OTTEAU Valuation Group, Inc.

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1 Administrative Offices 15 Brunswick Woods Drive East Brunswick, NJ Tel: Fax: January 6, 2012 Mr. Jack Kocsis, Jr. Chief Executive Officer Building Contractors Association of New Jersey Raritan Center Plaza II, Fieldcrest Avenue Edison, New Jersey RE: New Jersey Construction Forecast Dear Mr. Kocsis: In accordance with your request, we submit our construction forecast. The purpose of this study is to provide a projection of how recent economic events will affect future spending and pricing levels for selected categories of construction in the State of New Jersey. The intended use of this study is to provide guidance to a Coalition of the General Building Construction Industry for strategic planning purposes. The specific projections set forth herein have been based upon analyses of relevant economic, demographic and real estate market factors. This summary report explains the various methodologies employed in developing our forecast as well as the relevant data upon which our opinions have been based. We hereby certify that we possess the knowledge and experience necessary to perform this study competently and have no present nor contemplate any future interest or bias with respect to the subject matter of this study report and the parties involved. Respectfully submitted, Jeffrey G. Otteau, President Otteau Valuation Group, Inc. Richard B. Reading, Principal-Richard B. Reading Associates. JGO, RBR/nm

2 NEW JERSEY CONSTRUCTION FORECAST A Summary Study Report PREPARED FOR A Coalition of the General Building Construction Industry AUTHORED BY Jeffrey G. Otteau, President Otteau Valuation Group, Inc. Brunswick Woods Office Park 15 Brunswick Woods Drive East Brunswick, NJ Richard B. Reading, Principal Richard B. Reading Associates 759 State Road Princeton, NJ 08540

3 TABLE OF CONTENTS Letter of Transmittal... I Title Page....ii Table of Contents... iii I. INTRODUCTION Executive Summary... 1 Intended Users of the Study... 4 Purpose & Intended Use of the Study... 4 Date of the Study... 6 Scope of Work... 6 II. ECONOMIC, DEMOGRAPHIC & MARKET ANALYSIS Economics & Demographics... 8 For Sale Housing Market Multi-Family Rental Housing Office Market Analysis Retail Market Analysis Industrial Market Analysis Hospitality Market Analysis Healthcare Market Analysis III.IMPLICATIONS FOR CONSTRUCTION COSTS Cost Containment as a Construction Pricing Model Historical Components of Price Change Construction Industry Employment Diminished Construction Volume Components of Price Decline Implications for Labor Adjusting Construction Pricing to the Market IV. CONSTRUCTION SPENDING FORECAST Historical Construction Spending Forecast Methodology Construction Spending Forecast Conclusions Certification of the Authors Qualifications of the Authors V. ADDENDUM Limiting Conditions, Assumptions & Hypothetical Conditions Definitions & Terms

4 1 PART I INTRODUCTION EXECUTIVE SUMMARY Date of Study Report: January 6, 2012 Effective Date of Study: September 1, 2011 Client: Geographic Study Area: Intended Use: A Coalition of the General Building Construction Industry State of New Jersey To provide guidance to the construction industry regarding future construction activity for strategic planning purposes Synopsis: The intended use of this study is to provide guidance to the construction industry for strategic planning purposes. The purpose of this study is to provide a projection of how recent economic events will affect future construction spending and pricing in the State of New Jersey for the following market sectors: Multi-Family Construction Office Construction Retail Construction Industrial Construction Hospitality Construction (hotels & motels) Healthcare Construction Miscellaneous Non-Residential Construction Government Construction Education Construction Aggregate Construction (limited to the above sectors only) From a historical perspective, New Jersey has long been a top economic performer due to a combination of factors including its strategic geographic location between New York City and Philadelphia, a diverse and highly educated workforce, the present of Newark International Airport and the Port Newark-Elizabeth shipping port, and its high concentration of technology based jobs. In 2010, the US Census Bureau reported that New Jersey had a total estimated population of 8,791,894 reflecting 4.5% growth from The State of New Jersey is comprised of 21 counties and 566 municipalities situated on 7, square miles of land area. The state s population density of approximately 1,168 people per square mile is more than 10 times greater than for the US as a whole (86 / sq. mile) and exceeds that of the more crowded places around the world including India (992), Belgium (917), Japan (907), Israel (875) and the Philippines (785). Similarly, the state is also highly urbanized with 94 percent of its residing in urban areas which are defined as places with a population density of 1,000 people per square mile or greater. New Jersey also has the highest percentage of millionaire households in the

5 United States and has 3 counties which rank in Forbes Magazine list of America's 25 Richest Counties. 2 Despite this historic strength however the state has experienced significant loss of its economic base during the prior decade from as evidenced by a range of indicators including stagnant long-term private sector job growth, the replacement of lost high-paying jobs with ones paying lower salaries, a steeper decline in household income than for the rest of the nation, elevated domestic outmigration whereby residents are leaving the state, elevated unemployment which exceeds the regional and national rate, and a slower pace of job recovery since the recession ended than is being experienced elsewhere. In addition to these economic challenges there are a number of demographic shifts occurring which have the potential to redirect future construction activity toward more urban locations in the state, particularly those that are nearest to New York City. This study has been based upon an econometric analysis of historic and current key drivers of construction activity to include economic, demographic, real estate and governmental factors. The results of our analysis indicate that the restructuring of the Statewide and National economies as a result of the Great Recession, coupled with the long term structural economic challenges facing New Jersey have had a disproportionate impact on the construction industry. These effects are evidenced by dramatic reductions in construction spending, construction employment and market price levels for real estate. We expect these challenges to continue for the foreseeable future as lower market price levels for commercial real estate require a corresponding reduction in construction costs to achieve financial feasibility. In other words, new construction projects will need to achieve a reasonableness of finished cost or they simply won t be built. More specifically, we have found that real estate values in the specific construction sectors analyzed in this study declined statewide from by an average of 20.6%. These price declines have a direct and necessary compressive effect on construction pricing since finished costs must correlate to finished market values. As a result of these effects, construction costs need to decline by a statewide average of 27.4% to offset the market pricing declines in the real estate market sectors analyzed in this report. While this top down compression creates downward pressure on overall construction costs, two of the major components of that cost have recently been increasing as evidenced by rising construction material costs and higher proportional land values. These dynamics point to long term downward pressure and compression of costs associated with construction management services and labor. The study has also analyzed historical construction spending in New Jersey at the sector and geographic levels. Further, the continuing economic challenges affecting the state and the national overall suggest that the steep decline in construction spending in recent years is not expected to return to prior levels in the near future. Based upon our analyses, our forecast for the dollar volume of construction starts in New Jersey from is summarized in the following chart:

6 3 $ Millions $8,000 $6,000 $4,000 $2,000 New Jersey Construction Forecast Aggregate of Sectors $5,492 $6,394 $5,076 $5,814 $4,498 $6,280 $3,329 $3,569 $3,214 $3,358 $3,511 $3,615 $3,720 $

7 4 INTENDED USERS OF THE STUDY The intended user of the report is the client, a coalition of the general building construction industry, which includes the following organizations: Bricklayers & Allied Craftworkers Labor-Management Council of NJ Building Contractors Association of New Jersey Building Contractors Association of Atlantic County Building Contractors Association of South Jersey Drywall & Interior Systems Contractors Association Floor Covering Institute of New Jersey Ironworkers-Management Progressive Action Cooperative Trust Masonry Contractors of New Jersey NJ Laborers Employers Cooperation & Education Trust New Jersey Carpenter Contractor Trust Operating Engineers, Local No. 825 Any reliance upon this report by anyone other than the client is unintended. PURPOSE & INTENDED USE OF THE STUDY The purpose of this study is to provide a projection of how recent economic events will affect future spending and pricing levels for the following categories of construction in the State of New Jersey. Multi-Family Construction is defined as a building composed of three or more dwelling units, usually with common access, service systems, and land use. Office Construction is defined as a place in which business, clerical, or professional activities are conducted. For the purpose of this study, office includes the following subcategories: Office and Office Warehouse. Retail Construction is defined as being related to the sale of goods or commodities in small quantities directly to consumers. For the purpose of this study, retail includes the following subcategories: Automotive, Bank Branches, Food Stores, Funeral Homes, Individual Stores, Movies & Entertainment, Restaurants and Shopping Centers. Industrial Construction - Industrial is defined as property (land and/or improvements) that can be adapted for industrial use; a combination of land, improvements and machinery integrated into a functioning unit to assemble, process, and manufacture products from raw materials or fabricated parts; factories that render service, e.g., laundries, dry cleaners, storage warehouses, or those that produce natural resources, e.g., oil wells. For the purpose of this study, industrial includes the following subcategories: Industrial Laboratories, Laboratories, School Laboratories, Manufacturing, Rental Warehouses & Warehouses. Hospitality Construction (hotels & motels) - is defined as the industry consisting of a broad category of fields within the service industry that includes lodging, restaurants,

8 5 event planning, theme parks, transportation, cruise line, and additional fields within the tourism industry. The hospitality industry is a several billion dollar industry that mostly depends on the availability of leisure time and disposable income. A hospitality unit such as a restaurant, hotel, or even an amusement park consists of multiple groups such as facility maintenance, direct operations (servers, housekeepers, porters, kitchen workers, bartenders, etc.), management, marketing, and human resources. For the purpose of this study, hospitality includes the following categories: o Hotel is defined as a facility that offers lodging accommodations and a wide range of other services, e.g., restaurants, convention facilities, meeting rooms, recreational facilities, and commercial shops. Subcategories of lodging include budget, economy, luxury, mid-price, and upscale. o Motel is defined as a building or group of buildings located on or near a highway and designed to serve the needs of travelers by offering lodging and parking; may also provide other services and amenities, e.g., telephones, food and beverages, meeting and banquet rooms, recreational areas, swimming pool, shops. Healthcare Construction - is a composite category which includes the following subcategories: o Hospitals/Clinics which for the purpose of this study includes the following subcategories: Hospitals and Clinics, Imaging Centers, Medical Offices, and Outpatient Surgery Centers. o Nursing/Assisted Living which for the purpose of this study includes the following subcategories: Assisted Living Facilities, Independent Living Facilities and Nursing Homes. Miscellaneous Non-Residential Construction is defined as a composite category which includes the following construction subcategories: o o o o o Amusement which for the purpose of this study includes the following subcategories: Arenas and Convention Centers, Auditoriums, Clubs and Community Centers, Golf Courses and Country Clubs. Miscellaneous Commercial which for the purpose of this study includes the following subcategories: Broadcast Studios and Transportation Terminals. Miscellaneous Other which for the purpose of this study includes the following subcategories: Demolition and Electrical Work Facilities. Parking Garages which for the purpose of this study includes the following subcategory: Parking facilities. Religious which for the purpose of this study includes the following subcategories: Religious Auditoriums and Religious Classrooms. Government Construction is defined as a is a composite category which includes the following subcategories: o Government Space which for the purpose of this study includes the following subcategories: Governmental Offices, Courthouses, Fire Stations, Jails, Juvenile Detention Facilities, Police Stations and Prisons. o Miscellaneous Government which for the purpose of this study includes the following subcategories: Government - Miscellaneous Buildings, Park Buildings and Post Offices

9 6 Education Construction is defined as a composite category which includes the following subcategories: o Libraries/Museums which for the purpose of this study includes the following subcategories: Libraries and Museums. o Schools/Colleges which for the purpose of this study includes the following subcategories: Cafeterias, Classrooms, College, University Miscellaneous, Dormitories, Elementary & Pre- Schools, Gyms & Athletic Buildings, Junior High Schools, Senior High Schools, School Auditoriums, Special Schools and Vocational Training. Aggregate Construction is defined as being limited to the sum total of the construction sectors identified and is therefore not indicative of total construction spending. This aggregate therefore excludes the following sectors which are not analyzed in this report: o o o Civil (including roads, highways & bridges) EXCLUDED Military EXCLUDED Single-Family Residential EXCLUDED The intended use of this study is to provide guidance to the construction industry for strategic planning purposes. DATE OF THE STUDY The analyses, forecasts and opinions set forth herein have been based upon an analysis of relevant data that was available during the time period immediately preceding the effective date of this study, which is September 1, It should be understood by any intended users and readers of this report that the rate of change, which is always occurring with regard to economic, governmental, demographic, social and political dynamics; has accelerated substantially in recent years with the onset of the economic recession and its related aftershocks. As a result of this volatility, forecasts such as these are inherently less certain and therefore more useful in predicting broader measures of change rather than specific pinpoint projections. Readers of this report should therefore exercise appropriate caution in interpreting and applying the conclusions set forth herein. SCOPE OF WORK In developing this analysis we have investigated factors that are relevant to the purpose and intended use of the forecast. Specifically, the intended use of this report is to provide a projection of future spending and pricing levels for selected categories of construction in the

10 State of New Jersey for strategic planning purposes. The scope of work employed in developing this analysis included: 7 1. Identification of the purpose and intended use of the analysis. 2. Identification of relevant economic, demographic, construction and real estate market data points that are relevant the purpose and intended use of the forecast. 3. Researched national, regional, statewide and county level data from reliable sources including US Census Bureau, Comparable Sale Databases, Market Analysis Databases, the Bureau of Labor Statistics (BLS), the Bureau of Economic Analysis (BEA), NJ Dept. of Labor & Workforce Development, NJ Dept. of Health & Senior Services, Reed Construction Data LLC, CoStar Realty Information Inc., Reis Inc., Smith Travel Report, PKF Hospitality Research, Nielsen Site Reports, various national, local and regional subscribed services and records developed and data collected by our team of researchers and analysts. 4. The application of appropriate analysis techniques employed in developing our analyses. 5. A reconciliation of the data and analysis techniques employed to derive our forecast conclusions. After developing our analysis and forecast conclusions, the next step is to report our findings to the intended user. The results of this forecast analysis are reported in a Summary Report format with some additional research results and supporting documentation having been retained in our work file. Therefore, this report is not intended to be a complete stand-alone document encompassing all aspects of the study analysis but instead communicates the more important and salient facts and conclusions which formed the foundation for analyses, forecasts and conclusions set forth herein. The following persons provided assistance in developing the analyses and conclusions set forth in the report, as follows: Jessica L. Curcio provided significant professional research, analysis and report writing assistance to Jeffrey G. Otteau. Eric G. Tazelaar provided significant professional research, analysis and report writing assistance to Richard B. Reading.

11 8 PART II ECONOMIC, DEMOGRAPHIC & MARKET ANALYSIS ECONOMICS & DEMOGRAPHICS Demand for real estate is directly affected at the macro and micro levels by a wide range of key economic and demographic drivers. This section of the report will discuss the primary determinants and their relationship to real estate demand. Gross Domestic Product (GDP) - Beginning with the US economy, GDP first began to decline in Q coincident with the official start of the economic recession in December That recession, which has since become known as The Great Recession officially ended in June 2009 ranking its duration of 18 months as the longest period of modern-day economic contraction since World War II. Over the course of the recession GDP contracted in 5 out of 6 quarters with the deepest declines occurring in late 2008 and early 2009 following the collapse of the financial markets earlier in 2008.

12 9 Since the recession s end in June 2009, GDP has increased for 8 consecutive quarters. It is significant to note that the recent economic expansion was attributable in large part to $3.2 Trillion of economic stimulus enacted by Congress and orchestrated by the Federal Reserve. A part of this stimulus was allocated to a series of 3 federal homebuyer tax credit offerings, the most recent of which expired in April More recently in 2011, the pace of recovery has slowed dramatically raising fears of an economic stall or the start of a new or recession. While it s presently unclear as to how the future will unfold in this regard, the consensus opinion among economists is for the pace of economic recovery to remain weak for the foreseeable future. Therefore, prospects for a speedy recovery in the construction industry remain dim. Employment - Focusing next on job growth, total US non-farm employment declined precipitously during the recession with net job losses occurring for 25 consecutive months beginning in February 2008 until February 2010.

13 10 US Cummulative Job Losses Job Loss MIllions Aug 11 July 11 June 11 May 11 Apr 11 Mar 11 Feb 11 Jan 11 Dec 10 Nov 10 Oct 10 Sep 10 Aug 10 Jul 10 Jun 10 May 10 Apr 10 Mar 10 Feb 10 Jan 10 Dec 09 Nov 09 Oct 09 Sep 09 Aug 09 Jul 09 Jun 09 May 09 Apr 09 Mar 09 Feb 09 Jan 09 Dec 08 Nov 08 Oct 08 Sep 08 Aug 08 Jul 08 Jun 08 May 08 Apr 08 Mar 08 Feb 08 Jan Source: U.S. Dept. Labor, Bureau of Labor Statistics Over that time period and through February 2010, US economy lost 7,490,000 non-farm jobs representing a 5.4% decline. NON-FARM EMPLOYMENT Dec 2007 June 2009 Job Loss United States 137,983, ,493,000 (7,490,000) -5.4% While the US economy has realized a net gain in Non-Farm jobs since then, the pace of job creation has slowed significantly in 2011 ending with zero (0) net jobs being created in August. (a preliminary estimate subject to revision). Based upon the pace of job recovery from March 2010 to date, the US economy is on pace to recover the remaining non-farm jobs lost during the recession by February 2017 approximately 5.5 years from now. The present US unemployment rate stands at 9.1% down from its cyclical peak of 10.1% in October 2009 but higher than the 8.8% rate in March 2011.

