UBS Real Estate Outlook 2010

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Real assets, real expertise

Global Real Estate ResearchOutlook 2010 – US

For Professional Clients/Institutional Investors only

By William Hughes, Gregory Brown, Zoya Geller,Tiffany Gherlone, Amy Holmes, Kimberly House & Brian O’Connell

WestMidwestSouthEast

NCREIF regions

Outlook 2010 – US

Cover image:Kifer TechSan Jose, CA

Dear Reader,

Global Real Estate Research offers its economic and real estate perspective for the United States in ‘Outlook 2010 – US.’ Itreports our general strategic framework from which we can build specific plans to meet the goals of individual portfolios.To form the included opinions we evaluate the general economic conditions, capital markets and 65 property markets,identified on the map below.

As anticipated a year ago, 2009 was a difficult year with the economy and capital markets searching for solid ground,and investors facing tremendous uncertainty. The range of performance outcomes for 2010, as we start the year, is verywide again, but we have confidence that the result will be better than that of the past 12 months. The following pagesdescribe in detail the reasons for our expectations.

UBS Global Asset Management, Global Real Estate has USD 43.2 billion under management with direct propertyinvestments in Asia, Europe and the US and in publicly traded real estate securities worldwide. Our global experience inreal estate securities management, private real estate investment, commercial mortgage financing and securitization, andrisk management is invaluable to our market understanding. Experience within our US business includes 31 yearsmanaging private equity real estate. During that time we have acquired more than 660 assets and sold more than 395.US AUM exceeded USD 13 billion (as of September 30, 2009).

The views presented in ‘Outlook 2010 – US’ are the product of our strategy team. The Global Real Estate Research groupchairs this team by presenting data, concepts and trends. Members of the strategy team include personnel fromacquisitions, asset management, portfolio management, client service and senior management. The team debates thepresented numbers and collects the opinions of all participants to form a collective outlook. While this report is theresponsibility of the research group, it is a product of our entire strategy team.

Thank you for considering our perspective. We welcome your comments and opinions.

Sincerely,

William T. Hughes, Jr.Head of Global Real Estate Research – USUBS Global Asset [email protected]

65 property markets indicated by CBSA or division boundary.

US economy 1

Economic scenarios 4

Property sector outlookApartment 5Hotel 7Industrial 9Office 11Retail 13Farmland 15

Public REITs 17

Capital markets 18

Strategy 21

Data sources and glossary 27Contacts 28

1

US economy

Recession to recovery• Recovery is underway.

• Maury Harris, chief US economist for UBS Securities,recently echoed this sentiment “The data is strongerthan expected … one more sign that recovery is wellunderway and will be sustained.”

• Exhibit 1 presents economic performance variables frompast recessionary periods. Blue bars represent theduration in quarters of each recession. Colored dashesidentify the number of quarters from each recession’sofficial start to the factor’s respective peak or trough.

• Third quarter 2009 marks the seventh quarter since therecession began. The National Bureau of EconomicResearch is responsible for declaring the official end ofa recession. In some instances, many quarters passbefore an official determination is made. Ourexpectation is that when declared, this recession will besix to eight quarters long, making it as long or longerthan any recession in the past 60 years.

• A positive sign in the current cycle is the apparent peakor trough of each of the related variables in the seventhquarter (third quarter 2009). Industrial production maybe the best indicator of a cyclical low. Its troughcoincided with the end of all of the recent recessionsexcept 1975.

0 1 2 3 4 5 6 7 8 9 10

4Q48-4Q49

2Q53-2Q54

3Q57-2Q58

2Q60-1Q61

4Q69-4Q70

4Q73-1Q75

1Q80-3Q80

3Q81-4Q82

3Q90-1Q91

1Q01-4Q01

4Q07-*

Quarters

Number of quarters in recession

Real retail sales troughIndustrial production trough

Real GDP troughEmployment troughUnemployment peak

Exhibit 1Turning points in economy and key economic indicators

GDP• The 2.8% real GDP growth in third quarter 2009, the

first increase in over a year, probably marked the end ofthe longest and most severe recession since the 1930s.

• Positive GDP growth does not automatically signal theend of a recession, but it is a comprehensive measure ofeconomic strength.

• Looking forward, exhibit 2 shows an expectation ofpositive, albeit modest, GDP growth during 2010.

• Although still not operating normally, the financialsystem has stabilized. The economy must now shiWfrom external stimulus-based growth to a sustainable-employment and income-driven expansion.

-6

-4

-2

0

2

4

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

Quarterly, annualized (%)

-1.8

-1.2

-0.6

0.0

0.6

1.2Millions of jobs

Real GDP growth (L)Employment growth (R)

Exhibit 2General economy

White area indicates forecast data.

*Current recession: official end date has yet to be determined.

2

Corporate performance• As shown in exhibit 3, corporations increased profits in

2009 by slashing expenses, especially inventories andlabor. Now companies must expand production tosustain profitability.

• Inventory reductions usually measure aboutone percentage point in a recession. The current cyclereduction was 1.5 points. If domestic and internationaldemand improve, rebuilding depleted inventories couldlead to unexpected growth.

0.40.6

0.81.0

1.21.4

1.61.8

1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09

USD trillions

Exhibit 3Corporate profits

Employment• Although many indicators point to recovery, job growth

is conspicuously absent. More than seven million jobswere lost during the recession. Layoffs slowed from660,000 jobs per month in the first half of the year to199,000 in the third quarter and 61,000 in the fourth.

• Employment growth is expected sometime in 2010, asshown in exhibit 2. Most economists agree with thetrend but vary on the timing.

• Firms typically increase hours of existing employees andthen add temporary workers, before increasing thepermanent workforce. AWer falling continuously from apeak in December 2006, the average workweek rose by0.2 hours in November to 33.2 hours and 52,000temporary jobs were added in November.

Federal stimulus• Fiscal and monetary support from the federal

government initiated the turn from recessionary declineto stabilization. When failures of major financial andnonfinancial institutions led investors to question thesolvency of the entire financial system, the Fed andFDIC responded by mounting a massive andcoordinated effort to restore confidence in financialmarkets and avert a catastrophic recession.

• The foundation of the federal effort includes two piecesof landmark legislation: the Emergency EconomicStabilization Act of 2008 (EESA) and the AmericanRecovery and Reinvestment Act of 2009 (ARRA). Bothare described in detail in the Capital markets section.

• As of third quarter 2009, approximately USD 640 billionhas been spent on the two major stabilization andstimulus programs: Troubled Asset Relief Program(TARP) and the ARRA. Although TARP spending isflattening out, the benefits of ARRA will continue in2010 but at a diminishing rate.

• Even though TARP spending is winding down, two veryimportant components, TALF (Term Asset-BackedSecurities Loan Facility) and PPIP (Public-PrivateInvestment Program), remain vital to rejuvenating theasset-backed lending market. Both programs aredesigned to increase securitized lending by enhancingthe value to investors.

• Year-end economy was supported by stimulus that willnot continue indefinitely. The end of stimulus providessome risk to continued economic expansion.

• Despite a number of meaningful threats, there areenough positive factors for the recovery to evolve into aself-sustaining expansion.

Foreign trade• US exports should be a source of strength in the near

term. The recovery of major trading partners is furtheralong than that of the US.

• A weaker dollar, which makes US goods cheaper inforeign markets, will encourage export growth. Asshown in exhibit 4, the benefits of a weaker currencylag currency movement. The sharp currency drop inearly 2008 should be supportive in the near term.

• As the US recovery gains momentum, stronger importgrowth will reduce the contribution of foreign trade.

-15

-10

-5

0

5

10

15

20

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 1080

90

100

110

120

Real US dollars index 1973=100

Export growth (L)Real US dollars (R)

Export growth (%)

Exhibit 4US exports

Shaded area indicates forecast data.

• AWer declining for nearly two years, household networth increased by 10.2% in the second and thirdquarters of 2009. The recovery in the equity marketaccounted for much of the improvement, but housingassets also rose in third quarter and higher home pricesaccounted for two-thirds of the increase in assets.

• In late 2009, the savings rate rose above 4%, a levelnot seen in over a decade. Combining rising net worthwith deleveraging is a positive for future consumption.

• Debt levels and debt service remain high relative toincome. However, balance sheets can be improved bythe increased savings rate, continued progress in debtrepayment, gradually rising household assets andincome growth, all without seriously impactingspending plans.

3

Consumers• Consumer confidence leads to purchasing, which leads

to production. Production growth requires expandingemployment and growing facilities, which in turnincreases demand for commercial real estate.

• As shown in exhibit 5, the Conference Board measureof consumer confidence remains low but increased inOctober and November. During 2009, the index fell to apoint below any level since the 1960s. The slightrebound late in 2009 may indicate a positive trend, butthe year-end value is still as low as that of any previousperiod shown.

• Spending has been hampered not only by reducedwillingness, due to job losses and weak confidence, butalso by constrained ability, due to high debt levels.

• Consumers deleveraged their balance sheets over thepast year but additional improvement is warranted. Therelationship between household debt service and thesavings rate is shown in exhibit 6.- Household debt outstanding fell for the first time in

third quarter 2008 and continued to decline throughthird quarter 2009.

- With less debt and low interest rates, the percentageof disposable income required to service debt hasfallen to mid-2002 levels.

• It is unlikely that families will increase debt from currentlevels, which could fuel rapid consumption growth.However, they may slow the rate of deleveraging,which should allow a return to modest growth.

10

11

12

13

14

1Q80 3Q84 3Q88 3Q92 3Q96 3Q00 3Q040

2

4

6

8

10

12

14Debt service ratio (L)Savings rate (R)

Household debt service ratio (%) Savings rate (%)

3Q09

Exhibit 6Consumer finance

0

40

80

120

160

200

1Q67 2Q69 3Q71 4Q73 1Q76 2Q78 3Q80 4Q82 1Q85 2Q87 3Q89 4Q91 1Q94 2Q96 3Q98 4Q00 1Q03 2Q05 3Q07 3Q09

Index 1985=100

Exhibit 5Consumer confidence

Summary• It increasingly looks like the economy will continue its

gradual transition from recovery to expansion. Growthis expected to be moderate but should accelerate asemployment begins to expand.

