APARTMENT MARKET SUPPLY AND DEMAND DATA. Prepared March 2012 PAGE 1

APARTMENT MARKET SUPPLY AND DEMAND DATA Prepared March 2012 PAGE 1

SUMMARY OF MARKET CONDITIONS Inventory According to the 4 th quarter 2011 MFP report on the San Jose metro apartment market, the inventory of apartments were 96.9 percent occupied with only 2,200 units under construction. According to Marcus & Millichap, the San Jose apartment market will enjoy the highest rent increases of any market in the nation in 2012. 1 Vacancy rates are forecast to decline below three percent with asking rents increasing by 6.1 percent to $1,620 per month and effective rents are forecast to increase by 7.4 percent to $1,548 per month. Marcus & Millichap forecasts delivery of only 520 units. According to the 2010 Census, the Evergreen planning area of San Jose contains approximately 5,500 rental housing units. More than 5,300 of these units were reportedly occupied in 2010, for an overall low vacancy rate of 3.5 percent. New Multi-Family Supply According to a February 2012 report prepared by the City of San Jose Department of Planning, Building and Code Enforcement entitled Development Activity Highlights and Five-Year Forecast (2013-2017), new construction is expected to range from 2,000 to 2,500 units annually over the next several years. The City forecasts that multi-family units will account for nearly 90 percent of new unit deliveries. Eleven apartment projects totaling 4,455 units are currently under construction within the City; more than 3,400 of these units are in the North San Jose planning area. Over 400 apartment units are under construction in the Alum Rock area. No apartment units are under construction in the Evergreen planning area. The two newest projects added in San Jose are the 108-unit Lavare Apartments at Santana Row and a 185-unit senior complex by Core Developers, Belovida at Newbury Park. Monthly asking rents for one-bedroom apartment units in the Lavare project range from $2.75 to $3.30 per square foot. Rents for larger two- and three-bedroom units generally range from $2.70 to $3.00 per square foot. In addition to the 4,455 apartment units under construction, over 14,000 multi-family units, including apartments for seniors, have been approved but have not yet commenced construction. Only one project which has not yet been approved is planned for the Evergreen planning area. This is a 104 unit single family project called Mirassou at the southwest corner of Ruby and Aborn. The future new supply comprises 11 percent of San Jose s 133,528 multi-family units reported in the 2010 American Community Survey. 1 2012 National Apartment Report, Marcus & Millichap. PAGE 2

LIMITED AND HIGH PRICED FOR-SALE HOUSING SUPPORTS APARTMENT DEMAND The 2010 American Community Survey reports that only 3.8 percent of the 312,541 housing units in San Jose have been built since 2005. According to the City s development activity report, only 1,119 single-family homes (on average 224 homes per year) were permitted in San Jose from 2006 through 2011. Based on 2009 projections from Association of Bay Area Governments (ABAG), the number of households in San Jose is projected to increase between 2005 and 2035 by approximately 155,000 households (on average 5,200 households per year). The City was forecast to grow by more than 312,000 jobs during this same period, resulting in an increase from the current jobs-to-housing ratio of approximately 1.3 to a level of 1.5 by 2035. In 2008, the ABAG Housing Needs Plan 2007-2014 indicated that San Jose would need to provide for nearly 35,000 additional housing units over the 7-year horizon, with the majority of units needed to accommodate above moderate income households. According to the City of San Jose Department of Housing website, the median price of Santa Clara County s single-family homes in September 2011 was $570,000. The limited amount of new and planned supply of housing relative to the need for housing will keep prices high, resulting in a high proportion of renter households and demand for apartment units. HIGH FOR-SALE HOUSING PRICES, JOB GROWTH AND HIGH APARTMENT OCCUPANCY RATES WILL PRODUCE APARTMENT UNIT RENT INCREASES High prices for for-sale ownership housing, job growth in the technology and business and technical service sectors, and already high apartment unit occupancy rates will produce apartment unit rent increases. According to Cassidy Turley s fourth quarter 2011 Apartment Market Report for Santa Clara County, apartment rents in Santa Clara County have increased 12 percent over the past year. Table 1 shows the change in vacancy and market rents for Santa Clara County between fourth quarter 2009 and fourth quarter 2011. PAGE 3

