Bloomberg Real Estate Special Focus Q1 2014

First Quarter 2014
REAL ESTATE
sponsored by:

Welcome to Bloomberg Brief’s special edition on real estate.The pool
of investors looking to put money to work in real estate flowed through to
the equity markets last year where initial public offerings from real estate
companies hit a nine-year high.At the same time, mergers involving real
estate companies were at the liveliest pace since 2007.
Within the world of commercial property, credit quality of loans improved
as delinquency and foreclosure rates fell to multi-year lows.
The issuance of bonds backed by commercial mortgage loans — a
source of financing that had all but dried up immediately after the 2008 credit crisis — rose
to pre-crisis highs and borrowers seeking financing for commercial property were increas-
ingly able to get mortgages that allowed them to pay only interest.At the same time, cap
rates trended lower for retail, multifamily, hotel and office properties.
Within the residential property markets, home prices as tracked by Case Shiller rose, but
sales of pre-owned homes were little changed in 2013 from 2012. Higher borrowing costs
chipped away at demand for residential home loan refinancings, a key source of profit for
many lenders.
Higher mortgage rates are eroding affordability for homebuyers — an issue brought up by
several economists who are guest contributors in this edition of Real Estate Brief.
Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch, warns that tight
credit conditions and the slow healing of the U.S. jobs market have kept some consum-
ers from owning a home. Douglas Duncan and Orawin Velz of Fannie Mae pick up on the
theme of affordability, writing that higher borrowing costs will continue to weigh on sales of
existing homes that typically attract first-time buyers.
Recovery in the jobs market is not only important for residential property markets.Accord-
ing to Will McIntosh, head of research at USAA Real Estate Co., the wellbeing of commer-
cial properties such as multifamily, office and industrial are tied to employment growth.
Another threat to the housing market comes from GSE reform. Bank analyst Dick Bove
warns that mortgage market restructuring may kill off 20- and 30-year fixed-rate loans.
Elsewhere, Lisa Pendergast of Jefferies offers her outlook on commercial property cap
rates.And William Lie Zeckendorf tells us about who is buying apartments in Manhattan,
gives the outlook for prices in the city’s market and explains why he believes NewYork can
weather a downturn in housing.
Finally, Michael Lewis discusses sub-prime lending and tells us that high-frequency trad-
ing, examined in his best-seller “Flash Boys,” is not just in equity markets.
Introduction
Aleksandrs Rozens

Data: real estate prices, CMBS LOAN leverage
While home sales ended 2013 little changed,
home prices rose slightly. CMBS issuance
climbed and leverage within commercial real
estate finance grew last year. page 9
tighter credit conditions weigh on home
sales
Bank of America Merrill Lynch’s Michelle Meyer
looks at how borrowers with lower credit scores
are having a tougher time getting loans to buy a
home. page 11
what’s limiting Home purchases by Young
Adults?
Student loan debt and a lack of income growth
have crimped demand for housing among young
adults, write Fannie Mae chief economist Doug-
las Duncan and director Orawin Velz. page 13
Data: cmbs deals rely more on agency debt
Use of agency debt in commercial mortgage
backed securities grew to a record in 2013.
AAA-five year CMBS spreads ended the year
tighter from 2012 despite an increase in issu-
ance. page 14-15
outlook on cap rates
While cap rates likely will rise this year, investors
should expect any increase to be tempered by the
high level of CRE/multifamily financing available
from portfolio lenders, according to Lisa Pender-
gast, a debt strategist at Jefferies Group. page 16
Data: cap rates by property type
The weighted average cap rate for multifamily
properties rose in 2013, while cap rates for office,
retail and hospitality property loans fell. page 17
Data: top underwriters of delinquent CMBS
Debt
Among underwriters of commercial mortgage
loans resold as CMBS, Wachovia Bank NA had
the highest number of delinquent mortgage loans.
page 19
banks Step into distressed real estate
A low rate environment has spurred invest-
ment banks to invest in distressed real estate,
Mission Capital’s Dwight Bostic says in an
interview. page 20
Data: CMBS Loan Delinquencies, Foreclosures
The credit picture of commercial property mort-
gages resold into securities fell to a 51-month low
in December. page 22-23
why not all Distressed real estate has been
picked off
Westport’s Russell Bernard explains in an
interview why the U.S. real estate market has not
completely returned to health and how distressed
investors can find buying opportunities in proper-
ties worth $50 million or less. page 24
data: real estate ipo, M&A renaissance
In 2013 real estate mergers hit post-crisis high
and real estate IPO issuance was at a nine-year
high. page 25
who is buying real estate from servicers?
Hedge funds and private equity funds have been
attracted to distressed real estate sold off by
servicers, Alexander Rubin, managing director at
Moelis, says in an interview. page 26
focus on reits
Bloomberg Industries examines how office REITs
are increasingly turning to unsecured bond
sales, what’s behind the jump in developments
by apartment REITs and how the retail sector
is weathering the spate of retailer bankruptcies
page 27, 29-30
jobs picture and its impact on commercial
properties
The well-being of commercial real estate such
as multifamily, office and industrial properties are
closely tied to the health of the U.S. jobs market,
writes Will McIntosh, head of research at USAA
Real Estate Co. page 31-32
wealth gap and its impact on local housing
markets
The wealth gap isn’t just about individuals — it’s
about entire communities, writes Kathy Bostjan-
cic, director of macroeconomic analysis at the
Demand Institute and the Conference Board.
page 33
Data: Residential mortgage delinquencies;
ARM Loan USE Increases
Florida saw the largest decline in single family
mortgage delinquency rates last year.Adjust-
able rate mortgages as a percentage of all home
loans processed by lenders grew to 8.18 percent
in December 2013, the highest since June 2008.
page 34
Americans shut out of home market
threaten recovery
First-time homebuyers hurt by rising prices and
tighter credit standards are disappearing from
the market, slowing the pace of the three-year
recovery. page 36-37
Mortgage market restructuring sounds
death knell for fixed-rate loans
Richard Bove explains why a wind down of
Fannie Mae and Freddie Mac could spell the
end of 20-year and 30-year fixed rate home
loans. page 38
tight supply should buffer new york market
from any downturn, zeckendorf says
William Lie Zeckendorf explains why he believes
Manhattan’s supply of real estate is so tight that
it is likely to withstand a downturn in the housing
market. page 39-40
High Frequency trading in the u.s. Treasury
market?
Michael Lewis says the high-frequency trading
in his best selling “Flash Boys” has cropped up
in the U.S.Treasury market.Also, he offers his
thoughts on subprime lending and the enduring
popularity of “Liar’s Poker.” page 41-42
Bloomberg Brief Real Estate Supplement
Newsletter Ted Merz
Executive Editor tmerz@bloomberg.net
212-617-2309
Real Estate Aleksandrs Rozens
Editor arozens@bloomberg.net
212-617-5211
CMBS/CRE Product Cheryl Lopez-Collins
Manager clopez12@bloomberg.net
415-617-7026
CMBS Analyst Tadvana Narayanan
tnarayanan1@bloomberg.net
212-617-3814
Real Estate Jennifer Prince
Data Editor jprince10@bloomberg.net
212-617-4589
Contributing Jeffrey Langbaum
Bloomberg jlangbaum1@bloomberg.net
Industries Analyst 609-279-4658
Bloomberg News Prashant Gopal
617-210-4640
John Gittelsohn
323-782-4257
Art Director Lesia (Alexandra) Kuziw
akuziw@bloomberg.net
212-617-5113
Newsletter Nick Ferris
Business Manager nferris2@bloomberg.net
212-617-6975
Advertising Adrienne Bills
abills1@bloomberg.net
212-617-6073
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CONTENTS
04.24.14 www.bloombergbriefs.com Bloomberg Brief | Real Estate 3

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Share of mortgage loan applications related to residential home loan refinancings in the fourth quarter of 2013.
Share of loan applications for residential mortgage refinancings in the fourth quarter of 2012.
Gain in S&P/Case-Shiller national home-price index in Q4 2013 from Q4 2012.
Rate for 30-year fixed rate jumbo mortgage in March 2014.
Rate for 30-year fixed rate jumbo mortgage five years ago.
Price per square foot for Manhattan office property in March 2014, a five-year high.
Expected percentage gain in non-residential construction spending in 2014.
Expected gain in non-residential construction spending in 2015.
Percentage of single-family home sales in California that were distressed sales in February 2014.
Percentage of single-family home sales in California that were distressed sales in February 2013.
2013 recovery rate for loans in U.S. commercial mortgage backed securities.
2012 recovery rate for mortgages resold in commercial mortgage bonds.
Rate for 30-year, fixed-rate home mortgage in 2013.
Mortgage Bankers Association’s forecast rate for 30-year mortgages in 2014.
Forecast rate for 30-year mortgages in 2015.
Real estate loan rate for city property in fifth century BC Greece.
Real estate loan rate for country property in fifth century BC Greece.
Maturity for real estate loan in fifth century BC Greece.
Real estate loan rate in 14th century Netherlands.
Total one- to four-family home loans underwritten by U.S. lenders in 2013.
Total home loans expected to be underwritten in 2014.
Total commercial real estate collateralized debt obligations issued in 2013.
Total commercial real estate CDOs assembled in 2007.
Florida’s residential foreclosure rate in January 2014.
Average residential foreclosure rate in the U.S. in January 2014.
Florida’s residential foreclosure rate in January 2013.
American Institute of Architects non-residential architectural billings index reading in December 2013.
AIA non-residential architectural billings index in December 2012.
Number of single family homes in the U.S. sold within six months of purchase in 2013.
Increase in number of single family homes sold within six months in 2013 vs. 2012.
Total value of single U.S. family homes sold within six months of purchase in 2013.
Sources: California Association of Realtors,Fannie Mae,Bloomberg LP,Fitch Ratings,Mortgage Bankers Association,JP Morgan American
Institute of Architects,RealtyTrac, “A History of Interest Rates,”(Fourth Edition) by Sidney Homer and Richard Sylla (John Wiley & Sons,Inc.).
By the numbers
52.9%
75.9%
11.3%
4.70%
6.42%
$717.97
5.8%
8.0%
15%
33%
66.5%
74.8%
4.0%
4.7%
5.2%
8%
8%-12%
1-5 Years
8%-10%
$1.755 trillion
$1.080 trillion
$2 billion
$35 billion
6.2%
2%
10.1%
48.6
51.4
122,825
20%
$38 billion

