PWC Emerging Trends in Real Estate 2016 en

GREGG GALBRAITH, RED STUDIO
Emerging Trends
in Real Estate
Canada and the United States 2016

Emerging Trends in Real Estate 2016
A publication from:
Emerging Trends
in Real Estate
2016
Contents
2 Chapter 1 Emerging Trends in Canada: Changing Opportunities
4 Emerging Trends in Canadian Real Estate
11 Markets to Watch in 2016
16 Property Type Outlook
20 Expected Best Bets for 2016
21 Chapter 2 Coordinating Offense and Defense in 2016

23 18-Hour Cities 2.0
24 Next Stop: the Suburbs . . . What Is a Suburb?
27 Offices: Barometer of Change
28 A Housing Option for Everyone
30 Parking for Change
31 Climate Change and Real Estate
33 Infrastructure: Network It! Brand It!
34 Food Is Getting Bigger and Closer
34 Consolidation Breeds Specialization
35 We Raised the Capital; Now, What Do We Do with It?
36 Return of the Human Touch
37 Issues to Watch
38 Expected Best Bets for 2016
40 Chapter 3 Capital Markets

41 The Debt Sector
46 The Equity Sector
53 Summing It Up
54 Chapter 4 Markets to Watch

54 2016 Market Rankings
56 Market Trends
57 The Top 20 Markets
67 Perspectives on Regions
78 Chapter 5 Property Type Outlook

79 Industrial
82 Apartments
85 Office
88 Hotels
89 Retail
93 Housing
95 Interviewees
Emerging Trends in Real Estate 2016 i

Editorial Leadership Team
Emerging Trends Chairs PwC Advisers and Contributing Researchers
Mitchell M. Roschelle, PwC Adam Boutros* Julia Powell
Kathleen B. Carey, Urban Land Institute Aki Dellaportas Kelly Nobis
Alex Tanchez* Kelsey Edelen
Principal Advisers and Contributing Authors Alexander P. Stimpfl Kristen Conner
Allen Baker* Kristen D. Naughton
Andrew Warren, PwC Amy Brohman* Kristianne M. Marchart
Anita Kramer, Urban Land Institute Amy E. Olson LaRon E. York
Andrew Alperstein Laura Daniels*
Author Andrew Paterson* Lawrence A. Goodfield
Andrew Popert* Leah Waldrum
Hugh F. Kelly Andrew Stansfield Leandra M. Charsky
Annie Labb* Lisa Guerrero
Senior Advisers Brian J. ODonnell Lona Mathis
Christopher J. Potter, PwC, Canada Brian T. Nerney Lori-Ann Beausoleil*
Brion L. Sharpe Mark Williams
Miriam Gurza, PwC, Canada Bud Thomas Martin J. Schreiber
Frank Magliocco, PwC, Canada Carlo Bruno Martina Scheuer
Charles P. Alford Marvin A. Thomas
ULI Contributing Researchers Chase C. Evans Mary Wilson-Smith*
Chris Potter* Mathilde C. Hauswirth
Sarene Marshall Chris Vangou* Matthew Berkowitz
Maureen McAvey Christina Howton* Maxime Lessard*
Dean Schwanke Christine Lattanzio Meghan OBrien
Christopher A. Mill Michael Anthony
Stockton Williams Christopher L. Nicholaou Michael Shields*
Constance Chow* Michael T. Grillo
ULI Editorial and Production Staff Courtney S. McNeil Mike Herman
James A. Mulligan, Senior Editor Dan Crowley Miriam Gurza*
Daniel J. ONeill Nadia King*
David James Rose, Managing Editor/Manuscript Editor Daniel DArchivio* Nadja Ibrahim*
Betsy Van Buskirk, Creative Director David Baldwin Naveli Thomas*
David Baranick Neal P. Kopec
Anne Morgan, Cover Design David Khan* Nicholas Mitchell
Deanna Pineda, Muse Advertising Design, Designer David M. Voss Nick Ethier*
Craig Chapman, Senior Director of Publishing Operations David Seaman Nicole M. Stroud
David Yee* Noah Weichselbaum
Marc Andrew Curtin, Project Assistant Deborah Dumoulin* Oliver Reichel
Rebecca Lassman, Project Intern Dominique Fortier* Philippe Thieren*
Donald Flinn* Rajen Shah*
Doug Purdie* Rajveer Hundal*
Douglas B. Struckman Renee Sarria
Dwayne MacKay* Richard Fournier
Edward Sheeran Rick Barnay*
Eli Rabin Rob Christmas*
Emerging Trends in Real Estate is a trademark of PwC and is regis- Elliot Kung Rob Sciaudone
Emily Pillars Ron Bidulka*
tered in the United States and other countries. All rights reserved. Eric Andrew* Ron Walsh*
Eric St-Amour* Rosanna Musto*
PwC US helps organizations and individuals create the value theyre Ernest Hudson* Ross Sinclair*
looking for. Were a member of the PwC network of firms, which has Eugene Chan Ryan Dumais
firms in 157 countries with more than 195,000 people. Were committed Frank Magliocco* Ryan Thomas*
to delivering quality in assurance, tax, and advisory services. Find out Fred Cassano* Sean Hiebert*
Gabrielle Mendiola* Seth E. Kemper
more and tell us what matters to you by visiting us at www.pwc.com/US. Haley M. Anderson Shannon M. Comolli
2015 PwC. All rights reserved. PwC refers to the U.S. member firm or Heather M. Lashway Shareen Yew
Howard Ng* Stephan Gianoplus
one of its subsidiaries or affiliates, and may sometimes refer to the PwC Howard Quon* Stephen W. Crisafulli
network. Each member firm is a separate legal entity. Please see www. Ian Gunn* Steve Tyler
pwc.com/structure for further details. Isabelle Morgan Steven Weisenberger
Jackie Kelly Susan M. Smith
October 2015 by PwC and the Urban Land Institute. Jacqueline Kinneary Tim Bodner
Jaime D. Phillips Timothy C. Conlon
Printed in Canada. All rights reserved. No part of this book may be James Oswald Tracy L. Howard
reproduced in any form or by any means, electronic or mechanical, Janaki Sekaran Victoria M. Music
including photocopying and recording, or by any information storage Janice McDonald* Warren Marr
Janice Zaloudek Wendi Pope*
and retrieval system, without written permission of the publisher. Jasen Kwong* Wendy J. Wendeborn
Jeff Kiley Wesley Mark*
Recommended bibliographic listing: Jill Lising* William Croteau
PwC and the Urban Land Institute: Emerging Trends in Real Estate John Gottfried William Hux
John Paul Pressey* William Keating
2016. Washington, D.C.: PwC and the Urban Land Institute, 2015. Joseph H. Schechter Yvens Faustin
Joseph R. Fierro
Joshua Hookkee * Canada-based.
ii Emerging Trends in Real Estate 2016

Notice to Readers
Emerging Trends in Real Estate is a trends and forecast publication now in its 37th
edition, and is one of the most highly regarded and widely read forecast reports in the
real estate industry. Emerging Trends in Real Estate 2016, undertaken jointly by PwC
and the Urban Land Institute, provides an outlook on real estate investment and devel-
opment trends, real estate finance and capital markets, property sectors, metropolitan
areas, and other real estate issues throughout Canada and the United States.
Emerging Trends in Real Estate 2016 reflects the views of individuals who completed
surveys or were interviewed as a part of the research process for this report. The
views expressed herein, including all comments appearing in quotes, are obtained
exclusively from these surveys and interviews and do not express the opinions of
either PwC or ULI. Interviewees and survey participants represent a wide range of
industry experts, including investors, fund managers, developers, property compa-
nies, lenders, brokers, advisers, and consultants. ULI and PwC researchers personally
interviewed 404 individuals and survey responses were received from 1,465 individu-
als, whose company affiliations are broken down below.
Private property owner or developer 34.3%

Real estate services firm 26.5%
Institutional/equity investor or investment manager 11.5%
Bank, lender, or securitized lender 7.4%
Real estate brokerage 6.5%
Homebuilder or residential land developer 5.5%
Equity REIT or publicly listed real estate property company 3.1%
Other entity 2.6%
Private REIT or nontraded real estate property company 2.1%
Mortgage REIT or real estate debt investor 0.4%
Throughout the publication, the views of interviewees and/or survey respondents

have been presented as direct quotations from the participant without attribution to
any particular participant. A list of the interview participants in this years study who
chose to be identified appears at the end of this report, but it should be noted that all
interviewees are given the option to remain anonymous regarding their participation.
In several cases, quotes contained herein were obtained from interviewees who are
not listed. Readers are cautioned not to attempt to attribute any quote to a specific
individual or company.
To all who helped, the Urban Land Institute and PwC extend sincere thanks for sharing
valuable time and expertise. Without the involvement of these many individuals, this
report would not have been possible.
Emerging Trends in Real Estate 2016 1

2 Emerging Trends in Real Estate 2016
Chapter 1: Emerging Trends in Canada: Changing Opportunities
Emerging Trends in Canada:

Changing Opportunities
Its a time of transition for the Canadian real estate markets, but its not a time for pessimism. Across
the country, opportunities aboundonly theyre not necessarily the same ones that
have driven the markets growth in recent years.
The story of Canadian real estate this year is one of shifting

Exhibit 1-1 Real Estate Business Prospects for 2016
economic fortunes and changing real estate trends. The decline
in oil prices has caused a sharp slowdown in the Calgary
economy, the Edmonton economy also is trending downward, Private local real estate 3.89
owners/developers
and the long-term impact on the local real estate market remains
Real estate brokers 3.87
to be seen. At the time of writing, the Canadian economy has
Institutional real estate
had a second quarter of minor declinelargely a result of the owners/developers 3.81
impact of oil in Alberta. Yet these low energy pricesand the Real estate investment 3.75
low Canadian dollarare improving the prospects for manufac- managers
turing, transportation, warehousing, and other sectors across Homebuilders/residential 3.69
land developers
the country, especially in eastern Canada. As economic power
returns to the east, investors and developers are turning their Commercial builders 3.67
attention to new opportunities in faster-growing Toronto and REITs 3.60
some parts of Montreal. Vancouver is the exception in the west,
as it retains the top real estate investment spot. Real estate consultants 3.57
Architects/designers 3.56
This years top-ranked property subsectors reflect the changing
Insurance company 3.51
nature of Canadas real estate market. Warehouses, fulfillment real estate lenders
centers, and neighborhood shopping centers are among the top- Commercial bank 3.48
ranked this year. Each is a classic defensive play in times of slower real estate lenders
economic growth, and even minor negative economic growth CMBS lenders/issuers 3.43
yet each of these sectors is also ideally positioned to capitalize
Property managers 3.38
on periods of stable domestic consumer demand and increased
exports, especially to the United States. In our view, to interpret this 1 2 3 4 5
as a sign of firms battening down the hatches in preparation for Abysmal Poor Fair Good Excellent
an economic storm would be to miss the larger pointwhich is
Source: Emerging Trends in Real Estate 2016 survey.
that opportunities are changing, but they still exist. Note: Based on Canadian investors only.
We see other signs of real estate players responding posi- and more people are choosing to rentpermanently, in some
tively to changes in their markets and identifying new growth cases. Even some retirees are opting to rent after they sell their
opportunities. Investor interest in medical office and health care homes, rather than buy a smaller home. Developers are keen to
properties is perking up as an aging baby boomer generation meet this growing demand with new purpose-built rental units.
makes increasing demands on the health care sector. As the However, some of our interviewees expressed concern with the
rise in housing prices continues to outpace Canadians income number of purpose-built rental projects announced in Toronto,
growth, especially in markets like Toronto and Vancouver, more citing concerns with whether the numbers really do work yet.

Exhibit 1-2 2016 Forecast Economic Indicators
Total Personal income

Real GDP growth employment Unemployment per capita Population Total housing Retail sales
(%) growth (%) rate (%) growth (%) growth (%) starts growth (%)
Vancouver 3.2 2.1 5.6 3.1 1.7 20,500 4.8
Toronto 3.2 2.5 7.1 3.0 1.9 33,095 4.1
Winnipeg 3.0 2.1 5.2 3.0 1.3 3,946 4.0
Halifax 2.8 2.0 5.7 3.1 1.1 1,841 4.4
Montreal 2.7 1.9 7.6 3.3 1.1 16,595 4.0
Saskatoon 2.2 1.0 4.7 0.8 2.4 3,114 2.8
Ottawa 2.1 1.9 6.2 3.2 1.0 7,241 3.8
Calgary 1.5 1.3 6.2 1.8 1.9 11,010 2.5
Edmonton 1.3 1.2 5.1 1.8 1.8 11,590 2.4
Source: Conference Board of Canada, Metropolitan Outlook 1: Economic Insights into 13 Canadian Metropolitan Economies, Spring 2015.
holding pattern as they wait out the current downturn, avoiding

Exhibit 1-3 Emerging Trends Barometer 2016 rash action.
good Calgary and Edmontonand, to a lesser extent, Saskatoon

Hold
aside, the outlook for Canadian real estate remains generally
stable. Condominium sales remain solid, and single-family
homes continue to do well despite affordability worries. The
boom in office construction in recent years is giving rise to some
fair oversupply concerns, at least in the near term. And industrial
Buy property across much of the country is poised for growth in the
Sell
current export-friendly environment.
poor Without a doubt, Canadas real estate market is undergoing

important shiftsbut it would be wrong to take a pessimistic
view of the current environment. Opportunities may be chang-
2008 2009 2010 2011 2012 2013 2014 2015 2016
ing, but Canadian real estate players should remain confident
that good opportunities exist across the country.
Note: Based on Canadian investors only.
Mixed-use developments with residential and retail real estate Emerging Trends in Canadian Real Estate
space have also grown beyond a trend and have become a The real estate market in Canada has nine lives. Every time a
requirement in and around Toronto and Vancouver. correction should have happened, something else goes wrong
locally or worldwide and causes a distraction.
Caution and prudence characterize todays Canadian real estate
players. Many of our survey respondents suspect that Canadas Caution Rules as Firms Position Themselves for the Next
real estate markets are due for a breather after so many years of Business Cycle
economic and real estate expansionand theyre acting accord-
How long can Canadas real estate market continue to grow?
ingly. Some are slowing their acquisition efforts in Canada, and
Its a question many in the industry are asking these days.
focusing their attention on existing holdings and opportunities in
The Canadian economy and real estate market have grown
the United States and other foreign markets. Landlords are con-
consistently or stayed stable in the seven years since the global
centrating on bringing in new tenantsand extending the leases
economic downturn, and the 13 years leading up to it. Some
of existing ones. In Calgary, industry players are settling into a
respondents suspect a downturn is comingsooner rather
than later.

Its a line of thinking that is convincing real estate companies that respondents believe that the Canadian market is due for
to adopt a more prudent, defensive position. With competition a breather.
for high-quality properties intensifying, large real estate players
are slowing their pace of acquisitions in Canada; while they opt Liquidity Everywhere, but Nothing to Buy
to wait and see where the Canadian market is heading, they While theres a lot of liquidity in the Canadian market, there isnt
are looking to the United States and elsewhere for opportuni- much to invest it in. Respondents talk about the severe lack of
ties. Some companies, including real estate investment trusts high-quality product available for purchase right now, given
(REITs), are culling non-core property holdings to capitalize on the current cost of capital. Prized, top-tier Canadian proper-
high valuations and raise capital for redevelopment or inten- ties are increasingly in the hands of pension funds, institutional
sification projects. Landlords are working to sign tenants to investors, and REITs, which in some cases are selling their Tier
longer-term leases. And most companies are taking the long 2 assets to help fund the purchases. As a result, transaction
view when it comes to their business strategy. volumes have picked up for secondary assets and value-added
plays. While this creates a steady supply of product, respon-
However, this heightened level of caution appears to be driven dents point out that the properties often are older and require
by pragmatism, not pessimism. True, respondents are con- investment to suit current market needs.
cerned about the impact of low energy prices on western
Canadas markets. While many feel that U.S. and European Office Leasing: Yield Is King, but the Rules Are Changing
economic performance is less than ideal, others see opportuni-
The workplace has to be viewed as a stimulus to productivity.
ties in those markets as well as in South America. Few seem to
With so little top-tier product available, respondents are maxi-
mizing their existing holdings. Yield is king, and companies
Exhibit 1-4 Real Estate Capital Market Balance Forecast
are focused on attracting new tenants to existing office proper-
tiesand extending the leases of existing tenantsin order to
Equity capital for investing
generate stable income.
2016
6% 26% 68%
Yet respondents say that leasing itself is changing, in part
as a response to tenants own business challenges. Instead
of ten- to 15-year leases, respondents say that tenants want
2015
leases of ten years or less. Tenants are also reducing space
18% 32% 51% per employee, and some tenants are sharing offices, or opting
for value over high-end, luxury amenities. Respondents report
2014 that it is becoming increasingly critical to engage the tenants
human resources groups and others in organizations to secure
24% 38% 37% new leasing. Some tenants are declining traditional property
management services like cleaning, choosing to engage their
2013 own, often less costly, suppliers.
29% 33% 39% Stronger U.S. Dollar a Source of Mild Optimism

Economic uncertainties in China and Europe have Canadian
2012 firms once again looking to the United States to drive growth.
Its not without risk, of course: the U.S. recovery is not especially
29% 23% 49%
strong, and many U.S. trading partners are not growing.
Undersupplied In balance Oversupplied
The U.S. dollars relative strength could well benefit Canadian real
Source: Emerging Trends in Real Estate surveys.
estate markets, particularly in eastern Canada. Respondents
believe that Toronto-area industrial development, especially
distribution centers, may be boosted by the U.S. dollar. Should
believe that these wider economic factors will cause significant U.S. firms choose to capitalize on the stronger U.S. dollar to hire
problems for their business. More than anything else, it seems skilled Canadian staff, the office sector, especially suburban

Exhibit 1-5 Real Estate Capital Market Balance Forecast
Debt capital for acquisitions Debt capital for renancing Debt capital for development
2016 2016 2016
11% 38% 52% 12% 48% 40% 24% 50% 26%
2015 2015 2015
14% 59% 27% 16% 57% 27% 30% 54% 16%
2014 2014 2014
22% 55% 22% 18% 62% 20% 40% 45% 15%
2013 2013 Undersupplied In balance Oversupplied
37% 43% 20% 41% 43% 16%
2012 2012
37% 36% 27% 29% 51% 20%
Undersupplied In balance Oversupplied Undersupplied In balance Oversupplied

office properties located near or on transportation hubs, may currency should make the countrys non-energy exports more
also benefit. competitive. If gas pump savings should materialize, this too
could boost business and consumer spending, potentially
Lower Oil Prices Have Mixed Impact on Canadian benefiting retailers, among others. This could, in turn, drive
Real Estate activity in industrial, office, and commercial real estate, espe-
The sharp drop in oil prices has led some to speculate that cially in the east.
eastern Canada will regain its position as Canadas economic
engine. However, the impact of the energy sector downturn on Foreign Investment: Canada Retains Its Allure
Canadian real estatein Alberta and elsewhereis just starting There will always be one guy who needs it more than
to be felt. someone else.
Oxford Economics May 2015 report, Canada: The Negative Global investors continue to see Canada as a safe haven for
Impact of Lower Oil Prices, forecast a 20 percent drop in energy their capital, and the lower Canadian dollar only adds to the
sector investment this year, and indeed Canadian energy allure. Many respondents expect foreign investment to continue
companies have postponed or shelved many projects in light to flow into Canadian real estatenot only into traditional mar-
of business conditions. Yet on the real estate side, investors kets like Vancouver, Calgary, and Toronto, but also into Montreal
appear to be biding their time. There are little to no large real and even Saskatoon, where interest in farmland and develop-
estate purchases or sales taking place in Alberta, although firms ment land is rising.
are putting space up for sublet. Albertas experience with boom-
and-bust cycles has taught companies that sometimes the best Foreign investors face numerous hurdles in entering the
strategy is to simply hold. Canadian market. As a result, they are determined to ensure that
they realize a good return on their investments. Interest in hotel
Elsewhere, low energy prices may prove a boon to certain and office properties is rising, and observers expect that foreign
sectors and their related real estate markets. Canadas weaker

Exhibit 1-6 Foreign Direct Investment in Canada Exhibit 1-7 Average Home Size, by Country
2014 49.4% Australia

United States
2004 64.1% United States
Canada
34.3%
Europe Denmark
29.0%
Greece
11.7%
Asia and Oceania France
5.0%
Germany
4.0%
Latin America Spain
1.7%
Japan
0.7% Sweden
Others
0.2%
Italy
0% 10% 20% 30% 40% 50% 60% 70% United Kingdom
Source: Statistics Canada, April 2015. China
Russia
investors will soon turn to Canadian health care real estate,
Hong Kong
especially as the U.S. health care real estate market matures.
0 500 1,000 1,500 2,000 2,500
Square feet
However, like their institutional counterparts, foreign investors
Sources: CommSec, Reserve Bank of Australia, United Nations, U.S. Census Bureau.
are also finding that premium opportunities are expensive and
in short supply, and it remains to be seen whether this will cool it easier for people to buy more affordable homes further out
their interest in the Canadian market. It is equally unclear what from the core; one respondent remarked that within a few years,
impact the slowdown in Canadas energy sector will have on self-driving automobiles could have a similar impact, by making
foreign investment. lengthy commutes less of a burden. The longer-term impact
on development in the core, however, remains to be seen.
Housing Affordability Concerns on the Rise Of course, a rise in interest rates could make housing even
While developers are building condominiums and mid-density less affordable than it is currently and drive more significant
products like stacked townhouses to meet municipal and provin- changes in real estate markets.
cial urban density demands, it is getting harder for developers to
build affordable housing in the urban centers that people covet Rise of the Renters
which could have consequences for Canadas urbanization trend. There is a trend in rentals that will emerge over time: people
will want to rent luxuryby choice, not because they cant
Developers and builders believe that several issues are pushing afford to buy.
housing prices up and potentially out of reach for many prospec-
tive homebuyers. Land prices continue to rise, and many believe As concerns over housing affordability grow, a rising number of
that provincial government policies are a key factor: greenbelt Canadian households are choosing to rent rather than buy. Its a
legislation in Ontario and British Columbia, for example, is limiting trend that is expected to continue and create new opportunities
land supplies in an effort to promote urban densification. In addi- across the country.
tion, lengthy approval processes and significant development
charges also are limiting supply and driving up costs across the Attitudes about renting have changed, respondents note.
country. And then there are the construction costs themselves, Renting is no longer seen only as a temporary step on the road
which continue to rise. to homeownership, but as an alternative. Today, we are seeing
the rise of permanent rentersa new demographic in many
Affordability issues could potentially change urbanization Canadian markets, especially as a growing proportion of the
trends, some argue. One respondent sees homeowners selling population cannot assemble the downpayment for a new home.
their homes, moving further out from the core to a less expen- This is not new in Montreal, but is relatively new in other cities.
sive house, and banking the remaining equity. Expansion of the Changes to lending rules, which have effectively doubled mini-
regional transit systems across major urban areas may make mum downpayments, have not helped, and rising house prices

Exhibit 1-8 Average Home Prices and Price to Income Ratio*
2016 Price Price to 2015 Price Price to 2014 Price Price to 2013 Price Price to
income ratio income ratio income ratio income ratio
Vancouver $921,900 11.6 : 1 $889,100 11.6 : 1 $813,200 10.8 : 1 $767,400 10.4 : 1
Toronto $639,300 7.0 : 1 $614,400 7.0 : 1 $563,500 6.6 : 1 $521,800 6.3 : 1
Calgary $441,700 3.9 : 1 $451,300 3.9 : 1 $459,500 4.0 : 1 $436,600 4.0 : 1
Canada $440,100 5.7 : 1 $435,800 5.7 : 1 $407,000 5.5 : 1 $381,700 5.3 : 1
Ottawa $375,400 3.9 : 1 $368,300 3.9 : 1 $360,700 3.9 : 1 $356,400 4.0 : 1
Edmonton $357,100 4.3 : 1 $366,700 4.3 : 1 $361,300 4.4 : 1 $343,600 4.3 : 1
Montreal $344,000 5.0 : 1 $336,800 5.0 : 1 $331,800 5.1 : 1 $324,100 5.1 : 1
Saskatoon $297,800 4.5 : 1 $297,800 4.5 : 1 $297,900 4.6 : 1 $287,500 4.6 : 1
Halifax $285,200 3.8 : 1 $279,200 3.8 : 1 $275,300 3.8 : 1 $274,200 3.9 : 1
Winnipeg $279,200 3.5 : 1 $275,200 3.5 : 1 $271,900 3.5 : 1 $268,500 3.7 : 1
* The price to income ratio is the ratio of the metro-area average home price to the median income.
Source: TD Economics, Canadian Regional Housing Outlook, August 2015.
just add to the challenge. Faced with a choice between long

Exhibit 1-9 Rapid Transit Infrastructure Underway
commutes from suburbs or renting in the urban core, more and
more people are opting to rent.
Length of rapid transit Total investment
lines (km) (C$ billion]
But that is not the only reason that renting is on the rise. Some
Toronto 59.2 C$14.00
older homeowners are often opting to sell their homes and cash
Montreal 14.0 C$0.42
out, moving into high-end or luxury rental units and keeping the
proceeds from the sale for spending. Luxury apartment units Vancouver 11.0 C$1.55
aimed at baby boomers and retirees could be increasingly Calgary* 25.0 C$0.80
popular in the years to come, noted one respondent. Offering Ottawa 12.5 C$2.13
flexibility, high quality, and low maintenance, rented luxury units Source: Pembina Institute, Fast Cities: A Comparison of Rapid Transit in Major Canadian
will provide a comfortable bridge between homeownership and Cities, September 5, 2014.
retirement homes. Notes: Figures are for instrastructure funded or under construction. Investment is in
2014 dollars.
* Canadas federal government has pledged C$1.53 billion for the LRT Green Line. Source:
With housing affordability likely to remain an issue for some Tories Announce $1.5B for Green Line LRT Project. July 24, 2015. The Calgary Herald. http://
calgaryherald.com/news/local-news/tories-announce-1-5b-for-green-line-lrt-project.
time, rentals are expected to continue to be in demand. These
properties offer investors steady income and stable cash flows; Suburbs Resilient in the Face of the Urbanization Trend
in the current environment, that is an attractive proposition.
Respondents expect to see more condos redeveloped into There is just a different mind-set about the suburbs. Tell me
rental properties; they also expect to see more purpose-built where the kids are going to go to school downtownthere are
multi-unit rentals come on stream, since the current, aging no high schools downtown. Not everyone is going to be able
stock of multi-unit residential is not well suited to the demand for to come into the city until there are major changes. Families will
high-quality rental units. Further cap-rate compression for multi- continue to want to be in the suburbs.
residential product in eastern Canada is making a compelling
case to build rather than buy. Some observers, however, have The urbanization trend remains strong in Canada, but respon-
raised concerns about new players entering the multi-residential dents dismiss suggestions that the suburbs are in decline. Every
market and competing with established players; multi-residential day, noted one commenter, people choose to exchange their
is a unique segment, and new players may find themselves fac- small urban spaces for larger suburban living quarters.
ing greater-than-expected challenges.
Suburbs around the Greater Toronto Area are also becoming
more expensive due to government policies, immigration, and

Exhibit 1-10 Prime Multifamily Rental Units, by Year of Construction
Total Before 1960 19601979 19801999 2000 or later

Quebec 791,402 325,587 291,429 120,355 54,031
Ontario 664,519 134,536 431,368 71,659 26,956
British Columbia 176,746 24,460 112,415 28,152 11,719
Alberta 132,428 7,634 84,610 25,414 14,770
Manitoba 62,894 13,150 35,427 7,735 6,582
Nova Scotia 52,619 7,603 20,608 13,576 11,372
Saskatchewan 34,797 4,372 20,412 7,325 2,688
New Brunswick 32,307 7,942 11,327 6,038 7,000
Prince Edward Island 6,485 1,465 1,025 2,289 1,716
Newfoundland/Labrador 5,720 1,224 2,720 1,233 543
Canada total 1,961,877 527,986 1,011,494 284,544 137,853
Source: Canadian Mortgage and Housing Corporation, Rental Market Survey, 2015.
Exhibit 1-11 Prospects for Commercial/Multifamily Subsectors in 2016
Investment prospects Development prospects
Fulllment center 3.80 Warehouse industrial 4.00

Warehouse industrial 3.75 Fulllment center 3.88
Medical ofce 3.68 Medical ofce 3.66
Neighborhood/community Apartment rental 3.56
shopping centers 3.53
high income
Apartment rental
moderate income
3.49 Limited-service hotels 3.51
Apartment rental 3.49 Central city ofce 3.43
high income
Limited-service hotels 3.49 R&D industrial 3.29
Apartment rental
Central city ofce 3.43 moderate income 3.29
Full-service hotels 3.41 Neighborhood/community 3.28

shopping centers
Apartment rentalaffordable 3.34 Student housing 3.26
R&D industrial 3.29 Apartment rentalaffordable 3.23

Student housing 3.26 Full-service hotels 3.11
Suburban ofce 3.13 Institutional rent 2.69
for single family
Regional malls 3.08 Power centers 2.69
Power centers 3.06 Suburban ofce 2.53
Institutional rent 2.83 Regional malls 2.30
for single family
1 2 3 4 5 1 2 3 4 5
Abysmal Poor Fair Good Excellent Abysmal Poor Fair Good Excellent

higher demand. Respondents believe that major investments dent remarked that some retail tenants arent looking for stores
in transit infrastructure, especially in and around the Greater as much as storeroomsplaces to store their goods and pack-
Toronto Area, will make the suburbs more attractive to a wider age them for shipping to online purchasers.
group of people. And as demand drives housing prices higher
and higher in the core, they expect to see a growing number of The shift to a multichannel, e-commerce-driven retail model
people choose more affordable homes in the suburbs. Moving is about logistics more than anything, according to another
to the suburbs does not necessarily mean resigning oneself to respondent; as this changes how retailers move their products,
a lengthy commute, either: many successful suburbs enable it will also change how they look at real estate. Distribution facili-
people to live, work, and play without having to travel all the way ties will become just as vital as physical shopsif they arent
downtown, and the growing trend of working from home also already. This will change how real estate players developor
reduces commute times from the suburbs. Some people, in redeveloptheir retail properties.
fact, may be choosing where they live first, based on affordabil-
ity, and then choosing where they work, rather than the other Its not just retail that is changing, either. Respondents are also
way around. coming to terms with how technology is changing the office
real estate segment. Office workforces are flexible, nimble,
In terms of commercial real estate, though, developers acknowl- and highly mobile; workflows and document management are
edge that suburbs need more services, better tax incentives, increasingly digital and cloud-based. As a result of these shifts,
and lower operating costs to compete with the downtown core. office tenants are looking for smaller spacesnot in an effort to
cut costs, but rather to adopt a more modern approach to what
Technology Creates New Opportunities and Challenges the office should be. Traditional officesand even cubicles
Data mining is a must-have. Continued investment in all are giving way to bench-style desks that support several
aspects of technology needs to be a permanent line item in workers and even more screens of various shapes and sizes.
the budget. File rooms are disappearing; closets, drawers, and cupboards
are being replaced by lockers.
E-commerce, cloud computing, mobile, and data analytics are
just a few of the technologies that continue to reshape the way Property owners are discovering that these changes in office
that people live and work each day. In the process, they are space needs are driving up costs for office design, construction,
creating new opportunitiesand challengesfor Canadian
real estate players. Exhibit 1-12 Projections for Canadian Population,
Age 55 and Over
Respondents noted numerous ways that technology is chang-
ing how they do business. Theyre harnessing the power of
data to make better business and marketing decisions and 2038 36%
2028 34%
improve their financial reporting. Theyre using technology to Over 55 2018 31%
improve how they design and build new developments and 2014 29%
share knowledge across their enterprises. Some are using
24%
remote monitoring technology to deliver superior property man- 22%
agement services to their tenants. And one respondent even Over 65 17%
15%
noted that Google Maps allows potential investors, tenants,
and buyers to view a buildingand its surrounding neighbor- 13%
hoodwell before making a visit in person. 10%
Over 75 7%
7%
Many respondents spoke of the way technology is changing
the real estate needs of their retail tenants. Retail is evolving 4%
3%
rapidly: e-commerce and a multichannel approach to engag- Over 85 2%
ing consumers become vital to retailers success, and this is 2%
changing how they think about their physical space require-
0 5,000 10,000 15,000 20,000
ments. Many are rethinking the role of the store, and finding that
Thousands
smaller formats are all that is needed to serve consumers who
Source: Statistics Canada, Table 052-0005, Projected population, by medium projection
are likely to view in person and buy online later. One respon- scenario, as of July 1.

and infrastructure. Renovating an office to suit a tenant is no Overall, respondents rank Vancouver as the top invest-
longer just a matter of moving some walls around: as office den- ment, development, and housing market in Canada this year.
sities rise and per-worker square footage drops, big investments However, investor interest is definitely moving eastward as well,
in air conditioning, heating, washrooms, and other facilities are with four eastern markets in the top five. Several interviewees felt
often needed. Some believe the real estate sector is underesti- that the stable industrial outlook in both Toronto and Montreal
mating the cost impact of these technology-driven changes. positions those markets to benefit from U.S. economic growth
and a lower Canadian dollar.
As well, the increasingly critical role of technology in tenants
businesses is matched by their growing dependence on a 4
good
stable supply of electricity. Outages are no longer a tempo-
rary inconvenience; they can bring a companys business to a 3.62
complete and costly halt. Landlords report that their commercial
tenants are demanding that they guarantee uninterrupted power,
including immediate backup supplies in case of outages. Some
tenants want these promises written into their leases. 3 fair
Markets to Watch in 2016

With the exception being Vancouver, the focus is shifting back
to the east. Vancouver
poor
After three years of topping the Canadian markets to watch list, 2
08 09 10 11 12 13 14 15 16
Calgary and Edmonton have slipped to mid-table as Vancouver,
Toronto, and Montreal rise to the top. Vancouver
Exhibit 1-13 Investment Recommendations for Commercial/Multifamily Subsectors in 2016
2016 expected
Buy Hold Sell cap rate
Warehouse industrial 59.6% 21.3% 19.1% 5.9%
Medical office 54.3 31.9 13.8 6.4
Fulfillment center 52.4 42.9 4.8 6.0
Neighborhood/community shopping centers 42.2 36.1 21.7 6.1
Limited-service hotels 37.8 35.1 27.0 7.3
Apartment rentalaffordable 35.0 40.0 25.0 5.6
Apartment rentalmoderate income 35.0 38.8 26.3 5.3
Central city office 33.3 41.7 25.0 5.5
Student housing 32.4 47.3 20.3 6.0
Full-service hotels 27.0 48.6 24.3 6.8
Apartment rentalhigh income 26.3 32.5 41.3 4.7
Suburban office 25.0 41.7 33.3 6.6
R&D industrial 23.8 50.0 26.2 6.6
Regional malls 18.1 60.2 21.7 5.4
Power centers 13.1 44.0 42.9 6.4
Institutional rent for single family 10.3 47.1 42.6 6.0

Exhibit 1-14 Forecast Net Migration, 20152019
Intercity International Interprovincial
Calgary
Edmonton
Vancouver
Winnipeg
Halifax
Ottawa/Gatineau
Toronto
Montreal
Saskatoon
200,000 100,000 0 100,000 200,000 300,000 400,000 500,000 600,000

Source: Conference Board of Canada.
Vancouver continues to be an in-demand marketplace to be for Rental developments are in the works in Surrey, Richmond, and
all real estate. There is a lot of available capital. The number of Burnaby; in Vancouver, some estimate that as many as one in
purchasers for large-dollar land deals has increased significantly three condo buildings is aimed at the rental market. In retail, out-
from a few years ago, when there were maybe three bidders; now let and destination malls are proving popular, but traditional retail
there are six or sevenquite a lot of foreign money as well. in Vancouvers downtown is seeing some softening. There also
are some concerns about office vacancy rates, which at 10.4
Vancouvers economic growth may have hit a recent peak in percent in the second quarter of 2015 are Vancouvers highest
2014, but growth in 2015 and 2016 is still expected to remain in a decade. The high cost of living is making it harder to attract
strong, with gross domestic product (GDP) growth at 3.1 per- head offices and other major firms to the city, and its not at all
cent in 2015 and forecast GDP growth of 3.2 percent in 2016, clear how long it will take for the market to absorb all the space
according to the Conference Board of Canada. Manufacturing, that is available nowor becoming available in the next year.
transportation, and warehousing are likely to drive this growth in
2016, owing to the Canadian dollars weakness against the U.S. 4
good
dollar. The construction sector will be kept busy by a number
of larger-scale mixed-use development projects in 2016; some 3.58
observers believe that the industry could also benefit should the
low Canadian dollar attract further additional foreign interest in
Vancouver housing.
3 fair
From a real estate perspective, more of the same seems to be
Vancouvers mantra. Foreign investment still flows into Greater
Vancouvers residential sector, though some foreign investors Toronto
are now diversifying into the retail, office, hospitality, and even
agricultural sectors. The ongoing flow of international investment
is still driving up prices, particularly for single-family homes; this poor
2
has some Vancouver-area employers worried about their ability 08 09 10 11 12 13 14 15 16
to attract and retain staff who are being priced out of the market.
It is also giving rise to concerns that governments will come Toronto
under pressure to bring foreign investment under some degree Toronto achieved its strongest economic growth in four years
of control. in 2014 at 2.9 percent, and 2015 and 2016 are expected to be

of years, two-thirds of this space is pre-leased. Furthermore,

Exhibit 1-15 Markets to Watch: Overall Real Estate
vacancy rates, at 7.3 percent, are among the lowest in Canada.
Prospects
While there may be little worry over top-tier office properties,
Investment Development Housing respondents worry that the Class B and lower-tier properties
left behind may experience rent pressures.
1 Vancouver 3.62 3.27 3.96
2 Toronto 3.58 3.23 3.54 The retail outlook also is generally positive. Urban retail is very
3 Montreal 3.17 2.99 3.36 strong: nearly every new project features some retail component
4 Ottawa 2.94 2.82 3.33 to attract buyers and/or tenants. Destination retail such as outlet
5 Saskatoon 3.02 2.83 3.18 centers continues to perform well, and large regional shopping
6 Winnipeg 2.95 2.75 3.20
centers remain very strong. Respondents also report that strip
plazas that are anchored by grocery store or drugstore ten-
7 Edmonton 2.66 2.58 3.65
ants also are doing well. However, power centers appear to be
8 Halifax 2.80 2.75 3.23
waning. Many tenants, it seems, had contingency leases that
9 Calgary 2.98 2.67 2.86 allowed them to break their lease or to negotiate lower rents if an
anchor tenant left. Investors holding properties that were home
1 2 3 4 5
to now-defunct Canadian retailers foresee a challenging time
Abysmal Poor Fair Good Excellent
ahead.
4
good
even better, with forecasted growth rates of 3.1 percent and 3.2
percent, respectively, according to the Conference Board of
Canada. While many industries are expected to play a part in
this growth, key drivers include manufacturing, transportation,
3.17
and warehousing, as well as trade and business services. Once
more, the disparity between the U.S. and Canadian dollars, as 3 fair
well as low energy prices, are seen as playing a positive role
in spurring economic activity. Several high-profile construction
projectsnotably the citys ongoing waterfront redevelopment,
Union Stations expansion, the Spadina subway extension, and
Montreal
the Eglinton Crosstown light-rail linemay offset any potential
drop in residential building activity in 2016.
poor
2
08 09 10 11 12 13 14 15 16
Overall, the Toronto market continues to have picked up where Montreal

it left off last yearbut investors and developers are acting
Respondents feel that Montreals economy is in for a period
with a bit more caution. Companies are still buying properties
of stable but relatively low organic growth, though the regions
and investing in new developments, but they are being more
GDP is projected to grow 2.6 percent in 2015 and 2.7 percent
selective and choosing opportunities that tick most, if not all, the
in 2016the fastest rate of growth since 2002, according to
boxes. Not surprisingly, infill developments and redevelopments
the Conference Board of Canada. Major infrastructure spend-
remain high on the agenda, given Torontos commitment to
ing should benefit the construction sector, though whether this
intensification. Prime examples of this include ongoing devel-
will offset any potential slowdown in housing starts remains
opment in the citys South Core and West Don Lands districts.
to be seen. Once more, lower energy prices and a lower
Mixed-use projects combining commercial, retail, and residen-
Canadian dollar are viewed as a boon for local manufacturers.
tial are increasingly attractive.
Montreals suburban population continues to fall as baby

The outlook for Torontos office market is fairly comfortable.
boomers join generations X and Y in the urban core to embrace
Rents and cap rates are flat, causing investors to pay close
the live/work/play lifestyle. Condo development is set to take
attention to fundamentals in order to make money on projects.
a breather, however, after the building boom of recent years.
While 3.6 million square feet of new Class A space is under
Retail remains an area of some concern in the core. The Rue
construction and slated to come on stream in the next couple

Ste. Catherine redevelopment project has not yet resulted in an Overall, however, Ottawas aging infrastructure and the prospect
influx of luxury retailers. Outlet and strip malls on the outskirts of a change in Canadas federal government is dampening
of the Greater Montreal Area are performing quite well, but the investors attraction to the market, despite signs of an economic
market can support only a small number of such destination upturn and falling office and industrial vacancy rates from
retail developments. According to JLLs second-quarter 2015 5.3 percent to 4.8 percent, according to Colliers International
office market overview, office vacancies are very high10.6 Canada. Ottawas retail segment also looks poised to enter a
percent in 2015s second quarterand some believe it could transition period in the aftermath of major chain closures.
take five years to fill the space. Midtown Montreal is increasingly
attractive to new businesses, especially those in the informa- 4
good
tion, communication, technology, multimedia, and video game
industry. Midtown offers businesses a location that is close to
the downtown core, public transit, and other transportationat
more affordable rates.
4
good 3 fair 3.02
Saskatoon
poor
3 fair 2.94 2
09 10 11 12 13 14 15 16
Ottawa
Saskatoon
According to the Conference Board of Canadas spring 2015
report of 13 CMAs, Metropolitan Economic Trends, Saskatoons
poor economic growth rate is expected to see a significant drop in
2
08 09 10 11 12 13 14 15 16 2015, bringing it to 1.8 percent from the 6.1 percent in 2014,
a level just below the national average of 1.9 percent. The
Ottawa ripple effect of the slowdown in primary industry and utilities
Public sector austerity measures have kept the government- could cause slower growth across all sectors of the Saskatoon
dominated economy of Ottawa relatively stagnant in recent economy. Lower demand for housing is likely to slow residential
years. The outlook for 2015 and 2016 is a bit brighter: the federal construction, and commercial construction is likely to proceed
government has recently announced that it is in a surplus posi- cautiously as well. Real estate sales volumes are projected
tion and expects to remain in surplus for 20152016. Further to shrink in 2016 from 6.1 percent to 3.3 percent, and this is
public spending cuts are expected to be minimal, according to expected to slow activity in finance, insurance, real estate, and
an article published in the Globe and Mail on August 28, 2015. other parts of the service sector. Yet while the energy sectors
The regions goods production sector is projected to expand by demands for manufactured goods are projected to be slow for
1.7 percent in 2015 and by 2.5 percent in 2016. the next couple of years, demand from the agriculture and tim-
ber sectors could in fact support manufacturing growth above
According to the Conference Board of Canada, the business the national average of 2.7 percent.
services sector also is set to grow significantly faster in 2015
2016 by 2.4 percent and 2.6 percent, respectively, buoyed by
a strong technology sector and heightened investor interest in
a number of Ottawa startups. Slow demand for single-family
homes and a possible oversupply of multi-residential units are
clouding the forecast for residential building, but the construc-
tion industry should be well supported by infrastructure projects
in 2016.

