There is a Difference. Wading Through Deep Water: Turmoil in the Economy and Capital Markets Western States Commercial Real Estate Finance Mary K. Ludgin, PhD September, 2008

1 Real Estate Values Being Pulled Multiple Ways Sources of Downward Pressure  Economy in recession, job losses mounting, consumer and business sentiment plunging and outlook is weak  Decline in tenant space demand in primary sectors  Capital markets repricing risk  Credit crunch restricting debt capital availability Mitigating Factors  Low vacancy rates for onset of recession  Low construction for onset of recession  Enormous fiscal and monetary stimulus Market Conditions

2 Equity Real Estate Prospects: 2008 vs Early 1990s Market Conditions Investor Double-digit returns, inflationSingle-digit core returns, Expectations hedge, low volatilityinflation hedge if markets in balance, moderate volatility Liquidity Deteriorating and no capitalDeteriorating but capital available for some strategies Institutional UndisciplinedDebt side undisciplined Underwriting Equity side disciplined Pricing Spread between NCREIF current value cap rate of 6.97% and 10-Yearcap rate of 5.61% and 10-Year Treasury Yield of 8.68% = -171 bps Treasury Yield of 4.26% = +135 bps Property No link between supply and demandDemand and supply linked Market Office vacancy downtown: 14.0%Office vacancy downtown: 9.6% Conditions Office vacancy suburban: 21.2%Office vacancy suburban: 14.2% OutcomeValue decline: 32%Value Decline: 15%-20% Source: NCREIF; Moody’s Economy.com; Heitman Research

3 U.S. Economy in Recession Market Conditions

4 Sparked by Declining Home Values 4 Mountain Pacific Southwest Southeast Mideast Northeast West North CentralEast North Central Seattle, WA -7.1% Portland, OR -5.8% San Francisco, CA -23.7% Los Angeles, CA -25.3% San Diego, CA -24.2% Denver, CO -4.7% Dallas, TX -3.2% Minneapolis, MN -13.9% Chicago, IL -9.5% Detroit, MI -16.3% Cleveland, OH -7.3% Miami, FL -28.3% Tampa, FL -20.1% Atlanta, GA -8.1% Charlotte, NC -1.0% Washington, DC -15.7% New York, NY -7.3% Monthly 20-City Composite -15.9% Monthly 10-City Composite -17.0% Las Vegas, NV -28.6% Phoenix, AZ -27.9% As of June 30, 2008 Source: S&P/Case-Shiller Boston, MA -5.2% Market Conditions

5 Job Losses Expected into 4 th Quarter Market Conditions

6 Giving No Near-Term Lift for Housing Market Market Conditions

7 Conditions Vary Widely by Market Market Conditions

8 And Could Improve Over Next Four Quarters Market Conditions

9 Consumers Encumbered by Mountain of Debt Market Conditions

10 Inflation has Added to Consumer Woes: But Picture May Be Brightening Some Market Conditions

11 Inflation Helped Restrain Development Market Overview 11

12 Loss of Debt Capital Causing Ripple Effect Capital Markets

13 Showing Up in Huge Pull Back in Transactions Capital Markets

14 Putting Pressure on Cap Rates Capital Markets

15 National Apartment Market Weakening Apartment Overview

16 Fewer Markets Seeing Above-Inflation Rent Growth Market Overview 16

17 Apartments Helped by Lack of Construction Market Overview 17

18 Industrial Overview Pullback in Imports Affecting Industrial

19 Multiple Healthy Markets Market Overview 19

20 But Western Markets Under Greater Pressure Market Overview 20

21 Market Overview And Real Rent Growth Disappearing 21

22 Market Overview Drivers of East Coast Container Growth Suez Canal all-water route Port facility expansion High transcon intermodal rail fees Panama Canal expansion 22

23 Initial Signs of Softer Office Market Office Overview

24 Downtowns Much Healthier than Suburbs 24 Market Overview

25 Great Variability at Metro Level Market Overview 25

26 Great Variability Within Suburban Markets Market Overview 26

27 And Within Downtown Markets Market Overview 27

28 Market at Position Where Rent Growth Stopped in 2001 Market Overview 28

29 Retail Helped by Strong Starting Position Market Overview 29

30 But Retail Sales Trending Down Market Overview 30

31 That Trend will Continue as Savings Grow Market Overview

32 Retail Vacancy Will Rise Off Historical Lows Market Overview

33 Vacancy Concentrated in Newest Centers Market Overview

34 There is a Difference. Wading Through Deep Water: Turmoil in the Economy and Capital Markets Western States Commercial Real Estate Finance Mary K. Ludgin, PhD September, 2008