4Q12 Absorption and Vacancy Rate Trends

Transcription

1 RED CAPITAL GROUP MARKET OVERVIEW Pittsburgh, Pennsylvania Multifamily Housing Update 12 April 2013 Payroll Job Summary Total Payrolls 1,170.6m Annual Change 9.6m(0.8%) 2013 Forecast 14.0m 2014 Forecast 15.8m 2015 Forecast 15.4m 2016 Forecast 12.9m Unemployment 8. (Jan) Occupancy Rate Summary Occupancy Rate (Reis) 97.1% RED 50 Rank 5 th Annual Chg. (Reis) +0.5% RCR YE13 Forecast 96.7% RCR YE14 Forecast 96.8% RCR YE15 Forecast 96.8% RCR YE16 Forecast 96.9% 12 Payroll Trends and Forecast Steel City payroll trends were moderately weaker than previously understood, according to revised data published in March by the BLS. Average monthly headcounts for 2011 and 2012 were revised down by 3,700 and 2,800, respectively. But there was little change to 2H12 figures and the Pittsburgh labor market recovery appears to remain fully intact. Indeed, payroll job growth during 12 was revised up to the 9,600-job, 0.8% level from the initial 6,800-job, 0. estimate. Financial, business, heath care and education services and construction provided the principal 12 Absorption and Vacancy Rate Trends Apartment demand regained momentum during the fall as tenants occupied a net of 352 vacant units, up from 163 and 142 during the seasonally stronger second and third quarters, respectively. The availability of new supply contributed as developers delivered 282 units during the quarter, each located in a high-demand infill location near the Triangle. Metro average occupancy was nearly unchanged, inching 10 basis points 50 bps sequentially and year-over-year to 97.1%, highest level observed in eleven years. impetus, growing collectively at a 10,000-job, 1.8% rate in. The wholesale trade and government sectors generated the lion s share of losses, together hemorrhaging jobs at a -4,000 (-2.3%) position annual rate, down from -3,000 during. Our forecast remains much the same, calling for useful net job adds in the range of 12,000 to 15,000 per year through After a slow start in 2013, consistent with the 12 results, Pittsburgh establishments should return to hiring in the 1. to 1.5% range by 2H13, creating about 14,000 net jobs in 2013 and 15,800 in Occupancy was nearly stable across the metro area as 6 of 7 Pittsburgh submarkets posted flat to +20 bps occupancy rates. U.S.C. was the exception, recording a 40 bps sequential gain to 97.. On the surface, the RCR model forecast appears dull. We foresee virtually no change in occupancy over the course of the five-year forecast. But this stability will be at an exceptionally high average occupancy rate, supply levels not seen since 1999 notwithstanding. Consequently, conditions are ripe for strong rent growth and property value creation. Effective Rent Summary Mean Rent (Reis) $838 Annual Change 3. RED 50 Rank 28 th RCR YE13 Forecast 2. RCR YE14 Forecast 1.8% RCR YE15 Forecast 2. RCR YE16 Forecast 2.3% 12 Rent Trends Pittsburgh owners enjoyed considerable pricing power during the forth quarter, posting a 3. year-on-year effective rent advance, the strongest metric posted in five years. Average effective rent increased $6 (0.9%) sequentially, the largest gain since 12 and the second largest quarter-toquarter increase in more than three years. The largest gains were recorded in the suburban Upper St. Clair (1.9%) and West (1.) submarkets. By contrast, the infill (and highest average rent) Bellefield submarket notched a smaller 0.5% increase (3.1% y-o-y) despite a metro high 97. average occupancy rate. Whitehall (0.) and Monroeville (0.3%) posted the smallest advances. RCR multivariate modeling exercises find that vacancy rates are not statistically significant predictors of metro rent growth. Rather, personal income is the primary determinant. As our model projects relatively weak personal income growth (3%-5% p.a.) it also anticipates below average rent growth: 2.1% compound annual growth for the period, ranking 43 rd among the R46.. Trade & Return Summary $3mm+ Sales 4 Approx. Proceeds $59.8mm Median Cap Rate (FNM) 6. Avg. Price/Unit $62,815 Expected Total Return 6.7% RED 46 ETR Rank RED RAI Rank 39 Th Risk-adjusted Index st 12 Property Markets and Total Returns There was no Pittsburgh trade as noteworthy as 12 s four-trophy property Nationwide/ Blackstone mega-deal, but the property markets were active still. Three 200-unit or larger apartment complexes exchanged hands for gross proceeds of $59.8 million. The average price of a unit was $62,815 up from $22,191 during (excluding the Nationwide portfolio for which pricing details were not disclosed). The bellwether transaction involved a 389-unit, 23 -story high-rise located in Uptown adjacent to Pittsburgh s NHL hockey venue. The 1964-construction asset was priced to the equivalent of $123,522 per unit to an estimated yield of 5.. An above average purchase cap rate of 6.75% notwithstanding, RCR estimate that buyers of generic Pittsburgh apartment assets can expect to achieve a 6.7% total return over five years, 80 bps below the R46 average. But Pittsburgh is the most stable market in America by a large margin. Consequently, it produces the highest risk-adjusted return in the R46 despite slow rent growth.

