FLORIDA CHICA

Investment Monitor

Q1 2012
All Sperry Van Ness offices independently owned and operated

Q1 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

Following a loss of momentum in the third quarter of last year, the national economic recovery showed signs of strengthening in the final months of 2011. Measures of business and consumer confidence have improved. Most important, a steady decline in new claims for unemployment benefits and a corresponding increase in job openings suggest that labor markets are finally firming. Investors have been cautious in their response to the improving data, reflecting that the recovery remains susceptible to spillovers from the European debt crisis, challenges in the domestic policy environment, and continued weakness in the single-family housing market. A Firming Job Market While corporate profits now surpass their pre- 4% recession levels, the frustratingly slow Year-Over-Year Change in Non-Farm Employment pace of hiring has been a major 2% Source: Bureau of Labor Statistics shortcoming of the recovery thus far. A more robust labor market is a necessary 0% condition for sustained increases in consumer spending and a range of other -2% economic outcomes. While the monthly data on net hiring show that firms are -4% ramping up slowly, complementary data on job losses and new job openings are -6% Florida leading indications of trends in 2012. National -8% 2007 2008 2009 2010 2011 Confidence Improves
100 98 96 94 92 90 88 86 84 82 80 2007 2008

As business confidence in the recovery begins to improve, employment is Source: National Federation projected to rise. The most current data of Independent Business on business sentiment show that while sentiment remains weak by historic standards, the outlook is brightening. As of its January 2012 update, the NFIB Small Business Optimism Index has been improving for four consecutive months. The Conference Boards CEO Confidence measure improved in the fourth quarter, as well. 2009 2010 2011 Floridas Prodding Recovery Picks Up With parts of Florida still grappling with falling house prices and construction job losses, the state

US Small Business Optimism Index

has lagged the broader recovery. The unemployment rate remains stubbornly high, not only because of challenges in the private sector but also as a result of cutbacks in state and local government payrolls. The outlook is slowly turning more positive, however. As recently as last summer, employment in the state was essentially flat as compared to a year earlier. Hiring has picked up since then; between July and November, Floridas private businesses created more than 60,000 jobs. As a result, total employment increased by 1.6 percent during 2011, outpacing the national trends with the Sunshine States best result since 2006. Education and healthcare and the leisure and hospitality sectors have been the primary contributors to the long- awaited improvement. Floridas improving jobs picture is clouded by the challenges facing the state government and the negative impact of an unnerving pipeline of foreclosures. Last summers projections of a balanced budget have been revised down. Increases in tax rates are unlikely, but state programs are likely to face further cuts. Helping to close the gap over the next several years, Florida stands behind just two other states Texas and California in attracting new residents and spending. By 2016, it will be the third most populous state in the union, overtaking New York. Most of those gains are in older age cohorts, principally retirees. A strong recovery in tourism and household refinancing into record-low mortgage rates are also supporting the increase in sales tax revenue. Orlando and Tampa both experienced very sharp job losses during the recession but have been recovering at a slightly faster pace than peer markets. One-Year Change in Employment Tampas gains ('000) % have come Florida 113.9 1.6% late. With a 2.7 percent Fort Lauderdale 5.9 1.0% increase in Fort Myers 4.0 2.5% 2011, Tampa Gainesville -0.2 -0.2% Bay Jacksonville 9.9 1.9% accounted for Miami 18 2.1% almost one in Ocala 1.8 2.5% four of Orlando 8.3 0.9% Floridas new Sarasota 2.3 1.1% jobs during Tallahassee 0.1 0.1% the last year.
Tampa West Palm Beach 25.8 7.8 2.7% 1.8%

