2q11 us c&w multi-family

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US MULTIFAMILY REPORT 2Q 2011 1

ECONOMYThe Manhattan office market continued to tighten during the first half of 2007, extending

strengths exhibited during the second half of 2006. Steady employment growthcontributed to positive absorption of available space and rapidly escalating asking rents.

The New York City economy expanded at a healthy pace during the first six months ofthe year, led by strong gains in office-using employment. Data available through the end

of May show that the City has added nearly 16,800 jobs in industries that are key to thecommercial office market, with financial services and professional business services

adding 7,400 and 5,500 jobs, respectively. This resulted in increased demand for office

space in a market that was already the tightest it had been since the first quarter of 2001.

The year began with 26.1 million square feet available throughout Manhattan. By the endof June, available space had fallen precipitously to 20.8, a decline of 20.5%. Thisdiminishing availability of space has been the story of the market; April 2007 was the only

month in the past year that did not record a month-to-month decline of at least 122,000square feet). As a result, Manhattans overall vacancy rate has tumbled to a six-year low,

closing the mid-year at 5.3%. For the third consecutive quarter, the vacancy rate closedbelow equilibrium, defined as a vacancy rate range of 7.0% - 9.0%.

OVERVIEWIn this environment, it is no surprise that asking rates have skyrocketed. Up 36.2% from ayear ago, Manhattans overall total average asking rent closed the first half of 2007 at

another record-high: $59.17 per square foot Thus far this year, rents have increased by anaverage of $1.44 each month since January, breaking the old record set back during the

second and third quarters of 2000. The rapid pace of rental rate growth has extendedthroughout Manhattan. In every submarket but one, overall rents have registered double-

digit percentage increases from a year ago. Chelsea, up 4.2%, was the only exception.

On a cautionary note, however, leasing activity throughout Manhattan was slower during

the first two quarters, partially attributable to both significantly higher rents and lack ofavailable space. With 11.8 leased year-to-date, 2007 activity trails last years total throughJune by 5.4%, with Midtown trailing by nearly 20.0%. This suggests that tenants are

possibly beginning to search for lower-priced space in response to landlords hiking uprents throughout the market.

U.S. MULTIFAMILY REPORT

2Q 2011

ECONOMIC INDICATORS

National Current 2011F 2012F

GDP Growth 1.3% 2.5% 3.6%

CPI Growth 3.8% 3.0% 1.9%

Unemployment 9.1% 9.0% 8.6%

EmploymentGrowth

1.3% 1.1% 1.7%

Source: MoodysAnalytics

APARTMENT MARKET FORECAST

ABSORPTIONwill sustain momentumin the second half of 2011. Thecombination of still declining homeownership rates and a high percentage ofjob gains going to young adult agecohorts will sustain occupancy demandthrough lulls in the recovery at a rate ofroughly 33,000 units per quarter.

RENTAL RATESwill continue toincrease with little supply-side pressure inplace or on the horizon to impedegrowth. Effective rent gains are expectedto increase 3.8% on average in 2011, wellahead of 2.8% in asking rent gains as

concessions continue to evaporate.CONSTRUCTIONwill lag demandover the next several years. Well locatedmultifamily developments are only nowstarting to be able to acquire financing,although a handful of markets have seenhigher concentration of starts in 2011,including Seattle, Minneapolis, Oakland,

Austin and Suburban Maryland.

U.S. ECONOMIC INDICES

ECONOMYThe recovery in the U.S. economy has come to a temporary standstill in the secondquarter, mired in a slow growth period amidst concerns regarding the federal debtceiling, the European sovereign debt crisis and elevated energy prices. The advanceestimate of second quarter GDP came in well below expectations at 1.3%, a low numberexacerbated by a significant downward revision to first quarter growth to 0.4% (from anearlier estimated 1.9%). Cutbacks in state and local government spending continue tohamper gains, subtracting from GDP growth (0.2 percentage points) for the thirdconsecutive quarter. This trend is expected to be a headwind well into 2012. Consumersand businesses alike both pulled back demand in the second quarter, with consumptioncontributing less than 0.1 percentage points to second quarter growth, the lowestquarterly contribution since mid-2009. A silver lining is that second quarter business

investment remained strong, particularly in non-residential structures (+6.3%) andequipment and software (+8.1%).

Business and consumer confidence remain fragile and underscore the deterioration ofthe optimism in the nascent recovery at the beginning of the year. The ConferenceBoard's Consumer Confidence index declined every month in the second quarter toreach 57.6, its lowest point since last November and down from 72.0 in February. TheExpectations component, which peaked at 97.5 in February, plummeted to 71.6 in June.Not surprisingly, this translated into weak consumer spending in the second quarter, as a0.1% decline in retail sales in May was followed by only a scant 0.1% increase in June.

