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Second Quarter 2008 ReportVol. 4, No. 2Investment Trends

Quarterly

Spotlighton

Portland

�Investment TrendsQuarterly

Copyright© 2008 by Real Estate Research Corporation (RERC) and the CCIM Institute.

InThisVolume

Regional and Metro-Level AnalysesComing Soon! East RegionBaltimore, Boston, Charlotte, Hartford, Norfolk, Northern New Jersey, New York City, Pittsburgh, Philadelphia, Raleigh, Richmond, Washington, D.C.

South RegionAtlanta, Austin, Dallas/Ft. Worth, Houston, Memphis, Miami, Nashville, New Orleans/Baton Rouge, Oklahoma City, Orlando, San Antonio, Tampa

Midwest RegionChicago, Cincinnati, Cleveland, Columbus, Detroit, Indianapolis, Kansas City, Milwaukee, Minneapolis, Omaha, St. Louis, Toledo

West RegionDenver, Honolulu, Las Vegas, Los Angeles, Phoenix, Portland, Sacramento, Salt Lake City, San Diego, San Francisco, Seattle, Tucson

Now Available!National OverviewCaught in the StormEconomic Background & Investment EnvironmentA Focus on Real Estate Cap Rate & Yield Rate ExpectationsSeeking Shelter from the StormEffect on Real EstateNational Market Analysis & Property Sector Highlights“Sustainable Development Shapes PortlandPast and Future”ContributorsScope & Methodology



Foreword

April 2008

Dear Readers,

Property fundamentals for commercial real estate are beginning to reflect the new economic and capital market storm we find ourselves in. Vacancies are up for all property types on a national level, and as noted in the second quarter 2008 RERC/CCIM Investment Trends Quarterly, sales volume and pricing are starting to decline. What’s more, the National Association of REALTORS® (NAR) forecasts that until confidence levels return, commercial real estate investment will remain as much as 40 percent below transaction levels seen in 2007, when a record $427.2 billion of commercial real estate traded hands.

Despite this softening, commercial real estate is holding up reasonably well compared to other investments, and CCIM designees and candidates who responded to RERC’s survey remain optimistic about this asset class. While we see a great deal of turbulence in the commercial real estate debt market, according to anecdotal information gathered at the mid-year CCIM Institute business meeting, most CCIM members are expecting only an approximate 10-percent adjustment for commercial real estate this year.

Given the turmoil in the markets, return expectations are of special interests—thus our special analysis on yield rates, capitalization rates, and spreads. We hope you find this, and our other analysis of the capital markets, of interest.

To make this research report even more valuable to CCIM members, we encourage you to share your completed sales transactions. Here’s how:

• At www.ccim.com, go to the Member Services category,

• Click on the CCIM Transactions link (you’ll be prompted to enter your regular username & password),

• Under the Professional Profile section, click the Manage Completed Transactions link, and

• Enter the transaction.

Thank you to all who completed and returned our surveys, communicated your transaction information, or shared re-ports or other details about the various property sectors and markets. We appreciate your information and insights.

Sincerely,

Kenneth P. Riggs, Jr., CCIM, CRE, MAIPresident & CEOReal Estate Research Corporation (RERC)

Timothy S. Hatlestad, CCIM2008 CCIM Institute PresidentPresident, RE/MAX Commercial Investment



CaughtInTheStorm

Few, if any, could have anticipated how much the financial markets and the economy could change over the last 12 months. The commercial real estate market had reached a new pinnacle in early 2007, with The Blackstone Group’s acquisition of Equity Office Properties (EOP), plenty of cheap capital, and a belief that we were on the cusp of a new era of investing with limited downside volatility. The storm clouds then began to roll in with the subprime mortgage meltdown, followed by declining home values, sustained high oil prices, and a slowing economy. The winds began to shift, and we saw the credit markets pause as the rating agencies finally started to sound a warning. Questions arose in the financial arenas about the underlying risk of securitized pools of mortgages involving a string of investors and elements that were unknown to even the most informed. By late 2007, there was a recognized credit crisis and we knew there were rough times ahead for the U.S. economy. Once the broad debt markets seized up and the eventual buyout of Bear Stearns (fifth largest investment bank in the world) occurred, the finger-pointing began in earnest, and even the past two Federal Reserve chairmen were pulled into the fray to comment on the state of the financial markets.

These are the shifting conditions that are darkening the climate in which commercial real estate finds itself. The reach of the storm is global, and there is no end in sight. Further, the ripple effect of this storm is immense, with those sitting on the front lines either gone or forever changed in the way they conduct their business or approach the financial world. However, as we have pointed out in the past, the impact on the various investments and the magnitude of the change in investment conditions depend on your perspective and where you are sitting as this storm plays out for the balance of 2008.

Real Estate Research Corporation’s (RERC’s) view, from a commercial real estate equity standpoint, is that low-leveraged commercial real estate is doing reasonably well relative to investment alternatives, and we see the market dynamics for this style of low-leverage equity investment from a credit disruption perspective rather than a credit crisis. Although Wall Street may challenge us on this optimistic approach to a world in crisis, RERC has remained focused on commercial real estate investing from a low-leverage equity perspective, and how investors can best cope with the turbulent conditions surrounding us all. This report will lay out our perspective for commercial real estate returns as we are tested and challenged to navigate through a tempest that most of us have never seen before.

The year 2007 will be remembered for the many storm clouds in our economy—the global financial markets, the U.S. residential housing market, gasoline prices, and geo-political risk, among others. While the storm clouds have been hovering over the commercial real estate arena and the turbulence has affected the debt markets, the com-mercial real estate low-leverage equity market has not been as negatively affected as the residential market.

Although the global credit crisis ripped apart the most so-phisticated leveraged structures from a financial perspec-tive, we did not see a collapse of home prices. As can be seen in Exhibit 1, even though home prices fell around 8 percent in 2007, they were still 70 percent higher than in first quarter 2000. We recognize that then was then and now is now, but it demonstrates that the undoing of the housing market lies in the financial package and not in the

Economic Background &Investment Environment

Exhibit 1. Historical Housing Prices

Source: National Association of REALTORS® (NAR), 4q 2007.

fundamental value of the asset. There is clear downward home re-pricing taking place in parts of the U.S. that ex-perienced the most speculation, and we still have some tough realities to face before the market stabilizes. This is important to keep in mind when we examine the financial side of the commercial real estate market versus the as-set side.

The inability of investors to sort though the financial in-struments that were created over the past decade has caused them to become more risk averse, and has brought established underwriting and investment criteria back to appropriate standards that focus on the funda-mental value of the asset. Getting back to basics is not a bad thing, but one should not overreact to this situa-tion. It is important to avoid the old pendulum paradigm of swinging from a sentiment of greed to a sentiment of fear. We see this happening on a limited basis, and it tends to guide commercial real estate to spots where one needs the pendulum to swing in the opposite direction, although commercial real estate did not experience the broad-based overselling and overleveraging that we saw in the residential sector. Investors are seeing a bifurcation rela-tive to repricing issues in commercial real estate between top-quality, low-leveraged assets, versus average-quality, high-leveraged assets (75+ percent), although each set of assets is facing some level of re-pricing.

Investors have a wait-and-see attitude, given the disar-ray and disappointment seen in the economy and finan-cial markets, but who can blame them? However, despite what one hears in the news, investors are not totally out-of-sorts with commercial real estate. It is no surprise that we continue to see the bid/ask spread widen, as sellers

are not willing to sell at a discount, and buyers are not willing to buy at the ask price, given the uncertainty in the economy and financial markets.

The profound shift in the sell sentiment can be found in the historical buy, sell, or hold recommendations shown in Exhibit 2. The sell recommendation during first quarter 2003 through first quarter 2007 hovered around 8.0 on a scale of 1 to 10, indicating that it was a good time to sell (prices were viewed as strong relative to value). Today, however, the sell recommendation is about half that level,

indicating that it fell quickly alongside the credit market concerns and now is not a good time to sell (properties are viewed as underpriced relative to what buyers will pay). This reversal occurred right after the Blackstone/EOP deal, which will go down in history as a major mar-ket coup and pricing velocity watermark. The message the market is sending is that commercial real estate is a good investment and the pricing is not viewed as being too far ahead of the fundamentals, especially from a risk perspective and compared to alternative investments. We have noted during the last year that the market has been going through a re-pricing phase and that investor sentiment is shifting to reflect the changing nature of the clouds that exist in today’s turbulent environment. This is a clear signal that the commercial real estate capital markets recognized the credit crisis and that commercial mortgage-backed securities (CMBS) are temporarily on the sidelines.

Given the big picture, commercial real estate is reacting appropriately to the alarm. If it had continued with the levels of first quarter 2007 CMBS underwriting that pos-sessed aggressive pricing of high loan-to-value ratios and high valuations, commercial real estate would have un-

3

4

5

6

7

8

9

3

4

5

6

7

8

9HoldSellBuy

1Q 2008

1Q 2007

1Q 2006

1Q 2005

1Q 2004

1Q 2003

1Q 2002

1Q 2001

1Q 2000

1Q 1999

Exhibit 2. RERC Historical Buy, Sell, Hold Recommendations

Source: RERC.

Rat

ing



dergone a fate similar to that of the subprime market, and we would all be suffering. Oddly, this current commercial real estate market disruption (or crisis, for those on Wall Street) is better for long-term investment prospects for commercial real estate, and provides us with a more solid investment foundation without having to suffer a broad-based market failure like the residential securitized mar-ket. However, we know that it is not over yet, and there will be casualties along the way. As shown in Exhibit 3, CCIM designees and candidates rated commercial real estate at 6.7 on a scale of 1 to 10, indicating it is a better investment relative to the alterna-tives of stocks, bonds, and cash. This does not come as a surprise to commercial real estate investors, but they have always been a group that was somewhat biased

toward commercial real estate. Clearly, the respondents see many clouds above, and while preparing for a storm, are establishing strategies toward safer harbor.

