FLORIDA CHICA

Q2 2012

Q2 2012 ECONOMIC AND COMMERCIAL REAL ESTATE TRENDS REPORT NATIONAL AND FLORIDA MARKET UPDATES

LEADERS IN COMMERCIAL REAL ESTATE

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NATIONAL ECONOMY Page 2

National and Florida Economic Update

Slowdown in National Economy and Hiring Should be Temporary Following a strong start to the year, the national economic and job recoveries showed signs of slowing in the early Change in Real GDP spring. GDP growth slipped in Source: Bureau of Economic Analysis the first quarter, down to an Forecast: Chandan 3.0% 3.0% annualized rate of 2.2 percent 2.5% 2.6% from 3.0 percent in Q411. 1.9% 1.7% Bolstered by a rebound in confidence and pent up demand for cars, consumer -0.3% activity held up even as business investment softened. A necessary consequence of -3.5% their higher debt burdens and 2007 2008 2009 2010 2011 2012 2013 2014 rising entitlement costs, cutbacks by governments at all Year-Over-Year Change in levels including in Florida Non-Farm Employment Florida | National dragged on the first quarters Through March 2012 | April 2012 preliminary result. Source: Bureau of Labor Statistics Latest Jobs Data Underscore Challenges The most recent jobs data confirm that businesses are only expanding payrolls in fits and starts. While reports on claims for unemployment insurance 2011 2012 show a persistent decline in layoffs, new hiring has been less consistent. After pushing private sector employment growth to a six-year high in January, firms are more confident in the outlook but have pulled back on hiring nonetheless. The monthly employment data can be extremely volatile and may turn more positive as a matter of course. Considered in the context of stresses from the recalcitrant sovereign debt crises in Europe and the uncertain political and tax environment in the United States, erratic hiring trends are unsurprising. If these broader drivers of risk abate, however, businesses are generally well positioned to reengage with job seekers.

Still Challenging, Floridas Recovery Gaining Momentum In spite of persistent weakness in many of the states housing markets, improvements in professional and business service employment, rebounding tourism, and strong demographic trends including migration from other parts of the country and from abroad are bolstering Floridas recovery. As of March, statewide employment had increased by 1.2 percent from a year earlier. While that result is disappointing, it reflects a stronger 1.6 percent increase in private sector payrolls. Even as conditions improve, the state still faces challenges from rebalancing of public spending and the historical dependency on housing. In the hard-hit construction sector, opportunities for the states large number of unemployed workers remain few. Offsetting gains in other areas, state and local government budgets are being pared back as federal transfers dwindle, leaving gaps from property tax shortfalls. Apart from the direct impact of cuts on public jobs, transfers to healthcare and education are being slashed. Hospitals around the state are grappling with Medicare adjustments enacted in Tallahassee over the last two years. Capturing the knock-on effect of those cuts, the University of Miami announced plans in early May to trim its workforce by 5 percent.
One-Year Change in Employment
Through March 2012 In Thousands
From Market Trough

6%

4%

2%

0%

-2%

-4%

6% 4% 2% 0% -2% -4% -6%

-8% 2007

2008

2009

2010

National Florida Fort Lauderdale Fort Myers Gainesville Jacksonville Miami Ocala Orlando Sarasota Tallahassee Tampa West Palm Beach

