Business Review Day
Economic Trends in
Commercial Real Estate
May 17, 2006
Raymond G. Torto, Ph.D., CRE
Exhibit 99.2

CB Richard Ellis | Page 2
Recent Returns

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0
5
10
15
20
25
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Office (20.23)
Apartment (20.97)
Industrial (20.9)
Retail (18.76)
One Year Total Return, %
Historical Holding Period (Years)
NCREIF Holding Period Returns 2006.1
Source: NCREIF and TWR
Last Year About 20%
Returns for All Types

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0
1
2
3
4
5
6
7
8
9
10
CF return
10 yr
The Cash Yield Advantage of Recent Years
Has Been Competed Away
Source: NCREIF, TWR 1Q, 06, all types
Cash Yield Advantage
%

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Doing It With Smoke & Cap Rates
15.0
5.3
9.6
-0.4
-2
0
2
4
6
8
10
12
14
16
Total Return
Yield
NOI Growth
Cap Rate Contribution
3-Year Average, %
Source: TWR Investment Database, Spring 2006
Components of Return (2002.4-2005.4)
NCREIF-weighted returns for Office, Industrial, Multi-Housing, and Retail.
Yield
Appreciation
Comes From

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0
100
200
300
400
500
600
2000
2001
2002
2003
2004
2005
Today
3
4
5
6
7
8
9
Basis-point spread
10yr. Treasury yield, %
Office cap rate, %
Basis points
%
Cap Rates Are Unlikely to Go Lower
Source: NCREIF, Federal Reserve

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TWR’s
View:
Property Markets

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Nothing Happens In a Vacuum.  The Economy Is Moving Forward
Industrial capacity utilization at 81.2%
Manufacturing capacity utilization at 80.4%
Business sales rising by 8.5% year over year
Inventories-to-sales ratio extremely low at 1.24
Corporate profits are rising at 21.3% year over year
Commercial & Industrial lending up 12.3% year over year
Exports are rising at a clip of 13.5%
And on and on and on....
We’re doing well.  Don’t worry

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Second Year of Expanding Jobs
127
128
129
130
131
132
133
134
135
1999
2000
2001
2002
2003
2004
2005
2006
U.S. Total Employment, Mil.
Source: BLS data as of March 2006.

-15
-10
-5
0
5
10
15
20
Percent Above or Below Pre-Recession Peaks
U.S.
Top 3:
Nevada  +18.5%
Arizona +10.9%
Florida    +9.4%
Michigan
-6.8%
Mass
-5.0%
Mississippi
-4.4%
Ohio
-3.7%
Illinois
-3.1%
Wide Job Growth Variance!
Source: BLS. Data ending December 2005
Today’s Jobs Relative to Pre-Recession Peak (2001)

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Rates Rise and Here’s a Troubling Trend!
5.5
6.0
6.5
2005Q1
2005Q2
2005Q3
2005Q4
2006Q1
3.5
4.5
5.5
6.5
30-Year Mortgage ( L )
New homes
Existing single-family
Existing condominiums
Months of supply on the market
30-Year Mortgage Rate, %
Sources: BOC, FRB, NAR.

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And, This is Going to Hurt, as Well!
-4
-2
0
2
4
6
8
10
12
2000
2001
2002
2003
2004
2005
Disposable personal income
Retail sales
% change year ago

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However…Fundamentals Are Improving for All Types
Percentage Increase in Rents by Property Type
Rents are a good performance measure because they reflect the balance
between supply and demand.
Source: TWR Outlook XL, Spring 06
11.0%
6.5%
8.0%
Hotel
5.0%
4.0%
2.8%
Retail
4.8%
3.6%
2.9%
Industrial
13.5%
4.5%
5.2%
Office
7.3%
3.2%
3.4%
Multi-Housing
Last High (2000)
2006F
2005

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TWR’s
View:
The Capital Markets

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Why Real Estate? Why Now?
There Are Still Opportunities in Real Estate for:
•
Cash Flow
•
Appreciation
•
Diversification
•
Alpha
•
Gamma
Past Results Are Not Indicative of Future
Performance!

Efficient Frontiers with and without Real Estate
Selected Asset Classes for the Twentyeight-Year Period 1978–2005
2.40% Free Lunch
Prior to the last three years the “free lunch”
was 1.74%
An Ilustration
of “Free Lunch”

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Cap Rate Composition
Cap rate is composed of:
•
+ Risk free rate
•
+ Risk premium
•
+ Cap X
•
-
Expected appreciation

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Rule of Thumb
Appreciation =
•
% chg income -
% chg in cap rate
•
Bottom line:  fundamentals matter!

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Pricing and
Fundamentals

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0
2
4
6
8
10
3
5
7
9
2005 Transaction-Based Cap Rate, %
A Pricing/Fundamentals Disconnect:
An Example for the Office Sector
Sources: RCA, TWR Investment Database
BUY
SELL

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“Fooled by Randomness:
the Hidden Role of Chance in Life and in the Markets”
by Nassim
N. Taleb
Book’s Thesis:
–
It’s plain dumb luck, or randomness, not skills, hard
work, etc, etc,
Book’s Implication:
–
Forecast don’t work: Big events not known
»
e.g., 9/11. Long Term Capital, 1987 market
crash
»
“Even a broken clock right twice a day”
Book’s Shortcoming
–
If didn’t anticipate future, how can we function?
–
Role of econometrics: what is known vs. what is
unexplained!