Excellent report from CBRE\'s Econometric Advisors on the 12 Corporate Real Estate Trends for 2012 - Enjoy!

1. CBRE Econometric Advisors
SPECIAL REPORT
12 Trends for 2012
January 2012

2. TABLE OF CONTENTS
Special Report: 12 Trends for 2012
TREND #1 EMPLOYMENT GROWTH WILL CONTINUE TO MUDDLE THROUGH
PAGE 3 Balance Sheets Prevent Level of Growth Needed
TREND #2 CAPITAL FLOWING, BUT ONLY TO THE RIGHT OPPORTUNITIES
PAGE 4 Global Picture Shows Eastern European Growth
TREND #3 HOUSING SEARCHES FOR BALANCE
PAGE 6 Rising Rents Help to Stabilize Home Prices
TREND #4 SUBURBAN OFFICE WILL CONTINUE TO TAKE PART IN THE RECOVERY
PAGE 8 Busting the Myths Suggesting the Death of Suburban Office
TREND #5 SHORTAGES IN LARGE WAREHOUSE SPACE WILL ACCELERATE
PAGE 10 Large Warehouses Recovering Faster than Overall Industrial
TREND #6 HOTEL ROOM DEMAND GROWTH WILL SLOW
PAGE 12 Overseas Slowdown will Contribute
TREND #7 DEBT MARKET DISTRESS MOVES PAST PEAKS BUT REMAIN HIGH
PAGE 13 A Widening Window of Investment Opportunity?
TREND #8 CONSTRUCTION MAY RETURN SOONER THAN YOU THINK
PAGE 15 Single Tenant and Delayed Projects Bring Back New Building
TREND #9 RETAIL RENTS FINALLY SEE BOTTOM
PAGE 18 Lagging Behind Other Property Types, Last Pieces Fall in Place
TREND #10 MOVEMENT FROM TRUCKS TO TRAINS WILL BE INCREMENTAL
PAGE 19 Rise of Rail Inevitable but Slow
TREND #11 IN SPITE OF CAPITAL MARKETS VOLATILITY, FINANCE JOB CUTS TO END
PAGE 21 BY MID-YEAR 2012
Many Finance Sub-categories Have Seen Losses Level Off
TREND #12 CAP RATE COMPRESSION WILL END
PAGE 23 Cap Rates Flat or Worse in the Next Two Years
January 2012
Page 2
© 2012, CBRE, Inc.
2

3. TREND #1
Special Report: 12 Trends for 2012
answer to the lack of professional surprise for forecasts
EMPLOYMENT GROWTH WILL of moderate employment growth in 2012. Output, as
CONTINUE TO MUDDLE THROUGH measured by Gross Domestic Product, is our best measure of
Balance Sheets Prevent Level of Growth demand for work, but increases in output are not sufficient to
Needed generate jobs because work can sometimes be accomplished
by stretching existing resources, rather than employing new
2012 will mark the third consecutive year that employment ones. At no time has this been truer than the recent cycle.
fails to generate much growth. That we begin this period with
a high level of unemployment makes it all the more painful, Economists think about productivity both as an important
and that the upcoming year will again make little progress long-term factor for the economy and also as it relates to
in reducing unemployment is frustrating for everyone. cyclical employment growth. Over longer periods, higher
Availability of labor generally encourages businesses to hire, productivity growth is one of the best things an economy can
so unemployment remaining high is surprising; yet what produce. It is the foundation of sustainable wage growth
should be surprising among economists and business leaders (or at least an expanding pie). Within a cycle, however,
is widely accepted. It is worth examining why there has been productivity is not always as welcome, as higher productivity
acceptance of high unemployment in this business cycle. means that businesses can expand without hiring. In recent
cycles, productivity has been highest as output has started to
The connection between output and employment is a factor rebound, with companies first finding efficiencies that would
in this acceptance. That the difference between output allow their current workers to accomplish more and only later
growth and employment growth is productivity, is effectively resorting to hiring as demand continues to expand. In the
a mathematical identity. As such, productivity is part of the early stages of this expansion, year-over-year productivity
growth was even higher than usual.
Productivity Now More Likely to Precede Job Growth
Employment
YoY Growth (%) GDP
Productivity
10
8
6
4
2
0
-2
-4
-6
1984Q1
1985Q1
1986Q1
1987Q1
1988Q1
1989Q1
1990Q1
1991Q1
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
2000Q1
2001Q1
2002Q1
2003Q1
2004Q1
2005Q1
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
Source: CBRE Econometric Advisors, BLS
In determining where productivity (and therefore employment) productivity growth. The 1980s and the period from 2004
is going in the next year or two, judgments are made. First, to 2008 were marked by low productivity growth, while the
what is the level of productivity growth we should expect in 1990 tech boom led to growth rates often above 3%.
this expansion, and second, what cyclical effects can we
expect next year? The former question is interesting because The slowdown in GDP in 2011—averaging 1.2% in the first
the last three expansions have seen such different levels of three quarters—affects our views on the cycle of productivity
January 2012
Page 3
© 2012, CBRE, Inc.