+1,952 +89.8 +6.5 +1.7 -2.0 +2.1 +23.2 -0.6 +5.2 +3.8 -0.6 +23.5 +4.0

+1.5% +1.2% +0.9% +0.8% -1.6% +0.4% +2.3% -0.7% +0.5% +1.6% -0.4% +2.1% +0.8%

+2.9% +2.5% +2.0% +3.5% +0.5% +2.4% +4.6% 0.0% +2.2% +2.3% +0.7% +3.8% +1.6%

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Page 3 NATIONAL REAL ESTATE

Apartment Fundamentals and Investment Trends Still Dominating Property Recovery

The volume of commercial property sales slipped from $70 billion in Q411, to just over $50 billion in the first quarter. Apart from lackluster sales in the hotel and suburban office sectors, the slowdown reflects a seasonal drop in January and February closings that shows signs of normalizing in preliminary data for April and early May. In contrast with these metrics, the first quarters year-over-year comparison indicates a measurable improvement in activity, with sales volume rising almost fifty percent from a year earlier. Sales volume has increased in every sector except hotels. Value Proposition in Smaller Markets Continues to Strengthen The headline numbers conceal that investment activity remains uneven. Holding to the investment recoverys overarching theme of bifurcation, transaction volume remains skewed to larger core assets in cardinal markets, including New York, Washington, DC, and San Francisco. Prices for well- positioned assets in these markets are rising at a faster pace than income, driving cap rates lower in the first quarter. The national average apartment cap rate fell to 6.2 percent in the first quarter and was just 4.9 percent across six cardinal markets. In the CBD office sector, cap rate compression in the top markets has triggered plans for new development that anticipate sharp improvements in absorption. In spite of increasingly aggressive pricing in the most coveted markets, sales in other parts of the country have been recovering relatively slowly as investors and lenders await healthier economic and job trends. Spillovers from headline-making trades into smaller markets and properties are observable, however, reflecting that many investors are being priced out of the most competitive segments and are exploring a wider range of opportunities. Bank Lending and CMBS Crucial for Wider Transaction Activity For many of the investors making forays outside of gateway markets, a relatively thin pool of high-quality properties for sale has stymied efforts to ramp up acquisitions. At the other extreme, investors targeting distressed properties held in bank real estate owned (REO) and CMBS special servicing have only seen that market begin to deliver in recent months. REITs have dominated buying activity for the largest properties and portfolios, supported by record- breaking fundraising. Buyers in the middle-market do not have the same access to public capital markets and so are dependent on secured financing, principally through banks and CMBS. Banks are increasing their net lending activities as default rates on their multifamily and commercial real estate loans moderate. The CMBS outlook remains challenging, however, given its dependence on a predictable corporate bond market. Benefits from an improvement in CMBS issuance will accrue to the retail and hospitality sectors, which are less likely to find homes on bank balance sheets and which dominated CMBS issuance in Q112.
7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2010 2011 2012 Cardinal Markets National

Apartment Cap Rates by Market Tier

Source: Chandan

$100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0

Hisorical Offerings of REIT Securities

Through April 30 2012 Year 2012 Annualized In Billions Source: NAREIT, Chandan

$23.8 YTD $72.4

2004 $80 $70 $60 $50 $40 $30 $20 $10 $0 2007

2006

2008

2010

2012

CMBS Issuance by Quarter

Through Q1 2012 In Billions Source: Chandan

$6.0

2008

2009

2010

2011

2012

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FLORIDA APARTMENT Page 4

FLORIDA ECONOMY

Gains Across Floridas Apartment Markets

Except in markets that are struggling to stanch housing losses or facing the brunt of new pressures from government cutbacks, apartment vacancy rates declined across Florida in the first quarter. Fort Lauderdale, Naples, Orlando, and Tampa all reported vacancy rates below 6.5 percent. At the extreme, vacancy rates in Sarasota and Miami fell to 4.2 and 3.7 percent, respectively. Even in Gainesville, which bears the distinction of the highest vacancy rate among Floridas major apartment markets, overall demand is fomenting upward pressure on effective rents. The biggest jumps in effective rents were observed in the tightest markets. Miami led the pack with an annualized increase of 5.4 percent. In spite of the typically slower pace of rent gains during the first quarter of the year, increases surpassed 3.0 percent in eight of eleven markets. Apartment Sales and Development Floridas combination of improving cash flow and relatively high cap rates (apart from Miami) has encouraged investors to pursue acquisitions and development opportunities with support from low-cost financing available through Fannie Mae and Freddie Mac and their lending partners.
Florida Apartment Rent and Vacancy Rate Trends
Vacancy Rate Change from Q411 Effective Rent Change from Q111

Interest rates on long-term fixed-rate amortizing mortgages were practically unchanged in the first quarter at 4.5 percent. Rates lag the immediate movements in the Treasury yield, which has fallen once again as European concerns have renewed, pointing to even lower borrowing costs for the most recent transactions. In Miami, Fort Lauderdale, and elsewhere, land sales are picking up in response to apartment development opportunities. Among the heavyweights acquiring parcels in the first quarter, Equity Residential purchased land in Miamis Biscayne Bay where it plans to build a 390-unit property for just under $100 million. New projects are kicking off in earnest, particularly in Southern Florida, requiring that investors regularly update their assessments of potential overbuilding.
7.0% 6.9% 6.8% 6.7% 6.6% 6.5% 6.4% 6.3% Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 7% 6% 5% 4% 3% 2% 1% 0% Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11 Q1'12

Florida Apartment Cap Rates

Source: Chandan

Q1 2012 Fort Lauderdale Fort Myers Gainesville Jacksonville Miami Naples Orlando W Palm Beach Sarasota Tallahassee Tampa