2 MARKET OVERVIEW 12 PITTSBURGH, PENNSYLVANIA Metro Occupancy Rate 98% 97% 9 95% 9 93% 9 91% RED 46 AVERAGE Metro Occupancy Rate Trends Source: Reis History, RCR Forecasts PITTSBURGH Metro Cap Rate Trends Source: efannie.com, RCR Calculations PITTSB U RGH MID-ATLANTIC REGION Average Cap Rate % % Q Q Annual Chg (000) Metro Payroll History and Forecast Source: BLS History, RCR Forecasts Metro Cap Rate Trends Source: efannie.com, RCR Calculations f 2014f 2015f 2016f 2017f PGH 2.8 (28. 2) NOTABLE TRANSACTIONS NOTABLE TRANSACTIONS Property Name (Submarket) Property Class/ Type (Constr.) Date of Transaction Total Price (in millions) Price per unit Estimated Cap Rate Washington Plaza (Bellefield) B/HR (1994) 22-Nov-2012 $48.1 $123, Royal Mile Canongate (Whitehall) B-/MR (1976) 21-Dec-2012 $6.1 $28, % Royal Mile Maiden Bridge (Whitehall) B-/MR (1972) 21-Dec-2012 $5.6 $28, % Cloverleaf Village Apts. (Whitehall) C+/GLR (1953) 20-Feb-2012 $4.0 $27, % Kenmawr Apartments (Shadyside) MR + Comm l Oct-2012 $38.1 (Apprsd.) $184, (FN Refi) RED CAPITAL Research April 2013

3 MARKET OVERVIEW 12 PITTSBURGH, PENNSYLVANIA Metro Effective Rent Trends Sources: Reis, Inc., Axiometrics, RCR Forecast YoY Rent Trend - - RED 46 AVERAGE PGH (REIS/RCR) Y-o-Y % Change % % % % % Metro Home Price Trends Source: FHFA Home Price Index U. S. A. PITTSBURGH % Metro Payroll Employment Trends Source: BLS, INSITUTE FOR ECONOMIC COMPETITIVENESS & RCR 1% Y-o-Y % Change -1% - -3% - -5% - U.S.A. PITTSBURGH f 2014f 2015f 2016f The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors. RED CAPITAL Research April 2013

4 SUBMARKET TRENDS Effective Rent Physical Vacancy Submarket Change Change Bellefield $939 $ % 1.9% 2.3% 40 bps Monroeville / McKeesport $706 $ % 3.8% -30 bps North / Butler County $834 $ % 2.7% bps Upper St Clair / Bethel Park $745 $ % 2.8% -50 bps West $875 $ % 2.5% bps Whitehall / Baldwin $631 $ % 11.9% 6.7% -520 bps Wilkinsburg / Penn Hills $664 $ % % -90 bps Metro $809 $ % % -50 bps Total Return 1 1 8% 5.7% PGH (RAI=9. 69) RED 46 AVG. (RAI=3.40) 3.9% 6.3% 5.9% Total Return Distributions Source: RED CAPITAL Research % Proba bility of Ac hie ving Sta te d Re turn or Grea te r 10.1% RED CAPITAL GROUP For more information about RED s research capabilities contact: Daniel J. Hogan, Director of Research Kenneth H. Bowen, President, Red Mortgage Capital, LLC djhogan@redcapitalgroup.com khbowen@redcapitalgroup.com

5 RED CAPITAL GROUP MARKET OVERVIEW Pittsburgh, Pennsylvania Multifamily Housing Update 2Q12 September 2012 Payroll Job Summary Total Payrolls 1,165.3m Annual Change 13.4m 2012 Forecast 15.1m 2013 Forecast 10.7m 2014 Forecast 7.5m 2015 Forecast 7.7m Unemployment 7. (July) 2Q12 Payroll Trends and Forecast Pittsburgh establishments continued to hire workers at a healthy rate during the second quarter but net job gains were moderately slower than the blazing pace set during the previous six months. Employers added to payrolls at a 13,400-job, 1. year-on-year rate, down from s 17,500- job advance and 11 s 26,700-job tidal surge. The skilled service sectors remained the primary economic drivers as financial, business, education and health care concerns accounted for 11,400 of 2Q net job gains. The sequential quarter slowdown was attributable to slower growth in education services (1,000 jobs vs. 5,600) and a accelerating cuts in government headcounts (-6,100). RCR s econometric payroll forecast model foresees another 18 months of above trend job growth in the Steel City. Pittsburgh is expected to add nearly 26,000 total jobs in 2012 and Conditions are likely to return to a more normal 0.7% to 1. rate of growth pattern beginning in 2014, translating to net job creation in the 7,000- to 10,000-job per year range through Vacancy Rate Summary Vacancy Rate (Reis) 3. RED 50 Rank 6 th Annual Chg. (Reis) <0.9%> RCR YE12 Forecast 2.7% RCR YE13 Forecast 3. RCR YE14 Forecast 3. RCR YE15 Forecast 3.7% 2Q12 Absorption and Vacancy Rate Trends Apartment demand was moderately softer in the second quarter as metro property tenants absorbed a net of 163 units, down from 326 in 12 and 268 in 2Q11. No supply was added to metro inventory, however, allowing average metro occupancy to rise 20 basis points sequentially to 97., moving Pittsburgh from 9th position among the 46 markets we cover (RED 46) to 6th. Properties in the Whitehall and North submarkets posted solid gains. Occupancy in the former advanced 150 bps sequentially and 740 bps yearover-year, settling at a 10-year high 93.. North submarket properties netted about 70 net new tenants, boosting occupancy 40 bps to 97., highest in the 18-year Reis submarket data series. RCR models suggest that the tightening arc of the Pittsburgh market is near its apex. Supply will regain momentum next year while absorption is expected to return to a normal 450- to 550-unit annual range. As a result, metro occupancy is likely to fade to the low-9 area by 2015, keeping it near the top rank of major U.S. metros. Effective Rent Summary Mean Rent (Reis) $825 Annual Change 3. RED 50 Rank 23 rd RCR YE12 Forecast 2.5.% RCR YE13 Forecast 0.9% RCR YE14 Forecast 1. RCR YE15 Forecast 2. 2Q12 Rent Trends Rent growth also was a bit weaker during the seasonally stronger spring leasing season as average asking and effective rents increased $5 (0.) and $7 (0.8%) sequentially to $870 and $825. This compares to 12 s respective $7 (0.8%) and $9 (1.1%) gains. Nevertheless, year-over-year comparisons improved for the third consecutive quarter, rising at a 4.5-year high 3. in 2Q, up from 3. during the winter quarter. Submarkets popular with young professionals recorded the strongest sequential gains. Owners in the infill Bellefield submarket recorded a $13 (1.) sequential increase, while suburban Upper St. Clair notched a hefty $17 (2.1%) advance. The RCR rent model remains skeptical that the Pittsburgh market can maintain the current rent trajectory. Despite tight conditions and personal income growth near the RED 46 average, rents are forecast to rise only 2.5% this year and less and 1% in We have a high-side logical basis, however, as rent growth should remain above until demand for for-sale housing rebounds. Trade & Return Summary $3mm+ Sales 1 Approx. Proceeds $5.9mm Median Cap Rate 7.5% Avg. Price/Unit $37,342 Expected Total Return 5. RED 46 ETR Rank RED RAI Rank 44 Th Risk-adjusted Index th 2Q12 Property Markets and Total Returns Sales of Pittsburgh properties evolved at a deliberate rate. For the second consecutive quarter only one property of 25 units or more closed during 2Q12, according to CoStar. Proceeds of this related party transaction totaled $5.9 million or $37,342 per unit, down from 12 s $5.7mm and $61,957 metrics. A shortage of assets offered for sale was primarily responsible. Currently, only two properties in Southwestern Pennsylvania are listed for sale on Loopnet, each offered for $3mm or less. Cap rates for these properties were posted by listing brokers at 7% and 8%, respectively. For purposes of estimating expected total returns we employ a 6.75% generic cap rate, about 100 basis points above the RED 46 average. Despite higher going in yields our forecast of below average rent growth limits expected investment total returns to 5., ranking just 44th among the 46- metro peer group. What Pittsburgh lacks in NOI growth potential, however, it makes up with almost ineffable cash flow stability. As a result, riskadjusted returns rank 8th among the RED 46, making Pittsburgh among the most attractive options for highly risk-averse investors.

