U.S. Economic & Market Commentary

Transcription

1 Quadrant Real Estate Advisors LLC U.S. Economic & Market Commentary 2nd Quarter 2017 Atlanta, Georgia London, England Kurt Wright, CFA Chief Executive Officer (770)

2 Table of Contents Executive Summary...2 State of the U.S. Economy..3 Commercial Real Estate Market Relative Value..6 Commercial Real Estate Market Quadrants...7 Public Debt Market Review...8 Public Equity Market Review.10 Private Debt Market Review...12 Private Equity Market Review...15 Property Sector Updates & Outlooks Contacts & Important Disclosures...28 About Quadrant Real Estate Advisors Quadrant Real Estate Advisors LLC ( Quadrant ) is a United States SEC registered investment adviser and Australian Securities and Investments Commission (ASIC) Foreign Registered Corporation (ABN ). QREA Europe LLP ("QREA") is a subsidiary of Quadrant. QREA Europe LLP (registration number ) is authorized and regulated by the Financial Conduct Authority. Quadrant has approximately $9.0 billion of commercial and multifamily real estate investments under management on behalf of institutional investors. Clients include insurance companies, pension funds, sovereign wealth management funds, and high net worth investors. Since 1993 Quadrant s senior management has worked together as a team providing the firm s clients with access to both privately placed and publicly traded U.S. commercial real estate debt and equity investments through commingled funds and single client accounts. In addition to experience, senior management controls 100% of the firm, thereby providing true alignment of interests and accountability. Quadrant Real Estate Advisors LLC 1

3 Kurt Wright, CFA Chief Executive Officer (770) Executive Summary Annualized Gross Domestic Product ( GDP ) growth increased 2.6% in the second quarter of 2017, up from 1.2% (revised) in the first quarter of U.S. nonfarm payroll employment increased by 581,000 jobs during the quarter, bringing total employment up to million public and private employees. Per the US Census Bureau, second quarter 2017 single family housing starts were up 9.1% over second quarter The Federal Reserve (the Fed ) increased the targeted federal funds rate ( Fed Funds Rate ) a quarter percentage point to 1.00% 1.25% at its June 2017 Federal Open Market Committee ( FOMC ) meeting. This marks the third rate increase in seven months, and at least one more rate hike is expected this year. Key Economic Indicators 12.00% Atlanta, Georgia London, England 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2.00% 4.00% Real GDP Unemployment CPI 10 Yr UST 2017F Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Bloomberg. Forecasts represent consensus estimates. Commercial real estate fundamentals remain strong. Competition among non bank lenders for commercial mortgages remains high for high quality loans. CMBS and bank lenders continue to be less active as they adjust to regulatory pressures. CMBS 60+ day delinquencies (including liquidations) were at 5.65% in June. Comparatively, life insurance companies reported a delinquency rate of 0.02% (as of March 2017). CRE benchmark performance (ascending by standard deviation): Annualized Q Asset Class Index TR Yield 10 Yr STD (TR) Private CRE Direct Debt Giliberto Levy Index 2.11% 3.66% 2.04% Private CRE Direct Equity NCREIF Property Index ( NPI) 1.75% 4.64% 2.90% AAA CMBS Barclays Capital AAA CMBS 1.27% 2.59% 3.95% Risk Free Investment BofA/ML, UST, Cur 10 Yr 1.29% 2.30% 4.55% Public CRE Corp Bonds Barclays REIT Bond Index 1.83% 3.41% 5.76% U.S. Stock Market S&P % 1.97% 8.09% Public CRE Pfd Stock Wells Fargo REIT PFD 3.20% 6.55% 8.30% BBB CMBS Barclays Capital BBB CMBS 3.02% 5.82% 11.43% Public CRE Com Stock NAREIT Equity REITs 1.52% 4.02% 12.62% Source: Giliberto Levy, NCREIF, Barclays, Bloomberg, Wells Fargo, NAREIT Note: NPI yield represents the Q net income return, annualized. TR = Total Return, 10 Yr STD (TR) = standard deviation of total returns over the previous ten years Quadrant Real Estate Advisors LLC 2

