capital markets update

Capital Markets Update

The Forces Transforming Markets

November 2007

The Past

December 2006 – April 2007“The Height of the Market”

November 2007

CB Richard Ellis |

Changes in Risk Tolerance Spring 2007

Rating Agencies Tighten Screws on CMBSThe widening in CMBS spreads occurred despite the excellent fundamental performance in commercial mortgages.

Heat Turned Up on Securitization ProgramsSubordination levels rose for commercial MBS deals- reversing a decade-long decline.

Aggressive PricingSpreads near 100 bps

Aggressive underwritingDebt service coverage below 1.10

Future income versus in-place income

CB Richard Ellis |

Perce

ntage

of In

teres

t Only

Loan

s

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 20070%

By Loan Count By Loan Amount

10%

20%

30%

40%

50%

60%

70%

Source: Trepp

CMBS Underwriting TrendsImpact on Value % of IO Loans Has Skyrocketed

CB Richard Ellis |

0.050,000.0

100,000.0150,000.0200,000.0250,000.0300,000.0350,000.0

1995

1997

1999

2001

2003

2005

2007US ($Mil.)

Non-US ($Mil.)

Global ($Mil.)

Source: Commercial Mortgage Alert 2007 through 3Q

Historical CMBS Issuance

CB Richard Ellis |

CMBS Timeline

The Present

A “Mixed Market”

November 2007

CB Richard Ellis |

Moody’s April 10 declaration, underwriting gets conservative

Residential loan market tumbles with sub-prime issues

Commercial mortgage spreads widen

CMBS deals fail to “sell-out”, B buyers back in charge

On-book lenders (life companies, Freddie Mac, Fannie Mae) regain prominence

The Lending Environment Changed

CB Richard Ellis |

Historic 10-Year Treasury

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

10-Yr. Treasury Trailing 10-Yr. Average

November 2, 2007 Close @ 4.31%

30-Year Average = 7.68%

10-Year Trailing Average 4.78%

CB Richard Ellis |

LIBORHistoric One Month LIBOR Rates

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

One Month LIBOR

November 2, 2007 Close @ 4.69%

10-Year Average = 3.98%

CB Richard Ellis |

Home Mortgage Delinquency on Rise

CB Richard Ellis |

CMBS Delinquency Rates

Sources: Lehman Brothers, 3Q 2007 *Note delinquencies represent loans 60+days delinquent

CB Richard Ellis |

Cap Rates

CB Richard Ellis |

Underwriting

Early 2007 Underwriting Standards Versus Recent Standards

Source: Citi

UNDERWRITING EARLY 2007 STANDARDS RECENT PARAMETERS

Interest Only Loans Commonly Offered 30-yrs common, 1-2 yrs IO offered and additional IO at a substantial premium unless low leverage

Underwriting Higher of market rent and rent contracts

Revert to in-place rent roll unless there are contractual lease steps by a long-term investment grade tenant

Loan to Value 75 to 80% based on aggressive cap rates

75-80% with adequate coverage (see DSCR below)

DSCR Sub 1.0x based on no amortization and anticipated

market improvement

1.2 times being held firm based no tougher underwriting and amortization

Reserves Frequently dropped in competition

All up-front and continuing reserves are now being funded

CB Richard Ellis | Source: Commercial Mortgage Alert, Morgan Stanley

CMBS Spreads, Swaps & Treasuries

CB Richard Ellis |

Source: Wall Street Journal & Bloomberg

Key Rate Summary

11/1/07 6 Months Ago

Year Ago

Prime 7.5% 8.25% 8.25%

5-Yr US Treas. 4.02% 4.53% 4.52%

10-Yr US Treas. 4.36% 4.64% 4.57%

LIBOR 3-mo. 4.87% 5.35% 5.37%

Dow Jones Avg. 13,567 12,382 12,031

10-Yr Swap Spread 63bps 53 bps 55bps

The Future

“Where Will Tomorrow Lead?”

November 2007

CB Richard Ellis |

Source: Institutional Real Estate, Inc. Kingsley Associates

Expected Capital Flows to Real Estate

Non-Invested Capital Carryover From 2006: $60 billion

CB Richard Ellis |

Change in Availability of Capital for 2008

Relative Strength

Capital Cushion

More Discipline

Greater Caution

Extended Pain

Source: Emerging Trends in Real Estate 2008 Survey, ULI

CB Richard Ellis |

Source: Commercial Mortgage Alert 2007

CMBS Deals in the Works

CB Richard Ellis |

0%

10%

20%

30%

40%

50%

60%

70%

1991

1993

1995

1997

1999

2001

2003

2005

2006

2006

2007

Depository Institutions

Life Insurance and PensionFundsCMBS

Source: CBRE Torto Wheaton Research

Holders of Commercial Mortgages

CB Richard Ellis |

53%

26%

2%

7%

6%2% 2%2%

AustraliaGermanyNetherlandsMiddle EastIrelandUnited KingdomJapanSingapore

2006 Investment Survey

Source: Association of Foreign Investors in Real Estate, 2007

Most Active Foreign Buyers of U.S. Real Estate

CB Richard Ellis |

1998 Crisis 2001 Crisis

Source: Citi Research 2007

Is History Repeating Itself?

