Washington Metropolitan Area Class B Apartment Market Report Third Quarter 2012

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT THIRD QUARTER 2012

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ECONOMIC TRENDS AND FORECAST ECONOMIC OUTLOOK United States United States

15% 51 months: 32 months: 32 months: 72 months: GDP 2013 2022 Recession + Recession + Recession + Recession + Recovery Recovery Recovery Recovery With Sequestration -0.5% 2.3% 10% Without Sequestration 1.7% 2.1%

5% UNEMPLOYMENT RATE With Sequestration 9.1% 5.3%

0% Without Sequestration 8.0% 5.3% 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Source: Congressional Budget Office, Delta Associates; September 2012. -5%

Percent Change in GDP Unemployment Rate

Unemployment and Unemployment GDP Annualized Rate Change Given the enormous impact to the national economy, we do Recession Recovery -10% not expect Congress to allow sequestration and tax increases to take hold at the start of 2013. Congress could pass a bill Source: BLS, BEA, Center for Regional Analysis, Global Insight, Delta Associates; September 2012. to delay the start date after 2013, which would allow time to devise an alternative plan to the scheduled cuts. Or, PAYROLL JOB GROWTH Congress, after the November election, could pass a bill that alters the current plan, allowing the cuts to take place in 2013, but with less immediate impact. United States | Year-Over-Year 4000 Private Sector Overall, current economic conditions point to a sluggish

2000 Public Sector is likely the new normal for periods of economic “expansion.” 0 So,economy business – not success a stalled could economy. be measured Sluggish by economic how commerce growth adapts to this new slower-growth economic environment, at -2000 least for the intermediate term.

-4000

-6000

Thousands of New Payroll Jobs Jobs of New Payroll Thousands SLUGGISH ECONOMIC GROWTH IS LIKELY THE

-8000 NEW NORMAL FOR PERIODS OF ECONOMIC Jan. Mar.May. Jul. Sep. Nov. Jan. Mar.May. Jul. Sep. Nov. Jan. Mar.May. Jul. Sep. Nov. Jan. Mar.May. Jul. 09 09 09 09 09 09 10 10 10 10 10 10 11 11 11 11 11 11 12 12 12 12 “EXPANSION.” SO, BUSINESS SUCCESS COULD BE MEASURED BY HOW COMMERCE Source: Bureau of Labor Statistics, Delta Associates; September 2012. ADAPTS TO THIS NEW SLOWER-GROWTH ECONOMIC ENVIRONMENT, AT LEAST FOR THE INTERMEDIATE TERM. CUMULATIVE JOB LOSS AFTER PEAK A LOOK AT PAST RECESSIONS United States Now, for a look at the components that make up our economy: 1.0% 0.0% PAYROLL JOBS

-1.0%

-2.0% The national economy added approximately 1.8. million

-3.0% new jobs during the 12 months ending August 2012, with the private sector adding 2.0 million new jobs compared -4.0% 1981-1982 to the public sector shedding 200,000 positions. Month-to- 1990-1991 from Employment from Peak -5.0% month gains have been slow to progress, as 96.,000 jobs were 2001 Percent Cumulative Job Change Job Change Cumulative Percent -6.0% 2007-2009 added to the economy during the month of August 2012. Job

-7.0% gains have been disappointing compared to past economic 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 recoveries. Approximately 125,000 jobs must be created per Number of Months from Peak Employment month just to keep the unemployment rate steady. Although Source: Bureau of Labor Statistics, Delta Associates; September 2012. the economy continues to move forward, it does so at a sub-

4 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 THE NATIONAL ECONOMY

SPONSORED BY ROSS COMPANIES par pace. This sub-par pace will encourage businesses and PAYROLL JOB GROWTH consumers to alter spending patterns to adjust to this limited United States | 12 Months Ending August 2012 growth. We expect muted job growth in the near-term. We expect around 2.0 million jobs to be added to the national Professional/Business Services economy during 2012 and perhaps slightly more in 2013. Education/Health Leisure/Hospitality Companies remain cautious in hiring, as they take a wait- Manufacturing Wholesale Trade and-see approach. And many companies do not need to Retail Trade hire back laid off employees, as productivity gains have Transportation/Utilities eliminated some jobs. Financial Services Other Services Information We expect more jobs to be trimmed from the public sector Construction/Mining during the balance of 2012, as governments cut their Federal Government State and Local Government workforces to make up for budget shortfalls. However, the -200 -100 0 100 200 300 400 500 600 700 national economy will continue to see positive job gains as Job Change these losses will be offset by continued growth in the private sector. Although we expect the private sector to grow for all Source: Bureau of Labor Statistics, Delta Associates; September 2012. of 2012, the pace of growth will be muted. We expect the pace to improve somewhat in 2013. PROJECTED PAYROLL JOB GROWTH United States | December 2010 – December 2020 During the 12 months ending August 2012, the top three sectors in job gains were Professional/Business Services, Education/ Education/Health new jobs. State and Local Government shed the most workers Professional/Business Health, and Leisure/Hospitality – adding a total of 1.3 million Construction over the past year, cutting 123,000 positions. The Government Retail State/Local Govt as budget austerity measures are put in place. Leisure/Hospitality sector (both Federal and state/local) is reducing its workforce Transportation/Util. Other Services The Bureau of Labor Statistics projects the economy will Financial add 19.7. million nonfarm payroll jobs through 2020, for Wholesale Trade an average annual growth rate of 1.4.%. This growth rate Information Manufacturing compares to the 20-year average of 1.0%. Education/ Federal Govt

Health is projected to be the leader in job growth through -1,000 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 2020, adding 6..5 million jobs. Professional/Business Job Change Services follows, adding 3.8. million positions. Although the Construction sector ranks third for the number of Source: Bureau of Labor Statistics, Delta Associates; September 2012. jobs added, this sector suffered severe job loss during the 2008. downturn and will remain below its pre-recession INITIAL UNEMPLOYMENT CLAIMS employment level in 2020. United States | Four-Week Moving Average

Initial unemployment claims have bounced around the 15- 700,000 Peak in Initial Unemployment Claims (Week of 4/4/09) = year average since the start of 2012. Initial claims declined 658,750 to 37.1,000 based on a 4.-week moving average as of the 15-Year Average = 368,000 start of September. This compares to the 15-year average 600,000 of 36.8.,000. We expect claims to hover at the current level during the remainder of 2012. 500,000

The unemployment rate has ticked down to 8..1% as of August 2012 from 9.1% one year ago. Although this decline 400,000

provides optimism for the economy, it should be observed Claims Initial Unemployment with caution, as the decline was due in part to people giving 300,000 up looking for work and dropping out of the workforce. We anticipate the unemployment rate will hover around 8..0% through year-end 2013. Note: Data is seasonally adjusted. Source: Department of Labor, Delta Associates; September 2012.

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UNEMPLOYMENT RATE We anticipate the unemployment rate will not edge down materially in the short run, as formerly discouraged job applicants start the application process again. This could United12% States push the rate higher in late 2012 and into 2013. We expect

10% the unemployment rate will be slow to descend, remaining in the 8..0% range through 2013.

8% Job applicants: As of July 2012, for every job opening there 6% are 3.5 potential applicants. This is below the peak of 6..9 applicants for every job in July 2009, but above the 10-year 4% average of 3.1.

U.S. U.S. Unemployment Rate 2% Drilling down to job sectors, there are too many potential 0% applicants for too few jobs within each sector. This gap is 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12* most apparent in the construction sector where for every Note: Through August 2012; seasonally adjusted; shaded bars represent recessions. Source: Bureau of Labor Statistics, Delta Associates; September 2012. job opening, there are 15 potential applicants. Although BLS projects the Construction sector will add 1.8. million jobs through 2020, this sector suffered severe job loss during the downturn and will remain below its pre-recession JOB-SEEKERS RATIO employment level in 2020. This loss will force many United States unemployed construction workers to revamp their skill set in order to be hirable by another sector. The Education and 8 Health Services sector has just 2 applicants per job opening. 7

6 GROSS DOMESTIC PRODUCT (GDP) 5 AND CONSUMPTION

4 Ratio Ratio

3 quarter of 2012, compared to rising 1.9% during the 1st 2 quarter.GDP increased GDP increased 1.5% (annualized1.7.% during rate)2011, duringcompared the to 2ndthe 1 20-year annual average of 2.5%. The rise in GDP during the

0 2nd quarter is the 12th consecutive quarter that the economy 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 has expanded. Although the economy continues to make gains, the growth rate remains lackluster. We anticipate GDP Source: Bureau of Labor Statistics, Economic Policy Institute, Delta Associates; September 2012. growth to complete 2012 at around 2.1%, which is above the rise achieved during 2011, but below the pace needed to significantly lower the unemployment rate. NUMBER OF UNEMPLOYED VS. JOB OPENINGS United States | 12-Month Average Ending June 2012 GDP growth during the 2nd quarter was due to personal expenditures and private domestic investment. However,

Wholesale and retail trade the Government and exports continue to pull back, acting Leisure and hospitality as a drag to overall GDP growth. Although growth has Professional and business services benefited from gains in consumer spending and equipment Manufacturing investment, these fundamentals have improved at a pace Construction below the average of prior recoveries. Education and health services

Government Other services Households are currently under stress, as the unemployment Number of Job Openings Financial activities Number of Unemployed rate remains elevated, prices are on the rise, and home values Transportation and utilities remain depressed, despite a modest rebound. According to Information the household stress index, which accounts for the rate of Mining Annual GDP Change in 2005 Constant Dollars Constant 2005 in Change GDP Annual

0 200 400 600 800 1000 1200 1400 1600 1800 2000 inflation, unemployment, and real estate values, households Thousands of Jobs experienced a rise in stress during 2011.

Source: Bureau of Labor Statistics, Economic Policy Institute; September 2012.

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The index peaked at 26. during 2008., as home values GDP PERCENT CHANGE experienced a steep decline and unemployment was elevated. United States Although the index declined during 2009 as home values and unemployment stabilized, it climbed again in late 2010 and 6% 20-Year Average = 2.5% into 2011, as prices on consumer goods increased and housing 4%

Wevalues expect took anotherthe consumer hit – although to remain not asunder drastic elevated as in 2008. stress 0% during the balance of 2012. Stress should decline to the 10- -2% year average during 2013, as conditions improve, and fall -4% below this average during 2014.. -6%

-8%

Annual GDP Change in 2005 Constant Dollars Dollars in 2005 GDP Annual Change Constant -10% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 WE EXPECT THE CONSUMER TO REMAIN 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 UNDER ELEVATED STRESS DURING THE Note: Annualized. BALANCE OF 2012. STRESS SHOULD DECLINE Source: Bureau of Economic Analysis, Delta Associates; September 2012. TO THE 10-YEAR AVERAGE DURING 2013, AS CONDITIONS IMPROVE, AND FALL BELOW THIS AVERAGE DURING 2014. CONTRIBUTIONS TO U.S. GDP PERCENT CHANGE United States

As household stress rises, consumers become less confident 4% about their financial stability. This uncertainty causes 2% consumers to tighten spending. Although spending has 0% picked up pace recently, it remains subpar. Compared to past -2% recoveries, consumer spending will not be a strong economic -4% driver during this recovery period. With consumer spending Personal Expenditures responsible for 7.0% of U.S. GDP, growth in consumer -6% Gross Private Domestic Investment Net Exports of Goods/Services spending is essential for a more robust domestic recovery. -8% Government Expenditures Annual GDP Change in 2005 Constant Dollars Dollars Annual GDPin 2005 Change Constant -10% Although consumer spending is helping to boost GDP, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 spending has been restrained due to below average 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 consumer confidence. Even though confidence has edged Note: Annualized. up to 7.4..3 as of August 2012 from 55.8. at August 2011, it Source: Bureau of Economic Analysis, Delta Associates; September 2012. remains below the 20-year average of 8.8..2. This continues to hamper spending, as consumer expenditures rose 1.7.% HOUSEHOLD STRESS INDEX on a year-over-year basis during the 2nd quarter of 2012, United States excluding auto and gas purchases. This rate is below the 15- year average of 2.9%. 30

Consumer spending remains below average due in part to 25

20 10-Year Average = 9.0 are still digging themselves out of this hole. Households lost the decline in net worth during the recession – consumers 15 over $17. trillion in personal wealth from the 4.th quarter of

2007. to the 1st quarter of 2009. Although households have Index 10 regained some of the assets lost, gains have been uneven 5 and it will take several years to recoup the total amount. 0 Household net worth increased $2.8. trillion during the 1st 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 quarter of 2012. Despite this rise during the first three -5 months of 2012, Americans continue to struggle to recover -10 what was lost during the downturn, as median net worth Note: 2012 – 2014 projection. dropped 4.0%, from $126.,4.00 in 2007. to $7.7.,300 in 2010, Source: Bureau of Labor Statistics, Case/Shiller, PNC, Delta Associates; September 2012.

