U.S. Industrial MarketView

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1 U.S. Industrial MarketView AVAILABILITY RATE 13.2% LEASE RATE $5.46 NET ABSORPTION 26.4 MSF CONSTRUCTION COMPLETIONS 5.2 MSF THE FIGHT FOR CLASS A SPACE ACCELERATES Executive Summary Despite a lackluster macroeconomic environment, industrial leasing velocity has improved as users try to lock-in currently favorable rent and lease terms. Industrial demand will soften over the next several quarters, in line with slowing U.S. and global growth, a faltering manufacturing sector and shrinking international trade. User demand for Class A space will continue to drive down availability rates, leading to upward pressure on lease rates. Construction activity is back, including both build-to-suit and speculative projects across some of the nation s largest industrial markets. Low interest rates and the limited supply of Class A industrial product for sale will continue to drive cap rates down in the near term. Industrial real estate performance continues to recover as signaled by the NCREIF Property Index. Industrial real estate delivered an annualized total return of 13.4% during Q1 2012, in line with the overall index. INDUSTRIAL LEASING ACTIVITY: More active than underlying economic trends would suggest Despite a number of major global economic headwinds and a U.S. economy that is fast losing momentum, industrial leasing remained surprisingly active across most markets during the past quarter. The U.S. industrial market continued to show signs of recovery, with the national industrial availability rate dropping by 20 basis points (bps) to 13.2% in the second quarter of Occupiers have begun to move off the sidelines, seeking longer term leases to take advantage of lower competitive rents, which are expected to rise. Extend and blend user transactions continue, but landlords are getting pricing power back as industrial market conditions improve. A number of industrial users are also considering the ownership option given record-low interest rates. Warehouse demand was the main driver for spaces larger than100,000 sq. ft. Tenants are upgrading, relocating from Class B to Class A space, but options are getting tighter. Manufacturing space requirements were also on the rise, particularly in the southeastern and northeastern U.S. markets, due in part to the U.S. manufacturing renaissance. The prospect for industrial demand over the next few months will likely be flat, however, given weakening headline economic indicators. U.S. economic data has been disappointing, leading to further downward revisions to growth. The overall economy, consumer spending, international trade and the broader manufacturing sector are among the key drivers of industrial demand, with all pointing to a soft patch through at least the next quarter.

2 Figure 1: U.S. Economy Downshifts Annual Percent Change (%) Forecast Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 Figure 2: U.S. International Trade Activity Total Trade ($ Billions) Annual Percent Change (%) $6,000 Forecast 6% $5,000 5% $4,000 $3,000 $2,000 $1,000 $0 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 4% 3% 2% 1% 0% 1% Consumer Spending Real GDP Total Trade (L) Growth % (R) Source: IHS Global Insight, Interim Forecast, July 2012 Source: IHS Global Insight, Interim Forecast, July 2012 The U.S. economy and industrial sector have begun to feel the brunt of the slowdown in global growth, which originated in Europe but has now spread to Latin America and Asia. U.S. trade, which is the sum of imports and exports, slowed during the second quarter and is expected to actually decline in the third quarter. Figure 3: ISM Surprised to the Downside (ISM Purchasing Managers Index [Diffusion index, SA]) M M M M M M M M M M M M M M M M M M M M M Source: Institute for Supply Management

