March 05, 2013

Economics Group
Special Commentary
Mark Vitner, Senior Economist
mark.vitner@wellsfargo.com (704) 410-3277

Anika Khan, Senior Economist

anika.khan@wellsfargo.com (704) 410-3271

Sara Silverman, Economic Analyst

sara.silverman@wellsfargo.com (704) 410-3281

Commercial Real Estate Chartbook: Quarter 4

Broadening Economic Gains Are Boosting Commercial Real Estate
Any worries about the surprisingly sluggish fourth quarter real GDP growth should be more than offset by stronger economic data elsewhere. Job growth has picked up and gains over the past two years were significantly stronger than first reported. While the 0.1 percent rise in fourth quarter real GDP was not much to look at, it had quite a bit of personality. Most of the weakness was due to a colossal plunge in defense outlays. Inventories grew less rapidly. Underlying domestic demand in the private sector remained relatively solid, with final sales to domestic purchasers climbing at a 3.3 percent annual rate. Our early read on first quarter real GDP looks for overall growth to bounce back in line with underlying domestic demand. The case for stronger economic growth has become more compelling. Years of easy monetary policy have helped revive the housing market, stabilize commercial real estate values and triggered an increase in merger and acquisition activity. Consumer spending also appears to be weathering the most recent round of tax increases, although the hike in the social security payroll tax will likely cut into first quarter spending. Energy exploration and production are still booming and the tech sector continues to post strong gains. Even the international situation appears to be improving. Chinas economy is ramping back up, as are many of the emerging economies throughout Asia. Latin America appears to have stabilized, while Eurozone economies are expected to stabilize this year and produce less of a drag on U.S. growth. With the economic recovery on surer footing, operating fundamentals are poised to improve further. The strong recovery in the apartment market should gradually spill over into other areas. Gains in single-family construction will boost prospects for the industrial market, as demand from subcontractors and building materials suppliers revives. Demand for office and retail space will improve less dramatically overall but a handful of markets should see much stronger gains. Figure 1
Commercial Real Estate Vacancy Rates
Percent 24% Office Vacancy Rate: Q4 @ 17.1% Industrial Vacancy Rate: Q4 @ 8.4% Retail Vacancy Rate: Q4 @ 10.7% Apartment Vacancy Rate: Q4 @ 4.5% 24%
40% 30%

The case for stronger economic growth has become more compelling.

Figure 2
Real Nonresidential Construction
Bars = CAGR Line = Yr/Yr Percent Change 40% 30% Forecast

The strong recovery in the apartment market should gradually spill over into other areas.

20%

20%
20% 20%
10% 0% -10% -20% -30% Nonres Construction - CAGR: Q4 @ 5.8% -40% -50% 2002 2004 2006 2008 2010 2012 2014

16%

16%

10% 0%

12%

12%

-10% -20% -30%

8%

8%

4%

4%

-40% -50% 2000

Nonres Construction - Yr/Yr Percent Change: Q4 @ 4.7%

0% 1994

0% 1996 1998 2000 2002 2004 2006 2008 2010 2012

Source: Real Capital Analytics, Reis, Inc., U.S. Department of Commerce and Wells Fargo Securities, LLC