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■■ “Wall Street has found a new oppor-
tunity amid the destruction they caused
with the mortgage crisis — cheap
homes that only they can buy because
they have access to capital, which are
then converted to rental properties that
they control the price of. Now they have
decided to socialize the risk by securitiz-
ing the income from the rents and sell it
to investors. This reminds me too much
of the ‘Too Big to Fail’ schemes of the
past and I’m concerned that the Ameri-
can people would once again be stuck
with the bill.”
— Rep. Mark Takano, D-Calif., in a statement
requesting Congressional hearings into single-
family rental backed securities that are being de-
veloped by The Blackstone Group (Jan. 23, 2014)
■■ “The housing recovery has been
uneven across the nation and we are no
longer able to buy in some of our west-
ern markets although we remain excited
about many others where we can still
acquire homes at a discount to replace-
ment cost and attractive rental yields.
Florida, for example, leads the nation
with the highest foreclosure inventory at
6.7 percent, which should provide a con-
tinuing supply of distressed inventory
in 2014. While we are generally quite
sanguine about home price appreciation
in our markets in 2014 we do expect the
pace to moderate compared to 2013.
— David N. Miller, President and Chief Execu-
tive Officer, Silver Bay Realty Trust, Q4 2013
earnings call (March 6, 2014)
■■ “So far this year, I’ve seen an inordi-
nately low success rate for bids because
the supply of properties is so limited. I
wish I got paid in pre-approval letters
instead of closed loans.”
— Jonathan Sexton, a vice president at NE
Moves Mortgage LLC’s office in Cambridge,
Massachusetts, in an interview with Bloomberg
(March 31, 2014)
■■ “Housing starts for 2013 finished at
927,000; the starts were lower than
expectations early in 2013, but still
represented a 19 percent improve-
ment over 2012. We expect the housing
recovery in the U.S. to push ahead in
2014, with starts around 1.1 million. We
believe over the next few years, U.S.
housing starts will return to long-term
trend levels of 1.4 million to 1.5 million.
Our fourth quarter sales were just shy
of $800 million, up 15 percent from the
same quarter in 2012. Probably the most
encouraging thing we’ve seen is existing
home sales appear to be picking up, and
there are fewer people under water. So
the fact that home prices have moved
up, typically what happens is the repair
and remodel follows 12 months to 18
months after the sales of homes. So, if
we continue to see the pace of the exist-
ing home sales go up, we think that will
be good news for repair and remodel.”
— Thomas Carlile, chief executive officer, Boise
Cascade, earnings call (Feb. 21, 2014)
■■ “It is not our view that all housing
metrics will sustain the growth rates
from 2013 going forward. This last year
saw a particularly strong recovery in
housing prices, but we do expect the
housing recovery to continue, expect
that home prices will increase even
though at a lower rate and expect that
affordability will support growth in the
home improvement market.”
— Francis Blake, chief executive officer, Home
Depot, earnings call (March 25, 2014)
■■ “The buyer is becoming more accus-
tomed to the current mortgage rates.
If you recall back a couple of quarters
ago, there was a pretty adverse reaction
to the increase in mortgage rates, even
though they were slight and they’re still
historically low by anybody’s standards.
But frankly, over the last four months
to six months, the buyer has become
accustomed to the mortgage rates. And
I think that that will be less and less a
factor, as we move into the spring sell-
ing season and fiscal year 2014.”
— Donald Tomnitz, chief executive officer, D.R.
Horton, earnings call (Jan. 28, 2014)
■■ “There remains a production deficit
of both single-family and multifamily
dwellings from underproduction during
the economic downturn and up to and
including last year. This shortfall will
continue to define the housing markets
for the foreseeable future and will drive
the housing recovery forward.”
— Stuart Miller, chief executive officer, Lennar
Corp. earnings call (March 20, 2014)
■■ “If I had a choice, I would never be
in default servicing again. I would tell
anyone who’s got a mortgage with us,
‘You’re 60 days late, we’re selling the
mortgage, and we don’t want to do any
business with you anymore.’ It’s just far
too painful.”
— Jamie Dimon,chairman and chief executive
officer of JPMorgan Chase & Co,on mortgage ser-
vicing at presentation for investors (Feb.25,2014)
■■ “The level of household formation is
very depressed, has been very de-
pressed for some time. There are a lot
of kids who are shacking up with their
families and probably would like to be
going out and acquiring places of their
own, whether it’s an apartment or a
home. There is a lot of demographic
potential there for new household forma-
tion that would ultimately generate new
construction, either single or multifamily,
and the level of rates I think does matter.
And the fact that they’re low now I think
is something that should serve as a
stimulus to people coming back into the
housing market.”
— Janet Yellen, chair of Federal Reserve, press
conference (March 19, 2014)
■■ “Right now, around the world, I’d say
there’s the most interest in investing in
real estate in the U.S. That makes it a
little more challenging than other places
today.”
— Jonathan Gray, global head of real estate at
Blackstone, Harbor Investment Conference in
New York (Feb. 13, 2014)
■■ “The interest has not really abated
from the Asian or the European inves-
tors. There’s a greater focus on certainty
from Asia and parts of Europe. Current
income is the big driver there and get-
ting a 5 percent plus-or-minus current
return is a very attractive element.”
— Matt Khourie, chief executive officer of CBRE
Global Investors Ltd., in an interview with
Bloomberg (March 11, 2014)
■■ “Mortgage underwriting standards
remain tight, which does limit the num-
bers of qualified buyers in the market.
Meanwhile Dodd-Frank continues to be
clarified and adopted and proposals in
Congress for GSE reform are creating
an additional uncertainty for the mort-
gage industry.”
— Jeffrey Mezger, chief executive officer, KB
Home, earnings call (March 19, 2014)
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Last year, rising U.S. interest rates tugged mortgage rates higher, hurting demand for home loan refinancings. Rates for 30-year mort-
gages, the most common home loan, ended the year at 4.80 percent, having risen as high as 4.93 percent on Sept. 6, 2013. The higher
borrowing costs weighed on home sales; existing home sales ended the year at a pace of 4.88 million units, having risen to a pace of
5.38 million units in July.
At the same time, sales of bonds backed by commercial real estate loans rose to a high not seen since 2007 and use of interest only
and partial IO loans for commercial properties climbed to levels not seen since before the credit crisis.
Real Estate Trends
Existing Home Sales Little Changed, Prices Up
0
1
2
3
4
5
6
7
8
0
50
100
150
200
250
2004 2006 2008 2010 2012 2014
Millionunits
S&P/Case-Shiller Composite-20 Home Price
Index, Not Seasonally Adjusted (left)
US Existing Homes Sales (right)
Source: Case-Shiller, National Association of Realtors
U.S. existing home sales ended 2013 at a seasonally adjusted rate of 4.87
million units, little changed from December 2012 when they were at a rate
of 4.88 million units. At the same time, the Case Shiller home price index
ended the year at a reading of 165.63, up from 146.08 in December 2012.
Rise in Rates Chips Away at Refinancing Activity
0
1
2
3
4
5
6
0
1,000
2,000
3,000
4,000
5,000
6,000
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14
MBA Refinance Index (left)
MBA 30-Year Effective Mortgage Rate % (right)
Source: Mortgage Bankers Association
The Mortgage Bankers Association’s refinance index, a measure of requests
for home loan refinancings, ended 2013 at a reading of 1,315.1, down from
3,528.3 at the end of 2012.At the same time, 30-year mortgage rates rose to
4.80 percent by December 2013 from 3.66 percent a year earlier.
CMBS Leverage Jumps in 2013, Still Shy of 2007
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1997 1999 2001 2003 2005 2007 2009 2011 2013
Partial IO IO Balloon Fully Amort
Source: Bloomberg LP
Just over 51 percent of all loans resold into commercial mortgage backed
securities in 2013 were interest-only mortgages or partial IO loans, the
highest since 2007, when 85.16 percent of all commercial mortgage debt
had such loans.
2013 U.S. CMBS Supply Up 38 Percent From 2012
0
50
100
150
200
250
300
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
DollarAmount(Billions)
All US All Non-US
Commercial mortgage backed securities issuance in the U.S. rose 38
percent in 2013 to $162.7 billion from $117.6 billion in 2012. Issuance was
its highest since 2007, when volume was $253.9 billion.
Home Prices Climb as Higher Rates Erode Refi Activity and Leverage Increases in CRE

