MAY 20, 2020

U.S. CRE AMID COVID-19

Jimmy HintonSenior Managing Director

Investment & Data Analytics

EMPLOYMENT TRENDS

0

1

2

3

4

5

6

7

0

100

200

300

400

500

600

700

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

2019

Millions

Thou

sand

s

Weekly Unemployment Claims Prior to March 14th Including claims after March 14th

0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.20.3

3.3

6.9

6.6

5.2

4.4

3.9

3.2

3.0

4-Ja

n

11-Ja

n

18-Ja

n

25-Ja

n

1-Fe

b

8-Fe

b

15-F

eb

22-F

eb

29-F

eb

7-M

ar

14-M

ar

21-M

ar

28-M

ar

4-Ap

r

11-A

pr

18-A

pr

25-A

pr

2-M

ay

9-M

ay

“FLATTENING THE CURVE” IN UNEMPLOYMENT CLAIMSHow Many Will Be Temporary Vs. Permanent?

3Source: Transwestern Investment & Data Analytics, Department of Labor

TX

NYFL

PA

IL

OH

GA

NC

MI

NJ

VA

MA

WA

IN

TN

AZWI

MN

MO

CO

MD

SC

AL

LA

OR

KY

OK

CT

UT

IA

KS

NV

AR

MS

NE

NM

DC

ID

WV

NH

HI

ME

RI

MT

DE

SD

ND

AK

VT

WY

5%

10%

15%

20%

25%

30%

35%

40%

0 250,000 500,000 750,000 1,000,000 1,250,000 1,500,000 1,750,000 2,000,000 2,250,000

Une

mpl

oym

ent C

laim

s As

% o

f Em

ploy

men

t Bas

e, S

ince

Mar

ch 7

th

Total Unemployment Claims Since March 7th

UNEVEN ECONOMIC RESPONSES COMPLICATE OUTLOOKTiming/Depth of Shelter-In-Place Orders Determine Economic Impact

4

CA

Note: California: 4.2 million claimsSource: Transwestern Investment & Data Analytics, Department of Labor, data as of May 9, 2020 (latest available)

U.S. Avg.

0

10

20

30

40

50

60

70

$0 $50 $100 $150 $200 $250 $300 $350 $400

Zip

Code

Une

mpl

oym

ent (

%)

Average Reported Income per Tax Return ($th)

Higher Income Suggests Lower Unemployment

INCOME PREDICTIVE OF UNEMPLOYMENTZip Codes With Income <$50k 2x As Likely To Report Above-Average Unemployment

5Note: Zip codes with minimum 1,000 residents and 1,000 tax returnsSource: Transwestern Investment & Data Analytics, Internal Revenue Service, Census Bureau, Bureau of Labor Statistics, AGS

ECONOMIC TRENDS

EMPLOYERS COMPETING WITH DEPARTMENT OF LABOR”The Government Can Pay My Employees More Than I Can?”

7Note: Benefit level is based on unemployment insurance weekly payment for person making state-average income with no dependents and employed at least one year + $600 from CARES ActSource: CoStar, Bloomberg

-4.8% GDP CONTRACTION WORST SINCE Q4 2008Contraction In Personal Consumption Worst Ever, Could Prove Elastic

8Source: Transwestern Investment & Data Analytics, Bureau of Economic Analysis

-15

-10

-5

0

5

10

15

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Qua

rter

ly G

DP G

row

th, A

nnua

lized

(%)

Contribution to GDP Goods Services Fixed Investment InventoriesExports Imports Gov't Consumption GDP

-8.4 08Q4-4.4 09Q1

-4.8% 20Q1?? 20Q2

2007

2008

2009

2020

2008Recession

2020Recession

CONSUMER-DEPENDENT FIRMS UNCERTAINSpending Under Threat, Poor Implications For Retail Properties

