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					CBRE Econometric Advisors


     Around the Bend
The Shape of the Recovery
    U.Conn, November 11, 2009
        William Wheaton
Professor, Department of Economics
                MIT



 Global Research and Consulting
 Econometric Advisors
                             The Global Outlook

  The rest of the world does not have Housing
   and Debt market woes quite like the US
  The rest of the world is recovering sooner and
   likely stronger than the US.
  But with expanded trade, the world can only
   go so far without the US.
  Property markets outside of the US already
   show signs of mending.
  Long term good news: high global Savings =
   Plentiful Capital
  Long term concern: slowing demographics
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 2
      GDP Growth, G-8 vs. EM: Continued Synchronization?
        Y/Y
12
                                                                               ?              Forecast




7




2




-3




-8
      1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


                    Germany                    India   United States          China              Japan


     Source: IHS Global Insight, August 2009
 Global Research and Consulting • Econometric Advisors
 CB Richard Ellis | Page 3
                                    Consumption growth, G-8 vs. EM
      Y/Y
6
                                                                                                                                    Forecast
5

4

3

2

1

0

-1

-2

-3

-4
        1995

                1996

                             1997

                                      1998

                                             1999

                                                    2000

                                                           2001

                                                                  2002

                                                                          2003

                                                                                 2004

                                                                                        2005

                                                                                               2006

                                                                                                      2007

                                                                                                             2008

                                                                                                                    2009

                                                                                                                            2010

                                                                                                                                   2011

                                                                                                                                          2012

                                                                                                                                                   2013

                                                                                                                                                          2014

                                                                                                                                                                 2015
                                    United States                 China                 United Kingdom                     India                 Japan

     Source: IHS Global Insight, September 2009

 Global Research and Consulting • Econometric Advisors
 CB Richard Ellis | Page 4
        Savings Rates (total), G-8 vs. EM: Plenty of Capital
        %
55
                                                                                                                                  Forecast
50


45


40


35


30


25


20


15


10
          1995

                    1996

                             1997

                                    1998

                                           1999

                                                  2000

                                                         2001

                                                                  2002

                                                                         2003

                                                                                2004

                                                                                        2005

                                                                                               2006

                                                                                                      2007

                                                                                                             2008

                                                                                                                    2009

                                                                                                                           2010

                                                                                                                                  2011

                                                                                                                                         2012

                                                                                                                                                2013

                                                                                                                                                       2014

                                                                                                                                                              2015
                           United Kingdom                       China                  United States                   India                Japan

     Source: IHS Global Insight, August 2009

     Global Research and Consulting • Econometric Advisors
     CB Richard Ellis | Page 5
                                         Hence Long Term Rates remain low
      %                                                                                                                                  Forecast
9



8



7



6



5



4



3
        1995

                  1996

                           1997

                                  1998

                                           1999

                                                  2000

                                                         2001

                                                                2002

                                                                        2003

                                                                               2004

                                                                                      2005

                                                                                             2006

                                                                                                    2007

                                                                                                           2008

                                                                                                                    2009

                                                                                                                           2010

                                                                                                                                  2011

                                                                                                                                           2012

                                                                                                                                                  2013

                                                                                                                                                         2014

                                                                                                                                                                2015
                                         Asia-Pacific                  EU: European Union                         NAFTA                   World

    Source: IHS Global Insight, August 2009
    Global Research and Consulting • Econometric Advisors
    CB Richard Ellis | Page 6
         Trade (I + M) as % of GDP: increasing “openness”
       %
100
                                                                                                                                Forecast

 90


 80


 70


 60


 50


 40


 30


 20


 10
          1995

                   1996

                            1997

                                   1998

                                          1999

                                                 2000

                                                        2001

                                                               2002

                                                                      2003

                                                                             2004

                                                                                    2005

                                                                                           2006

                                                                                                    2007

                                                                                                           2008

                                                                                                                  2009

                                                                                                                         2010

                                                                                                                                2011

                                                                                                                                       2012

                                                                                                                                              2013

                                                                                                                                                     2014

                                                                                                                                                            2015
                                          Germany                     China                       Japan                  United States

Source: IHS Global Insight, August 2009
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 7
                  Slowing/negative Population Growth Rates
        Y/Y
1.5
                                                                                                                                      Forecast


  1



0.5



  0



-0.5



 -1



-1.5
           1995

                    1996

                              1997

                                     1998

                                             1999

                                                    2000

                                                           2001

                                                                  2002

                                                                         2003

                                                                                 2004

                                                                                        2005

                                                                                               2006

                                                                                                        2007

                                                                                                               2008

                                                                                                                      2009

                                                                                                                             2010

                                                                                                                                    2011

                                                                                                                                            2012

                                                                                                                                                   2013

                                                                                                                                                          2014

                                                                                                                                                                 2015
                                            Germany                      Japan                        United States                        China

