Why Real Estate?

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(No Transcript)
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Why Real Estate? Dr. Glenn Mueller
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• Glenn R. Mueller, Ph.D.
• Professor
• University of Denver
• Franklin L. Burns School of Real Estate
• Construction Management
• Real Estate Investment Strategist
• Dividend Capital Research
• glenn.mueller_at_du.edu

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Why Real Estate Fits A Portfolio Size U.S. Real
Estate vs. Other Asset Classes - 12/06
Source Pension Investments, October 30, 2006
and Prudential Real Estate Investors, December
2006.
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All Real Estate Half - 12/06
U.S. Real Estate Values 33.3 Trillion
Source Prudential Real Estate Investors,
December 2006.
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• Market Cycle Analysis
• Physical Cycle
• Demand Supply drive Occupancy
• Occupancy drives Rental Growth

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Market Cycle Quadrants
Phase 3 - Hypersupply
Phase 2 - Expansion
Demand/Supply Equilibrium Point
Increasing Vacancy
Declining Vacancy
New Construction
New Construction
Occupancy
Long Term Vacancy Average
Increasing Vacancy
Declining Vacancy
More Completions
No New Construction

Phase 1 - Recovery
Phase 4 - Recession
Time
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Demand/Supply
Equilibrium
High Rent
Growth in
Rent Growth
Rents Rise
Tight Market
Positive But
Rapidly
Declining
Toward New
Construction
Occupancy
Levels
Cost Feasible New
Construction Rents
Long Term Average Occupancy
Below
-
Inflation
Negative
Below
Rent
Physical
Inflation
Growth
Rental
Market Cycle
Negative
Growth
Rental
Characteristics
Growth
Time
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Historic National Office Rental Growth
11.0
10.5
11
6.1
10
12
6.4
9
13
12.5
3.3
10.0
8
Long Term Average Occupancy
7
Occupancy
6
14
1.7
6.7


5
0.3
15
4.0
4
-1.0
-3.0
1.6
3
2.7
16
2
1
1
30 Year Cycle - Periods 1968-1997

-1.5
Time
10
Historic National Industrial Rental Growth
8.3
6.8
11
4.6
10
12
5.1
9
4.8
5.9
13
8.5
8
Long Term Avg Occupancy
7
Occupancy
3.8
3.0
6
14


5
-2.1
15
4.6
4
-0.4
0.8
3
0.7
0.4
16
2
1
1
30 Year Cycle - Periods 1968-1997

2.8
Time
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National Property Type Cycle Locations
Phase II - Expansion
Phase III-Hypersupply
Retail -1st-Tier Regional Malls
Health Facility
11
Retail - Factory Outlet Industrial -
Warehouse Office - Downtown
Retail - NH Com Power Center Retail
10

12
9

8
13
LT Average Occupancy
7
Industrial - RD Flex
6
14

Apartment1 Hotel - Full-Service Senior Housing
15
5
1
16
4
1
3

2
Retail - 2nd Tier Regional Malls
Hotel - Ltd. Service
2nd Qtr 2007
Office - Suburban
Phase I - Recovery
Phase IV - Recession
Source Mueller, 2007
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Office Market Cycle Analysis
2nd Quarter, 2007
Charlotte East Bay 1 Ft. Lauderdale Honolulu Hous
ton Miami Orlando Phoenix San Antonio San
Diego Wash DC W. Palm Beach-1
Dallas FW Indianapolis Long Island Nashville San
Francisco Stamford1
Boston1 Hartford Las Vegas Los
Angeles Memphis Oklahoma Cty Portland Raleigh-Durh
am Riverside-1 Salt Lake San Jose1 Seattle Tampa
Albuquerque Baltimore Cincinnati Cleveland Columbu
s Detroit Norfolk Pittsburgh
11
Austin Denver New York
10
12
9
8
13
7
6
14
LT Average Occupancy
15
5
1
16
4
1
3
2
New Orleans Orange County-2 Sacramento NATION
Atlanta Chicago Jacksonville Kansas
City Milwaukee Philadelphia 1
Minneapolis N. New Jersey Richmond St.
Louis Wilmington
Source Mueller, 2007
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Industrial Market Cycle Analysis
2nd Quarter, 2007