4 Edmonton
good
Edmontons economy finds some stability due to public sector
employment, bit it is expected to be hit hard by the drop in oil
prices, tipping into recession in 2015 before showing signs of
recovery in 2016if oil prices stabilize and start to recover,
according to a spring 2015 report on 13 CMAs published by
the Conference Board of Canada. Primary industry and utilities
3 fair 2.95 will contract significantly, and this will spill over into manufactur-
ing, transportation and warehousing, construction, and trade.
Manufacturers closely linked with oil extraction will struggle into
Winnipeg 2016; others, however, could benefit from the lower Canadian
dollar and lower transportation costs. High-profile projects in
poor the city core may sustain the construction industry to an extent,
2
09 10 11 12 13 14 15 16 but this may be offset by a slowdown in business invest-
ment and residential activity. While new condo towers rise up
Winnipeg alongside the citys new arena, provincial museum, and other
Winnipegs economy is expected to continue its steady growth developments, it will be critical to add retail and other ameni-
at 2.1 percent in 2015 and 2.5 percent in 2016, according to the ties to increase the appeal for people to move into Edmontons
Conference Board of Canada. The local manufacturing sector, downtown core. Respondents also expressed concerns about
which does not depend as heavily on the oil extraction indus- occupancy rates and pricing in the existing office buildings, with
try, is benefiting from the lower Canadian dollar and reduced the number of new additions to Edmontons office sector.
energy and transportation costs, and this should spark growth
in U.S. exports. The retail and wholesale sectors should remain 4
good
stable in the current economic environment, and business and
personal services also are expected to do well.
Winnipegs economic growth is persuading more people to stay

put, it appears, as domestic out-migration to other provinces is
falling. At the same time, Winnipeg is experiencing a rise in new 3 fair
migrants from across Manitoba and around the world. Despite
2.80
this influx of people, construction activity may slow as housing
Halifax
starts fall into balance with population growth. A number of large
nonresidential projects are slated to reach completion in 2015,
which will further slow construction activitythough future infra-
structure projects could pick up some of the slack. poor
2
08 09 10 11 12 13 14 15 16
4
good Halifax
According to the Conference Board of Canadas Metropolitan
Economic Trends report of 13 CMAs, published in spring
of 2015, Halifaxs economic growth is expected to rebound
strongly to 3.1 percent in 2015 from 1.7 percent in 2014, and
maintain the pace in 2016 at 2.8 percent. A decline in primary
3 fair
industry and utilities output should be more than offset by
Edmonton growth in both manufacturing and construction. Increased
2.66
shipbuilding and aerospace activity should provide a welcome
boost to the manufacturing sector; the construction sector will
benefit from several public sector projects and ongoing work on
poor major mixed-use commercial developments.
2
08 09 10 11 12 13 14 15 16

The prevailing view is that Halifaxs residential market will remain still digesting the impact of Targets exit; there is little appetite
strong, and housing construction could pick up as a result for new retail buildings, especially in the current environment,
of stronger economic growth. Its unlikely well see the sort of and so companies are instead focusing on redeveloping and
urbanization impact seen in other Canadian cities, as Halifax enhancing existing holdings. On the commercial side, Calgarys
did not experience huge suburban growth in years past. Retail, underdeveloped hotel segment is set to welcome two new
which has struggled in the past couple of years, is attracting developments. The office segment, however, is keenly watching
interest as regional development improves the employment to see the impact of 2 million square feet of space coming on
picture. The office market, however, is a source of some con- stream soon. Concerns over vacancies are risingas are wor-
cern: Businesses are rethinking space needs and searching for ries over the amount of subleasing going on as firms try to cut
flexible, high-quality spaces that suit highly mobile, collaborative costs in a tough economy.
employees. Many current buildings simply are not equipped to
accommodate those needs, and concern exists that businesses
will flock to the newer properties coming on stream.
Property Type Outlook
This years survey responses reflect an outlook marked by
4 cautious pragmatism. Some of the top-ranked property sub-
good sectorsfor example, warehouses, fulfillment centers, and
neighborhood or community shopping centersare traditionally
seen as defensive investments well suited to periods of slow
economic growth.
It would be wrong to make too much of this and declare that

3 fair 2.98 Canadas real estate players are battening down the hatches.
Warehouses and community shopping centers may be
defensive plays, truebut they are also sectors that are well
positioned to benefit from stable domestic consumer demand
Calgary and the prospect of rising exports to the United States.
poor
2 The results also point to other areas of optimism for the
08 09 10 11 12 13 14 15 16
Canadian market. Investors are keen on the medical office
Calgary sector, which is poised to benefit from favorable demographic
According to the Conference Board of Canadas Metropolitan trends and create opportunities for higher yields. Investors
Economic Trends report of 13 CMAs, published in spring 2015, interest in mid- and high-income housing rentals also is strong,
declining oil prices are expected to push Calgarys economy and these sectors are set to capitalize on the rising number of
into recession in 2015 as well. While primary industry and utilities Canadians choosing to rent rather than own.
are taking the brunt of the downturn, manufacturing, construc-
tion, transportation and warehousing, wholesale, and retail also Retail
are projected to suffer. Residential construction is expected to There is a trend for the consumer to spend more on quality of
drop over the next two years, as the economic slump slows net life than on hard assetstoday its more about the lifestyle than
migration into the region. Nonresidential construction is also owning a BMW, people want balance in their life.
expected to slow, though several current projects should pro-
vide some buffer against the downturn. But while the downturn The rise of e-commerce and changing consumer behaviors
may have slowed down Calgarys real estate activity, it has not are driving profound shifts in Canadian retailing, with significant
made real estate players especially pessimistic. Long experi- implications for retail real estate. Retailers are rethinking their
ence with boom-and-bust cycles has helped Albertans excel real estate needs in the online shopping era. Smaller store
at taking the long view: They are opting to hold onto what they footprints, locations that combine both retail and distribution
have and wait as long as it takes before buying or selling. functions, and click-and-collect facilities will become increas-
ingly common. Destination retail propertiesoutlet malls or
Calgary has not embraced condo developments in the way large centers with premium brandsare poised to do well as
Toronto or Vancouver has. Current buildings are selling, but Canadians search for memorable shopping experiences along
no new condo projects are planned. In retail, companies are with good deals. In Toronto, urban retail, especially as part of

a mixed-use development, is seen to be strong, since integrat- suggest that institutional investors and large REITs that have
ing retail and mixed-use developments can help appeal to a been focused on this segment are the players most likely to stay
targeted demographic. An influx of luxury brands is providing a with rental property holdings over the long term.
welcome boost to the retail market in Vancouver, Toronto, and
even Calgary to some extent. Single-Family Homes
We need to be able to create affordable housing in the city to
Recent retailer exits from Canada and other recent chain be a socially responsible and competitive city.
closures are creating sizable challenges for some retail real
estate investors. The loss of anchor tenants is opening the door Respondents are keenly aware of widespread concerns over the
for shopping centers smaller retail tenants to break their own lack of affordable housing, especially single-family homes. They
leasesor lower their rents. Meanwhile, new anchor tenants are frustrated by the popular opinion that they realize massive
are not easy to find, compelling some players to look at repo- profit margins on residential developments and therefore must
sitioning these larger spaces. Ultimately, investors in these be able to absorb rising building costs, development charges,
anchorless shopping centers and suburban big-box retail and other government-mandated costs. It is simply not true, they
spaces may face limited growth prospects in the years ahead. assert, and they make it clear that increases in development
charges and other costs, as well as government policy impact
Purpose-Built Multi-Residential Rentals on supply, have a direct impact on home prices and housing
Faced with rising and increasingly unaffordable housing prices, affordability. Developers believe that if the trend continues,
Canadians across the country are instead choosing to rent. Canadians will grow more comfortable with living in smaller
And its not just those priced out of the market who are renting: spaces, like many of their peers around the world (see exhibit
downsizers and retirees also are driving demand for rentals as 1-7). Either that, or they will come to terms with commuting long
they opt to turn their equity into cash. Rental demand is likely to distances in order to find affordable housing. There isnt much
remain strong in locations such as Montreal, where a tradition- of an alternative. Some interviewees also suggested that a need
ally strong rental market already existsas well as centers like exists for better communication among government, industry,
Toronto, with its housing prices and solid population growth. It is and consumer groupsand better information about what is
likely that we will see more condominium developments convert really happening in Canadas housing marketsin order to
to rentals in the face of market demand. Purpose-built multi- address the affordability issue.
residential units have been largely owned by the private sector
historically, and oftentimes the properties have long since paid Condominiums
for themselves. Now, some investors question whether returns There is a real trend of people accepting smaller living spaces.
on purpose-built multi-residential rentals justify the cost, and The design of the space must be efficient and well thought out.
Exhibit 1-16 Survey Respondents View of Their Local Markets
Fair Good Excellent
Development/ Local
Strength of Investor Capital redevelopment Public/private development
Average local economy demand availability opportunities investment community
Montreal 4.09 3.91 4.50 4.36 4.00 3.74 4.00
Halifax 3.96 3.87 4.43 4.21 3.86 3.67 3.75
Toronto 3.36 2.67 3.50 3.50 3.00 4.00 3.50
Winnipeg 3.36 3.18 3.41 3.47 3.32 3.36 3.39
Ottawa 3.29 3.23 2.95 3.47 3.35 3.42 3.29
Vancouver 3.16 3.18 3.10 3.30 3.10 3.13 3.13
Saskatoon 3.10 3.29 2.86 3.29 3.14 3.00 3.00
Edmonton 3.00 2.75 2.88 2.63 3.25 3.17 3.33
Calgary 2.83 2.62 2.62 3.00 2.92 2.80 3.00


have changed from yield and capital appreciation to yield and
Exhibit 1-17 Prospects for Major Commercial Property
capital preservation. Vancouver and Toronto are still seen as
Types, 2016 versus 2015 and 2014
attractive, safe places for foreign investment capital, which is
Investment prospects keeping condo demand steady. Most condos also continue to
perform well in other Canadian cities.
3.61 2016
Industrial/distribution 3.47 2015
3.22 2014 Industrial
3.45 Logistics buildings are still in demand to support increases

Hotels 3.43 in online ordering together with smaller retailer footprints. In
2.46 Ontario, this is encroaching on the greenbelt, so players either
3.41 need to redevelop older sites or go beyond the greenbelt.
Ofce 2.96
3.17 Distribution and logistics are driving industrial activity, as
3.40 e-commerce grows and consumers and businesses alike
Multifamily 3.28 demand shorter and shorter delivery times. Height is in
3.31 demand, with 30-foot ceilings far more attractive to tenants
3.22 than the squat, sprawling properties suited to yesteryears
Retail 2.87 manufacturing sector. Redevelopment is popular now, since
3.37 developers find that retrofitting older buildings to suit modern
Single family 2.83 tenant needs is more cost-effective than new development.
Office
Development prospects
It used to be that the president or CEO made all the decisions
3.43 2016 on leases and real estate. Now companies must listen to, under-
Industrial/distribution 3.40 2015
3.18 2014
stand, and adapt to what employees want.
3.33 Canadas office segment will see millions of square feet in new
Multifamily 3.28
3.02
office space come on stream over the next couple of years.
Concerns over finding tenants for this new space vary across
3.31
the country, and the numbers tell the tale. According to two
Hotels 3.00
2.36 JLL reportsOffice Market Overview: Canada Second Quarter
2015 and The Canadian Quartet: Look Forward: Summer 2014
3.20
vacancy rates are up across the country, rising slightly in Toronto
Ofce 2.80
2.93 (5.7 to 7.3 percent) and Montreal (9.4 to 10.6 percent) and spik-
ing more sharply in Calgary (2.5 to 9.8 percent) and Vancouver
2.76
(5.9 to 10.4 percent). And while preleasing rates have improved
Retail 2.60
3.13 in Torontofrom 56 percent last year to 67.4 percent this year
they have dropped in Calgary (75 to 67.1 percent), Vancouver
Single family 3.29
(60 to 36.6 percent), and Montreal (58 to 43.8 percent).
1 2 3 4 5
Abysmal Poor Fair Good Excellent Industry players are particularly worried about the prospects
for the older properties left behind. Of chief concern is that
these older buildings are not well suited to the needs of the
modern workplace. Where once presidents and CEOs made
As single-family detached homes become increasingly unaf- office space decisions, today it is just as likely to be the human
fordable for many Canadians, respondents have noted that resources team. Private offices are shrinking to make way for
people are growing more comfortable with the idea of living in large, open collaborative spaces; bike racks and showers
smaller spaces. Demand is good, with both younger Canadians are needed more than parking spaces; sustainability, energy
and older retirees eager to purchase condos and embrace the efficiency, and multipurpose or outdoor spaces are becoming
urban-core lifestyle. The drivers for international investor interest must-haves. Older offices, designed with yesteryears work-

Exhibit 1-18 Downtown Class A Office Space, Second Quarter 2015
Space under construction Under construction,

(sq ft) percentage preleased Market vacancy rate
Toronto 3,602,655 67.4% 7.3%
Calgary 3,813,310 67.1% 9.8%
Vancouver 1,112,140 36.6% 10.4%
Montreal 1,358,780 43.8% 10.6%
Source: JLL, Canada Office Market Overview Q2 2015.
place needs and attitudes in mind, must be upgraded to stand little time or desire to handle the administrative side of their
a hope of competing. practices, so some property owners are stepping in and offering
administrative, technology, and other services to fill that need.
Alternative Property Types and Secondary Markets
With intense competition for top-tier properties limiting opportu- Senior Housing and Assisted Living
nities and putting pressure on yields, investors are searching the An aging population is also driving demand for retirement
market for overlooked or underserved niches. Shifting demo- homes and assisted living complexes. Despite the fact that
graphic and economic trends are driving interest in a number of some sizable Canadian REITs are focused on this market seg-
alternative property types. ment, the current senior housing market in Canada remains
highly fragmented among a number of smaller players, and
Health Care Real Estate some see opportunities for consolidation. The low Canadian
Health care as a real estate class is becoming more accepted dollar is also piquing foreign investors interest: Some U.S.
globally, and more dollars are being invested in health care real companies are already looking for acquisition opportunities in
estate entities. Quebec. Outstanding deals remain in short supply, however,
and cap rates remain low.
Investors are starting to pay much more attention to medical
office and health care real estate opportunities as aging, health- Respondents anticipate that baby boomers will upend tradi-
conscious baby boomers begin to fuel a sharp rise in demand tional thinking in this sector. Rather than gradually moving from
for health care services. While U.S. investors have backed a downsized home to an assisted living facility and then on to
health care developments for some time nowsome of the a full-care nursing home, some boomers may demand care
largest U.S. REITs focus on health careCanadians have been continuityand higher-quality carein a single location. The
slow to embrace the segment. problem is that much existing senior housing facilities can-
not accommodate such demands, which could open up new
Health care is seen by some respondents as an ideal defensive opportunities.
play. Demand for health care services is continually growing,
and rents are stable or rising. Not surprisingly, competition for Student Housing
attractive health care properties is increasing. Canadas growing student population needs affordable accom-
modation, and many universities are eager to offer guaranteed
Yet as governments and health care practitioners strive to con- housing as a selling point to prospective first-year students.
trol costs and improve efficiencies, the nature of health care real
estate is changing. The key trend is toward fewerbut larger The problem? Universities cannot afford to build the housing
medical offices. Individual doctors offices are increasingly a they so desperately want. In some cases, investors and devel-
thing of the past: more and more doctors are sharing spaces opers are stepping in to meet the demand. Pension funds and
and costs, and even co-locating with labs, walk-in clinics, and institutional investors have entered into joint ventures to build
other complementary health care services in the same building. new student housing properties. Elsewhere, developers have
converted hotels into student residences, capitalizing on the
This consolidation or concentration is giving property owners similarities between the layouts of the two kinds of properties.
the opportunity to provide additional services beyond traditional Student housing remains very much a niche market, however,
property management. Many health care professionals have and one that is sensitive to demographic shifts. Some respon-

dents are skeptical about its potential, citing the difficulty of not all about condos any longer: as many Canadians opt to rent,
achieving any sort of scale in the market. demand for rental apartments also is growing.
Suburbs await an exodus from the core. As it gets harder

Expected Best Bets for 2016 and harder to find affordable housing in Canadas urban cores,
Retail in mixed-use developments. Mixed-use projects com- frustrated homebuyers will start looking further afield. Investors
bining condominiums, offices, and retail space are still going and developers are keen to welcome them back to the suburbs.
strong in most Canadian urban centers. And as people continue
to move closer to the core (at least, those who can afford to),
demand for retail and other amenities is rising. Retailers are
eager to meet the demand with smaller, innovative store for-
matswhich bodes well for developers with space to lease.
Destination retail remains a solid play. While the need for

retail in the new core developments gets much of the attention,
respondents also see strong opportunity in destination retail.
Consumers eager for a bargainor an outstanding shopping
experiencehave proved more than willing to make the trip to
outlet malls and regional shopping centers.
Eastern Canada industrial property, especially distribution.

The growth of e-commerce and shifting consumer behaviors
is compelling companies to improve their supply chains and
achieve ever-shorter delivery times. As a result, demand for
industrial buildings and land that is suited for distribution centers
is rising, particularly in eastern Canada. Suburban properties
and industrial campus developments are attracting investor
interest, since moving away from the urban center provides
better transportation access.
Redevelopment of older properties. Respondents expect to

see significant investment in the redevelopment of older build-
ings in the years to come. Companies are eager to upgrade
their properties to keep pace with new developments coming
on stream, to address tenant demands, and to capitalize on the
trend toward multi-use building in the urban core.
In the west, bargain hunters are on the prowl. Investors will

be keeping a keen eye on companies whose exposure to west-
ern Canadian real estate puts them at risk. We may see more
consolidation among REITs, as well as more activity by inves-
tors keen to acquire valuable assets at a discount by targeting
troubled REITs and other companies.
Condos and rental apartments are still a good bet. The mar-
ket for condominiums remains solid in many parts of the country,
particularly in Greater Vancouver and the Greater Toronto Area,
especially as single-family home prices continue to rise. Yet its

Chapter 2: Coordinating Offense and Defense in 2016
Coordinating Offense and Defense in 2016

You can never forget about cycles, but the next 24 months look
doggone good for real estate.
Every major college and NFL football team sees its game plan
Exhibit 2-2 Emerging Trends Barometer 2016
shaped by its offensive and defensive coordinators, working in
concert with the head coach. The coordinators are expected
to have both technical and strategic skills, the ability to work excellent
under pressure, and the capacity to adjust to rapidly changing
Sell Hold
conditions. good
Buy
For the offense, the coordinator is charged with marshalling the
teams resources to maximize opportunities and to translate
fair
them into points on the road to victory. For the defense, the
coordinator is constantly assessing risks, both before and dur- poor
ing the game, and countering them. In limiting the competitions
advantages, the defensive coordinator seeks to put his team abysmal
in the best position on the field by managing adversity and,
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Exhibit 2-1 U.S. Real Estate Returns and Economic Growth Note: Based on U.S. respondents only.
GDP NAREIT as much as possible, turning an opponents risk taking into an

40% NCREIF total 5%
NCREIF
expected return
opportunity for his own squad.
30% 8.0
3% For real estate, 2016 will see investors, developers, lenders,
20%
users, and service firms relying upon intense and sophisticated
Index change
10%
GDP change
1% coordination of both their offensive and defensive game plans.

0% In an ever more competitive environment, with well-capitalized
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016*
1% players crowding the field, disciplined attention to strategy and
10%
NAREIT total to execution is critical to success.
expected return
20% 7.0
3%
30% A lending officer at a large financial institution said, You can
never forget about cycles, but the next 24 months look doggone
40% 5%
good for real estate. At the same time, as one senior capital
Sources: NCREIF, NAREIT, Bureau of Economic Analysis/U.S. Department of Commerce,
World Economic Outlook, Emerging Trends in Real Estate 2016 survey.
markets executive said, The first 15 minutes of any committee
* GDP forecasts are from World Economic Outlook. discussion is on the potential risk in the deal. Weve learned
Note: NCREIF/NAREIT data for 2015 are annualized as of first-quarter 2015. Forecasts for some lessons in the not-too-distant past.
2016 are based on the Emerging Trends in Real Estate 2016 survey.

Real estate has become ever more dynamic as it adapts to a
Exhibit 2-3 Firm Profitability Prospects for 2016
networked world. Everything is connected to everything else, so
market participants cannot afford to ignore developments well
100%
beyond the property markets themselves. The major forces of
Modestly poormodestly good globalization, technology, urbanization, and demography are
80% constantly interacting with each other. A lapse of attention or a
Percentage of respondents
misstep in execution can result in being blindsided, foiling even

60% a well-considered plan of action.
Goodexcellent
Because of this, it is important to understand that none of the

40%
trends we identify and discuss should be considered in isola-
tion. The Keep It Simple, Stupid rule has its strengths, but
20% only if it also recognizes that a complex world punishes any
Abysmalpoor
overly rigid approach to change in the markets. In business,
0% as in biology, adaptation is the key to survival and competi-
2010 2011 2012 2013 2014 2015 2016 tive advantage.
Exhibit 2-4 Real Estate Business Prospects
4.02 2016 3.67 2016

3.91 2015 3.72 2015
Real estate brokers 3.62 2014 REITs 3.42 2014
3.21 2013 3.46 2013
2.95 2012 3.27 2012
3.98
3.86 3.61
Private real estate 3.52
owners/developers 3.18 Insurance company 3.63
real estate lenders 3.51
2.84 3.32
3.22
Institutional real
estate owners/ 3.85
developers
3.61
3.81 3.59
3.76 Real estate consultants 3.33
Real estate 3.46 2.87
investment managers 3.18 2.67
3.02
3.80 3.55
3.72
Commercial builders 3.68 Commercial bank 3.57
3.49 real estate lenders 3.43
3.04
3.14 2.76
3.70
3.62 3.52
Homebuilders/residential 3.56
land developers 2.64 3.45
CMBS lenders/issuers 3.29
1.66 2.74
2.44
3.67
3.62
Architects/designers 3.27 Property managers 3.44
2.49
2.09
1 2 3 4 5 1 2 3 4 5
Abysmal Poor Fair Good Excellent Abysmal Poor Fair Good Excellent

Exhibit 2-5 Survey Market Outlook Change, 2010 to 2016
y
au
rse
Sa ork y, CA
t. P
th
Je
Bo se m
Ho r n V C
or
/S
D
a
o
y
Y nt
ic a e w
s ti t W
n J ur h
rtl isc
sA R
n D Cit
r t h n,
iam lis
lei e s
us A
u
L o n d, O
Ch r n N
i
N o n g to
N e e Co
A u / For
W n to n
P h ie g o
M a po
Po a n c
R a g el
S a h/ D
Sa ille
S e te
N o on
go
M ix
ot
Na r
n
De a
n
le
e
e
o
r
n
n
i
e
v
e
s
hi
g
a
t
nA
t
s to
r th
nF
a rl
inn
sh
la n
at t
oe
nv
lla
an
as
Ch
Da
Sa
Or
At
1
4
7
10
13
16
19
22
25
28
2016
31
2010
34
37
40 2016 Top 20 Notable others
So as we discuss the top trends for 2016, we will be empha- compression, and so provide an opportunity for superior yields.
sizing granularity, the weaving together of several strands of Investors themselves are demonstrating greater risk tolerance,
change, and the continuing capacity of the economy and the moving gradually from defense to offense as their playing field
real estate markets to surprise by their flexibility, resilience, and position improves. And, lastly, the inexorable expansion of data
innovation as both local and macro forces compel ever-greater availability has generated more confidence that decisions about
open-mindedness about the future. secondary market opportunities can be grounded in good
statistical evidence.
1. 18-Hour Cities 2.0
The 18-hour cities have been consistently making headway in
Last year, Emerging Trends identified the rise of the 18-hour city. replicating pieces of what makes the gateway cities so attrac-
This year, the real estate industry is expressing growing confi- tive. The development and application of technology make it
dence in the potential investment returns in these markets. We possible for these markets to offer the benefits of a larger urban
are finding a tangible desire to place a rising share of investment area at a significantly lower cost. In addition, a number of the
capital in attractive markets outside the 24-hour gateway cities. markets in the top 20 rankings of this years survey are consis-
tently tagged as cool markets that are expanding on their own
Global as well as domestic investors are casting wider nets as unique culture.
they look at U.S. real estate markets. One such investor, at a
large international institution, marveled at the number of second- Should the market be concerned that this wider investor interest
ary markets that are suddenly hip. Austin, Denver, San Diego, could diminish in the face of a downturn? Although 18-hour
and San Antonio are examples, and rightly so. They rank in cities and all higher-growth markets have historically been more
the top ten markets for entrepreneurship in the 2015 Kauffman volatile than their gateway counterparts, there are factors that
Foundation study, and all four are in Emerging Trends 2016s list could diminish the volatility going forward. During the current
of top 20 markets for real estate investment and development. economic expansion, the capital markets have demonstrated a
much greater degree of restraint when it comes to funding new
What supports this trend? To start, strengthening U.S. macro- development. So the 18-hour cities face lower-than-average
economic performance is bolstering absorption and improving supply pressure, compared with history. Investors, meanwhile,
occupancy in the majority of American real estate markets. have become more sophisticated. And the greater information
Secondly, the 18-hour cities have seen more moderate cap-rate across all markets, mentioned above, allows investors to have

Exhibit 2-6 Change in Value, by Market Category and Property Type, 12 months through June 2015
Major Nonmajor
30%
26.9%
25%
20%
18.2%
16.8%
15.0%
15% 13.5%
13.0% 13.4%
12.1% 11.7%
10%
6.9%
5%
0%
Apartment Industrial Retail CBD ofce Suburban ofce
Sources: Moodys and Real Capital Analytics.
a laser focus on their investment, focused on more precisely Many feel that time is on the suburbs side. They argue that the
defined areas and asset characteristics within a submarket or deferral of marriage and family formation by millennials, and the
neighborhood. The belief that anywhere in the market is good related preference for downtown living in denser, more active
is likely a thing of the past. mating markets, is just that: deferral. Eventually, the logic goes,
generation Y will follow the baby boomers path and head to the
An ever-restless search for returns persists, and deals are suburbs in the child-rearing years. That may very well be, and
framed on a risk/reward matrix. As an executive with a private numbers are on the side of that argument as well. Survey results
equity investor explained in his interview, In Nashville, we from ULI earlier in 2015 show that a smaller number of millen-
bought an office building for a 7.25 cap. We plan to redo the nials prefer to live in the city than currently do and, conversely,
lobby, roll the leases to market, hold for four years, and then sell. a larger number of millennials prefer to live in the suburbs than
Nashville is a strong secondary market with some risk, but the currently do. Another ULI survey shows that six out of ten gen-Y
price was much more reasonable than core assets in primary respondents expect to live in a detached single-family home
markets. Thats an 18-hour city story, a deal that works in a five years from now (although these results did not specifically
vibrant downtown that is drawing residents and businesses indicate location). It should be pointed out that, overall, there is
to the core. a slightly larger group of millennials who ultimately prefer city
living (37 percent) to suburban living (29 percent), but the gap
Going forward, this trend should intensify. More capital is avail- between the two locations is expected to be smaller than cur-
able than a handful of 24-hour markets can absorb. rent location patterns (46 percent and 24 percent, respectively).
There is enough of this 80 millionplus generation intending to
relocate to the suburbs to make an impact.
2. Next Stop: the Suburbs . . . What Is a
Suburb? An economist with a national real estate data firm observed,
The suburbs are a long way from dead, said one interviewee however, that this group wont move to the suburbs of their
emphatically. Another industry veteran counseled, There are parents. The attractive suburbs will be more like the airline hub-
only about ten dynamic downtowns in the county; the rest of the and-spoke model. These diet urban locations will offer urban
areas, people are in the suburbs. As prices have risen in the and suburban benefits. The critical descriptors seem to be sub-
core gateway markets, it is apparent that a fresh look at subur- urbs that are close-in, transit-oriented, and mixed-use. A 2015
ban opportunities is gaining favor. National Association of Realtors/Portland State University study

Exhibit 2-7 Current and Desired LocationCities, Suburbs, Rural/Small Towns, by Generation
Cities 46% Current Desired
36% 37% 36%
29% 30%
28%
24% 23%
22%
Total Millennials Gen Xers Baby boomers War/silent
Suburbs Current Desired

29% 30%
27% 27% 28%
26% 25% 25%
24% 24%
Rural/small towns Current Desired 51%

49%
46%
44%
42%
38% 39%
37%
32%
30%

Source: Urban Land Institute: America in 2015: A ULI Survey of Views on Housing, Transportation, and Community, 2015.
Note: Response to America in 2015 survey question: If you could live anyplace in the next five years, would it be a rural area, a small town, a medium-sized
city, a big city, a suburb within a 20-minute drive of a city, a suburb farther than a 20-minute drive to a city, or something else?
Exhibit 2-8 Current Location of Millennials within Cities
Downtown/ 27%
near downtown
Other city 73%
neighborhoods
0% 10% 20% 30% 40% 50% 60% 70% 80%
Source: UDR/Lachman Associates Survey, Gen Y and Housing, Urban Land Institute, November 2014.

Exhibit 2-9 Detail of Current and Desired City LocationMedium-Sized vs. Big City, by Generation
100%
90%
80% 39%
54% 53%
48%
70% 53% 59% 65% Medium-sized city
70%
60%
Big city
50%
40%
61%
30%
46% 52% 47%
20% 47% 41%
35%
30%
10%
0%
Current Desired Current Desired Current Desired Current Desired
Millennials Gen Xers Baby boomers War/silent
Note: Drawn from response to America in 2015 survey question: If you could live anyplace in the next five years, would it be a rural area, a small town, a medium-sized city, a big city,
a suburb within a 20-minute drive of a city, a suburb farther than a 20-minute drive to a city, or something else?
Exhibit 2-10 Detail of Current and Desired Suburban LocationSuburbs within 20 Minutes vs. Farther Than
20 Minutes from City, by Generation
100%
90%
80%
70% Suburbs within

68% 76% 20 minutes of city
70% 76% 81% 78%
60% 79% 81% Suburbs farther than
20 minutes from city
50%
40%
30%
20%
30% 32%
24% 24% 22%
10% 21% 19% 19%
0%
Current Desired Current Desired Current Desired Current Desired
Millennials Gen Xers Baby boomers War/silent
Note: Drawn from response to America in 2015 survey question: If you could live anyplace in the next five years, would it be a rural area, a small town, a medium-sized city, a big city,
a suburb within a 20-minute drive of a city, a suburb farther than a 20-minute drive to a city, or something else?

found that millennials prefer walking over driving by 12 percent- As in all real estate discussions, location matters and general-
age points (see trend 7). One investment manager said that izations based on U.S. averages are less relevant. Where the
transportation, not affordability or schools will be the key driver jobs are growing will shape the trend of residential choices over
in a world where two-income households are the social norm. time. It would be a mistake to paint that trend with too broad a
brush. But the suburbs may adopt Mark Twains legendary com-
So, how do these cross currents sort themselves out? ment that reports of his death were greatly exaggerated.
The interaction between jobs and homes is the dynamic that

must be carefully understood. Since 2002, job growth (in annual
3. Offices: Barometer of Change
percentage terms) has been higher in the core than the periph- On the subject of jobs, the office sector has been benefiting
ery in the majority of top 40 U.S. metropolitan areas. That trend from the strengthening employment numbers in this maturing
accelerated during the Great Recession and in the immediate recovery. Employment is up by more than 2.9 million year-over-
post-recession years. This was true for the usual suspects like year, as it has been since late 2014, and the July growth rate
New York City and San Francisco. But it was also true for Austin, for jobs was a solid 2.1 percent. Job gains have now spread to
Charlotte, Nashville, and Portland, and for cities like Hartford, the vast majority of metro areas, with New York/Northern New
Milwaukee, Philadelphia, Pittsburgh, and Oklahoma City as well. Jersey (168,900), Los Angeles (152,000), and Dallas/Fort Worth
And access to these expanding employment opportunities is (117,800) leading in absolute change, and only a few metro
one of the keys to suburbs with future growth potential. areas registering moderate decreases.
Still, the suburbs, obviously, are not starting from scratch. Even With office-using jobs, as tallied by a national brokerage firm,
in the big metro areas, suburbs represent a major share of the accounting for 39 percent of the employment gain, both central
existing jobs base. In the top 40 metro areas, 84 percent of business district (CBD) and suburban office absorption has
all jobs are outside the center-city core. That is the basis for been brisk, bringing vacancy down 90 basis points and rents
optimism for the suburban future. The configuration (and recon- up 2.9 percent year-over-year. The outlook for the year ahead is
figuration) of suburban commercial real estate will play a role in more of the same.
building on the existing employment base.
Redesign of office space to do away with walls and cubicles
And the configuration of the suburbs is not standing still. More and the rethinking of work that goes along with itremain
suburban downtowns are densifying, especially if they have prominent in the minds of our interviewees. It is no longer an
a 20-minute transportation link to center-city jobs, Main Street issue of overall space per employee compression. Some see
shopping, and their own employment generators. These sub- the redesign as a way to accommodate an alteration in work
urbs exhibit many of the attributes of an 18-hour city. These are style itself; others view it as a workforce capture toolkey
typically in metro areas where close-in suburbs can both access to attracting and keeping the desired talent; and for others,
center-city job growth and act as employment nodes in their its both. And hip, cool open spaces are not just for startups.
own right. And they have the advantage of being less costly Corporate space is accommodating a mix of open areas and
than the densest coastal markets. Three out of four millennials a variety of private or semiprivate configurations.
preferred such close-in (within 20 minutes of the city) locations
if they considered suburban choices. Interestingly, one veteran of the insurance industry remarked,
Insurance companies, decades ago, had these big open
In Texas, San Antonio joins Dallas and Houston in suburban- offices with desks next to each other. The floor plan was like
dominated job growth. San Diego and Phoenix are in this club 100,000 square feet, with big signs that hung from the ceiling
as well. Denvers growth marginally favors its suburbs. And that said Area 1-J or Area 3. It was old-school: they had the
even in cities like Chicago, which has been seeing a trend of regular employee dining room and the officers dining room, but
corporate in-migration from suburb to center, suburban offices in both cases employees could get lunch for free. I just went to a
have been marking positive absorption and a slow but measur- social media companys building in San Francisco. It reminded
able decline in vacancies. Granularity trumps generalizing in me that whats old is new again: open space and a cafeteria
the discussion of the future of suburbs, as it does in other trends where lunch is free.
discussed in this report.
Entrepreneurial businessesoften seen as the key to a vibrant
local economyurban or suburban, also are contributing to
changes in office space, as startups have special space needs.

