seattle, washington - red capital groupredcapitalgroup.com/.../09/rch-wa-001_seattle_all.pdf ·...

2Q14 PAYROLL TRENDS AND FORECAST

The Jet City economy remained in a steep ascent during thesecond quarter, adding payroll positions at a 42,800-job, 2.9%year-on-year pace, up from 1Q’s strong 39,800-job performance.Skilled service and consumer-driven sectors led the way. Busi-ness, health care and education service employment increased ata combined 15,000-job, 3.6% rate (the education component aloneadvanced at an 11.8% pace), while construction, retail trade andleisure service headcounts expanded at a 5.2% rate. Conversely,aerospace manufacturing represented a small net employment

drain as industry payrolls fell at a –2.5% y-o-y rate during 2Q.

Seasonally-adjusted data were commensurate, showing a solid12,800-job net add April through June, up from 8,400 during the

prior quarter and 9,800 in the year-earlier period. PreliminaryJuly data were somewhat weaker as headcounts increased 900from June, comparing unfavorably to a 6,100-job add in the previ-

ous month and July 2013’s 5,400-job performance.

RED Research’s Seattle payroll model employs U.S. payrollgrowth; S&P500 returns and interest rate variables to achieve a95.1% adjusted-R2. The model produces a bullish outlook through2016, with payroll growth rates remaining consistently above 2%.But our GDP model forecasts slower economic activity in 2017,which will bend the Seattle growth curve down.. The most probableoutcome is for annual growth to slow to about 25,000 jobs in 2017,

down from 2014-16’s 35,000- to 45,000-job performances.

Households exhibited strong rental space demand during thesecond quarter as tenants net leased 1,689 vacant units, accordingto Reis, the highest absorption tally in any spring quarter since2004. A corresponding increase in new supply was at least part ofthe equation, as developers put finishing touches on propertiesencompassing a total of 2,164 units, representing the equal largestsingle-quarter vintage observed in the 16-year quarterly Reis dataseries. Occupancy declined sequentially to 95.8% as a result,

consistent with levels observed over the past three years.

Axiometrics surveys of 359 stabilized properties recorded an96.3% average occupancy rate, up 40 bps year-over-year. Class-B

and C complexes reported comparable average occupancy rates(96.3% and 96.4%, respectively), while class-A properties posted a95.8% metric. Lease-up at new properties was brisk, averaging 12units per month. New Downtown and North Seattle mid-rise build-

ings seemed to encounter particularly avid interest from renters.

RCR’s Seattle absorption model relies on inventory and rentgrowth, S&P500 returns and vacancy variables to reach a 93.6% A-R2. This model foresees demand trailing supply in 2015 and 2016,resulting in a most probably 110 bps decrease in occupancy out-come. Firmer demand is projected in the forecast out-years, keep-

ing occupancy steady at about 94.8% in 2017 and 2018.

Reis surveys found that metro effective rents increased $23 (2.0%)sequentially, the largest quarterly gain since 1Q13. Expressed on ayear-on-year basis, rents were 6.4% higher, up from 5.9% duringthe first quarter. Reis found most of the impetus coming from theclass-A sector, where asking rents surged 2.2% sequentially,

comparing favorably to a 1.0% gain posted among B&C properties.

Axiometrics surveys of 359 stabilized same-store propertiesrecorded an average effective rent of $1,483, up 7.1% y-o-y. Thisservice found that class-B apartments chalked down the fastest

growth (7.4%), followed by class-C (6.9%) and class-A (5.8%).

Reis report that the Downtown (10.7%) and North Seattle (9.5%)submarkets recorded the fastest annual rent growth rates, benefit-ing for the delivery of new luxury mid– and high-rise buildings.Analysis of Axiometrics stabilized same-store property data sug-gests that the northern tier suburbs enjoyed the largest percentage

gains, especially Bothell, Kirkland, Everett and Edmunds.

RCR’s Seattle rent model employs five lags of the dependent varia-ble, personal income, inventory and occupied stock growth, andhome price variables to achieve a 97.1% A-R2. The model projectsan above average 4.0% compound annual rent growth rate through

2018, ranking 9th among RED 46 peer group.

Sales velocity accelerated during the second quarter as integratedfunds managers, pension funds, REITS and private equity investorsstepped up Seattle buying programs. A total of 22 propertiesvalued at $5 million or more exchanged ownership, generating totalsales volume of $840mm. By way of comparison, investors closedon 16 and 14 deals during 1Q14 and 4Q13, respectively, for aggregate

proceeds of $497mm and $745mm.

The 2Q14 average price per unit metric was $178,792. This datumrepresents a small increase from the prior quarter ($162,633), but

a sharp decline from 4Q13’s trophy-rich $256,293 result.

Cap rates appeared to drift higher, largely because property NOIs

ascended at a faster pace than asset prices. Class-A propertiestraded to yields in the mid– to high-4% range, while going-in yieldsfor class-B assets gravitated toward the 5.25% - 5.75% area, in

each instance about 25 bps above levels observed earlier.

To account for the NOI-driven increase in Seattle cap rates, weelected to increase the generic metro purchase yield by 25 bps forthe second consecutive quarter, in this case to 5.25%. With aterminal cap rate assumption of 6.0%; model derived rent, occu-pancy and expense inflation forecasts; and Reis-based operatingexpense levels, we estimate that an investor would expect toachieve a 7.3% 5-year, unlevered total return from a Seattle asset,

ranking 15th among the RED 46 peer group.

$5mm+ Sales 22

Approx. Proceeds $840mm

Avg. Cap Rate (FNM) 5.4%

Avg. Price/Unit $178,792

Expected Total Return 7.3%

RED 46 ETR Rank 15th

TRADE & RETURN SUMMARY

RED 46 RAI Rank 35th

Risk-adjusted Index 3.29

Mean Rent (Reis) $1,174

Annual Change 6.4%

RED 50 Rank 3rd

RCR YE14 Forecast 6.0%



EFFECTIVE RENT SUMMARY


Occupancy Rate (Reis) 95.8%

RED 50 Rent Chg. Rank 26th

Annual Chg. (Reis) -0.3%

RCR YE14 Forecast 96.3.%



OCCUPANCY RATE SUMMARY


Total Payrolls 1,544.9m

Annual Change 42.8m (2.9%)

2014 Forecast 41.6m

2015 Forecast 42.2m

2016 Forecast 34.6m

2017 Forecast 25.2m

PAYROLL JOB SUMMARY

Unemployment (NSA) 5.0% (July)

SEATTLE, WASHINGTONMARKET OVERVIEW & MULTIFAMILY HOUSING UPDATE

2Q14 ABSORPTION AND OCCUPANCY RATE TRENDS

2Q14 EFFECTIVE RENT TRENDS

2Q14 PROPERTY MARKETS AND TOTAL RETURNS

RED Capital Group | 2Q14 | September 2014

NOTABLE TRANSACTIONS

RED Capital Research | September 2014

MARKET OVERVIEW | 2Q14 | SEATTLE, WASHINGTON

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

4Q09 4Q10 4Q11 4Q12 4Q13 4Q14f 4Q15f 4Q16f 4Q17f 4Q18f

Un

its

(T1

2M

on

ths)

ABSORPTIONS COMPLETIONS

Seattle Absorption and Supply Trends

Source: Reis History, RCR Forecasts

4.8%

5.2%

4.7%4.8%

5.4% 5.4%

5.0%

5.6%

5.2%5.2%5.3%

5.4%

5.7%5.6%

4.50%

4.75%

5.00%

5.25%

5.50%

5.75%

6.00%

6.25%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14

Av

era

ge

Ca

pR

ate PACIF IC REGION SEATTLE

Seattle Cap Rate Trends

Source: eFannie.com, RCR Calculations

Property Name (Submarket)Property Class/Type

(Constr.)Approx. Date of

Transaction

Total Price /<Appr. Value>(in millions)

Price /<Appr. Value>

per unit

Estimated<Underwritten>

Cap Rate

Collins on Pine (Downtown / Capitol Hill) A / MR (2014) 23-May-2014 $29.1 $383,115 4.7%

Park South (Tukwila / Sea-Tac) C / GLR (1986) 29-May-2014 $29.7 $118,033 5.5%

Stream Uptown (Downtown / Capitol Hill) B+ / MR (2013) 9-Jul-2014 $32.9 $273,956 4.8% / 5.3% p.f.

Rock Creek Landing North (West Kent) C / GLR (1986) 1-Aug-2014 $73.8 $128,150 5.7%

Light Box (North Seattle) B+ / MR (2014) 27-Aug-2014 $45.3 $281,099 NA / 4.8% p.f.

95.8%

96.0%

95.0% 94.6% 94.8%94.8%

91%

92%

93%

94%

95%

96%

97%


YoY

Rent

Tre

nd

RED 46 AVERAGE

SEATTLE (REIS/RCR)

Seattle Occupancy Rate Trends

Source: Reis History, RCR Forecasts


RED Capital Research | September 2014

6.4%

3.4% 3.5%2.8%4.3%

6.2%

-6%

-4%

-2%

0%

2%

4%

6%

8%


YoY

Rent

Tre

nd

RED 46 AVERAGE SEATTLE (REIS/RCR)

Seattle Effective Rent Trends

Sources: Reis, Inc., Axiometrics, RCR Forecast

10.5% 11.6%11.7%9.8%10.5%11.5%

-10%-8%-5%-3%0%3%5%8%

10%13%15%

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Y-o

-Y%

Ch

an

ge

U.S.A. SEATTLE (FHFA) SEATTLE (CSI)

Seattle Home Price Trends

Source: FHFA Home Price Indices, S&P Case Shiller Index and RCR Forecasts

2.8%2.5%

2.2%

1.1%

1.4%

0%

1%

2%

3%

4%

2011 2012 2013 2014 2015f 2016f 2017f 2018f

Y-o

-Y%

Change U.S.A. SEATTLE

Seattle Payroll Employment Trends

Source: BLS, Institute for Economic Competitiveness at UCF & RCR

The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recom-mendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not beenindependently verified or accepted by RED Capital Group. RED makes no representations or warranties as to the accuracy or completeness of the information, assump-tions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the informationgathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer toparticipate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, ac-countant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.

SubmarketEffective Rent Physical Vacancy

2Q13 2Q14 Change 2Q13 2Q14 Change

Auburn / Enumclaw $834 $857 2.8% 3.0% 1.9% -110 bps

Beacon Hill / Rainier $999 $1,033 3.4% 6.3% 5.5% -80 bps

Bellevue / Issaquah $1,324 $1,412 6.6% 4.9% 5.1% 20 bps

Bothell $1,096 $1,150 4.9% 3.2% 3.5% 30 bps

Des Moines / West Kent $878 $920 4.8% 2.5% 2.0% -50 bps

Downtown/ Capitol Hill $1,520 $1,683 10.7% 6.2% 7.6% 140 bps

Edmonds / Lynnwood $925 $974 5.3% 3.4% 2.8% -60 bps

Everett / Mukilteo $931 $982 5.5% 3.0% 3.3% 30 bps

Federal Way $906 $930 2.6% 3.1% 2.6% -50 bps

Kent $898 $925 2.9% 2.6% 2.0% -60 bps

Kirkland / Juanita $1,287 $1,356 5.4% 2.7% 4.0% 130 bps

North Seattle $1,104 $1,209 9.5% 4.2% 6.3% 210 bps

Redmond $1,265 $1,333 5.3% 4.7% 2.7% -200 bps

Renton $976 $994 1.9% 2.7% 2.1% -60 bps

Tukwila / Sea-Tac $792 $811 2.4% 1.9% 1.4% -50 bps

West Seattle / Burien $932 $987 5.9% 4.6% 3.9% -70 bps

Metro $1,103 $1,174 6.4% 3.9% 4.2% 30 bps

RED Capital Group, LLC RED Mortgage Capital, LLC RED Capital Markets, LLC (Member FINRA/SIPC) RED Capital Partners, LLC

T w o M i r a n o v a P l a c e , C o l u m b u s , O h i o 4 3 2 1 5 r e d c a p i t a l g r o u p . c o m + 1 . 8 0 0 . 8 3 7 . 5 1 0 0

THE FACE OF LENDING

Daniel J. HoganDirector of [email protected]+1.614.857.1416 office +1.800.837.5100 toll free

James P. HensleySenior Managing DirectorHead of Multifamily [email protected]+1.770.753.6472 office +1.800.837.5100 toll free

© 2014 RED Capital Group, LLC


SUBMARKET TRENDS (REIS)

FOR MORE INFORMATION ABOUT RED’S RESEARCH CAPABILITIES CONTACT:

Payroll job formation continued at a brisk paceover the winter as Seattle employers hired at a39,800-job, 2.7% year--on-year rate, in line with4Q13 results. The skilled services industries werethe prime movers as business, education andhealth care services establishments hired at acombined 16,100-job, 3.9% annual rate, up froma 13,600-job pace in the prior quarter. Resultswere inhibited to some degree by weakness in theaerospace sector, where attrition of -3,300 jobswere recorded over the trailing 12 months, repre-senting the first annual net decline observed in

this critical industry since 3Q10.

Seasonally-adjusted data also were constructive.This series indicates that establishments createda net of 8,400 jobs in 1Q14, despite a slow start,

and another 8,100 jobs during April and May.

The RCR payroll model finds that Seattle jobgrowth is closely correlated to national job trends,the shape of the yield curve and S&P 500 returns.This 95.1% R2 model finds that moderately slow-ing expansion is likely to evolve through 2015,

followed by a meaningful rebound in 2016.

RED CAPITAL GROUP® | MARKET OVERVIEW

Multifamily Housing Update 1Q14 June 2014

Demand for Seattle apartment space intensifiedduring 1Q14 as tenants net leased 1,906 units,according to Reis, the largest tally in a year. Devel-opers delivered 1,293 new units, producing a net30 basis point sequential quarter average occu-pancy increase to nearly 95.9%. Same store stabi-lized properties surveyed by Axiometrics recordeda unit-weighted average 95.5% occupancy rate, up

50 bps sequentially but down 10 bps year-on-year.

Axiometrics report that occupancy levels weresimilar across classes, ranging from 95.3% in

class-A to 95.6% in classes-B and –C. Absorptionof new units remained brisk but some slowing wasevident as the mean lease-up decelerated to a 12-

unit per month pace in 1Q14 from 16 in 2Q13.

RCR’s modeling exercise suggests that Seattleapartment demand is correlated to current andlagged rent growth, S&P 500 returns and newsupply. We expect rent and supply growth to re-main brisk while S&P gains moderate. With thisbackground, the most probable outcome is a gen-

tle occupancy rate slide to about 95% in 2017.

Reis report that asking and effective rents in-creased 1.0% sequentially in the first quarter, ineach case representing the smallest quarterlygains recorded since 4Q11. Expressed on a year-on-year basis, asking and effective rents were5.9% higher, down from 7.3% and 7.1%, respec-tively, during the prior quarter. As a result, Seattledropped two spots to 3rd rank among the RED 46after San Jose and San Francisco. Axiometricssurveys of stabilized same store properties record-

ed a 5.5% y-o-y advance, slowest since 3Q10.

Axio Class-A rent trends accelerated from 4Q13’s

5.4% annual pace to a 6.3% y-o-y advance to$2,043. Class-C assets also posted a 6.3% y-o-ygain in 1Q14 ($1,005), while class-B properties

recorded an average 5.8% increase ($1,411).

RCR’s Seattle rent model employs personal in-come, employment, home price growth and laggedvacancy rates as predictive variables. The 96.9%Adjusted-R2 model projects healthy rent gains inthe 4.5% to 5.5% range for the next several years.The 4.7% compound annual growth forecast is the6th fastest among the RED 46, trailing the three

Bay Area markets, New York City and Orange Co.

Twenty $5 million or larger sales for which pricingdata were available closed during the first quarterfor gross proceeds of $522mm, up from 18 and$469mm in the year earlier period. Sales equatedto an average price of $162,160/unit, down from$241,416 in the previous quarter and $182,452in the year-earlier period. Sales gained momentumduring the spring as 28 transactions were closedby the fourth week of June for total proceeds of

$918mm and average unit price of $180,159.

A diverse group of buyers participated, led by

hedge and private equity funds, REITs and diversi-fied owner/managers. Institutional quality assetstraded to mid-4% to mid-5% cap rates. Secondtier properties offered going-in yields ranging from

5.25% to 6.25%, according to broker sources.

Using 4.7% purchase and 5.3% exit cap rates andmodel derived rent and occupancy assumptions,RCR estimate a 7.8% 5-year expected total return,ranking 20th among the RED 46 and comparingfavorably to the 7.5% mean of the peer group.

The risk-adjusted return measure ranks #33.

Seattle, Washington

1Q14 Payroll Trends and Forecast

1Q14 Absorption and Occupancy Rate Trends

1Q14 Effective Rent Trends

1Q14 Property Markets and Total Returns

$5mm+ Sales 19






Trade & Return Summary

RED 46 RAI Rank 33rd



Annual Change 5.9.%

RED 50 Rank 3st




Effective Rent Summary


Occupancy Rate (Reis) 95.9.%

RED 50 Rank 28th

Annual Chg. (Reis) +0.1%




Occupancy Rate Summary



Annual Change 39.8m(2.7%)

2014 Forecast 33.9m

2015 Forecast 26.9m

2016 Forecast 31.1m

2017 Forecast 28.9m

Payroll Job Summary

Unemployment 4.8% (May)

RED CAPITAL Research | June 2014


MARKET OVERVIEW 1Q14 | SEATTLE, WASHINGTON

Property Name (Submarket)Property Class/Type (Constr.)

Approx. Date ofTransaction



per unit


Cap Rate

Bailey Farms (Everett / Mukilteo) A / GLR (2013) 16-Mar-2014 $91.3 $245,431 4.5% p.f.

Ballinger Commons (North Seattle) B- / GLR (1989) 28-Mar-2014 $86.0 $177,267 5.2%

Park Highland (Bellevue) B- / GLR (1993) 31-Mar-2014 $47.7 (Allocated) $190,632 6.5%

Waterford at the Lakes (West Kent) C+/ GLR (1989) 2-Apr-2014 $48.1 (Allocated) $139,859 5.0%

Joseph Arnold Lofts + Retail (Belltown) A / MR (2013) 29-Apr-2014$58.2 (Allocated to

Rental Apartments)$445,000 5.3% p.f.


95.9%

95.3% 95.2% 95.1%95.6%

91%

92%

93%

94%

95%

96%

97%


Avera

ge

Occupancy

Rate

RED 46 AVERAGE

SEATTL E (REIS/RCR)

Seattle Occupancy Rate TrendsSource: Reis History, RCR Forecasts

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


Unit

s(T

12

Mo

nth

s) ABSORPTIONS COMPLETIONS

Seattle Absorption and Supply TrendsSource: Reis History, RCR Forecasts

5.3%

4.6%

5.2%5.0% 5.2%5.1%

7.1%

4.6%

5.3%5.4%5.7%

5.5%5.2%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14

Ave

rage

Ca

pR

ate

PACIF IC REGION SEATTLE

Seattle Cap Rate TrendsSource: eFannie.com, RCR Calculations

The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting orfinancial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has beengathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representa-tions or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report.RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third partysources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer toparticipate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please con-sult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change with-out notice due to market conditions and other factors.



5.9% 4.0%5.3%4.8%4.9% 4.3%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%


Yo

YR

en

tTr

en

d

RED 46 AVERAGE

SEATTLE AXIOMETRICS SAME-STORE

SEATTLE (REIS/RCR)

Seattle Effective Rent TrendsSources: Reis, Inc., Axiometrics, RCR Forecast

3.3%1.7%

0.7%

4.2%5.1%

10.0% 10.2%8.6%

5.6% 2.6%

9.3%

-8.0%

-4.0%

0.0%

4.0%

8.0%

12.0%

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Y-o

-Y%

Ch

an

ge

U.S.A. SEATTLE

Seattle Home Price TrendsSource: FHFA Home Price Indices and RCR Forecasts

1.9% 1.8%

2.2%

1.6%

2.0%

2.7%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2011 2012 2013 2014 2015f 2016f 2017f 2018f

Y-o

-Y%

Ch

an

ge

U.S.A. SEATTLE

Seattle Payroll Employment TrendsSource: BLS, Institute for Economic Competitiveness at UCF & RCR

RED CAPITAL GROUP

For more information about RED’s research capabilities contact:






Bothell $1,084 $1,117 3.1% 3.4% 3.7% 30 bps


Downtown / Capitol Hill $1,467 $1,636 11.5% 6.1% 7.2% 110 bps

Edmonds / Lynnwood $916 $960 4.8% 2.7% 3.1% 40 bps


Federal Way $901 $922 2.4% 3.4% 2.7% -70 bps

Kent $893 $919 3.0% 2.8% 1.9% -90 bps



Redmond $1,247 $1,302 4.4% 4.9% 3.0% -190 bps

Renton $966 $990 2.5% 2.9% 2.4% -50 bps



Metro $1,087 $1,151 5.9% 4.2% 4.1% -10 bps

SUBMARKET TRENDS

Daniel J. Hogan, Director of [email protected]

James P. Hensley, Senior Managing DirectorHead of Mortgage [email protected]

Metro job creation trends decelerated moderatelyover the winter months but remained healthyoverall. Seattle concerns hired at a 40,200-job,2.7% annual pace in 4Q13, down from 3Q’s ro-bust 46,700-job, 3.2% performance. PreliminaryJanuary and February data suggested that theslowdown carried over into the new year, as year-over-year comparisons slipped to an average of38,700 jobs. Goods producing industries werelargely responsible. Over the year growth in con-struction and manufacturing fell from 8,500 jobsin August to no net change in February. Job losses

were detected in the aerospace industry. The techsector also was softer as hiring in the computer

system design and software segments declined.

The RCR payroll model relies on three lags of thedependent variable, U.S. payroll growth, stockprices and the slope of the yield curve to achievea statistically unbiased 90.8% adjusted R2. Thismodel projects further deceleration in 2014 to the1.8% level followed by advances in the 1.9% to2.2% range through 2016. The forecast out-yearsare moderately slower in keeping with the U.S.

economy in the late stage of its current recovery.


Multifamily Housing Update 4Q13 April 2014

Seattle space demand showed no signs of lostmomentum as tenants occupied a net of 1,386units (Reis) during 4Q13, comparing constructivelyto 1,120 in the seasonally stronger third quarterand 1,525 in the year-earlier period. Supply levelsplayed a major role in the trend. Developers com-pleted 2,244 units during 4Q (7,097 units for theyear), the largest one-quarter and the third largestannual vintages in the 24-year history of the Seat-tle Reis series. As a result, occupancy fell 40 basis

points sequentially and year-on-year to 95.4%.

Axiometrics same-store surveys detected a moder-ately larger decline: stabilized property occupancydropped -60 bps sequentially to 94.9% in 4Q13.The phenomenon was most pronounced in the

class-A sector (-90 bps); least in class-C (-50 bps).

RCR models forecast that supply and demandgrowth should remain at historically high levels in2014 and 2015, before reverting to long-termaverages thereafter. Consequently, occupancy islikely to dip to the low-95% area in 2H14, before

rebounding to about 95.7% by mid-year 2015.

Rent trends moderated from the torrid pace ob-served during the third quarter but remainedamong the strongest in the country. Effectiverents increased $14 (1.2%) sequentially to anaverage of $1,139, down from $22 (2.0%) in3Q13 (Reis). Expressed on a year-on-year basis,rents advanced 7.1% for the second consecutive

quarter, ranking #1 among the RED50 once more.

Axiometrics surveys detected a seasonal weaken-ing trend as stabilized same-store property rentsdeclined about -$30 (-2.2%) sequentially to a

$1,370 mean. Year-on-year comparisons deceler-ated to 5.7% from 7.2%, representing the smallestgain posted since 3Q10. Class-B assets were mostaffected, slipping –3.0% sequentially. Class-A and

C rents declined –1.5% and –0.4%, respectively.

RCR’s rent model (Adj_R2=96.5%) employs in-come, employment and vacancy variables. Themodel foresees gradually slowing growth through2014-15 to about the 4% level, followed by reac-celeration to the mid-4% area during 2016. Annu-

al growth will average about 4.3% through 2018.

The velocity of property sales held steady duringthe fourth quarter as 11 properties valued at $5million or more were exchanged, consistent withthird quarter results. But the character of tradechanged materially, with increased participationby institutional and hedge fund investors whozeroed in on high-quality, recent construction prop-erties. As a result, sale proceeds increased from$349mm to $671mm, and the average value of

units traded rose from $201,351 to $271,736.

Cap rates applicable to trophies were steady in the

mid-4% area, despite increased competitionamong buyers, perhaps reflecting rising supplyconcerns. Class-B and C+ assets sold to yields in

the low-5% to high-5% range.

Based on observations of recent trade, RCR elect-ed to bump the generic cap rate 15 bps to 4.75%.Using this assumption, a 5.2% terminal cap rateand our model occupancy and rent forecasts pro-duced an 8.0% expected 5-year unlevered annualreturn, ranked 19th among the RED 46. Low model

standard error boosted Seattle’s RAI to R46 #12.

Seattle, Washington





$5mm+ Sales 11










Annual Change 7.1%

RED 50 Rank 1st







RED 50 Rank 35th

Annual Chg. (Reis) -0.4%








2014 Forecast 33.3m

2015 Forecast 26.5m

2016 Forecast 33.6m

2017 Forecast 26.2m

Payroll Job Summary

Unemployment 5.4% (Feb.)

RED CAPITAL Research | April 2014




Approx. Date ofTransaction

Total Price(in millions) Price per unit

EstimatedCap Rate

206 Bell (Downtown / Capitol Hill) A / MR (2013) 3-Nov-2013 $39.1 (Alloctd) $320,820 4.4% p.f.

Catalina Community (Bellevue) B+/ LR (92/08) 28-Feb-2014 $16.4 $170,547 7.5%

Muriel’s Landing (North Seattle) B+/ MR (2012) 27-Mar-2014 $21.6 (Alloctd.) $216,000 5.4%

Westhaven Apartments (West Seattle) C+/ GLR (1987) 28-Mar-2014 $27.0 $142,105 5.4%

Waterford at the Lakes (West Kent) C+/GLR (1989) 1-Apr-2014 $48.1 (Alloctd.) $139,859 4.5%


95.1%95.4% 95.4% 95.6%

95.1%95.3%

90%

92%

94%

96%

98%


Avera

ge

Occupancy

Rate RED 46 AVERAGE

SEATTL E (REIS/RCR)


7,185

2,6823,005

2,4972,192

4,494

0

750

1,500

2,250

3,000

3,750

4,500

5,250

6,000

6,750

7,500


Unit

s(T

12

Mo

nth

s)



5.7%

5.0%5.2%5.2%5.2%5.3% 5.2% 5.2%

4.5%4.6%

4.5%

5.2%5.4%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14

Ave

rage

Ca

pR

ate



The supply outlook now appears to be moderately heavier than

previously understood. Consequently, the occupancy outlook is now

moderately weaker than in the third quarter..




7.1%

4.8%4.0% 4.6% 4.2% 3.9%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%


Yo

YR

en

tTr

en

d

RED 46 AVERAGE SEATTLE (REIS/RCR) SEATTLE AXIOMETRICS SAME-STORE


10.0%

12.6%

-7.5%

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Y-o

-Y%

Ch

an

ge

U.S.A. SEATTLE FHFA SEATTLE CSI

Seattle Home Price TrendsSources: S&P Case-Shiller and FHFA Home Price Indices and RCR Forecasts

1.8%2.0%

2.2%

1.4%1.7%

2.7%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2011 2012 2013 2014f 2015f 2016f 2017f 2018f

Y-o

-Y%

Ch

an

ge

U.S.A. SEATTLE


Weaker economic and occupancy forecasts resulted in a reduction in the

compound annual growth rate of rents to 4.3% in 4Q from 5.2% in 3Q13.

Flat price trends in 4Q13 contributed to weaker home price forecasts using

both the FHFA and Case-Shiller Home Price Indices.

RED CAPITAL GROUP







Bothell $1,071 $1,115 4.2% 3.5% 3.4% -10 bps





Federal Way $893 $920 3.0% 4.0% 3.0% -100 bps

Kent $892 $913 2.3% 3.0% 2.4% -60 bps



Redmond $1,225 $1,274 4.0% 4.5% 5.3% 80 bps

Renton $949 $988 4.1% 3.3% 2.8% -50 bps



Metro $1,063 $1,139 7.1% 4.2% 4.6% 40 bps

SUBMARKET TRENDS (REIS)



-4.0

%

-0.5

%

3.0

%

6.5

%

10.0

%

-2%

2%

6%

10%

14%

The Jet City economy activated the afterburnersduring 3Q13, creating new payroll jobs at a43,800, 3.0% year-on-year rate, fastest in sixyears. Hiring was significantly stronger in the con-struction, transportation and business, healthcare and leisure service sectors, which collectivelygrew at a 26,300-job, 3.9% pace, up from 2Q’s15,900-2.4% rate. Seasonally-adjusted data wereconsistent, showing a 13,400-job surge duringJuly, propelling 3Q job creation to a net of 15,300,

third strongest quarter in the last fourteen years.

Preliminary 4Q13 data indicate that the job mar-

ket cooled late in the year. Slower services growthand weaker conditions in aerospace manufactur-

ing (-2,100/-2.3%) were largely responsible.

The RCR payroll model suggests that the fall slow-down is a temporary event. Strengthening U.S.economic conditions coupled with robust localhousing and stock prices will return the Seattleemployment market back above the 3% growththreshold by 2H14. The most probable outcomefor 2014 is for a 16-year high 47,600-job netgain, followed by growth averaging 40,200 jobs

per year from 2015 through 2018.


Multifamily Housing Update 3Q13 January 2014

Tenant demand slowed moderately during thethird quarter but remained at a brisk clip. Rentersabsorbed a net of 1,141 units, according to Reis,down from 1,302 and 1,226 in the prior and yearearlier quarters, respectively. Moreover, supplyticked upward 211 units sequentially to 1,312,resulting in a -10 basis point occupancy rate re-treat to 95.9%. Axiometrics surveys fixed occu-

pancy at 95.4%, down -50 bps quarter-to-quarter.

Supply pressure exerted some downward force onDowntown occupancy. Reis report a -40 bps se-

quential submarket occupancy decline on deliveryof 554 units. Axiometrics paint a brighter picture,finding a 95.5% (-20 bps) same store occupancyrate among stabilized assets and a 96.5% rate for2012/13 deliveries, up 850 bps on average new

property absorption of 10 (6%) units per month.

RCR models expect occupancy to fall -30 bps in4Q13 and another 10 bps in 2014 (Reis reportpreliminarily that the metric fell -40 bps in 4Q to95.4%). RCR expect occupancy to bottom in late

2014 and rebound to near 96% by 2H15/1H16.

Metro rents continued to increase at an extraordi-nary rate during the third quarter, rising $28(2.6%) sequentially and $75 (7.1%) year-over-year(Reis); ranking 2nd and 1st, respectively, amongthe RED 46 by these measures. Axiometrics same-store analysis recorded comparable 2.0% and6.9% gains. Data suggest that momentum wasstronger in the class-A segment. Axiometrics same-store data reveal a 2.5% sequential advance inclass-A assets compared to a 1.9% gain amongclass-B&C properties. Likewise, Reis report that

class-A assets posted an average 2.3% asking rent

gain against 1.3% among the B&C strata.

Downtown/Q.A. assets performed admirably. Reismean and Axiometrics same-store data show se-

quentially gains of 2.8% and 3.4%, respectively.

RCR models forecast 7.3% average annual per-sonal income gains through 2018, which shouldfuel further U.S.-leading rent growth. We expect 5-year compound annual rent growth of 5.1%, fast-

est among the RED 46 by 20 bps over New York.

Property trade regained momentum in the secondhalf 2013 as 30 $5 million+ trades were closedfor total proceeds of approximately $1.33 billion.The average price of the 6,379 units sold was$209,233. These data compare to 21 transac-tions valued at an aggregate of $652mm

($147,836/unit) during the year’s first half.

Investors largely were made up of major nationalinstitutions, investment companies and funds. Aglobal, NYSE-listed investment fund led investorsin 4Q13, acquiring Bellevue and Seattle properties

valued at an aggregate of $349mm ($614,500/unit). Cap rates were mostly in the high-4% to mid-

5% range, although trophies priced to the low-4s.

RCR remain of the mind that institutional qualityassets trade at approximately 4.6%. Using thisassumption, model-derived 5.2% exit cap rate andour most probable rent and occupancy outcomes,we derive an expected five-year annual rate ofreturn of 8.8%. This result ranks 4th among theR46. A Monte Carlo risk simulation finds that risk-

adjusted returns rank 16th among the 46 markets.

Seattle, Washington





$5mm+ Sales 14





RED 46 ETR Rank 4th





Annual Change 7.1%

RED 50 Rank 1st







RED 50 Rank 26th

Annual Chg. (Reis) 0.2%








2013 Forecast 37.8m

2014 Forecast 47.6m

2015 Forecast 46.1m

2016 Forecast 41.1m

Payroll Job Summary

Unemployment 5.2% (Nov.)

RED CAPITAL Research | January 2014




Date ofTransaction



per unit


Cap Rate

The Bravern Apartments (Bellevue) A+/HR (2010) 14-Oct-2013 $307.8 $676,523 4.1%

Bailey Farm (Bothell) B+/GLR (2013) 17-Dec-2013 $88.8 (Allocated) $238,700 4.5% p.f. @95%

Arcadia Townhomes (Federal Way) B-/TH (1990) 26-Dec-2013 $53.0 $171,597 6.4%

Madison Sammamish (Bellevue/Issaquah) B/GLR (88/06) 21-Dec-2013 $52.7 $198,178 5.6%

Marina Landing (Renton) B-/GLR (1986) 25-Nov-2013 $32.8 $176,075 5.4%


95.9%95.7%95.8%95.8%95.4%95.9%

90%

92%

94%

96%

98%

3Q 07 3Q 08 3Q 09 3Q 10 3Q 11 3Q 12 3Q 13 3Q 14 3Q 15 3Q 16 3Q 17 3Q 18

Avera

ge

Occupancy

Rate

RED 48 AVERAGE

SEATTL E (REIS HISTORY/RCR FORECAST)


5.0%5.2%5.4% 5.2%5.3% 5.7%

5.2%5.2%

5.2%

4.5% 4.6%

5.2%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

Ave

rage

Ca

pR

ate

SEATTLE PACIFIC REGION


-4,000

-2,000

0

2,000

4,000

6,000

8,000

3Q 07 3Q 08 3Q 09 3Q 10 3Q 11 3Q 12 3Q 13 3Q 14 3Q 15 3Q 16 3Q 17 3Q 18

Unit

s(T

12

Mo

nth

s)






4.6%5.0%4.8%7.3%

5.5%

-12%-10%

-8%-6%-4%-2%0%2%4%6%8%

10%

3Q 07 3Q 08 3Q 09 3Q 10 3Q 11 3Q 12 3Q 13 3Q 14 3Q 15 3Q 16 3Q 17 3Q 18

Yo

YR

en

tTr

en

d

RED 48 AVERAGE


SEATTLE (REIS HISTORY/RCR FORECAST)


-8%

-6%

-4%

-2%

0%2%

4%

6%

8%

10%

12%

2011 2012 2013f 2014f 2015f 2016f 2017f

Y-o

-Y%

Ch

an

ge

U.S.A. SEATTLE REGION

Seattle Home Price TrendsSources: FHFA Home Price Indices and RCR Forecasts

2.3%2.6%

2.9%2.7%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2011 2012 2013f 2014f 2015f 2016f 2017f

Y-o

-Y%

Ch

an

ge

U.S.A. SEATTLE


RED CAPITAL GROUP







Bothell $1,059 $1,108 4.6% 3.2% 3.0% -20 bps


Downtown / Capital Hill $1,405 $1,562 11.2% 4.9% 6.6% 170 bps



Federal Way $886 $912 3.0% 4.6% 3.1% -150 bps

Kent $878 $907 3.3% 3.4% 2.3% -110 bps

Kirkland / Juanita $1,252 $1,318 5.3% 2.8% 2.6% -20 bps


Redmond $1,227 $1,272 3.6% 5.0% 4.6% -40 bps

Renton $935 $987 5.5% 3.8% 2.6% -120 bps


West Seattle / Burien $887 $950 7.1% 4.4% 4.5% 10 bps

Metro $1,061 $1,124 7.1% 4.3% 4.1% -20 bps

SUBMARKET TRENDS

1 4 .8 % 7 0 . 5 % 1 4 .7 %

4 . 0 0 % 1 0 .0 0 %

-5%

0%

5%

10%

15%

20%

0

2

4

6

8

1 0

1 2

1 4

1 6

S e a t t l e / I R R

S e a t t l e / I R R

M i n i m u m - 4 . 1 0 %

M a x im u m 1 6 . 8 %

M e a n 7 . 0 4 %

S t d D e v 2 . 8 5 %

V a l u e s 1 0 0 0 0



Payroll job growth moderated during the springquarter as Seattle concerns hired at a 32,900-job,2.3% pace, down from 1Q13’s vigorous 40,900-job, 2.9% advance. The slowdown was largelyattributable to weaker trends in the business ser-vice and construction sectors, which expanded ata combined 6,400-job, 2.3% rate after posting a

12,500-job, 4.7% growth surge during 1Q13.

