Third Quarter 2008 Report Investment Trends Vol. 4, No. 3 ...Signs that the economy and market are adjusting to new market realities are evident in residential real estate con-struction,

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Third Quarter 2008 ReportVol. 4, No. 3Investment Trends

Quarterly

Spotlighton

Sacramento

�Investment TrendsQuarterly

Copyright© 2008 by Real Estate Research Corporation (RERC) and the CCIM Institute.

InThisVolume

Regional and Metro-Level AnalysesComing Soon! East RegionBaltimore, Boston, Charlotte, Hartford, Norfolk, Northern New Jersey, New York City, Pittsburgh, Philadelphia, Raleigh, Richmond, Washington, D.C.

South RegionAtlanta, Austin, Dallas/Ft. Worth, Houston, Memphis, Miami, Nashville, New Orleans/Baton Rouge, Oklahoma City, Orlando, San Antonio, Tampa

Midwest RegionChicago, Cincinnati, Cleveland, Columbus, Detroit, Indianapolis, Kansas City, Milwaukee, Minneapolis, Omaha, St. Louis, Toledo

West RegionDenver, Honolulu, Las Vegas, Los Angeles, Phoenix, Portland, Sacramento, Salt Lake City, San Diego, San Francisco, Seattle, Tucson

Now Available!National OverviewBracing for Turbulent TimesEconomic Background and Investment EnvironmentHow Is Commercial Real Estate Affected?A Focus on Real Estate Cap Rate & Yield Rate ExpectationsNational Market Analysis & Property Sector Highlights“Sacramento Follows Blueprint to Guide Future Smart Growth”ContributorsScope & Methodology



Foreword

August 2008

Dear Readers,

As the economy deals with the credit crisis, high oil prices, and the disruption in the financial markets, investors are focusing on what impact this has for commercial real estate. Until recently, fundamentals were strong, but now as unemployment continues to increase, demand for office-using work space is down. Consumers, with less dis-cretionary income, are not shopping as much, and as a result, retail and warehouse space availability is increas-ing. High gasoline prices are causing business and leisure travel to slow, and so hotel stays are declining. Even apartments, which have been somewhat recession-proof in the past, are seeing increased vacancies due to the high number of single-family homes on the market and the absorption of overbuilt condominiums into this sector.

Despite this treacherous economic backdrop, commercial real estate—at least low-leverage equity real estate—has been able to steer clear of much of the bumpiness the debt markets have been experiencing. However, trans-action volume continues to decline, and price vs. values, along with returns, are being affected. While the landing for commercial real estate is not expected to be trouble-free, there are opportunities for investors who are willing to hold on or look for new properties in which to invest.

Please take a look at our feature article in this issue—“Sacramento Follows Blueprint to Guide Future Smart Growth.” Like many markets, Sacramento has been affected by the sluggish economy, but with various initiatives set forth in the community, remains optimistic about its future.

As always, we would like to thank all who provided information through the form of shared research and complet-ing surveys. We appreciate your sharing this information with RERC and with the industry overall, especially dur-ing these turbulent times.

Sincerely,

Kenneth P. Riggs, Jr., CCIM, CRE, MAIPresident & CEOReal Estate Research Corporation (RERC)

Timothy S. Hatlestad, CCIM2008 CCIM Institute PresidentPresident, RE/MAX Commercial Investment



BracingForTurbulentTimes

The conditions in which commercial real estate finds itself in mid-2008 are challenging to even the most seasoned investors. The turmoil in the housing market and the credit crisis that was triggered because of lender greed and neglect has created a lack of confidence in the financial markets that will take much time to work through. Throw into the mix oil prices that are straining an already sluggish economy and serve as yet another drain on businesses and consumers, and you get a sense of the turbulent times ahead for commercial real estate.

The nature of commercial real estate means that it lags the economy and the financial markets by about 6 to 12 months. As a long-term investment, commercial real estate typically has leases in-place and has a capital structure with terms that allow timing adjustments around various demand and capital influences. However, the credit crisis has been in full swing for a year now, and has made its presence known in profound ways as we prepare for the next several quarters. As a result, the lag advantage that commercial real estate had been enjoying is disappearing, property vacancies are rising, and the capital structure is showing signs of stress. This stress was evident for marginal properties in weak locations over the past 6 months; however, these conditions are now testing and challenging higher-grade properties that are well-leased and well-located. This issue of the RERC/CCIM Investment Trends Quarterly is intended to help you and your clients prepare for the turbulent headwinds ahead for commercial real estate.

Signs that the economy and market are adjusting to new market realities are evident in residential real estate con-struction, which continued to decline in all districts, accord-ing to the July 23, 2008 Beige Book. Commercial real estate construction also has been slowing, with high construction costs, overbuilding, and tightened financing in some dis-tricts. Total construction during the first half of 2008 was $282.1 billion, 16 percent less than a year ago, accord-ing to McGraw-Hill Construction. Further, nonresidential construction activity declined by 12 percent in June, after increasing 32 percent in May. During the first 6 months of

2008, nonresidential building increased 6 percent as com-pared to a year ago, while residential building decreased 39 percent during that same time period. On the face of this data, the slowdown in construction appears to be a negative view of things, but in reality, the building slow-down reflects the corrective steps that the market must take in order to find equilibrium in the search of healthy supply and demand.

In addition, gross domestic product (GDP) increased by 1.9-percent annualized growth during second quarter 2008, versus 0.9-percent GDP growth in first quarter. The big dark cloud hovering over the U.S. economy is oil pric-es, followed closely by concerns about unemployment and inflation.

Despite slightly higher-than-expected GDP growth during second quarter 2008, survey respondents to the RERC/CCIM Investment Trends Quarterly lowered their outlook for the U.S. economy. Their outlook for the economy de-clined to 3.8 from 4.4 on a scale of 1 to 10, with 10 be-ing high. Likewise, on a regional basis, the economic out-look fell to 4.9 from 5.6 for the Midwest region, to 5.5 from 5.9 for the South region, and to 4.4 from 5.7 for the West region. The outlook for the economy for the East region increased slightly during second quarter, to 5.9 from first quarter’s rating of 5.8.

Economic Background andInvestment Environment



How Is Commercial Real Estate Affected?The number of commercial real estate transactions contin-ues to decline from the record pace set in 2007. RERC es-timates that commercial real estate transactions are off by 50 percent during the first half of 2008 relative to the pace set during the first half of 2007. However, the number of transactions that occurred in 2007 was a high-water mark that was not sustainable and will not be matched for many, many years. RERC forecasts that this slowed transaction velocity trend will continue for the balance of 2008, and in the end, we will return to transaction levels seen in 2004 and 2005, thus ending the year with transaction levels off a net of about 40 percent for 2008 compared to 2007.

As transaction volume has slowed significantly, the concern over the “bid-ask” spread has risen. As shown in Exhibit 1, the “sell” recommendation fell from a level of 8.0 in late 2006 to the current average, for a decline of over 50 per-cent. While many buyers are sitting on the sidelines, trying to scoop up bargain opportunities, the highest rating is for “hold” recommendations, as investors watch and wait for the market turbulence to clear. It is important to note that so far, most investors do not find themselves in desperate enough straits to sell properties at distressed levels.

The challenge for investors is the vexing issue of value ver-sus price. The credit crisis brought an official end to capi-talization rate compression in second quarter 2007. Since then, space fundamentals have been holding up reason-ably well, however, allowing investors to hope that the nu-merator, or income side, of the price/value equation would hold, thus keeping prices/values within a comfortable ad-justment zone. However, with continued weakness in the economy and more negative employment numbers, the re-

sult is weaker fundamentals and higher vacancies for all major property types. This weakness in the fundamentals is exhibited in survey respondents’ views of the “value versus price” and in “return versus risk” for commercial properties, as demonstrated in Exhibit 2.

CCIM designees and candidates rated the value versus price of commercial real estate overall at 4.8 on a scale of 1 to 10, with 10 being high, for second quarter 2008. This rating was unchanged from first quarter, indicating that investors feel that real estate values for commercial properties are under some level of price pressure. The only property type where the value versus price increased during second quarter, is the apartment sector, which was rated at 5.2, and indicates that investors generally feel the value of apartment proper-ties is slightly higher than the price paid. All other property types received value versus price ratings below 5.0, and were viewed as providing less value than the price paid. The retail sector received the lowest rating of 4.3, while the office sector was close behind with a rating of 4.4.

Although commercial real estate overall received a rating of 5.1 on a scale of 1 to 10, with 10 being high, for return versus risk, the second quarter 2008 rating was somewhat

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Exhibit 1. RERC Historical Buy, Sell, Hold Recommendations

Source: RERC.