This report is available on wellsfargo.com/economics and on Bloomberg WFEC

Commercial Real Estate Chartbook: Quarter 4 March 05, 2013

WELLS FARGO SECURITIES, LLC ECONOMICS GROUP

Paving the Way Toward a Full-Fledged Recovery

The combination of steadily improving operating fundamentals, low interest rates and aggressive monetary easing are paving the way toward a sustained recovery in commercial real estate. Exceptionally low interest rates and the expectation that long-term interest rates will remain low for some time to come are pushing investors out to find alternative income flows. Apartments were the first beneficiary, and the improvement in operating fundamentals has triggered a building boom in a handful of markets where job growth is expected to be relatively strong. The surge in investment into the apartment market is spilling over into other product categories, even though the underlying improvement in operating fundamentals has been far less dramatic. The recovery in the apartment market may be further along than many currently believe. Apartment investors are riding a huge wave of improving operating conditions but the recovery may be further along than many currently believe. Vacancy rates have fallen 0.7 percentage points over the past year to 4.5 percent and are in a zone that has generally been supportive of sustained rent increases. We have continuously raised a cautionary flag on the apartment market. There has been a surge in development in red-hot markets, such as Seattle, Austin and Raleigh. While underlying economic conditions remain positive in these markets, the rush of simultaneous development in key submarkets of these metro areas, as well as a handful of others, may lead to some indigestion as properties come to market later this year and in early 2014. Overall, the operating fundamentals for rental housing will likely remain positive for some time to come. There is no doubt that renters, and rental housing, are playing a larger role in the economic recovery. The number of rental households has increased by 5.3 million over the past six years, while the number of homeowners has fallen 1.3 million. This period, however, has been one of the roughest stretches for homeownership in U.S. history. While this exceptionally challenging environment has not ended yet, it is winding down. We believe the talk of a permanent shift toward renting homes instead of buying them is considerably overblown. The rental pool has clearly increased, as mortgage underwriting has strengthened and income growth has struggled. Neither is a permanent condition, however. We expect homeownership to become more attractive in coming years, as job and income growth improves and mortgage underwriting criteria normalize. Traditional retailers face a number of headwinds. With single-family housing struggling, retail properties have tended to languish. Traditional retailers face a number of headwinds, including lackluster job and income growth, the recent rise in the payroll tax, soaring gasoline prices and intense competition from online merchants. Vacancy rates in the retail sector fell just 30 bps in 2012 and remain relatively high at 10.7 percent. There are a few bright spots. Higher-end retailers are holding up relatively well, benefitting from the rise in the stock market and the rebound in home prices. Retail chains that cater to the middle market are not faring as well, however, and some have been downsizing. Bigbox stores are still trying to come up with a winning formula to compete with online competitors and are also scaling back. Even grocery chains are under pressure to consolidate. While e-commerce has provided new competition to the already-struggling retail sector, it has simultaneously breathed life into the warehouse sector. Warehouse vacancy rates have fallen 0.9 percentage points in the past year to 8.4 percent, marking the lowest vacancy rate since the third quarter of 2008. The improvement is being driven by growth at online retailers, data centers and a turnaround in basic manufacturing. The downward trend in vacancy rates should continue as net absorption will likely outpace the tepid supply of new space currently being developed. Demand for office space is gradually reviving. While vacancy rates remain stuck in the upper teens, absorption has remained modestly positive for the past eight quarters. Office employment growth has clearly picked up and the annual employment revisions show that job growth has been stronger than previously thought over the past two years. Even with the increase, office employment remains 693,000 jobs below its July 2007 peak. Moreover, employers are still actively working to reduce the amount of space needed per worker, particularly in higher-cost office markets. Office employment growth will likely match this past years 2.1 percent pace, led by gains in key technology and energy hub markets. On the flip side, federal budget cuts and the continuing consolidation of the financial sector are taking a toll on areas such as Washington DC, New York City and northern New Jersey.

Commercial Real Estate Chartbook: Quarter 4 March 05, 2013

WELLS FARGO SECURITIES, LLC ECONOMICS GROUP

Nonresidential Construction Spending

Private nonresidential construction has steadily increased over the past two years, but remains well below its pre-recession peak. Recent policy uncertainty has stalled capital spending plans somewhat, but improving fundamentals during the year should boost outlays modestly in 2013. Lodging and commercial, which include autos, retail and warehouses, will likely see the largest gains. Architectural billings, which are a forward-looking indicator for construction activity, have remained in expansionary territory for the past five months, with improvement in all components. A few firms even noted that they are seeing a pickup in speculative projects due to improving economic conditions and pent-up demand.
Private Nonresidential Construction Spending
Both Series are 3-Month Moving Averages 50% 50%

Priv. Commercial and Lodging Cons. Spending

Both Series are 3-Month Moving Averages 80% 80%

60%

60%

40%

40%

20%

20%

0%

0%

-20%

-20%

-40%

3-Month Annual Rate: Jan @ -2.9% Year-over-Year Percent Change: Jan @ 7.4%

-40%

-60% 94 96 98 00 02 04 06 08 10 12

-60%

PPI: Materials & Components for Construction

Quarter-over-Quarter Percent Change 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

