The State of the Commercial Real Estate Industry: Year-End 2010 Office Review & Outlook

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The State of the Commercial Real Estate Industry: Year-End 2010 Office Review & Outlook Copyright 2011 CoStar Realty Information, Inc. No reproduction or distribution without permission.

1 The State of the Commercial Real Estate Industry: Year-End 2010 Office Review & Outlook Copyright 2011 CoStar Realty Information, Inc. No reproduction or distribution without permission. The following information includes projections and analyses that are based on various assumptions by CoStar concerning future events and circumstances, as well as historical and current data maintained in CoStar s database, obtained from public sources or provided by proprietary sources. Actual results may vary materially from the projections presented. The information in this presentation speaks only as of the date(s) referenced and is provided as is. CoStar expressly disclaims any guarantees, representations or warranties of any kind, including those of merchantability and fitness for a particular purpose. You should not construe any of the information herein as investment, tax, accounting or legal advice L Street, NW, Washington, DC 20005, USA (800) NASDAQ: CSGP

2 Today The Economy Leasing Market Review & Outlook The Capital Markets and Sales Trends Q&A

4 Our Fed Chair: QE2 Continues While Dr. Bernanke makes a somber report January 6 th to congress that the Federal deficit as a proportion of GDP is heading to heaven

5 U.S. Federal Budget Balance, % of GDP 4% U.S. Fiscal Balance, % of GDP Bloomberg Consensus Forecast as of February 2010 As of January % 0% (2%) (4%) (6%) (8%) (10%) (12%) Source: Global Insight; Bloomberg

6 Choices to Solve the Deficit Problem 1. Do nothing and become Portugal or Greece with crippling interest rates within a decade.

7 Choices to Solve the Deficit Problem 1. Do nothing and become Portugal or Greece with crippling interest rates within a decade. 2. Raise taxes, hurting future productivity as incentives are reduced, and not get re-elected.

8 Choices to Solve the Deficit Problem 1. Do nothing and become Portugal or Greece with crippling interest rates within a decade. 2. Raise taxes, hurting future productivity as incentives are reduced, and not get re-elected. 3. Cut spending including entitlements and defense spending and not get re-elected.

9 Choices to Solve the Deficit Problem 1. Do nothing and become Portugal or Greece with crippling interest rates within a decade. 2. Raise taxes, hurting future productivity as incentives are reduced, and not get re-elected. 3. Cut spending including entitlements and defense spending and not get re-elected. 4. Monetize the debt via inflation which makes our real debt burden lower but dissuades future foreign buyers and this will raise interest rates overall.

10 Elements of the 2010 Tax Bill $858 billion over 10 years in renewed tax cuts and extended unemployment benefits Maintains the current income and capital gains tax rates established by the Bush tax cuts of 2001 and 2003 Reduces 2011 payroll taxes by 2% Establishes estate tax of 35% after $5 million individual exemption Extends long-term unemployment benefits

11 Recent Stimulus Means a Rosier 2011 For GDP 6% Moody's New Forecast Moody's Old Forecast U.S. GDP Growth 4% 2% 0% (2%) (4%) (6%) (8%) 2007 q q q q q q q q q q q q q q q q q q3 Source: Moody's Analytics

12 3.2 Million New Jobs in 2011! 1,500 Moody's New Forecast Moody's Old Forecast Historical Job Growth 1, (500) (1,000) (1,500) (2,000) (2,500) 2007 q q q q q q q q q q q q q q q q q q3 Source: Moody's Analytics

13 More Jobs Mean More Spending in % Moody's New Forecast Moody's Old Forecast Year-Over-Year Change in Retail Sales 8% 6% 4% 2% 0% (2%) (4%) (6%) (8%) (10%) (12%) 2007 q q q q q q q q q q q q q q q q q q3 Source: Moody's Analytics

14 Key Economic Indicators Indexed to Pre- Recession Levels GDP Retail Sales Employment Source: Moody s Analytics

15 10-Year Treasury Rates 16% 14% 12% Average Since 1900 = 4.9% Average Since 1953 = 6.3% 10% 8% 6% 4% 2% 0% Source: Moody s Analytics