Preliminary data for the third quarter suggest thelabor market regained momentum over the sum-mer. July and August payroll aggregates reflected47,3000-job and 40,500-job 12-month gains, the

July statistic representing the largest y-o-y ad-vance recorded since 2007. Seasonally-adjusteddata were consistent, showing a 7,300-job net

increase in June and a 13,400-job gain in July.

RCR employs three lags of the dependent variableand current and lagged U.S. payroll, inflation andoutput gap and metro personal income as varia-bles to produce a 95.0% adj-R2 forecasting model.This model generates a highly positive forecastcharacterized by growth rates in the mid-2% tomid-3% range from 2014 through 2017, after a

relatively sluggish (1.7%-1.9%) second half 2013.


Multifamily Housing Update 2Q13 October 2013

Following the first quarter’s near record net ab-sorption of 2,118 units, space demand was mod-erately slower in the spring. Tenants net leased1,042 units during 2Q13, according to Reis, upfrom 689 in the year-earlier period, and comforta-bly above the 604-unit 14-year spring quarteraverage. A decrease in new apartment deliverieswas partially responsible, as developers addedonly 778 units to inventory during 2Q13, down

from 2,087 units between January and March.

Reis recorded a 96.0% occupancy rate, up 10

basis points both year-over-year and sequentially.Axiometrics surveys of stabilized larger propertiesreached a similar conclusion, finding a 95.7%

2Q13 weighted average, up from 95.1% in 2Q12.

Supply will continue to challenge the Seattle mar-ket through 2015. Our supply models suggestthat nearly 5,000 and 4,000 units will be deliv-ered in 2014 and 2015, respectively. Althoughwe expect tenant demand to be healthy, it is un-likely to keep pace, contributing to occupancy

declines in the 75-125 bps range through 2017.

The healthy economy and strong demand for infillspace drove rents substantially higher in thespring. Reis report that metro mean effective rentincreased $14 (1.3%) sequentially and $64 (6.2%)year-over-year to $1,096, ranking first among theRED 50 markets. Momentum was fueled by largehikes in Downtown/Queen Anne submarket wherethe average rent surged $53 (3.6%) sequentiallyto $1,520. Axiometrics surveys recorded a 6.7% y-o-y advance, propelled by 9% or faster growth insubmarkets near aerospace and software employ-

ment centers (Kent, Renton, Kirkland, Bellevue).

RCR’s Seattle rent model is unusually strong (adj-R2=97.0%, STD-ER=0.7%), relying on five inde-pendent variables, including metro personal in-come, payroll and apartment stock growth; vacan-cy rates; and home prices. The results are impres-sive as rent growth averages 4.7% for the next fiveyears (trailing only San Jose among the RED 46)and never falls below 3.7% (4Q14). Trends arelikely to be a bit weaker through 2014 due to sup-

ply pressures, but 5%+ gains may return by 2016.

As the availability of coveted infill assets dwindledtrade velocity decelerated and investors shiftedfocus toward class-B suburban garden projects. Atotal of 15 transactions involving properties of80+ units closed during the quarter, down from 23and 33 during 1Q13 and 4Q12, respectively.Sales proceeds totaled about $425mm, downfrom approximately $800mm during the first quar-ter. Prices equated to a $151,972/unit average,

down from $174,677 in the prior quarter.

Aggressive competition for Downtown and Belle-

vue trophies held cap rates on these assets in thelow– to mid-4% range. Class-B/B– suburban as-sets, by contrast, exchanged hands at considera-

bly higher yields in the 5.75% to 6.25% area.

In view of the higher yields observed in recentgarden trades, RCR elected to raise the genericSeattle cap rate 15 basis points to 4.75%. Usingthis going-in rate; a 5.61% exit level; and our mod-el derived occupancy and rent forecasts, we esti-mate a 7.1% expected 5-year annual rate of re-

turn, ranked 16th among the RED 46.

Seattle, Washington





$5mm+ Sales 15







RED RAI Rank 29th



Annual Change 6.2%

RED 50 Rank 1st







RED 50 Rank 24th

Annual Chg. (Reis) 0.1%








2013 Forecast 31.3m

2014 Forecast 36.1m

2015 Forecast 43.7m

2016 Forecast 47.4m

Payroll Job Summary

NSA Unemployment 5.7% (Aug.)

RED CAPITAL Research | October 2013




Date ofTransaction



per unitEstimatedCap Rate

Morning Run Apts. (Snohomish County) B-/GLR (1991) 27-May-2013 $26.4 $118,919 6.9%

Eastlake 2851 (Downtown / Eastlake) B+/MR (2008) 17-Jul-2013 $39.8 (net) $299,501 4.3%

Alto Apartments (Downtown / Belltown) A / HR (2012) 18-Jul-2013 $61.2 (net) $332,466 4.0%

Linden Square (North Seattle / Northgate) B- / MR (1994) 29-Aug-2013 $25.1 $136,995 6.0%

Crystal Cove (Everett / Mukilteo) B-/GLR (1998) 22-Sep-2013 $40.8 $131,190 6.1%


96.0%

95.0%95.0%95.2%95.0%

90%

91%

92%

93%

94%

95%

96%

97%

98%

2Q 07 2Q 08 2Q 09 2Q 10 2Q 11 2Q 12 2Q 13 2Q 14 2Q 15 2Q 16 2Q 17

Avera

ge

Occupancy

Rate RED 46 AVERAGE SEATTLE (REIS/RCR)

Metro Occupancy Rate TrendsSource: Reis History, RCR Forecasts

5.8% 5.8%6.0%

4.6% 4.7%

5.0%

5.7%

5.3%5.3% 5.6% 5.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13

Ave

rag

eC

ap

Ra

te


Metro Cap Rate TrendsSource: eFannie.com, RCR Calculations

-4,000

-2,000

0

2,000

4,000

6,000

8,000

2Q 07 2Q 08 2Q 09 2Q 10 2Q 11 2Q 12 2Q 13 2Q 14 2Q 15 2Q 16 2Q 17

Unit

s(T

12

Mo

nth

s)


Metro Absorption and Supply TrendsSource: Reis History, RCR Forecasts




5.1%4.8%4.0%5.7%

-14%-12%-10%

-8%-6%-4%-2%0%2%4%6%8%

10%12%

2Q 07 2Q 08 2Q 09 2Q 10 2Q 11 2Q 12 2Q 13 2Q 14 2Q 15 2Q 16 2Q 17

Yo

YR

en

tTr

en

d

RED 46 AVERAGE


SEATTLE (REIS/RCR)

Metro Effective Rent TrendsSources: Reis, Inc., Axiometrics, RCR Forecast

8.3%

9.6%

-8%

-6%

-4%-2%

0%

2%

4%

6%8%

10%

12%

2011 2012 2013f 2014f 2015f 2016f 2017f

Y-o

-Y%

Ch

an

ge

U.S.A. SEATTLE PACIFIC REGION

Metro Home Price TrendsSource: FHFA Home Price Indices and RCR Forecasts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2011 2012 2013f 2014f 2015f 2016f 2017f

Y-o

-Y%

Ch

an

ge

U.S.A. SEATTLE

Metro Payroll Employment TrendsSource: BLS, Institute for Economic Competitiveness at UCF & RCR

RED CAPITAL GROUP





Beacon Hill / Rainier $974 $999 2.5% 10.6% 6.3% -430 bps


Bothell $1,045 $1,096 4.9% 3.3% 3.2% -10 bps


Downtown / Capitol Hill / QA $1,374 $1,520 10.6% 3.9% 6.2% 230 bps



Federal Way $877 $906 3.3% 4.8% 3.1% -170 bps

Kent $872 $898 3.1% 3.5% 2.6% -90 bps



Redmond $1,196 $1,265 5.8% 5.1% 4.7% -40 bps

Renton $923 $976 5.7% 4.0% 2.7% -130 bps



Metro $1,032 $1,096 6.2% 4.1% 4.0% -10 bps

SUBMARKET TRENDS

4.0%

5.9%7.1%

8.1%9.5%

4.6%2.7%

6.0%7.3%

8.9%

0%

2%

4%

6%

8%

10%

12%

90% 70% 50% 30% 10%Probability of Ac hie ving Sta ted Re turn or Gre a te r

Tota

lR

etu

rn

SEA (RAI=2.85)RED 46 AVG. (RAI=4.03)

Total Return DistributionsSource: RED CAPITAL Research


Andrew T. Warnock, [email protected]

Seattle payroll trends went from strength tostrength during the first quarter as metro estab-lishments hired at a 40,700-job, 2.9% year-over-year rate, up from 4Q12’s 37,700-job perfor-mance. Quarter-to-quarter gains were realized inthe trade, transportation and education servicesectors, which collectively grew at a 14,300-job,5.1% annual pace compared to 4Q12’s 10,500-job, 3.7% advance. Expansion in the tech sectoralso continued apace as the professional, scien-tific and tech service sub-sector added workers at

a 5,900-job rate, up from 4,500 during 4Q12.

April data were weaker, however, raising the pro-spect of a mid-year slowdown. Payrolls declined–1,000 jobs on a seasonally-adjusted basis be-tween March and April, while the year-on-year NSA

comparison rose by the fewest jobs in 14 months.

The RCR payroll model projects slower conditionsin the Seattle area through 2016. The forecastcalls for a net gain of 33,600 jobs this year fol-lowed by gains in the mid– to high 20,000 rangein 2014, 2015 and 2016. Faster growth is ex-pected in 2017 in keeping with stronger GDP and

job conditions anticipated for the U.S.


Multifamily Housing Update 1Q13 June 2013

Tenants warmly embraced a flood of new supplythat washed up on the shore of Puget Sound dur-ing the first quarter, net leasing 2,051 vacantunits, representing the fourth largest quarterlyabsorption total in the 14-year Reis data series.Average metro occupancy increased only 10 basispoints, however, as developers delivered 2,024units to market, which stands as the second larg-

est one-quarter vintage in the Reis series.

Supply pressures are likely to be a recurringtheme in Seattle over the next several years. Reis

expect 2,326 units to be added to inventory dur-ing the remainder of 2013, with another 4,588 ontap for 2014. Our model projects deliveries of

3,736 units in 2015 and 3,043 in 2016.

The RCR absorption model expects demand tokeep pace with supply through 2014 and overtakeit during the following two years. As a result,average occupancy should remain above 96%through the forecast period, with a good prospectof piercing the 97% threshold by 2016. The prob-

ability of a 96%+ average through 2017 is 83.6%.

Fueled by exceptional demand for apartmentspace and addition of more than 2,000 mostlyluxury units to inventory sequential Seattle effec-tive rents surged $17 (1.6%) in 1Q13, represent-ing the fifth consecutive quarter of 1.2% growth orfaster. Expressed on a year-over-year basis rentincreased at a 6.1% rate, ranking the Jet City first

among the RED 50 markets on this basis.

Rents increased sequentially in 13 of Seattle’s 16Reis-defined submarkets. The exceptions wereAuburn (-0.3%), Beacon Hill (-0.9%) and Edmonds

(-0.1%). Seven submarkets chalked down gainsof 1.8% or more, led by Downtown (2.4%), WestSeattle (2.0%) and Everett (1.9%). Everett accom-

plished the feat entirely on a same-store basis.

RCR’s Seattle rent model is primarily influenced bymetro and U.S. personal income growth. Both areprojected to grow relatively slowly, exerting pres-sure on rent trends over the next three years.Nevertheless, rents are projected to rise at a 3.9%compound annual rate from 2012 to 2017, with a

17% probability of 5% annual growth or faster.

Property trade continued at jet propelled speedduring the first quarter, as 31 projects of 80 ormore units exchanged hands. Sale proceeds forthe 17 transactions for which pricing data wereavailable totaled $752.4 million, down marginallyfrom 4Q12’s $1 billion plus blow out. Units tradedat an average price of $231,013 as at least eightsales were consummated at prices exceeding

$200,000 per unit.

The liquidation of six properties controlled by aprivate REIT dominated the conversation. The

assets were valued at $480 million or $322,000per unit. Sources indicate that the properties

were priced to initial yields in the high-4% area.

Employing a 4.6% going-in cap rate; a derived5.0% exit cap rate; and our model generated occu-pancy and rent forecasts RCR estimate that buy-ers of institutional quality Seattle assets shouldexpect to achieve 5-year unlevered total returns ofabout 8.4%, ranking 17th among the R46. Thestandard error of the models is low, resulting in a

favorable 6th-ranked 6.71 risk-adjusted index.

Seattle, Washington





$5mm+ Sales 31


Median Cap Rate (FNM) 5.4%



RED 46 ETR Rank 17Th


RED RAI Rank 6th



Annual Change 6.1%

RED 50 Rank 1st







RED 50 Rank 20th









2013 Forecast 33.6m

2014 Forecast 24.2m

2015 Forecast 24.6m

2016 Forecast 24.4m

Payroll Job Summary

Unemployment 4.5% (Apr)





Date ofTransaction


EstimatedCap Rate

Skye at Belltown (Downtown/SA) B+/HR (2001) 17-Apr-2013 $93.6 $260,028 4.6%

Jasper Apartments (North Seattle) A/GLR (2012) 28-Apr-2013 $29.3 $321,923 5.0%

Veloce Apartments (Redmond) B+/MR (2009) 23-Apr-2013 $91.4 $283,861 4.6%

Chandlers Bay Apts. (Des Moines) B+/GLR (1989) 12-Apr-2013 $32.8 $111,945 5.6%

On the Green Harbour Pt. (Edmonds) B/GLR (1990) 8-May-2013 $49.4 $168,037 5.4%

5.4%5.8%

5.3%

6.9%

5.8% 6.0%5.7% 5.3% 5.6% 5.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13

Ave

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-80

-60

-40

-20

0

20

40

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SEA 18.0 (78.4) (23.1) 26.6 37.6 33.6 24.2 24.6 24.4 37.5

2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f

Metro Cap Rate TrendsSources: eFANNIE.COM, RCR CALCULATIONS

Metro Payroll History and ForecastSource: BLS HISTORY, RCR FORECASTS


96.2%

97.6%

90%

91%

92%

93%

94%

95%

96%

97%

98%

1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 1Q 13 1Q 14 1Q 15 1Q 16 1Q 17

Me

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RED 46 AVERAGE SEATTLE

Metro Occupancy Rate TrendsSources: REIS HISTORY, RCR FORECASTS

The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting orfinancial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has beengathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representationsor warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannotbe held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Underno circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in anyparticular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel,accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to marketconditions and other factors.



-15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 1Q 13 1Q 14 1Q 15 1Q 16 1Q 17

Yo

YR

en

tTr

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RED 46 AVERAGE SEATTLE (REIS/RCR)SEATTLE (AXIOM)

Metro Effective Rent TrendsSources: REIS, INC., AXIOMETRICS, RCR FORECAST

-20%

-15%

-10%

-5%

0%

5%

10%

2009 2010 2011 2012 2013

Y-o

-Y%

Ch

an

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CSX -20 METROS SEATTL E

Metro Home Price TrendsSource: CASE SHILLER HOME PRICE INDIEX

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

2010 2011 2012 2013f 2014f 2015f 2016f

Y-o

-Y%

Ch

an

ge

U.S.A. SEATTLE

Metro Payroll Employment TrendsSources: BLS , INSITUTE FOR ECONOMIC COMPETITIVENESS & RCR

RED CAPITAL GROUP


Daniel J. Hogan, Director of Research Kenneth H. Bowen, President, Red Mortgage Capital, [email protected] [email protected] 800-837-5100





Bellevue / Issaquah $1,236 $1,304 5.6% 4.9% 4.5% -40 bps

Bothell $1,038 $1,084 4.4% 3.7% 3.4% -30 bps





Everett / Mukilteo $872 $924 5.9% 3.0% 2.1% -90 bps

Federal Way $862 $901 4.5% 5.0% 3.4% -160 bps

Kent $865 $893 3.3% 3.8% 2.8% -100 bps


Redmond $1,167 $1,247 6.8% 5.2% 4.9% -30 bps

Renton $914 $966 5.6% 4.2% 2.9% -130 bps



Metro $1,016 $1,078 6.1% 4.3% 3.8% -50 bps

SUBMARKET TRENDS

4.4%

6.5%7.8%

9.0%

10.7%

6.7%5.7%7.4%

9.6%

12.3%

0%

2%

4%

6%

8%

10%

12%

90% 70% 50% 30% 10%Proba bility of Achie ving Sta te d Return or Gre a te r

Tota

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Seattle job creation trends remained among themost robust in the nation during 4Q12. Establish-ments hired at a 37,700-job, 2.6% pace, repre-senting the fourth consecutive quarter of 2.6%growth or faster. Professional and technical busi-ness services, aerospace manufacturing and soft-ware publishing were the principal drivers, directly

accounting for nearly one-third of new jobs.

Early 2013 data were constructive. Expressed ona year-on-year basis, Seattle payrolls advanced ata 41,800-job 3.0% rate during January and Febru-ary. Expansion was balanced across industries

with acceleration notable in the construction,trade and business and leisure service sectors.As a result, the metro unemployment rate fell to

5.8% in February, lowest since October 2008.

The RCR payroll model suggests that 2013 and2014 are likely to be banner years for the Jet Cityeconomy as job creation may be the fastest since1998. The model forecasts net adds of 49,500and 50,900 jobs in 2013 and 2014, respectively,up from 37,600 last year. For the out-years of theforecast gains decelerate slightly but continue to

exceed the 40,000-job annual threshold.


Multifamily Housing Update 4Q12 April 2013

Apartment absorption took off like a Boeing 757during 4Q12. Tenants net leased 1,694 vacantunits, representing the strongest ever fourth quar-ter leasing performance in the 14-year Reis quar-terly data series and nearly twice the number ofunits occupied in the prior quarter. Average occu-pancy improved 30 basis points sequentially to

96.2%; highest level observed in nearly 12 years.

Delivery by developers of 1,244 new units consist-ing largely of highly sought after luxury infill prod-uct helped fuel robust demand. But supply soon

may become a burden. Recent completions werea first wave of new product poised to break onshore with nearly 10,000 units in the pipeline for

2013 and 2014 delivery.

The RCR absorption model suggests that newproduct is likely to lease-up successfully. The mod-el projects absorption of 9,323 units for the 2013-2014 period, just 440 units shy of expected sup-ply. As a result, occupancy should remain at orabove 96% for the duration of the five-year fore-

cast period; perhaps breaching 97% by 2015.

Sequential quarter effective rent growth decelerat-ed moderately during the fourth quarter, slowingto $11 (1.1%) from 3Q’s blistering $17, 1.7%pace. By contrast, the year-on-year comparisonincreased again, rising from 3Q’s 5.3% metric to5.8%. The 4Q12 advance represents the fastest

annual rent growth observed among the RED 50.

Rent momentum is primarily attributable to theclass-A sector. Class-A asking rents increased at a5.8% rate last year while rents in the class-B&C

inventory achieved a 3.2% gain.

To no one’s surprise, infill submarkets postedsome of the fastest effective rent growth. Down-town / Q.A. recorded a 2.0% sequential gain while

Beacon Hill / Rainier posted a 1.7% advance.

The RCR rent model projects strong rent growth in1H13 in line with recent observations followed bya gradual deceleration through the balance of the5-year forecast period. Metro rents should in-crease by about 4.4% this year (fifth fastestamong the R46) and at a 3.7% compound annual

rate through 2017, ranked 14th in the peer group.

Many of the nation’s top fund managers, pensionfunds and investment trusts dove head first intothe Seattle property market during the fourth quar-ter as 38 large apartment properties exchangedhands. Total proceeds approached the $1.3 billionthreshold, up from approximately $385mm duringthe third quarter. The average price of a unit in-creased to $170,300 from $155,700 quarter-to-quarter due to a greater concentration of institu-

tional-quality trophy properties in the mix.

Trophy properties traded to yields in the low– to

mid-4% range. Class B+ suburban assets were

priced 50 to 75 bps wider to the curve.

Aggressive pricing of year-end deals led RCR totrim the metro generic cap rate 25 basis points to4.5% for 4Q12. In spite of the low going-in yield(only New York, San Francisco and San Jose arelower), Seattle assets still deliver a derived 7.0%unlevered 5-year expected total return. Althoughthis falls below NYC, S.F. and S.J. derived TRRs,Seattle’s lower volatility level elevates risk-

adjusted returns to the highest among the four.

Seattle, Washington


4Q12 Absorption and Vacancy Rate Trends

4Q12 Rent Trends


$3mm+ Sales 38

Approx. Proceeds $1.3bn






RED RAI Rank 23rd



Annual Change 5.8%

RED 50 Rank 1st







RED 50 Rank 16th







Total Payrolls 1.463.4m


2013 Forecast 49.5m

2014 Forecast 50.9m

2015 Forecast 47.4m

2016 Forecast 45.6m

Payroll Job Summary

Unemployment 5.8% (Feb.)





Date ofTransaction


EstimatedCap Rate

Aspira (Downtown / Queen Anne) A+ / HR (2009) 2-Nov-2012 $165.7 $509,760 3.8% (4.2% pf)

Harrington Square (Renton) A / GLR (2011) 19-Nov-2012 $41.3 $190,092 4.9%

Avalon HighGrove (Everett) B+ /GLR (2000) 21-Dec-2012 $59.5 $152,174 5.3%

Avalon Juanita Village (Kirkland) A- / GLR (2005) 22-Dec-2012 $72.2 $342,201 3.8%

Archstone Northcreek (Bothell) B / GLR (1999) 18-Feb-2013 $88.0 $167,939 5.4%

5.7% 6.2%6.7% 5.3% 5.7% 5.1% 5.2% 5.3%4.6% 4.6%

3%

4%

5%

6%

7%

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SEATTLE PACIF IC REGION


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SEATTLE 18.0 (78.4) (23.1) 26.6 37.6 49.5 50.9 47.4 45.6 44.2

2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f 2017f


Metro Payroll History and ForecastSource: BLS History, RCR Forecasts


91%

92%

93%

94%

95%

96%

97%

98%

4Q 06 4Q 07 4Q 08 4Q 09 4Q 10 4Q 11 4Q 12 4Q 13 4Q 14 4Q 15 4Q 16

Me

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RED 46 AVERAGE SEATTLE

Metro Occupancy Rate TrendsSource: Reis History, RCR Forecasts




-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2007 2008 2009 2010 2011 2012

Y-o

-Y%

Ch

an

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CSX -20 METROS SEATTL E

-7%-6%

-5%-4%-3%-2%

-1%0%1%2%

3%4%

2008 2009 2010 2011 2012 2013f 2014f 2015f 2016f

Y-o

-Y%

Ch

an

ge

U.S.A. SEATTLE

Metro Payroll Employment TrendsSource: BLS , Institute For Economic Competitiveness & RCR

-14.0%

-10.5%

-7.0%

-3.5%

0.0%

3.5%

7.0%

10.5%

14.0%

4Q 06 4Q 07 4Q 08 4Q 09 4Q 10 4Q 11 4Q 12 4Q 13 4Q 14 4Q 15 4Q 16

Yo

YR

en

tTr

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RED 46 AVERAGE SEATTLE (REIS/RCR) AXIOM

Metro Effective Rent TrendsSources: Reis, Inc., RCR Forecast, Axiometrics

Metro Home Price TrendsSource: S&P Case Shiller Home Price Index

RED CAPITAL GROUP








Bothell $1,020 $1,071 5.0% 4.0% 3.5% -50 bps


Downtown / Capital Hill $1,321 $1,433 8.5% 4.0% 5.1% 110 bps


North Seattle $1,015 $1,071 5.6% 3.8% 3.3% -50 bps


Federal Way $848 $893 5.3% 5.1% 4.0% -110 bps

Kent $857 $892 4.1% 4.1% 3.0% -110 bps


Redmond $1,146 $1,225 6.9% 5.8% 4.5% -130 bps

Renton $909 $949 4.4% 4.1% 3.3% -80 bps



Metro $1,002 $1,060 5.8% 4.6% 3.8% -80 bps

SUBMARKET TRENDS

3.9%

5.9%7.2%

8.4%

10.1%

5.7%4.1%

6.7%7.6%

8.8%

0%

2%

4%

6%

8%

10%

12%

90% 70% 50% 30% 10%Proba bility of Ac hie ving Sta te d Re turn or Grea te r

Tota

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Seattle labor market conditions were among themost robust in the nation as establishments add-ed workers at a 45,200-job, 3.2% rate during thethird quarter, up from 2Q’s 36,200-job advance.Expressed on a seasonally-adjusted basis, estab-lishment added 10,700 workers to payrolls, down

slightly from 2Q’s 5-year high 11,500-job gain.

Goods producing industries added workers at a20,200 job year-on-year rate, highlighted by a7.9% surge in manufacturing and wholesale trade.Likewise leisure, finance and health care servicesstrengthened, adding 13,800 employees relative

to 2011, up from 8,700 in 2Q12. While skilledbusiness service headcount growth was moder-ately slower software publishers picked up someof the slack adding workers at a 1,200-job, 2.4%

pace, up from 2Q’s 900-job, 1.9% y-o-y advance.

The RCR econometric payroll model expects jobcreation to moderate somewhat from the blister-ing pace set over the past six months. After add-ing about 45,000 payroll jobs in 2012, Seattle willcreate nearly 35,000 next year. Subsequently,totals should gravitate between 25,000 and

30,000 from 2014 to 2016.


Multifamily Housing Update 3Q12 October 2012

Reis surveys uncovered no change in Seattle oc-cupancy during the third quarter. Average occu-pancy held steady sequentially at 96.0%, main-taining the metro’s 17th rank among the RED 50.Average vacancy fell -80 basis points year-on-year,

in line with the –100 bps national average.

Axiometrics (AXM) same store metrics were mod-erately weaker than Reis’s findings. This source’s344-property same store inventory posted report-ed average occupancy of 95.32% during 3Q, down

–34 bps sequentially but up 65 bps y-o-y.

Only 6 of AXM’s 18 submarkets posted occupancybelow 95.0%; namely Auburn; Beacon Hill; DesMoines; Everett; West; and Federal Way. By con-trast, 4 topped 96%, most notably Kirkland

(96.5%), Downtown (96.3%) and North (96.3%).

RCR models anticipate stable to weaker occupan-cy trends through 2015. We maintain a logicalbias for stable to improved performance, however,as the recent surge in employment growth sug-gests that the payroll job creation model underly-

ing the forecast may be too conservative.

Reis report that average metro asking rents in-creased $17 (1.5%) sequentially, representing amomentum gain from 2Q’s $14, 1.3% advance.Expressed on a year-over-year basis, average facerents increased $47 or 4.4%, sharply higher than

the prior quarter’s $38 and 3.6% metrics.

AXM same store data show comparable $11/0.9%and $58/4.8% asking rent statistics. At the sametime the typical rent concession decreased fromthe equivalent of about $2.30/month to $6.65,

boosting effective rents $13/1.0% and $69/5.6%.

High occupancy submarkets also scored well onthe AXM rent growth tables. Downtown/QA (7.1%)and Kirkland (11.2%) posted some of the strong-est y-o-y effective rent growth in the metro area,along with tech favorites Beacon Hill, Bellevue andRedmond, which chalked down 7.2%, 7.6% and

9.2% surges, respectively.

RCR models project strong rent growth to persistthrough 2013. Trends will moderate slightly there-after as occupancy rates level off and begin to

slide and household income growth tapers off.

Investors rushed in with guns blazing, snapping up22 institutional quality properties during the thirdquarter for total cost of $497.8 million. The aver-age unit price was $188,850. These data com-pare to 2Q’s 23 transactions; $413.0mm pro-

ceeds total and $122,581/unit price metric.

Institutional quality asset cap rates ranged fromthe high-3% to high-4% area. Trophies traded uni-versally to prices above $300,000 per unit, push-ing initial yields below 4.5%. Infill assets com-manded the highest valuations but standard gar-

den complexes represented the lion’s share oftrades. The bellwether was a 1992 construction201-unit Issaquah property. The complex tradedfor $196,517/unit to yield about 4.5%, represent-

ing a new standard for class-B garden assets.

Using a 4.5% generic cap rate and RCR modeloccupancy and rent forecasts, we estimate inves-tors may expect to achieve a 5.9% annual yieldover a 5-year hold, ranking 38th among the R46. Arisk-adjusted index of 1.77 ranks 35th among the

national peer group.

Seattle, Washington



3Q12 Rent Trends

3Q12 Property Markets and Total Returns$5mm+ Sales 22


Median Cap Rate (FNM) 5.7%

Average Price/Unit $188,850




RED RAI Rank 35th


Mean Rent (AXM) $1,319

Annual Change 6.0%

RED 50 Rank NA






Vacancy Rate (Reis) 4.0%

RED 50 Rank 17th

Annual Chg. (Reis) <0.8%>




Vacancy Rate Summary


Total Payrolls 1,451.7.m

Annual Change 45.2m

2012 Forecast 40.2m

2013 Forecast 34.8m

2014 Forecast 24.8m

2015 Forecast 27.8m

Payroll Job Summary

Unemployment 7.0% (Sep.)



Property Name (Submarket)Property Class/

Type (Built)Date of

TransactionTotal Price

(in millions)Price per unit

EstimatedCap Rate

Limestone Court (Bellevue) A- / MR (2000) 12-Jul-2012 $16.5 $317,404 3.8%

Lakemont Orchard (Bellevue) B / GLR (1992) 18-Sep-2012 $39.5 $196,517 4.5%

Circa Green Lake (North) A/MR+RET (08) 16-Sep-2012 $83.3 $418,342 4.5% (Apt. only)

Prescott Wallingford (North) A+/MR (2012) 10-Oct-2012 $52.0 $337,914 4.1% p.f.

Lothlorien Building (North) A-/MR+RET (07) 30-Sep-2012 $39.1 $308,173 4.4% (Apt. only)


4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12

Ave

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SEATTLE 35.9 45.1 44.3 18.0 (78.4) (23.1) 24.4 40.2 34.8 24.8 27.8

2005 2006 2007 2008 2009 2010 2011 2012f 2013f 2014f 2015f

Metro Cap Rate TrendsSource: eFannie.com MBS Database , RCR Calculations

Metro Payroll History and ForecastSource: BLS History, RCR Forecasts

6.1%5.3%

4.3%

6.4%

4.8% 5.1% 5.1%

4.5%

2%

3%

4%

5%

6%

7%

8%

9%

1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 1Q 13 1Q 14 1Q 15 1Q 16

Me

tro

Va

ca

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SEATTLE RED 46

Metro Vacancy Rate TrendsSource: Reis, Inc. History, RCR Forecasts



Metro Effective Rent TrendsSource: Reis, Inc., RCR Forecasts

Metro Payroll Employment TrendsSource: BLS Data, RCR Forecasts

Home Price TrendsSource: S&P Case-Shiller Repeat Sales Index


-8%

-6%

-4%

-2%

0%

2%

4%

2009 2010 2011 2012 2013F 2014F 2015F

Y-o

-yG

row

thR

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SEATTLE USA

-20%

-15%

-10%

-5%

0%

5%

2009 2010 2011 2012

Y-o

-Y%

Ch

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CSX-20 METROS SEATTL E

3.1%

3.6% 3.0% 3.0%

7.2% 5.1%3.6%

2.9%

-15%

-12%

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 1Q 13 1Q 14 1Q 15 1Q 16

Yo

YR

en

tTr

en

d

RED 46 (REIS/RCR)

AXM SEATTLE SAME STORE

Metro Effective Rent TrendsSource: Reis, Axiometrics Inc. Metro History and Forecast, RCR Metro Forecast

Metro Effective Rent TrendsSource: Reis, Inc. History, RCR Forecasts

Metro Payroll rends and ForecastSource: BLS History, RCR Forecasts

RED CAPITAL GROUP



SubmarketSame Store Effective Rent Same Store Physical Vacancy

3Q11 3Q12 Change 3Q11 3Q12 Bps Change

Auburn / Enumclaw $987 $1,017 3.0% 93.2% 93.2% -2 bps

Beacon Hill / Rainier Valley $1,177 $1,263 7.2% 88.6% 92.3% 371 bps


Bothell / Woodinville $1,219 $1,275 4.6% 95.7% 95.3% -45 bps

Des Moines / West Kent $901 $943 4.6% 93.0% 94.9% 184 bps

Downtown / Queen Anne $1,571 $1,682 7.1% 96.0% 96.3% 37 bps

Edmonds / Lynnwood $1,057 $1,085 2.7% 90.6% 95.3% 475 bps

Everett / Mukilteo $1,022 $1,048 2.6% 94.6% 94.1% -45 bps

Federal Way $908 $923 1.6% 94.3% 94.2% -11 bps

Kent $978 $987 0.8% 95.3% 95.0% -27 bps

King County / Other $1,459 $1,681 15.2% 95.9% 96.9% 100 bps


North Seattle / Northgate $1,317 $1,375 4.5% 97.1% 96.2% -86 bps

Redmond $1,379 $1,505 9.2% 95.3% 95.4% 11 bps

Renton $1,050 $1,095 4.3% 94.4% 95.1% 76 bps

Snohomish County / Other $1,056 $999 -5.5% 94.4% 95.5% 110 bps

Tukwila / Sea-Tac $937 $987 5.3% 94.0% 95.8% 175 bps

West Seattle / Burien $1,215 $1,257 3.4% 89.7% 94.9% 513 bps

Metro $1,245 $1,319 6.0% 94.7% 95.3% 65 bps

SUBMARKET TRENDS (AXIOMETRICS)

3.3%

5.5%

6.9%

8.4%

10.3%

3.8%1.2%

5.6%

7.3%

9.7%

- 2%

0%

2%

4%

6%

8%

10%

12%

90% 70% 50% 30% 10%

Proba bility of Ac hie ving Sta te d Re turn or G rea te r

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SEATTLE (RAI=1.77)RED 46 AVG. (RAI=3.23)

Total Return DistributionSources: RCR Forecasts and Calculations

After a solid second half 2011, the pace of Seattlelabor market growth shifted up a gear to the fast-est tempo in five years. Establishments addedworkers at 33,100-job, 2.4% year-on-year rate

during 1Q12, up from a 25,700-job 2H11 pace.

Rapid hiring in the aerospace manufacturing sec-tor led the way. With aircraft assembly plants run-ning near full capacity, sector payrolls increasedat faster than a 10% annual rate, generating a11,000-job, 8.7% y-o-y increase in durable goodmanufacturing employment. Tech and skilled ser-

vice sector hiring also contributed to Seattle’sstrong performance. Professional and Technicalservice employers added 6,800 worker y-o-y andhospitals, colleges and private schools increased

headcounts at a 5,100 y-o-y rate.

RCR models foresee a steady-state performanceduring 2012 and 2013, with gradually accelerat-ing conditions emerging in 2014. The model fore-casts a 33,800-job add this year, followed bygains in the mid-30,000 to low—40,000 job range

in 2014 and 2015.


Multifamily Housing Update 1Q12 May 2012

Robust employment trends fueled the strongestapartment demand in a year. Tenants leased a netof 942 vacant units during 1Q12, up from 699 in4Q11 and more than twice the average of theprevious 13 first quarter periods (402). Supplycontinued to come on line at a moderate rate —271 units in this case — providing for a 40 basispoint sequential increase in the metro average

occupancy rate to 95.9%, an 11-year high..

