M A R K E T R E P O R T

First Quarter 2008

ECONOMY SLOWING — STRENGTHENING EXPORTS A BRIGHT SPOT

Slower economic growth is expected to reduce industrial tenant demand this year, but new development is on the
decline, and vacancy is forecast to remain healthy when compared to earlier in the decade. Home building has been a major
drag on economic growth over the past several quarters, weighing on industrial demand among manufacturers and dis-
tributors of construction materials and other housing-related products. Fortunately, the industrial market is receiving a
boost from international trade, as foreign demand for U.S. goods has strengthened over the past few years due to the dol-
lar’s weakness against other major currencies. Investors would be wise to not only monitor the direction of local and nation-
al economic activity, but also logistics trends, infrastructure improvements and policy changes, all of which may signifi-
cantly impact distribution and warehousing demand.

After a four-year recovery cycle characterized by improving fundamentals, strong inflows of capital and cap rate com-
pression, the industrial investment market is reverting to more normalized conditions. Investor demand for industrial prop-
erties remains strong, though the focus has shifted away from short-term price appreciation to property fundamentals. Over
the past five years, industrial prices have increased 45 percent, cap rates have declined almost 200 basis points, and trans-
action velocity has doubled. Investment activity was strong in the first half of the last year but decelerated in the third and
fourth quarters as lending standards tightened. Since the capital markets shock, investors and lenders have shied away from
lower-quality assets and secondary and tertiary markets, which had experienced some of the most significant price gains in
recent years. More conservative lending standards have put cash and lower-leverage investors at a strong advantage by lim-
iting the buyer pool for both higher-priced, top-tier assets, as well as underperforming, aging warehouse properties. With
industrial tenants favoring newer product, older infill industrial assets can offer strong opportunities for adaptive reuse or
redevelopment plays.

2008 ANNUAL INDUSTRIAL FORECAST

73 million Construction: Developers will deliver 73 million square feet of new industrial space in 2008, down
square feet from 77 million square feet last year. A handful of markets — specifically, Dallas/Fort Worth,
will be
completed Riverside-San Bernardino, Phoenix, Chicago, Houston and Northern New Jersey — will account for
more than one-third of this year’s new supply.

70 basis Vacancy: Speculative developers have increased their activity over the past year, with roughly 70
point percent of the total square footage under construction not yet leased. The combination of new sup-
increase in
vacancy ply and easing demand will cause vacancy to climb 70 basis points to 10 percent in 2008.

2.5% Rents: Slower economic growth and rising vacancy will hamper rent gains this year. Asking rents
increase in are forecast to increase 2.5 percent, while effective rents will advance 2 percent. Last year, asking
asking
rents and effective rents grew by 3.5 percent and 3.3 percent, respectively.

7.3 percent Cap Rates: Marketwide cap rates over the past year have averaged 7.3 percent, similar to last year.
cap rate Cap rates for higher-quality properties in coastal markets are averaging 6 percent, while assets in
over the last
12 months major inland markets are selling with cap rates in the mid-6 percent to high-7 percent range.
 EASTERN OVERVIEW
Atlanta
Annual Industrial Completions
This year, the Atlanta industrial market is expected to experience some
2006 2007 2008*
8 weakness, particularly in the Airport and South submarkets, and the vacan-
cy rate is forecast to rise 30 basis points to 15.3 percent. Despite some over-
Square Feet (millions)

6 supply in the near term, strong population growth and steady additions to
payrolls in the coming years support the region’s extended outlook. Over the
4 next five years Atlanta’s population is forecast to add more than 115,000 new
residents annually, supporting industrial space demand among businesses
2
eager to serve the growing region. The industrial investment market remains
healthy, underpinned by forecasts for future demand growth generated by
0
Atlanta NYC-NNJ Chicago Detroit the expansion of local roadways and future port access.
* Forecast
Sources: Marcus & Millichap Research Services, Reis, TWR
New York City-Northern New Jersey
The effects of a softer economy on space demand and the delivery of
speculative new space will result in modest softening of property funda-
mentals in the New York City-Northern New Jersey market in 2008.
Completions will total 4.3 million square feet in the region, up slightly from
last year, with 3.4 million square feet of space is expected to come online this
year in Northern New Jersey. The marketwide increase in deliveries will
drive vacancy up 30 basis points to 7.6 percent by year end. Investors are
Industrial Vacancy likely to demand higher first-year returns in 2008, given the likelihood of
2006 2007 2008* greater near-term vacancy and a slowing rate of rent growth. In fact, the pace
16%
of price appreciation started to level off late last year after years of inexpen-
sive financing enabled buyers to make optimistic assumptions on future rent
12%
and revenue growth.
Vacancy Rate

