US Real Estate

Outlook 2018

UBS Asset Management

Contents

Page
Performance scenarios 1

Macro perspective 4

Property sector outlooks

Apartments 10
Hotel 12
Industrial 14
Office 16
Retail 18
Farmland 20

Strategy 22

Dear Reader,

We are pleased to present our firm's US Real Estate Outlook 2018.

One of the great strengths of our platform is the collaboration that goes into developing a consistent market outlook oriented
around trends in the hard data. We aim to share the Research & Strategy efforts that guide our firm's multi-disciplined Strategy
Team to investment themes for the coming year.

Outlook 2018 focuses on the conditions affecting income-producing, investment-quality, commercial property with the
understanding that the baseline position could then be extended to value-add or niche real estate investment strategies.

Our goal is to tell the story of the data, applying a macro perspective to the broad institutional real estate market and individual
property sectors. Coverage of the US economy, capital trends and fundamentals grounds our expectations for the investable real
estate asset class.

The Real Estate business of Real Estate & Private Markets within UBS Asset Management has USD 87.1 billion under
management, with direct property investments throughout Asia, Europe and the US, as well as publicly traded real estate
securities and private fund holdings worldwide. The firm’s global experience in private real estate investment, real estate
securities management, commercial mortgage financing and risk management is invaluable to our market understanding. Within
Real Estate US, our experience includes 39 years managing private equity real estate and originating participating mortgages. US
assets under management exceeded USD 31.9 billion (as of September 30, 2017).

Our emphasis is less on seeking a single answer and more on providing guidance for navigating the changing investment landscape.

We welcome your interest.

Sincerely,

Tiffany Gherlone
Head of Real Estate Research & Strategy - US
UBS Asset Management
tiffany.gherlone@ubs.com
Performance
Scenarios
 As in previous issues of the US Real Estate Outlook, we Exhibit 1 - Performance scenarios
provide our most likely scenario and two alternative 2017* 2018
scenarios as shown in exhibit 1. While the Base Case is our Estimate Downside Base Case Upside
most likely scenario, the Upside and Downside scenarios
2.3 GDP (%) 0.5 2.3 3.5
are offered to explore the impact of a range of possible
shocks on the outlook for real estate investments in 2018. 2.0 Employment 0.5 2.0 2.5
Primary discussion throughout this document will refer to (mill. Jobs/yr)
our Base Case Outlook. 2.0 Inflation (%) 1.0 2.2 3.2
3.5 Retail sales (%) 1.0 3.7 5.6
2018 Base Case 4.4 NOI growth (%) 1.5 3.7 5.4
In the Base Case presented in exhibit 1, we assume that the 10 Cap rate change (bps) 10 10 5
US economy is fundamentally sound and growth should be
bolstered by the sustained expansion in the global economy. 4.7 Income return (%) 4.8 4.8 4.7
Labor shortages, higher interest rates and political uncertainty 2.2 Appreciation (%) -0.7 1.3 4.3
could limit US Gross Domestic Product (GDP) growth to 2.3% 6.9 Total return (%) 4.1 6.1 8.9
in 2018, virtually unchanged from 2017.
Source: UBS Asset Management, Real Estate & Private Markets, Research & Strategy –
US. Based on data from UBS Investment Bank, NCREIF and Moody's Analytics as of
Inflation should move slightly higher in 2018. With the September 2017.
economy operating near its potential, wages face upward Economic data are expressed as fourth-quarter over fourth-quarter rates of change
pressure and some of the transitory factors—like energy except for retail sales where growth is the average annual change.
pricing—that kept inflation at bay reverse. We expect the *2017 data are estimated through year end based on actual data as of October 2017.
tightening labor market and rising inflation expectations
will be sufficient to allow the Federal Reserve Board (Fed)
to increase its target federal funds rate twice in 2018 and
continue with its announced pace of reducing the size of
its balance sheet. The ultimate pace of policy changes will
be based on how inflation expectations—rather than actual
inflation—unfold over the year.

The impact of fiscal policy may be more consequential than

the relatively mild inflation expectations over the year. One of
the key elements is the passage of tax reform. Our Base Case
assumes that the new tax package should be supportive of
incremental growth while prolonging positive consumer and
financial market support.

Following recent trends, we expect aggregate net operating

income (NOI) growth to decelerate from 4.4% to a still-
respectable rate of 3.7%. NOI detail by property sector can be
found in exhibit 50. Capital market pressures should move cap
rates up by 10 basis points (bps). Our Base Case assumes total
returns should moderate to a more sustainable rate of 6.1% in
2018 with income contributing about 80% of the total.

2
Alternative scenarios
Evidence suggests that the US economic expansion is likely to
continue through at least 2018. Still, we believe it is prudent
for our Strategy Team to walk through plausible alternative
outcomes. Government policy and global change introduce
uncertainty in the economic outlook. Tax reform, trade and
immigration policy impact the outlook for growth, inflation
and real estate demand.

We view two key risks to our forecast. Although the impact

of tax reform legislation is unclear, it is possible that growth
will be stronger if some form of stimulus package is passed.
On the downside, job growth has already decelerated and
although the Base Case assumes that the slowdown is
transitory, continued weakness could create a problem as
policy makers have little latitude to counteract the impact of a
downturn with fiscal and monetary policy.

Upside scenario Downside scenario

The Upside scenario assumes that the acceleration in growth
during the spring and summer of 2017 is sustained into 2018,
and job growth rebounds accordingly. The impact of tax cuts
could foster faster growth and higher inflation than our Base
Case. Better-than-expected growth in corporate profits would
extend the recovery in business investment spending, which
was driven almost exclusively by the energy sector in 2017. If
inflation rises above 3%, the Fed would likely accelerate the
normalization process to prevent overheating the economy.
With the economy at full employment, the multipliers for tax
cuts and spending are modest and growth may support GDP
growth around 3.5% in 2018.
Commercial real estate would benefit from the stronger
economy. Although interest rates would be higher, stronger
NOI growth should outweigh the negative impacts of a
nominal rise in cap rates. NOI growth 100 bps above the 2017
pace would contribute to a total return nearly 300 bps above
the Base Case. Income returns would be slightly below the
Base Case, due to the denominator affect, but appreciation
would accelerate and contribute more than twice as much to
the total.
Despite accelerating GDP growth, employment growth
has been slowing, largely due to the retail sector. Retail
employment growth, which began to slow in February 2017,
turned negative in July 2017. Under our Downside scenario,
US GDP grows more slowly than in the Base Case and inflation
is weaker. Recession is avoided, as the Fed is forced to reverse
course by quickly lowering its target rate and postponing the
process of normalizing their balance sheet. Fears that the
economy is faltering would likely cause capital markets to
reassess valuations across all asset classes. Uncertainty would
be heightened around the potential negative effects of the
United Kingdom's departure from the European Union on
the European economy as the likelihood increases that the
separation will be contentious, diminishing the otherwise
favorable outlook for global trade.
In the Downside scenario, commercial real estate returns
would remain slightly positive with NOI growth of just under
1.5%. It tends to take several quarters of weakness in the
economy to slow NOI growth, as rents are contractual. In this
scenario, the total return would be 4.1%. An income return of
4.8% would more than offset a decline in appreciation caused
by a rising risk premium pushing up cap rates.