• Real GDP rose in the third quarter, following a periodwith five out of six negative quarters.

• Government programs were badly needed in 2009 andappear to be successful in supporting general economicstabilization and credit market function.

• Employment is expected to grow during 2010, althougheconomists disagree on the exact timing.

4

Economic scenarios

The estimates in these scenario tables are provided to define the range ofexpectations for economic performance during 2010. Exhibit 7 is a table of2009 year-end estimates based on data through November. Three possible2010 economic outcomes are described at the bottom of the page in exhibit 8;each depends on the pace at which we emerge from the recent recession. Theestimated variables are interrelated and modeled with the support of manyassumptions. According to the economic analysis of Moody’s Economy.com, theRebound and Relapse scenarios define an 80% confidence interval, with theBaseline representing the highest probability outcome.

• By all accounts 2009 was a very difficult economic year, with declines in GDP,employment, income, sales and returns. Commercial real estate values, asmeasured by the NCREIF Property Index (NPI), fell by 19% during the firstthree quarters and are expected to fall slightly during the fourth quarter. Thisvalue decline is similar to that of most assets during the year.

• Each of the presented scenarios—Rebound, Baseline and Relapse—suggestimproving conditions during 2010, as shown in exhibit 9. Although somecomponents may weaken further, depending on the scenario, the relativechange is always positive or less negative than that seen over the last year.

• Focusing on the Baseline scenario, the economic figures return to positivegrowth in 2010, with the exception of employment.

• Our analysis, including insight from UBS Investment Bank economists,anticipates an earlier recovery in employment than the Moody’sEconomy.com figures used in the table. We suggest that 2010 will end withan equal or greater number of employed individuals than 2009.

• Our real estate Baseline forecasts a slight decline in NOI, offset by a lowercap rate, leading to little or no value change. Property values at the end of2010 are generally expected to be the same as values at the end of 2009.

• Total return for 2010 is expected to be dominated by the income return,which has risen due to the value adjustments of 2009.

2009 2010

GDP growthGDP growth

-3-2-1012345

ReboundBaselineRelapse

(%)

Exhibit 9Economic change

ReboundBaselineRelapse-6

-5-4-3-2-1012

2009 2010

Employment growthEmployment growth (millions of jobs)

-3

-2

-1

0

1

2

3

2009 2010

Income growthIncome growth

ReboundBaselineRelapse

(%)

Exhibit 72009 market conditions

Real GDP %

Inflation (CPI annual average rate)

Employment annual change (millions)

Real personal income change (%)

Real retail sales (%)

Net mortgage flow (USD billions)

Transactions (USD billions)

Cap rates increase (bps)

NOI growth (%)

Income return (%)

Appreciation (%)

Total return (%)

2009Estimated

-2.5

-0.3

-5.0

-2.4

-5.7

-63

47

107

-3

6

-22

-17

4.3

2.6

1.3

2.0

4.1

100

120

-50

0

5.5

7

12.5

Rebound2010

0.1

0.5

-2.7

0.0

-3.3

0

45

50

-10

6.5

-15

-8.5

Relapse2010

Baseline

2.3

1.7

-1.1

0.7

0.9

-50

75

-25

-3

6

0

6

2010

Real GDP %

Inflation (CPI annual average rate)

Employment annual change (millions)

Real personal income change (%)

Real retail sales (%)

Net mortgage flow (USD billions)

Transactions (USD billions)

Cap rates increase (bps)

NOI growth (%)

Income return (%)

Appreciation (%)

Total return (%)

Exhibit 82010 market scenarios

• Building demand – During the recession, to save moneyor by necessity, many potential renters doubled andtripled-up with roommates or moved in with parents orrelatives. These trends will reverse as the economyimproves.

• Quick response – One-year terms that typify apartmentleases allow the sector to respond quickly to improvingconditions. Following the 2001 recession, apartmentincome recovered sooner and stronger than the all-property-type average, as seen in exhibit 11.

• Below average construction levels – The 2010apartment completions forecast, illustrated in exhibit12, is 33% below the average since 1990. Anincreasing number of abandoned and deferred projects,due to financing or owner-equity problems, will likelydetract further from an already below average forecast.

• Access to Fannie Mae and Freddie Mac lending – As ofthird quarter 2009, government sponsored enterprisesheld USD 197 billion in multi-family mortgages, whichis 56% more than the amount held in third quarter2007. Access to Fannie Mae and Freddie Mac lending isfacilitating more apartment transactions and supportingvalues more than most sectors.

5

Property sector outlookApartment

+_

Current outlook

Apartment

Solid blue triangle indicates 2010 outlook. Hollow yellow triangle indicates2009 outlook. Taken from exhibit 52, an all-sector outlook for 2010.

Our positive outlook is unchanged from last year dueprimarily to favorable demographics, declininghomeownership and muted supply growth. Concernsinclude high unemployment, improved housingaffordability and pricing relative to other sectors.

Positives• Declining homeownership rates – Housing market

difficulties are reducing the percentage of familiesowning a home. Per exhibit 10, aWer peaking over 69%in 2004, the homeownership rate fell to 67% by late2009 and is forecast to approach 66% in 2010. Sincepeople require some form of shelter, fewerhomeowners translates into more renters. From a lowof 33.6 million in mid-2004, the number of renterhouseholds increased to 37.5 million in 2009 and isforecast to grow to 39 million in 2010.

• Primary renter age-bracket growth – Children of baby-boomers, or echo-boomers, are now of the primaryages for apartment renting. The 20 to 34 age bracket isforecast to grow 1.5% in 2010 or 1.5 times faster thanthe total population.

• Forecast for healthy recovery in household formation –We expect job losses to slow in early 2010, beforeimproving during the balance of the year and into2011. An improving job market is forecast to increasethe annual household formation rate from 0.8% in2009 to 0.9% in 2010, 1.1% in 2011 and 1.5% in2012.

30

32

34

36

38

40

42

90 92 94 96 98 00 02 04 06 08 10 1263

64

65

66

67

68

69

70Renter households (L)Homeownership rate (R)

Homeownership rate (%)Millions of renter households

Exhibit 10Homeownership and renter population


-15

-10

-5

0

5

10

15

99 00 01 02 03 04 05 06 07 08

All-property type Apartment

NOI growth (%)

09

Exhibit 11Apartment income

2009 data is through third quarter.

-50

0

50

100

150

200

250

90 92 94 96 98 00 02 04 06 08 10 12

Thousands of units

0123456789

Vacancy rate (%)

Absorption (L)Completions (L)

Vacancy (R)

Long-term completions average (L)

Exhibit 12Apartment absorption, completion and vacancy


Demand – Homeownership declines and favorabledemographics rank apartment demand as strongest of thefive property types, despite subpar, but improving,employment conditions.

Supply – The 8.1% 2009 year-end vacancy rate is thelowest of any sector. The 30 bps rise in vacancy forecastfor 2010 is milder than all sectors, but hotels. Shadowsupply is lingering but dissipating.

Income – Negative 2.7% net income growth for the yearending third quarter 2009 is less negative than all sectorsexcept office. Apartment income shows a propensity torespond quickly to improving conditions.

Transactions – Although 85% below the 2007 peak, USD13.6 billion of transactions in the year ending third quarter2009 is more than that of the hotel, industrial and retailsectors. Higher volume is due in large part to theavailability of government-sponsored lending.

Pricing – Cap rates are lowest of the five property types,due in part to greater availability of debt capital.

Negatives• Subpar employment conditions – When employment

conditions worsen, household formation slows andrenter demand weakens. More than seven million jobswere lost during the recession. Concurrently, the annualhousehold formation rate slowed from 1% at the startof the recession to 0.8% as of late 2009. A ratereduction of 20 basis points (bps) in householdformation translates roughly into 230,000 fewerhouseholds formed per year.

• Elevated vacancy – Job losses and sluggish householdformation pushed apartment vacancy from 5.4% in2006 to 7.9% in late 2009. Exhibit 12 shows that peakcycle vacancy is forecast to exceed 8%, surpassingprevious highs since 1990.

• Lingering shadow supply – Vacant, for-rent homes andcondominiums will continue to detract from apartmentfundamentals in 2010. The 2.6% homeowner vacancyrate in late 2009 is well above the 1.5% long-termaverage. Shadow supply will likely be less of an issue in2010 than 2009, as economic and housing marketconditions improve.

• Housing affordability may detract from rentals – Thehousing affordability index rose from 105 at thehousing peak in mid-2006 to 169 by late 2009, whichmeans more households can afford the average pricedhome. When the economy improves, homebuyers maycapitalize on improved affordability.

• Declining transactions and values – Exhibit 13 showsthat in the year ending third quarter 2009, transactionstotaled USD 13.6 billion, which is 85% below the 2007annual peak. Fewer transactions and weakerfundamentals pushed Real Capital Analytics (RCA) caprates from 5.8% in late 2005 to 7.1% in late 2009.AWer appreciating 48% during the expansion, NPIapartment values declined 29% from the peak, as ofthird quarter 2009.

SummaryOur outlook for apartments, detailed in exhibit 14, is themost positive of the five property types. Homeownershipheadwinds, support from government lending, mutedconstruction levels and favorable demographics justify thetop ranking. Subpar employment conditions and lingeringshadow supply are the sector’s key counterweights.

6

Demand Supply Income Transactions Pricing

Strengthening

Detracting

Exhibit 142010 apartment outlook

Transactions (USD billions) Cap rates (%)

05

10152025303540

1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q095.05.35.55.86.06.36.56.87.07.3

Transactions (L)Cap rates (R)

Exhibit 13Apartment transactions and pricing

• Hotel occupancies respond quickly in recovery – Due toone-night stays, hotel occupancies respond quickly toimproving economic conditions. AWer increasing atepid, but much improved, 1.1% in 2010, revenue peravailable room (RevPAR) is forecast to grow by 5.1% in2011 and 6.7% in 2012. Exhibit 16 shows that duringthe two previous post-recession expansions, hotelsexperienced the highest two-period average increase intotal returns.

• 2009 likely set the high watermark for supply growth –Due to financing, demand or owner equity issues, it isunlikely that all of the rooms planned for 2010 will becompleted. In the first three quarters of 2009, 2,300hotel projects were abandoned or deferred, a trendlikely to continue in 2010. In 2011 and 2012, hotelcompletions are forecast to be less than half of thelong-term average.

