Revisiting the Operating Expense Database

1
Revisiting the Operating Expense
DatabaseDrilling Down Into NPI Acquisitions
October 2008

• Walter G. Page
• Director of Market Research and Portfolio Strategy

10/9/2009
2
Updated 4/4
Revisiting The Operating Expense Study

• Entire NCREIF Universe 4,878 properties
• Excluded properties acquired after the 4th
  quarter of 2002
• Excluded properties for which were not in
  NCREIFs database prior to 2004
• Excluded properties that were not in NCREIFs
  database in the second quarter of 2008.
• Same Store Universe 1,202 properties
• Office 338 properties
• Industrial 532 properties
• Multifamily 210 properties
• Retail 122 properties

Source ARA Research
1
10/9/2009
3
Market Coverage of Operating Database Office
Sector
Updated 7/30/2008
Source NCREIF, Torto Wheaton, ARA Research
4
Market Coverage of Operating Database
Industrial Sector
Updated 7/30/2008
Source NCREIF, Torto Wheaton, ARA Research
5
Market Coverage of Operating Database
Multifamily Sector
Updated 7/30/2008
Source NCREIF, Torto Wheaton, ARA Research
6
Market Coverage of Operating Database Retail
Sector
Updated 7/30/2008
Source NCREIF, PPR, ARA Research
7
Updated 7/28/08
Operating Expenses on the Rise
Annual Operating Expenses PSF
2004 to 2007 Change
10.5
11.4
8.9
16.7
Source NCREIF, ARA Research
10/9/2009
8
Updated 7/28/08
Operating Expenses on the Rise
Annual Operating Expenses Per SF
Change 2006 to 2007
4.2
2.5
6.3
8.2
Source NCREIF, ARA Research
10/9/2009
9
Updated 7/29
Office Segmentation of Operating Expenses
Marketing 1 0.09 PSF
Insurance 4 0.58 PSF
Average Building Operating Expenses 13.15 PSF
Management Fee 5 0.63 PSF
Administrative 8 1.06 PSF
Real Estate Taxes 29 3.79 PSF
Other Expenses 12 1.64 PSF
Maintenance 23 3.04 PSF
Utilities 18 2.32 PSF
Note Expense segmentation represents OPEX for
2007 on a same store basis. Excludes buildings
acquired since 2003
Source NCREIF, ARA Research
10
Updated 7/28/08
Office Expenses by Category
Annual Operating Expenses Per SF
Source NCREIF, ARA Research
10/9/2009
11
Updated 7/29
Industrial Segmentation of Operating Expenses
Administrative 4 0.07 PSF
Marketing 0 0.01 PSF
Average Building Operating Expenses 1.69 PSF
Utilities 6 0.10 PSF
Other Expenses 7 0.12 PSF
Management Fee 8 0.13 PSF
Real Estate Taxes 46 0.78 PSF
Insurance 9 0.15 PSF
Maintenance 20 0.33 PSF
Note Expense segmentation represents OPEX for
2007 on a same store basis. Excludes buildings
acquired since 2003
Source NCREIF, ARA Research
12
Updated 7/28/08
Industrial Expenses by Category
Per Occupied SF
Source NCREIF, ARA Research
10/9/2009
13
Updated 7/29
Multifamily Segmentation of Operating Expenses
Insurance 6 0.34 PSF
Average Building Operating Expenses 6.14 PSF
Marketing 6 0.39 PSF
Management Fee 7 0.46 PSF
Real Estate Taxes 27 1.64 PSF
Other Expenses 9 0.58 PSF
Utilities 11 0.69 PSF
Maintenance 18 1.08 PSF
Administrative 16 0.96 PSF
Note Expense segmentation represents OPEX for
2007 on a same store basis. Excludes buildings
acquired since 2003
Source NCREIF, ARA Research
14
Updated 7/28/08
Multifamily Expenses by Category
Per Occupied SF
Source NCREIF, ARA Research
10/9/2009
15
Updated 7/29
Retail Segmentation of Operating Expenses
Insurance 4 0.37 PSF
Marketing 5 0.44 PSF
Average Building Operating Expenses 9.55 PSF
Administrative 7 0.71 PSF
Management Fee 8 0.77 PSF
Real Estate Taxes 31 2.94 PSF
Utilities 9 0.86 PSF
Other Expenses 12 1.20 PSF
Maintenance 24 2.26 PSF
Note Expense segmentation represents OPEX for
2007 on a same store basis. Excludes buildings
acquired since 2003
Source NCREIF, ARA Research
16
Updated 7/28/08
Retail Expenses by Category
Per Occupied SF
Source NCREIF, ARA Research
10/9/2009
17
Updated 7/28/08
CapEx Rising Rapidly For Consumer-Driven Real
Estate
Annual Capital Expenditures PSF
Source NCREIF, ARA Research
10/9/2009
18
Updated 7/30/08
CapEx Breakdown - Office
Annual Capital Expenditures PSF
Source NCREIF, ARA Research
10/9/2009
19
Updated 7/30/08
CapEx Breakdown - Industrial
Annual Capital Expenditures PSF
Source NCREIF, ARA Research
10/9/2009
20
Updated 7/30/08
CapEx Breakdown - Multifamily
Annual Capital Expenditures PSF
Source NCREIF, ARA Research
10/9/2009
21
Updated 7/30/08
CapEx Breakdown Retail
Annual Capital Expenditures PSF
Source NCREIF, ARA Research
10/9/2009
22
Updated 7/30/08
NOI Growth Strongest For Consumer-Driven Sectors
Annual Net Operating Income PSF
Source NCREIF, ARA Research
10/9/2009
23
Updated 7/30/08
Base Rent is Steadily RisingExcept for Industrial
Base Rent PSF
Source NCREIF, ARA Research
10/9/2009
24
Updated 7/30/08
Income Breakdown - Office
PSF
Source NCREIF, ARA Research
10/9/2009
25
Updated 7/30/08
Income Breakdown - Industrial
PSF
Source NCREIF, ARA Research
10/9/2009
26
Updated 7/30/08
Income Breakdown - Multifamily
PSF
Source NCREIF, ARA Research
10/9/2009
27
Updated 7/30/08
Income Breakdown - Retail
PSF
Source NCREIF, ARA Research
10/9/2009
28
Updated 4/4
Drilling Down into NPI by Year of Acquisition