17 Inflation Rates Versus Commodity Prices 250 Commdty Prices Inflation, CPI Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10-3

18 Where Are Interest Rates Headed? Long Term Risk Free Government Rates Long Term Real Growth Rate (GR) = + Approx Expected Inflation Rate (I) LT Growth Rate in GDP Inflation Nominal Rate for 10 Yr Treasury Bonds 2.5% 2.0% 4.5% 3.0% 2.5% 5.5% 3.5% 3.0% 6.5% But QE2 could keep us well below these figures for 2011 until at least June when bond buying eases off

19 Federal Reserve's Industrial Production Index Source: Moody s Analytics

ISM Purchase Managers Index 65 60 55 50 45 40 35 Over 50 = Expansion Under 50 = Contraction 30 1995

20 ISM Purchase Managers Index Over 50 = Expansion Under 50 = Contraction Source: Moody s Analytics

21 Consumer Confidence Source: Moody s Analytics

23 Worst Post-War Job Loss Periods by % of Pre-Recession Workforce 1% October July 1950 August June 1955 May April 1959 May December 1961 August February 1976 August November 1983 July February 1993 March February 2005 January ??? 0% (1%) (2%) (3%) (4%) (5%) (6%) (7%) t-30 t-24 t-18 t-12 t-6 Mid-Point t+6 t+12 t+18 t+24 t+30 Source: Moody s Analytics, CoStar Group

24 Total Nonfarm Employment 150 Total Non-Farm Employment (millions) Forecast (per Moody's Analytics) Source: Moody s Analytics

25 Millions of Jobs Copyright 2011 CoStar Group, Inc. Presented by Andrew Florance, President and CEO Nonfarm Job Growth Historical Job Growth Forecast Job Growth (0.1) (0.2) (0.3) (0.4) (0.5) (0.6) (0.7) (0.8) Source: Moody s Analytics

26 Millions of Jobs Copyright 2011 CoStar Group, Inc. Presented by Andrew Florance, President and CEO Office Using Job Growth 0.4 Historical Job Growth Forecast Job Growth (0.1) (0.2) (0.3) (0.4) (0.5) (0.6) (0.7) Source: Moody s Analytics

29 Housing Distress Remains: Case Shiller Takes A Double Dip (Starts in Jan 2000) Jan-00 Feb-01 Mar-02 Apr-03 May-04 Jun-05 Jul-06 Aug-07 Sep-08 Oct-09 Nov-10

30 Housing Distress Remains: Case Shiller Takes A Double Dip (Starts in Jan 2000) Jan-00 Feb-01 Mar-02 Apr-03 May-04 Jun-05 Jul-06 Aug-07 Sep-08 Oct-09 Nov-10

31 Economic Danger Zones for 2011 and beyond 1. Oil price increases based on emerging market demand (China, India) 2. Rising health care costs even before the health care plan coverage of 32 million Americans is implemented 3. A terrorist act or continued stupidity on the part of North Korea 4. Rising interest rates after June of 2011

32 Summary Weaning the US off of the Bernanke QE2 pump and government stimulus will be hard. Debt Deficit could be catastrophic if not reined in with a solid and legislated plan. Short term slack in the labor markets will keep prices and interest rates down for the first half of 2011 but commodity prices will lead inflation. Positive employment will drive positive absorption.

Millions of Square Feet Copyright 2011 CoStar Group, Inc.

