Commercial realestate market overview 2016 by Cutmytaxes

U.S. Commercial Real Estate Market Overview First Quarter 2016 Applied Research

Rising Foreign Capital Trend into U.S. Commercial Real Estate Despite reduced buying power resulting from the strengthening United States dollar (USD), foreign capital flows into U.S. commercial real estate more than doubled in 2015 to unprecedented levels. While growth was broad based, foreign investment was particularly strong from Asia where inflows increased roughly $19.6 billion or 159%.1 The increased foreign demand has had a positive impact on price appreciation and can be attributed to a number of drivers including the low global interest rate environment, global economic uncertainties, and regulatory changes. In light of these demand drivers, we expect foreign capital flows into U.S. commercial real estate to continue to trend above historical norms over the near-term but if flows decrease significantly or reverse course, expect downward pressure on asset valuations.

Foreign Capital

Interest Rates - With low and even negative interest rates around the world, foreign investors are looking cross boarder in the search for yield. Germany, France, Netherlands, Switzerland, and Japan all report 10-year government bond yields below 1.0%.2 With average pre-tax yield rates of 6.7% to 9.3%,3 depending on property type, core U.S. real estate offers an attractive risk premium for foreign investors willing to brave currency risk.

$100 $90 $80 Billions

$70

Global Economy - Sluggish growth in Europe and uncertainty in China are drawing investors to the U.S. in the search for stability. With annualized Real GDP of 1.6% and virtually no inﬂation in the Eurozone, the European Central Bank (ECB) is aggressively trying to stimulate the economy with easy monetary policy.4 In the March policy meeting, the ECB lowered the deposit rate 10 basis points to -0.4% and expanded asset purchase programs. The negative interest rate policies emerging in both Europe and Asia are creating a new source of uncertainty themselves as central banks begin to move into uncharted waters. In China, we have seen currency devaluation in an effort to boost exports amid slowing growth. With continued strength in domestic labor markets, the U.S. should continue to draw capital from Europe and Asia as they work through economic headwinds.

$60 $50 $40 $30 $20 $10 $0

'05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Latin America

Australia

Asia

Middle East

Europe

Canada

Real Capital Analytics, US Capital Trend, 2015 Year Review

Currency Exchange Rate Indices 1.5

FIRPTA & EB-5 - A number of provisions were recently changed in the Foreign Investment in Real Property Tax Act (FIRPTA) that provide increased opportunities for non-U.S. investors. The changes effectively increase the amount of capital foreign investors can invest in public U.S. REIT stocks before becoming subject to FIRPTA taxes.5 Extension of the EB-5 program is another law that will continue to generate foreign capital ﬂows into new U.S. real estate developments. EB-5 is a program were foreign nationals can invest money in the U.S. and receive a green card. An Individual must invest at least $1,000,000 (or $500,000 in Targeted Employment Areas) and create or preserve 10 jobs. With regional centers pooling foreign investors, EB-5 is becoming an increasingly popular source of equity capital in new real estate development.

Rate of Exchange

1.4 1.3 1.2 1.1 1 0.9 0.8 0.7

'05

'06

'07 CNY/USD

'08

'09 '10 CAD/USD

'11

'12

'13 '14

EUR/USD

Yahoo! Finance, CCT, 2015

Overall, conditions are favorable for continued capital ﬂows into U.S. commercial real estate in the near-term but the abundance of capital from both foreign and domestic sources are cause for concern for the long-term durability of current asset values.

Refer to endnotes for sources www.aegonrealty.com

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'15

U.S. Commercial Real Estate Market Overview First Quarter 2016 Applied Research

Apartment Market Completion

Apartment prices increased 12.9% from a year ago, and were 37.5% above the 2007 peak.8 “In most years, transaction volume for the office sector is ahead of that for the apartment sector but more capital was invested in the apartment sector than any other in 2015. In many sectors, strong growth in portfolio sales and entity level deals provided the lift to volume for 2015. For the apartment sector however, growth in the sale of individual assets was still strong, up 28.0% yoy. Deal volume grew in 2015 even as prices continued to rise. Initial estimates of the Moody’s/RCA CPPITM suggest that prices increased 13.0% yoy. This growth is not bad, but it is the weakest year of price growth since 2010.”18 *Effective Apartment Rent- The actual rent after deducting the value of concessions from the base rental rate paid by tenant.

