Inside Real Estate · 2020. 5. 5. · Inside Real Estate 2019 3 Executive summary Key themes Slower, synchronized global growth – Global growth has peaked, and, if 2018 is remembered

1 Inside Real Estate 2019

Chapter 1: Continued

Inside Real EstateAnnual strategy outlook for 2019



AuthorsIndraneel Karlekar, Ph.D., Senior Managing Director, Global Head, Research & Strategy

Arthur Jones, Director, Research & Strategy

Madhan Rengarajan, Director, Research & Strategy

Rachel Shone, Manager, Research & Strategy

Jonathan Frank, Manager, Research & Strategy

Sarah Meylor, Manager, Research & Strategy

Jonathan Ling, Research Analyst, Research & Strategy

Inside Real Estate 2019 3

Executive summary

Key themesSlower, synchronized global growth – Global growth has peaked, and, if 2018 is remembered as the year when world growth desynchronized because the US

outperformed, 2019 will likely be the year of synchronized albeit slower global growth.

An increasingly hawkish Federal Reserve (Fed) will challenge US growth, and a strong

dollar will prove problematic for emerging markets. Subsequently, US and Eurozone

growth are expected to converge and be the catalysts for more moderate global growth.

For commercial real estate investors, a slower growth environment will create a varied

opportunity set, though common themes will be a focus on income and less reliance on

capital markets as the primary driver of performance.

US growth gap to fade in 2019 – Boosted by pro-cyclical fiscal stimulus, the US economy is on track to grow by approximately 2.5-3% over the next 12 months and will most

likely enter the history books as the longest expansion on record. Growth will likely

fade towards mid-2019 as the economy struggles from tighter monetary policy with its

transmission mechanism of higher consumer mortgage rates and borrowing costs that

adversely impact disposable incomes. Subsequently, the growth gap between the US

and Eurozone is expected to narrow as we move deeper into 2019. The UK’s economic

outlook will remain under pressure from Brexit-led consumption decline.

US, Eurozone short-term interest rates to stay divergent – Despite the expected US slowdown in the second half of 2019, there is enough near-term strength for the Fed

to continue raising interest rates in 2019 and retain the monetary policy gap with

other developed markets. Futures contracts are expecting the federal funds rate to be

approximately 3% in 2019. In contrast, Eurozone and UK monetary policy normalization

is going to trail the US, though long-dated bond yields should move modestly higher

as the year progresses. This divergence in policy rates should provide a more favorable

capital markets backdrop for European real estate opportunities, especially for core

strategies that can take advantage of accretive debt.

Real estate investors to combine the tactical with the strategic – Late-cycle dynamics make it important for investors to take advantage of both shorter-term “tactical” and

longer-term “strategic” investment opportunities. Over the short term, investors need

to be “stock” pickers by identifying markets and property less reliant on capital market

forces and more reliant on income potential. Core investors should also pay close

attention to capital market signals and seek relative value where cost of debt may stay

low, for example, core Eurozone. Longer term, investors should strategically focus on

“DIGITAL” drivers centered on changing demographics, innovation, and globalization in

order to identify sustainable investment opportunities.

Policy and politics — twin challenges to the global economy – The global economy faces risks from policy and politics. US growth will face increasing challenges from

higher interest rates with the Fed’s language becoming progressively hawkish. Markets,

however, remain disconnected from the Fed’s tone and raise the risk that perceived policy

errors might swiftly feed back to the real economy through a rapid tightening in financial

conditions. Geopolitical risk also remains very much center stage, as potential downside

risks exist, whether it is the continuation of the US administration’s “America First”

policy and the mounting escalation in tariff wars with China or an unknown Brexit with

potentially negative capital market and economic impact.

Contents:

4 Chapter 1: Economic outlook: Global, US, Europe

10 Chapter 2: Commercial real estate outlook

17 Chapter 3: Key DIGITAL themes to guide long-term strategies 23 Chapter 4: Short-term real estate opportunities


Chapter 1: Economic outlook: Global, US, Europe

Exhibit 1: Global growth will slow, but that is okay

Global contribution to GDP

Economic outlook Global: Goldilocks and the three bears?

The global economy is now operating at capacity. Nine years out from the onset of the global financial crisis (GFC), global labor markets are tight, corporate balance sheets are in good shape, trade has been robust, and financing is available to both corporations and households on favorable terms. Inflation metrics have also picked up, particularly in the developed world, allowing some major central banks to start normalizing short-term interest rates before potential excesses manifest in the financial system, which is always a risk during extended recoveries.

It is likely that 2018 was the peak year for global growth during the current cycle, and the signposts suggest that 2019, while a good year for the economy, will not be as robust. We anticipate that the global economy will experience slower but still healthy growth over the next 12 months. Over the short term, global expansion should be well supported by growing private sector aggregate demand leading to stronger wage growth and consumption. Long-delayed capex is finally beginning to flow as companies look to catch up on delayed projects. Exhibit 1 provides a snapshot of key contributors to global growth and shows that regional growth will remain synchronized albeit more modest over the next two years.

United States Europe Asia

Rest of the world Global GDP Growth

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2010 2011 2012 2013 2014 2015 2016 2017 2018(f) 2019(f) 2020(f)

Source: Moody’s Analytics, Principal Real Estate Investors, Q3 2018.

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● United States ● Europe ● Asia ● Rest of the world — Global GDP growth



“”

Increasing business investment, worker productivity, and tightening labor markets are finally evident in stronger wage growth, especially among the G3 nations. As of October 2018, G3 wage growth was tracking at an annual rate of 2.3%, the highest level in 10 years. Given that wage growth has not yet “normalized”, in other words, remains below productivity plus inflation, we anticipate further increases given the tightness of labor markets. Though higher wage growth is likely to lead initially to a moderate acceleration in inflation, it should also support higher consumption and consumer confidence, which remains elevated in Europe and the US (Exhibit 2). In Europe, consumer confidence reached a record high in the first half of 2018 and remains near an all-time high despite moderating more recently. Upbeat consumer confidence, and by implication more support for consumption, is important for the global growth story and will remain a key ingredient underpinning developed markets going forward.

So, what could go wrong? In many ways, the global economy is operating in a "Goldilocks" environment with growth running at just the right pace without triggering a rapid shift-up in inflation or a sharp tightening in global monetary policy. This is remarkable given the duration of the current expansion.

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Exhibit 2: Consumer confidence roars ahead

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Source: Moody’s Analytics, OECD, Principal Real Estate Investors, November 2018.

