Moody s/rca CPPI: Commercial Property Prices, Led by Apartment and CBD Office in Major Markets, Top Pre-crisis Peak November 2014

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1 NOVEMBER 6, 2014 COMMERCIAL MBS SPECIAL COMMENT Table of Contents: HIGHLIGHTS 1 MOODY S/RCA CPPI 3 Overview Sectors constituting the national all-property index 3 Tiers 1 & 2: National, apartment and core commercial 4 Tier 3: Core commercial sectors 5 Tier 4: Major markets by sector 6 Tier 4: Non-major markets by sector 7 Tier 5: Major and non-major markets 8 Hotel (informational indices, not part of composite index) 9 SPOTLIGHT: DRIVERS OF THE PEAK- TO-PEAK PATH OF COMMERCIAL PROPERTY PRICES 10 APPENDIX 14 I: Tier 4 supplemental data 14 II: Recovery profile of CPPI indices 17 III: Repeat-sales transaction volume IV: Distressed transaction volume V: Schedule of CPPI report releases 20 VI: Index hierarchy 21 VII: Definitions 22 MOODY S RELATED RESEARCH 23 Contacts Moody s/rca CPPI: Commercial Property Prices, Led by Apartment and CBD Office in Major Markets, Top Pre-crisis Peak November 2014 Highlights The Moody s/rca Commercial Property Price Indices (CPPI) national all-property composite index increased by 0.5% in September and topped the November 2007 prefinancial crisis peak price by 0.2%. Commercial property prices have completed a peak-topeak round trip in just under seven years. EXHIBIT 1 Moody s/rca CPPI: National All-Property Composite Index Dec-00 Index = National All-Property NEW YORK Tad Philipp Director - CRE Research tad.philipp@moodys.com Kevin Fagan Assistant Vice President kevin.fagan@moodys.com Peter Simon Analyst peter.simon@moodys.com Dana Baranaskas Associate Analyst dana.baranaskas@moodys.com Nick Levidy Managing Director - Structured Finance nick.levidy@moodys.com» contacts continued on the last page Recent 25% 2 15% 1 5% 0.5% 2.2% 13.5% Historical -5% 1-Month 3-Month 12-Month Peak Trough Inception Nov-07 Jan-10 Dec % 68.6% 82.1%

2 The Moody s/rca CPPI measures price changes in US commercial real estate based on completed sales of the same commercial properties over time, or the repeat-sales 1 methodology. Below are the highlights of this month s report, which we base on transaction data through the end of September 2014.» The national all-property composite index increased 0.5% in September to top the crisis peak by 0.2%. The CPPI has risen by 68.6% from its January 2010 trough to recover the more than 4 loss that occurred between the November 2007 pre-crisis peak and January Commercial property prices have now completed a peak-to-peak round trip in just under seven years.» Among the key drivers of the price recovery were the increased availability and decreased cost of debt and equity capital, capitalization rate compression, improving property fundamentals and a declining share of distressed transactions. The effects of these drivers overlap to a degree, and thus their contributions to the price recovery are hard to differentiate.» The price recovery varied greatly by property type and market segment. Among the 10 Tier 4 2 segments that roll up to constitute the national all-property index, major market apartment was the star performer in the recovery, topping its pre-crisis peak by approximately 35%. CBD office in major markets and apartment in non-major markets followed, topping their pre-crisis peaks by 27.9% and 7.1% respectively. The three top-performing segments constitute approximately 43% of the national all-property index.» Two of the 10 Tier 4 segments are just short of matching their pre-crisis peak levels: retail and industrial in major markets. Five segments are 13% or more below their respective pre-crisis peak, four in non-major markets (CBD office, suburban office, retail and industrial) and one in major markets (suburban office).» The contraction and expansion of debt capital over the last seven years closely aligned with price movements between the prior and current peaks. The commercial sector had a more prolonged contraction of debt capital than the apartment sector, as well as a more prolonged price recovery.» The relationship between cap rate and price movements was strong during the initial stage of the recovery. Other factors, including improving property fundamentals, growing liquidity and fewer distressed transactions, helped drive the later stages of the price recovery. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 1 More information about the index, including the 2012 Moody's/RCA CPPI announcement paper, is available in reports we cite in the Moody s Related Research section at the end of this report and at 2 Refer to definitions section of this report for explanation of tier components of the CPPI. 2 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