++6C
Angeles, Chicago, D.C., San Francisco, Miami, Dallas, and
Exhibit 2-11 Share of Job Growth by Company Size,
Austin also are target markets for coworking. There are niche
since 2013
players focusing on health care technology, engineering and
1,000+ design, women-owned businesses, and even entrepreneurs
focused on social and environmental causes. Depending upon
500 to 999 1 to 49 the specialization, amenities range from conference rooms, to
9.8% car-sharing memberships, to three-dimensional printer access.
6.0% The range of innovation and experimentation is impressive.
Traditional landlords have embraced the coworking enterprises

46.5% up to now. Not only do these firms represent immediate market
demand for office space, but some see them as the private sec-
tor laboratory for incubator space that hitherto depended on
public or institutional subsidies for the most part.
Number of
employees 37.8%
Emerging Trends interviewees did have some reservations
about jumping on the bandwagon, however. Skeptics included
50 to 499
a prominent academic and consultant who looked at the sharing
membership model and told us, Do I want to be a tenant in a
Sources: U.S. Bureau of Labor Statistics; Moodys Analytics, as of June 30, 2014. building where you have 30,000 members who can just drop by
and use the space? Forget about this space taken separately;
This is a significant opportunity for the office market, with the think about the rest of the tenants. . . . I dont know what office
U.S. Government Accountability Office estimating the contin- building youve been in lately, but you dont just stop by the
gent workforce (self-employed and unincorporated workers) at modern office building post-9/11, security-wise.
8 percent of the workforce, or 11 million jobs.
Perhaps. But the real estate market seems to be figuring out
Coworking space firms have been actively providing for this issues like that. And, meanwhile, coworking spaces are not gen-
emerging element of office workers. Computer coders, business erating the same kind of regulatory push-back as the apps for
consultants, lawyers, and other knowledge workers are among ride sharing and room sharing. In the coworking spaces, then,
those taking on space through coworking venues, which have we have entrepreneurial innovation matched up with industry
become a major office leasing force in some large markets. This acceptance and at least a benign noninterference from public
spreads across the geography of the United States. regulators. Is this a small part of the real estate industry future?
Probably. Will it be growing? Most assuredly. One more reason
Entrepreneurs and so-called gig workers are the customer well see changes in office space? For sure.
mainstays for such tenants companies. The business model
for coworking companies, incredibly, is based upon levering up Altogether, the speed at which all these changes appear to be
the price of conventional office space, even in such expensive taking place is reflected in interviewees unusually frequent men-
markets as Manhattanwhich has the highest concentration of tion of repositioning and reuse of existing assets.
coworking firms of any office market. The coworking sponsor
leases space from the primary landlord, and then subleases
by the desk, the private office, or the suite at a premium, while 4. A Housing Option for Everyone
providing a menu of amenities and the promise of collaboration If the work component of live/work/play is evolving, so is the
and synergy, as well as a more professional environment than a live elementhousing. We normally think of change in terms
wi-fienabled coffee shop. of trends or cycles. Sometimes, we acknowledge patterns of
maturation. But the global financial crisis began with disruptive
There is, of course, risk in the fixed obligation of the basic change in the bursting of the housing bubble, which, in turn, has
lease, but the reported operating margin for coworking firms been sorting itself out in a change of state whereby homeown-
is reported to be about 30 percent and their growth trajectory ership is pulling back from the nearly 70 percent of households
has been spectacular. In the New York area, such firms have seen at the extreme of the bubble to 63.4 percent in the second
branched out into Brooklyn and Hoboken, New Jersey. Los quarter of 2015.

Exhibit 2-12 Decline in U.S. Homeownership, 1994 to Present, by Generation
95%
85% 82.4% 81.8%

77.4%
75% 70.1% 78.5%
69.2% 75.4%
65% 69.9%
High
63.4%
Current
55% 58.0%
43.6%
45%
35%
34.8%
25%
Total Under 35 35 to 44 45 to 54 55 to 64 65 and older
Source: U.S. Census Bureau, Table 19: Homeownership Rates by Age of Householder: 1994 to Present.
As the market sorts itself out, a reasonable expectation is for Housing is a field where it pays to look under the equator. By
the homeownership rate to settle in a narrow range around its that, we mean that the tendency of analysts (as well as investors
50-year average of 65 percent. In the short run, that means the and developers) to focus on averages or medians can gravely
advantage remains with investors and developers in the rental miss key statistical points that can illuminate both opportunities
housing sector. Over the longer haul, though, it means that and risks in the marketplace. The impact of big data on real
housing demand will be greater across all residential segments. estate should improve the situation, but only if the data are used
to the fullest. Superior profit potential has skewed recent hous-
Economic and demographic factors are influencing the housing ing production toward the luxury end of product. What is not so
market as it deals with issues around providing the type of hous- obvious is that a shortfall of supply in the mid-to-lower end of the
ing desired by the peak of the baby boom generation, aging residential market is putting upward pressure on pricing for such
millennials, a population making an urban/suburban choice, and units, exacerbating already severe affordability issues.
finding a way to provide affordable housing to support a vibrant
workforce. Affordable and workforce housing is ranked higher in impor-
tance in Emerging Trends surveys this year than in the last five
Cohousing solutions, micro housing, and other design trends years, and the Issues to Watch section later in this chapter
are addressing some of the scarcity and lifestyle issues shaping looks at some looming regulatory issues of concern to the indus-
household preferences. One company, for example, is target- try. The pressures already exist, and are building. Since housing
ing an age segment as young as the late 40s, who may want affects everyone, it is no wonder that voters will be pushing poli-
community amenities like catered meals, happy hours, shared ticians for action. Creative ideas, though, will likely depend upon
recreationand who might become the market for more senior- the real estate sectors savvy if they are going to be effective.
oriented facilities in later decades of life. We see a trend toward
greater diversity in demand and supply across different sectors Getting ahead of the pressures would be a salutary trend for the
of the housing market, not to mention the migration of hous- industry. Elements of success would mean developing housing
ing styles from one target market to another. An example is the products targeted to a variety of income-range cohorts. Some
expansion of the student housing model of renting by the bed would be rental, some ownership, some rent-to-own. Sharp
being applied to a nonstudent market. The concept of renting pencils will be needed to delineate the amounts and the form of
your own bedroom and bathroom in a group setting may well government supports. Tax credits, flexible zoning, public/private
appeal to millennials even after they have graduated. finance tools, and land trusts are all possible avenues to be
explored. Developing improved housing options for everyone,

however, is passing from the realm of nice to do to must do.
Exhibit 2-14 Importance of Issues for Real Estate in 2016
Thats going to be shaping the housing trends going forward.
1 2 3 4 5
5. Parking for Change No Little Moderate
importance importance importance
Considerable Great
importance importance
Should we be phasing out parking lots and parking structures
Economic/nancial issues
even before the widespread adoption of the autonomous
Job growth 4.56
vehicle (a.k.a., the driverless car)? Miles traveled by car for
Income and wage growth 4.10
those people 34 years old or younger are down 23 percent. The
American Automobile Association reports that the percentage Interest rates 3.95
of high school seniors with drivers licenses declined from 85 Global economic growth 3.53
percent to 73 percent between 1996 and 2010, with federal data Tax policies 3.44
suggesting that the decline has continued since 2010. The new Ination 3.38
Yankee Stadium, built in 2008, provided 9,000 parking slots for Strength of U.S. dollar 3.33
its 50,000 seating capacity. But that has turned out to be too New federal nancial regulations 3.24
many, since most fans come by mass transit, and the parking Energy prices 3.13
structure is left at just 43 percent occupancy. State and local budget problems 3.05
Federal scal decits/imbalances 2.94
Many interlocking trends come into play where parking is
concerned. The automobile shaped cities and suburbs, influ-
Social/political issues
enced building and zone codes, and helped form the psyche
of a couple of generations after the end of World War II. Siting Terrorism/war 3.37
real estate development often involved identifying not only the Lack of qualied workers 3.32
nearest freeway cloverleaf, but even whether a right or left turn Political gridlock 3.16
from the access street was needed. Was land so dear that Federal government actions 3.14
structured parking was a required solution, or could acres be Immigration 3.13
devoted to striped asphalt for shoppers or workers? How many Rising cost of education 3.00
spaces per residential unit? How many per 1,000 square feet Social equity/inequality 2.84
of commercial space? Regional/global epidemic 2.80
And now, in an era of change, whats next?

Real estate/development issues
Construction costs 4.13
Land costs 4.03
Exhibit 2-13 Automobile Drivers, as a Percentage of Infrastructure funding/development 3.83
All Commuters Vacancy rates 3.78
Transportation funding 3.57
90% Renancing 3.51
87.9%
86.5% 86.7% 86.3%
85.8% Affordable/workforce housing 3.30
85% 84.1%
Future home prices 3.26
NIMBYism 3.22
80%
77.7% State and local water regulations 3.20
Increasing water conservation 3.19
75%
CMBS capital availability 3.14
Deleveraging 2.99
70%
Sustainable buildings 2.84
Wellness/health features in buildings 2.82
65% 64.0%
Risks from extreme weather 2.61
60% 1 2 3 4 5
1960 1970 1980 1990 2000 2006 2010 2013
Sources: U.S. Census Bureau, 19602000; American Community Survey, 20062013.

Climate Change and Real Estate

Are the risks recognized? may shift: 26 percent of Emerging Trends respondents report
This years Emerging Trends in Real Estate survey reveals a ten-year or longer time horizon for investing, compared with
the real estate industrys lukewarm opinions on how climate 16 percent last year. Another hypothesis for these results is
changeor government actions to address itmight affect the perception that climate change requires collective action
their business. Compared with their thoughts on issues like at a significant scale.
job growth and construction costs, respondents placed
much less importance on the risks of extreme weather, Industry is responding.
energy prices, sustainable buildings, water conservation, Some industry stakeholders are beginning to incorporate
and water regulations (see exhibit 2-14). resilience thinking and adaptation measures into their busi-
nesses.When Emerging Trends respondents were asked
Regarding extreme weather (which ranked lowest), data from
what measures, if any, they were taking to address risks
the National Oceanic and Atmospheric Administration reveal
posed by extreme weather, several key strategies rose
that 178 $1 billion weather disastersincluding droughts,
to the top:
wildfires, hurricanes, floods, and winter stormsoccurred
from 1980 to 2014. The average event cost $5.8 billion, much Installing backup and on-site power;
of that directly to property, while losses in other sectors (e.g.,
agriculture and tourism) clearly ripple to affect real estate. Investing in higher-quality construction to withstand risks
The science is clear on the upward trend of disasters like (often above code);
these, given rising global temperatures, changes in rainfall, Avoiding construction in high-risk areas;
and warming oceans.
Conducting risk assessments that incorporate severe
Alarmed by these impacts, the public sector is responding. weather impacts;
California, for instance, has adopted strict water conserva-
Securing enhanced insurance; and
tion measures in the face of historic drought. With them, golf
courses and swimming pools become difficult amenities to Developing emergency management, disaster recovery,
maintain, while efficient building features become impera- and contingency plans.
tives. Motivated to address not just climate change effects,
but also their cause, more than 30 U.S. jurisdictions have Cities see things differently.
passed energy benchmarking or disclosure laws, echo- To compare Emerging Trends respondents perspectives
ing the approach of ULIs Greenprint Center for Building with those of city leaders, we collaborated with CDPan
Performance. And numerous cities have incorporated LEED- organization that works to transform the way the world does
like standards into their green building codes, making them business to prevent dangerous climate change and protect
mandatory. These measures and otherslike the presidents natural resources. CDP uses measurement, transparency,
Clean Power Planshould dramatically increase demand for and accountability todrive positive change in the world of
greener buildings, and may even affect energy prices. business and investment, and holds the worlds largest col-
lection of self-reported climate change, water, and forest-risk
Why this difference in rankings? data from cities and companies.
Perhaps these issues are obvious, and are already being con-
Risks are recognized. Forty-six U.S. jurisdictionsfrom
sidered? (Emerging Trends interviewees indicated that many
New York City and San Francisco to Aspen, Colorado, and
see LEED measures as second nature, for example.) Or
Arlington County, Virginiapublicly disclosed responses to
maybe it is simply a matter of mismatched timescaleswith
CDPs 2015 information request. CDPs data reveal that many
climate change impacts perceived as beyond the investment
U.S. cities recognize significant risks from climate change:
horizon for most real estate projects? Attitudes on that front

91 percent said that current and/or anticipated effects of strategies that reduce climate-changing carbon emissions
climate change present a significant risk to their city; and help buffer climate-induced extreme weather also make
cities healthier and wealthier, making them more attractive
87 percent said their cities face social risks as a result of
to employers and residents. Or, as Austin, Texas, noted in
climate change (including the loss of traditional jobs);
response to CDPs 2015 information request: By reduc-
76 percent said that the effects of climate change could ing greenhouse gas emissions and better managing water
threaten the ability of businesses to operate successfully resources, we will also have cleaner creeks, less air pollution,
in their city; and and other ancillary benefits.
74 percent said they foresee substantive risks to their citys A number of the cities that ranked in the top 20 in the
water supply in the short or long term. Emerging Trends survey (see chapter 4) were those asked
Of the 245 expected climate change effects disclosed by by CDP about their strategies for reducing climate change
these cities, 58 percent were deemed current or short-term. related risks. These include the following:
The public sector takes action. Cities dont just see these City Strategies to Reduce Climate ChangeRelated
challenges; they are acting to address them. Many of their Risks to Infrastructure, Citizens, and Business
strategies could have impacts on real estate, including the
following: Atlanta Creating incentives for water-efficient equip-
ment and appliances to lessen the risk of more
Addressing energy use Addressing water risks intense droughts.
Setting citywide green- Water use restrictions Austin Setting a 140-gallon-per-capita daily water goal
house gas (GHG) reduction and revising the water conservation code to
targets address long-term drought conditions.
Setting citywide renew- Water conservation Denver Developing a recycled-water program that uses
able energy and electricity incentives treated wastewater for irrigation and other non-
targets potable uses to combat water scarcity.
Taking specific actions to Water metering New York Published A Stronger, More Resilient New York,
reduce GHG emissions which led to the passage of more than a dozen
Stormwater manage-
from the building sector via: new laws to make new construction in the
ment, including fees or
Building codes and floodplain more resilient to increasingly strong
ordinances, or green infra-
standards storms and associated flooding.
structure incentives
Building performance Phoenix Increasing the tree canopy from 9 percent to 25
Use of nonpotable water
rating and reporting percent to counteract the effect of hotter summers.
inside (e.g., via permitting
Energy efficiency and graywater systems) Seattle Providing incentives and technical assistance
retrofitting*
Use of nonpotable for green roofs to absorb more intense rainfall.
On-site renewable energy
water outside (e.g., for
generation*
landscaping)
*Including through codes Disclosure about risks (and actions to address threats) provides
and incentives the real estate industry with important transparency around
market conditions; it can help cities and businesses align their
efforts to address climate change together; and it helps asset
Top markets move to increase resilience. Municipal owners in developing strategies for their own portfolios.
leaders are acting for many reasons, and some of the very

The urbanization trend and gen-Y preferences already are 6. Infrastructure: Network It! Brand It!
suggesting that existing parking represents a suboptimal use of
The U.S. is losing the battle globally, when it comes to infra-
land. In both 24-hour cities and 18-hour cities, that is foment-
structure, complained one investment manager interviewed this
ing change. In the highly dense San Francisco market, a pilot
year. What is our problem?
program is using variable, demand-responsive fees for both
metered and garage parking. In Minneapolis, the traditional
The conventional approach to infrastructure improvement is
one-parking-spot-per-unit rule is giving way to a zero-parking
utterly disheartening. The most recent (2013) American Society
requirement for small (i.e., with fewer than 50 units) apartment
of Civil Engineers (ASCE) Infrastructure Report Card give the
developments and a 50 percent reduction in required parking
United States a grade of D+. At present, state-by-state updating
for larger buildings outside downtown, provided they are within
is going on, and the results are not showing much improve-
a quarter-mile of mass transit running at 15-minute frequencies
ment. Arizona rates a C, as does Georgia. ASCE scores Utah
or greater. Seattle has a new apartment development with a
a bit better at C+, but Illinois, Iowa, and Virginia get only a C.
walk score of 98 (walkers paradise level) with little parking
And none of these states is in the oldest region of the nation
to start with, but even that little amount is thought to provide
the New England/Mid-Atlantic corridoror the heart of the
excess capacity.
factory belt in Ohio and Michigan. The ASCE estimate of $3.6
trillion in infrastructure spending needed by 2020 seems way,
And in Los Angeles, the avatar of the automobile-oriented city,
way out of reach.
development consultants are thinking about the citys expanding
mass transit. If there is a transit line coming, how do you think
Clearly, there is a lot of need to play defense, to prioritize urgent
about parking in the short run, and can the parking structure be
repair and maintenance, and to tackle critical needs in areas
reused for something later? We are looking at a project right now
like water supply and distribution, aviation, highway bottlenecks
where there will be an extension of one of the train/subway lines,
and rail safety. With voters in many parts of the country loathe
but it could be ten to 15 years away. So youre going to have to
to approve local and state bond issues, public financing is a
build the parking structure, but maybe there is a way to build the
tough sell. Yet it can be done, as Colorado has demonstrated
parking structure where it can convert to something else in the
in passing bond referendums repeatedly, and as the state of
future. In the inner-ring Washington, D.C., suburb of Bethesda,
Washington is now doing to address its transportation needs.
Maryland, surface parking lots in business parks are already
giving way to mixed-use developments with an emphasis on
Many have put hope in public/private partnerships and in vehicles
multifamily housing.
like infrastructure real estate investment trusts (REITs). But the
REIT market has focused more on clearly commercial assets, like
Even if we still have a ways to go before we reach the point
cellphone towers, energy pipelines, transmission networks, and
where we forget that the gas is on the right and the brake is on
solar generation than on roads, dams, bridges, and hazardous
the left, we will be seeing change trending in the parking pat-
waste disposal. So public moneywhere availableneeds to go
terns of real estate developments. How cool would it be, that
almost exclusively to urgent needs, rather than toward important
development consultant mused, if I looked out my window and
future needs.
saw a park instead of a parking lot?
Nevertheless, some creative plans are shifting toward playing

With lowering the overall cost of construction ranked the
offense. High-frequency bus networks, for instance, provide
number-two issue of importance in the Emerging Trends in Real
greater transit capacity with superior flexibility and lower cost
Estate 2016 survey, it is easy to see why a Jetsons-like future is
than fixed-rail operationsespecially in less dense cities.
capturing the industrys imagination. Years away is the con-
Bus rapid transit is often effectively connected to other transit
sensus of our interviewees, but this is an emerging trend caught
modes such as rail stations or park-and-ride hubs. Minneapolis,
in its early stages.
Portland (Oregon), Omaha, and Austin have installed high-
frequency systems, and Columbus (Ohio), Houston, and Los
It may seem far-fetched, but the pace of technological change
Angeles have plans in the works.
and the consumers willingness to adopt and adapt suggest that
the future may come faster than many expect. For this trend,
The private sector has stepped up as well, as one private equity
call the offensive coordinator and figure out the best way to get
manager noted, The tech firms are providing bus service, paying
down the field.
some of the costs of freeway exits, even investing in educational

facilities. Thats not purely charity. The idea is helping to better Small potatoes, some might think. While it is true that fruits,
conditions that attract and retain productive employees. vegetables, and products like honey grown in urban envi-
ronments are no threat to large-scale agribusiness, there is
With traffic congestion costing U.S. businesses and individu- surprising scale to a number of operations. New York City is
als $124 billion per year and with interest in shorter commutes home to one operation that produces more than 300 tons of
and general walkability growing, here is where infrastructure vegetables in three hydroponic operations in Brooklyn and
improvement meets the 18-hour city and the densifying suburb. Queens. In Chicago, a local business has grown its output
Places that address this intersection well will trend upward. to about a million pounds of salad greens and herbs, and
Places that dont will be competitively disadvantaged. And with contracts with four dozen upscale supermarkets. Detroits com-
a denser network of transit, soaring land costs around transit munity and commercial farming operations brought 400,000
nodes can be mitigated, with multiplier effects on reducing pounds of food to market in 2014. The term locavore has entered
housing and commercial property development costs as well. the vocabulary of the cuisine cognoscenti.
Green infrastructure, another creative instance, is a growing This, not incidentally, fits hand in glove with the phenomenon of
field with aspects of both offense and defense. On offense, an specialty restaurants buoying shopping centers, generating traf-
expanding set of tools is available for water management for fic, holding customers for longer periods, and creating buzz.
both local governments and private developers. Permeable Foodies are at the sweet spot of retailers desired demograph-
pavement, green rooftops, greener parking lots, rainwater har- icsupscale, knowledgeable, and spending-oriented.
vesting, and other strategies are being employed in New York,
Philadelphia, Chicago, Milwaukee, and Seattle, among other In the Ironbound neighborhood of Newark, a 69,000-square-
large and midsized cities. With the recent evidence of increased foot former steel factory is being converted into the worlds
storm severity and frequency, these are not only quality-of- largest indoor vertical farm. The $30 million investment has
life tactics; they also have the defensive strength of dealing attracted institutional capital as well as public dollars from the
preemptively with potentially massive repair and replacement city of Newark and the state of New Jersey. The Ironbound is
needs. Many localities support private efforts with either rebates poised to be for Newark what revitalizing neighborhoods have
or tax advantages, as in Portland, Oregons Grey to Green initia- been just across the harbor in Brooklyn.
tive. State and local governments, commendably, have stepped
up while Congress has dawdled. What is the trend here? Are we likely to see barns and silos
dotting our cityscapes? No, that is hardly the point. What is
As the need to do more with little (lets not concede less) importantand trendingis the new vision that has urban land
becomes more acute, a greater attention to innovative solutions as that most precious and flexible of resources. The idea that
to Americas massive infrastructure needs is likely to mark the the end of one productive use of a real estate asset spells the
latter half of this decade and beyond. extinction of value and the sunsetting of opportunity is an idea
whose time is over. Just as the reinvention of the suburbs is an
emergent story for the decade ahead, so is the creative adapta-
7. Food Is Getting Bigger and Closer tion of inner-city uses.
This may be the ultimate in niche property types: adaptive use
with a vengeance (or at least with veggies). Vegetables arent the only things sprouting. So is productive
activity in places that have long lain fallow.
The classic theory of urban places relegates agriculture to
the hinterlands, as virtually every kind of vertical construction
has superior highest-and-best-use characteristics, bringing 8. Consolidation Breeds Specialization
greater investment returns to land value than growing food. This If size matters, that is not the same as bigger is better.
is absolutely true in most cases. But there are places in more The playing field itself is changing. While size and scale have
cities than we might imagine where neighborhood land is cheap brought advantage over the years, the evolutionary trends in
or older buildings sit idle, and where median incomes are low development, equity investment, and lending are showing that
and the need for fresh food is high. Some are the hollowed out small can be powerful as well.
areas of Detroit as well as Camden and Newark, New Jersey.
But there is a surprisingly significant level of activity in places This works on many levels. Developers find it hard to access the
like Brooklyn, Chicago, Philadelphia, and Washington, D.C., best capital unless they have scale; but this means fitting the
where foodies of all generations abound. quality demands of conservative lenders. That requires niche

being stretched for yield by the sheer volume of capital. Are

Exhibit 2-15 Time Horizon for Investing
they being paid for the risk they are taking?
13 years 9.0%
The community lenders themselves must watch their portfolios
so they dont grow to a size that tips them into more regulations.
Right now, those banks are a go-to source of development
35 years 31.7%
financing, and local developers are increasingly knocking on the
doors of those banks for projects in the $20 million to $50 million
510 years 32.9% range. Many real estate projects are right in that size class.
10+ years 26.4% What it meansand what the trend looks like going forwardis
another instance of how granularity is the texture of the industry.
0% 10% 20% 30% 40% Or, to change the metaphor, the sharpness of your picture is
Percentage of total survey respondents really dependent on the density of its pixels. Success will be a
matter of high resolution operations in 2016 and beyond.
Note: Based on U.S. respondents only.
lenders can fund the smaller projects, and small developers with 9. We Raised the Capital; Now, What Do
their lenders may be accessing the most innovative parts of the We Do with It?
business. Also: think brokerage and fund management.
The flow of capital into U.S. real estate continues to increase.
Total acquisition volume for the 12 months ending June 30,
Firms may find themselves in the middle and will need to choose
2015, was $497.4 billion, up 24.6 percent year-over-year. While
which sidesmaller or largerthey wish to be on. A Chicago
this pace of growth is probably not sustainable, investors across
developer who had long operated as an independent with
the board (with the exception of the government-sponsored
the capacity to execute high-end urban construction recently
enterprises [GSEs]) are anticipated to have capital availability
moved under the umbrella of a large firm with cross-border
in 2016 that is equal to or greater than 2015 levels. With pricing
businesses. He said, The builders and owners of property
already near record levels in a number of markets and property
now are entirely different. Small builders just arent designed to
types, where will this new capital be invested?
withstand cycles. He also cited the pursuit costs of deals
not only having substantial equity that will stay at risk, but also
Additional markets. Capital is expected to begin to flow
the length of time that capital is at risk. With the average pursuit
more freely to 18-hour cities, as discussed in Trend 1.
of a significant deal taking a minimum of 18 months and millions
of dollars, I just need deeper pockets behind me to do busi-
ness I used to be able to accomplish with resources I could put
together myself. Big projects are the domain of big organiza- Exhibit 2-16 Potential Investment Universe, by Market
Classification
tions, especially in an era of lower leverage.
At the same time, large lenders are more cautious in the greater Flex
Big six
regulatory scrutiny they face. If you are designated a systemi-
cally important financial institution (SIFI), you face hurdles that Industrial
Secondary
limit activities that might have been your norm in the years be-
fore the global financial crisis. Retail
Multifamily
As the historically more powerful banks are now more regu-
lation-constrained, community and regional banks are more
Ofce
active. A Midwest banker with a regional footprint felt his
SIFI-designated competitors were somewhat handicapped by Total
capital surcharges, while the community and smaller banks
were being encouraged to lend as a way to promote macroeco- $0 $400 $800 $1,200 $1,600 $2,000
nomic growth. However, he noted that the smaller banks are US$ billions
Sources: CoStar and PwC.

Exhibit 2-17 U.S. Sales of Large Commercial Properties
$600
$500 Entity
Portfolio
$400
Individual
$ billions
$300
$200
$100
$0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
H1
Source: Real Capital Analytics.
Note: Based on independent reports of properties and portfolios $2.5 million and greater. Before 2005, RCA primarily captured sales valued at $5 million and above.
Alternative assets. The definition of what constitutes real Real estate will not be standing pat.
estate is likely to continue expanding. We have seen the
expansion of REITs to include cell towers and outdoor adver- We see greater inclination to order off the full menu, rather
tising. Retailers and restaurants continue to look at unlocking than taking prix fixe options, a continuation of our observation
the potential value in their real estate holdings so that they in Emerging Trends 2015 that everyone is in everyone elses
can devote the capital to their core business. Discovering business. As investors seek to balance capital conservation
a way for private investors to creatively and profitably invest with capital growth, it will be harder to characterize investors as
in infrastructure could also expand the real estaterelated exclusively core, value-add, or opportunistic. Rather, the provid-
investable universe. ers and the intermediaries of real estate capital are looking at
the entire spectrum, moving deeper into the geography and the
Old is new again. Renovation and redevelopment are property-type mix available in the United States.
not new concepts, but the fervor with which the market is
embracing older space is making the market consider a A broker with a large national office practice told us, It is an
wider range of potential investments. Reports from markets extremely competitive market for placing capital. That competi-
about the popularity of office space housed in rehabbed tion is driving money more and more into a discovery process, a
industrial space demanding rents above new Class A prod- process many describe using the term granularity. Drilling down
uct serve only to support this idea. Much of this is related to into markets and submarkets, working with smaller assets within
the changing work environment discussed in Trend 3. Other the larger markets, specialized property typesthese are all
uses for obsolete urban industrial space include last mile examples of the search to identify thriving niche opportunities.
distribution facilities and even urban farming as discussed As that broker also remarked in his interview, More capital will
in Trend 7. be moving into the middle marketassets in the $10 million to
$25 million range in primary, secondary, and tertiary markets.
Alternative property types. Institutional investor inter- This market is attractive to those managing family wealth and
est begins to expand to alternative property types that to other investors. As much as the big players capture headline
date have been dominated by a more limited investor set. attention, there is plenty of roomand plenty of capitalat work
Property types such as medical office and senior housing off the front pages of the news.
could potentially see a benefit from changing demograph-
ics. Data centers and lab space may be positioned to be in
demand due to technological changes.
10. Return of the Human Touch
We are passing from the dazzle era of technology and big
data, to the more difficult tasks of wise application. The idea

that expertise in slicing and dicing numbers is the skill most car? Of your HVAC system? Of your financial reporting? You bet.
needed in real estate financial analysis has been exposed as Real estate attention to countermeasures will be on the rise.
inadequate. The global financial crisis did not get triggered
because of a lack of mathematical aptitude. The folks who got In a world mesmerized by what can be downloaded onto a
us all into trouble knew math just fine. What they lacked was the smartphone, weve run the danger of falling in love with our toys.
good judgment to foresee consequences and the conscien- The next step is a greater skepticism of apps without the man-
tious determination to prudently manage to standards other than agement of human judgment interface. Attention to individual
short-run profits. For such tasks, computers are of little help. decision making is needed as much as ever. Could we call this
trend the return of the humans?
The industry is trending toward more intensively active manage-
ment, even by beta investors building institutional portfolios.
Investment by algorithm, with equations constructed on varia-
Issues to Watch
tions in historical data, can be out of date in the blink of an eye Listing the top trends affecting real estate in the near-term
in a fast-changing world. In business, the element of trustan and mid-term future can hardly cover all the ground worth the
intangible but real factormatters most in difficult times. Those industrys attention. Physical, financial, regulatory, demographic,
who have had to cope with severe dislocation get this. That is and social forces are much too complex for that. So we think it
why being a fiduciary counts for so much. worthwhile to point out a few other topics to keep on the radar
screen.
Risk management of hacking issues also is of critical concern in
a more internet-dependent business world. With both business 1. Interest rates. The era of rising rates now appears to be
and government computer systems vulnerable, attention to launched, after years of anticipation. Agreement is wide-
cybersecurity will penetrate ever more deeply into the real estate spread that the variables are the degree and timing of
business. This will be even more important as the internet of change. Of course, the black swan factor of unforeseen
things grows more prevalent. Can a hacker take control of your events always existsespecially any economic or geopoliti-
cal occurrence raising the specter of deflation, which could
postpone the anticipated period of rising Treasury rates, and
those rates benchmarked against Treasuries. The underly-
Exhibit 2-18 Prospects by Investment Category/Strategy, ing question is how the generation whose entire business
2016 career has been shaped by a low-interest-rate environment
will respond to the upward movement in the price of money.
Value-add Will higher rates alter behaviors, to what degree, and at what
investments threshold? Keep an eye on such questions.
Development 2. Water. The historic drought afflicting the western United

States has brought cascading impacts to the regionand to
Opportunistic the nation. The prodigiously productive California agricultural
investments industry is also a tremendously thirsty activity. As irrigation
has become more problematic and costly, so too have food
Core-plus prices for crops ranging from almonds and artichokes to pis-
investments
tachios and raisins. Some signs of declining farmland values
Core
are being seen as output is constrained. But agriculture is
investments far from the only economic sector affected. Semiconductor
plants require enormous amounts of water for operations, as
Distressed do the cloud storage data centers now so integral to the
properties
internet. Even the snow-making machines at ski resorts
which become even more essential when Mother Nature
Distressed
debt is uncooperative in providing the white stuffdraw large
quantities of water to keep the regions resort and recreation
Abysmal Fair Excellent businesses humming. Wildfires, meanwhile, have scorched

more than 87 million acres in the past decadea land area already lamenting the difficulty of finding workers with the
equivalent to the state of New Mexiconot only in forests, right skills, worker development has to be part of the solu-
but also in residential communities throughout the West. tion. For many employers, that is going to mean rethinking
Cities whose economic energy has been driven by popula- the college degree as an appropriate threshold for qualifica-
tion increases must confront limits on growth that are defined tion. Such a trend is beginning in the blue-collar sector, but
by water availability and cost. Although a strong El Nio for it will eventually filter into white-collar jobs. Watch an initiative
the winter of 20152016 is forecast to bring much-needed called GoBuild, a collaboration among trade associations
rain, the water deficit west of the 100th Meridian is a factor like the Associated General Contractors, labor unions, local
that real estate should watch closely in the years ahead. economic developers, and vocational and technical training
schools. Apprenticeship programs are combined with earn
3. Generation X. Caught between the baby boomers and the while you learn training. Importantly, the education com-
millennials, both of whom get outsized attention, gen Xers ponent starts before college. Better to have incomes than
(those born from 1965 to 1980) are now understood as those student debt, many feel. Keep an eye on this movement,
needed to take the reins of business. They are in a good which is being led by states like Georgia and Alabama.
position, in a way, as they are the ones whom the boomers
should be grooming for management succession. But they
came of age in the aftermath of the savings-and-loan crisis,
Expected Best Bets for 2016
in dire times for real estate. Few came into the business Emerging Trends survey respondents and interviewees ex-
during the early 1990s, and even fewer have the benefit of pressed their informed opinions about what to do to prosper in
real estate graduate education. Watch for the implications for the year ahead. Here are some of their most salient observations.
leadership in the industry going forward.
Go to Key Secondary Markets
4. The Fair Housing Act and the Affordability Crisis. The Price resistance is an issue for gateway markets. Secondary
Supreme Court has affirmed that local communities can take markets, especially 18-hour cities, are emerging as great relative
legal action to address disparities in housing, even if they value propositions. Such markets are hip, urban, walkable, and
are the unintentional result of actions rather than conscious attractive to the millennials while providing better future opportu-
discrimination. The U.S. Department of Housing and Urban nities for rising net income and appreciation than the 24-hour city
Development (HUD) is requiring local communities to markets that led the postfinancial crisis real estate recovery.
affirmatively further equal housing opportunity, with com-
munities risking losing out on federal housing funding for These secondary markets (think Austin, Portland, Nashville,
noncompliance. This could alter where affordable housing Charlotte, and similar cities) boast lower costs of livingpar-
is built, and where households in need of such housing may ticularly in housingand strong growth potential. Value-add
move. When asked to identify barriers to affordable housing investors can access multiple sources of real estate financing
production, Emerging Trends survey respondents list local from insurance companies, CMBS lenders, private equity firms,
regulation, development costs (labor and materials), and and cross-border investors. With this positive liquidity profile
land costs at the top of the list; NIMBY-ism also was cited as and socioeconomic fundamentals, asset selection in secondary
a factor. Watch for a heated debate on multifamily develop- markets should pay off as a 2016 strategy.
ment against the background the U.S. Supreme Court and
HUD rulings. Take a Deep Dive into the Data
The era of big data can be a blessing or a curse. The avalanche
5. Good jobs and income mobility. As we move into the era of numbers pouring down each day creates a daunting challenge
of increased labor shortages discussed in Emerging Trends to separate the signal from the noise. Having a clear strategy is
in Real Estate 2015, one great challenge will be planning for the key: a well-defined set of criteria for property characteristics,
career paths. This includes succession planning for execu- submarket qualities, and demand segments helps the investment
tives in the boomer generation, who need to groom gen-X focus. Deals that meet specific investment objectives will vary
leaders, who are relatively fewer in number. More generally, business by business. One size does not fit all.
managers need to prepare for the era when new gen-Y work-
ers are outnumbered by those retiring. Increasingly, that will Once the filtering process is accomplished, the skill set of
mean that promoting from within will make more economic experienced real estate professionals takes over: analysis of
sense than competing for outside talent. And with employers operating statements and rent rolls, assessing cap-ex needs

Exhibit 2-19 Metropolitan Mobility by Generation, 20132014
10,000
Movers within same metropolitan area
Moved within same city

8,000
Moved between suburbs
Persons (000s)
6,000 Moved from city to suburb
Moved from suburb to city
4,000
2,000
0
Total Millennial Generation X Baby boomer
Source: U.S. Census Bureau.
nitty-gritty asset management. The amount of information tant decline in driving licenses among the young are forcing a
available at the submarket and property levels surpasses even hard look at conventional parking ratios. This is not just about
the greediest wish list of a generation ago. The advantage suburban surface parking, although there are bound to be reuse
belongs not to those who can get the data (pretty much every- opportunities in that sector. It is about rethinking the way that
body), but those who can use the data. user preferences, new technologies, and urban form interact.
Middle-Income Multifamily Housing Live/work/play downtowns need fewer parking slots per 1,000
The real estate industry has a chance to provide creative square feet of office space or per multifamily unit. Developments
answers for the excluded middle of American households. in the path of planned mass transit should consider temporary
Theres a good chance to do solid business, too. The upper versus permanent parking needs. Planning and zoning require-
end of the multifamily housing market is saturated with prod- ments should be revisited in light of the emerging trends in
uct, sometimes at ridiculously low cap rates. That should turn transportation and land use.
development attention to midpriced units in or near growing
employment centers to find a competitive edge. Affordable Go Long on REITs Priced Substantially below NAV
housing can be a viable enterprise. REITs live in parallel universesthe real estate markets and the
stock markets. The occasional mismatch between valuations in
Governments need to help: equity supports, middle-class tax these two arenas can lead to substantial arbitrage opportunities,
benefits, and incentives for upgrading dilapidated older hous- and 2016 is shaping up to be one of those periods. Volatility and
ing are all in the public interest. The luxury market is thin, and price correction in stocks have caught REITs in a more general-
picked over. The heavily subsidized low end is complicated, ized downdraft. But improved property market fundamentals
low-margin, and politicized. But millions of households need have bolstered the value of the sticks-and-bricks
mid- to higher-density housing in the middle-income range, in
urban and suburban settings. Thats opportunity writ large for In a period of low cap rates, REITs are high-dividend equity
those able to target it. instruments. Those looking for low leverage will find it on REIT
balance sheets. Search out REITs with solid A properties,
Plan Your Parking for Change especially if they are in the 24-hour or 18-hour markets, for a
The advent of autonomous vehicles, the shift to walkability and great combination of offense (alpha returns due to pricing arbi-
transit proximity as a location preference, and the concomi- trage) and defense (high-quality buildings in top markets).

Capital Markets
Theres an investor or a lender for every viable deal.
Real estate is the meeting place for all three forms of capital: or a mixed-use development in Los Angeless central business
physical capital, financial capital, and human capital. When real district (CBD)invariably makes headlines. When a televised
estate people speak about capital, though, the rule is follow presidential debate explores the strategic use of bankruptcy by
the money. The discussion moves on many levels: Sources a casino owner, with 24 million viewers tuned in, a new level of
of equity and debt capital. Strategies. Motivation. Pricing and public awareness has been reached.
returns. Timing and structure. Expectations. Risk.
The big picture is this: In many ways, it appears that worldwide
Capital markets and real estate markets are in the minds of capital accumulation has rebounded fully from the global finan-
a much broader public than just the property development, cial crisis. The recovery of capital around the globe has been
investment, and service industry. The nonfiction best-seller extremely uneven. And the sorting-out process has favored
list has seen titles such as Hernando de Sotos The Mystery the United States and the real estate industry, affecting prices,
of Capital (2000) and Thomas Pikettys Capital in the Twenty- yields, and risk management for all participants in the market.
First Century (2014). The very nature of real estate projects
makes them public events and subjects of reports in the print In the view of a Wall Street investment adviser, There is going
and electronic media. International investmentwhether in a to be a long wave of continued capital allocation towards
Manhattan condominium, a suburban office park in Houston, our business, even though interest rates in the U.S. are defi-
Exhibit 3-1 Anticipated Inflation and Interest Rate Changes in 2016 and 2021
90%
80%
70% Increase substantially
60% Increase moderately

50%
Remain stable at current levels
40%
30% Fall moderately
20% Fall substantially

10%
0%
2016 2021 2016 2021 2016 2021 2016 2021
Ination Short-term rates Long-term rates Mortgage rates
Source: Emerging Trends in Real Estate 2016 surveys.