Net Absorption

Vacancy Rate

300

16%

200

12%

100

-100

'94

'97

'00

'03

'06

'09

'12

'15

Effective Apartment Rent 8%

Year-over-year growth

Sales volume for apartment properties in the fourth quarter totaled $50.5 billion, up 43.3% from a year ago.7

Thousand Units

Apartment vacancy was 3.9% in 2015 Q4, down from 4.0% a year ago.6 Apartment cap rates decreased 30 bps to 5.8% from 6.1% a year ago.7

Vacancy Rate

APARTMENT

6% 4% 2% 0% -2% -4% -6% '01 '02

'03 '04 '05 '06 '07 '08

'09 '10

'11 '12 '13 '14 '15

Annual Data, CoStar Portfolio Strategy, 2015 Q4

MSA Count Based on Vacancy

Top And Bottom Trending Markets (Year Over Year) Vacancy Leaders* Tampa Las Vegas Indianapolis Jacksonville San Antonio

14Q4 4.8% 5.9% 7.1% 5.3% 6.5%

15Q4 3.6% 4.8% 6.2% 4.5% 5.7%

Rent ($/Unit) CHANGE -1.2%  -1.1%  -0.9%  -0.8%  -0.8% 

14Q4 $952 $786 $753 $852 $862

15Q4 $1026 $ 842 $ 788 $ 915 $ 908

CHANGE 7.8%  7.2%  4.7%  7.5%  5.3% 

Favorable Vacancy Trend: Unfavorable Vacancy Trend: Neutral Vacancy Trend: Total MSAs:

MSA Count Based on Rent Rent Growth Above 0%: Rent Growth Below 0%: Neutral Rent: Total MSAs:

Laggards** All national markets experienced positive rent growth

28 25 1 54

54 0 0 54

CoStar Portfolio Strategy, 2015 Q4 *Leaders have a favorable vacancy trend and rent growth of 3% or higher. **Laggards have an unfavorable vacancy trend and rent growth of 0% or lower. www.aegonrealty.com

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U.S. Commercial Real Estate Market Overview First Quarter 2016 Applied Research

Office Market

OFFICE The office vacancy rate dropped to 10.8% in 2015 Q4 from 11.3% a year ago.6

Completion

Net Absorption

Vacancy Rate

Office prices are 18.7% above the 2007 peak. CBD office prices are up 16.6% from a year ago, while suburban prices are up only 9.0%.8

16%

150

12%

-75

'88

'91

'94

'97

'00

'03

'06

'09

'12

'15

Office Asking Rent 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10%

Year-over-year growth

“The breadth of the U.S. office market is one of its greatest strengths. Having options provides value. Secondary office markets are experiencing higher levels of investment for just this reason, somewhat greater volatility priced by higher yields, and the ability to accommodate fastgrowing companies with a volume of new construction at costs much lower than that available in the primary downtowns. Interviewees spoke of “pocket markets,” conversions and redevelopments, and opportunities to reposition struggling suburban office parks with vast parking into more effective mixed use.”10

Vacancy Rate

Transaction volume was $39 billion in 2015 Q4, down 2.0% from a year ago. Cap rates fell in both CBD and Suburban locales in Q4. In the suburbs, the decline was 16 bps from a year earlier with a 7.0% national average while CBD office cap rates compressed 14 bps to 5.8%.7

Million Square Feet

225

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Annual Data, CoStar Portfolio Strategy, 2015 Q4

MSA Count Based on Vacancy

Top And Bottom Trending Markets (Year Over Year) Vacancy Leaders* San Jose East Bay Miami Atlanta Nashville

14Q4 10.0% 10.7% 11.9% 13.9% 6.9%

15Q4 7.1% 8.6% 10.0% 12.2% 5.3%

Rent ($/Unit) CHANGE -2.9%  -2.1%  -1.9%  -1.7%  -1.6% 

14Q34 $34.70 $24.20 $29.00 $18.60 $20.10

Laggards** There were 0 out of 54 MSAs with both unfavorable vacancy trends and negative rent growth.

