2

Letter from the CEO 3

REO & Special Assets 4

Downtown 5

Office 6

Retail 8

Industrial 10

Apartments 12

Medical Office 14

Principals / Agents 15

ne of the lessons I learned early in life was to look to the future with optimism.“Better to look at the glass as half full, rather than half empty,” are famous words to live by.

2009 was a half full glass. The commercial real estate brokerage business was waydown. In my 30 years of business, I have not seen such a lack of enthusiasm for realestate in general. Investors are sitting on their money, as are the banks. There has beengenuine fear in the marketplace as rents and values have stayed the same or been in decline.Even in the 80s when the prime rate was 18%, we were making deals with seller financingat 10% to 12%. This is not a reality today, as more people are looking to sell rather thanbuy. Although interest rates remain low, the underwriting is much more conservative anddemanding. As the banks figure out which loans are truly bad and which ones can be workedout, I think this market unrest will level out and we can get back to business.

On the bright side, the property management end of our business is booming. We hada record year in 2009. Property owners and financial institutions need our expert adviceand value-added comprehensive service now more than ever. We are involved in severalreceiverships and workouts with lenders.

One notable account we are now managing is the Wells Fargo building, a 200,000square foot, Class A building in Downtown Spokane. I am very proud of all of our propertymanagement professionals and their commitment to excellence. Our NAI affiliation continuesto provide our sales team with national and international contacts, superb technology,and great educational opportunities.

2010 looks to be a much better year as many investors and retailers will start makingdeals again. We are already seeing an increase in activity and lease proposals. I alsothink that the local banks will work through their problem loans in 2010, and will look tomake more loans. With the return of the stock market to “normal levels,” a more balancedpolitical environment, and rising employment, we will see consumer confidence pick up andspending getting back to reasonable levels. This will help the retailers make a comeback,and investors to again venture back into the market with new acquisitions.

I believe this year will be the start of a great decade for real estate. The InlandNorthwest has fared better than most places in the country and we have truly been discovered as a wonderful place to work and play. I see the glass more than half full in2010, and beyond.

David R. Black, CCIM, SIOR Chief Executive Officer

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Time to Look Forward By David R. Black CCIM , SIOR

David R. BlackChief Executive Officer

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Will 2010 Be the HighWater Mark for REO? By Jeff K. Johnson CCIM, SIOR

and Christopher D. Bell, Esq.

conomic and real estate market conditions that deteriorated in 2008 and 2009 have ledto an unprecedented number of properties being taken back by real estate lenders. As aresult, many prognosticators view 2010 as the year of the REO as commercial real estatelenders accelerate their evaluation of non-performing loans or loans that have passed thematurity date, and for one reason or another, are not eligible for renewal of the loan. Real Estate Owned (REO) or Other Real Estate Owned (OREO) are the terms commonlyused when a bank or lender takes back real estate that secures an obligation to pay.

Commercial banks in Washington rank at the top of the list nationally in delinquentland acquisition and development loans, delinquent single-family residential land acquisitionand construction loans, and delinquent commercial mortgage loans. With one of the highestloan delinquencies in the U.S., Washington will see the closing and consolidation of a materialnumber of its community banks over the next few years. By some estimates, there couldbe more than 20 banks taken over by the FDIC in Washington state by the end of 2010.

NAI Black's Asset Optimization Team and Strategic Assets Services Group are workingwith both national and community banks, and CMBS special servicers to analyze troubledassets, work with the lenders to dispose of these assets or counsel the lenders on workoutsolutions with their borrowers.