Vacancy Rate

5.0% 7.2% 8.1% 7.0% 3.7% 6.1% 5.4% 6.5% 4.2% 6.8% 6.3%

-0.3% +0.8% 0.0% -0.7% -0.4% 0.0% -1.6% -0.4% -0.5% +0.7% -0.7%

+2.3% +2.0% +4.6% +3.3% +5.4% +5.0% +5.1% +2.7% +3.9% +3.6% +4.1%

Florida Apartment Lending Rates v Corresponding 10-Year Treasury Yield

Amortizing Mortgages Source: Chandan

Interest Rate

Treasury Yield

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FLORIDA APARTMENT Page 5 FLORIDA OFFICE

Professional Employment Trends Point to Tentative Office Improvements

Floridas office market was upended during the worst days of the housing crisis and has struggled to recover. Across the states leading office markets, vacancy rate trends have been mixed, reflecting the negative impact of legacy lease expirations on absorption and effective rents. Only Tallahassee can boast a vacancy rate significantly below 20.0 percent. In contrast with the Florida apartment and condo markets, developers have been mercifully unenthusiastic about new office projects. Hinting at a nascent recovery in Floridas core office markets, professional and business service employment growth has strengthened and a growing minority of companies is expanding. Investors will need more convincing before capital inflows rebound. Apart from buyer hesitancy, large assets coming to market face challenges related to weak price discovery and conservative underwriting. In Jacksonville, the former AT&T Tower has been renamed the EverBank Center as the firm prepares to consolidate 1,500 employees into a 269,000 square foot block of the thirty-story building beginning this summer. With the benefit of a visible anchor tenant, the building has been listed for sale. If it finds a buyer, it will be first major office property trade in Jacksonville since 2008.
Florida Office Vacancy Rate and Rent Trends
Q1 2012
Vacancy Rate Change from Q411 Asking Rent (PSF)

Investors with longer time horizons and a knack for honing in on well-positioned assets might capitalize on the dearth of competition to acquire assets at substantial discounts compared to the headline-making trophy trades in New York and Washington, DC. Demand for Medical Office Building Investor demand for medical office properties held strong in the first quarter, with stable occupancy gains and a thin development pipeline supporting sustained cash flow gains and price appreciation. The thesis underpinning investor activity relies on population growth weighted heavily towards seniors. This cohort will account for almost half of new Floridians over the next two decades. That overriding demographic trend, coupled with a dearth of capital investment by hospitals under pressure from the states Medicare reimbursement cuts, supports long-term demand for medical office space. Regulatory and compliance changes are also motivating hospitals and health systems to dispose of tenanted properties or pursue sale- leasebacks. In other cases, the healthcare tenants projected renewal has buoyed valuations. In Jacksonville, for example, a Shands HealthCare satellite campus traded for $13.3 million, almost $400 per square foot. Physician practices in Florida are seeking to redeploy equity, reduce overhead, or unencumber themselves of mortgage debt as they internalize two years of Medicare cuts. While a larger number of properties may come to market as part of this trend, a sudden increase in supply of small assets for sale and the potential for defaults by doctors who levered up during the real estate boom could still hurt prices in the near-term.

Vacancy Rate

Fort Lauderdale Fort Myers Jacksonville Miami Orlando Palm Beach Sarasota Tallahassee

18.8% 22.9% 19.1% 18.7% 18.3% 23.9% 20.8% 14.8% 20.1%

-0.2% +0.6% +0.2% -1.0% 0.0% +1.9% +0.4% +0.3% +0.1%

$25.8 $16.8 $18.0 $30.7 $20.9 $29.1 $13.9 $27.1 $21.5

Tampa

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6 FLORIDA RETAIL AND

INDUSTRIAL Page 6

FLORIDA OFFICE

Tourism and Population Growth Propel Florida Retail Performance

Vacancy rates declined in all of Floridas major retail markets in the first quarter, albeit only on the margin in Miami and Orlando. Supporting retail absorption along the major tourist corridors, spending by visitors has continued to rise at a remarkable pace. Value-oriented retail space is also registering Year-Over-Year Change in Taxable Florida Tourism Sales improvements, meeting the Through February 2012 value-conscious mood of Source: Florida Ofce of Economic & Demographic Research Floridians reentering the labor market at lower discretionary income levels. Miami registered the lowest vacancy rate in the first quarter, once again followed by Tampa and Orlando. Fort Lauderdale reported the largest quarter-to-quarter decline, with vacancy rates falling 110 basis points. In other markets, the retail sector is in flux, adjusting to big box tenants downsizing ambitions, discount retailers trading up to better-locate spaces, and continued investor demand for credit tenant net lease spaces.

