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

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Presentation on theme: "2008 APARTMENT TRENDS A National Multifamily Market Overview Hessam Nadji Managing Director Research Services Linwood C. Thompson Managing Director NMHG."— Presentation transcript:

1 2008 APARTMENT TRENDS A National Multifamily Market Overview Hessam Nadji Managing Director Research Services Linwood C. Thompson Managing Director NMHG

2 U.S. Housing Market Remains in Transition Months Supply of Inventory Rising *Through August Sources: Marcus & Millichap Research Services, National Association of Realtors Y-o-Y Change 38% 27.7% Number of Months

3 Housing Slow Down Impacting Overall Economy - Existing Home Sales *Through August Sources: Marcus & Millichap Research Services, Economy.com, National Association of Realtors Year-Over-Year Percent Change

4 Home Mortgage Originations by Loan Type Share of Total Volume Sources: Marcus & Millichap Research Services, Joint Center for Housing Studies (Harvard) Share of Total Volume 2001 = 11% 2006 = 34%

5 Home Prices Yet to Reflect Correction Median Existing Home Prices Median Home Price (000s) *Through August Sources: Marcus & Millichap Research Services, Economy.com, National Association of Realtors Data points = % growth from 2001-2007* 39% 63% 28% 27% 58%

6 Cash From Home Refinancing No Longer Shielding Retail Sales From High Energy Prices Crude Oil (price per barrel) Sources: Marcus & Millichap Research Services, Economy.com Y-o-Y Percent Change in Retail Sales *Retail Sales Forecast, Oil Prices as of September 25th

7 Strong Corporate Sector, Full Employment Helping to Offsetting Housing, Consumer Weakness Sources: Marcus & Millichap Research Services, Economy.com *Forecast Fixed Nonresidential Investment (Annual Percent Change) Annual Unemployment Rate

8 Easing Inflation Giving the Fed More Flexibility For Lowering Rates *Fed Funds Through August, Core Inflation Through July Sources: Marcus & Millichap Research Services, BLS, Economy.com, Federal Reserve Fed Funds Rate Core Inflation Y-o-Y Percent Change

9 Monthly Job Growth *YE Forecast Sources: Marcus & Millichap Research Services, Economy.com Gross Domestic Product Jobs in Thousands Housing Has Not Bottomed – Growth Expected to Moderate and Avoid Recession Annualized Growth -4,000 Jan-06Jan-07 Avg. 07 Avg. 08 Aug-07 2005: 3.1% 2006: 2.9% 2007: 2.3% 2008: 2.5%

10 Percent Change in Employment Top and Bottom 15 U.S. Markets – YOY August 2007 Bottom 15 Y-o-Y % Change Boston1.2% Philadelphia1.2% Oakland1.0% Nashville1.0% Minneapolis0.9% Chicago0.9% Los Angeles0.8% San Diego0.7% Columbus0.6% Pittsburg0.4% Baltimore0.4% Orange County0.1% Cleveland0.1% Cincinnati0.0% Detroit-1.1% U.S.1.2% Sources: Marcus & Millichap Research Services, Economy.com Top 15 Y-o-Y % Change Salt Lake City4.5% Austin4.1% New Orleans3.6% Inland Empire3.6% Seattle3.4% Tucson3.0% Dallas-Fort Worth2.7% Phoenix2.7% Houston2.6% Charlotte2.6% Orlando2.6% Fort Lauderdale2.5% Raleigh-Durham2.3% Atlanta2.2% Jacksonville2.0% U.S.1.2%

11 Home Ownership Decreasing in All Cohorts In the Past Year Sources: Marcus & Millichap Research Services, Economy.com

12 Vacancies: Short-Term Challenge in Select Markets – Long-Term Outlook Strong Due to Rebounding Demand, Balanced New Supply *Forecast Sources: Marcus & Millichap Research Services, Reis Market Rate Apartment Completions (Thousands of Units) Vacancy

13 Apartment Rent Growth Strong – Likely to Moderate but Remain Healthy Sources: Marcus & Millichap Research Services, Reis *Forecast Y-o-Y Percent Change

