2008 APARTMENT TRENDS A National Multifamily Market Overview Hessam Nadji Managing Director Research Services Linwood C. Thompson Managing Director NMHG.
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20082008APARTMENT TRENDSAPARTMENT TRENDSA National Multifamily Market OverviewA National Multifamily Market Overview
Hessam NadjiManaging DirectorResearch Services
Linwood C. ThompsonManaging Director
NMHG
U.S. Housing Market Remains in Transition
Months’ Supply of Inventory Rising
0
3
6
9
12
01 02 03 04 05 06 07*
Single-Family Condo
*Through AugustSources: Marcus & Millichap Research Services, National Association of Realtors
Y-o-Y Change
38%
27.7%
Nu
mb
er o
f M
on
ths
Housing Slow Down Impacting Overall Economy - Existing Home Sales
*Through AugustSources: Marcus & Millichap Research Services, Economy.com, National Association of Realtors
-20%
-10%
0%
10%
20%
30%
01 02 03 04 05 06 07*
Existing Condo Sales Existing Single-Family Sales
Yea
r-O
ver-
Yea
r P
erce
nt
Ch
ang
e
Home Mortgage Originations by Loan TypeShare of Total Volume
0%
25%
50%
75%
100%
2001
2002
2003
2004
2005
2006
Prime Subprime Alt-A Home Equity FHA/VA
Sources: Marcus & Millichap Research Services, Joint Center for Housing Studies (Harvard)
Sh
are
of
To
tal V
olu
me
2001 = 11% 2006 = 34%
Home Prices Yet to Reflect CorrectionMedian Existing Home Prices
$100
$200
$300
$400
U.S. Northeast Midwest South West
1991-2006 2007*
Med
ian
Ho
me
Pri
ce (
000s
)
*Through AugustSources: Marcus & Millichap Research Services, Economy.com, National Association of Realtors
Data points = % growth from 2001-2007*
39%
63%
28%27%
58%
Cash From Home Refinancing No Longer Shielding Retail Sales From High Energy Prices
0%
2%
4%
6%
8%
10%
2000
2001
2002
2003
2004
2005
2006
2007
*
$0
$20
$40
$60
$80
$100Retail Sales Oil Prices
Cru
de O
il (price p
er barrel)
Sources: Marcus & Millichap Research Services, Economy.com
Y-o
-Y P
erce
nt
Ch
ang
e in
Ret
ail S
ales
*Retail Sales Forecast, Oil Prices as of September 25th
Strong Corporate Sector, Full Employment Helping to Offsetting Housing, Consumer Weakness
-10%
0%
10%
20%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
*
2008
*
0%
2%
4%
6%
8%Fixed Nonresidential Investment
Unemployment Rate
Sources: Marcus & Millichap Research Services, Economy.com
*Forecast
Fix
ed N
on
resi
den
tial
Inve
stm
ent
(An
nu
al P
erce
nt
Ch
ang
e)A
nn
ual U
nem
plo
ymen
t Rate
Easing Inflation Giving the Fed More Flexibility For Lowering Rates
0%
2%
4%
6%
8%
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
0%
2%
4%
6%
8%Fed Funds Rate Core Inflation
*Fed Funds Through August, Core Inflation Through JulySources: Marcus & Millichap Research Services, BLS, Economy.com, Federal Reserve
Fed
Fu
nd
s R
ate C
ore In
flation
Y-o
-Y P
ercent C
han
ge
-100
0
100
200
300
0%
2%
4%
6%
8%
05 06 Q2Y07*
Monthly Job Growth
*YE ForecastSources: Marcus & Millichap Research Services, Economy.com
Gross Domestic Product
Job
s in
Th
ou
san
ds
Housing Has Not Bottomed – Growth Expected to Moderate and Avoid Recession
An
nu
aliz
ed G
row
th
-4,000Jan-06 Jan-07
Avg. 07
Avg. 08
Aug-07