20% 15% 10% 5% 0% -5% -10%

Florida Retail Vacancy Rate and Rent Trends

Vacancy Rate

Change in Vacancy Rate

Asking Rent (PSF)

Fort Lauderdale Jacksonville Miami Orlando Palm Beach Tampa

9.8% 11.6% 6.8% 9.8% 10.1% 8.2%

-1.1% -0.5% -0.1% -0.2% -0.9% -0.6%

$18.2 $14.7 $23.7 $17.1 $21.1 $14.0

-15% 2007

2008

2009

2010

2011

2012

Ports, Jobs Boost Industrial Warehouses and Flex Spaces

Floridas industrial fundamentals and investment activity outpaced the recovery in the office and retail sectors once again in the
Container TEUs Handled by Florida's Seaports
Port 2011 Total % Change 2010-2011 % Change 2011-2016

Manatee Ft Pierce Tampa Fernandina Panama City Canaveral Jacksonville Florida Everglades Miami

14,576 11,853 39,632 22,005 41,900 646 900,433 3,025,188 880,999 906,607 206,537

-52.1% -21.4% -11.6% -33.1% +4.8% -2.0% +8.9% +6.4% +11.1% +7.0% -3.2%

+594.5% +271.2% +215.4% +172.7% +138.7% +85.8% +61.0% +56.2% +49.0% +43.4% +12.0%

first quarter. Recent trades of well-located warehouses and research and development facilities have allowed investors to secure stable cash flow streams at higher projected yields than are currently offered in the apartment sector. North of Miami, investment opportunities in the $2 million to $10 million range are relatively commonplace. Within this subset of the market, modern warehouse and distribution centers adjacent to the best-performing ports are benefiting from robust year-over-year gains in trade volume. Apart from container traffic, the Ports of Miami, Everglades, and Canaveral have held their positions as the top three cruise ports in the world.

Palm Beach

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FLORIDA HOSPITALITY AND DISTRESSED

Sustained Recovery in Florida Hospitality

Rebounding tourism spending and the return of conventions that steered clear of warmer climes during the financial crisis are supporting fundamentals and investment activity for hotels, restaurant spaces, and other hospitality venues. Miami and Orlando are among the markets riding the crest of renewed investor interest. In the latter, investors are uncovering assets in the sub-$5 million and sub-$10 million segments that might have gone unnoticed before the downturn. Like the retail sector, hotels are benefitting from the measured increase in conduit lending activity. The two property types have been overrepresented in new deals as agency, bank, and life company lending has cornered more conservative multifamily and office opportunities with more favorable terms. Among recent deals citing Floridas strong tourism outlook, the National Hotel in South Beach secured a $26.5 million refinancing that will be packaged into a forthcoming CMBS issue. Funding is not limited to marquee assets. The Hampton Inn in Pensacola Beach is part of a three-property portfolio that closed $57 million in CMBS financing.

Mixed Bag in First Distressed CMBS Deal, Liquidations of Bank REO

Opportunities to acquire distressed assets are on the rise, though investors may be disappointed with the array of offerings. The small set of high-quality multifamily assets and commercial properties that may offer the best match to buyers acquisition criteria are seeing their prices bid up. At the same time, a surplus of less desirable assets available at substantial discounts is testing investors risk-tolerance. What has prompted the shift? As delinquency and default rates for bank-held mortgages have declined from their peaks, banks and their regulators have shown new readiness to liquidate non-performing loans and offload properties from their balance sheets. Among recent sellers, Capmark Bank offloaded the Fountains at Camino, a mixed-use seven- building office and retail complex, for approximately $16 million. In a separate REO transaction, ORIX Capital Markets sold a Verona Beach retail strip center for $1.4 million. Recognizing pent up demand for distress, the CMBS market responded in the first quarter with the first distressed deal in fifteen years. A small deal even by recent standards, Rialto 2012-LT1 met with strong demand for bonds backed primarily by non-performing loans.

26% 24% 22% 20% 18% 6% 4% 2% 0% 3% 4% 16% 14% 12% 2009 2010 2011 2% 2009 2010 2011 10% 2009 2010 2011

14% 12% 10% 8%

Multifamily Default Rates

7%

Florida CRE Default Rates

6%

Florida | National Through Q4 2011 Source: Bank Call Reports, Chandan

Construction Default Rates

5%

Investment Monitor Q2 2012

FLORIDA

I Hope you find our Second Quarter 2012 information helpful. Please contact me if I can assist you anywhere in the state.

@gregjordansbiz

Greg Jordan, Commercial Real Estate Advisor Sperry Van Ness 1626 Ringling Blvd. Sarasota, Florida, Suite 500, 34236 941 487 3790 | www.svnflorida.com |
"All Sperry Van Ness Offices Independently Owned and Operated" All Sperry Van Ness offices independently owned and operated.