Sequential occupancy gains were recorded in 13of Seattle’s 16 submarkets. The largest increases

were recorded in the Downtown (236 units), Ever-ett (152) and Bellevue (139) submarkets. Sub-stantial percentage gains also were recorded inNorth Seattle, Redmond and Kirkland. Converse-ly, the relatively weak Beacon Hill submarket suf-fered a loss of about 40 tenants, resulting in a 50

bps sequential vacancy rate increase to 11.4%.

Our vacancy model casts doubt on the sustainabil-ity of the Seattle rally. It expects supply pressuresto redevelop next year, pulling occupancy down

100 bps in 2013 and 70 bps in 2014 to 94.0%.

Healthy demand and rising earnings among therenter population produced a surge of positiverent momentum over the winter. Average askingand effective rent increased $10 (0.9%) and $13(1.3%), respectively, the strongest sequentialquarter gains recorded in two years. Indeed, aver-age effective rents set a new metro series record,

eclipsing the previous high set in 3Q08 ($1,006).

Class-A properties provided the principal impetus.Asking rents among top tier apartments increasedby $14 sequentially or 1.1%. Class-B&C rents, by

contrast, increased only $4 or 0.4%.

Six submarkets chalked down sequential gains of1.5% or greater. Redmond and Bothell led thepack for the second consecutive quarter, increas-ing 1.8%; joined by Downtown, Tukwila and Feder-

al Way (1.6%) and Everett/Mukilteo (1.5%).

Higher vacancies not withstanding our modelsproject fulsome rent growth through 2015. Rentsare expected to increase 4.1% this year, followed

by 4.8% annual advances in 2013 and 2014.

Trade in Seattle investor grade properties slowedmoderately from 4Q11’s white hot pace. A total of14 professionally-managed properties valued at$5 million or more exchanged hands January toMarch totaling $392mm, down from 14 transac-tions valued at $437mm during 4Q11. The aver-age price of traded units increased, however, ris-ing from $198,214 in 4Q to $205,039. Activitywas off to a sluggish start in 2Q12 as only onelarger property was known to close during April: a137-unit Belltown rehab that exchanged hands at

a $18.4mm price tag or about $134,500 per unit.

First quarter cap rates fell mostly in the low-4% tomid-5% range. Trophy properties continued totrade in the mid– to high-3% vicinity, while gardenprojects in second tier suburbs may be available

at 75 to 100 bps discounts.

Our total return model now estimates that inves-tors can expect to achieve a 5.9% return over a 5-year hold, up 130 bps from 4Q11. Now, Seattleranks 37th among the RED 45, up from 45th.Downside risks also have diminished as holders

have a 90% probability of achieving a 4.5%+ yield.

Seattle, Washington



1Q12 Rent Trends

1Q12 Property Markets and Total Returns$5mm+ Sales 14


Median Cap Rate 5.1%





RED RAI Rank 35th



Annual Change 2.6%

RED 50 Rank 17th







RED 50 Rank 17th

Annual Chg (Reis) <1.3%>







Annual Change +33.1m

2012 Forecast +33.8m




Payroll Job Summary

Unemployment 7.4% (Mar)

RED CAPITAL Research | May 2012


Property Name (Submarket)Property Class/

Type (Constr)Date of



EstimatedCap Rate

The Cornelius (CBD / LQA / Belltown) B+ / MR (1925) 26-Apr-2012 $18.4 $134,536 5.4%

Kirkland at Carillon (Kirkland / Juanita) A / GLR (1990) 27-Jan-2012 $47.5 $362,595 4.0%

The Link Apartments (West Seattle) A / MR (2010) 28-Mar-2012 $62.7 $321,538 3.8%

Brookside Village (Auburn / Enumclaw) A- / GLR (2003) 21-Mar-2012 $24.9 $140,506 4.6%

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SEATTLE 12.2 35.9 45.1 44.3 18.0 (78.4) (23.1) 24.4 33.8 36.9 40.6

04 05 06 07 08 09 10 11 12f 13f 14f


5.6%5.1%

4.6%

5.4%5.9%5.9%6.1%6.2%

5.4%

6.2%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12

Ave

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6.4%

4.9%

3%

4%

5%

6%

7%

8%

9%

1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 1Q 13 1Q 14 1Q 15 1Q 16

Me

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Metro Vacancy Rate TrendsSource: Reis, Inc. History, RCR Forecasts


Metro Payroll History and ForecastSource: BLS Data, RCR Forecasts.



RED CAPITAL Research | May 2012

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

2008 2009 2010 2011 2012

Y-o

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CSX -20 METROS Seatt le

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 1Q 13 1Q 14 1Q 15 1Q 16

Yo

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RED 46 AVG SEATTLE

-4%

-3%

-2%

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2010 2011 2012f 2013f 2014f

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SEATTLE USA

Metro Home Price TrendsSource: S&P Case Shiller Repeat Sales Index


Metro Payroll Employment TrendsSource: BLS Data, RCR Forecasts

RED CAPITAL GROUP


Daniel J. HoganDirector of [email protected]

Kenneth H. BowenPresident, Red Mortgage Capital, [email protected]

Submarket

Effective Rent Physical Vacancy





Bothell $1,011 $1,038 2.7% 4.9% 3.7% -120 bps


Downtown / Capitol Hill / QA $1,291 $1,343 4.0% 4.9% 4.1% -80 bps



Federal Way $821 $862 5.0% 6.1% 5.0% -110 bps

Kent $850 $865 1.7% 4.5% 3.8% -70 bps


North Seattle $1,001 $1,026 2.5% 4.9% 3.3% -160 bps

Redmond $1,140 $1,167 2.4% 6.5% 5.2% -130 bps

Renton $892 $914 2.5% 4.6% 4.2% -40 bps



Metro $1,015 $981 3.5% 5.4% 4.1% -130 bps

SUBMARKET TRENDS

Metro establishments added workers at a briskpace, expanding at a 26,400-job, 1.9% annualrate, faster than the 1.3% national average. Con-sequently, the unemployment rate fell to 7.7% inDecember and 7.5% in January, the lowest levels

reported in the Seattle area in nearly three years.

The manufacturing sector was the primary moti-vating force. Factories added staff at a 11,600-job, 7.6% year-on-year rate, up from an 8,900 jobpace in 3Q11. The aerospace industry was respon-

sible for creating 8,800 (10.8%) of the manufac-turing jobs. Robust expansion also was evident inthe tech sector. Software publishers grew at thefastest rate in two years, hiring at a 1,200-job,2.3% rate, and professional and scientific service

subsector headcounts grew by 5,500 (5.2%).

The RCR payroll model forecasts creation of about26,400 jobs in 2012. Growth is projected to mod-erate to 20,900 in 2013, but rebound on stronger

U.S. GDP growth in 2014 to nearly 35,000.


Seattle, WashingtonMultifamily Housing Update 4Q11 March 2012

Payroll Job Summary

Reis data indicate that apartment leasing activityrebounded in the fourth quarter, as absorptionincreased from 3Q’s seasonally disappointing 557units (-78% year-on-year) to 747. Accounting fordelivery of 203 units to the Downtown inventory,occupancy increased 20 basis points sequentially

and 130 bps y-o-y to 95.5%, a four-year high.

Occupancy was steady or higher in every metrosubmarket except Bothell, where 50 tenant move-outs caused average vacancy to rise 80 bps to4.0%. Downtown occupancy was essentially un-

changed despite the addition of an Uptown mid-rise to the inventory. The REIT-sponsored propertywas 67% occupied in December after leasing few-er than three months. Strong tenant interest wasrecorded in infill Beacon Hill and North Seattle,which together absorbed 200 units, as well assuburban Federal Way. Average occupancy in Bea-con Hill remained lowest in the metro area(89.1%), however; largely due to slow lease-up at a351-unit mid-rise completed in April. Edmonds

reported the highest occupancy rate at 97.3%


Metro rents continued to rise at a steady pace,advancing $6 (0.6%) sequentially and $26 (2.7%)year-over-year to $1,002, a three-year high. Thegain brought average effective rent within $4 of

the series record established in September 2008.

Suburban submarkets recorded the fastest se-quential rent growth, led by Federal Way (2.4%);Auburn (1.7%); and Edmonds (1.4%). Conversely,rents declined sequentially in Bothell (-0.7%); Red-mond (-0.6%) and Everett (-0.2%), reflecting lower

asking rents and increased concessions. Infillsubmarkets notched moderate gains. Downtownrents increased 0.3% and Beacon Hill and North

Seattle gained 0.1% and 0.4%, respectively.

Reis expect effective rents to increase 5.6% thisyear and Wall Street equity research firms projectgains in the 5% neighborhood. Our models are notas bullish; rather they project gains of about 2.8%in 2012, a forecast heavily influenced by the tepid

momentum exhibited in the second half 2011.


Investor enthusiasm for Seattle area assets grewduring the fall and winter. Buyers closed on atleast seven large properties during 4Q11 for totalproceeds of $166.3 million, up slightly from seventransaction valued at $148.2mm acquired duringthe previous quarter. Buyers resumed where theyleft off in 2012, inking seven transactions for

$166 million through the first week of March.

The average price of units purchased during 4Q11was $169,675, up from $166,500 during 3Q11.The mean year-to-date 2012 price was $158,766/

unit, reduced by a higher concentration of proper-

ties over 20 years old in the transaction mix.

Institutional quality property cap rates were mostlyin the 4.0% to 4.5% range. Class-B propertieslocated in class-B Snohomish County neighbor-

hoods appeared to trade at 50-100 bps discounts.

Using a 4.7% cap rate, RCR estimate Seattle un-levered expected total returns of 4.6%, rankinglowest among the R45. The impact of forecast

supply on projected NOI is largely responsible.




4Q11 Rent Trends

Recent Property Market Review and Total Return Estimates


4Q11 Y-o-y Chg. +26.4m

FY 2011 +24.4m




Unemployment 7.5% (Jan)

Vacancy Rate 4.5%

RED 50 Rank 22nd

Annual Change -1.3%

YE12 Forecast 4.7%

YE13 Forecast 5.7%

YE14 Forecast 6.2%

YE15 Forecast 6.4%

Mean Rent $1,002

Annual Change 2.7%

RED 50 Rank 11th

2012 Forecast 2.8%

2013 Forecast 3.1%

2014 Forecast 3.7%

2015 Forecast 4.0%

4Q11 $8mm+ Sales 8


Average Cap Rate 5.2%

Avg. Price / Unit $169,675

Expected Total Ret 4.6%


Risk-adjusted Indx 1.3 / 42nd

RED CAPITAL Research | March 2012


Property Name (Submarket)Property Class /

VintageDate of



EstimatedCap Rate

Mural (Beacon Hill/Alaska Junction) A / 2008 3-Mar-2012 $32.4 $238,327 4.1%

Harleen Court (Everett) A- / 2007 19-Jan-2012 $10.9 $118,479 6.0%

Bon Terra (Redmond) A / 2004 6-Jan-2012 $16.0 $265,833 4.0%

Mill Apartments (Mill Creek) B / 1985 16-Dec-2011 $71.0 $137,548 4.4%

Rivercroft (Bothell / Woodinville) B+ / 1990 5-Jan-2012 $12.7 $140,556 5.5%


6.4%

4.5%4.9%

5.2%

3%

4%

5%

6%

7%

8%

9%

1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 1Q 13 1Q 14 1Q 15

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4.3%

5.2%5.6%

5.2% 4.9%

6.3%

5.2%4.6%

5.3%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12

Ave

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Metro and Region Cap Rate TrendsSources: Fannie Mae MBS & RCR

Metro Vacancy Rate TrendsSource: Reis, Inc.

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SEATTLE -17.4 -47.1 -15.1 12.2 35.9 45.1 44.3 18 -78.4 -23.1 24.4 26.4 20.9 34.2

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012f 2013f 2014f

Metro Payroll Employment TrendsSources: BLS & RCR Forecasts

-3%

-2%

-1%

0%

1%

2%

3%

4%

2010 2011f 2012f 2013f 2014f

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SEATTLE USA



RED CAPITAL Research | March 2012

Metro Home Price TrendsSource: FHFA Home Price Index

2.4%

2.7%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 1Q 13 1Q 14

Yo

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RED 45 AVG SEATTLE


Metro Payroll Employment Growth TrendsSources: BLS data, IEC at UCF and RCR Forecasts

-20%

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0%

5%

10%

2009 2010 2011 2012

Y-o

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Ch

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CSX-20 METRO INDEX SEATTLE

Metro Home Price TrendsSource: S&P Case-Shiller Repeat Sales Index

RED CAPITAL GROUP

For more information about RED’s research and origination capabilities contact:

Kenneth H. Bowen Daniel J. HoganPresident, Red Mortgage Capital, LLC. Director, [email protected] [email protected] 614-857-1416

Submarket






Bothell $990 $1,020 3.0% 5.8% 4.0% -180 bps


Downtown / Capital Hill $1,278 $1,321 3.4% 6.3% 4.0% -230 bps



Federal Way $811 $848 4.6% 5.7% 5.1% -60 bps

Kent $843 $857 1.7% 5.0% 4.1% -90 bps


North Seattle $995 $1,015 2.0% 5.7% 3.8% -190 bps

Redmond $1,113 $1,146 3.0% 6.5% 5.8% -70 bps

Renton $886 $909 2.6% 5.2% 4.1% -110 bps



Metro $976 $1,002 2.7% 5.8% 4.5% -130 bps

SUBMARKET TRENDS

Employment trends were among the strongest inthe country as establishments added to payrolls ata 31,800-job, 2.3% year-on-year pace, up from2Q’s 26,700-job advance. The aerospace industrymade the largest contribution hiring at a 7,200-job, 9.4% annual rate, strongest in four years.Software publishers and computer network designshops also made a meaningful contribution, col-

lectively growing at a 5,400-job, 7.1% pace.

Seattle posted further strong gains in early 4Q11.

Workers on payrolls increased by 44,600 over the12 months ended in November, the largest year-

on-year growth comparison recorded in four years.

The RCR payroll model produces a robust employ-ment forecast. The model suggests that metroemployers will create 30,000 jobs in 2012, fol-lowed by 35,000-and 45,000-job performances in2013 and 2014. The model also projects 6% to8% annual personal income growth, laying the

groundwork for healthy rent revenue gains.


Seattle, WashingtonMultifamily Housing Update 3Q11 January 2012

Payroll Job Summary

Total Payrolls: 1,408.1m

Annual Change: +31.8m





Unemployment 7.8% (Nov)

Metro apartment demand slowed from its recenttorrid pace. Tenants leased a net of 557 units,down from 705 during 2Q11 and 2,481 in 3Q10.But no supply was delivered during the quarter(the first quarter without supply in at least 13years), allowing occupancy to climb 30 basis

points sequentially to 95.3%, a three-year high.

Fourteen of 18 metro submarkets recorded se-quential occupancy gains led by Bellevue, wherenearly 160 vacant units were tenanted and occu-pancy advanced 90 bps. Downtown demand also

was notable as tenants absorbed about 105 units,trimming vacancy 50 bps to 4.0%. Net losses were

confined to Auburn, Federal Way and Sea-Tac.

Supply levels are poised to rise again in 2012,leading RCR models to project a moderate declinein occupancy next year. Demand will acceleratewith the economy in 2013, but new construction isexpected to remain an obstacle to further materialoccupancy improvement. As a result, averageoccupancy rates are most likely to scape along at

the 95% level through at least 2015.



RED 50 Rank 18th

Annual Chg (Reis) -1.6%





Seattle rents continued to rise briskly, advancing$9 (0.8%) sequentially and $27 (2.8%) year-on-year to $996. Rents now stand only $10 below theReis data series record set in 2008, and are near-

ly $60 above the 4Q09 cycle trough.

In keeping with tenant demand trends, rent gainswere strongest in Bellevue (1.9%) and Downtown(1.7%). Above average growth also was observedin North King and Snohomish Co. submarkets,especially Kirkland, Beacon Hill, Edmonds and

Bothell. Conversely, Southwest King submarketsdidn’t fare as well, especially Sea-Tac and Renton,

where rents were up 0.3% and flat, respectively.

RCR models suggest that Seattle rent trends maybe running ahead of fundamentals. The modelsindicate that rent gains may moderate in 2012before regrouping in the out-years of the forecast.The compound average growth rate of effectiverents is projected to be about 3.7%, in line with

the average of the 44 modeled U.S. metro areas.


Mean Rent (Reis) $996

Annual Change 2.8%

RED 50 Rank 13th

RCR 2011 Forecast 2.8%



CAGR 4Q11 –2015 3.7%

Institutional investors were active participants inthe Seattle market, accumulating 22 propertiesvalued at $5mm or more from July to December,up from 18 in the first half (Loopnet.com). Saleproceeds aggregated $606mm in 2H11, a 21%

increase above the January to June tally.

The bellwether trade involved a multiphase 882-unit class-B+ property located in Redmond. Buyerpaid $161mm or $171,995 per unit for the prop-erty where rents averaged about $1,150 and oc-

cupancy hovered at about 93%. RCR estimate

that the asset will yield about 4.3% initially.

Employing an 4.5% acquisition cap rate, RCR esti-mate that metro assets will generate 4.1% ex-pected 5-year unlevered total returns, 43rd high-est among the RED 46. Returns are hampered bylow going-in cap rates; mediocre projected rentgrowth and an absence of projected occupancygains. Better returns may materialize should sup-

ply levels be lower than our model forecasts.


$5mm+ Sales 22

Approx. Proceeds $606.1mm

Cap Rate (T12 Med) 5.1%



RED 46 Rank 43rd

RAI 6.42 RAI Rank 18th



3Q11 Rent Trends




Property Name (Submarket) Property ClassDate of



EstimatedCap Rate

Archstone Redmond (Redmond) B+ Sep-2011 $151.7 $171,996 4.3%

Solara (North Seattle / Northgate) A- Aug-2011 $38.5 $161,785 4.5%

1000 8th Avenue (Downtown / QA) B Jul;-2011 $61.0 $173,789 4.1%

Waterford at Lakes (Des Moines) B Sep—2011 $37.75 $109,738 5.8%

Pay ro l l Empl oy ment Gr owth

Source: B LS Data & RCG Research F orecast

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SEA (17.7) (47.2) (15.3) 12.0 35.8 44.9 44.1 17.8 (78.9) (26.5) 30.1 35.3 45.6 61.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 2014f

Metro Multifamily Cap Rate Trends

Sources: Fannie, Freddie, RCR, Reis & RCA

5.25%

5.50%

5.75%

6.00%

6.25%

6.50%

6.75%

7.00%

1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11

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FNM DUS SEATTLE

FNM DUS PAC NW REGION


5.1%

5.3%4.6%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 1Q 13 1Q 14

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SEATTLE RED 46

Metro Vacancy RateTrendsSource: Reis, Inc. Historical, RCR Forecasts

Year-over-year Payroll Growth Rate

Source: BLS, RCG Research Forecasts

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

2008 2009 2010 2011f 2012f 2013f 2014f

Ra

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SEATTLE USA

-20%

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5%

2008 2009 2010 2011

Y-o

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U.S.A. SEATTLE




Apartment Effective Rent Trends

Source: Reis, Inc., RCG Forecasts

4.7%1.2% 3.7%

2.7%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 1Q 13 1Q 14

Yo

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TOP 82 METRO AVG SEATTLE

Metro Home Price TrendsSource: S&P Case-Shiller Repeat Sales Index

RED CAPITAL GROUP



William T. HingaBusiness [email protected]

Submarket




Beacon Hill / Rainier $922 $965 4.7% 10.0% 12.5% 250 bps

Bellevue/ Issaquah $1,158 $1,205 4.0% 8.2% 5.8% -240 bps

Bothell $1,020 $1,027 0.6% 6.5% 3.2% -330 bps


Downtown / Capitol Hill $1,277 $1,317 3.1% 6.5% 4.0% -250 bps



Federal Way $808 $828 2.5% 6.9% 6.0% -90 bps

Kent $832 $856 2.9% 5.6% 4.2% -140 bps



Redmond $1,113 $1,153 3.5% 6.2% 6.1% -10 bps

Renton $881 $901 2.3% 5.6% 4.4% -120 bps



Metro $969 $996 2.8% 6.3% 4.7% -160 bps

SUBMARKET TRENDS

Seattle area employers created 26,700 (1.9%)jobs year-over-year in 2Q11, marking the thirdconsecutive quarterly gain. Moreover, the pace ofgrowth accelerated from 1,400 and 22,500 netnew jobs recorded in 4Q10 and 1Q11, respective-ly. Robust hiring among manufacturing and busi-ness service firms were responsible. Combined,the sectors were responsible for 20,000 net new

jobs in 2Q11.

Seasonally-adjusted job trends were moderately

weaker, however, and according to the BLS’shouseholds survey, the metro unemployment raterose from 8.6% in March to 8.8% in June due to a–1.0% decline in total employment. In the payroll

series, job growth slowed from 0.9% to 0.7%.

RCR expect metro payroll growth to continue toaccelerate in the next few years. Our model pro-jects a 31,500-job increase in 2011, followed by37,100- and 38,600-job advances in 2012 and

2013, respectively.


Seattle, WashingtonMultifamily Housing Update 2Q11 September 2011

Payroll Job Summary

Total Payrolls: 1,401.8 m

Annual Change: +26.7m




Unemployment 8.6%

Despite economic improvement, apartment de-mand was subdued in the second quarter as posi-tive net absorption slowed from 1,338 units in thefirst three months of the year to 707 units. Themetro vacancy rate declined nonetheless, falling

40 basis points to 5.0%.

Developers completed 791 units in the BeaconHill / Rainier submarket in the year-ended in June.As a result, the second quarter submarket vacan-cy rate (13.0%) was 350 basis points above theprior year comparison. By comparison, vacancy

rates in each of the remaining 15 submarkets

declined year-over-year.

Reis expect tenants to absorb another 1,391 unitsin 2H11 and 3,254 units in 2012, raising occu-pancy 60 bps by YE11 and 20 bps in 2012 to95.8%. Conversely, the RCR forecast models ex-pect occupancy to decrease modestly to 94.5% byDecember 2012, largely because of our more

cautious near-term payroll outlook.



RED 50 Rank 20th

Annual Chg (Reis) 1.9%




Effective rent growth was subdued in recentmonths. During the first six months of 2011,average effective rent advanced 1.1% as conces-sions proved difficult to eliminate. Indeed, thesize of the average concession package fell slight-ly from 5.7% of asking rent in December 2010 to

5.6% in June.

Two (West Seattle / Burien and Beacon Hill /Rainier) of the metro’s 16 submarkets experi-enced year-over-year effective rent gains that ex-

ceeded 4.0% in 2Q11. Save for a –0.4% decreasein the Bothell submarket, effective rent growth

was positive in the remaining submarkets.

Reis expect effective rent growth to accelerate in2H11, leading to year-over-year increases of 4.3%and 3.9% in 2011 and 2012, respectively. Bycontrast, the RCR models predict moderately slow-er gains of 4.1% and 3.1% in 2011 and 2012,

respectively.


Mean Rent (Reis) $987

RED 50 Rank 17th

Annual Change 2.6%




Real Capital Analytics were aware of 35 Seattlearea transactions involving properties priced at orabove $5 million. Sales volume totaled $589.3million and the average price per unit was$118,204. CBRE report that cap rates for stabi-lized Class-A assets ranged from 4.75% to 5.25%

in March.

Employing an 4.5% acquisition cap rate, RCR esti-mate that the expected five-year un-levered totalreturn for Seattle assets is 5.9% The metric ranks

25th highest among the RED 46.

In regard to risk-adjusted returns, Seattle assetsrank 36th overall. The RCR integrated perfor-mance and total return model indicates that Seat-tle investments have a 65.6% probability ofachieving a total return of 5% or higher over fiveyears. The model projects typical assets will tradeat a 5.5% cap rate (up 100 bps) after 5 years, witha 19.3% probability of cap rates at or below the

current level.


$5mm+ Sales 35

Approx. Proceeds 589mm

Median Cap Rate 5.5%



RED 50 Rank 25th



2Q11 Rent Trends


RED CAPITAL Research | September 2011


Property Name (Submarket) Property ClassDate of



EstimatedCap Rae

Archstone Redmond Hill (Redmond) B/C September 2011 $150.1 $170,181 4.7%

Park at Northgate (North Seattle) B/C August 2011 $22.2 $151,138 5.7%

Solara (North Seattle) A August 2011 $38.5 $161,765 4.5%

One Thousand 8th Ave (Downtown) B/C July 2011 $60.9 $173,603 4.7%

Payroll Employment Growth

Source: BLS Data & RCG Research Forecast

38.637.131.5

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Apartment Vacancy Trends

Source: Reis, Inc.

5.0%

5.9%

3%

4%

5%

6%

7%

8%

9%

1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11

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SEATTLE U.S.A.

Metro Multifamily Cap Rate Trends

Source:s: Fannie, Freddie, RCR, Reis

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11

Ave

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FNM / FM C US

FNM / FM C PACIFIC REGION

REIS SEATTLE (T12 AVG)



Source: BLS, RCG Research Forecasts

-8%

-6%

-4%

-2%

0%

2%

4%

6%

03 04 05 06 07 08 09 10 11f 12f

Ra

te

SEATTLE USA

Apartment Effective Rent Trends

Source: Reis, Inc.

2.6%

2.4%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11

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SEATTLE

U.S.A.

Metro Median Single Family Home Prices

Source: S&P Case-Shiller Index

-25%

-20%

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0%

5%

10%

15%

20%

25%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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SEATTLE SPX20



RED CAPITAL Research | September 2011

RED CAPITAL GROUP



William T. HingaBusiness [email protected]










Bothell $1,023 $1,018 -0.4% 8.0% 4.1% -390 bps

Renton $870 $901 3.6% 6.1% 4.9% -120 bps

Redmond $1,118 $1,146 2.5% 7.1% 6.3% -80 bps

Kent $836 $853 2.0% 6.3% 4.4% -190 bps



Federal Way $799 $824 3.1% 7.9% 5.9% -200 bps



Metro $962 $987 2.6% 6.9% 5.0% -190 bps

SUBMARKET TRENDS

P uget Sound economic activ-ity perked-up in late 2010, but the brew remained more

“institutional drip” than “double shot of espresso” strength. Faster hiring was evident in the key transportation equipment manufacturing, software and professional service sectors, but net headcount gains were marginal, especially by comparison to the deep cuts suffered over the past 24 months.

By way of numbers, total metro divi-sion payrolls declined at a 600-job pace during the third quarter, up from 2Q’s 20,100-job, -1.4% loss. Firmer results were attributable to marginal improvement in every industry super-sector with the exception of govern-ment. Manufacturing, transportation, and information and business service establishments made the largest net contributions, collectively expanding payrolls at a 5,700-job, 1.2% rate in 3Q, up from 2Q10’s 5,700-job, -1.2% rate of decline.

Labor market momentum continued to improve in October and November, reflecting up-tempo hiring in goods producing and skilled service sectors. Strengthening orders for aircraft and electronics returned wholesale trade, computer and transportation industry headcount comparisons back into the black for the first time in two years. Sales of efficiency-enhancing soft-ware products firmed and Redmond’s favorite publisher seemed to find its footing in the consumer products seg-ment after a series of missteps. Con-sequently, total payrolls advanced by 10,900 (0.8%) jobs y-o-y in October and 13,600 (1.0%) jobs in November.

RED Research expect trends to im-prove steadily over the next two years. After expanding at a roughly 12,000-job annual rate in 4Q10, our econometric payroll model suggests that metro payrolls will rise by about 15,600 jobs this year, and 26,300 jobs

in 2012. The constructive November metric leads us to form a positive logical bias for 2011, with gains up to 20,000 jobs a reasonable possibility.

Apartment owners enjoyed a third consecutive quarter of intense retail demand. After absorbing a net of 3,532 units during the first half of the year, tenants shifted into overdrive in 3Q, net leasing a record 2,461 units, exceeding the next highest single-quarter harvest in Reis’s 12-year quarterly data series by 362. Average occupancy increased in every submar-ket sequentially with the exception of Beacon Hill, where delivery of 440 units (6.8% of existing inventory) gave rise to a 50 basis point quarter-to-quarter decline. Properties in three submarkets absorbed more than 300 units, including North Seattle, Beacon Hill and Bellevue. Overall, average occupancy improved 70 bps q-o-q to 93.8%, highest in nearly two years.

Leasing agents seemed intent to fill empty space and were judicious with rent hikes. Average asking rents in-creased only $6 (0.6%) sequentially to $1,023, and concession levels were essentially unchanged. Effective rent levels actually fell in six submarkets, with the sharpest decline recorded in Everett (-1.5%). Properties in the small Kirkland submarket posted the strongest same-store advance, as ef-fective rents rose $125 (2.2%) q-o-q.

Reis forecast robust rent growth in 2011 (3.5%), and above U.S. metro average rent trends through 2014. But the service expects supply pres-sures to limit prospective occupancy gains. Consequently, NOI growth is likely to proceed at a moderate pace over the next five years, constraining investment returns. Employing a 6.0% generic cap rate (recent trades were in the 5% range), RCR estimate ex-pected annual total returns of 8.3%, just 10 bps above the RED 50 mean.

RED CAPITAL GROUP®

Market Overview

Seattle, Washington Multifamily Housing Update January 2011

Y-o-y Projected

change YE 2010

Vacancy (6.2% - 3Q10)

Effective

Rents ($969 - 3Q10)

Cap Rate (5.3% - 3Q10)

Employment (1,388.6m - 3Q10)

SNAP SHOT

0.6m 21.6m

2.3%

0.4% 4.2%

0.2%

Seattle apartment owners experienced record apartment demand during 3Q as tenants leased a net of 2,461 units.

Accounting for 1,201 units of supply, occupancy increased 70 basis points sequentially to 93.8%.

Leasing agents elected to consolidate 2Q10’s aggressive 1.7% average effective rent gains and prioritized occupancy. Average asking rents increased $6 (0.6%) sequentially and effective rents advanced $7 (0.7%) to $969.

Trade velocity picked up late in the year as investors actively pursued Seattle trophy properties and repositioning opportunities. Cap rates applicable to trophies plunged into the high-3% area and class-B assets with upside potential traded at around 5%-5.5%

The metro labor market exhibited signs of recovery in the fall. After posting a 600-job year-over-year loss in 3Q10, payrolls increased by an average of 12,300 (0.9%) y-o-y positions in October and November.

RCR project 8.3% expected 5-year un-levered total returns, ranking 27th among the RED 50. Risk-adjusted returns rank 36th.

KEY POINTS

EXECUTIVE SUMMARY

1.1%

0.5%

After posting a sharp 1.7% effective rent surge during 2Q10, Seattle properties were more inclined to raise occupancy in the third quarter. Average asking rent increased $6 (0.6%) sequentially to $1,029 while effective rents advanced $7 (0.7%) to $969.

Effective rents increased 0.4% year-over-year, according to Reis, representing the first positive metric recorded since 1Q09. By contrast, MPF surveys indicate that annual rent comparisons remained in negative territory during 3Q. Conversely, this service also reported that rents increased 4% from December 2009 to September 2010.

Publicly-held REIT experienced a weighted average 1.7% sequential rent advance to $1,188. Property rents were up 0.1% year-over-year.

RANK: 12th out of 50

Reis project a 3.5% effective rent increase in 2011, but only a 2.7% gain in 2012.

Seattle-area property managers made considerable progress working through the inventory of some 7,700 new units delivered to the market since the beginning of 2009. Tenants absorbed 2,461 units during the third quarter, raising the year-to-date net to 5,993.

Average metro occupancy increased 70 basis points sequentially and 110 bps year-over-year to an average of 93.8%.

MPF Research post a 94.3% September occupancy rate, up 90 bps from June. Conversely, the occupancy rate of 20,106 units operated by publicly-traded real estate trusts was 94.7%, down 90 bps sequentially.

In November, Reis predicted the vacancy rate would rise 20 bps to 6.4% by year-end; but preliminary data suggest that vacancy declined.


3Q10 VACANCY TRENDS Apartment Vacancy Trends

Source: Reis, Inc.

6.2%

7.2%

4%

5%

6%

7%

8%

9%

3Q 04 3Q 05 3Q 06 3Q 07 3Q 08 3Q 09 3Q 10

Met

ro V

acan

cy R

ate

SEATTLEU.S.A.

3Q10 RENT TRENDS

After shying away for a time, institutional investors concluded that the time was right to wade back in to the Seattle market. At least 8 transactions valued at $10mm or more were closed during 3Q for proceeds of at least $320mm, and nine large trades were consummated during 4Q for total proceeds of about $245mm.

According to Real Capital Analytics, 38 investor-quality properties exchanged hands during the first 11 months of 2010. Gross proceeds totaled $665mm and the average price per unit was $148,348. The same source indicates that the average cap rate observed regarding trades closed January to November was 6.0%, and that 75 properties were offered for sale in December at a mean asking cap rate of 5.9%.

When RCR updated the metro total return series in November, generic Seattle cap rates were about 6%. Employing this rate, we estimated 8.3% expected total returns, 10 bps above the RED 50 mean. Recent trades suggest that cap rates fell dramatically near year end: thus ETRs probably are lower now.

PROPERTY MARKET & CAP RATE TRENDS Metro Multifamily Cap Rate Trend

Source: Reis, Inc. Trade Composite

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

4Q

07

2Q

08

4Q

08

2Q

09

4Q

09

2Q

10

4Q

10

Cap

Rat

e


Seattle - Bellevue - Everett, WA Metropolitan Division Q3 2010

RED CAPITAL Research

Property Name (Submarket) Property Class Date of

Transaction

Total Price

(in millions) Price per unit

Estimated Cap

Rate

Elliot Bay Plaza (Downtown) A- 11-Dec-2010 $54.3 $232,833 3.9%

The Summit (DT / Capitol Hill) B+ 02-Nov-2010 $9.1 $175,000 5.0%

Courtyard off Main (Bellevue) A 30-Oct-2010 $30.0 $272,727 3.6%

Shorewood Heights (Bellevue) B 16-Sep-2010 $109.9 $170,430 5.4%

Metro Rent Trends

Source: Reis, Inc.

-0.7%

0.4%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

3Q 04 3Q 05 3Q 06 3Q 07 3Q 08 3Q 09 3Q 10

Yo

Y R

ent

Tre

nd

ASKINGEFFECTIVE

EMPLOYMENT TRENDS

According to recently released 2010 Census data, the population of the state of Washington was 6,724,540, representing an increase of 60,345 (0.9%) persons from the 2009 inter-censual estimate.

Weakness persisted in Seattle home price trends. The Case-Shiller index stood at 143.13 (January 2000 = 100) in October, down -4.1% year-over-year. The datum was the lowest posted in 68 months and represents the 34th consecutive monthly year-over-year decline.

The FHFA all transactions index showed a -3.5% y-o-y value decrease during 3Q10, representing the 10th consecutive quarterly declination.

Among Seattle - Tacoma MSA homeowners, 0.78% received a notice of default or foreclosure during 3Q10, up 23.3% from 2Q, according to RealtyTrac. The 3Q metric was the 63rd highest recorded among the top 206 U.S. metro areas, down from 97th highest during 1H10.

DEMOGRAPHICS & HOUSING MARKET

Non-Seasonally Adjusted

Metro payroll trends stabilized during the third quarter and showed renewed forward momentum in October and November. Total pay-roll employment fell only 600 (0.0%) jobs year-over-year in 3Q10, up from a 20,100-job, -1.4% setback in 2Q. Twelve-month payroll com-parisons in November and December were positive, the former by 10,900 jobs and the latter 13,600. The November comparison was the strongest recorded in Seattle since September 2008.

Recent improvement was primarily attributable to faster hiring in the manufacturing and high tech services sectors. Durable goods manu-facturers (mostly in aerospace) added 1,900 workers to payrolls dur-ing the 12-month period ended in November, up from an average loss of 1,500 jobs during 3Q. Software and computer system design shops grew at a 2,900-job pace in November, up from 1,900-job and 100-job average advances during 3Q and 2Q, respectively.