4 State of the U.S. Economy Gross Domestic Product ( GDP ) The GDP advance estimate reported second quarter annualized real GDP growth of 2.6%. Personal consumption expenditures grew by 2.8% in the second quarter. Gross private domestic investment increased by 2.0%. Imports and exports increased by 2.1% and 4.1%, respectively. Public sector spending increased 0.7% due to an increase in federal spending of 2.3%, but was offset by a decrease in state and local spending. Consumer Outlook U.S. consumer sentiment ended the second quarter at 95.1 (versus a 92.1 three year average). The Federal Reserve reported year over year total consumer credit outstanding growth of 5.7% in June. Nominal retail sales increased 0.2% quarter over quarter, and 3.7% year over year. Inflation adjusted per capita retail sales increased 1.0% year over year and decreased 0.5% over the prior quarter. U.S. Consumer Sentiment and Nominal Retail Sales Consumer Sentiment Index , , , , , ,000 0 Total Retail Sales, US $, in Millions U.S. Consumer Sentiment Retail Sales Rolling 5 Yr. Avg. Consumer Sentiment Rolling 5 Yr. Avg. Retail Sales Source: University of Michigan Survey Research Center, Bureau of Economic Analysis Note: Retail sales represent Total Retail Sales (incl. food & automobile). Consumer credit levels and single family home prices are steadily rising, adding further momentum to consumer driven economic expansion. Year over year average nominal hourly earnings increases have averaged 2.27% per capita annually over the past 5 years compared to a 1.30% average annual increase in the CPI over the same period. As shown in the graph below, the inflation adjusted per capita retail sales decreased to $858 by the end of the second quarter, falling $2 from the prior quarter. Quadrant Real Estate Advisors LLC 3

5 Domestic Inflation and Inflation Adjusted Per Capita Nominal Retail Sales Inflation (CPI; Cumulative) 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Inflation Adj. Per Capita Retail Sales, US $ Inflation (CPI) Inflation/Population Adj. Retail Sales Rolling 5yr Avg. of Adj. Retail Sales Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Bloomberg, Census Bureau, Quadrant Real Estate Advisors Note: Retail sales represent Total Retail Sales (including food and automobile). Quadrant has adjusted Total Retail Sales to reflect per capita Total Retail Sales in December 1991 U.S. dollars. Inflation Core CPI increased 1.7% during the last twelve months ( LTM ) period through June Headline CPI (including food and energy) increased 1.6% during the LTM period. The Fed increased the targeted Fed Funds Rate a quarter percentage point to 1.00% 1.25% at its June 2017 FOMC meeting. This marks the third rate increase in seven months. Inflation has contracted greatly after it surpassed the Feds 2.0% target in February. Employment U.S. nonfarm payroll employment increased by 581,000 jobs during the second quarter. Indicating net absorption of unemployed job seekers, and resulting in a new record for total employment of million public and private employees. There has been a net gain of about 9 million jobs since the 2007 to 2009 recession began. As of June 2017, the labor force participation rate was 62.8%, down 20 bps from last quarter and up 10 bps year over year. The U.S. unemployment rate decreased quarter over quarter from 4.5% to 4.4%, returning to prerecession lows. We are beginning to see signs of modest wage growth. Quadrant Real Estate Advisors LLC 4

6 Number Employed 160, , , ,000 80,000 60,000 40,000 20,000 Total U.S. Non Farm Payroll Employment (in 000s) through June 30, Q2* Total Government Sector Total Private Sector 5 year moving annual average Source: Bureau of Labor Statistics * Q data is preliminary U.S. Labor Statistics for the Ten Years Ending June 30, 2017 Non Farm Employment Change (in 000's) 1,500 1, (500) (1,000) (1,500) (2,000) (2,500) 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 3Q 10 4Q 10 1Q 11 2Q 11 3Q 11 4Q 11 1Q 12 2Q 12 3Q 12 4Q 12 1Q 13 2Q 13 3Q 13 4Q 13 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 12% 10% 8% 6% 4% 2% 0% Unemployment Rate Change in Number of Jobs Unemployment Rate Source: Bureau of Labor Statistics Quadrant Real Estate Advisors LLC 5

