The real estate industry is entering an "Era of Less" in 2011 characterized by a smaller industry, lower return expectations, restrained development, reduced credit availability, and lower profits. Commercial lenders and borrowers will accelerate recognition of substantial losses from pre-recession deal making. Properties with weak cash flows face problematic workouts and uncertain refinancing prospects as loans mature. Housing remains mired in a dead zone of reduced demand. However, owners of high-quality properties in prime markets enjoy better outlooks as capital flees to quality assets. Apartments are seen as the top core investment. Some investors positioned with cash and avoiding overleveraging can take advantage of opportunities to acquire distressed assets from credit-starved

1. 2011
Emerging
Trends
in Real Estate
®

2. Emerging Trends in Real Estate® 2011
A publication from:

3. Emerging
Trends 20
in Real Estate
11
®
Contents
1 Executive Summary
2 Chapter 1 Entering the Era of Less
5 Muddling Along at Bottom
7 Demand Drag: The Compromised Economy
9 Inflation versus Deflation and Higher Interest Rates
10 Supply Side: Development Stall-Out
10 Regulation and Taxes
11 Real Estate Industry: Chastened and Smaller
12 Best Bets 2011
14 Chapter 2 Real Estate Capital Flows
15 More Realistic
18 Banks and Insurers
19 Wall Street
19 CMBS—Conduits and Special Servicers
22 Mezzanine Debt
22 Opportunity and Core Funds
22 REITs
23 Private REITs, High-Net-Worth Investors, Local Operators
23 Pension Funds
24 Foreign Investors
26 Chapter 3 Markets to Watch
27 No Surprises, Gaps Remain
32 Major Market Review
39 Other Market Prospects
40 Chapter 4 Property Types in Perspective
41 Prospects Improve
44 Apartments
45 Industrial
47 Hotels
49 Office
51 Retail
53 Housing
54 Niche Sectors
56 Chapter 5 Emerging Trends in Canada
57 Investment Prospects
59 Capital in Balance
61 Markets to Watch
63 Property Types in Perspective
65 Best Bets
68 Chapter 6 Emerging Trends in Latin America
69 Brazil: Opportunities and Limits
70 Mexico: Potential and Concerns
72 Interviewees

4. Editorial Leadership Team
Emerging Trends in Real Estate ® 2011 Chairs PricewaterhouseCoopers Advisers and Researchers
Patrick L. Phillips, Urban Land Institute Adam Harvey James Pettigrew
Mitchell M. Roschelle, PricewaterhouseCoopers Allen G. Baker Jasen Kwong
Amedeo Prete Jason Palmer
Author Ami J. Patel Jeff Kiley
Jonathan D. Miller Amy E. Olson Jeff Nasser
Andrew Alperstein Jennifer A. Murray
Principal Researchers and Advisers Andrew Popert Katherine Billings
Stephen Blank, Urban Land Institute Anne Daniel Lois McCarron-McGuire
Charles J. DiRocco, Jr., PricewaterhouseCoopers Brandon Bush Lori-Ann Beausoleil
Dean Schwanke, Urban Land Institute Bruce Raganold Michael Chung
Chris Vangou Michael Epstein
Senior Advisers Christine Lattanzio Nadja Ibrahim
Christopher J. Potter, PricewaterhouseCoopers, Canada Claude Gilbert Nick Panagiotopoulos
Susan M. Smith, PricewaterhouseCoopers Court Maton Patricia Perruzza
Dan Crowley Reginald Dean Barnett
Emeritus Emerging Trends Chairs Daniel D’Archivio Rich Fournier
Patrick Leardo David E. Khan Rob E. Sciaudone
Richard Rosan David M. Voss Russell Goodman
Dennis Johnson Russell Sugar
Dominique Fortier Sandra Blum
Douglas B. Struckman Scott Williamson
Frank Magliocco Stephen Shulman
Holly V. Allen Susan Johnson
Emerging Trends in Real Estate® is a trademark of
Ian Nelson Timothy C. Conlon
PricewaterhouseCoopers and is registered in the United States
Jaclyn Paul Tori Lambert
and other countries. All rights reserved.
Jag Patel Yekaterina Kostyuk
“PricewaterhouseCoopers” refers to PricewaterhouseCoopers, a James A. Oswald
Delaware limited liability partnership, or, as the context requires,
the PricewaterhouseCoopers global network or other member ULI Editorial and Production Staff
firms of the network, each of which is a separate and independent James Mulligan, Managing Editor/Manuscript Editor
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Craig Chapman, Senior Director, Publishing Operations
© October 2010 by the Urban Land Institute Karrie Underwood, Administrative Coordinator
and PricewaterhouseCoopers.
Printed in the United States of America. All rights reserved. No
part of this book may be reproduced in any form or by any means,
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permission of the publisher.
Recommended bibliographic listing:
Urban Land Institute and PricewaterhouseCoopers LLP. Emerging
Trends in Real Estate® 2011. Washington, D.C.: Urban Land
Institute, 2010.
ISBN: 978-0-87420-149-9
ULI Catalog Number: E41
ii Emerging Trends in Real Estate® 2011