We anticipate that the global economy will experience slower but healthy growth over the next 12 months.— US (LH) — Euro Area (RH)



Longer term, concerns on debt and fiscal deficits will have to be addressed, but in the short term, "three bears" are looming, which leads to a more cautious outlook for 2019. Monetary policy is being steadily tightened in the US, and a constructive growth outlook indicates that the Fed will continue to raise interest rates in 2019. Thus far, the impact on corporate balance sheets, consumers, and risk assets has been limited. Going forward, however, higher interest rates will increasingly bite into consumer finances and put pressure on levered balance sheets, setting in place conditions for a negative feedback loop into the economy. A corollary effect of tighter US monetary policy is a stronger dollar, which may become an increasing problem for emerging markets, especially those with significant dollar-denominated debt and large current account deficits. Some of these countries may need to tighten their monetary policies rapidly, thus acting as a catalyst for slower global growth in 2019.

Growing trade friction between the US and China is becoming an increasingly chilling factor on global growth. In September, the US announced tariffs on $200 billion of imported goods from China effective at a rate of 10% but scheduled to increase to 25% on January 1, 2019. China retaliated, and further escalation is not unreasonable with the resultant impact that higher import costs will impact US consumer spending, and supply chain disruptions will negatively affect corporate budget planning forecasts. A full-fledged

trade war between the US and China may potentially shave off 25 bps of global growth and 50 bps of US growth in 2019.

The third challenge to the global outlook is the growing threat from geopolitics, particularly nationalist tendencies manifesting in protectionist and anti-establishment sentiment. Recent elections in Italy, and the subsequent adoption of a budget that contravenes EU fiscal guidelines, speaks to the tensions between some member states and the federalist system. A hazy outlook on the Brexit outcome is another example of global geopolitical stress. A hard Brexit will create capital markets stress, the real economy will feel the negative impact of dislocated supply chains, and subsequently global growth will suffer. Italy and the UK are manifestations of growing nationalism and protectionism in developed markets, which are risks threatening the global economic outlook.

This trifecta of potential “bears” has varying degrees of probability and impact, which we try and handicap in Exhibit 3 below. Individually these headwinds provide some cause for concern over the pace of the global expansion going forward but are not necessarily a big deal. When combined, however, they have the potential for a more significant negative impact to US and global growth in 2019. Moreover, these risks are a reminder that market cycles are not linear and can whipsaw investors sharply.

Exhibit 3: Here are some potential downside catalysts and probabilities

Event/Catalyst Impact Probability

Higher US interest rates/monetary policy divergence High High

Stronger USD impact on emerging markets Medium Medium

Geopolitical stress/Brexit Medium Medium

Source: Principal Real Estate Investors, November 2018.



US

Some dark clouds may be on the horizon, but it’s time for the US economy to bask in the sunshine. The massive fiscal stimulus enacted at the end of 2017 is making its way into the economy, which is on track to expand by roughly 3% in 2018 (third quarter preliminary real GDP came in at 3.5%), a very credible performance given the length of the current expansion. In fact, according to Oxford Economics, the impact of fiscal and tax stimulus is estimated to raise US economic output by 0.65% in 2018 and by 0.6% in 2019. And even though the economy entered its ninth year of expansion, the strength of growth helped the US diverge from other developed markets in 2018 and emerge as the pre-eminent driver of global growth. This growth divergence has put the US on track to deliver its longest expansion on record by mid-2019.

Most details in recent GDP reports remain positive, and underlying fundamentals are healthy. Personal consumption remains strong at 4%, business investment appears robust, and even government expenditures have increased. The labor market remains in excellent shape with employers adding an average of 210,000 new jobs a month year-to-date, up by 15% over the monthly average in 2017 (Exhibit 4). In October, the US added 250,000 jobs, keeping the unemployment rate at 3.7%, a level not seen since 1969. Furthermore, manufacturing jobs are surging, up another 32,000 in September and up by 296,000 over the last year, the best 12-month showing since May 1995. The broader category of goods-producing jobs is also expanding strongly.

Total Employment Change [LH] Unemployment Rate [RH]

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Source: Moody's Analytics, Principal Real Estate Investors, November 2018.

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Exhibit 4: The US labor market looks to be in great shape

● Total employment change (LH) — Unemployment rate (RH)



Europe

Europe’s economy is in good shape, and, despite a slowdown since late 2017, growth in most economies remains strong by historic standards with prospects fairly bright. The broad themes of increasing capital

expenditure, buoyant labor markets, and rising consumption remain intact across the Eurozone.

While the Eurozone has passed its peak with 2017 as the strongest year in a decade, business and consumer sentiment indicators remain supportive of slower but above-average growth of about 1.5%-2% in 2019-2020. The key driver of this positive outlook is domestic spending, which is forecast to grow by 2% in 2019, helped by continued gains in employment. Given spare capacity in most European labor markets, there is room for employment to grow strongly in the coming quarters. Household wealth is also being boosted by healthy home price gains.

Like the US, the outlook for investment is positive with rock-bottom interest rates making their way through to capital expenditure. Bank lending has accelerated, suggesting improved appetite for funding. While the ECB has indicated it is confident enough to end quantitative easing in December 2018, it has made it clear that it wants to keep monetary policy accommodative by reinvesting funds from maturing securities. Capital markets do not expect the first interest rate hike before late 2019, and, as Exhibit 5 indicates, a considerable gap is forecast between US, European, and UK long-term bond yields.

Over the short term, the US is expected to outperform the developed world as the impact of the 2017 fiscal package permeates the economy. The biggest drivers are likely to be capital spending incentives introduced in the December 2017 tax reforms now being felt, thus supporting investment gains. With consumer confidence still near the high levels of the late 1990s, wage growth steadily gathering steam, and workers streaming back into the labor force, consumption should surpass the 2.4% or so trend of the last several years.

The steady drumbeat of good news notwithstanding, increasingly hawkish language from the Fed, a sharp rise in 10-year bond yields, and ongoing tensions related to trade tariffs with China are emerging as challenges to US growth. Moreover, the impact from the stimulus package also will have largely worn off by mid-2019, adding another headwind to the economy. Looking ahead, we expect US growth to close out near 3% for 2018 but slow to around 2% to 2.5% in 2019 as higher interest rates start to bite in the form of increased consumer borrowing and mortgage costs. As such, US outperformance with the Eurozone is likely to narrow with a much smaller gap in growth heading into 2020.



It’s a different story in the UK. Initial fears of an economic collapse following Brexit were unfounded. Still the outlook for the UK has become increasingly fuzzy given the uncertainty of the May-led government to successfully push through a Brexit deal by March 2019. The result is that Brexit-related uncertainty has clipped growth, and the fall in the pound has hit real spending power. Consumers were more confident in their spending after the referendum than had been expected, but spending has slowed recently. A weak pound is partially to blame for increased inflation and for the political uncertainty that has affected business investment. The fall in sterling has some upsides with UK exporters and foreign tourists benefiting. The uncertain outlook likely puts the Bank of England on hold until 2019, but long rates have been driven up in recent months as a response to Fed rate hikes as well as to an increase in inflation. Higher interest rates, in turn, have started to bite spending, creating an additional challenge to the UK outlook.

