U.S.

MULTIFAMILY REPORT 2Q 2011

ECONOMY
The recovery in the U.S. economy has come to a temporary standstill in the second ECONOMIC INDICATORS
National Current 2011F 2012F

ECONOMY in a slow growth period amidst concerns regarding the federal debt quarter, mired

ceiling, the European market continuedcrisis and elevated energyhalf of 2007, extending The Manhattan office sovereign debt to tighten during the first prices. The advance estimate ofstrengths exhibited during the second halfexpectations at 1.3%, a low number second quarter GDP came in well below of 2006. Steady employment growth exacerbated byto significant downward revision to first and rapidly escalating asking rents. contributed a positive absorption of available space quarter growth to 0.4% (from an earlier estimated 1.9%). Cutbacks in state and local government spending continue to The Newgains, City economy expanded at a healthy pace during the first sixfor the third hamper York subtracting from GDP growth (0.2 percentage points) months of the year, led by strongThis trend is expected to be a headwind well into 2012. Consumers consecutive quarter. gains in office-using employment. Data available through the end of May show that the both has added nearly 16,800 the second quarter, with consumption and businesses alike City pulled back demand in jobs in industries that are key to the commercial office market, with financial services to second quarter growth, the lowest contributing less than 0.1 percentage points and professional business services quarterly contribution jobs, mid-2009. This resulted in increased demand for business adding 7,400 and 5,500 since respectively. A silver lining is that second quarter office investment remained strong, particularly in had been since structures (+6.3%) and space in a market that was already the tightest it non-residential the first quarter of 2001. equipment and software (+8.1%). The year began with 26.1 million square feet available throughout Manhattan. By the end of June, available space had fallen precipitously to 20.8, a underscore20.5%. This Business and consumer confidence remain fragile and decline of the deterioration of diminishing availabilitynascent recovery at the beginning market; year. 2007 was the only the optimism in the of space has been the story of the of the April The Conference month inConsumer Confidence index declined every monthdecline of at least 122,000 Board's the past year that did not record a month-to-month in the second quarter to square 57.6, its lowest point since last November and down from 72.0 in February. low, reach feet). As a result, Manhattans overall vacancy rate has tumbled to a six-year The Expectations component, which the third 97.5 in February, plummeted to 71.6 in June. closing the mid-year at 5.3%. For peaked atconsecutive quarter, the vacancy rate closed Not surprisingly, this translated into weak consumer 7.0% - 9.0%. below equilibrium, defined as a vacancy rate range of spending in the second quarter, as a 0.1% decline in retail sales in May was followed by only a scant 0.1% increase in June.

GDP Growth CPI Growth Unemployment Employment Growth

Source: Moodys Analytics

1.3% 3.8% 9.1% 1.3%

2.5% 3.0% 9.0% 1.1%

3.6% 1.9% 8.6% 1.7%

APARTMENT MARKET FORECAST

ABSORPTION will sustain momentum in the second half of 2011. The combination of still declining home ownership rates and a high percentage of job gains going to young adult age cohorts will sustain occupancy demand through lulls in the recovery at a rate of roughly 33,000 units per quarter. RENTAL RATES will continue to increase with little supply-side pressure in place or on the horizon to impede growth. Effective rent gains are expected to increase 3.8% on average in 2011, well ahead of 2.8% in asking rent gains as concessions continue to evaporate. CONSTRUCTION will lag demand over the next several years. Well located multifamily developments are only now starting to be able to acquire financing, although a handful of markets have seen higher concentration of starts in 2011, including Seattle, Minneapolis, Oakland, Austin and Suburban Maryland. U.S. ECONOMIC INDICES

OVERVIEW

Corporate earnings it is profits remain asking rates have skyrocketed. Up 36.2% from a In this environment, and no surprise thatstrong, but the prevailing uncertainty amidst of the federal debt ceiling debates, a very weak single-family housing market, high energy year ago, Manhattans overall total average asking rent closed the first half of 2007 at costs and the still unknown impact of the European debt troubles have translated into a another record-high: $59.17 per square foot Thus far this year, rents have increased by an cautious nervousness that has undermined hiring plans. Net job gains slowed to a average of $1.44ineach month since January, breaking 25,000 jobs added back during the meager 18,000 June, a further decline from only the old record set in May. All told, second and third quarters ofadded 371,000 jobs in total in the second quarter. private sector employment 2000. The rapid pace of rental rate growth has extended throughout Manhattan. In every submarket but one, overall rents have registered doubledigit percentage increases from a year ago. Chelsea, up 4.2%, was the only exception. On a cautionary note, however, leasing activity throughout Manhattan was slower during the first two quarters, partially attributable to both significantly higher rents and lack of available space. With 11.8 leased year-to-date, 2007 activity trails last years total through June by 5.4%, with Midtown trailing by nearly 20.0%. This suggests that tenants are possibly beginning to search for lower-priced space in response to landlords hiking up rents throughout the market.

