CCIM Investment Trends Quarterly - 3Q 2010

RERCsCCIM
InvestmentTrends
Third Quarter 2010 Report s Vol. 6, No. 3 QUARTERLY
Sponsored by:
Foreword
August 2010
Dear Readers,
As mid-year data has suggested, the economic recovery has lost its steam. Growth remains positive, but momen-
tum has slowed, and even the Federal Reserve has lowered their growth expectations for the rest of the year. We
understand that this slowdown is part of the recovery process, and that there will be more ups and downs before
we achieve stabilization, but it is still disheartening to recognize that there is likely to be little if any job growth for
the rest of 2010.
Even so, there are some positive trends to point out in the commercial real estate market, as investors continue to
seek the general stability that this asset class offers. Transaction volume for the national office market increased
by nearly 30 percent during second quarter 2010 on a 12-month trailing basis. In addition, the office sector saw its
first pricing increase on a 12-month trailing basis in several years, with the size-weighted average price increas-
ing by approximately 15 percent. The industrial sector has not seen much improvement yet in either volume or
pricing, but volume did increase for the retail, apartment, and hotel sectors on a 12-month trailing basis, along
with some increase in size-weighted average pricing. As one would expect, transaction activity for the office mar-
ket was heaviest in the East region, and activity in the industrial market was heaviest in the West region.
We would also like to thank those who responded to RERC’s research surveys. The comments, data, and ratings
you provide offer exceptional insight to the changes occurring in the commercial real estate industry, and we ap-
preciate your willingness to share information for the benefit of all.
Sincerely,
Kenneth P. Riggs, Jr., CCIM, CRE, MAI Richard E. Juge, CCIM, CIPS, SIOR
President & CEO 2010 CCIM Institute President
Real Estate Research Corporation (RERC) President, RE/MAX Commercial Brokers, Inc.
Investment Trends Quarterly s Copyright© 2010 by Real Estate Research Corporation (RERC) and the CCIM Institute. 1
Investment Environment
With the slowing momentum in the economic recovery made In his Semiannual Monetary Policy Report to Congress in
more evident in second quarter 2010, we are seeing further July 2010, Federal Reserve Chairman Ben Bernanke de-
bifurcation in the investment environment. The labor market scribed the economic outlook in the U.S. as “unusually un-
is weak, yet there are significant increases in corporate prof- certain.” Besides causing another huge drop in the stock
its. Consumers are pulling back, yet the stock market has market the day the phrase was uttered, the term seems to
been positive. With respect to commercial real estate, we have reinforced the lack of confidence that Americans have
are seeing some of the highest prices ever being paid for been feeling about the economic recovery, the government’s
properties, like the recent sale of a Chicago office tower for handling of the recession, and their own financial wellbeing.
$655 million ($500 per square foot), as well as some of the
biggest losses, like the Peter Cooper Village and Stuyvesant Although there are still some positive indicators in the in-
Town apartment complexes in New York that were financed vestment environment, we have received a host of nega-
at $5.4 billion at the peak of the market, and were returned tive reports of late, and there is concern about the resilience
to creditors earlier this year at an estimated value of $1.8 of the economic recovery. This is especially discouraging,
billion. And while there is strong demand at the top of the given that the signs of recovery had been more positive just
institutional market for investment real estate (and in fact, a a few months ago. On the other hand, even in challenging
scarcity premium is being paid for such properties), we are times with multiple risks dominating the investment environ-
seeing little demand in many of the tertiary markets. ment, there are opportunities for investors
Economic Highlights
Recovery Losing Momentum Consumer Confidence Wanes
As the various economic reports came in during the past Flat home values, battered retirement accounts, stagnant
month, it was obvious that the economic recovery had wage growth, and the weak job market are having a decid-
lost its momentum. Even so, it was disappointing to hear edly negative effect on consumer confidence and spending,
that second quarter gross domestic product (GDP) growth as reflected by the Conference Board’s Consumer Confi-
slowed to 2.4 percent from an upwardly-revised first quarter dence Index, which dropped to 52.9 in June 2010 from the
growth rate of 3.7 percent on an annualized basis. Although May reading of 62.7. In addition, consumer spending re-
the decline in growth was due mostly to stronger imports mained flat in June, and June retail sales declined 0.5 per-
and slower inventories, there is concern about the resil- cent from May, although sales were still 4.8 percent higher
ience of the recovery. than year-ago reports. Both the Consumer Confidence In-
dex and retail sales figures had been on the rise during the
Further, consumer spending, still considered the growth en- 3 months prior to June, but concerns about the strength and
gine for the U.S. economy and comprising about 70 percent sustainability of the economic recovery, along with expecta-
of its annual growth, declined in second quarter. With stim- tions of slower job growth, led to declines in both of these
ulus funds subsiding, government spending also declined important indicators by the end of second quarter.
slightly. Business spending remained strong, however, with
growth at more than 20 percent for the second consecutive On the other hand, consumers increased their personal
quarter. savings rate to 6.4 percent, or $725.9 billion, in June, ac-
cording to the Commerce Department. Some economists
This slowdown led the Federal Open Market Committee view increased savings as an indication that consumers
(FOMC) to lower its GDP growth forecast to between 3.0 have made good progress toward repairing their finances
and 3.5 percent in 2010, but even this may be optimistic. and will be in a position to increase their spending during
The fact that the National Bureau of Economic Research the second half of the year, while other economists believe
(NBER) has been reluctant to declare the recession official- the savings rate reflects the bleak economic outlook and
ly over adds to the economic uncertainty and chatter about consumers’ desire to prepare for an uncertain future.
the risk of a double-dip recession. (The risk of a double-
dip recession increased slightly in June 2010, bringing the Job Growth Lacking
likelihood up to 27 percent, according to analysis of survey
results conducted by Moody’s Economy.com.) Although the unemployment rate dropped to 9.5 percent in
June 2010 and the U-6 unemployment rate ticked down to
16.5 percent, the Bureau of Labor Statistics (BLS) noted
that total nonfarm payroll employment declined by 125,000
during the month, primarily due to the loss of 225,000 Cen-
sus jobs. The decline in the unemployment rate was due to
the fact that the labor force decreased by 652,000 (despite
an increase in population), with the majority of these work-
ers dropping out of the labor force altogether, as they have
simply given up looking for jobs. However, one encouraging
sign of future employment growth is that the second-leading
source of job growth in June was temporary help in profes-
sional and business management and technical/consulting
services, suggesting that the additional need for temporary
workers will eventually translate to more permanent jobs June 30, 2010. Sales of new homes increased 23.6 percent
being created (and an increase in commercial property over May’s figures to a seasonally-adjusted annual rate of
space requirements). 330,000 homes, while building permits increased by 2.1
percent from May to a seasonally-adjusted annual rate of
The first half of 2010 saw payroll growth of approximately 586,000 permits in June, reported the U.S. Department of
100,000 workers a month, but according to Federal Reserve Commerce.
Chairman Bernanke, this is “insufficient to reduce the un-
employment rate materially,” and it will take years to recover According to the National Association of REALTORS®
the 8.5 million jobs lost in 2008 and 2009. A GDP growth (NAR), however, sales of existing homes slowed in June,
rate of 3.0 percent is traditionally considered the minimum falling 5.1 percent from May to a seasonally-adjusted an-
required to create enough jobs to even keep up with normal nual rate of 5.37 million units, although June’s 2010 sales
population growth. figures remain 9.8 percent higher than year-ago sales. As a
result, the total housing inventory rose 2.5 percent in June
Inflation or Deflation? to nearly 4 million existing homes for sale, representing an
8.9-month supply, while the median existing home price
Federal Reserve Chairman Bernanke’s remarks to Con- was $183,700. In addition, pending home sales dropped 2.6
gress in July 2010 indicated that the Federal Reserve ex- percent from the previous month.
pects subdued inflation over the next several years, with
inflation projected to average about 1 percent in 2010 and Unfortunately, the number of foreclosures increased 38
to remain low during 2011 and 2012. This is in keeping with percent during second quarter 2010 from year-ago figures,
the Consumer Price Index (CPI) reading for June 2010, re- reports RealtyTrac, Inc. At this rate, lenders will take back
flecting that the index increased 1.1 percent before season- more than 1 million homes this year. Mortgage rates remain
al adjustment over the past 12 months. However, despite a at record lows, and refinancing activity has increased, but
0.2 percent increase in core inflation in June 2010, the CPI the jury is still out as to whether low rates are enough to
declined 0.1 percent on a seasonally-adjusted basis. Due to draw buyers in or whether home values will decline further
the weakness in energy and food prices, CPI has remained without the sustenance that tax credits have provided. For
mired in deflation territory for the third straight month. now, the sector remains on the watch list.
Although there has been considerable criticism of busi- How CCIM Members View the Economy
nesses sitting on cash reserves and not investing in hiring
new employees during the recovery, increasing numbers of CCIM members rated the national economy at 4.1 on a
economists are suggesting that the lack of demand in the scale of 1 to 10, with 10 being high, during second quarter
economy at present does not warrant additional employ- 2010, which was down slightly from the previous quarter,
ment. This lack of demand, along with the fact that price and indicates that survey respondents believe the economy
increases declined further in second quarter 2010, further is struggling. However, the East, Midwest, South, and West
suggest that the environment for deflation is increasing. regional economies individually were rated the same or
higher than the previous quarter, and all were rated higher
Housing Market Still in Doubt than the national economy, indicating that CCIM members
have more confidence in their regional economies. The East
Although the housing market remains weak, sales of new regional economy was the highest-rated economy and the
single-family homes and building permits increased as ex- only economy with a rating higher than 5.0. At 4.3, the Mid-
pected in June 2010, as buyers rushed to take advantage west economy received the lowest rating, while the West
of low interest rates and the $8,000 tax credit that expired economy saw the biggest change from the previous quarter.
Commercial Real Estate Highlights
According to the July 28, 2010 Beige Book, commercial and to an investment portfolio, according to CCIM members.
industrial real estate markets continued to struggle in all 12 As noted in Exhibit 1, commercial real estate maintained its
districts during second quarter, with vacancy rates ranging lead over other investment alternatives, earning a rating of
from flat to slightly increased and exerting pressure on rents. 6.1 on a scale of 1 to 10, with 10 being high, during second
According to the FOMC, the outlook for commercial and in- quarter 2010. At 5.7, cash earned the second highest rating,
dustrial real estate remains uncertain. while stocks and bonds tied for last place among the invest-
ment alternatives.
Lending Continues to Stabilize
RERC’s institutional investment survey respondents have
The banking system has improved greatly since the begin- noted that billions of dollars in funds have been raised to
ning of the recession, and according to the FOMC, loss rates purchase commercial real estate. Since banks have imple-
on most types of loans seem to be peaking. However, many mented “extend and pretend” programs to restructure loans
banks continue to have a high number of troubled loans on on what would eventually be considered troubled assets,
their books, and bank lending standards remain tight. With fewer distressed properties are available to investors at bar-
credit demand weak and with banks writing down problem gain prices, driving prices upward. In addition, top-tier com-
credit, bank loans outstanding have continued to contract, mercial real estate properties have also become increasing-
which is particularly difficult for those small businesses that ly attractive, and investors looking to place capital for such
depend on bank credit. properties are finding a low supply of such properties, along
with elevated competition.
As for the number of troubled loans, the loan delinquency
rate continues to increase. According to Moody’s, the de- As shown in Exhibit 2, when RERC’s institutional investment
linquency rate for commercial mortgage-backed securities survey respondents were asked whether to buy, sell, or hold
(CMBS) reached 7.71 percent, with a 3-month increase of commercial real estate, the predominant answer in second
129 basis points. The hotel sector leads the way in delin-
quency rates, with 13.75 percent of loans defaulting, fol-
Exhibit 1. CCIM Respondents Rate Investments
lowed by the multi-family sector at 13.19 percent. The retail,
office, and industrial sectors are more stable, with loan de- 2Q 2010 1Q 2010
fault rates of 6.18 percent, 5.92 percent, and 5.42 percent,
respectively. Commercial Real Estate 6.1 6.0
Stocks 4.5 5.1

