaLf eligible cMBS was unlikely to materialize, leaving dealers
                                with fairly heavy inventories. in addition, after accepting all of the bonds submitted in
                                September, the federal reserve rejected five securities submitted for the Legacy cMBS TaLf
                                subscription in october, further adding to investor uncertainty and reducing investor appetite
                                for TaLf eligible bonds. average spreads on TaLf eligible cMBS widened by over 50 bps from
                                late october to late november, while spreads on non-TaLf eligible bonds widened by over 100
                                bps in the same period, once again demonstrating that government support is the primary
                                driver in the market. The tone of the market changed once again in December, however, as
                                cash-heavy investors, positioning for year-end, caused broader credit markets to rally.

                                figure 19: TigheTning SPreaDS of aaa cMBX inDeX over SWaP




                                Source: ING Clarion Capital, Markit, March 2010




                                30
                                     Commercial Mortgage Alert, March 2010
i 20
                                                                                                                        US VIEW 2010




Securitization Showing Signs of Life
also in november, the cMBS market received some welcome news in the form of a uS cMBS                 The cMBS market received
deal consisting of the first newly originated collateral issued in almost a year and a half. The      some welcome news in the
Developers Diversified realty transaction was issued into strong demand and priced at tighter         form of a uS cMBS deal
                                                                                                      consisting of the first newly
than expected spreads with the TaLf eligible aaa tranche pricing at 140 bps over swaps. The           originated collateral issued in
deal featured notable differences to the traditional cMBS structure, including a simplified           almost a year and a half.
low-leverage, three-tranche structure. The mortgage collateral was also more conservatively
underwritten than that of the recent past, with a debt service coverage ratio of 2.0x and a
Loan-to-value (LTv) of 51.7%.31

Two similarly low-leverage, new issue cMBS deals quickly followed and were also met with
very strong investor demand. in addition, general growth Properties announced a uSD 9.4
billion bankruptcy reorganization plan, removing one of the largest overhangs weighing on
the market. With these broadupgrades in investor sentiment, market pricing improved at the
end of the year. By the end of December, spreads on TaLf eligible and non-TaLf eligible cMBS
returned to the october levels of approximately 300 bps for TaLf eligible bonds and 500 bps
for non-TaLf eligible bonds.32

Bonds lower in the capital structure, particularly mezzanine and junior aaas, also continued
to see price increases over the fourth quarter. investors, faced with low rates and tightening
spreads at the top of the capital structure, reached for more yield in spite of weakening
fundamentals. Most deeply subordinated cMBS positions are still trading for pennies on the
dollar as they are now viewed as ‘credit interest only’ positions, which will receive interest cash
flow for a limited period of time before increasing defaults wipe out the principal.

non-government sponsored loan sale activity has been modest. The federal Deposit insurance
corporation (fDic), however, is pursuing multiple strategies to push a higher volume of
government owned loans into the private sector. given the attractive financing packages
being offered, coupled with limited investment alternatives, these fDic dispositions are
garnering significant investor interest.

With respect to non-securitized commercial mortgage debt, portfolio lenders have been actively        The refinancing gap that
pursuing a small universe of the high-quality cash flowing collateral, increasing competition         remains on upcoming
and leading to a tightening of spreads. Senior ten-year whole loans staged a rally in the fourth      maturities will likely remain
                                                                                                      unresolved without a healthy
quarter, tightening in 30 bps to a year-end average loan spread of 340 bps.33 alternatively,          securitization market and a
portfolio lender activity in lower quality (non-class a properties) collateral has yet to revive.     major deleveraging.
While new loan allocations from life insurance companies and larger banks, likely limited
to high-quality class a collateral, are expected to increase in 2010, the refinancing gap that
remains on upcoming maturities will remain unresolved without a healthy securitization
market and a major deleveraging.




