Outlook 2011

Sponsored by

2010: Active in the Halls of Government

• Santa Cruz rental inspection ordinance

• San Jose reduces rent control fees

• San Jose protects owners liability

• Menlo Park goes smoke‐free (sort of)

• Campbell business license tax

• Mountain View scales back relocation program

• Electoral success

Active in the Halls of Government

CAA Tri‐County’s efforts saved rental owners– $2.00/unit in San Jose

– Burdensome calculations in Campbell

– $38/unit in Santa Cruz– Liability for a tenant’s unruly behavior

– Posting signs throughout their property

Rental Housing Market Outlook 2011Steve Seligman

Vice President & Regional ManagerMarcus & Millichap

2011CAA Tri-County Outlook

Steven Seligman – Regional Manager

EMPLOYMENT TRENDS

U.S. Employment Change by Sector2010

Sources: Marcus & Millichap Research Services, BLS

-1.3%(37,000)Information

2.2%422,000 Education & Health Services

-0.9%(72,000)Financial Activities

1,548,000 Total Gain

-1.6%(93,000)Construction

1.2%65,000 Other Services13.6%92,000 Natural Resources & Mining1.2%136,000 Manufacturing

1.8%240,000 Leisure & Hospitality2.2%366,000 Prof. & Business Services

-1.0%(222,000)Government

0.9%227,000 Trade, Transport & Utilities

(424,000)Total Loss

% ChangeAbsolute ChangeU.S. Employment Sectors

Employment Absolute Change by MetroForecast 2011

1.5%56,000Los Angeles

2.7%77,000Dallas-Fort Worth

2.3%84,000New York City

2.2%36,000Seattle-Tacoma

1.0%28,000Philadelphia

1.5%25,500Minneapolis

2,000,000

24,000

28,000

36,000

36,000

37,000

49,000

52,500

65,000

85,300

Abs Chg

1.5%

2.0%

3.6%

2.1%

2.6%

1.6%

2.1%

1.3%

2.6%

2.9%

% Chg

Austin

Phoenix

Orange County

Atlanta

Boston

U.S. Total

Chicago

Denver

Top 15Markets

Houston

Washington, DC 1.8%14,000Las Vegas

2,000,000

4,976

7,000

7,376

7,800

8,400

9,000

9,500

9,500

11,000

12,000

12,000

13,000

13,200

13,400

Abs Chg

1.5%

0.9%

1.2%

0.6%

2.2%

0.5%

1.6%

1.2%

1.4%

1.1%

2.4%

2.0%

1.4%

1.3%

1.4%

% Chg

Jacksonville

Sacramento

Fort Lauderdale

Cleveland

U.S. Total

Salt Lake City

Oklahoma City

Louisville

Baltimore

Tucson

Detroit

Bottom 15Markets

West Palm Beach

Kansas City

Cincinnati

Oakland

* San Jose: +21,000 (+2.5%), San Francisco: +20,400 (+2.2%)Sources: Marcus & Millichap Research Services, BLS

-8%

-4%

0%

4%

8%

San Jose San Francisco Oakland United States

2000-2008 2009 2010* 2011**

Year

-ove

r-Ye

ar P

erce

nt C

hang

e

2009 : -55,900 -59,600 -60,200 -4,740,0002010* : +7,000 -11,300 -12,000 +1,124,0002011** : +21,000 +20,400 +13,400 +2,000,000

* Year-end estimate** ForecastSources: Marcus & Millichap Research Services, BLS

Employment TrendsBay Area vs. United States

CAPITAL MARKETS

Recent 10-Year Treasury Movement Reflects the Power of Market Sentiment, Expectations and Uncertainty

