U.S. Property Market Update

Mary Ludgin, PhD, Heitman Research

September, 2007

There is a difference.

2

GDP Has Peaked

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

00 2001 2002 2003 2004 2005 2006 2007 2008

Source: Economy.com; Heitman Research

Gross Domestic Product Growth

U.S. Q4 2000-Q4 2008

forecast

Real GDP Growth

Nominal GDP Growth

Annualized % change

6.7%

4.0%

3

Job Numbers are Weak

0

50,000

100,000

150,000

200,000

250,000

300,000

Jan-0

5

Feb-0

5

Mar-05

Apr-0

5

May-05

Jun-0

5Ju

l-05

Aug-0

5

Sep-0

5

Oct-0

5

Nov-0

5

Dec-0

5

Jan-0

6

Feb-0

6

Mar-06

Apr-0

6

May-06

Jun-0

6Ju

l-06

Aug-0

6

Sep-0

6

Oct-0

6

Nov-0

6

Dec-0

6

Jan-0

7

Feb-0

7

Mar-07

Apr-0

7

May-07

Jun-0

7Ju

l-07

Aug-0

7

Sep-0

7

Oct-0

7

Nov-0

7

Dec-0

7

Change in EmploymentU.S. 2005-2007

Jobs added -- three-month moving average

Source: Economy.com; Heitman Research

forecast

4

Recession Risk Up – Rate Cut Enough?

0

10

20

30

40

50

60

70

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3

2000 2001 2002 2003 2004 2005 2006 2007

Probability of Recession in 6-12 MonthsU.S. 2000-2007 YTD

Source: Economy.com; Heitman Research

%

40%

5

Corporations Remain Profitable But…

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Economy.com; Heitman Research

Corporate Profit GrowthU.S. 2000-2010

Year-over-year growth

6

Cap Rates Poised to Move Up a Little

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

2002 2003 2004 2005 2006

Cap Rates by SectorU.S. 2002-2006

Source: Real Capital Analytics; Heitman Research

Apartment

Retail

OfficeIndustrial

7

7.5 8.0 7.98.7

0

5

10

15

20

25

30

35

40

2004 2005 2006 2007

Institutional Allocations to Stocks, Bonds, and Real Estate2004-2007

Source: Institutional Real Estate Inc.; Heitman Research

% of Total Portfolio

With Repricing Mitigated by Staunch Investors

U.S. Stocks

Bonds

Non-U.S. Stocks

Real Estate

8

And Increasing Capital Flows

8 8

45

60

18.1

0

10

20

30

40

50

60

70

2002 2003 2004 2005 2006

Real Estate Private Equity Fund Raising Activity2002-2006

$s Billions

Source: Private Equity Intelligence; Heitman Research

9

Most Western Metros Growing Faster than U.S. But Growth Will Slow

1.9%

6.0%

5.4%

3.4%

2.1% 2.0%

1.3%

3.2%

2.1%

2.6%

1.6%

2.1%

0.7%0.9% 0.8%

1.2%

0.8%1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

U.S. Phoenix Las Vegas Seattle Denver San Francisco

Employment GrowthWestern metros beating the U.S. average 2006-2008

y-o-y growth

Source: Economy.com; Heitman Research

10

L.A. and San Diego Lagging U.S. in Job Gains

1.9%

1.8%

1.4%

1.3%

0.6%

0.3%

0.7%

0.3%

0.5%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

U.S. Los Angeles San DiegoSource: Economy.com; Heitman Research

20062006

2006

2007

2007

2007

2008

2008

2008

Employment GrowthWestern metros lagging the U.S. average 2006-2008

y-o-y growth

11

Apartments Feeling Bruntof Housing Market Correction

-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

0

1

2

3

4

5

6

7

8

CompletionsNet AbsorptionVacancy

Apartment Supply, Demand, and Vacancy RateU.S. 1980-2007*

% Percent

So

Units

Source: REIS, Heitman Research; *2007 data is forecasted as of March 31

12

Apartment Vacancies on the Rise

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

Phoenix Las Vegas U.S. Denver San Diego Seattle Los Angeles San Francisco

Vacancy Rate

Multi-family Vacancy Rates Western Markets vs U.S. Q2 2007

+300

+210+90

-30

+60

+60 +20

+100

bp change from Q2 2006 vacancy rate

Source: Axiometrics Inc.; Heitman Research

13

But Apt. Rents GenerallyStill Growing Faster Than U.S. Average

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

2Q00 2Q01 2Q02 2Q03 2Q04 2Q05 2Q06 2Q07

U.S. San Diego

Los Angeles Denver

San Francisco Seattle

Effective Rental Rate GrowthWestern Metros Beating the U.S. Average Q2 2000-Q2 2007

Source: Axiometrics Inc.; Heitman Research

14

With a Few Exceptions

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

2Q00 2Q01 2Q02 2Q03 2Q04 2Q05 2Q06 2Q07

Effective Rental Rate GrowthWestern Metros Lagging the U.S. Average Q2 2000-Q2 2007

Source: Axiometrics Inc.; Heitman Research

U.S.