6 MARKET OVERVIEW 2Q12 PITTSBURGH, PENNSYLVANIA Metro Vacancy Rate 9% 8% 7% 5% 3% 1% Metro Vacancy Rate Trends History, RCR Forecasts 4.5% PITTSBURGH RED % 5.1% 5.1% 2.9% % Average Cap Rate % % % % % 7. Metro Cap Rate Trends Source: efannie.com, RCR Calculations 6. 2Q Q Q WESTERN PENN MIDDLE ATLANTIC REGION 5.3% 5.8% 7.3% 30 Metro Payroll History and Forecast Source: BLS History, RCR Forecasts Annual Chg (000) Metro Cap Rate Trends Source: efannie.com, RCR Calculations f 2013f 2014f 2015f 2016f PGH (0.8) (28.2) NOTABLE TRANSACTIONS Property Name (Submarket) Property Class/ Type (Built) Date of Transaction Total Price (in millions) Price per Unit / Bed Estimated Cap Rate Dwellings4400 (Bellefield) B / IL (1903) May-2012 $5.9 $37, % (FN REFI) Cranberry Pointe (Butler County) B+ / GLR Mar-2012 $5.7 $61,957 NA Pristine Pines Wexford (North) B+ / AL Mar-2012 $2.6 $93,452 / $59, % (Reis) Pristine Pines Sewickley (North) B+ / AL Mar-2012 $5.2 $93,452 / $68, % (Reis) RED CAPITAL Research September 2012

7 MARKET OVERVIEW 2Q12 PITTSBURGH, PENNSYLVANIA YoY Rent Trend 5% 3% 1% -1% - -3% - Metro EffectiveRent Trends Source: Source: Reis, Reis, Inc. Inc., History, RCR RCR Forecasts Forecasts % 2.5% RED 46 AVG 0.9% 1.8% PITTSBURGH Y-o-Y % Change 12.5% % % % % -10. MetroHome HomePrice PriceTrends Source: S&P Federal Case-Shiller Housing Finance Repeat Sales Agency Index U.S.A. PITTSBURGH Y-o-y Growth Rate 3% 1% -1% - -3% - -5% - Metro PayrollEmployment rends and Forecast Trends Source: BLS History, Data, RCR Forecasts PGH IN-SAMPLE U.S.A. PITTSBURG H U.S.A. F oreca st The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors. RED CAPITAL Research September 2012

8 SUBMARKET TRENDS Submarket Effective Rent Physical Vacancy 2Q11 2Q12 Change 2Q11 2Q12 Change Bellefield $928 $ % % 10 bps Monroeville $697 $ % bps North $825 $ % bps Upper St Clair $720 $ % bps West $855 $ % 2.8% 2.5% -30 bps Whitehall / Baldwin $620 $ % bps Wilkinsburg $655 $ % 3.8% 2.9% -90 bps Metro $798 $ % bps Total Return 1 1 8% 4. PITTSB URGH (RAI=4.97) RED 46 AVG. (RAI=3.23) 3.3% 5. Total Return Distribution Sources: RCR Forecasts and Calculations 5.5% 6.9% 5.8% 6.3% % 10.3% Probability of Achieving State d Re turn or Grea te r RED CAPITAL GROUP For more information about RED s research capabilities contact: Daniel J. Hogan, Director of Research Kenneth H. Bowen, President, Red Mortgage Capital, LLC djhogan@redcapitalgroup.com khbowen@redcapitalgroup.com

