VIEWPOINT 2016 COMMERCIAL REAL ESTATE TRENDS REPORT

Transcription

1 VIEWPOINT 2016 COMMERCIAL REAL ESTATE TRENDS REPORT An Integra Realty Resources Publication

2 Comprehensive Commercial Real Estate Market Research, Valuation and Advisory Services About IRR Over the past 16 years, Integra Realty Resources, Inc. (IRR) has grown to become North America s largest independent CRE market research, valuation, and counseling firm. Our clients tell us that our 875+ professionals in 58 offices deliver extraordinary insight, unbiased advice, and excellent service. In 2015, IRR valued over $400 billion in real estate assets across more than 60 metro markets comprising approximately 43,000 assignments. Every IRR office is supervised by one of our more than 218 MAl-designated professionals, industry leaders who have over 25 years, on average, of experience in their local markets. Having more MAI-designated experts than any other firm is just one testament to the high levels of training and experience which we put at our clients disposal: as of December 2015, IRR s senior management team also includes: 46 FRICS; 33 MRICS; 24 CREs; 24 SRAs; 20 CCIMs; 10 ASAs. These designations from the most prestigious real estate organizations in the world mean that from a culture of quality and ongoing professional development, we can offer unparalleled expertise in appraisals, feasibility and market studies, expert testimony, and related property consulting services across all local and national markets. IRR stands ready to serve you with unmatched Local Expertise Nationally.

3 CONTENTS CRE TRENDS 1 Chairman s Letter 4 The Economy Is the Great Recession a Memory or a Real Factor Today? 5 Housing Reconnecting the Supply Pipe 6 Capital Markets Capital: Is the Tap Staying On? 9 Interest Rates The Big Question: What Impact Will Fed s Change in Zero-Rate Monetary Policy Have? 10 Employment What is Behind the Jobless Recovery? 12 Property Sector Expectations for 2016 The Bears or the Bulls PROPERTY REPORTS 16 Office Positive Indicators Continue in 2016, Despite Challenges 20 Multifamily Outstanding Performance in 2015 Stimulates Confidence For Retail Fundamentals Improving, Challenges Remain for Industrial Significant Expansion and Growth Highlights Sector SPECIALTY REPORTS 38 Senior Housing Market at the Peak, Where Does it Go From Here? 40 Medical Office Breakout Investment Class in Self-Storage Fierce Investor Demand Drives Market 44 Auto Dealerships Vehicle Sales Hit Records in 2015, Market Expects Continued Improvement in Hospitality 2015 Recovery Path Leads to Favorable Conditions In

4 4

5 CHAIRMAN S LETTER Dear Friends and Colleagues, All of us at IRR are elated to present Viewpoint 2016, our 26th annual edition of what we know you ve come to count on for critical information that helps shape your commercial real estate outlook. We consider it a privilege to share our independent analysis of commercial real estate trends as they relate to U.S. and Caribbean property markets. I m honored to introduce IRR s Viewpoint this year, my first as Chairman. I am particularly keen to announce that in addition to IRR s unrivaled valuation and advisory services that you ve come to know and trust, we ll be providing you with access to our aggregated cap rate data to help you drive real-time insights into changing markets during With IRR s unsurpassed scale in providing 43,000 valuation assignments to our clients annually, we sit uniquely qualified to produce such cap rate insights and are excited to offer this new service to our clients in today s increasingly data-driven world. Real estate markets are always changing, and as a result, Viewpoint evolves as well. This year, you ll discover a fresh look that presents an abundance of valuable commercial real estate information in the form of engaging charts that capture what transpired in 2015, while also shedding light into IRR s views of the property markets in the coming year. Viewpoint 2016 begins by covering observations and trends on topics ranging from the economy, interest rates, capital markets, and housing, including insights as to how these items are expected to impact commercial real estate markets. Next, you ll find more detailed overviews of the five core property types office, multifamily, retail, industrial and hospitality as well as four specialty property overviews on senior housing, medical office buildings, self-storage and auto dealerships. We are excited to continue providing our independent services and trusted interpretations to the industry, and we wish all a happy, healthy, and prosperous Michael Welch Chairman of the Board Integra Realty Resources, Inc. 1

6 2

7 CRE TRENDS Viewpoint begins its 2016 national overview and outlook with a glance at the U.S. economy. We will explore the major factors impacting continued recovery, drivers of the economy, business sentiment toward growth and expansion, and a few of the key challenges and opportunities that face the U.S. marketplace. 3

8 2016 VIEWPOINT / INTEGRA REALTY RESOURCES 30% Approximate percentage of the U.S. economy tied to imports and exports Heading into 2016, one of the challenges the U.S. economy faces is global volatility ranging from a multitude of currency crises, economic upheaval, political instability owing to corruption and/ or terrorism, and one of the largest worldwide migrations of refugees in history. All of these factors have the potential for negative economic consequences on the world stage. THE ECONOMY Is the Great Recession a Memory or a Real Factor Today? Though the U.S. is in its seventh year of the current economic cycle, uncertainty as to the recovery s strength continues to persist. One view opines that the U.S. is nearing an end of the current upward cycle, with a high probability of real estate price correction owing to asset appreciation that is ahead of real growth. An alternate view notes that the U.S. economy may be on a long runway that will continue to accelerate. The various global and domestic economic forces are mixed, and as a result, the state of the economy feels edgy, volatile, chaotic, and oftentimes fragile. A Global Perspective Approximately 30% of the U.S. economy is tied to imports and exports. Financial volatility among global markets causes uncertainty and can negatively impact the still-fragile U.S. recovery. Over the past two years, the U.S. has represented both a safe haven and a prospect for global capital preservation. Quantitative Easing by the Federal Reserve The Federal Reserve successfully used quantitative easing to attract equity into the market and spur investments by keeping borrowing costs low. The U.S. dollar is at its strongest in more than a decade, while inflation has been at zero for the past 12 months; factors the Fed will weigh in determining future interest rate increases and the pace of hikes. However, analysts who believe the U.S. economy is nearing the end of the current cycle are concerned that interest rate increases could hasten a downturn a concurring view ostensibly held by Fed economists late into