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Michelle Meyer, se-
nior U.S. economist
of Bank of America
Merrill Lynch, writes
that tight credit
conditions remain a
hurdle to a stronger
housing market. A
near-term concern
is that demand from
investors will fade
without demand from
first-time homebuyers coming in to replace it.
Although the housing market is still
far from normal, it has made significant
progress. Home prices have climbed
since the trough in early 2012, reversing
about a third of the cumulative decline
during the recession. Foreclosure inven-
tory has shrunk while new delinquency
rates have tumbled. The U-shaped
recovery in housing construction contin-
ues, albeit with bumps along the way.
The missing link to a stronger housing
recovery has been tight credit condi-
tions, which limit the pool of potential
buyers, particularly of first-time home-
owners. According to the latest survey
from the National Association of Real-
tors (NAR), only 28 percent of sales are
to first-timers. This compares to about
40 percent historically.
The big question is whether the dearth
of first-time homebuyers can be ex-
plained by supply or demand forces. Is it
that typical first-time buyers are no lon-
ger interested in becoming homeowners
or that they are not eligible because of
the challenging credit environment? It
is likely a bit of both, but we believe it is
more of a supply than demand issue.
First-time buyers are particularly sensi-
tive to the credit environment, as 86
percent of first-time buyers finance their
purchase compared to about 75 per-
cent of relocation buyers and between
25 percent and 45 percent of investors
and second home owners, according
to the NAR. Credit has continued to
tighten, which means homeownership
has become restricted to a subset of the
population.
Using data from CoreLogic, we cre-
ated a histogram of mortgage loans by
credit score. We then compared this to
the credit distribution of the population,
based on those who request a FICO
score, which admittedly biases the sam-
ple toward higher credit quality house-
holds. About a quarter of the population
have a FICO score below 600, which
makes it virtually impossible to receive a
mortgage. In contrast, about 85 percent
of mortgage loans are to borrowers with
FICO scores between 650 and 800, but
this cohort only makes up 47 percent of
the population. The divergence is par-
ticularly notable in the 750-800 bucket,
which is the group of borrowers that
banks are targeting. These households
make up a much larger share of mort-
gage loans than they do the population.
Looking at the credit scores is only one
part of the equation; buyers also need
to afford the down payment. Fannie Mae
and Freddie Mac mortgages, which
make up about 60 percent of origination
(based on dollars, not units), require a
20 percent down payment or mortgage
insurance − the latter increasing the
cost of borrowing. Loans backed by the
Federal Housing Authority (FHA), which
make up 20 percent of origination, will
accept down payments between 3.5 per-
cent and 10 percent.
Many first-time buyers struggle with
the down payment. This is particularly
true today with high student debt burden
and slow wage growth over the past
several years. Indeed, according to the
NAR’s Profile of Home Buyers and Sell-
ers report, 54 percent of those reporting
difficulty affording the down payment
said it was due to student loans.
Tight credit conditions and a slow heal-
ing in the labor market mean that for
many households, the dream of home-
ownership is still many years away.
Demand may also be a factor in the
decision to rent instead of buy as percep-
tions about homeownership may have
changed due to the crisis. One lesson
learned from the recession is that home
prices can and do decline. The pain
from foreclosures was felt throughout
the country; many homeowners became
delinquent on their mortgages and even
more struggled with negative equity.
Opinions have also changed in regards
to housing as a store of wealth and a
means for financing future expenditures.
For many young adults who are search-
ing for labor mobility and liquid assets,
buying a home may not seem as attrac-
tive as renting.
Weak demand from first-time home-
buyers has been partly offset by greater
demand from investors, including large
private equity firms. Investors have
purchased distressed properties, many
times in bulk, and have converted them
to rental homes. This has been a good
trade given the trend of young adults
renting for longer.
The near-term concern for the housing
market is that demand from investors
will fade but first-time homebuyers won’t
be prepared to take market share as a
result of tight credit and years of slug-
gish income growth. This could lead to a
hiccup in home sales and moderation in
home price appreciation. Stay vigilant;
we are still far from smooth sailing in
these waters.
guest editorial micheLle meyer, Bank of America merrill Lynch
Tight Credit, Shifting Perceptions Drive Down First-Time Homebuying
Tight credit conditions and
a slow healing in the labor
market mean that for many
households, the dream of
homeownership is still many
years away.

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BloombergRealEstate_AllEvents_March20.indd 1 21/03/2014 17:02:33

New home sales likely will weather an
increase in mortgage rates better than exist-
ing home sales because buyers of existing
homes are more sensitive to higher rates,
write Douglas Duncan, chief economist at
Fannie Mae, and Orawin T. Velz, a director at
Fannie Mae.
Rising mortgage rates and home
prices coupled with changing young-
adult demographics have put a damper
on home sales, especially existing home
sales. February existing home sales fell
for the sixth time in seven months, and
pending home sales — a leading indica-
tor of existing homes — fell in February
for the eight consecutive month. New
home sales, which record signings and
not closings of new homes, have fared
better. Despite the February drop, new
home sales remain near recovery highs.
The diverging trends in contract sign-
ings between new and existing homes
can be largely explained by demograph-
ics. A typical new homebuyer tends
to have higher income than a typical
existing homebuyer. As a result, poten-
tial existing homebuyers may be more
sensitive to a rise in mortgage rates
and an associated increase in monthly
mortgage payments than those looking
to buy a new home.
Indeed, the existing home sales mar-
ket has lost momentum since the spike
in mortgage rates last summer. At the
same time, home prices have continued
to climb, leading to a substantial decline
in overall home purchase affordability.
Though affordability conditions still
remain high by historical standards, this
is not the case for buyers in many high-
cost areas, such as the West Coast and
the Northeast Corridor.
In the past when affordability dropped
due to a surge in mortgage rates or
rapid home price gains, more borrow-
ers opted for adjustable-rate mortgages
(ARMs) to boost their purchasing power.
For example, data from the Federal
Housing Finance Agency’s Monthly
Interest Rate Survey show that the
ARM share of purchase loans surged to
60 percent in 1994, when the yield on
30-year fixed mortgage rates jumped by
more than 2 percentage points during
the course of the year.
However, today’s borrowers have fewer
options for affordable ARM products as
they face more stringent underwriting
standards. In addition, the new Qualified
Mortgage rule, which took effect in Janu-
ary, curtailed the availability of riskier
ARMs, including interest-only products
and those with balloon payments. These
stricter standards and curtailments
have reduced the ability of households
to afford a home in today’s higher rate
environment.
According to data from the Mortgage
Bankers Association, even though the
ARM share of purchase mortgage appli-
cations doubled between the end of 2012
and the end of 2013, it was still below 10
percent through the end of February. The
limited ability of potential homebuyers
to switch to ARMs in the face of declin-
ing affordability supports our cautious
outlook for existing home sales.
In addition to rising rates and curtailed
affordability, a difficult macroeconomic
environment for young adults in par-
ticular also is impacting the existing
home sales market. Much of the pent-up
demand for housing is in the young
adult segment, as the share of young
adults living at home rises to a record
level. If labor market conditions improve
sufficiently to allow this group to form
households, they will likely opt to rent
initially for a variety of reasons, includ-
ing lifestyle choices, rising student loan
debt burdens, poor credit scores, and a
lack of income growth in recent years.
First-time homebuyers are crucial to
the housing sector’s recovery since
investor demand is fading because of
dwindling supply for bargain-priced
properties. However, these economic
factors suggest that young adults are
likely to delay becoming first-time
homebuyers, implying weaker near-term
organic demand for existing homes.
While existing home sales languish,
the performance of new home sales has
gradually improved as they face less
competition from distressed proper-
ties. The supply of new homes has
remained near historic lows, largely due
to resource constrained homebuilding
activity. Home builders have expressed
a wide range of concerns, including
difficulties in securing finished lots,
materials, and skilled labor. We remain
optimistic on the demand side in the
new home market and expect housing
starts to rise nearly 20 percent to 1.1
million units this year to meet the in-
creased demand. However, our forecast
of homebuilding activity faces downside
risks as supply constraints may impede
the ability of builders to ramp up supply.
With this backdrop, we forecast dou-
ble-digit gains for new home sales and
housing starts in 2014, and flat existing
home sales. Stronger employment and
income growth in coming quarters will
help buoy the sector, even as a pullback
in demand in the existing home market
points to moderating gains this year.
Our longer-term outlook for the
housing market is positive despite the
weaker near-term existing home sales
picture. Using the Census Bureau’s
latest population projections and our
forecast of headship rates by age, we
expect that annual household growth
will average 1.37 million in the second
half of the decade, up from a sub-million
pace currently. This rebound in funda-
mental demand growth should support
housing production of over 1.7 million
units per year in the second half of the
decade (including replacement and
second home demand). This level of
construction activity would be substan-
tially above the current pace of housing
production as the housing market con-
tinues its journey toward recovery.
The views expressed in this article reflect
the personal views of the authors, and do not
necessarily reflect the views or policies of
any other person, including Fannie Mae.Any
figures or estimates included in the article
are solely the responsibility of the authors.
guest editorial douglas duncan and orawin t. velz, Fannie Mae
Existing, New Home Sales on Divergent Tracks Suggest Uneven Recovery

