A White Paper Report
Produced by the
NAIOP Industry Trends Task Force
October 2003

OVERVIEW: LOOKING FORWARD, LOOKING BACK

Led by Michael Pittana, the Task Force began the journey into the future with a discussion of David Pearce Snyder's white paper, "Five Trends That Are Changing the World."

Cultural Modernization
The "Westernization" seeping into traditional cultures around the world is creating a sense of cultural marginalization in many countries. Pittana notes that "the United States is viewed in many countries as the 800-pound gorilla - we can't live with you and we can't live without you, so we tolerate you." A backlash of anti-Americanism is the result (even in Canada), leading to fractious relationships at best and potentially, to terrorist attacks as an extreme result.

Globalization
At the same time, forces of globalization are underway. According to Pearce-Snyder, globalization is a positive force that is expected to improve the quality of life for many people and reduce the costs of goods and services for all around the world. Hopefully, the benefits of globalization will help to counteract terrorist leanings. The question for real estate professionals is, how will locally based real estate companies compete in this global economy?

Universal Connectivity
The ability to communicate with each other — anywhere, any time, any place — means that, in Pearce-Snyder's words, we will be "living in a global village, in which cyberspace will be the town square." As Norm Miller, PhD and a NAIOP Distinguished Fellow notes, "Better real time data and instant global transmission puts pressure on the speed of everything, and on all of us to do more. It also requires meeting managers to be more conscious of effective time management as we all are facing greater and greater opportunity costs of time."

Across the board, real estate firms, typically slow to embrace technology, will also need to expand their communications comfort zone beyond fax and email. Miller believes that "networking and integration are pushing the second wave of technology advances in business (i.e., property and facilities management, security management, accounting, market studies, work collaboration, power management, data back ups, etc.). All of these advances will be integrated and centrally served, allowing real time updates. Mostly this increases speed of business processes, maintenance and customer care and sets new standards for performance." He urges the industry to keep working on applications, with an emphasis on saving labor, and not be complacent with the technological status quo.

Transparency
Spurred by the recent corporate scandals, companies are now being forced to be more transparent in their financial records. The need to share information in a global marketplace will also require greater transparency and standards. In commercial real estate we are seeing the beginning of a trend toward transparency and acceptance of the need for standardized terms adopted by all in the real estate supply chain.

Social Change
The first four trends will cause massive social change in the way we work. For example, job compression caused by technology efficiencies and off-shoring may force workers to work two low pay/low skill jobs to replace the one they lost. [A discussion of the effects of off-shoring continues in the Procedures section below.] Telecommuting will allow us to work from home so we can care for an aging parent. Communicating with global companies will expand the workday into as much of a 24/7 environment as possible. The concept of a traditional real estate company will have to identify opportunities in trends such as off-shoring and globalization, adapting in order to continue to grow.

PLACES

Within the framework of these broad trends, how will business be conducted and financed, and what will the workforce and workplace look like.

Remembering the go-go days of the late 1990's, Marty Irving shared some prescient thoughts from his 2000 Chairman of the Board presentation to NAIOP Chapters about which locations would emerge as the new "Imperial Cities." To become such a world-class city and sustain that dominance, Irving had said that a city needed to possess the following qualities:

• Governance
• Education
• Adequate Transportation Infrastructure
• Focal Industry
• Diversity of Economy
• Branding Strategy
• Culture
• Ethnic Diversity

• Seattle
• San Francisco
• San Diego
• Austin
• Chicago
• Boston
• New York
• Washington, DC
• Atlanta

Key messages from the JonesLangLasalle historical analysis of city performance from 1991 -2001 were that the cities that prospered had exhibited the following characteristics:

• Light regulation
• Favorable tax regimes
• Labor market flexibility
• Inward investment
• In-migration
• Skilled workers
• Leisure/tourism

1. Educated labor force
2. Flexible labor force
3. Affordable housing
4. Adequate infrastructure
5. Warm climate
6. Modern transportation - land, sea and air
7. Geographic location
8. Regional hub
9. Size/scale - critical mass
10. Geographic appeal
11. Moderate to high density
12. Abundant access to higher education
13. High levels of immigration - multicultural
14. Environment that is open and encourages new ideas
15. Healthy and vibrant downtowns including large residential component

