We are perfectly pOSItIONeD tO kNOW WheN the

hOSpItalIty SectOr WakeS up.

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ISSUE TWO 2009

survival of the fittest

who do we think we are?

TOPmarkETS TO WaTch

Developing Your Creative Edge innovation wins the day

“IT’S NOT THE STRONGEST OF THE SPECIES

THAT SURVIVES, NOR THE MOST INTELLIGENT.

IT’S THE ONE THAT’S THE MOST ADAPTABLE

TO CHANGE.” – CHARLES DARWIN

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In changethere is power.

Contents

04 Overview A message from Kevin Maggiacomo.

06 Fast Facts Sperry Van Ness has based its success on 10 key principles.

08 Industry News Everything you need to know about what’s happening in the real estate market.

12 Top Markets to Watch An exclusive market sector report compiled by Sperry Van Ness.

UPFRONT

20 Survival of the Fittest The sooner the property market reaches a stage of acceptance, the better.

24 Bargaining at the Office Excess offi ce space has created a climate of bargaining in the market.

26 After Capitalism Will capitalism adapt to its most recent shock and what new world order awaits us?

31 My Forecast The fi ve National Directors of Sperry Van Ness take us through developments in their sectors.

36 Innovation in Turbulent Times How to develop your creative edge and embrace innovation as a strategy to suceed.

43 Jack and Suzy Welch on Winning Internationally acclaimed motivational speakers offer solid advice on the dynamics of teamwork.

FEATURES

12

26

36

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44 Market Share We look at Sperry Van Ness Advisors countrywide who have managed to own the market in their areas.

46 The Big Picture Foreclosures and auctions, a common daily occurence where emotions can run high.

48 Division Focus The Sperry Van Ness Asset Recovery Team is a highly specialized team that is standing by to help extract maximum value from distressed assets.

52 A Charter for Success Discover how the corporate world can contribute to the building of a nation through education.

56 Off the Wall Tired of hearing about ‘green shoots’? So is Advisor Terry Yormark.

REGULARS

3

The paper used in the printing of this publication is from a renewable source. The wood and paper products industry in the US plants 1.7

million new trees daily as part of this process.The inks used to print these pages are non-

hazardous, contain no heavy metals and are not flammable. They contain renewable resources derived from pine tree pulp, vegetable oil and

soybean oil. The Enviroink qualifying logo used here conforms to regulations set by the Federal

Trade Commission (FTC).

The Advisor magazine is published on behalf of Sperry Van Ness by

SchreiberFord Publications London • Cape Town

www.sfpublications.com

The Advisor magazine is the official publication of Sperry Van Ness. 5,000

copies are sent nationally to Sperry Van Ness Advisors and key clients. The views

expressed in articles are those of the authors and do not necessarily reflect

those of Sperry Van Ness. The authors reserve copyright in their works as

indicated on these articles.No part of this publication may be

reproduced or transmitted in any form, electronic or mechanical, without prior

permission from Sperry Van Ness.

Views, opinions and manuscripts to be considered for publication can be sent to

Matt Fitch at matt.fitch@svn.com

Sperry Van Ness International

PRESIDENTKevin Maggiacomo

VICE-PRESIDENT OF OPERATIONSMatthew Fitch

Sperry Van Ness Corporate Office18881 Von Karman, Suite 800

Irvine, CA 92612Tel. 888 311 0605 (Toll free)

www.svn.com

52

Overview

DURING TOUGH TIMES there are those who sit back helplessly waiting for someone to bail them out and there are those who embrace the chaos as necessary for change, knowing that whatever the outcome, human nature will inevitably find a unique solution and change the way we see the world, and do business, forever. Such is human nature, always seeking the positive and continually innovating to ensure the survival of the fittest. Fittest used to mean “biggest”, now it’s “smarter” that wins the day. That’s why, in this second issue of The Advisor, we have focused on innovation as a recurring theme. We believe that innovation is a crucial factor in running a business, and indeed, one’s life. Our pledge to you of being Your Creative Edge is not just an empty slogan but one that has been successfully implemented by our Advisors for the last 22 years. On page 44 we look at 10 Sperry Van Ness Advisors who have bucked the current downward trends in their respective markets and over the last 12 months managed to achieve market dominance within

their cities and regions. This was not done through ruthless tactics or selfish acts but through an understanding of our client’s needs – wanting the best deal for themselves. Some of these Advisors achieved this alone, some through open collaboration and others still by narrowing their focus to a single client. This bears testimony to a company philosophy that stays humble and focused on the market, rather than the competition.

With highly volatile global markets and even the glimmer of some distant relief now in sight the companies that emerge stronger and more profitable will be the ones who have taken the lessons of this recession to heart. This means understanding something about the human condition. Along with food and health, shelter is a primary concern for people everywhere. Whether it be a multi-family apartment, a hardworking retail space or a trophy building trumpeting the glories of a Fortune 500 company there will always be an unrelenting demand for housing and places of business. As well as keeping an eye on the facts, figures and statistics of this market, a willingness to innovate also allows us to find that creative strategy which closes the deal and keeps all involved happy.

The key ingredient to some of the most successful companies in the world has been the pairing of a creative with an insightful analyst. This is found in fashion, the automotive industry, technology and commercial property. Allow us to become Your Creative Edge.

4

Kevin MaggiacomoPresident, Sperry Van Ness

Join us!We have recently adopted online social media throughout our enterprise. As one of the nation’s largest commercial real estate firms we recognize the importance of clear, effective and constant communication across all our divisions and between our Advisors and clients. We have therefore mandated that Sperry Van Ness integrate a 100% adoption of social media into our business model by Q2 of 2010. The reason for this mandate is simple... every segment of our clientele has embraced social media, and our competitors are all but invisible making this a tremendous opportunity.

We have always been an innovative company and believe in leading by example. You won’t find many commercial real estate CEOs who have embraced social media, but Kevin Maggiacomo has a blog, and frequently uses Twitter to update his various constituencies. Most of his peers find any number of excuses to avoid blogging and tweeting, but when he saw Sperry Van Ness clients were rapidly adopting social media as a valid communications channel, he felt it was incumbent to join in the dialogue.

We believe that commercial real estate clients want less marketing hype and more authentic and transparent communication from their service providers. Bottom line... our clients want unfettered access to their advisors across multiple mediums and we’re going to give them exactly what they want! If you would like to learn more about Sperry Van Ness we won’t force you to call a media representative. You can simply visit our website at www.svn.com, check out Maggiacomo’s blog at www.maggiacomoblog.com or follow him on Twitter at www.twitter.com/maggiacomo. We also have a Facebook presence where you can share your comments and photographs as well as a company blog: http://svninternational.wordpress.com/

Join us online and discover how our unique formula of collaboration and improvization has grown Sperry Van Ness into one of the largest and most valuable resources you can find when buying or selling your property.

7

HOPEis not a strategy

WE LIKE TO KEEP OUR FOCUS ON THE FACTS.

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IT’S ALL ABOUT

At Sperry Van Ness our agents pledge to honor ten Core Covenants. These aim to create and nurture a positive working environment and to encourage team work. It is these benefi ts which ultimately fl ow to our clients and which are embedded in every deal we do.

PRINCIPLE

y, mental, -

r.

I place my client’s interest above my own and proactively cooperate with all brokers and agents.

I show respect and support to all.

I epitomize the first-class reputation and image of Sperry Van Ness.

I consistently provide superiorquality and service to my clients.

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FAST FACTS

y, mental, -

r.

I value the importance of family, mental, spiritual and physical health, and involvement within my community in the support of a balanced and successful career.

I quickly resolve conflicts, positively and effectively.

I am individually responsible for achieving my own potential.

I honor my commitments.

I dominate my market area and promote my speciality within the firm. My thoughts, actions and energies are focused on the positive and possible.

I create amazing benefits for my clients, colleagues, and community.

I dominate my market area and

7

(All Property Types) – Source RCA

Name Volume #Properties (in $bil) 1 Harrah’s Entertainment $27.3 302 JP Morgan $1.6 153 Macquarie Group $1.5 404 Regency Centers $1.2 455 Developers Diversified $1.2 226 Prudential Real Estate $1.1 197 Deutsche Bank $0.9 28 Maguire Partners $0.9 79 Broadway Partners $0.8 410 Morgan Stanley $0.8 9

(All Property Types) – Source RCA Name Volume #Properties (in $bil) 1 Texas Pacific Group $27.3 302 Apollo Investment Corp $27.3 303 Inland Real Esate $1.1 294 CB Richard Ellis Group $1.0 165 First Washington Realty $1.0 346 CalPERS $1.0 347 Ruffin Cos $0.8 18 KBS Realty Advisors $0.7 79 DRA Advisors $0.6 110 Feil Organization $0.6 1

▲10 MOST ACTIVE BUYERS IN THE US

8

NEWS Everything you need to know about what’s happening in the market

10 MOST ACTIVE SELLERS IN THE US

Apartment vacancies still upDistress accumulates, resolutions are elusiveVacancy continues to rise despite what has traditionally been a strong leasing period for apartment properties in the third quarter of the calendar year. The national vacancy rate rose to 7.8%, up 10 basis points from the second quarter of 2009. Given that we started this current downturn with relatively high vacancies (above 6% through 2008) and now that we’ve breached a national vacancy level that rep-resents a 23 year high, landlords have far less wiggle room to simply offer concessions (lowering effective rents): they now need to lower asking rents as well in a fierce battle for tenants. The issue is that the end is not yet in sight for the current downturn; even if the technical recession may be over (as the Federal Reserve seems to be implying), labor markets tend to recover with some lag, and it is only when labor markets stabilize and recover that we will see a ramp-up in household formation that represents the greatest driver for rental apartments. It seems likely that apartments will have to endure a few more quarters of distress, lower rents and higher vacancies. – Reis

Office distress still climbingMore sellers than buyers still hamper the marketThird quarter results, though dismal, are not inconsistent with general projections over the past three quarters. It was anticipated that 2009 would be one of the most challenging years on record, given the depth and magnitude of the current crisis. The remainder of new properties coming online in the fourth quarter will come online largely vacant, adding further pressure to landlords. On average, office buildings that opened their doors in the first half of the year came online over 50% vacant; this number rose to close to 60% in the third quarter. As five year leases signed during the peak years of 2005

to 2007 expire from 2010 to 2012, in-place income will continue to erode as signing rents fall. Positive rent growth is not expected to resume until late 2012. In the last downturn, it took seven years for the national office market to regain peak effective rent levels achieved in the first quarter of 2001. We have to look back to 1995 to observe a similar time period when landlords were under such pressure to retain existing tenants or attract new ones.– Reis

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BOOKS

The New York Observer reports: In April 2007, during those blindered days of economic bluster, The Observer published an article naming New York’s 10 most expensive towers, according to prominent real estate professionals. They agreed on the most valuable single building: the GM Building. That rocket of marble and black glass, considered then and now the most coveted skyscraper in Manhattan, if not the country, was, said one, “worth $4 billion–plus.”

Sure! Why not? The building sits at that delicious juncture of midtown and the Upper East Side, at the southeast corner of Central Park, above the Apple Store, and across from the Plaza and Peter Schjeldahl’s favorite piece of New York public art: Augustus Saint-Gaudens’ statue of William Tecumseh Sherman astride a horse.

The GM Building, based upon its reported income, is today worth between $1.9 billion and $2.6 billion, according to Dan Fasulo, managing director of Real Capital Analytics. Such is the economic reality for Manhattan’s top office trophies.

Since the peak years of 2007, the trophies’ values have fallen by somewhere between 25 and 60%. Emphasis on modifying words like “somewhere between,” “probably” and “about”.

So what are the other nine buildings included in our 2007 survey now worth?

The 2007 most expensive list included, along with the GM Building: 9 West 57th Street; Rockefeller Center; 200 Park Avenue; the Seagram Building; 4 Times Square; One Bryant Park; 245 Park Avenue; 277 Park Avenue; and the one non-midtown entry, 7 World Trade Center.

Based on interviews with real estate professionals, their values have declined anywhere between 25 and 60%. So, Rockefeller Center, guesstimated to be worth $8 billion in 2007, might be worth between $6 billion and $3.2 billion. 277 Park, then valued at about $2 billion, would sell for between $800 million and $1.5 billion. And The Seagram Building, in 2007 valued at around $1.6 billion, might today sell for between $640 million and $1.2 billion.

Upon what are we basing these wildly irresponsible estimations? That, we’re afraid, entails a discussion of what the pros refer to as “price discovery”, a process that involves broadly comparing the prices of recently sold buildings (of which there are, frankly, very few, given the economy and the ongoing dearth of credit).– RCA / The New York Observer

NEWS

GE

TTY

IMA

GE

S

Industrial Investor compositionLocal and private buyers dominate the sectorSmall deal sizes and a renewed emphasis on relationship banking currently favor local, largely private buyers. Acting within their own metro area, local buyers have gained market share – from a low of 19% to 44% – while national-platform investors have shrunk from 80% at the peak to 56% in Q2. Cross-border buyers, never aggressive in the sector, have stepped away entirely from industrial. National investors are expected to regain market share in coming months as more distressed assets become available, although industrial has the lowest volume of troubled assets. However, the $448m portfolio sale by a pressured ProLogis to a JV of private and institutional capital signals that industrial may prove more attractive to distress-targeted capital sooner than other sectors, especially if prices fall faster.

No capital group has dominated industrial, although private buyers typically have had the largest market share, they have never exceeded 50% of acquisition activity. At the peak in 2007, their investment of $20b accounted for 40% of activity, while institutions – which have been able to grab larger market share with lower fewer industrial acquisitions than in other property types – captured 20% with just $10b in investment. This year, institutions have invested $935m in the sector and achieved a 23% market share. Industrial is also the only property type where institutional market share has grown since the peak. – RCA

Re-imagine! Business Excellence in a Disruptive Age by Tom Peters. In 2003 Tom teamed up with publisher Dorling Kindersley to present a departure in business books. Visually exciting and compelling to read, Re-imagine! presents reasons why cool business is not optional. More than just a how-to book for the 21st century, Re-imagine! is a call to arms – a passionate wake-up call for the business world, educators, and society as a whole. Focusing on how the business climate has changed, this inspirational book outlines how the new world of business works, explores radical ways of overcoming outdated, traditional company values, and embraces an aggressive strategy that empowers talent and brand-driven organizations where everyone has a voice.

The 10 most expensive buildings, revisited

10

NEWS

Deutsche Bank approves $600m+ sale of worldwide Plaza TowerAn investment group led by George Comfort & Sons and RCG Longview has sweet talked its way back into completing a $600 million- plus deal with Deutsche Bank for the Worldwide Plaza office building.

Rather than creating a joint venture, Deutsche Bank will now simply provide a $470 million mortgage with the Comfort team, which will put up about $135 million in equity, sources told The Post.

The price comes to roughly $375 a square foot for the 1.6 million square foot tower. As part of the deal, Deutsche Bank will write

down the original $1.014 billion mortgage it held on the property when Macklowe Properties bought the building in 2007.

The bank took possession of the tower after the Macklowe empire began to collapse with the market downturn. Macklowe has “cooperated fully”, sources said.

The Comfort group was originally set to buy the 47-story building at 825 Eighth Ave. through a joint venture with Deutsche Bank, but that deal was nixed by the bank’s board last month. Competing bidders were notified by phone and e-mail that investment marketers at Eastdil Secured were no longer accepting offers on the property.

One bidder, who asked to remain anonymous, wasn’t too upset about missing out, though. “We’re just as happy because the rents have gone the wrong way, so I wish them luck with it,” this person said.

Earlier, the sale to Comfort had been thrown into doubt after Deutsche Bank’s board refused to approve the deal on worries about retaining an interest in the tower.

However, Comfort President, Peter Duncan, refused to accept the return of a $50 million deposit and publicly went on the offensive, saying his team was ready to close on the deal.

Developer Douglas Durst, who said he withdrew his bid of $350 a square foot several weeks before, said he believes Duncan got the deal by playing hardball. “What probably happened is they said they were going to sue… and make sure they never got the building sold,” he said.

Added another source: “The bank didn’t do it because he was nice, but because it was in both their interests.” The building was

one of seven Manhattan office buildings that Macklowe bought from the Blackstone Group when the private-equity giant paid $38 billion for Sam Zell’s Equity Office Properties. Macklowe defaulted on $7 billion in Deutsche Bank mortgages when the market tanked and lost all the EOP properties plus parts of its legacy portfolio, including the GM Building, which had been used as collateral. – Reis / The New York Post / Lois Weiss

Emerging markets Still driving global activityThe concept of “decoupling” – that emerging markets can stand on their own – may still have some validity. Consider this: Property acquisitions in emerging markets accounted for an astounding 60% of global activity in Q2. China’s importance to the global marketplace is clear throughout 2009 as property acquisitions there have dominated global statistics, but it is not alone. The other BRIC countries are showing significant activity. Russia has already seen closed and in contract sales in Q3 surpass Q1 and Q2 totals combined. Brazil and India are also showing positive momentum, although far below that of Russia and China. – RCA

No money down?This approach no longer worksIn the universe of late-night TV infomercials, Carleton H Sheets once reigned supreme. Sheets offered the average Joe a piece of the action. When property values soared in the late 1990s, so did the frequency of Sheets’ infomercials. For millions of middle-Americans sitting in their living rooms, he embodied the bubble as much as Merrill Lynch did for a more elite audience. Today, Sheets presides over some holdings of his own that appear to be troubled, his late-night profile has dimmed, and the world that he so avidly promoted – easy real estate riches – is in shambles. – The New York Times

11

Plenty of room at the inn Hotels the fastest growing segment of distress globallyThe global investment market for hotel property continued to plummet in the first half of 2009. Transaction volume was down 78% year over year to $3.1b, and the number of trades fell by a similar percentage. Portfolio activity, which dominated the sector in 2007, is almost non-existent. Of the transactions still taking place, the deal size remains small with the largest single asset or portfolio fetching just $134m. Investors are also shunning assets in secondary markets and most significant sales involved trophy assets in primary markets. New York City was the most active market in H1’09, but with few trades globally, many markets made the top 15 list with just one or two significant transactions. Hotels are the fastest growing segment of distress in the global commercial property markets, with over $15.0b worth of assets (1,200+ properties) identified as troubled. Another $7.0b is included in the casino-hotel niche. Portfolios such as Extended Stay (US) and Queens Moat Houses (UK) have gone into receivership. The economic slowdown has also sent shockwaves through the resort hotel niche, with over $2.0b worth of assets in distress. It remains difficult to determine how much hotel values have fallen given the lack of data points in the marketplace. One recent example, the Sungate Port Royal Hotel in Turkey, sold for a 50% discount to its 2007 acquisition cost. As more distressed situations become resolved, investors will have a better idea where true values reside. – RCA

China’s booming (for now)Chinese commercial property transactions outperform the UK and USPropertyWire reports: Not only is the Chinese residential property market soaring, but now the latest figures show that its commercial real estate sector is performing above expectations too. China outpaced the US and the UK combined in commercial property sales in the first half of the year, according to Real Capital Analytics.

China’s transactions totalled US$31.2 billion following a surge in sales of land development rights after the government eased credit terms, according to RCA. US sales were US$16.2 billion in the first half, according to the report, and the UK’s were US$13.7 billion.

‘There’s no question that China will be a more significant player on the world stage for commercial property transactions versus other Western countries,’ said Dan Fasulo, Real Capital’s managing director. But he questioned whether such strong growth was sustainable.

About US$62.8 billion of commercial properties were sold during the second quarter of 2009, some 17% more than in the previous three months and the first increase in 18 months, the report from the New York based research company found.

Analysts said that sales growth is the first step toward a global recovery. The first half’s total sales were US$116.4 billion, some

65% less than a year earlier and US$500 billion below the market’s peak in the first half of 2007. They said that countries that receive the most financial support from their governments will recover faster. For example, in China, investors took advantage of looser borrowing terms to buy the rights to develop buildings on state-owned land, Fasulo explained. – RCA / Property Wire

NEWS

While credit remains inaccessible for many commercial real estate investors, Fannie Mae and Freddie Mac fi nanc-

ing for construction projects and the replacement of maturing debt has been a lifeline for the apart-ment industry. Nonetheless, transaction volume in this sector has fallen in the last year, a casualty of the slow process of price adjustment and investors’ anticipation of lucrative distressed sales. In assessing the range of investment opportunities, market participants are now drawn to the apart-ment sector’s healthier credit supply and medium-term demographic trends that will support gains in fundamentals once the job market stabilizes. In previous commercial property slumps, over-building was among the chief culprits in the rapid decline of apartment and commercial property fundamentals. Given a paucity of commercial construction activity during the most recent mar-ket cycle, inventory additions have not been as important a factor in pressing vacancy rates. The apartment sector has been the exception. While apartment building has slowed over the last year, the repurposing of condominium properties for in-troduction into the apartment market has combined with the shadow inventories of condominiums-for-rent to compromise apartment performance.

Vacancy rates in Miami, Fort Lauderdale, Phoe-nix, and Las Vegas have spiked as a result of indirect supply shocks. Investors have fl ed many of these markets on account of their struggling economies, opening opportunities for investors ready to con-tend with a very challenging fundamentals outlook in return for long-term price appreciation.

Aside from supply-side issues facing some mar-kets, the short-term challenges for multifamily in-vestors and operators include an absence of new jobs for recent graduates and other young people who account for a large share of renter demand. Thus a keystone of rental demand has softened, resulting in lower apartment occupancy and rental rates.