9 RED CAPITAL GROUP MARKET OVERVIEW Pittsburgh, Pennsylvania Multifamily Housing Update 11 March 2012 Payroll Job Summary Total Payrolls 1,170.4m 11 Y-o-y Chg m FY m 2012 Forecast +16.6m 2013 Forecast +18.6m 2014 Forecast +23.8m Unemployment 7. (Jan) 11 Payroll Trends and Forecast Pittsburgh establishments continued to hire at a brisk clip, adding 12,800 workers to payrolls during the fourth quarter according to seasonallyadjusted data. The performance represented the largest one-quarter increase observed since Measured on a non-seasonally adjusted year-overyear basis, payrolls advanced at a 26,700-job, 2.3% pace, up from s 20,100-job gain. More than one-quarter of net job creation (7,700-jobs/ +13.7%) was attributable to hiring by education institutions, the fastest growth ever recorded in this sub-sector. Only state and local governments recorded meaningful attrition. The outlook for the future is constructive, although slower U.S. GDP growth will dampen future gains. Our payroll model foresees creation of about 16,600 jobs in 2012, followed by stronger 18,600 job and 23,800-job advances in 2013 and Economy.com are more bullish, projecting a total 60,000 new jobs created in 2013 and Vacancy Rate Summary Vacancy Rate 3.5% RED 50 Rank 7th Annual Change <0.> YE12 Forecast 3. YE13 Forecast 3.3% YE14 Forecast 3.3% YE15 Forecast Absorption and Vacancy Rate Trends Tight apartment markets and a dearth of vacant units limited occupancy growth. Tenants absorbed 288 units during the quarter, down from 321 in 11 and 709 in 10. Aggregate supply totaled only 38 units, however, allowing occupancy to rise 30 basis points sequentially (60 bps year-overyear) to a ten-year high 96.5%. Five of Pittsburgh s seven submarkets registered positive absorption during led by Whitehall, the only submarket with substantial vacant inventory, where tenants leased a net of 156 units. Robust demand also was observed in Wilkinsburg and West submarkets which together leased a net of more than 100 previously vacant units. RCR models indicate that 2012 will yield further net occupancy gains, forecasting a 60 bps increase to 97. by year end. Further progress will be more difficult, however, as supply is expected to become a larger inhibiting factor. Occupancy is likely to drift back toward the mid-9 range as a result. Still, Pittsburgh occupancy is likely to remain among the ten highest in the RED 50. Effective Rent Summary Mean Rent $809 Annual Change 2.1% RED 50 Rank 32nd 2012 Forecast 1.3% 2013 Forecast Forecast 1.8% 2015 Forecast 2.1% 11 Rent Trends Whereas sequential rent trends slowed in more than two-thirds of the RED 50 during the fourth quarter, Pittsburgh apartment owners enjoyed faster rent growth for the third consecutive quarter. In this case, average asking and effective rents increased $6 quarter-to-quarter to $858 and $809, generating 0.7% and 0.8% increases respectively for 12th rank among the peer group. Year-on-year comparisons were not as impressive, reflecting sluggish conditions recorded during the year s first half. Expressed on this basis, rents gained only 2.1%, ranking 32nd among the R50. Surprisingly, effective rents fell in the tight Bellefield submarket, tumbling $4 or -0. to $941. The other submarkets recorded nice sequential gains led by below average rent Monroeville and Whitehall. Each posted a 1.8% surge. Our model questions whether income growth will be strong enough to support further above average gains. The forecast calls for annual increases ranging from only 1. to 1.8% through Trade & Return Summary 11 $8mm+ Sales 3 Approx. Proceeds $20.1mm Average Cap Rate 6.1% Avg. Price / Unit $31,983 Expected Total Ret 5. RED 45 ETR Rank 38th Risk-adjusted Index 3.18/9th Recent Property Market Review and Total Return Estimates A dearth of institutional quality apartment properties offered for sale prevented institutional investors from accumulating multifamily assets in the Pittsburgh area. Only three trades valued at $3mm or more were completed in for a total of $20.1mm. Instead, institutions seeking to set stakes in the Steel City market are electing to pursue new construction. Currently, five major projects are underway, mostly in the infill Bellefield/Shadyside area. In addition, 17 projects of 40 or more units are in the planning stage, including nine Bellefield communities encompassing 691 units. Another four projects of 457 total units are proposed for the Northern suburbs. Cap rates of recent trades were in the 7.5% to 8.5% range. Using a 6.8% going-in cap rate for institutional quality assets, our model calculates a 5. expected unlevered return, ranking only 38th among the RED 45. Weak projected rent growth is large responsible. On the other hand, low volatility contributes to strong risk-adjusted returns: a 3.18 RAI ranks #9 among the peer group.