9 The opposing viewpoint is that economic expansion is just beginning. Proponents of this view believe that the recovery from the Great Recession is different from previous recoveries. Historically, economic recoveries begin slowly and then accelerate. However, there hasn t been an accelerator with the current recovery just an extended build up, which could explain a lack of productivity gains or housing expansion that traditionally accompany a healthy U.S. economic expansion. So the question remains are we going to experience an accelerator within this economic cycle? Up, Down or Sideways? The economy has moved into a different phase as the memory of the Great Recession fades. Job creation is picking up, which is having a positive impact on commercial real estate rents and occupancy, and, in effect, values. But headwinds could challenge investors in 2016 as the Fed continues mulling options and global economies remain far from stable. IRR predicts that 2016 will see a return of global capital into mature developed European economies, but posits that the U.S. will maintain greater than fair share of foreign capital investment allocations throughout the year. Some abatement in capital inflows would be a welcome cooling to the feverish asset pricing of HOUSING Reconnecting the Supply Pipe The home building industry suffered a significant blow from the Great Recession, shutting off the housing creation supply pipeline for roughly three years. In 2015, the housing sector did not recover to pre-recession levels, and the long-term view for housing growth remains unclear. This major pillar of the U.S. economy continues adjusting to demographic, geographic, and generational shifts. Housing market conditions are improving nationally, but the pace of recovery varies by state and region, according to the National Association of Home Builders (NAHB). Economists at the NAHB report that in 2009, single-family home production stood at 27% of what is considered normal levels. The group considers 1.3 million units as its annual healthy Homeownership Down to 63.7% Lowest Level in 48 Years The home ownership rate fell to 63.7% in 3Q 2015 from 64.4% at the same period in Energy States North Dakota, Wyoming, Texas, Montana and Louisiana Experienced the most successful recoveries in 2015 Bubble States California, Arizona, Nevada, Florida and industrial Midwest Hardest hit areas during the downturn 5

10 +29% According to the NAHB, multifamily starts jumped 29% from Multifamily permits (333,000) exceeded starts, (296,000) suggesting more projects may begin soon. +6.7% According to the NAHB, single-family permits rose 6.7% from single-family permits were 531,000, trailing 549,000 starts. benchmark average. Starts have risen steadily each year since then, reaching 647,900 units in As of the third quarter of 2015, single-family production was 53% of normal activity, according to the NAHB. IRR predicts a strong 2016 for U.S. home building as negative homeownership equity rates continue to decline. Simultaneously, positive job growth and declining foreclosure rates offer a ray of light towards stronger U.S. single-family housing growth in The Strength of Multifamily As the home building industry continues its slow recovery, the multifamily and condominium components have been quite active. Millennials simply are not flocking to the homeownership pool, a positive trend for multifamily investors. The Pew Research Center reported a nominal increase in the number of young adults establishing their own households yet fewer households are headed by 18 to 34 year-olds now than 10 years ago despite increases in population and jobs. This trend infers pent-up demand, as millennials will ultimately move from apartments and urban environments into homeownership in the suburbs. But, in the meantime, these shifts have helped fuel the multifamily sector in 2015 and will continue into 2016, as developers move to capture multifamily opportunities by delivering residential products to meet current demand. CAPITAL MARKETS Capital: Is the Tap Staying On? There is no shortage of real estate investment options in international markets. But, foreign investors continue plowing money into U.S. real estate, a sign that international money regards the U.S. as a safe haven amid global uncertainty. Commercial real estate lending roared back in 2015 with many active global and domestic capital sources - a trend not expected to slow in

11 2016 VIEWPOINT / INTEGRA REALTY RESOURCES Global Capital Environment It is hard not to opine that the commercial real estate market is looking frothy, given that 2015 transaction activity returned to the $370-billion-plus level YTD 3Q This level is comparable to 2005 and is being achieved during a period of near zero monetary inflation. The U.S. market, which experienced an average rise of $70 billion per year in transaction volume from 2009 to 2014, is expected to exceed $500-bilion in total volume in Cross-border investment remains robust highlighting the international perception of a strong U.S. commercial real estate market. Direct foreign investment, private, and REIT investment acquisitions have returned to pre-recession levels, but institutional lending has not yet. Cross-border investment is double the levels experienced in IRR expects this trend to continue in 2016 as home office wealth continues to migrate family money into U.S. direct investment. CROSS-BORDER TOTAL CAPITAL VS. U.S. MARKET SHARE $30 $25 $20 $15 $10 $5 $- '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Cross-Border Volume ($B) Cross-Border Market Share (%) COMMERCIAL PROPERTY PRICING INDICES Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-15 Apartment Retail Industrial Office - CBD Office - Suburban 20% 15% 10% 5% 0% Equity Returns Equity returns have decreased as investors pay up to close deals quickly. Though equity returns are lower, it s a game of liar s poker as market players all chase the biggest deals. A significant volume of global capital will continue to flow into the U.S. because foreign investors can generate positive leverage against a local economy. The risk outweighs concerns investors have about dollar values or the U.S. economy. If the U.S. economy falters, there likely will be a receding flow of global capital. In fact, major equity players that pursue value deals, such as BlackRock, Blackstone, and Carlyle Group, are expected to chase yields overseas in DISTRIBUTION OF 2015 TRANSACTION VOLUME 13.5% 17.0% 8.8% 4.6% Office Retail Hotel 27.7% 28.3% Apartment Industrial Dev Site 2015 INVESTOR COMPOSITION 5% 14% 12% 42% 13% 14% Cross-Border Institutional Equity Fund Listed/REIT Private User/Other 7

