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					      Glenn R. Mueller, Ph.D.
     Johns Hopkins University
           Real Estate Institute
Director, Capital Markets & International Programs
                        &
            Legg Mason, Inc.
     Real Estate Research Group
         Real Estate Investment Strategist

          grmueller@leggmason.com
Market Cycle Analysis

      Physical Cycle

  Demand, Supply and Vacancy
     affect Rental Growth
                            Market Cycle Quadrants
            Phase 2 -                                       Phase 3 -
            Expansion                                       Equilibrium Point
                                               Demand/SupplyHypersupply
Occupancy




            Long Term Vacancy Average




              Phase 1 -                                                   Phase 4 -
              Recovery                  Legg Mason Real Estate Research   Recession
                                                   Time
                                                      Demand/Supply
                                                       Equilibrium
                                     High Rent
                         Rents Rise     Growth in                 Rent Growth
                            Rapidly        Tight Market             Positive But
                             Toward New                                Declining
                                Construction
                                    Levels
Occupancy




                                                Cost Feasible New
                                                 Construction Rents
            Long Term Average Occupancy
                                                                         Below
                                                                         -

                                                                          Inflation &
                                                                          Negative
                                Below
                                                                            Rent
                                 Inflation
                                   Rental
                                                     Physical                 Growth
                  Negative            Growth       Market Cycle
                     Rental
                         Growth                   Characteristics


                                               Time
                 Historic National Office Rental Growth
                                                                11.0%
                                                     10.5%      11
                                                                          6.1%
                                                           10        12
                                           6.4%       9
                                                 8        12.5% 10.0% 13       3.3%
        Long Term Average Occupancy         7
Occupancy




                                      6                                       14
                              1.7%               6.7%
                                5
                     0.3% 4                                                    15
                                      4.0%
       -3.0%            3
                                                                                     -1.0%
                                                                          1.6%
                 2          2.7%                                                    16
            1                             30 Year Cycle - Periods 1968-1997              1
                -1.5%
                                             Time
                 Historic National Industrial Rental Growth %
                                                                 8.3%
                                                       6.8%        11         4.6%
                                                            10           12
                                            5.1%        9
                                                   8        8.5%        5.9% 13 4.8%
            Long Term Avg Occupancy
                                              7
                                                  3.8%
Occupancy




                                   3.0% 6                                        14

                                    5
                       -2.1%   4
                                                                                   15
                                        4.6%
            0.8%                                                                        -0.4%
                         3
                   2         0.4%                                               0.7% 16
             1                              30 Year Cycle - Periods 1968-1997             1
                  2.8%
                                               Time
 Office Market Cycle Analysis
                          4th Quarter, 2003
Albuquerque    Nashville-1
     Atlanta   N. New Jersey
      Austin   New Orleans
  Baltimore    New York
     Boston    Norfolk
   Charlotte   Oklahoma City
    Chicago    Orlando
  Cincinnati   Philadelphia
  Cleveland    Phoenix
  Columbus     Pittsburgh
 Dallas FW     Portland
 Denver        Raleigh-Durham
     Detroit   Sacramento
   East Bay    Salt Lake
  Hartford-1   San Antonio
   Houston     San Francisco
               San Jose                                          10      11
Indianapolis
Jacksonville   Seattle                                    9                        12
Kansas City    Stamford
  Las Vegas    St. Louis                             8                                  13
Long Island
Los Angeles
               Tampa
               Wash DC
                                                 7       LT Average Occupancy
     Miami     W. Palm Beach                 6                                               14
 Milwaukee     NATION
Minneapolis                                                                                       15
                                  4     5                                                              16
        1       2        3                                                                                  1
                           Orange County+1
                           Riverside+1