Atlanta Baltimore Chicago Cincinnati
Columbus Indianapolis Kansas City Milwaukee
Minneapolis Nashville New York Norfolk Oklahoma
City Orlando Raleigh-Durham

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Orange County
10
New Orleans2 Phoenix
12
Boston1 Hartford Honolulu Philadelphia St.
Louis Stamford
9
Las Vegas3 Los Angeles2
8
13
7
East Bay Riverside W. Palm Beach
6
14
15
LT Average Occupancy

Austin-1 Ft. Lauderdale Portland Sacramento San
Diego San Francisco San Jose1
5
16
1
4
1
3
2
Charlotte Dallas FW Denver2 Jacksonville Long
Island Memphis1 Miami N. New Jersey Richmond San
Antonio Wash DC NATION
Cleveland Detroit-1 Pittsburgh Tampa
Houston Salt Lake Seattle-1
Source Mueller, 2007
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Apartment Market Cycle Analysis
2nd Quarter, 2007
Jacksonvill1e Phoenix2 Riverside2 Sacramento1 S
an Diego1 Tampa W Palm Beach Wash DC3
Ft. Lauderdale Miami Norfolk1 Orlando
Austin East Bay1 N. New Jersey1
Baltimore Denver1 Philadelphia Portland2 San
Jose2 NATION1
11
10
12
9
Las Vegas Los Angeles1
Charlotte Dallas FW Houston1 Nashville St.
Louis1
8
13
7
6
14
Orange County New Orleans1 New York3 San
Francisco1
Indianapolis
LT Average Occupancy
Atlanta Boston Chicago1 Columbus1
Honolulu Kansas City Minneapolis2 Oklahoma
City1 Richmond1 Salt Lake Seattle
15
5
16
1
4
1
3

2
Cincinnati1 Cleveland1 Detroit Long Island1
Memphis1 Pittsburgh1 RaleighDurham1 San
Antonio Stamford1
Hartford Milwaukee
Source Mueller, 2007

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East Bay Ft. Lauderdale Honolulu Long Island
-1 New York Norfolk2 Orange County Orlando3 Por
tland1 San Diego Tampa Wash DC1
Retail Market Cycle Analysis
2nd Quarter, 2007
Boston Chicago-1 Houston1 Los Angeles Philadelphi
a Richmond1 San Jose NATION
Baltimore3 Miami Oklahoma City7 Phoenix Sacramen
to Salt Lake
Cincinnati Dallas FW Hartford Kansas City
Minneapolis W. Palm Beach Stamford-1
San Francisco
11
10
12
9
Seattle1 St. Louis
8
13
LT Average Occupancy
7
6
14
Denver Milwaukee N. New Jersey Pittsburgh Raleigh-
Durham1
Indianapolis Riverside-1

New Orleans
15
5
1
4
16
1
3
2
Atlanta Charlotte Cleveland Columbus Detroit-1 Las
Vegas Nashville San Antonio-1
Austin Jacksonville Memphis
Source Mueller, 2007
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Hotel Market Cycle Analysis
2nd Quarter, 2007
Atlanta Charlotte Chicago Denver1 East
Bay1 Miami Norfolk Raleigh-Durham Richmond1 San
Antonio Salt Lake Seattle Tampa NATION
Austin Honolulu Houston1 Los Angeles New
York Phoenix San Diego
11
10
12
9
Baltimore-1 Boston Cincinnati Indianapolis Pittsb
urgh1
8
13
7
Jacksonville Long Island2 Nashville Orange
County Philadelphia Riverside-1 San
Francisco1 Wash DC W. Palm Beach
Columbus Detroit Kansas City St. Louis
14
6
LT Average Occupancy
15
5
Dallas Ft. Lauderdale Las Vegas Memphis Milwaukee-
1 Minneapolis Oklahoma City Orlando1 Portland Sac
ramento San Jose2 Stamford1
16
1
4
1
3
2
Hartford New Orleans N. New Jersey
Cleveland
Source Mueller, 2007
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1970s Cycle

• Factors Driving The First Half Cycle (5 Year)
• Strong Demand from the 1960s that stopped
• Recession 1974
• Capital Flow - Mortgage REITs produced oversupply

