A key question concerns the future path of cap rates. Capital appreciation was driven more by cap rate compression than NOI growth over the past five years, as sentiment improved following the financial crisis. We believe that it is prudent to assume that cap rates will gradually increase over time as interest rates normalize to higher levels. Yet cap rate spreads to Treasuries are historically wide and have room to narrow. Were Treasury yields to double to 3% and spreads revert to their 20-year average, cap rates would increase by 50 basis points, subtracting 2% annually from capital appreciation. In this scenario, total returns would average 6.2% annually through 2020, nearly two percentage points below the average from 1981-2010, although only slightly lower on an inflation adjusted basis (4.2% versus 4.8%). However, it is worth noting that market-based measures of interest rate expectations place 10-year Treasury yields in the 2%-2.5% range through 2020. If market expectations prove correct and fundamentals also remain intact, it is conceivable that cap rates could remain stable. In this scenario. total returns would average 8% annually (6% after inflation). While this is not our base case. it is an upside risk. In a low-yield, volatile financial environment, prospective returns of 6%-8% annually are competitive, we believe, with those available from other asset classes on a risk-adjusted basis 4 Industrial Sector 4.1 Current Conditions The U.S. industrial market has performed well in recent years and remains well positioned as cyclical and structural forces continue to benefit the sector. Industrial space demand remained strong this year, despite eroding global economic growth and mixed domestic manufacturing indicators. Healthy demand, vacancy and rent fundamentals have spread broadly across markets, particularly in the warehouse segment. National drivers and local economic growth are fueling strong conditions in gateway and primary inland