3
 Macro View

4

From a real estate perspective, demand for space has
been increasing since reaching a low in 2009 and remains
near or above the level of new supply, depending on the
property sector and location. Income is growing, and
fundamentally, landlords continue to be able to raise rents.
Yet, the current economic recovery is more than eight
years old, and broad-based growth is below normal by
historical standards. We argue that the slow steady pace
of expansion likely prevented rapid build-up of inflationary
pressures, overleverage and asset bubbles. Often, it is the
inability of policy makers to address mounting pressures
that jeopardizes expansions. Steering the economy with
monetary and fiscal policy is a difficult task, especially
in this low-growth, low-inflation environment with an
unprecedented unwinding of quantitative easing underway.
Economy
In our Base Case scenario, we expect more of the same slow,
steady economic growth. Although US Gross Domestic Product
(GDP) gained some momentum in the middle of 2017, the
economy is likely to revert to trend growth in 2018. Employers
should find it increasingly difficult to locate qualified workers
in such a tight labor market, an issue that is expected to put
modest upward pressure on inflation. Higher interest rates are
likely to pose a headwind in 2018, as the Fed continues the
process of gradually normalizing monetary policy. However,
the foreign trade sector is expected to offset some of these
headwinds, as global growth in 2018 is expected to match the
2017 growth rate—the best performance since 2011.
Exhibit 2 – Real GDP growth
Real GDP growth (%)
6 3
5 2
4
3
2 0
1 -1
0 -2
-1
-2
-3
-4
3Q09 3Q10 3Q11 3Q12 3Q13 3Q14 3Q15 3Q16
Quarterly annualized Annual growth
Source: Moody's Analytics as of September 2017.
Economic growth, measured by GDP, has been locked in
a narrow range, with growth averaging about 2.2% since
recovery began, exhibit 2. However, in the second and
third quarters of 2017 the economy appeared to gain some
momentum posting back-to-back 3% increases in GDP. Some
of the improvement can be traced to disposable income and
corporate profit growth, but recent natural disasters and
large inventory swings make it difficult to determine the exact
underlying strength of the economy.
Jobs
Job creation is the lifeblood of the economy. Theory posits that
more jobs lead to higher wages, more income and stronger
consumer spending, which accounts for about 70% of the
economy. Despite concerns of a jobless recovery, employment
growth averaged 1.6% per year since the beginning of the
recovery, more than enough to provide jobs for a labor force
that has been increasing 0.6% per year or the 0.7% growth in
the population.
Despite the recent pickup in GDP growth, job growth has been
slowing, exhibit 3. Our Base Case assumption of two million
net new jobs in 2018 would translate to a 1.4% growth rate
over the year, just 10 bps below the anticipated 2017 growth
rate. The US economy added 169,000 jobs per month through
October 2017, after averaging 192,000 per month during the
first 10 months of 2016. We anticipate employment growth in
2018 will be similar to 2017.
Exhibit 3 – Job growth
Year-over-year growth (%)
1
-3
-4
-5
3Q17 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
Source: Moody's Analytics as of September 2017. Shaded area indicates forecast data.
5
 Wages and inflation
Solid, though slowing, job growth has not translated into
faster wage gains. Economists often cite that structural
changes in demographics, e-commerce and disruptive
technologies have altered the relationship between the
amount of slack in the labor market and wage gains. Some
argue, with good reason, that the headline unemployment
rate measures overestimate the amount of slack in the labor
market. While different applications of statistical tools, like the
Philips Curve, vary in their estimates of the responsiveness of
the wage gains to the unemployment rate, most suggest that
some wage pressure is likely to build with the unemployment
rate at 4.1% in October, the lowest rate since December 2000.
Supporting the view that there will be some modest upward
pressure on wages and inflation, the Congressional Budget
Office estimates that the US economy is currently operating
near its potential, see exhibit 4. When an economy grows
above its potential, bottlenecks begin to appear that exert
upward pressure on wages and prices.
Inflation is a key element in the Base Case outlook since it is
likely to guide the Fed on the pace of interest rate hikes in the
normalization process and maintains upward pressure on proper-
ty-level rent growth. Inflation has been surprisingly weak in this
expansion. The Fed's preferred measure, the Core Personal Con-
sumption Expenditure Deflator (PCE), rose 1.3% year-over-year
in September 2017, well below the 2.0% to 2.5% target range.
The private real estate market continues its trend toward
normalcy, where total returns are driven more by income than
capital flows. The economic outlook shows a modest growth
in the US economy, and capital markets portray a slightly
positive trajectory for real estate values. However, the top line
numbers are not without churn in the underlying components.
The affinity for major market trophy assets drove prices to
levels that crowd out many domestic investors, fostering the
risk of chasing higher yields. Decreasing activity in the retail
sector is giving pause to investors searching for retail exposure
and driving some media outlets to espouse the coming
of a retail apocalypse. With all the inflammatory investing
headlines, the solution typically lies somewhere in the middle.

Exhibit 4 – Real GDP Pricing

Trillion 2009 USD Our US Real Estate Outlook 2017 projected a slight expansion
19 in cap rates reflecting the headwinds facing real estate value
18 appreciation in general, which we believe would be substanti-
17 ated if it were possible to observe cap rates on all US commer-
16 cial real estate. Just using the NCREIF Property Index (NPI), the
15 change in yields across property sectors was close to flat with
14
13 an equal-weighted average of negative eight basis points, ex-
12 hibit 5. Retail results were flat. Downtown office experienced
11 some softening in pricing, while industrial warehouse and
10 apartment exhibited further cap rate compression.
9
8
1Q90 1Q93 1Q96 1Q99 1Q02 1Q05 1Q08 1Q11 1Q14 1Q17 4Q18 Exhibit 5 - Yield hierarchy

Potential Actual/Estimated Year-over-year

Sectors 2016 Initial yields1 change (bps)2
Source: US Congressional Budget Office and Moody's Analytics as of September 2017. Suburban office 4.99 4.89 -10
Shaded area indicates forecast data.
Warehouse 4.99 4.76 -22
Non-mall retail 4.98 4.75 -1
S&P 500 public equities 4.71 4.69 -3
Apartments 4.45 4.28 -17
Mall 4.27 4.25 -1
Downtown office 3.96 4.00 4
Bbb corporate bonds 3.77 3.60 -17
10-Year US Treasury 1.75 2.32 57
Source: NCREIF & Morningstar as of September 2017, 10-Year Initial Yield from
federalreserve.gov as of November 16, 2017.
1 Initial yields represent the average annual yield during the first three quarters of 2017.
2 Year-over-year change is 1Q17-3Q17 average yield minus 1Q16-3Q16 average yield.

6
Spreads in initial yields between the 10-year US Treasury and Public markets can be helpful in exploring the current
core real estate (as measured by NFI-ODCE properties within perception of the growth prospects amongst the sectors.
the unlevered NCREIF Property Index) are starting to compress GreenStreet Advisors shows the US public REITs selling at a
to levels below the 20-year long term average, exhibit 6. slight discount to gross asset value, but the notable discounts
Compression has been driven primarily by the recent upticks are in malls and total office at 17.7% and 10.2%, respectively
in Treasury rates. Still, real estate and corporate bond markets as of October 2017.
have been less responsive to upward pressure on interest rates
than analysts would have forecast several years ago. Transactions
After a strong recovery in US real estate transactions, there
is softness but no obvious distress in the market. Owners
Exhibit 6 - Private core cap rate to 10-year treasury can choose to hold rather than transact if pricing is not
Basis points compelling. Debt is available but not abundant enough to
450 drive down risk premiums.
400
350 Transactions volume across the US decreased by 10%
300 year-over-year, exhibit 8. Downtown office saw the largest
250 decrease driven by six major markets: Boston; Los Angeles;
200 San Francisco; New York; Washington, DC and Chicago. In
150 general, office transactions decreased 23%, but downtown
100 office in major markets experienced a decrease of 56%, to
50 levels last seen in 2010 (detailed in exhibit 35). Suburban
0 office transaction volume is steady but faces some downward
1Q97 3Q99 1Q02 3Q04 1Q07 3Q09 1Q12 3Q14 3Q17 pressure. Industrial is the only sector that experienced increased
Spread (cap rate minus 10-year Treasury rate) transaction volume and is up by 16%. Transaction volume
20-year average spread appears to be steady in the apartment and hotel sectors.

