Government Rental Housing Market Outlook

2010: Active in the Halls of Government
• Santa Cruz rental inspection ordinance
• San Jose reduces rent control fees
• San Jose protects owners liability
• Menlo Park goes smoke‐free (sort of)
• Campbell business license tax
• Mountain View scales back relocation program
• Electoral success

Active in the Halls of Government
CAA Tri‐County’s efforts saved rental owners
– $2.00/unit in San Jose
– Burdensome calculations in Campbell
– $38/unit in Santa Cruz
– Liability for a tenant’s unruly behavior
– Posting signs throughout their property

Rental Housing Market Outlook 2011
Steve Seligman
Vice President & Regional Manager
Marcus & Millichap

2011 CAA Tri-County Outlook

Steven Seligman – Regional Manager

EMPLOYMENT TRENDS

U.S. Employment Change by Sector
2010

U.S. Employment Sectors Absolute Change % Change
Education & Health Services 422,000 2.2%
Prof. & Business Services 366,000 2.2%
Leisure & Hospitality 240,000 1.8%
Trade, Transport & Utilities 227,000 0.9%
Manufacturing 136,000 1.2%
Natural Resources & Mining 92,000 13.6%
Other Services 65,000 1.2%
Total Gain 1,548,000
Information (37,000) -1.3%
Financial Activities (72,000) -0.9%
Construction (93,000) -1.6%
Government (222,000) -1.0%
Total Loss (424,000)

Sources: Marcus & Millichap Research Services, BLS

Employment Absolute Change by Metro
Forecast 2011
Top 15 Bottom 15
Markets Abs Chg % Chg Markets Abs Chg % Chg

Washington, DC 85,300 2.9% Las Vegas 14,000 1.8%

New York City 84,000 2.3% Oakland 13,400 1.4%

Dallas-Fort Worth 77,000 2.7% Cincinnati 13,200 1.3%

Houston 65,000 2.6% Kansas City 13,000 1.4%

Los Angeles 56,000 1.5% Salt Lake City 12,000 2.0%

Chicago 52,500 1.3% West Palm Beach 12,000 2.4%

Boston 49,000 2.1% Cleveland 11,000 1.1%

Atlanta 37,000 1.6% Fort Lauderdale 9,500 1.4%

Orange County 36,000 2.6% Sacramento 9,500 1.2%

Phoenix 36,000 2.1% Jacksonville 9,000 1.6%

Seattle-Tacoma 36,000 2.2% Detroit 8,400 0.5%

Austin 28,000 3.6% Tucson 7,800 2.2%

Philadelphia 28,000 1.0% Baltimore 7,376 0.6%

Minneapolis 25,500 1.5% Louisville 7,000 1.2%

Denver 24,000 2.0% Oklahoma City 4,976 0.9%
U.S. Total 2,000,000 1.5% U.S. Total 2,000,000 1.5%

* San Jose: +21,000 (+2.5%), San Francisco: +20,400 (+2.2%)

Employment Trends
Bay Area vs. United States
8% 2000-2008 2009 2010* 2011**
Year-over-Year Percent Change

4%

0%

-4%

-8%
San Jose San Francisco Oakland United States
2009 : -55,900 -59,600 -60,200 -4,740,000
2010* : +7,000 -11,300 -12,000 +1,124,000
2011** : +21,000 +20,400 +13,400 +2,000,000

* Year-end estimate
** Forecast

CAPITAL MARKETS

Recent 10-Year Treasury Movement Reflects the Power of
Market Sentiment, Expectations and Uncertainty
150K+ Monthly Private
Employment Growth
4.00 “Cash for Clunkers” BP Oil
Ends Spill
Euro Debt
3.75 Crisis
Bush-Era Tax
10-Year Treasury Rates

Cuts Extended
3.50 Disappointing Private
Employment Growth
Healthcare Reform Bill
3.25 Signed into Law Retail Sales
Exceed Expectations

