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AGC / CFMA / ASM

Present

State of the Market: The Bentall Kennedy Perspective

December 4, 2014 Presented By: Douglas M. Poutasse EVP, Head of Strategy and Research

Preview: The Times they are a Good, Far Better than Sentiment

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Economy and Demographics



U.S. economic growth is attractive relative to the rest of the industrialized world



It is still early in the cycle in terms of wage growth; plenty of labor force slack



Millennials and Immigrants represent key components of U.S. population and their lifestyle choices will be very impactful in the coming years



Strong economy allows us to attract skilled labor from abroad to support growth and innovation;

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Key Question: How much do we choose to let in?

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Real Estate and Capital Markets:

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Demand rising in all major property types and most major markets

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Vacancies are falling and rents are rising, generating strong NOI growth



Construction up from recessionary lows but below peak levels

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Yields are attractive relative to other asset classes: Strong NOI growth and spreads vs. Treasuries near historic peaks.

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U.S. Economy

Slowdown!? Depending On Location Your View May Differ Dramatically 2

U.S. Economy

National Job Growth Remains Steady; Significant Differences Across Sectors 7.0% 6.0%

Above pre-recession peak Below pre-recession peak

Nat. Resources & Mining 5.0% 4.0% 3.0% 2.0% 1.0% Construction Prof. & Business Svcs.

Trans. & Utilities Total Leisure & Hospitality Education Manufacturing State & Local Gov.

Wholesale Trade Health Svcs.

Retail Financial Activities Other Svcs.

Information 0.0% -1.0% Federal Gov.

-2.0% -3.0% -3.0% -2.0%

Source: Bureau of Labor Statistics

-1.0% 0.0% 1.0% 2.0% 3.0% Employment Growth YOY Sept. 2013 4.0% 5.0% 6.0% 7.0%

Note: U.S. employment 0.8% above peak.

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U.S. Economy

Energy and Technology Markets Outperforming; But Recovery Strengthening in Growth Markets 4

Source: Bureau of Labor Statistics

U.S. Economy

Wage Growth Varies Greatly Across Markets Due to Economic Conditions 5

Sources: U.S. BEA, Moody’s Analytics, Bentall Kennedy Research

U.S. Economy

High Educational Attainment Leads to Innovation 6

Sources: U.S. Census Bureau, Moody's Analytics, U.S. Patent Office

Note: Bubble size reflects patents per capita

U.S. Economy

Back to the Future: Migration a Driving Force in America Foreign Born Population 15 10 5 0 40 35 30 25 20

Foreign Born Population % of Total Source: United States Census, “Foreign-Born Infographic”, American Community Survey 2010

7 6% 4% 2% 0% 16% 14% 12% 10% 8%

U.S. Economy

Back to the Future: Migration a Driving Force in America

Source: United States Census, “Foreign-Born Infographic”, American Community Survey 2010

Miami-Ft. Lauderdale, FL San Jose-Sunnyvale, CA 38.9% 36.7% Los Angeles-Long Beach, CA 34.3% San Francisco-Oakland, CA

McAllen-Edinburgh-Mission, TX

30.0%

28.9%

New York, North NJ-L.I., NY/NJ 28.8%

El Paso, TX

San Diego-Carlsbad, CA

Oxnard-Thousand Oaks, CA 26.2%

23.5%

23.0% Stockton, CA

Houston-Sugar Land, TX

22.6%

22.3% Riverside-San Bernardino, CA 22.0%

Fresno, CA 21.9%

Washington-Arlington, DC/VA 21.8%

Las Vegas-Paradise, NV

Chicago-Naperville, IL

21.7%

17.6% Dallas-Ft. Worth, TX

Sacramento-Arden, CA

Seattle-Tacoma-Bellevue, WA Boston-Cambridge, MA 17.5%

17.0%

16.8% 16.8% 2.2MM

0.7MM

4.4MM

1.3MM

0.2MM

5.4MM

0.2MM

0.7MM

0.2MM

0.2MM

1.3MM

0.9MM

0.2MM

1.2MM

0.4MM

1.7MM

1.1MM

0.4MM

0.6MM

0.8MM

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U.S. Economy

Successful Innovation Markets Leveraging Both Immigration and Educational Attainment 9

Sources: U.S. Census Bureau, U.S. Bureau of Labor Statistics, U.S. Patent Office

Notes: Bubble size = patents per capita; Color = employment growth

Demographics

Boomers vs. Millennials: Take-Aways

Sources: Bentall Kennedy, Pew Research Center, “The Next America,” Published April 10,2014, US. Census Bureau, Moody’s Analytics

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Demographics

Conclusions from the Macro Data …

 Demographic outlook is positive for the U.S., despite and because of changes • Working age population posts strong growth next decade • • • • Number of empty nesters will skyrocket 10,000 Boomers turn 65 every day!