9Source: Bloomberg

26.0%

3.6%

7.4%

10.3%

17.1%

18.4%

23.7%

29.8%

30.6%

38.1%

61.4%

0% 10% 20% 30% 40% 50% 60% 70%

Total

Utilities

Energy

Materials

Technology

Financials

Healthcare

Industrials

Consumer Staples

Communications

Consumer Discretionary

S&P 500 Firms Pulling Forward Guidance

V-SHAPED RECOVERY NOT PROBABLEMajority Expect U-Shaped Rebound

10Source: RCLCO Real Estate Advisors

PROPERTY VALUATIONS

12

REIT CORRECTION RESEMBLES 2008Comparable REIT Corrections Resemble Periods Of CRE Distress

Source: Transwestern Investment & Data Analytics, Bloomberg, as of May 18, 2020

Jun '07, -20%

Sep '08, -62%

Dec '08, -44%

May '10, -18%

'Feb 20, -30%

-65%

-55%

-45%

-35%

-25%

-15%

-5%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

% D

eclin

e Fr

om P

eak

Number of Trading Days Since Peak

Selected REIT Corrections Jun '07 Sep '08 Dec '08 May '10 Feb '20Timing of Peak

0.9%

9.7%5.4%

1.3%

23.3%

3.3%8.3%

-5.9%-10.6%

-6.1%

-21.5%

2.2%

-2.9%

-12.0%-14.9%

-22.7% -22.9%-28.7%

-31.3% -31.9% -33.2%

-63.9%

-80%

-60%

-40%

-20%

0%

20%

40%

Technology Industrial Overall Self Storage Healthcare Residential Diversified Office Lodging Strip Center Regional Mall

REIT Price:NAV Ratios as of 12/31/2019 as of 5/15/2020

Source: Transwestern Investment & Data Analytics, JPMorgan

REIT VALUATION IMPACT VARIES BY PROPERTY TYPEIndustrial & Data Favored, Healthcare Presents Demographic Challenges,Residential Faces Rent Growth Doubts, Malls Under Significant Pressure

13

Source: Moody’s, Federal Housing Finance Agency

MOODY’S: THREE-YEAR CYCLE, 25% CORRECTIONLosses Due To Cap Rate & NOI Volatility, Property Type Performance Will Vary

14

PROPERTY SECTOR KPIs

Note: Rolling seven-day mobility scoreSource: Transwestern Investment & Data Analytics, Google, as of May 9,2020

EARLY SALES IN GROCERY STORES PROVED TRANSIENTStates Allowing Looser Shelter-In-Place Directives Report Faster Recovery

16

-40%

-30%

-20%

-10%

0%

10%

20%

30%

21-F

eb

23-F

eb

25-F

eb

27-F

eb

29-F

eb

2-M

ar

4-M

ar

6-M

ar

8-M

ar

10-M

ar

12-M

ar

14-M

ar

16-M

ar

18-M

ar

20-M

ar

22-M

ar

24-M

ar

26-M

ar

28-M

ar

30-M

ar

1-Ap

r

3-Ap

r

5-Ap

r

7-Ap

r

9-Ap

r

11-A

pr

13-A

pr

15-A

pr

17-A

pr

19-A

pr

21-A

pr

23-A

pr

25-A

pr

27-A

pr

29-A

pr

1-M

ay

3-M

ay

5-M

ay

7-M

ay

9-M

ay

% D

epar

ture

from

Bas

elin

e

Google Mobility: Grocery Visits California District of Columbia Georgia Illinois New York Texas

-50.5% 10.3% -34.9% -40.5% 13.7% -15.1% -4.0% -11.0% -89.3% -35.3% -67.4% -64.9% -49.0%-$60

-$40

-$20

$0

$20

$40

$60

$80

$100

$120

Restaurants& Bars

Grocery &Liquor Stores

Vehicles/Parts Gas Stations e-Commerce General BuildingMaterials

Health &Personal Care

Clothing Misc. Furnishings Electronics Sporting,Hobbies

Billi

ons

Advanced Retail Sales February Sales March & April Impact Percent Change

Source: Transwestern Investment & Data Analytics, Census Bureau

APRIL SALES COLLAPSE -16.4%, THE WORST ON RECORDGrocery Sales Decline After Initial Surge, e-Commerce Sales Now 19% Of Total