7 Interest Rates The targeted Fed Funds Rate increased a quarter percentage point to bps during the second quarter. The Fed expects continued gradual increases in the Fed Funds Rate. The ten year U.S. T Note yield decreased 9 bps during the second quarter to 2.30%. 8% Historical Ten Year U.S. Treasury Note Yield 7% 6% 5% Yield 4% 3% 2% 1% 0% Source: Bloomberg 10 year UST yield Long Term Average Standard Deviation Relative Value of Investments Excluding private CRE equity and REIT common stock, spreads compressed across the board during the second quarter. Commercial mortgage spreads remain attractive relative to alternative fixed income instruments. Credit spreads by investment type (ascending by Q spread): Asset Class Index Q Q Qtr over Qtr Change in bps Period Yield "Risk Free" Investment BofA/ML, UST, Cur 10 Yr 2.39% 2.30% (9) Credit Spreads (bps) AAA CMBS Barclays Capital AAA CMBS Public Corporate Bonds Barclays US Corp. Investment Grade Bonds (10) Public CRE Corp Bonds Barclays REIT Bond Index (9) Public CRE Common Stock NAREIT Equity REITs Whole Loan QREA Proprietary Analysis (7) Private CRE Direct Equity NCREIF Property Index BBB CMBS Barclays Capital BBB CMBS (11) Public CRE Pfd Stock Wells Fargo REIT Pfd (5) Source: Giliberto Levy, NCREIF, Barclays, Bloomberg, Wells Fargo, NAREIT, Quadrant Real Estate Advisors Quadrant Real Estate Advisors LLC 6

8 Commercial Real Estate Market Quadrants 2nd Quarter 2017 Total Returns 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% 1.00% 2.00% Public Debt Public Equity Private Debt Private Equity 1.27% 1.77% 0.50% 0.63% 2.11% 2.08% 1.75% 7.05% Total Return Q Total Return LTM Source: Barclays Investment Grade vintage CMBS (Public Debt), NAREIT and Wells Fargo Hybrid & Preferred Securities Equity REIT Index (Public Equity), Giliberto Levy Commercial Mortgage Performance Index (Private Debt), NCREIF (Private Equity) LTM Last Twelve Months Public Debt: Delinquencies (60 day +) rose to 5.65% in June and are forecasted to keep rising. CMBS lenders have been less active in the last few quarters as they have been adjusting to new regulations; however, second quarter market share is up from 6% to 11%. Per Morgan Stanley, private label CMBS originations ended 2016 at $66 billion, approximately 31% lower than 2015 s $95.8 billion. Expectations for 2017 originations range from $55 $65 billion. Demand for high grade CMBS will remain strong. Public Equity REIT performance has shown a continued recovery after a poor second half Private Debt Portfolio lenders continue to have strong demand for high quality loans. Delinquency rates remain near 0%. Credit spreads for transitional loans range from approximately 250 to 450 basis points over libor. Loan coupons for ten year fixed rate first mortgages are in the 4% range. Private Equity: Performance continues to reflect strong CRE fundamentals, vacancy rates are stable, rents are rising and construction remains reasonable. Cap rates are near or at their lows; however, financing remains inexpensive for high quality properties, which should allow for cap rates to remain low. Quadrant Real Estate Advisors LLC 7

9 Public Debt Market Review Demand Demand for high grade CMBS bonds continues to be strong. Per the Securities Industry and Financial Markets Association, second quarter average daily nonagency CMBS trading volume was approximately $1.7 billion, down approximately 1% year overyear. The median of primary dealers positions in non agency CMBS was $5.8 billion during the second quarter of 2017, compared to a median of $6.3 billion in the second quarter of Supply There were 31 new non agency CMBS issues totaling $20.7 billion priced in the second quarter. The new issues were composed of the following types of deals: 12 conduit pools and 19 singleborrower deals. Total new issuance is approximately 4.3% above last year s pace Domestic Non GSE CMBS New Issuance Volume As of June 30, 2017 $ Billions Forecast $65 billion Source: Bloomberg Quadrant Real Estate Advisors LLC 8

10 Pricing Spreads on CMBS 2.0 AAA rated securities over USD swaps increased 2 bps, while BBB rated CMBS over USD swaps decreased 1 bps. New Issue CMBS Spreads to USD Swaps As of June 30, 2017 Spread (basis points) yr AAA 10yr AA 10yr A 10yr BBB Source: J.P Morgan; Post 2014 Wells Fargo Research. Refinancing With CMBS conduits being less prevalent in the market, secondary quality loans may struggle to find refinancing in the near term. Delinquency/Credit CMBS 60+ day delinquencies (including liquidations) increased to 5.65% in June. The rate is now 117 basis points higher than the level a year ago. With many pre crisis loans maturing this year, the rate is expected to keep climbing every month. Commercial Mortgage Backed Securities Delinquency As of June 30, 2017 Percentage 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 60 day + Delinquent Loans Source: Morgan Stanley, Solomon Smith Barney, Lehman Brothers, Barclays Capital, Trepp Quadrant Real Estate Advisors LLC 9