Exhibit 4 tells what investors are facing in a world of downside volatility. The only positive realized returns dur-ing first quarter 2008 are those reflected by the National Council of Real Estate Investment Fiduciaries (NCREIF) and the National Association of Real Estate Investment Trusts (NAREIT). The 10-year treasury bonds reflect ex-pected returns versus realized returns. NCREIF and NA-REIT show almost no capital (appreciation) return, indi-cating that values flattened in first quarter 2008, and we likely are entering a time of potential value adjustments or re-pricing of the underlying assets. However, while com-mercial real estate is not performing at a level witnessed a year ago, it is still delivering positive returns. As we head into the second quarter 2008 and beyond, we need to assess the economy and what it holds in store for commercial real estate. If a recession takes hold and unemployment increases, vacancy rates are likely to in-crease, rents will deteriorate, and values will be affected by these strong undercurrents. With respect to the pric-ing of commercial real estate, the key thing is to assess where prices have settled on a price per square foot/unit basis, and what direction capitalization rates and yield rates are heading.

Exhibit 4. What Do the Financial Markets Tell Us?Compounded Annual Rates of Return as of 4/1/2008

Market Indices 1Q 2008 1-Year 3-Year 5-Year 10-Year 15-YearConsumer Price Index 1.16% 3.98% 3.37% 3.00% 2.79% 2.68%

10-Year Treasury Bond* 3.66% 4.38% 4.52% 4.39% 4.81% 5.34%

Dow Jones Industrial Average -3.06% -0.74% 5.30% 8.94% 3.37% 8.85%

NASDAQ Composite -6.75% -6.11% 3.56% 10.83% 2.39% 8.27%

NYSE Composite -3.60% -5.02% 7.07% 13.21% 3.80% 8.36%

S&P 500 -4.05% -6.91% 3.86% 9.29% 1.84% 7.43%

NCREIF Index 1.60% 13.56% 16.84% 15.17% 12.70% 11.29%

NAREIT Index** 1.40% -17.37% 11.69% 18.34% 10.69% 11.66%

*Based on Average End of Month T-Bond Rates.**Based on FTSE NAREIT US Real Estate Index Equity REITs, Total Return.Sources: Economy.com, Federal Reserve Board, BLS, NYSE, NCREIF, NAREIT, compiled by RERC.

Exhibit 3. CCIM Respondents Rate Investments

1Q 2008 4Q 2007

Commercial Real Estate 6.7 6.0

Stocks 4.3 3.9

Bonds 4.5 4.7

Cash 5.7 5.9

Source: RERC Institutional Investment Survey, 1Q 2008.



Yield RatesAs a starting point in examining return expectations, it is important to focus on the spreads of commercial real estate yields (total returns) versus 10-year and 5-year treasuries rather than reviewing these returns strictly on a nominal basis. In our evaluation, we are using both 10- and 5-year durations, because the holding periods for commercial real estate have shortened from the traditional 10-year holding periods, and because the durations of average leases that create these cash flows are probably something between that of 5-year and 10-year bonds. Regardless, we can see that the spreads in 2003 in both cases were huge, which meant that commercial real estate was a very attractive risk-adjusted investment and that capital was bound to flow into this arena. As one survey respondent stated, “It was a no-brainer to invest in real estate.” Then the market started to aggressively bid up real estate prices to bring this spread down to its lowest level in 10 years in the first quarter 2007. Since then, we have seen yield spreads for commercial real estate reach around 450 basis points over 10-year treasur-ies (refer to Exhibit 5), and 550 basis points over 5-year treasuries (refer to Exhibit 6). We recognize that spreads for other financial instruments have widened much more and at a more rapid pace during this credit crisis.

Since second quarter 2007, the market has been re-pricing commercial real estate risk relative to treasuries. On histori-cal terms and given the dynamics of commercial real estate today, the spread is at least recognizing market risk vaga-ries. This shift in attitude is demonstrated in Exhibit 7, show-ing the significant upward percentage change in commer-cial real estate yield expectations during the second quarter 2007 from a 10-percent decline to a net upward shift of over 25 percent (-10 percent versus +15 percent).

Are we there yet? Probably not across the board, but for the low-leverage, high-quality deals, we are getting close. From our vantage point, the biggest question that the market is wrestling with today is: How do you price risk for com-mercial real estate when there are fewer transactions to measure investor behavior?

Exhibit 5. RERC Yield Rates vs. 10-Year Treasuries

Sources: RERC, Federal Reserve.





A Focus on Real Estate Cap Rateand Yield Rate Expectations



Exhibit 11. RERC Yield Rates vs. Required Going-inCap Rates

Source: RERC.

Exhibit 9. RERC Required Going-in Cap Ratesvs. 5-Year Treasuries


Exhibit 10. RERC Yield Rates

Source: RERC.

Exhibit 8. RERC Required Going-in Cap Rates

Source: RERC.



The market tends to talk about pricing in terms of capitaliza-tion rates on a nominal basis. Cap rates are a simple perfor-mance measure and an easy metric to extract from actual transactions; however, a cap rate does not give you the full picture like a yield rate or internal rate of return (IRR) can provide. During the last few years, RERC and others have commented on this “era of cap rate compression,” as depict-ed in Exhibit 8. Since 2004, cap rates have declined by 200 basis points, much of which is attributable to spreads over treasuries, as seen in Exhibit 9. Cap rate compression has been reflecting the attractiveness of commercial real estate from an overall investment appeal perspective, a world with lower return expectations, and significantly improved trans-parency. Although required cap rates have increased only around 25 basis points, the spreads over treasuries have increased significantly and have incorporated more upward

re-pricing for the asset class than most market observers are recognizing.

Exhibit 10 shows that yields (total returns, or IRRs/discount rates) also have increased slightly more than cap rates since second quarter 2007. The spread between yields and re-quired cap rates (refer to Exhibit 11) showed a spike during the latter part of 2007, which has settled down to a 160-basis-point spread in first quarter 2008. As with cap rate compres-sion, we see a 200-basis-point decline in yield expectations over the past 3 years until first quarter 2007, and an increase in yield expectations from that point in time. This downward trend in yield expectations is reflecting the attractiveness of commercial real estate from an overall investment appeal (improved transparency and attractive investment) and a world with lower return expectations.

Cap Rates

*RERC Required Cap Rates are used and reported onin the RERC Real Estate Report.

It is becoming harder and harder for the U.S economy to find shelter, as conditions have changed dramatically over the past 15 months and there is no near-term relief in sight. The credit crisis continues, and the International Monetary Fund (IMF) predicts that before it is over, an overwhelming $945 billion of credit-related losses will have occurred. Oil prices have topped $120 per barrel and are still climbing, which continues to exact a heavy toll on consumers and businesses. The labor markets are succumbing to the pressure of rising costs and abating demand, with approximately 260,000 jobs lost in the first 4 months of 2008 (although this is relatively good news in the short term, when one compares this total to the 2001 recession when at times we lost 300,000 jobs per month). The 1-year expected inflation readings are approaching 5.0 percent, up from the prior month’s level of around 4.5 percent, according to published reports. However devastating, our financial system and the economy have remained relatively resilient given the storms in our path, but how long can we hold on?

Home prices continue to deteriorate, and a turnaround in the housing market is not on the near-term horizon. The S&P/Case-Shiller® Home Price Index that measures home prices in 20 major metropolitan areas dropped 12.7 percent in February 2008 from year-ago prices, which is the largest decline in the 20-year history of the Index. Tighter lending terms for mortgages and broader weakness in the economy, particularly in the labor market, are depressing demand, and with a large inventory of unsold homes, prices are likely to fall further.

The Federal Reserve has stepped up in a big way to make sure that capital is available, although more expensive in most cases. The Federal Reserve cut interest rates in late April for the seventh time in 8 months, but signaled that one of its most aggressive rate-cutting campaigns in a generation may be nearing an end. The Federal Reserve also lowered its target for the federal funds rate to 2.0 percent from 2.25 percent, bringing the cumulative reduction in interest rates since September 2007 to 3.25 percentage points. That exceeds even the aggressive rate posture set by former Federal Reserve Chairman Alan Greenspan in the first 8 months of 2001, before the economy was shocked by the terrorist attacks of September 11.

The Federal Reserve indicated that while the economy remains under stress, the “substantial” rate cuts and other measures it has taken to provide liquidity to the financial markets have tempered the risk of a severe recession. On Wall Street, the turmoil that has devastated market conditions for the stock and bond markets now shows signs of improving. It is still too early to be certain, but there are some believers that the worst of the credit crisis may be past. Gold prices, which had surged to a record high of more than $1,000 an ounce, have dropped below $900.

In addition, the global economy appears to be re-entering an era when governments are harboring more protectionist attitudes and are reasserting those views through their policies and opinions related to world trade. Once again, barriers are rising. “The era of easy globalization is certainly over,” says Pulitzer Prize-winning author Daniel Yergin, whose 1998 book, “Commanding Heights: The Battle for the World Economy,” detailed the triumph of markets over nations, starting with British deregulation under Margaret Thatcher. “The power of the state is reasserting itself.”

