2008 APARTMENT TRENDS A National Multifamily Market Overview Hessam Nadji Managing Director Research Services Linwood C. Thompson Managing Director NMHG.

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


*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%


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


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%


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%


*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


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


$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


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


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


-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


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*


*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

2008 APARTMENT TRENDS A National Multifamily Market Overview Hessam Nadji Managing Director Research Services Linwood C. Thompson Managing Director NMHG.

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