us policy econ_ggu_pres_oct_25_master_full_master_1_c

Time: 4:00 – 7:00 pm Location: 536 Mission Street, Ro om 6208-6211

The Political Philosophy and Economy of Commercial Real Estate Investment: Global, United

States, and SF Bay Area Forecast 2012-2017

Prepared for

Golden Gate University Faculty and StudentsSan Francisco Bay Area Commercial Real Estate

CommunityPrepared by

Lawrence Souza, CCIM/CRE/RICS- Johnson Souza Group, Inc.: Principal – Real Estate and Financial Economist and Broker

- Golden Gate University: Adjunct Professor – Real Estate/Finance/Economics; DBA Candidate: Bus Admin.

Thur 10/25/12 5:00 PM

• Introduction : Systematic Risks, Discount Rates and Intrinsic Values.

– Structural Risks: Budget Deficits and Total Debt

• Institutional Analysis : Historical, Philosophical, Political and Economic

• Commercial Real Estate Economic and Market Analysis– Modern Real Estate Portfolio Theory (MREPT)– Real Estate and Financial Institutional Analysis– Monetary Oversight and Re-Regulation– Economic Indicators and Employment– Technology and Venture Capital Flows– International Trade– Infrastructure Policies and Public/Private Construc tion

– Commercial Real Estate Investment, Space and Debt/E quity Markets

• Mortgage Delinquency, Distress and Security Defaults• Real Estate Investment Trusts (REITs)

– Residential Real Estate Markets

• Conclusions and Appendix : Education, Training, Certification and Networking

OutlineOutline

“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex,”

“The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic process.”

Republican President Dwight D. Eisenhower, Farwell Address, January 17, 1961.

Introduction

Political Philosophy and Economy of Commercial Real Estate

Investment

Institutional Foundations for Efficient Capital Markets

“Efficient real estate and securities capital markets require strong public and private sector cooperation, disclosure of government and corporate financial conditions, and institutional and individual investor confidence in financial and political institutions.” Lawrence Souza, 1996

Cross Sectional ApproachCommercial Real Estate Investment

“The nature of commercial real estate investment is cross-sectional in nature, taking multiple disciplines and approaches to solving the

valuation equation.”

V REt = THEOLOGY + e^ Linquistics

V REp1 = PHILOSOPHY + e^ Language

V REl = LAW + e^ Psychology

V REp2 = POLITICS + e^ f Sociology

V REtp3 = PUBLIC ADM INISTRATION + e^ Technology

V REte = ECONOM ICS + e^ Telecom

V REtf = FINANCE + e^ Cognition

V REta = ACCOUNTING + e^ Logic

Commercial Real Estate Valuation –Income Approach - CAPM

CAPM = E (r) = ie = r f + β (rm – rf)

VRE = NOIie

iRE = NOIVt

PVRE = NOI (1+g)n + NOI/(i-g)(1+i)n (1+i)n

Σ

Michael Giliberto, Real Estate in A Capital Markets Context.

i = Discount Rate = Risk Free Rate + Credit RP + i lliq RP + σP

i = Discount Rate = Opp Cost of Capital = Exp Rate o f Return =

Risk Free Rate (RR + InfExp)

+ Inflation RP

+ Credit RP

+ illiq RP

+ Maturity RP

+ Currency RP

+ Tax RP

+ Political RPPolitical RP

++ Policy RPPolicy RP

+ σRP*

Discount Rate Determination - Volatility

Institutional AnalysisHistorical-Philosophical-Political-

Economic Risk

Political-Economic Institutional Analysis“Over the past 95 years, society and the economy have witnessed great prosperity, wars, depressions, recessions and revolutions. We have just witnessed a revolution in political-economic ideological thought – from Keynesianism to Monetarism – and in its wake…..institutional deconstruction, destruction and market failure…… the question is…… what social, political and economic institutional synthesis will develop ….and how will history judge us and how will we be remembered.”

Lawrence Souza

Rise and Fall of the Great Powers : Economic Change and Military Conflict From 1500 to 2000,

by Paul Kennedy

• Over long-term, specific military expenditures correlate strongly with available resources and economic durability. Military "over- stretch“, relative decline, are consistent threats facing powers whose ambitions and security require greater resources.

http://en.wikipedia.org/wiki/The_Rise_and_Fall_of_the_Great_Powers

• The need for additional capital (natural, human, technological, land resources) – to pay for over extended military expansion and geographic presence, governments are forced to print money (hyper-inflation), issue bonds (high borrowing costs) and raise taxes (negative multiplier affect).

This eventually leads to a devaluation in sovereign currencies, inflation, negative wealth affects, social unrest, stagnation and decline.

http://www.amazon.com/Rise-Fall-Great-Powers/dp/0679720197

Interdisciplinary/Cross-Sectional Approach to Real Estate Market Analysis

The Political Philosophy and Economy of Commercial Real Estate Investment

Modern Hegelian Dialectical – Modern Application

SYNTHESIS/THESIS??

Transition (30 years)

SYNTHESIS/THESIS ANTI-THESIS(2007 -to- 2037)

Neo-Liberal Economics Financial Institutional Crisis New-KeynesianMonetarism (Friedman) Economic Dislocations Re-RegulationNeo-Classical Thought Debt Monitization Progressive Democratic Policy

Managed Markets



Neo-Keynesian Neo-Liberal EconomicsCold War Capitalism Monetarism (Friedman)

Globalisation Neo-Classical Thought



Democratic-Capitalism Neo-KeynesianKeynesian (FDR) Cold War Capitalism

Centrist Political Ideology GlobalisationRegulated Markets

Conflict/Wars/Transition (30 years)(1915 - 1945)

THESIS ANTI-THESISAristocracy World Wars I/II Democratic-Capitalism

Authoritarianism Korean War Keynesian (FDR)Dictatorship Cold War Centrist Political Ideology

Fascisim Proxie Wars Regulated Markets

32 Years

30 Years

30 Years

30 Years

Keynesian/Neo -Keynesian

Period

Liberal/Neo -Liberal/Monetarist

Period

Democratic Capitalism

?!?!?

“Institutional deconstruction is the dismantling of pluralistic and democratic institutions by powerful interests within society. The goal is to “deconstruct”these institutions, and replace them with new autho ritarian institutions that enforce and redistribute private property rights to privileged interests, at any cost.”

Jacques Derrida, Martin Heidegger, Friedreich Nietzs che, Larry Souza, Et.Al.

PostPost--Modern Philosophy Modern Philosophy -- Institutional DeconstructionInstitutional DeconstructionV io la t io n s P lu ra lis t ic /D e m o c ra tic In s t itu t io n a l D e c o n s tru c t io n

B ill o f R ig h ts M e d ia C e n s o rs h ip (In a b ility to R e p o rt fro m W a r Z o n e s )

M e d ia C o n s o lid a tio n o f O w n e rs h ip (V io la tio n 1 9 9 6 T e le c o m A c t)

R e p o rte r In c a rc e ra tio n (L a c k o f S h ie ld L a w s )

C itize n E a ve s d ro p p in g a n d W ire ta p p in g (S p e c ia l A g e nc ie s )

C o n s t itu t io n a l P riva te P ris o n a n d L e g a l S ys te m s (K id n a p p in g /M ilita ry C o u rts )

R ig h ts W a ve r H a b e a s C o rp u s a n d D u e P ro c e s s (N o L e g a l R e p re s e n ta tio n )

P riva tiza tio n o f P u b lic P ro p e rty a n d G o o d s (L a n d /R e d is tr ic tin g )

L a c k o f E n v iro n m e n ta l P ro te c tio n a n d P u b lic S a fe ty (F o o d /D ru g s )

A m m e n d m e n ts T a lk in g o f In d iv id u a l R ig h ts (L a te T e rm A b o rtio n /C o n tra c e p tive s )

to th e R e c la s s if ic a tio n o f R ig h ts (H e a lth c a re L im ita tio n s a n d C o ve ra g e )

C o n s titu t io n

U n ific a tio n o f C h u rc h a n d S ta te (P r iva te C h a ritie s /S o c ia l S e rv ic e s )

L a c k o f G o ve rn m e n t T ra n s p a re n c y/A c c o u n ta b ility (E x e c u tive P r iv ile g e )

T a x a tio n w ith o u t R e p re s e n ta tio n (M o n e tiza tio n o f D e b t)


Binary Institutional-Ideological Extremes


Keynesian-Industrial Policy Neo-New Deal• Wage/Labor• Infrastructure• Technology• Institutions/Government• Equity/Utilitarian• Production/Manufacturing• Domestic Comparative Advantages

• Full Employment• Individual/Social Rights• Budget Surplus• Fiscal Policy• Public Goods• Regulation

Friedman-LiberalismFree Market Capitalism• Capital• Interest• Markets• Price Bubbles• Distribution• Finance• Services• Globalization• Inflation• Private Property Rights• Deregulation• Budget Deficits• Monetary Policy

“Progressive Democrats” “New Democrats/Republicans”

Vs.

• Greenspan developed a New Business Cycle that privileges financial-capital markets over labor markets.

• Major shift to preemptive monetary policy strikes toward inflation targeting, and away from full employment-real wage growth targeting (Paul Volcker -> Ben Bernanke).

• Foundation of monetary policy was deregulation, a financial boom in the stock and real estate markets and free trade, driving up consumer consumption and debt levels.

• Results : Cycle marked by deindustrialization, growing trade deficits, financial-asset market price bubbles, dollar overvaluation, L-T decline real wage growth, growing household debt levels, under investment by business in capital stock

• Risks : Fragile economy-recovery, high debt levels, under performing labor markets, exposure to financial market corrections, moral hazard –Fed intervention to rescue markets

Thomas Palley, Challenge, Nov.-Dec. 2005.

Greenspan Critique: Labor vs. CapitalGreenspan Critique: Labor vs. Capital


Public Choice Theory – Mean Voter Theorem


LEFT RIGHT

Voter Spectrum

Voter Spectrum

Mean Voter (Center)

Left of Center Right of Center

Non-Voting Population

Kennedy/Johnson

NixonCarter Regan/Cable

Clinton

Bush I

Bush II/Fox News

Tea PartyRomney/ McCain/ Palin/ Christian Coalition/NRA

Obama

HomogeneousHeterogeneous/Fractured Coalitions

Back-to-Center Strategy

Split Republican Party

Rightward Shift

Policy Consensus

Roosevelt/TrumanEisenhower

Systematic Monetary Policy Risk

Yield Curve Theory and AnalysisYield Curve Theory and Analysis

-300 bsp

-300 bsp

-250 bsp

-275 bsp

-200 bsp

-225 bsp

All debt + equity securities priced off of the yiel d curve (term structure interest rates)

Although S-T Risk Free Rates near Zero (negative re al) debt/equity credit and illiquidity risk premium s still high

Inflation ExpectationsInflation ExpectationsU.S. Producer and Consumer Price Index (PPI/CPI)

http://www.bls.gov/home.htm

Sept Year-Over-Year Change: 5.5% (1950), 0.0% (1960), 3.4% (1970), 13.3% (1980), 5.9%(1990), 3.3% (2000), 3.9% (2010), +7.2% (2011), 2.2% (9/12)

-6.6%

2.5% (1950), 1.2% (1960), 5.7% (1970), 12.8% (1980), 6.2% (1990), 3.5% (2000), 1.1% (2010), 3.9% (2011), 2.0% (9/12)

-2.0%

9.8%

5.5%

http://www.federalreserve.gov/Releases/G17/Current/default.htm

2.2%

2.0%

Since 1947, Up 977%

Since 1947, Up 661%

Real Interest Rates (From 1953 to 2011)

-75%~85%

Real Yield Curve Theory and AnalysisReal Yield Curve Theory and Analysis

Real Yield Curve Inverted – Shifted Downward 2012 : rising consumer-producer price inflation-expectations (Oil Prices).