5. Executive Summary
A
fter three years of dislocation and delaying live comfortably and more affordably in smaller Without ample leverage (and attendant risk), real
unprecedented losses, the U.S. real estate houses or apartments and gain economies from estate assets cannot sustain higher performance.
industry finally sees some hopeful signs in driving less. Infill areas and 24-hour neighbor- Washington, D.C., and New York City solidify
2011 of tempered improvement—across all mar- hoods in cities and urbanizing suburban nodes ratings as the leading U.S. real estate investment
kets and all property sectors. Emerging Trends become more desirable locations for the large markets, followed by San Francisco, Boston,
interviewees expect halting advances in digging population cohorts of aging, empty-nest baby and Seattle. All these metropolitan areas fit the
out from the recent avalanche of ill-considered boomers and their young adult, echo boomer Emerging Trends profile of 24-hour gateways
commercial property investments and prob- offspring. At the same time, fringe suburban along global pathways, which will continue
lem loans, but grow concerned about larger subdivisions—long car rides from work, shopping, to attract a large proportion of high-paying,
economic forces that could stunt any upturn and recreation amenities—lose some appeal. brainpower jobs. Despite somewhat improved
and make the course more treacherous. “It’s A flight to quality by investors accelerates outlooks for all surveyed cities, most markets
always been a mistake to bet against the U.S. toward the best places—typically coastal gate- struggle with cash-strapped state and local
economy,” says an interviewee. “Just this time way cities with traditional 24-hour dynamics— governments and the prospect of reduced ser-
it’s different. We haven’t gone through a garden- further bolstering their investment citadel status. vices, including police and fire protection and
variety recession, and now we’re facing a huge Many interior markets, meanwhile, struggle to sanitation.
deleveraging process, which means a subdued attract investor interest; they typically lack direct Apartments easily outrank all other property
recovery.” Worries mount that the nation and its links to global commerce pathways. More afford- sectors: favorable demographics and the hous-
real estate markets enter a disconcerting period able communities face slower growth or worse ing bust should increase renter demand, and
of limits and uncertainty—an “Era of Less.” because the incomes of people who live there some interviewees forecast rent spikes by 2012
Among the anticipated factors slowing any may be increasingly compromised. in some infill markets where development activity
rebound: unemployment stays high, wages stag- Lenders with strengthening balance sheets has ground to a halt. Readily available financing
nate, the middle class gets further pinched, lend- finally step up foreclosure activity and dispo- from Fannie Mae and Freddie Mac bolsters buy-
ers and regulators restrict credit, and the tax bite sitions of properties during 2011 and 2012, ing activity. Core players also like warehouses
(including local property taxes) increases. The helping values reset 30 to 50 percent below and infill grocery-anchored retail, while full-
consequences of the nation’s debt bomb explo- 2007 peaks. Borrowers should have improved service center-city hotels remain the top choice
sion extend well beyond the obvious implications chances to obtain refinancing, if they own rela- for opportunity investors. Suburban office gets
for this next real estate cycle, which include tively well-leased cash-flowing properties. But the cold shoulder in surveys.
restrained revenue growth and tempered appre- overleveraged owners dealing with high vacan- Canada’s real estate markets largely avoided
ciation. The United States may have reached cies and rolling-down rents could face more recessionary impacts, thanks to constrained
an inflection point where Americans’ incomes uncertain prospects in the credit markets, includ- lending practices and the dominance of conser-
and standard of living come under pressure in ing the increasing likelihood of foreclosure. vative institutional owners who hold assets for
the face of intense global competition. While the Investors with cash should have excellent cash flows. But interviewees remain concerned
population grows, individuals curb consumption opportunities to seize market-bottom plays by about lagging outlooks for the U.S. economy,
out of necessity, and increase savings rates to recapitalizing floundering owners and buying which could impinge on Canada’s growth track,
ensure more secure financial futures. foreclosed assets, but they realize that pent-up especially for industrial and hotel investments.
As a result, developers realize “we won’t equity demand for high-quality assets reduces Most retail and office markets boast mid- to low-
need as much space” on a per-capita basis in chances for outsized returns. In certain 24-hour single-digit vacancies, and multifamily markets
the future, and continue on an enforced holiday. coastal markets, frenzied bidding for trophy sustain strong demand. Toronto and Vancouver
Technological advances and corporate outsourc- office space and apartments already raises remain two of North America’s most favored
ing combine to moderate growth in demand concern about buyers ignoring the realities of investment gateways.
for office space. Distribution advances and supply/demand fundamentals and conjuring Investors circumspectly consider Latin
e-commerce reduce links in the supply chain unrealistic growth forecasts. America’s two prime emerging markets. Brazil,
between manufacturers and consumers, trans- Survey respondents and interviewees ratchet in particular, shows signs of becoming a major
forming warehouse needs and dampening ten- down performance expectations, anticipating 21st-century global player, and Mexico’s bur-
ant demand for bricks-and-mortar retail space. high-single-digit returns for core properties and geoning middle class craves more housing and
Homeowners slowly will accept that they can midteen returns for higher-risk investments. retail space.
Notice to Readers
Emerging Trends in Real Estate is a trends and forecast publication now in its 32nd Private Property Company or Developer 43.1%
edition, and is one of the most highly regarded and widely read forecast reports in Real Estate Service Firm 20.5%
the real estate industry. Emerging Trends in Real Estate® 2011, undertaken jointly by Institutional/Equity Investor or Investment
the Urban Land Institute and PricewaterhouseCoopers, provides an outlook on real Manager 15.4%
estate investment and development trends, real estate finance and capital markets, Other (please specify) 10.0%
property sectors, metropolitan areas, and other real estate issues throughout the Bank, Lender, or Securitized Lender 4.9%
United States, Canada, and Latin America. Homebuilder or Residential Land Developer 3.2%
Publicly Listed Property Company or REIT 2.9%
Emerging Trends in Real Estate 2011 reflects the views of more than 875 individuals
who completed surveys or were interviewed as a part of the research process for Throughout the publication, the views of interviewees and/or survey respondents
this report. The views expressed herein are obtained exclusively from these surveys have been presented as direct quotations from the participant without attribution
and interviews, and do not express the opinions of either PwC or ULI. Interviewees to any particular participant. A list of the interview participants in this year’s study
and survey participants represent a wide range of industry experts, including inves- appears at the end of this report. To all who helped, the Urban Land Institute and
tors, fund managers, developers, property companies, lenders, brokers, advisers PricewaterhouseCoopers extend sincere thanks for sharing valuable time and
and consultants. ULI and PwC researchers personally interviewed more than 275 expertise. Without the involvement of these many individuals, this report would not
individuals and survey responses were received from 600 individuals, whose com- have been possible.
pany affiliations are broken down below.
Emerging Trends in Real Estate® 2011 1

