commercial real estate market trends

Commercial Real Estate

Market Trends

Commercial Real Estate

August 3, 2007

2

Goals of Presentation

• Wall Street Real Estate Trends

– CMBS

– CDO

– REIT

• Macro Trends

• Investor (Cap Rate) Trends

• Real Estate Market (Rents, Prices) Trends

3

Who is the “Real” Father of Anna’s Child?

4

CMBS Outstandings in U.S.

Source: Federal Reserve – Flow of Funds - Z1-L.126, Bank of America – Real Estate Research

Note: Amount represents total of Multi-Family and Commercial Mortgages

409.

82 521.

71 618.

97

661.

44

0

200

400

600

80019

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Q1

$ B

illio

ns

409.

82 521.

71 618.

97

661.

44

0

200

400

600

80019

90

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Q1

$ B

illio

ns

5

REIT Market Capitalization

379.

86438.

07

343.

90422.

41

0

200

400

60019

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

07.Q

120

07.Q

220

07.0

7

$ B

illio

ns

379.

86438.

07

343.

90422.

41

0

200

400

60019

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

07.Q

120

07.Q

220

07.0

7

$ B

illio

ns

Source: NAREIT, Bank of America – Real Estate Research

Note: Includes Equity, Debt and Hybrid REITS

6

National Trend - Vacancy

Source: REIS, Inc, Torto-Wheaton Research, Bank of America – Real Estate Research

0.002.004.006.008.00

10.0012.0014.0016.0018.00

2003

.1

2004

.1

2005

.1

2006

.1

2007

.1

AptOffRetInd

0.002.004.006.008.00

10.0012.0014.0016.0018.00

2003

.1

2004

.1

2005

.1

2006

.1

2007

.1

AptOffRetInd

7

National Trend – Effective Rents


780

800

820

840

860

880

900

920

940

96020

03.1

2004

.1

2005

.1

2006

.1

2007

.1

0.00

5.00

10.00

15.00

20.00

25.00

AptOffRetInd

8

National Trend - Realized Rents*


* Realized Rent is area occupancy times area rent

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%20

03.1

2004

.1

2005

.1

2006

.1

2007

.1

AptOffRetInd

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%20

03.1

2004

.1

2005

.1

2006

.1

2007

.1

AptOffRetInd

9

What is a CMBS?

• Commercial Mortgage Backed Security

• Type of Pass-through Security

• Commercial Mortgages are securitized into an investment pool. Rights to the revenue from the mortgages are divided into many smaller pieces (aka traunches, strips, slices), each with differing priorities. Proceeds are distributed to investors based on the priority of their traunche.

10

What is a CDO?

• Collateralized Debt Obligation

• Type of Pass-through Security

• CDO’s are securitized debt pools, similar to CMBS, but debts can be CMBS/CDO paper, car/boat/plane loans, credit cards, or virtually any type of debt obligation. Rights to the revenue from the obligations are divided into many smaller pieces (aka traunches, strips, slices), each with differing priorities. Proceeds are distributed to investors based on the priority of their traunche.

11

What is a REIT?

• Real Estate Investment Trust – 3 types– 1) Equity 2) Debt 3) Hybrid

• Pass-through Investment, effectively a corporation. 95% of income passed through to shareholders. No “corporate” tax. All earnings single-taxed at shareholder level.

• Typical Covenants: – Max Total Debt/ Total Assets: 60%

– Max Secured Debt / Total Asset: 40%

– Minimum Service Charge Coverage: 1.5x

– Min. Unencumbered Assets / Unsecured Debt: 150%

12

Example of CMBS/CDO Subordination

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

UnratedBBBBBBAAAAAAAAA S30AAA S60

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

UnratedBBBBBBAAAAAAAAA S30AAA S60

First Loss / High Risk

Source: Bank of America – Real Estate Research

Last Loss / Low Risk

13

Example of a CMBS/CDO StructureNo. Loans 250Avg. Loan Size $10,000,000Total Loan Amt. $2,500,000,000

Index Name 10-Year TreasuryIndex Rate 5.000%Avg. Margin 1.750%Avg Yield 6.750%

CurrentSpread

TrauncheRating (10Y)

Approximate Subordination

ImpliedYield

Yieldx Weight%

0.22% AAA S60 60.0% 5.22% 2.088%0.25% AAA S30 30.0% 5.25% 1.575%0.30% AAA 12.5% 5.30% 0.928%0.40% AA 9.0% 5.40% 0.189%1.00% A 8.0% 6.00% 0.060%1.75% BBB 5.0% 6.75% 0.202%2.50% BB 4.0% 7.50% 0.075%4.00% B 2.5% 9.00% 0.135%5.00% Unrated 0 to <2.5% 10.00% 0.250%