2.25

2.50

2.75

3.00

3.25

3.50

3.75

4.00

Jul-0

9Ju

l-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-1

0

Feb-10

Mar-10

Apr-10

May-10

Jun-1

0Ju

l-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

10-Y

ear T

reas

ury

Rat

es

Sources: Marcus & Millichap Research Services, Federal Reserve

“Cash for Clunkers”Ends

Healthcare Reform BillSigned into Law

Euro DebtCrisis

BP OilSpill

1Q10 U.S. GDPRevised Down

To 2.7%

2Q10 China GDP SlowsTo 10.3%

150K+ Monthly Private Employment Growth

Disappointing Private Employment Growth

Lower Jobless Claims

QE2 Announced

Retail Sales Exceed Expectations

Bush-Era Tax Cuts Extended

0%

5%

10%

15%

20%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Core Inflation 10-Year TreasuryAvg. Core Inflation Avg. 10-Year Treasury

Rat

e

Sources: Marcus & Millichap Research Services, Economy.com, Federal Reserve

4.41%

7.21%

Core Inflation vs. 10-Year Treasury

0%

2%

4%

6%

8%

10%

4Q19

97

4Q19

98

4Q19

99

4Q20

00

4Q20

01

4Q20

02

4Q20

03

4Q20

04

4Q20

05

4Q20

06

4Q20

07

1Q20

08

2Q20

08

3Q20

08

4Q20

08

1Q20

09

2Q20

09

3Q20

09

4Q20

09

1Q20

10

2Q20

10

3Q20

10

CMBS (30+ days and REO) Life Companies (60+ days)Fannie Mae (60+ days) Freddie Mac (60+ days)Banks & Thrifts (90+ days)

Del

inqu

ency

Rat

es

Delinquency rates at the end of each periodSources: Marcus & Millichap Research Services, Mortgage Bankers Association

U.S. Commercial Mortgage Delinquency Rates by Lender Type

Total Commercial/Multifamily Mortgage Debt Outstanding: $3.2 trillion*

* As of 3Q10Sources: Marcus & Millichap Research Services, Mortgage Bankers Association

GSEs and Ginnie Mae

10%

State & Local Gov't

3%Savings

Institutions6%Federal

Government2%

Others5%

Life insurance companies

9%

Commercial Banks45%

CMBS, CDO and other ABS

issues20%

By Lender Types ($Bil):Commercial Banks $1,428.1CMBS, CDO & Other ABS $639.9GSEs and Ginnie Mae $317.2Life Insurance Companies $298.6Savings Institutions $180.1 State & Local Governments $89.9Federal Government $78.8 Others $169.9

Sources of Commercial Real Estate Acquisition Financingby Dollar Volume

6%13% 7% 4%

2% 12%4%

8% 5%

7%6%

17% 19%

12%

35%1%

5%

13%

16%32%

36%

25%

30% 27%16%

35%

7%

0%

25%

50%

75%

100%

2007 2008 2009 2010*

Bank -nat'l, int'l, inv bnk

Assumed Debt

CMBS

Regional/Local Bank

Insurance

Seller Financed

Financial

Sources: Marcus & Millichap Research Services, Real Capital Analytics

Perc

ent

*Through October

U.S. Commercial Mortgage Backed Securities (CMBS) Issuance

$0

$50

$100

$150

$200

$250

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

U.S. CMBS

CM

BS

Issu

ance

(bill

ions

)

Sources: Marcus & Millichap Research Services, Commercial Mortgage Alert

PROPERTY FUNDAMENTALS

U.S. Apartment Rent and Vacancy Trends

$700

$800

$900

$1,000

$1,100

00 01 02 03 04 05 06 07 08 09 10* 11**0%

3%

6%

9%

12%Asking Rent Vacancy Rate

Ask

ing

Ren

t per

Uni

tVacancy R

ate

* Estimate** ForecastSources: Marcus & Millichap Research Services, Reis

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

Santa Clara San Mateo Alameda

2000-2008 2009 2010* 2011**

Average Apartment Asking Rent

* Estimate**ForecastSources: Marcus & Millichap Research Services, Reis

Ave

rage

Ask

ing

Ren

t per

Uni

t

0%

2%

4%

6%

8%


2000-2008 2009 2010* 2011**

Average Apartment VacancyVa

canc

y


U.S. Office Rent and Vacancy Trends

$22

$24

$26

$28

$30

00 01 02 03 04 05 06 07 08 09 10* 11**5%

10%

15%

20%


Ask

ing

Ren

t per

Squ

are

Foot

Vacancy Rate


$0

$20

$40

$60

$80


2000-2008 2009 2010* 2011**

Average Office Asking Rent


Ave

rage

Ask

ing

Ren

t per

Sq.