40%
30% 20%

40%
30% 20%

10%
0% -10% -20% -30% -40% -50% 94 96 98 00 02 04 06 08 10 12

10%
0% -10% -20% -30%

-1.0%
-2.0% Materials & Components for Construction: Q4 @ 0.4% -3.0% 2005 2006 2007 2008 2009 2010 2011 2012

-1.0%
-2.0% -3.0%

3-Month Annual Rate: Jan @ 29.6%

Year-over-Year Percent Change: Jan @ 11.6%

-40% -50%
65

Institutional and C&I Architecture Billings

Seasonally Adjusted 65 60 55 50 45 40 35 30 25 96 98 00 02 04 06 08 10 12

Private Transportation Construction Spending

Both Series are 3-Month Moving Averages 120% 120%

60 55 50 45 40 35 30 25

100%
80% 60%

100%
80% 60%

40%
20% 0% -20% -40% -60% -80% 94 96 98 00 02 04 06 08 10 12 3-Month Annual Rate: Jan @ -31.4% Year-over-Year Percent Change: Jan @ -0.5%

40%
20% 0% -20% -40% -60% -80%

Institutional Billings: Jan @ 50.2 Comm. and Industrial Billings: Jan @ 52.0

Source: American Institute of Architects, U.S. Dept. of Commerce, U.S. Department of Labor and Wells Fargo Securities, LLC

Commercial Real Estate Chartbook: Quarter 4 March 05, 2013

WELLS FARGO SECURITIES, LLC ECONOMICS GROUP

Commercial & Multifamily Mortgages Outstanding

Commercial Mortgages Outstanding

Commercial/multifamily mortgage debt outstanding rose 0.3 percent in the third quarter, which is an increase of $6.6 billion. Agency and GSE portfolios and MBS showed the largest gains. The largest decrease was in CMBS, CDO and other ABS issues, which fell by $9.5 billion, a 1.7 percent decline. Finance companies and private pension portfolios also shed some of their holdings. Multifamily holdings also continued to grow. Lending standards remain tight, with the latest Senior Loan Officer Survey showing only a small fraction of domestic banks easing standards on CRE loans over the past three months. Commercial real estate delinquency rates, including land development loans, continue to come down and now sit at 4.6 percent in the third quarter.

Year-over-Year Percent Change 24% 24% 20%

20%
16%
12% 8% 4% 0% -4% -8% Commercial & Multifamily Mortgages: Q3 @ -1.3% -12% 68 72 76 80 84 88 92 96 00 04 08 12

16%
12% 8% 4% 0% -4% -8% -12%

Commercial Real Estate Delinquency Rates

Percent 14% Commercial Real Estate Delinquency Rates: Q3 @ 4.6% 12% 12% 14%

Commercial Mortgages Outstanding

Q3 2012

Other 12% Commercial Banking 56%

10%

10%

8%

8%

6%
Life Insurance Companies 13%

6%

4%

4%

2%

2%

0%
Securitized 22%

0% 91 93 95 97 99 01 03 05 07 09 11

Net Percent of Banks Tightening Standards

Commercial Real Estate Loans 100% 100% Commercial Real Estate Loans: Q1 @ -13.4% 80% 80%

Net Percent of Banks Reporting Stronger Demand

Commercial Real Estate Loans 60% 60%
60%

60%

40%

40%
40% 40%

20%

20%
20% 20%

0%

0%
0% 0%

-20%

-20%
-20% -20%

-40%

-40%
-40% 1990 -40% 1994 1998 2002 2006 2010

-60% Demand for Commercial Real Estate Loans: Q1 @ 40.3% -80% 1995 1997 1999 2001 2003 2005 2007 2009 2011

-60%

-80% 2013

Source: Federal Reserve Board and Wells Fargo Securities, LLC

Commercial Real Estate Chartbook: Quarter 4 March 05, 2013

WELLS FARGO SECURITIES, LLC ECONOMICS GROUP

CRE Property Fundamentals

Commercial real estate fundamentals are firming, with apartment demand still driving much of the activity. Apartment rent growth remains solid, but the pace is moderating. Indeed, five metros saw a decline in rent over the quarter including New York. That said, we expect apartments to post additional gains through the next two years, as supply catches up with robust demand. Warehouse space should also perform well over the year, as online retailers, such as Amazon, continue to expand. Retail will continue to lag other property types, as consumer spending sputters amid sluggish economic growth, higher taxes and continued policy uncertainty. With the Fed on hold, the all-property spread between cap rates and the 10-year U.S. Treasury is the highest on record (dating back to 2001).