15Q4 $38.40 $26.50 $30.40 $19.60 $21.60

CHANGE 10.8%   9.4%  4.9%  5.7%  7.8% 

Favorable Vacancy Trend: Unfavorable Vacancy Trend: Neutral Vacancy Trend: Total MSAs:

44 7 3 54

MSA Count Based on Rent Rent Growth Above 0%: Rent Growth Below 0%: Neutral Rent: Total MSAs:

52 2 0 54

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U.S. Commercial Real Estate Market Overview First Quarter 2016 Applied Research

Industrial Market Completion

INDUSTRIAL

Net Absorption

Vacancy Rate

300

16%

200

12%

100

Industrial property prices are up 6.9% from a year ago, and are 2.8% above the 2007 peak.8

-100

'82

'85

'88

'91

'94

'97

'00

'03

'06

'09

'12

'15

Industrial Asking Rent 10% 8%

Year -over -year growth

“As it did last year, warehouse industrial ranks as the top pick among investors with regard to investment prospects in the year ahead, according to Emerging Trends in Real Estate® 2016, published by PwC and ULI. Speciﬁcally, industrial/ distribution scored a 3.63 on a scale of 1 (abysmal) to 5 (excellent), just above multifamily with a score of 3.50 and office with a score of 3.43. The results of this year’s Emerging Trends report also awarded the industrial sector its highest score since 2004. Looking ahead, all Survey participants see values rising in this market over the next 12 months. The highest expected value increase is 10.0% – the average increase is 3.3%.” 9

Vacancy Rate

Transaction volume was $25.7 billion in 2015 Q4, up 66.0% from a year ago. Cap rates fell 30 bps from last year to 6.7%.7

Million Square Feet

The industrial vacancy rate dropped to 5.9% in 2015 Q4 from 6.5% a year ago.6

6% 4% 2% 0% -2% -4% -6% -8% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Annual Data, CoStar Portfolio Strategy, 2015 Q4

MSA Count Based on Vacancy

Top And Bottom Trending Markets (Year Over Year) Vacancy Leaders* Austin Memphis Las Vegas Raleigh San Diego

14Q4 8.2% 12.6% 8.2% 7.2% 5.7%

15Q4 5.6% 10.2% 5.9% 4.9% 3.8%

Rent ($/Unit) CHANGE -2.6%  -2.4%  -2.3%  -2.3%  -1.9% 

14Q4 $7.50 $2.80 $5.80 $5.00 $9.80

15Q4 $ 8.10 $ 2.90 $ 6.30 $ 5.30 $10.30

CHANGE 8.9%  3.2%  8.6%  6.5%  5.3% 

Favorable Vacancy Trend: Unfavorable Vacancy Trend: Neutral Vacancy Trend: Total MSAs:

MSA Count Based on Rent Rent Growth Above 0%: Rent Growth Below 0%: Neutral Rent: Total MSAs:

Laggards** All national markets experienced positive rent growth

45 7 2 54

53 0 1 54

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U.S. Commercial Real Estate Market Overview First Quarter 2016 Applied Research

Retail Market

“Little movement in the vacancy rate for U.S. regional malls and the ambiguity of U.S. interest rate increases have some investors feeling uneasy about investing in this property type. The trepidation felt by some investors with regard to regional mall investing is noted in this market’s average initial-year market rent change rate assumption, which slips 20 basis points this quarter and represents the ﬁrst quarterly drop for this key indicator in the past year. Moreover, in Emerging Trends in Real Estate® 2016, published by PwC and ULI, regional malls placed last among the 16 commercial/multifamily subsectors included in the report with regard to both investment and development prospects for the year ahead.” 9

Million Square Feet

Retail property prices increased 12.6% from a year ago, but are 2.4% below the 2007 peak.8

Vacancy Rate 16%

150

12%

100

'90

'95

'00

'05

'10

'15

Retail Asking Rent 8% 6%

Year-over-year growth

Retail vacancy decreased to 5.8% in 2015 Q4, down from 6.1% a year ago.6 Cap rates for the retail sector fell 20 bps from a year earlier to 6.4% in Q4. Total sales volume for Q4 was $21.3 billion, down 16.0% from a year earlier.7

Net Absorption

200

Vacancy Rate

Completion

RETAIL

4% 2% 0% -2% -4% -6% -8% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Annual Data, CoStar Portfolio Strategy, 2015 Q4

MSA Count Based on Vacancy

Top And Bottom Trending Markets (Year Over Year) Vacancy Leaders* Austin Palm Beach County Orlando Phoenix Raleigh Laggards** Philadelphia

