Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S....

89
Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI

Transcript of Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S....

Page 1: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI

Page 2: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

What I will cover this year:• What I told you last year.• An economic overview of current trends, mortgage

rates and capital market issues. • A review of the housing market.• A look at the current CoStar and Moody’s RCA

repeat sales indices for CRE• Q&A will follow after KC Conway.

Page 3: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Last year I said:• After June of 2011 interest rates would be very likely to

go up based on QE2 ending.• That we would start to see a value impact race

between interest rates (neg) and rental growth (pos) over the next several quarters.

• The pricing spread for high quality occupied core property was quite high compared to property with some vacancy in the non-top tier markets.

• That this was a slow recovery and that the government cannot easily create jobs.

Page 4: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

GDP Annual Change, 1980-2011

Source: U.S. Bureau of Economic Analysis

In 2005 Dollars

Economic Recessions(Q1)

GDP Change from the

Economist Survey is 2.3% for

2011

Page 5: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

U.S. Employment Annual Change,1991-2010

Source: U.S. Bureau of Labor Statistics

Annual Data Not Seasonally AdjustedThe Private sector started laying off quickly while the Gov sector kept

hiring.

Page 6: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

U.S. Jobs Gained or Lost By Month, 2010-11Thousands

Source: U.S. Bureau of Labor Statistics; *data for June and July 2011 is preliminary

Seasonally Adjusted through July

Page 7: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

U.S. Corporate Profitability 1999-2011

Source: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics

Seasonally AdjustedBillions

Page 8: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

U.S. Corporate Profitability vs.Private Employment, 1999-2011

Source: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics

Seasonally AdjustedBillions Millions

Page 9: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Another Look: U.S. Corporate Profitability vs.Private Employment, 1999-2011

Source: U.S. Bureau of Economic Analysis; U.S. Bureau of Labor Statistics

Billions Millions(Corporate profits shifted ahead 1 year; i.e.: 1999 actual = 2000 on chart)

Page 10: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

U.S. Retail Sales, 1992-2011Billions

Source: U.S. Census Bureau

Seasonally Adjusted

Page 11: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Purchasing Managers Index, 1980-2011Above 50 = Purchasing More

Source: Institute for Supply Management

Page 12: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

What about mortgage rates?• Where are mortgage rates headed?

– What about inflation?– What about spreads?

Page 13: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

CPI Annualized Quarterly Change, 1990-2011

Source: U.S. Bureau of Labor Statistics

U.S. City Average, All Items; Not Seasonally Adjusted

Page 14: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

10-Year Treasury Bonds, 1900-2011

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Source: Federal Reserve Board

Average: 4.88

2.50

15.32

Page 15: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

30-Year Fixed Rate Mortgages (FRM) vs.10-Year Treasury Bonds, 1990-2011

0%

2%

4%

6%

8%

10%

12%0

1/9

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7/9

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30-Year FRM 10-Year Treasury Bonds

Source: Freddie Mac; Federal Reserve Board

Page 16: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

1-Year Adjustable Mortgage Rates vs.1-Year Treasury Bonds, 1990-2011

Source: Freddie Mac; Federal Reserve Board

Page 17: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Stockton Single Family Regular & REO Average Sold Price and First Mortgage Amount

Watch this mortgage line when we add

second mortgages

Page 18: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Stockton Single Family Regular & REO Average Sold Price and Total First & Second Mortgage Amount

Page 19: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Palmdale Single Family Regular & REO Average Sold Price and First Mortgage Amount

Page 20: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Palmdale Single Family Regular & REO Average Sold Price and First and Second Mortgage Amount

Page 21: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

La Jolla Single Family Regular & REO Average Sold Price and First Mortgage Amount

Page 22: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

La Jolla Single Family Regular & REO Average Sold Price and First and Second Mortgage Amount

Page 23: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Does Case-Shiller represent the typical home in America?

Page 24: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change
Page 25: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Note: This is a two edged sword. C-S overstates the decline but also over states the increase.

Page 26: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

San Diego 2005-2011 Home Prices Mapped at Zip Plus 4

Page 27: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

What about the impact of distress by market?• Where will you see greater discounts between

regular sales and REO sales?– In markets with a lot of distress or– In markets with very little distress?

