united states | h1 2017 a focus on value and risk shaping ... focus on value and risk shaping...

United States | H1 2017

Investment

A focus on value and risk shaping investor behavior

JLL Research

The appetite for real estate debt and equity remains high…

… from both domestic and offshore sources of capital, keeping capital markets activities strong at mid-year. Despite record stock market highs and signs of stability in the markets, uncertainty on the future of U.S. policy and the Federal Reserve remains, impacting investment across sectors. This, along with current asset pricing, is pushing investors beyond markets or sectors to specific niche sectors, users and micromarkets.

This targeted focus comes as markets are more competitive, barriers to entry are elevated and underwriting is increasingly conservative. So despite stable market fundamentals and liquidity across a diverse group of investors, several factors are limiting the placement of capital:

• Nearly $2.0 trillion of commercial transactions since 2012 is limiting opportunities;

• With the exceptions of the industrial and net lease sectors, large transactions over $250 million are down 27.7 percent year-over-year;

• Those with strong, stable portfolios are opting for longer hold periods, recaps or refinancings rather than sales given concerns of redeploying capital;

• Domestic and offshore institutional capital remains conservative and selective; and

• Current pricing is proving a challenge for groups underwriting their exit, especially in emerging markets or submarkets

These factors are keeping capital on the sideline focused on new deployment strategies, shifting away from conventional single asset sales.

We’re already seeing a higher level of portfolios, joint ventures, recaps and entity- or GP-level investments as a means of increasing real estate AUM. These will drive a greater share of activities into 2018.

Looking ahead, the battle between more conservative underwriting and increased capital seeking higher-yielding, value-add opportunities will continue to challenge current pricing and the notion of ‘risk’ across the spectrum. Despite any near-term bumpiness, this will be healthy for markets in the mid- to long-term.

However, dynamics are creating challenges for today’s investor on both sides of the transaction. We see these as opportunities for investors to adopt a more granular, targeted approach to understanding market and capital dynamics.

- Jonathan Geanakos & Sean Coghlan President, JLL Capital Markets Director, Investor Research

Contents

Investment Outlook | United States | H1 2017

It’s all in the numbers … the first half breakdown 4

Transactions 5

Global capital 6

Fundraising 8

Debt 10

Property sectors

Office 12

Industrial 19

Multifamily 25

Retail 31

Net Lease 37

Office Industrial Multifamily Retail

12-month net absorption (as a % of inventory)

0.7% 1.9% 1.1% 0.8%

12-month completions (as a % of inventory)

1.3% 1.7% 1.4% 0.7%

12-month rent growth (p.s.f., %)

3.2% 9.2% 2.5% 5.0%

H1 investment sales growth (%)

-11.9% 20.7% -22.3% -18.7%

Investment sales volume(YTD, billions of $US)

$58.6 $23.8 $55.3 $27.0

It’s all in the numbers … the first half breakdown


Investment volumes down 13.6 percent at midyear. Gains

through the year expected to moderate declines at year-end.

2017 investment sales forecast (%)

-10%$164.7Investment sales (H1, billions of $US) H1 investment sales growth (%)

-13.6%

United States

Average cap rate (%)

Net Lease

$23.6Investment sales (YTD, billions of $US)

Overall investment

6.0%

$10.9

Officeinvestment

6.5%

$7.8

Industrial investment

6.4%

$4.9

Retailinvestment

5.7%

TransactionsTransactions

Investment Outlook | United States | Q2 20175

Continued uncertainty and selectivity are impacting volumes in the first half of 2017. While domestic and offshore capital remains active, activity declined 13.6 percent at midyear, with $177 billion of transactions across sectors. With the broader market, the depth of large transactions similarly is down year-over-year: Transactions over $250 million have declined 27.7 percent. This has paralleled declines in the New York market. Of those larger deals which have transacted, we are seeing a higher concentration of less conventional single-asset sales, reflected in more joint ventures, recaps and entity-level investments. Given the prolonged timeline for these transactions, these profiles of deals will become increasingly apparent as we move through 2017 and into 2018.

Volumes are down across all sectors year-over-year, excluding the industrial sector:

• The industrial sector is up 20.7 percent at midyear, a key factor being the reemergence of large-scale portfolios with $3.5 billion of portfolios, over $250 million already closed this year. An additional $12.5 billion of comparably sized transactions are expected to close by year-end.

• On the heels of three record years of activity, the multifamily sector is seeing activity decline, down 22.3 percent at midyear. Sentiment remains optimistic for the multifamily sector in the mid- to long term. However, the softening of rent growth across more markets and peak cycle deliveries in urban cores are encouraging suburban- and value-add-centric investment. This has spurred a near 60.0 percent decline in high-rise transactions year-to-date.

• Office dynamics are in line with the broader market: An 11.9 percent decline at midyear paralleled a pullback in large, single-asset transactions across primary and secondary markets. With high barriers to entry and

decreased transactions in the urban cores of the primary markets, groups continue to find opportunities in secondary markets, notably in the Sun Belt. A focus on value add will continue to drive office investment through year-end.

• The question of tenancy risk continues to impact retail dynamics and liquidity. While this risk continues to impact Tier 2 malls and power centers, it is beginning to creep into grocery-anchored assets amid fears of online disruption. This paralleled a 31.1 percent decline in grocery-anchored transactions at midyear. Well-located, grocery-anchored centers with strong tenants like Whole Foods or Trader Joe’s continue to price aggressively. The retail sector at-large is down 18.7 percent.

In the second quarter, activity trended up from the first quarter, and we expect this to continue as we move to year-end. Full-year activity is forecasted to decline 10.0 percent. Despite this decline, market sentiment and liquidity remains elevated, with an active, engaged and diverse investor pool in the markets.

Continued uncertainty, selectivity and the changing nature of transactions are impacting volumes in the first half of 2017

While domestic and offshore capital remains active, activity declined 13.6 percent at midyear

Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m;

portfolio, entity-level transactions)

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

2002 2004 2006 2008 2010 2012 2014 2016

To

tal i

nve

stm

ent

sale

s vo

lum

es

(bill

ion

s o

f $U

S)

Multifamily Office RetailIndustrial Hotels Forecast

Forecasted FY 2017:

– 10%

Capital

Through the first half of 2017, the United States maintained its position as the leading recipient of cross-border capital globally. Foreign capital accounted for $19.8 billion of investment. From an overall volume perspective, this falls slightly below the pace of 2016, which saw $55.1 billion of activity at year-end. When viewed as a percentage of total volume, foreign capital has made up roughly 11.0 percent of total transaction volume this year, compared with 16.0 and 13.0 percent in 2015 and 2016, respectively. Despite the modest decline, offshore investor activity remains stable with a selective, disciplined approach to acquisitions.

With activity steady, foreign capital continues to focus first and foremost on the office sector. Roughly half of foreign capital went into the office sector over the past six months, accounting for $10.6 billion of investment. Multifamily was the next most active sector, seeing $3.1 billion worth of investment. The only sector to see any substantial movement was the hotel sector. 2016 was an abnormal year where 48.0 percent of all hotel acquisitions were sourced to foreign buyers. That figure has moderated to 25.0 percent as domestic buyers, led by REITs and private equity funds, have picked up their pace of investment in the first of 2017.

On a market level, foreign buyers have selectively ventured outside of primary markets. In 2014, 71.4 percent of foreign capital went to primary markets. That figure now sits at 58.2 percent through midyear. Signaling an apparent increased appetite for risk from these buyers, 21.9 percent of foreign investment went to tertiary markets in the past six months, the largest share these markets have seen since 2007. This migration has largely been spurred by portfolio opportunities across the industrial and alternatives sectors, notably within student housing and medical office.

As overall foreign capital flows have remained relatively steady, the sources of that capital have shifted, particularly toward Asia. While Asian capital flowing into the U.S. isn’t a new story, its continued growth and relative importance to the U.S. CRE market is worth highlighting. Through the first half of 2017, 47.2 percent of offshore acquisitions have originated in Asian countries, showing their continued appetite for U.S. real estate. Added to this, seven of the top ten foreign buyers were based in Asia.

.

Global capital


Asian capital remains active and is increasingly driving U.S. cross-border acquisitions

Source: JLL Research, Real Capital Analytics (Transactions larger than

$5.0m; includes portfolio, entity-level transactions)

Foreign investment more concentrated in 2017, reflective of selectivity and discipline

30%

21%15%

7%

6%

5%

3%2%

11%

Canada

China

Singapore

Germany

Japan

Israel

South Korea

Denmark

All Others

Foreign investment (H1 2017)

In aggregate, Asian, Canadian and German capital are driving 83.8 percent of year-to-date activity.

7

• Among the Asian countries driving this volume, China continues to be the largest source. Chinese investors have tallied up $3.6 billion worth of investment this year. At this pace, China is well on its way to a record year having seen, at its peak, $4.9 billion for the entire year of 2015. On the receiving end of this wave of Chinese capital, the office sector, primary markets and specifically New York continue to be the targets. In the largest acquisition by a Chinese firm this year so far, HNA Group acquired 245 Park Avenue in New York in May for $2.1 billion, a prime example of this investment profile.

• Not far behind the Chinese were Singaporean investors, responsible for $2.6 billion of acquisitions halfway through the year. This is in large part due to the activity of their sovereign wealth fund, GIC, and its purchase of a 95.0 percent stake in Deutsche Bank’s U.S. headquarters at 60 Wall Street. GIC partnered with Paramount Group, which now owns the remaining 5.0 percent, on the transaction.

Ahead of both the Chinese and Singaporeans was Canada with $5.2 billion in acquisitions. Canadian firms continue to lead offshore peers and diversify across both the sectors and market tiers. So far this year, roughly a third of

Canadian capital has gone toward industrial assets and another third into multifamily. New European investors also continue to emerge. Most recently, Danish pension fund PFA acquired a 49.0 percent stake in a national office portfolio crossing Dallas and Northern New Jersey from Spear Street Capital in the first quarter.

Looking forward, we expect foreign investment to keep pace with the broader market at current cycle norms. As targeted opportunities remain limited and pricing elevated in primary markets, foreign capital will continue to explore investments outside the office sector and primary markets. However, selectivity will remain the norm given the risk profiles of these groups and the limited familiarity with non-coastal markets.