• Factors Driving The Second Half Cycle (5 Year)
• Baby Boom Generation Goes to Work Demand
• Capital Flow Shut Down no supply Lenders
  Recover
• Markets tighten and reach peak occupancy 1979 (5
  vacancy)

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Oversupply Years
Baby Boomers Go To Work
Source FW Dodge, CB Commercial, BLS, Mueller
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1980s Cycle

• Factors Driving The First Half Cycle (5 Year)
• Tight market in 1979 pushes rents and prices up
• Tax Act of 1981 attracts taxable investors supply
  up
• Inflation pushes real estate prices higher
• Thrift Deregulation allows capital to flow

• Factors Driving The Second Half Cycle (5 Year)
• Tax Act of 1986 slows taxable investors, but not
  tax free
• Poor stock market attracts Pension Foreign
  capital
• Rising R.E. prices masks poor income returns

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Oversupply Years
Source FW Dodge, CB Commercial, BLS, Mueller
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1990s Cycle

• Factors Driving The First Half Cycle (5 Year)
• Moderate but stable demand growth (1991
  recession minor)
• Oversupply and Foreclosures shut down
  construction
• Excess space absorbed - bringing markets back

• Factors Driving The Second Half Cycle (5 Year)
• Moderate Demand growth Continues
• Oversupply absorbed and return performance
  improves
• Construction constrained causing rents prices
  to rise
• More efficient markets match supply to demand

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Demand Supply Matched
Oversupply Absorbed
Source FW Dodge, CB Commercial, BLS, Mueller
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2000s Cycle

• Demand
• Globalization - creates stable U.S. economy
• Job Growth out of Technology Change
• 2.7 million population growth per year for 10
  years
• Baby boomers at highest income earning years
• second home market wave
• Echo boom children college, first job,
  renting
• Aging population not a major factor till 2014
• Employment growth drives commercial demand

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2000s Cycle
Demand Age 0-60 Percent of Total Population
Source U.S. Census Bureau, November 2006.
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2000s Cycle
Change in 20-29 Year Old Age Cohort
1,500,000
Baby Boom
1,000,000
Echo Boom
500,000
-
(500,000)
Gen X
(1,000,000)
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2008E
2010E
2012E
2014E
2004
2006
Source National Center for Health Statistics
and Mueller estimates
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Government Stimulus Working?
of GDP
Source U.S. Census Bureau, Office of Management
Budget
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2000s Cycle

• Supply Constraint
• Public Markets make R.E. Capital markets
  efficient
• Economically driven capital - low spec
  construction
• 500 Research watchdogs Data Available
• Constrained Supply (economically driven capital)
• construction labor harder to find
• materials costs increasing
• infrastructure problems constrain growth
• Feedback loop keeps demand and supply in better
  balance
• greater transparency
• Faster reaction to demand slowdown

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2000s US Office Demand Supply
FORECAST Demand 1.4 Supply 1.4
Supply Reacted to Demand Slow Down
Source Property Portfolio Research, Grubb
Ellis, Mueller 2007.
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National Property Type Cycle Forecast
Phase II - Expansion
Phase III-Hypersupply
Retail - 1st-Tier Regional Malls
Health Facility
11
Power Center Retail3
10
Apartment1 Hotel - Full-Service
12
9
Retail Neighborhood Community
8
13
Office - Downtown Office - Suburban1 Senior
Housing
7
6
14
LT Average Occupancy
Hotel - Ltd. Service
15
5
1
16
4
1
3
2
Industrial -Warehouse Retail - Factory Outlet
Retail 2nd -Tier Regional Malls
Industrial - RD Flex
2nd Qtr 2008 ESTIMATE
Phase I - Recovery
Phase IV - Recession
Source Mueller, 2007
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Office Occ. Cycle Rent Growth
6.0
Source Property Portfolio Research, Grubb
Ellis, Mueller 2007.
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Office Market Cycle FORECAST
2nd Quarter, 2008 Estimate
Dallas FW Hartford Las Vegas Los
Angeles Memphis Oklahoma City Orange
County-2 Richmond Salt Lake San Francisco Tampa
Austin2 Denver New York W. Palm Beach
Cincinnati Cleveland Columbus Jacksonville Kansas
City Milwaukee Norfolk N. New Jersey Philadelphia
Stamford St. Louis
11
10
12
9
8
13
LT Average Occupancy
7
6
14
Charlotte East Bay1 Houston Miami San
Antonio San Jose1
15
5
16
1
4
1
3
2
Atlanta Chicago Indianapolis Long
Island Minneapolis Nashville Portland Riverside
Boston1 Ft. Lauderdale Honolulu New
Orleans Orlando-2 Phoenix Raleigh-Durham Sacrament
o San Diego Seattle Washington, D.C. NATION
Baltimore-1 Detroit Pittsburgh
Source Mueller, 2007
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Industrial Occ. Cycle Rent Growth
2.8
Source Property Portfolio Research, Grubb
Ellis, Mueller 2007.
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Industrial Market Cycle FORECAST
2nd Quarter, 2008 Estimates
Austin-1 Houston-1 Denver Jacksonville Long
Island Memphis2 Norfolk1 Richmond Sacramento-1 S
alt Lake Washington DC NATION
Las Vegas New Orleans4
11
Ft. Lauderdale San Francisco
10
12
9
8
Los Angeles Orange County
13
Cleveland Hartford Pittsburgh Stamford St. Louis
7
6
14
LT Average Occupancy
East Bay Riverside W. Palm Beach
15