12 2016 VIEWPOINT / INTEGRA REALTY RESOURCES CMBS Market Since the recession, CMBS issuances continued to rise, but were drastically down in 2015 compared to pre-recession figures. At the peak in 2006, CMBS issuances globally totaled $198.4 billion. After substantially contracting during the recession, issuances have increased since 4Q In 2014, issuances totaled $94.1 billion globally and based on historical data, 4Q 2015 will surpass issuances in prior quarters. Lending Sources In 2015, lending sources returned to the real estate investment market in big ways. At the close of 2014, there was concern whether lending would slow in 2015 due to interest rate risk, as well as expectations that values would stabilize, making refinancing less feasible. The U.S. lending composition situation shifted in 2015 when CMBS decreased its volume share in comparison with past annual market share growth. The share of lending volume held by regional or local banks increased, as did national banks market share. Government lending sources maintained lending control of the multifamily property sector. In 2015, there was a strong national bank lending presence within the industrial property segment, while CMBS lending sources held a majority share of volume in the hotel and retail sectors in In 2015, CMBS lending sources accounted for 21% of total activity, followed by government sources (18%), national banks (16%), regional banks (15%), insurance (12%), and other financial institutions (10%). International banks and private sources accounted for the balance. CMBS ISSUANCES ($BIL.) $80 $70 $60 $50 $40 $30 $20 $10 $ % 22% 23% 27% 21% 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter LENDER COMPOSITION (ALL PROPERTY TYPES) 6% 5% 7% 10% 9% 27% 27% 18% 18% 17% 12% 12% 20% 14% 11% 8% 7% 7% 8% 7% 18% 14% 16% 13% 14% 11% 13% 14% 15% 9% 1% 0% 20% 40% 60% 80% 100% CMBS Financial Gov't Agency Insurance Int'l Bank Nat'l Bank Reg'l/Local Bank Pvt/Other 1% 1% 1% 2% 8

13 INTEREST RATES The Big Question: What Impact Will the Fed s Change in Zero-Rate Monetary Policy Have? The zero interest-rate policy (ZIRP) changed in December 2015; yet there is a lack of strategy concerning the $19-trillion U.S. debt. Equity is betting on inflation and devaluation of all currency globally. ZIRP is swelling the stock market and crushing the bond market. If the interest rate moves as expected, it should cool real estate prices, although some accommodation is priced into market. The real estate market is expected to rerun to normalized equity and debt spreads in Taking Action, or Not? The Fed determined the action that best suited U.S. economic needs was to raise the ZIRP. In mid-december, it increased the benchmark 25 basis points fulfilling a long-term promise to raise rates. The Fed also indicated it anticipates continued bumps in 2016, although it left open the pace of increases. Quantitative easing is an experiment for which the actual outcome is unknown, creating a fair amount of economic uncertainty in 2016 for many in the real estate industry. Quantitative easing has had a profound impact on the central bank s balance sheet, as well as fixed income and other capital markets. Concern exists that, in the short term, turmoil in the public markets will continue to affect real estate. Still, real estate returns appeal to private investors as the search for yields continues. Fed s Impact on CRE Commercial real estate market fundamentals have improved since 2011; prices have recovered and the significant effects of deleveraging have been minimized. Apartment and industrial vacancy rates are at or near their historic lows. In the office and retail property sectors, vacancy rates reached their lowest post-crisis levels. Development activity remains more than 25% below its prerecession peak. Many in the real estate industry believe the first interest rate hike since 2006 will benefit commercial real estate markets, as interest rate hikes generally signal an improving economy. The increased rate supports conditions that lead to higher rents and property values. More people working spurs economic growth and productivity, which, in turn, leads to demand for more real estate. Overvaluation Concerns Current monetary policy has lowered borrowing costs to artificially low levels, which has boosted asset prices. The net effect could represent a mispricing of commercial real estate assets, which will now reprice following rate hikes. The good news is that an interest rate hike in a truly robust economy should not topple real estate valuations. 9

14 2016 VIEWPOINT / INTEGRA REALTY RESOURCES 2015 Employment: The Bulls & Bears Growth Driven by aging America, health care jobs dominate the Bureau of Labor Statistics forecasted list of the fastest growing occupations. Improved economic environment and anticipated increased discretionary income spending resulted in increased employment in retail trade, food services, drinking places and construction. EMPLOYMENT What is Behind the Jobless Recovery? The U.S. employment market has drastically changed during the past seven years of economic recovery. While the unemployment rate reached an eight-year low in 2015, it is perhaps more important to note what s missing. During that time, the workforce shrunk and middle-income jobs, a stalwart performer in the past job picture, disappeared. It could take several years for middle-income jobs to return, if they ever do. No Change Employment in other major industries, including manufacturing, wholesale trade, transportation, warehousing, information, and financial activities showed little or no change in November over the previous month. A strong dollar may be impacting the manufacturing, warehouse and trade sector. The employment recovery is defying traditional economic theory about jobs, too. As the economy picked up steam following the recession, job creation did not increase. It is a significant milestone that the unemployment rate dipped to 5.0% in October and held steady through November, an eight-year low. In the first 11 months of 2015, more than two million jobs were added. That means the year s job gains will likely close at nearly the same level as in A slowing growth rate in the working-age population (16 to 65) and an increasing rate of baby boomer retirement could combine to reduce what is considered the typical U.S. job market roughly 150,000 jobs added each month. These fundamental shifts could mean lower workforce numbers in the future. Declines The jobs picture isn t as bright for goods-producing jobs, durable goods jobs and mining jobs, as a result of falling oil and commodity prices. 10

