Market Analysis Presented by: Chris Macke, Senior Strategist, Americas Research

November 27, 2012

Agenda I.

Why Do Market Analysis

II. Key Market Analysis Assumptions/Questions III. Applications Example – Market Supply/Demand for Inland Empire Industrial Acquisition IV. Market Analysis Drives The Property Pro Forma Example – 2008 Office Offering Memorandum

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I. Why Do Market Analysis? • Owner/Investor reason #1 NOI’s (Fundamentals)

Value Cap Rates (Capital Markets)

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I. Why Do Market Analysis? • Owner/Investor reason #2 NOI’s (Fundamentals)

Yield Value/ Purchase Price

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II. Key Market Analysis Assumptions/Questions • Timeframe • Geography • Variables How determine?

Source: University of Chicago, Booth School of Business and Dr. Glenn Mueller CBRE | Page 5

II. Key Market Analysis Assumptions/Questions What question are you trying to answer? • Should I give the prospect 3 months free rent requesting? • Should I open a store in this submarket or that submarket? • How many units should I build this year? • When will I need to widen that ride? • What price should I pay for that building?

Source: University of Chicago, Booth School of Business and Dr. Glenn Mueller CBRE | Page 6

III. Application Where and what do I invest in?

“I’m starting to hear multifamily is overheating”

“Tech and energy markets are the only places to be”

“Nobody gets fired for buying multifamily”

“Is it safe to buy in Southern California?”

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“Blackstone is buying Midwest office,”

“Only buy in gateway markets”

“Don’t buy retail “Gateway markets are whatever you do!” overpriced, Texas is the place to be”

III. Application Should I buy this building? At what price?

“What if my biggest tenant doesn’t renew?”

“Can our leasing team really get it to 90%?” “Where will cap rates be in 5 years?”

“It’s got some vacancy Is that an opportunity or risk?” “The price is back to 2007 levels. Am I overpaying?

“How long will it take to lease up the vacant space?”

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“What is the historical market and property availability?”

“Will rents really grow that much?”

Example – Market Supply/Demand Leases Signed:

Bldg A

Bldg B

2005-2007

75%

25%

2008 – Current

25%

75%

Both assets listed at same cap rate – Should they be? Either Asset A is overpriced or Asset B is underpriced How much?

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Peak-to-Current

% Decline

Submarket A

-7%

Submarket B

-17%

Submarket C

-27%

Example – Market Supply/Demand • Inland Empire Industrial

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Example – Market Supply/Demand • Anything noteworthy? Market Fundamentals data as of Q1 2012

Year

Stock Completions (SF x 1000) (SF x 1000)

Availability Net Gross Net Rate Absorption Asking Rent Asking Rent (%) (SF x 1000) ($/SF) ($/SF)

2010.1

349,214

57

16.20

-1,220

5.36

4.19

2010.2

349,214

0

16.00

651

4.98

4.03

2010.3

349,214

0

15.40

2,002

5.11

4.02

2010.4

349,881

667

14.70

3,043

5.17

3.98

2011.1

350,441

560

13.10

5,962

5.15

3.95

2011.2

350,441

0

12.40

2,586

5.42

4.05

2011.3

350,441

0

11.80

2,173

5.38

4.09

2011.4

352,261

1,820

11.70

1,789

5.33

4.08

2012.1

352,953

692

12.10

-645

5.27

4.10

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Example – Market Supply/Demand • Anything else? Market Fundamentals data as of Q1 2012

Year

Stock Completions (SF x 1000) (SF x 1000)

Availability Net Gross Net Rate Absorption Asking Rent Asking Rent (%) (SF x 1000) ($/SF) ($/SF)

2010.1

349,214

57

16.20

-1,220

5.36

4.19

2010.2

349,214

0

16.00

651

4.98

4.03

2010.3

349,214

0

15.40

2,002

5.11

4.02

2010.4

349,881

667

14.70

3,043

5.17

3.98

2011.1

350,441

560

13.10

5,962

5.15

3.95

2011.2

350,441

0

12.40

2,586

5.42

4.05

2011.3

350,441

0

11.80

2,173

5.38

4.09

2011.4

352,261

1,820

11.70

1,789

5.33

4.08

2012.1

352,953

692

12.10

-645

5.27

4.10

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Example – Market Supply/Demand • What are the implications? Market Fundamentals data as of Q1 2012

