Presentation on Eocnomic Trends and Real Estate Markets to the Appraisal Institute of Denver August 2005

1. Capital,
Condos,
and
Mr. Greenspan's
Conundrum
Notes on
the Current
and Future
Real Estate
Capital and
Transaction
Environment
Peter C. Burley, CRE
Vice President Market Research
Simpson Housing LLLP
for the
Colorado Chapter of the Appraisal
Institute

2. Real Estate has Been Great the Past Few Years
Year-Year Returns Are Good
Transaction Volume is at Record Highs
Capital is Abundant
All DESPITE THREE YEARS of WEAK FUNDAMENTALS

3. Commercial Property Transactions At A Record
$62 bil. in Q2
70 Up 50% YTD
Volume Closed Transactions ($ billions) from 2004
60
50
40
30
20
10
0
3 :1 4 :1 5 :1
00 '2 00 '2 00
'2
Source: Real Capital Analytics

4. Commercial Transactions Jump Across the Board
45000
Transaction Volume ($ bil.)
40000
35000 +64% +48%
30000
25000 +10%
20000
+88%
15000
10000
5000
0
Apartments Industrial Office Retail
Source: Real Capital Analytics

5. Record New and Existing Home Sales
New Record in Q2
Including an 8.54 mil
Unit Rate in June Alone
8000 Units (Qtr, SAAR)
7000
6000
5000
4000
3000
New Homes
2000 Existing Homes
1000
0
Q3 Q2 Q1 Q4 Q2
02 03 04 04 05
20 20 20 20 20
Source: NAR; Bureau of Census; Economy.com

6. Who is Buying
Commercial
Pension Funds
REITs
Foreign Investors
Private Companies
Residential
Homeowners
Private Investors

7. What's Driving the Activity ?

8. Uncertainty.
Low Yields Elsewhere.
Easy Access to Capital.

9. Stocks Have Been Rangebound
S&P 500 (Index 1941-43=10)
1260
1240
1220
1200
1180
1160
1140
1120
1100
1080
1060
3 -04 -04 -04 04 04 -05 -05 -05
ec-0 ar ay ug ct- ec- ar ay ug
0-D 2-M 4-M 5-A -O -D -M -M 2-A
3 1 2 15 28 10 20
Source: Standard & Poors; Economy.com

10. Commercial Real Estate Outperforms Other Markets
DJIA
S&P500
NASDAQ
MS REIT Index
NCREIF Index*
-4 -2 0 2 4 6 8 10 12 14 16
% Return Through Mid-June 2005
Source: Urban Land Institute
* Trailing 12-month through 3/31/2005

11. NOI Has Contributed Nothing to Commercial Property Returns
12
3 Year Average, %
10.2
10
8
3 Yr Return 5.8
6
4.5
4
Yield Cap Rates
2
NOI
0
-0.2
-2
Source: Torto Wheaton Research, Investment Database

12. Originators Have Ample Capital Available,
and Rates Are Extremely Competitive
800
CMBS Trading Spreads above 10Yr Treasuries (bp)
700
600
500
400
300
200
100
0
4 11 13 31 31 -70
-22 -35
-100
ry -
AA
A AA A
BB
B B BB B
re as u BB
T
- Yr
10 Source: Morgan Stanley; ULI

13. CMBS Issuance Continues to Rise
140000
Issuance ($ mil.)
120000
100000
80000
60000
40000
20000
0
2000 2001 2002 2003 2004 2005 (ytd)
Source: Commercial Mortgage Alert; ULI

14. REIT Growth Has Been Impressive
350
REIT Industry Market Cap ($ bil.) 320.8
305
300
250
200
150 139
100
50
0
2000 2004 2005(ytd)
Source: NAREIT

15. - Are long-term yield levels
still a "conundrum"?
- Can the current nationwide housing market
be categorized as a bubble?

16. Is This a Conundrum?
Spreads Have Narrowed; The Yield Curve Has Flattened
5 %
4.5
4
3.5
2001
3 2005
2.5
2 2002
1.5 2004
2003
1
90-Day Bill 1 Yr 2 Yr 5 Yr 10 Yr
Source: Economy.com

17. Long Term Yields Aren't Moving Much Higher
18
%
16
14
12
10
10-year Treasury
8
6
4
2
Fed Funds
0
1976Q1 1981Q1 1986Q1 1991Q1 1996Q1 2001Q1
Source: Economy.com

18. Mortgage Rates are About as Low as They Have Ever Been
16 (%)
14
12
10 Average 30-Yr Conventional
8
6
Avg 1-Yr Adj
4
2
1984M1 1988M3 1992M5 1996M7 2000M9 2004M11
Source: Economy.com

19. A Brief Look at Apartments and Condos

20. Apartment Share of Commercial Transactions
Has Grown from 22% in 2002 to About 30% in 2005
From 2000-2005 over $130 billion in Apartment
Transactions - About 6,100 properties
Hottest Markets Have Been California, Florida,
Nevada, DC Metro - Represent 45% of Apartment
Transactions, Up from 30% in 2002

21. Following the Money to Apartments
Cap Rate (%) Q1:2005
10
9.5
CBD Office Sub'n Office
9
8.5
Malls
8
R&D
7.5
Multifamily
7
6.5
1998:4 1999:4 2000:4 2001:4 2002:4 2003:4 2004:4 2005:1
Source: RERC; ULI