In general, and as the downturn has spilled over into the broader economy, the contraction in the la-bor market slowed the rate of household formation. This trend is expected to reverse itself only after the resumption of meaningful job growth. Looking past these immediate issues, apartments will ben-efi t from important demographic trends, including growth in the number of adult echo boomers.

Apartment transaction volume remains low but has improved from its early 2009 lows. While domestic and foreign buyers have focused their at-tention on coastal gateway and 24-hour markets, contrarian investors prepared for an extended

period of weak fundamen-tals will also fi nd opportuni-ties in the Sunbelt markets decimated by burst hous-ing bubbles. The long-term population and employment outlook in markets such as Phoenix and Las Vegas are favorable. Current distress and a limited number of in-vestors will afford outsized returns for patient buyers.

12

Austin

Home to the state capitol, a resilient technology sector and the 50,000-student central campus of the University of Texas, the Austin economy is expected to be one of the strongest in the nation over the next year. June brought an uptick in the unemployment rate, but at 7.1%, unemployment is lower than in the other major Texas markets and well below the national average of nearly 10%. In the apartment sector, landlords will benefi t from an early return to job growth and from the countercyclical trend of rising university enrollment during economic contractions. In the near term, however, oversupply is a growing concern. Construction is expected to introduce more than 12,000 units to the market in all of 2009, a pipeline nearly as large as that of Houston, which has a population 3.5 times larger. The vacancy rate in Austin has eclipsed 10% and is expected to climb as supply outpaces demand. In the intermediate term, investors should monitor progress on the startling number of high-rise residential condominiums under development in the Central Business District. While these projects are largely pre-sold, experience in Las Vegas, Florida and other centers of condominium development has demonstrated that buyers may decide to forfeit deposits and break presale agreements rather than close. There is the potential for condos to make their way into the rental supply, further weakening the ability of apartment landlords to drive rent growth. Over the longer term, Austin offers consistent growth that will absorb all this new supply and more. The metro welcomes 50,000 to 60,000 new residents each year, creating approximately 10,000 renter households annually.

Denver

A recent increase in development activity in Denver has pushed vacancy rates higher and eroded operating fundmentals. More than 5,000 new units have either come on line or are slated for completion in 2009, which is roughly 2.5 times the annual delivery rate of the previous four years. The surge in construction coincides with increasing joblessness that is curtailing demand for rental housing. The unemployment rate in the metro area climbed to 8% in July from 5% a year earlier. At least for the time being, the Denver metro area is losing jobs at a rate of more than 60,000 per year. Effects of declining demand and increasing supply have been disproportionately felt in newer properties charging the highest rents. Market-wide, rental rates have fallen in line with the national drop of about 3.5% from a year ago, but effective rent for Denver’s high-end stock has come down more than 5% in that period. Upper-tier apartments may be feeling the brunt of competition from single-family homes available for rent. Denver led the nation in home foreclosures for several quarters in 2008, although the number of homes foreclosed in the fi rst half of 2009 marked an 18% decline from the same period a year earlier, according to the State of Colorado. Going forward, investors should factor in further declines in market fundamentals,

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Apartment Property Investment Outlook

TOP MARKETS TO WATCHThe Sperry Van Ness Sector Report

although occupancy and rent may show greater resiliency in middle and lower rental tier units. In general, underwriting in 2006 and 2007 make properties developed in those years more likely to encounter distress as loans mature. That tendency, combined with Denver’s recent softening in newer high-end inventory will offer a range of distressed investment opportunities.

13

Houston

With marginal growth in effective rents, Houston has exhibited remarkable strength in a year when most U.S. cities are struggling with large drops in property fundamentals. Driven by the global energy markets as much as the national economy, this Gulf Coast metro enjoyed net job growth throughout 2008, dipping into negative territory beginning in February 2009. This sprawling home to 5.6 million residents has experienced a milder economic contraction so far during the recession than its peers in Texas and the nation. Non-farm employment fell 2.7% in June from a year earlier, far healthier than the national decline of 4.2%. The unemployment rate stood at 8.4% in July compared with 5.1% a year ago. The metro area’s recent employment losses have contributed to a slight increase in apartment vacancy, which is up roughly 200 basis points from a year ago to about 10%. A massive injection of new supply is in the development pipeline and will add nearly 15,000 units by early 2010, however, that increase may compel landlords in affected submarkets to begin lowering effective rent. In the face of fl at fundamentals, cap rates have climbed to an average of 7.5%. Yet the energy sector stands ready to rally the local job market and economy when prices for oil, gas and related products recovers from this year’s price slump. In the meantime, the local employment base benefi ts from diverse drivers that include the Port of Houston and the Texas Medical Center. The latter is the world’s largest medical district, a cluster of 46 medical-related institutions that collectively employ more than 73,000 Houstonians.

Raleigh-Durham

Anchored by leading academic institutions, government, healthcare, and a diversity of high technology fi rms, Raleigh-Durham has been among the fastest growing markets over the last decade. Since 2000, the Research Triangle’s population has grown by just under 30%. Between 2007 and 2008, the Raleigh-Carey metropolitan statistical area (MSA) was the single fastest growing in the country, expanding by 4.3% and adding 44,800 people. Nearby Durham expanded by 2.5% over the same period. Across the Triangle, in-migration has resulted from a balance of high-paid job opportunities, quality of life, and lower real estate costs.

In spite of robust growth in the demand for housing alternatives, construction activity in Raleigh-Durham has often outpaced the market’s needs. In 2002, for instance, owners in the Research Triangle suffered through vacancy rates of more than 13%. Similarly, the apartment vacancy rate edged above 10% in 2009; asking rents fell by approximately 10% over the same period. Still, the long-term outlook for the Research Triangle remains very healthy. Although the local economy has weakened since the onset of the recession, investors have focused on the diverse, educated job base and the market’s exceptional diversity of employment drivers as key features of its investment appeal. This contrasts with Charlotte, which is more dependent on fi nancial services and the specifi c contributions of individual institutions. In the aftermath of Wachovia’s acquisition by Wells Fargo, the Research Triangle has cemented its position in the Southeast as the leading target for investors seeking to avoid Florida’s more complex challenges.

Las Vegas and Phoenix

It seems fi tting that a city built on laying bets would end up with an apartment market best suited for gamblers. Fueled by rapid population and employment growth and a frenzied infl ow of development capital, Phoenix and Las Vegas set a new standard for housing activity over the last fi ve years. In both markets, the severity of the subsequent housing crash has devastated the local economies, undermining demand for all types of real estate and driving unemployment rates sharply higher. As of June 2009, house prices in Phoenix had fallen by 54.6% from their peaks; in Las Vegas, by 54.6%. The resulting drags have pushed the Phoenix unemployment rate from 5.3% in July 2008 to 8.7% in July 2009. Conditions in Las Vegas have deteriorated to a greater degree. The unemployment rate in Las Vegas has nearly doubled over the last year, rising from 6.9% in July 2008 to 13.1% a year later. Only 11 of the nation’s 372 metropolitan areas have reported larger increases in unemployment. The combination of job

Seattle

Seattle is suffering from job cuts by most of the area’s large employers, including its traditional

Washington DC

Growth in government programs and policy interventions over the last year has fueled a rise related public and private employment in the nation’s capital. In the past year, the metro area has added over 15,000 jobs in government and nearly 6,500 in education and health services. The unemployment rate peaked in June 2009 before falling back to 6.3% in July. Just 2.2%age points higher than a year earlier, the unemployment in the District has remained well below the national level.

Increases in staffi ng at selected federal departments and among government contractors have worked to stabilize apartment demand and the economy in general. As a result, the uptick in the District’s apartment vacancy rate and resulting rent declines has been modest as compared to other major markets. Short-term risks to the outlook are related to construction activity that has tapered off more slowly than in other markets. More than 5,000 new units will be added to the District’s local inventory in 2009. The additional units are projected to lift the vacancy rate slightly. Developers have scaled back their plans for 2010. Refl ecting the slowing pipeline of residential and commercial projects, more than 14,000 construction jobs have been lost in the District over the last year.

Washington DC is projected to be one of the few markets to grow employment in 2009, with a net gain of just under 5,000 jobs. The District’s short-term stability and long-term demographic trends have not gone unnoticed by domestic and foreign multifamily investors. According to the most recent report of the Association of Foreign Investors in Real Estate (AFIRE), Washington DC is the leading target market for investment, both in the United States and globally.

losses, shadow inventories of condominiums-for-rent, and repurposing of condos for the rental market have undermined multifamily fundamentals in both markets. In Las Vegas, vacancies are expected to crest at just under 10%. In Phoenix, the impact of shadow inventories has taken a greater toll and is ultimately expected to push vacancy rates to 13%.

Faced with a long period of adjustment and a distant real estate recovery, investors seeking to exit these markets far outnumber those seeking to enter. Therein lies the opportunity for the tough-as-nails investor. Just as the infl ow of risk insensitive credit fueled development and property price bubbles during the boom, the current aversion to risk has allowed property prices in Las Vegas and Phoenix to freefall. Investment and operational conditions in these markets will be inordinately challenging for the next few years, but prices are slipping well below their long-term potential. The underlying drivers of growth remain fi rmly in place. Both markets have grown by a roughly a third since the beginning of the decade, adding more than 1.5 million people between them. Absorption of available inventory is a matter of time. Well-equipped investors daring to tread upon this contrarian ground may be handsomely rewarded for their foresight.

San Francisco

With its diversifi ed local economy and expectations of an early return to growth, San Francisco remains one of the best-performing apartment markets in

San Antonio

Just seven U.S. markets added as many people as San Antonio over the last year. In spite of robust population growth and an unemployment rate of just 7.1% as of July 2009, the short-term outlook for the market is challenging. With more apartments coming on line and a slowdown in demand, San Antonio’s apartment vacancy rate is projected to rise even after other Texas markets have embarked on their respective recoveries. Inventory additions will remain elevated over the next year, which will push the apartment vacancy rate to nearly 10%.

Long considered one of Texas’s least-cyclical economies, a resumption of job growth in San Antonio is not far off. Amongst the near-term drivers of employment, areas northwest of downtown will benefi t from an increase in activity at Fort Sam Houston. Longer-term, increasing activity at Brooks City-Base will support demand growth in the southeast. For now, San Antonio’s immediate challenges and its relatively lower profi le as compared to its Texas peers have resulted in a sharp drop off in investor interest. While San Antonio’s job losses are muted in national comparisons, investors set a higher bar for this market given its location near Austin and Houston. The more exacting tests imposed on San Antonio will allow investors to capture future cash fl ow at lower prices than in other nearby Texas markets in spite of the city presenting many of the same positive attributes.

engines of job growth and major fi nancial services fi rms. The metro area’s unemployment rate reached 8.9% in July 2009, up from 4.5% a year earlier. Still, a diverse employment base that includes Boeing, Microsoft’s global headquarters, and nearly a dozen other Fortune 500 companies, as well as a major seaport and thriving tourism industry, has tempered the local job market’s decline. Measured in terms of its underlying population and job growth trends, Seattle is the fastest growing of the major West Coast markets. The confl uence of highly skilled labor, well-established fi rms, and incubators is expected to bolster Seattle’s position as a high growth market as it emerges from the recession.

Seattle’s apartment occupancy has demonstrated remarkable stability over the course of the last year, drawing the attention of domestic and foreign investors. According to the Urban Land Institute’s 2009 Emerging Trends report, Seattle ranks second only to San Francisco in terms of investor appetite for apartment assets. Given its high profi le and relatively limited inventory additions, Seattle offers investors an enticing combination of strength in short- and long-term fundamentals and liquidity. For the very same reasons, however, investors must be careful to avoid opportunities that have overcapitalized future cash fl ow potential and pushed prices too high, too soon.

the country. High barriers to entry and a quality of life that compares favorably with any of its peers make the City by the Bay the leading target for domestic apartment investors. According to the Urban Land Institute, San Francisco is second-to-none in its investor appeal. Over 60% of investors rate San Francisco’s apartment market a buy; in contrast, fewer than 10% would sell assets in this market in the next year.

San Francisco is the second-most densely populated city in the nation. While on a smaller scale than New York City, similar development constraints have coincided with economic and demographic trends to buoy San Francisco’s apartment market. More than 62% of the city’s population are renters, fueling the strongest effective rent growth trends among the nation’s largest markets. Bucking the national trend, effective rents are projected to rise slightly over the coming year. The vacancy rate remains below 5%, up only slightly from the beginning of the recession. Employment-related demand is easing in San Francisco as job losses have taken hold, particularly in the high-end segment of the market, but the market is expected to recover sooner than its peers in Southern California or Sacramento. Following on slower wage growth, apartment operators in the Civic Center and Downtown submarket may benefi t from prospective renters priced out of the highly desirable Marina, Pacifi c Heights, Russian Hill, and Embarcadero neighborhoods. A vast mixed-use project now under construction at Transbay Terminal and its surrounding district also has tremendous upside for long-term renter demand.

As with Seattle, San Francisco offers strength in medium- and long-term fundamentals and liquidity from a diversity of investors. In evaluating opportunities to acquire assets, investors will have to negotiate aggressively to avoid overpaying for assets.

the country. High barriers to entry and a quality of life that compares favorably with any of its peers make the City by the Bay the leading target for domestic apartment investors. According to the

the country. High barriers to entry and a quality of life that compares favorably with any of its peers

SVN MARKET WATCH

While prices for apartment, offi ce, and retail properties rocketed sky-ward on the wings of low-cost credit

and aggressive rent growth projections, the industrial market often struggled to hold the investors’ attention in the years leading up to the peak in transaction activity. Today, the com-paratively stable fundamentals and incremental cash fl ow potential that once made warehouse, distribution, and fl ex properties seem staid are the very same attributes that are attracting risk-sensitive investors to the sector.

No sector operates in a vacuum, however, and industrial property demand has weakened as a matter of course. The recession has throttled US manufacturing activity while a precipitous decline in global trade has drained demand for distribution centers, particularly at the nation’s seaports. With few exceptions – the ports of Houston, Philadelphia, and Baltimore, among them – the volume of shipping containers pass-ing through the nation’s ports was down by as much as 14% in 2008. Coincident with these de-clines, occupancy rates and rents have declined in virtually every market in country.

Evincing the extent of the decline in space needs, the dollar value of U.S. international trade in goods fell by more than 30% between mid-year 2008 and mid-year 2009. Both exports and im-ports of goods through the leading East and West Coast centers have fallen as a result of withering demand for manufactured goods in domestic and foreign markets.

While gains in occupancy and rent levels will follow the broader economic recovery, indications of stability are already apparent in the underlying drivers of industrial space demand. International trade has stabilized and is expected to expand as

China’s government-propelled recovery picks up speed.

Domestic factory orders have begun to recover slowly as well. Partway through 2009, the Feder-al Reserve Banks of New York, Philadelphia, and Dallas all reported that manufacturing activity is projected to increase slowly by year-end. Co-inciding with the early signs of demand growth, limited construction activity will compel many expanding companies to absorb the market’s large inventory of available space.

Industrial fundamentals are projected to lead the ultimate recovery in com-mercial real estate, but an early resumption of investment re-mains hampered by constraints on the availability of credit and a bid-ask spread separating sellers and potential buyers. Transaction volumes improved between the fi rst and second quarters, however. Early details of third quarter sales suggest

that the sector will extend its measured rebound from the market’s trough in early 2009.

Among the drivers of the industrial sector’s precursory gains – and a key consideration for investors seeking to avoid the vagaries of the distressed marketplace – the more conservative underwriting of industrial property mortgages has cushioned the sector from the full weight of the credit crisis. Through August 2009, defaults of industrial mortgages have trailed the broader commercial real estate market. The divergence of trends is expected to grow wider as a larger number of mortgages mature.

Investors with a limited appetite for distress and a desire for more predictably performing as-sets to balance their portfolios in the coming year will fi nd ample opportunities in the industrial market. The markets described here offer a cross-section of opportunity, from the nation’s largest seaports, to inland distribution centers, to subur-ban fl ex and research and development space, to regional ports that are poised for growth as trade and commerce reassert themselves.

Industrial Property Investment Outlook

Chicago

After adding 18 million square feet of industrial space in 2007 alone, Chicago developers and their lenders have grown restrained in recent quarters. The market had just 2.5 million square feet of in-dustrial space under construction at mid-year 2009. The vacancy is rising, however. Like most of the nation’s industrial centers, negative absorption is expanding the supply of available space. Illinois em-ployment has deteriorated further than the national average and companies are reducing their leased space requirements accordingly, even as bankrupt-cies and folded businesses add to the numbers of distressed offerings for sale. Sublease offerings from amongst these properties approached 10 mil-lion square feet by mid-year. Coinciding with lower occupancy, rental rates will continue to fall through-out 2009 as landlords compete to retain tenants, renegotiating leases at lower rates and providing concessions to new users. Cargo tonnage passing through O’Hare International Airport decreased by more than 13% in 2008, diminishing the demand for space in the vicinity. Investors will fi nd that assets near the airport are in line with replacement costs, and eventual improvements in the economy and trade should invigorate occupancy there. The recent airport expansion removed some industrial inventory from the O’Hare submarket, but failed to exert upward pressure on rental rates. Vacancy around the airport is slightly higher than the citywide average, which is nearing 12%.

Chicago’s distressed offerings are projected to rise over the next year, with properties being brought to market by investors and lenders and by owner-occupants seeking a source of liquidity through sale-leasebacks. In the fi rst seven months of 2009, 17 major industrial properties sold in Chicago for an average price of $77 per square foot. Investors can expect sales offerings to pick up later in the year, as a number of mortgages come due for refi nancing.

Los Angeles – Long Beach

If any market can brush off 15 million square feet of negative absorption in a two-year period and then reposition itself for long-term growth, then the combined ports of Los Angeles and Long Beach are the place. Yet even this giant among seaport communities has suffered from reduced global trade and the downsizing of logistics companies that operate in and around the San Pedro Ports. Traffi c in containers of consumer goods passing through the Port of Los Angeles declined by 6% in 2008; in Long Beach, traffi c dropped off by more than twice that. Los Angeles employers eliminated a net 138,700 jobs in 2008 and are on track to cut similar number by the end of 2009, shrinking employment by 3% each year.

Vacancy rates have been rising slowly for nearly two years but remain well within the single digits. Still, competition from subleasing and negative absorption has pushed landlords to cut asking rents by 10% or more in the past year. The trend to lower rents will continue as long as tenants retain an upper hand

14

15

Houston

The oil capital’s brief, contrarian growth spurt came to an end in early 2009. Declining energy demand and falling prices for petroleum, petrochemical equipment, and petrol products sapped the life from Houston’s job market, bringing the metro its fi rst net job losses of this cycle in February 2009. Even so, the unemployment rate remains well below the national average and Houston’s diverse economy is expected to keep industrial absorption near positive territory going into 2010. Perhaps an unfortunate side effect of Houston’s job growth, which led the nation in 2008, is a ponderous development pipeline that will churn out several million square feet of industrial space before the end of this year. Coupled with accelerating net job losses, the metro area will lose some of its luster in the coming months. Tenants are demanding concessions and lower rent to help them deal with lower space utilization, while others are downsizing or closing up shop altogether. These softening fundamentals will bring lowered prices, particularly in overbuilt submarkets. Distress will be less prevalent than in other major metropolitan areas, however, and motivated sellers are more likely to be driven by looming debt maturities than by non-performing real estate. Longer term, the Port of Houston’s new Bayport terminal expands its capacity to handle containerized goods, while the expansion of the Panama Canal will allow more and larger vessels to bring Asian goods to ports along the Gulf and East coasts. In all, Houston’s economic diversity offers a degree of stability that may help to balance out a volatile portfolio.

Jacksonville

Jacksonville’s main investment appeal lies in its relative fi nancial health and long-term growth prospects. Like many Florida markets, the local economy is weighed down by an overbuilt single-family housing and residential condominium sector. Jacksonville’s ace in the hole is an expanding seaport and low cost structure that will help to drive absorption once global trade picks up again. In the short term, however, the metro is encumbered with 3 million square feet of recently completed industrial space that increased the total inventory in the market by 5%. In Ocean Way, the submarket nearest the port, vacancy nearly doubled to more than 10% in the past year as new space came online and met with only lackluster leasing interest from tenants. Container traffi c through the Port of Jacksonville, or JAXPORT, fell 13.2% in 2008 compared with a 1.8% decline at the Port of Long Beach. Yet JAXPORT is poised to benefi t from the inevitable increase in global trade, having doubled its capacity to process container traffi c with the opening of a new terminal in early 2009. Served by excellent surface transportation links, Jacksonville is well-positioned to become an increasingly important regional distribution hub for goods shipped from Europe, South America and the Caribbean. Only one industrial asset valued at more than $5 million traded in this port market during the fi rst seven months of 2009, yet that $6 million purchase by a private buyer carried a sale price of $131 per square foot – the highest price paid in the entire southeastern United States for that period.

Seattle

Conservative investors are drawn to coastal gateway cities in good times and bad, and Seattle stands out among those 24-hour cities as both a vibrant corporate cluster and a thriving seaport. Although container traffi c through the Port of Seattle declined 13.4% in 2008, a restrained construction pipeline enabled the area to avoid the surge in available space that has dogged many other U.S. port cities this year. Less than 1 million square feet of new space will reach the market in 2009, a marked change from the average 4 million square feet that builders completed annually in recent years. Seattle is facing a rise in sublet availabilities and the overall vacancy rate is expected to remain just below the 2003 peak of nearly 11%. Nearly half of the market’s job cuts this year will be in manufacturing and other industrial sectors, undercutting demand for industrial space and forcing landlords to lower rents to maintain occupancy. Nevertheless, institutional and private investors have closed more than a dozen major acquisitions in Seattle since the beginning of 2009 at an average price of $147 per square feet. Among those deals, retailer IKEA paid $32.8 million or $43 per square foot to acquire two warehouses it occupies in Renton. Owner-occupant transactions of this size highlight the liquidity and diversity of potential buyers that attract investors to Seattle.