  Source: IHS Global Insight, September 2009

  Global Research and Consulting • Econometric Advisors
  CB Richard Ellis | Page 8
                             Office Vacancy Rates stabilizing: except for US
18

16

14

12

10

 8

 6

 4

 2

 0
  01

           01

                       02

                                   02

                                          03

                                                 03

                                                        04

                                                               04

                                                                      05

                                                                             05

                                                                                    06

                                                                                           06

                                                                                                  07

                                                                                                         07

                                                                                                                08

                                                                                                                       08

                                                                                                                              09

                                                                                                                                     09
20

         20

                     20

                                 20

                                        20

                                               20

                                                      20

                                                             20

                                                                    20

                                                                           20

                                                                                  20

                                                                                         20

                                                                                                20

                                                                                                       20

                                                                                                              20

                                                                                                                     20

                                                                                                                            20

                                                                                                                                   20
                                                        Asia         United States               EU-15

     Global Research and Consulting • Econometric Advisors July 2009
                                      Source: CB Richard Ellis,
     CB Richard Ellis | Page 9
   Office Rents show a bottom in A-P, not US, EU
Rent Index 100 = 2001.1
    160


    150
                                                                                        Pacific
    140


    130

                                                                                                                       Asia
    120


    110
                                                                                                                           EU
    100


     90

                                                                                             North America
     80


     70


     60
          2001.1 2001.3 2002.1 2002.3 2003.1 2003.3 2004.1 2004.3 2005.1 2005.3 2006.1 2006.3 2007.1 2007.3 2008.1 2008.3 2009.1 2009.3
                     EU-15                          North America                         Asia                       Pacific


  Global Research and Consulting • Econometric Advisors
  CB Richard Ellis | Page 10   Source: CBRE Research and Consulting, July 2009
Cap Rates Starting to fall : except for continued US rise
9.0%

8.5%

8.0%

7.5%

7.0%

6.5%

6.0%

5.5%

5.0%
             07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3    Oct-
                                                                        09

                                            Americas     Asia   EMEA

 Source: Real Capital Analytics, Oct 2009
 Global Research and Consulting • Econometric Advisors
 CB Richard Ellis | Page 11
      So Capital Values stabilizing: except for the US

        Index, 100=2001.2
200


180


160


140


120


100


 80


 60


 40


 20
      19872
               19881
                       19884
                               19893
                                       19902
                                               19911
                                                       19914
                                                               19923
                                                                       19932
                                                                               19941
                                                                                       19944
                                                                                               19953
                                                                                                       19962
                                                                                                               19971
                                                                                                                       19974
                                                                                                                               19983
                                                                                                                                       19992
                                                                                                                                               20001
                                                                                                                                                       20004
                                                                                                                                                               20013
                                                                                                                                                                       20022
                                                                                                                                                                               20031
                                                                                                                                                                                       20034
                                                                                                                                                                                               20043
                                                                                                                                                                                                       20052
                                                                                                                                                                                                               20061
                                                                                                                                                                                                                       20064
                                                                                                                                                                                                                               20073
                                                                                                                                                                                                                                       20082
                                                                                                                                                                                                                                               20091
              EU Office                                                  US Office                                                     Pacific Office                                                          Asia Office


Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 12 Source: CB Richard Ellis July 2009
           The US Economic Outlook in more detail

  Trade, exports, low dollar – are big recovery
   drivers
  Business Investment and Inventories – also
   big recovery driver.
  Housing – surprise – a huge recovery driver.
  The big question is consumption. Will
   consumers save more or spend less?
  Another jobless recovery – why?




Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 13
                                           US Trade Flows are Turning positive
            Change from previous month (Millions of $)
  10,000


    5,000


          0


   -5,000


 -10,000


 -15,000


 -20,000


 -25,000


 -30,000
                                           May-07




                                                                                                                                                       May-08




                                                                                                                                                                                                                                                                   May-09
                         Mar-07




                                                                                                 Nov-07




                                                                                                                                     Mar-08




                                                                                                                                                                                                             Nov-08




                                                                                                                                                                                                                                                 Mar-09
                                  Apr-07



                                                             Jul-07
                                                                      Aug-07
                                                    Jun-07




                                                                                                                   Jan-08



                                                                                                                                              Apr-08


                                                                                                                                                                Jun-08
                                                                                                                                                                         Jul-08
                                                                                                                                                                                  Aug-08