Corporate earnings and profits remain strong, but the prevailing uncertainty amidst ofthe federal debt ceiling debates, a very weak single-family housing market, high energy

costs and the still unknown impact of the European debt troubles have translated into acautious nervousness that has undermined hiring plans. Net job gains slowed to ameager 18,000 in June, a further decline from only 25,000 jobs added in May. All told,private sector employment added 371,000 jobs in total in the second quarter.

Source: The Conference BoardSource: MoodysAnalytics


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Although the unemployment rate increased slightly to 9.2% in June, the U.S. economyhas added 1.8 million jobs since February 2010 and unemployment is down from itscyclical peak of 10.1%. Most notably, the BLS estimates that upwards of 75% ofemployment gains since the beginning of the recovery cycle have been in the 20-34 year-old age cohort, the primary renter demographic, and one of the key reasons why

apartment market demand has accelerated ahead of more robust employment gains.

After a red hot first quarter with employment gains of 2.8%, West Coast metros(California, Oregon, Washington) saw the sharpest slowdown in the second quarter asjob growth registered only 0.4%. High levels of housing foreclosures in the Westernpart of the country continue to weigh heavily on growth. The Southwest region -particularly Oklahoma, Texas and Louisiana - continue to see strong gains, withHouston, New Orleans and Austin now expected to see the strongest employmentgrowth in 2011. Given the strong investment in equipment and software, metro areaswith strong concentrations of technology firms are also expected to outperform.

Forecast: Despite the numerous grey clouds currently dotting the sky, the forecasthorizon still looks bright. The disruptions to the global supply chain that resulted from

Japan's earthquake are expected to ease in the second half of 2011 - in fact, automotivemanufacturers in the Southeast and Midwest are already beginning to increaseproduction and a return to positive growth in the manufacturing sector will again be amomentum-building contributor to a more sustained recovery in the second half of theyear (as it was in 2010). The Conference Board's Leading Indicators index increased inMay and June, pointing towards renewed expansion in the second half of the year.Notably, consumer expectations and stock prices were two negative components of theindex.

While the recovery currently feels tenuous in this "soft patch" period, underlyingeconomic fundamentals are positive and continue to show signs of strengthening.Credit conditions have also continued to improve from gains in the first quarter, withinterest rates remaining near historical lows. The resolution of the debt limit crisis willserve as a key first step in injecting much needed confidence into the mindset of

corporate employers. The employment outlook is still positive for the second half of2011, although the forecast hiring activity was downgraded to an estimated 200,000 netjobs per month. Barring any external shocks to the economy, GDP in the third andfourth quarter is expected to return to levels between 3.5% and 4.0%.

HOUSINGMETRICSThe protracted weakness in the single-family housing market continues to be a drag on

overall U.S. economic performance and has played a significant role in undercutting theconfidence levels of businesses and consumers. There were subtle bright spots in recent

data that point to stabilization, although the consensus is that the overall marketremains at the bottom of a "double dip".

The pace of new home sales remains near record lows, declining to an annual rate of

312,000 units in June, consistent with monthly levels throughout the first half of 2011.The pace of existing home sales did not fare much better, dipping to an annual rate of4.77 million units in June, its lowest level since November. Months of supply for

existing homes on market has steadily increased from the beginning of the year, from7.5 months in January to 9.5 months in June. Median home prices for both new and

existing homes increased over the course of the quarter to $234,400 and $184,300,respectively, although these increases may largely be a function of the dwindling numberof sales than any measurable appreciation in prices. However, the S&P Case-Shiller

Home Price Index also increased in both April and May, the first such increase in theindex since the homebuyer tax credit in Spring/Summer of 2010.

SINGLE-FAMILY HOME PRICES

MULTIFAMILY HOUSING PERMITS VS.

STARTS VS. COMPLETIONS, SAAR

NEW & EXISTING SINGLE-FAMILY

SALES VOLUME

Source: Census Bureau

Source: NAR, Census Bureau

Source: NAR, Census Bureau


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On a year-over-year basis, foreclosure activity was down nearly 29% in June, althoughthe number of foreclosures increased roughly 7% month-to-month. As the backlog

of foreclosures that resulted from the suspensions of foreclosure processing by largemortgage servicers begin to work their way to the market, the number of foreclosures

is expected to increase over the course of 2011 and will continue to put downwardpressure on prices and add additional supply to the market. California remains the

hardest hit among U.S. states, accounting for nearly 25% (54,000) of new foreclosuresin June, followed by Florida (23,800) and Arizona (13,500).

