2011 National Apartment Report by Markus & Millichap

8/7/2019 2011 National Apartment Report by Markus & Millichap

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Real Estate Investment Research

National Apartment Report

2011

-

ULATION PENT-UP DEMAND REVENUES BUY

ONDOS FOR RENT FUTURE OF FANNIE MA

RMA ECONOMY DELIVER CAP RATES QE2 RE

T GROWTH PERCENT ABSORPTION EXPANSI

VER POTENTIAL FUNDAMENTALS URBAN DE

L EXCEEDING CONDOS FOR RENT INVEST

CESSION UNCERTAINTY RENT GROWTH A

GE SUSTAINABLE OPPORTUNITY FORECAST

UNEMPLOYMENT GROWTH SPENDING S

PPLY INCREASE SALES DISTRESSED RANK

EMERGING INTEREST DECLINE CONCESS

ETURNS YEAREND LOW COMPLETIONS QE2

ENT GROWTH VELOCITY MOMENTUM DISC

ANSION PRICING PROPERTY AVERAGE BID AS

BAN DEVELOPMENT INCOME NATIONWIDE

NT INVESTOR TRENDS EMERGING GAINS

WTH ACQUISITIONS POTENTIAL UPTURN FO

ECAST OUTLOOK SIGNS CAPITAL NEW CO

TABILIZED INVESTMENT VACANCIES SHAD

ESILIENCE INVENTORY POPULATION PENT-

URN SELLER RECOVERY CONDOS FOR RENT

GY LIMIT FISCAL PROFORMA ECONOMY D

LEGISLATIVE GRIDLOCK SUBMARKET RE

AGE BID ASK MAXIMIZE FOCUS HEADWIND

WIDE STRENGTH PROJECTED FREDDIE MACSK SLUMP DRIVERS ASSETS CASH FLOW

UPTURN APARTMENT FORECLOSURE MO

SIGNS CAPITAL NEW CONSTRUCTION INFLATI

MENT VACANCIES SHADOW MARKET SING

VENTORY POPULATION PENT-UP DEMAND

OVERY CONDOS FOR RENT FUTURE OF F

AL PROFORMA ECONOMY DELIVER CAP RATE

TS RATERENT GROWTH MARKET PERCENT

S REBOUND ROLLOVER POTENTIAL FUND

D FREDDIE MAC LOCAL QE2 EXCEEDING CO

S ASSETS CASH FLOW RECESSION UNCERT

RATE JOB GROWTH SUSTAINABLE FORECAST

UNEMPLOYMENT GROWTH SPENDING S

RESSED RANK RESILIENCE INVENTORY P

ST DECLINE CONCESSIONS BURN SELLER C

TIONS QE2 STRATEGY FISCAL PROFORM

SSIONS BURN SUBMARKET RECOVERY

MARKET MAXIMIZE FOCUS ROLLOVER

PROJECTED FREDDIE MAC LOCAL EXCEEDIN

SLUMP DRIVERS ASSETS CASH FLOW

FORECLOSURE MODERATE JOB GROWTH H

CAPITAL NEW CONSTRUCTION ROLLOVER

LY OVER-SUPPLY INCREASE SALES DISTRE

OW COMPLETIONS INTEREST DECLINE CO

END LOW COMPLETIONS QE2 STRATEGY LI

ELOCITY RENT GROWTH MOMENTUM DISCO

ABSORPTION EXPANSION PRICING PROPERT

DAMENTALS URBAN DEVELOPMENT INCOME

FOR RENT INVESTOR TRENDS EMERGING

RENT GROWTH ACQUISITIONS POTENTI

PORTUNITY FORECAST OUTLOOK SIGNS C

WTH SPENDING STABILIZED INVESTMENT

RANK RESILIENCE INVENTORY POPULATI

URN SELLER RECOVERY CONDOS FOR RENT

GY LIMIT FISCAL PROFORMA ECONOMY D

LEGISLATIVE GRIDLOCK SUBMARKET RE

E BID ASK MAXIMIZE FOCUS HEADWINDS

WIDE STRENGTH ECHO BOOMERS FREDDIEG GAINS RISK SLUMP DRIVERS ASSETS

UPTURN FORECLOSURE MODERATE JOB GRO

2011


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2011 National Apartment Report

To our valued clients:

The economy weathered numerous challenges and setbacks as it made slow progress toward recovery last year.

Cautious consumers and cash-heavy, but guarded, U.S. companies reflected a pervasive negative psychology, whichhampered economic momentum. To be sure, profound concerns and economic risks will linger well into 2011, par-ticularly high unemployment, record private- and public-sector debt, and the potential for sovereign debt contagion.The gravity of these issues, however, should not overshadow key indicators that affirm a solid footing for the U.S.economy, including the return of core retail sales and corporate earnings to pre-recession levels and the creation ofmore than 1.2 million private-sector jobs in 2010. While job creation last year was tepid, especially in light of the 8.4 mil-lion jobs cut during the Great Recession, it is a solid start and better than the early stages of the last two recovery cycles.

Consumers, though hampered by high unemployment and limited credit, will make positive contributions tothe recovery this year, but they still lack the wherewithal to propel the economy forward as they have in previousrecoveries. In this cycle, businesses must assume the lead, a trend that will slowly manifest over the course of 2011 ascompanies gain sufficient confidence to expand capital expenditures and long-term hiring. In the near term, they willcontinue to rely on temporary employment to keep expenses low and options open, though easing uncertainty andstrengthening demand by midyear will encourage business spending and job creation in the second half.

The Feds latest round of quantitative easing signals a continued willingness by the government to mitigate defla-tion and other near-term risks to the recovery. The extension of the Bush-era tax cuts, which were scheduled to sunsetat the end of 2010, will stimulate the economy and bring badly needed clarity to the markets. Like many policy deci-sions developed along the learning curve of the Great Recession, the economic benefit and efficacy of these efforts inachieving the stated goals, and even unintended consequences, may not emerge for some time.

The apartment sector will continue to lead the recovery in commercial real estate fundamentals through 2011 asowners capitalize on lower vacancies to raise rents and scale back concessions. In addition, historically light construc-tion levels in most markets over the next two to three years will help owners more than recover the ground lost throughthe recession. These factors, along with broad-based, though limited, job growth, will propel all 44 markets coveredin this report toward falling apartment vacancies in 2011, together with climbing rents. The unprecedented breadthof this strengthening in apartment fundamentals, coupled with low-cost debt, will continue to fuel higher apartmentinvestment activity. REITs and institutional investors, who led the charge in the buying surge last year, will look be-

yond top-tier assets in the best markets, which are now priced to perfection, in search of yield. Private and opportunityinvestors, frustrated by the limited inventory of distressed sales, are adjusting their yield expectations and appearpoised to become more active.

To assist you in planning and executing a successful investment strategy, we are pleased to present our 2011 Na-tional Apartment Report. Included is our National Apartment Index (NAI), a forward-looking ranking of 44 marketsbased upon forecast economic, supply and demand conditions. We hope you will find this report helpful, and ourinvestment professionals look forward to assisting you in meeting your goals.

Sincerely,

John J. Kerin Hessam NadjiPresident and Managing DirectorChief Executive Officer Research and Advisory Services


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2011 National Apartment Report

2011 Annual Report

NATIONAL PERSPECTIVE

Executive Summary .......................................................................................... 3National Apartment Index ................................................................................ 4-5National Economy ............................................................................................ 6National Apartment Overview .............................................................................. 7Capital Markets ............................................................................................... 8

Apartment Investment Outlook ............................................................................ 9

MARKET OVERVIEWS

Atlanta ........................................................................................................ 10Austin ......................................................................................................... 11Boston ......................................................................................................... 12Charlotte ..................................................................................................... 13Chicago ....................................................................................................... 14Cincinnati..................................................................................................... 15Cleveland ..................................................................................................... 16Columbus ..................................................................................................... 17Dallas/Fort Worth ........................................................................................... 18Denver ........................................................................................................ 19Detroit ........................................................................................................ 20

Fort Lauderdale ............................................................................................. 21Houston ....................................................................................................... 22Indianapolis .................................................................................................. 23Jacksonville .................................................................................................. 24Kansas City ................................................................................................... 25Las Vegas ..................................................................................................... 26Los Angeles ................................................................................................... 27Louisville ..................................................................................................... 28Miami .......................................................................................................... 29Milwaukee .................................................................................................... 30Minneapolis-St. Paul ........................................................................................ 31

Statistical Summary Table ............................................................................. 32-33New Haven ................................................................................................... 34New Jersey ................................................................................................... 35

New York City ................................................................................................ 36Oakland ....................................................................................................... 37Orange County ............................................................................................... 38Orlando ....................................................................................................... 39Philadelphia .................................................................................................. 40Phoenix ....................................................................................................... 41Portland ....................................................................................................... 42Riverside-San Bernardino .................................................................................. 43Sacramento .................................................................................................. 44Salt Lake City ................................................................................................ 45San Antonio................................................................................................... 46San Diego ..................................................................................................... 47San Francisco ................................................................................................ 48San Jose ...................................................................................................... 49Seattle ........................................................................................................ 50

St. Louis ...................................................................................................... 51Tampa ......................................................................................................... 52Tucson ......................................................................................................... 53Washington, D.C. ............................................................................................ 54West Palm Beach ............................................................................................ 55

CLIENT SERVICES

Research Services ........................................................................................... 56Contacts, Sources and Definitions ........................................................................ 57Office Locations ......................................................................................... 58-59

Written by John Chang, Vice President, Research Services, and edited by Hessam Nadji, Managing Director. The Capital Markets section was co-authored by William E. Hughes, Managing Director, Marcus & Millichap Capital Corporation. Additional contributions were made by Marcus &Millichap market analysts and investment brokerage professionals nationwide.