                 Ft. Lauderdale
                 Honolulu                                  Source: Mueller, 2004
                 Memphis
                 Richmond
                 San Diego+1
                 Wilmington
Industrial Market Cycle Analysis
     Atlanta       Milwaukee
                                        4th Quarter, 2003
      Austin       Minneapolis
  Baltimore        Nashville
     Boston        New York
   Charlotte       Oklahoma City
    Chicago        Orlando-1
  Cincinnati       Philadelphia
  Cleveland        Phoenix
  Columbus         Pittsburgh
 Dallas FW         Portland
     Detroit       Raleigh-Durham
   East Bay        Richmond
    Hartford       Salt Lake
Indianapolis       San Francisco
                                                                                10      11
Kansas City        San Jose                                                                     12
  Las Vegas        Seattle              Los Angeles
                                        Orange County
                                                                        9
Long Island        Stamford
   Memphis         St. Louis            W. Palm Beach+1            8                                 13
      Miami        Tampa                                      7        LT Average Occupancy
                   NATION
                                                     6                                                    14
                                                     Riverside+1                                               15
                                    4        5                                                                      16
    1          2         3                                                                                               1
                             San Diego

                   Denver
                   Ft. Lauderdale
                   Honolulu
                   Houston                                                  Source: Mueller, 2004
                   Jacksonville+1
                   New Orleans+1
                   Norfolk+1
                   N. New Jersey
                   Richmond
                   Sacramento
                   San Antonio
                   Wash DC
     Multifamily Market Cycle Analysis
                                                 4th Quarter, 2003
   Atlanta         Miami
  Charlotte        Minneapolis
 Cincinnati        Nashville
 Columbus          New Orleans
  Denver           New York
     Detroit       Portland
    Hartford       Raleigh-Durham
   Houston         Richmond                                                                                       Riverside
Indianapolis       St. Louis                                                           10      11
Kansas City        Salt Lake                                                                            12
Long Island        San Jose                                                     9
   Memphis         Seattle
                   NATION
                                                                          8                                  13
                               Jacksonville
                                                               7              LT Average Occupancy
         Philadelphia+1                                 6                                                             14
         San Antonio+1
                                                        Norfolk                                                               15
         Tampa+1
                                    4        5          Las Vegas+2                                                                16
    1          2          3                             Los Angeles+1                                                                   1
                                        Boston          Orange County+1
                   Austin+1             Honolulu        Orlando+2
                   Baltimore+1          Sacramento      San Diego
                   Chicago+1            W. Palm Beach
                   Cleveland            Wash DC
                   Dallas FW+1
                   East Bay
                   Ft. Lauderdale                                               Source: Mueller, 2004
                   Milwaukee
                   N. New Jersey
                   Phoenix
                   Pittsburgh
                   Oklahoma City
                   San Francisco
                   Stamford
Retail Market Cycle Analysis
                        4th Quarter, 2003

                                        Baltimore
                                        Chicago
                                        Milwaukee
                                        Minneapolis
              Atlanta                   Norfolk
              Boston                    Orange County
            Charlotte                   Pittsburgh
              Detroit                   Riverside
            Houston                     San Antonio            Wash DC          10      11
         Indianapolis                   Stamford                                                 12
        Los Angeles                     St. Louis
                                                                         9
            Memphis                     NATION               8                                        13
       N. New Jersey
            Nashville
                                                 7               LT Average Occupancy
        Richmond+1                    6              East Bay
                                                                                                           14
    W. Palm Beach+1
                                                     Ft. Lauderdale
                             5                       Miami                                                      15
            3        4           Denver+1            New York                                                        16 1
1   2           Austin           Honolulu+1          Phoenix
                Cincinnati       Long Island-1       Portland
                Cleveland        New Orleans+1       Sacramento
                Columbus-1                           Salt Lake
                Dallas FW                            San Diego
                Hartford                             San Francisco
                Jacksonville                         Seattle
                Kansas City                          Tampa
                Las Vegas
                Oklahoma City                                            Source: Mueller, 2004
                Orlando
                Philadelphia
                Raleigh-Durham
                San Jose
   Hotel Market Cycle Analysis
                             4th Quarter, 2003