TABLE 1 Rental Market Data for Santa Clara County: 2009-2011 APARTMENT COMPLEXES WITH 99 UNITS OR LESS Average Monthly Rent $ APARTMENT COMPLEXES WITH 100 UNITS OR MORE Average Monthly Rent $ Vacancy % Vacancy % 4 th Quarter 2009 5.9 1,300 5.3 1,514 4 th Quarter 2010 4.5 1,350 4.3 1,628 4 th Quarter 2011 3.4 1,504 4.1 1,828 Percentage Change 2009-2011 15.7% 20.7% Sources: Cassidy Turley Northern California Apartment Market Report, Santa Clara County, Fourth Quarter 2011; Gruen Gruen + Associates. Since 2009, vacancy rates have declined in both larger and smaller apartment complexes. Vacancy rates in projects with 100 units or more have remained low at approximately four percent despite the addition of over 1,400 new units in the first half of 2011. For smaller apartment complexes, vacancy has been below five percent for seven consecutive quarters. Average rents have climbed significantly since the end of 2009. For smaller complexes, rents have increased 15.7 percent from an average of $1,300 to just over $1,500. For larger complexes, rates have increased even more by nearly 21 percent over the past two years, from an average of $1,514 to $1,828. Table 2 presents average rental rates by type of unit for both smaller and larger apartment complexes in 2011. TABLE 2 Average Monthly Rents by Type of Unit: 2011 Type of Unit Apartment Complexes with 99 Units or Less Apartment Complexes with 100 Units or More Studio $1,110 $1,251 1 Br/1Ba $1,389 $1,641 2Br/1 Ba $1,545 $1,752 2 Br/2Ba $1,885 $2,075 3 Br/2 Ba $2,188 $2,464 Average $1,504 $1,828 Sources: Cassidy Turley Northern California Apartment Market Report, Santa Clara County, Fourth Quarter 2011; Gruen Gruen + Associates. Average rents are lower for the smaller apartment complexes. Rents for smaller complexes range from 82 percent to 88 percent of average rents for the larger complexes. As unit size increases by number of bedrooms and bathrooms, average rents increase from seven percent PAGE 4

to as much as 25 percent to 31 percent. The increase in average rent is higher between studio type units and one bedroom units than between two- and three-bedroom unit types. EXISTING APARTMENT SUPPLY COMPETITION Our site and area inspections and interviews indicate that the primary apartment within approximately five miles of the Site consists of the projects summarized in Table 3 and Map 1. PAGE 5

TABLE 3 Map ID A B C D E F G H I Name SAN MARINO 2175 ABORN ROAD Existing Apartment Supply Near the Site Units Occupancy Unit Types # Year Built % (# Beds/# Baths) 248 1984 95 2/1 2/2 3/2 THE CARLYLE 2909 NEIMAN BLVD 132 2000 97 LION VILLAS 2550 S. KING RD PINEWOOD TERRACE 2620 ALVIN AVE WOODSIDE 2557 ALVIN AVENUE CASA REAL 2580 FONTAINE ROAD THE WOODS 4300 THE WOODS DR 272 1978 N/A STUDIO 2/1 2/2 Unit Sizes # Sq. Ft. 701-720 901-978 760 1,028 1,232 410 600 800 850 Monthly Rents $ 1,425-1,515 1,775-1,825 1,666 1,940 2,222 870 1,200 1,400 1,450 Monthly Rents $ Per Sq. Ft. 2.03-2.10 1.87-1.97 2.19 1.89 1.80 2.12 2.00 1.75 1.71 125 1970 N/A 700 1,145 1.64 106 1980 N/A N/A N/A N/A 1,840 1981 96 ORCHARD PARK 5635 BLOSSOM GARDENS 180 1986 97 BLOSSOM HILL 5480 LEAN AVE 201 1974 N/A 2/2 2/1 STUDIO.5 1/2 2/2 2/3 3/2 2/1 2/2 2/1 3/1.5 650 850 592 946 476 669-746 900 957-971 889-1,196 1,340-1,408 1,255-1,397 760 860 890 775 875 1,250 1,055 1,395 1,145 1,345 1,250 1,365-1,615 1,575-1,605 1,715-1,775 1,625-2,055 2,195-2,245 2,235-2,315 1,285 1,465 1,565 1,275 1,485 1,775 1.62 1.64 1.93 1.42 2.63 2.04-2.16 1.75-1.78 1.79-1.83 1.72-1.83 1.59-1.64 1.66-1.78 1.69 1.70 1.76 1.65 1.70 1.42 PAGE 6