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Executive Summary

2011 Annual Report page 3

National Apartment Index (NAI)

Healthy employment growth expectations and tight vacancies advanced New York City two places to the #1 spot in the NAI,bumping Washington, D.C., to #2. California markets also fared well in the index due to perennial supply constraints that willkeep vacancy steady and generate some of the strongest effective rent gains.

Tech-heavy markets led advances in the 2011 NAI, with Austin (#9), Denver (#14) and Seattle (#15) all climbing seven spots.Fellow tech titans Boston (#3) and San Jose (#4) gained five and six positions, respectively. Other Texas markets achievedstrong momentum due to healthy job gains, favorable demographics and revenue growth prospects; Dallas/Fort Worth (#18)and Houston (#24) rose five and four spots, respectively.

Midwestern markets remain stable but slipped in the NAI, as coastal and dynamic markets offer greater growth potential thisyear. Declines were led by Cleveland (#40) and Milwaukee (#25), both of which lost eight positions, while Detroit (#42) andColumbus (#37) each dropped six spots. Minneapolis-St. Paul (#8) slipped four places but maintained a top 10 ranking.

National Economy

The U.S. economy will add 2 million jobs in 2011, double the amount created in 2010. The extension of Bush-era tax cuts andthe addition of new incentives for businesses should stimulate hiring driven by export-related industries, a cyclical reboundin technology goods and services, and the business and professional services sector.

Several trends suggest the recovery will gain more traction, including moderate private-sector job growth, improving consump-

tion, stabilizing initial unemployment claims, robust temporary hiring, strong and sustained corporate profitability, and easingbond spreads. Recent government actions signal a willingness to take strong, albeit controversial, steps to reinforce the recovery.

The Fed will have to tread carefully to recalibrate monetary policy in response to stronger economic expansion to keep infla-tion at bay. Many housing markets will also continue to struggle as foreclosures make their way through the pipeline, andconcerns will loom over solvency and trade implications as risks of sovereign debt defaults roll across the eurozone.

National Apartment Overv iew

All 44 markets will post employment growth, vacancy declines and effective rent gains in 2011, confirming a sweeping recov-ery and expansion in the U.S. apartment sector above expectations. This year will mark the first across-the-board reductionin vacancy since at least 1990. This is driven by the release of pent-up demand in the aftermath of the Great Recession, lowerturnover rates, falling homeownership and job growth.

Apartment completions will total 53,000 units this year, 46 percent fewer than delivered in 2010. New supply will again fallcritically short of demand, which is expected to reach 158,000 units. U.S. apartment vacancy will decrease 110 basis points in

2011 to 5.8 percent as a result, matching the decline recorded in 2010.

As vacancy in 2011 aligns closely to pre-recession levels, owners will regain pricing power. Asking rents will rise 3.5 percentto $1,067 per month, while effective rates will increase 4.5 percent to $1,002 per month.

Capital Markets

Fannie Mae and Freddie Mac provide apartments a financing advantage relative to other property types, but more com-mercial banks and life insurance companies are stepping up with competitive terms. The agencies registered a healthy delin-quency rate of 1 percent in their multifamily portfolios, a strong indication of their continued involvement in the sector.

Debt availability increased dramatically from the trough two years ago, but the overall supply remains limited and selective.Sales of $5 million to $20 million in the Class B-minus to C-quality range face fewer financing prospects than top-tier assets.

Seller financing and loan assumptions accounted for nearly 30 percent of all commercial real estate transactions last year andwill remain common in 2011. Life insurance companies and CMBS are poised to extend recent gains in volume.

Apartment Investment Outlook

Dollar volume will rise further this year as the economy gains momentum, apartment fundamentals improve, debt marketsloosen, and REITs and institutions increase acquisitions. During 2010, apartment sales volume totaled an estimated $40 bil-lion, up nearly 65 percent from the cyclical low in 2009 but less than one-third of the 2006 peak.

Institutional investors led the surge in sales in 2010, with dollar volume more than doubling in the $20 million-plus segment.Improving occupancy and rising rents, along with low-cost debt, will help assuage investors and lenders lingering trepida-tion about values. As the year progresses, investors will move down the quality chain in search of stronger yields, resultingin more sales in the Class B and B- categories.

The average cap rate will decline in 2011 after slipping 20 basis points in 2010 to 7.2 percent, led by recompression of the mostsought-after deals. Since peaking in 2009, cap rates for top-quality properties have fallen by as much as 100 basis points.


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National Apartment Index

page 4 2011 Annual Report

Vacancy

Rate

Markets with the LowestExpected 2011 Employment Growth

Nonfarm Employment (Y-O-Y Change)

Markets with the LowestExpected 2011 Vacancy Rates

NewYo

rkCity

SanJo

se

Minn

eapolis

-St.Pa

ul

SanDi

ego

New

Jerse

y

Phila

delphi

a

SanFr

ancis

co

NewHa

ven

Portl

and

Washington

,D.C.

Unite

dStates

Markets with the HighestExpected 2011 Employment Growth

Nonfarm Employment (Y-O-Y Change)

0% 1% 2% 3% 4%

United States

New York City

Orlando

West Palm Beach

San Antonio

San Jose

HoustonOrange County

Dallas/Fort Worth

Washington, D.C.

Austin

0% 0.4% 0.8% 1.2% 1.6%

United States

Fort Lauderdale

Kansas City

Cincinnati

Chicago

Louisville

Sacramento

Cleveland

PhiladelphiaDetroit

New Jersey

2%

3%

4%

5%

6%

Vacancy

Rate

Markets with the Highest

Expected 2011 Vacancy Rates

Jack

sonv

ille

Houston

LasV

egas

Tucson

Phoe

nix

Atlan

ta

Orlan

do

Colu

mbu

s

Kansas

City

Charlo

tte

Unite

dStates

4%

6%

8%

10%

12%

Markets with the HighestExpected 2011 Completions

Units(thousands)

Dalla

s/FortW

orth

Hous

ton

Wash

ington

,D.C.

Austi

n

Phoe

nix

SanA

nton

io

Seattle

NewYo

rkCity

LosA

ngeles

New

Jersey

0

1.5

3.0

4.5

6.0

2011 National Apartment Index

Strengthening Economy Fuels Tech Markets, Texas and Florida

A cyclical recovery of the technology sector will continue to lendstrength to the national economy, benefiting tech-heavy employmentmarkets. These metros led advances in the 2011 National Apartment In-dex (NAI), with Austin (#9), Denver (#14) and Seattle (#15) rising sevenplaces, supported by growing hardware companies, software publishingand commercial aircraft manufacturing. Fellow tech titans Boston (#3)and San Jose (#4) gained five and six positions, respectively.

Texas markets achieved strong momentum, generally due to healthy job gains, population and migration trends, and revenue growth pros-pects. The four major Texas MSAs lead U.S. employment growth fore-casts for 2011, reflecting the states linkages to global trade, energy, tech-nology, and business and professional services. Dallas/Fort Worth (#18)and Houston (#24) rose five and four spots, respectively. San Antonio(#13) slipped one notch this year behind markets with tighter vacancies.If Texas holds true to form, the next few years will present a good windowfor superior performance before the hyper-supply cycle begins again.

While Florida markets rank near the bottom of the NAI, all reflecta broad-based regional vacancy rate recovery. Both central and coastalFlorida metro areas strengthened in the ranking; Orlando (#30) andFort Lauderdale (#34) advanced five positions, while Miami (#21) andTampa (#36) improved four spots. Jacksonville ranked last in the index,unchanged from 2010. Despite a strong rebound in occupancies, Jack-sonville posts a vacancy rate in double digits, and its 2011 rent growthforecast falls well below the national average. Supported by trends simi-lar to those in the Florida markets, the Phoenix (#27) apartment recoverybuilt momentum last year that will carry into 2011, advancing the market

seven places in the 2011 ranking.