Forecast: Slivers of light are beginning to show in the housing market outlook:pending homes sales have increased for two consecutive months and homebuildingcontributed positively to GDP growth for the second time in the last three quarters.

Given the persistently low mortgage rates, high levels of housing affordability andslow improvement in the availability of credit to potential home buyers, conditions

are in place for a moderate recovery in housing at the first sign of renewed hiring andlifting of uncertainty from the economic recovery.

APARTMENTMARKETThe slowdown in the overall economy slightly dampened the torrid pace of therecovery in U.S. apartment market metrics in the second quarter. As reported byREIS, demand translated into just under 42,000 units of positive absorption, slightlybelow the pace of both the previous quarter and second quarter of last year. Withoccupancy gains of nearly 85,800 units year-to-date, overall vacancy rates declined to5.9% at mid-year, representing a 210 basis point (bp) decline over a five-quarter span.

Sun Belt markets across the Southeast and Southwest have seen the strongest year-over-year recoveries in occupancy, with Charleston, Austin, Greensboro, Charlotte,Jacksonville, Orlando, Phoenix, Dallas and Las Vegas all recording improvements invacancy between 300 and 400 bps over the previous 12 months. Metros in Texas allcontinue to outperform, with Austin, Dallas, Fort Worth, Houston and San Antoniocollectively accounting for nearly 21% (64,569 units) of total U.S. apartmentabsorption since the beginning of 2010, more than 50% above their pro rata share, as

these metros only account for 14% of total U.S. apartment inventory.

Rent growth continues to accelerate, with overall U.S. averages for both asking($1,053 per unit) and effective ($997 per unit) rents tallying their strongest quarter-to-quarter increase (0.6%) since mid-2008. The strongest quarterly increases in effectiverents occurred in the Bay Area, where sub-4.0% vacancy rates in San Jose and SanFrancisco contributed to effective rent gains of 2.0% and 1.3%, respectively. Gainsin the greater New York area also continue to accelerate, with Manhattan effectiverents increasing 1.0% and suburban areas, Westchester (+1.5%), Long Island (+1.3%)and Fairfield County (+1.2%), increasing even faster.

The rapid acceleration in rental rates is also having the effect of pushing a larger shareof tenant demand to class B/C properties. Second quarter absorption in class B/Cproperties (23,341 units) eclipsed occupancy gains in class A properties (16,833 units),helping push class B/C vacancy rates down 40 bps to 6.1%. Class A vacancy ratescurrently stand at 5.6%.

Apartment rent growth has been slowest in metros in Southern California andFlorida, not coincidentally areas with some of the highest foreclosure pipelines in thecountry. Although tenant demand has returned and vacancy rates have declined inthese markets, single-family home rentals and cheaply priced distressed home salescontinue to compete with apartment renter demand, keeping downward pressure onrental rate gains.

COMPLETIONS VS. NET ABSORPTION

VS. VACANCY RATES

ASKING VS. EFFECTIVE RENTS

NEW APARTMENT CONSTRUCTION

Source: REIS

Source: REIS

Source: REIS


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Development continues to lag well behind the improvement in demand, as only15,760 units were delivered in the first half of 2011. Just over 40,300 units areexpected to be completed this year, which would represent less than 50% of last year'stotal and by far the lowest total in more than a decade. The slow emergence of moredebt and financing options for multifamily development projects will allow for somedevelopments to move forward, particularly those in well-located, high growth areas.

Multifamily permitting (as measured by the Census Bureau, which includes condos)increased 20% in May and an additional 7% in June to an annual rate of 217,000 units,the highest level since mid-2008. However, only roughly 14,000 of the nearly 65,000apartment units currently under construction across the country are estimated to havebroken ground in 2011.

Notably, nearly one-third of the total units under construction are concentrated in tworegions of the country. Nearly 10,000 units are currently underway in the region of thenations capital, including Baltimore, Suburban Maryland, Suburban Virginia andWashington, DC. The nearly 3,000 units under construction in the District are thehighest percentage of units under construction as a percentage of existing inventory inthe U.S. Five metros in the state of Texas (listed earlier) collectively account for anadditional 11,400 units.

Forecast: Despite the prevailing sluggish economic conditions, prospects continue tolook bright for sustained strong apartment demand. Homeownership rates continued

to fall in the second quarter, a by-product of a large pipeline of foreclosures still beingworked out, constrained access to credit for potential homebuyers, and a general lack

of confidence in the economy and housing markets that has steered an unprecedentedlevel of households to renting versus owning their home. The high concentration ofnew jobs going to young adults (age cohort 20-34 years old) is also allowing for an

unbundling effect, as those previously living with parents and/or roommates arebeginning to enter the renter market, and this trend will only accelerate when

employment growth resumes in earnest.