Political and economic uncertainties are the primary challenges to Europe with the biggest headache being the unresolved and potential messy resolution to Brexit as of this publication. Growing nationalism expressed in various forms, the election of more right-wing protectionist governments, to outright challenges to EU federal policy, such as Italy’s recent budget announcement that exceeds fiscal guidelines, point to the many challenges that lie ahead.

Exhibit 5: Interest rate expectations suggest divergence

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Source: Moody’s Analytics, Principal Real Estate Investors, November 2018.

— UK — US — Eurozone

Government 10-year nominal bond yield forecasts

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Chapter 2: Commercial real estate outlook

Commercial real estate outlookNine years into the global economic recovery, strong corporate balance sheets and elevated consumer confidence are keeping tenant demand for commercial real estate at a healthy level. While tenant needs continue to evolve, space fundamentals are generally in equilibrium with a few outliers, such as weakness in US retail and ongoing strength in logistics/warehouses in Europe, the UK and the US. With the global economic cycle maturing and more moderate growth forecast in 2019-2020 coinciding with tighter spreads for yields and capitalization rates, the ability to push rents will increasingly determine investment performance.

In both geographies, rent forecasts are constructive as markets continue to enjoy strong consumer and corporate occupier demand. An analysis of key office market rent forecasts across the US and Europe show that traditional gateway markets will lag other cities where cost of living and business is lower and where younger populations are able to enjoy a higher standard of living (Exhibit 6). Interestingly, of the major markets sampled, European cities are forecast to outperform their US counterparts, largely because occupier demand has lagged.

Thus, in terms of the rental cycle given its stronger economic recovery, the US is probably ahead of Europe by 18 to 24 months (Exhibit 7). Subsequently, a broader array of European markets may offer investors the opportunity for above-average rent growth. In the UK given the uncertain outlook on Brexit, real estate investors should treat investment opportunities with caution and focus on occupiers with long-term business plans and well-protected covenants. As the current cycle increasingly matures, we believe investors should identify and focus on sustainable long-term trends that will have long lasting investment implications. We call these DIGITAL trends, and they are centered on demographics, innovation-led industries, globalization, and technology. We believe these key factors will heavily influence and drive tenant demand and subsequently investment performance. In this chapter, we identify the short-term state of play for commercial real estate, and then in chapter 3, we will investigate some of the key DIGITAL themes for investors to consider as part of their portfolio construction process.

Exhibit 6: Key European markets have solid income growth potential

-5% 0% 5% 10% 15%

Berlin

Madrid

Stockholm

Barcelona

Hamburg

Amsterdam

Oslo

Seattle

Frankfurt

Copenhagen

Paris (CBD)

Brussels

Los Angeles

Boston

New York

Chicago

Washington, DC

London (City)

San Francisco

Source: CBRE ERIX, CBRE EA, Principal Real Estate Investors, Q2 2018.

* CBD = Central business district

Global city office rent outlook: 2 year annualized rent growth % (2018-2020)



US commercial fundamentals are in sync with growth

In the US, there has not been a better time to own commercial real estate in nearly 20 years. A long and comparatively stable economic expansion, which will soon become the longest on record in more than 70 years, continues to provide support for real estate demand. The job market in the US has seldom performed this well for such an extended period, and labor is fully employed with an unemployment rate of 3.7%, the lowest recorded since 1969 with potentially further tightening ahead. Business conditions appear good, and there are few signs that this will change dramatically over the next 12 months. Space markets are also largely balanced with property owners benefiting from slower supply growth than in previous cycles. Part of this is the result of capital market conditions following the financial crisis, but much is also due to investors taking to heart some of the hard lessons learned through prior financial crises, for example, in the way underwriting has remained disciplined.

Source: CBRE, Principal Real Estate Investors, November 2018.

Exhibit 7: US is leading the property cycle

Expansion phase

Late cycle phase

Recovery phase

Contraction phase

• Europe office• Europe industrial• US industrial• UK industrial

• US retail

• US apartment• US office• UK office


Exhibit 8: Demand outlook appears strong in demographic and high-tech markets

New York

Washington, DC

ChicagoBoston

Los Angeles

Houston

Dallas

AtlantaPhiladelphia Denver

San Francisco

SeattlePhoenix

Pittsburgh

Orange CountyDetroit

Minneapolis

Baltimore

Newark

San Diego

Raleigh

San Jose

Cleveland

Oakland

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Population growth, %

Source: CBRE EA, US Census Bureau, Moody’s Analytics, Principal Real Estate Investors, Q2 2018.

Landlords in the US will continue to benefit from current market conditions. All property types have vacancy rates that are at or below equilibrium, meaning that rent growth should at least equal the rate of broader inflation in the economy. Supply conditions, except for high-end luxury apartments, are supportive of further increases in occupancy rates in the near term, despite increasing development activity in select regions of the country.

In the case of both office and industrial, for example, new supply is beginning to emerge but is still largely limited to markets that are well positioned to absorb it, most notably high-tech hubs and strong demographic markets in the south and western regions. Exhibit 8 shows how the demand outlook for top office markets is strongest in both high-tech and demographic growth centers.

Demand & population growth forecast, 2 year average annual % change

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As we continue to navigate the waters of an extended cycle over the next 12 months, investors will need to focus more attention on both market and asset selection when rebalancing their portfolios.

Blue fill indicates a high-tech location quotient >1


Going forward, it is also far less likely that investors will continue to benefit from low interest rates to help push yield compression. Toward the end of 2018, long-term interest rates experienced their most significant increase since the taper tantrum of 2013, which coincided with the end of quantitative easing. What is different this time is that markets are starting to price in stronger growth amid sustained hiring and a series of increasingly positive GDP releases, in

turn, pushing up bond yield expectations. With bond yields moving up, cap rates on core properties that remain as low as before the GFC may start to feel some upward pressure.

As we continue to navigate the waters of an extended cycle over the next 12 months, investors will need to focus more attention on both market and asset selection when rebalancing their portfolios. As far as performance is concerned, the good news is that healthy economic growth is setting the stage for positive rent and income growth across most property types. We are forecasting annual rent growth of near 3% across the board with the exception of industrial, which is forecast to outperform over the next 12 to 18 months due to excess demand for logistics/warehouses as e-commerce continues to provide tailwinds to the sector. On the flip side, brick-and-mortar retail will remain challenged over the same period since it is currently on the wrong side of the digital economy, particularly the over-supplied commodity-type segment of the market.