New York City Edges Out Washington, D.C., for Top Spot

With healthy employment expected for 2011, combined with alreadytight vacancies, New York City advanced two places in the NAI this yearto claim the #1 spot, bumping Washington, D.C., to #2. Three other NewEngland markets retreated, however; New Jersey (#12) and New Haven(#20) fell six places, while Philadelphia (#10) slipped five spots, primar-ily on weak employment forecasts. Philadelphia and New Jerseys lowerranking stems from other markets posting stronger recoveries, and eachwill likely improve as their lagging labor markets recover.


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National Apartment Index


Growth Markets Bypass Stable Midwestern Metros; Coastal California

Maintains Ranking in Top Quartile

Midwestern markets fell in the 2011 NAI, largely due to being sup-

planted by core, coastal and dynamic markets with greater growth poten-tial. Cleveland (#40) and Milwaukee (#25) declined eight positions, whileDetroit (#42) and Columbus (#37) dropped six spots. Minneapolis-St.Paul (#8) slipped four places but remained in the top one-third due totight and declining vacancy and solid rent growth prospects. Chicago(#23) receded three spots in the ranking but should move up next year asemployment gains momentum and vacancies tighter further.

Perennial supply constraints throughout much of California havekept vacancies among the tightest in the country while generating someof the highest-ranked effective rents. These factors drove most markets inthe state toward the top of the NAI this year. Orange County (#5) and LosAngeles (#11) advanced two spots in the 2011 ranking, while San Fran-cisco (#7) also moved up two positions on a job growth projection above

that of the nation and strong momentum in asking rents. San Diego (#6),however, dropped four notches as top employment growth markets sur-passed it.

Index Methodology

The NAI is a snapshot analysis that ranks 44 major apartment mar-kets based upon a series of 12-month forward-looking economic and sup-ply and demand variables. Markets are ranked based on their cumula-tive weighted-average scores for various indicators, including forecastemployment growth, vacancy, construction, housing affordability andrents. Taking into account both the forecast level and incremental changeover the next year, the index is designed to indicate relative supply anddemand conditions at the metro level.

Users of the index are cautioned to keep several important points inmind. First, the NAI is not designed to predict the performance of indi-vidual investments. A carefully chosen property in the bottom-rankedmarket could easily outperform a poor choice in the top-ranked market.Second, the index ranking is a snapshot of a one-year time horizon. Amarket facing difficulties in the near term may provide excellent long-term prospects, and vice versa. Third, a markets ranking may fall fromone year to the next even if its fundamentals are strengthening.

The NAI is an ordinal index, and differences in specific rankingsshould be carefully interpreted. A top-ranked market is not necessarilytwice as good as the second-ranked market, for example, nor is it 10 timesbetter than the 10th-ranked market.

Markets with the HighestExpected 2011 Absorption

Units(thou

sands)

Dalla

s/FortW

orth

Houston

Atlan

ta

Wash

ington

,D.C.

LosA

ngeles

New

Jersey

Phoe

nix

Austi

n

Phila

delphi

a

SanA

nton

io2

4

6

8

10

Rank Rank 10-11

MSA 2011 2010 1 Change

New York City 1 3 2

Washington, D.C. 2 1 1

Boston 3 8 5

San Jose 4 10 6

Orange County 5 7 2

San Diego 6 2 4

San Francisco 7 9 2

Minneapolis-St. Paul 8 4 4

Austin 9 16 7

Philadelphia 10 5 5

Los Angeles 11 13 2

New Jersey 12 6 6

San Antonio 13 12 1

Denver 14 21 7

Seattle 15 22 7

Portland 16 19 3

Oakland 17 18 1

Dallas/Fort Worth 18 23 5

Salt Lake City 19 11 8

New Haven 20 14 6

Miami 21 25 4

Louisville 22 15 7

Chicago 23 20 3

Houston 24 28 4

Milwaukee 25 17 8Kansas City 26 24 2

Phoenix 27 34 7

Charlotte 28 29 1

St. Louis 29 26 3

Orlando 30 35 5

Indianapolis 31 27 4

Riverside-San Bernardino 32 37 5

Cincinnati 33 30 3

Fort Lauderdale 34 39 5

Sacramento 35 33 2

Tampa 36 40 4

Columbus 37 31 6

West Palm Beach 38 41 3

Atlanta 39 42 3

Cleveland 40 32 8

Tucson 41 38 3

Detroit 42 36 6

Las Vegas 43 43 0

Jacksonville 44 44 0

1 See National Apartment Index Note on page 57.


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National Economy


AnnualizedQuarterlyChangein

GDP

-10%

-5%

0%

5%

10%

11**10*050095908580

U.S. GDP

Retail Sales and UnemploymentUnemployment Rate

Retail Sales, Excluding Auto & Gas

UnemploymentRate

Year-o

ver-YearChangeinRetailSales-10%

-5%

0%

5%

10%

0%

3%

6%

9%

12%

10****09080706050403020100

Fallen Yield Curve Sign of Slow Growth;Level Still Above Recessionary Point

TemporaryEmployment(Y-O-YChg.) No

nfarmEmployment(Y-O-YChg.)-30%

-15%

0%

15%

30%

10***09070503019997959391

-6%

-3%

0%

3%

6%

Recessions

Temporary vs. Nonfarm EmploymentTemporary Employment Nonfarm Employment

SpreadBetween10-YearNote

&

Three-MonthBill

-6

-3

0

3

6

10***050095908580757068

Recessions

The U.S. economic recovery has unfolded in anything but a linear fash-

ion, as tenuous, and occasionally erratic, economic growth has testedthe durability of the recovery and sparked concerns of a double-diprecession. This scenario remains improbable, however, as todays low in-terest rate and minimal inflation environment differs from conditions 30years ago, when the U.S. experienced its last double-dip recession. Further-more, recent government actions, such as the extension of Bush-era tax cutsand the resumption of quantitative easing by the Fed, signal a willingnessto take strong, albeit controversial, measures to reinforce economic recov-ery. Several trends suggest the recovery will gain more traction, includingmoderate private-sector job growth, improving consumption, lower initialunemployment claims, robust temporary hiring, strong and sustained cor-porate profitability, and easing bond spreads.

While overall employment growth disappointed through the lat-

ter half of 2010, job creation among the prime renter age cohort of 20- to34-year-olds significantly outpaced the broader market. This trend helpedjump-start a recovery in the apartment market, boosting absorption to lev-els unseen since 2000, when job growth and household formations boomed,a sharp contrast to current conditions. Both employment and householdgrowth will accelerate in 2011, but the rate of gains depends on improvingcorporate confidence, which is essential to increasing investment and hir-ing. The Feds ability to keep inflation at bay by recalibrating monetary pol-icy in response to economic expansion may not be fully tested in 2011 butremains paramount to the recovery staying on course. The housing market,saddled with foreclosures, will not be a contributor to the expansion until2012. Concerns about solvency and trade implications also loom as risks ofsovereign debt defaults roll across the eurozone.

2011 National Economic Outlook

Employment Growth to Accelerate. The U.S. economy will add 2 millionjobs in 2011, double the amount created in 2010. The extension of Bush-era tax cuts and the addition of new incentives for businesses shouldstimulate hiring driven by export-related industries, a cyclical reboundin technology goods and services, and the business and professional ser-vices sector. Tax-cut extensions will add 50 basis points to 75 basis pointsto GDP.

U.S. Economy Transitioning to Private Sector. GDP will rise by between2.5 percent and 3.0 percent this year as growth shifts from governmentinitiatives and inventory restocking to the still-wary private sector. Cor-porations will likely utilize a share of their cash stockpiles on new equip-ment and software, lending a boost to the headline rate of growth.

Elevated Unemployment, Weak Housing Create Drag. While foreclo-sures will slow as irregularities in the process are examined, distresssales will remain an enduring theme, holding down prices in harder-hitmarkets. At the same time, unemployment will stay elevated, hoveringin the high-9 percent range through at least the first half of the year.

Commercial Mortgage Maturities Pose Risk. Five-year loans madeat the peak of the commercial real estate market in 2006 will ma-ture in 2011, creating risk for lenders holding high-leverage notes onunderperforming assets. Banks hold approximately $1.5 trillion in com-mercial real estate loans, or roughly 45 percent of the total, while CMBSaccounts for 20 percent.

