Residential Forecast 2009 Cindy Clare, CPM President, Kettler Management January 27, 2009

MARKET FOR 2009 What a difference a year makes! Impact of the decline in the economy Impact of the election How will the credit crunch impact the apartment industry?

ECONOMY The implosion of the financial markets impacted everyone Renters are being more cautious, and much more price sensitive Renters are taking smaller units, but not doubling up “yet” Silver Lining – the bailout may bring more jobs to Washington

ELECTION The change in administration brought “hope” to the nation Immediate increase in leasing after the election Will it continue?

WHAT DOES THIS MEAN FOR RENTALS? Slower absorption pace at lease-up properties (average 15 per month) Rental concessions will continue and will increase in 2009 Increased vacancy in both product types Limited to no rent growth in strong sub-markets, rent reductions in other sub-markets

2008 RENTAL RESULTS Vacancy increased in VA, MD, and DC Class A vacancy increased to 4.4% Small increase in rents of 1.3%, decrease in high-rise rents Class A absorption dropped from 17 to 15 units per month There are currently 51 apartment communities in lease-up in the Washington Metropolitan Region Concessions continue to increase; Class A 5.7%

2008 RENTAL RESULTS Supply beginning to stabilize as reversions slow down and new construction is delayed Rentals in No. VA were up 1.5% Rentals in Rockville and Bethesda, MD were down 2.4%. However, rentals in Silver Spring, MD were up 5.1% Rentals in DC were down 0.7% Shadow market is not having as much impact in the outer suburbs

2009 RENTAL FORECAST – No. VA Concessions will continue and will increase in all sub- markets. Additional spreading of concessions as absorption slows Rent growth is unlikely in any product type. Although there may be an opportunity to raise rents on particular unit types (smaller units) Vacancy will edge up everywhere Location and quality will be key for new product. Unique features will become increasingly important Properties located near mass transit will continue to hold up better than other product Pipeline may continue to be reduced as new construction is delayed due to lack of financing Turnover should slow as buyers will need more money down to buy. However, those that have cash may see 2009 as an “opportunity”

2009 RENTAL FORECAST - DC 25% increase in apartment supply in 2008 will impact occupancy in 2009 There will not be rent growth Reversions will continue to impact the market and could affect absorption depending on timing Vacancy will increase slightly Concessions will continue to increase as lease-ups are introduced into the market

2009 RENTAL FORECAST - MD Concessions will increase and spreading of concessions will continue as absorption slows Rents will be flat Properties near mass transit and close in locations will do better than outlying suburbs Vacancy will continue to increase

2009 SUB-MARKET RECAP Near-term pipeline is imposing but upon closer review some markets may perform better than others Currently Washington, D.C. itself is saturated with failed condo projects and new apartments - Poor locations are forced to offer steep concessions, dragging down all new communities who are forced to match - Concessions and price cuts are bringing some communities inline with new product in Arlington—Ballpark vs. Pentagon City Most Fairfax County supply will be absorbed by the first half of 2010 Arlington has been hard hit by condo reversions however virtually all of these projects will be leased up by early 2009 Which will be followed by another 2,900 units delivering over the next 18 months—however most new deliveries are in secondary locations, many without Metro

ITEMS TO WATCH IN 2009 Increase in delinquencies particularly in the B market - Hold fast on credit standards in order to avoid the pitfalls of the “for sale” market “Let’s make a Deal” as absorption slows - Focus on retention of existing residents

SUMMARY 2009 will be a slow market, but not a sharp decline The Washington Metro market will continue to be desirable due to a stronger economy than the majority of the country While the market will be declining from our standpoint, it is still much stronger than many areas of the country

THANK YOU