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PERSONAL CONSUMPTION EXPENDITURES according to the Federal Reserve. This decline in net worth United States puts downward pressure on future spending, as Americans will remain cautious until a broader recovery is achieved.

4.0% 15-Year Average = 2.9% U.S. companies are sitting on piles of cash, waiting for clear 3.0% signals that the economy is on a consistent recovery path. 2.0% Corporate profits rose 6..1% during the 12 months ending

1.0% June 2012. Currently, companies have $1.91 trillion in profits Year-Over-Year Year-Over-Year – as of reporting at June 2012. Companies have the resources 0.0% to hire, but remain wary about future demand for their -1.0% products and services. In addition, with sluggish consumer demand, companies have enough labor to keep pace. -2.0% Percent Change Change Percent

-3.0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 COMPANIES HAVE THE RESOURCES TO HIRE,

Note: Excludes auto/auto parts and gasoline. In constant dollars. BUT REMAIN WARY ABOUT FUTURE DEMAND Source: Bureau of Economic Analysis, Delta Associates; September 2012. FOR THEIR PRODUCTS AND SERVICES.

CHANGE IN U.S. HOUSEHOLD NET WORTH United States HOUSING MARKET

$3 Net Worth Home prices in the 20 major metro areas increased 0.5% $2 during the 12 months ending June 2012, the most recent data $1 available, according to S&P/Case-Shiller. The housing market $0 has struggled with recovery, as unemployment remains high, -$1 foreclosures dampen gains, and lending standards remain -$2 tightened. We expect home prices to stabilize during the

-$3

-$4 muted by foreclosures that continue to plague the market.

Change in Net Worth (in trillions) in Net Worth Change balance of 2012 – although any year-over-year gains will be -$5

-$6 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 during July 2012, compared to 4..3 million during 2011. However,The number the number of sales of increased sales is well to 4.5below million the level (annualized) achieved Source: Federal Reserve, Delta Associates; September 2012. at the peak of the market. The sales price averaged $236.,000 during July 2012, up 7..1% from one year ago, according to the National Association of Realtors. Prices have risen on existing home sales, as inventory has declined from 9.3 CORPORATE PROFITS United States months of supply in July 2011 to 6..4. months at July 2012. This low level is more a reflection of homeowners not putting

$2.5 their house on the market given the value of their home has not increased enough to justify the sale. In many cases,

$2.0 homeowners have negative equity, meaning their home is worth less than the remaining balance on the mortgage.

$1.5 In the current economic recovery, the housing market is experiencing a long-term correction, which continues to

$1.0 hamper broader economic conditions.

Corporate Profits in Trillions Profits in Trillions Corporate $0.5 FEDERAL INTERVENTION AND INFLATION $0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* The Federal government continues to implement programs *12 months ending June 2012. Source: Bureau of Economic Analysis, Delta Associates; September 2012. to sustain the national economy, vowing to do what it takes to keep the economy on track.

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The Federal Reserve has kept the Federal Funds Rate at its EXISTING HOME SALE PRICES current low level, as some business sectors continue to shed United States jobs. Given the economy continues to grow at a slow pace, the Fed plans to keep short-term rates at its current range 10% of 0% to 0.25% through mid-2015. Between little pressure 5% in the economy and the Fed’s commitment, we see a low probability of a meaningful increase in long-term interest 0% rates over the next few years. But that could change if our -5% foreign bond holders trade out of our sovereign debt at an unexpected rate. And that could be related to the coming debt -10%

ceiling debate and probable display again of a dysfunctional Homes Single-Family -15% Federal government. Stay tuned. -20% Annual Percent Change for Median Price of Price Median for Change Percent Annual

-25% WE SEE A LOW PROBABILITY OF A MEANINGFUL 2008 2009 2010 2011 2012 INCREASE IN LONG-TERM INTEREST RATES OVER THE NEXT FEW YEARS. BUT THAT COULD Source: S&P/Case-Shiller, Delta Associates; September 2012. CHANGE IF OUR FOREIGN BOND HOLDERS TRADE OUT OF OUR SOVEREIGN DEBT AT EXISTING HOME SALES VS. SALES PRICE AN UNEXPECTED RATE. AND THAT COULD United States BE RELATED TO THE COMING DEBT CEILING DEBATE AND PROBABLE DISPLAY AGAIN OF 6,500 $280,000 Number of Existing Home Sales A DYSFUNCTIONAL FEDERAL GOVERNMENT. 6,000 $270,000 Average Existing Home Sales Price STAY TUNED. $260,000 5,500

$250,000 5,000 Regarding inflation, prices increased 1.4.% during the 12 $240,000 4,500 months ending July 2012, which is its lowest level since $230,000

4,000 Prices Sales Average November 2010. The main driver of the lower rate is a $220,000 notable decline in gas prices from April to June. Consumer 3,500 Number Number of - of Sales Units Thousands $210,000 food prices were also tepid. However, we expect this to change in the near-term due to drought conditions pushing 3,000 $200,000 2006 2007 2008 2009 2010 2011 2012* food prices higher. Overall, we expect inflation to be contained in the near-term, due to elevated unemployment *Annualized sales rate at July 2012. Source: National Association of Realtors, Delta Associates; September 2012. and limited income growth, which will continue to cause lackluster consumer spending. Given this, coupled with appropriate monetary measures, inflation should remain FEDERAL FUNDS RATE controlled around 1.9% during 2012. United States

FEDERAL BUDGET AND DEBT 20%

16% budget deficit for 2012 will total $1.1 trillion, compared to The Congressional Budget Office (CBO) anticipates the U.S. $1.3 trillion in 2011. As seen this past year with the debt 12% ceiling debate and the Congressional supercommittee, Rate gaining Federal budget balance has generated concern 8% by both political parties, though so far a lack of broadly acceptable solutions. A split Congress and the election 4% of many new representatives in 2010 who campaigned on the promise to cut spending sparked heated debate on 0% how to reduce the deficit. The debate resulted in spending 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08* reductions in the 2012 budget and implications for the *Unchanged since December 16, 2008. proposed 2013 budget, which has yet to be approved. Source: Federal Reserve Board, Delta Associates; September 2012.

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INFLATION Automatic across-the-board cuts, totaling $1.2 trillion over United States ten years, called “sequestration,” are slated to go into effect at the start of 2013. This dagger has been looming over the 16% heads of businesses and consumers since November 2011, 14% hampering economic growth due to uncertainty. Half the

12% cuts will come from the Defense budget and half from the

10% Domestic budget.

8% According to Dr. Stephen Fuller of the Center for Regional 6% Analysis, if these cuts are allowed to take place starting in 4% 2013, the national GDP will take a $215 billion hit and 2.15 Percent Change in CPI-U Change Percent 2% million jobs could be lost. 0%

-2% This level of job loss would act as a drag on the economy, 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12* keeping the unemployment rate elevated through 2015,

*12-month percentage change through July 2012 Note: data is seasonally adjusted. suppressing confidence and consumer and business Source: Bureau of Labor Statistics, Delta Associates; September 2012. spending. Much of the hit will come in 2013, as the greatest reduction in Federal spending is scheduled to take hold then. FEDERAL BUDGET DEFICIT The residual impact would mean reduced demand for office United States space and lowered retail spending.

$400 ECONOMIC OUTLOOK $200 $0 We believe the Congress will do what is right for the economy -$200 and ultimately avoid the “fiscal cliff.” So, we believe the -$400 national economy will continue to experience slow recovery -$600 during the balance of 2012 and into 2013 and beyond. -$800 Billions of Billions Dollars -$1,000 We believe the economic outlook is as follows: -$1,200

-$1,400 -$1,600 • GDP: 2.1% in 2012 and 2.0 - 2.5% in 2013. 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12*13*14*15*16*17*18*19*20*21*22* to-December calculation) and slightly more in 2013. • Payroll jobs: 2.0 million added in 2012 (based on December- * Projected by CBO as of August 2012. Unemployment: hovering in the 8..0% range through 2013. Source: Congressional Budget Office, Delta Associates; September 2012. Federal Funds Rate: 0% to 0.25% through year-end 2015. • Long-term interest rates: steady. U.S. PAYROLL JOB GROWTH • Inflation: 1.9% during 2012. Comparably low in 2013. • YEAR JOB CHANGE % CHANGE • 2012* 1,808,000 1.4% NATIONAL PAYROLL JOB 2011 1,503,000 1.2% GROWTH SUMMARY

2010 -931,000 -0.7% The U.S. economy gained 1.8. million payroll jobs over the 12 2009 -6,008,000 -4.4% months ending August 2012. This represents a rise of 1.4.%. 2008 -800,000 -0.6% This compares to the 25-year annual average of 1.3 million jobs at a 1.1% average growth rate. 2007 1,504,000 1.1% 2006 2,397,000 1.8% 2005 2,275,000 1.7% 2004 1,423,000 1.1% 2003 -344,000 -0.3% 2002 -1,489,000 -1.1%

*Change for 12 months ending in August 2012; others are comparisons of annual averages. Note that BLS has rebenchmarked figures since their initial publication; the figures presented above are the most recent estimates.

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12-MONTH PAYROLL EMPLOYMENT CHANGE THROUGH JULY 2012 JOB CHANGE JOB CHANGE METRO AREA # % METRO AREA # % LA Basin Portland (OR) 21,500 2.2% Los Angeles/Long Beach/Glendale 58,900 1.6% Tampa-St. Pete 20,500 1.8% Orange County (Santa Ana/Anaheim/Irvine) 27,400 2.0% Raleigh-Durham 20,500 2.6% Riverside/San Bernardino/Ontario 25,100 2.3% Columbus (OH) 18,300 2.0% Subtotal LA Basin 111,400 1.8% Indianapolis 17,500 2.0% San Francisco Bay Area Pittsburgh 17,300 1.5% San Jose/Sunnyvale/Santa Clara 40,900 4.4% Salt Lake City 17,000 2.8% San Francisco/San Mateo/Redwood City 30,400 3.5% Oklahoma City 15,700 2.8% Oakland/Fremont/Hayward 19,800 2.1% South Florida Subtotal Bay Area 91,100 3.3% Miami/Miami Beach/Kendall 5,600 0.6% New York 90,400 1.1% Fort Lauderdale 4,800 0.7% Houston 83,700 3.2% West Palm Beach/Boca Raton 3,900 0.1% Dallas/Ft. Worth 60,300 2.1% Subtotal South Florida 14,300 0.7% Boston (Metropolitan NECTA) 52,800 2.2% Philadelphia 13,200 0.5% Seattle 49,000 2.9% San Antonio 11,100 1.3% Phoenix 48,500 2.9% Orlando 10,200 1.0% Denver-Boulder 41,700 3.0% Charlotte 9,000 1.1% San Diego 35,100 2.9% Las Vegas 8,700 1.1% Minneapolis-St. Paul 32,300 1.9% Memphis 8,400 1.4% Chicago 31,900 0.7% Nashville 6,300 0.8% Atlanta 31,900 1.4% Cleveland 5,200 0.5% Detroit (Detroit/Warren/Livonia) 31,400 1.8% Kansas City 3,200 0.3% Cincinnati 27,900 2.8% Jacksonville 1,800 0.3% Washington, DC 24,300 0.8% Baltimore 700 0.1% Austin 23,200 2.9% St. Louis (200) 0.0% Sacramento 21,800 2.8% New Orleans (3,000) -0.6% Source: Bureau of Labor Statistics, Delta Associates; September 2012.

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THE WASHINGTON AREA ECONOMY

SPONSORED BY ROSS COMPANIES THE WASHINGTON AREA ECONOMY

Third Quarter 2012

SLOW GROWTH UNTIL SEQUESTRATION UNCERTAINTY RESOLVED; HIGHLY EDUCATED WORKFORCE BOLSTERS ECONOMY

The Washington metro area continues its economic expansion PAYROLL JOB GROWTH at a slower pace than prior expansion periods: Washington Metro Area Slow growth due to the uncertainty associated with Federal

140 • Federal budget that begins January 2013. 120

austerity and the threat of sequestration – a reduced 20-Year Annual Average = 100 Continuing growth due to strengths imbedded in the 39,800/Year regional economy such as a highly educated work force, a 80 • 60

region on the Federal establishment in the 197.0s), growing 40 diversified economy (as compared to the dependence of the tech and health care industries, a high quality of life, a strong 20

housing market with sustained values, and a destination for (Annual Average) 0 corporate and association headquarters moves.