Page 28: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change
Page 29: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change
Page 30: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

REO Percent of All Sales, 2008-2011

Source: Collateral Analytics

Average of 20 Major U.S. Markets

Page 31: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

REO Sale Price Discounts, 2008-2011

Source: Collateral Analytics

Percent Lower Price Than Regular Sales; Average of 19 Major U.S. Markets

Page 32: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Cardiff By the Sea Spread

Chula Vista Spread

Page 33: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Appraisal includes REO comps and

Page 34: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

2 REO sales in red

Subject

Page 35: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Value estimate without the REO comps

Page 36: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change
Page 37: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Subject

REO sales in red

Page 38: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Prices will rebound, why?

Page 39: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Single-Family Home Permits, 1980-2011Millions

Source: Economy.com

1980-2011 Average: 0.866

Seasonally Adjusted

Page 40: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Multi-Family Home Permits, 1980-2011Millions

Source: Economy.com

1980-2011 Average: 0.379

Seasonally Adjusted

Page 41: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

A Few CRE Price Trends

Page 42: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

CoStar CCRSI August release

Investment grade up 5.6%

in past year

Page 43: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Volume is back to normal but does include a lot of distress

Page 44: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change
Page 45: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change
Page 46: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Conclusions Corporate profits are up and private employment growth

should be accelerating but uncertainty looms. Mortgage rates are a bargain right now and likely to go up. Future values will be a race between interest rates and

rental growth. Capital is coming back but buyers remain focused on core

markets and highly occupied properties. Metro market averages can be misleading, just as Case-

Shiller indices are a poor representation of the typical owner in any given metro.

Page 47: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Thank you

Page 48: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

K.C. Conway, MAI, CREExecutive Managing Director, Real Estate AnalyticsColliers [email protected]

The “Fast & Furious”As the market

conditions and the U.S. debt crisis change at a

FAST pace,the response from the

capital markets and regulatory regime is

FURIOUS.What does it all mean for Commercial

Real Estate?

48

Page 49: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

THE DISCLAIMER:

The Appraisal Institute (AI) makes no representations or warranties aboutthe accuracy or suitability of any information in this presentation. The AIdoes not guarantee, warrant, or endorse the advice or services of ColliersInternational Valuation & Advisory Services (CIVAS).

This presentation consists of materials prepared by CIVAS, and is providedduring this conference solely for informational purposes of conferenceattendees. This presentation is not intended to constitute legal,investment or financial advice or the rendering of legal, consulting, or otherprofessional services of any kind.

49

Page 50: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

“It’s The Economy!”

As Norm Miller pointed out regarding

residential real estate,we need to understand how what we have been doing the past decade

impacts us in the decade ahead.

50

Page 51: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

51

“It’s The Spending!”

The U.S. has reached 100% of GDP

& 100% of Household Income

in terms of total debt.

That is why the U.S. “AAA” debt rating was downgraded!

Americans owe $98,141,000,000,000 or$319,587 per man, woman and child.

Page 52: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Decade

Job Growth (millions)

% Ch

1940s 11.927 38%

1950s 10.744 25%

1960s 16.902 31%

1970s 19.624 28%

1980s 18.351 20%

1990s 21.630 20%

2000s -1.179 -1% Source: U.S. BLS

-10%

0%

10%

20%

30%

40%

50%

Nov

-50

Nov

-53

Nov

-56

Nov

-59

Nov

-62

Nov

-65

Nov

-68

Nov

-71

Nov

-74

Nov

-77

Nov

-80

Nov

-83

Nov

-86

Nov

-89

Nov

-92

Nov

-95

Nov

-98

Nov

-01

Nov

-04

Nov

-07

Nov

-10

Rol

lin 1

0-Y

r.C

hang

e in

Tot

al E

mpl

oym

ent

Implication: Less construction lending; More focus on Perm & ReFi R.E. Investing

As a result, regulators want banks on a Land and R.E. diet! What is the value of R.E. without credit? Def of Market Value?

