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BEYOND THENUMBERSNUMBERS

Dr. Richard Barkham

OCTOBER 2012OCTOBER 2012

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THE GLOBAL FINANCIAL CRISISTHE GLOBAL FINANCIAL CRISIS

CONTINUES TO LINGER

The legacy of the Global Financial Crisis is still with us

SPARE CAPACITY IN THE OECD

OECD output gap, %

3Source:OECD

US RECOVERY REMAINS SLUGGISH

Unemployment rate, %

4Source: IHS Global Insight

ECB PROPS UP EURO BANKS

ECB lending to

‘peripheral Europe’,

€ billion

5Source: Oxford Economics/Haver Analytics

MONEY, MONEY, MONEY

Central Bank Balance

Sheets, Jan 2007 = 100

6Source: EcoWin, Bank of England, Bank of Japan, US Federal Reserve

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HOW DID WE GET HERE?HOW DID WE GET HERE?

LONG DECLINE IN BOND RATES

Percent

8Source IHS Global Insight

CHINA’S EXPORT DOMINANCE

Change in share of world

manufacturing output, %

9Source: EcoWin

CHINA RECYCLES ITS EARNINGS

Chinese foreign currency

reserves,

US$ mn

10Source: IHS Global Insight, US department of the Treasury

WORLD INTEREST RATES FALL

OECD Real

Interest Rates, %

11Source: IHS Global Insight

CREATING A MOUNTAIN OF DEBT

Household debt to

GDP ratios, %

12Source: OEF

CENTRAL BANK COMPLACENCY

The defeat of inflation was a major policy triumph

But central banks took their eyes off the ball:

Cheap goods from China helped suppress inflation

Cheap capital flooded into bond markets and money

markets

Weak regulation allowed excessive bank gearing and the

emergence of a huge shadow banking industry

Monetary stimulus became a panacea:

Causing a series of asset bubbles

And the build up of a debt mountainp

13

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WHERE DOES THIS LEAVE US?WHERE DOES THIS LEAVE US?

GLOBAL RECOVERY UNCERTAIN

Real GDP, quarterly percent

change year over year

15Source: IHS Global Insight

Source: IHS Global Insight

GLOBAL RETAIL COMPOSITE CAP RATE

Global retail

composite yield, %

16Source: Brokers, Grosvenor Research

GLOBAL OFFICE COMPOSITE CAP RATE

Global office

composite yield, %

17Source: Brokers, Grosvenor Research

Source: Brokers, Grosvenor Research

THE CLOUDS DARKEN

Grosvenor world

economic activity

indicator,

0 is trend growth

18Source: IHS Global Insight, Grosvenor Research, Google

GLOBAL REAL ESTATE RETURNS

% Core Real Estate IRRs – per annum, next 5 years

Sector US Canada CE UK Japan China Australia All

Office 8.1% 5.1% 4.1% 5.0% 6.2% 7.3% 8.4% 6.0%

Retail 8.6% 6.3% 5.2% 4.8% - 7.3% 7.4% 6.6%

Residential 6.2% - - 4.0% - 4.5% - 5.0%

All 7.9% 5.7% 4.5% 4.7% 6.2% 6.4% 7.9% 6.1%All 7.9% 5.7% 4.5% 4.7% 6.2% 6.4% 7.9% 6.1%

19Source: Grosvenor Research, 2012

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BEYOND THENUMBERSNUMBERS

Eileen Marrinan

OCTOBER 2012OCTOBER 2012

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US ECONOMIC OUTLOOKUS ECONOMIC OUTLOOK

US ECONOMIC OUTLOOK

Economic expansion in the US is

slated to strengthen over the

next five years.

Where will it focus?

22

Last Decade Sectors Next Decade Sectors

DRIVERS OF GROWTH

A rotation is occurring in the

Finance Energy

Government Manufacturing

Defense Housing/Construction

Trade Trade

sectors that drive economic

growth.