Interestingly, it is U.S. consumers, although burdened with high food and gasoline costs, who may be best equipped to help stave off recession. By most accounts, approximately $110 billion will be injected into the U.S. economy this spring through the economic stimulus program. Some pundits are suggesting that how Americans spend the tax rebate checks they began receiving in early May is a good predictor of whether consumers can continue to hold



Seeking Shelterfrom the Storm

Exhibit 12. Annualized Quarterly Investment Performance

-5%

0%

5%

10%

15%

20%

25%

-5%

0%

5%

10%

15%

20%

25%Market EquilibriumHotels

ApartmentsRetail

Industrial

Office

1Q 2008

4Q 2007

3Q 2007

2Q 2007

1Q 2007

4Q 2006

3Q 2006

Sources: RERC, NCREIF.



on during this economic storm. If consumers use most or all of their tax rebate checks for discretionary purchases, like flat-screen TVs, new furniture, or vacations, it is a sign that the economy may make it through this storm without much more damage. On the other hand, if consumers use most or all of their tax rebate checks for non-discretionary purchases like food or energy, or to pay down credit cards or other bills, consumer strength may be more at risk than anyone thought.

How accurate this projection is as an indication of things to come is anyone’s guess. Nor do we know how long this storm will go on. But we do know that we have often doubted the strength of the U.S. consumer in years past—during the 2000-2001 recession, after the terrorist attacks of September 11, through corporate and accounting scandals, with the war on terror, during the jobless recovery, through rising gas prices, with the housing bubble and the bursting of that bubble, the subprime lending crisis, and most recently, through the weakness in the capital and financial markets. So far, U.S. consumers have held on. We will see if they will be able to continue to do so through this current storm.

According to CCIM designees and candidates, commercial real estate is the most preferred investment alternative, with cash as the second-most preferred investment vehicle. RERC maintains that as the economy, financial markets, and capital markets continue to go through troubled times, commercial real estate will remain a relatively strong investment option, given the nature of the asset and where it has been over the past year as compared to other investment prospects.

First quarter 2008 commercial real estate fundamentals remained relatively steady, although vacancy rates are inching upward for office, industrial, apartment, and retail properties. As pressures from the economy and the financial markets increase, low investor confidence is keeping the volume of sales down.

The considerations and analyses of yield and cap rate expectations included herein reflect much more of a risky undercurrent than one would surmise by looking at nominal returns—they reflect and incorporate the dynamic changes that we have seen in the financial markets over the past year. Although some pundits would argue there

has not been enough upward adjustment on these return expectations, given the global credit crisis and particularly in the CMBS debt market, RERC believes that the market is working toward figuring out the malaise but there is not enough clarity to make a confident adjustment. The message we offer from the equity commercial real estate market is that of selectivity, caution, and the need to keep a watchful eye on the rest of the financial markets. Low-leverage, high-quality commercial real estate is in a relatively positive position compared to investment alternatives.

As demonstrated in Exhibit 12, commercial real estate’s investment performance on a realized basis has exceeded investor expectations. However, we can clearly see that performance has changed dramatically over the past year and that it continues to deteriorate. RERC expects this trend to continue until the write-down adjustments are taken in the NCREIF Index. We are using the NCREIF Index as the basis for the realized return in this performance analysis, and we recognize the lag in data relative to the timing of capital adjustments. The impact of the credit crisis has not fully played itself out in this data. Commercial real estate will be challenged by continued storm clouds in the form of a tough economy, tighter credit standards, tougher underwriting criteria, and an uncertain world. In the end, “institutional” commercial real estate will weather this storm battered but in relatively good shape, but we are being pulled into market dynamics that few have ever experienced, and adjustments to our expectations will need to be made.

�0Investment TrendsQuarterly


TheEffectonRealEstate

w Residential real estate construction remained weak while commercial real estate construction activity was mixed during first quarter 2008, according to the April 16, 2008 Beige Book. Continued slowing of residential construc-tion was expected as the economy slowed, and is needed for the housing market to strike a better balance between supply and demand.

w Total construction for first quarter 2008 was $121.2 billion, down 19 percent from a year ago according to McGraw-Hill Construction. Total new construction starts were down 8 percent for March 2008. Non-residential building declined by 23 percent in March, after increasing by 36 percent in January and February. Residential building dropped by 1 percent in March.

w Sales of commercial real estate have been slowing and prices are seeing downward pressure in most districts, ac-cording to the April 16, 2008 Beige Book. Rental conditions are weakening in the New York, Philadelphia, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and San Fran-cisco districts, while conditions are steady in the Boston, Kansas City, and Dallas districts.

w CCIM designees and candidates rated commercial real es-tate as the top investment alternative compared to stocks, bonds, and cash. With the volatility in the stock market, stocks earned the lowest rating overall. On a scale of 1 to 10, with 10 being high, survey respondents gave commercial real estate a rat-ing of 6.7, cash a rating of 5.7, bonds a rating of 4.5, and stocks a rating of 4.3.

w Survey respondents rated the return versus risk for commercial real estate during first quarter 2008 at 6.2 on a scale of 1 to 10, with 10 being high, nearly a full point higher than the rating for fourth quarter 2007, indicating that respondents expect a slightly higher return on commercial real estate versus the amount of risk taken.

w The apartment sector received a return versus risk rating of 6.8 on a scale of 1 to 10, with 10 being high, for first quarter 2008. This was the highest rating received by any of the property types covered in this report. The industrial mar-ket received the second highest rating at 5.9.

w The office sector was the only property type to receive a return versus risk rating below 5.0 on a

scale of 1 to 10, with 10 being high, for first quarter 2008, indicating that investors believe the office sector is offering a lower return relative to risk.

w Commercial real estate received a slightly higher value versus price rating in first quarter 2008 than it received during fourth quarter 2007. However, at 4.8 on a scale of 1 to 10, with 10 being high, investors still believe the value of commercial properties is generally less than the price paid for them.

w At 5.3 on a scale of 1 to 10, with 10 being high, the hotel sector received the highest value versus price rating dur-ing first quarter 2008. The apartment and industrial sectors weren’t far behind, with ratings of 5.1 each. These ratings indicate that respondents feel the value of the properties is slightly higher than the price.

w In first quarter 2008, both the office and retail sectors earned a value versus price rating of less than 5.0 on a scale of 1 to 10, with 10 being high, indicating that survey respondents feel the value of the property is less than the price paid. Except for the apartment sector, all property types received a higher value versus price rating than they received during fourth quarter 2007.

Historical Return/Risk and Value/Price Ratings1Q 2008 4Q 2007 3Q 2007 2Q 2007 1Q 2007

Return vs. RiskOffice 4.9 4.6 5.4 5.6 6.3

Indusrial 5.9 5.4 6.0 6.0 6.3

Retail 5.5 4.7 5.7 5.9 6.3

Apartment 6.8 7.0 6.3 6.2 6.7

Hotel 5.6 5.5 6.0 5.9 6.7

Overall 6.2 5.3 5.6 5.8 6.2

Value vs. PriceOffice 4.6 4.3 4.8 5.0 5.0

Indusrial 5.1 4.6 5.4 5.5 5.7

Retail 4.8 4.4 4.6 4.8 5.0

Apartment 5.1 6.0 5.3 5.3 5.1

Hotel 5.3 5.1 5.2 5.3 5.2

Overall 4.8 4.5 5.0 4.8 5.3

*Ratings are based on a scale of 1 to 10, where 1 is poor and 10 is excellent.Source: RERC.

��Investment TrendsQuarterly


TheEffectonRealEstate

w With housing starts at historic lows, home foreclosures at all-time highs, increasing residential vacancy rates, and tighter restrictions on credit for those purchasing a home, the majority of first quarter 2008 survey respondents said that the apartment sector offers the greatest opportunity for investment during 2008. Survey respondents also not-ed that the industrial sector offers good investment oppor-tunity due to the stable income, growing demand, and low vacancy rates associated with this property type.

w Many first quarter 2008 survey respondents stated that the retail sector offers the lowest investment potential as com-pared to the other property types. This is due in large part to the impact of the slowing economy on the retail property type. In addition to higher unemployment, increased en-ergy costs, and inflation, the retail sector overall is over-priced and overbuilt.

In Summary

w In first quarter 2008, CCIM designees and candidates not-ed that the commercial real estate market is mostly sta-ble but it is beginning to soften. Many respondents were seeing trends such as slightly rising vacancies among all property types, flat rental rates, and a gradual increase in capitalization rates. For now, most respondents are taking a “wait and see” approach to commercial investment.

w For the most part, fundamentals for commercial real estate remained relatively steady in first quarter 2008, although vacancy rates are inching upward for office, industrial, retail, and apartment properties. Investor confidence has been declining as pressures from the economy and the financial markets increase. However, the majority of sur-vey respondents state that there is still ample credit and interest for quality assets, but low confidence is keeping the volume of sales down.

NAR U.S. Economic Outlook: April 20082007 Quarterly 2008 Quarterly 2009 Quarterly Annual

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2006 2007 2008 2009

Annual Growth Rate

Real GDP 3.8 4.9 0.6 -0.1 0.3 2.2 2.0 2.8 2.6 2.8 2.9 2.2 1.4 2.4

Nonfarm Payroll Employment 0.9 0.8 0.8 -1.2 0.3 0.6 0.9 1.1 1.3 1.4 1.8 1.1 0.2 1.1

Consumer Prices 4.6 2.8 5.0 4.2 2.8 1.0 1.4 2.7 2.5 2.7 3.2 2.9 3.4 2.2

Real Disposable Income -0.8 4.0 0.1 0.6 0.6 2.1 2.3 4.1 3.2 3.1 3.1 3.1 1.2 3.0

Consumer Confidence 107 106 91 76 63 68 72 79 85 86 106 103 70 85

Unemployment 4.5 4.7 4.8 4.9 5.3 5.6 5.7 5.7 5.6 5.6 4.6 4.6 5.4 5.6

Interest Rates, Percent

Fed Funds Rate 5.3 5.1 4.5 3.0 2.3 2.3 2.3 2.5 3.0 3.3 5.0 5.0 2.4 3.0

3-Month T-Bill Rate 4.7 4.3 3.4 2.5 2.1 2.1 2.2 2.6 3.0 3.2 4.7 4.4 2.2 3.0

Prime Rate 8.3 8.2 7.5 6.0 5.3 5.3 5.3 5.5 6.0 6.3 8.0 8.1 5.4 6.0

Corporate Aaa Bond Yield 5.6 5.8 5.5 5.0 4.9 4.9 5.0 5.1 5.3 5.4 5.6 5.6 5.0 5.3

10-Year Government Bond 4.8 4.7 4.3 3.6 3.6 3.7 3.8 3.9 4.1 4.2 4.8 4.6 3.7 4.1

30-Year Government Bond 5.0 4.9 4.6 4.0 4.0 4.1 4.2 4.3 4.4 4.6 4.9 4.8 4.1 4.5

Source: Forecast produced using Macroeconomic Advisers quarterly model of the U.S. economy. Quarterly figures are seasonally-adjusted annual rates. Assumptions and simulations by NAR's Dr. Lawrence Yun.



