Economic Growth Nearly Flat in First Quarter, Fiscal Stimulus Supports

More Optimistic Outlook for Second Half

U.S. GDP increased at an estimated annual rate of 0.6
Interest Rates Low, Inflation Risks Rising
percent in the first quarter of 2008, propped up by
8%
personal expenditures on services, government
spending and net exports. Housing remains a drag on

Interest Rates / Core Inflation

Core Inflation
growth, subtracting 120 basis points from the first quarter 6% Fed Funds Rate
GDP figure, while a pull back in business spending on 10-Year
equipment and structures deducted an additional 30
basis points from the overall rate. 4%

Despite the increase in GDP, weakness has clearly

spread beyond the manufacturing, housing and
2%
banking sectors, as evidenced by the loss of 260,000
jobs year to date. Business and consumer confidence
have slipped, which combined with tighter credit markets 0%
and high oil prices, has created a somewhat self- 00 02 04 06 08*
propelling downturn that is likely to last until midyear.
*Inflation as of March, interest rates through April
During the second half, however, the benefits of Fed rate Sources: Marcus & Millichap Research Services, Federal Reserve
cuts, new liquidity measures and tax rebates will provide
a moderate boost to the economy.
The housing market continues to exert downward pressure on the economy, both directly and indirectly.
Existing home sales are down 20 percent from 12 months ago, while for-sale inventory is hovering around 10
months of supply, compared to a low of 3.6 months in early 2005 and 7.5 months one year ago. Home prices are
8 percent below year-ago levels and recent stabilization is likely temporary.
Fed efforts to prevent a prolonged economic downturn became more aggressive in the first quarter. In
addition to rate cuts and an extension of its term-auction facility, the Fed also opened the door for major securities
firms to borrow directly from the central bank and supplied credit to J.P. Morgan Chase to support the acquisition
of struggling Bear Stearns. While recent Fed action has helped stave off a financial sector collapse, mortgage-
related writedowns are rising rapidly and many banks remain hesitant to lend, focusing first on stabilizing their
battered balance sheets. At the end of April, investors were gaining some confidence in financial markets, with the
yield on the 10-year Treasury ticking up modestly and the stock market posting healthy gains.
Short-term risks remain elevated due to ongoing housing market correction, high energy costs and the
fragility of the financial sector. Oil prices have increased 15 percent to date in 2008 and are up 75 percent from
one year ago, fanning inflation concerns and potentially threatening an economic recovery. In addition, an
estimated 9 million households have negative equity in their homes, which could lead to a greater-than-expected
spike in foreclosure activity, extending the mortgage- and housing-market slide into 2009.
Forecast:
Additional Fed rate cuts will not come as willingly given inflationary pressures; a tightening campaign is
likely shortly after the economy normalizes. While risks are clearly present, there are some bright spots in the
economy, such as the still-expanding health-care sector, strong export activity and heightened international travel
to the U.S. due to the weakened state of the dollar. Following flat to potentially negative readings of U.S. GDP in
the first half, moderate economic expansion is forecast to resume in the second half of this year as the positive
impact of rate cuts and the economic stimulus package takes hold.
Job growth is anticipated during the latter part of this year, offsetting losses posted through midyear. If
history repeats itself, approximately two-thirds of the $100 billion in tax rebates will be spent by year end, largely in
the retail sector, but a portion of the cash will also go toward paying down consumer debt. While moderate GDP
growth of 1.2 percent is anticipated in 2008, a renewal of business and consumer confidence is necessary for the
recovery to build momentum heading into 2009. Unlike the last recession, lending standards are tight, home
prices are declining and energy costs are at record-high levels, forcing consumers to rein in spending.
The information in this report is deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no
representation, warranty or guarantee, expressed or implied, may be made as to the accuracy or reliability of the information contained herein.
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Economy.com, Federal Reserve, NAR, Real Capital Analytics, PPR, Reis.
John Chang, National Research Manager May 2008
(602) 952-9669 x669 © 2008 Marcus & Millichap
 Moderate Increase in Office Vacancy Breaks Strong Recovery Streak
Office vacancy rose 20 basis points during the first
quarter to 12.8 percent but remains 410 basis points Office Supply and Demand Trends
below its early-2004 peak. Economic uncertainty Completions Vacancy
160 25%
pushed many tenants to delay large lease commitments
and expansions during the first quarter, as the financial
services sector registered a decline of 21,000 jobs, 120 20%

Millions of Sq. Ft.