Denver

Wind and sun fuel the investment outlook in the Mile-High City, where demand from a growing concentration of alternative energy companies has partially offset the contraction in Denver’s manufacturing and distribution sectors. While these newer employers shelved expansion plans in 2009, a return to high prices for fossil fuels will rekindle their demand for fl ex research and development space. As a distribution hub, Denver has suffered from reduced international trade during the recession. If China’s ongoing recovery gains momentum, Denver could experience resurgent demand for distribution space to handle imported goods.

The second quarter brought an early return to positive absorption, but subleasing and a market-wide vacancy rate nearing 10% will drive further rent declines and exert pressure on capitalization rates. Subleasing is particularly troublesome in Boulder and Glendale, where rental rates will likely fall the most. The northern submarket of Broomfi eld, home to a cluster of technology fi rms, as well as the northeast and southeast portions of the metro area, enjoy lower vacancy rates that will help to preserve rent and temper the trend toward higher cap rates. After introducing nearly 3 million square feet of space into the market in 2008, Denver’s construction pipeline is nearly exhausted. But negative absorption remains a concern, particularly in submarkets with older inventory, given the propensity of tenants with expiring leases to explore taking space at new facilities. Investors may fi nd opportunities amongst the growing number of owner-occupants marketing their space for sale or sale-leaseback.

in lease negotiations. Long term, the Los Angeles and Long Beach markets will recoup their strength along with global trade. That optimistic outlook is refl ected in median sale prices, which have held their ground above $140 per square foot since 2006. Expansion of the Panama Canal will draw some container traffi c away to the East and Gulf Coasts, but closer proximity to Asian manufacturers will continue to make Los Angeles and Long Beach the chief gateway for the Pacifi c Rim’s exporters to the United States. Aggressive measures by the Chinese government to invigorate its economy may speed the recovery of trade, boosting demand for space in Los Angeles and Long Beach. Near term, land constraints and only incremental vacancy increases will help to maintain pricing. Over the coming decade, the land constrained Port of Long Beach will fi ll in a channel between its existing terminals to add 54 acres of land. The new acreage will allow for faster processing of cargo and provide room for an on-dock rail yard. Long term, the enhanced agglomeration of this expansion will offset any immediate declines in property income resulting from the inventory addition and higher vacancy rates.

Oakland-East Bay

Following losses in excess of 40,000 jobs in 2008, the brunt of Oakland’s labor market contraction appears to be over. Employment this year is shrinking at a more modest pace, and negative net absorption is slowing. While the overall vacancy rate for industrial space will enter double digits by 2010, landlords have managed to keep rents near peak levels. Median sale prices, too, have hovered near $120 per square foot. Negative absorption of more than 4 million square feet in 2008 and at least 2 million square feet in 2009 plagues the market, however, particularly the cluster of warehouse and distribution centers along Interstate 880. Property sales have slowed, even among the fl ex buildings that are a favorite of high tech employers in Freemont and Newark. Longer term, AMB/CCG is heading up a redevelopment of the former Oakland Army Base as a mixed-use project that will include nearly 1 million square feet of new industrial space near the port.

Investors may fi nd a window of opportunity in the coming months as rental rates drop and patient buyers force cap rates higher. Like other high tech markets, Oakland and the East Bay will likely recover from recession more quickly than the rest of the country. It will almost certainly recover before its Southern California neighbors. Investors seeking steady income will fi nd consistently strong tenant demand in downtown Oakland, where space is scarce and the port and airport drive activity.

Orange County

With a jobless rate below 10%, Orange County has maintained its employment levels better than most California markets. That relative strength has translated into one of the lowest industrial vacancy rates in the nation. Vacancy rates have climbed this year but will not exceed 8% in the near term, in part because construction is at a standstill. Negative absorption accelerated in early 2009 and is expected to introduce as much as 2 million square feet of available space going into 2010. As a result, landlords have eased rental rates slightly. Tenants have shown strong interest in extending their leases in exchange for more favorable terms, a prospect that may help investors lock in income streams from good credit tenants as part of an acquisition. Flex space, however, face increased competition for tenants from traditional offi ce buildings due to a glut of offi ces left empty after contraction in the mortgage fi nance sector.

Orange County’s longstanding attributes as a dense population center with signifi cant barriers to entry have helped to keep median prices relatively high. Before the collapse of the mortgage market, Orange County assets traded near $200 per square foot, rivaling the prices paid for similar properties in San Francisco. In the fi rst half of 2009, the average price paid for industrial properties valued at $5 million or more averaged $149 per square foot. The decline compares favorably with a price drop of nearly 50% for San Francisco industrial space traded in the same period.

Long Island

Industrial landlords have slashed asking rents on Long Island in a decisive response to tenant strife and to remain competitive in the face of a mounting supply of vacant space. While virtually every submarket in the area experienced negative absorption in 2009, fundamentals in Long Island are coming down from a position of remarkable strength and remain healthier than national averages. Long Island has mercifully little industrial space under construction and will appeal to investors seeking long-term investments in markets with natural supply constraints. In the market’s immediate future, a substantial number of companies have been vacating portions of their owned and leased space, either returning those properties to the leasing market or offering them for sale or sublease. Whether through consolidation and downsizing or outright bankruptcy, several of the area’s employers have returned space in increments of 100,000 square feet or larger since the beginning of the year. These additions are the reason that a low economic vacancy rate for the market belies an availability rate that is well over 10% when sublease offerings are added to the calculation. Vacancy is generally higher and rental rates lower in central and eastern Suffolk County than in the county’s western end and in its smaller neighbor to the west, Nassau County. Yet with nearly twice the inventory of existing buildings than Nassau County, Suffolk County may offer more numerous investment opportunities. Submarket performance varies widely; Riverhead is wrestling with one of the highest vacancy rates in the metro yet commands higher average rents than Brookhaven, where vacancy is low. Investors seeking steady returns may favor Nassau County, which supports Long Island’s highest rental rates.

SVN MARKET WATCH

Shippingcontainervolumes were down by as much as 14% in the nation’s ports.

More than any other asset class, the offi ce sector experienced an extraor-dinary run-up in asset prices and

transaction volumes in the years preceding the credit crunch. Property sales reached their most frenetic pace in the fi rst half of 2007, buoyed by the acquisition of the Equity Offi ce portfolio and the subsequent re-trading of trophy offi ce prop-erties in New York City and elsewhere. By the fi rst quarter of 2009, however, the market had come to a near standstill. Constrained credit and the expectation of further price declines pushed sales to less than 3% of the volume recorded at the market peak just two years earlier. In late 2009, prices have corrected to an extent that is motivating healthy domestic and foreign buyers to reengage the market.

In hindsight, a slowdown in transaction ac-tivity and a broader offi ce price correction were inevitable. Price appreciation during the market upswing consistently outpaced fundamentals gains, resulting in ever-lower cap rates and high-er leverage. Fueling the trend, lenders competing to place loans struggled with downward pressure on underwriting quality. Near the pricing zenith, conservative investors who sought to acquire offi ce properties for their long-term cash fl ow potential backed away from deals as prices di-verged from observable cash fl ows.

With a few exceptions, the immediate out-look for fundamentals remains weak across the nation’s offi ce market. Employment in fi nancial services and professional and business serv-ices—key drivers of offi ce demand—have regis-tered larger losses than the labor market in gen-

eral. The experience of previous cycles suggests that improvements in the labor market will lag the headline economic indicators.

As a result of reduced space needs, direct vacan-cy and sublet availability have risen sharply over the last year. On the supply side, a lengthy devel-opment cycle has made offi ce construction slow to adjust. Spending on offi ce development has fallen by just 20% since the beginning of 2008.

Thus far, the default rate for offi ce loans remains below the average for commercial real estate. Distress in the sector will increase, however, on account of the property income falling short of principal and interest obligations and as a result of leverage in excess of current credit standards’ allowable levels. As in-place leases roll, mortgages originated in 2006 and 2007 are experiencing the most signifi cant shortfalls in current cash fl ow relative to current debt service obligations.

The increase in distress will challenge lend-ers and investors encumbered by debt, but those challenges will translate into opportunities for investors seeking to acquire assets at deep dis-counts to long-term cash fl ow potential. In the credit-starved markets of 2009, operators with access to fi nancing – and who are experienced in coaxing income from properties during periods of economic uncertainty – are at an advantage.

Office Property Investment Outlook

16

Austin

As one of the nation’s fastest-growing cities, Austin remains ripe for longer-term investment. At 6.1%, Austin’s unemployment rate in the second quarter of 2009 was increasing at a slower rate than the national average, and the metro actually added 6,000 jobs in February, most of them in the offi ce-using government sector. Job growth is anticipated on the back-end of the recession in the high technology and government sectors, and among the educated workforce hired by the University of Texas and other higher education institutions. However, Austin’s strong numbers have been tempered by the recession and a spurt of construction and inventory additions that will extend into early 2010. The city will need an estimated 23,000 new offi ce jobs to fi ll about 4.5 million square feet of excess offi ce space in the coming years. With sublease offerings reaching highs not seen since the fourth quarter of 2003, Austin’s vacancy rate may well exceed 20% before falling back. Rents will fall further before post-recession job growth begins to drive positive absorption. Investors may focus on smaller Class B and C properties near the downtown area, where the fast-growing population requires offi ce-using support. Since Austin does not receive the investor attention of other large U.S. cities, an exit will depend on the broader economic recovery and resumption of credit fl ows to real estate in general. For investors seeking long-term hold opportunities, the underlying drivers of space demand in this market are amongst the strongest in the nation.

Boston

The Greater Boston offi ce market was formerly a national frontrunner, but the recession set off severe contractions in offi ce-using employment that have undercut the region’s previously strong fundamentals. In spite of meaningful net gains in 2008, employment in Boston peaked in June of that year and the metro has since shed some 60,000 positions. Financial services companies, in particular, have pumped excess space into the growing volume of sublease offerings, contributing to a 21% increase in sublease inventory since mid 2008. Demand for space is at its lowest since the 1990s, and rents will continue their already substantial decline to stabilize at a level 25% to 35% less than pre-recession rates. This malaise will continue through 2010, as the market has not yet hit bottom. Still, the long-term outlook is favorable. Boston’s job losses pale relative to national numbers, and its offi ce fundamentals are more stable than many of its peers.

Boston attracts a diverse class of investors and remains one of the most favored investment markets. Investors are positioned to narrow the buyer-seller bid-ask spread in their favor. The Greater Boston market appeals to those buyers concerned about liquidity in secondary and tertiary metropolitan areas, while it presents a more manageable entry point than Manhattan’s offerings. Submarkets close to downtown Boston, such as the biotechnology clusters of Cambridge and Somerville, will likely outperform in 2010 and properties there will trade at premium prices.

17

Houston

The fastest growing of the nation’s largest cities, Houston is poised to leverage its nascent economic recovery. A surge in oil prices may expedite that process; oil prices in April 2009 had recovered about half of the ground lost between July 2008 and March 2009, which will help temper the effects of the recession. Medium-term, the city’s diverse economy and strong demographics will bolster its offi ce market with steady demand growth and a jobless rate much lower than the nation’s as a whole. The metro’s affordability for businesses and households is another of its positive features. Several key sectors of the local economy are growing, including energy, healthcare, and social assistance. This growth has helped to offset the net 56,200 jobs lost from May of 2008 to May of 2009, mostly in construction, transportation and warehousing, and wholesale trade. While builders remain active in Houston, offi ce construction was relatively restrained in 2008 with less than 2 million square feet added to Houston’s roughly 160 million square feet of inventory. With steady economics, it is unlikely that any near-term development push will outrun the persistent demand for offi ce space. Some energy fi rms have even taken space in anticipation of growth. Houston’s offi ce fundamentals have been sluggish in 2009 as rents have slipped and vacancy rates have reached their highest level in three years. But offi ce investors will fi nd opportunities among assets that will capture the market’s long-term demand trajectory, such as properties near the Port of Houston’s Bayport Terminal and assets near the Texas Medical Center.

Los Angeles

With its economy deeply mired in recession, Los Angeles shows few signs of imminent recovery. In a summer when many areas of the nation experienced a slowdown in job losses, layoffs in Los Angeles pushed the unemployment rate to 11.3% in June. The city hemorrhaged 130,700 jobs between November 2008 and the middle 2009, and analysts predict the bleed will continue through 2011. Further contraction of Los Angeles’ economy is expected to drive its offi ce vacancy rate from the summer’s record high to more than 17% by the beginning of 2010. In the fi rst two quarters of 2009, market rents dropped by 6% while effective rents plummeted by an estimated 16%. A growing supply of sublease space – more than 6 million square feet – is putting downward pressure on rents in large submarkets like North Los Angeles.

Stagnant and declining fundamentals are creating a tremendous opportunity for investors with access to credit. In what may be the fi rst sale of a Class A offi ce in downtown Los Angeles in nearly a year, One California Plaza went under contract in the spring of 2009 for approximately $225 per square foot, with an estimated cap rate of 8%. Los Angeles landlords facing impending loan maturities for which refi nancing options are limited will be another source of distressed sales. High-profi le offi ce hubs such as Santa Monica and Beverly Hills, and a revitalized Greater Downtown area, may harbor potentially lucrative long-term asset acquisition opportunities.

New York

New York suffered a severe blow with the downturn in fi nancial services and has lost 76,800 private sector jobs since the beginning of 2008. Offi ce vacancy rates may well hit 20% by 2010, and the amount of sublease space on the market continues to grow. Although New York’s economy has generally outperformed the national economy since the start of the recession, more job losses are anticipated. Average asking rents have fallen 25% since the market’s peak. While that may induce many employers in the city’s diverse industries to stay put rather than relocate to more affordable markets, it makes New York a challenging environment from a building-operations perspective. Vacancy and deteriorating rental income has led to distressed landlords and sharp price corrections. A recent market-rate sale of a vacant downtown offi ce building evidenced a price decline of 60%. Aggressive pre-recession underwriting will likely lead to more distressed sales that buyers can exploit to acquire choice assets. With its diversity of investors, foreign and domestic, New York has more readily available credit than any other market. Recent bidding activity has demonstrated that prices will improve quickly once a properly functioning debt market asserts itself. Aggressive buyers may track Midtown assets west of Sixth Avenue, where steeper price discounts will likely result from weak tenant demand. More conservative investors may consider offi ce properties with some mixed-use space, which should be subject to fewer income fl uctuations in the near term.

Philadelphia

With a lower profi le than nearby New York and Washington, Philadelphia is often overlooked. But in contrast with previous recessions, the city is well positioned for recovery and offers a value opportunity for investors. Rapid employment declines have slowed to a more controlled descent, and Philadelphia’s jobless rate of 8.2% in the second quarter of 2009 is below the national average. In spite of recent years’ sizable inventory additions, the city’s slow development pipeline has moderated the effect of job losses on the offi ce market. Recent additions to offi ce inventory have been brought online almost fully pre-leased and, in spite of the softening market, there are still a number of large tenants seeking space. The in-migration of new tenants will be a key source of stability for Center City, as some law fi rms and fi nancial services fi rms holding large blocks of space are at risk of shuttering.

The market’s overall availability rate rose slowly through the second quarter of 2009 to approximately 18%. Effective rental rates have fallen as more sublet space came to market. The worst appears to be over, however, as leasing activity picked up from the fi rst to the second quarter of 2009. As in other metros, investment activity is down. With its cultural and historic attractions, respectable inner-town neighborhoods, medical facilities, universities and commuter-rail lines, Philadelphia remains under the radar for many investors. Those who do take notice of Philadelphia will target stabilized properties in infi ll submarkets, such as Center City and Penn’s University City, or relatively high-priced but stable assets along the Main Line.

Denver

Denver’s residential real estate market is expected to be one of the nation’s fi rst to recover. A rejuvenated single-family sector, along with continued growth in government services and alternative energy, will secure the city’s position among the early leaders of the economic expansion. Contrary to national employment trends, the jobless rate in metropolitan Denver peaked in March 2009 and has since fallen to 7.5%. Offi ce fundamentals remained relatively strong in Denver throughout much of 2008, although the remainder of 2009 is expected to bring a signifi cant rent decline. Even as rental rates wane, the market’s steady population growth and diverse labor pool will enable employers to ramp up quickly once the economy turns around. Denver added 2,100 jobs in May – its fi rst gain since August 2008 – and temporary employment, a leading indicator of recovery, rose by 1.0%.

While Denver’s capital markets were ablaze in early 2008, sales transactions have slowed, with only 710,000 square feet of assets trading in the fi rst half of 2009 compared with 3.5 million square feet during the fi rst half of 2008. The most recent development cycle generated only a limited amount of new offi ce supply, and although vacancy rates are high, property owners are not experiencing the high levels of distress seen in other large cities. Denver’s long-term potential will continue to draw out-of-state investors into 2010. Limited distress will afford them selective opportunities for the acquisition of assets over the next year.

Seattle

Besides being a Pacifi c gateway positioned to rise with the returning tide of trade with Asia, Seattle harbors an enviable battery of employers that range in size from corporate giants Microsoft and Boeing to cutting-edge incubator companies. This diversity bodes well for the city’s offi ce market, which is struggling with a glut of offi ce space in the wake of a pre-recession building boom and post-recession corporate downsizing. The collapse of Washington Mutual and layoffs at Starbucks helped push unemployment up to 9.4% in the second quarter of 2009. The city is slated to receive its biggest injection of new space since the dotcom boom a decade ago, with 1.2 million square feet delivered in the fi rst quarter of 2009 alone. The development pipeline is bulging with a whopping 15 million square feet in the works, though constraints on development fi nance will result in some project cancellations. Leasing has not picked up all of the slack created by construction, but a steadily increasing vacancy rate was still rather low in the fi rst quarter of 2009.

Even if positive net absorption does not return to Seattle until 2011, there are indications the market has hit bottom. Fundamental weakness may be confi ned to the near term, while the area’s diverse economic base will serve as a springboard for the long term. Investors will fi nd value opportunities in Bellevue, as well as the Eastside, where T-Mobile’s expansion will spur demand from related service providers.

Washington DC

Though its offi ce market may struggle through the end of 2009, the outlook for Washington DC is more secure than any other markets. The focus of activity for the government’s growing presence in the economy, new government jobs are also fueling job creation at ancillary service companies in the lobbying, defense, information technology, biotech, and education sectors. While Metro DC reported 7,600 new federal government jobs in the 12-month period ending in May of 2009, that couldn’t offset steep cuts in the legal, information technology, retail trade and fi nancial industries, which resulted in a net loss of 31,300 jobs. However, many economists believe positive job growth will resume by the end of 2009. With 10.2 million square feet still in the development pipeline, landlords will act aggressively to lure tenants from nearby offi ce centers.

As mortgages underwritten before the market peak in 2007 mature, landlords will fall into distress in greater numbers. Signifi cantly, the Washington region has seen its fi rst handful of buildings revert to lenders. After six months of limited capital markets activity, investors, especially those in search of smaller deals, have returned to Washington to fi nd lower-than-expected prices. In particular, well-capitalized offshore investors, REITs and domestic opportunity funds have been scrutinizing the market. While strong government employment numbers will attract conservative buyers seeking a stable offi ce market, more aggressive investors may also look to the Sterling and Reston submarkets for high-yield investments.

San Francisco

San Francisco is a perennial target for investors seeking favorable supply-constraints and a mix of high-paying tenants in the fi nancial services, technology, and health care sectors. Although the recession has belted the region, its well-diversifi ed economy is poised to recover faster than the rest of the nation. This city has attracted tourists and tapped Asian trade for more than a century, and both activities will help to drive its recovery. Though the metro’s unemployment rate has nearly doubled year over year – reaching 9.1% in the second quarter of 2009 – the city is home to world-class centers of medicine and educational, the only industries to provide growth during the current recession.

San Francisco avoided a building boom prior to the recession despite boasting some of the strongest offi ce market performance numbers in the nation. Less than 150,000 square feet of space will come online in 2009. Fewer than 1 million square feet are under way, down from the nearly 2 million delivered in 2008. The drop in San Francisco’s asset prices and cash fl ows will be milder than in the devastating dotcom bust of 2001, but the investment market will remain soft this year as major employers restructure and shed space. Signifi cantly, San Francisco properties were underwritten with some of the most aggressive rent growth projections in the country, so distressed assets may well provide attractive opportunities for well-capitalized buyers ready to pay a premium for liquidity.

SVN MARKET WATCH

The recession has undermined retail property fundamentals to a greater degree than at any time in recent history. In many

parts of the country, store openings beyond the point of saturation during the property boom were both a cause and effect of overheated consumer spending. Fueled by extractions of wealth from rapidly increasing home equity, consumers grew their spending faster than their incomes up until the collapse of credit markets in September 2008. In the steep labor market contraction that has ac-companied the recession, American shoppers have transformed themselves into savers in an effort to correct household balance sheets. Household sav-ings rates, which had hovered near their historic lows during the housing boom, spiked in May 2008 as households received the fi rst stimulus checks. In spite of slowing wage growth, falling house prices and nervousness about job security have kept sav-ings rates high. Consumers’ discretionary dollars have been redirected to paying down debt instead of driving spending. In response to weaker con-sumer activity, many retailers have contracted, re-organized or closed their doors, outpacing the de-terioration in offi ce occupancy in many markets.

