Multifamily Research. Market Report Third Quarter New York City. Surging Household Formation Pushes Vacancy to Multiyear Lows

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1 Multifamily Research Market Report Third Quarter 217 New York City Surging Household Formation Pushes to Multiyear Lows Multiple high-wage industries power household formation and rental demand across all boroughs. Boosted by a diverse industry base, New York City is adding new workers at a consistent pace. Additionally, employment growth has skewed mostly toward high-wage sectors such as healthcare and professional employment, providing a boost in demand for the multitude of new Class A deliveries. As a result, vacancy has fallen to the lowest levels in nearly two decades, led by the more expensive boroughs of Manhattan and Brooklyn. The peaking of development in 217 will reinforce these conditions as deliveries slow in coming years, particularly at more affordable Class B and C units, which are unaffected by construction. Meanwhile, higher concessions will continue to drive Class A buildings during lease-up. Peak delivery schedule centered on Brooklyn waterfront properties. Boosted by the relative affordability of Brooklyn properties in comparison with Manhattan, builders have flocked toward easily transformed parcels along the East River. Additionally, peaking deliveries are focused in Long Island City, Downtown Brooklyn and the Far West Side of Manhattan. The scale and scope, however, is sliding from previous years, with an average size of less than 5 units per project. As a result, vacancy will remain compressed, allowing further rises in rental rates as the pace of completions falls beyond 217. Multifamily 217 Outlook Metro Y-O-Y Basis Point Effective Rent Y-O-Y Bronx $1,36. Brooklyn $2,19 3. Manhattan $3,68 2.6% Queens $2,6 3. Staten Island 2.9% -4 $1,55. Westchester County $1,91 2. Investment Trends Average Rate % % Local Apartment Yield Trends Apartment Cap Rate * Trailing 12 months through 2Q17 Sources: CoStar Group, Inc.; Real Capital Analytics 1-Year Treasury Rate 9 11 Deal flow and dollar volume slipped roughly 2 percent over the past 12 months, driven by a slowdown in listings amid uncertainty over the outlook for interest rates and 421-a regulation. Investors remain most active in Manhattan and Brooklyn. While institutional investors have focused primarily on marquee Class A buildings in Manhattan, deal flow and transactions have been dominated by Class C offerings, particularly in Brooklyn. Cap rates for these properties are roughly 4 basis points higher than the Class A assets. Metrowide, cap rates are in the mid-4 percent band, driven primarily by the high-3 percent first-year returns in Manhattan. Meanwhile, outer boroughs assets typically trade in the high-4 and mid-5 percent range. A widening gap between buyers and sellers has emerged over the past months as operations have become more challenged, lengthening closing times and placing upward pressure on cap rates.

2 Manhattan CURRENT TRENDS Year-over-Year Employment Trends Borough United States Completions and Absorption Completions Absorption EMPLOYMENT: 1.9% increase in total employment in 2 Manhattan establishments added 47,2 employees during 2, expanding total employment by 1.9 percent. The borough is forecasted to create 3, positions in 217, a 1.2 percent growth rate. Since the current expansion began in 29, more than 318, positions have been created in the borough, a.4 percent rise in total employment. 2Q17 12-Month Period 5,852 units completed Y-O-Y Over the past year, deliveries ticked up moderately from the 4,318 rentals brought to market in the previous yearlong period. Development will remain elevated through 217 with 4,54 units underway. The largest project is 525 W. 52nd St. in Hell s Kitchen. The 392-rental offering contains numerous amenities including a golf simulator. Rate Trends VACANCY: Rate 8% 6% Borough United States 2 basis point decrease in vacancy Y-O-Y Net absorption of nearly 6,7 units, outpacing new deliveries by a considerable margin, trimmed vacancy to 2.4 percent by the end of the second quarter. Several submarkets posted vacancy declines to below 2 percent. The East Village/Lower East Side registered the lowest rate at 1.6 percent. Morningside Heights contracted the most, falling 8 basis points to 3.2 percent. Monthly Rent Rent Trends Y-O-Y Rent RENTS: 1. increase in effective rents Y-O-Y Monthly Effective Rent $3,8 $3,6 $3,4 $3,2 $3, 8% 6% Year-over-Year Rent growth was subdued as a greater amount of concessions entered the marketplace. The Upper East Side led the borough, with average effective rents rising 3.8 percent to $3,756 per month. Rent slid 1.6 percent to $4,179 per month in Midtown West as the rapid pace of development weighed on performance, yet it remains the most expensive submarket. * Forecast