14 11 Job Loss 700, , , , , , , , , , , , , , , ,000 1,000,000 1,100,000 1,200,000 13,000 US Non Farm Job Change Jan 2008 Present 35,000 39, ,000 55, , , , , , , , , , , , , , , , , , , ,000 72,000 83, , , ,000 29,000 59,000 49, , ,000 20,000 53, , , ,000 68, ,000 93, ,000 Source: U.S. Dept. Labor, Bureau of Labor Statistics Aug 11 July 11 June 11 May 11 Apr 11 Mar 11 Feb 11 Jan 11 Dec 10 Nov 10 Oct 10 Sep 10 Aug 10 Jul 10 Jun 10 May 10 Apr 10 Mar 10 Feb 10 Jan 10 Dec 09 Nov 09 Oct 09 Sep 09 Aug 09 Jul 09 Jun 09 May 09 Apr 09 Mar 09 Feb 09 Jan 09 Dec 08 Nov 08 Oct 08 Sep 08 Aug 08 Jul 08 Jun 08 May 08 Apr 08 Mar 08 Feb 08 Jan 08 Shifting to New Jersey, the state has long been a top economic performer due to a combination of factors including its strategic geographic location between New York City and Philadelphia, a diverse and highly educated workforce, the presence of Newark International Airport and the Port Newark-Elizabeth shipping port, and its high concentration of technology based jobs. In 2010, the US Census Bureau reported that New Jersey had a total estimated population of 8,791,894 reflecting 4.5% growth from 2000, and is the most densely populated state within the entire U.S. The state is comprised of 21 counties and 566 municipalities situated on 7, square miles of land area. New Jersey s 21 counties are divided into seven Metropolitan Statistical Areas (listed below), and is located at the center of the Northeast Megalopolis. Allentown-Bethlehem-Easton, PA-NJ Atlantic City-Hammonton, NJ New York-Northern New Jersey-Long Island, NY-NJ-PA Ocean City, NJ Philadelphia-Camden-Wilmington, PA-NJ-DE-MD Trenton-Ewing, NJ Vineland-Millville-Bridgeton, NJ The state s population density of approximately 1,168 people per square mile which is more than 10 times greater than for the US as a whole (86 / sq. mile) and exceeds that of the more crowded places around the world including India (992), Belgium (917), Japan (907), Israel (875) and the Philippines (785). Similarly, the state is highly urbanized with 94 percent of its residing in urban areas which are defined as places with a population density of 1,000 people per square mile or greater.

15 12 With regard to the state s economy, New Jersey s per-capita Gross State Income (as calculated by Gross State Product) of approximately $58,000 exceeds the US figure of approximately $48,000 and would rank the state as the 6 th highest in the world if New Jersey was a country. Evidence of the state s economic strength is seen in its consistently high ranking for household income which is a key driver for many construction sectors including housing (single & multifamily), retail and warehousing. According to the US Census Bureau New Jersey had the 3 rd highest median household income in 2010 of $64,693 which was 23% above the national income level of $50,022. As shown in the chart below, the highest ranking states of Connecticut and New Hampshire have median incomes that are only 2% higher than New Jersey. By contrast, the neighboring states of New York and Pennsylvania have significantly lower household incomes ranging between 22%-25% lower than in New Jersey. New Jersey also has the highest percentage of millionaire households in the United States. In an article published in the March 2011 edition of Forbes Magazine entitled America's 25 Richest Counties, three of NJ s counties were in the top 10 (Morris at Rank #7, Somerset at Rank #5 & Hunterdon at Rank #4). Rank Median Household Income 2-Yr Moving Average State Median income Delta to NJ 1 Connecticut 66,187 2% 2 New Hampshire 65,949 2% 3 New Jersey 64,693 0% 4 Maryland 64,636 0% 5 Virginia 60,932-6% 6 Massachusetts 60,843-6% 7 Alaska 60,410-7% 8 Washington 58,821-9% 9 Colorado 58,648-9% 10 Utah 58,122-10% 24 New York 50,436-22% - United States 50,022-23% 27 Pennsylvania 48,714-25% SOURCE: US Census Bureau The New Jersey economy suffered the loss of jobs during and immediately following the recent economic recession. Non-farm employment began to decline in February 2008 with the largest job losses occurring during the latter part of 2008 and 1 st half of 2009, consistent with national trends.

16 13 NJ Non Farm Job Change 15,000 5,000 8, ,000 18,300 6,700 5,700 3,800 13,700 4,300 12,500 1,800 8,800 2,900 5,000 15,000 25,000 Jul 11 Jun 11 May 11 Apr 11 Mar 11 Feb 11 Jan 11 Dec 10 Nov 10 Oct 10 Sep 10 Aug 10 Jul 10 Jun 10 May 10 Apr 10 Mar 10 Feb 10 Jan 10 Dec 09 Nov 09 Oct 09 Sep 09 Aug 09 Jul 09 Jun 09 May 09 Apr 09 Mar 09 Feb 09 Jan 09 Dec 08 Nov 08 Oct 08 Sep 08 Aug 08 Jul 08 Jun 08 May 08 Apr 08 Mar 08 Feb 08 Jan 08 7,100 1,700 4,100 15,700 13, ,400 20,700 15,500 15,200 18,300 22,200 15,100 11,300 11,900 12,200 4,400 12,400 10, ,200 9,700 9,100 1,200 8,900 6,700 11,300 4,600 7,200 15,800 35,000 Source: U.S. Dept. Labor, Bureau of Labor Statistics Over the course of The Great Recession, New Jersey s non-farm employment declined by 195,000 jobs through June 2009 reflecting a 4.8% loss, which was slightly less than the 5.4% national decline. NON-FARM EMPLOYMENT Dec 2007 June 2009 Job Loss United States 137,983, ,493,000 (7,490,000) -5.4% New Jersey 4,086,400 3,891,400 (195,000) -4.8% Those statistics only tell a part of the story however as they don t account for New Jersey s subpar job growth in the years both before and after The Great Recession. By expanding the above chart to reflect these additional time periods we find that non-farm job growth in New Jersey during the 7 years preceding the recession increased by only 1.6% compared to a 4.1% at the national level, equivalent to 38% of the national pace. Further, non-farm employment growth since the recession s end in June 2009 has reflected an additional loss of 0.5% compared to a 0.5% increase for the US overall. As a result, New Jersey s non-farm employment now stands 5.2% below where it was at the start of the recession while the US is down by 4.9%. In combination, these trends provide a clear indication that New Jersey s employment situation is, and has been, weaker than the US performance for more than a decade. As a result, it is likely that the recovery of the construction market in the state will progress at a slower pace than in other places.

17 14 NON-FARM EMPLOYMENT Change Change Change Change Dec 2000 Dec 2007 (pre-recession) June 2009 (recession) July 2011 (post-recession) (12/2007 to date) United States 132,485, ,983,000 5,498, % 130,493,000 (7,490,000) -5.4% 131,190, , % (6,793,000) -4.9% New Jersey 4,023,500 4,086,400 62, % 3,891,400 (195,000) -4.8% 3,872,900 (18,500) -0.5% (213,500) -5.2% Based upon the recent pace of job recovery in New Jersey, which also began in March 2010, the NJ economy is on pace to recover the remaining jobs lost during the recession by October approximately 10 years, nearly twice as long as for the US economy. An even closer look at employment gains shows that the majority of that job creation was concentrated in government employment. As shown in the chart below, private sector jobs over that time period increased by only 7,700 representing a meager 0.2% gain over the entire 7 year period and equating to 0.03% (three hundredths of a percent) annually. During the same time period however, public sector (government) employment increased by 55,200 jobs or 9.3% and therefore accounted for 88% of all job growth in the state. NJ Nonfarm Jobs Dec 2000 Dec 2007 Change Private Sector 3,429,400 3,437,100 7, % Government 594, ,300 55, % Total 4,023,500 4,086,400 62, % Given the current fiscal challenges facing all levels of government, and considering that 9 out of 10 jobs created in the state during the pre-recession years of were in the public sector, it is clear that future job growth in the state will need to come from the private sector. The chart below shows the beginnings of private sector job growth in New Jersey. This chart analyzes comparative trends in both the public (government) and private sectors since the start of The Great Recession in December As shown below, job losses during that recessionary period were concentrated entirely in the private sector.

18 15 NJ Monthly Job Change 20,000 10, ,000 20,000 30,000 6, , ,200 2,800 2, , , ,700 9,700 12,900 5,600 9,400 9,900 11,900 14,800 21,300 18,100 20,400 15,800 20,700 20,600 1,300 12,800 2,000 13, ,300 6, ,400 2, ,600 2,700 7,700 7,400 6,300 11,400 4,700 6,500 6,800 9,100 1,900 4,500 11,000 2,000 1,300 2,200 5,900 12,400 1,300 2,400 2,100 1,800 4,400 5,000 9, ,500 3, ,700 2,800 6,400 40,000 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Government Private Sector SOURCE: U.S. Dept of Labor Statistics More recently however, private sector job creation has improved suggesting that some measure of economic stabilization is occurring in the state. Over the past 6 months, private sector job creation in the state has occurred at a pace equivalent to 150% the national pace (on a prorated basis). As shown in the following chart, private sector employment increased in New Jersey for 6 consecutive months, and 10 of the last 12 months (through July 2011). SOURCE: U.S. Dept of Labor Statistics

19 16 Based upon the pace of private-sector job recovery in New Jersey from March 2010 through July 2011, the NJ economy is on pace to recover the remaining private sector jobs lost during the recession by February 2016, approximately 5 years sooner than for non-farm jobs in the state. Despite these gains however, private sector employment in the state is still down by 182,900 jobs or 5.3% from the start of the recession in December Over that same period, government employment is down by 30,600 reflecting a 4.7% decline. NJ Nonfarm Jobs Dec 2007 July 2011 Change Private Sector 3,437,100 3,254,200 (182,900) -5.3% Government 649, ,700 (30,600) -4.7% Total 4,086,400 3,872,900 (213,500) -5.2% Shifting to unemployment indicators, New Jersey s 9.4% rate is the highest of the tri-state region and also exceeds the national rate. 10.0% 9.5% 9.0% 9.4% Unemployment Rate 9.1% 8.5% 8.0% 7.5% 8.0% 8.2% 7.0% New Jersey New York Pennsylvania US SOURCE: U.S. Dept of Labor Statistics

20 17 The preceding analyses demonstrate long term challenges facing New Jersey relating to job retention and attraction, which are reinforced by the factors: NJ Business has the 3 rd highest business taxes in the US (following #1 New York and #2 California) as reported by Tax Foundation NJ has the highest real estate taxes in the US NJ has highest per-capita taxes and 4 th highest median home prices (following Hawaii, California, and District of Columbia) and 5 th highest monthly housing costs (measured as a percentage of income). These costs pass through into the need to pay higher salaries in the state which can compromise employer competitiveness. Another benchmark for economic conditions is the filing rate for initial unemployment claims which had generally trended lower over the past 2 years. Recently however, claims filings have been on par with 2009 providing further evidence that the pace of economic recovery has slowed. 30,000 Weekly Initial Unemployment Claims New Jersey 25,000 20,000 15, ,000 5, Week # SOURCE: U.S. Dept of Labor Statistics, Office of Unemployment Insurance, Employment & Training Administration Recent rankings of state competitiveness rank New Jersey in the bottom half of all states: According to a Tenth Annual Competitiveness Report by the Beacon Hill Institute, which purports to measure whether a state s ability to ensure and sustain a high level of per capita income and continued growth, New Jersey ranked 36 th out of 50 states. According to a 2010 survey by Chief Executive Magazine, CEO s ranked New Jersey s business environment as 47 th out of 50 states, making it 4 th lowest ranking in the nation.

21 18 An analysis published by Site Selection Magazine in 2011 ranked New Jersey as the weakest in the tri-state area in terms of the construction or expansion of corporate employment facilities. New Corporate Facilities & Expansions Total 4 State Share 4 State Share US Average (per state) 92 n/a 268 n/a Top State (TX) 424 n/a 1,295 n/a Pennsylvania % % New York % % New Jersey 23 4% % Delaware 8 1% 14 1% Source: Conway Data Inc for Site Selection Magazine Household Income - The combined effects of the recent economic recession coupled with the more systemic problems discussed above have a direct pass-through effect into both personal income and construction demand. As discussed previously, New Jersey has consistently ranked near the top of all states in terms of household income which is a key driver for many construction sectors including housing (single & multi-family), retail and warehousing. However, the erosion of the state s private sector job base during the period from coupled with the recent economic recession has resulted in an erosion of household income at the 3 rd fastest pace in the US. During the 2 year period from , New Jersey had the highest household income in the US which has currently slipped to the #3 position. As shown below, household income declined by 10.4% from to , which is 2.8 times the national decline of 3.7%. By comparison, household income declined at a slower pace in the neighboring states of Pennsylvania (-6.4%) and New York (-3.8%). The 10.4% decline in New Jersey ranks as the 3 rd largest in the US following Georgia (#1) and Hawaii (#2).

22 19 Rank Median Household Income Decline Based Upon 2-Yr Moving Average State Median income Median income Change 1 Georgia 44,082 52, % 2 Hawaii 57,538 65, % 3 New Jersey 64,693 72, % 4 Michigan 46,597 51, % 5 Minnesota 54,785 60, % 6 Tennessee 39,936 44, % 7 Rhode Island 52,200 56, % 8 Arizona 46,887 50, % 9 Florida 45,314 48, % 10 Arkansas 37,856 40, % 11 Pennsylvania 48,714 52, % 24 New York 50,436 52, % United States 50,022 51, % Note: Income in 2010 CPI-U-RS adjusted dollars SOURCE: U.S. Census Bureau It is noted that nearly all of the decline in New Jersey occurred between 2005/2006 and 2007/2008 over which time period median household income declined by 10.1%, suggesting that some measure of income stabilization occurred in 2009 and Consumer Confidence - As discussed previously, economic conditions are directly relevant to projecting future real estate demand and construction activity. In this regard, a weaker economy results in lower levels of construction activity, and vice versa. The faster pace of economic recovery in 2010, both in terms of GDP and job creation, had the effect of improving consumer confidence heading into the 1 st half of Recently however, that confidence has begun to erode due to the ripple effects of the slowing pace of economic recovery. Still, consumer confidence through June 2011 was at the highest level of the past 4 years, while significantly lower than the time period from It is likely however those lower consumer confidence readings will emerge due to the recent financial turmoil following the raising of the Federal debt ceiling and emerging information about the depth of the economic crisis in Europe.

23 20 SOURCE: NJ Dept. of Labor & Workforce Development Domestic Outmigration - Another noteworthy trend for New Jersey is that outmigration has been occurring at an elevated pace in recent years. Net Domestic Migration represents the net flow of residents moving into the state from another state versus those moving out of New Jersey to another state. New Jersey now ranks among the highest in the US in this regard due in part to older age residents relocating to other states offering lower housing costs and a lower overall cost of living. Following is a recap of New Jersey s recent Net Domestic Migration as reported by the US Census Bureau: , , , , , , , ,690 NOTE 1: The decline in domestic outmigration in 2009 was part of a nationwide trend whereby the economic effects of the recession resulted in diminished household mobility. Looking ahead, it is expected that New Jersey s outmigration will accelerate as the economic recovery progresses due to structural drivers which include high housing costs, high cost of living, high tax rates and erosion of household income... NOTE 2: 2010 Census data not yet released

24 21 These trends have resulted in a cumulative loss of 388,623 residents over the 8 year period of Going back to 2000, the cumulative loss was 459,803, ranking New Jersey as 4 th worst in the US. While net loss due to domestic outmigration has been recently declining, this is likely due to reduced mobility in a weakened economy rather than any improvement in the state s high cost of living. Another study conducted by United Van Lines ranked New Jersey as being the state with highest percentage of outbound shipments followed by Michigan (#2) and Missouri (#3). Also noteworthy in this regard is a 2007 study published by Monmouth University which found that (50%) of all New Jersey residents want to leave the state and live somewhere else United Van Lines Migration Study These domestic outmigration trends are anticipated to adversely affect future demand for housing, retail, warehousing and governmental construction. Fewer Households With Children Living At Home & Declining School Enrollment - Since peaking in the 1980 s, the percentage of New Jersey households with children living at home has declined to 35% with future declines likely over the next decade. This trend, which is based in the composition of New Jersey s demographic cohorts, is anticipated to drive future housing demand increasingly toward smaller homes including multi-family housing in more urban

25 22 locations. The table below shows that 65% of households within the state of New Jersey have no children under the age of 18 living at home. State of NJ % 2011 Est. Households by Presence of People 3,220,564 Households with 1 or more People under Age 18: 1,138, Married-Couple Family 796, Other Family, Male Householder 75, Other Family, Female Householder 258, Nonfamily, Male Householder 5, Nonfamily, Female Householder 1, Households no People under Age 18: 2,082, Married-Couple Family 862, Other Family, Male Householder 73, Other Family, Female Householder 156, Nonfamily, Male Householder 438, Nonfamily, Female Householder 551,262 Source: The Nielsen Company These trends have already affected school enrollments in New Jersey which after decades of increasing have recently begun to decline. According to data published by the New Jersey Department of Education, statewide public school enrollment declined from a peak of 1,394,779 for the school year to 1,349,092 for the school year. This reflects a decline of 48,687 (-3.3%) students statewide. Given the trend toward fewer households with children living at home identified above, this pattern of declining school enrollment is likely to expand in the future. Declining Homeownership & Rising Rentership Consistent with national trends, New Jersey residents found it increasingly difficult to find affordable housing choices within their financial means. This situation is exacerbated due to the state having the highest per capita taxation and 3 rd highest home prices in the US. Considering these factors together with the state s 3 rd largest decline in household income over the past 4 years and the large rate of domestic outmigration provide evidence that New Jersey s present range of housing alternatives do not meet the needs of its residents. The ramifications of these trends, coupled with elevated mortgage delinquency and foreclosure rates among existing homeowners have increased rental demand in recent years due to the inverse relationship between rental and purchase demand as shown below.