31
     Developers Diversified Realty 2009-DDR1 Term sheet, November 2009
32
     ING Clarion Capital, January 2010
33
     Ibid.
                                                                                                                                   i 21
US VIEW 2010




US REIT Market
A Remarkable Recovery
“Despite the fact that share prices have exhibited manic
depressive behaviors in recent years, REITs have consistently
delivered the types of returns that long-term investors likely
expect from leveraged real estate.”
                                                                                                        Mike kirby, Director of research
                                                                                                                  green Street advisors
                                                                                                                     December 31, 2009



                                  Strong rebound
few were able to predict the      The down market for real estate stocks has ended. it was as deep and long as any of the
rapid and dramatic recovery       previous declines in real estate stocks, in fact surpassing any of the declines in the last 20 years.
as the nareiT equity index
                                  after a tough start in 2009, uS reiTs recovered strongly. During the first quarter of 2009,
ultimately provided 2009
returns of approximately          uS real estate stocks fell by 32.0% before bottoming in early March 2009. few were able to
28.0%, outperforming the S&P      predict the rapid and dramatic recovery as the nareiT equity index ultimately provided 2009
500 index.                        returns of approximately 28.0%, outperforming the S&P 500 index.34

                                  We believe that three major factors contributed to the dramatic turnaround and rally of listed
                                  property companies. first, public reiT companies moved decisively to repair their balance
                                  sheets as companies raised significant amounts of equity. The equity raises were generally
                                  well supported given the excessively low valuations. Second, the debt markets began to open
                                  for property companies due in part to the equity raising, but also as a result of broader credit
                                  market improvements. in mid-2009, uS listed property companies began to access unsecured
                                  debt in the capital markets. Spreads tightened materially during the second quarter and the
                                  required interest rates on unsecured debt dropped significantly. Many reiT companies also
                                  sold some properties as an additional source of capital raising. The balance sheet repair and
                                  refinancing of debt continued during the second and third quarters. The third contributor to
                                  the rally in property stocks came as investors turned their attention to potential acquisitions.
                                  With newly repaired balance sheets, listed property companies were correctly perceived
                                  as being able to potentially take advantage of “buying opportunities.” in hindsight, the
                                  improvement in sentiment during the year was stunning in its speed but, in some respects,
                                  unsurprising in its eventuality given the pattern of past recessions and recoveries.

                                  capital advantage
The rapid recovery of the         The rapid recovery of the capital markets was an important driver of real estate securities’
capital markets was an            returns. one of the more dramatic developments during the year was the speed at which the
important driver of real estate   credit markets recovered from the financial crisis, which had a direct bearing on real estate
securities’ returns.
                                  asset values and proved a stimulus to real estate stock prices. The timing and extent of this
                                  recovery can be seen in the surge in unsecured note issuance shown in figure 20.




                                  34
                                       NAREIT, February 2010
i 22
                                                                                                                 US VIEW 2010




figure 20 : reiT unSecureD BonD iSSuance




Source: ING Clarion Real Estate Securities, NAREIT, March 2009



uS mall giant Simon Property group (SPg) serves as an example for how quickly this
market improved. first, in late March 2009, SPg helped to re-open the unsecured debt
market by successfully issuing uSD 650.0 million of unsecured 10-year debt with a 10.8%
yield to maturity. This was deemed to be a success as it marked the first debt issuance by a
uS real estate company from a post-crisis standpoint, but was achieved at a significant cost
(high cost of capital). Less than two months later, in early May, SPg raised an additional
uSD 600.0 million of five-year unsecured debt at a 7.0% yield to maturity as spreads had
improved dramatically. in July, SPg re-opened its unsecured bond deal that it issued in May
with an aggregate uSD 500.0 million issuance with a 5.5% yield to maturity. Therefore, for
SPg, spreads improved by over 400 basis points over the course of four months. current
spreads for five- and ten-year unsecured debt in the uS reside in the 250 to 300 basis
point range. More broadly, during 2009, over uSD 10.0 billion was raised among uS reiT
companies via the unsecured debt markets. We expect them to continue these efforts
in 2010.