The metro division unemployment rate in November was 9.1%, up from 8.6% in November 2009 and 9.0% during the prior month. The rate was higher only once since 1990: in January 2010 (9.3%).

Seasonally-Adjusted

Seattle establishments cut 7,300 seasonally-adjusted jobs during 3Q after posting a 6,400-job advance during 2Q. Termination of tempo-rary Census positions appears to have had little influence on the trend.

A net of 3,900 jobs were created during October and November.

Seasonally-adjusted unemployment in November also was 9.1%. The datum is the highest ever recorded in the 21-year metro data series.

Forecast

Seattle is poised to emerge from a two-year funk. Our model projects a 15,600-job gain this year, followed by robust creation of 26,300 (1.6%) and 33,500 (2.0%) jobs during 2012 and 2013, respectively.

Seattle - Bellevue - Everett, WA Metropolitan Division - Q3 2010



Source: BLS, IEC/UCF, RCR

-8%

-6%

-4%

-2%

0%

2%

4%

6%

03 04 05 06 07 08 09 10 11f 12f 13f

Rat

e

SEA ACTUALSEA FORECASTUSA ACTUALUSA FORECAST

RED Estimated Generic Unlevered Asset Total Return Probabilities

3.6%6.4%

10.0%12.5%

5.7%7.8% 9.2% 10.5% 12.4%

8.2%

0%5%

10%15%

90% 70% 50% 30% 10%P ro bability o f A chieving Stated R eturn o r Greater

SEA (RAI=2.40) PORT (RAI=3.52)



33.526.3

15.6

-21.6

-77.0-100

-80

-60

-40

-20

0

20

40

60

99 00 01 02 03 04 05 06 07 08 0910f11f12f13f

Ann

ual C

hg (

000)

Year-over-year Home Value Change

Source: S&P Case-Shiller Index, RCR

-20%

-15%

-10%

-5%

0%

5%

Apr-

08

Aug-

08

Dec-

08

Apr-

09

Aug-

09

Dec-

09

Apr-

10

Aug-

10

Ap

pre

ciat

ion

SEATTLE CSX20

A wave of supply inspired by Seattle’s hot market during the 2006 to 2008 period crested over the market last year. Reis identify 21 major projects completed in 2010 encompassing a total of 4,466 units, easily the largest vintage since 2000.

Six projects in six distinct submarkets were underway in January, encompassing 1,067 total units. One of the largest properties, a 351-unit mid-rise located in the Brighton/So. Beacon Hill area, was in pre-leasing in January with a view toward March occupancy. Asking rents ranged from $800 to $2,170, equating to about $1.90 to $2.25 per square foot. A two-month free concession was offered on most units.

The largest property listed as under construction — a 397-unit high- rise in Bellevue — began leasing-up in mid-2010. Face rents range from $1,095 to $3,850, equating to $2.25 to $2.50/sf. Select units were offered at discounted rents as low as $1.70/sf.

A 196-unit Queen Anne mid-rise is expected to begin leasing in November 2011. Price talk suggests that studio rents will start at $1,290; one-br units at $1,668 and 2-br units at $2,286. About 40 units will be priced to rents affordable to middle income tenants.

SUPPLY TRENDS

SUBMARKET TRENDS

Submarket Effective Rent Physical Vacancy


Auburn / Enumclaw $780 $766 -1.8% 5.7% 4.8% -90 bps

Beacon Hill / Rainier $945 $922 -2.4% 9.5% 10.0% 50 bps

Bellevue / Issaquah / Mercer $1,135 $1,158 2.0% 8.3% 8.2% -10 bps

Bothell $1,017 $1,020 0.3% 9.8% 6.5% -330 bps

Des Moines / West Kent $820 $800 -2.4% 7.3% 5.2% -210 bps


Edmonds / Lynnwood $858 $849 -1.0% 5.7% 4.5% -120 bps

Everett / Mukilteo $869 $820 -5.6% 7.4% 5.7% -170 bps

Kent $834 $832 -0.3% 6.9% 5.6% -130 bps

Federal Way $813 $808 -0.6% 8.8% 6.9% -190 bps


North Seattle $983 $988 0.5% 7.8% 6.1% -170 bps

Redmond $1,091 $1,113 2.0% 6.8% 6.2% -60 bps

Renton $886 $881 -0.6% 7.5% 5.6% -190 bps

Tukwila / Sea-Tac $756 $735 -2.8% 5.5% 4.8% -70 bps

West Seattle / Burien $832 $818 -1.7% 8.1% 5.4% -270 bps

Metro $965 $969 0.4% 7.3% 6.2% -110 bps

Completions and Absorption

Source: Reis, Inc

-2,000

0

2,000

4,000

6,000

8,000

02 03 04 05 06 07 08 09 10f 11f

Uni

ts

Completions Absorption

The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or ac-cepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circum-stances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.

RED CAPITAL GROUP Two Miranova Place

Columbus, OH 43215 www.redcapitalgroup.com

800.837.5100

Daniel J. Hogan Director of Research

[email protected] 614-857-1416

William T. Hinga Business Development


©2010 RED CAPITAL GROUP

A 37-story, 325-unit tower in lease-up since 4Q09 was 42% occupied in September at rents averaging $2,769.

The highest rent Downtown high-rise, a 224-unit, 27-story tower delivered in 2009, was 85% occupied in September at rents averaging about $3,256.

B usiness sentiment soured in September. According to the Manpower Employment

Outlook Survey, the percentage of Seattle-Tacoma-Bellevue MSA firms planning to add workers fell from 24% in June to 13% in September. Similarly, 18% of firms surveyed in September expected to trim staffs in 4Q10, versus only 8% in the June survey. The source notes that the anticipated losses are largely confined to the construction, manufacturing and government sectors.

Seasonally-adjusted payroll data show that job market conditions started to weaken in July and August. Indeed, employers added a net of 15,200 posi-tions to payrolls in the first six months of 2010, before cutting -8,100 workers in July and August. The in-flux and outflow of 3,000 temporary Census workers was partially respon-sible.

Conversely, the pace of year-over-year job attrition decelerated from -12,900 (-0.9%) in June to -100 in August, owing to job growth among business service establishments. The super-sector added 5,500 jobs y-o-y in August, the largest over-the-year gain since June 2008. Similarly, whole-sale, retail, information, education and health service employers added a combined 9,800 jobs during the pe-riod.

The RED CAPITAL Research (RCR) econometric model produces a point estimate of -15,200 (-0.9%) jobs lost this year, followed by gains of 33,200 (2.0%) and 59,600 (3.6%) jobs in 2011 and 2012, respectively. Economy.com are more optimistic than we, forecasting gains of 27,090, 33,270, and 45,890 jobs in 2010, 2011, and 2012, respectively.

MSA home prices continued to trend lower in the second quarter. The Na-tional Association of Realtors esti-

mate that the median price of a single-family home fell -6.4% y-o-y from $328,400 in 2Q09 to $307,300 in 2Q10. Likewise, the metropolitan division registered a -3.0% y-o-y de-crease in the Federal Housing Finance Agency’s (FHFA) purchase-only home price index in 2Q10, marking the tenth consecutive y-o-y decline.

Apartment demand surged in 2010 as property managers net leased 3,594 units in the first six months of the year. As a result, the metro occu-pancy rate increased 50 basis points from 92.6% in December to 93.1% in June. Marcus & Millichap report that occupancy among Class-A properties rose 90 basis points in 1H10, compar-ing favorably to the 30 basis point improvement observed among Class B/C assets.

The average effective rent rose 1.6% sequentially in 2Q10, moderately faster than the 1.0% advance recorded in 1Q10. Likewise, the pace of an-nual effective rent decline moderated from -3.9% in 1Q10 to -0.5%. Mar-cus & Millichap report stout asking rent trends in 1H10 as Class-A asking rent advanced 2.0% and Class B/C asking rent increased 1.0% in the first six months of 2010.

Real Capital Analytics were aware of 15 investor-grade transactions in the first eight months of 2010, totaling $329 million in sales proceeds. The source calculates an average price per unit of $159,000 and a 6.5% average cap rate. Similarly, CB Richard Ellis estimate that cap rates for stabilized Class-A properties ranged from 5.75% to 6.75% in August.

Based on an assumed 6.0% cap rate, RCR calculate a 7.5% unlevered ex-pected rate of total return, higher than the 7.4% RED 50 mean. But above average historic rent trend volatility produces a less favorable (42nd high-est) measure of risk-adjusted return.

RED CAPITAL GROUP®

Market Overview

Seattle, Washington Multifamily Housing Update October 2010

Y-o-y Projected

change YE 2010

Vacancy (6.9% - 2Q10)

Effective

Rents ($961 - 2Q10)

Cap Rate (6.3% - 2Q10)


SNAP SHOT

20.1m 15.2m

70bps

0.5% 2.8%

30bps 30bps

• The metro vacancy rate fell 50 basis points sequentially to 6.9% in 2Q10, owing to strong tenant demand (1,482 units) and limited supply (690 units). The second quarter vacancy rate also was down 30 basis points year-over-year.

• Effective rent increased 1.0% sequentially in 1Q10 and 1.6% sequentially in 2Q10, following five consecutive quarterly declines from 4Q08 to 4Q09. Additionally, the pace of annual effective rent declined improved to -0.5% in 2Q10, from a low of -6.3% recorded in 4Q09.

• Same-store data from public REITs reveal that average rent fell at a rapid -8.2% annual pace to $1,175 in 2Q10. On a positive note, lower rents contributed to a 150 basis point increase in occupancy from 94.0% in 2Q09 to 95.5% in 2Q10.

• According to the National Association of Realtors, the median price of a single-family MSA home decreased -6.4% year-over-year to $307,300 in 2Q10.

• At an assumed 6.0% generic metro cap rate, RCR calculate a 7.5% expected rate of total return, above the 7.4% RED 50 average.

KEY POINTS

EXECUTIVE SUMMARY

• Effective rent improved in 1H10. The figure advanced 1.0% sequentially in 1Q10 and 1.6% to $961 in the second quarter. As a result, the pace of annual effective rent decline moderated from -3.9% in the first quarter to -0.5%.

• The size of the average concession package fell from 6.8% of asking rent in 2Q09 to 6.0% in 2Q10.

• Marcus & Millichap calculate that Class-A asking rent advanced 2.2% in 1H10, comparing favorably to the 1.0% increase observed among Class B/C assets.

• Reis predict that the pace of annual effective rent growth will accelerate to 2.8% this year.

RANK: 42nd out of 50

• Apartment demand was robust over the past year, resulting in a 30 basis point decrease in vacancy from 7.2% in 2Q09 to 6.9% in 2Q10. Property managers net leased 5,395 units in the twelve-month period ended in June (1,482 units in 2Q10), outpacing supply of 5,164 units during the period.

• According to Marcus & Millichap, vacancy among Class-A properties decreased 80 basis points in the first six months of 2010, from 7.7% in December to 6.8% in June. Additionally, Class B/C vacancy fell 30 basis points during the period.

• Reis expect the metro vacancy rate to rise to 7.2% by year-end. Conversely, the service predicts that vacancy will decline to 6.6% next year.


VACANCY TRENDS Apartment Vacancy Trends

Source: Reis, Inc.

6.9%7.2%

0%

2%

4%

6%

8%

10%

2Q

00

2Q

01

2Q

02

2Q

03

2Q

04

2Q

05

2Q

06

2Q

07

2Q

08

2Q

09

2Q

10

Met

ro V

acan

cy R

ate

SeattleU.S.A.

Metro Rent Trends

Source: Reis, Inc.

-1.4%

-0.5%

-8%-6%-4%-2%0%2%4%6%8%

10%12%

2Q

00

2Q

01

2Q

02

2Q

03

2Q

04

2Q

05

2Q

06

2Q

07

2Q

08

2Q

09

2Q

10

Yo

Y R

ent

Tre

nd

AskingEffective

RENT TRENDS

• Real Capital Analytics were aware of 15 transactions involving properties priced at or above $5 million in the first eight months of 2010, totaling $329 million in sales proceeds. The average price per unit was $159,000.

• The largest transaction involved a 645-unit asset located on Mercer Island. The buyer paid $109.9 million or $170,430 per unit. Based on Reis rent, occupancy and expense data, RCR calculate a 5.5% cap rate.

• CB Richard Ellis estimate that cap rates for stabilized Class-A properties ranged from 5.75% to 6.75% in August.

• Based on an assumed 6.0% cap rate, RCR calculate a 7.5% expected rate of total return, just above the 7.4% RED 50 average.


Source: Reis, Inc.

3%

4%

5%

6%

7%

8%

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

Cap

Rat

e


Seattle - Bellevue - Everett, Washington Metropolitan Division - Q2 2010


Property Name Property Class Date of

Transaction Total Price (in millions)

Price per unit Estimated Cap

Rate

Shorewood Heights A September 2010 $109.9 $170,430 5.5% St. Croix Apartment Homes B/C August 2010 $22.5 $75,000 7.0% The Eagle Rim Apartments B/C July 2010 $18.5 $118,410 5.7% Westhaven Apartments A July 2010 $18.1 $95,487 7.5%

EMPLOYMENT TRENDS

• The Census Bureau estimate that the pace of Seattle - Bellevue - Everett metropolitan division population growth accelerated from 1.4% in 2008 to 1.6% in 2009.

• According to the National Association of Realtors, the median price of a single-family Seattle - Tacoma - Bellevue MSA home declined -6.4% year-over-year from $328,400 in 2Q09 to $307,300 in 2Q10. Similarly, the MSA registered a -1.6% year-over-year decrease in the Case-Shiller home price index in July.

• Based on the FHFA’s purchase-only home price index, Seattle metropolitan division home values fell -3.0% year-over-year in 2Q10, comparing favorably to the -6.3% drop observed in the first quarter.

• RealtyTrac.com calculate a 0.94% 1H10 metro foreclosure rate, below the 1.28% US average.



• The pace of year-over-year payroll job attrition decelerated from -55,700 (-3.9%) in 1Q10 to -20,100 (-1.4%) in 2Q10. Additionally, only -100 jobs were lost in the twelve-month period ended in August.

• Business service firms were partially responsible for the improve-ment. After cutting -9,800 jobs year-over-year in 1Q10, area estab-lishments eliminated -400 positions from payrolls year-over-year in 2Q10. Moreover, a net of 5,500 jobs were created in the twelve-month period ended in August, largely due to growth among profes-sional, scientific and technical service providers.

• Additionally, construction and manufacturing business reduced staffs at a much slower -9,600-job annual pace in August, as compared to a combined loss of -27,700 jobs year-over-year in 1Q10.

Seasonally-Adjusted

• On a seasonally-adjusted basis, employers created 15,200 jobs in the first six months of 2010, partially fueled by the addition of 2,900 temporary Census workers. Conversely, preliminary data reveal that metro headcounts declined -8,100 in July and August.

Forecast

• RCR predict that Seattle area employers will create 33,200 (2.0%) jobs next year, following a -15,200 (-0.9%) job decrease this year. Based on an optimistic domestic economic outlook, our model pro-duces a bullish point estimate of 59,600 (3.6%) net new jobs in 2012.

• Economy.com project faster growth of 27,090 (2.0%), 33,270 (2.4%), and 45,890 (3.2%), new jobs in 2010, 2011, and 2012, respectively.




33.2

-15.2

-100

-80

-60

-40

-20

0

20

40

60

99 00 01 02 03 04 05 06 07 08 09 10f11f

Ann

ual C

hg (

000)


Source: BLS

-8%

-6%

-4%

-2%

0%

2%

4%

6%

99 00 01 02 03 04 05 06 07 08 09 10

Rat

e

Seattle USA

Seattle - Bellevue - Everett, Washington Metropolitan Division - Q2 2010



2.7%5.4%

9.2%11.7%

4.5%6.7% 8.1% 9.5%

11.4%7.3%

0%

5%

10%

15%

90% 70% 50% 30% 10%

Seattle Portland


Source: National Association of Realtors

$100

$150

$200

$250

$300

$350

$400

$450

07

Y

08

Y

09

Y

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

Pri

ces

(00

0)

MSA US

• Reis were aware of 18 apartment properties completed from January to September, totaling 4,106 units. The largest addition to inventory was recorded in the Bellevue / Issaquah submarket as 1,421 units were completed year-to-date. Other submarkets with significant supply growth were North Seattle (841 units) and Downtown / Capital Hill (807 units).

• Reis also were aware of 1,826 apartment units under construction in October. The source believes that 475 units will open in 4Q10, while the remaining 1,351 units will debut in 2011.

• Condo construction was tame in 2010. As of October, 600 condo units were under construction and only one project, containing 20 units, was completed year-to-date. On the other hand, more than 8,000 condo units were in the planned / proposed stage.

SUPPLY TRENDS

SUBMARKET TRENDS



West Seattle / Burien $830 $804 -3.2% 9.0% 6.8% -220 bps Des Moines / West Kent $822 $805 -2.0% 7.5% 6.4% -110 bps Tukwila / Sea-Tac $763 $732 -4.0% 5.4% 5.1% -30 bps Bellevue / Issaquah $1,128 $1,137 0.8% 7.3% 8.5% 120 bps Edmonds / Lynnwood $867 $832 -4.0% 5.2% 5.0% -20 bps Downtown / Capital Hill $1,245 $1,269 2.0% 6.8% 7.5% 70 bps Kirkland / Juanita $1,181 $1,157 -2.0% 7.5% 6.3% -120 bps Bothell $1,025 $1,023 -0.2% 11.0% 8.0% -300 bps Renton $896 $870 -3.0% 6.7% 6.1% -60 bps Redmond $1,082 $1,118 3.4% 7.3% 7.1% -20 bps Kent $846 $836 -1.2% 6.3% 6.3% unchg Beacon Hill / Rainier $928 $915 -1.4% 9.9% 9.5% -40 bps North Seattle $980 $979 -0.1% 7.9% 7.1% -80 bps Federal Way $817 $799 -2.2% 8.3% 7.9% -40 bps Auburn / Enumclaw $786 $775 -1.4% 5.8% 5.6% -20 bps Everett / Mukilteo $872 $832 -4.5% 7.0% 6.5% -50 bps

Metro $966 $961 -0.5% 7.2% 6.9% -30 bps


Source: Reis, Inc

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

02 03 04 05 06 07 08 09 10f 11f

Uni

ts


The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any informa-tion contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.



800.837.5100






S eattle’s economy improved measurably during the first five months of 2010, but the

metro recovery lagged the national average and seems likely to do so for the balance of 2010. Moreover, the city’s leading employers appeared unable to shake a propensity to fum-ble new-product developments, poten-tially undermining their market domi-nance and clouding the outlook.

By the numbers, Emerald City MSA payrolls declined at a 55,700-job, -3.8% rate in 1Q10, up from 4Q’s 84,300-job, -5.7% rout. The gain was largely attributable to firmer retail trade and business service sector trends, where combined sector losses slowed to a 9,100-job year-on-year pace following cuts at a 25,000–job rate in the prior quarter. Slower con-struction and financial industry attri-tion (22,000-jobs y-o-y in 1Q vs. 30,000-jobs in 4Q) also contributed.

Trends in the bedrock aerospace and software publishing sectors weren’t constructive as headcounts declined at 3,300-job and 1,500-job annual rates, respectively. While the Sound’s lead-ing aerospace and software companies appeared to staunch some of the ero-sion in their core short-distance equipment and PC operating system businesses, R&D and product devel-opment pipelines continued to fall short of expectations.

May payroll data were moderately disappointing, showing no meaningful acceleration in the recovery. Total payrolls fell at a 20,000-job, -1.4% y-o-y rate, trailing the nation’s –0.4% average. Seasonally-adjusted figures revealed a gain of 1,200 jobs month-to-month (down from 5,600 in April), despite hiring of approximately 4,000 temporary Census workers.

RCR econometric forecasting models project that Seattle payrolls will de-cline by another 22,500 jobs this year.

Year-on-year gains should emerge by late-summer, however, and build mo-mentum steadily, producing gains of 37,700 jobs in 2011, 65,300 in 2012.

Owners encountered rising apartment demand, reflecting improved con-sumer confidence and positive reac-tions to reduced rents, currently about 6% below late-2008 highs. Reis re-port that tenants net-leased 1,497 units in 1Q, the largest one-quarter catch netted since 2004, and the high-est winter-quarter total recorded since 2000. Supply was an impediment to occupancy rate gains, however, as developers added 1,472 units to stock, limiting sequential occupancy gains to 10 basis points to 92.7% in March.

Following a -6.3% plunge last year, effective rents rebounded in the first quarter, rising 1.0% sequentially to $946. Average rents remained –3.9% below year-earlier levels though, still one of the weakest metrics (47th) registered by a RED 50 market.

Occupancy improved sequentially in 12 of Seattle’s 16 submarkets. The four decreases were entirely attribut-able to supply. The largest gains were recorded in lower-rent precincts, es-pecially Everett and Federal Way. As for effective rents, sequential gains were recorded in 12 submarkets, led by advances of 1.3% in Kirkland / Juanita and 1.7% in West Seattle.

Reis forecast models project generally mediocre market performance through 2014. The service expects occupancy to fall 30 bps by YE10 before recovering to 93.6% by 2014. With respect to rents, the service pro-jects a below-R50-average 2.5% com-pound growth rate from 2010 to 2014.

The Reis performance outlook leads us to derive a below-average forecast of 5-year unlevered total returns. The RCR model projects a 6.2% total rate of return, 80bps below the R50 mean.

RED CAPITAL GROUP®

Market Overview

Seattle, Washington Multifamily Housing Update June 2010

Y-o-y Projected

change YE 2010

Vacancy (7.3% - 1Q10)

Effective

Rents ($946 - 1Q10)

Cap Rate (6.2% - 1Q10)

Employment (1,364m - 1Q10)

SNAP SHOT

55.7m

80 bps

3.9% 1.0%

60 bps

• Job losses declined from 4Q09’s devastating 84,300-job, -5.7% rate to a –55,700-job annual pace in 1Q10, and 20,000-jobs y-o-y in May. May seasonally-adjusted data were disappointing, however, raising questions regarding the strength of the recovery.

• Firmer economic conditions encouraged faster household formation activity, giving rise to the highest three-month apartment net absorption performance recorded since 2004.

• Tenants absorbed 1,497 units in 1Q, counter-balancing delivery of 1,472 units of new supply. Metro vacancy fell 10 bps to 7.3%.

• Rents advanced sequentially for the first time in 18 months in 1Q10. The average effective rent increased $9 (1.0%) to $946, offsetting about 1/7th of the decline posted since 3Q08.

• Apartment sales velocity decelerated in the first-half 2010: 7 trades valued at $106mm closed, compared to 18 trades valued at an aggregate of $129mm settled during 2H09.

• RED Research estimate that institutional quality Seattle assets trade at cap rates near 5.8%, yielding a 6.2% expected rate of total return, 80 bps below the RED 50 mean.

KEY POINTS

EXECUTIVE SUMMARY

30 bps

22.5m

• Year-on-year rent trends turned over after declining in eight consecutive quarters. The first quarter comparison showed a –3.9% decline from 2009, up from –6.3% in the previous quarter.

• Average effective rents increased $9 (1.0%) sequentially to $946 (Reis), primarily due to a $7 (0.7%) average face rent hike.

• By contrast, real estate trust disclosure revealed sequential same store rent decreases ranging from –1.4% to –2.2%. MPF recorded a 1.1% advance. The apparent conflict may be attributable to the concentration of above average rent luxury properties in trust portfolios.

• Reis forecast a 2.5% metro compound annual effective rent growth rate from YE10 to YE14, 10 bps below the Top 80 U.S. Metro average.


• Puget Sound owners enjoyed a second consecutive quarter of robust apartment demand. By Reis’s count, tenants absorbed 1,497 units in 1Q, topping 4Q09’s impressive 1,252-unit performance. Supply of 1,472 units largely counterbalanced the impact on occupancy, however, limiting sequential gains to 10 basis points to 92.7%.

• Other sources reported more vigorous demand. MPF recorded a total of about 5,000 net move-ins resulting in a 110 bps sequential occupancy advance to 93.3%. Public real estate trust disclosure reported sequential same store occupancy gains ranging from 130 to 210 bps.

• Reis posted sequential occupancy gains in 12 of 16 submarkets, while MPF reported higher occupancy in 2/3rds of Seattle’s neighborhoods. Supply precipitated the handful of submarket occupancy decreases.



Source: Reis, Inc.

7.3%

8.0%

0%

2%

4%

6%

8%

10%

1Q 04 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10

Met

ro V

acan

cy R

ate

SEATTLEU.S.A.

Metro Rent Trends

Source: Reis, Inc.

-3.9%

-3.9%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1Q 04 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10

Yo

Y R

ent

Tre

nd

ASKINGEFFECTIVE

RENT TRENDS

• Property sales velocity decelerated moderately in the first half of 2010. Seven properties priced over $1.5mm exchanged hands in the period, down from 18 in the prior 6-month period and 26 in the comparable period of 2009. Sales proceeds totaled $106mm in 1H10, down from $129mm and $224mm in 2H09 and 1H09, respectively.

• Only one class-A asset was acquired after February: a 1997-vintage flat and townhome project in suburban Kirkland. The property was valued at the equivalent of $156,855 per unit, yielding 6.1% by our estimate and 6.0% according to information provided by the broker.

• CBRE report that market cap rates for stabilized, class-A assets ranged from 5.75% to 6.75% in March. Using a 5.8% generic assumption, RCR estimate that a typical Seattle investment would generate a 6.2% annual total rate of return over a 5-year holding period, comparing unfavorably to the 7.0% RED 50 average. High historical NOI volatility also yields a below average measure of risk-adjusted returns.


Source: Reis, Inc.

5.4% 6.2%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

4Q

07

2Q

08

4Q

08

2Q

09

4Q

09

2Q

10

Cap

Rat

e







Rate

Montebello (Kirkland/Juanita) A 05-Apr-2010 $38.9 $156,855 6.1% The Cove (Federal Way) B 28-Feb-2010 $23.0 $73,718 7.4% Orchard Crest (Tacoma) B 05-May-2010 $8.9 $51,118 7.7% (quoted)

EMPLOYMENT TRENDS

• According to S&P Case-Shiller, Seattle home values in March were –3.6% below the level recorded in 2009. This compared to an average 2.3% advance for the 20 metro areas included in the CSX20 index. Indeed, Seattle trends trailed the composite every month since June.

• According to the N.A.R., the median price of a Seattle-Tacoma MSA home sold in the first quarter was $302,600, a decrease of -4.0% year-over-year. This compared to –8.3% and –0.7% declines for the West Region and the U.S., respectively.

• Seattle-Bellevue-Everett M.D. population increased 41,474 (1.6%) during the 12 months ended July 1, 2009, up from 36,227 (1.4%) in 2008. It was the second largest advance recorded in the decade after 2006. The city of Seattle added 13,707 (2.3%) residents last year, representing the largest one-year advance of the decade.



• Total payroll employment in Greater Seattle declined at a 55,700, -3.8% year-over-year rate. It was the slowest rate of decline recorded in a year. Net losses peaked at a 98,600-job, -6.6% pace in 3Q09.

• First quarter gains were largely attributable to improved retail trade and business services employment trends. After plummeting at an-nual rates of –10.6% and -8.3% in 3Q09 and 4Q09, respectively, busi-ness service payroll attrition slowed to a –4.6% y-o-y rate in 1Q10. The improvement reflects a stabilization of sector payrolls rather than any significant realized net hiring. Retail payrolls, on the other hand, exhibited actual growth, rising from 133,800 positions in April 2009 to 139,700 jobs in May 2010.

• Signs of moderate hiring among skilled service concerns emerged in the spring. Computer system design shops and corporate headquar-ters management establishments hired a net of 1,600 employees be-tween November and May. On the other hand, there was no sign of increased use of contract laborers, a frequent precursor of stronger job growth. Indeed, year-over-year comparisons in this category declined nearly 4% over the same period.

Seasonally-Adjusted

• According to seasonally-adjusted data, Seattle payroll employment increased by 8,800 jobs in 1Q10, up from a 6,800-job decline in 4Q09. But preliminary data for May showed only a 1,200-job se-quential advance, despite the hire of 4,000 temporary Census workers.

Forecast

• Our models project that Seattle will begin adding workers as meas-ured on a year-over-year comparison basis in late summer, leading to a 8,500-job y-o-y advance in 4Q10. After hemorrhaging another 22,500 jobs in calendar 2010, Seattle is poised to create 37,700 jobs in 2011, and what would be a 15-year high 65,300 jobs in 2012.



65.3

(77.0)

(22.5)

37.7

-100

-80

-60

-40

-20

0

20

40

60

80

99 00 01 02 03 04 05 06 07 08 09 10f11f12f

Ann

ual C

hg (

000)




1.2%4.2%

8.0%10.5%

0.1%

5.4%8.7%

11.8%16.0%

6.1%

0%

5%

10%

15%

20%

90% 70% 50% 30% 10%

SEA (RAI=1.70) AUST (RAI=1.40)



-20%

-15%

-10%

-5%

0%

5%

Mar-

08

Jul-

08

Nov-

08

Mar-

09

Jul-

09

Nov-

09

Mar-

10

App

reci

atio

n

SEATTLE CSX20


Source: BLS, Woodley Park Research, RCR

-8%

-6%

-4%

-2%

0%

2%

4%

6%

03 04 05 06 07 08 09 10 11f 12f

Rat

e

SEA ACTUALSEA FORECASTUSA ACTUALUSA FORECAST

• Year-to-date through June 22, 13 properties with 2,893 total units were added to the metro inventory, a 1.6% increase.

• Supply pressures remain one of the Seattle market’s biggest challenges. Presently, 13 major projects are under construction, according to Reis, encompassing a total of 2,943 units. Eight (1,699 units) are scheduled for second half 2010 delivery.

• Four projects of 1,112 units are identified as under construction in the urban core (Beacon Hill / Rainier and Downtown / Capital Hill submarkets). A stylish Renton mid-rise is near delivery and in the pre-leasing phase. Rents range from $840 for a studio to $2,005 for a 2-bedroom unit. A 350-unit transit oriented “green” development is in the pipeline for the Othello neighborhood in the Rainier Valley. No rent details were available at this writing. In the city, a public REIT broke ground on a 204-unit, $60 million mid-rise in Queen Anne in June. The project is scheduled to begin leasing in fall 2011. Finally, a rehab of an historic building in Chinatown to a mixed-use project with 117 rental units finally appears to be moving forward in earnest.

SUPPLY TRENDS

SUBMARKET TRENDS



Auburn / Enumclaw $785 $770 -2.0% 6.1% 5.5% -60 bps Beacon Hill / Rainier $955 $914 -4.3% 10.2% 10.6% 40 bps Bellevue / Issaquah $1,150 $1,104 -4.0% 7.5% 9.0% 150 bps Bothell $1,020 $1,014 -0.6% 5.3% 8.7% 340 bps Des Moines / West Kent $832 $797 -4.2% 6.0% 7.3% 130 bps Downtown / Capital Hill $1,274 $1,229 -3.5% 7.4% 8.1% 70 bps Edmonds / Lynnwood $871 $830 -4.7% 4.8% 5.8% 100 bps Everett / Mukilteo $894 $844 -5.6% 6.5% 6.3% -20 bps Federal Way $825 $795 -3.6% 7.6% 7.1% -50 bps Kent $850 $820 -3.5% 5.6% 6.1% 50 bps

Kirkland / Juanita $1,220 $1,138 -6.8% 9.8% 6.4% -340 bps North Seattle $999 $956 -4.3% 8.2% 7.6% -60 bps

Redmond $1,111 $1,083 -2.6% 6.4% 8.1% 170 bps Renton $936 $863 -7.8% 6.2% 6.9% 70 bps

Tukwila / Sea-Tac Airport $780 $743 -4.8% 4.7% 5.5% 80 bps West Seattle / Burien $826 $802 -2.9% 4.0% 7.4% 340 bps

Metro $984 $946 -3.9% 6.7% 7.3% 60 bps


Source: Reis, Inc

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

02 03 04 05 06 07 08 09 10f 11f

Uni

ts


The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or ac-cepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circum-stances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.



800.837.5100






• A “green” 37-story, 325-unit tower in Denny Triangle was delivered in January, according to Reis. Reis reported it 0% occupied in March. Asking rents averaged about $2,150 or about $2.10/sf. A concession of “up to four months” free rent was offered on “most units” in June.

P uget Sound economic trends tend to run hot or cold. Un-fortunately, the region has

been on a chilly streak lately, with negative implications for payroll and housing market conditions. Seattle’s flagship software publisher is playing an unaccustomed game of catch-up with its chief Silicon Valley rivals in the high-end PC operating system and search engine arenas, and it continues to search in vain for the next “killer app” that will return it to the top of global high-tech ranks. At the same time, Seattle’s bedrock aerospace equipment industry encountered re-cessionary turbulence, leading to the announcement of the first material layoffs in recent memory, while a paucity of venture capital funding kept the local entrepreneurial tech sector moored securely to the ground.

The foregoing events evolved before a weak global and national economic backdrop, combining to yield a set of decidedly below average metro pay-roll trend data. By the numbers, Seat-tle payrolls declined at a 52,700-job, -3.6% year-over-year pace in 4Q09, up from a 66,200-job setback in 3Q. But the advance wasn’t as great as these data suggest: the 4Q08 comparisons were deflated by the effects of an Oc-tober 2008 Boeing strike. Adjusting for this event, the y-o-y comparison would have shown a loss of more than 60,000 (-4.1%) jobs, weaker than the overall U.S. average.

In spite of a surge of unemployment to 9.2% (a 20-year high), December job data contained a few hopeful signs. Twelve-month payroll losses declined to 49,100 (-3.4%) jobs, the smallest decline recorded since Febru-ary. Use of contract labor increased to the highest volume in 12 months, typically a good leading indicator of near-term permanent hiring; retail store headcounts rebounded to a 12-month high; and seasonally-adjusted

payroll trends swerved into the black.

RED Research’s econometric payroll model suggests that the December thaw is the beginning of better tidings to come. Seattle has another rough quarter to endure, but conditions should begin to improve in the spring. Net hiring will resume next summer, setting the stage for a solid 30,500-job advance in calendar year 2011.

After suffering a 230 basis point va-cancy rate rise during the 12 months ended in September, metro apartment owners cut rents aggressively in 4Q to retain tenants. Reis report that average effective rents tumbled $28 (–2.9%) quarter-to-quarter, the largest decline recorded among the RED 50 (only Las Vegas and Phoenix declined –2%or more). Cuts were deepest in pre-cincts heavily exposed to “B” and “MSN” workers, especially Bellevue, Redmond and Everett, which posted sequential declines of –3.8% or more. Rents in submarkets catering to the young professional demo also re-treated, falling -5.4% in Beacon Hill and –3.4% in North Seattle.

The gambit apparently had the in-tended effect as tenants responded by absorbing 526 net units. The tally matched the volume of new supply added to metro stock, holding occu-pancy constant at 92.6%. Beacon Hill and Redmond were notable excep-tions as steep rent discounts weren’t enough to prevent supply-effected 100+bps q-o-q vacancy rate increases.

Reis expect tenant demand to recover smartly in 2010 — the service pro-jects absorption of 3,500 units this year - but pipeline supply will pro-hibit any net occupancy progress. Conditions should improve in 2011 when the latest supply wave ebbs, but rent trends promise to be slightly weaker than the RED 50 average, holding prospective total returns (6.3%) below the 6.7% group mean.

RED CAPITAL GROUP®

Market Overview

Seattle, Washington Multifamily Housing Update February 2010

Y-o-y Projected

change 2010

Vacancy (7.4% - 4Q09)

Effective

Rents ($937 - 4Q09)

Cap Rate (5.8% - 4Q09)


SNAP SHOT

52.7m 0.2m

30bps

6.3% 0.6%

160bps 20bps

• Seattle job losses continued at an accelerated rate in 4Q. Adjusting for a 2008 Boeing strike, payrolls declined at a 63,000-job year-on-year rate or –4.3%, sending the unemployment rate to a 20-year high 9.2%.

• RCR project flat payroll trends this year, but a solid 30,500-job advance in 2011.

• Apartment owners slashed rents to stem a growing tenant exodus. Average effective rents fell –2.9% sequentially, the largest drop recorded among the RED 50 markets.