4. Special Report: 12 Trends for 2012
in 2012. Such slowdowns are indeed a setback for the years. Net exports were previously a hope for an increase
employment recovery, quite literally. In contrast to similar in GDP but the European crisis closed off this avenue in
,
stages in the past two cycles, in the past year productivity was 2011. Government is the last remaining category and one
brought down more by slowing output than by improving need look no farther than the September debt ceiling crisis to
employment growth. This puts us back to where we were become dispirited about any assistance being offered there.
some time ago; so, while it won’t be at the magnitude of What has not been discussed enough is how the rise of the
2009, we expect to see a period of productivity increase filibuster suggests that the future will insure no assistance as
before we see hiring pick up. As a result, even as we see well, regardless of the results of this November’s elections.
GDP improving in 2012 over 2011, it will take much of the
year for this to translate into significant new hiring. Until these conditions change—say, after debt is better paid
down or housing has begun its recovery—it is hard to see
Looking at these factors from another angle, output growth enough aggregate demand coming through to change the
needs to be exceptionally high to restore the unemployment employment situation in the way we all would like. This
situation to normal. To take some round numbers: if we are explains why there are very few optimists expecting anything
around 9% unemployment today, and 5% is more in keeping more than “muddling through” over the next few years.
with full employment, we need 2% employment growth On the brighter side, trends have been seeing gradual
above the annual labor force growth of around 1% just to improvement in all the underlying constraints mentioned
reduce the unemployment growth within two years. But in in the above paragraph, so expectations for a return to
order to obtain the 3% employment growth target we just recession remain rare among economists. From this
arrived upon, we need GDP growth to be 2 percentage points standpoint there is contentment with “muddling through”,
faster, to overcome the expected increases in productivity. as it is better than the next most likely alternative.
In short, growth rates need to be routinely 4% to 5% over
many quarters to see the type of job recovery that has been
more typical in the post-war era.
TREND #2
So while there is some relief when GDP growth makes it CAPITAL IS FLOWING, BUT ONLY TO
above 2%, this is more about the economy having what it THE RIGHT OPPORTUNITIES
takes to avoid dipping back into recession, than it is about Global Picture Shows Eastern European
the economy improving in any way that the average citizen Growth
will appreciate. Indeed, recent job gains, retail sales, and
industrial production have increased enough to make us We will look back on 2011, fondly or not, as a year
comfortable that a recession is not imminent. Unfortunately, full of economic and financial shocks that reverberated
we also believe that output growth will stay in the 2% range throughout the global economy. Volatile global financial
for much of 2012. markets, solvency concerns throughout the European
Union, and the combination of sluggish U.S. job growth
The reasoning has to do with to the differences between and political gridlock in America’s capital led to a drop in
more typical recessions and what some have called the optimism following a number of positive indicators and
“balance sheet recession” we are seeing today. The distinct reports that characterized the global economic recovery
feature of the recent recession is the high level of debt and in early 2011. This uncertainty has dampened both the
the need across much of the economy to deleverage from already-weak recovery in advanced economies and the
those high levels. If we are to achieve 5% GDP growth, a more robust expansion in emerging markets. Meanwhile,
good anchor would be for consumers to spend at a similar Western Europe is flirting with yet another recession.
pace. This has happened in the past as consumers have
made up for delayed purchases, but the necessity to pay And while the current high level of uncertainty puts any
down debts has placed a limit on how fast consumers are projection at risk, we expect the pattern of a two-speed
willing to increase spending. We could turn to investment, global economic recovery, with pockets of economic
but the overhang of housing means that the major category and commercial real estate growth in select regions and
of residential investment will be moribund for a few more markets, to continue as we head into 2012.
January 2012
Page 4
© 2012, CBRE, Inc.
4

5. The Multi-Speed Economic Recovery Continues
Special Report: 12 Trends for 2012
commercial property prices remain below their pre-
Western Europe
United States downturn peaks, exposing investors to high refinancing
Real GDP, YoY % Change Asia Pacific
World risks, which may increase property sales as investors seek
10
to raise capital.
8
6
4 Can We Find Growth Anywhere?
Europe presents a prime case of how demand drivers for
2
real estate exist even in the face of economic uncertainty.