On a regional basis, the South and the West continue to
have the highest number of loan defaults, climbing to 9.63 Bonds 4.5 4.6
percent and 8.89 percent, respectively. Defaults in the East
Cash 5.7 5.2
increased slightly, but the East region continues to be the
most stable, with a default rate of 5.92 percent, followed by Ratings are based on a scale of 1 to 10, where 1 is poor and 10 is excellent.
the Midwest region with a default rate of 8.12 percent. Source: RERC/CCIM Investment Trends Quarterly Survey, 2Q 2010.
Unfortunately, almost every weekend we hear of several

more banks closed by the Federal Deposit Insurance Cor- Exhibit 2. RERC Historical Buy, Sell, Hold Recommendations
poration (FDIC). Just recently, the number of failed finan- 10 10
cial institutions passed the 100-mark for the year. This time
last year, the number of failed banks numbered 64. There is
8 8
more pain to come too, as the number of problem banks on 6 6

the FDIC’s list of troubled banks continues to increase, total-
ing 775 at the end of first quarter 2010.
Rating
4 4
Hold
How CCIM Members View Real Estate 2

Sell
Buy
2
Despite the uncertain economic environment and the more 0 0

01
02
03
04
05
06
07
08
09
10
than 30-percent average loss in value that this sector has

20
20
20
20
20
20
20
20
20
20
2Q
2Q
2Q
2Q
2Q
2Q
2Q
2Q
2Q
2Q
endured during the past couple years, commercial real es- Ratings are based on a scale of 1 to 10, where 1 is poor and 10 is excellent.
tate seems to be the ideal asset class for adding stability Source: RERC Institutional Investment Survey, 2Q 2010.
quarter 2010 was to hold. This was the first time in several
quarters that holding property was recommended over buy-
Exhibit 3. Real Estate Investment Conditions Ratings
ing, and with a rating of 6.8 on a scale of 1 to 10, with 10 be- 2Q 1Q 4Q 3Q 2Q
ing high, this was also a slightly higher hold rating than that 2010 2010 2009 2009 2009
for the previous quarter. In contrast, the buy rating fell to 6.1 Office 4.0 3.8 3.8 3.8 3.5
in second quarter from 6.8 in the previous quarter. Although Industrial 4.4 4.2 4.1 4.3 4.3
institutional respondents have shifted their views somewhat,
Retail 4.2 3.7 3.8 3.8 3.4
they gave the sell option a rating of 4.0, which is still consid-
ered a generally weak option. Apartment 5.9 5.5 5.4 5.5 5.1
Hotel 4.2 3.8 3.8 3.6 3.4
In looking more closely at the individual property sectors, Ratings are based on a scale of 1 to 10, where 1 is poor and 10 is excellent.
CCIM members increased their investment conditions rat- Source: RERC/CCIM Investment Trends Quarterly Survey, 2Q 2010.
ings for all property types during second quarter 2010. As
demonstrated in Exhibit 3, the apartment sector continued Exhibit 4. Historical Return/Risk and Value/Price Ratings
to receive the highest investment conditions rating, and with 2Q 2010 1Q 2010 4Q 2009 3Q 2009 2Q 2009
a rating of 5.9 on a scale of 1 to 10, with 10 being high, far
Return vs. Risk
out-distanced the ratings of the other property sectors. The
industrial sector received the second-highest rating at 4.4, Overall 5.4 5.1 4.8 5.0 4.7
while the retail and hotel sectors followed closely, each with Office 4.4 4.1 4.1 4.2 4.0
a rating of 4.2. At 4.0, the office sector received the low- Industrial 4.8 4.7 4.7 4.9 5.0
est investment conditions rating among the property types
RERC surveyed. Retail 4.7 4.1 3.9 4.0 3.6
Apartment 6.2 6.1 5.8 5.8 5.2
The return versus risk rating for commercial real estate over- Hotel 4.4 3.9 3.9 3.8 3.4
all increased to 5.4 on a scale of 1 to 10, with 10 being high,
Value vs. Price
as reported for second quarter 2010 and shown in Exhibit 4.
Although the return for investment in commercial real estate Overall 5.2 5.5 4.7 4.8 4.9
slightly outweighs the risk for this asset class, investors re- Office 4.7 5.0 4.3 4.4 4.5
main cautious. Industrial 5.1 5.0 4.7 5.0 4.9
The apartment sector retained the highest return versus risk Retail 4.5 4.9 4.2 4.4 4.3
rating, and as noted in Exhibit 4, this was the only property Apartment 5.2 5.6 4.9 5.3 4.8
type with a return versus risk rating above 5.0 on a scale of Hotel 4.7 4.7 4.0 4.1 3.9
1 to 10, with 10 being high, during second quarter 2010. The Ratings are based on a scale of 1 to 10, where 1 is poor and 10 is excellent.
office, industrial, retail, and hotel sectors were rated lower Source: RERC/CCIM Investment Trends Quarterly Survey, 2Q 2010.
than 5.0, indicating that the risk for these property sectors is
greater than the return. At 4.8, the industrial sector earned highest ranking. The industrial sector was the only property
the second highest rating, followed closely by the retail sec- type where the value versus price rating increased during
tor, which saw the biggest rating increase from the previous the quarter, earning it the second highest rating of 5.1. The
quarter. The office and hotel sectors received the lowest rat- ratings for the office and retail sectors decreased to 4.7 and
ings, at 4.4 each, indicating that while the ratings are still 4.5, respectively. The value versus price ratings for the hotel
low, CCIM members are beginning to see more potential for sector did not vary from first quarter 2010 to second quarter.
returns from these sectors for investors who can take the CCIM members believe that price is generally greater than
risk. the value of office, retail, and hotel properties, which indi-
cates that confidence remains low.
CCIM members lowered their rating for value versus price
for commercial real estate overall to 5.2 on a scale of 1 to Transaction volume increased for all property types in sec-
10, with 10 being high, during second quarter 2010, also ond quarter 2010 on a 12-month trailing basis. Volume in-
shown in Exhibit 4. Although the rating has declined, CCIM creased the most for the office sector, with a nearly 30-per-
members believe that the value of commercial real estate is cent increase over first quarter volume, while the property
slightly greater than the price of this asset class. type in which transaction volume increased the least dur-
ing second quarter was the industrial sector. The 12-month
