CAPITAL MARKETS OVERVIEW and OUTLOOK How Did We Get Here? Where Are We Going? 2009 Review / 2010 Preview Presented by: Michael Balan, Associate Director Marcus & Millichap Capital Corp.

The Most Reliable Financing - The Most Competitive Rates How Did We Get Here? 1.Abundant, cheap credit during years 2005 to 2007 fuels real estate expansion – values increase in an unprecedented manner 2.Credit analysts identified sub-prime mortgage deterioration in spring of This realization and resulting concern over real estate and credit markets froze structured finance (CMBS, ABS, RMBS, CDO, etc,) 4.Sudden halt in structured finance crippled secondary loan market, commercial banks and life companies 5.Deterioration of commercial banks resulted in significant pull-back of consumer credit and spending 6.Pull-back in consumer spending negatively impacts real estate over time

The Most Reliable Financing - The Most Competitive Rates No More ATM! 

The Most Reliable Financing - The Most Competitive Rates What Happened in 2009?  A whole lot of nothing!  Deal velocity off 69% from ’08, which was off 62% YOY  Gov’t stimulus DID NOT stimulate deal velocity  Gov’t stimulus DID stave off a run on banks  140 U.S. banks failed (26 failed in 2008 and 3 in 2007)  Investors focused on saving assets not buying new ones  TREASURY HAD THEIR FOOT ON THE GAS (TARP, TALF, PPIP, bailouts, reversed mark to market, allowed servicers to anticipate defaults). YAY!  REGULATORS HAD THEIR FOOT ON THE BRAKES! Hired more auditors, stepped up bank audits, consistently criticized banks handling of valuations and writedowns. BOO!

The Most Reliable Financing - The Most Competitive Rates

U.S. Commercial Real Estate Investment Trends Dollar Volume by Property Type Total Dollar Volume (billions) * Preliminary Estimate U.S. Sales $1 million and above Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics -85% % From ‘07 Peak

The Most Reliable Financing - The Most Competitive Rates Sources of Acquisition Financing by Dollar Volume Through 3Q * Through 3Q Sources: Marcus & Millichap Research Services, Real Capital Analytics Percent

The Most Reliable Financing - The Most Competitive Rates Where Are We Today? 1.Delinquencies remain low by historical standards; however… 2.Assets moved to special servicing increasing rapidly:  CMBS special servicing 8.17 percent of total outstanding

The Most Reliable Financing - The Most Competitive Rates CMBS Special Servicing Exposure by Unpaid Balance Rising Significantly % of Outstanding CMBS Nov-09, 8.17% Jan-09, 1.71% Jan-08, 0.52%Jan-07, 0.52% Jan-06, 1.00% Sources: Marcus & Millichap Research Services, Real Point

The Most Reliable Financing - The Most Competitive Rates Where Are We Today? (cont.) 1.Financing generally constrained with underwriting extremely tight: 1.Deals are getting done with primarily local and regional banks with some limited life company participation 2.Lenders scrutinizing global cash flow, personal credit, contingent liabilities and running background checks 3.Closer attention being paid to maturing leases, tenant viability and location (remember location, location, location?) It’s the main thing but not the only thing! 2.Lenders face two overriding concerns: 1.Property fundamentals continue to deteriorate 2.Property valuation is foggy at best 3.Significant volume of maturing debt

The Most Reliable Financing - The Most Competitive Rates Estimated Commercial Debt Maturities by Lender Type Billions $ Sources: Marcus & Millichap Research Services, Foresight Analytics

The Most Reliable Financing - The Most Competitive Rates CAPITAL MARKETS OUTLOOK Where Are We Headed? 1.Commercial banks’ market participation will be choppy 2.Life insurance are re-entering the market – capacity limited 3.TALF extension should help start a correction phase for CMBS  Wide market impact will be limited for some time 4.Banks poised to sell more notes and REO 5.Mortgage rates will be range bound with underwriting staying tight as lenders remain conservative What strategy should I employ as a borrower with a loan that is maturing, or a property that is now underperforming:  Hand back the keys?  Sell the property to preserve what equity I may still have?  Work with the existing lender to gain some relief?

The Most Reliable Financing - The Most Competitive Rates CAPITAL MARKETS OUTLOOK Where Are We Headed?  Interest rates increasing  Lenders looking for a way to be profitable  Lenders are looking to take in deals they are confident can get done  65% LTV is the new 80% LTV!  Borrowers are starting to be more realistic about what is available in the market  Regulators continue to focus on bank capital levels  Smaller deals, credit tenant and sensible deals getting done.

The Most Reliable Financing - The Most Competitive Rates 10-Year Treasury Rate Rate Sources: Marcus & Millichap Research Services, Federal Reserve

CAPITAL MARKETS OVERVIEW and OUTLOOK How Did We Get Here? Where Are We Going? 2009 Review / 2010 Preview Presented by: Michael Balan, Associate Director Marcus & Millichap Capital Corp.