Market Timing for Development in the Bay Area

1

• Bay Area Economic and
• Apartment Market Outlook
• Prepared for
• South Bay Apartment Brokers Forum
• Prepared byLawrence Souza, CRE
• Chief Economic Council
• California-Tri-County Apartment Association
• Principal - Real Estate and Financial Economist
• Johnson/Souza Group, Inc.- Commercial Real
  Estate Broker - Professor Real Estate
  Finance RE/MAX Commercial
  Santa Clara University
• Golden Gate University

Wed. 2/9/05
2
Introduction
3

Introduction

• Introduction
• U.S. California Budget Issues
• National Economic Fundamentals
• Technology/Venture Capital Trends
• Local Business Cycles
• California
• Demographics
• Employment/Inflation
• Housing Market
• Apartment Market
• Commercial Market
• Conclusions Comparative Advantages and Risks

4

Johnson/Souza Group, Inc

• Over 15 years of real estate economic and
  financial research, and institutional due
  diligence underwriting.
• Specializes in residential and commercial market
  research, valuation and brokerage services.
• Tracking and forecasting of economic, real estate
  and financial cycles and efficient portfolio
  construction, optimization and risk management.

Contact Information Lsouza_at_JohnsonSouzaGroup.com
Direct [phone] Message [phone]
5
Economic Environment and Forecast
6
Economic Environment 2005

• National Economy
• Economic growth accelerated in 2003 - 2004 to
  average 4.2 per year, compared to 2.4 in 2003,
  expected to slow to 3.5 in 2005, barring any
  major shocks such as stock-bond market declines
  from rising short/long-term interest rates caused
  by massive government funding (crowding out) of
  federal-state-local budget deficits
• Apartment construction peaked in 2002 bottomed
  in 2003 at higher levels compared to historical
  cycles and projected to rise through 2008 as
  high capital flows persist
• Tech sector reached first cyclical peak in 2004,
  moving from recovery-to-growth phase, reflecting
  rising demand (prices) and business investment in
  semiconductors and IT services and equipment
  however, industry slowed in second half of 2004,
  revenues expected fall slightly in first half of
  2005

7
Economic Risks 2005-2006
Global Terrorist attacks, military buildups Aggression for natural resources (Oil Shocks 35-45) Mass migrations (Immigration) Rising gap between rich and poor nations (Poverty) Currency devaluations (deflation), trade wars Mounting sovereign debt Environmental catastrophe-degradation
United States Massive federal (war/entitlements), state and local debt Currency devaluation (disinflation), rising interest rates Healthcare crisis (underinsured-none), rising costs Affordable housing crisis, rising urban homelessness Slow job growth (manufacturing sector), trade deficits
California Continued budget deficits, low credit ratings Continued cutbacks in social welfare, education, infrastructure spending and state bureaucracy Higher fees and taxes at local level Affordable housing crisis, rising urban homelessness
8
Economic Environment 2005
Bay Area Job losses since 2000 exceeds 350,000 -- driven by tech sector, 32 of wages -- job growth strong upward trend High home prices, extremely low affordability Rental rate declines bottoming at structural occupancy rates, reduced use of concessions, normal turnover
Sacramento Weakness in economy from state budget deficits, expenditure reductions-layoffs in gov-tech sectors Rapidly rising, but more affordable home prices Benefiting from continued firm-population in-migration New supply being absorbed, more competitive
Southern California Diversified economic base, exposure to declining dollar, competition from cheap China imports Housing demand in excess of supply, price exposure to rising mortgage interest rates Orange County improving Inland Empire regional job leader
9

Silicon Valley Business-Market Cycle Overview

• The local economy continues to recover, low
  levels of employment growth (Jobless Recovery),
  on upward trend.
• Economic growth to accelerate second half 2005
  into 2006.
• Apartment construction cycle peak 2002, trough in
  2003-2004, growth phase from 2005 through 2008.
• Next business cycle peak 2004 - 2005, next
  technology-employment cycle peak 2006 - 2008.
• Target submarkets for apartment investment
• Mountain View, Milpitas, and Sunnyvale
• Santa Clara, Campbell and San Jose