CRE Cap Rates vs. 10-Year Treasury Yields

Percent, Yield 12% 12%

10%

10%

8%

8%

6%

6%

4% Industrial: Q4 @ 7.8% Retail: Q4 @ 7.4% Office: Q4 @ 7.0% Apartment: Q4 @ 6.2% 10-Year Yield: Q1 @ 1.9% 1997 1999 2001 2003 2005 2007 2009 2011

4%

2%

2%

0% 1995

0% 2013

Total Monthly Volume

Billions of Dollars $90 $90 Monthly Volume: Dec @ $49.4 billion $80

Commercial Real Estate

Percent, Dollars per Square Foot 16% 14% 12% 10% 8% 6% $180 $160 $140 $120

$80

$70
$60 $50 $40 $30

$70
$60 $50 $40 $30 $20 $10 $0 2003 2005 2007 2009 2011

$100 $80

$20 $10 $0 2001

4%
2% 0% 01 02 03 04 05 06 07 08 09 10 11 12 Price: Q4 @ $162.38 per SF (Right Axis) Vacancy Rate: Q4 @ 10.4% (Left Axis) Cap Rate: Q4 @ 6.9% (Left Axis)

$60
$40 $20

U.S. CMBS Issuance

Billions of Dollars $45 CMBS Issuance: Feb @ $7.1 Billion $40 $40 $45

NCREIF Transactions-Based Index

All-Property Price Index, CRE, Q1 1984 = 100 240
Price Index: Q4 @ 193.2

240 220 200 180 160 140

$35
$30 $25 $20 $15 $10 $5 $0 2004

$35
$30 $25 $20 $15 $10 $5 $0 2005 2006 2007 2008 2009 2010 2011 2012 2013

220 200 180 160 140

120
100 80 60 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

120
100 80 60

Source: Federal Reserve Board, PPR, RCA, Reis, Inc., NCREIF, IHS Global Insight and Wells Fargo Securities, LLC

Commercial Real Estate Chartbook: Quarter 4 March 05, 2013

WELLS FARGO SECURITIES, LLC ECONOMICS GROUP

Apartments
Property fundamentals for apartments continue to hold strong. Vacancies declined 0.2 percentage points to 4.5 percent in the fourth quarter, driven by heightening consumer demand for rental properties and builders inability to outpace absorption. Over 69,000 units were completed in 2012, versus total absorption of more than 140,000 units. Although 2012 was a strong year for the multifamily sector, the pace of acceleration has begun to slow. Construction of new units is up 64 percent, while absorption is down nearly 19 percent. These numbers come from a relatively low base, meaning year over year percent changes are amplified, yet the underlying message is clear, the apartment market is headed toward equilibrium, and the national vacancy rate will likely stabilize in the coming year.

Apartment Effective Rent Growth

Quarter-over-Quarter Percent Change 1.6% 1.2% 0.8% 0.4% 0.0% -0.4% 1.6% 1.2% 0.8% 0.4% 0.0% -0.4%

-0.8%
-1.2% Apartment Effective Rent Growth: Q4 @ 0.6% -1.6% 2006 2007 2008 2009 2010 2011 2012

-0.8%
-1.2% -1.6%

Apartment Supply & Demand

Percent, Thousands of Units 9% 100

Apartment Price vs. Vacancy Rate

Dollars per Square Foot, Percent $120 10%

8%

75

7%

50

$100

8%
6% 25

$80

6%

5%

4%

-25

$60

4%
3% Apartment Net Completions: Q4 @ 27,124 Units (Right Axis) Apartment Net Absorption: Q4 @ 46,986 Units (Right Axis) Apartment Vacancy Rate: Q4 @ 4.5% (Left Axis) 05 06 07 08 09 10 11 12 -50