3.00
1Q10 U.S. GDP QE2
Revised Down Announced
2.75 To 2.7%

2Q10 China
2.50 GDP Slows
To 10.3% Lower Jobless
Claims
2.25
Se 0
9

Se 9

10

Au 0
M 10
M 0

Ap 0
O 9

D 9

O 0

D 0
Fe 0
N 9

N 0
Ju 0
Ja 9

0
1
l-0

l-0

l-1
1
-1
-0

-1

-1
0

-0

1

-1
1
-0

-1
r-

n-

g-
b-
p-

p-
n-
ov

ov
ar
ct

ct
ay
ec

ec
Ju

Ju

Ju

Sources: Marcus & Millichap Research Services, Federal Reserve

Core Inflation vs. 10-Year Treasury
Core Inflation 10-Year Treasury
20%
Avg. Core Inflation Avg. 10-Year Treasury

15%
Rate

10%

7.21%

4.41%
5%

0%
70

72

74

76

78

80

82

84

86

88

90

92

94

96

98

00

02

04

06

08

10
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20

20

20

20

20

20
Sources: Marcus & Millichap Research Services, Economy.com, Federal Reserve

U.S. Commercial Mortgage
Delinquency Rates by Lender Type
CMBS (30+ days and REO) Life Companies (60+ days)
Fannie Mae (60+ days) Freddie Mac (60+ days)
10% Banks & Thrifts (90+ days)

8%
Delinquency Rates

6%

4%

2%

0%
4Q 997
4Q 998
4Q 99
4Q 000
4Q 001
4Q 002
4Q 003
4Q 004
4Q 005
4Q 06
1Q 007
2Q 008
3Q 008
4Q 008
1Q 008
2Q 009
3Q 009
4Q 009
1Q 009
2Q 10
3Q 010
10
19

20

20

20
1
1

2
2
2
2
2
2

2
2
2
2
2
2
2
2
2

2
4Q

Delinquency rates at the end of each period
Sources: Marcus & Millichap Research Services, Mortgage Bankers Association

Total Commercial/Multifamily Mortgage Debt
Outstanding: $3.2 trillion*

State & Local
Savings Gov't GSEs and
By Lender Types ($Bil): Institutions 3% Ginnie Mae
Commercial Banks $1,428.1 Federal 6% 10%
Government
CMBS, CDO & Other ABS $639.9 2%
GSEs and Ginnie Mae $317.2
CMBS, CDO
Life Insurance Companies $298.6 and other ABS
Savings Institutions $180.1 issues
20%
State & Local Governments $89.9
Federal Government $78.8
Others $169.9 Commercial
Others Banks
5% 45%
Life insurance
companies
9%

* As of 3Q10
Sources: Marcus & Millichap Research Services, Mortgage Bankers Association

Sources of Commercial Real Estate Acquisition Financing
by Dollar Volume

100%
Bank -nat'l, int'l, inv bnk
16%
30% 27%
35% Assumed Debt
75%
CMBS
36%
16%
32% Regional/Local Bank
Percent

25%
50%
5%
1% Insurance
35%
17% 19% 13%
Seller Financed
25%
5% 12%
8% Financial
6% 2% 12% 7%
7%
13% 4%
6% 7% 4%
0%
2007 2008 2009 2010*

*Through October
Sources: Marcus & Millichap Research Services, Real Capital Analytics

U.S. Commercial Mortgage Backed
Securities (CMBS) Issuance
U.S. CMBS
$250
CMBS Issuance (billions)

$200

$150

$100

$50

$0
95

96

97

98

99

00

01

02

03

04

05

06

07

08

09

10
19

19

19

19

19

20

20

20

20

20

20

20

20

20

20

20
Sources: Marcus & Millichap Research Services, Commercial Mortgage Alert

PROPERTY FUNDAMENTALS

U.S. Apartment Rent and Vacancy Trends
Asking Rent Vacancy Rate
$1,100 12%
Asking Rent per Unit