Real Yield Curve (10/24/11Real Yield Curve (10/24/11 --toto --10/23/12):10/23/12):

5 yr T-bond -72 bpts -0.66% to -1.38%

7 yr T-bond -84 bpts -0.27% to -1.11%

10 yr T10 yr T --bond bond --94 94 bptsbpts +0.23% to +0.23% to --0.71%0.71%

20 yr T20 yr T --bond bond --78 78 bptsbpts +0.77% to +0.77% to --0.01%0.01%

30 yr T30 yr T --bond bond --100 bpts+1.40% to +0.40%100 bpts+1.40% to +0.40%

Real Rate = Nominal Risk

Free Rate -Inflation

Expectations

(Negative Real Returns)

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield

Yield 10Yield 10--Year TreasuryYear Treasury

Source: Federal Reserve Board of Governors. http://www.federalreserve.gov/

10-Year Treasury Yield down from high of 15.8% in J uly 1981. Since 2006-2007, down from high of 5.2% to 2.1% Dec 2008. Up to 4.0% in 09’, 2.4% in Oct 10’, 2.0% in Sept 11’, 2.2 % April 12’.

• Low inflation expectations (falling economic growth )• Geo-political default/oil risk (Greece, Spain, Ital y, Portugal)• Quantitative Easing/Accommodative Monetary Policy• Flight to Safety (U.S. Treasury Backed Securities)

10-Year Treasury Yields are the lowest since 1954 a t 2.3%, and forthe same time period are:

• -240 bsp 4.7% (2001)• -530 bsp 7.6% (1991) • -1,300 bsp 15.3% (1981)• -380 bsp 6.1% (1971)• -160 bsp 3.9% (1961)• -50 bsp 2.8% (1951)- 443 bsp Avg.

Decline in Velocity of Money- Global Shadow Banking- Labor Productivity/Participation- Capital/Labor Substitution- Global Jobs Outsourcing- Fed Over Accommodation- Falling Savings Rate- Rising Cash BalancesQTM = G r*I = V*M s

16.0%

6.0%

5.0%

4.0%

2.0%1960-to-1985 1985-to-2012

2012-2013F 2.0%~3.00%

Mtg Int Rt = 2.0% + 1.5% = 3.5%

Deflationists argue the decline in the velocity of money can

only lead to declining productivity, lower wages and

excess capacity

Velocity of Money – Deflationary – Downward Pressure on Rates

Inflation ExpectationsU.S. Consumer Price Index (CPI) - Monthly Volatility

Source: Bureau of Labor Statistics.http://www.bls.gov/home.htm

Volatile Price

Period

Volatile Price

Period

Stable Price

Period

9 Years14 Years11 Years

Inflation ExpectationsInflation Expectations

Oil Prices up from $11.8 in Feb 1999 to $146.2 in Jul 2008, up 1,141%

Extreme Volatility Past 7 years: speculator dominated market,

hedge against devaluation of dollar

Source: Energy Information Administration (http://www.eia.doe.gov/)

$146.2 Jul 08’

$43.6 Feb 09’

$93.55

$11.8 Feb 99’

Up 161%

Down -70%

Deflationists argue the decline in the velocity of money can

only lead to declining productivity, lower wages and

excess capacity

Philadelphia Gold/Silver Index (PHLX) From 2001 –to - 2012

Source:http://www.marketwatch.com/investing/index/XAU/charts?symb=XAU&time=20&startdate=1%2F4%2F1999&enddate=10%2F23%2F2012&freq=2&compidx=none&compind=none&comptemptext=Enter+Symbol%28s%29&comp=none&uf=7168&ma=1&maval=50&lf=1&lf2=4&lf3=0&type=2&size=2&style=1013

+233%

-71%

+250%+275%

-33%

VIX CBOE Mkt Volatility Index - From 2001 to 2012

http://bigcharts.marketwatch.com

Post-Dot Com Bust 9/11 Econ

Decline

Economic Recovery/Growth Stock/Real Estate

Market Price Appreciation

High Volatility

Falling/Low Volatiltiy

High Volatility

Highly Volatile Capital Market Environments Businesses-Consumers Hold Off on Investment- Consumption

Hold Large Precautionary Cash BalancesMaking Monetary Policy Ineffective (Liquidity Trap)

12

Extreme Capital Market

Shocks/Credit Crisis/Recession/Foreclosures/Curren

cy Crisis

Structural Fiscal Policy Risk

• $15.0 trillion public debt outstanding, $630 billio n in interest; Total Debt-to-GDP to reach ~ 100% by 2012

Crowding Out Effect ~ High Inflation Expectations and Interest Rates ~ Fiscal/Monetary Policy

Ineffectiveness ~ Devaluation of Dollar

• $1.3 trillion annual budget deficit, $640 billion Per Year for Iraq/Afghanistan Wars 10’–15’; defense budget up 40% since 2001.

• Budget deficits to total +$10 trillion over next 10 years.

• Japan and China currently own 44% of U.S. government debt (China/Japan): China $846.7 bill., Japan $821.0 bill., U.K. $374.3 bill., Hong Kong $135.2 bill., Oil Exporting $223.8 bill. U.S. Federal Reserve Buying Most Debt!!!!

US Budget DeficitsUS Budget Deficits

• $789 billion - Economic stimulus package• $280 billion - Freddie Mac/Fannie Mae (Judicial Watch/FHFA)• $200 billion - Carry-over budget from 2008• $750 billion - Troubled Assets Relief Program (TARP)• $160 billion - GW Bush stimulus tax rebates• $150 billion – AIG bailout (US 80% ownership)• $50 billion – Loan to GM (US 60% ownership)• $2.0 trillion – Federal Reserve balance sheet up from $870 billion• $3.13 trillion – Tot. Money Supply Printed less than 9 months • $8.3 trillion – Total Money Supply in Economy (Up 40% YOY)

Risks: Federal Reserve Independence, Credibility and Effectiveness ~ government default, foreign policy, tax and inflation, capital market,

accounting, private property rights, and social welfare.

Source: Tom Campbell, “Stimulating Inflation?; San Francisco Chronicle, 2009.

US Treasury Borrowing Money Printed by US Treasury Borrowing Money Printed by Federal ReserveFederal Reserve

20

30

40

50

60

70

80

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

AdvancedEmerging

Public sector debt as % GDP

Source: IMF

www.tomllewis.com

High Advanced Country Debt Burdens

Moderate Emerging Country Debt Burdens

Debt Gap

Infrastructure Policies and Public/Private Construction

$787.0 billion (Spending + Tax Cuts/Credits)

• Tax Credits/Cuts : – $275B (Co. $51B/Hlth $150B/Ed $91B)

• Infrastructure : $81B (Core $51B/Other $45B)• Energy : $61 billion• Housing : $13 billion• Science : $9 billion

Note: The ability to start and fund projects also comes from local municipal bond financing and state level block grants.

American Recovery and Reinvestment Act (2009)American Recovery and Reinvestment Act (2009)

Websites : http://www.recovery.gov/Pages/home.aspx; http://www.irs.gov/newsroom/article/0,,id=204335,00.html; http://www.sba.gov/recovery/index.html; http://www.gsa.gov/Portal/gsa/ep/contentView.do?contentType=GSA_OVERVIEW&contentId=25761; http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009

Total Public Sector Construction Value 2010 – 2015:

$20.0 billion ($4 billion per yr.)

3x = $60 billion Economic Stimulus

High Paying Union Labor JobsSupplier and Construction Companies

Major Bay Area Regional Construction ProjectsMajor Bay Area Regional Construction Projects

Source: The Registry, Large-Scale Public Const in 2010, pg. 18-19.

Financial Institutional Risk

Institutional Impact of Political Philosophy and Economic Ideology

“I found a flaw in the model that I perceived is the critical functioning structure that defines how the world works.” Alan Greenspan, Chairman, Federal

Reserve System, House Committee on Oversight and Government

Reform Hearing, October 23, 2008.

“The housing bubble was a major cause, if not the cause, of the subprime crisis and the broader economic crisis we are now face.”

Dr. Robert Shiller, Professor of Economics, Yale University, 2008.

“Never let a serious crisis go to waste. What I mean by that is it’s an opportunity to do things you couldn’t do before.” White House Chief of Staff, Rahm

Emanuel, November 2008.

Investment

Real Estate

Industry/ Rest of

U.S.

Rating Agencies

Fannie/Freddie/RMBS/CMBS

• Dilution - Equity Issues• Gov Preferred/Convertible Stock

Purchase• RMBS/CMBS/GSE Debt/Equity

Purchases

Reserve Balances with Federal Reserve Banks

http://research.stlouisfed.org/fred2/series/RESBALNS

QE1 $800 Billion

QE2 $1.2 Trillion

QE3 $1.6 Trillion

QE0 $0 Billion

Total Assets Held by Federal Reserve Bank

http://wallstreetpit.com/16815-bernanke-on-the-feds-bloated-balance-sheet

Driven Largely by MBS and Agency Purchases

Sterilization

RMBS

SWAPS

Paying Interest on Bank Held Reserves with Fed to Limit Liquidity in System

“Fed Lender, Market Maker, and

now Portfolio Manager of Last

Resort”

Com Pap

Term Auction Credit

““ Greatest Greatest Expansion of Expansion of

Credit in HistoryCredit in History ””

““ $1.1 $1.1 triltril . . Excess reserves Excess reserves

sitting idle, sitting idle, higher interest higher interest

rates.rates.

TALF $9.3 bil.

Monetary Oversight and

Re-Regulation

• Phil Angelides (D)• Bill Thomas (R)• Brooksley Born (D)• Byron Georgiou (D)• Bob Graham (D)• Keith Hennessey (R)• Douglas Holtz-Eakin (R)• Heather Murren (D)• John Thompson (D)• Peter Wallison (R)

Financial Crisis Inquiry Commission vs. Wall StreetFinancial Crisis Inquiry Commission vs. Wall Street

• Lloyd Blankfein (Chair/CEO)Goldman Sachs

• Jamie Dimond (Chair/CEO)JP Morgan Chase

• John Mac (Chair)Morgan Stanley

• Brian Moynihan (CEO/Pres)Bank of America

• Tim Geithner (Pres)Federal Reserve Bank New York

http://www.fcic.gov/http://en.wikipedia.org/wiki/Financial_Crisis_Inquiry_Commissionhttp://www.c-span.org/Watch/Media/2010/01/13/HP/R/28350/Financial+Crisis+Panel+Questions+Big+Bank+CEOs.aspx

““We Made MistakesWe Made Mistakes”” ““Outsourced Outsourced Risk ManagementRisk Management”” ““Bonuses May Bonuses May Have Led to Excessive Risk TakingHave Led to Excessive Risk Taking””

““Sold Defective ProductSold Defective Product””““Bought InsuranceBought Insurance””

Hearings 1/13-1/14 2010

• Macro-Prudential Bank Regulator (Federal Reserve)• Improved Regulatory Oversight and Risk Management Practices• Use Monetary Policy (Orthodox/Unorthodox) Regulate Asset Price

Bubbles• Implementation of Regressive/Progressive Income and Capital Gains

Taxes (Wall Street Bonuses-Salary/Bank Leverage Fees)• Return Glass-Steagall Act (1933 – 1999) – Comm/Inv Banks

(Overruled by Gramm-Leach-Bliley Act) – Volker Rule• Bank Levy/Capital Requirements for Derivatives Trading (Book)• Required Holding of Collateral by Rating Agencies (S&P)• Increased FDIC Bank Deposit Insurance Prems (OTS/Fed/OCC)• Increased SEC/FINRA/Justice-Treasury

Dept/FBI/Congressional/State: Oversight, Investigation, Prosecution (Mtg/Securities Fraud) – Goldman Sachs (CDOs)

Goals and Objectives : Alleviate Moral Hazard, Adverse Selection, Principal-Agent Problem, Asymmetric Info rmation.

Financial ReFinancial Re --Regulation (Policy Response)Regulation (Policy Response)

• Promote financial stability by improving accountability-transparency in financial system, end to big to fail, protect taxpayers by ending bailouts, protect consumers from abusive financial services practices.

• Title I : Financial Stability (Oversight Council) by monitoring systematic risk and researching state of economy.