Thousands of New Payroll Jobs Jobs Thousands of New Payroll -20

-40

Payroll employment increased 24.,300 during the 12 months -60 ending July 2012, compared to a long-term annual average 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12* of 39,8.00. But the region is used to 6.0-8.0,000 job gains per *12 months ending in July 2012. annum during expansion cycles, so this expansion feels quite Source: Bureau of Labor Statistics, Delta Associates; September 2012. anemic by comparison.

The Education/Health and Professional/Business Services sectors have been the drivers of new jobs during the past THIRD QUARTER 2012 ECONOMIC HIGHLIGHTS Payroll Employment: 3.0 million at July 2012. the unemployment rate remains the lowest in the nation Job Change: grew 24,300 during the 12 months among12 months major – metros, two categories at 5.6.%. ofThis high compares income. to At the July national 2012 ending July 2012. Compares to 39,800/annum long- unemployment rate of 8..3% at July 2012. term average.

Automatic across-the-board Federal budget cuts, totaling Unemployment Rate: 5.6% at July 2012, down from $1.2 trillion over ten years, are slated to go into effect at the 6.0% one year ago and lowest among the nation’s largest metro areas. start of 2013. This dagger has been looming over the heads of businesses and consumers since November 2011, hampering Inflation: prices increased 1.4% during the 12 months economic growth due to uncertainty. We believe the cuts will ending July 2012. not take place as scheduled. Rather, we expect a bill will be Housing Prices: increased 3.8% during the 12 months passed either for a delay until after 2013 or a less aggressive ending June 2012. alternative plan to start in 2013. Either way, the region is in Source: Bureau of Labor Statistics, S&P/Case-Shiller; September 2012. for slower growth than it is used to in this expansionary cycle.

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PAYROLL JOB GROWTH PAYROLL JOBS Large Metro Areas | 12 Months Ending July 2012 With 3.0 million payroll jobs, the Washington metro area ranks

120 the fourth-largest job market among metro areas, behind New York, the LA Basin and Chicago. Payroll employment

100 increased 24.,300 in the Washington metro area over the 12 months ending July 2012. 80

60 Although the Washington metro area added 24.,300 new jobs during the past 12 months, other metro areas continued to 40 outpace it in job gains. LA Basin, San Francisco Bay, and New 24.3 York topped job growth, spurred by growth in Professional/ 20 Thousands of New Payroll Jobs Jobs of New Payroll Thousands Business Services and Health/Education.

0 LA SF Bay NY Hou DFW Bos Phx Den Chi Atl Was S. Fla On a percentage basis, the Washington metro area grew by Basin 0.8.% during the 12 months ending July 2012. This compares Source: Bureau of Labor Statistics, Delta Associates; September 2012. to the national rise of 1.4.% during this period.

JOB GROWTH BY SECTOR PAYROLL JOB CHANGE IN PERCENTAGE TERMS Large Metro Areas | 12 Months Ending July 2012 There are important differences in job growth by sector occurring in the Washington metro area. The service-providing 4.0% industries, made up of such industries as Professional/

3.5% Business Services and Financial Activities, created 20,6.00 new positions during the 12 months ending July 2012. This 3.0% compares to the goods-producing sectors, made up of such 2.5% industries as Construction and Manufacturing, which added 2.0% 3,7.00 positions.

1.5% The top three sectors leading job growth are Education/ 1.0% 0.8% Health, Professional/Business Services, and Leisure/ Percent Change in Payroll Jobs in Change Payroll Percent 0.5%

0.0% economy in these three sectors alone. SF Bay Hou Den Phx Bos DFW LA Atl NY Was S. Fla Chi Hospitality – with a total of 31,700 new jobs added to the Basin The Education/Health sector gained 13,000 jobs in the Source: Bureau of Labor Statistics, Delta Associates; September 2012. previous 12 months, which is above the 20-year annual average of 8.,300 new positions. Approximately 4.5% of these positions were created in the District of Columbia. PAYROLL JOB GROWTH Washington Metro Area | 12 Months Ending July 2012 The Professional/Business Services sector gained 10,200 jobs during the last 12 months, which is below the 20-year

Education/Health annual average of 16.,300 new positions. The Computer Professional/Business Services Systems Design and Related Services subsector added 8.,300 Leisure/Hospitality of these jobs. After some softening earlier in the year, this Construction/Mining +44,100 Financial Services sector is starting to pick up steam, albeit modestly compared Transportation/Utilities to past recovery cycles. Other Services Manufacturing Wholesale Trade The Leisure/Hospitality sector gained 8.,500 jobs during the Federal Government 12 months ending July 2012, which is well above the 20-year -19,800 Information annual average of 4.,500 new positions. The bulk of positions Retail Trade State and Local Government were added to food services and drinking places with 7.,7.00

-15,000 -10,000 -5,000 0 5,000 10,000 15,000 added in this sub-sector. Hiring in this sub-sector moderated during the recession and is rebounding, as consumers are Job Change eating out more and eating establishments are entering or Source: Bureau of Labor Statistics, Delta Associates; September 2012. expanding in this market.

14 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 THE WASHINGTON AREA ECONOMY

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Notably, the Construction and Financial Services sectors, TRENDS IN EMPLOYMENT BY MAJOR SECTOR which suffered job cuts during the recession, are starting to make gains. The Construction and Financial Services sectors Washington Metro Area each added 4.,300 payroll jobs during the 12 months ending JULY 12-MONTH 20-YEAR ANNUAL July 2012. 2012 CHANGE AVERAGE Edu/Health 376.5 13.0 8.3 Through 2016., we expect the Professional/Business Services sector to create over 4.6.,500 jobs. We expect most of these Prof/Business 701.5 10.2 16.3 positions to be created in the Management, Scientific, and Leisure/Hosp 287.9 8.5 4.5 Technical Consulting Services and Computer Systems Design Construction 149.1 4.3 1.5 and Related Services sectors. We project the Education/ Health and Leisure/Hospitality sectors to closely follow in job Financial 150.7 4.3 0.6 growth, adding 4.5,500 and 37.,000 positions through 2016.. Trans/Utilities 61.4 2.5 (0.1) Other 185.4 1.3 3.6

Business Services, Education/Health, and Financial Services) Manufacturing 49.8 (0.6) (0.9) Just three of these employment categories (Professional/ will generate demand over the next 5 years for 20 million SF Wholesale 62.2 (1.1) 0.0 of office space and more than 20,000 Class A apartments. Federal Gov’t 385.3 (1.3) 1.4 Information 79.8 (1.7) (0.1)

JUST THREE OF THESE EMPLOYMENT Retail Trade 252.9 (3.9) 1.1 CATEGORIES (PROFESSIONAL/BUSINESS St./Local Gov’t 290.9 (11.2) 3.6 SERVICES, EDUCATION/HEALTH, AND Total 3033.4 24.3 39.8 FINANCIAL SERVICES) WILL GENERATE Note: In thousands of payroll jobs. DEMAND OVER THE NEXT 5 YEARS FOR 20 Source: BLS, Delta Associates; September 2012. MILLION SF OF OFFICE SPACE AND MORE THAN 20,000 CLASS A APARTMENTS.

These employment projections are further supported by PROJECTED PAYROLL JOB GROWTH occupations in the Washington metro area with the most Washington Metro Area | 2012 – 2016 job openings, as compiled by the Brookings Institution. As computer occupations had 7.8.,6.6.6. openings, with health Professional/Business Services diagnosingof January/February and treating 2012 practitioners,(the most recent the data 2nd available), highest, Education/Health Leisure/Hospitality trailing with 14.,7.7.0 openings. Construction/Mining State and Local Government As high-wage jobs are added and low-wage jobs are eliminated, Financial Services Other Services a labor shortage is being created in the Washington metro area Retail Trade Transportation/Utilities Technical Services sector and those requiring security clearance. Wholesale Trade in key high-wage job categories, such as within the Scientific and Information Manufacturing Federal Government This creates an imbalance in the available workforce – too few generating a demand for high-wage employees to relocate to the -30,000 -20,000 -10,000 0 10,000 20,000 30,000 40,000 50,000 high-wage employees and too many low-wage employees – Job Change to be a magnet for population growth. This population growth metro area to fill this gap. The Washington metro area continues Source: Dr. Stephen Fuller, Delta Associates; September 2012. will further fuel more companies to relocate to the metro area – Corporategenerating headquartersgreater demand relocation for office, toretail, the andWashington housing. metro area has ramped up over the past few years. For example, Northrop Grumman, Hilton, and Siemens have relocated headquarters to the area. What causes these companies to

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 15 THE WASHINGTON AREA ECONOMY

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relocate to the Washington metro area? One notable draw is OCCUPATIONS WITH THE MOST JOB OPENINGS the talented labor pool. The Washington metro area has the Washington Metro Area | January/February 2012 NUMBER OF OCCUPATION among other large metro areas. Other draws are access to the OPENINGS highest percentage of bachelor’s or advanced degrees (at 47%) Computer Occupations 78,666 Virginia has been a draw for many relocated companies). power on Capitol Hill and lower taxes (of which Northern Health Diagnosing and Treating Practitioners 14,770 Business Operations Specialists 13,552 CORPORATE HEADQUARTERS RELOCATION Other Management Occupations 11,926 TO THE WASHINGTON METRO AREA HAS Operations Specialties Managers 10,795 RAMPED UP OVER THE PAST FEW YEARS. Financial Specialists 9,437 Advertising, Marketing, Promotions, PR 9,238 The Washington metro area has the smallest education gap Secretaries and Administrative Assistants 8,354 compared to large metro areas, as of January/February 2012, Media and Communication Workers 6,495 according to the Brookings Institution. The small gap is driven Supervisors of Sales Workers 6,372 by a high demand and high availability of educated workers. Note: January/February 2012 data is the most recent data available. Of the total job openings in the metro area, 50% require a Source: Brookings Institution, Delta Associates; September 2012. bachelor’s degree or higher at January/February 2012, up from 37.% one year prior. This compares to 4.7.% of people EDUCATION GAP in the Washington metro area that has a Bachelor’s degree Large Metro Areas | January/February 2012 or higher, as of 2010, the most recent data available. This compares to the average of the 100 metro areas studied, with 10.0% 4.3% of job openings demanding a bachelor’s degree or higher

9.0% 100 Metro Average = with only 32% having attained this degree. 8.0% 5.1% 7.0% The study by the Brookings Institution found that metro areas 6.0% Job Openings with a small education gap were more successful, held a lower 5.0% unemployment rate, and experienced more entrepreneurship.

Gap for for Gap 4.0% 3.0% a smaller education gap) competitively positions metro areas, 2.0% asHigh workers demand are and more high employable availability and of educatedfirms more workers competitive (thus Education 1.0% and entrepreneurial, which creates more job openings for all 0.0% education levels. Notably, the Washington metro area was Was Bos SF Bay Den NY Chi Atl Phx DFW LA Basin Hou recently ranked fourth by Venture Beat among metro areas for

Note: Education gap for job openings is measured as percent that demand for education exceeds supply. start-ups. The Washington metro area was fourth behind San Source: Brookings Institution, Delta Associates; September 2012. Francisco, Los Angeles, and Denver, respectively. Although the education gap is larger for those with a high school diploma EDUCATED WORKER SUPPLY AND DEMAND or less, the study by the Brookings Institution found that Washington Metro Area| January/February 2012 those with this level of education fared better in employment in metro areas with small education gaps, such as Washington 60% as overall job creation is greater. 50% 50% 47%

required required UNEMPLOYMENT RATE 40%

30% 30% The Washington area unemployment rate was 5.6.% at July 2012, down from 6..0% one year ago. This compares to the 19% 20% national rate of 8..3% in July 2012. The national rate edged down to 8..1% in August 2012. The Washington metro area 10% has the lowest unemployment rate among the nation’s largest metro areas. Notably, the metro area unemployment rate has

share of job openings by education ofeducation job openings by share 0% Share of workers by educational attainment vs. attainment by educational of Share workers Bachelor Degree or Higher High School Diploma or Less declined 4.0 basis points over the past year. The Washington Job Openings All Potential Adult Workers metro area unemployment rate peaked in January 2010, at Note: job openings data as of Jan/Feb 2012; worker by educational attainment as of 2010. 7..0%, and has since declined, albeit unevenly. Source: Brookings Institution, Delta Associates; September 2012.