equity capital raising has been significant since the first half of 2009 with more than uSD    equity capital raising has been
20.0 billion of equity raised in the uS over the past twelve months.35 The breadth and scale   significant since the first half of
of the equity raising was surprising as many companies were able to raise more equity          2009 with more than uSD 20.0
                                                                                               billion of equity raised in the uS
than we believed possible at the beginning of 2009 when markets seemed closed to all but
                                                                                               over the past twelve months.
the highest quality companies. nonetheless, the negative aspect of balance sheet repair
was earnings dilution since most of the equity was raised at discounts (i.e., higher yields
and lower valuations than the underlying real estate owned by the companies). however,
the dilution was often more than offset by the increase in stock prices that resulted as
companies removed the threat of insolvency and bankruptcy. in many ways, with access
to the improved capital markets, public reiT companies are much better capitalized than
their private counterparts.




35
     ING Clarion Real Estate Securities, March 2010
                                                                                                                             i 23
US VIEW 2010




                                  real estate stocks showed a disquieting increase in volatility during 2007 and 2008, a
                                  characteristic shared with the stock market in general. volatility remained high early
                                  in 2009, but decreased materially as the year progressed. The rolling 30-day standard
                                  deviation of total returns for the S&P Developed Property index is now approaching
                                  the 1% range after peaking during the depths of the credit crisis about one year ago at
                                  approximately 4%.36 While current volatility remains above the long-term average going
                                  back to 1989, volatility is well under peak levels. Two typically stabilizing characteristics
                                  remain true of real estate stocks: first, underlying core earnings remain fairly visible, and
                                  second, dividend yields are higher compared to other equities on average. We believe
                                  these characteristics will cause property companies to trade with lower volatility than they
                                  have during the period of market dislocation we have seen over the past few years.

                                  investment outlook
                                  The backdrop as we start 2010 is significantly better than a year ago. economic growth is
                                  improving, though still fragile. consequently, real estate fundamentals are expected to
                                  stabilize during the year. Though occupancies and rents may remain soft in 2010, with low
                                  levels of new construction and improving demand, we expect fundamentals to improve going
                                  into 2011.

as capital markets and            it is estimated that approximately 70% of the uS reiTs reduced or eliminated their dividends
earnings recover over the next    during the financial crisis to preserve capital.37 as capital markets and earnings recover
several quarters, public reiTs    over the next several quarters, public reiTs are expected to either retain cash for attractive
are expected to either retain
                                  investment opportunities (at discount pricing) or restore or increase dividends gradually. We
cash for attractive investment
opportunities (at discount        believe that the income component of total return via the dividend will return as a defining
pricing) or restore or increase   investment characteristic of the total return prospects for listed property companies. We
dividends gradually.              believe the nareiT equity index dividend is likely to yield approximately 4% in 2010. We also
                                  expect multiple expansion (i.e., stock price appreciation) as sentiment continues to improve
                                  during the year.

Many uS reiTs are well            Many uS reiTs are well capitalized to take advantage of distressed investment opportunities.
capitalized to take advantage     earnings will stabilize in 2010 with expectation of “normal” growth in 2011. We anticipate
of distressed investment          real estate companies’ earnings growth to turn positive in approximately half of the
opportunities.
                                  regions during 2010. residual effects of earnings dilution from equity issuance and still-soft
                                  fundamentals will put pressure on real estate companies’ earnings in the uS. however, the
                                  effect on underlying cash flows is often lagged and muted relative to changes in the economy
                                  because of the contracts/leases, which determine underlying cash flows. as such, we project
                                  reiT company earnings to decline only 2% to 3% in 2010. More importantly, we think the
                                  market will increasingly focus on the prospects of a return to more normalized growth for
                                  listed real estate companies of 6% to 7% in 2011 with potential upside, should an interesting
                                  investment environment emerge for well-capitalized listed property companies. There are
                                  indications of increased merger and acquisition activities as some investors are trying to
                                  capitalize on distressed opportunities during this “trough” of the real estate market cycle.
                                  This is highlighted by the ongoing competition among several large players, including Simon
                                  Property group, Brookfield asset Management (BaM), hedge funds, and sovereign wealth
                                  funds, to take control of bankrupted general growth Properties (ggP). in addition, because
                                  of the improved equity market and rising reiT share prices, it is likely that several private real
                                  estate companies could go public to raise much needed capital, creating additional investment
                                  opportunities.