Chapter 3: Capital Markets
Exhibit 3-2 Availability of Capital for Real Estate in 2016 Exhibit 3-3 Moodys/RCA Commercial Property Price Index,
by Major/Nonmajor Markets
Equity source
250
Foreign investors 3.90
225 Major markets
Private equity/opportunity/hedge funds 3.60 (all property)
200
Institutional investors/pension funds 3.60 National
(all property)
175
Private local investors 3.50
150
Private REITs 3.31
125
Public equity REITs 3.26
100
Lending source Nonmajor markets
75 (all property)
Securitized lenders/CMBS 3.65
50
Nonbank nancial institutions 3.59 Jan Jan Jan Jan Jan Jan Jan Jan Jun
2001 2003 2005 2007 2009 2011 2013 2015 15
Mezzanine lenders 3.58
Insurance companies 3.48 Notes: Major markets are defined here as Boston, Chicago, Los Angeles, San Francisco, New
York City, and Washington, D.C. The Moodys/RCA Commercial Property Price Index is based
Commercial banks 3.44 on repeat-sales transactions that occurred anytime through the month before the current
report. Updated August 2015; data through June 2015.
Mortgage REITs 3.33
Government-sponsored enterprises 2.91

ing eligible investments there. Those investments must create
at least ten jobs for U.S. workers, and amounts are set at a $1
1 2 3 4 5
Large Decline Stay Increase Large million minimum, or $500,000 for rural or high-unemployment
decline the same increase market areas.)
Note: Based on U.S. respondents only. Those on-the-ground differences make it imperative to look
at the specific trends and conditions shaping the equity and
debt participants in the real estate capital markets for 2016
nitely going to go up at some point [and] even though you see and beyond.
more supply in most of the product categories.
The close-up picture is this: Americas real estate market con- The Debt Sector
tains many niches, with tremendous diversity of participants and The 2016 Emerging Trends survey indicates a dramatic pivot
asset types. One size definitely does not fit all. That diversity is a point in refinancing expectations. A year ago, 35 percent of the
key strength because it promotes liquidity, price discovery, and respondents anticipated an undersupply of such capital. Now,
opportunities to enter or exit the market. 35 percent say they expect an oversupply of money for refinanc-
ing. (In balance responses are roughly the same.) The 2016
Even in terms of an industry-wide concern such as regulation, refinancing expectation resembles what the acquisition financ-
impacts will vary considerably. Reaction to rules on banking, ing projections were a year ago.
including Dodd-Frank and Basel III, is changing the lending
landscape. Smaller investors, meanwhile, care a lot about If oversupply for acquisition debt was the consensus last year,
1031 exchanges and the potential impact of proposed respondents think that 2016s environment will be even more
legislation limiting or eliminating the tax deferral benefit so. But, for development, debt capital is forecast to remain
of like-kind exchanges. Many developers, meanwhile, have disciplined.
been using capital made available under the EB-5 program,
which has pretty much become mainstream, according to a With the exception of the government-sponsored enterprises
West Coast investment manager. (EB-5 grants a visa that can (GSEs), debt capital availability is expected to grow at a moder-
lead to permanent residency in the United States for those mak-

Exhibit 3-4 Debt Underwriting Standards Forecast Exhibit 3-6 Real Estate Capital Market Balance Forecast,
for the United States 2016 versus 2015
Less rigorous Remain the same More rigorous Debt capital for acquisitions
2016 35.4% 51.7% 12.9%

2015 45.7% 44.7% 9.6% 2016 11% 46% 44%
2014 43.3% 39.4% 17.4%

2013 19.6% 41.5% 39.1%
2012 31.9% 35.1% 33.0%
2011 29.8% 29.2% 41.0% 2015 14% 48% 38%

Debt capital for renancing

Exhibit 3-5 Equity Underwriting Standards Forecast
for the United States
2016 10% 55% 35%
Less rigorous Remain the same More rigorous
2016 34.0% 52.4% 13.6%

2015 41.4% 47.5% 11.1%
2015 30% 56% 14%
2014 30.7% 50.8% 18.5%
2013 19.6% 50.7% 29.7%
2012 22.8% 46.7% 30.5%
Debt capital for development
2011 26.6% 40.6% 32.8%

Note: Based on U.S. respondents only. 2016 23% 52% 25%
ate pace from all sources. That could signal that this recovery
is hitting its mature phase.
2015 30% 51% 20%

The majority of survey respondents are not suggesting fur-
ther easing in debt underwriting standards, and the number
expecting less rigorous loan requirements dropped by about Undersupplied In balance Oversupplied
ten percentage points compared with the prior year. As noted Source: Emerging Trends in Real Estate surveys.
last year, lenders spreads have been compressed almost to the Note: Based on U.S. respondents only.
point where the following critical question assumes paramount
importance: Are we being paid for the risk we are taking? If Sharp disagreement exists among Emerging Trends
spreads are thin, risk must be managed in other elements of interviewees about the potential for disruptions as rates
the dealmost particularly, in the loan-to-value ratio where rise, often tied to the expected degree and pace of the rate
the borrowers skin in the game has had to increase. Intense increases. Those fearing the worst echo a seasoned com-
competition exists among the lenders for the A-quality deals mercial lender who told us, I think if we get more than 50 basis
in the market, and it is here that we may see some underwriting points movement by February, people are going to be reeling.
flexibility to secure core properties for the balance sheet. Everybody thinks they can get through the eye of the needle right
at the end. I think an interest rate surprise to the upside is going
The expectation that a regime of rising interest rates is upon us to throw people for a loop. In a more sanguine perspective, a
and will shape mortgage and construction loan pricing in the private equity executive notes, Rising rates are generally good
20162021 period is virtually universal. In the short run, recent for CRE [commercial real estate]. The last five cycles show high
past experience about Fed caution leads 30 to 40 percent to correlation between rising interest rates and higher CRE prices.
anticipate general interest rate stability for 2016 itself.

Following is a look at the various categories of lenders, and the

Exhibit 3-7 U.S. CMBS Issuance
outlook for debt capital from each in 2016 and beyond.
$250 Total 350%
Commercial Banks
300%
Regulation is biting. Dodd-Frank requirements are particularly
$200 250%
constraining big banks, in concert with Consumer Protection Act
provisions. And the Basel III rules about high-volatility com-
Year-over-year change
Year-over-year 200%
change
Total ($ billions)
mercial real estate loans expose bank lenders to higher capital $150 150%
reserving requirements for acquisition, development, and con-
100%
struction lending that are anything but extremely conservative.
$100 50%
One banker interviewed noted that banks will need to rebuild
their systems to accommodate these new rules and believed 0%
that it would reduce the volume of lending and/or raise its price. $50 50%
100%
Others, however, think that this is exactly the point. Disciplined
lending by banks that have strong capital foundations are $0 150%
1999 2001 2003 2005 2007 2009 2011 2013 2015*
essential not only for solid real estate market performance, but
Source: Commercial Mortgage Alert.
also for the well-being of the financial system itself. As the head
* Total through June 30, 2015.
of an international institutional investor remarked, The bubble
was created by overlending. Even though experience teaches
that the next recession will not look like the last one, it is in no ance in 2016 is in line with the trend of recovery in securitized
ones interest to have a replay of the global financial crisis. lending. He believes CMBS is a financing source thats very
valuable for commodity real estate and some single-asset real
On the ground, banks are doing business. A lender with a estate. An investment adviser described such structured finance
national commercial real estate program says, Regulation is as very efficient for secondary and tertiary markets, a key attri-
largely good, but requires a lot of work, but that the result is bute as investment activity accelerates beyond the high-priced
that new deals are not priced to perfection. There is cushion gateway markets in the years ahead. An analyst specializing in
against risk. This lender cited loan-to-values (LTVs) of 75 percent the structured-debt world says, CMBS is no longer in a domi-
with partial recourse, but 65 percent or lower with no recourse. nant position, which is probably good for the market.
Nevertheless, spreads have been reduced, which is a clear sign
of competition for real estate lending among the banks. Not only past history, but also going-forward concerns about
credit quality are the critical issues for CMBS in the year ahead.
An executive with an analytics firm focused on the debt mar- An institutional investor cautioned, The CMBS market is where
kets reflected, Smaller banks are back in business and have folks are really looking as to whether that sector will have more
resolved most of their problems. Extend-and-pretend actually discipline or not. So far its the sector where were seeing the
worked pretty well for banks. It allowed banks to address most erosion of underwriting, mostly in conduit loans. He identi-
problems over time as the markets recovered, rather than using fies as concerns rating agency [independence], loan-to-value
a mark-to-market approach. [levels], and percent of loans with interest only are certainly
objective measures that show that theres been erosion in
One Midwest developer/owner said, Credit is very available. underwriting.
Banks are becoming more like the life companies, with longer
loans available. I have found commercial banks very accommo- One important area of ambiguity is in the alignment of the
dating. The competition is cutting both ways, apparently, since interests of the originators of CMBS and the purchasers of the
a developer in the Southeast reported accessing construction bonds. One post-crash reform is the practice of originators hold-
funding from an insurance company willing to then provide the ing some of the risk on their own books.
takeout financing.
Conduit lenders are looking to provide capital for deals that are
CMBS good, but not so pristine as to pass muster as portfolio assets
A West Coast consultants forecast of $125 billion to $135 billion to be held on the books for liquidity ratio and capital reserving
in new commercial mortgagebacked securities (CMBS) issu- purposes. But, to be marketable as a securities issuance, the

great bulk of CMBS needs to be rated as investment-grade. applications, respecting portfolio allocations, and managing
So the AAA tranche is the key for institutional demand for the toward satisfying actuarial liabilities.
bonds. Spreads for that piece have been widening, temper-
ing the profitability of the issuance as a greater risk premium is Even when we hear of life companies providing development
demanded by bond purchasers. At the first-loss position, says financing, an overarching rationale is at work: positioning toward
the chief investment officer of a commercial mortgage bank, providing the permanent financing on a desired core asset.
B-piece buyers are becoming more selective on the loans they
will take because they are concerned about the underwriting Federal Reserve data show that life insurance companies have
having worsened in the past 12 to 24 months. $305.7 billion in commercial mortgages outstanding, a 12.7 per-
cent market share that has remained basically stable over the
The caveat emptor lesson has been learned, and the greater past year, in line with our expectations in Emerging Trends 2015.
discipline imposed by the CMBS bond-buying community This measure of the insurance industrys market share excludes
should help the performance of the instruments over time. But it multifamily holdings, which add another $57 billion to their bal-
also is the reason why issuance is highly unlikely to achieve the ance sheets, a 5.6 percent share of this property type. So the
$200 billionplus levels seen before the global financial crisis. strategic aim has not targeted expanding market share at a time
when borrower demand is robust. Rather, it has been to secure
One final story to watch in 20162018: These are the years assets that will perform well across cycles. The enviable default/
when the refi cliff was due to inflict a death blow to the CMBS delinquency record of the insurers during the global financial cri-
industry, as securities issued at the peak of the frothy market a sis demonstrates the wisdom of such attention to relative value,
decade ago came due and payable. Of course, the recovery of and it is one of the reasons that regulators have not spotlighted
prices since 2011 has taken the most dire risks off the table. But this sector to the degree they have zeroed in on commercial and
there is still a quantity of CMBS backed by assets in commercial investment banks.
real estate markets that have not seen full price recovery. The
Asset Securitization Report issued in early 2015 estimated What are the policies and procedures supporting such perfor-
that 20 percent of the $300 billion to be refinanced over mance, and the underlying financing philosophy that borrowers
three years would require additional capital. So a threat of can expect in bringing deals to the life companies in 2016?
haircuts for some bondholders still exists.
A typical major life company platform prefers holding the senior
That threat may be mitigated by the overall higher level of debt position, with express limits on the amount of subordinated
liquidity in the marketsboth debt and equity. If you must sell debt permitted. Twenty- to 30-year amortization is standard, with
or recapitalize property, now is a good time to do so, and the interest-only loans considered if the LTV is below 65 percent.
private markets may provide the exit strategy that the public Even when participating in structured lending venturescolend-
debt markets will not. ing or allowing subordinated debtthe life companies retain
decision-making rights, and require institutional-grade property
From within the industry, an appreciation of the role of CMBS and sponsorship.
in the entire panoply of debt finance has taken hold. An asso-
ciation executive observes, The industry is starting to ask While geographic diversification is a consideration, insur-
the questions regarding overbuilding, overvaluation, and so ance company lenders prefer primary markets and a handful
forth, which is a good and different thing from prior cycles. It of secondary markets. There is no drive to be everywhere.
should be remembered that CMBS is just a 20-year-old market. Consequently, the life companies can comfortably commit to
Learning from experience is entirely appropriate. very large mortgage investments. This creates efficiency in the
deployment of capital as well as staff resources. The big life
Insurance Companies insurance companies have been at this a long time, and have
Perhaps no source of debt capital is exploiting the surge of refined their game nicely. All in all, the life companies seem
demand for commercial real estate funding more shrewdly to have little inclination to match the expansion of lending at
than the life companies. Even as they expand their volume (a 6 regional and community banks. There is a willingness to sac-
percent increase year-over-year as of the first quarter of 2015), rifice market share to preserve loan quality. There are enough
there has been a strategic focus on asset selection for the long qualified potential borrowers to satisfy underwriting standards
term. This, of course, is a textbook move, sifting out lower-quality while funding the insurers allocations for commercial real estate.

Keeping future defaults at a de minimis level is an objective of The National Association of Real Estate Investment Trusts
paramount importance. Conservativism in lending is the overrid- (NAREIT) Index for M-REITs was down 2.2 percent in total
ing investment philosophy, for sure. returns year-to-date through July 2015, compared with a
Standard & Poors 500 gain of 3.4 percent. The holdings of
That conservatism is a factor to take into account in under- mortgage REITs are fixed-income assets and hence are particu-
standing the very thin spreads in insurance company lending. larly sensitive to movements in interest rates. Since the public
The spread is not only profit margin, but also payment for risk. markets are anticipatory, reflecting the expectation of rising
Managing risk at the asset level by strict underwriting, and at the interest rates into 2016, the year ahead is unlikely to see this
portfolio level by sophisticated diversification, helps keep the segment of the debt markets expanding aggressively.
appropriate risk premium for life company lenders lower than
that for those taking more idiosyncratic risk in their mortgage Borrowers seeking to access M-REIT debt capacity should
products. anticipate a preference for variable-rate instruments and a
requirement for higher yield-to-maturity coupon rates. For those
REIT Debt borrowers willing and able to work with such terms, the M-REITs
The trend for REITs is evolutionary rather than a distinct break may be a more flexible, if more expensive, source of mortgage
in pattern. This market has been steady and should remain that money than either the regulated banking sector or the core-
way, says a noted Wall Street analyst following this sector. asset-oriented life companies in the near future. Borrowers can
be expected to fall into the value-add and opportunistic buckets
Publicly traded REITs have access to debt capital in the cor- of investment style, financing turnaround acquisitions, as well as
porate finance sector, sources that are not typically available at development. If borrowers are willing to take on (and hedge) the
the property level per se. REITs have been successfully issuing interest rate risk, M-REITs can price loans more competitively
commercial paper, for instance, for short-term capital needs. than if they hold that risk as lenders.
This has supplemented their use of lines of credit, and the com-
mercial paper is often backed by the companys line of credit. Bespoke Lending
This is a useful bridge financing tool, as long as the REITs funds Debt funds are growing like dandelions, one Emerging
from operations (FFO) will support repayment. The rating agen- Trends interviewee said. There is more mezzanine debt out
cies monitor this closely. there than there are deals, said another, and they are high-
priced. A national-scale investor/owner remarked, Private debt
Such access to debt in the public markets is likely to be more funds can make loans outside of the Basel IIIregulated environ-
important, as bankers interviewed suggest that large loans to ment. Protections against bad actors is an expense; its not free.
large REITs are going to be limited by the tighter regulations in
the banking sector. Here is where the complex ecology of the debt space benefits
the market as a whole: Evolution is all about successful adap-
As a provider of debt capital, it is the 40-plus mortgage REITs tation. In the early phase of the global financial crisis, many
(market capitalization of about $70 billion) that supplement the investors saw the Resolution Trust Corporation era as the model
banks, life companies, CMBS, and private debt funds in fun- to be emulated. These investors were disappointed as fire-sale
neling mortgage money to the real estate investment markets. pricing failed to materialize. In the end, it is hard to fault the strat-
Mortgage REIT (M-REIT) assets are vastly weighted toward the egy of patience in 20092012. But it has left a residue of capital
residential sector, and they have been contributors to the strong seeking placement.
performance of the multifamily arena through the purchase
of U.S. agency (Fannie Mae and Freddie Mac) bonds during Space in the capital stack is opening up as larger institutional
the period of conservancy that began in 2008. The market for lenders are increasingly sticking with safe loans on top-quality
agency debt is very largeover $6 trillionand mortgage assets. A lot of U.S. real estate sits below that top tier, fall-
REITs have about a 5 percent share. ing either into the value-add category or in secondary or
tertiary markets currently off the radar screen of the most
The most recent Federal Reserve data (issued June 11, 2015) risk-averse lenders. That could prove to be a great oppor-
show mortgage REITs holding $166.2 billion in commercial tunity for bespoke lenders if the economy and the property
property mortgages, or roughly half the level of the life insurance markets continue to improve in the next few years.
companies. This was down about $5 billion from year-end 2014,
indicating net sales and lower production by the M-REITs.

For example, some of the vintage CMBS maturing in 20162018
Exhibit 3-8 Real Estate Capital Market Balance Forecast,
may require gap financing from the private sector debt funds, as
2016 versus 2015
anticipated by one institutional asset manager. As noted earlier
in this chapter, this could represent as much as 20 percent of Equity capital for investing
the securities requiring refinancing.
The reluctance of senior lenders to accommodate subordinated 2016 8% 29% 64%

debt in the capital stack creates another opening. Private debt
funds may find themselves repositioning their approach to favor
investment in the preferred equity space. That is a comparable
spot in the capital stack, between common equity and senior 2015 12% 33% 55%
debt. The large banks can count preferred equity favorably in
LTV reporting, while an overall increase in property indebted-
ness plays poorly in reporting to the regulators. Undersupplied In balance Oversupplied
The trend of bespoke lendingcustom-tailoring for borrowers Note: Based on U.S. respondents only.
without off-the-rack needsis likely to accelerate in the second
real estate. The concept of path dependence suggests that
half of the decade. This is partly because of the need to play
the experience of the coming yearconsidered to include
offense, in responding to borrowers needs for flexibility and
greater movement to secondary markets, greater attention to
timing. We found at least one pension fund manager looking to
value-add assets, and the expectation of an extension of the
supply such short-term needs, in return for a quicker return on
U.S. economic expansionadvantages real estate vis--vis
capital invested, for example. But it is also partly responding to
other investments in the United States and abroad.
the institutional lenders increasing obligation to play defense in
a more regulated lending environment.
Here is where the size, depth, and diversity of the real estate
markets can play to advantage. The varying equity sources
Overall, the outlook for the quantity and quality of lending in
have distinct capacities, motivations, return requirements, and
2016 looks good. If volume is rising, this is not at the expense of
appetite for risk. It is not as though there is a single ocean of
basic underwriting. As one interviewee put it, If debt is a little
equity capital to be deployed. Rather, there are streams of
less fantastic, this is a good thing. Loan applicants may find
capital flowing to the markets. That is plural streams and plural
accessing debt a bit easier next year than last, but no lender is
markets. The most urgent questions are whether and how
indiscriminately pushing money out the door.
those streams of capital will stay within their banks, nourishing
rather than flooding their target markets.
The key is for the borrower to candidly evaluate what is being
presented and then to search the whole lending field for the
Lets be clear at the outset: The recovery of transaction volumes
most likely source of mortgage funding. The money is there, and
and pricing to prefinancial crisis levels, especially in the gate-
someone is specializing in what each borrower needs. The vari-
way markets, is not prima facie evidence of a bubble.
able, of course, is pricing. But real estate debt in 2016 will still be
very cheap by historical standards, and borrowers should look
Much is different from a decade ago, not least the alteration in
to take advantage of that while the opportunity exists.
the amount of leverage in the market. Soaring leverage ratios
are one of the hallmarks of bubble economies over the course
The Equity Sector of history, and both the real estate and banking industries have
The United States has long boasted the largest, deepest, and been assiduous in limiting that risk. This is critical, since the
most diverse real estate market on the planet. That remains true. reduction of equity cushions sets the stage for equity extinction
But a question not often considered needs to be raised: Are we when cycles turn downward. The situation where lenders-in-
big enough to absorb the volume of investment capital directed possession are pushed to get troubled assets off their books
our way without undergoingagaindisruptive change? can degrade to a free fall in prices, as the United States saw
during the savings-and-loan crisis years, and again during the
Much of the industrys trend later in the decade will be shaped global financial crisis. Such a risk did not loom on the horizon as
by investor behaviors in 2016. This could be a pivotal year for we prepared Emerging Trends in Real Estate 2016.

Exhibit 3-9 Investment Prospects by Asset Class
Excellent 5
Good 4
Fair 3
Poor 2
Abysmal 1
2016
2012
2013
2015
2016
2016
2016
2016
2016
2012
2012
2012
2012
2013
2015
2013
2015
2013
2015
2012
2013
2015
2013
2015
2014
2014
2014
2014
2014
2014
2011
2011
2011
2011
2011
2011
Private direct Publicly listed Publicly listed Publicly listed Commercial Investment-grade
real estate property companies homebuilders nonreal estate mortgagebacked corporate bonds
investments or REITs securities securities
Nevertheless, it is difficult to be entirely sunny when 64 percent significance and guide decisions. That is where the institutional
of the survey respondents characterize the market as oversup- investors are today, and where they are headed tomorrow.
plied with equity capital, and 34 percent believe that equity Modern portfolio theory is just the foundation of institutional real
underwriting standards will become less rigorous in 2016. estate investment operations. Besides running the numbers on
Balancing those figures is the mild retreat in the outlook for portfolio allocations, there is still significant room forindeed, a
change in capital availability: still growing, but not so vigorously requirement forgood judgment.
as in 2015.
With core properties in the gateway markets so richly priced,
This year, we find equity seeking to stay disciplined while investors with deep pockets are searching for alpha using
dealing with a very competitive environment where all capital all investment styles, including value-add and opportunistic
sources are geared up for transactions. In the current market development. You do have to dollar-cost-average over the
situation, it is not hard to raise money; it is harder to find cycle, said the head of this firm, while affirming that one cannot
good deals, and hard competition when you do find one, effectively raise capital in a competitive market by being merely
said an investment banking interviewee. average. Even with holding periods typically longer than a single
cycle, institutions are constantly culling their portfolios, taking
Institutional Investors profits (or cutting losses), and redeploying capital to improve
It is in institutions nature to have long memories. Experienced yield. In the first half of 2015, for example, Real Capital Analytics
managers often ask themselves, Have I seen this movie tallied $55.7 billion in institutional acquisitions, and an even
before? Awareness of cyclical risk and opportunity is embed- greater $74.5 billion in dispositions.
ded in their DNA, yet there is a deep understanding that the
next recession will probably not look like the last one. As Another very large-scale institution stressed that core-only
long-term portfolio holders, the institutional investors who make strategies in 2016 face pricing conditions reflecting 4 percent
up the National Council of Real Estate Investment Fiduciaries cap rates and a 6 percent internal rate of return (IRR) over ten
(NCREIF) data contributors are both fact- and theory-driven. years. Such returns do not satisfy actuarial requirements, and so
They would have to be, with $426 billion invested in 6,863 prop- this investor is, by its own reckoning, one of the nations top four
erties as of the first quarter of 2015. value-add investors, while still holding a huge core portfolio. In
the value-add space, executives of that institution maintain, they
A Chicago-based investment consultant commented in his can achieve yields that are in the 7 to 10 percent range while
interview, Real estate is just knocking on the door of the big- continuing to deploy their capital prudently. That means explicit
data era. That means more than just access to information; it criteria for the value-add underwriting, including a demonstrated
means having systems and algorithms in place to sift out the case for cash-flow growth, in markets of proven liquidity, and

leverage sufficiently low that a worst-case scenario still pro- depending on the sector. Theyre a little more hesitant to raise
vides ample debt-service coverage. money now, but the moneys there if they want it. That suggests
that REITs can harvest profits by selective disposition in the short
The manager of a large state pension plan has his eye on the run, but should have plenty of capital for growth in 2016.
short term. We are trying not to get into long-term investments.
Instead, we are looking for investments where the capital returns Investors have voted with their wallets in motivating REITs to
sooner. The average life of investments should be three to five stick to their knitting, an interviewee observed. For the biggest
years. That is a real shift of perspective in the institutional space, REITs, that has meant moving up the quality chain and respond-
and a telling indication that active management is a growing ing to the same changes in market preference as the institutional
trend even in a sector heretofore known as beta investors. investors. We used to want modern garden apartment com-
plexes with highway frontage, remarked the CEO of one REIT,
Lastly, the institutions are acutely aware that their real estate but now we are only buying high-rise urban assets with great
investments do not exist in a vacuum. The head of equity invest- walk scores.
ment strategy for a firm with some $40 billion of real estate under
management warned, In an increasingly volatile environment, REITs live in the parallel universes of real estate and stock
whether its weather or its political instability and terrorism, markets, and misalignments between the two domains con-
pooling and sharing of risk is an important way to deal with un- stantly create tensions. Because of common perceptions on
certainty. That costs more. Its going to be an added cost of Wall Street, the rising interest rate environment of 2016 and 2017
doing business, but I think its more important than ever. that is expected is already putting downward pressure on share
prices. If it turns outas some others closer to the property
REITs market expectthat rising rates will be modulated in timing and
In the views of most Emerging Trends interviewees, the outlook degree in accord with employment change, the spread between
for the REIT sector is bullish. Business is as good as its ever net asset value (NAV) and share values may widen, but not
been, in the words of one REIT executive, and, The market will necessarily so, since economic growth supported by job gains
be good for at least another two years, at a very conservative of 2.7 million to 3.0 million per year should eventually spur an
estimate. A fund manager concurs, adding, REITs are buying equity market advance.
everything because they have a cost-of-capital advantage.
We see nothing too frothy in REIT markets, according to one While all this is going on, some shareholders are pressing man-
international institutional investor who suggests that REITs are agement at restaurant chains to monetize their real estate assets
the best vehicle for small real estate investors. by entering the REIT IPO market. This will be a company-by-
company set of choices, of course. Investors and management
A healthy REIT sector has a very positive impact on the U.S. need to ask themselves some hard questions about the
property industry as a whole. It is a very large player, certainly, potential sales growth at the individual restaurant brand, and
with the publicly traded REITs capitalized at $867 billion (as of how much of the value of shares will depend upon locking the
July 31, 2015). REITs were net purchasers of real estate in the restaurants into long-term leases that, while providing steady
first half of 2015, to the tune of $8.4 billion, on gross acquisition dividends, will stress the low-end profit margins typical of mass-
volume of $37.9 billion. The public markets continue to provide market food operations.
capital, responding to an annualized total return of 16.9 percent,
as reported by NAREIT this past summer. One repeated caution from the Emerging Trends interviewees
concerned the smaller nontraded REIT sector due to concerns
A developer expressed it this way: I consider the publicly about illiquidity in the nontraded REITs and their lesser price
traded REITs to be a little bit undervalued. I think the stock mar- transparency.
ket as a whole is. When you sit there and say a space-sharing
startup has the same capital value as a long-established and Lastly, the expansion of the REIT concept to forms of fixed
successful public REITI mean, come on, thats Wall Street assets beyond the traditional real estate property types may
hype. Id rather own a share of the REIT at its price today than be an accelerating trend, if the regulators are flexible about
the unicorn, if it were public. qualifying assets. There already are REITs in power generation,
distribution, and other forms of infrastructure. The public mar-
An investment banker agrees: Most [REIT] companies are prob- kets have often been creative in providing capital where needs
ably trading at a discount of about 10 percent to net asset value, emerge but are inadequately funded. There is reason to believe

Exhibit 3-10 U.S. Buyers and Sellers: Net Acquisitions, by Source and Property Sector, 2Q 2014 to 2Q 2015
$15
Office Industrial Retail Apartment Hotel
$10
$5
$0
US$ billions
$5
$10
$15
$20
Cross-border Institutional/equity fund Listed REIT Private User/other
$25
Source: Real Capital Analytics.
that the scope of the REIT industry has not yet fully expanded and new development feasibility, the private funds should
and that more growth lies ahead. attract additional capital oriented to the higher yields in those
alpha-oriented purchases. By the way, private equity investors
Private Equity are not alone in this perspective. A REIT executive with assets
Since 2001, annual acquisition activity from private purchasers across the Sun Belt remarked, We are looking for good growth,
has grown faster than any other equity capital source (with the good tenant mix, rents moving upward in markets like Charlotte,
exception of cross-border investors). In the 12 months ending Atlanta, Miami, Austin, and Phoenix.
June 2015, private real estate investors bought $216 billion of
U.S. property, or 43.5 percent of the total gross investment flow One global investor argues, We are getting a better appre-
for that period. That compares with a 20.1 percent share for insti- ciation for how many great American cities there areand
tutional investors, a 14.1 percent share for REITs, and an 11.7 how many American cities are doing great thingssec-
percent share for international investors. This is clearly the major ondary cities showing hip, amenitized, urban, walkable,
capital source for commercial property investment. transit-oriented development. The chief investment officer
of one private equity firm says, We have many investments in
The trend should be for increasing activity. At least three rea- secondary markets. Markets with hospitals, universities, trade
sons exist for such an outlook. First, private equity capital is ports, and strong infrastructure generate higher quality of life,
exceptionally nimble, compared with capital sources where such as Austin, Charlotte, Charleston, Dallas, Denver, Nashville,
decisions must go through investment committee processes. and Raleigh.
Second, private equitys reach is deeper into the broad U.S.
market since it is unencumbered by allocation decisions driven Does that mean that private equity investors are at risk of
by portfolio considerations and by minimum deal size param- overpromising and underdelivering? Not necessarily. Very few
eters typical of the largest investors. investors put much credibility in projections of 20 percent or
higher returns these days. A banker specializing in the private
Third, as a consequence, in an environment where core and equity space told us, What I have seen over the last three years
core-plus assets are priced to perfection, private equity can is a lowering of expectation on return. Generally, that means a
provide higher yields because it accesses more opportu- realistic expectation in the low to mid-teens.
nistic investments. If, as some think, many secondary and
tertiary markets are approaching the point of real rent increases This is another reason to feel that the risk of an asset bubble
in real estate is not especially high for 2016: across the board,

the tendency for a more conservative financial structure is
+ +Q
Exhibit 3-12 Global Real Estate Investment in the United
evident and investors think about return of capital as a primary
States as a Percentage of Total Sales
considerationand return on capital only once loss mitigation
requirements are satisfied. This may be a powerful explanatory Total sales $420.8 billion
factor in low cap rateseven more powerful than the zero-inter- Global investment 10.9%
est-rate Fed policies that have been in place.
An interview with the head of a large equity fund featured a Past 12
++G
discussion of sifting through opportunity and risks across the Total sales $1,051.8 billion months
Global investment 10.2%
entire spectrum of metropolitan economies and property types.
The era of big data means that fewer secrets are out there, fewer
hidden gems that no one is aware of. But the ability to execute
swiftly is a competitive advantage, as is a willingness to move Past 3
into smaller markets. As that equity fund executive said, Were years
not in the salty six, referring to the gateway markets of New
York City; Boston; Washington, D.C.; Seattle; the Bay Area; and
southern California.
The most likely behavior for the private equity fund in the next
couple of years is heightened activity, and greater deal velocity Source: Real Capital Analytics, as of June 2015.
on the sell side. Alpha investors make money by booking profits
and moving on. Between 2011 and 2012, while many other
investor groups were reluctant to buy on the come, private offer when going out to raise fresh capital for deals in the years
funds placed $202 billion into real property assets. Price recov- ahead.
ery now makes those purchases look very smart.
International Investors
A REIT CEO marvels, Private equity has a ton of money. I Where the money is coming from and how it is deployed can
would say the fastest-growing source of capital is private equity be characterized by a single word: expanding. A Washington,
at the moment. A good track record is the best argument to D.C., private investor says, Funds for real estate are growing
every day, and international money is coming in droves. And,
Exhibit 3-11 Global Investment in U.S. Real Estate by Country
$40
Previous 3 years Previous 12 months

$35
$30 Previous 12 months

as a percentage of 3-year total
$25
US$ billions
50%
$20
$15
76%
$10 64%
54%
$5 51%
42% 58% 58%
25% 23% 39%
$0
Canada Singapore Norway China Germany Switzerland Japan Israel Australia South Korea U.A.E.
Source: Real Capital Analytics, as of June 2015.

Exhibit 3-13 Global Investment in U.S. Office Sector, Exhibit 3-15 Global Investment in U.S. Multifamily Sector,
by Five Largest Country Sources by Five Largest Country Sources
$16 $10
3 years 12 months 3 years 12 months
$14 $9
$12 as a percentage of 3-year total
$7
Previous 12 months
$10 as a percentage of 3-year total
US$ billions
$6
US$ billions
57%
$8 $5
44%
$6 $4
60% $3
$4
57% $2
$2 32% 46%
31% $1 33% 47% 38%
$0 $0
Canada Norway Germany China Hong Kong Canada Switzerland Israel United Bahrain
Kingdom
Source: Real Capital Analytics, as of July 31, 2014.
Exhibit 3-14 Global Investment in U.S. Retail Sector, Exhibit 3-16 Global Investment in U.S. Industrial Sector,
by Five Largest Country Sources by Five Largest Country Sources
$4 100%
3 years 12 months as a percentage of 3-year total
$7
3 years 12 months
$3 Previous 12 months $6 93%
as a percentage of 3-year total
US$ billions
$5
US$ billions
$2
$4
44%
$3
$1 32% 37% 51% $2
13%
$1 24% 48%
$0 0%
$0
Australia Canada Switzerland Germany Netherlands
Singapore Norway Canada U.A.E. Germany
yes, the gateway markets are still high on the list of top markets A small firm that has been intermediating offshore real estate
in the Association of Foreign Investors in Real Estate (AFIRE) capital for a quarter-century said this in its Emerging Trends
annual survey. But, as an investment manager who had just interview: Our investors dont like the pricing in the gateways.
returned from Singapore told us, World capital cannot be Weve made investmentsvalue-add and opportunisticin
contained by the limited opportunities in just six coastal Orlando, St. Louis, and other markets, often in the suburbs
markets. A fresh eye and open-mindedness are key attributes where the flood of capital hasnt arrived yet. This firm invests
in putting that money to work in 2016. international equity alongside some of the largest U.S. institu-

ample reason exists to see even more powerful capital flows into
Exhibit 3-17 Global Investment in U.S. Hotel Sector,
U.S. real estate markets in the coming period.
by Five Largest Country Sources
$4 Crowdfunding
3 years 12 months
Watchful waiting continues to be the dominant perspective on
Previous 12 months
as a percentage of 3-year total crowdfunding by most of the Emerging Trends interviewees
$3 commenting on the topic. As discussed in chapter 2, it has
85% recognized potential but carries risks that make many nervous.
A model of capital raising still in its infancy (though with some
US$ billions
historical precedents), crowdfunding may show impressive

$2
growth when measured on a percentage basis. But it is dwarfed
48% by the other capital aggregates and is unlikely to scale to the
point where it represents a meaningful competitor to the more
$1 traditional funding sources.
25% 56%
15% An investor/owner of office properties weighed in, saying,
$0 I dont think [crowdfunding] is a good thing. Real estate is
China Canada Singapore Japan U.A.E. an industry where investors feel way more comfortable than
Source: Real Capital Analytics, as of June 2015. they should [based on small-scale personal experience]: Ive
owned a house; I can own real estate. And they make bad
tional investors, bringing deals to the value-add programs of decisions. This is the same kind of fallacy of composition that
the institutions. They report that the Middle East investors in equates household budgets to national budgets. Scale matters
particular get it. Those investors are capital gains oriented and a great deal.
are quite willing to fund ground-up development in markets they
believe will support it. A banker is keeping an open mind for now: Ive met with a
couple of the companies that are doing it. I think it has phenom-
A top executive for a regional firm in the Southeast remarks enal potential. The challenge is making sure the companies
about how offshore investors have discovered real estate in that that are doing it really add value. If its wrapped in real hands-
area, following investments in manufacturing activities over the on assistance, where they can really help you get the books
past several decades. He reports capital coming into the region together and get everything in the right format, good. But if its
from Germany, Italy, Japan, China, and Canada. Everybody kind of a do-it-yourself, Im not sure.
wants to be here, he says, and cites a much more welcoming
environment and population diversity as contributing factors. A pension fund manager, thinking in a broader perspective,
Even last springs uproar over the Confederate flag may have sees crowdfunding as one of the pressures threatening the real
helped, as the ultimate decision on the part of South Carolina estate brokerage industry. The important trend question is
came down on the side of progress. Its about damn time, in what sort of economic impact, in the long term, will social
the view of this businessman. media and internet-based platforms, which include crowd-
funding, have on commercial real estate? I think theyll
Notwithstanding the geographic spread of offshore invest- disintermediate it. Information about specific submarkets and
ment, the salty six still get the lions share of inbound capital deal sourcing will be dispersed along a lot more quickly. Again,
flows. From New York to Los Angeles, as well as in other coastal it comes down to scale. Will there be a crowdfunding Zillow?
markets from Seattle to Miami, international investors know and And will large-scale investors be inclined to access such a
covet U.S. cities with air and sea ports. This can be for develop- source for deal making, more than just information gathering?
ment or for operating properties, by large institutions such as
sovereign wealth funds and insurance companies or individu- A firm in the capital-raising business asks, Who are the spon-
als (including EB-5 immigrants). When it is all summed up, net sors? Crowdfunding is attempting to buy into the dot-com
cross-border real estate investment amounted to a robust $31.2 culture and there is a slight disconnect. I think there will be a lot
billion for the 12 months ending June 2015. Given the continued of entries and failures. Crowdfunding is a mile wide, but only an
uncertainties in Europe and the increasing volatility in Asia, inch deep. There is a lack of credibility: no background checks,
no scrubbing, no due diligence.

We will be hearing more about crowdfunding as time goes on,

especially during that period in which real estate as a whole is
on the ascent. In the vernacular of social media, it will be trend-
ing. The question on most peoples minds is: What happens
when the cycle turns?
Summing It Up
For 2016, and likely for some time thereafter, the background
music for the Emerging Trends capital markets interviews was
Youve Got to Accentuate the Positive. Without ignoring risk,
the spirit of the industry right now is fairly upbeat. Some further
duration to the upcycle is expected, and it is the rare person
seeing any immediate recession for the economy or for the
industry. Many indeed are inclined to think that we may have
a long top to this recovery.
There are those with greater concerns, and they are taking
some defensive moves by shortening investment horizons,
shifting toward the income component of total return instead of
expecting appreciation, and moving down the leverage scale
to conserve capital. Undoubtedly, such a prudent approach will
prove wise eventually, but will it leave money on the table (yes)
and for how long?
For the latter years of this decade, it seems safe to say that the
amassing of capital oriented to real estate will continue, but at a
lesser pace than it has been from 2012 to 2015. The era ahead
will be all about finding the best way to occupy the individual
niche in a way that preserves capital and nourishes it in a way
that promotes sustainable investment growth.