10 MARKET OVERVIEW 11 PITTSBURGH, PENNSYLVANIA Metro Vacancy Rate 8% 7% 5% 3% Metro Vacancy Rate Trends % PITTSBURGH RED 45 AVERAGE 4.9% 3. Average Cap Rate 8.5% % % % 5. Metro and Region Cap Rate Trends Sources: Fannie Mae MBS & RCR MID- ATL REGION 6.7% 6.7% % % 10 2Q Q PGH 6.5% Metro Payroll Employment Trends Sources: BLS & RCR Forecasts Annual Chg (000) f 2013f 2014f PITTSBURGH (8.1) (0.4) (0.8) (28.2) NOTABLE TRANSACTIONS Property Name (Submarket) Property Class/Type (Construction Year) Date of Transaction Total Price (in millions) Price per unit Estimated Cap Rate Avalon Arms (North) B/MR (1968) 20-Dec-2011 $6.5 $68, Park Place (USC/Bethel Park) B/GLR (1973) 8-Nov-2011 $11.5 $52, Cedar Ridge (Monroeville) C+/GLR (1965) 28-Oct-2011 $3.5 $30, % RED CAPITAL Research March 2012

11 MARKET OVERVIEW 11 PITTSBURGH, PENNSYLVANIA Metro Effective Rent Trends, RCR Forecasts YoY Rent Trend % - RED 45 AVG PITTSBURGH % 2.1% Y-o-Y % Change 1 1 8% % -1 Metro Home Price Trends Source: FHFA All Transaction Home Price Index Metro Home Price Trends Source: FHFA Home Price Index. U.S.A. PITTSBURGH Metro Payroll Employment Growth Trends Sources: BLS data, IEC at UCF and RCR Forecasts Y-o-y Growth Rate - - PITTSBURGH USA f 2012f 2013f 2014f The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors. RED CAPITAL Research March 2012

12 SUBMARKET TRENDS Submarket Effective Rent Physical Vacancy Change Change Bellefield $922 $ % 2.5% 1.9% -60 bps Monroeville / White Oak $690 $ % % -90 bps North $818 $ % -90 bps Upper St. Clair $720 $ % 3.5% 3.3% -20 bps West $849 $ % 3.1% 2.5% -60 bps Whitehall / Baldwin $613 $ % % -110 bps Wilkinsburg / Penn Hills $654 $ bps Metro $792 $ % 3.5% -60 bps ExpectedTotal Return 1 1 8% 2.8% PITTSBURGH 2.5% P HIL ADEL P HIA 4.3% 4.3% Total Return Distribution Source: RED CAPITAL Research 5.3% Probabi l i ty of Achi ei vi ng Stated IRR or Hi gher % 7.8% RED CAPITAL GROUP For more information about RED s research and origination capabilities contact: Kenneth H. Bowen Daniel J. Hogan President, Red Mortgage Capital, LLC. Director, Research khbowen@redcapitalgroup.com djhogan@redcapitalgroup.com

13 RED CAPITAL GROUP MARKET OVERVIEW Pittsburgh, Pennsylvania Multifamily Housing Update 11 November 2011 Payroll Job Summary Total Payrolls: 1,143.4m Annual Change: +14.0m 2011 Forecast +14.1m 2012 Forecast + 6.0m 2013 Forecast +13.8m 2014 Forecast +20.0m Unemployment 6.8% (Sep) 11 Payroll Trends and Forecast Following a sluggish spring season the Steel City labor market regained momentum during the third quarter. Metro establishments added to payrolls at a 14,000-job, 1. rate, up from 2Q s 11,700- job pace. Third quarter gains were attributable to faster hiring in the construction, trade and health care sectors which expanded at a combined 10,300-job pace, up from 2Q s 4,800-job rate. Preliminary September data suggested a slowing trend, however, as seasonally-adjusted headcounts dropped -3,100 jobs month-to-month, and y-o-y comparisons slowed from August s brisk 15,000-job advance to 12,700 in September. The RCR econometric payroll model produces an encouraging forecast. The model suggests that metro employers will create a net of 13,800 jobs in 2013 and 20,000 jobs in 2014, following a weaker 6,000-job add next year. The soft 2012 outlook reflects a forecast for slow U.S. domestic output growth next year in our base economic forecast and is not a Pittsburgh-specific issue. Vacancy Rate Summary Vacancy Rate (Reis) 3.8% RED 50 Rank 7th Annual Chg (Reis) -1. Reis YE11 Forecast 3.5% Reis YE12 Forecast 3. RCR YE13 Forecast 3.8% 11 Absorption and Vacancy Rate Trends Demand for apartment space accelerated during the summer as tenants net leased 321 units in 11, up from 268 in 2Q. Pittsburgh was only one of 13 metros in the RED 50 to record more net move-ins in than 2Q. Average occupancy increased 10 basis points as a result (in spite of delivery of 243 new units) to 96., highest in 10 years and the 7th best rate among the peer group. Monroeville (-0.1%/4.5%) was the only metro submarket to record negative net absorption in the quarter. The infill Bellefield area registered the best performance again, as tenants leased nearly 40 net units, raising occupancy 20 bps sequentially to a metro high 98.. Reis expect tenants to absorb another 232 units in 11, raising metro occupancy 30 bps to 96.5% by YE11. But the service anticipates that further gains will be harder to achieve as supply pressures begin to build. Reis project annual deliveries to average 640 units from 2012 to 2015, blunting likely overall metro occupancy rate gains. Effective Rent Summary Mean Rent (Reis) $820 Annual Change 2. RED 50 Rank 34th Reis 2011 Forecast 2.3% Reis 2012 Forecast 2.8% Reis 2013 Forecast 3. CAGR Rent Trends Following a lackluster first half 2011 when average asking and effective rents increased only $5 (0.), rent trends regained traction over the summer. Average asking and effective rents increased $5 (0.) sequentially in each case, representing the strongest momentum observed in a year. Year -on-year effective rent growth was weaker, however, slipping to 2. from 2Q11 s 2. metric, ranking Pittsburgh only 34th among the RED 50. The Bellefield, West and Upper Saint Clair submarkets posted the strongest sequential gains, recording $15/1., $14/1.7% and $19/2.7% hikes, respectively. Monroeville recorded the only quarterly setback, falling $3 (-0.) to $694. Reis expect the pace of rent growth to rise gradually in 2012, accelerating from 2011 s projected 2.3% advance to a 2.8% increase next year. But the pace of growth will gain velocity in 2013 with a projected 3. increase, and continue to accelerate above the threshold in 2014 and 2015 Trade & Return Summary $5mm+ Sales 5 Approx. Proceeds $47.8mm Cap Rate (T12 Med) 7. Avg. Price/Unit $ Expected Total Return 5.8% RED 46 Rank NA 11 Property Markets and Total Returns There is very little stock on the shelves in the Pittsburgh market, causing trade velocity to be commensurately slow. RCA observed only five significant transactions during the first half of the year, with proceeds totaling $48mm. Nevertheless, this represented a nice pick-up from the comparable period of 2010, which saw only two trades closed for total proceeds falling short of $20 million. Very little change appears to be in store. According to listing website Loopnet.com, there were only two $2mm+ properties listed for sale by participating brokers in mid-november. Consequently, the value propositions for Pittsburgh apartments is largely theoretical. Nevertheless, we continue to perceive value in the sector on a risk-adjusted basis. Refinance data suggest that appraisers see class-b cap rates in the mid to 7% range, levels that will produce expected unlevered total returns in the mid-5% to range at exceptionally low levels of yield volatility.