NAR Commercial Forecast (March 2008)

2007 2008

2006 2007 2008II III IV I II III IV

OFFICE

Vacancy Rate (%) 12.4 12.5 12.5 12.7 13.0 13.2 13.3 12.6 12.5 13.3

Net Absorption (’000 sq. ft.) 21,202 14,766 15,414 9,179 8,690 9,468 11,193 81,183 57,265 38,530

Office Employment (thousands) 16,795 16,826 16,875 16,915 16,950 16,997 17,066 16,648 16,875 17,066

Completions (’000 sq. ft.) 14,732 16,476 17,380 17,380 23,442 17,338 16,252 51,606 61,102 74,412

Inventory (millions sq. ft.) 3,362 3,378 3,398 3,416 3,439 3,456 3,472 3,326 3,398 3,472

Rent Growth (%) 1.2 3.5 1.3 1.0 0.9 0.8 0.8 5.2 8.0 3.5

INDUSTRIAL

Vacancy Rate (%) 9.3 9.2 9.4 9.5 9.6 9.6 9.6 9.4 9.4 9.6

Net Absorption (’000 sq. ft.) 35,402 29,390 19,733 32,899 33,299 33,035 35,429 205,365 120,231 134,662

Industrial Employment (thousands) 10,236 10,238 10,238 10,244 10,252 10,255 10,261 10,235 10,238 10,261



Rent Growth (%) 1.2 0.8 0.7 0.6 0.8 0.9 0.9 1.4 3.6 3.3

RETAIL

Vacancy Rate (%) 9.0 8.8 9.2 9.1 9.1 8.9 8.8 8.0 9.2 8.8

Net Absorption (’000 sq. ft.) -169 9,199 -621 6,756 6,368 6,000 5,636 10,526 11,081 24,760



Rent Growth (%) 0.8 0.8 0.8 0.4 0.3 0.3 0.3 3.9 3.2 1.4

MULTIFAMILY

Vacancy Rate (%) 5.7 5.7 5.1 5.4 5.3 5.1 4.8 5.9 5.4 5.1

Net Absorption (Units) 70,705 41,348 111,734 10,612 71,751 82,375 91,707 229,452 234,399 245,786

Completions (Units) 57,798 58,384 57,436 57,314 56,275 54,573 53,999 224,170 230,932 216,880

Inventory (Units in Millions) 13.8 13.9 14.0 14.0 14.1 14.1 14.2 13.8 14.0 14.2

Rent Growth (%) 0.7 0.7 0.8 0.9 1.0 1.3 1.4 4.1 3.1 5.3

Sources: NAR, CBRE/Torto Wheaton Research.



Snapshot of Real Estate Space and Market Performance – 1 Q 2008

Vacancy Rates

Performance Indicator Recent Data Impact on Commercial Real Estate

Rental Rates(RERC’s surveyed rent growth expectations)

Office - 3.0% to 3.2%Industrial - 2.8% to 2.9%Retail - 2.6%Apartment - 3.1%Hotel - 3.0%

Rental rate expectations for first quarter 2008 for all the property types increased by 20 to 30 basis points, as compared to the previous quar-ter’s rates.

Real Estate Returns

RERC’s Required Returns:Office - 7.9% to 8.4%Industrial - 8.1% to 8.5%Retail - 7.8% to 8.5%Apartment - 8.2%Hotel - 9.2%

NCREIF Realized Returns:Office - 14.6% - 21.9%Industrial - 12.4% - 15.2%Retail - 7.4% - 14.5%Apartment - 9.6%Hotel -15.6%

RERC’s required return expectations for office, retail, and apartment sec-tors increased during first quarter 2008. Expected returns for the hotel sector decreased slightly, while those for the industrial sector remained about the same as the previous quarter. NCREIF’s realized returns de-creased across the board as compared to the previous quarter.

Capitalization Rates

RERC’s Realized Cap Rates:Office - 5.6%Industrial - 6.7%Retail - 6.4%Apartment - 5.8%Hotel - 7.9%

NCREIF Implied Cap Rates:Office - 4.9% - 5.6%Industrial - 5.9% - 6.2%Retail - 5.7% - 5.9%Apartment - 4.6%Hotel - 7.1%

RERC’s realized capitalization rates for first quarter 2008 remained steady for all property types, except for hotels, which increased 20 basis points. NCREIF’s implied capitalization rates decreased slightly for all property sectors.

Source: Torto Wheaton Research.



Source: Reis.

Gross domestic product (GDP) increased at an annual rate of 0.6 percent during first quar-ter 2008. Although GDP was not negative, as is required in the traditional definition of a recession, the National Bureau of Economic Research (NBER) determines a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

Consumer Price Index (CPI) inflation increased by 0.3 percent in March 2008, while con-sumer prices for the first quarter increased at a seasonally-adjusted annual rate of 3.1 percent, as compared to the 4.1 percent for all of 2007, according to the Bureau of Labor Statistics. The largest increases in consumer prices came from food and energy, which are contributing greatly to lower consumer confidence overall.

Source: Bureau of Labor Statistics.

The unemployment rate has been climbing during the last year, settling at a seasonally-adjusted rate of 5.1 percent in March 2008. Nonfarm payroll contracted during first quarter 2008, falling by 80,000 during March, primarily in construction, manufacturing, and em-ployment services. Continued increases in unemployment indicate that commercial real estate vacancies may be on the rise.

Source: Bureau of Labor Statistics.

Source: Bureau of Economic Analysis.

The Federal Open Market Committee (FOMC) lowered the federal funds rate and the discount rate by 25 basis points, on April 30, 2008. Economic activity remains weak ac-cording to the FOMC, and inflation is still a concern. The last time the federal funds rate was this low was in November 2004.

Consumer spending appears to be slowing. Retail sales increased 2.0 percent year-over-year in March 2008 as compared to an increase of 2.9 percent in February. The March increase was the lowest year-to-year increase since October 2002. Retail sales peaked in November 2007, and have been declining since then, due mostly to decreased sales by furniture and home furnishing stores, building material and garden equipment/supplies dealers, and motor vehicle and parts dealers.

Source: Census Bureau.

The manufacturing utilization rate dropped for the fourth consecutive month. Although the rate has been on an upward trend since the 2001 recession, it began declining in July 2007, ending at 78.6 percent in March 2008. Industrial production slowed during first quarter 2008, with the decline attributable to the decline in motor vehicles and parts manufacturing.

Source: Federal Reserve.

Source: Federal Reserve.





Approximately 4.93 million existing homes were sold in March 2008, a decline of 19.8 percent on an annualized basis from year-ago sales. The peak for existing home sales was 7.35 million units in June 2005. Now that the financial market has tightened the stan-dards on home loans, it is harder to qualify for mortgages. In addition, buyers are wary of purchasing homes that may continue to decrease in value.

Source: NAR.

New residential construction was down sharply by 11.9 percent, or 947,000 units, in March 2008. The downward trend in construction started after peaking in January 2006. While all of the regions also posted declines for March, the largest decline in new residential construction ocurred in the Midwest region at 21.4 percent.

Source: Census Bureau.

The median sales price of existing single-family homes increased slightly in March 2008 to $198,200. Despite the increase, single-family home prices are down approximately 8.3 percent from a year earlier. The West region was the only area in the U.S. to see a price decrease in March, due largely to the increased number of foreclosures in that area, which usually sell at a discounted price and tend to bring down the value of other “for sale” homes in the area.

Source: NAR.

Consumer confidence has dropped significantly since July 2007. The Consumer Confi-dence Index stood at 64.5 in March 2008, lower than it has been at any time during the last 5 years. The declining housing market, increasing energy costs, financial market instabil-ity, and job losses are taking their toll, with declining consumer confidence and slower spending expected to eventually affect the the hotel and retail property sectors.

The Commercial Leading Indicator (CLI) fell by 0.4 percent to 120.1 during fourth quarter 2007. This is the second consecutive decrease after the index reached its historical high of 120.7, suggesting a slowdown for commercial real estate in the coming months. The index factors in 13 variables affecting commercial real estate, such as unemployment, retail sales, and the NAREIT Price Index.

Source: NAR.

The Standard & Poor (S&P) 500 peaked in October 2007, and declined until starting to increase again in March 2008.

Source: S&P.

Source: The Conference Board.



NAR Commercial Forecast (March 2008)

Time Period

Commercial Leading Indicator

% Change from 1 Quarter Ago

% Change from 1 Year Ago

2007

4Q 120.1 -0.4 0.1

3Q 120.6 -0.1 0.7

2Q 120.7 0.5 1.1

1Q 120.3 0.2 0.8

2006

4Q 120.1 0.1 1.7

3Q 120.0 0.3 2.8

2Q 119.5 0.2 2.6

1Q 119.2 1.0 3.1

2005

4Q 118.1 1.1 1.9

3Q 116.7 0.2 2.2

2Q 116.5 0.7 2.6

1Q 115.7 -0.1 2.5

2004

4Q 115.8 1.4 3.5

3Q 114.2 0.6 3.0

2Q 113.6 0.7 3.3

1Q 112.8 0.8 2.3

2003

4Q 111.9 0.9 1.2

3Q 110.9 0.9 -0.6

2Q 109.9 -0.3 -1.7

1Q 110.3 -0.3 -1.0

2002

4Q 110.6 -0.8 -0.6

3Q 111.5 -0.3 -1.1

Source: NAR.