3 Multifamily Research Market Report DEMOGRAPHIC HIGHLIGHTS 2Q17 MEDIAN HOUSEHOLD INCOME Metro $61,33 U.S. Median $58,672 2Q17 AFFORDABILITY GAP Renting is $637 Per Month Lower Average Effective Rent vs. Mortgage Payment* MULTIFAMILY (5+ Units) PERMITS 12,238 1H 217 Compared with 1H h Q17 MEDIAN HOME PRICE Metro $541,7 U.S. Median $246, FIVE-YEAR HOUSEHOLD GROWTH** 1,1 or.9% Annual Growth U.S. 1. Annual Growth SINGLE-FAMILY PERMITS 5,693 1H 217 Compared with 1H g *Mortgage payments based on quarterly median home price with a 3-year fixed-rate conventional mortgage, 9 LTV, taxes, insurance and PMI. ** Annualized Rate Lowest Rates 2Q17 Slower Pace of Deals as Buyers Focus on Assets in Transitioning Neighborhoods SUBMARKET TRENDS Submarket Rate Y-O-Y Basis Point Effective Rents Y-O-Y % East Village/Lower East Side 1.6% -3 $3, North Manhattan 1.7% -5 $1,89.9% East Harlem 1.8% -1 $2, Upper East Side 1.8% -7 $3, % Soho/Tribeca/West Village $4,2 1.9% Harlem $1, Midtown East 2.7% 3 $3,831. Upper West Side $4,4 -. Morningside Heights $2, Midtown West 3. 8 $4, % Overall Metro $3, SALES TRENDS Over the past year, transaction velocity fell roughly 18 percent as fewer listings came to market. The Upper West Side and Harlem submarkets led investment volume and activity. The average price per unit slid nearly 3 percent to more than $65, per door as lower-quality assets dominated trading. The highest prices were paid in the Upper East Side, exceeding $1 million per unit. Outlook: The rezoning of several submarkets and neighborhoods in the borough provides opportunities for larger developments in place of current smaller existing structures. Average Price per Unit (s) $7 $6 $5 $4 $3 Pricing Trends * ** Trailing 12 months through 2Q17 Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics

4 Brooklyn CURRENT TRENDS 6. Employment Trends Borough United States EMPLOYMENT: 1.9% increase in total employment in 2 Year-over-Year 4.5% % Over the past year, Brooklyn employers hired,1 workers. More than 1,1 jobs are forecasted to be created this year, increasing employment by 1.4 percent. More than 9, people have found work since the beginning of 29, accounting for a 27 percent rise in total employment. Completions and Absorption Completions Absorption 2Q17 12-Month Period ,33 units completed Y-O-Y Over the past year, builders completed more than 6, units, dramatically accelerating the pace of construction from the prior year when 3,622 apartments were completed in the borough. More than 12, units are underway with projected completion through the end of 217. The largest, the second phase of The Edge, will contain 554 units. Rate Trends VACANCY: 8% Borough United States 3 basis point decrease in vacancy Y-O-Y Rate 6% ticked down 3 basis points to 2.1 percent over the past year as operators deployed higher incentives to attract tenants. The vacancy decline was broadly driven by a sharp contraction in the Dumbo/Downtown Brooklyn submarket, where vacancy fell 23 basis points to 6.1 percent as new units were absorbed in the market. Rent Trends RENTS: Monthly Rent Y-O-Y Rent. increase in effective rents Y-O-Y Monthly Effective Rent $2,2 $2,5 $1,9 $1,75 $1,6 8% 6% Year-over-Year The average effective rent advanced.1 percent over the past year to $2,186 per month. A robust increase occurred in the Bed-Stuy/Ft. Greene/Bushwick submarket, where rent advanced 6.9 percent to $2,236 per month, the strongest gain in the borough. Higher concessions activity in Dumbo/Downtown Brooklyn led to a.7 percent rent gain to $3,436 per month. * Forecast

5 Multifamily Research Market Report DEMOGRAPHIC HIGHLIGHTS 2Q17 MEDIAN HOUSEHOLD INCOME Metro $55,286 U.S. Median $58,672 2Q17 AFFORDABILITY GAP Renting is $1,263 Per Month Lower Average Effective Rent vs. Mortgage Payment* MULTIFAMILY (5+ Units) PERMITS 12,238 1H 217 Compared with 1H h Q17 MEDIAN HOME PRICE Metro $577,8 U.S. Median $246, FIVE-YEAR HOUSEHOLD GROWTH** 46, or.9% Annual Growth U.S. 1. Annual Growth SINGLE-FAMILY PERMITS 5,693 1H 217 Compared with 1H g *Mortgage payments based on quarterly median home price with a 3-year fixed-rate conventional mortgage, 9 LTV, taxes, insurance and PMI. ** Annualized Rate Lowest Rates 2Q17 Prices Remain Elevated as Deal Flow And Dollar Volume Contract Submarket Rate Y-O-Y Basis Point Effective Rents Y-O-Y % Amid an environment of rising prices, buyers are slowing their purchases in Brooklyn, leading to a 21 percent decline in transactions over the past year. SUBMARKET TRENDS Ditmas Park/Flatbush.6% $1, Crown Heights/ Prospect Leffers Gardens 1.6% $1,58. Southern SE Brooklyn 1.6% 4 $1, Southwest Brooklyn 1.6% -5 $1, Bed-Stuy/Fort Greene/ Bushwick Park Slope/Prospect Heights Williamsburg/Greenpoint/ Navy Yard 2.7% 1 $2, % 3. $2, $3,67 1. Dumbo/Downtown Brooklyn $3,436.7% Overall Metro $2,186. SALES TRENDS The average price per unit exceeded $3,, up roughly 3 percent from the prior year, while cap rates remained in the mid-4 percent band. Buyers were particularly active in the Southwest Brooklyn, Crown Heights and Williamsburg/Greenpoint submarkets. Outlook: Waterfront assets with quick commutes to Manhattan are in high demand for long-term capital appreciation due to the relative affordability of the market. Average Price per Unit (s) $34 $255 $17 $85 $ Pricing Trends * ** Trailing 12 months through 2Q17 Pricing trend sources: CoStar Group, Inc.; Real Capital Analytics

