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THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2006: What Kind Of Transition Year For

THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2006: What Kind Of Transition Year For A Middle-Aged Expansion? A Presentation To The Counselors Of Real Estate Annual Convention Maui, Hawaii October 24, 2006.

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THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2006: What Kind Of Transition Year For

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  1. THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2006: What Kind Of Transition Year For A Middle-Aged Expansion? A Presentation To The Counselors Of Real Estate Annual Convention Maui, Hawaii October 24, 2006

  2. GLOBAL ECONOMIC GROWTH REMAINS STRONG THROUGH 2007 Real GDP Growth, Percent Change Avg. Avg. Annual, Annual, 1996-2000 2002-2005 2001 2006 Fcst 2007 Fcst World 3.9 2.6 4.3 5.1 4.9 U.S. 4.1 0.8 2.8 3.4 2.9 Other "Advanced" 2.8 1.4 2.0 2.9 2.6 Developing Areas 5.0 4.4 6.7 7.3 7.2 Asia 6.4 6.1 8.3 8.7 8.6 China 8.3 8.3 9.8 10.0 10.0 India 6.1 4.1 7.0 8.3 7.3 Latin America 3.1 0.5 3.1 4.8 4.2 Russia 1.6 5.1 6.4 6.5 6.5 Eastern Europe 3.2 -0.2 4.8 4.9 4.6 Sources: IMF, World Economic Outlook, April 2004, Sept. 2006

  3. FORECAST HIGHLIGHTS • * Moderate Economic Growth Into 2007 • --How Deep A Slump In Housing? • * “Core” Inflation’s Bumpy Ride Back To 2% • * An Extended Fed “Pause,”…Then? • * Long-Term Rates “Anchor” The “Yield Curve” • * A Diminished “Tail Wind” For Commercial Real Estate

  4. BANKS' BROAD-BASED "EASING" OF CREDIT TERMS STILL EXTENDS TO MORTGAGE LOANSNet % Of Large Commercial Banks Reporting Tighter Lending Standards 16 12 Net "Easing" '06Q3 8 4 0 -4 Net "Tightening" -8 -12 Sep-92 Sep-94 Sep-96 Sep-98 Sep-00 Sep-02 Sep-04 Sep-06 Source: Federal Reserve Board

  5. A "SOFT LANDING " FOR HOME SALES? Percent Index: 3/16/90=100 6.9 460 Mortgage "Purchase" Applications, Rolling 4-Wk. 6.8 Avg. (Right Scale) 430 6.7 6.6 10/14/06 Wk. 400 6.5 30-Yr. Fixed-Rate Mortgages 6.4 (Left Scale) 370 6.3 Mortgage "Purchase" Applications, Rolling 10-Yr. Avg (Right Scale) 6.2 340 6.1 6.0 310 12/31/05 02/25/06 04/22/06 06/17/06 08/12/06 10/07/06 Source: Mortgage Bankers Association; Freddie Mac

  6. HOUSING MARKETS STILL GENERALLY TRACKING ECONOMIC ACTIVITY IN THE SECOND QUARTER Rank By Rank By Rank By Rank By Q2 Home Q2 Job Q2 Home Q2 Job Price Inc Growth Price Inc Growth Top 10 Housing Markets Bottom 10 Housing Markets NM 1 8 WI 41 38 OR 2 9 NV 42 1 UT 3 3 MN 43 11 WA 4 7 IN 44 43 ND 5 23 OH 45 45 ID 6 4 ME 46 48 WY 7 5 NH 47 33 MT 8 10 MA 48 42 MS 9 46 WV 49 36 AZ 10 2 MI 50 49 U.S. 32 n.a. Source: OFHEO, U.S. Dep't Of Labor

  7. COMPETITIVENESS STILL STRONG ENOUGH TO SUPPORT HEALTHY U.S. EXPORT GROWTH Year-Ago % Chg., 3-Mo. Moving Avg. Index: 2000=100 15 110 8/06 108 106 10 104 102 5 100 98 96 0 94 92 -5 90 Inflation-Adjusted Exports 88 (Left Scale) "Real" Trade-Weighted 86 Dollar* -10 9/06 84 (Right Scale) 82 -15 80 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 * Against 44 other currencies, adjusted for inflation differences between the U.S. and its trading partners. Source: J.P. Morgan Chase, Inc.

  8. A TYPICAL LATE-CYCLE ROTATION (AND THEN SOME) FROM RESIDENTIAL TO NON-RESIDENTIAL CONSTRUCTIONCurrent-Dollar Construction Spending; Year-Ago % Change 30% Residential 25% 20% 15% 10% 5% 0% -5% Non-Residential -10% Recession Period Aug '06 -15% -20% Nov-98 Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Source: U.S. Commerce Department

  9. JOB GROWTH STRONGEST IN THE MOUNTAIN STATESYear-Ago Percent Change, Non-Farm Payrolls 3.9% Aug. '05-'06 3.3% Aug. '02-Aug. '05, Avg Ann % Chg 2.7% 2.1% 1.5% 0.9% 0.3% -0.3% Pacific Mtn. US Atlantic East Central West Central Source: U.S. Depart Of Labor

  10. INVESTORS POSITIONED FOR INTEREST-RATE CUTS BY THE FEDERAL RESERVEThe Treasury Yield Curve, Selected Periods; Yields In Percent 5.5 10/13/06 4.5 Current Fed Funds Target Rate (5/10/06)=5.25% 6/29/04 3.5 2.5 Fed Funds Target Rate, 6/29/04=1% 1.5 0.5 0 5 10 15 20 25 30 35 40 Years To Maturity Source: Bloomberg Financial News, Inc.