15 142M Total U.S. employment of 142 million is now well above the previous peak of 138 million in 2008 Shifts in Participation Rate After rising steadily for more than half a century, the overall labor force participation rate has continued to decline in recent years and it is occurring across most demographic segments. Though overall job numbers appear strong, the labor force participation rate was 62.4% in 3Q 2015, though it decreased overall in To put things in perspective, the rate of participation for workers ages 25 to 54 declined from 84.4% in April 2000 to 83.1% in December It is interesting to note that 19% of this age group is classified as not in the labor force. The normalized percentage would be 23% if those not considered prime workforce groups (less than age 20 and over age 65) were excluded. While the economic downturn accounted for a portion of the labor force participation decrease, an aging population and higher college enrollment has also contributed significantly to the decline. Additionally, fiscal, monetary and family leave policies have played key roles in reducing workforce numbers. U.S. EMPLOYMENT VS. PARTICIPATION RATE 145, , , , , ,000 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Total U.S. Nonfarm Payroll Employment (in Thousands) Labor Force Participation Rate Jan-15 67% 66% 65% 64% 63% 62% 61% 60% Filling the Hole in the Middle There s a big hole in the American jobs picture that s hard not to notice. Simply stated, the U.S. is not producing middle-income jobs like it used to. In fact, a study by Georgetown University s Center on Education and the Workforce, shows the U.S. economy now has roughly one million more jobs in occupations ranking in the top third of income, and 800,000 jobs in the lower third. The middle third, or middle-income segment, however, has yet to recover the jobs lost during the recession and is likely never to do so. Surprisingly, growth was experienced in high-paying occupations, with nearly all (97%) of them going to individuals with at least a college degree. While it remains to be seen if job gains at the top and bottom will fill the gap middle-income jobs left behind, it fundamentally changes how the U.S. workforce is structured and will function moving forward. Changes in employee benefits health insurance, definedbenefit pensions, or definedcontribution plans, could shift the burden onto government programs. Economic growth flows from jobs and there s a direct correlation between jobs, GDP, and productivity, as well as commercial real estate. Without the middle, there s likely a bifurcation of what the housing stock that gets built and a further polarization of neighborhoods and local communities in suburban real estate markets. 11

16 IRR remains bullish on the U.S. real estate sectors heading into 2016 In 2016, we enthusiastically look forward to continuing our role as one of the key players in benchmarking commercial real estate values nationwide and assisting our clients in understanding the broader trends that contribute to their success in the real estate markets. PROPERTY SECTOR EXPECTATIONS FOR 2016 The Bears or The Bulls Uncertainty will rule the 2016 market for all the reasons previously discussed. IRR remains bullish on the U.S. real estate sectors heading into 2016, because institutionally, we understand that while the U.S. economy is changing, the people and economic institutions continue to be innovative and enthusiastic. American discretionary spending will be high in 2016 on low oil prices. A Presidential election year is never a good time for bad policy on either side of the aisle, and envisioning the future always tends to bring some economic lift heading into the election. 12

17 2016 VIEWPOINT / INTEGRA REALTY RESOURCES Key Property Highlights Office The broader trends favor the office sector, which has been growing in lockstep with the economic recovery without much new construction to hinder rent growth. Retail Strong housing growth and improvement in consumer confidence favors retail in 2016, except in markets that rely heavily on international tourist sales. Multifamily Provided employment gains continue, the multifamily market will enjoy continued investment interest due to pent-up demand, current buy versus rent preferences, and the need to replace post-war inventory. Industrial Despite global headwinds on trade, U.S. logistic distribution hubs will perform well on the back of increased retail distribution activity domestically. Hospitality A strong U.S. dollar favors American travel abroad, coupled with the uncertainty of international tourism, would be a setback to ADRs across almost every sector. 13

18 14

19 PROPERTY REPORTS Five core property types form the backbone of the commercial real estate industry office, multifamily, retail, industrial, and hospitality. Each sector is unique and different, requiring both global trend interpretations, as well as a local perspective. IRR closely tracks these primary sectors in order to provide independent analysis and help shape your outlook. We examine transaction volume, market cycles and cap rate insights, so that you can make informed decisions in

20 Transaction Volume There was $145.5-billion in transactional activity completed within the U.S. office sector, as tracked by Real Capital Analytics (RCA) YOY through 3Q This represents a 16.2% increase from the prior year. Regionally, the East had 36.5% of the national transaction volume, followed by the West (32.3%), South (20.1%), and Central (11.2%). The largest annual changes occurred in the South, which experienced a 26.3% increase, followed by the West (20.2%), Central (19.0%), and finally the East (7.5%). OFFICE Positive Indicators Continue in 2016 Despite Challenges The U.S. office markets exhibited numerous positive indicators in 2015 that are expected to continue into Despite challenges ranging from volatile global and domestic financial markets and expected interest rate hikes, gains in employment helped drive demand for office space in Manhattan transaction activity was more than three times the transaction volume of Chicago, IL, the second-ranked office market with $8.4 billion in activity in the past year. The balance of the top five office transaction volume markets include: San Francisco, CA, Los Angeles, CA and Boston, MA. Seattle, WA is a newcomer in the top 10, replacing Houston, TX as a result of a 109.2% increase in transaction volume in IRR s research finds that values are expected to increase more among Class A office properties than Class B properties over the next 12 months. Additionally, IRR expects that 18.6% of U.S. markets will experience CBD Class A value increases of at least 4% in 2016, compared with 8.5% for CBD Class B, 6.5% for suburban Class A, and just 3.2% for suburban Class B. In terms of debt capital markets activity, IRR data shows that multitenant CBD office property loans presented the lowest risk across all LTV ranges, except on deals with an LTV of 76% to 85%. In those higher leverage scenarios, medical office deals had the lowest perceived risk among lenders. 16