Negatives• Elevated construction levels – Hotels are the one sector

currently experiencing above average supply growth. In2010, 47,000 room completions are expected, which is20,000 less than 2009, but 50% higher than theaverage since 2000.

Property sector outlookHotel

+_

Current outlook

Hotel

Solid blue triangle indicates 2010 outlook. Hollow orange triangle indicates2009 outlook. Taken from exhibit 52, an all-sector outlook for 2010.

Our shiW from negative to positive is due exclusively to thepotential for compelling pricing opportunities. One-nightleases that typify hotels will help occupancies respondquickly to improving conditions.

Positives• Significant value-buying opportunities – The severity of

hotel sector value declines is generating compelling andin some instances below replacement-cost acquisitionopportunities. RCA cap rates in late 2009 were thehighest of any sector, 200 bps above the cycle low inlate 2005.

• Business travel and tourism are forecast to improve –Travel is poised to stabilize in early 2010, beforebeginning a gradual recovery late 2010 and into 2011.

• Occupancies and room demand are stabilizing – Perexhibit 15, occupancies are forecast to increase by twopercentage points in 2010 with continued improvementin 2011. Room demand is expected to grow in 2010following the steepest downturn on record.

-100 -80 -60 -40 -20

020406080

00 02 04 06 08 10 12

Thousands of rooms

545658606264666870

Occupancy rate (%)

Demand (L)Supply (L)Occupancy (R)

01 03 05 07 09 11

Exhibit 15Supply trends


Annualized total return1996-2000 (%)

Annualized total return2004-2007(%)

12.7Apartment 15.018.818.8HotelHotel 17.617.614.2Industrial 16.015.4Office 17.78.7Retail 17.4

12.8Average 16.7

Exhibit 16NPI returns by sector following 1991 and 2001recessions

• Severe fundamental losses will take time to recover –Hotel fundamentals tend to reflect prevailing economicconditions. One hundred thousand fewer rooms werein demand in late 2009 than in 2007. Recession-drivendeclines in business, consumer and international travelhelped push occupancies back to 2001 levels. In exhibit17 we see a similar condition to that of the 2001recession, where year-over-year RevPAR declined 20%.

• Weak 2010 RevPAR forecast – RevPAR is forecast togrow only 1.1% in 2010, a significant improvementover 2009 but well below the 2.8% average rate since1999.

• Leverage and expense – Hotels are typically the highestleveraged sector, which adds volatility to financialperformance. The sector also requires the highestproportion of fixed expenditure and is capital intensive.This combination intensifies revenue variability.

• Above average sector distress – An increasing numberof hotels are failing to generate enough income tocover their debt service, resulting in more distressedhotel assets in 2009 than any other sector.

• Slow group business recovery anticipated – Pastrecessions indicate that businesses are slow to rebookconventions or group travel following downturns.Forecasts anticipate that normal group businessbooking conditions are unlikely to return before 2011.

• Declining transactions and values – In the year endingthird quarter 2009, USD 3 billion in hotel transactionsclosed, which is 93% below the amount in 2007 andthe largest percentage decline of any property type. Thedecline in transactions is having a pronounced influenceon values. AWer appreciating nearly 40% during theexpansion, NPI hotel values declined by 32% from thesector peak to third quarter 2009, more than any otherproperty type.

8


Strengthening

Detracting

Exhibit 182010 hotel outlook

-25-20-15-10-505

1015

99 00 01 02 03 04 05 06 07 08 09 10 11 12-10-8-6-4-20246

RevPar (L)Employment (R)

Year over year change inhotel RevPAR (%)

Year over year change innonfarm employment (%)

Exhibit 17RevPAR and employment


Demand – The recession caused severe declines in tourismand business travel, which are reflected in fundamentals.One-night leases allow fundamentals to respond toimproving economic conditions quickly.

Supply – Completions are delivering at an above-averagerate, because of the sector’s long development cycle.Lenders are likely to abandon projects in planning or notyet started. 2011 and 2012 call for muted new supply.

Income – Hotel income was decimated by the recession.The severity of losses will take time to recover to pre-recession levels.

Transactions – Sales are at a standstill and the lowest levelof any sector. Lending conditions are restrained due to thepoor state of fundamentals. Competition may be limitedfor buyers using 100% equity.

Pricing – Hotel cap rates are higher than all property types,which is fostering compelling acquisition opportunities.

Westin GalleriaDallas TX

SummaryOur 2010 outlook for hotels is described in exhibit 18.Fundamentals are in worse shape than in any other sector.RevPAR, occupancy and demand are near record lows andsupply is above average at the worst possible time. Thecritical silver lining is that the severity of price declines iscreating significant value-buying opportunities. One-nightleases will help improving fundamentals impactperformance more quickly than in most sectors.

Negatives• Elevated availability rates – Slowing trade, distribution

and manufacturing activity pushed the industrialavailability rate from 9.5% at the start of the recessionto 13.5% as of third quarter 2009. Exhibit 19 showsthat the 15.6% peak availability rate forecast isconsiderably higher than peaks dating back to 1990.

• Fundamentals were particularly hard hit – Exhibit 20illustrates manufacturing employment declines of 11%in 2009 and transportation and warehousingemployment declines of more than 5%. AWer averaging1.8% from 2004 to 2007, the industrial net absorptionrate declined 0.7% in 2008 and fell 2.3% further in2009.

• Subpar net absorption and rent shiBs – 2010 isexpected to be another marginal year for netabsorption due to continued weakness in demand andrising availability. Manufacturing employment is forecastto decline another 4% in 2010. Transportation andwarehouse employment is forecast to decline 1.8%.

• Operating income reflects weak fundamentals – Netoperating incomes and rents reflect rising availabilitiesand below average demand. In the year ending thirdquarter 2009, net income declined by 7.7%, moresevere than any sector.

9

Property sector outlookIndustrial

+_

Current outlook

Industrial

Solid blue triangle indicates 2010 outlook. Hollow purple triangle indicates2009 outlook. Taken from exhibit 52, an all-sector outlook for 2010.

Our outlook is a slight downgrade from last year due tothe severity of the recession's influence on fundamentals.Support from trade and limited new construction are keyadvantages.

Positives• Inventory and capacity utilization – During the

recession, many producers and warehouse operatorsliquidated inventories to generate revenues. Inventoriesare now so lean that production, and in turnwarehousing, will have to increase to satisfy even weakdemand. Capacity utilization, which measures theproportion of plant and equipment in use, is forecast toimprove from 66% in 2009 to 69% in 2010 and 71%in 2011.

• Industrial production is forecast to improve – TheIndustrial Production Index, which measures the changein manufacturing output, is forecast to improve from 96in 2009 to 101 by the end of 2010 and 105 by the endof 2011.

• The global economy is beginning to stimulate trade –US exports fell 13% in the year ending third quarter2009 but are expected to increase to 6% in 2010 andto 10.5% in 2011. Improving trade demand will beparticularly beneficial to port-market occupancies.

• Well below-average construction levels – Per exhibit 19,the 2010 completions forecast is 68% below theaverage and, if realized, would be the lowest annualtotal since 1990. Muted supply will help hasten thesector’s return to equilibrium.

-12-10-8-6-4-20246

90 92 94 96 98 00 02 04 06 08 10 12-20

-15

-10

-5

0

5

10

15Employment, year over year change (%) Rate (%)

Manufacturing employment (L)Transportation, warehouse, wholesale (L)

Net absorption rate (R)

Fixed nonresidential investment rate (R)

Exhibit 20Industrial employment and fixed non-residentialinvestment


-400-300-200-100

0100200300400

90 92 94 96 98 00 02 04 06 08 10 12

Millions of square feet

02468

1012141618

Vacancy rate (%)

Absorption (L) Completions (L) Vacancy (R) Long-term completions average (L)

Exhibit 19Industrial absorption, completion and vacancy


Bressi Ranch Self StorageCarlsbad, CA

• Declining transactions and values – As with all sectors,industrial transaction volumes slowed considerably. Inthe year ending third quarter 2009, USD 8.4 billion ofindustrial transactions closed, which is 84% below thepeak in 2007. Fewer transactions are depressing values,as implied in exhibit 21. Industrial RCA cap rates rosefrom 6.8% in mid-2007 to 8.6% in third quarter 2009.– NCREIF cap rates follow a similar pattern but are

lower due to higher-quality average assets. AWerappreciating nearly 40% during the expansion, theleast of any property type, NPI industrial valuesdeclined by 29% from the peak to third quarter2009.

SummaryOur 2010 industrial outlook is broken down into keyfactors in exhibit 22. We expect weak but graduallyimproving fundamentals and performance. Limited newconstruction, inventory replenishment and exposure toglobal trade are key advantages. Peak sector vacancy isexpected before that of the office and retail sectors butaWer the apartment and hotel sectors. It is expected tosurpass previous peaks as well. Supply-constrained portmarkets are preferred to interior distribution ormanufacturing hubs. Long-term structural issues, such asthe widening of the Panama Canal, will have long-termimplications for market-sector fundamentals as well.


Strengthening

Detracting

Exhibit 222010 industrial outlook

02468

10121416

1Q06 1Q07 1Q08 1Q09

USD billions

0123456789

Transactions (L)RCA (R)NCREIF (R)

Cap rates (%)

3Q06 3Q07 3Q08 3Q09

Exhibit 21Industrial transactions and pricing

Demand – The recession pummeled distribution, trade andmanufacturing demand, which will take time to recover.Exposure to global trade will be an important attribute inrecovery.

Supply – Completions are being delivered at the lowestrate of any sector and are well below the sector’s long-term average.

Income – ShiWs in net operating income were morenegative in 2009 than any sector. Due to elevatedavailability rates, recovery is expected to be slow.

Transactions – Volumes are at a virtual standstill. Onlyhotels experienced fewer transactions in the year endingthird quarter 2009.

Pricing – Cap rates are second highest behind hotels,suggesting compelling acquisition opportunities may beavailable.

the years leading up to the 1990-1991 recession and anaverage of 96 million square feet delivered in the yearsleading up to the 2001 recession. In the years precedingthe 2008 recession, an average of 50 million squarefeet of office space was delivered. Furthermore, only 26million square feet are forecast for 2010 and 10 millionsquare feet for 2011. Forecasts for both years are wellbelow the 79 million square feet long-term average.