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Exhibit 2. Historical Return/Risk and Value/Price Ratings2Q 2008 1Q 2008 4Q 2007 3Q 2007 2Q 2007

Return vs. RiskOffice 4.6 4.9 4.6 5.4 5.6

Industrial 5.2 5.9 5.4 6.0 6.0

Retail 4.5 5.5 4.7 5.7 5.9

Apartment 6.3 6.8 7.0 6.3 6.2

Hotel 5.0 5.6 5.5 6.0 5.9

Overall 5.1 6.2 5.3 5.6 5.8

Value vs. PriceOffice 4.4 4.6 4.3 4.8 5.0

Indusrial 4.9 5.1 4.6 5.4 5.5

Retail 4.3 4.8 4.4 4.6 4.8

Apartment 5.2 5.1 6.0 5.3 5.3

Hotel 4.6 5.3 5.1 5.2 5.3

Overall 4.8 4.8 4.5 5.0 4.8

*Ratings are based on a scale of 1 to 10, where 1 is poor and 10 is excellent.Source: RERC Institutional Investment Survey, 3Q 2008.

lower than the previous quarter, indicating respondents are seeing reduced returns relative to risk on commercial prop-erties. Like last quarter, the apartment sector received the highest return versus risk rating; at 6.3, survey respondents believe apartments are providing a higher return relative to risk. Only two property types—retail and office—received a rating lower than 5.0, indicating that respondents believe these sectors are providing a lower return relative to risk.

RERC’s investment conditions ratings declined for all prop-erty types during second quarter 2008. At 6.5, the apartment sector received the highest rating among all the property sectors, while the office sector received the lowest rating of 4.6.

Despite the difficulties and doubts associated with commer-cial real estate, however, CCIM designees and candidates rated commercial real estate higher than stocks, bonds, and cash during second quarter 2008, with a favorable rating of 6.2 on a scale of 1 to 10, with 10 being high, followed by cash. The credit crisis weights heavily on stocks, which at 3.9, continued to have the lowest rating among the in-vestment options, while bonds followed closely, as shown in Exhibit 3. A comparison of the financial market returns over time is shown in Exhibit 4. This historical and current picture of returns tells us a very important story about the relative investment game. Nothing is performing well in this environment, and regretfully, commercial real estate private market returns, as represented by the National Council of Real Estate Independent Fiduciaries (NCREIF), have de-clined significantly.

Exhibit 3. CCIM Respondents Rate Investments

2Q 2008 1Q 2008

Commercial Real Estate 6.2 6.7

Stocks 3.9 4.3

Bonds 4.4 4.5

Cash 5.9 5.7

Source: RERC Institutional Investment Survey, 2Q 2008.



Exhibit 4. What Do the Financial Markets Tell Us?Current and Compounded Annual Rates of Return as of 7/1/2008

Market Indices 2Q 2008 1-Year 3-Year 5-Year 10-Year 15-YearConsumer Price Index 1.86% 5.02% 4.01% 3.56% 2.99% 2.81%

10-Year Treasury Bond* 3.89% 4.14% 4.49% 4.40% 4.76% 5.31%

Dow Jones Industrial Average -11.47% -15.35% 3.37% 4.78% 2.40% 8.13%

NASDAQ Composite 2.51% -6.47% 5.39% 8.27% 3.06% 8.69%

NYSE Composite -6.87% -12.28% 6.26% 9.48% 3.53% 8.26%

S&P 500 -2.73% -13.12% 4.41% 7.59% 2.88% 9.22%

NCREIF Index** 0.56% 9.21% 15.05% 14.80% 12.31% 11.40%

NAREIT Index -4.93% -13.64% 4.99% 14.30% 10.65% 11.50%

*Based on Average End of Month T-Bond Rates.**Based on FTSE NAREIT US Real Estate Index Equity REITs, Total Return.Sources: Economy.com, Federal Reserve Board, BLS, NYSE, NCREIF, NAREIT, compiled by RERC.

Unleveraged required pre-tax yield rates, or discount rates, continue to increase and now stand at an average of 8.6 percent for all property types with an accompanying capi-talization rate of 6.8 percent. This is part of an upward trend that started in second quarter 2007, when expected discount rates reached an all-time low of roughly 8.0 percent and re-quired capitalization rates bottomed out at 6.5 percent (see Exhibits 5 and 6). These discount and capitalization rate lev-els are contrasted to the descent from 9.0 percent and 7.25 percent, respectively, from 2005 thru early 2007, although prior to these 2004 levels, discount and capitalization rates were roughly 10.0 percent and 8.25 percent, respectively. We point these levels out to develop a gauge as to where the future lies for these rates. Given the outlook that institu-tional real estate values will fall by 10 percent to 15 percent over the next year, this would suggest that we will go back to 2005 discount and capitalization rate levels.

As shown in Exhibit 7, during second quarter 2008, the spread between discount and capitalization rates increased to 180 basis points from 160 basis points. Interestingly, this spread has a narrow band of time when it traded over a peri-od of much volatility. Further, some suggest that transaction volume will revert to a level experienced during this period, or off 40 percent from the peak of second quarter 2007.

The spread between RERC’s pre-tax yield rate and 10-year treasuries continues above 450 basis points (see Exhibit 8), and most likely will stay at the level or edge up over the coming quarters. This spread is a reasonable level given the alternative investment returns and the relative outlook for in-vestment returns in general.

A Focus on Real Estate Cap Rateand Yield Rate Expectations



Exhibit 5. RERC Historical Required Pre-tax Yield Rates (%)

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Sources: RERC, Federal Reserve.

Exhibit 7. RERC Historical Spread Between Yield Rates and Capitalization Rates

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Exhibit 8. RERC Historical Spread Between Required Pre-tax Yield Rates and 10-Year Treasuries

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Exhibit 6. RERC Historical Required Going-in Capitalization Rates

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NAR U.S. Economic Outlook: August 20082007 Quarterly 2008 Quarterly 2009 Quarterly Annual

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2006 2007 2008 2009

Annual Growth Rate

Real GDP 4.8 -0.2 0.9 1.9 2.0 0.4 1.6 1.3 2.0 1.9 2.8 2.0 1.7 1.5

Nonfarm Payroll Employment 0.8 0.8 -0.3 -0.6 -0.4 0.0 0.3 0.4 1.0 0.8 1.8 1.1 0.1 0.2

Consumer Prices 2.8 5.0 4.3 5.0 3.3 2.1 1.9 2.3 3.7 2.2 3.2 2.9 4.1 2.6

Real Disposable Income 3.1 0.6 -0.1 11.3 -5.0 -1.2 3.2 1.8 1.0 1.3 3.5 2.8 1.7 1.1

Consumer Confidence 106 91 77 57 54 60 65 72 75 75 106 103 62 72

Unemployment 4.7 4.8 4.9 5.3 5.7 5.9 6.0 6.0 6.0 6.0 4.6 4.6 5.5 6.0

Interest Rates, Percent

Fed Funds Rate 5.1 4.5 3.2 2.1 2.0 2.1 2.5 3.0 3.5 3.5 5.0 5.0 2.3 3.1

3-Month T-Bill Rate 4.3 3.4 2.0 1.6 1.9 2.1 2.8 3.2 3.5 3.6 4.7 4.4 1.9 3.3

Prime Rate 8.2 7.5 6.2 5.1 5.0 5.1 5.5 6.0 6.5 6.5 8.0 8.1 5.3 6.1

Corporate Aaa Bond Yield 5.8 5.5 5.5 5.6 5.8 5.9 6.1 6.1 6.0 6.0 5.6 5.6 5.7 6.0

10-Year Government Bond 4.7 4.3 3.7 3.9 4.1 4.2 4.5 4.5 4.5 4.5 4.8 4.6 4.0 4.5

30-Year Government Bond 4.9 4.6 4.4 4.6 4.5 4.6 4.9 4.9 4.9 4.9 4.9 4.8 4.5 4.9

Source: Forecast produced using Macroeconomic Advisers quarterly model of the U.S. economy. Quarterly figures are seasonally-adjusted annual rates. Assumptions and simulations by NAR's Dr. Lawrence Yun.

Given the weak economy, investment conditions ratings are declining for investment types, except for cash, which increased slightly from last quarter. While commercial real estate is still rated as the highest investment alternative compared to stocks, bonds, and cash, tighter credit is starting to take its toll on commercial properties, and sales volume is down dramatically from a year ago. Vacancy rates began increasing during fourth quarter 2007, and are expected to continue to climb throughout the remainder of 2008.

