United States Real Estate Report Q1 2013

The US real estate report examines the commercial office, retail, industrial and construction sectors inthe country in the context of a gradual return to growth.

With a focus on the principal cities of New York, Los Angeles, Chicago, Dallas and Philadelphia, thereport covers the rental market performance in terms of rates and yields over the past 18 months andexamines how best to maximise returns in the commercial real estate market, while minimisinginvestment risk and exploring the impact of economic on a market that can dictate regionalperformance. Despite the bleak horizon outlined at the beginning of 2012, the US commercial realestate market is continuing to exhibit signs of a recovery in 2013, albeit a cautious one. Positiveconsumer sentiment has gone some way to keeping real estate investment afloat. The overriding viewseems to be that the outlook for commercial real estate is improving, but that ongoing vulnerability inthe market is leading to continued caution among real estate players. This indicates that while therecovery is under way, it will continue to be slow.

Office vacancy levels currently remain high, and forecasts for a decline in unemployment have not yetreversed this trend. New office space is being added at a higher rate, but has not yet matched thatdiscarded during the downturn. Our latest data collection in July of 2012 has revealed the recovery inthe office market continues to be patchy, while the retail segment posted some very strong results incomparison to its peers. Retail activity is being buoyed by a shift in focus to second-tier shoppingmalls, as competition for top quality space has saturated that part of the market. International retailersare also pursuing expansion plans across the US, taking advantage of a recent move for some majorretailers to close some of their stores. Meanwhile, industrial production in the US - which has longbeen a driver of growth - remains flat - and rental rates have seen the gains of H211 already eroded.

Key Points:

The US economy continues to expand at a very modest pace. The downside shock risksremain prevalent, but the balance of evidence suggests that the economy has and willcontinue to avoid recession barring a major external crisis, or the triggering of the 'fiscal cliff'in 2013.

Leading construction data is reinforcing our long-held view that the US construction industrywill return to growth in 2012. In fact, the data implies a more positive investment climate forthe sector than we had previously factored in, and thus we are upgrading our 2012 growthestimate to 1.2%, with further upside potential. The key growth divers remain the energy andutilities sector, as well as the ongoing revival in residential construction.

The upward revision is a strong validation of our mid-2011 view that the US housing sectorhad bottomed-out and was about to experience a moderate recovery. Since this point,indicators have continued to point to an uptick in residential activity, which we believe hasthe potential to lift the construction sector as a whole. The non-residential sector is alsoexperiencing a relative recovery, although we question how long much of this spending canbe sustained as federal and state budgets remain tight.

Our building materials forecast for the North American region is largely positive off the backof increasingly positive indicators for the US construction industry and the consistentlystrong performance of the Canadian sector. H212 has so far seen significant y-o-y increasesin the supply of steel and concrete, yet we note that output and consumption levels are stillsignificantly trailing those reported pre-2008.