14Q4 4.8% 6.3% 6.6% 10.1% 5.1%

6.0%

15Q4 3.8% 5.5% 5.9% 9.5% 4.5%

6.3%

Rent ($/Unit) CHANGE -1.0% -0.8% -0.7% -0.6% -0.6%

0.3%

14Q4 $18.00 $18.19 $14.84 $13.90 $14.91

     

$15.6

15Q4 $19.37 $19.47 $15.51 $14.37 $15.98

$15.6

CHANGE 7.6%  7.0%  4.5%  3.4%  7.2% 

-0.3% 

Favorable Vacancy Trend: Unfavorable Vacancy Trend: Neutral Vacancy Trend: Total MSAs:

39 6 9 54

MSA Count Based on Rent Rent Growth Above 0%: Rent Growth Below 0%: Neutral Rent: Total MSAs:

40 14 0 54

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U.S. Commercial Real Estate Market Overview First Quarter 2016 Applied Research

CMBS Delinquency Rates

CMBS DELINQUENCY The percentage of loans seriously delinquent* was 3.97% in December 201511, down from 4.7% a year ago. The percentage of loans seriously delinquent peaked at 9.2% in July 2012. The retail sector was the most improved sector in December, increased 0.09% from a year ago. The other four sectors all decreased, with industrial declining 1.9%, lodging declining 1.6%, apartment declining 1.1% and office declining 0.3%. * Loan 60+ days delinquent, in foreclosure, REO, or non-performing 1 Seriously delinquent percentage may not match Treppâ&#x20AC;&#x2122;s monthly report.

60 Days Delinquent Including Non-Performing Balances Apartment

Industrial

Office

Retail

Lodging

20% Recessions

15%

10%

0% '00

'01

'02

'03

'04

'05

'07

'08

'09

'10

'11

'12

'14

'15

Trepp, December, 2015

60-DAY DELINQUENCY RATES Dec-13

Dec-14

Dec-15

Office

7.8%

5.6%

5.4%

Industrial

9.8%

7.1%

5.2%

Retail

5.7%

5.3%

5.4%

Apartment

5.1%

3.7%

2.6%

Lodging

7.2%

4.2%

2.6%

Total

6.3%

4.7%

4.0%

HIGHEST AND LOWEST DELINQUENCY RATES by MSA ($ Balance in millions, includes Apartment, Retail, Industrial, and Office, top 50 MSAs, Trepp downloaded November 2015) Highest

Delinquent Balance

60+ Days

Delinquent Balance

60+Days

Providence, RI

$147

10.0%

San Jose, CA

0.0%

Cleveland, OH

$287

10.0%

Portland, OR

0.1%

Jacksonville, FL

$286

9.9%

New Orleans, LA

0.2%

Richmond, VA

$203

8.9%

Salt Lake City, UT

0.4%

Buffalo, NY

$101

8.8%

Austin, TX

$40

0.6%

Pittsburgh, PA

$217

7.9%

Houston, TX

$167

1.0%

Las Vegas, NV

$465

6.8%

Louisville, KY

$20

1.0%

Detroit, MI

$392

6.6%

San Antonio, TX

$47

1.1%

Raleigh, NC

$161

5.7%

San Francisco, CA

$112

1.3%

Birmingham, AL

$100

5.6%

Seattle, WA

$114

1.4%

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Lowest

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U.S. Commercial Real Estate Market Overview First Quarter 2016 Applied Research

TRANSACTION VOLUME

Commercial Real Estate Transaction Volume

Sales of commercial real estate totaled $157 billion in 2015 Q4, up 19.5% from a year ago. The industrial sector was the most improved, recording a 66.0% yearover-year increase in sales volume. The retail (-16.0%) and office (-2.0%) sectors recorded volume decreased, while the apartment properties (+43.3%) saw an increase in volume.

All Property Types - Quarterly Billions $160 $115 bn

$140 $158 bn $120 $100 $80 $60

Number of Properties sold Office Industrial Apartment

2006 Q4 (Peak) 1,577 1,416 1,825

Retail

1,903

2009 Q1 (Trough) 261 275 376

351

2015 Q4 1,482 2,537 2,066

1,795

$20 bn

$40

$14 bn

$20 $Millions

Average Transaction Size

$20 $(20)

$22 m

$17.6 m

$16 m

$8.6 m

$(40) $0

'01

'05

'10

'15

Real Capital Analytics, 2015 Q4

Commercial Real Estate Cap Rates

CAP RATES

Quarterly

Cap rates continued to fall in Q4 across all property types except Industrial which remained the same from a year ago. The retail sector had the most cap rate compression, declining 30 basis points from a year ago.