                                  36
                                       Ibid.
                                  37
                                       Morningstar, March 2010
i 24
                                                                                                                    US VIEW 2010




Mexico Market
Positioned for Growth
“While Mexico has been hit hard by the global financial crisis,
the Mexican authorities have responded strongly and effectively,
and there are now clear signs that a recovery is underway.”
                                                                                                                        John Lipsky
                                                                                                       international Monetary fund
                                                                                                                     March 16, 2010



economic overview
a variety of indicators, including gDP data, suggest that economic recovery is underway in          a variety of indicators,
Mexico. While Mexico’s strong ties to the uS economy were significantly detrimental to its          including gDP data, suggest
economic performance during the recession, the inchoate recovery in the uS has benefited            that economic recovery is
                                                                                                    underway in Mexico.
Mexico. external demand from the uS is driving improvement in Mexico’s export sector which
subsequently led to improvements in manufacturing, employment, and private consumption.
The Mexican economy grew by 2.9% during the third quarter of 2009, driven by strengthening
external demand. This trend continued over the fourth quarter, with Mexico’s real gDP
increasing by 2.0%.38 Looking forward, strength in industrial activity is expected to lead to
above-average economic growth of 4.3% in 2010.39

improving conditions in the export and manufacturing sectors during the third quarter
began to drive job growth in the following quarter. according to the Mexican Social Security
institute, the trade, transportation, manufacturing and business and personal services sectors
all experienced job growth in the fourth quarter.40 construction employment continued to lose
jobs due to lack of private investment. The national formal unemployment rate dropped from
a high of 6.4% in September to 4.8% in December. as the employment situation improves, we
believe that further gains in private consumption and consequently retail sales are likely.

real estate outlook
The real estate market showed signs of an incipient recovery during the fourth quarter of
2009, which may set the stage for a broader recovery in 2010. While economic activity remains
well below pre-recession levels, positive growth trends emerged during the second half of
2009 that bode well for 2010. vacancy rate movements were mixed across property types
and regions in the fourth quarter. While real estate vacancy rates remain elevated relative to
historical averages, rent reductions are beginning to stimulate some leasing activity, especially
in certain industrial markets. new projects delivering into the market are still facing difficult
leasing conditions, and are often forced to reduce rents and increase concessions to attract
tenants. new construction has dropped sharply, which will limit future supply and help to
improve fundamentals during a recovery.

reTaiL
economic headwinds continued to put pressure on Mexican retail sales in 2009, but a                 With the unemployment
combination of improving labor markets and heavy store promotions contributed to strong             rate declining and consumer
sales reports in the final months of the year. The anTaD41 same store sales index shows that        confidence improving, private
                                                                                                    consumption is likely set to
clothing and general Merchandise stores had a very strong holiday season, with December             increase over 2010.
sales up by 11.2% and 10.0% respectively over the same month last year. While the year-over-
year increase benefits from comparison to an extremely low base, these results give reason
for optimism nonetheless. With the unemployment rate declining and consumer confidence
improving, private consumption is likely set to increase over 2010.




38
     Instituto Nacional de Estadística y Geografía (INEGI), February 2010
39
     Economist Intelligence Unit, March 2010
40
     Instituto Mexicano del Seguro Social (IMSS), INEGI, January 2010
41
     Asociación Nacional de Tiendas de Autoservicio y Departamentales (ANTAD)
                                                                                                                                  i 25
US VIEW 2010




                                 inDuSTriaL
                                 Strengthening foreign demand led to increasing industrial activity towards the later part
                                 of the year, though the gains were limited to manufacturing. The total industrial activity
                                 index gained 2.3% over october and november, driven by a 6.2% increase in manufacturing
                                 over that time period. The other components of industrial activity (mining, utilities,
                                 and construction) continued to trend downward, but at a slower pace. Driving gains in
                                 manufacturing were the transportation equipment, furniture, and petroleum products
                                 sub-sectors. after steep declines earlier in 2009, transportation equipment manufacturing was
                                 up by 2.9% year-over-year in november.42