3 Moody s/rca CPPI 3 Overview Sectors constituting the national all-property index EXHIBIT 2 Price Changes by Sector and Market Type: Value-Weighted Composite Tiers Higher Tier Share of Higher Tier Index Month 3-Month 12-Month Composite * Tier Composite ** 1 National All-Property 0.5% 2.2% 13.5% N/A 10 2 Apartment -0.5% 2.4% 15.5% National / T1 28.6% 2 Core Commercial 0.9% 2.1% 12.8% National / T1 71.4% 3 Retail 0.1% -1.2% 5.3% Core Comm / T2 27.2% 3 Industrial -0.8% 2.1% 15.2% Core Comm / T2 20.7% 3 Office CBD 5.3% 6.7% 17.8% Core Comm / T2 26.7% 3 Office Suburban -1.2% 0.9% 13.5% Core Comm / T2 25.4% 3 Office % 15.7% Standalone N/A 5 Major Markets 1.5% 2.9% 14.6% Standalone 46.9% 5 Non-major Markets -0.4% 1.6% 12.6% Standalone 53.1% Notes to exhibit: * The tier is the hierarchical level of the index, with the national all-property CPPI defined as Tier 1. Tiers 1-3 and 5 are value-weighted composite indices. Tier 4 consists of the underlying, building block indices, which we estimate as equal-weighted regressions of sector repeat sales. ** We weigh composite indices in the Moody s/rca CPPI system by value, based on the segments long-term, 10-year rolling average dollar share of the defined composite market, similarly to typical stock market indices, which we weigh by the market capitalization of the constituent stocks. We adjust the weights monthly according to relative returns and rebalance them yearly. The weights here are the most recently rebalanced. *** The office segmentation is a mezzanine-level index tier; in other words, the core commercial composite comprises both CBD and suburban segments. **** The major markets (MM) are the six gateway metropolitan areas: Boston, Chicago, Los Angeles, New York, San Francisco and Washington, DC. For composite Tier 5, we show major and non-major markets (NMM) as a percentage of national, for reference only. They do not contribute directly to the calculation of the national all-property composite index; however, when combined at their weighted averages, they produce the same Tier 1 result. 3 Historical data for these indices are available in Excel format here. Data on the 10 building block indices are available to Moody s or RCA subscribers here. Repeat sales indices, including the CPPI, are subject to backwards revision, particularly for the most recent periods and for the indices with the fewest number of repeat sale observations. We have elected not to employ smoothing techniques in order to maximize information content. The most recent returns tend to be more volatile than earlier results and should be interpreted cautiously. Over time, the range of reported returns for a given period tends to stabilize as more data bridging that period becomes available. 3 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

4 Tiers 1 & 2: National, apartment and core commercial» The national all-property composite index increased 0.5% in September, driven by the 0.9% increase in its core commercial component. The apartment component decreased by 0.5%.» Apartment prices now exceed their pre-financial crisis peak level by 17.8%, while core commercial property prices are 5.8% below peak. EXHIBIT 3 Moody s/rca CPPI: Apartment and Core Commercial Composite Indices* 240 National Apartment Core Commercial Dec-00 Index = Recent Historical 3 25% 2 15% Apartment Core Commercial National 15.5% 12.8% 91.2% 60.6% 116.7% 69.9% % 0.9% 2.4% 2.1% 17.8% -5.8% 4 2-5% -0.5% 1-Month 3-Month 12-Month Peak Trough Inception -2 Nov-07 Jan-10 Dec-00 * In this report, peaks are pre-financial crisis, and troughs, post-financial crisis, for the highest tier index in a given exhibit. For example, the peak and trough dates in Exhibit 3 refer to the peak and trough of the national all-property index, not Apartment or Core Commercial. 4 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

