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Commercial Real EstateFall 2008Market Overview

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INVESTMENT SALES AND VALUES (DOMESTIC):

The value cycle has accelerated into a declining market much faster than historical norms would suggest, as the debt•markets impact the overall deal ﬂow and subsequently establish a less competitive investment sales market.Investors are facing higher borrowing costs and have less access to leverage. This has forced many previously active buyers•to the sidelines driving lower prices and resulting in a lower volume of transactions.Low-leveraged and cash buyers are now taking advantage of the market including institutional buyers and foreign capital.•What we are seeing is a simple supply and demand equation; less competition for quality assets equates to lower pricing•across the board.

CAPITAL MARKETS

Prices are declining as Capitalization (CAP) Rates return to more normalized levels.Investors are facing higher borrowing costs and have access to less leverage. This hasforced many previously active buyers to the sidelines.

CAPITALMARKETS

Source: Real Capital Analytics

Overall:

Property sales were off 62% in the first half of the year,•but still over $85 billion of significant deals did close.However, the structure and capitalization of these saleshas changed dramatically in the wake of the credit crunch.All cash, assumable mortgages or seller financing are•behind the majority of successful transactions this year.Wall Street and the major national banks that financed•almost 60% of all deals from 2006 through mid-2007now account for just 9% of acquisition financings. Buyersare increasingly stepping forward with all cash.Buyers are relying on assumable mortgages, a major shift in•lending patterns. Assumable debt is now the financingmethod of choice: it was used in up to half of acquisitionsthis year and we are seeing the emergence of a moreaggressive seller through seller financing.The credit markets are very tight. While there is some•lending occurring with balance sheet lenders - primarilyregional and local banks as well as life insurance companies– the deals getting done are high quality assets with credittenancy and significant equity.The Commercial Mortgage Backed Securities (CMBS)•markets have failed to recover in 2008. Through June, $12.1billion of new issuances hit the market; representing a 91%drop year-over-year. To put that into perspective, CMBSfinancing accounted for 70% of all CRE financing in ‘07.CMBS spreads indicate a lack of confidence in underlyingcredit.

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CAPITALMARKETS

Prices peaked in early 2007 and then began to decline•as deal volume declined.With few exceptions, the primary markets with high•quality assets are outperforming the national meanand continue to see decent volume of transactions;albeit signiﬁcantly less than the ﬁrst half of ‘06 and ‘07.

OFFICE

Capitalization (CAP) rates rose in Q4-2007by 50 basis points (bps) for suburban ofﬁceand 25 bps for CBD ofﬁce. By Q2-2008 webegan to see another decline in CAP rateswith averages at 5.75% for CBD assets and7.1% for suburban.

Source: Real Capital Analytics

CBDSUBURBANCBDSUBURBAN

INDUSTRIAL AND FLEX

Industrial product has seen the largestcorrection in CAP rates of the four producttypes; increasing 60 bps on average.Average capitalization rates stand at 7.35%.

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