Milwaukee Metro Area Second Quarter 2008

FIRMS RELOCATING TO DOWNTOWN FROM MILWAUKEE SUBURBS

The Milwaukee economy is undergoing a change from manufacturing to more service-oriented industries, but
the transition will take several years. In the near term, operating fundamentals will record mixed performance as
employers shed jobs and new construction increases. As a result, elevated vacancy levels are expected to hamper
rent gains over the next few quarters. There are bright spots, however, such as the Downtown submarket, where
local companies like Roundy and Manpower are moving in from the suburbs. During the past five years, residential
development has been brisk, particularly in and around the Third Ward. Indeed, this elevated construction activity
is expected to continue to lure business relocations from the metro’s outlying areas, which have been particularly
hard hit by ongoing job cuts.

In the investment arena, tightened lender requirements have slowed transaction velocity during the past 12
months. This deceleration is expected to continue as fundamentals soften this year. The historical consistency of
Milwaukee’s economy has resulted in a steady contingent of out-of-state buyers targeting premium properties with
long-term leases, which currently trade with cap rates in the low- to mid-7 percent range. Local buyers, on the other
hand, have sought upside potential in Class B/C properties in traditionally high-growth areas, such as the West
Waukesha County and Wauwatosa/West Allis submarkets. Cap rates for these assets are hovering in the mid- to
high-8 percent range. Looking ahead, properties in the city core will continue to garner intense interest, while assets
in suburban areas may need to be priced conservatively to avoid prolonged marketing times. Class A cap rates are
expected to push only modestly higher in the next few months, but below-average performance of metrowide fun-
damentals will likely result in Class B/C yields recording more significant increases.

2008 ANNUAL OFFICE FORECAST

0.7% Employment: After expanding 0.1 percent in 2007, Milwaukee-area payrolls are expected to
decrease in contract 0.7 percent this year as approximately 5,700 jobs are eliminated. Office-using sectors
total
employment are projected to trim nearly 1,400 spots, also a 0.7 percent reduction.

900,000 Construction: Developers are on pace to add 900,000 square feet of office space to the
square feet Milwaukee metro this year for a 3 percent stock increase, following a 0.5 percent gain in 2007.
will be
completed

210 basis Vacancy: Reduced tenant demand and increased completions are expected to push vacancy up
point 210 basis points to 15.8 percent in 2008, after the rate improved 60 basis points last year.
increase in
vacancy

0.4% Rents: Owners are anticipated to respond to decreased occupancy levels by slowing rent
increase in expansion this year. Asking rents are expected to gain 0.4 percent to $19.08 per square foot,
asking
rents while effective rents recede 1.6 percent to $15.24 per square foot.
 ECONOMY
Employment Trends ◆ Employers have generated just 140 jobs during the last year, while payrolls
3% Nonfarm have been trimmed by more than 1,000 positions over the past two quarters.
Office-Using
Year-over-Year Change

2% ◆ Office-using employment has thinned by 1.6 percent, or approximately 3,000

jobs, in the last 12 months, following a 2 percent expansion in the preceding
1% period. Current losses have been heaviest in the professional and business
services sector, which has lost more than 2,000 workers during the past year.
0%
◆ Diminished home equity refinancing and rising fuel prices have led to a
-1% decrease in Harley Davidson sales. In an effort to cut costs, the company will lay
04 05 06 07 08* off nearly 750 Milwaukee-area employees, including 360 office-using positions.
* Forecast
Sources: Marcus & Millichap Research Services, BLS, Economy.com
◆ Outlook: After expanding 0.1 percent in 2007, Milwaukee-area payrolls are
expected to contract 0.7 percent this year as approximately 5,700 jobs are
eliminated. Office-using sectors are projected to trim nearly 1,400 spots, also
a 0.7 percent reduction.

CONSTRUCTION
◆ Approximately 470,000 square feet of office space has come online during the
last 12 months, expanding metro inventory by roughly 1.7 percent. This fol-
Office Construction Trends lows the completion of 18,000 square feet in the previous period.
2.0 Completions
Absorption
◆ Just under 600,000 square feet is under way throughout the metro. Building
Millions of Square Feet

1.5
activity in the Greenfield/South Milwaukee County submarket is brisk, as 85
percent of all current construction is located in the area. In addition, 65 per-
1.0
cent of the planning pipeline is slated for the submarket.
0.5
◆ New mixed-use developments in the downtown area have come to promi-
nence lately. One project, the 40,000-square foot Pabst Boiler House building
0
04 05 06 07 08* of the Brewery redevelopment, broke ground in the first quarter this year.
* Forecast Three companies are expected to move in upon completion in the fourth
Sources: Marcus & Millichap Research Services, Reis
quarter of this year.

