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Property Pricing, CAP Rates and Capital Flows Changing Daily

Trends during the first half of 2006 vs. the same period in 2005:

• Income property inventory had been expanding rapidly nationwide.
• Offer activity per transaction has been considerably lower.
• Quality and credit matter much more.
• Letter of Intent's and contracts have been more actively re-traded.
• Buyers have been much more selective in scrutinizing their potential acquisitions.
• Their is a wide range of capital including foreign, public, private exchange and "crossover" buyers in the marketplace.
• Pricing will vary considerably based on geographic area and submarkets therein.

Relief Found in REITs

REITs that trade in residential markets are tangentially affected by the subprime situation, and REITs that are active in commercial mortgage lending are directly affected, by commercial real estate REITs (such as those within Behringer Harvard’s family of investment programs) are somewhat insulted. Why? First, commercial real estate programs are typically leveraged with assumable, long-term fixed-rate debt. This provides stability to an asset investment and often provides an incentive for subsequent debt assuming buyers if the debt market is less attractive at that time. Second, while Behringer Harvard’s portfolio of assets includes tenants are in financial services companies, the portfolio is well balanced by a diverse mix of other industries, which would potentially offset the negative short-term impact from the subprime situation. And, third, experts like Linneman believe that property quality-not property type-will be the main driver for obtaining credit in the future. As a general business strategy, Behringer Harvard targets primarily institutional-quality properties.

In conclusion, as the subprime situation creates dramatic ripples in the mortgage industry and headlines nationally, commercial real estate has remained separate and stable. The good news- say experts like Linneman, and even Ben Bernanke, the chairman of the Federal Reserve- is that there is little historic reason to think the subprime situation will be contagious for the commercial real estate industry-or spillover into the overall real economy.

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Last modified: 09/23/08

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