7. c h a p t e r 1
Entering the
Era of Less
“The problems are obvious, but the solutions oblique.”
A
fter a hard crash, the real estate world reluctantly reaping excellent risk-adjusted returns. For lenders back in
enters a new “Era of Less” in 2011—encompass- the game and good-credit borrowers, the bottom of the cycle
ing a shrunken industry, lower return expectations, offers the best environment to employ leverage, especially on
restrained development prospects, reduced credit availability, high-quality assets, and low interest rates only magnify the
and crimped profits. Adding to unnerving short-term pes- opportunity for owners. Investment managers and real estate
simism, commercial lenders and borrowers finally accelerate investment trusts (REITs) with teams to lease properties and
recognition of substantial losses (30 to 50 percent haircuts on nurse asset income streams back to health can bulldoze
asset values) from frenzied deal making in the years before aside many operator-light opportunity-fund boutiques, which
the recent steep worldwide recession. Limping assets, suffer- had depended on cap-rate compression and leverage to
ing high vacancies and rolling-down rents, face problematic reap appreciation. “You can no longer make money off flip-
workouts and uncertain refinancing prospects as hundreds ping; you must be able to manage assets at the property
of billions of dollars of loans mature in each of the next four level,” an interviewee said.
years, according to Emerging Trends interviewees. Housing,
meanwhile, remains mired in a dead zone of reduced demand: ExHIBIT 1-1
many Americans cannot afford new homes even with record- NCREIF Capitalization Rates vs. S&P 500
low mortgage rates and slumping prices. But owners of the Inverse P/E Ratio
sliver of properties with healthy cash flows in prime gateway
— Cap Rate — Inverse P/E Ratio
markets enjoy significantly better outlooks—a capital flight to 15
15%
quality buttresses prices and balance sheets—and, not sur-
prisingly, everybody falls in love with rental apartments, the 12
12%
king of core-style income-generating investments.
Over the next year, some real estate players could gain 9%
9
significantly. The smart investors who sold near market tops,
avoided overleveraging, and kept powder dry are extremely 6%
6
well positioned to take advantage of legions of credit-starved
competitors who overborrowed and overpaid. Now, the
3%
3
haves can attract new capital, poach tenants, and lure talent
away from the have-nots. Cash-flush investors and reviving
0
0%
lenders should have plenty of opportunities to recapitalize
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
2010
debt-starved, have-not players and take preferred investment
or loan-to-own positions in asset capital stacks, eventually Sources: NCREIF, S&P, PricewaterhouseCoopers LLP.
Emerging Trends in Real Estate® 2011 3

8. Gradually, extreme negativity in the commercial real
ExHIBIT 1-2
estate universe will abate. For 2011, debt markets will thaw
NCREIF Cap Rates vs. U.S. Ten-Year Treasury Yields
further as money-center banks continue to strengthen bal-
ance sheets, take their losses, and step up lending, lead-
Spread 10-Year Treasury Yield* Cap Rate
ing to higher transaction volumes. In addition, left-for-dead
conduits will increase activity. Emerging Trends surveys also 15%
15
point to improved prospects off last year’s rock bottom for
12%
12
all U.S. property markets and real estate sectors. This recon-
stituting marketplace should position real estate once again 9%
9
as an attractive yield-producing asset class for those inves- 6%
6
tors who recalibrate investment expectations rationally. “The
3%
3
recent lesson learned is that real estate is a low-operating-
leverage business,” an interviewee explains. “It’s very hard to 0%
0
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
2010
get 15 percent to 20 percent rates of return without more risk –3%
-3
and more leverage, and you can’t succeed on a sustained
–6%
-6
basis. Real estate is more about cash flow and keeping
buildings leased.” What’s wrong with delivering unlevered, –9%
-9
high-single-digit returns or low-teens performance for conser-
Sources: NCREIF, Moody’s Economy.com, Federal Reserve Board, PricewaterhouseCoopers LLP.
vatively financed assets? Well nothing, especially when you
* Ten-year Treasury yields based on average of the quarter; 2010Q2 average as of August 31, 2010.
consider the dismal record of the stock market over the past
decade.
Still, the overwhelming majority of Emerging Trends inter- corporations cut back on pensions, states grapple to reduce
viewees register doubts and uncertainty about the future public employee benefits, and just about everyone pays more
and, especially, the subdued outlook for the U.S. economy, for health insurance coverage. Again this year, Emerging
which not only flounders in consumer and government debt, Trends interviewees enter a familiar echo chamber, repeat-
but also struggles to create high-paying jobs in a more ing emphatically how real estate recovery “is all about jobs,”
competitive, technology-enabled global marketplace. “Our but turn silent when trying to identify America’s high-growth
problems are much bigger than real estate, and solutions are employment-creating industries of the future.
well beyond the scope of our industry.” Americans and their Homebuilding and commercial real estate construction
government have been living large off borrowing for several certainly do not offer much hope for jump-starting employ-
decades, and now the staggering bills have come due. The ment or the economy in the near term. “We really don’t need
housing debacle, precipitated by easy credit, shakes con- much new of anything.” Housing led the economy into the
fidence to the core, undermining personal wealth and the dumpster, and increasing home loan defaults and foreclo-
sense of a secure financial future. Consumption takes a nec- sures curtail any chance for a sudden rebound. Sobered
essary breather as people retrench to pay off sizable debts— lenders now expect homebuyers to make downpayments and
home mortgages, car loans, and credit cards—and increase have solid credit histories before they extend mortgages, but
savings rates from record-low levels. coming out of this recession, many Americans simply cannot
The unemployment picture appears more worrisome: even meet these basic requirements or turn too skittish to take a
before the recession, wages and benefits had stagnated for chance.
the average American. Manufacturing jobs have leached to Eventually population growth will absorb the overhang in
lower-cost overseas markets since the 1970s, slowly decimat- housing supply, but location preferences show signs of shift-
ing bedrock blue-color jobs. Now the internet and telecom ing away from bigger homes on the suburban fringe to infill
advances allow companies to outsource more professional locations closer to 24-hour markets. Reversing decades of
and service jobs to overseas locations at reduced wages, moving away from city centers, “more people will regroup in
and various computer applications eliminate office and areas where life is easier, more efficient, and less car depen-
administrative positions. Many corporate productivity gains dent”—that is, closer to shopping districts and workplaces. In
and enhanced profits come at the expense of damping down the approaching cycle, the industry can expect to see more
appetites for new hires, and now government belt tighten- high-rise and mid-rise apartments, as well as townhouse proj-
ing, especially at the state and local levels, eliminates more ects, built around shopping centers and commercial districts.
jobs as stimulus funding begins to run dry. At the same time, Failing retail space will be converted to other uses, often with
4 Emerging Trends in Real Estate® 2011