• Title II : Orderly Liquidation Authority (FDIC/SIPC) banks, broker dealers and insurance companies.• Title III : Transfer of Powers to Comptroller, FDIC and Fed, elimination of Office of Thrift Supervision• Title IV : Regulation of Advisors to Hedge Funds and Others, limits exclusion of financial information in

government reporting.

• Title V : Creation of Federal Insurance Office to monitor insurance industry, sales practices.• Title VI : Bank and Savings Associations Holding Company and Depository Institution Regulation

Improvements, intorducing Volcker Rule to reduce speculative investments, limits on hedge fund and private equity ownership.

• Title VII : Wall Street Transparency and Accountability in regards to OTC Credit Default SWAPs/Derivatives.• Title VIII : Payment, Clearing and Settlement Supervision Act, mitigate systematic risk, promote stability in

payment system.• Title IX : Investor Protections and Securities Reform Act, Improvements to Regulation of Securities (SEC),

fiduciary duty BDs/RIAs, whistleblower program.

• Title X : U.S. Consumer Financial Protection Bureau (Fed), regulates products and services with federal law.

• Title XI : Federal Reserve System Provisions.• Title XII : Improving Access to Mainstream Financial Institutions Act, encourage low income people to

participate in financial system.• Title XIII : :Pay It Back Act, amends Emergency Economic Stabilization Act and TARP, unused funds can

not be used for new programs, deficit reduction, spending offsets.• Title XIV : Mortgage Reform and Anti-Predatory Lending Act, organization/servicing mtg standards.

DoddDodd ––Frank Wall Street Reform and Consumer Protection Ac tFrank Wall Street Reform and Consumer Protection Ac t

http://en.wikipedia.org/wiki/Dodd%E2%80%93Frank_Wall_Street_Reform_and_Consumer_Protection_Act

• Global regulatory standard on bank capital adequacy , stress testing and market liquidity risk, strengthen regulation, supervision, risk management of banking sector, developed in response to deficiencies in financial regulation revealed by late-2000s financial crisis.

• Improve sector's ability to absorb shocks from fina ncial and economic stress; risk management/governance, strengthen transparency and disclosures; target bank-level or microprudential regulation, raise resilience peri ods of stress; mitigate macroprudential, risk build up and procyclical ampl ification of risks.

• Strengthens capital requirements and regulation of liquidity and leverage: 1) require to hold 4.5% of common equity and 6% of Tier I capital of risk-weighted assets (RWA); mandatory capital conservation buffer of 2.5% and (ii) discretionary countercyclical buffer, require up to another 2.5% of capital during periods of high credit growth; minimum 3% leverage ratio and two required liquidity ratios; requires holding sufficient high-quality liquid assets to cover total net cash outflows over 30 days; and net Stable Funding Ratio requires available amount of stable funding to exceed required amount of stable funding over one-year period of extended stress.

• Add CVA (Credit Valuation Adjustment)-risk due to d eterioration counterparty credit rating; strengthen capital requirements for counter party credit exposures arising from banks’ derivatives, repo and securities financin g transactions; raise capital buffers backing these exposures; provide additional incentives to move OTC derivative contracts to central counterparties (pro bably clearing houses); provide incentives to strengthen the risk management of cou nterparty credit exposures; raise counterparty credit risk management standards by in cluding wrong-way risk.

Basel IIIBasel III : : International Bank Capital/Liquidity Standards International Bank Capital/Liquidity Standards

http://en.wikipedia.org/wiki/Basel_III; http://www.bis.org/bcbs/basel3.htm

Commercial Real Estate Commercial Real Estate Economic and Market AnalysisEconomic and Market Analysis

Modern Real Estate Portfolio TheoryModern Real Estate Portfolio Theory-- Benefits of DiversificationBenefits of Diversification --

N#

SYSTEMATIC RISK

NON-DIVERSIFIABLE

NON-SYSTEMATIC RISK

DIVERSIFIABLE

T O T A L

R I S K

σσσσ/ββββ

Modern Real Estate Portfolio TheoryModern Real Estate Portfolio Theory-- Limitations to DiversificationLimitations to Diversification --

N#

SYSTEMATIC RISK

STRUCTURAL RISK

POLITICAL RISK

ECONOMIC RISK

MARKET RISK

NON-DIVERSIFIABLE

NON-SYSTEMATIC RISKDIVERSIFIABLE

T O T A L

R I S K

σσσσ/ββββ

Modern & PostModern & Post--Modern Modern Real Estate Portfolio Theory Real Estate Portfolio Theory

(MREPT/PMREPT)(MREPT/PMREPT)

Commercial/Institutional Market SizeCommercial/Institutional Market Size

Institutional Real Estate, Inc. (IREI), Visions, Insights & Perspectives (VIP), Real Estate 101, Feb 11, 2011.

• Commercial $10.3 trillion - (30%) $33 trillion Total RE US Market.

• Institutional $3.2 trillion – (9.5%) $33.9 trillion Global RE Market.

• Compared to: Commercial Real Estate 19.3% Total Cap ital Market.

• $16.4 trillion in Equities (31.3%).

• $25.9 trillion in Debt (49.4%).

• Investment Grade Income Producing US Real Estate

• Debt and Equity $5.8 trillion.

• Total Debt $3.3 trillion (57%) – Priv $3.1 tril./Pub $245 bil.

• Total Equity $2.5 trillion (43%)- Priv $2.2 tril./Pub. $275 bil.

• Majority owned by Defined Benefit Public Pension Fu nd Plans.

Institutional Real EstateCapital Allocation Line (CAL)

E (r)

σσσσ/β

Capital Allocation/Security

Market Line (CAL/SML)

LENDING

LEVERAGE

100% High Risk/Return

Portfolio

100% Low Return/Risk

Portfolio

Market Basket

E (r)*

σσσσ*

Higher Return/Risk Real Estate Investments

Lower Risk/Return Real Estate Investments

Loan Origination

Direct Real Estate Development

MultiMulti--Asset Portfolio Management/Movements Along the Efficient FrontieAsset Portfolio Management/Movements Along the Efficient Frontierr

Rf

REAL ESTATE/ENERGYINSURANCE HEDGE

Applications In Portfolio Theory – Target

Average Standard Metro Annual Return DeviationOrange County 13.4% 7.6%SF Bay Area 15.5% 8.8%Seattle 14.3% 9.3%San Diego 13.7% 9.4%Los Angeles 14.4% 9.9%Sacramento 13.8% 11.0%Denver 12.0% 11.2%Portland 12.5% 10.0%Salt Lake City 13.0% 11.0%Phoenix 14.1% 11.4%Tucson 14.1% 11.4%Riverside 11.6% 11.9%Las Vegas 5.1% 6.6%Albuquerque 2.4% 4.4%

Sources: National Real Estate Index (NREI) and BRE Properties Research Department

Total Returns are calculated by the year-over-year change in sales price per square foot on a quarterly basis (Capital Appreciation) plus the annualized cap rate (Income Return) per quarter.

1.3

0.80.5

Risk-Adjusted Rates of Return are calculated by dividing the Total Average Annual Rate of Return by the Standard Deviation (Risk) for each metro area.The Risk-Adjusted Rate of Return measures the amount of return for each unit of risk. For example Orange County provides 1.7 units of return for each unit of risk.

1.21.21.21.0

1.41.41.31.3

1.71.71.5

Risk-Adjusted Rate of Return 1986-2000

Risk-AdjustedRate of Return

Balanced Conditions for Long Periods:

• LA/Orange County/Riverside• San Diego• Bay Area• Seattle

Modest Conditions ofOver/Under Supply:

• Sacramento• Salt Lake City• Portland• Denver

• Job Growth• In-Migration• Housing Demand• Positive Net Absorption

• Low Vacancy Rates• High Effective Rents• Prices Above

Replacement

Applications In Portfolio Theory – Target

Real Estate Supply/DemandAnalysis

Real Estate Supply and Demand Analysis

Rent Growth %

# Units

Supply

(Space Available)

Demand

(Absorption)

Market

Equilibrium

*Rent

Growth

* Existing Inventory

Inflation Rent Growth (3.5%)

Structural Vacancy Rate

(5%)

LongLong--Run Market EquilibriumRun Market Equilibrium

No Incentive to Build New

ProductRents-Prices Equal Cost of Construction


Rent Growth %

# Units

Short-Run Supply (Fixed)

New Demand

New Market Equilibrium

Price

Rent Spikes

ShortShort--Run Supply Conditions with Employment Demand ShockRun Supply Conditions with Employment Demand Shock


Old Demand

*Rent Growth (3.5%)

*Rent Growth (8.5%)

Frictional Vacancy Rate

(2% - 3%)

Rents-Prices Above

Replacement Costs

Incentive to Build New Product


Prices

# Securities/Inventory

Supply

(Securities/Property)

Demand

(Securities/Property)

Market

Equilibrium

‘Prices

Q* Existing

Securities (Inventory)

LongLong--Run/Short Run Market EquilibriumRun/Short Run Market Equilibrium

S* S’

Q’

S-T L-T

D

D’

Market

Equilibrium

Supply Constrained in Short Term – By Lags in

Securities Underwriting/Issuance and

Property Construction

*Prices


Rent Growth %

# Units

SR Supply (Fixed)

Demand

Old Market Equilibrium

Price

Rent Decline

s

LongLong--Run Supply Response in Supply Unconstrained MarketsRun Supply Response in Supply Unconstrained Markets

* Old Level Inventory

*Rent Growth (-3.5%)

Rent Growth (8.5%)

Vacancy Rate (8%)

Rents-Prices Well Below Replacement

Costs


Product

LR Supply (Flex)

* New Level Inventory

Rent Growth (3.5%)

Vacancy Rate (5%)

Over

Supply


Rent Growth %

# Units

Short-Run Supply (Fixed)

Old Demand

Old Market Equilibrium

Price

Negative Rent

Spikes

LongLong --Run Supply Response with Negative Employment Demand ShockRun Supply Response with Negative Employment Demand Shock


New Demand

Rent Growth (-3.5%)

Rent Growth (3.5%)

Structural Vacancy Rate

(5%)

Rents-Prices Well Below

Replacement Costs


Product

Vacancy Rate (8%)

Vacancy Rate (10%)

LR Supply (Flex)

*Rent Growth (-8.0%)

* New Level Inventory

Real Estate Derivatives Capital Market Supply and Demand

AnalysisPrices

# Property Derivative Contracts

Supply

(Property Derivatives)

Demand

(Property Derivatives)

*Prices

Q*

LongLong--Run/ShortRun/Short--Run Market EquilibriumRun Market Equilibrium

S* S’

Q’

S-T L-T

D

D’’

Market

Equilibrium

D’Supply Unconstrained

Short/Long Term (Purely Elastic Supply Curve) –

No Underlying Asset to Constrain Market

Q’’

Real Estate and Business Cycle Analysis

Real Estate Cycle Theory

E1 E2

Occupancy/ Rent Growth Line

Rent/Value Spikes

Structural Occupancy Rate/Inflation Rent Growth

Rising Delinquency and Defaults

High Delinquency and DefaultsLow Delinquency and Defaults

Falling Delinquency and Defaults

Business/Real Estate Cycles

Source: Richard Knutson, Cornish & Carey/Newmark Night Frank, Apartment Advisors.

Real GDP Output Gap (From 2000 to 2011)

Wells Fargo Securities, Economic Outlook, May 2, 2011.

Gross Domestic Product (GDP)

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

GDP = consumption + gross investment + government s pending + (exports − imports)

20092009--5.0%5.0%

http://www.bea.gov/briefrm/gdp.htm

20132013+2.0%+2.0%

20002000+5.0%+5.0%

19551955--toto --19851985+7.5%+7.5%

19471947--toto --19851985--2.5%2.5%

Gross Domestic Product (GDP)

http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

20092009--5.0%5.0%

20132013+2.0%+2.0%

20002000+5.0%+5.0%

20082008--9.0%9.0%

Source: Department of Labor Statistics, Bureau of Labor Statistics.