The value versus price rating for the apartment sector de- trailing size-weighted average price per square foot/unit
clined to 5.2 on a scale of 1 to 10, with 10 being high, dur- increased in the office, retail, apartment, and hotel sectors
ing second quarter 2010, with the sector barely retaining its during second quarter, but declined slightly in the industrial
sector. In addition, the 12-month trailing weighted
average capitalization rates declined for the office, Exhibit 5. What Do the Financial Markets Tell Us?
apartment, and hotel sectors, but increased for the
industrial and retail sectors. Compounded Annual Rates of Return as of 6/30/2010
The Dow Jones Industrial Average (DJIA) declined Market Indices YTD 1-Year 3-Year 5-Year 10-Year 15-Year
drastically for the year, falling 5.0 percent to 9,687 Consumer Price Index 1
-0.28% 1.13% 1.53% 2.30% 2.34% 2.38%
by June 30, 2010, the lowest it had been since Au-
gust 2009. As shown in Exhibit 5, the other stock 10-Year Treasury Bond2 3.60% 3.43% 3.62% 4.04% 4.31% 4.87%
market indices also showed losses for the year.
However, the major U.S. stock indices saw signifi- Dow Jones Industrial Average -5.00% 18.94% -7.39% 1.66% 1.68% 7.52%
cantly higher readings in July 2010, generally re-
NASDAQ Composite3 -7.05% 14.94% -6.77% 0.50% -6.12% 5.59%
porting their biggest monthly gains in a year, as the
majority of corporate earnings surpassed expecta- NYSE Composite3 -9.96% 9.56% -13.14% -2.16% -0.49% 5.06%
tions. These stock market increases came in spite
of the avalanche of weak economic data reported in S&P 500 -6.65% 14.43% -9.81% -0.79% -1.59% 6.24%
July, which showed the recovery is slowing.
NCREIF Index 4.10% -1.48% -4.70% 3.79% 7.16% 8.78%
With such volatility in the stock market, the stability NAREIT Index (Equity REITS) 5.56% 53.90% -9.00% 0.20% 9.86% 9.76%
that commercial real estate offers investors is even
more valuable, and the second quarter 2010 returns 1
Based on the published data from the Bureau of Labor Statistics (Seasonally Adjusted).
2
reported by the National Association of Real Estate Based on Average End of Day T-Bond Rates.
3
Investment Trusts (NAREIT) and the National Coun- Based on Price Index, and does not include the dividend yield.
Sources: BLS, Federal Reserve Board, S&P, Dow Jones, NCREIF, NAREIT, compiled by RERC.
cil of Real Estate Investment Fiduciaries (NCRIEF)
in Exhibit 5, look attractive in comparison.
Summary
We are at an inflection point in the current real estate cycle, • Investors wary of the volatility driving the stock and bond
and while there are strong headwinds facing the economy markets, are turning toward the stability of commercial
and the commercial real estate market, we are starting to real estate and reliable cash flows to help round out their
see some tailwinds with respect to increases in volume and portfolios.
pricing. Given this environment, RERC concludes:
• Bank lending remains tight, but much private capital is
• GDP is slowing, and while there were growth contribu- looking for distressed property at bargain prices, or for
tions from business and government in second quarter high-quality fully-leased properties in top-tier markets at
2010, growth from consumers, which comprises approxi- nearly any price.
mately 70 percent of the economy, is lacking. Until we
see consumer spending strengthen, growth will be mini- • The vacancy rate for the apartment sector is starting
mal. to decline. Vacancy for the office and retail sectors is
expected to remain at current levels or even increase
• The unemployment rate is expected to remain at or near slightly throughout the rest of the year.
current levels throughout the remainder of the year. Pri-
vate businesses seem to be in no hurry to start hiring • Transaction volume and pricing on a 12-month trailing
until demand for their goods and services increases. basis are starting to increase, particularly in the office
sector.
• In light of the slowing in the economy, interest rates are
expected to remain at current low rates throughout the
rest of the year.
Snapshot of Real Estate Market Performance – 2Q 2010
Going-In Cap Rates vs. Unemployment

12% 12%
10%
10%
8% 8%
6% 6%
4% 4%
Unemployment 2%
2%
Going-In Cap Rate
0% 0%
7
8
20 9
10
9
0
1
2
3
4
5
6
7
8
9
0
1
2
3
4
5
6
0
1
2
3
4
5
6
7
8
2Q 200
2Q 200
2Q 200
2Q 198
2Q 199
2Q 199
2Q 199
2Q 199
2Q 199
2Q 199
2Q 199
2Q 199
2Q 199
2Q 199
2Q 200
2Q 200
2Q 200
2Q 200
2Q 200
2Q 200
2Q 200
2Q 198
2Q 198
2Q 198
2Q 198
2Q 198
2Q 198
2Q 198
2Q 198
2Q 198
2Q
Sources: RERC, BLS, NBER, 2Q 2010.
Performance Indicator Recent Data Impact on Commercial Real Estate
According to Reis, Inc., vacancy rates for the office and retail property
Office: 17.4%
sectors increased during second quarter 2010, while vacancy for the
Industrial: 10.0%
apartment sector decreased. Vacancy in the industrial property sector
Vacancy Rates Retail: 10.9%
continued to decline from the previous quarter, according to the CoStar
Apartment: 7.8%
Group. Smith Travel Research reported that hotel occupancy increased
Hotel: 65% (occupancy)
during second quarter.
Office: 1.3% to 1.8%

Rental Rates Industrial: 0.9% to 1.4% RERC’s second quarter 2010 rental rate expectations were slightly high-
(RERC’s surveyed rent Retail: 0.9% to 1.3% er for the office, retail, apartment, and hotel sectors, when compared to
growth expectations) Apartment: 2.2% those for first quarter 2010.
Hotel: 1.7%
RERC Required Returns: NCREIF Realized Returns:

RERC’s second quarter 2010 required returns for the retail sector were
Office: 8.9% to 9.8% Office: -4.6% to 2.4%
lower than first quarter returns, while those for the office, industrial,
Industrial: 9.4% to 10.1% Industrial: -4.1% to 2.8%
Real Estate Returns Retail: 9.1% to 9.6% Retail: -0.8% to -0.5%
apartment, and hotel sectors were higher. NCREIF’s realized returns
continued to improve for all property sectors during second quarter, with
Apartment: 8.6% Apartment: -0.1%
positive returns being seen in the office and industrial sectors.
Hotel: 11.4% Hotel: -5.8%
RERC Realized Cap Rates: NCREIF Implied Cap Rates:

RERC’s second quarter 2010 realized cap rates were lower than first
Office: 7.2% Office: 6.6% to 7.1%
quarter rates for the office, apartment, and hotel sectors, and were higher
Industrial: 8.5% Industrial: 7.3% to 7.6%
Capitalization Rates Retail: 8.6% Retail: 6.9% to 7.7%
for the industrial and retail sectors. NCREIF’s implied capitalization rates
for second quarter were higher in each sector compared to the previous
Apartment: 6.8% Apartment: 5.8%
quarter.
Hotel: 8.7% Hotel: 5.6%
National Market Analysis
National Transaction Breakdown

12-Month Trailing Averages (07/01/09 - 06/30/10)
Office Industrial Retail Apartment Hotel
< $2 Million
Volume (Mil) $1,301 $2,414 $2,447 $1,062 $65
Size Weighted Avg. ($ per sf/unit) $84 $48 $83 $48,731 $26,318
Price Weighted Avg. ($ per sf/unit) $120 $76 $126 $70,474 $35,219
Median ($ per sf/unit) $89 $57 $86 $51,250 $23,636
$2 - $5 Million
Volume (Mil) $1,694 $2,607 $2,695 $2,032 $314
> $5 Million
Volume (Mil) $21,777 $6,442 $15,521 $16,271 $4,112
All Transactions
Volume (Mil) $24,771 $11,462 $20,663 $19,365 $4,492
Capitalization Rates (All Transactions)
Range (%) 4.8 - 12.9 4.2 - 13.1 4.2 - 13.3 4.0 - 11.1 6.5 - 13.1
Weighted Avg. (%) 7.2 8.5 8.6 6.8 8.7
Median (%) 8.2 8.8 7.7 7.0 9.0
Source: RERC.
National Market Analysis
National Transaction Breakdown

Current Quarter Rates (04/01/10 - 6/30/10)
< $2 Million
Volume (Mil) $329 $581 $653 $292 $25
$2 - $5 Million
Volume (Mil) $440 $635 $711 $597 $91
> $5 Million
Volume (Mil) $8,450 $1,782 $3,536 $3,792 $2,078
All Transactions
Volume (Mil) $9,220 $2,998 $4,900 $4,681 $2,194
Range (%) 4.8 - 12.9 5.8 - 12.2 6.3 - 12.6 4.4 - 9.9 –
Weighted Avg. (%) 6.6 8.1 8.3 6.3 –
Median (%) 7.9 8.6 7.8 6.6 –
Source: RERC.
National Office Property Sector
RERC Weighted Average Capitalization Rate w Many respondents to the RERC/CCIM Investment Trends
(12-Month Trailing Average) Quarterly survey stated that office properties are the most
9%
West
9% available property type now because of distressed sales
South National
East Midwest
and foreclosures, although prices are a little above market
value. In addition, a few respondents reported that inroads
8% 8%
are being made into reducing office inventory.
w Twelve-month trailing office sector volume started to in-

crease in 2010, after declining since third quarter 2007. In
7% 7%
addition, the office sector saw its first increase in 12-month
trailing pricing during second quarter 2010. Capitalization
rates also reversed direction this quarter.
6% 6%
2Q09 3Q09 4Q09 1Q10 2Q10
w Twelve-month trailing volume increased by nearly 30 per-
cent over first quarter volume, while the size-weighted av-
erage price increased by approximately 15 percent. The
weighted average capitalization rate decreased to 7.2 per-
RERC Size-Weighted Average PPSF cent, while the median capitalization rate remained stable
(12-Month Trailing Average) at 8.2 percent.
$275 $275
South West National
East Midwest w According to Reis, Inc, second quarter 2010 office va-
$225 $225
cancy rose to 17.4 percent, a level unseen since 1993.
This is the 10th consecutive quarterly increase in vacancy
$175 $175
for the office sector. In addition, effective rent declines ex-
ceeded asking rent declines, with second quarter asking
$125 $125
rents down 0.2 percent while effective rents were down 0.8
percent.
$75 $75
$25 $25
2Q09 3Q09 4Q09 1Q10 2Q10
RERC Price-Weighted Average PPSF

(12-Month Trailing Average)
$500 $500
South West National
East Midwest
$400 $400
$300 $300
$200 $200
$100 $100
$0 $0
2Q09 3Q09 4Q09 1Q10 2Q10
National Industrial Property Sector
RERC Weighted Average Capitalization Rate w Respondents to the RERC/CCIM Investment Trends Quar-
(12-Month Trailing Average) terly survey commented that industrial properties were
9.0% 9.0% reasonably priced, and because of distressed sales and
foreclosures, the supply of industrial properties was quite
ample. The national industrial vacancy rate declined dur-
8.5% 8.5%
ing second quarter 2010, the first decrease in more than 2
years according to CoStar Group.
8.0% 8.0%
National
West w It appears that volume in the industrial sector has leveled
Midwest off after slight increases during the first part of 2010. The
7.5% 7.5%
South 12-month trailing size-weighted average price per square
East
foot of industrial property has been declining for the past
7.0%
2Q09 3Q09 4Q09 1Q10 2Q10
7.0% five quarters, but began to show signs of stabilization in
2010. The capitalization rates for this property sector have
been steadily increasing since first quarter 2009.
w RERC’s analysis of 12-month trailing and current quar-

RERC Size-Weighted Average PPSF ter industrial property transactions showed no significant
(12-Month Trailing Average) change in either volume or pricing during second quarter
$100
South West National
$100
2010. The 12-month trailing weighted average and me-
East Midwest dian capitalization rates increased to 8.5 percent and 8.8
$75 $75 percent, respectively.
w According to CoStar Group, the national industrial vacan-

$50 $50
cy rate declined by 10 basis points to 10.0 percent, dur-
ing second quarter 2010. Rental rates continued to fall,
$25 $25 though at a slower pace than during previous quarters.
The industrial warehouse sector continues to struggle, as
rental rates are not expected to increase until 2011. Sec-
$0 $0
2Q09 3Q09 4Q09 1Q10 2Q10 ond quarter 2010 net absorption was reported to be 13
million square feet.

$150 $150
South West National
East Midwest
$125 $125
$100 $100
$75 $75
$50 $50
$25 $25
2Q09 3Q09 4Q09 1Q10 2Q10
National Retail Property Sector
RERC Weighted Average Capitalization Rate w According to respondents to the RERC/CCIM Investment
(12-Month Trailing Average) Trends Quarterly survey, the retail sector continues to face
10% 10% difficulties. The effects of the poor economy and slow job
South West National growth are negatively impacting the retail sector, as evi-
East Midwest denced by the increasing vacancy rate. As such, respon-
9% 9% dents commented that retail properties are abundantly
available.
8% 8%
w After showing signs of stabilization since fourth quarter
2009, 12-month trailing volume for the retail sector began
7% 7% to increase in second quarter 2010. The 12-month trailing
size-weighted average price for the sector has also been
increasing since fourth quarter 2009, while the capitaliza-
6%
2Q09 3Q09 4Q09 1Q10 2Q10
6% tion rates have been increasing since third quarter 2009.
w The 12-month trailing transaction volume increased more

than 10 percent for the retail property sector during sec-
ond quarter 2010. The 12-month trailing size-weighted av-
RERC Size-Weighted Average PPSF erage price per square foot also increased during second
(12-Month Trailing Average) quarter, while the 12-month trailing weighted average and
$200 $200 median capitalization rates increased to 8.6 percent and
South West National 7.7 percent, respectively.
$175 $175
East Midwest
w According to Reis, Inc., the retail vacancy rate increased
$150 $150 by 10 basis points during second quarter 2010, although
this increase is the smallest since the beginning of 2008.
$125 $125
In addition, the negative net absorption of 2.2 million
$100 $100
square feet for the quarter is modest in comparison to
fourth quarter 2009. Completions have nearly stopped at
$75 $75 355,000 square feet, and are at the lowest quarterly level
since Reis began reporting this data 10 years ago. Asking
$50
2Q09 3Q09 4Q09 1Q10 2Q10
$50 and effective rents are comparable to first quarter 2010
results, and the pace of decline has continued to slow.