Markets to Watch
2016 is the year of the secondary and tertiary markets. They continue to be more
attractive on a relative opportunity basis than some of the gateway cities. Gateway
cities, we know, are places people want to be, but we are thinking of cities like
Nashville, Charlotte, Indianapolis, Louisville, Portland, Austin, Raleigh, Durham.
These cities continue to attract lots of people. There are a lot of places that people
love to live and work; they are manageable environments and have
a better value proposition.
As the results of the Emerging Trends in Real Estate 2016 survey tion where demographics may drive future growth, and new
were tabulated, it became evident that this was going to be a markets that appear to be in a position to move up a class in the
year of movement. Markets moved up and down in the rankings. investment strata.
A new market moved into the top position, while last years num-
ber one fell to number 30. Markets entered the top ten and 20 Another perspective on this market is to play some solid
spots for the first time while markets traditionally in the top five or defense. The traditional big six markets have offered inves-
ten slipped to lower positions. This result provoked the following tors some perception of relative security since the days of the
question: Did it all make any sense? Great Recession. These markets, however, have become so
highly valued on a global perspective that pricing has risen to
Emerging Trends in Real Estate is a combination of an in-depth levels that could make them slightly less attractive to a typical
online survey and face-to-face interviews for a reason: It gives domestic investor. This position is not how everyone views these
readers a more complete and well-rounded perspective of markets. A number of interviewees offered very logical positions
what market participants are thinking, or, to put it another way, for why they like the relative security of these top markets, and
a method to the madness. also where they see room for upside.
Through the iterative process of reconciling survey results with The result is whether one decides to play offense or defense,
interview notes, it became clear that markets were moving in this real estate cycle is giving everyone a wide array of choices
the rankings as a result of market participants feeling either the in a number of markets. It all comes down to calling the proper
need to take a more offensive approach to the market, or to set play and executing it to perfection.
up a desirable defensive position.
As the market senses an opportunity to play offense, partici-

2016 Market Rankings
pants are favoring cities with better growth opportunitiesnot In this year of movement, the Emerging Trends in Real Estate
a bad strategy in an environment where the economy is adding markets-to-watch survey reveals a new number-one market as
jobs and new supply is still tame by historical standards. These Dallas/Fort Worth climbed four spots from last years survey to
opportunities represent a combination of traditional higher- take the top spot, leapfrogging state rival Austin in the process,
growth markets that offer favorable business conditions, markets which remains in the number-two spot. Nashville, Atlanta, and
that were slowed by the global financial crisis but are in a posi- Portland, Oregon, are new entrants into the top ten for 2016,
while Minneapolis and San Antonio enter the top 20. Economic

Chapter 4: Markets to Watch
Exhibit 4-1 U.S. Markets to Watch: Overall Real Estate Prospects
Investment Development Homebuilding Investment Development Homebuilding

1 Dallas/Fort Worth (2, 3, 1) 3.87 3.79 4.34 39 Kansas City (42, 22, 38) 3.29 3.33 3.28
2 Austin (4, 1, 2) 3.82 3.83 4.17 40 Orlando (29, 34, 39) 3.41 3.20 3.27
3 Charlotte (11, 5, 4) 3.71 3.69 4.07 41 Fort Lauderdale (46, 52, 20) 3.26 2.99 3.57
4 Seattle (3, 10, 5) 3.84 3.57 4.00 42 Salt Lake City (45, 21, 45) 3.27 3.34 3.20
5 Atlanta (5, 6, 8) 3.79 3.68 3.93 43 Pittsburgh (35, 32, 48) 3.34 3.21 3.18
6 Denver (8, 13, 3) 3.74 3.51 4.14 44 Palm Beach (51, 49, 30) 3.20 3.03 3.42
7 Nashville (7, 2, 14) 3.75 3.81 3.67 45 Cincinnati (30, 36, 59) 3.40 3.20 2.99
8 San Francisco (9, 14, 12) 3.73 3.51 3.77 46 Cape Coral/Fort Myers/Naples (54,42,44) 3.15 3.10 3.23
9 Portland, OR (10, 7, 16) 3.71 3.63 3.64 47 New Yorkother boroughs (49, 46, 53) 3.23 3.07 3.15
10 Los Angeles (1, 8, 25) 3.87 3.61 3.50 48 Madison (39, 31, 66) 3.31 3.22 2.89
11 Raleigh/Durham (20, 15, 10) 3.57 3.50 3.88 49 Albuquerque (61, 37, 50) 3.04 3.19 3.17
12 San Jose (6, 11, 17) 3.78 3.54 3.61 50 Louisville (65, 55, 33) 3.01 2.98 3.40
13 Boston (14, 4, 27) 3.66 3.69 3.48 51 Washington, DCMD suburbs (62, 56, 36) 3.04 2.97 3.36
14 Orange County (12, 26, 11) 3.68 3.31 3.78 52 New Orleans (59, 48, 47) 3.12 3.05 3.19
15 New YorkManhattan (13, 9, 40) 3.67 3.59 3.26 53 Jacksonville (63, 66, 26) 3.03 2.77 3.48
16 San Diego (16, 27, 19) 3.62 3.27 3.57 54 Boise (52, 60, 51) 3.19 2.90 3.16
17 Phoenix (17, 38, 15) 3.61 3.19 3.66 55 Des Moines (44, 43, 65) 3.27 3.09 2.89
18 Minneapolis/St. Paul (19, 16, 37) 3.59 3.48 3.28 56 Columbia (47, 63, 52) 3.24 2.84 3.15
19 Miami (25, 25, 22) 3.48 3.31 3.54 57 Cleveland (27, 40, 70) 3.42 3.14 2.64
20 San Antonio (36, 47, 7) 3.34 3.05 3.94 58 Westchester, NY/Faireld, CT (57, 67, 54) 3.13 2.76 3.14
21 New YorkBrooklyn (21, 12, 41) 3.54 3.51 3.25 59 Tacoma (26, 74, 57) 3.44 2.49 3.09
22 Indianapolis (18, 17, 42) 3.60 3.45 3.25 60 Oklahoma City (58, 61, 60) 3.13 2.87 2.98
23 Honolulu (40, 50, 9) 3.30 3.02 3.88 61 Sacramento (56, 58, 63) 3.14 2.91 2.91
24 Washington, DCDistrict (28, 39, 18) 3.42 3.19 3.59 62 Las Vegas (68, 53, 62) 2.99 2.98 2.95
25 Charleston (38, 18, 29) 3.32 3.40 3.44
63 Memphis (71, 70, 34) 2.82 2.66 3.40
26 Chicago (15, 24, 46) 3.64 3.32 3.20
64 Hartford (64, 65, 58) 3.01 2.79 3.00
27 Columbus (31, 20, 31) 3.38 3.34 3.41
65 Omaha (66, 57, 67) 3.00 2.94 2.83
28 Oakland/East Bay (32, 28, 24) 3.37 3.25 3.51
66 Richmond (67, 64, 64) 3.00 2.81 2.89
29 Tampa/St. Petersburg (33, 35, 23) 3.36 3.20 3.54
67 Birmingham (69, 69, 61) 2.95 2.69 2.96
30 Houston (50, 59, 6) 3.23 2.91 3.96
68 Milwaukee (60, 54, 72) 3.05 2.98 2.55
31 Philadelphia (34, 29, 32) 3.35 3.22 3.41
69 Virginia Beach/Norfolk (72, 72, 56) 2.74 2.65 3.11
32 Washington, DCNorthern VA (24, 41, 35) 3.51 3.11 3.36
70 Tucson (48, 73, 75) 3.24 2.56 2.50
33 Detroit (23, 23, 55) 3.51 3.33 3.12
71 Providence (70, 68, 71) 2.92 2.75 2.61
34 St. Louis (41, 33, 28) 3.29 3.21 3.44
72 Spokane (53, 75, 68) 3.19 2.17 2.81
35 Baltimore (37, 19, 43) 3.33 3.37 3.23
73 Portland, ME (73, 62, 73) 2.66 2.87 2.55
36 Inland Empire (43, 45, 21) 3.28 3.08 3.56
74 Buffalo (75, 51, 74) 2.49 2.99 2.53
37 Northern New Jersey (22, 30, 49) 3.52 3.22 3.17
75 Deltona/Daytona (74, 71, 69) 2.55 2.66 2.66
38 Greenville (55, 44, 13) 3.14 3.08 3.68

Note: Numbers in parentheses are rankings for, in order, investment, development, and homebuilding.
growth potential seems to be the reason behind the movement slipped slightly, dropping just out of the top 20 and ending up
of markets within and into the top 20 for 2016. The market may at number 26.
be poised to take a more offensive approach in 2016 as the
economy strengthens and real estate fundamentals improve. The consensus for the movement of these markets seems
to be related to their current pricing rather than their rela-
The movement was not all in a positive direction, however. tive attractiveness as markets. A number of interviewees and
Houston provided the most dramatic move, falling from number survey respondents feel that these are still excellent defensive
one to number 30. Concern over what the fall in the price of oil investment markets. The final big-six marketWashington,
combined with the current level of new development gave sur- D.C.slipped again this year to number 24. Survey respon-
vey respondents pause for 2016. San Francisco, a perennial top dents remain cautious about the economic condition of the
market, slipped from number three to number eight. Other big- market and the amount of new supply still being delivered.
six markets slipping in the top 20 include Los Angeles, Boston,
and the Manhattan submarket of New York City. Chicago Notable moves outside the top 20 include Tampa Bay/St.
Petersburg and Columbus, Ohio, which moved into the top 30.

Orlando, Fort Lauderdale, and the metropolitan statistical areas The Florida markets are benefiting from the country finally
(MSAs) making up southwest Florida also joined Tampa as returning to normal levels of mobility after the temporary freeze
Florida markets improving in this years survey. created by the housing market collapse. The result has been
improved levels of population and employment growth. One
interviewee noted, The real tailwind to Florida growth created
Market Trends by retiring baby boomers is still to come. While markets in
What could lead to the market movement in the Emerging Florida have similar characteristics, they offer diversity in the
Trends in Real Estate 2016 survey? The following five trends form of economic opportunities. The different regions and mar-
were identified by interviewees as potentially leading to the kets appear poised to benefit from an improving U.S. economy.
changes in survey respondents outlook for each market. These
trends are seen as having positive and negative influences on a Respondents Get Cautious about High-Priced Markets
number of cities in the survey.
Survey respondents and interviewees both really like the big-six
markets, but this is how a number of interviewees would charac-
Look Out for the Villes . . . and Pittsburgh
terize their views of the markets: While they do not disagree that
Survey respondents and interviewees both expressed an inter- the investment performance in markets such as New York and
est in the villes, loosely defined as markets such as Nashville San Francisco has been phenomenal, the question is whether
and Knoxville, Tennessee, and Jacksonville and Gainesville, it is too late to invest in these markets now. One interviewee put
Florida. The sentiment, however, is not limited to the similarity in it this way: If I was going to invest in San Francisco with pricing
the names. The real meaning behind this trend relates to what where it is now, I would have to be planning on holding the asset
is going on in these markets and others with similar economic, for at least ten years. Coincidentally, this appears to be the
demographic, and cultural characteristics. strategy for a significant amount of foreign capital coming into
these markets. This has prompted a number of interviewees to
The villes are seen as offering opportunities to take advantage raise the following question: What will these markets look like
of faster-growing demographics, economies, concentrations in with a number of trophy assets off the market for possibly 25
desirable industries, and, in many cases, aggressive develop- years or longer?
ment plans to establish growth centers within the community. A
number of these markets appear to offer benefits similar to key Survey respondents appear to echo the questions raised by
18-hour cities: growing urban centers, good in-migration (spe- the interviewees. A number of the big-six markets have slipped
cifically among desired workers), attractive quality of life, and a in the 2016 rankings. The markets are still seen as attractive,
lower cost of doing business. just maybe priced at a level that requires some extra diligence.
Emerging Trends in Real Estate 2014 presented how survey
Nashville is a market that has been mentioned numerous times respondents preferred the big six to the field; 2016 could well
in interviews over the past three years, and this year survey be the year when the field closes the gap.
respondents have moved the market up significantly in terms of
perceived attractiveness. What market may be on the horizon as Growth and Affordability Drive Market Sentiment
the future Nashville? How about Pittsburgh? Pittsburgh has seen
My investment recommendation is to identify a growth path and
fairly stable survey results, but the number of mentions during
put yourself right in front of it. That was the specific advice from
interviews is trending up. Interviewees cite the growth in sci-
one interviewee, but it is a sentiment voiced by many more. As
ence, technology, engineering, and math (STEM) employment
the market begins to express some reticence about the market
and a strong education and medical sector as creating invest-
possibilities available in the big six, what other markets do they
ment opportunities in the market.
see as offering opportunities? The answer is as diverse as the
real estate market itself, but finding markets that are showing
Floridas Resurgence Continues
signs of significant growth tops the list for almost everyone.
In last years survey, Miami made it back into the top 20. This
year, the entire state of Florida is being viewed in a very positive The dominance of growth markets in this years top ten is a
light. Along with the primary southeast Florida markets, survey testament to current market sentiment. Survey respondents and
respondents and interviewees like the rest of the state as well. interviewees like markets such as Dallas/Fort Worth and Atlanta,
The position of Orlando and Tampa both improved noticeably in citing that the current growth pattern along with restrained levels
this years survey. Other markets such as southwest Florida and of new construction makes this a good time to invest in these
Jacksonville continued to improve. markets. Another factor that is prevalent among the top markets

for 2016 is the affordability and ease of doing business. Dallas/ housing stock will be needed. It will be interesting to watch the
Fort Worth, Atlanta, Nashville, and Portland are all seeing com- market determine what that housing stock will look like.
pany relocations to augment organic employment growth.
Fall in Oil Prices Affects Energy-Dependent Markets
Housing Outlook Continues to Improve Last years interviews and surveys were conducted with oil
A driving component behind the improved outlook for a number prices climbing steadily toward $100 a barrel, so it was no sur-
of markets is the housing market. Last year, we commented that prise when Houstonwhich had been in the top ten in previous
housing was ready to step off the roller coaster. It appears that yearsmoved to the number-one spot. What a difference a
in a majority of markets, housing has indeed stabilized and is year can make! As oil prices have plummeted into the $40-per-
poised to begin a sustained upward trajectory. Another 2015 barrel range, survey respondents are not confident in Houston
trend was that peak levels of millennials and baby boomers real estate for the coming year. Houston drops to number 30 in
would be making housing decisions in the next five years. This this years survey, a drop that exceeds that of Washington, D.C.,
could have a significantly positive impact on housing: millennials which fell out of the top 20 in the 2014 survey. Healthy debate is
buying their first homes and baby boomers either downsizing or good, and there are some differences of opinion on the out-
retiring to a new home or perhaps purchasing a second home. look for Houston. One interviewee summed it up thusly: The
Houston situation would make a great science experiment. We
The locales that will benefit the most from the movement of will get to see if all of the economic diversification that has taken
these two generational titans are still subject to a certain amount place over the past 20 to 30 years can help offset an oil price
of speculation, but one thing is certain: most markets will need shock. Other interviewees see the perceived weakness in the
to add housing to keep up with any type of increase in demand. Houston market as potentially a buying opportunity in what they
The increase in housing stock, both single-family and multifam- feel is still a vibrant market. The bottom line: Houston may be in
ily, has lagged household growth in many markets. When one for an interesting couple of years, with detractors and cheerlead-
factors in that the number of home purchases is quickly getting ers debating its future.
back to average historical levels, it becomes apparent that more
The Top 20 Markets market remains very strong in Dallas/Fort interest, plenty of available capital, and a
Worth. The view of market participants strong local development community.
Dallas/Fort Worth (1). Impressive
in the Dallas/Fort Worth market is the
employment growth is the story behind
highest in the South region and one of Austin (2). One of the inaugural 18-hour
the Dallas/Fort Worth metropolitan
the strongest in the nation. The market cities, the Texas state capital has become
areas rise to the top of this years sur-
continues to benefit from strong investor a perennial favorite among survey respon-
vey. Multiple survey respondents and
dents. This optimism has been rewarded
interviewees mentioned the strong job
by continued strong economic and real
growth driving the local economy. This
estate performance. Austin continues to
job growth is supported by a business- 5 excellent
benefit from diverse job creation ranging
friendly environment along with an 4
attractive cost of doing business and
good 3.87 from service jobs to higher-end STEM and
technology, advertising, media, and infor-
cost of living that has allowed the Dallas/
mation (TAMI) positions. Austin remains
Fort Worth market to enjoy the benefits of
an attractive place to live for all genera-
corporate relocations.
Dallas/Fort Worth tions. If there is a concern about Austin, it
may be that the market is growing faster
Survey respondents were positive regard-
ing all property types in the Dallas/Fort
3 fair than the local infrastructure.
Worth market and in both the investment

The 2016 outlook for all property types in
and development potential. Concerns
Austin is well above average, but survey
about potential overbuilding are on the
respondents were particularly favorable
markets mind, but the sentiment is that
toward single-family and retail. Austin
new construction is still justified at this
2
poor may well be a market where the growth
time. The outlook for the single-family 04 06 08 10 12 14 16 in population leads to the need for new

Exhibit 4-2 U.S. Office Property Buy/Hold/Sell Recommendations 5 excellent
4
Buy Hold Sell good
New YorkBrooklyn 78% 17% 6% 3.71
Minneapolis/St. Paul 60 20 20
Portland, OR 59 33 7
Austin 53 37 10
53 29 18
Atlanta 3 fair
Los Angeles 51 41 7
Nashville 50 45 5
Charlotte
Boston 49 29 22
San Diego 48 44 7
Dallas/Fort Worth 48 33 20
47 32 21 2
poor
San Jose
46 28 26 04 06 08 10 12 14 16
San Francisco
Seattle 45 33 23
This is similar to many of the faster-
Phoenix 44 40 16
growing affordable markets in the survey.
Charlotte 44 41 16
Industrial, to serve the growing local
Orange County 43 43 14
economy, and hotels, to handle growing
Chicago 42 19 39
numbers of business and leisure travel-
Raleigh/Durham 37 47 15
ers, are the two highest-rated commercial
New YorkManhattan 34 40 26
sectors. The local view of the Charlotte
Denver 33 45 17 market is very strong, with the only sec-
0% 20% 40% 60% 80% 100% tor not scoring in the good-to-excellent
range being development opportunities.
Note: Cities listed are the top 20 rated for investment in the office sector; cities are listed in order of the relative percentage
of buy recommendations.
Seattle (4). The Seattle market has
become so popular with domestic and
retail centers. The perception of the local potential shortcoming perceived by global investors that in interviews it is
real estate market by Austin respondents the local market is in public and private not unusual for it to be added to the list
remains very good, with all categories investment. of top six markets. Clearly, 2016 survey
in the good-to-excellent range. The only respondents feel the same way. Seattle
Charlotte (3). The largest city in North has a diverse industry base and is ben-
Carolina continues to embody many of efiting from growth in the TAMI industries.
5 excellent the components of an 18-hour city that One interviewee noted that Seattle is one
4 the Emerging Trends in Real Estate 2015
good of those markets where the growth has
3.82 report introduced. Good job and popula- been strong enough, long enough, that
tion growth along with the development of the only potential risk is being able to
urban centers continues to make the mar- sustain its current pace.
ket attractive to residents. Interviewees
generally feel good about the Charlotte The 2016 outlook for all the commercial
3 fair market, although some did express con- sectors of the Seattle market is relatively
Austin cern that the concentration of the financial strong with the exception of hotels. The
services industry may not offer the same outlook for hotels is good, just not as
level of growth as other more technology- good as that for the rest of the market. A
oriented markets. growing population base and legitimate
constraints on supply make the single-
poor Housing is the sector that has the stron- family housing market the most attractive
2
04 06 08 10 12 14 16 gest 2016 outlook in the Charlotte market.

5 excellent Exhibit 4-3 U.S. Retail Property Buy/Hold/Sell Recommendations

4
good Buy Hold Sell
3.84
New YorkBrooklyn 68% 21% 11%
Miami 65 35 0
Austin 60 36 4
Los Angeles 54 33 13
3 fair
Seattle Boston 52 24 24
Nashville 47 41 12
San Jose 44 50 6
2
poor San Francisco 43 40 17
04 06 08 10 12 14 16 Washington, DC 42 43 15
Northern VA
Atlanta 41 46 13
sector for 2016. The local outlook for the
Honolulu 41 46 14
economy and investor demand could
Washington, DC 40 40 20
not be much stronger in Seattle. In fact,
New YorkManhattan 39 37 24
a lack of development opportunities and
Charlotte 38 50 13
public and private investment is seen as
San Diego 36 59 5
the only potential problem from a local
market perspective. Northern New Jersey 36 57 7
Seattle 32 49 19
Atlanta (5). Interviewees and survey 0% 20% 40% 60% 80% 100%
respondents agree that the Georgia Source: Emerging Trends in Real Estate 2016 survey.
state capital is solidly in a sweet spot Note: Cities listed are the top 20 rated for investment in the retail sector; cities are listed in order of the relative percentage
with regard to growth and new supply. of buy recommendations.
The market is enjoying strong growth in

key sectors of the economy without the ing to market growth. As one interviewee ees both commented on the favorable
typical concerns about oversupply. The remarked, If you get into this market now, outlook for the market. Denver has taken
lower cost of doing business is attracting you will be ahead of the curve when new advantage of a location and a culture
corporate relocations that are contribut- development gets fully underway. that are attractive to a qualified workforce
Survey respondents have a favorable

5 excellent view of all sectors of the Atlanta real 5 excellent
4 good estate market, with no particular sector 4
good
3.79 standing out significantly from the others.
3.74
The local outlook for the Atlanta market is
good, led by relatively strong outlooks for Denver
the local economy, investor demand, and
Atlanta capital availability. The weakest compo-
fair nent of the local market is the perceived
3 3 fair
accomplishments of public and private
investment.
Denver (6). The strength of the economy

in Colorados state capital seems to have
poor put it on everyones list of top markets for poor
2 2
04 06 08 10 12 14 16 2016. Survey respondents and interview- 04 06 08 10 12 14 16

and exposure to growing technology
Exhibit 4-4 U.S. Hotel Property Buy/Hold/Sell Recommendations
industries. In addition, a number of public
and private infrastructure investments are Buy Hold Sell
setting the stage for future sustainable
growth. San Diego 53% 13% 33%
Tampa/St. Petersburg 44 44 11
The single-family housing market is San Francisco 44 44 12
expected to remain hot in 2016. Survey San Jose 44 50 6
respondents picked single-family housing Raleigh/Durham 43 21 36

to have the best outlook for next year. Charleston 43 43 14
The industrial market also is projected to Los Angeles 42 17 42
offer good investment opportunities in the Portland, OR 40 47 13
coming year. Local Denver market par- Boston 40 37 23
ticipants are understandably optimistic Minneapolis/St. Paul 40 20 40
about 2016. The overall outlook of good Dallas/Fort Worth 35 38 27
to excellent is led by a strong perception Miami 31 50 19
of investor demand, the strength of the Orlando 31 46 23
local economy, and capital availability. Austin 29 46 25
While it is the lowest-scored component, Seattle 26 56 19
public and private investment is still one 24 52 24
Atlanta
of the highest scores in the survey. 22 56 22
Charlotte
Nashville (7). Tennessees state capital Northern VA
Nashville 15 38 46
has been on the lips of interviewees the
last two years as a potential up-and-
coming market. Well, it looks like it has 0% 20% 40% 60% 80% 100%
up and come. Survey respondents have Source: Emerging Trends in Real Estate 2016 survey.
caught up with the interviewees and Note: Cities listed are the top 20 rated for investment in the hotel sector; cities are listed in order of the relative percentage
Nashville is a top-ten market for 2016.
Nashville is another market that embodies concern from interviewees is whether the ees alike are taking a more conservative
the 18-hour city amenities that include a current infrastructure will be able to keep approach to the market. One interviewee
growing and vibrant urban core, but that up with growth at its current pace. noted: The good thing about San
also offers attractive suburban locations. Francisco is that even if it does drop, the
Similar to Austin, the only noticeable Office is the property type that survey chances are it will bounce back even
respondents anticipate will offer the
5 excellent best investment opportunity in 2016. 5 excellent
According to local market participants, 4
4 good the Nashville economy should be firing on good
3.75 all cylinders in 2016. Local respondents 3.73
see an extremely strong local economy
supported by plenty of investor demand
and available capitalall factors that a
Nashville
strong local development community can
3 fair put to good use.
3 fair San Francisco
San Francisco (8). The San Francisco

market is back to peak levels in just about
every market component: occupancy,
poor rent levels, and valuations. This may be poor
2 why survey responders and interview- 2
04 06 08 10 12 14 16 04 06 08 10 12 14 16

higher. That may explain why even with The 2016 outlook for investment by
a market back at peak levels, survey Portland property type is led by the
5 excellent
respondents still feel like it belongs in industrial and office sectors. The two 4 good
the top ten. commercial property types are higher
than both of the residential-related sec-
3.57
Every real estate sector in San Francisco tors. Portland survey respondents feel
could arguably be called hot, but survey good about their local market, but do see
respondents like the outlook for hotel and some room for improvement in public and
single-family residential for 2016. The rest private investment and the local develop- 3 fair
of the national market may have some ment community. Raleigh/Durham
reservations about the San Francisco
market, but that does not seem to apply Los Angeles (10). As the largest big-six
to the local market. The local outlook market on the West Coast, Los Angeles
score for San Francisco is the highest in continues to be a favorite among inter-
the surveya score that is even more viewees and survey respondents. Pricing poor
2
impressive when one considers that the and fundamentals are strong, but are 04 06 08 10 12 14 16
outlook for development opportunities is relatively mild compared with those in
only fair. San Francisco. Interviewees remarked Raleigh/Durham (11). The Raleigh/
on the potential for future growth in select Durham metro area built on its strong
Portland, Oregon (9). Along with a Los Angeles neighborhoods. position in last years survey and has
few other select markets, Portland may been added to a large number of top
arguably have been at the forefront of the Two property sectors typically viewed as market lists. The concentration of edu-
attributes that make up the core of what undersupplied in Los Angeles have the cational facilities along with a growing
constitutes an 18-hour city. As such, it is highest outlook score in this years survey. technology sector is driving the economy,
definitely a market that interviewees like Multifamily has the highest score, fol- and the development of attractive urban
to hold up as an example of what they lowed closely by retail. In some respects, centers is making the cities within the
like to see in market characteristics. That the Los Angeles local outlook matches Raleigh/Durham area appealing as
being said, there is still some hesitation the national opinion of the marketgood places to live. Interviewees are drawn to
among all national investors to embrace and steady. While the outlook for the local the growth in the STEM industries and the
Portland as a true primary market. It will economy is just good, investor demand potential this adds to longer-term growth.
be interesting to see whether 2016 is and capital availability are stronger,
the beginning of Portlands rise from top matching more closely what interviewees The single-family residential market was
secondary market to primary market. and all survey respondents seem to think selected by survey respondents to have
about Los Angeles. the best outlook for 2016. This is likely
driven by the expectations for strong
5 excellent 5 excellent household growth in the market. The
4 local Raleigh/Durham market is optimistic
4 good good 3.87 about 2016: The overall local outlook is in
3.71 the good-to-excellent range, driven by a
Portland very strong outlook for the local economy
and investor demand.
San Jose (12). Technology is still seen

3 fair 3 fair as the driver of economic growth in
the United States, and San Jose is still
viewed as the center of that growth. A
Los Angeles
new facet of the conversation concern-
ing San Jose is the urbanization of the
poor poor technology industry to San Francisco.
2 2 Several interviewees mentioned that it
04 06 08 10 12 14 16 04 06 08 10 12 14 16

Edmonton
Saskatoon
Vancouver Calgary
Seattle Winnipeg
Tacoma
Spokane
Portland, OR
Minneapolis/
Boise St. Paul
Des Moines
Omaha
Sacramento
San Francisco
Salt Lake City
Oakland
San Jose East Bay Kansas City
Denver
Las Vegas
Los Angeles Inland Empire Albuquerque Oklahoma City
Orange County Phoenix

San Diego
Tucson
Dallas/Fort Worth
Honolulu/Hawaii
Austin
Houston
San Antonio

Halifax
Montreal
Ottawa
Portland, ME
Boston
Toronto
Providence
Buffalo
Hartford
Madison Milwaukee Detroit Westchester, NY/Faireld, CT
Northern New Jersey
New Yorkother boroughs
New YorkBrooklyn
Chicago Cleveland Pittsburgh
New YorkManhattan
Indianapolis Washington, DC Philadelphia
Columbus Baltimore
MD suburbs
Washington, DCDistrict
St. Louis Cincinnati Richmond
Washington, DCNorthern VA
Louisville
Virginia Beach/Norfolk
Charlotte Raleigh/Durham
Nashville Greenville
Memphis
Columbia
Atlanta Leading U.S./Canadian Cities
Charleston
Birmingham
Overall Real Estate Prospects
Generally good
Jacksonville Fair
Generally poor
New Orleans Deltona/Daytona
Note: Numbers represent metro-area overall
country rank.
Orlando
Tampa/ Palm Beach
St. Petersburg
Fort Lauderdale
Cape Coral/Fort Myers/Naples
Miami

5 excellent Exhibit 4-5 U.S. Multifamily Property Buy/Hold/Sell Recommendations
4 good Buy Hold Sell
3.78
Orlando 71% 12% 18%
Minneapolis/St. Paul 70 20 10
San Diego 69 17 14
Los Angeles 63 28 9
3 fair San Francisco 60 22 18

San Jose 60 20 20
Indianapolis
San Jose 47 32 21
Chicago 45 30 24
poor 45 26 29
2 Denver
04 06 08 10 12 14 16 44 17 39
Northern New Jersey
will be interesting to see how this could
Austin 43 36 21
change the dynamic between the two
Honolulu 43 43 14
Bay Area metro areas. One thing that
Boston 41 36 23
interviewees did agree on is that San
Nashville 41 27 32
Jose is still the most desirable technol-
Seattle 40 30 30
ogy campus location.
Columbus 33 33 33
As one of the highest-cost housing mar- New YorkManhattan 26 30 44
kets in the country, it is not surprising that 0% 20% 40% 60% 80% 100%
San Jose multifamily housing and single- Source: Emerging Trends in Real Estate 2016 survey.
family housing were selected by the Note: Cities listed are the top 20 rated for investment in the multifamily sector; cities are listed in order of the relative percentage
survey as the two property types with the
best outlook for 2016. The local outlook According to this years survey, the the highest residential-related property
among San Jose market participants is Boston office sector had the highest type. Slipping out of the overall top ten
very good, but somewhat bifurcated. The outlook score of all Boston property sec- has not diminished the local real estate
local economy, investor demand, and tors for 2016. Multifamily came in as the communitys confidence in the Boston
capital availability all received very strong second-highest property type score and market. The overall score is one of the
scores, while the other components were top in the survey and is led by a strong
merely good. 5 excellent outlook for investor demand and capital
4 availability.
Boston (13). It was a relatively quiet good
year for the Massachusetts state capital. Orange County (14). Orange County
3.66
Survey respondents still like the market, appears to have fully rebounded from
but it did slip out of the top ten this year. the collapse of the subprime mortgage
Interviewees remarked that Boston is industry that drove growth until the global
becoming an increasingly neighborhood- financial crisis. The market is now more
Boston
driven market. It continues to be viewed 3 fair reliant on the traditional small busi-
as one of the top lab markets in the coun- nesses that make up a large percentage
try, and good growth in STEM industries of the tenant base. A number of these
should support that position. Interviewees firms are involved with foreign trade, so
also like the continued concentration in they continue to benefit from a growing
education and medical employment in local economy. One question posed by
the market. 2
poor
interviewees is the following: What impact
04 06 08 10 12 14 16

5 excellent 5 excellent 5 excellent

4 good 4 good 4
good
3.68 3.67
3.62
3 fair 3 fair 3 fair
New YorkManhattan
Orange County
San Diego
poor poor poor
2 2 2
04 06 08 10 12 14 16 04 06 08 10 12 14 16 04 06 08 10 12 14 16
could a strong dollar have on this sector Retail is the highest-scoring sector private investment and the availability of
of the economy? for New York in the 2016 survey, with development opportunities.
the multifamily sector a close second.
As in other higher-cost housing markets, Investor demand and capital availability Phoenix (17). Phoenix is back to being
the multifamily sector is the highest-scor- are viewed by the local New York market a high-growth market, having shaken
ing property type for Orange County in this as definite strengths for 2016. If there is a off many of the ill-effects from the global
years survey. As in the other West Coast weakness in the market, it is in the avail- financial crisis. Interviewees like the
markets, the local Orange County respon- ability of development opportunities and growth potential there, especially in
dents see strength in investor demand and public/private investment cooperation. sectors that will benefit from the growing
capital availability. The outlook for the local population base. Some concern exists,
economy in 2016 is also good, but the San Diego (16). In this years survey, San however, that the potential for new devel-
outlooks for the other local market compo- Diego moved up from number 20 in last opment could be starting prematurely.
nents are scored relatively lower. years survey. A number of interviewees
have started adding San Diego to their The 2016 outlook for the commercial and
New YorkManhattan (15). Manhattan list of markets that they see as having residential sectors in Phoenix are fairly
remains one of the top global markets the potential to outperform in 2016. The even. The sectors that stand to benefit
for investment, but the competition from typical reason given is the concentration directly from stronger population growth
global capital may be hurting its position in life sciences and technology. These
with survey respondents. Several inter- industries are seen as having significant 5 excellent
viewees remarked that the competition tailwinds because of the aging of the U.S.
for assets is so intense that the market population. 4 good
is out of reach for a number of investors.
This may force investors to seek other Survey respondents feel the most opti- 3.61
areas for opportunities; it certainly does mism toward the residential real estate
not diminish the health of the market for sector, with single-family and multifamily
Phoenix
other segments who still view Manhattan as the leading sectors for the market. The
as an attractive place in which to do local market outlook for San Diego is one 3 fair
business. If an area for concern exists, it of the lowest for a top-20 market. Local
is the cost of doing business there. With respondents feel relatively good about
a number of new projects underway, will the local economy, investor demand, and
the market be able to afford to attract capital availability. The real weakness in
the quality of worker needed to keep the the 2016 local outlook comes from public/
poor
economy growing? 2
04 06 08 10 12 14 16

are ranked slightly higher than the other
Exhibit 4-6 U.S. Industrial Property Buy/Hold/Sell Recommendations
sectors. The industrial sector should ben-
efit from an increase in regional and local Buy Hold Sell
distribution. The local Phoenix market
may be slightly more conservative in its Seattle 64% 27% 9%
outlook than the broader survey group. Chicago 63 23 13
The local perception of the economy and Northern New Jersey 63 31 6
investor demand remain good, but capital Minneapolis/St. Paul 61 25 15
availability and development opportuni- Indianapolis 60 30 10

ties are seen as being slightly weaker. Denver 59 30 11
Minneapolis/St. Paul (18). Minneapolis/ Los Angeles 57 37 6
St. Paul is the highest-ranked midwestern St. Louis 57 21 21
market in this years survey. Minneapolis Detroit 57 28 15
is enjoying strong growth in the education Inland Empire 55 41 4
and medical sectors along with being a Portland, OR 48 48 5
regional center for STEM employment. San Jose 47 47 7
A vibrant neighborhood culture is the 43 52 4
Charlotte
reason cited most often by interviewees 42 44 14
Salt Lake City
for being attracted to Minneapolis/St. 40 47 13
Nashville
Paul, making the region attractive to an 39 47 13
Atlanta
educated workforce.
Baltimore 38 42 20
Phoenix 33 56 11
The commercial real estate sectors are
seen as offering the best opportuni- Northern VA
ties in 2016. Industrial has the highest 0% 20% 40% 60% 80% 100%
score because the Minneapolis/St. Paul Source: Emerging Trends in Real Estate 2016 survey.
industrial market benefits from a stron- Note: Cities listed are the top 20 rated for investment in the industrial sector; cities are listed in order of the relative
percentage of buy recommendations.
ger local and regional economy. Unlike
many other markets in this years survey, lower compared with the outlook for the ism component in the market. It remains
the single-family sector is actually one rest of the top 20. While the local econ- to be seen if the strong dollar and an
of the lower-rated components of the omy and investor demand are perceived economic slowdown in Latin America
market. The local market outlook is as good, the local development com- will be a headwind to Miamis continued
perceived as relatively strong, although munity and public/private investment are improvement. Local market participants
seen as somewhat weaker than the rest
5 excellent of the market. 5 excellent
4 4
good Miami (19). Miami remains in the top 20 good
this year, and the outlook from survey
3.59 respondents and interviewees alike
3.48
seems to be more optimistic. Interviewees
cited the potential for continued growth in
the Miami economy along with com-
3 fair paratively strong supply constraints as
3 fair
reasons for optimism.
The retail sector has the strongest out-

Minneapolis/St. Paul Miami
look in the Miami market. Retail is seen
poor as benefiting from good population and poor
2 income growth as well as the strong tour- 2
04 06 08 10 12 14 16 04 06 08 10 12 14 16

feel very good about the local economy in force that must compete for qualified
Miami and rate overall prospects as good workers.
5 excellent
to excellent. If an area of concern exists, it 4 good
is one of success: the lowest-rated com- The local housing market, both single-
ponent of the local market is the availability family and multifamily, is viewed as
of development opportunities. offering two of the best investment
opportunities, with the other commercial 3.34
San Antonio (20). San Antonio moves sectors viewed as offering good potential
into the top 20 this year, but not without a for 2016. The local view is good for San 3 fair
few questions. The economy is exhibiting Antonio, although survey respondents
San Antonio
strong growth, but concerns exist about would like to see the opportunity for more
negative implications resulting from the public and private investment opportu-
fall in oil prices and any negative reper- nities. Respondents in San Antonio, a
cussions this could have on the local secondary market, are not as confident in
economy. On a positive note, a reduction continued investor demand and capital poor
2
in labor demand for the oil fields could availability as respondents in many of the 04 06 08 10 12 14 16
provide a boost to the San Antonio labor primary markets.
Perspectives on Regions
The outlook for U.S. regions for 2016 reflects the continued Exhibit 4-7 Local Outlook: West Region
improvement in the outlook for more markets. The West and
South regions both exhibit improved outlooks for all property San Francisco 4.31
types, and local market participants on average feel more posi- Seattle 4.31
Denver 4.23
tive about the current environment. The general positive feeling
San Jose 4.22
for 2016 continues the positive outlook reported for 2015. The
Salt Lake City 4.21
Northeast and Midwest regional average results also are gener- Tacoma 4.13
ally positive, with any decline in outlook from 2015 limited to a Orange County 4.02
few property types. Los Angeles 3.94
Portland, OR 3.93
West Region Oakland/East Bay 3.92
Boise 3.92
The 20 markets that make up the West region have an average
San Diego 3.88
rank of 33 in this years survey. This is the highest average rank Honolulu 3.67
of all four U.S. regions represented. The region includes four of Phoenix 3.67
the top ten markets and an impressive eight of the top 20. Las Vegas 3.60
Inland Empire 3.39
Survey respondents like the multifamily sector as the highest- Sacramento 3.30
scoring property type in the region. Multifamily markets pro- Albuquerque 3.13
Tucson 3.04
jected to easily outperform the regional average include San
Spokane 2.94
Jose, Orange County, Los Angeles, San Diego, and Honolulu.
1 2 3 4 5
After multifamily, survey respondents like industrial, single-family Weak Declining Average Improving Strong
housing, retail, hotel, and office in the West region. Industrial Source: Emerging Trends in Real Estate 2016 survey.
markets expected to outperform the regional average include Note: Average score of local market participants opinions on strength of local economy,
investor demand, capital availability, development and redevelopment opportunities, public/
the following: Los Angeles, Denver, the Inland Empire, Salt Lake private investments, and local development community.