10
U.S. Policy Issues
11

2005-2006 Budget

• 2.568 trillion budget, 55.4 mandatory (1.4
  trill.), 36 discretionary (922 bill.), 8
  interest (211 bill.), 427-to-390 billion
  deficit (3.5 GDP)
• Borrows 170 billion from social security trust
  fund.
• 20 billion cut in domestic programs, 137
  billion in entitlement programs, 1.4 billion for
  Amtrak, 56 bill. education.
• Does not include 81 billion for Iraq War, tax
  cuts (1.5 trill.2011-2015), social security
  (1.0 trill. 10 years).
• Increased spending on defense (419 bill.), up
  41 since 2001.
• 69 billion cut in Medicaid, California to see
  550 mill. cut in Medicaid, 4.6 bill. over
  decade.
• Elimination of State Criminal Alien Assistance
  Program, 120 million Cal.
• Research-and-Development Programs, 132 bill, up
  45 since 2000.
• Basic technology research, up 2.4,
  Nanotechnology to get 344 bill
• Under current system, deficits debt-to-GDP to
  50 by 2014

12

Budget Deficits

• 7.6 trillion public debt outstanding, 33
  billion in interest.
• 427 billion annual budget deficit, not including
  192 billion for Iraq War 2004 - 2005
• Administration to cut deficit in half by 2009,
  under optimistic assumptions for rising tax
  revenue, excluding cost of Iraq/Afghanistan wars
  (100 billion in 2005)
• After 2005, will have to pay 500 billion for
  permanent tax cuts and 400 billion for Medicare
  prescription drug program
• Budget deficits to total 5 trillion over next 10
  years
• Foreigners currently own 47 of U.S. government
  debt (China/Japan)

13

Social Security

• 70 year-old retirement system (New Deal FDR) will
  be taking in less than it pays by 2018
  (Pay-as-you-go) as boomers retire
• System once had 16 taxpaying workers per retiree
  in 1950, will have two workers per senior by
  2030, has 3.3 workers today
• No longer trust fund accumulating assets to pay
  beneficiaries surpluses have been spent on war,
  pork-barrel projects, tax relief, etc. Government
  is now issuing IOUs.
• Percentage of income tax revenues needed to meet
  payroll tax shortfall on Social Security and
  Medicare to rise from 3.6 in 2004, to 28.6 in
  2020, and 52.7 in 2030
• 3.7 trillion shortfall over 75 years, dwarfed by
  Medicare shortfalls, less than projected value of
  tax cuts

14

Social Security

• Adding private accounts similar to 401K programs,
  to earn higher returns however, since 1990,
  defined benefit median annual returns (7.42),
  compared to defined contribution median returns
  of (6.86) (Watson Wyatt Worldwide)
• Includes cuts in future benefits, would cost 2
  trillion to over 10 years to move system to
  private accounts, plus borrow money to balance
  accounts
• Index benefits to price-index from wage-index
• Business to pay from 19 today to 30 per
  participant to fund the Pension Benefit Guaranty
  Corp., up 58, may cause small funds to stop
  providing retirement benefits, deficit doubled to
  23.3 billion in 2004, to introduce more
  complicated formula to calculate premium
• System will have to be financed through higher
  payroll taxes on future generations, increased
  borrowing, lower benefits, lower expenditures,
  etc.

15
California Budget
16

California Budget

• 2005-2006 Gov. Arnold Schwarzenegger (R)
• 85.7 billion budget, 4.2 increase (revenues
  6.8)
• 4 billion in new borrowing, to close 9.1
  billion deficit, 30 billion in Outstanding
  Debt will face 6 billion deficit next year
• No new taxes, 3 billion in spending cuts local
  governments, social service programs/schools,
  eliminate cost-of-living increases
• Take 1.3 billion from transportation funds,
  redirect Prop. 42 funds
• Schools would get 2 billion less than promised,
  will need to pick up 1.1 billion in pension
  costs, looking to weaken Prop.98 guaranteed
  funding did come through on UC/CSU compacts,
  increased spending on prisons
• Gov. wants constitutional amendment, spending cap
  (budget control), across-the-board cuts if
  lawmakers do not me deadline, special election to
  cost 15-to-20 million
• Privatize pension system, from defined benefit to
  defined contribution by 2007 (CalPERS/CalSTRS)