Phoenix

Las Vegas

15

Industrial Recovery Continues But Slowing

7.7

9.3

10.6

7.5

11.5

11.0

8.0 8.0

7.5

8.3

11.6

6.7

9.7

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

250,000

300,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

6.5

7.5

8.5

9.5

10.5

11.5

12.5

Completions

Net Absorption

Vacancy Rate

Industrial Completions, Net Absorption, and AvailabilityU.S. 1995-2007 (years ending Q2)

Source: Torto Wheaton Research; Heitman Research

sf x 1,000Vacancy Rate (%)

16

Western Metros Beating U.S. Average

9.7

4.6

5.3

7.16.9

8.7

9.9

10.8

9.3

4.4

5.2

7.2 7.3

9.2 9.3

9.8

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

U.S. Los Angeles Las Vegas Seattle Riverside Phoenix Oakland Denver

YE Q2 2006 YE Q2 2007

Industrial Availability RateYE Q2 2006 - YE Q2 2007

Source: Torto Wheaton Research; Heitman Research

%

17

This Carries Through to Rent Growth

3.9%

1.0%

3.8%

5.0%

10.9%

18.8%

5.3%

12.8%

5.2%

-0.8%

1.8%

6.7% 6.9%

11.1%

5.3%

12.2%

-5%

0%

5%

10%

15%

20%

U.S. Denver Los Angeles Seattle Las Vegas Riverside Oakland Phoenix

YE Q2 2006 YE Q2 2007

Industrial Rent GrowthYE Q2 2006 - YE Q2 2007

Source: Torto Wheaton Research; Heitman Research

18

Mixed Picture on Industrial Construction

1.6%

0.4%

1.1% 1.3%

2.2%2.5%

4.9%

10.3%

1.2%

0.3%0.5%

2.1%

3.1%

5.7%6.1%

0.3%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

U.S. Oakland Los Angeles Denver Seattle Phoenix Las Vegas Riverside

YE Q2 2006 YE Q2 2007

Industrial Construction RateYE Q2 2006 - YE Q2 2007

Source: Torto Wheaton Research; Heitman Research

19

Office Market Well Positioned for Slow Down

16.2

15.6

14.6

13.1

11.3 11.3

17.0

8.2

13.1

14.5

9.3 9.6

12.4

-100,000

-75,000

-50,000

-25,000

0

25,000

50,000

75,000

100,000

125,000

150,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

0

2

4

6

8

10

12

14

16

18

Completions

Net Absorption

Vacancy Rate

Office Completions, Net Absorption, and VacancyU.S. 1995-2007 (years ending Q2)

Source: Torto Wheaton Research; Heitman Research

sf x 1,000Vacancy Rate (%)