16 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 THE WASHINGTON AREA ECONOMY

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REGIONAL CONSUMER PRICE INDEX UNEMPLOYMENT RATE Large Metro Areas | July 2011 vs. July 2012 Overall inflation in the Washington/Baltimore region was 1.4.% during the 12 months ending July 2012, compared to the 14% July 2011 July 2012 National national inflation rate of 1.4.%. The Federal Reserve expects 12% Average inflation to be pushed up temporarily due to rising gas

10% prices and reduced crop output due to drought conditions. 9.1% 8.3% For the year, we expect inflation to be contained, as slowly 8% progressing economic conditions keep prices in check, with 6% growth of around 1.5% to 2.0%. As long as appropriate 4% monetary measures are in place, inflation should remain Rate Unemployment controlled during the balance of 2012. 2%

0% HOUSING PRICES Was Bos DFW Hou Phx Den SF Bay Chi Atl NY S. Fla LA Basin Basis Point -40 -80 -90 -110 -150 -10 -140 -120 -80 60 -160 -150 Change House prices increased 3.8.% in the Washington metro area during the 12 months ending June 2012, according to the Source: Bureau of Labor Statistics, Delta Associates; September 2012. S&P/Case-Shiller Home Price Index. This compares to a rise of 0.5% in the 20 MSA Composite Index. UNEMPLOYMENT RATE The Washington metro median home price was 3.1 times the Washington Metro Area vs. United States median household income as of the 2nd quarter of 2012, above 11% the U.S. ratio of 2.8.. Nationally, home price growth outpaced Washington Metro Area 10% income growth from 2000 to 2006.. Prices started to decline in United States 2007. due to the Credit Crunch. The national recession further 9%

impacted home prices, as the credit markets froze and job 8% losses increased foreclosures. The recession actually brought 7% about a much-needed correction in housing affordability. Nationally, housing is more affordable now than at any time in 6% the past 30 years. The New York and San Francisco Bay metro 5% Unemployment Rate Unemployment areas are the least affordable with a ratio of 6..3 as of the 2nd 4% quarter of 2012. 3%

2% We believe the Washington area housing market is in full 2007 2008 2009 2010 2011 2012 recovery, which is supported by six quarters in a row of Note: Not seasonally adjusted. favorable trends. We expect that a combination of the Source: Bureau of Labor Statistics, Delta Associates; September 2012. following will bring gains to the Washington for-sale housing market in the 2012-13 period: CONSUMER PRICE INDEX (CPI) Washington/Baltimore Region Mortgage interest rates that remain near all-time lows • A slowly recovering national economy, even if in fits and starts. through 2012, with small, measured increases in 2013. • 5% Improving affordability in the for-sale market due to the continued high cost of renting in the area. 4% 10-Year Annual Average = 2.9% • An expanding local labor market during the balance of 3% 2012, notwithstanding Federal austerity measures. The • automatic cuts from last summer’s debt ceiling deal, known 2% as “sequestration,” are not due to start until 2013, and 1% they may be modified before taking effect. There is enough political distaste from both parties for these planned cuts 0% Mar-09 Jul-09 Nov-09 Mar-10 Jul-10 Nov-10 Mar-11 Jul-11 Nov-11 Mar-12 Jul-12 Annual Price Change Index

-1%

seemsthat a deal plausible to revise after them the November– perhaps extendingelection. the cuts over -2% a longer period of time to reduce their immediate impact – An end to the local structural shift away from home ownership and toward rentals. Source: : Bureau of Labor Statistics, Delta Associates; September 2012. •

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 17 THE WASHINGTON AREA ECONOMY

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PERCENT CHANGE IN HOUSE PRICES The pace of the housing recovery may remain volatile, Washington MSA vs. U.S. 20 MSA Composite however. In 2012, we expect that rising demand will yield modest yearly housing price gains with likely percentage 25% price increases in the mid-single-digits. Of note, while

20% Washington MSA underwater mortgages remain a problem locally, a significant U.S. 20 MSA Composite share of those who owe more than their homes are worth 15%

only owe modestly more. According to Zillow, while 32.4.% of 10% homeowners in this region are underwater, 35.4.% of those 5% with negative equity are underwater by less than 20%. While 0% this is little consolation for those who must sell right away,

Percent Change Percent -5% it does suggest that as prices continue to rise, the share of

-10% mortgage-holders in trouble here may quickly decline. In turn, this will enable more potential sellers to bring their homes to -15% the market, increasing the very low levels of inventory and -20% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* bringing out more potential buyers.

Note: Seasonally adjusted. *12 months ending June 2012. Source: S&P/Case-Shiller, Delta Associates; September 2012. REGION’S CORE INDUSTRIES

$4.4.9.6. billion in 2011 in current year dollars, an increase RATIO OF MEDIAN HOME PRICE TO MEDIAN HOUSEHOLD INCOME The Washington area’s gross regional product (GRP) was Washington Metro Area of 5.2% in 2011 from 2010 figures. Spending by the Federal government drives economic growth in the area, although other sectors play key roles. Local Federal spending in 2011 5.0

4.5 The Federal government is the largest component of the grew 5.0% (versus 2010 data) to a total of $177.4 billion. 4.0 Washington area economy, accounting for more than one-

3.5

Ratio Ratio third of the Gross Regional Product (GRP). 3.0 The most important element of Federal spending in the metro

2.5 of goods and services from the private sector. Procurement 2.0 area economy is procurement – the government’s purchase

1.5 to $8.3 billion, accounting for 4.7.% of all Federal funds flowing 1994 1996 1998 2000 2002 2004 2006 2008 2010 MY 2012 intospending the area rose economy.0.7% in 2011 We expect(compared procurement to revised spending 2010 data), to

Source: NAHB/Wells Fargo Opportunity Index, Delta Associates; September 2012. Federal government continues to implement budget austerity measures.decline by 1.9%Although during procurement 2012 (in current spending year is dollars), set to decline as the during 2012, the $8.1.4. billion is enough to sustain economic growth, albeit modest, in the Washington metro area. RATIO OF MEDIAN HOME PRICE TO MEDIAN HOUSEHOLD INCOME Select Metro Areas | Second Quarter 2012

7.0 ALTHOUGH PROCUREMENT SPENDING IS SET

6.0 TO DECLINE DURING 2012, THE $81.4 BILLION IS ENOUGH TO SUSTAIN ECONOMIC GROWTH, 5.0 National Average = 2.8 ALBEIT MODEST, IN THE WASHINGTON 4.0 METRO AREA.

Ratio Ratio 3.0

2.0 During 2011, Virginia firms captured approximately 57.% 1.0 of the total procurement funds flowing into the area. Many firms providing government services are located in Northern 0.0 NY SF Bay LA Bos Was Mia Hou DFW Chi Phx Atl Virginia, especially around the Pentagon and in the technology corridor between Tysons Corner and Dulles Airport. Despite

Source: NAHB/Wells Fargo Opportunity Index, Delta Associates; September 2012. budget pressure, this substate area is likely to remain a

18 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 THE WASHINGTON AREA ECONOMY

SPONSORED BY ROSS COMPANIES leader in the receipt of Federal dollars, as many government CORE ECONOMIC SECTORS contracts are technology-dependent, and Northern Virginia is Washington Metro Area the area leader in technological innovation. 2011 2012 GRP IN BILLIONS $ % OF GRP $ % OF GRP adjusted dollars) in 2012 will be 2.7.%, before increasing Total Federal $s $177.4 39.5% $183.7 38.8% 2.9%We project in 2013, the area’sas the GRP building growth industry, (in constant hospitality, or inflation- and Portion Procurement $83.0 18.5% $81.4 17.2% health/education drive the economy. We expect the U.S. GDP Technology will grow 2.2% and 2.4.%, respectively, in 2012 and 2013. $68.4 15.2% $72.2 15.3% Building Industry $22.4 5.0% $23.7 5.0% We expect local economic growth rates to accelerate Int’l Business $20.4 4.5% $21.6 4.6% moderately through 2014. as the metro area recovers from the Health/Education $20.3 4.5% $21.7 4.6% most recent recession. Growth rates will plateau in 2015 and Hospitality $9.6 2.1% $10.1 2.1% 2016., as the construction industry decelerates. In addition, Other $131.1 29.2% $140.0 29.6% much of the rebound from the recession will occur through Total GRP $449.6 100.0% $473.0 100.0%

Note: Current year dollars. Figures are estimates. Procurement figures do not include US Postal Service and FAA purchases. Source: Dr. Stephen Fuller, Delta Associates; September 2012. The2014 Washington – leveling off metro during area 2015 is andcurrently 2016. bracing for right- sizing within the Federal government, as the growth rate of the Federal budget will be scaled back. This could seriously FEDERAL PROCUREMENT SPENDING impact the Washington area, as historically 30% or more of Washington Metro Area

Federal spending. This share jumped to around 4.0% in 2011. $90 Giventhe region’s current gross austerity regional measures, product we (GRP) expect has this been share due to decline to around 35.8.% in 2016.. $80

$70

$60 HISTORICALLY, 30% OR MORE OF THE $50

REGION’S GROSS REGIONAL PRODUCT (GRP) in BillionsDollars HAS BEEN DUE TO FEDERAL SPENDING. THIS $40

SHARE JUMPED TO AROUND 40% IN 2011. $30 GIVEN CURRENT AUSTERITY MEASURES, WE $20 EXPECT THIS SHARE TO DECLINE TO AROUND 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012** 35.8% IN 2016. *Estimate; **Projected Source: Dr. Stephen Fuller, Delta Associates; September 2012.

Automatic across-the-board cuts, totaling $1.2 trillion over FEDERAL PROCUREMENT SPENDING ten years, are slated to go into effect at the start of 2013. Washington Metro Area By Jurisdiction This dagger has been looming over the heads of businesses and consumers since November 2011, hampering economic growth due to uncertainty. Half the cuts will come from the 19% Defense budget and half from the Domestic budget.

DC According to Dr. Stephen Fuller of the Center for Regional Analysis, if these cuts are allowed to take place starting in 2013: VA 57%

24% MD Locally, the GSP in DC would decline by $12.8. billion, in • The national GDP will take a $215 billion hit. Maryland $11.5 billion, and $20.9 billion in Virginia. • Nationally, 2.15 million jobs could be lost. Locally, Virginia could lose over 207.,000 jobs, DC over • 127.,000 jobs, and Maryland over 114.,000 jobs. • Source: Dr. Stephen Fuller, Delta Associates; September 2012.

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 19 THE WASHINGTON AREA ECONOMY

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GRP VS. GDP GROWTH This level of job loss would act as a drag on the economy, Washington Metro Area vs. United States keeping the unemployment rate elevated through 2015, suppressing confidence and consumer and business spending.

7% Much of the hit will come in 2013, as the greatest reduction Washington Metro Area in Federal spending is scheduled to take hold in 2013. The 6% United States residual impact would mean reduced demand for office space 5% and lowered retail spending. 4%

3% Given the enormous impact to the national economy, we do 2% not expect Congress to allow the automatic spending cuts to 1% take hold as now planned in 2013. Congress could pass a bill 0% to delay the start date until after 2013, which would allow Annual Percent Change Annual Percent 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -1% time to devise an alternative plan to the scheduled cuts. Or, -2% Congress, after the November election, could pass a bill that -3% alters the current plan, allowing the cuts to take place in 2013, but with less immediate impact. Note: Constant dollar percent change. Source: IHS Global Insight, Dr. Stephen Fuller, Delta Associates; September 2012. WASHINGTON AREA ECONOMIC OUTLOOK

We expect the Washington metro area economy to progress during 2012 much as it did during 2011. However, growth will be sluggish through year-end, as consumers and businesses PERCENT SHARE OF GROSS REGIONAL PRODUCT remain cautious about the economy. Uncertainty persists due to the unknown outcomes of sequestration and the Bush-era Washington Metro Area tax cuts. These uncertainties continue to plague the purse 2011 2016 strings of consumers and companies. We expect economic Federal Spending 39.5% 35.8% conditions in the Washington region to improve after the start of 2013, as the picture becomes clearer and the outcome of Portion Procurement 18.5% 13.2% the Federal budget is better established. Source: Center for Regional Analysis, Delta Associates; September 2012. Although we believe the local economy is in the expansion phase of the economic cycle and showing recent signs of acceleration, we expect the speed to be slower than seen in previous expansion cycles. The Washington metro area could experience a hit in 2013 if the automatic spending cuts to the Federal budget are fully implemented. However, Congress could alter this plan before the cuts are implemented. PAYROLL JOB GROWTH Washington Metro Area Looking forward, we believe the Washington metro area’s GRP growth will continue to outpace the nation’s. We expect 140 local GRP will grow 2.7.% during 2012, compared to 2.2% 120 nationally.

