K.C. Conway, MAI, CRE Executive Managing Dir. R.E. Analytics Colliers International

1. Where is True North? 10th Annual State of Atlanta “A Decade of Extremes” September 23, 2011 K.C. Conway, MAI, CRE Executive Managing Dir. R.E. Analytics Colliers International KC.Conway@Colliers.com

2. It’ the Economy & Understanding What Happened to the Jobs

3. America’s Lost Decade of Job Growth 1st Decade of Negative Job Growth We are Back to 2001 Payrolls

4. Translating Macro Economic Data to… Meaningful Knowledge at the Property Level Unlocking the Value of the Weekly Jobless Claims Data… and the Real Unemployment Rate

5. What are the Key Economic Metrics to Monitor? • Understand the Macro: • GDP – Not just of U.S. but bell-weather global economies, such as Hong Kong and Germany. • Employment – Go beyond U-3 unemployment rate to U-6 • Chicago FED National Activity Index (CFNAI – best macro I know) • Translate the Macro: • National Restaurant Performance Index or “Chart of The Day.com” • State Level Comments in the Weekly Jobless Claims data • Correlate to your Property Type and Market: • Zillow.com to get granular Home Price detail and break out condos • Net Absorption and Construction still underway in your market (Dodge Pipeline and ask the WHY questions.)

6. Weekly Market Recap – a subscription product By K.C. Conway, MAI, CRE

7. Weekly Market Recap – a subscription product By K.C. Conway, MAI, CRE

8. It’s the Spending too Americans owe $98,141,000,000,000 or $319,587 per man, woman and child.

9. The Big Picture – Part I: How Did We Get Here? Misreading Demand Drivers – Again and Again! r

10. Test Your Knowledge of Commercial Real Estate r

11. Test Your Knowledge of Commercial Real Estate r

12. The Big Picture – Part II: What to Understand about US Commercial R.E. Debt? We are far from being out of the woods! • #1: US Financial Institutions • 50% / $1.6 Trillion • #2: CMBS • 20% / $640 billion • < 1/2 that of US Banks • Q. What was the total out-standing CRE debt in 1998? • $800 billion We did not quadruple the physical amount of US Real Estate in 12 years. This crisis is an OVERLEVERAGE event. r

13. Not all Banks are Created Alike! What are the types of CRE Debt in Banks? Why the mortgage “put-backs” are so material to the large banks

14. Construction Mismanagement ! Why can’t banks clear the R.E.? 1 in 4 Constr Loans are like these 1. Construction “mis-Management” Actual photos from appraisals by banks with “Impaired CRE” Lake Community Driveways @ 45 º 2. Corus Condo in FL 25% of value from view premiums AND…2 Key Points: What is the “Cost to Fix” hit to ALLL ? When these finally sell, how are they used as comps to value stuff that isn’t like this? 3.

15. Bank Failures by Total Count YTD 63 71 Failures YTD

16. Bank Failures by State Georgia Still Leads with 17 followed by Florida with 10 Source: FDIC – Thru Aug 5th Interesting side note: The latest Bank failure last Friday involved a Florida Bank that was bought by a GA Bank?

17. Bank Failures – Historical Perspective You judge if we have “Extend & Pretend” Key Notes: 23,674 banks were closed 1929-1933 (We only have 7,575 banks & 7,800 credit unions today, or a total of 15,375 financial institutions). 3,625 banks have been closed 1934-July 2011 2,369 banks closed during the S&L Crisis 1986-1994 390 banks have been closed during this Financial Crisis 2008-Sept 2011

18. Will Europe have a U.S-type 1933 Bank Holiday in 2011?

19. The Euro Debt Crisis J.P Morgan May have it figured out – I know I don’t

20. Directory of Characters in the Euro Debt Crisis “Gee, nothing about the Irish or Swiss” – Luck or their knives?

21. So Where are We? How does K.C tell Colliers about the Economy & R.E? K.C.’s forecast at beginning of 2011: “Light growth (<2% GDP) as we cut Big Debt” K.C.’s forecast revised in June for 2H2011: “No growth (0% to <1% GDP) while government can’t act.”

22. What are the Big-Picture R.E. Trends that I see It’s not all bad. This may be the best time to… Intellectual Property Mfg returning to the U.S. and going to the “Education Center” MSAa. Boston NC & VA Denver? R.E. will outperform in the “education center” markets.

23. AG Land – A “Bullish” story not understood… Cap Rates on AG Land USDA’s 2010 Land Values & Cash Rents Report r

24. Land Values & Cash Rents 2010 Summary

25. What are the Big-Picture R.E. Trends (continued) CMBS

26. What are the Big-Picture R.E. Trends (continued) 2011 CMBS Issuance thru August – What is needed? • 2011 CMBS Mkt: • $50 billion goal • $30.5 billion YTD • 21.2 billion Private • 9.3 billion Gov. • $30.5 billion YTD • 26.7 billion Conduit • 3.8 billion SingleAsset • Sources: • FDIC • TREPP • Freddie Mac • Fed Reserve Bank of NY

27. What are the Big-Picture R.E. Trends (continued) CMBS will not play out equally across the U.S. CMBS Delinquencies by GEO Lowest – New England / Highest Mtn 5.52% 7.19% 7.87% 8.63% 10.40% 16.67% 9.79% 12.48% 9.15%

28. Q2 2011 National Property Type Overviews Multifamily – The Star Performer, Rents up >3% in 1H2011, Condo piece NOTE: Trend to MF over SF ownership has HUGE implications for Retail CRE.