CMBS data
Agency Collateral in CMBS Hits a Record in 2013; Deals With European Debt Show Gains
0
20
40
60
80
100
120
140
160
180
200
2005 2006 2007 2008 2009 2010 2011 2012 2013
HistoricalIssuanceVolume(Billions)
Japanese European Large loans/Floaters Conduit Agency
Much of the increase in
securtization of bonds pooling
commercial property mortgage
loans was due to an increase
in agency collateral typically
for multifamily properties. Of
the $162.67 billion in CBMS
issued last year, $69.39 billion,
or 43 percent, were transac-
tions pooling agency collateral,
according to data compiled by
Bloomberg LP. At the same
time, use of European debt
rose to $7.13 billion from $2.7
billion in 2012. From 2008 until
2011, no European collateral
was included in CMBS issues.
In 2007, deals with European
collateral totaled $25.05 billion.
In 2012, $56.71 billion worth of
agency debt was repackaged
into commercial mortgage
bonds and in 2011, $30.34
billion of agency collateral was
resold into CMBS. In 2007,
when CMBS issuance levels
were at their highest, $1.23
billion of agency collateral was
repackaged into bonds.
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CMBS Yield Premiums Demanded by Investors Narrow Even as Supply Grows
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2006 2007 2008 2009 2010 2011 2012 2013
SpreadsVersusSwaps(BasisPoints)
Legacy Spread - AAA 5-Year CMBS
Source: Commercial Real Estate Direct - crenews.com
On Dec. 27, 2013 AAA
five-year CMBS
spreads were 130 basis
points over swaps; they
were as narrow as 97.5
basis points on Feb. 1, 2013.
Commercial mortgage backed
securities spreads to swaps
narrowed despite an increase
in issuance as investors sought
out higher returns. By year-end,
AAA 5-year classes of CMBS
were at a spread of 130 basis
points over swaps, in from 140
basis points quoted in the clos-
ing days of 2012. In February
2009 and December 2008,
yield premiums for AAA, 5-year
CMBS were as wide as 1,500
basis points.
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Any rise in cap rates
could be tempered
by readily avail-
able financing from
CMBS conduits
and portfolio lend-
ers, writes Lisa
Pendergast, a debt
strategist at Jeffer-
ies Group Inc.
A question weighing on the commer-
cial real estate market is whether the
benefits of more robust economic growth
and any related increase in demand for
commercial property will outweigh the
negative effects of higher borrowing
costs and rising capitalization rates that
may come with tighter Federal Reserve
monetary policy.
While cap rates likely will rise, inves-
tors should expect any increase to be
tempered by the high level of CRE/mul-
tifamily financing available from portfolio
lenders, CMBS conduits and the GSEs.
Other factors that could restrain cap
rates include increased demand for
commercial property space, little in the
way of commercial real estate develop-
ment and a more sanguine risk/reward
view of value-added CRE investments.
The severity of the recession and an
unprecedented response by the Federal
Reserve led to an environment in which
base interest-rate levels became the
overriding influence on cap rates.
To date, commercial real estate values
in many markets and asset classes have
appreciated more because of capital-
markets machinations and artificially
low benchmark rates/capitalization
rates than because of actual growth in
demand for space.
Appreciation in property values has
been restricted largely to core markets
where trophy/Class-A assets provide
commercial real estate investors with
long-term stable value and, conceivably,
additional upside as economic growth
accelerates and commercial real estate
demand grows.
The March 2014 Moody’s/RCA Com-
mercial Property Price Index (CPPI)
report noted that prices in major or
core markets now exceed November
2007’s pre-crisis peak by 3 percent,
while prices of properties in non-major,
or non-core, markets are still mired at
about 16 percent below peak.
For most CRE assets in non-core mar-
kets, cap rates have demonstrated little
downward momentum from elevated
post-crisis levels. Investors still shy away
from non-core markets, many of which
are still experiencing depressed eco-
nomic activity.
This is reflected in cap rate spreads
across the post-crisis era: even though
the ten-year Treasury rate fell from a
high of 4.80 percent in 2006 to a low of
1.79 percent in 2012, the average capi-
talization rate across asset classes fell
only 46 basis points from 5.82 percent
in 2006 to 5.36 percent in 2013. Why?
Investors demanded an incremental
risk premium or a wider cap rate spread
over the ten-year Treasury rate given the
perceived riskier environment.
There is a silver lining to this situation
as benchmark treasury rates grow more
likely to rise. Currently, the CRE average
cap rate spread to the ten-year risk-free
rate is 310 basis points across all asset
classes; this compares to a spread of 93
basis points over swaps in 2007.
The wider spread today means that
cap rates have some protection against
a rise in benchmark rates, assuming
investors are willing to reduce their risk
premium from the average of 310 basis
points to its long-term average of around
200 basis points.
Not surprisingly, cap rates are low-
est today for the multifamily sector at
around 4.9 percent. Low multifamily cap
rates are attributable to more stable
cash flows and reduced risk associated
with multifamily properties versus other
commercial real estate assets.
This is particularly evident since the
credit crisis, and accentuated by 1) the
presence of the government-sponsored
enterprises Fannie Mae and Freddie Mac
in the lending markets at the height of
the crisis and 2) growth in demand tied
to a drop in U.S. homeownership. For the
future, a supply increase as multifam-
ily projects proliferate — particularly in
metropolitan areas in Texas, Washington,
D.C., and Seattle — should stem further
declines in cap rates if not nudge them
slightly higher in certain markets.
Meanwhile, the office sector is not
far behind multifamily in terms of cap
rates, averaging around 5.1 percent
at the national level. When it comes to
cap rates for office properties there is a
major disparity between assets located
in central business districts, or CBDs,
and those in suburban markets. The lat-
ter are significantly higher. For example,
CBD trophy office assets in Manhattan
are trading at cap rates in the 4 percent
area, whereas office properties in subur-
ban markets where there is less demand
see cap rates of 7 percent or more.
Among other property categories, cap
rates for retail facilities differ greatly
depending on market and asset type.
Very limited new supply should help this
sector, and it should be supported by
any job growth and/or improved con-
sumer confidence. Our overarching the-
sis still applies: given the expectations
that second-quarter economic growth
will reflect considerable improvement
from the first-quarter’s weather-induced
doldrums, it is difficult not to expect
benchmark Treasury rates to rise; as a
result, retail capitalization rates could be
pressured higher.
guest editorial lisa pendergast, Jefferies Group
The Price You Pay: Better Economy and Higher Real Estate Cap Rates Could Go Hand in Hand
The severity of the recession
and an unprecedented
response by the Federal
Reserve led to an
environment in which base
interest-rate levels became
the overriding influence on
cap rates.

The weighted average cap rate for office, retail and hospitality property loans resold into bonds fell in the final three months of 2013,
while weighted average cap rates for multifamily properties rose, according to data compiled by Bloomberg LP. The spread to U.S. Trea-
sury rates earned by lenders for all property types fell in 2013 from 2012, suggesting investors financing property purchases were willing
to earn less of a return. The biggest drop in the spread to 10-year U.S. Treasury note rates earned by lenders was seen in retail property
mortgages; the smallest decline was in multifamily mortgages.
CAP RATES
Retail Property Loan Cap Rates Down
0
2
4
6
8
10
12
2010 2011 2012 2013
Rate(Percent)
Weighted Avg. Cap Rate U.S. Treasury 10-year Yield Spread
The weighted average cap rate for retail property mortgages resold into
bonds was at 5.59 percent in the fourth quarter of 2013, down from 6.17
percent in the fourth quarter of 2012. The spread to Treasuries earned by
lenders narrowed to 2.56 percent from 4.42 percent in that time period.
Multifamily Cap Rates at 6.64 Percent in Q4 2013
1
2
3
4
5
6
7
8
2010 2011 2012 2013
CapRate(Percent)
Weighted Avg. Cap rate U.S. Treasury 10-year Yield Spread
Multifamily cap rates ended the fourth quarter of 2013 at 6.33 percent,
up from 5.85 percent in the final three months of 2012. The spread to
benchmark U.S. government debt earned by lenders during that period
narrowed to 3.30 percent from 4.09 percent.
Hospitality Cap Rates Close 2013 at 7.31 Percent
0
2
4
6
8
10
12
2010 2011 2012 2013
Rate(Percent)
Weighted Avg. Cap Rate U.S. Treasury 10-year Yield Spread
The weighted average cap rate for hospitality mortgage debt was at
7.31 percent in the final three months of 2013, down from 7.34 percent in
December 2012. Cap rates for this property type were as high as 10.34
percent in the third quarter of 2010.
Office Cap Rates Fall to 5.78 Percent in Q4 2013
1
2
3
4
5
6
7
8
9
2010 2011 2012 2013
CapRate(Percernt)
Weighted Avg. Cap rate U.S. Treasury 10-year Yield Spread
The weighted average cap rate for mortgage debt backed by office proper-
ties was at 5.78 percent in the fourth quarter of 2013, down from 6.01
percent in the fourth quarter of 2012. Late last year the spread to Treasuries
earned by lenders fell to 2.76 percent from 4.25 percent in December 2012.
Most Commercial Property Cap Rates Trended Lower in 2013