3 The ISM manufacturing index, a great demand-side proxy for industrial real estate, came in well below expectations. The June ISM manufacturing index slumped to 49.7, the first sub-50 reading since July The forwardlooking details of the survey were also weak, with both new orders and export orders coming in below 50 as global headwinds appear to be exerting greater pressure on the U.S. industrial sector. The dip in the ISM suggests that the downshift in the manufacturing sector may be accelerating. The manufacturing data had been weak, but until now the ISM index had looked better than either manufacturing output or durable goods orders. The ISM survey s details suggest that the factory slowdown will continue through at least the next few months. Domestic demand for local goods has also decreased over the past few months due to the continued struggles in the housing sector and weaker-thananticipated job growth. A silver lining for consumer spending and the U.S. economy, however, has been the decline in commodity and energy prices globally. In the U.S., it is estimated that a onecent decline in retail gasoline prices equates to roughly $1 billion in economy-wide tax cuts. The lower price of oil will provide a floor under consumer spending and likely cause domestic consumption to increase moderately as consumers now have a higher level of disposable income. The challenge remains with both consumer and business confidence levels; this has resulted in cautious spending and investment from both sides. Longer-term, however, we expect the drivers of industrial demand to shift to a more positive trajectory given secular changes in the global economy. U.S. manufacturing companies continue to benefit from the relatively lower value of the U.S.dollar. Accelerating wage rates in Asia and higher transportation costs are also fostering a manufacturing renaissance in the U.S. Over the past few months there have been a few announcements of new manufacturing plants, especially in the transportation sector, in the southern U.S. markets. These companies have been drawn by competitive labor costs, the availability of real estate at competitive rates, and the availability of a skilled and highly productive workforce. Part of the re-shoring of manufacturing to the U.S. has been driven by the needs of the consumers, the timely delivery of product to the consumer and the demand for custom products such as a specific color or design. Although with the recent increase in demand, manufacturers will increase the utilization rates of existing facilities before seeking additional space. Recent announcements include: Airbus new assembly plant to be built in Mobile, Alabama is scheduled to be completed in 2015, a $600 million investment. Ford is adding 1,800 jobs in Louisville, Kentucky, adding a third shift in the fall of Magna Seating of America, Inc. is building a 140,000-sq.-ft. plant in Shepherdsville, Kentucky, adding 450 new jobs in Asahi Forge, a Japanese automotive supplier, is adding a second manufacturing plant in Richmond, Kentucky, in Nissan will increase production for the new Sentra, adding 1,000 new jobs in Mississippi. GM to add 800 jobs, adding a third shift to its truck plant in Texas in The domestic energy sector is having a marginal influence on the industrial sector as well, but this will likely change with the further development in shale, as existing plants are adapted to accommodate the processing and transport of the new materials. New plants are also being built in ports to facilitate the transportation of oil and gas for exports. The expansion of e-retailers continues to fuel the need for warehouse and distribution space. Amazon, the leader in e-retailing, continues to push for larger facilities close to large metropolitan areas to decrease delivery times. As traditional retailers grow their e-retailer strategies, it will likely increase demand for warehouse space and shrink the need for traditional bricks-and-mortar retail, which is typically 10 to 20 times the cost of a warehouse facility. 3

4 Figure 4: U.S. Industrial Supply and Demand Completions and Absorption (MSF) Availability Rate (%) 16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 2007Q2 2007Q3 2007Q4 2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 Completions (L) Absorption (L) Availability Rate (R) Source: CBRE Econometric Advisors USERS UPGRADING SPACE 4 Despite the lackluster economic environment, industrial space demand has been relatively stable. Industrial users continue to favor higher quality, newer space that can increase productivity and lower the real estate cost. Companies are reviewing everything from their current locations, technology, and plant layout of equipment to increase production efficiencies. In some cases occupiers are moving into newer facilities and reducing space, compared to their prior premises, due to the increase in storage capacity with higher stacking capability and a more efficient plant layout. This is driving the demand by tenants to trade up to newer, more modern Class A industrial facilities. These buildings typically have higher ceilings, super-flat floors and have been built in the last ten years. Even with the national industrial availability rate at 13.2%, the scarcity of available space in such buildings means that Class A industrial availabilities continue to shrink, in some cases at the expense of older industrial buildings.

5 HERE COMES THE SUPPLY The lack of available product required by users is placing upward pressure on lease rates for the best space; however, lease rates for average product remain flat. In primary markets, rents for newer facilities are approaching replacement levels and spurring new development. New construction continues to increase across key markets due to the drop in availability rates in 2012 and the lack of newer, Class A industrial space. New construction for 2012 has totaled nearly 11 million sq. ft., and is on track to exceed the industrial new supply completed in Most of this new space consists of Class A design-build projects, although an increase in speculative construction projects across the country is emerging. Pockets of speculative construction activity are occurring in Northern Virginia, Indianapolis, the Inland Empire, Orange County, Salt Lake City and Atlanta. Many of these markets have single-digit industrial availability rates, with available Class A industrial space virtually nonexistent. Due to the short supply of new product, many of these projects are often pre-leased. In Atlanta, despite many available warehouse options, a new 630,000-sq.-ft. speculative project is under construction, underscoring the demand for state-of-the-art large warehouse and distribution space. THE PANAMA CANAL FACTOR The Panama Canal has also impacted the U.S. industrial market with respect to competition between East Coast versus West Coast ports. The race continues in the eastern U.S. gateway markets such as New York, New Jersey, Norfolk, and Miami to invest capital in preparing for the completion of the Panama Canal expansion. Most of the investment continues to be for dredging projects, which will allow the ports to accommodate larger ships as well as the need to increase the clearance height of bridges. The only port that can currently accommodate the post-panamax ship is Norfolk. The Port Authority of New York and New Jersey has committed $1 billion to raise the Bayonne Bridge, which connects Bayonne, New Jersey, with Staten Island, New York, by 64 feet to allow larger ships to pass. Port spending will increase as we near the completion of the Panama Canal expansion in The investment benefits for eastern ports will be minimal in the short term, as the transportation infrastructure for goods inland remains in western ports. In the near term, it remains more cost effective and quicker for shippers to offload in western ports and transport goods via rail to major markets such as Chicago. Eastern ports will likely benefit from increased container traffic from ships using the Suez Canal and expanding markets such as Brazil to the south. 5