17
National Economic Fundamentals
18
Consumer Confidence
Fell dramatically in Feb, lowest in 16-months,
due to policy announcements
19
Gross National Product (GDP)
World GDP Growth Rates 2004
2005 Wld 3.6 2.9 U.S.
4.4 3.5 Eur 1.8
1.9 Jap 4.0 2.1 China 9.2
8.0
2005f 3.5
20
Non-Farm Productivity (Output Per Hour)
1996 - 2001 2.5 Ann. Avg.
1990 - 1992 2.5 Ann. Avg.
6.6 4Q01
2002-2004 4.3 Ann. Avg.
1993 - 1995 0.7 Ann. Avg.
0.8 4Q05
Source Bureau of Labor Statistics.
21
Payroll Employment
U.S. added 157,000 jobs in Dec.04, added 2.23
million in 2004, best since 1999, below labor
force growth rates
150,000-to-175,000 needed per month to compensate
for labor force growth
U.S. lost 1.7 million jobs to China imports from
1989-to-2003
Note U.S. lost 2.0 million mfg jobs since 2000,
added 96,000 in 2004, weakest rebound in factory
employment of any economic recovery on record.
22
Domestic Revenue Aircraft Departures
23
U.S. Unemployment Rate
442,000 people not looking for work
Median length of time to find job, dropped from
10.5-to-9.5 weeks
Dec.04 5.4
5.0 Natural Rate
People are finding jobs, but working more hours,
at less income and less benefits (low-wage
service jobs).
24
Inflation Expectations
Up 114
Oil Prices up from 15 in 1998 to 45 in 2005, up
200
Down 27
25
Inflation Expectations
U.S. Producer Price Index
Note Commodity prices up 75 since 2001, 15 in
2004, 50 from three years ago spot gold up 57
since 2002 to 414 troy ounce in 2004 materials
up 16.2, copper up 34 healthcare costs up 8
per year since 2000.
26
Inflation Expectations
U.S. Consumer Price Index
Increased Volatility
8 Ann. Avg.
3 Ann. Avg.
4 Ann. Avg.
27
Regional Economics - Inflation Rates
2005f
2003 2004 United States 1.8 3.8 Western
Region 2.1 2.3 SF Bay Area 1.8 1.5 Los
Angeles 2.6 3.7
Pt.Ch.
2.0
3.4
2.9
0.2
- 0.3
2.5
1.1
3.5
Source U.S. Department of Labor Consumer Price
Index All Urban Consumers, Johnson/Souza Group,
Inc.
28
Yield 10-Year Treasury
10-Year Treasury Yield up over 50 basis points
since March 04 due to rising inflation
expectations, geo-political risk, and government
deficit financing
Imputed Mtg. Int. Rt. 4.24 2 6.24
4.24
29
Yield Curve
Yield Curve rose in 2004 - 2005 due to rising
economic activity, consumer-producer inflation
expectations (Oil Prices), and government
deficits (Crowding out)
Prime 5.25 Fed Funds 2.25, from 6.5
00 Discount 3.25
Yield Cure Analysis 1 mth T-bill
up 100 bpts 1-to-2.0 3 mth T-bill
up 125 bpts 1-to-2.25 6 mth T-bill up
150 bpts 1-to-2.56 2 yr T-bond up
150 bpts 1.75-to-3.25 5 yr T-bond up
50 bpts 3.0-to-3.5 10 yr T-bond up
2 bpts 4.25-to-4.27 30 yr T-bond down
-25 bpts 5.0-to-4.75
http//www.bloomberg.com/markets/rates/ http//sto
ckcharts.com/charts/YieldCurve.html
30
Balance of Trade
31
Current Account Balance
5.6 of GDP
China trade surplus, 100 bn per year, to
increase due to removal of quotas textiles,
apparel, and capital-intensive high-tech goods.
China foreign-exchange reserves to 610 billion
in 2004, biggest single year, largest behind
Japan, exports up 35 foreign direct investment
up 17, will continue, due to pegging of Yuan
below PPP
32
Foreign Currency
U.S. dollar to be in long-term bear mkt, similar
to 1970s/1985-95 period external financing
exceeds private savings, current account/budget
deficits, currency policy Japan/China, slowing
economic growth in Europe/Asia, etc.
Euro up 13.3 since Aug 2004, 40 since
introduction
33
Technology
34
The Importance of IT Industries
35
Silicon Valley Geography
36
Silicon Valley Geography