◆ Outlook: Developers are on pace to add 900,000 square feet of office space to
the Milwaukee metro in 2008 for a 3 percent stock increase, following a 0.5
percent gain last year.

VACANCY
◆ Metrowide vacancy increased 150 basis points year over year to 14.7 percent
Vacancy Rate Trends in the second quarter. Elevated deliveries in the first half of this year con-
20% Metro Area
United States tributed to the rise.
18%
◆ Additions to premium inventory during the past 12 months resulted in Class
Vacancy Rate

A vacancy climbing 170 basis points to 12.7 percent in the second quarter. As
16%
completions accelerate in the second half of the year, vacancy in this segment
is projected to escalate.
14%

◆ Competition from new space spurred a 280 basis point increase in lower-tier
12%
04 05 06 07 08*
vacancy over the past year to end the second quarter at 17.7 percent.
* Forecast
Sources: Marcus & Millichap Research Services, Reis
◆ Outlook: Reduced tenant demand and increased completions are expected
to push vacancy up 210 basis points to 15.8 percent in 2008, after the rate
improved 60 basis points last year.

page 2 Marcus & Millichap ◆ Office Research Report

RENTS
◆ On a year-over-year basis, asking rents climbed 2.1 percent to $19.09 per
square foot in the second quarter. Increased competition from new space Rent Trends
6% Asking Rent
caused existing owners to raise concessions, resulting in a 0.8 percent gain in Effective Rent

Year-over-Year Change
effective rents to $15.40 per square foot. 4%

◆ Asking rents in the metro’s upper-tier properties ended the second quarter at 2%
$22.96 per square foot, 1.7 percent higher than in the same period last year.
Class B/C rents advanced 2.6 percent to $16.07 per square foot. 0%

◆ The jump in vacancy during the second quarter, combined with slowing -2%
effective rent gains, softened year-over-year revenues 1.2 percent; in the pre- 04 05 06 07 08*
ceding 12-month period, revenues increased 7.5 percent. * Forecast
Sources: Marcus & Millichap Research Services, Reis

◆ Outlook: Owners are anticipated to respond to decreased occupancy levels

by slowing rent expansion this year. Asking rents are expected to gain 0.4
percent to $19.08 per square foot, while effective rents recede 1.6 percent to
$15.24 per square foot.

SALES TRENDS**
◆ Transaction velocity has declined 14 percent during the most recent 12-month
period, driven largely by difficulty for prospective buyers to obtain financing. Sales Trends
$120

Median Price per Square Foot

◆ Despite the slowdown in sales activity, the number of deals involving upper-
$110
tier space has increased recently. As such, the median price has appreciated
roughly 15 percent to $111 per square foot over the past year.
$100

◆ Cap rates have remained relatively stable in the mid- to high-7 percent range
$90
for the last two years, slightly higher than other Midwestern metros. Yields
will likely trend upward as the cost of capital remains elevated. $80
04 05 06 07 08*
◆ Outlook: While investment activity may moderate further through the sec- * Trailing 12-Month Period
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA
ond half of the year, buyers with market knowledge will likely continue to
target assets with repositioning or value-add opportunities, particularly in
the suburbs.

MEDICAL OFFICE
◆ Developers have added two projects with nearly 77,000 square feet of med-
ical office space to the metro during the past year, compared with no com-
pletions in the previous period. There are currently no developments under
way and 660,000 square feet in the planning stages.
Medical Office Vacancy
12% Metro Area
United States
◆ Absorption of medical office space has slowed over the last 12 months. As 10%
such, vacancy in this sector ended the second quarter at 5.3 percent, 20 basis
Vacancy Rate

points higher than in the same quarter last year. 8%

◆ Asking rents for medical office space finished the second quarter at $16.42 6%
per square foot, a year-over-year gain of 1 percent.
4%
◆ Buyers have displayed flight-to-safety patterns recently, accelerating sales 04 05 06 07 08*
activity for medical office properties over the past 12 months. As a result, the * 2Q Estimate
Sources: Marcus & Millichap Research Services, CoStar Group, Inc.
median sales price has increased 3 percent in the last year to $186 per square
foot. As the metro’s population remains older than the national average,
interest in medical office space is expected to intensify, which will likely gen-
erate further appreciation for medical office space.
** Data reflect a full 12-month period, calculated on
a trailing 12-month basis by quarter.