Source: Moodys Analytics

Source: The Conference Board

US MULTIFAMILY REPORT 2Q 2011

Although the unemployment rate increased slightly to 9.2% in June, the U.S. economy has added 1.8 million jobs since February 2010 and unemployment is down from its cyclical peak of 10.1%. Most notably, the BLS estimates that upwards of 75% of employment gains since the beginning of the recovery cycle have been in the 20-34 yearold age cohort, the primary renter demographic, and one of the key reasons why apartment market demand has accelerated ahead of more robust employment gains. After a red hot first quarter with employment gains of 2.8%, West Coast metros (California, Oregon, Washington) saw the sharpest slowdown in the second quarter as job growth registered only 0.4%. High levels of housing foreclosures in the Western part of the country continue to weigh heavily on growth. The Southwest region particularly Oklahoma, Texas and Louisiana - continue to see strong gains, with Houston, New Orleans and Austin now expected to see the strongest employment growth in 2011. Given the strong investment in equipment and software, metro areas with strong concentrations of technology firms are also expected to outperform. Forecast: Despite the numerous grey clouds currently dotting the sky, the forecast horizon still looks bright. The disruptions to the global supply chain that resulted from Japan's earthquake are expected to ease in the second half of 2011 - in fact, automotive manufacturers in the Southeast and Midwest are already beginning to increase production and a return to positive growth in the manufacturing sector will again be a momentum-building contributor to a more sustained recovery in the second half of the year (as it was in 2010). The Conference Board's Leading Indicators index increased in May and June, pointing towards renewed expansion in the second half of the year. Notably, consumer expectations and stock prices were two negative components of the index. While the recovery currently feels tenuous in this "soft patch" period, underlying economic fundamentals are positive and continue to show signs of strengthening. Credit conditions have also continued to improve from gains in the first quarter, with interest rates remaining near historical lows. The resolution of the debt limit crisis will serve as a key first step in injecting much needed confidence into the mindset of corporate employers. The employment outlook is still positive for the second half of 2011, although the forecast hiring activity was downgraded to an estimated 200,000 net jobs per month. Barring any external shocks to the economy, GDP in the third and fourth quarter is expected to return to levels between 3.5% and 4.0%.

MULTIFAMILY HOUSING PERMITS VS. STARTS VS. COMPLETIONS, SAAR

Source: Census Bureau

SINGLE-FAMILY HOME PRICES

Source: NAR, Census Bureau

HOUSING METRICS
The protracted weakness in the single-family housing market continues to be a drag on overall U.S. economic performance and has played a significant role in undercutting the confidence levels of businesses and consumers. There were subtle bright spots in recent data that point to stabilization, although the consensus is that the overall market remains at the bottom of a "double dip". The pace of new home sales remains near record lows, declining to an annual rate of 312,000 units in June, consistent with monthly levels throughout the first half of 2011. The pace of existing home sales did not fare much better, dipping to an annual rate of 4.77 million units in June, its lowest level since November. Months of supply for existing homes on market has steadily increased from the beginning of the year, from 7.5 months in January to 9.5 months in June. Median home prices for both new and existing homes increased over the course of the quarter to $234,400 and $184,300, respectively, although these increases may largely be a function of the dwindling number of sales than any measurable appreciation in prices. However, the S&P Case-Shiller Home Price Index also increased in both April and May, the first such increase in the index since the homebuyer tax credit in Spring/Summer of 2010. US MULTIFAMILY REPORT 2Q 2011

NEW & EXISTING SINGLE-FAMILY SALES VOLUME

Source: NAR, Census Bureau

On a year-over-year basis, foreclosure activity was down nearly 29% in June, although the number of foreclosures increased roughly 7% month-to-month. As the backlog of foreclosures that resulted from the suspensions of foreclosure processing by large mortgage servicers begin to work their way to the market, the number of foreclosures is expected to increase over the course of 2011 and will continue to put downward pressure on prices and add additional supply to the market. California remains the hardest hit among U.S. states, accounting for nearly 25% (54,000) of new foreclosures in June, followed by Florida (23,800) and Arizona (13,500). Forecast: Slivers of light are beginning to show in the housing market outlook: pending homes sales have increased for two consecutive months and homebuilding contributed positively to GDP growth for the second time in the last three quarters. Given the persistently low mortgage rates, high levels of housing affordability and slow improvement in the availability of credit to potential home buyers, conditions are in place for a moderate recovery in housing at the first sign of renewed hiring and lifting of uncertainty from the economic recovery.