Weighted Average Yield 5.502%

* Implied Annual Excess Return** Rd to .001 1.000%$25,000,000

* note: swap, agency, trust, servicer and other fees estimated at 25 bps

14

Source:CMAlert 7/6/07,

Bank of America –Real Estate Research

http://www.sec.gov/

Archives/edgar/data/

1404501/00009501360

7005085/0000950136-

07-005085-index.htm

15

CMBS Spreads are Widening - Pricing Trends

Source: CMAlert 8/10/07, CMAlert-Morgan Stanley 8/8/07, Bank of America – Real Estate Research

Note: All Spreads are quoted as “Spreads over Swap Rates”

0

50

100

150

200

250

300

350

400

450

AugJulJunMayAprMarFeb

BBB-BBBAAAA-10Y

0

50

100

150

200

250

300

350

400

450

AugJulJunMayAprMarFeb

BBB-BBBAAAA-10Y

16

Interest Rate Trends – 10 Yr Treasury

Source: Federal Reserve (H15), Bank of America – Real Estate Research

2

4

6

8

10

12

14

16

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2

4

6

8

10

12

14

16

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

17

REIT Returns by Property Type - Old v New


Note: “Price Only” Returns, buy at beginning of period, sell at end of period. Left = 1 year; Right = 6 months

YTD yield thru 6/30/07

Self Stg

Hlth Cr

Ind/Off

Divers

Ret

Resid

Ldg

Spclty

-25 0 25 50


Self Stg

Hlth Cr

Ind/Off

Divers

Ret

Resid

Ldg

Spclty

-25 0 25 50


Self Stg

Hlth Cr

Ind/Off

Divers

Ret

Resid

Ldg

Spclty

-25 0 25 50


Self Stg

Hlth Cr

Ind/Off

Divers

Ret

Resid

Ldg

Spclty

-25 0 25 50

18

Benchmark Returns – Changes so Fast!


Note: Price only Returns

6 mo's Ended6/30/2007

DJI

A

S&P

500

NA

SDA

Q C

omp.

RE

ITs

-10

-5

0

5

10

15

20

25

30

35

40

6 mo's Ended6/30/2007

DJI

A

S&P

500

NA

SDA

Q C

omp.

RE

ITs

-10

-5

0

5

10

15

20

25

30

35

40

12 mo's Ended12/31/2006

RE

ITs

S&P5

00 NA

SDA

Q C

omp.

DJI

A

-10

-5

0

5

10

15

20

25

30

35

40

12 mo's Ended12/31/2006

RE

ITs

S&P5

00 NA

SDA

Q C

omp.

DJI

A

-10

-5

0

5

10

15

20

25

30

35

40

19

Industrial Performance - National Averages

$30

$35

$40

$45

$50

$55

$60

$65

1985

1987

1989

1991

1993

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Pric

e $/

SF ■

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

$6.50

$7.00

$7.50

Rent

$/S

F/Yr

♦

Industrial Performance - National Averages

$30

$35

$40

$45

$50

$55

$60

$65

1985

1987

1989

1991

1993

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Pric

e $/

SF ■

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

$6.50

$7.00

$7.50

Rent

$/S

F/Yr

♦

Value versus Rent Trends

Source: National Real Estate Index, Bank of America – Real Estate Research

20

6

6.5

7

7.5

8

8.5

9

9.5

1019

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Cap

Rate

s (%

)

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

10 Y

r Tre

as. (

%)

6

6.5

7

7.5

8

8.5

9

9.5

1019

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Cap

Rate

s (%

)

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

10 Y

r Tre

as. (

%)

Interest Rate versus Cap Rate

9+ Qtr Gap

150

to 2

00 B

Ps


21

55.5

66.5

77.5

88.5

99.510

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Cap

Rate

s (%

)

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

10 Y

r Tre

as. (

%)

offcapindcapretcapaptcap10_Yr

55.5

66.5

77.5

88.5

99.510

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Cap

Rate

s (%

)

3.00

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

10 Y

r Tre

as. (

%)

offcapindcapretcapaptcap10_Yr

Interest Rate versus Cap Rate


Note: 10 Yr is 3-month average. Curve represents “best fit” 10-Yr Treasury

22

Macro - Rents by Property Type


National Averages

8

13

18

23

28

33

3819

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Rent

$/S

F(O

ff, A

pt, R

et)

2

3

4

5

6

7

8

9

10

Rent

$/S

FIn

d

RetAptOffInd

National Averages

8

13

18

23

28

33

3819

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Rent

$/S

F(O

ff, A

pt, R

et)