14 MARKET OVERVIEW 11 PITTSBURGH, PENNSYLVANIA 8% Apartment Vacancy Trends, RCR Forecasts Metro Vacancy Rate 7% 5% 3% PGH PGH FORECAST RED % 3.8% 3.7% % 4.9% Average Cap Rate 7.5% % % 5. F anni e Mae DUS: Pi ttsbur gh F anni e Mae Large DUS: Metro Multifamily Capitalization Rate Trends (Trailing 12-month Moving Average) Source: Fannie Mae DUS History Mi d-atl antic 10 2Q Q Annual Chg (000) Payroll Employment Growth Source: BLS Data & RCG Research Forecast f 2012f 2013f 2014f PGH (11.8) (8.1) (0.4) (0.8) (28.2) NOTABLE TRANSACTIONS Property Name (Submarket) Property Class Date of Transaction Total Price (in millions) Price per unit Estimated Cap Rate Penn Garrison Apts (Cultural Distr) A Apr-2011 $13.5 $115, Leland Point (Whitehall) C+ Jun-2011 $9.9 $9,182 NA RED CAPITAL Research November 2011

15 MARKET OVERVIEW 11 PITTSBURGH, PENNSYLVANIA YoY Rent Trend 5% 3% 1% -1% - -3% - TOP 82 Metro Avg TOP 82 Forecast Pittsburgh Pittsburgh Forecast Metro Apartment Effective Rent Trends % % % Y-o-Y % Change 1 1 8% % -1-1 U.S.A. PGH MSA Metro Home Price Trends Source: FHFA Home Price Index Rate 3% 1% -1% - -3% - Year-over-year Payroll Growth Rate Source: BLS, RCG Research Forecasts -5% f 2012f 2013f 2014f PGH U.S.A. The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors. RED CAPITAL Research November 2011

16 SUBMARKET TRENDS Submarket Effective Rent Physical Vacancy Change Change Bellefield / Shadyside $914 $ % bps Monroeville / McKeesport $688 $ % 5.8% 4.5% -130 bps North / Butler / Beaver Co. $815 $ % % -250 bps Upper St Clair / Bethel Park $717 $ % -190 bps West / Airport / Carnegie $845 $ % 3.8% 2.8% -100 bps Whitehall / Baldwin $603 $ % 12.8% 14.3% 150 bps Wilkinsburg / Penn Hills $654 $ % % -130 bps Metro $787 $ % -120 bps RED CAPITAL GROUP For more information about RED s research capabilities contact: Daniel J. Hogan Director of Research djhogan@redcapitalgroup.com William T. Hinga Business Development wthinga@redcapitalgroup.com