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Page 3 NATIONAL REAL ESTATE

Apartments Lead National Investment Recovery

While the pace of investment activity slowed in the third and fourth quarters, the years final tally easily surpassed sales activity during 2010. Sales volume reached $160 billion in 2011, up more than 30 percent from a year earlier and more than three times the markets nadir in 2009. The gains remain uneven, however. Extending the investment recoverys overarching theme, transaction volume has been skewed to larger core assets in gateway markets. Sales in other parts of the country, including Florida, have been recovering more slowly as investors have waited for a occupancy rates and rents to stabilize. Investors Looking Outside Gateway Cities Competition for trophy assets in gateways like New York City and Washington, DC have pushed cap rates lower at the top end of the market. The most coveted CBD office towers and mid- and high-rise apartment buildings were trading at cap rates below 5.0 percent in the fourth quarter. In the most extreme cases, a small subset of buildings has traded at higher prices than in 2007. As prices have outpaced cash flow, the value proposition has weakened in these markets. As a result, prospective buyers have begun to explore acquisitions elsewhere, balancing the risk of investing in less active markets against their significantly higher yields. Spillovers into secondary markets and trading in smaller properties have been increasing slowly. As the outlook for the economy brightens and investors reach for value, sales activity is still constrained in these segments of the market by a lag of cash flow inflexions and limited access to financing. In some cases, investors also cite a dearth of distressed assets and high quality properties both performing and value-add available for sale. Apartments Fundamentals Strengthen Bucking the trends of slow recovery in cash flow and credit availability, the apartment sector held its place at the fore of the investment recovery in the fourth quarter. Five years into the housing crisis, young households show a strong bias to renting. For those who are ready to make the transition to homeownership, the need for larger down payments and higher credit scores are limiting their access to financing. Even as
70 Rental Apartment Thousands residential mortgage rates fell to their Construction Starts lowest levels in history the 30-year 60 Source: Census fixed mortgage rate dropped below 3.9 percent in January home sales 50 and price trends remain weak, 40 dragging on the national and Florida economies. The recalcitrance of the 30 housing downturn continues to 20 power gains in apartment fundamentals. Axiometrics reports 10 that national apartment rents jumped 4.4 percent in 2011 and projects a 5.5 0 2007 2008 2009 2010 2011 percent increase in 2012. The sectors falling vacancy rates and robust rent growth have prompted an increase in development activity and development land sales. As new properties begin to come online in 2013, the pace of rent growth will moderate.

Banks Start Lending But Outlook for CMBS Remains Uncertain While the apartment sectors investment and development activity benefits from the strong support of Fannie Mae, Freddie Mac, and the Federal Housing Administration, other sectors have depended on private sources of financing. The $70 Hisorical Offerings of Billions largest net buyers in 2011, REITs REIT Securities $60 raised more than $50 billion in equity Source: NAREIT, Chandan and debt, setting a new record. $50 While the largest REITs have put $40 their money to work in gateway $30 markets where life companies and international banks have also been $20 active, investors in other markets have depended on banks and CMBS. $10 Banks entered the fourth quarter $0 2003 2005 2007 2009 2011 with significantly lower default rates than a year earlier. While many banks $80 Billions CMBS Issuance are still pulling back from real estate, by Quarter $70 Source: Chandan a larger number reengaged with the borrowers by making new loans in $60 the third and fourth quarter. Bank $50 lending remains critical to the health $40 of the industry since the outlook for CMBS is uncertain. CMBS issuance of $30 $32.7 billion in 2011 fell short of early $20 expectations; projections for 2012 do not anticipate a significantly stronger $10 level issuance. $0
2007 2008 2009 2010 2011