8%
Chicago
4%
Conditions will remain generally positive in Chicago this year, although
there will be pockets of softness due to expectations of slower economic
0%
growth. The vacancy rate in suburban submarkets is projected to increase 40
Atlanta NYC-NNJ Chicago Detroit basis points to 11 percent as new speculative space weighs on the market.
* Forecast
Sources: Marcus & Millichap Research Services, Reis Specifically, properties built since 2006 remain approximately 50 percent
vacant, whereas smaller multi-tenant assets typically have vacancy rates in
the single digits. Significant projects are scheduled to come online in sub-
markets such as the South I-55 Corridor, although some buildings that have
not yet broken ground may be delayed until 2009 if vacancy continues to
edge higher. Investors remain highly motivated in the metro. Top-tier assets
in areas such as Bolingbrook and Romeoville can price at cap rates of 6 per-
cent or less, while other properties in coveted DuPage and Will counties can
command initial returns of 6.8 percent to 7.1 percent.
Average Asking Rent
2006 2007 2008* Detroit
$8
Restructuring efforts by the Big Three automakers are beginning to sub-
Average Asking Rent

$6 side, and metro employers are projected to trim payrolls in 2008 at a more
modest pace than in recent years. Sectors associated with industrial space
$4 will continue to downsize, offsetting limited supply additions and keeping
vacancy steady at 14.5 percent. The weak dollar, however, is expected to
$2 make U.S.-manufactured goods more affordable overseas and should lead to
increased export activity, which could support the job market and demand
$0
Atlanta NYC-NNJ Chicago Detroit
for industrial properties going forward. Despite local economic turmoil dur-
* Forecast ing the past few years, buyers have remained active, drawn by comparative-
Sources: Marcus & Millichap Research Services, Reis, TWR
ly high cap rates. Assuming early forecasts for modest additions to payrolls
beginning in 2009 come to fruition, investors may accelerate buying activity,
sensing that the local economy has hit bottom and is beginning to rebound.

page 2 Marcus & Millichap ◆ Industrial Research Market Report

WESTERN OVERVIEW
Los Angeles
The Los Angeles industrial market will remain tight in 2008, supported Annual Industrial Completions
2006 2007 2008*
by rising demand for warehouse and distribution space. Trade with Asian 8
markets has driven a 10 percent annual increase in container shipments over

Square Feet (millions)

the past 14 years, though expansion was modest in 2007 and could ease fur- 6
ther this year due to the cooling U.S. economy. Limited land and high con-
struction costs will restrict additions to industrial supply to just 0.7 percent 4

in 2008, but vacancy will inch up 20 basis points to 3.9 percent by year end.
In the investment arena, velocity may slow in 2008 as cash buyers dominate 2

deal flow. Cap rates are in the high-5 percent range, limiting financing
0
options for buyers unable to reduce their loan-to-value ratios with signifi- Los Angeles Phoenix Dallas/ Houston
cant downpayments. If transaction velocity slows considerably during the * Forecast Fort Worth
Sources: Marcus & Millichap Research Services, Reis, TWR
first six months of the year, upward pressure on cap rates could persist
through year-end 2008, enticing more buyers into the market.

Phoenix
The Phoenix market continues to emerge as an attractive distribution
and warehouse center for transporting goods throughout rapidly expanding
Southwest metros. As a result, a surge in the development of large ware-
house space in the Phoenix metro, most notably in the southwestern section
of the valley, has accelerated. The delivery of speculative projects will result Industrial Vacancy
in a supply-demand imbalance, pushing vacancy up 70 basis points to 10.9 2006 2007 2008*
percent this year, while easing rent growth. On the investment side, a sig- 16%

nificant amount of out-of-state capital has driven up prices and compressed

12%
cap rates into the low-7 percent range in the last 12 months. In 2008, howev-

Vacancy Rate
er, investors may require higher yields to offset higher financing costs and
8%
more modest rent growth.
4%
Dallas/Fort Worth
Developers in Dallas/Fort Worth are responding to healthy absorption
0%
levels over the past three years by ramping up construction in 2008, creating Los Angeles Phoenix Dallas/ Houston
* Forecast Fort Worth
a temporary oversupply. New construction is expected to peak this year Sources: Marcus & Millichap Research Services, Reis
with the delivery of 8 million square feet of space. The Metroplex is a major
distribution center along the NAFTA highway, however, which will support
long-term demand for the metro’s industrial space, despite an anticipated 70
basis point increase in vacancy to 13.4 percent this year. Investment activity
will remain elevated in 2008 as buyers continue to expand their portfolios.
Newer top-tier properties will likely garner attention from large buyers,
which could leave some local and smaller investors outbid for the metro’s
best assets.
Average Asking Rent
Houston 2006 2007 2008*
$8
The outlook for Houston’s industrial market will remain positive in
2008, largely as a result of the metro’s favorable location as an important
Average Asking Rent

$6
entry port for foreign goods. The Port of Houston is expected to get a boost
from the widening of the Panama Canal, which is scheduled for 2014 and $4
should alleviate congestion in West Coast ports. Developers are building in
anticipation of this future demand and nearly 4 million square feet of com- $2
petitive space is expected to come online by year end, the second-largest
increase to inventory since 2001. Healthy construction activity, meanwhile, $0
Los Angeles Phoenix Dallas/ Houston
will push vacancy up 20 basis points to 8.5 percent this year. Cash-heavy * Forecast Fort Worth
institutions and REITs are both anticipated to expand their stakes, especial- Sources: Marcus & Millichap Research Services, Reis, TWR

ly as some newer, high-end properties come online. Additionally, prices in

Houston remain more favorable than those in many coastal markets, attract-
ing out-of-state investors to the area.