2005: 3.1%2006: 2.9%
2007: 2.3%2008: 2.5%
Percent Change in EmploymentTop and Bottom 15 U.S. Markets – YOY August 2007
Bottom 15Y-o-Y
% Change
Boston 1.2%
Philadelphia 1.2%
Oakland 1.0%
Nashville 1.0%
Minneapolis 0.9%
Chicago 0.9%
Los Angeles 0.8%
San Diego 0.7%
Columbus 0.6%
Pittsburg 0.4%
Baltimore 0.4%
Orange County 0.1%
Cleveland 0.1%
Cincinnati 0.0%
Detroit -1.1%
U.S. 1.2%
Sources: Marcus & Millichap Research Services, Economy.com
Top 15Y-o-Y
% Change
Salt Lake City 4.5%
Austin 4.1%
New Orleans 3.6%
Inland Empire 3.6%
Seattle 3.4%
Tucson 3.0%
Dallas-Fort Worth 2.7%
Phoenix 2.7%
Houston 2.6%
Charlotte 2.6%
Orlando 2.6%
Fort Lauderdale 2.5%
Raleigh-Durham 2.3%
Atlanta 2.2%
Jacksonville 2.0%
U.S. 1.2%
-150
-100
-50
0
50
Under 35 35-44 45-54 55-64 65+ U.S.Age Cohort
Ch
an
ge
in
Ho
me
ow
ne
rsh
ip R
ate
2Q
20
06
- 2
Q 2
00
7 (
ba
sis
po
ints
)
41.9% 80.6%75.5%67.6%
Current Homeownership Rate
80.5% 68.2%
Home Ownership Decreasing in All CohortsIn the Past Year
Sources: Marcus & Millichap Research Services, Economy.com
Vacancies: Short-Term Challenge in Select Markets –Long-Term Outlook Strong Due to
Rebounding Demand, Balanced New Supply
40
80
120
160
200
90 92 94 96 98 00 02 04 06 08*
0%
5%
10%
15%
20%Multi-Family Completions Vacancy
*Forecast
Sources: Marcus & Millichap Research Services, Reis
Mar
ket
Rat
e A
par
tmen
t C
om
ple
tio
ns
(Th
ou
san
ds
of
Un
its)
Vacan
cy
-4%
0%
4%
8%
12%
96 97 98 99 00 01 02 03 04 05 06 07* 08*
Asking Rent Effective Rent
Apartment Rent Growth Strong – Likely to Moderate but Remain Healthy
Sources: Marcus & Millichap Research Services, Reis*Forecast
Y-o
-Y P
erce
nt
Ch
ang
e
Effective Rent Growth Variations ShowingTop and Bottom 15 U.S. Markets YOY
Bottom 15 2Q 06 2Q 07 % Change
Kansas City $610 $630 3.3%
Indianapolis $593 $612 3.2%
Inland Empire $978 $1,009 3.2%
Orlando $794 $819 3.1%
Fort Lauderdale $1,023 $1,055 3.1%
Houston $652 $672 3.1%
Columbus $588 $606 3.1%
Minneapolis $840 $865 3.0%
Milwaukee $762 $783 2.8%
Cleveland $660 $677 2.6%
Cincinnati $625 $641 2.6%
Atlanta $733 $749 2.2%
Denver $749 $762 1.7%
Palm Beach $1,036 $1,049 1.3%
Detroit $749 $758 1.2%
U.S. Average $909 $951 4.6%
Sources: Marcus & Millichap Research Services, Reis
Top 15 2Q 06 2Q 07 % Change
San Jose $1,339 $1,470 9.8%
Seattle $851 $919 8.0%
San Francisco $1,541 $1,620 7.9%
Salt Lake City $624 $668 7.1%
Portland $677 $719 6.2%
Los Angeles $1,270 $1,348 6.1%
Washington, DC $1,160 $1,227 5.7%
Oakland $1,172 $1,236 5.5%
Tucson $566 $597 5.5%
Orange County $1,374 $1,449 5.5%
Austin $694 $731 5.3%
Phoenix $672 $706 5.1%
Chicago $915 $957 4.6%
Philadelphia $907 $947 4.4%
San Antonio $609 $635 4.3%
U.S. Average $909 $951 4.6%
Top and Bottom 15 U.S. Markets – 2008* Vacancy Rate
Top 15 2008*
New York 2.3%
San Jose 3.2%
N. New Jersey 3.2%
Los Angeles 3.7%
Orange County 4.0%
San Diego 4.2%
San Francisco 4.3%
Philadelphia 4.4%
Oakland 4.5%
Fort Lauderdale 4.6%
Miami 4.6%
Washington, D.C. 4.7%
Milwaukee 4.8%
Minneapolis 4.8%
Chicago 4.9%
U.S. Average 5.7%
Bottom 15 2008*
Columbus 7.0%
Detroit 7.3%
Phoenix 7.4%
Kansas City 7.4%
St. Louis 7.6%