America’s Lost Decade of Job Growth!

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Page 53: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

53

Construction “mis-Management” Actual photos from appraisals by banks with “Impaired CRE”

1.

2.Two Key Questions for Appraisers:1. As these sell, how are they

used as comps in appraisals?2. Is there a “Cost to Fix” or

complete adjustment ?

Maybe LESS CONSTRUCTION isn’t such a bad thing!

3.

Page 54: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

What happened in the Market? Misread Demand Drivers!

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Page 55: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

What happened in the Capital Markets and Banks?OVER-LEVERAGE#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?

A. $800 billion

We did not quadruple the physical amount of US Real Estate in 12 years.This crisis is an OVERLEVERAGE event.

$3.15 TrillionTotal Outstanding CRE Debt end of Q1 2011Source: Federal Reserve Bank of New York 55

Page 56: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

56

29.5 22.2 24.3 21.237.5

57.317.3

12.5 14.3 15.7

13.4

11.532.336.6 37.7 33.4

34.420.1

20.9 28.6 23.6 29.714.7 11.1

Commercial Construction

Residential Construction

Investor Commercial

Mortgage

Owner Occupied

Commercial Mortgage

Multi family Residential 1-4, HELOC

< $1 Bil 6,179 Banks

$1-$50 Bil 512 Banks

$50-$160Bil 17 Banks

$160Bil -$1.5Tr 10 Banks

Why the mortgage “put-backs” are so material to the large banks

NOT all Banks are created alike!1 : What are the types of CRE Debt in Banks? 2 : Is CRE debt the same for all of our Bank clients?

10

Page 57: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

57>90% was ADC, CRE or Residential

Page 58: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

2011 BANK FAILURES - 63No.

63 Bank of Whitman WA 5-Aug-1162 Bank of Shorewood IL 5-Aug-1161 Integra Bank National Assoc. IN 29-Jul-1160 BankMeridian, N.A. SC 29-Jul-1159 Virginia Business Bank VA 29-Jul-1158 Bank of Choice CO 22-Jul-1157 LandMark Bank of Florida FL 22-Jul-1156 Southshore Community Bank FL 22-Jul-1155 Summit Bank AZ 15-Jul-1154 First Peoples Bank FL 15-Jul-1153 High Trust Bank GA 15-Jul-1152 One Georgia Bank GA 15-Jul-1151 Signature Bank CO 8-Jul-1150 Colorado Capital Bank CO 8-Jul-1149 First Chicago Bank & Trust IL 8-Jul-1148 Mountain Heritage Bank GA 24-Jun-1147 First Commercial Bank of Tampa FL 17-Jun-1146 McIntosh State Bank GA 17-Jun-1145 Atlantic Bank and Trust SC 3-Jun-1144 First Heritage Bank WA 27-May-1143 Summit Bank WA 20-May-1142 First Georgia Banking Company GA 20-May-11

Bank Name State Closing Date

19 Habersham Bank GA 18-Feb-1118 Canyon National Bank CA 11-Feb-1117 Badger State Bank WI 11-Feb-1116 Peoples State Bank MI 11-Feb-1115 Sunshine State Community Bank FL 11-Feb-1114 Community First Bank Chicago IL 4-Feb-1113 North Georgia Bank GA 4-Feb-1112 American Trust Bank GA 4-Feb-1111 First Community Bank NM 28-Jan-1110 FirsTier Bank CO 28-Jan-119 Evergreen State Bank WI 28-Jan-118 The First State Bank OK 28-Jan-117 United Western Bank CO 21-Jan-116 The Bank of Asheville NC 21-Jan-115 CommunitySouth Bank & Trust SC 21-Jan-114 Enterprise Banking Company GA 21-Jan-113 Oglethorpe Bank GA 14-Jan-112 Legacy Bank AZ 7-Jan-111 First Commercial Bank of Florida FL 7-Jan-11

Source: FDIC – Thru Aug 5th

63 Bank Failures YTD Vs. 534 in 1989 & 3,625 in 1934

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Page 59: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