11 Problem Loan Liquidation and Modification In May, 48 loans with an original balance of $1.9 billion reported losses totaling $439.0 million. In June, 23 loans reported losses totaling $150.0 million, bringing the total losses year to date to $2.4 billion, in line with The average loss severity decreased from 2016 levels, with the year to date average reported at 24.2% compared with an average rate of 35.5% in OUTLOOK: Demand from fixed income investors for high grade CMBS is expected to remain strong. Supply, however is expected to be limited given that CMBS issuers must consider compliance with the newly enacted risk retention rules. Public Equity Market Review Pricing The NAREIT Equity REITs Index increased 1.52% during the second quarter of Sector Activity REITs raised $10.2 billion of senior unsecured debt (29 transactions). Secondary offerings of common equity totaled $8.8 billion, and secondary offerings of preferred equity totaled $1.2 billion. There were four IPO s in the second quarter, raising $765.0 million. Performance Public common equity and preferred equity CRE investments (REIT preferred stock) showed positive returns again in the second quarter, recovering from a weak second half Historical REIT Quarterly Performance Returns 15.0% 10.0% 5.0% 0.0% 5.0% 10.0% 15.0% REIT Common REIT Preferred Source: Wells Fargo WHSPR Index (REIT Preferred), NAREIT (REIT Common) Quadrant Real Estate Advisors LLC 10

12 12.0% REIT Dividend Yields vs. the 10 year U.S. Treasury January 1990 June % 8.0% 6.0% 4.0% 2.0% 0.0% 10 Year Constant US Treasury Yield FTSE NAREIT Equity REITs Dividend Yield Source: NAREIT, Bloomberg Monthly Equity REIT Dividend Yield Spread January 1990 June % 7.0% 6.0% 5.0% 4.0% Average Yield Spread % 3.0% 2.0% 1.0% 0.0% 1.0% 2.0% Source: NAREIT, Bloomberg OUTLOOK: Public REIT pricing may continue to be volatile based on concerns of interest rate increases and unsustainable growth in net operating income. Quadrant Real Estate Advisors LLC 11

13 Private Debt Market Review Commercial Mortgage Loan Originations Source: MBA Survey of Commercial/Multifamily Originations, Morgan Stanley Research As indicated in the charts above, Life Insurance and agency lenders (Fannie Mae and Freddie Mac) have easily taken up the slack for higher quality loans from the CMBS conduits since the Global Financial Crisis. Fundamentals The average life insurance company whole loan delinquency rate as reported by ACLI for the first quarter of 2017 was 0.02% in contrast to the 5.65% delinquency in the CMBS market % 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% Historical Delinquency Rates As of March, % CMBS 60 day + Life Insurance Companies Q1 Quadrant Real Estate Advisors LLC 12

14 Source: ACLI, Barclays Capital Sector Activity and Pricing According to the ACLI first quarter 2017 Commercial Mortgage Commitments report, life insurance company commercial mortgage lending volume was $15.2 billion, up 4.0% year over year. Competition remains strong as life insurance companies and other portfolio lenders seek high quality, conservatively positioned first mortgage loans with strong sponsorship. Loans with LTVs in the 65 70% range are generally getting quoted at long term fixed rates of approximately 4.0% based on property type, loan term, and location. Life insurance companies remain committed to solid underwriting standards and choose to compete on rate and flexibility of loan terms rather than compromising on credit. Banks and debt funds continue to have plenty of capital for bridge loans backed by transitional or value add real estate. Fixed Term Commercial Mortgage Commitments Historical Contract Rates As of March 31, 2017 Source: ACLI Refinancing Demand from portfolio lenders and non regulated lenders for high quality commercial mortgages will remain strong. Borrowers refinancing low quality properties and/or properties located in secondary and tertiary markets may struggle to find available capital. $1.4 trillion of loans are due to mature over the next four calendar years. Quadrant Real Estate Advisors LLC 13