Marcus & Millichap ◆ Industrial Research Market Report page 3

 CAPITAL MARKETS
BY WILLIAM E. HUGHES, SENIOR VICE PRESIDENT, MARCUS & MILLICHAP CAPITAL CORPORATION
◆ Amid continued volatility across financial markets and rising concerns that a
recession may be looming, the Fed announced a surprise 75 basis point rate
Alan L. Pontius cut in January, followed by a 50 basis point reduction at its scheduled meet-
Managing Director ing at the end of the month. Since the capital markets shock, the Fed had cut
National Office and the fed funds rate a total of 225 basis points to 3 percent by the end of January.
Industrial Properties Group
Tel: (415) 391-9220
apontius@marcusmillichap.com ◆ Economic uncertainty and stock market volatility have driven many investors
to seek safety, resulting in strong demand for U.S. Treasuries. Since last sum-
mer, the yield on the 10-year Treasury has declined approximately 170 basis
points to 3.6 percent.

◆ Underwriting standards snapped back quickly to near-historical norms late last

summer and have stayed fairly consistent, with property quality, location and
operating fundamentals once again the primary drivers of value.

◆ In early February, conduit lender spreads for industrial loans ranged from 295
basis points over the 10-year Treasury to 350 basis points over, 190 basis points
higher than mid-2007. Portfolio lender spreads have also increased but are more
competitive at 195 basis points to 205 basis points over the 10-year Treasury.

◆ Overall, lender requirements reflect the more cautious environment. Loan-

to-values have declined from the mid-70 percent range to approximately 60
percent to 65 percent, while debt-service coverage ratios have increased
from 1.1x to 1.2x. Financing older assets and those outside of high-demand
port and distribution markets has become more challenging.

◆ Outlook: Long-term rates are expected to remain relatively low through 2008,
with the 10-year Treasury yield forecast to hover in the high-3 percent to mid-
4 percent range. The Fed has not ruled out further rate cuts if necessary.

Prepared and edited by

Stephen Hovland
Market Analyst
Research Services RECENT INDUSTRIAL SALES HIGHLIGHTS
Tel: (602) 952-9669
shovland@marcusmillichap.com Price/
Property Name Address City Sales Price Sq. Ft. Sq. Ft.
For information on additional Midwest Portfolio 2622 Lake Avenue Fort Wayne, IN $22,850,000 534,221 $43
research materials, contact
Federal Express Building 710 Dado Street San Jose, CA $21,500,000 106,057 $203
John Chang
National Research Manager Schneider Electric 1354 Clifford Avenue Loves Park, IL $20,000,000 545,000 $37
Tel: (602) 952-9669
john.chang@marcusmillichap.com Recticel North America, Inc. 5600 Bow Pointe Drive Clarkston, MI $19,015,886 120,000 $158
Cooper Standard Automotive Headquarters 2110 Executive Hills Court Auburn Hills, MI $19,000,000 103,822 $183
Adidas Distribution Center 5675 N. Blackstock Road Spartanburg, SC $18,000,000 563,210 $32
Windsor Commerce Center 1440 W. Indiantown Road Jupiter, FL $16,542,500 150,270 $110
DHL Building 3636 Gateway Center Avenue San Diego, CA $14,200,000 131,720 $108
Diamond Foods Facility 11899 Exit Five Parkway Indianapolis, IN $13,516,667 177,861 $76
Silgan Containers 1191 Lake Avenue Woodstock, IL $12,850,000 187,850 $68
Cornwall Road Warehouse 1201 Cornwall Road Sanford, FL $11,600,000 242,000 $48
BAE - Auburn Hills 1426 Pacific Drive Auburn Hills, MI $10,765,455 120,000 $90
Reywest Commerce Center 6221 & 6223 S. Palo Verde Road Tucson, AZ $10,500,000 120,810 $87
© Marcus & Millichap 2008
www.MarcusMillichap.com Enterprise Automotive Systems 21445 Hoover Road Warren, MI $10,250,000 395,049 $26
The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the informa-
tion contained herein. Note: Metro-level employment growth is calculated using seasonally adjusted quarterly averages. Sources: Marcus & Millichap Research Services, Bureau of Economic Analysis, Bureau of Labor Statistics, CoStar Group, Inc., Economy.com, Property & Portfolio Research,
Real Capital Analytics, Reis, TWR/Dodge Pipeline, U.S. Census Bureau.