Charlotte 7.8%
Atlanta 8.4%
Denver 8.4%
Austin 8.5%
Raleigh-Durham 8.5%
Cincinnati 8.6%
Dallas-Fort Worth 8.6%
Oklahoma City 8.8%
Indianapolis 9.2%
Houston 10.1%
U.S. Average 5.7%
Sources: Marcus & Millichap Research Services, Reis
*Forecast
Economy Strong Enough to Avoid Recession - Risk Levels Will Remain Elevated through First Half of 2008 Due to Housing, Capital Markets
Expect a Slower Economy and Job Market Through Mid-Year 2008
Apartment Demand Expected to Rise Because of Housing Correction and Natural Drivers – Rent Growth Slower, but Healthy
Economic, Apartment Demand Outlook Variations By Market Widening
Over-Hang of Excess Homes and Condos Concentrated in Select Markets
Long-Term Apartment Supply/Demand Outlook Very Strong
Major Risk Factors: Credit/Housing, High Energy Costs, Corporate/Consumer Psychology
National Economic and Apartment Fundamentals Summary
Top U.S. Markets 5-year Population and Job Growth Forecast
Sources: Marcus & Millichap Research Services, Economy.com
Top 15Austin
Las Vegas
Riverside-San Bernardino
San Antonio
West Palm Beach
Orlando
Dallas-Fort Worth
Atlanta
Phoenix
Houston
Charlotte
Tucson
Fort Lauderdale
Sacramento
Seattle
Linwood C. ThompsonManaging Director – National Multi-Housing Group
National Apartment Investment Overview and Outlook
Historic PerspectiveMFEEC “Consensus” 2002-2005
Panelist’s / Speaker’s Consensus: Pricing bubble in the market Cap rates would increase
Marcus & Millichap Consensus No systemic pricing bubble Investor demand would overshadow
operational weakness Pricing would remain strong Cap rates would continue to decrease
Marcus & Millichap Consensus 2006
Operations offset minimal rate increaseNo systemic “pricing bubble”Investor demand would remain strongVelocity would increase through 1st half Cap rates would be relatively “flat”
Key Observations for 2007
Investor demand for apartments will remain strong (no erosion)
No systemic “pricing bubble” Operations continue to strengthen and
rekindle buyer aggressiveness Velocity remains static for 3 – 6 months…
then accelerates Cap rates remain relatively “flat” No sustainable pressure for the FED to raise
interest rates
Commercial Mortgage-Backed Securities (CMBS)Spreads Have Risen Dramatically
0
100
200
300
400
500
9/8/
2006
10/6
/200
6
11/3
/200
6
12/1
/200
6
12/2
9/20
06
1/26
/200
7
2/23
/200
7
3/23
/200
7
4/20
/200
7
5/18
/200
7
6/15
/200
7
7/13
/200
7
8/10
/200
7
9/7/
2007
CM
BS
Sp
rea
d t
o S
wa
p
AAA AA A BBB+ BBB BBB-
Sources: Marcus & Millichap Research Services, Wachovia
The “Special” Debt Deli Sandwich
HAM - $.90/lb
STEAK - $1.10/lb
TURKEY - $1.00/lbAvg. Cost = $1.10Avg. Cost = $1.05
Avg. Cost = $1.00MYSTERY MEAT - $.60/lb Avg. Cost = $.90
Reasons to buy…the “Special”
•More diversified sandwich
•Lower average cost (Better yield)
The “Special” Debt Deli Sandwich
The “mystery” meat didn’t digest very well Investors who “ate” the sandwich got sick The “value” of the sandwich plunged
HAM - $.90/lb
STEAK - $1.10/lb
TURKEY - $1.00/lbAvg. Cost = $1.10Avg. Cost = $1.05
Avg. Cost = $1.00
MYSTERY MEAT - $.60/lb Avg. Cost = $.90
What Went Wrong?
