Capital, Condos,

and Mr. Greenspan's

Conundrum

Notes on the Current and Future Real Estate Capital and Transaction Environment

Peter C. Burley, CREVice President Market ResearchSimpson Housing LLLPfor the Colorado Chapter of the Appraisal InstituteAugust 5, 2005

Real Estate has Been Great the Past Few Years

Year-Year Returns Are Good

Transaction Volume is at Record Highs

Capital is Abundant

All DESPITE THREE YEARS of WEAK FUNDAMENTALS

'2003:1

'2004:1

'2005:1

0

10

20

30

40

50

60

70Volume Closed Transactions ($ billions)

Commercial Property Transactions At A Record

Source: Real Capital Analytics

$62 bil. in Q2Up 50% YTDfrom 2004

Apartments Industrial Office Retail0

5000

10000

15000

20000

25000

30000

35000

40000

45000Transaction Volume ($ bil.)

+64%

+88%

+48%

+10%

Commercial Transactions Jump Across the Board

Source: Real Capital Analytics

2002Q3

2003Q2

2004Q1

2004Q4

2005Q2

0

1000

2000

3000

4000

5000

6000

7000

8000

New HomesExisting Homes

New Record in Q2Including an 8.54 milUnit Rate in June Alone

Units (Qtr, SAAR)

Source: NAR; Bureau of Census; Economy.com

Record New and Existing Home Sales

Who is Buying

CommercialPension FundsREITsForeign InvestorsPrivate Companies

ResidentialHomeownersPrivate Investors

What's Driving the Activity ?

Uncertainty.

Low Yields Elsewhere.

Easy Access to Capital.

30-Dec-

03

12-Mar-0

4

24-May-04

5-Aug-04

15-Oct-

04

28-Dec-

04

10-Mar-0

5

20-May-05

2-Aug-05

1060

1080

1100

1120

1140

1160

1180

1200

1220

1240

1260

Source: Standard & Poors; Economy.com

S&P 500 (Index 1941-43=10)

Stocks Have Been Rangebound

-4 -2 0 2 4 6 8 10 12 14 16

DJIA

S&P500

NASDAQ

MS REIT Index

NCREIF Index*

Commercial Real Estate Outperforms Other Markets

Source: Urban Land Institute * Trailing 12-month through 3/31/2005

% Return Through Mid-June 2005

-2

0

2

4

6

8

10

12

10.2

5.8

-0.2

4.5

3 Yr Return

Yield

NOICap Rates

3 Year Average, %

Source: Torto Wheaton Research, Investment Database

NOI Has Contributed Nothing to Commercial Property Returns

10-Y

r Trea

suryAAA AA A

BBBBBB- BB B

-100

0

100

200

300

400

500

600

700

800

-22 4 11 13 31 31-35

-70

Originators Have Ample Capital Available, and Rates Are Extremely Competitive

CMBS Trading Spreads above 10Yr Treasuries (bp)

Source: Morgan Stanley; ULI

2000 2001 2002 2003 2004 2005 (ytd)0

20000

40000

60000

80000

100000

120000

140000 Issuance ($ mil.)

CMBS Issuance Continues to Rise

Source: Commercial Mortgage Alert; ULI

2000 2004 2005(ytd)0

50

100

150

200

250

300

350

139

305320.8

REIT Growth Has Been Impressive

REIT Industry Market Cap ($ bil.)

Source: NAREIT

- Are long-term yield levels still a "conundrum"?

- Can the current nationwide housing market be categorized as a bubble?

90-Day Bill 1 Yr 2 Yr 5 Yr 10 Yr1

1.5

2

2.5

3

3.5

4

4.5

5

2002

20032004

2001

2005

Is This a Conundrum?Spreads Have Narrowed; The Yield Curve Has Flattened

%

Source: Economy.com

1976Q1 1981Q1 1986Q1 1991Q1 1996Q1 2001Q10

2

4

6

8

10

12

14

16

18

10-year Treasury

Fed Funds

%

Long Term Yields Aren't Moving Much Higher

Source: Economy.com

1984M1 1988M3 1992M5 1996M7 2000M9 2004M112

4

6

8

10

12

14

16

Average 30-Yr Conventional

Avg 1-Yr Adj

Mortgage Rates are About as Low as They Have Ever Been

(%)

Source: Economy.com

A Brief Look at Apartments and Condos

Apartment Share of Commercial TransactionsHas Grown from 22% in 2002 to About 30% in 2005

From 2000-2005 over $130 billion in Apartment Transactions - About 6,100 properties

Hottest Markets Have Been California, Florida, Nevada, DC Metro - Represent 45% of Apartment

Transactions, Up from 30% in 2002

1998:4 1999:4 2000:4 2001:4 2002:4 2003:4 2004:4 2005:16.5

7

7.5

8

8.5

9

9.5

10

Multifamily

Sub'n Office

R&D

CBD Office

Malls

Cap Rate (%) Q1:2005

Following the Money to Apartments

Source: RERC; ULI

$30 mil + $15-30 mil $5 - 15 mil0

1

2

3

4

5

6

7

8T

hird

Tie

r M

ark

ets

Seco

ndar

y M

arke

ts

Pri

mar

y M

arke

ts

Bigger is BetterLarger Properties in Larger Markets Trade at Lower Yields

Average Cap Rate (%)