                                                                                                                                                                                                                               Jan-09



                                                                                                                                                                                                                                                          Apr-09




                                                                                                                                                                                                                                                                                              Aug-09
                                                                                                                                                                                                                                                                            Jun-09
                                                                                                                                                                                                                                                                                     Jul-09
                Feb-07




                                                                               Sep-07




                                                                                                                            Feb-08




                                                                                                                                                                                           Sep-08




                                                                                                                                                                                                                                        Feb-09
                                                                                        Oct-07


                                                                                                          Dec-07




                                                                                                                                                                                                    Oct-08


                                                                                                                                                                                                                      Dec-08
                                                                      Change in Exports                                                                                                     Change in Imports


Source: BEA
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 14
                  Business Investment + Clunkers + stimulus =3.5%
       Contribution to Headline GDP Growth (%)
5



3



1



-1



-3



-5



-7
          2005               2006   2007   2008q1   2008q2    2008q3      2008q4   2009q1   2009q2   2009q3

              Consumer Driven GDP                   Business Driven GDP                 Government Driven GDP




 Source: BEA and CBRE Econometric Advisors
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 15
       Housing GDP Contribution Turns Positive Next Year
                             HH growth + demolitions + 2nd homes = 1.3m units!
       Change in housing starts, %                                                                            Residential investment contribution to GDP grow th, %
80                                                                                                                                                                                                    2.0
                                                                                                                           Housing starts increase
60                                                                                                                   from 570 ths in 2009 to 1250 in 2012
                                                                                                                                                                                                      1.5

40                                                                                                                                                                                                    1.0

20                                                                                                                                                                                                    0.5

   0                                                                                                                                                                                                  0.0

-20                                                                                                                                                                                                   -0.5

-40                                                                                                                                                                                                   -1.0

-60                                                                                                                                                                                                   -1.5
        1960
               1962
                      1964
                             1966
                                    1968
                                           1970
                                                  1972
                                                         1974
                                                                1976
                                                                       1978
                                                                              1980
                                                                                     1982
                                                                                            1984
                                                                                                    1986
                                                                                                           1988
                                                                                                                  1990
                                                                                                                         1992
                                                                                                                                1994
                                                                                                                                       1996
                                                                                                                                              1998
                                                                                                                                                     2000
                                                                                                                                                            2002
                                                                                                                                                                   2004
                                                                                                                                                                          2006
                                                                                                                                                                                 2008
                                                                                                                                                                                        2010
                                                                                                                                                                                               2012
                                     change in housing starts, %                                   residential investment contribution to GDP grow th, %




Sources: Bureau of the Census, BEA, CBRE Econometric Advisors

Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 16
                   “Jobless Recoveries”: getting worse
      Employment Growth, Peak Indexed to 0
10

 8

 6

 4

 2

 0
      -16       -14      -12   -10   -8   -6   -4   -2   0     2    4    6       8   10   12    14   16   18   20   22
 -2

 -4

 -6

 -8                                                                                            Much Longer Road
                                                              Peak Employment                  to Recovery
-10

-12
                                                     Quarters to and From Peak

                                      2008 (0=2007Q4)        1990 (0=1989Q4)         2001 (0=2001Q1)


 Sources: Bureau of Labor Statistics, CBRE-EA.
 Global Research and Consulting • Econometric Advisors
 CB Richard Ellis | Page 17
But a Labor Force shortage still looms with BB Retirees

             Civilian Labor Force, Mil.                          Ratio of workers/pop Age 65+
   180                                                                                          4.5




   170                                                                                          4.0



   160                                                                                          3.5




   150                                                                                          3.0



   140                                                                                          2.5




   130                                                                                          2.0
                    2000      2005          2010    2015    2020           2025          2030


                             Civilian Labor Force          Ratio of w orkers / Pop age 65+

 Sources: BLS, BOC, CBRE-EA
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 18
The Outlook for Consumer Driven Real Estate

  Retail sales recover – but more slowly – with
   consumer balance sheet issues
  Internet competition threatens traditional
   shopping.
  Housing Rents and Prices move together not
   apart!
  Why haven’t apartments benefited from
   housing’s foreclosure misery?




Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 19
    2009:Worst Year ever for retail Absorption
               SQFT X 1,000                                                                                                                                                               %
60,000                                                                                                                                                                                        14
                                                                                                                                                              Forecast
50,000                                                                                                                                                                                        13

40,000
                                                                                                                                                                                              12

30,000
                                                                                                                                                                                              11
20,000
                                                                                                                                                                                              10
10,000
                                                                                                                                                                                              9
         0

                                                                                                                                                                                              8
-10,000

-20,000                                                                                                                                                                                       7


-30,000                                                                                                                                                                                       6
                 1991
                        1992
                               1993
                                      1994
                                             1995
                                                    1996
                                                           1997
                                                                  1998
                                                                         1999
                                                                                2000
                                                                                       2001
                                                                                              2002
                                                                                                     2003
                                                                                                            2004
                                                                                                                   2005
                                                                                                                          2006
                                                                                                                                 2007
                                                                                                                                         2008
                                                                                                                                                2009
                                                                                                                                                       2010
                                                                                                                                                              2011
                                                                                                                                                                     2012
                                                                                                                                                                            2013
                                                                                                                                                                                   2014
                                        Completions (L)                                 Absorption (L)                                  Availability Rate (R )



  Source: CBRE Econometric Advisors

 Global Research and Consulting • Econometric Advisors
 CB Richard Ellis | Page 20
Internet Sales: recovering fastest, LT threat
      Yr/Yr Growth (%)
35

30

25

20

15

10

  5

  0

 -5

-10
      1993
             1993
                    1994
                           1994
                                  1995
                                         1995
                                                1996
                                                       1997
                                                              1997
                                                                     1998
                                                                            1998
                                                                                   1999
                                                                                          2000
                                                                                                 2000
                                                                                                        2001
                                                                                                               2001
                                                                                                                      2002
                                                                                                                             2002
                                                                                                                                    2003
                                                                                                                                           2004
                                                                                                                                                  2004
                                                                                                                                                         2005
                                                                                                                                                                2005
                                                                                                                                                                       2006
                                                                                                                                                                              2007
                                                                                                                                                                                     2007
                                                                                                                                                                                            2008
                                                                                                                                                                                                   2008
                                                                                                                                                                                                          2009
                                                Electronic shopping and mail order houses                                                  Core Sales w/o Nonstore

  Source: BOC

 Global Research and Consulting • Econometric Advisors
 CB Richard Ellis | Page 21
                                            Rents follow Home Prices: Always
          Why won’t apartments benefit from foreclosures?
                                   8
                                                                         y = 0.28x + 1.92
         Average Annual % Change                                             R2 = 0.65

                                   6
           Median Gross Rent




                                   4
                                                                                            2000-2008
                                                                                            1990-2000
                                   2
                                                      y = 0.32x + 1.88
                                                          R2 = 0.66

                                   0
                                       -5       0           5             10                15          20
                                                      Median Home Value
                                                    Average Annual % Change

 Sources: Bureau of the Census, CBRE Econometric Advisors
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 22
                  Dramatic movements Homeownership 1995-2011


      Renter Households, Mil.                                                 Homeownership Rate, %
45                                                                                                    70
                                        1996-2005: 1m renter household
                                        decline
40                                                                                                    68
                                        2006-2011, 5m increase

35                                                                                                    66


30                                                                                                    64


25                                                                                                    62


20                                                                                                    60
       1965
       1966
       1967
       1968
       1969
       1970
       1971
       1972
       1973
       1974
       1975
       1976
       1977
       1978
       1979
       1980
       1981
       1982
       1983
       1984
       1985
       1986
       1987
       1988
       1989
       1990
       1991
       1992
       1993
       1994
       1995
       1996
       1997
       1998
       1999
       2000
       2001
       2002
       2003
       2004
       2005
       2006
       2007
       2008
     2009 F
     2010 F
     2011 F
     2012 F
                                Renter Households, Mil.           Homeownership rate, %

     Sources: Bureau of the Census, CBRE Econometric Advisors

 Global Research and Consulting • Econometric Advisors
 CB Richard Ellis | Page 23
                 Homeownership change explains Rental Demand

           Year-over-year change in renter households, mil.
2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5
          1998

                      1999

                              2000

                                     2001

                                            2002

                                                   2003

                                                          2004

                                                                  2005

                                                                         2006

                                                                                2007

                                                                                       2008

                                                                                              2009F

                                                                                                      2010F

                                                                                                              2011F

                                                                                                                       2012F
                     due to household growth                     due to homeownership change                          total




  Sources: Bureau of the Census, CBRE Econometric Advisors
Global Research and Consulting • Econometric Advisors
 CB Richard Ellis | Page 24
But Conversions (supply) moves with demand

            Year-over-year change in rental stock, mil. units
 2.0

 1.5

 1.0

 0.5

 0.0

-0.5

-1.0

-1.5
            1998


                             1999


                                    2000


                                            2001


                                                   2002


                                                            2003


                                                                   2004


                                                                          2005


                                                                                  2006


                                                                                           2007


                                                                                                  2008


                                                                                                                 2009
                              completions            demolitions             conversions                 total



 Sources: Bureau of the Census, CBRE Econometric Advisors

Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 25
     Sales Duration Points to stabilizing price (and rents)

               House Price Index (Jan-2002=100)                            Months on Market
  180                                                                                         12