17

Grocery Not OffsettingDecline In Eateries

Vehicle segments exhibitlower demand

e-Commerce growing, other “essential” sectorsshowing lower contractions

“Non-essential” categories and big-ticketitems report sharp declines

0

50

100

150

200

250

300

350

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

E-Commerce Adoption Rises Sharply Retail Sales (ex-Ecommerce) e-Commerce

Source: Transwestern Investment & Data Analytics, Commerce Department

E-COMMERCE RISES 3x OTHER RETAIL CATEGORIESNonstore Sales Now Account For 19.4% Of Total Retail Sales

18

Increased demand for logistics space

Decreased demand for logistics space

-20%

0%

20%

40%

60%

80%

100%

120%

0

25

50

75

100

125

150

T-12 Net Absorption/Total Availability RatioTo

tal A

vaila

ble

Squa

re F

eet (

mill

ions

)

Availability & Demand Momentum Total Available SF (lhs)T12 Month Net Absorption as Percent of Total Available SF (rhs)

Mar

kets

Abs

orbe

d >2

0%of

Tot

al A

vaila

ble

Squa

re F

eet I

n Pa

st Y

ear

Markets With >50MSF ofTotal Available Square Feet

MIXED FOOTING AMID LARGE INDUSTRIAL MARKETSINL EMP & DFW Strong In Spite Of Availability, CHI & HOU More Challenged

19Source: Transwestern Investment & Data Analytics ,CoStar, data as of March 31, 2020

NEW BASELINE: SHORT-TERM PAIN, LONG-TERM UPSIDEVacancy Rises Sharply, Stronger Demand & Lower Supply In Medium-Term

20Source: CoStar

89.8%85.0%

87.7%

0%

20%

40%

60%

80%

100%

May 2019 April 2020 May 2020

Perc

enta

ge o

f Ren

t Pay

men

ts M

ade

Rent Payment Tracker**Data collected from 11.5MM Units

May 6th May 13th

88%

70%

75%

80%

85%

90%

95%

100%

Clev

elan

dPi

ttsb

urgh

Sacr

amen

toCi

ncin

nati

Baltm

ore

Salt

Lake

City

Bost

onCh

icag

oPh

ilade

lphi

aM

inne

apol

isPo

rtla

ndRa

leig

h/Du

rham

Nas

hvill

eN

ew O

rlean

sCh

arlo

tte

San

Dieg

oAu

stin

Rive

rsid

e-Sa

n Be

rnar

dino

Dalla

sHo

usto

nDe

nver

Phoe

nix

Was

hing

ton,

DC

Orla

ndo

Anah

aeim

Mia

mi

Kans

as C

itySa

n Fr

anci

sco

New

Yor

kTa

mpa

Seat

tleAt

lant

aLo

s Ang

eles

Las V

egas

Monthly Rent Collections May 1-13, 2020 May 1-13, 2019

APARTMENTS TRENDS SURPRISE FOR NOWRent Collections Better Than Expected, Asking Rents Will Deteriorate

21Note: * These figures are as initially reported; these are calendar days, so the specific day of the week can have an affect on these reported figures, as leasing offices can have reduced hours or be closed on those days, creating potential delays for payment processing. **Unit counts may change to reflect refinements to the methodologies and changing occupancy levels due to move in-move out activity.Source: National Multifamily Housing Council, Entrata, MRI Software, RealPage, ResMan, Yardi

Source: CoStar

APARTMENTS TRENDS SURPRISE FOR NOWRent Collections Better Than Expected, Asking Rents Will Deteriorate

22

Source: CoStar

OFFICE MOSTLY INSULATED FROM INDUSTRY DENSITYFew Markets Exposed To Energy/Hospitality

23

SUBLET AVAILABILITY THE CANARY IN THE COALMINENYC & SFO Experience Sharp Re-Direction In Tenant Demand

