2. 2013 Macro Economic Assumptions
“Slow, but Steady, Economic Recovery”
GDP (2013 Average for 3 Quarters)
GDP (4th Quarter 2013 Estimated)
Total GDP
2013
Actual
2.57%
3.1%
2.70%
2.25%
Inflation (2013)
1.5%
1.5%
Unemployment
◦ Nationally
◦ State
◦ Locally
7.9% to 6.7%
8.2% to 7.5%
6.7% to 5.9%
6.7%
7.0%
6.25% to 5.5%
3.04%
3.5%
Loosening for
Existing Buildings.
Tight for Development.
Less stringent for existing.
Loosening for Development.
10-Year Treasury (12/31/13)
Credit Environment
2014

3. National Real Estate Overview
•
Apartments: Rent/Values Above Pre-Recession Peaks; Cap Rate rose
slightly in 2013, some believe market has peaked.
•
Industrial: Positive Absorption of 45 Million Square Feet in first three
quarters with National Vacancy at 11.7%; Strong Demand from
Institutional Investors.
•
Hotels: Significant RevPAR Improvement Year Over Year; Strong
Demand from Institutional Investors.
•
CBD Office Occupancy Back; Strong Institution Demand for Trophy
Properties at Historically Low Cap Rates.
•
Suburban Office Continues a Slow Road to Recovery; National Vacancy
at 16.9%.

4. National Real Estate Overview
•
Cap Rate Movement Lower in All Asset Classes.
Apartments
Industrial
Suburban Hotels
CBD Office
Suburban Office
Neighborhood/Community Centers
Range
3.5%-10%
5%-7.75%
7%-10.5%
4%-9%
5%-9.5%
5%-10%
2013 Average
5.8%
6.22%
8.16%
6.45%
6.98%
6.98%
•
Supply Growth Kept in Check Due to Limited Supply of Debt Capital.
•
Philadelphia – Suburban Office Caps Rate at 8.77%, Apartments 5.77%, and
Warehouse 5.73%.
•
Equity is Abundant, Looking for “Core” and “Core Plus” and “Value Added
Opportunities”.
•
Source of CAP Rates is Price Waterhouse Cooper.
Change







5. Industrial
“Logistics Revolution”
•
Leads recovery of commercial products
•
Vacancy fell 70 basis points to 11.7%.
•
Effective Rents rise 1.6% (slightly less than expected).
•
New Development back to post-recession high at 7.4 million SF
in third quarter.
•
Continued new development more likely than any other
products.
•
Favored Asset Class of Lenders.

6. Industrial Drivers for 2014
and Beyond
•
E-Commerce: Major retailers looking for multiple distribution
hubs to get closer to customers.
o Allentown/Carlisle corridor first, Lebanon and Lancaster
now on radar screen.
•
“Reshoring” sees the return of manufacturing.
o Rising off-shore labor cost and increasing transportation
expense.
•
Panama Canal-Port and intermodal cities prepare for increase
in demand.
o Los Angeles, Houston, Philadelphia, Newark,
New Orleans

7. Industrial Building Trends
•
Location importance heightened – E-commerce
o
•
Highway access, workforce access, last mile provider access.
Size demand increases 500,000-1,500,000 (now 26% of new development
compared to 3% 2 decades before).
o
o
•
Nationally – Amazon and Walmart have multiple million SF projects
underway.
Locally – Nordstrom's – 1.2 million SF (Conewago); Urban Outfitters 1.2
million SF (Gap), Walmart 1 million SF (Bethlehem, PA).
Design Criteria
o
o
o
Cross Dock Design
On-Site Trailer Storage
Clear Height Increasing and Mezzanines

8. Office
“Tale of Two Cities”
Suburban / Urban
•
Continues slow recovery.
•
Vacancy fell 20 basis points to 16.9%.
o Slower recovery performance than 2012.
•
Effective Rents grew by 2.2% slightly better than
expectations.
o Rents have grown for 13 consecutive quarters.
•
Least likely of all products for development for
foreseeable future.
•
Second least favorite among Lenders.

9. Office Drivers for 2014 and Beyond
•
Markets centered in Technology and Energy will recover first.
o Houston, San Francisco, Denver, Charlotte
•
Markets rich with Meds and Eds will recover at a slightly faster
pace.
o Boston, Philadelphia
•
Gen Y takes a larger role, driving demand toward CBD from
suburbs.

10. Office Building Trends – Gen Y
Re-writing the Office Playbook
•
Migration to Urban locations.
o Transportation, housing, food and entertainment.
•
Communication Infrastructure Key
•
Square foot per employee decreases.
•
Collaboration areas increase, with increased amenities.
•
Access Flexibility = 24/7 Office.
•
Energy Efficiency and Green Features becoming more required.

11. Apartments
“Let the Good Times Roll”
•
Vacancy falls by 50 basis points to 4.1%.
•
Effective rent growth has slowed: unusually weak compared to
Vacancy at 2.5%.
•
Second most active in development cycle – are we becoming over
supplied?
•
•
Five projects being discussed locally 1,600 plus units.
Popular among Lenders and Investors, except luxury which is
declining.

12. Generational Changes
Impacting Apartments
•
Baby Boomers are selling.
o Looking for walkable downtown locations or active centers.
•
Gen Y – Is Home Ownership no longer the dream?
o 54% rent their home verses 32% of all adults.
o 63% expect to move in 5 years.
o Of those that move, 69% expect to rent.
o Looking for smaller space with more amenities, walkability or mass
transit use, close to work, friends, and shopping/entertainment.