Year

Stock Completions (SF x 1000) (SF x 1000)

Availability Net Gross Net Rate Absorption Asking Rent Asking Rent (%) (SF x 1000) ($/SF) ($/SF)

2010.1

349,214

57

16.20

-1,220

5.36

4.19

2010.2

349,214

0

16.00

651

4.98

4.03

2010.3

349,214

0

15.40

2,002

5.11

4.02

2010.4

349,881

667

14.70

3,043

5.17

3.98

2011.1

350,441

560

13.10

5,962

5.15

3.95

2011.2

350,441

0

12.40

2,586

5.42

4.05

2011.3

350,441

0

11.80

2,173

5.38

4.09

2011.4

352,261

1,820

11.70

1,789

5.33

4.08

2012.1

352,953

692

12.10

-645

5.27

4.10

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Example – Market Supply/Demand • Future value? NOI’s (Fundamentals)

Value Cap Rates (Capital Markets)

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Example – Market Supply/Demand • Future yields? NOI’s (Fundamentals)

Yield Value/ Purchase Price

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Example – Market Supply/Demand Leases Signed:

Bldg A

Bldg B

2005-2007

75%

25%

2008 – Current

25%

75%

Both assets listed at same cap rate – Should they be? Either Asset A is overpriced or Asset B is underpriced How much?

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Peak-to-Current

$ Decline

% Decline

Inland Empire

$-12.27

-13%

San Bernardino

$-4.81

-17%

Chino

$-5.24

-18.6%

IV. Market Analysis Drives The Property Pro Forma • Is this a good deal? SUMMARY: Year Sq. Ft. Price Debt Equity 1. INCOME: Rent/SF Rent G: Rate Vacancy Rate Residual Cap Rate Spread (Bps) Year Gross Rent Less: Vac: Net Rent Less: DS Operating Income 4. Returns CBRE | Page 17

100,000 $12,857,143 $9,000,000 $3,857,143 2. DEBT: $10LTV 2%Term 10%Amortization 0.01

0

70%Index 10 Spread (bps) 25Rate Mortgage Constant

1 2 $1,000,000 $1,020,000 -$100,000 -$102,000 $900,000 $918,000 -$749,598 -$749,598 ($3,857,143) $150,402 $168,402 Cash on Cash 4% 4% IRR 11%

3. PRICE: 3.30%Cap Rate: 3.50% 7.0% 6.80% 8.33%

3 4 $1,040,400$1,061,208 -$104,040 -$106,121 $936,360 $955,087 -$749,598 -$749,598 $186,762 $205,489 5%

5%

5 $1,082,432 -$108,243 $974,189 -$749,598 $224,5914. 6%

IV. Market Analysis Drives The Property Pro Forma • It depends 1st ….on the OM’s assumptions SUMMARY: Year Sq. Ft.

100,000

Price

$12,857,143

Debt

$9,000,000

Equity

$3,857,143

1. INCOME:

3. PRICE: 3.30%Cap Rate: 7.0% 3.50%

2. DEBT:

$10LTV 2%Term 10%Amortization

Rent/SF Rent G: Rate Vacancy Rate Residual Cap Rate

70%Index 10

Spread (bps)

25Rate

0.01

6.80%

Mortgage

Spread (Bps)

8.33%

Constant

0

1

2

3

4

5

Gross Rent

$1,000,000

$1,020,000

$1,040,400

$1,061,208

$1,082,432

Less: Vac:

-$100,000

-$102,000

-$104,040

-$106,121

-$108,243

Net Rent

$900,000

$918,000

$936,360

$955,087

$974,189

Less: DS

-$749,598

-$749,598

-$749,598

-$749,598

-$749,598

$150,402

$168,402

$186,762

$205,489

$224,5914.

4% 11%

4%

5%

5%

6%

Year

Operating Income

4. Returns CBRE | Page 18

($3,857,143)

Cash on Cash IRR

IV. Market Analysis Drives The Property Pro Forma • Adjust the OM’s assumptions

Variable

Rent G: Vacancy Absorption Probability to Renew ??? ??? ??? CBRE | Page 19

OM Assumptions

Mkt. History

Mkt. Forecast

Adjustment to OM Assumptions

IV. Market Analysis Drives The Property Pro Forma

SUMMARY: Year Sq. Ft.