24Source: Transwestern Investment & Data Analytics ,CoStar, data as of March 31, 2020

16.2

6.4 6.0 5.9 5.5 5.1 5.1 5.04.3

3.5 3.2 3.2 3.1 2.6 2.6 2.6 2.4

0.5 0.5 0.4 0.4 0.4 0.3 0.3 0.2 0.1 0.1 0.0

-2

0

2

4

6

8

10

12

14

16

18

Squa

re F

eet (

mill

ions

)

Sublet Available Square Feet Total Sublet Available Square FeetChange in Sublet Available Square Feet Over Prior Year

Markets Added 2MSF+ SubletAvailable In Past Year

Mar

kets

With

>5M

SF o

f Sub

let A

vaila

ble

NEW BASELINE: DIVERGENCE IN SUPPLY & DEMANDVacancy Peaks Near 11% But Remains Below 2010 Highs, Recovery In 2021

25Source: CoStar

CAPITAL MARKETS

TRANSACTION VOLUMES WILL DECLINE“Price Discovery” Will Slow Pace of Sales

27

R² = 0.8014

$0

$100

$200

$300

$400

$500

$600

$700

0 20 40 60 80 100 120 140 160

Tran

sact

ion

Volu

me

Billi

ons

CPPI Index

Values vs. Volumes

0

20

40

60

80

100

120

140

160

$0

$100

$200

$300

$400

$500

$600

$700

02Q

1

03Q

1

04Q

1

05Q

1

06Q

1

07Q

1

08Q

1

09Q

1

10Q

1

11Q

1

12Q

1

13Q

1

14Q

1

15Q

1

16Q

1

17Q

1

18Q

1

19Q

1

CPPI Index

Tran

sact

ion

Volu

me

Billi

ons

Quarter

Values vs. Volumes

Note: Trailing twelve-month transaction volumes, data Q1 2002 through Q4 2019Source: Transwestern Investment & Data Analytics, Real Capital Analytics

FEW DEALS DISSOLVING, BUT BIDDER POOLS THINNING“Price Discovery” Will Slow Pace of Sales

28Source: Real Capital Analytics

CAP RATES RISE DURING PRICE DISCOVERYFewer Transactions = Higher Cap Rates

29Note: Cap rates are shaded by distance from trailing average to identify trend, Industrial assets selling for at least $5 million.Source: CoStar Portfolio Strategy

Source: Mortgage Bankers Association, Real Capital Analytics, Morgan Stanley Research

DEBT MARKET WELL-POISED FOR TURBULENCEBanks Liquid, CMBS & Debt Funds <25% of Originations and Maturities

30

15%17%

20%14%

19%28%

25%23%

17%16%

11%3%

54%

21%21%22%

27%7%

4%

5%12%

25%

11%10%6%

8%9%

9%7%

5%6%

5%3%

10%6%

14%7%

12%15%

6%13%

4%9%

12%

22%24%

27%23%

20%19%

17%26%

26%31%45%

25%6%

50%36%

10%25%

25%

10%11%10%

12%12%

10%12%

14%20%15%

10%9%

5%

10%16%

11%4%

9%

5%11%

10%

8%7%6%

7%7%

8%10%

7%8%

10%7%

14%8%

13%8%

9%10%

5%5%

5%5%

9%

17%14%

13%16%

16%13%

17%14%

13%12%

11%16%

12%

24%22%

15%18%

12%19%

17%16%

16%

18%17%

17%19%

15%12%11%9%

9%11%

13%22%

7%

17%23%

28%25%

12%19%

51%21%

2%

2019201820172016201520142013201220112010200920082007

OfficeIndustrial

RetailHotel

ApartmentSeniors

<$10m$10m-$50m

>$50m

CMBS Debt Fund/REIT Agency Insurance International Bank National Bank Regional/Local Bank

Source: Transwestern Investment & Data Analytics, Preqin

DRY POWDER READY TO RECAPInvestors Seek Yield | Opportunistic Dry Powder ~8x Core Dry Powder