13. Retail
“Foot Traffic Down, Sales are Up”
What’s Going On?
•
Neighborhood and Community Centers
o Rent Growth – 1.4%, highest since 2007.
o Vacancy Rates – down 30 basis points to 10.4%.
o Moderate Development Opportunities in 2014.
•
Regional Malls (particularly “fortress malls” in major
Metropolitan areas) – out performs the retail recovery.
o Rent Growth – 1.6% eleventh straight quarter of gain.
o Vacancy Rates – down 70 basis points to 7.9%.

14. Retail Trends for 2014 and Beyond
•
Technology improvements has retailers investing in omnichannel distribution platforms, and “rationalizing” on brick and
mortar footprints.
•
Outlets and high-end retailers like Nordstroms are performing
better than mid-tier like Kohl’s and WalMart.
•
Ecommerce continues to expand exponentially.
o Currently 6% of all retail sales, 30% by 2025.
•
Retail Developments become a place to experience the product,
connect with friends and be entertained. Buy on-line.

15. 2013 Underwriting Criteria for
Investment Grade Real Estate
LTV
Vacancy
Cap
Rate
Spread
10-Year
Treasury
All In
Rate
Residential
70-80%
5-7%
5-7%
1.75-2%
2%
3.75-4%
Industrial
65-75%
10-15%
6.75-9%
2-2.25%
2%
4-4.25%
Office Suburban
60-75%
10-15%
7.5-9%
2.25-2.5%
2%
4.25-4.5%
Retail Anchored
65-75%
7-10%
7-7.5%
2-2.5%
2%
4-4.5%

16. National Real Estate Cycle
Third Quarter 2012
Phase II - Expansion
Office
Multi-Family
Industrial
Phase III - Hypersupply
Retail
Office
Industrial
6
5
1
2
3
4
1
H o t e l
Retail
Phase I - Recovery
Phase IV - Recession
Source: Dividend Capital Research Cycle Monitor – Real Estate Market Cycles

17. National Real Estate Cycle
Third Quarter 2013
Phase II - Expansion
Multi-Family
Phase III - Hypersupply
Hotel
Retail
6
1
2
3
4
1
Industrial
Office
Phase I - Recovery
Phase IV - Recession
Source: Dividend Capital Research Cycle Monitor – Real Estate Market Cycles

18. •
Research – Primary Research
◦ Secondary Sources (CoStar, MLS, C&I Council)
•
Industrial – Institutional Grade, for Lease
◦ Over 10,000 SF in size
◦ Lancaster County Market
•
Office – Institutional Grade, for Lease
◦ Over 5,000 SF in size
◦ Lancaster City, Manheim Township, East Hempfield, East Lampeter
•
Retail – Statistics are provided by LCAR/C&I Council

19. Major Office Changes
•
Armstrong - 70,000 SF - Manor Campus
•
Jay Group - 48,000 SF - East Hempfield
•
Wachovia - 21,200 SF - Lancaster City
•
Reese Lower Patrick & Scott - 16,700 SF - Manheim Twshp.
•
Erin Court properties removed from study - 49,000 SF

20. Lancaster Market Comparison
2010 - 2013
14 Year
Average
Class “A” Space
Absorption
Vacancy
Amount Constructed
Available Supply
2010
2011
2012
2013
212
8.3%
0
138,949
583
8.3%
0
138,366
40,010
5.9%
0
98,356
-146,368
13.6%
0
244,724
17,037
Class “B” Space
Absorption
Vacancy
Amount Constructed
Available Supply
-134,035
18.6%
0
423,080
-112,872
21.9%
0
535,952
22,414
20.2%
0
513,538
10,395
19.3%
0
503,143
-3,987
Business Center
Absorption
Vacancy
Amount Constructed
Available Supply
43,963
20.7%
71,500
247,136
16,669
19.9%
12,500
242,967
2,563
19.7%
0
240,404
58,165
15.7%
0
182,239
13,250
31,944
9,233
22,653

21. Major Industrial Changes
•
Childcraft becomes available - 400,000 SF - Mt. Joy
•
New Design Ind. Park, Jayln, Orlan
◦ 100,000+ SF absorbed – New Holland
•
Large Flex User vacates a Running Pump Road property

22. Lancaster Market Comparison
2010 - 2013
2010
2011
2012
2013
14 Year
Average
Industrial Space
Absorption
Vacancy
Amount Constructed
Available Supply
88,317
9.73%
0
1,293,492
-90,245
10.25%
0
1,383,737
-16,430
10.75%
125,000
1,525,167
59,719
10.33%
58,289
Flex Space
Absorption
Vacancy
Amount Constructed
Available Supply
523
15.1%
0
103,074
26,705
11.2%
0
76,369
11,370
8.4%
0
64,999
-22,352
11.3%
Retail Space
Absorption
Vacancy
Amount Constructed
Available Supply
147,863
8.24%
251,200
500,136
47,993
8.25%
52,964
505,107
-41,135
8.9%
0
546,242
48,485
8.1%
0
497,757
112,794
1,465,448
11,855
17,845
87,351
63,356
76,710

23. •
2008 – 2013 Loss of 9,500 Jobs (3.6%)
•
Unemployment
◦ January 2013 – 18,300 (6.7%)
◦ January 2014 – 15,900 (5.9%)
•
2013 Creation of 2,776 job (private sector)
◦ Retail Positions +100
◦ Office Positions +886
◦ Industrial Positions +609

24. •
Presentation will be available at
www.highassociates.com
•
Subscribe to our blog:
http://blog.highassociates.com/
•
If you would like the presentation e-mailed to you,
please drop your business card in the bowl at the
back table.