MarcusMillichap_2012_NAR

8/3/2019 MarcusMillichap_2012_NAR

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Real Estate Investment ResearchNational Apartment Report


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2012 National Apartment Report

To our valued clients:

For apartment owners and investors, a strong recovery in the property sector overshadowed disappointing economic per-ormance in 2011. Te common perception that apartment renter demand is deying economic undamentals is understand-able but only partially true. Favorable demographics among prime renters, the release o pent-up demand as young adults de-bundle rom amily and roommates and increased renter demand due to alling homeownership certainly drove more rentersto apartment communities last year. At the same time, young adults captured a majority o the 1.8 million private-sector jobscreated over the past year, which emphasizes the importance o underlying economic perormance as a major driver o rentaldemand. Tis becomes more important in 2012 and beyond as the white-hot levels o post-recession net absorption cools oto healthy but less-spectacular levels. Simply stated, we still need jobs to drive long-term demand. On that ront, investorsshould take comort in the better-than-expected economic readings that streamed in month ater month ollowing the U.S.debt downgrade in August o last year. Improvements in retail sales, private sector jobs and manuacturing point to a muchstronger economic ooting than expected by most economists despite heightened macro concernsnamely the Europeandebt crisis and the U.S. political paralysis. It is unlikely that the macro clouds will measurably dissipate in 2012, but economic

momentum points to moderately better perormance this year, certainly enough to support the apartment expansion cyclenow in ull swing.

Developers are getting busy, as are lenders and equity investors, and ater the brie pause in late 2011, we should seemore projects started, steadily boosting additions to supply over the next three years. For the time being, demand will outstripsupply additions by a wide margin, leading to lower vacancy across virtually all markets and the rst year o broadening rentgrowth. Beyond 2012, caution in metro and submarket selection will be much higher as new supply ramps up.

On the investment ront, the institutional capital which led the recovery in sales and pricing since the second hal o2009 has ushered in dramatic pricing and cap rate strengthening. rends are now reachingand in many cases exceedingpre-recession highs. Tis metro- and product-selective ight to saety dened a major dichotomy avoring the top-10, most-

desired markets and top-tier assets. Even Class A properties in hard-hit markets have seen cap rates compress dramatically asinvestors move capital to eventually take advantage o a rent-growth cycle. Te continuation o an extremely low interest rateenvironment that ostered this ight to saety in the last 24 months, combined with ultra-rich, top-tier pricing, will nallymove capital down the quality chain in greater volumes, a pattern that emerged in late 2011. Class B assets, secondary markets,and minor value-add investment opportunities (taking a B- asset to a B+) will be the primary beneciaries. Given the depthand breadth o capital demand, high-quality assets will remain popular, but their valuations are leveling o as the buyer poolssearch or higher yields. Investors should also careully examine prospects or realistic rent growth, as income levels struggleto keep up and periods o increased home buying are likely to emerge over the next ew years. Overall, all indicators point toa continuation a strong supply/demand cycle at the macro level over the next several years, but metro and submarket peror-mance variance will once again rule.

o help you plan and execute your strategy, we are pleased to present our 2012 National Apartment Report. Included is

our National Apartment Index (NAI), a orward-looking ranking o 44 markets based upon orecast economic, supply anddemand conditions. We hope you will nd this report helpul, and our investment proessionals look orward to assisting youin meeting your goals.

Sincerely,

John J. Kerin Hessam NadjiPresident and Managing Director

Chie Executive Ocer Research and Advisory Services


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2012 National Apartment Report

2012 Annual Report

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

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

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

Detroit .......................................................................................................................................... 20Fort Lauderdale............................................................................................................................ 21Houston ....................................................................................................................................... 22Indianapolis .................................................................................................................................. 23Jacksonville ................................................................................................................................. 24Kansas City .................................................................................................................................. 25Las Vegas .................................................................................................................................... 26Los Angeles ................................................................................................................................. 27Louisville ...................................................................................................................................... 28Miami ........................................................................................................................................... 29

Statistical Summary Table...................................................................................................... 30-31Milwaukee .................................................................................................................................... 32Minneapolis-St. Paul .................................................................................................................... 33New Haven .................................................................................................................................. 34

New Jersey .................................................................................................................................. 35New York City .............................................................................................................................. 36Oakland........................................................................................................................................ 37Orange County ............................................................................................................................ 38Orlando ........................................................................................................................................ 39Philadelphia ................................................................................................................................. 40Phoenix ........................................................................................................................................ 41Portland ....................................................................................................................................... 42Riverside-San Bernardino ............................................................................................................ 43Sacramento ................................................................................................................................. 44Salt Lake City ............................................................................................................................... 45San Antonio ................................................................................................................................. 46San Diego .................................................................................................................................... 47

San Francisco .............................................................................................................................. 48San Jose ...................................................................................................................................... 49Seattle .......................................................................................................................................... 50St. Louis ....................................................................................................................................... 51Tampa .......................................................................................................................................... 52Tucson ......................................................................................................................................... 53Washington, D.C. ......................................................................................................................... 54West Palm Beach......................................................................................................................... 55

CLIENT SERVICESResearch Services ....................................................................................................................... 56Contacts, Sources and Defnitions .............................................................................................. 57Ofce Locations ..................................................................................................................... 58-59

Written by John Chang, Vice President, Research Services, and edited by Hessam Nadji, Managing Director. Te Capital Markets section was co-authored by WilliamE. Hughes, Managing Director, Marcus & Millichap Capital Corporation. Additional contributions were made by Marcus & Millichap market analysts and investmentbrokerage proessionals nationwide.


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Executive Summary

2012 Annual Report page 3

National Apartment Index (NAI)

Markets benetting rom strong ties to technology, nancial services, and leisure and hospitality made the biggest moves in the index.Seattles (#8) links to sotware publishing and Las Vegas (#36) ties to tourism led momentum, each rising 7 positions. San Jose (#1)and San Francisco (#2) occupy the top positions this year, edging out New York (#3) and Washington, D.C. (#9).

Sales o institutional-grade assets drove the market in 2011 with transactions exceeding $20 million constituting 60 percent o thetotal volume or the year. While top-tier assets in primary markets are still attractive to these investors, they have begun to seek ClassB properties and other value-add options.

Orange County (#5) and San Diego (#6), maintained their positions, but the risk o a slower pace in trade and export volumes weighson Los Angeles (#13) and Riverside (#29). Most Florida markets climbed out o the bottom 10 ranking, except Jacksonville, whichoccupies the last position or the second consecutive year.

Midwestern markets remain stable, but lag the recovery and job momentum in Sunbelt markets. Detroit (#38) advanced our placeson balanced undamentals. Indianapolis (#39), Kansas City (#33), Columbus (#41), and St. Louis (#34) all slipped at least ourplaces based upon weaker job prospects and undamentals.

National Economy

Better-than-expected retail sales, robust business investment, and expansion in production and new orders support stronger GDPgrowth o 2.1 percent in 2012. Modestly sub-trend employment growth will prevail until GDP returns to its 3.2 historical average.

Te private sector has added 2.9 million jobs since the employment trough, recovering 33 percent o the jobs lost during the reces-sion. Te U.S. economy will add 1.8 million jobs in 2012 as improved business condence transitions to temporary positions.

A eurozone nancial crisis could undermine the U.S. economic recovery. Te biggest obstacle to growth remains the climate o un-certainty that attenuates consumer demand and impairs progress in job gains, leaving the economy vulnerable to downside risks.

National Apartment Overview

All 44 markets tracked in the National Apartment Index are orecast to post continued employment growth and eective rent growthin 2012. Recovery has moved beyond the cyclical surge in demand to a more sustainable expansion, as remarkable shits in demo-

graphic, economic and social patterns underpin demand or rental housing. U.S. vacancy should reach 5.0 percent by the end o 2012, a 40-basis-point decline since 2011, and resulting in 4.8 percent eective

rent growth. Forecast completions will total nearly 85,000 units, still critically short o a conservative demand orecast or 120,000units, initiating a new development cycle.