5 Tier 3: Core commercial sectors» CBD office has been the best-performing core commercial property type over the last 12 months, with prices increasing by almost 18%.» Retail is the only core commercial sector whose prices have not increased by a double-digit percentage over the last 12 months. EXHIBIT 4 Moody s/rca CPPI: Core Commercial Sector Composite Indices Dec-00 Index = Core Commercial Retail Industrial Off-CBD Off-Sub Office Recent Historical Ret Ind Off-CBD Off-Sub Off Core Comm % 138.6% 15 25% 2 15% 1 5% 0.1% 5.3% % 6.7% 0.9% 3.8% 5.3% 15.2% 17.8% 13.5% 15.7% 17.4% % 49.3% 85.2% 55.8% 51.7% 31.6%.5% 125% 10 75% 5 25% -5% % -1.2% -1.2% % -19.2% % -5 1-Month 3-Month 12-Month Peak Trough Inception Oct-07 Jan-10 Dec-00 5 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

6 Tier 4: Major markets by sector» CBD office, up 22.3%, and apartment, up 16.8%, are the two best-performing major market segments over the past 12 months.» Retail and suburban office are the only two of the major market segments to post less than double digit gains over the last 12 months. EXHIBIT 5 Moody s/rca CPPI: Core Commercial Sector Composite Indices 330 Major Markets Aggregate Major Apt Major Ret Major Ind Major Off-CBD Major Off-Sub Dec-00 Index = Historical Changes Major Apt Major Ret Major Ind Major Off-CBD Major Off-Sub Major Markets % 2.9% 13.6% 22.3% 7.8% 34.6% % -15.4% 76.4% 58.4% 46.7% 143.5% % 69.2% 172.7% 40.7% 12-Month Peak Trough Inception Jan-10 Dec-00 6 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

7 Tier 4: Non-major markets by sector» Non-major market apartments, up 14.5% over the last 12 months, are the only non-major segment to surpass their pre-crisis peak. All of the other non-major market segments are still at least 1 below their pre-crisis peaks.» Retail, up 6.3%, and CBD office, up 3.7%, are the only two non-major market segments where prices have risen by less than 10. over the past 12 months. EXHIBIT 6 Moody s/rca CPPI: Core Commercial Sector Composite Indices 200 Non-Major Markets Aggregate Non-Major Apt Non-Major Ret Non-Major Ind Non-Major Off-CBD Non-Major Off-Sub Dec-00 Index = Historical Changes Non-Major Apt Non-Major Ret Non-Major Ind Non-Major Off-CBD Non-Major Off-Sub Non-Major Markets % 6.3% 16.3% 3.7% 18.3% 7.1%. 38.9% 88.6% 39.4% 78.3% 35.5% 48.7% 22.8% % -14.5% -13.1% % 12-Month Peak Trough Inception Oct-07 Jan-10 Dec-00 7 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

8 Tier 5: Major and non-major markets» Prices in major markets have increased by about two percentage points more than those in nonmajor markets over the last 12 months.» Major-market prices exceed the November 2007 pre-crisis peak level by approximately 13%, while non-major market prices are approximately 1 below peak. EXHIBIT 7 Moody s/rca CPPI: Major Markets and Non-major Markets Composites Dec-00 Index = National Major Markets Non-Major Markets Recent Historical 25% Major Non-Major National 125.7% 2 15% % 12.6% 84.1% 56.1% 50.6% % 1.5% 2.9% 1.6% 12.8% -10.4% 3-5% -0.4% 1-Month 3-Month 12-Month Peak Trough Inception Nov-07 Jan-10 Dec NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