• Sustained income growth – Multi-year leases that typifythe office sector are helping net income grow despiteweak demand and declining market rents. In the yearending third quarter 2009, office net income increasedby 5.5%, the most of any sector and well above thenegative 1.9% all-property type average.

Negatives• Elevated vacancy rate continues to rise – The severity of

office-using job losses pushed office vacancy from12.5% in mid-2007 to 16.1% in third quarter 2009.Vacancies are forecast to continue rising in 2010 beforepeaking near 19%, approaching the previous peakreached in the early 1990s.

• Negative rent and net absorption forecast for 2010 –Weak demand will suppress 2010 net absorption andrent shiWs but not as severely as in 2009. The 2010 netabsorption forecast is for negative 1%, 50 bps betterthan the 2009 year-end forecast. Rent shiWs areforecast to decline by 3% in 2010. Although negative,this will be a notable improvement over 2009.

• Multi-year leases are poised to reset at lower rates –When multi-year office leases reset at lower rates, weexpect office net income to decline accordingly. Office-rent declines of approximately 10% in the year endingthird quarter 2009, foreshadow 2010 operating incomedeclines.

11

Property sector outlookOffice

+_

Current outlook

Office

Solid blue triangle indicates 2010 outlook. Hollow green triangle indicates2009 outlook. Taken from exhibit 52, an all-sector outlook for 2010.

Our office outlook is the least positive of the sectors.Elevated vacancies are poised to continue rising well into2010, which undermines rent growth potential.

Positives• Severe job losses are likely past the worst – Changes in

office employment explain 80% of changes in netabsorption. Per exhibit 23, the recession causedapproximately 2 million office-using job losses. Officejobs are forecast to decline by 335,000, which is less ofa decline than during 2009. Recent monthly jobconditions suggest there is upside risk that 2010 officejobs could be flat or slightly positive.

• Improving corporate profits and business confidence –From 2007 through third quarter 2009, corporateprofits turned negative with the recession. Profits areforecast to turn positive over the next year, which bodeswell for office employment conditions.

• Net absorption is likely past the worst – 2009 likelymarks the cycle low point for net absorption asdescribed in exhibit 24. Net absorption is forecast toimprove but remain negative in 2010, before turningpositive in 2011. If office-using jobs outperformforecasts, there is upside risk that net absorption will bebetter than forecast.

• Below average supply – A key difference between thisrecession and the prior two is the level of officeconstruction preceding respective downturns: anaverage of 121 million square feet delivered annually in

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

90 92 94 96 98 00 02 04 06 08 10 12

InformationFinancial activitiesBusiness and professional services

Thousands of jobs

Exhibit 23Office using components


-150

-100

-50

0

50

100

150

90 92 94 96 98 00 02 04 06 08 10 12


0

5

10

15

20Vacancy rate (%)

Absorption (L) Completions (L) Vacancy (R)Long term completions average (L)

Exhibit 24Office absorption, completion and vacancy


• Declining transactions and values – In the year endingthird quarter 2009, USD 18.5 million of officetransactions closed, which is more than any sector but89% below the sector peak in 2007. Fewer transactionspushed RCA cap rates from a low of 6.3% in early2007 to 8.3% in third quarter 2009. Exhibit 25 showsthat aWer appreciating 51% during the expansion, thesecond most behind retail, NPI office values declined31% from the peak to third quarter 2009.

SummaryThe weakness in the 2010 office sector outlook ispresented in exhibit 26. Fundamentals will likely continueto fall, as multi-year leases reset under more strenuousconditions. New supply is below average, which will helpprevent an even sharper correction. Notwithstanding themuted supply growth, vacancies are poised to continuerising during 2010, forcing landlords to lower rents toretain or attract tenants.

Demand – Through third quarter 2009, the recessioncaused 2 million office-using job losses. Profits and officeemployment are slowly beginning to stabilize but theimprovement will be slow.

Supply – Completions were relatively high in 2009 but areexpected to fall in the coming year; vacancy rates areexpected to continue rising well into 2010 in response toweak demand.

Income – Positive net income in 2009 will likely give way in2010, as multi-year leases reset under more strenuouseconomic conditions.

Transactions – The office sector led other property types intransaction dollar volumes for the year ending thirdquarter 2009, but levels are significantly below the sectorpeak.

Pricing – Office values are poised to continue weakeninguntil fundamentals stabilize.

12


Strengthening

Detracting

Exhibit 262010 office outlook

Trough to peakappreciation (%)

Peak to datedepreciation (%)

48.0Apartment (28.7)40.5Hotel (31.7)39.7Industrial (28.9)50.750.7OfficeOffice (30.6)(30.6)67.6Retail (22.5)

47.2NPI (28.2)

Exhibit 25Current cycle value trends

9/90 Corporate CenterFramingham, MA

• Consumer confidence is slowly improving – TheConference Board Consumer Confidence Index (CCI),which reflects consumers’ attitudes toward theeconomy, local job markets and their financialconditions, rose from 30 in first quarter 2009 to 52 inthe third quarter. Though still below average, the trendis encouraging. The CCI is forecast to improve to 85 in2010.

• Muted construction levels – Completions are forecast toaverage 11 million square feet per year in 2010 and2011. Per exhibit 28, this rate is 56% below the long-term average and should help expedite the sector’sreturn to balanced fundamentals.

• Retail returns have declined the least of any sector – Sofar, retail NPI total returns are negative 15.8% in thiscycle correction, which is the least of any property type.Total return for the NPI, which includes all propertytypes, is negative 22.2%.

• Sector values have declined the least of any sector – Sofar, retail cap rates have increased the least of any

13

Property sector outlookRetail

Current outlook

Retail +_

Solid blue triangle indicates 2010 outlook. Hollow orange triangle indicates2009 outlook. Taken from exhibit 52, an all-sector outlook for 2010.

Our outlook is more positive than a year ago, but stillnegative, as it will take time for consumer income andspending growth to return to normal.

Positives• Consumption, income and sales are past cycle lows –

The recession destroyed consumer confidence, personalincome and retail sales. However, we are likely pastrespective lows with a return to growth expected in2010 and, to a greater extent, 2011, per exhibit 27.

• Some positive signs at end of 2009 – While 2009 totalsales growth was negative, it turned positive in the thirdquarter, and year over year growth was positive in thefourth quarter.


Strengthening

Detracting

Exhibit 302010 retail outlook

-30-20-10

01020304050

90 92 94 96 98 00 02 04 06 08 10 120

24

6

8

1012

14Vacancy rate (%)

Absorption (L) Completions (L)

Vacancy (R)Long-term completions average (L)


Exhibit 28Retail absorption, completion and vacancy


00 01 02 03 04 05 06 07 08 09 10 11 12-15

-10

-5

0

5

10

15Year over year change (%)

Personal disposable incomeTotal retail sales

Personal consumption expenditures

Exhibit 27Retail space demand drivers


Demand – Confidence and sales were pummeled by therecession but are beginning to stabilize. The recovery willbe sluggish due to severe cut-backs in consumer credit andmore conservative spending patterns.

Supply – Retail completions forecast for 2010 is well belowaverage and the lowest of all property types exceptindustrial.

Income – Rents and operating income reflect subparfundamentals due to a prolonged recession.

Transactions – As with other sectors, transactions aresignificantly less than the peak.

Pricing – Institutional retail values have adjusted the leastof any sector, continuing to defy expectations.

sector. AWer appreciating 48% during the expansion,NPI retail values declined by 23% from the peak, as ofthird quarter 2009, the least decline of any sector.

• Support from necessity goods – Necessity-based retail,such as food and drug sales, have proven to be moreresilient than economically sensitive retail. “Sales atgrocery-anchored centers, which tend to feature tenantmixes geared towards necessity-based retail, areexpected to hold up relatively well amid a slowerspending environment through 2012.” Green StreetAdvisors

Negatives• Severe retail sales losses – Real retail sales declined by

an estimated 5.7% in 2009, which contributed to theretail vacancy rate rising from 6.5% in mid-2005 to10.1% in third quarter 2009. Exhibit 28 shows thesevere effect the recession is having on spacefundamentals, in the form of pronounced negative netabsorption in 2009.

• Elevated sector vacancy continues to increase – Theretail vacancy rate is forecast to continue rising throughmost of 2010, before peaking above 12%, exceedingprior highs. Although elevated everywhere, retailvacancy is relatively low along the coasts and higher inthe central cities, as shown in exhibit 29.

• Operating income reflects weak demand – Marketrents, reflecting rising availability and weak demand,are leading to falling income. In the year ending thirdquarter 2009, net income declined 5.3%. The 2009year-end forecast is for effective rents to decline anadditional 4%.

14

• Poor consumer credit – Per Moody’s Economy.com,“Household finances have crumbled during thisrecession. More than 10% of balances held byconsumers are in some form of distress. More than 3%of balances are in default.” These conditions willcontinue to detract from consumer spending and slowthe overall pace of the retail recovery.

• Savings may remain above pre-recession lows – At thepeak of the economic expansion, personal savings as apercentage of disposable income reached an all-timelow of 1.2%. The recession induced consumers tospend less, causing the savings rate to steadily climb to5% by mid-2009. When consumers save more, theyspend less. The savings rate is unlikely to climb higherbut is also unlikely to return to pre-recession lows anytime soon. If consumers continue to deleverage andmaintain a high savings rate, spending will likely expandonly modestly.

• Declining transactions – Transaction volumes haveslowed by 86% from their peak in 2007 and RCA caprates have risen from 6.6% in mid-2007 to 7.9% inthird quarter 2009.

SummaryOur outlook for the retail sector is more positive than ayear ago, as described in exhibit 30. It remains slightlybelow neutral because the slow pace of the economicrecovery will hamper the pace of the retail sector recovery.Demand is past the low point, as confidence and spendingare beginning to improve and supply is muted by historicstandards.