• Tenants responded affirmatively, net leasing 526 units; but supply offset the gain, leaving average occupancy unchanged at 92.6%.

• Heavy supply in 2010 will continue to exert downward pressure on occupancy and rent levels. Reis expect deliveries to decline next year, however, laying the groundwork for stronger fundamental performance.

• Despite challenging fundamentals, cap rates for class-A infill assets remained remarkably low. Three institutional quality properties exchanged hands after the winter solstice at estimated initial yields below 5%.

KEY POINTS

EXECUTIVE SUMMARY

• Reis surveys indicate that Seattle effective rents plunged –2.9% in the fourth quarter, falling from an average of $965 and $937.

• M/PF Research report that effective rents fell more than -3% sequentially in 4Q09 and -10.3% year-on-year. A group of six public REITs (19,600 units) experienced weighted average –3.9% and –10.1% sequential and year-over-year declines, respectively.

• Reis data show three Seattle submarkets suffering –4% sequential quarter effective rent declines: Bellevue (-4.3%), Redmond (-4.8%) and Beacon Hill (-5.3%). Each is an area heavily exposed to tenants employed in the high-tech or aerospace manufacturing industries.

• After falling –6.3% in 2009, Reis expect Seattle rents to drop another –0.6% in 2010. RANK: 49th out of 50

• Deep rent discounts encouraged renters to commit to apartment leases. Owners filled a net of 526 units during 4Q, down from 3Q’s 847-unit tally but up sharply from negative net absorption of 988 units in 4Q08.

• Reis aver that supply of 526 units offset 4Q09 absorption, holding occupancy steady at 93.6%. A group of five publicly-traded REITs managing a total of 15,300 units achieved a 40 bps q-o-q advance to 92.4%. M/PF Research also reported a 92.4% average occupancy rate.

• Three higher rent submarkets (Bothell, Redmond and Beacon Hill) experienced 100 bps sequential quarter vacancy rate increases, despite significant rent discounting, reflecting economic pressure on key young professional and tech industry renter demographics.

• Reis expect supply pressure to cut occupancy 20 bps in 2010; but recovery in 2011. RANK: 26th out of 50


Source: Reis, Inc.

5.8%

7.4%

0%

2%

4%

6%

8%

10%

4Q

99

4Q

00

4Q

01

4Q

02

4Q

03

4Q

04

4Q

05

4Q

06

4Q

07

4Q

08

4Q

09

Met

ro V

acan

cy R

ate

SEA Class-ABCSEA Class-ASEA Class-BC

Metro Rent Trends

Source: Reis, Inc.

-5.3%

-6.3%-8%-6%-4%-2%0%2%4%6%8%

10%12%

4Q

99

4Q

00

4Q

01

4Q

02

4Q

03

4Q

04

4Q

05

4Q

06

4Q

07

4Q

08

4Q

09

Yo

Y R

ent

Tre

nd

AskingEffective

RENT TRENDS

• Trade in Seattle properties was thin in the second half of 2009. Real Capital Analytics identified only eight closed transactions valued at $4mm or more, with aggregate proceeds totaling $99mm. By way of comparison, 31 trades valued at $4mm or more were consummated in 2H08, generating aggregate proceeds of $469mm.

• Investors followed disciplined acquisition strategies, targeting specific neighborhoods or in some cases waited on the sidelines for distressed properties to come to market.

• A large publicly-traded REIT broke the ice in 2010, purchasing a two-property Queen Anne portfolio in February. The class-A mid-rise projects were priced to yield less than 5% by our estimate.

• Below average rent growth will hamper investment returns from Seattle assets. Using a 6.8% generic cap rate, RCR estimate a 6.3% expected 5-year holding period total return, 40 bps below the RED 50 average, ranking 38th among the group.


Source: Reis Trade Composite Median

6.1%5.8%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

08

Cap

Rat

e


Seattle - Bellevue - Everett, Washington Metropolitan Division - 4Q 2009


Property Name (Submarket) Property Class Date of



Rate

Rianna II (Downtown / Q. Anne) A 08-Feb-2010 $16.3 $209,410 4.9% Rianna I (Downtown / Q. Anne) A 08-Feb-2010 $17.1 (Retail Incl) $219,572 4.5% Regent at Bellevue (Bellevue) A- 21-Dec-2009 $35.0 $182,280 4.7% Country Home (Kent) B- 10-Dec-2009 $10.9 $62,000 7.0%

EMPLOYMENT TRENDS

• The N.A.R. report that the median price of a Seattle-Tacoma MSA home was $305,000 in 4Q09, down –6.3% year-over-year and –5.0% quarter-to-quarter. Western Region home values decreased –8.9% year-over-year in 4Q, but advanced 0.7% from the September quarter level.

• The S&P Case-Shiller repeat sales index indicates Seattle home prices continued to lag the firm’s 20-metro index in late 2009. Values in December reflected a –7.9% year-over-year decline, trailing the –3.1% drop registered by the CSX-20 index. Moreover, the Seattle index decreased for the second consecutive month, falling –0.7% from November to 147.54, the lowest metric recorded since April 2005.

• Home foreclosures were a growing problem for Seattle-Tacoma households last year. RealtyTrac reported that 1 of every 62 metro households was embroiled in a foreclosure action, a 43% increase from 2008 and the 86th highest rate recorded among the top 203 US metros.



• Nominal payroll totals declined at a 52,700-job, -3.6% rate in the fourth quarter, up from 3Q’s 66,200-job, -4.5% decline. Adjusted for a weak October 2008 comparison (due to a Boeing strike), 4Q09 re-sults were considerably weaker. The year-over-year pace of job loss would have been approximately 60,000 positions or –4.0%.

• The not seasonally-adjusted unemployment rate in December was 9.0%, down 10 basis points from the 20-year high June 2009 metric.

• December payroll trends took an optimistic turn. Twelve-month job losses declined to a 49,100-job, -3.4% pace, the best comparison re-corded since February 2009. Decelerating job losses in retail sales and temporary employment services as well as a significant uptick in government headcounts were primarily responsible.

Seasonally-Adjusted

• After posting a 9,700-job setback in 3Q09, job losses expressed on a seasonally-adjusted basis declined to 6,600 in 4Q, representing the smallest quarterly headcount decline since 3Q08.

• Preliminary seasonally-adjusted December data also exhibited some positive momentum. Payrolls actually increased 4,400 jobs month-to-month, representing the first net gain registered in twelve months.

Forecast

• Seattle entered the Great Recession a bit later than the rest of the county and evidence suggests that it will be tardy to the recovery party as well. The RCR econometric payroll forecasting model tells us that year-over-year comparisons are likely to remain in the red through mid-year but gain momentum quickly beginning in the sum-mer. Total payrolls will be nearly unchanged this year, but gains should exceed 30,000 jobs in 2011, if GDP growth reaches 3%, as projected by the PNC Economics team.




30.5

0.2

-60

-40

-20

0

20

40

60

99 00 01 02 03 04 05 06 07 08 09 10f 11f

Ann

ual C

hg (

000)


Source: BLS

-6%

-4%

-2%

0%

2%

4%

6%

99 00 01 02 03 04 05 06 07 08 09 10

Rat

e

SEA USA




1.2%4.2%

8.1%10.8%

-1.4%

4.1%7.0% 8.8%

11.4%6.2%

-5%

0%

5%

10%

15%

90% 70% 50% 30% 10%

SEA (RAI=1.69) AUST (RAI-1.97)


Source: S&P Case-Shiller Index

-20%

-15%

-10%

-5%

0%

5%

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

App

reci

atio

n

CSX20 SEATTLE

• A roll of supply waves inspired by the strong NOI growth observed in 2005 - 2008 will continue to break on the shores of the Puget Sound through mid-2011. At this writing, nineteen major projects were under construction encompassing a total of 3,777 units. Twelve projects incorporating 2,135 units are scheduled to debut in 2010.

• The Downtown / Queen Anne submarket will add four properties to the rental inventory in 2010, yielding an increase of 581 units to stock. A substantial rehab of a 117-unit hotel in the International District is tipped for a 1Q10 delivery date. No pre-leasing details were available. A 118-unit mid-rise on Broadway due in the spring posts pre-lease pricing as follows: studios renting from $860 to $1,895; 1-bedroom units from $1,221 to $2,396 and 2-bedroom units from $1,580 to $2,490. Rents equate to $2.25—$2.50/sf. A public REIT will bring a 290-unit, 6-story building to Capitol Hill in the late spring or summer, and a condo / hotel / apartment project sited near the Convention Center with 56 rental units will debut in the spring. No price details were available for either property.

SUPPLY TRENDS

SUBMARKET TRENDS



West Seattle / Burien $839 $814 -3.0% 3.8% 7.6% 380 bps Des Moines / West Kent $846 $791 -6.5% 4.4% 7.7% 330 bps Tukwila / Sea-Tac $805 $737 -8.4% 4.0% 5.9% 190 bps Bellevue / Issaquah $1,159 $1,087 -6.2% 6.3% 8.0% 170 bps Edmonds / Lynnwood $904 $829 -8.3% 4.0% 5.9% 190 bps Downtown / Capital Hill $1,304 $1,206 -7.5% 6.5% 7.4% 90 bps Kirkland / Juanita $1,227 $1,149 -6.4% 9.4% 7.0% -240 bps Bothell $1,052 $1,003 -4.6% 4.9% 9.6% 470 bps Renton $933 $861 -7.8% 5.5% 7.5% 200 bps Redmond $1,156 $1,037 -10.3% 5.5% 7.8% 230 bps Kent $851 $822 -3.4% 5.0% 6.7% 170 bps Beacon Hill / Rainier $958 $897 -6.4% 9.8% 10.7% 90 bps North Seattle $1,008 $953 -5.5% 3.7% 7.2% 350 bps Federal Way $816 $792 -2.9% 6.8% 8.1% 130 bps Auburn / Enumclaw $794 $767 -3.4% 4.5% 5.8% 130 bps Everett / Mukilteo $908 $837 -7.8% 6.4% 7.1% 70 bps

Metro $1,000 $937 -6.3% 5.8% 7.4% 160 bps


Source: Reis, Inc

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

02 03 04 05 06 07 08 09 10f 11f

Uni

ts





800.837.5100






• About 90 of the 224-units of a 27-story high-rise near Pacific Place were occupied in December after about nine months of lease-up. Rents averaged $3,745.

R ecent payroll data suggest that Seattle will be among the laggards rather than

leaders of the burgeoning economic recovery. Headline payroll trends deteriorated sharply in the third quar-ter as -66,200 (-4.4%) jobs were lost year-over-year in 3Q09, as compared to the -55,700 (-3.8%) job decline observed in the previous quarter. Additionally, seasonally-adjusted payroll data revealed that the pace of job loss was slightly worse in the third quarter. After trimming -9,100 jobs sequentially in the second quar-ter, attrition accelerated to -9,700 from July to September. Moreover, a combined net of -10,600 jobs were lost in October and November.

Business service firms continued to shed the most jobs, accounting for -17,900 fewer positions y-o-y in 3Q09. Administrative support service establishments cut -10,600 jobs and professional, technical and scientific service reduced -4,800 positions from staffs.

Manufacturing, construction and retail businesses were also to blame. The sector lost a combined -34,200 jobs y-o-y in 3Q09. But conditions in the retail segment improved in November as only -4,800 jobs were lost y-o-y, better than the -7,000-job monthly y-o-y average decline observed from January to October.

The employment outlook remains bleak. According to the December Manpower Employment Outlook Sur-vey, only 10% of metro businesses plan to add workers in 1Q10, much lower than the 17% than expect to reduce staffs. By comparison, the September survey (regarding the out-look for 4Q09) revealed that 10% of establishments planned to hire work-ers and 16% intended to contract.

The RED CAPITAL Research (RCR) econometric model forecasts

that payrolls will continue to trend lower through 2010. Specifically, the model produces point estimates of -63,400 (-3.6%) jobs lost last year and a -4,100 (-0.2%) job decrease in 2010. But we forecast a strong 34,200 (2.0%) job expansion in 2011.

Home price data declined, but sales activity accelerated in 3Q09. The Washington Center for Real Estate Research report that the median price of a King County home fell -10.5% y-o-y to $382,000, while the number of homes that sold advanced 9.7% y-o-y. By comparison, the $297,000 median home price in Snohomish County was -12.6% lower than the 3Q08 compari-son.

Supply (987 units) outpaced demand (684 units) from July to September, resulting in a 10 basis point decrease in occupancy from 92.8% in 2Q09 to 92.7% in 3Q09. On an annual basis, occupancy dropped 220 basis points, owing to steady supply and weak de-mand. Developers completed 3,343 units and tenants vacated 904 units in the twelve-month period ended in September.

Effective rent decreased -4.2% y-o-y to $965 in 3Q09. Elevated conces-sions were largely responsible. The size of the average concession pack-age rose from 5.2% of asking rent in 3Q08 to 6.9% in 3Q09. Preliminary Reis data reveal that the average ask-ing rent decreased -3.0% sequentially in 4Q09, following a -0.2% decline in 3Q09.

Real Capital Analytics estimate that sales volume totaled $277 million last year, down -82.9% from 2008. More-over, the average price per unit de-creased -17.7% to $109,337. At an assumed 6.2% going-in yield, RCR calculate a 4.9% expected rate of total return and a 1.43 risk-adjusted return index. The metrics rank 35th and 42nd, respectively among the RED 50.

RED CAPITAL GROUP®

Market Overview


Y-o-y Projected

change 2009

Vacancy (7.3% - 3Q09)

Effective

Rents ($965 - 3Q09)

Cap Rate (7.6% - 3Q09)

Employment (1,421m - 3Q09)

SNAP SHOT

66.2m 63.4m

200bps

4.2% 4.4%

220bps 30bps

• The average vacancy rate rose 10 basis points sequentially and 220 basis points year-over-year to 7.3% in 3Q09. Supply was largely to blame. Developers completed 987 units in the third quarter and 3,343 units in the twelve-month period ended in September. Preliminary data show that the metro vacancy rate rose to 7.4% in 4Q09.

• Rising concessions were largely to blame for falling effective rent in the third quarter. The size of the average concession package rose from 5.2% of asking rent in 3Q08 to 6.9% in 3Q09. As a result, the average effective rent fell -4.2% year-over-year to $965.

• According to the National Association of Realtors, the median price of a single-family MSA home fell -8.1% year-over-year to $321,500 in 3Q09. The Case-Shiller home price index reveals that metro home values decreased -12.4% in the year-ended in October.

• Real Capital Analytics estimate that sales volume totaled $277 million in 2009, down sharply from the $1,628 million tally in the previous year.

KEY POINTS

EXECUTIVE SUMMARY

• Effective rent decreased -0.2% sequentially to $965 in 3Q09, marking the fourth consecutive quarterly decline. As a result, the metric was -4.2% below the figure from the comparable period of 2008, the worst over-the-year comparison since 2Q03.

• Reis estimate that the 3Q09 asking rent was -2.4% below the prior year comparison. But Marcus & Millichap estimate that asking rent fell -3.0% year-over-year, largely attributable to the -3.7% drop in Class-A asking rent and a -2.9% decrease in Class B/C asking rent.

• Based on preliminary Reis data, the average asking rent plunged -3.0% sequentially to $1,005. By comparison, the typically pessimistic service predicted in October that asking rent would fall only -0.6% to $1,030 in the fourth quarter.

RANK: 43rd out of 50

• The apartment vacancy rate increased 10 basis points sequentially from 7.2% in 2Q09 to 7.3% in 3Q09, owing to supply. Developers completed 987 units, outpacing tenant demand of 684 units from July to September. On an annual basis, vacancy rose 220 basis points as tenants vacated 904 units and developers delivered 3,343 units in the twelve-month period ended in September.

• At 8.2%, vacancy among Class-A properties was up 270 basis points year-over-year in the third quarter. On the other hand, Marcus & Millichap estimate that Class B/C vacancy rose 200 basis points year-over-year to 6.9% in 3Q09.

• Preliminary 4Q09 Reis data show that vacancy averaged 7.4% in Seattle, lower than the 8.0% US average.



Source: Reis, Inc.

5.1%

7.3%

0%

2%

4%

6%

8%

10%

3Q

00

3Q

01

3Q

02

3Q

03

3Q

04

3Q

05

3Q

06

3Q

07

3Q

08

3Q

09

Met

ro V

acan

cy R

ate

SeattleU.S.A.

Metro Rent Trends

Source: Reis, Inc.

-2.4%

-4.2%-8%-6%-4%-2%0%2%4%6%8%

10%12%

3Q

00

3Q

01

3Q

02

3Q

03

3Q

04

3Q

05

3Q

06

3Q

07

3Q

08

3Q

09

Yo

Y R

ent

Tre

nd

AskingEffective

RENT TRENDS

• Real Capital Analytics estimate that apartment sales volume totaled $277 million in 2009, down -82.9% from $1,628 million in the previous year. Pricing metrics were lower. The average price per unit fell -17.7% to $109,337 and the average cap rate rose 110 basis points to 7.0%.

• Marcus & Millichap calculate that the median price per unit was $109,600 in the twelve-month period ended in September, -11% lower than the figure from the same period of 2008. The source estimates that yields typically ranged from 6.75% to 7.25% in recent months. However, Marcus & Millichap note that some downtown Seattle properties still command cap rates in the high 5% range.

• At an assumed 6.2% cap rate, RCR calculate a 4.9% expected rate of total return, below the 5.4% RED 50 average. Moreover, Seattle generated the 9th lowest measure of risk-adjusted return in the group.


Source: Reis, Inc.

3%

4%

5%

6%

7%

8%

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

Cap

Rat

e







Rate

Regent at Bellevue Way A December 2009 $35.0 $182,208 5.0% Summerwalk Apartments B/C December 2009 $10.9 $62,000 7.0% Bravado on 27th B/C September 2009 $14.4 $57,631 8.4%

EMPLOYMENT TRENDS

• The Census Bureau report that the metro homeownership rate fell 120 basis points year-over-year from 61.8% in 3Q08 to 60.6% in 3Q09. Moreover, the source calculates a 3.6% 3Q09 homeowner vacancy rate, up from 2.3% in the same period of 2008.

• According to the National Association of Realtors, the median price of a single-family home in the Seattle - Tacoma - Bellevue MSA decreased -8.1% year-over-year to $321,500 in 3Q09. By comparison, the Case-Shiller home price index decreased -12.4% in the twelve-month period ended in October, ranking 15th among the 20 markets tracked by the source.

• The Washington Center for Real Estate Research report that the median price of a King County home decreased -10.5% year-over-year to $382,000 in 3Q09. Sales activity, on the other hand, advanced 9.7% as an annualized total of 22,100 homes sold in the third quarter.



• Payroll employment trends deteriorated sharply in the third quarter. A net of -66,200 (-4.4%) jobs were lost year-over-year in 3Q09, fol-lowing the -55,700 (-3.8%) job annual decrease in the second quarter. Additionally, job attrition totaled -64,100 (-4.3%) in the twelve-month period ended in November.

• The most severe third quarter job losses were recorded in the business service super-sector as -17,900 jobs were lost year-over-year. But the pace of job loss decelerated to -8,300 in the year-ended in November.

• Manufacturing and construction firms also were to blame. The sec-tors cut a combined -27,200 jobs year-over-year in 3Q09. Likewise, headcounts among retail, finance and education service firms fell -12,700.

• Health care establishments continued to expand in the third quarter, adding 2,000 jobs year-over-year.

Seasonally-Adjusted

• On a seasonally-adjusted basis, -9,700 jobs were eliminated sequen-tially in the third quarter, following losses of -28,100 jobs in 4Q08, -23,400 jobs in 1Q09 and -9,100 jobs in 2Q09.

• As of November, the seasonally-adjusted unemployment rate was 8.6%, up from 4.9% in December.

Forecast

• RCR’s econometric payroll model estimates that -63,400 (-3.6%) jobs were lost last year and predicts that job losses will total -4,100 (-0.2%) in 2010. By the same token, we forecast a strong gain of 34,200 (2.0%) jobs next year.




34.2

-4.1

-63.4-80

-60

-40

-20

0

20

40

60

99 00 01 02 03 04 05 06 07 08 09f 10f 11f

Ann

ual C

hg (

000)


Source: BLS

-6%

-4%

-2%

0%

2%

4%

6%

99 00 01 02 03 04 05 06 07 08 09

Rat

e

Seattle USA




0.2%3.0%

6.6%9.0%

2.2%4.3%

5.7%7.0%

8.9%

4.8%

0%

5%

10%

90% 70% 50% 30% 10%

Seattle Portland



$100

$150

$200

$250

$300

$350

$400

$450

05

Y

06

Y

07

Y

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

Pri

ces

(00

0)

MSA US

• As of January, Reis count 22 apartment properties with 3,120 units completed and added to inventory in 2009. The largest additions to inventory were recorded in the Bellevue / Issaquah (776 units) and North Seattle (749 units) submarkets.

• Supply levels will remain elevated this year. Already, 593 units were completed in the first two weeks of January. In addition, a total of 3,624 apartment units were under construction in January and were forecast to debut by year-end.

• Deliveries will wane in 2011. Only 747 units that were under construction in January are scheduled to open next year. Additionally, one property (125 units) is in the planning phase with a 2011 target completion date.

• Reis identified 11,573 apartment units in the planning stage.

SUPPLY TRENDS

SUBMARKET TRENDS



West Seattle / Burien $855 $824 -3.6% 4.1% 8.0% 390 bps Des Moines / West Kent $848 $817 -3.7% 4.5% 7.3% 280 bps Tukwila / Sea-Tac $802 $758 -5.5% 4.1% 5.5% 140 bps Bellevue / Issaquah $1,171 $1,136 -3.0% 5.1% 8.3% 320 bps Edmonds / Lynnwood $895 $855 -4.5% 3.9% 5.5% 160 bps Downtown / Capitol Hill $1,325 $1,241 -6.3% 4.4% 7.1% 270 bps Kirkland / Juanita $1,228 $1,161 -5.4% 4.6% 7.3% 270 bps Bothell $1,063 $1,019 -4.1% 3.1% 8.6% 550 bps Renton $954 $885 -7.3% 5.7% 7.5% 180 bps Redmond $1,180 $1,089 -7.7% 3.9% 6.8% 290 bps Kent $861 $836 -2.9% 3.6% 6.7% 310 bps Beacon Hill / Rainier $967 $947 -2.0% 12.5% 9.5% -300 bps North Seattle $998 $987 -1.1% 4.4% 7.8% 340 bps Federal Way $831 $811 -2.4% 6.2% 8.8% 260 bps Auburn / Enumclaw $798 $781 -2.1% 4.0% 5.7% 170 bps Everett / Mukilteo $911 $870 -4.5% 5.2% 7.4% 220 bps Metro $1,007 $965 -4.2% 5.1% 7.3% 220 bps


Source: Reis, Inc

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

02 03 04 05 06 07 08 09f 10f

Uni

ts





800.837.5100






R ecently crowned as the na-tion’s “hippest” city by the Wall St. Journal, Seattle’s

reign at the top is for a moment at least a troubled one. The metro area lost 55,700 (-3.8%) jobs year-over-year in the second quarter, and the third quarter got off to an even slower start as Jet City establishments trimmed payrolls at a record 69,800-job, -4.7% y-o-y pace in August.

The goods producing industries were the primary instigators of the job cuts, collectively eliminating 27,200 posi-tions. Construction led the way, trim-ming 12,300 workers, followed by machinery manufacturers (3,900 posi-tions), wholesalers (2,600 jobs) and computer and electronics makers (1,800 jobs). Service industry trends were hardly better, as conditions in the bedrock business services sector took a sharp turn for the worse, drop-ping 17,500 (-8.0%) jobs, including a 4,000-job, -3.7% decline in the criti-cal professional and technical service component. Even the recession-resistant health care and government sectors barely scratched out gains (indeed, each recorded y-o-y losses in August), while the educational ser-vices component dropped 1,800 jobs.

Consistent with national trends, sea-sonally-adjusted figures were moder-ately stronger. These data showed payroll attrition slowing from 23,400 jobs in the first quarter to 9,100 jobs in the second. The sense of progress was shattered in August, however, as losses rebounded to 10,300 jobs, ac-cording to preliminary data.

The RED CAPITAL econometric payroll model forecasts stormy weather for the balance of 2009, with y-o-y losses exceeding 50,000 jobs continuing through year end. Condi-tions are expected to stabilize next winter, giving way to clearing skies by 2Q10. By way of forecast, RCR

project 57,500 job losses in 2009; followed by 9,200- and 45,300-job gains in 2010 and 2011, respectively.

After four consecutive quarters of negative net absorption, Seattle own-ers posted a 2Q gain as regards occu-pied stock, net leasing 33 units, ac-cording to Reis. Demand was over-whelmed by 753 units of delivered supply, however, sending occupancy down for the sixth quarter in succes-sion; in this instance 40 basis points to 92.9%, lowest in five years. Trends were notably weak in West Seattle, Bothell and Redmond, where negative absorption and moderate supply pressure sent occupancy down 4.0% to 6.1% from March to June.

Average effective rents buckled under the pressure, falling $18 (-1.8%) from March to $967, the third and largest sequential decrease recorded since summer 2008. The decline was largely attributable to face rent dis-counting as average asking rents fell $17 quarter-to-quarter to $1,038. Trends were soft across the board as only two submarkets posted sequen-tial quarter gains. The largest setback was posted in Redmond, home to the Microsoft Corp. headquarters, where effective rents fell $94 (-8.0%) from March, according to Reis data.

Reis expect demand to rebound in 2H09 (the service sees net absorption of 2,262 units) but see robust supply to outpace leasing, sending occupancy down 10 basis points by year-end. Reis anticipate nearly flat occupancy levels for the next four years. Rents are projected to fall -1% by YE09, and -0.2% in 2010 before recovering lost ground thereafter. Still, effective rents aren’t expected to pierce the $1,007 3Q08 peak level before 2013.

Using a 6.5% generic cap rate, RCR estimate total returns at 4.0%, 70bps below the R50 mean. The risk-adjusted index also is below average.

RED CAPITAL GROUP®

Market Overview


Y-o-y Projected

change YE09

Vacancy (7.1% - 2Q09)

Effective

Rents ($967 - 2Q09)

Cap Rate (5.6% - 2Q09)


SNAP SHOT

55.7m 57.5m

2.3% 4.4%

240bps 10 bps

• Seattle’s principal employment drivers—aerospace, software, tourism and trade-came under pressure over the summer, resulting in faster job losses and higher unemployment. Metro payrolls fell 61,800 jobs during the 12-month period ended in August, while the unemployment rate reached a record 9.2% in June before receding to 8.8% in August.

• RCR expect metro establishments to begin rebuilding headcount by the spring 2010.

• Occupancy and rents tumbled again in 2Q09. Occupancy dropped -40 basis points to 92.9%, while effective rent slipped $18 (-1.8%). Occupancy and rents declined -2.3% and -240 bps from June 2008 levels.

• Supply pressures will limit the degree to which the market can recover over the next several years. Reis project falling rents through 2010, and occupancy levels near recent marks prevailing through 2013.

• Investor demand for Seattle properties was brisk. Seventeen assets traded in 2Q for $202mm of gross proceeds, up from 11 closings valued at $48mm in the first quarter.

• Class-B assets traded at cap rates above 7%.

KEY POINTS

EXECUTIVE SUMMARY

50 bps 40 bps

• Job losses and lean options/bonus distributions pressured tenants pocketbooks and forced owners to adjust rents lower. Metro effective rents fell $18 (-1.8%) to $967 March-to-June, according to Reis, the largest one-quarter decline in this market’s history.

• M/PF Yieldstar reported a larger rent decline than Reis. This service recorded a -3.6% sequential effective rent decline in 2Q09, contributing to a -9.6% y-o-y decrease since June 2008.

• Rents were weak across the board but infill markets seemed to have the worst of it. M/PF found that rent declines were greatest in key urban submarkets, including Downtown, Capitol Hill and North Seattle.

• Reis expect rents to decline another $10 (-1.0%) by YE09, followed by another $2 (-0.2%) dip in 2010. Rents won’t return to 2008 highs until 2013.


• Metro occupancy declined for the sixth consecutive quarter. Although owners managed to net lease 33 units in 2Q09, the first positive absorption recorded since 1Q08, supply of 753 units was too much to fill, causing the average occupancy rate to fall -0.4% to 92.9%.

• Several submarkets suffered large 2Q occupancy setbacks. Demand for units in suburban submarkets northeast (Bothell, Redmond) and south (West Seattle, Kent) of Downtown and in the largely infill North Seattle areas was relatively weak.

• Heavy supply clouds Seattle’s occupancy outlook. Presently, 30 projects are underway encompassing more than 6,000 units and another 74 are in the planning stage, including 23 apartment developments in the Downtown / Queen Anne’s submarket alone.



Source: Reis, Inc.

4.7%

7.1%

7.6%

0%

2%

4%

6%

8%

10%

2Q

00

1Q

01

4Q

01

3Q

02

2Q

03

1Q

04

4Q

04

3Q

05

2Q

06

1Q

07

4Q

07

3Q

08

2Q

09

Met

ro V

acan

cy R

ate

SEATTLEU.S.A.

Metro Rent Trends

Source: Reis, Inc.

-1.0%

-2.3%

-8%-6%-4%-2%0%2%4%6%8%

10%12%

2Q

00

1Q

01

4Q

01

3Q

02

2Q

03

1Q

04

4Q

04

3Q

05

2Q

06

1Q

07

4Q

07

3Q

08

Yo

Y R

ent

Tre

nd

ASKING

EFFECTIVE

RENT TRENDS

• Sales of Seattle properties gained momentum in the spring and summer. After recording an anemic (by local standards) 11 transactions valued at $48mm in 1Q09, sales accelerated to 17 exchanges for $202mm in 2Q. Velocity slowed down again during the summer months though, as only five trades were closed from July 1 to September 30 valued at an aggregate of $30mm.

• The last recorded trade may be a harbinger of the future: in late September a 30-year old B– property in West Kent was acquired for $57,229 per unit to yield about 7.5%. This sale was the first Seattle –Bellevue MSA property in recent memory priced under $60,000/unit.

• Using a 6.5% generic cap rate, RCR derive a 4.0% expected five-year unlevered total return estimate and a 1.13 risk-adjusted index. These metrics compare unfavorably to the 4.7% and 1.73 RED 50 means.


Source: Reis, Inc.

4.0%

5.0%

6.0%

7.0%

1Q

07

3Q

07

1Q

08

3Q

08

1Q

09

3Q

09

Cap

Rat

e


Seattle-Bellevue-Everett, WA MSA - 2Q 2009





Rate

Admiralty House (West Seattle) B+ 20-Aug-2009 $4.5 $125,396 4.9% (Reis) Lexington Heights (Renton) B 30-Jun-2009 $26.0 $103,075 6.8% (Reis) Domaine (Downtown/Cptl Hill) A 31-May-2009 $19.5 $214,246 Distressed Verona Apts (Bellevue/Issaquah) A 11-May-2009 $31.1 $150,455 5.6% (Reis)

EMPLOYMENT TRENDS

• Home sales in the Seattle area sputtered in August, falling -10% from July, the largest decline ever recorded in this period or so say DQ News. The median price of a home held firm at $300,000 in August, but the figure remained –11% below the comparable level in 2008.

• The Case-Shiller repeat sales index fell –15.3% year-over-year in July, moderately worse than the -13.3% decline suffered by the 20 top metro markets in the nation. Also, the seasonally-adjusted price index fell slightly from June to July, slipping -0.1%. Only one other constituent metro in the CSX-20 index declined sequentially in July: Las Vegas.

• Condo sales fell -13% June to July, but inched up 0.2% from July 2008. The median price of resale condos fell only -3.9% (to $244,950) over the 12 months ended in July, good news for apartment owners.

• Condo auctions occurred but prices often were higher than anticipated.


Second Quarter 2009

• Layoffs in the construction, manufacturing and wholesale trade sec-tors were largely responsible for Seattle’s 55,700-job, -3.8% payroll setback during the second quarter. Also contributing was a surprising 17,500-job, -8.0% year-over-year decline in business service payrolls, the largest retreat ever recorded in this super-sector.

• Computer and electronic equipment manufacturing headcounts fell at a 1,800-job, -12.2% pace in the quarter, reflecting weak global de-mand for personal computers and capital goods generally.

Twelve Months ended August 2009

• Job losses continued to mount through the summer months. Prelimi-nary estimates of August payrolls indicated that Seattle establish-ments cut 69,800 (-4.7%) jobs over the prior 12 months, representing the worst annual comparison ever recorded in Seattle.

• Financial services, trade and manufacturing exhibited the weakest conditions on a year-on-year basis. Other sectors showed rare year-over-year declines: payrolls fell in the normally stalwart education services, health care services and software publishing segments.

• After posting an unchanged metric in July, seasonally-adjusted pay-roll totals dropped by 10,300 jobs in August, the worst one-month metric registered since March and an indication that the Seattle econ-omy isn’t out of the woods yet.

• The unemployment rate receded from 9.2% to 8.8% June to August.

Forecast: The RED CAPITAL econometric payroll model projects two more quarters of ugly year-over-year payroll losses before it divines an inflexion point developing in late winter 2010. The model produces forecasts of -57,500 job losses in 2009, followed by year-on-year gains emerging in 2Q10, ultimately generating 9,200-job and 45,300-job gains in 2010 and 2011, respectively.



-57.5

9.2

45.3

-80

-60

-40

-20

0

20

40

60

00 01 02 03 04 05 06 07 08 09f 10f 11f

Ann

ual C

hg (

000)


Source: BLS

-4.7%

-4.4%

-6%

-4%

-2%

0%

2%

4%

6%

99 00 01 02 03 04 05 06 07 08 09

Rat

e

SEATTLEUSA

Seattle-Bellevue-Everett, WA MSA - 2Q 2009



-0.8%

2.0%5.7%

8.2%

2.0%4.0% 5.3% 6.6%

8.5%

3.9%

-5%

0%

5%

10%

90% 70% 50% 30% 10%

SEA (RAI=1.13) SLC (RAI=2.13)



-15.3%-13.3%

-20%

-15%

-10%

-5%

0%

5%

Jan-

08

Apr-

08

Jul-

08

Oct-

08

Jan-

09

Apr-

09

Jul-

09

App

reci

atio

n

SEATTLE CSX20

RED

• While recent job losses have stymied the Seattle apartment market rally, supply pressures will be the market’s future undoing. Presently, some 30 projects are underway, according to Reis, incorporating an aggregate of 6,090 units. M/PF estimates that the under construction figure is 7,200 units, with more than one-half (4,500) scheduled to be delivered in the second half of 2009.

• Submarkets that need additional supply the least, at least in the short run, will receive the most units over the next eighteen months. For example, the Downtown / Queen Anne / Capitol Hill submarket currently has eight project with 1,123 units underway, and another 23 properties in the planning stages encompassing 3,337 units. Vacancies are up 260 bps in the past 12 months and are likely to spike higher as new apartments and unsold condo units come on line.

• A number of condo tower projects have been shelved, at least temporarily, and moderately good sales during the summer months trimmed unsold inventory, thereby reducing shadow supply risks.

• A 114-unit mid-rise located adjacent to the Pacific Science Center delivered in summer 2008 was 93% occupied in June 2009. Rents range from $1,200 to $2,500 per month.