• New York
• San Francisco
• Austin
• San Diego
• Seattle
• Boston
• Washington, DC
• Chicago
• Toronto
• Vancouver

Technology Rich/Untapped Resources

• Austin
• Bangalore
• Budapest
• Dalian
• Helsinki
• Raleigh-Durham
• San Jose
• Suzhou
• Tallinn

• Barcelona
• Calgary
• Cape Town
• Copenhagen
• SE Queensland
• Porto Alegre

• Beijing
• Chongqing
• Delhi
• Guangzhou/Shenzhen
• Mumbai
• Santiago
• Shanghai
• Xian

Nordic and other colder-climate countries, including Canada, with their focus on urban sustainability and the environment, will attract people and businesses, even though sustainability substantially increases costs. "Europe is at least a decade ahead of North America," says Moore. "Environmental issues - most prominently, water and air quality — do have an influence on site selection, particularly for knowledge-based businesses. North America is becoming much more aware of pollutants - 'Green' is everywhere."

Moore also notes that political and economic integration/trading blocks are having an effect on location decisions. For example, Japanese auto manufacturers have located in Canada. And German appliance manufacturing facilities (e.g., Siemens) have set up factories in Mexico. This 10-year trend increases the probability of a common regional currency (like the Euro) in the future.

He notes that three out of four global regions have low-cost assembly nodes. These centers will promote specialization of manufacturing processes in these nodes. Businesses around the globe will be able to take advantage of increased options to locate manufacturing facilities and offices.

Moore believes that in North America, the future growth will continue to be in urban, as well as suburban or urban constellation (edge cities) and towns. The future for discrete suburban areas and towns, however, is mixed. "Cities can't grow forever, at some point the benefits of a city are cancelled by cost, traffic and infrastructure issues. Sprawl is finite." To grow, successful cities will have to embrace higher density.

PROCEDURES: HOW WILL BUSINESS BE CONDUCTED?

What is going offshore? Miller points to technology companies, like Microsoft, Cisco, and GE, to name a few. Call center support. Financial services and accounting companies. Merrill Lynch and Goldman Sachs have added a twist by recently announcing plans to hire equity analysts in India. "What is most interesting is how business functions have been segmented so successfully, so that even a hospital can run its insurance filing operation from India," notes Miller.

Moore predicts however, that North American businesses will be forced to adopt the current "off-shoring" trend to stay competitive. "First it was manufacturing, now it is services. But at some point, there are limitations to off-shoring."

The Industry Trends Task Force would like to thank the following Task Force members who researched and made presentations at the October meeting in Boston: Michael Pittana Industry Trends Task Force Chair, Crown Realty Partners, Toronto, ON Brian Brennan Allianz of America, Westport, CT Dale Dekker Dekker Perich Sabatini, Albuquerque, NM James DeLisle, PhD University of Washington, Seattle, WA, NAIOP Distinguished Fellow Norman Miller, PhD University of Cincinnati, OH, NAIOP Distinguished Fellow Ross Moore Colliers International, Vancouver, BC J. Martin Irving Cassidy & Pinkard, McLean, VA, Special Guest

Thinking strategically, if the United States loses manufacturing jobs because of NAFTA and brain-based jobs to off-shored operations, which industries will have the best prognosis for corporate health? Miller suggests that the U.S. excels or is at least globally competitive in the following industries: entertainment, bio-tech, pharmaceuticals, genetic research, food production and processing, aerospace, telecommunication, financial services, higher education and medicine. Dale Dekker mentions nanotechnology (e.g., medical and other interventions on a cellular level) as another industry holding future promise for the United States. "If the local economy does not have some of these industries then it must have advantages in terms of climate or quality of life or it will not grow," Miller cautions.

HOW WILL DEVELOPMENT BE FUNDED?

New Capital Sources

Brennan makes the following predictions regarding debt:

• Spread compression will continue as capital is more efficiently priced.
• CMBS (public debt) will continue to mature as an industry.
• Secondary markets (for retrading) will be valid and reliable.
• Banks will continue to emerge as creative capital sources.
• The character of Government Sponsored Enterprises (e.g., Fannie Mae and Federal Home Loan Mortgage Corporation) will change.