$300 $300
South West National
East Midwest
$250 $250
$200 $200
$150 $150
$100 $100
2Q09 3Q09 4Q09 1Q10 2Q10
National Apartment Property Sector
(12-Month Trailing Average) Quarterly survey said that the apartment sector remains a
8.0% 8.0% safe investment with little risk, and that it has held up rela-
South West National
Midwest
tively well during the downturn. Apartments are increasing
East
7.5% 7.5% in demand and value due to low vacancy rates, few new
housing starts, and an illiquid market.
7.0% 7.0%
w According to RERC’s transaction analysis, the apartment
6.5% 6.5% sector has been showing steady improvement since fourth
quarter 2009. Twelve-month trailing volume and price per
6.0% 6.0% unit have been steadily increasing for the past 3 quarters.
5.5%
2Q09 3Q09 4Q09 1Q10 2Q10
5.5% w The weighted-average capitalization rate has been de-
creasing slightly during the first half of 2010, with the sec-
ond quarter 2010 rate decreasing by 10 basis points to
6.8 percent. The median capitalization rate remained un-
changed at 7.0 percent during second quarter.
RERC Size-Weighted Average PPU
(12-Month Trailing Average) w The vacancy rate for the apartment sector declined 20 ba-
$125,000
South West National
$125,000
sis points during second quarter 2010, bringing vacancy to
East Midwest 7.8 percent, according to Reis, Inc. This is the first time in 2
$100,000 $100,000 years that the vacancy rate has been this low. In addition,
net absorption increased by more than 46,000 units. Ask-
ing and effective rents grew at an accelerated rate during
$75,000 $75,000
second quarter, increasing by 0.4 percent and 0.7 percent,
respectively.
$50,000 $50,000
$25,000 $25,000
2Q09 3Q09 4Q09 1Q10 2Q10
RERC Price-Weighted Average PPU

$250,000 $250,000
South West National
East Midwest
$200,000 $200,000
$150,000 $150,000
$100,000 $100,000
$50,000 $50,000
$0 $0
2Q09 3Q09 4Q09 1Q10 2Q10
National Hotel Property Sector
(12-Month Trailing Average) Quarterly survey reported that the hotel sector continued
9.5% 9.5% to struggle due to the weak economy and a continued lack
of jobs. However, a few respondents noted that the hotel
9.0% 9.0% sector is beginning to see some strengthening due to the
turnaround in occupancy and because the hotel sector is
8.5% 8.5% undercapitalized.
8.0% 8.0% w RERC’s transaction analysis shows the hotel sector began
National a slow turn-around during the first half of 2010. Twelve-
7.5%
East
7.5% month trailing volume and the size-weighted price per unit
both increased for the past 2 quarters. Transaction volume
7.0%
2Q09 3Q09 4Q09 1Q10 2Q10
7.0% hit bottom in fourth quarter 2009, after peaking during fourth
quarter 2007.
w Transaction volume for the hotel sector increased by more

than 25 percent on a 12-month trailing basis during second
RERC Size-Weighted Average PPU quarter 2010. The 12-month trailing size-weighted price
(12-Month Trailing Average) per unit increased from the previous quarter. The 12-month
$125,000
South West National
$125,000
trailing weighted average and median capitalization rates
East Midwest decreased 50 basis points each to 8.7 percent and 9.0 per-
$100,000 $100,000 cent, respectively.
w According to Smith Travel Research, occupancy in the ho-

$75,000 $75,000
tel sector increased by 6.9 percent to 65.0 percent in June
2010. The average daily rate (ADR) increased 1.0 percent
$50,000 $50,000 to $98.33, and the revenue per available room (RevPAR)
increased by 8.0 percent to $63.87.
$25,000 $25,000
2Q09 3Q09 4Q09 1Q10 2Q10
RERC Price-Weighted Average PPU

$250,000 $250,000
South West National
East Midwest
$200,000 $200,000
$150,000 $150,000
$100,000 $100,000
$50,000 $50,000
$0 $0
2Q09 3Q09 4Q09 1Q10 2Q10
East Region
Tr a n s a c t i o n B r e a k d o w n
East Transaction Breakdown

< $2 Million
Volume (Mil) $276 $598 $651 $178 $8
$2 - $5 Million
Volume (Mil) $420 $663 $791 $618 $61
> $5 Million
Volume (Mil) $10,530 $1,817 $4,939 $6,491 $1,318
All Transactions
Volume (Mil) $11,226 $3,077 $6,380 $7,286 $1,387
Range (%) 4.8 - 10.5 5.8 - 12.3 4.2 - 10.0 4.5 - 9.3 6.5 - 9.0
Weighted Avg. (%) 7.0 8.3 7.9 6.5 8.0
Median (%) 8.0 8.8 7.5 7.0 7.4
Source: RERC.
South Region
South Transaction Breakdown

< $2 Million
Volume (Mil) $354 $520 $734 $181 $17
$2 - $5 Million
Volume (Mil) $315 $401 $698 $308 $89
> $5 Million
Volume (Mil) $2,603 $930 $4,816 $4,188 $1,179
All Transactions
Volume (Mil) $3,272 $1,850 $6,247 $4,676 $1,285
Range (%) 6.9 - 10.4 7.0 - 10.7 5.8 - 10.8 5.6 - 10.6 –
Weighted Avg. (%) 8.1 8.8 8.8 7.4 –
Median (%) 8.5 9.0 8.0 7.6 –
Source: RERC.
Midwest Region
Midwest Transaction Breakdown

< $2 Million
Volume (Mil) $208 $356 $361 $119 $12
$2 - $5 Million
Volume (Mil) $167 $366 $263 $183 $37
> $5 Million
Volume (Mil) $2,150 $736 $1,412 $787 $515
All Transactions
Volume (Mil) $2,526 $1,458 $2,036 $1,090 $564
Range (%) 7.0 - 10.0 6.8 - 11.0 5.9 - 10.5 6.0 - 10.1 –
Weighted Avg. (%) 7.7 8.9 8.6 7.3 –
Median (%) 8.6 8.9 8.0 8.0 –
Source: RERC.
We s t R e g i o n
West Transaction Breakdown

< $2 Million
Volume (Mil) $463 $939 $702 $584 $28
$2 - $5 Million
Volume (Mil) $787 $1,174 $943 $923 $128
> $5 Million
Volume (Mil) $6,476 $2,953 $4,355 $4,806 $1,100
All Transactions
Volume (Mil) $7,727 $5,067 $6,000 $6,313 $1,256
Range (%) 6.0 - 12.9 4.2 - 13.1 6.0 - 13.3 4.0 - 11.1 –
Weighted Avg. (%) 7.6 8.5 9.2 6.6 –
Median (%) 8.1 8.6 7.5 6.7 –
Source: RERC.
GDP FOMC Policy Decisions
9 9 7 7
Discount Rate
7 7
Percent Change Quarter Ago
6 6
Fed Funds Rate
5 5
5 5
3 3
Percent
4 4
1 1
3 3
-1 -1
2 2
-3 -3
-5 -5 1 1
-7 -7 0 0
0
0
1
1
2
2
3
3
4
4
5
5
6
6
7
7
8
8
9
9
10
No -00
Ja -02
Ja -03
Fe -04
Ja -05
Ja -06
Ja -07
M -0 8
D -0 9
Ap -00
Au -09
J u -0 9
Ja 01
Au -05
S e 01
10
Au -02
Au -03
Au -04
Au -06
Au -07
Au -08
4Q 00
2Q 00
4Q 0
2Q 0
4Q 00
2Q 0
4Q 0
2Q 0
4Q 00
2Q 0
4Q 0
2Q 0
4Q 0
2Q 0
4Q 0
2Q 0
4Q 0
2Q 00
4Q 0
2Q 0
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
p-
r-
n-
ay
g
v
ar
ec
b
2
2
n
2Q
M
Source: Bureau of Economic Analysis. Source: Federal Reserve.
According to the Bureau of Economic Analysis, real gross domestic product (GDP) growth In the June 2010 meeting, the Federal Open Market Committee (FOMC) stated that the recovery
was revised upward to 3.7% in first quarter 2010 and increased 2.4% on an annualized basis would continue “at a moderate pace.” The federal funds rate remained in the 0.0% to 0.25%
in second quarter 2010. This was the fourth consecutive quarterly increase. Growth slowed in range and the discount rate remained at 0.75%. However, there is greater concern about the
second quarter due to stronger imports and lower inventories, but was buoyed by homebuild- recovery, as deflation concerns increased during second quarter 2010. The FOMC is expected
ing, business investment, and spending by federal, state, and local governments. to keep the federal funds rate at its current range into the spring of 2011.
Unemployment Manufacturing Utilization