100 5-Year Projected Average = 41,600/Year 20-Year Annual Average = 39,800/Year

80 In consultation with Dr. Stephen Fuller of George Mason 60 University, we project that 36.,000 payroll jobs will be added 40 to the Washington metro area economy during 2012. We 20 expect the Northern Virginia substate area to be the leader (Annual Average) 0 in job growth with 18.,000 new jobs in 2012. The Suburban 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Thousands of New Payroll Jobs Jobs Thousands of New Payroll -20 Maryland and District substate areas should produce 6.,200 -40 and 11,8.00 new jobs, respectively. We expect job growth in -60 the Washington metro area to gain traction during 2013, as District Sub. MD No. Virginia 4.2,000 new jobs will be added to the economy. Private sector firms relocating operations to the Washington area will Source: Bureau of Labor Statistics, Dr. Stephen Fuller, Delta Associates; September 2012. bolster local employment in the period ahead.

20 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 THE WASHINGTON AREA ECONOMY

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We project job growth will average only 4.1,6.00 jobs per PAYROLL JOB GROWTH – COMPARING PAST CYCLES annum during this expansion cycle through 2016., compared Washington Metro Area to 6.0,000 in the last expansion cycle and 100,000 in the cycle before that. Although 4.1,6.00 jobs per annum is low compared 140 to prior expansion cycles, it is sufficient to support a healthy 120 commercial real estate market if the industry re-calibrates its 100

demand expectations. 80

WE PROJECT JOB GROWTH WILL AVERAGE 20 (Annual Average)

ONLY 41,600 JOBS PER ANNUM DURING THIS 0

Thousands of New Payroll Jobs Jobs Thousands of New Payroll 19971998199920002001200220032004200520062007200820092010201120122013201420152016 EXPANSION CYCLE THROUGH 2016, COMPARED -20

TO 60,000 IN THE LAST EXPANSION CYCLE -40

AND 100,000 IN THE CYCLE BEFORE THAT. -60 ALTHOUGH 41,600 JOBS PER ANNUM IS LOW COMPARED TO PRIOR EXPANSION CYCLES, Source: Bureau of Labor Statistics, Dr. Stephen Fuller, Delta Associates; September 2012. IT IS SUFFICIENT TO SUPPORT A HEALTHY COMMERCIAL REAL ESTATE MARKET IF THE INDUSTRY RE-CALIBRATES ITS DEMAND EXPECTATIONS.

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 21

STATE OF THE WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET 2 A SNAPSHOT OF THE CLASS B APARTMENT MARKET

SPONSORED BY ROSS COMPANIES A SNAPSHOT OF THE CLASS B APARTMENT MARKET

ANNUAL AVERAGE EFFECTIVE RENT GROWTH ANNUAL AVERAGE EFFECTIVE RENT GROWTH Class B Garden Apartments | Washington Metro Area Class B High-Rise Apartments | Washington Metro Area Third Quarter 2012 Third Quarter 2012

Annual Increase Annual Increase Past 5 Past 1 Past 5 Past 1 Years Year The District Years Year Northern VA 3.4% 6.6%

3.7% 2.0% Northern VA 5.5% 1.2%

Suburban MD 3.6% 2.7% Suburban MD 3.5% -7.9%

$1,000 $1,500 $2,000 $800 $1,000 $1,200 $1,400 $1,600 Third Quarter 2007 Increase 2007-2012 Third Quarter 2007 Increase 2007-2012 Source: Delta Associates; September 2012. Source: Delta Associates; September 2012.

VACANCY RATES VACANCY RATES Class B Garden Apartments | Washington Metro Area Class B High-Rise Apartments | Washington Metro Area

8% 7.4% 8% 7.7% 7% 7% 6.3% 6% 6% 4.8% 4.7% 4.9% 5% 5% 3.9% 4% Rate 4% 3.0% 3.3% 3% 2.3% 3% 2.2%

Vacancy Rate Rate Vacancy 2.1% 2% 1.6% Vacancy 2% 1.8% 1.1% 1.3% 1.5% 1.0% 1.0% 1.0% 1% 1% 0% 0% Northern Virginia Suburban Maryland Northern Virginia Suburban Maryland District of Columbia

3Q 2009 3Q 2010 3Q 2011 3Q 2012 3Q 2009 3Q 2010 3Q 2011 3Q 2012

Source: Delta Associates; September 2012. Source: Delta Associates; September 2012.

24 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 STATE OF THE CLASS B APARTMENT MARKET

SPONSORED BY ROSS COMPANIES STATE OF THE CLASS B APARTMENT MARKET

Third Quarter 2012

VACANCY REMAINS LOW BUT IS ON THE RISE METRO-WIDE; RENT GROWTH SLOWS DUE TO RISE IN VACANCY AND LOW TURNOVER

During the third quarter of 2012 Class B apartment market EFFECTIVE RENTAL RATE AND VACANCY RATE saw a material increase in vacancy, yet remains relatively low, Class B Apartments | Washington Metro Area fostering continued rent growth although at a slower pace. 5.5% $1,600 Average Effective Base Rent Vacancy increased 210 basis points metro-wide to 3.6.% 5.0% Vacancy $1,500 from 1.5% this time last year. Vacancy increased in the 4.5% $1,400 • 4.0% suburbs but decreased in the District. $1,300 3.5% Even with the jump in metro wide vacancy, average effective 3.0% $1,200 rent increased 0.8.% from one year ago to $1,57.3. Effective 2.5% $1,100 Vacancy Rate Vacancy • 2.0% rents increased over the year in most submarkets, with $1,000 1.5%

The District up 6..6.%, outperforming Northern Virginia, $900 Base Rent Effective Average 1.0% which was up 1.6.%. Suburban Maryland was up only 0.5%. 0.5% $800 0.0% $700 OUTLOOK FOR CLASS B 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

APARTMENTS IS POSITIVE Source: Delta Associates; September 2012. *At third quarter 2012.

We expect to see moderating rent growth in Class B assets during the remainder of 2012 and into early 2013 despite continued low, yet increasing, vacancy. Several contributing factors will keep vacancy low but rents may be under AN OVERVIEW OF THE CLASS B APARTMENT MARKET pressure in 2013 and 2014.. AT THIRD QUARTER 2012 BY SUB-STATE AREA; THE TREND SINCE THIRD QUARTER 2011: 1. The addition of jobs in the Washington metro area is Northern Virginia: expected to continue, though at a slower pace through year-end 2012. Conditions should improve after the • Effective rents up 1.6% start of 2013, as uncertainty is mitigated and the • Vacancy up 200 basis points to 3.2% outcome of the Federal budget is clearer. Job growth, albeit at a decelerated rate, will support a sturdy Class B Suburban Maryland: apartment market in the coming year. However, as low- • Effective rents up 0.5% wage jobs are eliminated and high-wage jobs are added, • Vacancy up 280 basis points to 4.8% there may be higher demand for Class A apartments, as Class B apartments are generally rented by lower-wage The District: workers. If job growth in these lower-paying categories • Effective rents up 6.6% rebounds, Class B apartment demand will follow. • Vacancy down 70 basis points to 1.5%

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 25 STATE OF THE CLASS B APARTMENT MARKET

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2. Median home prices in the Washington metro area are 3.1 times the median household income as of the 2nd quarter of 2012, above the U.S. ratio of 2.8.. These high home prices force many people in the area to rent instead of buy. The ratio of renters relative to owners has increased substantially in the Washington region over the past few years.

3. As deliveries of Class A units increase in the remainder of the year and into 2013, pressure on the Class B market will mount as concessions may be introduced in the Class A market to lease new projects quickly. This will lead to rent compression, putting downward pressure on Class B rents.

Given this outlook, more specific opportunities are addressed at the end of this report.

VACANCY REMAINS LOW BUT IS ON THE RISE Empire Group Holdings: Empirian Village (formerly Springhill Lake), Greenbelt, MD The Washington metro area Class B apartment vacancy rate rose to 3.6.% at the end of third quarter 2012, from 1.5% one year ago.

Mid- and high-rise vacancy is 3.3%, up from 1.2% last year

• Garden and low-rise vacancy is 3.9%, up from 1.8.% last year. • basis points higher than last year at this time. The vacancy rateGarden for andgarden low-rise and low-rise apartments properties post 3.9%increased vacancy 17.0 –basis 210 points from last year in Northern Virginia to 3.0% and increased in Suburban Maryland by 24.0 basis points to 4..7.%.

higher than at the end of the third quarter of 2011. Class BB mid-mid- and and high-rise high-rise vacancy vacancy is 3.3%rates –at 210 the basis end pointsof the third quarter of 2012:

Northern Virginia 3.3%

• Suburban Maryland 4..9% • The District 1.5%

The • District was the strongest performer in the third quarter with the lowest vacancy rate. The District was the only metro area that had a lower vacancy rate than last year at this time after falling 7.0 basis points. Northern Virginia’s vacancy rate was higher at 3.3% from 1.0% a year earlier. Suburban Maryland’s vacancy rate increased 390 basis points when compared to September 2011, to 4..9%.

Dragone Realty Investments: The Milano Apartments, Oxon Hill, MD

26 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 STATE OF THE CLASS B APARTMENT MARKET

SPONSORED BY ROSS COMPANIES

EFFECTIVE RENTS CONTINUE TO INCREASE

Effective rents at Northern Virginia properties grew 1.6.% over the year, with growth in the majority of submarkets. Suburban Maryland performed the worst due to tepid job growth, with a rent increase of 0.5%. The District’s 6..6.% growth rate was the strongest compared to the other substate areas.

Turnover at Class B properties is lower than for Class A communities and this lower turnover impacts rent growth opportunity. With so few units available, rent growth is statistically underreported and appears to be lower than we would expect compared to Class A assets. Also affecting rent growth this quarter is continued economic uncertainty, contributing to lower turnover and unwillingness on the part of property managers to raise rents significantly.

Class B mid- and high-rise rents are growing at a mixed pace across sub-state areas, with the average effective rent in the metro area now at $1,7.96.. The District had the best high-rise rent performance over the past year, with a 6..6.% increase since this time last year.

Effective rents in Northern Virginia are up 1.2% from this time last year, and high-rise rents in Suburban Maryland decreased by 7..9% year-over-year. Effective rents are the highest in The District at $1,915, and continue to be the highest on a per square foot basis at an average of $2.4.0.

Mid- and high-rise rent change during the past year by substate area: ROSS Companies: Spring Parc, Silver Spring, MD

Northern Virginia 1.2%

• Suburban Maryland -7..9% • The District 6..6.% ANNUAL CLASS B APARTMENT RENT GROWTH Upper • Northwest DC was the submarket with the most Washington Metro Area | Mid- and High-Rise Submarkets expensive rents beating out Crystal City for the first time Third Quarter 2012 this quarter. Upper Northwest had an average effective rent 10% 8% of $2,17.1 while Crystal City follows in second place with

6% average rent of $2,127.. Falls Church/North Arlington is 4% close behind, at $2,04.6.. Mt. Vernon Square has the highest 2% rent per square foot again this quarter at $2.55. Upper 0% -2% Northwest DC follows at $2.4.5 with Southwest DC in third -4% place, at $2.22 per square foot. -6% -8%

Percent Effective Rent Growth Rent Effective Percent -10% Class B garden apartment effective rents in the Washington -12% metro area have increased 2.4.% since third quarter 2011. The average effective rent for Class B garden apartments is currently $1,4.27. per month. Source: Delta Associates; September 2012.

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 27 STATE OF THE CLASS B APARTMENT MARKET

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Rent change for garden and low-rise properties by sub-state area during the past year:

Northern Virginia: 2.0%

• Suburban Maryland: 2.7.% • Northern Virginia: Class B garden apartment rents are up 2.0% from last year at this time with an average effective rent of $1,506., or $1.7.2 per square foot. Northern Virginia experienced positive rent growth across most submarkets over the year, with eight of ten garden submarkets showing positive rent growth; two submarkets experienced a decrease over the year. The Annandale submarket gained the most again this quarter

Stellar Management: Patriot Village, Annandale, VA communities in this submarket. The Falls Church/Merrifield (up 14.6% over the year) with continued upgrades to from the third quarter of 2011. ANNUAL CLASS B APARTMENT RENT GROWTH submarket was the weakest in the metro area (down 7.4%) Washington Metro Area | Garden Submarkets Suburban Maryland: Third Quarter 2012 Class B garden apartment rent increased 2.7.% over the year 16% 14% in Suburban Maryland. Rockville garden rents are currently

12% best in the Montgomery County submarket with an increase 10% of 5.2% over the year. The Gaithersburg submarket had 8% 6% the weakest performance in Montgomery County, with a 4% decrease of 2.5% during this time. Rents in Silver Spring/ 2% 0% Wheaton are up 4..8.% since this time last year. -2% -4% Percent Effective Rent Growth Rent Effective Percent -6% Prince George’s County effective rent has increased by 2.2% -8% year-over-year, with an average effective rent rate of $1,207.. Columbia experienced rent growth of 3.9% over the year with average effective rent of $1,4.8.0.

