Milwaukee Metro Area First Quarter 2008

LONG-TERM POTENTIAL ATTRACTING INVESTORS TO MILWAUKEE

The Milwaukee apartment market is expected to benefit from stable home prices and uncertain economic con-
ditions this year. During the past 12 months, the median home price in Milwaukee has risen at the highest rate in
more than five years, defying the regional and national trends. Nevertheless, Wells Fargo recently deemed the mar-
ket “at risk,” making home loans difficult to obtain. This bodes well for the local renter pool, however, as more strin-
gent lending requirements will keep apartment tenants in their leases longer, as well as relegate some current home-
owners to for-rent units. These beneficial trends will counteract supply-side pressure on metro vacancy, as devel-
opers are set to increase their activity in 2008, adding 0.7 percent to area stock. Although vacancy is expected to
increase this year, the metro’s tight conditions will allow for steady rent growth. Furthermore, construction activi-
ty is forecast to be minimal after this year, which will help to stabilize long-term supply and demand.

Investor interest in the Milwaukee apartment market is expected to remain healthy in 2008 due to the metro’s
relatively tight conditions. Revenue growth over the last two years has been strong, giving many owners justifica-
tion for higher sales prices. Tightened underwriting guidelines and overall economic uncertainty, though, have
widened the expectations gap between buyers and sellers, slowing velocity over the past 12 months. With capital
availability forecast to remain restrained in the near term, deal flow will likely stabilize. Velocity could be buoyed
by investors willing to pay a premium for well-performing assets, particularly those in outlying areas, such as West
Waukesha County and the Northshore/Northwest Milwaukee submarkets. Properties in these areas have benefited
from the recent influx of urban tenants moving to higher-quality assets in the suburbs.

2008 ANNUAL APARTMENT FORECAST

0.7% Employment: Despite healthy payroll expansion over the last 12 months, employers are
decrease in expected to trim jobs this year. The forecast elimination of approximately 5,700 positions in
total
employment 2008 will equate to a 0.7 percent contraction to overall employment.

641 Construction: After completing 216 units in 2007, developers are expected to add 641 units this
units year. Deliveries in 2008 will expand area stock by 0.7 percent, the largest annual increase in
will be
completed more than five years.

30 basis Vacancy: Slowing employment growth and the largest yearly addition to inventory this
point decade are expected to push vacancy up to 4.3 percent, 30 basis points higher than the rate at
increase in
vacancy year-end 2007.

2.7% Rents: With vacancy rising and the local economy weakening, apartment owners will slow rent
increase in gains in an effort to retain tenants. Asking rents are forecast to increase 2.7 percent to $852 per
asking
rents month, while effective rents gain 2.6 percent to $814 per month.
 ECONOMY
◆ Early estimates suggest that employers added 3,600 jobs to the Milwaukee
Employment Trends metro over the 12-month period ending in the first quarter, a 0.4 percent
3% Metro Area
United States increase. Growth is showing signs of decelerating, however, with only 1,100
positions generated in the last six months.
Year-over-Year Change

2%

◆ Gains of nearly 6,600 positions in the professional and business services

1%
and leisure and hospitality sectors have partially offset losses across the
trade, transportation and utilities, and manufacturing sectors.
0%

◆ HellermannTyton recently received tax credits to support the planned

-1%
04 05 06 07 08* expansion of its Milwaukee plant. The new facility is expected to create more
* Forecast than 150 new jobs over the next year, increasing demand for apartment space
Sources: Marcus & Millichap Research Services, BLS, Economy.com
in the Northshore/Northwest Milwaukee submarket.

◆ Outlook: The forecast elimination of approximately 5,700 positions in 2008

will equate to a 0.7 percent contraction to overall employment.

HOUSING AND DEMOGRAPHICS

◆ Over the last 12 months, annualized single-family permits have fallen 18 per-
cent to roughly 2,000 units in the Milwaukee metro. Permit issuance for
Home Price Appreciation multi-family properties during that time has declined to just under 700 annu-
Median Existing Home Price (Y-O-Y Chg.)