$40

2%

2%

-75

Apartment Price: Q4 @ $108.76 per SF (Left Axis) Apartment Vacancy Rate: Q4 @ 4.5% (Right Axis)
$20 01 02 03 04 05 06 07 08 09 10 11 12
100

0%

NMHC Apartment Tightness Index

National Multi Housing Council, Diffusion Index 100

Apartment Cap Rate vs. 10-Year Treasury Yield

Percent, Yield 10% 10%

90
80 70

90
80 70

8%

8%

60
50

60
50 40 30 20 10 0 2000 2002 2004 2006 2008 2010 2012

6%

6%

40 30 20 10 0

4%

4%

NMHC Market Tightness Index: Q1 @ 45.0

2% Apartment: Q4 @ 6.2% 10-Year Yield: Q1 @ 1.9% 0% 1995

2%

0% 1997 1999 2001 2003 2005 2007 2009 2011 2013

Source: IHS Global Insight, NMHC, Reis, Inc. and Wells Fargo Securities, LLC

Commercial Real Estate Chartbook: Quarter 4 March 05, 2013

WELLS FARGO SECURITIES, LLC ECONOMICS GROUP

Office
Despite ongoing weakness in the office sector, effective rent jumped 0.8 percent in the fourth quarter, its ninth consecutive quarter of growth. The vacancy rate remains stagnant around 17 percent, falling just 0.3 percent this past year. Absorption is barely outpacing completions, and both metrics remain near historical lows. There is little to suggest any acceleration in office construction. The office market remains in a painfully slow recovery. Until the sector works through its backlog of vacant properties, most new construction will likely be build-to-suit or niche opportunities, where pre-leasing virtually guarantees success. Significant gains in speculative office construction are still years away.

Office Effective Rent Growth

Quarter-over-Quarter Percent Change 4.0% Office Effective Rent Growth: Q4 @ 0.8% 3.0% 3.0% 4.0%

2.0%

2.0%

1.0%

1.0%

0.0%

0.0%

-1.0%

-1.0%

-2.0%

-2.0%

-3.0% 2006 2007 2008 2009 2010 2011 2012

-3.0%

Office Supply & Demand

Percent, Millions of Square Feet 21% 30

Office Price vs. Vacancy Rate

Dollars per Square Foot, Percent $350 18% 16% 14% 12% $200 10% $150 8% $100

18%

20

$300

15%

10

$250

12%

9%

-10

6% Office Net Completions: Q4 @ 3.2M SF (Right Axis) Office Net Absorption: Q4 @ 3.9M SF (Right Axis) Office Vacancy Rate: Q4 @ 17.1% (Left Axis) 2005 2006 2007 2008 2009 2010 2011 2012

-20

3%

-30

6%
0%

$50

-40

Office Price: Q4 @ $244.73 per SF (Left Axis) Office Vacancy Rate: Q4 @ 17.1% (Right Axis)

4% 2%

$0 01 02 03 04 05 06 07 08 09 10 11 12

Job Openings as Percent of Total Employment Plus Job Openings, SA 6.0% 6.0%

Job Openings Rate - Professional Services

Office Cap Rate vs. 10-Year Treasury Yield

Percent, Yield 10% 10%
5.0% 5.0%

8%

8%
4.0% 4.0%

6%

6%
3.0% 3.0%

4%

4%
Job Openings Rate: Dec @ 2.9% 3-Month Moving Average: Dec @ 3.3% 2.0% 2.0% 01 02 03 04 05 06 07 08 09 10 11 12

2%

2%

Office: Q4 @ 7.0%
10-Year Yield: Q1 @ 1.9% 0% 1995 0% 1997 1999 2001 2003 2005 2007 2009 2011 2013

Source: IHS Global Insight, Real Capital Analytics, Reis, Inc, U.S. Department of Labor and Wells Fargo Securities, LLC

Commercial Real Estate Chartbook: Quarter 4 March 05, 2013

WELLS FARGO SECURITIES, LLC ECONOMICS GROUP

Retail
The retail sector is still eking out only modest gains. Fundamentals are expected to remain lackluster in 2013. Sluggish job growth, anemic retail sales and the nascent housing recovery all make it difficult for the retail sector to gain any real traction. Moreover, competition from e-commerce retailers is exerting pressure on traditional retailers and independent retailers have only limited access to capital. Despite listless overall retail fundamentals, Class A malls are seeing lower vacancy rates and increasing rent growth. According to the REIS data, the top nine markets by lowest vacancy rate are in affluent suburbs of California and New York. Once dependable neighborhood centers are facing a more challenging environment, as grocers consolidate and independent retailers struggle.