The latest reading of the Commercial Leading Indicator (CLI) for Brokerage Activity suggests reduced business opportunities for commercial real estate practitioners in the months ahead, reports Lawrence Yun, chief economist for the National As-sociation of REALTORS® (NAR).

The CLI slipped 0.4 percent to an index of 120.1 in the fourth quarter from a reading of 120.6 in the third quarter, but remains 0.1 above the fourth quarter of 2006 when it stood at 119.9.

This is the second straight quarterly dip after reaching a record of 120.7 in the second quarter of 2007. The index showed nine consecutive quarterly gains prior to these declines; NAR’s track of the index dates back to 1990.

“The decline in the index implies that commercial activity, as measured by net ab-sorption and the completion of new commercial buildings, is likely to contract mod-erately over the next six to nine months, which is consistent with an expectation for slower overall economic expansion in upcoming quarters,” Yun said.

Rising unemployment insurance claims and falling durable goods shipments were the key factors in lowering the CLI, but a weaker rate of return on investment as measured by the National Association of Real Estate Investment Trust (NAREIT) Price Index was also a factor. The only positive contributors to the index were growth in wholesale and retail trade, and rising personal income. “The latest data imply that investment in private nonresidential structures, which rose a solid 13.2 percent in 2007 according to a preliminary GDP estimate, could show only minimal growth or even decline in 2008,” Yun said. “REALTOR® mem-bers who specialize in office and industrial properties indicated in a separate survey that they anticipate a measurably lower level of business activity in the upcoming quarters.”

The commercial leading indicator is a tool to assess market behavior in the major commercial real estate sectors. The index incorporates 13 variables that reflect future commercial real estate activity, weighted appropriately to produce a single indicator of future market performance, and is designed to provide early signals of turning points between expansions and slowdowns in commercial real estate.

The 13 series in the index are industrial production, the NAREIT Price Index, the National Council of Real Estate Investment Fiduciaries (NCREIF) total return, personal income minus transfer payments, jobs in financial activities, jobs in professional business service, jobs in temporary help, jobs in retail trade, jobs in wholesale trade, initial claims for unemployment insurance, manufacturers’ durable goods shipment, wholesale merchant sales, and retail sales and food service.

Nearly 140,000 NAR members offer commercial services, and 73,000 of those are currently members of the REALTORS® Commercial Alliance, NAR’s commercial division.

This information is reproduced in part from the March 2008 “Commercial Real Estate Out-look,” a newsletter published by the REALTORS® Commercial Alliance and with their per-mission.

100

105

110

115

120

125Commercial Leading Indicators

200720062005200420032002

Commercial RealEstate Index Eases in Fourth Quarter

Source: NAR.



NationalMarketAnalysis

Investment Conditions Ratings* - 1Q 20081Q 2008 4Q 2007 3Q 2007 2Q 2007 1Q 2007

Office 5.1 5.6 6.1 6.0 6.5

Industrial 5.9 5.1 6.1 6.4 6.8

Retail 5.4 5.2 6.3 6.5 6.9

Apartment 7.0 7.1 6.9 6.8 7.1

Hotel 5.9 6.4 6.6 6.7 7.0*Ratings are averages based on responses to surveys from CCIM designees and candidates for first quarter 2008.

National Transaction Breakdown (4/1/07 - 3/31/08)Office Industrial Retail Apartment Hotel

< $2 MillionVolume (Mil) $2,757 $4,386 $4,809 $2,483 $169

Size Weighted Avg. ($ per sf/unit) $98 $56 $93 $56,231 $25,725

Price Weighted Avg. ($ per sf/unit) $135 $88 $135 $77,450 $32,441

Median ($ per sf/unit) $100 $63 $92 $60,667 $27,273

$2 - $5 MillionVolume (Mil) $5,384 $7,596 $8,452 $5,909 $1,489




> $5 MillionVolume (Mil) $157,273 $39,444 $46,654 $69,844 $57,580




All TransactionsVolume (Mil) $165,414 $51,426 $59,915 $78,236 $59,238




Capitalization Rates (All Transactions)Range (%) 3.0 - 12.6 3.7 - 11.7 3.0 - 11.7 2.6 - 10.9 2.9 - 13.2

Weighted Avg. (%) 5.6 6.7 6.4 5.8 7.9

Median (%) 6.7 7.0 6.6 6.0 9.0 Source: RERC.

OfficePropertySector



w CCIM designees and candidates who responded to RERC’s survey rated investment conditions for the office market at 5.1 on a scale of 1 to 10, with 10 being high, for first quarter 2008. This is a decline from the previous quar-ter’s rating, and is the lowest rating this quarter among the five property types covered in the survey.

w According to RERC’s recent sales transaction analysis, average prices for office properties decreased slightly dur-ing first quarter 2008, while average and median capital-ization rates remained stable.

w For the second consecutive quarter, survey respondents rated the office sector the lowest among the major prop-erty types for both “return versus risk” as well as “value versus price,” indicating that the return on office property investment generally is less than the amount of risk taken, and that the value of office space is less than the price of the property.

w According to Torto Wheaton Research, the overall vacan-cy rate for the office sector increased to 12.9 percent dur-ing first quarter 2008. In addition, overall net absorption of office space in first quarter 2008 was the lowest posted since 2003.

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%NationalWestMidwestSouthEast

1Q084Q073Q072Q071Q07

RERC Weighted Average Capitalization Rate

$100

$200

$300

$400

$500

$600

$700NationalWest

Midwest

SouthEast

1Q084Q073Q072Q071Q07

RERC Price-Weighted Average PPSF

$100

$150

$200

$250

$300

$350NationalWest

MidwestSouthEast

1Q084Q073Q072Q071Q07

RERC Size-Weighted Average PPSF

National

CCIM members who responded to RERC’s survey noted that office vacancies are increasing in most areas and that “the office market, particularly the suburban office market, is still very soft.” However, opportunities are available in the future, with one respondent advising investors to “hold cash and wait for risk/reward and value/price corrections in all property types; office will concede first.” Medical office space is in demand, regardless of region, and in some of the southern metros (Dallas, San Antonio, New Orleans/Baton Rouge, Memphis, etc.), office space is in high demand with rent growth continuing.



IndustrialPropertySector

w CCIM designees and candidates who responded to RERC’s survey rated investment conditions for the indus-trial sector at 5.9 on a scale of 1 to 10, with 10 being high. This was significantly higher than last quarter’s rating, and indicates increased confidence in the investment potential of industrial properties overall.

w RERC’s first quarter 2008 sales transaction analysis in-dicates that like the other major property types, the sales volume of industrial property declined from the previous quarter. However, average sale prices per square foot of industrial space increased slightly, and average realized capitalization rates remained stable.

w Respondents to RERC’s survey rated “return versus risk” for industrial properties at 5.9, indicating that the return on industrial property is slightly more than the amount of risk involved in investment. Respondents rated “value versus price” of industrial property at 5.1, indicating that the value of the investment is about the same as the price.

w According to Torto Wheaton Research, the average avail-ability rate for the industrial sector increased to 9.8 percent during first quarter 2008 from 9.4 percent in fourth quar-ter 2007. Additionally, net absorption of industrial space was -11 million square feet, the least amount of space ab-sorbed in about 5 years.

6.0%

6.5%

7.0%

7.5%


1Q084Q073Q072Q071Q07


$40

$60

$80

$100

$120

$140

$160

$180NationalWest

Midwest

SouthEast

1Q084Q073Q072Q071Q07


$30

$60

$90

$120NationalWest

MidwestSouthEast

1Q084Q073Q072Q071Q07


National

The industrial warehouse and flex sectors are favored by many CCIM respondents, particularly in the port cities and in metros with access to highways and rail. “There is a premium being placed on industrial properties with great locations,” reported one survey respondent. Another respondent noted that industrial remains a preferred investment, as it is “traditionally overvalued, but consistently underserved.”



RetailPropertySector

6.00%

6.25%

6.50%

6.75%

7.00%

7.25%


1Q084Q073Q072Q071Q07


$100

$150

$200

$250

$300

$350

$400 NationalWestMidwest

SouthEast

1Q084Q073Q072Q071Q07


w CCIM Institute designees and candidates who responded to RERC’s survey rated investment conditions for the retail sector at 5.4 on a scale of 1 to 10, with 10 being high, for first quarter 2008, slightly higher than the previous quar-ter’s rating.

w RERC’s weighted average capitalization rate and the median capitalization rate for retail properties during first quarter 2008 remained stable.

w According to RERC’s analysis of recent retail sales, na-tional transaction volume decreased notably in first quar-ter 2008 from fourth quarter 2007 volume.

w The availability rate for the retail sector increased to 9.2 percent, according to Torto Wheaton Research.

w Although the retail sector’s “return versus risk” and “price versus value” ratings increased for first quarter 2008 over the prior quarter’s rating, the “value vs. price” rating in-creased to only 4.8 on a scale of 1 to 10, with 10 being high, indicating that the value of retail properties is gener-ally still less than the price listed.

$100

$125

$150

$175

$200

$225NationalWest

MidwestSouth

East

1Q084Q073Q072Q071Q07


National

Although retail space remains in demand in a few metros mentioned in RERC’s survey, low consumer confidence and spending, a fear of unemployment, and higher gasoline prices are taking a toll on this property type in most regions. Interestingly, although discount store retail sales seem to be increasing and higher-end shopping is starting to slow in most areas, one Dallas/Ft. Worth CCIM respondent reminded investors to “expect the high-end shops to experience a good year because the people making good money will shop and flaunt.”



