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1 PPR Portland State University’s Center for Real Estate Property & Portfolio Research, Inc. Trends, Opportunities, and Risks in Commercial Real Estate www.ppr.info PPR

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Trends, Opportunities, and Risks in Commercial Real Estate. Property & Portfolio Research, Inc. www.ppr.info. The U.S. Economy. Job Growth is Increasingly Weak. U.S. Job Growth. 12-month moving average. Year-over-Year Growth. Year-over-Year Growth (%). Month-to-Month (000s). 400. - PowerPoint PPT Presentation

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1PPR Portland State University’s Center for Real Estate

Property & Portfolio Research, Inc.

Trends, Opportunities, and Risks in

Commercial Real Estate

www.ppr.info

PPR

2PPR Portland State University’s Center for Real Estate

The U.S. Economy

3PPR Portland State University’s Center for Real Estate

Job Growth is Increasingly Weak

Month-to-Month (000s) Year-over-Year Growth (%)

U.S. Job Growth 12-month moving average Year-over-Year Growth

Source: U.S. Bureau of Labor Statistics

(150)

(100)

(50)

0

50

100

150

200

250

300

350

400

Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

4PPR Portland State University’s Center for Real Estate

Percent Job Growth Year-over-Year as of March

West SouthEast Midwest

Job Losses Concentrated in Housing Bust Markets

Sources: Moody’s Economy.com; Bureau of Labor Statistics

(3%)

(2%)

(1%)

0%

1%

2%

3%

4%

Hou

ston

Ral

eigh

Aus

tinS

an A

nton

ioS

an F

ranc

isco

Sea

ttle

Sal

t La

ke C

ityD

alla

s -

For

t W

orth

New

Orle

ans

Cha

rlott

eD

enve

rN

ashv

ille

Har

tfor

dA

tlant

aC

olum

bus

New

Yor

kN

orfo

lkB

altim

ore

Por

tland

Long

Isl

and

Min

neap

olis

San

Jos

eK

ansa

s C

ityW

ashi

ngto

n -

NoV

A -

MD

Pitt

sbur

ghIn

dian

apol

isH

onol

ulu

Orla

ndo

PP

R54

Phi

lade

lphi

aR

ichm

ond

Bos

ton

Okl

ahom

a C

ityC

hica

goM

emph

isN

orth

- C

entr

al N

ew J

erse

yC

inci

nnat

iS

tam

ford

Milw

auke

eS

acra

men

toM

iam

iS

an D

iego

Jack

sonv

ille

Pho

enix

Las

Veg

asLo

s A

ngel

esS

t. L

ouis

Cle

vela

ndE

ast

Bay

For

t La

uder

dale

Tam

paP

alm

Bea

ch C

ount

yO

rang

e C

ount

yIn

land

Em

pire

Det

roit

5PPR Portland State University’s Center for Real Estate

The Severity of Market Employment Cycles Will Be Quite Different

Tampa

Stamford

Seattle

San Jose

San FranciscoSan Diego

San Antonio

Salt Lake City

Sacramento

Richmond

Raleigh

Portland

Pittsburgh

Phoenix

Philadelphia

Palm Beach County

OrlandoOrange County

Oklahoma City

New York

New Orleans

Nashville

Minneapolis

Milwaukee

Miami

Los AngelesLong Island

Las Vegas

Kansas CityJacksonville

Inland Empire

Indianapolis

Houston

Honolulu

Hartford

Fort Lauderdale

East Bay

DenverDallas - Fort Worth

Columbus

Cleveland

Cincinnati

Chicago

Charlotte

Boston

Baltimore

AustinAtlanta

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

(0.02) (0.02) (0.01) (0.01) 0.00 0.01 0.01 0.02 0.02 0.032008 Employment Growth

2009 Employment GrowthEast West SouthMidWest

Sources: Moody’s Economy.com; PPR

6PPR Portland State University’s Center for Real Estate

(4%)

(2%)

0%

2%

4%

6%

8%

10%

94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

CPI (U.S. Consumer) PPI (U.S. Producer)Year-over-Year Change

Sources: BLS; Moody’s Economy.com; PPR*As of April 2008

Inflation is a Serious Concern

7PPR Portland State University’s Center for Real Estate

(10%)