Household ormations are orecast to increase by 29 percent to an annual average o 1.4 million through 2015, aided by rising im-migration and 2.1 million echo boomers entering the prime renter age cohort.

Capital Markets

Fundamentals and a avorable spread against reasurys will promote multiamily development. Fannie and Freddie will remain thechie suppliers o apartment loans in an increasingly crowded eld o providers.

Accommodative monetary policy will keep interest rates low or several years. Expect lie companies and commercial banks to growmarket share by pursuing assets with good credit eatures and stabilized revenue.

Apartment Investment Outlook

Te recent pause in sales activity will not last long into 2012, given the stronger economic data late in 2011. Sellers will bring moreproperties to market, capitalizing on strong investor demand, easing bidding wars.

Capital will migrate to secondary markets and value added investments. Sales volume will rise as risk tolerance expands and capitalbecomes more uid. Expect higher levels o workout activity rom banks.


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National Apartment Index

page 4 2012 Annual Report

VacancyRate

Markets with the LowestExpected 2012 Employment Growth

Nonfarm Employment (Y-O-Y Change)

Markets with the LowestExpected 2012 Vacancy Rates

NewYork

City

Portl

and

Minn

eapolis

-St.P

aul

SanJ

ose

SanF

rancisc

o

New

Jerse

y

Oakla

nd

SanD

iego

Boston

LosA

ngele

s

Unite

dStat

es

Markets with the HighestExpected 2012 Employment Growth

Nonfarm Employment (Y-O-Y Change)

0% 1% 2% 3% 4%

United States

Las Vegas

Tucson

Orlando

San Antonio

West Palm Beach

Dallas/Fort WorthPortland

San Jose

Houston

Austin

0.0% 0.5% 1.0% 1.5% 2.0%

United States

St. Louis

Columbus

Los Angeles

Oakland

Chicago

Sacramento

Philadelphia

Detroit

ClevelandNew Haven

1%

2%

3%

4%

5%

VacancyRate

Markets with the HighestExpected 2012 Vacancy Rates

Jacksonville

Houston

Atlanta

Tucson

Columbus

LasVegas

Phoenix

Orlando

Charlotte

Palm

Beach

UnitedStates

2%

4%

6%

8%

10%

Markets with the HighestExpected 2012 Completions

Units(tho

usands)

NewYork

Dalla

s/FortW

orth

Houston

Washing

ton,D.C.

Austin

Atlan

ta

New

Jerse

y

Denv

er

Orange

Coun

ty

Indian

apolis

0

2

4

6

8

2012 National Apartment Index

Technology, Financial, Leisure and Hospitality Sectors BoostCoastal Markets and Propel Recovery in Sunbelt

Te recovery in technology and trade-centered metros expanded toa broader cross-section o industries and markets. Te biggest moversinclude markets beneting rom ties to technology, nancial services, andleisure and hospitality. Seattles (#8) links to sotware publishing and LasVegas (#36) ties to tourism led momentum in the index, each climbingseven spots. Portland (#11) advanced six positions, ueled by high-techmanuacturing while recovering nancial services acilitated a six-pointgain or Chicago (#17) and a ve-spot rise or San Francisco (#2). iesto energy helped Houston (#18) move up six places in this years NAI.Late-recovery Sunbelt markets began to emerge rom the housing crisis

with Phoenix (#22) rising ve positions while ampa (#30) and West PalmBeach (#32) each gained six spots.

San Francisco Bay Area Dislodges New York and Washington,D.C., rom Top Spots in NAI

San Jose (#1) and San Francisco (#2) occupy the top o this yearsindex, edging out New York (#3) and Washington, D.C., (#9). Te SiliconValley beneted rom robust technology employment and signicantincome gains, as well as 40 percent o all venture capital unding in 2011.

Washington, D.C., slipped seven positions as its early recovery momentumslowed and construction jumped. Other markets, such as Austin (#7) andSeattle (#8), will expand with stronger jobs and revenue growth ahead.

Dallas (#15) posts remarkable net absorption, gaining three spots, but SanAntonio (#21) suers rom higher vacancy and signicant construction,alling eight rungs rom last year. Beyond 2012, supply will become a moreserious concern or some o these markets.

Boston (#4) slipped one position, supplanted by the San FranciscoBay Area. However, Boston similarly benets rom strong job and incomegains, venture capital ows, and the robust technology and healthcaresectors. Te healthcare sector brought notable employment gains inMinneapolis (#10), slipping two places, and a still-healthy Philadelphia(#19) ell nine spots as other markets show more positive momentum.wo Southern Caliornia markets, Orange County (#5) and San Diego(#6), maintained their index positions, both supported by the proessional


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National Apartment Index


Markets with the HighestExpected 2012 Absorption

Units(tho

usands)

Dallas/FortWorth

Houston

NewYork

Washington

,D.C.

LosAngeles

NewJersey

Atlanta

Austin

Chicago

Seattle

0.0

2.5

5.0

7.5

10.0

1 See National Apartment Index Note on page 57.

Rank Rank 11-12

MSA 20121 2011 Change

San Jose 1 4 s 3

San Francisco 2 7 s 5

New York 3 1 t 2

Boston 4 3 t 1

Orange County 5 5 0

San Diego 6 6 0

Austin 7 9 s 2

Seattle-Tacoma 8 15 s 7

Washington, D.C. 9 2 t 7

Minneapolis 10 8 t 2

Portland 11 17 s 6

New Jersey 12 12 0

Los Angeles 13 11 t 2

Denver 14 14 0

Dallas/Fort Worth 15 18 s 3

Oakland 16 16 0

Chicago 17 23 s 6

Houston 18 24 s 6

Philadelphia 19 10 t 9

Miami 20 21 s 1

San Antonio 21 13 t 8

Phoenix 22 27 s 5

New Haven 23 20 t 3

Salt Lake City 24 19 t 5

Charlotte 25 28 s 3

Orlando 26 30 s 4

Milwaukee 27 25 t 2

Louisville 28 22 t 6

Riverside-San Bernardino 29 32 s 3

Tampa 30 36 s 6

Fort Lauderdale 31 34 s 3

West Palm Beach 32 38 s 6

Kansas City 33 26 t 7

St. Louis 34 29 t 5

Cincinnati 35 33 t 2

Las Vegas 36 43 s 7

Atlanta 37 40 s 3

Detroit 38 42 s 4

Indianapolis 39 31 t 8

Cleveland 40 39 t 1

Columbus 41 37 t 4

Sacramento 42 35 t 7

Tucson 43 41 t 2

Jacksonville 44 44 0

Index Methodology

Te NAI ranks 44 major apartment markets based upon a series o

12-month, orward-looking economic and supply and demand variables.Markets are ranked based on their cumulative weighted-average scoresor various indicators, including orecast employment growth, vacancy,construction, housing aordability and rents. Weighing both the orecastsand incremental change over the next year, the index is designed to indicate

relative supply and demand conditions at the market level.

Users o the index are cautioned to keep several important pointsin mind. First, the NAI is not designed to predict the perormance oindividual investments. A careully chosen property in a bottom-rankedmarket could easily outperorm a poor choice in a top-ranked market.Second, the NAI is a snapshot o a one-year time horizon. A market acingdiculties in the near term may provide excellent long-term prospects,and vice versa. Tird, a markets ranking may all rom one year to thenext even i its undamentals are improving. Te NAI is an ordinal index,and dierences in rankings should be careully interpreted. A top-rankedmarket is not necessarily twice as good as the second-ranked market, nor isit 10 times better than the 10th-ranked market.

