2013: To The Cliff…and Beyond ECONOMIC & COMMERCIAL REAL ESTATE TRENDS GEORGE RATIU Manager, Quantitative & Commercial Research NATIONAL ASSOCIATION OF REALTORS® 2013 Economic Forecast IREM Northern Ohio Chapter Cleveland, OH January 24, 2013

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION Where Are We Headed? • Global Economies - Highlights • U.S. & Ohio Economic Activity • Global and U.S. CRE Trends • U.S. Outlook Source: The Economist: KAL’s cartoon NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Global Economic Activity NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

U.S. Economy Maintains Momentum NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

U.S. Economy Back to “Normal” NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION The “New Normal” NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION HOW ARE CONSUMERS? NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Consumer Spending – Cautious NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION Household Wealth NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Earnings and Consumer Credit Reduced NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Consumer Credit – Education Debt Rising NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION Housing Stabilizing NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Consumer Confidence Remains Low NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION EMPLOYMENT NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Employment Gains at Moderate Pace J.08-D.09: 8.7M jobs cut NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Service Industries Gain in 2012 NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Unemployment Continues as Concern NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Significant Issues Remain 12 M People Still Unemployed Average Unemployment = 9.5 months NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION HOW ARE BUSINESSES? NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Business Activity Trends Up NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

International Trade Boosts Business NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Corporate Profits – Record High NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Equity Markets – Rising (but Volatile) NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Prices at Fed’s Inflationary Target NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Business Reined In Spending NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Commercial Construction Weakened NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Ohio Economy & Employment NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION Ohio Economy Growing NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION Ohio Employment Gap NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Ohio Employment – Selected Industries NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION Ohio Employment – MSAs NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Cleveland Employment Gains NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Ohio Unemployment Declines NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

COMMERCIAL REAL ESTATE NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Global Investments Moderate Source: Real Capital Analytics NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

China and U.S. Dominate Global Volume Market Volume ($Mil) Avg. Cap Rate NYC Metro 42,282 5.87% London Metro 34,875 5.69% LA Metro 25,650 6.25% Tokyo 25,260 5.63% Hong Kong 24,836 3.11% SF Metro 21,241 5.81% Shanghai 19,368 DC Metro 19,137 6.18% Singapore 18,996 4.77% Paris 16,718 6.35% Beijing 13,429 Chicago 11,522 7.00% Seattle 10,327 Chongqing 10,012 Chengdu 9,130 Houston 8,502 7.35% Wuhan 8,472 Moscow 8,447 Shenyang 8,399 Dallas 8,095 Source: Real Capital Analytics, 01/09/2013 NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

U.S. Commercial Fundamentals OFFICE 2012 2013 2014 Vacancy Rate 16.6% 15.9% 15.7% Net Absorption ('000 sq. ft.) 21,732 49,011 53,235 Completions ('000 sq. ft.) 12,735 30,924 38,633 Rent Growth 2.0% 2.5% 2.8%   INDUSTRIAL 10.4% 9.7% 9.4% 93,410 89,569 91,328 25,522 56,188 76,022 1.7% 2.2% 2.6% RETAIL 10.9% 10.7% 10.1% 9,065 19,767 28,119 4,344 15,969 23,422 0.8% 1.4% MULTI-FAMILY 4.2% 4.0% 3.9% Net Absorption (Units) 219,725 234,576 281,518 Completions (Units) 88,517 143,222 187,018 4.1% 4.6% 4.7% Commercial Real Estate Fundamentals continue stabilizing Demand grows Vacancy rates decline Rent growth positive Supply lags demand Source: NAR / Reis, Inc. NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION U.S. Commercial Sales 2012 Q1-Q3: $184 B Source: Real Capital Analytics NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

U.S. Prices Rise – Apartments Lead NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION U.S. Cap Rates NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION Top U.S. Markets & Buyers Market Volume ($M) Cap Rate NYC Metro 42,282 5.87% LA Metro 25,650 6.25% SF Metro 21,241 5.81% DC Metro 19,137 6.18% Chicago 11,522 7.00% Seattle 10,327 5.69% Houston 8,502 7.35% Dallas 8,095 South Florida 7,990 6.86% Boston 7,824 6.92% Atlanta 6,994 7.17% Phoenix 6,112 6.13% Denver 5,554 6.62% San Diego 4,574 6.35% Austin 4,036 6.83% Charlotte 2,948 6.93% Philly Metro 2,867 6.21% Baltimore 2,832 6.90% Minneapolis 2,556 7.19% Tampa 2,461 7.14% Buyer Volume ($M) Properties Equity Residential 16,237 156 AvalonBay Communities 15,558 154 Blackstone 11,799 1462 Lehman Brothers Holdings Inc 9,420 290 CPP Investment Board 7,957 74 NBIM 7,872 401 GIC (Govt of Singapore) 6,582 70 China Vanke 6,472 56 Poly Real Estate Group 5,055 27 Invesco RE 5,017 35 Simon Property Group 4,882 36 Starwood Capital Group 4,099 255 Greenland Group 3,438 41 China Investment Corp 3,331 46 AXA Group 17 TIAA-CREF 3,208 Qatar Investment Authority 3,123 9 MetLife 3,080 39 Global Logistics Properties 3,073 52 China Overseas L&I 3,068 Source: Real Capital Analytics NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION U.S. Markets Outlook NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION Cleveland Outlook Source: Reis, Inc. NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Tale of Two U.S. CRE Markets NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

REALTOR® Commercial Concerns NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

CRE Financing – Broader Markets NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

CRE Financing – REALTOR® Markets NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Qualified Commercial Real Estate Mortgage Securitizers must hold 5% of CMBS issued unless the underlying mortgages meet stringent underwriting standards including: 65% loan-to-value 60% if cap rate < 10-year swap + 300bp Debt service coverage ratio of 1.5x (stable history) to 1.7x or higher Amortization period ≤ 20 years 10-year minimum loan term 80% of tenants must pay rent + taxes + insurance + maintenance Borrower credit and income verification along with 2-year forecast Collateral restriction limits subordinate financing Securitizer must buy back bad loans in order to retain QCRE status Few CRE loans qualify: Just 0.4% of CMBS ever issued would qualify for first 3 stipulations NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

Commercial Debt Maturities Peak NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION U.S. Economic Outlook Economy Employment Competitive Global Economic Position Demographic Trends/Changes Federal Reserve Actions Consumers Confidence Personal Wealth Changing Attitudes Washington – Short Term Focus Fiscal Policy vs. Government Debt Taxation, Entitlements, Deductions Annual Growth Rates (%)  2011 2012 2013 2014 Real GDP 1.8 2.1 2.3 3.0 Nonfarm Payroll Employment 1.2 1.4 2.0 Consumer Prices 3.1 2.5 3.7 Consumer Confidence 58 69 78 90 Unemployment (%) 8.9 8.1 7.8 7.4 Interest Rates (%) Fed Funds Rate 0.1 30-Year Fixed Rate - Mortgage 4.7 3.9 Source: National Association of REALTORS® NATIONAL ASSOCIATION OF REALTORS® RESEARCH DIVISION

GEORGE RATIU Manager, Quantitative & Commercial Research ECONOMIC & COMMERCIAL REAL ESTATE TRENDS GEORGE RATIU Manager, Quantitative & Commercial Research NATIONAL ASSOCIATION OF REALTORS® RESEARCH RESOURCES: Web: www.realtor.org/research Blog: economistsoutlook.blogs.realtor.org Facebook: www.facebook.com/narresearchgroup Twitter: twitter.com/#!/NAR_Research