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APARTMENT TRENDSAPARTMENT TRENDS
Special Client Special Client WebcastWebcast –– May 31, 2006 May 31, 2006
U.S. Economic and MultiU.S. Economic and Multi--Family OutlookFamily Outlook
U.S. Apartment Market
Economic and Apartment Supply-Demand Overview and
Outlook
U.S. Economic Conditions Ideal -Employment Well Above Prior Peak
115
120
125
130
135
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Sources: Marcus & Millichap Research Services, BLS, Economy.com
5/03 –4/065.2 Million2/01 – 5/03
-2.7 Million
Non
-Far
m E
mpl
oym
ent (
mill
ions
)
April-0
6
U.S. Housing Market Cooling EvidentMonths’ Supply of Inventory Rising
2
4
6
8
'04Aug
'04Oct
'04Dec
'05Feb
'05Apr
'05Jun
'05Aug
'05Oct
'05Dec.
'06Feb.
'06April
Single Family Condo
Y-O-Y Change
73.2%
40.5%
No.
of M
onth
s
Sources: Marcus & Millichap Research Services, National Association of Realtors
-20%
-10%
0%
10%
20%
97 98 99 00 01 02 03 04 05 06*
Fixed Non-Residential InvestmentRetail Sales Excl. Auto
Ann
ual C
hang
e
Sources: Marcus & Millichap Research Services, Economy.com
*Forecast
Growth Drivers Transitioning From Consumers to Companies
Energy Price and Core Inflation Trends Point to Eventual Rise in Prices - Hyper Inflation Unlikely
$0
$25
$50
$75
$100
70 74 78 82 86 90 94 98 02 06*0%
5%
10%
15%
20%Oil (Left) Core CPI
Cru
de O
il (p
rice
per b
arre
l)C
ore CPI
Year-Over-Year %
Change
*Through April
Sources: Marcus & Millichap Research Services, Economy.com
150
170
190
210
230
250
80 82 84 86 88 90 92 94 96 98 00 02 04 06*
U.S. Single-Family Home Price to Apartment Rent Premium
20-Year Average (1980-2000)
Hom
e Pr
ice
to A
part
men
t Ren
t Rat
ioU.S. Single-Family Home Price
and Apartment Rent Ratio
Sources: Marcus & Millichap Research Services, Economy.com, Reis
*As of 1q-2006
U.S. Apartment Vacancy Reaching Equilibrium New Construction Balanced
50
100
150
200
90 92 94 96 98 00 02 04 06*0%
3%
6%
9%Completions Vacancy
Com
plet
ions
(Tho
usan
ds o
f Uni
ts)
Vacancy Rate
* Forecast
Sources: Marcus & Millichap Research Services, Reis
Effective Rent Growth Gaining Momentum As Concessions Burn Off
Sources: Marcus & Millichap Research Services, Reis
* Forecast
Ann
ual R
ent G
row
th
-3%
0%
3%
6%
9%
96 98 00 02 04 06*
Asking Rent Effective Rent
Top 10 U.S. Apartment Markets By Vacancy Rate - 2006 Forecast
Sources: Marcus & Millichap Research Services, Reis
2005 2006*Bps
ChangeFort Lauderdale 2.6% 2.7%
2.8%
3.0%
Los Angeles 3.1% 3.0% (10)
3.1%
San Diego 3.6% 3.2% (40)
Orlando 4.9% 3.6% (130)
Northern New Jersey 3.6% 3.7% 10
Washington, D.C. 4.0% 4.2% 20
U.S. Average 5.7% 5.3% (40)
Miami 3.3% 3.7% 40
10
New York-Manhattan 3.0% (20)
Las Vegas 4.0% (100)
Orange County 3.2% (10)
* Forecast
Bottom 10 U.S. Apartment Markets By Vacancy Rate - 2006 Forecast
Sources: Marcus & Millichap Research Services, Reis
2005 2006*Bps
Change
Denver 7.9% 7.3% (60)
Atlanta 8.0% 7.5% (50)
Portland 7.7% 7.6% (10)
Dallas-Fort Worth 9.5% 8.5% (100)
San Antonio 8.7% 8.0% (70)
8.5%
9.0%
Milwaukee 8.8% 9.0% 20
Indianapolis 9.9% 9.3% (60)
U.S. Average 5.7% 5.3% (40)Houston 12.2% 10.9% (130)
Columbus 8.9% (40)
Cincinnati 8.7% 30
* Forecast
U.S. Apartment Market
Capital Markets Overview and Outlook
Opposing Forces Driving Long-Term Interest Rates – Volatility to be Expected
Sources: Marcus & Millichap Research Services, Economy.com
0%
2%
4%
6%
8%
00 01 02 03 04 05 06
Fed Funds 10-Year
Core Inflation and Interest RatesStill Below Long-Term Trend
0%
4%
8%
12%
16%
67 70 73 76 79 82 85 88 91 94 97 00 03 06*0%
4%
8%
12%
16%10-Year Treasury Core Inflation
Sources: Marcus & Millichap Research Services, Economy.com, Federal Reserve
Average
Average
*Through April
10-Y
ear T
reas
ury
Core Inflation Y-O
-Y Change
U.S. Apartment Market
Apartment Investment Market Overview and Outlook
U.S. Apartment Market Buoyed By Capital Flows, Condo Conversions a Major Factor
Sources: Marcus & Millichap Research Services, CoStar Group, Inc.
