The Outlook for Commercial Real Estate through

the Downturn and Initial Recovery

July 2009

1
Where Do We Stand?

•The“shock and awe” stage is over; most financial market and economic indicators
have ceased their free-fall.
•However, there is little impetus to growth at the present as most sectors of the
economy remain under intense pressure and government policies are working at
cross-purposes to each other.
•Real estate fundamentals will continue to deteriorate and values continue to
decline as vacancies and rents in coming quarters reflect the impact of damage
already inflicted and still to come from the weak economy.

2
Over-Arching Issue for the Economic Outlook

“Crises feed uncertainty. And uncertainty affects

behavior, which feeds the crisis. Were a magic wand
to remove uncertainty, the next few quarters would
still be tough (some of the damage cannot be
undone), but the crisis would largely go away.”
Uncertainty
affects:
Portfolio
decisions.
Investment.
Consumption.

3
2nd Key Issue: Economic Recovery Requires Credit Market
Normalization
Credit Markets Slowly Thawing and Have Avoided Setbacks

↓ Distress
↔ Sideways
↑ Healthy

4
Where Does the Consumer Go From Here?
Pressure on Consumers Remains Intense So Difficult to Envision Sustained
Recovery Yet
Employment Bloodbath: Nearly 6.5 Million Jobs Real Household Net Worth Is Falling Sharply
Lost So Far
Month-Ago Employment Difference, thousands $Trillion, Inflation-Adjusted
600 600 35 35
Through
6/09 Total Household Net Worth
400 30 Total Less Real Estate 30
280 Real Estate
200
25 25
0
-40
20 20
-200

-360 15 15
-400

10 10
-600
-680
-800 5 5
Through
1q09
-1000 -1000 0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

• Unemployment about to pierce double-digits.

• Worker earnings growth slowing.

5
Where Does the Consumer Go From Here?
The Free-Fall in Consumer Spending Has Stabilized but No Upward
Momentum Evident
$Billion 2000
8400 8400
Through
5/09

8200 8200

8000 8000

7800 7800

7600 7600

7400 7400
2004 2005 2006 2007 2008 2009

6
 Investment Weak but No Longer in Freefall
The Freefalls in Home Sales and Capital Goods Orders Have Halted
but No Boost to the Economy from that Sector Yet
Business Profitability Stabilized in Most Recent
$Billion SAAR, $1982-84 Quarter
1200 1200
Corporate Profits Through
1Q09
Proprietors Income
Home Sales Have Been Stable in Recent 1000 1000
Months
New plus Existing Home Sales, Millions 800 800
9 9

8 8 600 600

7 7 400 400

6 6
200 200

5 5
0 0
00 02 04 06 08
4 4
New Orders for Capital Goods Have Stabilized
3
Through
3
Following
Orders for Nondefense Capital Plunge
Goods (ex Aircraft), $Bilion
5/09 70 70
2 2
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
65 65

60 60

55 55

50 50

Through
5/09
45 45
00 01 02 03 04 05 06 07 08 09

7
But Investment in Nonresidential Is Now a Drag on Growth
As the Commercial Development Pipeline Empties, Nothing Being
Started to Supplant Existing Projects
MSF
300 300
Maximus Advisors
Forecast
250 250

200 200

150 150

100 100

50 50

0 0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

8
Exports Are Down Sharply, Reflecting Global Recession
But Here, Too, Freefall Has Stopped

Exports, $Billion
110 110

100 100

90 90

80 80

70 70

Through
5/09
60 60
2003 2004 2005 2006 2007 2008 2009

9
How Much Can Government Really Do?

The Stimulus Will Help but More Slowly and with Less Bang than
Advertised
•Less than ¾ of spending will take place in 2009-2010, the crucial years for jump-
starting economy. Early indications are much slower pace of getting the money out.
•The impact on jobs will be much delayed owing to natural tendency of employers to
be cautious to begin hiring until profits improve and economic growth is well
established.
•Thetemporary tax cuts will not boost household spending by as much as the
government claims.
•Overallimpact on growth is likely to be about half of what was advertised when it
was passed.
•Treasury and Federal Reserve programs to boost credit markets are showing some
signs of helping, but the government keeps throwing new uncertainty onto financial
institutions and the market, undermining attempts to return to normalcy.