Absorption 50 40 30 20 10 0 0 (0) 19 5 19 15 1516 42 36 37

(9) (8) (5) (20) (16) (19) (13) (18) (18) (30) (40) (38)

35 Millions of Square Feet Copyright 2011 CoStar Group, Inc. Presented by Andrew Florance, President and CEO Net Absorption (0) (10) (9) (8) (5) (20) (16) (19) (13) (18) (18) (30) (40) (38) (50) Source: CoStar Group

36 Office Using Jobs Copyright 2011 CoStar Group, Inc. Presented by Andrew Florance, President and CEO Net Absorption and Office Using Job Growth Office Net Absorption Office Using Job Growth (10) (20) (30) (40) Millions of Square Feet -0.7 Source: CoStar Group (50) 2010

37 2010 Net Absorption in 20 Largest Markets Washington Dallas/Ft Worth Denver Seattle/Puget Sound Houston Chicago South Florida Minneapolis San Francisco Phoenix Philadelphia Boston Detroit Northern New Jersey Atlanta Orange (California) Westchester/So Connecticut New York City Long Island (New York) Los Angeles Millions of Square Feet Source: CoStar Group (2.4) (0.0) (0.1) (0.6) (0.7) (1.0) (3) (2) (1)

38 2010 Net Absorption by Class Class A 23.6 Class B 13.7 Class C Millions of Square Feet Source: CoStar Group

39 Deliveries as % of Inventory 6.0% Historical Deliveries Future Deliveries Hist Average 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Source: CoStar Group

41 Under Construction as % of Inventory in 20 Largest Markets New York City Seattle/Puget Sound Houston Long Island (New York) Washington South Florida Westchester/So Connecticut Phoenix Boston Los Angeles Denver Philadelphia Northern New Jersey Dallas/Ft Worth Orange (California) San Francisco Chicago Atlanta Detroit Minneapolis Millions of Square Feet Source: CoStar Group 0.8% 0.8% 0.8% 0.7% 0.5% 0.5% 0.5% 0.3% 0.3% 0.3% 0.3% 0.3% 0.2% 0.2% 0.2% 0.1% 0.0% 0.0% 1.1% 1.6% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%

42 Vacancy and Availability Rates 18% Vacancy Rate Availability Rate 17% 16% 15% 14% 13% 12% 11% 10% q q q q q 2010 Source: CoStar Group

43 Quarterly Change in Vacancy Rate 1.4% 1.2% 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% -0.4% -0.6% 2001 Source: CoStar Group

44 Percentage of Submarkets With Declining Vacancy Rates 70% 65% 60% 55% 50% 45% 40% 35% 30% Source: CoStar Group

45 Current Vacancy Rates in 20 Largest Markets New York City Minneapolis Long Island (New York) Boston Westchester/So Philadelphia Los Angeles Washington Seattle/Puget Sound San Francisco Houston Northern New Jersey Denver South Florida Chicago Orange (California) Atlanta Dallas/Ft Worth Detroit Phoenix Source: CoStar Group 7.7% 8.9% 9.4% 10.9% 11.3% 12.2% 12.4% 12.9% 12.9% 13.1% 13.5% 13.9% 13.9% 14.7% 15.5% 15.7% 17.3% 17.5% 18.3% 21.3% 0% 5% 10% 15% 20% 25%

46 Quarter-Over-Quarter Change in Occupancy Rates in 20 Largest Markets San Francisco Detroit Philadelphia Dallas/Ft Worth Denver Phoenix Houston New York City Washington Chicago Orange (California) South Florida Atlanta Seattle/Puget Sound Boston Northern New Jersey Los Angeles Minneapolis Westchester/So Connecticut Long Island (New York) Source: CoStar Group (0.7%) (0.0%) (0.0%) (0.1%) 0.6% 0.6% 0.6% 0.5% 0.5% 0.5% 0.4% 0.4% 0.4% 0.3% 0.3% 0.3% 0.2% 0.1% 0.1% 0.1% (0.8%) (0.6%) (0.4%) (0.2%) 0.0% 0.2% 0.4% 0.6% 0.8%