    Atlanta
    Austin
    Boston                 Honolulu
    Cleveland              Jacksonville
    Columbus-1             Las Vegas
    Dallas                 Nashville
    Detroit                New York
                                                                                    10      11
    East Bay               Oklahoma City+1                                                          12
    Hartford               Orlando+1
                                                      Norfolk
                                                                            9
    Indianapolis-1         Philadelphia
    Kansas City            Phoenix-1
                                                                       8                                 13
    Minneapolis            Seattle                          7              LT Average Occupancy
    Pittsburgh-1
    St. Louis                                  6                                                              14
    San Jose                            5              Los Angeles+1
                                                                                                                   15
                                4                                                                                       16   1
    1        2         3            Baltimore+1
                                                       Riverside
                                                       San Diego
                                    Long Island
                                    Orange County+1
     Charlotte   N. New Jersey      Sacramento
     Chicago     Portland           Wash DC+1
    Cincinnati   Raleigh-Durham     W. Palm Beach+1
     Denver      Richmond
Ft. Lauderdale   Salt Lake                                                      Source: Mueller, 2004
      Houston    San Antonio
     Memphis     San Francisco
       Miami     Stamford
    Milwaukee    Tampa
 New Orleans     NATION
                1970s Cycle
•Factors Driving The First Half Cycle (5 Year)
   •Strong Demand from the 1960s that stopped
   •Recession 1974
   •Capital Flow Mortgage REITs produces oversupply
•Factors Driving The Second Half Cycle (5 Year)
   •Baby Boom Generation Goes to Work
   •Capital Flow Shut Down as Lenders Recover
   •Markets tighten and reach peak occupancy 1979
                      1970s Office Demand & Supply
                                                                Demand         Supply
8%
                             Oversupply Years               Baby Boomers Go To Work
6%
4%
2%
0%
            1970


                      1971


                                 1972


                                           1973


                                                  1974

                                                         1975


                                                                1976


                                                                       1977


                                                                              1978


                                                                                     1979
Source: FW Dodge, CB Commercial, BLS, Mueller
                 1980s Cycle
•Factors Driving The First Half Cycle (5 Year)
   •Tight market in 1979 pushes rents and prices up
   •Tax Act of 1981 attracts taxable investors supply up

•Factors Driving The Second Half Cycle (5 Year)
   •Thrift Deregulation allows capital to flow
   •Inflation pushes real estate prices higher
   •Tax Act of 1986 slows taxable investors, but not tax free
   •Poor stock market attracts Pension & Foreign capital
   •Rising R.E. prices masks poor income returns
      1980s Office Demand & Supply                                      Demand        Supply
10%
 8%
                                                                      Oversupply Years
 6%

 4%
 2%

 0%
            1980

                      1981

                                1982

                                          1983

                                                 1984

                                                        1985

                                                               1986

                                                                        1987

                                                                               1988

                                                                                       1989
Source: FW Dodge, CB Commercial, BLS, Mueller
                 1990s Cycle
•Factors Driving The First Half Cycle (5 Year)
   •Moderate but stable demand growth    (1991 recession minor)

   •Oversupply and Foreclosures shut down construction
   •Excess space absorbed - bringing markets back
•Factors Driving The Second Half Cycle (5 Year)
   •Moderate Demand growth Continues
   •Oversupply absorbed and return performance improves
   •Construction “constrained” causing rents & prices to rise
   •More efficient markets match supply to demand
                                                                                   Demand Supply
                                                                                      Matched
   3.0%                 1990s Office Demand & Supply
                        Demand            Supply
   2.5%
   2.0%                          Oversupply Absorbed
   1.5%
   1.0%
   0.5%
   0.0%
                 1990

                          1991

                                   1992

                                                1993

                                                       1994

                                                              1995

                                                                     1996

                                                                            1997

                                                                                     1998

                                                                                            1999
Source: FW Dodge, CB Commercial, BLS, Mueller
                   2000s Cycle
Demand
•Globalization - creates stable U.S. economy
•Job Growth out of Technology Change
•2.4 million population growth per year for 10 years
•Baby boomers at “highest income earning” years
   •second home market wave
•Echo boom children – college, first job, & renting
•Aging population not a major factor till 2014
•Employment growth - determines demand - WHEN
                2000s Cycle
                         Demand
        Echo Boom                                      Baby Boom
              Ages 0-60: Percent of Total Population
1.70%