The majority of CCIM designees and candidates stated that apartments are the best investment opportunity dur-ing second quarter 2008. Apartment demand is expected to continue due to tighter credit standards, high-priced mortgages, more foreclosures, and expected interest rate increases.

Most respondents cited the retail sector as the property type most at risk due to slow consumer spending, infla-tion, and increasing job loss. Respondents also noted that the cost of debt is high, and asking prices are still too high, making it difficult for investor returns to overcome the risks.

We are navigating through very turbulent times that are reminiscent of the 1970s when oil prices skyrocketed and there was a rush to fuel efficiency. While we may not be sorting through the fuel crisis any time soon and busi-nesses and consumers will have to continue to bear the brunt of high energy prices, there is the expectation that the credit crisis and the fallout in the financial markets will be resolved in due time. For now, commercial real estate will hold its own on a relative basis, but moving out of a holding pattern will be difficult for the next several quarters to come.

In Summary



NAR Commercial Forecast (June 2008)

2007 2008 2009

2006 2007 2008III IV I II III IV I

OFFICE

Vacancy Rate (%) 12.5 12.5 12.9 13.3 13.5 13.7 13.8 12.6 12.5 13.3

Net Absorption (’000 sq. ft.) 15,210 15,322 3,869 8,911 9,495 8,990 9,983 81,183 57,265 38,530

Office Employment (thousands) 16,727 16,712 16,646 16,586 16,699 16,653 16,733 16,648 16,875 17,066

Completions (’000 sq. ft.) 17,047 19,795 16,306 26,754 19,938 14,922 16,328 51,606 61,102 74,412

Inventory (millions sq. ft.) 3,389 3,409 3,425 3,452 3,472 3,487 3,503 3,326 3,398 3,472

Rent Growth (%) 3.5 1.3 1.0 0.8 0.6 0.7 0.7 5.2 8.0 3.5

INDUSTRIAL

Vacancy Rate (%) 9.3 9.4 9.8 9.9 10.0 9.9 10.0 9.4 9.4 9.6

Net Absorption (’000 sq. ft.) 43,354 27,785 -12,524 28,245 26,677 26,417 30,036 205,365 120,231 134,662

Industrial Employment (thousands) 10,189 10,170 10,140 10,091 10,068 10,057 10,063 10,235 10,238 10,261



Rent Growth (%) 0.8 0.7 0.2 0.4 0.4 0.3 0.3 1.4 3.6 3.3

RETAIL

Vacancy Rate (%) 8.8 9.2 9.5 9.7 9.6 9.3 9.2 8.0 9.2 8.8

Net Absorption (’000 sq. ft.) 8,737 1,524 -639 5,904 6,484 6,446 6,510 10,526 11,081 24,760



Rent Growth (%) 0.7 0.7 0.7 0.2 0.2 0.2 0.2 3.9 3.2 1.4

MULTIFAMILY

Vacancy Rate (%) 4.4 4.8 5.5 5.4 5.3 5.7 5.7 5.9 5.4 5.1

Net Absorption (Units) 111,745 2,882 -52,603 63,860 69,590 -255 42,567 229,452 234,399 245,786

Completions (Units) 57,436 57,314 56,275 54,573 53,999 55,084 52,341 224,170 230,932 216,880

Inventory (Units in Millions) 14.0 14.0 14.1 14.1 14.2 14.2 14.3 13.8 14.0 14.2

Rent Growth (%) 0.7 0.9 0.9 1.0 1.2 1.1 1.1 4.1 3.1 4.0

Sources: NAR, CBRE/Torto Wheaton Research.



Snapshot of Real Estate Space and Market Performance – 2Q 2008

Vacancy Rates

Performance Indicator Recent Data Impact on Commercial Real Estate

Rental Rates(RERC’s surveyed rent growth expectations)

Office: 2.4% to 2.9%Industrial: 2.5%Retail: 2.4% to 2.8%Apartment: 3.2%Hotel: 3.0%

Expected rental rates for most property types were mixed for second quarter 2008. Compared to the previous quarter, expected rental growth decreased for the office and industrial sectors, increased slightly for the apartment sector, and remained about the same for the retail and hotel sectors.

Real Estate Returns

RERC’s Required Returns:Office: 8.2% to 8.7%Industrial: 8.4% to 8.8%Retail: 7.7% to 8.5%Apartment: 8.3%Hotel: 9.7%

NCREIF Realized Returns:Office: 9.6% to 14.4%Industrial: 6.8% to 8.7%Retail: 4.1% to 12.2%Apartment: 6.5%Hotel: 10.5%

RERC’s required returns increased for all property types during second quarter 2008. With an increase of 50 basis points, the hotel sector saw the biggest jump. NCREIF’s realized returns decreased dramatically for all property types, with the largest decrease in the office sector.

Capitalization Rates

RERC’s Realized Cap Rates:Office: 5.6%Industrial: 6.9%Retail: 6.5%Apartment: 5.8%Hotel: 7.5%

NCREIF Implied Cap Rates:Office: 4.7% to 5.4%Industrial: 5.8% to 6.1%Retail: 5.5% to 6.0%Apartment: 4.5%Hotel: 6.6%

RERC’s second quarter realized capitalization rate averages were mixed across the property types. The rates for the office and apartment sec-tors remained steady, while those for the industrial and retail sectors increased slightly. The averge capitalization rate for the hotel sector de-clined 40 basis points. NCREIF’s implied capitalization rates decreased slightly for all property sectors.

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Source: Reis.

Office Vacancy Rate Retail Availability Rate

Industrial Availability Rate Apartment Vacancy Rate

�0Investment TrendsQuarterly


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Real gross domestic product (GDP) increased at an annual rate of 1.9 percent during second quarter 2008, as compared to first quarter’s increase of 0.9 percent. Economic growth was attributed to the boost from the economic stimulus checks, strong exports due to the weak dollar, imports, and investment in structures.

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Consumer Price Index (CPI) inflation increased to 217.4 in June 2008, an increase of 1.1 percent from May. This increase was the largest since September 2005, and was due primarily to energy and transportation costs. Energy increased by 6.6 percent in June, and transportation increased by 3.8 percent.

Source: Bureau of Labor Statistics.

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The unemployment rate rose to 5.7 percent in July 2008, while nonfarm payroll employ-ment lost 51,000 jobs. This has been the seventh consecutive month of negative nonfarm payroll growth. Weakness continued in the construction, manufacturing, and service-pro-viding industries, although positive growth occured in the healthcare and mining indus-tries.

Source: Bureau of Labor Statistics.

Source: Bureau of Economic Analysis.

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The Federal Open Market Committee (FOMC) left the federal funds rate at 2.0 percent and the discount rate at 2.25 percent for the second consecutive meeting. According to the FOMC, inflation is a concern for the economy, as the financial and labor markets struggle and the credit markets continue to tighten.

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Nov-07

Oct-07

Sep-07

Aug-07

Jul-0

7

Retail sales increased 0.1 percent in June 2008 as compared to the previous month, and increased 3.0 percent from the previous year. Despite the increase in June, retail sales slowed during the quarter overall due to declining auto sales, although strong gasoline sales helped to offset the negative growth.

Source: Census Bureau.

70

72

74

76

78

80

82

70

72

74

76

78

80

82

Perc

ent

Apr-08

Jul-0

7

Oct-06

Jan-0

6

Apr-05

Jul-0

4

Oct-03

Jan-0

3

Apr-02

Jul-0

1

Oct-00

Jan-0

0

Manufacturing utilization remained steady at 77.6 percent in May and June 2008, while industrial production increased by 0.5 percent in June. The manufacturing rate has been trending downward since July 2007. According to the Federal Reserve, second quarter industrial production decreased at an annual rate of 3.1 percent.

Source: Federal Reserve.

Source: Federal Reserve.

Unemployment

GDP

Consumer Price Index

Manufacturing Utilization

FOMC Policy Decisions

Retail Sales

��Investment TrendsQuarterly


4.5

5.0

5.5

6.0

6.5

7.0

7.5

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Mill

ions

Jun-0

8

Nov-07

Mar-07

Jul-0

6

Nov-05

Mar-05

Jul-0

4

Nov-03

Mar-03

Jul-0

2

Nov-01

Mar-01

During June 2008, 4.86 million existing homes were sold, a decline of 15.6 percent, or 5.76 million homes, from year-ago sales. Existing home sales in May and April were 4.99 million and 4.89 million, respectively. Although starting to stabilize, the national housing market remains weak.

Source: NAR.