9. Chapter 1: Entering the Era of Less
But buying time with extend and pretend may pay off for
ExHIBIT 1-3
other financial institutions, including larger money-center banks
U.S. Real Estate Returns and Economic Growth
and life insurers, as well as some commercial mortgage–
backed securities (CMBS) special servicers. They will step
NCREIF GDP NAREIT Composite
up writedowns and workouts as a prelude to disposing of
40%
assets when loans mature, and likely can recoup some lost
30% value in slowly improving markets. Given the looming num-
20% ber of maturing loans up for refinancing starting in 2011, this
“painful” deleveraging to lower values and disposition pro-
10%
cess could take until mid-decade to complete. But with FDIC,
0% bank, and special servicer sales, substantially more proper-
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010*
–10% ties will hit transaction markets in 2011 and 2012, allowing the
market to begin clearing and prices finally to reset. The time
–20% approaches to “absorb losses, deleverage to the new value
–30% levels, adjust, and move on.”
–40%
No Way Out. In the meantime, compromised borrowers survive
Sources: NCREIF, NAREIT, Moody’s Economy.com.
on life support until they succumb finally to maturity defaults or
* 2010 data annualized from second quarter 2009.
raise new capital from eager investors taking preferred posi-
tions. Essentially, “they get squashed.” Most or all of their exist-
ing equity vaporizes (“If you can get back to par, it’s a grand
residential components, and more underoccupied suburban slam”), and some high-profile developers, who took recourse
office campuses will be transformed into mixed-use proper- financing, suffer even greater carnage (“It’s a personal wipe-
ties. “Coming years will focus on readapting real estate to out”). Sentiment grows among Emerging Trends interviewees
people’s revised goals, priorities, and expectations. We’ll be that odds improve for owners of properties with a reasonable
working longer, saving more, and looking for greater efficien- cash flow to overcome refinancing hurdles as liquidity returns to
cies in how we live and work.” debt markets. For investors in more commodity assets, whose
Simply put, an Era of Less replaces an era of bigger cost basis goes back to 2005–2007 pricing peaks, refinancing
and more. prospects “hardly look rosy” as long as leases roll down to mar-
ket rents and vacant space stays empty.
Muddling Along at Bottom
ExHIBIT 1-4
A reluctance and sheer inability to confront the mountain Emerging Trends Barometer 2011
of legacy asset problems, comprising hundreds of billions
of dollars in investment losses, have hamstrung lenders, 10 n Buy n Hold n Sell
delayed market repricing, and hobbled chances for a faster 9
real estate market upturn. The U.S. government talks a brave 8
game about improved financial market stability, but keeps
interest rates at “artificial” lows “to avoid more damage,” and
6
everyone worries that credit markets and world economies
5
cannot endure the shock of wholesale asset writedowns.
Rating
4
Despite widespread “extend and pretend” practices to avoid
taking balance-sheet losses and force foreclosure on belea-
2
guered borrowers, still-undercapitalized regional and local
banks totter with overweightings of failed land and construc- 1
2004 2005 2006 2007 2008 2009 2010 2011
tion loans. Several hundred of these banks have collapsed
1 = abysmal, 5 = fair, 9 = excellent.
into the hands of the Federal Deposit Insurance Corporation
(FDIC), a process that will continue through 2011. Source: Emerging Trends in Real Estate 2011 survey.
Note: Based on U.S. respondents only.
Emerging Trends in Real Estate® 2011 5

10. Extreme Bifurcation. The capital flight to quality, predicted Already Overpaying? Emerging Trends interviewees’
in last year’s Emerging Trends, has produced “a deep can- heads spin over the high prices plunked down for core prop-
yon” separating “trophy” and “trash” assets, “with a lot more erties in New York City and Washington, D.C., and “amaz-
trash.” “The best properties have cash flow, and that’s what ing” sub-5 cap rates achieved for some apartment deals.
buyers and lenders want.” Bifurcation results from investors “Have people already forgotten what’s happened over the
protecting themselves against perceived risk in a problematic past three years?” Capital appears disconnected from still-
economy, and not as much from perceived opportunity and weak fundamentals, but historically rents can bounce back
quick gains at cyclical depths. Investors have also learned quickly in these markets, and demographic/housing–related
from recent cycles that prime properties hold value better in trends strongly favor multifamily investments. Many buyers
downturns and appreciate more in good times. As a result, find justification in below-replacement-cost numbers, “but
pent-up, sidelined capital swarms apartments and office that’s a useful rationale when economics don’t support the
buildings in gateway cities and mostly ignores just about purchase price.” At these expensive levels, investors cannot
everything else. afford any nasty surprises like double-dip recessions or out-
of-the-blue events. Some private equity firms and investment
Increasing Transactions. Market bottom should be the managers appear to force out money before client commit-
best time to buy, finance, and set the stage for big invest- ment terms expire. “Instead of stretching on future assump-
ment gains. But buyers have been frustrated by lenders tions” (didn’t we learn this recent lesson at significant cost?),
holding back on distressed sales, and bankers have no inten- buyers should be underwriting on current income and think
tion of forcing assets off their balance sheets until they have about exit caps when Treasury rates, now well below historic
built up enough loss reserves. “Everyone waits for the dam norms, are “sure to be higher.” Investors also need to “resize
to break.” The Emerging Trends investment barometer indi- cap-rate models to include more (30 to 40 percent) equity,”
cates the gulf between buyers and sellers will start to close in replacing 90 percent debt. “Until people reconcile with the
2011: selling sentiment improves dramatically from last year’s new reality, they could overpay.”
all-time survey lows, and acquirers realize they should not
expect giant discounts on everything that comes to market; in Untouchables. At the other end of the spectrum, “the early
fact, buyer outlooks dip slightly (see exhibit 1- 4).“Banks will stuff from banks has all sorts of problems”—properties “peo-
start to sell, just not at ridiculously low prices buyers want,” ple don’t want at almost any price.” To move some of these
and as resources run out, “more borrowers will capitulate.” “leasing-challenged properties” when buyers are experienc-
ing the angst of economic doldrums, sellers will need to swal-
low hard and accept cents-on-the-dollar “RTC-style pricing.”
ExHIBIT 1-5
Rational Returns. Emerging Trends surveys peg expected
Index Returns: Real Estate vs. Stocks/Bonds
returns for calendar year 2011 in the high single digits—7.5
percent for institutional-quality private real estate equity (unle-
S&P 500 NCREIF NAREIT Composite Barclays Capital
Government vered NCREIF) and 8.2 percent for REITs. These total returns
Bond Index comprise 5 to 7 percent from income and additional modest
40%
appreciation, and greater gains for Bond Index
Barclays Capital Government signature properties in
30% prime markets. “After a 30 percent to 40 percent loss, it could
20% take aNAREIT Composite up ground.” Opportunity inves-
long time to make
tors may score on one-off deals, but will be hard pressed
10% NCREIF
to realize consistent mid- to high-teens performance, espe-
0% cially in the absence of ample financing to fuel gains. If fund
S&P 500
–10% marketers create pro formas with returns above 20 percent,
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010* they either may be out of touch or trying to snow prospects,
–20% according to interviewees. Not surprisingly, survey respon-
–30% dents expect private equity real estate and public REITs to
outperform the overall stock and bond markets—the profes-
–40%
sional real estate crowd always does. But publicly traded
Sources: NCREIF, NAREIT, S&P, Barclays Group. homebuilders will lag, according to surveys (see exhibit 1-6).
* 2010 data annualized from second quarter 2009.
6 Emerging Trends in Real Estate® 2011