U.S. remains the highest recipient of cross-border capital, but activity is behind 2016’s pace

Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0M; includes portfolio, entity-level transactions)

$19.3 $21.4

$38.2

$46.4

$12.7

$4.2

$14.1 $19.7

$29.6 $30.6 $32.5

$78.7

$55.1

$19.8

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

$100.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 H1

2017

Off

sho

re in

vest

men

t vo

lum

es

(bill

ion

s o

f $U

S)

Multifamily Hotels Industrial Office Retail

FundraisingIn the first half of 2017, fundraising of closed-end funds reached $31.9 billion, a slight decline from comparable figures in 2016, which reached $33.0 billion. Despite overall fundraising being down 3.1 percent, dry powder continues to increase and now sits at $254 billion.

Given the state of the commercial real estate (CRE) cycle, it has proven difficult for opportunistic funds to deploy capital over the past two years. As a result, global opportunistic dry powder currently sits at $103 billion, representing 40.0 percent of all global dry powder and spurring the lowest opportunistic fundraising period since 2014. Opportunistic fundraising is on pace to see its least active year since 2010. However, value add fundraising continues to rise and accounts for 43.2 percent of total fundraising at midyear. With $13.8 billion of capital raised, this represents growth of 58.9 percent since this time last year. While this is adding to the $61 billion of value add capital on the sidelines, we are seeing an increase in thematic or sector-focused fundraising in this space. Of the five closed funds exceeding $1.0 billion this year, three are sector focused across the industrial, retail and multifamily sectors:

Fundraising

8

Value add strategies leading fundraising with potential to reach 2007 peak this year

Value add fund Manager

Final size

(millions of $US)

DRA Growth &

Income Fund IXDRA Advisors $1,576

Exeter Industrial

Value Fund IV

Exeter Property

Group$1,275

Greystar Equity

Partners IX

Greystar Real

Estate Partners$1,250

Merlone Geier

Partners XII

Merlone Geier

Partners$1,140

Rockwood Capital

Real Estate Partners

Fund X

Rockwood

Capital$1,100

Value add fundraising on pace to have best year since 2014 and possibly 2007

Source: JLL Research, Preqin

$0

$5

$10

$15

$20

$25

$30

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 H1 2017

Fun

dra

isin

g (i

n b

illio

ns

of $

US

)

Midyear value add Full-year value add



Debt fundraising similarly continues to rise with $7.9 billion year-to-date, an increase of 6.5 percent year-over-year. This already represents more than half of 2014’s full-year record total of $15.9 billion. The focus on debt continues to reflect later cycle strategies, which we additionally saw emerge in 2014. At midyear, four debt funds have closed with over $1.0 billion:

Overall fundraising remains healthy and is expected to remain in line with recent years, having averaged $70.1 billion since 2013. Debt funds will continue to raise more capital as balance sheet lenders are forced to pull back and tighten lending standards. However, value add fundraising is expected to be the headline of the year, with the potential to surpass record levels set in 2007. This fundraising will continue to increase already elevated levels of dry powder. In the current competitive environment for these profiles of equity and debt investments, these factors will further cement deployment pressures and force managers to rethink strategies, while maintaining strong liquidity for those targeted opportunities.

Debt fund Manager

Final size

(millions of $US)

TCI Real Estate

Partners Fund II

The Children's

Investment Fund

Management

$1,900

Rialto Real Estate

Fund III - Debt

Rialto Capital

Management$1,522

Kayne Anderson

Real Estate Debt

Fund II

Kayne Anderson

Capital Advisors$1,500

Colony Distressed

Credit & Special

Situations Fund IV

Colony NorthStar $1,210

Source: JLL Research, Preqin

$0

$5

$10

$15

$20

$25

$30

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 H1 2017

Fun

dra

isin

g (b

illio

ns

of $

US

)

Midyear debt funds Full-year debt funds

Elevated fundraising for debt funds will remain and will likely eclipse 2014’s record year

DebtDays after the second quarter of 2017, the Office of the Comptroller of the Currency (OCC) released its semi-annual risk perspective, which, among other things, highlighted that loan growth in commercial real estate (CRE) has been strong, despite coming off the heels of a slight slowdown in the second half of 2016. This strong growth has brought forth several concerns, some of which were mentioned by the OCC in 2016 and early 2017:

1. Strength in lending is causing higher concentrations of CRE loans among all banks, but primarily in community banks;

2. Some banks are exhibiting weaker underwriting standards in order to remain a relevant lending source as competition from non-bank lenders increases; and

3. A resumption in construction lending is occurring.

Despite these concerns and continued dialogue on commercial banks’ need to curtail lending, bank CRE lending has not stopped; in fact, banks have continued to lend, but on net, banks are tightening. While there has been a slowdown in the pace at which bank lending is growing (13.6 percent in 2016 relative to 35.2 percent in 2015), banks remained the leading lender type in 2016, according to the most recent Mortgage Bankers Association (MBA) Origination Survey. Mortgage outstanding data for all commercial banks for 2017 shows a 3.6 percent year-to-date increase, further echoing the notion that banks continue to lend.

Debt


Real estate debt markets remain liquid. Alternative lenders continue to challenge traditional players, sustaining competition late in the cycle.

Growth of mortgage outstanding (Federal Reserve)

All

commercial

banks

Large domestically

chartered commercial

banks

Small domestically

chartered commercial

banks

2011-2017 39.8% 21.4% 49.1%

2015-2017 20.5% 15.0% 21.4%

June 2016-

June 2017 8.0% 4.7% 9.3%

11

Life companies remain active in the lending space and a formidable financing competitor. Each year since 2013, life company originations have set a new record, reaching $76.2 billion in 2015. While 2016 originations were down slightly at $71.4 billion—a 6.6 percent decline, it was the second highest year for life company originations on record. In the first quarter of 2017, life companies pledged commitments of $15.2 billion, the highest first quarter on record. This is expected to drive stable if not increased activity in 2017. According to data from the American Council of Life Insurers (ACLI), leverage levels in the first quarter of 2017 across all property types averaged 58.4 percent. Despite the competitive environment and asset pricing, leverage levels remain fairly stable and cautious.

The opportunity for life companies and banks last year was supported by challenges in the CMBS markets, having been negatively impacted in 2016 by market volatility and regulatory uncertainty. In the first half of 2017, new CMBS issuance reached $38.8 billion, a 26.3 percent increase year-over-year. As CMBS lending picked up steam and lenders started to get comfortable with risk retention, new issuance AAA spreads have simultaneously stabilized and are now averaging 94 basis points—attractive compared to 137 basis points one year ago. This represents stable levels, comparable to those in midyear 2015. In the remainder of 2017, CMBS will continue to rebound and is expected to surpass 2016’s $75.8 billion of originations.

As we get closer to the tail end of this real estate cycle, debt funds have emerged and become competitive as alternative lenders. After coming off a historic year of fundraising in 2016, 2017 is proving to be no different. Closed-end debt funds raised $7.9 billion in the first half of 2017, a 6.5 percent increase year-over-year and the most raised since 2014. This debt capital is getting deployed. According to the MBA Annual Origination Survey, these credit and specialty finance companies have increased originations by 126.8 percent on average since 2012, reaching their highest levels since 2008 in 2016.

Looking ahead to the remainder of 2017, liquidity in the U.S. debt markets for real estate remains strong. The current pricing environment remains accretive to competitive financing, with healthy origination levels expected across the major lender types. One area where there could be increased participation is from foreign banks, who are actively exploring U.S. debt strategies. As debt funds and other alternative lenders remain active in the market, banks and life companies will continue to lend but face increased competition. This will present challenges for traditional lenders in areas such as construction financing, where lenders need to be selective given increased costs associated with credit spreads and higher Libor.


Banks and life companies have dominated, while alternative lenders incrementally grow

Source: JLL Research, Mortgage Bankers Association Source: JLL Research, Federal Reserve (as of Q2 2017)

As CMBS declines, banks and life companies average 6.0 percent growth in 2016; however, CMBS is rebounding in 2017.

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

Commercial

Bank /

Savings

Institution

Life Company /

Pension Fund

CMBS /

Conduit

Ori

gin

atio

n v

olu

mes

(in

bill

ion

s o

f $U

S)

2011 2012 2013 2014 2015 2016

Small commercial banks continue to lead bank originations, up 9.0 percent year-to-date for the third consecutive year

-9.1

%

-9.3

%

-4.5

%

0.8%

4.6% 5.

7%

9.1%

4.7%

-6.1

%

-6.3

%

0.2%

3.5%

7.9%

10.5

%

10.9

%

9.3%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

2010 2011 2012 2013 2014 2015 2016 H1

2017

Per

cen

t ch

ange

, Mo

rtga

ge O

uts

tan

din

g

(an

nu

al a

vera

ge)

Large Commercial Banks

Small Commercial Banks

Investment Outlook | United States | Office | H1 201712

Office

OfficeProperty market

It’s all in the numbers… the Office first half breakdown


Despite modest volume declines at midyear,

foreign share remains elevated

2012-month change in total vacancy (bps)

Source: JLL Research

Construction volumes remain flat at 108.8 m.s.f. with minimal further growth expected this cycle

0.7%12-month net absorption (as % of inventory)

1.3%12-month completions (as % of inventory)

3.2%12-month rent growth (p.s.f.)

Investment market

$58.6Investment sales (H1, billions of $US)

-11.9%H1 investment sales growth

4.2%Average cap rate

-1312-month change in cap rate (bps)

construction starts have now fallen below the long term quarterly average of 11.1 million square feet. Although construction starts have slowed, new deliveries expected by year-end total roughly 65.9 million square feet, 41.3 percent higher than the 2016 total.

As the market has realized a portion of these new deliveries over the last year, year-over-year Class A vacancy has increased roughly 50 basis points. Further pressure will be applied to vacancy as preleasing rates through 2018 hover around 50.0 percent. However, average asking rents will continue to rise with little in the way of slowing down, up 3.2 percent this year. As more scheduled office space is delivered in 2017 into 2018, the office market can expect steady increases in vacancy and tempered net absorption, which will in turn normalize development activity across the nation.Demand

Sustained tenant demand and rising rents remain the norm, but office supply pressures are rising As this cycle has matured and the economy has experienced growth, so too have absorption and rents in the office market. Since the second quarter of 2010, office markets posted 29 consecutive quarters of positive absorption. Over that same period, CBD Class A rents have appreciated by 35.7 percent. Year-to-date absorption in 2017 totals 9.9 million square feet, healthy but below the previous levels of growth seen in 2014, 2015 and 2016. Poised to benefit from this rapid growth early in this cycle, developer activity has spiked. Currently standing at 108.8 million square feet, construction levels remain near the cycle high reached in the fourth quarter of 2016 and are slightly higher than the previous cycle high in 2007. As markets have reacted to this supply cycle, developmentand financing markets have begun to pull back and

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Un

der

co

nst

ruct

ion

(s.

f.)