• Greater flexibility and creativity will be needed (better mousetrap).
• Tenants In Common with tax driven money.
• Syndicates selling "protected" or limited shares.
• REITs (public equity) will continue to grow in capitalization.
• Focus on transparency and liquidity (e.g., Can I get my money out?!)

Brennan thinks "the risk profile may be moving downward to more moderate levels, with total returns around 10-15%. There will be fewer 'cowboys' pulling the trigger." The continuing trend toward more public ownership (liquidity) will also result in more accountability (more rules and regulations). This reflects the broad trend toward increased transparency. The result will be less discontent among investors. Market fundamentals will support pricing.

REAL ESTATE PRODUCT

The workspaces will reflect the following trends:

• Mixed-use: live-work-play with a neighborhood feel
• 24/7 round-the-clock environment
• Wireless
• Connected
• Fun
• Safe
• Smart buildings
• Near transportation

The hard question about old buildings, warns Moore, is which ones to choose to renovate, and which ones to demolish and rebuild. The answer, he believes, depends on the individual building, its location and whether it has any architectural interest.

The trend is toward more infill, more mixed use and more density. Green development will catch on in a big way, with energy supplied and generated by a building's solar, wind and photovoltaic systems. Adoption of green building principles will be spurred by government incentives and tax credits.

Public/private partnerships will meet emerging needs and offer opportunities for development, particularly with government agencies like GSA, DOD and the Veterans Administration. Design/build will emerge as a dominant force.

In what Dekker refers to as "Gap Fillers," these partnership projects will pencil with the addition of government assistance like Low Income Housing Tax Credits, Business Improvement Districts, energy tax credits and public finance through tax increments.

PEOPLE

Jim DeLisle, PhD, and a NAIOP Distinguished Fellow, sees the current industry profile as comprised of people with a wide array of specializations with different skills and abilities, but from a generally aging population with limited diversity. The majority has had limited academic studies in real estate, and is self-taught or industry trained on the job. No formal body of knowledge or certification exists for development as it does for other disciplines like property management and real estate investment (e.g., CPM and CCIM designations). In terms of style, Dr. DeLisle characterized today's industry professionals as generally more people-oriented than analytical, with limited/moderate technology literacy and a somewhat myopic strategic vision, based primarily on the business-at-hand.

Future Industry Profile

For more information JonesLangLasalle, "Rising Urban Stars - Uncovering Future Winners." The 2003 NAIOP Industry Trends Task Force David Pearce Snyder, "Five Trends That Are Changing the World."

DeLisle believes that the future will demand a "generalist/specialist with standardized skills." The resource pool needs to become increasingly heterogeneous as well as younger to fill the slots as the Baby Boomers finally retire. To compete in the global economy, the professional of the future will need a broader and deeper educational foundation in real estate studies. The increasingly fast-paced business environment will seek and reward continuous learners, with an appetite and sense of urgency and a firm understanding of real estate and capital markets.

The style of the future will be a return to the more entrepreneurial, charismatic and dynamic personalities of the past, but with several important differences. The successful real estate developer of the future will have strong technological skills, which s/he can use on offensive and for competitive advantage. Collaborative and customer-oriented, the developer will emphasize solutions and focus strategically on "sustainable business practices" vs. "current income maximizers."

People Challenges and Proposed Solutions

To sum up, Dr. DeLisle sees that the challenges facing the real estate industry in the future are to:

• Attract stronger, more focused candidates earlier in their careers.
• Instill an appropriate ethical balance in light of resource issues.
• Encourage greater diversity of people and practices.
• Retain professionals and establish clear career paths.
• Strengthen "value-add" and competitive edge of credentials.
• Promote intellectual/social/political collaborative "satisficing" (a combination of satisfaction and sacrifice).

• Support recognition of real estate as a legitimate academic discipline in colleges and universities.
• Educate potential professionals about career opportunities.
• Elevate recognition and access to formal designations and credentials.
• Promote professional "best practices" and higher standards of conduct.
• Identify and cultivate an appreciation for the "value-add" that professionals bring to real estate transactions.