Slide Title44 points SubTitle32 points

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2008
APARTMENT TRENDS
AHIC Fall Conference Scottsdale, AZ
Linwood C. Thompson Managing Director
2
Housing Slow Down Impacting Overall Economy -
Existing Home Sales
Year-Over-Year Percent Change
Through AugustSources Marcus Millichap
Research Services, Economy.com, National
Association of Realtors
3
U.S. Housing Market Remains in Transition Months
Supply of Inventory Rising
38
Y-o-Y Change
27.7
Number of Months
Through August Sources Marcus Millichap
Research Services, National Association of
Realtors
4
Home Prices Yet to Reflect CorrectionMedian
Existing Home Prices
Data points growth from 2001-2007
58
63
Median Home Price (000s)
39
27
28
Through August Sources Marcus Millichap
Research Services, Economy.com, National
Association of Realtors
5
Home Mortgage Originations by Loan TypeShare of
Total Volume
2001 11

2006 34
Share of Total Volume
Sources Marcus Millichap Research Services,
Joint Center for Housing Studies (Harvard)
6
Cash From Home Refinancing No Longer Shielding
Retail Sales From High Energy Prices
Y-o-Y Percent Change in Retail Sales
Crude Oil (price per barrel)
Retail Sales Forecast, Oil Prices as of
September 25th
Sources Marcus Millichap Research Services,
Economy.com
7
Strong Corporate Sector, Full Employment Helping
to Offsetting Housing, Consumer Weakness
Fixed Nonresidential Investment (Annual Percent
Change)
Annual Unemployment Rate
Forecast
Sources Marcus Millichap Research Services,
Economy.com
8
Easing Inflation Giving the Fed More Flexibility
For Lowering Rates
Core InflationY-o-Y Percent Change
Fed Funds Rate
Fed Funds Through August, Core Inflation Through
July Sources Marcus Millichap Research
Services, BLS, Economy.com, Federal Reserve
9
Housing Has Not Bottomed Growth Expected to
Moderate and Avoid Recession
Monthly Job Growth
Gross Domestic Product
2005 3.1
2007 2.3
2006 2.9
2008 2.5
Annualized Growth
Avg. 07
Jobs in Thousands
Avg. 08
-4,000
Jan-06
Jan-07
Aug-07
YE Forecast Sources Marcus Millichap Research
Services, Economy.com
10
Percent Change in EmploymentTop and Bottom 15
U.S. Markets YOY August 2007
Sources Marcus Millichap Research Services,
Economy.com
11
Commercial Mortgage-Backed Securities
(CMBS)Spreads Have Risen Dramatically
Sources Marcus Millichap Research Services,
Wachovia
12
The Special Debt Deli Sandwich
Avg. Cost .90
MYSTERY MEAT - .60/lb
HAM - .90/lb
Avg. Cost 1.00
TURKEY - 1.00/lb
Avg. Cost 1.05
Avg. Cost 1.10
STEAK - 1.10/lb

• Reasons to buythe Special
• More diversified sandwich
• Lower average cost (Better yield)

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The Special Debt Deli Sandwich
MYSTERY MEAT - .60/lb
Avg. Cost .90
HAM - .90/lb
Avg. Cost 1.00
TURKEY - 1.00/lb
Avg. Cost 1.05
Avg. Cost 1.10
STEAK - 1.10/lb

• The mystery meat didnt digest very well
• Investors who ate the sandwich got sick
• The value of the sandwich plunged

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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 ..

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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

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Commercial Mortgage Delinquency Rate Remains
Near Historic Lows
THEN CRE Supply/Demand Imbalance Credit Crunch
Due to Rising Delinquencies
NOW Credit Concerns Rooted in Subprime
Residential CRE Market Fundamentals
Healthy Commercial Delinquencies lt .5
Sources Marcus Millichap Research Services,
ACLI
17
All-In Rate Down From Recent Peak2
10-Yr. Treasury and All-In Rate
Average Conduit Spread (Large Loan)
10-Year Treasury Yield Plus Average Conduit
Spread Sources Marcus Millichap Research
Services, Marcus Millichap Capital Corp.
18
Core Inflation and Interest RatesStill Below
Long-Term Trend
10-Year Treasury
Core InflationY-o-Y Percent Change
Average
Average
Through August 2007 Sources Marcus Millichap
Research Services, Economy.com, Federal Reserve
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National Economic and Apartment Fundamentals
Summary

• 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
• Major Risk Factors Credit/Housing, High Energy
  Costs, Corporate/Consumer Psychology