15 Maturing CRE Loans Across Lending Types ($Bn) ($Bn) Banks CMBS Life Cos Other Source: Morgan Stanley Research Performance As illustrated by the Giliberto Levy Commercial Mortgage Performance Index below, the private debt investment sector has provided stable long term income returns. Giliberto Levy Commercial Mortgage Performance Index As of June 30, 2017 Income Return Total Return 3 Months 1.11% 2.11% 1 Year 4.50% 2.08% 3 Years* 4.78% 4.51% 5 Years* 5.02% 4.73% 10 Years* 5.60% 5.56% Source: Giliberto Levy Commercial Mortgage Performance Index *Periods greater than 1 year are annualized. OUTLOOK: Competition for senior loans is expected to remain strong as life insurance companies maintain substantial commercial mortgage allocations. Opportunities for prudent subordinate debt positions may increase given the reduction in CMBS originations volume and tighter lending conditions in the banking sector. Quadrant Real Estate Advisors LLC 14

16 Private Equity Market Review Fundamentals Dodge Data and Analytics ( Dodge ) reports that the number of non residential construction starts, which excludes multi family construction, for the six months ending June 30, 2017 has increased 6% year over year. Dodge reports that the value of multifamily construction fell 7% in June, sliding back for the third month in a row. The American Institute of Architects ( AIA ) reported that the Architecture Billings Index ( ABI ) ended the second quarter at 54.2, up from a score of 53.0 in May. A reading above 50.0 indicates rising demand for design services. The ABI levels as of the end of the second quarter are as follows: Source: American Institute of Architects Vacancy rates for office properties remained flat quarter over quarter, while industrial saw a 20 bps decrease and multifamily and retail a 10 bps increase. Office and industrial vacancy rates decreased 10 bps and 60 bps, respectively, year over year. Multifamily and retail properties increased 20 bps. Multifamily vacancy rates are increasing as the market absorbs new supply; however, it is not expected to trend materially higher in the near term. Historical Vacancy Rates by Property Type 20.0% 18.0% 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Source: REIS Region of U.S. ABI Level South 54.8 West 53.1 Northeast 51.5 Midwest Q1 2012Q2 2012Q3 2012Q4 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3 2014Q4 2015Q1 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 2017Q1 2017Q2 Multifamily Industrial Office Retail Quadrant Real Estate Advisors LLC 15

17 Sector Activity According to Jones Lang LaSalle, second quarter private equity real estate transaction volume totaled $64 billion in the Americas, down 7% year over year. The driver of the downward movement is the U.S., all other markets in the Americas are up over the first half of Top MSAs continued to attract significant amounts of capital resulting in high pricing and low cash yields. Demand continued to grow for properties in secondary and tertiary markets that exhibited comparatively high yields. Similarly, investors continued to seek value add/redevelopment opportunities in certain markets. Pricing The average capitalization rate, as reported by NCREIF, increased quarter over quarter by 3 bps to 5.02%. Spreads over the 10 year U.S. T Note rose to approximately 271 bps due to a slight decline in US treasury yields following the surge after the presidential election. Cap rates are below pre GFC levels; if prices increase it would likely come from continued NOI growth. U.S Equity Capitalization Rate Trends 8.00% $1,200, % 6.00% 5.00% 4.00% $1,000,000 $800,000 $600, % 2.00% 1.00% 0.00% $400,000 $200,000 $0 Spread to UST NCREIF Cap Rate Average NOI/Property Source: NCREIF Performance Total Return 8.00% 6.00% 4.00% 2.00% 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% Private Equity Historical Quarterly Performance Source: NCREIF Quadrant Real Estate Advisors LLC 16

18 OUTLOOK: Transaction activity over the next several years for high quality properties will be supported by relatively inexpensive financing options, global capital (equity and debt) inflows, and strong commercial real estate fundamentals. Nominal cap rates are very low in certain primary markets, which limits near term valuation upside for stabilized assets in these markets. The spread between primary and secondary markets has begun to tighten as investors seek yield beyond the top CBD markets, although that phenomenon may be short lived if financing becomes less plentiful in those markets. The relatively high cap rate spread over U.S. T Notes provides a degree of buffer to rising benchmark interest rates in the near term, which helps reduce rate driven downside valuation risk. Furthermore, any incremental increase in inflation, which Quadrant expects to be a prerequisite for the Fed to begin material interest rate increases, should support rising long term CRE private equity valuations as rents and construction costs rise (i.e. increasing income and limiting new supply). Quadrant Real Estate Advisors LLC 17