2009 metro retail vacancy rate2009 metro retail vacancy rateLess than 9%9% to 12%Greater than 12%

NCREIF divisionsNCREIF divisionsPacificMountainWest North CentralEast North CentralSouthwestSoutheast

MideastNortheast

Exhibit 29Retail vacancy rate

• Net farm income is influenced by improvements in farmproductivity and changes in underlying commodityprices and input costs.

• Commodity prices in 2009 remained higher thanhistoric norms primarily due to increased global demandgenerated by improving incomes in developingcountries and the trend toward greater use of bio-fuels.The pattern of some per bushel prices is shown inexhibit 31.

• The supply response to this persistent increase indemand can only be supported at higher commodityprices, as it requires the reliance on more expensiveinputs and/or the use of less efficient farmland.

• Rents from leased farmland are intermediate to long-term forward looking and do not exhibit the volatility ofcommodity prices.

Property sector outlookFarmland

Our outlook for farmland is down slightly from last year, asnet farm income has fallen back to trend line fromhistorically high levels. Farm income should benefit froman improving global economy in future years.

Farmland investments• Farmland is a real asset that historically has appreciated

in value faster than the rate of inflation.

• Income can be generated each year by either leasingfarmland to local operators or farming the land directly.

• Farm operations have very different returncharacteristics than farmland ownership and bringcomplicated labor, commodity, tax, accounting and cashflow issues into play.

• We believe investors, in general, are better served byleasing farmland investments to local operators incountries and regions where quality farmers are readilyavailable.

• A number of well-capitalized farmers can be found inall major agricultural regions around the US and theyare receptive to leasing quality farmland.

Farmland values and commodity fundamentals• Farmland values are supported by the income that can

be produced from the land.

0

2

4

6

8

10

12

14

Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Oct-09

USD/bushel*

Corn

SoybeansWheat

Exhibit 31Farm commodity prices

Solid blue triangle indicates 2010 outlook. Hollow green triangle indicates2009 outlook. Taken from exhibit 52, an all-sector outlook for 2010.

+_

Current outlook

Farmland

*Not seasonally adjusted.

16

• Farmland rents and values in place today are generallysupported by commodity prices in late 2009 and neverreflected the peak levels observed in 2008.

• Increases in farmland values generally lead increases infarmland rents, putting short-term pressure on incomereturns.

• The recent leveling of farmland values should allowrents to catch up and income returns to revert to morenormal levels.

Annual and permanent cropland• The universe of institutional farmland investments in

the US is composed of approximately 80% annualcropland (wheat and corn) and 20% permanentcropland (apples and almonds).

• Values and rents of permanent cropland exhibit morevolatility, as crops cannot be easily changed in responseto current market conditions. Rents oWen have avariable component to align the interests of theoperator with the interests of the owner.

• Income returns on permanent cropland compared toannual cropland need to be higher to reflect the greaterrisks. Higher capital expenditures and lowerappreciation over time, due to the depreciating trees orvines on the land, are illustrated in exhibit 32.

• Annual cropland has out-performed permanentcropland, particularly on a risk-adjusted basis, over thelong run and, we believe, is in position to outperform inthe near term.

• A neutral strategic weight to annual cropland in a well-diversified farmland portfolio would be 80%. We aretactically targeting an over-weight to 85% in thecurrent environment.

Farmland returns• Income returns from a diversified portfolio of leased

farmland in the US have historically been in the 5% to6% range, see exhibit 33.

• Total returns have been very competitive with otherasset classes and have exhibited strong inflation-hedging and diversification characteristics.

• Excess appreciation has been generated in recent years,reflecting the long-term sustainable increases incommodity prices previously described.

• Excess appreciation, by its very definition, cannot persistover the long-run and farmland values have recentlyleveled, as the global economy has remained weak.

• The macro forces that supported the excessappreciation in recent years have room to rise andshould positively influence farmland returns once againwhen the global economy strengthens.

• A well-diversified portfolio of quality farmland in the USshould provide competitive income and total returns, asit has since 1970, with additional periods of out-performance as the global economy improves.

NCREIF 1991-2008 (%)

Leasedannual

Leasedpermanent

CoreFarmland

Index

Income return 5.3 7.3 5.7Change in market value 5.9 3.4 5.8Capital expenses (0.5) (1.3) (0.6)Total return 10.9 9.2 10.7Standard deviation of total return 4.7 8.3 5.0CPI 2.5 2.5 2.5Real return 8.4 6.6 8.2

Exhibit 32Annual and permanent cropland returns

Components may not simply add to total return due to compounding.

-10

0

10

20

30

40

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

%

TotalIncome

Exhibit 33Farmland total income return

Shaded area indicates UBS Global Asset Management, Global Real EstateResearch forecast as of December 31, 2008.

SummaryOur outlook for the farmland sector remains positive withcurrent rents and values supported by sustainably highercommodity prices and farm income. The recent leveling offarmland values should allow rents to catch up and incomereturns to revert to more normal levels. Increasing demandfor farm commodities should resume, as the globaleconomy recovers and developing countries continue theirtrend of improving diets. We expect farmland returns toremain around long-term averages in the near term andfurther benefit from increasing global demand in thefuture.

Giffen RanchFresno County, CA

17

Publicly traded real estate funds are similar to private fundsin that they primarily invest in and operate commercial realestate. At the fundamental level, the information offeredthroughout this document applies to both fund types.However, the investment vehicle, specifically public versusprivate, influences the return performance in significantways, allowing each form to offer unique characteristicsthat may appeal to certain investors and offerdiversification benefits.

• A thoughtful comparison of attributes reveals thatpublic and private funds share common characteristicsand are influenced by similar forces, but they shouldnot be considered surrogates nor does performance inone necessarily foreshadow that of the other.

• Exhibit 34 shows a price index for four asset types,including public REITs and private real estate.Comparing the NAREIT line to the NPI line reveals somecommon market influences on returns but alsodramatic differences in cumulative values.

• From the chart, it is difficult to suggest that one seriesleads the other without substantial manipulation.However, it is clear that the public series, in dark blue, ismore responsive to information, occasionallyrebounding without movement in the private series, indark green, and moves with greater amplitude.

• The total returns shown in exhibit 35 measure realestate investment performance. Since 1978, thecorrelation between public and private returns is 0.25.

• The relationship between public and private returnsoffers diversification benefits to investors who holdboth forms, a point developed further in thediversification discussion in the Strategy section.

• Some of the key reasons for the low correlationbetween public and private real estate returns include:

Liquidity—As a stock, public real estate can betraded daily, offering greater liquidity than privatereal estate.Ownership—Private real estate is typically owned byinstitutions with long expected holding periods,while public shares are held by a diverse group ofinstitutional and retail investors.Structure—Public REITs are business entities withgrowth expectations, and private funds arecollections of income-producing properties.Valuation—Public real estate is valued through thetrade of its shares. Private real estate is valued by asmall percentage of property trades and appraisals,which require estimation from market data.Volatility—Public real estate typically has a higherstandard deviation than private real estate. Publicreal estate volatility is similar to that of stocks. Privatereal estate has similar volatility to that of bonds.

Public REITs

0.60.81.01.21.41.61.82.02.22.4

98 99 00 01 02 03 04 05 06 07 08 09

Price index (1=December 1997)

Housing

NPI NAREIT

S&P500

Exhibit 34Asset value comparison

4

5

6

7

8

9

10

Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09

%

NCREIF Property IndexPrivate core real estate portfolio

Public REIT

Exhibit 36Implied and measured cap rates

-60

-40

-20

0

20

40

60

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09

NCREIF Property IndexFTSE NAREIT all REIT Index

Total return %

Exhibit 35Public vs. private returns

• The line in exhibit 36 represents public pricing in theform of an implied cap rate and the columns revealprivate pricing for properties (the grey columns) andcore portfolios (the blue columns). Both types of caprates began to rise during fourth quarter 2008, but thepublic adjustment was much more dramatic. AWerpeaking in early 2009, public rates fell through theremainder of the year, as private rates continued to rise.

• At the end of 2009, public and private real estate pricesgradually narrowed to virtually the same level.

18

Government programs• The Emergency Economic Stabilization Act of 2008

(EESA) and American Recovery and Reinvestment Act of2009 (ARRA) are two congressional acts quicklydeveloped to support the US financial system andencourage general economic stability. Several programsunder each act are summarized in exhibit 37.

• The Troubled Asset Relief Program (TARP), establishedas part of EESA, is one of the cornerstones of thegovernment effort to stabilize credit markets. TARP’sobjective is to stabilize illiquid markets through directinvestment or asset purchase. USD 700 billion wasauthorized, of which approximately USD 470 billion hasbeen committed and about USD 370 billion paid out, asof third quarter 2009.

• TALF and PPIP support credit markets throughinvestment in Asset-Backed Securities (ABS), includingCommercial Mortgage-Backed Securities (CMBS).

• By providing equity and debt capital, these programssupport asset-backed lenders by making collateralizedsecurities more valuable to investors.

• From March 2009 to October 2009, there were eightABS subscriptions worth nearly USD 86 billion of

14

Medicaid, education & other programs52

49 Unemployment, food stamps, COBRA

19 Excluding AMT exemption

40

ARRA stimulus

Infrastructure

Transfers to governments

Transfers to persons

Individual Tax Cuts

Business Tax Cuts

Commitments through 3Q09 (USD billions) Notes

81 Treasury holds 10% of new Chrysler,61% of GM and 35% of GMAC

27 Provides up to USD 50 billion in TARP funds;USD 25 billion to Fannie and Freddieto adjust mortgages to affordable levels

205 Preferred Stock, plus warrants- 5% dividendfor first 5 years, 9% thereaer

Funds available if institutions are unableto raise capital independently

USD 40 billion in preferred plus USD 30 billionequity line facility for AIG

70

40 Equity investment-8% dividendCitigroup, Bank of America

5 Partial insurance for Citigroup againstlosses in a high risk portfolio

20 FRBNY non-recourse loans for purchase of asset

20 Treasury provides equity and debt to privateinvestment funds to purchase troubledmortgage backed securities

PurposeEESA TARP programs

Provide debt to GM, Chrysler,their suppliers and finance arms

Automotive industry support

Stabilize housing market Making Homes Affordable MHA

Equity Investments in viablefinancial institutions

Capital Purchase ProgramCPP

Capital adequacy of 19 largest banksCapital Assistance Program CAP

Capital for institutions integralto the financial system

Systemically Significant Failing InstitutionsSSFI

Capital for institutions integralto the financial system

Targeted Investment ProgramTIP

Insurance against losses thatpose a risk to market confidence

Asset Guarantee ProgramAGP

Loans backed by these securitiesTerm Asset-Backed Securities Loan FacilityTALF

Support valuation of troubledloans and securities by making theassets more marketable

Public-Private Investment ProgramPPIP

Transportation, water, etc.