Ft.

0%

8%

16%

24%

32%


2000-2008 2009 2010* 2011**

Average Office Vacancy

Vaca

ncy


U.S. Retail Rent and Vacancy Trends

$12

$14

$16

$18

$20

00 01 02 03 04 05 06 07 08 09 10* 11**4%

6%

8%

10%


Mon

thly

Ask

ing

Ren

t per

Squ

are

Foot

Vacancy Rate


$15

$20

$25

$30

$35


2000-2008 2009 2010* 2011**

Average Retail Asking Rent

* Estimate** ForecastSources: Marcus & Millichap Research Services, CoStar Group, Inc.

Ave

rage

Ask

ing

Ren

t per

Sq.

Ft.

0%

2%

4%

6%

8%

10%


2000-2008 2009 2010* 2011**

Average Retail VacancyVa

canc

y

* Estimate** ForecastSources: Marcus & Millichap Research Services, CoStar Group, Inc.

INVESTMENT TRENDS

$0

$25

$50

$75

$100

$125

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

*

5%

6%

7%

8%

9%

10%

Average Price Cap Rates

* EstimateIncludes sales $1Million and GreaterSources: Marcus & Millichap Research Services, Costar Group, Inc.

National Apartment Price / Cap Rate TrendsA

vera

ge P

rice

per U

nit (

000s

)A

verage Cap R

ate

$0

$60

$120

$180

$240

Ave

rage

Pric

e pe

r Uni

t (00

0s)


2002-2008 2009 2010*

Apartment Prices by County

* Preliminary EstimateIncludes Sales $500,000 and aboveSources: Marcus & Millichap Research Services, CoStar Group, Inc.

3%

4%

5%

6%

7%


2002-2008 2009 2010*

Apartment Cap Rates by CountyA

vera

ge C

ap R

ate


$0

$50

$100

$150

$200

$250

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

*

5%

6%

7%

8%

9%

10%



National Office Price and Cap Rates

Ave

rage

Pric

e pe

r Squ

are

Foot

Average C

ap Rate

$0

$100

$200

$300

$400

Ave

rage

Pric

e pe

r SqF

t


2002-2008 2009 2010*

Office Prices by County


2%

4%

6%

8%

10%


2002-2008 2009 2010*

Office Cap Rates by County

Ave

rage

Cap

Rat

e


$0

$40

$80

$120

$160

$200

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

*

5%

6%

7%

8%

9%

10%



National Retail Price and Cap RatesA

vera

ge P

rice

per S

quar

e Fo

otA

verage Cap R

ate

$0

$105

$210

$315

$420

Ave

rage

Pric

e pe

r SqF

t


2002-2008 2009 2010*

Retail Prices by County


2%

4%

6%

8%

10%


2002-2008 2009 2010*

Retail Cap Rates by CountyA

vera

ge C

ap R

ate


DISTRESSED ASSETS

U.S. Estimated Distressed Assets Summary By Property Type

1,200 $33.0 Hotel

1,318 $29.3 Development Site

2,728 $37.9 Apartment

1,959 $24.1 Retail

402 $4.2 Other

Distressed

$186.0

$9.1

$48.3

$ in Bil.