While this can represent a dire picture for the FDIC, shareholders, bondholders and the overall economy, it signals a tremendous acquisitions opportunity for well-positioned investorswho have been sitting on their cash reserves waiting for this day to come. We have beencounseling our clients on the acquisition of these distressed assets and advising them thatbanks are typically motivated by cash offers with short feasibility periods. We have seenthe successful acquisition of development land for as low as $0.20 to $0.30 on the dollar,acquisitions of distressed improved commercial real estate between $0.40 and $0.60 onthe dollar, and stabilized income producing properties closing at $0.70 to $0.80 on the

dollar. The moniker “cash is king” has never born so much truth. Cash buyers who want to prosper from the current buying opportunities are wise to work with a seasoned Realtor® who has relationships with lending institutions and has an in depth knowledge of available properties.

NAI Black is the asset management firm most often chosen by lenders with troubled assets in the greater Inland Northwest to serve as a custodial receiver and/or REO manager, in addition to its REO disposition and acquisition, and valuation consulting and loan workout advisory services.

Jeff K. Johnson CCIM, SIOR Christopher D. Bell, Esq.

Downtown Synergy RipplesThroughout the Region:Part IIBy Mark C. McLeesand John M. Bennett CPM®

he Downtown Spokane experience is dynamic and continues to evolve. Spokane is thelargest and most vibrant city between Seattle and Minneapolis on the northern tier. ItsDowntown features strong office and retail components, an 18-hour dining and night life cycle,entertainment and sporting venues, spectacular lodging with river views and some of themost spectacular refurbished historic hotels in the states. Scenic vistas and outdoor activitiesare also a part of the Downtown experience, highlighted by our 100-acre Riverfront Park andthe 37 mile long Centennial Trail. These amenities provide downtown residents and workerseasy access to walking, running, biking, kayaking and other outdoor pursuits. Also availableare convention activities /events, five universities and seven accredited higher educationopportunities, a growing medical district, and a diversity of high paying career opportunities.

Impacts of the RecessionAlthough Downtown Spokane did not materially experience the effects of the recession

until the beginning of 2009, the adjustment to property values and lease rates made a veryabrupt transition down to 2006 levels. This adjustment came at a time right when real estatevalues were on the verge of skyrocketing. The good news is that the curve back to marketstability has begun and this offers an ideal window in time for buyers and tenants to positionthemselves and their real estate strategies for the next 5, 10 and 20 years. With lease incentivesbeing offered to tenants, 2010 is surely a year for market-savvy businesses and tenants totake advantage of these favorable transactional opportunities.

CommerceCommerce has remained strong in the Downtown market; including dining, retail,

hospitality, and entertainment services. 2010 started off strong with a successful First NightSpokane. Downtown is capitalizing on the U.S. Figure Skating Championships, which Spokanehosted for the second consecutive time, and this year was a precursor event to the VancouverOlympics. Other events like the NCAA Men's Division 1st & 2nd Round Basketball tournament,Bloomsday, Hoopfest, and Pig-Out-in-the-Park will continue to draw visitors to Downtown and create record-breaking volumes in commerce.

The FutureThe future of Downtown Spokane will remain vibrant and continue to attract new visitors

and businesses to participate in all of the commerce and activities our city has to offer. Andalthough Downtown Spokane has been blessed with many redevelopment and revitalizationprojects over the last five years, there are still many opportunities out there, including anabundance of underutilized historic buildings for re-use development that will continue tosupply our city with a vibrant construction sector. The CBD office market remains relativelyhealthy compared to other cities. This year will prove to be the beginning of another rally backto 2007-2008 values, with the effects leading us into a very prosperous 2011 and 2012.

Mark C. McLees John M. Bennett CPM®

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pokane’s office market ended 2009 with quiet and cautious hope for the coming year. We saw rather stable occupancy numbers throughout the market, with the exception of theSpokane Valley where vacancy increased to 22%. A large part of that vacancy was broughtabout with the completion of the 250,000 square foot River View Corporate Center. This propertymakes up approximately 10% of the Spokane Valley office space, providing a big impact on Valleyvacancy. To date, we understand that around 40,000 square feet has been leased in this newproject. This property is a testament to the continued commitment by Walt Worthy to producequality Class A office properties in multiple submarkets in Spokane. Though the downtownmarket remains the hub of major office activity, the Riverview Corporate Center will appealto office tenants who need large amounts of space but do not need to be located in the CBD.With the lack of many large floor plate options in the marketplace, this building will beattractive to larger tenants as our economy and the office market turn around in the nextyear or so. In addition to this project in the Valley, Iron Bridge (just off I-90 at Trent andthe Spokane River) completed its third phase of development and substantially filled building#3 containing 40,000 square feet, prior to completion of construction.