After a nearly 20.0 percent year-over-year decline in the first quarter of 2017, office volumes are rising as we progress through the year. Volumes made a resurgence this quarter, falling just 3.6 percent year-over-year and reaching $31.5 billion. With this activity, the profiles of transactions are beginning to shift beyond conventional, single-asset transactions: Of-single-asset transactions in the first six months of the year, roughly 24.0 percent were joint ventures—a significant increase compared to the 16.1 percent average over the last two years. From a portfolio perspective, transaction volumes are down modestly, representing 17.7 percent of overall activity compared to a roughly 20.0 percent average during the past three quarters. The largest portfolio closed this quarter was a $512 million portfolio recapitalization of Phoenix Tower and Greenway Plaza in Houston; in the transaction, Parkway Inc. sold a 49.0 percent stake to Silverpeak, TH Real Estate and CPPIB. Since this deal, CPPIB announced

plans to acquire Parkway Inc. in its entirety and will assume any remaining interest Parkway has in the portfolio. However, transactions larger than $500 million are down across the office sector. Since 2013, markets have averaged 20 trades greater than or equal to $500 million each year, amounting to $17.3 billion annually. In 2015 and 2016, we saw 25 and 19 transactions, respectively. At midyear 2017, only eight such deals have closed, totaling $7.7 billion.

Now, continued capital demand and plateauing fundamentals are spurring selectivity. With this, we are seeing a slowing of capital appreciation, and instead the income component of investments is driving returns. This is spurring more defensive strategies from domestic and offshore institutional investors. Pricing levels remain stable broadly, with market averages for institutional product ranging between 3.6 and 4.9 percent across the primary markets and 4.1 and 7.8 percent across the secondary markets. Market uncertainty, investor selectivity and current pricing dynamics will continue to put a damper on full-year volumes, forecasted to decline as much as 10.0 percent this year. However, the latter half of 2017 is expected to see modest gains in office activity levels.

TransactionsTop transactions – what’s happening and where


Continued investor selectivity

softening volumes and paralleling a

drop in large transaction activities

Notable secondary market transactions, Q2 2017Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)

Dallas 7900 Windrose Ave Liberty Mutual KDC $350,000,000 992,884 $353Orange County 1920/2010 Main St Emmes Realty Services Shorenstein Properties $200,000,000 656,000 $307

Silicon Valley 14600 Winchester Blvd King Asset Management Sand Hill Prop Co $200,000,000 260,899 $767

Atlanta 271 17th Street Lionstone Investments CBRE Global Investors $182,000,000 541,870 $341

Notable portfolio transactions, Q2 2017Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)

Houston Parkway Inc Houston Portfolio

TH Real Estate & Silverpeak / CPPIB

Parkway Inc $512,050,000 4,977,052 $103

Boston Boston PGIM Portfolio Blackstone (20%) PGIM Real Estate $363,957,325 280,000 $1,300

Washington, DC G Street Portfolio UNIZO Westbrook Partners / TIER REIT $193,500,000 283,941 $681Seattle-Bellevue 90 East Portfolio Kennedy Wilson Talon Capital / Cerberus Capital $153,000,000 573,000 $267

Notable primary market transactions, Q2 2017Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)

New York 245 Park Avenue HNA Group Brookfield Properties / Clarion Partners / NYSTRS

$2,210,000,000 1,778,249 $1,243

Los Angeles 1999 Avenue of the Stars

JMB Financial Advisors LLC

Blackstone $860,000,000 825,000 $1,042

New York 825 Eighth Avenue New York REIT George Comfort & Sons / DRA Advisors / RCG Longview

$686,125,000 2,049,618 $671

New York 85 Broad Street Ivanhoe Cambridge MetLife / Beacon Capital Partners $652,000,000 1,119,813 $582

MarketsMixed signals across markets, with leading secondary markets positioned for continued growth


In the first half of 2017, year-over-year volumes decreased 11.9 percent. During this time, primary and secondary markets accounted for $14.9 and $7.9 billion in volume, respectively. While the prevalence of larger transactions is down and partly responsible for volume declines, large deals are skewing figures in select markets. This is notably happening in New York and Houston, the most active primary and secondary markets this quarter.

• In New York, HNA Group and 181 West Madison acquired 245 Park Avenue from Brookfield Property Partners, NYSTRS and Clarion in a deal valued at $2.2 billion. This accounted for 51.5 percent of New York volumes this quarter.

• In Houston, the $512 million portfolio recapitalization of Phoenix Tower and Greenway Plaza accounted for 74.8 percent of volumes.

Unsurprisingly, primary markets following New York were Los Angeles,Boston, Washington, DC and Seattle. Of these, Seattle is the only market experiencing year-over-year declines in volume. Houston, in this instance, is beginning to benefit from improving liquidity as the market seemingly begins to bottom out. Continuing the trend of Sun Belt growth, six of the ten most active secondary markets were in this region. Dallas, for that matter, has seen significant activity over past quarters, accounting for $10.9 billion of activity since 2013. During that period, per-square-foot pricing has appreciated by 94.3 percent. In addition to Dallas, Charlotte has also seen significant per-square-foot

pricing appreciation of 90.0 percent since 2013. Put in perspective, the average secondary market change over that period was just 8.5 percent. Like many Sun Belt markets, these markets continue to benefit from demographic shifts and employment growth, and thus office demand. Generally speaking, however, pricing in office markets across the U.S. is plateauing. Markets with stable demand, disciplined construction activity and high barriers to entry can expect to maintain stable liquidity and pricing in the near term.


New York dominates volume, but significant year-over-year decline partly responsible for national decline

Transaction volume (billions $US)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

New

Yo

rk

Bo

sto

n

Los

An

gele

s

Was

hin

gto

n, D

C

Sa

n F

ran

cisc

o

Ch

icag

o

Sea

ttle

-Bel

levu

e

H1 2016 H1 2017

50.4

% d

eclin

e


NJ

CT

MA

NH

NC

VA

WA

VT

AL

AZ

AR

CACO

FL

GA

ID

IL IN

IA

KSKY

LA

ME

MI

MN

MS

MO

MT

NE

NV

NM

NY

ND

OH

OK

OR

PA

SC

SD

TN

TX

UTWV

WI

WY

Seattle4.25% - 5.50%

Portland4.50% - 5.50%

SF Bay Area

6.50% - 7.00%

Sacramento5. 50% - 6.50%

San Diego

5.00% - 6.00%

Salt Lake City6.00% - 6.50%

Orange County5.00% - 5.75%

Denver4.50% - 5.25%

Minneapolis5.75% - 6.25%

Chicago4.50%- 5.50%

Kansas City6.25% - 7.00%

St. Louis4.50% - 5.25%

Dallas4.60% - 9.00%

Houston5.50% - 6.50%

Columbus8.00% - 9.00%

Cincinnati5.50% - 7.00%

Louisville4.50% - 5.25%

Nashville5.50% - 7.00%

Atlanta4.75% - 5.75%

Washington, DC4.0% - 5.75%

Tampa5.00% - 6.50% Miami

4.50% - 5.25%

National Office – CBD Class A cap rate map

National Office – Suburbs Class A cap rate map

Austin5.00% - 6.00%

Boston4.50% - 5.25%

Raleigh-Durham6.50% - 7.50%

Cleveland8.00% - 9.00%

Detroit

8.00% - 9.00%

Phoenix6.25% - 6.75%

Charlotte6.0%-8.0%

Richmond7.50% - 8.00%

San Antonio7.00% - 9.00%

San Francisco

4.00% - 4.50%

Silicon Valley

5.00% - 6.50%

NJ

CT

MA

NH

NC

VA

WA

VT

AL

AZ

AR

CACO

FL

GA

ID

IL IN

IA

KSKY

LA

ME

MI

MN

MS

MO

MT

NE

NV

NM

NY

ND

OH

OK

OR

PA

SC

SD

TN

TX

UTWV

WI

WY

Seattle5.50% - 6.50%

Portland5.40% - 6.75%

SF Bay Area

7.00% - 7.50%

Sacramento

6.75% - 7.75%

San Diego5.00% - 6.50%



Denver5.50% - 7.00%


Chicago5.50% - 7.00%


St. Louis5.50% - 7.00%

Dallas4.60% - 8.88%

Houston7.00% - 8.50%

Columbus8.00% - 9.00%




Atlanta4.75% - 5.75%

New Jersey7.50% - 8.50%

Philadelphia6.00% - 7.00%

Tampa6.50% - 7.50% Miami

5.50% - 7.00%

Austin6.00% - 7.50%

Boston5.50% - 7.00%

Cleveland9.00% - 10.00%

Detroit8.00% - 8.50%

Los Angeles5.50% - 7.00%

New York5.50% - 7.00%

Oakland / East Bay6.50% - 7.50%

Phoenix5.75% - 6.50%

Charlotte6.50% - 6.80%

Richmond7.50% - 8.25%


Silicon Valley5.00% - 6.50%


Oakland / East Bay5.00% - 6.50%

Indianapolis8.50% - 9.50%


Pittsburgh6.50% - 7.50%

Orlando6.00%

New Jersey6.00% - 7.00%

New York4.50% - 5.25%

4.00 – 5.00%5.00 – 6.00%6.00 – 7.00%7.00 – 8.00%

3.00 – 4.00%2.00 – 3.00%

8.00 – 9.00%9.00% +

Orlando6.50% - 8.00%





capitalSources of


Elevated foreign investment remains

the norm for primary office markets

With geopolitical uncertainty and the relative liquidity of U.S. real estate, the office sector continues to see the outsizedbenefit of foreign capital. Year-to-date, foreign investment as a percentage of total volumes reached 18.1 percent, unchanged from 2016 but an increase compared to 13.0 and 16.4 percent in 2014 and 2015, respectively. Interestingly, 77.9 percent of all foreign investment came from five countries: China, Singapore, Canada, Germany and Japan. This marks a major diversion from prior years as these countries combined haven’t accounted for more than 60.0 percent of foreign activity since 2003. Continuing a trend of Asian investor preference for coastal gateway markets, Chinese investment in the first half of 2017 was almost entirely located in New York at 68.7 percent of volume.

