ULI Trend Program Series

1
Update on the Bay Area Condo Market

• ULI Trend Program Series
• February 5th, 2007

2
Recent Headlines

• Housing market likely to achieve new lowsEast
  Bay Business Times, 12/29/06
• Home sales bode well for big pictureWall
  Street Journal, 12/29/06
• End of housing slump seems to be drawing near
  Wall Street Journal, 12/28/07
• Housing market slump goes on, December home
  sales reflect usual holiday slowdownSan
  Francisco Chronicle, 1/18/07

3
Introduction

• Trends in Bay Area residential real estate
• Specific project challenges, successes
• Panelists
• Kim Diamond, Senior Manager-Land Acquisition
  Entitlements, Pulte Homes
• Krysen Heathwood, COO, The Mark Company
• Connie Moore, President/CEO, BRE Properties
• Renee McDonnell, Senior VP, IHP Capital Partners

4
Panelist

• Kim Diamond
• Senior Manager, Land Acquisition Entitlement
• Pulte Homes
• Nine years of real estate experience in the Bay
  Area
• Concentrates on urban infill and redevelopment
  residential opportunities in San Francisco and
  the East Bay
• M.A. in Urban Planning from University of
  California, Los Angeles

5
East Bay Market Conditions

• 2006 Challenging Year
• From Housing craze to more normalized,
  stabilized and corrected housing market
• East Bay - No exception to rule
• Look back at 2006 Housing Market Resales New
  Construction
• Homebuilding market response
• Pricing incentives, slowing of housing starts
• 2007 Moving Forward

6
East Bay Employment

• Total Jobs in East Bay increased 1.9 between
  11/2005 and 11/2006 - 19,900 jobs
• 2007 is projected to increase at the same rate
• Most significant sectors
• Trade / Transportation/Utilities 18
• Government 17
• Professional / Business Services 15
• Education Health Services 12
• Manufacturing 9

Source Real Estate Economics
7
East Bay Resales

• 12/2005 12/2006
• Sales
• Single-Family Homes 78 of total resales
• Huge growth in inventory
• 24 drop in sales for Single-Family Homes and
  Condos
• Median price
• 1.5 - Modest Increase to 697k (Single-Family)
• 5.1 Decrease to 393k (Condos)

8
Resales Single-Family Homes
Sales Volume
24 drop in volume - Homes sold from 12/2005 to
12/2006 Huge Growth in Inventory !!!
Source Trendgraphix
9
Resales Single-Family Homes
Pricing
1.5 increase in price - 12/2005 to 12/2006
Source Trendgraphix
10
Sales Volume New Homes

• Q4 2005 Q4 2006
• Alameda County
• Attached Product 73 of total sales (2006)
• 17 decrease in sales for Detached Attached
  
• 8 decrease for Attached
• 42 decrease for Detached
• Contra Costa County
• Attached Product 36 of total sales (2006)
• 47.5 increase in sales volume
• Total of Active Projects increased 14 (104 to
  119)
• Absorption remained the same at 2-3 units/month

11
Sales Volume New Homes
Source Hanley-Wood, The Gregory Group
12
Pricing New Homes

• Q4 2005 Q4 2006
• Alameda County
• 4.4 decrease in sales for Detached Attached
  combined
• 1.6 decrease for Attached
• 5.7 increase for Detached
• Contra Costa County
• .7 decrease for Attached
• 1.9 decrease for Detached

13
Average Pricing New Homes
Source Hanley-Wood, The Gregory Group
14
Response to Market Conditions

• Consumer buying pace slowed down dramatically
  interest rates increased, consumer confidence
  down.
• Homebuyers mortgage buying power declines
  affordability worsens.
• Tremendous growth in resale inventory new home
  market competes against resale market.
• Construction pace slowed down, but not immediate
  slowdown of construction engine.
• Spec inventory needs to be sold.
• Ongoing burn-off of inventory through sales
  incentives.