ApartmentPropertySector

w CCIM designees and candidates rated investment condi-tions for the apartment sector at 7.0 on a scale of 1 to 10, with 10 being high, for first quarter 2008. This rating was similar to last quarter’s rating, and remained the highest score when compared to the other major property sectors.

w The first quarter 2008 weighted average capitalization rate for the apartment sector showed no change over fourth quarter 2008. However, during the past year, the average capitalization rate for the apartment sector increased 60 basis points.

w Total apartment transaction volume decreased notably dur-ing the past 2 quarters, although both the size- and price-weighted average prices per apartment unit declined only slightly during first quarter 2008.

w Average vacancy in the apartment sector increased to 5.9 percent in first quarter 2008, according to Reis, Inc. This increase in vacancy can be attributed in part to seasonality in the apartment cycles.

w Respondents to the first quarter 2008 survey rated the “return versus risk” for apartments higher than any of the major property sectors tracked by RERC. The apartment rating for “value versus price” decreased to 5.1, a signifi-cant decline from last quarter’s rating, and indicating a low-er level of investor confidence in the value of apartments when weighed against their price.

3.5%

4.5%

5.5%

6.5%


1Q084Q073Q072Q071Q07


$50,000

$100,000

$150,000

$200,000

$250,000NationalWest

MidwestSouthEast

1Q084Q073Q072Q071Q07

RERC Price-Weighted Average PPU

$50,000

$75,000

$100,000

$125,000

$150,000


Midwest

South

East

1Q084Q073Q072Q071Q07

RERC Size-Weighted Average PPU

National

CCIM members who responded to RERC’s survey generally expect apartments to be a good investment opportunity due to tighter restrictions on credit for homebuyers and because “in good economic times or bad, people still have to have somewhere to live.” There have been some reports of overpricing of this property type among speculators.



HotelPropertySector

w Over the past year, the investment conditions ratings for the hotel sector has been consistently declining. The first quarter 2008 rating was 5.9 on a scale of 1 to 10, with 10 being high, and although this rating was slightly lower than the previous quarter, it tied with the industrial sector for the second highest rating given to any of the property sectors tracked by RERC.

w With consumer confidence down and gasoline prices up, the first quarter 2008 average hotel occupancy rate de-clined to 64.7 percent, 3.7 percent lower than the year-ago average rate, according to Smith Travel Research. Reve-nue per available room (RevPAR) was $70.89, essentially unchanged from the same time one year ago.

w RERC’s first quarter 2008 average capitalization rate was 7.9 percent, 20 basis points higher than the previous quar-ter’s rate.

w Survey respondents rated first quarter 2008 “return versus risk” for hotel properties at 5.6 on a scale of 1 to 10, with 10 being high, indicating that the sector offers slightly more return when compared to the amount of risk involved in the investment. They also gave the sector a “value versus price” rating of 5.3, indicating that the sector represents slightly more value when compared to the price paid for hotel assets.

7.0%

7.5%

8.0%

8.5%

9.0%


1Q084Q073Q072Q071Q07


$50,000$150,000$250,000$350,000$450,000$550,000$650,000$750,000$850,000$950,000

NationalWestMidwest

SouthEast

1Q084Q073Q072Q071Q07

RERC Price-Weighted Average PPU

$50,000

$100,000

$150,000

$200,000

$250,000


Midwest

South

East

1Q084Q073Q072Q071Q07

RERC Size-Weighted Average PPU

National

Low consumer spending and high gasoline prices, along with reduced business travel due to budget cutbacks, are a double-blow to this property type. One CCIM respondent to RERC’s survey noted, “There are a lot of hospitality-related projects on the drawing boards right now. Investors should do their homework, know where everyone else is going, and do their math a few times determining absorption.”



Long known as one of the nation’s most progressive urban centers, met-ropolitan Portland--Oregon’s largest city and the fourth largest city on the West Coast--practiced sustainable development, incorporated strict land use guidelines, and promoted eco-logically sound building practices de-

cades before it became fashionable. Today, the market of 2.2 million re-mains at the vanguard of how to “go green.”

Portland developers and planners even export knowledge and exper-tise to other markets. Gerding-Edlen Development Company, for example, had tremendous success converting a defunct five-block property into the thriving Brewery Blocks mixed-use development. Portland experts are applying design and construction principles to new properties in Los Angeles and San Diego.

Clearly, city fathers and business leaders have taken tremendous steps forward to keep run-away growth in check and preserve the scenic beau-ty of the Willamette Valley and sur-rounding region, with its nearby snow-capped mountain peaks, forests and rivers. In the city limits, the outdoors

and quality of life are exemplified by the city’s 5,000-acre Forest Park, the largest natural urban forest reserve in the nation, and numerous other parks and gardens. The Columbia River Gorge and Mt. Hood, world-class out-door wonders, are a short drive away. And, Portland is the headquarters for such outdoor-oriented companies like Nike and Columbia sportswear.

But strong development laws and green initiatives also have drawbacks. Portland’s development controls and dedication to preserving the natu-ral environment have made it much more challenging and expensive for new properties to be constructed or renovated, and for businesses want-ing to grow. Also, controls have led to a shortage of housing, and they may be a factor in curbing job growth; job growth in 2007 was 1.2 percent, a drop from 2.4 percent the previous year, and the unemployment rate

By Edward M. Bury, APR

Sustainable DevelopmentShapes Portland’s Past and Future



at year-end 2007 was 4.9 percent, slightly above the national average.

Despite pressures to relax guide-lines, Portland remains steadfast on sustainability. Consider:

• In order to reduce urban sprawl, Portland operates on an 84-year-old, single-use zoning practice where land is zoned for a single use. This policy, which greatly re-duces development of mixed-use properties, is under scrutiny; pro-ponents of growth believe urban boundaries should be expanded to accommodate new development.

• All new commercial properties must be built to meet the Leadership in Energy and Environmental Design (LEED) silver rating from the U.S. Green Buildings Council. To meet these standards, buildings must reach specified criteria for sustain-ability, water and energy efficiency, materials and resources selection, indoor environment quality, and de-sign innovation.

• This year, the City Council will de-bate a “feebate” system, which will provide financial incentives for de-velopments that exceed or match high-level green building stan-dards.

Even with these challenging regula-tions, a wide range of large-scale development has taken place in Port-land, and there are many properties under development. One of the most visible and successful redevelopment projects is the Pearl District, a one-time undesirable concentration of light manufacturing and warehouse buildings converted during the late 1990s into Portland’s hippest district for galleries, boutiques, restaurants, and living. Green living is exemplified by the 937 Condominiums, a luxury 16-story, 114-unit property that will be LEED-gold certified once completed. Featuring a 4,000-square-foot rooftop

garden, condo prices will range from $2.1 million to $328,000.

“Portland has been very successful in developing buildings that are on the leading edge of sustainability,” said T.J. Newby, CCIM, vice president of

Integrated Corporate Property Ser-vices, LLC, of Portland. “One reason is that developers and institutions such as Portland State University en-gage directly with the community.” An innovative cooperative program with Portland State University has helped

Portland Transaction Breakdown (4/1/07 - 3/31/08)Office Industrial Retail Apartment Hotel

< $5 MillionVolume (Mil) $67 $89 $53 $170 $12

Size Weighted Avg. $140 $83 $160 $63,736 $52,257

Price Weighted Avg. $179 $102 $229 $71,101 $60,135

Median $148 $84 $152 $65,878 $56,959

> $5 MillionVolume (Mil) $1,102 $422 $314 $836 $242



Median $175 $97 $148 $94,753 $92,026

All TransactionsVolume (Mil) $1,169 $510 $367 $1,007 $253



Median $161 $87 $150 $74,974 $91,219

Capitalization Rates (All Transactions)Weighted Average – – 6.8 5.6 –

Median – – 6.4 6.0 –Source: RERC.



keep new construction and redevel-opment projects on track, she noted. And, with good reason: Portland State is the largest land owner down-town, with 4 million square feet of space spread out over 44 city blocks, and the University’s Center for Real Estate has a 30-year history of edu-cating future urban planners and de-velopers.

Newby pointed out another “benefit” of Portland’s urban growth boundary–it helped insulate the market from of-fice overbuilding during the dot-com bust of the late 1990s and the re-cent economic slowdown caused by the sub-prime fallout. Today, Newby said, downtown Portland has “a lot of cranes in the air” at office construction sites. According to a market report from Portland State University, the downtown market can absorb from 400,000 to 500,000 square feet of new office construction by 2009 with-

out causing a spike in vacancy rates. New Class A office rents would range from $33 to $35 per square foot. Given the housing shortage, investors have targeted Portland for apartment properties. Earlier this year, the 245-unit Wyatt apartments sold for $111.5 million, or $455,000 per apartment, and a tower at the Harrison complex sold for $45 million, or $245,000 per unit. Both properties were sold to California-based companies.

Still, concern over how much land can be developed to meet market needs remains a concern. Most major mar-kets plan for future development; the general standard is to have a 20-year supply of industrial land available to promote economic development. Economic theory suggests that for every base employment or traded sector job, another 2.8 jobs are cre-ated within that community.

“Portland effectively has less than a 5-year supply of industrial land avail-able, and most of that is in small par-cels,” Newby said. There is strong demand for industrial properties, and that is driving land prices and lease rates up. Warehouse and flex indus-trial availability in the metropolitan area is under 7.5 percent , with ware-house monthly lease rates at $45 per square foot and rising. “Portland’s ‘uber’ growth boundary won’t be ex-panding anytime soon,” Newby says. “Metro and regional planners are not expected to publish recommenda-tions for urban growth boundary ex-pansion until sometime after 2010.” In the meantime, industrial land pric-es start at $7.50 per square foot and warehouses are transacting around $100 per square foot.