(5%)

0%

5%

10%

15%

20%

25%

30%

Jan-

01

Apr-0

1

Jul-0

1

Oct-01

Jan-

02

Apr-0

2

Jul-0

2

Oct-02

Jan-

03

Apr-0

3

Jul-0

3

Oct-03

Jan-

04

Apr-0

4

Jul-0

4

Oct-04

Jan-

05

Apr-0

5

Jul-0

5

Oct-05

Jan-

06

Apr-0

6

Jul-0

6

Oct-06

Jan-

07

Apr-0

7

Jul-0

7

Oct-07

Jan-

08

Apr-0

8

Year-over-Year GrowthBasket Index CPI

Basket includes a dozen eggs, a gallon of milk, a loaf of bread, a pound of ground beef, and a gallon of gasSource: Bureau of Labor Statistics; PPR

Is CPI Still a Good Measure of Inflation?

8PPR Portland State University’s Center for Real Estate

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

10-Year Treasury Rate CPI Inflation

What Happens When Investors Demand a Real Rate of Return?

Sources: Federal Reserve; U.S. Census Bureau

9PPR Portland State University’s Center for Real Estate

Forecast for the Economy is Not Pretty

• 2008 will be tale of two halves Much like liquidity in 2007 Contracting GDP growth in first half to begin recovering in

second Policy stimulus will prevent prolonged downturn But recovery contingent on global financial market stability by

summer

• 2007 was not a great year and 2008 likely to be worse 2008 GDP will fall under 2% for the year Housing and credit crunch will continue to weigh on broader

economic growth Only a couple hundred thousand job gains in 2008

• Risks are mainly on the downside Housing has had limited impact on broader consumption to

date, but is impacting retail sales growth Foreclosures and resets will continue to be an issue Inflation

10PPR Portland State University’s Center for Real Estate

Capital and Debt Markets

11PPR Portland State University’s Center for Real Estate

Fears are Easing

0

50

100

150

200

250

300

4/4/2007

5/4/2007

6/4/2007

7/4/2007

8/4/2007

9/4/2007

10/4/2007

11/4/2007

12/4/2007

1/4/2008

2/4/2008

3/4/2008

4/4/2008

5/4/2008

Basis PointsTED Spread

Sources: Federal Reserve Board; Daily Press

12PPR Portland State University’s Center for Real Estate

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0 10 20 30 40 50 60 70

2002 2003 2004 2005 2006 2007

Loans ARE Still Performing Well(Including foreclosure and REO)

Delinquency 60+ Days Percentage

Deal AgeSource: Trepp

13PPR Portland State University’s Center for Real Estate

Private Lenders Have Some Free Time

Number of Loans Dollar Volume ($ Millions)

100

200

300

400

500

600

700

800

900

1,000

0

2,000

4,000

6,000

8,000

10,000

12,000

12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007

Source: Giliberto-Levy

14PPR Portland State University’s Center for Real Estate

$ Billions

Sources: RCA; Trepp; PPR

Few Deals Getting DoneMonthly Transaction Volume

Warehouse Retail Office Apartment CMBS Issuance

0

10

20

30

40

50

60

70

Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08

15PPR Portland State University’s Center for Real Estate

NCREIF Spreads over 10-Year Treasury

(1993Q1–2008Q1)

0

50

100

150

200

250

300

350

400

450

500

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Basis Points

Me

an

Plu

s 1

Std

. D

ev.

Me

an

Plu

s 2

Std

. D

evs

.