Spreads widened sharply then began to recover in 3 to 6 months

CB Richard Ellis |

Spectrum of Possible Outcomes

Probability

Return to Goldilocks

Evidence

Soft Landing Hard Landing Prolonged Recession

Description

• Very Unlikely • Most Likely • Possible • Very Unlikely

• Originations of leveraged loans, high-yield bonds, and CMBS resume onformer terms

• Availability of cheap capital fuels strong growth in domestic economy

• Backlog exhausted / debt markets find new equilibrium

• Moderate domestic growth• Adequate fundamentals:

consumer spending, interest rates, employment

• Liquidity crises catalyst for economic slowdown

• Housing and consumer trends worsen

• US troubles impact foreign economies

• Synchronized global recession

• China bubble bursts• Housing meltdown• Central bank missteps

• High-yield defaults remain at all-time lows ~1.5%in 2007

• Immense global liquidity likely to continue

• Strong global growth expected: 5.0% 2007E and 4.5% 2008E

• Recent Fed actions; further 50 bps expectedby 3Q 2008

• Low default rates ~1.5%• 46% and 30% of firms

surveyed plan to increase CapEx and hiring

• Large backlog of committed PE capital

• US forecasted real GDP growth only 2% until 2009

• Higher cost of borrowing• Tight labor market and

increasing commodity prices threaten inflation

• Residential investment projected to go down 16.2% in 2007 and 15.2%in 2008

• Unemployment projected to be 5.5% by 4Q 2008

• Global growth projections downsized in light of liquidity issues: 4.6% 2008E

• Political unrest in India and China may lead to slower than expected economic growth

Source: Morgan Stanley

Economic Trends

November 2007

CB Richard Ellis |

GDP 3Q Update

Source: BEA and Torto Wheaton Research

CB Richard Ellis |

Business Has the Means to Continue the Expansion

4 .0%

5 .0%

6 .0%

7 .0%

8 .0%

9 .0%

10 .0%

11 .0%

12 .0%

13 .0%

14 .0%

19 921 9 9 2

1 9 9 31 9 9 4

1 9 9 51 9 9 5

1 9 9 61 9 9 7

1 9 9 81 9 9 8

1 9 9 92 0 0 0

2 0 0 12 0 0 1

2 0 0 22 0 0 3

2 0 0 42 0 0 4

2 0 0 52 0 0 6

2 0 0 7

Corpora te Profits a s a % of GDPSource: BEA and Torto Wheaton Research

CB Richard Ellis |

Employment Situation

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Sep-

05

Oct

-05

Nov

-05

Dec

-05

Jan-

06

Feb-

06

Mar

-06

Apr-

06

May

-06

Jun-

06

Jul-0

6

Aug-

06

Sep-

06

Oct

-06

Nov

-06

Dec

-06

Jan-

07

Feb-

07

Mar

-07

Apr-

07

May

-07

Jun-

07

Jul-0

7

Aug-

07

Sep-

07

Service-producing Goods-producing

Employment, % change year ago


CB Richard Ellis |

Positive but Slowing Employment Growth


CB Richard Ellis |

Jobless Claims


CB Richard Ellis |

Personal Income


CB Richard Ellis |

United States Exports are Growing

40

60

80

100

120

140

16019

75.4

1976

.319

77.2

1978

.119

78.4

1979

.319

80.2

1981

.119

81.4

1982

.319

83.2

1984

.119

84.4

1985

.319

86.2

1987

.119

87.4

1988

.319

89.2

1990

.119

90.4

1991

.319

92.2

1993

.119

93.4

1994

.319

95.2

1996

.119

96.4

1997

.319

98.2

1999

.119

99.4

2000

.320

01.2

2002

.120

02.4

2003

.320

04.2

2005

.120

05.4

2006

.320

07.2

-20%

-10%

0%

10%

20%

30%

40%

Trade Weighted Dollar Value (1973 = 100) Annual Growth in the Export of Goods

Trade Weighted Dollar Value YoY Grow th, Goods Exports


CB Richard Ellis |

Moving Toward a Business Driven Economy

-2

-1

0

1

2

3

4

5

2004 2005 2006 2007 Q 1 2007 Q 2

Consum er Business Governm ent

We Believe Future GDP Will Continue 2Q Trend of Positive Contributions from Business Investment & Trade

% G

DP


CB Richard Ellis |

Globalization

Globalization has allowed emerging markets to more fully take advantage of their comparative economic advantages and contribute to the growth in the global economy.

Due to a significant increase in the quality and quantity of their labor force, emerging markets have provided a significant global disinflationary force to counterbalance high global commodity prices and wage pressure in developed economies

In addition, the forces of globalization have led to a significant increase in capital formation, especially in commodity-based and export-oriented economies.

capital markets update

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