June 24,  2009     Notes from CBRE presentation on NYC Commercial Real Estate (CRE) on June 22, 2009

Darcy Stacom, CB Richard Ellis Group, Inc. - Vice Chairman, Investment Properties,  presented at Thomson Reuters Global Real Estate Summit – New York on June 22, 2009. The following are some takeaways I took from the discussion.

1. Claims there is a fair amount of anecdotal evidence that NYC CRE is off about half from the peak. Doesn’t expect to see much more of a decrease in value, especially as TARP, TALF and PIPP, begin to “morph.”

2. “If I had a crystal ball, I would be in buying every REIT and stock in the marketplace. If it dropped another 5% to 10%, it's not going to hurt, because the problem is the first leg up will go so quickly, like it did with the stock market, that you will just have missed the bottom.”

3. "I think any deal that got traded from '06 to '08, early '08, is probably going to go into some form of watch list at some point, unless it was taken down more cash than financing."

4. Seems to be an increase of interest in NYC properties coming from Asia and South America.

5. Thinks NYC will eventually recover.

6. "We've been playing with a line -- Zell had his keep it -- "Stay alive till '95." We've decided, "It will be heaven after '11." We have a lot of wood to chop, so I think 2010 and '11, we will be dealing with a lot of the big rolls and maturities. But I think we've been now working at it for a while, and people are beginning to sense that they can start underwriting where rents should be and where financing may or may not be. And everybody says there is none. It is not that there is none. It is just you have to be prepared to take a low loan-to-value, and you have to be prepared to sign on a lot of covenants that you haven't looked at in 20 years."

7. Thinks historical cap rates for midtown NYC Class A Commercial Real Estate have mostly been 7% to 8%. Claims NYC was trading at a 4 cap in 2007. Doesn’t expect to see that again. Darcy reminds us that you need to look at a going in cap rate, as well as a forward cap rate. I will mention that of course when projecting forward, you are at the mercy of the data you are selecting. Are you projecting proper future rentals, expenses and occupancy?

8. Darcy pondered, “what is long term?” Is long term going to be 6 or 7 years, whereas in the past it was 20 to 30 years.

9. Indicated that loans being written in today’s standards, will allow for rents to fall 15% or more. It is interesting, as getting to the point of being able to allow for materially reduced rents, probably will affect current owners of NYC Class A Commercial Real Estate.

10. Apparently there were 30 bidders for AIG. I recall seeing 5 bidders a month ago, at around $100 per SF. I think I recently saw that a deal will close in the $300 - $400 SF range. Incidentally, the rumored prospective buyer is a South Korean company.

11. Darcy mentioned the following in regards to downtown real estate. "Because I think it will have the newest office space as a portion. The one thing that New York has that you wish it didn't is that we have a very aging office building inventory. I think roughly 60% of the buildings in Manhattan will be 50 years old or older by 2010. So a market like downtown is going to have the advantage of having the whole World Financial Center, the East side (inaudible) buildings that are typically newer. And then have the new Trade Center development, plus all the transportation money. It has a huge number of residential units. Again, midtown's units are going to typically be prewar to '60s. Again, the downtown inventory is going to be newer. The hotel conversions are new. The retail is new. So my heart, for some reason, has always kind of belonged to downtown. I think it could be a Boston. You go into Boston, it's like five minutes from the bloody airport to get into downtown Boston, and it feels good. Downtown has so many museums, lots of great waterfront; it's got a lot of potential."

12. Believes NYC asking rents to be down between 20% to 25%.

13. Mentioned the long- term winners will be the companies that have “huge war chests.” Also a company would need stomach and skill.

14. I recall hearing Vornado talk about replacement costs being a decent metric of fair value. Yet, during the liquidity bubble, perhaps replacement costs were unduly to high. Darcy mentioned, "You know, you couldn't -- even with no land cost, you couldn't build an office building in this town right now for less than $400 to $500 a foot, probably more because of the financing costs. So when you can start buying the assets for less than that replace -- the construction costs with no value to the land, you feel pretty good about that."