Most Midwestern Markets Remain Stable, but Lag RecoveryMomentum in Sunbelt Markets

Tree Sunbelt markets rank in the bottom 10: Las Vegas (#36), Atlanta (#37) and Jacksonville (#44). Las Vegas made big gains on animproving job-growth orecast and, while still high, a vacancy decline.

Atlanta climbed three places, but operations will remain challenged. Whilemost Florida markets emerged rom the bottom 10, Jacksonville remainsthe exception, with a persistent supply-side imbalance. Fort Lauderdale(#31) and Orlando (#26) advanced three and our positions, respectively,aided by tourism and trade, setting the stage or a more dramatic rise in

2013. Detroits (#38) balanced undamentals advanced the metro ourplaces, despite weak employment growth. Indianapolis (#39), Kansas City(#33), Columbus (#41), and St. Louis (#34) all slipped our or more placesbased upon weaker job prospects.

and business services sector and international tourism. Los Angeles (#13)slipped two places and Riverside (#29) improved by only three positionsbased on their employment outlooks. Both maintained low vacancy, butrisks o slower port activity weigh on the region.


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National Economy


AnnualizedQuarterlyChangeinG

DP

-10%

-5%

0%

5%

10%

12**10050095908580

Employment Change vs. Unemployment

Employment Change

Unemployment Rate

EmploymentChange(millionsof

jobs)

UnemploymentRate

-6

-3

0

3

6

12**1008060402009896949290

2%

4%

6%

8%

10%

20-34YearOldPopulation(million

s)

54

58

62

66

70

15**13**11*09070503019997959391

20-34 Year Old Population Trends

Existing Single-Family Home Sales Trends

Median Home PriceHome Sales

MedianHomePrice(thousands)

HomeSales(millions,SAAR)

$150

$175

$200

$225

$250

11***1009080706050403

3

4

5

6

7

U.S. GDP

Steady incremental gains rom a variety o sectors propelled U.S. econom-

ic growth throughout 2011, as opposed to any one segment. Te absenceo a major driver in GDP growth, together with severe cutbacks in the

government sector and skittish consumer and business condence, resulted insub-trend employment improvement and comparatively low wage and incomegains. However, most economic indicators support expectations or continuedgrowth at a measured pace. Te private sector has added 2.9 million jobs sincethe employment trough, representing a recovery o 33 percent o the jobs lost inthe peak-to-trough period o January 2008 to February 2010. Te unemploy-ment rate ell 40 basis points to 8.6 percent in November, marking the rstsignicant decline in seven months. In addition, retail sales moved above thepre-recession peak, corporate prots measured 19 percent higher than the peakin the third quarter o 2006, and exports contributed 13 percent o GDP. Ater

rising 1.7 percent in 2011, GDP was well below the historical trend.However,better-than-expected holiday retail sales and expansion in production and neworders suggest stronger productivity in early 2012.

In addition to numerous domestic challenges persisting into the new year,risks o another eurozone nancial crisis could undermine the U.S. economicrecovery. Te biggest obstacle to growth remains the climate o uncertainty thatboth attenuates consumer demand and impairs job gains, leaving the economyvulnerable to downside risks. Looking orward, employment is orecast to ex-pand by an average o 150,000 jobs per month. Employment growth o 2.5percent in the 20- to 34-year-old age cohortwhich captured the majority onew jobs throughout 2011suggests stronger hiring activity or this critical

segment, and continued support or rental housing.

2012 National Economic Outlook

Improved GDP and Employment Growth. GDP should strengthen percepti-bly to 2.1 percent in 2012. Modestly sub-trend employment growth will prevailuntil GDP returns to its 3.2 percent historical average, but job additions shouldedge higher in 2012 to 1.8 million positions. Improved business condence willtransition a signicant portion o temporary hiring to permanent jobs.

Potential Mild Eurozone Recession Risks Productivity. Te pace o ex-port growth could contract i eurozone countries slip into recession, mildly

depressing corporate prots. Business-xed investment remains a pillar ogrowth, both in capital equipment and, increasingly, non-residential struc-tures as commercial real estate undamentals improve.

Weak Disposable Income Weighs on For-Sale Housing. Diminishedsingle-amily construction will gradually subdue the excess supply o dis-counted homes and rm values. Apartments will outperorm the or-salemarket as households stay mobile to pursue job opportunities and potentialhomeowners remain unable to clear tougher credit hurdles.

Access to Credit or Small Firms Remains Problematic. Commercial andIndustrial loans trended down as lenders were less willing to lend in the cur-rent environment and borrower demand dropped sharply toward the end o

2011. Marginal access to adequate credit acilities remains a crucial impedi-ment to business investment and, consequently, job growth.

Economic Indicators Support Outlook or

Moderate Growth, Marathon-Like Recovery

* Estimate ** Forecast *** Through October


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National Apartment Overview


Apartment Rent and Vacancy Trends

AverageEffectiveRent

VacancyRate

Effective Rent

Vacancy Rate

$700

$800

$900

$1,000

$1,100

12**11*10090807060504030201

2%

4%

6%

8%

10%

Completions vs. Units AbsorbedUnits Completed

Net Absorption

Employment in the

Prime Renter Demographic

VacancyRate

EmploymentChange(millionsofjobs)

Employment Change - Ages 20-34

Vacancy Rate

-1.0

-0.5

0.0

0.5

1.0

Apartment Revenue and Concessions

RevenueperUnit

Concessionsasa%ofAskingRents

Revenue per UnitConcessions as a Percentage

of Asking Rents

$750

$800

$850

$900

$950

11*100908070605040302010%

3%

6%

9%

12%

UnitsCompleted(thousands

)

UnitsAbsorbed

(thousands)

0

80

160

240

12**1008060402009896949290

-80

0

80

160

240

2%

4%

6%

8%

10%

11*10090807060504030201

-80

Apartment perormance remained undeterred by slow economic growth

in 2011, powering through the summers economic doldrums, and re-cording strong gains in net absorption and lower vacancy rates. ightsupply conditions exist in most markets, with a unique, avorable bias drivenby shits in demographic, economic and social patterns that underpin demandor rental housing. Foreclosures, potential owners unable to meet nancingrequirements, and households choosing rental housing or liestyle reasons oremployment mobility all contributed to a net rise in rental households, total-ing an annualized 900,000 in 2011. In addition, the 20-34-year-old age cohortcaptured approximately 70 percent o job gains recorded in 2011, stimulatingnew household creation.

Net absorption in 2011 totaled more than 153,000 units which, while

still strong, marks a signicant deceleration rom 225,000 units recorded theprior year. However, only a modest 39,000 new units were delivered, the lowestnumber on record or at least 30 years. Te national vacancy rate declined 120basis points over the year to 5.4 percent. Asking and eective monthly rents o$1,061 and $995, posted annualized gains o 2.8 and 4.0 percent, respectively,

with asking rents discounted by about 6.2 percent. All 44 markets tracked inthe Marcus & Millichap National Apartment Index orecast continued employ-ment and eective rent growth in 2012.

2012 National Apartment Outlook

Rent Growth, Equilibrium Signals New Development Cycle.U.S. vacancy

should reach 5 percent by the end o 2012, a 40-basis-point decline rom2011, resulting in 4.8 percent eective rent growth. Completions will trendhigher, orecast to total nearly 85,000 units in 2012, but still critically shorto a conservative demand orecast or 120,000 units. Well-capitalized apart-ment REIS will lead the ramp up in construction.

Acceleration in Multiamily Permitting. Permits or 5+ units posted a 45percent year-over-year increase to 232,000 units as o October 2011. Starts

will accelerate meaningully by mid-2012 and require another 12-18 monthsto deliver, which suggests a two-to-three-year window beore risk o a supplyimbalance emerges in most metros.