Vacancy Rate
bringing the total since the onset of the capital markets
crisis to 103,000 positions. The greatest vacancy 80 15%
increases in the first quarter were recorded in markets
impacted most by the housing downturn, such as Orange
40 10%
County, Phoenix, South Florida, Sacramento and
Riverside-San Bernardino. Markets that registered
improvement early this year included San Antonio, 0 5%
Orlando, Denver, Washington, D.C., Minneapolis and a 90 92 94 96 98 00 02 04 06 08*
handful of smaller markets that have received minimal * Forecast
additions to office inventory. Sources: Marcus & Millichap Research Services, Reis

Asking rents increased 1.7 percent in the first quarter despite rising vacancy, while effective rents were
flat due to the re-emergence of concessions. Boston, New York, Houston, Los Angeles and Seattle posted
some of the strongest rent growth during the first quarter, while minor decreases were recorded in Riverside-San
Bernardino, Fort Lauderdale and Detroit. Continued housing and financial sector job losses will result in rising
sublease availability in many major markets, limiting rent growth and putting upward pressure on concessions as
2008 progresses.
The median price for office properties increased to $201 per square foot during the first quarter, up from
$190 in 2007. The “flight to quality” among investors and lenders is apparent when reviewing first quarter cap rate
trends. Cap rates for $5 million-plus properties in primary markets increased just 10 basis points during the first
quarter to 6 percent, while the average in tertiary markets rose 60 points to 8.2 percent, the highest figure since
mid-2005. The number of office property sales during the first quarter was down nearly 70 percent from one year
earlier, while dollar volume dropped by 60 percent. The credit crunch is clearly hindering large transactions, which
were at a peak 12 months ago, and more importantly, buyers and sellers are engaged in a classic price
expectations gap.
Forecast:
Developers are slated to deliver 63 million square feet in 2008, up from 54 million square feet in 2007,
adding to the pressure on rising vacancies. Some projects are being delayed or abandoned due to the shift in
economic and lending conditions. New supply, increased sublease availability and reduced space demand will
result in a 100 basis point increase in vacancy this year, pushing the marketwide average to 13.6 percent.
After recording double-digit growth in 2007, effective rents are forecast to rise by just 3.6 percent this
year. Fortunately, office fundamentals were comparatively healthy heading into the current economic downturn
and rents are well above cyclical lows recorded in 2004, providing insulation against lease rollovers this year.
Furthermore, unlike 2001, companies have not taken on significant amounts of space for future expansion and are
generally running at leaner staffing levels, minimizing the likelihood of a major vacancy correction this year.
Tenant credit, property quality and location will drive investors’ and lenders’ decisions over the balance
of 2008. Assets in secondary/tertiary locations are becoming difficult to finance, which will cause further price
correction in the lower tiers. The medical office sector is a bright spot in the marketplace, with activity as a share
of total office transactions during the first quarter at its highest level since 2004. This niche will continue to garner
strong investor interest as aging baby boomers drive space demand.

The information in this report is deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no
representation, warranty or guarantee, expressed or implied, may be made as to the accuracy or reliability of the information contained herein.
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Economy.com, Federal Reserve, NAR, Real Capital Analytics, PPR, Reis.
John Chang, National Research Manager May 2008
(602) 952-9669 x669 © 2008 Marcus & Millichap
 Office Market Vital Signs
Employment Growth Office Effective Rent vs. S&P 500
12% Total Non-Farm Employment Office-Using Employment S&P 500 Effective Rent (YOY Chg)
YOY Change in Employment (BLS)

1,500 15%

Average Effective Rent (YOY Change)

8%
1,200 10%

4%
900 5%

S&P 500
0%
600 0%

-4%
300 -5%

-8% 0 -10%

Office Supply and Demand Trends Office Price and Cap Rate Trends

Completions Vacancy Rate Average Price/SF Average Cap Rate

25 18% $250 10%
Average Price per Square Foot

20 16%
Completions (thousands)

Average Cap Rate

$200 8%
Vacancy Rate

15 14%

10 12%
$150 6%

5 10%

0 8% $100 4%

Sources: Marcus & Millichap Research Services, Reis $5 Million+ Transactions

Sources: Marcus & Millichap Research Services, Real Capital Analytics

1Q 2007 to 1Q 2008 Change in Vacancy

Top 10 Decrease in Vacancy Top 10 Increase in Vacancy

Metro 1Q 2008 Chg (bps) Metro 1Q 2008 Chg (bps)

Oklahoma City 14.6 -230 Las Vegas 14.1 160
Albuquerque 10.5 -220 Suburban Virginia 11.3 160
Minneapolis 14.9 -210 Austin 15.5 210
Raleigh-Durham 11.5 -210 West Palm Beach 12.7 220
Chicago 15.3 -190 Fort Lauderdale 12.1 280
Louisville 13.0 -190 Riverside-San Bernardino 14.2 280
Denver 14.9 -170 Ventura 13.0 280
Pittsburgh 16.8 -170 Phoenix 15.6 300
Kansas City 15.1 -150 Orange County 11.3 320
Nashville 9.4 -150 Sacramento 15.8 390
US Metro Average 12.8 -30 US Metro Average 12.8 -30

Sources: Marcus & Millichap Research Services, Reis

The information in this report is deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no
representation, warranty or guarantee, expressed or implied, may be made as to the accuracy or reliability of the information contained herein.
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Economy.com, Federal Reserve, NAR, Real Capital Analytics, PPR, Reis.
John Chang, National Research Manager May 2008
(602) 952-9669 x669 © 2008 Marcus & Millichap