$1,000 9%

Vacancy Rate
$900 6%

$800 3%

$700 0%
00 01 02 03 04 05 06 07 08 09 10* 11**
* Estimate
** Forecast
Sources: Marcus & Millichap Research Services, Reis

Average Apartment Asking Rent

$2,000 2000-2008 2009 2010* 2011**
Average Asking Rent per Unit

$1,800

$1,600

$1,400

$1,200

$1,000
Santa Clara San Mateo Alameda

* Estimate
**Forecast

Average Apartment Vacancy
2000-2008 2009 2010* 2011**
8%

6%
Vacancy

4%

2%

0%

* Estimate
** Forecast

U.S. Office Rent and Vacancy Trends
$30 25%
Asking Rent per Square Foot

$28 20%
Vacancy Rate

$26 15%

$24 10%

$22 5%
00 01 02 03 04 05 06 07 08 09 10* 11**
* Estimate
** Forecast

Average Office Asking Rent

$80 2000-2008 2009 2010* 2011**
Average Asking Rent per Sq. Ft.

$60

$40

$20

$0

* Estimate
** Forecast

Average Office Vacancy

2000-2008 2009 2010* 2011**

32%

24%
Vacancy

16%

8%

0%

* Estimate
** Forecast

U.S. Retail Rent and Vacancy Trends
$20 12%
Monthly Asking Rent per Square Foot

$18 10%

Vacancy Rate
$16 8%

$14 6%

$12 4%
00 01 02 03 04 05 06 07 08 09 10* 11**
* Estimate
** Forecast

Average Retail Asking Rent

2000-2008 2009 2010* 2011**
$35
Average Asking Rent per Sq. Ft.

$30

$25

$20

$15

* Estimate
** Forecast
Sources: Marcus & Millichap Research Services, CoStar Group, Inc.

Average Retail Vacancy

2000-2008 2009 2010* 2011**
10%

8%

6%
Vacancy

4%

2%

0%

* Estimate
** Forecast

INVESTMENT TRENDS

National Apartment Price / Cap Rate Trends
Average Price Cap Rates

$125 10%
Average Price per Unit (000s)

$100 9%

Average Cap Rate
$75 8%

$50 7%

$25 6%

$0 5%

*
01

02

03

04

05

06

07

08

09

10
20

20

20

20

20

20

20

20

20

20
* Estimate
Includes sales $1Million and Greater
Sources: Marcus & Millichap Research Services, Costar Group, Inc.

Apartment Prices by County

2002-2008 2009 2010*

$240
Average Price per Unit (000s)

$180

$120

$60

$0

* Preliminary Estimate
Includes Sales $500,000 and above

Apartment Cap Rates by County

2002-2008 2009 2010*

7%
Average Cap Rate

6%

5%

4%

3%


National Office Price and Cap Rates

$250 10%
Average Price per Square Foot

$200 9%
Average Cap Rate

$150 8%

$100 7%

$50 6%

$0 5%
*
01

02

03

04

05

06

07

08

09

10
20

20

20

20

20

20

20

20

20

20

* Estimate

Office Prices by County

2002-2008 2009 2010*

$400
Average Price per SqFt

$300

$200

$100

$0


Office Cap Rates by County

2002-2008 2009 2010*

10%
Average Cap Rate

8%

6%

4%

2%


National Retail Price and Cap Rates

$200 10%
Average Price per Square Foot

$160 9%

Average Cap Rate
$120 8%

$80 7%

$40 6%

$0 5%

*
01

02

03

04

05

06

07

08

09

10
20

20

20

20

20

20

20

20

20

20
* Estimate

Retail Prices by County

2002-2008 2009 2010*

$420
Average Price per SqFt

$315

$210

$105

$0


Retail Cap Rates by County

2002-2008 2009 2010*
10%

8%
Average Cap Rate

6%

4%

2%


DISTRESSED ASSETS

U.S. Estimated Distressed
Assets Summary By Property Type

Distressed
$ in Bil. # of props
Office $48.3 1,876
Apartment $37.9 2,728
Hotel $33.0 1,200
Development Site $29.3 1,318
Retail $24.1 1,959
Industrial $9.1 1,271
Other $4.2 402
Grand Total $186.0 10,754

