There is a Difference.

Wading Through Deep Water: Turmoil in the Economy and Capital Markets Western States Commercial Real Estate FinanceMary K. Ludgin, PhDSeptember, 2008

2

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

3

Equity Real Estate Prospects:2008 vs Early 1990s

Market Conditions

1990 2008

Investor Double-digit returns, inflation Single-digit core returns, Expectationshedge, low volatility inflation hedge if markets in

balance, moderate volatility

Liquidity Deteriorating and no capital Deteriorating but capital availablefor some strategies

Institutional Undisciplined Debt side undisciplinedUnderwriting Equity side disciplined

Pricing Spread between NCREIF current valueSpread between NCREIF current valuecap rate of 6.97% and 10-Year cap 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 demand Demand and supply linkedMarket Office vacancy downtown: 14.0% Office vacancy downtown: 9.6%Conditions Office vacancy suburban: 21.2% Office vacancy suburban: 14.2%

OutcomeOutcome Value decline: 32%Value decline: 32% Value Decline: 15%-20%Value Decline: 15%-20%

Source: NCREIF; Moody’s Economy.com; Heitman ResearchSource: NCREIF; Moody’s Economy.com; Heitman Research

4

U.S. Economy in RecessionMarket Conditions

0.9%0.9%

3.3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Economy.com; Heitman Research

Gross Domestic Product, Inflation-Adjusted

U.S. 2001-2010

forecast

annualized % change

5

Sparked by Declining Home Values

5

Mountain

Pacific

Southwest Southeast

Mideast

Northeast

West North Central East 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

Market Conditions

6

Job Losses Expected into 4th Quarter

Market Conditions

-200,000

-100,000

0

100,000

200,000

300,000

400,000J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D

2005 2006 2007 2008 2009 2010

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Source: Bureau of Labor Statistics; Economy.com; Heitman Research

Historical and Forecast Employment GrowthU.S. 2005-2010

forecastjobs created job growth

Pessimistic Case

Optimistic Case

7

Giving No Near-Term Lift for Housing Market

46,000

107,000

57,000

74,00081,000

140,000

60,000

41,000

-76,000-83,000-88,000

-67,000

-47,000-51,000-51,000

162,000

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul

2007 2008

4,000

4,500

5,000

5,500

6,000

6,500

7,000Employment Growth (L)

Total Home Sales (R)

x1,000monthly change

Employment Growth vs. Total Home SalesU.S. April 2007-July 2008

Source: Bureau of Labor Statistics; National Association of Realtors; U.S. Census Bureau; Heitman Research

Market Conditions

8

Conditions Vary Widely by MarketMarket Conditions

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Job Growth July 2007-July 200850 Largest U.S. Metropolitan Areas

Source: Economy.com; Heitman Research

Austin

Houston

Dallas

Seattle

Washington, D.C.

Atlanta

Philadelphia

U.S. Average

Chicago

San Francisco

Phoenix

Detroit

New York City

Los Angeles

Miami

Boston

Riverside

Baltimore

Tampa

Denver

Orange Co.

Charlotte

9

And Could Improve Over Next Four Quarters

Market Conditions

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Job Growth Forecast Q3 2008-Q3 200950 Largest U.S. Metropolitan Areas

Source: Economy.com; Heitman Research

Houston

Austin

Dallas

Seattle Washington, D.C.

