Small Balance Advocate Monthly Update for Small Cap CRE Investors

Small Balance Advocate Monthly Update for Small Cap CRE Investors June 25 Strong Price Gains Piggyback on Sales Push The stunning volume of sales transactions has stoked national small cap CRE prices to their highest level in six years. Yet price levels for smaller assets in many cities are still substantially below the pre-recession peak and will present challenges for some borrowers with maturing loans. Small Balance Loan Originations We discuss below small balance loan originations during first quarter. In the opening section of next month s report, we will return to small-cap CRE space market fundamentals updated for second quarter of 25. Small balance commercial (SBC) originations for loans under $5 million rose year over year. Highlights include: 3 SBC originations totaled $38.7 billion during first quarter, up 6.8% compared with the same period last year. Following typical seasonal fluctuations, loan originations dipped 9.7% from fourth quarter s volume of $42.8 billion. (See the nearby graph.) SMALL BALANCE ORIGINATIONS TREND Volume ($B) Volume ($B) -Year Note (%) 5 45-4 35-3 25-2 15- - 5-22 23 24 25 ; FDIC - 3.5-3.0-2.5-2.0-1.5-1.0-0.5-0.0 3 Purchase loans increased relative to refinance loans. During the most recent quarter, 34% of total volume, or $13.0 billion, was generated by loans funding property acquisitions, up from 31% during fourth quarter and a sizable jump over the 27% share in the corresponding period in 24 when slightly less than $ billion of purchase loans were booked. Refinance loans of $25.7 billion during first quarter accounted for 66% of total volume but represents a decline from 73% of total loan production compared with 12 months earlier. Clearly, flourishing small cap CRE property sales have powered acquisition loans higher while the small balance refinance market was relatively flat. 3 The broader originations market rose faster. According to the Mortgage Bankers Association (MBA) lender survey, first quarter CRE loan originations jumped 49% compared with the same period in 24, while volume in the latest quarter declined 26%. During first quarter, MBA s survey indicated that the originations surge was led by the GSEs (306%) and followed by increases among CMBS lenders (113%) and life companies (51%). Commercial bank volume eased 1% according to MBA. 3 The national market share of the top SBC lenders stiffened. The top 15 lenders all commercial banks garnered 21.1% of SBC loan originations during first quarter and, by dint of their renewed competitiveness, halted their recent slide in total market share. Their aggregate percentage was flat compared with the corresponding period 12 months ago, but rose handily by 156 basis points compared with fourth quarter. On the leader board, J.P. Morgan Chase bumped up its share to 6.3% followed by Wells Fargo (3.8%), Bank of America (1.4%) and New York Community Bank (1.3%). 3 Banks have yet to stem the outflow of small business real estate loans. Ever since the Great Recession, commercial banks have witnessed a significant decline in small business real estate (SBRE) loans outstanding. The aggregate book of bank SBRE loans under $1MM stood Copyright 25 Boxwood Means, LLC. All rights reserved

P. 2 at $288.9 billion during first quarter, down a seemingly modest 0.4% from the previous quarter and 1.4% year over year. Yet these recent figures belie a historical trend of important consequence: Bank SBRE loans outstanding have progressively declined for seven consecutive years amounting to a 23% decrease in SBRE portfolio loans despite an overall increase in non-residential CRE debt outstanding during the same term (see the nearby graph). As of March, for example, total non-residential CRE debt grew by 4.1% year over year. x Bank Small Business Real Estate Loans (<$1MM) OUTStAnding As Percentage of Total Non-Residential Bank CRE Loans Total Loans Small Loan Share (right axis) ($000 s) 2000 20 2002 2003 20 2005 20 20 21 22 23 24 25 ; FDIC - 50% - 45% - 40% - 35% - 30% - 25% - 20% - 15% - % - 5% - 0% Despite the slide in SBRE loans under $1MM, commercial banks are still very much in the game of business real estate loans generally. As a case in point, FDIC data indicates that CRE debt backing owner-occupied facilities, which are typically funded by business real estate loans, has cumulatively climbed 30% since 20. So what might explain the enduring contraction of SBRE loans among banks in the aftermath of the Great Recession on the one hand, while overall bank business real estate lending has expanded on the other? We suggest the following: (a) That higher bank liquidity, and new lending standards and reserving policies in the post-financial crisis era have incentivized these now healthier institutions to target and book larger business real estate loans at the expense of the smaller-loan variety; and (b) The proliferation of alternative lenders of CRE debt, from non-bank SBA lenders and specialty finance companies to credit unions and small private lenders, have collectively seized a sizable chunk of the SBRE market. In so doing, these diverse players increasingly are challenging the banks supremacy as the go-to source of CRE funding for small businesses. Property Sales Activity Sales volume advanced in April. Sales highlights involving assets under $5 million include: 3 Sales maintained a record pace so far this year. April volume totaled $6.6 billion on a preliminary estimate basis, and year-to-date sales totaling $27.5 billion included an upward revision of $700 million for March. The four-month total is 14.4% greater than the record volume established during the year-earlier period. Property sales are receiving an extra kick from small businesses that have boosted borrowing to record levels with renewed optimism about the U.S. economy. For instance, the Thomas Reuters/ PayNet Small Business Lending Index increased 13% year over year in April to a seven-year high. See the two nearby graphs for sales trends. SALES VOLUME TREND Property Sales ($B) 20 21 22 ANNUAL CHANGE IN SALES VOLUME (%) 1,300,00 1,0,00 900,00 700,00 500,00 300,00 0,00 12- - 8-6- 4-2- 6 4 2-2 -4-6 20 21 22 23 23 24 24 25 25 Copyright 25 Boxwood Means, LLC. All rights reserved