SUPPLY TRENDS

SUBMARKET TRENDS



West Seattle / Burien $822 $831 1.0% 4.6% 9.0% 440 bps Des Moines / West Kent $843 $819 -2.9% 4.0% 7.5% 350 bps Tukwila / Sea-Tac $798 $765 -4.1% 3.1% 5.4% 230 bps Bellevue / Issaquah $1,152 $1,130 -1.9% 4.7% 7.3% 260 bps Edmonds / Lynnwood $885 $865 -2.3% 3.6% 5.2% 160 bps Downtown / Capitol Hill $1,296 $1,246 -3.8% 4.2% 6.8% 260 bps Kirkland / Juanita $1,215 $1,176 -3.2% 4.3% 7.5% 320 bps Bothell $1,055 $1,025 -2.8% 2.4% 8.5% 610 bps Renton $941 $898 -4.5% 5.2% 6.5% 130 bps Redmond $1,173 $1,079 -8.0% 3.1% 7.1% 400 bps Kent $850 $848 -0.2% 3.7% 6.0% 230 bps Beacon Hill / Rainier $944 $931 -1.4% 10.3% 9.9% -40 bps

Everett / Mukilteo $893 $869 -2.7% 5.3% 7.0% 170 bps

North Seattle $976 $979 0.3% 4.2% 7.9% 370 bps Federal Way $837 $817 -2.3% 5.4% 7.9% 250 bps Auburn / Enumclaw $780 $786 0.7% 3.8% 5.7% 190 bps

Metro $990 $967 -2.3% 4.7% 7.1% 240 bps


Source: Reis, Inc

-1,000

0

1,000

2,000

3,000

4,000

5,000

02 03 04 05 06 07 08 09f 10f

Uni

ts


The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change with-out notice due to market conditions and other factors.



800.837.5100





©2008 RED CAPITAL GROUP (11/08)

• A 226-unit project in the Belltown section of Downtown hasn’t leased as quickly. The project remained 80% vacant in June after leasing for about nine months. Rents range from $875 to $2,500.

• Projects in the Downtown, Queen Anne and University districts delivered between 2006 and 2008 averaged 30% vacancy in June.

jscain

RCG Solo

E merald City economic condi-tions deteriorated signifi-cantly over the past several

months, consistent with the domestic economic downturn. Between Janu-ary and September 2008, area em-ployers added a seasonally-adjusted 7,600 workers to staffs. But during the eight months from October to May, a net of -55,500 positions were eliminated from payrolls. By com-parison, the economy lost -98,100 jobs during a 30-month span in the previous recession.

Non-seasonally adjusted year-over-year payroll data reveal that the pace of job loss accelerated from -15,000 (-1.0%) in 4Q08 to -41,500 (-2.8%) in 1Q09. Data from April and May indi-cate that y-o-y losses totaled about -55,000 in the second quarter.

Nearly every major employment sec-tor reduced headcounts. But the most severe declines were recorded in the construction, manufacturing and busi-ness service sectors, which lost a combined -30,900 positions from pay-rolls y-o-y in 1Q09. Additionally information and health care sector job growth slowed from 9,100 y-o-y in 4Q08 to 6,100 y-o-y.

The RED CAPITAL Research (RCR) econometric model predicts job losses of -54,200 (-3.7%) this year and a -6,900 (-0.5%) payroll job re-duction in 2010. Economy.com are more optimistic, forecasting a com-paratively modest -32,690 (-2.2%) decrease in payrolls this year and a 29,510 (2.1%) job gain in 2010.

Transaction activity in the condo mar-ket remained weak in 2009. As a result, for-sale units continued to con-vert to rental tenancy. By way of example, a 91-unit property in Seat-tle’s Queen Anne neighborhood (Downtown / Capital Hill submarket) was purchased from the original condo developer for $19.5 million and

converted to rental apartments. The property now offers units leasing from $1,350 to $4,595 per month.

Apartment demand was weak in the first quarter, owing to shadow supply and falling payrolls. Tenants vacated 694 units during the period, resulting in a 70 basis point decrease in the metro occupancy rate from 94.4% in 4Q08 to 93.7% in 1Q09. Addition-ally, developers completed four prop-erties totaling 591 units. Three of the assets (462 units) are located in the North Seattle / Northgate submarket.

Waning demand gave rise to falling face rents and increased concessions. The average asking rent decreased -0.8% sequentially, the first decline of this metric since 4Q04. Furthermore, the size of the typical concession package rose from 5.8% of asking rent in 4Q08 to 6.6% in 1Q09. Con-sequently, the average effective rent plunged -1.6% quarter-over-quarter and was -2.2% lower than the level recorded in September 2008.

Reis are somewhat more optimistic regarding apartment demand next year. Based on the aforementioned Economy.com payroll projection, Reis expect net absorption (4,085 units) to keep pace with supply (4,201 units), resulting in a 10 basis point increase in occupancy. But Reis’ view of rent trends are less sanguine. The service predicts that the pace of y-o-y rent growth will total -3.8% in 2009 and -0.2% next year.

According to Real Capital Analytics, multifamily asset sales volume totaled $120 million in 1H09. The average price was $118,186 per unit. Two of the seven transactions were “forced sales”. CBRE conclude a cap rate range of 6.25% to 7.0% was applica-ble to Class-A properties in March. At an assumed 6.5% going-in yield, RCR calculate a below average 2.5% expected rate of total return.

RED CAPITAL GROUP®

Market Overview

Seattle, Washington Multifamily Housing Update July 2009

Y-o-y Projected

change 2009

Vacancy (6.3% - 1Q09)

Effective

Rents ($985 - 1Q09)

Cap Rate (4.8% - 1Q09)


SNAP SHOT

41.5m 54.2m

50bps

1.4% 3.8%

180bps 70bps

• The metro vacancy rate increased 70 basis points sequentially and 180 basis points year-over-year to 6.3% in 1Q09. Negative net absorption totaled 694 units in 1Q09 and 1,492 units in the twelve-month period ended in March.

• According to the Washington Center for Real Estate Research, the King County vacancy rate was 6.8% in March, up from 4.1% in the same month last year.

• Effective rent fell -1.6% sequentially to $985 in 1Q09. As a result, the pace of annual effective rent growth decelerated to 1.4%, from 4.9% in the previous period.

• According to the Case-Shiller home price index, Seattle - Tacoma - Bellevue MSA single-family home values fell -16.8% in the twelve-month period ended in April. By contrast, the metropolitan division (King and Snohomish Counties) registered a -8.4% year-over-year decline in the 1Q09 FHFA purchase-only price index.

• Investor-grade properties were priced around $120,000 to $125,000 per unit over the past year.

KEY POINTS

EXECUTIVE SUMMARY

• Rent trends deteriorated sharply in 1Q09. The average effective rent decreased $16 or -1.6% sequentially to $985. Consequently, the pace of annual effective rent growth slowed from 4.9% in 4Q08 to 1.4%.

• The average asking rent rose a 2.6% annual rate, largely due to rent growth among Class B/C assets. According to Marcus & Millichap, year-over-year asking rent growth for Class B/C properties (3.9%) more than doubled the annual advance recorded in the Class-A property segment (1.6%).

• At 4.2%, the North Seattle submarket boasted the strongest rate of year-over-year effective rent growth in 1Q09.

• Reis expect effective rent to fall to $961 by YE 2010. RANK: 11th out of 50

• The metro average vacancy rate increased 70 basis points sequentially to 6.3% in 1Q09. Weak tenant demand and increased supply were responsible. Tenants vacated 694 units and developers completed 591 units during the period.

• Vacancy increased 180 basis points partially due to negative net absorption of -1,492 units in the twelve-month period ended in March. Additionally, the rental stock increased 1,761 units as supply (1,968 units) outpaced conversion activity (207 units).

• Reis predict that vacancy will continue to rise to 7.0% by year-end but improve to 6.9% in 2010.

RANK: 21st out of 50 COMMENT: The rebound in tenant demand next year is predicated on a 29,150-job increase.


Source: Reis, Inc.

4.5%

6.3%

0%

2%

4%

6%

8%

10%

1Q

00

4Q

00

3Q

01

2Q

02

1Q

03

4Q

03

3Q

04

2Q

05

1Q

06

4Q

06

3Q

07

2Q

08

1Q

09

Met

ro V

acan

cy R

ate

SeattleU.S.A.

Metro Rent Trends

Source: Reis, Inc.

2.6%

1.4%

-8%-6%-4%-2%0%2%4%6%8%

10%12%

1Q

00

4Q

00

3Q

01

2Q

02

1Q

03

4Q

03

3Q

04

2Q

05

1Q

06

4Q

06

3Q

07

2Q

08

1Q

09

Yo

Y R

ent

Tre

nd

AskingEffective

RENT TRENDS

• Real Capital Analytics identify seven trades involving properties priced at or above $5 million in 1H09, totaling $120 million in sales proceeds. The average price was $118,186 per unit.

• Marcus & Millichap report a median price per unit of $123,100 during the twelve-month period ended in March. The source reports that cap rates typically ranged from 5.5% to 6.0%. CBRE, on the other hand, note that a cap rate range of 6.25% to 7.0% was appropriate for Class-A assets in March.

• Based on an assumed going-in yield of 6.5%, RCR calculate a 2.5% expected rate of total return, among the lowest in the RED 50. The measure of risk-adjusted return (0.70) was similarly weak.


Source: Reis, Inc.

2.0%

2.5%

3.0%

3.5%4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

Cap

Rat

e







Rate

Woodland Greens BC June 2009 $14.7 $61,250 7.5% Waterford at the Lakes A June 2009 $33.2 $96,380 6.5% Broadstone Domaine A June 2009 $19.5 $214,286 N/A Verona A May 2009 $33.1 $150,455 6.5%

EMPLOYMENT TRENDS

• The population of the Seattle - Bellevue - Everett metropolitan division advanced at a 1.3% pace in 2008, slightly slower than the 1.4% increase observed in the previous year.

• According to the Washington Center for Real Estate Research, the median price of a King County home was $375,000 in 1Q09, down -13.8% from 1Q08. Seasonally-adjusted home sales fell -15.0% sequentially to an annualized 14,910 in the first quarter. The median price fell -11.6% year-over-year to $311,800 in Snohomish County.

• DQ News report that foreclosure sales accounted for 19.2% of the Seattle MSA’s transactions in May, up from a 5.9% share in the same month of 2008.

COMMENT: The April Case-Shiller home price index reveal a -16.8% year-over-year decline in MSA single-family home values.


First Quarter 2009

• King and Snohomish County employers eliminated a seasonally-adjusted -23,400 jobs from January to March, equal to a -6.4% annu-alized decline. On a year-over-year basis, headcounts fell -41,500 (-2.8%) in 1Q09, the largest decrease since 3Q02.

• The weak housing market was partially to blame for job losses in the construction and finance sectors. Combined, the sectors cut -15,200 jobs year-over-year in 1Q09.

• Reduced global trade activity contributed to a downturn in manufac-turing as industrial headcounts fell -8,600 year-over-year.

April and May

• Payroll employment conditions deteriorated further in April and May as year-over-year job losses totaled -52,800 (-3.6%) and -55,400 (-3.7%), respectively.

• The business service super-sector hemorrhaged jobs at a rapid pace. Firms eliminated -17,700 positions from payrolls in the twelve-month period ended in May. Relatively low-wage paying administrative support establishments were responsible for -11,400 job cuts.

• At 8.4%, the Seattle - Bellevue - Everett metro unemployment in May was up 350 basis points from YE 2008.

Forecast

• RCR’s econometric payroll model predict a -54,200 (-3.7%) job de-crease in 2009 and a -6,900 (-0.5%) job decline next year.

• Economy.com are optimistic, forecasting a loss of -32,690 (-2.2%) jobs this year and a comparatively strong 29,510-job advance in 2010.




-6.9

-54.2-60

-40

-20

0

20

40

60

99 00 01 02 03 04 05 06 07 08 09f 10f

Ann

ual C

hg (

000)


Source: BLS

-6%

-4%

-2%

0%

2%

4%

6%

99 00 01 02 03 04 05 06 07 08 09

Rat

e

Seattle USA




-2.3%

0.5%4.2%

6.7%

0.6%3.1%

4.9%6.6%

8.9%

2.4%

-5%

0%

5%

10%

90% 70% 50% 30% 10%

Seattle Phoenix



$100

$150

$200

$250

$300

$350

$400

$450

05

Y

06

Y

07

Y

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

Pri

ces

(00

0)

Seattle-Tacoma-Bellevue MSA

US

• Reis identify nine properties totaling 1,344 units that were completed in the first half of 2009. The largest additions to inventory were reported in the North Seattle (462 units) and Bothell (344 units) submarkets.

• As of June, 6,981 apartment units were under construction. More than 2,500 units were under construction in the Bellevue / Issaquah submarket and 1,342 and 1,053 units were located in the Downtown and North Seattle submarkets, respectively.

• Developers completed 1,439 condo units year-to-date and another 1,848 condo units were under construction in June.

• The planned pipeline was robust, containing 12,059 apartment units and 5,717 condo units.

SUPPLY TRENDS

SUBMARKET TRENDS



West Seattle / Burien $815 $827 1.5% 4.3% 4.0% -30 bps Des Moines / West Kent $814 $832 2.2% 3.6% 5.9% 230 bps Tukwila / Sea-Tac $791 $778 -1.6% 2.5% 4.7% 220 bps Bellevue / Issaquah $1,122 $1,148 2.4% 4.7% 7.5% 280 bps Edmonds / Lynnwood $876 $869 -0.8% 3.8% 4.6% 80 bps Downtown / Capital Hill $1,283 $1,272 -0.8% 3.5% 7.0% 350 bps Kirkland / Juanita $1,191 $1,217 2.2% 4.7% 9.8% 510 bps Bothell $1,020 $1,023 0.2% 2.6% 5.0% 240 bps Renton $920 $934 1.5% 4.4% 6.0% 160 bps Redmond $1,141 $1,109 -2.8% 3.0% 5.8% 280 bps Kent $838 $851 1.6% 3.6% 5.6% 200 bps Beacon Hill / Rainier $928 $958 3.3% 10.8% 10.2% -60 bps North Seattle $958 $999 4.2% 4.6% 6.0% 140 bps Federal Way $815 $825 1.2% 4.6% 7.1% 250 bps Auburn / Enumclaw $763 $788 3.2% 4.2% 5.6% 140 bps Everett / Mukilteo $867 $894 3.0% 4.8% 6.4% 160 bps Metro $971 $985 1.4% 4.5% 6.3% 180 bps


Source: Reis, Inc

-1,000

0

1,000

2,000

3,000

4,000

5,000

02 03 04 05 06 07 08 09f 10f

Uni

ts


The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change with-out notice due to market conditions and other factors.



800.837.5100






cmpowell

RCG Logo

T he Emerald City economy created jobs at a strong pace throughout much of 2008.

But the trend was initially interrupted in October by the machinist strike at Boeing and although the strike ended at the beginning of November, head-line job trends failed to recover. In-deed, October was simply the first of five consecutive months of year-over-year job declines.

Preliminary BLS data show that the Seattle metropolitan division lost -44,600 (-3.0%) workers in the twelve-month period ended in Febru-ary, nearly tripling the average monthly y-o-y decrease reported in 4Q08 (-15,000, -1.0%). The February decline was largely attributable to four industrial super-sectors; con-struction, manufacturing, retail and business services.

The Seattle unemployment rate spiked year-to-date. On a seasonally-adjusted basis, the jobless rate in-creased from 4.9% in December 2008 to 6.7% in January and 7.8% in Feb-ruary. The latter figure represents the metro’s highest rate since February 1984.

RED CAPITAL Research (RCR) expect job attrition to persist through 2009 but forecast a modest recovery in 2010. Our econometric model pro-duces point estimates of -55,000 (-3.2%) jobs lost this year and a 3,800 (0.2%) job advance in 2010. By con-trast, Economy.com project a modest decline this year (-2,300, -0.2%) fol-lowed by a robust recovery (36,200, 2.4%).

Home prices continued to slide in Seattle, although at a more modest pace than other Western market, par-tially due to relatively low foreclosure activity. The National Association of Realtors report that the median price of a single-family MSA home fell -13.7% y-o-y to $325,900 in 4Q08.

By comparison, the median price de-clined -25.1% y-o-y in the West Re-gion. According to DQNews, 21.9% of the 1,478 homes that sold in Febru-ary were foreclosed upon in the previ-ous twelve-months. By comparison, foreclosures accounted for a more significant percentage of sales activity in Las Vegas (71.0%) and Phoenix (65.0%).

Negative net absorption exerted downward pressure on occupancy in 4Q08. Tenants vacated a net of 487 units, pushing occupancy down 50 basis points from 94.9% in 3Q08 to 94.4%. Over a twelve-month period, the metro occupancy rate fell 140 bps as developers completed 2,087 units and 819 units were vacated.

Property owners increased conces-sions and held asking rent stable in the fourth quarter to maintain occu-pancy. The size of the average con-cession package rose from 5.2% of asking rent in 3Q08 to 5.8% in 4Q08. As a result, the average effective rent fell -0.7% sequentially to $1,000, however; the metric remained 4.8% above the figure from the comparable period of the previous year.

Real Capital Analytics identify 11 transactions involving properties priced at or above $5 million that oc-curred between October 2008 and February 2009. Sales volume totaled $147 million. The average cap rate rose from 5.6% in calendar 2008 to 6.3% in the five month period.

At an assumed going-in yield of 4.8%, RCR calculate a minimal 1.5% expected rate of total return for ge-neric metro assets. Even assuming a 5.8% purchase cap rate, the expected return is only 4.1%, hardly compel-ling for investors. Consequently, we recommend that owners should con-sider monetizing unrealized gains and buyers should stay on the side-lines until prices moderate.

RED CAPITAL GROUP®

Market Overview

Seattle, Washington Multifamily Housing Update April 2009

Y-o-y Projected

change 2009

Vacancy (5.6% - 4Q08)

Effective

Rents ($1,000 - 4Q08)

Cap Rate (6.2% - 4Q08)

Employment (1,747.3k - 4Q08)

SNAP SHOT

20.5k 55k

130bps

4.8% 3.0%

140bps 90bps

• The metro vacancy rate increased 50 basis points sequentially to 5.6% in 4Q08. Negative net absorption of 494 units was partially to blame. On an annual basis, vacancy rose 140 basis points largely due to tenant outflow.

• Year-over-year asking and effective rent growth decelerated to 5.4% and 4.8%, respectively in 4Q08, down from cyclical peaks near 8.0% Owners held asking rents steady and increased concessions, producing a -0.7% sequential decrease in effective rent.

• Notwithstanding stronger tenant demand next year, Reis forecast a 90 basis point increase in vacancy due to elevated supply. The service is also pessimistic regarding effective rent trends, forecasting a -3.0% drop.

• Seattle registered a -15.0% year-over-year decline in the January Case-Shiller home price index. The trend compared favorably to the -19.0% decrease in the composite index of the top 20 markets.

• Property trade activity slowed during the five-month period ended in February as prices adjusted.

KEY POINTS

EXECUTIVE SUMMARY

• The pace of effective rent growth decelerated sharply in 4Q08. The average effective rent increased at a robust 1.7% sequential pace in 3Q08 but fell -0.7% in 4Q08. As a result, the rate of year-over-year effective rent growth decelerated from 7.5% in 3Q08 to 4.8%.

• Asking rent trends were more robust, remaining unchanged quarter-over-quarter and rising at a 5.4% annual pace in 4Q08.

• At 7.1%, the Beacon Hill / Rainier submarket produced the strongest pace of year-over-year effective rent growth in 4Q08.

• Reis forecast a sharp -3.0% decrease in effective rent this year. The service expects a comparatively modest -1.1% drop in 2010 and a return to positive growth thereafter.

RANK: 1st out of 50

• The metro vacancy rate increased 50 basis points sequentially and 140 basis points year-over-year to 5.6% in 4Q08. Weak tenant demand was partially to blame as negative net absorption of 494 units was recorded in 4Q08, bringing the annual absorption total to -819 units. By comparison, supply levels were in-line with recent history. An average of 1,926 units were completed annually from 2002 to 2007 and 2,087 units were delivered in 2008.

• Only two (West Seattle and Auburn) of the metro’s 16 submarkets generated year-over-year declines in vacancy in 4Q08.

• Reis are aware of 20 properties totaling nearly 4,000 units that are scheduled to open this year. Consequently, the service projects that the vacancy rate will increase 90 basis points to 6.5% by year-end.



Source: Reis, Inc.

4.2%

5.6%

0%

2%

4%

6%

8%

10%

4Q

99

3Q

00

2Q

01

1Q

02

4Q

02

3Q

03

2Q

04

1Q

05

4Q

05

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06

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1Q

08

4Q

08

Met

ro V

acan

cy R

ate

SeattleU.S.A.

Metro Rent Trends

Source: Reis, Inc.

5.4%

4.8%

-8%-6%-4%-2%0%2%4%6%8%

10%12%

4Q

99

3Q

00

2Q

01

1Q

02

4Q

02

3Q

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AskingEffective

RENT TRENDS

• Real Capital Analytics identified 11 trades involving properties priced at or above $5 million from October 2008 to February 2009. Sales volume totaled $147 million, the third highest total in the West region after LA at $396 million and San Diego at $229 million.

• Cap rate decompression was significant in recent months. RCA calculate a 6.3% cap rate for the sales consummated from October to February, well above the 5.6% rate applied for calendar 2008 transactions.

• Based on an assumed cap rate of 4.8%, RCR calculate a nominal 1.5% expected rate of total return. But the cap rate assumption perhaps is an inaccurate reflection of current market conditions. Revising the going-in yield up 100 basis points produces a 4.1% expected return, still hardly compelling for potential investors.


Source: Reis, Inc.

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

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3Q

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Seattle - Bellevue - Everett, Washington Metro Division - 4Q 2008





Rate

Brittany Park Apts (Auburn) B/C December 2008 $13.2 $69,474 7.0% Treetops (Silverdale) B November 2008 $34.0 $125,926 5.8% 2900 On 1st (Downtown) A October 2008 $36.5 $269,630 4.8% Park at Dash Point (Federal Way) B October 2008 $30.0 $107,143 6.1%

EMPLOYMENT TRENDS

• The pace of metro population growth decelerated slightly from 1.4% in 2007 to 1.3% in 2008. Net international and domestic migration trends remained positive, adding together 16,693 residents to the metro division last year.

• Home prices trended lower in 4Q08. The National Association of Realtors estimate a median single-family MSA (Seattle-Tacoma-Bellevue) home price of $325,900 in 4Q08, a -13.7% decrease from the same period of 2007. The OFHEO home price index suggests that home prices in the metro division fell -5.0% year-over-year in 4Q08.

• Metro prices continued to fall in the first two months of 2009. DQNews calculate a median single-family home price of $300,000 in February, down -16.7% from the same month last year.


Past 12 Months

• On a year-over-year basis, the pace of job loss accelerated from -23,500 (-1.6%) in December to -30,300 (-2.1%) in January and -44,600 (-3.0%) in February. Much of the jobs lost year-over-year in February were related to the construction, manufacturing, retail and business service sectors. Combined, sector establishments lost -38,800 workers in the twelve-month period ended in February.

• Measured on a seasonally-adjusted basis, the unemployment rate spiked from 4.9% in December to 6.7% in January. The rate contin-ued to ascend in February, rising to 7.8%.

Fourth Quarter 2008

• Following a 19,900 (1.4%) job year-over-year increase in 3Q08, metro employers trimmed -15,000 (-1.0%) positions from payrolls in 4Q08.

• Employment growth turned negative in October, largely due to the machinist strike at Boeing. Indeed, the aerospace manufacturing sector lost -18,800 jobs year-over-year in October as compared to the -14,400 job decrease in the headline figure. The rate of decline decel-erated to -6,900 (-0.5%) in November, following the end of the strike. But subpar demand for retail goods and business services contributed to the -23,500 (-1.6%) job decline year-over-year in December.

Forecast

• RCR expect job losses to continue to mount this year, culminating in a -55,000 (-3.2%) job annual decline. But conditions should improve modestly in 2010 as employers add 3,800 (0.2%) workers to payrolls.

RANK: 21st out of 50



3.8

-55-60

-40

-20

0

20

40

60

99 00 01 02 03 04 05 06 07 08 09f 10f

Ann

ual C

hg (

000)


Source: BLS

-6%

-4%

-2%

0%

2%

4%

6%

99 00 01 02 03 04 05 06 07 08 09

Rat

e

Seattle USA




-3.1%-0.5%

3.0%5.5%

0.8%2.8% 4.1% 5.4%

7.2%

1.3%

-5%

0%

5%

10%

90% 70% 50% 30% 10%

Seattle Portland



$100

$150

$200

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Y

07

Y

4Q

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08

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MSA US

• Supply levels were near recent historical averages last year. An April construction report shows that 2,087 units were completed in 2008 as compared to the 1,926-unit annual average recorded from 2002 to 2007. Developers added 647 units in the final quarter of the year, largely contained in assets located in the Downtown / Capitol Hill and North Seattle submarkets.

• The report identified 32 apartment properties under construction as of April. The assets contained a total of 6,653 units. About half of the units are scheduled to open this year. The inventory of the Beacon Hill / Rainier submarket will increase the most (1,010 units).

• There were another 16,276 apartment units in the planned or proposed stage of development. Three submarket contain more than 3,000 units in the planned / proposed pipeline (Downtown / Capitol Hill, Bellevue / Issaquah and West Seattle).

SUPPLY TRENDS

SUBMARKET TRENDS

Market Overview is a publication of RED CAPITAL GROUP. If you are interested in other metro areas we cover or would like to

read about the research methodology we apply in our reports, please visit us at www.redcapitalgroup.com/research.



Columbus, OH 43215

www.redcapitalgroup.com 800.837.5100

Columbus, OH_Boston, MA_Charlotte, NC_Chicago, IL

Denver, CO_Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY







West Seattle / Burien $799 $839 5.0% 4.7% 3.8% -90 bps Des Moines / West Kent $803 $846 5.3% 3.0% 4.4% 140 bps Tukwila / Sea-Tac $762 $805 5.7% 2.2% 4.0% 180 bps Bellevue / Issaquah $1,100 $1,159 5.4% 4.7% 6.3% 160 bps Edmonds / Lynnwood $867 $904 4.3% 2.8% 4.0% 120 bps Downtown / Capitol Hill $1,252 $1,304 4.2% 4.0% 6.5% 250 bps Kirkland / Juanita $1,186 $1,227 3.4% 4.3% 9.4% 510 bps Bothell $1,020 $1,052 3.1% 3.2% 4.9% 170 bps Renton $902 $933 3.5% 4.0% 5.5% 150 bps Redmond $1,130 $1,156 2.3% 4.0% 5.5% 150 bps Kent $816 $851 4.3% 3.5% 5.0% 150 bps Beacon Hill / Rainier $895 $958 7.1% 8.6% 9.8% 120 bps North Seattle $945 $1,008 6.7% 3.2% 3.7% 50 bps Federal Way $807 $816 1.1% 4.8% 6.8% 200 bps Auburn / Enumclaw $760 $794 4.4% 4.9% 4.5% -40 bps Everett / Mukilteo $857 $908 6.0% 4.8% 6.4% 160 bps

Metro $954 $1,000 4.8% 4.2% 5.6% 140 bps


Source: Reis, Inc

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

02 03 04 05 06 07 08 09f 10f

Uni

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cmpowell

RCG Logo

E merald City job trends re-mained robust in 3Q08. Metro employers added

33,400 (2.3%) employees year-over-year in 3Q08, up from the 27,300 (1.9%) job advance in the previous quarter. The rise was partially attrib-utable to increased hiring among busi-ness service providers, software pub-lishers and government agencies. Combined the sectors added 23,400 positions to payrolls in 3Q08, up from the 11,800 jobs created in 2Q08.

The machinist strike at Boeing re-sulted in dismal headline job trends in October but relatively strong growth returned in November. Metro pay-rolls advanced 600 in the twelve-month period ended in October and 23,900 (1.6%) y-o-y in November.

Despite strong payroll growth, the unemployment rate rose throughout 2008. The seasonally-adjusted unem-ployment rate rose from 3.7% at year-end 2007 to 4.0% in June and 5.6% in November.

RED CAPITAL Research (RCR) expect metro job growth to deteriorate next year but improve in 2010. We project that 31,000 (1.8%) jobs were created in 2008 and our econometric model produces a point estimate of no growth in 2009 but a 34,000 (2.3%) job advance in 2010. By comparison, Economy.com are optimistic, fore-casting a 29,520 (2.0%) job advance in 2009 and a 43,150 (2.9%) gain in 2010.

Home prices weakened in Seattle. The Seattle - Tacoma - Bellevue MSA posted an -11.3% y-o-y decrease in the median single-family home from $394,700 in 3Q07 to $350,000 in 3Q08. According to OFHEO, Seattle home prices dropped -3.0% y-o-y, ranking 177th among the 292 market tracked by the source. Home sales activity fell -44.9% in the twelve-month period ended in November.

Struggling tenant demand produced downward pressure on occupancy. Negative net absorption of 487 units in 3Q08, resulted in a 40 basis point decline in occupancy from 95.5% in 2Q08 to 95.1%. Over a twelve-month period, the metro occupancy rate fell 50 bps as supply of 1,803 units ex-ceeded net demand of 877 units.

An uptick in supply threatens to fur-ther reduce occupancy in the next few years. According to a Reis construc-tion report released in January, 6,699 apartment units were under construc-tion and scheduled to open in either 2009 or 2010. Based on the service’s absorption forecast, the occupancy rate is expected to fall to 94.0% by December 2010.

Rental rates continued to climb at a rapid pace in 3Q08. The average ask-ing rent increased 1.3% sequentially and 7.1% y-o-y to $1,062. Effective rents rose at a moderately faster 7.5% annual pace, owing to a decline in leasing concessions. The size of the typical concession package fell from 5.5% of asking rent in 3Q07 to 5.2% in 3Q08.

Reis believe that rent growth will decelerate in the coming years. The source forecasts y-o-y effective rent growth of 3.0% per year from 2009 to 2011, about equal to the average an-nual increase from 2000 to 2007.

According to Real Capital Analytics, 66 investor-grade apartment assets traded from January to November 2008, totaling $1.527 billion in sales proceeds. The average price was $137,523 per unit and the average cap rate was 5.8%.

RCR calculate a 6.7% expected unlevered rate of return from generic metro asset, the 7th highest rate among the RED 50. Consequently, we af-firm our unconditioned “Accumulate” rating for metro assets.

RED CAPITAL GROUP®

Market Overview


Y-o-y Projected

change 2008

Vacancy (4.9% - 3Q08)

Effective

Rents ($1,007 - 3Q08)

Cap Rate (5.6% - 3Q08)


SNAP SHOT

33.4k 31k

100bps

7.5% 5.9%

50bps

unch

20bps

• The metro vacancy rate increased 40 basis points sequentially and 50 basis points year-over-year to 4.9% in 3Q08. Sluggish tenant demand was largely to blame as negative net absorption totaled 487 units in 3Q08.

• Increased supply may give rise to higher vacancy in the next two years. Recent construction reportage reveals that 6,699 apartment units were under construction in January. Reis expect vacancy to rise to 6.0% by the end of 2010 as demand lags supply.

• Asking and effective rents continued to rise at robust rates in 3Q08. The average effective rent advanced 1.7% sequentially and 7.5% year-over-year to $1,007. The annual increase was the fastest among the RED 50.

• Home prices continued to slide in 3Q08. According to the National Association of Realtors, the median price of a single-family MSA home fell -11.3% year-over-year to $350,000 in 3Q08.

• Real Capital Analytics count 66 trades totaling $1,527 million in sales proceeds in the first 11 months of 2008. The average price was $137,523 per unit.

KEY POINTS

EXECUTIVE SUMMARY

• Apartment owners in Seattle continued to achieve robust rent growth as asking and effective rents increased at 1.3% and 1.7% sequential rates, respectively in 3Q08. Effective rents advanced 7.5% year-over-year during the period, the fastest rate of growth among the RED 50. The average asking rent rose at a moderately slower 7.1% year-over-year pace, owing to a decrease in concession levels.

• An alternative source estimates that asking rents increased 1.7% sequentially and 6.2% year-over-year to $1,012 in 3Q08.

• The Beacon Hill / Rainier submarket experienced the largest over-the-year increase in effective rent (9.8%), partially due to the completion of new high-end luxury rental product.

• Reis expect rent trends to decelerate sharply next year. The source forecasts year-over-year effective rent growth to slow to 3.0% in 2009.

• Apartment demand faltered in 3Q08, leading to a modest rise in the metro vacancy rate. Negative net absorption of 487 units was recorded during the quarter. At the same time, developers completed 201 units. As a result, the vacancy rate increased 40 basis points to 4.9%. Vacancy rose 50 basis points year-over-year as supply of 1,803 units outpaced net absorption of 877 units.

• An alternative source calculates a 10 basis point sequential decline in vacancy from 4.9% in 2Q08 to 4.8% in 3Q08.

• Reis expect vacancy to rise 20 basis points to 5.1% in 4Q08 as completions are forecast to total 1,227 units. The service forecasts a 40 basis point increase next year, owing to increased supply.



Source: Reis, Inc.

4.4%4.9%

0%

2%

4%

6%

8%

10%

2Q

00

1Q

01

4Q

01

3Q

02

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4Q

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3Q

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Met

ro V

acan

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ate

SeattleU.S.A.

Metro Rent Trends

Source: Reis, Inc.

7.1%

7.5%

-8%-6%-4%-2%0%2%4%6%8%

10%12%

2Q

00

1Q

01

4Q

01

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RENT TRENDS

• Through the first 11 months of 2008, Seattle multifamily asset trade volume ($1,527 million) exceeded the combined totals from Las Vegas ($297 million), San Jose ($766 million) and San Francisco ($344 million). Still, assets sales activity was far below the pace set the prior year, when nearly $2.3 billion in sales were recorded. Average price and cap rate metrics were relatively stable. The average price per unit increased 1.9% to $137,523, while the average cap rate rose 30 basis points from 5.5% to 5.8%.

• According to Reis, seven properties priced at or above $10 million traded in 3Q08. By comparison, nine trades met the same criteria in 3Q07.

• At an assumed going-in yield of 4.8%, RCR estimate a 6.7% expected rate of total return, ranking 7th among the RED 50.


Source: Reis, Inc.

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

3Q

06

4Q

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Seattle - Bellevue - Everett, Washington MSA - 3Q 2008





Rate

The Summit A September 2008 $41.4 $113,009 5.3% Covington Farms A August 2008 $42.6 $121,034 5.1% Sidney Apts A August 2008 $40.6 $316,797 4.2% Island Market Square A July 2008 $112.1 $476,957 N/A

EMPLOYMENT TRENDS

• The population of the Seattle metro division decreased 1.1% in 2008, according to Tactician data. The source forecasts a 1.0% compound average annual increase from 2009 to 2013.

• The National Association of Realtors report an -11.3% year-over-year decline in the metro single-family home price from $394,700 in 3Q07 to $350,000 in 3Q08. DQ News estimate a -13.3% year-over-year decrease in the metro single-family home in November. Single-family home sales activity fell -44.9% as 1,325 properties were purchased in November.

• According to Zillow.com, 8.4% of the homes sold in the twelve-month period ended in September were foreclosure sales. The metric compares to a 2.7% share between January 2003 and September 2008.

COMMENT: The Seattle foreclosure rate ranks 22nd lowest among the 100 largest MSAs.


Third Quarter 2008

• The Seattle economy continued to generate solid employment gains in 3Q08. The pace of year-over-year hiring accelerated from 27,300 (1.9%) in 2Q08 to 33,400 (2.3%).

• Increased hiring among business service firms and government agen-cies was largely responsible. The pace of job growth among business service providers jumped from 6,800 in 2Q08 to 11,600. Likewise, government payrolls added 2,900 employees in 2Q08 and 7,900 in 3Q08.

• Software publishing firms also generated solid job growth, adding 3,900 workers year-over-year in 3Q08. Conversely, construction and finance businesses trimmed a net of -3,500 jobs in the twelve-month period ended in September.

October and November 2008

• Metro payroll figures plunged in October, owing to the machinist strike at Boeing. Total metro headcounts advanced 600 year-over-year in October, following a 30,500-job advance in September. The aerospace product and parts manufacturing industry reported an -18,000 job year-over-year October decline, following the 4,700-job gain in the previous month.

• Metro job growth returned to normal as a net of 23,900 (1.6%) jobs were created in the year ended in November.

Forecast

• The outlook for 2009 is comparatively weak. Our econometric model generates a point estimate of no change in metro payrolls next year, following an estimated 31,000 (1.8%) job gain in 2008.

RANK: 3rd out of 50

COMMENT: Boeing announced plans to trim -4,500 (-6.6%) jobs in the Commercial Airplanes Unit located in Everett and Renton.