COMPLETIONS VS. NET ABSORPTION VS. VACANCY RATES

Source: REIS

APARTMENT MARKET

The slowdown in the overall economy slightly dampened the torrid pace of the recovery in U.S. apartment market metrics in the second quarter. As reported by REIS, demand translated into just under 42,000 units of positive absorption, slightly below the pace of both the previous quarter and second quarter of last year. With occupancy gains of nearly 85,800 units year-to-date, overall vacancy rates declined to 5.9% at mid-year, representing a 210 basis point (bp) decline over a five-quarter span. Sun Belt markets across the Southeast and Southwest have seen the strongest yearover-year recoveries in occupancy, with Charleston, Austin, Greensboro, Charlotte, Jacksonville, Orlando, Phoenix, Dallas and Las Vegas all recording improvements in vacancy between 300 and 400 bps over the previous 12 months. Metros in Texas all continue to outperform, with Austin, Dallas, Fort Worth, Houston and San Antonio collectively accounting for nearly 21% (64,569 units) of total U.S. apartment absorption since the beginning of 2010, more than 50% above their pro rata share, as these metros only account for 14% of total U.S. apartment inventory. Rent growth continues to accelerate, with overall U.S. averages for both asking ($1,053 per unit) and effective ($997 per unit) rents tallying their strongest quarter-toquarter increase (0.6%) since mid-2008. The strongest quarterly increases in effective rents occurred in the Bay Area, where sub-4.0% vacancy rates in San Jose and San Francisco contributed to effective rent gains of 2.0% and 1.3%, respectively. Gains in the greater New York area also continue to accelerate, with Manhattan effective rents increasing 1.0% and suburban areas, Westchester (+1.5%), Long Island (+1.3%) and Fairfield County (+1.2%), increasing even faster. The rapid acceleration in rental rates is also having the effect of pushing a larger share of tenant demand to class B/C properties. Second quarter absorption in class B/C properties (23,341 units) eclipsed occupancy gains in class A properties (16,833 units), helping push class B/C vacancy rates down 40 bps to 6.1%. Class A vacancy rates currently stand at 5.6%. Apartment rent growth has been slowest in metros in Southern California and Florida, not coincidentally areas with some of the highest foreclosure pipelines in the country. Although tenant demand has returned and vacancy rates have declined in these markets, single-family home rentals and cheaply priced distressed home sales continue to compete with apartment renter demand, keeping downward pressure on rental rate gains.

ASKING VS. EFFECTIVE RENTS

Source: REIS

NEW APARTMENT CONSTRUCTION

Source: REIS

US MULTIFAMILY REPORT 2Q 2011

Development continues to lag well behind the improvement in demand, as only 15,760 units were delivered in the first half of 2011. Just over 40,300 units are expected to be completed this year, which would represent less than 50% of last year's total and by far the lowest total in more than a decade. The slow emergence of more debt and financing options for multifamily development projects will allow for some developments to move forward, particularly those in well-located, high growth areas. Multifamily permitting (as measured by the Census Bureau, which includes condos) increased 20% in May and an additional 7% in June to an annual rate of 217,000 units, the highest level since mid-2008. However, only roughly 14,000 of the nearly 65,000 apartment units currently under construction across the country are estimated to have broken ground in 2011. Notably, nearly one-third of the total units under construction are concentrated in two regions of the country. Nearly 10,000 units are currently underway in the region of the nations capital, including Baltimore, Suburban Maryland, Suburban Virginia and Washington, DC. The nearly 3,000 units under construction in the District are the highest percentage of units under construction as a percentage of existing inventory in the U.S. Five metros in the state of Texas (listed earlier) collectively account for an additional 11,400 units. Forecast: Despite the prevailing sluggish economic conditions, prospects continue to look bright for sustained strong apartment demand. Homeownership rates continued to fall in the second quarter, a by-product of a large pipeline of foreclosures still being worked out, constrained access to credit for potential homebuyers, and a general lack of confidence in the economy and housing markets that has steered an unprecedented level of households to renting versus owning their home. The high concentration of new jobs going to young adults (age cohort 20-34 years old) is also allowing for an unbundling effect, as those previously living with parents and/or roommates are beginning to enter the renter market, and this trend will only accelerate when employment growth resumes in earnest.