1.60%


1.50%


1.40%
                           Gen X
1.30%


1.20%


1.10%


1.00%


0.90%
         0
         1
         2
         3
         4
         5
         6
         7
         8
         9
        10
        11
        12
        13
        14
        15
        16
        17
        18
        19
        20
        21
        22
        23
        24
        25
        26
        27
        28
        29
        30
        31
        32
        33
        34
        35
        36
        37
        38
        39
        40
        41
        42
        43
        44
        45
        46
        47
        48
        49
        50
        51
        52
        53
        54
        55
        56
        57
        58
        59
        60
                                  Age
                                                      2000s Cycle
                                                   Change in 20-29 Year Old Age Cohort
 1,500,000




 1,000,000
                                                   Baby Boom

                                                                                         Echo Boom
   500,000




        -




  (500,000)




                                                                         Gen X
(1,000,000)
               62

               64

               66

               68

               70

               72

               74

               76

               78

               80

               82

               84

               86

               88

               90

               92

               94

               96

               98

               00

               02

                E

                E

                E

                E

                E

                E
              04

              06

              08

              10

              12

              14
             19

             19

             19

             19

             19

             19

             19

             19

             19

             19

             19

             19

             19

             19

             19

             19

             19

             19

             19

             20

             20
            20

            20

            20

            20

            20

            20
Source: National Center for Health Statistics and Legg Mason estimates
                 2000s Cycle
                  Supply Constraint
•Public Markets make R.E. Capital markets efficient
   •Economically driven capital - low spec construction
   •Research watchdogs
•Constrained Supply (economically driven capital)
   •construction labor harder to find
   •materials costs increasing
   •infrastructure problems constrain growth
•Feedback loop keeps demand and supply in better balance
   •greater transparency
   •Faster reaction to demand slowdown
         -0.015
                  -0.01
                          -0.005
                                   0
                                       0.005
                                               0.01
                                                      0.015
                                                              0.02
                                                                        0.025
1976:1                                                                          0.03

1978:1
1980:1
1982:1
1984:1
1986:1
1988:1
1990:1
1992:1
1994:1
1996:1
                                                                                  Employment Growth




1998:1
                                                                     US




2000:1
2002:1
2004:1
                                                                     DENVER




2006:1
2008:1
  Office Market Cycle FORECAST
                   4th Quarter, 2004 Estimates
     Atlanta    New Orleans
      Austin    Norfolk
   Charlotte    N. New Jersey
    Chicago     Oklahoma City
  Cincinnati    Orlando
  Cleveland     Philadelphia
  Columbus      Phoenix
Dallas FW-1     Pittsburgh
  Denver        Portland
      Detroit   Raleigh-Durham
    East Bay    Sacramento
     Hartford   Salt Lake
    Houston     San Antonio
                San Francisco
 Indianapolis
 Jacksonville   San Jose                                              10      11
                Seattle                                                                  12
 Kansas City
Long Island-1   Stamford                                     9
 Los Angeles    St. Louis
                Wash, D.C.
                                                        8                                     13
       Miami
  Milwaukee     W. Palm Beach-1                     7       LT Average Occupancy
 Minneapolis    NATION                         6                                                   14
    Nashville
                                                                                                        15
                              4           5                                                                  16
    1       2        3            Orange County+1
                                                                                                                  1
                                  Riverside+2
     Baltimore-1
     Boston
                         Albuquerque
     New York
                         Ft. Lauderdale
     Tampa-1
                         Honolulu                                Source: Mueller, 2004
                         Las Vegas
                         Memphis
                         Richmond
                         San Diego+1
                         Wilmington
                                                             Denver Office Cycles

15.0%                                                                                                                                                     94.0

                                                                                                                                                          92.0
10.0%
                                                                                                                                                          90.0

 5.0%                                                                                                                                                     88.0

                                                                                                                                                          86.0
 0.0%
         1989

                1990

                       1991

                              1992

                                     1993

                                              1994

                                                     1995

                                                            1996

                                                                     1997

                                                                            1998

                                                                                   1999

                                                                                           2000

                                                                                                  2001

                                                                                                         2002

                                                                                                                2003

                                                                                                                       2004

                                                                                                                              2005

                                                                                                                                     2006

                                                                                                                                            2007

                                                                                                                                                   2008
                                                                                                                                                          84.0
 -5.0%
                                                                                                                                                          82.0
                                            LT Average 82.2%
-10.0%                                                                                                                                                    80.0