$0
$30,000
$60,000
$90,000
$120,000
99 00 01 02 03 04 05 06*0%
3%
6%
9%
12%Price per Unit Cap Rate
*As of 1Q-2006
Med
ian
Pric
e pe
r Uni
tC
ap Rate
U.S. Condo Conversion Sales Outpaced Ground-Up Development in 2004-05; Balance to Tilt in 2006
0
100
200
300
2002 2003 2004 2005 1Q06
Ground-Up Condo DevelopmentApartment Conversion Sales
No.
of U
nits
(000
s)
Sources: Marcus & Millichap Research Services, Real Capital Analytics, Dodge
Source: Marcus & Millichap Research ServicesSource: Marcus & Millichap Research Services
Traditional Apartments a BenefactorUnits Sold for Conversion as a % of Rental Stock 2003-2006*
Market % of Stock1Q 2006 Vacancy
22.9% 4.1%
4.0%
3.1%
Orlando 19.1% 4.6% (340)
5.0%
3.7%
3.6%
4.2%
6.2%
3.2%
6.5%
21.7%
20.7%
13.5%
10.9%
9.2%
9.0%
7.6%
5.0%
4.4%
Bp Change in Vacancy 2003-2006*
NYC/Manhattan (150)
Tucson (160)
West Palm Beach (560)
Washington D.C. (80)
Miami/Ft. Lauderdale (290)
Las Vegas (300)
San Diego (40)
Phoenix (340)
Jacksonville (170)
Tampa (320)
* Through 2006 Q1
Sources: Marcus & Millichap Research Services, CoStar Group, Inc.
2%
4%
6%
8%
10%
99 00 01 02 03 04 05 06*
10-Year Treasury Apartment Cap Rate
* Forecast
Ave
rage
Ann
ual R
ate
Capital FlowsApartment Cap Rate and 10-Year Treasury
Sources: Marcus & Millichap Research Services, NCREIF, Standard & Poors
20
Tota
l Ret
urn
(%)
Real Estate Returns Outperforming Stocks In Recent Years
* As of 1Q 2006
12%21% 20% 21% 19%
62%
48%58%
82%
112%125% 125% 128% 126%
29%
0%
50%
100%
150%
S&P 500 Apartment Office Industrial Retail
1-year 5-year 10-year
U.S. Renter, First-Time Home Buyer Demographics Turning Positive
Sources: Marcus & Millichap Research Services, Economy.com
-10%
-5%
0%
5%
10%
1990-95 1995-00 2000-05 2005-10* 2010-15*
Ages 20-24 Ages 25-29 Ages 30-34
Cha
nge
in P
opul
atio
n
5.5 million Increase
* Forecast
U.S. Household Growth2005 - 2015
32%
68%
Own Rent
4.3m new renter households
9.1m new owner households
13.4 million net new households
Sources: Marcus & Millichap Research Services, Economy.com, Harvard University
Multi-family Trends and OutlookDemand exceeds acquisition opportunitiesInterest rates increasing but remain below long term avg.Compressed yieldsOperational recoveryShortened “holding periods” (turnover +)Positive demographics (renter households)Urbanization (changing life styles)DensityShortfall of “in-fill” development “dirt”High development costsPossible demand / supply imbalance in many markets
Risks and ChallengesInterest rates rising faster than NOIs
Asian fund flows to U.S. declining more than expectedInflation surpriseCapital market shock (i.e. currency dynamics, hedge funds, emerging markets)
Fed over-reaction to inflation data – rising rates too muchHousing slowdown more dramatic than the expected soft landing (would impact broader economy, employment growth)Market selectionAsset selection (value-add component more critical)Portfolio optimization (cap rate reversion risk based on asset, market quality)Missing the upside of the next cycle due to short-term concerns
It’s an excellent time to own and invest in
U.S. apartments!
APARTMENT TRENDSAPARTMENT TRENDS
Special Client Special Client WebcastWebcast –– May 31, 2006 May 31, 2006
U.S. Economic and MultiU.S. Economic and Multi--Family OutlookFamily Outlook
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