14 Effective Rent Growth Variations Showing Top and Bottom 15 U.S. Markets YOY Bottom 152Q 062Q 07% Change Kansas City$610$6303.3% Indianapolis$593$6123.2% Inland Empire$978$1,0093.2% Orlando$794$8193.1% Fort Lauderdale$1,023$1,0553.1% Houston$652$6723.1% Columbus$588$6063.1% Minneapolis$840$8653.0% Milwaukee$762$7832.8% Cleveland$660$6772.6% Cincinnati$625$6412.6% Atlanta$733$7492.2% Denver$749$7621.7% Palm Beach$1,036$1,0491.3% Detroit$749$7581.2% U.S. Average$909$9514.6% Sources: Marcus & Millichap Research Services, Reis Top 152Q 062Q 07% Change San Jose$1,339$1,4709.8% Seattle$851$9198.0% San Francisco$1,541$1,6207.9% Salt Lake City$624$6687.1% Portland$677$7196.2% Los Angeles$1,270$1,3486.1% Washington, DC$1,160$1,2275.7% Oakland$1,172$1,2365.5% Tucson$566$5975.5% Orange County$1,374$1,4495.5% Austin$694$7315.3% Phoenix$672$7065.1% Chicago$915$9574.6% Philadelphia$907$9474.4% San Antonio$609$6354.3% U.S. Average$909$9514.6%

15 Top and Bottom 15 U.S. Markets – 2008* Vacancy Rate Top 152008* New York2.3% San Jose3.2% N. New Jersey3.2% Los Angeles3.7% Orange County4.0% San Diego4.2% San Francisco4.3% Philadelphia4.4% Oakland4.5% Fort Lauderdale4.6% Miami4.6% Washington, D.C.4.7% Milwaukee4.8% Minneapolis4.8% Chicago4.9% U.S. Average5.7% Bottom 152008* Columbus7.0% Detroit7.3% Phoenix7.4% Kansas City7.4% St. Louis7.6% Charlotte7.8% Atlanta8.4% Denver8.4% Austin8.5% Raleigh-Durham8.5% Cincinnati8.6% Dallas-Fort Worth8.6% Oklahoma City8.8% Indianapolis9.2% Houston10.1% U.S. Average5.7% Sources: Marcus & Millichap Research Services, Reis *Forecast

16 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

17 Top U.S. Markets 5-year Population and Job Growth Forecast Sources: Marcus & Millichap Research Services, Economy.com Top 15 Austin Las Vegas Riverside-San Bernardino San Antonio West Palm Beach Orlando Dallas-Fort Worth Atlanta Phoenix Houston Charlotte Tucson Fort Lauderdale Sacramento Seattle

18 Linwood C. Thompson Managing Director – National Multi-Housing Group National Apartment Investment Overview and Outlook

19 Historic Perspective MFEEC Consensus 2002-2005 Panelists / Speakers 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

20 Marcus & Millichap Consensus 2006 Operations offset minimal rate increase No systemic pricing bubble Investor demand would remain strong Velocity would increase through 1 st half Cap rates would be relatively flat

21 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

22 Commercial Mortgage-Backed Securities (CMBS) Spreads Have Risen Dramatically Sources: Marcus & Millichap Research Services, Wachovia

23 The Special Debt Deli Sandwich HAM - $.90/lb STEAK - $1.10/lb TURKEY - $1.00/lb Avg. Cost = $1.10 Avg. Cost = $1.05 Avg. Cost = $1.00 MYSTERY MEAT - $.60/lb Avg. Cost = $.90 Reasons to buy…the Special More diversified sandwich Lower average cost (Better yield)

24 The Special Debt Deli Sandwich The mystery meat didnt 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/lb Avg. Cost = $1.10 Avg. Cost = $1.05 Avg. Cost = $1.00 MYSTERY MEAT - $.60/lb Avg. Cost = $.90

25 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 ………..

26 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

27 Commercial Mortgage Delinquency Rate Remains Near Historic Lows 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%

28 All-In Rate Down From Recent Peak#2 *10-Year Treasury Yield Plus Average Conduit Spread Sources: Marcus & Millichap Research Services, Marcus & Millichap Capital Corp. Average Conduit Spread (Large Loan) 10-Yr. Treasury and All-In Rate

29 Core Inflation and Interest Rates Still Below Long-Term Trend Average 10-Year Treasury Core Inflation Y-o-Y Percent Change *Through August 2007 Sources: Marcus & Millichap Research Services, Economy.com, Federal Reserve