Loan Originator Current Balance
Delinquent
Balance
Total
Number of
Loans
Number of
Delinquent
Loans
Number of Delinquent Loans that
Had Borrowers Filing For
Bankruptcy Court Protection
1 Wachovia Bank NA 42,951,934,457 6,680,083,262 3,503 221 10
2 Column Financial 26,343,251,643 2,292,324,922 6,442 215 8
3 LaSalle Bank National Association 15,706,071,678 2,088,200,503 5,159 200 14
4 JPMorgan Chase & Co. 56,677,236,277 2,430,220,626 4,925 141 7
5 Lehman Brothers 20,238,268,322 1,644,960,318 4,031 131 5
6 Bank of America, NA 37,965,237,929 2,829,229,425 4,254 129 3
7 Greenwich Capital 17,678,730,549 3,118,232,805 1,863 122 7
8 CRF 9,026,773,488 1,115,742,080 1,297 93 6
9 CIBC 10,641,584,744 1,213,095,780 1,854 90 7
10 German American Capital 26,055,040,777 2,271,672,660 1,857 82 5
10 Merrill Lynch & Co. Inc. 12,282,912,986 2,237,262,238 2,306 82 7
12 UBS AG 21,725,319,210 2,032,556,947 2,420 76 3
13 Wells Fargo Bank, NA 35,970,924,646 579,442,802 5,642 73 2
13 Morgan Stanley Mortgage Capital Holding 19,352,348,341 924,741,462 1,845 73 3
15 PNC 11,378,060,855 678,149,447 1,849 72 5
16 CGM 11,774,159,280 1,407,135,230 1077 70 2
17 General Electric Capital Corp. 7,921,250,427 820,150,333 2,876 69 4
18 Bridger Commercial Funding 2,502,663,052 391,906,816 966 65 0
19 Goldman Sachs 28,642,172,877 1,708,624,863 1,674 61 1
20 Washington Mutual Bank 1,328,650,840 77,491,596 2,573 60 5
21 Bear Stearns Co. Inc. 15,118,024,303 1,345,707,419 2,401 48 2
22 Barclays 8,382,006,634 800,707,523 792 39 2
23 Artesia Mortgage Capital Corporation 2,696,903,754 288,121,857 937 36 2
23 NCCI 5,230,898,831 552,777,242 963 36 2
23 KeyBank NA 6,973,747,666 569,482,197 1,434 36 1
real estate q1 2014
Wachovia, Column and LaSalle Are Top Underwriters of Delinquent CMBS Property Loans
Among underwriters of commercial mortgage loans resold as CMBS, Wachovia Bank NA had the biggest number of delinquent mortgage loans as of
January 2014, according to data compiled by Bloomberg LP. Wachovia, acquired by Wells Fargo in 2008, had 221 delinquent loans for commercial real
estate properties and 10 of these loans involved borrowers that filed for bankruptcy court protection. Column Financial was the number two underwriter
of problem loans — 215 of its mortgages were delinquent — and LaSalle was the third biggest. Two hundred of the 5,159 loans underwritten by LaSalle
were delinquent.

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Q & A with Dwight Bostic
The low interest rate environment has spurred
investment banks to join hedge funds and private
equity firms to buy distressed real estate, Dwight
Bostic, managing director at Mission Capital,
tells Bloomberg Brief’s Aleksandrs Rozens.
Q: Who is buying distressed real estate
debt these days?
A: In the last few years there’s been sig-
nificant capital raised and there have been
participants that exited the market during
the significant downturn that have moved
back in – probably most notably the
investment banks. Then, there are hedge
funds and private equity. It’s a pretty broad
market when it comes to investing in
distressed assets these days.
Q: What kind of paper is it – Fannie
and Freddie mortgage debt or non-
conforming mortgages?
A: It is mostly assets that would have
been originated in 2006 and 2007 and into
2008. From a legacy standpoint on the
Investment Banks Eager for Yield Return to Real Estate, Mission’s Bostic Says
distressed side, there is still a significant
amount of non-performing and troubled
debt, restructured re-performing assets
that sit on balance sheets of the deposi-
tory institutions. Some of the structured
sales that the FDIC ran in 2008 and 2009
have kind of played out and have gotten
to the point where they can be liquidated.
We are seeing some funds enter their
wind-down phase — some of the early
acquisitions that were made in the market.
It’s not purely depository institutions that
have been sellers. It has been some of
the funds as well.
Q: What’s behind the renewed inter-
est by investment banks? Are they
restarting conduits for commercial and
residential mortgages?
A: Today while there have been some
banks willing to get back into new origina-
tion in conduit, that hasn’t really taken off
because the securitization market has
not really taken off. The banks are look-
ing at taking down the distressed side or
re-performing assets in this rate environ-
ment as something they are willing to
hold and earn the yield. Sometimes they
have private investors behind them and
they create investment vehicles for private
equity groups or investors. They are really
focused on the higher yield, distressed
side of the market. The banks are also
extending warehouse lines now to buyers
in distressed markets. That’s been a boon
to overall pricing.
Q: What’s your impression of the sec-
ond lien home equity market? Is any-
one buying home equity loans? What
does that say about how people feel
about the return in value of housing?
A: The second-lien home equity space
has been very thin. While the housing
appreciation we have seen has been
more favorable than we thought it would
be at this stage, it really has not resulted
in some of 2006, 2007 and 2008 vintages
coming back to a point where the second
liens have equity in them. So it’s still very
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much a collection play from a debt versus
any sort of collateral backing it up. The
banks and the other holders of that — the
execution they are going to get on that
is pennies on the dollar. The operational
capacity that it relieves from them doing
is not that significant. That market is very
thin right now and given some of the regu-
latory oversight and regulations that have
been put in place, I don’t think that market
is going to come back for a while.
Q: What happens to the market when
Fannie and Freddie are unwound?
Does this mean the end of 20- and 30-
year mortgages?
A: That’s one of the big concerns as to
whatever sort of reform comes out of
this: How do you preserve the 30-year
fixed-rate mortgage for people? And, what
sort of role does the government have
in ensuring that that type of financing is
available? I don’t think anybody knows the
resolution that’s going ultimately pass. I
know that’s a very important part of this
unwinding process and the future role of
government in the mortgage space — and
that is to not push the market to purely a
balloon or adjustable rate environment.
Q: From what I recall, FHA loans saw
a high rate of defaults and delinquen-
cies. Are you doing anything in that
space in terms of FHA or VA paper?
A: HUD has been actively selling non-
performing loans for the last couple of
years. All indications are that they will
continue to be active sellers for the fore-
seeable future, call it three to five years.
We are pursuing that market. Really there
is the direct involvement with HUD and
then there is the potential for individual
banks and other holders of that paper to
buy loans out of the Ginnie Mae securi-
ties — its called early buy out — and sell
them. But the current rate environment is
not really conducive to that trade. I think
the majority of the trades will be direct
through the HUD where HUD actually
takes a bank out of the asset, pays off the
claim and sells that uninsured asset into
the secondary market. We are pursuing
that business and I think that will be the
majority of the HUD FHA and VA loan
sales over the next several years.
Age: 49
Education: West Virginia University
Professional Background: Has worked for Pru Home Mortgage, Ocwen
Financial, Donaldson Lufkin & Jenrette and Credit Suisse. Joined Mission
Capital when it was founded in 2002.
Family: Married, two daughters.
Hobby: Avid tennis player.
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KEY TOPICS THAT WILL BE COVERED:
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Q&A…

Foreclosure data
December Commercial Mortgage Debt Foreclosure Rate at Lowest Since September 2009
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
2007 2008 2010 2011 2013
DelinquencyRate(Percent)
30D 60D 90D+ Foreclosure
Foreclosures of commercial property
mortgages resold into securities fell to a
51-month low in December.
The rate of commercial mortgage debt
foreclosures involving all property types in
December was 0.53 percent, the lowest
since September 2009 when it was at
0.57 percent.
Foreclosures of commercial mortgage
debt peaked in July 2011 when they hit a
rate of 1.92 percent.
The 30-day delinquency rate of commer-
cial mortgage debt involving all property
types was at 0.28 percent in December.
That’s a low not seen since October 2008
when the 30-day delinquency rate was
0.17 percent.
Thirty-day delinquency rates of com-
mercial property debt hit a peak of 1.33
percent in June 2009.
Commercial mortgage debt delinquent
60 days was at a rate of 0.15 percent,
down from 0.18 percent in November.
Sixty-day delinquency rates, which were
as high as 0.72 percent in April 2010, were
at 0.13 percent in October 2013.
Ninety-day delinquencies of commercial
mortgage debt rose to 1.08 percent in De-
cember from 1.07 percent in November.
— Aleksandrs Rozens
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Managing Director
AZORA
David Gillerman
Managing Director
OCH-ZIFF
Gianluca Muzzi
MD, Head of Real Estate
DEUTSCHE ASSET &
WEALTHMANAGEMENT
Jonathan M. Lurie
Managing Director
BLACKSTONE
Paul A. Brundage
EVP, Senior MD Europe
OXFORD PROPERTIES
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MD & Founding Partner
ORION CAPITAL
MANAGERS
Wolfgang G. Behrendt
Managing Director
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PARIS
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The 17th Annual
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2014
Bloomberg_EuropeAd_April17.indd 1 17/04/2014 16:30:20