But not all retail centers have strained as con-sumers have grown more judicious. Increasing cost-consciousness has buoyed foot traffi c at value-oriented retailers such as Wal-Mart Stores and for necessity-oriented sellers such as pharmacies and grocery stores. Between mid-2008 and mid-2009, retail spending at health and personal care stores, grew by more than 4%. At the other extreme, spending related to home investment – on items such as furniture, building supplies, and gardening supplies – has fallen by almost 15%. Discretionary items such as clothing and electronics have also borne the brunt of consumers’ frugality.

In the near term, investors can expect a further contraction in payrolls that will temper consumer spending growth. Yet consumer sentiment – a leading indicator of spending – has come off its lows and retail spending has shown early signs of stabilizing. Barring any unexpected shocks to the economy or consumer confi dence, retailers should experience the fi rst modest but sustained increases in spending activity by early 2010.

In the investment market, concerns about ane-mic demand for space and falling asset prices have manifested as sharply lower sales volumes and in higher levels of distress, particularly for unanchored retail locations. By August 2009, the default rate for unanchored retail center mort-gages had climbed to 2.5%, sharply higher than at the beginning of the year.

In response to restrained expectations for space demand, developers have curtailed shop-ping center construction. The longer develop-ment cycle required for mall construction has hindered an equivalent adjustment to slackened demand in that subsector.

For investors who are prepared for a challeng-ing operating environment, the fl ight of capital from retail real estate means limited competition for the mushrooming number of distressed assets available for acquisition at very favorable prices. As compared to pricing at the market’s recent peak, pricing over the next year will afford patient, seasoned investors the opportunity to capture long-term cash fl ow potential at a deep discount.

Each of the markets described in this report is unique and will appeal to different investors. The nation’s global markets, such as New York City, offer an earlier improvement in liquidity condi-tions and credit availability. Other markets offer greater stability in local economic conditions and more limited long-term asset price appreciation.

Some markets require a greater appetite for risk-taking because of uncertainties in the path to recovery in the local job market. Each of the markets offers the opportunity to take advantage of carefully planned and well-executed investment strategies.

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Austin

Like other Texas markets, Austin is weathering the recession better than the majority of U.S. cities. Job losses concentrated in construction and manufacturing have been partially offset by gains in services, education and healthcare. With state government and the University of Texas among its major employers, Texas’ capital city suffered a modest rise in its unemployment rate to 7.1% in June from 4.5% a year earlier. Consistently ranked among the fastest-growing metros in the nation, Austin attracted 400,000 new residents since July 2000, growing by 30.6% in the past decade and 3.8% in just the last year. Austin’s retail market has already shown signs of distress, including a fi ling for bankruptcy protection in May 2009 by the new Hill Country Galleria to prevent its being sold at auction while the developers attempt to deal with a matured, $191.8 million construction loan. In the fi rst seven months of 2009, the only local retail property to sell for more than $5 million was a 185,000 square foot retail strip that traded for approximately $20 million in San Marcos, south of Austin. In spite of its robust population growth and relatively low unemployment, the Austin area is seldom considered a primary target by retail investors. Being off the radar screen may give investors less competition for Austin acquisitions; good pricing relative to cash fl ow is available, while expectations for continued population and job growth make this market a candidate for long-term cash fl ow investment.

San Diego

The investment story in San Diego revolves around constrained supply. This West Coast market experienced few additions of space in the past two years, with builders delivering roughly 500,000 square feet in all of 2008. This year’s pipeline will turn out less than half that amount of new supply. Equally important, a relatively benign job climate has enabled retailers to hang onto their leased space with fewer store closings and negative absorption than in neighboring markets. Employment losses in the county have been more moderate than in most other California metros with only 18,400 net jobs cut last year. San Diego’s unemployment rate rose to 10.3% in July 2009 from 10.2% in the previous month. That exceeds the national jobless rate of 9.7% for July but pales in the context of California’s 12.1% unemployment. Retail vacancy started the year below 5%, although it breached that ceiling by the end off the second quarter and could reach 8% in 2010. Sublease offerings are gradually increasing as well but their impact on the market has been small. While far from an ideal balance of supply and demand, the market continues to outperform its peers, and tenants are taking advantage of softening fundamentals to extend their lease terms. Landlords command the highest rents in the Highway 56 Corridor, Beach Cities and Interstate 5 North submarkets. Recent transactions suggest investors can purchase quality retail in San Diego for about $250 per square foot.

Retail Property Investment Outlook

19

Los Angeles

Retail properties in Los Angeles are holding true to form by performing through the recession. As in every U.S. market, vacancy rates are climbing and asking rents falling, but L.A.’s vacancy rate is expected to stay well within the single digits through the end of 2009. A healthy balance of supply and demand is due in part to slowed construction that will add less than 3 million square feet of space this year – small for this market and slightly less than the previous year’s new deliveries. Joblessness threatens to further curtail retail performance as consumers cut back on spending. In July 2009, the metro area’s unemployment rate hit climbed to a painful 11.9%, equal to the state average. The Los Angeles metro area shed 172,100 jobs from July 2008 to July 2009. Home to one of the world’s largest seaports for container vessels, area employment stands ready to fi rm up when global trade picks up steam. Until that occurs, investors may fi nd opportunities to enter the market at temporarily higher capitalization rates. While slower than in previous years, L.A.’s investment activity has been brisk in comparison to other western markets. More than a dozen major assets traded in the fi rst seven months of the year at an average price of $417 per square foot. The largest of these was a 370,000 square foot mall that Vintage Capital Group purchased in neighboring Long Beach for approximately $50 million in July. The L.A. economy and its retail fundamentals, given time, are well positioned to regain their footing along with a resumption of regular global trade.

Raleigh-Durham

The North Carolina Research Triangle, bounded by Raleigh, Durham, and Chapel Hill, is amongst the fastest growing regions in the nation. Outpacing any of its peer markets, the Triangle has added more than 350,000 residents since the middle of 2000. In the past year alone, Raleigh’s population expanded by 4.3% and Durham’s grew by 2.5%. The recession has not dulled the luster of this North Carolina hot spot for high technology, government services, and academia. This diverse employment base, which includes a signifi cant dose of healthcare, bodes well for the Triangle’s long-term growth but has not protected area retailers from the recession. The employment rates in Raleigh and Durham were 9.1% and 8.4%, respectively, in June 2009. While higher than a year earlier, the Triangle’s job market remains relatively healthy. By comparison, the unemployment rate has risen to 12.4% in Charlotte, a city grappling with a greater exposure to the fi nancial services sector.

The immediate outlook for the sector calls for rising vacancy rates and falling rents, exacerbated by a construction pipeline that will introduce 1.5 million square feet of new space by year’s end. Numerous retailers have returned space to the market as well. Circuit City alone has closed several local stores. New construction will increase vacancy that is already high in the RTP/Interstate 40 submarket, and to a lesser degree in Cary, which lost several major retailers early in the year. Still, the Triangle offers excellent long-term cash fl ow potential for operators, supported by population growth and a well-educated, well-compensated workforce. Transaction volume and pricing for retail properties had picked up in 2007, but will remain subdued for the foreseeable future. The area is outside core investors’ current targets, affording other investors freer roam of its retail investment opportunities.

Salt Lake City

Rapid population growth and burgeoning household income earlier in the decade sparked a retail revolution of sorts in Salt Lake City. But the infl ux of national chains opened the door for store closures that have driven up vacancy rates in recent quarters. Even now, developers are counting on a return of earlier growth trajectories to fuel demand for projects in the works. There is evidence to support expectations for signifi cant growth down the road, considering the leasing success of grocery-anchored retail projects that either opened in 2008

San Francisco

Its diverse employment base, growing academic and health care center, and supply constraints have not made San Francisco immune to the contraction in the California economy and to cutbacks in state funding. Unemployment rose sharply in 2009, surpassing 10% year over year. Job losses have hit fi nancial services fi rms and high tech manufacturer hard, impacting consumers who generated a large portion of retail sales in the past. The Bay Area’s economy has diversifi ed since the high tech boom and bust, however, and shows continued employment strength in health care, education, research and development. Tourism is a substantial contributor to the economy as well, providing economic benefi ts out of proportion to the market’s size. In other words, the near-term outlook for retail fundamentals is more stable than headline unemployment rates would suggest. San Francisco’s physical constraints and high construction costs have held new supply in check and kept overall retail vacancy down to one of the lowest rates in the nation despite some store closings. Lease rates will soften going into 2010, but the combination of a well-educated, high wage-earning workforce and low vacancy rates will help the market to recover quickly when consumer spending picks up again. San Francisco offers investors one of their best opportunities to acquire core assets that will bring an early return to healthy fundamentals, and is particularly suited to buyers with a relatively shorter investment horizon. Expect the Golden Gate market to recover as quickly as any metro in the nation.

Seattle

Retail vacancy rates have increased slowly in Seattle since 2007 but accelerated their climb in 2009 as several retailers closed up shop or fi led for bankruptcy protection. While rental rates have dropped slightly, the combined effect of reduced asking rates and concessions such as free rent and liberal tenant improvement allowances has brought effective rates down more sharply. As landlords struggle to maintain occupancy levels in some submarkets, such perks are becoming standard inclusions in lease negotiations. Many of Seattle’s consumers are dealing with reduced or lost incomes – Boeing recently slashed its ranks and JP Morgan Chase eliminated thousands of jobs at the former headquarters of Washington Mutual in downtown Seattle. Downsizing and business failures pushed the area jobless rate to 8.9% in July from 4.6% a year earlier. The local unemployment rate was slightly healthier than the statewide and national rates of 9.1% and 9.4%, respectively. Seattle’s retail value proposition rests in its diverse economy, reputation as a desirable market by investors the world over, and its prospects for economic recovery. High development costs and increasing vacancy will reduce speculative projects going forward, but the market will gain approximately 2 million square feet in new space that is nearing completion. As in other markets, fi nancing is a hindrance to investment. Indicative of the market’s underlying strengths,

Washington DC

The U.S. capital was already among the nation’s highest profi le investment markets. Now that national job losses are upsetting retail sales and demand for space, the stable and growing employment base in Washington D.C. puts the metro in a class unto itself. Construction has been adding approximately 4 million square feet annually to the retail supply, and while construction has slowed, oversupply is exerting pressure on rental rates. The weakness in the local retail market has been tempered, however, by the relative health of the area’s economy and job market. Through June 2009, the local unemployment rate increased by just 280 basis points. The expansion of government programs that are part of the administration’s efforts to manage the economy are expected to outlast the current crisis and support employment levels for years to come. But to attribute the District of Columbia’s position of strength solely to the downturn would understate the dynamics of the local economy. D.C.’s population has grown by 11.1% over the past decade, impressive for a mature market. By comparison, growth in the same period measured 2.7% in Boston and 3.6% in New York. Indeed, Washington has edged out New York to become the preferred investment venue for foreign investors, according to the Association of Foreign Investors in Real Estate. The district offers a target for buyers seeking core assets in a liquid market, and offers the additional benefi t of outperforming its peers on the retail front.

Dallas

Department store sales in the Dallas have improved their positioning but consumers are cost-conscious and substituting less expensive store brands for name brands, according to the Dallas Fed. Household formation is increasing as workers relocate to the Metroplex, many in search of jobs, and the swelling ranks of local consumers are helping to sustain retail sales. For investors, this means tenants have a greater likelihood of meeting sales goals and lease obligations. Low barriers to entry are an ongoing concern in Dallas and construction is still introducing new space in the suburbs, to the tune of more than 6 million square feet to be added in 2009. Transaction activity remains subdued but did accelerate in spring and summer. More than a dozen large retail assets traded in the fi rst seven months of the year, more by half than the next-busiest market in the Southwest, Houston. The largest and highest priced transaction was for Highland Park Village, a 246,000 square foot lifestyle shopping center that sold for a reported $170 million or $690 per square foot. As in Houston, Dallas’ energy sector boosted the local economy in 2008 but fl agged as oil prices fell. Effective rents for retail space have softened due to concessions by landlords, but property owners have largely maintained rental rates. That will help to sustain net operating incomes once the local economy revives, an outcome that will be hastened if energy prices regain their lost ground.

however, investors have been willing to commit their equity. Earlier this year, Inland American Real Estate Trust used all cash to buy the James Center grocery-anchored retail project for $22.5 million. In mid 2009, a joint venture of CalPERS and First Washington Realty Trust agreed to purchase three Seattle retail projects from Regency Centers and Macquarie CountryWide Trust for $41 million or $154 per square feet.

or simply increased their occupancy in that year. Grocers rely less on discretionary spending than dry goods providers, but the expansion of food stores indicates that population growth had outpaced development. Employment levels are higher than average as well, with a statewide jobless rate of just 5.7% in June compared with the national rate of 9.5%. In the near term, however, vacancy rates are climbing in every submarket and a once-robust investment market has gone into hibernation. After three years of billion-dollar annual transaction volumes, sales tapered off in the fi rst quarter of 2008. In fact, no large retail assets have sold in Salt Lake City since January of that year, and since those transactions that closed were likely initiated before the onset of the credit crunch, investors can assume that lenders have been reluctant to fi nance deals there. Buyers willing to transact on an un-leveraged basis and those able to obtain seller fi nancing may fi nd excellent opportunities in Utah’s capital city and the surrounding areas.

or simply increased their occupancy in that year. Grocers rely less on discretionary spending than dry goods providers, but the expansion of food stores indicates that population growth had outpaced

or simply increased their occupancy in that year. Grocers rely less on discretionary spending than dry

SVN MARKET WATCH

Global MarketsSuch as New York City will offer an earlier improvement in liquidity.

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SURVIVAL OF THE FITTEST

NOT ONLY WILL THEY SURVIVE, BUT THE BENEFITS OF DEVELOPING A CREATIVE

RESPONSE TO THE CURRENT DILEMMA WILL PAY BACK

HANDSOMELY IN THE FUTURE. WE EXPLORE THIS IDEA WITH KEVIN

MAGGIACOMO, PRESIDENT OF SPERRY VAN NESS

BY GRAHAM MURRAY

T he goal posts have shifted, the playing fi eld is uneven and the rules have changed. Welcome to commercial real estate in late 2009. Few could have predicted the

magnitude of the correction in the CRE market during the past year, and few did. Popular opinion amongst brokers was that signs relating to a decline in future volume would be noticeable. Not industry changing. »

LEAD STORY

WE WANT YOUTO GAIN MARKET SHARE

22

The velocity with which the gap cap increased and buyer and seller expectation grew caught everyone off-guard. How do brokers who have enjoyed prosperity for the last seven years by using tried and tested methods react? They don’t. “Sit tight folks, we’ll be back to selling $20m properties in due time” was the industry’s initial response on the advisory side. On the ownership side, as recently as last winter, many a client felt that their strip center property was still worth a 6.75% cap when the available comps showed that the few deals that were actually closing were coming in 7.5%.

Kevin Maggiacomo, President of Sperry Van Ness likens the process to the Kübler-Ross model – the 5 stages of grieving that people go through after they are presented with a serious illness or loss. “It occurred to me that CRE buyers and sellers alike are prone to advancing through similar stages. These five stages are Denial, Anger, Bargaining, Depression, and Acceptance”, says Maggiacomo. Each of these stages (below) are tough and demanding in themselves, and moving through all five can be dispiriting. Brokers and clients have no choice but to work through these five stages of grieving, hoping they will eventually arrive at stage five, acceptance. The sooner this happens the better for everyone and the more efficient the market will become. Advisors can help steer the market to change as much as anyone else.

The goal for Advisors in this market is two-fold. First, there is the need to educate clients and arm them with internal and external data. Maggiacomo suggests that Advisors need to have difficult but important conversations with their clients on a regular basis. “Have fierce conversations, pull no punches and help them to accept reality. Second, and for your own well-being, change your own approach, if you haven’t already. The market is different, chiefly because it now consists of very different buyers and sellers. Your old database can’t be relied on anymore. And those $20m plus properties mentioned earlier? Today’s market is all about shifting gears and chasing smaller listings.”

As Maggiacomo also points out, referring to Kübler-Ross’s 5 stages of grieving may be over-stressing the point somewhat. The original published work is entitled On Death & Dying and deals with far more serious matters than a shaky CRE market. As that familiar song by R.E.M goes, “It’s the end if the world as we know it... and I feel fine.” They have a good point here. CRE will never be the same again, but things really aren’t that bad. In fact, they’re good if you can see the tremendous opportunity that exists in this market.

And there’s further good news, this is a great time to be in commercial real estate, as both an advisor and principal. On the advisory side some may even go so far as saying that this is the best time in history to work in the trading side of the industry. This may seem counter-intuitive and illogical as most people made more money between 2001 and 2008 than they will have made in 2009, in light of the fact that we are dealing with perhaps the most significant market correction in history.

But there is a silver lining. As Maggiacomo explains, “Depending on what you read or who you listen to, the number of active participants in the commercial real estate market is expected to decline by some 40%-60%. I would suggest that those leaving the business are brokers, not advisors. CRE professionals who have positioned themselves as industry experts and as resources for their clients will endure in the industry. By remaining active in the business during this downturn you will cause an incline in market share by default. Specializing in active segments of the market and adjusting your approach can create market dominance.”

Current and projected market conditions have created the strongest opportunity that you will ever have to gain market share. It may come as a surprise that a decrease in sales activity is actually to your advantage with respect to market share goals. “If you have a 10% market share and the number of transactions decreases by 50%, increasing your production by 25% will double your market share” says Maggiacomo.

And in terms of building your business for the long term, nothing is

Acceptance“I can’t fight it, I may as well prepare for it.” This final stage comes with peace and understanding that things have changed. Broker: “What worked then doesn’t work now. Time to adopt a new strategy.” Seller: “The market has changed for sellers. What are my options?”

13DenialDenial is a conscious or unconscious refusal to accept facts, information or reality relating to the situation concerned. It’s a defense mechanism and perfectly natural. Seller: “My property is different than the comps show and is worth more.” Broker: “Things won’t get too bad, I don’t need to make any significant changes to my approach.”

2mAnger“Why me? It’s not fair!” “How can this happen to me?” “Who is to blame?” Once in this stage, you recognize that denial cannot continue. At first grief feels like being lost at sea: no connection to anything. Anger provides something to hold onto. Seller: “Hey broker! You’re not adequately marketing my property, go and generate some interest!” Broker who owns a firm: “My team is not working hard enough!”

3eBargainingThe third stage involves the hope that the individual can somehow postpone or delay the inevitable. Usually, the negotiation for an extended life is made with a higher power. Broker: “I understand things have changed, but if I could just land one more deal”. If this doesn’t work, move to stage four...

46 5oDepression“Why bother with anything?” “It’s over... What’s the point?” During the fourth stage, individuals begin to understand the certainty of change. This is an important time as it represents the first steps towards the acceptance of the inevitable.

The five stages of grieving

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more important; nothing will help you generate revenue more than an increase in market share.

Maggiacomo does warn against market share strategies however. “A market share strategy leads companies to set their sights on the past, not the future; and market share is about the competition, not the customer. If we increase our sales volume we increase our market share. If we double-end more deals then we increase our sales volume – not the direction we want to take. We can never compromise our integrity and our fiduciary to our clients.”

On the principal side, the transfer of wealth will be significant, perhaps to unprecedented levels, and tremendous fortunes stand to be gained. We know this because tremendous fortunes have been lost. By now this is old news, but the degeneration of the commercial real estate market has created tremendous potential for investors to create wealth. Those with liquidity, the ability to react quickly and without heavy reliance on financing will rule the day.

Having a creative edge, the need for innovative thinking and turning negatives into positives are mantras that apply to everyone. The more businesses that see the light, the better for the economy as a whole. We’ve discussed opportunities specific to the CRE market, but what about the opportunities and lessons that apply across the board?

These tough times are giving us invaluable experience that will prove beneficial, especially when the market improves. For example, in boom times there is a tendency not to monitor cash flow as stringently. Tough times challenge business owners to manage and allocate every last cent, which will help them to remain in business throughout a downturn. This experience will cause them to make better business decisions about where and how to allocate their cash. This practice will then continue when the economy recovers. The result? More cash flow on the backend higher profitability in the long run and a healthier economy built on solid fundamentals. With the economy now sitting somewhere on the recession continuum, it’s tempting for any business to simply batten down the hatches, suppress new thinking and ride out the storm. But now more than ever, it’s time to challenge traditional business methods. When you continue to do what you’ve always done, creativity and innovation are stifled. If you are tempted to adopt the “if it isn’t broken, then don’t fix it” attitude, then think again. Business leaders best equipped to navigate stormy economic waters are those willing to incorporate flexibility and creative thinking into their companies – whatever the weather.

Keep innovating, no matter how successful your product or service. Standing still for one day could see you being left behind the following day. The McKinsey Global Institute has found that during the last major recession in 2000/1, 40% of leading US industrial companies toppled from the top quartile within their sectors. During that same period 15% of companies that had not been industry leaders prior to the recession vaulted into those positions. You could confidently say that these smaller companies didn’t achieve this by playing safe.

Perhaps the most compelling case study for this is the automobile industry. It’s common knowledge that in the US and globally, automobile sales have been hit hard. Yet somehow, in 2009, with the US market down 39.4%, automaker Hyundai almost doubled their market share from 2.4% to 4.1%. This, despite their sales dropping almost 50% in December, as reported by Autoweek Magazine in March

last year. How did they do it?The Hyundai Assurance program, launched in January this year,

immediately got buyers’ attention. Here’s how it worked: buy a new Hyundai, and if you lose your job, the automaker will make your payments for a short while and then buy the car back from you. A perfect example of how an innovative idea can endear people to a brand.