The distinction between high growth and top performer markets and those markets that have seen fundamental performance plateau is of critical importance late in the cycle. While neither economic or commercial real estate cycles die of old age, they do grow more fragile and become more susceptible over time as imbalances build up and fault lines emerge. This is perhaps best manifest from a space markets perspective in excess supply, but, from an investor perspective, elevated pricing and irrational forward-yield expectations tend to pre-date poor market performance. Although we may not yet be at a tipping point for commercial real estate, much as we cautioned last year, it does appear that the low-hanging fruit have been already been picked in US markets. Put another way, we are past the peak for appreciation returns across the broad swath of markets (Exhibit 9). Performance, synchronized a few years earlier, is becoming less balanced as some markets that were priced for perfection, such as coastal gateways, are giving way to secondary markets with strong demographic growth and solid demand drivers, which increasingly include high-tech industries. These markets will ultimately allow investors to derive higher returns through income growth as the cycle continues to mature.

Exhibit 9: Appreciation will slow, and income will drive returns

1-Year 3- Year 5-Year

-2%

0%

2%

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Apartment Industrial O�ce Retail

Source: NCREIF, Principal Real Estate Investors, Q3 2018.

● 5-year ● 3-year ● 1-year

NCREIF National property index (NPI) appreciation return

App

reci

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, %



European commercial fundamentals are strong

European occupier demand is also benefiting from some of the similar demand tailwinds experienced in the US, such as healthy corporate balance sheets, a firm labor market, and improving business and consumer sentiment. Record low interest rates have been a key driver of strong investment performance too. With Brexit, however, the fortunes of the UK and Eurozone have parted. In the Eurozone, despite significant compression of property yields, the combination of the persistent, low interest rate environment and forecasted rental growth render investment in high quality assets attractive on a relative value basis. Furthermore, despite the prospect of European quantitative easing tapering, the ECB remains committed to maintaining a low interest rate environment. Given these considerations, prime core real estate should be able to offer competitive alternatives to other asset classes, especially fixed income (Exhibit 10).

Exhibit 10: There’s still some relative value in Eurozone commercial real estate

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Retail Yield Industrial Yield O�ce Yield Eurozone 10 yr government bond

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Prime core real estate should be able to offer competitive advantages to other asset classes, especially fixed income.

— Industrial yield — Office yield — Retail yield • • • Eurozone 10 yr government bond

EU-15 Prime yields

Source: CBRE-ERIX, Moody’s Analytics, Principal Real Estate Investors, Q3 2018.



In contrast, the UK occupier market is facing significant questions over short-term demand. For instance, are some businesses going to relocate to other European markets? London, one of the world’s top transaction markets, has seen a marked weakening in commercial property investment activity compared to the strength of 2017. The bid-ask spread has widened considerably, and larger transactions are more thinly supported. Though prime yields remain stable in greater London with the big six regional cities experiencing some yield compression, the expectation going forward is that a weaker economy will pressure occupiers and, hence, be reflected in lower pricing. Like the US, industrial yields continue to compress given the secular tailwinds e-commerce is experiencing with strong demand from occupiers and third-party logistics operators. With pricing very keen in major UK markets but growing ambiguity around occupier demand and capital markets, the relative attractiveness of core real estate is less compelling.

In the Eurozone, sustained economic growth will continue to drive demand for commercial real estate space, eroding existing capacity in large developed cities and generating development opportunities. The pace of demand should remain healthy across all property types with technology and innovation being the unifying themes throughout the year, particularly for office and industrial property types that are at the forefront of secular change globally. The supply response through much of the cycle has been muted during much of the recovery and expansion, allowing landlords to maintain some pricing power in the market and setting up favorable conditions for rent inflation over the next 12 to 18 months (Exhibit 11).

Exhibit 11: Rent growth stays ahead of inflation

Retail Industrial O�ce Combined

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Source: CBRE-ERIX, Principal Real Estate Investors, Q3 2018.

— Retail — Industrial — Office • • • All property


“”

In the Eurozone, sustained economic growth will continue to drive demand for commercial real estate space, eroding existing capacity in large developed cities and generating development opportunities.



REITs: Volatility ahead in 2019

The outlook for slower, synchronized global growth along with removal of monetary accommodation in varying degrees is likely to result in an uptick in volatility in sovereign bond and currency markets, which, in turn, will likely feed into public real estate securities or REITs that appear vulnerable to growth and interest rates.

From a rate/policy perspective, UK/European REITs appear to have an edge since, as of late 2018, dividend spread over sovereign bonds has averaged over 300 bps compared to roughly 100 bps in the US. US REITs have modest multiples, especially relative to growth. They also appear better positioned from an earnings growth perspective (adjusted funds from operations growth of over 5%). In other words, US REITs are priced for growth, while UK/European REITs appear to be priced for ongoing accommodation.

The current US economic growth trajectory and ongoing EU accommodation are likely to come under pressure as fiscal stimulus and the trade- and tariff-driven inventory buildup begins to reverse in the US, while the ending of quantitative easing in Europe could lead to some tightening of financial conditions in the Eurozone relative to expectations. Furthermore, Europe remains exposed to risk events, such as Brexit and public balance sheet issues, such as Italy’s budget deficit, that are yet to be adequately reflected in risk assets.

As a result, a more dynamic weighting appears prudent with a modest overweight to the Eurozone and UK near term, which may well reverse and have to be adjusted as US policy comes under pressure. A more medium- to long-term view suggests that US REITs may offer not only better valuation metrics but also a lower policy trajectory.

Regardless, total returns across both geographies are forecast to be modest relative to recent history as well as more volatile. Risk-adjusted returns are likely to weaken in 2019. From a late-cycle perspective, multi-family and industrial remain interesting as do niche sectors, such as self-storage and data centers. Investors should remain selective in their strategy as the publicly listed real estate sector is likely to be driven by both an entity-specific and idiosyncratic risk/reward profile.

“”

A more dynamic weighting appears prudent with a modest overweight to the Eurozone and UK near term, which may well reverse and have to be adjusted in favor of the US if policy rates come under pressure.

REIT securities are subject to risk factors associated with the real estate industry and tax factors of REIT registration. Fixed-income investment options that invest in mortgage securities, such as commercial mortgage-backed securities, are subject to increased risk due to real estate exposure.