As we look forward to 2010, the outlook for the Spokane office market this year is positive.The level of activity in the office market has begun to increase. Although we don’t expect tosee any speculative office building development in 2010, there are a number of owner userprojects under construction and on the drawing boards. We believe the market will move intwo main directions this year. First, we see tenants looking to cut back on their operationalcosts, moving to lower cost space or attempting to renegotiate their leases at lower rents withexisting landlords. Landlords and tenants have had to work together toward win/win leaserenegotiations this past year as some Spokane businesses have struggled. Second, there aretenants in our market who have been contemplating an upgrade of their existing office spacefor some time and they will now take advantage of concessions provided by some buildingowners to finally consider a move. These tenants will dive into this market to get themselvesrepositioned for the upturn in the economy that is bound to begin as the year progresses.

It is our expectation that rents in Class A office buildings will remain at their 2009 levelsthrough 2010 but the amount of dollars being spent by building owners to complete leases willincrease. Tenant improvements, moving expenses, and other transactional costs will be carefullyscrutinized by all parties to a lease transaction this year.

From an investment standpoint, we have not seen many investors looking at office buildingsover the last year but we foresee that investment activity will increase in 2010. Cap rates havemoved up to a point that make office building investments attractive again to investors who have stood on the sidelines and waited for prices to stabilize. Local and regional appraisers pegincreases in office building cap rates at 50-125 basis points. Spokane has always had a relativelystable office market, which is attractive to investors. The key will be the easing of the financialmarkets and having financing more readily available for the purchase of office buildings.

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Spokane’s Conservative Growth Provides a Stable Office Market “TheTortoise Wins the Race”

By Christopher J. Siemens and Kevin M. Guthrie

Christopher J. Siemens Kevin M. Guthrie

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CBD OFFICE VACANCY RATES

SUBURBAN OFFICE VACANCY RATES

Retailers Look to ResetPriorities in 2010By Christopher D. Bell, Esq.and Colin C. Conway CSM

etail brokers in Spokane and across the country are relieved to see the end of 2009.With the cratering of the national economy and the related impact on retailing, investment,and leasing in the retail market, retail leasing ground to a screeching halt. Many retailersexperienced a material decrease in sales and many were forced to either seek rent relief orshutter their business. The good news is that with every downturn there will be highlyattractive acquisition and leasing opportunities for both investors and tenants as our economyand retail sales climb back to stabilized levels. Retail properties are becoming attractiveagain through lower prices, higher capitalization (cap) rates, and the upside potential of theoverall market. Dislocation in the retail market is not universal. We have seen cases wherecenters in high demand are still achieving pre-recession rent levels.

Investment MarketAs lending institutions constrained the supply of money to investors, developers,

and landlords, there was a significant increase in cap rates across all sectors of the retail investment market. Appraisers that we have consulted have forecast that retail cap rates haveincreased 100-150 basis points in the last 12 months. Cap rates for quality grocery-anchoredcenters currently hover around 9%. With higher cap rates and the resulting buyer’s market,2010 should see increased investment activity as the banks slowly reopen the credit markets.

Leasing MarketRetail leasing activity in 2009 was close to non-existent, but the immediate future looks

good. Wall Street requirements for retailers to open new locations and an abundance ofaggressively priced retail space have helped to restart retailer’s expansion plans. Landlordswill need to be very competitive with aggressive lease rates, flexible terms, and other incentivesto compete for the few tenants in the market.