Source: Moody's Analytics and NCREIF as of September 2017.

Exhibit 8 - Transaction breakout
The overall softening of values across the market is a Transaction volume (1Q-3Q) (billion USD)
combination of strong investor appetite for industrial 350
properties, which tend to offer higher cap rates but smaller 300
deals, and weakening appetite for retail and pricey downtown
office buildings. Furthermore, the spread between major and 250
non-major market cap rates remains wide, exhibit 7, mainly 200
because non-major market cap rates did not decline as sharply.
150
The spread was 140 bps as of third quarter 2017, which is 90
bps above the spread seen in the early 2000s; yet many of 100
these secondary markets are in a better economic standing 50
fundamentally than they were historically.
0
2012 2013 2014 2015 2016 2017
Exhibit 7 – Spread in pricing Apartments Hotel Industrial Office Retail
Cap rate (%)
9.5 Source: Real Capital Analytics as of September 2017.
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
1Q02 4Q05 3Q09 2Q13 3Q17
Major markets Non-major markets

Source: Real Capital Analytics as of September 2017.

7
 Debt markets
Real estate debt markets seem to be proceeding at a
reasonable pace of growth which could mean, given
regulations aimed at de-risking banks, stricter underwriting
standards for higher risk investments. In terms of total
commitments, American Council of Life Insurers (ACLI)
reports a slight trend toward lower originations among this
cohort of high-quality, institutional lenders (exhibit 9) with
smaller industrial deals growing in importance. The level of
committed fixed-rate loans was USD 55 billion for the trailing
four quarters ended September 2017, which is higher than
the amount of debt placed in 2007 (USD 15 billion higher) but
represents a moderate annual growth rate of 3.7% over nine
and a half years. One loose measure of risk appetite, the loan-
to-value (LTV) at origination, is sitting at 60% but has been as
high as 70%, historically.

Exhibit 9 - ACLI loan commitments Exhibit 10 - Loan profiles at commitment

% Four-quarter rolling billion USD Debt coverage ratio Spread over comparable US Treasury (bps)
75 60 2.4 600

50 2.2 500
70
2.0
40 400
65
1.8
30 300
60 1.6
20 200
1.4
55 10 1.2 100

50 0 1.0 0
1Q00 2Q02 3Q04 4Q06 1Q09 2Q11 3Q13 4Q15 TTM 3Q06 2Q08 1Q10 4Q11 3Q13 2Q15 3Q17
3Q17
LTV at commitment (L) Amount committed (R) Debt coverage (L) Gross spread (R)

Source: ACLI-Commercial Mortgage Commitments database as of September 2017. Source: American Council of Life Insurers as of September 2017.

In addition to LTV, it is important to track the ability of a
property's income to service its debt load, since the values of
real estate can distort the apparent risk when using the LTV in
isolation. Exhibit 10 shows debt coverage is near a historically
high level with net operating income of 2.0 times debt service.
Spreads available to lenders compressed below 200 bps, which
is still above where they were at the height of the market
a decade ago. Recent increases in the 10-year Treasury rate
pushed spreads down over the past year.
Much like the economic outlook, there are no obvious risks
in the capital markets that could be an obvious trigger to the
next downturn. Instead, there will likely be corrections specific
to certain metros and property types, but all will most likely
aggregate up to produce steady growth in cash flows and
stable values for diversified positions.

8
Property Sector
Outlooks

9
Apartments

Exhibit 13 – Apartment demand, supply and vacancy

Exhibit 11 - Outlook 2018 2018 expectations
Percent of inventory (%) Vacancy rate (%)
Apartments Demand – Sustained 3.0 20
conservative aggressive
Supply – Peaking 2.4
2018 2017 15
Conclusion: 1.8
Source: Real Estate Research & Strategy
- US as of November 2017. Excerpt from
Decelerating NOI growth 1.2 10
exhibit 51 in the Strategy section.
0.6
5
0.0

Apartment development is expected to peak in early 2018 and -0.6 0

then begin to subside, while vacancy experiences only a small 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
upward movement supported by high levels of tenant demand. Demand (L) Supply (L) Vacancy (R)

As shown in exhibit 12, 2018 is now expected to be a peak
construction year as about 24,000 units nationally have
shifted from 2017 to early 2018 completion expectations.
The shift in completion target is likely driven by natural
disasters, construction labor shortages and competition for
materials causing delays. According to Axiometrics, residential
construction job growth rates have fallen almost five
percentage points since their peak in February 2015—but the
sector's unemployment rate is the lowest since the recession.
Source: Axiometrics data as of September 2017. Supply is shown as a completion
rate (i.e. completions as a percent of existing inventory). Demand is shown as an
absorption rate (i.e., absorption as a percent of existing inventory). Shaded area
indicates forecast data.
In 2018, completions are expected to slightly exceed 2017,
but demand is forecast to remain steady, leading to a relatively
unchanged vacancy rate. As presented in our Macro View,
economic fundamentals are supportive of the forecast for
continued strong demand.

The homeownership rate remains low compared to historical

Exhibit 12 - Completion rate numbers, despite a slight uptick in the year-to-date 2017
Year-over-year completion rate (%) average. We expect that the homeownership rate is likely
1.6 to trend flat. As such, landlords should be able to replace
1.4 nearly all of the tenants who move out to buy homes. The
1.2 third quarter 2017 rate of 63.8% is considerably far away
1.0
from 2004 when homeownership reached a record peak of
69%, exhibit 14. The household formation rate has remained
0.8
relatively steady over the past few years hovering around
0.6 1%. The combination of a low homeownership rate and
0.4 steady pace of household formation represent a tailwind for
0.2 apartment demand.
0.0
2016 2017 2018 2019
20-year average Exhibit 14 - Housing fundamentals
Homeownership rate (%) Household formation rate (%)
Source: Axiometrics as of September 2017. 70 1.8
69 1.5
National apartment supply and demand dynamics have been 68
67 1.2
well balanced over the past five years, despite the continued
elevated supply, exhibit 13. As such, apartment vacancy 66 0.9
has remained below 5.5% since 2014. US apartments are 65 0.6
64
expected to be 5.2% vacant by year end 2017, 90 bps below 0.3
63
the 10- and 20-year averages.
62 0.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17*
Homeownership rates (L) Household formation (R)

Source: Moody's Analytics as of September 2017. *Homeownership and household

formation are forecast through the end of 2017.

