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The Credit Crisis in

Commercial Real Estate

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• Commercial real estate accounts for a meaningful 6% of GDP

• Commercial real estate entered the recession reasonably well balanced

• However, approximately $400 billion of CRE debt matures in 2009, and

another $800 billion matures in 2010 and 2011

• According to S&P, another $800 billion of corporate debt matures on 2009

• Two largest sources of CRE debt have been banks and CMBS

• Banks are not lending, and the CMBS market is closed

• Lending terms, when available, are ruinous and assets cannot be sold

• Performing loans must be refinanced to avoid asset price deflation

• Super-duper AAA-rated debt trades at 10.2% yields to maturity

• AAA-rated debt requires Treasury support to establish price discovery

Summary

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3Source: JPMorgan Asset Management

Commercial Real Estate Debt and EquityInvestment-grade, income-producing real estate$6.4 trillion as of December 2008

Total Debt

$3.5 trillion

Total Equity

$2.9 trillion

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4Sources: JPMorgan Asset Management and NAREIT®

Commercial Real Estate Debt and EquityPublic and Private Ownership as of December 2008

Debt

$3.2 trillion

Equity

$2.7 trillion

Debt

$260 billion

Equity

$240 billion

$5.9 trillion

$0.5 trillion

PrivateOwnership

PublicOwnership

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5Source: Federal Reserve Flow of Funds Accounts of the United States

Commercial Mortgage Debt OutstandingBy source of funds

■ Banks ■ Thrifts ■ Insurance ■ Government ■ CMBS ■ Other

$1,041 billion$1,253 billion

$3,499 billion

1988-Q41998-Q4

2008-Q4

CMBS Banks

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• 93 companies listed on the NYSE

• 72% investment grade by equity market capitalization

• $500 billion of property owned as of December 31, 2008

• Current leverage ratio of 65% compared with 40% at the end of 2007

• Fixed charge ratio of 1.7 compared with 2.5 at the end of 2007

• $17.7 billion of dividends paid to shareholders in 2008

• Average daily trading volume of $4 billion to $5 billion

• Share returns lead measured returns in property markets by 6-18 months

– Share returns peaked early in 2007 and have since declined 68%

Note: Data as of March 31, 2009 Source: NAREIT®

Publicly Traded Real Estate Equity (REITs)A window on commercial real estate equity finance

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Debt Maturities by Year

$410$310

$500

$1,800

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

2009 2010 2011 2012+

$ o

f M

aturi

ty p

er Y

ear

Public companies Total commercial real estate

Billions of dollars

Commercial Real Estate Debt MaturitiesIncluding secured and unsecured debt

Sources: Goldman Sachs and REIT filings7

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Public Company Debt MaturitiesInvestment grade unsecured debt

Note: Data as of April 30, 2009Sources: Goldman Sachs, Advantage Data, Barclays and Bloomberg

Unsecured Investment Grade Bond Maturities (BAA1/BAA2)

$10 $10

$38

$10 $10

$6

$0

$8

$16

$24

$32

$40

2009 2010 2011 2012 2013 2014+

Bill

ions

of d

olla

rs

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

Weig

hted

average cou

pon

Weighted average coupon: 6.0%(Right-hand scale)

Current Yield-to-Worst: 10.6%(Right-hand scale)

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Overall U.S. CMBS Maturities by Year

$45$52

$46$54

$100

$131$136

$60$65

$40

$0

$40

$80

$120

$160

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018+

CM

BS

Mat

uri

ty A

mo

un

t

Publicly Traded Real Estate Debt (CMBS)A window on commercial real estate debt financeAnnual maturity schedule

Sources: Goldman Sachs and Trepp

Billions of dollars

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Commercial Real Estate Loans at BanksCRE credit standards: 1997:Q1 – 2009:Q1

Source: Federal Reserve Board Senior Loan Officer Opinion Survey on Bank Lending Practices (January 2009)

-30

-10

10

30

50

70

90

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Net

% R

epo

rtin

g T

igh

ter

Sta

nd

ard

s

Net percent

A record tightening of credit standards

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Commercial Real Estate Loans at BanksCRE lending volume: 1989 - 2009

Note: Data through April 15, 2009 Source: Federal Reserve Board

45

33

-2

-12

21 2432

45

89

71 7177

121

191

179

150

135

94

-7

11

-12-20

20

60

100

140

180

220

1989 1993 1997 2001 2005 2009

$ D

iffe

ren

ce f

rom

Pre

vio

us

Yea

r

Billions of dollars

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Securitized Commercial Real Estate LoansCMBS issuance volume: 1999 - 2009

Note: Data as of April 30, 2009 Source: Commercial Mortgage Alert

5547

67

52

93

169

203

230

0

78

12 00

40

80

120

160

200

240

1999 2002 2005

CM

BS

Issu

ance

s

Billions of dollars

1st Half 2nd Half

2008

12

2009

13

CMBS Credit SpreadsCMBS yield less 10-year Treasury yield

Note: Data through April 24, 2009 Source: Morgan Stanley

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

AAA-Sup. Senior AAA-Junior AAA-Mezz BBB

Basis points

CMBS with 10-year average life

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Commercial Real Estate TransactionsTransaction volume: 2001 – 2009

Note: Data as of March 31, 2009. Source: Real Capital Analytics

4,769 4,979

6,447

10,178

16,064

18,001

7,437

580

13,814

0

5,000

10,000

15,000

20,000

2001 2002 2003 2004 2005 2006 2007 2008 2009

Number of transactions

Indicative of bid-ask spreadstoo wide to clear the market

Asset sales an unlikely sourceof liquidity; neither buyers norsellers have access to credit

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CMBS and Residential Mortgage Delinquencies1999 – 2008:Q4

Note: Delinquency rates are for fixed-rate, conduit CMBS transactions. 60+ excludes 30-day delinquencies. Sources: Trepp, CMSA, and Mortgage Bankers Association National Delinquency Survey

0%

1%

2%

3%

4%

5%

6%

7%

8%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

CMBS Delinquencies - 60+ CMBS Delinquencies - All 30+ MBA NDS

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Nationwide Core Property Vacancy Rates1983:Q1 – 2008:Q4

Note: Data as of December 31, 2008 Source: NCREIF

0%

5%

10%

15%

1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

16

17

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Securities Offerings by Public Companies

0

10

20

30

40

50

1992 1994 1996 1998 2000 2002 2004 2006 2008

Equity Debt

Note: Data as of April 30, 2009 Sources: NAREIT® and SNL Financial

Billions of dollars

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• Banks must be encouraged or required, as a condition for Treasury or Fed liquidity assistance, to refinance performing commercial mortgages and unsecured credit facilities reaching maturity

• Foreign equity capital should be encouraged and barriers to such investment, such as the Foreign Investment in Real Property Tax Act (FIRPTA), should be revised

• Real estate mortgage investment conduit (REMIC) rules should be amended to facilitate reasonable modifications to the terms of loans securitized through CMBS

• Provisions to encourage workouts of distressed commercial real estate debt should be extended to REITs

• Continuation of the long-time role of Fannie Mae and Freddie Mac in providing an appropriate level of credit to the multifamily and senior housing sectors

• Accounting rules for “mark-to-market” and “consolidation” must adapt to the current capital markets crisis

Policy Actions to Stabilize Financial Markets

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