Employment and Demographic rends Gain raction. Stronger GDP and

rising employment will increase immigration, a critical component o rentaldemand, as well as de-bundle college graduates rom their parents homes.Te progression o echo boomers reaching prime renter years will expand the20-34-year-old age cohort by approximately 2.1 million over the next veyears. Annual household ormations declined by nearly 10 percent, to an av-erage o 1.1 million rom 2008 through 2011, likely suppressed by the reces-sion and high unemployment. Household ormations are orecast to increaseby 29 percent to an annual average o 1.4 million between 2011 and 2015.

Long-Run Operations and Attractive Debt Broaden Investment Oppor-tunities. Improved operations extend to Class B/C properties in secondaryand tertiary markets. Value-add properties in inll locations and core proper-

ties in secondary markets will exhibit solid operations, attract investor interestand spur greater sales velocity, lending support to values and market pricing.

Positive Momentum Tightens Vacancy,

Moving Apartment Sector into Full Expansion

* Estimate ** Forecast


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Capital Markets


CMBS, CDO &Other ABS, 12%

GSEs & GinnieMae, 41%

Other, 5%Life Insurance

Companies, 6%

Commercial Banks, 27%

Multifamily Mortgage Debt Outstanding

MaturingBalance(billions)

$0

$25

$50

$75

$100

15141312111009080706050403020100

Estimated Multifamily DebtMaturities by Lender Type

GSEs & OtherBanks

CMBSLife Ins. Co.s

10-Year Treasury Yield vs. Core Inflation

Rate

10-Year Treasury Yield

Core Inflation

0%

2%

4%

6%

8%

11**1009080706050403020100

Avg. 10-Yr. Treasury4.25%

Avg. Core Inflation2.02%

Apartment Mortgage Originations

by Lender

PercentofTotal

0%

25%

50%

75%

100%

11*100908

Govt. Agency

Intl/Natl Bank

Private/Other

CMBS

Financial/Insurance

Regl/Local Bank

State & LocalGovernments, 9%

Financial conditions improved throughout 2011. GDP and employment

growth rose, shoring up property perormance and revenue streams. Loandelinquencies receded rom their cyclical peaks and values rmed across

most commercial property types, aided by the low cost o debt and positivespread between cap rates and interest rates. Te multiamily sector was the onlyproperty type with strengthening loan perormance on a national level. Restoredlender condence stimulated apartment debt issuance and equity investmentinto a broader range o strategies, particularly given the return to pre-recessionpricing and compressed cap rates or top-tier properties in major metros. Teshit toward more competitive lending maniested in higher slightly LVs andlower spreads. Te U.S. credit downgrade and emergence o the eurozone debtcrisis last summer briey, but severely, rocked the global equity markets, creat-ing both a pause in the CMBS market and modest pull-back in underwriting.

Te second quarter o 2011 marked the rst time in 18 months that mul-tiamily mortgage originations outpaced the net pay-o and pay-down o loans.Originations or the third quarter topped $140 billion, a 39 percent increaseover one year earlier. GSE originations accounted or a 55 percent share, mark-ing a decline rom last year, as lie companies, CMBS and banks each gainedmarket share o 200-300 basis points. otal multiamily debt outstanding hasreached $806 billion, o which GSEs hold approximately 41 percent, whilebanks and lie companies hold 27 percent and 6 percent, respectively. Multiam-ily delinquencies vary widely by investor class. Loans held in the GSEs porto-lios remain at less than 1 percent, but elevated relative to trend. Te delinquencyrate or CMBS loans rose 40 basis points over the year to 8.9 percent.

2012 Capital Markets Outlook

Long-erm Rates, Fundamentals Support Multiamily Development.Rich pricing o quality assets, strong apartment demand and a avorablespread against reasuries will promote development. Fannie and Freddie willremain the chie suppliers o apartment loans, but lie companies will oerhighly competitive rates to select buyers and developers.

An estimated $363 billion o commercial and multiamily real estateloans will mature in 2012. Nearly 63 percent o maturing loans are consid-ered underwater. Banks hold nearly 59 percent o maturing loans; another15 percent are held in CMBS. Renancing the riskier debt may open oppor-

tunities or increased mezzanine lending, loan extensions or recapitalization.

Te GSEs. Te entities will have unlimited ederal nancial support throughDecember 31, 2012, but Congress will debate a number o proposals tosunset Fannie Mae and Freddie Mac over the next decade and privatize thesecondary mortgage market. Te GSEs and FHA kept credit owing to themultiamily market during the credit crisis, providing the only net additionsto multiamily debt or both market rental and low-income housing needs.

Credit Available or Apartments Along the Capital Stack. Accommodativemonetary policy will keep interest rates low through 2012. Expect lie com-panies to aggressively pursue top-tier assets and high-quality Class B assets

with good credit eatures. Commercial banks will continue to grow marketshare in 2012 or apartment properties with stabilized revenue streams.

Improved Market Conditions Restore

Confdence; Capital Flow Expands

* Through 3Q ** Through October


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Apartment Investment Outlook


Apartment Price and Cap Rate Trends

AveragePriceperUnit(thousa

nds)

AverageCap

Rate

Average Price per Unit

Average Cap Rate

$0

$30

$60

$90

$120

11*1009080706050403020100

5%

6%

7%

8%

9%

TotalTransactions(thousands)

0

1

2

3

4

11*1009080706

U.S. Apartment Transactions by Quarter

Apartment Cap Rate Trends by Market

AverageCap

Rate

Primary Secondary Tertiary

5%

6%

7%

8%

9%

11*10090807060504

Apartment Cap Rate TrendsApartment Cap Rate 10-Year Treasury Rate

Sales $1M and above

AverageRate

2%

4%

6%

8%

10%

11*1008060402009896949290

380 bps 400 bps

430 bps

410 bps

Cap Rate Long-Term Avg.

10-Year TreasuryLong-Term Avg.

90 bps

460 bps

The conuence o several trends pushed investor demand urther along

the risk/reward spectrum in 2011. Proven sustainability in apartmentperormance, condence in property values, and access to low cost debt

spurred investors to seek arbitrage through value-add strategies. Sales activitysurged through the rst three quarters o 2011, characterized by portolio sales,a return to pre-bubble sales volumes, and a narrowing dierential between coreand value-add yields. A signicant shit in transactions to secondary and ter-tiary markets compressed cap rates or Class B and value-add properties to the7.5 percent range, while core properties settled below six percent. Te numbero oerings in October spiked to the highest level since 2007, yet the ourthquarter marked a moderate slowdown in apartment property sales. Economicuncertainty played a role, but deal atigue, rich pricing, and macro concernscaused investors in the top-tier segment to pull back in late 2011. However,

many risk-tolerant investors view this as an opportunity, so it should not resultin a major market slowdown.

Apartment sales approached $57 billion in 2011, reecting a 27 percentincrease over last year. Te overall cap rate averaged 6.5 percent, down 70 basispoints rom one year earlier. Te biggest year-over-year increases in sales volumeoccurred in the $20+ million and $10-20 million categories, up 78 and 63 per-cent, respectively. Larger deals in the $20+ million range accounted or 60 per-cent o total sales volume in 2011. Consequently, the median price per unit rosenearly 8 percent to $131,500 per unit and cap rates compressed 70 basis pointsto 5.5 percent in this price tier. In addition, the median sales price in the $1-10 million segment increased by 12 percent to $83,100, the rst increase since

2005. Gateway markets, including New York, Washington, D.C., Los Angeles,San Francisco, Houston, Dallas and Chicago, dominated investments.

2012 Investment Outlook

Sales Volume Gains Momentum Midyear. Te lull in late-2011 sales sug-gests that economic uncertainty and pricing will cause investors to slow activ-ity into the rst quarter. Te pause will not last long, given the better-than-expected economic data in late 2011. Sellers will bring more properties tomarket, capitalizing on strong investor demand, thereby easing bidding wars.