* As of November 15, 2010
Note: Some portfolio deals may not be allocated to a single market

Estimated Distressed Assets Summary
Major Western Markets
Distressed
$ in Mil. # of props
Las Vegas $17,954.9 466
Los Angeles $7,749.3 593
Inland Empire $3,236.6 282
San Francisco $3,063.3 244
Orange County $3,034.3 132
Seattle $2,777.0 156
San Diego $2,437.6 172
Oakland $2,378.0 169
San Jose $2,030.6 128
Sacramento $1,976.8 211
Portland $621.6 56
Grand Total $47,260.0 2,609


Estimated Distressed Assets Summary By
Property Type-San Jose

Distressed
Office $1,124.4 38
Hotel $264.6 12
Development Site $211.0 5
Retail $164.5 18
Industrial $133.6 24
Apartment $132.6 31
Grand Total $2,030.6 128


Property Type-San Francisco

Distressed
Office $1,434.1 47
Apartment $802.5 139
Hotel $366.9 15
Retail $234.7 26
Industrial $158.8 9
Development $40.0 5


Property Type-Oakland

Distressed
Office $643.7 33
Apartment $319.6 28
Hotel $285.1 13
Retail $247.6 30


Property Type-Bay Area

Distressed
Office $3,202.2 118
Apartment $1,254.7 198
Hotel $916.6 40
Retail $646.8 74

Bay Area includes: San Francisco, San Jose, and Oakland

Tri‐County Local Issues Outlook
Joshua Howard
Executive Director
California Apartment Association, Tri‐County Division

Outlook 2011
Local government finance
• Local government & school district deficits
– San Jose $110‐million
– Mountain View $2‐million
– San Mateo County $84‐million
• Fee and tax increases
• School parcel taxes
• Government reform

Measure A
March 8, 2011 Special Election

$64,000/unit tax on new multi‐family development

Outlook 2011
Local regulations

• Soft story retrofits
• Smoking regulations continue
• Interest on security deposits
• Bed bug liability

Outlook 2011
Local rental market
• From the headlines….

Outlook 2011
Local regulations
• Just cause
• Late fee regulations
• Rental housing database
• Longer notice period to terminate tenancy

Outlook 2011
Partnerships for a stronger community

State & National Issues Outlook & Update
Thomas Bannon, CEO, California Apartment Association
Debra Carlton, Senior Vice President, California Apartment Association

CAA State Legislative Affairs
2010 Year In Review & Looking Forward

Bills Signed by the Governor

Domestic Violence
This new law gives a tenant an option to change the locks if
he/she has written proof that he/she is the victim of domestic
violence. It also provides that a landlord cannot terminate a
tenancy or fail to renew a tenancy based solely upon an act or
acts of domestic violence against a tenant. The law does,
however, specifically give landlords the right to evict the tenant
if he/she allows the perpetrator to visit the property or the
property owner reasonably believes that the presence of the
perpetrator poses a physical threat to other tenants,
guests, or to a tenant's right to quiet enjoyment of the
property. SB 782 (D-Yee).

Carbon Monoxide Detectors
This new law requires an owner of a housing unit to install a
carbon monoxide device in each existing dwelling unit that has
a fossil fuel burning heater or appliance, fireplace, or an
attached garage:

For all existing single‐family dwelling units intended for human
occupancy on or before July 1, 2011.

For all other existing dwelling units intended for human
occupancy on or before January 1, 2013.
SB 183 (D‐Lowenthal).