• What is Known About NPI
• Appraisal Lag Of About 6 to 8 Quarters
• NPI Transaction Cap Rate is An Early Indicator of
  Value
• Open Ended Fund Index Adjusts Faster than the
  Overall Index
• What is Known About Acquisitions
• Are Valued in Todays Market
• Most of the Return is From Income

Source ARA Research
27
10/9/2009
29
Updated 7/22/08
Looking At Past Periods of Market Stress
Cumulative 3 Year Total Return

• In each case total returns on new investments
  outpaced that of existing investments, to average
  nearly 18 more than the market average over the
  next three years

Year
Source NCREIF, ARA Research
30
Updated 7/22/08
Why Invest Now?

• During past downturns, new acquisition
  performance has usually outperformed the overall
  market

Percent Annual Total Return
Forecast
Returns Favor New Acquisitions
Source NCREIF, ARA Research
31
Why New Acquisitions Should Exceed NPI In Todays
MarketTransaction Cap Rates Have Moved Up but
Appraised Cap Rates Have Lagged
Greatest Difference in Cap Rates Since 1990s
Trailing NCREIF Cap Rate
Long Term Average
8.6
8.2
Source NCREIF, ARA Research
32
Cap Rates Relative to Alternative Investments
Transaction Cap Rates Are Now at Long-Term Spread
to 10 Year T Bill
Difference in Cap Rate to 10 Yr T Bill
Long Term Average
2.7
2.3
Source NCREIF, ARA Research
33
Revisiting the Operating Expense
DatabaseDrilling Down Into NPI Acquisitions
October 2008

• Walter G. Page
• Director of Market Research and Portfolio Strategy

10/9/2009