Chapter 3: Key DIGITAL themes to guide long-term strategies

Key DIGITAL themes to guide long-term strategies

1 – Demographics is driving investment opportunities

Significant demographic changes in Europe and the US are creating a variety of real estate investment needs and opportunities. In thinking about the demographic picture of Europe and the US, most forecasts focus on structural ageing of the population. While both continents are clearly ageing, a significant and growing younger demographic is increasingly entering prime workforce years. In fact, demographic changes offer multifaceted opportunities for real estate investors over the coming years. Exhibit 12 identifies some of the key real estate investment opportunities that each age cohort may be able to offer. Investors may be able to adopt multiple strategies to capture opportunities across the demographic spectrum.

Exhibit 12: Demographic cohorts offer a variety of real estate opportunities

Europe United States

Population % Population % Opportunities

Silent Generation (1928-1945) 37.3m 10.9% 25.7m 7.9%

Assisted livingCare housing

Baby Boomers (1946-1964) 78.2m 22.9% 73.5m 22.6% Independent senior living

Generation X (1965-1980) 79.2m 23.2% 61.9m 19.0%

LogisticsRentalResidential

Millennials(1981-1997) 70m 20.5% 76.2m 23.4%

CreativeFlexible office Rental residential

Generation Z (1998-Present) 73.4m 21.6% 82.2m 25.2%

ResidentialCo-working officeOmni-channel retail

Source: US Census Bureau, Moody's Analytics, Eurostat, Principal Real Estate Investors, November 2018.

Old may be gold for real estate investors

Unquestionably, the ageing population of Europe, and increasingly the US, offers considerable investment opportunity to meet this growing need via an array of real estate programs that range from senior living, assisted and care living, to end of life accommodation. Wealthier countries are increasingly seeking private sector alternatives to meet this growing demand, and spending on healthcare is rising (Exhibit 13). The rapid increase in the elderly population is a challenge to future growth but also offers real estate investors the opportunity to tap into the emergence and growth of institutional and private healthcare. In Europe, according to Eurostat, dependency ratios are projected to nearly double, from 53.2% in 2016 to 79.7% by 2080. In the US, healthcare-associated strategies have become an important sector of real estate investment with private sector alternatives a major asset class within residential housing. Europe is likely to follow suit, although there will be differences in how healthcare is addressed and the speed at which private sector solutions will be adopted.



Clearly, the most significant difference is the system of healthcare payment. Europe offers a single-payer system, where the state is by and large responsible for cradle-to-grave healthcare. However, private-payer systems are becoming more prevalent, especially in high-income countries, such as Germany and the Netherlands, with substantial savings ratios that offer a viable healthcare investment strategy for real estate investors. Healthcare expenditure in such high-income countries is beginning to rise and is likely to increase given inherent structural demographics. Healthcare expenditure as a percentage of GDP is quite high in high-income European countries, potentially providing real estate investors an opportunity to meet the growing need for healthcare-related services, whether they are medical offices or an array of assisted living options.

The rise of the millennials and Generation Z

On the flip side, the millennial, Generation Z (population under 21), and Generation X cohorts in both continents will provide a large and growing opportunity set. A number of cities are experiencing significant growth in younger age cohorts, which are going to require a different set of real estate solutions that range from flexible co-working space to rental residential options (Exhibit 14).

Exhibit 13: Healthcare is an increasing share of the global economy

0% 5% 10% 15% 20%

Poland

Ireland

Spain

Italy

United Kingdom

Belgium

Netherlands

Denmark

Austria

Norway

Sweden

Germany

France

Switzerland

United States

Source: OECD, Principal Real Estate Investors, November 2018.

Total health spending, % of GDP (2017)



Amsterdam

Barcelona

Berlin

Copenhagen

DublinFrankfurt

Stockholm

Hamburg

Helsinki

Lisbon

London

Lyon

Madrid

Milan

Munich

Oslo

Paris

Prague

Rome

RotterdamWarsaw

Atlanta

Baltimore

Boston

Chicago

Dallas-Ft. Worth

Denver

Detroit

Houston

Los Angeles

Miami

Minneapolis

New York

Philadelphia

Phoenix

Riverside

San Diego San Francisco

Seattle

Tampa

Washington D.C.

Orange County

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%

Source: Moody’s Analytics, Principal Real Estate Investors, November 2018.*European markets based on gross value added.

Source: Principal Real Estate Investors , November 2018.

Exhibit 14: Demographics will drive economic growth and opportunity

Exhibit 15: Office occupier needs are changingWhile the millennial generation has been well documented, Generation Z is only just beginning to enter the labor market as they reach adulthood but offer significant opportunities to investors through their changing tastes and preferences. This age cohort is currently the largest generation, comprising just over 25% of the US population, and will carry considerable impact as they enter the workforce and rental market in the coming years. One example of how millennials and Generation Z employees will impact real estate is in the use of office space that will increasingly need not only to be ESG compliant but flexible and tailored to individuals (Exhibit 15).

2018

-202

3 Po

pula

tion

grow

th

2018-2023 Gross metro product growth*

Cities showing strong growth

Cities with slower growth

Flexibility

Services

Co-working

Increasing number of smaller firms

Curating spaces to match tastes

Increase in self-employment in the gig economy

Urbanization and demand to be in major metropolises

Co-working

Smaller individual workspaces but larger communal areas

Hot desking and hoteling

Property as a service

Large assets, facing obsolescence requiring major intervention to adapt to new requirements in space

Services

Requirement to sub-divide and reconfigure space

Trend towards shorter leases with break options

Cloud computing and connectivity infrastructre for distance work, work from home , etc.

Heightened political and economic insecurity, because tenants want the ability to react to external factors if needed

Flexibility


2 – Innovation and technology are driving growth

Other secular drivers of long-term growth are innovation and technology driven industries. Young, growing populations are locating to cities that are home to innovative, technology driven growth. Technology is a widely encompassing high value-add growth driver that touches almost every facet of modern life and has been a significant driver of productivity and consumption. Technology is driving wealth and innovation across the globe, but the value creation is increasingly heading to cities that have skilled workforces, strong infrastructure, and supportive institutional frameworks. By all measures, the global technology sector has been in significant growth mode, leading other economic sectors with forecasts supporting the current pace of growth and perhaps even an increase. Global GDP in 2018 is estimated to be roughly $85 trillion according to Moody’s Analytics. Of that, $4.8 trillion, or 5.7% was accounted for by information and communications technology spending according to IDC.1 The current rate of spending on information and communications technology will be more than twice global GDP growth with the addition of emerging technologies such as robotics and augmented/virtual reality. Global growth is projected to be approximately 2.5-3%, which suggests that the technology sector could grow twice as fast as the global economy.

Over the past decade, cities with centers of educational excellence have become the engines of the global economy and are increasingly found across Europe and the US. Incubators of growth industries, cities with ties to highly educated workforces, an attractive quality of life, and a globalized presence have rapidly established themselves as hubs of innovation. A number of these cities have diversified

well beyond the traditional hubs, such as Silicon Valley, Seattle, Boston, and London.