6 INDUSTRIAL CAPITAL MARKETS Domestic and cross-border investors continue to closely monitor industrial sector fundamentals given favorable leasing velocity and the lack of Class A options for newer space. Stronger rental recovery is being used in underwriting industrial acquisitions. Rising sales volume reflects the surge in investor interest. The industrial capital market trends signal improving transaction volume, according to Real Capital Analytics. Over the first five months of 2012, industrial transactions totaled $10.3 billion, a 13% increase over year-ago levels. Interest in industrial property has resurfaced, as investors increasingly eye portfolio transactions. Institutional investors, however, continue to focus on Class A and/or value-add properties in primary markets. Recordlow interest rates, combined with greater institutional capital than available supply of properties for sale, continue to drive down cap rates, especially for better assets. Figure 5: Institutional Capital Targeting Industrial Assets $12 $10 $8 $6 $4 $2 $0 Industrial Transaction Volume ($ Billions) Cap Rates (%) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May 8.8% 8.6% 8.4% 8.2% 8.0% 7.8% 7.6% 7.4% 7.2% 7.0% 2010 Industrial Transactions (L) Average Cap Rates (R) Source: Real Capital Analytics 6 Industrial real estate performance continues to recover as signaled by the NCREIF Property Index. Industrial real estate delivered an annualized total return of 13.4% during Q1 2012, in line with the overall index. This was the second highest return, trailing only the multi-housing sector. Much of the return has been due to a surge in appreciation returns that have been driven by cap rate compression earlier this year. The western region of the U.S. also dominates the market value of industrial properties in the NPI and as such, the solid performance of industrial markets in the west continue to drive overall industrial performance.

7 REGIONAL OVERVIEW: SUPER-REGIONAL DISTRIBUTION CENTERS OUTPERFORM The national availability rate masks regional performance. According to second quarter figures, west coast markets such as Los Angeles (6.8%) and Orange County (7.4%) are reporting lower industrial availability rates than any other market. By contrast, east coast markets such as Stamford (25.9%), Boston (20.9%) and Atlanta (18.8%) report among the highest industrial availability rates in the nation. Industrial markets in older east coast cities suffer from a higher degree of older and obsolete product. From a regional perspective, the largest increases in absorption occurred in Chicago, the Inland Empire and New Jersey, respectively, and were mostly driven by the demand in Class A industrial warehouse and distribution space. NATIONAL QUICK STATS LOS ANGELES 993,073 SF 6.8% $6.52 Current QoQ YoY Availability Rate 13.2% i i Lease Rate $5.46 h h SAN DIEGO 200,759 SF 15.0% $10.32 Figure 6: 25 Largest Industrial Markets - SAN JOSE 243,759 SF 13.5% $11.42 SEATTLE 249,079 SF 10.3% $6.49 INLAND EMPIRE 403,354 SF 11.8% $4.08 ORANGE COUNTY 252,457 SF 7.4% $7.56 PHOENIX 275,326 SF 15.0% $6.84 MINNEAPOLIS/ ST. PAUL 326,839 SF 10.2% $4.70 DENVER 223,929 SF 7.8% $6.21 MILWAUKEE 226,563 SF 11.8% $3.76 KANSAS CITY 233,654 SF 12.3% $4.53 ST. LOUIS 222,407 SF 14.9% $4.34 DALLAS/ FT. WORTH 721,121 SF 13.4% $3.70 HOUSTON 448,767 SF 9.2% $3.91 CHICAGO 1,188,170 SF 9.7% $3.99 DETROIT 511,766 SF 11.9% $4.47 CLEVELAND 290,783 SF 8.3% $4.59 COLUMBUS 208,190 SF 12.6% $3.04 CINCINNATI 267,221 SF 9.5% $3.79 INDIANAPOLIS 238,848 SF 9.1% $4.28 ATLANTA 551,590 SF 18.8% $3.29 MIAMI 211,710 SF 9.3% $4.68 NEW JERSEY NORTHERN 409,442 SF 10.1% $6.11 NEW JERSEY CENTRAL 395,459 SF 10.4% $4.37 PHILADELPHIA 401,433 SF 12.5% $3.86 BALTIMORE 153,169 SF 15.5% $4.79 MARKET STOCK (SF x 1000) AVAILABILITY RATE NNN ASKING RENT 1,000,000,000 SF 200,000,000 SF Net Absorption* 26.4 MSF i i 7 Construction Completions 5.2 MSF i i *The arrows indicate a trend and do not represent a positive or negative value for the underlying statistic (e.g., net absorption could be negative, but still represent a positive trend over the time period). Source: CBRE Research Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of the CBRE Global Chief Economist. 8