United States NonUnited States Non--Farm Farm Employment Growth (YOY)Employment Growth (YOY)

R

R R R

G

GG

G G

R

G

R

R R

G GG G G

G

High Probability Recession First 5 Years Every Decade, Growth Last 5

Years Every Decade

R R

G

R

Business and Real Estate Cycles

Source: Urban Land Institute Emerging Trends, 2013.

Commercial Real Estate Cycles Highly Correlated

with Overall Business Cycle

Economic Indicators

Change in Net WorthChange in Net Worth

Increasing probability of a international financial crisis.

Faster rates of capital accumulation due to foreign direct investment in manufacturing production, services, and technology sectors.

CHANGE IN NET W ORTH(end o f year to end of year)

-$14,000 .0

-$12,000 .0

-$10,000 .0

-$8,000 .0

-$6,000 .0

-$4,000 .0

-$2,000 .0

$0 .0

$2,000 .0

$4,000 .0

$6,000 .0

$8,000 .0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Since 2007 ,

U.S. Net Worth -$10 trillion

Global Net Worth -$20 trillion

Income and WagesIncome and WagesAverage Hourly Earnings of Production Workers

Source: Bureau of Labor Statistics. http://www.bls.gov(Hard to Find)

Zero Real Wage Growth

Median Weekly Pay : Women 79% of Men, Blacks/Hispanic 68% White/Asian, High School 54% of College Grads

Wage and Salary Income - 2.9% YOY, from - 8.0% in 2009. Hit 0% at bottom of prior recessions. Averages 8% YOY in mature growth phase of business cycle.

1.8% YOY

Real Income (From 1954-to-2012)

-10%-20%-50%

NonNon--Farm Productivity Farm Productivity (Output Per Hour)(Output Per Hour)

2002-2004 4.3% Ann. Avg.

1996 - 20012.5% Ann. Avg.

1993 - 19950.7% Ann. Avg.

2.2%2Q12

Source: Bureau of Labor Statistics. http://data.bls.gov/http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

2009-20104.5% Ann. Avg.

2005 - 20081.3% Ann. Avg.

1990 - 19922.5% Ann. Avg.

Personal Savings RatePersonal Savings Rate

Delveraging/Precautionary Cash Balances by Businesses and Consumers Contributing to Slow

Aggregate Demand (Consumption and Investment) Growth

http://research.stlouisfed.org/fred2/series/PSAVERT

12%-to-15%

8%-to-10%

1%-to-2%

5%-to-7%

10%-to-12%

3.7%3.7%

Consumer ConfidenceConsumer Confidence

http://www.advisorperspectives.com/dshort/updates/C onference-Board-Consumer-Confidence-Index.php

Retail SalesRetail Sales

Avg. 8%

Avg. 5%

-10.0%

Dow Jones Composite Index (From 1988 to 2012)

In Trading Range Since 1997

Up 115% Since Market Bottom in March 2009

Need Productivity Need Productivity Gains and Top Line Revenue Gains and Top Line Revenue

Growth/Aggregate Demand to Break Growth/Aggregate Demand to Break Market Out of Trading RangeMarket Out of Trading Range

Up 7.7% Per Year Since 1995


~ 4.9% Per Year Since 2005


--57%57%

NASDQ Composite Index (From 1980 to 2012)

In Trading Range Since 1995

Up 60% Since Market Bottom in March 2009

Need Human Capital Productivity Gains, Product and Technological Innovations, Globa l

Exports Sales and Domestic Consumption and Investme nt to Pull Market Out of Trading Range





EmploymentEmployment

NonNon--Farm Payroll EmploymentFarm Payroll Employment

300,000

Source: Bureau of Labor Statistics. http://www.bls.gov

Sept 12’ Total = 158,000

Total Lost Since Peak (Jan. 08’) : - 4.5 million jobs (4.8 million L-T Unemployed)

Aug 12’ Total = 142,000

Jul 12’ Total = 181,000

458,000

-820,000

-320,000

114k Oct 12’

U.S. Unemployment RateU.S. Unemployment Rate

5.0% Natural Rate (NAIRU)

Sept. 7.8%

http://data.bls.gov

Source: Bureau of Labor Statistics.

Peak ~10%, Structural 5%

2015-2016

Note: Under-employment rate double stated unemploym ent rate.

Labor Market Failure

LABOR MARKET SUPPLY GAP

International TradeInternational Trade

Global Geography – Export Market Growth(Forecast 2013)

Exposure to Fast Growing

Southeast Asian

Economies

Goods/Services Volume Trade Flows

7.7%

http://www.oecd.org

7.2%7.2%8.2%

6.4%6.4%

7.2%7.2%

6.5%6.5%

6.4%6.4%

8.3%

7.1%7.1%8.4%

8.7%

7.9%7.9%

7.9%

6.7%6.7%

5.2%5.2% UK 6.6%6.6%Germ6.1%6.1%

Fran 6.0%6.0%

Italy6.4%6.4%

Spain5.4%5.4%

100 100 ––to to –– 200 200 bspbsp Downward Downward

RevisionsRevisions

OECD Economic Outlook, Volume 2012 Issue 1 - No. 91 - © OECD 2012

Grec6.3%6.3%

California Geography

http://mapofcaliforniausa.com/

Santa Clara 1,805,861Alameda 1,525,655Sacramento 1,430,537Contra Costa 1,061,132San Francisco 814,088San Mateo 725,245Sonoma 486,479Monterey 419,710Solano 413,635Placer 355,687Marin 254,114

NorCalTotal

9,293,000

SoCal Total 20,319,000

Source: U.S. Census/CA Dept. Finance.

County 2010 TotalAnnual

Average

CALIFORNIA 2,010 5,580,255 214,625

Santa Clara 18,489 445,567 16,502

Alameda 12,248 292,167 10,821

San Francisco 8,430 270,324 10,012

San Mateo 5,111 153,853 5,698

Contra Costa 5,066 117,245 4,342

Monterey 1,824 59,045 2,187

Marin 908 23,741 879Napa 478 12,026 445

Legal Immigration 1984-2010

Population Ch.10'-11' Nt.Dom.County Number MigrationCalifornia 260,135 -154,276Santa Clara 18,308 -7,209Alameda 12,162 -6,348Sacramento 10,090 -4,607Contra Costa 8,940 -100San Francisco 6,911 -3,401San Mateo 5,663 -2,382Monterey 3,885 -2,303Santa Cruz 1,650 -539Napa 1,051 302

Transportation Flows

http://www.dot.gov/http://www.fhwa.dot.gov/environment/freightaq/appendixc.htm

Trucking carriers 64% of interregional freight tonnage, marine vessels 21%, railroads 14%. Ranked second in total intercity freight tonnage and tied for first for greatest volume of intercity truck freight.

One of Most Extensive Networks of Highways and Arterial Streets in U.S. (I-5/I-15/I-40/I-10)

Port of Oakland Container VolumePort of Oakland Container Volume

http://www.portofoakland.com/maritime/facts_cargo.asp

http://www.truckinginfo.com/news/news-detail.asp?news_id=68596Full In 2013, + 4% -to- 7%

Port/Airport FacilitiesPanama Canal - Diversion Asia/East/Gulf Coast Trade

Competing Ports : Houston/Savannah/Charleston/ Mobile/Norfolk/Baltimore/S.Carolina/Georga/Oakland/Seattle/NYCNJ/Miami/Gulfport/ Suez/LazaroCardenas/Panama/Cape ($300m)

Comparative Advantage :-Speed-To-Market-12.3days

-Ship-to-Rail (On Docks)-High Value/CustomerFashion/Tech/Demand Oriented Product Response (100 Trains)

Externalities:-Pollution/Traffic/Permits-Bureaucracy/Litigation -Business Relocation-Mgt Decisions

Construction : $5.25 billion/600 vessel tons- Widening(1.2k’)/Deepening (53’) start 2007

finish 2014. Ships to carry Avg. 15,000 containers, from 5,000 (total global 12,600)-Post PanaMax/Mega Ships (27%)

Estimated Economic Impact : 500,000 Direct/Indirect Supported by Ports

- 20% Reduction = -100,000 jobs lost- 30% Reduction = -150.000 jobs lost

Direct Occupations Impacted :- Longshoremen/Warehousing/Distribution- Trucking/Trans/Wholesale/Retail Trade- Manufacturing/Logistics/Supply Change

Policy Response :- Investment/Integrated Response ($1.8bil.)

Exchange Rates (2010) Exchange Rates (2010) ––Dollar DevaluationDollar Devaluation

http://www.x-rates.com/d/USD/EUR/graph120.html

Euro Japanese Yen

British Pound Chinese Yuans

Dollar Devaluation Against Yen

Dollar Appreciation Against Euro

Dollar Appreciation Against British Pound

Dollar Devaluation Against Yuan

+7.3%-9.5%

+4.8%-2.6%

Trade balance roughly zero from 1960 through 1981, fell to -215 bill. 06’ to -120 bill. 11’Devaluation/Exports

Balance of TradeBalance of Trade

Sources: U.S. Department of Commerce: Bureau of Economic Analysishttp://research.stlouisfed.org/fred2/series/BOPBCA/13

IMF Global Output 2011: 3.6% 2012: 4.1%U.S. 1.5% 1.8%Jap -0.5% 2.3%Ger 2.7% 1.3%China9.4% 9.0%Brazil3.7% 3.6%

http://www.portoflosangeles.org/maritime/stats.asphttp://www.polb.com/economics/stats/latest_teus.asp

http://www.imf.org/external/pubs/ft/weo/2011/02/pdf/text.pdf

http://www.census.gov/foreign-trade/statistics/state/data/ca.html

http://latimesblogs.latimes.com/money_co/2010/02/california-exports-imports-trade.html

Imports Significantly Higher than

Exports

Imports Fall

Rapidly due to

Deficient Aggregate Demand

Economic Geography

Geographies-Submarkets by Industry Sector :

• High-tech and Bio-tech Manufacturing (SF/Oak/SEA/SD)• Alternative and Clean Energy Technologies (SF/SJ/PHO)• Healthcare -Information Systems Services

(SF/SJ/SD/Oak/SEA/PHO)• Financial Services and Venture Capital (SF/SJ/SM/SEA)• Telecommunications /Networking (SJ/Marin/Den/Sea)• Multimedia and Entertainment (SF/Marin/LA)• Internet and Software Programming (SF/SJ/Oak/Sea)• International Trade & Tourism (SF/SJ/Sac/SEA/LA/Mon)• Construction and Engineering Services (SF/SJ/SEA/LA)• Education/Government Services (SF/SJ/Oak/SEA/PHO)• Defense (SJ/Sac/SEA/LA/PHO/UT/MON)• Agricultural/Timber Products (Cent Val/Port/SEA/Mon)

Commercial Demand (Economic Base)Commercial Demand (Economic Base)

• Economy in recovery/growth phase : local employment expansion/accelerating (24-to-36 month capital market/global economic volatility).

• Business-commercial real estate cycle : investment-distress secondary- tertiary market supply shocks 2013 – 2014; 2014 – 2015, rent/value spikes, current for tech

driven markets; and cycle peak 2016 – 2018.

• Commercial Markets 2012-2017 :

Northern CA – Business/Market Cycle

Target Urban-Infill/Supply-Constrained/Transit Orie nted (TOD)/Diverse-Growth Economic Base SubmarketsDowntown San Francisco/West San Jose; I-680/880

Corridors-Walnut Creek->San Ramon (UC/Nth Berkeley/Oakland Hills/Pleasanton/Fremont) ; SF Peninsula-Redwood City/Palo Alto (Marin/Santa

Cruz/Monterey ); Sacramento (Davis/CBD -State Capitol)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

-0.6 -0.4 -0.2 0.0 0.2 0.4 0.6 0.8

Sources: Claritas, Inc., REIS Reports, Inc., and BRE Properties Research Department.