TABLE 3 CONTINUED Map ID J K Name BLOSSOM OAKS 229 BLOSSOM HILL RD MONTEREY GROVE 6100 MONTEREY ROAD 224 1999 98 TOTAL 3,648 Existing Apartment Supply Near the Site Units Occupancy Unit Types # Year Built % (# Beds/# Baths) 320 1976 N/A 2/1 2/2 3/3 Sources: CBRE; Forrent.com; GG+A Interviews. Unit Sizes # Sq. Ft. 632 834 720 1,035 1,180 Monthly Rents $ 1,165 1,490 1,500 1,970 2,480 Monthly Rents $ Per Sq. Ft. 1.84 1.79 2.08 1.90 2.10 PAGE 7

MAP 1: Existing Apartment Supply Near the Site PAGE 8

The existing apartment supply near the Site is currently experiencing high occupancy rates with strong rental rate increases, much like the rest of San Jose and Santa Clara County. None of the project representatives with whom we spoke are currently offering concessions. Only two sources of primary apartment supply competition exist within approximately three miles of the Site; the San Marino Apartments and The Carlyle Apartments, both of which are located along the Capitol Expressway at Aborn Road. Built in 2000, The Carlyle is the newest addition to the rental inventory in the Evergreen market area. The Carlyle consists of 132 units, with monthly rents generally ranging from $1.90 to $2.20 per square foot for one- and two-bedroom units. Monthly rents for larger 1,200-square-foot three-bedroom units approximate $1.80 per square foot. According to the leasing agent, the project is currently 97 percent occupied. Strong rental growth has occurred, with rents increasing by approximately $200 per month (about 10 percent) over the past year. The project primarily attracts tenants that originate from within the Evergreen district of San Jose. Many renters have moved out of previously-owned housing units in the area due to financial hardships. The supply completion in the immediate area is limited. The primary source of competition is the San Marino Apartments. San Marino was built nearly 30 years ago and contains 248 one- and two-bedroom units, ranging in size from approximately 700 to 980 square feet. The project is reportedly 95 percent occupied and occupancy is expected to increase over the spring and summer months. Both occupancy levels and rents have increased over the past year. Monthly rents for one-bedroom units range from approximately $2.00 to $2.10 per square foot, while rents for the two-bedroom units approximate $1.90 to $2.00 per square foot. San Marino recently started marketing to Evergreen Valley College students and faculty, providing discount referrals and deposit reductions for students (which has generated a few renters thus far). Tenants generally originate from within San Jose and the project competes with in addition to The Carlyle the Woods apartments further southwest and other projects along the 101. The leasing agent indicated that demand for units originates from a variety of household types, some of whom are employed in the nearby area. Households moving from owneroccupied housing are a frequent source of demand. The positive reputation of the Evergreen School District also generates demand from family households with children. Monterey Grove, built in 1999, is the second newest institutional-grade apartment project relatively close to the Site. The project is situated about four miles south of the Site, at the nexus of Highways 101 and 85. The project contains 224 units. Monthly rents for one- and two-bedroom units approximate $1.90 to $2.10 per square foot. Monthly rents for the largest three-bedroom units average $2.10 per square foot. According to the leasing agent, the project is extremely well occupied at greater than 98 percent. Rent growth has been strong, estimated at 5 to 10 percent each of the past two years. The project attracts a variety of tenants, but many are single and younger couple professional households. Few if any students are attracted to the project. The majority of renters are not employed in the area. Most commute north via Highway 101 or 85 to major employment centers in North San Jose, which is a key advantage to the location (especially for dual-income households). Proximity to the adjacent Evandale Business Park, for example, is not a major determinant of demand for units. When searching for apartments, many tenants consider projects further north along Highway 101 (including The Woods). The leasing agent also indicated that the project is increasingly attracting family households and empty nesters who for PAGE 9