0.75

0.95

1.15

1.35

1.55

1.75

1.95

2.15

2.35

0.75

0.95

1.15

1.35

1.55

1.75

1.95

2.15

2.35

Mill

ions

Mar-08

Aug-07

Jan-0

7

Jun-0

6

Nov-05

Apr-05

Sep-04

Feb-04

Jul-0

3

Dec-02

May-02

Oct-01

Mar-01

New residential construction increased by 9.1 percent in June 2008, or 1.066 million new units, as compared to the previous month. While still down substantially from its peak in January 2006, the increase in June may be an indication that the residential market is starting to stabilize.

Source: Census Bureau.

9.0

9.5

10.0

10.5

11.0

11.5

9.0

9.5

10.0

10.5

11.0

11.5

Mon

ths

Jun-08

May-08

Apr-08

Mar-08

Feb-08

Jan-08

Dec-07

Nov-07

Oct-07

Sep-07

Aug-07

Jul-0

7

Jun-07

Total housing supply in second quarter 2008 was 11.1 months, up 22 percent from year-ago inventory. The inventory of single-family homes was 11 months in June 2008. The number of foreclosed homes coming onto the market is contributing to the high supply, while the high supply is further driving down home values.

Source: NAR.

40

60

80

100

120

40

60

80

100

120

Inde

x

May-08

Oct-07

Mar-07

Aug-06

Jan-0

6

Jun-0

5

Nov-04

Apr-04

Sep-03

Feb-03

Jul-0

2

Dec-01

May-01

Consumer confidence increased slightly to 51.9 in July 2008, its first increase in 7 months, after falling to 51.0 in June, a 16-year low. With still-declining home values, stock market volatiliy, continued high energy costs, and lower availability of credit, consumers are find-ing little about which to be confident.

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

Perc

ent C

hang

e Q

uart

er A

go

1Q 2008

3Q 2007

1Q 2007

3Q 2006

1Q 2006

3Q 2005

1Q 2005

3Q 2004

1Q 2004

3Q 2003

1Q 2003

3Q 2002

1Q 2002

3Q 2001

1Q 2001

3Q 2000

1Q 2000

The Commercial Leading Indicator (CLI) declined by 0.7 percent during first quarter 2008, the biggest decline since fourth quarter 2002. With increasing unemployment, the National Association of REALTORS® (NAR) expects commercial real estate to weaken slightly over the coming months. The index factors in 13 variables affecting commercial real es-tate, such as unemployment, retail sales, and the NAREIT Price Index.

Source: NAR.

1,250

1,300

1,350

1,400

1,450

1,500

1,550

1,600

1,250

1,300

1,350

1,400

1,450

1,500

1,550

1,600

End

of M

onth

Adj

uste

d Cl

osin

g Pr

ice

Jun-0

8

May-08

Apr-08

Mar-08

Feb-08

Jan-0

8

Dec-07

Nov-07

Oct-07

Sep-07

Aug-07

Jul-0

7

The S&P 500 ended July 2008 with an adjusted closing price of 1284.26. The stock mar-ket has been very volatile since first quarter, with increases in April and May and a large sell-off in June, mostly due to financial market instability, the fluctuation of oil prices, and the weak dollar.

Source: S&P.

Source: The Conference Board.

Consumer Confidence New Residential Construction

S&P 500 Existing Home Sales

Commercial Leading Indicator Housing Supply



NAR Commercial Forecast (June 2008)

Time Period

Commercial Leading Indicator

% Change from 1 Quarter Ago

% Change from 1 Year Ago

2008

1Q 119.0 -0.7 -0.8

2007

4Q 119.9 -0.4 0.1

3Q 120.6 -0.1 0.7

2Q 120.7 0.5 1.1

1Q 120.3 0.2 0.8

2006

4Q 120.1 0.1 1.7

3Q 120.0 0.3 2.8

2Q 119.5 0.2 2.6

1Q 119.2 1.0 3.1

2005

4Q 118.1 1.1 1.9

3Q 116.7 0.2 2.2

2Q 116.5 0.7 2.6

1Q 115.7 -0.1 2.5

2004

4Q 115.8 1.4 3.5

3Q 114.2 0.6 3.0

2Q 113.6 0.7 3.3

1Q 112.8 0.8 2.3

2003

4Q 111.9 0.9 1.2

3Q 110.9 0.9 -0.6

2Q 109.9 -0.3 -1.7

1Q 110.3 -0.3 -1.0

2002

4Q 110.6 -0.8 -0.6

Source: NAR.

Although fundamentals are sound, activity in commercial real estate markets is expected to ease in the months ahead, according to a forward-looking index for the commercial real estate sectors published by the National Association of REAL-TORS® (NAR).

The Commercial Leading Indicator (CLI) for Brokerage Activity edged down 0.7 percent to an index of 119.0 in first quarter 2008 from a downwardly revised reading of 119.9 in fourth quarter 2007, and is 0.8 percent below first quarter 2007 when it stood at 120.0.

This is the third consecutive quarterly dip since reaching a record of 120.5 in sec-ond quarter 2007. Before that, the index showed generally positive expansion from the middle of 2003; NAR’s track of the index dates back to 1990.

Lawrence Yun, NAR chief economist, expects somewhat diminished business opportunities for commercial real estate practitioners in the months ahead. “The moderate erosion in the index suggests that commercial activity, as measured by net absorption and the completion of new commercial buildings, will be positive but somewhat weaker over the next 6 to 9 months. Private nonresidential investment in structures is likely to subtract one-third to one-half percentage point off GDP growth,” he said. “Along with the impact of the credit crunch, a weakening in leasing and building sales activity should come as no surprise because commercial real estate follows changes in overall economic activity.”

The quarterly decline results from falling employment in the sectors requiring office space, rising first-time unemployment claims, a lower rate of return as measured by the National Council of Real Estate Investment Fiduciaries (NCREIF), and a falling National Association of Real Estate Investment Trust (NAREIT) price index. In addition, there was a modest decline in industrial production.

“The job market is weak, but not recessionary,” Yun said. “There are large regional variations, with job growth in the South, while overall professional business service jobs are in the process of a long-term expansion.

“The U.S. is the world leader in the knowledge-based industry, and trade exports are solid – combined, these are solid underlying fundamentals for positive rent growth and net absorption in the commercial real estate market.”

The commercial leading indicator is a tool to assess market behavior in the major commercial real estate sectors. The index incorporates 13 variables that reflect future commercial real estate activity, weighted appropriately to produce a single indicator of future market performance, and is designed to provide early signals of turning points between expansions and slowdowns in commercial real estate.

The 13 series in the index are industrial production, the NAREIT price index, NCREIF total return, personal income minus transfer payments, jobs in financial activities, jobs in professional business service, jobs in temporary help, jobs in retail trade, jobs in wholesale trade, initial claims for unemployment insurance, manufac-turers’ durable goods shipment, wholesale merchant sales, and retail sales and food service.

More than 80,000 NAR members offer commercial services, and 60,000 of those are currently members of the REALTORS® Commercial Alliance, NAR’s commer-cial division.

This information is reproduced in part from the June 2008 “Commercial Real Estate outlook,” a newsletter published by the REALTORS® Commercial Alliance and with their permission.

100

105

110

115

120

125

100

105

110

115

120

125

Commercial Leading Indicators

20082007

20062005

20042003

2002

Leading Index Contracts in First Quarter 2008

Source: NAR.



NationalMarketAnalysis

Investment Conditions Ratings* - 2Q 20082Q 2008 1Q 2008 4Q 2007 3Q 2007 2Q 2007

Office 4.6 5.1 5.6 6.1 6.0

Industrial 5.3 5.9 5.1 6.1 6.4

Retail 4.9 5.4 5.2 6.3 6.5

Apartment 6.5 7.0 7.1 6.9 6.8

Hotel 5.4 5.9 6.4 6.6 6.7*Ratings are averages based on responses to surveys from CCIM designees and candidates for second quarter 2008.

National Transaction Breakdown (7/1/07 - 6/30/08)Office Industrial Retail Apartment Hotel

< $2 MillionVolume (Mil) $2,416 $3,876 $4,305 $2,073 $106

Size Weighted Avg. ($ per sf/unit) $94 $54 $89 $53,789 $26,628

Price Weighted Avg. ($ per sf/unit) $134 $88 $134 $76,842 $32,822

Median ($ per sf/unit) $98 $62 $90 $60,156 $27,619

$2 - $5 MillionVolume (Mil) $4,520 $6,338 $7,294 $5,105 $1,031




> $5 MillionVolume (Mil) $102,435 $29,037 $34,684 $55,465 $37,327




All TransactionsVolume (Mil) $109,372 $39,252 $46,283 $62,642 $38,464




Capitalization Rates (All Transactions)Range (%) 2.8 - 12.6 3.7 - 11.7 3.0 - 11.7 2.6 - 10.9 2.9 - 13.2

Weighted Avg. (%) 5.6 6.9 6.5 5.8 7.5

Median (%) 6.7 7.0 6.7 6.0 8.4 Source: RERC.

