O’Connor & AssociatesLand Forecast Luncheon
October 22, 2008
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Situs provides a wide range of commercial real estateservices, including the following brokerage services
• Represent individuals, institutions, and public companies buying,selling, leasing and repositioning commercial properties– Land Brokerage
– Investment Sales
– Project Leasing
– Tenant Representation
– Asset Repositioning / Dispositions
– Entitlement & Development
– Sealed Bid Sales
– Note Sales
– Highest & Best Use Analysis
– Asset Management
Services Offered
Rated as a Special and PrimaryServicer by
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Desired Outcome of Today’s Discussion
• Review the dynamics of activity in Houston fromthe 1980s through today
• Discuss role of land and land development inHouston’s future
Note: This presentation has been modified slightlyfrom the version presented at the O’Connorluncheon to include new text slides that provideadditional color on the charts
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Flight to the Suburbs (1946 – 1980)
• Prior to this time, people lived, worked and played in the innercity
• First people, then retail, then jobs moved out of the city andinto new subdivisions, malls, and office parks in suburbanareas
• As families moved to the suburbs, they left behind out-of-fashion real estate, a poorer residential base, and rising crime
• Once-thriving central-city retail districts were decimated bythe regional suburban malls
• By the mid-1970s, Houston newcomers generally had littlealternative but to locate in the suburbs for desirableneighborhoods and quality public schools
The suburban transformation began in 1946 when theGIs returned home from World War II
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Houston Population
* Figures represent the City of Houston and not the MSASource: U.S. Census Bureau (2007)
Since 1950, Houston’s* population has increased anaverage of 33% per decade, resulting in explosivegrowth
Pop
ulat
ion
(1,0
00)
0200400600800
1,0001,2001,400
1,6001,8002,000
2,200
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2006
e
4
4
45
6
7
14
2126
456885
Rank amonglargest US
cities
2% growthin 1980s
6
The 1980s offered Houston the best and worst oftimes – a boom and a bust
A Tale of Two Cities (1980 – 1990)
• Early-1980s saw a significant level of suburbanresidential development
• Suburban retail and office development followed
• A major catalyst was unrealistic optimism that theoil boom would continue – oil bust began in 1982
• 1985 was the beginning of the S&L crisis that ledto creation of FADA & RTC
• Real estate industry was further exacerbated bythe Tax Reform Act of 1986 and national recessionin the early-1990s
BoomBoom
BustBust
7
Housing Starts
Relatively speaking, there was little new residential landdevelopment in the early-to-mid 1990s
0
10
20
30
40
50
60
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Single Family Units Multifamily Units
Num
ber
ofU
nits
(1,0
00)
Steep decline inhousing startsbegan in 1984
Steepest dropsince 1985
Peak reflected artificialdemand fromsubprime lending
Source: Texas RECenter (2008)
Higher levels than 1980s or 1990s
8
• RTC, created in 1989, began mass liquidation of assets taken backfrom failed thrifts through sealed bid sales and auctions
• Many properties, including commercial and residential land, wereacquired at distressed prices that were significantly below the costof developing new raw land
– Finished lots
– Partially developed subdivisions
– Commercial reserves
• Commercially, there was not a lot of significant construction as themarket was absorbing existing office and retail
• Many out of state buyers that were new to Houston
Distressed asset sales by RTC, FDIC, etc. were thecatalyst for much of the activity during this time frame
Distressed Land Sales (1990 - 1995)
9
• Many raw tracts of land acquired during the early-1990s werelater developed in the late-1990s and early-2000s
• As pressure increased on homebuilders to produce more lotsin the early 2000s, residential builders entered landdevelopment business
• From 2001-2006, homebuilders drove up the price forresidential land
The sheer volume of land sold during this period hadan effect in subsequent years
Distressed Land Sales (1990 - 1995)[continued]
10
0
10
20
30
40
50
60
70
80
90
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
$0
$50
$100
$150
$200
$250
Sales Average Price
Sal
es(1
,000
)A
verageP
rice($1,000)
Houston MLS Residential HousingActivityAs a result of the rising costs related to land,infrastructure, and construction, the average homesales price has continued to increase