20

Western Office Markets Mostly Healthy

11.3

14.2

7.2

10.510.3

8.1

12

10.9

11.7

14.2

16.8

9.9

13.9

5.4

7.3

8.7

9.3 9.5

10.1

12.2

13 13.2

14.1

15.3

16

9.4

15.3

10.9

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

17.0U

.S. - D

ownt

own

U.S

. - S

ubur

ban

Sea

ttle

- Ea

stsi

de

Sea

ttle

- D

ownt

own

San

Fra

ncis

co -

Dow

ntow

n

Ora

nge

Cou

nty

Den

ver - D

ownt

own

Las

Vega

s

San

Jos

e/Sili

con

Valle

y

San

Die

go -

Sub

urbs

San

Die

go -

Dow

ntow

n

Phoe

nix

Oak

land

/Eas

t Bay

Den

ver - S

ubur

bs

YE Q2 2006 YE Q2 2007

Office Vacancy RateYE Q2 2006 - YE Q2 2007

Source: Torto Wheaton Research; Heitman Research

%

21

Office Rent Growth Varies

5.1%5.6%

7.5%

5.3%

9.1%

4.2%

10.7%

4.1%3.4%

5.6%

10.2%

9.0%

4.7%

1.5%

3.7%4.5%

6.0%

7.2%

8.1%8.7%

9.6%

11.4% 11.6%

17.2%

19.8%

11.1%

7.1%

10.7%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%U

.S. - D

ownt

own

U.S

. - S

ubur

ban

San

Die

go -

Sub

urbs

Las

Vega

s

Oak

land

/Eas

t Bay

Den

ver - S

ubur

bs

Ora

nge

Cou

nty

Phoe

nix

San

Die

go -

Dow

ntow

n

Den

ver - D

ownt

own

Sea

ttle

- Ea

stsi

de

Sea

ttle

- D

ownt

own

San

Fra

ncis

co -

Dow

ntow

n

San

Jos

e/Sili

con

Valle

y

YE Q2 2006 YE Q2 2007

Office Rent GrowthYE Q2 2006 - YE Q2 2007

Source: Torto Wheaton Research; Heitman Research

22

As Does Construction Volume

0.7%

1.5%

0.3%0.6% 0.6%

2.0%

1.0%

0.0%

3.4%

4.1%

6.1%

0.5%

2.2%

0.0% 0.0% 0.1% 0.2% 0.2%

0.7%

2.0%

2.7%

3.8%

6.3%

6.9%

8.3%

4.3%

1.2%

0.4%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%U

.S. - D

ownt

own

U.S

. - S

ubur

ban

Den

ver - D

ownt

own

San

Fra

ncis

co -

Dow

ntow

n

San

Jos

e/Sili

con

Valle

y

Oak

land

/Eas

t Bay

Sea

ttle

- D

ownt

own

Den

ver - S

ubur

bs

Ora

nge

Cou

nty

Sea

ttle

- Ea

stsi

de

San

Die

go -

Dow

ntow

n

San

Die

go -

Sub

urbs

Phoe

nix

Las

Vega

s

YE Q2 2006 YE Q2 2007

Office Construction RateYE Q2 2006 - YE Q2 2007

Source: Torto Wheaton Research; Heitman Research

23

Sales Declining as Economy Slows

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A

2000 2001 2002 2003 2004 2005 2006 2007

Chain Store Sales

Three-Month Moving Average

Historical Average

Chain Store Sales TrendsU.S. 2000-2007 (August)

Year-over-year % change

Source: ICSC; Heitman Research

Historical Average = 4.2%

24

Income Growth Will Drive Sales

-0.5%

0.5%

1.5%

2.5%

3.5%

4.5%

5.5%

6.5%

7.5%

8.5%

9.5%2000Q

1

2000Q

2

2000Q

3

2000Q

4

2001Q

1

2001Q

2

2001Q

3

2001Q

4

2002Q

1

2002Q

2

2002Q

3

2002Q

4

2003Q

1

2003Q

2

2003Q

3

2003Q

4

2004Q

1

2004Q

2

2004Q

3

2004Q

4

2005Q

1

2005Q

2

2005Q

3

2005Q

4

2006Q

1

2006Q

2

2006Q

3

2006Q

4

2007Q

1

2007Q

2

Wage and Salary GrowthCPI Growth

Wage and Salary GrowthU.S. 2000-2007 Q2

y-o-y growth

Source: Economy.com; Heitman Research

25

Retail Markets Starting From Good Position

7.3%

2.7%3.1%

3.3% 3.4%

4.7%

6.6%

9.1%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

US Los Angeles San Diego San Francisco Seattle Las Vegas Phoenix Denver

Strip Retail Vacancy RatesWestern Metros and U.S. Q2 2007

Source: REIS; Heitman ResearchSource: ; Heitman Research

U.S. average

Beating the U.S. average

Lagging the U.S. average

26

Construction Quite Modest in Some Markets

2.0%

1.0%

1.1%

0.7%

2.8%

0.2%

1.4% 1.4%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

U.S. San Francisco San Diego Los Angeles

Retail Construction as a Percentage of Total StockWestern Metros Lower Than the U.S. Average 2006-2007*

Source: CoStar Group; Heitman Research*2007 includes YTD completions and projected deliveries through year-end

27

Though Not Modest Everywhere

2.0%

2.7%

2.2%

4.8%

3.5%

2.8% 2.9% 3.1%

7.0%

8.6%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

U.S. Denver Seattle Las Vegas Phoenix

Source: CoStar Group; Heitman Research*2007 includes YTD completions and projected deliveries through year-end

Retail Construction as a Percentage of Total StockWestern Metros Higher Than the U.S. Average 2006-2007*