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Property & Portfolio Research, Inc.

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.

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Property & Portfolio Research, Inc.

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  1. Trends, Opportunities, and Risks in Commercial Real Estate Property & Portfolio Research, Inc. www.ppr.info

  2. The U.S. Economy

  3. 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 2.5% 350 300 2.0% 250 200 1.5% 150 100 1.0% 50 0 0.5% (50) (100) (150) 0.0% 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 Source: U.S. Bureau of Labor Statistics

  4. Job Losses Concentrated in Housing Bust Markets East Midwest West South Percent Job Growth Year-over-Year as of March 4% 3% 2% 1% 0% (1%) (2%) (3%) Miami Austin Detroit Seattle Atlanta Boston Tampa Norfolk PPR54 Denver Raleigh Orlando Hartford Phoenix Chicago Houston Portland St. Louis Honolulu East Bay Stamford Charlotte Memphis Nashville San Jose Baltimore New York Cincinnati Cleveland Pittsburgh Columbus Richmond San Diego Las Vegas Milwaukee Long Island Kansas City Minneapolis Indianapolis Sacramento Jacksonville San Antonio Philadelphia Los Angeles New Orleans Salt Lake City Inland Empire San Francisco Oklahoma City Orange County Fort Lauderdale Dallas - Fort Worth Palm Beach County Washington - NoVA - MD North - Central New Jersey Sources: Moody’sEconomy.com; Bureau of Labor Statistics

  5. The Severity of Market Employment Cycles Will Be Quite Different MidWest East West South 2009 Employment Growth 3.5% Phoenix Inland Empire 3.0% San Antonio Austin Las Vegas Atlanta Sacramento 2.5% Raleigh Dallas - Fort Worth Minneapolis Denver Charlotte Orlando Seattle Orange County Houston Portland 2.0% Salt Lake City San Jose East Bay Indianapolis San Diego Baltimore San Francisco Honolulu Fort Lauderdale Nashville 1.5% Cincinnati Stamford Columbus Palm Beach County Oklahoma City Long Island Chicago Richmond Los Angeles Boston 1.0% Philadelphia Tampa New York Pittsburgh Hartford Kansas City Cleveland Milwaukee Jacksonville 0.5% Miami New Orleans 0.0% (0.02) (0.02) (0.01) (0.01) 0.00 0.01 0.01 0.02 0.02 0.03 2008 Employment Growth Sources: Moody’s Economy.com; PPR

  6. 10% 8% 6% 4% 2% 0% (2%) (4%) 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Inflation is a Serious Concern CPI (U.S. Consumer) PPI (U.S. Producer) Year-over-Year Change *As of April 2008 Sources: BLS; Moody’s Economy.com; PPR

  7. Is CPI Still a Good Measure of Inflation?

  8. What Happens When Investors Demand a Real Rate of Return? 10-Year Treasury Rate CPI Inflation 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 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 Sources: Federal Reserve; U.S. Census Bureau

  9. Forecast for the Economy is Not Pretty • 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 • 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

  10. Capital and Debt Markets

  11. Fears are Easing TED Spread Basis Points 300 250 200 150 100 50 0 5/4/2007 7/4/2007 9/4/2007 1/4/2008 3/4/2008 5/4/2008 11/4/2007 4/4/2007 6/4/2007 8/4/2007 2/4/2008 4/4/2008 10/4/2007 12/4/2007 Sources: Federal Reserve Board; Daily Press

  12. Loans ARE Still Performing Well (Including foreclosure and REO) Delinquency 60+ Days Percentage 2002 2003 2004 2005 2006 2007 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0.0 0 10 20 30 40 50 60 70 Deal Age Source: Trepp

  13. 1,000 12,000 900 10,000 800 700 8,000 600 6,000 500 400 4,000 300 2,000 200 100 0 12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007 Private Lenders Have Some Free Time Number of Loans Dollar Volume ($ Millions) Source: Giliberto-Levy

  14. Few Deals Getting Done Monthly Transaction Volume Warehouse Retail Office Apartment CMBS Issuance $ Billions 70 60 50 40 30 20 10 0 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 Sources: RCA; Trepp; PPR

  15. NCREIF Spreads over 10-Year Treasury (1993Q1–2008Q1) Basis Points 500 450 400 350 300 Mean Plus 1 Std. Dev. Mean Plus 2 Std. Devs. 250 200 150 100 50 0 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Sources: NCREIF; PPR

  16. Values Will Take Their Biggest Hit This Year Apartment Office Retail Warehouse Value Growth 20% 15% 10% 5% 0% (5%) (10%) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2003 Source: PPR