37

Technology
38
Non-Residential Fixed Investement
39
RD Expenditures
40

Technology
2003-2005 100
1985-2000 2010
Global merger activity up 59 in 2004, highest
since 2000
2000-2003 -80
41

Technology

• Global chip sales up 48 Y-O-Y Nov. 2003, up 40
  in 2004, due to capital spending by chip makers,
  end of 5-Year (1998-2000) GAAP depreciation cycle
  (2002 2005).
• In 2004, global chip revenues up 33, 12.5 per
  year through 2008.
• In 4Q03, global PC shipments grew 11.4 Y-O-Y,
  -4 in 2001.
• In 2004, chip-making tools and equipment revenue
  growth equipment up 39.3 and Chips up 27.
• In 3Q03, IT spending up 8.7 Y-O-Y, 3 in 3Q02,
  12.5 in 2004.

42

Silicon Valley - Information/Manufacturing
Employment
43
Venture Capital Trends
44
Silicon Valley Venture Capital Flows hit bottom
2003, rising stock prices-IPOs drive flows
45
Bay Area still captures over 32 of all VC
invested in the U.S.
46

No. Cal. Venture Capital Flows
Ch.
3Q03 3Q04 California 1.83 bil. 1.97 bil. San
Jose 1.06 bil. 1.17 bil. San Francisco
0.24 bil. 0.28 bil. Sacramento 0.02
bil. 0.00 bil.
7.7
10.4
16.7
- 100
6.7

• Silicon Valley 1.35 bil. 1.44 bil.

Accounts for 33 of all VC raised in U.S.
Source Venture Economics and Johnson/Souza
Group, Inc.
47
So. Cal. Venture Capital Flows
Ch.
3Q03 3Q04 Los Angeles 0.17 bil. 0.13
bil. Orange Co. 0.06 bil. 0.07 bil. San
Diego 0.22 bil. 0.31 bil. So. Cal. 0.45
bil. 0.51 bil.
- 24
17
41
13
0.2

• United States 4.32 bil. 4.33 bil.

Source Venture Economics and Johnson/Souza
Group, Inc.
48
Business Cycles
49
United States Business Cycles
http//www.bea.doc.gov/bea/dn/home/gdp.htm
50
California Employment Growth (YOY)
51
San Jose PMSA Non-Farm Employment Growth (YOY)
G
G
G
G
G
R
R
R
R
R
R
Source Department of Labor Statistics.
52
California
53
California Worlds 5th LargestEconomic Power
The Western Region is projected to outperform the
nation overall, driven largely by employment and
population growth in California.
Gross State Product Exceeds 1.3 trillion
Population (35.8 Million) 12.3 of total U.S.
population today 19 of U.S. population growth
through 2007 Adds 479,000 people per year
Employment (14.6 Million) 11 of total U.S.
employment today 13 of U.S. employment growth
through 2008 Adds 262,000 new jobs per year
Venture Capital (9.2 bill. 04) Up 13.6, 45 of
all U.S. Venture Capital depends on 580,000 of
students enrolled at University of California
State Colleges for brain power/human capital
investment
Source Economy.com, U.S. Census, Venture
Economics
54
Non-Farm Employment Growth Trends
55
Change in HH Formation vs. Change in Total
Residential Permits
56
From 2000 through 2005, the accumulated gap
between housing production and housing demand is
projected to total 370,000 units, averaging
50,000-to-60,000 housing units per year
57
Residential Mortgage Rates Fixed
- 70 bpts
5.13
http//www.bankrate.com/brm/rate/mtg_home.asp
58
Existing Median Home PriceAppreciation -
California
04 appreciation shown as Nov 03 vs. Nov
04Source California Association of Realtors
59
creating an ever increasing affordability gap
60
Silicon Valley Facts
61
Silicon Valley Facts