  160                                                                                         9




  140                                                                                         6




  120                                                                                         3




  100                                                                                         0
             Jul-02




             Jul-03




             Jul-04




             Jul-05




             Jul-06




             Jul-07




             Jul-08




             Jul-09
            Jan-02




            Jan-03




            Jan-04




            Jan-05




            Jan-06




            Jan-07




            Jan-08




            Jan-09
            Oct-02




            Oct-03




            Oct-04




            Oct-05




            Oct-06




            Oct-07




            Oct-08
            Apr-02




            Apr-03




            Apr-04




            Apr-05




            Apr-06




            Apr-07




            Apr-08




            Apr-09
                         New SF Homes Sale Duration (R)    Case-Shiller Home Price Index
                         Fannie/Freddie Home Price Index


Sources: BOC, S&P Case Shiller, FHFA
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 26
   The Outlook for Business driven Real Estate

  Rebuilding Inventories and trade gives
   industrial a shot in the arm.
  But we have way too much (obsolescent)
   industrial space.
  But Financial job growth is slowing
   dramatically – why?
  Any financial jobs are dispersing out of the
   traditional money centres.
  At least Office is not overbuilt (as in the
   1980s).

Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 27
              Trade is recovering, and growing in the long term
 But Inventories are shrinking from Logistic efficiency
                  Exports, Imports, and Inventory as
                              % of GDP
16%




12%




 8%




 4%




 0%
         1970q1
                  1971q3
                           1973q1
                                    1974q3
                                             1976q1
                                                      1977q3
                                                               1979q1
                                                                        1980q3
                                                                                 1982q1
                                                                                          1983q3
                                                                                                   1985q1
                                                                                                            1986q3
                                                                                                                     1988q1
                                                                                                                              1989q3
                                                                                                                                       1991q1
                                                                                                                                                1992q3
                                                                                                                                                         1994q1
                                                                                                                                                                  1995q3
                                                                                                                                                                           1997q1
                                                                                                                                                                                    1998q3
                                                                                                                                                                                             2000q1
                                                                                                                                                                                                      2001q3
                                                                                                                                                                                                               2003q1
                                                                                                                                                                                                                        2004q3
                                                                                                                                                                                                                                 2006q1
                                                                                                                                                                                                                                          2007q3
                                                                                                                                                                                                                                                   2009q1
                                                               Inventories                                              Imports                                                 Exports
                                                                                                                     as % of GDP

Source: U.S. Bureau of Economic Analysis.
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 28
 Inventories are best predictor of Industrial RE Demand
Industrial Net Absorption                                                                                                                                          Change in Bus. Inventories
       (millions sf)                                                                                                                                                   (billions 2005 $)

  150                                                                                                                                                                                             40

                                                                                                                                                                                                  30
  100
                                                                                                                                                                                                  20
    50
                                                                                                                                                                                                  10

       0                                                                                                                                                                                          0

                                                                                                                                                                                                  -10
   -50
                                                                                                                                                                                                  -20
 -100                                       Correlation=0.769
                                           *Statistically significant at 0.001 level                                                                                                              -30

 -150                                                                                                                                                                                             -40
             1990q1
                      1991q1
                               1992q1
                                        1993q1
                                                 1994q1
                                                          1995q1
                                                                   1996q1
                                                                            1997q1
                                                                                     1998q1
                                                                                              1999q1
                                                                                                       2000q1
                                                                                                                 2001q1
                                                                                                                          2002q1
                                                                                                                                   2003q1
                                                                                                                                            2004q1
                                                                                                                                                     2005q1
                                                                                                                                                              2006q1
                                                                                                                                                                       2007q1
                                                                                                                                                                                2008q1
                                                                                                                                                                                         2009q1
                               Industrial Net Absorption                                                        Change in Real Business Inventories

 Source: Bureau of Economic Analysis; Industrial Outlook XL, Fall 2009.
 Global Research and Consulting • Econometric Advisors
 CB Richard Ellis | Page 29
 Record vacancy pushes the start of recovery into 2011
Net Absorption, Completions
        (millions sf)                                                                                                                                                                Availability Rate

    400                                                                                                                                                                                           18%
                                                                                                                                                                      Forecast
    300                                                                                                                                                                                           16%

                                                                                                                                                                                                  14%
    200

                                                                                                                                                                                                  12%
    100
                                                                                                                                                                                                  10%
        0
                                                                                                                                                                                                  8%
    -100
                                                                                                                                                                                                  6%

    -200
                                                                                                                                                                                                  4%

    -300                                                                                                                                                                                          2%

