36 Offices in 17 Countries

Beyond the Media Stories: What’s Happening in the USA?

John Thomas

Global Real Estate Practice Group Leader

State of the U.S. Market

•The market is fluid

•No consistent answer to the question of how is the market

•StrengthsMultifamily HousingSuper prime commercialHealth care related real estate

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State of the Market

•Weak spotsHome BuildingSuburban OfficeUnanchored RetailHospitality

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Lender Preferences

Source: NREI Lender Survey

State of the Market

•Commercial rental growth is generally slow

•Commercial vacancy rates remain high – 16.2%60bps below recessionary peak380bps below prerecession low

•Week employment growth hurts office fundamentals. Growth follows employment.

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Net Job Gains over Next 5 Years

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State of the Market

•Interest Rates are low

•Capital is tight, but there are signs of progress

•In 2Q 2011, net commercial and multifamily debt increased for the first time in 18 months

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Outlook

•The GoodCorporate profits are upPrime office markets are holding upStock market at 4 year highUnemployment is creeping downStrong holiday retail seasonOverseas InvestorsTourism increasingSigns of life in the lending market

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Lender and Borrower Optimism

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Source: NREI Survey

Outlook

•The BadForecasted GDB revised downward

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Revised U.S. GDP

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Outlook

•The BadFear of second global slow downFederal Reserve retrenchmentPossible meltdown in EurozoneFear of credit crunch

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Libor Spread over U.S. Treasuries

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Outlook

•The Bad (continued)Political StalemateHigh energy and commodity pricesStubbornly high unemployment

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Slow Growth in Jobs

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Outlook

•The Bad (continued)High consumer and government debt levelsFiscal Drag

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Outlook

•Real estate concernsWill bubble burst on top tier commercialLease renewals from 2007 top of marketLoan maturities from 2007 top of marketCredit crunch

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The Cause

•The impact of the housing crisis has been under reported

•Home construction is a major economic driver55% of constructionDurable goods

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The American Dream - Homeownership

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The Cause

•Aggressive lending practices supported by the GovernmentLow teaser ratesNo amortizationLittle or no underwriting

•Home ownership increases

•Wall street makes money

•Construction Booms

•Prices go up – owners feel wealthier

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The Cause

•But then the bubble pops

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Housing Prices

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. S&P/Case Shiller

The Cause

•Prices dropped in 18 of 20 largest markets

•3.6 million mortgages are 90 days or more late

•Housing markets are out of balance

•S&P estimates 45 months to clear the market

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National Association of Home Builders

Conclusions

•Large debt levels suggest a slow recovery

•Paying off debt will reduce consumer and government spending

•Real estate implicationsWealth preservers go to quality

Long term investors look at:– Multifamily– Day to day retail– Mezzanine Debt

Higher return investors go for growth or distressed assets

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Conclusions

•How to move forwardDebt forgiveness in the home mortgage market

Political resolution

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Lessons Learned

•Housing matters

•Political decisions have significant impacts.

•Despite challenges, savvy players thrive.

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