10
Key Apartment Themes

• Tug-of-war: shift to rental versus lower household

formations due to recession
• Excellent demographics of 20-29 age cohort
• Multifamily starts have finally dropped sharply
• Shadow condo supply
• Overall impact is rising vacancies, which will surpass
previous peak
• Best chance for quickest recovery among the property
segments

11
 Apartment Fundamentals: More Pain; Faster Gain
Vacancies Trending Up and Rents Weakening; Construction Now Falling
Off
Impact of Weak Economy Dominating Shift from Multifamily Starts Now Sharply Lower
Ownership, Pushing Absorption Negative
Absorption, Thousand Units Thousand Starts of Properties of 5+ Units, Seasonally Adjusted Annual Rate
80 80 450 450

400 400
60 60
350 350
40 40
300 300

20 20 250 250

200 200
0 0
150 150
-20 -20
100 100
Through
6/09
-40 -40 50 50
00 01 02 03 04 05 06 07 08 09 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Percent Rental Vacancies Higher
7 7

6 6

5 5

4 4

3 3

2 2
99 00 01 02 03 04 05 06 07 08 09

12
 Apartment Fundamentals: More Pain; Faster Gain
Broader Apartment Trends: Shift Back to Rental, Favorable
Demographics,
Declining HomeownershipSlower Migration
Rate – Shift Back to Rental Population in the 20-34 Age Group Growing Rapidly
Percent, seasonally adjusted Million People (20-34 Age Group)
70 70 68 68

69 69
66 66
68 68

64 64
67 67

66 66
62 62

65 65
60 60
64 64
Through
1q09
63 63 58 58
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15

Number of People Moving in US Down Sharply

13
 Apartment Fundamentals: More Pain; Faster Gain
Apartments: More Pain Ahead than More Rapid Recovery than Other
Segments
Rents Heading Down this Year and Next then
US Apartment Vacancies Look to Reach New
Recovering in 2011-12
Highs
Thousand Units Percent Effective Rents, %Change
250 10 10 10
Maximus Advisors
Absorption
Forecast
Completions 8 8
200 Vacancy Rate (right) 8
6 6
150
6
4 4
100
2 2
4
50
0 0
2
0
-2 -2

-50 0 -4 -4
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

•Vacancies will jump to around 8% and stay there through next year.
•Vacancies will then drop relatively quickly back to 6% by end of 2012.
•Rents down some 4.7% through 2010.
•Should make most of that back over following two years.
•This places apartment sector in line to have a faster recovery than most other sectors.
•We expect apartment valuations to fall over 20% from their peak level and then regain about half of
that between 2010 and 2012.

14
Apartment Fundamentals: More Pain; Faster Gain
Market Outlooks in Apartment Sector

Baltimore
Boston
Columbus Atlanta
Denver Cleveland
District of Columbia Dallas
Chicago Fort Worth Detroit
Indianapolis Houston Fort Lauderdale
Kansas City New York Las Vegas Austin
Long Island Orlando Los Angeles Charlotte
Milwaukee Palm Beach Memphis Jacksonville
Central NJ Northern NJ Portland Nashville Miami
Cincinnati Northern Virginia Sacramento Oakland-East Bay Orange County
Minneapolis Philadelphia San Francisco Riverside-San Bernardino Phoenix
Pittsburgh Salt Lake City San Jose San Diego San Antonio
Raleigh-Durham St. Louis Suburban Maryland Tampa-St. Petersburg Seattle
1 2 3 4 5 6

15
Key Office Themes

• Office employment sharply lower, more negative absorption

in the cards
• Vacancies to rise further
• Rents will continue to decline

16
 Office Fundamentals Deteriorating as Expected
Demand for Office Space Continues to Weaken
Office Absorption Sharply Negative While
Office Employment Shrinking Rapidly Completions Continue
Millions of Office Jobs, Seasonally Adjusted MSF
29.5 29.5 30 30
Through
6/09
29.0
28.9 20 20

28.5
28.3 10 10
28.0
27.8 0 0
27.5

27.2 -10 -10

27.0 Absorption
Completions
26.6 -20 -20
26.5
Through
1q09
26.0 26.0 -30 -30
99 00 01 02 03 04 05 06 07 08 09 03 04 05 06 07 08 09
US Office Rents Declining
Annualized quarterly %ch
20 20

•Office job losses imply 210 msf drop in occupancy vs.