Apartment

Industrial

Office

Retail

10.5% Recessions

8.5%

CAP RATES (RERC) 2012 Q4

2013 Q4

2014 Q4

2015 Q4

Office

6.1%

5.8%

5.6%

5.4%

Industrial

6.6%

6.4%

6.0%

Apartment

5.4%

5.2%

5.0%

4.8%

Retail

6.6%

6.7%

6.2%

5.9%

6.5%

4.5% '94

'97

'00

'03

'06

'09

'12

'15

Situs RERC, 2015 Q4

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U.S. Commercial Real Estate Market Overview First Quarter 2016 December 1, 2015 Applied Research

NCREIF The trailing one-year return for the NCREIF property index (NPI) increased to 13.5% in Q4 2015. The NPI is a measure of unlevered private equity returns as determined through application of an appraisal-based exit price.

NCREIF Property Index (NPI) Apartment

Industrial

Office

Retail

30% Recessions

20%

10%

-10%

-20%

-30% '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '15

Annual rates (appreciation + income) NCREIF, 2015 Q4

Rent Index

RENTS Rent levels in the fourth quarter rose modestly across all property types. The Apartment sector reported the highest growth in 2015 Q4, with effective rents 6.0% higher than a year ago.

Apartment

Industrial

Office

Retail

1.4 1.3 1.2 1.1

Rent Index From a Year Ago Industrial

+5.9%

1.0

Office

+4.4%

0.9

Retail

+2.1%

0.8

Apartment

+6.0%

0.7

Recessions '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

* Industrial, Office and Retail industry are using Asking rent as a standard for rent index. * Apartment industry is using Effective rent as a standard for rent index.

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CoStar Portfolio Strategy, 2015 Q4

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U.S. Commercial Real Estate Market Overview First Quarter 2016 Applied Research

RETAIL SALES Nonstore retail (primarily internet sales) were $125 billion in the fourth quarter of 2015, up 6.8% from a year ago. Retail sales, excluding nonstore, were $1.3 trillion in the fourth quarter, up 2.0% from a year ago. Comparing retail sales categories, gasoline stations declined the most from a year ago (-18.5%). Electronics and appliance stores also declined (-4.5%). Food services and drinking places (+6.7%) and Motor Vehicle and Parts Dealers (+6.0%) increased from a year ago.

Retail Sales Quarterly, Inflation Adjusted Sales/SF (ex nonstore sales)

Sales/SF (including nonstore sales)

$90

$80

$70

Recession

$60 '95

'00

'05

'10

'15

U.S. Census Bureau, December, 2015 CoStar Portfolio Strategy, 2015 Q4

NONSTORE SHARE OF RETAIL

CONSUMER CONFIDENCE The Consumer Confidence Index now stands at 92.2, down 5.9 points from January 2016. The Consumer Sentiment Index was 91.7 in February, down from the final January read of 92.0. “Consumer confidence slumped in February as households grew more concerned about the outlook for the economy and job. Americans said they believed the high-flying job market wouldn’t get much better as they turned the most pessimistic about the outlook for stock prices in more than three years. While buying plans for automobiles held up, households said they were less likely to buy homes or major appliances, raising concern about the strength of consumer spending, the biggest part of the economy.”12

Nonstore (Billions)

% Of All Retail Sales

2000Q4

$48

5.8%

2005Q4

$67

6.5%

2010Q4

$88

8.0%

2015Q4

$125

9.3%

Consumer Confidence

February 2016 Consumer Confidence : 92.2 Consumer Sentiment : 91.7

150

100

Recessions 0 '00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

'16

Reuters/University of Michigan Consumer Sentiment Index, 26 February, 2016 The Conference Board Consumer Conﬁ dence Index, 23 February, 2016

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U.S. Commercial Real Estate Market Overview First Quarter 2016 Applied Research

US Farm Value and Commodity Prices

COMMODITY PRICES The IMF Commodity Index is 58.0% below the July 2008 peak. For 2015 Q4, Crude Oil (-40.0%) and Energy (-39.3%) declined from a year ago.13 Commodity prices fell 7.1 percent in December, extending losses to seven months, led by a sharp decline in oil prices. Non-fuel prices fell 0.2 percent, and in part reﬂect appreciation of the U.S. dollar. During 2015 (Dec’14-Dec’15), commodity prices fell 30.7 percent with energy dropping 39.3 percent and non fuel prices falling 19.1 percent.14