Retail Effective Rent Growth

Quarter-over-Quarter Percent Change 1.2% Retail Effective Rent Growth: Q4 @ 0.1% 0.8% 0.8% 1.2%

0.4%

0.4%

0.0%

0.0%

-0.4%

-0.4%

-0.8%

-0.8%

-1.2% 2006 2007 2008 2009 2010 2011 2012

-1.2%

Retail Supply & Demand

Percent, Millions of Square Feet 14% Retail Net Completions: Q4 @ 0.9M SF (Right Axis) Retail Net Absorption: Q4 @ 2.3M SF (Right Axis) Retail Vacancy Rate: Q4 @ 10.7% (Left Axis) 20

Retail Price vs. Vacancy Rate

Dollars per Square Foot, Percent $280 12% 11% 10% $200 9% 8% 7%

12%

16

10%

12

$240

8%

6%

$160

4%

$120

2%

-4

6%
$80 Retail Price: Q4 @ $233.98 per SF (Left Axis) Retail Vacancy Rate: Q4 @ 10.7% (Right Axis) $40 01 02 03 04 05 06 07 08 09 10 11 12
8%

0%

-8 2005 2006 2007 2008 2009 2010 2011 2012

5% 4%

Real Personal Consumption Expenditures

Bars = CAGR Line = Yr/Yr Percent Change 8% 6% 4% Forecast 2% 0% -2%

Retail Cap Rate vs. 10-Year Treasury Yield

Percent, Yield 12% 12%

6% 4% 2% 0%

10%

10%

8%

8%
-2%

6%

6%

-4%
-6% -8% 2000 PCE - CAGR: Q4 @ 2.1% PCE - Yr/Yr Percent Change: Q4 @ 1.9%

-4%
-6% -8% 2002 2004 2006 2008 2010 2012 2014

4%

4%

2% Retail: Q4 @ 7.4%

2%

10-Year Yield: Q1 @ 1.9%

0% 1995 0% 1997 1999 2001 2003 2005 2007 2009 2011 2013

Source: IHS Global Insight, Real Capital Analytics, Reis, Inc, U.S. Department of Commerce and Wells Fargo Securities, LLC

Commercial Real Estate Chartbook: Quarter 4 March 05, 2013

WELLS FARGO SECURITIES, LLC ECONOMICS GROUP

Industrial
Warehouse fundamentals perked up in the fourth quarter following a year of anemic growth. Demand jumped to its highest level since early 2008, which helped cut the vacancy rate by a whopping 40 basis points over the quarter. Demand has picked up in several key inland markets, including Chicago, Dallas and Atlanta. Rent growth, however, remains modest increasing only 0.7 percent over the quarter. While Amazon is still the key driver of warehouse demand, PPR notes that several smaller online retailers including HauteLook, Hayneedle and Sheik Shoes also signed large fourth quarter leases. Manufactures also stepped up, executing sizeable leases in Memphis, Nashville, Los Angeles and the Inland Empire. On the supply side, completions posted their first positive quarter in 2012.

Warehouse Net Absorption by MSA

Thousands of Square Feet, Total 2012 Richmond Los Angeles Kansas City 2.3 2.4 2.4 2.9 3.0 3.0 3.0 4.7 4.8 4.9 5.1

Denver
Houston Seattle Detroit

Phoenix
Nashville Inland Empire Atlanta Dallas - Fort Worth Chicago 0 2 4

7.8
13.5 6 8 10 12 14 16

Industrial Supply & Demand

Percent, Millions of Square Feet 14% 60

Industrial Price vs. Vacancy Rate

Dollars per Square Foot, Percent $80 14%

12%

40

10%

20

$70

12%
8% 0

$60

10%

6%

-20

4%

-40 Industrial Net Completions: Q4 @ 8.4M SF (Right Axis) Industrial Net Absorption: Q4 @ 40.9M SF (Right Axis) Industrial Vacancy Rate: Q4 @ 8.4% (Left Axis) 2005 2006 2007 2008 2009 2010 2011 2012