10 10 70 msf actually lost.

0 0

-10 -10

Through
1q09
-20 -20
99 00 01 02 03 04 05 06 07 08 09

17
 Office Fundamentals Deteriorating as Expected
Outlook for Office Sector

Outlook for US Office Fundamentals Outlook for US Office Rents

MSF Percent %Change Year Ago
150 24 15 15
Maximus Advisors Maximus Advisors
Forecast Forecast

100 20 10 10

50 16 5 5

0 12 0 0

-50 8 -5 -5

Absorption
-100 Completions 4 -10 -10
Vacancy Rate (right scale)
-150 0 -15 -15
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

•We expect vacancies to head to 18-19% range.

•Recovery in 2011 and 2012 will be slow.
•Rents to drop 20% from peak and begin to recover in 2012.
•This suggests a peak-to-trough valuation drop of 40-50% if cap rates increase to 10%.
•Office property prices will increase about 10% in first two years of recovery.

18
Office Fundamentals Deteriorating as Expected
Latest Outlook for Individual Office Markets: No One Is Spared Impact of
Downturn

19
Key Retail Themes

• Retail development was relatively more robust in the

expansion so relatively higher supply-side danger
• Pressures on households still intense but free-fall in
spending has paused
• Home sales appear to be improving
• Savings rate has increased: sign of changing consumer
behavior?
• Retailers in severe contraction mode
• 2008 was first year on record with more store closures than
openings
• Announced closing this year already close to announced
openings, both likely to shift leading to second consecutive
net store closure year
• Vacancies have jumped and heading higher, to highest level
since early 1990s
• Rents declining: unprecedented for the segment

20
 US Retail Fundamentals Look to Weaken This Year and Next
Situation Treacherous for Retailers
•Households still under intense pressure.
•But there has been a pause in the spending free-fall.
•Store closing mounting: 2008 was first year on record with net store closings.

Retail Sales Freefall Has Stopped but Higher Savings Rate Could Have Long-Term
Spending at 2004 Levels Impact on Retail
Retail Sales ex Autos, $1982 Billion US Savings Rate, %
130 15 15
Through
6/09

125 10 10

120 5 5

115 0 0

Through
5/09
110 -5 -5
04 05 06 07 08 09 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

21
 US Retail Fundamentals Look to Weaken This Year and Next
Neighborhood/Strip Center Conditions Will Continue to Deteriorate
Neighborhood/Strip Net Absorption Saw a Fifth Consecutive Quarter
of Decline, Vacancy Rates Have Spiked
Million Square Feet Vacancy Rate
15 9.8
Absorption (L-Axis)
Completions (L-Axis)
10 Vacancy Rate (R-Axis) 9.1

5 8.4
•Neighborhood/Strip vacancies jumped to
0 7.7 9.5%, the highest since 1993.
•In “vicious” part of supply/demand cycle.
-5 7.0
•Retail rents have contracted for 5 straight
quarters, further declines in the cards.
-10 6.3
05 06 07 08 09
Neighborhood/Strip Rents Are Sharply Lower
Difference, Effective Rent PSF, USD
0.3 0.3

-0.0 -0.0

-0.3 -0.3

-0.6 -0.6

-0.9 -0.9

-1.2 -1.2
05 06 07 08 09

22
 US Retail Fundamentals Look to Weaken This Year and Next
Outlook for Retail Fundamentals through the Downturn and Initial
Recovery
US Retail Vacancies Will Hit a New Record
Million Square Feet Vacancy Rate
60 16

Absorption (L-Axis) Forecast

40
Completions (L-Axis)
14
•Vacancies are projected to peak at 12.7% in 2010.
Vacancy Rate (R-Axis)
•Vacancy improvement will be limited thereafter,
20 12 finishing 2012 at a still high 12%.
•Rents fell 1% in 2008, and were down 6.9% at an
0 10
annualized rate in the first quarter.
-20 8
•We are expecting rent loss on the order of 10.5% by
the end of 2011.
-40 6 •A modest gain is anticipated in 2012, though rents fall
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Retail Rents Will Post Significant Declines far short of the current rate by the end of that period.
% Change Year Ago •Under this scenario, retail valuations are likely to drop
6 6
Forecast
by 40%, peak to trough.
4 4