Momentum Grows or Infll, Value-Add Product. Ultra-low cap rates intop-tier markets and assets will drive capital migration to Class B assets, sec-ondary markets and value-added investments. Sales volume will rise as risktolerance expands and capital conditions become more uid.

Shiting Buyer Composition Continues. Tough private investors remainactive, transactions involving equity unds, REIs and institutional investorshave recently surged. Sales o properties valued in excess o $20 million repre-sented 15 percent o the total transactions last year, a signicant increase romthe long-term average o 10 percent.

Higher Levels o Workout Activity. Banks will continue to resolve troubledloans at a brisk pace, either liquidating at market price or granting loan exten-sions on troubled properties. Improved cash ows will provide owners more

options or renancing or recapitalization.

Risk Tolerance to Expand

as Investors Pursue Higher Yields

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


11/61page 10 2012 Annual Report

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

Weakened Single-Family Market

Keeps Atlantas Recovery on Firm Footing

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Atlanta Up 3 Places 2012 Rank: 37 2011 Rank: 40

Market Forecast Employment: 1.6% s Construction: 900 s Vacancy: 40 bps t Eective Rents: 4.0% s

Arejuvenated job market will take over as the primary driver o vacancy

declines in Atlanta during 2012, supplanting the release o pent-up de-mand and the de-bundling o combined households. In addition, the

weak single-amily housing market also continues to make contributions torental housing demand. Single-amily oreclosures in the metro remain high,albeit much lower than at the peak o the recession, and the migration o manyhomeowners to rentals continues to represent a source o demand or apartmentoperators. Te eects o these trends are apparent in the local homeownershiprate, which has allen rom 67 percent to 64 percent over the past our years.More stringent mortgage underwriting, high down payments and stagnant in-comes are discouraging many prospective homeowners rom purchasing and

will extend their stay in rental housing. As a result, the Atlanta apartment mar-ket appears well positioned or additional declines in vacancy and steady rent

growth over the next several quarters.

Sales o newer Class A complexes will continue in 2012 as large investorsshufe portolios and deploy capital that was accumulated during the recession.Cap rates in the metro or this class o property generally start in the 5 percentrange. Smaller investors and those seeking higher yields will turn to stabilizedClass B assets, which were attracting greater attention in the nal months o lastyear. Cap rates or well-operating Class B properties near major employmenthubs and residential services compressed to the mid-7-percent range in 2011and may decline urther as investor demand intensies. Areas o the marketthat promise to receive greater attention include northern Fulton County, CobbCounty and Gwinnett County, which has many high-demand neighborhoods.

In addition to stabilized properties, distress sales will remain prevalent in 2012,especially among apartment owners who ace near-term debt maturities.

2012 Market Outlook

2012 NAI Rank: 37, Up 3 Places. Atlanta improved three spots in the 2012NAI, though a below-average outlook kept the market in the bottom 10.

Employment Forecast: Employers will add 36,000 jobs in the metro thisyear, a 1.6 percent gain and improvement rom the 2,400 spots lled in 2011.

Construction Forecast: In 2012, builders will bring 2,900 units online. An

average o 5,700 rentals were completed annually over the past 10 years. Vacancy Forecast: Minimal construction and absorption o more than 4,000

units will push down the vacancy rate 40 basis points in 2012 to 7.9 percent.

Rent Forecast: Asking rents will climb 2.9 percent in 2012 to $871 permonth while eective rents will increase 4.0 percent to $800 per month.

Investment Forecast: Investors seeking large, new properties will increasinglyturn their ocus to Clayton County, located directly south o the urban core.More than 20 percent o the 31,000 rentals in the county were built in thepast 10 years and many owners may take advantage o investor interest to sell.


12/612012 Annual Report page 11


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Market Forecast Employment: 3.8% s Construction: 2,680 s Vacancy: 70 bps t Eective Rents: 6.2% s

Vacancy Drop to 11-Year Low

Sparks Signifcant Rent Increases

Widespread job growth in Austin will bring vacancy to the lowest level

in more than a decade, allowing owners to push rents and withdrawconcessions. Te proessional and business services sector will be the

primary generator o top-tier apartment demand as relocating and growingrms add to payrolls. Several major tech companies have already announcedexpansion plans, osetting losses in the public sector. For example, Rackspaceplans to triple its Austin work orce over the next ew years, supporting Class

A operations. Class B/C apartments will benet rom job growth in the typi-cally lower-paying leisure and hospitality and trade, transportation and utilitiessectors, which will add 6,000 jobs. As operations improve, developers will be-gin moving projects through the planning stages to capture elevated demand.Nonetheless, Austins permitting process is stringent by exas standards, acili-tating another year o strong revenue improvement beore a wave o new supply

in 2013 orces owners to consider raising concessions and cutting rents.

Te combination o impressive operational improvements and a strong lo-cal economy will attract interest rom a wide range o investors this year. REIsand institutions will target Class A properties where conditions will be remi-niscent o the dot-com boom 13 years ago. However, despite healthy interestin these properties, cap rate compression will likely ease as the cost to builddips below per-unit prices. Consequently, investors looking or higher yields willshit down the quality scale toward Class B properties, lowering cap rates in themid tier. Lending or these properties will include aggressive insurance compa-nies and the agencies in the coming year. Te combination o low interest rates,accessible nancing and a motivated buyer pool will encourage sellers to divest,

especially beore the onset o new construction and maturing long-term debt.

2012 Market Outlook

2012 NAI Rank: 7, Up 2 Places. Te nations astest growing employmentmarket supported the metros two-position rise in the ranking.

Employment Forecast: In 2012, local employment will expand by 3.8 per-cent, an increase o 30,000 positions. Last year, job growth reached 3 percent,or 23,000 jobs.

Construction Forecast: Construction will pick up this year, as 3,000 units

are slated or delivery. In addition, approximately 21,000 units are in somestage o the planning pipeline.

Vacancy Forecast: Vacancy will descend 70 basis points in 2012 to 4.3 per-cent, slowing down rom the 200-basis-point plunge reported last year.

Rent Forecast: Average asking rents will rise 4.1 percent to $927 per monthwhile eective rents gain 6.2 percent to reach $868 per month this year.

Investment Forecast: As operations strengthen, buyers will begin their searchor Class B assets near the University o exas and major employers in North-

west and Southwest Austin.

AustinUp 2 Places 2012 Rank: 7 2011 Rank: 9





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Fueled by growth in the biotechnology industry, Boston will be one o the

top-perorming apartment markets in the nation this year. Pharmaceuti-cal companies are rapidly expanding in the area. Te redevelopment o

the South Boston Waterront, or example, is attracting Vertex Pharmaceuticals.Te company announced plans to relocate their world headquarters to Fan Pierby 2013, a move that will spur economic growth and support demand or Class

A apartments in surrounding areas. Additionally, thousands o construction jobswill be created, sparking demand or Class B/C rentals. Elsewhere, in the Cam-bridge/Watertown/Waltham and Brookline/Brighton/Newton submarkets, ex-pansions by several biotech companies, including Novartis, Merck and Amgen

will expand the renter pool or high-end units. With home prices still out oreach or many residents, apartment vacancy in these areas will compress to thesub-2-percent range this year. Overall, vacancy will dip below 4 percent this

year, acilitating healthy rent growth or apartment operators.

In an attempt to acquire best-in-class apartments, institutional investors will reposition their portolios to core markets, including Boston, pushingsmaller syndicates to suburban areas. REIs will dispose o assets in secondarymarkets to deploy capital in trophy assets located inside o state Route 128. Asbidding activity remains elevated and interest rates hover near historic lows, caprates or these properties will compress to the mid-4 percent range this year. Inthe suburbs, meanwhile, buyers looking or outsized returns and lower pricepoints will target value-add properties near transportation corridors in Norolkand Essex counties. Well-occupied assets below the $5 million threshold willtrade at initial yields around 8 percent. Depending on location, owners may be

able to reposition the property to attract more afuent renters and elevate rents.