10
Job growth is highly correlated to multifamily demand. As the National multifamily permit approvals peaked in 2015 and have
economy inches toward the Fed's definition of full employment, been declining ever since. Over the past five years an annual
job growth has been decelerating. Full employment is likely to average of 400,000 multifamily permits have been approved
support wage gains but inhibit total job growth over the longer nationally, compared to the 20-year average of 375,000 per an-
term as the available labor pool constricts. num. Although 2016 and 2017 have each seen a decline in the
number of permits approved, these annual totals remain above
Even as demand continues at its steady pace, landlords are both the long-term and short-term averages. Moody's Analytics
being forced to compete for the tenant pool. The level and expect 2015 to remain the national peak year for permit ap-
type of concessions being offered varies widely by market, proval; however, permit approvals are forecast to remain 14%
but as exhibit 15 shows, the pace of rent growth has trended above the 20-year average over the next three years.
lower since 2014. Full-year 2017 rent growth is expected to be
in line with the 2016 1.6% growth rate. Overall rent growth With the exception of a handful of markets, such as Washing-
is forecast to remain positive at a pace slightly below inflation ton, DC; Atlanta and Phoenix, most of the larger apartment
expectations until the new supply begins to wane in 2019. markets are expected to see flattening or decreasing permitting
activity over the next two years. Exhibit 16 illustrates the region-
al trends. The slowdown in permitting is not as sharp nationally
Exhibit 15 – Effective rent growth as one would expect given the large number of deliveries the
Annual rent growth (%) apartment sector has experienced in the past three years.
8
6
4 Apartment demand is expected to remain steady in 2018
2 even as new supply peaks. Current fundamentals lead to
0 the expectation of persisting demand in 2019 as the pace
-2 of supply finally relaxes. The resulting consequence is a
-4 relatively unchanged vacancy rate. Rent growth is expected
-6 to underperform the long-term average over the coming
-8 two years, potentially seeing occasional intra-quarter
06 07 08 09 10 11 12 13 14 15 16 17 18 19 declines. As homeownership rates are no longer declining,
apartments will face the competition of owning versus
Source: CBRE-Econometric Advisors, Moody's Analytics forecast scenario, as of
September 2017. Shaded area indicates forecast data.
renting. With these trends in mind, our suggestion is to
move to a slightly more conservative investment approach.

Exhibit 16 – Metro level annual multifamily permit approvals

Forty largest apartment markets by unit count
Seattle

Portland

Minneapolis
Boston

New York
Sacramento Detroit
Chicago Cleveland Newark
San Francisco
Oakland Columbus Philadelphia
Denver Indianapolis
San Jose Baltimore
Cincinnati
Kansas City St. Louis
Riverside Las Vegas Washington DC
Los Angeles Nashville Raleigh
Orange County Charlotte

San Diego Phoenix

Atlanta
Fort Worth Dallas

Nation Austin
San Antonio Houston
Tampa Orlando
15 17 19 Miami
Five-year historical average

Source: Moody’s Analytics as of December 20, 2017. National data as of January 8, 2018. 
2017 data are forecast through year-end, orange line segment indicates forecast data.Sparklines show trending moment, value scales vary by market.

11
Hotel

Exhibit 19 – ADR growth

Exhibit 17 - Outlook 2018 2018 expectations
Year-over-year change (%)
Hotel Demand – Flat 7
conservative aggressive Supply – Increasing 6
2018 2017 5
4
Conclusion:
Source: Real Estate Research & Strategy 3
- US as of November 2017. Excerpt from
Minimal RevPAR growth
2
exhibit 51 in the Strategy section.
1
0
-1
A moderating occupancy trend in the face of increased supply -2
leads us to suggest a conservative underwriting stance for -3
10 11 12 13 14 15 16 17 18
hotels in 2018. We acknowledge that opportunities should
Upper tier ADR Lower tier ADR Real personal income
increase in the hotel space as supply moves closer to peaking.
Source: CBRE-Econometric Advisors and Moody's Analytics as of September 2017.
Hotels can be classified in many ways (e.g., luxury, resort, Shaded area indicates forecast data.
boutique, motel). For the purpose of this analysis, we focus
on upper tier hotels—higher-priced hotels based on a ranking Revenue per available room (RevPAR) is expected to continue
of Average Daily Rate (ADR) in the market—and lower tier decelerating for the third consecutive year. Upper tier hotels
hotels—those with a lower ADR. are expected to see RevPAR pick up by year-end 2018 while
lower tier hotels are expected to see continued deceleration
Supply growth continues to threaten the performance of the in RevPAR growth year-over-year, albeit still growing at a
hotel market. Decelerating demand amidst accelerating supply relatively higher pace than upper tier hotels. 2018 is expected
growth in 2015 and 2016 led to a slight decline in occupancy to be a peak year for new supply, putting additional pressure
across all price tiers, exhibit 18. Based on CBRE-Econometric on existing operators.
Advisors' outlook for year-end 2017, occupancy should end
the year around 71.7%, 20 bps above year end 2016. While Real personal income growth is a proxy for domestic travel,
this is a slight improvement over 2016, occupancy has trended which historically trends with ADR growth (exhibit 19). Hotel
flat since 2015 and is expected to decline in 2018 amidst a rates are expected to moderate through year-end 2017 and
peaking supply year. 2018, similar to the outlook for real personal income growth.
It is unlikely that operators can continue to squeeze expenses
at the pace of recent years, leading to our expectation for
Exhibit 18 – All price fundamentals lower near-term income growth from hotels.
Year-over-year change (%)
%
10 Hotel occupancy generally tracks the trend of overall economic
9 74
growth, as measured by GDP. In exhibit 20, the correlation
8 72
between real GDP growth and change in occupancy weakens
7 70
6 through year-end 2017 and 2018. This dynamic would indicate
5 68 that the hotel operators are not considering the GDP outlook
4 66 in their own forecasts or that economic performance will have
3 64 less of an impact on hotel occupancy. Pressure from oncoming
2 supply may force operators to adjust ADR lower in order to
1 62
maintain current occupancy levels.
0 60
10 11 12 13 14 15 16 17 18
Rooms sold (L) Supply (L) Occupancy rate (R)

Source: CBRE-Econometric Advisors as of September 2017. Shaded area indicates

forecast data.

12
Exhibit 20 – Occupancy change
The relationship between occupancy and RevPAR growth
varies widely by market. Exhibit 21 shows the changes in these
%
factors across the 25 largest hotel markets during the year
5
ended September 2017. Houston continues to be impacted
4 by supply increases, growing 5.5% year-over-year. Prior to
3 Hurricane Harvey, the Houston hotel market saw occupancy
2 declines for 10 consecutive quarters on a year-over-year basis.
The impact of Harvey has positively benefited hotel occupancy,
1
which in the short term has increased by 11.8% year-over-year
0 as of third quarter 2017.
(1)
10 11 12 13 14 15 16 17 18 Tied for the third largest increase in new supply year-over-
Upper tier change Lower tier change Real GDP growth year, New York maintained positive occupancy growth, an
indication of continued demand in the market. The markets
Source: CBRE-Econometric Advisors and Moody's Analytics as of September 2017. that have seen declines in occupancy have received an average
Shaded area indicates forecast data.
increase of 2.9% in inventory.

Political uncertainty is likely to impact Hotel demand going
into 2018. The ongoing conversation around tax, trade,
foreign and monetary policies will likely impact travel plans
for consumers and businesses. Despite the uncertainty around
policy, economic growth is expected to remain upbeat in
2018, historically a boon to hotel performance.
Moderate growth in corporate profits amidst an expanding
employment market, specifically among Education & Health
Services and Office-Using sectors, historically bodes well for
the hotel industry. A weakening US dollar along with lagged
median income growth are both expected to negatively
impact household balance sheets and are thus headwinds to
the hotel outlook.
Including all 61 markets covered by CBRE-Economic Advisors,
50 markets experienced positive RevPAR growth year-over-year.
No markets with declining ADR experienced positive RevPAR
growth, illustrating the influence of ADR in a balanced supply-
demand environment.
Hotel markets that received less new supply emerged
as leaders in year-over-year RevPAR growth, generally
benefiting from positive occupancy gains and positive ADR
growth. Nationally, performance has been weighed down
by the impact of supply increases to larger markets, which
have not been able to increase ADR amidst moderating
occupancy gains, leading to declining or moderate gains
in RevPAR.