0
-2
The early days of the economic recovery were marked by
-4
strong investor interest in prime assets in prime markets,
-6
with trophy office buildings in major markets such as London
-8 and Paris experiencing great interest and bidding activity.
2006Q1
2007Q1
2008Q1
2009Q1
2010Q1
2011Q1
2012Q1
2013Q1
2014Q1
2005Q1
Germany and France—traditionally real estate investment
magnets, both of which have so far outperformed the
overall Eurozone in terms of economic growth—attracted
Source: IHS Global Insight as of Q3 2011. a great deal of capital targeting their commercial property
sectors. But with the economic recovery waning as a result
The Investment Market of sovereign debt concerns, investors are searching for
Despite a backdrop of deteriorating European economic properties beyond traditional hotspots. This is evidenced
and financial market indicators, property investment held by recent acceleration in cross-border activity targeting
up well in 2011. Globally, commercial property transactions the commercial property sector. According to Real Capital
(excluding land sales) in the first three quarters of 2010 Analytics, in the third quarter of 2011, the percentage of
increased by 40.3% compared to the same time period trading volume involving cross-border capital reached its
during the previous year. Regionally, growth was strongest highest point in three years. And while the usual markets
in the Americas (+71.6%) followed by EMEA (+31.2%) and in U.S., France, Germany and the UK continue to attract
Asia Pacific (+16.8%). capital, yields in these markets have fallen and cross-border
investors are shifting to other areas of Europe despite
Global Transaction Volume Continues to Recover
concerns over the future of the European Union. Investors
Asia Pacific
Quarterly Transaction Volume by Region, billions
EMEA have begun to look at other areas, such as Poland, Russia
Americas
$140 and Turkey. Recent surveys show a marked increase in cross-
$120
border transactions in Central Eastern European markets,
where governments are not straddled with the overarching
$100
debt issues of many of their larger neighbors.
$80
$60 The increased investor interest in Central and Eastern
$40 Europe reflects growth in the demand for certain classes of
$20 commercial property. Of the fifteen global office markets
with the strongest growth in occupied office stock over
0
the past year, nine are located in the region. Warsaw, for
2007Q1
2007Q2
2007Q3
2007Q4
2008Q1
2008Q2
2008Q3
2008Q4
2009Q1
2009Q1
2009Q3
2009Q4
2010Q1
2010Q2
2010Q3
2010Q4
2011Q1
2011Q2
2011Q3
example, was the only EU nation to avoid a recession in
Source: Real Capital Analytics
2009, and experienced a 6.5% increase in occupied office
Recent surveys point to continued investment in commercial space during the past four quarters. Other markets in the
property—transactions remain below their pre-recession region recording similarly strong performance include
peaks, but volumes continued to recover in 2011. Moscow, Kyiv, St. Petersburg, and Prague.
Transaction volume is expected to remain steady in 2012,
even in Europe; according to the European Central Bank,
approximately a third of outstanding commercial property
mortgages are expected to mature by 2013. Prevailing
January 2012
Page 5
© 2012, CBRE, Inc.

6. Office Hotspots in 2011 TREND #3
Special Report: 12 Trends for 2012
Growth in Occupied HOUSING SEARCHES FOR BALANCE
Market Office Stock Rising Rents Help to Stabilize Home
(Q3 2010 - Q3 2011)
Prices
Abu Dhabi 25.8%
Guangzhou 19.2% Can housing finally find a bottom in 2012? There are
Shanghai 15.2% some good reasons to think that it can, as long as one
Beijing 14.5% looks at the whole market, rather than just the for-sale
segment. Total household growth and new construction
Kyiv 12.6%
should strengthen as the economy adds more jobs and
Moscow 11.7%
the unemployment rate drops. It is important to see the
Bucharest 11.1% two sides of this trend, however—their interaction is what
Mexico City 10.5% ultimately drives the housing recovery.
St. Petersburg 9.9%
Owner-occupied units account for about two thirds of
Sofia 9.5%
the nation’s housing demand. Given the still-high rate of
Belgrade 8.8%
foreclosures and their negative impact on home prices and
Warsaw 6.5% sales, it is likely that owner demand will continue to struggle,
San Jose 4.5% although perhaps not as much as it did last year. At the
Bratislava 5.4% same time, rental demand is expanding at a near-record
pace that is well ahead of supply. As a result, vacancy is
Prague 4.6%
falling and rents are rising in every region of the country—a
Source: CBRE Research
key building block for an eventual recovery in home prices.
