Update on the Bay Area Condo Market :ULI Trend Program Series February 5th, 2007 Update on the Bay Area Condo Market


Recent Headlines… :“Housing market likely to achieve new lows”East Bay Business Times, 12/29/06 “Home sales bode well for big picture”Wall 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 slowdown”San Francisco Chronicle, 1/18/07 Recent Headlines…


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 Introduction


Panelist :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


East Bay Market Conditions :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…


East Bay Employment :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


East Bay Resales :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)


Resales: Single-Family Homes :Resales: Single-Family Homes 24% drop in volume - Homes sold from 12/2005 to 12/2006 Huge Growth in Inventory !!! Sales Volume Source: Trendgraphix


Resales: Single-Family Homes :Resales: Single-Family Homes 1.5% increase in price - 12/2005 to 12/2006 Source: Trendgraphix Pricing


Sales Volume: New Homes :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


Sales Volume: New Homes :Sales Volume: New Homes Source: Hanley-Wood, The Gregory Group


Pricing: New Homes :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


Average Pricing: New Homes :Average Pricing: New Homes Source: Hanley-Wood, The Gregory Group


Response to Market Conditions :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.


Sales Incentives :Sales Incentives


Pulte’s Strategy :Pulte’s 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)


428 Alice :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


2007 – Moving Forward :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 don’t pencil in East Bay at present.


2007 – Moving Forward :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


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


San Francisco Pricing :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


San Francisco Absorption :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.


San Francisco Pipeline :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


Market Conditions :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


Successful Projects Today :Successful Projects Today Characteristics Location Pricing and concessions Designed to the target market Strong initial interest list Differentiated offering


Successful Developers Today :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 let’s get started.”


Buyer Profile :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


Panelist :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


BRE Properties, Inc. :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


Affordability Metrics :Affordability Metrics MEDIAN HOME PRICE/AFFORDABILITY San Francisco Bay Area San Diego Los Angeles Sacramento Seattle Denver Phoenix $709,980 $708,840 $612,030 $560,990 $383,920 $310,300 $248,400 $243,400 11% 12% 9% 12% 19% 29% 50% 53% Orange County


Market Cap Rates :Market Cap Rates


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


Rental Pipeline :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


Renter Profile :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.


Panelist :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 IHP’s existing assets Bachelor of Science, Business Administration, Southern Oregon State University


Sacramento Region: Attached New Homes :Sacramento Region: Attached New Homes 0 500 1,000 1,500 2,000 2,500 3,000 1993Q2 1993Q4 1994Q2 1994Q4 1995Q2 1995Q4 1996Q2 1996Q4 1997Q2 1997Q4 1998Q2 1998Q4 1999Q2 1999Q4 2000Q2 2000Q4 2001Q2 2001Q4 2002Q2 2002Q4 2003Q2 2003Q4 2004Q2 2004Q4 2005Q2 2005Q4 2006Q2 2006Q4 Quarters Sales El Dorado Sacramento South Sacramento Northeast Sacramento Northwest Placer Sutter/Yuba Yolo Sources: Hanley Wood, IHP Capital Partners Annual Running Sales


Northern/Central CA Affordability :Northern/Central CA Affordability 0 10 20 30 40 50 60 70 1988Q1 1989Q2 1990Q3 1991Q4 1993Q1 1994Q2 1995Q3 1996Q4 1998Q1 1999Q2 2000Q3 2001Q4 2003Q1 2004Q2 2005Q3 2006Q4 Quarters Affordability California State San Francisco Bay Area Sacramento Area Central Valley Overflow 41 Percentage Points 14 Percentage Points


Sacramento Region :Sacramento Region Quarters Sources: Hanley Wood, IHP Capital Partners New Attached & Detached Median Home Prices


Sacramento SFA Q305 vs. Q306 :Sacramento SFA Q305 vs. Q306 0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 2400 1 Flash Sales Q3 2005 Flash Sales Q3 2006 Unsold Inventory Q3 2005 Unsold Inventory Q3 2006 2005 2005 2006 2006 46% increase in unsold inventory 12% decrease in Flash Sales


Happy New Year!Questions? :Happy New Year!Questions?