12 12 85 85
10 10 80 80
8 8 75 75
Percent
Percent
6 6 70 70
4 4 65 65
2 2 60 60
0
n- 0
n- 0
7
8
5
6
2
4
0
1
0
9
c 0
c 1
c 2
c 3
c 4
9
c 5
c 6
c 7
c 8
c 9
10
8
4
5
2
c 9
10
0
c 7
c 8
c 4
c 5
c 6
c 2
c 3
c 0
c 1
Jub-0
Ju -0
Jub-0
Ju -0
Jub-0
Ju -0
Ju -0
Jub-0
Ju -0
Jub-0
Ju -1
Ju -0
Jub-1
Ju -0
Jub-0
Ju -0
Jub-0
Jub-0
Ju -0
Jub-0
Jub-0
Ju -0
Fe t-0
Fe t-0
Fe t-0
Fe t-0
Fe t-0
Fe t-0
Fe t-0
Fe t-0
Fe t-0
Fe t-0
O n-0
O n-0
O n-0
O n-0
O n-0
O n-0
O n-0
O n-0
O n-0
O n-0
Fe t-0
Fe t-0
Fe t-0
Fe t-0
Fe t-0
Fe t-0
Fe t-0
Fe t-0
O n-0
Fe t-0
Fe t-0
O n-0
O n-0
O n-0
O n-0
O n-0
O n-0
O n-0
O n-0
O n-0
b
b
b
b
b
b
Fe
Fe
Source: Bureau of Labor Statistics. Source: Federal Reserve.
The unemployment rate increased to 9.9% in April 2010 before improving to 9.5% in June, Manufacturing utilization increased to 71.6% in June 2010, and over the past year, has risen
due primarily to the contraction in the labor force of 652,000 workers. Despite this decline, the by more than 6%, the largest annual rise in more than a quarter-century. However, industrial
employment report was weaker than expected, with payroll gains tepid. activity stalled in June, and there are concerns about the extent of the slowing. The good news
is that although consumer spending has weakened, spending by businesses has been strong.
Also, auto production is expected to rebound in July.
Consumer Price Index Retail Sales

0.4 0.4 10 10
Year To Year Percent Change
Percent Change Month Ago
0.3 0.3
5 5
0.2 0.2
0 0
0.1 0.1
-5 -5
0.0 0.0
-10 -10
-0.1 -0.1
-0.2 -0.2 -15 -15

10
9
09
0
09
0
9
10
10
O 7
O 8
O 9
9
Fe 7
Fe 8
Fe 9
Ap 8
Ap 9
Ap 0
Ju 8
Ju 9
Ju 0
D 7
D 8
D 9
Au 8
Au 9
10
-0
-0
-1
-1
-1
-0
0
l-0
-0
-0
-0
0
1
r-0
r-0
r-1
-0
-0
-0
0
0
-
v-
p-
n-
n-
g-
g-
g-
ay
g
b-
b-
b-
ec
ar
n-
n-
n-
b
r
ct
ec
ec
ec
ct
ct
ct
Ap
No
Ju
Au
Se
Fe
Ju
Ja
Au
M
O
M
D
Source: Bureau of Labor Statistics. Source: Census Bureau.
The Consumer Price Index (CPI) decreased 0.1% to 218.0 in June 2010, the third consecutive Retail sales fell for the second consecutive month in June 2010, decreasing 0.5%. This indi-
month it has fallen. However, compared to a year ago, the CPI was up 1.1%. Deflation is a con- cates that the momentum for spending growth has slowed, although retail sales were still 4.8%
cern due to the decline in gas prices and in food prices remaining flat. Consumer spending has higher than a year ago. Consumers remain cautious, and it is expected that when spending
dropped, and the rest of the year looks challenging. One positive sign is the shelter index, which growth does resume, it will be modest.
is finally showing strength. Though deflation is unlikely, the risk will continue until employment
strengthens. Core inflation is expected to increase again in 2011.
Consumer Confidence Housing Affordability
120 120 190 190
180 180
100 100 170 170
160 160
80 80
150 150
Index
Index
140 140
60 60
130 130
40 40 120 120
110 110
20 20 100 100
O 06
O 01
Ja 07
Ja 02
O 07
O 08
O 09
Ap 08
Ap 03
M 05
Au 07
Au 02
Fe 07
Fe 08
Fe 09
Fe 09
Fe 04
Ju 0
Ju 5
Se 09
Se 04
M 06
Ap 07
Ap 08
Ap 09
Ap 10
M 01
No 08
No 03
Ju 07
Ju 08
Ju 09
Ju 10
D 07
D 08
D 09
Au 07
Au 08
Au 09
10
Ju 8
Ju 3
0
D 5
1
0
0
0
l-1
l-0
-
-
g-
g-
v-
v-
-
-
p-
p-
b-
b-
r-
r-
-
-
n-
n-
g-
g-
g-
n-
n-
-
b-
b-
b-
b-
r-
r-
r-
r-
-
-
n-
n-
n-
n-
ay
ay
ec
ar
ar
ct
ct
ec
ec
ec
ct
ct
ct
Fe
M
Source: The Conference Board. Source: NAR.
Consumer confidence started off positive in second quarter 2010, reaching 62.7 in May before The NATIONAL ASSOCIATION OF REALTORS® Housing Affordability Index measures whether
falling in June and declining to 50.4 in July. Consumers are weighed down by a variety of or not a typical family could qualify for a mortgage on a typical home. This is defined by home
concerns, including the fear of another recession, job insecurity, a volatile stock market, and price averages, family income, and mortgage rates. A reading of 100 means that a family with
others. a median income has exactly enough income to qualify for a mortgage on a median-priced
home. A reading above 100 signifies that a family has more than enough income to qualify for
a mortgage loan on a median-priced home, assuming a 20% down payment.
S&P 500 Existing Home Sales

Beginning of Month Adjusted Closing Price
1,600 1,600 8.0 8.0

1,500 1,500
1,400 1,400
7.0 7.0
1,300 1,300
1,200 1,200
Millions
1,100 1,100 6.0 6.0

1,000 1,000
900 900
800 800 5.0 5.0
700 700
600 600
4.0 4.0
Ju -00
Ju -01
Ju -02
Ju -03
Ju -04
Ju -05
Ju -06
Ju -07
Ju -08
Ju -09
Ju -10
Fe -00
Fe t-01
Fe -02
Fe -03
Fe -04
Fe -05
Fe t-06
Fe -07
Fe t-08
Fe -09
O -00
O -01
O -02
O -03
O -04
O -05
O -06
O -07
O -08
O -09
10
n-
b
b
ct
ct
ct
ct
ct
ct
ct
n
Ju -02
Ju -03
Ju -04
Ju -05
Ju -06
Ju -07
Ju -08
Ju -09
Ju -10
Fe t-01
Fe -02
Fe -03
Fe -04
Fe -05
Fe -06
Fe t-07
Fe t-08
Fe -09
O -01
O -02
O -03
O -04
O -05
O -06
O -07
O -08
O -09
10
c
c
Fe
n-
b
b
ct
ct
ct
ct
ct
ct
n
n
c
c
Ju
Source: S&P. Source: NAR.
The S&P 500 ended July 2010 at 1,030.71, down 0.05% from May. Since April, the S&P 500 Existing home sales fell by 5.1% in June 2010 at an annualized rate of 5.37 million units. The
has slowly but steadily continued to decrease, although in general, the stock market has been pace of sales is still up 10% from June 2009. In addition, sales increased by an annualized
quite volatile during this time period. rate of 42% during second quarter, as compared to the previous quarter’s sales. With the
homebuyer tax credits ending April 30, housing was expected to show a decline, and although
the decline was more than expected, sales are on track to exceed last year’s pace. Home prices
are expected to stabilize in early 2011.
Index of Leading Indicators Single Family Home Supply

1.6 1.6 10 10
1.4 1.4
Percent Change Quarter Ago
1.2 1.2
9 9
1.0 1.0
0.8 0.8
Months
0.6 0.6 8 8
0.4 0.4
0.2 0.2
0.0 0.0 7 7
-0.2 -0.2
-0.4 -0.4
6 6
10
9
09
0
09
0
9
10
10
9
-0
-0
-1
-1
-1
-0
l-0
-
v-
p-
n-
n-
0
9
09
0
09
ay
0
g
10
ec
ar
10
b
r
ct
-1
-0
Ap
-0
-1
No
Ju
-1
-1
-0
Au
Se
Fe
Ju
Ja
l-0
M
O
v-
D
p-
n-
n-
ay
g
ec
ar
b
r
ct
Ap
No
Ju
Au
Source: NAR. Source: NAR.

