Order of Presentation

1. What The Credit Crunch Has Brought to Northern Virginia:The Retail & Real Estate PerspectiveMetropolitan Washington Council of GovernmentsMetropolitan Development Policy CommitteeJuly 8, 2009

2. Order of Presentation Why the Research • Introduction • Housing • Consumer Spending • Retail • Banking • Local Government • Response to information gap: Local perspective on the credit crisis given less attention • Focus on Northern Virginia • Our view: Regional economy weakened but better off than other regions, especially close-in areas • Employment levels higher than national average • Proximity to Washington, DC • Advantage: relevant data in one place • Local governments – great asset in the research • Intention • Data-based trend analysis and insights for policy making • Audience: local government, business, thought leaders 2

3. Macroeconomic Adjustment I: Unsustainable Budget Deficit • Federal government demand for funds rising to record levels • Support of financial and auto industries • Stimulus spending • Rising interest payments and entitlements • Inevitable assistance to certain states running large deficits? • Financing sourcesconstrained • Competition for the global savings: upward limit on foreign investment in U.S. debt • Rising U.S. savings rate from low level • One rough estimate: Federal Government on pace to absorb 90% of savings pool • Federal government competing with corporate, mortgage, consumer borrowers = upward pressure on rates without continued Fed intervention

4. Macroeconomic Adjustment 2:Consumer Behavior Shift • Consumer spending led economic growth until the recession • New dynamic: savings rate grows, consumer debt slows • Consumer spending no longer counted on as dominant economic growth driver • Negative wealth effect • Employment anxiety • Probability of rising aggregate tax levels • Less Available Credit + Shift in Consumer Savings/Debt Attitude = Deleveraged Consumer

5. Downturn Started in Residential Real Estate: The Housing Prices Continue to Decline • Outer suburbs most affected; only close-in Arlington County seems somewhat immune • Price slippage started in 2006 • Price drop picked up the latter half of 2008, continued in 2009 • Temporary respite this spring during the foreclosure moratorium and very low conforming mortgage rates • Decline accelerates more in areas further from the urban center of Washington, D.C. Source: MRIS 3

6. Residential Property Tax Assessments Fall in Line • Sales prices falling more than anticipated • Commercial assessments now declining as well. • Steeper assessment declines on the way? Notes: Assessments based on most recent county reports as of May 2009 and MRIS for median price change 4

7. Foreclosureand Distressed Sales Dominate Weak Markets • Distressed buyers and sellers drive down prices Source: MRIS *Bank sales are defined as properties that were foreclosed by lenders and the lenders, in turn, have sold the properties. Note foreclosure moratorium from late 2008 through end of March 2009. 5

8. Foreclosures and Distressed Properties Rising • Foreclosures increased significantly since mid-May, following the moratorium • Incidence of foreclosures especially high in outlying areas: Using Realty Trac data prior to the moratorium effect, foreclosure actions increased from 2006 to 2008 (through October) as % of assessed residential properties • Fairfax County: 0.2% to 2.6% • Loudoun County: 0.3% to 3.1% • Prince William County: 0.5% to 7.6% • Rising delinquencies and falling prices lead to additional foreclosures and distressed properties • More than 45% subprime mortgages and 25% Alt-A in Virginia delinquent as of Mar 31 according to CoreLogic data • Nearly one in five mortgaged properties “upside down” or negative equity as of year-end 2008. 6

9. Negative and Near-Negative Equity in Mortgaged Properties by State and Nationally Year-End 2008 7

10. Residential and Commercial Retail Construction Hit • Fewer building permits and residential construction lower. • Commercial retail construction declining. Source: McGraw Hill Construction - Research and Analytics, Bedford, Mass. Source: McGraw Hill Construction - Research and Analytics, Bedford, Mass. 8

11. Auto Sales: Example of Credit Crunch Effect on Consumer Spending • Similar to housing, other consumer purchases drop, especially those that are credit-dependent • Example: Northern Virginia new auto sales – fall in sales accelerated in latter part of year and early 2009, especially domestic autos. April-May declines slowed by domestic auto dealer inventory liquidation Source: Virginia Auto Dealers Association Source: Virginia Auto Dealers Association 9

12. Less Consumer Spending Slows Demand For Retail Space

13. Distant Retail Markets Hit the Hardest in Northern Virginia

14. Distant Retail Markets Also Hit the Hardest Region Wide

15. Economic Downturn Weakens Regional Office Market

16. Banks’ Real Estate Lending Capacity Stressed • FDIC records through the first quarter indicate for Northern Virginia-headquartered banks and thrifts lending continued to be constrained. (Note that Capital One and E*Trade Bank are excluded and Chevy Chase Bank accounts for 47% of the assets) • Real estate lending remains a high multiple of equity capital. • Unfunded construction/ commercial loan commitments are another demand on bank capital. • Commercial Real Estate & Construction delinquencies and foreclosures are rising since 2005 to the present. Note: Nonperforming loans are loans more than 90 days past due Source: FDIC as of March 31, 2009 Source: FDIC as of March 31, 2009 10

17. Local Government Feels the Heat • Counties are making plans for budget cuts this fiscal year, in some cases severe • Bigger cuts this fiscal year (FY ’10) • Local government revenue base closely tied to real estate • Recordation taxes lower this fiscal year; some jurisdictions budget increase in FY ’10 assuming more distressed/foreclosure sales 11

18. Property Taxes – Major Source of Local Government Revenues • Property taxes, on average, make up over 60 percent of the local revenue base and residential assessments, on average, make up over 70 percent of the property tax base. 12

19. Sales Tax Revenues Lower in CY 2008 and 2009 • Sales taxes are another important local government revenue source. • Recession has slowed sales tax revenues and the impact is greater this year. 13 Source: Commonwealth of Virginia

20. Summary • Northern Virginia in better economic shape than other regions but credit crunch has significant effects at the local level – most negative in further out jurisdictions. • Regional economic deterioration started with residential real estate - still in decline: prices dropping, delinquencies rising - distressed sellers major driver of the market. • Consumer credit pulled back, cuts retail spending, outlook for commercial retail properties and demand for retail construction. • Biggest effect on commercial real estate markets furthest away from Washington, DC center. • Eventual recovery will be from a lower base. • Local government revenues primarily real estate dependent - downward trend continuing, accelerating in FY 10. • No easy choices, economic pain - public policy response critical variable. 16