    -400                                                                                                                                                                                          0%
                1990
                       1991
                                1992
                                       1993
                                              1994
                                                     1995
                                                            1996
                                                                   1997
                                                                          1998
                                                                                 1999
                                                                                        2000
                                                                                               2001
                                                                                                      2002
                                                                                                             2003
                                                                                                                    2004
                                                                                                                           2005
                                                                                                                                   2006
                                                                                                                                          2007
                                                                                                                                                 2008
                                                                                                                                                        2009
                                                                                                                                                               2010
                                                                                                                                                                      2011
                                                                                                                                                                             2012
                                                                                                                                                                                    2013
                                                                                                                                                                                           2014
                                                            Net Absorption                      Completions                       Availability Rate

   Global Research and Consulting • Econometric Advisors
   CB Richard Ellis | Page 30
      Finance is now a declining share of US Jobs
             Major US financial Centers loosing market share
                                         Financial Employment as a Share of Total Employment
    11.5                                                                                                               7.0

                                                                                                                       6.8
    11.0
                                                                                                                       6.6

                                                                                                                       6.4
    10.5
                                                                                                                       6.2

    10.0                                                                                                               6.0

                                                                                                                       5.8
      9.5
                                                                                                                       5.6

                                                                                                                       5.4
      9.0
                                                                                                                       5.2

      8.5                                                                                                              5.0
         1970           1973    1976    1979     1983    1986    1989   1992   1996    1999     2002     2005   2009

                               Top 10 Financial Markets (Left)            All Other Office Markets (Right)
    Source: Bureau of Labor Statistics.

Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 31
                       Hence Office demand increasingly from Services
           Job Growth in the Office Market will come from Service Sector
 Financial Services Jobs, x 1,000                                                                                                                                                                                                              Office Services Jobs, x 1,000
   5,000
                                                                                                                                                                                  Forecast                                                                                                   14,000

   4,800
                                                                                                                                                                                                                                                                                             13,000

   4,600                                                                                                                                                                                                                                                                                     12,000


   4,400                                                                                                                                                                                                                                                                                     11,000


                                                                                                                                                                                                                                                                                             10,000
   4,200

                                                    Recovery, ie, positive job growth,                                                                                                                                                                                                       9,000
   4,000                                          comes in early 2010 for services, late
                                                    2010 for finance. Expansion, ie,                                                                                                                                                                                                         8,000
                                                   growth beyond the previous peak,
   3,800                                          comes in 2012 for services, not over
                                                                                                                                                                                                                                                                                             7,000
                                                       next ten years for finance.

   3,600                                                                                                                                                                                                                                                                                     6,000
              1997.1
                       1997.4
                                1998.3
                                         1999.2
                                                  2000.1
                                                           2000.4
                                                                    2001.3
                                                                             2002.2
                                                                                      2003.1
                                                                                               2003.4
                                                                                                        2004.3
                                                                                                                 2005.2
                                                                                                                          2006.1
                                                                                                                                   2006.4
                                                                                                                                            2007.3
                                                                                                                                                     2008.2
                                                                                                                                                              2009.1
                                                                                                                                                                       2009.4
                                                                                                                                                                                2010.3
                                                                                                                                                                                         2011.2
                                                                                                                                                                                                  2012.1
                                                                                                                                                                                                           2012.4
                                                                                                                                                                                                                    2013.3
                                                                                                                                                                                                                             2014.2
                                                                                                                                                                                                                                      2015.1
                                                                                                                                                                                                                                                2015.4
                                                                                                                                                                                                                                                         2016.3
                                                                                                                                                                                                                                                                  2017.2
                                                                                                                                                                                                                                                                           2018.1
                                                                                                                                                                                                                                                                                    2018.4
                                                              Financial Services                                                                                                                  Office Using Services


 Source: Office Outlook XL, Fall 2009
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 32
                              Current Crisis not a Construction Crisis (whew!)

                                                             Office Construction Starts
                 200                                                                                                                   15




                 160                                                                                                                   12




                                                                                                                                            Percent of NRA
                 120                                                                                                                   9
Millions of SF




                  80                                                                                                                   6




                  40                                                                                                                   3




                   0                                                                                                                   0
                       1980


                               1982


                                      1984


                                             1986


                                                      1988


                                                               1990


                                                                       1992


                                                                              1994


                                                                                     1996


                                                                                            1998


                                                                                                   2000


                                                                                                           2002


                                                                                                                  2004


                                                                                                                         2006


                                                                                                                                2008
                                                Construction Starts ( L )                          As % of NRA ( R )