Exhibit 4-8 Economy
Millennials
2016 Population (age 1635) Business costs Total employment Location quotient****
5 -year GMP per Per capita 5-year
annual net 2016 GMP capita 5-year Cost of disposable disposable 2016 as % 2018 as % Business & Education
Total 20152016 migration % of total 5-year per capita projected doing income income 20152016 of previous of previous professional & health Goods Ofce
Market (millions) % change (000s) population growth ratio* growth business** ratio*** growth % change peak peak services services Energy producing using
United States 324.11 0.8% 27.2% 2.2% 1.00 2.3% 100% 1.0 10.8% 2.2% 105.2% 109.3% 1.0 1.0 1.0 1.0 1.0
Albuquerque 0.91 0.1% (0.41) 27.1% 0.6% 0.83 3.7% 92% 0.8 0.9% 2.0% 98.5% 101.5% 1.1 1.0 0.2 0.7 1.0
Atlanta 5.82 1.9% 91.37 27.6% 10.5% 0.97 3.3% 90% 0.9 8.6% 3.2% 108.5% 114.6% 1.3 0.8 0.6 0.7 1.3
Austin 2.06 3.0% 44.03 31.6% 16.3% 1.03 7.7% 102% 1.0 6.5% 2.5% 125.9% 133.7% 1.2 0.8 0.5 0.9 1.1
Baltimore 2.81 0.5% 4.53 27.7% 3.8% 1.14 2.8% 106% 1.2 9.7% 1.6% 105.9% 108.2% 1.2 1.2 0.4 0.7 1.1
Birmingham 1.16 0.6% 5.05 26.3% 3.0% 0.85 2.1% 95% 1.0 10.1% 2.4% 100.3% 104.3% 0.9 0.9 0.7 0.9 1.0
Boise 0.69 1.9% 7.96 26.6% 5.9% 0.79 3.7% 85% 0.9 14.9% 2.3% 106.4% 111.5% 1.0 1.0 0.2 1.1 1.0
Boston 4.80 0.7% 15.25 28.4% 2.9% 1.43 3.3% 123% 1.3 11.1% 2.0% 108.2% 111.7% 1.3 1.3 0.5 0.8 1.3
Buffalo 1.13 0.2% (3.53) 26.4% 4.7% 1.20 2.3% 91% 0.9 5.8% 1.3% 104.7% 106.4% 1.0 1.1 1.0 1.0 0.9
Cape Coral/Fort Myers/
1.10 3.7% 43.19 20.6% 14.7% 0.66 6.3% 94% 1.2 14.8% 4.3% 108.5% 117.9% 0.9 0.8 0.1 0.9 0.9
Naples
Charleston 0.75 1.6% 8.27 29.2% 6.3% 0.80 0.3% 99% 0.9 9.0% 2.3% 112.5% 116.8% 1.1 0.7 0.4 0.9 1.0
Charlotte 2.47 1.8% 42.72 26.8% 12.0% 0.97 2.6% 90% 0.9 6.0% 2.5% 110.2% 115.4% 1.2 0.7 0.8 1.0 1.2
Chicago 9.61 0.4% (12.62) 27.9% 2.4% 1.09 3.3% 99% 1.1 11.9% 1.8% 102.2% 105.5% 1.3 1.0 0.9 0.9 1.2
Cincinnati 2.17 0.6% 4.89 26.5% 1.4% 0.97 3.0% 100% 1.0 10.2% 2.3% 104.5% 108.3% 1.2 0.9 1.0 1.1 1.1
Cleveland 2.06 0.2% (5.56) 24.6% 2.2% 1.04 5.9% 98% 1.0 12.7% 1.9% 100.3% 103.6% 1.0 1.2 1.1 1.1 1.0
Columbia 0.83 1.5% 9.56 29.3% 1.3% 0.87 1.5% 93% 0.9 11.4% 2.5% 105.9% 110.9% 0.9 0.8 1.1 0.9 1.0
Columbus 2.04 1.1% 11.91 28.8% 7.1% 1.03 1.8% 96% 1.0 9.7% 2.5% 110.2% 115.5% 1.2 1.0 0.6 0.8 1.2
Dallas/Fort Worth 7.25 2.1% 60.26 18.9% 10.8% 0.78 5.8% 97% 0.7 10.2% 2.6% 115.8% 123.4% 1.3 0.8 0.7 0.9 1.4
Deltona/Daytona 0.64 2.5% 18.72 21.8% 6.6% 0.54 1.8% 88% 0.8 11.6% 3.2% 101.4% 107.9% 0.8 1.3 0.2 0.8 0.8
Denver 2.85 1.6% 26.19 28.3% 10.0% 1.13 0.1% 97% 1.2 11.5% 2.3% 113.9% 120.0% 1.2 0.8 0.8 0.9 1.2
Des Moines 0.62 0.9% 2.11 27.3% 6.6% 1.21 2.4% 85% 1.0 10.2% 1.9% 110.5% 114.3% 1.0 0.8 0.6 0.8 1.4
Detroit 4.30 0.1% (5.31) 25.1% 0.1% 0.93 4.1% 98% 1.0 16.3% 2.2% 101.3% 105.1% 1.4 1.0 0.7 1.2 1.2
Fort Lauderdale 1.93 1.7% 28.75 25.8% 9.7% 0.84 1.3% 100% 1.0 12.4% 3.0% 104.4% 110.0% 1.3 0.8 0.2 0.6 1.3
Greenville 0.89 1.4% 9.86 26.5% 2.1% 0.78 1.5% 89% 0.9 10.7% 2.6% 107.8% 112.7% 1.2 0.8 1.8 1.3 1.1
Hartford 1.22 0.4% 2.50 26.4% 0.0% 1.52 5.2% 107% 1.2 8.5% 1.4% 102.7% 105.0% 1.0 1.1 0.4 1.0 1.2
Honolulu 1.00 0.6% 0.35 29.5% 3.3% 1.04 0.5% 162% 1.1 8.3% 1.7% 104.8% 108.1% 1.0 0.9 0.1 0.6 0.9
Houston 6.75 2.0% 75.87 29.0% 9.0% 1.26 5.4% 101% 1.2 9.4% 1.7% 117.8% 124.5% 1.1 0.8 3.1 1.4 1.0
Indianapolis 2.01 1.0% 9.46 27.2% 6.2% 1.03 3.0% 89% 1.0 14.4% 1.6% 109.0% 112.8% 1.1 0.9 1.2 1.0 1.1
Inland Empire 4.55 1.2% 19.18 29.3% 1.9% 0.65 0.3% 103% 0.7 5.3% 2.5% 106.5% 111.0% 0.8 1.0 0.7 1.0 0.7
Jacksonville 1.47 1.8% 22.43 27.1% 7.8% 0.84 0.8% 94% 1.0 17.8% 3.5% 104.5% 111.0% 1.1 1.0 0.2 0.7 1.2
Kansas City 2.10 0.6% 3.07 26.5% 5.2% 0.96 1.3% 95% 1.0 10.5% 2.2% 105.7% 109.7% 1.2 0.9 0.6 0.8 1.2
Las Vegas 2.17 2.5% 43.59 28.0% 11.9% 0.83 0.2% 93% 0.9 4.8% 4.0% 102.0% 106.0% 1.0 0.6 0.2 0.6 0.9
Los Angeles 10.26 0.7% (0.76) 30.2% 4.7% 1.17 1.9% 107% 1.0 12.8% 2.3% 104.6% 108.8% 1.0 1.2 0.6 0.8 1.1
Louisville 1.29 0.7% 5.35 25.9% 4.0% 0.93 3.1% 88% 0.9 8.4% 2.4% 107.9% 112.9% 1.0 0.9 0.7 1.2 1.0
Madison 0.64 0.8% 1.92 30.2% 2.0% 1.22 1.4% 98% 1.1 12.9% 2.1% 109.3% 113.8% 0.9 0.8 1.0 0.9 1.0
Memphis 1.36 0.7% 3.13 27.8% 0.6% 0.89 3.4% 90% 1.0 12.6% 2.9% 100.0% 105.1% 1.1 0.9 0.7 0.8 1.0
Miami 2.73 1.3% 28.68 27.2% 9.4% 0.84 0.5% 111% 0.9 13.3% 3.1% 107.9% 113.9% 1.0 1.0 0.3 0.5 1.1
Milwaukee 1.58 0.3% (2.03) 26.7% 0.4% 1.03 4.2% 102% 1.1 10.9% 2.2% 100.7% 105.5% 1.1 1.2 0.8 1.3 1.1
Sources: Moodys Analytics, U.S. Census Bureau, Bureau of Economic Analysis, Bureau of Labor Statistics.
* Metro GMP per capita divided by national GMP per capita.
** Cost of doing business: national average = 100 percent.
*** Market per capita disposable income divided by national per capita disposable income.
**** Location quotient measures employment concentration by market: (metro industry employment as a percentage of metro total)/(national industry employment as a percentage of national total).

Exhibit 4-8 Economy
Millennials
2016 population (age 1635) Business costs Total employment Location quotient****
5 -year GMP per Per capita 5-year
annual net 2016 GMP capita 5-year Cost of disposable disposable 2016 as % 2018 as % Business & Education
Total 20152016 migration % of total 5-year per capita projected doing income income 20152016 of previous of previous professional & health Goods Ofce
Market (millions) % change (000s) population growth ratio* growth business** ratio*** growth %change peak peak services services Energy producing using
United States 324.11 0.8% 27.2% 2.2% 1.00 2.3% 100% 1.0 10.8% 2.2% 105.2% 109.3% 1.0 1.0 1.0 1.0 1.0
Minneapolis/St. Paul 3.57 1.1% 15.77 27.4% 6.4% 1.14 0.7% 105% 1.1 0.4% 2.2% 106.9% 111.0% 1.2 1.1 0.7 1.0 1.2
Nashville 1.84 1.4% 17.65 28.4% 7.6% 0.98 2.2% 94% 1.1 11.2% 3.0% 116.7% 122.3% 1.1 1.0 0.5 1.0 1.1
New Orleans 1.27 0.8% 6.35 27.8% 4.5% 0.99 1.2% 89% 1.0 19.9% 1.4% 105.3% 105.9% 0.9 1.0 1.9 0.8 0.9
New YorkBrooklyn 2.66 0.8% (6.88) 31.7% 11.2% 0.48 3.6% 135% 0.9 9.6% 1.9% 126.5% 130.4% 0.6 2.3 0.1 0.6 0.9
New Yorkother boroughs 7.16 0.4% (5.36) 27.4% 3.3% 0.29 2.1% 93% 1.0 2.3% 1.6% 109.3% 112.1% 0.8 1.6 0.5 0.8 0.9
New YorkManhattan 1.65 0.3% (3.48) 35.5% 10.8% 5.06 3.4% 160% 2.6 8.9% 1.4% 109.6% 112.1% 1.5 0.8 0.0 0.2 1.8
Northern New Jersey 2.52 0.2% (4.90) 24.8% 2.0% 1.30 6.9% 106% 1.3 13.2% 1.8% 99.1% 102.2% 1.3 0.9 1.5 0.8 1.3
Oakland/East Bay 2.79 1.2% 17.65 27.4% 9.9% 1.07 1.8% 108% 1.3 10.2% 2.8% 105.5% 110.5% 1.2 1.1 0.7 1.0 1.1
Oklahoma City 1.36 0.9% 5.18 29.3% 2.6% 0.92 4.5% 84% 1.0 11.2% 2.1% 111.5% 115.7% 1.0 0.9 2.1 1.0 0.9
Omaha 0.92 1.0% 2.40 27.8% 3.4% 1.04 3.2% 94% 1.1 6.6% 2.0% 108.0% 112.1% 1.1 1.0 0.6 0.9 1.2
Orange County 3.20 0.9% 8.83 28.2% 5.0% 1.40 0.6% 110% 1.2 9.9% 2.5% 104.2% 108.6% 1.3 0.8 0.6 1.2 1.3
Orlando 2.46 3.0% 66.10 29.0% 13.5% 0.95 4.3% 107% 0.9 15.2% 4.1% 111.1% 119.6% 1.2 0.8 0.2 0.6 1.2
Palm Beach 1.47 2.6% 41.01 22.8% 10.7% 0.81 4.0% 97% 1.3 19.3% 3.5% 106.3% 113.1% 1.3 1.0 0.1 0.6 1.3
Philadelphia 6.09 0.3% 1.50 27.1% 0.8% 1.07 4.3% 103% 1.2 13.0% 2.0% 102.2% 105.8% 1.1 1.4 0.9 0.8 1.1
Phoenix 4.71 2.4% 82.53 27.6% 8.3% 0.83 2.4% 98% 0.9 10.2% 4.2% 103.7% 111.5% 1.2 1.0 0.3 0.9 1.3
Pittsburgh 2.36 0.1% 6.78 24.8% 0.5% 1.08 5.8% 98% 1.1 12.8% 1.8% 105.2% 107.8% 1.1 1.3 1.2 1.0 1.0
Portland, ME 0.53 0.4% 1.50 23.4% 1.2% 0.90 3.4% 108% 1.0 1.1% 2.1% 102.6% 105.8% 0.9 1.3 0.6 0.9 0.9
Portland, OR 2.41 1.3% 20.31 27.4% 10.6% 1.37 12.9% 91% 1.0 17.3% 3.0% 109.2% 115.2% 1.1 0.9 0.4 1.2 1.1
Providence 1.62 0.3% 1.87 26.6% 0.3% 0.90 3.7% 111% 1.0 2.8% 1.4% 100.6% 102.8% 0.9 1.4 0.7 1.0 0.9
Raleigh/Durham 2.52 1.8% 45.42 27.6% 11.4% 0.97 2.1% 85% 0.9 4.7% 2.9% 109.9% 116.1% 1.2 1.0 0.9 0.9 1.1
Richmond 1.28 0.9% 6.60 27.6% 3.2% 1.07 1.3% 91% 1.0 10.4% 3.0% 105.3% 110.6% 1.1 1.0 0.7 0.7 1.1
Sacramento 2.30 1.2% 16.72 27.9% 4.7% 0.98 2.7% 112% 1.0 9.8% 2.5% 102.3% 106.8% 1.0 1.0 0.2 0.7 0.9
Salt Lake City 1.18 1.3% 2.47 31.0% 3.3% 1.20 7.0% 87% 0.9 14.0% 2.5% 113.4% 118.1% 1.2 0.7 0.9 1.0 1.3
San Antonio 2.41 1.8% 25.67 29.0% 3.9% 0.83 5.1% 88% 0.9 5.1% 2.6% 119.1% 125.3% 0.9 1.0 0.5 0.8 1.1
San Diego 3.34 1.1% 12.69 31.0% 5.4% 1.16 1.5% 123% 1.1 11.3% 2.5% 107.9% 112.5% 1.2 0.9 0.5 0.9 1.1
San Francisco 1.65 1.0% 8.37 29.7% 16.5% 1.97 3.3% 121% 1.9 21.8% 1.9% 119.5% 124.3% 1.8 0.8 0.6 0.5 1.7
San Jose 1.99 1.0% 5.43 27.9% 12.1% 1.65 1.8% 129% 1.6 17.5% 3.3% 119.3% 124.5% 1.5 1.0 0.2 1.4 1.5
Seattle 2.92 1.3% 20.61 28.8% 13.5% 1.57 1.1% 103% 1.4 13.2% 2.6% 111.8% 116.8% 1.1 0.8 0.2 1.2 1.2
Spokane 0.70 1.1% 5.59 26.7% 2.5% 0.86 2.0% 85% 0.9 12.5% 2.2% 105.2% 109.3% 0.8 1.2 0.6 0.9 0.8
St. Louis 2.82 0.2% 0.08 26.3% 1.0% 0.94 3.5% 93% 1.0 12.8% 2.2% 100.7% 104.4% 1.1 1.1 0.9 0.9 1.1
Tacoma 0.85 1.3% 5.61 28.7% 6.9% 0.77 2.3% 90% 1.0 14.1% 2.2% 107.5% 111.6% 0.6 1.2 0.6 0.9 0.7
Tampa Bay/St. Petersburg 3.01 1.7% 53.28 24.5% 7.7% 0.84 0.7% 101% 0.9 16.8% 3.4% 104.3% 110.2% 1.2 1.0 0.3 0.7 1.3
Tucson 1.04 1.6% 13.09 27.5% 1.7% 0.74 1.4% 96% 0.8 9.4% 3.4% 99.2% 106.0% 1.0 1.1 0.5 0.8 0.9
Virginia Beach/Norfolk 1.74 0.7% 3.14 30.7% 0.5% 0.99 2.5% 92% 1.0 9.5% 2.3% 100.5% 104.4% 1.0 0.9 0.2 0.9 0.9
Washington, DCDistrict 0.68 1.2% 2.89 38.2% 15.0% 2.69 3.7% 120% 1.6 15.1% 1.4% 112.0% 114.8% 1.5 1.1 0.0 0.2 2.5
Washington, DC
2.31 1.0% 9.59 27.3% 8.1% 0.96 2.1% 99% 1.2 9.4% 1.1% 102.2% 104.2% 1.3 0.9 0.3 0.7 1.4
MD suburbs
Washington, DC
2.96 1.2% 8.84 28.0% 10.7% 1.01 2.7% 112% 1.3 10.4% 2.1% 108.4% 113.2% 2.0 0.7 0.2 0.5 1.9
Northern VA
Westchester, NY/
1.93 0.3% (1.27) 24.5% 1.0% 1.11 0.0% 125% 1.7 12.9% 1.5% 101.9% 104.3% 1.1 1.2 0.4 0.7 1.2
Faireld, CT

Exhibit 4-9 Housing
Households Median home prices 2016 single-family home year-to-year change Multifamily metrics
3-year Rent as % of Space under
2016 total projected 20152016 2016 as Affordability Rent/cost of household construction as
Market (000s) growth 2016 price % change % of peak index* Permits Starts Completions Sales Walk Score ownership** income % of inventory
United States 123,852 4.8% $231,644 4.0% 104.4% 157.48 38.2% 38.5% 24.5% 13.8% 51 0.8 31.4% 1.4%
Albuquerque 358 1.8% $190,834 3.1% 103.8% 166.63 4.4% 7.8% 3.0% 13.5% 40 0.8 26.8% 0.6%
Atlanta 2,139 8.2% $175,742 2.8% 102.7% 207.88 8.1% 8.9% 8.7% 10.3% 46 0.9 23.2% 2.1%
Austin 780 9.2% $261,292 1.0% 150.6% 154.42 1.7% 1.7% 1.8% 13.9% 35 0.7 26.4% 3.2%
Baltimore 1,078 4.1% $267,943 4.1% 96.0% 168.54 26.5% 26.6% 43.6% 9.4% 66 0.8 26.3% 1.1%
Birmingham 459 4.2% $180,947 1.4% 109.7% 174.41 4.8% 4.5% 11.7% 8.4% 33 0.7 21.0% 0.5%
Boise 263 7.8% $197,869 3.4% 97.8% 168.11 32.3% 28.7% 22.4% 17.9% 37 0.7 22.5% 4.8%
Boston 1,860 3.7% $421,677 3.2% 104.6% 125.18 16.8% 22.3% 34.9% 15.4% 80 0.8 37.6% 1.0%
Buffalo 470 0.7% $133,313 2.5% 135.5% 275.48 29.0% 36.8% 36.0% 10.3% 65 1.2 26.7% 0.4%
Cape Coral/Fort Myers/
479 15.8% $337,048 5.5% 80.8% 107.89 33.5% 34.7% 48.8% 15.1% 36 0.6 35.6% 1.3%
Naples
Charleston 296 7.3% $243,238 2.2% 114.7% 149.91 7.1% 8.6% 19.2% 9.5% 34 0.8 30.1% 2.6%
Charlotte 961 8.2% $207,105 0.1% 141.4% 166.43 4.7% 4.8% 7.0% 12.7% 24 0.8 26.7% 3.6%
Chicago 3,570 3.0% $226,848 2.9% 83.3% 175.49 4.1% 7.6% 0.9% 13.0% 75 0.9 29.7% 0.4%
Cincinnati 856 4.1% $153,344 2.2% 107.5% 235.69 32.8% 30.4% 33.2% 12.8% 50 1.0 24.4% 0.5%
Cleveland 857 1.9% $128,416 3.2% 96.3% 273.35 41.6% 46.3% 20.2% 11.9% 57 1.1 23.8% 0.2%
Columbia 326 7.0% $157,232 2.6% 111.8% 214.35 15.4% 16.4% 23.1% 8.4% 35 0.9 25.4% 1.7%
Columbus 808 5.7% $168,117 1.6% 114.5% 215.38 68.3% 72.9% 24.1% 13.4% 40 0.9 24.2% 1.4%
Dallas/Fort Worth 1,741 8.7% $220,403 2.5% 138.4% 167.64 1.0% 3.3% 15.6% 14.1% 44 0.9 29.2% 2.7%
Deltona/Daytona 270 11.0% $160,004 7.3% 77.8% 175.13 93.5% 87.8% 66.0% 13.9% 13 1.0 32.6% 0.5%
Denver 1,147 7.7% $364,488 4.3% 146.0% 116.64 27.5% 25.7% 23.9% 11.4% 56 0.7 31.5% 2.6%
Des Moines 246 5.7% $179,098 0.4% 124.0% 222.63 6.8% 6.0% 17.9% 16.3% 42 0.8 21.3% 2.1%
Detroit 1,722 2.8% $103,931 6.3% 69.3% 348.53 18.8% 23.3% 32.8% 22.7% 52 1.2 18.9% 0.7%
Fort Lauderdale 788 8.2% $301,874 3.5% 82.3% 108.28 109.3% 108.3% 142.3% 13.8% 54 0.8 42.4% 0.6%
Greenville 361 6.6% $179,119 2.1% 118.2% 176.54 16.0% 16.8% 20.4% 14.1% 41 0.9 31.7% 2.4%
Hartford 481 2.8% $247,175 5.2% 96.1% 192.96 33.5% 41.8% 53.7% 13.0% 68 0.8 25.1% 0.4%
Honolulu 330 3.8% $756,688 1.9% 120.0% 62.66 21.6% 18.3% 18.7% 10.0% 63 0.4 36.1% 0.7%
Houston 2,364 8.5% $217,964 2.4% 146.2% 161.60 4.2% 5.0% 9.9% 13.2% 44 1.0 30.8% 2.6%
Indianapolis 787 4.4% $149,715 1.2% 125.8% 231.42 19.6% 28.7% 2.7% 12.3% 29 0.9 23.9% 1.8%
Inland Empire 1,421 7.6% $303,682 3.3% 75.6% 111.21 54.0% 48.6% 41.6% 12.2% 39 0.7 37.1% 1.0%
Jacksonville 572 8.5% $202,504 3.3% 105.2% 177.70 28.7% 30.3% 38.4% 13.8% 26 0.7 25.1% 1.3%
Kansas City 836 4.3% $167,742 1.4% 108.3% 230.24 51.8% 55.8% 17.5% 14.6% 32 0.7 18.2% 1.2%
Las Vegas 809 9.5% $226,312 4.7% 71.4% 143.06 39.7% 38.3% 22.2% 13.0% 39 0.7 26.2% 1.3%
Los Angeles 3,382 3.7% $492,913 4.7% 88.5% 71.61 24.3% 21.0% 17.3% 9.7% 50 0.7 54.4% 1.0%
Louisville 526 4.3% $155,053 2.5% 112.9% 226.95 58.2% 57.4% 44.8% 17.4% 31 0.8 20.8% 0.9%
Madison 272 4.9% $247,960 2.1% 111.2% 169.59 23.5% 27.5% 29.0% 11.8% 47 0.7 26.8% 1.5%
Memphis 518 4.0% $150,593 2.8% 105.9% 205.04 30.8% 27.3% 7.0% 8.9% 33 0.8 22.5% 1.1%
Miami 960 6.8% $291,010 3.5% 77.6% 89.91 63.2% 59.7% 67.7% 13.5% 76 0.9 49.4% 1.6%
Milwaukee 642 3.1% $219,063 3.0% 99.8% 168.02 43.6% 45.8% 24.9% 11.0% 59 0.7 25.5% 0.3%
Minneapolis/St. Paul 1,422 6.1% $225,009 1.3% 96.7% 192.06 44.9% 49.2% 45.6% 18.5% 65 0.8 24.3% 1.3%
Sources: U.S. Census Bureau, Moodys Analytics, WalkScore, U.S. Federal Reserve, Reis, CoStar, Bureau of Economic Analysis.
* Affordability is the percentage of the median home price that can be puchased with the median income for the market.
** Market apartment rent divided by median mortgage payment, taxes, insurance, maintenance.

Exhibit 4-9 Housing
Households Median home prices 2016 single-family home year-to-year change Multifamily metrics
3-year Rent as % of Space under
2016 total projected 20152016 2016 as Affordability Rent/cost of household construction as
Market (000s) growth 2016 price % change % of peak index* Permits Starts Completions Sales Walk Score ownership** income % of inventory
United States 123,852 4.8% $231,644 4.0% 104.4% 157.48 38.2% 38.5% 24.5% 13.8% 51 0.8 31.4% 1.4%
Nashville 726 6.1% $200,533 1.9% 114.2% 175.11 7.2% 9.1% 21.4% 10.8% 26 1.0 31.4% 3.0%
New Orleans 495 4.9% $182,061 2.9% 105.6% 173.77 31.6% 27.7% 5.9% 10.8% 56 1.0 33.4% 0.4%
New YorkBrooklyn 953 4.2% $453,082 3.5% 103.2% 60.32 21.9% 26.7% 16.4% 12.5% 97 0.8 65.8% 2.1%
New Yorkother boroughs 2,416 3.3% $428,327 3.0% 97.4% 89.18 49.3% 53.7% 33.9% 11.2% 83 0.9 51.0% 1.2%
New YorkManhattan 781 2.5% $1,414,809 3.2% 108.6% 31.28 21.1% 25.9% 16.4% 12.5% 100 0.3 43.0% 1.5%
Northern New Jersey 906 2.6% $416,623 4.3% 97.0% 125.44 16.5% 22.9% 1.5% 19.1% 78 0.5 26.1% 2.3%
Oakland/East Bay 994 4.3% $831,416 4.9% 109.9% 64.09 11.3% 11.9% 24.6% 11.6% 69 0.5 45.4% 0.8%
Oklahoma City 530 5.3% $160,769 1.5% 129.9% 203.43 25.0% 20.0% 0.5% 12.6% 32 1.0 26.4% 0.9%
Omaha 358 5.2% $158,541 1.5% 114.8% 230.16 20.9% 25.9% 2.0% 10.1% 41 1.0 23.7% 1.2%
Orange County 1,057 4.7% $751,259 3.4% 106.0% 63.42 14.2% 12.4% 35.3% 11.3% 51 0.5 40.8% 1.7%
Orlando 958 13.1% $202,710 3.5% 75.4% 155.81 39.6% 40.0% 54.2% 15.6% 39 0.8 30.9% 3.1%
Palm Beach 624 11.7% $314,983 3.1% 82.0% 113.66 69.1% 73.0% 84.4% 14.7% 40 0.8 40.7% 0.7%
Philadelphia 2,322 2.8% $232,826 3.2% 101.7% 185.76 28.6% 37.2% 27.5% 20.1% 77 0.8 26.9% 1.2%
Phoenix 1,790 10.7% $226,370 4.2% 84.7% 144.20 27.4% 27.4% 36.4% 10.8% 52 0.7 27.8% 1.8%
Pittsburgh 1,008 0.5% $148,931 1.9% 129.3% 254.59 96.6% 80.6% 12.0% 19.6% 60 1.0 25.3% 0.8%
Portland, ME 222 2.9% $250,545 3.5% 102.7% 150.94 17.5% 23.7% 33.9% 12.9% 63 0.9 36.9% 0.7%
Portland, OR 982 7.0% $320,580 4.4% 114.5% 125.86 25.8% 24.4% 26.8% 14.6% 57 0.6 28.5% 1.7%
Providence 639 2.0% $257,146 3.0% 88.2% 147.32 29.3% 35.8% 57.6% 12.8% 76 0.9 35.1% 0.1%
Raleigh/Durham 996 8.7% $191,884 0.8% 111.9% 192.61 4.0% 3.3% 7.5% 12.8% 29 0.9 27.6% 2.0%
Richmond 502 4.9% $231,112 2.4% 102.9% 160.58 37.4% 37.0% 35.7% 18.7% 49 0.7 23.4% 1.1%
Sacramento 843 5.4% $312,593 6.7% 83.6% 125.85 36.7% 36.5% 53.3% 11.1% 33 0.6 28.3% 0.6%
Salt Lake City 395 5.8% $259,864 3.1% 127.5% 150.12 54.1% 46.2% 32.3% 19.0% 55 0.7 23.8% 3.9%
San Antonio 863 7.7% $198,246 1.8% 140.3% 162.41 20.9% 21.0% 11.2% 13.5% 34 0.8 25.0% 1.0%
San Diego 1,172 5.1% $574,481 5.7% 95.7% 72.03 22.5% 26.7% 20.7% 11.2% 49 0.5 41.6% 1.6%
San Francisco 625 3.5% $1,256,732 4.5% 141.3% 47.94 31.7% 28.3% 32.5% 12.4% 84 0.3 41.0% 1.4%
San Jose 664 4.0% $1,024,654 5.3% 133.0% 59.42 11.0% 10.5% 9.9% 13.3% 48 0.4 37.8% 2.3%
Seattle 1,175 6.6% $441,913 4.2% 113.0% 112.73 30.8% 23.7% 4.4% 10.8% 71 0.5 26.3% 2.7%
Spokane 283 5.9% $198,399 4.2% 102.8% 167.99 1.8% 2.6% 47.2% 10.9% 36 0.7 22.9% 4.2%
St. Louis 1,137 3.0% $151,300 0.7% 102.7% 247.10 39.0% 48.4% 30.3% 14.2% 60 0.8 19.7% 0.6%
Tacoma 325 6.4% $248,072 5.1% 96.2% 158.68 30.4% 26.9% 5.9% 9.8% 51 0.9 33.7% 1.0%
Tampa Bay/St. Petersburg 1,272 8.1% $178,463 5.1% 79.1% 183.31 31.4% 34.5% 50.9% 13.5% 46 0.9 31.0% 1.6%
Tucson 430 8.4% $196,207 4.9% 80.2% 149.25 28.3% 24.1% 15.4% 9.7% 39 0.7 27.8% 1.0%
Virginia Beach/Norfolk 665 4.6% $214,806 2.8% 91.7% 165.50 29.6% 29.6% 30.3% 17.6% 38 0.8 26.0% 1.6%
Washington, DCDistrict 293 4.1% $377,891 2.0% 101.7% 116.13 5.8% 2.1% 58.4% 7.9% 74 0.7 33.5% 2.1%
Washington, DC
841 6.0% $389,611 1.3% 91.3% 127.95 38.9% 38.9% 54.2% 13.4% 47 0.7 25.5% 0.8%
MD suburbs
Washington, DC
1,106 6.3% $376,357 1.6% 91.1% 139.44 45.3% 48.2% 43.1% 21.3% 56 0.7 25.7% 2.1%
Northern VA
Westchester, NY/
697 2.8% $546,391 4.5% 94.4% 106.20 4.4% 10.1% 100.0% 12.9% 51 0.6 32.6% 0.6%
Faireld, CT

Exhibit 4-10 West Region: Sector and Local Outlook Scores
Investment prospect scores, by sector Local

outlook
Overall rank Ofce Retail Industrial Multifamily Hotel Housing score*
4 Seattle 3.92 3.80 3.86 3.80 3.61 4.16 4.31
6 Denver 3.62 3.59 3.98 3.75 3.27 4.08 4.23
8 San Francisco 3.71 3.90 3.45 3.86 4.25 4.10 4.31
9 Portland, OR 3.73 3.60 3.74 3.78 3.57 3.45 3.93
10 Los Angeles 3.74 3.82 4.02 3.91 3.74 3.59 3.94
12 San Jose 3.70 3.75 3.63 4.06 3.67 3.78 4.22
14 Orange County 3.62 3.60 3.56 3.93 3.47 3.75 4.02
16 San Diego 3.59 3.61 3.39 3.89 3.53 3.71 3.88
17 Phoenix 3.59 3.50 3.66 3.68 3.02 3.68 3.67
23 Honolulu 2.33 3.69 3.30 3.88 3.30 3.88 3.67
28 Oakland/East Bay 3.26 3.28 3.45 3.50 3.26 3.51 3.92
36 Inland Empire 2.61 3.03 3.94 3.54 2.91 3.64 3.39
42 Salt Lake City 3.17 3.06 3.76 3.10 3.06 3.06 4.21
49 Albuquerque 2.75 3.00 3.25 3.17 3.25 3.33 3.13
54 Boise 2.97 3.18 3.30 3.32 3.05 3.30 3.92
59 Tacoma 3.00 3.58 3.55 3.64 3.04 4.11 4.13
61 Sacramento 3.13 3.27 2.91 3.23 2.91 2.91 3.30
62 Las Vegas 2.66 2.38 3.56 3.38 3.42 3.04 3.60
70 Tucson 2.50 3.50 3.25 3.70 3.00 2.67 3.04

72 Spokane 3.32 3.32 3.32 2.81 2.81 2.81 2.94
33 West average 3.25 3.42 3.54 3.60 3.31 3.53 3.79

* Average score of local market participants opinion on strength of local economy, investor demand, capital availability, development and redevelopment opportunities, public/private
investments, and local development community.
City, and Portland. Single-family housing markets expected to outlook scores for 2016 are Seattle, San Francisco, Denver, San
outperform the regional average include Seattle, Tacoma, San Jose, and Salt Lake City.
Francisco, and Denver. Retail markets with the highest outlook
scores for 2016 are San Francisco, Los Angeles, Seattle, and South Region
San Jose. Survey respondents expect San Francisco, Los The 29 markets that make up the South region have an average
Angeles, Seattle, San Jose, and San Diego to be the top hotel rank of 37 in this years survey. The region is home to Dallas/Fort
markets in the region. Finally, Seattle is projected to be the top Worth, the number-one market, and also seven of the top 20
West region office market, followed by Los Angeles, Portland, markets.
San Francisco, San Jose, Phoenix, and San Diego.
Survey respondents like the 2016 outlook for housing markets in
The average local market outlook score for the West region is the South region. The single-family sector has the highest aver-
the highest of all four regions. The markets with the top local age score of all property types. Markets that are expected to
significantly outperform the average include Dallas/Fort Worth,

Exhibit 4-11 South Region: Sector and Local Outlook Scores

outlook
1 Dallas/Fort Worth 3.72 3.82 3.99 3.95 3.72 4.38 4.30
2 Austin 3.85 3.94 3.56 3.91 3.50 4.27 4.28
3 Charlotte 3.73 3.65 3.78 3.68 3.80 4.07 4.12
5 Atlanta 3.84 3.74 3.89 3.67 3.64 3.77 4.02
7 Nashville 3.93 3.65 3.71 3.71 3.45 3.56 4.24
11 Raleigh/Durham 3.62 3.56 3.50 3.58 3.73 3.88 4.17
19 Miami 3.26 3.75 3.56 3.35 3.55 3.33 4.23
20 San Antonio 3.16 3.13 3.37 3.68 3.05 3.83 3.88
24 Washington, DCDistrict 3.29 3.68 3.28 3.41 3.28 3.47 3.69
25 Charleston 3.25 3.21 3.48 3.35 3.48 3.31 4.18
29 Tampa/St. Petersburg 3.32 3.30 3.44 3.39 3.45 3.46 3.88
30 Houston 2.80 3.56 3.35 3.23 3.28 4.09 3.25
32 Washington, DCNorthern VA 2.96 3.85 3.57 3.65 3.50 3.57 3.43
38 Greenville 3.19 2.89 3.26 3.21 3.23 3.68 4.13
40 Orlando 3.14 3.41 3.34 3.75 3.50 3.31 3.85
41 Fort Lauderdale 3.13 3.36 3.13 3.42 3.36 3.64 4.07
44 Palm Beach 2.82 3.28 3.14 3.55 3.42 3.42 4.09
46 Cape Coral/Fort Myers/Naples 2.94 3.05 2.94 3.70 3.23 3.36 3.50
50 Louisville 2.98 2.98 2.98 3.12 2.55 3.40 3.17
51 Washington, DCMD suburbs 2.42 3.31 3.36 3.07 3.14 3.36 3.28
52 New Orleans 3.12 3.12 2.83 3.40 2.98 2.98 3.59
53 Jacksonville 2.94 2.90 2.98 3.32 2.93 3.49 3.46
56 Columbia 3.15 3.15 3.15 3.50 3.15 3.15 3.21
60 Oklahoma City 2.76 3.19 3.19 3.40 3.12 2.98 3.59
63 Memphis 2.55 2.98 3.40 2.34 2.55 3.40 3.13
66 Richmond 2.88 2.58 3.25 3.28 3.21 2.88 3.26
67 Birmingham 2.78 2.64 3.32 3.07 2.85 2.95 3.19
69 Virginia Beach/Norfolk 2.29 2.79 2.82 3.07 2.78 2.88 3.28

75 Deltona/Daytona 2.13 2.55 2.98 2.55 2.83 2.55 3.33
37 South average 3.10 3.28 3.33 3.39 3.25 3.46 3.72

* Average score of local market participants opinions on strength of local economy, investor demand, capital availability, development and redevelopment opportunities, public/private

Exhibit 4-12 Local Outlook: South Region Exhibit 4-13 Local Outlook: Midwest Region
Dallas/Fort Worth 4.30

Columbus 3.96
Austin 4.28
Nashville 4.24 Minneapolis/St. Paul 3.94
Miami 4.23 Madison 3.89

Charleston 4.18
Indianapolis 3.78
Raleigh/Durham 4.17
Greenville 4.13 Kansas City 3.78
Charlotte 4.12 Des Moines 3.72
Palm Beach 4.09
Chicago 3.70
Fort Lauderdale 4.07
Atlanta 4.02 Omaha 3.64
Tampa/St. Petersburg 3.88 Detroit 3.58
San Antonio 3.88
Milwaukee 3.42
Orlando 3.85
Washington, DCDistrict 3.69 Cincinnati 3.37
New Orleans 3.59 Cleveland 3.33
Oklahoma City 3.59
St. Louis 3.22
Cape Coral/Fort Myers/Naples 3.50
Jacksonville 3.46 1 2 3 4 5
Washington, DCNorthern VA 3.43 Weak Declining Average Improving Strong
Deltona/Daytona 3.33 Source: Emerging Trends in Real Estate 2016 survey.
Virginia Beach/Norfolk 3.28 Note: Average score of local market participants opinions on strength of local economy,
Washington, DCMD suburbs 3.28 private investments, and local development community.
Richmond 3.26
to be the top hotel market in the region, followed by Raleigh/
Houston 3.25
Durham, Dallas/Fort Worth, and Atlanta.
Columbia 3.21
Birmingham 3.19
The average local market outlook score for the South region
Louisville 3.17
is the second highest for all four U.S. regions, trailing only the
Memphis 3.13
West region. The markets with the top local outlook scores for
2016 are Dallas/Fort Worth, Austin, Charleston, Nashville, Miami,
1 2 3 4 5
Weak Declining Average Improving Strong Raleigh/Durham, and Palm Beach.
Note: Average score of local market participants opinions on strength of local economy,
Midwest Region
private investments, and local development community. The 13 markets that make up the Midwest region have an aver-
age rank of 41 in this years survey. This ranks the region third
Austin, Houston, and Charlotte. The multifamily sector is the out of the four U.S. regions represented. The highest-ranked
second-highest-scoring property type in the region. Multifamily market in the region is Minneapolis/St. Paul, the only Midwest
markets projected to easily outperform the regional average market represented in this years top 20.
include Dallas/Fort Worth, Austin, Orlando, Nashville, and Cape
Coral/Fort Myers. Survey respondents like the 2016 outlook for industrial markets
in the Midwest region. Industrial markets that are expected to
After housing, survey respondents like industrial, retail, hotel, significantly outperform the regional average include Detroit,
and office in the South region. Industrial markets expected to Chicago, and Indianapolis.
outperform the regional average include the following: Dallas/
Fort Worth, Atlanta, Charlotte, and Nashville. Retail markets with After industrial, survey respondents like multifamily, office,
the highest outlook score are Austin, northern Virginia, Dallas/ retail, single-family housing, and hotel in the Midwest region.
Fort Worth, and Nashville. Survey respondents expect Charlotte

Exhibit 4-14 Midwest Region: Sector and Local Outlook Scores

outlook
18 Minneapolis/St. Paul 3.47 3.55 3.57 3.76 3.52 3.20 3.94
22 Indianapolis 3.44 3.47 3.68 3.80 3.34 3.20 3.78
26 Chicago 3.58 3.46 3.73 3.77 3.31 3.16 3.70
27 Columbus 3.26 3.02 3.53 3.72 3.41 3.41 3.96
33 Detroit 3.32 3.31 3.73 3.69 3.06 3.12 3.58
34 St. Louis 3.17 3.17 3.67 3.15 2.99 3.56 3.22
39 Kansas City 2.97 3.21 3.53 3.44 2.66 3.23 3.78
45 Cincinnati 3.31 3.07 3.53 3.69 2.91 2.99 3.37
48 Madison 3.21 3.20 3.50 3.34 2.40 2.89 3.89
55 Des Moines 3.08 3.06 3.46 3.50 2.83 2.89 3.72
57 Cleveland 3.47 3.22 3.30 3.70 2.48 2.64 3.33
65 Omaha 2.77 2.88 3.19 3.18 2.53 2.81 3.64

68 Milwaukee 2.98 2.98 3.40 2.83 1.70 2.55 3.42
41 Midwest average 3.23 3.20 3.52 3.51 2.86 3.05 3.64

Multifamily markets expected to outperform the regional aver- The Massachusetts state capital is joined by Manhattan as the
age include the following: Indianapolis, Chicago, Minneapolis/ only two Northeast region markets in this years top 20.
St. Paul, Columbus, Cleveland, and Cincinnati. Office markets
expected to outperform the regional average include Chicago, Survey respondents like the 2016 outlook for retail markets in
Minneapolis/St. Paul, Cleveland, and Indianapolis. Retail the Northeast region. Retail markets that are expected to sig-
markets with the highest outlook scores are Minneapolis/St. nificantly outperform the regional average include Manhattan,
Paul, Indianapolis, and Chicago. Survey respondents expect northern New Jersey, Brooklyn, Pittsburgh, and New York Citys
St. Louis, Columbus, and Kansas City to be the top housing other boroughs.
markets in the Midwest region. Finally, Minneapolis/St. Paul is
projected to be the top Midwest region office market, followed After retail, survey respondents like multifamily, industrial,
by Columbus and Kansas City. single-family housing, hotel, and office in the Northeast region.
Multifamily markets expected to outperform the regional average
The average local market outlook score for the Midwest region include northern New Jersey, Manhattan, Boston, and Brooklyn.
is the third highest out of the four U.S. regions. The markets Industrial markets expected to outperform the regional average
with the top local outlook scores for 2016 are Columbus, include northern New Jersey, Baltimore, Boston, Manhattan,
Minneapolis/St. Paul, Madison, Indianapolis, and Kansas City. and Pittsburgh. Housing markets with the highest outlook scores
are Boston, Philadelphia, and Pittsburgh. Survey respondents
Northeast Region expect Boston; Portland, Maine; Baltimore; and Pittsburgh to be
The 13 markets that make up the Northeast region have an the top hotel markets in the Northeast region. Finally, Boston is
average rank of 45 in this years survey. This ranks the region projected to be the top Northeast region office market, followed
number four out of the four U.S. regions represented. Coming in by Manhattan, Brooklyn, and Pittsburgh.
at number 13, the highest-ranked market in the region is Boston.