15
Sales Incentives
16
Pultes Strategy

• Approx. 900-1,000 closings/year in Bay Area
• Diversified geographically product mix
• 1) Inner East Bay Higher-density attached
  product (townhomes, condos)
• 2) East Contra Costa County Lower-density
  detached product (single-family homes)

17
428 Alice

• 93-unit mid-rise condo project in Jack London
  Square
• Pre-sales began in early 2006 Construction
  completed August 2006
• Cannot slow down construction engine as market
  changes
• All or nothing proposition
• Sales pace decreased sales pricing was
  normalizing
• Construction Costs increased 10-15
• Inventory on Market - Competition with several
  other condominium projects in Jack London Square
  Downtown Oakland
• 18 units left to sell
• Sales blitz Reduced pricing by 20 free HOA
  dues for 2 yrs

18
2007 Moving Forward

• Burning-off of standing inventory continues while
  controlling production. Pulte no standing
  inventory.
• Sales incentives continue, but not as extensive
  as in Q4 2006.
• Future of interest rates unknown - projected to
  increase gradually over next 12 months.
• Aggressive pricing strategies at market-supported
  prices.
• East Bay Job Growth is promising. Housing in
  close proximity to job centers will fare better.
• Focus on core competencies in East Bay townhome
  product single- family homes. Open to
  higher-densities, but mid-rise, high-rise deals
  dont pencil in East Bay at present.

19
2007 Moving Forward

• The Future is Still Bright.Richard Dugas,
  Pulte Homes, President CEO
• January Strong month for sales
• Construction beginning in new communities in East
  Bay

Glashaus, Emeryville 130 townhomes
The Anchorage at Marina Bay, Richmond 207
townhomes
Zephyr Gate, West Oakland 145 townhomes/condos
20
Panelist

• Krysen Heathwood
• Chief Operating Officer
• The Mark Company
• Over 15 years of real estate sales marketing
  experience
• Represented some of the Bay Areas most
  high-profile, successful developments The
  Brannan, St. Regis Residences, Portfolio at
  Santana Row
• Bachelor of Science, Business Administration,
  San Diego State University

21
San Francisco Pricing

• Overall (New Construction and Resales Entire
  City)
• YOY 2005 to 2006 1.67
• Resales (SF Districts 7, 8, 9)
• YOY 2005 to 2006 2.1
• New Construction /SF
• YOY 2005 to 2006 4.7
• CAR predicts a 2 decline for 2007

22
San Francisco Absorption

• Resales (SF Districts 7, 8, 9)
• YOY 2005 to 2006 Active Units 15.3
• YOY 2005 to 2006 Units Sold -12.8
• YOY 2005 to 2006 DOM 45.2
• New Construction
• YOY 2005 to 2006 Total Units on Market 52
• YOY 2005 to 2006 Absorption -22.9
• CAR predicts a 7 decline in sales volume for
  2007

Due to presales trend, approx. 604 of the 1,805
units entering the market are in contract at
developments still under construction and
therefore unable to close.
23
San Francisco Pipeline

• Approximately 1,100 1,200 of the 2,875
  currently-selling units are actually available
  (not in contract or closed)
• Under Construction
• 3,399 units scheduled to start marketing in 2007
• 248 units scheduled to start marketing in 2008

24
Market Conditions

• Stronger since late November until early January
• Stronger consumer confidence
• More traffic
• More qualified buyers
• Stronger traffic to sales ratio
• Past two weeks have seemed erratic

25
Successful Projects Today

• Characteristics
• Location
• Pricing and concessions
• Designed to the target market
• Strong initial interest list
• Differentiated offering

26
Successful Developers Today

• Characteristics
• Able to make decisions quickly
• Listens to the sales team
• Team members with urban experience
• Team members have experience with difficult
  markets
• It is a tough market with lots of competition,
  so lets get started.

