Commercial Real Estate

Fall 2008
Market Overview

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>> CAPITAL
MARKETS CAPITAL MARKETS

Prices are declining as Capitalization (CAP) Rates return to more normalized levels.
Investors are facing higher borrowing costs and have access to less leverage. This has
forced many previously active buyers to the sidelines.

INVESTMENT SALES AND VALUES (DOMESTIC):

• The value cycle has accelerated into a declining market much faster than historical norms would suggest, as the debt
markets impact the overall deal flow and subsequently establish a less competitive investment sales market.

• Investors are facing higher borrowing costs and have less access to leverage. This has forced many previously active buyers
to the sidelines driving lower prices and resulting in a lower volume of transactions.

• Low-leveraged and cash buyers are now taking advantage of the market including institutional buyers and foreign capital.

• What we are seeing is a simple supply and demand equation; less competition for quality assets equates to lower pricing
across the board.

Overall:
• Property sales were off 62% in the first half of the year,
but still over $85 billion of significant deals did close.
However, the structure and capitalization of these sales
has changed dramatically in the wake of the credit crunch.
• All cash, assumable mortgages or seller financing are
behind the majority of successful transactions this year.
• Wall Street and the major national banks that financed
almost 60% of all deals from 2006 through mid-2007
now account for just 9% of acquisition financings. Buyers
are increasingly stepping forward with all cash.
• Buyers are relying on assumable mortgages, a major shift in
lending patterns. Assumable debt is now the financing
method of choice: it was used in up to half of acquisitions
this year and we are seeing the emergence of a more
aggressive seller through seller financing.
• The credit markets are very tight. While there is some
lending occurring with balance sheet lenders - primarily
regional and local banks as well as life insurance companies
– the deals getting done are high quality assets with credit
tenancy and significant equity.
• The Commercial Mortgage Backed Securities (CMBS)
markets have failed to recover in 2008. Through June, $12.1
billion of new issuances hit the market; representing a 91%
drop year-over-year. To put that into perspective, CMBS
financing accounted for 70% of all CRE financing in ‘07.
CMBS spreads indicate a lack of confidence in underlying
credit.

Source: Real Capital Analytics

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 >> CAPITAL
MARKETS
OFFICE
Capitalization (CAP) rates rose in Q4-2007
by 50 basis points (bps) for suburban office
and 25 bps for CBD office. By Q2-2008 we
began to see another decline in CAP rates
with averages at 5.75% for CBD assets and
7.1% for suburban.

• Prices peaked in early 2007 and then began to decline
as deal volume declined.
• With few exceptions, the primary markets with high
quality assets are outperforming the national mean
and continue to see decent volume of transactions;
albeit significantly less than the first half of ‘06 and ‘07.
INDUSTRIAL AND FLEX
Industrial product has seen the largest
correction in CAP rates of the four product
types; increasing 60 bps on average.
Average capitalization rates stand at 7.35%.

OFFICE INVESTMENT SNAPSHOT INDUSTRIAL INVESTMENT SNAPSHOT

CBD SUBURBAN FLEX WAREHOUSE

CBD SUBURBAN FLEX WAREHOUSE

Source: Real Capital Analytics

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 RETAIL INVESTMENT SNAPSHOT
>> CAPITAL
MARKETS

RETAIL
Retail volume is off as well; showing an overall
decline of 62% since January 2008.

• The Mid-Atlantic market was down 74%; while the

Midwest saw only an 11% decline with several large
asset sales in Chicago setting the pace for the
region.

• The Northeast performed better than the national

average with a decline in volume of 50% - while the
Southeast – including several Florida markets
(Orlando and Tampa), Nashville and Atlanta - were
off as much as 90%.

• The Southwest and the West performed slightly

better than the national average but have still seen
declines in excess of 50% since the beginning of the
year.

• CAP Rates overall have risen to 7% on average,

however, some markets have shown improvement.

Source: Real Capital Analytics

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 >> CAPITAL
MARKETS
MULTI-FAMILY
The multi-family market has been the most resilient product type. While sales have declined
45% year-over-year through July, the monthly figures are showing a significant
improvement over previous months.

