O’Connor & Associates Presented By RICHARD ZIGLER Director of Research Commercial Real Estate Trends O’Connor & Associates

OUTLINE  Industry Overview  Major Events and Developments  Occupancy Changes Across the Markets  Rental Rates Across the Markets  Key Trends  Economic Factors  Mobility Improvements  Current Construction and Expansions  Where are the Markets Going?

O’Connor & Associates Industry Overview  Retail Market - closing of Kmart, Albertson’s, Service Merchandise - entrance of Kohl’s; expansions of HEB, Wal-Mart, the Galleria, Memorial City Mall and drugstores  Office Market - Enron bankruptcy, Dynegy and Reliant turmoil, Arthur Andersen scandal, Compaq merger, etc.  Multifamily Market – home ownership is an attractive alternative. Still… high level of new construction  Industrial Market – softer than in previous years, very low demand

O’Connor & Associates  Office & Industrial sectors posted the sharpest decline in occupancy rate  Multifamily Market was the most robust sector with a 92.6% occupancy  Retail Market also experienced a decline in occupancy rate from 86.5% to 85.1%  Real Estate was not an exception in the 2002 economic slow-down Industry Overview

O’Connor & Associates  Office and Retail sectors posted a slight decline in rental rates, less than $0.01  Apartment Market was the only sector to post somewhat higher rents, from $0.74 to $0.76 per square foot  Industrial Market was rather soft and rental rates were flat  2002 rental rates remained relatively flat across all markets Industry Overview

O’Connor & Associates  US economy is still posting slow growth figures  Headlines are screaming about increasing unemployment  Interest Rates are at a record low  The specter of war adding more pressure Key Trends Better Times on the Horizon?  Economic Recovery is expected in the second half of 2003 BUT… the War is now the biggest determinant!

O’Connor & Associates Key Trends Local mobility improvements include  West Loop (610) & I-10 expansions  Westpark Tollway construction  Fort Bend Toll Road & Grand Parkway planned expansion  $235 mill. local street improvements Despite the hard times, Houston continues to grow and expand

O’Connor & Associates The suburban markets are developing at a rapid rate Key Trends Major markets include: Silverlake/Pearland The Woodlands Fort Bend Katy

O’Connor & Associates Key Trends  For Retail some submarkets are more promising than others  Powered by new home construction, retail expansion is at its peak, especially in the suburban markets  Suburbs offer great opportunities for retail Empty retail boxes in the city! High Construction in the suburbs! VS Silverlake Houston

O’Connor & Associates Key Trends Due to low mortgage rates, tenants are choosing home ownership! But why is Apartment construction so aggressive?  11,632 units are under construction! Will they be absorbed? We are building high-rises too! 1200 Post Oak The Greenbriar

O’Connor & Associates Key Trends  The Office Market is perhaps the weakest one  High level of construction in CBD  Businesses are shrinking, no job growth  These trends result in negative absorption figures The Industrial Market is in imbalance  Bankruptcies and heavy construction have added plenty of empty space  Due to business failures, demand is very low  But thankfully… construction has slowed Air Center Blvd 5 Houston Center

O’Connor & Associates  Office Market occupancy will continue to decline by points Inventory will increase by 1.7 million after the construction of the Reliant Resource Plaza (844,000 SF) and Calpine Center (689,028 SF) Where are the Markets Going?  Retail Market will remain healthy due to residential expansions In 2003, 4.5 million SF of retail space will be opened, occupied mainly by discount stores (27%) and supermarkets (19%)  Multifamily construction remains high but demand is flat Vacancy is expected to rise by 1.5 points. Class A vacancy may rise by 8 points!  Industrial sector will not reach equilibrium until mid 2005

O’Connor & Associates Thank You Questions ? ? ? ? ? ? ? ?

O’Connor & Associates RICHARD ZIGLER Director of Research Real Estate Valuation, Research & Consulting O’Connor & Associates O’Connor & Associates 2000 N Loop W, # 110 Houston, TX