8 NEW JERSEY Industrial availability in Central New Jersey remained flat at 10.4%, whereas availability decreased 40 bps to 10.1% in Northern New Jersey during the same period. The average asking lease rate for industrial property in New Jersey increased during the second quarter for the first time in the past four years. The state s asking lease rate is still $1.07 below its peak rate set in Q2 2008, although that gap is expected to tighten, especially for Class A industrial space. Central New Jersey continues to attract the majority of demand for new space, mostly consisting of third party logistics as well as consumer products companies. Activity at the ports of New York and New Jersey remains strong, adding to the demand for warehouse and distribution space. In the northern portion of New Jersey, the Meadowlands submarket continues to attract significant tenant demand with its high concentration of industrial space in close proximity to New York City. As compared to just a few quarters ago, industrial construction activity in New Jersey is picking up, due to increasing demand and limited number of options for large, modern industrial users. Four industrial buildings were completed in : three build-to-suit projects totaling 652,155 sq. ft. and one 101,600-sq.-ft. speculative project. Three new construction projects amounting to 1.17 million sq. ft. broke ground during. More than half of these new starts are being built on speculative development and the recent increase in new construction is pushing land prices higher. GREATER LOS ANGELES The Greater Los Angeles industrial availability rate fell to 6.8%, a 10 bps decrease from the previous quarter; this represents one of the lowest rates in the U.S. The increased volume of port activity has created an even greater need for distribution space for larger and more modern distribution facilities of over 100,000 sq. ft. In addition, there has been an increase in demand for industrial space under 50,000 sq. ft., mainly coming from small start-up companies. The Inland Empire is dominating market activity in Southern California, as large Class A distribution centers are in high demand by logistics companies and retailers looking to expand distribution capabilities. Activity levels are very high in the 100,000-sq.-ft. category. The bulk of construction activity in Southern California is also occurring in the Inland Empire, with 7.3 million sq. ft. currently under construction (the highest figure since pre-recession), of which 38% or 2.8 million sq. ft. is speculative construction. In Los Angeles County, Commerce, South Bay and San Fernando have been particularly strong, with demand from both manufacturing companies and wholesalers. The most active size range is between 50,000 sq. ft. and 75,000 sq. ft. in fact, approximately 63% of activity was between 10,000 sq. ft. and 100,000 sq. ft. Although construction is fairly active in Los Angeles County, with 1.8 million sq. ft., the market has not experienced the same growth that the Inland Empire is witnessing. However, during the next six to 12 months, the lack of Class A industrial space will likely spur an increased volume of construction, including speculative projects. 9