• Silicon Valley (Epicenter of Information
  Technology)
• Greatest concentration of high-tech industries
• Leading development next generation technologies
• 40 workforce in tech related industries
• Home to 61 fastest-growing high-tech firms
• 60 manufacturing in high-tech, 9 for U.S.
• 90 exports high-tech
• 34 of all California exports
• 53 of exports to Asia

62

Silicon Valley Facts

• Silicon Valley is poised for the next tech boom,
  driven by combined bio-science and information
  technologies, continued Internet innovation and
  investment, and molecular electronic circuitry.
• Tech sector accounts for 32 of all wages and 11
  of all jobs in the Bay Area.
• Since 1993, federal RD funding into the Bay Area
  totaled 20 billion.
• Bay Area labor productivity is projected to
  average 4.2 per year through 2007.

63
Demographics
64
Population Change by Bay Area Counties
Bay Area Demographics
Source Association of Bay Area Governments,
2001 data.
65
Components of Population Change Santa Clara
Co., 1991-2003F
South Bay Demographics
Source California Dept. of Finance and
Johnson/Souza Group, Inc.
66
Santa Clara County Age Distribution
South Bay Demographics
WWII GENERATION
SWING GENERATION
BABY BOOMERS
GEN X
ECHO BOOMERS
Source California Dept. of Finance.
67
Population Densities Santa Clara County Target
Markets
68
Household Income Distributions Santa Clara
County Target Markets
69
Prime Renter Cohort Densities Santa Clara County
Target Markets
70
Unemployment
71
Unemployment is projected to reach
Natural-Frictional rates by 2004 2005
72
Employment
73
Bay Area Non-Farm Employment growth turned
positive in 4Q04
74
Northern California Economics
MSA Year-Over-Year Employment Growth Rates
Ann.Ch. Gain/Loss
Pt.Diff.
Nov 02-03 Nov
03-04 San Jose - 3.8 - 1.2 San Francisco -
3.8 0.9 Oakland - 2.3
1.1 Sacramento 1.0 0.1
2.60
- 9,800
1990 2000 2.6, 23,850
4.7
8,800
1990 2000 1.4, 14,400
3.4
10,900
1990 2000 1.7, 16.600
- 0.9
700
1990 2000 2.5, 15,760
2.0
915,618

• Western Region 0.9 2.9

1990 2000 2.0, 548,095
Average annual compound growth rate, and
average annual absolute change in non-farm
employment.
Source U.S. Department of Labor, Johnson/Souza.
Note Non-farm employment growth rates are not
seasonally adjusted.
75
Absolute Change in Job Growth
South Bay Economics
Source Association of Bay Area Governments,
Projections 2001.
76
South Bay Economics Job Growth Trends
1984-2008F
2005-2008 60,700 new jobs
1995-2000 201,000 jobs created
2000-2004 216,000 jobs lost
72,000
18,700
52,000
27,000
16,250
27,000
10,100
Average
15,650
-9,800
-31600
-74,000
- 112,000
Source California Employment Development Dept.,
Johnson/Souza Group, Inc., and Economy.com.
77
Major Employment Clusters Santa Clara County
(850 Employees)
78
Home Prices
79
Housing Market
Median Home Prices

• Home Prices Nov03
  Nov04 Y-O-Y Ch.
• United States 175,000 188,500 7.7
• West 235,800 271,000 14.9
• California 386,760 473,260 23.1
• Bay Area 574,340 661,660 15.2
• Los Angeles 382,190 474,570 24.2
• Santa Clara 560,000 649,000 15.9
• Sacramento 261,310 346,170 33.1
• Riv.-San. Co. 235,150 321,950 36.9
• Orange Co 526,270 633,340 20.3
• San Diego 454,620 564,830 24.2