26 23 SOURCE: U.S. Census Bureau The inverse of this trend is that renter occupancy in New Jersey has been rising in recent years and reached its highest point in Q3 of This implies long-term increases in rental demand in the state in future years. SOURCE: U.S. Census Bureau

27 24 Given the slow pace of job creation, high rate of mortgage delinquency & foreclosure, tight lending standards, declining household income and high home prices in the state, rentership is anticipated to account for an increasing share of housing occupancy in future years. Increasing Urban & Declining Rural Demand - A developing trend in New Jersey is an increasing preference among home buyers toward locations that offer closer proximity to employment centers and transportation corridors. This trend is evident across a range of demographic and real estate market indicators. One of the reasons for this shift is the previously discussed trend toward households without children living at home, which presently account for 65% of all households in the state. This is because shrinking household size translates into less demand for larger house sizes which become less expensive in exurban/rural submarket areas. Another reason for this shift away from rural areas is the increased cost of gasoline due to elevated oil prices which makes commuting from far removed areas expensive. As a result, the drive-till-you-qualify approach to home buying is no longer viable because the savings in housing expense associated with rural areas is offset by the increased cost of daily commuting to work each day. Another factor influencing this trend is the emergence of a demographic cohort known as Generation-Y (Gen-Y). This cohort, which is also referred to as the Millennial or Echo-Boomer generation, includes those born between 1977 and Gen-Y consists of approximately 77- Million people in the US and is of equal size to the Baby-Boom generation. The leading edge of Gen-Y is currently turning age 33 at a rate of 11,000 per day across the US and is therefore a powerful demographic group which will increasingly dominate the economy as their maturation continues. Studies of Gen-Y have shown a high interest in living in downtown lifestyle locations offering easy access to both mass transportation and retail services situated within walking distance. The strongest indication of these trends is found in urban, semi-urban and inner-ring suburban communities that are situated within close proximity to employment centers and transportation facilities including rail, bus and convenient highway access. An additional component for more urban-centric housing demand comes from older age emptynest households interested in the lifestyle amenities and/or the lower home prices associated with higher density multi-family housing. A 2008 survey of homebuyers conducted by Coldwell Banker Real Estate found that 80% of prospective home buyers indicated a preference for an urban location, 75% want the ability to walk to work from their homes, and 55% indicated proximity to public transportation to be a high priority in selecting a home to purchase. While

28 25 this cohort tends to prefer inner-ring suburbs to more urban downtown locations, they still account for reduced housing demand in outlying rural locations. Still another factor in the urbanization of housing demand is the increased importance of employment opportunities in Manhattan to New Jersey households. Different from the employment situation in New Jersey, New York City s economic downturn resulting from the recession began later, declined less, and began recovery sooner. Also, the pace of job recovery in New York City is progressing at a faster pace than for New Jersey and the US overall and is on pace to recover all of the jobs lost during the recession ahead of schedule. Evidence of this shift can be found in the real estate market in a variety of indicators, most notable of which is the rising share of building permits issued in towns with rail stations. According to research by New Jersey Future, the share of New Jersey residential building permits issued in towns with a rail station increased from 24% in the decade of the 1990 s to 43% in the combined years of Source: New Jersey Future Still more evidence of this trend can be found in an analysis of home prices prepared by Otteau Valuation Group (OVG) which found that home price increases in towns situated along the Mid- Town Direct train line, which offers express service to New York s Pennsylvania Station, outpaced the rest of the state. This same analysis found that home prices in Emerging Markets, which are defined as towns with an abundance of affordably priced small-lot homes situated within walking distance of a downtown business district served by a rail station, and which have not yet experienced significant redevelopment activity, also exceeded the state-wide trend. It is

29 26 noted however that the price premium in Emerging markets has not translated to towns on the Riverline in the southern portion of the state NJ Median Home Prices Market Sector Midtown Direct % Change 6% Emerging Markets 2% Statewide 1% Suburban North NJ 2% Riverline 5% Suburban South NJ 6% Urban 6% SOURCE: Otteau Valuation Group, Inc. Further evidence of this trend comes from the county population estimates from the Census Bureau for 2009 which indicate a marked change from past patterns as summarized in the following analysis by New Jersey Future (New Jersey Future Facts Blog; April 28, 2010; Tim Evans): Pike and Monroe counties, in the Poconos, used to be the two fastest growing counties in the entire northeastern United States, but they have tailed off in the latter half of the 2000s. Monroe County had already been overtaken by several New Jersey counties (and by Northampton County, Pa., in the Lehigh Valley) a few years ago and now Pike s annual growth has come back down to earth as well. For , two New Jersey counties (Somerset and, surprisingly, Hudson) actually had higher growth rates than Pike. As a more concrete illustration, looking at all 21 New Jersey counties plus the four eastern Pennsylvania counties that border northern and central New Jersey, the top five fastest growing counties for were: Pike (Pa.), Monroe (Pa.), Cumberland (N.J.), Northampton (Pa.) and Gloucester (N.J.). But for , the top five were much less dominated by Pennsylvania: Somerset (N.J.), Hudson (N.J.), Pike (Pa.), Union (N.J.) and Ocean (N.J.). Two additional New Jersey counties Passaic and Middlesex outpaced the next fastest-growing Pennsylvania county, Northampton. And three more Cumberland, Gloucester and Bergen grew faster than Monroe. All of this is a dramatic change from what has been happening since For the single year , the previous year s fastest-growing county, Cumberland, has fallen to seventh place, and Gloucester, which had taken top honors for several years earlier in the decade, is in eighth. Instead, the top spot has been reclaimed by Somerset, which had been the fastest-growing county in the 1990s. More remarkable are most of the other counties that grew faster than Cumberland and Gloucester over the last year Hudson, Union, Ocean, Passaic and Middlesex. Of these, only Ocean has habitually been among New Jersey s fastest-growing in the 2000s; the other four have not been among the state s population growth leaders in many years.

30 27 The turnaround is especially notable for Hudson County, which had been losing population earlier in the decade. In fact, Hudson had been losing population every decade since 1930 before staging something of a recovery in the 1990s. After growing by 10 percent in the 1990s, its population began slipping again, decreasing by 1.5 percent between 2000 and 2004 and declining each year up to 2007 (in fact, its population is still lower in 2009 than it was in 2000). But it posted a 0.46 percent gain for and an even bigger 0.98 percent gain for Remarkably, Hudson actually grew faster over the last year than any of the eastern Pennsylvania counties that had previously eclipsed all of New Jersey's counties in terms of growth rates. Only three New Jersey counties posted population losses for : Sussex, Warren and Cape May. Cape May has lost people every year since 2000, but the two northwestern counties are not accustomed to population loss (although Sussex lost population last year, too). Sussex grew by 4.3 percent in the early part of the decade ( ), ranking it eighth among New Jersey s 21 counties, and Warren scored the third-highest growth rate for that period at 6.2 percent. Most New Jersey counties numerical growth between 2008 and 2009 was less than or equal to what they had averaged between 2000 and Only five counties experienced absolute population gains over the last year that appreciably exceeded their annual average increases early in the decade: Bergen, Passaic, Essex, Hudson and Union. Interestingly, these five counties of the northern New Jersey urban core are the state's five most built-out counties. While growth is cooling off in the rest of the state, relative to the early years of the 2000s, it is accelerating in these most urbanized counties. Numerous aspects of the new 2009 county population estimates point toward an attenuation of the expansion of New Jersey s exurban fringes both in the north, where the frontier had already crossed the Delaware River into eastern Pennsylvania, and in the south, where Philadelphia-centered growth was pushing into southern Gloucester County and even into northern Salem and Cumberland and a resurgence in the state s already-built counties, particularly in the north. A series of reports are emerging which indicate that the flow of jobs to suburban corporate campus settings may be heading back to its urban roots. The Chicago Crain s Business Journal reports that companies such as Allstate, Motorola, AT&T, GE Capital, Sara Lee and even Sears are re-considering their fringe suburban locations, generally in stand-alone campuses, and considering a move back to downtown Chicago. Such a move by Sears would be significant since it abandoned the country s tallest building for an equally huge, though horizontal, building 45 miles from the Loop over 20 years ago. These current companies follow moves into downtown Chicago by United Airlines and Navteq Corp. in the last decade. Also, UBS, the huge Swiss banking firm, is reportedly considering relocating their U.S. headquarters back to New York City from Stamford, Connecticut citing both a desire to locate nearer to its clients as well as challenges in recruiting young bankers who want to live in Manhattan or Brooklyn to work for the firm. Even downtown Detroit has seen four major corporate moves into the city in recent years including the recent corporate headquarters of the parent company of Quicken Loans. Here in New Jersey, Panasonic Corp. is relocating from Secaucus to Newark in a move

31 28 that will occupy 250,000 ft 2 and employ 1,000 people by Also, Manischewitz is moving into a renovated 200,000 ft 2 manufacturing and corporate facility in Newark. According to demographer Christopher B. Leinberger, a visiting fellow at the Brookings Institution, the reason in nearly every case? The millennial generation is demanding it. Highly-educated young workers, the life s blood of many industries, have been flocking to center cities in recent years. Trying to recruit this talent to Stamford, Conn., or Hoffman Estates, Ill. is exceedingly difficult. They are voting with their feet for a hip, high-density walkable lifestyle and a reverse commute to the burbs is not in the cards for most of them. The companies moved out to the suburbs to attract their baby boomer parents, raising their kids in suburban isolation. The millennials are doing what many generations have done in the past; they have rejected how they were raised. This once again shows that building a high quality residential base will lead to the attraction of jobs only this time it is back to the future. These trends suggest a renewed interest and growing vitality for urban, semi-urban and innerring suburban areas which will increase construction demand in these submarkets. A side effect of this dynamic is an expectation for more muted construction volume in outlying suburban and rural submarkets due to slower growth in localized real estate demand. Looking ahead, the strengths and weaknesses of the New Jersey economy will impact future prosperity and construction demand. On the positive side, the state s strategic geographic location coupled with its high gross domestic product, top-tier household income and high population density will continue to create demand for construction activity in the future. At the same time however the erosion of the state s private sector employment base coupled with its high-cost profile and sweeping demographic changes suggest a less robust future than in the past. Also to be considered in forecasting the future is the recent acceleration in private sector job growth in the state which raises hopes of a more robust economic recovery going forward. Finally, a recent ranking coauthored by the Ewing Marion Kaufman Foundation and the Information Technology and Innovation Foundation (ITIF) ranked New Jersey as the 4 th highest state in terms of its ability to thrive in a global economy.

32 29 The 2010 State New Economy Index SOURCE: Ewing Marion Kaufman Foundation and the Information Technology and Innovation Foundation (ITIF) According to that report, New Jersey s strong pharmaceutical industry, coupled with a high-tech agglomeration around Princeton, an advanced services sector in Northern New Jersey, and high levels of inward foreign direct investment help drive it to fourth place (up from sixth in 2002, and fifth in 2008). Further reason for optimism can be found in a renewed commitment by the current gubernatorial administration and both parties of the state legislature to promote economic growth and to adopt policies focuses on retaining and attracting private sector jobs in the state. There have been a string of recent announcements by existing New Jersey employers decisions to remain in the state, coupled with out-of-state employers planning to relocate into New Jersey, which have the potential to brighten New Jersey s future. FOR SALE HOUSING MARKET National Trends At the national level, existing-home sales in July declined slightly from the prior month but were higher than one year ago. On a regional basis, sales increased in the Northeast and Midwest while declining in the West and South. Total existing-home sales (closed transactions) declined by 3.5 percent in July to a seasonally adjusted annual rate of 4.67 million but were 21.0 percent higher than the 3.86 million unit pace in July 2010 which was

33 30 a cyclical low point following the expiration of the home buyer tax credits last year. Contract cancellations, due primarily to declined mortgage applications or under-appraisals, were unchanged in July. 13 percent of the members of the National Association of Realtors (NAR) reported that a contract was renegotiated to a lower sales price because of an under-appraisal. National average mortgage rates increased slightly from the previous week to 4.22% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on August 25, This follows is the three consecutive weeks of declines. According to the Mortgage Bankers Association survey for the week ending September 9, 2011, mortgage applications increased 6.3 percent for the previous week on a seasonally adjusted basis, with purchase applications rising 7.0 percent and refinance applications increasing by 6.0 percent. Refinancing accounted for 77.3 percent of all applications during the week while adjustable rate mortgages (ARM) share declined from 7.1% in prior week to 6.9% in the most recent week. The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.17 percent from 4.23 percent which is the lowest in the history of the survey, with the previous low being 4.21 percent in the week ending October 8, The interest rate for the 15-year fixed-rate mortgages decreased to 3.40 percent from 3.41 percent which is also the lowest in the history of the survey. SOURCE: Mortgage Banker s Association

34 31 New Jersey Trends - The dramatic increase in New Jersey home prices from 2000 through 2005 resulted in a disparity between income and home prices (see chart below). This trend was most pronounced in the entry-level housing price range as restrictive rezoning of land to lower development densities resulted in a disproportionate concentration of luxury priced home construction. Comparison of NJ Income vs. House Prices Year Per-Capita Income Change Median Home Value 2000 $37,734 $167, $38, % 12.0% $187, $39, % 12.0% $209, $40, % 15.0% $241, $41, % 13.0% $272, $43, % 15.1% $314, Year Change 16.0% 87.6% SOURCE: US Census Bureau & Otteau Valuation Group, Inc. These trends resulted in significant increases in the cost of homeownership with New Jersey rising to 2 nd highest in the US (as of 2006). Due to New Jersey s relatively high household income relative to the rest of the nation, a more effective measurement of housing affordability is to calculate housing affordability in terms of the ratio of monthly expense to gross income. The chart below indicates that in 2005, 45% of all New Jersey homeowners had a monthly housing expense that exceeded 30% of their gross income.

35 32 This increased to 46.1% in 2008, ranking New Jersey as 4 th highest housing costs as a percentage of income in the US (see 2008 ranking chart below). Percent of Mortgaged Owners Spending 30% or More of Household Income on Mortgage Costs Rank State Percent 1 California Nevada Florida New Jersey Hawaii Rhode Island New York Massachusetts Oregon Washington 40.6 Source: US Census Bureau Note: More recently NJ rank fell to 5th at 46.8% in 2009 As a result of these trends New Jersey residents found it increasingly difficult to find affordable housing choices within their financial means due to the state having the 1 st highest per capita taxation in combination with its high housing costs. While these trends are problematic for all sectors of housing demand, they were particularly challenging for lower income households

36 which include younger entry-level home buyers and older age households in their retirement years. 33 The resulting effect on the housing market was sharply diminished home purchase activity beginning in the 3 rd quarter of 2005 and continuing through the end of 2008 (see charts below): SOURCE: Otteau Valuation Group, Inc Further evidence of deterioration in the housing market is found in the chart below depicting the sharp rise in Unsold Inventory which increased from 30,000 homes in January 2005 to more than 70,000 homes by May of SOURCE: Otteau Valuation Group, Inc

37 34 The ensuing decline in home prices from combined with continued low mortgage interest rates had the effect of partially restoring housing affordability in the state which had been eroded during the preceding housing bubble (see chart below). SOURCE: Otteau Valuation Group, Inc Coincident with the improvement in home purchase affordability, the US Congress enacted 2 separate homebuyer tax credit programs in an attempt to boost home sales for the benefit of the overall economy. The first of these tax credits became available in 2008 which served as a catalyst to increase home purchase activity beginning in The chart below demonstrates that home purchase activity in New Jersey exceeded the same month in the prior year for 11 consecutive months through April 30, 2010, which corresponds to the contract-date expiry of the final tax credit offering.

38 35 SOURCE: Otteau Valuation Group, Inc Following that expiry, home purchase activity in the state declined for 12 consecutive months. More recently, purchase demand increased in May (+13%), June (+12%) and July (+4%) suggesting that some stabilization in housing demand is occurring. Considering that these recent gains followed 12 straight months of declining purchase activity should be good news for the housing market. However, declining strength of the increases coupled with slowing job growth, recent stock market losses, the debt ceiling crisis, the lowering of the US credit rating and the economic uncertainty in Europe all point toward weakened purchase demand in the near future. And while full recovery of the housing market is still a long way off, stabilization is a necessary first step in that direction.