The European Startup Initiative2 ranks London, Berlin, Barcelona, Paris, and Amsterdam as top hub cities due to their role as a crucial connection to the larger European start-up ecosystem. Such cities, with access to talent, younger demographics, and accommodating workspace, should remain attractive long-term nodes of economic growth. The emergence of technology is also a driver in the office market with a push for workplace changes that can cater to a new audience. Flexible office space is already seeing a growing demand in the European office market, specifically in high-tech metro areas, and is expected to persist. The primary growth driver for this sector has been the trend in technology, largely centering on start-up cities, as tenants’ needs continue to change. The shift is challenging for investors, but it can offer opportunities as the sector presents new demand, and new cities continue to place emphasis on innovation.

Increasingly, start-up ventures are beginning to epitomize the direction that technology has taken away from public markets, at least in initial phases as well as in the type of infrastructure and regulatory environment that national governments and cities are willing to provide. In a globally competitive marketplace, cities and regional leaders are finding ways to accelerate the growth of their ecosystems to support technology driven industries that increasingly require new models of development. Many cities are developing specialist innovation and technology ecosystems, which is helping them develop long-term competitive advantages and, in turn, supporting a vibrant real estate environment (Exhibit 16).

1 Source: https://www.idc.com/promo/global-ict-spending/forecast

2 European Startup Initiative, "Startup Heatmap Europe 2017"



Exhibit 16: Many cities are developing specialist innovation and technology ecosystems

North America Europe

Artificial intelligenceSeattle, Silicon Valley, Austin, Houston, Atlanta, Miami, New York, Boston, Montreal, Chicago

Helsinki, London, Frankfurt, Malta

Blockchain Silicon Valley, New York London, Berlin, Zug, Malta, Gibraltar

Advanced manufacturing and robotics

Seattle, Silicon Valley, Houston, New York, Boston, Toronto, Montreal Berlin, Munich

Agtech Silicon Valley, Boston Amsterdam

Fintech Silicon Valley, Chicago, Atlanta, New YorkParis, Amsterdam, Stockholm, Berlin, Frankfurt, London, Zug, Munich, Malta

Health and life sciencesVancouver, Edmonton, Toronto, Boston, New York, Silicon Valley, Phoenix, Austin, Houston, Tampa Bay

London, Berlin, Helsinki, Munich, Amsterdam, Paris, Barcelona

Cybersecurity Toronto, Silicon Valley, Phoenix, Boston, New York, Ottawa The Hague, Berlin, Prague, Frankfurt

Cleantech Vancouver, Seattle, Silicon Valley, Los Angeles, Austin, Boston Stockholm

Edtech Silicon Valley, Phoenix, Boston, New York Paris

Gaming Vancouver, Silicon Valley, Los Angeles, Montreal, Quebec CityStockholm, Helsinki, London, Barcelona, Malta

Adtech Silicon Valley, Los Angeles, Phoenix, Atlanta, Tampa Bay, Chicago, New York

London

Source: Start-up Genome, Global Startup Ecosystem Report, 2018.

“”

Global GDP in 2018 is estimated to be roughly $85 trillion. Of that, 5.7% was accounted for by information and communications technology spending according to IDC.


Global start-up ecosystem rankings



3 – Globalization increases long-term economic growth potentialAn increasingly global economy is interconnected by technology, labor, and capital, where cities are competing for all three more and more. Globalization may be currently facing challenges, but the growth of trade and services has been a major driver of the global economy and led to the rise of key trading hubs. Innovation-led growth has been driven by a global marketplace for goods and services. Since the signing of the General Agreement on Tariffs and Trade (GATT) and the subsequent adoption of the World Trade Organization (WTO), global trade has grown by a significant level (Exhibit 17).

Looking ahead, the globalization of goods and services is expected to be driven by forces of technology and changing consumer and corporate demand. E-commerce, with its attendant supply chain requirements, is a powerful, secular driver of globalization and is forecast to grow at a significant pace. Increasingly, high-tech manufacturing with its specialized centers of excellence and globally integrated supply chains will become the driving force of globalization.

Changes in the structure of the global economy have been facilitated by increases in technology and the willingness of developed markets to implement an array of free-trade agreements in the past three decades. As economies have become more global, this has allowed stronger and more synchronized growth as well as moderating inflation as a comparative advantage has helped disperse cost pressures by alleviating the binding constraints of labor and materials costs witnessed in previous cycles. As a result, the emergence of the global supply chain has allowed trading partners to connect and track activity in a manner not previously possible, which has provided stability and development opportunities within commercial real estate, particularly in the industrial sector that is undergoing a significant transformation.

Exhibit 17: Globalization has been an engine of global growth

European Union United States World

0

50

100

150

200

250

300

350

400

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

Source: World Bank, Principal Real Estate Investors, November 2018.

Glo

bal t

rade

as

% o

f GD

P (In

dex

1960

= 1

00)

— European Union — United States — World


Chapter 4: Short-term real estate opportunities

In suggesting our tactical views on relative value, our underpinning theme to investors concerns a focus on investments that can generate income and be less reliant on capital appreciation over the next 12 to 18 months, regardless of whether they are debt or equity focused. Growth in capital values will be limited, especially in markets where interest rates are forecast to move higher. All else being equal, we believe 2019 will be a good environment to be a lender. Moreover, market selection will emerge as a key to outperformance as a smaller set of cities will have the potential to outperform aggregate trends. Stock picking, not beta plays, will drive excess returns relative to core benchmarks. Increasingly, investment strategies for 2019 will require (1) above average growth; (2) sufficient risk premia upfront to absorb emerging uncertainty; and (3) strategic emphasis on DIGITAL drivers for relative outperformance.

Short-term real estate opportunities Investors looking to assemble a portfolio that embeds structural drivers of demand and growth should consider some of the DIGITAL themes discussed in the previous chapter. Many of these trends are at an early stage, allowing investors the opportunity to capture the long and productive growth curve expected. But short-term performance matters, and investors have enjoyed several years of outsize growth (Exhibit 18) and are beginning to ask questions on how best to find relative and absolute value in a late-cycle market. The good news is that real estate remains a local business. Moreover, markets are at different points in the economic and capital market cycle and, thus, offer investors the opportunity to toggle and tactically tilt their portfolios in order to maximize relative value. The ability to invest across debt and equity offers investors additional flexibility.