17 RED CAPITAL GROUP Market Overview Pittsburgh, PA Multifamily Housing Update November 2010 EXECUTIVE SUMMARY H opes for a new burst of energy-inspired prosperity in Western Pennsylvania ran into a cold dose of reality in the fall, as environmental impact concerns slowed natural gas development in the promising Marcellus Shale region. Indeed, the city of Pittsburgh banned drilling within city limits in November, placing existing leases with city residents in legal limbo. Energy sector employment growth decelerated in the third quarter, inhibiting the metro area s economic recovery. After posting a solid 9,700- job seasonally-adjusted gain in 2Q10, payroll totals slumped by -3,400 jobs in, representing the weakest quarterly trend recorded in 12 months. Year-over-year comparisons of nonseasonally-adjusted data suggest that weaker hiring in energy related employment sectors like mining, wholesale trade and technical business services was partially responsible for the summer slowdown. Also contributing was slower growth in the hospitality, finance and government sectors. Weaker hospitality expansion was attributable to a decrease in restaurant and food service headcounts, while government payroll trends were affected by the termination of temporary Census jobs and slower expansion among local school districts. But the data contained plenty of promising news as well. Improved consumer confidence boosted retail sales and new housing demand, leading stores to staff up at the fastest rate in six years and construction firms to record the first payroll growth in nearly two years. Business and education service establishments also hired at a faster pace, reflecting increased use of temporary contract workers and expansion at private schools. The RED Research econometric payroll model foresees further sluggish growth in 2011, but increased momentum developing during the following two years. The model projects a gain of 4,100 (0.) jobs next year, accelerating to 8,500 (0.8%) in 2012 and 12,300 (1.1%) in Households expressed robust apartment demand in the third quarter, as tenants net leased 510 units in the period, the largest renter inflow recorded in five years. The metro apartment stock expanded by only 54 units quarter-to-quarter, allowing occupancy to rise 60 basis points to 95., ranking as the 10th highest rate observed among the RED 50 markets. Six of seven metro submarket posted sequential vacancy rate declines, led by North and Upper St. Clair, which recorded 120 and 110 bps decreases, respectively. Following weakness in 2Q10, third quarter rent trends firmed considerably. Reis report that average face rents advanced $5 (0.) sequentially to $837, a series high. Effective rents also advanced $5 (0.7%) to $787, likewise setting a Reis data series record. Sequential trends were positive in five submarkets, led again by USC (1.), while the West and North submarkets placed and showed. Reis expect stable demand to maintain average occupancy rates in the 95% vicinity through Rents are forecast to rise at a compound rate of about 2.9%, in line with the projected RED 50 norm. Combined with a generic purchase cap rate of 7., we calculate that an investor in a typical metro multifamily asset would expect to achieve an 8. un-levered total return over five years, 32nd highest among the R50. But exceptionally low NOI volatility boosts riskadjusted returns to RED 50 top echelon: the Steel City s 4.69 risk-adjusted index is the 6th highest observed among our metro market peer group. SNAP SHOT Vacancy ( ) Effective Rents ($787-10) Cap Rate (7.3% - 10) Employment (1,131.3m - 10) Y-o-y Projected change YE bps bps 10 bps 6.1m 1.6m KEY POINTS Growing confidence in job prospects drew hundreds of metro residents into the apartment market in 10. Tenants absorbed a net of 510 units from July to September, the largest three-month catch since Strong demand combined with scarce supply allowed metro occupancy to soar 60 basis points sequentially and 50 bps year-on-year to 95., 10th highest among the RED 50. After a spate of discounting in the spring (average effective rents tumbled 0.5% in 2Q10), metro rent trends recovered nicely during the summer. Each of the average asking and effective rent metrics increased $5 sequentially, giving rise to 0. and 0.7% respective quarter-over-quarter gains. Measured on a year-on-year comparison basis, payroll growth was robust in 10, registering at 6,100-job annual pace, up from a -1,600-job setback in 2Q10. Strong gains were recorded in construction, retail trade and skilled services. But seasonally-adjusted data painted a considerably different picture, depicting a net loss of -3,400 positions. RCR observed two institutional quality property sales closed during 2H10. The class-b assets were priced to yield 8.5%-9%.

18 Pittsburgh, Pennsylvania MSA Q VACANCY TRENDS Pittsburgh apartment owners continued to enjoy some of the most advantageous supply and demand conditions in the country. After reaching a cycle peak 7.7% in 2004, average vacancy tumbled steadily over the following 6 years, settling at a near eight-year low 5. in September, 200 basis points less than the 7. RED 50 average. Stronger job trends encouraged hundreds of residents living with roommates or parents to establish independent households. As a result, property agents leased a net of 510 units in, the best three-month catch since 05. Metro tenants absorbed only 94 units during 2Q. Properties in two metro submarkets net leased 100 or more units: North (202) and West (125). Vacancy fell 120 and 70 bps, respectively. RANK: 10 th out of 50 Reis expect metro occupancy to remain at or about 95% through year-end Metro Vacancy Rate 9% 8% 7% 5% Apartment Vacancy Trends PITTSBURGH U.S.A RENT TRENDS Rent trends rebounded from 2Q10 s sharp drop with a useful gain. The metro average asking and average effective rent metrics increased $5 sequentially, recording 0. and 0.7% respective gains. 5% Metro Rent Trends Year-over-year comparisons were depressed by weak performances recorded during 09 and 2Q10. Asking rents stood $3 (0.3%) above the 2009 comparison, while effective rent levels exhibited a $5 (0.) advance. The latter metric ranked only 36th among the RED 50. Two submarkets suffered rent decreases quarter-to-quarter: Whitehall (-1.1%) and Monroeville (-0.5%). Four submarkets recorded gains, led by Upper Saint Clair, which posted an $11 (1.) advance to $717. Reis expect rents to rise by an average of 2.8% annually through RANK: 36 th out of 50 YoY Rent Trend 3% 1% -1% - ASKING EFFECTIVE % PROPERTY MARKET & CAP RATE TRENDS Real Capital Analytics identified three institutional quality asset sales closed during the first eight months of Proceeds totaled $27mm. Cap rates for 2010 closed trades averaged 7.5%, according to RCA Metro Multifamily Cap Rate Trend Trade Composite RED CAPITAL Research identified two significant trades closed during the fourth quarter. An 82-year old Squirrel Hill mid-rise located near Schenley Park traded for $10mm ($56,061 per unit). RCR estimate an 8.5% cap rate. Also, a 222-unit, Penn Hills class-b golf course mid-rise exchanged hands at an estimated 9. going-in yield. Cap Rate Employing a generic cap rate of 7. for institutional quality assets, RCR calculate that a buyer of a typical metro asset would expect to yield an 8. annualized total return, ranking 32nd among the RED 50. Pittsburgh NOI volatility is among the lowest in the group, however, boosting risk-adjusted returns to the 6th highest in the R NOTABLE TRANSACTIONS Property Name Property Class Date of Transaction Total Price (in millions) Price per unit Estimated Cap Rate Morrowfield Apts (Squirrel Hill) B 1-Oct-2010 $10.0 $56, % Alcoma on the Green (Penn Hills) B 2-Nov-2010 $9.4 $42, RED CAPITAL Research