9 Hotel (informational indices, not part of composite index)» Hotel prices are approximately 23% below peak and have recovered approximately 4 of their peak-to-trough price decline.» The share of hotel transactions recorded by RCA as distressed has declined in recent months but has been volatile, consistent with the segment s upward but bumpy post-trough price recovery. Having peaked at over 6 in late 2010, the share of distressed hotel transactions has worked its way down to about 3, but with several quarterly swings of 5% or more. EXHIBIT 8 Moody s/rca CPPI: Hotel Major Markets, Non-major Markets and Composite Index = Hotel Major Hotel Non-Major Hotel Historical Changes Major Hotel Non-Major Hotel Hotel % % 31.3% % -16.4% -30.8% 12-Month Peak Trough Inception Nov NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

10 Spotlight: Drivers of the peak-to-peak path of commercial property prices Commercial property prices fell 40.6% from the November 2007 peak to the January 2010 trough, and then gained 68.6% through September 2014 to set a new peak. Among the key drivers of the post-trough price recovery were the increased availability and reduced cost of debt and equity capital, capitalization rate compression, stabilizing property fundamentals and a declining share of distressed transactions. The effects of these drivers overlap to a degree, and thus their contributions to the price recovery can be hard to differentiate. Apartment and CBD office in major markets led the recovery The price recovery varied greatly by property type and market segment. In Exhibit 9, we illustrate price movements for the 10 segments constituting Tier 4 of the national all-property composite (five property types for each of major and non-major markets) by when they hit their trough and their price change relative to the pre-crisis peak. We vary the size of each segment to represent its contribution to the composite index. Exhibit 9 also shows that apartments in both major and non-major markets, as well as CBD office in major markets, had among the earliest troughs and biggest subsequent recoveries. Together, these three segments account for 43% of the national all-property price index. The major market apartment index was clearly the star performer in the recovery, topping its pre-crisis peak by approximately 35%. Major market CBD office was the next strongest in recovery, approximately 28% above its pre-crisis peak. Major market apartments have had continually strong demand and access to capital. CBD office has had a much stronger recovery of fundamentals than its suburban counterpart. Apartment in non-major markets was the third biggest gainer, up about 7% from its pre-crisis peak. Two sectors are within 5% of matching their pre-crisis peak levels: retail and industrial in major markets. Five segments remain 13% or more below their pre-crisis peak, four in non-major markets (CBD office, suburban office, retail and industrial) and one in major markets (suburban office). EXHIBIT 9 Major Market Apartments and CBD Office Prices Saw Earliest Trough, Biggest Recovery Pre-Financial Crisis Peak to Current Peak Price Change Major Markets Apartment MM CBD-Office MM CBD-Office NMM Non-Major Markets Apartment NMM Industrial MM Sub-Office MM Retail MM Sub-Office NMM Retail NMM Industrial NMM -4 Jul-09 Oct-09 Jan-10 May-10 Aug-10 Nov-10 Feb-11 Trough Month of Index 10 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

11 Price recovery aligns with decreased share of distressed transactions Exhibit 10 illustrates the alignment of the share of repeat sales made up of distressed transactions, 4 with recent price movements. The pre-crisis and current peak levels each align with shares of distressed transactions of about 1 or less, while the trough aligns with a share in excess of one third. The Moody s/rca CPPI seeks to broadly represent the commercial property sales market. Certain subsets of the commercial property market, specifically institutional quality properties with little or no leverage, have lower levels of distress and thus may experience different price movements. The dataset used to calculate the Moody s/rca CPPI captures repeat-sales of properties that had an initial sales price equal to or greater than $2.5 million, and includes varying types of sponsorship and leverage, thus more closely reflecting price movements in the overall market. 5 EXHIBIT 10 Moody s/rca CPPI and the Share of Distressed Sales (Inverted Scale) CPPI (Dec-00 Index = ) National All-Property CPPI Distress Nov-07 Jan-08 May-08 Jul-08 Nov-08 Jan-09 May-09 Jul-09 Nov-09 Jan-10 May-10 Jul-10 Nov-10 Jan-11 May-11 Jul-11 Nov-11 Jan-12 May-12 Jul-12 Nov-12 Jan-13 May-13 Jul-13 Nov-13 Jan-14 May-14 Jul-14 5% 1 15% 2 25% 3 35% 4 Share of Transactions Resolving Distress (Trailing 3-Month Average) Prices align with expansion and contraction of debt capital The expansion and contraction of debt capital closely aligned with price movements between the prior and current peaks. Exhibit 11 shows mortgage debt outstanding as well as price movements for each of the apartment and commercial sectors. The commercial sector had a more prolonged contraction of debt capital as well as a more prolonged price recovery. For apartments, there were only a handful of quarters near the price trough in which multi-family mortgage debt outstanding contracted. Apartments benefitted from government-sponsored enterprise lending, which made liquidity available throughout the downturn. Commercial, on the other hand, saw 16 quarters in which there was a contraction of liquidity and had a less robust recovery than apartment. The 16-quarter contraction period largely overlaps with the 4 RCA records the share of commercial property sales that are distressed. Please see the definitions section of the appendix for more detail on their methodology. 5 The RCA transaction series, which drives the CPPI, captures more than 9 of commercial transactions exceeding $2.5 million, the threshold for inclusion in CPPI, in the US. 11 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

