Rate Cuts, Stimulus Package to Underpin Growth in Second Half

GDP increased by an estimated 2.2 percent in

2007, compared to 2.9 percent the previous Interest Rate Trends
year. Housing continued to weigh on the economy 8% Fed Funds Rate 10-Year Treasury
in 2007, subtracting 1 percentage point from the
annual expansion rate. The trade sector, however, 6%

Interest Rate
became a contributor to growth for the first time
since 1991 as the weak dollar bolstered demand 4%
for U.S. goods and services. Net exports tacked
on 0.6 percentage points to GDP last year. 2%
Consumer expenditures continued to rise, albeit at
a slower rate, as did business spending. 0%
Continued weakness in the housing sector and 97 98 99 00 01 02 03 04 05 06 07 08*
financial market volatility are dragging down * As of mid-February
both consumer and business confidence. Sources: Marcus & Millichap Research Services, Economy.com
Writedowns in the financial sector have topped
$125 billion to date, and additional subprime losses still lay ahead. Residential subprime loans account
for a relatively small share of the overall mortgage market, but the psychological impact on consumers,
investors and businesses has been dramatic. An overall flight to quality has emerged across
investment sectors, and investors are generally shying away from mortgage-backed securities. Since a
wide range of residential mortgages were pooled and sold as mortgage-backed securities, quantifying
and re-pricing the high-risk portion of these investments is difficult. Commercial mortgage-backed
security (CMBS) delinquency is still near historical lows but has ticked up recently, adding fuel to
concerns regarding later-vintage commercial loans that were subject to lax underwriting standards.
Recent Fed rate cuts and the economic stimulus package are unlikely to prevent further
economic slowing or recession in the near term, but they provide a solid foundation for a
recovery to take shape in the second half of the year. There are positive forces at work in the
economy that should be noted, including healthy export activity, low business inventories and a
relatively sturdy corporate sector outside of banking- and housing-related industries.
Forecast:
After slashing the fed funds rate 225 basis points since last September, any future rate cuts are
likely to be in relatively small increments. Despite near-term slowing, GDP is forecast to rise 1.8
percent in 2008, down from 2.2 percent last year. A potential side effect of the Fed’s rapid easing is the
re-ignition of inflation, which points to a Fed reversal quickly upon normalization of the economy.
Employment trends will reflect weaker economic conditions through the first several months of
2008 but are expected to improve as the impact of rate cuts and tax rebates takes hold. Nonfarm
job growth this year is forecast at 0.8 percent, or 1.1 million jobs, compared to 0.9 percent in 2007.
Retail sales are expected to rise in 2008, but at a slower rate. Reduced home equity withdrawal and
high energy prices are putting a squeeze on consumer spending; however, lower interest rates should
relieve some of the pressure on household budgets, as credit cards and home equity lines are often
tied to the prime rate, which tends to track the fed funds rate. In addition, if history holds true, 60
percent of tax rebates will be spent in the same quarter they are received by households.

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.

Erica L. Linn
Marcus & Millichap Research Services March 2008
elinn@marcusmillichap.com Copyright 2008 Marcus & Millichap
 RETAIL: Modest Speculative Development
Limiting Impact of Consumer Pullback on Vacancy
The vacancy rate for U.S. retail properties rose
90 points in 2007 to 9.7 percent, as several Retail Property Price Trends
retailers reduced expansion. There were also a $250

Median Price per Square Foot

handful of notable closures, including a few home
furnishings retailers. The hardest-hit housing 2000-2006 2007*
$200
markets, such as Las Vegas, Phoenix and
Riverside-San Bernardino, along with several $150
Florida and Texas markets, registered the greatest
increases in vacancy last year. There were markets
$100
that defied the national trend and continued to
improve in 2007, however, including Boston, Orange
County, Philadelphia, San Francisco and San Jose. $50
Each of these markets has relatively high barriers to Single-Tenant Multi-Tenant
entry. * Estimate
Sources: Marcus & Millichap Research Services, CoStar Group, Inc.
Slower demand for retail space and rising
vacancy last year caused asking and effective
rent growth to decelerate. During 2007, shopping center asking rents gained 2.9 percent to $19.49
per square foot, compared with growth of 3.8 percent the previous year. Effective rents increased at a
slower rate of 2.4 percent last year to $17.60 per square foot, following a 3.4 percent rise one year
earlier, as owners in many areas increased concessions.
Transaction volume decelerated last year. Reduced investor demand was most evident in the lower
price ranges, with trades of assets priced from $1 million to $10 million declining roughly 7 percent.
Velocity in higher price ranges fell only modestly, due in part to a rise in portfolio sales and foreign
investment. Retail cap rates ticked up slightly last year to around 7 percent. The single-tenant sector
has recorded the greatest jumps in cap rates, with lower-tier assets in particular facing the greatest
upward pressure due to the tighter lending standards and investors’ flight to quality.
Forecast:
Completions are forecast at 125 million square feet this year, down from 145 million square feet
in 2007. Development remains highly tenant driven, with big-box retailers and other built-to-suit
properties accounting for 40 percent of the space under way. Overall vacancy is forecast to rise 50
basis points in 2008 to 10.2 percent, following a 90 basis point increase last year.
After skyrocketing 80 percent since 2002, retail property prices are expected to retreat
moderately in 2008. Correction will be concentrated in the lower tiers, where cap rates could rise more
than 100 basis points, depending on asset quality, tenant credit and location. Properties with national
credit tenants are expected to register only modest cap rate increases of 20 to 40 basis points, though
a slowdown in 1031-exchange capital coming out of coastal apartment markets will dampen activity.
Demand for high-quality retail properties will remain strong this year, supported by lower-
leverage investors such as REITs, institutions and foreign buyers. The dollar has declined roughly
30 percent since 2002, generating significant foreign demand for U.S. real estate – a trend that is
anticipated to remain in force through 2008. Retail properties accounted for more than one-third of
major foreign commercial real estate purchases last year, nearly matching activity in the office sector.

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.

Erica L. Linn
Marcus & Millichap Research Services March 2008
elinn@marcusmillichap.com Copyright 2008 Marcus & Millichap