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Apartment Investments TrendsTransactions by
Price Category
10,406
9,216
8,354
4,919
3,992
Estimate
Sources Marcus Millichap Research Services,
CoStar Group, Inc., Real Capital Analytics
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Apartment Investment Trends Dollar Volume by
Price Category
101 Billion
102 Billion
63 Billion
50 Billion
43 Billion
Estimate
Sources Marcus Millichap Research Services,
CoStar Group, Inc., Real Capital Analytics
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Apartment Buyer Composition, Past 12 Months vs.
Previous 12 Months
Sources Marcus Millichap Research Services,
Real Capital Analytics
Sales 5 million and above
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Top Condo Conversion MarketsFrom 2Q 2003 - 2Q
2007
Sources Marcus Millichap Research Services,
Reis
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Apartment Sales Trends Median Price per Unit vs.
Average Cap Rate
2Q
Apartment Sales 1M for 40 Major Markets
Sources Marcus Millichap Research Services,
CoStar Group, Inc.
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U.S. Apartment Investment Market Still
Outperforming 10-Year Treasury
2000 240 Bps
Average Annual Rate
120 Bps
2Q07
Sources Marcus Millichap Research Services,
NREI
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U.S. Apartment Price and Rent Trends
Estimate Based on Q2-2007
Apartment Sales 1M
Sources Marcus Millichap Research Services,
RCA, Reis
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Vacancies Short-Term Challenge in Select Markets
Long-Term Outlook Strong Due to Rebounding
Demand, Balanced New Supply
Market Rate Apartment Completions (Thousands of
Units)
Vacancy
Forecast
Sources Marcus Millichap Research Services,
Reis
28
Apartment Rent Growth Strong Likely to
Moderate but Remain Healthy
Y-o-Y Percent Change
Forecast
Sources Marcus Millichap Research Services,
Reis
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Home Ownership Decreasing in All CohortsIn the
Past Year
Sources Marcus Millichap Research Services,
Economy.com
30
Effective Rent Growth Variations ShowingTop and
Bottom 15 U.S. Markets YOY
Sources Marcus Millichap Research Services,
Reis
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Top and Bottom 15 U.S. Markets 2008 Vacancy
Rate
Forecast
Sources Marcus Millichap Research Services,
Reis
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National ApartmentAsking and Effective Rent
Growth
Rent Growth 2000-2008
25
19
Average Rent per Unit
Forecast Sources Marcus Millichap Research
Services, Reis
33
National ApartmentAsking Rents by Class
Average Asking Rent per Unit
2Q 2007 Estimate Sources Marcus Millichap
Research Services, CoStar Group, Inc., Real
Capital Analytics
34
U.S. Apartment Average Cap Rates by Market Type
Sales 5 million and above
Sources Marcus Millichap Research Services,
Real Capital Analytics
35
National Apartment Cap RatesPrimary vs. Tertiary
Markets by Region
Average Cap Rate
Sales 5 million and above
Sources Marcus Millichap Research Services,
Real Capital Analytics
36
National Apartment Median Price Per Unitby Price
Category
2000 2006 Avg. Annual Increase
5.6
10
5.7
Sources Marcus Millichap Research Services,
CoStar Group, Inc., Real Capital Analytics
37
Real Estate Returns Outperforming Stocks In
Recent Years
Total Return ()
As of 2Q 2007
Returns represent total compounded returns over
each time period Total returns include both
income and capital return
Sources Marcus Millichap Research Services,
NCREIF, Standard Poors
38
Apartment REIT Index vs. SP 500
Total Return Index (1993100)

Through September
Indexed to 100 Dec. 1993
Sources Marcus Millichap Research Services,
NAREIT, Standard and Poors
39
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 1st Qtr (10 in
  2008)

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Multi-family InvestmentThe Continued Case for
Optimism

• Reasons Why U.S. Investors Should Be Acquiring
  Multi-family Assets

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Echo Boomer Demand Supports Appreciation
5.5 million Increase
Change in Population
Forecast
Sources Marcus Millichap Research Services,
Economy.com
42
Demand From ImmigrationSupports Appreciation
12 Million Increase
Thousands
1980
1985
1990
1995
2000
2005
2010
2015
Sources Marcus Millichap Research Services,
Economy.com
43
U.S. Household Growth2005 - 2015
4.3m new renter households
9.1m new owner households
13.4 million net new households
Sources Marcus Millichap Research Services,
Economy.com, Harvard University
44
U.S. Apartment DemandRobust for Next 10 Years
Projected demand for new U.S. apartments
averages 430,000 units per year for next 10
years!
Completions (Thousands of Units)
Forecast
Sources Marcus Millichap Research Services,
Reis, U.S. Census Bureau
45
New Supply Has Become More Constrained, Less
Volatile - Construction as a Percentage of Stock
Forecast
Sources Marcus Millichap Research Services,
Reis
46
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)

47
Marcus Millichaps NMHGRemains 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

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Long-term Implications For US Housing

• Social experiement of using financial
  slight-of-hand to stimulate homeownership
  failed!
• Greenspan Social engineering kept him from
  recognizing the existence of, and then the
  severity of, the sub-prime problems.
• Bush Administration Was more pro-ownership
  than balanced in its housing policy

49
Long-term Implications For US Housing

• Density is a real trend
• Density utilizes better land use
• Density is easier on infrastructure
• Density is green
• Density enhances quality of Gen X lifestyles
• Urbanism is a real trend
• Urbanism is more aligned with 24-7 lifestyles
• Urbanism is more aligned with multi-tasking
  lifestyles

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Long-term Implications For US Housing

• Demand / supply demand imbalance in next few
  years will put significant pressure on rents
• Rents will grow significantly faster than
  inflation
• The percentage of household income that must be
  allocated to housing costs will increase
  significantly

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Long-term Implications For US Housing

• The gap between workforce and high-end market
  rate rental housing will widen
• The demand for, and value of, LIHTC properties
  will increase
• The demand for, and value of, the LIHTC program
  will increase

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2008
APARTMENT TRENDS
AHIC Fall Conference Scottsdale, AZ
Linwood C. Thompson Managing Director