the BRIEFING: September 2013

THE NATIONAL ECONOMY AT A GLANCESEPTEMBER 2013

the BRIEFING

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� Overall job growth and retail sales continue to be anemic

� Corporate earnings growth has also moderated in the mid-single digit range

� Overall economic climate will continue to restrain hiring, business investment and retail sales in the near term

The Federal Reserve’s surprise decision to delay, for at least a month, its “tapering” plan shows a lack of confidence in the economy going into 4Q13.

THE ECONOMY

$12.8BWill be invested in chemical plants in 2015, compared to $4.8 bn this year

40%Increase in U.S. oil and gas job growth since 2007 vs. 1% overall private industry job growth

2.57MBarrels of oil Texas produced a day in 2013 compared to 1.14 million in 2010

THE ENERGY BOOM CONTINUES!

3.9MDirect and indirect jobs will be created by 2025

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� FedEx, often seen as a bellwether, has lowered earnings expectations for the coming year by 20%

� 30-year mortgages have spiked as high as 4.80% from 3.60% at the end of April; now approximately 4.35%

� In the face of rising rates, the Mortgage Bankers Association reported mortgage applications dropped 13.5% the week of Sept. 6

� Refinancings are down are at the lowest level since 2009, 71% from peak in May

� Home purchase applications have also fallen, but are still running 7% ahead of last year

Banks are stronger than ever, the auto industry has become a major U.S. economic engine and the European economy is finally showing some signs of a thaw. The yield on 10-year Treasuries has receded back below 2.65%.

THE ECONOMY, cont.


� Recent improvements in rates of about 50 bps due to postponement of “tapering” should provide some relief in underwriting housing affordability

� Big companies increasingly closing their own health plans and moving retirees to exchanges created by the 2010 Affordable Care Act

� Basically transferring cost of healthcare risk to the employee

� Similar to shift from defined benefit pension plans to 401(k) plans

� About 44$ of companies plan to stop administering health plans for former employees over the next two years

THE ECONOMY, cont.


� Governments are rushing to shore up their currency

� Impact has been deep and broad: Indonesia, Thailand, the Philippines, India,Brazil, Turkey, South Africa, Russia, Venezuela, Ukraine

� Emerging markets now represent approximately 50% of the world economy

� Zero rates and quantitative easing were the cause of the dollar liquidity flooding these countries

� Biggest reason why net capital flows into emerging markets doubled from $4 trillion to $8 trillion after 2008 as investors searched high and low for yield

As fears of tapering strengthened the dollar, foreign capital started fleeing developing countries — an estimated $400 bn — causing some fear of a replay of the Asian currency crisis of 1997-98.

CHALLENGES


� Short run 10-year Treasury rates have fallen below 2.65%, providing some relief from an earlier spike to almost 3%

� Led to record bond sales by investment-grade companies and has also resulted in a flight from emerging market bond and stock markets

� Investment-grade companies sold $145.7 bn of corporate bonds in September, the largest amount in the 18 years that records have been kept

� Buoyed by largest corporate bond deal on record: Verizon Communications’ $49 billion bond sale

Investors continue to be hungry for returns after several years with benchmark rates near zero. Despite the Fed’s recent postponement of “tapering,” there is a general anticipation of higher interest rates to come.

CAPITAL MARKETS


� In light of uncertainty, everything seems to be going through a re-pricing

� However, even at 3% the 10-year Treasury would be priced in the historically low range

� 10-year Treasury rates vs. inflation suggests a 10-year Treasury rate will be between 3% and 4%

� 55-year, 10-year Treasury average note about 2% over inflation

� Current inflation 0.1% monthly CPI and 1.53% annualized

� Outlook for inflation over the coming decade has come down from 2.6% to 2.1%

CAPITAL MARKETS, cont.


� Rotation out of core into increasing tolerance for risk and search for higher yield

� Opportunistic/value-add strategies accounted for 43% of commitments in 2Q12 vs. 62% in 2Q13

� Pledges to core strategies fell from 50% to 28% over the same period

� Overall pledges are flat at $13.5 bn for 1H13 vs. 1H12

� 1Q13 commitments were up 23%, but 2Q13 commitments dropped significantly

� 182 commitments, up from 144 a year earlier

� Shift away from separate accounts back to closed-end commingled funds, which increased to 55% of first-half commitments from 44% for full-year 2012

CRE continues to provide an attractive return to both institutional and non-institutional investors.

COMMERCIAL REAL ESTATE


� Prequin reports that AUM for the private equity industry has reached an all-time high of $335 bn total of invested or dry powder

� A 57% increase from $214 bn reported Dec. 2009

� Dry powder has risen to $98 bn from $79 bn in Dec. 2012

� AAA CMBS trading at 105 bps over swaps notes after rising to more than 125 bps

� The benchmark class of the recent Cantor-Deutsche deal priced at 128 bps over swaps well above the 72 bps low this year

� The week ending Sept. 20 saw five CMBS offerings totaling $3.8 bn

� The latest, a $1.1 bn offering by Ladder Capital, Deutsche Bank and Natixis is expected to price 103 bps over swap rates

CMBS rally with nearly $5 bn sold in first two weeks of August after a plunge in CMBS pricing slowed issuance in June and July to a standstill. Projections of total issuance for CMBS in 2013 are being revised downward from $100 bn to $70 bn.

COMMERCIAL REAL ESTATE, cont.


� REITs remain highly active in M&A

� American Tower Corp $4.8 bn merger with Global Tower Corp

� Parkway Properties buys Thomas Properties for $1.2 bn with meaningful recap from TPG

� Cousins buys $1.1 bn portfolio in Texas

� Cabot announces sale of virtually all its $1.5 bn assets to Liberty Property Trust

� Blackstone is listing Hilton for an IPO and is also expected to list LaQuinta

� GE has agreed to sell 80 multifamily assets valued at $2.7 bn to Blackstone

� Regency Centers to sell seven shopping centers to Blackstone, $332 mm value

� Westfield sale of $1.6 bn secondary-market shopping malls to Starwood Capital

� Brookfield to buy IDI/Industrial Development International from Kajima for $1.1 bn

� ARC/American Realty International entities acquires 300 net-leased properties from Inland for $2.3 bn

COMMERCIAL REAL ESTATE, cont.

the BRIEFING is an aggregation by Tom McNearney, Transwestern chief investment officer, of other articles and reports. Tom leads Transwestern’s capital market efforts for development and investment nationwide. Tom also serves on the firm’s investment committee and board of directors, and he directs the execution and expansion of the firm’s principal investment activities across the country.

DISCLAIMERCopyright © 2013 Transwestern. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. The information contained in this report was gathered by Transwestern from various sources believed to be reliable. Transwestern, however, makes no representation concerning the accuracy or completeness of such information and expressly disclaims any responsibility for any inaccuracy contained herein.

the BRIEFINGTHE NATIONAL ECONOMY AT A GLANCE

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Real Estate

the BRIEFING: September 2013