Source California and National Associations of
Realtors and Johnson/Souza Group, Inc.
80
Median Home Prices 1982 2005
Housing Market
Bay Area home prices increased 11.4 per year
since 1997, and are almost three times the
national average
Source California Association of Realtors,
Johnson/Souza Group, Inc., and Economy.com.
81
Housing Affordability
82
high home prices, low affordability
83
Bay Area Housing Market
84
Housing Market
Housing Affordability Index

• Affordability Nov 03 Nov
  04 Y-O-Y Ch.
• United States 57 55 -3.5
• California 25 19 -24.0
• SF Bay Area 19 14 -26.3
• Los Angeles 24 17 -29.1
• Santa Clara 26 23 -11.5
• Sacramento 38
  25 -34.2
• Riv.-San Co. 33 20 -39.4
• Orange Co 18 13 -27.8
• San Diego 16 12 -25.0

Source California Association of Realtors and
Johnson/Souza Group, Inc.
85
Apartment Market
86
Applications - Real Estate Cycle Theory
87
Applications - Real Estate Cycle Theory
88
Employment Driven Apartment Demand
Bay Area total 5 multifamily permits issued are
projected to fall below employment driven demand
by 2005
89
Bay Area household formations turned positive in
3Q/2003 as net outmigration slowed
San Francisco Bay Area Total HouseholdsAbsolute
Change Year-Over-Year vs. Total Residential
Permits Issued
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
-5,000
-10,000
Household Formations
Total Residential Permits
-15,000
-20,000
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
Sources Economy.com, U.S. Census, and
Johnson/Souza Group, Inc.
90
Bay Area apartment market at structural vacancy,
job growth recovery to drive rent growth
91
Bay Area Apartment Market
92
Commodity (Mountain/Desert/Pacific North West)
markets have been much more volatile than supply
constrained (California) markets
93
Vacancy and Rent Trends
94
Market Vacancy Rate Trends
Vacancy Rate
Vacancy Rate

• Asking Rents 2003
  2004
• Los Angeles 5.3 4.9
• Orange Co. 4.9 4.5
• San Diego 5.2 4.1
• Riverside 4.3 4.1
• Sacramento 6.9 7.2
• Seattle 7.8 7.0

2006f
2005f
4.2
4.6
4.7
4.2
3.8
3.2
3.9
3.8
SF Bay Area 7.4
6.6 5.6 4.7
6.6
5.6
5.5
4.0
Denver 10.5 9.9
8.6 7.2
Phoenix 10.0
8.7 7.4 6.4
Source MP/F Research, Inc., REIS Reports, Inc.,
RealFacts, Inc., and Johnson/Souza Group, Inc.
95
Market Rent Trends
Effective Rent Growth
Effective Rent Growth

• Asking Rents 2003
  2004
• Los Angeles 2.5 3.8
• Orange Co. 2.1 3.3
• San Diego 1.7 3.5
• Riverside 4.1 5.6
• Sacramento - 2.9 - 2.3
• Seattle - 5.8 - 2.2

2006f
2005f
5.4
4.2
3.0
4.2
4.4
5.7
5.2
5.4
SF Bay Area - 9.0 -
3.1 2.5 5.7
0.9
3.5
3.4
5.1
Denver - 8.8 - 4.4
- 1.0 2.9
Phoenix - 4.6
- 2.0 2.7 5.4
Source MP/F Research, Inc., REIS Reports, Inc.,
RealFacts, Inc., and Johnson/Souza Group, Inc.
96
Metro Area Relative Rankings
97
Californias Limited supply leads to sustained
revenue growth...
Same-Store Revenues
LAX 7.27SFO 3.92PHX 0.34DEN (
0.82)
CAGR
98
and even stronger NOI growth
Same-Store Net Operating Income
LAX 10.45SFO 4.88PHX (1.40)DEN (2.74)
CAGR
99
Silicon Valley Cap Rate Trends
100
Commercial Market
101
Silicon Valley Commercial Market
MSA Office-Industrial Vacancy Rates (4Q03/4Q04)
Office
Industrial YOY Ch.Rnts San
Jose 24/19 10/12 - 12 San
Francisco 20/17 13/9 5.8
Oakland 19/18 15/13
0 Sacramento 12/14 12/11 -
4
Bay Area 9,000,000 sf Net Absorption 2004
(Silicon Valley 16) 114,570,000
sf Available as of 4Q04 (Silicon Valley 49)
Source CB Richard Ellis, Inc. and Johnson/Souza
Group, Inc.
102
Office-Industrial-Apartment Markets Santa Clara
County
103
Non-Residential Permits Valuations