47 Class A Office Quoted Rental Rates $31 $30 $29 $28 $27 $26 $25 Source: CoStar Group

48 Annual Change in Quoted Office Rents 8% 6% 4% 2% 0% (2%) (4%) (6%) (8%) Source: CoStar Group

49 Contract Rent to Asking Rent Percent Differential

50 Quarter-Over-Quarter Change in Rental Rates in 20 Largest Markets New York City Chicago Tampa/St Petersburg Northern New Jersey Long Island (New York) Atlanta Detroit Westchester/So Connecticut Seattle/Puget Sound Philadelphia Houston Dallas/Ft Worth San Francisco South Florida Phoenix Washington Denver Los Angeles Orange (California) Boston (1.7%) (0.0%) (0.1%) (0.2%) (0.2%) (0.4%) (0.7%) (0.8%) (0.8%) (1.0%) 1.1% 1.0% 1.0% 0.9% 0.7% 0.5% 1.7% 2.3% 2.8% 3.6% Source: CoStar Group (2.0%) (1.0%) 0.0% 1.0% 2.0% 3.0% 4.0%

51 Absorption & Deliveries in Millions Sqft Copyright 2011 CoStar Group, Inc. Presented by Andrew Florance, President and CEO Vacancy Forecast 50 Deliveries Absorption Vacancy Rate Forecast Vacancy Rate (10) 4 (20) 2 (30) Source: CoStar Group

52 Percentage Point Change in Occupancy Rate Copyright 2011 CoStar Group, Inc. Presented by Andrew Florance, President and CEO Rent Forecast 2.0 Change in Rent Change in Occupancy Forecast 10% (0.5) 8% 6% 4% 2% 0% -2% Annual Percent Change in Rent (1.0) -4% (1.5) -6% (2.0) Source: CoStar Group % 2014

54 Change in CRE Debt Outstanding Life Insurers and Pension Funds Depository Institutions CMBS (50) (100) Source: Federal Reserve (150)

56 REIT Capital Offerings $60 IPOs Secondary Equity Unsecured Debt Secured Debt $50 $40 $30 $20 $10 $ Source: NAREIT

57 Year-to-Date Sales Volume in 20 Largest Markets New York City Washington San Francisco Bay Area Boston Chicago Los Angeles Seattle/Puget Sound South Florida Northern New Jersey Denver Houston Phoenix Orange (California) Atlanta Long Island (New York) Philadelphia Minneapolis Dallas/Ft Worth Detroit Westchester/So Connecticut Source: CoStar Group $1.9 $1.5 $1.4 $1.3 $1.1 $1.1 $0.9 $0.9 $0.8 $0.5 $0.5 $0.5 $0.5 $0.3 $0.2 $3.2 $2.8 $2.8 $5.7 $8.3 $0 $2 $4 $6 $8 $10

58 Number of Properties Withdrawn Copyright 2011 CoStar Group, Inc. Presented by Andrew Florance, President and CEO For Sale Properties Withdrawn From the Market 5,000 Properties Withdrawn Dollar Volume Withdrawn 12 4,500 4, ,500 3,000 2,500 2,000 1, Billions of Dollars Withdrawn 1, Source: CoStar Group

59 Select Top Sales Fourth Quarter 2010 John Hancock Tower Clarendon Street Boston, MA 12/29/2010 $930,000,000 $521/SF Hyatt Center 71 S Wacker Chicago, IL 12/20/2010 $625,000,000 $419/SF Potomac Yard Crystal Drive Arlington, VA 10/1/2010 $241,912,936 $389/SF Heritage Plaza 1111 Bagby & 430 Lamar Street Houston, TX 12/9/2010 $321,500,000 $280/SF Port of NY Authority Inland Terminal 111 Eighth Avenue New York, NY 12/22/2010 $1,770,000,000 $606/SF

61 Premium Paid Per Square Foot For a 90% Leased Property $110 $100 $90 $80 $70 $60 $

62 Price PSF for Office Buildings At 90% Plus Occupancy Over Those at 70% or Less % % % 130% 142% 138%

64 Cap Rates 11 Average Cap Rate Weighted Average Cap Rate Source: CoStar Group

65 Weighted Average Cap Rates By Deal Size (Two Quarter Moving Average) 11 Less Than $5 Million $5-$20 Million $20-$50 Million Over $50 Million Source: CoStar Group