Exhibit 21 – Fundamental growth by metro

Year-over-year occupancy change (%)
Largest 25 markets by room count
Norfolk
3

Orlando
2
Seattle
New York
San Diego Detroit
1
San Francisco San Antonio
Atlanta Phoenix Washington, DC
0 Nation
New Orleans St. Louis Tampa
Annaheim
Philadelphia Chicago Los Angeles Nashville
-1
Boston
Minneapolis Denver
-2 Miami
Houston
Dallas
-3
-8 -6 -4 -2 0 2 4 6 8
Year-over-year RevPAR growth (%)
Circle size indicates year-over-year change in inventory, ranged from negative 0.5% (Norfolk) to positive 5.5% (New York & Houston).

Source: CBRE-Econometric Advisors as of September 2017.

13
Industrial

E-commerce is arguably the highest impact demand driver

Exhibit 22 - Outlook 2018 2018 expectations of industrial net absorption, but the mechanism of impact
is often overlooked. Improved inventory management
Industrial Demand – Sustained technology has allowed retailers to provide goods via just-in-
conservative aggressive
Supply – Increasing time (JIT) delivery, decreasing inventory-to-sales ratios over
2018 2017
the 1990s through the Great Financial Crisis (GFC), exhibit
Conclusion: 24. Since then, inventory-to-sales ratios have grown from 1.4
Source: Real Estate Research & Strategy
- US as of November 2017. Excerpt from
Decelerating NOI growth times to 1.5 times sales, coinciding with not only an expansion
exhibit 51 in the Strategy section. in the business cycle, but also with the rise of next-day
shipping. All else held equal, higher inventory levels lead to
higher demand for warehouse space.

Exhibit 23 – Supply, demand and availability Manufacturing employment growth bounced back in 2017
Percent of inventory (%) Availability rate (%) adding just over 94,500 jobs across the US, as seen in exhibit
3.0 16 25. Growth in this sector can serve as an indicator of demand
2.5 14
2.0
for manufacturing space directly and indirectly through down-
1.5 12 stream wholesalers. The Food, Beverage & Tobacco Manu-
1.0 10 facturing subsector supported nearly half of all the additions,
0.5 while energy-related subsectors were responsible for most of
8
0.0
6 the volatility. Going into 2018, manufacturing employment is
-0.5
-1.0 forecast by Moody's Analytics to decline modestly.
4
-1.5
-2.0 2
-2.5 0 Exhibit 25 – Manufacturing employment growth
05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
One-year change in manufacturing jobs (thousands jobs)
Supply (L) Demand (L) Availability rate (R)
300
Source: CBRE-Econometric Advisors Moody's Analytics forecast scenario as of 250
September 2017. Shaded area indicates forecast data. 200
Industrial availability as of third quarter 2017 is at its lowest 150
rate since the beginning of 2001, exhibit 23. This fact, along 100
with increasing supply expectations, suggests that occupancy 50
in the industrial sector may have peaked in 2017. Although 0
supply side factors, such as existing and future available -50
space, weigh on underwriting expectations for this sector, -100
the demand side drivers, such as e-commerce and industrial -150
employment continue to grow. 12 13 14 15 16 17
Food; Beverage & Tobacco Mfg. Textile; Fiber & Printing Mfg.
Chemicals; Energy; Plastics & Rubber Mfg. Metals & Mining Mfg.
Exhibit 24 – Monthly retail sales, and inventory-to-sales ratio Machinery Mfg. Electronic & Electrical Mfg.
Inventory-to-sales ratio Billion USD Transportation Equipment Mfg. Furniture & Misc. Mfg.
1.85 440 Total

1.75 390 Source: Moody's Analytics as of September 2017. All figures rolling one-year as
of September.
1.65 340
1.55 290 The historic volatility of the components of growth highlights
1.45 240 the benefits of a diverse tenant base within industrial. While
structural changes within e-commerce and continued steady
1.35 190
growth detailed in the Macro View are anticipated to positively
1.25 140 shape demand, evolving tenant requirements are also
Jan-92 Dec-94 Nov-97 Oct-00 Sep-03 Aug-06 Jul-09 Jun-12 May-15 Sep-17 expected to play a role.
Inventory to sales ratio (L) Total retail sales excluding food services (R)

Source: US Bureau of the Census as of November 2, 2017.

14
 Increased facility cube, automation and other technological
advances are important considerations when evaluating a
supply-side response to rent growth.

Exhibit 28 – Industrial supply

Rent growth (%) Million square feet
10 350
8 300
6
4 250
2 200
0
-2 150
-4 100
-6
-8 50
-10 0
81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
Rent growth (L) Annual supply (R)

Source: CBRE-Econometric Advisors as of September 2017. All data are four-quarter

Exhibit 26 – Construction preferences rolling as of September.
Clear height Completion rate (%) (1991-2017)
Industrial supply tends to lag rent growth, which is driven
0-28' up as tenants compete over limited space in an expanding
economy. Positive rent growth is shown in exhibit 28, to
29-33' highlight how developers typically respond to good conditions.
The supply response to accelerating rent growth since 2012
34+
was restrained relative to history.
Source: CBRE-Econometric Advisors as of September 2017.
Completions are likely to increase substantially in 2018. As of
Despite the popularity of 32' clear height, which has held a third quarter 2017, 197 million square feet of industrial space
consistent 5.0% supply growth rate over the past three years, is underway, up 33% from the prior year. CBRE-Economic
developers continued to raise the standard as illustrated in Advisors is forecasting supply over the calendar year of 2018
exhibit 26. Almost 40% of supply developed in 2017 had a to total 228 million square feet, with expected supply growth
clear height 34' or higher, which compares to less than 30% of even stronger in 2019.
new supply a year earlier. The majority of existing warehouse
inventory has less than 28' clear heights, shown in exhibit 27. As more speculative industrial buildings lease up, increased com-
petition should temper asking rent growth, which is anticipated
to increase 5.3% in 2017, per CBRE-Econometric Advisors.
Exhibit 27 – Existing warehouse clear heights
In the near-term, NOI growth is likely to continue from
No clear height data
23% properties that have in-place rents that are under market, even
0-28'
54% if asking rent growth flattens.
34'+
6%
Industrial supply is expected to increase as a result of
continued robust demand over the next year, portending a
29-33' deceleration of asking rent growth. Favorable positioning
18% of contract versus market rents mitigates some upset in
demand versus supply. The combination of these factors
leads us to an optimistic but increasingly cautious position
Renter-only warehouse inventory on the industrial property type.

Source: CBRE-Econometric Advisors, Peer Select as of September 2017.