Source: Real Capital Analytics

3:01 3:02 3:03 3:04 4:01 4:02 4:03 4:04 5:01 5:020

5000

10000

15000

20000

25000

30000

35000

New Completions Conversions

Units

Source: Reis Inc

Condo Conversions Have Exceeded New Apartment Deliveries For Two Quarters

2003:1 :2 :3 :4 2004:1 :2 :3 :4 2005:1 :25

10

15

20

25

30

35Share of All Apartment Sales (%)

Sales to Condo Converters As a Share of All Apartment Sales

Source: Real Capital Analytics

0 2000 4000 6000 8000 10000 12000

Miami

Las Vegas

San Diego

Orlando

Tampa

DC Metro

Phoenix

Chicago

LA

20042005 (ytd)

Units

Source: Real Capital Analytics

Leading Condo Conversion Markets

2003 2 3 4 2004 2 3 4 2005 20

500

1000

1500

2000

2500

Condo Conversions are Picking Up in Denver Too

Units

Source: Reis Inc

Housing Market Activity in Denver

1994Q4

1995Q2

1995Q4

1996Q2

1996Q4

1997Q2

1997Q4

1998Q2

1998Q4

1999Q2

1999Q4

2000Q2

2000Q4

2001Q2

2001Q4

2002Q2

2002Q4

2003Q2

2003Q4

2004Q2

2004Q4

2005Q2

0

5

10

15

20

25

30

35

40

45Existing Single Family Home Sales (Ths., SAAR)

The Denver Market Looks Like Elsewhere

Source: Economy.com

1995Q1 1996Q2 1997Q3 1998Q4 2000Q1 2001Q2 2002Q3 2003Q4 2005Q1100

120

140

160

180

200

220

240

260

Denver

US

Prices Are Rising Faster in Denver

Median Existing Home Price (Ths., SAAR)

Source: Economy.com

1995Q1

1996Q2

1997Q3

1998Q4

2000Q1

2001Q2

2002Q3

2003Q4

2005Q1110

120

130

140

150

160

170

Denver

US

Affordability (Index)

Source: NAR; BOC; BEA; Economy.com

Affordability is A Bit Less in Denver

Concerns About Current Trends

Outlook for A Strong Economy and Low Mortgage Rates

Suggests A Solid Owner Market for Housingin the Near Term

However,

Buyer and Investor LeveragePose Some Downside Risk

1995M1 1996M9 1998M5 2000M1 2001M9 2003M5 2005M15

10

15

20

25

30

35

40

45

50

55

60Percent of All Mortgage Borrowers with Adjustable Rates

Source: FHFB; Economy.com

The Share of Adjustable Rate Mortgages is Increasing

1980Q1 1985Q1 1990Q1 1995Q1 2000Q1 2005Q113

13.5

14

14.5

15

15.5

16

16.5Household Financial Obligations Ratio (% if Dis Income)

Source: Economy.com

Homeowners Are Highly Leveraged

2001 2004 2005 (Thru April)0

2

4

6

8

10

Inve

stor

Pu

rch

ases

Sec

ond

Hom

es

% Mortgage Originations

Source: LoanPerformance; Economy.com

Investor Purchases Are Increasing

2005Q2

2005Q4

2006Q2

2006Q4

2007Q2

2007Q4

2008Q2

2008Q4

2009Q2

2009Q42.5

3

3.5

4

4.5

5

5.5

6

6.5

10-year Treasury

Fed Funds Rate

(%)

Source: FRB; Economy.com

Look for Mr Greenspan to Stay the Course

2005M6 2006M4 2007M2 2007M12 2008M10 2009M84

4.5

5

5.5

6

6.5

7

7.5

30yr Fixed

ARM

Conventional Mortgage Rates (%)

Source: Freddie Mac; Economy.com

Mortgage Rates Will Rise Toward Long Term Averages

2005Q1

2005Q3

2006Q1

2006Q3

2007Q1

2007Q3

2008Q1

2008Q3

2009Q1

2009Q3180

200

220

240

260

280

300Median Existing Home Price ($Ths)

Source: NAR; Economy.com

Prices Will Continue to Rise Faster in Denver

2005Q1

2005Q3

2006Q1

2006Q3

2007Q1

2007Q3

2008Q1

2008Q3

2009Q1

2009Q390

95

100

105

110

115

120

125

130Affordability (Index)

Source: Economy.com

Affordability will Decline

2005Q2

2005Q3

2005Q4

2006Q1

2006Q2

2006Q3

2006Q4

2007Q1

2007Q2

2007Q3

2007Q4

2008Q1

2008Q2

2008Q3

2008Q4

2009Q1

2009Q2

2009Q3

2009Q40

5

10

15

20

25

30

35

40Existing Sales, Units (Ths., SAAR) - Denver MSA

Source: NAR; Economy.com

Sales Will Ease (hopefully) Down

We’ll See