These markets are enjoying demand for office space from
international as well as domestic occupiers. Healthier The housing market is being shaped by many countervailing
government balance sheets, relatively low labor costs, forces. The costs of buying a home now are record-low
and high rates of education have attracted a number of relative to both household incomes and rents, which
international companies, both from continental Europe makes pursuing homeownership today an opportunity of
and beyond. a generation. At some point, this high and rising housing
affordability should unleash pent-up demand, leading to
Summary rising sales and prices. The chart below illustrates this,
The outlook for the coming year is very dependent on displaying the ratio of monthly principal and interest
governmental policy responses—which makes the level of payments on a median-priced home, to rent. This ratio is
uncertainty high. Policy responses have been inadequate computed historically using the all-transaction home price
and slow across the globe, and this shows no signs of and apartment rent index. In 2011, for example, with a
changing. Commercial property data, however, point to a 4.9% interest rate, the cost of owning a $250,000 home
number of markets that have experienced positive growth in purchased with a 20% down payment comes to about
occupier and investment demand—even in Europe—despite $1,100 a month—which is very close to the current national
the uncertainty. That economic momentum remains uneven average rent. It turns out that the current ratio is not only
will continue to drive investment activity both within and more than 20% below the historical average; it is also at
across borders. a record low over this period.
January 2012
Page 6
© 2012, CBRE, Inc.
6

7. Housing Affordability is at a Record High
Special Report: 12 Trends for 2012
the second half of the year. At the same time, this impact
Ration of monthly principal and interest to rent, 2011Q3=1 should be less negative than in 2011, if the economy does
1.7 show steady improvement in the first half and the so-called
1.6 “strategic defaults” do not intensify. Under this more
1.5 optimistic scenario, almost 0.5 million households will still
1.4 lose homes, which would push the homeownership rate
1.3 2006-2011 average down by another 30-50 basis points. As a result, prices
1.2 will still decline, but probably by only 1-2%, as compared
1.1 to the 3-4% in 2011, when the losses to owner demand
1.0
were also more severe.
0.9
The U.S. Homeownership Rate is Likely to Continue
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Declining in 2012
Homeownership Rate
Sources: Federal Reserve, FHFA, MPF Research, CBRE Econometric Advisors.
Renter Households
Homeownership Rate, % Renter Households, Millions
71 42
Whether it does unleash demand ultimately depends on
70 40
households' view of homeownership in this fragile market. 69 38
This view is being shaped by three factors. First, with 68 36
67 34
hundreds of thousands of homes entering foreclosure
66 32
every month, some buyers expect further declines in home 65 30
prices, or are uncertain about the fair market value of 64 28
63 26
homes. Second, the labor market is still too weak to boost
62 24
confidence much and with the unemployment rate high, it 61 22
takes a person longer to find a job today than it did in the 60 20
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
past. In such an environment, households have to be able
to move quickly to where jobs are. Being that it takes time Sources: Bureau of the Census (Housing Vacancy Survey), CBRE Econometric Advisors
to sell and buy a house, mobility and homeownership are at
odds with one another. A third factor is buyers' expectations The silver lining to this is the accompanying expansion in the
for building equity while owning homes. With property taxes number of renter households: combined with demographic
and maintenance costs high and home price appreciation growth, the shift from owning to renting should yield over
yet to resume, home ownership does not yet look like the 0.7 million new renters. As a result, growth in rental
sure investment it used to be. Another key impediment to demand will exceed supply next year, although not by
home ownership is that higher mortgage down payment as much as one might expect. While new completions
requirements, combined with depleted household savings, intended for rent will be low by historical standards—near
are making it much harder for households to qualify for 0.2 million units—rental stock will also add over 0.4
loans. As long as unemployment remains high, rebuilding million units through conversions from owner-occupied
credit will be a slow process for most households, and and vacant for-sale units. More than 4 million units
will be particularly challenging for those who are near have been converted to rentals since 2004, significantly
retirement. constraining improvement in the rental vacancy rate—and
conversions will remain a significant headwind, especially if
Foreclosures remain a major drag on housing appreciation, owner demand falls. Considering this, rent growth should
and progress in stemming them has been slow. While rates approach its long-term average of about 3%, but a much
of foreclosure starts and completions have declined from stronger inflation will prove challenging.
the peak, the share of mortgages in foreclosure remains
near its record high of 4.5%. Distress is likely to continue Home prices remain under pressure from a major
to affect home sales and prices during 2012’s spring imbalance brought about by the housing boom and bust
and summer home-buying season, considering that the of the last decade: there are about 2.5 million more
labor market is not expected to gain much traction until vacant units than there were prior to the correction. Of this
January 2012
Page 7
© 2012, CBRE, Inc.