OfficePropertySector



w CCIM designees and candidates who responded to RERC’s survey rated investment conditions for the office market at 4.6 on a scale of 1 to 10, with 10 being high for first quarter 2008. This is lower than the 5.1 rating given during the previous quarter, and also represents the lowest rating among the five main property types.

w Total transaction volume for the office sector during second quarter 2008 decreased approximately one-third from first quarter 2008, and about half from year-ago volume. Ac-cording to RERC’s transaction analysis, the size-weighted average price for office properties decreased during sec-ond quarter, while the price-weighted average price in-creased. The average capitalization rate for office proper-ties remained at 5.6 percent.

w Survey respondents gave the office sector low ratings for both return versus risk and value versus price during sec-ond quarter 2008, indicating that they feel returns are less than the amount of risk taken and that the value is less than the price of the investment.

w According to Torto Wheaton Research, the overall vacancy rate for the office sector increased to 13.2 percent during second quarter 2008. Overall net absorption for the sector improved over first quarter’s dismal results, but absorption remains among the lowest recorded since mid-2003.

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%NationalWestMidwestSouthEast

2Q081Q084Q073Q072Q07

RERC Weighted Average Capitalization Rate

$100

$200

$300

$400

$500

$600

$700

$100

$200

$300

$400

$500

$600

$700NationalWest

MidwestSouthEast

2Q081Q084Q073Q072Q07

RERC Price-Weighted Average PPSF

$100

$150

$200

$250

$300

$350

$100

$150

$200

$250

$300

$350NationalWestMidwest

SouthEast

2Q081Q084Q073Q072Q07

RERC Size-Weighted Average PPSF

National

Survey respondents from most regions are seeing difficulties in the office sector, citing “high vacancy, increasing unemployment, stagnant or declining rents, and too many unknowns about what companies will do.” There remain pockets in the East region, however, where fully-leased office properties are still doing well. Also, demand still exists for office space in areas such as Orlando and San Antonio.



IndustrialPropertySector

w CCIM designees and candidates who responded to RERC’s survey gave the industrial sector an investment conditions rating of 5.3 on a scale of 1 to 10, with 10 being high, during second quarter 2008. Like the ratings for all the property sectors, this is down from last quarter and indicates less confidence in the property sector’s investment potential.

w The total dollar volume of reported industrial property sales declined during second quarter 2008. Size-weighted aver-age and median sale prices for this property type decreased slightly, while the price-weighted average price increased slightly from first quarter 2008.

w Respondents to RERC’s survey rated risk versus return for the industrial sector at 5.2, indicating that the return on in-dustrial property investments is just slightly better than the risk involved in investing. However, respondents gave the industrial sector a value versus price rating of 4.9, indicating that the value represented in investment is about equal to or maybe a little less than the price for industrial properties. Both of these ratings are less than last quarter’s averages.

w According to Torto Wheaton Research, the average avail-ability rate for the industrial sector increased to 10.3 percent during second quarter 2008 from 9.8 percent the previous quarter. Additionally, net absorption for the industrial sec-tor was approximately -31.0 million square feet, a level of negative quarterly absorption not seen since first quarter 2002.

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

6.0%

6.5%

7.0%

7.5%

8.0%


2Q081Q084Q073Q072Q07


$40

$60

$80

$100

$120

$140

$160

$180

$40

$60

$80

$100

$120

$140

$160

$180NationalWestMidwest

SouthEast

2Q081Q084Q073Q072Q07


$30

$60

$90

$120

$30

$60

$90

$120National

WestMidwest

SouthEast

2Q081Q084Q073Q072Q07


National

Industrial properties still carry relatively strong appeal among survey respondents, particularly near ports and distribution areas. “Cap rates are in line, value is generally equal to price, and vacancy of 8 to 10 percent is considered market equilibrium.”



RetailPropertySector

6.00%

6.25%

6.50%

6.75%

7.00%

7.25%

7.50%

6.00%

6.25%

6.50%

6.75%

7.00%

7.25%


2Q081Q084Q073Q072Q07


$100

$150

$200

$250

$300

$350

$400

$100

$150

$200

$250

$300

$350

$400National

West

Midwest

SouthEast

2Q081Q084Q073Q072Q07


w CCIM Institute designees and candidates who respond-ed to RERC’s survey lowered their investment conditions rating for the retail sector to 4.9 on a scale of 1 to 10, with 10 being high, during second quarter 2008.

w RERC’s weighted average and median capitalization rates increased slightly for retail properties during sec-ond quarter 2008, while average and median pricing de-clined.

w Transaction volume of retail properties decreased 22 percent in second quarter 2008. Compared to RERC’s year-ago sales volume, transactions are down almost 40 percent.

w The availability rate for the retail sector increased to 9.5 percent from the prior quarter, according to Torto Whea-ton Research.

w The retail sector’s return versus risk and price versus value ratings were the lowest of all the property sectors, at 4.5 and 4.3, respectively.

$100

$125

$150

$175

$200

$225

$100

$125

$150

$175

$200

$225National

West

Midwest

South

East

2Q081Q084Q073Q072Q07


National

Although we are seeing stress in the retail sector due to “tenant fall-out, overbuilding in some areas, and slow consumer spending,” some survey respondents see this as an opportunity, especially for those “retail centers in proven commercial corridors” or “neighborhood malls with a value add, mixed-use component.”



ApartmentPropertySector

w CCIM designees and candidates rated investment condi-tions for the apartment sector at 6.5 for second quarter 2008. This is a decline from first quarter, but remains the highest rating when compared to the other major property sectors.

w Both the size- and price-weighted average prices per apart-ment unit increased during second quarter 2008, although the median price per unit declined. The weighted average capitalization rate for this sector is 5.8, where it has re-mained for the last 3 quarters.

w Total apartment transaction volume was down by about 20 percent during second quarter 2008. This is the third consecutive quarter that sales volume for this sector has declined.

w Average apartment vacancy increased to 6.0 percent dur-ing second quarter 2008, according to Reis, Inc. Apartment vacancy rates are expected to increase in the near term, as some renters look to purchase homes at bargain prices when the housing market bottoms out.

w Survey respondents gave the apartment sector the high-est return versus risk rating when compared to the other sectors tracked by RERC, while the rating for value ver-sus price increased slightly. Both ratings were the highest among the property types, showing that the apartment sec-tor is perceived to hold the best investment value.

3.5%

4.5%

5.5%

6.5%

7.5%

3.5%

4.5%

5.5%

6.5%


2Q081Q084Q073Q072Q07


$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000National

WestMidwest

SouthEast

2Q081Q084Q073Q072Q07

RERC Price-Weighted Average PPU

$50,000

$75,000

$100,000

$125,000

$150,000

$175,000

$50,000

$75,000

$100,000

$125,000

$150,000

$175,000National

WestMidwest

SouthEast

2Q081Q084Q073Q072Q07

RERC Size-Weighted Average PPU

National

The apartment sector still retains preferred status among survey respondents, due to “continued demand for housing as people continue to move out of their homes and fewer buyers qualify for home loans, as well as good rent growth opportunities.” However, this sector also is reported to be overbuilt in some markets.



HotelPropertySector

w Investment conditions for the hotel sector earned a rating of 5.4 on a scale of 1 to 10, with 10 being high, during second quarter 2008. Although this rating was lower than the previ-ous quarter’s rating of 5.9, it was second only to apartments as the highest rating given to the property sectors tracked by RERC.

w According to Smith Travel Research, the national average hotel occupancy rate was 68.2 percent during June 2008, 4.3 percent lower than year-ago rates. For the first half of 2008, the average occupancy rate was 61.5 percent, down 2.5 percent from the first half of 2007. At $73.91 at the end of June, revenue per available room (RevPAR) declined -0.9 percent from a year earlier.

w At 7.5 percent, RERC’s second quarter 2008 weighted av-erage capitalization rate for the hotel sector was 40 basis points lower than first quarter.

w Although both the size- and price-weighted average sale prices per hotel unit increased during second quarter 2008, transaction volume was significantly lower. In addition, the median price per hotel unit was slightly lower.

w Survey respondents rated the return versus risk for hotel properties at 5.0 during second quarter 2008, indicating that they feel the sector offers a return commensurate to the amount of risk taken. The sector earned a price versus val-ue rating of 4.6, indicating respondents’ view that the sector offers a little less value when compared to the price paid.