MODEL SCORE

SURVEY SCORE

HIGH

HIGHLOW

MARKET EVALUATION MODELSan Francisco Bay Area

HIGH

E. San Jose

Concord/Martinez

N. Alameda W. Contra Costa

San Leandro/Hayward

E. Alameda

Height Ashbury/Western

West San FranciscoNE San JoseEast Contra Costa

Civic Center/DowntownNorth Marin

North San Mateo

Central San Jose

South San Jose South of Market

Santa Clara

South Marin

Fremont/Newk/UnCty

Campbell/Los Gatos

Cupertino/Saratoga

Marina/Pacific Heights

Mountain View/Los Altos

Central San Mateo

SunnyvaleSouth San Mateo

Walnut Creek

Russian Hill/Embarcadero

S.F. Bay Area Submarket RankingsExisting BRE CommunitesA - Deer Valley (171)B - Blue Rock Village (560)C - Promontory Point (400)D - Pinnacle City Centre (192)E - Verandas (282)F - Red Hawk Ranch/Sun Pointe Village (789)G - Sharon Green (296)H - Foster’s Landing /Lakeshore Landing (798)

A

H

G

FE

D

C

B

1

2

3

4,5,6,7

8

9

10

11

17

19

18

16

15

14

13

12

26

2524

23

2221

20

2827

Submarket RankingsMountain View (12)Central San Mateo (10) (H)Marina ( 4)Cupertino (14)Sunnyvale (13)South San Mateo (11) (G)Russian Hill (5)San Ramon (25) (C)Campbell (17)Fremont (21) (E,F)South Marin (2)Santa Clara (15)South of Market (8)North San Mateo (9)West San Francisco (3)Northeast San Jose (20)South San Jose (18)Central San Jose (16)Haight Ashbury (7)North Marin (1) (A)East Contra Costa (26)Civic Center (6)East Alameda (22)Hayward (23) (D)West Contra Costa (28)North Alameda (24)Concord (27)East San Jose (19)

MF Target MarketsHousehold Income

Executive Occupations Home Prices

Education Levels Supply Constraints

CRE Inventory Renter Hhld Density

California Employment Trends

Source: CA EDD, Labor Market Information Division, LAEDC

July 2012 : CA +2.6%, +365,000 JobsAnnual Percentage Change in Nonfarm Jobs

Salinas 3.3%July YOY %

Professional (10%) +9.5%Educat/Hlth (11%) +7.5%Finance (4%) +7.1%Information (1%) +6.3%Tran/Trade (20%) +5.8%Leis/Hotel (18%) +4.3%Services (4%) +2.1%Mfg (5%) 0.0%Construct (3%) 0.0%Gov (24%) -2.9%

Unemployment Rate[15.1%][7.3%][8.8%][14.7%][9.3%][10.7%][12.7%][9.5%][13.6%][7.9%][11.9%][15.7%]

[9.4%]

[9.5%]

Aug ’10-’11 Aug (p) ’11-‘12

San Jose +2.8% +3.4%

San Francisco +1.8% +3.8%

Oakland +0.5% +2.0%

Sacramento -1.1% +2.2%

MSA Year-Over-Year Employment Growth Rates

Salinas -2.4% +3.9%

Ann.Ch.Gain/Loss

+23.8k / +29.6k

+16.6k / +36.4k

+4.9k / +18.9k

-8.5k / +17.7k

+3.0k / +4.7k

Northern California Economics

*1998 – 2008: -0.6%, -5,620 Total Non-Farm Employmen t 889,900

*1998 – 2008: -0.1%, -1,350 Total Non-Farm Employmen t 963,100

*1998 – 2008: 0.6%, 5,920 Total Non-Farm Employment 953,900


*Average annual compound growth rate, and average annual absolute change in non-farm employment.

Source: U.S. Department of Labor. www.bls.gov. Note: Non-farm employment growth rates are not seas onally adjusted.


Source: U.S. Department of Labor. www.bls.gov. Note: Non-farm employment growth rates are not seas onally adjusted.

Aug ’10-’11 Aug (p) ’11-‘12

Los Angeles +0.1% +2.0%

Orange Co. +0.7% +2.1%

Inland Empire +0.3% +2.3%

San Diego -0.2% +2.5%

Southern California EconomicsMSA Year-Over-Year Employment Growth Rates

California* +0.7% +2.1%

Ann.Ch.Gain/Loss

+ 2.0k / + 74.0k

+ 9.5k / + 29.0k

+ 3.8k / + 25.4k

- 2.7k / + 30.3k

+ 93.0k / + 398.7k

*Average annual compound growth rate, and average annual absolute change in non-farm employment.

*1998 – 2008: 0.0%, 14 Total Non-Farm Employment 3,826,1 00

*1998 – 2008: 1.3%, 18,570 Total Non-Farm Employment 1,391,5 00



*1998 – 2008: 1.0%, 148,400 Total Non-Farm Employment 14,199, 000

San Francisco San Francisco –– Oakland Oakland –– Fremont, CAFremont, CA


Forecast

(Highest Since May 2000)

Three Month Net Change in Non-Farm Employment

2013

35k –to- 45k

San FranciscoSan Francisco--OaklandOakland--Fremont, CAFremont, CA

Source: Bureau of Labor Statistics.http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

Monthly % Year-Over-Year Non-Farm Employment Growth Rates

+2.2% YOY

Mar 12’(42.0k)

1.9% YOY

Jun.06 (+38.6k)

Wst. +1.3%CA +1.3%

SJ +3.4%OAK +1.6%

Mar YOY 11’+14,200

-7.2% YOY

Aug 09’(-146.6k)

Mar YOY 12’+42,000

Ann. Avg. 50.0k-to-60.0k

Mar (p) YOY %Serv +8.1%Prof/Bus +5.8%Infor +4.8%Ed/Hlth +3.3%Leis/Hosp +2.8%Tran/Trade +1.6%Mfg -0.3%FinActiv -1.1%Gov -1.7%

-2.3% YOY

Feb.92’(-42.0k)

4.3% YOY

Aug.00’(+88.8k)

-5.6% YOY

Mar.02 (-120.5k)

San FranciscoSan Francisco--San MateoSan Mateo--Redwood City, CARedwood City, CA

http://data.bls.gov/


Job Growth, Labor Force Contraction

Peak ~10%, Structural 5.0%

2015-2016


Unemployment Rate


Aug. 7.0%

U.S. Labor Participation Rate

63.6%, 30 Year Low.New Structural

Old Structural

San JoseSan Jose--SunnyvaleSunnyvale--Santa Clara, CASanta Clara, CA


Forecast

Net Positive 3Net Positive 3--Mth Net Job Growth May 2010 Mth Net Job Growth May 2010 –– 18,700, Highest Since 200618,700, Highest Since 2006’’-- 20072007’’

November 2010/2011: 19.4k 3-mth Net(Highest Since December 2000)

Three Month Net Change in Non-Farm Employment


http://data.bls.gov/


Job Growth, Labor Force Contraction

Peak ~12%, Structural 5.0%

2015-2016


Unemployment Rate


Unemployment Rate 25 Yr High: U.S. (8.2%). Calif (11 .0%), SF Bay (8.9%), San Jose (9.3%), SF/SM (7.7%), Sac (11.6%), LA (11.9%), ORG (8.1%), RIV (12.7%)

Mar. 9.3%New Structural

Old Structural


Source: Bureau of Labor Statistics.http://data.bls.gov/PDQ/servlet/SurveyOutputServlet

Monthly % Year-Over-Year Non-Farm Employment Growth Rates

+3.4% YOY

Mar 12’(+29.4k)

2.7% YOY

May.06 (+23.7k)

Wst. +1.3%CA +1.3%

SF/SM +2.9%OAK +1.6%

YOY Mar 11’+23,100

-8.6% YOY

Aug 09’(-78.7k)

YOY Mar 12’+29,400

Ann. Avg. 30.0k-to-50.0k

Mar YOY %Const +12.6%Information +10.2%Educ/Hlth +5.6%ProfBusServ +4.5%TradeTrans +3.3%Leas/Hosp +2.0%Manufactring +1.2%Services 0.4%Government -1.3%

-3.6% YOY

Feb.92’(-29.1k)

7.2% YOY

Dec.00’(+72.5k)

-11.7% YOY

Feb.02 (-124.2k)

Technology/Venture CapitalTechnology/Venture Capital

Not Important

Average Importance

Highly Important

Note: IT accounts for 10.5% of U.S. Employment

The Importance of IT Industries

Silicon Valley GeographySilicon Valley Geography

Major Employment Clusters Major Employment Clusters Santa Clara County (+850 Employees)Santa Clara County (+850 Employees)

• Worldwide IT spending is forecast to surpass $3.7 t rillion in 2013, a 3.8% increase from 2012 projected spending of $3.6 trillion.

• By 2015, 4.4 million IT jobs globally will be creat ed to support big data, generating 1.9 million IT jobs in the United States.

• Worldwide sales semiconductors reached $24.1 billio n April 2012, 3.4% increase from the prior month; largest month-over-month growth since May 2010; 7.2% growth 2013 ($322 billion) and 4.4% 2014 ($337 billion).

• Big data to drive $28 billion worldwide IT spending 2012; 2013, big data to drive $34 billion IT spending.

• India IT services forecast to reach $10.2 billion 2 013, 12% increase from $9.1 billion 2012; mobile device sales reach 251 million units in 2013 , 13.5% over 2012 sales 221 million units, expect growth through 2016, sales surpass 326 milli on units; IT spending projected total $71.5 billion 2013, 7.7% increase from $66.4 billio n 2012.

• Worldwide PC Shipments Declined 8 Percent in Third Quarter of 2012 as the Market Prepares for the Launch of Windows 8.

• Worldwide wafer fab equipment (WFE) spending is on p ace to total $31.4 billion in 2012, a decline of 13.3% from 2011 spending of $36.2 billio n.

• Public cloud services market forecast to grow 19.6% 2012, $109 billion worldwide; business process services largest segment, 77% total market, infrastructure fastest-growing segment public cloud services, expected to grow 45.4% 2012.

Technology

Sources: Gartner Research and the Semiconductor Industry Association (SIA).http://www.sia-online.org http://www.gartner.com/it/section.jsp

NonNon--Residential Fixed InvestmentResidential Fixed Investment

Source: http://research.stlouisfed.org/fred2/series/PNFI

Business/Commercial Equipment

2012:Q2: 1,614.1 Billions of Dollars2012:Q2: 1,614.1 Billions of Dollars2012:Q2: 1,614.1 Billions of Dollars2012:Q2: 1,614.1 Billions of Dollars

7.2% Ann.Gth.

6.1%

2.7%

Corporate ProfitsCorporate Profits

Source: http://www.bea.gov/briefrm/corpprof.htm

Retained Earnings/Cash Balances Available for Investment/Payout

Over $1.0

Worldwide Semiconductor Revenues Worldwide Semiconductor Revenues YearYear--toto --Year Percent Change 1996 Year Percent Change 1996 -- 20122012

Source: World Semiconductor Trade Statistics (http: //wsts.org)

Worldwide Semiconductor Billings (US$) per 12 month s Worldwide Semiconductor Billings (US$) per 12 month s Rolling Average and WSTS Semiconductor ForecastRolling Average and WSTS Semiconductor Forecast

Source: World Semiconductor Trade Statistics (http://wsts.org)

Worldwide Semiconductor Market to reach $302 bill. 2011, up up 2.6% in 20122.6% in 2012 , ,

and and 5.8% in 20135.8% in 2013, to top $328 bill.

Month-Over-MonthGlobal Sales

Asia Pacific $13.3 bil (+5.8%)Americas $4.6 bil (2.2%)

Europe/Japan $6.2 bil (-1.6%)

Venture Capital Flows

https://www.pwcmoneytree.com/MTPublic/ns/index.jsp D eloitte and Clean Tech Group.