11. Chapter 1: Entering the Era of Less
ExHIBIT 1-6 Demand Drag: The Compromised
Real Estate Business Prospects in 2011
Economy
For all the frustration about delays in market repricing and
Private Local Real 5.69 slow deal flow, Emerging Trends interviewees voice most
Estate Investors
concern about the shell-shocked U.S. economy and wonder
Insurance Company
Real Estate Lenders
5.58 if recent declines foreshadow a new age of diminished global
clout and an ebbing standard of living. In these seemingly
Public Equity REITs 5.52 “unchartered waters,” slackened demand for real estate
across all sectors (except apartments) and near-record
Private Real Estate Equity
Funds
5.52 vacancies in many markets signal a long and difficult period
before developers and landlords can enjoy any renewed
Private Equity REITs 5.48 pricing power, and one in which investors exercise little
control. “The longer it takes for the economy to gain traction,
Pension Real
Estate Funds
5.22 the deeper the hole for real estate fundamentals to dig out.”
Outlooks range from mildly pessimistic (“the economy will
Real Estate Consultants
5.13 rebound at some point”) to grim (“it could be a ten-year val-
and Attorneys
ley”). Virtually nobody anticipates a sharp rebound: “They’d
Real Estate
Investment Managers
5.09 be brain-dead.” Relative optimists hope for a U-shaped
recovery, but a reversed J-shape seems more likely, and
Real Estate Brokers 4.92 everybody prays to avoid a nasty double-dip recession. Huge
deficits, ongoing wars, high unemployment, and consumer
Bank Real
Estate Lenders
4.82 debt weigh down psyches. “We’ve bought everything we
need for a while and now must pay off the enormous bills; the
Mortgage REITs 4.74 deleveraging will be extremely painful.” And homeowners can
no longer depend on rising house prices to cover spending.
CMBS Lenders/Issuers 4.36 “People have been badly scarred by the decline in home
values”: for many families, the nest egg for economic security
Commercial/Multifamily
4.09 has been broken.
Developers
Homebuilders/Residential 3.47 Flat Lining. Adding to festering consternation and dismay
Land Developers are business uncertainty over new government financial
Architects/Designers 3.36 market regulations, the probability of higher taxes (including
property levies) to fill yawning local-government budget gaps,
1 5 9
Abysmal Fair Excellent
and the breakdown of public pension systems. In increas-
ing numbers, cash-stretched Americans must tap into their
Source: Emerging Trends in Real Estate 2011 survey. already meager 401(k) retirement accounts to meet monthly
Note: Based on U.S. respondents only. mortgage and credit-card bills. “When you visit other global
regions, you realize the U.S. is not the center of the universe
any longer or as dynamic,” says an international funds man-
ager. “We’re headed along a lackluster plateau.”
Hiring Malaise. More than any other issue, the sputter-
ing U.S. jobs engine compromises sustained recovery and
growth in real estate markets. People need the confidence
provided by a steady paycheck to resume spending in shop-
ping centers, look for new housing, and take vacations at
resorts and hotels, while more hiring would help fill empty
Emerging Trends in Real Estate® 2011 7