2012 Market Outlook

2012 NAI Rank: 4, Down 1 Place. Bostons surging pharmaceutical indus-try helped the metro retain a top-ve position in this years ranking.

Employment Forecast: Boston employers will add 46,000 jobs to the metrothis year, an increase o 1.9 percent. In 2011, 41,000 workers were hired.

Construction Forecast: Construction activity will increase in 2012 as devel-

opers complete 1,500 market-rate units, expanding inventory by 0.8 percent. Vacancy Forecast: Vacancy will decrease 50 basis points in 2012 to a 10-year

low o 3.5 percent, ater improving 110 basis points last year.

Rent Forecast: Owners will raise asking rents 4.2 percent to $1,849 permonth, while eective rents will surge 5.8 percent to $1,802 per month.

Investment Forecast: Investors looking or stability will target the Cam-bridge/Watertown/Waltham submarket. Te areas low homeownership rateand steady renter pool o more than 80,000 students will continue to supportlong-term demand.

Healthy Growth in the Biotech Industry

Will Solidiy Boston as a Top Rental Market

Boston Down 1 Place 2012 Rank: 4 2011 Rank: 3




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Market Forecast Employment: 2.1% s Construction: 440 t Vacancy: 20 bps t Eective Rents: 4.6% s

Strong blue-collar job gains will tighten operations in the suburbs, while

demand or high-end units in the metros core will ease as nancial rmstrim payrolls. Growth in the education and health services sector will

accelerate household ormation in outlying areas such as the Harris Boulevard/Mallard Creek Church Road and Concord/North Concord submarkets. ightlending requirements or residential mortgages will also keep many residentsin these areas in the renter pool over the next year. As a result, vacancy in thesesubmarkets will all to the mid-7-percent range by year end, allowing propertyowners to implement solid rent increases. Meanwhile, in an attempt to improveprotability and build its capital reserves, Bank o America will eliminate thou-sands o jobs through 2014. Te move will generate uncertainty in Charlotte,

where the bank employs roughly 15,000 workers at its corporate headquarters.

Investment activity will remain rm this year as institutional buyers expandtheir presence in the metro and target Class A buildings within the urban coreand distressed properties trade more briskly. Improving operations will encour-age banks to list some o the $350 million o distressed properties rom receiver-ship. Well-capitalized investors with established track records will take advan-tage o low interest rates to purchase assets with deerred maintenance. Teselocal investors looking to achieve higher upside will venture to the suburbs andacquire value-add Class B/C properties trading at a discount. Ater perormingrenovations and repositioning the property, owners will lit rents or greater cashow over the next ew years. Leveraged buyers, meanwhile, will target denselypopulated areas with high barriers to entry within Interstate 485. Properties inDowntown, Fairview North and East Charlotte/Central Avenue, will trade at

cap rates around 6 percent.

2012 Market Outlook

2012 NAI Rank: 25, Up 3 Places.Average improvement in operating condi-tions and healthy job gains supported Charlottes three-spot rise in the NAI.

Employment Forecast: Employers will create 17,000 positions in 2012, anincrease o 2.1 percent. Last year, 5,000 workers were added to payrolls.

Construction Forecast: Developers will construct 390 apartments this year,

expanding stock by 0.4 percent ater completing 825 units last year. Vacancy Forecast:Vacancy will improve 20 basis points this year to 6.4 per-

cent, a ve-year low. In 2011, vacancy decreased 180 basis points.

Rent Forecast: Asking rents will climb 3.5 percent to $816 per month, whileeective rents will surge 4.6 percent to $753 per month. Last year, asking andeective rents increased 2.7 percent and 3.9 percent, respectively.

Investment Forecast: Broader access to nancing will support bids rom out-o-state buyers searching or inll assets. Tese investors will ocus on proper-ties along Interstate 77 and Interstate 85 corridors or long-term cash ow.

Vacancy to Reach Five-Year Low,

Rents to Return to Pre-Recession Peak

CharlotteUp 3 Places 2012 Rank: 25 2011 Rank: 28





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Completions will increase, but tenant demand will grow at a aster pace,

reducing vacancy in Chicago or the third consecutive year in 2012.Occupancy and rents will strengthen throughout this year as newly

employed residents move into rental housing, but the progress o developmentsthrough the supply pipeline will limit additional declines in vacancy beyond2012. Approximately 15,000 rentals were planned in the metro at the end o lastyear, an amount that would expand rental stock 3.4 percent i all o the projectscome online. Planned rentals in the Loop would expand stock by 15 percent,

while the Gold Coast aces a potential 9 percent increase in rental stock. Citylocations will remain primary targets or developers, due to the expected migra-tion to urban areas by young residents entering the work orce.

Institutional appetites or prime, Class A product in the metro remain

unullled, while the market or Class B/C assets was gradually gaining mo-mentum at the end o last year. Property owners with equity in stabilized ClassB/C assets will increasingly take advantage o another year o low interest ratesand strong demand to list assets. However, many other owners remain unableto monetize the equity in their properties and re-deploy it into other assets,thereby limiting transaction activity. In act, demand or Class B/C product willcontinue to exceed the supply o or-sale product, and buyers that nd suitable,

well-priced investments should move quickly to execute deals. Investors seekingstable properties with rising rents will target listings on the north side o Chi-cago and in the suburbs, while value-add opportunities will emerge on the southand west sides o the city.

2012 Market Outlook

2012 NAI Rank: 17, Up 6 Places. Chicagos below-average overall vacancyrate and above-average projected rent growth pushed up the Windy City sixpositions in this years ranking.

Employment Forecast: otal employment in the metro will increase 1 per-cent in 2012, or by 42,000 jobs. More vigorous job growth, however, will berequired to stimulate signicant rent growth in the Class B/C segment.

Construction Forecast: In 2012, projects containing 1,600 units will comeonline in the metro, including 1,200 rentals in the city. During 2011, less

than 700 units were delivered in the market. Vacancy Forecast:Vacancy will decline 50 basis points this year to 4.2 per-

cent; a 90-basis-point drop was recorded last year.

Rent Forecast: Asking rents will rise 4.0 percent to $1,115 per month in2012. Eective rents will advance 4.8 percent to $1,055 per month.

Investment Forecast: Stable Class B/C product in strong locations remainattractive, while access to nancing widens. Generally, cap rates on Class Bassets start in the high-6-percent range, while Class C product trades closer to8 percent.

Young-Renter Demand Slashes City

Vacancy, but Developers Queue Projects

Chicago Up 6 Places 2012 Rank: 17 2011 Rank: 23




Construction Ramp Up Outstrips Positive

Demographic Trends; Vacancy to Rise

CincinnatiDown 2 Places 2012 Rank: 35 2011 Rank: 33

Despite modest employment gains in the coming year, vacancy will trend

higher as construction ramps up. Nonetheless, positive demographictrends will continue to work in avor o apartment owners as growth

in the prime renter cohort, or those aged 20 to 34 years, will spur demand inButler/Warren Counties and Northern Kentucky. Many o these young proes-sionals will be unable to purchase a home due to tight lending standards and

will instead rent apartments. In addition, baby boomers are selling their homesand downsizing into rentals. With over 37,000 residents turning 55 and olderduring the next ve years, this trend will provide apartment operators with anew long-term source o demand. Tis year, however, multiamily developers

will complete 1,300 new units, most o which, are slated or the Downtown andButler/Warren Counties submarkets, resulting in a uptick in vacancy.