So what can you do? In the current economic climate it’s important to correctly frame your challenges. A few points to consider:

Manage your thinking. You could look at this recession as the worst thing in the world, which will ruin your business and career or look at this as an opportunity to leap frog the competition. The difference here is the attitude you choose. Pay attention to your thoughts.

Look for opportunities. Your competitors and consumers are doing things differently now and if they’re holding back on marketing, new launches or investments then that spells opportunity for you. If consumers are asking for something different or changing their behaviors, that means there’s a need to be filled. What can you do to fill it?

Clarify the problem. Don’t take the problem at face value. If management is saying, “reduce costs,” don’t automatically think, “how can we reduce head count?” or, “how do we reduce spending?” Instead, look for opportunities to redefine the problem that will grow the business, such as, “how might we shorten our product development time?”; “how might we improve efficiency?”; “how can we get the entire organization to help reduce costs?” or “how can we expand our product line?”

Pay attention to the climate. When layoffs occur, the climate is usually unpleasant and recessionary. After reductions are complete, things eventually pick up. As James Kirkpatrick noted in a recent AMA webinar, “Innovation and creativity comes from a foundation of security.” So pay attention to what you can do to reduce the stress and fear among staff during layoffs and how you can move the organization forward while waiting for things to return to the ‘new’ normal. Kirkpatrick also noted that, “Fostering innovation and creativity counters recession–era tendencies of fearfulness and withdrawal.” What can you do to counter those tendencies?

During recessions, depressions and major organizational downturns, there are abundant opportunities for growth and money to be made if you can prevent people from hiding inside the box while they wait for the ‘all clear’ signal. You have a choice in how you will respond to this challenge. “Now is the time to seize the moment, capitalize on the opportunities that this emerging market currently presents and innovate boldly to reduce the bottom line and increase the top line.” says Maggiacomo. It’s not a choice between newness and savings, but rather how you put them together to achieve exponential benefits.

The goal posts have shifted, the playing field is uneven and the rules have changed. Early humans were able to adapt to new environments and situations by making tools and weapons, which improved their hunting abilities. It’s the reason we are so successful as a species. Roughly translated: when life gives you lemons, make lemonade. SVN

IF CONSUMERS ARE ASKING FOR SOMETHING DIFFERENT OR CHANGING THEIR BEHAVIORS, THAT

MEANS THERE’S A NEED TO BE FILLED.

24

After slashing some 3.4 million workers in the first six months of 2009, corporations are increasingly wringing savings out of their real estate. From renegotiating better rents with landlords to paying termination fees to eliminate their now-excess space, companies are making every effort to survive the deepest

downturn in decades. In the year’s first half, tenants vacated 45.2 million square feet of office space nationwide, according to Reis, a New York-based commercial real estate research firm. That was 7 million more square feet emptied than in the second half of 2008. Real estate observers expect companies, in total, to keep vacating more space than they lease over the next two to four quarters.

They’re doing it with different twists. But together they’re exerting tremendous pressure on the office property market.

Ireland-based Icon, a contract researcher that serves the pharmaceutical, biotech and medical device industries, shut several of its US offices this year and turned employees at those locations into home-based workers. Lease termination fees related to the closings accounted for much of the company’s $13.4 million in restructuring costs in the second quarter, Icon said.

In June, News Corp.’s Fox Interactive Media division abandoned plans

to occupy 420,000 square feet at the Horizon at Playa Vista development in the Los Angeles area. It will instead try to sublet the space.

“Companies today are certainly looking to give back excess space to their landlords and to downsize their existing space,” said Michael Colacino, president of New York-based Studley, a brokerage that specializes in tenant representation. “Instead of taking 10% more space than they need, companies are saying, “I’ll take 10% less than I need and make it work.”

The rapid employment contraction has pummeled office property fundamentals, which thrive on job growth. Early in the recession, most firms thought they could weather the downturn, says Hessam Nadji, a managing director with Marcus & Millichap Real Estate Investment Services, a large property brokerage.

But the game changed last fall as interbank lending and the commercial paper market froze for six weeks.

“Companies went from recognizing we were in a recession, but not really a crisis, to all of a sudden assuming a worst-case scenario,” said Nadji, who oversees the Encino, California-based company’s research division. “They started slashing payrolls very aggressively, sending the deepest and most abrupt shock to the labor market we’ve probably experienced since World War II.”

The companies also began to aggressively shed space. The office

BARGAINING AT THE OFFICE

Companies are shedding space at a rapid rate to cope with economic layoffs and some are being left with too much room as employees leave. A few are bucking the trend and renewing

office leases as the recession lends bargaining power

FEATURE STORY

vacancy rate climbed 70 basis points in Q2 to nearly 16% nationwide, Reis says, as asking rents fell 2.9% year over year and effective rents fell by 6.6%.

Typically, an oversupply of office space in past downturns has fueled demand as tenants took advantage of lower lease rates or concessions such as free rent, free parking and generous tenant improvement allowances, says Joe Vargas, executive vice president of global real estate firm Cushman & Wakefield’s Southern California operations.

That kind of activity generally marks the beginning of a recovery, but most companies today are wary of taking on more or better space than they absolutely need, despite widely available concessions.

“By all definitions we’re in a tenant’s market,” said Vargas, noting the office vacancy rate in much of Southern California is around 17%. “But what’s peculiar is that we’re seeing a total lack of confidence about the business environment.”

Still, corporations in some markets are pursuing office opportunities. In Chicago, international engineering firm Tetra Tech renewed a 26,400-square-foot lease downtown a year before it expired. The company also is consolidating workers at a nearby building into the space later this year.

The five-year deal allowed Tetra Tech to take advantage of a market where some Class A office building rents have fallen as much as 25%

in the last year. And it also included a tenant improvement package to prepare the space for the new workers, says Lisa Davidson, an executive managing director in Studley’s Chicago office who represented Tetra Tech in the lease.

Davidson represented Associated Banc-Corp in a similar transaction in June, locking in low rents for a lease term beyond the bank holding company’s original 2014 expiration date. That deal included rent abatement and tenant-improvement allowances.

Generally, two motivations are driving early renewals, Davidson says. Some companies searching for cheaper digs are finding competing building owners willing to pay some or all of a lease termination fee at their existing space. They then can use that leverage to bargain for a better deal with their current landlord.

In the other camp, struggling firms are working with their existing landlords to restructure leases to trim current expenses, she said. In return, the tenants are willing to sign up for longer terms, even if the space doesn’t best suit them anymore.

“That’s primarily what we’re seeing in the marketplace today,” said Davidson, referring to the second scenario. “We’re finding that landlords are more and more understanding of the fact that everybody is having a hard time right now.” SVN

– By Joe Gose, Investor’s Business Daily/RCA

25

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If one dream is over, what other dreams wait in the shadows? Will capitalism adapt? Or should we be ask-ing again one of the great questions that has animated

political life for nearly two centuries: What might come after capitalism?

Only a few years ago that question had been parked, deemed about as sensible as asking what would come after electricity. Yet the lesson of capitalism itself is that nothing is permanent. Within capitalism there are as many forces that undermine it as there are forces that carry it forward.

In the early decades of the 19th century, the monarchies of Europe appeared to have seen off their revolutionary chal-lengers, whose dreams were buried in the mud of Water-loo. Monarchs and emperors dominated the world and had proven extraordinarily adaptable. Just like the advocates of capitalism today, their supporters then could plausibly argue that monarchies were rooted in nature. But just as monarchy moved from center stage to become more peripheral, so capi-talism will no longer dominate society and culture as much as it does today. Capitalism may, in short, become a serv-ant rather than a master, and the slump will accelerate this change.

To understand what capitalism might become, we first have to understand what it is. This is not so simple. Capitalism in-cludes a market economy, but many traditional market econo-mies are not capitalistic. It includes trade, but trade too long precedes capitalism. It includes capital – but pharaohs and fascist dictators commanded surpluses too.

The French historian Fernand Braudel offered perhaps the best description of capitalism when he wrote of it as a series of layers built on top of the everyday market economy of on-ions and wood, plumbing and cooking. These layers, local, regional, national and global, are characterized by ever greater abstraction, until at the top sits disembodied finance, seeking returns anywhere, uncommitted to any particular place or in-dustry, and commodifying anything and everything.

After Capitalism�e US banking system faces losses of over $3 trillion. Japan is in a depression. China is headed for zero growth. Some still hope that urgent surgery can restore the status quo. But more feel that we are at one of those rare points of inflection when nothing is the same again

BY GEOFF MULGAN

27

FEATURE STORY

GLOBAL ISSUES: Heads of state at the G-20 Summit in London. Seated, from left: Angela Merkel (Germany), Barack Obama (USA), Lee Myung-bak (South Korea), King Abdullah (Saudi Arabia) and Luiz Lula da Silva (Brazil).

28

Capitalism has a complicated relationship with politics: sometimes constrained and tamed by it and sometimes seeking to domi-nate it. The same pattern can be seen in the US, where both parties are enmeshed in Wall Street – one reason why they have found it hard to respond to a crisis that has so challenged their assumptions (Obama’s early steps have some-times seemed less assured and less radical than Roo-sevelt’s in part because whereas F.D.R. used comparative outsiders for advice, Obama has opted for insiders like Larry Summers and Tim Geithner).

Only a few decades ago, there was great interest in what would supersede capitalism. The answers ranged from communism to managerialism, and from hopes of a golden age of leisure to dreams of a return to com-munity and ecological harmony. But restless capitalism has continued to give grounds for believing that it might destroy itself. A gen-eration ago, the American social scientist Daniel Bell wrote of the “cultural contradic-

tions of capitalism,” arguing that capitalism would erode the traditional norms on which it rests – willingness to work hard, to pass on legacies to children, to avoid excessive he-donism. Japan in the 1990s was a good case in point – its slacker teenagers rejecting their

parents’ work ethic that had driven the economic miracle.

Related arguments present demography as the Achilles heel. Capitalist materialism has undermined the incentives for people to

have children, sacrifi cing income and pleas-ure for the hard grind of family life.

Other critiques have emphasized capital-ism’s vulnerability to success. Extraordinary productivity gains in manufacturing reduce its share of gross domestic product, leav-ing economies more dependent on services which are inherently harder to grow. There’s a matching vulnerability in consumption. Having successfully met people’s material needs, capitalism is threatened if they then lose interest in working hard and making money, turning instead to counseling, mid-life gap years and three-day weekends.

Capitalism’s only response is to invest ever more in creating new needs fueled by anxi-ety about status, or beauty and body mass, a perverse result that may make developed capitalist societies more psychologically trou-bled than their poorer counterparts.

All of these critiques have hit some of their targets, though none gives much sense of how capitalism’s contradictions might be resolved. To fi nd insights into how the current crisis might connect to these longer-term trends we need to look to the work of Carlota Perez, a Venezuelan economist whose writings are attracting growing attention.

Perez is a scholar of the long-term patterns of technological change. In his account, economic cycles begin with the emergence of new technologies and infrastructures that promise great wealth; these then fuel fren-zies of speculative investment, with dramatic rises in stock and other prices. The booms are then followed by dramatic crashes. After these crashes, and periods of turmoil, the potential of the new technologies and infrastructures is eventually realized, but only once new institu-tions come into being that are better aligned with the characteristics of the new economy. Once that happens, economies go through surges of growth as well as social progress.

FEATURE STORYFEATURE STORY

CHANGE IS AFOOT China is set to become a dominant player in the International Monetary Fund, while manufacturers, such as BMW, are placing more and more emphasis on sustainable practices.

Only a few decades ago, there was great interest

in what would supersede capitalism…

29

Before the Great Depression, the elements of a new economy and a new society were al-ready available – and encouraged the specu-lative bubbles of the 1920s. But they were nei-ther understood by the people in power, nor were they embedded in institutions. Then, during the 1930s, the economy transformed, in Perez’s words, from one based on “steel, heavy electrical equipment, great engineer-ing works and heavy chemistry … into a mass production system catering to consumers and the massive defense markets. Radical demand management and income redistribu-tion innovations had to be made, of which the directly economic role of the state is perhaps the most important.” What resulted was the rise of mass consumerism and an economy supported by new infrastructures for elec-tricity, roads and telecommunications. Dur-ing the 1930s, it wasn’t clear which institu-tional innovations would be most successful, but after World War II, a new model of state

regulated capitalism emerged, characterized by suburbs and highways, welfare states and macroeconomic management, which under-pinned postwar growth.

Seen in this light, the Great Depression was both a disaster and an accelerator of re-form. It helped to usher in new economic and welfare policies in countries like New Zea-land and Sweden that later became the main-stream across the developed world.

One implication of Perez’s work is that some of the old has to be swept away before the new can fi nd its most successful forms. Propping up failing industries is in this light a risky policy. Perez suggests that we may be on the verge of another great period of in-stitutional innovation and experiment that will lead to new compromises between the claims of capital and the claims of society and of nature. In retrospect these periodic ac-commodations are as integral to capitalism as fi nancial crises – indeed it’s only through

crisis and institutional reform that capitalism adapts to a changing environment and redis-covers the moral compass that is so vital for markets to work well.

If another great accommodation is on its way, this one will be shaped by the triple pressures of ecology, globalization and de-mographics. The new technologies – from high-speed networks to new energy systems, low-carbon factories to open source software and genetic medicine – have a connecting theme: Each potentially remakes capitalism more clearly as a servant rather than a mas-ter, whether in the world of money, work, everyday life or the state.

Consumption is the second place where the signs of change are unmistakable. In the high debt countries, there will simply have to be less of it and more saving. It’s an irony that so many of the measures taken to deal with the immediate impact of the recession, like fi scal stimulus packages, point in the op-

FEATURE STORYFEATURE STORY

1820

2006

Chile Sweden USA Mexico India China

THE INCREASE IN PER PERSON INCOME

$830 $1,500 $1,500 $900 $750 $800

$10,500 $40,000 $50,000 $9,500 $4,500 $8,500

NO PRECEDENT. Unlike Roosevelt who relied on advice from both political parties during an econonomic crisis, Obama surrounds himself with insiders, including Tim Geithner, the Secretary of the Treasury.

30

posite direction to what’s needed long-term. But there are already strong movements to restrain the excesses of mass consumerism: Slow food, the voluntary simplicity move-ment and the many measures to arrest rising obesity are all symptoms of a swing toward seeing consumerism less as a harmless boon and more as a villain.

Mirroring these changes are shifts in how things are made, as capitalism moves away from the destruction of nature to something closer to balance with it. Visit the BMW factories in Germany and you can see a new model of capitalism that attempts to reuse all the materials that go to make up a car.

Knowledge, too, is dividing between capi-talist models and cooperative alternatives. A decade ago, every government’s indus-trial policies put a premium on the creation and protection of intellectual property. Yet against expectations, different models have thrived as well. A high proportion of the soft-ware used in the Internet is open source.

The third place we should look for changes is the world of work. The varieties of work experience are vast, with huge disparities of pay, fulfi lment and power. In some sectors the slump will give new momentum to the old idea that workers should employ capital rath-er than vice versa. In other sectors, there has been a long-term trend toward more people wanting work to be an end as well as a means, a source of fulfi lment as well as earnings.

Many of these changes are forcing states to consider again how to socialize new risks. The last two accommodations – of the late 19th century and the mid 20th century – were at root about risk, as governments took on the task of protecting people against the risks of poverty in old age, ill-health and unem-ployment. China looks set to catch up with the West in this respect; it desperately needs to create a viable welfare state and health service if the Communist party is to remain legitimate and contain a political backlash against capitalistic excesses. Elsewhere the battleground will be care. As populations age, it is in principle feasible for everyone to insure themselves, and even for that insur-ance to be calibrated to DNA results and lifestyles. But experience suggests that it is hard to design insurance markets for care that are both effi cient and seen to be fair. For the majority the gulf between what’s needed

and what’s on offer is widening, as life ex-pectancy continues to rise and disability be-comes the norm. Within a generation we may be on the threshold of a major expansion of collective provision, born of our shared vul-nerability to disability, dementia and being left without children or spouses to look after us. That provision will be shaped by access to more accurate information about individual dispositions, or the effectiveness of treat-ments, and it will undoubtedly make use of business capabilities. But it is highly unlikely to be capitalistic.

Governments may also be drawn further into fi nancial services. So far the fi nancial services industry has been remarkably slow to develop products better fi tted to contemporary needs. Personal welfare accounts; personal budgets in health; personal carbon allowances – may turn out to be distinct parts of the architecture of a reformed state that pools risks while personalizing its services.

The longer trend is toward seeing gross domestic product as less impor-tant than other measures of social suc-cess, including well-being.

Capitalism’s crisis is, of course, a global one, and has shown up the limi-tations of the global institutions that took shape half a century ago. China is set to become a dominant player in a strengthened International Monetary Fund and World Bank, followed by In-dia and Brazil. The G-20 is edging out the G-8 as the club that matters. And waiting in the wings are possible new institutions to police and manage car-bon emissions.

The result is that a large political space is opening up. In the short run it is being fi lled with anger, fear and confusion. In the longer run it may be fi lled with a new vision of capitalism, and its relationship to both society and ecology, a vision that will be clearer about what we want to grow and what we don’t. Democracies have in the past repeatedly tamed, guided and revived capitalism. They have prevented the sale of people, of votes, public offi ces, children’s labor and body organs, and they have enforced rights and rules,

while also pouring resources into science and skills, and it has been out of this mix of confl ict and cooperation that the world has achieved the extraordinary progress of the last century. We need to rekindle our capacity to imagine, and to see through the still-gath-ering storm to what lies beyond. SVN

Geoff Mulgan is the director of The Young Foundation that undertakes research to iden-tify unmet social needs and then develop ini-tiatives and institutions to address them.

FEATURE STORY

NOW AND THEN The flag flies high at the New York Stock Exchange, though memories of the 1930’s Depression have been rekindled.

31

MY FORECAST

My ForecastWhat’s the broad outlook for commercial real estate? � e fi ve National Directors of Sperry Van Ness take us through developments in each of their sectors

Offi ce and Industrial

By John McDermott

LeasingBy Rich Vaaler

Retail By Joseph French

Hospitality By Tom Hamm

Forecast

MultifamilyBy David Baird

MY FORECAST

32

Office and Industrial

By John McDermott, National Director of Office and Industrial Properties for Sperry Van Ness

Once in a lifetime events are typically mile-stones, short in duration and memorable for the rest of your life. The real estate and financial crash we have all seen and are now living certainly is the first of its kind (The Great Depression comes close) so it quali-fies under the “once in a lifetime” category and, while it is sure to be remembered, it will not be short in duration. As those who survived the Great Depression modified their financial behavior for the rest of their lives, we too will adjust our thinking, our consumption and our investment mindset.

Here are my thoughts. Commercial real estate is 30 times the residential world in the size of its problems. This “event” will clearly last for the next 24 to 48 months and some form of financial intervention from the government is highly probable and nec-essary. Buyers are building war chests while sellers and lenders are in denial. Significant transactions in industrial (Prologis 335 property sale) and office (Maguire proper-ties giving back seven landmark buildings) are certainly the benchmarks we can use today to measure where we are. I believe we have 200 basis points in value left to adjust upward being applied against “sustainable and predictable” income streams, which is our greatest valuation challenge.

Ownership is a moving target and wealth, while diminished, is changing hands. The infrastructure for the distribution of those assets is still the brokerage community. We all just need to survive until the flood gates open and transactions replace rhetoric. •

Leasing

By Rich Vaaler, National Directorof Leasing for Sperry Van Ness

If you signed a commercial lease in the last few years prior to 2008, you are most likely paying more than the industry standard ratio of rent to revenue. Like mortgages originated in the recent past, lease rates were based more on the high demand/low vacancy dynamic than on what businesses should pay for rent.

When the economy was hot, revenue for most businesses was above normal levels so the rent differential was covered. But when the economy started to slow down, and consumers stopped spending, the revenue/rent ratio inverted. Retailers and business owners found themselves unable to pay rent and many well-known companies have since closed or restructured.

Across the country, landlords and tenants

are struggling to find the right balance to reduce rental rates to maintain tenancy and retain as much value as possible. An SVN Advisor saw this coming in early 2008 when he presented an impactful slideshow, including one showing the dramatic effects on value from the decrease in rents combined with the simultaneous increase in cap rates.

So what is the answer? Many SVN Advisors are offering a unique solution to their landlord and tenant clients. The program called Blend & Extend involves restructuring the terms of the current lease and adding additional term to the lease. This process uses best practices and equitable metrics to forge a win-win solution to enable viability for the tenant and maintain value for the landlord.

Blend & Extend agreements are based on what a business should pay for rent as percentage of revenue using national averages for specific business and retail types. They include an extension of the lease term to add security and a recovery period for the landlord to recapture rent concessions.

It will be a while before rents in most markets begin trending upward. This is a time to focus on fundamentals. Landlords should focus on occupancy not rate, and tenants should sign leases with terms that ensure long-term viability. As this balance equalizes, we will see values begin to stabilze.

My Market Indicator

As far as what I watch for in trends? The housing market. If people have equity in their homes they can get financing to start or expand businesses. Larger retailers and employers will expand into new areas where housing growth is steady. Retailers want to see “rooftops”. It all starts with housing. •

Hospitality

By Tom Hamm, National Director of Hospitality for Sperry Van Ness

It comes as no surprise that the lodging indus-try has been hard hit by the economic reces-sion. Among all classes of commercial real estate, hotels are the first to feel the effects of a downturn and late to join the recovery.