Exhibit 4-15 Local Outlook: Northeast Region
New YorkBrooklyn 4.28
New YorkManhattan 4.22
Boston 4.21
Pittsburgh 3.87
New Yorkother boroughs 3.85
Philadelphia 3.69
Portland, ME 3.33
Westchester, NY/Faireld, CT 3.33
Northern New Jersey 3.32
Buffalo 3.25
Baltimore 3.15
Hartford 2.90
Providence 2.62
1 2 3 4 5
Weak Declining Average Improving Strong
Note: Average score of local market participants opinions on strength of local economy,
private investments, and local development community.
Exhibit 4-16 Northeast Region: Sector and Local Outlook Scores

outlook
13 Boston 3.82 3.61 3.50 3.70 3.54 3.52 4.21
15 New YorkManhattan 3.64 3.90 3.34 3.81 3.23 3.33 4.22
21 New YorkBrooklyn 3.55 3.60 3.36 3.65 3.28 3.25 4.28
31 Philadelphia 3.08 3.45 3.38 3.50 2.87 3.42 3.69
35 Baltimore 2.79 3.47 3.56 3.50 3.39 3.22 3.15
37 Northern New Jersey 2.60 3.70 3.92 3.86 2.99 3.11 3.32
43 Pittsburgh 3.20 3.60 3.30 3.26 3.35 3.30 3.87
47 New Yorkother boroughs 2.85 3.60 2.95 3.54 2.78 3.09 3.85
58 Westchester, NY/Fairfield, CT 2.76 3.48 2.99 3.31 3.22 3.22 3.33
64 Hartford 2.71 2.83 3.00 3.50 2.80 3.00 2.90
71 Providence 2.69 2.92 3.02 3.05 2.37 2.62 2.62
73 Portland, ME 2.55 3.40 1.70 2.98 3.40 2.55 3.33
74 Buffalo 2.40 2.84 2.59 2.13 2.13 2.54 3.25
45 Northeast average 2.97 3.41 3.12 3.37 3.03 3.09 3.54

Exhibit 4-17 Local Market Perspective: Development/

Redevelopment Opportunities
Weak Declining Average Improving Strong
Portland, ME 4.50 Chicago 3.70

New Orleans 4.50 Phoenix 3.69
Boise 4.50 New Yorkother boroughs 3.68
Salt Lake City 4.33 Cape Coral/Fort Myers/Naples 3.67
Columbus 4.25 Spokane 3.67
San Antonio 4.24 Cincinnati 3.67
Greenville 4.22 St. Louis 3.65
Raleigh/Durham 4.16 Boston 3.63
New YorkBrooklyn 4.16 Jacksonville 3.63
Nashville 4.14 San Diego 3.62
Austin 4.12 Las Vegas 3.60
Denver 4.02 San Francisco 3.60
Dallas/Fort Worth 4.02 Honolulu 3.57
Fort Lauderdale 4.00 Indianapolis 3.56
Louisville 4.00 Philadelphia 3.55
Detroit 4.00 Cleveland 3.50
Madison 4.00 Inland Empire 3.46
Milwaukee 4.00 Washington, DCDistrict 3.43
Minneapolis/St. Paul 4.00 Deltona/Daytona 3.33
Atlanta 3.98 Tacoma 3.33
Palm Beach 3.92 Providence 3.20
Portland, OR 3.92 Birmingham 3.20
Miami 3.91 Albuquerque 3.17
Tampa/St. Petersburg 3.91 Sacramento 3.17
Des Moines 3.90 Richmond 3.13
Pittsburgh 3.89 Baltimore 3.12
Omaha 3.83 Washington, DCMD suburbs 3.12
Seattle 3.81 Washington, DCNorthern VA 3.06
Oklahoma City 3.80 Buffalo 3.00
Orlando 3.80 Houston 3.00
Charlotte 3.79 Virginia Beach/Norfolk 3.00
Orange County 3.76 Tucson 3.00
San Jose 3.76 Northern New Jersey 2.88
Charleston 3.75 Westchester, NY/Faireld, CT 2.86
Oakland/East Bay 3.75 Memphis 2.86
New YorkManhattan 3.75 Hartford 2.75
Los Angeles 3.72 Columbia 2.75
Kansas City 3.70

Property Type Outlook
Optimistic on fundamentals, but prices are testing
the resistance level.
Louis Sullivan, the first modern architect, famously wrote that

Exhibit 5-1 Prospects for Major Commercial Property
form follows function. Change over time has altered the mix
Types, 2016 versus 2015
of functions in all sectors of the U.S. economy. Economic value
flows down to the land in ways that are not always immediately Investment prospects
obvious. During the first century of our national history, for
instance, the United States was predominantly agricultural, with Industrial/distribution 3.63 2016
2015
3.61
the industrial revolution taking hold principally in a few states 3.50
Multifamily
along the Atlantic Seaboard. How swiftly and decisively we 3.48
3.43
have changed from being a nation of farmers, to a manufactur- Ofce 3.17
ing colossus, to an economy of knowledge workers, as Peter Single family* 3.43
Drucker described us. Hotels 3.42
3.37
3.19
But, with all that change, the output of agricultural land has Retail 3.01
exponentially increased. The volume of land in agricultural
Development prospects
use remains greater than 900 million acres (1.4 million square
miles), or 37 percent of the total land area of the United States. Industrial/distribution 3.72
3.65
Total output of crops and livestock exceeds $280 billion annu-
Single family* 3.54
ally, allowing us to run a trade surplus in farm goods of $28.6
Multifamily 3.46
3.48
billion in the 12 months ending June 2015. One consequence
has been that the value of U.S. farmland has more than tripled Ofce 3.25
2.86
(in real dollar terms) since 1970. Economic productivity is the
Hotels 3.22
3.32
ultimate support for real estate values.
Retail 2.82
2.73
Real estate should not fear technologies. While there are bound
1 2 3 4 5
to be winners and losers, technologys most significant contri- Abysmal Poor Fair Good Excellent
bution is to ensure that competition in the world of real estate
assets is not necessarily a zero-sum game. Economically * First year in survey.
valuable technologies increase the size of the pie by expanding Note: Based on U.S. respondents only.
output: that is the function side of things.
existing properties adapt their physical design to new functional
As far as form goes, the amazing thing is how adaptable real needs. The opportunistic move will often be to alter form to
estate actually turns out to be. We are by now quite familiar with accommodate improved functioning. The very gist of positive
adaptive use in the form of lofts to housing, or offices to hotels. feasibility is an acknowledgment that the new form and function
No doubt there will be new shifts in highest and best use as exceed the value of a previous use.

Chapter 5: Property Type Outlook
Exhibit 5-2 Moodys/RCA Commercial Property Price Index, by Sector
250
225 OfficeCBD
Retail
200
175
150
125
100 Officesuburban
75 Industrial
50
Jan Jan Jan Jan Jan Jan Jan Jan Jun
2001 2003 2005 2007 2009 2011 2013 2015 2015
Note: Updated August 2015; data through June 2015.
The market reflects this basic economic principle as it allocates nomic recovery. While manufacturing employment has indeed
capital. Capital allocation, in turn, prices the various economic declined, real (inflation-adjusted) output from U.S. industry is
uses as expressed in the expected return. In many places, now 85 percent greater than in 1987.
trends will still drive activity toward sites where the land has a
low basis, and for this reason the interviewees who believe that Such trends have not been lost on the real estate industry.
the suburbs are not dead can be vindicated. But for other Secular trends are goosing demand, in the words of one insti-
places, most notably the 24-hour and 18-hour cities, highest tutional investment manager.
and best use is best realized by increased density.
Enthusiasm for the industrial property type is manifest. A public
Remarkably, this explains why real estate can at the same time pension fund manager sees industrials with a longer runway for
be considered as a fixed asset, but also behave as one of the appreciation and income growth because of the economic land-
most dynamic and innovative forms of capital. scape in this country. The senior asset manager for a global
fund said, Im bullish on industrials. And the chief executive
Industrial of an investment management firm succinctly put it thusly:
Industrials rule.
We are a knowledge-driven society and a knowledge-driven
economy whose innovations and growth are based on a
The basic motivations are relatively easy to understand: Investors
Moores Law technology curve. It is a creative class economy
like the value-for-price relationship in a property type where the
where more attention is paid to apps than to appliances,
average cap rate is 6.9 percent. They like the downside protec-
where artificial intelligence is more interesting than hands-on
tion afforded by the triple-net leases that are typical in this sector.
knowledge, where algorithms trump the lessons of praxis.
They like the cash-in-hand quality of industrials. National Council
of Real Estate Investment Fiduciaries (NCREIF) data show recent
Yet, over time, the American economy has become more and
capital appreciation at an 8.1 percent annual rate.
more an economy that is about stuff. Look to the truck conges-
tion on our highways and the containers flowing through our
The results of the Emerging Trends survey not only place indus-
ports for tangible evidence. Measure the shift in consumption
trials at the top of the commercial property sector for investment
expenditures from the low 60 percent of gross domestic product
and development prospects next year in 2016, but also posted
(GDP) range that typified the 1960s to todays approximately
the highest score achieved for industrial properties in our sur-
70 percent. Look at the annualized growth of retail sales, which
veys as tracked since 2004.
has outstripped GDP growth throughout the most recent eco-

Exhibit 5-3 Prospects for Commercial/Multifamily Subsectors in 2016
Fulllment center Warehouse industrial
Warehouse industrial Fulllment center
Medical ofce Medical ofce

Apartment rental Apartment rental
moderate income high income
Apartment rental Limited-service hotels
high income
Limited-service hotels Apartment rental
moderate income
Neighborhood/community
shopping centers Student housing
Central city ofce Central city ofce
R&D industrial R&D industrial

Neighborhood/community
Student housing shopping centers
Full-service hotels Apartment rental
affordable
Apartment rental
affordable Full-service hotels
Suburban ofce Institutional rentals of

single-family houses
Institutional rentals of
single-family houses Suburban ofce
Power centers Power centers
Regional malls Regional malls
Abysmal Fair Excellent Abysmal Fair Excellent

Our industry consensus believes that supply/demand funda- an industrial segment category for the first time this year, and
mentals are sound for the sector. The lead researcher for a large rated that segment above warehouse/distribution and R&D/flex
brokerage says, Actually, we will see a pickup in absorption as for investment potential in 2016. A prominent consultant urges
some of this industrial space completes, just because people a look at industrial in the new economy. He says, Warehouse
are having trouble finding the product they want. Even with all facilities for the new economy are the new retail; they bypass the
this new supply coming on the industrial front, we think there is retail channel and go directly to consumer from warehouse.
a wave of absorption that comes with it. A major life company
asset manager endorses that viewpoint: Were seeing good, Emerging Trends interviewees distinguish between the macro
strong demand. There is new construction, but it seems to be patterns and the on-the-ground differences in facilities size
being absorbed at the pace that its being built. A global asset and local market configurations. Youve seen construction in
manager agrees, saying, With the warehouse distribution for large space, but we havent built as much small space [under
[online retailers] combined with the traditional, I think there is 200,000 square feet]. There is a real shortage in that area, and
going to be a lot of demand. that is usually the product that is fairly close in. So as we look
to same-day delivery, those smaller warehouses are what you
That demand is itself fairly diverse. Technology, seen as disrup- need, close to the urban center. We have heard a lot about the
tive to real estate by many, has been a positive influence on smile states (the two coasts linked by the Sun Belt), but there
the industrial real estate sector. The internet has been a major are investors examining opportunities other than ports and bulk
driver as e-commerce has expanded the need for fulfillment distribution. One investment banker observes, Industrial in the
centers. Survey respondents were given fulfillment centers as right spot is still a very attractive segment. The corridor from

Exhibit 5-4 Prospects for Niche and Multiuse Property Types in 2016
Urban mixed-use properties Urban mixed-use properties
Data centers Data centers
Master-planned communities Master-planned communities
Infrastructure Self-storage
Self-storage Infrastructure
Mixed-use town centers Land
Lifestyle/entertainment centers Mixed-use town centers
Land Lifestyle/entertainment centers
Resort hotels Resort hotels
Abysmal Fair Excellent Abysmal Fair Excellent

Exhibit 5-5 U.S. Industrial Property Total Returns Exhibit 5-6 Change in Supply and DemandU.S. Industrial
60% 3% Occupancy
20-year average
94%
occupancy
NAREIT Supply
Demand
40% 92%
NCREIF ODCE 2%
Percentage of inventory
20% 90%
Occupancy
1%
Annual return
88%
0%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015* 0%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015* 2017* 2019*
86%
20%
1%
84%
40%
2% 82%
60% Source: CBRE Econometric Advisors.
* Forecast.
80%
Midwest with the highest total returns in industrials among all
Sources: NCREIF Fund Index Open-End Diversified Core (ODCE); NAREIT Equity U.S. regions.
REIT Index.
* Returns as of June 30, 2015.
Construction is definitely accelerating in this sector, but it is
Milwaukee to the Wisconsin/Illinois border has seen tremen- coming off a lengthy period of virtually no development at all. So
dous growth in the industrial area. That perspective is echoed attention to high year-over-year change is less meaningful than
by a private equity executive who favors light industrials in infill consideration of the absolute amount of new space being pro-
locations. First-quarter 2015 data from NCREIF showed the vided in the vast (about 14 billion square feet) national industrial

past the cyclical peak in demand. Meanwhile, they observe the
Exhibit 5-7 Industrial/Distribution Investment
prior weighting toward build-to-suit industrial shifting toward the
Prospect Trends
more familiar area of speculative construction.
excellent The multiyear period of supply discipline should not breed

Fulfillment centers*
complacency, though, especially for industrial assets where
good the development period is exceptionally short. As one insti-
R&D industrial
tutional investment manager exclaimed, Supply constraint?
Really? It is true that the past five years are not likely to be a
good guide to the next five, and industrial construction is one
fair area to watch vigilantly.
Warehouse industrial
Two additional considerations should be highlighted: The first
is the rotation forward of investor appetite for R&D/flex space,
poor both by owner-users (particularly the big Silicon Valley brand
names) and by traditional investors from the institutional and
2004 2006 2008 2010 2012 2014 2016
private equity sectors. The second is the targeting of industrial
property portfolios as a way to put money to work at scale by
* First year in survey.
sovereign wealth funds, real estate investment trusts (REITs),
U.S. warehouse industrial and pension funds.
2016 Prospects Ranking
In the more globalized, institutionalized real estate environ-
Investment prospects 3.78 2 ment, size does matter, especially in the efficiency of capital
Development prospects 4.04 1 deployment. However, we should have already learned that
Buy Hold Sell when the big guys concentrate on the biggest assets in the
54.4% 26.9% 18.8%
biggest markets, that opens up viable niches elsewhere.
Expected capitalization rate, December 2016 6.1% Entrepreneurs have often nimbly seized such opportunities,
in the computer field, in transportation, and in finance as well.
U.S. R&D industrial A niche-sensitive investment ecology will shape real estate
2016 Prospects Ranking trends over the foreseeable future.
Investment prospects 3.45 9

Development prospects 3.42 9 Apartments
Buy Hold Sell The highly favored multifamily rental sector has enjoyed a long
31.3% 42.4% 26.4%
run of success during this decade. Our Emerging Trends survey
Expected capitalization rate, December 2016 6.7% respondents still rate its prospects well, yet the extraordinarily
high prices and low cap rates in many locations are giving
U.S. fulfillment centers quite a few of our interviewees pause as they contemplate
the future. We may well be seeing the beginning of a shift in
investment/development outlook as we go forward in 2016 and
Investment prospects 3.80 1 later. The executive vice president of a major national developer
Development prospects 3.92 2 remarked, I have never seen the apartment sector so good.
Buy Hold Sell That will change. There is too much building in some markets.
44.2% 40.6% 15.2%
High rent increases will have to come down. A private equity
Expected capitalization rate, December 2016 6.1% manager observed, This is a great market to sell. Investing is
Source: Emerging Trends in Real Estate 2016 survey. more challenging.
Too often, issues in this sector are conflated in an attempt to

property market. Those who are nervous about incipient over- draw a broadly sketched picture. The urban/suburban choice,
supply seem to focus on the growth rate, absent a longer-term for instance, is frequently identified with the rent/buy choice,
perspective, or are worried by past patterns to continue building and thats just not the case. An investment banker told us, The

question is now: do people want to own a house, or do they

Exhibit 5-8 Change in Supply and Demand
want to live in the city and rent an apartment? Is property owner-
U.S. Multifamily Housing
ship still a main trend? Many couch the discussion in such
a framework. But, for residential investment, a huge range of 3% 100%
options means that there are selections for investors and devel- Demand
opers in all products. A fine-grained look in this sector is not only

2% Supply 98%
essential analytically, but also the key for those who need to pull
the trigger on deals.
Occupancy
1% 96%
An analyst with one of the major housing data firms believes that
the size of generation Y (a very interesting cohort) should sup- 0% 94%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015* 2017* 2019*
port expanding housing demand for both rentals and ownership
housing. It is not an either/or proposition. The demographic 20-year average
1% 92%
forces are very positive to support residential construction, occupancy
Occupancy
support multifamily, while serving a growing need for additional
single-family housing stock. 2% 90%
Source: REIS Inc.
Garden apartments. Institutions have enjoyed a golden era in * Forecast.
the apartment market. Robust leasing activity has continued in

2015, pushing occupancy and rent growth higher even as mul-
Exhibit 5-9 U.S. Multifamily Property Total Returns
tifamily development accelerated swiftly. NCREIF has reported
double-digit total returns continuing, with the garden apartment
60%
subsector moving ahead of higher-density residential, largely on
NCREIF ODCE
the strength of superior net operating income (NOI) growth. 50%
NAREIT
According to a midyear 2015 report by Real Capital Analytics, 40%
the garden apartment sector is also seeing stronger investment 30%
volume growth in the transaction data. While the pressure of
Annual return
institutional investment competition in this recovery has inexo- 20%

rably pushed cap rates lower for mid- and high-rise multifamily
10%
assets, garden apartments have maintained average cap rates
above 6 percent, compared with mid-/high-rise going-in rates 0%
that average 4.9 percent. 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015*
10%
Some adopt the Baseball Hall of Famer Wee Willy Keelers
20%
advice: Keep your eye on the ball and hit em where they
aint. A West Coast investment manager reported an invest- 30%
ment program on Floridas Gulf Coaststill rebounding from
Sources: NCREIF Fund Index Open-End Diversified Core (ODCE); NAREIT Equity
the subprime mortgage crisiswhere good-quality apartment REIT Index.
complexes have been acquired at 7.5 percent cap rates at * Returns as of June 30, 2015.
prices in the $50,000 to $75,000 per unit range. So with many

echoing the financier who told us, Values in New York and San Street fund manager comments, Our portfolio has very much
Francisco are just ridiculous, we see a trend in finding multifam- evolved. We are selling out of the older-style apartments at very
ily housing opportunities where costs are more manageable, high prices and replacing them with newer and much more
looking more favorably to the garden apartment subsector. urban properties in the seven or eight target markets where we
can create scale. A public pension fund investor calls luxury
Urban multifamily. For some investors, the best tactical apartments in urban infill areas the best bet for 2016: We love
approach means taking profits in a market that will still be strong the big three [Manhattan, San Francisco, Los Angeles] and we
in 2016, and redeploying the capital into preferred assets. A Wall also like the multifamily markets in Seattle, Dallas, and Atlanta.

affordably at incomes of $125,000. This interviewee went on
Exhibit 5-10 Apartment Investment Prospect Trends
to mention that this groups downtown experience has led to
interest in close-in for-sale housing as a next step. And as for
excellent the proposition that educational choices will drive millennials
to traditional suburbs eventually, he notes that charter schools
good and homeschooling have expanded educational choice: neither
Apartment rentalmoderate income
needs the traditional suburb to be successful.
While many other interviewees still view schools as the stum-

fair Apartment rental bling block to city living (as one institutional investor argued,
affordable*
Unless you can fix the school system in urban areas, as much
Apartment rentalhigh income
as millennials say theyll never go to the suburbs, when they
have children they probably will), others concur with the posi-
poor tion stated in the previous paragraphs (I definitely dont think
youll find [gen Y] moving for a school district; they might find a
2004 2006 2008 2010 2012 2014 2016 magnet school, as a seasoned appraiser-consultant said in
Source: Emerging Trends in Real Estate surveys. her interview).
Infill and mixed-use development. With the evolution of

U.S. high-income apartments
18-hour cities, more places around the country are benefiting
from additional diversity and complexity in their populations and
Investment prospects 3.58 4 (tie) economic bases. A Tennessee developer lauds the planning
Development prospects 3.66 4 trend to rethink separation of uses zoning. He believes that
Buy Hold Sell it is smart to seek an environment where something is going
21.0% 25.7% 53.4%
on every night. Mixed-use development in such a context
Expected capitalization rate, December 2016 4.9% reinforces value across the varied uses. An executive with a
retail REIT concurs, Infill and MXD [mixed-use development]
U.S. moderate-income apartments are megatrends, and horizontal MXD is easier than vertical. It is
more efficient, too, since you have greater cross-use of the park-
ing requirement over the course of the day.
Investment prospects 3.58 4 (tie)
Development prospects 3.48 6 A New Yorkbased firm that intermediates cross-border
Buy Hold Sell investment has been doing ground-up apartment develop-
38.8% 37.4% 23.8%
ment in spots like Altamont Springs outside Orlando; Revere,
Expected capitalization rate, December 2016 5.6% Massachusetts, near Boston; and the Clayton suburb near St.
Louis. We see these as infill locations, too, not sprawl at the
U.S. affordable apartments perimeterand our projects have been exceeding pro-forma
2016 Prospects Ranking projections.

Residual impact of the bubble years. Quite a hangover
Development prospects 3.28 11
remains from the U.S. housing market collapse, epitomized by
Buy Hold Sell
32.9% 45.2% 21.9% the subprime mortgageinduced bubble a decade ago. More
than 7.4 million homeowners are still seriously underwater as
Expected capitalization rate, December 2016 6.1%
of mid-2015, with the market value of the homes 25 percent or
Source: Emerging Trends in Real Estate 2016 survey. more lower than the outstanding mortgage balance, accord-
Note: Based on U.S. respondents only. ing to Realty Trac. Based on such data, a Wall Street finance
Others, such as the president of a Southeast brokerage, also specialist sees a slow recovery in the suburban housing markets
encourage a close look at what is going on in the regional and a disincentive for homebuying for now.
markets with which he is familiar. Downtown housing has more
of a boutique feel than in New York. Millennials here can rent

Such conditions surely influence the buy/rent decision. Many young families, workforce housingand how that housing
have spoken of the trauma felt by millennials who saw their fami- changes . . . in size of home, style of home, where they are
lies net worth evaporate in the housing debacle. Those scars, located, and how theyre constructed.
they feel, will be very slow to heal. Moreover, the tenuous situa-
tion they experience in terms of job security gives them pause That challenge will not be going away in 2016, 2017, or 2018.
when contemplating a long-term mortgage commitment. Jobs It is safe to label it an emerging trend.
are not sticky anymore, declares an executive with a global
investment and asset manager, and this impacts on the home
purchase and mortgage decision.
Office
Mind the gap! Thats the gap between CBD and suburban
With such factors in mind, many long-term investors align with offices, the top and bottom lines respectively in Moodys/RCA
an institutional investor who concludes for the years ahead, Commercial Property Price Index in exhibit 5-2. One property
We are still bullish on the apartment sector, although there type diverging on two separate tracksand the gap has been
are certainly markets with emerging supply issues. Overall, we widening.
think that the demographic tailwind for rental apartments
and continued urbanization is a longer-term trend that will The breadth of the U.S. office market is one of its greatest
make multifamily a good sector for a long time. strengths. Having options provides value. Secondary office
markets are experiencing higher levels of investment for just
Design, price, and user preferences. A Chicago-based this reason, somewhat greater volatility priced by higher yields,
developer described the difference between product for mil- and the ability to accommodate fast-growing companies with a
lennials and baby boomers this way: The gen Y product is a volume of new construction at costs much lower than that avail-
700-square-foot apartment at $2,000 per month, but empty able in the primary downtowns. Interviewees spoke of pocket
nesters need 1,500 square feet. This is another instance where markets, conversions and redevelopments, and opportunities
granular market analysis is absolutely required. to reposition struggling suburban office parks with vast parking
into more effective mixed use.
Lest we think this is simply the case in the largest U.S. cities,
listen to a Nashville housing investor/developer: My key demo- Where? Quite a few interviewees find themselves overweighted
graphic is women in their 60s, whose social life centers on their in office at this stage of the cycle. Almost universally, that
jobs and their church affiliations. They need a low-maintenance concentration of investment has been in the downtowns of the
home with enough size and community amenity to be happy at largest cities. Research has validated the claims that 24-hour
this stage in life. The micro unit is not the answer for this group. cities would provide superior returns over time. New studies of
And a West Coast investor wonders about the durability of the vibrancy have extended the connection between live/work/
market for such a product: When people are successful, they play locations and commercial real estate performance into the
dont want to be crammed into micro units. category of 18-hour cities introduced in Emerging Trends 2015.
So even as we see a push in demand coming from new house- Institutional investors with a long-range perspective have been
hold formation, as jobs become more plentiful and release looking past the high prices for core office assets in gateway
boomerang kids into the housing market, there will be a need markets, doubling down on offices in Boston, Chicago, D.C.,
for a range of developmentnot just luxury. A challenge for the New York, Los Angeles, and San Francisco. Even at higher
industry is making the economics of affordable housing work. prices, CBD has topped suburban office in total returns over the
As one investment manager noted, both ends of the income one-, three-, five-, ten-, and 20-year time horizons in the NCREIF
inequality spectrum need to be satisfied: We need to ask where Property Index. No wonder that one interviewee specializing
workers will be living. in office investment sales said, Tenants want to be in urban
locations, so investors want to be there, too. There is a good
One consultant from the Carolinas maintains, We are going degree of due diligence being done on deals, so we are not get-
to have to deal with affordable housing in a more holistic way. ting out over our skis.
A private developer in Florida defines the issue even more
sharply: Affordable housing is much more than simply a It is not just the insurance companies and pension funds,
real estate issue. It is a significant cultural issue. Products though. A variety of buyer types is represented in the current
will be delivered that will accommodate millennials, small/ wave of downtown office acquisitions. A private owner/investor
told us, Sell noncore assets; invest in quality office. One inter-

Exhibit 5-11 U.S. Office Property Total Returns Exhibit 5-13 Office Investment Prospect Trends
60%
excellent
Medical office*
NAREIT
40% NCREIF ODCE good
Central city office
20%
Annual return
fair
0%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015* Suburban office
20%
poor
40% 2004 2006 2008 2010 2012 2014 2016

60%
Sources: NCREIF Fund Index Open-End Diversified Core (ODCE); NAREIT Equity U.S. central city office
REIT Index.
* Returns as of June 30, 2015. 2016 Prospects Ranking
Exhibit 5-12 Change in Supply and DemandU.S. Office
Buy Hold Sell
32.7% 34.6% 32.7%
Occupancy
5% 92% Expected capitalization rate, December 2016 5.6%
Demand
4%
Supply 90%
3% 20-year average U.S. suburban office
occupancy 88%
2% 2016 Prospects Ranking
Occupancy
1% 86% Investment prospects 3.14 13

0% 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015* 2017* 2019* 84%
Buy Hold Sell
1% 24.4% 39.7% 35.9%
82%
2% Expected capitalization rate, December 2016 6.9%
80%
3%
4% 78% Medical office
Source: CBRE Econometric Advisors. 2016 Prospects Ranking
* Forecast.
viewee cited the move of a forest products firm from its longtime Development prospects 3.71 3
suburban campus to Seattles gritty Pioneer Square, remarking, Buy Hold Sell
40.4% 37.3% 22.3%
Companies are all competing for talent. How are you going
to attract the talent right out of college? The CBD is benefiting Expected capitalization rate, December 2016 6.4%
from the trend of companies moving from the suburbs into the Source: Emerging Trends in Real Estate 2016 survey.
center city. Such a reversal of the corporate migration patterns Note: Based on U.S. respondents only.
that dominated relocation decades ago, patterns that made

Of course, here again it is prudent to warn against overgeneral-
suburbanization more than just a residential phenomenon, sug-
ization. More than a few interviewees caution that the suburbs
gests that the back-to-the-city movement may be with us for a
are not dead, and economic equilibrium should mean that the
while yet.
gap in rents and prices between the gateway market down-

towns and their nearby suburbs cannot expand indefinitely. At space, drop-in space, meeting space, some offices. If you do
some point, a price advantage stimulates demand. it right, it increases productivity. If you do it cheaply, you run
into problems.
That countertrend is already quietly underway. First-half 2015
transaction data put suburban office sales volume at $39.8 A Texas developer sketched out an office property he had
billion, versus $31.6 billion for CBD office. Both in southern repositioned as millennium space, people stacked in 50 square
California and the Bay Area, suburban office sales were in feet each. But then you go back and look at the common space
the billions, led by Silicon Valley. Similarly, Seattles suburbs and see it is not so much a difference in the quantity of space
saw $1.8 billion in investment. This is not just a West Coast as in the uses of that space. There was a Zen room, space to go
story. Boston, New Jersey, and the northern Virginia suburbs mellow out. I imagine after sitting next to someone five feet away
of Washington, D.C., also broke the billion-dollar barrier. And you might need a space like that, what I would call common
so did Sun Belt suburbs around Atlanta, Dallas, Denver, and nonfunctioning space.
Phoenix.
Productivity and employee experience are both design values in
Costs count. An interviewee whose firm is closely associated the densification discussion. The concept is not space reduc-
with high-rise urban office properties wondered, At what point tion for its own sake, in most cases. It is about collaboration and
does the cost of living in some citiesdriven by housing interaction. Its about attracting the talent, said the manager of
expensecut off the flow of young employees? I need to a Seattle firm. Companies want to induce interactions and, lo
think about places with a more manageable cost of living, and behold, people are happier. Attract and retain talent. Thats
secondary marketsPittsburgh, Minneapolis, Austin. You good business. Form follows function.
give up the excitement of Manhattan or San Francisco, but
somethings gotta give. It is always healthy when a thoughtful Another seasoned building owner thinks it comes back to the
sense of limits enters the discussion of market trends. venerable economic concept of agglomeration, and consid-
ers the technological revolution an ally to real estate investors.
Drawing a bright line between all downtowns and all suburbs Technology has been very good for officenet, net, net.
probably does not make sense. A value-add investor describes Access to high-speed connections caused people to cluster
his firms approach this way: We are conservative in core where those connections exist. More and more of the world is on
markets and looking for opportunities in second-ring urban a screen, but you only really make money on information that
neighborhoods. We are focused on urbanizing suburbs. That is not out in the market. Thats why people in Silicon Valley
means places with a historic retail core on Main Street, with want to have lunch in little pubs. Tech has made person-to-
mixed-use potential, but without the high density of the true person interactionprivatelyway more valuable.
urban experience. Other interviewees were enticed by close-in
suburbs, with great attention to submarket distinctions, while Why? How does this translate into a bottom line? Employers talk
dismissing the plain-vanilla suburban business park: They have about building a culture of collaboration, liberating the workday
nothing. There is no reason for people to be there, in the words from the 9-to-5 limits and keeping workers in the workplace
of a major private equity executive. A specialist in the commer- longer (as well as closer). Again, the issue is productivity: Does
cial real estate debt markets says, in contrast, Suburban office being in the office for 12 hours translate into 12 hours of work, or
needs to be near transit or walkable to be viable. just eight hours of output? There has recently been pushback.
One interviewee maintains, At some point, the novelty will wear
How? Costs are very much part of the densification discussion, off. An institutional investor believes, We are going to see the
and space compression is still trending in the minds of many. pendulum swing back a little on this dense open-office con-
But here, too, we find some sense of limits, and greater nuance figuration. Im hearing more and more evidence that some of
in the thinking of building owners and managers as the actual the new dense-space configurations are simply less productive
operation of redesigned space is fleshed out by experience. than those that do have more privacy.
The buildout is actually more expensive if you do it right, said Like every emergent trend, densification will either prove its
one senior officer about an installation that combined open- worth over time, or it wont. Most probably, the very large office
space planning with other functional elements. Somebody who market provides plenty of options along the space/design
needs private time for calls, for writing, needs a place to go. spectrum, and individual firms will demand varying designs for
You end up with a lot of glass and a lot of light. You have open their spaces. One interviewee, an investment banker, observed

that it was the technology, advertising, media, and information
Exhibit 5-14 Change in Supply and DemandU.S. Hotel/
(TAMI) firms that were driving office demand, not the finance,
Lodging
insurance, and real estate (FIRE) companies that were once the
mainstays. Does that mean buildings without large floor plates? 5% 75%
Demand Occupancy
Look no further than the new World Trade Center complex in
4% Supply
Manhattan, built with the kind of floor plates that could have
3% 70%
facilitated trading operations. Those buildings are now the cen-
ter of the lower Manhattan TAMI beehive. 2%
Occupancy
65%
1%
There is a lot of room for change. Some see steady growth
0%
ahead in the medical office field, recognizing that we are 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015* 2017* 2019* 60%
just at the beginning of the aging of the baby boomers. Both 1% 20-year average
private equity firms and more institutional players are seeing occupancy
2% 55%
the need for more suburban medical office development and
3%
even large-scale medical campuses as the health care industry
consolidates. The provision of insurance to millions of additional 4% 50%
Americans under the Affordable Care Act actually appears Source: CoStar Portfolio Strategy.
to be accelerating health care consolidation, for reasons of * Forecast.
economies of scale, while simultaneously creating small-space

demand for medical offices specializing in urgent care. Such
Exhibit 5-15 U.S. Hotel/Lodging Property Total Returns
trends create options for real estate development and invest-
ment, for those nimble enough to take advantage. There are
80%
gaps to be foundnot only in pricing, but also in the matching NAREIT
of supply to demand. 60%
NCREIF ODCE
Hotels 40%
A rising U.S. dollar is making international travel to the United 20%

Annual return
States more costly for tourists and business visitors. Airbnb is

seen as diverting demand from full-service hotels. The recent 0%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015*
surge in development in the hospitality industry is challenging
the hotel sector to keep occupancy and revenue per available 20%
room (RevPAR) numbers robust, though RevPAR is up again in
mid-2015 as it has been each year since 2010. 40%
Emerging Trends survey respondents seem to expect 2016 to 60%

be an inflection point for the hotel sector, especially for full-
80%
service facilities. Lets be clear that the overall development/
investment outlook for both of those segments is up from the REIT Index.
survey scores a year ago. Thats good. But the percentage of * Returns as of June 30, 2015.
respondents favoring a sell posture has risen since our last
survey for limited-service hotels, and for full-service hotels there Private equity funds and the REITs, meanwhile, were buyers of
is a higher proportion of sell recommendations (30.7 percent) limited-service portfolios, to a greater degree.
than buy (24.8 percent).
Hotels have always been understood as more of an operating
According to Real Capital Analytics, capital flows into hotels business than most other forms of real estate. Volatility is always
have remained high during the first half of 2015, at $26.9 billion, the norm because the lease term is by-the-night, with fluctua-
70 percent of which was directed to full-service facilities. These tions in both room rate and occupancy occurring on a daily
larger and more prestigious assets were favored by offshore basis. That can be good when the markets are tight, as they
investors and by the publicly owned operating companies. have been. But it is a risk when an increase in supply, which

these types of services for travelers. So [the cousin] has bought

Exhibit 5-16 Hotel Investment Prospect Trends
them for investment purposes and [is] renting them out on these
services via Airbnb and Home Away. Thats a real phenomenon.
excellent
Boutique hotels also are competing to take market share from
good established chains, intensifying a trend we identified last year.
Full-service hotels
Everyone is trying to stay ahead with design forward, noted
one hotel investor, who also indicated strong demand dynamics
in 18-hour markets like Nashville and Austin. In New York, the
fair avatar of the 24-hour city, hotel supply is up, but occupancies
Limited-service
hotels have not declined, thanks to the annual tourist flow of 54 million
visitors there. Room rates were said to be flat in the Big Apple,
but that is flat at a stratospheric level for many guests. One pri-
poor vate equity player said, Smart investors are starting to sell NYC
hotels. Thats a sign.
2004 2006 2008 2010 2012 2014 2016
Source: Emerging Trends in Real Estate surveys. Could the cycle have topped out for hotels? Perhaps. It is very
much a cyclical industry, and getting more complicated over
U.S. limited-service hotels
time. No wonder the trend is for capital to align with operators
2016 Prospects Ranking who can provide alpha opportunities, with institutional and
Investment prospects 3.57 6 cross-border investors supplementing that with purchases like
Development prospects 3.57 5 Manhattans Waldorf Astoria, a proven asset retaining its value
Buy Hold Sell decade after decade.
31.4% 40.2% 28.4%
Expected capitalization rate, December 2016 7.4% Retail

Fluidity as well as granularity are the forces shaping retail
U.S. full-service hotels property trends going forward. Stripped down to essentials,
2016 Prospects Ranking the key is how do you get goods to the customer? An ana-
Investment prospects 3.41 11 lyst specializing in this sector sees the conversion of function
Development prospects 3.12 12 in retailingnamely, on-floor selling to order fulfillmentas a
Buy Hold Sell
dynamic characterized by stores shifting from showrooms to
24.8% 44.6% 30.7% web rooms to guide rooms. The major mall operators are
Expected capitalization rate, December 2016 7.0% bringing think-tanks (a.k.a, skunk works) to their management
procedures. Staying ahead of the game is the game.
In retrospect, it is unlikely that many will credit the 2011 Occupy
Wall Street demonstrations as having much lasting effect on
adds to relatively fixed inventory, is faced with a potential reduc- the economy. It is certain, though, that the sloganeering about
tion in demand. the 1 percent and the 99 percent has altered the framework of
economic discourse. Income inequality is front and center in the
Some of our interviewees feel that is exactly the Airbnb chal- national discussion, like it or not. A May 2015 Gallup poll shows
lenge, and it is directed upscale. A sophisticated capital manager 63 percent of American adults agreeing that the national income
expressed it this way: I personally know people who are booking distribution is unfair, a position that is endorsed by 42 percent of
though Airbnb with their families instead of staying at four- or self-described conservatives.
five-star hotels. In fact, on a percentage basis, it might be more
impactful because there are fewer of them. People who would Why would this be germane to a discussion of real estate pros-
have normally gone to a Four Seasons are looking at Airbnb. pects? If you are in retailing, you know the answer all too well.
Knowledgeable investors and developers focused on shopping
She continued, saying, Someone was telling me that their centers speak about the barbell in retailing: success in value
cousin bought houses in the Boston area to make available for retailing and in the luxury segment, while stores catering to the

middle of the income distribution struggle year after year. Job
Exhibit 5-17 U.S. Retail Property Total Returns
gains are noted, but they do not translate into improved rev-
enues at the merchants unless accompanied by wage growth.
60%
NAREIT
Much depends upon the future of income growth in the lag- NCREIF ODCE
ging sectors. That is why the income inequality issue is vitally 40%
relevant for merchants and for shopping center investors. That
is especially true for centers designed for the shrinking number 20%
of middle-class households. One investment manager sees a
Annual return
tremendous number of dead malls to be dealt with over the
next few years. A major financing firm sifts the sands this way: 0%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015*
In the Midwest, the best retail locations have largely bounced
back, but B and B-minus centers are overbuilt and need to be 20%
redeployed. A Chicago-based builder/owner looked at his
home metro area and said, Suburbs are a wasteland around
Chicago. Schaumberg and Naperville are dying for dollars. 40%
As Pew Research data show, over the past three decades 60%
wealth for middle-income households has hardly moved the
needle, while upper-income household wealth has doubled, REIT Index.
in real dollar terms. * Returns as of June 30, 2015.
It is impossible to accurately analyze the outlook for the retail

property sector if such data are not factored in. High-end retail Exhibit 5-18 Change in Supply and DemandU.S. Retail
will prosper as the high-end population does well; commod-
3% 96%
ity [or mass-market] retail will suffer, predicts a top analyst we 20-year average
interviewed. An asset manager observes, Retail is in flux. A occupancy
Supply
small number of really top malls are going to do well, but after 2%
Demand
94%
that it is tricky. . . . It will take some time to sort out.
Occupancy
1%
NCREIFs data for retail look excellent, for example. A longtime
92%
monitor of institutional trends says, Retail is still a top performer
0%
[for this class of investor] in spite of all the negative talk. Retail 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015* 2017* 2019*
assets have turned in the highest total returns of all property 90%
types in two of the last three years, and also lead the long-term 1%
performance measures of the ten- and 20-year time horizons. Occupancy
2% 88%
Yet, according to the first-quarter 2015 NCREIF discussion of
Source: REIS Inc.
its retail index, lackluster retail sales growth, limited new store * Forecast.
openings and continued store closures, and an overhang of
crippled retail centers burden the shopping center picture. percent since the trough of the Great Recession, they are still
Nevertheless, the NCREIF datas focus on higher quality, 7.5 percent below their prior peak (exhibit 5-2). The situation in a
more institutional properties . . . insulates it from these trends. half-dozen major markets is the exception, as these urban areas
Meanwhile, those centers in the bottom third of trade area have seen prices move 4.1 percent above preglobal financial
demographics languish. crisis levels.
The upshot is that both demand and supply in the retail sector Generally speaking, transaction volume for retail has been rising
have lagged behind their long-run averages in this recovery, annually throughout the present decade, and hit $91.3 billion for
and are projected to remain sub-par a while longer (exhibit the 12 months ending June 2015. A large private equity investor
5-18). While investment prices for retail assets have risen 62 reflects, I thought retail was really quiet after the recession.

about the retail sector is that it is subject to disruption.