8. Special Report: 12 Trends for 2012
inventory, only 0.5 million units are on the market, however, on their way to gradually becoming a thing of the past, as
and this has a direct impact on prices. Current household individuals are choosing more central, urban locations with
growth is 0.7 million per year (half the historical average) easy access to mass transit, restaurants, cultural activities
and with home demolitions of 0.3 million, new demand and their places of work. Such a trend would not only have
must be close to a million units and well ahead of the 0.6 a major impact on residential real estate, but it would also
million in new completions. Household growth is a largely present a significant challenge to the sustainability of the
a function of labor market conditions, and with a stronger nation’s suburban office markets.
pace of recovery, virtually all of the excess supply for rent
and for sale could be absorbed by the end of next year. The The problem with the argument for the de-suburbanization
negative effect that the glut of vacant homes on the market (or re-urbanization) of America to this point is that it is less
is having on prices would subside as a result. theory than it is a hypothesis that has yet to be fully tested.
The story of a population base shifting from suburban to
It is much harder to foresee how many of the homes now in city locations sounds plausible, but the lack of empirical
the “shadow” inventory might be put up for sale next year. evidence thus far makes it hard to defend. While data
Historically, the share of these units entering the market has from the most recent decennial Census show that cities are
increased when buyer demand and prices were strong— indeed growing, they also show that they are not growing
which will not be the case in the near term. At the same any faster in most cases than their suburban counterparts.
time, many of these units are non-primary residences, so
it is possible that more owners will decide to strategically None of this matters, however. If a story gains enough
default on their mortgages this time around—especially in traction, it can take on a life of its own—even without the
areas were home prices are still down by more than 20%. research or data to back up the argument. For their part,
Investors’ views of the market will play a major role in commercial real estate investors appear to have bought into
shaping their decisions. the argument for the renaissance of center cities, and are
adopting strategies to divest themselves of suburban assets.
In summary, U.S. housing should see a slight improvement Transaction data have shown that over the past year an
in price trends along with moderate rent growth in 2012, increasing share of deals has been based in downtowns,
preparing ground for a more sustained recovery later. as investors view these assets to be more liquid, and are
Rising rents can help to stabilize home prices but any willing to buy yields below 5% in markets like New York.
real progress can only take place when households have
trust and confidence in the economy—including a more But investor behavior does not fully support the argument
robust job market and an expectation of building home that the suburban office market is dead as much as it
equity—and enough resources to qualify for mortgages. reveals something about investor appetite for risk at this
Foreclosures remain the major wild card and as such the stage in the recovery. Investment activity has been focused
outlook will depend on how quickly they are being resolved. largely on core assets in high-profile locations in markets
In this regard, 2012 can be viewed as a transition year for like New York, Boston and San Francisco; the reasoning
the U.S. housing market. is that prime downtown locations offer a buffer against
downside risk by way of increased liquidity, when compared
with suburban locations. This is nothing new, however, as
investment typically picks up for well-located core assets
TREND #4 first during a recovery, then spreads beyond downtowns and
SUBURBAN OFFICE WILL CONTINUE into suburban locations as investors grow more willing to
TO TAKE PART IN THE RECOVERY take on more risk to expand their portfolios.
Busting the Myths that Suggest the Death
of Suburban Office Another way to look at this argument is through property
fundamentals. If a secular shift is occurring away from
There has been no shortage of discussion lately about the suburbs and toward downtowns, surely this should manifest
death of the suburbs as an American institution. Some itself in the property data. We can start by looking at
metropolitan population pundits suggest that suburbs are demand for office space, which should reveal location
January 2012
Page 8
© 2012, CBRE, Inc.
8

9. Special Report: 12 Trends for 2012
preferences for businesses. Historically, net absorption in the office market recovery simply does not hold up across
absolute terms has favored suburban markets, but in recent the board. In fact, we see a picture that suggests that the
decades this has largely been a function of the relative strength of the office market recovery is more focused on
size of the suburban office market, which today makes up submarkets outside of the nation’s CBDs. In itself this is
roughly two-thirds of the nation’s office market. Looking at not all that surprising; historically, demand for suburban
the net absorption rate, which accounts for the relative size office space has outpaced that of downtown locations. What
of the market, allows for a more fair comparison. might be surprising at this point, then, is that demand in
downtown office markets has managed to keep pace with
When these series are graphed, we can see the relative the broader trend.
demand trends for downtown and suburban office space.