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FLORIDA APARTMENT Page 4

FLORIDA ECONOMY

Gains Across Floridas Apartment Markets

Among the states hardest hit by the housing downturn, tentative signs of stability emerged in Floridas single-family markets during the fourth quarter. Even so, rental demand is improving, pushing occupancy rates and rents higher. Vacancy rates fell across the board in 2011, albeit only by 10 basis points in Tallahassee. Orlando and Jacksonville both saw vacancy rates fall by almost 200 basis points. That is a welcome trend in Jacksonville, which opened 2011 with vacancy above 10.0 percent. By the end of the fourth quarter, vacancy rates were below 6.0 percent in Fort Lauderdale and Sarasota and just 4.3 percent in Miami. The favorable trends are expected to hold, even as housing affordability in Florida reaches historic highs. Similarly, the positive outlook is largely unaffected by new Federal Reserve proposals that would repurpose foreclosed home as rental properties, threatening to expand the supply of available rental options. Higher Occupancy Rates But Slow Rent Growth Apart from a limited supply of new purpose-built apartments, job growth trends in Florida are an important factor in driving rental demand. Workers finding jobs in hospitality and healthcare, which have dominated Floridas employment recovery, are more likely to rent than to buy. In Jacksonville and Orlando, the two Florida markets that have seen the least progress in the single-family housing market, the relatively stronger uptick in occupancy reflects challenges in obtaining mortgages and concerns that prices may fall further. The downside of an employment mix weighted to lower income occupations can be seen in slower rent growth. Even in Miami, which boasts one of the lowest vacancy rates in the country and where condos are being snapped up by cross-border buyers in all cash-deals, average rent growth was 4.5 percent. Apartment Sales and Development Investment activity in Floridas apartment sector has been surprisingly strong, supported by its favorable cash flow trends and low-cost financing. As compared to gateway markets, however, cap rates averaging 6.6 percent in the fourth quarter are relatively high.
7.0% 6.9% 6.8% 6.7% 6.6%

Florida Apartment Cap Rate Trends

Florida Apartment Rent and Vacancy Rate Trends

2011 Change in Asking Rents Q4 2011 Vacancy Rate 2011 Change in Vacancy Rate

6.5% 6.4% 6.3% Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11

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

2.5% 2.4% 2.0% 2.5% 4.5% 2.9% 2.8% 1.0% 1.8% 2.0% 3.0%

5.4% 8.5% 8.5% 9.0% 4.3% 7.9% 7.0% 7.2% 5.1% 8.0% 6.5%

-0.4% -1.0% -0.3% -1.8% -0.6% -1.3% -1.9% -0.3% -0.8% -0.1% -1.0%

This combination of improving cash flow and higher yields, coupled with a positive long-term outlook for population growth and available financing, supports a positive investment outlook for cautious buyers. Fort Lauderdale, in particular, has seen a strong uptick in price discovery and sales of properties trading below $10 million. As in other markets, investors in Fort Lauderdale must watch for potential overbuilding that would undercut gains down the road.

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Page 5 FLORIDA OFFICE

Florida Office Struggles; Niche Opportunities in Medical Office In Jacksonville, a single fourth quarter lease
signing by EverBank Financial stabilized the CBD office market. Looking to move roughly 1,500 employees from its suburban headquarters, EverBank took 270,000 square feet and naming rights at the AT&T tower in a December lease signing that will increase CBD employment by as much as 8 percent. Even with concerns about weak fundamentals weighing on office valuations, investors showed a new readiness to buy assets at a discount in the fourth quarter. Recent trades in Brevard County and a spate of sales in Tampa, including the January sale of the Pointe office building to Parkway Properties, reflect a departure from the disappointing levels of activity reported earlier in 2011. Underperforming assets are trading at deep discounts. Palm Springs Center, which defaulted on its mortgage in early 2011, sold in December for less than half of the outstanding principal balance on the mortgage. Medical Office Buildings Capture Upside Medical office property investment activity slowed in the fourth quarter, but investor demand in the niche remains strong. Floridas projected population growth is weighted heavily towards seniors, who will account for almost half of new Floridians over the next two decades. These prevailing demographic trends support long-term demand for medical services in the state. At the same time, buyers are finding a relatively deep pool of acquisition opportunities. Regulatory and compliance changes are motivating hospitals and health systems to dispose of tenanted properties or undertake sale-leasebacks. Healthcare reform and its impact on doctor reimbursement rates are ever-present considerations for this sector. The outlook for physician practice reimbursement is dim given constraints on the federal and state purses. Seeking to redeploy equity, reduce overhead, or unencumber themselves of mortgage debt, a larger number of physicians may bring properties to market in 2012. 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 hurt prices. But investors with reasonably long-term investment time horizons will look past the immediate pressures on value.