0

31

-60

-40

-20

0

20

40

60

99 00 01 02 03 04 05 06 07 08f 09f

Ann

ual C

hg (

000)


Source: BLS

-6%

-4%

-2%

0%

2%

4%

6%

99 00 01 02 03 04 05 06 07 08

Rat

e

Seattle USA




2.6%5.0%

8.3%10.5%

2.6%4.4% 5.7% 6.9%

8.7%6.6%

0%

5%

10%

15%

90% 70% 50% 30% 10%

Seattle Portland



$100

$150

$200

$250

$300

$350

$400

$450

04

Y

05

Y

06

Y

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

Pri

ces

(00

0)

MSA US

• Reis count three projects containing 201 units that were completed in 3Q08. The source identify three more projects with a total of 347 units in the fourth quarter.

• Development is poised to surge over the next two years. A Reis construction report dated January 5th shows that 33 apartment properties were under construction. Combined, the properties contain 6,699 apartment units. About two-thirds of the units are scheduled to come on-line in 2009, the balance are slated for delivery next year.

• The most active development submarkets were Bellevue / Issaquah (1,731 units), North Seattle / Northgate (1,654) and Downtown / Capital Hill (1,149 units) as a total of 4,534 apartment units were under construction.

SUPPLY TRENDS

SUBMARKET TRENDS


Source: Reis, Inc

0

500

1,000

1,500

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2,500

3,000

3,500

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ts






Columbus, OH 43215

www.redcapitalgroup.com 800.837.5100


Denver, CO_Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY







West Seattle / Burien $793 $855 7.8% 5.4% 4.1% -130 bps Des Moines / West Kent $789 $848 7.5% 3.4% 4.5% 110 bps Tukwila / Sea-Tac $749 $802 7.1% 2.9% 4.1% 120 bps Bellevue / Issaquah $1,082 $1,171 8.2% 4.1% 5.1% 100 bps Edmonds / Lynnwood $845 $895 5.9% 3.4% 3.9% 50 bps Downtown / Capital Hill $1,230 $1,325 7.7% 5.0% 4.4% -60 bps Kirkland / Juanita $1,180 $1,228 4.1% 4.5% 4.6% 10 bps Bothell $1,003 $1,063 6.0% 2.8% 3.1% 30 bps Renton $885 $954 7.8% 4.9% 5.7% 80 bps Redmond $1,110 $1,180 6.3% 3.5% 3.9% 40 bps Kent $797 $861 8.0% 3.9% 3.6% -30 bps Beacon Hill / Rainier $881 $967 9.8% 5.8% 12.5% 670 bps North Seattle $925 $998 7.9% 4.1% 4.4% 30 bps Federal Way $790 $831 5.2% 5.2% 6.2% 100 bps Auburn / Enumclaw $744 $798 7.3% 4.0% 4.0% 0 bps Everett / Mukilteo $839 $911 8.6% 5.8% 5.2% -60 bps Metro $937 $1,007 7.5% 4.4% 4.9% 50 bps

T he Puget Sound economy ex-panded at a healthy pace through the summer despite

the onset of a host of adverse circum-stances. The metro’s largest bank, Washington Mutual, collapsed after suffering mortgage loan losses; 27,000 Boeing workers were idled by a machinists strike; the Microsoft Corporation battled unsuccessfully to acquire internet portal Yahoo at con-siderable expense to both companies and Microsoft’s founder, Bill Gates, was surpassed by Warren Buffet as the world’s wealthiest man. In spite of the drama, Seattle MSA added 27,300 (1.8%) jobs to establishment payrolls in 2Q08 and enjoyed a mod-erate acceleration of year-over-year job trends in July and August.

Seattle was not immune to the hous-ing woes visited upon other West Region metro areas, however; median home prices fell in each of the first two quarters of 2008 and home con-struction activity plunged. Construc-tion headcounts dropped for the first time in five years in 2Q and job cuts accelerated dramatically in July and August when access to construction and jumbo mortgage financing evapo-rated. Financial services employment declined as well, falling 1,600 jobs (-1.8%) year-over-year in 2Q08 and –1.2% and –0.9% in July and August, respectively. The consolidation of WAMU into acquirer JPMorgan will likely precipitate further cuts in finan-cial service payrolls.

Although the outlook for the US economy seemed to deteriorate by the day, the RCR payroll model main-tains a fairly optimistic view of Puget Sound employment trends. In May, the model produced 25,000– and 27,000-job forecasts for 2008 and 2009, respectively Now, the model foresees a 33,000-job advance this year, followed by a gain of 12,000 (0.8%) positions in 2009. The confi-

dence interval for 2009 ranges from 1,000 jobs to a high end of 23,000.

Apartment demand was sluggish in what is typically a strong leasing sea-son. Reis report net negative absorp-tion of -4 units in 2Q, which in con-junction with completion of 344 new units contributed to a 20 basis point increase in the metro vacancy rate to 4.5%. Occupancy was the lowest re-corded in 12 months and stood 40 bps below the cycle high set in 4Q07.

But tepid demand did not deter own-ers from pursing some of the fastest rent growth in the US. Average effec-tive rents ballooned $20 (2.1%) to $990, representing the fastest sequen-tial advance in nearly two years. Measured on a year-over-year basis, average rents increased $71 (7.7%), ranking 3rd among the RED 50.

Submarket trends were the model of consistency. Only two of 16 failed to achieve sequential gains of 1% or more, while only one fell short of a 5% advance figured on a y-o-y basis.

Reis are optimistic for regarding pro-spective rents trends but expect sup-ply to begin to chisel away at market occupancy. The service forecasts rent growth averaging 3.65% through 2012, but expect vacancy to rise 150 bps to 6.0% by 2010.

Investors have not lost an appetite for Seattle properties. RCA identify $1.3bn of institutional quality apart-ment sales January through August, a modest 19% decline from 2007.

RCR observe cap rates for “A” qual-ity assets in the low-4% range, with B+ properties trading in the high-4% to low-5% area. Using a generic 4.9% rate, we estimate expected 5-year total returns of 7.6%, 70 bps above the RED 50 average. Risk-adjusted re-turns are constructive despite above average rent volatility. We affirm our unconditioned “Accumulate” rating.

RED CAPITAL GROUP®

Market Overview


Y-o-y Projected

change 2008

Vacancy (4.5% - 2Q08)

Effective

Rents ($990 - 2Q08)

Cap Rate (4.8% - 2Q08)


SNAP SHOT

30 bps

7.7% 6.5%

20 bps

• The skyrocketing Jet City economy felt a tremor or two during the summer, including the collapse of its largest bank and weaker home sales and prices.

• Median home prices fell -3.7% in 2Q08, the second consecutive y-o-y decline. Existing home sales dropped -41% in King Co. and -47% in Snohomish Co.

• Job creation wasn’t significantly hampered, at least according to data available through August. The metro produced jobs at a 27,300 (1.8%) position rate in 2Q08 and reported stronger over-the-year comparisons in July and August.

• Apartment demand was tepid in the usually robust spring season. Occupancy fell 20 bps sequentially after supply of 344 units.

• Owners were no less aggressive than before with regard to pricing; average rents spiked $20 (2.1%) in 2Q, ranking as the fastest sequential advance recorded among the 65 largest metro markets in America.

• Jet City apartments offer investors solid returns and best-in-class economic and market fundamentals: “Accumulate.”

KEY POINTS

EXECUTIVE SUMMARY

27.3m 33m

Unchd

• Seattle 2Q08 rent trends were among the strongest in the country. Owners raised effective rents an average of $20 (2.1%) to $990. Rents are an average of $71 (7.7%) higher than 2Q07, ranking RED 50 3rd.

• Concessions were unchanged at $58/mth (5.5%), RED 50 31st lowest.

• A second data source report a 5.7% asking rent increase. By way of comparison, Reis recorded a 7.8% average asking rent advance.

• Preliminary data for 3Q08 show asking rent trends slowing. Reis estimate a $14 (1.3%) sequential gain, down from $20 (1.9%) in 2Q08.

• Reis forecast compound rent growth averaging 3.65% through 2012. A second source predicts a 3.75% compound annual growth rate.

RANK: 3rd out of 50

COMMENT: Prepare for materially slower rent growth going forward.

• Owners focused primarily on revenue maximization in the spring quarter, pushing rent levels rather than seeking to raise occupancy. Net absorption totaled –4 units, according to Reis, down from +212 units in 1Q08 and +419 units in the year earlier period.

• Reis identified 344 units added to the apartment inventory in 2Q08, resulting in a 20 basis point increase in average vacancy rate to 4.5%.

• Another data source that surveys a 50% larger inventory reported a 10 bps average vacancy rise to 5.0% after absorption of about 750 units.

• Reis expect occupancy to fall 150 bps by YE2010 to 94.0%. The other source foresees a 60 bps increase of occupancy over the same period.


COMMENT: In a preliminary report, Reis posted occupancy down 40 bps in 3Q08.


Source: Reis, Inc.

4.9%4.5%

4.5%

0%

2%

4%

6%

8%

10%

4Q

00

3Q

01

2Q

02

1Q

03

4Q

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06

4Q

06

3Q

07

2Q

08

Met

ro V

acan

cy R

ate

SEATTLEU.S.A.

Metro Rent Trends

Source: Reis, Inc.

7.8%

7.7%

-8%-6%-4%-2%0%2%4%6%8%

10%12%

3Q

00

2Q

01

1Q

02

4Q

02

3Q

03

2Q

04

1Q

05

4Q

05

3Q

06

2Q

07

1Q

08

Yo

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ent

Tre

nd

ASKINGEFFECTIVE

RENT TRENDS

• Demand for apartment properties in most top markets declined materially in 2008, but Seattle sales remained strong. Real Capital Analytics identified trades totaling $1.3bn during the first eight months of the year, down about 19% from 2007. The average price of a unit increased, however, rising 7% from $134,000 to $143,000.

• RCA estimate that the average cap rate applicable to 2008 trades was 5.9%, up 30 bps from 2007. RCR findings suggest that cap rates for trades valued at $20mm or greater increased from the mid-4% range in 1Q—3Q07 to the low-5% area in the comparable period of 2008.

• Class-A trophy properties coveted by large institutional buyers continue to trade in the low– to mid-4% range.

COMMENT: RCR estimate 7.6% generic 5-year unlevered returns from Seattle assets, 16th highest among the R50 and 3rd highest among the barrier protected markets. Therefore, we affirm our “Accumulate” ranking.


Source: Reis, Inc.

4.0%

4.2%

4.4%

4.6%

4.8%

5.0%

5.2%

5.4%

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

Cap

Rat

e

REIS COMPOSITENCREIF


Seattle-Bellevue-Everett, WA Metropolitan Division - 2Q 2008



Transaction

Total Price


Estimated Cap

Rate

Sidney Apts (Dwntwn / St. Anne) A Aug-2008 $40.8 $318,359 4.2%

Avalon Redmond (Redmond) A Jun-2008 $81.3 $203,125 4.2%

Indigo Springs (Kent) B Jun-2008 $35.9 $129,296 4.7%

Covington Farms (Everett) B Aug-2008 $42.6 $121,034 5.1%

EMPLOYMENT TRENDS

• King and Snohomish County population increased by 37,407 (1.8%) residents in 2007, down slightly from 2006’s 43,166 population gain.

• The National Association of Realtors aver that the median price of a Seattle MSA home sold in 2Q08 was $380,500, an increase of $8,200 from 1Q08 but a -3.7% price decline from the same period of 2007.

• The more sensitive Case-Schiller Home Price Index for Seattle MSA reflected a -7.1% year-over-year price decline in June.

• HousingTracker.com report that the median asking price of a metro home was $385,000 on October 13, down -3.3% from last year. In addition, the web site measured a 14.8% increase of homes listed for sale to 15,040, representing roughly a 5-month supply.


Second Quarter 2008

• The largest bank collapse in US history and a strike by a 27,000-member industrial union notwithstanding, the Seattle economy purred like a Bentley. Metro payrolls increased at a 27,300-job, 1.8% rate in 2Q08, down moderately from the 31,800-job pace posted in 1Q08.

• The Jet City’s leading industries made large contributions to 2Q growth. The aerospace manufacturing sector hired a net of 6,400 (7.9%) workers, up from a 6,100-job pace during 1Q08. Software publishers expanded at a 2,200-job, 4.5% year-over-year pace, accelerating from 1Q08’s 1,500-job advance. Professional, scientific and technical service providers hired at a 4,800-job pace, including a 2,200-job, 8.9% burst in the computer system design component.

• As elsewhere, weakness was evident in the construction and financial services sector. The former dropped 300 employees, recording the first net loss in nearly five years. Financial service employers severed 1,600 workers, consistent with the 1Q08 pace.

August 2008

• Payroll growth rebounded in August to a 38,500-job year-over-year pace. The business service, packaged software and government sectors posted faster job growth, while aerospace manufacturing and the tourism and visitor industries maintained brisk rates of expansion.

• Despite solid job creation trends, Seattle employers were not able to keep pace with the expansion of the work force. The unemployment rate spiked to 5.1% in August from a 3.6% cycle-low in April.

Forecast: RCR forecast net creation of 33,000 (2.3%) jobs in 2008, and a point estimate of 12,000 (0.8%) new jobs in 2009. The confidence interval for 2009 ranges from 1,000 (0.1%) jobs to 23,000 (1.5%) jobs.



12

33

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-40

-20

0

20

40

60

99 00 01 02 03 04 05 06 07 08f 09f

Ann

ual C

hg (

000)


Source: BLS

-6%

-4%

-2%

0%

2%

4%

6%

99 00 01 02 03 04 05 06 07 08

Rat

e

SEATTLEUSA



$180

$230

$280

$330

$380

$430

05

Y

06

Y

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

Pri

ces

(00

0)

SEATTLE US

Seattle-Bellevue-Everett, WA Metropolitan Division - 2Q 2008



3.4%5.9%

9.1%11.4%

4.0%5.8% 7.1% 8.3%

10.1%7.5%

0%

5%

10%

15%

90% 70% 50% 30% 10%

SEATTLE ( RAI = 2 . 47 )

P ORTLAND ( RAI = 3 . 06 )

• After several years of moderate, readily digestible supply levels a wave of new construction is poised to reach the market. Reis anticipate completion of 2,021 units during 2H08 and deliveries totaling 11,471 units in 2009 and 2010. The 6,039-unit vintage forecast for 2010 would be the largest to reach the Seattle market since 1991.

• A Reis competitor draws a meaningfully different conclusion regarding the Seattle pipeline. This service foresees stock growth equal to 2.1% of inventory in 2009 and 0.9% of inventory in 2010. By way of comparison, the Reis pipeline forecast equates to growth rates of 3.0% and 3.2% in 2009 and 2010, respectively.

• Developers are focusing on infill locations that appeal to Seattle’s population of young professional renters. Reis estimate that 3,548 units are under construction or planned in the Downtown, Beacon Hill, West Seattle and North Seattle submarkets.

SUPPLY TRENDS

SUBMARKET TRENDS


Source: Reis, Inc

0

1,000

2,000

3,000

4,000

5,000

6,000

02 03 04 05 06 07 08f 09f

Uni

ts




©2006 RED CAPITAL GROUP (8/9/06)


Columbus, OH 43215

www.redcapitalgroup.com 800_837_5100


Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ








Des Moines / West Kent $769 $843 9.5% 3.7% 4.0% 30 bps

Tukwila / Sea-Tac $728 $798 9.5% 3.0% 3.1% 10 bps





Bothell $979 $1,055 7.8% 2.9% 2.4% -50 bps

Renton $867 $941 8.5% 4.6% 5.2% 60 bps

Redmond $1,090 $1,173 7.6% 3.2% 3.1% -10 bps

Kent $783 $850 8.7% 3.4% 3.7% 30 bps



Federal Way $771 $837 8.5% 6.1% 5.4% -70 bps


Everett / Mukilteo $820 $893 8.9% 5.5% 5.3% -0.2%

Metro $919 $990 7.7% 4.5% 4.5% 0.0%

A lthough the pace of year-over-year payroll growth slowed in 1Q08, labor mar-

ket conditions in Seattle ranked among the best in the country. Metro establishments added 32,100 (2.2%) workers, ranking 7th among the 50 markets tracked by RED CAPITAL Research (RCR), a group we call the RED 50. In addition the metro unem-ployment rate fell 40 basis points y-o-y to 3.8%.

Weaker job trends were largely con-fined to only a few employment sec-tors. Slower home sales velocity led builders to cut back on construction projects. As a result, hiring fell from 7,200 y-o-y in 4Q07 to 2,500 in 1Q08. Similarly, employment service establishments cut 1,400 positions in the twelve months ended in March.

Solid y-o-y growth was observed in the region’s key high-wage sectors. Aerospace parts producers added 6,100 workers in 1Q08, on par with last year’s pace. Also, computer sys-tems design firms added 3,000 posi-tions, an increase from the 2,700 new jobs in the same period of last year.

RED are optimistic with regard to near-term job growth. Our economet-ric model generates point estimates of 25,000 (1.7%) new jobs this year and 27,000 (1.8%) additional workers in 2009. Economy.com are less optimis-tic this year, projecting job creation of 18,150 (1.2%) in 2008.

Home price trends remained largely stable in recent months, in contrast to the significant declines observed in many metro markets. Despite price stability, sales velocity fell off dra-matically in January. According to DataQuick, 34.2% fewer sales were recorded in January 2008 as com-pared to the same month of 2007.

The combination of slower home sales velocity and rapidly rising rental

rates convinced a number of develop-ers to repurpose condo projects as rentals. As of April 28th, Reis identi-fied nearly 2,300 apartment units that were slated for delivery this year (including the 450 units completed in 1Q08). The annual total could cer-tainly rise depending upon the per-centage of the 2,831 condo units scheduled for completion this year that are delivered as rentals.

Conditions in the rental market re-mained robust in 1Q08. The metro occupancy rate was 95.7%, up 70 bps from the previous year. Effective rents advanced 1.7% sequentially and were 7.7% above year-ago levels. In conjunction, occupancy and rent trends produced a 12.7% increase in generic property net operating income and a 33% rate of total return.

Reis hold a somewhat pessimistic view of future fundamentals. The service expects a combination of slug-gish demand and increased supply to produce lower occupancy rates and slower rates of rent growth. Specifi-cally, Reis forecast occupancy to fall 40 bps in 2008 and 80 bps in 2009. Effective rents are forecast to deceler-ate to 5.7% this year and 4.1% in 2009. We are biased toward higher rates of occupancy and faster rent growth but hold concerns regarding unanticipated supply through repur-posed condo projects.

The fundamental forecasts published by Reis does not support current pric-ing. But our more optimistic outlook leads us to assign an “Opportunistic” rating to metro assets. A couple of years of better than expected rent growth would result in above average rates of total return. Buyers should proceed cautiously in submarkets with significant condo construction how-ever, such as Downtown / Capital Hill and Bellevue / Issaquah.

RED CAPITAL GROUP®

Market Overview

Seattle, Washington Multifamily Housing Update May 2008

Y-o-y Projected

change 2008

Vacancy (4.3% - 1Q08)

Effective

Rents ($970 - 1Q08)

Cap Rate (5.3% - 1Q08)


SNAP SHOT

32.1k 25k

30bps

7.7% 5.7%

70bps

unch

40bps

• The metro vacancy rate rose 20 basis points sequentially to 4.3% in 1Q08. The rate fell 70 basis points year-over-year due to robust tenant demand.

• Year-over-year effective rent growth remained stable at 7.7% in 1Q08. Moderately weaker growth was evident on a sequential basis as the metric rose 1.7% following a 1.8% advance in 4Q07.

• Metro median home prices ($355,000) were unchanged year-over-year in January 2008, according to DataQuick. Sales of new and existing home and condos fell 34.2% as 2,779 properties were sold.

• Real Capital Analytics recorded 61 investor grade property trades in the six-month period ended in February. Sales volume totaled $1.1 billion and the average price was $127,974 per unit. According to NCREIF, the average cap rate in 4Q07 was 4.1%, down from 4.8% in the same period of 2006.

• RED assign a rating of Opportunistic to metro assets. Assets appear over priced relative to the Reis forecasts for rent and occupancy trends.

KEY POINTS

EXECUTIVE SUMMARY

• Effective rents rose at a 1.7% sequential pace in 1Q08, down from 1.8% in the previous period. On a year-over-year basis the average effective rent increased 7.7% to $970. Asking rents advanced at a faster 2.0% sequential rate in 1Q08 and were up 7.8% from the same period of 2007.

• The size of the average concession package inched up from 5.4% of asking rent in 4Q07 to 5.6% in 1Q08. The latter ratio was slightly better than the 5.7% RED 50 average.

• Reis forecast year-over-year effective rent growth to decelerate to 5.7% in 2008 and 4.1% in 2009.

RANK: 4th out of 50 COMMENT: Based on our rent growth model, we expect effective rents to grow at a faster rate than Reis forecast in 2009.

• The metro vacancy rose 20 basis points sequentially to 4.3% in 1Q08. Completions totaled 450 units and only 54 units were absorbed. On a year-over-year basis the vacancy rate fell 70 basis points, owing to robust tenant demand. Positive net absorption of 2,543 units outpaced the 1,595 unit deliveries.

• Reis expect the weak demand observed in 1Q08 to persist through the rest of the year. As a result, the metro vacancy rate is forecast to increase 40 basis points to 4.7%. In 2009, supply pressures are expected to produce an 80 basis point increase in vacancy despite stronger tenant demand.

RANK: 12th out of 50 COMMENT: Solid employment gains should result in stronger than forecasted net absorption.


Source: Reis, Inc.

4.3%5.0%

0%

2%

4%

6%

8%

10%

3Q

00

2Q

01

1Q

02

4Q

02

3Q

03

2Q

04

1Q

05

4Q

05

3Q

06

2Q

07

1Q

08

Met

ro V

acan

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ate

SeattleU.S.A.

Metro Rent Trends

Source: Reis, Inc.

7.8%

7.7%

-8%

-4%

0%

4%

8%

12%

3Q

00

2Q

01

1Q

02

4Q

02

3Q

03

2Q

04

1Q

05

4Q

05

3Q

06

2Q

07

1Q

08

Yo

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Tre

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AskingEffective

RENT TRENDS

• A total of 61 investor grade property trades were recorded in the six months ended in February, totaling $1,114 million in sales proceeds. The average price per unit was $127,974, down slightly from the $134,815 price in calendar 2007.

• According to Loopnet, 29 trades involving properties priced at or above $5 million were recorded in the first four months of 2008. Sales volume totaled $636 million and the average price per unit was $115,975.

• RED estimate generic metro asset five-year holding period total returns of 5.8%, below the 6.3% RED 50 average.

COMMENT: We are more optimistic than Reis with regard to total returns as we view the Reis five-year forecast as conservative. Using a different set of assumptions we estimate generic asset returns of around 7.5%.

PROPERTY MARKET & CAP RATE TREND Metro Multifamily Cap Rate Trend

Source: Reis, Inc.

4.0%

4.2%

4.4%

4.6%

4.8%

5.0%

5.2%

5.4%

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

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Rat

e







Rate

The Madison at Fairwood BC March 2008 $42.9 $112,295 5.9% Archstone Harbour Pointe A February 2008 $40.7 $177,138 3.7% Campus Grove A February 2008 $41.0 $132,654 5.4% James Street Crossing A February 2008 $35.6 $118,767 4.9%

EMPLOYMENT TRENDS

• The population of the Seattle metropolitan division increased 1.5% in 2007 due to positive net domestic migration of 7,358 residents.

• The metro homeownership rate fell 90 basis points to 62.8% in 2007.

• Home prices fell 2.7% year-over-year in February according to the Case-Shiller home price index. Homes valued above $448,511 performed the best, posting only a 1.1% decrease.

• The National Association of Realtors report that the median price of a single-family home increased 1.2% year-over-year to $377,500 in 4Q07.

• According to DataQuick, the median single-family home price was unchanged year-over-year at $355,000 in January 2008. The source notes that condo price rose 0.3% to $257,000.


Past 12 Months

• Seattle area employers added positions at a brisk pace last year. A net of 42,700 (3.0%) workers were hired, lead by above average growth in the construction and business service sectors.

First Quarter 2008

• The rate of annual job formation slowed to 32,100 (2.2%) in 1Q08 and to 29,400 (2.0%) in March. The slowdown was largely a result of reduced hiring by construction firms and attrition among temp agen-cies.

• Banking sector payrolls continued to fall. After losing 1,600 employ-ees in 2007, attrition rose to 1,800 year-over-year in 1Q08. The March decline represented the twentieth consecutive month of year-over-year sector declines.

• Solid hiring among computer systems design firms counterbalanced weakness among management consulting firms. As a result, profes-sional service hiring remained relatively firm as 5,400 workers were added year-over-year in 1Q08.

• Stable trends were also recorded in the aerospace manufacturing sec-tor. Results from the first quarter reveal a 6,100 year-over-year gain.

Forecast

• Seattle will continue to exhibit strong trends relative to the nation. RED forecast job growth to range from 19,000 (1.3%) to 31,000 (2.1%) this year and from 16,000 (1.1%) to 38,000 (2.6%) in 2009.

• By comparison, Economy.com project job growth of 18,150 (1.2%) in 2008 and 34,420 (2.3%) in 2009.

RANK: 7th out of 50



2725

-60

-40

-20

0

20

40

60

99 00 01 02 03 04 05 06 07 08f 09f

Ann

ual C

hg (

000)


Source: BLS

-6%

-4%

-2%

0%

2%

4%

6%

99 00 01 02 03 04 05 06 07 08

Rat

e

SeattleUSA



$100

$150

$200

$250

$300

$350

$400

$450

03

Y

04

Y

05

Y

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

Pri

ces

(00

0)

MSA US




1.5%4.0%

7.3%9.6%

2.5% 4.0% 5.1% 6.1% 7.6%5.7%

0%

5%

10%

15%

90% 70% 50% 30% 10%

Seattle Las Vegas

For more information about our total return analysis see the “Annual Guide to the Multifamily Markets” at www.redcapitalgroup.com/research.

• Developers added 450 apartment units in 1Q08, down sharply from the 1,047 units delivered in the same period of 2007. Completions totaled 1,595 units in the twelve-months ended in March.

• Reis forecast 1,690 apartment unit completions in the remainder of 2008. That figure could turn out to be conservative if condo projects are re-purposed as rentals. More than 2,800 condo units are scheduled to come on-line this year.

• The Bellevue / Issaquah submarket is poised for the greatest rental inventory growth. Reis count 969 apartment units that are slated for completion this year. Four of the five projects are scheduled for delivery in the second half of the year.

• Reis project supply to rise to 5,756 units in 2009. As of April 28th, construction started on only 2,651 apartment units.

SUPPLY TRENDS

SUBMARKET TRENDS


Source: Reis, Inc

0

1,000

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Columbus, OH 43215


Columbus, OH_Boston, MA_Bozeman, MT_Charlotte, NC_Chicago, IL Fredericksburg, TX_Irving, TX_Jupiter, FL_Linwood, NJ_Nashville, TN

Newport Beach,CA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ







West Seattle / Burien $768 $815 6.0% 4.8% 4.3% -50 bps Des Moines / West Kent $755 $814 7.8% 4.0% 3.6% -40 bps Tukwila / Sea-Tac $716 $791 10.5% 2.8% 2.5% -30 bps Bellevue / Issaquah $1,047 $1,122 7.1% 5.6% 4.7% -90 bps Edmonds / Lynnwood $811 $876 8.0% 4.0% 3.8% -20 bps Downtown / Capital Hill $1,201 $1,283 6.8% 5.2% 3.5% -170 bps Kirkland / Juanita $1,136 $1,191 4.8% 5.5% 4.7% -80 bps Bothell $963 $1,020 5.9% 3.2% 2.6% -60 bps Renton $847 $920 8.6% 5.0% 4.4% -60 bps Redmond $1,051 $1,141 8.5% 4.1% 3.0% -110 bps Kent $766 $838 9.4% 4.0% 3.6% -40 bps Beacon Hill / Rainier $846 $928 9.6% 6.1% 10.8% 470 bps North Seattle $886 $958 8.1% 5.0% 4.6% -40 bps Federal Way $760 $815 7.2% 6.3% 4.6% -170 bps Auburn / Enumclaw $718 $763 6.2% 7.2% 4.2% -300 bps Everett / Mukilteo $805 $867 7.7% 5.8% 4.8% -100 bps Metro $901 $970 7.7% 5.0% 4.3% -70 bps

G ood news for Boeing, good news for Seattle. The aero-space giant reported $8.3

billion of third quarter revenues from its Renton based commercial air-planes division, up from $6.7 billion in 3Q06. This supported the eighth consecutive quarter when year-over-year job growth exceeded 5,000 in the aerospace manufacturing industry. Metro payroll growth was firm as 44,100 (3.1%) positions were added year-over-year, up slightly from the 43,200 (3.1%) metric recorded in 2Q07.

Not all employment sectors boasted such steady performance. Among the weaker performers were retail trade, software publishers, administrative support services and leisure and hos-pitality. Owing to relatively low wages in three of the four sectors ($31,235 in retail, $35,283 in admin-istrative support and $20,051 in lei-sure services), the multiplier effect of decelerating growth was small. The only high wage sector ($130,879 in software publishing), added 3,600 jobs year-over-year in 3Q07. While this was down from 4,700 in 1Q07 and 4,200 in 2Q07, it was near the 3,700-job tally from last year.

RED forecast 2007 job growth of 42,500 (3.0%), with a confidence band of 40,900 (2.9%) to 44,100 (3.1%) new jobs. We expect job growth to decelerate to around 31,000 (2.1%) in 2008. Economy.com are far less optimistic, forecasting only 27,800 (1.9%) new jobs in 2007 and 22,130 (1.5%) in 2008.

The metro occupancy rate increased 50 basis points sequentially to 95.5% in 2Q07. Strong tenant demand and limited supply contributed to the im-provement. According to preliminary Reis data the occupancy rate rose 10 bps to 95.6% in 3Q07. Our outlook for the fourth quarter is positive. Eco-

nomic conditions should support sta-ble demand.

Asking rents increased 7.4% y-o-y to $973, the third consecutive quarter when asking rent growth met or ex-ceeded 7.0%. Owing to reduced con-cessions, effective rent growth ex-ceeded advances in asking rent. The average effective rent rose 2.0% se-quentially and 8.0% y-o-y to $919. Preliminary 3Q07 data show that ask-ing and effective rent growth deceler-ated slightly to 7.0% and 7.7% y-o-y, respectively.

Three metro submarkets experienced double digit effective rent gains: Ed-monds / Lynnwood (10.3%); Kent (10.5%) and; Everett / Mukilteo (10.1%). The largest increase in oc-cupancy was found in the Kent sub-market. The average occupancy rate increased 190 bps to 96.6%. At 97.1%, the Bothell submarket boasted the highest rate of average occupancy.

Investor interest in Seattle apartment assets increased year-to-date through September, according to Real Capital Analytics. The source counted 84 investor grade trades in the first nine months of the year, up 14% from the same period last year. Sales volume increased 12% over-the-year to $1,741 million.

We estimate an indicative going-in cap rate of 4.2% for institutional qual-ity Seattle assets. This is expected to yield a 6.5% un-levered rate of total return over a five-year holding period, below the 6.9% RED 50 average. This indicates that assets are rich, considering Reis fundamental fore-casts. We hold a more optimistic view than Reis, expecting employ-ment growth to decelerate but not to the extent forecasted by Econ-omy.com. On the other hand, we still view assets as pricy and recommend that investors take an “Opportunistic” approach.

RED CAPITAL GROUP®

Market Overview


Y-o-y Projected

change 2007

Vacancy (4.5% - 2Q07)

Effective

Rents ($919 - 2Q07)

Cap Rate (5.3% - 2Q07)


SNAP SHOT

43.2k 43k

30bps

8.0% 5.8%

50bps 60bps

• The metro vacancy rate fell 50 basis points sequentially to 4.5% in 2Q07. The metric was down 50 basis points year-over-year.

• Asking and effective rents increased 7.4% and 8.0% year-over-year, respectively in 2Q07. Preliminary Reis data indicate that effective rent growth slowed to 7.7% y-o-y in 3Q07.

• The Seattle housing market continued to out-perform the national average. According to NAR the median home price rose 8.9% year-over-year to $395,300 in 2Q07. OFHEO measured price appreciation of 9.9% for the Seattle metro division.

• Purchase yields are estimated at 4.2% for institutional quality Seattle assets. RED calculate a generic metro asset 5-year holding period total return of 6.5%, ranking 31st among the RED 50. Owing to rich initial yields, we assign a rating of “Opportunistic”, despite attractive market fundamentals.

• RED forecast job growth of 42,500 (3.0%) in 2007 and 31,000 (2.1%) in 2008.

KEY POINTS

EXECUTIVE SUMMARY

• Effective rents increased 2.0% sequentially and 8.0% year-over-year to $919 in 2Q07. Asking rents grew at a moderately cooler 7.4% year-over-year pace to $973.

• The value of the average concession package fell from 6.1% of asking rent in 2Q06 to 5.5% in 2Q07. This is approximately equal to 0.7 months free-rent on a twelve-month lease.

• According to preliminary 3Q07 Reis data, asking rents increased 2.0% sequentially and 7.0% year-over-year in 3Q07. Effective rents advanced 7.7% year-over-year to $937.

RANK: 3rd out of 50 COMMENT: As of 2Q07, Reis forecast year-over-year effective rent growth to decelerate to 5.8% in 2007 and 4.6% in 2008. Recently released preliminary data for 3Q07 suggest the market out-performed the forecast.

• A net of 816 units were absorbed in 2Q07 while developers only delivered 44 units of supply. As a result the metro vacancy rate fell 50 basis points sequentially to 4.5%. The metric was also down 50 basis points year-over-year.

• Preliminary 3Q07 Reis data revealed that vacancy fell 10 basis points to 4.4%. Construction data indicate 829 units were completed in 3Q07, which suggests that absorption totaled approximately 1,050 units. By contrast, Reis previously forecast 2H07 completions of 1,530 units but only 436 unit absorptions. This would require negative net absorption of nearly 1,100 units in 4Q07, an unlikely event.

RANK: 14th out of 50 COMMENT: Reis are pessimistic regarding vacancy. The service forecasts vacancy to rise to 5.1% in 4Q07 and 5.3% in 2008.


Source: Reis, Inc.

4.5%5.0%

0%

2%

4%

6%

8%

10%

4Q

99

3Q

00

2Q

01

1Q

02

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SeattleU.S.A.

Metro Rent Trends

Source: Reis, Inc.

7.4%

8.0%

-8%-6%-4%-2%0%2%4%6%8%

10%12%

4Q

99

3Q

00

2Q

01

1Q

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• According to Real Capital Analytics 84 investor grade properties traded in the first nine months of 2007, totaling $1,741 million in sales proceeds. The average price was $134,369 per unit.

• Loopnet count 30 trades of properties priced at or above $5 million in 2Q07. Sales volume totaled $545.3 million and the average price was $134,914 per unit. The service identifies 83 such trades, year-to-date, totaling $1,650 million in volume.

• RED estimate generic metro asset 5-year holding period total returns of 6.5%, below the 6.9% RED 50 average. We estimate an indicative cap rate of 4.2% for institutional quality assets.


Source: Reis, Inc.

4.5%

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Archstone Belltown A July 2007 $82.0 $230,337 4.5% The Mill at Mill Creek BC July 2007 $80.0 $155,039 3.7% The Carriages at Fairwood A September 2007 $63.2 $158,120 4.3% On the Green at Harbour Point A September 2007 $47.0 $159,864 3.0%

EMPLOYMENT TRENDS

• The population of the Seattle metropolitan division, which contains King and Snohomish counties, increased 1.7% in 2006, after posting a 1.3% gain in 2005. The increase is attributable to a turnaround in net domestic migration in King County. The county lost a net of 4,123 residents to other counties in 2005 and gained a net of 4,198 in 2006.

• The median price of a single family MSA home increased 8.9% year-over-year from $363,000 to $395,300 in 2Q07.

• The metro division registered a 9.9% increase in the Office of Federal Housing Enterprise Oversight (OFHEO) home price index, ranking 17th among the 287 metro areas tracked by the agency.

COMMENT: Robust economic conditions support current home prices.