15
Office

Exhibit 31 – National employment picture

Exhibit 29 - Outlook 2018 2018 expectations
% Labor force participation rate (%)
Office 10.0 66.5
Demand – Decelerating 66.0
conservative aggressive 7.5
Supply – Decreasing 65.5
2018 2017 5.0 65.0
2.5 64.5
Conclusion: 64.0
Source: Real Estate Research & Strategy 0.0
Decelerating NOI growth 63.5
- US as of November 2017. Excerpt from -2.5 63.0
exhibit 51 in the Strategy section.
-5.0 62.5
06 07 08 09 10 11 12 13 14 15 16 17 18 19
Total employment growth (L) Unemployment rate (L)
Labor force participation (R)
The office sector continues to underperform at the national
level. Construction is continuing at a pace that, although Source: Moody's Analytics as of November 2017. Shaded area indicates forecast data.
below long-term average, is expected to exceed the level
of demand for new space, exhibit 30. Rent growth slowed Office-using employment averaged 2.4% annual growth over
dramatically in 2016, recovered somewhat year-to-date 2017, the past five years. Growth is forecast to slow over the next
but remains below the strength seen in 2014 and 2015. three years as the tight labor pool restricts the availability
of qualified workers. By segment, exhibit 32, Professional
& Business Services employment is expected to experience
Exhibit 30 – Office demand, supply and vacancy a gently decelerating growth rate, while Financial Activities
Percent of inventory (%) Vacancy rate (%) growth slows precipitously and Information growth turns
5 20 negative as early as fourth quarter 2017.
4 18
3 16
2 14
12 Exhibit 32 – Office-using employment
1 Year-over-year growth (%)
10
0 8 4.0
(1) 6 3.0
(2) 4 2.0
(3) 2 1.0
0.0
(4) 0 -1.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 -2.0
Demand (L) Supply (L) Vacancy (R) -3.0
-4.0
-5.0
Source: CBRE-Economic Advisors, Moody's Analytics based forecast, as of September -6.0
2017. Shaded area indicates forecast data. -7.0
07 08 09 10 11 12 13 14 15 16 17 18 19
National employment growth is solid as unemployment Professional & Business Services Financial Activities Information
declines. A notable focus in office demand is the rising Labor
Force Participation rate, exhibit 31, which may put upward Source: Moody's Analytics as of November 2017. Shaded area indicates forecast data.
pressure on unemployment rates in the strongest markets as
entrants expand the labor pool. With office-using job growth slowing, the pace of demand is
expected to slow while the pace of new supply is expected to
remain steady in 2018 and 2019. The overall office market is
expected to see peak completions in 2017 driven by suburban
deliveries; however, the Downtown subset is anticipating peak
in 2018.

16
CBRE-Econometric Advisors is tracking 97.4 million square feet
of office product under construction across the nation, with
delivery dates through 2020. Downtown office space totals
40.0 million square feet; the remaining 57.4 million square
feet is in Suburban markets, exhibit 33. Downtown markets
account for 35% of existing office inventory.

Exhibit 33 – Downtown and Suburban fundamentals

Billion square feet Annual vacancy rate (%)
2.6 20
2.4 18
16
2.2
14
2.0 12
1.8 10
1.6 8
6
1.4
4
1.2 2
1.0 0
Downtown Suburban 07 09 11 13 15 17 19 The volume of all real estate transactions has trended down
Under Construction Downtown since the 2015 peak; office property transactions are no
Existing inventory (as of 3Q17) Suburban different. In the first three quarters of 2015 the US saw a total
of USD 108 billion in office transactions, 56% of which were
Source: CBRE-Econometric Advisors as of September 2017. Shaded area indicates
forecast data. Suburban properties. In the first three quarters of 2017 there
have been USD 95 billion in total Office sales, but this year 63%
Total office vacancy, which fell to 12.9% by the end of 2016, of sales year-to-date has been Suburban properties, exhibit 35.
is expected to exceed 13.4% by 2019. Downtown vacancy
rates are expected to rise at a faster rate than Suburban
offices, exhibit 34. As such, the spread between Downtown Exhibit 35 – Office transactions by subtype
and Suburban vacancy is tightening from an average of 450 Billion USD
bps over the past 10 years to 360 bps as of 3Q17. 120
100 60
55
Having averaged 2.2% and 1.0% (respectively) annually over 60
80 43
the past 10 years, Downtown and Suburban rent growth rates
are flattening, exhibit 34. 60 36

40 44 48 46
31 35
20
Exhibit 34 – Office rent breakout
0
Year-over-year rent growth (%) USD 3Q13 3Q14 3Q15 3Q16 3Q17
20 50 CBD Suburban
15
10 40
Source: Real Capital Analytics as of September 2017. Data are the sum of the first
5 30 three quarters of each year. Includes entity-level transactions.
0
-5 20
-10 Despite total office completions slowing, demand
10
-15 drivers—such as office-using employment growth—are
-20 0 just not supportive enough to take up all of the new
07 08 09 10 11 12 13 14 15 16 17 18 19
space. This is expected to result in slowly rising vacancy
Downtown rent level (R) Suburban rent level (R) and flat-to-minimal rent growth over the next few years.
Downtown rent growth (L) Suburban rent growth (L) Although not essentially unhealthy, the office market is
underperforming in aggregate, leading to a less optimistic,
Source: CBRE-Econometric Advisors, Baseline forecast, as of September 2017. Shaded
area indicates forecast data. neutral view of the sector.

17
Retail

Looking at the construction pipeline in isolation does not

Exhibit 36 - Outlook 2018 2018 expectations
Retail Demand – Decelerating
conservative aggressive
Supply – Flat
2018 2017
Conclusion:
Source: Real Estate Research & Strategy
- US as of November 2017. Excerpt from
Decelerating NOI growth
exhibit 51 in the Strategy section.
US retail real estate is in transition. Consumer preferences
continue to adapt to technological advancements, and
landlords are responding by changing their views on the
ideal tenant mix for retail centers. Transition does not equal
downturn for all types of retail. Occupancy rates are recovering.
Rent growth is exceeding inflation. US retail is providing real
income for investors. The challenge is to continue to harvest
retail income gains while navigating transition.
We focus on three retail supply-side trends:
1. minimal new construction
2. increasing e-tail space
3. changing ideal tenant mix
Increases in retailer debt loads, bankruptcies and store
closings are symptoms of growth in online competition and
transitions in tenant mixes. Minimal construction of brick and
mortar stores is indicative of the market attempting to find an
equilibrium level of supply and demand for space.
First, there is little traditional development of brick and mortar
retail properties, exhibit 37. Fifteen years ago, the US regularly
added 2% to 3% annually to its retail inventory. Today,
deliveries amount to just 0.5%, if economic conditions continue
to improve as expected, even an optimistic forecast anticipates
construction tops out at less than half of the historic level.
give the full picture of competitive new supply in the retail
sector. The second supply trend is growth in e-tail space, as
e-commerce retailers gain market share.
It is important to note that brick and mortar retail sales
continue to increase. However, there are clearly some
categories that are more susceptible to virtual competition
than others, exhibit 38. Understanding performance across
retailer categories can be helpful in designing a stronger mix of
tenants for a modern retail center.
Exhibit 38 – Retail market share gains and losses
e-commerce
Grocery, liquor, restaurants
Warehouse clubs
Health and beauty
Auto
Clothing, shoes, jewelry, sporting, hobby
Gas and fuel
Department stores
Furniture, electronics, building supplies
-4.0 -2.0 0.0 2.0 4.0 6.0
Change in share of total US retail sales
(Jan 2006 to Sept 2017, %)
Source: Moody's Analytics as of October 2017.
For the estimated USD 550 billion of e-commerce goods
purchased in 2017, suppliers shipped to a warehouse where
pallets were disassembled, packaged individually and shipped
again directly to consumers. In the tech-centric retail sequence,
the consumer purchase happens earlier than in the traditional
process, circumventing the brick and mortar store with the
exception of three cases: 1) when the consumer is sold a
membership in person, 2) when consumers pick up at the
store, and 3) when consumers go to the store for returns.

The third prevailing trend affecting retail supply is that the

Exhibit 37 – Retail supply growth ideal tenant mix preferred by customers and, by extension,
Percent of inventory (%) property owners is changing to be more experience based.
3.0 Decreasing department store sales are a symptom of this shift
2.5 in preferences.
2.0
Given the expectations laid out in our Macro View, consumers
1.5 in the US should maintain steady, positive growth in their
1.0 spending over the forecast, which should reinforce spending on
0.5
e-commerce and brick and mortar retail. Yet, virtual competition
weakens the connection between growth in consumer spending
0.0 and retail property rent growth. Since the last recession, the
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19
correlation weakened substantially across the US market.
Source: CBRE-Econometric Advisors as of September 2017. Shaded area indicates
forecast data.