What we see is that the recession’s demand fallout was But this also highlights an important distinction between
far more severe for downtowns, and that they still have a submarkets and markets. When we talk about downtown
great deal of ground to make up. Moreover, there is not versus suburban markets, we are comparing many
a discernible difference between downtown and suburban different and diverse submarkets within cities and broader
office demand in the period since the recovery began, metropolitan areas, respectively. It is entirely possible for
despite the perception that most of the improvement has pockets of strength to lead to more robust results for a
been in core locations. particular market. In New York’s downtown submarkets, for
example, this can be seen by looking at Sixth/Park Avenue
One might even argue that suburban office has outperformed and perhaps World Financial Center (WFC), where vacancy
downtown, in terms of demand. With respect to core rates are well below market average and are outperforming
performance in downtowns, just a handful of markets are their suburban counterparts. While these may be attractive
showing solid performance. New York is perhaps the best submarkets, investors will also have to pay a price for such
and largest example of this type of improvement, but it prime locations, in the way of lower yields.
also skews the results. By itself, New York has accounted
for nearly half of all downtown demand year-to-date, and Another argument for downtown office investment has to do
a comparison of downtown versus suburban office without with rent and vacancy. True, vacancy rates in the suburbs
New York produces a very different result, and a different tend to run higher than downtown markets, and tighter
view of relative performance. leasing markets support rent growth, which drives income
and returns. But vacancy rates don’t in themselves dictate
Are Suburbs Lagging or Leading in the Recovery? rent growth—it’s the market or submarket equilibrium
Downtown vacancy rate level that is important. To that point, both
Occupied Stock, YoY % Chg. Suburban
Downtown ex-New York downtown and suburban vacancy remains elevated and
4 above what would support rent growth on par with broader
3 inflationary measures. But this is changing and the rent
2 cycle has shifted from correction to recovery.
1
Downtown office rents have historically grown faster during
0
upswings, which can attract investors when the market is
-1
on the way up—but they fall faster during corrections.
-2 Because downtown rent cycles see such wide oscillations,
-3 average growth between downtown and suburban office
2007.1
2007.2
2007.3
2007.4
2008.1
2008.2
2008.3
2008.4
2009.1
2009.2
2009.3
2009.4
2010.1
2010.2
2010.3
2010.4
2011.1
2011.2
2011.3
2011.4
2012.1
2012.2
2012.3
2012.4
markets is statistically difficult to distinguish over the past
Source: CBRE Econometric Advisors.
20 years—something that will not change anytime soon.
Leasing decisions in markets like New York are usually While rent growth in downtowns has picked up faster than
reflective of corporate conditions and planning rather than in the suburbs, much of this can be attributed to a very
outright business formation and job growth. Without this, small core of markets—and submarkets. Once landlords
the picture of strong downtowns emerging and leading regain a measure of pricing power in downtown markets
January 2012
Page 9
© 2012, CBRE, Inc.

10. Little Difference in Rent Growth
Special Report: 12 Trends for 2012
deal of traction in the press without having a good deal
Downtown
TW Rent Index, YoY % Chg. Suburban of supporting data. For their part, investors should be
Downtown Ex-New York
20 conscious of whether their decisions are based on headlines
15 and perceptions of new urban theory, and they should look
10 to how much empirical evidence exists to support their
5 perceptions.
0
-5
-10
-15
TREND #5
-20
SHORTAGES IN LARGE WAREHOUSE
SPACE WILL ACCELERATE
2000.1
2000.3
2001.1
2001.3
2002.1
2002.3
2003.1
2003.3
2004.1
2004.3
2005.1
2005.3
2006.1
2006.3
2007.1
2007.3
2008.1
2008.3
2009.1
2009.3
2010.1
2010.3
2011.1
2011.3
2012.1
2012.3
Source: CBRE Econometric Advisors. Large Warehouses Recovering Faster
Than Overall Industrial
they tend to move more aggressively in order to maximize
operating income during the upswing. Again, excluding It comes as no shock to property investors to hear that the
New York gives us a much different perspective that shows recent recession ravaged the industrial sector. The sour
that rent growth across most markets is roughly the same. economy, falling trade and inventories, and plunging
Also, those investors who bought at the height of the market industrial production conspired to push the availability
in downtown locations, thinking they were hedging their rate in the nation’s industrial sector to a record high. With
bets, are now facing the threat of diminished cash flows the recession now over and many of the sectors’ primary
as those leases are starting to roll. This is something worth demand drivers recovering nicely, industrial property has
considering even in a market like New York, or perhaps San reported healthy demand every quarter for the past year.
Francisco, where rents dropped in excess of 20%, peak to Looking deeper, however, it becomes clear that 2011 will
trough, before beginning to rebound. Building owners in go down as a year of consolidating and upgrading by
these markets will need every bit of that accelerated growth occupiers.
to cover leases signed at the top of the market.
