China is transitioning from a government investment, export-driven model to a consumption-driven model, and that transition will continue to create choppiness in the global marketplace. Cushman & Wakefield Research has published How Will China’s Economy Affect the U.S. Commercial Real Estate Market? to provide information about the following topics and more: • How does this impact commercial real estate in the U.S.? • Is the Chinese economy in a recession? • What is happening to China’s currency and capital reserves? • How are these changes impacting global commodity prices?

1. ©2016 Cushman & Wakefield, Inc. All rights reserved. 1
How will China’s economy affect the
U.S. commercial real estate market?
March 2016
Cushman & Wakefield Research Perspective

2. ©2016 Cushman & Wakefield, Inc. All rights reserved. 2
10.5%
7.4%
0%
4%
8%
12%
16%
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
 The stock market declines makes it look that way. After growing at an average annual rate of 10.5% from 1992
to 2011, China’s gross domestic product (GDP) has slowed to a still-strong 7.4% per year from 2012 to 2015.
 China’s stock market has a history of severe volatility. Since the current economic expansion began in 2009,
Chinese equity prices have fallen by more than 20% four times. The equity market is poorly correlated with
economic growth.
Sources: Moody’s Analytics, Oxford Economics
China’s GDP Growth is Slowing
(Yr/Yr % Chg.)
Shanghai Composite Index
Is the Chinese economy in a recession?
1,900
2,400
2,900
3,400
3,900
4,400
4,900
5,400
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
-48% since June 2015

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What is happening to China’s
currency and capital reserves?
 After strengthening for several years, the Chinese Yuan began to weaken in 2014 (i.e. it took more Yuan to buy a dollar) as
the economy slowed. In mid-2015, the government permitted the Yuan to abruptly drop in value. This devaluation intensified
the ongoing correction in equity markets. The government wants to keep the Yuan weak to stimulate exports, but does not want
a sharp drop that could lead to more market volatility.
 The Chinese government has amassed huge foreign exchange reserves over the past 25 years that will enable it to manage
the value of the Yuan and support the financial system. This is why we do not anticipate a collapse in the Yuan or contraction
of the economy. The government has ample resources to support the economy and manage the transition.
China’s Foreign Exchange Reserves
(Billions of Dollars)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1990
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2012
2013
2014
2015
Sources: Moody’s Analytics
(Yr/Yr % Chg.)
Chinese Yuan Exchange Rate
(Yuan per Dollar)
6.000
6.100
6.200
6.300
6.400
6.500
6.600
6.700
6.800
6.900
2010
2011
2012
2013
2014
2015
2016

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 China’s slowdown has been a major factor in the decline in global commodity prices. During its strong growth
phase, China’s manufacturing sector was a major global consumer of many commodities including oil, copper, coal
and iron ore.
 As China’s economy has downshifted, so has demand for commodities. Since 2011, the prices of most major
industrial commodities have dropped by a minimum of one third and in the case of oil nearly three quarters.
Commodity Price Decline Since Early 2011
-72.1%
-51.7%
-66.9%
-35.7%
-45.0%
-80%
-60%
-40%
-20%
0%
Oil Copper Nickel Aluminum Industrial
Metals
Commodity Price Change and GDP Growth
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
-35%
-20%
-5%
10%
25%
40%
55%
70%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Industrial Metals Prices (left) China GDP (right)
Sources: Moody’s Analytics
(Yr/Yr % Chg.)
How are these changes impacting
global commodity prices?

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3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
What does all of this mean
for the U.S. economy?
 It’s a mixed bag. China is not a big consumer of U.S. goods. In 2015, U.S. exports of goods to China totaled approximately
$106 billion out of a total of $1.5 trillion in total U.S. exports. So very little direct impact on U.S. output overall.
 However, the slowdown in China is having a ripple effect on emerging markets and commodity prices, weighing down both
the U.S. manufacturing sector and heavy commodity-producing states like Louisiana, Oklahoma, North Dakota, Wyoming
and West Virginia.
 In other ways, the decline in commodity prices caused by the slowdown in China is positive for the U.S. Low oil prices for
example. Less spending on energy frees up income to spend on other goods and services.
U.S. Exports to China are Minimal
$0
$300
$600
$900
$1,200
$1,500
$1,800
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Billions
Total China
The Energy Bite
Spending on Energy Goods and Services as a % of After-Tax Income
(Yr/Yr % Chg.)
Sources: Moody’s Analytics, Oxford Economics

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How are these changes affecting the
flow of investment capital out of China?
 While it is difficult to get accurate and reliable data on capital flows into and out of China, it is estimated that somewhere
between $50 billion and $550 billion flowed out of China in 2015.
 This behavior is typical of a period of financial volatility. For example, during the 1997/98 Asian debt crisis, foreign
direct investment into the U.S. surged by nearly 110%.
 One area of concern: China is the largest holder of U.S. Treasury securities. If these were liquidated, U.S. interest
rates would likely rise sharply.
Foreign Direct Investment in the U.S.
-$150,000
-$100,000
-$50,000
$0
$50,000
$100,000
$150,000
$200,000
$250,000
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Millions
Asian Debt Crisis
20.6%
China
Japan
Carib Bkg Ctrs
Oil Exporters
Brazil
Ireland
Switzerland
United Kingdom
Hong Kong
Other
Foreign Holders of U.S. Treasuries
Sources: US Treasury Department, US Bureau of Economic Analysis, Institute for International Finance/Bloomberg

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How does this impact
commercial real estate in the U.S.?
 From a leasing perspective, very little in the aggregate. Demand for space will be driven by the growth of employment,
income and spending. All of these are expected to continue rising at a healthy clip in the coming year. Since new
construction continues to lag absorption, vacancy will tighten and rents will rise in most markets.
 From a capital markets perspective, uncertainty and volatility in Chinese equity markets could drive even more capital
to the U.S. as some Chinese investors seek to move capital to a more stable environment. In 2015, Chinese purchases of
U.S. commercial real estate more than doubled.
26.5
27.0
27.5
28.0
28.5
29.0
29.5
30.0
30.5
31.0
9%
11%
13%
15%
17%
19%
21%
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Office-using Employment, Mill. (Right Scale) Vacancy Rate (Left Scale)
U.S. Office-Using Employment vs. Vacancy U.S. CRE Purchases by Chinese Investors, $ Mill.
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Sources: Cushman & Wakefield, U.S. Bureau of Labor Statistics, Real Capital Analytics

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Conclusions
 China is transitioning from a government investment export-driven model to a consumption-driven model,
and that transition will continue to create choppiness at times in the marketplace.
 China’s slowdown is impacting commodity prices, causing steep declines and putting the economies of
nations that are major commodity producers under pressure.
 Although the U.S. is not immune, it is weathering the global turmoil extremely well. By general consent,
economic growth in the U.S. is expected to remain healthy due to strong consumer spending, healthy balance
sheets, and continuing job growth.
 Assuming no hard landing, the uncertainty and volatility in China is likely to drive even more foreign capital to the
U.S. Chinese purchases of U.S. commercial real estate assets more than doubled in 2015; acquisitions
will remain robust again in 2016, in all probability.
 Despite the shaky start to 2016, U.S. commercial real estate markets will, in general, improve with rising
demand and still-tight supply in most markets.
 Global capital targeted on commercial real estate is piling up once again – with the U.S. as the primary target –
which should help sustain elevated pricing for core assets as well as provide additional fuel for value-add
transactions