CAPITAL MARKETS

Total U.S. real estate investment volume surged to $80 billion in the first half of 2011,with June alone producing the most active month since late 2007. The continuedimprovement in apartment market fundamentals has led to easing of underwritingrequirements and improved access to financing for apartment transactions. Salesvolume for U.S. apartments totaled $22.9 billion in first half of 2011, with the $13.9billion of transactions in the second quarter representing more than double thevolume of second quarter 2010 and the highest quarterly total since first quarter 2008.

UDR, Inc. and Equity Residential continued to be the most active buyers in themarket, with a focus on mid/high-rise properties in core urban markets. Notabletransactions in the quarter by Equity Residential included Pegasus ($100M, 4.3% cap)in downtown Los Angeles, 1500 Massachusetts ($95M) in Washington, DC and theClarendon Apartments ($130M) in Arlington, VA. Meanwhile, UDR, Inc. completedits swap of assets with Avalon Bay, acquiring Avalon Woburn ($108M) and Avalon at

Crane Brook ($64.5M) in Boston and Towers By The Bay ($90.5M) in San Francisco.Brokered by Cushman & Wakefield and MAC Realty Advisors, UDR, Inc. alsoacquired View 14 in Washington, DC for a near record high price per unit of over$567,500 ($105M).

As anticipated, sub-5.0% cap rates and a highly competitive bidding environment havebegun to shift investor interest outside of the New York and Washington, DC areasthat have dominated transaction volume over the past twelve months. San Francisco,Boston and Chicago each saw apartment sales volume increase in excess of 450% inthe first half of 2011. Sales velocity in secondary markets has also dramaticallyincreased, with Atlanta, Oakland, Philadelphia, Northern New Jersey,

APARTMENT TRANSACTION VOLUME

PRICING VS. CAP RATES - GARDEN

Source: Real Capital Analytics


Source: REIS


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PRICING VS. CAP RATES

MID/HIGH-RISE

Charlotte and Seattle all seeing volume increase by more than 200%. Highlighting theintense interest in well-located properties, Cushman & Wakefield recently managed themarketing and sale of the 131-unit Kearny Plaza Apartments in the Pearl District indowntown Portland, which sold at 120% of the anticipated price in a mere 60 days (to JPMorgan Asset Management, $36.9M, 4.8% cap).

Second quarter transaction volume for garden apartments was nearly 80% higher thanmid/high-rise transactions, totaling $9.0 billion. This was the strongest quarterly totalfor garden apartment transactions since first quarter 2008. Average cap rates remainedflat in the quarter at 6.8%. Interest in garden properties in Los Angeles remains highwith an estimated $771 million in transactions closed in the quarter, bringing the year-to-date total to $1.3 billion. Top deals in Los Angeles in the second quarter includedAIMCO's acquisition of the 698-unit Malibu Canyon in Calabasas ($156.3M, 5.3% cap)and Essex Property Trust acquiring the 373-unit Arbors at Parc Rose in Oxnard ($92M).Atlanta also saw a significant increase in garden property sales, with nearly $746.5 millionin transactions in the second quarter after only $154.7 million in the first quarter.Equity fund Area Property Partners were especially active, acquiring three Atlantaproperties (valued at $150.6M) as part of a 10-property portfolio sale with ECI Group,Edgewater at Sandy Springs ($38M) from Aslan Realty and distressed asset Columns atWhite Oak ($33.1M) in a joint venture with ECI Group.

Volume for mid/high-rise properties increased to $4.9 billion in the second quarter,more than double the volume in the same period last year. The $18.1 billion inmid/high-rise transactions over the previous four quarters is the strongest such periodsince 2007. San Francisco saw a dramatic upswing in mid/high-rise apartmenttransactions in the quarter, with year-to-date volume totaling $622.2 million. Dutchpension fund PGGM's joint venture with Behringer Harvard closed one of the largestdeals, acquiring the 179-unit Argenta for $94 million. However, small to mid-sizedistressed asset portfolio sales dominated transaction activity in San Francisco, asremnants of the bankrupt Lembi Group's portfolio were the source of two portfoliodeals, with Veritas Investments acquiring 346 units across eight properties for $55million and local investor Flynn Investments acquiring two Nob Hill properties, also for$55 million. Additionally, Area Property Partners acquired a 396-unit, 20-property

portfolio of distressed LNR assets on behalf of the Winthrop Realty Trust for anestimated $60 million.