Cross-border investors remain focused on primary office markets and high-quality assets. Although overall foreign investment is down slightly at midyear, primary markets continue to see the bulk of cross-border office acquisitions at 73.9 percent of total volume. On the other hand, foreign investment into secondary markets remains highly selective. An Asian investment of note was a Singaporean acquisition of a near-fully occupied, 11-story office tower in Northern New Jersey for $115 million. Although technically a secondary and non-CBD market, the office building is located just three miles from New York City. While best-in-class assets in high-growth secondary markets may see this capital, the current ratio between primary and secondary markets is not likely to shift further in these markets’ favor given the risk profile of the capital.

China

13.0%

Canada

11.2%

Japan

7.4%

Germany

15.9%

All Others

52.5% 2016

China

24.3%

Canada

19.2%

Singapore

15.3%

Japan

10.3%

Germany

8.9%

All

Others22.1%

H1 2017

Five most active countries of origin account for 77.9 percent of foreign investment in first half of 2017

Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0M)

irisk



Class A and Trophy assets as a percentage of total volume increase significantly on 12-month trailing basis since 2015

As the cycle has progressed with growth now beginning to plateau, the risk appetite and thus investment preferences of investors is shifting across markets and transaction profiles. As pricing has appreciated and returns compressed, the universe of active capital has continued to expand. This remains evident in the first six months of 2017, with value add fundraising up nearly 60.0 percent year-over-year. In fact, 2017 thus far has been the most active first half for value add fundraising of the past 15 years, with the potential to surpass 2007’s historic highs. This value add capital is notably benefiting urban submarkets as well as secondary and even tertiary markets, where there are opportunities.

As the liquidity for value add transactions has remained strong and even expanded in recent quarters, a disciplined and conservative approach to underwriting from core institutional investors has simultaneously impacted capital demand for core transactions. However, as these groups adopt a more defensive approach to capital markets activities, markets are beginning to see a pullback in risk-taking behaviors. This is evidenced by the steady increase in Class A and Trophy transactions over the past

18 months: at the height of activity in 2015, elevated risk-seeking behavior paralleled increased levels of Class B and C acquisitions, having driven between 30.0 and 45.0 percent of overall activity. This paralleled a period of strong demand and diversified growth in fundamentals across most markets. Since this time, however, Class B and C investments have declined to less than 25.0 percent of activity, as Class A and Trophy activity’s share increased by 21.4 percent.

This presents an interesting dichotomy in today’s office investment market: risk-seeking, value add capital continues to increase and maintain elevated dry powder levels, yet the market fundamentals and investment activities are exhibiting a flight to quality. This storyline is further complicated by increased barriers to entry and pricing in primary markets and even high-growth secondary markets, leaving some groups in limbo. For the markets, this “tug-of-war” will continue to apply pressure on pricing in the near term and should benefit value add opportunities given outsized capital demand. However, this also may present opportunities for those on the lower-risk, core end of the spectrum.

Sources of

A pullback in risk-seeking investor behaviors reemerging in early 2017

12-month average Class A and Trophy share (%)

76.4% 77.9% 75.4% 79.3% 80.4% 78.7% 77.2%71.6%

62.9%54.0%

64.0% 67.5%74.3% 79.1% 75.4%

2013

Q4

2014

Q1

2014

Q2

2014

Q3

2014

Q4

2015

Q1

2015

Q2

2015

Q3

2015

Q4

2016

Q1

2016

Q2

2016

Q3

2016

Q4

2017

Q1

2017

Q2

Flight to quality?

Investment Outlook | United States | Industrial | H1 201719

Industrial

IndustrialProperty market

It’s all in the numbers… the Industrial first half breakdown


Industrial investment momentum outpaces

overall CRE as investors continue to

expand holdings

-5012-month change in total vacancy (bps)


Tight vacancy drove strong annualized rent growth, indicating strength of demand




Investment market


20.7%FH1 investment sales growth



Given the national historic low of 5.2 percent vacancy, rents continue to accelerate at a rapid but decelerating pace. Nationally, rents inched up further, reaching $5.35 per square foot, an all-time high. On an annualized basis, rents increased by nearly 6.6 percent. Vacancy rates are expected to continue to decline through the end of the year, albeit at a decelerated pace. Demand

New supply is catching up to net absorption after trailing for seven yearsTotal net absorption lagged new deliveries in the second quarter of 2017 for the first time in seven years. Net absorption still slightly leads new deliveries for the first half of the year. It should be noted that this is not a sign of weakening market conditions, but can largely be attributed to the lack of quality vacant space left in the market to absorb, coupled with a decline in the average size of lease transactions. Additionally, for all new industrial buildings delivered in the second quarter, preleasing rates increased by 370 basis points to 46.6 percent. In terms of largest drivers of demand, e-commerce and logistics & distribution continue to dominate leasing activity for new construction.

90

170

-10

-80 -80 -80 -70 -50 -70-40

5.6%

-1.1%

-2.8%

-6.6%

0.5% 0.7%

3.5%4.5%

5.4%

8.7%

6.6%

-150

-100

-50

0

50

100

150

200

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Q2

Change in vacancy (bps)Annualized rent growth (%)


Q2 2017 marks first time in seven years that new supply outpaced net absorption

0.0

50.0

100.0

150.0

200.0

250.0

300.0

2011

2012

2013

2014

2015

2016

H1

2017

(mill

ion

s o

f sq

uar

e fe

et)

New supply

Net absorption

The first half of 2017 recorded robust industrial investment volumes, closing with the second-largest first-half tally since 2007 and year-over-year growth of over 20.0 percent. First-half total volume amounted to nearly $24.0 billion, as 245.0 million square feet of industrial assets traded hands, setting expectations that the year is positioned to exceed the $47.8 billion 2016 total and make 2017 second only to 2015 in terms of overall historic activity. Single-asset transactions led sales velocity in the first half, representing 62.5 percent of all activity. However, the second half of the year is expected to experience a resurgence of large-scale portfolio activity after being largely sidelined in 2016.

Large-scale portfolios (transactions over $250.0 million) have already exceeded $3.5 billion in 2017, capped by the $1.07 billion sale of a Cabot industrial portfolio to DRA Advisors, the mixed-asset portfolio sale by TA Realty to Brookfield ($629.4 million) and ElmTree Funds’ 95.0 percent recapitalization by China Life. A new third GLP industrial fund launched in December,and is expected to have a $1.5 billion investment capacity, with a $400.0 million U.S. industrial asset deployment mandate, setting the tone for continued competition as portfolios do come to market.

The second half of 2017 will likely be the most active period in the industrial sector’s history, as +$12.5 billion of large-scale portfolio activity is set to close before the end of the year, not including the estimated $11.6 billion buyout bid for GLP and its U.S. assets led by Hopu Investment Management, Vanke Group and Hillhouse Capital.



Another wave of large-scale

industrial portfolio transactions will

lead second-half activity

Notable industrial park transactions, Q2 2017Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)

Inland Empire Safari Business Center (16 bldgs)

Rexford Industrial REIT

American Realty Advisors / SBCERA

$141,200,000 1,140,000 $124

Philadelphia-C. PA

Capital Business Center (6 bldgs.)

Dermody Properties Woodmont Properties / AEW Capital Management

$76,100,000 1,531,880 $50

Denver The Campus at Longmont (27 bldgs.)

Gibralt Capital Corporation

Goff Capital Partners $69,600,000 1,130,000 $62

Louisville Dixie Industry and Commerce Park (6 bldgs.)

UPS Dixie Real Properties $33,000,000 913,000 $36

Oakland-East Bay

Fremont Business Center (4 bldgs.)

TA Realty Deutsche $32,900,000 192,397 $171

Notable single asset transactions, Q2 2017Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)

Houston 4762 & 4830 Borusan Rd Pure Industrial REIT Clay Development $63,500,000 996,482 $64Philadelphia-C. PA

1 Ames Dr UPS Dermody Properties $55,000,000 595,000 $92

Atlanta 8095 McLarin Rd Clarion Partners USAA Real Estate $54,725,000 1,044,248 $52South Bay-Silicon Valley

587 Cinnabar St Trammell Crow Co. A & F Properties LLC $51,500,000 201,940 $255


National High Street Fund IV Portfolio Blackstone High Street $400,000,000 5,797,101 $69

NationalElmTree Net Lease Fund II Recap (56% Ind.; 29% Off.; 15% Health-Care)

China Life (95%) ElmTree Funds $950,000,000 5,500,000 $173

New Jersey Hampshire Companies NJ Infill Port.

AEW Capital Management Hampshire Companies

$146,850,000 1,218,164 $121

New York Estate Four Capital (Ind. & Land)

Sitex Group Estate Four $105,000,000 347,000 $160

Investors continue to consolidate to primary market assets, as a focus on rent growth and long term portfolio growth influence continued appreciation. Land-constrained markets such as the San Francisco Bay Area, Southern California and New Jersey are testing new records when opportunities became available. Asset scarcity, the inability to develop new supply and prolonged hold periods will continue to drive pricing in these geographies higher. With continued compression, Class A assets are setting new high watermarks, while cap rate ranges remain stable in all other industrial markets.

Despite sentiment that cap rates cannot be driven any lower, rent growth and strong tenant demand are proving this to be incorrect. Unique to this cycle, in extremely land-constrained markets like Los Angeles or San Francisco, investors are even setting unlevered required returns lower than that of multifamily assets. As a result, some investors are being driven to acquire assets in tertiary markets. Tertiary market activity has increased 36.2 percent since 2014. Despite the focus on major supply chain hubs, investors acquiring assets outside of primary markets are finding the strong rent growth and historically low vacancy in secondary and tertiary markets to be quite attractive.