25-30 year olds increase through 2020 Extending the working age = huge benefits  Immigration drives growth, vital to the future • Adds population through at least the late 40s/early 50s age cohort • Growth economies attract immigrants

Insights from the Metro Data…

 Racial diversity increases further • •  Immigrant epicenters generally major markets • Top markets will embrace diversity Less diverse markets likely grow slower 16 of Top 20 MSAs ranked by % of foreign-born population are PPR54 Markets  Immigration driven by and creates growth • Knowledge-based cities: high % and numbers of immigrants - legal and illegal • Legal immigration driven by H1B visas in knowledge-based cities • • Illegal immigration provides services demanded by wealthy populations Without immigration, many major markets’ populations would have shrunk

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U.S. Property Fundamentals

San Francisco: TransBay Aerial – Salesforce & LinkedIn will take 1 mSF+; Google Expanding 12

U.S. Property Fundamentals: Multifamily

Low Vacancy Rates Constraining Reported Demand Growth in Some Apartment Markets 6.5% 6.0% 5.5% 5.0% Y/Y Rent Growth >3% Y/Y Rent Growth 0%-3% Austin Raleigh 4.5% 4.0% 3.5% 3.0% San Jose Denver Seattle Washington, D.C.

Houston 2.5% 2.0% 1.5% 1.0% 0.5% San Francisco Orange County Boston Salt Lake City Los Angeles Minneapolis Portland Edison Philadelphia Chicago Detroit 0.0% -0.5% 3.0% 3.5%

Source: Axiometrics

4.0% 4.5% 5.0% Dallas Vacancy 2014Q3 5.5% Atlanta 6.0% Phoenix Durham 6.5% 13

U.S. Property Fundamentals: Multifamily

Low Vacancy Rates Constraining Demand Growth in Some Apartment Markets 6.5% 6.0% 5.5% 5.0% Y/Y Rent Growth >3% Y/Y Rent Growth 0%-3% Austin Raleigh 4.5% 4.0% 3.5% San Jose Denver 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% 3.0% 3.5%

Source: Axiometrics

4.0% Seattle Washington, D.C.

San Francisco Orange County Boston Salt Lake City Los Angeles Minneapolis Portland Edison Philadelphia Chicago Detroit 4.5% 5.0% Vacancy 2014Q3 Houston Dallas 5.5% Atlanta Phoenix Durham 6.0% 6.5% Highest Relative Construction Metro Multifamily Starts as % of Renter Hhlds YOY Job Growth

Austin Dallas Seattle Houston Bethesda Orlando San Jose Charlotte Raleigh Nashville Denver Miami Columbus Portland Minneapolis 3.0% 2.3% 2.2% 2.0% 2.0% 2.0% 1.9% 1.8% 1.8% 1.7% 1.7% 1.6% 1.4% 1.3% 1.3% 3.6% 4.1% 2.6% 3.8% 0.1% 3.0% 2.3% 2.8% 4.8% 2.4% 3.1% 3.2% 0.0% 2.6% 1.6%

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Sources: Axiometrics , U.S. Census Bureau, Bureau of Labor Statistics (employment as of July 2014), Moody’s Analytics (starts for year-ending July 2014)

U.S. Property Fundamentals: Multifamily

Tight Market Conditions Hinder New Household Creation

2.3% 1.8%

Boston Metro Change in Population Aged 25+ vs. Household Growth

Chg in Pop. Aged 25+ Chg in HHs Forecast 1.3% 0.8% 0.3% 33,000 28,000 23,000 18,000 13,000 8,000 3,000 -2,000

Boston Metro Apt and SF Permits vs. HH Growth 1980-2013

SF Permits MF Permits Change in HHs Forecast -0.3%

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Sources: U.S. Census Bureau, Moody's Analytics

U.S. Property Fundamentals: Multifamily

Slow Household Formation – Anecdotal? Or Real?

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U.S. Property Fundamentals: Office

Not Unlike the Economic Recovery, the Office Recovery is Focused on Education/Innovation 17

Source: CBRE-EA

Note: Bubble size reflects market size

U.S. Property Fundamentals: Industrial

Rents Rising in Nearly All Major Industrial Markets 18

Source: CBRE-EA

Note: Bubble size reflects market size

U.S. Capital Markets

Cap Rate Spreads Remain Above Historical Average; Interest Rates Down From Recent Highs 19

Sources: NCREIF (transaction-based cap rates), Federal Reserve, Moody's Analytics

U.S. Capital Markets

Performance Trends Vary by Property Type; Meaningful NOI Growth Now Widespread Apartment Retail Industrial Office

Note: Data for year-ending in third quarter

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Source: NCREIF

Conclusion: Not Quite “Don’t Worry, Be Happy”



Economy



U.S. economic growth is attractive relative to the rest of the industrialized world



It is still early in the cycle in terms of wage growth; plenty of labor force slack



Demographics



Millennials and Immigrants represent key components of U.S. population and their lifestyle choices will be very impactful in the coming years



Strong economy allows us to attract skilled labor from abroad to support growth and innovation; Key Question: how much we choose to let in.



Real Estate:



Demand rising in all major property types and most major markets



Vacancies are falling and rents are rising, generating strong NOI growth



Construction up from recessionary lows but below peak levels



Yields are attractive relative to other asset classes: Strong NOI growth and spreads vs. Treasuries near historic peaks.

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Conclusion: “Even a Broken Clock is Right Twice a Day…”

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