AtlantaPhiladelphia

U.S. Average

Chicago

San Francisco

Phoenix

Detroit

New York City

Los Angeles

Miami

Boston

Riverside

Baltimore

Tampa

Denver

Orange Co.Charlotte

10

Consumers Encumbered by Mountain of Debt

Market Conditions

10.0

10.5

11.0

11.5

12.0

12.5

13.0

13.5

14.0

14.5

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

2008

2009

2010

2011

2012

%

Debt Service Burden as a Percentage of Disposable Personal IncomeU.S. 1980-2012

Source: Economy.com; Heitman Research

forecast

11

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

Market Conditions

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Headline Inflation

Core Inflation

y-o-y change

Headline vs. Core InflationU.S. 2001-2010

Source: Economy.com; Heitman Research

forecast

12

Inflation Helped Restrain Development

Market Overview

12

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Industrial

Office

Retail

Apartment

Source: Torto Wheaton; CoStar; REIS; Heitman Research

New Supply as a Percentage of Existing StockU.S. 1988-2009

forecast

13

Loss of Debt Capital Causing Ripple Effect

Capital Markets

14

Showing Up in Huge Pull Back in Transactions

Capital Markets

77102

120

187

275

357

520

76.6

$0

$100

$200

$300

$400

$500

$600

2001 2002 2003 2004 2005 2006 2007 2008

Primary Property Type Transaction VolumeU.S. 2001-2008 Q2

Source: Real Capital Analytics; Heitman Research

Billions

Volume for f irst half of 2008 down 68% f rom

same period in 2007

15

Putting Pressure on Cap Rates

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

2001 2002 2003 2004 2005 2006 2007 2008

Apartment

Industrial

Office - CBD

Office - Suburban

Strip Retail

Capitalization RatesU.S. 2001-2008 (June)

Source: Real Capital Analytics; Heitman Research

Capital Markets

16

National Apartment Market Weakening

Apartment Overview

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 08

Effective Rent Growth vs. Apartment VacancyU.S. 1996-2008 Q2

Rent Growth

Vacancy

Source: Axiometrics; Heitman Research

6.6%

1.8%

17

Fewer Markets Seeing Above-Inflation Rent Growth

Market Overview

17

Effective Apartment Rent Growth

Q2 2007-Q2 2008

Columbus 1.9%Durham 1.9%Indianapolis 1.9%Baltimore 1.8%Kansas City 1.8%Raleigh 1.6% Denver 3.9%Santa Ana-Anaheim 1.5% Bethesda 3.5%Boulder 1.4% Dallas 3.4%Camden 1.3% Chicago 3.1%

New York -0.3% Detroit 1.3% San Diego 3.0%Providence, RI -0.4% Philadelphia 1.3% Washington, DC 2.9%Riverside-SB -1.2% Cincinnati 1.2% Albuquerque 2.8%Miami -1.3% Hartford 1.1% Austin 2.8%Fort Lauderdale -1.7% Nassau-Suffolk 1.1% Boston 2.8%Phoenix -1.9% Atlanta 0.8% Houston 2.8% Salt Lake City 8.9%Tampa -2.4% Los Angeles 0.8% Colorado Springs 2.7% Tacoma 8.0%Orlando -2.8% Memphis 0.7% Cambridge 2.6% San Jose 6.2%West Palm Beach -3.7% Tucson 0.6% San Antonio 2.6% San Francisco 5.9%Jacksonville -3.8% Charlotte 0.5% Edison 2.5% Seattle 4.9%Palm Bay -4.9% St. Louis 0.5% Warren 2.3% Nashville 4.8%Sarasota -7.0% Las Vegas 0.3% Savannah 2.2% Oklahoma City 4.8%Fort Myers -9.3% Minneapolis 0.3% Sacramento 2.1% Oakland 4.5%Naples -10.0% Lake County, IL 0.0% Cleveland 2.0% Portland 4.1% NONE!

10%+ growth

Source: Axiometrics Research; Heitman Research

Declining rents < 2.0% growth 2.0% to 3.9% growth 4.0% to 9.9% growth

18

211,271

187,818

164,070

141,782

126,914

101,474

89,333 88,038 86,220

98,452 98,911

0

50,000

100,000

150,000

200,000

250,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Units

Source: REIS; Heitman Research

Apartment CompletionsU.S. 1999-2009

forecast

Apartments Helped by Lack of Construction

Market Overview

18

19

Industrial Overview Pullback in Imports Affecting

Industrial

7.3

10.39.8

9.49.5

6.7

11.7

10.0

7.67.77.8

11.211.1

7.6

9.9

9.4 9.3 9.3

-200,000

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007 Q2 Q3 Q4 Q1 Q2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Completions

Net Absorption

Availability Rate

Industrial Completions, Net Absorption, and AvailabilityU.S. 1995-2008 Q2

Source: Torto Wheaton Research; Heitman Research

sf x 1,000 Vacancy Rate (%)

2007 2008

20

Multiple Healthy MarketsMarket Overview

20

Industrial Market Vacancy Rates U.S. 2008 Q2

Washington, D.C. 12.4

Sacramento 12.0 KEY:Dallas 11.8 Sum of MarketsAustin 11.6 Diversified Industrial CtrsChicago 11.5 Locally Driven MarketsRaleigh 11.5 Major Logistics Hubs