Source: Delta Associates; September 2012. CONCESSIONS REMAIN LOW

Concessions as a percentage of asking rent continue to be very CONCESSIONS AS A % OF ASKING RENT low, at 1.1%, down from 1.2% in the third quarter of 2011. Class B Apartments | Washington Metro Area Concessions as a percentage of asking rent at the end of 7% third quarter 2012 by sub-state area:

6% 5.1% Northern Virginia 1.1% 5%

Suburban Maryland 1.2% 4% 3.7% • 3% 2.4% • The District 0.2%

Concession % 1.9% 2% 1.5% 1.5% 1.2% 1.1% 1.2% 1.3% 1% • 0.3% 0.2% VALUE-ADDED STRATEGY: RENOVATION 0% Northern Virginia Suburban Maryland District of Columbia Opportunities continue for renovating existing B and C grade 3Q 2009 3Q 2010 3Q 2011 3Q 2012 properties. In our view, these opportunities can be the most profitable where the rent spread is widest between Class Source: Delta Associates; September 2012. A apartments on the one hand and Class B or even Class C apartments on the other hand. When Class B or C units

28 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 STATE OF THE CLASS B APARTMENT MARKET

SPONSORED BY ROSS COMPANIES are renovated, rents can be raised correspondingly and still CLASS B PROPERTIES UNDERGOING RENOVATION represent a discount to the prospective tenant compared to Washington Metro Area Class A rents.

$35,000 35,000 In dollar terms, the largest rent spreads between Class A and # of units Avg renovation budget B product are currently in high-rise properties. Submarkets $30,000 30,000 of note are South Arlington with a spread of $58.9, Bethesda $25,000 25,000 with a spread of $6.6.8., Alexandria with a spread of $56.3 and $20,000 20,000 Upper Northwest DC with a spread of $6.27.. $15,000 15,000 # of units

Properties renovated to Class B+ can generally achieve rents $10,000 10,000 that are $100 to $150 and more per month higher than the $5,000 5,000 Average renovation budget per budget unit renovation Average lower Class B’s. This allows for an $8.,000 to $12,000 per $0 0 unit renovation budget, and still yields sufficient revenue 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

Source: Delta Associates; September 2012. *At third quarter 2012. return on investment in renovations. ($1,200 to $1,800 or more per year) to generate a 15% + Value-creation in the Washington apartment market is still competitive, as illustrated by our representative sample of RENOVATION VOLUME COMPARISONS TO PRIOR PERIODS AS OF # UNITS IN RENOVATION Thererenovation are projectscurrently (see 3 Table4.,6.53 9).units in the Washington Third Quarter 2010 18,266 metropolitan area in our sample with substantial renovations Third Quarter 2011 26,148 or upgrades planned or ongoing. The number of units renovating in our sample has increased by several thousand Third Quarter 2012 34,653 units over the past year, as investment conditions have improved. The average renovation budget per unit is similar to last year at this time, at approximately $20,000 per unit compared to about $22,000 in the third quarter of 2011. CLASS B APARTMENT PROPERTY SALES: THROUGH AUGUST 2012 SALES TRANSACTIONS ON PACE NUMBER OF TYPE OF AVERAGE PRICE TO SURPASS 2011 TRANSACTIONS PROPERTY PER UNIT 17 Garden $135,905 Through August of 2012 there have been 26. Class B 9 Mid- and High-Rise $228,506 apartment sales noted; nine mid- and high-rise properties and 17. garden properties, totaling 10,100 units and approximately $1.6. billion.

In 2011 there were 4.4. Class B garden sales and 14. high-rise TOTAL SALES VOLUME sales posted, comprising a total of 17.,8.16. units and $2.5 Class B Apartments | Washington Metro Area billion at an average price of $134.,4.17. for garden properties $3,000,000 and $16.5,8.94. for high-rise properties. $2,532,606 $2,500,000 $2,292,574 WHAT DOES THE FUTURE HOLD? $2,114,280 $2,000,000 $1,594,331 $1,677,243

$1,417,675 Job losses among lower wage earners and excess supply of $1,500,000 $1,333,498 Class A units in several submarkets had dampened the Class $1,000,000 $934,002 B apartment market across the Washington metro area in $711,680 Sales Volume (in thousands) (in Volume Sales $644,009 2008. and 2009. This phenomenon abated in 2010 and into $465,680 $500,000 $352,300 early 2011. $0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012*

By late 2011, moderate job growth, constrained mortgage Source: Delta Associates; September 2012. *Through August 2012. financing, and continued high prices for housing of all types put added demand on Class B apartments as one of the more

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 29 STATE OF THE CLASS B APARTMENT MARKET

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affordable alternatives. However, by late 2011 and into early A WORD ABOUT OUR 2012, low turnover and uncertainty about future economic DEFINITION OF VACANCY RATE conditions have led to lower rent increases than would normally be expected at current levels of occupancy. We sometimes hear from apartment developers and managers that their portfolio vacancy rate is 200 to Turnover at Class B properties is lower than for Class A 4.00 basis points higher than the numbers we report, communities and this lower turnover has begun to impact which places them under unfair investor scrutiny. rent growth opportunity. With so few units available, While we state methodological matters at the end of rent growth is statistically underreported and appears to be lower than we would expect compared to other recent quarters. describe here our term “vacancy.” our report (Section 5), we thought it appropriate to We expect continued, though constrained, Class B rent When we conduct our quarterly surveys, we obtain growth during the remainder of 2012 due to low vacancy in the region in Class B properties. Strong demand created by physical vacancy. Obtaining the information this way, information on “units available to lease” – that is, limited supply will continue to affect concessions and enable of course, may produce several important differences owners to increase asking rents. However, by 2013 and from “vacancy” as reported in your financial 2014. rent pressure may be felt as a large pipeline of Class A statements. Simply stated, the difference can be apartments is delivered. characterized as: Here are specific opportunities we see for Class B projects: Delta’s Definition: Available units to lease 1. Class A supply will increase dramatically in the coming Operating Statement Vacancy: Economic vacancy quarters and may have a dampening effect on Class B rent growth opportunities, particularly in the District. Therefore, renovation could be a good defensive strategy. Our definition (available units) may therefore be vacant) by our exclusion of units occupied by non- understated compared to yours (economically 2. Convenient locations thrive. Fairfax City, South Arlington, Annandale, and all submarkets in the District. not available for lease, such as employee units and These submarkets benefit due to their easy access to paying tenants (which we cannot know), and of units model apartments. We estimate that this adds about 100 to 150 basis points to your definition of vacancy, etc.) and/or the Metro. employment centers via highways (I-395, I-495, I-66, as compared to ours. Our vacancy rate may also be understated, compared to yours, by our exclusion of 3. The differences in rent rates between Class A and what at present are economically vacant, on-notice Class B properties in specific submarkets continue to units for which a lease to occupy in the future has favor the investor who takes advantage of renovation opportunities at select locations. Look for those submarkets with the greatest spread in rents between lease). We estimate that this potentially adds another been signed (hence, they are not currently available to Class A and Class B apartments. 150 to 200 basis points to your definition of vacancy, as compared to ours.

30 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 COMPETING AGAINST CLASS A APARTMENTS WITH THE VALUE AND VARIETY OF CLASS B

SPONSORED BY ROSS COMPANIES ONLINE MARKETING BASICS FOR MULTIFAMILY By Elaine De Lude & Brent Stephens

The landscape of marketing has changed drastically over the last few years. And the pace of new trends and emerging types of media show no signs of waning. Most metro-area multifamily marketers have seen a dramatic decrease in the effectiveness of print advertising, time availability of the apartment communities within their desired location. Add into the mix the rise of social media and the growing importanceas most prospective of reputation renters management are scouring and theit can Internet appear (oftenoverwhelming from a smartphone) to figure out whatfor information, is the right mixphotos, of online reviews, tactics videos to best and market real- a multifamily asset. Here are some tactics we have found make an online marketing strategy more effective.

Community Website with Search Engine Optimization (SEO). When it comes to online web presence, content is king. A robust yet user-friendly website featuring floor plans, photos, videos and neighborhood information is the most powerful tool for getting renters to the community. Walkscore ratings, a live Google map, links to social media sites, and online reservation software are what prospective renters are looking for. Utilizing a marketing agency is a must to optimize your community’s website with key words and phrases to make it easier for search engines to locate your site and match it to similar search criteria. Elaborate Flash or animated intro presentations are unnecessary. Adding a blog with regular updates and responses to posters will also help enhance the SEO of the site. Pay per Click

Reputationcampaigns (PPC) Management can also be Tools, implemented Resident to Surveys support and the Socialmarketing Media of .the More community than 50% website of prospective through renters a marketing read reviewsagency. which rate, score and critique the multifamily industry. An inexpensive and proactive approach to this is to purchase a manager’s subscription to online review sites and have a set of pre-scripted responses for common issues such as maintenance and noise. By having an email alert sent to the community email address each time a comment is posted to a social media/blog source, the property manager can post a prompt and courteous response which will diffuse the situation and take the conversation off-line and into the manager’s office. residents feel about the quality of living at your community. Being able to collect and publish verified positive feedback from actual residentsThe utilization will make of resident a strong surveys and favorable like Satisfacts impression also onprovides prospective data – renters. which can be exported to several online platforms – about how

Creating Facebook pages, Pinterest accounts and YouTube channels are easy and low-cost methods to engage online dialog about your community and boost SEO efforts. Prompt responses coupled with frequent posts and updates will make these new media outlets highly effective to your online marketing program.

Mobile. The growth of mobile media consumption is continuing at a rapid rate. More than 250 million Americans have smartphones with Internet access. According to Comscore, social media engagement, online searches for information, retail and video make up nearly 50% of the phones’ usage. This means multifamily marketers must go mobile with community websites. By having a version of your website that is mobile-friendly, prospective renters can use it not only to gather information, but they can also view video, get GPS-based directions or reserve a unit from their phone. Many online services, like Vaultware offer mobile website creation and templates at very low costs.

Email Marketing. Every marketer loves fast, effective and practically free tools for generating traffic. One of the best uses of email marketing is for generating referrals. Using existing residents as a captive audience to generate leases with virtually no marketing cost is a great way to boost occupancy. By offering a referral incentive and sending an e-blast or email through your resident portal or email- blasting tool regularly, you can quickly and effectively get prospective renters in your leasing office who are already highly interested in the community.

While the perfect online marketing mix will differ for every community, these tools are essential to marketing your community online. Be sure to register your community website for a Google Analytics account. Google Analytics allows tracking visitors to your website, which online sources referred them to your website, and what content is most popular. A monthly review of your Google Analytics arms you with the information you need to make adjustments to your online marketing plan. Developing and delivering the informational content prospects desire, managing online reputation, and staying current with latest search engine marketing trends will make your online marketing program more effective, efficient and useful to tomorrow’s resident.

