While the lending environment has tightened, the supply/
demand balance across commercial real estate sectors
remains relatively healthy. Additionally, higher borrowing
costs and more stringent underwriting requirements will
make it difficult for developers to move forward with some
planned projects, further supporting space fundamentals.

APARTMENT MARKET
Moderate job growth, higher mortgage rates and tighter
lending standards will drive renter demand in the near
term. As ARMs adjust and mortgage payments become
unaffordable, many homeowners will return to the rental
market. Foreclosure sales are up 90 percent this year and
are forecast to rise further. It is estimated that 2.2 million
loans originated in recent years will end in foreclosure.

Competition for renters has increased in markets where
condo/single-family investors were most active, but new
apartment development remains moderate and vacancy
will remain in a healthy range. New supply is forecast to
total 92,000 units this year, up from 2006 but still well
below the average from 1999 to 2004 of 152,000 units. In the
near term, increasing supply of vacant homes and the
return of conversion projects to the rental market will put
some upward pressure on vacancy, though the net effect of
the conversion trend will remain a positive for apartments.

Longer term, immigration and demographic trends support
a favorable outlook for apartments. Immigration is
forecast to average 1.2 million new U.S. residents annually
through 2015. Over the same period, baby boomers’ children
will enter their prime renting years, with the 20- to
34-year old population expected to grow by 4.8 million.
Effective apartment rents are up 4.6 percent from last year
and have increased 13 percent since bottoming in 2003.
Rent growth of 4 percent is expected in 2007 and 2008.

RETAIL MARKET
Retail outperformed during the last economic downturn,
and therefore did not experience a strong recovery cycle
like apartments and office. Retail sales growth in recent
years was largely supported by housing and mortgage refinancing.
Rapid home price appreciation, low interest rates
and looser underwriting standards allowed homeowners
to cash out more than $1 trillion of equity from 2002 to 2006.

Cash-out refinancing will not be a driver, but major
retailers have accounted for slower retail sales growth
when preparing expansion plans. Nationwide, retail construction
is up from last year, but development has been
largely tenant driven; build-to-suit, big-box retail accounts
for half of the new space entering the market this year. Low
levels of speculative construction should prevent oversupply
conditions in most markets.