Minimalgrowth
Decliningprices
First declinesince 1992
Source: Texas RECenter (2008)
11
ResidentialResidential CommercialCommercial
• Many residents – old andnew Houstonians – havemoved to the core
• Reasons for movinginclude traffic issues,proximity to work, and adesire for diverse culture
• Tremendous priceappreciation in “older”neighborhoods
• Pent-up demand for urbanproperty is evident inpricing
• Inner loop commercial landhas been selling for 6 to 10times more per square footthan similar suburban sites
• Many older properties havebeen purchased at landvalue for redevelopment ashigher-density commercialand residential
The Inner City’s Comeback (1995 – 2007)
12
ResidentialResidential CommercialCommercial
• Affordability enablespeople to buy biggerhomes on larger lots
• Many suburbanites preferto live in new homes inmaster-plannedcommunities
• Desire for quality publicschools
• Proximity to employmentcenters
• The residential growth inthe suburbs has resulted insignificant commercialgrowth
• Desire for suburban livinghas increased due to theexistence of suburbanemployment centers
• Prevalent trend of locatingcompanies closer toemployees
Still Moving to the Suburbs (1995 – 2007)
13
• Competition for prime corners and sites significantly drove upprices
• Pricing was no longer based on comparables; rather, it wasbased on planned use
• Flow of information (transparency) has impacted howbusiness is done
• Expectations among buyers and sellers have risen
Commercial land prices were driven up over the pastseveral years
Surging Commercial Land Prices (2000 –2007)
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Cost of Living Index for US Metro Areas(Q2 2008)Houston’s overall after-taxes cost of living is 11%below the national average, largely due to housingcosts that are 23% below the average
Source: ACCRA (2008 Q2 )
15 0 15 30 45 60
San Francisco
New York
Washington
Boston
Miami
Denver
National
Phoenix
HoustonDallasAtlanta
Average of 318 urban areas
15Source: U.S. Census Bureau (2007)
4,000
4,200
4,400
4,600
4,800
5,000
5,200
5,400
5,600
4.33MM
5.54MM
Pop
ulat
ion
(1,0
00)
1996Population
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2006Population
Annual Average Growth: 120,500 residents
Total Growth: 27.8%
93.4K107.6K
109.6K70.9K
129.7K123.0K
106.1K102.5K
103.4K259.9K
Houston MSA Residential PopulationGrowth (1996–2006)Houston has experienced steady growth over the pastdecade, with the largest one-year surge occurring in2006
16Source: Texas Workforce Commission and Real Estate Center at Texas A&M University (2007)
1,900
2,000
2,100
2,200
2,300
2,400
2,500
1.98MM
2.45MM
Pop
ulat
ion
(1,0
00)
1996Jobs
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2006Jobs
Annual Average Growth: 46,400 jobs
Total Growth: 23.4%
82.7K
103.0K
34.5K52.6K
39.0K-5.1K -14.3K 15.6K 60.4K
95.8K
Houston MSA Employment Growth(1996–2006)Houston’s residential growth correlates directly to itsstrong employment growth over the same period
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TrendsTrends ImpactImpact
• Risk being re-priced
• Cap rates increasing
• "Easy" financing no longeravailable
• Financing only available for strongand experienced borrowers
• Retailers slowing growth withsome closing stores
• Banks and drug stores pullingback
• Housing starts slowing
• Foreclosures / REO propertiesincreasing
• Land prices decreasing
• Contract terms softening
• Sales activity slowing
• Development activity decelerating
• Transactions being re-traded
• Owner financing on horizon
• Investors with cash on sidelines,waiting to see how far prices drop
We expect some commercial real estate trends tocontinue for an unknown period of time
How Long Will This Last? (2008 – ?)
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Reasons for Optimism
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Over the past year, Texas has led the nation in highestjob growth among states
Job Growth by State
-0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5%
Massachussetts
New York
North Carolina
Utah
Washington
Maryland
Louisiana
Colorado
Oklahoma
Texas
% Growth
Texasaccounted for52.6% of allnew jobscreatednationally
National Average
Source: Texas State Data Center (2007)
TexasStrongenergy
industryemployment
20
Over the past year, Houston was among 4 Texas citiesto rank in the top 10 nationally in job growth and tomake Forbe’s list of the 10 Best Cities to Buy a Home
Job Growth by MSA & Best Cities to Buya Home (2007)
Source: Texas State Data Center (2007)
Number of Jobs Added170,000 130,000 90,000 50,000 10,000 30,000 70,000
Raleigh
Austin
San Antonio
Charlotte
Atlanta
New York City
Washington, D.C.