12. office space. But interviewees just “don’t know where job
growth is coming from” immediately, and they identify various ExHIBIT 1-7
hurdles: Importance of Various Trends/Issues/Problems
n “Many companies found they had a ton of overcapacity” for Real Estate Investment and Development 2011
and “the recession gave them cover to make cuts. Who says
many of these jobs will be coming back?” Firms learn to Economic/Financial Issues
Job growth Exhibit 1
operate with less and enhance profitability. Job growth
Income and wage change
Job growth 4.94 Exhibit 1
Importan
n Lofty compensation and benefit rates make the United Income and wagewage change
change
Income and Interest rates 4.21
Importan
Interest rates
Various T
States less competitive against the rest of the world. The Tax policies
Interest rates 3.91
Tax policies
Various T
Issues/Pr
country has lost high-paying manufacturing jobs since the State and local budget problems
Tax policies 3.90
1970s to Asia and Mexico, and many remaining factories State and local budgeteconomic growth
Global problems
State and local budget problems 3.65 Issues/Pr
Real Esta
have shifted from union bastions, mostly in the Midwest and Global economic growth
Federal Global economic growth
scal de cits/imbalances 3.59 Real Esta
ment an
Federal fiscal Federal scal de cits/imbalances
deficits/imbalances
Northeast, to lower-wage, right-to-work states in the South
New federal nancial regulations 3.54
ment an
ment 20
New federal financial nancial regulations
New federal regulations
In ation 3.52
and Southwest. ment 20
Inflation
Energy prices
In ation 3.46 Exhibit 1
n Vaunted advances in technology improve productivity while
Energy prices
European nancial instability
Energy prices 3.12 Exhibit 1
taking away domestic jobs. U.S.-based companies can easily
European financialnancial instability
Europeande instability
Trade cits/imbalances
3.01
move operations overseas—call centers, financial analysis,
Trade deficits/imbalances
Trade de cits/imbalances
2.85
software development, accounting, x-ray reading, etc. The
internet and telecommunications make transferring informa- Social/Political Issues
Social/Political Issues
tion between continents seamless and instantaneous. CEOs Immigration
Immigration
Social/Political Issues 3.02
and CFOs increasingly take advantage of “global jobs arbi- Threat of terrorism
Threat of terrorism
Immigration 2.88
trage” to increase profits and shareholder value, finding well- War issues
War issues
Threat of terrorism 2.88
educated, English-speaking workforces to fill the demand off- Social equity/inequality
Social equity/inequality
War issues 2.61
shore. “An infinite supply of service workers spreads beyond Climate change/global warming
Climate change/global warming
Social equity/inequality
2.33
India to China and elsewhere and pressures down wage Climate change/global warming
rates here.” In short, what happened to manufacturing now Real Estate/Development Issues
Real Estate/Development Issues
happens in the service sector. Refinancing
Re nancing
Real Estate/Development Issues 4.46
n Technology has created new opportunities domestically in Vacancy nancing
Re rates
Vacancy rates 4.33
a range of brainpower, tech-related industries, but advances Deleveraging
Deleveraging
Vacancy rates 4.25
InfrastructureInfrastructure funding/development
funding/development 3.70
have also destroyed or drastically reduced the number of Deleveraging
Future home price stagnation/deflation 3.63
many traditional jobs that supported middle-class lifestyles— Future home price stagnation/de ation
Infrastructure funding/development
Future home price price in ation
price home inflation
Future homeFuturestagnation/de 3.63
secretaries, file clerks, telephone operators, bookkeep-
CMBS Future home recovery
market price recovery
CMBS market in ation 3.62
ers, order takers, travel agents, messengers, typesetters,
Transportation funding
Transportationrecovery
CMBS market funding 3.48
newspaper reporters, and on and on. An executive with a
Urban redevelopment
Urban redevelopment
Transportation funding 3.31
Blackberry and a laptop needs a fraction of the office support
Affordable/workforce housing
A ordable/workforce housing
Urban redevelopment 3.16
he or she once did.
Growth controls
Growth controls
A ordable/workforce housing 3.15
These same trends directly affect real estate owners, as
Construction materials costs
Construction materials costs
Growth controls 3.10
do the following: Construction labor costs
Construction labor
Construction materials costs 3.07
n Midwest factory markets have been savaged by manufac- Land costs
Land
Construction labor costs 3.05
turing declines, stagnating and shrinking through a chronic ResponsibleResponsible propertyLand costs
property investing investing 3.00
slump. Sustainable development
Sustainable development
Responsible property investing 2.95
n Internet shopping allows for more direct factory-to- NIMBYism
NIMBYism
Sustainable development 2.87
consumer distribution without as many supply-chain links, Green GreenNIMBYism
buildings
buildings 2.81
leading to less need for warehouse space and fewer and/or Land availability issues
Land availability issues
Green buildings 2.77
smaller retail outlets. Land availability issues 0 1 2 3 4 5
n Outsourcing of jobs overseas and/or to home-based free-
lancers dampens overall demand for office space, especially 1 = no importance, 2 = little importance, 3 = moderate importance,
4 = considerable importance, 5 = great importance.
Source: Emerging Trends in Real Estate 2011 survey.
8 Emerging Trends in Real Estate® 2011

13. Chapter 1: Entering the Era of Less
in secondary and tertiary markets, as well as in the suburbs
of major cities.
Inflation versus Deflation and
“The bottom line is we need to create more jobs to drive Higher Interest Rates
the real estate economy and until we do, real estate econom-
Record-low interest rates (“essentially zero”) have been a life-
ics will get worse”; just making up the 8.4 million jobs lost in
line to both real estate lenders and borrowers. Survey respon-
the recession “will be a long haul.” Logical growth sectors
dents expect rates to remain where they are through 2011 and
remain high tech and engineering, which need to create the
expect inflation to stay under control for the year. But over the
new “new thing” to sell to the rest of the world; education, to
next five years, they forecast both higher rates and mounting
help generate more higher-paid brainpower workers, espe-
inflation (see exhibit 1-8). “We’re in such a big hole,” the only
cially in the tech, energy, and life science fields; health care,
way out is to print money. “The central bank will keep its foot
to address the bulge in aging demographic cohorts; and
on the gas to stimulate economic growth, putting people back
finance, to shelter and husband remaining wealth.
to work and ultimately bringing on inflation.”
Necessary Austerity. Near-stagnant U.S. wages and the
Inflation Benefits. For the present, investors discount infla-
absence of free-flowing credit unsettle Americans while creat-
tionary impacts and focus instead on getting yield, taking
ing “strong headwinds” for maintaining the nation’s upscale
advantage of low financing rates if they can qualify to obtain
way of life. “Our gold standard may go down a notch.” The
credit. “Inflation may let you earn your way out of your loan,
United States will “remain at the top of the pile,” but “life-
and a locked-in low rate could look good if interest rates
styles could ebb for the masses,” creating winners and los-
increase later on.” A gloomy minority of respondents con-
ers. Unhinged from charge cards and interest-only loans,
templates a double-dip recession with accompanying depre-
people “must do more with what they have.” As personal
ciation, short-circuiting any nascent recovery. “If deflation
austerity becomes more of a reality, expectations adjust
and frugality returns: “We’re shifting away from defining suc-
cess by how many toys we own.” Twenty-four-hour markets
ExHIBIT 1-8
attracting highly educated workforces and brainpower jobs
Inflation and Interest Rate Changes
will do better, but more commodity markets depending on
lower-paying back-office, manufacturing, and service-sector n 2011 n Next Five Years
employment could flag. “Six-figure salaries are alive and well
2011
in global pathway markets, but nothing’s going on in many
2.96
other cities.” This “turn in the road happens gradually, play- Inflation
Next Five Years
ing out over coming decades”: the credit crisis marked the 4.04
beginning, and people are in reset mode, spending less
and becoming more value oriented. Real estate players Exhibit 1-3
3.08
need to monitor how families cope. “Two-earner households Short-Term Rates In ation and
allowed a middle-class existence; now we may need three.” (One-Year Treasuries Interest Rate
4.16
Grandparents, parents, and grandchildren may have to Changes
share resources and live together longer. Many graying baby Exhibit 1-4
boomers have insufficient retirement savings, and young Commercial 3.22
adults, now struggling to find jobs, may have to downscale Mortgage Rates
4.26
expectations.
Long-Term Rates 3.23
(Ten-Year Treasuries)
4.18
0
0 1 2 3 4
4 5
5
1 = fall substantially, 2 = fall moderately, 3 = remain stable at current levels,
4 = increase moderately, 5 = increase substantially.
Source: Emerging Trends in Real Estate 2011 survey.
Note: Based on U.S. respondents only.
Emerging Trends in Real Estate® 2011 9