CAP rates have risen to an average of 6.6% on Garden Apartments – a rate not seen since 2004 levels. These price
declines are thought to have spurred the activity in transaction volume. With CAP rates still low on CBD assets; the
volume was off as most buyers shied away from those urban markets.

As with all product types, financing is still an issue and most transactions are occurring through debt assumption.
Freddie Mac and Fannie Mae are the primary lenders in the multi-family space, and while they have more than doubled
their deal volume, they are still far below what the CMBS markets were lending.

MULTI-FAMILY INVESTMENT SNAPSHOT

GARDEN MID/HIGH-RISE

GARDEN MID/HIGH-RISE

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Source: Real Capital Analytics

>> MARKET
FUNDAMENTALS
OFFICE
• The 2nd Quarter of 2008 saw negative net
absorption in the office sector and a 20 bp increase in
vacancy to 13% nationally, up from 12.6% in January.
Expect to see continued increases in vacancy through
year end – with a projected rate of 13.7% (a full 100 bp
increase over 2007).
• Effective rents will continue to see increases in 2008
of approximately 3.9% as compared to effective rent
gains in 2007 of 10.6%. This decline results from an
increase in landlord concessions and an overall
softening in demand.
• It should be noted, however, that effective rents are
6.6% higher than they were at this time last year;
solid growth by any measure.
Source: Reis
Source: Reis
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INDUSTRIAL
While export business has seen a significant increase,
many users in the industrial sector are taking the “wait
and see” attitude. Net absorption is significantly off this
year – down from $39.1 M to $225 K YTD. Vacancy
increased to 10.3% (a full 100 bp increase over 2007) and
is expected to reach 10.9% by year end.
Rent growth is expected but the overall increases will be
just above inflationary increases at 2.9%.
Average NNN rents today are as follows:
Flex: $10.21
Manufacturing: $4.70
Warehouse: $4.60
RETAIL
Consumer confidence has fallen considerably over the past year.
This in turn is having an impact in the retail markets. The
housing downturn, tighter credit, increased fuel and energy
costs and a decline in home values have all taken their toll on
the retail markets.
Vacancy and Net Absorption
Net absorption for the Quarter was a negative 3.2M sf. Vacancy
rates climbed to 8.2% overall – up 50 bps this quarter alone and
showing the largest deterioration in retail vacancy since 1995.
Rents, while still rising are up only 70 bps annualized. It is
expected that vacancies will continue to rise through year end
and finish the year at 8.6% with rent growth below 2% overall.
Source: Reis
>> MARKET
FUNDAMENTALS
MULTI-FAMILY
The decline in the housing sector has had a positive impact
on the fundamental picture of the apartment market.
• Effective rent growth in Q2 rose at an annualized rate
of 4.4%, while vacancies rose only 10 bps to 6% on
average – most of this increase was directly
attributable to South Florida and Southwest markets
where vacancies saw a faster rise.
• Many developers, once in the single family home
market are focused on developing multi-family
projects, as such deliveries will increase and the
inventory of available properties will grow.
• Expect to see an increase in vacancy of 20 bps in the
multi-family market to 6.2% with an annual effective
rent growth of 3.5%.
Source: Reis
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>> INDUSTRY
TRENDS/OUTLOOK

THE MARKET
• Expect to see a continued influx of capital in the sector. • Sale inventory increasing significantly but
Equity is not the issue in today’s market. no “fire sales”.
• Foreign investors increasing their positions in the U.S.
• Institutions and other low leverage buyers taking
markets – led primarily by European, Australian and
advantage of increasing capitalization rates and being very
Middle East investors.
active in the market.

• Leverage remains scarce (primarily • Flight to quality assets for investment as CAP rates rise
balance sheet lenders only). and rental increases slow.

• Underwriting standards remain tight for both • Fundamentals indicating a weakening picture through
debt and equity. 2009. A transitioning market but the picture is not an
unhealthy one.
• Deal volume down significantly until debt markets return.

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