Kansas City 7.5 Hartford 11.3

Orange County 7.5 Oakland 9.9 Edison 11.2

Houston 7.3 Nashville 9.8 St. Louis 11.1

Portland 7.3 Cleveland 9.7 Indianapolis 10.9 Boston 14.8

San Francisco 6.9 Fort Worth 9.6 San Jose 10.7 Baltimore 14.4

Albuquerque 6.7 Charlotte 9.2 Denver 10.5 Columbus 14.1

Las Vegas 6.7 Cincinnati 9.1 Market Avg. 10.3 Phoenix 13.7Seattle 6.6 Miami 9.0 Philadelphia 10.3 Pittsburgh 13.7

Tucson 6.2 Minneapolis 8.7 Orlando 10.2 Atlanta 13.3 Memphis 18.2

Salt Lake City 5.8 Newark 8.5 Jacksonville 10.1 Wilmington 12.7 Detroit 17.4

Los Angeles 5.4 Tampa 7.7 San Diego 10.1 Riverside 12.6 Stamford 15.4

Source: Torto Wheaton Research; Heitman Research

7.5% or less 15.1%+7.6%-10% 10.1%-12.5% 12.6%-15%

21

But Western Markets Under Greater Pressure

Market Overview

21

-70

60

90 100

150

440

530

-100

0

100

200

300

400

500

600

Seattle Oakland National Average Los Angeles Las Vegas Phoenix Riverside

Y-O-Y Vacancy Change

bps

Industrial Market Vacancy Rate ChangeSelected Markets Q2 2007 vs. Q2 2008

Source: Torto Wheaton; Heitman Research

22

Market Overview And Real Rent Growth Disappearing

22

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

6%

7%

8%

9%

10%

11%

12%

13%

Inflation-adjusted year-over-yearwarehouse rent growth (L)

Warehouse availability rate (R)

Forecast warehouse availability

Warehouse Real Rent Growth and AvailabilityU.S. 1990-2013

Source: Torto Wheaton Research; Heitman Research

forecast(Torto Wheaton)

23

Market Overview Drivers of East Coast Container

Growth

Suez Canal all-water routePort facility expansion

High transcon intermodal rail fees Panama Canal expansion23

24

13.212.9

12.512.512.5

15.4

16.5

13.9

12.2

9.9

14.1

16.8

8.6

12.613.6

8.9

9.5

12.5

-100,000

-75,000

-50,000

-25,000

0

25,000

50,000

75,000

100,000

125,000

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007 Q2 Q3 Q4 Q1 Q2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Completions

Net Absorption

Vacancy Rate

Office Completions, Net Absorption, and VacancyU.S. 1995-2008 Q2

Source: Torto Wheaton Research; Heitman Research

sf x 1,000Vacancy Rate (%)

2007 2008

Initial Signs of Softer Office MarketOffice Overview

25

Downtowns Much Healthier than Suburbs

25

Market Overview

0.0

5.0

10.0

15.0

20.0

25.0

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

YTD

2008

Source: Torto Wheaton; Heitman Research

%

Office Vacancy RatesU.S. 1988-2008 Q2

15.1%

9.8%

Suburban

CBD

26

Great Variability at Metro Level Market Overview

26

Office Market Vacancy Rates U.S. 2008 Q2

KEY:Boston 14.6 Primary Downtown Portland 14.6 Primary Suburban San Jose 14.4 Secondary MetroCleveland 14.2 National AveragesSan Diego 14.2

Orlando 14.1

Baltimore 12.5 Phoenix 14.1 Orange County 17.1

Los Angeles 12.5 Kansas City 14.0 Atlanta 16.7

Fort Worth 12.4 Sub. Maryland 14.0 Columbus 16.6

St. Louis 12.2 Cincinnati 13.9 Denver 16.6

Long Island 9.9 Houston 12.0 Philadelphia 13.8 Hartford 16.6

Downtown Avg. 9.8 Denver 11.9 Fort Lauderdale 13.6 Las Vegas 16.1

Philadelphia 9.5 Miami 11.9 Salt Lake City 13.6 San Diego 16.1

Portland 9.1 Nashville 11.3 Oakland 13.5 Sacramento 16.1 Phoenix 19.9

Seattle 8.6 San Francisco 11.3 North. Virginia 13.3 Charlotte 16.0 Cincinnati 19.7