Exhibit 18: It’s been a good run for real estate

1-year 3-year 5-year 10-yearTotal Return Total Return Total Return Total Return Since Inception*

US 7.2% 7.8% 9.6% 6.4% 9.2%

Eurozone 9.3% 8.6% 7.3% 5.0% 6.2%

Asia Pacific 7.7% 8.1% 8.3% 6.2% 7.5%

Global Bond Agg. -2.0% 1.5% 0.3% 3.2% 5.5%

Global Equities 11.2% 13.5% 9.3% 8.6% 7.4%

REITs 4.6% 7.2% 6.3% 6.9% 7.4%

Source: NCREIF, MSCI-IPD, Barclays, Bloomberg, Principal Real Estate Investors, November 2018.

*Inception Dates: US - 1978, Eurozone - 2000, Asia Pacific - 2005, Global Bond Agg. - 1990, Global Equities - 1987, and REITs –1989

● Private real estate



Real estate equity opportunities

Core: More positive on the Eurozone, focus tactically on industrial and residential

Exhibit 19: Risk premia between the US and Eurozone diverges

0

50

100

150

200

250

300

350

400

450

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: MSCI-IPD, US Federal Reserve, European Central Bank, Moody’s Analytics, Principal Real Estate Investors, November 2018.

*LT Avg. since 2001

Bas

is p

oint

s (b

ps)

— Eurozone — US • • • US LT Avg* • • • Eurozone LT Avg*

Cap rate spread to 10-year bond yields

Core equity real estate has been a great pocket of opportunity for both European and US investors over the past five years. Enabled by record low interest rates, core asset values have appreciated across most markets but nowhere more so than global gateways, which have seen a strong inflow of capital. In 2019, while occupier markets are expected to stay strong in both the US and Europe, though there is growing uncertainty around the UK, the relative attractiveness and performance in core strategies will largely be determined by capital markets, more specifically cost of debt and risk premia investors will require over bond yields, as well as the ability to push income growth.

And here, the divergence in monetary policy stance between the US and Eurozone will become interesting. Higher interest rates in the US are likely to start to increase cost of debt and also further narrow the spread between borrowing costs and real estate capitalization rates. To compensate, investors may require an increase in risk premia, such as higher real estate yields, especially in core assets, which have seen a significant

run up in values, and, thus, cap rate compression. Going forward, core investment performance is likely to be income-growth driven and, hence, will decelerate from recent trends.

The Eurozone and the UK are both further behind monetary policy tightening and are likely to keep policy looser than the US in 2019. Bond yields may push modestly higher in Europe and the UK, but a lack of sustained inflation is likely to keep interest rates anchored at very low levels and allow core investors access to still accretive debt. Above-average risk premia offered by real estate could also allow investors the luxury of letting bond yields drift up, as has been the case in the US, without an offsetting need to see property yields shift up (Exhibit 19). In our view, this differential in the interest rate environment should provide core real estate investors in Europe the room to modestly outperform the US. For offshore investors, the relatively low cost of hedging European versus US strategies may also offer some short-term benefits.



Given the beta nature of core real estate strategies, we believe investors should maintain focus on property types that are benefiting from secular DIGITAL demand drivers identified in this report. Property types we continue to believe offer the most compelling risk-adjusted opportunities are the logistics and for-rent residential sectors. Logistics continue to benefit from the structural change impacting retail via e-commerce and the resulting demand for modern warehouse space. Globalization, with its integrated supply chain models, is also creating strong demand for modern logistics space.

Similarly, the for-rent residential sector is undergoing a secular increase in demand. An ageing demographic profile is creating opportunities across various housing strategies, such as senior housing and assisted living. Additionally, the erosion of single-family home-price affordability in gateway markets in Europe and the US is creating opportunities for workforce housing investments, although the residential rental market is traditionally less institutional in Europe. That said, markets with younger population bases or with older “empty nester” demographic clusters could also offer attractive opportunities for multifamily strategies.

Exhibit 20: Here is our core real estate outlook for US and Europe

United States Europe

Cap Rates Below long-term average Below long-term average

Monetary Policy Tightening with risks from an increasingly hawkish FedAccommodative but potential for long-dated bond yields to shift higher

Rent Growth Largely tied to inflation; higher in logistics/warehousesLagging US cycle with some markets offering strong rent growth

Total Returns Tapering, primarily income returns Some capital appreciation along with rent growth with EU modestly outperforming US

Source: Principal Real Estate Investors, November 2018.

“”

In 2019 the relative attractiveness and performance in core strategies will largely be determined by cost of debt and income growth.


Value-add and opportunistic: Market and property selection key

Absolute return investors will need to tilt towards strategies that push the risk curve up to generate outsized performance. Geographic and capital market variances mean that such opportunities do exist but in very selected pockets. In the US, steeper cost of construction and mezzanine financing will make higher leverage strategies more challenging to execute, and so market and property type selection will be even more important in executing higher-risk strategies. In Europe, zoning regulations create higher barriers to entry but where selective development strategies may deliver opportunistic rates of return.

For investors who wish to stay higher up the risk curve, we believe the focus should be on property types that have clearly discernible growth drivers and where financial engineering alone is not the key driver of investment performance. Two property types appear best positioned to see strong tenant demand over the short term: industrial, which continues to benefit from secular tailwinds, and multi-family, which caters to underserved median housing in the US and a growing private-renter pool in Europe. Development yield to cost in both property types appears to offer sufficient excess risk premia to offset “exit cap rate” risks, so investors may want to selectively consider “merchant build” models to achieve opportunistic returns. Both property types also have a shorter delivery window, which can help mitigate some lease-up risks.

Investors may also find some opportunities in core “plus” strategies where the bulk of investment performance is driven by active real estate asset management but with some added growth being delivered by higher levered strategies, such as development. The bulk of core plus performance is mostly driven by the ability to push rents by refurbishment and re-leasing strategies into strong occupier markets. A core plus strategy may offer investors the opportunity to generate higher absolute returns without taking on the level of risk a purely opportunistic play may entail.

Across our real estate equity strategies over the short term, we have identified the logistics and residential sectors as those with the most ability to generate attractive rents but also provide bedrock for long-term holdings. These property types are at the heart of some of the DIGITAL changes occurring in Europe and the US and should form the basis of long-term sustainable investment performance.

“”

A core plus strategy may offer investors the opportunity to generate higher absolute returns without taking on the level of risk a purely opportunistic play may entail.


The past few years have been good for real estate lenders, and we expect this to be the case across Europe and the US, especially as interest rates rise. Short-term real rates in the US are near 0% and are expected to turn positive in 2019 after being steeply in negative territory in 2017. They are still sharply negative in the EU, but this is expected to change as the ECB begins to reverse excess accommodation, and longer tenor rates will likely lead this trend relative to policy rates. For debt investors, some interesting opportunities should arise across the yield curve, though a higher, and possibly steeper, US curve could tilt the balance in favor of US debt strategies.