2011 BANK FAILURES BY STATENo.

Superior Bank AL 15-Apr-112 Nexity Bank AL 15-Apr-11 Summit Bank AZ 15-Jul-112 Legacy Bank AZ 7-Jan-11 San Luis Trust Bank, FS CA 18-Feb-11 Charter Oak Bank CA 18-Feb-113 Canyon National Bank CA 11-Feb-11 Bank of Choice CO 22-Jul-11 Signature Bank CO 8-Jul-11 Colorado Capital Bank CO 8-Jul-11 FirsTier Bank CO 28-Jan-115 United Western Bank CO 21-Jan-11 LandMark Bank of Florid FL 22-Jul-11 Southshore Community FL 22-Jul-11 First Peoples Bank FL 15-Jul-11 First Commercial Bank o FL 17-Jun-11 Coastal Bank FL 6-May-11 Cortez Community Bank FL 29-Apr-11 First National Bank of Ce FL 29-Apr-11 Sunshine State Commun FL 11-Feb-119 First Commercial Bank o FL 7-Jan-11

Closing DateBank Name State High Trust Bank GA 15-Jul-11

One Georgia Bank GA 15-Jul-11 Mountain Heritage Bank GA 24-Jun-11 McIntosh State Bank GA 17-Jun-11 First Georgia Banking C GA 20-May-11 Atlantic Southern Bank GA 20-May-11 The Park Avenue Bank GA 29-Apr-11 First Choice Community GA 29-Apr-11 New Horizons Bank GA 15-Apr-11 Bartow County Bank GA 15-Apr-11 Citizens Bank of Effingha GA 18-Feb-11 Habersham Bank GA 18-Feb-11 North Georgia Bank GA 4-Feb-11 American Trust Bank GA 4-Feb-11 Enterprise Banking Com GA 21-Jan-11

16 Oglethorpe Bank GA 14-Jan-11 Bank of Shorewood IL 5-Aug-11 First Chicago Bank & Tr IL 8-Jul-11 Western Springs Nationa IL 8-Apr-11 The Bank of Commerce IL 25-Mar-11

Valley Community Bank IL 25-Feb-116 Community First Bank C IL 4-Feb-11

1 Integra Bank National As IN 29-Jul-11 Community Central Bank MI 29-Apr-112 Peoples State Bank MI 11-Feb-111 Rosemount National Ban MN 15-Apr-111 Heritage Banking Group MS 15-Apr-111 The Bank of Asheville NC 21-Jan-111 First Community Bank NM 28-Jan-111 Nevada Commerce Bank NV 8-Apr-11 First National Bank of Da OK 11-Mar-112 The First State Bank OK 28-Jan-11 BankMeridian, N.A. SC 29-Jul-11 Atlantic Bank and Trust SC 3-Jun-113 CommunitySouth Bank & SC 21-Jan-111 Virginia Business Bank VA 29-Jul-11 Bank of Whitman WA 5-Aug-11 First Heritage Bank WA 27-May-113 Summit Bank WA 20-May-11 Legacy Bank WI 11-Mar-11 Badger State Bank WI 11-Feb-113 Evergreen State Bank WI 28-Jan-11

Source: FDIC – Thru Aug 5th

GA still leads with 16… followed by FL (9), IL (6) & CO (5)

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Page 60: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Key Note: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 1986-1994382 banks have been closed during this Financial Crisis 2008-July 201160

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CMBS Delinquencies Hit All Time High in July

Q2 2011: 9.88% vs Q4 2010: 9.20%

CMBS Issues: 1. ReFI Maturity Defaults – There is seasonality to DQT2. 2005-2007 Vintage “Interest Only” to mature 2012-20153. S&P reviewing DSCR calculations / halted ratings

Dec - 09

Page 62: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

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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

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Page 64: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

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LIFE COMPANY R.E. PERFORMANCE

2008: - 4.14%2009: + 11.18%2010: + 16.02%

The “Overall” return was fueled by both “Income” and “Price” appreciation return. It wasn’t just “Cap Rate Compression.”

Page 65: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

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So where are me at Mid-2011? What’s ahead?

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Page 71: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

71Returning “Intellectual Property Mfg” is seeking the education centers!