Past 12 Months / Third Quarter 2007

• Job growth remained robust in 3Q07. Payrolls increased 43,200 (3.1%) year-over-year in 2Q07 and 44,100 (3.1%) in 3Q07. These compare to a monthly average of 47,100 (3.4%) new jobs last year.

• Employment gains in the retail trade sector fell from 4,100 in 2Q07 to 3,400 in 3Q07. Both were decidedly more robust than the 1,600 new retail jobs created in 2006.

• Business service establishments slowed hiring from 11,200 in 2006 to 9,900 in 2Q07 and 9,000 in 3Q07. Reduced demand for administra-tive support services was largely responsible. Only 4,400 jobs were added in 3Q07, following a 5,500-job advance in 2Q07.

• There are no signs of weakness at Boeing’s Commercial Airplanes Division in Renton. The unit posted $8.3 billion in revenue for the third quarter, up from $6.7 billion in the same period last year. Not surprisingly, aerospace manufacturing payrolls increased by 5,900 in 3Q07, on par with second quarter gains.

Forecast

• RED forecast job growth to range from 40,900 (2.9%) to 44,100 (3.1%) in 2007, with a point estimate of 42,500 (3.0%). Our econo-metric model generates a point estimate of 31,000 (2.1%) jobs next year and a confidence interval of 19,000 (1.3%) to 43,000 (2.9%).

• Economy.com are somewhat pessimistic. The service forecast job growth of 27,800 (1.9%) in 2007 and 22,130 (1.5%) in 2008.

RANK: 7th out of 50

COMMENT: We have a logical bias toward the higher-end of the forecast range in 2008.



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• There were 44 unit completions in 2Q07 bringing the first half total to 1,091 units. Reis forecast the delivery of 1,530 units in the second half of 2007 and 3,342 units in 2008. Preliminary tallies for the third quarter suggest supply of 829 units in 3Q07.

• Reis identify more than 5,200 condo units under-construction (as of October 22nd) and another 3,220 units in the pipeline. The service also identify four affordable rental properties in the pipeline, containing 750 units.

• Over 9,500 multifamily permits were issued in the twelve months ended in August, an increase of 21% from the previous twelve month period.

SUPPLY TRENDS

SUBMARKET TRENDS


Source: Reis, Inc

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Market Overview is a publication of RED CAPTIAL GROUP. If you are interested in other metro areas we cover or would like to




Columbus, OH 43215


Columbus, OH_Boston, MA_Bozeman, MT_Chicago, IL_Fort Worth, TX

Fredericksburg, TX_Jupiter, FL_Linwood, NJ_Nashville, TN_Newport Beach,CA Philadelphia, PA_Reston, VA_San Diego, CA_Syracuse, NY_Voorhees, NJ







West Seattle / Burien $731 $787 7.6% 5.4% 4.4% -100 bps Des Moines / West Kent $722 $769 6.6% 4.4% 3.7% -70 bps Tukwila / Sea-Tac $672 $728 8.4% 3.1% 3.0% -10 bps Bellevue / Issaquah $991 $1,057 6.7% 5.1% 4.6% -50 bps Edmonds / Lynnwood $751 $829 10.3% 4.9% 3.8% -110 bps Downtown / Capitol Hill $1,135 $1,211 6.7% 4.7% 4.8% 10 bps Kirkland / Juanita $1,063 $1,156 8.8% 5.1% 4.8% -30 bps Bothell $902 $979 8.5% 3.3% 2.9% -40 bps Renton $811 $867 6.9% 5.4% 4.6% -80 bps Redmond $1,006 $1,090 8.4% 4.5% 3.2% -130 bps Kent $708 $783 10.5% 5.3% 3.4% -190 bps Beacon Hill / Rainier $833 $861 3.4% 5.8% 6.5% 70 bps North Seattle $822 $901 9.6% 4.7% 4.6% -10 bps Federal Way $733 $771 5.2% 6.7% 6.1% -60 bps Auburn / Enumclaw $694 $737 6.2% 5.8% 6.2% 40 bps Everett / Mukilteo $745 $820 10.1% 5.7% 5.5% -20 bps

Metro $851 $919 8.0% 5.0% 4.5% -50 bps

E mployment growth in the Seattle metropolitan division accelerated to 47,100 (3.4%)

in 2006, up from 35,800 (2.7%) in the prior year. Faster hiring among con-struction, manufacturing, and busi-ness service firms contributed to the gain. Combined the sectors added 21,900 new jobs in 2005 and 29,400 in 2006.

First quarter employment gains slowed to 41,100 (3.1%) year-over-year, from 45,100 (3.2%) in 4Q06. Construction sector growth began to decelerate, falling from a 7,700 y-o-y pace in 4Q06 to 6,200 in 1Q07; and 5,100 in May. Aerospace manufac-turing gains dropped 400 last year to 5,400 in 1Q07. After posting gains of 900 employees in 2006, the finance sector lost 1,200 jobs y-o-y in 1Q07. While computer systems design estab-lishments slowed hiring efforts from a monthly average of 2,300 in 2006 to 900.

RED forecast slower payroll growth in 2007 and 2008. Our econometric model generates a point estimate of 39,000 (2.8%) jobs and a confidence interval of 36,000 (2.5%) to 43,000 (3.0%) in 2007. RED expect 2008 growth to range from 26,000 (1.8%) to 38,000 (2.6%).

The metro occupancy rate was un-changed sequentially in 1Q07 at 95.0%, ranking 15th among the RED 50. The 1,047 units of supply were readily absorbed in the market. The occupancy rate was up 30 basis points year-over-year, owing to strong tenant demand and limited supply in 2H06.

Reis forecast moderately weaker con-ditions going forward. The service expects supply to outpace demand in the remaining months of 2007, result-ing in a 20 basis point decline in oc-cupancy. In 2008, Reis forecast occu-

pancy to fall 30 bps to 94.5%.

Effective rents increased 1.7% se-quentially and 7.8% year-over-year to $901. Asking rents advanced 1.4% quarter-over-quarter and were up 7.0% from 1Q06. The value of the average concession package fell to $53 per month from $56 in 1Q06. Reis anticipate y-o-y effective rent growth to decelerate to 5.4% in 2007 and 4.4% in 2008.

The average effective rent in the Kirk-land / Juanita submarket increased 8.0% y-o-y to $1,136, the second highest average rent among the six-teen submarkets. The fastest rate of effective rent growth occurred in the Everett / Mukilteo. Average rents increased 9.7% from $734 to $805.

According to Real Capital Analytics, 135 investor grade properties traded from 2Q06 to 1Q07, totaling $2,282 million in sales proceeds. Volume increased 5% from calendar 2006. The average price increased 3.4% to $120,431 per unit, and the average cap rate was unchanged at 5.7%.

Thirty properties priced at $5 million or more traded in 1Q07 for a total of $624 million in sales proceeds. The largest transaction was the sale of the 750-unit Club Palisades Apartments in Federal Way. Buyer paid $81.9 million or $109,220 per unit. Reis estimate a going-in yield of 5.0% for the “Class B” asset.

The total return profile for Seattle assets ranked 27th among the RED 50 and historic revenue volatility is high, resulting in an unfavorable measure of risk-adjusted returns. On the other hand, market fundamentals are among the best in the country and the econ-omy continues to outperform the na-tional average. All things considered, we assign a cautious “Accumulate”

RED CAPITAL GROUP®

Market Overview

Seattle, Washington Multifamily Housing Update July 2007

Y-o-y Projected

change 2007

Vacancy (5.0% - 1Q07)

Effective

Rents ($901 - 1Q07)

Cap Rate (5.1% - 1Q07)


SNAP SHOT

47.8k 39k

70bps

7.8% 5.4%

30bps

unch

20bps

• The metro vacancy rate remained unchanged quarter-over-quarter at 5.0%. The rate was down 30 basis points from the comparable period of 2006.

• Asking and effective rents increased 7.0% and 7.8% year-over-year, respectively. The latter ranks 2nd among the RED 50.

• Home prices continued to increase in Seattle in 1Q07 According to the NAR, the median priced MSA home increased 12.3% year-over-year to $380,200. OFHEO estimates a 12.6% rate of appreciation, the 16th highest among the 285 metros in the sample.

• According to Real Capital Analytics, sales volume fell just short of $700 million in 1Q07, bringing the trailing twelve month total to $2,282.4 million. This was up 5% from 2006.

• RED forecast job creation to total 39,000 (2.8%) in 2007 and 32,000 (2.2%) in 2008. By way of comparison, Economy.com project gains of 22,410 (1.6%) in 2007 and 26,760 (1.8%) in 2008.

KEY POINTS

EXECUTIVE SUMMARY

• Effective rents were up 1.7% sequentially and 7.8% year-over-year to $901. Asking rents advanced at a slower 7.0% y-o-y pace to $954, falling short of effective rent growth for the ninth consecutive quarter.

• The value of the average concession package fell from 6.3% of asking rent in 1Q06 to 5.6%, approximately equal to 0.7 months free-rent on a twelve month lease. The lowest concessions are offered in the North Seattle submarket, with an average of only 0.4 months free-rent.

• Reis expect effective rent growth to decelerate to 5.4% in 2007 and 4.4% in 2008. The latter ranks 6th among the RED 50.

RANK: 2nd out of 50 2008 RENT GROWTH RATE OUTLOOK: Decreasing

• The metro vacancy rate was unchanged sequentially at 5.0%. Net absorption (1,035 units) and condo conversion activity (112 units) kept a lid on vacancy despite increased supply (1,047 units).

• The vacancy rate was down 30 basis points year-over-year, attributable to strong demand and limited supply in 2H06.

• Reis expect supply to outpace demand in the remaining months of 2007, causing vacancy to increase 20 basis points to 5.2%. In 2008, the service anticipates vacancy to rise 30 basis points to 5.5%.

RANK: 15th out of 50 2008 VACANCY RATE OUTLOOK: Increasing


Source: Reis, Inc.

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Metro Rent Trends

Source: Reis, Inc.

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• According to Real Capital Analytics, trade volume totaled nearly $700 million in 1Q07 and $2,282.4 million in the twelve months ended in March. The source notes an average price of $120,431 per unit and an average cap rate of 5.7%.

• According to Loopnet, 30 properties priced at $5 million or greater traded in 1Q07, totaling $624 million in proceeds. The source identifies 25 second quarter trades and $456 million in volume.

• RED estimate generic metro asset 5-year holding period total returns of 7.4%, below the national average.

2008 CAP RATE OUTLOOK: Stable


Source: Reis, Inc.

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Seattle-Bellevue-Everett, Washington Metropolitan Division - 1Q 2007





Rate

Club Palisades BC January 2007 $81.9 $109,220 5.0% Alexan Cascade A March 2007 $60.7 $303,758 3.6% The Heights on West Campus BC March 2007 $46.3 $115,536 5.7% 128 On State (Under Construction) A June 2007 $50.0 $403,226 N/A

EMPLOYMENT TRENDS



• The metro division registered a 12.6% increase in the Office of Federal Housing Enterprise Oversight (OFHEO) home price index, ranking 16th among the 285 metro areas tracked by the agency.

2008 DEMOGRAPHIC OUTLOOK: Stable


Past 12 Months

• Payroll growth accelerated to 47,100 (3.4%) in 2006, up from 35,800 (2.7%) jobs created in 2005.

• The increase was largely attributable to faster hiring among construc-tion, manufacturing, information and professional and business ser-vices.

First Quarter 2007

• Job creation fell to 43,100 (3.1%) year-over-year in 1Q07, down from 45,100 (3.2%) in 4Q06.

• Reduced hiring among construction and manufacturing firms was partially responsible. The sectors added 12,200 jobs year-over-year in 1Q07, down from 15,100 in 4Q06. Attrition among accounting establishments was also to blame. Sector payrolls were down 1,100 year-over-year in 1Q07.

Forecast

• RED forecast payroll growth of 39,000 (2.8%) in 2007 with a confi-dence interval of 36,000 (2.5%) and 43,000 (3.0%). In 2008, RED anticipate job creation between 26,000 (1.8%) and 38,000 (2.6%) with a point estimate of 32,000 (2.2%).

• By way of comparison, Economy.com project job growth of 22,410 (1.6%) in 2007 and 26,760 (1.8%) in 2008.


2008 EMPLOYMENT GROWTH RATE OUTLOOK: Decreasing



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Seattle-Bellevue-Everett, Washington Metropolitan Division - 1Q 2007

RED CAPTIAL Research

RED Estimated Generic Unlevered Asset Total Return Probabilites

3.0%5.6%

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Seattle San Diego

• Supply totaled 1,346 units in 2006, but conversion activity removed 3,435 units from apartment inventory. In 1Q07, supply totaled 1,047 and net conversion fell to 112 units.

• Reis expect 1,461 unit completions in the remaining months of 2007 and another 3,261 unit deliveries in 2008.

• With respect to submarkets, the Downtown / Capital Hill area will experience significant new construction. Reis identifies 1,262 units that are slated for completion from 2Q07 to 4Q08. Similarly, the service count 849 new units in North Seattle and 799 units in Bellevue. Reis anticipates no completions in the Federal Way, Des Moines, Tukwila and Kent submarkets.

2008 SUPPLY TREND OUTLOOK: Increasing

SUPPLY TRENDS

SUBMARKET TRENDS


Source: Reis, Inc

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Columbus, OH 43215


Columbus, OH_Boston, MA_Bozeman, MT_Chicago, IL_Fort Worth, TX

Fredericksburg, TX_Jupiter, FL_Nashville, TN_Newport Beach,CA Philadelphia, PA_Reston, VA_San Diego, CA







West Seattle / Burien $724 $768 6.1% 5.9% 4.8% -110 bps Des Moines / West Kent $706 $755 7.0% 5.3% 4.0% -130 bps Tukwila / Sea-Tac $658 $716 8.8% 5.2% 2.8% -240 bps Bellevue / Issaquah $969 $1,047 8.1% 4.3% 5.6% 130 bps Edmonds / Lynnwood $741 $811 9.4% 4.7% 4.0% -70 bps Downtown / Capitol Hill $1,113 $1,201 7.9% 5.5% 5.2% -30 bps Kirkland / Juanita $1,052 $1,136 8.0% 6.1% 5.5% -60 bps Bothell $885 $963 8.8% 4.1% 3.2% -90 bps Renton $794 $847 6.7% 6.2% 5.0% -120 bps Redmond $986 $1,051 6.6% 5.1% 4.1% -100 bps Kent $700 $766 9.4% 5.8% 4.0% -180 bps Beacon Hill / Rainier $819 $846 3.3% 6.2% 6.1% -10 bps North Seattle $809 $886 9.6% 5.0% 5.0% 0 bps Federal Way $718 $760 5.8% 7.4% 6.3% -110 bps Auburn / Enumclaw $681 $718 5.5% 5.4% 7.2% 180 bps Everett / Mukilteo $734 $805 9.7% 5.0% 5.8% 80 bps Metro $836 $901 7.8% 5.3% 5.0% -30 bps

J ob growth in the Seattle metro-politan division accelerated to 47,100 (3.4%) in 2006, up

from 35,800 (2.7%) in the prior year. Faster hiring among construction, manufacturing, and business service firms contributed to the gain. Com-bined the sectors added 21,900 new jobs in 2005 and 29,400 in 2006.

The area’s major employers made significant gains. Increased demand for new product lines have lead to faster hiring at Boeing and suppliers alike. The BLS report job growth in the aerospace manufacturing sector totaled 3,700 (6.3%) in 2005 and 7,200 (11.5%) in 2006. Employment in the software publishing sector, lead by Microsoft, accelerated from 1,900 (5.0%) net new jobs in 2005 to 3,700 (9.2%) in 2006.

The outlook for 2007 is positive. Recent media reportage reveal that Boeing’s airplane deliveries increased 8% year-over-year in 1Q07 and a ma-jority of the manufacturing activity took place in Renton and Everett. Labor data show average year-over-year growth of 5,600 and 4,700 jobs in January and February, respectively. For total payrolls, RED forecast job growth of 38,000 (2.7%) in 2007 with a confidence interval of 28,000 (2.0%) and 48,000 (3.4%). In 2008, our econometric forecast generate a point estimate of 32,000 (2.2%) new jobs.

The metro occupancy rate increased 90 basis points year-over-year to 95.0% in 4Q06, ranking 20th among the 50 metro areas tracked by RED CAPITAL (RED 50). The increase was primarily attributable to relatively slow supply growth (1,292 units) and an active conversion period (2,907 units). The occupancy rate fell 60 bps quarter-over-quarter as supply out-paced demand and conversion activity

slowed in the fourth quarter.

Reis anticipate weaker market condi-tions through 2008. The service an-ticipates vacancy to increase 20 bps to 5.2% in 2007 and another 20 bps to 5.4% in 2008.

Effective rents increased 7.9% year-over-year from $821 to $886 in 4Q06. Asking rents grew at a moderately slower rate of 7.3% to $941. The value of the average concession pack-age fell to 5.8% of asking rent from 6.4% in 4Q05. Reis forecast year-over-year effective rent growth of 4.4% in 2007 and 3.6% in 2008.

Effective rents in the Kent submarket increased the fastest, jumping 8.7% from $689 to $749. Occupancy rose 60 bps year-over-year in Kent to 95%. The Downtown / Capital Hill submar-ket commanded the highest effective rent ($1,182) in 4Q06 and achieved an 8.3% y-o-y advance.

According to Real Capital Analytics, 133 investor grade properties traded in 2006, totaling $2.176 billion in sales proceeds. Volume decreased 6% while the average price rose 5% to $116,476 per unit. The average cap rate was down 20 bps to 5.7%.

The Reis average cap rate index in-creased 10 bps to 5.9% in 4Q06. On a trailing 12-month basis, the average cap rate fell from 5.3% in 3Q06 to 5.1%. Purchase yields for investor grade properties were lower, gener-ally ranging from 4.0% to 5.0%.

The total return profile for Seattle assets is below average and even low occupancy volatility is insufficient to elevate risk adjusted returns above the national average. Accordingly, RED assign an “Opportunistic” ranking for metro assets. This indicates that an active buying program is not war-ranted at current prices, despite attrac-tive market fundamentals.

RED CAPITAL GROUP®

Market Overview

Seattle, Washington Multifamily Housing Update April 2007

Y-o-y Projected

change 2007

Vacancy (5.0% - 4Q06)

Effective

Rents ($886 - 4Q06)

Cap Rate (5.9% - 4Q06)


SNAP SHOT

45.1k 38k

30bps

7.9% 4.4%

90bps

unch

20bps

• The vacancy rate increased 60 basis points sequentially to 5.0% in 4Q06. The metric was down 90 basis points from the comparable period of 2005.

• Asking and effective rents increased 7.3% and 7.9% year-over-year, respectively. The rate of effective rent growth ranked 2nd among the RED 50.

• The median price of a single family MSA home increased 11.3% from $335,000 in 4Q05 to $372,900 in 4Q06.

• The Reis average cap rate index increased 10 basis points to 5.9% in 4Q06 but remained 30 basis points below value recorded in 4Q05.

• RED forecast payroll job growth of 38,000 (2.7%) in 2007 and 32,00 (2.2%) in 2008.

KEY POINTS

EXECUTIVE SUMMARY

• Effective rents increased 7.9% year-over-year in 4Q06, the second fastest rate of growth among the RED 50; only San Jose achieved a faster gain. Asking rents increased at a slightly slower rate of 7.3% year-over-year, averaging $941 in 4Q06.

• Owners reduced concessions from 6.4% of asking rent in 4Q05 to 5.8%, the lowest level since 2Q02. The average concession among markets in the RED 50 was a slightly lower 5.7% of asking rent.

• Reis anticipate slower effective rent growth going-forward. The service predicts year-over-year effective rent growth of 4.4% in 2007 and 3.6% in 2008.

RANK: 2nd out of 50

2008 RENT GROWTH RATE OUTLOOK: Decreasing

• Metro vacancy increased 60 basis points to 5.0% in 4Q06 but was down 90 basis points year-over-year. The sequential quarter increase was attributable to negative net absorption of 389 units and the addition of 644 units of supply.

• The year-over-year improvement is largely attributable to conversion activity, which removed 2,907 apartment units from inventory. Supply, on the other hand, totaled only 1,292 units. Therefore, on a net basis, apartment inventory fell 1,615 units over-the-year.

• Reis forecast vacancy to increase 20 basis points in 2007 to 5.2%. In 2008, the service predicts another 20 basis point increase to 5.4%.


2008 VACANCY RATE OUTLOOK: Increasing


Source: Reis, Inc.

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SeattleU.S.A.

Metro Rent Trends

Source: Reis, Inc.

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10%12%

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RENT TRENDS

• The Reis average cap rate index increased 10 basis points to 5.9% in 4Q06. The metric is down 30 basis points from the comparable period of 2005.

• According to Real Capital Analytics, sales volume decreased 6% in 2006 to $2.176 billion. Velocity was up 2% as 133 properties traded. The average price was $116,476 per unit, up 5% from 2005.

• Total sales volume ranked 7th among the top 35 metro areas ranked by RCA, up from 11th place in 2005.

• RED estimate generic metro asset 10-year holding period unlevered total returns of 7.4%, below the national average.

2008 CAP RATE OUTLOOK: Stable


Source: Reis, Inc.

5.5%

5.7%

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Seattle, Washington MSA - 4Q 2006



Transaction

Total Price


Estimated Cap

Rate

The Heights on West Campus BC March 2007 $51.0 $127,182 4.0%

Access Grand A December 2006 $42.3 $118,944 5.0%

Piedmont Apartments BC December 2006 $52.6 $132,838 5.2%

Stonehaven at West Campus A November 2006 $58.0 $11,969 4.9%

EMPLOYMENT TRENDS



• The metro division registered a 14.5% increase in the Office of Federal Housing Enterprise Oversight (OFHEO) home price index, down from the 17.7% gain recorded in 3Q06.



Past 12 Months

• Payroll growth accelerated to 47,100 (3.4%) in 2006, up from 35,800 (2.7%) jobs created in 2005.

• The increase was largely attributable to faster hiring among construc-tion, manufacturing, information and professional and business ser-vices.

Fourth Quarter 2006

• Payroll growth slowed somewhat in the fourth quarter as year-over-year employment increased 45,100 jobs, down from the 48,200 jobs created in 3Q06.

• Net job losses in financial activities were partially responsible. The sector lost 1,400 jobs in 4Q06 but added 900 on the year. Slower job growth in the aerospace manufacturing industry also contributed. Firms added 5,800 positions year-over-year in the fourth quarter, below the monthly average of 7,200 for the year.

Forecast

• RED forecast payroll growth of 38,000 (2.7%) in 2007 with a confi-dence interval of 28,000 (2.0%) and 48,000 (3.4%). Given recent performance, we expect payroll growth on the lower end of a 38,000 to 48,000 job range.

• In 2008, RED anticipate job creation between 15,000 (1.0%) and 48,000 (3.3%) with a point estimate of 32,000 (2.2%).


2008 EMPLOYMENT GROWTH RATE OUTLOOK: Decreasing



3238

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-40

-20

0

20

40

60

99 00 01 02 03 04 05 06 07f 08f

Ann

ual C

hg (

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Source: BLS

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-4%

-2%

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2%

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6%

99 00 01 02 03 04 05 06 07

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e

Seattle USA



$100

$150

$200

$250

$300

$350

$400

03

Y

04

Y

3Q

05

4Q

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1Q

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2Q

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3Q

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4Q

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Pri

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MSA US



RED Estimated Generic Unlevered Asset Total Return Probabilites

3.0%5.6%

8.9%11.2%

4.9%6.7% 7.9% 9.1%

10.8%

7.3%

0%

5%

10%

15%

90% 70% 50% 30% 10%

Seattle San Diego

• Supply totaled 644 units in 4Q06, bringing the annual total to 1,292 units. Conversion activity removed 2,907 units from apartment inventory.

• According to Reis, a more active construction period lies ahead. The service expects 2,816 unit completions in 2007 and another 3,885 unit deliveries in 2008.

• With respect to submarkets, the Downtown / Capital Hill area will experience significant new construction. Reis identifies 1,681 units that are slated for completion in 2007 and 2008. Similarly, the service count 1,066 new units in North Seattle and 1,034 units in Bellevue. Reis anticipates no completions in the Federal Way, Des Moines, Tukwila and Kent submarkets.


SUPPLY TRENDS

SUBMARKET TRENDS


Source: Reis, Inc

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

02 03 04 05 06 07f 08f

Uni

ts






Columbus, OH 43215


Columbus, OH_Boston, MA_Bozeman, MT_Fort Worth, TX











Bellevue / Issaquah $948 $1,023 7.9% 5.0% 5.2% 20 bps




Bothell $872 $944 8.3% 4.5% 3.8% -70 bps

Renton $780 $845 8.3% 7.6% 5.5% -210 bps

Redmond $970 $1,029 6.1% 5.9% 4.8% -110 bps

Kent $689 $749 8.7% 5.6% 5.0% -60 bps


North Seattle $793 $866 9.2% 4.8% 4.8% unch

Federal Way $712 $749 5.2% 7.7% 5.9% -180 bps

Auburn / Enumclaw $670 $710 6.0% 5.3% 5.4% 10 bps

Everett / Mukilteo $724 $786 8.6% 5.6% 5.6% unch

Metro $821 $886 7.9% 5.9% 5.0% -90 bps

M etro Seattle job creation grew moderately weaker in 3Q06, averaging

monthly payroll growth of 61,100 or 3.7%, compared to the 66,500 or 4.1% rate in 1H06. RED forecast job creation of 60,000 in 2006, which would be the largest total since 1998.

Job growth in the durable goods manufacturing industries is largely attributable to recent success at Boe-ing. Y-o-y headcount growth in the durable goods averaged 9,500 in 1H06 and 13,300 in 3Q06.

Seattle also benefited from a resilient IT sector. Information payrolls in-creased 3.4% in 1H06 and 6.4% in 3Q06.

Payroll growth in the construction trades lost steam, however, a trend that could worsen as the housing mar-ket cools. In 1H06 payrolls increased 11.0% (10,800) before slowing to 8.9% (9,600) in 3Q06.

RED forecast payroll growth between 41,000 (2.4%) and 67,000 (3.9%) in 2007, with a point estimate of 54,000 (3.2%). Slower domestic product growth and a cooling construction sector are principally responsible.

Occupancy spiked to 95.6% in 3Q06, up 150 basis points y-o-y and 60 bps quarter-over-quarter. Supply and demand both played a role in the oc-cupancy improvement. Condo con-versions and apartment development constraint lead to net supply reduc-tions of 3,125 units between 3Q05 and 3Q06. By the same token, net absorption totaled 3,679 over the past twelve months, fueled by population growth and plummeting home af-fordability.

The pace of condo conversions de-creased sharply in 3Q06 as only 474 units were converted. By compari-son, 756 units were converted in

3Q05, 1,445 in 4Q05, 1,144 in 1Q06, and 882 in 2Q06. Supply remained muted, however; 2006 will mark the fifth consecutive year that fewer than 3,000 units reached completion. Reis anticipate the trend to halt in 2007, as supply increases by 3,233.

Reis anticipate 2,518 net absorptions in 2007, down from 3,907 in 2006. By our way of thinking, Reis esti-mates are conservative. Given eco-nomic and demographic trends, RED anticipate 2007 net absorption be-tween 3,000 and 3,500 units.

The aforementioned supply trends (fewer conversions and more comple-tions), coupled with Reis absorption estimates lead the service to project an increase in market vacancy from 4.4% in 3Q06 to 5.0% in 4Q07. RED are more optimistic, projecting 4Q07 vacancy between 4.5% and 4.8%.

Market tightness in 3Q06 enabled effective rents to increase 6.5% y-o-y, outpacing the 5.9% advance in asking rents. Reis project y-o-y effective rent growth of 7.2% in 4Q06 and 4.3% in 4Q07. However, stronger demand growth would allow for ef-fective rent growth of 4.5% or more.

Seattle is an attractive investment option for those who seek strong NOI trends but not at California cap rates. The average going-in yield for a class A asset in 3Q06 was 4.9% with an average price of $188,829 per square unit. Class B/C assets traded at an average cap rate of 5.5% with an av-erage price of $96,229 per unit. The Reis indexed cap rate increased 20 bps between 2Q06 and 3Q06 to 5.8%, approximately equal to the regional average. Given the solid market fun-damentals, projections for strong eco-nomic and demographic trends, and the current pricing environment RED assigns a rating of “Accumulate” to Seattle.

RED CAPITAL GROUP®

Market Overview

Seattle, Washington Multifamily Housing Update November 2006

Y-o-y Projected

change 2007

Vacancy (4.4% - 3Q06)

Effective

Rents ($870 - 3Q06)

Cap Rate (5.8% - 3Q06)


SNAP SHOT

61.1k 54.0k

70bps

6.5% 4.3%

150bps 60bps

• Vacancy decreased 150 basis points, year-over-year, tied for the largest decrease among the 50 metro areas tracked by RED (RED 50).

• Effective rents increased 6.5% between 3Q05 and 3Q06 to $870. Asking rents increased 5.9% to $927 over the period.

• Reis estimate that cap rates increased 20 basis points between 2Q06 and 3Q06 from 5.6% to 5.8%. On a year-over-year basis, however, cap rate decreased 70 basis points.

• RED assign an “Accumulate” rating to Seattle, indicating that strong potential NOI trends and a cap rate environment that is favorable toward buyers.

• Payroll job growth reached 48,000 or 3.0% in 2005 and 64,100 or 4.0% in the twelve months ended in September.

• RED forecast payroll job growth of 60,000 (3.7%) in 2006 and 54,000 (3.2%) in 2007.

KEY POINTS

EXECUTIVE SUMMARY

up

• Effective rents increased 6.5%, the 10th fastest growth rate among the RED 50. Asking rents increased moderately slower at 5.9% year-over-year.

• Effective rent growth outpaced advances in asking rent for the seventh consecutive quarter. As a result, concessions fell to 6.1% of asking rent, down from 6.6% a year ago and a high of 7.4% in 1Q04.

• Reis project effective rent growth of $10 quarter-over-quarter or $59 (7.2%) year-over-year in 4Q06. In 4Q07 Reis project effective rents to increase $38 (4.3%) over-the-year. The slower rate of growth in 2007 is attributable to the relatively large influx of new product that will reach the lease-up stage in 2007.


2007 RENT GROWTH RATE OUTLOOK: Decreasing

• Vacancy fell 150 basis point from 5.9% to 4.4% in the twelve months ended in September. On a sequential quarter basis, vacancy decreased 60 basis points. At 4.4%, metro vacancy is the 17th lowest among the RED 50. The 150 basis point year-over-year improvement, on the other hand, is tied with Austin for the largest decline in the peer group.

• The vacancy improvement is attributable to the conversion of 3,945 apartment units to condo, positive net absorption of 3,679, and only 820 unit completions over the past four quarters.

• Reis project vacancy to increase 60 basis points by YE07 as the apartment construction pipeline swells and conversion activity slows. RED are more optimistic forecasting only a 10-40 bps increase.


2007 VACANCY RATE OUTLOOK: Increasing


Source: Reis, Inc.

5.9%

4.4%

0%

2%

4%

6%

8%

10%

3Q

00

2Q

01

1Q

02

4Q

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05

4Q

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3Q

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Met

ro V

acan

cy R

ate

SeattleU.S.A.

Metro Rent Trends

Source: Reis, Inc.

5.9%

6.5%

-9%

-6%

-3%

0%

3%

6%

9%

12%

3Q

00

2Q

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Tre

nd

AskingEffective

RENT TRENDS

• The trend of cap rates compression came to a halt in 3Q06 as going-in yields increased 20 basis points from 5.6% in 2Q06 to 5.8% in 3Q06. Cap rates are, however, 70 basis points lower than the comparable period last year.

• Class A yields averaged 4.9%, in 3Q06, while class B properties traded at an average cap rate of 5.5%. The weighted average price per unit for class A properties ($188,829) was nearly twice as high as the weighted average class B per unit price ($96,229), in 3Q06.

• Only one investor grade trade was recorded in the Renton submarket, a B/C asset that sold for $73,844 per unit at a 5.9% going-in yield.

2007 CAP RATE OUTLOOK: Stable / Increasing

At 5.8%, Seattle cap rates are approximately equal to the regional average.


Source: Reis, Inc.

5.0%

5.5%

6.0%

6.5%

7.0%

1Q

05

2Q

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3Q

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4Q

05

1Q

06

2Q

06

3Q

06

Cap

Rat

e





Transaction

Total Price


Estimated Cap

Rate

Connemara Apartments A October 2006 $36.8 $138,346 5.1%

Belle Arts A October 2006 $30.3 $236,336 4.0%

Crystal Cove A October 2006 $33.5 $107,717 5.9%

Northside A September 2006 $44.9 $233,875 4.0%

EMPLOYMENT TRENDS

• Metro population increased 1.1% between 2004 and 2005, the largest increase since 2001. Contributing to the increased rate of growth was a return to positive net domestic migration for the first time since 2001.

• The homeownership rate increased 110 basis points since 2000 from 63.4% to 64.5%. The average rate of homeownership among the RED 50 is 67.1%.

• The median price of a single family MSA home increased 14.6% between 3Q05 and 3Q06 to $372,400.


Economic growth in 2005 fueled positive domestic in-migration, a trend that should continue as the economy continues to create high-wage jobs.


Past 12 Months

• Job growth accelerated to 48,000 or 3.0% in 2005, the largest since 1998. Despite the increase total payroll employment in 2005 was 9,300 below the 2000 total.

• Payroll growth averaged 64,100 or 4.0% over the past twelve months.

Year-to-Date

• Growth averaged 3.7% in 3Q06, an increase of 61,100 year-over-year. Job creation in 1H06 was moderately faster, averaging 4.1% or 66,500.

• The construction sector increased 8.9% or 9,600 jobs in 3Q06, ac-counting for 15.8% of total payroll growth. Growth in 1H06 was more robust increasing 11.0% or 10,800 jobs.

• Boeing led a resurgence in durable goods manufacturing in 2006, which averaged payroll growth of 9,500 in 1H06 and 13,300 in 3Q06.

• The information super sector also created jobs at a faster clip, increas-ing 3.4% in 1H06 and 6.4% in 3Q06.

Forecast

• RED forecast payroll job growth between 59,000 (3.6%) and 62,000 (3.8%) in 2006.

• In 2007, RED anticipate growth between 41,000 (2.4%) and 67,000 (3.9%).

RANK: 5th out of 50

2007 EMPLOYMENT GROWTH RATE OUTLOOK: Small Decrease



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Sea USA



$100

$150

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MSA US



• Completions totaled 1,737 in 2005, 274 units fewer than were delivered in 2004. Year-to-date, 648 units were added to inventories, with 1,179 units slated for completion in 4Q06.

• In the Renton submarket, 48 units were added year-to-date, all of which are contained in a community called Valley Springs Phase II.

• Reis anticipate rapid supply growth in 2007 as 3,233 units are slated for delivery, an estimated 1.8% increase in inventory. Only 146 units are scheduled for construction completion in Renton, in 2007.

• The largest increases in inventory are slated for the Downtown (749 units), Auburn (634 units), and North Seattle (621 units) submarkets.


In 2007, apartment inventory will eclipse the high mark set in 1Q05 - before the rapid condo conversion activity.

SUPPLY TRENDS

SUBMARKET TRENDS


Source: Reis, Inc

0

1,000

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3,000

4,000

5,000

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Uni

ts






Columbus, OH 43215


Columbus, OH_Boston, MA_Bozeman, MT_Fort Worth, TX









Des Moines /West Kent $684 $730 6.7% 5.7% 4.1% -160 bps


Bellevue / Issaquah $955 $1,022 7.0% 5.4% 4.6% -80 bps




Bothell $870 $927 6.6% 4.0% 2.9% -110 bps

Renton $780 $834 6.9% 6.5% 5.0% -150 bps

Redmond $961 $1,034 7.6% 5.5% 4.0% -150 bps

Kent $690 $725 5.1% 5.8% 4.0% -180 bps



Federal Way $709 $742 4.7% 6.6% 5.6% -100 bps



Metro $817 $870 6.5% 5.9% 4.4% -150 bps

seattle, washington - red capital groupredcapitalgroup.com/.../09/rch-wa-001_seattle_all.pdf ·...

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