Grappling with an absence of new jobs in office- using occupations, net absorption remained weak or negative in Floridas office markets during the fourth quarter. The vacancy rate at the end of the year was 20.0 percent or higher in six of the eleven reporting metros. Only one market, Miami, reported an observable increase in rents. The small gain reflects the movement of tenants to other, better properties offering generous incentives rather than an uptick in net absorption. The increase in the market average has been helped along by the completion of three new buildings in the last year and half, even as the new properties have pushed the market vacancy rate higher. Overall, Floridas office vacancy rate could trend higher through the second or third quarters of 2012. If firms hiring plans offer any indication, occupancy gains in 2012 will benefit some of Floridas hardest hit markets. A small but growing net share of businesses in Fort Myers, Sarasota, and Tampa are reporting plans to increase payrolls in 2012. While many of the new jobs will be in healthcare and hospitality, corporate employers will contribute to the overall improvement.

Florida Office Rent and Vacancy Rate Trends

2011 Change in Asking Rents Q4 2011 Vacancy Rate 2011 Change in Vacancy Rate

Fort Lauderdale Fort Myers Gainesville Jacksonville Miami Naples Orlando Palm Beach Sarasota Tallahassee

0.0% -1.3% -0.8% -6.5% 1.7% 0.5% -2.1% -4.0% 0.2% -1.0% 0.2%

19.0% 23.8% 20.2% 18.9% 19.7% 22.0% 18.3% 22.0% 20.4% 14.5% 20.0%

0.1% 1.0% -0.4% -0.9% 0.7% 0.4% -1.0% -0.4% 0.3% -0.2% -0.6%

Tampa

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6 FLORIDA RETAIL AND

INDUSTRIAL Page 6

FLORIDA OFFICE

Tourism Spending and Discount Retail Both Benefit from Floridas Imbalanced Recovery Floridas retail sector has struggled during the At the other extreme, retail spaces along major
states housing crisis, weighed down by joblessness and anemic consumer confidence. Street-level retail in CBD office properties has faced particular headwinds given the high office vacancy rate. While most markets had lower vacancy rates at the end of 2011, Miami and Tampa are alone in reporting single-digit vacancy.

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

Year-Over-Year Change in Taxable Florida Tourism Sales

Source: Florida Ofce of Economic & Demographic Research

-15% 2007

2008

2009

2010

2011

The recent uptick in service jobs and lackluster wage growth in other sectors have afforded some upside. Discount retailing has been one of the few retail subtypes to capture the downturns silver lining. Land sales in support of discount retail development, such as the January acquisition of a Port Charlotte site that may become home to a Dollar General, are indicative of Florida consumers cost-conscious mood.

tourist corridors, including parts of South Beach, have seen vacancy rates fall on a sustained increase in tourism and related spending. A recent South Beach trade commanded a valuation in excess of $800 per square foot. Value-add deals for big box retail centers are also contributing to sales volume and, as part of repositioning efforts, marginal improvements in occupancy.
Florida Retail Rent and Vacancy Rate Trends
2011 Change in Asking Rents Q4 2011 Vacancy Rate 2011 Change in Vacancy Rate

Fort Lauderdale Jacksonville Miami Orlando Palm Beach Sarasota Tampa

-1.8% 0.1% 1.0% -2.1% -1.1% -5.8% -2.9%

10.9% 12.1% 6.9% 10.0% 11.0% 19.0% 9.6%

-0.4% 0.3% -0.7% -0.3% -0.3% -0.5% -0.4%

Ports, Trade Boosts Industrial Warehouses and Distribution Floridas industrial fundamentals and investment

activity carried gains from prior quarters into the fourth quarter, outpacing the recovery in the office and retail sectors. Managing to avoid the spotlight that has accompanied highly visible office sales, several recent trades of well-located warehouses and research and development facilities have allowed investors to secure stable cash flow streams at favorable prices. Avoiding functionally obsolete space has been a key consideration since these assets are trading at the deepest discounts. Investment opportunities in the $2 million to $10 million range are abundant, charting a path to portfolio diversification for buyers that may have focused on retail or office space up to now. Within this subset of the market, warehouse and distribution centers located near major ports are benefiting from healthy year-over-year gains in