Se
Fe
Ju
Ja
M
O
M
D
The Conference Board’s Index of Leading Indicators fell 0.2% in June 2010, indicating that With a 4% increase in listings and a decline in sales, the June 2010 single-family home supply
the pace of recovery is likely to slow in coming months. This decline was primarily due to the increased to 8.9 months, well above the normal rate of around 6.0 months. With increased
stock market, supplier deliveries, and average work week for production workers. However, the foreclosures, this number is expected to increase further.
index was 8.6% higher than year-ago readings, and if the index reading improves, as expected,
during the next few months, the recovery will begin strengthening by 2011.
Scope & Methodology
The analysis provided in the RERC/CCIM Investment Trends Quarterly is conducted by Real Estate Research Corporation (RERC). The information is gathered in raw form from surveys sent to
CCIM designees and candidates, and from sales transactions collected from various sources, including CCIM members, various key commercial information exchange organizations (CIEs), the
media, assessors’ offices, RERC contacts in the marketplace, and other reliable public and private resources. All sales transactions are aggregated, analyzed, and reported on by RERC. Additional
data and forecasts are provided courtesy of the REALTORS® Commercial Alliance and Torto Wheaton Research.
Published quarterly, the RERC/CCIM Investment Trends Quarterly report provides timely insight into transaction volume, pricing, and capitalization rates for the core income-producing properties.
RERC Definitions
Capitalization Rate: The capitalization rate is defined as the first year “stabilized” net operating income (NOI) (NOI is before capital expenditures – tenant improvements, leasing commissions,
reserves – and debt service) divided by the present value (or purchase price). Capitalization rates included are transaction-based medians and price-weighted averages.
RERC Capitalization Rate and Ranges: Capitalization rates and ranges listed throughout this report are based on RERC’s proprietary realized capitalization rate model, which includes available
transaction-based capitalization rates, NCREIF Index Returns, and other market factors, but is heavily weighted toward transaction-based capitalization rates for each property type within each market.
Price-Weighted Average: The price-weighted average is developed through weighting each asset based on the gross sales price. Therefore, larger dollar properties are given more weight than the
smaller dollar properties, with the weighted average reflecting more weight towards institutional real estate.
Size-Weighted Average: The size-weighted average is developed through weighting each asset based on its gross square footage – simply an aggregation of all the gross sales prices divided by
the aggregation of the gross square footage.
National/Regional Market Analysis: RERC ranks the investment potential of the metros and property types it covers based on various space market and financial market criteria, including pricing,
capitalization rates, vacancy rates, and other factors.
Investment Conditions Rating: A rating of 1 through 10 (with 10 being high) reflecting survey respondents’ collective views of the investment environment for a particular property type in comparison
with other property types. The rating may take into account supply and demand, economic conditions, pricing, rental rates, or other factors.
NCREIF Definitions
NCREIF: The National Council of Real Estate Investment Fiduciaries (NCREIF) is an independent organization dedicated to the compilation, validation, and distribution of performance data for the
institutional real estate investment community.
Total Return: The total return includes appreciation (or depreciation), realized capital gain (or loss), and income. It is computed by adding the income and capital appreciation return on a quarterly
basis.
Implied Cap Rate (Income Return): The implied capitalization rate measures the portion of return attributable to each property’s NOI. It is computed by dividing the total NOI by the total quarterly
investment.
Capital Appreciation Return: The capital appreciation return measures the change in market value adjusted for any capital improvements/expenditures and partial sales divided by the average
quarterly investment.
Annual and Annualized Returns: Annual returns are computed by chain-linking quarterly rates of return to produce time-weighted rates of return for the annual and annualized periods under study.
For time periods beyond 1 year, the annualized returns are expressed as the annual compounded rate of return.
Allocation: The distribution, expressed as a percentage of the overall investment, in a particular geographic area by property type.
For a detailed description of the proceeding returns, as well as the calculations used by NCREIF to derive these figures, please visit http://www.ncreif.org/indices.
The combined returns are the weighted average of the returns for each property type according to the proportionate market value of properties surveyed relative to the total market values surveyed
during a time period.
RERC Defined Regions and MSAs
West: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming
Midwest: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin
South: Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Oklahoma, Tennessee, Texas
East: Connecticut, Delaware, Kentucky, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia,
Washington D.C., West Virginia
Metropolitan Statistical Area (MSA): A geographic unit comprised of one or more counties around a central city or urbanized area with 50,000 or more population. Contiguous counties are
included if they have close social and economic links with the area’s population nucleus.
With a few exceptions, the MSAs within this report coincide with the U.S. Office of Management and Budget’s December 2005 definitions for each MSA. For example, St. Paul, Minn., and Bloom-
ington, Minn., as well as many other suburbs, are included within the Minneapolis MSA.
Note of Caution: It is imperative to exercise caution when comparing the data contained herein to previous reports published by RERC. The data herein is not “fixed,” and will be updated and
changed as additional transaction information is gathered and analyzed.
Disclaimer: This publication is designed to provide accurate information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering
legal or accounting service. The publisher advises that no statement in this issue is to be construed as a recommendation to make any real estate investment or to buy or sell a security or as
investment advice. The examples contained in the publication are intended for use as background on the real estate industry as a whole, not as support for any particular real estate investment or
security. Although the RERC/CCIM Investment Trends Quarterly uses only sources that it deems reliable and accurate, Real Estate Research Corporation (RERC) does not warrant the accuracy of
the information contained herein.
Acknowledgements
RERCsCCIM Investment Trends QUARTERLY
RERC Editorial Staff
The RERC/CCIM Investment Trends Quarterly is produced by Publisher

Real Estate Research Corporation (RERC) in association with Kenneth P. Riggs, Jr.
CFA®, CRE, FRICS, MAI, CCIM
and for members of the CCIM Institute.
Editor-in-Chief
Barb Bush
Real Estate Research Corporation
Lead Analyst
Founded more than 75 years ago, Real Estate Research Corporation Brian Velky
(RERC) was the nation’s first independent real estate firm that specialized
in both real estate research and analysis. Recognized as a pioneer in the Research Analysts
art of real estate management and for monitoring key sectors of the econ- Greg Philipp
Cliff Carlson
omy that influence the real estate industry, RERC has retained its place as Jeff Carr
one of the industry’s leading real estate investment trends analysts through Charles Gohr
the publication of such reports as Expectations & Market Realities in Real David Kelly
Estate and the RERC Real Estate Report. Today, RERC is known for its Lindsey Kuhlmann
research publications and market studies, commercial property valuations, Aaron Riggs
Meredith Steffen
complex consulting assignments, portfolio Ye Thway
management and technology services, and Morgan Westpfahl
independent fiduciary services.
Design Editor
Michelle Houlgrave
The CCIM Institute Data Management
Since 1969, the Chicago-based CCIM Institute has conferred the Certi- Scott Hamerlinck
Ben Neil
fied Commercial Investment Member (CCIM) designation to commercial
Daniel Warner
real estate and allied professionals through an extensive curriculum of 200
classroom hours and professional experiential requirements. Currently, Production Committee
there are 9,000 CCIMs in 1,000 markets in the U.S. and 31 additional coun- Terri Cotter
tries. Another 7,000 practitioners are pursuing the designation, making the
institute the governing body of one of the largest commercial real estate Research Assistants
Jeffrey Harms
networks in the world. An affiliate of the National Association of Realtors®, Chris Riggs
the CCIM Institute’s recognized curriculum, networking programs, and
powerful technology tools such as the Site To Do Business (site analysis
and demographics resource) and CCIMREDEX (commercial property data CCIM Institute
exchange), impact and influ-
President
ence the commercial real es-
Richard Juge, CCIM
tate industry. Visit www.ccim.
com, www.stdbonline.com, President-Elect
and www.ccimredex.com for Frank Simpson, CCIM
more information.
First Vice President
Leil Koch, CCIM
Copyright Notice for RERC~CCIM Investment Trends Quarterly
Treasurer
Copyright© 2010 by Real Estate Research Corporation (RERC) and the CCIM Institute. All rights Craig Blorstad, CCIM
reserved. No part of this publication may be reproduced, duplicated, or copied in any form, includ-
ing electronic forwarding or copying, xerography, microfilm, or other methods, or incorporated into Chief Executive Officer
any information retrieval system, without the written permission of RERC and the CCIM Institute. Susan Groeneveld, CCIM
Contributors
Jay Amoruso RE/MAX Precision Realty Hartford, CT M&I Marshall & Ilsley
Rob Green Indianapolis, IN
Bank
Beau Beery AMJ Inc. of Gainesville Alachua County, FL
Jeff Greischar Tech Builders Inc. Minneapolis, MN
Bart Binning Prudential Alliance Realty Oklahoma City, OK
Coldwell Banker
Mike Habib San Diego, CA
Tri-State Security Asset Commercial
Chip Bonghi West
Advisors
Chris Harris Mutual of Omaha Bank Las Vegas, NV
Latchezar Boyadjiev California Realty San Diego, CA
Jordan-Hart
Jack Hayes Columbus, GA
Jay Boyle Cassidy Turley San Diego, CA Commercial Real Estate
Heiden Homes Realty &
Josh Breaux K W Commercial Los Angeles, CA Toni L. Heiden Denver, CO
Associates
Coldwell Banker
Taro Chellaram Houston, TX Cindy Hopkins K W Commercial San Antonio, TX
Commercial United
Ben Cherry Manor Real Estate St. Louis, MO Gary Hunter Capital Financial, LLC Seattle, WA
Prudential Fox & Roach, Chris Jacobson Northmarq Minneapolis, MN