100,000

Price

$12,857,143

Debt

$9,000,000

Equity

$3,857,143

1. INCOME:

3. PRICE:

2. DEBT:

Rent/SF Rent G: Rate Vacancy Rate

10%Amortization

Residual Cap Rate

0.01

$10LTV

70%Index

2%Term

10

3.30%Cap Rate:

Spread (bps)

3.50%

25Rate

6.80%

Mortgage

Spread (Bps)

7.0%

8.33%

Constant

0

1

2

3

4

5

Gross Rent

$1,000,000

$1,020,000

$1,040,400

$1,061,208

$1,082,432

Less: Vac:

-$100,000

-$102,000

-$104,040

-$106,121

-$108,243

Net Rent

$900,000

$918,000

$936,360

$955,087

$974,189

Less: DS

-$749,598

-$749,598

-$749,598

-$749,598

-$749,598

$150,402

$168,402

$186,762

$205,489

$224,5914.

4% 11%

4%

5%

5%

6%

Year

Operating Income

4. Returns CBRE | Page 20

($3,857,143)

Cash on Cash IRR

IV. Market Analysis Drives The Property Pro Forma • Adjust the OM’s assumptions

Variable

Rent G: Vacancy Absorption Probability to Renew

Value

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OM Assumptions

Adjusted Assumptions

Delta

Why Adjusted/ Not Adjusted?

Example - 2008 Office OM

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Example - 2008 Office OM  Leases • What percentage of income expires in next seven years? • What will vacancy rates being doing over next five years? • Where are my in place lease rates vs market rates? • The Argus run shows 3% rent growth for next ten years, is that realistic in this market? • The Argus runs show building occupancy reaching 95%, what is historical market occupancy? • The OM says no new buildings under construction, is that correct?

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Example - 2008 Office OM  Leases • What percentage of income expires in next seven years? 6.5% • What will vacancy rates being doing over next five years? -680Bps • Where are my in place lease rates vs market rates? • The Argus run shows 3% rent growth for next ten years, is that realistic in this market? • The Argus runs show building occupancy reaching 95%, what is historical market occupancy? • The OM says no new buildings under construction, is that correct?

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Example - 2008 Office OM  Leases • What percentage of income expires in next seven years? 6.5% • What will availability rates being doing over next five years? ? -680Bps

• Where are my in place lease rates vs market rates? • The Argus run shows 3% rent growth for next ten years, is that realistic in this market? • The Argus runs show building occupancy reaching 95%, what is historical market occupancy? • The OM says no new buildings under construction, is that correct?

 Acquisition & Exit • What is the market cap rate? • What is cap rate trend since the market bottom? • Where is pricing today compared to peak of the market – cap rates and prices PSF? CBRE | Page 25

Example - 2008 Office OM

In-Place Rents Are 7.1% higher than market rents

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Example - 2008 Office OM  Leases • What percentage of income expires in next seven years? 6.5% • What will availability rates being doing over next five years? • Where are my in place lease rates vs market rates? 7.1% higher • The Argus run shows 3% rent growth for next ten years, is that realistic in this market? • The Argus runs show building occupancy reaching 95%, what is historical market occupancy? • The OM says no new buildings under construction, is that correct?

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Example - 2008 Office OM

What is greatest amount that rents have ever gone up from peak-totrough in this submarket? How much are they projecting rents to go up from the “tech wreck” trough?

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Example - 2008 Office OM

In-Place Rents Are 2.2% higher than competitive set rents CBRE | Page 29

Example - 2008 Office OM

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Example - 2008 Office OM

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Example - 2008 Office OM

Subject Property

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2008 Office OM

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2008 Office OM

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2008 Office OM

A B C D

All the same building

All the same building

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2008 Office OM

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2008 Office OM

Building took everyone from

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2008 Office OM

Building took everyone from

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Example - 2008 Office OM

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Christopher Macke Chris comes to CBRE with more than 20 years of real estate experience. His experience includes real estate development, financing, acquisitions and advising various regulatory agencies. He is a Senior Real Estate Strategist for the Investment Consulting group within the America’s Research team. Chris delivers investment opinions and insights to institutional investors with the aim of helping them develop a “house view.” Chris holds a B.A. in Political Science from the University of Southern California, where he specialized in political campaign strategy and finance. He earned a Masters of Business Administration from Indiana University’s Kelley School of Business specializing in Finance. [email protected]

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