Elaine De Lude is Chief Marketing Officer & Brent Stephens is Director of Advertising and Corporate Communications at ROSS Management Services

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 31

WASHINGTON STATISTICAL REPORT 3

WASHINGTON STATISTICAL REPORT

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TABLE 1 ESTIMATED EFFECTIVE RENT AND STABILIZED VACANCY RATE FOR INVESTMENT GRADE CLASS A AND CLASS B APARTMENTS Washington Metropolitan Area | Investment Grade Class A and Class B Apartments Third Quarter 2012 GEOGRAPHIC AREA NORTHERN VIRGINIA SUBURBAN MARYLAND THE DISTRICT WASHINGTON METRO AREA Total Units Responding to 91,526 63,339 15,758 170,623 Survey: CLASS A APARTMENTS VACANCY EFF RENT VACANCY EFF RENT VACANCY EFF RENT VACANCY EFF RENT Low-rise 3.0% $1,630 5.4% $1,576 NA NA 4.1% $1,605 Mid & High-Rise 3.0% $2,261 4.4% $2,270 3.5% $2,627 3.4% $2,384 Total Class A 3.0% $1,825 5.2% $1,697 3.5% $2,627 3.9% $1,867 Comparison at 2011: 3.6% $1,771 4.3% $1,664 1.6% $2,582 3.7% $1,815 CLASS B APARTMENTS VACANCY EFF RENT VACANCY EFF RENT VACANCY EFF RENT VACANCY EFF RENT Low-rise 3.0% $1,506 4.7% $1,343 NA NA 3.9% $1,427 Mid & High-Rise 3.3% $1,787 4.9% $1,726 1.5% $1,915 3.3% $1,796 Total Class B 3.2% $1,632 4.8% $1,423 1.5% $1,915 3.6% $1,573 Comparison at 11: 1.2% $1,621 2.0% $1,405 2.2% $1,886 1.5% $1,561 Total Class A and B 3.1% $1,740 5.0% $1,582 2.9% $2,416 3.8% $1,744 Comparison at 11: 2.5% $1,705 3.4% $1,556 1.8% $2,257 2.8% $1,708 Comparison at 07: 2.6% $1,437 3.1% $1,337 1.0% $2,069 2.7% $1,433 RENT INCREASE/ANNUM: VACANCY EFF RENT VACANCY EFF RENT VACANCY EFF RENT VACANCY EFF RENT -Since 11: -- 2.9% -- 1.4% -- 7.2% 2.7% -Since 07: -- 3.9% 3.4% 3.1% 4.0%

Source: Compiled by Delta Associates, 500 Montgomery St., Suite 600, Alexandria, Virginia 22314 Phone: (703) 836-5700. Last Update: 9/2012

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TABLE 2 KEY MARKET INDICATORS FOR INVESTMENT GRADE CLASS B RENTAL GARDEN APARTMENTS Summary: Washington Metropolitan Area Third Quarter 2012 GEOGRAPHIC AREA

WASHINGTON SUBURBAN MARKET INDICATOR NORTHERN VIRGINIA SUBURBAN MARYLAND1 AREA TOTAL/WEIGHTED AVERAGE2

Number of Units 22,289 20,943 43,232 Rent Levels ( Avg. of All Unit Sizes) Face Rent $1,528 $1,357 $1,445 Concession as a % of Face Rents 1.4% 1.0% 1.2% Effective Rent $1,506 $1,343 $1,427 Effective Rent per Square Foot $1.72 $1.48 $1.60 Per Annum Effective Rent Increase Since 2011 2.0% 2.7% 2.4% Since 2007 3.7% 3.6% 3.7% Since Early 1990s 3.4% NA 3.4% Vacancy 2012 3.0% 4.7% 3.9% Vacancy 2011 1.3% 2.3% 1.8%

1 Includes all surveyed submarkets in Prince George's County, Montgomery County, and Columbia. 2 Starting with the Year End 2001 Class B Apartment Report, Suburban Maryland weighted averages reflect the inclusion of all Prince George's County submarkets.

Source: Compiled by Delta Associates, 500 Montgomery St., Suite 600, Alexandria, Virginia 22314 Phone: (703) 836-5700. Last Update: 9/2012

TABLE 2 12206 Class B Tables.xlsx X:\DELTA\OLDSERV\Open Projects\12206\3rdQtr2012\Report Tables and Text\CLASS B\12206 Class B Tables.xlsx

36 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 WASHINGTON STATISTICAL REPORT

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3.4% 3.0% 1.4% 1.3% 2.0% 3.7% 1966 $1.72 22,289 $1,528 $1,506 OVERALL OVERALL AVERAGE TOTAL/WEIGHTED TOTAL/WEIGHTED NA ANNANDALE Table Class B Tables.xlsx 3 12206 NA WEST WEST ALEXANDRIA 3 RT. 1 3.1% 3.1% CORRIDOR CORRIDOR ALEXANDRIA 3 1,171 3,679 4,237 1,900 3.2% 3.2% ARLANDRIA 1 4 706 EAST 3.6% 3.6% ALEXANDRIA SUBMARKET NA SOUTH TABLE 3 ARLINGTON Third Quarter 2012 NA ROSSLYN/ ROSSLYN/ BALLSTON Selected Submarkets | NorthernVirginia NA X:\DELTA\OLDSERV\Open Projects\12206\3rdQtr2012\Report Tables Class B Tables.xlsx B\12206 and Text\CLASS Projects\12206\3rdQtr2012\Report X:\DELTA\OLDSERV\Open FALLS CH./ CH./ FALLS MERRIFIELD 5 CITY 3.5% 3.5% FAIRFAX 3 KEY MARKET INDICATORS FOR INVESTMENT INDICATORS KEY MARKET GARDEN FOR CLASSAPARTMENTS RENTAL GRADE B 3.9% 2.6% 3.7% 3.5% 1.5% 2.3% 3.2% 3.7% 2.9% 2.4% 1.8% 0.9% 5.8% 0.1% 0.0% 0.0% 0.1% 0.3% 1.4% 0.1% 1.7% 1.2% 1.3% 0.3% 0.1% 1.3% 1.9% 1.7% 1.3% 1.8% 1.7% 2.3% 4.0% 3.6% 4.1% 4.6% 3.4% 2.8% 4.3% 5.3% 1979 1979 1966 1944 1954 1948 1945 1973 1971 1970 1,387 3,554 2,893 1,311 1,451 $1.52 $1.76 $1.71 $2.37 $1.86 $1.96 $1.96 $1.60 $1.55 $1.57 -1.4% 5.8% -7.4% 0.5% 4.4% 1.1% 3.4% 2.0% 0.3% 14.6% 3.6% 3.6% $1,485 $1,533 $1,717 $1,719 $1,403 $1,400 $1,354 $1,367 $1,528 $1,688 $1,458 $1,519 $1,618 $1,717 $1,403 $1,400 $1,352 $1,363 $1,506 $1,687 RESTON 2 Vacancy 2012 Vacancy Vacancy 2011 Vacancy Since 2011 Since Since 2007 Since Since Early 1990's Since Face Rent Face Concession as a % of Face Rents Face of % a as Concession Effective Rent Effective Rent per Square Foot Square per Rent Effective Per EffectiveAnnum Rent Increase Formerly the Old Town Alexandria Formerly submarket. Town the Old utilities landlord-paid Rents include/assume Effective rentincrease since 1990. Effective rentincrease since 1992. Effective rentincrease since 1993. MARKET INDICATOR Number of Units Surveyed of Number Vacancy Average Year Built of Product Surveyed Rentof Unit Sizes) Levels All (Avg. 1 2 3 4 5 Source: Compiled byAssociates, Delta 500Source: Compiled St., Montgomery Suite 600, Alexandria, Virginia 22314 9/2012 Update: Last (703) 836-5700. Phone:

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 37 WASHINGTON STATISTICAL REPORT

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TABLE 4 KEY MARKET INDICATORS FOR INVESTMENT GRADE CLASS B RENTAL GARDEN APARTMENTS Selected Submarkets | Suburban Maryland Third Quarter 2012 SUBMARKET SUBMARKET SUBURBAN SUBTOTAL - SUBTOTAL- MARYLAND PRINCE MARKET INDICATOR SILVER MONTGOMERY OVERALL GEORGE'S ROCKVILLE GAITHERSBURG SPRING/ COUNTY COLUMBIA TOTAL/WEIGHTED COUNTY 2 WHEATON AVERAGE Number of Units Surveyed 1,498 1,844 3,368 6,710 3,214 11,019 20,943 Average Year Built of Projects Surveyed 1976 1977 1970 1974 1980 1967 1971 Rent Levels (Avg. of all Unit Sizes) 1 Face Rent $1,649 $1,379 $1,528 $1,514 $1,480 $1,226 $1,357 Concession as a % of Face Rents 0.0% 3.1% 0.0% 0.8% 0.0% 1.5% 1.0% Effective Rent $1,649 $1,336 $1,528 $1,502 $1,480 $1,207 $1,343 Effective Rent per Square Foot $1.80 $1.37 $1.62 $1.59 $1.53 $1.39 $1.48 Per Annum Effective Rent Increase Since 2011 5.2% -2.5% 4.8% 2.9% 3.9% 2.2% 2.7% Since 2007 3.4% 1.6% 5.4% 3.9% 5.1% 3.0% 3.6% Vacancy Vacancy 2012 4.5% 6.6% 2.3% 4.0% 3.7% 5.5% 4.7% Vacancy 2011 4.3% 4.1% 0.6% 2.8% 1.9% 2.2% 2.3%

1 Rents include/assume landlord-paid utilities. 2 See Table 5 for Prince George's Submarkets.

Source: Compiled by Delta Associates, 500 Montgomery St., Suite 600, Alexandria, Virginia 22314 Phone: (703) 836-5700. Last Update: 9/2012

TABLE 4 12206 Class B Tables.xlsx X:\DELTA\OLDSERV\Open Projects\12206\3rdQtr2012\Report Tables and Text\CLASS B\12206 Class B Tables.xlsx

38 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 WASHINGTON STATISTICAL REPORT

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TABLE 5 KEY MARKET INDICATORS FOR INVESTMENT GRADE CLASS B RENTAL GARDEN APARTMENTS Selected Submarkets | Prince George's County Maryland Third Quarter 2012 SUBMARKET

LANDOVER/ SUBTOTAL- PRINCE MARKET INDICATOR OXON HILL/ GREENBELT/ ANDREWS NEW LAUREL GEORGE'S COUNTY CAMP SPRINGS TAKOMA PARK CAROLLTON

Number of Units Surveyed 1,945 2,039 2,617 2,108 2,310 11,019 Average Year Built of Projects Surveyed 1964 1972 1968 1967 1967 1967 Rent Levels (Avg. of All Unit Sizes) 1 Face Rent $1,119 $1,116 $1,251 $1,365 $1,256 $1,226 Concession as a % of Face Rents 1.3% 1.0% 0.4% 0.7% 4.2% 1.5% Effective Rent $1,104 $1,105 $1,246 $1,355 $1,203 $1,207 Effective Rent per Square Foot $1.41 $1.15 $1.45 $1.55 $1.38 $1.39 Per Annum Effective Rent Increase Since 2011 -0.4% 3.3% 7.1% 1.6% -1.6% 2.2% Since 2007 1.2% 1.7% 4.3% 5.9% 1.8% 3.1% Vacancy Vacancy 2012 7.0% 5.0% 5.6% 4.5% 5.5% 5.5% Vacancy 2011 4.5% 1.0% 2.1% 1.7% 1.4% 2.2%

1 Rents include/assume landlord-paid utilities.

Source: Compiled by Delta Associates, 500 Montgomery St., Suite 600, Alexandria, Virginia 22314 Phone: (703) 836-5700. Last Update: 9/2012

TABLE 5 12206 Class B Tables.xlsx X:\DELTA\OLDSERV\Open Projects\12206\3rdQtr2012\Report Tables and Text\CLASS B\12206 Class B Tables.xlsx

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 39 WASHINGTON STATISTICAL REPORT

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TABLE 6 KEY MARKET INDICATORS FOR INVESTMENT GRADE CLASS B RENTAL HIGH-RISE APARTMENTS Summary: Washington Metropolitan Area Third Quarter 2012 GEOGRAPHIC AREA MARKET INDICATOR NORTHERN SUBURBAN DISTRICT OF TOTAL/ WEIGHTED VIRGINIA MARYLAND COLUMBIA AVG Number of Units Surveyed 18,033 5,549 4,671 28,253 Rent Levels ( Avg. of All Unit Sizes) Face Rent $1,800 $1,762 $1,919 $1,812 Concession as a % of Face Rents 0.7% 2.0% 0.2% 0.9% Effective Rent $1,787 $1,726 $1,915 $1,796 Effective Rent per Square Foot $1.95 $1.81 $2.40 $2.00 Per Annum Effective Rent Increase Since 2011 1.2% -7.9% 6.6% 0.3% Since 2007 5.5% 3.5% 3.4% 4.8% Vacancy 2012 3.3% 4.9% 1.5% 3.3% Vacancy 2011 1.0% 1.0% 2.2% 1.2%

Source: Compiled by Delta Associates, 500 Montgomery St., Suite 600, Alexandria, Virginia 22314 Phone: (703) 836-5700. Last Update: 9/2012

Table 6 12206 Class B Tables.xlsx X:\DELTA\OLDSERV\Open Projects\12206\3rdQtr2012\Report Tables and Text\CLASS B\12206 Class B Tables.xlsx

40 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 WASHINGTON STATISTICAL REPORT

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TABLE 7 KEY MARKET INDICATORS FOR INVESTMENT GRADE CLASS B RENTAL HIGH-RISE APARTMENTS Selected Submarkets | Northern Virginia Third Quarter 2012 SUBMARKET FALLS SUBTOTAL/ MARKET INDICATOR CHURCH/ SOUTH WEST ARLANDRIA CRYSTAL CITY WEIGHTED AVERAGE NORTH ARLINGTON ALEXANDRIA ARLINGTON Number of Units Surveyed 5,628 2,755 981 5,255 3,414 18,033 Average Year Built of Projects Surveyed 1987 1964 1963 1981 1981 1978 Rent Levels (Avg. of All Unit Sizes) 1 Face Rent $2,046 $1,542 $1,410 $1,524 $2,140 $1,800 Concession as a % of Face Rents 0.0% 1.4% 0.5% 1.5% 0.6% 0.7% Effective Rent $2,046 $1,521 $1,403 $1,501 $2,127 $1,787 Effective Rent per Square Foot $2.29 $1.82 $1.86 $1.61 $2.05 $1.95 Per Annum Effective Rent Increase Since 2011 4.2% 2.7% 4.9% -0.3% -4.0% 1.2% Since 2007 7.7% 4.1% 3.7% 5.3% 4.0% 5.5% Vacancy Vacancy 2012 2.6% 2.4% 1.0% 3.2% 5.9% 3.3% Vacancy 2011 0.6% 0.5% 0.2% 1.6% 1.5% 1.0%