19 Pittsburgh, Pennsylvania MSA - Q Appreciation 11% 9% 7% 5% 3% 1% -1% -3% -5% -7% Year-over-year Home Value Change Source: S&P Case-Shiller Index, RCR PGH U.S.A DEMOGRAPHICS & HOUSING MARKET Home prices remained ineffably stable in the Pittsburgh area. According to the Federal Housing Finance Agency, metro home values increased at a 1.8% annual rate in 10, considerably better than the 1. national average. Year-over-year comparisons oscillated within a tight 1.8% to 3.3% range from 06 to the present, dramatically tighter than the 6.5% to 10. range applicable to the nation. Home sales velocity during 10 was, apparently, exceptionally slow. The National Association of Realtors did not publish median price data for Pittsburgh MSA sales transaction for the period, presumably due to inadequate volume. The incidence of mortgage foreclosure remained low in the Pittsburgh area. According to Realtytrac, only 1 in 193 metro households received a foreclosure related notice during the third quarter, the 154th highest rate observed among the 206 largest U.S. metropolitan areas. Annual Chg (000) Rate % 1% -1% - -3% - -5% - Payroll Employment Growth Source: BLS Data & RCG Research Forecast Year-over-year Payroll Growth Rate Source: BLS, IEC/UCF, RCR PGH ACTUAL PGH FORECAST USA ACTUAL USA FORECAST f11f12f13f f 12f 13f EMPLOYMENT TRENDS Non-Seasonally Adjusted Expressed on a year-over-year comparison basis, Pittsburgh establishments added payroll employees at a 6,100-job, 0.5% annual pace in 10, up materially from the 1,600-job and 18,800-job loss rates observed in 2Q and, respectively. Substantial quarter-to-quarter gains were observed in the construction, retail trade and business, health care and education service sectors. Together, the foregoing sectors expanded at an 11,000-job annual pace in the third quarter, up from a 4,500-job gain observed in 2Q10. Notably, the professional, scientific and technical service sub-sector chalked down a 400-job advance, up from a -1,200-job setback in the prior quarter and before that four consecutive losses of -1,000 jobs or greater. Expansion in the energy extraction industry was likely responsible for a great deal of this advance. Payrolls grew 6,500 jobs over the 12-months ended in October. Seasonally-Adjusted The seasonally-adjusted data series painted a very different picture than the more benign nominal figures. This series indicates that Pittsburgh payrolls actually declined over the summer, falling -3,400 jobs from July to September. Difficult to accurately adjust school district headcounts and temporary Census job effects were at work. Preliminary October data showed a solid 900-job advance. Forecast The RCR econometric payroll model for Pittsburgh is skeptical of the October payroll data, suggesting that the real run rate for metro hiring is nearer to 300 to 500 jobs per month. The model projects a 4,100- job advance next year, followed by more robust 8,500 and 12,300- job gains in 2012 and 2013, respectively. 15% 1 RED Estimated Generic Unlevered Asset Total Return Probabilities PGH (RAI=4.69) PHIL (RAI=5.04) 9.1% 7.3% % 6.9% 7.7% 8.5% 5.7% % Probability of Achieving Stated Return or Greater RED CAPITAL Research

20 SUBMARKET TRENDS Submarket Effective Rent Physical Vacancy Change Change Bellefield / Shadyside $910 $ % 3.9% bps Monroeville / McKeesport $690 $ % 4.7% 5.8% 110 bps North $823 $ bps Upper Saint Clair $721 $ % bps West $816 $ % 3.8% -50 bps Whitehall / Baldwin $614 $ % 13.3% 12.8% -50 bps Wilkinsburg $658 $ bps Metro $692 $ % 6.8% 6.1% -70 bps SUPPLY TRENDS At November 22, Reis identified three projects in the construction phase. These included a 342-unit property (300 market rate units) located in rapidly growing Cranberry Township, Butler County; 243 units in Seven Fields, Butler County; and 250 units in a mixed use PUD in South Fayette County. The Seven Fields deal is scheduled to debut next May. The other two transactions are unlikely to reach the market prior to A 17-story, 300-unit mixed use high-rise in Squirrel Hill was projected to break ground in September in our 2Q10 report. Reis now retract that assertion on its construction works report. Five other projects sited in the Bellefield / Shadyside submarket are listed in the planning phase. The largest of these is a $40mm, 220- unit adaptive re-use of an office building near Point State Park. Developer projects a Fall 2010 start date. The same developer also proposes to construct a $65mm retail / residential project on the intersection of Market Street and Fifth Avenue Downtown. The residential component will consist of 125 apartments and condominiums. Developer estimates a 2013 delivery. A $9mm historical renovation of a Wilkinsburg property will bring 27 new rental affordable housing units to the market. The project is not yet underway but an August 2011 completion date is noted on the Reis construction report. Units 2,000 1,500 1, ,000-1,500 Completions and Absorption Source: Reis, Inc Completions Absorption f 11f A 60-unit high-rise located on Seventh Avenue was completed in the summer It was 10 occupied in September at rents averaging $1,229. A 46-unit project at Fifth and Market completed in April was about 95% occupied in September at rents averaging $1,780 per month. Daniel J. Hogan Director of Research djhogan@redcapitalgroup.com William T. Hinga Business Development wthinga@redcapitalgroup.com RED CAPITAL GROUP Two Miranova Place Columbus, OH RED CAPITAL GROUP The information contained in this report was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or securities or to engage in any specific transactions. Information has been gathered from third party sources and has not been independently verified or accepted by RED CAPITAL GROUP. RED makes no representations or warranties as to the accuracy or completeness of the information, assumptions, analyses or conclusions presented in the report. RED cannot be held responsible for any errors or misrepresentations contained in the report or in the information gathered from third party sources. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.