31

$10$7

$42

$10

$70

$62

$0

$10

$20

$30

$40

$50

$60

$70

$80

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Apr-20

Dry Powder Core Core-Plus Debt Distressed Opportunistic Value-Add

Source: Transwestern Investment & Data Analytics, National Multifamily Housing Council, as of April 17, 2020 (latest available)

NEW CONSTRUCTION STARTS WILL BE DELAYEDInspections, Approvals & Permitting Experiencing Largest Disruption

32

56%

77%

70%

40%44%

28%

4%

63%58%

48%

16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Experiencingconstruction

delays

Delays inpermitting

Delays instarts

Delays froma moratorium

Impacted byavailability of

labor

Lack ofmaterials

Materialscost

increases

Usingtechnologyto replacein-person

inspections/approvals

Staggeringlaborshifts

Sourcingalternativematerials

Offeringlabor

incentives

% o

f Affi

rmat

ive

Resp

onse

s

Construction Impacts

CONCLUSIONS

Source: Transwestern Investment & Data Analytics, Transwestern Investment Group

IDIOSYNCRATIC RISKS COMPICATE THE OUTLOOKTiming & Duration of Shelter-In-Place Orders & Consumer Confidence

Are The Most Important Considerations To Determine

34

Sector Pros Cons

Industrial Low employee-to-square-foot ratios can result in lower health-related disruption to the tenant workforce and productivity

Forced transition to e-commerce among retailers mayaccelerate demand for related warehousing space over the long run

Longer term, on-shoring of light manufacturing may improve absorption of older vintage assets

Markets with high concentrations of retail-oriented industrial tenants may be impacted as tenant demand declines in the near term

In some cases, landlords may undermine one another to secure cash flow amid fewer tenant requirements

Supply pipeline may have more difficult time achieving stabilization

Apartments Single-family housing affordability has likely deteriorated based on higher unemployment, lost wages and lack of down payment

Rent collections have broadly outperformed expectations, though may be supported artificially by PPP and CARES Act

Majority of new construction catered to highly-educated, above-median wage earners, insulating impact to associated rentrolls

Supply pipeline will diminish until property fundamentals and debt markets recover, removing a recent headwind

Moratoriums on rent increases and evictions either governed or taken as best practices (120 days + 30-day notice period)

Some rent rolls may therefore require up to 150 days of delay in ability to completely stabilize

Majority of new construction catered to highly-educated, above- median wage earners, which typically decrease in number in a recession

Shorter-term nature of lease agreements result in more immediatenet operating income declines and higher economic/physical vacancy

Office Cost of building and tenant space improvements to accommodatehealth concerns are relatively modest

Long-duration lease terms provide stable cashflow WALT will continue to be preferred by investors

Space density trends inhibit full restoration of attendance and productivity Coworking firms face deteriorating financials, could add to building vacancy Conjecture over economy and political elections may lead to lower leasing

and related net absorption

Retail Wide labor availability willreduce labor costs to surviving tenants Pent-up demand for “experience” could rebound sharply Grocery-anchored and Healthcare-related properties will benefit

from higher utilization and investor preferences Preleasing requirements and debt availability have limited supply

pipeline, underpinning a bottom in property fundamentals

Increased requests for rent relief or forbearance Heavier weighting to e-commerce distribution channels may accelerate

consolidation plans for brick and mortar space Underwriting capital reserves will increase Bankruptcies will increase physical vacancies Increased competition among landlords will drive occupancy costsdown

Capital Markets Fed intervention has aided market liquidity dramatically Majority of lenders well-capitalized Dry powder concentrated in value-add/opportunistic funds Liquidity availability is broad, and investors are eager to place capital in a

favored asset class

Cost of capital in the debt and equity space still above pre-pandemic norms Bid-ask gap between buyers and sellers has emerged broadly Volumes will remain challenged until property inspections can move forward Economic and physical vacancies are being underwritten, impacting hold period

IRRs

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