Source: REIS

APARTMENT TRANSACTION VOLUME

CAPITAL MARKETS

Total U.S. real estate investment volume surged to $80 billion in the first half of 2011, with June alone producing the most active month since late 2007. The continued improvement in apartment market fundamentals has led to easing of underwriting requirements and improved access to financing for apartment transactions. Sales volume for U.S. apartments totaled $22.9 billion in first half of 2011, with the $13.9 billion of transactions in the second quarter representing more than double the volume of second quarter 2010 and the highest quarterly total since first quarter 2008. UDR, Inc. and Equity Residential continued to be the most active buyers in the market, with a focus on mid/high-rise properties in core urban markets. Notable transactions in the quarter by Equity Residential included Pegasus ($100M, 4.3% cap) in downtown Los Angeles, 1500 Massachusetts ($95M) in Washington, DC and the Clarendon Apartments ($130M) in Arlington, VA. Meanwhile, UDR, Inc. completed its swap of assets with Avalon Bay, acquiring Avalon Woburn ($108M) and Avalon at Crane Brook ($64.5M) in Boston and Towers By The Bay ($90.5M) in San Francisco. Brokered by Cushman & Wakefield and MAC Realty Advisors, UDR, Inc. also acquired View 14 in Washington, DC for a near record high price per unit of over $567,500 ($105M). As anticipated, sub-5.0% cap rates and a highly competitive bidding environment have begun to shift investor interest outside of the New York and Washington, DC areas that have dominated transaction volume over the past twelve months. San Francisco, Boston and Chicago each saw apartment sales volume increase in excess of 450% in the first half of 2011. Sales velocity in secondary markets has also dramatically increased, with Atlanta, Oakland, Philadelphia, Northern New Jersey, US MULTIFAMILY REPORT 2Q 2011

Source: Real Capital Analytics

PRICING VS. CAP RATES - GARDEN

Source: Real Capital Analytics

Charlotte and Seattle all seeing volume increase by more than 200%. Highlighting the intense interest in well-located properties, Cushman & Wakefield recently managed the marketing and sale of the 131-unit Kearny Plaza Apartments in the Pearl District in downtown Portland, which sold at 120% of the anticipated price in a mere 60 days (to JP Morgan Asset Management, $36.9M, 4.8% cap). Second quarter transaction volume for garden apartments was nearly 80% higher than mid/high-rise transactions, totaling $9.0 billion. This was the strongest quarterly total for garden apartment transactions since first quarter 2008. Average cap rates remained flat in the quarter at 6.8%. Interest in garden properties in Los Angeles remains high with an estimated $771 million in transactions closed in the quarter, bringing the year-todate total to $1.3 billion. Top deals in Los Angeles in the second quarter included AIMCO's acquisition of the 698-unit Malibu Canyon in Calabasas ($156.3M, 5.3% cap) and Essex Property Trust acquiring the 373-unit Arbors at Parc Rose in Oxnard ($92M). Atlanta also saw a significant increase in garden property sales, with nearly $746.5 million in transactions in the second quarter after only $154.7 million in the first quarter. Equity fund Area Property Partners were especially active, acquiring three Atlanta properties (valued at $150.6M) as part of a 10-property portfolio sale with ECI Group, Edgewater at Sandy Springs ($38M) from Aslan Realty and distressed asset Columns at White Oak ($33.1M) in a joint venture with ECI Group. Volume for mid/high-rise properties increased to $4.9 billion in the second quarter, more than double the volume in the same period last year. The $18.1 billion in mid/high-rise transactions over the previous four quarters is the strongest such period since 2007. San Francisco saw a dramatic upswing in mid/high-rise apartment transactions in the quarter, with year-to-date volume totaling $622.2 million. Dutch pension fund PGGM's joint venture with Behringer Harvard closed one of the largest deals, acquiring the 179-unit Argenta for $94 million. However, small to mid-size distressed asset portfolio sales dominated transaction activity in San Francisco, as remnants of the bankrupt Lembi Group's portfolio were the source of two portfolio deals, with Veritas Investments acquiring 346 units across eight properties for $55 million and local investor Flynn Investments acquiring two Nob Hill properties, also for $55 million. Additionally, Area Property Partners acquired a 396-unit, 20-property portfolio of distressed LNR assets on behalf of the Winthrop Realty Trust for an estimated $60 million. The CMBS market continues to exhibit a bevy of mixed signals. U.S. CMBS issuance volume reached $15.9 billion in the first half of 2011, surpassing all global issuance in 2010. Moody's Investor Services reported delinquency rates (60+ days) for overall CMBS loans declining for the third consecutive month in June to 9.02%, with Morningstar reporting consecutive declines in delinquent unpaid balances for two consecutive months in May and June. However, Fitch Ratings reported a second quarter spike in delinquency (fixed rate, 60+ days) of 228 bps to 12.9% and Trepp's July delinquency report, released as this report was going to press, echoed this increase, reporting a similar spike of 51 bps in delinquency (30+ days) to 9.88%, a new record high. Notably, Real Capital Analytics is also reporting CMBS lenders - which account for nearly 50% of outstanding distressed apartment assets ($16.9B) - were the only lender type to not reduce their outstanding balances of distressed assets in the second quarter. Currently, CMBS lenders have only worked out 33% of their distressed asset balances, compared to an average of 48% among all lender types. Forecast: The emergence of a more competitive lending market for multifamily investments and a willingness to provide construction financing for select development projects bodes well for continued momentum in apartment investment activity. Apartment properties continue to exhibit the clearest signs of turnaround, with the appreciation return in NCREIFs Apartment Property Price Index tallying a 15.1% yearover-year increase in the second quarter, well above the next closest property type. US MULTIFAMILY at 8.7%). 2Q 2011 performance (office REPORT