Seattle
Houston
Dallas-Fort Worth 6
1075
2
Forbe’s 10 Best Cities toBuy a Home (Rank)USA Total
1Houston
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Growth is expected to continue with solid populationincreases forecasted
Source: Texas State Data Center (2007)
5,000
5,200
5,400
5,600
5,800
6,000
6,200
6,400
5.54MM
Annual Average Growth: 92,800 residents
Pop
ulat
ion
(1,0
00)
2006Population
Total Growth: 15.1%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2015Population
6.38MM
88.6K90.1K
91.5K93.0K
91.5K92.9K
94.4K95.8K
97.3K
Houston MSA Projected ResidentialPopulation Growth (2006–2015)
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Diversification
• 10th in the world in total tonnage
• 60 million people live within 700 miles
• Intermodal transportation - ample truck, rail and airconnections
• Weak dollar has bolstered exports
Port ofHouston
• Grown to encompass:
– 73,600 employees
– 37 million sq. ft. of physical space (includingconstruction)
– $2 billion of construction underway
TexasMedicalCenter
• Since 1981, the percentage of local economy tiedto energy has dropped from 84% to 48%Energy
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• World center of oil & gas industry• World’s largest medical center• One of world’s largest ports
Key Employment Centers
• Enabled by relatively short landentitlement process
• Key driver of population growth• Housing affordability is attractive
to major employers
Affordability
• Home to second largest numberof Fortune 500 companies
• Taxes are relatively low to otherparts of country
• International & domesticrelocation destination
Great Place for Business
• Proximity to oil & gas wells andrefineries
• Access to water• Texas' electricity grid has limited
interconnection with other states
Resources
Houston’s Glass is Half Full
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Thank You
4665 Southwest Freeway
Houston, Texas 77027
713-328-4400
www.situscompanies.com
Maury Bronstein
Martin Bronstein
Randall Tuller
Trusted InSight into Global Real Estate
25
Appendix
26Source: U.S. Census Bureau (2007)
Cit
y(P
opu
lati
onR
ank)
6,150
9,191
17,212
19,761
33,505
44,280
46,722
56,514
60,987
71,719
5,000 20,000 35,000 50,000 65,000 80,000
San Jose (10)
San Diego (8)
Philadelphia (5)
San Antonio (7)
Los Angeles (2)
Phoenix (6)
Chicago (3)
Dallas (9)
New York (1)
Houston (4)
Average: 32,702(excludes Houston)
Residential Construction Permits for Top10 US Metro Areas (2006)In 2006, Houston issued over twice as manyconstruction permits than the average issued by theother top 10 US metro areas
Houston (4)
27Source: U.S. Census Bureau (2007)
City
(Po
pula
tion
Ran
k)
$142
$149
$150
$230
$268
$274
$469
$585
$602
$775
$100 $200 $300 $400 $500 $600 $700 $800
San Antonio (7)
Houston (4)
Dallas (9)
Philadelphia (5)
Phoenix (6)
Chicago (3)
New York (1)
Los Angeles (2)
San Diego (8)
San Jose (10)
Average: $388(excludes Houston)
Median home prices in Houston are less than half ofthe average median cost for homes in other large USmetro areas
Median Home Prices for Top 10 US MetroAreas ($1,000)
Houston (4)
28
Cost of Living Index for Top US MetroAreas (2005)Low home prices are a key factor in Houston’sfavorable Cost of Living Index
Source: ACCOR (2006)
88
94
95
98
119
129
141
153
177
213
80 100 120 140 160 180 200 220
Houston (4)
San Antonio (7)
Dallas (9)
Phoenix (6)
Philadelphia (5)
Chicago (3)
San Diego (8)
Los Angeles (2)
San Francisco (14)
New York (1)
Average of Top Metro Areas:136 (excludes Houston)
US Average: 100
Cit
y(P
opul
atio
nR
ank)
Houston (4)
29
MLS – Number of Listings & MonthsInventory
0
5
10
15
20
25
30
35
40
45
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0
2
4
6
8
10
12
Total Listings Months Inventory
Tota
lLis
tings
(1,0
00) M
onth
sInventory
Source: Texas RECenter (2008)
Highestinventory
Housing inventory was at its highest level during theearly-1990s
30
In 1981, percentage of local economy tied to energy84
Number of the nation’s top 20 oil pipelines that have corporate ordivisional headquarters or ownership interests in Houston12
Number of publicly traded oil and gas E&P firms (out of 144 total) with apresence in Houston, including 10 of the top 2543
Percentage of the nation’s jobs in crude petroleum and natural gasextraction29
Number of the nation's top 20 natural gas transmission companies withcorporate or divisional headquarters in Houston15
Number of energy-related establishments that are located within theHouston MSA, including more than 500 E&P firms and 150 pipelinetransportation companies
3,000+
Today, percentage of local economy that is related to energy48
Energy Industry
While Houston’s dependence on energy has decreasedsince the 1980s, the city’s prospects are still closelytied to the industry’s health
31
Collection of hospitals (14), research centers, and medical schools (2)comprising Texas Medical Center46
Number of employees73,600
Number of existing parking spaces and those under construction52,500+
Approximate cost of buildings under active construction$2 billion
Number of square feet of existing, under construction, and programmedphysical plant space37 million
Number of acres in the South Main area plus other locations throughoutHouston and internationally1,000
Number of full-time (33,150) and part-time (75,000) students108,150
Number of volunteers13,500
Number of RNs, LVNs, clinical caregivers, technicians, and medical supportstaff26,000+
Number of MDs, PhDs and other doctorates10,000+
Number of beds6,500
Number of international patients10,000+
Approximate patient visits per year5.5 million
Texas Medical Center
The Texas Medical Center is a hub of activity
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Port of Houston
The Port of Houston is ranked tenth in the world intotal tonnage, and is growing at a strong pace
• Among U.S. ports, ranked first in foreign waterborne tonnage and second intotal tonnage
• During 2007, it had the second highest growth rate among U.S. portsrelative to the previous year
• Centrally located on the Gulf Coast, Houston is a strategic gateway forcargo originating in or destined for the U.S. West and Midwest.
– More than 17 million people live within 300 miles of the city, and approximately60 million live within 700 miles
• Fuel prices have increased the importance of intermodal transportation
– Ample truck, rail and air connections allow shippers to economically transporttheir goods between Houston and inland points
• Houston stands to benefit from the Panama Canal expansion