Tenure by Household Size

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NEIGHBORHOOD APARTMENT MARKET ANALYSIS CITY OF CHICAGO

Market Composition & Distribution

The neighborhood apartment market consists of a range of properties developed from the early 1900s to more modern, 1970s buildings. Properties range from two and three story walk up design to elevator buildings in the 10-15 story range. Higher density developments are located near the lakefront, maximizing views and proximity to mass transit, while lower density predominates

moving away from the lake. Development since the 1970s in the neighborhoods has been focused on condominium product with many of these units now being rented due to the decline in the economy and difficulties in financing purchases.

Count Percent Count Percent Count Percent

Chicago Metropolitan Division

Occupied Housing Units 1,863,442 65.5% 981,280 34.5% 100%2,844,722

Household Size

1 person 426,384 22.9% 402,386 41.0% 828,770 29.1%

2 person 586,092 31.5% 240,144 24.5% 826,236 29.0%

3 person 297,937 16.0% 139,060 14.2% 436,997 15.4%

4 person 307,599 16.5% 100,487 10.2% 408,086 14.3%

5 person 155,739 8.4% 57,568 5.9% 213,307 7.5%

6+ person 89,691 4.8% 41,635 4.2% 131,326 4.6%

City of Chicago

Occupied Housing Units 502,615 46.8% 570,271 53.2% 100%1,072,886

Household Size

1 person 148,583 29.6% 245,514 43.1% 394,097 36.7%

2 person 153,243 30.5% 136,224 23.9% 289,467 27.0%

3 person 73,895 14.7% 79,482 13.9% 153,377 14.3%

4 person 64,970 12.9% 53,153 9.3% 118,123 11.0%

5 person 32,955 6.6% 31,145 5.5% 64,100 6.0%

6+ person 28,969 5.8% 24,753 4.3% 53,722 5.0%

Source: US Census (2009 ACS 1-yr est), compiled by Appraisal Research Counselors

Total Units

Owner Renter

Tenure by Household Size - 2009

With just over 1 million occupied housing units in the entire city of Chicago, there are estimated to be over 1.1M housing units in total (including vacant housing units). Deducting the estimated 110,000 total housing units downtown, there are roughly 1M housing units in total, outside the greater downtown area.

Housing tenure includes 46.8 percent owner occupancy in the city compared to 65.5 percent for the entire MSA. 53.2 percent are renter occupied in the city compared to 34.5 percent in the MSA.

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Like most urban areas, the urban core housing stock includes a high percentage of rental housing stock while the surrounding suburban markets are dominated by bedroom communities geared to owner occupancy.

The renter population is dominated by one person households and when adding in two person households, over 65 percent of all renter households are represented.

Vacancy

Vacancy is tied closely to employment. As job growth occurs, occupancy increases and ultimately, new supply is added to meet demand. In the current environment, the job market bottomed out in mid 2009 with the rate of loss slowing notably since this time. Over the past several months nominal job growth has been occurring and will have an additional positive impact on vacancy.

Neighborhood Apartment Vacancy Rates City of Chicago

0%

2%

4%

6%

8%

10%

12%

Lincoln Park Belmont to Montrose

Rogers Park/Uptown

South Shore City West

VacancyRate

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 1Q12

Source: Marcus & Millichap, compiled by Appraisal Research Counselors

Several markets had been operating with vacancy levels close to 2 or 3 percent in early 2008 but most have since moved to a floor of four percent. The north side lakefront markets have generally performed better than the south side and west side markets. It is clear however that no submarket escaped the impact of the deterioration in the economy through 2009. Occupancy improved slightly in 2010 with would-be condo buyers content to stay in the rental market until price stabilization is apparent.

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Submarket 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 Lincoln Park 2.8% 3.8% 4.0% 4.2% 3.9% 3.6% 3.0% 2.9% 2.7% 2.4% 2.5% 2.1% 1.9%

Belmont to Montrose 4.0% 4.1% 4.2% 4.4% 4.2% 4.1% 4.1% 4.1% 3.7% 3.7% 3.5% 3.4% 3.2%

Rogers Park/Uptow n 4.4% 5.1% 5.4% 5.2% 5.3% 5.5% 5.1% 5.2% 5.3% 5.1% 5.1% 4.5% 4.3%

South Shore 5.7% 6.1% 6.3% 6.2% 6.7% 6.7% 5.6% 5.7% 5.5% 5.2% 5.3% 5.0% 5.1%

City West 10.5% 10.4% 10.0% 10.2% 11.1% 11.0% 10.7% 10.4% 10.4% 10.0% 10.2% 9.8% 8.7%

Apartment Vacancy by Submarket

Rent Trends

Following is a summary of rent trends by submarket:

Neighborhood Apartment Rent Trends City of Chicago

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

Lincoln Park Belmont to Montrose

Rogers Park/

Uptown

South Shore City West

Average Monthly Rent

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 1Q12

In the neighborhood rental market, there is limited information available on unit sizes due to the age of the buildings and variations of floor plans within a building. The rental market focuses more on the total monthly outlay.