19 Property Sector Updates & Outlooks Market Overview The broad outlook for U.S. commercial real estate fundamentals is generally positive for the five primary property sectors Commercial Real Estate Fundamentals Forecasts Rent Growth Vacancy Net Absorption ADR Growth RevPar Occupancy Property Sector Office Multifamily Retail Industrial Hotel Source: Quadrant Real Estate Advisors Grey areas represent information that is not applicable to the property sector. Debt and equity capital is plentiful, which continues to drive debt and equity transaction volume. In turn, cash yields remain relatively low for both lenders and equity investors. Although, fixed rate lenders are still enjoying higher yields driven by the run up in treasury yields since the presidential election. The following chart exhibits Quadrant s view of the U.S. commercial real estate market s current positioning in the market cycle. Commercial Real Estate Cycle (numbers reference the corresponding table sections) Growth Phase 4 3 B C A 1 2 D Decline Phase 5 Recovering Expanding Overheating Weakening Sector Fundamentals Sector Fundamentals Sector Fundamentals Sector Fundamentals N/A 1. Multifamily N/A N/A Capital Markets 2. Hotel Capital Markets Capital Markets N/A 3. Industrial D. Equity Pricing N/A 4. Office 5. Retail Capital Markets A. Equity Availability B. Debt Pricing C. Debt Availability Source: Quadrant Real Estate Advisors Quadrant Real Estate Advisors LLC 18

20 Office Market supply: At 7.5 million square feet, second quarter completions were 20.7% lower than the prior quarter, and 25.2% lower year over year. Office Completions (sf) Source: REIS Absorption and vacancy: Net absorption was 4.1 million square feet in the second quarter versus 6.4 million square feet a year ago. The five year average net absorption per quarter is 7.3 million square feet. Vacancy remained unchanged from the prior quarter at 16.0%. Year over year, vacancy declined 10 bps. Office Absorption and Vacancy Net Absorption (in thousands of Sq. Ft.) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, % 17.00% 16.50% 16.00% 15.50% 15.00% Vacancy Net Absorption Vacancy Source: REIS Quadrant Real Estate Advisors LLC 19

21 Rental rates: Year over year rent growth declined to 1.6% in the second quarter. Office Rent % Change 4.0% Change in Rent per Sq. Ft. per Year 3.0% 2.0% 1.0% 0.0% Source: REIS OUTLOOK: The office sector outlook remains positive; however, cap rates will eventually be impacted if Treasury rates rise significantly. There is currently a buffer, but at a point cap rates must give way to higher treasury yields. CBD office assets located in core markets should continue to exhibit low vacancy, strong rent growth, and significant capital availability. Absorption has been concentrated in CBD/urban locations, reflecting a move from suburban office properties. Quadrant Real Estate Advisors LLC 20

22 Industrial Market supply: Completions in the second quarter of 2017 were 18.5 million square feet, down 15.1% from the prior quarter and down 21.4% year over year. The five year quarterly average is 16.2 million square feet. Industrial Completions (sf) Source: REIS. Note the above data reflects only properties classified by REIS as Warehouse and Distribution facilities. Absorption and vacancy: Net absorption was 28.8 million square feet for the quarter, a decrease of 1.6% yearover year. The five year average net absorption per quarter is 24.2 million square feet. The vacancy rate decreased by 60 bps year over year to 9.70% in the second quarter. Industrial Absorption and Vacancy Net Absorption (in thousands of Sq. Ft.) 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, % 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Vacancy Net Absorption Vacancy Source: REIS Quadrant Real Estate Advisors LLC 21

23 Rental rates: Year over year rent growth remained flat at 2.4% in the second quarter. Industrial Rent % Change 3.0% Change in Rent per Sq. Ft. per Year 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Source: REIS OUTLOOK: The outlook for the near future remains favorable as the U.S. economy continues to post employment gains, driving increased consumer spending which ultimately leads to increased need for warehouse and distribution facilities. Net absorption will likely continue to soften as new developments are completed, but overall fundamentals are expected to remain strong. Quadrant Real Estate Advisors LLC 22

24 Retail Market supply: Second quarter 2017 completions in the retail sector were up 19.9% year over year to 2.9 million square feet, rising back above the 2.2 million square foot five year quarterly average. Retail Completions (sf) Source: REIS. Note REIS reports only properties defined as Neighborhood Centers and Community Centers in its aggregated retail data. This subset is viewed as a proxy for the greater retail market. Absorption and vacancy: Net absorption during the second quarter was 420,000 square feet, which is down 89.5% year over year and well below the five year average absorption of 2.9 million square feet. The vacancy rate increased 10 bps year over year to 10.0%. Retail Absorption and Vacancy Net Absorption (in thousands of Sq. Ft.) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, % 10.80% 10.60% 10.40% 10.20% 10.00% 9.80% 9.60% 9.40% 9.20% Vacancy Net Absorption Vacancy Source: REIS Quadrant Real Estate Advisors LLC 23