5
Milwaukee Phoenix-1 Portland San Diego-1 San
Jose1 Seattle
16
1
4
1
3
2
Atlanta Charlotte Cincinnati1 Columbus Dallas FW
Kansas City Miami Minneapolis Nashville New
York N. New Jersey-1 Oklahoma City Orlando Philade
lphia Raleigh-Durham San Antonio
Detroit-2
Baltimore-1 Boston1 Chicago Honolulu Indianapolis
Tampa
Source Mueller, 2007
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Apartment Market Cycle FORECAST
2nd Quarter, 2008 Estimates
New Orleans Riverside3 San Diego Washington,
D.C.2
Ft. Lauderdale Jacksonville1 Las
Vegas1 Miami2 Norfolk Phoenix4 Sacramento3 Tam
pa W. Palm Beach1
Austin Denver2 East Bay N. New
Jersey1 Portland2 San Jose1 NATION1
Boston Columbus Dallas FW Kansas
City Richmond San Antonio Seattle St. Louis1
11
10
Cleveland Detroit Indianapolis Milwaukee Raleigh-D
urham
12
9
Los Angeles2 Orange County
8
13
New York3 San Francisco
7
Orlando
6
14
Atlanta Baltimore Chicago Honolulu Nashville Minne
apolis3 Oklahoma City Philadelphia-1 Salt Lake
LT Average Occupancy
15
Hartford
5
16
1
4
1
3
2
Charlotte Cincinnati1 Houston Long
Island1 Memphis1 Pittsburgh2 Stamford1
Source Mueller, 2007
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Retail Market Cycle FORECAST
2nd Quarter, 2008 Estimates
East Bay Ft. Lauderdale Long Island-1 New
York San Diego-1 San Francisco Washington DC
Honolulu1 Miami Norfolk3 Orange County
Orlando Portland 1 Tampa1
Seattle NATION
11
Los Angeles St. Louis-1
10
Denver-2
12
Atlanta-2 Charlotte-1 Columbus Cleveland-1 Detroi
t-1 San Antonio-2
9
Boston Houston Philadelphia Sacramento San Jose
8
13
Occupancy
LT Average
7
6
14
Dallas FW Milwaukee N. New Jersey Pittsburgh1 Ra
leigh-Durham-2 Richmond Stamford-1
Baltimore4 Chicago4 Oklahoma City
8 Phoenix Salt Lake6
New Orleans
15
5
16
1
4
1
3
2
Cincinnati-1 Hartford-1 Kansas City-1 Minneapolis-
1 Las Vegas W. Palm Beach-1
Austin Indianapolis-2 Jacksonville-2 Memphis Nashv
ille-2 Riverside-2
Source Mueller, 2007
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Hotel Market Cycle FORECAST
2nd Quarter, 2008 Estimates
Charlotte Denver East Bay2 Ft. Lauderdale Orange
County Raleigh-Durham Richmond2 Riverside-2 San
Jose2 Washington DC
New York Phoenix San Diego
Baltimore-1 Dallas FW Long Island Miami Memphis Mi
nneapolis Norfolk San Antonio Stamford
Los Angeles
11
10
12
9
8
13
Austin Chicago Honolulu Houston1 Jacksonville Nas
hville Philadelphia San Francisco
LT Average Occupancy
7
6
14
Kansas City St. Louis
Atlanta Boston Las Vegas Milwaukee-1 Oklahoma
City Orlando2 Portland Sacramento Salt
Lake Seattle Tampa-1 W. Palm Beach-1 NATION
15
5
16
1
4
1
3
Cincinnati Columbus Hartford Indianapolis N. New
Jersey Pittsburgh
2
Cleveland Detroit New Orleans
Source Mueller, 2007
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• Market Information
• used to
• determine competitive position
• set lease strategy
• determine improvements program

