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Emerging Trends in Real Estate 2014. Highly regarded and widely read 35th annual outlook Based on over 1,000 interviews and surveys of industry leaders Sponsored by PwC and the Urban Land Institute Investment and development trends Capital markets Metro areas Property sectors.

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Emerging trends in real estate 2014
Emerging Trends in Real Estate 2014

  • Highly regarded and widely read

  • 35th annual outlook

  • Based on over 1,000 interviews and surveys of industry leaders

  • Sponsored by PwC and the Urban Land Institute

  • Investment and development trends

  • Capital markets

  • Metro areas

  • Property sectors


Gaining momentum
Gaining Momentum

  • Fundamentals continue to improve…slowly… across all property groups and property markets

  • Development is back, and 2014 will likely be the last year when minimal new supply is delivered

  • Reaching an inflection point where valuations will be driven by fundamentals, not capital markets

  • Interest rates anticipated to increase; it’s the pace and magnitude of the increase that is uncertain

  • Capital goes wide, in more markets and taking on more risk


Investment prospects by asset class
Investment Prospects by Asset Class

Abysmal Fair Excellent

Source: Emerging Trends in Real Estate surveys


Investment prospects average market score
Investment Prospects: Average Market Score

Investment Prospects

Excellent

Fair

Poor

Source: Emerging Trends in Real Estate surveys


Issues of importance for real estate economic financial issues
Issues of importance for real estateEconomic/Financial Issues

none moderate great

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Issues of importance for real estate real estate development issues
Issues of importance for real estateReal Estate/Development Issues

none moderate great

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


“2014 should be a year when we see real estate fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”


Headwinds facing the real estate industry
Headwinds Facing the Real Estate Industry fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

  • A “stubbornly high” unemployment rate

  • Uncertainty over government regulation and fiscal policy

  • Likely increase in the cost of both equity and debt capital

  • Economic uncertainty in the Euro-zone

  • China’s moderating economic growth


Tailwinds benefiting the real estate industry
Tailwinds Benefiting the Real Estate Industry fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

  • “Good if not great” job growth in industries with high real estate utilization including: energy, technology, health care, medical research, education, and financial services

  • Increasing corporate profits

  • Continuing recovery in the single-family housing industry

  • Historically low interest rates currently


Emerging trends key trends drivers for 2014
Emerging Trends: Key Trends/Drivers for 2014 fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

  • Industry profitability expected to continue to improve

  • Interest rates anticipated to increase

  • Dependence on cap rate compression to drive value to be replaced by rent growth and vacancy declines

  • Markets are expected to be “well supplied” with both equity and debt capital


Emerging trends key trends drivers for 20141
Emerging Trends: Key Trends/Drivers for 2014 fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

  • Opportunities to develop property finally appear in sectors other than multifamily

  • Industry begins to understand changing needs of both Gen Y and the baby boomers

  • Needs of end users of commercial space continue to evolve

  • The single family housing market continues to make a positive contribution to the overall economy


Prospects for profitability by percentage of respondents
Prospects for profitability by fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”percentage of respondents

Source: Emerging Trends in Real Estate surveys

Note: Based on US respondents only


Capital markets

Capital markets fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”


Prospects by investment category strategy
Prospects by Investment Category/Strategy fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Abysmal Fair Excellent

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Index returns real estate vs stocks bonds
Index Returns: Real Estate vs. Stocks/Bonds fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Source: NCREIF, NAREIT, S&P, Barclays Group

Note: 2013 data annualized from second-quarter 2013


Ncreif cap rates vs u s ten year treasury yields
NCREIF Cap Rates vs. U.S. Ten-Year Treasury Yields fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Spread

Source: NCREIF, Moody’s Analytics, Federal Reserve Board

*Ten-year Treasury yields based on average of the quarter, 2013Q2 average is as of July 2013

Note: Cap rate based on four-quarter moving average of current-value cap rate


Equity and debt capital balance outlook
Equity and Debt Capital Balance Outlook fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Debt capital for development and refinancing
Debt capital for fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”development and refinancing

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Debt underwriting standards forecast
Debt Underwriting Standards Forecast fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Emerging trends barometer 2014
Emerging trends barometer 2014 fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Excellent

Good

Fair

Poor

Abysmal

Source: Emerging Trends in Real Estate surveys

Note: Based on US respondents only


Change in availability of equity capital for real estate
Change in Availability of Equity Capital for Real Estate fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Equity source

Very large decline Stay the Same Very large increase

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Change in availability of debt capital for real estate
Change in Availability of Debt Capital for Real Estate fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Lending source

Very large decline Stay the Same Very large increase

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Cmbs revival continues
CMBS Revival Continues fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

CMBS 2013 issuance expected to exceed $80 billion

CMBS 2014 issuance anticipated to exceed $100 billion

CMBS lenders continue to fill the gaps left by conventional lenders in terms of:

--deal size (under $25 million) and

--property location (secondary versus solely primary locations)


Commercial banks
Commercial Banks fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Regional and local banks are expected to become increasingly active as their balance sheets improve

National banks, searching for opportunities, will increasingly compete on a regional and local basis

Development and construction loans will become increasingly available for borrowers with strong credentials and track records, and with substantial pre-leasing


Bank real estate loan delinquency rates
Bank Real Estate Loan Delinquency Rates fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Source: Federal Deposit Insurance Corp.