  17. Housing

  18. Housing Affordability Looks More Promising For Buyers Affordability Index 30-year Mortgage Rate Afford. Index 30-year Mort. Rate (%) 140 11 130 10 120 9 110 8 100 7 90 6 80 5 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Source: Moody’s Economy.com

  19. The Credit Spigot Continues To Tighten For Housing Net % of Banks With Tighter Prime Mortgage Loan Standards New Home Sales (‘000 SAAR) Net % of Banks With Tighter Subprime/Non-Traditional Loan Standards 100 1,400 80 1,200 60 1,000 40 800 20 600 0 400 (20) 200 (40) 0 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 1991Q1 1993Q1 1995Q1 1997Q1 1999Q1 2001Q1 2003Q1 2005Q1 2007Q1 Sources: Federal Reserve; Census Bureau; PPR

  20. Decline in Home Sales is Accelerating Existing SF Existing Condo New SF Year-over-Year Change (%) 30 20 10 0 (10) (20) (30) (40) (50) 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 Sources: NAR; U.S. Census Bureau *As of April 2008

  21. Unprecedented Foreclosure Activity Further Adding to Inventory Homeownership Rate (%) Percent of Loans Entering Foreclosure 70 0.90 69 0.80 68 0.70 67 66 0.60 65 0.50 64 63 0.40 62 0.30 61 60 0.20 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Source: MBA; U.S. Census Bureau (Thru 07Q4)

  22. Falling Home Prices ≠ Dramatic Spike In Apartment Demand Year-over-Year % Change in Existing SF Median Prices Net Apartment Absorption (PPR54) 20 90,000 80,000 15 70,000 60,000 10 50,000 40,000 5 30,000 20,000 0 10,000 0 (5) (10,000) (10) (20,000) 1984Q1 1986Q1 1988Q1 1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 Source: NAR; PPR

  23. Apartment Market Under Some Pressure Quarterly Change in Demand Quarterly Change in Supply Vacancy Rate Demand & Supply (Units) Percentage Vacant 20 70,000 18 60,000 16 50,000 14 40,000 12 30,000 10 20,000 8 10,000 6 0 4 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 (10,000) 2 0 (20,000) Source: PPR (08Q1)

  24. U.S. Homeowner Vacancy Rate Vacancy Rate (%) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 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 Source: U.S. Census Bureau

  25. Falling Treasuries Helping to Keep Cap Rates Low Despite Rising Spreads PPR54 Apartment Spreads vs. Rent Growth Spread 10-Year Treasury Rate Quarterly Rent Growth 6.5% 2.0% Forecast 6.0% 1.5% 5.5% 1.0% 5.0% 0.5% 4.5% 0% 4.0% 0.5% 3.5% 3.0% (1.0%) Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Sources: PPR; Moody's Economy.com

  26. Retail

  27. The Good News About Retail This Page Intentionally Left Blank

  28. PPR54 Retail Market Fundamentals Quarterly Change in Demand Quarterly Change in Supply Vacancy Rate Demand & Supply (000 SF) Percentage Vacant 100,000 25 80,000 20 60,000 15 40,000 20,000 10 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 5 (20,000) (40,000) 0 Source: PPR (08Q1)

  29. Office

  30. The Market Is Weakening Quarterly Change in Demand Quarterly Change in Supply Vacancy Rate Demand & Supply (000 SF) Percentage Vacant 60,000 30 40,000 25 20,000 20 0 15 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 (20,000) 10 (40,000) 5 (60,000) 0 Source: PPR

  31. 4% 3% 2% 1% 0% (1%) (2%) (3%) (4%) (5%) Some Important Markets Are Seeing Weak Growth Percent Office-Using Job Growth East Midwest West South Year-over-Year as of March 08 Miami Austin Detroit Seattle Atlanta Boston Tampa Norfolk Denver Raleigh Orlando Hartford Phoenix Chicago Houston Portland St. Louis Honolulu East Bay Stamford Charlotte Memphis Nashville San Jose Baltimore New York Cincinnati Cleveland Pittsburgh Columbus Richmond San Diego Las Vegas Milwaukee Long Island Kansas City Indianapolis Minneapolis Sacramento Jacksonville San Antonio Philadelphia Los Angeles New Orleans Salt Lake City Inland Empire San Francisco Oklahoma City Orange County Fort Lauderdale Dallas - Fort Worth Palm Beach County Washington - NoVA - MD North - Central New Jersey Sources: Moody’s Economy.com; BLS