22. Bigger is Better
Larger Properties in Larger Markets Trade at Lower Yields
8
Average Cap Rate (%)
7
6
5
Third Tier Markets
Secondary Markets
Primary Markets
4
3
2
1
0
$30 mil + $15-30 mil $5 - 15 mil
Source: Real Capital Analytics

23. Condo Conversions
Have Exceeded New Apartment Deliveries For Two Quarters
35000
Units
30000
New Completions Conversions
25000
20000
15000
10000
5000
0
3:01 3:02 3:03 3:04 4:01 4:02 4:03 4:04 5:01 5:02
Source: Reis Inc

24. Sales to Condo Converters As a Share of All Apartment Sales
Share of All Apartment Sales (%)
35
30
25
20
15
10
5
2003:1 :2 :3 :4 2004:1 :2 :3 :4 2005:1 :2
Source: Real Capital Analytics

25. Leading Condo Conversion Markets
Miami
Las Vegas
San Diego
Orlando
2004
Tampa 2005 (ytd)
DC Metro
Phoenix
Chicago
LA
0 2000 4000 6000 8000 10000 12000
Units
Source: Real Capital Analytics

26. Condo Conversions are Picking Up in Denver Too
2500 Units
2000
1500
1000
500
0
2003 2 3 4 2004 2 3 4 2005 2
Source: Reis Inc

27. Housing Market Activity in Denver

28. The Denver Market Looks Like Elsewhere
45
Existing Single Family Home Sales (Ths., SAAR)
40
35
30
25
20
15
10
5
0
2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2
Q4 Q
94 1995 1995 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005
19
Source: Economy.com

29. Prices Are Rising Faster in Denver
Median Existing Home Price (Ths., SAAR)
260
240
220
200 Denver
180
US
160
140
120
100
1995Q1 1996Q2 1997Q3 1998Q4 2000Q1 2001Q2 2002Q3 2003Q4 2005Q1
Source: Economy.com

30. Affordability is A Bit Less in Denver
Affordability (Index)
170
160
150
US
140
130
Denver
120
110
5Q
1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
9 96 97 98 00 01 02 03 05
19 19 19 19 20 20 20 20 20
Source: NAR; BOC; BEA; Economy.com

31. Concerns About Current Trends

32. Outlook for A Strong Economy
and Low Mortgage Rates
Suggests A Solid Owner Market for Housing
in the Near Term
However,
Buyer and Investor Leverage
Pose Some Downside Risk

33. The Share of Adjustable Rate Mortgages is Increasing
Percent of All Mortgage Borrowers with Adjustable Rates
60
55
50
45
40
35
30
25
20
15
10
5
1995M1 1996M9 1998M5 2000M1 2001M9 2003M5 2005M1
Source: FHFB; Economy.com

34. Homeowners Are Highly Leveraged
Household Financial Obligations Ratio (% if Dis Income)
16.5
16
15.5
15
14.5
14
13.5
13
1980Q1 1985Q1 1990Q1 1995Q1 2000Q1 2005Q1
Source: Economy.com

35. Investor Purchases Are Increasing
10
% Mortgage Originations
8
6
Second Homes
Investor Purchases
4
2
0
2001 2004 2005 (Thru April)
Source: LoanPerformance; Economy.com

36. Look for Mr Greenspan to Stay the Course
(%)
6.5
6
5.5
10-year Treasury
5
4.5
Fed Funds Rate
4
3.5
3
2.5
2 Q 4 Q 2 Q 4 Q 2 Q 4 Q 2 Q 4 Q 2 Q 4
Q
05 05 06 06 07 07 08 08 09 09
20 20 20 20 20 20 20 20 20 20
Source: FRB; Economy.com

37. Mortgage Rates Will Rise Toward Long Term Averages
Conventional Mortgage Rates (%)
7.5
7
30yr Fixed
6.5
6
5.5
ARM
5
4.5
4
2005M6 2006M4 2007M2 2007M12 2008M10 2009M8
Source: Freddie Mac; Economy.com

38. Prices Will Continue to Rise Faster in Denver
Median Existing Home Price ($Ths)
300
280
260
240
220
200
180
5Q
1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3
0 05 06 06 07 07 08 08 09 09
20 20 20 20 20 20 20 20 20 20
Source: NAR; Economy.com

39. Affordability will Decline
Affordability (Index)
130
125
120
115
110
105
100
95
90
Q 1
5 Q3 6 Q1 6 Q3 7 Q1 7 Q3 8 Q1 8 Q3 9 Q1 9 Q3
05 00 00 00 00 00 00 00 00 00
20 2 2 2 2 2 2 2 2 2
Source: Economy.com

40. Sales Will Ease (hopefully) Down
40
Existing Sales, Units (Ths., SAAR) - Denver MSA
35
30
25
20
15
10
5
0
2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
05Q 005Q 005Q 006Q 006Q 006Q 006Q 007Q 007Q 007Q 007Q 008Q 008Q 008Q 008Q 009Q 009Q 009Q 009Q
20 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2 2
Source: NAR; Economy.com

41. We’ll See