Note: Delinquent loans defined her as those that are noncurrent, either 90 days or more past due or in noncurrent status

*as of second quarter 2013


Life insurers mortgage delinquency rates
Life insurers mortgage delinquency rates fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

%

In-foreclosure

Source: Moody’s Analytics, American Council of Life Insurers


Mezzanine financing
Mezzanine Financing fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Interviewees and survey participants seem of two minds regarding the roll of mezzanine financing in 2014

Some interviewees predict an “increase in B-piece, mezzanine, and debt funds to fill gaps in transaction structure” and “an increase in the use of mezzanine financing combined with higher-cost senior debt.”

“The biggest question on mezzanine is where the returns are going to be. If mezzanine rates don’t increase enough and we don’t feel we’re getting paid enough, we’ll stop. At a 200 [basis point] difference, we don’t think we’re getting paid for the risk.”


Markets to watch

Markets to watch fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

More markets begin to look attractive


Growing strength across many metro areas
Growing Strength Across Many Metro Areas fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Top 10 total rank 2014
Top 10 total rank fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”2014

Investment

Development

Homebuilding

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Next 10 markets 2014
Next 10 markets fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”2014

Investment

Development

Homebuilding

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Outlook improves for more markets
Outlook improves for more markets fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”


Changing positions best and worst
Changing positions fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”Best and worst

Positionchange

Source: Emerging Trends in Real Estate surveys

Note: Based on US respondents only


The impact of uncertainty and new supply for washington dc
The impact of fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”uncertainty and new supplyfor Washington, DC

Investment Score

Market Rank

Excellent

Fair

Poor

The outlook for Washington, DC succumbs to fed fatigue

Source: Emerging Trends in Real Estate surveys

Note: Based on US respondents only


Top 10 investment markets
Top 10 investment markets fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”


Top 10 development markets
Top 10 development markets fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Top 10 homebuilding markets
Top 10 homebuilding markets fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Markets 2

Markets: 2014 emerging trends fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Markets: 2


East coast
East coast fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Boston 6.6

Westchester/Fairfield, CT 5.5

Providence 4.3

Northern NJ 5.9

New York 6.8

Philadelphia 5.6

Baltimore 5.1

Pittsburgh 5.5

Washington DC5.9


West coast
West coast fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Seattle 6.8

Portland 6.5

Sacramento 5.0

San Francisco 7.0

San Jose 6.8

Honolulu 5.7

Inland Empire 5.9

Los Angeles 6.5

Orange County 6.6

San Diego 6.5


Southwest
Southwest fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Salt Lake City 6.4

Denver 6.5

Las Vegas 5.5

Albuquerque 4.6

Oklahoma City 4.8

Phoenix 6.1

Dallas 6.8

Tucson 5.1

Austin 6.7

Houston 7.0

San Antonia 6.3


Southeast
Southeast fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Virginia Beach/Norfolk 5.2

Raleigh/Durham 6.3

Charlotte 6.4

Nashville 6.5

Memphis 4.5

Atlanta 6.1

New Orleans 4.5


Florida
Florida fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Jacksonville 5.0

Orlando 5.9

Tampa 6.0

Miami 6.6


Midwest
Midwest fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Minneapolis 6.3

Milwaukee 4.8

Detroit 3.1

Chicago 6.1

Cleveland 4.2

Columbus 4.9

Indianapolis5.3

Kansas City 5.3

Cincinnati 5.0

St. Louis 5.2


Property type outlook

Property type outlook fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Industrial leads the pack


Industrial takes the top spot
Industrial takes the top spot fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Abysmal Fair Excellent

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Subsector outlook shows diversity of recovery
Subsector outlook shows diversity of recovery fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Abysmal Fair Excellent

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Commercial development begins to look up
Commercial development begins to look up fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Abysmal Fair Excellent

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


Development prospects reflect where market is strongest
Development prospects reflect where market is strongest fundamentals improve in sectors beyond the very healthy multifamily sector—and in a number of markets—to a point where we could see above-inflation-rate rental growth”

Abysmal Fair Excellent

Source: Emerging Trends in Real Estate 2014 survey

Note: Based on US respondents only


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