10,754

1,271

1,876

# of props

Grand Total

Industrial

Office

* As of November 15, 2010

Note: Some portfolio deals may not be allocated to a single market


Estimated Distressed Assets SummaryMajor Western Markets

211 $1,976.8 Sacramento

244 $3,063.3 San Francisco

56 $621.6 Portland

172 $2,437.6 San Diego

169 $2,378.0 Oakland

128 $2,030.6 San Jose

Distressed

$47,260.0

$2,777.0

$3,034.3

$3,236.6

$7,749.3

$17,954.9

$ in Mil.

2,609

156

132

282

593

466

# of props

Seattle

Orange County

Los Angeles

Grand Total

Inland Empire

Las Vegas




Estimated Distressed Assets Summary By Property Type-San Jose

24 $133.6 Industrial

18 $164.5 Retail

5 $211.0 Development Site

12 $264.6 Hotel

38 $1,124.4 Office

31 $132.6 Apartment

128 $2,030.6 Grand Total

Distressed$ in Mil. # of props




Estimated Distressed Assets Summary By Property Type-San Francisco

9 $158.8 Industrial

15 $366.9 Hotel

26 $234.7 Retail

139 $802.5 Apartment

47 $1,434.1 Office

5 $40.0 Development

Distressed

$3,037.0

$ in Mil.

241

# of props

Grand Total




Estimated Distressed Assets Summary By Property Type-Oakland

25 $143.0 Industrial

13 $285.1 Hotel

24 $449.1 Development Site

33 $643.7 Office

30 $247.6 Retail

28 $319.6 Apartment

153 $2,088.2 Grand Total





Estimated Distressed Assets Summary By Property Type-Bay Area

34$700.1 Development Site

40$916.6 Hotel

198$1,254.7 Apartment

118$3,202.2 Office

74$646.8 Retail

58$435.4 Industrial

522$7,155.8 Grand Total



Bay Area includes: San Francisco, San Jose, and Oakland



Tri‐County Local Issues OutlookJoshua Howard

Executive DirectorCalifornia Apartment Association, Tri‐County Division

Outlook 2011

Local government finance

• Local government & school district deficits– San Jose $110‐million

– Mountain View $2‐million

– San Mateo County $84‐million

• Fee and tax increases

• School parcel taxes

• Government reform

Measure AMarch 8, 2011 Special Election

$64,000/unit tax on new multi‐family development

Outlook 2011

Local regulations

• Soft story retrofits

• Smoking regulations continue

• Interest on security deposits

• Bed bug liability

Outlook 2011

Local rental market

• From the headlines….

Outlook 2011

Local regulations

• Just cause

• Late fee regulations

• Rental housing database

• Longer notice period to terminate tenancy

Outlook 2011 Partnerships for a stronger community

State & National Issues Outlook & UpdateThomas Bannon, CEO, California Apartment Association

Debra Carlton, Senior Vice President, California Apartment Association

CAA State Legislative Affairs

2010 Year In Review & Looking Forward

Bills Signed by the Governor

Domestic ViolenceThis new law gives a tenant an option to change the locks if he/she has written proof that he/she is the victim of domestic violence. It also provides that a landlord cannot terminate a tenancy or fail to renew a tenancy based solely upon an act or acts of domestic violence against a tenant. The law does, however, specifically give landlords the right to evict the tenant if he/she allows the perpetrator to visit the property or the property owner reasonably believes that the presence of the

perpetrator poses a physical threat to other tenants, guests, or to a tenant's right to quiet enjoyment of the property. SB 782 (D-Yee).

Carbon Monoxide Detectors

This new law requires an owner of a housing unit to install a carbon monoxide device in each existing dwelling unit that has a fossil fuel burning heater or appliance, fireplace, or an attached garage:

For all existing single‐family dwelling units intended for human occupancy on or before July 1, 2011.

For all other existing dwelling units intended for human occupancy on or before January 1, 2013. SB 183 (D‐Lowenthal).