Choppy Recovery Gradually Gains Steam as

Private Sector Cautiously Takes Lead

* Estimate ** Forecast *** Through November**** Unemployment through Nov.; retail sales through Oct.


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National Apartment Overview


Apartment Rent and Vacancy Trends

AverageEffectiveRent

VacancyRate

Effective Rent

Vacancy Rate

$700

$800

$900

$1,000

$1,100

11**10*090807060504030201

2%

4%

6%

8%

10%

Completions vs. Units AbsorbedUnits Completed

Net Absorption

Employment in thePrime Renter Demographic

VacancyRate

EmploymentChange(millionsofjobs)

Employment Change - Ages 20-34

Vacancy Rate

-1.0

-0.5

0

0.5

1.0

Apartment Revenue and Concessions

RevenueperUnit

Co

ncessionsasa%ofAskingRents

Revenue per Unit

Concessions as a Percentageof Asking Rents

$750

$800

$850

$900

$950

10*0908070605040302010%

3%

6%

9%

12%

UnitsCompleted(thousands)

UnitsAbsorbed(thousands)

0

80

160

240

11**10*08060402009896949290

-80

0

80

160

240

2%

4%

6%

8%

10%

10*090807060504030201

Apartments staged a strong recovery in 2010 well ahead of expecta-

tions, despite modest job creation and stubbornly high unemploy-ment. Net absorption surged, with occupied stock rising by nearly200,000 units, double the number of apartments constructed and the high-est level on record since 2000. Several factors contributed to high levels ofabsorption, including the release of pent-up renter demand as householdsde-bundled in the wake of the recession. In addition, apartments benefitedfrom private-sector job growth in the critical 20- to 34-year-old cohort, ex-piration of the homebuyer tax credit, displaced foreclosed homeowners en-tering the renter pool, immigration and lower unit turnover. Renting alsobecame a lifestyle and economic choice for many households as the effectsof the housing collapse and recession persisted. Continued recovery in 2011depends more heavily on improvements in the job market, which shouldgain momentum as the year progresses.

All 44 markets in the Marcus & Millichap National Apartment Indexwill post employment growth, vacancy declines and effective rent gains in2011, confirming a sweeping recovery and expansion in the U.S. apartmentsector above expectations. This year will mark the first across-the-boardreduction in vacancy recorded since at least 1990; the strongest previousperformance played out in 2005, when all but three apartment markets reg-istered declining vacancy rates. The last time all markets exhibited positiveemployment trends occurred in 1999, and not since 2006 have all marketsposted effective rent growth. Further, new apartment supply will decline inall but six markets in 2011, the first time such broad-based reductions haveemerged in 20 years. At the national level, new supply dropped to sub-trend levels last year and completions will slip further in 2011, as tight cred-it conditions stalled construction projects and delayed new starts throughmuch of the past few years.

2011 National Apartment Outlook

Demand Outstrips New Supply. Apartment completions will total53,000 units this year, 46 percent fewer than delivered in 2010. New sup-ply will again fall critically short of demand, which is expected to reach158,000 units.

Surging Demand Drives Vacancies Lower. U.S. apartment vacancy willdecrease 110 basis points in 2011 to 5.8 percent, matching the declinerecorded in 2010. Strong demand drivers and expectations for increasedavailability of debt this year, however, elevate the likelihood of a con-struction cycle ramping up in 2012.

Rents Rise, Concession Ease. With vacancy in 2011 expected to alignclosely with pre-recession levels, owners will regain pricing power, par-ticularly in tight core markets. At the national level, asking rents will rise3.5 percent to $1,067 per month, while effective rates will increase 4.5percent to $1,002 per month. Last year, asking and effective rents gained1.5 percent and 2.3 percent, respectively.

Demographic Trends Support Positive Outlook. Stronger job growthwill spur new household formation over the next few years, as will theprogression of echo boomers into their prime renter years. Over the nextfive years, the 20- to 34-year-old cohort will expand by 3.2 million in-dividuals. Rising interest rates, large downpayment requirements andtight lending standards will bias young households toward renting.

Apartment Recovery Surges Past Expectations;

Strong Momentum for Coming Year

* Estimate ** Forecast


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Capital Markets


Commercial Mortgage Delinquency Rates

DelinquencyRate

CMBS (30+ days and REO)

Life Companies (60+ days)

Fannie Mae (60+ days)

Freddie Mac (60+ days)

Banks & Thrifts (90+ days)

0%

2%

4%

6%

8%

10%

3Q10

4Q09

4Q08

4Q07

4Q06

4Q05

4Q04

4Q03

4Q02

4Q01

4Q00

4Q99

4Q98

CMBS, CDO &Other ABS, 13%

GSEs & GinnieMae, 36%

Other, 5%Life Insurance

Companies, 6%

SavingsInstitutions, 7%

State & LocalGovernments, 9%

Commercial Banks, 24%

Multifamily Mortgage Debt Outstanding

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

MaturingBalance(billions)

$0

$25

$50

$75

$100

Estimated Multifamily DebtMaturities by Vintage

Pre-2001

2001-2004

2005-2007

2008

All-in Rates Trend Lower, FollowDeclining 10-Year Treasury Yield

Rate

10-Year Treasury Yield

Fannie Mae All-in Rate (Tier 2)

0%

2%

4%

6%

8%

10090807

Debt availability has increased dramatically from the trough two years

ago, but the overall supply remains limited and selective. Institutionaldebt sources share a preference for low-risk, higher-quality assets intop-tier markets with strong sponsors. This mandate leaves the majority ofthe transaction bell-curve, which includes sales of $5 million to $20 million inthe B-minus to C-quality range, with fewer financing options. Transactionsof this type can get funding, but the process and qualifications are more chal-lenging, with a significant focus on sponsorship. A large number of proper-ties remain in limbo with respect to refinancing without recapitalization orlender writedowns. An estimated $77 billion of maturing multifamily mort-gages will weigh on the market in 2011 as reduced market values in the B- toC- categories and higher loan-to-values (LTVs) create shortfalls for ownersin need of refinancing. This may result in more acquisition opportunities asmany owners opt for a quick sale over additional equity contributions.

Fannie Mae and Freddie Mac provide apartments afi

nancing advan-tage relative to other property types, though more commercial banks andlife insurance companies are stepping up with competitive terms. Lendingby life insurance companies increased nearly 150 percent last year, whileGSE volume declined 55 percent. In perspective, the GSEs currently hold 37percent of the $843 billion in total multifamily mortgage debt outstanding,while life companies account for 6 percent. Multifamily delinquencies heldin the GSEs portfolios remain below 1 percent, supporting expectations forthe agencies to remain active, despite talk of reform in Washington, D.C.CMBS apartment loans continue to post high levels of distress, with delin-quency in this sector hovering around 8.5 percent. Economic growth andincreases in apartment property values, particularly for high-quality assets,will relieve some pressure and lead to more sales and refinancing. Somelevel of distress at the local- and regional-bank level with high exposure tolower-quality assets and construction loans will persist into 2013.

2011 Capital Markets Outlook

10-Year Treasury Yields Remain Low. The extension of quantitative eas-ing by the Fed will help restrain interest rates in the near term, holdingthe 10-year Treasury yield in the 3.4 percent to 4.0 percent range throughmost of 2011.

All-in Rates Attractive; Lender Requirement Hurdles Remain. All-inrates for smaller apartment loans range from 3.75 percent to 4.5 percentfor five-year terms, with 10-year notes pricing 100 basis points higher.For larger, high-quality deals, the GSEs quote all-in rates of 3.75 percentto 4.6 percent, 100 basis points to 200 basis points lower than portfoliolenders. While rates are relatively low, stringent credit qualifications andhigher LTVs will remain challenges for many potential borrowers.

Seller Financing, Assumable Loans Prevalent. Seller financing and loan as-sumptions accounted for nearly 30 percent of all commercial real estate transac-tions last year and will remain common in 2011. For more broad-based easingin traditional lending sources to occur, the economy will need to post severalconsecutive quarters of solid employment growth and overall expansion.

Life Companies Ramp up; CMBS Re-Emerges. Motivated life insurancecompanies will offer low all-in rates on top-tier assets with good credit charac-teristics this year, regardless of asset size. CMBS issuance will continue to rise,but its next iteration will include new regulation, oversight of ratings agenciesand more conservative underwriting than at the peak of CMBS dominance.