$50

8%
2% -60

$40 Industrial Price: Q4 @ $62.05 per SF (Left Axis) Industrial Vacancy Rate: Q4 @ 8.4% (Right Axis) $30 01 02 03 04 05 06 07 08 09 10 11 12

6%

0%

-80

4%
8%

NCRIEF Property Index

Insdustrial Rate of Return 8% 6% 4% 2% 0% -2%

Industrial Cap Rate vs. 10-Year Treasury Yield

Percent, Yield 10% 10%

6% 4% 2% 0%

8%

8%

6%

6%

-2%

-4%

-4%
-6% Rate of Return: Q4 @ 2.4% -8% 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

4%

4%
-6% -8%

2%

2%

Industrial: Q4 @ 7.8%
10-Year Yield: Q1 @ 1.9% 0% 1995 0% 1997 1999 2001 2003 2005 2007 2009 2011 2013

Source: PPR, Real Capital Analytics, NCRIEF, IHS Global Insight and Wells Fargo Securities, LLC

Commercial Real Estate Chartbook: Quarter 4 March 05, 2013

WELLS FARGO SECURITIES, LLC ECONOMICS GROUP

Distressed CRE Properties Update

According to Real Capital Analytics, total troubled properties outstanding declined 15.8 percent in the past year. The pace at which properties fall into distress has slowed. Moreover, some properties have become lender REO, while others have been restructured, and a sizable portion of troubled deals have been resolved (sold to a third party). Real estate owned increased 4.8 percent, restructured properties rose 26.8 percent, and resolved properties increased 36.9 percent in the past year. Significant overbuilding of properties during the real estate boom primarily took place in the Sunbelt. The West and Southwest continue to account for the majority of distressed commercial properties. The office sector was hard-hit due to overbuilding in suburban areas and, with painfully slow job growth, the recovery has generally lagged.

Commercial Real Estate Asking Rent Growth

Quarter-over-Quarter Percent Change 3% 2% 1% 0% -1% -2% 3% 2% 1% 0% -1% -2%

-3%
-4% -5% 2005

Apartment Asking Rent Growth: Q4 @ 0.6% Retail Asking Rent Growth: Q4 @ 0.2%

-3%
-4% -5%

Office Asking Rent Growth: Q4 @ 0.8%

Industrial Asking Rent Growth: Q4 @ 0.7% 2006 2007 2008 2009 2010 2011 2012 2013

Percent of Distressed by Property Type

Q4 2012
Office 32%

Total Outstanding Distress

In Billions

$400
$350 $300 $250 $200

Resolved Restructured REO Troubled

$450
$400 $350 $300 $250 $200
Retail 21%

Industrial 11%

$150 $100 $50 $0 2007

$150 $100

Apartment 17%

Hotel 19%

$50
$0 2008 2009 2010 2011 2012
West 27%

Percent of Distressed by Region

Q4 2012

Distressed: Volume vs. Percent of Sales

In Billions, Percent $18.0 Distressed: Q4 @ $5.6 Billion (Left Axis) Percent of Total Sales: Q4 @ 5.5% (Right Axis) $15.0 20%
Mid-Atlantic 5%

24%

Southeast 26%

$12.0

16%
Northeast 8%

$9.0

12%
Midwest 17%

$6.0

8%

Southwest 17%

$3.0

4%

$0.0 07 08 09 10 11 12

0%

Source: RCA, Reis, Inc., PPR and Wells Fargo Securities, LLC

10

Wells Fargo Securities, LLC Economics Group

Diane Schumaker-Krieg John E. Silvia, Ph.D. Mark Vitner Jay Bryson, Ph.D. Eugenio Aleman, Ph.D. Sam Bullard Anika Khan Azhar Iqbal Tim Quinlan Michael A. Brown Sarah Watt Kaylyn Swankoski Sara Silverman Zachary Griffiths Peg Gavin Cyndi Flowe

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