                                                                                                                                                          78.0
-15.0%
                                                                                                                                                          76.0

-20.0%                                                                                                                                                    74.0
                                                                   Rent Growth            Occupancy
 Industrial Market Cycle FORECAST
                           4th Quarter, 2004 Estimates

     Atlanta    Nashville
   Charlotte    New York
    Chicago     Oklahoma City
  Cincinnati    Orlando
  Cleveland     Pittsburgh
  Columbus      Portland
 Dallas FW      Raleigh-Durham
     Detroit                               Denver
Indianapolis
                Richmond                   Los Angeles                                   11
Kansas City
                Salt Lake                  Milwaukee                               10              12
                San Francisco                                  Riverside
Las Vegas-1     San Jose
                                           Orange County
                                           San Diego
                                                                            9
Long Island
   Memphis
                Stamford                   W. Palm Beach               8                                13
                St. Louis
      Miami     Tampa-1                                    7               LT Average Occupancy
Minneapolis                                     6                                                            14
                                                                                                                  15
                              4        5                                                                               16
  1       2          3                                                                                                      1
                                  East Bay-1
                                  Houston-1
  Austin-1                        N. New Jersey-1
  Baltimore-1                     Norfolk
  Boston-1                        Philadelphia
  Hartford-1                      Washington, D.C.                              Source: Mueller, 2004
                         Ft. Lauderdale
                         Honolulu
                         Jacksonville+1
                         New Orleans +1
                         Phoenix-1
                         Sacramento
                         San Antonio
                         Seattle
                         NATION
                                                    Denver Industrial Cycles

20.0%                                                                                                                                                96.0

                                                                                                                                                     95.0
15.0%
                                                                                                                                                     94.0

                                                                                                                                                     93.0
10.0%    LT Average 92.3%
                                                                                                                                                     92.0

 5.0%                                                                                                                                                91.0

                                                                                                                                                     90.0
 0.0%
                                                                                                                                                     89.0
         1989

                1990

                       1991

                              1992

                                     1993

                                            1994

                                                   1995

                                                          1996

                                                                 1997

                                                                        1998

                                                                               1999

                                                                                      2000

                                                                                             2001

                                                                                                    2002

                                                                                                           2003

                                                                                                                  2004

                                                                                                                         2005

                                                                                                                                2006

                                                                                                                                       2007

                                                                                                                                              2008
                                                                                                                                                     88.0
 -5.0%
                                                                                                                                                     87.0

-10.0%                                                                                                                                               86.0
                                                          Rent Growth                 Occupancy
 Multifamily Market Cycle FORECAST
                              4th Quarter, 2004 Estimates



                                   Austin           Chicago
                                   Baltimore        Ft. Lauderdale
                                   Cleveland        Jacksonville
                                   Dallas FW+1      Las Vegas+1
                                   East Bay         N. New Jersey
                                   Indianapolis+1   Norfolk-1
                                   Kansas City-1    Philadelphia+2
                                                                           Orlando+3     10      11
                                   Milwaukee        Riverside                                            12
     Denver                        Minneapolis-1    Tampa                         9
       Hartford                    New Orleans      W. Palm Beach+1
     Houston-1                     New York
                                                                       8                                       13
       Miami-1                     Phoenix                 7                     LT Average Occupancy
        Portland
Raleigh-Durham
                                   St. Louis
                                   NATION
                                                    6          Los Angeles
                                                                                                                    14
      Richmond                                                 Orange County+1                                           15
                               4        5                      Sacramento                                                     16
    1       2             3                                    San Antonio                                                         1
                                            Atlanta-1          San Diego+1
             Charlotte                      Boston
            Cincinnati                      Honolulu
          Columbus+1                        Nashville
                Detroit                     Oklahoma City
           Long Island                      San Francisco
             Memphis                        Washington, D.C.                           Source: Mueller, 2004
            Pittsburgh
              San Jose
             Salt Lake
                Seattle
             Stamford
                                                          Denver Apartment Cycles