For long-term asset liability matching lenders, such as insurance companies, a tick up in interest rates could make it an attractive environment to be a lender. Perhaps the most simplistic explanation is that higher rates stand to benefit core lenders and life companies through increased margins. From a real estate lender perspective, higher rates allow mortgage debt to deliver attractive relative yields and, thereby, enhance return on capital for asset liability matching lenders/life insurance companies, which is something that has been an increasingly difficult task in an extraordinarily low-rate environment.

With regards to high-yield debt investments, the mortgage credit curve is similar across the US and EU for higher quality investment grade—relatively flat spreads for loans with LTVs of 40% to 55%, but then steepening sharply as we approach high yield, especially in the US. The trajectory in the EU suggests similar investor sentiment, reflecting heightened concerns regarding valuation levels and potential collateral vulnerability to higher policy rates and/or economic weakness.

These strategies have the potential to offer attractive yield relative to corporate bonds as well as yield to maturity that is attractive relative to unlevered, private real estate equity, especially on a risk-adjusted basis. Furthermore, subordinate debt investment strategies offer attractive flexibility in the current environment, and during a potential late cycle, as investors can move up the credit curve in response to weakening economic conditions and/or wider credit spreads.


Real estate debt opportunities




Conclusions and opportunities

Under our base case for 2019, the global economy enters slower but more synchronized growth. The US expansion reaches a historical milestone, which keeps the Fed on track to raise short-term interest rates and, thus, keeps monetary policy divergent with the Eurozone and UK. Commercial real estate should continue to benefit from strong occupier demand, but investor markets may start to behave differently as the cost of capital and bond yields diverge. Political and policy uncertainty are clear downside risks for investors, and our bias is to be more defensively positioned in the capital stack, so a modest tilt to debt over equity, as well as focusing on income versus capital appreciation.

Within core real estate, we see modestly better relative value in the Eurozone compared to the US, predicated on strong occupier demand and a more favorable capital market outlook. We are less optimistic on the UK where Brexit challenges are starting to feed through into tenant demand and capital market conditions. In debt, we believe the US offers some interesting opportunities given the expected lift in the Libor curve and the strong demand from an array of borrowers. Core mortgages may finally begin to address some long-term asset liability needs for lenders. Subordinate lending in the US may also offer more attractive relative value compared to the Eurozone and the UK. We have a clear preference for industrial, such as logistics/warehouses, and for residential rental assets across all geographies. For public market strategies, we have a near-term bias to the Eurozone and UK, which offer a more favorable spread to long-term bond yields. The areas we consider as key short-term opportunities are shown in Exhibit 21.

Exhibit 21: In our view, these are the key short-term opportunities

Private Equity Private Debt

Core Value-Add Opportunistic Public Equity Senior Sub-debt/Mezz

Eurozone

UK

US

Source: Principal Real Estate Investors, November 2018.Over weight

Neutral weight

Under weight


Investment risks

Potential investors should be aware of the many risks inherent to owning and investing in real estate, including: adverse general and local economic conditions that can depress the value of the real estate, capital market pricing volatility, declining rental and occupancy rates, value fluctuations, lack of liquidity or illiquidity, leverage, development and lease-up risk, tenant credit issues, circumstances that can interfere with cash flows from particular commercial properties such as extended vacancies, increases in property taxes and operating expenses and casualty or condemnation losses to the real estate, and changes in zoning laws and other governmental rules, physical and environmental conditions, local, state or national regulatory requirements, and increasing property expenses, all of which can lead to a decline in the value of the real estate, a decline in the income produced by the real estate, and declines in the value or total loss in value of securities derived from investments in real estate.

Direct investments in real estate are highly illiquid and subject to industry or economic cycles resulting in downturns in demand. Accordingly, there can be no assurance that investments in real estate will be able to be sold in a timely manner and/or on favorable terms.

As a general matter, the strategy entails a high degree of risk and is suitable only for investors for whom such an investment is not a complete investment program and who fully understand and is capable of bearing the risks associated with such strategy.



About Principal Real Estate Investors

Principal Real Estate Investors is the dedicated real estate investment group within Principal Global Investors. Our real estate capabilities span the spectrum of public and private equity and debt investments. Our specialized market knowledge, dedicated and experienced teams around the globe, and extensive connections across all four real estate quadrants allow us to maximize opportunities and find the best relative value on behalf of our clients.

Top 10 manager of real estate1

More than six decades of real estate investment experience2

$74.5 billion in real estate assets under management3

More than $80 billion in real estate debt and equity transactions over the past decade

1 Managers ranked by total worldwide assets (net of leverage), as of 30 June 2018. “Largest Real Estate Managers”, PENSIONS & INVESTMENTS, 1 October 2018.

2 Experience includes investment activities beginning in the real estate investment area of Principal Life Insurance Company and continuing through the firm to present.

3 As of 30 September 2018.

“”

Clients get the best of both worlds with us: the focused experience of each quadrant team combined with the insights and potential value added from cross-team collaboration.


Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of November 2018. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. This material contains general information only and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account.

Subject to any contrary provisions of applicable law, Principal Global Investors and its affiliates, and their officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy and any responsibility arising in any way (including by reason of negligence) for errors or omissions in this document or in the information or data provided in this document.

Past performance is no guarantee of future results and should not be relied upon to make an investment decision. Investing involves risk, including possible loss of principal. All figures shown in this document are in US dollars unless otherwise noted.

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

This document is issued in:

• The United States by Principal Global Investors, LLC, which is regulated by the U.S. Securities and Exchange Commission.

• Europe by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London, EC2V 7JB, registered in England, No. 03819986, which has approved its contents, and which is authorized and regulated by the Financial Conduct Authority. In Europe, this document is directly exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients (all as defined by MiFID). In connection with its management of client portfolios, Principal Global Investors (Europe) Limited may delegate management authority to affiliates that are not authorized and regulated within Europe. In any such case, the client may not benefit from all protections offered by rules and regulations enacted under MiFID. This material is not intended for distribution to, or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

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This document is intended for sophisticated institutional and professional investors only and not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

Principal Global Investors and its directors or employees advise that they and persons associated with them may have an interest in the securities and/or financial products discussed herein and that they may receive brokerage, commissions, fees and other benefits and advantages, whether pecuniary or not and whether direct or indirect, in connection with such securities and/or products.

©2018 Principal Financial Services, Inc. Principal, Principal and symbol design and Principal Financial Group are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company. Principal Global Investors is the asset management arm of the Principal Financial Group. Principal Real Estate Investors is a dedicated investment manager for Principal Global Investors.

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Inside Real Estate · 2020. 5. 5. · Inside Real Estate 2019 3 Executive summary Key themes Slower, synchronized global growth – Global growth has peaked, and, if 2018 is remembered