financial reasons or lifestyle preferences have sold their homes (or required to move out of homes due to foreclosure) in South San Jose. Thus, some demand for the larger units relates specifically to households with younger children who do not want to relocate to another school district. The Woods is a large apartment community located along the Capitol Expressway at Monterey Highway, about four miles southwest of the Site in the Edenvale neighborhood. The project contains a total 1,840 units, spread across six different villages within the community. The leasing agent indicated the project was originally built in 1981, but several major renovations have occurred (most recently about 10 years ago). The project offers more than 50 different floor plans for studios, one, two, and three-bedroom units. Asking rents for the small studio units (at less than 500 square feet in size) are reported at approximately $2.60 per square foot. One-bedroom units tend to vary in size from approximately 670 to 970 square feet, with monthly rents of approximately $1.80 to $2.15 per square foot. The larger two bedroom units ranging in size from approximately 900 to 1,400 square feet rent for approximately $1.60 to $1.80 per square foot. Average monthly rents for the three bedroom units of approximately 1,250 to 1,400 square feet approximate $1.70 per square foot. According to the project representative, the entire community is currently 96 percent occupied and both occupancy and effective rents have been increasing. Due to its size, variety of units, comparatively affordable rents, and ease of access to the regional highway system, the project attracts a variety of household types who are employed throughout San Jose and the South Bay Area. Conclusions Drawn From Review of Existing Apartment Supply Most existing supply options are located within one-half mile of the Bayshore Freeway or the Capitol Expressway. Proximity to these transportation linkages is important because many renters are not employed in the local area, but instead commute to the north and west to major employment centers in North San Jose and Silicon Valley. An increasing number of would-be and former homeowners are renting due to financial constraints, lifestyle preferences, and/or uncertainty about the future of owner-occupied housing alternatives. Family households constitute a larger than typical component of demand for rental housing in the market area. The average renter household size, according to the Census, is greater than three persons per households. This is reflected in the composition of unit size offerings at existing market area complexes; more than 60 percent of units at the two newest market area projects, for example, are two-and three-bedroom units. A related conclusion is that school districts in the market area are a more important consideration to renter households than is usually the case for multi-family rental uses. The Evergreen School District is regarded as having some of the top public schools in San Jose. This can be expected to support demand from family households with young children whom have elected not PAGE 10