14.0%                                                                                                                                                 96.0

12.0%                                                                                                                                                 95.0

10.0%                                                                                                                                                 94.0

8.0%                                                                                                                                                  93.0
                                                                                                              LT Average 92.3%
6.0%                                                                                                                                                  92.0

4.0%                                                                                                                                                  91.0

2.0%                                                                                                                                                  90.0

0.0%                                                                                                                                                  89.0
        1989

               1990

                      1991

                             1992

                                    1993

                                           1994

                                                   1995

                                                           1996

                                                                  1997

                                                                         1998

                                                                                1999

                                                                                       2000

                                                                                              2001

                                                                                                     2002

                                                                                                            2003

                                                                                                                   2004

                                                                                                                          2005

                                                                                                                                 2006

                                                                                                                                        2007

                                                                                                                                               2008
-2.0%                                                                                                                                                 88.0

-4.0%                                                                                                                                                 87.0

-6.0%                                                                                                                                                 86.0

                                                  Rent Growth            Occupancy
Retail Market Cycle FORECAST
        4th Quarter, 2004 Estimates


                                     Boston-1
                                     Honolulu
                                     Houston-1
                                     Indianapolis             East Bay
                                     Long Island              Norfolk
                                     Los Angeles              Phoenix
                Austin
                                     New Orleans              San Francisco
                Charlotte
                                     Riverside                Salt Lake
                Cincinnati                                    San Diego
                Cleveland            San Antonio-2
                                                              Tampa              10          11
                                     Stamford
                Columbus-1                                                                        12
                Dallas FW-1
                                     St. Louis
                                     W. Palm Beach+1
                                                                      9
                Hartford                                                  Ft. Lauderdale+1
                Memphis
                                                        8                 Miami+1                      13
                N. New Jersey-1               7                           Washington DC
                Philadelphia       6              Baltimore
                                                                                                            14
                San Jose-1
                                                  Chicago            LT Average Occupancy                        15
                4         5                       Denver+1                                                            16
1   2    3                    Atlanta
                                                  Milwaukee
                                                                                                                           1
                              Detroit
         Jacksonville                             Minneapolis
                              Nashville+1
         Kansas City                              New York-1
                              Oklahoma City
         Las Vegas                                Orange County
                              Orlando+2
         Raleigh-Durham                           Pittsburgh-1
                              Richmond+2
                                                  Portland-1                  Source: Mueller, 2004
                                                  Sacramento-1
                                                  Seattle
                                                  NATION
                                                           Denver Retail Cycles


10.0%                                                                                                                                                96.0

                                                                                                                                                     94.0
8.0%
                                                                                                                                                     92.0

6.0%                                                                                                                                                 90.0

                                                                                                                                                     88.0
4.0%
                                                                                                                                                     86.0
2.0%
                                                                                                    LT Average 84.5%
                                                                                                                                                     84.0


0.0%                                                                                                                                                 82.0
        1988

               1989

                      1990

                             1991

                                    1992

                                           1993

                                                   1994

                                                          1995

                                                                 1996

                                                                        1997

                                                                               1998

                                                                                      1999

                                                                                             2000

                                                                                                    2001

                                                                                                           2002

                                                                                                                  2003

                                                                                                                         2004

                                                                                                                                2005

                                                                                                                                       2006

                                                                                                                                              2007
                                                                                                                                                     80.0
-2.0%
                                                                                                                                                     78.0

-4.0%                                                                                                                                                76.0

                                                  Rent Growth           Occupancy
Hotel Market Cycle FORECAST
                  4th Quarter, 2004 Estimates