Fundamentally, hotels are operating busi-nesses. They must write hundreds of leases, one night at a time. When companies lay off employees by the thousands, they also curtail travel spending, cancel events, and send fewer people to attend conferences and conventions. And families worried about the next paycheck switch from vacations to staycations.

Hardest hit are the luxury resort properties. The St. Regis – Monarch Beach, California became the poster child for demonized corporate excess when the $400,000 AIG party was held there, paid for with government bailout money. The outcry that followed put the kibosh on such visible corporate spending, driving destinations like Las Vegas into a tailspin and the St. Regis into foreclosure.

Because of their high fixed cost component, hotels are saddled with high operating lever-age, especially large full-service hotels heavily dependent on group business. Couple that with high financial leverage, spawned by easy credit in recent years, and you have the recipe for dis-aster in a downturn as we are seeing currently. The recipe works great in boom times because about 90 cents of every incremental dollar of revenue after breakeven flows to the bottom line. And, when demand for hotel accommo-

dations is high (as we saw for example in New York City in 2006 & 2007), hotels are able to increase their room rates frequently. This com-pounds their profitability in good times. Other types of real estate don’t have that advantage.

But now, the industry is experiencing the op-posite trend. Companies are booking their peo-ple into select-service hotels, like Courtyard by Marriott or Hilton Garden Inn, instead of the more expensive full-service hotels with restau-rants and large meeting spaces. In an effort to compete for scarce customers, hotels are slash-ing rates. As upscale hotels reduce their rates to the level of mid-market properties, mid-tier hotels are forced to compete at budget prices.

The problem with this strategy, when viewed from an overall industry perspective, is that these actions do very little to increase the number of travelers; rather it drives down the profitability of the industry. And it will take a long time – several years – until room rates eventually rise to the levels we saw in 2007 (the last boom year). It is a slow process that begins when recovery is well under way. Just as com-panies quickly laid off thousands of workers early in the recession and only rehire in 10s and 20s in recovery, so too hotels will only be able to recover room rates gradually over time.

There is no question that the lodging prop-erty owners are stressed, as are their lenders. According to Real Capital Analytics, “Distress in the hotel marketplace is growing at a faster rate than for any other property type… new distress totaled a stupefying $11.5b for the first six months, mostly added in June.” Distressed properties amounted to $16.8b, involving over 1,000 hotels.

What does all this mean for hotel values and deals? First, at least for the present, there

is no such thing as “market value”. The market is made up of willing buyers and sellers, neither of whom is under duress. Another dimension that should probably be added to the definition is that debt fi-nancing be generally available.

For the most part, hotel sellers today are under duress. They may be draining other resources to keep their properties afloat, facing financing coming due that can’t be replaced due to lowered earnings, under pressure from the brands to renovate or lose the flag and the reservation system, facing foreclosure or a myriad of other troubles. Hence “distressed values” rather than

more normal “market values” prevail.Among the conclusions reached by a think

tank organized by The American Hotel & Lodging Association and published in the July issue of Lodging magazine are:

– Lodging real estate values will continue to drop for the next 12 months;

– A large percentage of investors expect to buy property from lenders as well as purchas-ing notes (loan-to-own);

– The majority felt that interest rates would increase , which would adversely affect owners who financed with variable rate debt.

– Unlevered equity return rates will increase over the coming 12 months.

Certainly, a key to the future of hotel invest-ment transactions is the availability of ade-quate debt financing. With the huge overhang of troubled debt, we believe lenders will contin-ue to be extremely cautious and conservative in their loan originations.

What is interesting is the wide bid-ask spread for potential note sales, especially for institutional quality assets. Lenders evidently are still confident that conditions will improve and fire sale pricing can be avoided. At the same time, lenders seem to be making a concerted effort to avoid foreclosing as long as possible. This has cynically been referred to as, “Extend and Pretend”. They want to avoid liability as-sociated with taking title as well as recognizing that they lack the manpower and experience to asset manage large numbers of hotels. The bulk of the foreclosures we have seen involve older and lower-end properties, where lend-ers have little choice. Some borrowers are so upside down that they are simply handing the keys over to the lender. »

33

MY FORECAST

34

MY FORECASTMY FORECAST

Retail

By Joseph French, National Director of Retail for Sperry Van Ness

With the stock market rallying amid signs the economic freefall may have come to an end, is there reason for hope for the retail real estate market? After yet another quarter of dismal investment sales of activity (just $1.5 billion, a 25% drop from 1Q) and rising cap rates (up 20 basis points), is the smart money finally starting to place bets on a rebounding market? With billions of dollars raised over the past year or so by private equity firms to buy distressed real estate, there is a tremen-dous amount of opportunistic capital ready to pounce once the market hits bottom. Fur-thermore, many REITs have recently com-pleted IPO’s that rose billions of dollars in new equity. With all this potential demand is the market poised for a significant rebound?

A Bridge Too FarThere still remains a gap of 50 to 100 basis points between what buyers are willing to

pay and sellers are willing to accept. Furthermore, buyers are applying far more critical underwriting standards gen-erally assuming that all re-newals will be at lower rents and that many tenants with-out leases maturing will ex-tract some form of rent con-cessions. Sellers who need to sell are “hitting the bid” in the market rather than waiting for some magical buyer to ap-pear and pay full price. Hope-ful sellers who waited during the past year for higher offers are regretting their decisions to do so.

To create demand for a property, it must be marketed at a price that signals to buy-ers that the seller understands today’s pricing. The good news is that with an attrac-tive asking price you should attract numerous offers and create competitive bidding for your property.

The Return of Liquidity – Sort of, Not ExactlyAre we starting to see the beginning of the end to the credit crunch? Well, sort of, maybe. Portfolio lenders have returned in significant numbers after years of being side-lined by the lower rates offered by the CMBS market. Pension funds, insurance companies and those banks not overly exposed to CMBS losses are back making traditional mort-gage loans that they will keep long term in their portfolios. However, these loans are at much lower LTV’s (60%-70%), higher inter-est rates (7%-8.5% and higher), shorter term (often just 3-5 years), shorter amortization periods (20-25 years) and usually recourse (often capped at 25%). There is even hope of the CMBS market returning to life. The large retail REIT, Developers Diversified Realty, has just successfully completed a CMBS of-fering enhanced with TALF funding from the Federal government. Whether one or more successful TALF enhanced CMBS offerings will jumpstart the CMBS market remains to be seen, but this does give reason for hope (there’s that word again).

The Dark Cloud Hanging on the HorizonJust as the slight uptick in the economy and partial resuscitation of the capital markets is bringing hope to the real estate market, the massive “shadow supply” of $173 billion in distressed assets will tip the balance of equi-librium back in the buyer’s favor. To date, only $4.1 billion in distressed assets have been resolved. Special Services will extend many of these loans for at a year or two. But those properties which have declined in mar-ket value below the outstanding principal and/or are experiencing negative cash flows will be foreclosed on and eventually put back on the market.

Is the Dam About to Burst?After nearly two years of anemic investment sales could we soon enter a phase of high sales volume? Sooner or later the Special Servic-ers will have to bring their REO properties to market. With $173 billion in distressed assets there could indeed be a selling frenzy.

Despite pledges by the banks and Special Servicers to not repeat the mistakes of the RTC days back in the 1990’s when proper-ties were dumped on the market without any

Where is the silver lining? First, there is a lot of money on the sidelines waiting for the bot-tom. Of course once the bottom is visible the uptrend will be underway, and as buyers try to catch up prices will be bid up. Buyers who step in now will have better opportunities.

Once lenders, special servicers and our gov-ernment devise a methodology for breaking the logjam of distressed assets (a.k.a Resolution Trust) we expect the market will be flooded, further depressing values; followed by a buyer feeding frenzy. We are already seeing some competitive bidding for limited service hotels where buyers see a strategic opportunity.

Second, distressed transactions are being worked out where the existing lender accepts a new (stronger) owner with a written down mortgage and the seller holds a purchase money note.

Third, buyers are becoming joint venture partners – taking over operating control of the hotel in exchange for funding renovation, or by providing additional support for financing.

It is all about having a creative edge in an en-vironment where values are difficult to deter-mine and financing is hard to come by. •

35

MY FORECASTMY FORECAST

efforts to first enhance their values, it is unlikely that they will have sufficient man-power to properly manage these assets. Furthermore, there will be significant regu-latory pressure to get these distressed assets off their books. To enable Special Servicers to better manage this process, Sperry Van Ness has established its Asset Recovery Team (SVN-ART) as a multi-disciple, single source solution for enhancing value prior to final disposition and then creating maximum competition among potential buyers.

What about the massive deficits and doubling of the money supply? Could inflation be in our future?The president has announced that US defi-cits over the next 10 years are projected to be a whopping $9 trillion. Given past perform-ance of such highly political projections and the obvious inability of politicians to control spending, it is highly likely that the deficit will be much higher. When added to the current National Debt of approximately $12 trillion, that’s means the US economy will be saddled with a National Debt of $21+ trillion by 2019. That’s roughly double the annual GDP! The taxes necessary to service that debt will be massive, yet there are very real limits to which any government can raise taxes before doing so becomes so counter productive for the economy that tax revenues actually de-cline. Given an unserviceable debt load, gov-

ernments throughout history have all done exactly the same thing; they have monetized their debt by “printing” lots of new money. This is, of course, highly inflationary. Added to these inflationary pressures the fact that the Federal Reserves system has doubled the money supply (as broadly measured) in just the past 18 months and then the prospects for future significant inflation are very high indeed. Fed Chairman’s claims that he has a plan to suck back in the money supply just as the economy and velocity of money increase and thereby avoid inflation seem highly opti-mistic.

So what does all this mean for investors? Investing in traditionally safe US treasuries could be a risky proposition in terms of infla-tion adjusted returns. Investing in real estate as a hedge against inflation could be a smart move. Among the different classes of real es-tate, necessity retail properties could be your best bet, especially grocery anchored retail. As the saying goes, we’ve all got to eat. Re-gardless of inflationary pressures, consum-ers will find a way to buy the food they need. As consumers adjust to the higher prices, eventually all retailers will be willing and able to pay higher rents.

We are advising our clients to “stress test” their portfolios based on the assumption of two to three consecutive years of double-digit inflation. Tenants without operating expens-es and real estate taxes pass-throughs (i.e.

not NNN) or with long-term flat rents such as Walgreens can erode the value of a prop-erty. Intermediate term leases (4-8 years) can be a good thing assuming they can be rolled over at higher rents. Even when a lease does not come due, the landlord benefits because his tenant’s ability of pay its rent as meas-ured by its “health ratio” (occupancy cost divided by sales) has improved. The landlord gets a more financially secure tenancy, and should he lose the tenant to bankruptcy he can replace them with a new tenant paying a higher rent. Perhaps most importantly, properties with significant amounts of debt become a benefit as the landlord will be able to pay off this debt with cheaper inflation ad-justed dollars.

ConclusionsThe market may get worse before it gets bet-ter. Without the resurrection or replacement of the CMBS market, interest rates and cap rates will remain high. To properly position investments in high inflationary times in-vestors have to be prepared to invest longer term, at least seven to 10 years. The greatest risk for investors is to have debt come due right in the middle of the high inflation pe-riod when both interest rates and cap rates are high. Properly timed, investors should be able to refinance at lower interest rates or sell at lower cap rates after inflation has once again been tamed. •

Multifamily

By David Baird, National Director of Multifamily for Sperry Van Ness

The housing market is making a comeback, but it’s not impressing anybody. New home sales rose by only 0.7% back in August, miss-ing Wall Street expectations. Builders are seeing a drop-off in foot traffic because home-buyers are running out of time to take advan-tage of a federal tax credit of up to $8,000 for first-time owners, ending November. There were 262,000 new homes for sale at the end of August, down more than 3% from July and the lowest in nearly 17 years. At the current sales pace, that represents 7.3 months of sup-ply, the smallest since early 2007. We are see-ing a softening, but have some way to go be-fore relaxed lending releases this market. •

INNOVATION IN TURBULENT

TIMES

DEVELOPING YOUR CREATIVE EDGE

FEATURE STORYFEATURE STORY

36

�e most succesful brands in the world have relied on the partnership of a pragmatist and a creative.

Here’s how to define yours

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INNOVATION IS A MESSY PROCESS – hard to measure and hard to manage. Most people recognize it only when it generates a surge in growth. When revenues and earnings decline during a recession, executives often conclude that their innovation efforts just aren’t worth it. Maybe innovation isn’t so important after all, they think. Maybe our teams have lost their touch. Better to focus on the tried and true than to waste money on untested ideas.

The contrary view, of course, is that innovation is both a vaccine against market slowdowns and an elixir that rejuvenates growth. Imagine how much better off General Motors might be today if the company had matched the pace of innovation set by Honda or Toyota. Imagine how much worse off Apple would be had it not created the iPod, iTunes, and the iPhone.

FEATURE STORYFEATURE STORY

BY DARRELL K. RIGBY, KARA GRUVER AND JAMES ALLEN

The Left-Brain Type Analytical, verbal, logical, exact

calculations, direct fact retrival and literal.

The Right-Brain Type Creative, holistic, intuitive, approximate calculations, pragmatic and contextual.

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FEATURE STORYFEATURE STORY

THE FASHION MODEL

ashion companies understand one fundamental truth about human beings, a truth overlooked

by all the organizations that try to teach their left-brain accountants and analysts to be more creative: Creativity is a distinct personality trait. Many people have very little of it, accomplished though they may be in other areas, and they won’t learn it from corporate creativity programs. Other people are inordinately creative, both by nature and by long training. They are right-brain dominant. Innovation comes as naturally

But when times are hard, companies grow disillusioned with their innovation efforts for a reason: Those efforts weren’t very effective to begin with. Innovation isn’t integral to the workings of many organizations. The creativity that leads to game-changing ideas is missing or stifled. Why would any company gamble on a process that seems risky and unpredictable even in good times?

When talking with executives about innovation, we often point to the fashion industry as a model. Every successful fashion company essentially reinvents its product line and thus its brand every season. It repeatedly brings out products that consumers didn’t know they needed, often sparking such high demand that the previous year’s fashions are suddenly obsolete. A fashion company that fails to innovate at this pace faces certain death. Understanding that, fashion companies have refined an organizational model that ensures a constant stream of innovation whatever the state of the economy.

At the top of virtually every fashion brand is a distinctive kind of partnership. One partner, usually called the creative director, is an imaginative, right-brain individual who spins out new ideas every day and seems able to channel the future wants and needs of the company’s target customers. The other partner, the brand manager or brand CEO, is invariably left-brain and adept at business, someone comfortable with decisions based on hard-nosed analysis. In keeping with this right-brain-left-brain shorthand, we refer to such companies as “both-brain.” They successfully generate and commercialize creative new concepts year in and year out. When nonfashion executives pause and reflect, they often realize that similar partnerships were behind many innovations in their own companies or industries.

The world’s most innovative companies often operate under some variation of a both-brain partnership. In technology the creative partner might be a brilliant engineer like Bill Hewlett and the business executive a savvy manager like David Packard. In the auto industry the team might be a “car guy” like Hal Sperlich – a major creative force behind both the original Ford Mustang and the first Chrysler minivan – and a management wizard like Lee Iacocca.

The former track coach Bill Bowerman developed Nike’s running shoes; his partner, Phil Knight, handled manufacturing, finance, and sales. Howard Schultz conceived the iconic Starbucks coffeehouse format, and CEO Orin Smith oversaw the chain’s rapid growth. Apple may have the best-known both-brain partnership. CEO Steve Jobs has always acted as the creative director and has helped to shape everything from product design and user interfaces to the customer experience at Apple’s stores. COO Tim Cook has long handled the day-to-day running of the business. (It remains to be seen, of course, how Apple will fare given Jobs’s current leave of absence.)

No industry has gone further than fashion, however, to incorporate both-brain partnerships in its organizational model. Of course it makes no sense for other kinds of companies to copy the fashion template exactly. But Procter & Gamble, Pixar, and BMW are among those that have borrowed heavily from fashion’s approach and enjoyed remarkable results.

to them as music did to Mozart, and like Mozart, they have cultivated their skills over the years. The first lesson from fashion is this: If you don’t have highly creative people in positions of real authority, you won’t get innovation. Most companies in other industries ignore this lesson.

It isn’t just innovation in the usual sense of products and patents that fashion companies pursue. Their creative people typically imagine a whole picture and see every innovation as a part that has to fit that whole. They are less concerned with perfecting any one component than with creating a brand statement that enhances the entire customer experience. At Gucci Group, for example, creative directors concern themselves with anything that affects the customer – the look and feel of retail stores, the typography of ads, and the quality of postsale service as well as the design of new products. Not every facet of the brand has to meet the narrow profit-and-loss test that many non-fashion companies require of their innovations. Gucci may only break even on its latest runway apparel, but those designs generate excitement among shoppers, who feel that they are sharing in the glamour of high fashion when they buy a Gucci item. Similarly, Starbucks doesn’t maximize sales per square foot in its cafés (heresy to many competitors), because it allows – even encourages – customers to linger for hours over a cup or two of coffee. Yet that innovative, homelike environment is precisely what distinguishes the chain from other coffee shops in the eyes of the customer.

Conventional companies look at innovation differently – and wrongly. Without creative people in top positions, they typically focus on innovations that can be divided and conquered rather than those that must be integrated and harmonized. They break their innovations into smaller and smaller components and then pass them from function to function to be optimized in sequence. The logic is simple: Improving the most important pieces of the most important processes will create the best results. But breakthrough innovation doesn’t work that way. What if a movie studio hired the best actors, scriptwriters, cinematographers, and

f

hat should the partners be in charge of? The scale and scope of an innovation unit depend on

both the company and the industry. Robert Polet’s arrival at Gucci Group followed the departure of the famously successful designer-executive team of Tom Ford and Domenico De Sole. Ford had served as creative director for all the group’s brands, including Yves Saint Laurent and Bottega Veneta. Polet thought this centralized structure stretched Ford’s creative genius too thin. “The business model – I call it one size fits all – hasn’t worked for all the

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FEATURE STORYFEATURE STORY

PEOPLE: BUILDING EFFECTIVE PARNTERSHIPS

DEFINE A PARTNERSHIP-FRIENDLY STRUCTURE

The executive who oversees a brand should have finely honed

matchmaking skills – but should also be ready to order a divorce

when required

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w

so on, but neglected to engage a director? The manufacturers of several portable music players tout technical specifications that are apparently superior to those of Apple’s iPod. Yet they continue to lose sales and profits to Apple, because the iPod offers an overall experience – including shopping, training, downloading, listening, and servicing – that the others have not yet matched. Little wonder that many companies may increase their patent portfolios yet grow disillusioned with their innovation efforts.

What is required to harness this kind of creativity and apply it to the needs of a business? Creative people can’t do it alone: They’re likely to fall in love with an idea and never know when to quit. But conventional businesspeople can’t do it alone either; they rarely even know where to start. And a true both-brain individual – a Leonardo da Vinci, say, who is equally adept at artistic and analytic pursuits – is exceedingly rare. So innovation requires teamwork. Fashion companies have learned to establish and maintain effective partnerships between creative people and numbers-oriented people. They structure the business so that the partners can run it effectively, and they ensure that each is clear about what decisions are his or hers to make. These companies have also learned to foster right-brain-left-brain collaboration at every level, and so continue to attract the kind of talent on which their survival depends.

o anyone outside the fashion industry, it’s astonishing how commonly designers team up with

talented business executives. Until 2003

Calvin Klein’s business alter ego was Barry Schwartz. The pair grew up together in the same New York City neighborhood and had been partners since the beginning of the Calvin Klein label. Marc Jacobs, the creative director of Louis Vuitton and Marc Jacobs International, relies on his longtime partner, Robert Duffy, to manage the business. “Marc Jacobs is not Marc Jacobs,” he told Fortune magazine. “Marc Jacobs is Marc Jacobs and Robert Duffy, or Robert Duffy and Marc Jacobs, whichever way you want to put it.” Yves Saint Laurent partnered with Pierre Bergé, Miuccia Prada with Patrizio Bertelli, Valentino Garavani with Giancarlo Giammetti.

Most of these well-known teams date back years. But a partnership may not work out, or one of the duo may move on, so creating new partnerships is among a leader’s chief tasks. Soon after the Unilever veteran Robert Polet became the chief executive of Gucci Group, in 2004, he replaced the CEO of the flagship brand and eliminated two of the three creative directorships attached to it. His new appointments were controversial. Mark Lee, who had been heading the money-losing Yves Saint Laurent brand, became the Gucci brand’s CEO. Frida Giannini, in her early thirties at the time, became its sole creative director. Innovation flourished, and the Gucci brand’s revenues grew by 46 percent during the four years of the partnership (Lee has since decided to leave Gucci).

Building a strong partnership isn’t simply a matter of throwing two individuals together, of course. “It’s truly like a marriage,” Polet told Time magazine in 2006. “It has ups and downs, and you have disagreements, (but) with a common purpose and within a common framework.” Polet may be understating the contentiousness that often characterizes these relationships. Some – like some marriages – don’t work at all. (Think of Steve Jobs and his earlier partner at Apple, John Sculley.) Many others are punctuated by shouting matches, temporary separations, and similar signs of intense

discord. Marc Jacobs sometimes infuriated Robert Duffy. The Pixar director Brad Bird and the producer John Walker are “famous

for fighting openly,” Bird has been quoted as saying, “because he’s got to get it done and I’ve got to make it as good as it

can be before it gets done.”Some of the tension between the

partners is productive. (“Our movies aren’t cheap, but the money gets on the screen because we are open in our conflict,” says Bird, the Oscar-winning director of The Incredibles and Ratatouille.) And some of it is destructive, dooming the relationship. The executive who oversees a brand should have finely honed matchmaking skills – but should also be ready to order a divorce when required.

