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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.

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Emerging Trends in Real Estate 2014

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  1. 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

  2. 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

  3. Investment Prospects by Asset Class Abysmal Fair Excellent Source: Emerging Trends in Real Estate surveys

  4. Investment Prospects: Average Market Score Investment Prospects Excellent Fair Poor Source: Emerging Trends in Real Estate surveys

  5. 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

  6. 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

  7. “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”

  8. Headwinds Facing the Real Estate Industry • 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

  9. Tailwinds Benefiting the Real Estate Industry • “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

  10. Emerging Trends: Key Trends/Drivers for 2014 • 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

  11. Emerging Trends: Key Trends/Drivers for 2014 • 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

  12. Prospects for profitability by percentage of respondents Source: Emerging Trends in Real Estate surveys Note: Based on US respondents only

  13. Capital markets

  14. Prospects by Investment Category/Strategy Abysmal Fair Excellent Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only

  15. Index Returns: Real Estate vs. Stocks/Bonds Source: NCREIF, NAREIT, S&P, Barclays Group Note: 2013 data annualized from second-quarter 2013

  16. NCREIF Cap Rates vs. U.S. Ten-Year Treasury Yields 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

  17. Equity and Debt Capital Balance Outlook Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only

  18. Debt capital for development and refinancing Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only

  19. Debt Underwriting Standards Forecast Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only

  20. Emerging trends barometer 2014 Excellent Good Fair Poor Abysmal Source: Emerging Trends in Real Estate surveys Note: Based on US respondents only

  21. Change in Availability of Equity Capital for Real Estate 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

  22. Change in Availability of Debt Capital for Real Estate 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

  23. CMBS Revival Continues 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)

  24. Commercial Banks 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

  25. Bank Real Estate Loan Delinquency Rates 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

  26. Life insurers mortgage delinquency rates % In-foreclosure Source: Moody’s Analytics, American Council of Life Insurers

  27. Mezzanine Financing 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.”

  28. Markets to watch More markets begin to look attractive

  29. Growing Strength Across Many Metro Areas Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only

  30. Top 10 total rank2014 Investment Development Homebuilding Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only

  31. Next 10 markets2014 Investment Development Homebuilding Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only

  32. Outlook improves for more markets

  33. Changing positions Best and worst Positionchange Source: Emerging Trends in Real Estate surveys Note: Based on US respondents only

  34. The impact of 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

  35. Top 10 investment markets

  36. Top 10 development markets Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only

  37. Top 10 homebuilding markets Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only

  38. Markets: 2014 emerging trends Markets: 2

  39. East coast 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

  40. West coast 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

  41. Southwest 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

  42. Southeast 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

  43. Florida Jacksonville 5.0 Orlando 5.9 Tampa 6.0 Miami 6.6

  44. Midwest 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

  45. Property type outlook Industrial leads the pack

  46. Industrial takes the top spot Abysmal Fair Excellent Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only

  47. Subsector outlook shows diversity of recovery Abysmal Fair Excellent Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only

  48. Commercial development begins to look up Abysmal Fair Excellent Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only

  49. Development prospects reflect where market is strongest Abysmal Fair Excellent Source: Emerging Trends in Real Estate 2014 survey Note: Based on US respondents only

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