27
Buyer Profile

• Location is main reason for purchasing
• Mix of first-time buyers, move-up buyers and
  multiple-home buyers
• Primary residence
• Brokers as main lead source
• No children or grown children
• Moving from within San Francisco
• Employed in San Francisco

28
Panelist

• Connie Moore
• President, Chief Executive Officer
• BRE Properties, Inc.
• 30 years of real estate experience
• National Association of Real Estate Investment
  Trusts Board of Governors Executive Committee,
  Fisher Center for Real Estate Urban Economics
  Policy Board Committees, ULI, RentBureau, LLC
  Board of Directors
• MBA from the University of California, Berkeley,
  Haas School of Business

29
BRE Properties, Inc.

• 100 focused on multi-family, for-rent housing in
  California where Gross State Product exceeds 1
  trillion
• 79 developments, 22,166 units
• Portfolio growth of over 6 in 2006, almost 8
  for Bay Area

30
Affordability Metrics
MEDIAN HOME PRICE/AFFORDABILITY
San Francisco Bay Area
11
709,980
Orange County
708,840
12
San Diego
612,030
9
Los Angeles
560,990
12
Sacramento
383,920
19
Seattle
310,300
29
Denver
248,400
50
Phoenix
243,400
53
31
Market Cap Rates
32
Rental Market Conditions

• Example San Diego
• Troup rotations
• Condo conversions (12,000 units removed from
  rental pool)
• Strong demand with little inventory

33
Rental Pipeline

• Strong pipeline is key
• 1.5 billion of construction in the pipeline
• BRE Properties is focusing on coastal California
  where land is
• Difficult to source
• Entitlements are difficult to obtain
• Merchant builders avoid

34
Renter Profile

• 46 million renters are between 19-30 years old
• 72 million renter are between 50-75 years old
• Californians have a 43 propensity to rent,
  compared to 34 in the entire U.S.

35
Panelist

• Renee McDonnell
• Senior Vice President
• IHP Capital Partners, San Francisco
• Worked with IHP since its inception in 1992
• Current focus is primarily dedicated to the
  management of IHPs existing assets
• Bachelor of Science, Business Administration,
  Southern Oregon State University

36
Sacramento Region Attached New Homes
Annual Running Sales
3,000
El Dorado
Sacramento South
2,500
Sacramento Northeast
Sacramento Northwest
Placer
2,000
Sutter/Yuba
Yolo
Sales
1,500
1,000
500
0
1997Q4
1998Q2
1998Q4
1999Q2
1999Q4
2000Q2
2000Q4
2001Q2
2001Q4
2002Q2
2005Q2
2005Q4
2006Q2
2006Q4
1993Q2
1993Q4
1994Q2
1994Q4
1995Q2
1995Q4
1996Q2
1996Q4
1997Q2
2002Q4
2003Q2
2003Q4
2004Q2
2004Q4
Quarters
Sources Hanley Wood, IHP Capital Partners
37
Northern/Central CA Affordability
California State
San Francisco Bay Area
70
Sacramento Area
Central Valley Overflow
60
41 Percentage Points
50
Affordability
40
30
20
14 Percentage Points
10
0
1988Q1
1989Q2
1990Q3
1995Q3
1996Q4
1998Q1
1999Q2
2000Q3
2001Q4
2003Q1
2004Q2
2005Q3
2006Q4
1991Q4
1993Q1
1994Q2
Quarters
38
Sacramento Region
New Attached Detached Median Home Prices
Sources Hanley Wood, IHP Capital Partners
Quarters
39
Sacramento SFA Q305 vs. Q306
2400
2200
12 decrease in Flash Sales
2000
1800
Flash Sales Q3 2005
1600
Flash Sales Q3 2006
Unsold Inventory Q3 2005
1400
Unsold Inventory Q3 2006
1200
46 increase in unsold inventory
1000
800
600
400
200
0
2005
2006
2005
2006
1
40
Happy New Year!Questions?