Sources: NCREIF; PPR

16PPR Portland State University’s Center for Real Estate

Value Growth

Source: PPR

Values Will Take Their Biggest Hit This Year

Apartment Office Retail Warehouse

(10%)

(5%)

0%

5%

10%

15%

20%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

17PPR Portland State University’s Center for Real Estate

Housing

18PPR Portland State University’s Center for Real Estate

Housing Affordability Looks More Promising For Buyers

80

90

100

110

120

130

140

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Afford. Index

5

6

7

8

9

10

11

30-year Mort. Rate (%)Affordability Index 30-year Mortgage Rate

Source: Moody’s Economy.com

19PPR Portland State University’s Center for Real Estate

Net % of Banks With Tighter Prime Mortgage Loan Standards

Net % of Banks With Tighter Subprime/Non-Traditional Loan StandardsNew Home Sales

(‘000 SAAR)

The Credit Spigot Continues To Tighten For Housing

Sources: Federal Reserve; Census Bureau; PPR

(40)

(20)

0

20

40

60

80

100

1991Q1

1992Q1

1993Q1

1994Q1

1995Q1

1996Q1

1997Q1

1998Q1

1999Q1

2000Q1

2001Q1

2002Q1

2003Q1

2004Q1

2005Q1

2006Q1

2007Q1

2008Q10

200

400

600

800

1,000

1,200

1,400

20PPR Portland State University’s Center for Real Estate

Decline in Home Sales is Accelerating

(50)

(40)

(30)

(20)

(10)

0

10

20

30

Jan-00 Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08

Year-over-Year Change (%)

Existing SF Existing Condo New SF

Sources: NAR; U.S. Census Bureau *As of April 2008

21PPR Portland State University’s Center for Real Estate

Unprecedented Foreclosure Activity Further Adding to Inventory

Homeownership Rate (%) Percent of Loans Entering Foreclosure

Source: MBA; U.S. Census Bureau (Thru 07Q4)

60

61

62

63

64

65

66

67

68

69

70

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.90

22PPR Portland State University’s Center for Real Estate

Year-over-Year % Change in Existing SF Median Prices Net Apartment Absorption (PPR54)

Falling Home Prices ≠ Dramatic Spike In Apartment Demand

Source: NAR; PPR

(10)

(5)

0

5

10

15

20

1984Q1 1986Q1 1988Q1 1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1

(20,000)

(10,000)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

23PPR Portland State University’s Center for Real Estate

Quarterly Change in Demand Quarterly Change in Supply Vacancy Rate

Apartment Market Under Some Pressure

Source: PPR (08Q1)

Demand & Supply (Units) Percentage Vacant

(20,000)

(10,000)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

0

2

4

6

8

10

12

14

16

18

20

24PPR Portland State University’s Center for Real Estate

U.S. Homeowner Vacancy Rate

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Vacancy Rate (%)

Source: U.S. Census Bureau

25PPR Portland State University’s Center for Real Estate

PPR54 Apartment Spreads vs. Rent Growth

Sources: PPR; Moody's Economy.com

10-Year Treasury Rate

Spread

Quarterly Rent Growth

Falling Treasuries Helping to Keep Cap Rates Low Despite Rising Spreads

Forecast

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12(1.0%)

0.5%

0%

0.5%

1.0%

1.5%

2.0%

26PPR Portland State University’s Center for Real Estate

Retail

27PPR Portland State University’s Center for Real Estate

The Good News About Retail

This Page Intentionally Left Blank

28PPR Portland State University’s Center for Real Estate

Demand & Supply (000 SF) Percentage Vacant

Quarterly Change in Demand Quarterly Change in Supply Vacancy Rate

PPR54 Retail Market Fundamentals

(40,000)

(20,000)

0

20,000

40,000

60,000

80,000

100,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

0

5

10

15

20

25

Source: PPR (08Q1)

29PPR Portland State University’s Center for Real Estate

Office

30PPR Portland State University’s Center for Real Estate

Quarterly Change in Demand Quarterly Change in Supply Vacancy Rate

The Market Is Weakening

Demand & Supply (000 SF) Percentage Vacant

(60,000)

(40,000)

(20,000)