We expect inventory rebuilding   Though demand for manufacturing and warehouse space remained relatively weak, positive
activity of uS retailers to      absorption was reported in some of the larger industrial markets in Mexico. at the end
increase production activity     of 2009, industrial vacancy rates in Mexico city and Monterrey were 10.0% and 14.7%
in Mexico for the next few
quarters.
                                 respectively, down slightly from the third quarter.43 increasing absorption is a result of
                                 significantly reduced rents and increasingly flexible lease terms offered by property owners.
                                 We expect inventory rebuilding activity of uS retailers to increase production activity in Mexico
                                 for the next few quarters. as most speculative construction has been put on hold, we believe
                                 that industrial market fundamentals could improve quickly during a recovery.

                                 reSiDenTiaL
                                 The economic environment over the past year was extremely challenging for homebuilders.
                                 construction financing was difficult to obtain and sales totals declined due to the recession.
                                 The total volume of financing for housing declined by over 25% in 2009. Most of the decline is
                                 explained by a large pull back by commercial banks and non-bank residential lenders (known
                                 as Sofoles). The low-income housing segment continued to represent the majority of housing
                                 activity due to government-sponsored mortgage programs. The second home market has
                                 remained stagnant across Mexico. Major resort destinations continue to struggle with low
                                 sales volumes and falling values, especially Baja california, Sonora, and the riviera Maya.44

                                 The temporary lack of financing for Mexican residential housing will reduce the supply
                                 of units available for the next few years. With an anticipated economic recovery in 2010
                                 and continuing strong rates of household formation, demand for housing may rebound
                                 over the next year. along with strengthening fundamentals, recent consolidation in the
                                 homebuilding industry may make the next 12 to 18 months a strategically opportune time
                                 to enter the market.

                                 hoTeL
Lower levels of tourism and      hotel fundamentals in Mexico have recovered significantly from the negative shock of the
tourism spending continue to     h1n1 scare in early 2009. however, they are still suffering from the lingering effects of
present challenges to hotel      negative international publicity and the tail end of the global recession. Lower levels of
operators and tourism-based
                                 tourism and tourism spending continue to present challenges to hotel operators and tourism-
economies throughout the
country.                         based economies throughout the country. The total number of international visitors in the first
                                 10 months of 2009 declined by 6.3% compared to the same time period of 2008. This trend
                                 has shown an initial sign of reversing, as the number of international visitors for the month of
                                 october was up by 7.2% year-over-year.45




                                 42
                                      INEGI, January 2010
                                 43
                                      CBRE Market View, Q4 2009
                                 44
                                      BBVA Bancomer, Real Estate Watch Mexico, January 2010
                                 45
                                      Secretaria De Turismo, Resultados de la Actividad Turística, August - October 2009
i 26
                                                                                                                  US VIEW 2010




Conclusion
The economic and commercial real estate outlook was significantly bleaker last year. While       While we are not out of the
we are not out of the woods yet, a path to recovery is beginning to emerge in 2010. The          woods yet, a path to recovery is
signposts on this path include continuing economic growth, imminent employment growth,           beginning to emerge in 2010.
increasing consumer confidence, declining risk premiums, and the increasing expansion of
lending activity.

While the operating fundamentals may still be in decline this year, they, like capital values,
are no longer in free fall. in fact, the global search for yield is beginning to put downward
pressure on the cap rates of higher quality properties. The anticipated deluge of distressed
properties has amounted to a trickle, as owners and lenders seem determined to play for
time, hoping for better market conditions to make decisions on selling or foreclosing. in the
meantime, extensions, loan modifications, and term adjustments could possibly portend a
much more gradual re-pricing than many anticipated at the start of the downturn.

We expect the delivery of new supply to remain at very low levels for at least the next
two years, setting the stage for a potentially rapid recovery in commercial property
fundamentals when we experience sustained demand growth.




                                                                                                                             i 27
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