18% Metro Area

United States alized units, down approximately 53 percent.
12%
◆ The median sales price for a single-family home in the metro has risen 10.4
percent year over year to an estimated $229,140. Milwaukee’s median house-
6%
hold income has increased 2.5 percent in the same period to $56,830 annual-
ly. For the first time in three quarters, income levels have created a surplus
0%
of $3,350 over the amount needed to finance a median-priced home.
-6%
04 05 06 07 08* ◆ Using traditional financing, the typical mortgage payment for a median-
* Trailing 12-Month Period price home in Milwaukee is approximately $1,110 per month, $48 higher
Sources: Marcus & Millichap Research Services, Economy.com, NAR
than the average Class A asking rent. This marks the smallest disparity
recorded during the last two years.

◆ Outlook: Despite a fairly affordable housing market, rising home prices and
tightening underwriting guidelines will keep many residents in the renter
pool this year, sustaining the demand for apartments.

CONSTRUCTION
Construction Trends ◆ Builders have completed just one project during the last 12 months; the 144-
4 Apartment Completions unit first phase of Georgetown Square in Brookfield came online during the
Number of Units (thousands)

Multi-Family Permits
first quarter.
3

◆ Future construction activity will remain moderate, as developers have

2
only 10 projects, totaling 486 units, in the planning pipeline. All of the proj-
ects that are currently under construction are slated to come online this
1
year, indicating that deliveries will stay minimal going forward.
0
04 05 06 07 08* ◆ Nearly 60 percent of all under construction developments are located in the
* Forecast Brookfield/New Berlin submarket. Once all of these projects, totaling 317
Sources: Marcus & Millichap Research Services, U.S. Census Bureau
units, are completed, the area’s inventory will increase by 5.1 percent.

◆ Outlook: After delivering 216 units in 2007, developers are expected to add
641 units this year. Completions in 2008 will expand area stock by 0.7 per-
cent, the largest annual increase in more than five years.

page 2 Marcus & Millichap ◆ Apartment Research Report

VACANCY
◆ Year over year, metrowide vacancy fell 100 basis points to 3.8 percent in the
first quarter. Vacancy dropped 30 basis points during the first three months
Vacancy Rate Trends
8% Metro Area
of 2008. United States

7%
◆ The vacancy rate in Class A properties increased in the first quarter, after

Vacancy Rate
eight consecutive quarters of declines. The addition of new inventory has 6%
pushed vacancy up 10 basis points from year-end 2007 to 3.5 percent.
5%
◆ Over the past 12 months, Class B/C assets have decreased 140 basis points to
3.9 percent. Supply and demand appear to be balanced, however, as vacancy
4%
in the lower tiers has dropped only 30 basis points over the past six months. 04 05 06 07 08*
* Forecast
Sources: Marcus & Millichap Research Services, Reis
◆ Outlook: Slowing employment growth and the largest yearly addition to
inventory this decade are expected to push vacancy up to 4.3 percent, 30 basis
points higher than the rate at year-end 2007.

RENTS
◆ Asking rents ended the first quarter at an estimated $839 per month, 3.3 per-
cent higher than one year ago. Concessions have remained modest and own-
ers have been able to raise effective rents 3.9 percent year over year to $804
per month. Rent Trends
4% Asking Rent
Effective Rent
◆ Class A rents advanced 4 percent to $1,066 per month during the 12-month

Year-over-Year Change
3%
period ending in the first quarter. In the lower tiers, asking rents increased 1.9
percent to $747 per month.
2%

◆ An uptick in vacancy and slowing rent growth have forced revenues to decel-
1%
erate to 3.6 percent in the last year, compared with the 4 percent increase
recorded over the previous period.
0%
04 05 06 07 08*
◆ Outlook: With vacancy rising and the local economy weakening, apartment * Forecast
Sources: Marcus & Millichap Research Services, Reis
owners will slow rent gains in an effort to retain tenants. Asking rents are
forecast to increase 2.7 percent to $852 per month, while effective rents gain
2.6 percent to $814 per month. Last year, asking and effective rents rose 3 and
3.3 percent, respectively.

SALES TRENDS**
◆ Transaction velocity has slowed 44 percent over the past 12 months, as tur-
moil in the credit markets has restrained the availability of capital, limiting
activity from leveraged investors. Sales Trends
Median Price per Unit (thousands)

$60
◆ During the last year, the median price in Milwaukee has been $58,000 per
unit, 2.2 percent higher than in the previous 12-month period. As prices $55
have crept higher, some investors have chosen to wait on the sidelines hop-
ing for some pricing adjustments. $50

◆ Healthy revenue growth has pushed average cap rates in the metro up $45
approximately 50 basis points year over year to the low-8 percent range.
$40
04 05 06 07 08*
◆ Outlook: Yield-seeking buyers will remain attracted to Milwaukee’s apart- * Trailing 12-Month Period
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA
ment properties, although uncertainty in the capital markets will keep some
smaller investors out of the market. As a result, transaction activity is expect-
ed to stay relatively stable throughout the year.