foreclosure data…
The credit picture for commercial real estate debt resold into commercial mortgage-backed securities showed further improvement last
year. Thirty-day, 60-day and 90-day delinquency rates for mortgages on retail properties, offices, industrial warehouses and hospitality
declined in 2013 from 2012, according to Bloomberg data. Foreclosures of all property showed improvement from the previous year.
Hotel Foreclosures Lowest Since May 2009
0
2
4
6
8
10
12
14
16
2007 2008 2009 2010 2011 2012 2013 2014
30 Day 60 Day 90 Day-plus Foreclosure
Foreclosures of mortgages backed by hotel properties fell in December 2013
to their lowest since May 2009.The foreclosure rate for hospitality mortgage
debt was 0.31 percent in December 2013, down from 2.61 in December
2012. In May 2009, hospitality foreclosure rates were at 0.17 percent.
60-Day Industrial Delinquencies Lowest Since ’08
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012 2013 2014
30 Day 60 Day 90 Day-plus Foreclosure
Industrial warehouse mortgage debt 60 days delinquent fell in December
2013 to its lowest level since November 2008. This property type saw a
drop in foreclosure activity last year; in December foreclosures were at
0.86 percent, down from 0.94 percent in December 2012.
30-Day Retail Loan Delinquencies at 5-Year Low
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2007 2008 2010 2011 2013
Thirty-day delinquencies for retail property mortgages ended the year at
0.25 percent, the lowest since October 2008 when they were at 0.19 per-
cent. Retail property foreclosures were at 0.75 percent in December 2013,
a low not seen since December 2009 when they were at 0.74 percent.
30-Day Office Delinquencies at Five-Year Low
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2007 2008 2009 2010 2011 2012 2013 2014
Thirty-day delinquencies for office property loans, which rose to as high
as 1.38 percent in May 2012, were at 0.32 percent in December 2013,
their lowest since December 2008. Office property foreclosures were at
1.21 percent in December 2013, a low not seen since January 2011.
Delinquency, Foreclosure Rates for All Property Types Trended Lower in 2013

Q & A WITH Russell Bernard
The U.S. real estate market has not completely
returned to health and distressed investors
likely will find buying opportunities in proper-
ties that are worth $50 million or less, Russell
Bernard, managing principal at Westport
Capital Partners LLC, tells Bloomberg Brief’s
Aleksandrs Rozens.
Q: How does this post-crisis era com-
pare to previous ones for a real estate
investor?
A: For a distressed investor, the best time
to buy distressed assets was 2008-2009
when the real estate markets were at their
worst. That was the best time to find value.
We are now five or six years into the
recovery and it’s clear that the recovery
is stronger in markets like New York and
San Francisco and not as strong in other
parts of the country. To evaluate today’s
opportunity, the standard example I use is
to look at banks. If you look at 2013, when
the stock market was at an all time high,
there were still 25 or so community and
regional banks that went out of business.
And what put those banks out of business
was probably their real estate loans. It
was not Latin America debt or derivatives.
It was probably real estate. Those 25 bank
closures — not counting the Resolution
Trust Corp. days in the late 1980s and
1990s or this last crisis — were among
the top 10 percent of bank closures since
the 1930s. So if banks are still failing, to
me that means the banking and liquidity
systems are not fully functioning. In that
scenario, you can’t have a completely
healthy real estate market, even though
the situation is improving, and there are
opportunities for investors.
Q: Some property types in New York
are richer than where they were prior to
the crisis.
A: Yes, residential construction for in-
stance. If you want to make money build-
ing a new building in Manhattan, it has
to be a luxury project selling at $2,000 or
$3,000 per square foot. Before the crisis
most projects were significantly under
that. Part of that is because land prices to-
day have more than doubled — from $300
Real Estate Not Entirely Healthy and That Makes for Good Buying Opportunities: Bernard
Age: 56
Education: Cornell University, B.S. in Business Management and Marketing
Favorite Charity: USC Shoah Foundation
Professional Background: Previously Principal at Oaktree and portfolio man-
ager for Oaktree’s real estate funds. Managing director and Portfolio manager at
TCW Special Credits Distressed Mortgage Fund. Partner at Win Properties Inc.
Current Favorite Book: “The Hard Thing About Hard Things,” by Ben Horowitz
a square foot to $700 or $800 a square
foot. And interest rates are certainly half
of what they were before. Now, throw in
the general costs of owning an apartment
in New York City. So, are interest rates or
demand or taxes driving current pricing?
Obviously it is a little of everything. But
what happens if interest rates double?
That’s not a big stretch. They won’t double
immediately, but what happens when they
double? Will property prices fall by half?
All those risk factors come into play.
Q: Is there any distressed real estate
left?
A: Distressed debt sold by banks is hard
to find at sufficiently discounted prices.
Very few loans offer yields that would in-
terest a distressed real estate investor. So
I don’t think buying non-performing loans
is as attractive as it was in 2008-09. But I
do believe there are pockets of opportuni-
ties in REO — real estate owned by spe-
cial servicers or banks. They just probably
are not in Manhattan or San Francisco,
but in smaller cities and suburbs outside
of the spotlight.
Q: REO — if you see value in it, what’s
the common denominator? What kind
of property is it? What gives it value?
A: There is value in all types of property.
I think the best opportunities are at $50
million dollars and under. A property can
be residential, it can be office, it can be
retail. It can be land. It can be hospitality.
It’s probably not in what people would call
core markets. It’s probably in secondary
or tertiary markets that you find the best
value for the least amount of risk.
Q: How do you go about buying this
property? Do you go to 363 bankrupt-
cy auction sales or do you go through
an agent?
A: We get some opportunities through
direct inquiries and others from bidding
on the court house steps. Some interest
comes from brokers scanning the Internet.
We have a variety of different sources,
which is why for us the deal flow is plenti-
ful. When deal flow is plentiful for assets
that need liquidity, that makes me feel that
the market has not fully stabilized yet, out-
side of certain places. It’s moving in the
right direction and, eventually, stability will
come unless something on the horizon
knocks it off. More liquidity is coming back
but it’s not easy to get a bank loan.
Q: How do these properties end up
REO? Is it because their owners can-
not get the money to pay down a bal-
loon payment?
A: There is usually a maturity default
or payment default and lenders either
foreclose or the borrower hands in the
keys. When a lender takes back an asset,
it obviously does not solve the problem.
A bank is in the lending business, not the
real estate business. They want to get the
property off of their balance sheet, espe-
cially when it needs a capital injection for
upkeep or repair. Over the last five years
lenders with REO have had the opportu-
nity to write down the value of their loans
over time. They’ve taken a little pain every
year, so they hope they can now dispose
of a property at a market clearing price, or
possibly hold on until the value rebounds.

The revival of commercial and residential real estate spilled over into equity markets in 2013 where the number of real estate companies
taken public rose to a nine-year high, according to data compiled by Bloomberg LP.
At the same time, mergers and acquisitions of real estate businesses rose to a level not seen since 2007 and most of the transactions
involved U.S. companies. Three hundred and ninety-three mergers valued at $96.4 billion were unveiled in 2013, up from 307 deals in
2012 worth $64 billion.
CAP MARKETS
Real Estate Mergers Hit Post-Crisis High in ’13
0
100
200
300
400
500
600
700
800
$0
$20
$40
$60
$80
$100
$120
$140
$160
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
← Annualized rate (B)
← Volume (B)
Deal Count →
Source: Bloomberg
While real estate mergers in 2013 are up from 2012, they are shy of 2007
levels when 638 transactions worth $147.9 billion were assembled by
bankers. The largest deal of 2013 was American Realty Capital Proper-
ties’ acquisition of Cole Real Estate Investments, a provider of real estate
investment services.
U.S. Companies Drive Real Estate Mergers
Real Estate IPO Issuance at Nine-Year High
0
5
10
15
20
25
30
35
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total IPO value (millions) Number of IPOs
Sixteen initial public offerings for real estate companies were completed
in 2013, raising $4.9 billion in equity markets. That’s the most since 2004,
when 29 real estate companies were taken public, raising $6.9 billion. In
2012, nine real estate IPOs raised $3.02 billion.
BAML Captures 21 Percent Share of RE IPOs
0 5 10 15 20 25
Barclays
Raymond James & Associates Inc
UBS
Deutsche Bank AG
Wells Fargo & Co
Citi
JP Morgan
Morgan Stanley
Goldman Sachs & Co
Bank of America Merrill Lynch
BAML was lead underwriter of seven real estate company IPOs in 2013, giv-
ing it a 21 percent market share, while Goldman underwrote five such trans-
actions, giving it a 15.5 percent market share. BAML underwrote the largest
real estate IPO of the year — Empire State Realty’s $1.1 billion offering.
Target Country Acquirer
Value
($M)
Deal
Status
Cole Real Estate
Investment Inc
US
American Realty Capital
Properties Inc
9,846 Completed
SM Land Inc PH SM Prime Holdings Inc 7,330 Pending
BRE Properties Inc US Essex Property Trust Inc 5,936 Completed
Brookfield Office
Properties Inc
US
Brookfield Property
Partners LP
5,037 Pending
GSW Immobilien AG DE Deutsche Wohnen AG 4,532 Completed
Corporate Prop-
erty Associates 16
- Global Inc
US WP Carey Inc 4,367 Completed
Primaris Retail Real
Estate Investment
Trust
CA
H&R Real Estate Invest-
ment Trust
4,106 Completed
Colonial Properties
Trust
US
Mid-America Apartment
Communities Inc
4,042 Completed
Cole Credit Property
Trust II Inc/Old
US Spirit Realty Capital Inc 3,663 Completed
CommonWealth REIT US
Corvex Management LP,
Related Fund Manage-
ment LLC
2,898 Pending
Real Estate Renaissance Spills Into Equity Markets With IPOs, M&A Activity