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Real Estate Financial Cycles

• Capital Flows
• Affect Prices

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Market Cycle Capital Flow Impact
Capital Flows to Existing Properties
Cost Feasible Rents Reached
LT Occupancy Avg.
Property Market Cycle
Total Capital Flow Cycle

Capital Flows to New Construction
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National Office Physical Market Cycle vs.
Financial Cycle New Permit Values
6 year lag
Physical
Financial
No Lag
Source CB Commercial, Census Bureau
Source BEA, CB Commercial, Mueller
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Flow of Funds Commercial MortgagesAll Sectors
(1976 - 2001)
False Price Appreciation Support
( Mils)
?
Public Market Volatility
Source Federal Reserve
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Property Prices Strong
Source Real Estate Research Corporation - Chicago
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Property Prices Strong
Source Real Estate Research Corporation - Chicago
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Transaction Pricing
36/1636 deals 25/1319 deals
33/1624 deals 37/1798 deals
Source Real Capital Analytics, New York
www.rcanalytics.com
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Transaction Pricing
Q3 2006 Cap Rates
9.0
Denver
8.5
US
8.0
7.5
7.5
7.1
6.9
7.0
6.6
6.3
6.4
6.5
5.8
6.0
5.5
5.8
Office
Industrial
Retail
Apartment
94/3512 deals 26/2871 deals
39/2703 deals 63/3922 deals
Source Real Capital Analytics, New York
www.rcanalytics.com
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Where is U.S. Real Estate Capital Coming From
Source Real Capital Analytics, New York
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Buyers Growing
US Property Acquisitions office, industrial,
multifamily, retail properties 5 mil.
Billions
Source Real Capital Analytics
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Have Prices Peaked?
price appreciation
cap rates
MIT-CRE/RCA repeat sales
Source Real Capital Analytics
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Did the Market Level Out in 2006?
cap rates, mortgage rates price appreciation
all cap rates
apt cap rate
7 to 10-year fixed rate conduit loans for
properties 5 mil.
Source Real Capital Analytics
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Property Type Demand
change in sales volume 2006 vs. 2005
Source Real Capital Analytics
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Where are they Buying?
office, industrial, retail and multifamily
properties 5 mil.
sales volume in 2006
change since 2005
Source Real Capital Analytics
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Buyer Comparison
2006 metro acquisitions by buyer type office,
industrial, retail and multifamily properties 5
mil.
NYC
LA Metro
DC Metro
SF Metro
Chicago
Boston
Metro
12
15
23
22
23
28
10
10
3
11
7
10
18
9
18
4
5
11
12
7
3
2
13
23
12
5
17
14
39
47
43
41
37
31
14
Source Real Capital Analytics
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Demand Diversity
2006 Composition of Buyers office, industrial,
retail and multifamily properties 5 mil.
Source Real Capital Analytics
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2007 Physical Cycle

• Demand Supply Affect Vacancies Rental
  GrowthDemand Growth - SLOWER but steady?
• Economic growth moderate positive
• Supply Slow - balanced absorption?
• Return to Growth Phase in 2008-9?
• 2007 Financial Cycle
• Capital Flows Affect Prices Stock Market Fear
• Real Estate the SAFEST Investment Alternative?
• Interest Rates drive Private Investments in the
  Short Run
• R E Equity dominated by Private Markets
  (diversified buyer groups)
• Public Market Debt Much More Acceptable Big
  Capital Source
• Confidence in R E prices in 200?

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• For an electronic copy
• of the
• Real Estate Market Cycle Monitor
• Email
• gmueller_at_dividendcapital.com