12 period in which CMBS shut down and then restarted at a much lower level than it left off. At the peak, CMBS accounted for approximately one quarter of outstanding commercial mortgages. 6 Commercial property prices remain heavily dependent on the availability of debt capital, with many investors seeking leverage in the 6-75% range. The low cost of debt in recent years has been a tailwind for price recovery. The average coupon for CMBS conduit loans was 6.2% at the pre-crisis peak in Q and was 4.6% for Q XHIBIT 11 Moody s/rca CPPI and Availability of Debt at Low Interest Rates Multifamily Sector 125 Change In Multifamily Mortgages Outstanding Apartment CPPI 30 CPPI (index = at Q Peak) Chane in Mortgages Outstanding ($ billioons) Commercial Sector 120 Change In Commercial Mortgages Outstanding Core Commerical CPPI CPPI (index = at Q Peak) Chane in Mortgages Outstanding ($ billioons) Sources: Moody s Investors Service, RCA, Moody s Analytics, Federal Reserve Board Cap rate compression is a major driver in early stages of recovery We examine the relationship between capitalization rates and prices between the current and prior peaks, showing cap rate movements in Exhibit 12 on an inverted scale given that an increase in cap rates results a decrease in prices. The relationship between cap rate and price movements is strong during the first three years of the recovery, with other factors, including improving property 6 Mortgage Bankers Association, Q Trepp LLC, October NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

13 fundamentals and growing liquidity, helping drive the later stages of recovery. Apartment fundamentals, for example, have improved to the extent that construction has resumed in many markets. In terms of debt capital, the CMBS market has substantially recovered, with loan proceeds in relation to cash flow by Moody s valuation metrics approaching peak levels. While the spread between cap rates and the 10-year treasury is widely noted, commercial property investments are driven primarily by equity considerations. Cap rates are effectively shorthand for a complex investment analysis, which typically takes into account expected future changes in cash flow as well as expected future interest rates and cap rates depending on whether the acquirer expects to refinance or sell. EXHIBIT 12 Moody s/rca CPPI and RCA Cap Rates (Inverted Scale) Indexed to at Nov-07 National All- Property CPPI Peak Moody's/RCA National All-Property CPPI RCA National All-Property Cap Rate Series Nov-07 Jan-08 May-08 Jul-08 Nov-08 Jan-09 May-09 Jul-09 Nov-09 Jan-10 May-10 Jul-10 Nov-10 Jan-11 May-11 Jul-11 Nov-11 Jan-12 May-12 Jul-12 Nov-12 Jan-13 May-13 Jul-13 Nov-13 Jan-14 May-14 Jul % % 6.4% 6.6% 6.8% % 7.4% 7.6% 7.8% Cap Rate 13 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