(Values Indexed, 1992=1)

5 Commodity Index (IMF) Farm Value (Last Update August 2015) 4

0 '93

'95

'97

'99

'01

'03

'05

'07

'09

'11

'13

'15

USDA, Ag Land Values and Cash Rents Annual Summary, January 2016

International Monetary Fund, Primary Commodity Price Index, January 2016

CONSTRUCTION SPENDING The annualized rate for residential construction spending in December was $429.6 billion, up 23.0% from a year ago and 36.0% lower than the 2006 peak. The annualized rate for non-residential construction spending in December was $394.4 billion, up 11.0% from a year ago but 5.0% lower than the 2008 peak. “U.S. construction spending barely rose in December as spending on nonresidential structures recorded its biggest drop since 2013, suggesting a mild downward revision to the advance fourth-quarter GDP growth estimate. Economists polled by Reuters had forecast construction spending rising 0.6 percent in December after a previously reported 0.4 percent drop in November. ”15

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Private Construction Spending Billions $800

Residential

Non-Residential

$600

$400

$200 Recession $0 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 U.S. Census Bureau, February 1, 2016

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U.S. Commercial Real Estate Market Overview First Quarter 2016 Applied Research

ORIGINATIONS

Commercial Loan Originations

ORIGINATIONS BY PROPERTY TYPE 2013 Q4

2014 Q4

2015 Q4

Office

9.4%

8.0%

7.9%

Industrial

4.6%

4.8%

9.4%

Apartment

42.8%

49.5%

48.9%

Retail

10.3%

10.0%

9.7%

Other*

32.9%

27.8%

24.2%

Life Insurance Commercial Banks

GSE's (Fannie/Freddie) CMBS/Conduits

750

Recession

500

*Other includes hotel and health care

ORIGINATIONS BY INVESTOR CLASS 2013

2014

2015

Life Cos

23.0%

18.7%

GSEs

16.0%

30.0%

25.7%

Comm Bank

32.6%

25.8%

33.6%

Conduits

28.4%

25.6%

22.0%

“Fourth quarter 2015 commercial and multifamily mortgage originations were 35 percent higher than in the third quarter and 19 percent higher than fourth quarter of 2014. The fourth quarter was the fourth highest quarter for borrowing and lending on record. Banks, life insurance companies, and Fannie Mae and Freddie Mac saw their highest originations volumes on record. Of the major investor groups, only the CMBS market didn’t break a record for originations. In terms of overall borrowing and lending volumes, 2015 as a whole was likely second only to 2007.”16

LIFE Cos ORIGINATIONS

250

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

Mortgage Bankers Association Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations, 2015 Q4

Life Company Loan Originations

Life Insurance Company's

Billions $18

4Q Trailing

(Billions)

$16

2006 Q4

$7.1

$14

2007 Q4

$6.0

2008 Q4

$1.6

2009 Q4

$3.4

$10

2010 Q4

$9.2

2011 Q4

$8.0

2012 Q4

$9.4

2013 Q4

$13.2

2014 Q4

$14.2

2015 Q4

$16.9

$12

Recession

$0 '03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

'14

'15

Mortgage Bankers Association Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations, 2015 Q4

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Price Based on Repeat Sales Indices

REPEAT SALES INDICES

Commercial Property Price Index (RCA)

The Commercial Property Price Index reported by RCA is up 13.0% in December from a year ago and up 17.0% from the 2007 peak.

U.S. General Commercial (CoStar)

The U.S. Investment Grade segment increased 10.5% over the past 12 months. The U.S. General Commercial Index increased 9.1% in December from a year ago.17

U.S. Investment Grade (CoStar)

1.2 1.1 1.0 0.9

“Improving CRE fundamentals, surging investor demand 0.8 and liquid capital markets propelled the CCRSI composite 0.7 indices upward in 2015. Demand for core property assets was especially strong. The value-weighted U.S. Composite Index rose 12.5% in 2015 to an all-time high 0.6 that is 19.1% above its prerecession peak.”17 “Among 0.5 '08 '09 '10 '11 '12 key drivers of the price recovery were the increased availability and decreased cost of debt and equity capi- Real Capital Analytics/Moody’s Investor Service, January 2016 tal, capitalization rate compression, improving property CoStar Commercial Repeat-Sale Indices, January 2016. fundamentals and a declining share of distressed trans-