18
Exhibit 39 – Retail trade job gains and losses
Over 12 months ending September 2017

Year-over-year
employment change (%)
1.1 to 7.0
0.0 to 1.0
(0.1) to (1.0)
(1.1) to (5.8)

National change, (0.3%)

Source: Moody's Analytics as of October 2017

Retail is the only real sore spot in the labor market right now.
Over the past year, the US lost 44,000 retail trade jobs. Exhibit
39 shows regional differences. Retail job losses were stronger
in the Northeast and Southwest, while the Pacific Northwest,
Mountain region and Carolinas actually recorded job gains.
After five years of being ahead of the index, retail returns were
in the middle of the pack during 2017. All three major categories
of retail assets produced positive returns with some appreciation,
but performance slipped just below the total NPI, exhibit 41.

Over the past 15 years, there has been a structural shift in retail Exhibit 41 – Retail sector returns
availability. Exhibit 40 compares long term trends in occupancy Annual return, rolling four-quarters, (%)
rates across three retail categories: malls & lifestyle centers, pow- 18
16
er centers and neighborhood, community & strip centers. 14
12
10
8
Exhibit 40 – Retail availability rates 6
Availability (%) 4
14 2
0
12 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17
10
NPI Malls & lifestyle Power center NCS
8
6 Source: NCREIF Property Index as of September 2017. Past performance is not indicative
4 of future results.
2
0
05 06 07 08 09 10 11 12 13 14 15 16 17 Key retail locations are retaining and increasing in value
Mall & lifestyle Power center NCS as retail uses have expanded to include medical, logistics,
and entertainment tenants. Data is a necessity. Methods
Source: CBRE-Econometric Advisors as of September 2017. NCS is neighborhood, for monitoring consumer traffic and cross-shopping are
community & strip retail centers. increasing and should be at the center of retail strategies
into the future. Continually monitor the relative strength
of your center in its market and adjust the tenant mix ac-
cordingly. Increasingly capitalize on the positive interaction
between e-commerce and traditional brick and mortar.

19
Farmland

Exhibit 44 illustrates that export sales have increased slightly in

Exhibit 42 - Outlook 2018 2018 expectations 2017 by about 3.3% over 2016.
Farmland Demand – Decelerating
conservative aggressive Supply – Flat Exhibit 44 – US agricultural exports
2018 2017
Billion USD
Conclusion: 160
Source: Real Estate Research & Strategy
- US as of November 2017. Excerpt from
Decelerating NOI growth 140
exhibit 51 in the Strategy section. 120
100
80
60
40
Our 2017 outlook for farmland remains unchanged for 2018. 20
Net Farm Income declined in 2016, and is expected to rise 0
slightly in 2017 as commodity prices have come down and 70 74 78 82 86 90 94 98 02 06 10 14 17
stabilized from record levels in prior years.
Source: USDA as of February 2017. 2017 is forecasted by the USDA. Data is based on
Fiscal Year.
Net Farm Income has weakened considerably since its record
level in 2013, as illustrated in exhibit 43. US agricultural exports have been one of the fundamental
driving forces in the profitability and stability of the US
farm economy.
Exhibit 43 – Net Farm Income 1970-2017
Billion USD While exports declined in 2009 to USD 96.4 billion, due to the
140
GFC, current USDA forecasts call for exports to reach USD 134
120
billion in 2017.
100
80
60
Farmland values were flat in 2017. Rents also remained
40
unchanged. The average value of cropland, as reported by the
20 USDA, has increased by 171% over the period from 2001 to
0 2017 from USD 1,510 per acre to USD 4,090 per acre, exhibit 45.
70 74 78 82 86 90 94 98 02 06 10 14 17

Source: USDA as of August 2017. 2017 is forecasted by the USDA. Exhibit 45 – Average cropland value
USD per acre
Net Farm Income is forecast to be USD 63.4 billion by the
4,500
end of 2017, an increase of 3% from 2016. Crop income is
4,000
expected to increase by 0.26% and livestock receipts could 3,500
increase by over 8% in 2017. 3,000
2,500
2,000
1,500
1,000
500
0
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Source: USDA, National Agricultural Statistics Service as of August 2017. All data
represents beginning of year estimates.

20
Increases in rent per acre of cropland (shown in exhibit 46)
have been catching up in the past six years, showing a gain
of 60%, a rise from an average of USD 85.50 per acre to
USD 136.00 per acre. Rents did not change in the past year,
reflecting stable commodity prices and farm income.
Exhibit 46 – Average cropland rent
USD per acre
145
135
125
115
105
95
85
75
65
01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Source: USDA, National Agricultural Statistics Service as of August 2017. All data
represents beginning of year estimates.
Most observers believe that cropland rents will slip a little
in 2018 given the outlook for income to farm operators.
As a result, rents in some areas, such as the Midwest, may
modestly decline.
Productivity of US agriculture continues to rise. Gains in
productivity have also been one of the driving forces in US
agricultural prosperity. The development of new technology
has been the source of most of the improved productivity.
The US Department of Agriculture (USDA) predicts that farm
sector equity will increase by about 4% in 2017. This is the
second year in a row that equity has increased.
While income returns to farmers have declined since 2013,
there is no evidence of any significant financial stress in the US
agricultural sector.
Debt in the farm sector remains low with a Debt-to-Equity
ratio of 14.5 cents of debt for each USD 1.00 of equity. Total
debt has increased in the past year. The non-real estate debt
remained unchanged while real estate debt increased about
USD 17 billion, 4.4%.
Rental rate increases have not kept pace with farmland value
gains. While rents have been rising until this year as described
above, the rate of increase has been slower than the rate of
increase in farmland values. The result is lower current yields or
cap rate compression.
On a national scale, using the USDA cropland data above, the
nominal rent-to-value ratio declined from 4.7% in 2001 to
3.3% in 2017.
The dearth of investment-grade properties available for sale is a
challenge for deploying investment capital. The overall strength
of the US farm economy, with solid farmland values and income
returns, provides little, if any, motivation for farmland owners
to liquidate their land holdings. Moreover, there are very few
alternative investments that offer equal or more attractive long-
term potential returns if one were to sell farmland.
When the absence of any significant financial stress in
the sector is added to this, the result is very few attractive
farmland buying opportunities. Investors seeking to
deploy capital into farmland must be patient in this
challenging market.
21
 Strategy

22

After laying out our macro and property-level assumptions,
the Strategy section ties our data-based observations into
a strategic path for investment and provides themes on
actionable guidance.
in 2018. Tying back to commercial real estate, there is room in
the spread to absorb higher interest rates without a material
downward shift in values. We already see evidence of this, as
values are growing at a rate that exceeds inflation, implying
that investors continue to price in real growth in property-
level income.