Local tenants took advantage of the tough market conditions to renegotiate lower rentsfor existing leases or to expand their presence at discounted rates. Prime locations werevacated by failing national retailers, creating many large vacancies throughout the market.2010 will see increased retail leasing activity but at significantly lower rates than in 2007and 2008.

There has never been a time where it has been more important for retail tenants andbuilding owners to engage a real estate professional to navigate current market conditionsand achieve the best possible outcomes.

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SUBURBAN RETAIL VACANCY RATES

RETAIL VACANCY RATES

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Slow 2009 ShowingRebound TrendBy Scott M. Personand Heidi A. Irvine

uring 2009, activity in the industrial market slowed down from years past. The amountof buildings available for sale has remained at a similar level as 2008, with the exception of a shortage of buildings for sale under 10,000 square feet. Available lease space hasincreased by nearly 1.68% between the fall of 2008 to the fall of 2009. A 4.72% increasein vacancy has occurred since 2007. Much of that vacancy is located in three of Spokane'sindustrial parks. The Spokane Industrial Park, West Spokane Industrial Park, and the CentralIndustrial Park, together have approximately 775,000 square feet of vacancy. Much of thisvacancy was responsible for pushing rental rates lower in 2009.

Toward the end of 2009, lease rates began to soften up and the market saw older, basicwarehouse space that was once averaging $0.25 per square foot NNN move below $0.20 persquare foot NNN. Newer blended office warehouse space slid down near $0.40 per squarefoot NNN. Most of the market activity last year was existing tenants moving to less expen-sive space. Many tenants also worked to negotiate lower rental rates from their landlords.

Scott M. Person Heidi A. Irvine

INDUSTRIAL VACANCY RATES

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In 2009, the industrial market experienced a negative absorption rate primarily due to two major companies, Columbia Lighting and Sherwin Williams Paint Company, vacatingnearly 300,000 square feet of space as they closed their Spokane operations.

Although construction costs have decreased from years prior, current lower rental ratesdo not support new construction. Additionally, conventional financing for new projects is veryhard to obtain and those lenders who are making loans are requiring large infusions of cash fromdevelopers. These changes in the financing market have kept developers out of the market.

The supply of industrial land in the City of Spokane and the City of Spokane Valley remainslimited. Although the supply is limited in these areas, we saw prices decrease from over $4.00 per square foot to $3.50 per square foot toward the end of 2009. Liberty Lake doeshave an ample supply of land, but prices did not vary much from $4.00 per square foot to $5.00 per square foot. This is primarily because industrial land in the Liberty Lake areaappeals to high tech manufacturers, as well as industrial users. The West Plains still hasthe largest amount of industrial land available. Prices there vary widely from under $1.50per square foot to in excess of $7.00 per square foot due to the large supply of land availableand if the property has infrastructure in place.

So far in 2010 the greater Spokane industrial market has seen solid progress with bothtenants and owner users active in the market place. Tenants are taking advantage of lowerrental rates to relocate or expand their businesses and owner users are looking for propertiesthat they can purchase with SBA financing. Rental rates will remain low in 2010 as theeconomy still works to recover, but sale prices should remain stable on properties under$1,000,000 as owner users seek to purchase properties in a market with a very limitedsupply. Larger investment-type industrial properties will likely see price decreases as lowerrents and lower cap rates continue to put downward pressure on prices. 2010 should be astabilizing year for the Spokane industrial market.

The Air Gets Let Out of the Balloon! By Mitch D. Swenson CCIM

and Jeffrey A. Swanson

fter almost a decade of exceptionally strong growth (in relative terms for Spokane) inthe apartment sales investment market, 2009 marked a derailment of the growth, valuationand volume trends. In 2008, approximately $70,000,000 in multifamily investment realestate traded hands in Spokane County. In comparison, preliminary year-end numbers for2009 showed closed sales volume of only about $10,000,000. This reflects almost an 85%drop in the dollar volume of closed apartment communities in Spokane from 2008 to 2009!