  32. 4% 2% 0% (2%) (4%) (6%) (8%) (10%) (12%) (14%) (16%) But Definitely Not the Dot-Com Bust 2001 Recession Peak To Trough Employment 3/31/2001–9/30/2002 Forecasted/Current Peak To Trough Employment 12/31/2007–9/30/2008 Atlanta Boston Seattle Phoenix Chicago Houston New York San Diego Washington - NoVA -MD Philadelphia Los Angeles North - Central New Jersey San Francisco Orange County Dallas - Fort Worth *Top 15 U.S. Office Markets Source: Moody's Economy.com, PPR

  33. Two Years of Flat Rents PPR54 Recent History and Forecast - Office Rent Change Rent Growth 10% 8% 6% 4% 2% 0% (2%) (4%) (6%) (8%) (10%) 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: PPR

  34. 2008 Rent Growth by Metro Midwest West South East 11.1% 8% 6% 4% 2% 0% (2%) (4%) (6%) Miami Austin Detroit Seattle Atlanta Boston Tampa PPR54 Norfolk Denver Raleigh Orlando Phoenix Hartford Chicago Portland Houston St. Louis Honolulu East Bay Nashville Charlotte Memphis Stamford San Jose Baltimore New York Cincinnati Cleveland Richmond Columbus Pittsburgh San Diego Milwaukee Las Vegas Long Island Minneapolis Indianapolis Kansas City Jacksonville Sacramento Philadelphia San Antonio Los Angeles New Orleans Inland Empire Salt Lake City San Francisco Oklahoma City Orange County Fort Lauderdale Dallas - Fort Worth North - Central New Palm Beach County Washington - NoVA - MD Source: PPR

  35. Primary Secondary Tertiary 11.0% 10.5% 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.5% 7.0% 7.0% 6.5% 5.7% 6.0% 5.5% 5.0% 4.5% Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Cap Rates Rising Across the Board Median Cap Rate By Quarter Sources: PPR; Real Capital Analytics

  36. Overview of the U.S. Warehouse Market

  37. PPR54 Warehouse Market Fundamentals Quarterly Change in Demand Quarterly Change in Supply Vacancy Rate Demand & Supply (000 SF) Percentage Vacant 25 50,000 45,000 40,000 20 35,000 30,000 15 25,000 20,000 10 15,000 10,000 5 5,000 0 0 (5,000) 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Source: PPR (08Q1)

  38. The Demand Forecast Has Some Upside Wholesale Trade Inventory Growth Total Import/Export Growth Warehouse Net Absorption Wholesale Trade Sales Growth Net Absorption (million SF) Year-Over Growth (%) 20% 80 15% 60 10% 40 5% 20 0% 0 (5%) (20) 0 (10%) (40) (15%) (60) 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sources:U.S. Census Bureau; Moody’s Economy.com; PPR

  39. Annual Warehouse Supply as % of Inventory 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 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

  40. Local Rent Growth Regional Rent Growth National Rent Growth National Distribution Hubs Are More Volatile 8% Forecast 6% 4% 2% 0% (2%) (4%) (6%) 1989 1990 1991 1993 1994 1996 1997 1999 2000 2002 2003 2005 2006 2008 2009 2011 2012 Source: PPR

  41. Warehouse NOI Growth vs. Cap Rate Increase (%) Annual NOI Growth Annual Cap Rate Change (%) Value Appreciation 5% 4% 3% 2% 1% 0% (1%) (2%) (3%) 2008 2009 2010 2011 2012 Average

  42. Warehouse Markets Are Inefficiently Priced Forecast Cumulative NOI Growth Regional National Local (08Q2–12Q4) 30% Cheap, relatively speaking, and a strong NOI growth forecast! Strong NOI growth forecast, but expensive. Orange County Los Angeles 25% Salt Lake City San Francisco Minneapolis East Bay Raleigh Inland Empire 20% Tampa Seattle Sacramento Atlanta Philadelphia Denver Stamford Chicago Columbus Nashville 15% Baltimore Portland Richmond Miami Memphis Boston San Jose Indianapolis Norfolk 10% New York Orlando Hartford Charlotte Washington - NoVA - MD Cincinnati Las Vegas Houston Oklahoma City Honolulu Cleveland North - Central New Jersey 5% San Diego Kansas City Phoenix Palm Beach County Austin Pittsburgh San Antonio Fort Lauderdale Dallas - Fort Worth Milwaukee Jacksonville 0% New Orleans Low NOI growth and too expensive! Cheap, but not a lot of upside in NOI. St. Louis Detroit (5.0%) (1.5%) (1.0%) (0.5%) 0.0% 0.5% 1.0% 1.5% 2.0% 08Q2 Going-in Cap Rate Relative to Average

  43. What to Do?

  44. 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

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