21 2016 VIEWPOINT / INTEGRA REALTY RESOURCES 3 of the top 5 markets (San Francisco, Los Angeles, and Boston) saw a decrease in transaction activity over the past year TOP MARKETS BY OFFICE TRANSACTION VOLUME BASED ON YOY PERCENTAGE CHANGE Seattle 8 9 St. Louis 6 Cleveland 4 Pittsburgh 50 Boston Portland 1 7 Hartford 52 Stamford 3 Long Island San Francisco 47 East Bay Columbus Las Vegas 49 5 Raleigh/Durham Los Angeles Memphis 54 Jacksonville 2 Tampa Bay 10 Salt Lake City 46 Broward Bulls (Top 10) Bears (Bottom 10) 2016 Rank City YOY Change Total 4Q14-3Q15 1 Portland % $1,589,973,056 2 Tampa % $1,522,768,093 3 Long Island % $576,670,382 4 Pittsburgh % $359,921,474 5 Raleigh/Durham % $1,261,368,443 6 Cleveland % $389,491,980 7 Hartford % $305,933,384 8 Seattle % $5,483,128,306 9 St Louis % $1,019,707, Salt Lake City % $788,614, Rank City YOY Change Total 4Q14-3Q15 45 East Bay % $1,507,167, Broward % $878,109, San Francisco % $7,505,646, Los Angeles % $7,422,030, Las Vegas % $296,476, Boston % $7,163,562, Memphis % $106,917, Stamford % $369,356, Columbus % $209,685, Jacksonville % $286,261,732 17

22 2016 VIEWPOINT / INTEGRA REALTY RESOURCES 41% Number of CBD office markets that are more than two years away from becoming in balance Market Cycle Half of the CBD office markets in the South and West are in the midst of expansionary market phases. Less than 20% of the markets in the Central region are considered to be in an expansion phase, while Wilmington, DE; Houston, TX; Dayton, OH; Jackson, MS; and Greensboro, NC are experiencing recessionary characteristics. Within the suburban office marketplace, more than 75% of the markets in the East are considered in a recovery phase, with only Pittsburgh, PA and Boston, MA in an expansionary phase. Suburban markets exhibiting recessionary characteristics include Houston, TX and Northern New Jersey. The comparison of markets in balance versus those not in balance reveals that 27% of CBD markets are in balance compared to 21% of suburban markets. IRR research shows that 41% of CBD office markets are more than two years away from becoming in balance compared to 48% for suburban office markets. CBD OFFICE MARKET CYCLE Boise, ID Broward-PB, FL Columbia, SC Dallas, TX Fort Worth, TX Minneapolis, MN Oakland, CA Pittsburgh, PA Portland, OR Austin, TX Boston, MA Charlotte, NC Denver, CO Miami, FL Nashville, TN New York, NY Philadelphia, PA Raleigh, NC Richmond, VA Salt Lake City, UT Seattle, WA Cincinnati, OH Columbus, OH Indianapolis, IN Las Vegas, NV Long Island, NY Los Angeles, CA Louisville, KY Phoenix, AZ San Jose, CA EXPANSION Charleston, SC Chicago, IL San Francisco, CA Atlanta, GA Birmingham, AL Cleveland, OH Greenville, SC Kansas City, MO/KS Orange County, CA Orlando, FL Providence, RI Sacramento, CA San Diego, CA Syracuse, NY Washington, DC RECOVERY HYPERSUPPLY Baltimore, MD Detroit, MI Hartford, CT Jacksonville, FL Memphis, TN New Jersey, No. St. Louis, MO Tampa, FL Tulsa, OK Dayton, OH Greensboro, NC Jackson, MS Wilmington, DE RECESSION Houston, TX EXPANSION HYPERSUPPLY RECESSION RECOVERY Decreasing Vacancy Rates Moderate/High New Construction High Absorption Moderate/High Employment Growth Med/High Rental Rate Growth Increasing Vacancy Rates Moderate/High New Construction Low/Negative Absorption Moderate/Low Employment Growth Med/Low Rental Rate Growth Increasing Vacancy Rates Moderate/Low New Construction Low Absorption Low/Negative Employment Growth Low/Neg Rental Rate Growth Decreasing Vacancy Rates Low New Construction Moderate Absorption Low/Moderate Employment Growth Neg/Low Rental Rate Growth 18

23 Cap Rates Cap rate compression continues to be strong in the South for CBD Class A assets, with 77% of markets surveyed by IRR experiencing contraction. The West region also saw contraction on average of 20 bps YOY as a result of 71% of markets having decreasing cap rates. Cap rates for CBD Class A office properties fell by 100 bps YOY in Houston, TX and Atlanta, GA. These two markets expect increases in 2016, and are the exceptions to forecasts of cap rate contraction in the South. Orlando, FL calls for the greatest contraction of up to 50 bps in In 2015, CBD office Cap Rates compressed nationally across both Class A and Class B assets by 19 bps and 20 bps respectively Cleveland, OH and Kansas City, MO are the only two Central markets expecting rates to drop in the next 12 months. The East expects cap rates to be relatively stable, with only Philadelphia, PA calling for further compression, and Washington, D.C. expected to see a slight increase. Investment confidence remains high for CBD office assets. IRR s data shows that 60% of office markets expect to see cap rates remain constant over the next 12 months, with none calling for more than 50 bps of change in cap rates in Conclusion The broader trends favor the office sector, which has been growing in lockstep with the economic recovery without much new construction to hinder rent growth. Office tends to be less volatile since rental contracts are longer and tend to be more durable in the long run. REGIONAL RATES COMPARISON - OFFICE Cap Rate Discount Rate Market Rent ($/SF) Suburban Class A & B Cap Rates Vacancy Rate 4Q14-4Q15 Cap Rate s South Region CBD Class A 6.77% 7.99% $ % 38 bps CBD Class B 7.70% 8.92% $ % 35 bps Suburban Class A 7.32% 8.46% $ % 30 bps Suburban Class B 8.03% 9.12% $ % 20 bps East Region CBD Class A 6.69% 7.67% $ % 11 bps CBD Class B 7.60% 8.68% $ % 19 bps Suburban Class A 7.19% 8.17% $ % 18 bps Suburban Class B 8.00% 9.05% $ % 13 bps Central Region CBD Class A 8.11% 9.30% $ % 5 bps CBD Class B 8.75% 9.93% $ % 7 bps Suburban Class A 7.86% 8.98% $ % 9 bps Suburban Class B 8.57% 9.64% $ % 7 bps West Region CBD Class A 6.03% 7.61% $ % 20 bps CBD Class B 6.63% 8.18% $ % 17 bps Suburban Class A 6.41% 8.02% $ % 32 bps Suburban Class B 6.96% 8.61% $ % 29 bps National Averages/Spreads CBD Class A 6.83% 8.08% $ % 22 bps CBD Class B 7.62% 8.88% $ % 22 bps Suburban Class A 7.18% 8.39% $ % 24 bps Suburban Class B 7.88% 9.08% $ % 18 bps Cap rate compression continues to be strong in the West for suburban office space, with an average of 29 bps of contraction for Class B and 32 bps for Class A in The East reported the highest percentage of markets with contracting cap rates (62%) for Class B, while suburban Class A cap rates were tightest in the Central region, and widest in the South region. Noteworthy changes in 2016 include Houston, TX, which expects to see suburban office cap rates rise up to 50 bps, and Philadelphia, PA expects cap rates to decline by up to 50 bps. In 2015, CBD office cap rates compressed nationally across both Class A and Class B assets by 19 bps and 20 bps respectively, compared with suburban office property cap rates that compressed 23 bps for Class A and 17 bps for Class B. 19