Q & A with alexander rubin
Servicer sales of distressed real estate have
drawn buyers such as private equity firms and
hedge funds, Alexander Rubin, managing
director at Moelis & Co., tells Bloomberg Brief’s
Aleksandrs Rozens.
Q:There’s more going in the equity mar-
kets related to real estate businesses.
A: Some of the larger companies — for
example, the collection of Blackstone’s
stakes in private businesses — it was pretty
clear those were going to come at least
on a dual track basis if not getting done
ultimately in the public market.They have
been structured well, priced correctly. For
the most part, those deals have traded
pretty well.
Q: How are these deals trading after they
have come to market?
A: Most have traded up. In all of these deals
sponsors are generally not initially selling
down their stake.They are actually raising
primary capital of the company, demonstrat-
ing ongoing commitment to the business.
Q:Are you seeing more M&A on the
back of the pickup in real estate IPOs?
A: There is a reasonably demonstrable
backdrop of increasing corporate con-
fidence in the boardroom expressed by
CEOs and their boards of directors.That
certainly is a function of general liquidity in
equity and fixed income capital markets. But
there are two additional trends contributing
to this.There are elevated levels of share-
holder activism coming into the REIT space.
That is not something we have seen in a
meaningful way before relatively recently.
The second is the utilization of various spin
off or split off technology by some of the
larger companies to simplify their busi-
nesses and give shareholders opportunity
for more of a pure play in the various com-
ponent businesses.That’s everything from
what Simon Property has done with their
shopping center and B mall business on the
one hand and Northstar on the other hand
with a successful example of spinning out of
their asset management business. Both of
those deals are likely to be completed in the
second quarter.
Servicer Sales of Real Estate Draw PE, Hedge Fund Interest, Says Moelis’s Rubin
Professional Background: Managing Director in Global Real Estate Invest-
ment Banking Group at Citigroup, M.D. and Co-Head of European Real Estate
Investment Banking at UBS, Managing Director at Merrill Lynch
Education: B.A. degree from Cornell University
Family: Married, three children
Q: Does the shareholder activism kick
up property sales or portfolio sales of
properties?
A: It certainly could. In other instances it
prompts, perhaps, a more thorough review
of a strategic alternatives. In some cases it
results in selective board representation; in
other cases it can result in a full restacking
of the board of directors and leadership of
the firm.
Q: How does any wind down of Fannie
Mae and Freddie Mac impact financial
sponsor investments in real estate?
A: It is not clear whether or not Congress
will actually back away from Fannie and
Freddie, or if they do, whether or not private
solutions don’t emerge to provide some
of that same secondary market support
for the single family mortgage product.
If availability of credit in the single family
mortgage business were to be impacted
or curtailed through some disruption to the
GSE template as it currently exists such that
some segment of homeowners that have
otherwise relied on mortgage financing to
buy their homes — if that becomes more
challenging and you tip the scales so that
you are increasing the number of renters,
that could arguably play well to two groups
of real estate owners: the multi-family sec-
tor, whether public or private, as well as
sponsors or public companies that have
aggregated portfolios of single family homes
and are offering them for rent.
Q:What are you seeing in terms of sales
of distressed property from banks?
A: What there has been more of more
recently in the U.S. have been some size-
able liquidations by special servicers in the
CMBS market where they are selling some
of their nonperforming portfolio — whether
it is a loan that has defaulted or if they have
actually gone through and perfected their
interest in the underlying real estate.There
have been some reasonably sizeable deals
by each of the major special servicers.
Unlike the period in the early financial
crisis when there was limited liquidity, the
markets today are far more functional and,
as a result, you are seeing reasonable if not
elevated dispositions by special servicers.
Q:Who are the buyers? Private equity,
hedge funds?
A: All of the above. Private real estate
owners, public companies. Offshore capital
has been a major source of demand for
practically all manner of real property in
major cities.
Q:What is private equity’s next play in
real estate?
A: We will experience a period of elevated
activity in the GP space broadly defined —
the actual managers of private equity for
commercial real estate.That could take a
number of forms.That could be GPs merg-
ing with each other.You could see some of
these firms explore IPOs to the extent they
have successful track records, sufficient
scale, diverse strategies and critical mass
as far assets under management.There
could be a good reception for some of the
successful names in the public market.You
could see some LPs narrowing the number
of relationships that they currently man-
age to deploy larger volumes of investment
dollars across a narrower portfolio of GP
relationships.The state of New Jersey last
year sold off a portfolio of 25 LP interests in
underlying real estate funds.Then the state
redeployed that money across a narrower
collection of their GP relationships.

Piedmont Office Realty Trust was the first office REIT to sell
unsecured bonds this year, after peers raised $2.7 billion in
2013. Piedmont sold $400 million in bonds priced at 178 basis
points over the 10-year Treasury, for a coupon of 4.45 percent.
Tightening bond spreads may encourage the use of unsecured
debt as a source of capital for office REITs during the balance
of 2014.
Office REITs have a total of $5.3 billion of debt scheduled
to mature in 2014, led by Brookfield Office’s $2.1 billion of
property-level debt.
Kilroy Realty Corp. and Brandywine Realty Trust have the
most unsecured debt maturities scheduled among office REITs
in 2014. Kilroy has said it intends to issue new debt to address
its maturities.
Kilroy Realty has $256 million of unsecured debt maturing in
2014, including $83 million in August with a 6.45 percent cou-
pon and $172.5 million of convertible debt at a 4.25 percent
coupon (7.1 percent GAAP interest rate).
Kilroy Realty noted during its fourth quarter earnings call that
it plans to issue debt to repay its 2014 maturities, which have
a blended GAAP interest rate of 6.9 percent. According to the
referenced curve, a new 10-year issue for Kilroy may price
160 basis points below that. Even those office REITs without
immediate liquidity needs might look to the bond markets as a
source of capital in 2014 given the 30-basis point year to date
drop in the 10-year Treasury yield and tighter spreads.
Brandywine Realty Trust has the next largest office REIT
unsecured debt maturity, $232 million in November with a 5.4
percent coupon. It has sufficient cash to repay its maturities.
Bloomberg Industries analysis of Office REITS is available on the termi-
nal at BI OFCR <GO>.
Office REITs Jeffrey langbaum, bloomberg industries analyst
Piedmont’s Unsecured Bond Sale Shows Alternative to Equity Financing
0
100
200
300
400
500
600
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
Bond Principal
Term Loan
Revover Available
Revolver Outstanding
0
1
2
3
4
5
6
7
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Years
Kilroy Yield Curve
Source: Bloomberg LPSource: Bloomberg LPSource: Bloomberg LP
3 5 7 10 20
Current Coupon on
Maturing 10-Year Bond
Kilroy Maturities Shows 2014 Refinancing Need
Kilroy Current Yields Suggest Refinancing Gain
Office REIT Bond 2013 Issuance
Issuer Name Issue Date Amount (Millions of Dollars) Coupon Maturity Date
Boston Properties LP 6/27/2013 700 3.8 2/1/2024
Corporate Office Properties LP 9/16/2013 250 5.25 2/15/2024
Mack-Cali Realty LP 5/8/2013 275 3.15 5/15/2023
Boston Properties LP 4/11/2013 500 3.125 9/1/2023
Corporate Office Properties LP 8/28/2013 350 3.6 5/15/2023
Kilroy Realty LP 1/14/2013 300 3.8 1/15/2023
Piedmont Operating Partnership LP 7/17/2013 350 3.4 6/1/2023
Bankers Hall LP 11/18/2013 288 4.377 11/20/2023

Economics ChinaBrief London (free brief)
Economics Europe Economics Asia Mergers
Hedge Funds Europe Hedge Funds Municipal Market
Financial Regulation Private Equity Leveraged Finance
Structured Notes Technical Strategies Clean Energy & Carbon
Bankruptcy & Restructuring Oil Buyer’s Guide

Apartment REIT development pipelines have grown about threefold
since early 2011 to $8 billion from $2.1 billion, due to a 100 to 150 bp
yield advantage over acquisitions. Apartment construction and leas-
ing can take 24 to 36 months, so earnings from the initial development
spike may support apartment REIT year-over-year funds from opera-
tions comparisons in 2014. AvalonBay, Equity Residential, Camden
Property Trust and UDR are the largest apartment REIT developers.
Apartment property sales in the first quarter by REITs topped ac-
quisitions at $637 million versus $397 million. Equity Residential led
buyers at $229 million, bucking the sectorwide trend. Brookfield led
sellers at $137 million, followed by Home Properties ($110 million).
REITs continue to take advantage of high apartment prices to
monetize assets, though dispositions hurt near-term earnings before
proceeds are re-invested.
Essex Property Trust’s consensus FFO estimate has declined
following its just-completed acquisition of BRE Properties and its
late-quarter issuance of $76 million of equity. Essex’s adjusted FFO
per share is expected to increase by 4.4 percent in the first quarter,
below the 11.4 percent growth of fiscal 2013.
Bloomberg Industries analysis of apartment REITS can be found on the
terminal at BI APTR <GO>.
Apartment REITs Jeffrey langbaum, bloomberg industries analyst
Construction Yields More Profits Than Acquisitions
0
1
2
3
4
5
6
7
8
9
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
2006 2007 2008 2009 2010 2011 2012 2013
BillionsofDollars
Units
Apartment Units Under Development (L1)
Total REIT Spending on Apartment Development (R1)
Source: Bloomberg Industries, Company Filings
Development Pipeline Is Growing
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
2006 2007 2008 2009 2010 2011 2012 2013
NumberofUnits
U.S.Dollars
Purchase Price per Unit (Left Axis)
Units Acquired (Right Axis)
Source: Real Capital Analytics
Acquisitions by Apartment REITs Declined in ’13...
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
200,000
2006 2007 2008 2009 2010 2011 2012 2013
NumberofUnits
U.S.Dollars
Sales Price per Unit (Left Axis)
Units Sold (Right Axis)
Source: Real Capital Analytics
...With Higher Deal Value Than Dispositions
First Quarter Apartment REIT Investment Deals
Acquisitions
Company
Amount (US$,
Mlns)
No. of Units Price/Unit
Equity Residential $229 1,018 $224,951
Washington REIT $73 216 $337,963
MAA $38.8 377 $103,044
Brookfield Asset Mgmt $25 753 $33,201
BRT Realty Trust $18.8 400 $47,000
Almco $12 40 $300,000
Source: Bloomberg Industries
Dispositions
Company
Amount (US$,
Mlns)
No. of Units Price/Unit
MAA $10.6 285 $37,135
Brookfield Asset Mgmt $137.2 2,098 $65,396
Almco $32 404 $79,208
Home Properties $110 864 $127,315
BRE $95.4 508 $187,795
AvalonBay $67.4 369 $182,656
Associated Estates $60 352 $170,455
UDR $48.7 264 $184
Winthrop Realty Trust $31.7 324 $97,840
Camden Property Trust $30 318 $94,340
Essex Property Trust $14.4 106 $135,535
Source: Bloomberg Industries