Capital markets

Exhibit 37Stimulus programs

TALF-eligible issues. Of that amount, USD 49 billion ofsecurities were purchased with TALF loans. Since thepeak of the credit crisis, spreads for eligible assets havedeclined by more than 60%.

• TALF provided loans to purchase USD 4.1 billion inlegacy CMBS (issued before January 1, 2009) andencouraged the first new CMBS issue of the year inNovember.

• As of November, eight private fund managers wereselected to participate in the PPIP program. If all of themanagers receive the full allocation from Treasury, thetotal purchasing power will be USD 40 billion; USD 10billion in private capital and USD 30 billion in federalequity and debt.

• ARRA was designed to boost domestic demand withUSD 787 billion in tax cuts and additional governmentspending. At roughly 6% of GDP, it is the boldestcountercyclical fiscal action in US history.

• Through September 2009, approximately USD 360billion of the ARRA funds was authorized and USD 176billion was distributed. The sharp increase in spendingprovided a major boost to the economy and helps toexplain the return to growth in third quarter GDP.

• Government financial stabilization and stimulusprograms have steadied credit markets and narrowedspreads from peak levels.

• The September 2008 to May 2009 period caused greatconcern because credit was high-priced, causing thelow volume of issuance.

• During the second half of 2009, credit spreadsnarrowed, leading to relatively normal market operationas we enter 2010.

• Because of the success of the first TALF-eligible CMBSissue, brought to market in November, and the successin securing eight private investment funds to participatein the PPIP program, several other originatorsannounced plans to issue new non-TALF CMBS.

• CMBS issuance will probably have reached USD 3 billionby the close of 2009. This is a steep drop from thealready depressed level of 12 billion in 2008. Althoughseveral successful single-borrower CMBS deals wererecently completed and two conduits have restartedand are quoting rates as low as 7.0%, the CMBSmarket has a way to go to restore equilibrium in themarket that provided over USD 150 billion per year incommercial loans prior to the crisis.

Real estate activity• Annual transaction volume fell 71% through October

2009 versus the same period in 2008.

• All of the property sectors posted similar declines, withhotels experiencing the steepest declines (negative80%) and retail the smallest (negative 62%).

• On a positive note, US investment activity posted itsfirst increase in two years in second quarter 2009, roseagain in third quarter and is likely to post anothermodest gain in fourth quarter.

19

0

5

10

15

20

25

2007 avg Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09

USD billions

TALF eligibleStandard Average pre-TALF

Sep-08 - Feb-09Average post-TALFMar-09 - Oct-09

Exhibit 39The impact of TALF on ABS issuance

• Roughly one third of the two-year total ARRAauthorizations were paid in 2009. Only 20% of theinfrastructure authorizations has been spent, suggestingthat the bulk of that impact will be felt next year.Exhibit 38 shows the escalating spending during 2010.

• TARP investment will likely slow over the coming year,due to the success of the program. ARRA funds shouldcontinue to escalate during 2010, as these funds arefocused on spending rather than market support.

Credit markets• The TALF impact on debt issuance is revealed in

exhibit 39. New issues virtually stopped aWer the failureof Lehman Brothers but were reignited in March 2009,following the February TALF launch.

• TALF restarted the ABS market by offering liquidity.Standard issuance rebounded along with eligibleissuance, where fewer than the available federal dollarswere employed.

• AWer the initiation of the TALF loan facility, ABSissuance averaged USD 14 billion per month comparedto USD 1.6 billion in the six months prior.

200300400500600700800900

1,0001,100

4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10

USD billions

TARP commitmentsARRA authorizations

Exhibit 38Cumulative spending—major government programs


• Transactions were negatively affected by the fallingvolume of commercial mortgage debt. Exhibit 40 showsa precipitous decline in sales from 2007 to 2008 alongwith the quarterly pattern in 2008 and 2009.

• CMBS lending stopped in 2008, as seen in exhibit 41.Negative values imply that the level of new originationis less than the level of principal repayment.

• Rising CMBS default and upcoming maturity appear tooffer risk. However, new issues at year-end 2009 givehope that the market will return.

• All commercial mortgage lenders were deleveragingduring mid-2009, which put stress on investors seekingnew acquisition or refinancing.

• Apartment mortgages are omitted because governmentsponsored enterprises, such as Fannie Mae and FreddieMac, expanded lending as part of the stimulus.

• The apparent reason for lender reluctance is the sharprise in delinquency rates, as shown in exhibit 42.

• Rising delinquency increases the risk that financialinstitutions will have to boost capital to reserve againstfuture losses. The TALF CAP (Capital AssistanceProgram) stress tests were designed to ensure that the

largest financial institutions had sufficient capital toweather a “worst case” scenario.

• All targeted institutions secured the required capitalprivately, without TALF funds, so the program fundscould potentially be shiWed to smaller “at-risk”institutions.

Cap rates• There are various measures of capitalization (cap) rates

that imply different market pricing. NCREIF transactioncap rates and rolling-average data reported by RCAcontinued to rise in the third quarter, while appraisalcap rates leveled. These rates are compared to Treasuryyields in exhibit 43.

• Although the range of the cap rates has widened, thischange is minor compared to the unanimouslyincreasing spread of all rates over the treasury rate.

• Limited transaction volume and credit uncertainty makethis a very difficult time to measure market pricing. Allrates indicate that year-end pricing is similar to 2003-2004 pricing, which is a significant value reduction (orcap rate increase) from the peak of 2007.

20

-200

-100

0

100

200

300

400

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09

USD billions

OtherCMBS

Life CosCommercial bank

Exhibit 41Net commercial mortgage flows

0

100

200

300

400

500

600

01 02 03 04 05 06 07 08 1Q08 3Q08 1Q09 3Q09

USD billions

0

20

40

60

80

100USD billions

Annual (L)Quarterly (R)

Exhibit 40US commercial property transaction volumes

23456789

10%

NPI appraisalNPI transaction

RCA all types10-yr Treasury

1Q00 3Q00 3Q01 3Q02 3Q03 3Q04 3Q07 3Q093Q05 3Q06 3Q08

Exhibit 43Market cap rates by source

0

2

4

6

8

10

12CMBS 30+ daysResidentialCommercial

%

1Q00 3Q00 3Q01 3Q02 3Q03 3Q04 3Q07 3Q093Q05 3Q06 3Q08

Exhibit 42Commercial and multifamily mortgage delinquencyrates

Perspective• Last year we presented the diagram shown in exhibit 44

describing the possible changes in Risk/Rewardrequirements of investors over time.

• Over the past year we have witnessed the cyclesuggested by this graphic, and we now see initialprogression back to equilibrium.– During 2007 the relationship between risk and

required return resembled Line 1 in the exhibit. Verylittle premium was required to induce investors toaccept incremental risk.

– During 2009, the relationship shiWed dramatically tosomething like Line 2, where investors requiredexcessive risk premiums leading to very limited equityand debt transactions.

– As 2010 approaches, we see early signs of economicimprovement and anticipate investors’ requirementswill reflect movement back to equilibrium, Line 3.

• The risk/reward relationship is not yet in equilibrium asthe year starts. Rather, we are hopeful that theeconomic stabilization described in the US economysection and the improving liquidity described in theCapital markets section will guide a sustainableinvestment relationship as the year progresses.

21

Strategy

23.6

16.6

17.0

19.2

2006

14.6

13.4

21.2

20.0

20.1

20.3

2005

19.5

19.0

23.0

12.1

13.0

14.5

2004

12.0

10.2

17.1

8.2

8.9

9.0

2003

6.1

5.7

6.0

2.3

4.5

5.8

1990

2.0

-1.1

4.6

-3.9

-1.9

-1.4

1991

-5.6

-11.4

1.7

-4.3

-2.3

-2.2

1992

-4.5

-8.0

8.7

1.4

4.8

7.1

1993

-0.8

-3.9

12.1

6.0

6.4

7.6

1994

5.5

3.9

13.7

6.7

7.6

8.8

2002

6.7

2.8

9.4

6.7

7.3

9.3

2001

6.2

-3.6

14.1

12.3

13.0

14.0

2000

7.8

7.6

12.7

11.6

11.7

12.2

1999

11.4

9.5

19.6

15.8

15.9

16.2

1998

14.1

12.9

30.5

13.9

15.9

17.9

1997

12.9

8.5

29.0

11.5

13.6

13.6

1996

10.3

4.9

16.5

7.5

11.7

12.3

1995

7.2

4.0

Apartment Industrial Office Retail NCREIF Property Index total returnHotel

12.5

7.8

8.7

8.8

1989

4.1

-1.3

14.9

9.6

9.9

10.3

1988

6.0

3.2

12.4

6.9

8.0

9.9

1987

5.8

4.0

12.5

7.1

8.3

8.7

1986

5.7

-1.4

14.4

11.2

11.6

12.2

1985

9.0

3.5

20.5

14.9

15.8

18.1

2007

13.5

11.4

-4.1

-7.3

-6.5

-5.8

2008

-7.3

-9.4

Performance

Bottom

Top-15.8

-23.0

-22.4

-22.1

2009*

-24.5

-26.5

Exhibit 45NCREIF Property Index total returns by property type

*2009 data represent year-to-date total returns as of September 30, 2009.

Sector returns• The NCREIF Property Index combines the performance

of five property sectors. Exhibit 45 shows the overallindex return, in grey, as well as the performance ofeach individual sector.

• Over the years, as few as one sector has outperformedthe total index and as many as four sectors haveoutperformed it.

• It is clear that no single sector dominates performanceover time, emphasizing the value of property-typediversification.

• Following the credit market collapse that becameevident in September 2008, all sectors’ returns turnednegative, indicating the expansive impact of capital lossand uncertainty.