You can improve the chances that a partnership will work. Here’s how…

FEATURE STORY

40

Uncreative people have an annoying tendency to kill good ideas and encourage bad ones

ESTABLISH ROLES AND DECISION RIGHTS

s

brands,” he said in 2004. “They have the same target consumer, the same retail strategy, and a central creative direction I’m not sure has worked well for all.” Polet made each brand a unit of innovation, established a creative-commercial partnership at the top of it, and asked the partners to focus on the needs of a distinct group of consumers.

Such decentralization usually deepens insights into customer opportunities and competitor vulnerabilities and allows greater creative freedom. It’s vital, however, to have an organizational structure that balances the benefits of decentralization with the efficiency of centralization.

Otherwise a company will go through repeated cycles of spawning lots of local innovations to keep growing revenues in good times and then reversing course to achieve efficiencies in downturns. Danone’s dairy division found that balance recently by shifting more innovation responsibilities from regional offices to a centralized team made up of both creative and commercial people. The regional groups had developed several great products, including the popular “probiotic” drink Actimel. But Danone’s new-product portfolio came to contain too many regional products with limited scale and poor financial returns. The centralized team conducted global research to assess opportunities and make the necessary trade-offs. It was able to invest enough marketing dollars to turn Actimel into one of the company’s fastest-growing global brands.

Executives at conventional companies often hamper innovation by failing to distinguish between innovation units and capability platforms. Innovation units are profit centers – similar to business units. They may be defined by brands, product lines, customer segments, geographic regions, or other boundaries. Their work involves choosing which customers to serve, which products and services to offer, which competitors to challenge, and which capabilities to draw upon.

What they have in common is that the innovation buck stops there. The units’ leaders have to balance creative aspirations

with commercial realities, which is why a partnership at this level is so important. Capability platforms, on the other hand, are cost centers. They build competencies that innovation units can share. Shared platforms create economies of scale, allowing a company to make investments that individual businesses could not afford and to take risks that smaller units could not tolerate.

Like innovation units, capability platforms should also be sources of

competitive advantage. In a fashion house they might include distribution and

logistics facilities, color and fabric libraries, and advertising-media purchasing services.

A company should create capability platforms only when its innovation units will choose to “buy” from them rather than to develop the capabilities independently or acquire them from outsiders. Innovation units own their final results, so they must also own as many capability-sourcing decisions as possible.

Protectionist policies that force them to use substandard corporate resources hamper innovation.

ome years ago two psychologists at Cornell University wrote an article titled “Unskilled

and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments.” The title alone captures a pitfall for left-brainers: Unskilled at coming up with breakthrough innovations,

they may nevertheless believe they are good at evaluating them. They are usually wrong. Joseph Stalin allegedly denounced a Dmitri Shostakovich composition as “chaos instead of music,” banning for almost 30 years a work by the man many music critics have called the most talented Soviet composer of his generation.

Many companies nevertheless give left-brain analytic types an opportunity to approve ideas at various stages of the innovation process. This is a cardinal error. Uncreative people have an annoying tendency to kill good ideas, encourage bad ones, and – if they don’t see something they like – demand multiple rounds of “improvements.” They add time, cost, and frustration to the innovation process even in a boom. In a downturn the effect is magnified. Financial analysts are sent in to prune the new-product portfolio. Charged with reducing costs, they often clumsily break up whatever partnerships exist and get rid of the creative people who were essential to them.

A better approach, in any economic environment, is what Polet has called “freedom within the framework” – a well-defined division of responsibility that plays to both partners’ strengths. At Gucci the CEO and creative director of each of the group’s 10 businesses work together to craft a sentence that captures the essence of the brand. Then each brand’s CEO establishes the framework within which creative decisions will be made: objectives, methods for accomplishing them, budget constraints, and so on. He or she maps out a three-year plan showing the brand’s strategic direction and projected financial performance. During tough times the financial resources may be limited, but the CEO and the creative director decide together how to deal with those constraints.

Product development occurs within this context. Merchandisers working under the brand’s chief executive develop market grids showing customer segments, competitive products, and price ranges. If there’s an opening on the grid, it becomes the target for a new product: a handbag, say, for a specific niche, with a particular price point and a particular margin. Product specialists offer

aintaining the balance in a creative-commercial partnership is always difficult. When Polet

joined Gucci, he found a company with a strong design culture. What its people needed, he believed, was an equally powerful appreciation for the commercial aspects of the business.

He started the rebalancing process by setting ambitious targets for sales and earnings growth: The Gucci brand, which accounted for 60 percent of revenues and most of the group’s operating profits, would

well in an environment without detailed job descriptions? Gucci also runs a program to develop leaders on the commercial side. One of its goals is to make leaders more aware of different styles of thinking and communicating, including their own.

Chris Bangle, until 2009 the design head and de facto creative director at BMW, described his job as “balancing art and commerce” – which, he said, required that he “protect the creative team” and “safeguard the artistic process.” That meant knowing his designers well enough to let them wrestle with the fuzzy front end in ways that improved ideas rather than killing them prematurely.

It also meant knowing the right moment to intercede and shift the focus of product development from design to engineering, so that designers didn’t “tweak and tinker forever.” Bangle made a point of fighting to preserve the integrity of designers’ creations, thus gaining their trust, even though he might eventually have decided to kill a particular concept.

FEATURE STORY

FOSTER TALENT AND NURTURE COLLABORATION

41

TRANSFERRING THE MODEL TO OTHER INDUSTRIES

m

options for materials and manufacturing processes. The creative director then takes over, with full freedom to create a product that meets those specifications. If trade-offs have to be made, the creative director calls the shots, so long as the specs aren’t violated. The ultimate judge of the innovation is the marketplace, not a higher-ranking individual or committee within the organization.

he partnerships at the top of fashion companies are the most visible. But both-brain

organizations like Gucci understand the importance of replicating these partnerships at all levels of the company. They hire both right-brain and left-brain people. They make sure that both types have strong mentors and career paths that suit their aspirations. They seek to extend and capitalize on individuals’ distinctive strengths rather than constantly struggling against deeply ingrained cognitive preferences. When the organizations find partnerships that work well, they create opportunities for those people to work together as frequently as possible.

The particulars, of course, will vary from one company to another. At Gucci the creative directors are responsible for hiring other creative people who, the directors believe, will live and breathe the values of a particular brand. Gucci’s human resources director, Karen Lombardo, says she looks for competencies and personality traits that foster teamwork. Are job candidates comfortable with ambiguity? Can they accept the fact that they don’t have control over the final product? Can they function

t

double sales within seven years, and almost all the money-losing brands would turn profitable within three years. To reach these objectives, Polet moved the organization’s focus away from personalities and toward the brands themselves. Its advertising messages abandoned heady runway fashions in favor of products that core customers actually bought. He spoke frequently about making the brand, not the talent, the star. He selected creative directors who shared his philosophy and were more passionate about the product than about potential celebrity. He stressed teamwork over one-man or one-woman shows, encouraging a “culture of interchange” among brands, geographies, and management levels. He established quarterly management committee meetings, annual leadership conferences for the top 200 managers, and a wide variety of experience-sharing meetings for other functional experts.

Polet also challenged the conventional wisdom that customer research was irrelevant to luxury goods; he commissioned an international focus group of 600 Gucci customers along with regular reviews of the customer feedback by Gucci executives. He encouraged his managers to learn from successful competitors – among them Zara, a Spanish apparel retailer that produces inexpensive interpretations of designer goods in cycles as short as two weeks rather than the traditional six to eight months. (The suggestion that an eight-month production cycle was unnecessarily long reportedly so angered one senior executive that he stormed out of the meeting.)

Though Polet’s changes were often controversial, they worked. All but one of the brands met their three-year plans, several ahead of schedule. Results were so impressive that Fortune named Robert Polet Europe Businessman of the Year for 2007.

Can the rebalancing process work in the opposite direction – that is, can nonfashion companies boost their right-brain potential by learning fashion’s lessons?

The experience of Procter & Gamble under A.G. Lafley suggests that they can. Lafley became CEO of P&G in June 2000. From the beginning he believed that creativity was a missing ingredient in the company’s

42

What is required to harness this kind of creativity and apply it to the

needs of a business?

innovation strategy. P&G’s technical innovations lacked the design elements that create holistic, emotional experiences for consumers and build their passion for brands. Believing that design could become a game changer for the company, Lafley set out to shake up the culture by increasing the flow of creativity. He proclaimed, “P&G’s ambition is to become a top design company as part of becoming the innovation leader in its industry.”

In 2001 Lafley tapped Claudia Kotchka from the package design department to create P&G’s first global design division. Kotchka reported directly to him, which sent a strong signal to the organization. The company hired about 150 midcareer designers over five years – another powerful signal. Lafley established a design advisory board, bringing in outside experts at least three times a year to examine and shape innovations. Kotchka and Lafley also launched Design Thinking, an initiative to teach new ways of listening, learning, visualizing, and prototyping. They redesigned corporate offices and other venues to open up work spaces and encourage collaboration. They built innovation centers around the world, replicating home and shopping environments to encourage co-creation insights with consumers and retail partners. Realizing that designers tend to “listen with their eyes,” Lafley encouraged research that focused less on what customers said than on what drove their emotions, beliefs, and behaviors.

Inside a converted brewery on Cincinnati’s Clay Street, P&G built an innovation design studio. Conference rooms there are filled with whiteboards, chalkboards, toys, and crayons. When a significant opportunity or challenge surfaces at P&G, team members from a variety of functions are released from their regular responsibilities for several weeks to immerse themselves in creative problem solving at Clay Street. Skilled facilitators train and guide the group. Experts from both inside and outside P&G are called in to provide opinions. The studio seeks to create “Eureka!” moments, and Lafley claims that every team that has gone to Clay Street has had one.

Under Lafley, P&G’s organic growth has averaged six percent – twice the average for the categories in which it competes – and its stock reached record highs before the current downturn. Its cultural transformation has produced such positive results that Chief Executive magazine named Lafley CEO of the Year in 2006.

Both Polet and Lafley launched their transformation programs as new CEOs (Polet came from outside Gucci; Lafley had spent 23 years at P&G). They both set compelling and credible objectives, making it clear that the goal was to accelerate profitable growth as well as to increase creativity. Both focused on the need for greater collaboration and teamwork, increasing respect for the unique talents of all cognitive styles in the organization and emphasizing simultaneous cooperation rather than development processes that passed innovation decisions from one function to another.

Both also strengthened mechanisms for listening to customers, though in somewhat different ways. And both started by building on legendary cultural strengths – Gucci’s design talents and P&G’s brand-management skills. The difference, of course, lay in the starting points of their organizations and, therefore, in the priorities and specific techniques each relied on. They used hiring, development, and talent management programs to rebalance their cultures – more left brain here, more right brain there.

Any executive knows that innovation is essential to success. The problem is that it takes both halves of a brain to make it happen – the imaginative, holistic right brain as well as the rational, analytic left brain.

Consider the wide range of activities that might be necessary to improve innovation significantly. Management might need better visioning skills to foster a culture of curiosity and greater risk taking – primarily right-brain activities. Left-brain analytic tools might be needed to steer innovation investments toward the most promising areas. The business might need more creativity

to generate ideas, but also analytics to constrain unprofitable projects. The right-brain design process might not be strong enough to transform intriguing ideas into practical products. Or the analytic left brains might need to fund the product pipeline to favor a different mix of large and small bets. Sometimes the products are fine but marketing needs to create stronger, more emotional bonds with customers, or engineers need to boost efficiency and profitability through improvements in cost or quality.

Both-brain organizations recognize that such changes won’t necessarily happen all at once. They put together people with the necessary brain orientation in the right places and at the right times.

Indeed, we frequently find both-brain principles flourishing and innovation thriving in some parts of an organization

even as other parts languish. Many executives have struggled to recognize and replicate the patterns of success – a definite right-brain task.

But with both-brain hypotheses firmly in mind, you can apply left-brain scientific testing methods. One way to get started is to pick two or three business areas in which substantial innovations feel important and achievable, despite the sluggish economy of today.

Build creative-commercial partnerships with exceptional leaders, even if that means moving key team members around. Give them bold challenges and freedom within a framework. Create a strong capability platform or two. Then track the results, including innovation levels, customer behaviors, financial performance, and cultural health. We suspect you’ll say what Robert Polet told us: “I could never go back to the conventional way of doing business.”

Darrell K Rigby is the head of Bain’s global practices in innovation and retail and the author of the forthcoming Harvard Business Press book Winning in Turbulence. Kara Gruver leads Bain’s North American consumer products practice. James Allen is a co-head of Bain’s global strategy practice. All three are partners with Bain & Company. SVN

FEATURE STORY

43

We were recently asked: When will this recession end?

Sometime in 2010. Unfortunately, it’s hard to be more precise than that. On one hand, there’s good evidence that the economy isn’t getting worse and, as many have observed, a few green shoots are emerging from the rubble of the economic crisis. On the other hand, looming defi cits and proposed

government actions dampen our optimism about the recovery’s scope and pace. Our forecast, then, will have to be a bit vague.However, we can be much more concrete when predicting what companies can expect when the economy fi nally improves: a whole different hiring game. Changed, and harder.

Look, this recession has really shocked people. The bottom fell out fast and affected so many people so deeply, leaving virtually no organization unscathed and causing ubiquitous layoffs. A year ago, a job in business meant promise and payback. Now, working in business is fl at-out scary. You just don’t know what bad news awaits when you arrive at work in the morning.

The result? Many people don’t want to work for ‘the man’ anymore. They want to work for themselves or someone they know and trust. A marketing specialist in Chicago told us recently, ‘My husband was fi red. My hours were cut in half. As soon as we get on our feet, we’re starting our own business. We’re never going to let ourselves be vulnerable again.’

She’s hardly alone. A tidal wave of emotion is sweeping from coast to coast – see the hundreds of messages sent to us via our website and Twitter. To be someone else’s employee, people are saying, is to be subject to someone else’s whim.

The ultimate impact of this phenomenon could be profound. When the economy recovers, many companies might, for the fi rst time ever, have to deal with a candidate pool that’s not particularly excited about working for them. As if surviving the recession wasn’t challenging enough!

Fortunately, companies can start preparing now for this changed hiring dynamic. All they have to do is, well, stop acting like big

companies – bureaucratic and impersonal – and start creating an atmosphere that’s fast moving and vibrant. Working at small companies and entrepreneurial ventures has a real upside, and big companies will need to mimic it. Teams must be smaller, organizations fl atter, and the values of candor, informality and innovation an integral part of the culture.

People throughout the organization will need to feel that what they say really matters, regardless of rank and title. And perhaps most important, companies will need to understand that when the recovery arrives, many star employees will stop waiting to be given the authority to make decisions or to be promoted for good performance. The alternative – running your own show – will have too much appeal.

Now, we’re not saying that big companies haven’t faced competition in this arena before. In the go-go 1990s before the dot-com bubble burst, MBAs fl ocked to Silicon Valley in unprecedented numbers. Promising new industries always attract talent.

But the coming dynamic won’t be a short-term trend. This recession has left a deep scar on the work force’s psyche. Previous recessions seemed to come on more slowly, with layoffs occurring more gradually. And previous recessions did not leave people blaming business, especially big business, for what went wrong in the fi rst place.

Something fundamental has changed, and it will be seen in how people choose their next jobs.

Is that a bad thing? Actually, it may be just the opposite. Our economy will only be helped if more people become entrepreneurs; if the proposed capital gains tax increases don’t take a toll on them,

those entrepreneurs will be an engine of job creation. And big companies will only improve if they change in ways that appeal to entrepreneurial employees. In the economy of the future, speed, fl exibility and innovation will be more crucial than ever.

So, no, we can’t be precise about when this terrible recession will end. All we know is that it will eventually happen, and then the brave new employees will rule the day. And only brave new companies will entice them back. SVN

Jack and Suzy Welch on Winning The dynamic duo confi rm a key Sperry Van Ness business strategy – inspired teamwork

FROM THE TOP

Jack and Suzy Welch are the authors of the international best-seller Winning. Their latest book is Winning: The Answers: Confronting 74 of the Toughest Questions in Business Today.

Josh Jansen: Coast Sperry Van NessLocation: Everett, WashingtonMarket Dominance: ApartmentsJosh’s team is focused on developing new business in the 15 and up apartment category, however, the last nine months have brought opportunities in the following categories: 20 to 65 unit apartments from King County to the Canadian Border; “medium” sized apartment land – $1m to $10m King County to Canadian Border; Mobile Home Parks Pierce County North. A total of 23 closings have taken place in these categories since January 2009 totaling $80,177,418 in volume. The team has closed $20,537,000 in volume (25.61%) or six transactions (26.09%).

Lock Richards: Sperry Van Ness Highland CommercialLocation: Nevada City, CaliforniaMarket Dominance: Office, Industrial, Commercial, Land (Sales & Leasing)Lock services a relatively small geographic market, Nevada County and more specifically the two major towns Grass Valley and Nevada City. He has dominated the market competing as one agent with a leasing assistant against CB Commercial, a firm that monopolized the market for over 10 years before he moved there and who had three to four full-time active agents until recently. His market share was calculated using the Nevada County MLS system which puts him on average 2%-6% ahead of the competition over the entire Nevada County and 3%-13% ahead on Nevada City and Grass Valley. Lock owes much of this to his assistants and to the SVN platform of cooperation, which is the polar opposite of the competition.

Andy and David Burnett: Sperry Van Ness – William T Strange AssociatesLocation: Oklahoma City, OklahomaMarket Dominance: ApartmentsThe duo reached a 2008 sales volume of $141,723,500 that translates into a market share of 53.46%. This market share was calculated by including the number of total transactions in the market against the number of transactions completed by the advisors. The share is calculated on total sales volume. There were 31 transactions in the market with a total of $265,098,502. Andy and David handled seven of these with a total value of $141,723,500.

Mike Eyer and Julius Tabert:

Sperry Van Ness – The Commercial Group, LLC

Location: Loveland, ColoradoMarket Dominance: LeasingThe pair has dominated the leasing market through the sheer number of transactions and square footage they have leased. Figures on CoStar show them dominating the market with 53% of all transactions and 42% of all leased footage.

Doug Carter: Sperry Van Ness – Doug Carter, LLC

Location: Colorado Springs, ColoradoMarket Dominance: ApartmentsDoug regularly captures 50% of apartment sales in his area at any given time. He has tracked his market share based on all apartment sales that occur in his market and when he does “brokered” sales only his share is much higher, often having as many sales as all the other local firms combined. Doug recently sold a record 40% of all multifamily properties sales in 12 months, including the largest multifamily property sale in Colorado Springs’ history.

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Colorado Springs’ history.

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in the 15 and up apartment category, however, the last nine months have brought opportunities in the following categories: 20 to 65 unit apartments from King County to the Canadian Border; “medium” sized apartment land – $1m to $10m King County to Canadian Border; Mobile Home Parks Pierce County North. A total of 23 closings have taken place in these

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SVN advisors whoown the market

REPORT BACK

We recently asked for nominations for advisors and SVN fi rms who dominate a market or asset class. The selection was not necessarily made on total market size but also on the dominance of a smaller asset class or geographic area of tremendous importance. Here are some of best…

Miguel de Arcos: Sperry Van Ness – Paradigm Commercial Real Estate GroupLocation: Lake Mary, FloridaMarket Dominance: OfficeMiguel and his team completed over $15.5 million in sales during 2008. Their market share is estimated at 81%+ for the City of Lake Mary, a powerful commercial submarket North of Orlando. It holds just under 5 million square feet of office space and is home to large corporations such as Mitsubishi, Chase, Symantec, Sperry Van Ness/Paradigm and the world headquarters of AAA. Their market dominance was calculated from data from Real Capital Analytics. In 2008 there were approximately four office transactions in the Lake Mary market totaling $19.2m. Miguel completed three of these four, totaling $15.5m, which accounted for the 81% market share.

Peter Colvin: Sperry Van Ness – Silveri CompanyLocation: Grand Rapids, MichiganMarket Dominance: Investment SalesWhen Peter’s son, Chris, joined him in 2008, it was decided to focus on investment properties leased to Dollar General and Family Dollar. They saw the looming recession and banking challenges ahead and wanted to provide the safest possible investments for their client. Their reasoning was based on the fact that the credit of these two tenants was very strong, the sale price per SF was very reasonable ($80/SF), they were still finance-able with reasonable down payments, they required minimum management, deals were affordable ($700,000-$800,000 sale price) and the properties were traded more as a commodity then a trophy property. Chris located all 600 Michigan locations and set out to find the owners. Over 12 months they achieved a 90%+ market share of all the sold properties in the State in that category (13 total sales) which they continue to do. Their nickname is the Dollar Store Gurus and would soon like to be known as the Sperry Van Ness National Dollar Store Team. The Winchester office of Sperry Van Ness

Location: Winchester, VirginiaMarket Dominance: Closings, Listings & SignageStatistically the Winchester team is located in an MSA of around 100,000 people. Sales this year are $16,211,949 to date, which represents about $162 in sales volume for every single “person” living within this MSA. This is a ratio not found in many other offices. In addition, they have another $7.4m in sales value on their books, still to close before the end of this year. This will then approach $24m in sales volume for the office. At best, the Winchester office has an absolute minimum of 50%+ market share. This is due to how they have positioned Sperry Van Ness within this market and the reach they have over the competitioin when it comes to marketing exposure and results. Another key factor is support for their clients and strong communication skills.