24 Transaction Volume Since 2010, the multifamily market has grown from $37.4 billion in total annual national transaction volume to $130.7 billion through 3Q 2015, as reported by RCA. Overall, the industry saw an increase of 19.4% YOY in multifamily activity. The regional distribution of $130.7 billion in national transaction volume was led by the South (39.6%), followed by the West (28.9%), the East (22.9%), and the Central (8.6%). MULTIFAMILY Outstanding Performance in 2015 Stimulates Confidence For 2016 It is difficult not to be bullish on the U.S. multifamily sector heading into For one thing, strong hiring numbers in 2015 provided significant momentum for the U.S. economy and especially, demand for multifamily. This, in turn, drove vacancy rates to 14-year lows, while boosting absorption. Although construction volumes are up, steady demand growth is expected to maintain current vacancy levels in most markets in The Central region had the largest percentage increase in transaction volume YOY, increasing by 34.8%, led by Minneapolis, MN and St. Louis, MO. Two Southern Florida markets, Broward and Palm Beach, drove the 28.5% yearly growth experienced in the South. Elsewhere, transaction volume increased 14.1% YOY in the West and 7.5% in the East. Market Cycle An overview of 2015 multifamily property market performance reveals that 93% of markets are currently in an expansion phase. Meanwhile, Atlanta, GA, Raleigh, NC and Washington, DC are exhibiting hypersupply conditions. Jackson, MS is the only market categorized as in recovery, but nearing the expansion phase, as bank-owned properties are diminishing and for-sale properties are acquired. IRR s research finds that asset values will remain stable more frequently in urban Class A markets compared to other market types, such as urban Class B, as well as suburban Class A or B. The data also shows that 88.7% of markets are expecting values to increase in the next 12 months, with the exception being markets affected by oil price drops, such as Houston, TX. 20

25 2016 VIEWPOINT / INTEGRA REALTY RESOURCES $130.7B Multifamily transaction volume jumped 19.4% YOY to $130.7 billion TOP MARKETS BY MULTIFAMILY TRANSACTION VOLUME BASED ON YOY PERCENTAGE CHANGE 4 St. Louis 3 Minneapolis 53 Cincinnati 54 Pittsburgh 8 Boston 46 Hartford 51 Stamford 52 Westchester San Francisco 5 50 San Jose 6 Inland Empire 48 Orange County 45 Las Vegas 47 Birmingham 9 Detroit 10 Richmond/ Norfolk 7 Atlanta 49 Columbus 1 Palm Beach 2 Broward Bulls (Top 10) Bears (Bottom 10) 2016 Rank City YOY Change Total 4Q14-3Q15 1 Palm Beach % $1,225,966,982 2 Broward % $1,520,827,127 3 Minneapolis % $1,353,025,136 4 St Louis % $608,568,200 5 San Francisco 81.27% $2,822,311,558 6 Inland Empire 65.99% $1,786,105,336 7 Atlanta 58.52% $7,244,010,575 8 Boston 55.41% $2,642,455,762 9 Detroit 52.90% $904,665, Richmond/Norfolk 52.55% $921,505, Rank City YOY Change Total 4Q14-3Q15 45 Las Vegas % $1,090,684, Hartford % $169,652, Birmingham % $584,096, Orange County % $1,130,983, Columbus % $587,987, San Jose % $934,216, Stamford % $407,688, Westchester % $225,260, Cincinnati % $176,784, Pittsburgh % $61,758,404 21