MarketsAttractive rent growth & scarcity of opportunitiesdriving tertiary market volumes


Source: JLL Research, Real Capital Analytics

Lack of available opportunities and rent growth driving capital to tertiary markets

NJ

CT

MA

NH

NC

VA

WA

VT

AL

AZ

AR

CACO

FL

GA

ID

IL IN

IA

KSKY

LA

ME

MI

MN

MS

MO

MT

NE

NV

NM

NY

ND

OH

OK

OR

PA

SC

SD

TN

TX

UTWV

WI

WY

Seattle4.00% - 5.00%

43.3%

44.8%

11.9%

40.8%

43.0%

16.2%

0.0% 50.0%

Primary

Secondary

Tertiary

Transaction volumes by market type (as a percentage of total)

H1 2017

2016

2015

2014

Portland4.75% - 5.75%

Reno5.75% - 6.75%

SF Bay Area3.90% - 5.00%

Southern California3.90% - 5.00%

Sacramento5.75% - 6.75%

Inland Empire4.00% - 5.00%

San Diego5.50% - 6.25%


Las Vegas5.25% - 6.25%

Phoenix5.25% - 6.25%

Denver5.50% - 6.50%


Chicago4.75%- 5.75%


St. Louis6.25% - 7.00%

Memphis6.25% - 6.75%

Dallas4.50% - 5.50%

Houston5.25% - 6.25%

Columbus6.00% - 6.50%




Atlanta4.75% - 5.75%

Boston6.00% - 6.75%

Eastern PA4.75% - 5.50%

Philadelpia-South NJ5.00% - 5.75%

Harrisburg5.00% - 5.50%

Baltimore/DC 5.50% - 6.00%


Orlando6.00% - 7.00%Tampa

6.00% - 7.00% Miami3.90% - 5.00%

4.00 – 5.00%5.00 – 6.00%6.00 – 7.00%7.00 – 8.00%

3.00 – 4.00%2.00 – 3.00%

8.00 – 9.00%9.00% +

National Industrial – Class A cap rate map


New Jersey4.00% - 4.75%

capitalSources of


Foreign capital stepping off the sidelines and

expanding industrial risk appetite

Foreign participation spiked in 2015 to peak levels when several large-scale portfolio transactions closed, making waves in the U.S. industrial sector. After largely sitting on the sidelines in 2016 due to the lack of opportunities of desired scale, foreign capital is again ramping up its investments, with Canadian and Chinese capital most active. The resurgence of participation and interest in industrial assets by foreign buyers drove midyear cross-border acquisitions to reach over 85.0 percent of last year’s total volume, with several closings set to occur in the second half of the year. Once only targeting core markets, a shift in sophistication and savviness has spurred an increased focus on highly specialized, function-based (such as last-mile, infill, cold storage, etc.) portfolios. This willingness to extend outside of core markets is exemplified by the new-to-sector Ivanhoé Cambridge and its near $1.0 billion acquisition of a “last mile” portfolio (Evergreen Industrial Properties) from TPG, which closed in the first few days of the third quarter.

REIT acquisitions are also surging. REITs have already acquired nearly 70.0 percent of their 2016 totals in the first half of 2017, with large year-over-year increases in primary market acquisitions where rent endures discernible growth. More activity within this buyer group is expected through the end of the year, as Wall Street has been signaling support for shifts toward a full focus on industrial assets for the publicly traded REITs.


Foreign capital and REIT participation rebound in first half of 2017

Transaction volume (as a % of total)

3%7% 6% 6%

34%

5%10%

51%

22%

35%

22%

18%15%

20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015 2016 2017

Foreign Developer-Operator

High Net Worth Institution-Advisor

REIT-REOC User-Other

irisk


Current discourse within the investment community remains focused on the prolific performance of the industrial sector since the financial crisis, almost always coupled with anxieties over how mature into the cycle the sector is. A focus on certain elements of the current market conditions are becoming more vocalized, with particular attention being given to the following risk factors:

Oversupply apprehensions. Broadly, as new supply exceeded net absorption nationally for the first time in seven years in the second quarter, investors will keep a sharp eye on market fundamentals in the latter half of the year. Worries that supply outpacing net absorption could tip the market will be weighed against the lack of quality vacant space remaining in the market, as well as the recent reduction in the average lease transaction size.

Persistent troubles by retailers and the industrial requirements of these users. Further bankruptcies, store closings and mergers/acquisitions could pose residual effects on industrial fundamentals, presenting risks to planned tenant expansions and renewals. While this does present a risk, these industrial facilities typically are last to be liquidated, solace for investors with retail-tenanted assets.

Current scarcity of industrial assets. Scarcity will be further amplified as consolidation continues in the sector with large-scale portfolio activity. This is already impacting the competitive landscape for assets that do become available, affecting underwriting and asset pricing. From a transactional point of view, we are currently observing an increase in capital evaluating highly specialized assets (multistory mezzanine facilities, food processing facilities, cold/freezer storage, urban infill warehouses, etc.), reflective of a shift out on the risk curve given the risks associated with these assets. This could potentially leave investors more susceptible to downside risk if a downturn in demand does materialize in the geographies of these facilities.

Sources of

Concentrated competition driving investment

further out the risk curve

Source: JLL Research, NCREIF, Board of Governors of Federal Reserve System

Primary market spreads over risk-frees remain comparatively healthyScarcity of opportunities, strength of rent growth both major drivers of modest & sustained cap rate compression throughout primary markets

2.3%

4.7%

5.2%

0.0%

5.0%

10.0%

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

H1

2017

10-year Treasury yield (%)Average primary market industrial cap rate (%)Average secondary market industrial cap rate (%)

Investment Outlook | United States | Multifamily | H1 201725

Multifamily

MultifamilyProperty market

It’s all in the numbers… the Multifamily first half breakdown


After record-setting volumes in 2016, high-rise

activity takes a pause


Source: JLL Research, Axiometrics

National annual effective rent growth declines 190 basis points year-over-year to 2.5 percent




Investment market





from one year prior. Minneapolis was the only market to see an increase in the pace of rents in the second quarter. The current softening in rents is also driven by continued new deliveries, which is expected to peak in the third quarter of this year. Nearly 364,000 units have delivered nationally across the top 40 markets over the last 12 months, representing 1.4 percent of overall inventory. Dallas, New York and Houston are seeing the greatest increases in units, while Nashville, Austin and Charlotte are experiencing the highest percentage gains, with each seeing annual inventory growth exceeding 4.0 percent.

In spite of these supply-side gains, national absorption remains resolute at 1.1 percent, reflective of sustained strength on the demand side. With this, however, we will continue to see a tapering from elevated rent growth levels. Those markets with the deepest demand to absorb new deliveries will be best positioned to see fundamentals rebound from any near-term softening.

DemandElevated deliveries softening rent growthNational annual effective rent growth was 2.5 percent in the second quarter. After 24 consecutive quarters above 3.0 percent, the national rate slipped below this threshold through the first two quarters of 2017. A near across-the-board softening in the pace of growth has occurred following six straight years of rent growth ranging between 3.2 and 4.9 percent. As the pace of rent growth has declined 190 basis points year-over-year, concessions have increased with the wave of deliveries. Six West region markets saw annual effective rent growth at or above 5.0 percent in the second quarter, ranging from Phoenix (5.0 percent) to Sacramento (10.2 percent). Inland Empire, Salt Lake City, Seattle-Bellevue and Las Vegas rounded out this list of leaders. While these markets doubled the national rate, all markets saw a pullback compared to rent growth

90.0%

91.0%

92.0%

93.0%

94.0%

95.0%

96.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Q1

2010

Q1

2011

Q1

2012

Q1

2013

Q1

2014

Q1

2015

Q1

2016

Q1

2017

Occ

up

ancy

(qu

arte

rly

aver

age)

(%)

Nat

ion

al a

nn

ual

eff

ecti

ve r

ent

gro

wth

(%

)

Effective rent growth (%)

Occupancy (quarterly average) (%)



Despite declines in investment sales

at midyear, pricing holding stable

After two years of record-setting volumes and $580.0 billion in transactions over the last five years, the pace of investment activity has slowed. Multifamily investment sales saw $30.5 billion of activity in the second quarter of 2017. While this figure rebounded in comparison to the $24.8 billion figure recorded for the first quarter, year-to-date volumes are 22.3 percent off the pace of 2016’s record-setting activity. Overall, roughly 4,400 and 4,600 properties sold in the successive years of 2015 and 2016, respectively. Comparatively, only 1,538 properties have sold so far in 2017, highlighting a clear lack of opportunity. A nearly 60.0 percent decline in high-rise transactions is driving volume declines. The pullback in larger high-rise deals in gateway markets is reflected if considering the

largest transaction in the quarter: American Assets Trust acquired the largest single-asset, purchasing the 533-unit Carmel Pacific Ridge in San Diego for $232.0 million. The Class A property delivered in 2013 and traded at a 4.35 percent cap rate.

In spite of these declines, overall pricing for multifamily continues to appreciate, as shown through Real Capital Analytics’ apartment property price index. The headline multifamily index has increased 8.6 percent year-over-year as of May. Non-major markets are currently driving appreciation, as the six major gateway markets (New York, San Francisco, Washington, DC, Los Angeles, Chicago and Boston) have only appreciated 7.1 percent in the past year. However, the decline of overall activity through the first six months of the year has placed pressure on pricing on select assets.

Notable secondary market transactions, Q2 2017Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)

San Diego Pacific Ridge American Assets Trust

Carmel Partners $232,855,000 533 $436,876

San Diego Alexan Melrose MG Properties Zephyr Partners / Trammell Crow Residential

$134,000,000 410 $326,829

Fort Lauderdale Amaray Las Olas GID Rockefeller Group / Stiles $133,550,000 254 $525,787Orange County Placentia Place Fairfield Residential The Irvine Company $104,400,000 416 $250,962Denver ArtWalk at CityCenter CBRE Global

InvestorsUBS $97,000,000 438 $221,461

Notable portfolio transactions, Q2 2017Market Property Buyer Seller Price ($) Size (units) Price (p. unit)National Milestone Apartments REIT

AcquisitionStarwood Capital Milestone Apartments REIT $2,850,000,0

0023,789 $119,803.27

National Kayne Anderson Student Housing-Multifamily Portfolio

Mapletree Kayne Anderson Real Estate Advisors

$1,600,000,000

3,751 beds / 1,388 units

-

National IMT Residential Group Portfolio Blackstone IMT Residential $790,500,000 4,488 $176,136

National TA Realty Portfolio Blackstone TA Realty $429,500,000 2,513 $170,911Regional Blackstone Texas Portfolio Bluerock Res Growth

REIT / CWS Capital Partners

Blackstone $188,900,000 1,400 $134,929

Notable primary market transactions, Q2 2017Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)

Boston Commons at Windsor Gardens

AllianceBernstein / John M Corcoran and Co

Berkshire Group $199,000,000 914 $217,724

Atlanta Emory Point Blackstone Cousins Properties Inc. / Gable Residential

$199,000,000 750 $265,333

Boston Cambridge Park Apartments Heitman Equity Residential $168,000,000 312 $538,462Washington, DC Latitude Monogram Residential

TrustPenrose Group $143,000,000 265 $539,623

Silicon Valley Colonnade Los Altos Stanford University Lennar Corporation / SARES-REGIS Group

$130,500,000 167 $781,437

MarketsLacking opportunities, investors remain active in secondary and tertiary markets


The significant decline of transactions in primary markets has sustained strong liquidity in secondary and even tertiary markets. As a result, secondary markets comprised 44.6 percent of total multifamily transaction volumes at midyear, a record for this indicator if analyzing the past nearly two decades. Denver and Phoenix led secondary market activity this quarter, with each market seeing over $1.1 billion of transactions. Despite the overall decline in activity, several secondary markets are seeing growth, ranging from Baltimore (+5.1 percent) to Salt Lake City (+99.2 percent). Jacksonville, Orlando, Philadelphia and San Antonio additionally saw year-to-date gains in volumes. Notably, volumes in tertiary markets have accounted for 6.4 percent of total volumes year-to-date. This exceeds the 5.9 percent of tertiary volumes during 2016 and represents the highest level of activity since 2009.