0

20,000

40,000

60,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

0

5

10

15

20

25

30

Source: PPR

31PPR Portland State University’s Center for Real Estate

Some Important Markets Are Seeing Weak Growth

Percent Office-Using Job GrowthYear-over-Year as of March 08

Sources: Moody’s Economy.com; BLS

Hou

ston

Ral

eigh

Aus

tinS

an F

ranc

isco

Kan

sas

City

Dal

las

- F

ort

Wor

thC

olum

bus

Cha

rlott

eN

ew O

rlean

sS

t. L

ouis

Indi

anap

olis

Den

ver

Mem

phis

Jack

sonv

ille

Sea

ttle

Atla

nta

Sal

t La

ke C

ityM

iam

iS

tam

ford

Chi

cago

New

Yor

kW

ashi

ngto

n -

NoV

A -

MD

San

Jos

eS

an A

nton

ioP

ittsb

urgh

Phi

lade

lphi

aO

rland

oC

inci

nnat

iN

orfo

lkS

an D

iego

Pal

m B

each

Cou

nty

Sac

ram

ento

Okl

ahom

a C

ityB

osto

nN

ashv

ille

Cle

vela

ndR

ichm

ond

Hon

olul

uP

hoen

ixIn

land

Em

pire

Min

neap

olis

Long

Isl

and

Por

tland

Har

tfor

dM

ilwau

kee

Nor

th -

Cen

tral

New

Jer

sey

Tam

paLo

s A

ngel

esF

ort

Laud

erda

leE

ast

Bay

Bal

timor

eD

etro

itLa

s V

egas

Ora

nge

Cou

nty

(5%)

(4%)

(3%)

(2%)

(1%)

0%

1%

2%

3%

4%

West SouthEast Midwest

32PPR Portland State University’s Center for Real Estate

(16%)

(14%)

(12%)

(10%)

(8%)

(6%)

(4%)

(2%)

0%

2%

4%

Ne

w Y

ork

Wa

shin

gto

n -

N

oV

A -

MD

Lo

s A

ng

ele

s

Ch

ica

go

Bo

sto

n

Sa

n F

ran

cisc

o

Se

att

le

Da

llas

- F

ort

Wo

rth

Ho

ust

on

Atla

nta

Ph

ilad

elp

hia

Ora

ng

e C

ou

nty

Sa

n D

ieg

o

No

rth

- C

en

tra

l N

ew

Je

rse

y

Ph

oe

nix

2001 Recession Peak To Trough Employment 3/31/2001–9/30/2002

Forecasted/Current Peak To Trough Employment 12/31/2007–9/30/2008

Source: Moody's Economy.com, PPR*Top 15 U.S. Office Markets

But Definitely Not the Dot-Com Bust

33PPR Portland State University’s Center for Real Estate

Two Years of Flat Rents

Source: PPR

PPR54 Recent History and Forecast - Office Rent Change

(10%)

(8%)

(6%)

(4%)

(2%)

0%

2%

4%

6%

8%

10%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Rent Growth

34PPR Portland State University’s Center for Real Estate

11.1%

(6%)

(4%)

(2%)

0%

2%

4%

6%

8%

Ho

ust

on

Sa

n F

ran

cisc

oS

ea

ttle

Sa

n J

ose

Sa

lt L

ake

City

Po

rtla

nd

Bo

sto

nD

en

ver

Ho

no

lulu

Ea

st B

ay

Ch

ica

go

Sa

n A

nto

nio

Min

ne

ap

olis

Ne

w O

rlea

ns

Da

llas

- F

ort

Wo

rth

No

rth

- C

en

tra

l Ne

wO

kla

ho

ma

City

St.