Marcus & Millichap ◆ Office Research Report page 3

 CAPITAL MARKETS
BY WILLIAM E. HUGHES, SENIOR VICE PRESIDENT, MARCUS & MILLICHAP CAPITAL CORPORATION

◆ The Federal Reserve held the fed funds rate at 2 percent during its June meet-
ing. The Fed had cut the rate by 275 basis points since last September, but the
potential for inflation stemming from elevated food and energy prices
Alan L. Pontius remains a concern.
Senior Vice President, National Director
National Office and Industrial Properties Group ◆ Office mortgage originations in the first quarter were down 75 percent from
Tel: (415) 963-3000
apontius@marcusmillichap.com one year earlier and 21 percent below the previous quarter. Much of the
decline was driven by conduits, which recorded a 96 percent year-over-year
decrease in originations.

◆ Lenders remain cautious, resulting in lower loan-to-values (LTVs) and high-

er debt-service coverage ratios (DSCRs). On average, LTVs are at 60 percent
to 70 percent, while DSCRs are 1.20x to 1.30x. Portfolio lender spreads for
office properties are currently 175 to 250 basis points over 10-year swaps.
Several major conduits are talking about re-entering the market in the second
half, but pricing is the immediate barrier to coming back into the market.

◆ The yield on the 10-year Treasury rose to 4.2 percent in June but has since
dropped to 4 percent. Through the rest of this year, the yield on the 10-year
Treasury is expected to remain in the high-3 percent to mid-4 percent range.

SUBMARKET OVERVIEW
◆ A 95,000-square foot medical office facility is expected to break ground in the
North Suburban submarket this summer to alleviate excess demand at the
nearby Orthopedic Hospital of Wisconsin. The project may spur additional
Prepared and edited by construction activity and ultimately lead to a medical office/research cam-
Josh Gisselquist
Research Associate pus in the area.
Research Services
Tel: (602) 952-9669 ◆ Office space in the Downtown submarket is poised for long-term health.
jgisselquist@marcusmillichap.com
Several large companies have recently announced plans to relocate to the
For information on national area, leasing a total of nearly 100,000 square feet.
office trends, contact
John Chang
National Research Manager ◆ During the past 12 months, the Greenfield/South Milwaukee County sub-
Tel: (602) 952-9669 market has posted the metro’s largest increase in effective rents. Tight condi-
john.chang@marcusmillichap.com
tions have allowed owners to trim concessions and raise effective rents by
Milwaukee Office: nearly 9 percent in that time. Significant supply additions this year, howev-
Matthew Fitzgerald er, will hamper attempts to maintain occupancy levels.
Regional Manager
mfitzgerald@marcusmillichap.com
13845 Bishop’s Drive
Suite 150
Brookfield, Wisconsin 53005

Tel: (262) 364-1900 SUBMARKET VACANCY RANKING

Fax: (262) 364-1910
Vacancy Y-O-Y Basis Effective Y-O-Y
Rank Submarket Rate Point Change Rents (psf) % Change
Price: $150 1 Greenfield/South 10.6% 150 $15.15 8.8%
2 North Suburban 12.5% 130 $14.60 0.0%
3 West Waukesha County 13.3% 260 $15.62 -2.3%
4 Downtown Milwaukee 13.7% 200 $16.08 3.1%

© Marcus & Millichap 2008

5 Brookfield/New Berlin 20.3% 140 $16.37 1.5%
www.MarcusMillichap.com 6 Wauwatosa/West Allis 20.9% 680 $13.02 -5.7%

Notes: Employment growth is calculated using seasonally adjusted quarterly averages. Construction, rent and vacancy figures exclude build-to-suit, flex-space and medical office properties unless otherwise noted.
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. Sources: Marcus & Millichap Research Services, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, Property & Portfolio Research, Real Capital Analytics, Reis, Torto Wheaton Research Services.