Of the major multifamily markets, Atlanta and Dallas-Ft. Worth are outperforming, each with at least $1.3 billion in sales volumes on the quarter. Silicon Valley was the only primary market to see a year-to-date gain in volumes (+12.2 percent). Despite this decline in overall volumes, cap rates across primary and secondary markets remain stable.

However, with rents increasingly under pressure and even on the decline in select gateway cities such as New York and San Francisco, current pricing will be tested as investors remain selective and increasingly disciplined in their underwriting.


(Transactions larger than $5.0M)

Dallas-Ft. Worth and Atlanta outpace investment sales across markets, both exceeding $2.5 billion year-to-date

Most active multifamily investment markets

H12017 Rank

H12016 Rank Market

Transactionvolume

2017 YTD (millions

$US)YoY

Change

1 3 Dallas-Ft. Worth $3,061 -12.2%

2 4 Atlanta $2,506 -20.6%

3 2 Denver $2,314 -36.9%

4 5 Phoenix $1,859 -30.4%

5 13 Orlando $1,626 +21.2%

6 1 New York $1,456 -74.4%

7 11Seattle-Bellevue

$1,348 +22.8%

8 9 Austin $1,343 -31.6%

9 12 Los Angeles $1,302 -20.0%

10 6 Washington, DC $1,298 -45.9%

NJ

CT

MA

NH

NC

VA

WA

VT

AL

AZ

AR

CACO

FL

GA

ID

IL IN

IA

KSKY

LA

ME

MI

MN

MS

MO

MT

NE

NV

NM

NY

ND

OH

OK

OR

PA

SC

SD

TN

TX

UTWV

WI

WY

Seattle-Bellevue4.00% - 4.60%

Portland4.30% - 4.80%

SF Bay Area

3.95% - 4.55%

Sacramento4.60% - 5.50%

San Diego4.00% - 4.50%


Denver4.70% - 5.40%


Chicago4.20% - 5.20%

Dallas4.20% - 5.00%

Houston4.50% - 5.80%

Columbus6.40% - 6.90%



Atlanta4.70% - 5.40%


New Jersey4.20% - 4.90%


Austin4.15% - 5.65%

Boston3.80% - 5.50%



New York3.30% - 4.30%

Phoenix4.90% - 5.30%



Inland Empire4.50% - 5.25%

Las Vegas5.00% - 5.40%

North / Central Florida5.30% - 5.60%

South Florida4.30% - 5.30%


4.00 – 5.00%5.00 – 6.00%6.00 – 7.00%7.00 – 8.00%

3.00 – 4.00%2.00 – 3.00%

8.00 – 9.00%9.00% +

National Multifamily – Class A cap rate map

capitalSources of


Private equity and institutional capital driving

multifamily portfolio acquisitions

Despite activity declines, mid- to long term optimism in the sector remains high across varied sources of capital, notably private equity and institutional investors, which continue to pursue opportunities of scale in the multifamily space. This has been evident in portfolio activity in recent years. Multifamily portfolio activity in the first half of 2017 accounted for nearly 19.0 percent of total volumes. While this is down year-over-year with the overall market, private equity and institutional investors have accounted for more than 50.0 percent of portfolio acquisitions year-to-date. These portfolios often comprised assets in the Sun Belt and Southwest regions of the country:

• In the largest portfolio of the quarter, Starwood closed on its approximately $2.85 billion acquisition of Milestone Apartments REIT. The portfolio contains 23,789 units throughout Southeast and Southwest markets.

• Blackstone remains active in the multifamily sector, acquiring more than 7,000 units this quarter across three portfolios with exposure to Texas, Florida,

Las Vegas, Southern California and the Midwest. In its two largest deals, Blackstone closed on 3,618 units throughout the Sun Belt from IMT Residential for $658.5 million, as well as 2,513 units from TA Realty for $429.5 million.

• Student housing accounted for 5.4 percent of institutional acquisitions in the quarter, spurred in part by Singapore-based Mapletree. The Singaporean investor acquired its second student housing portfolio from Kayne Anderson, closing on 3,751 beds and 1,388 multifamily units for $1.6 billion.

The appetite from institutional and private equity sources of capital will remain stable for the multifamily sector given historic sector performance and favorable demographics, to name a few factors. However, in the current environment of softening fundamentals, urban construction and elevated asset pricing, selectivity and caution will remain the norm. Capital will favor high-growth markets, high-barrier-to-entry submarkets and the continued diversification of overall portfolio exposure across these geographies.


Multifamily portfolio acquisitions by private equity and institutional buyers up 42.6 percent this expansion

$49

$70

Portfolio acquisition activity (billions of $US)

Prior expansion Current expansion

irisk



Despite improvements in fundamentals, garden-style assets trading at a wider pricing discount relative to historic cycles

Near-term risk in the multifamily sector is elevated given the current environment of peaking rents, cresting development and asset pricing at or near previous cycle peaks in markets. As a result, investors are adjusting approaches to investing capital in the maturing cycle. The focus is shifting toward untapped submarkets—notably in the suburban markets—as well as those with limited exposure to high levels of construction. The shift has caused garden-style transactions to surge to represent 70.6 percent of overall activity year-to-date. This figure is the highest on this metric since 2009.

With this shift, the availability of core opportunities has declined, and value add opportunities are driving transaction volumes. The fundamentals support this strategy: vacancy rates have converged across multifamily building classes, with Class C assets even seeing vacancy now at 5.0 percent—a minor 10 basis points higher than Class A. Despite tight occupancy across asset classes, the cap rate spread between urban and suburban assets remains elevated, reflecting a wider pricing discount for suburban product despite the improvement in suburban fundamentals. Urban activity is expected to reemerge as the next wave of product delivers this year and in 2018. As these opportunities come to market, current core pricing will be tested. Until then, core pricing remains stable.

Sources of

Amid a lull in core transactions, capital focused

on value add, suburban opportunities

0

20

40

60

80

100

120

140

160

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

2003 2005 2007 2009 2011 2013 2015 2017

Sp

read

(bas

is p

oin

ts)

Cap

rat

e (%

)

Spread Garden-style cap rate Mid/high-rise cap rate

Investment Outlook | United States | Retail | H1 201731

Retail

RetailProperty market

It’s all in the numbers… the Retail first half breakdown


Investors slow retail investment by 18.7 percent

at midyear while awaiting the effects of

e-commerce


Source: JLL Research, CoStar

Retail fundamentals remain strong despite fluctuation in the asset class




Investment market





Although fundamentals indicate relative stability, retail is still in transition. As a result of this transition, retail deliveries have slowed since 2015, with no shortage of supply. This is particularly the case with power centers, which have seen a decline in deliveries by 39.3 percent year-over-year from 2016. While select Tier 2 malls that challenged (and still challenge) the retail market in 2015 and 2016 begin to take new life with redevelopments and repositioning, though power centers are the question of the quarter. All other retail product types are seeing vacancy decline, power center vacancy has softened by 62 basis points year-over-year, due in part to retailers like Sports Authority, Circuit City and Staples, to name a few, bankruptcies and store closures.

DemandRetail demand remains stable at midyear, aside from power centersDespite the retail headlines, demand remains consistent throughout the U.S., with overall retail vacancy at 4.9 percent and rents continuing to rise by 5.0 percent. In particular, demand is strongest in primary markets, and investors are focusing on these markets in the first half of 2017. Bankruptcies and store closings have retailers streamlining their brick-and-mortar strategies, placing heightened emphasis on well-performing markets. For example, San Francisco and Miami are seeing vacancy under 4.0 percent, and both markets are in high demand for flagship and fleet retail locations. While some markets are losing retailers, San Francisco is capturing e-tailerslooking to make the jump to brick-and-mortar, like women’s apparel retailer Everlane, which announced its first permanent physical store in the Mission.

Though the threat of e-commerce disruption looms, retail fundamentals remain strong for the time being

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Q1

2016

Q2

2016

Q3

2016

Q4

2016

Q1

2017

Q2

2017

Vaca

ncy

(%

)

Ren

t gr

ow

th (%

)

Effective rent growth

Vacancy



Retail investment declines by 18.7 percent as retail investors

adopt a more focused, strategic approach to deals

The current retail climate has investors shying away from risk and, in turn, retail transaction activity decreased by 18.7 percent at midyear, with $27.0 billion in transaction volume. Portfolio activity in particular has declined by 14.2 percent year-over-year from 2016, though liquidity exists for strategic, large-scale partnerships and portfolio deals where quality opportunities arise. Of note this quarter, DDR and Madison International Realty agreed to recapitalize a $1.0 billion joint venture comprising 52 shopping centers, with Madison acquiring 80.0 percent of the joint venture’s common equity while DDR retained 20.0 percent. Last quarter, portfolio transaction volume increased by 10.5 percent, due in part to Regency Centers’ $4.6 billion merger with Equity One, which closed at the end of thefirst quarter.

Transactions over $1.0 billion made up 31.7 percent of overall retail volume at midyear, the highest level since 2014 when it comprised 39.2 percent of transaction volume. Similar to last cycle, which saw large-scale transactions with more regularity, access to credit is easily attained at present. However, unlike last cycle, investors this year are exhibiting more discipline in their investment strategies, learning from the prior cycle’s failures and acting in accordance with the secular changes impacting the retail sector. Given the undeniable uncertainty of retail now, investors will remain selective in their purchases but will likely make bold moves for the right large transactions when they present themselves. Though transacting less frequently, retail will continue to see large, strategic deals executed in the coming quarters, as opposed to smaller, lower-return deals.