High occupancy rates in malls and shopping centers owned
by specialized real estate investment trusts will likely continue
to insulate them from announced store closings.
With occupancy rates at almost 95 percent on average, a
record high for the peer group, REITs have pricing power. As
long-term leases with below-market rents expire, new leases
are being signed with double-digit rent increases.
Mall, outlet and shopping center REITs, especially those
with better-quality assets, have been able to overcome risks of
e-commerce. REIT portfolios generated 3.5 percent average
same-store net operating income growth in 2013.
Overall retail vacancy rates fell to 10.4 percent by the end
of last year from 10.5 percent in the third quarter of 2013,
according to real estate information firm REIS. Rent growth
(per square foot) rose to 1.4 percent year over year from 1.1
percent in the third quarter. Overall store rents will increase 2.3
percent in 2014 and 3 percent in 2015, REIS forecasts. Retail
completions increased 48.4 percent from the third quarter and
remained below net absorption for the ninth consecutive quar-
ter. Completions will rise 74.3 percent in 2014 and 38.2 percent
in 2015, yet remain below net absorption, REIS forecasts.
Occupancy rates tend to be higher at malls and shopping
centers selected to be included in REIT portfolios. Occupancy
rates at the end of 2013 reached 95 percent for both segments.
Shopping center REIT occupancy has been rising since 2010
and rental rate spreads have been consistently positive since
2011. With limited vacancy putting a premium on high-quality
real estate, shopping center REITs have generated double-
digit rent increases on leasing activity in recent quarters, which
may continue. Store closings by retailers such as Staples and
Radio Shack have a limited effect on REIT portfolios, as new
tenants are paying 20 percent more, on average, than the
retailers they replace.
Higher rents have allowed REITs to generate same-store net
operating income growth even as struggling retailers announce
store closings. Mall REITs with higher productivity centers are
poised to outperform. The group’s net operating income aver-
aged 3.5 percent in the last quarter of 2013. Shopping centers
ability to generating high rent spreads on low in-place rents
helped the group to push net operating income growth to 3.4
percent for the same period.
Tenant sales growth rates have been shrinking, which could
eventually limit the ability of mall REITs’ to raise base rents
or collect percentage rents, which are based on sales. So far,
with occupancy rates at record high levels and occupancy
costs low, mall landlords retain pricing power, especially for
higher productivity centers. Even with pending closures from
retailers such as J.C. Penney and Abercrombie & Fitch, mall
REIT same-store net operating income growth appears poised
to rise.
Bloomberg Industries analysis of retail REITS can be found on the termi-
nal at BI RETR <GO>.
Retail REITs Jeffrey langbaum, bloomberg industries analyst
Retail REITs Shrug Off Store Closings as High Occupancy Rates Support Rent Increases
BINASHPV Index (BI North America Shopping Centers - REIT Valuation Peers)
BINAMALV Index (BI North America Regional Malls - REIT Valuation Peers)
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Bloomberg ®Charts 1 - 1
Occupancy Rates Rise, Support Rents
Shopping Centers Get 20% Raise on New Leases
REIT’s Same Store Sales Outperform Retailers

The well-being of
commercial real
estate such as mul-
tifamily, office and
industrial properties
is tied closely to the
health of the U.S.
jobs market, writes
Will McIntosh,
head of research at
USAA Real Estate
Co.
One of the most important economic
indicators and a major demand driver for
real estate is employment growth. The
more workers earn, the more they buy,
propelling the economy and the demand
for real estate forward. As a result, news
of robust employment growth can stimu-
late the real estate market by boosting
expectations of higher sales and profits.
At the same time, little or no growth in
employment is generally viewed as a
negative for the real estate markets by
keeping would-be homeowners on the
sidelines and reducing their incentive to
invest and expand.
National total employment trends are
a powerful indicator of the health of the
commercial real estate markets and
are likely to retain increased impor-
tance over the next few years given
that supply is projected to remain well
below historical levels for most major
sectors and markets. Over the past 25
years, a 1 percent increase in employ-
ment has translated, on average, to
net absorption rates across the major
property sectors between 0.52 percent
(multifamily) and 0.88 percent (office).
Regressing employment against net
absorption suggests that changes in
employment explain between 44 percent
(multifamily) and 77 percent (industrial)
of the variation in net absorption. The
relationships are even stronger if we use
subsets of the employment data that
are more closely tied to each sector (ex.
office-using employment and office net
absorption).
With employment and net absorption
so closely correlated, an analysis of
the jobs market can provide invaluable
insight into the health of the real estate
guest editorial Will Mcintosh, USAA Real estate co.
Employment Recovery Is Missing Piece in Real Estate Puzzle
sector. As of the fourth quarter of 2013,
total employment in the U.S. stood at
136.7 million after adding 2.28 million
jobs in 2013. This level remains 0.9 per-
cent below the peak employment of 138
million reached during the first quarter
of 2008. According to Moody’s Analytics,
the U.S. will recover all of the employ-
ment losses from the Great Recession
by the second quarter of 2014.
However, the change in employment
rates has not been even across all sec-
tors. Private sector employment fell 7.5
percent during the recession from its
peak of 115.6 million in the fourth quar-
ter of 2007; it has since recovered most
of these losses and currently stands just
0.6 percent below peak levels. Govern-
ment jobs, on the other hand, fell only
3.1 percent from their peak of 22.6
million as of the second quarter of 2009,
but have made almost no recovery,
excluding the temporary impact from
Census hiring in the second quarter of
2010. They remain 3.1 percent below
their peak levels.
In the private sector, the top employ-
ment performers since 2007 have been
natural resources, education and health
services, professional and business
services, and leisure and hospitality. The
worst performers have been construc-
tion, manufacturing, information and
financial activities, though all of these
sectors saw some employment gains
nationally in 2013.
Employment Trends Drive Commercial Property Absorption Rates
-6%
-4%
-2%
0%
2%
4%
6%
1988Q4 1991Q4 1994Q4 1997Q4 2000Q4 2003Q4 2006Q4 2009Q4 2012Q4
% Change (Y/Y)
Employment Office Industrial Multifamily Retail
Source: USAA
While there has been a bit of
a slowdown in the monthly
employment numbers re-
cently, we attribute this in
large part to the severe winter
weather experienced in many
parts of the country. In many
cases, the top performing
employment markets over the
past few years are expected to
continue to outperform over
the near term, with Charlotte,
Las Vegas and Phoenix mov-
ing up the list as well.

Employment performance has also
varied by geography. Relative to peak
employment levels, the Texan markets,
for example, have seen outsized per-
formance since the recession, lending
credence to the statement that “every-
thing is bigger in Texas.” On a relative
basis, Nashville and Denver have also
posted strong performance over the past
five years.
Commercial real estate returns are
generated from both income and capital
appreciation. Over the past 10 years,
income has accounted for more than 70
percent of the returns from real estate
(it is closer to 80 percent for the past
30 years). As such, occupancy is a
significant driver of the overall return,
and the relationship between employ-
ment and occupancy is strong. Across
the office sector markets, since 2010,
the change in vacancy compared to the
change in employment has a correla-
tion of -0.47, which is strong considering
that shadow space and some new supply
also impacted leasing trends over this
period. Employment gains over the next
several years should continue to impact
net absorption even more strongly than
they have historically, at least for the
non-multifamily sectors, as construction
deliveries are projected to remain muted.
As such, employment increases will pro-
vide a strong tailwind to vacancy and rent
performance over the next couple years.
Our forecast calls for national employ-
ment growth to accelerate over the next
two years. While there has been a bit
of a slowdown in the monthly employ-
ment numbers recently, we attribute
this in large part to the severe winter
weather experienced in many parts
of the country. In many cases, the top
performing employment markets over
the past few years are expected to con-
tinue to outperform over the near term,
with Charlotte, Las Vegas and Phoenix
moving up the list as well. Technology,
health care and energy focused markets
have outperformed in recent years, and
these trends are expected to continue.
The relationship between performance
over the previous two years and that
forecast over the coming couple years
is robust.
Mcintosh…
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