US Overview: A Complicated Picture
But Broadly Supportive of Real Estate
 Economic backdrop quite positive
 US economy began accelerating in
back half of 2014; that should
continue despite weakness in Europe
and EMs
 Economy now closing in on average
length of recovery: recession risk?
 US property markets positioned for
continued NOI growth given support
from economy and modest
construction levels
 Capital markets: Plenty of debt, at
relatively low rates, and plenty of
equity; cap rates near new low given
strong capital demand
 Investment strategy: nuanced
Market Overview
1
Job Creation Has Accelerated
Historical and Forecast Employment Growth
US 2005-2015
600,000
jobs gained/lost month over month
jobs gained/lost % change year over
forecast year
500,000
3%
400,000
300,000
1%
200,000
100,000
0
-1%
 Job growth, the
best predictor of
occupier demand,
has accelerated
 Just under 3
million jobs were
added
in 2014; most
since 1999
-100,000
-200,000
-300,000
-3%
-400,000
-500,000
-600,000
-5%
-700,000
-800,000
-7%
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
J
M
M
J
S
N
-900,000
2005
2006
2007
2008
2009
Source: Bureau of Labor Statistics; Moody's Analytics; Heitman Research
Market Overview
2010
2011
2012
2013
2014
2015
2016
 Falling oil prices
and rising wages/
hours represent a
powerful stimulus
for a
consumer-driven
economy
 Enough weakness
remains in
economy to push
out rate hikes to
mid-2015 or
2
The US Economy is Breaking Out;
But Keep an Eye on the Clock
US Economy -- Positives and Negatives, February 2015
Positives
Negatives

Housing now a positive force

But housing isn’t contributing its usual weight

US has regained all jobs lost during GFC and
the rate of job growth is increasing

But wage gains haven’t accompanied job
growth until recently

Unemployment at 5.7%, from 6.8% a year ago

But millions remain unemployed/underemployed

Aggressive stimulus in Eurozone and Japan

But Europe’s recovery is still fragile and Japan’s
economic growth is moderate

The fiscal drag that held back the US economy
has ended

But faster economic growth means Fed
tightening sooner rather than later

US banking sector healthy and lending

Household formation remains stalled

Corporate profits are high and capital
expenditures are increasing

Economic expansion is in its fifth year, about
average for post-WWII expansions

US manufacturing competitiveness is rising

China’s slower growth has global implications

Falling oil prices broadly positive for
businesses and consumers across the US
US economic expansion will accelerate
Market Overview
Downside risks have lessened
3
Transaction Volume Continues to Rise
Transaction Volume
Primary Property Types 2001-2014
$700
Transaction Volume ($billions)
Transaction volume
for 2014 exceeded
2013 by 17%
$600
$500
$400
$300
$200
$100
$0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Real Capital Analytics; Heitman Research
Market Overview
4
Though Real Estate Yields Have Compressed,
Spread to Treasury Yields Remains Wide
 Capitalization rates
rose during the GFC,
peaking at 6.86% in
2009, a 147 bps jump
NCREIF Implied Cap Rate vs. 10-Year Treasury Rate
1990-2014 (Q4)
11%
10%
 They were 140 bps
under that level as
of Q4 2014
9%
8%
Implied Cap Rate
7%
6%
5.46%
5%
4%
3%
2%
2.20%
10-Year
Treasury
Yield
1%
 Spreads are wide
relative to the
average since the
modern era began in
1992, at 326 bps as
of Q4 versus 272 bps
since 1992
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
0%
Source: Moody’s Analytics; National Council of Real Estate Investment Fiduciaries; Heitman Research; Cap rates are equal weighted; treasury yields are as of quarter’s end
Market Overview
5
Cap Rate Spreads Have Plenty of Room
to Compress Once US Interest Rates Begin to Rise
Cap Rate Spreads
2014 Q4
6%
Current
LT Average
2007 Q3
1999 Q4
4.99
5%
4.62
4.13
4%
3.04
3%
3.0
2.57
2.16
2%
1.49
1.26
1.24
1%
0.87
0.72
0.81
0.73
0.38
0.22
0.06
0%
-0.03
-0.31
-0.51-0.56
-0.66
-1%
-1.04
-1.35
-2%
Ten Year Treasuries
Ten Year TIPS
Long-term CRE Debt Corporate Aaa Bonds Corporate Baa Bonds
REIT Implied Cap
Rate
Source: Heitman Research
Market Overview
6
NOI Growing Across The Major Property Types
Same-Store NOI Trends by Property Type
US NCREIF Properties 2002-2014 (Q4)
12.0%
Year-Over-Year
Rolling 4Q % Change
10.0%
8.0%
Apartment
6.0%
4.0%
Retail
2.0%
0.0%
-2.0%
Office
Long-Term Average NOI Growth
Apartments:
4.3%
Retail:
3.2%
Office:
2.5%
Industrial:
1.4%
-4.0%
-6.0%
-8.0%
Industrial
-10.0%
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: NCREIF; Heitman Research
Market Overview
7
Development Activity Remains Tempered
Completions as a Percent of Stock
US Primary Property Sectors¹
3.0%
2.5%
2.0%
1.5%
1.3%
25-Year
Average
1.0%
0.7%
0.5%
0.0%
Source: Co Star; Axiometrics; Heitman Research
1.
Weighted by NCREIF sector values
Retail Completions
Industrial Completions
Office Completions
Apartment Completions
200
180
160
140
120
100
80
60
40
20
0
200
180
160
140
120
100
80
60
40
20
0
60
300
Million SF
2013
2014
Source: Costar; Heitman Research
Market Overview
20-yr Avg
Million SF
Million SF
50
250
40
200
30
150
20
100
10
50
0
2013
2014
Source: Costar; Heitman Research
20-yr Avg
Thousand Units
0
2013
2014
Source: Costar; Heitman Research
20-yr Avg
2013
2014
20-yr Avg
Source: U.S. Census Bureau; Heitman Research
8