Notable secondary market transactions, Q2 2017Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)Inland Empire Riverside Plaza AEW Capital

ManagementVestar Development / UBS

$165,750,000 403,922 $410

Las Vegas 3767 Las Vegas Boulevard Gindi Capital / Nakash Holdings

Spectrum Group $59,500,000 29,406 $2,023

Charlotte Mooresville Consumer Sq Slate Retail REIT DDR $51,300,000 470,642 $109

West Palm Beach Promenade Shopping Plaza TH Global Real Estate WoolbrightDevelopment

$49,250,000 202,696 $243

Fort Lauderdale 1600 Commons PGIM Real Estate Halvorsen Holdings $49,200,000 65,338 $753

Fort Lauderdale Royal University Plaza Zurich Financial Lubert-Adler / CREC $48,000,000 123,343 $389

Charlotte Ballantyne Village American Realty Advisors / Stonemar Properties

Mount Vernon Asset Mgmt

$43,150,000 171,599 $251


National National Madison International Realty Shopping Center Recap

DDR Madison International Realty $840,000,000 7,000,000 $120

Notable primary market transactions, Q2 2017Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)Philadelphia King of Prussia Town Center CBRE Global Investors JBG Companies $183,000,000 263,423 $695Houston BLVD Place Whitestone REIT Wulfe & Co $158,000,000 216,944 $728New York 10 Madison Square West

(Retail Condo)TH Real Estate Savanna $97,500,000 20,676 $4,716

Chicago Fox Run Square First Washington Realty Bradford RE Services $78,000,000 143,512 $544Boston 201 Newbury Street

(Retail Condo)TH Real Estate Anglo Irish Bank Corp /

ECA Capital $75,000,000 24,993 $3,001

Houston First Colony Commons TriGate Capital Covington Realty Prtnrs $72,437,084 410,119 $177Boston 399 Washington Street LaSalle Investment

Management / L3 CapitalCharter Managagement Group

$63,250,000 77,000 $855

MarketsSecondary market activity softens as investors gravitate to well-known markets


In recent years, we have seen investors tread into new retail territory by opening their purview to less conventional secondary and tertiary markets, which contained significant available retail product. With the stress of online retail infiltrating all facets of the market, investors are sticking close to what they know, returning to strong gateway markets to place capital with less risk. 2016 in particular saw an uptick in retail activity in secondary markets, increasing by 28.6 percent from 2015 at year-end. With Tier 2 retail product readily accessible in many of these lesser-known markets, investors were hoping to capture untapped opportunity, targeting malls and power centers in submarkets with strong demographics and little to no retail competition. In 2016, much of those easily repositioned products were swooped up by the faster-acting, large investors. Now, those same secondary and

tertiary markets still have ample opportunity, though they require more care and the ability to hold

mid- to long term. This is limiting current buyer pools for riskier assets. As an example, Fort Lauderdale had seen consistent retail investment growth since 2013, peaking in 2016 with $582.8 million in overall retail volume, due in large part to Kimco’s$299 million, partial-interest purchase of Oakwood Plaza from CPPIB. Year-over-year, Fort Lauderdale investment volume has declined by 54.5 percent. This story rings true for numerous other secondary markets such as San Diego, Phoenix and Nashville—each of which have experienced declines at midyear. Despite this pause in investment in secondary markets, it is due in large part to the nature of the investment cycle and the natural hesitation that is occurring in reaction to the uncertain future of retail demand. As investors become more confident, the secondary markets likely will again prove themselves as areas of opportunity and growth. However, moving into next year, the aversion to retail real estate risk in those same markets is expected to limit liquidity.


(Transactions larger than $5.0M)

Secondary market investment declined 59.9 percent as investors shy away from risk

NJ

CT

MA

NH

NC

VA

WA

VT

AL

AZ

AR

CACO

FL

GA

ID

IL IN

IA

KSKY

LA

ME

MI

MN

MS

MO

MT

NE

NV

NM

NY

ND

OH

OK

OR

PA

SC

SD

TN

TX

UTWV

WI

WY

Boston –Newbury Street4.00% - 4.75%Chicago –

Oak Street4.50% - 5.50%

Los Angeles –Beverly Hills Triangle2.50% - 4.00%

Miami –Lincoln Road4.00% - 5.00%

New York –Fifth Avenue3.00% - 4.00%

Philadelphia –Walnut Street4.00% - 5.00%San Francisco –

Union Square4.00% - 4.50%

Seattle –Pike Street4.50% - 5.50%

Washington, DC –M Street4.25% - 4.74%

$1.9

$2.1

$5.1

$0.0 $10.0

Tertiary

Secondary

Primary

Transaction volume (billions $US)

2015

2016

2017

Overall retail transaction volume, H1

Prime Urban Retailcap rate map

4.00 – 5.00%5.00 – 6.00%6.00 – 7.00%7.00 – 8.00%

3.00 – 4.00%2.00 – 3.00%

8.00 – 9.00%9.00% +

capitalSources of


Private investors are driving

liquidity in struggling retail markets

With mall and power center product flooding the market, long term institutional and REIT investors are looking to rightsize their retail holdings, focusing on core assets and aggressively acquiring other well-performing, strategically aligned assets. Institutional investment declined by 67.1 percent year-over-year. At first glance, REIT investment grew 63.7 percent; however, this growth can be predominantly attributed to the $4.6 billion merger between Regency Center and Equity One. In reality, REITs too saw a decline in investment of over 40.0 percent. Both REIT and institutional investors, historically interested in malls and power centers, have turned their attention to other sectors and product types, such as strong shopping centers, while waiting to see the true impact of e-commerce on struggling market segments.

With the high inventory of underperforming product on the market, private investors are looking to get into the retail game, and pricing is on their side. As opposed to larger, institutional sources of capital that broadly are risk-off for mall and power center assets, private local buyers with an understanding of the local retail market and an appetite for one-off investments are emerging in select markets. Though this strategy is still a gamble, local purchasers are willing to take the risk and thus making up a large portion of the buyer pool for secondary market, distressed properties. For investors looking to dispose of mall and power center assets, private sources of capital present a potential opportunity to unload, so long as sellers are willing to meet these buyers’ pricing expectations. As mall and power center performance remains polarized between those strong and weak assets, the private purchaser may prove an exciting and creative option to bring new energy to secondary and tertiary retail in the coming quarters.

Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m)

Institutional and REIT investors stray from mall and power center product in H1 2017Institutional mall investment drops 94.9 percent at midyear, while REIT specialized purpose volume drops 96.3 percent

$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

$1.4

H1 2012 H1 2013 H1 2014 H1 2015 H1 2016 H1 2017

Tra

nsa

ctio

n v

olu

me

(bill

ion

s o

f $U

S)

MallSpecialized-Purpose Center

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

H1 2012 H1 2013 H1 2014 H1 2015 H1 2016 H1 2017

Tra

nsa

ctio

n v

olu

me

(bill

ion

s o

f $U

S)

MallSpecialized-Purpose Center

REIT retail acquisitions Institutional retail acquisitions

irisk



Despite grocery’s stable reputation, grocery volume declined by 31.1 percent at midyear

There is currently a broad opposition to risk across all retail product types, and to some surprise, this includes grocery-anchored shopping centers, which are generally thought to be one of the more stable retail investments in the current climate. The change in appetite for grocery product is evident by the increased vacancy within centers and the decline in grocery and grocery-anchored shopping center transaction volumes. Investment sales for these assets dropped 31.1 percent year-over-year. At this time last year, grocery investment had increased 54.0 percent from 2015 due to investor perceptions of these properties as safe havens.

What is sparking the decline in the previous retail favorite? Fear of online disruption. While we’ve seen disruption impact mall and urban retail strategies over the past five years, 2017 marks the start of this disruption affecting grocery and specialized-purpose retail centers. With major online retailers making large investments in their online grocery platforms, the fear is now real, and as result, investors are shying away from grocery-anchored assets at the moment. Comparable to the mall landscape, which

has notably seen a wide gap in pricing between A-malls and B-/C-product, grocery asset pricing is starting to experience a similar split. Well-located, grocery-anchored centers with strong grocery tenants like Whole Foods or Trader Joes are pricing aggressively, fetching cap rates between 5.0 and 7.0 percent, while less-optimally located centers are seeing a shrinking buyer pool and softening cap rates, often hovering in the low-teens.

With this shift in grocery perception, reputable grocery owners like Brixmor and Kimco are continuing to shed lower-performing assets. Brixmor, for example, disposed of a number of grocery-anchored centers in the first half of the year including Eustis Village Shopping Center, located in Southeast Florida. The Publix-anchored property sold to Slate Retail for $23.5 million, or $150 per square foot in May. Following suit, investors are likely to remain hesitant on retail in the short-term, streamlining portfolios through the remainder of the year. In the mid-to-long term, disruption fears will wane as the true impact becomes a reality, and the appetite for risk will begin to normalize toward the end of the year into early 2018.

Sources of

Risk aversion remains the norm in retail, even in grocery-anchored assets

$0.0

$0.2

$0.4

$0.6

$0.8

$1.0

$1.2

$1.4

$1.6

$1.8

$2.0

H1 2009 H1 2010 H1 2011 H1 2012 H1 2013 H1 2014 H1 2015 H1 2016 H1 2017

Bill

ion

s

Grocery-anchored transaction volume (billions of $US)

Investment Outlook | United States | Net Lease | H1 201737

Net Lease

Net LeaseIt’s all in the numbers… the Net Lease first half breakdown


Modest declines in opportunities not indicative of

net lease appetite. Selectivity remains the norm.

Overall Net Lease


6.0%Average cap rate (%)

Net Lease Office



Net Lease Industrial



Net Lease Retail



Long-term leases12+ years of lease term1Investment-grade creditS&P: AAA to BBB-2Strong rent growthSteady rent increases through the life of the lease3Mission critical locationSite-level operations are dependent on the regional area4Primary marketSpecifically classified for each sector5

Five macro investment parametersIn evaluating net lease opportunities, the following five key investment parameters drive asset valuations and investment considerations:



Net lease sales volumes remain stable despite a decline in deal closings

As pricing and opportunities have started to plateau for the overall sectors, varied sources of capital are increasing their focus on the net lease sector. This has sustained momentum, with volumes stable and cap rates maintaining compression. A continued strong appetite from foreign and institutional investors is providing buoyancy for sales volumes, driving 11 opportunities greater than $250 million to close year-to-date. Comparatively, there were 16 mega-deals of this size during the full year of 2016, the most active year of transactions of this profile in the cycle thus far. With these larger deals, overall sales volumes have increased by a modest 4.7 percent year-over-year.