14 Appendix I: Tier 4 supplemental data EXHIBIT 13 Tier 4: Moody s/rca CPPI Index Changes to September 2014 from Earlier Periods* Tier Index 3-Month 12-Month Higher Tier Composite Share of Higher Tier Composite 4 Apartment Major 2.6% 16.8% Apartment / T2 39.5% 4 Apartment Non-major 2.3% 14.5% Apartment / T2 60.5% 4 Retail Major % Retail / T3 34.1% 4 Retail Non-major 1.3% 6.3% Retail / T3 65.9% 4 Industrial Major 0.7% 13.6% Industrial / T3 42.4% 4 Industrial Non-major 3.1% 16.3% Industrial / T3 57.6% 4 CBD Office Major 9.9% 22.3% Office CBD / T CBD Office Non-major -3.8% 3.7% Office CBD / T Suburban Office Major % Office Sub / T3 45.5% 4 Suburban Office Non-major 1.7% 18.3% Office Sub / T3 54.5% 5 Major Markets Aggregate 2.9% 14.6% N/A 46.9% 5 Non-major Markets Aggregate 1.6% 12.8% N/A 53.1% * The tier is the hierarchical level of the index, with the national all-property CPPI defined as Tier 1. Tiers 1-3 and 5 are value-weighted composite indices. Tier 4 consists of the underlying, building block indices that we estimate as equal-weighted regressions of sector repeat sales. Property sector performance history by major and non-major markets The following exhibits compare Tier 4 building block indices (quarterly reporting) relative to the Tier 3 composites (monthly reporting). Because the Tier 4 indices come out quarterly and Tier 3 indices, monthly, prices in the Tier 3 indices can fluctuate more than in the Tier 4 components. EXHIBIT 14 Moody s/rca CPPI: Apartment Major and Non-major Markets 330 Apartment Major Apt Non-Major Apt 2 Dec-00 Index = NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

15 EXHIBIT 15 Moody s/rca CPPI: Retail Major and Non-major Markets Retail Major Ret Non-Major Ret Dec-00 Index = EXHIBIT 16 Moody s/rca CPPI: Industrial Major and Non-major Markets Dec-00 Index = Industrial Major Ind Non-Major Ind 15 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

16 EXHIBIT 17 Moody s/rca CPPI: CBD Office Major and Non-major Markets 320 Off-CBD Major Off-CBD Non-Major Off-CBD 270 Dec-00 Index = EXHIBIT 18 Moody s/rca CPPI: Suburban Office Major and Non-major Markets Dec-00 Index = Off-Sub Major Off-Sub Non-Major Off-Sub EXHIBIT 19 Moody s/rca CPPI: CBD and Suburban Office Dec-00 Index = Office Off-CBD Off-Sub 16 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

17 II: Recovery profile of CPPI indices Exhibit 20 ranks the primary 20 CPPI indices by the percentage of the nominal peak-to-trough price decline recovered.» The national all-property index has recovered all of its post-crisis loss. All sectors, except suburban office and retail properties in non-major markets, have recovered at least half of their peak-totrough loss.» Major market apartment prices have had the strongest recovery, with prices approximately 35% above their pre-crisis peak. Apartment prices have benefitted from strong underlying fundamentals and abundant liquidity. EXHIBIT 20 Summary Moody s/rca CPPI Sub-indices Peak-to-Trough Detail* Percentage Peak-to- Trough Loss Recovered ** Share of National Composite Index Peak-to- Trough Peak-to- Current Peak Month Trough Month Apartment Major -23.7% 34.6% 245.6% Nov % CBD Office Major -47.5% 27.9% 158.8% 14.5% Apartment -38.4% 17.8% 146.3% Nov-07 Jan % Office CBD % 135.6% 19.1% Major Markets Aggregate -38.7% 12.8% 133. Jan % Apartment Non-major -46.4% 7.1% 115.3% Nov-07 Jan % National All-Property -40.6% 0.2%.5% Nov-07 Jan-10. Office -46.5% % 52.1% Industrial Major -33.9% % Feb % Retail Major % Nov-07 Aug % Core Commercial -41.4% -5.8% 85.9% Oct-07 Jan % CBD Office Non-major -53.9% -13.1% 75.7% 4.6% Non-Maj Markets Aggregate -42.6% -10.4% 75.7% Oct-07 Jan % Industrial -33.4% -9.6% 71.3% Oct-07 Oct % Suburban Office Major -47.5% -15.4% 67.6% Nov % Retail -42.7% % Oct-07 May % Industrial Non-major -35.7% -14.5% 59.4% Oct-07 Aug % Office Suburban -45.8% -19.2% 58.2% Oct-07 Apr % Suburban Office Non-major -44.8% % Oct-07 Jul % Retail Non-major -44.8% -23.2% 48.1% Nov % * Peaks are pre-crisis ( ), and trough are, post-crisis ( ). ** We calculate percentage peak-to-trough loss recovered as the ratio of the current-minus-trough value divided by the peak-minus-trough value. For example, if the peak-to-trough loss was 5, and the price is currently 1 below peak values, we calculate: (90-50)/ (-50) = 40/50 = 8 of the loss recovered. 17 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