PRICING VS. CAP RATES MID/HIGH-RISE

Source: Real Capital Analytics

NET CHANGE TO APARTMENT HOLDINGS

Source: Real Capital Analytics

APARTMENT VOLUME BY MARKET

Source: Real Capital Analytics

MARKET STATISTICS

Market/Submarket NORTHEAST REGION Boston Central New Jersey New York Northern New Jersey Philadelphia MID-ATLANTIC REGION District of Columbia Suburban Maryland Suburban Virginia MIDWEST REGION Chicago SOUTHEAST REGION Atlanta Fort Lauderdale Miami Orlando Tampa-St. Petersburg SOUTHWEST REGION Dallas Fort Worth Houston Phoenix WEST REGION Denver Los Angeles Oakland-East Bay Orange County San Diego San Francisco Seattle Source: REIS UNITED STATES

Overall Vacancy Rate 4.4% 3.5% 2.8% 4.4% 4.7% 5.3% 4.9% 4.6% 5.1% 8.7% 5.8% 5.4% 7.8% 6.9% 7.0% 7.9% 9.7% 8.3% 5.4% 4.4% 4.2% 4.7% 3.7% 3.8% 5.0% 5.9%

YOY Chg Vacancy (bps) (180) (60) (30) (80) (160) (110) (170) (130) (150) (260) (180) (80) (320) (290) (300) (290) (270) (320) (270) (110) (130) (170) (120) (120) (190) (190)

YTD Net Absorption 1,456 935 2,914 1,393 1,536 540 809 1,206 2,520 3,062 698 614 1,143 1,573 5,173 1,698 5,566 3,315 1,948 4,048 808 1,528 1,008 735 2,045 85,791

Asking Rent YOY Change ($/month) Rent $1,754 $1,167 $2,878 $1,524 $1,044 $1,454 $1,309 $1,504 $1,076 $853 $1,120 $1,089 $876 $844 $834 $729 $795 $758 $915 $1,401 $1,359 $1,521 $1,350 $1,888 $1,046 $1,053 2.2% 1.7% 4.3% 2.2% 2.4% 2.5% 2.7% 3.8% 1.6% 1.3% 1.3% 1.2% 1.4% 1.6% 1.7% 2.0% 1.4% 1.1% 3.2% 0.6% 1.9% 1.7% 1.4% 3.8% 2.2% 2.0%

For industry-leading intelligence to support your real estate and business decisions, go to Cushman & Wakefields Knowledge Center at www.cushmanwakefield.com/knowledge

Maria Sicola Executive Managing Director, Research Services maria.sicola@cushwake.com (415) 773 3542

Steve Weilbach Senior Managing Director, National Head Of Multifamily Steve.weilbach@cushwake.com (415) 773 3510

This report contains information available to the public and has been relied upon by Cushman & Wakefield on the basis that it is accurate and complete. Cushman & Wakefield accepts no responsibility if this should prove not to be the case. No warranty or representation, express or implied, is made to the accuracy or completeness of the information contained herein, and same is submitted subject to errors, omissions, change of price, rental or other conditions, withdrawal without notice, and to any special listing conditions imposed by our principals. 2011 Cushman & Wakefield, Inc. All rights reserved.