** Data reflect a full 12-month period, calculated on

a trailing 12-month basis by quarter.

Marcus & Millichap ◆ Apartment Research Report page 3

 CAPITAL MARKETS
BY WILLIAM E. HUGHES, SENIOR VICE PRESIDENT, MARCUS & MILLICHAP CAPITAL CORPORATION
◆ The Fed has become aggressive in its efforts to prevent an extended econom-
ic downturn. In addition to rate cuts, the Fed has taken measures to stabilize
credit markets and restore liquidity.
Visit www.NationalMultiHousingGroup.com or call:
Linwood Thompson ◆ Lenders are increasingly cautious, resulting in lower loan-to-values (LTVs)
Managing Director and higher debt-service coverage ratios (DSCRs). On average, LTVs are at 65
Tel: (678) 808-2700
percent to 70 percent, compared with 75 percent to 80 percent in mid-2007,
lthompson@marcusmillichap.com
while DSCRs are 1.2x or greater, versus 1.1x prior to the credit crunch.

◆ Portfolio lenders today are generally pricing multi-family loans at 235 to 265
basis points over the 10-year Treasury. Apartment investors have the advan-
tage of using Fannie Mae and Freddie Mac, which have increased origina-
tions and are pricing loans at 220 to 250 basis points over the 10-year
Treasury. Conduit lenders are largely out of the market at this point, with
spreads at 400-plus basis points over the 10-year Treasury.

◆ The stock market remains volatile, leading investors to seek safety in U.S.
Treasury securities. As a result, the yield on the 10-year Treasury has
declined 170 basis points since last summer to 3.6 percent.

SUBMARKET OVERVIEW
◆ Steady demand from students at the University of Wisconsin – Milwaukee
has given owners in the Northshore/ Northwest submarket the leverage to
trim concessions and record the healthiest revenue increases in the metro.
Last year, new-student enrollment was the highest in the school’s history,
which provided additional demand for apartments.
Prepared and edited by
Josh Gisselquist ◆ Uline Shipping Supplies recently announced plans to move its headquarters
Research Associate to Pleasant Prairie and build a new distribution center, which will bring more
Research Services
Tel: (602) 952-9669
than 1,000 jobs to the city. Abbott Laboratories is also relocating to the area,
jgisselquist@marcusmillichap.com with estimates of adding more than 12,000 positions. These expansions bode
well for the Cudahy/South Milwaukee and Greenfield submarkets, as the
For information on national
apartment trends, contact
new positions are expected to bolster local apartment demand.
John Chang
National Research Manager ◆ Transaction activity from local buyers has been heaviest in the City West
Tel: (602) 952-9669
john.chang@marcusmillichap.com
submarket over the last 12 months. The presence of Marquette University
has provided a consistent renter pool for local owners while expanding
Milwaukee Office: office and retail markets are drawing investors seeking upside potential.
Matthew M. Fitzgerald
Regional Manager
mfitzgerald@marcusmillichap.com
13845 Bishop’s Drive
Suite 150 SUBMARKET VACANCY RANKING
Brookfield, Wisconsin 53005
Vacancy Y-O-Y Basis Effective Y-O-Y
Tel: (262) 364-1900 Rank Submarket Rate Point Change Rents % Change
Fax: (262) 364-1910 1 West Waukesha County 2.1% -100 $807 2.8%
2 Brookfield 3.0% -50 $910 2.7%
Price: $150 3 Cudahy/South Milwaukee 3.5% -80 $738 2.6%
4 City East 3.8% -10 $1,065 4.9%
5 Wauwatosa/West Allis 4.1% 20 $719 0.1%
6 Greenfield 4.1% -80 $715 2.4%
© Marcus & Millichap 2008 7 Northshore/Northwest 5.7% -120 $808 3.7%
www.MarcusMillichap.com 8 City West 6.1% -100 $659 2.0%

The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the informa-
tion contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sales data includes transactions valued at $500,000 and greater unless otherwise noted. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar
Group, Inc., Economy.com, National Association of Realtors, Property & Portfolio Research, Real Capital Analytics, Reis, TWR/Dodge Pipeline, U.S. Census Bureau.