• 9 Bay-Area Counties (1989-2003)

Millions of Dollars
SOURCEU.S. Real Estate Research Council of
Northern California
104
Office Bldg Total Rentable Space (1999 100)

SOURCE Torto Wheaton
105
Office Vacancy Rates

SOURCE Torto Wheaton
106
Office Rent Index, /SF

SOURCE Torto Wheaton
107
Industrial Total Rentable Space (1999 100)

SOURCE Torto Wheaton
108
Industrial Vacancy Rates

SOURCE Torto Wheaton
109
Industrial Rent Index, /SF

SOURCE Torto Wheaton
110
Construction Lending
Millions of Dollars

• 9 Bay Area Counties

SOURCEU.S. Real Estate Research Council of
Northern California
111
Conclusions
112
Comparative Advantages

• Long run apartment market fundamentals
• Extremely low housing affordability
• Scarcity of developable land
• High concentrations of wealth
• High quality of life
• Strong Demographic Trends
• Growing population of Empty-Nesters and
  Echo-Boomers

113

Comparative Advantages

• Future job growth-housing demand
• High-tech and Bio-tech Manufacturing
• Healthcare-Information Systems Services
• Financial Services and Venture Capital
• Telecommunications/Networking
• Multimedia and Entertainment
• Internet and Software Programming
• International trade and Tourism
• Construction and Engineering Services
• Education and Government Services
• Defense

114
Economic Risks

• Market-Economic Risks
• High costs of living and doing business
• State-Local Regulations, taxes, workers comp,
  deficits
• Lack of affordable/developable land
• Traffic Congestion and Infrastructure
  Constraints
• Out sourcing and migration
• Severe cut-backs in education and social
  services
• Mergers-consolidation industrial, technology,
• telecommunications and financial institutions

115
Macro-Economic Risks

• Middle East Wars (Oil Price Spikes)
• Current Account and Budget Deficits (Interest
  Rates)
• Rising Inflation Expectations (Health Care Costs)
• High Credit-Equity Risk Premiums (Spreads)
• Consumer-Business Confidence Investment
• European Recessions and Trade Wars
• Rising loan defaults, foreclosures, bankruptcies
• Labor strikes, falling wage growth,
  underemployment
• Accounting Announcements, Investor Confidence

116
Lawrence Souza (lsouza_at_Johnson/SouzaGroup.com)
brings to Johnson/Souza Group, Inc. (Direct
(415-713-0213) over 15 years of experience in
real estate economic and financial research. As
Director of Research for BRE Properties, Inc.
(REIT) in San Francisco and holding Senior
Market/Research Analyst positions at Metric
Institutional Realty Advisors and
Mellon-McMahan/MacFarlane Realty Advisors, and
market research positions at Norris, Beggs and
Simpson and Grubb Ellis commercial brokerage.
Mr. Souza combines traditional fundamental real
estate economic and market research with
fundamental and technical financial and capital
market research. This combined approach allows
for the tracking and forecasting of economic,
real estate and financial cycles and efficient
portfolio construction, optimization and risk
management. Mr. Souza is also a licensed
California Real Estate Broker (Realtor),
affiliated with RE/MAX Commercial, specializing
in urban-infill residential, commercial property
transactions, and 1031 Exchanges in the San
Francisco Bay Area and Western Region.   Mr.
Souza has undergraduate degrees in Economics (BA)
and Business Administration (BS) with
concentrations in Accounting, Finance, Banking
and Real Estate and holds masters degrees in
Applied Economics (MA), Finance/Investments (MS),
Public Administration (MPA), and Information
Systems (MSIS). Mr. Souza has been teaching
Modern Real Estate Principles and Finance since
1996 with an emphasis on real estate in a modern
portfolio and capital markets context and the
institutionalization, securitization,
internationalization and technologization of real
estate markets and products.