George Chronakis South Jersey
Realtors Coldwell Banker
Charles Kelly Dallas, TX
Tim Churchwell Prudential Towne Realty Norfolk, VA Commercial
Ralphael Marie Atlantic Coast Realty ERG Property
Tampa, FL James Kinsey New York, NY
Clarke Advisors, Inc. Advisors
Coldwell Banker Glen Kitto Kitto Realty Group Dallas, TX
Greg Clauson Destin, FL
Commercial United
Kenneth Krawczyk K.S.K. Services, Inc. Milwaukee, WI
SILVESTRI-CRAIG,
Coba C. Craig Midwest Gary J. Lee Carter & Associates Atlanta, GA
Realtors
Commercial Chris Leon Realty World San Francisco, CA
John DeStefano South Carolina
Investment Group, LLC
The Linco Group -
William T. Ellis Concord Properties, LLC San Antonio, TX Bruce Lindquist K W Commercial San Diego, CA
Charter Commercial Temecula
J.W.(Bill) Ernst Indianapolis, IN
Realty Group Quattro Development,
Mike Liyeos Midwest
NTS Development L.L.C.
Tony Fluhr Louisville, KY
Company Coldwell Banker
Karl Dee Maret Tampa, FL
Commercial NRT
William E Gamble Gamble Real Estate South
Steve Maygar CBC TradeMark Raleigh, NC
Century 21 Golden Post
Todd Gannet Northern New Jersey
Commercial Daryl Mccubbin Recap Advisors Nashville, TN
PICOR Commercial
Robert Glaser Tucson, AZ Melissa Molyneaux Colliers International Reno, NV
Real Estate Services
Chad Gleason Retail Realty Services Seattle, WA Dan Montgomery Western Properties Portland, OR
Capital Asset Chris Napier Foster Pepper PLLC Seattle, WA

Roger Gray San Antonio, TX
Properties, LC
Contributors
Real Property Brent Tayet CBRE Seattle, WA

Scott Naugle Washington, DC
Investment Mgmt., LLC
Nick A. Tillema Access Group, LLC Indianapolis, IN
O’Connor Mortgage
Tom O’Connor West
Investments Inc. BremnerDuke
Edward Trn Washington, DC
Coldwell Banker Healthcare Real Estate
Michael Overton Commercial Raleigh, NC Betty Tse GE Property Los Angeles, CA
CoastalMark
Hugh J. Wade Spire Commercial Alaska
Jeffrey Packer All Pro Real Estate Inc. Salt Lake City, UT
Christopher G.
Prudential Gary Greene, RC Commercial Realty Philadelphia, PA
Sherry Palermo Houston, TX Wallace
Realtors
National Realty
Donald Park Park Holdings LLC Phoenix, AZ John Walters Northern New Jersey
Investments LLC
Sean Patrick Ackerman & Co. Atlanta, GA RE/MAX of Spokane-
Tom Watson Spokane, WA
Commercial
Antoine Pirson Caldecott Properties San Francisco, CA
David L. Williamson BancorpSouth Bank Birmingham, AL
Joe Regner C. Brenner, Inc. Orlando, FL
Nancy Wluka Wluka Real Estate, Corp. Boston, MA
Don Bennett &
Bob Rein Phoenix, AZ Danny Zelonker Miami, FL
Associates, Inc.
Magnusson Balfour
John Robinson Commercial Maine
Brokerage
Dan Robinson
Ricardo Rubiano
Lidstrom Commercial
Realtors
AAA Real Estate &
Midwest
Rio Grande Valley in

Thank you
Investment Texas
Brandon K. Sanders Steve Eustis Co.
Slack Alost
West Texas,
San Angelo to all who
C. Stewart Slack South
shared
Development
Gambone, Songer &
Thomas Songer III Tampa, FL
Associates
Commercial
information
Robert Stefka Omaha, NE
Investment Services
Steinmetz Real Estate
Bonnie Steinmetz Milwaukee, WI
Group LLC
for this report.

Jack Fowler &
Angela Sumner Yavapai County, AZ
Associates
Gary Tang Hannah Investment, Inc. San Francisco, CA
NAI Ruhl & Ruhl
Jim Tansey Iowa, Illinois
Commercial Co.

CCIM Investment Trends Quarterly - 3Q 2010

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RERCsCCIM

Stocks 4.5 5.1

Unfortunately, almost every weekend we hear of several

more pain to come too, as the number of problem banks on 6 6

How CCIM Members View Real Estate 2

Despite the uncertain economic environment and the more 0 0

than 30-percent average loss in value that this sector has

Going-In Cap Rates vs. Unemployment

Sources: RERC, BLS, NBER, 2Q 2010.

Performance Indicator Recent Data Impact on Commercial Real Estate

Office: 1.3% to 1.8%

RERC Required Returns: NCREIF Realized Returns:

RERC Realized Cap Rates: NCREIF Implied Cap Rates:

National Transaction Breakdown

National Transaction Breakdown

w Twelve-month trailing office sector volume started to in-

RERC Price-Weighted Average PPSF

w RERC’s analysis of 12-month trailing and current quar-

w According to CoStar Group, the national industrial vacan-

RERC Price-Weighted Average PPSF

w The 12-month trailing transaction volume increased more

RERC Price-Weighted Average PPSF

RERC Price-Weighted Average PPU

w Transaction volume for the hotel sector increased by more

w According to Smith Travel Research, occupancy in the ho-

RERC Price-Weighted Average PPU

East Transaction Breakdown

South Transaction Breakdown

Midwest Transaction Breakdown

West Transaction Breakdown

Unemployment Manufacturing Utilization

Source: Bureau of Labor Statistics. Source: Federal Reserve.

Consumer Price Index Retail Sales

-0.2 -0.2 -15 -15

Source: Bureau of Labor Statistics. Source: Census Bureau.

Source: The Conference Board. Source: NAR.

S&P 500 Existing Home Sales

1,600 1,600 8.0 8.0

1,100 1,100 6.0 6.0

Source: S&P. Source: NAR.

Index of Leading Indicators Single Family Home Supply

Source: NAR. Source: NAR.

The RERC/CCIM Investment Trends Quarterly is produced by Publisher

Prudential Fox & Roach, Chris Jacobson Northmarq Minneapolis, MN

Capital Asset Chris Napier Foster Pepper PLLC Seattle, WA

Real Property Brent Tayet CBRE Seattle, WA

Rio Grande Valley in

Brandon K. Sanders Steve Eustis Co.

for this report.

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