Access to Debt Capital Dramatically

Improving, Though Favoring Top-Tier Assets


10/62

Apartment Investment Outlook


Apartment Price and Cap Rate Trends

AveragePriceperUnit(thousands)

AverageCapRate

Average Price per Unit

Average Cap Rate

$0

$30

$60

$90

$120

10**09080706050403020100

5%

6%

7%

8%

9%

TotalTransactions(thousands)

0

1

2

3

4

10**09080706

U.S. Apartment Transactions by Quarter

Yields in Primary Markets Recompress;Secondary, Tertiary Trends Stabilizing

AverageCapRate

Primary Secondary Tertiary

5%

6%

7%

8%

9%

10**090807060504

Apartment Cap Rate TrendsApartment Cap Rate 10-Year Treasury Rate

Sales $1M and above

AverageRate

2%

4%

6%

8%

10%

10*08060402009896949290

380 bps

400 bps

430 bps

410 bps

Cap Rate Long-Term Avg.

10-Year TreasuryLong-Term Avg.

90 bps

400 bps

Pricing for quality apartment assets in primary markets turned aggres-

sive in 2010, leapfrogging property fundamentals. As REIT and insti-tutional activity fueled momentum in the $20 million-plus category,the average price per unit increased and cap rates fell, though both mea-sures are still down from levels achieved at the markets peak. A prevailingflight to quality and attractive returns over other investment alternativesprompted buyers to compete more intensely for top-quality deals. Lastyear, the spread between the average cap rate in the apartment sector andthe 10-year Treasury yield widened to the largest gap on record in at least20 years before edging back to 400 basis points. For comparison, the differ-ence between the long-term average cap rate and 10-year Treasury yield is290 basis points.

Improving occupancies and rising rents, along with stabilized cashflows and strong demand for quality income-producing properties, will

continue to lend support to market pricing this year, helping assuage lin-gering trepidation about values. Yield compression and limited inventoryin the upper end of the market will lead to more sales of Class B and B-properties in 2011, spurring greater activity among private and opportuni-ty investors. As the year progresses, more buyers will move down the qual-ity chain in search of stronger yields, encouraging price discovery in thelower tiers and in secondary/tertiary markets. At the end of 2010, cap ratesfor mid-tier assets in tertiary markets exceeded those in primary marketsby approximately 200 basis points, with secondary markets falling in themiddle. This arbitrage offers attractive return spreads when viewed withproperly assessed risks and a longer, five-plus-year investment horizon.

2011 Investment Outlook

Sales Volume Rising, Still Well Below Peak Levels. Dollar volume willrise further this year as the economy gains momentum, apartment fun-damentals improve and debt markets loosen. During 2010, apartmentsales volume totaled an estimated $40 billion, up nearly 65 percent fromthe cyclical low in 2009 but less than one-third of the 2006 peak.

Apartment Buyer Composition Shifting. REITs and institutions willincrease acquisitions in 2011. Last year, approximately 80 percent of alltransactions fell below $10 million, reflecting a highly active private-buyer segment; however, public and institutional investors nearly qua-drupled their share of transactions, while equity funds tripled their share.

Cap Rates Recompress. The average cap rate will decline in 2011 after

slipping 20 basis points in 2010 to 7.2 percent, led by recompression of themost sought-after deals. Since peaking in 2009, cap rates for top-qualityproperties have fallen by as much as 100 basis points. Additional sup-port for prices derives from historically light construction and emergingdemographic shifts that favor rental housing.

Distress Creating Opportunities in Moderation. Distressed-propertysales increased dramatically in recent quarters, led by gains in deals over$20 million, but distressed activity still accounts for just 12 percent of allapartment sales. While demand for high-quality distress deals will con-tinue to outpace supply, a shortage of apartment construction, combinedwith a positive demand-side outlook and firming values, may turn moreinvestor attention to unfinished multifamily developments.

Low-Cost Debt, Rent Growth to

Increase Sales, Broaden Buyer Demand

* Estimate ** Through 3QSources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA


11/62


* Estimate ** ForecastSources: Marcus & Millichap Research Services, CoStar Group, Inc., RCA

Demand Surge Sparks Performance Gains,

Though Distress Lingers in Atlanta

-150

-100

-50

0

50

TotalNonfarmJ

obs(thousands)

Absolute Change Y-O-Y % Change

Employment Trends

08 09 10* 11**07

Year-over-YearChange

Units(thousands)

Completions Vacancy

Supply and Demand

Vaca

ncy

Rate

$30

$40

$50

$60

$70

MedianPriceperUnit(thousands)

Sales Trends

07 08 09 10*06


Asking Rents Effect ive Rents

Rent Trends

08 09 10* 11**07

0

2

4

6

8

08 09 10* 11**076%

8%

10%

12%

14%

-6%

-4%

-2%

0%

2%

-6%

-3%

0%

3%

6%

Atlanta Up 3 Places 2011 Rank: 39 2010 Rank: 42

Market Forecast Employment: 1.6% Construction: 3,900 Vacancy: 150 bps Effective Rents: 3.1%

Renter demand will continue to improve in Atlanta during 2011 as hiring

accelerates, providing a foundation for property owners to raise rentsmore aggressively as the year progresses. Asking rents in the Class Asegment, especially, appear poised to grow faster than the 1 percent increaseposted last year. Submarkets such as Buckhead, Marietta and South Gwin-nett County, each with a large stock of upper-tier rentals, will record some ofthe greatest rent gains as availability tightens in these established core areas .Asking rents at Class B/C complexes will also rise more significantly as hiringin lower-paying sectors boosts demand for lower-tier rentals. In another posi-tive trend in the market, completions will decrease this year. As demand-sideconditions strengthen, however, developers will advance projects through thepipeline, initiating a new building cycle after 2011. Potential supply growthremains greatest in the Midtown and Cherokee County submarkets, whereplanned projects equal 19 percent and 12 percent of existing stock, respectively.

Although property operations will gain ground this year, the improve-ments may arrive too late to avert distress for many owners who purchasedassets at the peak of the market under aggressive rent growth and occu-pancy assumptions. Sales of lender-owned properties accounted for morethan 75 percent of Atlanta-area deals last year and will command a sizableproportion again in the year ahead. Potential buyers include owners of sta-bilized assets who have met return objectives and can redeploy capital intoproperties with greater upside potential. In addition to distressed assets,stabilized complexes that can be obtained with agency debt will draw thegreatest interest, with cap rates expected to vary from 8 percent to 9 per-cent. More intense competition for well-performing Class A complexes willcompress cap rates to less than 6 percent as a result.

2011 Market Outlook

2011 NAI Rank: 39, Up 3 Places. Below-average rent gains limited At-lantas rise in the NAI to just three spots this year.

Employment Forecast: Employers will create 37,000 positions in 2011, a1.6 percent increase. Last year, 21,700 jobs were added.

Construction Forecast: Deliveries will subside to 1,000 units this year,compared with 4,900 units in 2010 and the five-year average completionof 5,700 rentals annually.

Vacancy Forecast: Following a 140 basis point decline last year, vacancywill fall 150 basis points in 2011 to 8.8 percent. Stronger job creation inthe service sectors will reduce the Class B/C vacancy rate by 140 basispoints to 11.1 percent.

Rent Forecast: Driven by a 3.4 percent increase in the Class A segment,marketwide average asking rents will rise 2.5 percent this year to $853per month; Class B/C asking rents will advance 1.4 percent. Marketwideeffective rents will jump 3.1 percent to $770 per month.

Investment Forecast: Distressed lower-quality assets will continue to at-tract buyers able to take a considerable equity portion in deals. Pricesof approximately $20,000 per unit remain an attractive entry point forinvestors seeking to expand local portfolios.


12/62



-30

-15

0

15

30

TotalNonfarmJ

obs(thousands

)


Employment Trends

08 09 10* 11**07


Units(thousands)

Completions Vacancy

Supply and Demand

Vac

ancy

Rate

$40

$45

$50

$55

$60

MedianPriceperUnit

(thousands)

Sales Trends

07 08 09 10*06



Rent Trends

08 09 10* 11**07

0

3

6

9

12

08 09 10* 11**074%

6%

8%

10%

12%

-4%

-2%

0%

2%

4%

-8%

-4%

0%

4%

8%


Austin Apartment Demand to Outstrip New

Supply, Driving Above-Average Rent Growth

Healthy job and population growth will combine with reduced con-

struction to set the stage for a potential shortage of apartments bylate 2011. Throughout the economic downturn, absorption remainedpositive in Austin, with rising vacancy largely a product of surging con-struction as opposed to sagging demand. Many of the complexes broughtonline in 2009 have since stabilized, with vacancy declining substantiallythrough 2010; however, construction has commenced on just a handful ofprojects. As vacancy slips to a 10-year low in 2011, supporting stronger rentgains and concession burn, some planned and postponed projects will moveoff the sidelines. This likely includes a few large master-planned commu-nities just outside the metros boundaries along Highway 130. It will taketime for developers to fully reboot, though, and Austin property ownerswill benefit from the lull in completions over the next 12 to 18 months.