1 Rents include/assume landlord-paid utilities.

Source: Compiled by Delta Associates, 500 Montgomery St., Suite 600, Alexandria, Virginia 22314 Phone: (703) 836-5700. Last Update: 9/2012

TABLE 7 12206 Class B Tables.xlsx X:\DELTA\OLDSERV\Open Projects\12206\3rdQtr2012\Report Tables and Text\CLASS B\12206 Class B Tables.xlsx

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 41 WASHINGTON STATISTICAL REPORT

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TABLE 8 KEY MARKET INDICATORS FOR INVESTMENT GRADE CLASS B RENTAL HIGH-RISE APARTMENTS Selected Submarkets | Suburban Maryland and Washington D.C. Third Quarter 2012 SUBMARKET SUBURBAN MARYLAND DISTRICT OF COLUMBIA SUBTOTAL MARKET INDICATOR SUBTOTAL BETHESDA/ UPPER MT. VERNON DISTRICT SILVER SPRING ROCKVILLE MARYLAND SOUTHWEST CHEVY CHASE NORTHWEST SQUARE, NW Number of Units Surveyed 2,957 1,544 1,048 5,549 2,186 1,039 1,446 4,671 Average Year Built of Projects Surveyed 1974 1972 1974 1973 1965 1967 1974 1968 Rent Levels (Avg. of All Unit Sizes) 1 Face Rent $1,611 $2,024 $1,804 $1,762 $2,181 $1,769 $1,632 $1,919 Concession as a % of Face Rents 0.5% 4.0% 2.7% 2.0% 0.5% 0.0% 0.0% 0.2% Effective Rent $1,603 $1,943 $1,755 $1,726 $2,171 $1,769 $1,632 $1,915 Effective Rent per Square Foot $1.65 $2.09 $1.86 $1.81 $2.45 $2.55 $2.22 $2.40

Per Annum Effective Rent Increase Since 2011 -11.2% -2.5% -6.7% -7.9% 8.4% 3.3% 6.1% 6.6% Since 2007 3.6% 2.9% 3.7% 3.5% 3.6% 2.1% 3.9% 3.4% Vacancy Vacancy 2012 4.7% 3.9% 6.7% 4.9% 2.1% 1.7% 0.4% 1.5% Vacancy 2011 1.0% 0.3% 1.9% 1.0% 3.3% 1.2% 1.2% 2.2%

1 Rents include/assume landlord-paid utilities

Source: Compiled by Delta Associates, 500 Montgomery St., Suite 600, Alexandria, Virginia 22314 Phone: (703) 836-5700. Last Update: 9/2012

TABLE 8 12206 Class B Tables.xlsx X:\DELTA\OLDSERV\Open Projects\12206\3rdQtr2012\Report Tables and Text\CLASS B\12206 Class B Tables.xlsx

42 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 RENOVATION REPORT 4

RENOVATION REPORT

SPONSORED BY ROSS COMPANIES

TABLE 11 SUMMARY OF CLASS B GARDEN AND HIGH-RISE APARTMENT BUILDING SALES WASHINGTON METROPOLITAN AREA 2012 Through August Sale Price Project Name/Location Date of Sale # of Units Year Built Total Per Unit CLASS B GARDEN/MID-RISE APARTMENTS 1. Comparable #1 1/12 57 1944/1990 $3,705,000 $65,000 Washington, DC 2. Comparable #2 1/12 198 1947 $35,000,000 $176,768 Arlington, Virginia 3. Comparable #3 3/12 65 1987 $11,000,000 $169,231 Laurel, Maryland 4. Comparable #4 4/12 180 1973 $22,700,000 $126,111 Alexandria, Virginia 5. Comparable #5 4/12 300 1985 $47,500,000 $158,333 Germantown, Maryland 6. Comparable #6 4/12 200 1989 $21,100,000 $105,500 Fredericksburg, Virginia 7. Comparable #7 5/12 234 1954 $14,800,000 $63,248 Hyattsville, Maryland 8. Comparable #8 5/12 165 1964 $16,200,000 $98,182 Leesburg, Virginia 9. Comparable #9 5/12 577 1969 $111,000,000 $192,374 McLean, Virginia 10. Comparable #10 5/12 1,242 1995 $182,000,000 $146,538 Landover, Maryland 11. Comparable #11 5/12 113 1950 $14,500,000 $128,319 Alexandria, Virginia 12. Comparable #12 6/12 1,350 1967 $186,000,000 $137,778 Ellicott City, Maryland 13. Comparable #13 6/12 556 1991 $125,500,000 $225,719 Alexandria, Virginia 14. Comparable #14 7/12 240 1968 $30,900,000 $128,750 Millersville, Maryland 15. Comparable #15 8/12 590 1964 $48,164,409 $81,635 Hyattsville, Maryland 16. Comparable #16 8/12 982 1972 $102,000,000 $103,870 Laurel, Maryland 17. Comparable #17 8/12 768 1982 $90,300,000 $117,578 Germantown, Maryland Total/Average: -- 7,817 -- $1,062,369,409 $135,905 CLASS B HIGH-RISE APARTMENTS 1. Comparable #1 1/12 88 1937 $6,961,500 $79,108 Washington, DC 2. Comparable #2 1/12 79 1929/1986 $22,000,000 $278,481 Washington, DC 3. Comparable #3 3/12 442 1972 $175,000,000 $395,928 Arlington, Virginia 4. Comparable #4 4/12 115 1930 $26,000,000 $226,087 Washington, DC 5. Comparable #5 5/12 324 1966 $28,500,000 $87,963 Fort Washington, Maryland 6. Comparable #6 6/12 890 1968 $168,000,000 $188,764 Silver Spring, Maryland 7. Comparable #7 7/12 64 1923 $11,000,000 $171,875 Washington, DC 8. Comparable #8 7/12 89 1929 $19,000,000 $213,483 Washington, DC 9. Comparable #9 8/12 237 1987 $75,500,000 $318,565 North Bethesda, Maryland Total/Average: -- 2,328 -- $531,961,500 $228,506

Note: Delta Associates no longer provides the name of each project listed above except to appraisal clients of the firm and those who provide this type of transaction data to Delta. If you wish a list of project names and you qualify to receive same, email your request to: [email protected]. Source: Compiled by Delta Associates, 500 Montgomery St., Suite 600, Alexandria, Virginia 22314. Phone: (703) 836-5700; Fax (703) 836-5765. Last update: 9/2012.

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 55

EXPLANATION OF GEOGRAPHIC COVERAGE AND METHODOLOGY 6

EXPLANATION OF GEOGRAPHIC COVERAGE AND METHODOLOGY

SPONSORED BY ROSS COMPANIES EXPLANATION OF GEOGRAPHIC COVERAGE AND METHODOLOGY

MARKET AREA DEFINITION

Delta Associates currently surveys 30 Class B garden and high-rise apartment submarkets in the Washington Metropolitan Area. The ten Northern Virginia garden apartment submarkets included are: Reston, Fairfax City, Falls Church/Merrifield, Rosslyn/ Ballston, South Arlington, Old Town Alexandria, Arlandria, Route 1 Corridor of Alexandria, West Alexandria, and Annandale. The nine Class B garden apartment submarkets included in Suburban Maryland are: Rockville, Gaithersburg, Columbia, Landover/ New Carrollton, Andrews, Oxon Hill/Camp Springs, Greenbelt/Takoma Park, Laurel, and Silver Spring. The eleven high-rise Class B apartment submarkets are: Arlandria, West Alexandria, Falls Church/North Arlington, South Arlington, and Crystal City, Virginia; Rockville, Silver Spring and Bethesda/Chevy Chase, Suburban Maryland; Upper Northwest, Mount Vernon Square, and Southwest, Washington, D.C.

COVERAGE

Delta Associates inspects and collects data on a representative sampling of the Class B product in each submarket. To date, a total of approximately 200 Class B properties are surveyed by Delta Associates each quarter – accounting for nearly 70,000 units. PRODUCT DEFINITION

“Class B” product is defined by Delta Associates as well maintained, older product, generally built in the 196.0’s or 197.0’s decorated model unit nor two bedroom/two bathroom floor plans. Class B communities typically offer limited project amenities. (some submarkets only have product older than 1960, so that is surveyed), and which does not offer a separate clubhouse nor The landlord typically pays gas and/or electric for the common areas and individual units. The projects are typically 200+ units except in submarkets where product is scarce.

FACE RENT/UTILITIES

Face rent is the asking rent for each unit, excluding any concessions or rent specials. Delta Associates quotes the weighted average projects are separately metered and tenants pay their own utilities. In these cases, rents are adjusted to include all utilities as follows: asking base rent for each submarket – the asking rent for a first floor unit without any premiums for fireplace, view, etc. A few Class B

EFFICIENCY 1 BEDROOM 2 BEDROOM 3 BEDROOM Utility Adjustment $28 $40 $51 $62

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 59 EXPLANATION OF GEOGRAPHIC COVERAGE AND METHODOLOGY

SPONSORED BY ROSS COMPANIES

tenants to pay their own utilities, regardless of the type of utilities. Delta has found that the variety of utility arrangements Beginning with the 2nd Quarter 2006 publication, Delta Associates has utilized one utility adjustment for all projects that require varies much more widely and changes more often than previously recognized. This reporting change will help to eliminate inconsistencies due to these variances.

EFFECTIVE RENT

Effective rent is face rent adjusted downward for concessions or rent specials. Typically, concessions are used selectively to lease weaker floor plans or surplus units.

STABILIZED VACANCY

“Stabilized Vacancy” as used herein is the rate of “available units” in stabilized properties. Once a property achieves 95% occupancy, it is considered “stabilized” and stays in our pool of stabilized properties even if it falls below 95% at a subsequent reporting date.

We obtain information on “available units” when conducting our surveys. Obtaining the information this way may produce several important differences from “vacancy” as reported in financial statements. Simply stated, the difference can be characterized as:

• Delta’s: Available units to lease • Financial statement: Economic vacancy “Available units” is understated compared to “economically vacant” by our exclusion of units occupied by dead-beat tenants and units not available for lease, such as employee units and model apartments. Our occupancy rate is overstated compared to financial reporting by our exclusion of economically vacant, on-notice units for which a lease to occupy in the future has been signed. As compared to the “vacancy rate” as used in financial reports, we estimate that the former reduces our “available units”

(vacancy rate) estimate by about 100 to 150 basis-points and the latter another 150 to 200 basis-points.

60 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 WASHINGTON AREA CLASS B APARTMENT SUBMARKETS

SPONSORED BY ROSS COMPANIES WASHINGTON AREA CLASS B APARTMENT SUBMARKETS

Columbia

Gaithersburg

Rockville Laurel Silver Spring/ Wheaton Greenbelt/ Reston Bethesda/ Takoma Park Chevy Chase

North Landover/ Falls Arlington D.C. New Carrollton Church/ Merrifield South Arlington Crystal City Arlandria Andrews Fairfax City

W. Alexandria Old Town Oxon Hills/ Camp Springs Rte. 1 Corridor

WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012 61 PHOTOGRAPHY CREDITS

SPONSORED BY ROSS COMPANIES PHOTOGRAPHY CREDITS

We would like to thank the following sources for the photography used in this report.

Page 23 & 25: ROSS Companies Seven Springs Village, College Park, MD

Page 26 (Top): Empire Group Holdings

Delta Associates’ 2008 Winner of Sale Transaction of the Year Empirian Village (formerly Springhill Lake), Greenbelt, MD

Page 26 (Bottom): Dragone Realty Investments The Milano Apartments, Oxon Hill, MD Delta Associates’ 2012 Winner of Best Renovation – Mid-Atlantic

Page 27: ROSS Companies Spring Parc, Silver Spring, MD

Page 28: Stellar Management Patriot Village, Annandale, VA Delta Associates’ 2008 Winner of Landmark Mid-Atlantic Class B Garden Apartment Sale

62 WASHINGTON METROPOLITAN AREA CLASS B APARTMENT MARKET REPORT | THIRD QUARTER 2012

www.DeltaAssociates.com

SPONSORED BY: | www.TheRossCompanies.com