Silicon Valley +50.2% 1Q12 - 2Q12 +4.4% 2Q12 YOY

2Q/2012 Total: Software industry again number one industry for investment, up 37% YOY to$2.3 bill.; Industrial Energy second up 20% to $914 mil.; Medical Divices Equip down 17% to $700 mill.; Biotechnology down 52% to $697 mill.; Media & Entertainment down 8% to $671 mill.; IT Services down 29% to $548 mill.; Semiconductors down 4.2% to $341 mill.; Telecommunications up 26% to $248 mill.; Computer Products down 53% to $199 mil.

California +58% of U.S. Total VC Funding

Global/Institutional Commercial Real Estate

Investment Market

Global Capital Value and Rental ClocksGlobal Capital Value and Rental Clocks

Source: Jones Lang LaSalle

Retail and Industrial Rental ClocksRetail and Industrial Rental Clocks


Source: DTZ Research

Core office markets are more expensive globally as yields tighten, but there remain several attractive markets

Ranking of prominent global office markets

Ranking Market Attractiveness

1 San Francisco HOT

2 Beijing HOT

3 Los Angeles HOT

4 Singapore HOT

5 Shanghai HOT

6 New York WARM

7 Tokyo WARM

8 London WE WARM

9 Sydney WARM

10 London City WARM

Ranking Market Attractiveness

11 Berlin WARM

12 Chicago WARM

13 Brussels WARM

14 Frankfurt WARM

15 Munich WARM

16 Madrid WARM

17 Barcelona COLD

18 Paris CBD COLD

19 Milan COLD

20 Hong Kong COLD

Robert Peto, RICS Global President, Global Property Outlook, 2011-2012.

Global/Asia Office Rental Growth CycleGlobal/Asia Office Rental Growth Cycle

Source: CBRE Market View, 2Q12.

North America/Europe Global Office North America/Europe Global Office Rental Growth CycleRental Growth Cycle


Global Office Rental/Value GrowthGlobal Office Rental/Value Growth


Global Office Net Absorption/Supply PipelineGlobal Office Net Absorption/Supply Pipeline


Global Office Vacancy RatesGlobal Office Vacancy Rates


Capital Value GrowthCapital Value Growth


Global Office Rent/Capital Value GrowthGlobal Office Rent/Capital Value Growth


Global Industrial/Retail Rent GrowthGlobal Industrial/Retail Rent Growth


Global Office Rent GrowthGlobal Office Rent Growth


Regional Transaction VolumeRegional Transaction Volume


10 Largest Recipient Cities 10 Largest Recipient Cities Cross Border InvestmentCross Border Investment


Domestic Commercial Real Estate Investment Market

Commercial Real Estate IndicesCommercial Real Estate Indices

Values Lowest in Seven Years

-42%

+90%

+55%


-42%

+113%


-40%


Commercial Property Sales Volume (From 2001 to 2012 )

http://www.mbaa.org/files/Research/DataBooks/1Q12QuarterlyDataBook.pdf

-90%

+500%$60 bil.

$140 bil.

Commercial Property Sales Prices (From 2001 to 2012 )


Divergent Pricing TrendsDivergent Pricing Trends

Real Capital Analytics (RCA), US Capital Trends, March 2011.

Average Cap RatesAverage Cap Rates

Source: CRE Finance Council.

-75-to-125 bsp

Commercial Real Estate SpreadsCommercial Real Estate Spreads

Spreads Lowest Since 1992


Spreads At Cycle High

http://www.rcanalytics.com

Top Markets – Majority CA/West

Commercial Real Estate MarketsCommercial Real Estate Markets


Top Markets Based on Total Return Forecast

ING/Clarion Partners Research & Investment Strategy, Feb 2011.

National Commercial Real Estate Space Market

Commercial ConstructionCommercial Construction

Commercial DevelopmentCommercial Development

Commercial Vacancy RatesCommercial Vacancy Rates


ApartmentVacancy, Rents and Completions (1995 to 2012)

Source: REIS Reports, Inc.

Excess DemandLow Supply

Supply Gap

Office Net Absorption, Vacancy and Rents (2007 to 2012)


Low DemandLow Supply

Supply Gap

IndustrialVacancy, Net Absorption, and Rents (2010 to 2012)


Rising DemandLow Supply

Supply Gap

Retail Net Absorption and Vacancy Rates (2007 to 2012)


Supply Gap

Hotel Occupancy Rates and RevPar (1992 to 2013)

Source: Urban Land Institute Emerging Trends, Smith Travel.

Local/Regional Commercial Real Estate

Space Markets

Office Industrial

Los Angeles 17.1% 6.9%SF Bay Area 12.1% 13.8%

Santa Clara 14.0% 9.3%Sacramento 23.7% 16.7%Riv.-San Co. 22.8% 12.5%Orange Co 15.0% 7.8%San Diego 16.6% 15.4%Seattle 17.1% 10.5%Portland 14.5% 10 .6%

Source: CB Richard Ellis, MarketView, First Quarter , 2012.

Office and Industrial Vacancy/Availability Rates

Commercial Market Comparison

SF Bay Area Commercial

Vacancy Rates Reaching Structural

Levels, Causing Asking Rents to Rise At or Well

Above Local Inflation Rates

Office MarketOffice Market


Cap Rate Trends for CBD Office12-months trailing average

Drop 220

bsp

1. San Fran. Peninsula2. San Francisco, CA3. Orange Co., CA4. Phoenix, AZ5. Oakland-E. Bay, CA6. San Jose, CA7. New York City8. Austin, TX9. Las Vegas, NV10.Seattle, WA

G&E Class A Office Rent AppreciationTop 10 Markets, 2010 to 2015

Source: Grubb & Ellis

Source: CBRE Research Reports, First Quarter 2012.

San Francisco Office

Rapid Vacancy Rate Decline, Asking Rent Growth, Net Positive

Absorption

Source: CBRE MarketView: San Francisco Office, First Quarter 2012.

San Francisco Office SubmarketsSan Francisco Office Submarkets

North Waterfront

15.6%

San Francisco Overall

Availability Rate14.1%

Union Square9.8%

Fin Dist Nth12.9%

Van Ness Corridor

29.1%

San Francisco Q1 Net Absorption

867,000 SF

Fin Dist Sth11.6%

YerbaBuena17.2%South of

Market Wst

24.3%Potrero

Hill19.9%

Mission Bay/China

Basin26.5%

MultiMedia Gulch10.3%

Rincon SthBch4.4%

San Francisco Top Office Leases

Source: Cassidy/Turley.


San Francisco Peninsula Office


Absorption

Source: CBRE MarketView: San Francisco Peninsula Office, First Quarter 2012.

San Francisco Peninsula Office SubmarketsSan Francisco Peninsula Office Submarkets

2.6%10.6%

San Francisco Peninsula Office

Overall Availability Rate

13.9%

32.0%

17.3%

48.2%

10.1%

10.6%

13.5%

16.2%

12.2%

17.1%

6.2%

22.5%


Oakland Office

Vacancy Rate Decline, Slow Asking

Rent Growth, Net Positive Absorption

Source: CBRE MarketView: Oakland Office, First Quarter 2012.

Oakland Office SubmarketsOakland Office Submarkets

Richmond30.6%

Oakland Office Overall


Emeryville17.9%

Berkeley10.6%

Q1 Net Absorption

21,000 SF

Oakland15.7%

Alameda26.9%

Oakland Airport 27.7%

San Leandro7.7%


Contra Costa Office


Absorption

Source: CBRE MarketView: Contra Costa Office, First Quarter 2012.

Contra Costa Office SubmarketsContra Costa Office Submarkets

24.4%

Contra Costa Overall


10.1%

20.9%

13.2% 14.1%

15.3%

11.0%

22.6%19.6%

31.8%

11.0%

15.7%

Contra Costa Q1 Net Absorption

760,000 SF

East Bay Top Office Leases



Silicon Valley Office

Rapid Vacancy Rate Decline, Rental Rate

Acceleration, Net Positive Absorption

Source: CBRE MarketView: Silicon Valley Office, First Quarter 2012.

Silicon Valley Office SubmarketsSilicon Valley Office Submarkets

18.6%

16.6%

Greater Silicon Valley Overall


Silicon Valley

362,000 Net Absorption

2.1%

6.9%

12.1% 22.4%

12.6%

11.8%

6.2%

Top Office Leases


Source: CBRE Research Reports, Second Quarter 2012.

Sacramento Office

Vacancy Rate and Rental Rate

Stabilization, Net Positive Absorption

Source: CBRE MarketView: Oakland Office, Second Quarter 2012.

Sacramento Office SubmarketsSacramento Office Submarkets

Roseville/Rocklin 32.3%

Sacramento Office Overall


North Gate/ Natomas

29.3%

Citrus Heights/Orangevale10.6%

Q2 Net Absorption/Under Construction

58,200/171,000 SF

Folsom15.7%

Elk Grove22.8%

Highway 50 Corridor

29.0%

West/South Sacramento

25.0% South Sacramento

29.4%

Carmichael/Fair Oaks

16.7%Downtown

22.0%

Sacramento Office

Industrial MarketIndustrial Market


Cap Rate Trends for Industrial12-months trailing average

Drop 130

bsp


Oakland Industrial

Vacancy Rate Decline, Rental Rate and Net Absorption

Stabilization


Oakland/TriOakland/Tri --Valley Industrial SubmarketsValley Industrial Submarkets

14.7%

7.2%

Oakland Overall Availability Rate

11.8%

18.6%

Oakland 234k SF Net

Absorption

157,000 SF Under

Construction

8.3%

Pleasanton 13.1%

11.5%

8.1%

9.6%

6.6%

5.6%

15.5%

Tri-County Overall


Dublin 18.3%

San Ramon 9.5%

East Bay Top Industrial/R&D/Mfg Leases



Silicon Valley Industrial

Vacancy Rate, Rental Rate and Net

Absorption Stabilization


Silicon Valley Industrial SubmarketsSilicon Valley Industrial Submarkets

13.2%

5.1%

Greater Silicon Valley Overall


5.7%

Santa Clara County

100k SF Net Absorption

10.0%7.5% 10.8%

10.0%

3.9%5.7%

8.2%

Silicon Valley Top Industrial Leases



Sacramento Industrial

Vacancy Rate and Rental Rate

Stabilization, Net Positive Absorption

Source: CBRE MarketView: Sacramento Industrial, First Quarter 2012.

Sacramento Industrial SubmarketsSacramento Industrial Submarkets

Lincoln 22.0%



Woodland22.2%

Roseville/Rocklin22.0%

Q1 Net Absorption/Under

Construction-271,000/401,000 SF

El Dorado Hills9.3%

Folsom 9.3%Davis

22.2%

Elk Grove/Laguna

15.7%

Carmichael/Fair Oaks

9.5%South/North

EastSacramento7.7%

Northgate/Natomus20.6%

Auburn/ Newcastle

19.4%

Rancho Cordova/ Hwy 50 16.6%

Source: Cassidy Turley BT Commercial.

MONTEREY COUNTRY INDUSTRIAL/OFFICE MARKET

RetailRetail

Northern California Northern California -- RetailRetail

Commercial Real Estate Debt and Equity Markets

Commercial Mortgage Backed Securities (CMBS)

Commercial Mortgage Flows


-$60 Bil.

+$100 Bil.

-$46 Bil. From Banks/CMBS

Commercial Mortgage Debt Exposure


Continued Bank Balance Sheet, Capital Market, and Tax Payer

and Default Risk Exposure

$1.4 trillion Outstanding: Banks (34%), CMBS (24%) = 58%

and Foresight Analytics.

Commercial Mortgage Back Securities (CMBS) Issuance

http://www.mbaa.org/files/Research/DataBooks/1Q12 QuarterlyDataBook.pdf

-93%

Monthly Cumulative Distress VolumeMonthly Cumulative Distress Volume


Restructured and Resolved

Since 2007, $200 bil. distressed worked out

(50% total).

+50% workouts resolved

Sales of Associated Distress VolumeSales of Associated Distress Volume

Real Capital Analytics (RCA), US Capital Trends, 3Q/2012.

Since 2007, $200 bil. distressed worked out

(50% total).

Commercial Mortgage Backed SecuritiesDelinquencies by Property Type


Commercial/Multifamily Mortgage Delinquency Rates Among Major Property Types – 12 Mth Trailing

Source: Morningstar, CRE Finance Council.

