Industrial Market

The US industrial and logistics market is also showing a good deal of strength. Jones Lang LaSalle reports that this market "is sailing ahead on a slow, steady course," and has now experienced six consecutive quarters of demand growth. Leading the pace is the "big box" bulk warehousing and logistics sector, where strength has brought the overall US industrial vacancy rate down to 9.6% at the end of the third quarter. This is 60 basis points below the level of one year ago, and it is expected that space availability should continue to tighten in 2012. Rents have been slow to stabilize in the industrial market, but the third quarter did see a slight upturn of about ½ of 1% nationwide. As with the office market, little new speculative construction is projected for the coming year and this should provide pressure for some further increase in rents in this sector.

The strength in the industrial market has been concentrated in those markets that are major distribution centers and that have a strong transportation infrastructure. This includes Atlanta, Chicago, Dallas, Houston, the Inland Empire of Southern California, Philadelphia and Central New Jersey. All of these locations depend to a very great extent on internal US distribution, and therefore benefit from the recovering US economy. On the other hand, those industrial markets that are focused primarily on the export markets, are experiencing a slower rate of recovery.

Apartments

The rental apartment market has maintained its position as the strongest part of the US commercial real estate market. The vacancy rate in the market continues to drop, falling another 30 basis points in the third quarter to reach 5.6%. There are a number of basic trends that are supporting the apartment market at this time. First of all, the collapse of the condo and housing markets has led to a significant decline in home ownership, moving a large percentage of the US population into the rental market. This trend is accelerated by the high level of unemployment that prevents many people from even attempting to own their own home. And with marriage in the United States now generally occurring much later in life, rental apartments become an acceptable form of housing for a longer period of time for more people.

From an investment viewpoint, the favorable conditions in the rental apartment market should continue well into 2012. The only foreseeable change will be the addition of new supply in some markets. The construction of new apartment projects, particularly of suburban garden apartments, can be completed relatively quickly, and the low level of vacancy rates has led some developers to begin such projects in major markets around the country. However, Falcon believes that there is very little chance that competitive pressures will arise due to overbuilding, and we feel that a well-located, well-managed project will retain its position in the market and continue to produce good returns.

On a long-term basis, the NCREIF performance statistics show that apartments have been the best performing asset class in the US commercial real estate market, consistently producing higher IRR's than other sections of the market. Therefore, Falcon recommends that any well-diversified portfolio of US commercial real estate should include rental apartments as one of its asset classes. We have had considerable experience in providing asset management for apartment complexes, and believe that we have management procedures in place that permit us to effectively manage such properties.

Retail

The Congressional Budget Office has reported that in 2011 there was a continued and growing disparity between the top levels of society in the United States and just about everyone else. This disparity has received a great deal of attention in the press due to political movements such as the "Tea Party" and "Occupy Wall Street". The principal effect of this disparity as it affects commercial real estate is, of course, on the retailing industry. High-end retailers clearly benefit from this situation, while all other segments of the retail industry are faced with a more difficult marketing environment. Falcon has always had a negative view of investing in properties leased to so-called "big box" retailers such as Walmart, Kmart or Target, because of their long-term flat leases. Competition in most other segments of the retail market has been increasing, particularly during the recent recession, and therefore we believe that it is important to be very selective in investing in any retail property. The very high-end retailers, however, in locations such as Fifth Avenue and Madison Avenue in New York, Michigan Avenue in Chicago and Rodeo Drive in Beverly Hills, have the advantage of the best possible locations and the strongest credit tenants. From time to time Falcon also recommends other select retailers in major urban areas if they meet stringent investment criteria.

Conclusion

With the slow but steady improvement of the US economy, we are seeing a surprisingly strong recovery in most segments of the US commercial real estate market. The rental apartment market is leading the way, but the office market in major metropolitan areas around the country is also doing very well, with leasing activity in the first nine months of 2011 jumping 23% from the previous year. In addition, the vacancy rate in the industrial and logistics sector has dropped to 9.6% following six consecutive quarters of increased leasing demand. We believe that both of these factors indicate a fairly optimistic outlook by American businessmen for 2012.

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