26 2016 VIEWPOINT / INTEGRA REALTY RESOURCES 93% Of markets are currently in the Expansion Phase Urban multifamily markets that are expected to perform well in 2016 with regard to net absorption include Seattle, WA and Houston, TX. Among suburban multifamily properties, Los Angeles, CA forecasts strong net absorption in IRR reports that 83% of suburban multifamily markets are in balance compared to 70% of urban multifamily markets. Less than 4% of suburban multifamily markets are more than two years away from moving to balance. Cap Rates IRR forecasts that multifamily cap rates in 74% of U.S. markets will remain constant over the next 12 months. Thirteen U.S. markets are calling for a reversal of cap rate contraction, with the largest reversal expected to be felt in Coastal New Jersey, with a cap rate increase of 75 bps for Class B properties, and a boost of up to 50 bps for Class A properties. Urban Class A Cap Rates In 2015, 30 of the 60 markets tracked by IRR experienced cap rate contraction for urban class A properties. Multifamily cap rates compressed in 64% of markets in the Central region in 2015, leading to MULTIFAMILY MARKET CYCLE Columbia, SC Dayton, OH Detroit, MI Las Vegas, NV Memphis, TN Sacramento, CA Wilmington, DE Austin, TX Broward-PB, FL Charleston, SC Cleveland, OH Denver, CO Greensboro, NC Greenville, SC Los Angeles, CA Nashville, TN Orange County, CA Orlando, FL Portland, OR Providence, RI San Diego, CA Seattle, WA St. Louis, MO Tulsa, OK Jackson, MS RECOVERY EXPANSION RECESSION HYPERSUPPLY Atlanta, GA Raleigh, NC Washington, DC Baltimore, MD Birmingham, AL Boise, ID Boston, MA Charlotte, NC Chicago, IL Cincinnati, OH Columbus, OH Dallas, TX Fort Worth, TX Hartford, CT Houston, TX Indianapolis, IN Jacksonville, FL Kansas City, MO/KS Long Island, NY Louisville, KY Miami, FL Minneapolis, MN Naples, FL New Jersey, Coastal New Jersey, No. New York, NY Oakland, CA Philadelphia, PA Phoenix, AZ Pittsburgh, PA Richmond, VA Salt Lake City, UT San Francisco, CA San Jose, CA Sarasota, FL Syracuse, NY Tampa, FL EXPANSION HYPERSUPPLY RECESSION RECOVERY Decreasing Vacancy Rates Moderate/High New Construction High Absorption Moderate/High Employment Growth Med/High Rental Rate Growth Increasing Vacancy Rates Moderate/High New Construction Low/Negative Absorption Moderate/Low Employment Growth Med/Low Rental Rate Growth Increasing Vacancy Rates Moderate/Low New Construction Low Absorption Low/Negative Employment Growth Low/Neg Rental Rate Growth Decreasing Vacancy Rates Low New Construction Moderate Absorption Low/Moderate Employment Growth Neg/Low Rental Rate Growth 22

27 compression of 24 bps, which was the strongest nationally. The South also experienced strong YOY contraction (20 bps), resulting from decreasing YOY cap rates among 52% of the markets. In 2015, especially strong YOY cap rate compression for urban Class A multifamily properties was noted in Nashville, TN (100 bps), and Charleston, SC (80 bps). Bucking the national trend, Cap Rates for Suburban Class B properties, in the East region, increased by 4 bps over the past year The West region had the lowest cap rates at 4.62% in On the other hand, the Central region had the highest average rate (6.04%), due to high variability in the region. Chicago, IL and Dayton, OH experienced a 300-bps difference in cap rate spreads. Meanwhile, Cleveland, OH and Indianapolis, IN expect rates to increase over the next 12 months. Cap rates in the East are forecast to be relatively stable in 2016, with only Syracuse, NY likely to experience additional compression. All West markets are projected to experience materially steady cap rates in 2016, except for Portland, OR, which is expecting a slight increase. Suburban Class A Cap rate compression for suburban Class A properties was relatively strong in the South during 2015, at an average of 29 bps; with 63% of markets in this region experiencing contraction in past 12 months. The East, led by Philadelphia, PA and Syracuse, NY, experienced an average YOY contraction of 16 bps REGIONAL RATES COMPARISON - MULTIFAMILY Cap Rate in The largest change in 2015 for suburban A multifamily cap rates was seen in Charleston, SC, which fell by 125 bps YOY. The West reported the highest percentage of markets with contraction among suburban Class A properties. Factors of Influence The top factors most likely to impact cap rates, ranked by IRR s local market surveys, include the balance between supply and demand within the marketplace, income growth potential of a multifamily property, and how well the market s local economy is performing, driven primarily by future job prospects. Discount Rate Market Rent ($/Unit) The multifamily segment is also feeling the impacts of demographic shifts involving millennials and young professionals in such markets as Austin, TX, Baltimore, MD, Boise, ID, Houston, TX and Raleigh, NC. Conclusion Vacancy Rate 4Q14-4Q15 Cap Rate s South Region Urban Class A 5.47% 7.13% $1, % 19 bps Urban Class B 6.22% 7.68% $ % 24 bps Suburban Class A 5.63% 7.41% $1, % 27 bps Suburban Class B 6.53% 8.00% $ % 17 bps East Region Urban Class A 5.23% 6.74% $2, % 17 bps Urban Class B 6.35% 7.65% $1, % 16 bps Suburban Class A 5.49% 7.09% $1, % 16 bps Suburban Class B 6.65% 7.87% $1, % 4 bps Central Region Urban Class A 6.04% 7.38% $1, % 24 bps Urban Class B 7.01% 8.20% $ % 12 bps Suburban Class A 6.04% 7.47% $1, % 15 bps Suburban Class B 6.99% 8.17% $ % 10 bps West Region Urban Class A 4.62% 6.76% $1, % 15 bps Urban Class B 5.27% 7.41% $1, % 23 bps Suburban Class A 4.80% 6.95% $1, % 11 bps Suburban Class B 5.45% 7.53% $1, % 19 bps National Averages/Spreads Urban Class A 5.34% 7.01% $1, % 19 bps Urban Class B 6.19% 7.71% $1, % 20 bps Suburban Class A 5.48% 7.25% $1, % 19 bps Suburban Class B 6.38% 7.89% $ % 12 bps Provided employment gains continue, the multifamily market will enjoy continued investment interest due to pent-up demand, current buy versus rent preferences, and the need to replace post-war inventory. Rent compression is a risk in some markets in The multifamily market will rebalance in 2016, as a bulk of the supply pipeline is delivered. 23