Office

Retail Multi-Family

Hotel

Industrial

Commercial/Multifamily Mortgage Delinquency Rates Among Major Institutional Investor Groups

Life Insurance Companies

Bank & Thrifts CMBS

FINNIE/FRDDIE


BBB/BBB- +14,000

+6,000

Significant Widening of Spreads (Credit/Liquidity Risk)

Commercial Mortgage Backed Securities (CMBS) - Spreads Over SWAP Rates -

Worthless

+200+1,450

Bank Real Estate Loan Delinquency Rates 1992 - 2012

Continued Tight Credit Conditions

FDIC and Banks Continue to Unload Commercial Real Estate Notes, Loans

and REO Properties 2012-2013


Commercial Mortgage Loan Maturity

http://nreionline.com/news/cre_debt_threatens_economy_0212/Sources: Foresight Analytics.

$1.2 tril. Com. RE Debt Due 7 yrs.

Majority Bank/Thrift

Fixed Rate

CMBS

Int Rt/Credit Spreads

Real Estate Investment Trusts Real Estate Investment Trusts (REITs)(REITs)

REIT Equity Stock Index Performance – Wilshire


+226% from

Bottom

http://www.reit.com/

Mkt.Equity Cap = $514 bil.

MF high leverage Fannie Mae/Freddie Mac (Mezz).

Debt/Equity Capital Raised : $54.3 bill. 2012 YTD vs.

$51.3 bill. 2011

Total Annual Return -37.3% +27.5% +27.6 +7.3% +17.6%

10 Yr. Tot. Ann. Ret = 10.8%

Avg. Daily Trading Volume = $3.8 bill.

-78.0% from Peak

Investment Performance by Property Sector/Subsector

REIT Equity Stock Index Performance – Dividend Yield Spreads

http://www.reit.com/Media/~/media/PDFs/October2010MediaUpdate.ashx

+700 bsp

+375 bsp

-200 bsp

+200 bsp

http://bigcharts.marketwatch.com http://finance.yahoo.com

Trading Range (Consolidation Phase) - 4 Yrs.

+50% from Bottom

0.0% 2-Yr. Ann. Return

EV/Revenue = 35.9x Price/Sales = 8.8xROA = 2.7%/ROE = 15.9% Div Yld = 6.8% Curr Ratio = 36.9x

Enterprise Value = $4.67 bil.Beta = 0.8x Forward P/E = 10.09x

-86% from Peak


REIT Equity Stock Index Performance – Redwood Trust (RWT)

+367% from Bottom50.0% 4-Yr. Ann. Ret.



+200% from Bottom

+73.2% 2-Yr. Ann. Return

EV/EBITDA = 23.5x Profit Margin = 9.3%ROA = 1.2%/ROE = -0.23% Div Yld = 4.1% Curr Ratio = 1.8x


REIT Equity Stock Index Performance – Equity Office (EQR)

-86% from Peak




+200% from Bottom


EV/EBITDA = 23.5x Profit Margin = 9.3%ROA = 1.2%/ROE = -0.23% Div Yld = 4.1% Curr Ratio = 1.8x


REIT Equity Stock Index Performance – AMB Prop Co (AMB)

-86% from Peak



+328% from Bottom+43.9% 4-Yr. Ann. Return

+221% from Bottom


EV/EBITDA = 26.7x Profit Margin = 24.8%ROA = 2.1%/ROE = 2.2% Div Yld = 3.6% Curr Ratio = 1.6x


REIT Equity Stock Index Performance – Avalon Bay (AVB)

-77% from Peak


REIT Equity Stock Index Performance – Digital Realty (DLR)


-67% from Peak

+253% from Bottom

EV/EBITDA = 17.3x Profit Margin = 12.5%ROA = 3.3%/ROE = 5.1% Div Yld = 3.3% Curr Ratio = 2.6x


+223% from Bottom+47.9% 4-Yr. Ann. Ret.

+87.9% 2-Yr. Ann. Ret.


Residential Residential Real Estate MarketsReal Estate Markets

Change in Renter and Owner-Occupied Rental Units

Renter Demand 1.5 Mil.

New Housing StartsNew Housing Starts

Source. United States Census Bureau. http://www.census.gov/briefrm/esbr/www/esbr020.html

- 80% from Peak March

2006

Homebuilder sentiment drops.

2.1 million at Peak

1.8 million at Peak

600,000 at Trough

http://www.census.gov/const/C30/totsa.pdf

Total Const. YOY +6.5%Residential +16.1%Office +30.3%Power +11.5%Manufacturing +6.3%Highway/Streets +3.8%Commercial +2.5%

Realtor Confidence IndexRealtor Confidence Index

http://www.realtor.org/reports/realtors-confidence-index

Time One MarketTime One Market


Distressed SalesDistressed Sales


National Home PricesNational Home Prices

Housing Market – Price Declines

http://www.standardandpoors.com/home/en/us www.zillow.com

- 20% YOY

Up 4% YOY

Down -4%

YOY

+ 20% YOY

+ 12% YOY

Housing Market – Price Declines

http://www.standardandpoors.com/home/en/us

California, August 2012: 3.2 Months

San FranciscoSan Francisco--OaklandOakland--FremontFremont

http://www.realtor.org/reports/local-market-reports

Home Prices Aug 11’ Aug 12’ Y-O-Y % Ch.

San Francisco $632,270 $692,980 +9.6%Marin $806,550 $806,450 0.0%San Mateo $742,000 $777,500 +4.8% Santa Clara $595,000 $666,750 +12.1%Contra Costa $607,310 $628,290 +3.5%

Monterey $252,000 $317,500 +26.0% San Luis Obispo $352,310 $386,180 +9.6%

Santa Barbara $421,430 $515,240 +22.3%Santa Cruz $490,000 $540,000 +10.2%California $297,660 $343,820 +15.5%

Source: California and National Associations of Realtors. http://www.car.org/ ; National Association of Realtors, http://www.realtor.orgMedian Home Prices

Housing Market

CA Housing Affordability% OF HOUSEHOLDS THAT CAN BUY

SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Affordability 2Q/2011 2Q/2012 Y-O-Y % Ch.

San Francisco 24% 24% 0.0%Marin 24% 27% +12.5% San Mateo 22% 23% +16.7%Santa Clara 32% 32% 0.0%Contra Costa 26% 26% 0.0%

Monterey 56% 55% -1.8%San Luis Obispo 37% 41% +10.8% Santa Barbara 34% 32% -5.9%Santa Cruz 32% 34% +6.3%California 51% 51% 0.0%

Source: California Association of Realtors. http:// www.car.org/

Housing Affordability Index - TraditionalHousing Market

Multifamily Permits, Starts and Completions

http://www.mbaa.org/ResearchandForecasts

-200,000 Units Supply GapAggregate Demand

Aggregate Supply

Source: Cassidy Turley BT Commercial.

ConclusionsConclusions

Economic/Employment SummaryStrengths Risks

• Global Economy Growing, focus on Asian, Emerging Europe, and Latin American Economies.

• Retail Sales Growth, Confidence and Investment Levels Recover.

• Large Multinational/Tech Firm Corporate Cash Holdings (Retained Earnings or Dividend Payout).

• Import/Export Trade flows.

• Inflation (Oil/Gas/Food Prices) and Interest Rate Volatility; Sovereign Defaults

• Uncertainty Business and Consumer Confidence:

• Middle East Unrest• Government Shut Down• State/Muni Budget Cuts.

• Rising Costs of Living: Food, Housing, Healthcare,Education, Utilities, and Taxes.

• Industry (Finance) Consolidation, Increased (M&A), LitigationActivity/ Re-Regulation.

Commercial Real Estate Market Summary

Strengths Risks

• Job Growth (Supply Constraints)

• Recovery and Growth in International Trade, and Retail Sales.

• Rising Occupancy Rates/Net Absorp.

• Rising Values/Rental Rates.

• Job Losses Government, Defense, Education, Finance Sectors.

• Rising Business Costs

(Federal/State/Local

Taxes and Fees.

• Business Consolidation.

• Rising Traffic Congestion.

• Rising Transportation Costs.

• Labor Strikes/Trade Disputes.

Thank YouThank You

Questions/AnswersQuestions/Answers

Educational, Training, Certification and Networking

• David Skeel, The New Financial Deal : Understanding the Dodd-Frank Act and its Unintended Consequences.

• Peter Ingersoll , Real Estate Tsunami Survivors Guide .• Gretchen Morgenson , Reckless Endangerment .• Satyajit Das , Extreme Money : Masters of the Universe and Cult of Risk.• Damon Vickers , The Day After the Dollar Crashes .• John Mauldin, Endgame : End of the Super Debt Cycle.• Diane Coyle , The Economics of Enough : How to Run an Economy as if the Future

Matters.• Barry Eichengreen, Exorbitant Privilege : The Rise and Fall of the Dollar and the

Future of the International Monetary System.• Dambisa Moyo, How the West was Lost : Fifty Years of Economic Folly – and the

Stark Choices Ahead.• Carmen Reinhart-Ken Rogoff , This Time is Different : Eight Centuries of Financial

Folly.• Glenn Hubbard, Seeds of Destruction : Why the Path to Economic Ruin Rugs

Through Washington, and How to Reclaim American Prosperity .• Robert Barbera, The Cost of Capitalism : Understanding Market Mayhem and

Stabilizing our Economic Future.• Paul Muolo, Chain of Blame : How Wall Street Caused the Mortgage and Credit

Crisis.• Manfred Max-Neef, From the Outside Looking In : Experiences in Barefoot

Economics.• Abhijit Banerjee-Esther Duflo , Poor Economics .• Edmund Phelps, Structural Slumps and Rewarding Work .

Recommended ReadingsRecommended Readings

• Randall Lane , The Zeros: My Misadventure in the Decade Wall Stree t Went Insane .

• David Brooks , Bobos in Paradise : The New Upper Class And How They Got There.

• Dambisa Moyo, How the West Was Lost : Fifty Years of Economic Folly, and the Stark Choices Ahead.

• Andrew Napolitano , A Nation of Sheep .• Paul Krugman , The Return of Depression Economics and the Crisis o f

2008.• Robert Reich, Aftershock : The Next Economy and America’s Future. Robert

Scheer, The Great American Stickup : How Reagan Republicans and Clinton Democrats Enriched Wall Street and Mugged Main Street.

• Joseph E. Stiglitz, Freefall : America, Free Markets and the Sinking of the World Economy.

• William Holstein , The Next American Economy : Blue Print for a Real Recovery.

• Suzanne McGee, Chasing Goldman Sachs : How they Melted.• Michael Lewis, The Big Short : Inside the Doomsday Machine.• Simon Johnson, 13 Bankers : The Wall Street Takeover and Next Financial

Meltdown.• Andrew Ross Sorkin, Too Big To Fail .• Gary Stern, Too Big To Fail : Hazards of Bank Bailouts.• Paul Sperry , The Great American Bank Robbery : The Unauthorized Report

About What Really Caused the Great Recession.


• Nicole Gelinas , After the Fall : Saving Capitalism from Wall Street and Washington.

• Frank Portnoy, FIASCO : Blood in the Water on Wall Street.• Liaquat Ahamed, Lords of Finance .• Steve Fraser, Wall Street : Americas Dream Palace.• Roger Lowenstein, The End of Wall Street .• Justin Fox , The Myth of the Rational Market : A History of Risk,

Reward and Delusion on Wall Street.• George Cooper , The Origins of Financial Crisis : Central Banks,

Credit Bubbles.• Charles Kindleberger , Manias, Panics and Crashes : The History

of Financial Crises.• Harry Dent , The Great Depression Ahead .• William Bonner , The Empire of Debt : the Rise and Fall of an Epic

Financial Bubble.• John Bogle , The Battle for the Soul of Capitalism .• John Cassidy , How Markets Fail : The Logic of Economic

Calamities.• David Harvey , The Enigma of Capital and the Crisis of

Capitalism .