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%


2Q081Q084Q073Q072Q07


$50,000$150,000$250,000$350,000$450,000$550,000$650,000$750,000$850,000$950,000

$50,000$150,000$250,000$350,000$450,000$550,000$650,000$750,000$850,000$950,000

National

West

Midwest

South

East

2Q081Q084Q073Q072Q07

RERC Price-Weighted Average PPU

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000National

WestMidwest

SouthEast

2Q081Q084Q073Q072Q07

RERC Size-Weighted Average PPU

National

Only a few survey respondents saw opportunities associated with the hotel sector because there is “no rent control and rates can be increased daily.” Most survey respondents, however, continue to see more risk in the hotel sector, “as corporate cost cutting will reduce business travel, and high food and gasoline prices keep consumers home.”



The famous Gold Rush of 1848 ush-ered in a boom time for the towns and counties that grew into present-day Sacramento and the distinct urban re-gion that includes the capitol of Cali-fornia. Over the decades, the city of Sacramento grew like many metro-politan regions and surrounding com-munities across the nation: outwardly

from its central core. What’s more, in the years following World War II, the city failed to annex new parcels, which let burgeoning municipalities expand.

The result was growth without a co-hesive plan for new housing tracts and business parks in the six-county region and economic powerhouse of the Central Valley, resulting in con-cerns over lengthy commutes by auto, increased congestion, and unbridled, poorly-conceived development. Qual-ity of life and the economic future of this Northern California market were in question.

Leaders from over 20 cities and six counties decided something had to be done. The result was a “smart growth” planning initiative called the Sacra-mento Regional Blueprint for Transpor-tation and Land Use Study, a coopera-

tive work from the 28-member regional government agency, Sacramento Area Council for Governments (SACOG), and Valley Vision, a self-described “action tank” group. Launched in 2003, the Blueprint will help shape the future for the region through 2050 by recom-mending that some areas remain un-developed while other areas get high-density development. Its objectives are straightforward: Put houses, jobs, and stores together to reduce driving and make it easier to use public trans-portation, sidewalks, and bikes.

The Blueprint was a true regional ef-fort built with input from not just eco-nomic development organizations, elected officials, and environmental groups, but also the man-on-the-street. A series of community meetings at the local, county, and regional level was held using computer models that

By Edward M. Bury, APR

Sacramento Follows Blueprint to Guide Future Smart Growth

Left:Sacramento RiverBridge

�0Investment TrendsQuarterly


allowed area residents access to ex-isting property information in order to recommend new development and to immediately see the consequences on traffic and land use. Already, there are success stories.

In nearby communities like Roseville, Folsom, and Rancho Cordova, new residential developments feature mul-tifamily townhomes and condomini-ums built in the more traditional town square concept near schools, shop-ping, and Sacramento’s light rail public transportation network. And, near the State Capitol, a developer has suc-cessfully marketed new town homes and has converted a former vintage auto dealership building into a mixed-use property.

“We’re seeing a dynamic movement toward smart growth in the entire re-gion, including downtown Sacramen-to,” said Bob Rosenberg, CCIM, presi-dent of Inve$tnet, Inc., a full-service Sacramento commercial real estate company. “We’ve seen it in some of the town centers built in the outlying communities, and it’s prompting a re-naissance in Sacramento’s downtown and midtown.”

Rosenberg, part of the local com-mercial real estate scene since 1982, agreed with reports that commercial development needed the guidelines recommended in the Blueprint. “Roads and utilities have not been able to keep up with suburban growth. The plan bal-

ances amenities, jobs, and lifestyles by placing density and services nearby.”

The seat of the largest, most diverse state in the union, California state gov-ernment – which brings an estimated 100,000-plus jobs to the market – will always remain Sacramento’s biggest economic engine; percentage-wise, government employment is down sub-stantially from 15 years ago due to the faster growth in the technology, healthcare, and retirement industries. Tech giants Intel and Hewlett-Packard account for 6,500 and 4,500 jobs, re-spectively, and the region’s growing healthcare network generates jobs and contributes to the economy. But Rosenberg pointed out two other pow-erhouses: The University of California at Davis (one of the fastest growing research programs in the country) and the growth at the uncongested Sacra-mento International Airport. Tech in-cubators abound, drawn by the close

proximity to the Silicon Valley, San Francisco, and a quality work force.

According to a University-sponsored study, the nearby Davis campus is the second largest employer in the region with more than 28,000 full-time employees. Plus, the University’s Col-lege of Agriculture and Environmental Sciences is a leader in its field and a training ground for many agricultural concerns in the Central Valley, includ-

Sacramento Transaction Breakdown (7/1/07 - 6/30/08)Office Industrial Retail Apartment Hotel

< $5 MillionVolume (Mil) $73 $71 $79 $52 $20




> $5 MillionVolume (Mil) $375 $69 $327 $410 $101




All TransactionsVolume (Mil) $448 $140 $406 $462 $121




Capitalization Rates (All Transactions)Weighted Average (%) 7.1 6.0 6.4 5.3 8.4

Median (%) 6.6 6.4 6.3 5.5 8.6 Source: RERC.

Above: Downtown Sacramento

Above: Downtown Sacramento Sunset



ing the world-famous nearby wine-growing regions of Napa and Sonoma valleys, genetic foods, and health. In fact, the late, legendary winemaker, Robert Mondavi, gave the University a sizeable grant to develop the Rob-ert Mondavi Institute for Wine and Food Science, a complex of five build-ings with classrooms and laboratories scheduled to open next month.

From a national perspective The Sac-ramento/Stockton/Modesto ranks as the 20th largest Area of Dominant In-fluence (ADI) market in the country. With its central location in the state and close proximity to the Bay Area & Napa Valley to the west and the moun-tains surrounding Lake Tahoe to the east, Sacramento is geographically fortunate. To improve air accessibil-ity for business and pleasure travel, the Sacramento International Airport

is undergoing a $1.27 billion terminal expansion plan. Upgrades and expan-sion of the terminals will let the facility increase the number of passengers to 16 million annually and as a gateway to Napa, Sonoma, and Lake Tahoe, as well as the fast-growing central Valley.

Even with strong economic drivers and an enviable geography, the region has taken some blows and faces challeng-es. Like many markets in the Golden State and elsewhere, Sacramento was hit hard by the housing sector slump. According to the Sacramento Associa-tion of REALTORS®, average home prices in June fell below $400,000 in the greater Sacramento region for the first time in 5 years, and the median price dipped to $220,000. Since 2007, an estimated 20,000 homes have gone into foreclosure. This year, reports the Sacramento Regional Research Insti-

tute, the region posted a slight nega-tive job growth for the first time in 15 years, the result of slowdowns in near-ly all major employment sectors.

Still, Rosenberg remains bullish on Sacramento’s and California’s resilien-cy. The region has terrific weather and strong economic fundamentals, and offers people and business a lower-cost alternative than the Bay Area, Los Angeles, or San Diego, he noted.

“California still gains 400,000 to 500,000 people annually,” he said . “There’s been a lot of talk about the demise of California, but it keeps com-ing back.”

The early success of the Blueprint points to Sacramento coming back, too.

Above: Sacramento Skyline



B.K. Allen, CCIMB.K. Allen Real EstatePotomac Falls, Virginia

Todd Clarke, CCIMNew Mexico ApartmentsAlbuquerque, New Mexico

Wayne D’Amico, CCIMProperty PoliticsEssex, Connecticut

Paul Fetscher, CCIMGreat American BrokerageLong Beach, New York

Stephen FurnaryING Clarion PartnersNew York, New York

Breck HansonLaSalle Bank, N.A.Chicago, Illinois

Charles LowreyPrudential Investment Management ServicesParsippany, New Jersey

Dennis MartinRREEF/DB Real EstateNew York, New York

Jeff Lyon, CCIMGVA Kidder MathewsSeattle, Washington

Buzz McCoyBuzz McCoy Associates, Inc.Los Angeles, California

Tom Nordstrom, CCIMAEGON USA Realty Advisors, Inc.Cedar Rapids, Iowa

Art PasquerellaBerwind Property Group, Inc.Philadelphia, Pennsylvania

Duncan Patterson, CCIMPatterson-Woods AssociatesGreenville, Delaware

Gary M. Ralston, CCIM, SIOR, SRS, CPM, CREFlorida Retail Development, LLCWinter Park, Florida