trade volume. In 2010, waterborne trade in and out of Floridas ports jumped 22.6 percent on the prior year. Apart from container traffic, the Ports of Miami, Everglades, and Canaveral have held their positions as the top three cruise ports in the world. In its 2011 fiscal year, Canaveral reported its best year ever for cruise passenger traffic. The Brevard market faces drags on container traffic if the surrounding businesses cannot replace the jobs lost upon the sunset of the Space Shuttle program or prospective cuts in military budgets. Port authorities in Brevard still report overcrowding at existing cargo facilities on account of the rise in container traffic. Canaveral completes development of a new pier in 2012 and will kick off construction of another facility in the coming months. Liberty Property Trusts fourth quarter acquisition of 126 acres in Miami presages the development of the 1.6 million square foot Miami International Tradeport.

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FLORIDA HOSPITALITY AND DISTRESSED

Florida Hospitality Buoyed by Tourism The recovery in Florida tourism spending and the December, the Traymore Hotel in South Beach
return of large conventions that had avoided the state during the recession has parlayed into improving fundamentals and transaction activity for high-quality hotels, restaurant spaces, and other hospitality venues.

was sold for $17.5 million. In this case, the new sale exceeded the principal balance on the defaulted mortgage significantly, demonstrating that the best-positioned distressed assets can command healthy investor attention. In another fourth quarter South Beach trade, Hersha Hospitality Trust acquired the Courtyard Miami Beach Oceanfront for $95.0 million, more than $360,000 per key.
7%

Improving fundamentals have not kept hotel and hospitality owners that levered up prior to the recession from defaulting on their debt. In fact, several recent trades have involved funds acquiring notes and foreclosing on borrowers. In

Distressed Opportunities Increase as CMBS Loans from 2007 Reach Maturity Investors frustrated by a thin set of opportunities to buy distressed properties are
understandably skeptical of whether 2012 will see a shift in banks and special servicers handling of non-performing loans. Sales of distressed properties increased in the 2011. The underlying trends fueling the increase in activity will persist well into 2012 and beyond. As delinquency and default rates for bank-held mortgages have declined from their peaks, banks and their regulators have been increasingly inclined to liquidate non-performing loans and offload real properties from their balance sheets. Florida banks holdings of multifamily properties have become prime candidates for disposition as investor demand has strengthened and recovery rates have improved. Banks have been parting with REO assets in other sectors, as well. Roughly half the retail property trades in Orlando in 2011 were through banks or special servicers. Amongst the sales, Washington Shores Plaza was acquired in the fourth quarter for less than $40 per square foot. The outlook for failed construction projects remains uncertain, as default rates in Florida have diverged from the national trend, leaving almost one in every four loans in this category in default. Bank losses on these loans generally remain high. This January, PNC Bank internalized a loss of more than 70 percent on a stalled development project in Jupiter, south of Port St Lucie. CMBS represent a potentially larger source of distressed investment opportunities in 2012 and 2013. Five-year interest-only loans made at the markets peak in 2007 begin to mature in the first quarter. Hundreds of loans will fail to meet prevailing criteria for refinancing, requiring injections of new equity or new sponsorship. The mix of properties runs the gamut from the traditional to the unusual. In December, Zions First National Bank offloaded a former Montessori School in Boca Raton, recouping $1.5 million against a 2006 mortgage. Legacy Bank of Florida funded the current acquisition. Distressed industrial properties are often trading at deep discounts, as well. Also in December, SunTrust Bank sold a flex condominium unit in Venice, just south of Sarasota, for $195,000. The new price is roughly 40 percent of the $468,700 paid by the last owner in 2006.

CRE Default Rates

Source: Bank Call Reports, Chandan 6% Florida National 5%

4%

3% 2009 14% 12% 10% 8% 6% 4% 2% 0% 2009 26% 24% 22% 20% 18% 16% 14% 12% 10% 2009 2010 2011 2010 2011 2010 2011

Multifamily Default Rates

Construction Default Rates

Investment Monitor Q1 2012

FLORIDA

Sarasota Florida
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