  11. THE CASE FOR AN EXTENDED “PAUSE” BY THE FED • * Moderate Economic Growth • * “Cyclical,” Structural” Pressures Slow The Decline Of “Core” Inflation • * Financial-Market “Liquidity” Still Ample • * “Effective” Interest Rates Still Fairly Low

  12. CREDIT-DEFAULT INSURANCE STILL "CHEAP" Dollar Cost Of Insuring $10,000 In Debt Through Credit-Default Swaps; 10-Day Averages 75 70 65 Avg., 1/04-12/05=55 B.P. 60 55 50 45 10/12/06 40 35 30 31-Dec-03 13-Jul-04 25-Jan-05 08-Aug-05 14-Feb-06 21-Aug-06 Sources: JP Morgan Chase, Inc., Bloomberg Financial News, Inc.

  13. STILL NOT MUCH "BITE" TO MONETARY POLICYFederal Funds Rate Less Yr-To-Yr Nominal GDP Growth; Percentage Points 11 Note: Diamonds Denote Fed Funds Rate Less GDP 9 Growth At End Of Credit-Tightening Cycles 7 5 3 1 06 Q3e -1 -3 -5 -7 -9 Dec-68 Dec-73 Dec-78 Dec-83 Dec-88 Dec-93 Dec-98 Dec-03 Source: U.S. Commerce Dep't; Federal Reserve Board

  14. “RISKS” IN THE OUTLOOK * A HOUSING “BUST” THAT RIVALS THE “BOOM” * GLOBAL THREATS --Energy-Prices, Terrorism/ Geo-Political Strains, The Dollar * “TWIN DEFICITS,” BURDENSOME HOUSEHOLD DEBT --”Kindling,” Not Catalysts * CHANGES IN WASHINGTON’S POWER BALANCE * FINANCIAL-MARKET TURBULENCE

  15. FOREIGN INVESTORS KEEP THEIR FAITH IN THE U.S ECONOMY Billions Of Dollars Percent 180 110% Private Foreign Investment As A % Of U.S. Financing Needs* 100% (Right Scale) 150 2006Q2 90% 120 80% 70% 90 60% Dollar Amount Of Private Foreign Investment 60 (Left Scale) 50% 30 40% Dec-98 Jun-00 Dec-01 Jun-03 Dec-04 Jun-06 * Current account deficit plus U.S. purchases of foreign securities & direct investment abroad; 4-qtr moving. average data. Source: U.S. Commerce Department

  16. ONGOING THEMES SHAPING LONGER-TERM ECONOMIC PERFORMANCE • * The “Financialization” Of Commodities • * An Aging Population’s Impact On Potential Growth, Spending & Investment Patterns • * Corporate Restructuring Via Mergers, Acquisitions & Spin Offs • * Political “Polarization” & Its Impact On Economic Policy • * “Muted” Economic Cycles, Efficient & Inherently Volatile Financial Markets • * Intense Competition Via Ongoing “Globalization”

  17. HEALTHY "FUNDAMENTALS," LOW INTEREST RATES POWER REAL ESTATE'S SOLID RETURNS Year-Ago % Chg. Percentage Points 22 9 '06Q2 20 NCREIF Property 10-Yr. Treasury Yield Index 18 8 (Right Scale) (Left Scale) 16 14 7 12 10 6 8 6 5 4 2 4 0 -2 3 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Sources: NCREIF; Federal Reserve Board

  18. HOTEL PROPERTIES & THE WEST OUT IN FRONTAverage Annual Percent Changes 25% 2000Q4- 20% 2005Q4 2005Q2- 2006Q2 15% 10% 5% 0% West East South Retail Hotels Offices Midwest Industrial Apartments All Properties Source: NCREIF; Rosen Consulting Group

  19. CAP RATES FOR MAJOR PROPERTY TYPES AT HISTORIC LOWSPercent 10.5% Industrial Offices 9.5% Retail 8.5% Apartments 7.5% 1995-2005 FH 2006 Difference Industrial 9.1% 7.2% -1.9% Office 9.0% 6.8% -2.2% 6.5% Retail 8.8% 7.6% -1.3% Apartments 8.3% 5.9% -2.4% As Of '06Q2 5.5% 1986 1989 1992 1995 1998 2001 2004 2007 Sources: ACLI; Rosen Consulting Group

  20. WHERE ARE WE IN THE REAL ESTATE CYCLE?Property Type/ Location Arranged By Cycle Phase 1: ABSORPTION 3: EQUILIBRIUM Suburban & Downtown Offices Industrial Multi-Family Rental Strip Malls Extended/ Ltd. Service Hotels Regional Malls 2: GROWTH 4: OVERSHOOTING Full Service Hotels So. California Condos 5: DECLINE Single Family So. Fla./ L.V. Condos Source: Rosen Consulting Group, Inc.

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