2 2

0 0

-2 -2

-4 -4

-6 -6
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

23
US Retail Fundamentals Look to Weaken This Year and Next
Market Outlooks in Retail Sector

Atlanta
Baltimore
Boston Central NJ
Charlotte Cincinnati
Chicago Cleveland
Dallas Columbus
Fort Worth Denver
Houston Detroit
Long Island Fort Lauderdale
Los Angeles Indianapolis
Miami Jacksonville
Milwaukee Kansas City
Minneapolis Las Vegas
Nashville Memphis
Northern New Jersey Oakland
Northern Virginia Orange County
Philadelphia Orlando
Phoenix Pittsburgh
Portland Riverside-San Bernardino
Raleigh-Durham Sacramento
Salt Lake City San Diego
San Antonio Seattle
San Francisco St. Louis
San Jose Tampa Bay
Austin Suburban Maryland West Palm Beach
1 2 3 4 5 6

24
Key Hospitality Themes

• Consumer travel spending has plummeted

• Business travel down and “frivolous” conference locales are
getting whacked
• Foreign travel to the US is down
• In vicious part of cycle where supply started during the
expansion is completed as demand drops; however pipeline
is contracting fast, setting stage for next cycle
• Hospitality drop-off has been worse than 2001
recession/post-9/11, with occupancy at all-time lows

25
 Hospitality Sector Feeling Economic Drag
Spending on Hotels Dropping Sharply Amid Soft Economy

Consumer Spending on Hotels Hit a Wall in Aftermath Foreign Travel to US Had Been a Bright Spot,
of Fall Financial & Economy Turmoil; Recent Stability Then Fell Off Dramatically in Late 2008, Early
$Billion, SAAR 2009; Stable Recently
68 68

66 66

64 64

62 62

60 60

58 58

56 Through 56
5/09

54 54
1 2 3 4 5 6 7 8 9101112 1 2 3 4 5 6 7 8 9101112 1 2 3 4 5 6 7 8 9101112 1 2 3 4 5 6 7 8 9101112
2006 2007 2008 2009

26
 Hospitality Sector Feeling Economic Drag
Supply-Demand Dynamics Have Turned Sharply
Negative, Occupancies Way Down
Room Demand Fell Sharply, Stable Recently, New Occupancies Are Low but Have Stabilized in
Supply Continuing to Increase Recent Months
Million Rooms Available Million Rooms Sold Occupancy Percent
150 95 75 75
Supply (left axis)
Demand (right axis)
145 90 70 70

140 85 65 65

135 80 60 60

55 Luxury 55
130 75
Upper upscale
Upscale
125 70 50 Midscale w /o F& B 50
Through Economy Through
5/09
All Segments 5/09
120 65 45 45
00 01 02 03 04 05 06 07 08 09 99 00 01 02 03 04 05 06 07 08 09

27
 Hospitality Sector Feeling Economic Drag
Room Rates and RevPAR Down Sharply but Stable in Recent Months;
Supply-Side Starting to Adjust Rapidly RevPAR Reflects Room Rate Decline on Top of
Room Rates Back to 2006 Level but Stable Recently Erosion of Occupancies; Last Few Months Flat
US Average Room Rate, $/night Rev per Avail Room, $/night
110 110 70 70
Through Through
5/09 5/09
105 105 65 65

100 100
60 60

95 95
55 55
90 90

50 50
85 85

45 45
80 80

75 75 40 40
99 00 01 02 03 04 05 06 07 08 09 97 98 99 00 01 02 03 04 05 06 07 08 09

Maximus Outlook for Hotel Operating Conditions

Hotel Pipeline Ratcheting Down Quickly

28
Hospitality Sector Feeling Economic Drag
Outlook for Hospitality Markets

29
Maximus Advisors Primary Contact Information

Peter Muoio, Ph.D.

646-352-9510
pmuoio@maximusadvisors.com

Frank Nitschke
646-352-9511
fnitschke@maximusadvisors.com

Tim Gunthel
646-352-9512
tgunthel@maximusadvisors.com

www.maximusadvisors.com

30