Exhibit 5-19 Retail Investment Prospect Trends
What weve gotten wrong is the expectation that everything
will shift. It turns out that stores are a very effective deliv-
excellent ery system.
good Urban/high street. When two high-end department stores

Neighborhood/
community elect to put new flagship stores in Manhattan, while eschewing
shopping centers
regional mall opportunities elsewhere in the metropolitan area,
thats news. And at the same time, the nations largest chain of
fair department stores has announced a development deal featuring
the renovation of a venerable downtown Brooklyn facility, rede-
Regional malls Power
centers signing 310,000 square feet as contemporary retail space while
converting some upper floors into headquarters-quality office
poor space. Thats more news. Irelands largest retailer purchases an
iconic former department store at Bostons Downtown Crossing.
2004 2006 2008 2010 2012 2014 2016 Still more news. Keep it up, and well see a trend!
A REIT executive predicts, Main Street retail will outperform

U.S. neighborhood/community shopping centers
other offerings. This fits with the migration of population into
2016 Prospects Ranking urban environments. At some level, thats undeniable, though
Investment prospects 3.54 7 the caveat of a pension fund investor should be acknowledged:
Development prospects 3.35 10 I wouldnt turn down a deal if theres a specific value proposi-
Buy Hold Sell tion . . . more a rifle shot than a scattered-shot approach.
37.5% 41.1% 21.4%
Expected capitalization rate, December 2016 6.3% A veteran mall developer, looking at center city retail opportuni-
ties, argues, It depends on the neighborhood. Retailers are
U.S. power centers choosy about which area of the city they are going. Different
neighborhoods dictate different uses in the retail project. Still,
there can be surprises. One investor has a deal in the south
Investment prospects 3.00 15 Bronx where he saw beyond its 1970s reputation and found a
Development prospects 2.61 15 high-volume transportation hub and great population density,
Buy Hold Sell with local employment generators including a college, the
9.9% 41.0% 49.1%
county courts, and a major hospital. Spots supporting high-rise
Expected capitalization rate, December 2016 6.5% multifamily development and investmentthink South Lake
Union in Seattle, Bunker Hill in Los Angeles, Fountain Square in
U.S. regional malls Cincinnatifit the description of the kind of walkable, amenity-
laden neighborhoods that support high street retailing.
Investment prospects 2.79 16 Neighborhood/community centers. Emerging Trends survey
Development prospects 2.04 16 respondents concluded good investment prospects for
Buy Hold Sell smaller shopping centers in 2016, according them the best
9.3% 44.2% 46.5%
outlook score in the past dozen years (exhibit 5-19). On the buy/
Expected capitalization rate, December 2016 6.0% hold/sell decision, such centers are favored as a buy by 37.5
Source: Emerging Trends in Real Estate 2016 survey. percent of our sample, versus just 21.4 percent making sell
Note: Based on U.S. respondents only. recommendations. This is in line with the empirical evidence
showing increasing transaction volume and falling capitalization
In the past year and a half, it seems to be picking up. National
rates for such assets.
players are looking to do deals in this market. Capital trends
discussed in chapter 3 give every indication that retail property
A Midwest developer sees these smaller shopping centers
investment activity will again be brisk in 2016. As one experi-
experiencing a shift in tenant mix. Grocery store wars are in
enced investor said in her interview, What weve gotten right

full swing, he remarks, with a push toward organics-branded That is getting more common, and both sides are converging
stores needing facilities of 20,000 to 25,000 square feet. Also in multichannel customer access.
in this niche we find value merchandisers backfilling locations
in tightly defined trade areas. NCREIF investors already have The application of technology is a much larger issue, and
$26.4 billion invested in neighborhood and community shopping a much bigger operational trend than merely e-commerce.
centers, and they have been posting annual returns averaging Technology now lets a mall see that you are approaching the
more than 12 percent for the past five years. center (or maybe passing it by) and can beam out a message
or coupon that is not only an ad, but, depending on your social
While the demographic mix in the United States changes, so media profile, also an invitation tailored to your preferences. A
does its retail mix. Hispanic-themed centers are springing up goal, said one interviewee, is to make your in-store experience
as one-sixth of the U.S. population identifies as Latino, and more like being online. We are really going down the rabbit
we should expect other immigrant groups to claim their share hole here!
of store area. Most major cities have long had Asian ethnic
enclaves, which had significant urban retail components. As Tenant mix continues to evolve. What is not replaceable by the
the newer wave of Asian immigration surpasses the Hispanic internet is moving to the fore. Restaurants and food are key.
cohort in its growth rate (now nearly 3 percent per annum for Market halls, the 21st-century version of a food court, are now
Asians), and the retailing community recognizes this population very popular, in the words of one major developer. Food is the
segment as older, better educated, and more affluent than other password for many millennials and boomers alike. They both
immigrant groups, shopping opportunities targeted to them spend a lot of their disposable income on food. Food culture
should be an emerging development/redevelopment theme in is a growing trend. Chefs are now celebrities in many cities like
the years ahead. Minneapolis and Louisville. Brew pubs are also a growing phe-
nomenon. They are being incorporated into malls as well.
Malls. Love em or hate em, Mall companies are doing great,
said one developer with experience across the United States A top retail broker mused, The selfie generation is all foodies,
in several property types. The head of a capital management too. Look at the cell phone pictures being snapped every night
firm calls it a tale of two strategies: the first is the demalling of in restaurants and posted on Instagram.
America, where the second-best mall in a trade area may not
survive; but a focus on the very top tier can be very rewarding. Its not just food, of course, but personal services, too (massage,
dental, yoga studios, fitness centers), and entertainment. Its all
Institutional returns on the top tier have surpassed the per- lifestyle oriented.
formance measures of the smaller shopping centers by a
considerable margin. Regional malls have average annual It is becoming more obvious to the investment community that
total returns of 14.2 percent, and super-regional malls returns online retailers, even the biggest ones, have not been making
have been even higher at 16.0 percent. That is enough to keep money for their shareholders in the form of cash profits, only in
attracting capital. Theres a limit to new competition, too, as the increasing stock prices. And this has been in an era when many
prime sites have long since been developed and the regula- were below the sales-tax radar. One savvy player puts it this
tory hurdles to development have only gotten more challenging way: One of the reasons why online sales grow so fast is that
since the last generation of mall building. Cap rates for malls are they are so cheap. They dont cover their costs. Stock inves-
a pricey 5.9 percent, and even lower in the Northeast and on the tors know this about the profit picture, but think, Well get there.
West Coast. At some point, like every other industry, they will have to make
money from operations. A marketing specialist declares even
Technology, e-commerce, and multichannel retailing. Now more forcefully, The music is stopping for pure play in e-com-
that the obvious has long since been stated, Shopping online merce. Stores are the new black.
will make retail space dwindle, it is time to see how the details of
this trend will be working out. The bricks and clicks discussion That may overstate the case. Surely, the commodity retailers
is going to get sharper, and in a hurry. Stores have punched who have nearly vanished from sales of music, books, travel,
back, adopting e-commerce for their own operations and, as and the like are probably never coming back. But the penetra-
we noted last year, internet retailers have increasingly been tion of the bricks domain with the clicks is only at the early
dabbling in physical stores as a supplement to online sales. stage of maturation. That evolution is the emerging trendand
it has its limits. One astute observer made this argument about

e-commerce growth: Going from 1 percent to 2 percent market

Exhibit 5-20 Prospects for Residential Property Types
share is easy. Five percent to 10 percent is harder. Ten percent
in 2016
to 20 percent is not likely to happen.
Investment prospects
The e-commerce share is just about at the 9 percent mark as of
Senior/elderly housing
right now.
Inll and urban housing
Housing Single familymoderate income
Residential starts came in at 1.2 million for the months of June Single familyhigh income
and July 2015, the best construction activity for housing since Multifamily condominiums
late 2007. More telling, the growth was spurred by single-family
Single familyrental
housing after apartment development had provided the momen-
tum during the past several years. The elements of a housing Second and leisure homes
development trend toward greater normalcy are falling into Affordable/workforce housing
place, after the catastrophic bursting of the mortgage-induced
Manufactured-home communities
bubble of a decade ago.
Abysmal Fair Excellent
The inventory of finished new homes for sale is 5.4 months, right Development prospects
in line with historical averages, and price increases are begin-
Inll and urban housing
ning to reflect scarcity on the supply side. This condition sets
the stage for further gains in 2016, since there is a shortage of Senior/elderly housing
ready-to-build housing lots. Banks skittishness about land and Single familymoderate income
development loansa major source of losses during the finan-
Single familyhigh income
cial crisishas meant that builders have not been able to get
the pipeline for production anywhere near historical capacity. Multifamily condominiums
Second and leisure homes
The CEO of a private equity firm focused on land develop-
Single familyrental
ment picks housing as a best bet over the next three years.
Residential, residential, residential. Single-family, multifam- Affordable/workforce housing
ily, and single-family to be rented. Its a safe bet that you will Manufactured-home communities
outstrip inflation by a couple of percent by doing that. You will Abysmal Fair Excellent
get above-normal historical returns by doing residential, all
three legs of the stool. Note: Based on U.S. respondents only.
Housing and the economy. A virtuous feedback loop exists

between housing development and housing demand. It obvi- rate policies of the Fed have kept 30-year fixed-rate mortgages
ously can be disrupted by excess, as it has in the past, but right under 4 percent, and while rates will be trending upward they
now that feedback is strengthening. The link is construction will still be at stimulative levels if the expected path of policy
jobs. The renewal of homebuilding is shifting employment trends change is executedgradual and moderate increases, taking
in ways not visible in top-line national statistics. Construction care not to shock the recovery. That should buttress more than
employment growth has been tepid, although it has risen in 32 homebuilding itself.
of the past 36 months. But government funding of infrastruc-
ture projects, or the inadequacy thereof, has been a drag on Single-family-for-rent investors. During the dark days of the
the numbers. Homebuilding, which is labor-intensive, is the global financial crisis, some forward thinkers moved into the
counterbalance, especially in an era of disciplined commercial housing breach, anticipating a flip over time, when renters-
development. by-necessity would become buyers-by-choice. That thinking is
changing somewhat, and one banker likes single-family rentals
The multiplier effect of housing growth carries over into all sorts as the logical way to understand a reduced homeownership
of other jobs in the building supplies industry, in furniture and rate and the viability of suburbs. Her view has generation Y
appliances, and in wholesale and retail trade. The low interest

thinking, I want to move to the suburbs, but I still want to rent lesser-known public universities and private schools. Over time,
because I still need flexibility. So we are seeing single-family we are watching demand shifts: there will be less of the popula-
home rentals evolving from the flip strategy to becoming oper- tion in that age groupthe 18-year-old population peaked four
ating businesses. to five years ago. And, obviously, student housing is operation-
ally intensive. It needs great hands-on management, not just
One lender has a different perspective, linking such invest- passive investors, to succeed.
ments to housing affordability. Its a challenging market, its
complicated from a regulatory point of view, even from an The baby boomers have long been anticipated as a huge mar-
investment point of view. Theres such an incredible need. We ket for a cafeteria menu of senior housing choices. But as in so
actually think one of the ways the affordable housing stock many other instances, this generation has confounded expec-
can be increased efficiently and effectively is through the tations. Right now, in early retirement (or deferring retirement),
support of the new single-family rental companies, look- boomers are more likely to be empty nesters than seeking their
ing at that as an emerging industry. Those companies own long-range housing solution. But that will be coming. And so,
single-family houses, they maintain them, and they rent them this year, housing for seniors ranks first for investment in the
out [with] a pretty big chunk as affordable housing. Theyre not Emerging Trends 2016 survey (exhibit 5-20).
just a bunch of mansions that were overbuilt. I think its start-
ing to work. I think its going to come into its own in the next 18 An executive in a health care REIT with significant senior hous-
months; its really an emerging industry. ing experience had the following to say: Today, the average
age of someone in senior housing is about 85. Thats up signifi-
Master-planned communities. Affording an opportunity to tar- cantly and continues to increase. You see people live longer,
get the live/work/play sweet spot very directly, master-planned with higher acuity. Its still a lifestyle choice, but its a lifestyle
communities have risen to the third position in the rankings of choice because of need. People are selling their home to pick
niche investment and development prospects for 2016, up from a different lifestyle choice. Its like going back to apartment liv-
eighth place (for investment) and sixth place (for development) ing, except that youve got food, entertainment, people so that
a year ago. Most often located in suburban locations, such com- you dont have to be lonely, and people who will be there if you
munities are increasingly taking on urban forms. This is partly need help.
a result of the new urbanism concepts evolving over the past
20 years, and partly a response to millennials preferences. So True enough, but the oldest baby boomer is still under 70 years
we see greater pedestrianization, integration of retailing and of age right now. We can glimpse the future opportunityand
amenities (including parks and schools) with housing in com- still recognize execution issues for now. Selling the existing
munity design, community gardens concepts, and aspects of home is, for now, not a given. Shortfalls in savings are a
the sharing economy in transportation and coworking spaces. problem for many households: fewer than half of U.S. house-
Intergenerational living is a factor, too. This is a kind of back-to- holds have retirement accounts. Those who are near retirement
the-future element, partly reflective of active seniors lifestyle, age and have such accounts have a median balance of only
partly a recognition of the boomerang phenomenon among $104,000, according to a 2015 study conducted by the National
generation Y, and partly a recognition that diversity of age is a Institute of Retirement Security; those without such accounts
desirable feature for any sustainable community. have median savings of just $14,500. In light of such econom-
ics, senior housing is like so many other investment segments in
Niche products. For certain investors, niche products like requiring careful scrutiny and very targeted selection.
student housing and senior housing are maintaining momentum
as attractive choices. This is an example of a trend previously
identified that is working its way forward. Fund managers are
reporting increased interest from capital providers, both domes-
tic and international, for exposure to these products.
Demographics obviously counts for a lot in student and senior

housing, but again our interviewees stress the importance of
nuance and granularity in evaluating opportunities. One investor
active in both niches says, Housing investment is steady at
good or flagship schools, but there are enrollment issues at

Interviewees
Aegis Property Group AXA Real Estate Buzz McCoy Associates Inc.
Jim Kinzig Olivier Thoral Bowen H. Buzz McCoy
Aegon USA Realty Advisors Inc. Axiometrics Cadillac Fairview Corporation
Donald P. Guarino Jr. Ron Johnsey Cathal OConnor
Lyndsay Schumacher
Balboa Investments Inc. Canadian Apartment Properties
AEW Capital Management Timothy Blair Real Estate Investment Trust
Michael J. Acton David Ehrlich
Marc L. Davidson Bank of America Tom Schwartz
Pamela J. Herbst Kenneth Cohen
Jonathan Martin Christopher Rogalski Canadian Tire Real Estate Investment Trust
Robert J. Plumb Ken Silver
Bank of America Merrill Lynch
Agellan Capital Partners Jeffrey D. Horowitz Canderel Management Inc.
Frank Camenzuli Ron D. Sturzenegger Daniel Peritz
AIG Global Real Estate Barclays Capital Canyon Capital Realty Advisors
Robert Gifford Ross Smotrich Jonathan P. Roth
Maria Stamolis
Allied Properties Real Estate Basis Investment Group LLC
Investment Trust Mark K. Bhasin CapRidge Partners
Michael Emory Steve LeBlanc
Bell Partners
Alston & Bird LLP Durant Bell Capright
Jason W. Goode Jules H. Jay Marling
Bentall Kennedy (Canada) LP
Rosemarie A. Thurston Remco Daal Carey Watermark Investors Inc.
Alterra Group Limited Paul Zemla Michael Medzigian
Robert Cooper Berkshire Group Carmel Partners
Amacon Chuck Leitner Christopher Beda
Bob Cabral Michael LaHorgue
BlackRock Dennis Markus
American Realty Capital Jack R. Chandler
Hospitality Trust Inc. CBRE
Blackstone Richard Barkham
Ed Hoganson Ken Caplan Tom Frye
Amicus Investors Bluerock Real Estate LLC Anthony Long
Steve Utley James G. Babb III Jeanette Rice
Bob Sulentic
Angelo, Gordon & Co. BMO Harris Bank William C. Yowell III
Reid Liffmann Hans C. Geyer
Mark Maduras Aaron Lanski CBRE Commercial Tri-State Region
Adam Schwartz John Petrovski Mary Ann Tighe
Gordon Whiting
Bosa Development Group CBRE Econometric Advisors
Apartment Investment and Nat Bosa Jeffery Havsy
Management Company
Ernie Friedman Boston Properties Charles River Realty Investors
Mike LaBelle Brian Kavoogian
APG Asset Management US Inc. Owen D. Thomas
Steven Hason Charter Homes & Neighborhoods
Brandywine Realty Trust Robert P. Bowman
Apollo Global Management Tom Wirth
Colburn J. Packard The Chevy Chase Land Company
The Bristol Group Thomas Regnell
The Armour Group Limited James Curtis
Scott McCrea Choice Properties REIT
Brixmor Property Group John Morrison
Aspac Developments Ltd. Michael Pappagallo Bart Munn
Gary Wong
Broccolini Construction Inc. CIBC World Markets
Aspen Properties Ltd. Michael Broccolini Benjamin Tal
Greg Guatto Paul Broccolini
Scott Hutcheson Citi Private Equity Services
Emilio Minotti Michael Dwyer
AvalonBay Communities Inc. Bucksbaum Retail Properties
Kevin OShea Clarion Partners
John Bucksbaum Doug Bowen
Avison Young Build Toronto Inc. Stephen J. Furnary
David Eyzenberg Bill Bryck Hugh McDonnell
Richard Hanson Tim Wang

Cogir Management Corporation Digital Realty Trust First Potomac Realty Trust
Mathieu Duguay William Stein Andrew P. Blocher
Colliers International DivcoWest Fonds immobilier de solidarit FTQ
George S. Iliff Mike Carp Ren Lamarche
Andrew Nelson
Dividend Capital Group, Forest City Commercial Group
Columbia Property Trust University of Denver James Ratner
James Fleming Glenn Mueller
E. Nelson Mills Forest City Enterprises Inc.
Donahue Schriber David LaRue
The Concord Group Lawrence P. Casey James Prohaska
Richard M. Gollis Patrick S. Donahue
Franklin Street
Connecticut Retirement Plans Dorsay Development Corporation Andrew Wright
and Trust Funds Geoffrey Grayhurst
Cherie Santos-Wuest Fraser Valley Real Estate Board
Douglas Elliman Rob Philipp
Conservatory Group Inc. Faith Hope Consolo
Mark Libfeld The Furman Company
DRA Advisors LLC Stephen P. Navarro
CoreLogic Paul McEvoy
Frank Nothaft GAW Capital Advisors (USA) LLC
Dream Office REIT and Ashbey Chang
Cornerstone Real Estate Advisers LLC Dream Global REIT Roman Nemtsov
Scott D. Brown Jane Gavan
J.D. Sitton Getty Realty Corp.
Dream Unlimited Corp. Chris Constant
Corporate Office Properties Trust Michael Cooper David Driscoll
Bill Barroll Jason Lester
Steve Burdorick GID
John Norjen D.R. Horton Inc. Robert DeWitt
Roger Waesche David Auld Brian OHerlihy
Jessica Hansen Bill Roberts
CoStar
Hans Nordby Easterly Government Properties Inc. Ginkgo Residential
William C. Trimble III Philip Payne
CRE Finance Council
Stephen M. Renna Education Realty Trust Glenborough LLC
Randy Churchey Alan Shapiro
Cresa Ottawa Christine Richards
Darren Fleming Goff Capital
Eii Capital Management John Goff
Crow Holdings Michael Hudgins
Harlan Crow Great Gulf Group
Anne Raymond Empire Communities Group David Gerofsky
Paul Golini Jr.
Crown Realty Partners Andrew Guizzetti Great Point Investors
Michael Pittana Daniel Guizzetti Joseph Versaggi
Cubesmart Empire State Realty Trust GreenOak Real Estate

Chris Marr David Karp Sonny Kalsi
CUNY Baruch EPIC Realty Partners Greenpark Group of Companies

David Shulman Gord Thompson Carlo Baldassarra
Cushman & Wakefield Equus Capital Partners Ltd. GreenPointe Homes

James Carpenter Arthur Pasquarella Margaret Jennesse
DDR Corp. Essex Property Trust Inc. Greystar

David Oakes Mike Schall Bob Faith
Luke Petherbridge Bill Maddux
Exeter Property Group
Desjardins Gestion internationale Ward Fitzgerald Grosvenor
dactifs inc. Robert Hess
Michel Bdard FelCor Lodging Trust
Richard A. Smith GTIS Partners
DG Group Amy Boyle
Robert De Gasperis First American Title Insurance Company Steven Gorey
David J. Feldman
DiamondRock Hospitality Company Guggenheim Partners
Mark Brugger First Niagara Bank Kieran P. Quinn
Christophe P. Terlizzi

Harrison Street Real Estate Capital Intracorp Projects Ltd. Lionstone Investments
Thomas R. Errath Kristen Devaney Doug Prickett
Kevin Smith
Harvard Management Company M3 Capital Partners
Dan Cummings Invesco Dan Poehling
Scott Dennis
Hawkeye Partners LP Macerich
Bret Wilkerson Island Capital Group Thomas E. OHern
Robert C. Lieber
HCP Inc. Mack-Cali Realty Corp.
Lauralee Martin iStar Financial Michael DeMarco
Jay Sugarman Tony Krug
Health Care REIT
Scott Estes Ivanhoe Cambridge Madison Homes
Jeff Brown Miguel Singer
Heitman Sylvain Fortier
Mary Ludgin William R.C. Tresham Makena Capital Management LLC
Susan Meaney
Heron Group of Companies Jamestown LP
Brad Foster W. Jeffrey Beckham Manulife Financial
Renee T. Bergeron William Secnik
Hersha Hospitality Trust David Shaw
Ashish Parikh Matthew Bronfman
Joseph Shaw
Jay Shah J.P. Morgan Asset Management
Nancy E. Brown Manulife Real Estate
HFF Catherine Barbaro
Riaz Cassum Wayne A. Comer
Kevin J. Faxon Ted Willcocks
David Keller
Preston D. Meyer The Mathews Company
Hilton Worldwide Hilary J. Spann Bert Mathews
Kevin Jacobs
JWI Investments Mattamy Homes Limited
Hines Scott J. Weiler Brian Johnston
Thomas D. Owens
Kensington Realty Advisors MedProperties Group
Holborn Group of Companies James Lee Jesse Ostrow
Joo Kim Tiah
KHP Capital Partners Menkes Development Group
HomeFed Joe Long Peter Menkes
Paul Borden
Kimco Realty Corporation Merrill Lynch, Pierce, Fenner & Smith
Homestead Capital Conor C. Flynn Incorporated
Gabe Santos David B. Henry Ken Cohen
Hopewell Residential Communications Inc. KingSett Capital Inc. MetLife Real Estate Investors
Paul Taylor Jon Love Mark Wilsmann
Hospitality Properties Trust Klingbeil Capital Management Metzler North America
John Murray Kevin Kaz Donald Wise
Hudson Realty Capital LLC KMK Capital Group of Companies Mid-America Apartment Communities
Arthur Brodsky Justin Ladha Eric Bolton
David J. Loo
Richard Ortiz Lachman Associates Moodys Investor Service
Leanne Lachman Merrie Frankel
Hyde Street Holdings LLC
Patricia R. Healy Ladder Capital Finance LLC Morgan Stanley
Greta Guggenheim Peter C. Harned
IDI Gazeley John Klopp
Matthew Berger Lakeview Homes Inc.
Anthony Montemarano Candice Todd
Bryan Blasingame
Laura Taylor Rino Montemarano The Muldavin Company
Larson Realty Group Scott Muldavin
Inland Private Capital Corporation
Rahul Sehgal Eric Larson Murray Hill Properties
LaSalle Investment Management David Green
Institutional Real Estate Inc. Norman Sturner
Geoffrey Dohrmann Jacques Gordon
Lynn Thurber Newland Communities
International Council of Shopping Centers Vicki R. Mullins
Michael P. Kercheval Linneman Associates and American
Jesse Tron Land Fund New York Life Investments
Peter Linneman Management LLC
Christian McEldowney

New York Life Real Estate Investors PNC Real Estate Rockpoint Group LLC
Brian Furlong Diana Reid Keith B. Gelb
Steve Repertinger Thomas Gilbane
PNC Real Estate Finance
Ninety Degree Enterprises William G. Lashbrook Rockwood Capital
Guy F. Jacquier Robert Gray
Polaris Development
Noble Investment Group Ziyad Mneimneh Rosen Consulting
Jim Conley Kenneth Rosen
Principal Enterprise Capital
NORC at the University of Chicago Emily Slovitt RXR Realty
Jon Southard Frank Patafio
Principal Real Estate Investors
Northwest Healthcare Properties REIT Jodi M. Airhart Sabra Healthcare REIT Inc.
Paul Dalla Lana Marty Cropp Richard K. Matros
John Frandson Talya Nevo-Hacohen
NPV Advisors Michael Lara
David Walden Jay Skelton Sentinel Real Estate Corporation
John Wrzesinski David Weiner
Prologis
Odebrecht USA Hamid Moghadam Seven Hills Properties
Eric Swanson Luis A. Belmonte
Prudential Real Estate Investors
Ohana Real Estate Investors Kevin R. Smith Shelter Rock Capital Advisors
Sarah Mancuso Walter Stackler
PSP Investments
Orlando Corporation Neil Cunningham Shorenstein Properties LLC
Bill ORourke Glenn Shannon
Quantum Properties
Otra Capital Diane Delves Silverpeak Real Estate Partners
Alfonso Graceffa Arash Dilmanian
Edmondo Marandola RBC Capital Markets
Carolyn Blair Silverstein Properties
Pace Properties Dan Giaquinto Marty Berger
Robert Sherwood Gary Morassutti Skanska USA Commercial
Pacific Urban Residential RCLCO Development Inc.
Arthur Cole Gregg Logan Catherine Pfeiffenberger
Alfred Pace
Real Estate Capital Partners Sonnenblick-Eichner Company
Paladin Partners Paul Doocy David Sonnenblick
James Worms Michael Fruchtman The Sorbara Group
Parkway Properties Sylvia Gross Edward Sorbara
Jason Bates RealNet Canada Inc. Stag Industrial
Pennsylvania Real Estate Investment Trust George Carras Ben Butcher
Robert F. McCadden Real Property Association of Canada Starwood Capital Group
Pension Real Estate Association Michael Brooks Marcos Alvarado
Greg MacKinnon Realty Income Jerry Silvey
Penwood Real Estate Investment Paul Meurer State of Michigan Retirement Systems
Management LLC Reardon Realty Brian Liikala
John Hurley Gary Reardon
Karen Nista State Teachers Retirement System of Ohio
Regency Centers Stanton West
Phillips Management Group Martin E. Hap Stein
Kevin G. Phillips Steadfast Companies
Regent Homes Ella Neyland
Piedmont Office Realty Trust David McGowan
Donald A. Miller Stockbridge
REIS Inc. Jack Melkonian
Playa Hotels & Resorts BV Ryan Severino
Larry Harvey Summit Industrial Income REIT
Bruce Wardinski RioCan REIT Ross Drake
Rags Davloor Paul Dykeman
Plaza Retail REIT Edward Sonshine
Kevin Salsberg Taubman Centers
RLJ Lodging Trust Robert Taubman
PM Realty Group Ross Bierkan
John Dailey TCF National Bank
Richard Baer

TCN International Vornado Realty Trust
H. Ross Ford Steve Theriot
Terreno Realty Corporation Wachtell, Lipton, Rosen & Katz
Michael Coke Adam O. Emmerich
Robin Panovka
Thibault, Messier, Savard et Associs Inc.
Martin Galarneau WAFRA
Frank Lively
TIAA-CREF
Gerald Casimir Watson Land Company
Richard Coppola Bruce A. Choate
Thomas Garbutt
Robert Villamagna Williams Preferred Apartment
Communities
TIAA Henderson Real Estate John Williams
James Martha
W.P. Carey
Tideline Partners Trevor P. Bond
Lev Gershman Hisham Kader
Katy Rice
Timbercreek Asset Management Thomas E. Zacharias
Ugo Bizzarri
Wright Runstad & Company
TMG Partners Greg Johnson
Michael Covarrubias
Toronto Port Lands Company
Michael Kraljevic
The Townsend Group
Jennifer Young
TPG Real Estate
Jamie Sholem
Trepp LLC
Matt Anderson
Thomas Fink
Trinity Development Group Inc.
Michael Dobrijevic
Fred Waks
Turner Impact Capital LLC
K. Robert Turner
UBS Global Asset Management
(Americas) Inc.
Lee S. Saltzman
UBS Realty Investors LLC
Gary Gowdy
Matthew Lynch
Unaffiliated
Connie Moore
United Properties
John Breitinger
Value Acquisition Fund
Andrew F. Cates
Velocis
W. Fredrick Hamm
Michael S. Lewis
Ventas
Debra Cafaro
Bob Probst

Sponsoring Organizations
PwC real estate practice assists real estate investment advisers, real The mission of the Urban Land Institute is to provide leadership in the
estate investment trusts, public and private real estate investors, cor- responsible use of land and in creating and sustaining thriving com-
porations, and real estate management funds in developing real estate munities worldwide. ULI is committed to
strategies; evaluating acquisitions and dispositions; and appraising and Bringing together leaders from across the fields of real estate and
valuing real estate. Its global network of dedicated real estate profes- land use policy to exchange best practices and serve community
sionals enables it to assemble for its clients the most qualified and needs;
appropriate team of specialists in the areas of capital markets, systems
analysis and implementation, research, accounting, and tax. Fostering collaboration within and beyond ULIs membership through
mentoring, dialogue, and problem solving;
Exploring issues of urbanization, conservation, regeneration, land
Global Real Estate Leadership Team
use, capital formation, and sustainable development;
R. Byron Carlock Jr. Advancing land use policies and design practices that respect the
U.S. Real Estate Leader uniqueness of both the built and natural environments;
Dallas, Texas, U.S.A.
Sharing knowledge through education, applied research, publishing,
Mitchell M. Roschelle and electronic media; and
U.S. Real Estate Valuation and Due Diligence Services Leader Sustaining a diverse global network of local practice and advisory
New York, New York, U.S.A. efforts that address current and future challenges.
Frank Magliocco Established in 1936, the Institute today has more than 35,000 members
Canadian Real Estate Leader worldwide, representing the entire spectrum of the land use and devel-
Toronto, Ontario, Canada opment disciplines. Professionals represented include developers,
builders, property owners, investors, architects, public officials, plan-
Kees Hage ners, real estate brokers, appraisers, attorneys, engineers, financiers,
Global Real Estate Leader academics, students, and librarians.
Luxembourg, Luxembourg ULI relies heavily on the experience of its members. It is through mem-
ber involvement and information resources that ULI has been able to
Uwe Stoschek
set standards of excellence in development practice. The Institute has
Global Real Estate Tax Leader
long been recognized as one of the worlds most respected and widely
European, Middle East & Africa Real Estate Leader
quoted sources of objective information on urban planning, growth, and
Berlin, Germany
development.
Craig Hughes
U.K. and Global SWF Real Estate Leader
London, U.K. Patrick L. Phillips
Global Chief Executive Officer, Urban Land Institute
K.K. So
Asia Pacific Real Estate Tax Leader Kathleen B. Carey
Hong Kong, China Chief Content Officer
ULI Center for Capital Markets and Real Estate

www.pwc.com Anita Kramer
Senior Vice President
www.uli.org/capitalmarketscenter
Urban Land Institute

1025 Thomas Jefferson Street, NW
Suite 500 West
Washington, DC 20007
U.S.A.
202-624-7000
www.uli.org

On the front cover: The Brewery Blocks, a 2014 ULI Global Awards
for Excellence winner that is located on the site of the former
Blitz-Weinhard Brewery, is a five-block development in Portland,
Oregons vibrant, postindustrial Pearl District. The Brewery Blocks
provides a transition between the citys central business district and
the River District and is home to urban retail, creative Class A office
space, and residential housing.
Emerging Trends in Real Estate 2016 Highlights
What are the best bets for investment and devel- Q Tells you what to expect and what the
opment in 2016? Based on more than 400 personal best opportunities are.
interviews with and over 1,400 surveys from the
Q Elaborates on trends in the capital markets,
most influential leaders in the real estate industry,
including sources and flows of equity and
this forecast will give you a heads-up on where to
debt capital.
invest, which sectors and markets offer the best
prospects, and trends in the capital markets that Q Indicates which property sectors offer
will affect real estate. A joint undertaking of PwC opportunities and which ones to avoid.
and the Urban Land Institute, this 37th edition of
Emerging Trends is the forecast you can count on Q Provides rankings and assessments of a
for no-nonsense, expert insight. variety of specialty property types.
Q Reports on how the economy and concerns

about credit issues are affecting real estate.
Q Describes the impact of social and geopolitical

trends on real estate.
Q Explains how locational preferences

are changing.
www.uli.org www.pwc.com

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GREGG GALBRAITH, RED STUDIO

Canada and the United States 2016

21 Chapter 2 Coordinating Offense and Defense in 2016

40 Chapter 3 Capital Markets

54 Chapter 4 Markets to Watch

78 Chapter 5 Property Type Outlook

Emerging Trends in Real Estate 2016 i

ii Emerging Trends in Real Estate 2016

Private property owner or developer 34.3%

Throughout the publication, the views of interviewees and/or survey respondents

Emerging Trends in Real Estate 2016 1

Emerging Trends in Canada:

The story of Canadian real estate this year is one of shifting

Emerging Trends in Real Estate 2016 3

Total Personal income

holding pattern as they wait out the current downturn, avoiding

good Calgary and Edmontonand, to a lesser extent, Saskatoon

poor Without a doubt, Canadas real estate market is undergoing

4 Emerging Trends in Real Estate 2016

29% 33% 39% Stronger U.S. Dollar a Source of Mild Optimism

Emerging Trends in Real Estate 2016 5

11% 38% 52% 12% 48% 40% 24% 50% 26%

2015 2015 2015

14% 59% 27% 16% 57% 27% 30% 54% 16%

2014 2014 2014

22% 55% 22% 18% 62% 20% 40% 45% 15%

2013 2013 Undersupplied In balance Oversupplied

37% 43% 20% 41% 43% 16%

37% 36% 27% 29% 51% 20%

Undersupplied In balance Oversupplied Undersupplied In balance Oversupplied

6 Emerging Trends in Real Estate 2016

2014 49.4% Australia

Emerging Trends in Real Estate 2016 7

just add to the challenge. Faced with a choice between long

8 Emerging Trends in Real Estate 2016

Exhibit 1-10 Prime Multifamily Rental Units, by Year of Construction

Total Before 1960 19601979 19801999 2000 or later

Exhibit 1-11 Prospects for Commercial/Multifamily Subsectors in 2016

Investment prospects Development prospects

Fulllment center 3.80 Warehouse industrial 4.00

Full-service hotels 3.41 Neighborhood/community 3.28

R&D industrial 3.29 Apartment rentalaffordable 3.23

Emerging Trends in Real Estate 2016 9

10 Emerging Trends in Real Estate 2016

Markets to Watch in 2016

Exhibit 1-13 Investment Recommendations for Commercial/Multifamily Subsectors in 2016

Emerging Trends in Real Estate 2016 11

Intercity International Interprovincial

200,000 100,000 0 100,000 200,000 300,000 400,000 500,000 600,000

12 Emerging Trends in Real Estate 2016

of years, two-thirds of this space is pre-leased. Furthermore,

Overall, the Toronto market continues to have picked up where Montreal

Montreals suburban population continues to fall as baby

Emerging Trends in Real Estate 2016 13

14 Emerging Trends in Real Estate 2016

Winnipegs economic growth is persuading more people to stay

Emerging Trends in Real Estate 2016 15

It would be wrong to make too much of this and declare that

16 Emerging Trends in Real Estate 2016