Is something wrong with delicatessens? Is something wrong with sandwiches? Is something wrong with diversification? Is something wrong with steak, turkey or ham?
No… the problem was with one very specific part of the sandwich…
The filler, the marginal cost reducer, the yield enhancer… turned out to be ………..
What Happens Next?
The CMBS deli guys are watching the agency guys make a lot of money
The CMBS deli will invent a new sandwich as soon as possible and re-open their doors
Investors will return to buy CMBS deli sandwiches with steak, turkey and ham
Next time around… investors will simply say… “This time, skip the mystery meat!”
Pricing will return to being “set” by the “market”
Commercial Mortgage Delinquency Rate Remains Near Historic Lows
0%
2%
4%
6%
8%
1988
Q2
1989
Q2
1990
Q2
1991
Q2
1992
Q2
1993
Q2
1994
Q2
1995
Q2
1996
Q2
1997
Q2
1998
Q2
1999
Q2
2000
Q2
2001
Q2
2002
Q2
2003
Q2
2004
Q2
2005
Q2
2006
Q2
2007
Q2
Co
mm
erc
ial D
elin
qu
en
cy
Ra
te (
AC
LI)
Sources: Marcus & Millichap Research Services, ACLI
THEN
CRE Supply/Demand Imbalance
Credit Crunch Due to Rising Delinquencies
NOW
Credit Concerns Rooted in Subprime Residential
CRE Market Fundamentals Healthy
Commercial Delinquencies < .5%
All-In Rate Down From Recent Peak#2
50
100
150
200
250
0%
2%
4%
6%
8%Apartment Spreads 10-Yr. Treasury
All-In Rate*
*10-Year Treasury Yield Plus Average Conduit Spread Sources: Marcus & Millichap Research Services, Marcus & Millichap Capital Corp.
Ave
rag
e C
on
du
it S
pre
ad (
Lar
ge
Lo
an) 10-Y
r. Treasu
ry and
All-In
Rate
Core Inflation and Interest RatesStill Below Long-Term Trend
0%
4%
8%
12%
16%
68 71 74 77 80 83 86 89 92 95 98 01 04 07*
0%
4%
8%
12%
16%
10-Year Treasury Core Inflation
Average
Average
10-Y
ear
Tre
asu
ry Co
re Inflatio
nY
-o-Y
Percen
t Ch
ang
e
*Through August 2007Sources: Marcus & Millichap Research Services, Economy.com, Federal Reserve
Apartment Investments TrendsTransactions by Price Category
0
4
8
12
2004 2005 2006 1H 2006 1H 2007*
Nu
mb
er
of
Tra
ns
ac
tio
ns
(th
ou
sa
nd
s)
$1M - $9.99M $10M - $19.99M $20M - $39.99M $40M+
9,216
10,406
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics
4,919
*Estimate
8,354
3,992
Apartment Investment Trends Dollar Volume by Price Category
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics
$0
$40
$80
$120
2004 2005 2006 1H 2006 1H 2007*
To
tal
Do
lla
r V
olu
me
($
bil
)
$1M - $9.99M $10M - $19.99M $20M - $39.99M $40M+
$101 Billion$102 Billion
$43 Billion
*Estimate
$63 Billion
$50 Billion
Apartment Buyer Composition, Past 12 Months vs. Previous 12 Months
19%24%
2%4%9%
8%
28%3%
2%
2%
7%
10%
35%
48%
0%
25%
50%
75%
100%
Previous 13-24 Months Past 12 Months
Pe
rce
nt
of
Sa
les Private
Fund
Syndicator
Condo Converter
REIT
Foreign
Institutional
Sources: Marcus & Millichap Research Services, Real Capital AnalyticsSales $5 million and above
Top Condo Conversion MarketsFrom 2Q 2003 - 2Q 2007
Sources: Marcus & Millichap Research Services, Reis
Market
% of Inventory Converted to Condos
Total Units Converted
2Q2003-2Q2006 Vacancy Bps
Change
2Q2006-2Q2007 Vacancy Bps
Change2Q 2007Vacancy
Fort Lauderdale 30.3% 28,800 (270) 110 4.0%
Orlando 24.2% 32,370 (390) 140 6.2%
Palm Beach 23.7% 14,875 (480) 280 7.0%