Therefore, the metros/regions

that outperform over the next Trade Trade

Tech Tech

Services Services

L t D d B fiti L ti N t D d B fiti L ti

that outperform over the next

decade will differ from those

that led in the past.

Last Decade Benefiting Locations Next Decade Benefiting Locations

Great Plains

Southwest

Gulf Coast

East Coast East Coast

West Coast West Coast

23

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ENERGYENERGY

ENERGY

Technological innovations US Natural Gas and Oil Production (Source: Moody's Analytics)

have transformed the US energy

industry.

Exploration and production of

both oil and gas are expanding6.00

6.50

2,000,000

2,200,000

(Mil Bbl )(Mil Cu Ft )

(Source: Moody s Analytics)

Oil (R) Natural Gas (L)

both oil and gas are expanding

rapidly.

5.00

5.50

1,600,000

1,800,000

4.00

4.50

1,200,000

1,400,000

3.50 1,000,000

25

ENERGY

This trend has a way to run. Natural Gas PricesSource:ycharts com

The US is now the world’s low-

cost producer of natural gas, by

a considerable margin.$14

$16

$18

$20

il B

TU

Source:ycharts.com

$4

$6

$8

$10

$12Sp

ot P

rice

per M

i

$0

$2

$4S

US (Henry Hub) Europe Japan (LNG)

26Source: EcoWin

ENERGY LOCATIONS

Salt Lake City Denver

Pittsburgh

Dallas

New OrleansHouston

New Orleans

27

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MANUFACTURINGMANUFACTURING

MANUFACTURING

Lower labor and energy costs Manufacturing Re-set: Renewed Competiveness of US Industry

have increased

the competitiveness of US

manufacturing.

Both domestic and foreign firms$10

$12

110

115

Renewed Competiveness of US IndustrySource: Moody's Analytics

Manufacturing Unit Labor Costs Index (L) Natural Gas Prices (R)

Both domestic and foreign firms

are expanding, especially

in the auto and

durables industries.$4

$6

$8

100

105

$0

$2

$4

90

95

29Surce: EcoWin

MANUFACTURING

By contrast, Chinese wages are

rising at double-digit rates.

China’s one-child policy will

soon translate into a shrinking

labor forcelabor force.

30

MANUFACTURING LOCATIONS

SeattleS

PortlandMinneapolis

San JoseChicago

Detroit

Los Angeles

Ft. WorthAtlanta

Ft. Worth

Houston

31

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HOUSINGHOUSING

HOUSING

The housing market is finally

coming back to

life, with both home

sales and prices on

the upswing.the upswing.

Historically low interest rates

and the Fed’s QE3 program will

speed and strengthen its

recovery.

33

HOUSING LOCATIONS

MinneapolisBoston

OaklandSan Francisco

Cincinnati

DenverSan Jose Washington, DC

Orange County

Los Angeles

Miami

Austin

34Oakland Cincinnati

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CONSTRUCTIONCONSTRUCTION

CONSTRUCTION

Homebuilding is poised to

expand after several years at a

historically low level.

36

CONSTRUCTION

Commercial real estate will Value of Private Construction Put in Place(Source: Moody's Analytics)

soon follow.

Multifamily – the most improved

sector – is already picking up.

$ 0

$60

$70

($Bil SAAR) (Source: Moody s Analytics)

$30

$40

$50

$0

$10

$20

$

Multifamily Warehouse Office Retail

37

CONSTRUCTION LOCATIONS

Boston

Los AngelesDenver

Chicago

Washington, DC

New York

Riverside

Orange County Phoenix

Dallas Atlanta

Houston

38

CONCLUSION

It’s not just the coasts anymore.

As the economy re-balances, other regions and other

metros are emerging as attractive prospects for

real estate investment.

Economic considerations are the first but not the sole

criterion – characteristics of the investors themselves

and of the markets also come into play.

39