P. 3 3 Transaction volume also surged in the general market. Sales of significant properties greater than $2.5 million in value totaled $29.5 billion in April, a slight 1.3% increase compared with 12 months earlier as apartment sales slowed according to Real Capital Analytics (RCA). But the $163.3 billion in sales year to date is a whopping 34.9% gain over the same period during 24, assisted in large part by a healthy amount of portfolio and entity-level deals. Persistent low interest rates and the near insatiable appetite among institutional investors for safe and secure returns continue to drive demand for investment-grade assets. 3 April sales jumped year over year for both large and small markets. The six largest population centers (New York, L.A., Chicago, Houston, Phoenix and Philadelphia) witnessed a 29.5% increase in transactions versus 12 months earlier. Sales for the balance of markets accelerated even a bit faster, advancing 31.0% year over year. 3 Smaller markets posted out-sized sales gains year to date. Sales in secondary and tertiary markets have naturally gained steam with the lengthening economic recovery. Among the 122 metros tracked for sales by Boxwood, 3 recorded increases in sale volume over the first four months of this year, up substantially from 79 cities for the three months ending in March. Leaders in percentage gains through April with at least $0 million in cumulative sales included Stockton (245.4%), Harrisburg (161.6%), Springfield-IL (140.0%), Augusta (137.2%) and Scranton (133.0%). See the nearby graph for the frontrunners year to date. z PERCENTAGE SALES LEADERS April, Year to Date (%) Santa Rosa Wichita Albuquerque Tucson Salt Lake City Scranton Augusta Springfield-IL Harrisburg Stockton 50 70 90 1 130 150 170 190 2 230 250 3 Some larger cities posted notable sales gains, too. Metro areas with a minimum of $500 million in year-todate sales were led by Phoenix (81.0%), Orange County (64.4%), Seattle (52.3%), New York (43.6%) and Dallas (39.4%). The large sales jump in Phoenix is aligned with the city s advances this year in population, jobs and housing starts. With recent gains in housing markets, rising consumer demand and a more favorable outlook for second quarter GDP, small cap CRE sales are likely to continue on record pace. Modest interest rate increases associated with the economy s expansion may cause some temporary angst, but CRE market fundamentals including low vacancy rates and buoyant rents remain compelling reasons why heavy deal flow is likely to persist. Sales Prices Small cap CRE prices further improved in April. Notable results include: 3 Boxwood s national Index reached the highest point in six years. SCPI-117, our national composite price index of commercial properties trading under $5 million (and excluding multifamily) across 117 metro areas, grew by 0.6% in April on a preliminary estimate basis. Prices have increased 2.1% year to date to a level last achieved in early. Excluding last month s performance, SCPI-117 s 6.4% return over 12 months was the best annual gain since the fall of 20. The Index has recovered 50.8% of its losses in the wake of the financial crisis and is 11.0% below its previous peak level. 3 Large cap CRE prices surged. The Core Commercial component of Moody s/rca CPPI (that excludes multifamily and tracks sales transactions of investmentgrade properties principally above $2.5 million) increased by 2.0% in April the largest percentage gain since last October and the fourth consecutive month of price increases exceeding 1%. The Core Commercial Index has risen a massive 6.9% year to date, easily beating the 3.8% gain over the first four months of last year and, at this pace, will surpass the record 18.0% annual rate of return established in 2005. That being said, the sustainability of the price surge seems questionable: The recovery of core commercial prices has been driven by Copyright 25 Boxwood Means, LLC. All rights reserved