Foreclosures
This new law requires a 90 day disclosure be given by a
property owner, informing tenants of their rights when the
property owner terminates a tenancy after a foreclosure action.
At the same time, this new law allows an unlawful detainer
lawsuit to be “masked” by the court permanently if the
buildings was involved in a foreclosure and the unlawful
detainer action against the tenant is never taken to a final
judgment. SB 1149 (D-Corbett).

Bills Vetoed by the Governor

Rental Property: Animals

This bill would have prohibited a landlord from advertising or
establishing rental policies that required a tenant or a potential
tenant with an animal to have that animal debarked or
declawed. AB 2743 (D-Nava).

Recycling
This bill attempted to mandate commercial recycling on private
businesses (rental property) that produced more than four
cubic yards of waste a week. It modified existing local
permitting requirements and required the Department of
Resource Recycling and Recovery (CalRecycle) to provide the
Legislature with a report on the progress being made by the
state towards a 75 percent diversion goal.
AB 737 (D-Chesbro).

2011 Legislative Make-Up

State Senate
25 Democrats ‐ 15 Republicans
(5 Moderates)
• Balance of Power remained unchanged
• 10 new Senators elected (6 Dem, 4 Rep)
• CAAPAC supported 10 of 10
• 1 new Moderate Democrat (Vargas, D‐San
Diego)
• 2 seats away from 2/3 majority

State Assembly

52 Democrats ‐ 28 Republicans
(6‐8 Moderates)

• 28 new Assemblymembers elected
• 17 Democrats  ‐ 11 Republicans
• CAAPAC supported 24 of 28
• Democrats gained 1 seat
• 2 seats away from 2/3 majority (3 in 2010)

Looking Ahead
Anticipated Legislative Activity

Funding, Finance & State Budget
Publicly Traded Companies – Increase in Property Tax –
Definitional Changes to Change in Ownership

Rental Property Owner Tracking Payments to Contractors –
Withholding

Permanent Source of Funding for Affordable Housing –
Escrow Fees

1031 Exchanges – Eliminate Tax Benefits

Landlord‐Tenant
Source of Income – Section 8 Protected Status
Just Cause
Cap or Eliminate Rental Payment Late Fees

Rental Housing Registry

90‐Day Notice for No Cause Evictions

No‐Smoking Legislation

Environmental
AB 32 – Changes to Agency Oversight
Mandatory Water Submeters
Prohibit RUBS
Mandatory Recycling

Substandard Housing Violations

Bed Bug Legislation
Lead Paint Education – Substantial Equivalency
with Federal Law

Employer/Employee
Eliminate Arbitration Agreements

Prohibit Credit Screening of Employees

Prohibit Criminal Screening for some Employees

Governor’s 3 Point Plan

Speak the Truth. No more smoke and
mirrors on the budget
No New Taxes unless approved by people
Return authority to local governments

Legal Cases

Rental Housing Inspections
Rental Housing Owners Association of Southern
Alameda County v. City of Hayward
Issue: May a City enforce an inspection ordinance that
mandates the owner “shall” allow entry into the unit (in
contradiction to state law (which strictly limits the right of
entry into an occupied unit))?

• Status: Victory at Trial Level. City may not enforce
requirement. Case is on appeal. CAA Filed
Amicus Brief in Appellate Court in Decemberl.

Section 8
Sabi v. Sterling
Issue: Is an owner required to accept a Section 8 voucher from a
disabled tenant? Specifically, (1) Does the prohibition against
“source of income” discrimination require an owner to participate in
the Section 8 program? and (2) Is it a “reasonable accommodation”
for the owner to be required to take this resident’s voucher, when
she has been a tenant for years, and her sons, who are also on the
lease (but reside elsewhere) have always paid the rent?

• Status: Victory. In April, the Court of Appeal ruled in favor of
the landlord, holding Section 8 vouchers do not fall within the
protections of the “source of income” provisions of California
law and that under the facts of this case, the owner was not
required to take the voucher as an accommodation for the
tenant’s disability.

Government Rental Housing Market Outlook

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