66 Year-to-Date Cap Rates in 20 Largest Markets New York City Northern New Jersey San Francisco Bay Area Long Island (New York) Washington Seattle/Puget Sound Los Angeles Westchester/So Connecticut South Florida Chicago Denver Phoenix Houston Orange (California) Atlanta Minneapolis Boston Dallas/Ft Worth Philadelphia Detroit Source: CoStar Group

67 CoStar's Quarterly Repeat Sale Index 200 Case Shiller 10-City Composite CoStar U.S. Composite CoStar Office Source: CoStar Group

68 CoStar's Monthly Repeat Sale Index Composite Investment Grade General Commercial Source: CoStar Group

69 Year-Over-Year Change in CoStar's Monthly Repeat Sale Index 0.25 CoStar Investment Grade CoStar General Commercial Case Shiller 10-City Composite Source: CoStar Group

70 Number of CoStar Repeat Sale Sub- Indices Going Up in Value 30 Number of Sub-Indices Going Up in Value CoStar U.S. Composite Index Source: CoStar Group 70

71 Year-Over-Year Change in CoStar's Repeat Sale Indices Top 10 Office Metros Midwest Multifamily Northeast Retail Midwest Retail Northeast Multifamily South Office Northeast Office Northeast Composite Northeast Industrial South Retail Top 10 Multifamily Metros U.S. Retail U.S. Investment Grade Top 10 Retail Metros Midwest Composite U.S. Multifamily U.S. Industrial U.S. Office West Multifamily U.S. General Commercial U.S. Composite West Industrial Midwest Industrial South Industrial West Office South Composite West Composite South Multifamily Top 10 Industrial Metros West Retail Midwest Office Source: CoStar Group -20% -23% -1% -2% -2% -4% -5% -6% -6% -6% -6% -7% -7% -7% -7% -8% -8% -8% -8% -9% -11% -12% -15% 6% 5% 4% 3% 3% 2% -30% -20% -10% 0% 10% 20% 30% 40% 11% 34% Office Multi-Family Retail Industrial Composite

72 Average Year-to-Date Price Per SF in 20 Largest Markets New York City Washington Seattle/Puget Sound Chicago San Francisco Bay Area Los Angeles Orange (California) Boston Long Island (New York) South Florida Denver Minneapolis Houston Northern New Jersey Phoenix Westchester/So Connecticut Dallas/Ft Worth Philadelphia Atlanta Detroit Source: CoStar Group $263 $241 $240 $232 $219 $183 $169 $158 $158 $151 $143 $137 $107 $102 $96 $94 $82 $69 $380 $429 $0 $50 $100 $150 $200 $250 $300 $350 $400 $450 $500

73 Distressed vs. Non-Distressed Sales Volume 3,500 Non Distressed Sales Distressed Sales Distressed % 35% 3,000 30% 2,500 25% 2,000 20% 1,500 15% 1,000 10% 500 5% % Source: CoStar Group

74 Distressed Sales Volume Source: CoStar Group

75 Distressed Sales Volume by Property Type Office Industrial Retail Multifamily Hospitality 60% 50% 40% 30% 20% 10% Source: CoStar Group 0%

76 Orange (California) Atlanta Colorado Springs Inland Empire (California) Las Vegas Houston East Bay/Oakland Dallas/Ft Worth South Florida Boston Phoenix Orlando Denver San Francisco Portland Chicago Baltimore New York City Sacramento Jacksonville (Florida) Austin Tampa/St Petersburg Stockton/Modesto Marin/Sonoma Los Angeles Northern New Jersey South Bay/San Jose Seattle/Puget Sound Washington DC San Diego Philadelphia Fresno Tucson Source: CoStar Group Copyright 2011 CoStar Group, Inc. Presented by Andrew Florance, President and CEO Distress Sales Volume by Market % 60% 50% 40% 30% 20% 10% 0%

77 Millions of Dollars Copyright 2011 CoStar Group, Inc. Presented by Andrew Florance, President and CEO Year-to-Date Net Buying by Investor Type $15,000 Bought Sold Net Purchases $10,000 $5,000 $0 -$5,000 -$10,000 -$15,000 Source: CoStar Group Private Institutional Private Equity User REIT/Public

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