18 III: Repeat-sales transaction volume EXHIBIT 21 Moody s/rca CPPI Three-Month Rolling Volume by Count 1,600 Apartment Retail Industrial Off-CBD Off-Sub 1,400 1,200 1,000 Count EXHIBIT 22 Moody s/rca CPPI Three-Month Rolling Volume by Dollar $35 Apartment Retail Industrial Off-CBD Off-Sub $30 $25 Billions $20 $15 $10 $5 $0 18 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

19 IV: Distressed transaction volume EXHIBIT 23 Moody s/rca CPPI Three-Month Rolling Distressed Share of Market Types by Count Share of Transactions Resolving Distress by Count (3-Month Rolling Average) 45% 4 35% 3 25% 2 15% 1 5% Nov-09 National All-Property Major Markets Non-Major Markets Jan-10 May-10 Jul-10 Nov-10 Jan-11 May-11 Jul-11 Nov-11 Jan-12 May-12 Jul-12 Nov-12 Jan-13 May-13 Jul-13 Nov-13 Jan-14 May-14 Jul-14 EXHIBIT 24 Moody s/rca CPPI Three-Month Rolling Distressed Share of Property Types by Count Share of Tranactions Resolving Distriss by Count (3-Month Rolling Average) National All-Property Apt Ret Ind OffC OffS Hotel Nov-09 Jan-10 May-10 Jul-10 Nov-10 Jan-11 May-11 Jul-11 Nov-11 Jan-12 May-12 Jul-12 Nov-12 Jan-13 May-13 Jul-13 Nov-13 Jan-14 May-14 Jul NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

20 V: Schedule of CPPI report releases The Moody s/rca CPPI is based on repeat-sales transactions that take place any time throughout the month, two calendar months prior to the current report. For example, the July CPPI report covers repeat sales on or before the final day of May; we process the data from these transactions through the end of June. The CPPI allows for backward revisions and incorporates new data we receive subsequent to publishing; thus, future indices will reflect adjustments from additional transaction data. CPPI releases take place the second week of each month. Reporting for the Tier 4 building block indices is quarterly; we include these data in the February, May, August and November reports. 20 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