Exhibit 44Risk premium

Risk

1

2

3

Equilibrium

Extreme risk aversionLow risk premium

Reward

The BernardinChicago, IL

22

Mean Std dev Correlations

CPI 4.0 - 3.0 1.00

Bonds 8.4 4.4 7.2 (0.22) 1.00

International 10.1 6.1 23.3 0.06 0.04 1.00

Lg stocks 10.8 6.8 17.5 0.14 0.26 0.63 1.00

Sm stocks 13.1 9.1 21.4 0.28 0.06 0.45 0.69 1.00

REITs 11.9 7.9 18.1 0.19 0.15 0.38 0.51 0.74 1.00

Nominal (%) Real (%) Nominal (%) CPI Bonds Int’l Lg stock Sm stock REITs RE

Real estate (RE) 9.7 5.7 6.9 0.470.47 (0.21)(0.21) 0.350.35 0.270.27 0.180.18 0.250.25 1.00

Exhibit 47Correlations between major US investment returns

Means are annualized returns consistent with methodology used by NCREIF. Standard deviations and correlations are based on December ending annualreturns.

Mid-pointallocations

Efficient allocationswith constant risk*

Asset class

Representative

ranges (%)allocation

international (%)Stocks, bonds &

Bonds 20.0 – 60.0 40.0International 5.0 – 15.0 10.0Large stocks 22.5 – 67.5 45.0Small stocks 2.5 – 7.5 5.0Real estate 5.0 – 15.0REITs 2.5 – 7.5Portfolio mean return 11.0Portfolio standard deviation 11.2

international (%)Stocks, bonds &

39.714.937.8

7.5----

11.111.2

estate (%)Include real

23.913.040.6

7.515.0

--11.311.2

REITs (%)21.012.236.8

7.515.0

7.511.511.2

Include

----

Exhibit 46Expanding portfolios

* Constraints imposed at the upper and lower end of representative allocation ranges. Columns may not sum to 100% due to rounding.

Diversification• Each year we focus on the diversification benefits

obtained by adding real estate to a stock and bondportfolio. While the past year exhibited a decline invirtually every asset class, the value of diversification isrevealed over long periods of time.

• The mixed-asset portfolio described in exhibit 46 showsthe positive impact of including real estate.

• Holding risk constant at 11.2% standard deviation, theportfolio return improves with the addition of privatereal estate and the incremental addition of public REITs.

• As described in the previous section, both public andprivate real estate improve the efficiency of a portfolio,even if added together.

• The diversification benefit arises from the fact that realestate returns are less than perfectly correlated withstock and bond returns.

• Ranging from negative one to positive one, correlationsclose to zero offer the greatest benefit to a portfolio. Asshown in exhibit 47, private real estate has a very lowcorrelation with all forms of stocks and bonds. Publicreal estate offers similar benefits.

23

Investment themes

Remember the basics• Reflect on the key reasons why real estate is valuable to

a mixed-asset portfolio.

• Real estate attributes, such as diversification, incomeand inflation hedge, are as valuable today as they wereyears ago. It was easy to overlook these characteristicswhen all asset values were growing rapidly andinvestors could focus on unusually high appreciation.

• Property operations will likely reemerge as an importantfactor in performance. When the entire market wasrising, weak operations could be overlooked becausemarket growth dominated returns. We expect leasing,expense control, capital investment and propertymanagement to separate poor operators from goodones during the next few years. The latter willmeasurably enhance performance.

Income is gold• Properties that have it are valuable; properties that need

it are struggling.

• Assets with existing leases that have at least anintermediate term remaining (two years or more) maynot suffer from recent market adjustments.

• Vacant space may take longer to lease and receive less-than-expected rent for some time, as 2010 will likely bea tenants’ market. Occupiers trying to lease significantspace should have great power when negotiating rentand lease terms during the coming year.

• Current mortgage markets are not only tighter than2007 but also tighter than normal. Commercialmortgage origination volume is very low and lender

requirements are unusually restrictive. This conditionmay relax in 2010, but investors should actively managefinancing needs.

• On average, we expect a slight reduction in incomeover the year, but adjustment should be far milder thanthat of the spot market. Income did not reach the peaksof new leasing and it will not reset completely, as manypast leases will extend beyond the year.

From growth to value• We refer to value investing not in the sense of the

value-added style but rather in the attention to currentvalue as opposed to the growth mode that was sosuccessful while cap rates compressed.

• From 2004 to 2007 investors became increasinglyattracted to appreciation potential. Appreciation is animportant component of total return, but it became theoverwhelming factor during these years.

• During 2010, a renewed focus on current and plannedincome should reward investors, as this is expected toagain be the major component of return.

Don’t confuse the markets• There are three “markets” to consider: Pricing, Leasing

and Income.– Pricing refers to the value of property, which is based

on expectations of future performance. The pricingmarket adjusted rapidly when the credit marketcollapsed in September 2008, as describe in exhibit48. Since that time commercial real estate valueshave fallen by an average 28%, despite the fact thatincome has dropped only minimally (less than 2%).

-30-25

-20-15

-10-5

05

1015

3Q06 3Q07 3Q08 3Q09

Appreciation (%)

Year-ending

Exhibit 48Pricing

0

5

-30

-25-20

-15

-10-5

10

15

3Q06 3Q07 3Q08 3Q09

Net rent growth (%)

Year-ending

Exhibit 49Leasing

– Leasing can be referred to as the “spot-market” as itreflects the changes in negotiations for currentcontracts. This market is a little less volatile than thepricing market but adjusts continuously and quickly.The most recent changes in the market are shown inexhibit 49, which can be directly compared to exhibit48. In response to the recession, vacancy increasedfor all property types in most markets. This conditionled to falling rents for contracts being negotiatedtoday. Thus, expectation of future income hasalready adjusted downward (despite minimalreduction in current income) and may begin to rise inthe near-term.

– Income reflects the level of collections among typicalproperties in current operation. This is the “marketfundamental” that can be described as lagging.Exhibit 50 shows more modest recent adjustmentthan the previous two markets. Income is affected bythe loss of current contract rents (due to default ormaturity) and the gain of new contract rents in thespot-market. If a property is fully occupied, itsincome will not be affected by changes in marketrents until a current lease terminates. A building withsignificant vacancy will be highly affected by theleasing market as much of its income will come fromnewly negotiated leases. This “market” is expectedto fall modestly (perhaps 3% to 5%) over thecoming year, as landlords look to the weakenedleasing market for new tenants.

• Each “market” must be put into perspective whenevaluating investment choices. Pricing, spot-marketconditions and existing lease terms may move indifferent directions and all should be considered whenassessing a transaction.

NOI growth (%)

-30

-25

-20

-15

-10

-5

0

5

10

15

3Q06 3Q07 3Q08 3Q09Year-ending

Exhibit 50Income

Champions at NorwoodColorado Springs, CO

Investment style• Investors seeking various levels of risk and expected

return should be confident that the markets areworking as financial theory predicts, as shown inexhibit 51. This chart shows that the risk/rewardrelationship holds consistently for Core, Value-Addedand Opportunistic investments.

• The past 20 years offered multiple periods of growthand decline, with the past 5 years being unique.Through these changing market conditions, Core fundsprovided a 5.8% average annual return, while Value-Added funds delivered 6.0% and Opportunistic fundsproduced 8.8%.

• These returns came with corresponding levels ofvolatility or risk.

• One should note that the data for these styles is notequally transparent since 100% of the Core funds areopen-end, more than 50% of Value-Add funds areclosed-end and 100% of Opportunistic funds areclosed-end.

• The years between 2008 and 2009 were difficult yearsfor all styles, producing negative returns, butopportunities exist in each sector.

• Core investments are more widespread, while successfulValue-added and Opportunistic projects will need to bemuch more tactical.

-50-40-30-20-10

01020304050

90 92 94 96 98 00 02 04 06 08

CoreValue addedOpportunistic

91 93 95 97 99 01 03 05 07 09

%

Exhibit 51Total returns

2009 is year to date as of June 30, 2009.

25

Corporate Center PasadenaPasadena, CA

Outlook• The sliding scales in exhibit 52 display our relative

performance expectation by sector. The trianglesindicate our view of the appropriate level ofaggressiveness or conservativeness investors shouldemploy when underwriting these sectors during 2010.

• The perspective in the sliding-scale chart is one ofrelative return performance over the next three years.

• In a diversified portfolio, all sectors should beconsidered. We suggest only an increased weighting ormore aggressive position in the sectors where thetriangle is to the right of center and caution or

conservative underwriting for sectors where the triangleis to the leW of center.

• The three sectors with a relatively optimistic outlook—apartment, hotel and farmland—hold these positionsfor very different reasons.– Apartments offer an expectation of demand growth.– Hotel’s near-term operations may be difficult, but

good pricing may become available.– Farmland has been the steady performer through

these volatile times.

• Retail continues to be the surprise sector, repeatedlyperforming better than expectation.

Apartment

Industrial

+

+_

_

Current outlook

Declining homeownership supports rentingDemographic shis favor renter household growthThe only sector benefiting from Fannie Mae & Freddie Mac lending

Distribution and trade demand are slowly recovering Net absorption and rent shis remain below averageLimited new supply will help sector recovery

Office+_

Office employment conditions are weakBusiness confidence is slowly improving from historic lowsFundamentals are poised to remain below average in 2010

Retail+_

Consumer confidence and consumption are slowly improvingRetail sales are beginning to growSpending habits will take time to recover

Hotel+_

Severity of value declines is creating significant buying opportunitiesOne-night leases allow quicker response to improving demandRevPAR decline and occupancy losses have been extreme

Farmland+_

Farm sector has shown less volatility than commercial real estateValue is supported by commodity pricesBio-fuels and emerging markets are adding to incremental demand

26

Outlook 2010 – US

SummaryThe preceding pages offer our economic and realestate perspective for the United States in 2010. Weevaluated general economic conditions, capitalmarkets and our 65 primary investment markets toform a general strategic framework. From thisblueprint, we are building specific strategies to meetthe goals of individual portfolios. The range ofperformance outcomes for 2010 is wide, but we areconfident that the result will be better than 2009.Our cover photograph is a quiet reminder of theimportance of reflecting on the unprecedentedcircumstances of the recent past as we embark on abrighter future.