Miami 20.7% 28,296 (300) 50 3.7%
Tampa 15.6% 24,459 (390) 130 6.1%
Charleston 15.3% 3,973 (190) 80 8.4%
Jacksonville 11.6% 8,009 (150) 170 6.1%
Las Vegas 11.6% 15,394 (350) 80 4.8%
Phoenix 9.6% 23,825 (370) 150 7.4%
San Diego 7.8% 14,048 (50) 50 4.3%
Apartment Sales Trends Median Price per Unit vs. Average Cap Rate
$30
$60
$90
$120
$150
2001 2002 2003 2004 2005 2006 2007*
Me
dia
n P
ric
e p
er
Un
it (
00
0s
)
5%
6%
7%
8%
9%
Ca
p R
ate
Median Price per Unit Average Cap Rate
Sources: Marcus & Millichap Research Services, CoStar Group, Inc.Apartment Sales $1M+ for 40 Major Markets
*2Q
2%
4%
6%
8%
10%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
10-Year Treasury Apartment Cap Rates
Sources: Marcus & Millichap Research Services, NREI
Ave
rag
e A
nn
ual
Rat
eU.S. Apartment Investment Market
Still Outperforming 10-Year Treasury
2000240 Bps
120 Bps
* 2Q07
National Apartment Median Price Per Unitby Price Category
$0
$40
$80
$120
$160
$1-$9.9 Million $10-$19.9 Million $20 Million +
Me
dia
n P
ric
e p
er
Un
it (
Th
ou
sa
nd
s)
2000-2006 1H 2007
Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics
10%
5.7%
5.6%
2000 – 2006 Avg. Annual
Increase
U.S. Apartment Price and Rent Trends
-10%
0%
10%
20%
30%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*
Me
dia
n P
ric
e A
nn
ua
l C
ha
ng
e
-3%
0%
3%
6%
9% Effe
ctiv
e R
en
t An
nu
al C
ha
ng
e
Median Price Per Unit Avg. Effective Rent
Sources: Marcus & Millichap Research Services, RCA, ReisApartment Sales $1M+* Estimate Based on Q2-2007
National ApartmentAsking and Effective Rent Growth
$400
$600
$800
$1,000
$1,200
Asking Rent Effective Rent
1990-2006 2007* 2008*
* ForecastSources: Marcus & Millichap Research Services, Reis
25%19%
Rent Growth 2000-2008
Ave
rag
e R
ent
per
Un
it
National ApartmentAsking Rents by Class
$500
$700
$900
$1,100
$1,300
Class A Class B/C
1999-2006 2007*
* 2Q 2007 EstimateSources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics
Ave
rag
e A
skin
g R
ent
per
Un
it
U.S. Apartment Average Cap Rates by Market Type
5%
6%
7%
8%
Jan-
04
May
-04
Sep-0
4
Jan-
05
May
-05
Sep-0
5
Jan-
06
May
-06
Sep-0
6
Jan-
07
May
-07
Av
era
ge
Ca
p R
ate
Primary Secondary Tertiary
Sources: Marcus & Millichap Research Services, Real Capital Analytics
Sales $5 million and above
National Apartment Cap RatesPrimary vs. Tertiary Markets by Region
6.0%
6.8%
5.5%
6.4%6.3%
5.4%
6.9%7.1%
6.9%6.8%
7.1%
6.3%
4%
5%
6%
7%
8%
Mid-Atlantic Midwest Northeast Southeast Southwest West
Primary Markets Tertiary Markets
Sources: Marcus & Millichap Research Services, Real Capital Analytics
Ave
rag
e C
ap R
ate
Sales $5 million and above
Sources: Marcus & Millichap Research Services, NCREIF, Standard & Poors
To
tal R
etu
rn (
%)
Real Estate Returns Outperforming Stocks In Recent Years
99%
236%245% 246%
257%
14%17%22%13%21%
125%
92%89%90%
66%
0%
100%
200%
300%
S&P 500 Apartment Office Industrial Retail
1-year 5-year 10-year
Returns represent total compounded returns over each time period Total returns include both income and capital return
*As of 2Q 2007
Apartment REIT Index vs. S&P 500
0
200
400
600
800
94 95 96 97 98 99 00 01 02 03 04 05 06 07
S&P 500 Apartment REITs
Sources: Marcus & Millichap Research Services, NAREIT, Standard and Poor’s
Indexed to 100 Dec. 1993