39 36 60% NJ Contract Sales Performance Monthly Year on Year Delta 55% 43% 40% 29% 33% 35% Change from Piror Year 20% 0% 20% 40% Jan 09 Feb 09 Mar 09 Apr 09 8% 15% 23% 25% 0% May 09 12% 8% Jun 09 Jul 09 21% Aug 09 Sep 09 Oct 09 Nov 09 20%21% Dec 09 Jan 10 14% Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 23% 27% 27% 25% 31% 30% Nov 10 Dec 10 10% 10% Jan 11 22% Feb 11 13% Mar 11 19% Apr 11 38% 13%12% May 11 June 11 4% July 11 SOURCE: Otteau Valuation Group, Inc. Shifting to the supply side of the equation, Unsold Inventory in New Jersey has been declining for the past 2 months due primarily to the 3 straight months of sales gains. Over that period, the number of homes being offered for sale dropped by 1,350, reflecting a 2% decline. Future trends however are largely dependent on what happens next with the pace of sales and job recovery in the months ahead. MarketTRAC Monthly by OTTEAU.com NEW JERSEY INVENTORY OF UNSOLD HOMES UNSOLD INVENTORY JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 2009 Inventory 2010 Inventory 2011 Inventory SOURCE: Otteau Valuation Group, Inc.

40 37 The overall New Jersey housing market now holds 13.2 months of housing supply compared to 16.8 months at the beginning of the year. MarketTRAC Monthly by OTTEAU.com 2011 YTD January-July % change Months Supply Jan '10 Feb '10 Mar '10 Apr '10 May '10 Jun '10 Jul '10 v. v. v. v. v. v. v. Jan '11 Feb '11 Mar '11 Apr '11 May '11 Jun '11 Jul '11 COUNTY Contract Sales Unsold Inventory Market Swing Total Market <$400k $400k- $599,999 $600k- $1mil $1,000,001- $2.5mil >$2.5 mil Atlantic -24% -5% -10% % -17% -32% -48% -12% -6% 8% Bergen -7% 1% -4% % -7% -1% -35% 12% 6% 4% Burlington -8% -1% -4% % -2% -23% -37% 42% 27% 12% Camden -21% 0% -11% % -18% -34% -48% -6% 8% 0% Cape May 1% -6% 4% % 34% -4% -28% 21% 16% 1% Cumberland -15% 5% -10% n/a -45% -19% -44% -42% 54% 95% 0% Essex -8% 5% -7% % -10% -20% -31% 13% 10% 0% Gloucester -1% 2% -2% n/a -22% -1% -22% -37% 98% 41% 23% Hudson -7% -18% 6% % 4% -6% -39% 28% 13% -2% Hunterdon -8% 1% -5% % 13% -8% -34% 7% 0% 2% Mercer -13% 4% -9% % -6% -21% -42% 22% -3% 19% Middlesex -33% 5% -19% % -39% -39% -57% -7% -2% -17% Monmouth -6% 3% -5% % -6% -14% -34% 20% 23% 11% Morris -8% -3% -3% % -25% -16% -33% 12% 22% 2% Ocean -6% 2% -4% % -1% -16% -32% 21% 11% 9% Passaic -17% 13% -15% % -18% -31% -42% 0% 15% 2% Salem -24% 1% -13% n/a -39% 18% -27% -57% 0% 10% -25% Somerset -14% 4% -9% % -25% -13% -40% -6% 13% 5% Sussex -17% -2% -8% % -32% -23% -40% 4% 22% -4% Union -7% 7% -7% % -21% -15% -20% 18% 16% 0% Warren -14% 0% -7% % -20% -23% -41% 4% 12% 11% Statewide -12% 1% -7% % -13% -19% -38% 13% 12% 4% KEY: positive percentages for Contract-Sales and Unsold-Inventory indicate an increase in the indicator, while negative percentages indicate a decrease. Market Swing indicates the combined market change with positive percentages reflecting a strengthening and negative percentages reflecting a weakening of the respective market. Contract Sales Contract Sales NOTE above projections of Months Supply of Unsold Inventory are non-seasonally adjusted Contract Sales Contract Sales Contract Sales Contract Sales Contract Sales Copyright: 2011 Otteau Valuation Group, Inc. The graphic below shows that the employment centers of Bergen, Essex, Morris, Somerset and Union counties carry the lowest levels of unsold housing inventory (in relation to sales pace). The other areas of the state however carry inventory levels that exceed one year of sales pace. This pattern, which is consistent with the earlier discussion of housing demand concentrating in employment centers and transportation corridors, is likely to continue in the future. As a result, the areas shaded in red in the graphic below are likely to see less robust construction demand as the economic recovery progresses. SOURCE: Otteau Valuation Group, Inc.

41 38 Turning to New Jersey home prices, the sequential change in home prices (measured by the 4 Quarter Price Change) turned positive in 2010 for the first time since the housing slide began. More recently however, home prices in New Jersey began to once again decline. The 2.9% decline in Q equates to a monthly rate of 0.7%, less than the half what occurred during the 1st quarter of the year. Seasonal declines in purchase demand during the 2nd half of the year together with a slowing economic recovery and the recent lifting of the foreclosure moratoriums suggest however that downward price pressures will continue into % New Jersey Median Home Prices Quarterly Price Change 0.5% 0.4% 0.2% 0.3% 0.3% 0.0% 0.5% 2009 Q Q Q Q Q Q Q Q Q Q2 1.0% 0.7% 1.5% 2.0% 1.9% 1.5% 1.7% 2.5% 3.0% 2.6% 3.5% 3.0% SOURCE: Otteau Valuation Group, Inc. Foreclosure filings in New Jersey remain at artificially low levels due to the effect of the foreclosure moratorium, with July filings 83% below the year-ago level. In July, New Jersey had the 11 th lowest rate of foreclosure fillings in the nation with a 0.04% of all homeowner households (unchanged from last month), compared to 0.17% nationally. The recent lifting of that moratorium for Bank of America, Citibank, JPMorgan Chase, Wells Fargo and OneWest Bank (formerly failed IndyMac Federal Bank) means that foreclosure actions should increase significantly during the 2 nd half of the year. Nationally, foreclosure filings also saw a slight decline of 6% in July. Nevada, California, and Arizona continue to have the highest foreclosure rates running 9 to 22 times greater than New Jersey.

42 NJ Foreclosure Filings Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec SOURCE: RealtyTRAC & Otteau Valuation Group, Inc. A deeper analysis of foreclosure filings, in New Jersey and nationwide, shows a correlation between areas with lower household income being experiencing higher foreclosure rates. The chart below shows that the highest rates of foreclosure filing, which are shaded in red, are occurring in the states more urban and exurban-rural submarkets. Conversely, the rate of foreclosure is lowest in the state s more primary suburban markets associated with college educated white collar employment. SOURCE: RealtyTRAC & Otteau Valuation Group, Inc.

43 40 This pattern is consistent with an analysis created from BLS data which shows that unemployment is least among college educated individuals. Conversely, those without a high school diploma have an unemployment rate that is more than triple that of college graduates. SOURCE: U.S. Dept of Labor Statistics MULTI-FAMILY RENTAL HOUSING While the recovery in the multi-family apartment rental market that began in 2010 is continuing, the pace of that recovery appears to be slowing. On a national basis, vacancies declined in from 6.2% in the 1 st quarter of 2011 to 5.9% in Q2, or about 30 basis points (bp). This improvement is attributable to positive net absorption of approximately 41,000 apartments compared to a vacancy decline of 40 basis points and net absorption of 45,000 units in Q1. This slowdown, although only slight in magnitude, is attributable to the weakening pace of economic recovery as previously discussed in terms of slowing GDP growth and hiring. That slower pace of hiring translates directly into diminished household formation which in turn passes through to apartment demand. Should the economic slowdown continue, or revert to recession, rental apartment dynamics could weaken.

44 41 SOURCE: REIS In New Jersey, vacancy rates continued to decline in Q2 to an average of 4.2%, or 200 bp less than the national rate. The 4.2% vacancy reflects a decline of 110 bp since peaking at 5.3% in Q (see chart below). 7.0% NJ Multi Family Vacancy 5.0% 3.8% 3.8% 3.9% 4.3% 5.0% 5.0% 5.1% 5.2% 5.3% 5.3% 4.9% 4.8% 4.5% 4.2% 3.0% SOURCE: REIS

45 42 At the regional level, the central part of the state has the lowest vacancy rate of 3.5%. This compares to 4.4% in northern New Jersey and 5.7% in the Philadelphia/Southern New Jersey submarket. By comparison, the lowest vacancy rate in the US is New York 3.3%. Multi-Family Rental Market At-A-Glance Market Asking Rent Vacancy Rate Rent Change Vacancy Change (Basis Pts.) Central NJ $1, % 0.3% 20 Northern NJ $1, % 0.5% 30 Southern NJ $1, % 0.5% 30 US $1, % 0.6% 30 SOURCE: REIS 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Apartment Vacancy Rates NJ South / Phila MSA NJ North NJ Central NYC SOURCE: REIS Asking rents In New Jersey apartments have continued to increase for the past 5 quarters on the strength of rising net positive absorption. Rental prices increased by 0.4% in Q2, the same as for 2 prior quarters.

46 43 NJ Multi Family Asking Rent Change Percentage SOURCE: REIS In addition to rising demand and increasing rental pricing, another factor that favors increased construction activity in this sector is that the existing stock of apartments in the state are relatively old with an average year-built of This indicates that newly constructed buildings will be able to achieve rental price premiums and higher occupancy levels which are likely to induce future construction activity. Year Built Percent Before % % % % After % All 100% Avg Year Built 1975 SOURCE: REIS These strong market dynamics for the multi-family apartment sector coupled with the economic and demographic factors previously discussed, rising foreclosure rates and tightened mortgage lending standards suggest a sharp increase in construction of multi-family rental apartments.

47 44 OFFICE MARKET ANALYSIS Demand for office space is directly linked to job creation. As employment declines or stagnates demand for office space is also affected. Conversely, the economic feasibility of constructing new office space is largely dependent on significant long term job creation. At the national level, net absorption of office space in the Q was positive for the 3 rd consecutive quarter. The significance of this trend is easily understood against the background of 11 consecutive quarters of negative absorption prior to the last 3. However, Q2 net absorption of 3.9 million ft 2 was less than the 5.5 million ft 2 in Q1, suggesting a slowdown coincident with the slower pace of recovery in the overall economy. Despite the positive absorption the national vacancy rate was unchanged in Q2 at 17.5%. SOURCE: REIS Both asking and effective rents increased for the 3 rd consecutive quarter rising in Q2 by 0.3 and 0.4 percent respectively. Here too however, the rate of increase slowed in Q2 compared to the prior period.

48 45 SOURCE: REIS Focusing on trends in the New Jersey office market, vacancy rates have continued to drift higher across the state as the slow pace of economic recovery passes through into weak demand for office space. Although vacancy in the state is slightly lower than the US rate, that it is still rising confirms that stabilization has not yet occurred. 15.0% 14.0% 13.0% 12.9% 13.1% 12.6% 12.6% 12.4% NJ Office Vacancy 13.5% 13.5% 14.4% 14.3% 14.2% 14.1% 14.1% 13.9% 13.9%13.9% 12.0% SOURCE: CoStar Asking rents for NJ Office asking rents have seen declines over the past two quarters after a slight increase at the beginning of this year.

49 46 $25.50 $25.00 $24.50 $24.00 $23.50 $23.00 $22.50 $24.91 $24.73 $24.72 $24.49 NJ Office Asking Rents $24.10 $23.91 $23.65 $23.32 $23.19 $22.91 $22.75$22.75 $22.92 $22.53 $22.45 $22.00 SOURCE: CoStar Also to be considered in this equation is that the loss of jobs during and immediately following the recent economic recession has effectively reduced short term demand for office space. Given the earlier straight-line projections for job recovery in the US in 2017, and for New Jersey in 2021, aggregate demand for office space will be limited in the near term. To illustrate the long-term structural weakness in the New Jersey office market, the chart below shows a sharp rise in vacancy beginning in 2002 which was 7 years before the onset of the economic recession in December The timing of this rising vacancy also coincides with the economic expansion that occurred following March 2001 November 2001, and therefore occurred during a growth phase in the US economy. This weakening of office demand during an economic expansion is attributable to the previously discussed stagnation in private-sector job creation in New Jersey economy. Also noteworthy in the chart below is that the state presently carries more than 55 Million ft 2 of vacant space and that net absorption in 2011 has been a negative 1.2 Million. Therefore, aggregate demand for office construction will be virtually non-existent for the foreseeable future. Despite this structural weakness however, localized market conditions vary from place to place which may create localized spot-demand for office construction going forward. Also, the previously discussed evidence of employers opting to move from suburban markets to urban centers is also likely to generate demand for construction of office buildings on a localized level. For the most part however, these localized sources of construction demand will largely occur at the expense of existing markets and have the effect of lessening demand in many existing markets.

50 47 NJ OFFICE MARKET SOURCE: CoStar RETAIL MARKET ANALYSIS Similar to office market, demand for retail space is directly linked to employment trends which create the necessary income for consumer spending. Therefore, as employment declines, stagnates or increases, demand for retail space is similarly affected. For this reason, US retail sales have increased since the end of the recent economic recession and commencement of net positive job creation in March As shown in the chart below, retail sales have increased on a year-on-year basis since the 1 st half of In the most recent month of August, U.S. comparable chain store sales increased by 4.8% (year-on-year) as measured by the International Council of Shopping Centers (ICSC) survey of 27 major retail chain stores.

51 48 SOURCE: ICSC A closer look at the above chart however shows the same pattern of slowing growth as previously identified for national GDP, non-farm job creation, apartment rental absorption and office demand. This reinforces the direct linkage between employment, real estate demand and construction demand discussed throughout this report. Looking at national retail market dynamics, the weakening pace of economic recovery caused the national vacancy rate to increase by 10 bp in Q to 11.0% after holding at 10.9% for four consecutive quarters. Net absorption also turned negative in the 2 nd quarter for the first time in a year. Also noteworthy is that new construction completions in Q2 were the lowest in more than a decade suggesting that the rise in vacancy would have been greater if not for the weak completion rate. Rental pricing has been generally declining since the economic recession deepened following the collapse of Lehman Brothers in the 3 rd quarter of Rents held stable in Q2 however, both in terms of asking and effective rents. However, tenants continue to hold the power in price negotiations due to weak demand which is preventing rental price increases from taking hold.

52 49 SOURCE: REIS In the New Jersey retail market asking rents have been generally declining since peaking in Q concurrent with the deepening job losses and GDP contraction at the worst point of the recent economic recession. Once again, it is significant to note that the decline in rental pricing in Q2 follows a brief rise in the prior quarter. Consistent with trend indicators throughout this report, the slowing pace of economic recovery is having a direct effect on a wide range of real estate sectors. $20.50 $20.00 $19.50 $19.00 $18.50 $19.59 $19.61 $19.42 $20.05 $19.88 NJ Retail Asking Rents $19.74 $19.55 $19.16 $18.89 $18.83 $18.54$18.56 $18.53 $18.35 $18.25 $18.00 SOURCE: CoStar

53 50 Vacancy levels in the New Jersey retail market remain elevated reaching the highest point since the start of the recession in Q at 6.9%. While vacancies had declined slightly in 2010 consistent with last year s more robust pace of job creation, they have reversed course recently which suggests long term challenges for this commercial real estate sector. 7.0% NJ Retail Vacancy 6.8% 6.9% 6.8% 6.6% 6.6% 6.5% 6.6% 6.8% 6.8% 6.7% 6.7% 6.7% 6.7% 6.4% 6.2% 6.2% 6.2% 6.0% 6.0% 6.0% 5.8% SOURCE: CoStar A longer term analysis of the New Jersey retail market shows that the sharp rise in vacancy began in before the start of the economic recession in December This also suggests a more structural oversupply of retail space due largely to the aggressive pace of new construction prior to the recession. This suggests that a recovery in the pace of retail construction will be delayed until this structural oversupply is absorbed by rising demand.

54 51 NJ RETAIL MARKET SOURCE: CoStar In addition to these issues, a range of demographic trends suggest that future long-term demand for retail space will be muted, including: Baby-Boomers began turning age 65 in January 2011 at a national pace of 10,000 daily which suggests a significant reduction in spending from this critical demographic group as they become more focused on retirement planning. Recent studies have indicated that middle-class baby-boomers lost nearly half of their personal wealth and that 60% of these households have underfunded retirement plans. This too will likely contribute toward reduced retail spending by baby-boomers in the future. If the trend toward fewer households with children under the age of 18 living at home continues it will also cause a reduction in average household. As a result, less expenditure for child related goods such as clothing and back-to-school supplies would ensue. The previously discussed demographic indicators which point toward more urban-centric housing demand would create new construction demand in more urbanized locations while reducing demand in exurban rural areas.