Sales activity will remain steady this year as opportunistic buyers continueto purchase value-add properties located inside o Interstate 275. Local and re-gional investors remain bullish on highly vacant Class B/C properties trading

well below replacement cost. Tese buyers will target neighborhoods in Ham-ilton County, including North College Hill, Colerain, Westwood, and Mount

Airy, or repositioning plays. Out-o-state investors, meanwhile, will begin o-cusing on Cincinnati as an alternate to coastal markets where cap rate compres-sion has signicantly reduced yields. Investors will capitalize on the avorableinterest rate spreads and use agency nancing to purchase the ew Class A orClass B assets that come to market. Properties in sought-ater areas such as Love-land and Hyde Park will produce returns in the mid-7 to mid-8-percent range.

2012 Market Outlook

2012 NAI Rank: 35, Down 2 Places. An uptick in vacancy and a signicantdecline in job growth pushed Cincinnati down two spots in the NAI.

Employment Forecast: Employers will create jobs or the second consecutiveyear during 2012. Tis year, 12,000 positions will be added in the metro, rep-resenting an increase o 1.2 percent. In 2011, 20,900 employees were hired.

Construction Forecast: Multiamily builders will construct 1,300 apart-ments during 2012, expanding inventory by 1.2 percent. Last year, a mere300 units came online.

Vacancy Forecast: Te projected additions to supply will outweigh demandgrowth. As a result, vacancy will rise 30 basis points this year to 5.7 percent.

Rent Forecast: In 2012, asking rents will accelerate 2.3 percent to $730 permonth, while eective rents will increase 3.1 percent to $704 per month. Lastyear, asking rents rose 1.7 percent and eective rents increased 2.7 percent.

Investment Forecast: High investor demand and greater transparency onprices will encourage lenders to liquidate distressed inventory. Hands-on in-vestors searching or discounted assets will target these older, highly vacantproperties with deerred maintenance trading below $10,000 per unit.

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Market Forecast Employment: 1.2% s Construction: 1,000 s Vacancy: 30 bps s Eective Rents: 3.1% s


17/61




Rising Costs Push Students O Campus;

Core Vacancy Falls

ColumbusDown 4 Places 2012 Rank: 41 2011 Rank: 37

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The Columbus apartment market will improve as some o the 100,000

students in the metro migrate to market-rate apartments to reduce ex-penses. Ohio State University will raise tuition by more than 3.5 per-

cent this year, while on-campus room and board will climb 6 percent. Studentslooking to reduce living expenses will seek o-campus housing in surroundingneighborhoods such as University District, Clintonville and German Village. Inaddition, students seeking advanced degrees will no longer receive a subsidy thatkeeps interest rom accruing while they are enrolled ull time and rebates or on-time repayment will be eliminated or recent graduates. As a result, vacancy inthe Upper Arlington/North Columbus and University/Downtown submarkets

will tighten below 4 percent this year.

Local and regional investors will target Class B/C properties in some level

o distress around the urban core or long-term holds, while out-o-state buyerswill acquire the ew Class A assets that come to market. A strengthening buyerpool will encourage lenders to release properties and nancially distressed own-ers to consider short sales. Many investors who sat on the sidelines during theboom will re-enter the market and target value-add properties with ewer than200 units. Opportunities or purchase will arise north o the Interstate 70 cor-ridor, where healthy job growth will enable owners to improve operations andreach ROI goals. Institutional buyers attempting to balance their portolios willalso be active in Columbus, targeting Class A apartments near universities andemployment centers. Stabilized top-tier properties will trade at cap rates in thehigh-6 to mid-7-percent range, 200 basis points higher than in some o thecoastal markets.

2012 Market Outlook

2012 NAI Rank: 41, Down 4 Places. Columbus ell our positions in the2012 NAI due to sot job growth and the nations th highest vacancy rate.

Employment Forecast: Employment will reach 97 percent o its pre-recession peak this year as 10,000 jobs are added, an increase o 1.1 percent.

Construction Forecast: Multiamily developers will complete 650 apart-ments in 2012, expanding rental stock by 0.5 percent. Last year, 1,154 unitscame online.

Vacancy Forecast: Solid student demand will support a 60 basis points all invacancy this year to 7 percent. In 2011, vacancy dropped 130 basis points.

Rent Forecast: A surge in demand will allow operators to lit rents to peaklevels in 2012, with asking rents to rise 3 percent to $702 per month, andeective rents to accelerate 3.9 percent to $670 per month.

Investment Forecast: Cap rates will remain relatively low in 2012, prompt-ing additional owners contemplating dispositions to list their properties. Op-portunistic investors with strong equity positions may renance and invest introubled assets in an attempt to capture higher returns.

Market Forecast Employment: 1.1% s Construction: 500 t Vacancy: 60 bps t Eective Rents: 3.9% s





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Broad-based job growth will result in the nations highest net absorption

in Dallas/Fort Worth this year, though vacancy improvements will begreater in arrant County as supply-side pressure ticks up in Dallas.

Developers will ramp up deliveries near employment centers in the high-growthsuburbs o Plano and Allen, reducing the impact o strong demand on vacancyin the eastern hal o the Metroplex. Vacancy in Fort Worth, meanwhile, willall urther as employers continue to add workers and ew development projectspencil out due to lower overall rents. Among the employers expanding in themarket, Allianceexas announced an upcoming addition o 2,400 positions.

Also, J.P. Morgan Chase will create 700 positions in Lewisville, a Dallas suburb.As job growth expands across the Metroplex and development remains concen-trated on the east side, vacancy in Fort Worth will nish the year in line withDallas or the rst time since 2003.

Strong local operations will bolster NOIs this year, prompting investors tovigorously pursue Dallas/Fort Worth listings. Despite the threat o new con-struction, Metroplex apartments will generate healthy returns over the longterm, with a strong and diverse job market supporting avorable conditions. In-migration o job seekers will boost occupancy at Class B properties, encouraginginvestors seeking stable cash ow to deploy capital towards these assets. Class Capartments will also garner investor interest, although a lack o nancing romthe agencies will limit activity to cash-heavy buyers. Tese lower-tier assets cantypically be acquired rom $10,000 to $20,000 per door, and be re-listed aterstabilization at cap rates in the 9 percent range. In the top-tier arena, institu-tions and REIs will remain active, although cap rates are unlikely to compress

urther, and instead remain in the low-6-percent range.

2012 Market Outlook

2012 NAI Rank: 15, Up 3 Places. One o the strongest absolute job gains inthe U.S. pushed up the Metroplex three positions in this years ranking.

Employment Forecast:Employers will add 88,000 positions in the Metroplexthis year, expanding payrolls by 3 percent. Employers added 70,000 workerslast year, a gain o 2.4 percent.

Construction Forecast: Approximately 5,500 apartments will come online

in 2012, expanding existing inventory by 1 percent. Vacancy Forecast: Te average vacancy rate will all 60 basis points to 6 per-

cent by year end. In 2011, vacancy ell 170 basis points.

Rent Forecast: Asking rents will climb 3.7 percent this year to $832 permonth as eective rents jump 5.4 percent to $767 per month.

Investment Forecast: Te volume o distressed assets in the Metroplex wasnearly $900 million at the end o 2011, prompting buyers to look or REOproperties with upside potential. Investors will target lower-tier properties orreposition opportunities in order to capture rent growth.