29. Q2 2011 National Property Type Overviews Multifamily – The Condo piece

30. Q2 2011 National Property Type Overviews Office – What are the most active markets & why?

31. Q2 2011 National Property Type Overviews Office – What are the most active markets & why?

32. Q2 2011 National Property Type Overviews Retail – Store closings, More Supply, Dollar Tree move to Class B

33. Q2 2011 National Property Type Overviews Retail – Store closings, More Supply, Dollar Tree move to Class B

34. Q2 2011 National Property Type Overviews Industrial – “Path of Goods Movement”

35. Appraisal Discussion Items: KC’s Top 11 for 2011 Competency and Fair Value Vs Market Value Competency Fair Value Vs. Market Value r

36. Appraisal Discussion Items: Property Interest Appraised Fee Simple Vs Leased Fee in a Declining Market Property Interest Appraised Fee Simple Vs. Leased Fee r

37. Appraisal Discussion Items: Appraisal Assumptions A “Known False” can result in a ‘Restricted Appraisal Report! EXTRAORDINARY Assumptions HYPOTHETICAL Conditions Discussion Item: What is the difference between an EXTRAORDINARY condition and a HYPOTHETICAL assumption? The distinction is critical to whether a client has a “Restricted Use” appraisal. During this financial crisis, a dearth of market data, along with certain assignment conditions imposed by clients (inability to inspect), has resulted in appraisers having to address more and more appraisal problems with an array of special assumptions and limiting conditions. It is important that both appraisers and users of appraisal services understand the difference and implications. An appraisal with one or more HYPOTHETICAL conditions is most likely a RESTRICTED USE appraisal that cannot be relied upon by a federally regulated financial institution. So, what constitutes a HYPOTHETICAL Condition? In the simplest of terms, a HYPOTHETICAL CONDITION is a “known false.” Examples range from the simple (assuming an agricultural tract of land is zoned for commercial development) to the less obvious (a building with dedicated handicap parking spaces is in compliance with the American with Disabilities Act – ADA). Not knowing the answer to a property condition, like zoning, presence of wetlands, occupancy, etc., when evidence to determine the truth/false of an assumption exists does not provide the appraiser with a defense to call a Hypothetical condition an Extraordinary assumption. The test is whether an appraiser, or his peers, would have had the ability to ascertain the truth/false of a particular assumption. r

38. Appraisal Discussion Items: Highest & Best Use Today it will hinge on Step 4: What is “Maximally Productive.” Highest & Best Use Step 4: What is “Maximally Productive?” r

39. Appraisal Discussion Items: Interest Rate Risk How can one measure Interest Rate Risk in Valuation? Mortgage Equity Technique R = LTV * DSCR * Mc r

40. Appraisal Discussion Items: Value Impact from Expenses Rising Faster than Rents Rents are Declining to Flat Expenses are Rising r

41. Appraisal Discussion Items: Lease Renewals The Dangers of Appraising from Rent Rolls Vs Reading Leases! NNN Lease to Modified Gross A 29% Hit to Value LEASE STRUCTURE & VALUE EROSION by Pat Craig & NY CIVAS: The industrial market in the NY CBSA has over 1.1 billion square feet of space within nearly 30,000 buildings. Lease structures within this market vary from gross leases to triple net leases, depending on the owner’s preference and the tenant’s tolerance for paying expense reimbursements. In the last 18 months, it has become a tenant’s market, and in many cases tenants have squawked at paying the tax reimbursement. When a market transitions from a triple net market, to a double net or modified-gross rent market (no tax pass through), there can be a significant loss in value. As an example, as the pro-forma below attests, with all things being equal except the tax reimbursement, the change in lease structure will cause value erosion of 29%. r

42. Appraisal Discussion Items: Property Inspections How can you identify “Material Change” if you don’t look for it? Property Inspections The “Wei” Metric for MF in 2011 r

43. Appraisal Discussion Items: Value Impact from Financial Distressed States or MSAs? Value Impact from a BK MSA A Case Study – Vallejo, CA Update: Jefferson Co/Birmingham, AL r

44. What Have I Learned in this R.E. Crisis? “You have to be nice to snakes!” – True Story Conclusion: “You have to be nice to snakes.” r

45. Recognizing on-coming risks, and then effectively communicating them, are two different things. Thank You K.C. Conway, MAI, CRE Executive Managing Director, R.E. Analytics Colliers International KC.Conway@Colliers.com