55 52 According to the US Dept. of Commerce, E-commerce sales increased 17.5% in Q to $46-Billion, up 17.5% over a 1-year period. This trend will subtract from retail sales at physical brick & mortar stores in retail shopping centers. Reduced access to consumer credit in the form of credit card spending limits and cashout refinancing of mortgage debt coupled with constrained personal income will reduce consumer spending power in the future. Increased personal savings rates that have developed over the last few years indicate that households are spending less and saving more. Overbuilding of the commercial retail real estate prior to the recent economic recession resulted in a dramatic increase in the supply of retail space in many submarkets. Emerging discussions about the need to reduce government employment which reduces net job growth in future years and would have an adverse effect on consumer spending. INDUSTRIAL MARKET ANALYSIS Demand for industrial space typically moves in tandem with the economy but also has a global component attributable to export activity. The US industrial market has strengthened over the past year due primarily to the combined influence of rising retail sales, restocking of manufacturer s inventories and foreign trade which has benefited from the weak dollar. Also helpful in stabilizing the industrial market was governmental fiscal stimulus for the Midwest region which served to stabilize the area. The overall vacancy rate for the U.S. Industrial market declined for the 4 th consecutive quarter to 9.8% in the 2 nd Quarter of 2011By subtype, vacancy for Flex buildings stood at 12.8% while Warehouses recorded 9.4%. The drop was primarily attributable to net positive absorption of 33 Million ft 2 during the quarter marking the 3 rd consecutive quarterly period with more than 30 Million ft.

56 53 SOURCE: CoStar Despite this improvement however average asking rental pricing declined to $5.14 per ft 2 down from $5.15. By subsector, asking rents for Flex space were $9.88 per ft 2 while Warehouses were $4.59. SOURCE: CoStar Construction completions during the 2 nd quarter totaled 6.7 Million ft 2 compared to 7.2 Million ft 2 in Q1. There was an additional 37 Million ft 2 under construction at the end of the second quarter.

57 54 SOURCE: CoStar In New Jersey, annualized net absorption has been negative for the past 3 years ( ) due to space being vacated exceeding rental pace. It is encouraging however that negative absorption in 2010 (-2.7 Million ft 2 ) was significantly less than in 2009 (-14.0 Million ft 2 ) suggesting that market stabilization is occurring. Also, ytd net absorption in 2011 has been positive for the 1 st time since the start of the economic recession ,407 NJ Industrial Total Net Absorption 3, ,434 1, ,396 In Thousands of Sf ,176 2,734 3,222 2,549 3,770 5,060 5,749 2,144 1, Q Q Q Q Q Q Q Q Q Q Q Q Q Q QTD SOURCE: CoStar

58 55 As a result of the recent positive net absorption in 2011 vacancy in New Jersey industrial properties has shown modest improvement. Since peaking at 9.8% in Q1 2010, the industrial vacancy rate n New Jersey has slowly drifted downward to 8.9% reflecting a drop of 90 bp. NJ Industrial Vacancy 11.0% 9.8% 9.0% 7.0% 6.7% 7.3% 7.2% 7.7% 8.2% 8.6% 8.9% 9.2% 9.4% 9.5% 9.1% 9.2% 9.2% 8.9% 5.0% SOURCE: CoStar The improvement in absorption and vacancy has been modest however as evidenced by the continued decline in asking rental pricing. Asking rents, which averaged $5.82 per ft 2 at the start of the economic recession in Q have fallen to $4.88, reflecting a 16.2% decline. That rate of decline has been slowing recently however consistent with the above indicators of stabilization in New Jersey. $6.00 NJ Industrial Asking Rents $5.80 $5.60 $5.82 $5.76 $5.74 $5.66 $5.53 $5.47 $5.41 $5.40 $5.20 $5.00 $5.26 $5.17 $5.09 $5.09 $5.01 $4.93 $4.91 $4.88 $4.80 $4.60 SOURCE: CoStar

59 56 Further support that the New Jersey industrial market may be stabilizing comes from Marcus & Millichap Research Services which has forecasted that Northern New Jersey will have one of the highest net absorptions in SOURCE: Marcus & Millichap Research Services HOSPITALITY MARKET ANALYSIS The hotel sector is one of the more volatile in the economy and real estate market as it tends to react quickly to changes in economic conditions. While the hotel market is also tied to employment trends, the high level of corporate profits is a strong demand driver for hotels which cater to the business traveler. It is therefore likely that any pullback in demand due to the slowing pace of economic recovery will be primarily concentrated in consumer driven travel. Hotel demand in 2011 is likely to be the highest since the start of the recession in In July, hotel demand increased to 105 million room nights sold which was the largest number of rooms sold in the hotel industry during a single month, according to data from Smith Travel Research (STR). This is only the second time that monthly demand has exceeded 100 million room nights, with the other being in July 2010 which recorded 102 million. Given the recent slowdown in the pace of economic recovery a continuation of rising hotel metrics is in doubt however.

60 57 Occupancy increased to 69.9% in July, reflecting a 2.9% increase from the prior month. The Average Daily Rate (ADR) also increased 3.9% in July to (USD) while Revenue-Per- Available-Room (REVPAR) rose 6.9 percent to $72.07 (USD) SOURCE: Smith Travel Research, Inc. Limited availability for construction financing should continue to restrict new completions which will create fertile ground for hotel operators to increase ADR even if the economic slowdown continues. As a result, the hotel sector is likely to continue improving in the near term. Percent Change U.S. Hospitality Trends Supply Change (%) Demand Change (%) Occupancy Change (%) SOURCE: Smith Travel Research, Inc. & PKF Hospitality Research The luxury segment continues to report strong metrics in September with RevPAR rising 26.6% to $155.29, occupancy increasing 16.4% to 64.0%, and ADR rising 8.8% to $ HEALTHCARE MARKET ANALYSIS Although construction in the health care sector is typically recession-proof, that has not been the case this time around. While the dynamics of an aging population, technological advances and the aging hospital facilities that led to the building boom in health care from still

61 58 exist, the effect of the credit crisis coupled with uncertainty concerning the eventual impact of President Obama s landmark health care legislation have muted the industry s building boom of the prior decade. The effect has been for some projects to be put on hold as well as a move toward repairs and renovation instead of new construction. Despite these dynamics, a modest increase in construction is projected in 2011 at the national level based upon a survey by Health Facilities Management (HFM) and the American Society for Healthcare Engineering (ASHE). Still, US spending for new construction will likely remain below the high-water mark in According to estimates by Reed Construction Data/RSMeans Business Solutions, the $24.9 Billion of new US hospitals and clinics under construction in Q was down 10 percent from $27.8 billion a year earlier. However, pipeline projects planned for the future increased to $27.7 billion compared to $26 billion one year earlier due to projects that have been put on hold. Still, the $27.7 billion in planned projects is 24 percent less than the $36.3 billion in 2008 as US hospitals nationwide have allocated an average 37% of their capital budgets to construction this year. Renovation or expansion account for the majority of spending, accounting for 73 percent of construction projects at hospitals. The majority of those renovation projects have a cost of less

62 59 than $3 Million according to Reed Construction Data/RSMeans Business Solutions, accounting for approximately two-thirds. Infrastructure improvements account for a large share of projects including improvements to air handlers and ventilation systems and IT infrastructure upgrades including data center upgrades. Hospitals remain uncertain about the effect of the healthcare legislation with a projected increase of 32 million additional people seeking healthcare in This landmark legislation will bring significant opportunities and challenges to the healthcare industry in the form of bundled payments, lower reimbursement, incentive-based pay and more patients. As a result, cost savings are an industry-wide focus. The largest share of construction activity is concentrated in specialty hospitals that will service aging baby boomers and the revenues they produce including cancer treatment (21 percent), heart (18 percent) and orthopedics (12 percent). Construction of new children's hospitals is also up by 20 percent.

63 60 Hospitals continue to move in the direction of embracing sustainable green construction in search of long term operating efficiencies. Another continuing trend is to make patient rooms more like hotel rooms with the more popular features being wireless technologies for patients, individual room temperature control, larger room size, patient entertainment and educational systems and in-room family areas. Wireless technologies are also being implemented for hospital staff to facilitate electronic care processing and patient record keeping. Here in New Jersey the construction of the new University Medical Center of Princeton at Plainsboro is progressing with the facility anticipated to open in May The new hospital has an estimated cost of $447 million and is a 630,000 ft 2 facility that will include 231 singlepatient rooms set on a 171-acre health campus. The hospital will also include 10 surgical suites, full-service diagnostics, cardiac labs, radiation oncology with linear accelerators and related ancillary and support space. The hospital campus will also include medical offices, nursing and rehabilitation services, and facilities for fitness, health education, assisted living and independent living. The hospital is being constructed entirely of single-patient rooms to provide greater comfort and privacy. The construction design also provides for the HVAC system supplying the rooms and other patient areas to utilize outside air to help control the internal spread of infections. The existing hospital facility including nine individual homes along Harris Road is being purchased by Avalon Bay Communities Inc. with plans to redevelop the site into luxury rental housing. Another major hospital project in the same region is Capital Health s $530 million regional medical center being constructed at the intersection of Scotch Road and Interstate 95 in Hopewell. That facility is scheduled to open this year and comprises approximately 1 million ft 2 and 237 beds.

64 PART III IMPLICATIONS FOR CONSTRUCTION COSTS 61 COST CONTAINMENT AS A CONSTRUCTION PRICING MODEL This section of the report will analyze the change in real estate prices from 2005 to 2010 to provide a basis for quantifying the implications for construction costs. Given the numerous economic constraints and challenges at the present time, as previously detailed in this report, market pricing for completed new construction projects are subject to extraordinary constraints. As a result, the finished cost of new construction must achieve price points conducive to satisfying economic feasibility. In other words, the total cost of construction including land acquisition, construction materials, labor, management and entrepreneurial profit must equate to the finished value of the building. This essentially amounts to a top-down approach whereby construction cost is controlled by achievable market pricing for the finished product. This approach is in some ways different from past experiences whereby finished market prices were determined by cost. In that past model, which equates to a bottom-up approach, construction costs were largely passed through to the end user in the form of higher finished prices to the end user either as higher selling prices or rental prices. In that bottom-up pricing model, increases in construction costs were able to be easily passed-through to the end user. In today s challenging economic environment however that is no longer the case. Therefore, new construction buildings will need to achieve a reasonableness of finished cost or they simply won t be constructed. The construction industry is a vital component and contributor to the economy of New Jersey and, in a growing economy, responds to the need for new housing, office, retail, and other commercial and industrial facilities. Over the past 40 years, the construction activities in New Jersey have typically accounted for four to six percent of the State s total private sector employment with changes that reflect broader economic conditions. The State of New Jersey, through the New Jersey Department of Labor and Workforce Development, along with the U.S. Bureau of the Census, Manufacturing and Construction Division and the U.S. Department of Commerce, Bureau of Labor Statistics maintain records that chronicle economic trends, employment, construction, development patterns, and the interlocking relationships between economic growth and construction activities.

65 62 HISTORICAL COMPONENTS OF PRICE CHANGE Studies and models have been developed by a variety of practitioners in order to assess and measure the growth induced economic impacts, including primary and secondary impacts, associated with new development and the multiplier effects of economic expansion. Inputoutput analyses have been developed that utilize tables of coefficients to measure the ripple effects of various types of development upon other sectors of the economy. The focus of these techniques is typically structured to anticipate additional growth, directly or indirectly related to economic expansion. The consequences of declining economic conditions that result in stable or decreased levels of employment and/or population and the supply/demand factors influencing reduced development are equally important in examining the filter-down impacts upon interrelated sectors of the economy. Just as increases in economic growth resulting from employment gains can be expected to yield increased demands for housing and commercial space, diminished economic activity will exert a similar, but downward influence. The latter trend of negative growth implications is of particular importance in an extended economic downturn and restructuring that has been a persistent and ongoing concern in New Jersey and the Nation for most of the past five years. CONSTRUCTION INDUSTRY EMPLOYMENT Employment in New Jersey reflects the economic cycles of the State and Nation, and the presence and/or absence of job growth filters through the economy to the construction sector. Total private sector employment in New Jersey increased from 2,095,708 jobs in 1970, to 2,530,556 jobs in 1980, and to 3,058,500 jobs in Between 1990 and 2000, New Jersey s total private sector employment grew by 347,300 jobs to a total of 3,405,700 jobs in Statewide employment declined by 8,200 jobs between 2000 and 2005, decreasing further by 185,500 jobs in 2010:

66 63 New Jersey Total Private Sector Employment Year Total Jobs Change ,095, ,217, , ,530, , ,869, , ,058, , ,027,200-31, ,405, , ,397,500-8, ,212, ,500 The most recent declines in employment have lasted longer (two five year intervals) and have been more severe (total loss of 193,700 jobs) than the decreases observed in the prior economic cycles. The private sector employment declines experienced in New Jersey since 2005 have occurred in virtually all of the State s industrial sectors, with the greatest losses experienced in the construction and manufacturing industries. As detailed in Table III-1, declining employment in the construction and manufacturing industries accounted for over 60 percent, or 112,300 jobs of the 185,500 total jobs lost. Declining employment in the construction industry between 2005 and 2010 amounted to a decrease of 39,600 jobs, or 23.4 percent of total construction jobs, and represented one of every five jobs lost in New Jersey since During this same period, public sector employment increased slightly with an overall gain of 0.1 percent and was represented by minor losses in Federal and State jobs, offset by increases in local employment. As a result of these changes, public sector employment increased from 18.9 percent of private sector jobs in 2005 to 20.0 percent of private sector jobs in 2010.

67 64 TABLE III-1 New Jersey Private Sector Employment Private Sector Jobs by Industry (In Thousands) Change Percent of Total Jobs Percent Industry Mining Construction Manufacturing Wholesale Trade Retail Trade Transportation Publishing F.I.R.E Prof./Bus. Svcs Educ./Health Hospitality Other Total Private 3, , New Jersey Public Sector Employment Public Sector Jobs by Industry (In Thousands) Change Percent of Total Public Sector Jobs Percent Federal State Local Total Public Source: New Jersey Department of Labor and Workforce Development, Labor Market and Demographic Research, Current Employment Statistics, Non-Farm Wage and Salary Employment by Industry, Annual Averages. A review of the annual employment data available from the New Jersey Department of Labor and Workforce Development for the period from 2005 through 2010 discloses that the greatest

68 65 Statewide employment declines were concentrated in the period from 2006 through 2010, with a total loss of 211,700 jobs that was partially offset by the gain of 26,200 jobs between 2005 and Similarly, the losses in the construction industry amounted to 45,400 jobs between 2006 and 2010 and represented a 25.8 percent decrease in total construction employment. These year-by-year employment trends are further detailed in Table III-2. The U.S. Census Bureau provides detailed data, by industry sector (NAICS), regarding the number of business establishments, employees, and payrolls in the annual reports of County Business Patterns. These Census reports, through the most current year available (2009), reflect similar trends to the New Jersey Department of Labor data. The number of construction businesses (establishments) in New Jersey increased from 23,260 businesses in 2000 to 25,455 business in 2005, with a corresponding increase in construction employment from 164,099 jobs (2000) to 175,322 jobs (2005). The most recent Census reports (2009) reveal a loss of 3,666 business establishments and 31,068 construction jobs between 2005 and These employment losses were distributed throughout the construction industry, including declines in employment associated with new residential and non-residential construction, heavy construction, and in the specialty trades. Detailed construction sector information is provided in Table III-3 and summarized below: State of New Jersey Employment, Payroll, and Average Annual Wage 1 Year Established Employees ($000) Annual Wage 2000 Construction 23, ,099 $ 7,297,654 $44,471 All Industries 233,559 3,548,429 $147,082,234 $41, Construction 25, ,322 2 $ 9,240,445 $52,706 All Industries 242,128 3,594,862 $166,018,238 $46, Construction 21, ,254 $ 8,362,870 $57,973 All Industries 231,186 3,443,211 $177,070,691 $51, , 2005, U.S. Census Bureau, County Business Patterns (NAICS), New Jersey, State Totals, Total Construction Jobs differ from Table III-1 due to source methodology differences between NJDOL & U.S. Census Bureau

69 66 TABLE III-2 New Jersey Private Sector Employment 2005 through 2010 Total Private Sector Construction Change Change Percent of Total Jobs Year Jobs Number Percent Jobs Number Percent Number Change ,397, , ,423,700 26, ,900 5, ,431,200-7, ,300-2, ,401,000-30, ,500-7, ,242, , ,600-25, ,212,000-30, ,500-9, , , Source: New Jersey Department of Labor and Workforce Development, Labor Market and Demographic Research, Current Employment Statistics, Non-Farm Wage and Salary Employment by Industry, Annual Averages.