Strong Demand Across All Tiers

Reduces Vacancy in Metroplex

Dallas/Fort Worth Up 3 Places 2012 Rank: 15 2011 Rank: 18




Construction Accelerates, but Demand

Recovery Maintains Momentum

DenverNo Change 2012 Rank: 14 2011 Rank: 14

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Expansion in Denvers high-tech and energy sectors, along with growth in

proessional and business services, will support job creation sucient tooset a three-old increase in completions. As a result, apartment vacan-

cy will retreat to its lowest level since 2000. While shadow rental inventory mayrise this year as residential investors target oreclosures, the competitive threat toapartments remains minimal, as vacancy among single-amily and condo rentalsin the metro has allen below 2 percent. Over the past two years, renter demandin Denver increased dramatically despite limited job creation. Tis surge can beattributed to above-average household ormation, a declining homeownershiprate, and elevated oreclosures, which combined to support a 10 percent increasein the renter pool. Previously hard-hit submarkets, such as Denver-South/Glen-dale, Aurora-North and Aurora-Central-Southwest, are posting the strongestoccupancy gains. Closer-in areas, such as Lakewood, Littleton and Englewood/

Sheridan, along with central submarkets, outperormed through the downturnand, thereore, have less room or improvement in this recovery cycle.

ransaction velocity will accelerate as elevated buyer demand and rmingvalues encourage more apartment owners to list. Low interest rates will provideurther motivation, particularly among Class B/C owners who have achievedtheir return objectives. Tese owners would preer to ocus on assets with higheryields in secondary markets, or turnaround opportunities locally. Class A sales

will also increase as private, out-o-state buyers target high-quality assets in themetro or long-term investment. Tis trend began to gain traction last year,

when velocity in the $20-million-plus segment rose nearly 60 percent, driven byactivity in Littleton, Broomeld County, Lakewood and Denver proper.

2012 Market Outlook

2012 NAI Rank: 14, No Change. Denver holds the 14th place in the 2012NAI as strong rent gains compensated or elevated supply growth.

Employment Forecast: In 2012, employment will increase by 1.3 percent, or15,000 positions. Growth will surpass job creation in the previous two yearscombined by nearly 40 percent.

Construction Forecast: Approximately 2,500 units will come online in2012, up rom 838 units last year. Completions will be spread across several

submarkets, but Denver-North accounts or the majority o planned units. Vacancy Forecast: During the year, vacancy in the metro will recede 30 basis

points to 4 percent.

Rent Forecast: Asking rents will rise 3.7 percent in 2012 to $940 per month.Eective rents will grow at a aster clip o 5.2 percent, to $866 per month.

Investment Forecast: Properties with 100-plus units will command premi-um prices as demand exceeds or-sale inventory. Cap rates or larger, perorm-ing Class B assets have compressed to the high-6 to mid-7-percent range, butinvestors should achieve healthy returns as lenders compete aggressively.






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Vacancy in Detroit will drop to the lowest level in 10 years as broad-based

job growth, especially in the proessional and business services and man-uacturing sectors, supports positive net absorption. Te United Auto

Workers Union recently ratied a our-year deal with the Big Tree, which in-cludes $16 billion to invest in new products and inrastructure. Te move willcreate over 12,000 manuacturing jobs through 2014, with a bulk o the posi-tions slated or acilities in Midtown/West Detroit, Novi/Lavonia and Dear-born/Dearborn Heights submarkets. Household ormation will accelerate inthese areas over the next year, spurring demand or Class B/C units. As a result,vacancy in these submarkets will tighten to the mid-6-percent range by year end,allowing owners to lower concessions. Elsewhere, relocation incentives oeredby large corporations will draw proessionals to the Midtown/West Detroit andDowntown submarkets. Many o these renters will capitalize on the elevated

concessions and lease Class A units, reducing vacancy in the area to 8 percent.

Aided by tax incentives, property operators in Detroit will list perormingassets, attracting yield-seeking buyers looking or outsized returns. Te recentelimination o the 6 percent Michigan Business ax will entice some ownersto list their assets. Investors rom overseas with an appetite or risk will takeadvantage o the avorable exchange rates and pay cash or stabilized propertiesin sought-ater areas such as Oakland County and Ann Arbor. In addition, out-o-state buyers will expand their portolios in the metro and capitalize on thehighest cap rates in the country. As competition heats up or Class A properties,rst-year yields will compress below 8 percent this year. Local investors, mean-

while, will target redevelopment opportunities near Wayne State and the Uni-

versity o Michigan, where more than 70,000 students support the renter pool.

2012 Market Outlook

2012 NAI Rank: 38, Up 4 Places. Detroit will add jobs or the third con-secutive year, aiding in the markets our-position rise in this years NAI.

Employment Forecast: Ater adding 21,000 workers to payrolls last year,employers will create 11,000 jobs in 2012, expanding stas by 0.6 percent.

Construction Forecast: Construction will remain low this year as 290 apart-ment units come online. No market-rate units came online in 2011.

Vacancy Forecast: Stagnant building activity and employment-generateddemand will reduce vacancy 60 basis points in 2012 to 5 percent. Last year,vacancy contracted 130 basis points on net absorption o nearly 3,000 units.

Rent Forecast: Asking rents will rise 2.3 percent this year to $846 per month,accompanied by a 3.2 percent increase in eective rents to $783 per month.

Investment Forecast: As the local economy continues to gain momentumand operations improve, lenders will be enticed to work out deals with prop-erty owners who are underwater. As a result, the distressed pipeline will thinthis year, though a ew more REOs will trickle to the market.

Tax Reduction Entices Property Owners

to Sell, Lures Yield-Seeking Buyers

Detroit Up 4 Places 2012 Rank: 38 2011 Rank: 42




Local Buyers and Out-o-State Investors

Continue to See Upside in Broward Assets

Fort LauderdaleUp 3 Places 2012 Rank: 31 2011 Rank: 34

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Minimal construction will support an additional decline in the vacancy

rate and urther rent growth in Broward County in 2012, extend-ing the revival o the apartment sector that began in 2010. enant

demand or Class A apartments will remain strong as employment expandsand current residents orgo homeownership, but the Class B/C segment willalso strengthen this year. With a vacancy rate o 6 percent at the end o 2011,slack remains in lower-tier rentals as a result o recessionary cuts in employmentsectors such as construction, and trade, transportation and utilities. Payrolls inlower-paying elds will expand in 2012, most notably in port-related positions,as increasing cruise and cargo activity at Port Everglades continues to drive thelocal economic recovery. In addition, a potential increase in residential construc-tion will virtually assure renewed hiring in the construction sector.

A very uid investment market continues to evolve, with private local buy-ers, institutions and out-o-state capital searching the market. In addition, theemerging presence o Canadian investors and, to a lesser extent, Latin Americanbuyers, continues to oer potential sellers a broad and deep pool o potentialbidders. Te investor pool is also notable or its diverse objectives. Many buy-ers, or example, continue to target distressed assets available at attractive pricesto execute value-add strategies. In a market with improving occupancy, someinvestors will continue to have greater success re-tenanting and restoring rentrolls. Institutions are also actively pursuing newer Class A assets, which can tradeat cap rates o 5 percent to 6 percent. An eventual emptying o the pipeline odistressed properties will help to stabilize values and enable many institutionsto realize increases in asset value at the end o ve- to 10-year holding periods.

2012 Market Outlook

2012 NAI Rank: 31, Up 3 Places. Limited development and solid operatingmeasures resulted in Fort Lauderdales three-spot improvement in the index.

Employment Forecast: Employers will add 13,700 positions in the countythis year, an amount that will expand total employment 1.9 percent. Only2,800 jobs were created in 2011.

Construction Forecast: A mere 500 new rentals will come online during

2012. Last year, only 150 units were delivered. Vacancy Forecast: Following a 120-basis-point plunge last year, the vacancy

rate will decrease an additional 30 basis points in 2012 to 5.1 percent, thelowest year-end level in six years.

Rent Forecast: Asking rents will climb 2.9 percent in 2012 to $1,123 permonth, while eective rents will advance 3.6 percent to $1,072 per month.

Investment Forecast: Investors seeking older properties in established loca-tions with strong intrinsic demand drivers will continu

Documents

MarcusMillichap_2012_NAR