14. occurs, we’re all in the wrong business,” says an industry vet- Function over Form. For the future, office developers may
eran. “But if inflation is coming, real estate is the right place look to cut costs by incorporating more modular, cookie-
to be, and it’s time to get back in the game.” Investment mar- cutter, streamlined designs, offering different exterior finishes
keters may want to “dust off their old playbook” left over from to tenants. “The future promises more value-oriented devel-
the early 1980s touting the inflation-hedge benefits of prop- opment,” not ostentatious projects. “Tenants will emphasize
erty assets. “Over the next five years, that could help ignite function and efficiency, and green, energy-saving sustainabil-
transaction markets and put real estate back in vogue again.” ity features will be expected.”
But an industry warhorse warns that inflation will not rescue
property investments if demand does not escalate to absorb Consolidation. Recessionary impacts continue to whack
vacant space. “In the 1970s, double-digit inflation didn’t help many undercapitalized developers. “Bigger companies have
real estate, because of the oversupply.” many more resources than smaller competitors.” Survivors
“need to deleverage further and protect equity for possible
Bubble Threat. A leading real estate economist raises a future shocks to the system.” Some companies will merge and
caution flag about an extended period of low interest rates. consolidate; weaker firms get folded into stronger platforms.
If yield-hungry investors continue to gravitate to the current
attractive spreads between prime properties and Treasury
bonds, an asset bubble could develop, leading to another Regulation and Taxes
sudden correction when rates inevitably increase. “It all
New Regulation Maze. Uncertainty over new financial
depends on the Fed; we need to be careful.”
industry regulation and future federal tax policy adds com-
plexity and confusion to investment decision making, and
Supply Side: Development many interviewees complain businesses “can’t move aggres-
sively on expansions and growth strategies,” which might
Stall-Out help fill buildings. “There are too many unknowns to make
any decisions.” Federal agencies scramble to write new
Absence of demand, rather than overdevelopment, has
banking rules—“the devil is in the details”—while lobbyists
spurred record or near-record vacancies across many mar-
angle to gain favorable language (read: protect industry
kets and asset sectors. “Fortunately, no new anything is
profits). Among the biggest outstanding issues will be how
coming on line, so when the economy improves, rents can
reserve requirements are meted out. Must CMBS loan origi-
start to increase more quickly.” Overall, developers have
nators retain a certain percentage of junior B tranches to
little chance to obtain construction financing: most bankers
ensure underwriting vigilance, or will CMBS 2.0 operate like
assume the fetal position if a builder heads their way. But
CMBS 1.0 off moral hazard? Investment banks, meanwhile,
life insurers consider construction take-outs for apartment
position themselves to shed asset-management funds if
projects, if developers can provide enough equity—40 to
reserve requirements seem too burdensome on co-invested
60 percent of cost. “Joint venture investments in apartment
house money.
development can be better than buying,” says an insurance
executive. “Land is a quarter of peak value; construction
Changing Tax Rates. Tax policy presents another investor
costs are down 25 to 30 percent. You can make attractive
conundrum, especially capital gains treatments. Investors
investments in development on high-quality apartment or
want to keep long-term rates at current low levels, but the
industrial properties, even with lower rents.” A handful of
government desperately needs enhanced funding sources.
singular office projects in site-constrained 24-hour markets
Everyone grapples to secure new advantages or keep exist-
can be expected to get funding, too, by year-end 2011, if the
ing ones. “We need a tax policy to encourage long-term
economy appears to be on sounder footing. These first-out-
investing,” says an exasperated developer/owner. “We
of-the-ground projects always score well early in sustained
should think about increasing shorter-term capital gains
recoveries. Otherwise, the few office developments nationally
taxes and lowering long-term gains below current levels for
will be limited to build-to-suit/net-lease deals and government
extended holding periods. Right now there are no advan-
buildings. “Rents just don’t justify doing anything. It’s dead.”
tages to long-term investing, and assets like real estate are
marginalized as a result. We trade and flip rather than build
value over time.”
10 Emerging Trends in Real Estate® 2011