70 67 TABLE III-3 TABLE III-3 State of New Jersey Construction Employment, Payroll, and Average Annual Wage 2000, 2005, & 2009 YEAR 2000 YEAR 2005 YEAR 2009 Establishments Employees Payroll ($000) Average Annual Wage Establishments Employees Payroll ($000) Average Annual Wage Establishments Employees Payroll ($000) BUILDINGS 6,375 39,153 1,691,686 43,054 7,516 45,448 2,569,528 52,706 6,356 32,016 1,819,174 57,973 Residential 5,163 23, ,771 6,246 29,029 1,562,714 5,177 19, ,655 Single-Family 4,632 19, ,070 36,417 2,852 16, ,601 60,886 1,420 4, ,720 46,081 Multi-Family 228 1,840 69,751 37, ,114 52,176 46, ,047 63,093 60,264 Subdivision 303 1,605 69,950 43, , ,995 66, , ,176 70,674 Remodel ,873 8, ,942 37,738 3,168 8, ,666 35,010 Non-Residential 1,212 16, ,915 1,270 16,419 1,006,814 1,179 12, ,519 Commercial 1,020 13, ,624 51,664 1,219 15, ,445 60,151 1,076 11, ,631 71,506 Industrial 192 2, ,291 54, ,369 81, ,888 61,446 HEAVY CONSTRUCTION 1,010 17, ,052 54,043 1,242 17,780 1,165,212 65,535 1,055 16,947 1,371,093 80,905 Civil Engineering , , , , , ,486 Highways, Streets, & Bridges 361 5, ,001 57, , ,368 83, , ,765 94,269 Other 410 6, ,841 53, , ,029 66, , ,721 75,910 Utilities 239 4, , , , , ,607 Power & Communication 79 1,371 54,392 39, , ,794 42, , ,075 66,417 Water & Sewer 160 3, ,818 55, , ,021 60, , ,532 76,600 SPECIALTY TRADES 15, ,866 4,688,916 43,470 16, ,094 5,505,705 50,840 14,378 95,291 5,172,603 54,282 Foundation 4,768 28,283 1,102,737 4,601 27,435 1,207,686 3,544 20, ,733 Carpentry & Framing 1,684 6, ,057 35,110 1,744 7, ,782 36,726 1,309 5, ,901 38,530 Concrete 641 5, ,247 39, , ,117 52, , ,289 60,133 Glass 191 1,278 55,190 43, ,042 50,657 48, ,224 59,223 48,385 Masonry 1,005 5, ,618 34,897 1,083 5, ,863 42, , ,688 44,539 Roofing & Siding 1,057 6, ,460 39, , ,292 45, , ,938 48,353 Structural Steel 190 3, ,165 51, , ,975 46, , ,694 56,625 Equipment 6,416 49,521 2,396,027 6,788 54,044 2,845,008 6,385 48,681 2,868,632 Building Equipment 179 2, ,226 57, , ,454 66, , ,178 69,936 Electrical 2,756 23,185 1,153,855 49,767 2,880 23,584 1,239,402 52,553 2,714 20,957 1,222,408 58,329 Plumbing & HVAC 3,481 23,634 1,086,946 45,991 3,657 26,832 1,364,152 50,840 3,418 23,918 1,380,046 57,699 Finishing 2,623 15, ,204 2,803 14, ,028 2,298 11, ,248 Drywall 542 6, ,751 45, , ,254 47, , ,035 53,907 Flooring & Tiles 762 4, ,501 38, , ,295 42, , ,554 45,945 Painting 1,319 4, ,952 35,417 1,328 4, ,479 38,588 1,036 3, ,659 4,088 Other 2,068 14, ,948 2,505 15, ,983 2,151 14, ,990 Demolition 65 1,285 51,112 39, ,339 72,071 53, ,367 75,896 55,520 Excavation 815 5, ,790 43, , ,606 51, , ,793 55,579 Other 1,188 8, ,046 35,161 1,385 6, ,306 50,587 1,130 5, ,301 49,580 TOTAL CONSTRUCTION 23, ,099 7,303,654 44,471 25, ,322 9,240,445 52,706 21, ,254 8,362,870 57,973 Source: U.S. Census Bureau, County Business Patterns (NAICS), New Jersey State Totals, 2000, 2005, & 2009 Average Annual Wage

71 68 DIMINISHED CONSTRUCTION VOLUME The decline in total Statewide employment and the decrease in construction jobs resulting from a recessionary environment have been characterized by stable and/or declining economic activities resulting from a seriously depressed housing market that has been exacerbated by an excess supply and compounded by mortgage foreclosures, declining values, and diminished demands for commercial (office and retail) space. New residential construction authorized by building permits in New Jersey has experienced dramatic declines since During 2000, a total of 34,585 new housing units were authorized in New Jersey and, between 2000 and 2005, a total of 200,801 new housing units, or an average of 33,467 new housing units were authorized each year. New housing construction has declined dramatically since 2006, when 34,323 new housing units were authorized, compared to 25,400 housing units in 2007, 18,369 housing units in 2008, 12,396 housing units in 2009, and 13,535 housing units in The average number of new housing units authorized during the past two years (12,966 units per year) is less than 40 percent of the average number of new housing units (33,467 units per year) authorized between 2000 and These residential construction declines, as detailed in Table III-4 occurred throughout the State, with declines reported in all 21 Counties. Residential Construction - The declines in residential construction between 2005 and 2010 have impacted all types of residential construction, including single-family detached homes, twofamily homes, 3-4 family homes, and multi-family (5+ units) homes. The overall decline in new residential construction, which amounted to a 65.0 percent decrease in the total number of residential units (from 38,588 to 13,526 units), was comprised of a 66.9 percent decrease in single-family homes, a 79.0 percent decrease in two-family homes, a 81.0 percent decrease in 3-4 family homes, and a 58.1 percent decrease in multi-family homes. Although construction spending for single-family detached homes is not the focus of this study, their dominant share (51.8 percent) of overall residential construction in the state provides an important insight into the State s overall construction decline. These residential construction trends, by product type and cost of construction, are presented in Table III-5.

72 69 TABLE III-4 TABLE III-4 New Residential Building Permits New Residential Construction Authorized by Building Permits in New Jersey COUNTY Atlantic 1,625 1,685 2,020 2,285 2,075 2,002 1,893 1, Bergen 2,847 1,784 1,771 1,289 2,142 2,972 2,164 2,957 1, ,226 Burlington 2,775 2,184 2,359 1,805 1,516 1,475 2,784 1, Camden ,160 1,934 1,413 1,706 1,183 1, Cape May 1,242 1,403 1,422 1,693 2,149 2,433 1,580 1, Cumberland Essex 1,491 1,548 1,588 2,235 2,343 3,128 3,284 1,854 1, Gloucester 1,337 1,635 1,802 1,859 2,050 2,075 1, Hudson 1,338 1,116 1,534 2,116 3,808 4,498 4,275 3,081 3,229 1, Hunterdon Mercer 1,283 1,355 1,428 1,188 1,641 1, Middlesex 2,460 1,884 1,999 2,306 2,622 3,206 2,567 1,597 1,020 1,018 1,568 Monmouth 2,912 2,194 2,372 2,756 2,628 2,584 2,820 2,060 1, Morris 2,684 1,577 1,914 1,555 1,427 2,503 1,670 1, Ocean 5,633 3,830 3,534 4,009 3,818 2,904 2,114 2,160 1, ,325 Passaic Salem Somerset 2,282 1,439 1,530 1,260 1,362 1,220 1, Sussex Union ,198 1,399 1,278 1,593 1, Warren Total 34,585 28,267 30,441 32,984 35,936 38,588 34,323 25,400 18,369 12,396 13,535 Source: U.S. Census Bureau, Manufacturing & Construction Division Prepared by: New Jersey Department of Labor & Workforce Development, June 2011

73 70 TABLE III-5 TABLE III-5 Units Authorized State of New Jersey Summary 1 Family 2 Family 3-4 Family 5+ Family Total 2005 Northern 10,122 2,596 1,133 9,919 23,770 Southern 12, ,756 14,818 Total 22,264 3,212 1,437 11,675 38,588 1 Family 2 Family 3-4 Family 5+ Family Total 2006 Northern 8,367 2,488 1,467 9,424 21,746 Southern 8, ,990 12,577 Total 17,113 3,088 1,708 12,414 34,323 1 Family 2 Family 3-4 Family 5+ Family Total 2007 Northern 6,295 1, ,925 20,644 Southern 6, ,695 9,056 Total 13,077 1,692 1,311 13,620 29,700 1 Family 2 Family 3-4 Family 5+ Family Total 2008 Northern 4, ,383 11,745 Southern 4, ,736 6,627 Total 9, ,119 18,372 1 Family 2 Family 3-4 Family 5+ Family Total 2009 Northern 3, ,376 7,040 Southern 3, ,228 4,778 Total 6, ,604 11,818 1 Family 2 Family 3-4 Family 5+ Family Total 2010 Northern 4, ,598 8,367 Southern 3, ,603 5,159 Total 7, ,201 13, Percent Change (66.9) (79.0) (81.0) (58.1) (65.0)

74 71 The decline in New Jersey s residential construction occurred in all product sectors and was also distributed throughout the Northern and Southern Regions of the State. During the period between 2005 and 2009, single-family construction in the Northern Region of New Jersey (Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth, Morris, Passaic, Somerset, Sussex and Warren Counties) declined by 62.5 percent while multi-family construction decreased by 72.0 percent. In the Southern Region of New Jersey (Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean and Salem Counties), the number of new single-family homes declined by 71.9 percent between 2005 and 2009 while multi-family construction decreased by 49.1 percent. The overall declines in residential construction occurring between 2005 and 2009 in the Northern Region (68.0 percent) and in the Southern Region (67.8 percent) were essentially the same as the overall statewide decline of 67.9 percent: Residential Construction By Region In New Jersey Northern Region Southern Region Statewide Single Multi- Single Multi- Single Multi- Family Family Total Family Family Total Family Family Total Units ,122 13,648 23,770 12,142 2,676 14,818 22,264 16,324 38, ,795 3,823 7,618 3,416 1,362 4,778 7,211 5,185 12,396 Change Number -6,327-9,825-16,152-8,716-1,314-10,040-15,053-11,139-26,192 Percent The residential construction trends within the Northern and Southern Regions of New Jersey are further detailed in Table III-6. Non-Residential Construction - Accompanying and exacerbating the impact of the decline in residential construction has been an equally significant decrease in the amount of nonresidential construction occurring in New Jersey, particularly in the Office, Retail, Hospitality (hotel), and Industrial (warehouse/storage) sectors. Between 2000 and 2010, construction in these four sectors (office, retail, hotel, and warehouse) resulted in the issuance of Certificates of

75 72 Occupancy (CO s) for million square feet of new non-residential space, or an average of 21.8 million square feet annually during this period. This average annual non-residential construction (21.8 million square feet) was comprised of 7.1 million square feet of office space, 4.0 million square feet of retail space, 1.2 million square feet of hotel space, and 9.5 million square feet of storage facilities. Non-residential construction remained at these approximate levels through 2005, when 22.5 million square feet of non-residential space was constructed. The annual volume of non-residential constructed completed, as reflected in CO s issued, averaged 23.3 million square feet from 2000 through 2005.

76 73 TABLE III-6 TABLE III-6 Statewide Distribution New Residential Construction Authorized by Building Premits Northern Southern Statewide YEAR Single Multi Total Single Multi Total Single Multi Total ,145 7,333 19,478 13,115 1,992 15,107 25,260 9,325 34, ,762 5,220 14,982 11,741 1,544 13,285 21,503 6,764 28, ,242 5,994 16,236 12,137 2,068 14,205 22,379 8,062 30, ,907 7,623 17,530 12,256 3,198 15,454 22,163 10,821 32, ,105 10,269 20,374 12,324 3,238 15,562 22,429 13,507 35, ,122 13,648 23,770 12,142 2,676 14,818 22,264 16,324 38, ,367 13,379 21,746 8,746 3,831 12,577 17,113 17,210 34, ,295 10,049 16,344 6,782 2,274 9,056 13,077 12,323 25, ,483 7,262 11,745 4,692 1,932 6,624 9,175 9,194 18, ,795 3,823 7,618 3,416 1,362 4,778 7,211 5,185 12,396 Total 85,223 84, ,823 97,351 24, , , , ,289 Percent Change (62.5) (72.0) (68.0) (71.9) (49.1) (67.8) (67.6) (68.2) (67.9) Note Northern New Jersey includes Bergen, Essex, Hudson, Hunterdon, Middlesex, Monmouth. Morris, Passaic, Somerset, Sussex, and Warren County Southern New Jersey includes Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Mercer, Ocean, and Salem County

77 74 During 2005, the selected non-residential components reported the construction of 22.5 million square feet of new non-residential space, including 6.4 million square feet of office space, 4.7 million square feet of retail space, 1.0 million square feet of hotel space, and 10.4 million square feet of storage facilities. As further detailed in Table III-7, between 2005 and 2010, there was a decline in the overall level of new non-residential construction, as well as declines in each of the major non-residential components. During 2010, CO s were issued for 9.9 million square feet of non-residential construction and included 3.2 million square feet of office space, 2.2 million square feet of retail space, 0.4 million square feet of hotel space, and 4.1 million square feet of storage facilities. The declines in the amount of new construction between 2005 and 2010 ranged from 60.9 percent (hotel) to 50.1 percent (office) and averaged 55.8 percent, overall: Annual Square Feet of Non-Residential Construction Certificates of Occupancy for New Jersey Year Office Retail Hotel Storage Combined ,401,008 4,673, ,013 10,412,728 22,485, ,194,239 2,238, ,989 4,106,272 9,928,611 Percent Change

78 75 TABLE III-7 Annual Square Feet of Non-Residential Construction Certificates of Occupancy for New Jersey Year Office Retail Hotel Storage ,220,201 4,600, ,861 8,745, ,612,039 3,792, ,867 12,675, ,143,027 5,282,976 1,646,024 14, ,248,101 4,838,512 2,255,927 8,058, ,106,346 3,631, ,416 8,966, ,401,008 4,673, ,013 10,412, ,441,371 4,030, ,367 10,352, ,306,834 3,172,240 1,724,981 9,940, ,649,786 4,934,934 2,397,445 8,743, ,174,574 2,591, ,346 8,058, ,194,239 2,238, ,989 4,106, Total 78,497,526 43,785,905 12,752, ,569,224 Average 7,136,134 3,908,537 1,159,294 9,506,293 Comparison ,401,008 4,673, ,013 10,412, ,194,239 2,238, ,989 4,106,272 Percent Change

79 76 Sales Price Impacts The restructuring of New Jersey s economy over the past several years has manifested itself, not only in decreased levels of growth, but in absolute and relative declines in other key economic indicators. The decreases in total private sector employment have resulted in a loss of 185,500 jobs between 2005 and 2010 and, notwithstanding the broad-based nature of these job losses, there have been disproportionate losses in the construction and manufacturing sectors. Whereas the decreases in manufacturing employment are a part of a long-term trend in New Jersey, the losses in the construction sector, which amount to a 23.4 percent decline since 2005, are directly related to the diminished levels of residential and non-residential construction in New Jersey. Absent significant population 2 growth and with a documented decline in total employment, there has been a decreased demand for new residential (housing) and nonresidential (commercial) space. The diminished demand for residential and non-residential space have resulted in decreased vacancy rates and diminished price for existing and new construction. According to the preliminary reports of the 2010 Census of Population, the number of vacant housing units in New Jersey increased from 245,630 in 2000 to 339,202 vacant housing units in The 38.1 percent increase in vacant housing amounts to 93,572 additional vacant housing units and resulted in an increase in the statewide vacancy rate from 7.4 percent in 2000 to 9.5 percent in The increased vacancy rates are consistent with a substantial out-migration of New Jersey residents, reported to be the fifth highest in the United States, according to reports prepared by the Internal Revenue Service. The market impacts of the economic downturn on non-residential properties has been most apparent and chronicled in the office sector where there has been negative net absorption (more space vacated than new occupancies), increased vacancy rates and a concomitant decrease in rental rates. Current market reports for New Jersey prepared by Newmark Knight 2 Although New Jersey s population is reported by the U.S. Bureau of the Census to have increased from 8,414,350 persons at the time of the 2000 Census to 8,791,894 persons at the time of 2010 Census, for a gain of 377,544 persons, the majority of the population increase occurred in the earlier parts of the decade. The U.S. Census Bureau s population estimates for New Jersey of 8,685,300 residents in 2007 and 8,724,560 residents in 2006 would indicate that 71.8 percent of the total gain occurred by 2004 and 82.2 percent occurred by Conversely, the Census data suggests that the State s total population increased by only 67,344 persons between 2006 and 2010.

80 77 Frank indicate a 25.1 percent vacancy rate (21.9 percent direct lease and 3.2 percent sublet) accompanied by a net decrease in the average rental rate per square foot. Data regarding the sales of commercial properties reveal even greater declines in the actual transaction prices. Distress sales and financing-related liquidations have had a downward impact on other market transactions, as supply or oversupply and reduced demand have further reduced market expectations and sales prices. Residential sales prices have also been impacted by more stringent financing requirements, excess inventory levels, elevated foreclosure rates and buyer hesitance in a downward trending market. This combination of unfavorable economic conditions has yielded little in the way of an incentive for purchasers to proceed with transactions without steep price discounts. A survey of sales prices in the Northern and Southern Regions of the State recorded during 2005 and in 2010 for multi-family apartments, office space, hotels, retail space, and warehouse space that was undertaken by Otteau Valuation Group has confirmed decreases in prices that would be associated with the declining economic factors previously identified. This survey of sales prices, which included 1,011 transactions in 2005 and 739 transactions is 2010, has revealed decreases in per square foot sales prices ranging from 16.1 percent in the Southern portion of the State to 21.2 percent in the Northern portion of the State, with an overall Statewide decline of 20.6 percent in per square foot sales price between 2005 and The greatest statewide price decrease (25.0 percent) was observed in the price for office space, followed by a 20.4 percent decrease in the price of retail space. The decline in sales prices are consistent with the 25.1 percent office vacancy rate, are less than the decreases in residential construction (67.9 percent), and the decrease in new commercial construction (55.8 percent). The decrease in per square foot sales prices are summarized below, and are detailed by sector and region on Table III-8.