Austin apartment prices declined to a lesser degree than anticipated

during the downturn and even began to recover last year, rising 3 percent.Limited discounting has driven many local investors to other Texas metros,a trend likely to persist through 2011 as prices edge up, particularly for bet-ter-quality assets. Opportunities for local investors will center around smallproperties in some level of distress, while most larger deals will be targetedby REITs, syndicates and out-of-state, private investors. Strong competitionhas already driven down cap rates for best-of-class assets to the low-5 per-cent range, while first-year returns on well-located Class B properties fall inthe high-6 percent range. As a result of compression, cap rates today maybe comparable to some coastal markets, but investors in Austin anticipateoutsized rent gains over the next few years as new apartment supply fallsshort of demand.

2011 Market Outlook

2011 NAI Rank: 9, Up 7 Places. The strongest rate of job growth in thenation fueled Austins seven-place jump in the index into the top 10.

Employment Forecast: Job growth will reach 3.6 percent, or 28,000 posi-tions, in 2011. Last year, local employment rose by 3 percent.

Construction Forecast: Construction will continue to wind down thisyear, with 1,800 units slated for delivery. In 2009 and 2010, developerscompleted 10,400 units and 2,900 units, respectively.

Vacancy Forecast: Vacancy in Austin will decline 140 basis points in 2011to 6.2 percent, the lowest level since 2001. Last year, vacancy plummeted250 basis points.

Rent Forecast: This year, average asking rents will rise 4.2 percent to anaverage of $901 per month, and effective rents will climb 5.6 percent to$824 per month.

Investment Forecast: More Class A product will likely become availablethis year as projects completed in 2009 and early 2010 achieve sufficientoccupancy to support a sale. Proceeds from these deals will likely be puttoward new development as higher rents and occupancy justify con-struction costs.

AustinUp 7 Places 2011 Rank: 9 2010 Rank: 16


13/62



Market Forecast Employment: 2.0% Construction: 410 Vacancy: 100 bps Effective Rents: 4.5%

-90

-45

0

45

90

TotalNonfarmJ

obs(thousands)


Employment Trends

08 09 10* 11**07


Units(thousands)

Completions Vacancy

Supply and Demand

Vaca

ncy

Rate

$60

$80

$100

$120

$140


Sales Trends

07 08 09 10*06



Rent Trends

08 09 10* 11**07

0

2

4

6

8

08 09 10* 11**073%

4%

5%

6%

7%

-4%

-2%

0%

2%

4%

-6%

-3%

0%

3%

6%

Afaster pace of job growth, a decline in rental construction, and im-

proving vacancy and rent trends will place Boston among the topperforming apartment markets in the country in 2011. Following asolid rebound in hiring last year, employers will step up the pace as de-mand for goods and services strengthens in the months ahead. Job gainswill occur in most employment segments, with the professional and busi-ness services and education and health services sectors expected to eachgrow nearly 3 percent. Demand for rental housing will improve with theemployment market. Vacancy will decrease to the low-3 percent range incore urban submarkets, down from more than 5 percent during the reces-sion. In the suburbs, where more than 60 percent of jobs in the metro exist,vacancy will dip below 6 percent, enabling operators to significantly reduceconcessions by the second half of 2011.

As Boston remains a large, primary market with diverse demand driv-

ers, local apartments will generate considerable interest when listed. Gener-ally, cap rates ranged from about 6.2 percent to 7.0 percent at the end of lastyear. Low interest rates and intensified bidding will maintain downwardpressure on cap rates throughout the first half of 2011, encouraging ownersto explore sales. Local investors will leverage price adjustments to expandportfolios, focusing on small properties in the city of Boston and near-insuburbs. Institutions and REITs, which increased activity in the second halfof 2010, will target large, high-quality properties in the suburbs. The prob-ability that more intense bidding for these assets will drive up prices as theyear progresses may compel many of these investors to seek lower-pricedopportunities in other markets.

2011 Market Outlook

2011 NAI Rank: 3, Up 5 Places. Low housing affordability and above-average employment growth pushed Boston to the third position in thisyears NAI.

Employment Forecast: In 2011, employment will expand 2 percent, or by49,000 positions, compared with a 1.5 percent increase nationwide. Lastyear, local employers created 37,500 jobs.

Construction Forecast: Rental stock will grow only 0.3 percent in 2011as 600 units are completed, one of the lowest totals in the past 10 years.Slightly more than 1,000 rentals were delivered in 2010.

Vacancy Forecast: Waning construction and accelerated job growth willsupport a 100 basis point decline in vacancy this year to 4.5 percent. Therelease of pent-up demand generated a 90 basis point decrease in the

vacancy rate during 2010.

Rent Forecast: In 2011, asking rents will climb 3.5 percent to $1,777 permonth, while concessions will burn as effective rents advance 4.5 percentto $1,697 per month.

Investment Forecast: Additional loosening of the capital markets willsupport strong bids among local buyers for small properties in the city ofBoston. Investors seeking stable suburban assets will focus on the MassPike and Route 9 corridors.

Vacancy Decline Persists, Rents to Rise

Following Strong Rebound Last Year

Boston Up 5 Places 2011 Rank: 3 2010 Rank: 8


14/62



-50

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25

50

TotalNonfarmJ

obs(thousands

)


Employment Trends

08 09 10* 11**07


Units(thousands)

Completions Vacancy

Supply and Demand

Vac

ancy

Rate

$30

$40

$50

$60

$70

MedianPriceperUnit

(thousands)

Sales Trends

07 08 09 10*06



Rent Trends

08 09 10* 11**07

0

1

2

3

4

08 09 10* 11**074%

6%

8%

10%

12%

-6%

-3%

0%

3%

6%

-6%

-3%

0%

3%

6%


Aprojected decrease in apartment completions this year will under-

pin a further reduction in vacancy and enable Charlotte propertyoperators to implement more significant rent increases. In a marketcharacterized by periods of substantial development, the slowdown inconstruction and permitting constitute important trends that will influ-ence apartment operations for the next several quarters. Beyond the effectsof minimal completions during 2011, permitting fell to one of the lowestannual totals on record last year, assuring the construction cycle will notaccelerate until late 2012. The gap in the cycle provides owners the oppor-tunity to leverage this years expected improvements in rental demand andtenant turnover into higher rents and reduced concessions on new leases.In areas where vacancy has already fallen well below the marketwide aver-age, such as the Carmel and North Pineville submarkets, rent growth willsignificantly outpace the metrowide average.

After two years of subdued activity, improvingfi

nancing capacity, alarge stock of new properties and prices below pre-recession levels will re-attract investors back to the metro in 2011. Initially, most buyers will con-centrate on assets located within the boundaries formed by interstates 85and 485, along with areas with easy access to major employment nodes. Asthe year progresses, though, activity will shift gradually to more suburbanareas as the recovery in property operations gains momentum. Assets inGaston County and communities along the Interstate 77 and I-85 corridorsnorth of the downtown area may offer considerable upside for investorsskilled in operating suburban, garden-style properties.

2011 Market Outlook

2011 NAI Rank: 28, Up 1 Place. Charlotte remained near the middle ofthe index due to below-average rent growth and high vacancy.

Employment Forecast: Employers will create 17,000 jobs in the metrothis year, a 2.1 percent increase and up from 2010, when 10,300 new hireswere made.

Construction Forecast: Projects totaling 900 units will come online in2011, down from 1,760 units last year.

Vacancy Forecast: A decrease in construction and projected positive netabsorption of 1,800 units will reduce the vacancy rate 100 basis points to7.6 percent this year. Vacancy fell 270 basis points in 2010.

Rent Forecast: Driven by significant rent growth in low-vacancy areassuch as the Harris Boulevard and East Charlotte submarkets, marketwideasking rents will rise 2.7 percent this year to $789 per month. Effectiverents will increase 3.6 percent to $717 per month.

Investment Forecast: Attractive investment opportunities will emerge inseveral potential high-growth areas of the metro as property operationsstrengthen. Complexes that serve the growing employment base at theNorth Carolina Research Park in Kannapolis, for example, will garnerincreased attention.