B.K. Allen, CCIMB.K. Allen Real EstatePotomac Falls, Virginia

Todd Clarke, CCIMNew Mexico ApartmentsAlbuquerque, New Mexico

Wayne D’Amico, CCIMProperty PoliticsEssex, Connecticut

Paul Fetscher, CCIMGreat American BrokerageLong Beach, New York

Stephen FurnaryING Clarion PartnersNew York, New York

Breck HansonLaSalle Bank, N.A.Chicago, Illinois

Charles LowreyPrudential Investment Management ServicesParsippany, New Jersey

Dennis MartinRREEF/DB Real EstateNew York, New York

Jeff Lyon, CCIMGVA Kidder MathewsSeattle, Washington

Buzz McCoyBuzz McCoy Associates, Inc.Los Angeles, California

Tom Nordstrom, CCIMAEGON USA Realty Advisors, Inc.Cedar Rapids, Iowa

Art PasquerellaBerwind Property Group, Inc.Philadelphia, Pennsylvania

Duncan Patterson, CCIMPatterson-Woods AssociatesGreenville, Delaware

Gary M. Ralston, CCIM, SIOR, SRS, CPM, CREFlorida Retail Development, LLCWinter Park, Florida

Cynthia Shelton, CCIMColliers ArnoldOrlando, Florida

Frank Simpson, CCIMThe Simpson CompanyGainesville, Georgia

Richard SokolovSimon Property GroupIndianapolis, Indiana

John Stone, CCIMJohn M. Stone CompanyDallas, Texas

Dewey Struble, CCIMSperry Van NessReno, Nevada

Julien StudleyJulien Studley, Inc.New York, New York

Allan SweetAMLI Residential Properties TrustChicago, Illinois

Garry Weiss, CCIMFirst Industrial Realty TrustChicago, Illinois

Sam ZellEquity Group InvestmentsChicago, Illinois

RERC~CCIM Investment Trends Quarterly

RERC Editorial Staff

PublisherKenneth P. Riggs, Jr.CFA®, CRE, FRICS, MAI, CCIM

Editor-in-ChiefBarb Bush

Lead AnalystBrian Velky

Research AnalystsGreg PhilippCliff CarlsonMorgan Even

Design EditorMichelle Houlgrave

Data ManagementBen NeilDaniel Warner

Production CommitteeTerri CotterScott Hamerlinck

Research AssistantsAlicia BrownCharles GohrJeffrey HarmsDavid KellyHerinomena RakotoariveloSteven SchlangeAnthony Tholkes

CCIM Institute

PresidentTimothy S. Hatlestad, CCIM

President-ElectCharles McClure, CCIM, CRE

First Vice PresidentRichard E. Juge, CCIM, SIOR

Chief Executive OfficerJonathan Salk

Director of Public RelationsEdward M. Bury, APR

CCIM Member Services CommitteeSteve Moriera, CCIM, ChairmanBrent Case, CCIM, Vice Chairman

Immediate Past ChairmanCCIM Member Services CommitteeNick Miner, CCIM

LiasonCCIM Member Services CommitteeFrank Simpson, CCIM

Advisory Board Members

Copyright Notice for RERC~CCIM Investment Trends Quarterly

Copyright© 2008 by Real Estate Research Corporation (RERC) and the CCIM Institute. All rights reserved. No part of this publication may be reproduced, duplicated, or copied in any form, includ-ing electronic forwarding or copying, xerography, microfilm, or other methods, or incorporated into any information retrieval system, without the written permission of RERC and the CCIM Institute.



Acknowledgements

REALTORS® Commercial Alliance of the National Association of REALTORS®

NAR PresidentRichard F. “Dick” Gaylord CRS, CRB, GRI, CIPS

NAR Executive Vice President/CEODale A. Stinton

RCA Committee RepresentativePatricia A. NooneyCCIM, CPM, SIOR

NAR Vice President of Commercial Real EstateJan M. Hope

Real Estate Research CorporationFounded more than 75 years ago, Real Estate Research Corporation (RERC) was the nation’s first independent real estate firm that specialized in both real estate research and analysis. Recognized as a pioneer in the art of real es-tate management and for monitoring key sectors of the economy that influence the real estate industry, RERC has retained its place as one of the industry’s leading real estate investment trends analysts through the publication of such reports as Expectations & Market Realities in Real Estate and the RERC Real Estate Report. Today, RERC is known for its research publications and market studies, commercial property valuations, complex consulting assignments, portfolio management and technology services, independent fiduciary services, and corporate advisory services.

The CCIM InstituteThe CCIM Institute, headquartered in Chicago, confers the Certified Commer-cial Investment Member designation through an extensive curriculum of 200 classroom hours in addition to professional experience requirements. CCIMs are recognized experts in commercial real estate brokerage, leasing, asset management, valuation, and investment analysis, and form a business net-work encompassing more than 1,000 markets throughout North America, Eu-rope, Asia and the Caribbean. There currently are more than 8,600 CCIM designees, with an additional 8,200 professionals pursuing the designation. CCIM Institute is an affiliate of the National Association of REALTORS®. Visit www.ccim.com.

REALTORS® Commercial Alliance of the National Association of REALTORS®

The REALTORS® Commercial Alliance (RCA) is the commercial division of the National Association of REALTORS® (NAR) that connects commercial real es-tate professionals and exchanges valuable information that contributes to their success. RCA in partnership with NAR’s commercial affiliates -- CCIM Institute, the Counselors of Real Estate (CRE), the Institute of Real Estate Management (IREM), the REALTORS® Land Institute (RLI), and the Society of Industrial and Office REALTORS® (SIOR) -- is dedicated to collaboration with and building on the strengths of each affiliate entity to benefit the real estate industry. RCA works to serve the needs of members, and to shape and unify the commercial real estate industry through valuable products and services, technology initia-tives, public policy advocacy, education, and research.

The RERC/CCIM Investment Trends Quarterly is produced by Real Estate Research Corporation (RERC) in association with and for members of the CCIM Institute. The RERC/CCIM Invest-ment Trends Quarterly is sponsored by the REALTORS® Com-mercial Alliance of the National Association of REALTORS®.



RealEstateResearchCorporation

Founded in 1931, Real Estate Research Corporation is one of the longest-serv-ing and most recognized national firms devoted to real property research, valu-ation, real estate consulting, indepen-dent fiduciary services, and portfolio services.

“

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Offices located throughout the U.S., with headquarters in Chicago

LeadershipKenneth P. Riggs, Jr.CFA®, CRE, FRICS, MAI, CCIMPresident & CEO

Jules H. Marling, III, CRE, FRICS, MAIPartner & Senior Vice President

Del H. Kendall, CRE, MAIPartner & Senior Vice President

Donald A. Burns, CRE, FRICS, MAIPartner & Senior Vice President

Austin D. MacMullan, MAI, CCIMPartner & Senior Vice President

Gregory P. Kendall, CRE, MAIPartner & Senior Vice President

Standard PublicationsRERC Real Estate Report

RERC/CCIM Investment Trends Quarterly

Expectations & Market Realities in Real Estate

Real Estate Research Corporation980 North Michigan Avenue, Suite 1110Chicago, IL 60611-4522Phone: 319.352.1500Fax: 319.352.4050www.RERC.com

Explore our services... ■ Specialized Research■ Independent Fiduciary Services■ Fairness Opinions■ Litigation Support■ Consulting■ Portfolio Services■ Commercial Valuation■ Financial Risk Management■ Market Research & Analysis■ Appraisal Management Services

IndependentTo ensure objectivity and independence, RERC does not engage in any activity that may conflict with the best interests of our cli-ents. As an impartial observer of the markets, RERC is able to collect and synthesize data and commentary unavailable to less independent organizations.

UniqueRERC brings unique and diverse skills to solving complex real estate issues. RERC’s innovative approach to problem solving is fostered by the diverse education and professional backgrounds of our team members.

ExpertiseRERC’s expertise originates from a national presence and per-spective, coupled with local market knowledge gained through the completion of hundreds of engagements annually in every major market. Our clients have found that RERC is relationship-oriented, focusing first and foremost on our clients’ and custom-ers’ needs, and delivering the highest quality products and ser-vices. RERC is an SEC-registered advisor.


Copyright© �00� by Real Estate Research Corporation (RERC) and the CCIM Institute.

Trusted Advice. Proven Performance.

Gold

Bronze

Contributors

Thank you to all who contributed to this report.

