As this letter is being penned, an economic stimulus bill is being signed into law – approximately $800 billion of tax relief and government-sponsored spending designed to supplement the $750 billion Troubled Asset Relief Program (TARP) passed earlier, and fill a hole created by a massive global act of forced deleveraging. Over the past 12 months, global asset prices have deflated in a range of $20 trillion to $30 trillion – that is correct, trillion. The U.S. government, in the form of the Treasury, Federal Reserve and Congress, has expanded the federal balance sheet to match the contraction to private sector balance sheets, particularly in the financial sector. Deleveraging, and its impact on the economy and society, may prove to be the central theme that frames business and the quality of life for the next five to 10 years.

It may prove difficult for the government to solve a problem that has been almost 10 years in the making. The last great bull market was driven largely by misguided government policies and private market practices that significantly weakened credit standards on everything from business loans, corporate leveraged buyouts, automobiles, homes and luxury items to everyday household goods. The abundance of cheap debt inflated all asset prices, which led to more debt, and, in turn, drove asset values even higher. Over the past five years, the annual growth in debt easily outpaced the annual growth in GDP, creating a dangerous valuation bubble in virtually all asset classes. All the while, the consumer rate of savings in this country dropped, contrary to past economic cycles. During the last bull market run, from 2002 through 2007, savings fell rather than rose, going negative mid-2005 and staying at less than 1% until late 2008. The U.S. economy is caught in a perilous position. The world is experiencing a giant “margin call,” or a call for debt repayment. Asset values are not there to support additional borrowings, and financial institutions do not have the lending capacity to meet the need. Banks are deleveraging, the consumer is being forced to deleverage and the global economy is deleveraging until it finds a point of equilibrium. As we stated last year, many forces have combined to create an economic mess for the ages, impacting all businesses, jobs and households.

Jobs and Deleveraging
There may not be an adequate description to frame what occurred with jobs and the nation's economy during the fourth quarter of last year. From most reports, it was the worst single quarter since the Great Depression. During the last three months of the year, close to 1.7 million jobs were eliminated; for all of 2008, the job loss figure is closer to 3.1 million. Since the start of this recession, the nation has lost approximately 4.4 million jobs – a figure that does not include those Americans who have exhausted their unemployment benefits without securing a job, and who are underemployed. Unemployment levels in the U.S. are expected to exceed 10% during 2009.

We have seen all of this play out in our operating markets – California, Washington, Arizona and Colorado. Asset devaluation has had a significant impact on home prices. Median home prices in most of our major markets have declined 30% to 40%. The economic contraction has led to year-over-year job losses of almost 2%, or more than 300,000 jobs in our operating markets. At year-end, unemployment in California stood at 9.5%, which does not reflect total joblessness, and is expected to go higher.

The entire process of deleveraging is deflationary, and, in the process, investors are forced to sell everything. On the way down, only Treasuries and gold benefit from demand. All other asset classes, especially publicly traded securities that offer liquidity, are the hardest hit. We have always maintained that at any given time the share price of a publicly owned company reflects the strength or weakness of its business model and the external pressures that are at play with a company’s investors – to either buy or sell. The current economic climate clearly has damaged operating fundamentals, which we believe should be reflected in our share price. However, the financial maelstrom and deleveraging process have had a far greater negative impact on investors. As a result, the price of BRE shares has been driven well below what we believe is a reasonable level of fair value.

Of course, that statement can be made by virtually all publicly traded companies. 2008 proved to be one of the worst years on record for shareholders. For the year, BRE posted a negative total return of 25%, which closely matched the average negative return posted by the REIT apartment sector and outperformed the MSCI US REIT Index (RMS) that dropped 38%. Overall equity market returns were in step with REITs, as evidenced by the negative returns realized by the Standard & Poor’s 500 Index and the Dow Jones Industrial Average of 38% and 34%, respectively.