15. Chapter 1: Entering the Era of Less
ExHIBIT 1-9
Firm Profitability Forecast 2011
Profitability in 2010 by Percentage of Respondents
Very Poor 7.6% Modestly Poor 11.2% Modestly Good 13.0% Very Good 5.3%
Abysmal 6.1% Poor 12.5% Fair 27.8% Good 15.5% Excellent 1.1%
Profitability in 2011 by Percentage of Respondents
Very Poor 3.2% Modestly Poor 7.8% Modestly Good 22% Very Good 8.2%
Abysmal 0.8% Poor 6.3% Fair 26.3% Good 22.5% Excellent 2.9%
Source: Emerging Trends in Real Estate 2011 survey.
Note: Based on U.S. respondents only.
Fannie/Freddie’s Fate. At some point, Congress must Survival of the Fittest. There is a shakeout among invest-
come to grips with the future of Fannie Mae and Freddie Mac, ment managers and private equity firms: poor perform-
the mortgage-market black holes, which prop up single-family ers flunk and lose business to stronger firms with broader
and multifamily housing with hundreds of billions of dollars in asset-management and service platforms. Many opportunity
federal infusions. Expected changes could make borrowing investment managers leave the scene: they cannot wring
more expensive in the residential sector, and given the recent promotes from legacy disasters, and their prospects for new
debacle, that may be a good outcome. investments remain limited without a bubble market and
easy financing. Banks and special servicers still have trouble
“building teams of experienced workout specialists”; if acqui-
Real Estate Industry: Chastened sitions pros want jobs, that is the place to go. Lawyers always
and Smaller seem to find ballast—shifting from closing transactions to
handling litigation and negotiations between various stake-
While developers and homebuilders have been hammered holders, trying to secure what is left from soured assets. On
uniformly, the rest of the real estate world struggles to revive the leasing side, “brokers must have global coverage figured
in slimmer form. “A downsized industry feels more perma- out to serve big companies.” Owner reps will “work harder
nent than temporary,” says an interviewee. “We don’t need than ever before to find and keep tenants,” while tenant bro-
much new construction in any category”; commercial trans- kers can exert plenty of leverage. “In this environment, career
action activity was way out of kilter and will not ramp up to paths reward seasoned, experienced, plodding types rather
pre-downturn levels, and home mortgage financing volumes than entrepreneurs.”
may take many years to recover to 2006 peaks. Deal mak-
ers, sales brokers, and mortgage brokers will not be in huge Higher Profits. All the reconfiguring should help improve
demand, although hiring is bound to pick up in 2011. Future industry productivity and profitability from dismal nadirs, and,
deal making may not be as labor intensive or as profitable for notably, survey respondents turn somewhat optimistic. More
brokerage firms. “It used to be you hired a broker for industry than 80 percent expect "fair" or better company profitability
relationships to sell a property. Now you can reach the mar- in 2011, up from 65 percent in 2010. And more than 30 per-
ket effectively through a flyer to an e-mail list. Relationships cent predict a "good" to "excellent" year ahead. Less than
are worth something, just not as much.” 20 percent anticipate "modestly poor" or worse performance
in 2011, compared with more than 35 percent in 2010 (see
exhibit 1-9).
Emerging Trends in Real Estate® 2011 11

16. Best Bets 2011 Remember: Patience Is a Virtue. Transaction activity
will increase, and more value-add and distressed deals will
Buying at or near cyclical bottom typically offers substantial appear. “They’re coming” as the pressure of time builds for
opportunities, and 2011 is no different. But investors should lenders to push more failed properties into the market. Patient
be wary about obsolete and fringe assets, which have con- investors can be rewarded—“you’ll get a better price per
siderable downside risk even in recovery. “Sitting on hands” pound”—but buyers should have no illusions about rapidly
and waiting until the economy regains “certain vigor” still improving revenues and a return to quick flipping. A slow-
makes sense to more conservative Emerging Trends inter- growth economy and more limited credit availability will not
viewees. And given longer-term trends, investors naturally escalate pricing, except possibly in prime, flight-to-quality
should exercise greater circumspection. “You just can’t throw core markets. Familiar “hot-growth” Sunbelt cities may not
dollars around in a time of slow growth.” enjoy a typical overheated expansion in any recovery.
Buy or Hold REITs. Do not expect another big run-up, but
Investment these companies appear well capitalized, can be accretive
buyers, and concentrate strong core holdings in apartments
Temper Expectations. “Don’t try to shoot the lights out” and and retail and office space. Liquidity is always a plus. Survey
expect outsized returns. Buy well-leased core assets, looking respondents expect solid cash-flowing returns.
for 6 to 7 percent cash flows. Appreciation will follow as mar-
kets improve. The best properties in the best markets always Buy Land. It will not get any cheaper than it is now, but pre-
perform better whether over shorter or longer hold periods. pare to wait (a long time) for the right development opportu-
nity. Infill sites hold greater promise than greenfield locations.
Lock In Leverage—If You Can. Mortgage rates cannot get
much lower, and cyclical bottom is the optimal time to lever- Exercise Caution on Distressed Loan Pools. “They
age properties in order to magnify future value gains as prop- could be a recipe for disaster,” if you don’t underwrite the
erty fundamentals ameliorate. assets properly. “Too many won’t recover.”
Provide Debt and Recap Equity. Lenders only slowly
reenter the market at a time when a flood of borrowers needs
refinancing and recapitalizing. “Debt is scarce and dollars
Development
needed.” Players who fill the gap on assets with lowered cost Stay on Vacation. Except for some apartments, the odd
bases can obtain excellent risk-adjusted returns up and down warehouse, and select build-to-suit office projects, new con-
the capital stack, including mezzanine debt and preferred struction activity will be basically nonexistent. “Why build
equity, if not loan-to-own opportunities. “Concentrate on good when you can buy existing for so much less?” Demand for
assets with bad balance sheets.” new premium product is probably “three to five years out,” so
plan accordingly and time recovery. Schedules for anything
Focus on Global Gateways, 24-hour Markets. Everybody on the drawing board stretch out as the focus shifts to rede-
wants to be in the primary coastal cities with international air- velopment and enhancement activity. Commercial develop-
port hubs. Business and commerce concentrate there, attract- ers should “think beyond the U.S.,” looking to export talent
ing more highly educated workers to higher-paying jobs. But to emerging markets that need new facilities. Homebuilders
high quality costs more, so prepare to pay up. When deals get remain severely challenged: bulging inventories of existing
too pricey, back off and move down the food chain. houses hold back new construction, and prices continue to
sink in some markets.
Favor Infill over Fringe. Move-back-in trends gain force.
Twenty-something echo boomers want to experience more
vibrant urban areas where they can build careers, and their
aging baby boomer parents look for greater convenience in
downscaled lifestyles. Driving costs and lost time make outer
suburbs less economical, while the big-house wave dissi-
pates in the Era of Less.
12 Emerging Trends in Real Estate® 2011