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'14

'15

The difference between the RCA Index and the CoStar Indices is primarily the methodology weighting repeat sales, not the data sources. Commercial Property Price Index (Moody’s/RCA) - Index is based on property sales over $2.5 million. U.S. Investment Grade (CoStar) - This Index includes Class A and B offi ces with 35,000 SF or more, industrial properties with 80,000 SF or more, ﬂ ex properties with 55,000 SF or more, retail properties with 25,000 SF or more, multifamily properties with 90,000 SF or more, and hotels with 125,000 SF or more. U.S. General Commercial (CoStar) - Only includes properties not meeting the Investment Grade criteria.

Employment Situation Thousands 600

Signiﬁcant payroll increases from a year ago include construction (+3.8%), professional services (+3.1%), and leisure and hospitality (+3.0%). Mining and Logging is the only sector that decreased payroll (-16.1%). All sectors experienced payroll increases since the 2010 trough. The job sectors with the highest increases include construction (+20.6%) and administrative service (+21.0%). Total nonfarm employment has increased 10.7% since 2010.

12% Recessions

300

10%

-300

-600

-900

Unemployment Rate

The February unemployment rate was 4.9%, down from 5.5% a year ago.

Payroll Employment M/M Change

EMPLOYMENT

February 2016 : 242,000 Payroll Change Unemployment Rate : 4.9%

2% '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

Bureau of Labor Statistics, Employment Situation, March 4, 2016 Employment ﬁ gures reﬂ ect private and government non-farm jobs www.aegonrealty.com

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U.S. Commercial Real Estate Market Overview First Quarter 2016 Applied Research

ADDITIONAL OBSERVATIONS Prepared by Aegon USA Realty Advisors Applied Research Group Don Guarino, MAI, CRE, CCIM, FRICS dguarino@aegonusa.com Brad Bohl brbohl@aegonusa.com Felicia Gan, Neil Zhang ENDNOTES 1

Real Capital Analytics, U.S. Capital Trend-Big Picture, 2015 Year in Review Bloomberg Business, Rates & Bonds, 2016 3 Real Estate Research Corporation (RERC), 2015 Q4 4 European Central Bank, Statisics, Key Euro Area Indicators, March 2016 5 PricewaterhouseCoopers (PWC), Real Estate Tax Alert, February 2015 6 CoStar Portfolio Strategy, 2015Q4 7 Real Capital Analytics, 2015Q4 8 Moody CPPI Report, February 2016 9 PricewaterhouseCoopers (PWC), Real Estate Survey, 2015 Q4 10 PricewaterhouseCoopers (PWC), Emerging Trend in Real Estate, 2016 11 Trepp, Loan Performance by Preperty Type, December 2015 12 Darie, T. ( February 23, 2016). “ Consumer conﬁdence in U.S. sinks to Seven-Month Low”. 13 International Monetary Fund, Monthly data, 2015 14 International Monetary Fund, Commodity Market Monthly, January 15, 2016. 15 Reuters-Market. (February 1, 2016), “U.S. construction spending up slightly in December” 16 Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations, Q4 2015 17 Costar Commercial Repeat- Sale Indices Press Release, January 2016 18 Real Capital Analytics, U.S. Capital Trend-Apartment, 2015 Year in Review 2

DISCLOSURES

Aegon USA Realty Advisors, LLC, (AURA) is a U.S.-based real estate asset manager and a member company of Aegon Asset Management, the global investment management division of the Aegon Group. The information included in this document should not be construed as investment advice or a recommendation for the purchase or sale of any security, loan, interest in real estate, or other investment. This material contains general information only on economic and investment matters; it should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information does not take into account any investor’s investment objectives, particular needs or ﬁnancial situation. The value of any investment may ﬂuctuate. This information has been developed internally and may incorporate third party data, text, images and other content deemed to be reliable. Any opinions, estimates and projections included herein constitute the current judgement of the author as of the date of this document. Aegon USA Realty Advisors., LLC (AURA) has no obligation to update, modify or amend this document or to otherwise notify the reader in the event that any matter stated herein, or if any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes or is determined to be innaccurate. The reader acknowledges that all right, title and interest in the content of this document is owned by AURA and cannot be further distributed without the prior written consent of AURA.

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