                               Chicago
                               Cincinnati
                               Ft. Lauderdale
                               Las Vegas
                                                    Baltimore+1
                               Milwaukee
                                                    Jacksonville
                               Nashville
       Atlanta                                      Long Island
                               Orlando
     Boston-1
        Detroit
                               Portland
                                                    New York
                                                    Oklahoma City+2       San Diego       10      11
     East Bay
                               Raleigh-Durham
                                                    Orange County+1                                       12
      Hartford
                               San Antonio
                                                    Philadelphia
                                                                                 9
   Houston-1
                               Seattle
                               Stamford
                                                                      8                                        13
Indianapolis-1
  Kansas City                  NATION                     7                    LT Average Occupancy
    Pittsburgh                                  6                                                                   14
     San Jose                                                 Los Angeles
     St. Louis                                                Norfolk                                                    15
                              4        5                                                                                      16
    1        2       3                     Honolulu
                                                              Riverside
                                                              W. Palm Beach
                                                                                                                                   1
                         Austin            Phoenix
                         Charlotte         Sacramento
                         Cleveland         Washington DC+1
                         Columbus
                         Dallas FW+1
                         Denver                                                       Source: Mueller, 2004
                         Memphis
                         Miami
                         Minneapolis
                         New Orleans
                         N. New Jersey+1
                         Richmond
                         Salt Lake
                         San Francisco
                         Tampa
                                                                Denver Hotel Cyles

10.0%                                                                                                                                                 75.0


8.0%
                                                                                                                                                      70.0
6.0%


4.0%                                                                                           LT Average 63.8%                                       65.0

2.0%

                                                                                                                                                      60.0
0.0%


-2.0%
                                                                                                                                                      55.0
-4.0%


-6.0%                                                                                                                                                 50.0
        1989

               1990

                      1991

                             1992

                                    1993

                                           1994

                                                  1995

                                                         1996

                                                                  1997

                                                                         1998

                                                                                1999

                                                                                       2000

                                                                                              2001

                                                                                                     2002

                                                                                                            2003

                                                                                                                   2004

                                                                                                                          2005

                                                                                                                                 2006

                                                                                                                                        2007

                                                                                                                                               2008
                                                                Rent Growth            Occupancy
  Real Estate
Financial Cycles

 Capital Flows
 Affect Prices
        Market Cycle Capital Flow Impact
   Capital Flows to Existing Properties
Cost Feasible Rents Reached
                                          Hyper Supply




                            LT Occupancy Avg.




                           Capital Flows to New Construction
                       National Office Physical Market Cycle
                           vs Financial Cycle - New Permit Values
               96                                                                         65,000
                    Physical                                                              60,000
                                                       Financial                          55,000
               92
                                                                                          50,000
   Occupancy




                                                                                                   Value ($Mil)
                                                                                          45,000
               88                                                                         40,000
                                                                                          35,000
                                                                                          30,000
               84
                                                                                          25,000
                                                                                          20,000
               80                                                                         15,000
                1972    1976          1980    1984    1988
                       Source: CB Commercial, Census Bureau
                                                              1992   1996   2000   2004
                                             Market Cycle               Permit
Source: BEA, CB Commercial, Mueller
                    Flow of Funds Commercial Mortgages
                          All Sectors (1976 - 2001)
25,000
                                                                                                                    False Price
20,000                                                                                                              Appreciation
                                                                                                                    Support
15,000
 ($ Mils)




10,000
                                                                                                                                                                ?
  5,000
            0
                                                                                                                                     Public Market
 -5,000                                                                                                                              Volatility
-10,000
                1970Q1
                         1972Q1
                                  1974Q1
                                           1976Q1
                                                    1978Q1
                                                             1980Q1
                                                                      1982Q1
                                                                               1984Q1
                                                                                        1986Q1
                                                                                                 1988Q1
                                                                                                          1990Q1
                                                                                                                   1992Q1
                                                                                                                            1994Q1
                                                                                                                                     1996Q1
                                                                                                                                              1998Q1
                                                                                                                                                       2000Q1
       Source: Federal Reserve
                                         Historic Property Cap Rates
                                                               Historic Property Cap Rates 1989-2002
                        11.0


                        10.5


                        10.0
Going-in Cap Rate (%)




                         9.5


                         9.0


                         8.5


                         8.0


                         7.5

                                                                                                                    Source: Real Estate Research Corp.
                         7.0
                               1989