P. 4 CBD Office, up 29.9% from its pre-crisis peak according to Moody s; at these price levels (and cap rates) trophy office assets may become daunting for institutional investors. Moreover, Moody s reported that prices generally in major markets have soared 25% beyond the pre-crisis peak. These represent core markets where investment opportunities have grown scarce and, as a result, may damper continued robust price appreciation. Also, prices in non-major markets are still 2% below the previous peak and, even as sales inevitably tilt further towards secondary markets, the velocity of price increases in non-core cities is likely to be more measured. In the aggregate, the Core Commercial Index has recovered 9.6% of its losses and is 4.0% above the pre-crisis peak. A graph comparing the CPPI Core Commercial Index and SCPI-117 is shown nearby. NATIONAL CRE Sales PrICE TREND COMPARISON Index:July =0 Boxwood SCPI-117 Moody s/rca CPPI-Core Commercial z SCPI-20 Price leaders Last Three Months (%) Portland Los Angeles Detroit Seattle Denver Phoenix Miami Las Vegas San Francisco 0.0 0.5 1.0 1.5 2.0 2.5 3 Smaller markets are exhibiting solid price momentum. SCPI-97 representing secondary and tertiary markets has received a lift from the broadening U.S. economic recovery. The Index increased 0.5% in April and is up 1.8% year to date. April s 5.7% annual return is among the highest 12-month increases recorded this year, with the Index level now equating to prices last seen in. SCPI-97 has recovered 53.3% from its financial crisis low and is only 8.2% below its former peak level best in the Boxwood series. See the nearby graph for a price trend comparison between Boxwood s smaller and bigger markets. COmparative sales price trends 20 20 ; Moody s 3 SCPI-20 markets continued to out-perform. The Index, comprising 20 of the largest cities rose 0.7% in April on a preliminary estimate basis as well as a series-best 2.8% return year to date and 7.6% from 12 months earlier. Characteristic of the eruptive nature of many of these cities during an upcycle, 14 of the 20 cities posted gains of 1.0% or more over three months led by San Francisco (2.2%) and followed closely by a troika of former hard-hit metros including Las Vegas, Phoenix and Miami (2.1%). (See the nearby graph for the leaders over three months.) SCPI-20 has recovered 43.0% of its losses and is 18.4% below the previous peak. 21 22 23 24 25 Six Largest Metro Areas vs. Balance SCPI-6 SCPI-97 Index:July =0 13 1-9 7 6 1-9 7 20 20 21 22 23 24 25 Copyright 25 Boxwood Means, LLC. All rights reserved

P. 5 3 Big opportunities prevail in some smaller cities. Of the 117 markets tracked by Boxwood, 91 markets posted price increases over 12 months while 95 advanced over the last three months. Smaller markets represented the lion s share of recent out-performing cities led by Vallejo (4.4%), Sarasota (3.2%), Stockton (3.2%) and Wichita (2.8%). However as shown in the nearby graph, many of these cities are relative late-bloomers facing a long journey ahead in retracing some severe losses incurred during the Great Recession. The fact is that prices in a majority of these recent, faster-recovering areas are still 40% or more below their respective previous peak levels. But it s just this juxtaposition of deep price declines with nascent but steady price gains that spells opportunity for small balance lenders and investors. Note, by the way, that Wichita stands apart as the only city in this grouping that has recovered more than 0% of its recession-period losses. The price trends in the small cap CRE market are as favorable as they have been in years and offer a modicum of encouragement to borrowers and lenders that a solid percentage of long-term, maturing loans may pencil out for refinancing. However, as the last graph illustrates, small cap prices in many cities are still substantially underwater, a situation that is beginning to create plentiful opportunities for bridge lenders and other capital providers to step in with interim solutions. Note to Readers: Boxwood s reported sale price indices are preliminary estimates based on sales transactions received from county assessor offices for the latest available month. As a result of lags in sales transaction reporting, both current month sales volume and price estimates are subject to modest revision in the subsequent three periods. Boxwood deems that our data sources are reliable. Some areas of the country offer more complete information than others. This report is presented on an as is, as available basis. Boxwood makes no warranties, expressed or implied, without limitation, to the information provided, nor are we responsible for any errors or omissions. Boxwood Means, LLC (www.boxwoodmeans.com) is a Stamford, CT-based real estate research and analytics firm supporting the investment, valuation and risk management needs of a diverse base of commercial banks, and investment and services firms. Boxwood owns and operates SmallBalance.com (www.smallbalance.com) where commercial property valuations, price indices and data analytics are obtained by participants in the small commercial property and loan markets. z Price Recovery for Recent Out-Performing Cities Ranked by 3-Month Change (%) Last 3 months Peak-to-Current Change Seattle Memphis Oakland Denver San Jose Knoxville Riverside-San Bern. Miami Long Island Las Vegas West Palm Beach Phoenix San Francisco Santa Rosa Fort Myers Fort Lauderdale Wichita Stockton Sarasota Vallejo -80-70 -60-50 -40-30 -20-0 Copyright 25 Boxwood Means, LLC. All rights reserved