Lots of available space combined with very low rent
The office market continues to face a lengthy recovery levels has provided great opportunities for occupiers to
and after a transition in 2011, next year will be another consolidate space or upgrade to higher-quality space.
important step on the road back. The talk about the Consolidation is being reported in markets all over the
downtown renaissance and suburban demise will likely country, with firms consolidating multiple smaller facilities
continue, but you won’t hear it from us—at least not as part into fewer larger ones in a constant drive to reduce
of an argument on permanent trends. Sure, downtown core
Demand for Large Buildings Held Up Comparatively
assets will continue to trade at a premium and rent growth Well During the Recession
will likely outpace its suburban counterpart; that won’t be
Small
by much, however, and performance will be mixed, with the Absorption Rate Big
best downtown submarkets leading improvements. There is 1.2
1.0
also little evidence that demand for office space in suburban
0.8
business parks is likely to evaporate any time soon. 0.6
0.4
The point in all of this is not that 2012 will be the year of 0.2
the suburbs or that investors should alter their investment 0
-0.2
strategies and divest themselves of downtown assets.
-0.4
Investors like downtowns for a number of valid reasons, -0.6
including longer lease length, access to capital for liquidity -0.8
2000.1
2000.3
2001.1
2001.3
2002.1
2002.3
2003.1
2003.3
2004.1
2004.3
2005.1
2005.3
2006.1
2006.3
2007.1
2007.3
2008.1
2008.3
2009.1
2009.3
2010.1
2010.3
2011.1
2011.3
and potential for NOI growth in an up market. Rather, our
aim is to shed light on a debate that has gained a great Source: CBRE Econometric Advisors.
January 2012
Page 10
© 2012, CBRE, Inc.
10

11. Special Report: 12 Trends for 2012
expenses. This has led to above-average demand for larger rate of large buildings. The large building availability rate,
facilities during the past year. For almost the entire recession which historically has been several percentage points below
and specifically for the last four quarters, the nation’s largest the overall sector, rose faster and sooner than that of all
industrial facilities—those of more than 500,000 sf—have buildings early in the recession, until it was essentially in
been experiencing positive demand. line with the overall industrial sector. The recession caused
new construction to pull back dramatically for all types of
The recession officially started during the fourth quarter of buildings, even as demand for large buildings remained
2007, and large buildings have reported comparatively positive during most quarters. This allowed the segment’s
robust demand since the beginning, with average quarterly availability rate to stabilize sooner, and to drop faster, than
demand of nearly 4 msf, compared to -5.9 msf for smaller that of the overall industrial sector.
facilities. For the past year, large buildings have been
responsible for 18% of all the absorption in the nation’s Although nationally the demand for large buildings has
industrial sector, yet large buildings account for only certainly outpaced demand for small buildings, availability
13% of the nation’s stock of industrial space. This strong rates are comparable, due to relatively high large building
absorption has allowed the large building segment to construction. In some markets the difference is far greater,
see its availability rate fall 100 bps since the peak of the however, and shortages are being reported in places.
recession, to 12.5%; the country’s smaller buildings have Austin, for example—a smaller industrial market where
seen a decrease of 90 bps over the same period, to 14%. larger buildings comprise just under 10% of industrial
While those two figures are not dramatically different, the space—has no available space in its largest buildings.
availability decrease among large buildings is impressive Houston and Riverside, two of the largest markets we cover,
when you consider that large buildings also accounted for with great infrastructure and transportation networks, are
44% of all construction during the period—a far greater both reporting availability rates below 5% among their
share than we’ve seen at any point in our history. But though largest buildings, versus double-digit rates for the market
the share of total construction is high, absolute levels of new as a whole.
construction remain very low, currently running at about half Shortages Now Bring Reported in Some Markets
of what is being demanded. Over the past four quarters,
Current Availability Rates (%)
the construction rate for large buildings has been 0.16%,
Market Large Buildings Market Level
while the absorption rate has been 0.39%.
Austin 0.0 14.4
Availability Rates Stabilized Sooner for Large Houston 4.5 10.2
Buildings
Riverside 4.8 12.1
Small
Availability Rate, % Big Minneapolis 7.0 11.4
16
Denver 8.2 12.7
14
Chicago 12.5 15.4
12
Atlanta 15.1 18.1
10
Nation 12.5 13.7
8
Source: CBRE Econometric Advisors.