to (or cannot afford to) purchase housing in the market area. The interviews indicated that given the continued prevalence of homeowner displacement and foreclosure, some households with children will seek rental housing alternatives that would not require a change of school districts. POTENTIAL DEMAND FOR MULTI-FAMILY RENTAL HOUSING IN THE MARKET AREA Demand for Apartments will originate from New Households Locating in the Market Area Demand for apartment units attributable to employment growth can be expected to occur as the local economy continues to recover from the Great Recession. Future employment growth prospects in San Jose are strong. Nonfarm payroll employment in the San Jose MSA grew by nearly three percent last year (or 26,000 jobs), a rate that far exceeded growth in neighboring East Bay and San Francisco Peninsula counties. Over the next four years (2012-2016), the Business Forecasting Center at the University of the Pacific expects employment growth in the San Jose MSA to continue to remain strong, increasing at 1.9 to 2.6 percent annually. If this forecast materializes, the San Jose MSA will add more than 80,000 jobs over the next four years. Assuming the metro area maintains its current jobs-tohousing balance, approximately 60,000 new housing units over the next four years will be demanded (15,000 units per year) throughout the South Bay. If historical patterns prevail, approximately three-quarters of this demand, or 45,000 units, will be for rental housing. 2 The City of San Jose s current 2040 General Plan pursues a policy objective of increasing the balance between jobs and employed residents. As a result, the underlying growth capacity projections are conditioned upon future employment growth from 2008 to 2040 of an additional 470,000 jobs. Although such growth is unlikely to occur without an adequate housing stock (the General Plan housing capacity includes only 120,000 additional dwelling units), the policy implication is that demand for residential uses is likely to grow in excess of supply, due to the supply restrictions imposed by the regulations of the City of San Jose. As indicated previously, the City of San Jose reports that 4,455 apartment units are currently under construction within the City. According to CB Richard Ellis, an additional 1,609 apartment units are currently under construction elsewhere throughout Santa Clara County in Sunnyvale, Mountain View, and Milpitas. The apartment supply under construction in the South Bay totals just fewer than 6,100 units. This supply pipeline will not be sufficient to accommodate new rental housing needs as it represents only 54 percent of potential annual regional demand. The basic demand and supply determinants reviewed briefly here explain why secondary analysts are predicting that San Jose will experience the highest apartment rental rate increases in the Nation in the upcoming years. 2 Between 2000 and 2010, renter-household growth in Santa Clara County comprised approximately 74.9 percent of all household growth over the decade. PAGE 11

Estimate of Demand Generated by Turnover in Existing Rental Product Not all demand for rental units will originate from new households locating in the market area. Given the (1) low vacancy rate of apartment complexes in the market area; (2) the limited amount of rental product in the market area delivered in the past 10 years; and (3) the age of the existing inventory, an appropriately designed and priced apartment use at the Site will capture demand from existing market area tenants in addition to serving households new to the market area. According to the 2010 Census, the vacancy rate for market area rental housing approximated only 3.1 percent. Without any increase in the demand for rental housing, approximately 230 apartment units could be added to the existing inventory while maintaining a 95 percent occupancy level. For purpose of this analysis, we define the primary market area for apartment uses to include Census Tracts within the Evergreen planning district and eastern portions of the Edenvale and South planning districts of San Jose (all within five miles of the Site). Our interviews suggest that apartment projects within these areas tend to compete with one another for tenants. In 2010, the market area contained approximately 11,040 renter households. Approximately 43 percent of these renter households have incomes greater than $50,000. This suggests an existing potential market size for new market-rate multi-family rental housing of approximately 4,800 households. 3 Analysis of American Community Survey data indicates that the annual turnover rate of renters in the market area approximates 25 percent. The survey data over the 2006-2010 period indicated that the vast majority of renters who did move in a given year, 76 percent, moved elsewhere within Santa Clara County. We assume that a 12.5 percent local turnover rate is applicable to existing market area rental households. Or, in other words, that one of every two renters who relocates to a new unit will remain within the market area. Table 4 below summarizes an estimate of annual apartment demand attributable to the turnover of existing renter households. TABLE 4 Estimate of Demand Generated by Turnover of Existing Market Area Renter-Households Renter Households With Annual Incomes Greater than $50,000 4,746 Local Turnover Rate 1 12.5% Renter Households Moving to Apartment Product in Market Area 593 Average Annual Demand @ 5-10% Capture Rate 30 to 59 units 1 Percentage of renters that move internally within the market area each year. Sources: U.S. Census Bureau; Gruen Gruen + Associates. A five percent to ten percent capture rate of the estimated 593 candidate households (residing in the primary market area who are likely to move to another apartment within the 3 We assume for purposes of estimating turnover demand that households earning less than $50,000 are unlikely to be able to afford rents that would be sufficient to amortize new construction costs. PAGE 12

area) suggest obtainable demand from existing households would support between approximately 30 units to 60 units per year. PAGE 13