28 Transaction Volume There has been $90.4-billion in annual transaction volume recorded within the U.S. retail sector through 3Q 2015, as reported by RCA. This represents an increase of nearly $20 billion from the prior year, and is up from $22.9 billion in transaction volume in RETAIL Fundamentals Improving, Challenges Remain for 2016 Retail fundamentals continued to improve in 2015 for the U.S. retail real estate sector. Despite increased competition and unsteady consumer confidence, the industry experienced strong net absorption, rents continued to move steadily upward, and vacancy rates further trended downward. The West captured the greatest share of the national transaction volume, followed by the South, East and Central regions in In terms of year-over-year percentage increases, the national transaction volume grew 25.6%. The West led with an increase of 49.73%, followed by the East (22.1%), the Central (16.8%), and the South (12.5%). The top three markets in retail transaction volume size in 2015 include Manhattan, which experienced a YOY increase of 21.4%, Los Angeles, CA (up 24.5% YOY), and Chicago, IL (down 2.2% YOY). These markets rank as the top three most populous and continue their stronghold as the dominant retail centers in their regions. Palm Beach, FL, which ranks 9th in overall transaction volume in 2015, reported more than 325% in YOY volume increase, joining neighboring city Miami, FL in the top 10 rankings to represent another prominent retail center in the U.S. IRR research reveals that in 2015 lenders considered outlet centers and regional malls the highest risk, as compared to grocery-anchored properties, an indication of the impact that e-commerce is having on the retail commercial real estate markets. 24

29 2016 VIEWPOINT / INTEGRA REALTY RESOURCES $90.4B Annual retail transaction volume represents an increase of nearly $20B from the prior year TOP MARKETS BY RETAIL TRANSACTION VOLUME BASED ON YOY PERCENTAGE CHANGE 51 Indianapolis 48 Cincinnati 49 Cleveland 6 Detroit 52 Hartford 47 Stamford 45 Long Island 5 N. New Jersey 8 NYC B. 9 Sacramento 2 San Jose 53 Philadelphia 3 Columbus 50 Raleigh/Durham Orange County 7 Phoenix Jacksonville 1 Palm Beach 46 San Antonio 4 Kansas City Bulls (Top 10) Bears (Bottom 10) 2016 Rank City YOY Change Total 4Q14-3Q15 1 Palm Beach % $1,830,885,053 2 San Jose % $1,178,194,535 3 Columbus % $967,894,061 4 Kansas City % $882,602,244 5 N. New Jersey % $2,015,130,762 6 Detroit % $1,104,991,407 7 Orange County 86.47% $1,175,697,102 8 NYC Boroughs 82.77% $3,236,109,534 9 Sacramento 67.95% $810,007, Phoenix 65.92% $1,829,555, Rank City YOY Change Total 4Q14-3Q15 45 Long Island % $373,012, San Antonio % $402,546, Stamford % $453,839, Cincinnati % $372,704, Cleveland % $275,909, Raleigh/Durham % $322,887, Indianapolis % $199,216, Hartford % $114,203, Philadelphia % $533,087, Jacksonville % $210,006,801 25

30 2016 VIEWPOINT / INTEGRA REALTY RESOURCES Market Cycle IRR s overview of 2015 retail market performance reveals the Central and West regions still have a significant percentage of markets recovering (55% and 43% respectively). Overall, 63% of retail marketplaces are in the expansionary phase, driven by the Southern region with 75% of markets in expansion. Overall, 66% of regional mall, 57% of community retail, and 44% of neighborhood retail markets researched were considered stabilized. Market Fundamentals Vacancy rates in the East region were the tightest in 2015 followed by the West, South and Central regions. The widest community retail vacancy rates were experienced in Birmingham, AL, Cleveland, OH and Syracuse, NY. The lowest vacancy rates for community retail were found in Denver, CO, Dallas, TX and Washington, DC. The tightest neighborhood retail vacancy rates in 2015 were found in Orange County, CA, New York City and Seattle, WA. IRR s research reveals that over the next 36 months, 55% of U.S. retail markets are expected to experience annual rent growth rates of 1% - 3%. IRR also found that a higher percentage of neighborhood retail markets are calling for rent increases compared with community retail or regional mall retail marketplaces. Cap Rates IRR s data shows that 68% of retail markets expect to see cap rates remain constant over the next 12 months. An additional 27% expect RETAIL MARKET CYCLE Baltimore, MD Broward-PB, FL Charleston, SC Cincinnati, OH Columbia, SC Dallas, TX Denver, CO Detroit, MI Fort Worth, TX Jacksonville, FL Minneapolis, MN Naples, FL Oakland, CA Orlando, FL Philadelphia, PA Portland, OR Richmond, VA San Diego, CA Sarasota, FL Seattle, WA Tampa, FL Washington, DC Austin, TX Boston, MA Charlotte, NC Greenville, SC Houston, TX Long Island, NY Nashville, TN New Jersey, No. New York, NY Raleigh, NC Salt Lake City, UT San Francisco, CA San Jose, CA Wilmington, DE Birmingham, AL Boise, ID Dayton, OH Indianapolis, IN Jackson, MS Kansas City, MO/KS Las Vegas, NV Los Angeles, CA New Jersey, Coastal Orange County, CA Pittsburgh, PA Sacramento, CA St. Louis, MO Tulsa, OK EXPANSION Chicago, IL Louisville, KY Miami, FL Cleveland, OH Columbus, OH Phoenix, AZ Providence, RI Syracuse, NY RECOVERY HYPERSUPPLY Atlanta, GA Greensboro, NC Hartford, CT Memphis, TN RECESSION EXPANSION HYPERSUPPLY RECESSION RECOVERY Decreasing Vacancy Rates Moderate/High New Construction High Absorption Moderate/High Employment Growth Med/High Rental Rate Growth Increasing Vacancy Rates Moderate/High New Construction Low/Negative Absorption Moderate/Low Employment Growth Med/Low Rental Rate Growth Increasing Vacancy Rates Moderate/Low New Construction Low Absorption Low/Negative Employment Growth Low/Neg Rental Rate Growth Decreasing Vacancy Rates Low New Construction Moderate Absorption Low/Moderate Employment Growth Neg/Low Rental Rate Growth 26