Cynthia Shelton, CCIMColliers ArnoldOrlando, Florida

Frank Simpson, CCIMThe Simpson CompanyGainesville, Georgia

Richard SokolovSimon Property GroupIndianapolis, Indiana

John Stone, CCIMJohn M. Stone CompanyDallas, Texas

Dewey Struble, CCIMSperry Van NessReno, Nevada

Julien StudleyJulien Studley, Inc.New York, New York

Allan SweetAMLI Residential Properties TrustChicago, Illinois

Garry Weiss, CCIMFirst Industrial Realty TrustChicago, Illinois

Sam ZellEquity Group InvestmentsChicago, Illinois

RERC~CCIM Investment Trends Quarterly

RERC Editorial Staff

PublisherKenneth P. Riggs, Jr.CFA®, CRE, FRICS, MAI, CCIM

Editor-in-ChiefBarb Bush

Lead AnalystBrian Velky

Research AnalystsGreg PhilippCliff CarlsonMorgan Even

Design EditorMichelle Houlgrave

Data ManagementBen NeilDaniel Warner

Production CommitteeTerri Cotter

Research AssistantsCharles GohrJeffrey HarmsDavid KellyHerinomena RakotoariveloAnthony Tholkes

CCIM Institute

PresidentTimothy S. Hatlestad, CCIM

President-ElectCharles McClure, CCIM, CRE

First Vice PresidentRichard E. Juge, CCIM, SIOR

Chief Executive OfficerJonathan Salk

Director of Public RelationsEdward M. Bury, APR

CCIM Member Services CommitteeSteve Moriera, CCIM, ChairmanBrent Case, CCIM, Vice Chairman

Immediate Past ChairmanCCIM Member Services CommitteeNick Miner, CCIM

LiasonCCIM Member Services CommitteeFrank Simpson, CCIM

Advisory Board Members

Copyright Notice for RERC~CCIM Investment Trends Quarterly

Copyright© 2008 by Real Estate Research Corporation (RERC) and the CCIM Institute. All rights reserved. No part of this publication may be reproduced, duplicated, or copied in any form, includ-ing electronic forwarding or copying, xerography, microfilm, or other methods, or incorporated into any information retrieval system, without the written permission of RERC and the CCIM Institute.



Acknowledgements

REALTORS® Commercial Alliance of the National Association of REALTORS®

NAR PresidentRichard F. “Dick” Gaylord CRS, CRB, GRI, CIPS

NAR Executive Vice President/CEODale A. Stinton

RCA Committee RepresentativePatricia A. NooneyCCIM, CPM, SIOR

NAR Vice President of Commercial Real EstateJan M. Hope

Real Estate Research CorporationFounded more than 75 years ago, Real Estate Research Corporation (RERC) was the nation’s first independent real estate firm that specialized in both real estate research and analysis. Recognized as a pioneer in the art of real es-tate management and for monitoring key sectors of the economy that influence the real estate industry, RERC has retained its place as one of the industry’s leading real estate investment trends analysts through the publication of such reports as Expectations & Market Realities in Real Estate and the RERC Real Estate Report. Today, RERC is known for its research publications and market studies, commercial property valuations, complex consulting assignments, portfolio management and technology services, independent fiduciary services, and corporate advisory services.

The CCIM InstituteThe CCIM Institute, headquartered in Chicago, confers the Certified Commer-cial Investment Member designation through an extensive curriculum of 200 classroom hours in addition to professional experience requirements. CCIMs are recognized experts in commercial real estate brokerage, leasing, asset management, valuation, and investment analysis, and form a business net-work encompassing more than 1,000 markets throughout North America, Eu-rope, Asia and the Caribbean. There currently are more than 8,600 CCIM designees, with an additional 8,200 professionals pursuing the designation. CCIM Institute is an affiliate of the National Association of REALTORS®. Visit www.ccim.com.

REALTORS® Commercial Alliance of the National Association of REALTORS®

The REALTORS® Commercial Alliance (RCA) is the commercial division of the National Association of REALTORS® (NAR) that connects commercial real es-tate professionals and exchanges valuable information that contributes to their success. RCA in partnership with NAR’s commercial affiliates -- CCIM Institute, the Counselors of Real Estate (CRE), the Institute of Real Estate Management (IREM), the REALTORS® Land Institute (RLI), and the Society of Industrial and Office REALTORS® (SIOR) -- is dedicated to collaboration with and building on the strengths of each affiliate entity to benefit the real estate industry. RCA works to serve the needs of members, and to shape and unify the commercial real estate industry through valuable products and services, technology initia-tives, public policy advocacy, education, and research.

The RERC/CCIM Investment Trends Quarterly is produced by Real Estate Research Corporation (RERC) in association with and for members of the CCIM Institute. The RERC/CCIM Invest-ment Trends Quarterly is sponsored by the REALTORS® Com-mercial Alliance of the National Association of REALTORS®.



RealEstateResearchCorporation

Founded in 1931, Real Estate Research Corporation is one of the longest-serv-ing and most recognized national firms devoted to real property research, valu-ation, real estate consulting, indepen-dent fiduciary services, and portfolio services.

“

”

Offices located throughout the U.S., with headquarters in Chicago

LeadershipKenneth P. Riggs, Jr.CFA®, CRE, FRICS, MAI, CCIMPresident & CEO

Jules H. Marling, III, CRE, FRICS, MAIManaging Director

Del H. Kendall, CRE, MAIManaging Director

Donald A. Burns, CRE, FRICS, MAIManaging Director

Gregory P. Kendall, CRE, MAIManaging Director

Kent D. Steele, CRE, FRICS, MAIManaging Director

Standard PublicationsRERC Real Estate Report

RERC/CCIM Investment Trends Quarterly

Expectations & Market Realities in Real Estate

Real Estate Research Corporation980 North Michigan Avenue, Suite 1110Chicago, IL 60611-4522Phone: 319.352.1500Fax: 319.352.4050www.RERC.com

Explore our services... ■ Specialized Research■ Independent Fiduciary Services■ Fairness Opinions■ Litigation Support■ Consulting■ Portfolio Services■ Commercial Valuation■ Financial Risk Management■ Market Research & Analysis■ Appraisal Management Services

IndependentTo ensure objectivity and independence, RERC does not engage in any activity that may conflict with the best interests of our cli-ents. As an impartial observer of the markets, RERC is able to collect and synthesize data and commentary unavailable to less independent organizations.

UniqueRERC brings unique and diverse skills to solving complex real estate issues. RERC’s innovative approach to problem solving is fostered by the diverse education and professional backgrounds of our team members.

ExpertiseRERC’s expertise originates from a national presence and per-spective, coupled with local market knowledge gained through the completion of hundreds of engagements annually in every major market. Our clients have found that RERC is relationship-oriented, focusing first and foremost on our clients’ and custom-ers’ needs, and delivering the highest quality products and ser-vices. RERC is an SEC-registered advisor.


Copyright© �00� by Real Estate Research Corporation (RERC) and the CCIM Institute.

Trusted Advice. Proven Performance.

Gold

Bronze

Contributors

Len H. Layne Austin, TX

Lydell Lauro All Investment Realty Las Vegas, NV

Chung Wan Ileung anca realty Los Angeles, CA

Allen McDonaldBaker StoreyMcDonaldInvestments

Nashville, TN

Tom Baldwin Baldwin Commercial Properties, LLC San Antonio, TX

Mark Brill Brill Properties LLC Minneapolis, MN

Charles Connely Butler Real Estate Kansas City, MO

Bob Vecchiolli C21 Alliance Philadelphia, PA

Gary N. Hunter Capital Financial, LLC / Colliers International Seattle, WA

Francis Briggs Capstar Commercial Realty Washington, DC

Steve Pettit CB Richard Ellis | South Bend Goshen, IN

Norman W. Gregory, CCIM

CCIN Real Estate Services, Inc. Jacksonville, FL

Chris Schreiber Century 21Commercial Sandpoint, ID

Cory Peterson CL Peterson &Associates, LLC Salt Lake City, UT

Allen Yap Clearly Maui, Inc. Honolulu, HI

Dan MincherColdwell Banker Commercial,The Duncan Co.