9 DALLAS The industrial availability rate remained flat in Dallas at 13.4% for. Most of the recent demand has been from retailers for warehouse and distribution buildings. Home Depot recently occupied a large block of space, and Kohl s will be opening a facility later this year. The most active submarket, Great Southwest/Arlington, posted the largest amount of absorption in the first half of 2012, at 2.8 million sq. ft. total. Lease rates are starting to increase, primarily due to a shrinking availability of space. Most new construction has consisted of build-to-suit activity. Two speculative projects were recently announced: approximately 661,000 sq. ft. in South Dallas from ProLogis; and 529,000 sq. ft. in Northwest Dallas from IDI. Figure 7: Industrial Market Snapshot Lowest Availability Rates (%) LOS ANGELES METRO 6.8 ORANGE COUNTY 7.4 WESTCHESTER COUNTY 7.7 DENVER 7.8 CLEVELAND 8.3 CHICAGO Chicago s industrial market continues to recover, with the availability rate decreasing to 9.7%, a change of 40 bps from the previous quarter. Three out of the top 10 deals were paper-related companies (Kimberly Clark at 716,318 sq. ft.; Domtar Paper with 453,364 sq. ft.; and International Paper at 316,000 sq. ft.). Machinery, metal and durable goods also had strong showings during the second quarter. The Far SW suburban market in Chicago (also known as the I-55 corridor) dominated leasing activity during, with more than 1.7 million sq. ft. of activity. This accounted for 24% of all leasing activity that occurred in. This submarket has newer big box product, lower lease rates and easy access to expressways, which will keep it in tenants favor for the foreseeable future. For new industrial supply, two projects broke ground in the second quarter: a 239,000-sq.-ft. build-to-suit for FedEx, and a 604,000-sq.-ft. speculative project, both of which are in the Far SW suburban submarket. In addition, there are six projects currently under construction totaling 1.9 million sq. ft., of which two are speculative projects while the other four are build-to-suit. The last time Chicago had this much speculative construction was in An increase in demand is causing rental rates to increase marginally while landlords are offering less tenant incentives and moving rents up for Class A industrial buildings. Highest Availability Rates (%) STAMFORD 25.9 BOSTON 20.9 AUSTIN 19.4 ATLANTA 18.8 WALNUT CREEK 18.5 Figure 8: Largest Quarterly Decreases and Increases* Source: CBRE Research Decreases in Availability COLUMBUS -2.9 DETROIT -1.9 ORLANDO -1.8 HARTFORD -1.0 BALTIMORE & STAMFORD -0.9 ATLANTA The industrial availability rate in Atlanta increased to 18.8%, a difference of 20 bps from the previous quarter. Demand for warehouse and distribution space from third-party logistics firms has increased. Bulk warehouse Class A space in the core submarkets of Northeast and South Atlanta continues to be the most sought-after. The demand for modern industrial buildings has caused older product in the Fulton industrial market to lag due to the age and obsolescence of older industrial buildings. New construction has been limited until now, with mostly build-tosuit activity taking place in south Atlanta. Increases in Availability WESTCHESTER COUNTY 1.7 WALNUT CREEK 1.3 SAN ANTONIO 1.2 JACKSONVILLE 1.0 LONG ISLAND 0.8 *Percentage point change Source: CBRE Research 10

10 Figure 9: Industrial Availability - 11 NNN Asking Rate ($) Availability Rate (%) Market Region Size Rank Q2 12 Q2 12 Q1 12 Q2 11 BALTIMORE BOSTON HARTFORD LONG ISLAND MARYLAND SUBURBAN* NEW JERSEY CENTRAL NEW JERSEY NORTHERN NORFOLK PHILADELPHIA STAMFORD VIRGINIA NORTHERN* WESTCHESTER COUNTY East CHICAGO CINCINNATI CLEVELAND COLUMBUS DETROIT INDIANAPOLIS KANSAS CITY MILWAUKEE MINNEAPOLIS/ST. PAUL ST. LOUIS Midwest ATLANTA AUSTIN DALLAS/FT. WORTH FT. LAUDERDALE HOUSTON JACKSONVILLE MIAMI NASHVILLE ORLANDO PALM BEACH SAN ANTONIO TAMPA South ALBUQUERQUE DENVER INLAND EMPIRE LAS VEGAS LOS ANGELES METRO OAKLAND ORANGE COUNTY PHOENIX PORTLAND SACRAMENTO SALT LAKE CITY SAN DIEGO SAN FRANCISCO PENINSULA SAN JOSE SEATTLE TUCSON WALNUT CREEK West UNITED STATES * Maryland Suburban and Virginia Northern represent Washington, DC area. U.S. national figures provided by CBRE Econometric Advisors (CBRE EA), all other figures compiled by CBRE Research

11 contacts For more information about this U.S. Industrial MarketView, please contact: Edward J. Schreyer, SIOR Executive Managing Director Brokerage Services, Americas CBRE t: e: Asieh Mansour, Ph.D. Head of Research, Americas and Senior Managing Director t: e: Follow Asieh on James Costello Managing Director, Head of Americas Investment, Consulting and Strategy, t: e: Raymond Wong Managing Director, COO and Industrial Specialist, Americas Research, t: e: Heather Edmonds Director, Western U.S. Research Division, t: e: Pamela Murphy Senior Vice President, Eastern and Central U.S. Research Divisions, t: e: Andrea Walker Director Head of Americas Research Publications and Data, CBRE Global Research and Consulting t: e: FOLLOW US GOOGLE+ FACEBOOK TWITTER Global Research and Consulting This report was prepared by the CBRE U.S. Research Team which forms part of a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. 12 Disclaimer Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of the CBRE Global Chief Economist.