                                        1990



                                                 1991



                                                        1992



                                                                   1993



                                                                          1994



                                                                                    1995



                                                                                             1996



                                                                                                    1997



                                                                                                             1998



                                                                                                                          1999



                                                                                                                                  2000



                                                                                                                                             2001



                                                                                                                                                      2002
                                      Office - CBD       Apartment           Office - Suburban       Industrial - Warehouse              Industrial R&D
                                      Historic Property Cap Rates
                                                           Historic Property Cap Rates 1989-2002

                        12.0



                        11.0
Going-in Cap Rate (%)




                        10.0



                         9.0



                         8.0



                         7.0


                                                                                                               Souce: Real Estate Research Corp.
                         6.0
                               1989


                                      1990


                                             1991


                                                    1992


                                                               1993


                                                                      1994


                                                                               1995


                                                                                        1996


                                                                                                 1997


                                                                                                        1998


                                                                                                                    1999


                                                                                                                            2000


                                                                                                                                    2001


                                                                                                                                             2002
                                                    Hotels               Retail - Power Center          Regional Mall
                            Transaction Pricing
                              Q1 2004 Cap Rates
    9.5     9.3                 9.3
                                                                       Denver
    9.0
                                                                       US
                                      8.4      8.4
    8.5
    8.0           7.8
                                                     7.7
    7.5
                                                                 7.1
                                                                       6.9
    7.0
    6.5
    6.0
             Office            Industrial       Retail         Apartment
            36/1636 deals      25/1319 deals   33/1624 deals   37/1798 deals

Source: Real Capital Analytics, New York       www.rcanalytics.com
           Where is U.S. Real Estate $ Capital Coming From

                            2000 2001                2002 2003
           $4.0
Billions




           $3.0
           $2.0
           $1.0
           $0.0
           -$1.0
           -$2.0
           -$3.0
           -$4.0
                   inst'l    foreign   reit/public    user/other   private - local   private - nat'l




Source: Real Capital Analytics, New York www.rcanalytics.com
             Reduce Bond Allocation to Minimum Level as Rates Rise

                                                                                                      10yr Treasury Yield
            18.0

                                 Avg. Return '50 - '80 = 3.9%                                                                                                      Avg. Return '80 - '02 = 9.2%
            16.0


            14.0


            12.0


            10.0
Yield (%)




             8.0
                                 Avg. LT Yield = 6.65%
             6.0


             4.0


             2.0

                                 Avg. Return '50 - '70 = 1.9%
              -
                   Apr-53

                            Apr-55

                                     Apr-57

                                              Apr-59

                                                       Apr-61

                                                                Apr-63

                                                                         Apr-65

                                                                                  Apr-67

                                                                                           Apr-69

                                                                                                    Apr-71

                                                                                                             Apr-73

                                                                                                                      Apr-75

                                                                                                                               Apr-77

                                                                                                                                        Apr-79

                                                                                                                                                 Apr-81

                                                                                                                                                          Apr-83

                                                                                                                                                                    Apr-85

                                                                                                                                                                             Apr-87

                                                                                                                                                                                      Apr-89

                                                                                                                                                                                               Apr-91

                                                                                                                                                                                                        Apr-93

                                                                                                                                                                                                                 Apr-95

                                                                                                                                                                                                                          Apr-97

                                                                                                                                                                                                                                   Apr-99

                                                                                                                                                                                                                                            Apr-01

                                                                                                                                                                                                                                                     Apr-03
            2003 Physical Cycle
      Demand & Supply Affect Vacancies Rental Growth
        Demand Growth - MUCH SLOWER for How long?
              Supply Slowing - how long to absorb?
                Return to Growth Phase in 2006?
      Wars stop progress - Create Economic Recovery after ?

               2003 Financial Cycle
         Capital Flows Affect Prices – Stock Market Fear
        Real Estate the SAFEST Investment Alternative?
      Interest Rates are driving investments in the short run
R E Equity – dominated by private markets (currently international)
        Public Market Debt – Biggest RE Capital Source
                  Confidence will return in 200?
       For an electronic copy
               of the

      Legg Mason
Real Estate Market Cycle Monitor
               Email

grmueller@leggmason.com

				
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