Overall net lease sales stable in first half of 2017Larger average deal sizes drove modest increases in office and industrial sales, while limited opportunities drove a modest decrease for the retail sector

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

$35.0

H1 2008 H1 2009 H1 2010 H1 2011 H1 2012 H1 2013 H1 2014 H1 2015 H1 2016 H1 2017

To

tal i

nve

stm

ent

sale

s vo

lum

es

(bill

ion

s o

f $U

S)

Net Lease Office Net Lease Industrial Net Lease Retail

Overall deal count

-18.7%

Overall volume

+4.7%



Despite grocery’s stable reputation, grocery volume declined by 31.1 percent at midyear

Despite this modest growth, the market activity is not as persistent as it has been in previous quarters. An 18.7 percent decline in the quantity of closed deals year-over-year is more telling of the mixed signals within the data and investor sentiment. With over $300 billion of net lease product trading within the last 10 years, a slowdown in opportunities is not entirely startling. Investor selectivity and the increase in thematic investing are two critical factors in this storyline. What is consistent? Net lease

buyers are on the defense and seeking to mitigate risks, reflected in increased bidder pools on core net lease assets offering long term leases, creditworthy tenants and location criticality. Without these factors, opportunities are being left behind with limited buyer pools. A strong pipeline of large deals will continue to sustain sales volumes for the remainder of the year, while the number of deal closings will remain down.

Grocery-anchored transaction volume (billions of $US)

Notable office transactions, Q2 2017Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)

National portfolio

China Life / ElmTree Portfolio China Life ElmTree $950,000,000 5,787,653 $173

Washington, DC Waterview Office Tower Morgan Stanley Paramount Group $459,250,000 633,908 $724

Dallas-Ft. Worth Liberty Mutual Liberty Mutual KDC $350,000,000 992,884 $353

Seattle-Bellevue Midtown 21Metzler Real Estate / Union Investment

Trammell Crow Co / MetLife

$330,175,000 373,000 $885

Silicon Valley Netflix HQ 3,4King Asset Management

Sand Hill Prop Co / Carlyle Group

$200,000,000 260,899 $767

Notable industrial transactions, Q2 2017Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)

National portfolioVerizon US Data Centers Sale Leaseback Portfolio

Equinix Verizon $955,690,476 2,050,000 $466

San Francisco L-3 Communications Alexandria L-3 Communications Corp $64,900,000 217,482 $298

Houston Ikea Distribution Center Pure Industrial REIT Clay Development $63,500,000 996,482 $64

Atlanta Core5 Logistics Center Undisclosed Kajima Corporation $62,000,000 873,800 $71

Philadelphia-C. PA

1 Ames Drive UPS Master Dermody Properties $55,000,000 595,000 $92

Notable retail transactions, Q2 2017Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)

NationalMcLendon Hardware WA Retail Portfolio

CNRG McLendon Hardware $45,000,000 328,733 $137

New York Landmark Sunshine Cinema East End Capital Steven Goldman $31,500,000 24,800 $1,270

San Diego AMC Palm Promenade Theatre Citivest EPR Properties $36,000,000 86,610 $416

Maryland Walmart Walmart Brixmor $30,000,000 116,000 $259

JacksonvilleKassis Management US Retail Refi Portfolio

Kassis Management Undisclosed $29,150,000 137,322 $212

MarketsPrimary market activity softens as investors migrate towards tertiary opportunities


The expanding buyer pool—notably, from foreign buyers—is putting pressure on the competitiveness of domestic institutional funds. This is then applying further pressure on traditional net lease buyers such as private firms and REITs. The widespread appetite for traditional, net lease assets is leaving many buyers searching for risk-adjusted yields deeper into the markets. Throughout 2016, we noted a large shift in activity from primary markets into secondary. The jump into tertiary markets this year is quite significant, with tertiary sales volumes up 20.5 percent year-over-year. Accordingly, primary and secondary market

volumes are down 1.1 and 14.2 percent, respectively, as a result of current pricing in these markets.

Looking at this market migration, we see that all buyer types are keen on a shift in market focus for the right risk-adjusted yields. Foreign capital typically focuses on core assets in gateway markets but has increased net lease acquisitions in tertiary markets 76.6 percent since the first half of 2016 (excluding China Life’s transaction with ElmTree Funds) with purchases of distribution facilities and medical offices. This is a comparative increase of 16.8 percent since the first half of 2015, their most active year.

Similarly, domestic institutions have increased tertiary market purchases by 9.6 percent year-over-year. The pressure this places on the buyer pool is evidenced by a large jump in tertiary focus by REITs, with acquisitions increasing 58.1 percent year-over-year as they try to find opportunities in areas where they can still compete. Of these tertiary purchases, lease term, tenant credit and rent growth remain determining factors in driving pricing variances. This trend in market migration will likely continue over the next 12 months as pricing for core products remains competitive.


Evolving pricing dynamics drive an increase in tertiary opportunities

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

Overall investment sales Primary markets Secondary markets Tertiary markets

H1

inve

stm

ent s

ales

vo

lum

es (b

illio

ns

of $

US

)

H1 2013 H1 2014 H1 2015 H1 2016 H1 2017

-1.1%

-14.2% +20.5%

+4.7%

PricingInvestment Outlook | United States | Net Lease | H1 201742

The persistent search for yield through various market types has brought cap rate movement to diverge across varying profiles of assets. While the demand for office opportunities featuring all five key net lease investment values remains strong, the market migration has led cap rates to seemingly reach a low point for this profile of product in gateway markets. Consequently, more participation in secondary and tertiary markets is driving further compression – down an average of 38 basis points year-over-year.

Retail cap rate movement is increasingly diverging, with determining factors being the opportunity’s market and tenant type. Some investors are becoming timid toward opportunities featuring consumer-durables-tenanted retailers with a strong exposure to the e-commerce effect. Consequently, cap rates have finally begun to soften for these transactions, up 10 basis points year-over-year. A modest compression remains for service-oriented retailers, down an average of 30 basis points, as capital demand for this product increases given the stability these retailers have historically demonstrated through cycles.

Contrary to office and retail pricing dynamics, investor appetite for industrial product is expanding rapidly and pricing remains competitive for opportunities that feature four or five of the key investment values. Accordingly, cap rates are compressing across all market types with the same acceleration, down an average of 45 basis points year-over-year. This momentum will be sustained with a large pipeline of new deliveries coming to market over the next several years.


Net lease cap rates continue moderate compressionCap rates have continued to compress for all sectors, yet retail and office assets in primary markets are starting to see cap rates softening.

Cap rate movement diverges through the first half of the year

6.5%

6.4%

5.7%

6.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 H1

2017

Ave

rage

net

leas

e ca

p r

ate

10-Year Treasury (%) Net lease office

Net lease industrial Net lease retail

Overall net lease

YoY Change

Office-27 bps

Industrial-45 bps

Retail-25 bps

irisk


Risk within the net lease space is unique in that it is mitigated by five key investment values an asset can feature: long-term leases, investment-grade tenancies, strong rent growth, mission critical location and location in a primary market. The most ideal acquisitions feature four to five values offering greater risk mitigation and thus have the lowest yield. Pricing is affected as these values become absent, with cap rates softening as the risk increases.

Through the last few quarters, funds with growth pressures have eagerly deployed capital in the net lease space, with some becoming increasingly flexible in their risk requirements in return for accretive yields. Some office and industrial buyers are sacrificing one to three of the key investment values where the remaining values are very strong, such as a short-term lease to an A+ rated tenant within a mission critical location. Retail buyers, however, must be keen in selective risk mitigation due to the state of the retail industry. One creative strategy example involves investors finding opportunity in consumer-durable-

tenanted retail assets (in which cap rates are softening), and seeking opportunities with below-market rents or with lease structures featuring long termination options and high fees that provide ample time for the landlord to re-tenant or adaptively reuse. These flexible strategies are allowing funds to grow and meet their performance goals in a competitively priced landscape.

Opinions on this behavior are varying across investment companies, however. Some investors are adhering to their strict acquisition discipline, accepting smaller target allocations and sacrificing short-term growth for long-term stability. Their sentiment is relying on a correction in the market to bring the pricing dynamics back within reach. As more funds exhaust their willingness to loosen acquisition criteria and join this contrarian perspective, market activity will eventually begin to slow as capital demand begins to pull back. Timing of that market shift, however, may not be as soon as these hesitant participants would like given the continued capital demand flowing into the space.

Sources of

Pricing dynamics causing a reevaluation of risk strategies

Looking aheadA dichotomy in forward-looking sentiment has many net lease participants wondering if the market cycle is nearing its end, or if the momentum will continue through an extended cycle. Despite concerns of interest rates increasing, tax reform

uncertainties and speculation on impending FASB accounting changes, market activity provides a clearer perspective on what will drive activity over the next 12 months: capital demand. The steady sales and healthy pipelines within an expanding buyer

pool are expected to continue over the next 12 to 18 months given net lease’s bond-like returns and favorable long term performance. Absent a major economic event, cautious optimism remains the norm.

About JLL

JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $145 billion. At the end of the second quarter of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of nearly 80,000. As of June 30, 2017, LaSalle Investment Management had $57.6 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit ir.jll.com.

About JLL Research

JLL’s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today’s commercial real estate dynamics and identify tomorrow’s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions.

© 2017 Jones Lang LaSalle IP, Inc.

All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

Investor Research:

Sean CoghlanDirector, Investor Research+1 215 988 [email protected]

Sean KaneManager, Investor Research+1 213 239 [email protected]

Office:

David Hoebbel+1 312 228 [email protected]

Retail:

Arielle Einhorn+1 312 228 [email protected]

Industrial:

Peter Kroner+1 312 228 [email protected]

Net Lease:

Sean Coghlan+1 215 988 [email protected]

Multifamily:

Michael Morrone+1 312 228 [email protected]

Debt & Equity:

Ronak Sheth+1 312 228 [email protected]

mailto:[email protected]








united states | h1 2017 a focus on value and risk shaping ... focus on value and risk shaping...

Documents