Lo

uis

Ch

arlo

tte

Ind

ian

ap

olis

Ra

leig

hO

rlan

do

PP

R5

4S

acr

am

en

toW

ash

ing

ton

- N

oV

A -

MD

Atla

nta

Ric

hm

on

dJa

ckso

nvi

lleC

inci

nn

ati

Ba

ltim

ore

Co

lum

bu

sM

em

ph

isP

hila

de

lph

iaT

am

pa

Pitt

sbu

rgh

Sta

mfo

rdF

ort

La

ud

erd

ale

Milw

au

kee

Na

shvi

lleL

os

An

ge

les

No

rfo

lkL

on

g I

sla

nd

Ne

w Y

ork

Ka

nsa

s C

ityIn

lan

d E

mp

ireM

iam

iH

art

ford

Au

stin

Cle

vela

nd

Sa

n D

ieg

oP

alm

Be

ach

Co

un

tyL

as

Ve

ga

sD

etr

oit

Ora

ng

e C

ou

nty

Ph

oe

nix

2008 Rent Growth by Metro

Source: PPR

West SouthEast Midwest

35PPR Portland State University’s Center for Real Estate

Cap Rates Rising Across the Board

Primary Secondary Tertiary

Sources: PPR; Real Capital Analytics

Median Cap Rate By Quarter

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%

Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08

5.7%

7.0%

7.5%

36PPR Portland State University’s Center for Real Estate

Overview of the U.S. Warehouse Market

37PPR Portland State University’s Center for Real Estate

Demand & Supply (000 SF) Percentage Vacant

Quarterly Change in Demand Quarterly Change in Supply Vacancy Rate

PPR54 Warehouse Market Fundamentals

(5,000)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 120

5

10

15

20

25

Source: PPR (08Q1)

38PPR Portland State University’s Center for Real Estate

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Year-Over Growth (%)

(60)

(40)

(20)

0

20

40

60

80

Net Absorption (million SF)

Warehouse Net Absorption

Wholesale Trade Inventory Growth

Wholesale Trade Sales Growth

Total Import/Export Growth

0

Sources: U.S. Census Bureau; Moody’s Economy.com; PPR

The Demand Forecast Has Some Upside

39PPR Portland State University’s Center for Real Estate

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Annual Warehouse Supply as % of Inventory

40PPR Portland State University’s Center for Real Estate

National Distribution Hubs Are More Volatile

Source: PPR

(6%)

(4%)

(2%)

0%

2%

4%

6%

8%

1989 1990 1991 1993 1994 1996 1997 1999 2000 2002 2003 2005 2006 2008 2009 2011 2012

Local Rent Growth Regional Rent Growth National Rent Growth

Forecast

41PPR Portland State University’s Center for Real Estate

Warehouse NOI Growth vs. Cap Rate Increase (%)

Annual NOI Growth Annual Cap Rate Change (%) Value Appreciation

(3%)

(2%)

(1%)

0%

1%

2%

3%

4%

5%

2008 2009 2010 2011 2012 Average

42PPR Portland State University’s Center for Real Estate

Atlanta

Austin

Baltimore

Boston

Charlotte

Chicago

Cincinnati

Cleveland

Columbus

Dallas - Fort Worth

Denver

Detroit

East Bay

Fort Lauderdale

Hartford

HonoluluHouston

Indianapolis

Inland Empire

Jacksonville

Kansas City

Las Vegas

Los Angeles

MemphisMiami

Milwaukee

Minneapolis

Nashville

New Orleans

New YorkNorfolk

North - Central New Jersey

Oklahoma City

Orange County

Orlando

Palm Beach County

Philadelphia

PhoenixPittsburgh

Portland

Raleigh

Richmond

Sacramento

Salt Lake City

San Antonio

San Diego

San Francisco

San Jose

Seattle

Stamford

St. Louis

Tampa

Washington - NoVA - MD

(5.0%)

0%

5%

10%

15%

20%

25%

30%

(1.5%) (1.0%) (0.5%) 0.0% 0.5% 1.0% 1.5% 2.0%

08Q2 Going-in Cap Rate Relative to Average

Forecast Cumulative NOI Growth (08Q2–12Q4) Regional National Local

Cheap, relatively speaking, and a strong NOI growth forecast!

Strong NOI growth forecast, but expensive.

Low NOI growth and too expensive! Cheap, but not a lot of upside in NOI.

Warehouse Markets Are Inefficiently Priced

43PPR Portland State University’s Center for Real Estate

What to Do?

44PPR Portland State University’s Center for Real Estate

Conclusions

• Short-term Keys to Success (2008) Market selection and asset/risk

management Investor communication Patience

• Mid-term (2009) Be a buyer of risk and a provider of liquidity Have faith in the U.S. economy Look for signs of improvement and be ready to move

quickly

• Longer-term (2010-12) Participate in early development opportunities But be wary of next supply wave