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MARKET/RESEARCH REPORTS

1.  Employment Recovery Leads to Opportunity December 2004

For the past year, a recovery in the office market has been under discussion. National non-farm employment had hit its trough in the summer of 2003 after falling for more than two years, and vacancy rates had finally started to stabilize and recover. In the first half of 2004, optimism reached its peak, as non-farm employment was better than expected, and talk of a recovery gained momentum. But by the summer of 2004 that momentum had slowed, and the employment figures did not meet expectations. By October, the employment data became positive again, and optimism returned. The ride has been more like a roller coaster than a smooth sail, but the recovery finally seems to be on the right track.

2. Real Estate Cap Rates and Interest Rates – A Complex Relationship October 2004

Real estate investment performance has held up remarkably well since the economic recession in 2001. Despite soaring vacancy rates and falling rents in most property types and markets, strong investor demand for safety and yield has helped to sustain real estate asset values and to prevent a repeat of the distressed conditions in the last property market downturn. Instead, real estate capitalization rates have plunged amid fierce competition for core assets with secure, predictable cash flows and, increasingly, for non-core assets that can be repositioned for the space market recovery.

3.  2004 US Market Outlook

For most real estate investors, the bottom of the property market cycle never looked so good. Real estate property market fundamentals continued to deteriorate in most sectors and markets last year. However, real estate investment performance remained strong due to low interest rates and robust capital flows, both of which helped to further reduce cap rates.

4.  US Market Outlook – First Quarter 2004

At the end of first-quarter 2004, the generally positive economic trends in the United States and elsewhere were overshadowed once again by terrorism and violence. The bombings in Madrid in early March were a tragic reminder that terrorism and geopolitical instability still pose significant risks to the global economy.  Although most investors recognize the increased risks from such “random” events since 9/11, the new violence sent shockwaves of volatility through the financial markets.

5.  US Market Outlook – Second Quarter 2004

Midway through 2004, the outlook for the US commercial real estate market remains favorable and the risks benign, perhaps surprisingly so. The US economy, which has been expanding at a healthy pace for more than two years, is finally creating jobs in meaningful numbers, outside of the steadily declining manufacturing sector. Business investment is increasing, and corporate profits are growing robustly. Obviously, improving strength in the corporate sector is a positive trend for real estate investments generally. Expanding businesses and job growth will create demand for all types of commercial property, including multifamily, while taking some of the burden off consumers, who have largely carried the economy since 2001. But more evidence that the economy is on firmer ground, together with a growing federal deficit and new worries about inflation, means interest rates will be increasing, probably by more than the Fed’s recent quarter-point hike at the end of June.

6. US Market Outlook – Third Quarter 2004

Despite two more quarter-point increases in short-term interest rates by the Federal Reserve, the near-term outlook for the US real estate market remains decidedly upbeat at the end of the third quarter. In fact, it seems that real estate investments generally are benefiting from the dizzying swirl of positive and negative forces in the world these days. On the positive front, the US economy is continuing to expand and add jobs, albeit at a slower pace than most investors would like at this point in an economic recovery. And with very little new construction in most markets and sectors, the healthier economy should lead to improving real estate market fundamentals over the next 12 to 18 months and, eventually, to rising rents.

7.  Rational Differences Between Public and Private Real Estate May 2004

Two ownership markets – public and private – compete for commercial real estate.  Although real estate has been traded in the private markets since before the creation of any organized exchanges, the dramatic growth of the REIT market since 1993 has enhanced the status and influence of the public market. In today’s environment, the public market is as important as the private in shaping trends in the industry. Furthermore, investors have a genuine choice between public and private vehicles to gain exposure to real estate.

8.  2004 Asian Market Outlook

In line with the improving global economic outlook, Asia’s economies are likely to demonstrate accelerated growth into first half of 2004. Economies with strong domestic demand that proved resilient during the difficult challenges of last year will further boost from improving global trade, while trade-oriented economies may finally see robust recoveries in the new year.

9.  2004 Latin American Market Outlook

The current business climate in most Latin American countries is a clear improvement over that of early 2003. After a rough start last year, as fears of war in the Middle East and a stagnant US economy put a damper on growth, the region began to improve midyear. The major countries adapted to the negative external environment with structural changes to position their respective economies for growth once a global recovery began. For example, Brazil’s newly elected government kept monetary policy tight to lessen the risk of inflation and began to push through pension and tax reforms that are key to controlling the nation’s debt. In Mexico, fiscal reform was a top government priority, although lawmakers have yet to reach an agreement on the proposed measures.

10.  2004 European Market Outlook

The outlook for the European economy continues to improve, although the likely strength and timing of the recovery remain uncertain. The improved outlook has not yet created better conditions in leasing markets, but we might see a positive impact toward the end of the year. A discontinuity between relatively weak conditions in leasing markets and strong investor demand continues to characterize the European, as well as other, real estate markets. How this dislocation is resolved will principally determine European real estate performance this year. The base case scenario has a relatively benign solution, in which capital flows to the sector (and total returns) moderate slightly relative to last year as leasing market fundamentals improve to support pricing. But given the volume of capital that has been directed to real estate over the last couple of years, yields in some markets are vulnerable to weaker investor sentiment going forward.

11.  UK REITs – A Step in the Right Direction June 2004

The UK government’s interest in creating a tax-efficient property investment vehicle is a positive step for the UK property and investment markets. In preparing our response to the HM Treasury’s open request for comments regarding the creation of such a vehicle, we have reviewed the Consultation document and the “Barker Review of Housing Supply” published by the HMT and Inland Revenue as well as several recent reports by industry analysts (see “References” at the end of this report). As detailed below, we believe that a properly structured, tax efficient investment vehicle, tentatively called a “Property Investment Fund” (PIF), can help achieve the government’s stated objectives for the UK property and investment markets. But such a vehicle alone will not be a panacea for all the market inefficiencies cited in the Consultation document. Instead, creating a tax-efficient property investment vehicle is one important step on the long road to a more efficient and flexible UK property and investment market.

12.  The Warehouse Investment Landscape January 2004

Institutional investors must increasingly consider the trends that can affect investment in industrial assets.  Warehouse is the most important industrial subtype for institutional investment, but even in this large category differences exist. Changes in retailing, declines in manufacturing and advances in logistics all help determine which property characteristics and locations will be most in demand. Focusing on Strategic Markets, with selective investment in Major Markets and limited activity in Opportunistic Markets can help ensure portfolio performance.

13. The Office Market Recovery Ahead Nov. 2003

 For nearly three years, the office sector has epitomized the disconnect between the real estate investment markets and the space markets. Despite the sharp deterioration in office space market fundamentals in recent years, low interest rates and strong investor demand for core, income-producing properties have kept asset values from adjusting to the weaker underlying fundamentals. Unlike a decade ago, when excessive new construction and financial regulatory changes caused a wholesale withdrawal of capital from the real estate industry amid weakening demand and supply fundamentals, the ample liquidity and availability of relatively cheap capital in the current market downturn have continued to drive prices higher for certain assets while minimizing the distress among other property owners.

14. US Apartment Market: Between the Short and Long Run August 2003

The US apartment market faces significant challenges over the next 12 to 18 months. Apartment property market fundamentals and asset pricing have been moving in opposite directions for nearly two years. Job losses and rising homeownership have seriously weakened tenant demand. Yet investors continue to pour capital into the sector despite rising vacancies, falling rents and increasing expenses.