Reduced Construction Supports Operations,

Draws Investors to Charlotte

CharlotteUp 1 Place 2011 Rank: 28 2010 Rank: 29


15/62




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TotalNonfarmJ

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Vaca

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Rate

$50

$60

$70

$80

$90

MedianPriceperUnit

(thousands)

Sales Trends

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1

2

3

4

08 09 10* 11**074%

5%

6%

7%

8%

-6%

-4%

-2%

0%

2%

-6%

-3%

0%

3%

6%

Operating conditions in the Chicago apartment market will strength-

en considerably this year, building on improvements in vacancy andrents recorded in 2010. Apartment construction will sink to one ofthe lowest levels in the past decade, minimizing competition for tenantsat a time when renewed job growth will accelerate the formation of rentalhouseholds. A 2 percent increase in financial services and professional andbusiness services employment will spur demand for apartments in higher-priced city submarkets such as the Gold Coast and the Loop. As vacancyin the city falls closer to the 5 percent threshold in 2011, rent growth anda more rapid burn-off of concessions will commence in the second half.The performance of properties in inner-ring suburbs also will strengthenthis year, as apartments in these areas draw both residents from outlyingsections of the metro who desire housing closer to workplaces and thoserenters shut out of tighter in-city submarkets.

Driven by low interest rates and the expanded availability of acquisi-tion financing, the investment market will gain momentum in 2011. Buyerswill bid aggressively on high-quality properties in the city andfirst-ring sub-urbs, encouraging an increasing number of owners to list assets. Cap ratesfell across the market in 2010 but will likely remain near their current rangesthrough this year. High-quality assets in city locations often command first-year returns of less than 6 percent, while noncore city assets and propertiesin the suburbs primarily trade from 6.5 percent to 8.0 percent based uponcurrent operations. Distressed listings received considerable attention in2010, but deals involving these assets will diminish as the year progressesand owners facing difficulties begin to restore property operations.

2011 Market Outlook

2011 NAI Rank: 23, Down 3 Places. Chicagos lagging employment mar-ket and modest rent growth dropped the metro three spots in the index.

Employment Forecast: Expansion of the trade and professional and busi-ness services sectors will contribute significantly to the creation of 52,500

jobs this year, a 1.3 percent increase in total employment. Approximately20,000 positions were eliminated in 2010.

Construction Forecast: Only 700 new rentals will come online in 2011,down considerably from the completion of 2,420 units last year.

Vacancy Forecast: The metrowide vacancy rate will decrease 60 basispoints this year to 5.5 percent on resurgent demand and minimal con-struction; vacancy also fell 60 basis points in 2010.

Rent Forecast: Asking rents will rise 2.3 percent to $1,070 per month in2011, following a 1.3 percent increase last year. Concessions will declineto 6.1 percent of asking rents as effective rents climb 3.2 percent to $1,005per month; in 2010, effective rents advanced 2.4 percent.

Investment Forecast: Investors seeking distressed assets will continue tofind opportunities on the southern and western sides of the city. Prospec-tive buyers will require a long-term outlook for rehabilitating properties,restoring stable operations and implementing rent increases.

Resurgent Demand Boosts

Operations, Pressing Prices Upward

Chicago Down 3 Places 2011 Rank: 23 2010 Rank: 20


16/62



Major Development Projects Generate

Jobs, Support Apartment Demand

CincinnatiDown 3 Places 2011 Rank: 33 2010 Rank: 30

Spurred by an economic recovery in the city core and marketwide job

growth, apartment operations in Cincinnati will strengthen further in2011. The first phase of the mixed-use Banks development, located be-tween the Great American Ballpark and Paul Brown Stadium on the OhioRiver, will open in the second quarter of this year, expanding rental inven-tory in the Downtown submarket by 3 percent. Nevertheless, high-paying

job growth in the area will outpace new supply. Metrowide, employers willadd more than 5,600 positions in the professional and business services andeducation and health services sectors this year, boosting Class A demandnear major employment centers. Operations at Class B/C complexes willalso improve as employment gains rise in lower-paying industries. De-velopment of the Broadway Commons Casino, for instance, will generate2,100 construction jobs during 2011 and 2,800 permanent positions by year-end 2012. As a result, vacancy will retreat to a 10-year low in Cincinnati.

Apartment sales activity in the metro will increase this year as localinvestors leave the sidelines and out-of-state syndicates explore new op-portunities. In the lower tiers, buyers will target older REO complexes withturnaround potential. Many of these properties were purchased by out-of-state investors at the height of the market and have since been forecloseddue to weakening operations and banks reluctance to refinance. Two in-vestment strategies are emerging with these deals. Local buyers are pur-chasing at low per-door prices, addressing deferred maintenance issuesand stabilizing the property for long-term revenue potential. Syndicates,however, are re-listing assets shortly after building and occupancy condi-tions improve. Top-tier investment activity remains focused on complexesin the Downtown and Blue Ash/Amberley submarkets due to their highbarriers to entry and historically stable NOIs. Cap rates for assets in pre-mium locations currently average in the mid- to high-6 percent range andcould compress further if institutions and REITs become active.

2011 Market Outlook

2011 NAI Rank: 33, Down 3 Places. Below-average job growth and highhome affordability dropped Cincinnati three positions in this years NAI.

Employment Forecast: Approximately 13,200 jobs will be added to thework force this year, a 1.3 percent increase. In 2010, employers created700 positions.

Construction Forecast: Following the completion of 350 units last year,developers will deliver 700 apartments in 2011.

Vacancy Forecast: Vacancy will tick down 60 basis points this year to 6.3percent. In 2010, the average vacancy rate retreated 110 basis points.

Rent Forecast: Asking rents will increase 1.9 percent during 2011 to $715per month, and effective rents will climb 2.4 percent to $683 per month.

Investment Forecast: Financing standards in Cincinnati remain slightlymore stringent than in some other markets, creating opportunities forcash-heavy investors to purchase quality assets in a relatively stable met-ro without competing with highly leveraged buyers.

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6%

During 2011, healthy hiring in the local professional and business ser-

vices sector will drive Class A vacancies in Cleveland below those inlower-tier properties for the first time in nearly a decade. Last year,white-collar payrolls expanded at the fastest pace since 1999, and continuedgains this year will fuel stronger Class A leasing activity. This trend willhelp top-tier owners regain control over rents, especially in upscale areaslike the Beachwood and Strongsville/Berea submarkets, where vacancieswill settle below 3 percent in 2011. The recovery of Class B/C operationswill continue to lag until lower-paying industries post several consecutivequarters of sustainable growth and unemployment levels retract. Close-inareas, including the East Cleveland submarket, will record metro-high va-cancies as a result, hindering owners ability raise rents this year.

With low interest rates improving investor motivation in Cleveland,many owners who held assets through the downturn will begin to divest,

spurring increased dealfl

ow. Sales involving performing, higher-end as-sets will account for a larger share of closings, though competition fromregional, high-net-worth buyers will remain fierce. The availability of up-scale, stabilized assets will fall short of buyer demand, potentially com-pressing cap rates for best-in-class properties below their current average inthe low- to mid-7 percent range. Distressed-asset sales will also play a roleas local buyers with extended outlooks target underperforming Class B/Cproperties, despite some near-term challenges. Attractive per-unit pricesfor assets in hard-hit areas such as Euclid may provide investors with anopportunity to achieve healthy long-term returns once operations stabilize.

2011 Market Outlook

2011 NAI Rank: 40, Down 8 Places. Cleveland fell eight spots in the in-dex due to below-average rent growth, slowing payroll expansion andhigh home affordability.

Employment Forecast: Employers will add 11,000 jobs this year, a 1.1percent increase. During 2010, the work force grew by 17,000 positions,marking the end of four consecutive years of payroll contractions.

Construction Forecast: After 290 units were added to inventory last year,fewer than 80 units will come online in 2011.

Vacancy Forecast: The vacancy rate in Cleveland will improve 40 basis

points this year to 5.6 percent, after dropping 90 basis points in 2010.

Rent Forecast: In 2011, asking rents will tick up 1.7 percent to $733 permonth. Effective rents will appreciate 2.2 percent to $699 per month,pulling concessions below the 10-year average.

Investment Forecast: This year, cap rates for stabilized Class B assets willaverage in the low- to high-8 percent range, while fully occupied Class Cproperties will trade with initial yields between 9 percent and 10 percent,providing healthy returns for buyers.