This was due to many factors, including 1031 tax deferred exchange money comingnorth to Spokane drying up, along with major fundamental changes in the underwriting ofapartment development and acquisition loans and the availability thereof.

Since the market generated such a small number of closed transactions, it is reallydifficult to calculate what the average capitalization rate was for the year ending 2009. To take an educated guess, we would suggest that apartments are currently trading in the7.5% to 7.75% range. A panel of local and regional appraisers recently opined that apartment cap rates have increased between 75 and 150 basis points in the past 12 months.

On the bright side, as we transition to 2010, there seems to be a new awakening inapartment sales. We are currently working on a number of transactions, but investors arevery wary of the future. Coupled with the constriction in apartment financing, this translatesinto a slow recovery. There are some very good acquisition opportunities in today’s multifamily market place, but the investor has to have a very good relationship with his or her lender, a bankable project, and a real world income and expense projection to get atransaction closed.

With the lack of conventional financing, some sellers are now considering contractsales and trades to get their properties sold. This has opened up new opportunities forinvestors who have been unable to obtain financing from banks and life insurance companiesdue to more stringent lending requirements.

Looking in the rear view mirror a year from now, we hope to talk about a robust turnaround that happened in the multifamily sales arena.

Vacancy rates rose in 2009, continuing a trend from the previous year. The September2009 survey reflected a vacancy rate of 7.2%, up from 4.6% in September of 2008. The Central, South, and Valley markets saw their vacancy rates double from 2008, while the North side market saw a reduction in vacancy from 7.47% in 2008 to 6.1% in 2009. As the end of the year approached, vacancies were highest in the three-bedroom/two-bath apartments, especially in the South and Central markets. Overall rental rates increased justslightly over 1% in 2009, similar to 2008. There was no change in the average overall rentper square foot from 2008.

Mitch D. Swenson CCIM Jeffrey A. Swanson

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APARTMENT VACANCY AND RENTAL RATES

The following reflects overall vacancy and rental rate trends in accordance withThe Real Estate Reports – Fall 2009 Edition:

Average Submarket Average Vacancy 1 Rental Rate 1 Rent/S.F. 1

Mar. Sept. Mar. Sept.2008 2009 2 2009 2009 2009 2009 Change

Central 3.27% 6.60% $584 $652 $.707 $.812 12.97%

North 7.47% 6.10% 661 643 .824 .734 (12.27%)

South 3.03% 7.10% 642 659 .721 .760 5.13%

Valley 4.00% 8.50% 651 653 .776 .783 0.97%

Overall 4.60% 7.20% 639 651 .758 .766 1.04%

1 Source: The Real Estate Report/WCRER Survey.2 December results not available at time of publication.

13Riverfalls Tower Apartments

Rental rate growth is expected to be minimal in 2010. Increasesin vacancy levels have led torental concessions, usually in theform of free rent. Renters beingdrawn to low mortgage interestrates and tax incentives for first-time home buyers, as well as tenants doubling up and younger tenants moving back home, willhave a significant impact on occupancy in 2010. As the economyand unemployment rates continueto improve, the multifamily rentalmarket will incrementally improvein 2010 and 2011.

Health Care Remains Strong,But There Are Questions forthe Coming YearBy Thomas P. Hix CPM ®

and Jon J. Jeffreys

he health care sector remained strong this past year and should continue to be strong in 2010.Health care reform legislation raises some questions about this sector due to potential governmentfunding cuts and caps on reimbursement rates. Despite those concerns, Spokane's health care community will always be a key contributor to Spokane's economic vitality.