25 Rental rates: Year over year rent growth remained flat at 1.7% in the second quarter. Retail Rent % Change 4.0% Change in Rent per Sq. Ft. per Year 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Source: REIS OUTLOOK: The most pressing long term risk for the retail sector is online retail incentivizing customers to stay out of stores. Given localized soft spatial demand, new construction is expected to remain muted, which will likely drive vacancy rates lower due to a combination of net absorption and destruction of older, obsolete properties. However, large scale store closings by declining major retailers like Macy s may have a negative domino effect. Rental rate growth prospects will remain highly fragmented by location, asset quality, and property subsector. Favored asset classes are food/lifestyle oriented centers and grocers in growth markets. Quadrant Real Estate Advisors LLC 24

26 Multifamily Market supply: Number of Units Completions in the second quarter of 2017 totaled 37,633 units (gross), a year over year decrease of 24.8%. The AIA reports that demand for design services in the multifamily sector are increasing, ending the second quarter with an ABI level of 57.1, higher than all other sectors. 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Multifamily Completions (Units) Average Completions 42,085 units Source: REIS Absorption and vacancy: Net absorption in the second quarter was 30,093 units, a decrease of 13.8% year overyear and well below the five year average absorption of 43,861 units. Vacancy increased 20 bps year over year to 4.4%. 70,000 Multifamily Absorption and Vacancy 6.00% Net Absorption (in units) 60,000 50,000 40,000 30,000 20,000 10, % 4.00% 3.00% 2.00% 1.00% 0.00% Vacancy Net Absorption Vacancy Source: REIS Quadrant Real Estate Advisors LLC 25

27 Rental rates: Year over year rent growth declined in the second quarter from 3.3% to 3.1%. Multifamily Rent % Change 7.0% Change in Rent per Unit per Year 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Source: REIS OUTLOOK: Demographic trends are expected to support continued apartment demand on a near tointermediate term basis. Furthermore, tight single family and condominium residential mortgage loan underwriting standards continue to limit homeownership demand. Multifamily development remains fundamentally attractive in select markets, but as pipelines remain strong nationally, certain regions appear poised for oversaturation, which could cause underperformance of rental rates and occupancy in the short run. Thus, vacancy rates may trend slightly higher in upcoming quarters. However, demographics support the sector in the long term as apartment demand is projected to outweigh supply. Quadrant Real Estate Advisors LLC 26

28 Hotels Market demand: Lodging demand remains robust. According to STR the U.S. hotel industry s occupancy in the second quarter increased 0.7% to 73.4%. Market supply: According to the June 2017 STR Pipeline Report, the total active hotel development pipeline (by number of rooms) was up 11.6% year over year. The In Construction metric was up 12.4% year over year. The total active pipeline included projects in the In Construction, Final Planning, and Planning stages, but it did not include projects in the Pre Planning stage. Key metrics: According to STR, RevPAR increased 2.8% to $ Similarly, ADR increased 2.1% to $ OUTLOOK: Economic improvement and upward trending consumer sentiment are expected to support further RevPAR, ADR, and occupancy improvement in the near term. However, RevPAR and ADR growth may slow and fall negative as new supply comes on line. Given the hotel sector s particularly high correlation to the broad economic environment and business/consumer sentiment, downside risk is primarily tied to the risk of slowing GDP growth and/or geopolitical threats that could affect both business and leisure travel. Quadrant Real Estate Advisors LLC 27

29 Contacts United States: Thomas Mattinson Executive Vice President +1 (1) U.K. & Europe: Linda Nel Senior Vice President +1 (1) Important Disclosures This report is for informational purposes only and does not constitute, form, nor should be construed as an offer to sell or a solicitation of an offer to buy investments or any fund and does not constitute any commitment or recommendation on the part of Quadrant Real Estate Advisors. An investment offering will be made only through a confidential private offering memorandum subject at all time to revision and completion. The information contained herein is derived from various sources which Quadrant believes but does not guarantee to be accurate as of the date hereof. Neither Quadrant nor any of its affiliates nor any other person makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained in this newsletter and nothing contained herein shall be relied upon or construed as a promise or reorientation of past or future performance. Quadrant Real Estate Advisors LLC 28