Cleveland Apartment Market

Tightens on Strength of Class A Sector

Cleveland Down 8 Places 2011 Rank: 40 2010 Rank: 32


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Columbus Apartment Investments to

Attract Yield-Seeking Buyers in 2011

ColumbusDown 6 Places 2011 Rank: 37 2010 Rank: 31

-40

-20

0

20

40

TotalNonfarmJ

obs(thousands

)


Employment Trends

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Units(thousands)

Completions Vacancy

Supply and Demand

Vac

ancy

Rate

$20

$30

$40

$50

$60

MedianPriceperUnit

(thousands)

Sales Trends

07 08 09 10*06



Rent Trends

08 09 10* 11**07

0

0.4

0.8

1.2

1.6

08 09 10* 11**076%

7%

8%

9%

10%

-4%

-2%

0%

2%

4%

-6%

-3%

0%

3%

6%

White-collar employment expansion will boost top-tier apartment

demand in Columbus early this year, while lagging blue-collar jobgains will limit improvement among Class B/C properties untillate 2011. The professional and business services and financial services sec-tors will create nearly 6,000 jobs, reclaiming half the positions lost duringthe recession. Additions at finance companies, including the Westervilleoffice of Chase, are particularly encouraging, considering the financial ser-vices sector entered the recession early due to the credit crisis. While lower-tier conditions will not improve significantly until the second half, some ar-eas, including Hilliard, will begin to recover sooner. Developers will breakground in 2011 on the Hollywood Casino in the Hilliard submarket, gen-erating 3,500 construction jobs. When completed in 2012, the project willcreate 2,000 permanent positions, providing long-term demand for localapartment operators.

As cap rates compress in major metros during thefi

rst half of 2011,yield-seeking buyers will gravitate toward the relative safety of the Colum-bus apartment market to take advantage of initial returns that meet theirinvestment goals. In addition to traditional sales, some buyers will targethigh-vacancy, value-add opportunities as prices for these assets dip to amarket-clearing level. Healthy job growth and a slow-moving single-familyhousing market will enable owners to improve occupancy more quickly thisyear. Stabilized Class B/C properties, meanwhile, will trade in the mid- tohigh-9 percent range. Out-of-state investors interested in these complexeswill find opportunities in the Northeast and Southeast submarkets. Grow-ing apartment demand and limited competition from new supply in theseareas provide long-term revenue potential for owners.

2011 Market Outlook

2011 NAI Rank: 37, Down 6 Places. Below-average employment andrent growth pushed down Columbus six places in the NAI.

Employment Forecast: Employers will increase payrolls by 15,000 posi-tions this year, or 1.7 percent. In 2010, only 500 jobs were created.

Construction Forecast: After nearly 900 apartments came online lastyear, development will slow to 785 units in 2011, expanding marketwideinventory by just 0.6 percent.

Vacancy Forecast: Vacancy will decline 70 basis points this year to 8.3percent on positive net absorption of more than 1,550 units. In 2010, va-cancy fell 20 basis points.

Rent Forecast: Marketwide asking rents will climb 1.8 percent in 2011to $675 per month, and effective rents will spike 2.4 percent to $636 permonth. Last year, asking and effective rents rose 0.6 percent and 1.3 per-cent, respectively.

Investment Forecast: Distressed and REO listings will become avail-able over the next several months as banks clear assets from their books.Lower per-door prices for these properties will interest investors with apenchant for improving operations and realizing upside potential.



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-100

-50

0

50

100

TotalNonfarmJ

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Employment Trends

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Supply and Demand

Vaca

ncy

Rate

$30

$35

$40

$45

$50


Sales Trends

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Rent Trends

08 09 10* 11**07

0

5

10

15

20

08 09 10* 11**074%

6%

8%

10%

12%

-4%

-2%

0%

2%

4%

-6%

-3%

0%

3%

6%

The apartment market recovery exhibited greater strength in the Dal-

las side of the Metroplex last year but will spread throughout themarket during 2011 as job growth materializes across multiple sec-tors. In 2010, employment gains in the professional and business servicesand education and health services sectors disproportionately benefited Dal-las apartment complexes. While these vital segments will each add morethan 10,000 positions this year, manufacturers and government employers,industries particularly important to Fort Worth apartment operators, will

join them. As a result, the vacancy gap between the two cities will narrowand rent growth will accelerate across the Metroplex. Supply-side pressurewill continue to abate and center in Dallas suburbs. The 4,200 apartmentsthat come online this year will fall far short of the demand generated fromthe estimated 50,000 new households that will form in the Metroplex byyear end, supporting net absorption well above the five-year average.

A wide range of buyers are attracted to the Dallas/Fort Worth apartmentmarket, which should buoy deal flow again this year. Private, out-of-state syn-dicates, in particular, will boost their presence to acquire smaller properties. Af-ter stabilizing and financing these complexes, these buyers will redeploy thecapital to create portfolios. Local investors with a penchant for improving op-erations and doing light renovations can generate upside by purchasing ClassC or lower-end Class B properties in blue-collar areas, where job growth willaccelerate this year. REITs and institutions will also remain active, targeting re-cently stabilized properties completed immediately before the recession. In 2008and 2009, builders delivered nearly 28,000 apartments in large complexes, manyof which now qualify for agency financing. Cap rates for these deals have fallento the low-6 percent range, 50 basis points below the previous cyclical low.

2011 Market Outlook

2011 NAI Rank: 18, Up 5 Places. Dallas/Fort Worth jumped five spots inthe index behind strong household formation and limited construction.

Employment Forecast: Employers will add 77,000 positions in theMetroplex this year as every sector expands. The pace of job growth willreach 2.7 percent, after payrolls increased 1.2 percent during 2010.

Construction Forecast: Only 4,200 apartments will come online this year,a minor 0.7 percent rise to stock. Household growth of 2.3 percent will faroutpace the number of new single- and multifamily homes built in 2011.

Vacancy Forecast: Average vacancy will dip to 6.7 percent by year end,80 basis points below the rate at the beginning of the year. In 2010, va-cancy plummeted 220 basis points.

Rent Forecast: Asking rents will climb 3.1 percent this year to $804 permonth as effective rents jump 3.4 percent to $722 per month. Leasingincentives will fall by two days of free rent.

Investment Forecast: The markets large inventory provides investorswith plenty of distressed opportunities. At the end of last year, over $850million of apartment properties were in some level of distress. Improv-ing fundamentals and renewed lender enthusiasm to clear books willreduce that figure significantly by year-end 2011.

Household Formation Outpaces

Construction, Firms Operating Conditions

Dallas/Fort Worth Up 5 Places 2011 Rank: 18 2010 Rank: 23


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Apartment Operators Regain Pricing

Power as Vacancy Recedes to 10-Year Low

DenverUp 7 Places 2011 Rank: 14 2010 Rank: 21

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MedianPriceperUnit

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1

2

3

4

08 09 10* 11**072%

4%

6%

8%

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0%

3%

6%

-6%

-3%

0%

3%

6%

By year-end 2011, apartment vacancy in Denver will slip to the lowest

level in a decade, allowing owners to raise rents and scale back conces-sions. The local apartment market recovery began in 2010, fueled bypent-up renter demand for close-in units near employment hubs and light-railstations. This year, however, accelerating job growth and reduced construc-tion should begin to spread improvements throughout the metro. Ownersin the Denver-Downtown, Denver-Central, Denver-North and Lakewood-South submarkets, where vacancy already falls below 5 percent, will leveragetighter conditions by trimming concessions at an above-average pace. Op-erations in hard-hit areas like Aurora will also improve, with vacancy ratesdeclining from the peak levels reached in late 2009. A significant reduction inleasing incentives in these areas will not occur until the second half of 2011,though, when job creation intensifies in typically lower-paying sectors, in-cluding leisure and hospitality and trade, transportation and utilities.

Investor demand for distressed listings remains strong, but the short-age of available supply is encouraging more investors to bid on perform-ing assets in traditionally sturdy locations. The limited number of distressedproperties on the market will also curb price discounting as fierce competi-tion for short sales and REO listings pushes values to well above initial listprices. Only a few newer, higher-quality distressed properties traded recent-ly, and banks will wait for more significant improvement in occupancy andrents to dispose of these reclaimed assets. As unsatisfied demand for thesedeals migrates to the traditional apartment investment market, cap ratesfor strong-performing properties, particularly those in close-in locations orproximate to public transportation, have begun to decline. The most sought-after high-quality assets will close at cap rates in the 6 percent range earlythis year, considerably lower than the marketwide average of 7.5 percent.

2011 Market Outlook

2011 NAI Rank: 14, Up 7 Places. Tight vacancy and healthy employmentgains helped push up Denver seven places in the 2011 ranking.

Employment Forecast: Denver payrolls will rise by 24,000 positions in2011, a 2 percent gain. Growth resumed in 2010 after two years of con-traction, with local employment expanding by 0.5 percent.

Construction Forecast: Only 800 units are slated for completion in 2011,down from 2,550 units last year.

Vacancy Forecast: Reduced construction and accelerating job growthwill support an 80 basis point decrease in vacancy to 5 percent this year.During 2010, vacancy declined 220 basis points.

Rent Forecast: Asking rents will rise 3.1 percent in 2011 to $906 permonth, while effective rents will climb 4.1 percent to $816 per month.

Investment Forecast: With investors focusing on distressed deals andhigh-

Documents

2011 National Apartment Report by Markus & Millichap