81 78 Market Pricing Survey Price Per Square Foot Sale Price Percent Change Multi-Family Apartments $ $ Office-Composite $ $ Hospitality-Composite $ $ Retail-All Categories $ $ Industrial-Warehouse $ $ Overall Sales Weighted Average -20.6

82 79 TABLE III-8 New Jersey Market Pricing Price Per Square Foot Sale Price Multi-Family Apartments Change Percent North $ $ $ South $ $ $ Statewide $ $ $ Office-Composite North $ $ $ South $ $ $ Statewide $ $ $ Hospitality-Composite North $ $ $ South $ $ $ Statewide $ $ $ Retail-All Categories North $ $ $ South $ $ $ Statewide $ $ $ Industrial-Warehouse North $ $ $ South $ $ $ Statewide $ $ $ Overall Sales Weighted Average North South Statewide Source: Otteau Valuation Group, Inc., August 2011 COMPONENTS OF PRICE DECLINE The survey of sales prices of residential and non-residential properties in New Jersey has disclosed significant declines in the per square foot prices between 2005 and 2010, with price decreases reported for all types of properties throughout the entire State, both the Northern and Southern Regions. The decline in the total sales prices per square foot is a composite of

83 80 changes in the land price and the value of the construction (improvements) on the property. In order to determine the portion of the overall decrease in prices that may be attributed to changes in land values, as opposed to the construction improvements, a survey of the proportion of total value represented by land values in twenty representative 3 municipalities in New Jersey was undertaken. These selected municipalities, which include ten municipalities in each of the Northern and Southern Regions of the State, collectively represent 22.9 percent of the New Jersey s total employment base. Land values as a percentage of total values were obtained for a variety of properties including apartments, hotel, office space, retail space, and industrial (warehouse) space in the survey municipalities. The data obtained for 2005 has revealed proportional variations as a function of the type of use as well as geographic location. In the Northern region of New Jersey, land generally represents a higher proportion of the total sales price than in the Southern portion of the State, where there is a greater availability of developable land. The land component of the total price also varies by the type of use, and typically represents the highest proportion for warehouse space and the lowest proportion for retail and apartment properties. On a Statewide basis, land accounted for 31.0 percent of the total price in 2005 with a deviation of percent: Land As Percent of Total Price (2005 Values) Apartments Office Hotel Retail Whse Northern New Jersey Southern New Jersey New Jersey Changing Distributions The declines in the sales prices of properties that have occurred 3 Northern New Jersey - Bridgewater Township, Edison Township, Jersey City, Middletown Township, Morristown Town, Newark City, Paramus Borough, Parsippany Township, Wayne Township, and Union Township; Southern New Jersey - Camden City, Cherry Hill Township, Deptford Township, Egg Harbor Township, Hamilton Township, Mount Laurel Township, Trenton City, and Toms River Township, Vineland City, and Washington Township.

84 81 between 2005 and 2010 reflect, and are also affected by, changes in land values. Information available through the New Jersey Association of County Tax Boards regarding the proportion of total value that is represented by land has revealed varying changes in land value allocations by geographic location (Region) and type of use between 2005 and Whereas total price and land prices have declined between 2005 and 2010, the decline in land prices has been less than the overall decrease in prices, and has resulted in an increased proportion of the total sales prices now being represented by land. During 2010, the proportion of total value represented by land continued to be higher in the Northern Region than the Southern Region of the State. The land component of the total price also varies by the type of use, and currently accounts for the highest proportion of the total price for office space and the lowest proportion for apartment properties. On a Statewide basis, land accounted for 34.8 percent of the total price in 2010, with a deviation of percent: Land As Percent of Total Price (2010 Values) Apartments Office Hotel Retail Whse Northern New Jersey Southern New Jersey New Jersey A comparison of the statewide changes in the proportion of the total value represented by land indicates increases of 10.7 percent to 18.2 percent between 2005 and 2010: Changes in Land Allocation Change Percent Apartments Office Hotel Retail Warehouse

85 82 Although the proportions of the total sales prices represented by land have increased between 2005 and 2010, the per square foot prices attributable to land have actually decreased during this period. The increased proportion of price attributable to land was more than offset by the overall price declines in three of the five construction components (apartments, office, and retail space), while minor per square foot price increases are indicated for hotel and warehouse space. This information, which is summarized below and detailed on Table III-9, indicates decreases in per square foot land prices of $3.06 for apartments, $5.63 for office, and $2.51 for retail space, while increases of $3.21 and $0.18 per square foot are indicated for hotel and warehouse space, respectively: New Jersey Market Pricing Land Price Per Square Foot Total Price $ / SF Land $ / SF Land Change $ / SF Sector Amount Percent Apartments $ $ $30.12 $ $ Office $ $ $48.80 $ $ Hotel $ $ $41.25 $ $ Retail $ $ $41.94 $ $ Warehouse $ $ $17.45 $ $ IMPLICATIONS FOR LABOR The decline in volume and value of new construction has had significant impacts upon the construction industry, with a 2005 to 2010 decrease in the number of construction businesses (3,666 fewer businesses) and reduced construction employment (from 175,322 jobs to 144,244 jobs), with these impacts being most severe upon the sectors involved with new construction. As previously detailed (Table III-3), between 2005 and 2010, total construction employment decreased by 21.5 percent, while the number of construction employees engaged in the construction of new residential and non-residential buildings declined by 29.6 percent. Construction employment involved with maintenance, repairs, small alterations, and improvements would appear to be less affected by economic decline.

86 83 TABLE III-9 New Jersey Market Pricing Price Per Square Foot and Land Distribution Total Price Land $/SF Land Percent Multi-Family Apartments North $ $ $31.89 $ South $ $ $17.51 $ Statewide $ $ $30.12 $ Office-Composite North $ $ $57.29 $ South $ $ $29.42 $ Statewide $ $ $48.80 $ Hospitality-Composite North $ $ $41.25 $ South $ $ $41.25 $ Statewide $ $ $41.25 $ Retail-All Categories North $ $ $49.71 $ South $ $ $33.85 $ Statewide $ $ $41.94 $ Industrial-Warehouse North $ $ $19.57 $ South $ $ $11.57 $ Statewide $ $ $17.45 $

87 84 The overall (average) decline in construction prices between 2005 and 2010, which amounted to a 20.6 percent decrease, has a magnified impact upon the direct construction components represented by labor and materials due to lesser declines in land prices. When sales prices are adjusted to reflect the changes in land prices, the direct construction prices represented by contract construction (labor) and materials are subject to even greater percentage declines. Deducting land prices from the total sales prices results in prices for direct contract construction that are even further reduced. As indicated in the following tabulation and detailed in Table III- 10, the price available for the payment of construction labor yields Statewide price reductions ranging from 13.5 percent to 31.1 percent, with an overall (sales weighted) average of 27.4 percent: Construction Pricing Summary- Price Per SF Price / SF Percent Change Multi-Family Apartments $ $ Office-Composite $ $ Hospitality-Composite $ $ Retail-All Categories $ $ Industrial -Warehouse $ $ Overall (Sales Weighted) Average The economic conditions that have prevailed in New Jersey since 2005 have resulted in a restructuring of the State s economy, accompanied by decreased employment, substantially diminished residential and non-residential development, reduced population growth, an outmigration of residents, increased residential and commercial vacancy rates, and decreased prices for new and existing properties. The construction industry has been one of the most severely impacted segments of the State s economy. Although construction employment represented 5.0 percent of the State s total private sector jobs in 2005, the loss of construction jobs accounted for 23.4 percent of the State s total employment loss. The decrease in new residential construction (64.9 percent) and the decrease in commercial development (55.8 percent) have been accompanied by a 20.6 percent decline in Statewide per square foot sales prices. To the extent that land prices have decreased to a lesser degree intensifies the impact

88 85 and compression on contract construction and labor rates. The following analysis indicates that the overall decline of 20.6% in real estate prices equates to the need for a 27.4% reduction in the cost of construction. This downward pressure on construction prices is reinforced by an abundant inventory of available residential and commercial properties at offering prices that are near or in some cases below replacement cost. Although recent reductions in new construction activity will over time help to balance today s high vacancy levels, the absorption of that space is likely to require an extended period of time. As a result, the depth of the recession and its lingering effects are challenging builders who have managed to remain in business, who are now finding that increased material costs are further reducing their already minimized margins. A study by The Associated General Contractors of America has reported that the cost of construction materials during the first half of 2011 have greatly exceeded the Consumer Price Index and even exceeded the overall Producer Price Index. The June 2011 Producer Price Index reveals that the components affecting construction were up 7.5 percent during the preceding 12-months compared to a 3.6 percent increase in the CPI. Average copper prices were up 17 percent, while steel was up 10.1 percent and diesel fuel had experienced the greatest increase of 39 percent compared to a year ago.

89 86 TABLE III-10 Construction Pricing Summary Price Per Square Foot Price / SF Percent Change Total Land Const Total Land Const Total Const Multi-Family Apartments North $ $31.89 $ $ $28.85 $ South $ $17.51 $ $ $15.03 $ Statewide $ $30.12 $ $ $27.06 $ Office-Composite North $ $57.29 $ $ $49.87 $ South $ $29.42 $ $ $29.15 $ Statewide $ $48.80 $ $ $43.17 $ Hospitality-Composite North $ $41.25 $ $ $44.46 $ South $ $41.25 $ $ $44.46 $ Statewide $ $41.25 $ $ $44.46 $ Retail-All Categories North $ $49.71 $ $ $44.94 $ South $ $33.85 $ $ $35.40 $ Statewide $ $41.94 $ $ $39.43 $ Industrial-Warehouse North $ $19.57 $ $ $20.17 $ South $ $11.57 $ $ $ 9.68 $ Statewide $ $17.45 $ $ $17.63 $ Overall (Sales Weighted) Average - Northern Southern Statewide

90 87 The restructuring of the Statewide and National economies as a result of the great recession coupled with the long term structural challenges facing New Jersey have had a disproportionate impact on the construction industry. Looking ahead, these challenges are likely to continue for the foreseeable future as lower market price levels for commercial real estate demand a corresponding reduction in construction cost to achieve financial feasibility. In other words, new construction projects will need to achieve a reasonableness of finished cost or they simply won t be constructed. While this top down compression places downward pressure on the total cost of construction, we have found that two of the major components of that cost have actually been rising as represented by the increased cost of construction materials and higher proportional land values. These dynamics point to long term downward pressure and compression of costs associated with both construction management services and labor. ADJUSTING CONSTRUCTION PRICING TO THE MARKET The changed circumstances of the past decade have created downward pressure on construction demand across all real estate sectors. These events have resulted in an increased sensitivity to construction costs which must compete with the existing underutilization and lower market prices of existing real estate inventory. One of the direct effects of these changes is that the finished cost of new construction must achieve price points conducive to satisfying economic feasibility. In other words, new construction must achieve a reasonableness of finished cost to participate in any economic recovery. Therefore, achieving cost efficiencies are a necessary first step toward recovery of the construction industry. Our prior analysis of non-residential real estate prices indicated an average statewide market price decline of 20.6 percent in per square foot sales price between 2005 and By sector, the observed price declines are summarized immediately below.

91 88 Market Pricing Survey - Price Per Square Foot Sale Price Percent Change Multi-Family Apartments $ $ Office-Composite $ $ Hospitality-Composite $ $ Retail-All Categories $ $ Industrial-Warehouse $ $ Overall Sales Weighted Average In developing an indication of competitive construction pricing which corresponds to the 2010 average market price levels, it is important to note that the overwhelming majority of individual property sales included in our price change survey were existing buildings. Given the competitive disadvantages of older existing buildings in terms of physical depreciation, functional utility and operating efficiency, the results of the 2010 market price survey require upward adjustment to correlate to the superior appeal of new construction. We conducted an age sampling analysis of the individual property sales included in our survey to understand their age composition as summarized below. Real Estate Category Total Selling Price (Ft 2 ) Land Allocation Implied Building Value Effective Age Multi Family Apartments $83.00 $27.06 $ Office $ $43.17 $ Hospitality $ $44.46 $ Retail $ $39.43 $ Industrial $48.69 $17.63 $ The next step in our analysis is to apply upward adjustment above implied building values to develop a correlation to new construction pricing. To accomplish these we have referred to various age-life studies which analyze the effects of age and life expectancy on accrued depreciation in existing buildings. These studies analyze a multitude of relevant factors including actual mortality, condition of existing buildings and ages at which major reconstruction or changes of occupancy take place. The most notable of these studies is published by Marshall Swift Valuation Service which provide a segregated analysis of these factors by use type (office, retail, etc.), building class (construction materials, quality, etc.) and building age.

92 The results of this analysis are summarized in the table below which develops estimates of implied construction values by property type. 89 Real Estate Ca tegory Total Selling Price (Ft 2 ) Land Allocation Implied Building Value Effective Age Average Life Expectancy Accrued Depreciation Implied New Construction Value Multi Family Apartments $83.00 $27.06 $ % $ Office $ $43.17 $ % $ Hospitality $ $44.46 $ % $ Retail $ $39.43 $ % $ Industrial $48.69 $17.63 $ % $65.39 The preceding table provides projections of new construction costs (per Ft 2 ) that theoretically align with 2010 market price levels. To test the reliability of these projections we have developed cost estimates for each of the real estate use types identified. These cost estimates have been based upon data obtained from Marshall & Swift Valuation Service (M&S) which provide localized construction cost data at the regional, state and local submarket levels. The cost figures provided in the far-right column of the table below reflect average construction costs for Class-C construction based upon the M & S data. Total Selling Land Allocation Implied Building Value Effective Age Average Life Expectancy Accrued Depreciation Implied New Construction Value 2010 Construction Cost Clas s C (M & S Cos t) Real Estate Category Price (Ft 2 ) Multi Family Apartments $83.00 $27.06 $ % $ $ Office $ $43.17 $ % $ $ Hospitality $ $44.46 $ % $ $ Retail $ $39.43 $ % $ $ Industrial $48.69 $17.63 $ % $65.39 $67.71 Note: Class C Construction is characterized by masonry or reinforced concrete (including tilt-up) construction. The walls may be load bearing, i.e., supporting roof and upper floor loads, or non-bearing with open concrete, steel, or wood columns, bents or arches supporting the load. Floors and roofs are supported on wood or steel bar or web joists or trusses, or the floor may be a concrete slab on the ground. Upper floors or roofs may be of concrete plank, steel deck, or wood. Bearing walls are frequently strengthened by concrete bond beams and pilasters. Included In this classification are Uniform and Basic Building Code Type III (noncombustible wall), Standard Code Type V and ISO Classes 2 and 4, and those Class 5 and 6 buildings which have load-bearing walls without interior framing and of low-rise (3 stories or less) design. This class is also referred to as Masonry or Unprotected Noncombustible, Joisted, or Unprotected Masonry, or Ordinary or Unprotected One-hour and to include certain Two-hour or Mill construction (heavy timber). Note: The Class C construction type is different from Class C building types which generally refer to lower quality commercial building types. The preceding analysis provides a high degree of correlation between implied new construction values and current construction costs. At the sector level, the implied market price indication exceeds average construction cost which is attributable to rising demand for multi-family rental

93 90 properties associated with the previously identified trends of rising rentership and falling homeownership rates. Implied market pricing for the other categories is however slightly less than current average costs due to the excessive supply overhang affecting the commercial market sectors.

94 91 PART IV CONSTRUCTION SPENDING FORECAST HISTORICAL CONSTRUCTION SPENDING In developing our forecast of construction spending in New Jersey we have considered a wide range of factors and trends beginning with those contained in the earlier section of this report. In this regard, the combined effects of the recent economic recession, a subpar pace of economic recovery in the state, systemic weakening of real estate demand and recent volatility of the financial markets all point to an extended recovery period for construction spending. In developing our forecast we have expanded the prior analyses of economic, demographic and market trends to include historical measurements of sector-level construction activity in New Jersey. This analysis and the resulting forecasts have been limited to the following construction sectors identified by the client as being of greatest relevance to the intended users of this report: Multi-Family Housing Office Retail Industrial Hospitality (hotels & motels) Healthcare Miscellaneous Non-Residential Government Education As such, the following construction sectors that have been excluded from this analysis: Single-Family Residential Civil (including roads, highways & bridges) Military In developing our analysis of construction spending we have utilized a comprehensive database of construction projects maintained by Reed Construction Data, Inc (REED), a leading information provider for construction activity, cost data and analytics at the national, regional, state and local levels. Through the use of this database we have identified construction projects that reached the stage whereby a general contract, or subcontract bid, has been accepted for a particular project and for which the contract was not subsequently cancelled. These projects, which include new construction, renovations and additions, are therefore representative of future construction spending which typically commences within a day time period and continues over time until project completion. As such, they are a measurement of constructionstarts with the total dollar of spending being aggregated to the commencement date.