Bradley Gillis: Sperry Van Ness – Miller Commercial Real EstateLocation: Salisbury, MarylandMarket Dominance: Sales & ListingsBradley and his team captured a staggering 75% of sales volumes and 92% of listings in Wicomico County between January and June this year. From a total of 30 listings (sold/leased) in the county they were responsible for 22 with a buy side of 16. Of the seven listings (sale only) the SVN Miller team secured six with a buy side value of $3,508,500.

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Peter Colvin: Sperry Van Ness – Silveri Company

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focus on investment properties leased to Dollar General and Family Dollar. They saw the looming recession and banking challenges ahead and wanted to provide the safest possible investments for their client. Their reasoning was based on

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Miguel de Arcos: Sperry Van Ness – Paradigm Commercial Real Estate Group

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JEFFREY JOHNSTON, a spotter for the auctioneer, California-based Real Estate Disposition Corporation, calling out bids on foreclosed houses at the Jacob K Javits Convention Center, Manhattan. A mob of potential buyers convened at the Javits Center for an auction of foreclosed homes, a fast-paced and somewhat unusual happening in a place more used to trade shows and corporate events. Outside some 20 protesters – among them labor leaders and antiwar activists – were critical of both the auction and the billions of dollars the federal government has devoted to bailing out financial institutions.

803,489 properties received foreclosure filings in the first quarter of 2009, according to the U.S. Foreclosure Market Report.

This translates into a 9% increase from the previous quarter and an increase of nearly 24% from the same period in 2008. SVN

THE BIG PICTURE

The numbers...

New York

Foreclosure AuctionManhattan

DIVISION FOCUS

NON-PERFORMINGASSETS?

WHAT CAN YOU DO ABOUT

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NON-PERFORMINGASSETS?

WHAT CAN YOU DO ABOUT

The Sperry Van Ness Asset Recovery Team consists of real estate professionals who specialize in finding a creative solution for disposing of your asset or distressed portfolio anywhere in the United States

BY JOHN JOHNSON

Distressed Assets Done Right – that could quite easily become a company motto at Sperry Van Ness. While many brokerage firms have been rushing to create a distressed assets practice, we have been in the business for years.

Unlike other firms that have banded together thinly staffed, disparate groups of brokers trying to cash in on the flood of non-performing assets hitting the market, we take a different approach. Why are we different, and what you should look for when engaging a firm to assist you with distressed assets? If you’re a bank, hedge fund, life insurance company, pension plan, equity firm, mezz lender, asset manager, trustee, custodian, receiver, master servicer, sub-servicer or special servicer, then read on...

If you belong to any of the categories above, you have two problems. Firstly, the non-performing assets you already know about and secondly, the assets that you still have to identify that will more than likely become non-performing assets in the future. As a professional real estate advisor with more than 30 years experience in dealing with troubled assets spanning multiple asset classes across 39 states (and counting), I can tell you that it matters greatly who you select as a special assets advisor. As with any business, knowing who

to trust when placing an asset in their hands is always the tricky part. An economic crisis, such as the one we now find ourselves in, makes this selection process even more crucial. Desperate times can bring out desperate measures in some people, who might not have your interests at heart. Most brokerage firms have rushed into the distressed assets arena by quickly reallocating headcount to resemble an advisory practice when the skill-sets and core competencies needed to do so are sorely lacking. How is Sperry Van Ness different in this regard?

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StaffingWe don’t just have a few brokers in New York trolling for deals under the label of a special assets group. We have more than 73 seasoned professionals ranging from property and asset managers, to appraisers and analysts, to structured finance specialists, to note sales experts, to seasoned workout consultants and accelerated marketing experts.

The most important aspect of the Sperry Van Ness Asset Recovery Team (SVNART) is the emphasis on the word “team”. This is not just applicable to the actual SVNART team themselves but to the entire Sperry Van Ness network of Advisors. It takes a blending of sophisticated skill sets and core competencies to effectively advise a client on their best possible resolution of a distressed asset, something that cannot be done in isolation and without taking the bigger picture into account.

Current and future risk are both crucial considerations when reviewing a property portfolio and options need to be put on the table from which a client can choose. To achieve this, Sperry Van Ness Advisors draw on the collective experience of over 900 Advisors across the country all of whom come to bear on the specialized SVNART team of 73 professionals as well as 12 specialized alliances working with them. The Advisors, likewise, have a resource in this team too, who in turn give them the strategic support needed to help their clients with solutions for troubled assets. It is this unselfish approach to doing business and putting the client’s interest first that has contributed to Sperry Van Ness becoming one of the most successful real estate companies in the market today. As the old proverb goes, “All for one and one for all.”

As a way of ensuring that all Advisors are kept informed about distressed assets the SVNART team has placed them online. Jerry Anderson, the leader of the Asset Recovery Team says, “Distressed properties now show up on svnart.com under a new tab we have inserted

on our home page. If an Advisor tags a property as distressed in OTS it will appear here.”

In terms of where the market currently lies, Jerry also has some observations. “Many sellers are still in denial regarding the expectation of buyers, who obviously expect to pick up bargains in the current economic climate. With buyers now beginning to inch off the sidelines and become increasingly anxious to buy, sellers will need to start becoming more realistic in their expectation of price if the real estate market has any hope of gathering momentum.”

As a seller’s need to liquidate troubled assets intensifies, so, too, is the frequency of scheduled auctions, which is currently increasing. With more bank closings being forecast this will also mean more distressed properties eventually being on the market. In a sign of the effectiveness of the

SVNART team, banks currently have the team marketing close to $1-billion worth of non-performing loans on their behalf. In addition, the team has many assignments from banks for Broker Price Opinion’s and property management in Ohio, Florida and Texas as well as plenty of activity with their alliances, especially the court appointed receivers. SVN

The Sperry Van Ness Asset Recovery Team is at the disposal of every SVN Advisor and their clients as a resource available to coach, assist, propose, pitch, procure, and fulfill any real estate assignment; particularly those related to distressed real estate. SVNART hotline: 877 765 3786 extension # 31 / www.svnart.com

FocusOur focus is truly one that is of an advisory nature. We look at the big picture, yet have the expertise to get down to the atomic level with the appropriate solution quickly... whether it leads to a disposition or not. We’re not just brokers disguised as workout advisers (that’s like letting the fox guard the hen-house), but rather we have a broad array of solutions available to our clients to maximize returns and mitigate portfolio risk.

LeadershipThe SVN Asset Recovery Team team is led by Jerry Anderson, CCIM, and Dave Gilmore, CCIM, CAI, AARE. Jerry is the former president of Sperry Van Ness, the former president of Coldwell Banker Commercial, and the author of Success Strategies for Investment Real Estate. Dave has 25 years of accelerated marketing experience and has sold more than 5,000 real estate auction properties. Bottom line: leadership and experience matter.

Auction CapabilityAt Sperry Van Ness we don’t just contract with third-party auction firms, we have our own in-house auction team, known as the accelerated marketing team, which has been in operation for years. All sales include a buyer’s premium which pays our fee for you, the seller.

Who you gonna call?

51

DIVISION FOCUS

Can I place a minimum price on my

property(s)? How can I be assured

that you will not “give my property

away”?

Yes, you may place a minimum price on your property. We will analyze your property(s) condition, the current market and your overall objectives using a Broker Price Opinion (BPO) and SWOT analysis prior to any recommendations. The published minimum, reserve price must be low enough to be very attractive to prospective bidders and brokers to produce maximum competition for your property. This needs to be the absolute lowest possible price that you would be willing to accept on an all-cash, quick close basis. This would be the “worst-case scenario” as the competitive bidding normally drives the price upward. If your minimum or reserve is higher than our team feels is achievable, then the property would probably not be accepted for the auction event.

Where and when will the auction

be held?

Depending on the geographical location of the final inventory we will conduct the auctions either on site at the property or off site at a hotel or facility close to the property. Some properties may be sold from a centralized location, such as a hotel ballroom with easy access to an interstate highway or major roadway.

Will listing the property for auction

require rescinding my current

listing with my selected broker?

Not necessarily. Our intent is to work with all brokers to best serve your needs with selling the property(s) for the highest return. Our program includes the ability for your assigned broker to remain in the process and be compensated depending on their level of contribution and commitment.

What kind of property information

will you require from me?

We have a due diligence checklist that outlines all essential information needed to

present and position your property(s) for the best results. General items include: survey, environmental assessment, title report, financials, etc. Our alliance partners, US Survey, Integra Realty Resources and First American Title are all available to assist with any missing information.

What are the terms for the buyer

to purchase? The terms of the purchase and sale agreement are written for the protection of the seller with all competing bids submitted without contingencies, with closings to occur no later than 30 days following the acceptance by the seller, and without any “re-trading” or subsequent negotiation. These will be all “AS IS” sales with non-refundable escrow down payments fully forfeited if the primary bidder refuses to close. Back up bidders will be identified and involved until closing with the primary bidder occurs.

How do you qualify the buyers?

We qualify bidders through the brokers representing them, through the cash deposit requirements to bid and through affidavit statements of their financial ability to close the transaction.

What type of buyers do you

anticipate will participate?

Prospective buyers could include members of the business and investment communities where the property(s) are physically located, as well as through our extensive buyer relationships from our $21 billion of closed transactions in 2007 and 2008. We also have a proactive marketing program to include compensation for the entire commercial brokerage industry for the successful buyers that they represent.

What measure of success do you

anticipate in the market we are

presently experiencing?

Our historical closing ratio is over 90% of what we represent in the market through our accelerated marketing initiatives. We will not allow over priced expectations of any

seller to enter the program and our depth of market reach and understanding from our 1,000 plus senior advisors in 160 markets enable us to consult our clients with realistic objectives and insure the greatest percentage of success for our collective efforts.

Do I have to be at the auction?

It is always preferable to have the seller either on site or nearby the auction for last minute updates. It is not completely necessary but strongly encouraged, so proper attention is provided to the successful bidder(s).

What will I receive to monitor the

process?

We will provide you with a single point of contact for reporting and in addition will provide you with the following:1. Timeline of major tasks to be performed, by who and by what date.2. Checklist of due diligence items for marketing your property(s).3. Proofs of the marketing materials for your property(s) to approve or change.4. Purchase and sale agreement template for your property(s).5. Weekly progress reports of items undertaken, under advisement and needing direction, number of inquiries, broker registrations, etc.6. A schedule of the marketing with details of where all advertising will appear.

What if I receive an offer prior to

the auction?

All offers are submitted to you with an analysis of the primary points of sale for your review and direction. You remain in control of the process from consignment to closing.

What are my total costs to

participate?

1. The advertising costs are paid up front and fully auditable at the conclusion of the transaction.2. Customary closing costs in the market for your property.

FREQUENTLY ASKED QUESTIONS BY SELLERS

52

FOUNDATIONS

When Jay Leno was hosting The Tonight Show, he ran a regular segment called “Jaywalking”, in which he stopped ordinary people on the streets of Los Angeles and asked them questions, usually about current affairs.

Their answers were usually wrong, often ridiculous and always hilarious. Or were they? Once the hysterics were over, the viewer was simply left asking who or what let these people down to such an extent that, for example, they didn’t recognize a picture of Hillary Clinton or that their answer to the question “Who won the Civil War?” was “We did”?

Nationally and internationally, the US education system has been under fi re for some time. One effort to improve quality and increase scholars’ options is the charter-school movement.

THE CHANGEA charter school is a free-tuition public school, which is privately managed. It receives state funding; however, unlike public schools, it must pay for facilities out of its operating budget.

Crucially, a charter school is accountable to the

Sperry Van Ness has invested in the future by becoming involved with charter schools. Started in response to defi ciencies in the public education system, charter schools offer value in the form of innovation and independence. But with limited resources, they can fall short of their mandate. Companies can help boost the system – and reshape the future of a nation

BY KERRY ROGERS

FOR SUCCESSA CHARTER

FROM THE TOP DOWN The CEO of UPS in Venezuela visits a charter school participant at his home to get an idea of his study conditions.

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community it serves – students, parents, teachers, donors – for producing acceptable academic results.

A charter is granted to a school by a charter authorizer – usually a local school board, but sometimes a university or other public body, depending on the statutory rules of each state. The charter document outlines the ideals, goals, program and philosophy laid down by the founders of the school, who can be anyone from parents to philanthropists. Often, these ideals are tailored to the specifi c needs of the community. One, for example, may place higher emphasis on art while another specializes in mathematics.

Depending on state rules, a charter can be granted from one to 20 years, though one to fi ve years is most common. If the conditions of the charter are not met, it can be withdrawn unless corrected.

The fi rst charter law was passed in 1991 in Minnesota. Now, around 4,650 charter schools serve about 1.4-million students in the 41 states that have charter school laws.

Minority and low-income students are among the groups benefi ting most from charter schools, though they are also popular among families who feel their needs are not met by ordinary public schools.

Charter schools are usually smaller than regular schools (with about half the pupils on average of a traditional public school), ensuring more teacher attention per pupil. They have also become known as places for innovation in teaching methods, a direct result of the academic freedom allowed.

A great example is New Orleans, where, in the wake of Hurricane Katrina, many of the schools founded during the rebuilding process were charter schools. A full 55% of schools in the area are charter schools.

THE CONNECTIONSteven Morrison of SVN Equities fi rst visited a charter school a couple of years ago. “A broker brought me a deal involving a charter-school property in Florida. He took me on a tour during which I met the faculty and the kids, and I’m very enthusiastic about the concept.”

It appealed to him on a personal level, too. He explains, “I’m a 47-year-old without children, and one must fi nd a way to do service for society. I want to help disadvantaged kids.”

Morrison’s ambition led to the formation of a company, SVN/Educational Property Advisors, which will provide investment

banking, brokerage and development services to schools. Funding will be sourced through private equity investors, private and institutional philanthropy, commercial banks and government programs.

Additionally, SVN/EPA will provide tenant representation in purchase, lease and loan transactions, provide economic analysis of facility costs and consult in connection with land use, zoning and construction projects.

Such help is vital given Morrison’s reminder that “These schools operate on limited resources. In most cases the facilities are very basic and the emphasis is on academics.”

Still, it’s a growth market. The movement is gaining speed and, says Morrison, “It’s a tenant segment worth helping. Participating in a market that helps the US education system is very rewarding.”

THE CHALLENGESIn the charter sector, infrastructure, back-offi ce services and operations are neither run nor paid for by the district governing body. Often, the necessary expertise for smooth running of such aspects of the business of a school is not present, resulting

XXXXxx

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FOUNDATIONSFOUNDATIONS

XXX XXX

number of years the charter system has been running

percentage of the US’s scholars who attend charter schools

number of new charter schools opened in the 2008/9 school year

percentage of charter-school enrollments from minority groups

average percentage of funding per pupil that charter-schools get in relation to district schools

percentage of charter schools that have had to close down because of financial, operational or academic problems

EDUCATION BY NUMBERS

in ineffi ciencies that can negatively affect the fi nancial condition of the school and the quality of education. For example, “They need adequate space,” says Morrison. “Many of these schools have waiting lists because they can’t accommodate everybody who wants to attend.”

Donors are not only able to help by providing skills and expertise; they are often one of the groups to whom each school is accountable for proper operational and fi scal management.

Many critics of charter schools point to the fact that accountability is diffi cult when so much independence is allowed. Monitoring such a diverse array of schools takes manpower the district system is simply unable to provide.

A study this year by Stanford University’s Center for Research on Education Outcomes found that 17% of charter-school students showed better academic gains than those at public schools; 46% were the same; and 37% were worse off than those at traditional public schools.

Sponsor involvement is important here in the form of advice and assessment. The fact that these are free-choice schools helps as well. Parents dissatisfi ed with results can simply walk away and try another school. But it is in this same mechanism that great optimism can be found.

“The growth of charter schools suggests a perceived value for the communities in which they operate,” says Morrison. “Market demand is greatest where parents believe that their children are receiving a better education.”

As in many fast-growing industries, some charter schools are run by for-profi t corporations, generating controversy in instances where programs are cut in order to increase profi tability. However, the level of competition this creates is a healthy stimulus for performance standards.

This is a movement that makes business sense, which is great, but that also has the potential to help shape this generation’s future. It’s win-win. SVN

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FOUNDATIONSFOUNDATIONS

A SUCCESS STORYChristel House Academy is a public charter school authorized through the Mayor of Indianapolis’s office. Three weeks after the school opened in 2002, the students took the ISTEP+ (Indiana’s standardized test) and scored dead last in the state. By 2008, it showed a 154% improvement and has won awards and accolades.

The organization’s holistic human-development model provides a pathway to self-sufficiency for severely impoverished children around the world. Learning centers serving over 2,700 students are located in Mexico City, Mexico; Bangalore, India; Caracas, Venezuela; and Cape Town, South Africa.

Academics – specifically English and computers – are emphasized, along with life skills, social responsibility, character development, internships and job placements.

PUBLIC DUTY First Lady Michelle Obama visits a Latin American Montessori Bilingual Public Charter school as a lead-up to the Mexican Cinco de Mayo holiday.

“The growth of charter schools suggests a perceived value for the communities in which they operate,” – Steven Morrison, SVN Equities

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In Chicago we are familiar with the all too common Cub fan proclamation “Wait ‘till next

year!”. Yet again, after this season’s fi nal game, thousands of dizzied die-hards poured onto the streets of Wrigleyville shouting for all to hear that the Cubbies will indeed be next year’s World Series Champions. Their eternal optimism never ceases to amaze because most often these statements, which are uttered with such confi dence and conviction, are not backed by a single ounce of evidence. In fact, fans seem to be the most supportive and outspoken when the team is sliding away from a Pennant.

So, I got to wondering, are the economist and media whom are announcing the fi nding of “Green Shoots” in the economy Cubs fans? What are they seeing that we aren’t? My local car dealer is now a concrete desert, half of my friends are asking for job leads, and I never have to wait anymore to grab a table outside my favorite restaurant. This week I received a notice that my subscription for my Condé Nast Portfolio magazine would be refunded because its’ printing was terminated and every time I go shopping items seem to be on sale for less than what I previously paid.

With the green in my wallet seemingly becoming greener, the downward spiral has me asking “should I wait ‘till next year” for that fi shing boat purchase? The simple answer is that nobody knows. Calling the bottom is a loser’s game but we cannot ignore the collective collaboration of us willing things to be better has made things “less worse”. Recent turmoil has reinforced that our entire economy’s volatility moves

in unison with consumer psychology and confi dence, or lack thereof. Perhaps this fact resonates more with Cubs fans than the rest of us. Perhaps when things get so bad and all looks hopeless an innate survival mechanism is triggered that forces us to become optimists and discover green shoots. Only in America could our optimism in times of desperation create the grammatically incorrect term of “less worse”. Fortunately for our economy optimism isn’t just a trait owned by Cubs fans.

To be optimistic is to be American. While greed occasionally infests our well-oiled machine building like a volcano until it’s inevitable release and followed retracement, our machine never requires anything more than a tune up for the resumption of progress. It is this truism that is at the base of the stock market’s recent rally, our love of the underdog, and the 41,160 that fi ll the seats in Wrigley. SVN

2010 Cubs to be “ less worse”BY TERRY YORMARK

Americans are known for their optimism, even when it’s not backed by facts

Perhaps when things get so bad and all looks

hopeless an innate survival mechanism is triggered that forces us to become

optimists…

TERRY R YORMARK II IS A SPERRY VAN NESS ADVISOR IN ARLINGTON HEIGHTS (CHICAGO), IL. HE HAS CONTRIBUTED TO THE SUNDAY CHICAGO TRIBUNE AND LIBERTY SUBURBAN NEWSPAPERS.

OFF THE WALL

EMHC Investment Corporation is considered one of the top boutique investment firms in the South East in investment advisory, investment banking and private wealth management. The firm has recently diversed its portfolio to include professional sports, acquiring an indoor football franchise west of Atlanta and are hedging their bets on the success of the new league they have affiliated with, the Southern Indoor Football Conference. With the sudden demise of the Arena 2 Football League and the sudden signs of resurgence in our nations economy, Erick Moore, co-chair of EMHC Investment Corporation and managing partner of EMHC affiliate EM Holdings Ltd. feels that, “Investing in a product such as a professional sports

franchise opens the door for an array of opportunities, from both an employment stand point for the community as well as a revenue facilitator for the county and state.”

So, if you’re looking for sound investment advice from an experienced investment banking firm pleases visit us at www.emhcinvestments.com to find a representative nearest to you. One of our investment associates will gladly help you with your investment needs. And, if you ever visit beautiful Atlanta, Georgia, and are looking for some exciting family entertainment, make sure to take in an indoor football game – because in our view the experience is worth the ticket price many times over.

Houston 713-493-0561 • AtlAntA 404-419-6050 • london jdarvey@emhcinvestments.comwww.emhcinvestments.com

We’re hedging our bets on professional sport

Erick Moore, co-chair of EMHC Investment Corporation

We are perfectly pOSItIONeD tO kNOW WheN the

hOSpItalIty SectOr WakeS up.

WWW.SvN.cOm

ISSUE TWO 2009

survival of the fittest

who do we think we are?

TOPmarkETS TO WaTch

Developing Your Creative Edge innovation wins the day