Kevin Casebier Advanco Atlanta, GA

Michael Johnston Alain Pinel Realtors San Francisco, CA

Jonathan Epstein Berger-EpsteinAssociates, inc. Philadelphia, PA

Bill Chess Bill ChessReal Estate Bastrop, TX

Nancy Miller Bull Realty Atlanta, GA

Latchezar Boyadjiev California Realty San Diego, CA

Brian Bell Campana Resources Dallas, TX

Gary Hunter Capital Financial, LLC Seattle, WA

Tim Mehan CBCNRT Columbus, OH

Brandon Rodgers CBRE Tucson, AZ

Barry Marotz CenterPointe Real Estate Group Austin, TX

Chris Schreiber Century 21 / Onpoint Sandpoint, ID

James W. Wright Century 21 All Islands Honolulu, HI

Thomas D. Burke Coldwell Banker Commercial Westlake, OH

Brady Collier Coldwell Banker Commercial Dallas, TX

Mike Habib Coldwell Banker Commercial San Diego, CA

Tom Tolrud Coldwell Banker Commercial NRT Tampa, FL

Jecoah E. Byrnes Coldwell Banker Commercial NRT Denver, CO

Daniel G. MincherColdwell Banker Commercial, The Duncan Company

Sacramento, CA

John Seckerson Colliers Portland, OR

Peter Kravaritis Colliers Bennett & Kahnweiler Chicago, IL

Dan Colton Colton Commercial Phoenix, AZ

Kenneth Delvillar Cushman &Wakefield Orlando, FL

Daniel Huneke Dancor Commercial Properties Louisville, KY

Lon Lundberg, CCIM Discover Real Estate Boise, ID

Skip Duemeland DuemelandsCommerical Omaha, NE

Nicholas Miner, CCIM Eagle Commercial Realty Services Phoenix, AZ

Natalie Feldman Eisner, Feldman & Grant, Inc. Tampa, FL

Bill Eshenbaugh Eshenbaugh Land Company Tampa, FL

Matthew Curtis First AmericanCommercial San Antonio, TX

Ernest L Brown, IV, CCIM

Grubb & EllisCompany San Antonio, TX

Pete Riehm Grubb & Ellis/Peebles & Cameron Mobile, AL

Bill Overman GVA Advantis Norfolk, VA

James T Saint, CCIM Halo Realty &Investments Corp. Las Vegas, NV

Stuart Hardy, Ph.D. Hardy Commercial Real Estate Services Irvine, CA

Glenn Thomas Hart County Realty Nashville, TN

Robert Stone Henry S. MillerCommercial Dallas, TX

Benjamin Pitts Herman Walldorf & Company, Inc. Chattanooga, GA

Bruce Holmes HotelBrokerOne Oklahoma City, OK

John SchutziusIndustrial Commercial Realty andInvestment Corp

Chicago, IL

William Griffiths Inter/DesignInvestments inc. Milwaukee, WI

Michael G. Loveland Loveland Properties Wichita, KS



Bronze

Contributors

Paul Schapira JADDA CapitalManagement, LLC Bloomfield, MI

Jim Daniell JD Properties San Antonio, TX

JM Padron JM Partners Realty Miami, FL

felix tang Jobin Metro Realty, llc Washington, DC

Kenneth Krawczyk K.S.K. Services Inc. Milwaukee, WI

Wes Waltenspiel Keller Realty Reno, NV

Dionne Lang Lang World Realty, INC. Chicago, IL

Jay Verro, CCIM Larkin Commercial Properties, Inc. Albany, NY

Blake Fletcher Legacy Property Development Gainesville, FL

Robert L. Smith, Jr. Lockard Companies Cedar Falls, IA

Charles Wiercinski McLennan Comercial Properties Chicago, IL

Joe Milkes Milkes RealtyValuation Dallas, TX

David Miller Phoenix, AZ

Danny Zelonker Mizrach RealtyAssociates Miami, FL

Todd Clarke CCIM NM ApartmentAdvisors Inc Albuquerque, NM

Steven C. Longley Nortam Capital Dallas, TX

JP Newman PCF Austin, TX

Roz Peterson Peterson Minneapolis, MN

Michael Cantwell Platinum Property Group, LLC Miami, FL

N. L. Martin ProVista Professional Services Los Angeles, CA

Robert Strickland Prudential CRES Commercial RE Tampa, FL

Emile Tujague Prudential Gardner Realtors New Orleans, LA

Tom Watson RE/MAX of Spokane Spokane, WA

Tomasz Dubiski Real Estate Agency Poland

Thomas E. Hankins, CCIM SIOR

Realty CapitalHankins Group Orlando, FL

Mark Fontaine Realty Diversified Services, INC. Washington, DC

Ed Mendence, SIOR REMAX Commercial Silicon Valley San Francisco, CA

Ferrell Blair ReMax Results LaGrange LaGrange, GA

Jason Tuomey Rutledge Real Estate Dallas, TX

Bill Jeansonne Sealy & Falgoust Real Estate New Orleans, LA

Helen Selig Selig Comm. R.E. Memphis, TN

Gerald Katz Shorewest Realtors Milwaukee, WI

Pete Bine Sperry Van Ness Myrtle Beach, SC

Heather Konopka Sperry Van Ness Dallas, TX

Dewey Struble, CCIM Sperry Van Ness Reno, NV

Sabina Holtzman Stephen Frank As-sociates, Inc. St. Louis, MO

Steve Stephens Stephens Commer-cial Real Estate Chicago, IL

Emilio T & E Realty Denver, CO

David da Cunha The ALCOR Group New Orleans, LA

K. F. Crimmins The Blau & Bert Company

Northern New Jersey, NJ

Lee WheelerThe LWIII Group at Foxworth Real Estate Company

Beaumont, TX

Jair Morselli The Manna Group McLean, VA

Allen Nivens The Norton Agency Atlanta, GA

Greg Ruthven The Ruthvens Lakeland, FL

Omar Araim Uptown Realty, Inc Atlanta, GA

Dan Weil Weil Commercial Los Angeles, CA

Ricardo Rubiano West Harlingen Partners LP Harlingen, TX



Scope&MethodologyThe analysis provided in the RERC/CCIM Investment Trends Quarterly is conducted by Real Estate Research Corporation (RERC). The information is gathered in raw form from surveys sent to CCIM designees and candidates, and from sales transactions collected from various sources, including CCIM members, various key commercial information exchange organizations (CIEs), the media, assessors’ offices, RERC contacts in the marketplace, and other reliable public and private resources. All sales transactions are aggregated, analyzed, and reported on by RERC. Additional data and forecasts are provided courtesy of the REALTORS® Commercial Alliance and Torto Wheaton Research.

Published quarterly, the RERC/CCIM Investment Trends Quarterly report provides timely insight into transaction volume, pricing, and capitalization rates for the core income-producing properties.

RERC DefinitionsCapitalization Rate: The capitalization rate is defined as the first year “stabilized” net operating income (NOI) (NOI is before capital expenditures – tenant improvements, leasing commissions, reserves – and debt service) divided by the present value (or purchase price). Capitalization rates included are transac-tion-based medians and price-weighted averages.

RERC Capitalization Rate and Ranges: Capitalization rates and ranges listed throughout this report are based on RERC’s proprietary realized capitalization rate model, which includes available transaction-based capitalization rates, survey responses, NCREIF Index Returns, and other market factors, but is heavily weighted toward transaction-based capitalization rates for each property type within each market.

Price-Weighted Average: The price-weighted average is developed through weighting each asset based on the gross sales price. Therefore, larger dollar properties are given more weight than the smaller dollar properties, with the weighted average reflecting more weight towards institutional real estate.

Size-Weighted Average: The size-weighted average is developed through weighting each asset based on its gross square footage – simply an aggregation of all the gross sales prices divided by the aggregation of the gross square footage.

National/Regional Market Analysis: RERC ranks the investment potential of the metros and property types it covers based on various space market and financial market criteria, including pricing, capitalization rates, vacancy rates, and other factors.

Investment Conditions Rating: A rating of 1 through 10 (with 10 being high) reflecting survey respondents’ collective views of the investment environment for a particular property type in comparison with other property types. The rating may take into account supply and demand, economic conditions, pricing, rental rates, or other factors.

NCREIF DefinitionsNCREIF: The National Council of Real Estate Investment Fiduciaries (NCREIF) is an independent organization dedicated to the compilation, validation, and distribution of performance data for the institutional real estate investment community.

Total Return: The total return includes appreciation (or depreciation), realized capital gain (or loss), and income. It is computed by adding the income and capital appreciation return on a quarterly basis.

Implied Cap Rate (Income Return): The implied capitalization rate measures the portion of return attributable to each property’s NOI. It is computed by divid-ing the total NOI by the total quarterly investment.

Capital Appreciation Return: The capital appreciation return measures the change in market value adjusted for any capital improvements/expenditures and partial sales divided by the average quarterly investment.

Annual and Annualized Returns: Annual returns are computed by chain-linking quarterly rates of return to produce time-weighted rates of return for the an-nual and annualized periods under study. For time periods beyond 1 year, the annualized returns are expressed as the annual compounded rate of return.

Allocation: The distribution, expressed as a percentage of the overall investment, in a particular geographic area by property type.

For a detailed description of the proceeding returns, as well as the calculations used by NCREIF to derive these figures, please visit http://www.ncreif.org/indi-ces.

The combined returns are the weighted average of the returns for each property type according to the proportionate market value of properties surveyed relative to the total market values surveyed during a time period.

RERC Defined Regions and MSAsWest: Alaska, Arizona, California, Colorado, Hawaii, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington, Wyoming

Midwest: Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, Wisconsin

South: Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Oklahoma, Tennessee, Texas

East: Connecticut, Delaware, Kentucky, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, Washington D.C., West Virginia

Metropolitan Statistical Area (MSA): A geographic unit comprised of one or more counties around a central city or urbanized area with 50,000 or more popu-lation. Contiguous counties are included if they have close social and economic links with the area’s population nucleus.

With a few exceptions, the MSAs within this report coincide with the U.S. Office of Management and Budget’s December 2005 definitions for each MSA. For example, St. Paul, Minn., and Bloomington, Minn., as well as many other suburbs, are included within the Minneapolis MSA.

Note of Caution: It is imperative to exercise caution when comparing the data contained herein to previous reports published by RERC. The data herein is not “fixed,” and will be updated and changed as additional transaction information is gathered and analyzed.

Disclaimer: This publication is designed to provide accurate information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal or accounting service. The publisher advises that no statement in this issue is to be construed as a recommendation to make any real estate investment or to buy or sell a security or as investment advice. The examples contained in the publication are intended for use as back-ground on the real estate industry as a whole, not as support for any particular real estate investment or security. Although the RERC/CCIM Investment Trends Quarterly uses only sources that it deems reliable and accurate, Real Estate Research Corporation (RERC) does not warrant the accuracy of the information contained herein.

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