95 92 The granularity of this database provides for categorization and quantification of construction spending at the sector (e.g. Multi-Family Housing, Office, Retail, etc) and county submarket (e.g. Atlantic, Bergen, Burlington, etc.) levels which was extremely useful in determining historical measurements of construction spending at a localized level. The results of this research are summarized in the following table: $ Millions $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Aggregate Construction Spending NJ Specific Sectors $5,492 $6,394 $5,076 $5,814 $4,498 $6,280 $3,329 $3, Segregating the historical analysis at the sector level is depicted in the following chart which shows the yearly dollar volume of starts and the percentage change compared to each prior year:

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97 94 Aggregate construction spending for the limited sectors analyzed in this report demonstrate a general decline over the study period. Given the start of the economic recession in December 2007, coupled with the weakening of the housing market in Q4 2005, the logical starting point for declining construction spending should have occurred in And while that is generally true, a rebound occurred in 2008 which seems to defy market logic. A closer look at the data table above shows the spending increases were limited to the retail, industrial, hospitality, healthcare, government and miscellaneous-non-residential sector categories. This is consistent with earlier observations that erosion in market fundamentals occurred initially in housing and office market sectors, and later in other non-residential categories. Another reason for the lag in construction declines in these specific sectors is attributable to the lengthy incubation period from project conceptualization to construction commencement. This is due to the lengthy process that developers must navigate before building a project, including land acquisition, project design, project entitlements and construction financing approval. As a result, a regularly occurring phenomenon in New Jersey is for some projects to come to market after demand has already weakened. Due to this lengthy timeline, project commencements which coincide with the inflection point for market change are often ill fated and can worsen a developing oversupply condition in a submarket. FORECAST METHODOLOGY The final step in our study is to develop a forecast of future construction spending in New Jersey, both for the individual sectors and in the aggregate. The reader is once again reminded that the preceding historical analyses and forecasts that follow are limited to the specific construction sectors identified by the client. As a result, the aggregate forecasts which follow reflect the sum total of these limited sectors only and are therefore not representative of total construction spending in New Jersey. The forecasts that follow have been developed using a combination of methods. The primary methodology is Multiple Linear Regression which is a technique for modeling and analyzing multiple variables, when the focus is on the relationship between a dependent variable and one or more independent variables. More specifically, regression analysis helps us understand how the typical value of a dependent variable changes when any one of the independent variables is varied (see Definitions & Terms section of report).

98 95 In developing our analysis, the dependent variable being solved for in each forecast is the dollar volume of construction spending authorizations in each of the following sectors: Multi-Family Office Retail Industrial Hospitality (hotels & motels) Healthcare Miscellaneous Non-Residential Government Education Aggregate of Sectors In developing each of our forecasts we have analyzed and tested a range of economic, demographic and real estate market factors with a logical historical linkage to the independent variables identified above that are potential key drivers of development activity. These independent variables include: NJ Months Supply US Mortgage Rates US GDP Change (Qrtly) US GDP Change (Annual) NJ Unemployment Rate NJ Non-Farm Employment NJ Non-Farm Job Change US CPI Index US CPI Change NY/NJ CPI Index NY/NJ CPI Change Phila CPI Index Phila CPI Change NY/NJ/PA CPI Change NJ Homeowner Vacancy Rates (%) NJ Homeownership Rate NJ Median HH Income NJ Median HH Income Change NJ Median Home Price NJ Median Home Price Change NJ Housing Affordability Index US Consumer Confidence NJ Population NJ Population Growth US Retail Sales US Retail Sales Change NJ Households NJ Household Formation NJ Office Total # Buildings NJ Office Total RBA NJ Office Total Vacant SF NJ Office Total Vacant % NJ Office Occupied % NJ Office Average Asking Rent NJ Office Average Asking Rent % Change NJ Office RBA Delivered NJ Office # Buildings Under Construction NJ Office Total RBA Under Construction NJ Retail Total # Buildings NJ Retail Total RBA NJ Retail Total Vacant SF NJ Retail Total Vacant % NJ Retail Occupied % NJ Retail Average Asking Rent NJ Retail Average Asking Rent % Change NJ Retail RBA Delivered NJ Retail # Buildings Under Construction NJ Retail Total RBA Under Construction NJ Industrial Total # Buildings NJ Industrial Total RBA NJ Industrial Total Vacant SF NJ Industrial Total Vacant % NJ Industrial Occupied % NJ Industrial RBA Delivered NJ Industrial # Buildings Under Construction

99 96 NJ Industrial Total RBA Under Construction NJ Flex Total # Buildings NJ Flex Total RBA NJ Flex Total Vacant SF NJ Flex Total Vacant % NJ Flex Occupied % NJ Flex RBA Delivered NJ Flex # Buildings Under Construction NJ Flex Total RBA Under Construction US Hospitality Occupancy Change (%) US Hospitality Demand Change (%) US Hospitality Supply Change (%) NJ Multi-Family Inventory (SF/Units) NJ Multi-Family Completions NJ Multi-Family Conversions NJ Multi-Family Vacancy % NJ Multi-Family Vacant Stock NJ Multi-Family Occupied Stock NJ Multi-Family Net Absorption NJ Multi-Family Avg. Asking Rent $ (weighted) NJ Multi-Family Avg. Asking Rent $ (non-weighted) NJ Multi-Family Asking Rent % Change (weighted) NJ Multi-Family Asking Rent % Change (non-weighted) NJ Multi-Family Avg. Effective Rent $ (weighted) NJ Multi-Family Avg. Effective Rent $ (non-weighted) NJ Multi-Family Effective Rent % Change (weighted) NJ Multi-Family Effective Rent % Change (non-weighted)

100 97 In addition to the regression methodology described above, we have also employed more subjective analyses such as trend analysis, multiple year averaging, and considering present day economic realities such as declining public sector employment, lingering high unemployment, and structural deficiencies in specific sectors such as office buildings and home purchase demand. These more subjective rationales are equally valid in and some cases have greater reliability than more objective statistical methods. This is because regression methodology is predicated upon the assumption that past correlations between certain variables provide a reliable indication of what the future will bear. Given the unprecedented present day volatility of the financial and real estate markets, the historical relationship between variables is certainly diminished at the present time. As an example, past conditions in home purchase demand have been correlated inversely with home mortgage interest rates. In this past relationship, falling interest rates triggered increased purchase demand, rising home prices, and increased employment in the construction industry. In today s New Normal however, historically low interest rates have failed to stimulate home purchase demand. Therefore, any reasonable forecast must employ both objective and subjective reasoning. CONSTRUCTION SPENDING FORECAST CONCLUSIONS Based upon our entire analysis we present the following forecast of future construction starts in New Jersey.

101 98 FORECAST OF NEW JERSEY CONSTRUCTION STARTS Dollar Volume of Construction Starts ($) & One Year Change ( ) Family Office Retail Industrial Hospitality Heathcare Res Gov't Education Aggregate Year $ $ $ $ $ $ $ $ $ $ Actual 2003 $611.8 $763.5 $426.2 $194.4 $220.0 $360.9 $380.3 $325.9 $2,208.5 $5,492 n/a Actual 2004 $898.0 $536.7 $623.9 $102.4 $122.0 $377.8 $272.4 $547.9 $2,913.0 $6,394 16% Actual 2005 $1,224.5 $326.6 $414.6 $244.3 $264.6 $445.7 $253.9 $304.8 $1,596.9 $5,076 21% Actual 2006 $1,242.4 $255.2 $333.3 $122.6 $650.0 $678.4 $616.4 $269.5 $1,646.3 $5,814 15% Actual 2007 $1,006.9 $370.1 $439.5 $216.6 $112.3 $396.5 $246.5 $299.1 $1,411.0 $4,498 23% Actual 2008 $892.0 $222.2 $882.0 $389.7 $170.8 $1,387.5 $683.7 $366.8 $1,285.3 $6,280 40% Actual 2009 $355.4 $75.1 $196.5 $164.9 $149.8 $271.2 $543.8 $568.0 $1,004.0 $3,329 47% Actual 2010 $521.0 $63.8 $211.0 $64.1 $282.5 $695.8 $342.1 $458.5 $930.2 $3,569 7% Forecast 2011 $615.3 $146.2 $236.1 $31.0 $28.1 $160.5 $447.0 $361.8 $1,188.2 $3,214 10% Forecast 2012 $793.1 $67.1 $227.1 $55.3 $70.2 $289.2 $306.1 $377.7 $1,172.8 $3,358 4% Forecast 2013 $872.5 $90.6 $238.4 $57.8 $112.2 $343.0 $284.8 $383.4 $1,182.0 $3,565 6% Forecast 2014 $959.7 $114.2 $250.3 $60.3 $106.9 $396.9 $263.6 $389.2 $1,191.3 $3,732 5% Forecast 2015 $1,007.7 $137.8 $275.4 $62.7 $101.5 $450.8 $242.4 $394.9 $1,200.5 $3,874 4%

102 99 The results of this forecast indicate that while construction spending is expected to rise beginning in 2012, the pace of recovery will be slow. On an annualized basis we forecast a 10% decline in aggregate spending in 2011 (as measured by the dollar volume of new starts) followed by modest increases ranging from 4% - 6% from 2012 through This slow growth is primarily attributable to the anticipated slow pace of economic recovery over the forecast period % % % % % Therefore, given continuing complications resulting from the economic recession as well as the more long-term systemic challenges in New Jersey, the present day compression in the construction industry is not expected to reverse course in the near term. Following is a presentation of Sector-Level forecasts from MULTI-FAMILY RESIDENTIAL CONSTRUCTION construction spending in the Multi-Family sector is anticipated to rise sharply over the initial 2 years of the forecast due to rising renter demand and developing supply shortages. The rate of rise will slow during the later forecast years as higher rental prices coupled with job creation and less rigid mortgage underwriting standards result in rising purchase demand.

103 100 OFFICE CONSTRUCTION - Remarkably, this sector is presently on pace for a 129% increase in 2011 despite deep long term structural challenges relating to private-sector job creation. A closer look at this year s strong pace indicates it to a handful of large projects in Bergen, Burlington, Hudson, Middlesex and Morris Counties. The largest of these projects are a $16- Million reconstruction project for Siemens at MetroPark in Iselin, a $15-Million pharmaceutical facility in Parsippany and a $10-Million data center in Weehawken. Also figuring into the large percentage increase in 2011 is that spending in 2010 of $63.8-Million was down by a stunning 92% from the peak year in As shown in the forecast below, spending is anticipated to recede in 2012 to be more in line with 2010, followed by moderate increases from New Jersey Construction Spending Office Sector $1,000.0 $800.0 $ Millions $600.0 $400.0 $200.0 $763.5 $536.7 $326.6 $255.2 $370.1 $222.2 $75.1 $63.8 $146.2 $67.1 $90.6 $114.2 $137.8 $

104 101 RETAIL CONSTRUCTION Retail construction has fallen dramatically from the peak year in 2008 when there were $882-Million in starts and which resulted in a structural oversupply condition in the market. More recently, construction activity has been hovering in the $220- Million range, and is anticipated to rise modestly beginning in INDUSTRIAL CONSTRUCTION The decline in industrial construction has a dual cause attributable to both the weakening economy as well as the continuing loss of manufacturing jobs in the Northeastern US. Currently, industrial construction in 2011 is on pace for $31-Million in construction starts, which is more than a 50% decline from 2010 and equates to a 92% decline from the peak year in Our forecast calls for minimal recovery in this sector due to the manufacturing situation as well as a large overhang of vacant warehouse space in the state. One bright spot which could increase construction of warehouse-distribution centers is the widening of the Panama Canal which is projected to be completed in 2014 and could increase cargo volume arriving at Port Newark-Elizabeth. However, that shipping volume hinges on the lifting of the Bayonne Bridge at a project cost of $1-Billion. Given that project has not yet begun, it is unlikely that it can be completed soon enough to capitalize on the Canal completion and so will likely push any increases in Industrial construction beyond the forecast period.

105 102 New Jersey Construction Spending Industrial Sector $ Millions $500.0 $400.0 $300.0 $200.0 $100.0 $194.4 $102.4 $244.3 $122.6 $216.6 $389.7 $164.9 $64.1 $31.0 $55.3 $57.8 $60.3 $62.7 $ HOSPITALITY CONSTRUCTION The previously outlined improvement in hotel metrics is anticipated to result in increased construction activity in this commercial real estate sector. However, any gains in the overall market are likely to be largely offset by the continuing weakness in the Atlantic City market which has lost 12,900 jobs since 2006, equivalent to a 21% decline. In developing our forecast we note that the surge in construction spending in 2008 was attributable to a handful of projects in Atlantic City including Borgata s Water Club, Harrah s

106 103 Marina Waterfront Tower and the Mirage which is presently on hold. Given the current economic climate in Atlantic City, which is also being affected by the opening of casino operations in Pennsylvania, future statewide spending is likely to be modest. As a result, our forecast calls for modest increases in overall construction spending for this sector with overall activity to remain far below the peak year in 2006 for the foreseeable future. New Jersey Construction Spending Hospitality Sector $800.0 $650.0 $600.0 $ Millions $400.0 $200.0 $0.0 $220.0 $122.0 $264.6 $112.3 $170.8 $149.8 $282.5 $28.1 $70.2 $112.2 $106.9 $ HEALTHCARE CONSTRUCTION Given the financial challenges facing this industry coupled with the approaching completion of the $447-Million Princeton Medical Center in Plainsboro and Capital Health s $530 million regional medical center in Hopewell Township, construction spending in this sector is expected to be greatly reduced in future years. This is confirmed by 2011 construction starts which are on pace for $28.1-Million in 2011 compared to $282.5 Million in As a result we forecast lower levels of construction starts in this sector which will be more in line with long-term historical averages.

107 104 $1,700.0 New Jersey Construction Spending Healthcare Sector $1,387.5 $ Millions $1,200.0 $700.0 $200.0 $360.9 $377.8 $445.7 $678.4 $396.5 $271.2 $695.8 $160.5 $289.2 $343.0 $396.9 $450.8 ($300.0) MISCELLANEOUS NON-RESIDENTIAL CONSTRUCTION as discussed previously, this sector includes the following subtypes: Amusement Misc. Non-Categorized Commercial Misc. Non-Residential Parking Garages Religious We forecast much lower levels of construction spending in this catch-all category due primarily to the extended reach of the economic recession. As a result, we anticipate that future construction spending will be more closely aligned with long-term averages. We do however expect that spending in this area will increase significantly with each passing year due in large part to the expectation that increasing urban redevelopment construction activity of multi-family housing, retail and offices will generate the need for construction of parking facilities which are included in this category.

108 105 $ Millions $800.0 $600.0 $400.0 $200.0 New Jersey Construction Spending Misc. Non Residential Sector $380.3 $272.4 $253.9 $616.4 $246.5 $683.7 $543.8 $342.1 $447.0 $306.1 $284.8 $263.6 $242.4 $ GOVERNMENTAL CONSTRUCTION the effects of the economic slowdown were not evident in governmental construction expenditures which did not peak until 2009, later than any other sector of the construction market. This is largely attributable to the life-cycle of governmental projects which tends to be slower in starting and therefore more likely to continue well after an economic slowdown. Another factor to be considered is New Jersey s large growth in public sector jobs from , during which 9 out of every 10 jobs created in the state were in the public sector. More recently however, governments in New Jersey and throughout the US are struggling with budgetary constraints which will reduce construction spending in future years. As a result, we forecast that governmental construction spending will occur at a more modest level over the forecast period with relatively small annualized increases.

109 106 EDUCATIONAL CONSTRUCTION The historical trend of construction spending in this sector shows sizable declines following the peak year in However, year-to-date spending in 2011 indicates a significant increase over the prior year. It is unlikely however that the recent increase will carry forward into future years due to a combination of factors. One reason for much slower growth in construction spending for this sector is the same budgetary constraints discussed in the Governmental forecast. Equally important however is the developing trend of declining school enrollments in New Jersey whereby 65% of households in the state having no children under the age of 18 living at home has caused a decline of 48,687 (3.3%) decline in public school enrollment over from the to school years. This reflects a decline from the peak of 48,687 students statewide, or 3.3%. Despite these trends we anticipate increased public awareness and interest in local community and state colleges due largely to the lower costs for in-state residents. As a result, long-term construction in this area is expected to offset the declines in public sector classroom demand. We forecast that construction spending in the educational sector will remain relatively stable in future years and likely to perform consistent with long term averages.

110 107 $ Millions $3,500.0 $3,000.0 $2,500.0 $2,000.0 $1,500.0 $1,000.0 $500.0 $0.0 New Jersey Construction Spending Educational Sector $2,208.5 $2,913.0 $1,596.9 $1,646.3 $1,411.0 $1,285.3 $1,004.0 $930.2 $1,188.2 $1,172.8 $1,182.0 $1,191.3 $1,

111 CERTIFICATION OF THE AUTHORS 108 I certify that, to the best of my knowledge and belief: The statements of fact contained in this report are true and correct. The reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions and are my personal, impartial, and unbiased professional analyses, opinions, conclusions and recommendations. I have no present or prospective interest in the subject matter of this report or to the parties involved. I have no bias with respect to the subject matter of this report or to the parties involved with this assignment. My engagement in this assignment was not contingent upon developing or reporting predetermined results. My compensation in this assignment is not contingent upon the development or reporting of a predetermined opinion, conclusion or forecast that favors the cause of the client, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of the consulting assignment. My analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice. Jessica L. Curcio provided significant professional research, analysis and report writing assistance to Jeffrey G. Otteau. Eric G. Tazelaar provided significant professional research, analysis and report writing assistance to Richard B. Reading. Jeffrey G. Otteau, President, SCGREA, #42RG , IFA Richard B. Reading, Principal-Richard B. Reading Associates.

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