21 VI: Index hierarchy Construction of the CPPI suite We calculate the CPPI suite with a repeat-sales regression methodology using a two-stage annual to monthly frequency conversion (ATM) technique. 8 ATM enhances accuracy and versatility, given the comparatively small datasets typical of commercial real estate transactions. The first step in the process is to generate the most granular underlying indices in the index suite possible, which we have labeled Tier 4 in the exhibit below. Tier 4 indices are equal-weighted, meaning each verified repeat sale constitutes the same contribution to the index calculations. The higher-tier indices, Tiers 1 through 3, are based on value-weighted roll-ups of the underlying indices. The value weighting of Tiers 1 to 3 is similar to that in a buy-and-hold portfolio in which each component is weighted annually by the dollar share of total stock outstanding. 9 The CPPI methodology makes advantageous use of both equal- and value-weighting. Equal weighting at the underlying/tier 4 level is important, primarily to prevent any single property sale or small market segment from skewing the CRE market picture. The value-weighted roll-up of the underlying/tier 4 indices to the higher Tier 1-3 levels appropriately allows a market segment to influence composite indices in correct proportion to its market share of dollar-based transaction volume. EXHIBIT 25 Moody s/rca CPPI Suite: Hierarchy of Composite Indices Note: Office, Hotel and Tier 5 are for information only and are not included in the national composite roll-up. 8 More information about the index, including the 2012 Moody's/RCA CPPI announcement paper, is available in the Moody s Related Research section at the end of this report and at 9 For the CPPI, the annual weighting of the index segments is based on a 10-year rolling average share. Most actively traded commercial properties typically turn over within 10 years; thus, we infer that the 10-year rolling average of total trading volume as Real Capital Analytics tracks it is an appropriate proxy for the relative value of the outstanding stock of the corresponding sub-index properties. 21 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

22 VII: Definitions Building Block Indices CBD Composite Indices Distressed Transactions Full-Service Hotel Limited-Service Hotel Major Markets (MM) Non-major Markets (NMM) Repeat-Sale Tiers These indices, also referred to as Tier 4 (see Exhibit 13), are the most granular of the CPPI suite, grouped by market type (major or non-major) and property type. They are constructed from equal weighting of repeat-sales transactions. They are reported quarterly. Central business district is the center of business activity in a metro area, characterized by a high density of commercial real estate. These indices, also referred to as Tiers 1, 2, 3 and 5 (see Exhibit 13), are constructed from the value-weighted average returns of the building block indices or lower-tier composite indices. Value-weighting is based on the long-term, 10-year rolling average dollar share of the defined composite market, adjusted monthly according to relative returns and rebalanced yearly. Composite indices are reported monthly. Transactions classified as distressed are those in which the property was previously in foreclosure, REO or bankruptcy, or the debt financing was restructured or delinquent in any way. Only arms-length transactions are included in the CPPI. Therefore, the transfer of a property from a defaulted borrower to a lender is excluded, whereas the subsequent sale of the property by the lender will typically be included and classified as distressed. For further information, the RCA Troubled Assets Methodology is available upon request. A hotel is likely to be classified as full-service if it satisfies these conditions: has room service and has an on-site restaurant. A hotel is likely to be classified as limited-service if it satisfies these conditions: does not have room service, does not have an on-site restaurant or does not have a concierge. The six metros we define as major (Boston, Chicago, Los Angeles, New York, San Francisco and Washington, DC) are gateway markets with unique price performance and the ability to attract capital, and they represent approximately half of the RCA repeat-sales on a dollar basis. All markets other than those classified as major. A transaction where the prior sale of the same property is known. The CPPI is a hierarchical suite of composite indices rolled up from 10 underlying, building block indices. Tier 1 is the national, allproperty composite index. Tier 2 consists of the apartment index and roll-up of the core commercial sector indices. Tier 3 consists of the individual commercial sector indices. Tier 4 is the building block indices. Tier 5 is a standalone roll-up of transactions in major and non-major markets. 22 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

23 Moody s related research Below are links to publications from Moody s related to the indices and underlying trends: CPPI related:» US CMBS: Moody's to Publish State-of-the-Art Commercial Property Price Indices, May 2012 (SF285594) Supplemental data: o Moody's/RCA CPPI (Public Excel supplement) o Moody's/RCA CPPI (Subscription Excel supplement)» Prior month s report: Moody's/RCA CPPI: National All-Property Index Increases to Just Short of November 2007 Peak, November 2014 Commercial real estate related:» US CMBS: Moody's Delinquency Tracker, November 2014» CMBS: Red Yellow Green Update, Q Quarterly Assessment of U.S. Property Markets, August 2014 (SF373567)» US CMBS Loss Severities, Q Update, September 2014 (SF379208) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. Moody s publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at 23 NOVEMBER 6, 2014 SPECIAL COMMENT: MOODY S/RCA CPPI:

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