       Sources: McGraw Hill, CBRE Econometric Advisors.
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 33
  Will the recovery in rents will be as slow as from 2001 (and 1992)?
                                         Does sharper current drop = sharper recovery?
   Net Absorption , msf                                                                                                                                                                                      TW Rent Index($)
      50                                                                                                                                                                                                                                 35
                                                                                                                                                                                                    Forecast
      40                                                            15 qtrs                                                                                                                                                              30
                                                                                                                                                                                                   9 qtrs
      30
                                                                                                                                                                                                                                         25
      20
                                                                                                                                                                                                                                         20
      10
                                                                                                                                                                                                                                         15
        0
                                                                                                                                                                                                                                         10
    -10

    -20                                                                                                                                                                                                                                  5
                                                  *Excludes 21 msf of
                                                  WTC Loss
    -30                                                                                                                                                                                                                                  0
              2000.1
                       2000.3
                                2001.1
                                         2001.3
                                                  2002.1
                                                           2002.3
                                                                     2003.1
                                                                              2003.3
                                                                                       2004.1
                                                                                                2004.3
                                                                                                         2005.1
                                                                                                                  2005.3
                                                                                                                           2006.1
                                                                                                                                    2006.3
                                                                                                                                             2007.1
                                                                                                                                                      2007.3
                                                                                                                                                               2008.1
                                                                                                                                                                        2008.3
                                                                                                                                                                                 2009.1
                                                                                                                                                                                          2009.3
                                                                                                                                                                                                    2010.1
                                                                                                                                                                                                              2010.3
                                                                                                                                                                                                                       2011.1
                                                                                                                                                                                                                                2011.3
                                                            Net Absorption                                                                                        Rent Index



 Source: CBRE Econometric Advisors

Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 34
        The Outlook for Capital, and Asset Values

 Fundamentals hit hard in 2010-2014 as
  current rents roll into NOI.
 A renewed appetite for risk will help curtail the
  rise in cap rates.
 Some debt is now available, but is it enough?
 So much of the rise in cap rates is based on
  the fear of a (forthcoming) debt rollover crisis.
 But there are lots of Alternative solutions:
  • Re-ignite CMBS (2 big new TALF deals)
  • Use public debt markets (REITS)
  • Equity –for- Debt!

Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 35
 Cap Rates hurt Values now, NOI declines loom
Cap rates have a strong initial impact, NOI declines through 2015.
Annualized Contribution to Apprectiation Return %
                   30
                                                                                                                                                                Forecast
                   20

                   10
  Contribution %




                    0

                   -10

                   -20

                   -30

                   -40
                         1994.3

                                  1995.4

                                           1997.1

                                                    1998.2

                                                             1999.3

                                                                      2000.4

                                                                               2002.1

                                                                                        2003.2

                                                                                                 2004.3

                                                                                                          2005.4

                                                                                                                   2007.1

                                                                                                                            2008.2

                                                                                                                                     2009.3

                                                                                                                                              2010.4

                                                                                                                                                       2012.1

                                                                                                                                                                  2013.2

                                                                                                                                                                           2014.3

                                                                                                                                                                                    2015.4

                                                                                                                                                                                             2017.1

                                                                                                                                                                                                      2018.2
                             NOI Contribution to Value                                  Cap-Rate Contribution to Value                                           Appreciation Return


Source: CBRE-EA, Investment Outlook Fall 2009, NCREIF; Base Case Scenario
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 36
                     Cap Rate Outlook: Stop rising in 2010, why?
                                                 How high will institutional cap rates trend?

                     12
                                                                                                                                                        Forecast
                     11
                     10
 NCREIF Cap Rate %




                     9
                     8
                     7
                     6
                     5
                     4
                     3
                     2
                          1981
                                 1982
                                        1984
                                               1986
                                                      1988
                                                             1989
                                                                    1991
                                                                           1993
                                                                                  1995
                                                                                         1996
                                                                                                1998
                                                                                                       2000
                                                                                                              2002
                                                                                                                     2003
                                                                                                                            2005
                                                                                                                                   2007
                                                                                                                                          2009
                                                                                                                                                 2010
                                                                                                                                                        2012
                                                                                                                                                               2014
                                                                                                                                                                      2016
                                                                                                                                                                             2017
                                                      Retail                      Multifamily                        Industrial                     Office


Source: CBRE-EA, Investment Outlook Fall 2009, NCREIF
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 37
                          Investor Appetite for Risk is returning
              Spread between corporate bonds and ten year treasury are falling
                                      corporate bond sales globally are brisk
BPS Spreads
300
                                                                                 Forecast

250

200

150

100

 50

   0
         1980.1
         1981.3
         1983.1
         1984.3
                              1986.1
                              1987.3
                                       1989.1
                                       1990.3
                                       1992.1
                                       1993.3
                                       1995.1
                                       1996.3
                                                      1998.1
                                                               1999.3
                                                               2001.1
                                                               2002.3
                                                               2004.1
                                                               2005.3
                                                               2007.1
                                                                        2008.3
                                                                                 2010.1
                                                                                 2011.3
                                                                                 2013.1
                                                                                 2014.3
 Source: CBRE Econometric Advisors, Federal Reserve
 Global Research and Consulting • Econometric Advisors
 CB Richard Ellis | Page 38
               The Net growth of the stock of Debt is stuck
       The crunch in debt requires a deleveraging of the economy & property.