Exhibit 522010 strategy for core real estate portfolio

Data sources and glossary

27

Data sources:

Exhibit 1 Moody’s Economy.com as of December 2009Exhibit 2 Moody’s Economy.com as of December 2009Exhibit 3 Moody’s Economy.com as of September 2009Exhibit 4 Moody’s Economy.com as of November 2009Exhibit 5 Moody’s Economy.com as of November 2009Exhibit 6 Moody’s Economy.com as of October 2009Exhibit 7 Moody’s Economy.com as of December 2009Exhibit 8 Moody’s Economy.com as of December 2009Exhibit 9 Moody’s Economy.com as of December 2009Exhibit 10 Moody’s Economy.com as of September 2009Exhibit 11 NCREIF as of September 2009Exhibit 12 Reis Reports as of September 2009Exhibit 13 Real Capital Analytics as of September 2009Exhibit 14 UBS Global Asset Management, Global Real Estate Research as

of December 2009Exhibit 15 CBRE Econometric Advisors as of September 2009Exhibit 16 NCREIF as of September 2009Exhibit 17 CBRE Econometric Advisors and Moody’s Economy.com as of

September 2009Exhibit 18 UBS Global Asset Management, Global Real Estate Research as

of December 2009Exhibit 19 CBRE Econometric Advisors as of September 2009Exhibit 20 CBRE Econometric Advisors and Moody’s Economy.com as of

September 2009Exhibit 21 NCREIF and Real Capital Analytics as of September 2009Exhibit 22 UBS Global Asset Management, Global Real Estate Research as

of December 2009Exhibit 23 Moody’s Economy.com as of September 2009Exhibit 24 CBRE Econometric Advisors as of September 2009Exhibit 25 NCREIF as of September 2009Exhibit 26 UBS Global Asset Management, Global Real Estate Research as

of December 2009Exhibit 27 Moody’s Economy.com as of September 2009Exhibit 28 Reis Reports as of September 2009Exhibit 29 Reis Reports as of September 2009Exhibit 30 UBS Global Asset Management, Global Real Estate Research as

of December 2009Exhibit 31 Moody’s Economy as of October 2009, Agriculture Statistics

BoardExhibit 32 NCREIF as of December 2008. Source of CPI: Bureau of Labor

Statistics. During the first quarter of 2009 NCREIF expandedtheir farmland data base to include properties held for taxableinvestors. These properties have been acquired, managed andvalued on a basis consistent with all properties in the database.The NFI and CFI have been restated back through 2Q2006 toreflect the expanded set of properties.

Exhibit 33 Ibbotson Associates (1970-1990) and the Core Farmland Index(1991-2008) as of December 2008.

Exhibit 34 Case Shiller, Morningstar Encorr and NCREIF as of September2009. Fourth quarter housing data quarterized from the firsttwo months of the quarter.

Exhibit 35 NCREIF and Morningstar as of September 2009Exhibit 36 NCREIF and Green Street Advisors as of September 2009Exhibit 37 Office of the Special Inspector General for the Troubled Asset

Relief Program Quarterly reports to Congress; The EconomicImpact of the American Recovery and Reinvestment Act of2009, first quarterly report, Council of Economic Advisors,September 2009

Exhibit 38 Written Testimony of Mark Zandi Before the Joint EconomicCommittee The Impact of the Recovery Act on EconomicGrowth, October 2009; Office of the Special Inspector Generalfor the Troubled Asset Relief Program Quarterly reports toCongress; US Treasury Monthly Report to Congress pursuant toEESA Act of 2008, November 2009.

Exhibit 39 Markets Room, US Treasury Department October 2009Exhibit 40 Real Capital Analytics as of October 2009Exhibit 41 Moody’s Economy.com as of September 2009Exhibit 42 Moody’s Economy.com as of September 2009; Mortgage

Bankers Association’s (MBA) Commercial/MultifamilyDelinquency Report 3Q2009

Exhibit 43 NCREIF, Real Capital Analytics and Moody’s Economy.com as ofSeptember 2009

Exhibit 44 UBS Global Asset Management, Global Real Estate Research asof December 2009

Exhibit 45 NCREIF as of September 2009Exhibit 46 Morningstar Encorr, Bar-Cap Aggregate Bond Index, EAFE

International Index, S&P 500 Stock Index, IA SBBI US SmallStock Index, NAREIT Equity Index, NCREIF Property Index as atDecember 2008.

Exhibit 47 Morningstar Encorr, the Bar-Cap Aggregate Bond Index, EAFEInternational Stock Index, S&P 500 Stock Index, IA SBBI USSmall Stock Index, NAREIT and the NCREIF Property Index as ofDecember 2008.

Exhibit 48 CBRE Econometric Advisors, Reis Reports and Axiometrics as ofSeptember 2009



Exhibit 51 NCREIF as of December 2009Exhibit 52 UBS Global Asset Management, Global Real Estate Research as

of December 2009

Glossary

ABS Asset-Backed SecuritiesARRA American Recovery and Reinvestment ActAUM Assets Under Managementbps Basis pointsCBSA Core Business Statistical AreaCCI Consumer Confidence IndexCFI Core Farmland Index: composed of all annual and permanent

cropland investments in the NFI that are leased. For a moremarket-neutral benchmark, UBS AgriVest excluded investmentsthat are owner/operated and re-weighted NFI returns to 80%annual cropland and 20% permanent cropland.

CMBS Collateralized Mortgage-Backed SecuritiesCPI Consumer Price Index – An inflationary indicator of the

standard of living in the US. It is also referred to as the cost-of-living index.

EESA Emergency Economic Stabilization Act

FDIC Federal Deposit Insurance CompanyFed Federal ReserveFRBNY Federal Reserve Bank of New YorkGDP Gross Domestic ProductNAREIT National Association of Real Estate Investment TrustsNCREIF National Counsel of Real Estate Investment FiduciariesNFI NCREIF Farmland IndexNOI Net Operating IncomeNPI NCREIF Property IndexPPIP Public-Private Investment ProgramRCA Real Capital AnalyticsREIT Real Estate Investment TrustTALF Term Asset-Backed Securities Loan FacilityTALF CAP Term Asset-Backed Securities Loan Facility Capital Assistance

ProgramTARP Troubled Asset Relief Program

UBS Global Asset Management, Global Real Estate Research based on data obtained from:

28

Business Development

Global Head of BusinessDevelopmentAndreas MondovitsTel +852-2971 [email protected]

Asia PacificAndreas MondovitsTel +852-2971 [email protected]

AmericasThomas AnathanTel +1-860-616 [email protected]

Continental EuropeRoberto VarandasTel +44-20-7901 [email protected]

UKAnthony ShayleTel +44-20-7901 [email protected]

SwitzerlandDominic von FeltenTel +41-44-234 60 [email protected]

Germany & AustriaTilman HicklTel +49-89-206 095 [email protected]

Global Real Estate

Head of Global Real EstatePaul W. MarcuseTel +44-20-7901 [email protected]

Contacts

UBS Global Asset Management

Chairman & CEOJohn Fraser+44-20-7901 [email protected]

Asia PacificChristof KutscherHead of Asia PacificTel. +852-2971 [email protected]

AmericasKai SotorpHead of AmericasTel. +1-312-525 [email protected]

Global Real Estate Research

GlobalRussell ChaplinGlobal Real Estate StrategistTel +44-20-7901 [email protected]

Elisabeth TroniGlobal Real Estate EconomistTel +44-20-7901 [email protected]

AmericasWilliam HughesHead of Global Real EstateResearch – USTel +1-860-616 [email protected]

EuropeGunnar HermHead of Global Real EstateResearch – EuropeTel +49-69-1369 [email protected]

Global Head of Real EstateFund of Funds & SecuritiesRoddy SloanTel +1-44-20-7901 [email protected]

SwitzerlandAndreas SchlatterTel +41-44-234 80 [email protected]

EMEA ex SwitzerlandTim BlackwellTel +33-1-4953 20 [email protected]

Head of Global Real Estate – USMatthew H. LynchTel +1-860-616 [email protected]

UBS Realty Investors LLC242 Trumbull StreetHartford, CT 06103

Tel. +1-860-616 9000Fax +1-860-616 9006

www.ubs.com/realestate

ab1

This document is intended for limited distribution to professional clients/institutionalinvestors and associates of UBS Global Asset Management. It is not to be distributed to orrelied upon by Retail Clients under any circumstances. Using, copying, reproducing, redistributingor republishing any part of this publication without the written permission of UBS Global AssetManagement is prohibited. The information and opinions contained in this document have beencompiled or arrived at based upon information obtained from sources believed to be reliable and ingood faith but no responsibility is accepted for any errors or omissions. All such information andopinions are subject to change without notice. Please note that past performance is not a guide to thefuture. With investment in real estate (via direct investment, closed- or open-end funds) the underlyingassets are very illiquid, and valuation is a matter of judgment by a valuer. The value of investments andthe income from them may go down as well as up and investors may not get back the original amountinvested. This document is a marketing communication. Any market or investment views expressed arenot intended to be investment research. The document has not been prepared in line with therequirements of any jurisdiction designed to promote the independence of investment research and isnot subject to any prohibition on dealing ahead of the dissemination of investment research. Theinformation contained in this document does not constitute a distribution, nor should it be considereda recommendation to purchase or sell any particular security or fund. A number of the comments inthis document are considered forward-looking statements. Actual future results, however, may varymaterially. The opinions expressed are a reflection of UBS Global Asset Management’s best judgmentat the time this document is compiled and any obligation to update or alter forward-lookingstatements as a result of new information, future events, or otherwise is disclaimed. Furthermore,these views are not intended to predict or guarantee the future performance of any individual security,asset class, markets generally, nor are they intended to predict the future performance of any UBSGlobal Asset Management account, portfolio or fund. Source for all data/charts, if not statedotherwise: UBS Global Asset Management. The views expressed are as of January 29, 2010 and are ageneral guide to the views of UBS Global Asset Management. All information as at December 30,2009 unless stated otherwise. Published January 29, 2010. Approved for AU, CA, CEMEA, DE, HK, JP,SG, TW, UK, US

© UBS 2010. The key symbol and UBS are among the registered and unregistered trademarks of UBS.All rights reserved.

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