*
*Through September
To
tal R
etu
rn I
nd
ex (
1993
=10
0)
Key Observations for 2008
Investor demand for apartments will remain strong No systemic “pricing bubble” Operations will remain healthy and support current
level of investor demand and pricing Investors will increase differentiation for quality
Product Class (Class “A”, “B” and “C”) Market Size (Primary, secondary and tertiary)
Cap rates for quality will remain relatively “flat” Cap rates on the margin will trend higher (50 bps) No sustainable pressure for the FED to raise rates Velocity begins to increase in 1st Qtr (+10% in 2008)
Multi-family Investment“The Continued Case for Optimism”
Reasons Why U.S. Investors Should Be Acquiring Multi-family Assets
Echo Boomer Demand Supports Appreciation
Sources: Marcus & Millichap Research Services, Economy.com
-10%
-5%
0%
5%
10%
1990-95 1995-00 2000-05 2005-10* 2010-15*
Ages 20-24 Ages 25-29 Ages 30-34* Forecast
Ch
ang
e in
Po
pu
lati
on
5.5 million Increase
Demand From ImmigrationSupports Appreciation
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Th
ou
san
ds
19801980 19851985 19901990 19951995 20002000 20052005 20102010
12 Million Increase12 Million Increase
20152015
Sources: Marcus & Millichap Research Services, Economy.com
U.S. Household Growth2005 - 2015
32%
68%
Own Rent
13.4 million net new households
4.3m new renter households
9.1m new owner households
Sources: Marcus & Millichap Research Services, Economy.com, Harvard University
U.S. Apartment DemandRobust for Next 10 Years
0
100
200
300
400
500
600
700
800
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08* 10* 12* 14* 16*
*Forecast
Sources: Marcus & Millichap Research Services, Reis, U.S. Census Bureau
Co
mp
leti
on
s (T
ho
usa
nd
s o
f U
nit
s)
Projected demand for Projected demand for new U.S. apartments new U.S. apartments averages 430,000 units averages 430,000 units per year for next 10 per year for next 10 years! years!
New Supply Has Become More Constrained, Less Volatile - Construction as a Percentage of Stock
0%
2%
4%
6%
8%
10%
Apartment ShoppingCenters
Office Industrial
Co
ns
tru
cti
on
as
% o
f S
toc
k A
nn
. A
vg
. 1980-89 1990-99 2000-06 2007-10*
Sources: Marcus & Millichap Research Services, Reis
*Forecast
Can / Will The US Apartment Industry Meet Projected Demand?
Land is more scarce and more expensive Construction costs more expensive Development “nimby-ism” more common Impact fees more expensive Urban development (where demand is more
reliable) is inherently more expensive Mid-rise or high-rise vs. traditional garden Cost of land preparation (scraping) Parking (subterranean or decks)
Marcus & Millichap’s NMHGRemains Bullish on US Apartment Market
High levels of future demand Supply more difficult and expensive to deliver Unlikely the industry will meet demand Current rents in most markets do not justify
development Significant future pressure on rents US apartments will be dramatically more
valuable in 2012 than 2007
20082008APARTMENT TRENDSAPARTMENT TRENDSA National Multifamily Market OverviewA National Multifamily Market Overview
Hessam NadjiManaging DirectorResearch Services
Linwood C. ThompsonManaging Director
NMHG
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