Sacramento, CA

Ryan Proler Colliers International Houston, TX

David Fisher Colliers Intl. San Diego, CA

Dean Cameron Columbia River Bank Portland, OR

Rob Stefka CommercialInvestment Services North Platte, NE

Damon Jordan Crown Enterprises Inc Detroit, MI

Daksha Vakharia Daksha Vakharia-Broker Orlando, FL

David C Penix David C Penix &Associates Augusta, GA

John Deters Deters Investments Charlotte, NC

Bob Rein Don Bennett &Associates Phoenix, AZ

Steve Eberle Eberle Company Los Angeles, CA

David Graves Equity Office Dallas, TX

Joe McDonough EXiT Tampa, FL

Robert V. Priscoe First FidelityRealty, LLC

Northern New Jersey, NJ

Sean Carter First National Bank of Chester County Philadelphia, PA

Ernest L Brown, IV, CCIM

Grubb & EllisCompany San Antonio, TX

Scott Fraser GVA Kidder Mathews Portland, OR

Phillip Oh Hanmi Realty Inc Los Angeles, CA

Harold H. Huggins, CCIM, CPM

Harold H. Huggins Realty, Inc. Washington, DC

Andy Hinds HCA Greensboro, NC

RD Hoot Gibson Hoot GibsonRealty, Inc Tucson, AZ

James Katon Integra RealtyResources Charlotte, NC

Jayant Nayak International Partners Houston, TX

Stephen Raub Investment Realty Co. L.C. San Antonio, TX

Jim Jacob Jacob Real Estate Services, Inc. Tampa, FL

Luciano Rappa Kaizen RealtyPartners Miami, FL

Michael F. Doerr Keller WilliamsCommercial Austin, TX



Bronze

Contributors

Kristin Ayers Kellogg Development Company Charlotte, NC

Kent Myers Marcus and Millichap Austin, TX

Diane Sappenfield McEnearneyCommercial Washington, DC

Kevin J. McRoberts, MAI, ASA, Broker

MCRE.US /McRoberts &Associates, LLC

Des Moines, IA

Chris Messick Messick Group Philadelphia, PA

Joe Milkes,MBA, MAI CCIM

Milkes RealtyValuation Dallas, TX

Don Rudolph NAI Realvest Orlando, FL

Daren Hebold NAI The Dunham Group Portland, ME

Susan Pfeil Principal RealEstate Investors Des Moines, IA

Lee Patrick Brown Prudential Santa Fe Sante Fe, NM

Linda Joyner-Jones Quad Cities Realty Lewiston, ID

Thomas Hankins Realty CapitalHankins Group Orlando, FL

Patricia E Schwartz RE/MAX Milwaukee, WI

Van A Yon RE/MAX Commercial Atlanta Atlanta, GA

Hawley D. Smith RE/MAX ofSouthern Maril San Francisco, CA

Bob Young, CCIM RIISnet, LLC Fairhope, AL

Stephen Jacquemin S.J. Financial Group St. Louis, MO

Frank SchnitzlerSchnitzlerCommercial Real Estate

Chicago, IL

Sandy Schonberger SchonbergerAssociates

Northern New Jersey, NJ

Dennis Rooklyn SomersetInternationalProperties, Inc.

Los Angeles, CA

Troy Legge Sperry Van Ness Charlotte, NC

Katherine Ripper Sperry Van Ness Houston, TX

Richard Belschner Sperry Van Ness Orlando, FL

Rick Schulte Stanberry &Associates Austin, TX

Tarik H Choudhury, CCIM

Tarik &Associates, Inc Orlando, FL

Bo Gibbons The Abbey Company San Diego, CA

Edward C. Kiesa The Bell Group Syracuse, NY

Sanford Mahr The Mahr Company Tampa, FL

Reuben S. Robin The Robin Group Los Angeles, CA

Bruce Bright The Sanders Trust Birmingham, AL

Shari Steiner The SREI Group Sacramento, CA

Brant Tidwell Tidwell Company Kansas City, MO

Vic Avakian VerdugoProperties Inc. Los Angeles, CA

Ian Johnson Viewpoint Realty International Ocala, FL

Dan Weil Weil Commercial Los Angeles, CA

Robert Campbell Westfield Orlando, FL

Patrick Clark Wright Runstad & Co. Seattle, WA

Thank youto all who

contributedto this report.



Scope&MethodologyThe analysis provided in the RERC/CCIM Investment Trends Quarterly is conducted by Real Estate Research Corporation (RERC). The information is gathered in raw form from surveys sent to CCIM designees and candidates, and from sales transactions collected from various sources, including CCIM members, various key commercial information exchange organizations (CIEs), the media, assessors’ offices, RERC contacts in the marketplace, and other reliable public and private resources. All sales transactions are aggregated, analyzed, and reported on by RERC. Additional data and forecasts are provided courtesy of the REALTORS® Commercial Alliance and Torto Wheaton Research.

Published quarterly, the RERC/CCIM Investment Trends Quarterly report provides timely insight into transaction volume, pricing, and capitalization rates for the core income-producing properties.

RERC DefinitionsCapitalization Rate: The capitalization rate is defined as the first year “stabilized” net operating income (NOI) (NOI is before capital expenditures – tenant improvements, leasing commissions, reserves – and debt service) divided by the present value (or purchase price). Capitalization rates included are transac-tion-based medians and price-weighted averages.

RERC Capitalization Rate and Ranges: Capitalization rates and ranges listed throughout this report are based on RERC’s proprietary realized capitalization rate model, which includes available transaction-based capitalization rates, survey responses, NCREIF Index Returns, and other market factors, but is heavily weighted toward transaction-based capitalization rates for each property type within each market.

Price-Weighted Average: The price-weighted average is developed through weighting each asset based on the gross sales price. Therefore, larger dollar properties are given more weight than the smaller dollar properties, with the weighted average reflecting more weight towards institutional real estate.

Size-Weighted Average: The size-weighted average is developed through weighting each asset based on its gross square footage – simply an aggregation of all the gross sales prices divided by the aggregation of the gross square footage.

National/Regional Market Analysis: RERC ranks the investment potential of the metros and property types it covers based on various space market and financial market criteria, including pricing, capitalization rates, vacancy rates, and other factors.

Investment Conditions Rating: A rating of 1 through 10 (with 10 being high) reflecting survey respondents’ collective views of the investment environment for a particular property type in comparison with other property types. The rating may take into account supply and demand, economic conditions, pricing, rental rates, or other factors.

NCREIF DefinitionsNCREIF: The National Council of Real Estate Investment Fiduciaries (NCREIF) is an independent organization dedicated to the compilation, validation, and distribution of performance data for the institutional real estate investment community.

Total Return: The total return includes appreciation (or depreciation), realized capital gain (or loss), and income. It is computed by adding the income and capital appreciation return on a quarterly basis.

Implied Cap Rate (Income Return): The implied capitalization rate measures the portion of return attributable to each property’s NOI. It is computed by divid-ing the total NOI by the total quarterly investment.

Capital Appreciation Return: The capital appreciation return measures the change in market value adjusted for any capital improvements/expenditures and partial sales divided by the average quarterly investment.

Annual and Annualized Returns: Annual returns are computed by chain-linking quarterly rates of return to produce time-weighted rates of return for the an-nual and annualized periods under study. For time periods beyond 1 year, the annualized returns are expressed as the annual compounded rate of return.

Allocation: The distribution, expressed as a percentage of the overall investment, in a particular geographic area by property type.

For a detailed description of the proceeding returns, as well as the calculations used by NCREIF to derive these figures, please visit http://www.ncreif.org/indi-ces.

The combined returns are the weighted average of the returns for each property type according to the proportionate market value of properties surveyed relative to the total market values surveyed during a time period.

RERC Defined Regions and MSAsWest: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming

Midwest: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin

South: Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Oklahoma, Tennessee, Texas

East: Connecticut, Delaware, Kentucky, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, Washington D.C., West Virginia

Metropolitan Statistical Area (MSA): A geographic unit comprised of one or more counties around a central city or urbanized area with 50,000 or more popu-lation. Contiguous counties are included if they have close social and economic links with the area’s population nucleus.

With a few exceptions, the MSAs within this report coincide with the U.S. Office of Management and Budget’s December 2005 definitions for each MSA. For example, St. Paul, Minn., and Bloomington, Minn., as well as many other suburbs, are included within the Minneapolis MSA.

Note of Caution: It is imperative to exercise caution when comparing the data contained herein to previous reports published by RERC. The data herein is not “fixed,” and will be updated and changed as additional transaction information is gathered and analyzed.

Disclaimer: This publication is designed to provide accurate information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal or accounting service. The publisher advises that no statement in this issue is to be construed as a recommendation to make any real estate investment or to buy or sell a security or as investment advice. The examples contained in the publication are intended for use as back-ground on the real estate industry as a whole, not as support for any particular real estate investment or security. Although the RERC/CCIM Investment Trends Quarterly uses only sources that it deems reliable and accurate, Real Estate Research Corporation (RERC) does not warrant the accuracy of the information contained herein.

Third Quarter 2008 Report Investment Trends Vol. 4, No. 3 ...Signs that the economy and market are adjusting to new market realities are evident in residential real estate con-struction,

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