BostonNC & VA

Note re TX vs CO:Pop dispersion and size are the diff btw green shading.

Office R.E will outperform in “education centers”

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Appraisal Discussion Items:KC’s Top 11 for 2011

Competency

Fair Value Vs. Market Value

Fee Simple Vs. Leased Fee

Highest & Best Use

Sensitivity Analysis

Cap Rate derivation – Mtg Equity

Rents are Declining to FlatExpenses are Rising

DCF Assumptions

Abstracting Leases again NNN Lease to Modified Gross

Property Inspections

Value Impact from a BK MSA

Page 79: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

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Competency Fair Value Vs. Market Value

Q. How much experience does a 15-yr practicing MAI have with valuing “distressed Commercial R.E.?

A. Get some before your deposition!

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Property Interest Appraised Fee Simple Vs. Leased Fee

We still see another 15%-20%decline in value on existingleased CRE as contract rentsroll to market.So what is masking it?Cap Rate Compression!

Page 81: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Highest & Best Use What is “Maximally Productive?”

It’s time to go back to Con-Ed on how to do a proper H&B Use analysis. Every TDR and land deal is a H&B Use assignment!

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Page 82: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Q. Why H&B Use Study?

A. To understand how a $400 million piece of land purchased in 2006 could be worth just $32.5 million 5 years later.

CalPers had written the value completely off by end of 2010, and is recovering $0.08 of their investment.

Note: These were sophisticated investors –CalPers and Weyerhauser.

Arizona Land Sells for 8% of Price Calpers Group Paid at Peak By John Gittelsohn - May 27, 2011 3:07 PM ET Bloomberg

A 10,200-acre (4,100-hectare) desert site in Arizona sold for $32.5 million this week, five years after a group with investors including the California Public Employees’ Retirement System paid $400 million for the land.

Arcus Property Solutions LLC, a private-equity fund with about $100 million under management, paid cash for the property in Goodyear, about 60 miles (97 kilometers) southwest of Phoenix. The site, now called Amaranth Land LLC, had been planned for a 42,000-home community. The deal shows how property investors are taking advantage of a plunge in values after the real estate bubble burst in Arizona.

“Five, six years ago, people were spending $200 million or $300 million or $400 million,” Garrett said in a telephone interview. “This just sold for about eight cents on the dollar.”

The 2006 buyers were a joint venture of MW Housing Partners III LP, a real estate fund with money from Calpers and Weyerhaeuser Co. (WY); and Scottsdale, Arizona-based Montage Land LLC, according to Arizona Corporation Commission records. The deal was funded by a $250.1 million loan and $150 million in cash, according to Terry McDonnell, publisher of Business Real Estate Weekly of Arizona in Scottsdale. 82

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Sensitivity Analysis Land

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Mortgage Equity Technique R = LTV * DSCR * Mc

Page 85: Presentation by Norm Miller, Ph.d. & K.C. Conway, MAI · GDP Annual Change, 1980-2011. Source: U.S. Bureau of Economic Analysis. In 2005 Dollars. Economic Recessions (Q1) GDP Change

Rents are Declining to Flat Expenses are Rising

DCF Assumptions

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NNN Lease to Modified Gross A 29% Hit to ValueLEASE STRUCTURE & VALUE EROSIONby Pat Craig & NY CIVAS:

The industrial market in the NY CBSA has over1.1 billion square feet of space within nearly30,000 buildings. Lease structures within thismarket vary from gross leases to triple netleases, depending on the owner’s preferenceand the tenant’s tolerance for paying expensereimbursements.In the last 18 months, it has become a tenant’smarket, and in many cases tenants havesquawked at paying the tax reimbursement.When a market transitions from a triple netmarket, to a double net or modified-gross rentmarket (no tax pass through), there can be asignificant loss in value.As an example, as the pro-forma below attests,with all things being equal except the taxreimbursement, the change in lease structurewill cause value erosion of 29%.

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Property Inspections The “Wei” Metric for MF in 2011

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Value Impact from a BK MSA

A Case Study – Vallejo, CA

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Conclusion:

“You have to be nice to snakes.”