The CMBS market continues to exhibit a bevy of mixed signals. U.S. CMBS issuancevolume reached $15.9 billion in the first half of 2011, surpassing all global issuance in2010. Moody's Investor Services reported delinquency rates (60+ days) for overallCMBS loans declining for the third consecutive month in June to 9.02%, withMorningstar reporting consecutive declines in delinquent unpaid balances for twoconsecutive months in May and June. However, Fitch Ratings reported a second quarterspike in delinquency (fixed rate, 60+ days) of 228 bps to 12.9% and Trepp's Julydelinquency report, released as this report was going to press, echoed this increase,reporting a similar spike of 51 bps in delinquency (30+ days) to 9.88%, a new recordhigh.

Notably, Real Capital Analytics is also reporting CMBS lenders - which account fornearly 50% of outstanding distressed apartment assets ($16.9B) - were the only lendertype to not reduce their outstanding balances of distressed assets in the second quarter.Currently, CMBS lenders have only worked out 33% of their distressed asset balances,compared to an average of 48% among all lender types.

Forecast: The emergence of a more competitive lending market for multifamilyinvestments and a willingness to provide construction financing for select developmentprojects bodes well for continued momentum in apartment investment activity.Apartment properties continue to exhibit the clearest signs of turnaround, with theappreciation return in NCREIFs Apartment Property Price Index tallying a 15.1% year-over- ear increase in the second uarter, well above the next closest ro ert t e.

NET CHANGE TO APARTMENT

HOLDINGS




APARTMENT VOLUME BY MARKET


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This report contains information available to the public and has been relied uponby Cushman & Wakefield on the basis that it is accurate and complete.Cushman & Wakefield accepts no responsibility if this should prove not to bethe case. No warranty or representation, express or implied, is made to theaccuracy or completeness of the information contained herein, and same issubmitted subject to errors, omissions, change of price, rental or otherconditions, withdrawal without notice, and to any special listing conditionsimposed by our principals.

2011 Cushman & Wakefield, Inc. All rights reserved.

For industry-leading intelligence to support your real estate and business decisions, goto Cushman & Wakefields Knowledge Center atwww.cushmanwakefield.com/knowledge

Maria SicolaExecutive Managing Director,Research Services

[email protected](415) 773 3542

Steve WeilbachSenior Managing Director,National Head Of Multifamily

[email protected](415) 773 3510

MARKET STATISTICS

Market/Submarket

Overall

Vacancy

Rate

YOY Chg

Vacancy (bps)

YTD Net

Absorption

Asking Rent

($/month)

YOY Change

Rent

NORTHEAST REGION

Boston 4.4% (180) 1,456 $1,754 2.2%

Central New Jersey 3.5% (60) 935 $1,167 1.7%

New York 2.8% (30) 2,914 $2,878 4.3%

Northern New Jersey 4.4% (80) 1,393 $1,524 2.2%

Philadelphia 4.7% (160) 1,536 $1,044 2.4%

MID-ATLANTIC REGION

District of Columbia 5.3% (110) 540 $1,454 2.5%

Suburban Maryland 4.9% (170) 809 $1,309 2.7%Suburban Virginia 4.6% (130) 1,206 $1,504 3.8%

MIDWEST REGION

Chicago 5.1% (150) 2,520 $1,076 1.6%

SOUTHEAST REGION

Atlanta 8.7% (260) 3,062 $853 1.3%

Fort Lauderdale 5.8% (180) 698 $1,120 1.3%

Miami 5.4% (80) 614 $1,089 1.2%

Orlando 7.8% (320) 1,143 $876 1.4%

Tampa-St. Petersburg 6.9% (290) 1,573 $844 1.6%SOUTHWEST REGION

Dallas 7.0% (300) 5,173 $834 1.7%

Fort Worth 7.9% (290) 1,698 $729 2.0%

Houston 9.7% (270) 5,566 $795 1.4%

Phoenix 8.3% (320) 3,315 $758 1.1%

WEST REGION

Denver 5.4% (270) 1,948 $915 3.2%

Los Angeles 4.4% (110) 4,048 $1,401 0.6%

Oakland-East Bay 4.2% (130) 808 $1,359 1.9%Orange County 4.7% (170) 1,528 $1,521 1.7%

San Diego 3.7% (120) 1,008 $1,350 1.4%

San Francisco 3.8% (120) 735 $1,888 3.8%

Seattle 5.0% (190) 2,045 $1,046 2.2%

UNITED STATES 5.9% (190) 85,791 $1,053 2.0%Source: REIS

2q11 us c&w multi-family

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