• Mark Zandi, Financial Shock : A 360° Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Cris is.

• Robert Shiller, Animal Spirits : How Human Psychology Drives the Economy and Why It Matters for Global Capitalism; and The Subprime Solution : How Today's Global Financial Crisis Happened, and What to Do about It.

• Thomas Sowell , The Housing Boom and Bust .• Roman Frydman, Beyond Mechanical Markets : Asset Price Swings, Risk and

the Role of the State.• Eric Weiner, The Shadow Market : How Wealthy Nations/Investors Secretly

Dominate the World.• Raghuram Rajan, Fault Lines : Hidden Fractures Still Threaten the World

Economy.• Barry Eichengreen, Exorbitant Privilege : The Rise and Fall of the Dollar and

the Future of the International Monetary System.• Clyde Prestowitz, The Betrayal of American Prosperi ty. • Pat Choate, Saving Capitalism : Keeping America Strong.• Judge Richard Posner, A Failure of Capitalism .• Kim Phillips-Fein, Invisible Hands .• Jerome Corsi, America for Sale .• Timothy Carney, Obamanomics .• Naomi Klein, The Shock Doctrine .• Daniel Yergin, The Prize : The Epic Quest for Oil, Money and Power.• Anthony Downs, Real Estate and the Financial Crisis .


• David Harvey, The New Imperialism .• Paul Kennedy, Rise and Fall of the Great Powers .• Noam Chomsky, Failed States , Necessary Illusions , and

Manufacturing Consent .• V.S. Soloviev, Politics, Law and Morality ; Michel Foucault,

Power/Knowledge .• Arthur Miller, Death of a Salesman , The Crucible , A View from the

Bridge , Timebends , and A Life .• Susan Casey, The Devil’s Teeth: Great White Obsessi on/Survival .• Stephen Breyer, Making Our Democracy Work .• Garber Mate: Scattered Minds: A New Look at Origins and Healing

of ADD .• Max Weber, The Protestant Ethic and the Spirit of C apitalism .• Friedrich Nietzsche, The Will to Power .• David Ricardo, The Principals of Political Economy and Taxation .


Books - www.amazon.com - www.irei.com

• Real Estate Finance & Investments 12th Ed, William B. Brueggeman, Jeffrey D. Fisher, 2005.

• Commercial Real Estate Analysis and Investments (2nd Ed), David Geltner, Norman G. Miller, 2007.

• Income Property Valuation (2nd Ed), Jeffrey D. Fisher, Robert S. Martin, 2004.


- Argus Valuation (Investment/Development) Softwarewww.argussoftware.com

- Loop Net http://www.loopnet.com/- CoStar/Comps http://www.comps.com/comps.asp- Real Capital Analytics (RCA) www.rcanalytics.com- FW Dodge http://www.fwdodge.com/- Marshall & Swift http://www.marshallswift.com/- MP/F Research/Yield Star (Apartment Data)

http://www.realpage.com/yieldstar/- REIS Research, Inc. http://www.reisreports.com/- CB Richard Ellis http://www.cbrichardellis.com/- Marcus & Millichap http://www.mmreibc.com/- SNL Financial http://www.snl.com

Online DataOnline Data

Certifications/Designations/Education- Counselors of Real Estate (CRE)

http://www.cre.org- Royal Institute of Chartered Surveyors (RICS)

http://www.rics.org- Appraisal Institute (AI) – MAI

http://www.appraisalinstitute.org- Certified Commercial Investment Member (CCIM)

http://www.ccim.com- Institute of Real Estate Management (IREM) – CPM

http://www.irem.org/- Urban Land Institute (ULI) – Development

http://www.uli.org/

OrganizationsOrganizations

Professional

- Building Owner Management Association (BOMA)http://www.boma.org

- Commercial Real Estate Women (CREW)http://www.crew.org/

- National Association of Industrial and Office Professionals (NAIOP)http://naiop.org/

- National Association of Realtors – Commercial Division http://www.realtor.org/commercial/

- Society of Industrial and Office Realtorshttp://www.sior.com/


Institutional

- National Association Real Estate Investment Management (NAREIM)http://www.nareim.org/

- National Council of Real Estate Investment Fiduciaries (NAREIF)http://www.ncreif.org/

- National Association of Real Estate Investment Trusts (NAREIT)http://www.nareit.com/

- Pension Real Estate Association (PREA)http://www.prea.org/


AppendixAppendix

Lawrence Souza brings to his clients over 20 years of experience in real estate economic and financial research experience. Mr. Souza has held senior positions as Managing Director-Index Services, Charles Schwab Investment Management (CSIM); Chief Real Estate Economist and Director of Index Services, Global Real Analytics (GRA); Director of Research for BRE Properties, Inc. (REIT) in San Francisco and holding Senior Market/Research Analyst positions at Metric Institutional Realty Advisors and Mellon-McMahan/MacFarlane Realty Advisors, and market research positions at Norris, Beggs and Simpson and Grubb & Ellis commercial brokerage. Mr. Souza combines traditional fundamental real estate economic and market research with fundamental and technical financial and capital market research and investment strategy. This combined approach allows for the tracking and forecasting of economic, real estate and financial cycles and efficient portfolio construction, optimization and risk management.

Mr. Souza has undergraduate degrees in Economics (BA) and Business Administration (BS) with concentrations in Accounting, Finance, Banking and Real Estate; and holds master’s degrees in Applied Economics (MA), Finance/Investments (MS), Public Administration (MPA), Information Systems (MSIS), and Political Science (MA). Mr. Souza has been teaching Modern Real Estate Principles and Finance since 1996 with an emphasis on real estate in a modern and post-modern portfolio and capital markets context; and the institutionalization, securitization, internationalization and technologization of real estate markets and products.

Lawrence A. SouzaLawrence A. SouzaContact Information: Contact Information:

www.thewww.the--commercialcommercial--group.comgroup.comLsouza@[email protected]

Cell Direct: (415) 713Cell Direct: (415) 713--0213 Fax: (415) 8260213 Fax: (415) 826--22162216

www.fullermoney.com

0

2

4

6

8

10

12

2009 2010 2011

GermanyFranceUKPortugalSpainRepublic of Ireland

%

Source: Reuters

10 year government bonds

As a result, the cost of borrowing in ‘peripheral’ E uropean economies has rocketed, which is likely to impair growth

Robert Peto, RICS Global President, Global Property Outlook, 2011.

Spain +200 bsp Spread

Portugal +200 bsp Spread

Ireland +600 bsp Spread

Semiconductor Sales RevenueSemiconductor Sales Revenue

http://wsts.org/

Default Rate Commercial Mortgages 1992 - 2012

-75%~85%

More than 180 federally insured national banks closed in last two years, $30 billion of loans to sell.

Continued Tight Credit Conditions

FDIC and Banks Looking to Unload Commercial Real Estate

Notes, Loans and REO Properties 2011-2013

2010 Acquisition Financing2010 Acquisition Financing


28%28%28%28%

http://www.GreerAdvisors.com

Implied Discount Rates Commercial Real Estate (Debt/Equity)

24%

CMBS Spreads vs. 10 Yr. Treasury YieldsImputed Discount Rate – Band of Investments

http://www.crefc.org/uploadedFiles/CMSA_Site_Home/Industry_Resources/Research/Industry_Statistics/CMSA_Compendium.pdf

Spreads Over 10 Year T-Bills (6/01/10)AAA + 250 bps (2.5%), 1400 bsp peakAA + 2,500 (25.0%), 4000 bsp peakA + 3,250 (33.0%), 5000 bsp peak

BAA2/BBB + 5,500 (55.0%)

IRR* = WACC* = 15% -to - 25%

[25% -to- 35% Imputed Debt Cost of Capital] * 50% + [5% -to- 15% Imputed Equity Cost of Capital] * 50%

Compression in Spreads from Peak

Institutional Sector – Total Returns

National Council of Real Estate Investment Fiduciaries (NCREIF),Press Release, First Quarter 2011, April 25, 2011.

Regional – Total Returns


CMBS Delinquency Rate 1Q03 –to- 1Q10

Market driven by small group willing to take first risk of default in exchange for outsized returns.

Loans backed by strong balance sheets. Low LTVs, more equity. Better underwriting, ridged approval process, better oversight by rating agencies, alignment between senior piece

buyers and special services, and financial interest by all parties (5% “Skin in Game Requirement).


CMBS Delinquency vs. Residential 1Q03 –to- 2Q10


Prime Residential 10%

Sub-Prime Residential 40%Alt-A Residential 35%

CMBS 8%

GDP barely rose Advanced economies over past 5 year s due to credit crunch, Emerging economies strong -- capital -- gains to cont inue (Source: IMF)

0

2.5

5

7.5

10

Euro area Japan UK US Brazil Russia India China

2011 2012

Source: IMF

Annual % change, GDP


GDP Growth 7% -to- 10%

GDP Growth 4% -to- 5%

GDP Growth 1.5% -to- 3%

The trend in Europe is improving in most countries

-100

-80

-60

-40

-20

0

20

40

60

80

100

2008 2009 2010

RussiaUKEmerging EuropeFranceGermany

Net balance %

Source: RICS Global Commercial Property Survey

Capital value expectations Capital Values are

rising

Capital Values are

falling


Capital Values Rising : Russia, Germany, Emerging Europe and France.

Capital Values Falling : United Kingdom.

However, the global trend is such that it shows the recovery is most pronounced in emerging economies

-100

-80

-60

-40

-20

0

20

40

60

80

100

2008 2009 2010

RussiaUKEuro areaBrazilChina

Net balance %

Source: RICS Global Commercial Property Survey

Capital value expectations Capital Values are

rising

Capital Values are

falling


Capital Values Falling or Slow : United Kingdom and Euro Area.

Capital Values Rising : Russia, Germany, Brazil and China.

0

10

20

30

40

50

60

70

80

90

100

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Global Asia Pacific

EU UK

'Fair Value'

More markets

rated COLD

More markets

rated HOT

Fair Value Index score

Source: DTZ Research

All property 'fair value'

Downward trend emerging

Prime property in general in Europe and the UK has rebounded to the extent that it can no longer be deemed to be of ‘fair valu e’


0

2

4

6

8

10

12

2009 2010 2011

GermanyFranceUKPortugalSpainRepublic of Ireland

%

Source: Reuters

10 year government bonds

As a result, the cost of borrowing in ‘peripheral’ E uropean economies has rocketed, which is likely to impair growth


Spain +200 bsp Spread

Portugal +400 bsp Spread

Ireland +600 bsp Spread

High Sovereign Bond Credit Default Risk

Summary Summary –– Capital Raise ActivityCapital Raise ActivityGeographic Focus and Investment StyleGeographic Focus and Investment Style

Institutional Real Estate, Inc. (IREI), Fund Tracker, First Quarter 2011.

U.S. Property Sales (2005U.S. Property Sales (2005--2012)2012)


11 12

2011-2013: $190-to-$250 bil.

2012-2014: $300-to-$400 bil.

Annual Forecast

Most Active Markets : New York, Wash DC, San Francisco; Hotels, Office, Apartments

2010 Top Lenders2010 Top Lenders


Sector Level – Total Returns

Investment Property Databank (IPD), US Quarterly: Fourth Quarter, 2011.

-30%

+10%

+20% -to- 25%

Institutional Sector – Total Returns


Regional – Total Returns



http://web.mit.edu/cre/research/credl/rca.html

+70% Since 2004

-33%+200%

Since 1994


-42%

Moody ’s REAL –Commercial Property Price Index (CPPI) -Repeat Sales

+93%

http://web.mit.edu/cre/research/credl/rca.html


Apts -35%


http://web.mit.edu/cre/research/credl/tbi.html

MIT Transaction Based Index

Positive (capital) appreciation rates in 2010, East/West Coast appreciating first.

Points to Appreciation

us policy econ_ggu_pres_oct_25_master_full_master_1_c

Economy & Finance

principal real estate

political rp

inflation rp

political economic risk

illiq rp

credit rp

policy rp

maturity rp