2

3

4

5

6

7

8

9

10

Rent

$/S

FIn

d

RetAptOffInd

23

Macro - Value by Property Type


National Averages

50

100

150

200

250

300

35019

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Valu

e $/

SF

(Off,

Apt

, Ret

)

25

45

65

85

105

125

145

165

Val

ue $

/SF

Ind

RetAptOffInd

National Averages

50

100

150

200

250

300

35019

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Valu

e $/

SF

(Off,

Apt

, Ret

)

25

45

65

85

105

125

145

165

Val

ue $

/SF

Ind

RetAptOffInd

24

CMBS – Actual Losses by Property Type

Source: Intex, Bank of America Securities, Bank of America – Real Estate Research

2000 2001 2002 2003 2004 2005 20062007 YTD

Hotel 0.73% 1.84% 6.37% 3.10% 1.29% 1.49% 0.46% 0.61%Industrial 0.19% 0.26% 0.84% 1.18% 1.26% 0.86% 0.55% 0.18%Multifamily 0.34% 0.29% 0.75% 1.02% 1.37% 1.62% 0.79% 0.67%Manfd Hsg 0.26% -0.09% 0.28% 0.74% 0.13% 0.31% 0.12% 0.06%Office 0.05% 0.15% 0.43% 1.02% 0.98% 0.64% 0.24% 0.22%Retail 0.29% 0.68% 0.97% 0.77% 0.40% 0.27% 0.22% 0.15%Sr Housing 6.03% 6.72% -1.39% 4.07% 0.55% 3.17% 6.58% 5.86%Self Stg 0.00% 0.28% 0.07% 0.06% 0.08% 0.15% 0.14% 0.06%Total 0.44% 0.65% 1.16% 1.09% 0.87% 0.78% 0.41% 0.33%

2000 2001 2002 2003 2004 2005 20062007 YTD

Hotel 0.73% 1.84% 6.37% 3.10% 1.29% 1.49% 0.46% 0.61%Industrial 0.19% 0.26% 0.84% 1.18% 1.26% 0.86% 0.55% 0.18%Multifamily 0.34% 0.29% 0.75% 1.02% 1.37% 1.62% 0.79% 0.67%Manfd Hsg 0.26% -0.09% 0.28% 0.74% 0.13% 0.31% 0.12% 0.06%Office 0.05% 0.15% 0.43% 1.02% 0.98% 0.64% 0.24% 0.22%Retail 0.29% 0.68% 0.97% 0.77% 0.40% 0.27% 0.22% 0.15%Sr Housing 6.03% 6.72% -1.39% 4.07% 0.55% 3.17% 6.58% 5.86%Self Stg 0.00% 0.28% 0.07% 0.06% 0.08% 0.15% 0.14% 0.06%Total 0.44% 0.65% 1.16% 1.09% 0.87% 0.78% 0.41% 0.33%

25

Macro - Recent News in Homebuilding

•D.R. Horton takes $852MM hit

•Pulte took $749MM write down

•Standard Pacific took $165MM

•Sub-prime is “old” news– Source: Builder Online – July 31, 2007

http://www.builderonline.com/industry-news-channel.asp?channelID=55

26

SFR Trends – Inventory and Supply

Source: National Association of Realtors, Banc of America Securities Estimates

27

Single Family Trends – BAS Index

BTI = Buyer Traffic Index

HPI = Home Price Index

IL = Incentive Index

HLI = Home Listing Index

TTS = Time to Sell Index

0

10

20

30

40

50

60

Yea

r.Mo

2006

.01

2006

.02

2006

.03

2006

.04

2006

.05

2006

.06

2006

.07

2006

.08

2006

.09

2006

.10

2006

.11

2006

.12

2007

.01

2007

.02

2007

.03

2007

.04

2007

.05

2007

.06

BTIHPIIIHLITTS

0

10

20

30

40

50

60

Yea

r.Mo

2006

.01

2006

.02

2006

.03

2006

.04

2006

.05

2006

.06

2006

.07

2006

.08

2006

.09

2006

.10

2006

.11

2006

.12

2007

.01

2007

.02

2007

.03

2007

.04

2007

.05

2007

.06

BTIHPIIIHLITTS

Source: Banc of America Securities, July SFR Survey

Note: 50=Neutral, Sub 50 represent poor conditions

28

Real Estate Investment Trust (REIT)- Price Index Performance Analysis, July 2007

Source: Bank of America Securities, LLC, FactSet, SNL Financial, Reuters

commercial real estate market trends

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