30 Apartment Investments Trends Transactions by Price Category 9,216 10,406 Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics 4,919 *Estimate 8,354 3,992

31 Apartment Investment Trends Dollar Volume by Price Category Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics $101 Billion$102 Billion $43 Billion *Estimate $63 Billion $50 Billion

32 Apartment Buyer Composition, Past 12 Months vs. Previous 12 Months Sources: Marcus & Millichap Research Services, Real Capital Analytics Sales $5 million and above

33 Top Condo Conversion Markets From 2Q 2003 - 2Q 2007 Sources: Marcus & Millichap Research Services, Reis Market % of Inventory Converted to Condos Total Units Converted 2Q2003-2Q2006 Vacancy Bps Change 2Q2006-2Q2007 Vacancy Bps Change 2Q 2007 Vacancy Fort Lauderdale30.3%28,800(270)1104.0% Orlando24.2%32,370(390)1406.2% Palm Beach23.7%14,875(480)2807.0% Miami20.7%28,296(300)503.7% Tampa15.6%24,459(390)1306.1% Charleston15.3%3,973(190)808.4% Jacksonville11.6%8,009(150)1706.1% Las Vegas11.6%15,394(350)804.8% Phoenix9.6%23,825(370)1507.4% San Diego7.8%14,048(50)504.3%

34 Apartment Sales Trends Median Price per Unit vs. Average Cap Rate Sources: Marcus & Millichap Research Services, CoStar Group, Inc. Apartment Sales $1M+ for 40 Major Markets *2Q

35 Sources: Marcus & Millichap Research Services, NREI Average Annual Rate U.S. Apartment Investment Market Still Outperforming 10-Year Treasury 2000 240 Bps 120 Bps * 2Q07

36 National Apartment Median Price Per Unit by Price Category Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics 10% 5.7% 5.6% 2000 – 2006 Avg. Annual Increase

37 U.S. Apartment Price and Rent Trends Sources: Marcus & Millichap Research Services, RCA, Reis Apartment Sales $1M+ * Estimate Based on Q2-2007

38 National Apartment Asking and Effective Rent Growth * Forecast Sources: Marcus & Millichap Research Services, Reis 25% 19% Rent Growth 2000-2008 Average Rent per Unit

39 National Apartment Asking Rents by Class * 2Q 2007 Estimate Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics Average Asking Rent per Unit

40 U.S. Apartment Average Cap Rates by Market Type Sources: Marcus & Millichap Research Services, Real Capital Analytics Sales $5 million and above

41 National Apartment Cap Rates Primary vs. Tertiary Markets by Region Sources: Marcus & Millichap Research Services, Real Capital Analytics Average Cap Rate Sales $5 million and above

42 Sources: Marcus & Millichap Research Services, NCREIF, Standard & Poors Total Return (%) Real Estate Returns Outperforming Stocks In Recent Years Returns represent total compounded returns over each time period Total returns include both income and capital return *As of 2Q 2007

43 Apartment REIT Index vs. S&P 500 Sources: Marcus & Millichap Research Services, NAREIT, Standard and Poors Indexed to 100 Dec. 1993 * *Through September Total Return Index (1993=100)

44 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 1 st Qtr (+10% in 2008)

45 Multi-family Investment The Continued Case for Optimism Reasons Why U.S. Investors Should Be Acquiring Multi-family Assets

46 Echo Boomer Demand Supports Appreciation Sources: Marcus & Millichap Research Services, Economy.com * Forecast Change in Population 5.5 million Increase

47 Demand From Immigration Supports Appreciation Thousands 1980198519901995200020052010 12 Million Increase 2015 Sources: Marcus & Millichap Research Services, Economy.com

48 U.S. Household Growth 2005 - 2015 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

49 U.S. Apartment Demand Robust for Next 10 Years *Forecast Sources: Marcus & Millichap Research Services, Reis, U.S. Census Bureau Completions (Thousands of Units) Projected demand for new U.S. apartments averages 430,000 units per year for next 10 years!

50 New Supply Has Become More Constrained, Less Volatile - Construction as a Percentage of Stock Sources: Marcus & Millichap Research Services, Reis *Forecast

51 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)

52 Marcus & Millichaps NMHG Remains 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

53 2008 APARTMENT TRENDS A National Multifamily Market Overview Hessam Nadji Managing Director Research Services Linwood C. Thompson Managing Director NMHG


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