San Francisco 8.2 Chicago 11.0 Overall Avg. 13.2 Indianapolis 15.8 Atlanta 19.0

Washington DC 7.6 Houston 11.0 Baltimore 13.1 Minneapolis 15.8 St. Louis 18.8 Detroit 26.3

Boston 6.3 Westchester 10.8 Miami 13.0 Tampa 15.7 N. New Jersey 18.7 Dallas 22.1Downtown-NYC 6.1 Los Angeles 10.7 Minneapolis 13.0 Austin 15.4 W. Palm Beach 18.6 Dallas 20.9

Midtown-NYC 4.3 Seattle 10.7 Riverside 13.0 Oakland 15.1 Jacksonville 18.1 Detroit 20.8

Charlotte 2.8 Stamford 10.1 Raleigh 12.9 Suburban Avg. 15.1 Cleveland 17.6 Chicago 20.5

Source: Torto Wheaton Research; Heitman Research

17.6%-20.0% 20.0% or more10.0% or less 10.1%-12.5% 12.6%-15.0% 15.1%-17.5%

27

Great Variability Within Suburban Markets

Market Overview

27

10.0%

8.7%

10.4%

14.3%

12.2%

13.9%

13.0%

15.9%

10.8%

14.2%

10.6% 10.6%

13.5% 13.7%

14.6%15.1%

16.1%16.6%

17.8%

19.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Seattle Los Angeles San Jose SanFrancisco

Salt LakeCity

NationalAverage

San Diego Denver OrangeCounty

Phoenix

Q2 2007

Q2 2008

Suburban Office Vacancy RatesSelected Markets Q2 2007 vs. Q2 2008

Source: Torto Wheaton; Heitman Research

28

And Within Downtown Markets Market Overview

28

8.7%

7.3%

10.0%

11.6%

9.3%

14.0%13.6%

13.2%

15.3%

7.9%

8.7%

9.8%

11.0%

11.9%12.5%

14.1% 14.2%14.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

SanFrancisco

Seattle NationalAverage

Sacramento Denver Los Angeles Phoenix San Diego Oakland

Q2 2007

Q2 2008

Downtown Office Vacancy RatesSelected Markets Q2 2007 vs. Q2 2008

Source: Torto Wheaton; Heitman Research

29

Market at Position Where Rent Growth Stopped in 2001

Market Overview

29

12.9

14.0

12.8

14.1

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0Rent Growth (L) Vacancy (R)

National Office Vacancy Rate vs. Rent GrowthU.S. 1988-2010

Assuming No Net Absorption

%

Source: Torto Wheaton Research; Heitman Research

30

Retail Helped by Strong Starting Position

Market Overview

30

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 08

NCREIF Retail Vacancy Rate U.S. 1995-2008 Q1

% Vacant

Source: NCREIF; Heitman Research

31

But Retail Sales Trending DownMarket Overview

31

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008

Chain Store Sales

Three-Month Moving Average

Historical Average

Chain Store Sales TrendsU.S. 2000-2008 (July)

y-o-y change

Source: ICSC; Heitman Research

Historical Average = 4.1%

YTD Average = 2.2%

32

That Trend will Continue as Savings Grow

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Retail Sales

Personal Income

Savings Rate

Mortgage Equity Withdrawal Peak

Retail Sales Growth vs. Personal Income GrowthU.S. 1993-2014

savings rategrowth rate

Source: Economy.com; Heitman Research

forecast

Market Overview

Market Overview

33

Retail Vacancy Will Rise Off Historical Lows

Market Overview

5.9% 6.0%6.2% 6.2% 6.2% 6.3% 6.2% 6.3% 6.4%

6.6%

7.1% 7.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1 2 3 4 1 2 3 4 1 2 3 4

2006 2007 2008 2008 2008

Retail Vacancy RateU.S. Q1 2006-Q4 2008

Source: CoStar; Heitman Research

34

Vacancy Concentrated in Newest Centers

4%5%

6% 6%

9%

13%

22%

28%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2001 2002 2003 2004 2005 2006 2007 2008

Shopping Center Vacancy by Year CompletedU.S. 2001-2008

Source: CoStar; Heitman Research

Market Overview

Market Overview

35

There is a Difference.

Wading Through Deep Water: Turmoil in the Economy and Capital Markets Western States Commercial Real Estate FinanceMary K. Ludgin, PhDSeptember, 2008