     Net Debt Growth / GDP
40
                                                                                                                                                 Forecast
35
30
25
20
15
10
 5
 0
      1980.1
               1981.3
                        1983.1
                        1984.3
                                 1986.1
                                          1987.3
                                                   1989.1
                                                   1990.3
                                                            1992.1
                                                                     1993.3
                                                                              1995.1
                                                                                       1996.3
                                                                                       1998.1
                                                                                                1999.3
                                                                                                         2001.1
                                                                                                                  2002.3
                                                                                                                  2004.1
                                                                                                                           2005.3
                                                                                                                                    2007.1
                                                                                                                                             2008.3
                                                                                                                                             2010.1
                                                                                                                                                      2011.3
                                                                                                                                                               2013.1
                                                                                                                                                                        2014.3
 Source: CBRE Econometric Advisors, Federal Reserve
 Global Research and Consulting • Econometric Advisors
 CB Richard Ellis | Page 39
         Institutional Asset Values: back to the 1990s
                                  Almost a decade before we are back to peak values.

  NCREIF Value Index, 1978q1 = 100; base case outlook
  380
                                F o re c a s t e d pe a k - t o - t ro ugh de c line s f ro m 2 0 0 8 q1:                                                                 Forecast
                                O F C : 3 3 %, IN D : 4 1%, M F H : 3 3 %, R T L: 2 4 %
  330
                                D e c line R e a lize d t o D a t e ( 2 0 0 9 q2 ) :
                                O F C : 2 7 %, IN D : 2 5 %, M F H : 2 5 %, R T L: 19 %
  280

  230

  180

  130

     80
              1979.1
                       1981.1
                                   1983.1
                                            1985.1
                                                     1987.1
                                                              1989.1
                                                                       1991.1
                                                                                1993.1
                                                                                         1995.1
                                                                                                  1997.1
                                                                                                           1999.1
                                                                                                                    2001.1
                                                                                                                             2003.1
                                                                                                                                      2005.1
                                                                                                                                               2007.1
                                                                                                                                                        2009.1
                                                                                                                                                                 2011.1
                                                                                                                                                                          2013.1
                                                                                                                                                                                    2015.1
                                                                                                                                                                                             2017.1
                                            Office                               Industrial                                   Multifamily                                          Retail



Source: CBRE-EA, Investment Outlook Fall 2009, NCREIF
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 40
Real Estate Round Table, Aggregate CRE Value: - 30%
                                 2008q1: 3.2Trillion equity, 3.5 Trillion Debt

    Capital Stack:
      Debt and                 2008q1 Values
      Equity $
             100
                                   55% LTV

                90                   Equity                     2009-2010 Values
                80
                                                                    80% LTV
                70
                                                                                      66%
                60
                                                                                   Equity loss
                50                    CMBS                          CMBS

                40

                30
                                      Other                          Other
                20                                                   Debt
                                      Debt
                10
                   0
                              Original C apital Stack         New C apital Stack
 Global Research and Consulting • Econometric Advisors
 CB Richard Ellis | Page 41
   How will CRE Market be Refinanced at Rollover?


   Capital Stack:                                                  Market Capital
     Debt and                  2008q1 Values                      needs at Rollover
     Equity $
            100

               90                   Equity
                                                                   Remaining Equity
                                                                        = $15
               80

               70
               60
                                                 Equity Re-Cap
               50                    CMBS         Gap = $16.5

               40

               30                                  New 55% LTV
                                     Other
                                                       Debt
               20                    Debt
                                                 Plenty without
               10
                                                    CMBS!
                  0
                             Original C apital Stack              New C apital Stack
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 42
     The “rollover crisis” is really an Equity Gap

 Looks like lots of equity forming on the
  sidelines to purchase “A” properties at 30-40%
  distressed sale prices.
 The problem is that “A” properties are not for
  sale at those prices! At least yet.
 Current sales are “thin” and based mostly on
  problem properties.
 MIT TBI index says that demand (purchases)
  are more willing, while supply (sellers) are
  less. Hence adjusting for Liquidity, prices
  actually rose a bit in 3q!
 Maybe we will escape the crisis
Global Research and Consulting • Econometric Advisors
CB Richard Ellis | Page 43

				
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