One of the big surprises in 2009 was Community Health Systems’ (which operates 32 medicalfacilities) acquisition of Rockwood Clinic late that same year. Observers are waiting to see how thisacquisition affects health care delivery and the competitive balance between the two major hospitaloperators in the market; CHS and Providence. Even with the competitive balance in question, bothProvidence Health Care, which operates the Sacred Heart Medical Center, Children's Hospital, and HolyFamily Hospital; and Community Health Systems, Inc., which operates the Deaconess Medical Center andValley Hospital & Medical Center, continue to invest for the future with major capital investments planned.

Providence kicked off a five-year capital investment that included projects like a new cancer center and doctors building that added 173 licensed beds to the hospital. Unfortunately, the certificateof need to license those additional beds was rejected by the Washington State Department of Health.Providence has appealed that decision. Providence did put their West Tower four-story addition, holding75 patient beds (which was scheduled for 2014), on hold due to softness in the economy.

Community Health Systems has spent $17 million on capital improvements as part of a commitmentto invest $100 million in improvements within five years from their acquisition of facilities previouslyowned by Empire Health Services. Most of the initial money spent went to improve patient health careservices and add new equipment.

Washington State University and University of Washington have formed a task force to study thefeasibility of a four-year medical school in Spokane. The creation of a four-year medical school wouldhave a significant economic/development impact here in Spokane; both in employment opportunitiesand by bolstering medical research.

With a stable medical office market, medical office building developers have responded to the needfor additional office space with a 16,000 square foot building on the South Hill for podiatrists and dentistsand a 30,000 square foot office/medical office on 29th Avenue. Owner users of medical and dentalbuildings will continue to build new buildings for their practices as long as easily obtainable SBA financingremains available at attractive interest rates. Also in 2009, the Spokane Eye Clinic moved into its new44,000 square foot building on the lower South Hill.

The fall 2009 survey for medical office space,completed in October 2009, shows a vacancy rate of 7.06%, which is nominally lower than the vacancyrate from the October 2008 survey. The survey includes 79 buildings containing approximately 1,857,616 square feet. Rental rates in the survey range from a low of $8.00 per square foot on a netbasis up to $20.09 per square foot for an average rate on a full-service basis. Absorption for the past year was approximately 48,500 square feet.

Thomas P. Hix CPM® Jon J. Jeffreys

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MEDICAL OFFICE SPACEHISTORICAL VACANCY

15

COMMERCIAL MANAGEMENT

David R.Black CCIM, SIOR Jeff K. Johnson CCIM, SIOR Mark G.Pinch CCIM Gloria A.Ries CPA John M. Bennett CPM® Thomas P. Hix CPM®

Chief Executive Officer President Chief Financial Officer President Senior Vice President

Judith I. Bagge C11 Christopher D.Bell Esq. Anne M. Betow James S. Black, III Colin C. Conway CSM Mark Davis CCIM, SIOR

Kevin C. Edwards Michael K. Egan Earl L. Engle CCIM Kevin M. Guthrie Jamie R. Hutchison Heidi A. Irvine

Don B. Jamieson Randy K. Jassman Jon J. Jeffreys Carlo A. Jensen Susan K. Lane Jeff A. McGougan

Mark C. McLees Michelle S. McLees Jim A. Orcutt J. Grant Person Scott M. Person

Chris J. Siemens Jeffrey A. Swanson Mitch D. Swenson CCIM David B.Wright CPM® 509.623.1000

Black Commercial, Inc.Black Realty Management, Inc.

Stanford Financial

Commercial Real Estate Services,Worldwide.

107 South Howard Street, Spokane,WA 99201509.623.1000 ¥ www.naiblack.com

Photograph by Alan Bisson Photography

Image provided by ALSC Architects.Photograph by Explosive Illusions Photography.

NAI Black's roots have been in Spokane for over

50 years. We're committed to being an active

partner in the Inland Northwest's great history

and it's vibrant future. NAI Black is proud to

manage, lease and market for sale commercial

real estate properties throughout Spokane and

the region. We look forward to our continued role

in building a dynamic and vital Inland Northwest.

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