6
4 As the economy continues to recover and the industrial
recovery spreads, 2012 will see more of these spot shortages
2
2000.1
2000.3
2001.1
2001.3
2002.1
2002.3
2003.1
2003.3
2004.1
2004.3
2005.1
2005.3
2006.1
2006.3
2007.1
2007.3
2008.1
2008.3
2009.1
2009.3
2010.1
2010.3
2011.1
2011.3
show up, as rents still are too low to justify substantial new
construction. In Atlanta, where the recovery has been slower
Source: CBRE Econometric Advisors.
than the nation’s, and where there currently isn’t a shortage
of any type or size of space, the large building segment is
Record-high construction of large buildings during the early now showing signs of strength. The large building segment
stages of the recession, combined with weakening demand in Atlanta has seen availability rates fall 330 bps from their
as the economy soured, led to a rapid rise in the availability recessionary peaks, compared to a decline of 140 bps for
January 2012
Page 11
© 2012, CBRE, Inc.

12. Special Report: 12 Trends for 2012
the market overall. Similar trends are starting to show in factor in boosting the demand recovery in its early phase
Dallas, where a massive large-building boom that lasted was that room rates fell to historically low rates during
through the early parts of the recession pushed availability the downturn; ADRs remaining low well beyond the start
rates of large buildings above 22%, while the market as a of the demand recovery has only compounded the effect.
whole registered 17.1%. Since the recession has ended, Though the hotel recovery has remained resilient, growth
however, the availability rate has fallen much faster for the has diminished a bit and factors will arise in the coming
large building segment, with its current availability rate now quarters to diminish growth even further.
comparable to the market’s overall 15.3% rate.
Robust Demand Recovery Underway
Demand Growth (R)
Looking to 2012, as the economy continues to steadily 4 Qtr. Moving Avg. Demand
recover and hopefully even to accelerate, it is clear that we SF x 1000 Demand Growth, YoY (%)
will start to see increased spot shortages—particularly of 1500 15
the largest industrial assets. The economy-of-scale benefits
1400 10
expected from building super-large assets have historically
1300
been constrained by the technological difficulties of heating 5
1200
and cooling those assets, such that taking advantage of 0
their immense size in a cost effective way has been difficult. 1100
-5
However, recent technological improvements have allowed 1000
for more of these buildings to be built and for occupiers to 900 -10
benefit from their scale. Larger buildings that are now cost
800 -15
effective to run and manage will lead to more consolidation 1988.1
1989.1
1990.1
1991.1
1992.1
1993.1
1994.1
1995.1
1996.1
1997.1
1998.1
1999.1
2000.1
2001.1
2002.1
2003.1
2004.1
2005.1
2006.1
2007.1
2008.1
2009.1
2010.1
2011.1
2012.1
2013.1
2014.1
among firms that currently use several smaller facilities.
Source: CBRE Econometric Advisors.
And with supply chains increasingly dependent on cheap
and reliable transportation systems, recent rail investments
also have the potential to encourage firms to consolidate The rapid recovery in demand for hotel rooms, which
multiple facilities into a single one located near a strong began as early as mid-2009, was historic. Reaching
intermodal network, reducing the high costs associated growth rates of 10% on a year-over-year basis, the rate
with truck shipments. With minimal new construction of rebound well surpassed the recovery that followed the
and fewer buildings available to be leased up, in 2012 2001 recession, despite the fact that the demand declines
this consolidating trend will have only shortages of large during this recession were slightly less severe than in 2001.
buildings to constrain it. Since that historic 10% growth, the demand growth rate has
decelerated consistently and currently reads around 5%.
The pattern is similar to what we witnessed following the
demand spike in 2004, when the pace of demand growth
TREND #6 fell consistently until 2006, even declining for a couple of
HOTEL ROOM DEMAND GROWTH quarters before stabilizing at around 0.5% in 2007. The
WILL SLOW more recent sharp improvement in hotel room demand
Overseas Slowdown will Contribute helped us achieve expansion by the end of 2010. Demand
growth will likely stabilize in the coming quarters.
This hotel recovery has been one for the record books.
After a near-halting of business and leisure travel during During the recent hotel recovery, the boost in demand has
the recession brought a significant decline in demand for come from international, rather than domestic, travelers.
rooms in 2008 and 2009, the hotel industry has witnessed Just as demand growth was reaching 10%, international
dramatic demand improvement since the economy has tourism growth was achieving nearly the same growth
begun to show signs of recovery. A rapid increase in figures, while domestic travel remained much lower.
international tourism helped to fuel the demand recovery in International travelers were most likely taking advantage
the U.S., but as global unbalance has plagued travelers in of the low room rates, but rates have risen since then
recent months, international tourism has dropped. Another and the global crisis is creating international tourism
January 2012
Page 12
© 2012, CBRE, Inc.
12