Many things changed in the US since we wrote our last We expect 2018 to be a continuation of relative calm. US
Outlook, and yet much of what we noted last year still real estate began a long-anticipated, orderly transition from
applies from a strategic perspective for the commercial and double-digit returns to single-digit normalization more
multifamily real estate sectors. than two years ago. No bubbles. No shocks. Appreciation
just moved slower and leveled off by mid-2016, as shown
In our last Outlook, we stressed diversification as a key in exhibit 48. Investors should be reassured that slower
strategic focus, including an investment theme titled Keep appreciation was expected and the transition happened
your balance, advocating the benefits of a balanced, diversified without market disruption.
portfolio. With less variance in real estate performance across
sectors, diversification is only growing in importance. We
expect markets will continue on a stabilized path, which will Exhibit 48 – NCREIF Property Index returns
likely result in continued convergence in expected performance %
and, relative to past years, limit the investment opportunities 4.5
that seem "obvious". 4.0
3.5
A slow expansion is underway. Industrial was the only 3.0
outperforming sector in 2017, exhibit 47. Returns across the 2.5
other four sectors more or less converged at levels that are in- 2.0
line with long-term expectations.
1.5

There is not much inflation in the US. The Federal Reserve is 1.0
slowly testing the markets, raising interest rates and reducing 0.5
holdings of long-term debt instruments. Fed actions are better 0.0
characterized as a measured normalization of monetary policy 1Q11 2Q12 3Q13 4Q14 1Q16 3Q17
than a hawkish tightening, and we expect more of the same Income return Appreciation return

Source: NCREIF Property Index as of September 2017. Past performance is not indicative
of future results.

Exhibit 47 – NCREIF Property Index total returns by property type

%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*

1.7 8.7 12.1 16.5 29.0 30.5 19.6 12.7 14.1 9.4 13.7 17.1 23.0 21.2 23.6 20.5 -4.1 -11.0 18.2 15.5 11.6 12.9 13.4 15.3 12.3 12.8 Performance
Top
-2.2 7.1 7.6 12.3 13.6 17.9 16.2 12.2 14.0 9.3 8.8 9.0 14.5 20.3 19.2 18.1 -5.8 -16.9 13.1 14.6 11.2 12.3 13.1 14.9 9.0 6.8

-2.3 4.8 6.4 11.7 13.6 15.9 15.9 11.7 13.0 7.3 7.6 8.9 13.0 20.1 17.0 15.8 -6.5 -17.5 12.6 14.3 10.7 11.0 11.8 13.3 8.0 6.0

-4.3 1.4 6.0 7.5 11.5 13.9 15.8 11.7 12.3 6.7 6.8 8.2 12.1 20.0 16.6 14.9 -7.3 -17.9 11.7 13.8 10.5 10.4 11.5 13.2 7.3 5.8

-4.5 -0.8 5.5 7.2 10.3 12.9 14.1 11.4 7.8 6.2 6.7 6.1 12.0 19.5 14.6 13.5 -7.3 -19.1 9.4 13.8 9.5 9.9 11.1 12.5 6.2 5.8

-8.0 -3.9 3.9 4.0 4.9 8.5 12.9 9.5 7.6 -3.6 2.8 5.7 10.2 19.0 13.4 11.4 -9.4 -20.4 9.0 11.8 8.2 7.7 10.3 12.0 4.7 Bottom

Apartment Hotel Industrial Office Retail NCREIF Property Index total return

Source: NCREIF as of September 2017. *2017 data are three quarters annualized. Past performance is not indicative of future results.
As of 2017, Hotel data have become too thin to offer reliable return results and will not be included in future reporting.

23
 US real estate returns are moving closer
to long-term expectations. Exhibit 49
compares the portion of return derived
from income in recent years to historical
averages. We are already a year and a half
into a period when private-market real
estate returns trended in a tighter band—
between 1.5% and 1.75% each quarter—
with the majority of the performance de-
rived from income. The period of ultra-low
interest rates and faster inbound flows
of capital are no longer driving down cap
rates. Appreciation in the market today
relates back to the positive income gener-
ated by properties, as opposed to heated
capital market conditions. As long-term
investors, we take comfort in income-gen-
erated performance.

We enhanced our Outlook 2018 with
Exhibit 49 - Breakout of total property
a visual expectation of the relative
return characteristics
positioning and magnitude of NOI
growth across property sectors, exhibit
100%
50. The one-year forward expectation
shows more dispersion across the
market than future periods and—in
anticipation of increasing convergence—
50%
leads us to our investment theme,
Balance your expectations.
Consistent with our multi-year NOI
guidance across sectors, the sliding scale
in exhibit 51 is intended to suggest how
conservative (to the left) or aggressive
(to the right) our underwriting should
lean relative to long-term expectations.
Overall, we observe our underwriting
posture is close to a long-term neutral
stance with the exception of the volatile
but relatively small hotel sector.

0% Exhibit 50 - Market-level income Exhibit 51 - 2018 property sector balance

Since 10-year 3-year 1-year
inception directional guidance

Appreciation proportion Income proportion Relative NOI growth (year-over-year %)

Apartments
Source: NCREIF Property Index as of September 2017.
Past performance is not indicative of future results.
Hotel

Industrial
Conservative

Aggressive

+ Office

Year 1 Year 2 Year 3 Retail

Market outlook

Apartments Industrial Office Farmland

Retail Hotel

Source: UBS Asset Management, Real Estate & Private
Markets, Research & Strategy – US based on data from
NCREIF Property Index as of September 2017. Estimates
represent an expectation at a point in time and are
subject to change. Past performance is not indicative of
future results.
Source: UBS Asset Management, Real Estate & Private
Markets, Research & Strategy – US as of December 2017.
Estimates represent an expectation at a point in time and
are subject to change.

24
Investment Themes
Value in income
Appreciation will come from income growth, assuming little
movement in yields. Income is already the dominant portion
of the total return. Rents are growing across all property
sectors even as occupancy rates flatten. The result is that
income continues to grow at a positive but slower pace than
recent years.
Whether investing in value-add or core investments, favorable
fundamentals should build confidence. Liquidity is available
but not abundant. Focus on value creation through enhancing
property-level income as opposed to simply accepting risk in
memory of the high returns achieved several years ago, when
US real estate was in recovery mode.
Positive first derivative
A myth is floating around about commercial real estate—the
myth of the "peak". Commercial real estate values have not
peaked. In fact, the NCREIF Property Index has not had a
depreciating quarter for eight years. Values and returns are
trending in a fairly tight range. Returns are lower than they
were two years ago, yet investments into commercial real
estate are still recording gains.
Fundamentals are favorable. We anticipate continued slow,
positive growth—a positive first derivative. Under this
expectation, it is business as usual in US commercial real estate.
No easy money
Capital is flowing at a manageable pace whether we are
talking about equity or debt. There is no evidence of too many
dollars chasing too few assets—a condition that would create
pressure to reduce risk premiums. 2017 transaction volume
is lower than 2016, which was lower than 2015. Still, the
volume of real estate trading today is among the highest in
history. One point of caution lies in the value-add space, with
investors increasing intensity in the search for higher returns.
This sector is much smaller than the core sector and more
susceptible to capital overflow.
Over the past two years, investors appeared to accept reduced
returns with relative market calm. Realizing that there is no
easy money today is a continuance of this acceptance of a
more normalized real estate investment environment. Take
comfort that these peaceful transitions should lead prudent
investors to better risk-adjusted decisions.
Balance your expectations
Expectations across the property sectors are converging as
returns have settled down to historical levels. Be wary of
extrapolating extremes in performance into the future. Our
2017 theme of Keep your balance persists into the new year.
Fairly level occupancy rates and moderate rent growth
leads us to conclude that most property sectors are near or
moving toward equilibrium levels of supply and demand, a
market condition that points investors toward the benefit of
balanced allocations.

Real Estate Research & Strategy – US
William Hughes, Tiffany Gherlone
Brandon Best, Kurt Edwards, Kara Foley,
Samantha Hartwell, Amy Holmes,
Kim House, James McCandless,
Brian O’Connell, Joshua Rome,
& Laurie Tillinghast
For more information please contact
UBS Realty Investors LLC
10 State House Square
Hartford, CT 06103
1-860-616 9000
www.ubs.com/realestate
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