ForeclosuresThis new law requires a 90 day disclosure be given by a property owner, informing tenants of their rights when the property owner terminates a tenancy after a foreclosure action. At the same time, this new law allows an unlawful detainer lawsuit to be “masked” by the court permanently if the buildings was involved in a foreclosure and the unlawful detainer action against the tenant is never taken to a final judgment. SB 1149 (D-Corbett).

Bills Vetoed by the Governor

Rental Property: Animals

This bill would have prohibited a landlord from advertising or establishing rental policies that required a tenant or a potential tenant with an animal to have that animal debarked or declawed. AB 2743 (D-Nava).

RecyclingThis bill attempted to mandate commercial recycling on private businesses (rental property) that produced more than four cubic yards of waste a week. It modified existing local permitting requirements and required the Department of Resource Recycling and Recovery (CalRecycle) to provide the Legislature with a report on the progress being made by the state towards a 75 percent diversion goal. AB 737 (D-Chesbro).

2011 Legislative Make-Up

State Senate

25 Democrats ‐ 15 Republicans (5 Moderates)

• Balance of Power remained unchanged

• 10 new Senators elected (6 Dem, 4 Rep)

• CAAPAC supported 10 of 10

• 1 new Moderate Democrat (Vargas, D‐San Diego)

• 2 seats away from 2/3 majority

52 Democrats ‐ 28 Republicans (6‐8 Moderates)

State Assembly

• 28 new Assemblymembers elected

• 17 Democrats ‐ 11 Republicans

• CAAPAC supported 24 of 28

• Democrats gained 1 seat

• 2 seats away from 2/3 majority (3 in 2010)

Looking AheadAnticipated Legislative Activity

Publicly Traded Companies – Increase in Property Tax –Definitional Changes to Change in Ownership

Rental Property Owner Tracking Payments to Contractors –Withholding

Permanent Source of Funding for Affordable Housing –Escrow Fees

1031 Exchanges – Eliminate Tax Benefits

Funding, Finance & State Budget

Source of Income – Section 8 Protected Status

Just Cause

Cap or Eliminate Rental Payment Late Fees

Rental Housing Registry

90‐Day Notice for No Cause Evictions

No‐Smoking Legislation

Landlord‐Tenant

Environmental

AB 32 – Changes to Agency Oversight

Mandatory Water Submeters

Prohibit RUBS

Mandatory Recycling

Substandard Housing Violations

Bed Bug LegislationLead Paint Education – Substantial Equivalency with Federal Law

Employer/Employee

Eliminate Arbitration Agreements

Prohibit Credit Screening of Employees

Prohibit Criminal Screening for some Employees

Governor’s 3 Point Plan

Speak the Truth. No more smoke and mirrors on the budgetNo New Taxes unless approved by peopleReturn authority to local governments

Legal Cases

Rental Housing InspectionsRental Housing Owners Association of Southern

Alameda County v. City of Hayward Issue: May a City enforce an inspection ordinance that mandates the owner “shall” allow entry into the unit (in contradiction to state law (which strictly limits the right of entry into an occupied unit))?

• Status: Victory at Trial Level. City may not enforce requirement. Case is on appeal. CAA Filed Amicus Brief in Appellate Court in Decemberl.

Section 8Sabi v. Sterling

Issue: Is an owner required to accept a Section 8 voucher from a disabled tenant? Specifically, (1) Does the prohibition against “source of income” discrimination require an owner to participate in the Section 8 program? and (2) Is it a “reasonable accommodation”for the owner to be required to take this resident’s voucher, when she has been a tenant for years, and her sons, who are also on the lease (but reside elsewhere) have always paid the rent?

• Status: Victory. In April, the Court of Appeal ruled in favor of the landlord, holding Section 8 vouchers do not fall within the protections of the “source of income” provisions of California law and that under the facts of this case, the owner was not required to take the voucher as an accommodation for the tenant’s disability.

www.caanet.org

Outlook 2011

Business

employment change

yearoveryear percent

government cmbs

year treasury20

year treasury15

year treasury core inflation

year treasury movement

employment absolute