Lincoln Park and the Belmont to Montrose markets along the lakefront set the upper end of the range for the neighborhood apartment market. Moving further north and/or west results in lower rents as access to the lakefront and the public transportation system diminishes. Rents had been flat to declining through 2009 but in 2010/11 they have stabilized and in many submarkets, increased.

Rents are expected to continue increasing at a moderate rate. Details on a submarket basis follow:

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Submarket 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 Lincoln Park 1,154 1,144 1,138 1,100 1,110 1,132 1,122 1,124 1,133 1,145 1,142 1,152 1,173 Belmont to Montrose 1,106 1,122 1,123 1,118 1,114 1,136 1,140 1,133 1,139 1,145 1,148 1,157 1,157 Rogers Park/ Uptow n 776 773 779 795 760 751 757 759 762 763 768 768 774 South Shore 851 860 860 841 848 844 848 838 844 844 851 852 862 City West 937 920 935 914 946 965 961 974 973 970 981 972 990

Apartment Rents by Submarket

New Construction

There has been very little new construction of multi-family rental product in the neighborhoods since the 1980s. Construction was simply not feasible given the rent levels in the market and when the development wave returned in the 1990s through the late 2000s, virtually all residential construction was condominium development. Land prices escalated due to high demand for condo product and while rents for rental product increased, developers received higher returns constructing condo product.

Since the market downturn that began in 2007, sales at condominium developments suffered and more recently, much of the remaining inventory is being rented out by developers. In other cases, individual unit owners are renting new product because they cannot sell their current residence.

Thus, the new inventory in the market is by default, condominium product. The extent of the addition to supply varies significantly by submarket.

Subject Submarket Conclusion

State what submarket you are in and what the rent and vacancy trends are from the prior table and how it relates to your property.

Transaction Market

A substantial run up in transaction volume across all property types occurred from 2004 through 2006 due in large part to very favorable loan terms (high leverage/low rates) and the expectation of increases in net income due to expected growth in demand. Weaknesses in the overall economy became apparent in early to mid-2007. The housing market was cooling in part due to the subprime mortgage market and a general over building in many markets. The collapse of numerous financial services firms led to a virtual shut down of the markets as noted below:

Bear Sterns acquired by JP Morgan Chase March 2008

IndyMac taken over by FDIC July 2008

Lehman Brothers filed for Bankruptcy September 2008 Merrill Lynch acquired by Bank of America September 2008 AIG Bailout by US Treasury September 2008 Washington Mutual, Inc seized by OTS September 2008 Fannie Mae acquired by US Treasury September 2008 Freddie Mac acquired by US Treasury September 2008 Wachovia acquired by Wells Fargo October 2008

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The ability to obtain financing for real estate was diminishing as banks began to stockpile cash for reserves. As financing became more costly with lower loan to values and higher debt coverage ratio requirements, equity investors were requiring higher rates of return resulting in a double hit to returns.

0 100 200 300 400 500 600 700 800 900

$0

$500,000,000

$1,000,000,000

$1,500,000,000

$2,000,000,000

$2,500,000,000

$3,000,000,000

$3,500,000,000

$4,000,000,000

$4,500,000,000

$5,000,000,000

1q05 2q05 3q05 4q05 1q06 2q06 3q06 4q05 1q07 2q07 3q07 4q07 1q08 2q08 3q08 4q08 1q09 2q09 3q09 4q09 1q10 2q10 3q10 4q10 1q11 2q11 3q11 4q11 1q12

Transaction Volume - Chicago MSA

Multi-Family Retail Industrial Office Number of Sales

Source: Costar Property

After running in the 2.5 to 4.5 billion range for several years, the transaction market has settled in the 0.5 to 1.5 billion range since late 2008. Reasons for the decline include a significant buy/sell price gap for most property types that has not yet been bridged. Debt levels on properties acquired in the last up cycle are preventing re-trading of assets since a sale would often require the seller to bring funds to the closing table. Second, while many buyers believe the market is at or near the bottom, they cannot obtain financing at leverage levels that make the deals work. We note the 3q10 dollar volume was skewed by the $655M sale of 300 N LaSalle, a 1.2M+ square foot office building in downtown Chicago. Then in 4q10 the sales of 71 S Wacker, 353 N Clark and 300 S Riverside for a total of 1.2B accounted for 86% of the office dollar volume. The 3q11 office sales include 600 W Chicago ($390M), 70 W Madison ($344M) and 200 W Madison ($217.5M). Excluding these 3 sales, the net office volume was roughly $100M for the quarter. The 4q11 volume was driven by a flurry of large, institutional quality apartment deals that closed just before year end. Over the past several quarters the market appears to have settled into a total transaction volume range of 1.5 to 2.0 billion.

With the exception of larger institutional quality deals, we do not expect to see transaction volume increase over at least the next six months as there does not appear to be a solution at this point to the lack of liquidity in the small to mid-size property market.