6 Rate Rate QUEENS Completions Supply and Demand Absorption 2Q17 12-Month Period VACANCY AND RENT: 4 basis point decrease in vacancy Y-O-Y Net absorption of more than 3,1 units pushed vacancy to 1.5 percent over the past year, reversing the 4-basis-point rise of the prior yearlong period. 4. increase in effective rents Y-O-Y The average effective rent climbed 4.1 percent to $2,57 per month, driven by numerous injections of high-end units in Astoria and Long Island City. Record-low levels of vacancy are driving significant demand for available units. 2,43 units completed Y-O-Y A slower pace of development emerged over the past year, with completions down from 2,658 rentals in the previous year. There are more than 5,6 units currently underway in the borough, led by Eagle Lofts in the Hunters Point submarket. The 54-story offering contains 79 units in the former Eagle Electric Manufacturing building. INVESTMENT HIGHLIGHTS: Transaction velocity contracted significantly over the past year, with closed deals down nearly 3 percent. Buyers primarily focused on higher-end assets in Long Island City and Northwest Queens. Cap rates remained in the low-4 percent range, with roughly 4 basis points higher possible in outlying areas. Prices per unit were in the mid-$2, per door band. STATEN ISLAND Supply and Demand Completions Absorption 6 45 VACANCY AND RENT: basis point decrease in vacancy Y-O-Y tumbled to 2.9 percent over the past year, driven by a lack of new development and net absorption of 338 units. Units 3 4.6% increase in effective rents Y-O-Y The average effective rent rose 4.6 percent to $1,541 per month as vacancy contracted significantly. Last year, rents vaulted 1.2 percent higher. INVESTMENT HIGHLIGHTS: 67 units completed Y-O-Y Developers completed one project over the past year at 533 Bay Street. The future pipeline remains benign, with just one building underway at 5 Bay Street. The 1- unit, -story offering is slated for a 219 delivery date. Transaction velocity has remained consistent over the past year, with dollar volume more than doubling to over $66 million. Cap rates were in the high-5 to low-6 percent band, depending on the quality and size of the asset. Buyers paid roughly $4, per unit on average, ranging from approximately $9, to $2, per door. Smaller properties dominated local activity. * Forecast

7 Rate Rate Completions Supply and Demand Absorption 2Q17 12-Month Period VACANCY AND RENT: BRONX 5 basis point decrease in vacancy Y-O-Y Even as construction rose, vacancy contracted to 1.2 percent on net absorption of more than 3,667 units, bringing vacancy to the lowest level of the cycle. 1.5% increase in effective rents Y-O-Y Robust net absorption exceeding deliveries prompted growth in the average effective rent, which reached $1,355 per month. This represents a modest slowdown in increases from 2.8 percent. 2,3 units completed Y-O-Y Development activity accelerated over the past year, rising from 1,512 rentals to more than 2,1. Builders will stay active through the remainder of the year, with more than 3,32 units underway. Only two projects are over 2 rentals, while the vast majority contain less than 1 apartments. INVESTMENT HIGHLIGHTS: Tremendous appreciation in asset prices prompted a considerable slowdown in transaction velocity, with deal flow falling roughly 3 percent. The average price per unit rose roughly 4 percent to nearly $5, per door, while cap rates sank into the mid-5 percent band. Deal flow centered around the Fordham/ West Bronx and South Bronx submarkets. WESTCHESTER COUNTY Completions Supply and Demand Absorption 792 units completed Y-O-Y Deliveries accelerated moderately over the past year, rising 33 percent to 792 units from 592 rentals in the previous yearlong period. Development will remain elevated through the remainder of the year, with 1,188 apartments underway in the county. The largest, at 55 Bank Street, will contain 288 units in a -story tower. VACANCY AND RENT: 1 basis point increase in vacancy Y-O-Y The vacancy rate ticked up 1 basis points to 3.4 percent over the past year, driven by net absorption that fell short of new supply. 2. increase in effective rents Y-O-Y The delivery of several higher-end units coupled with tight overall vacancy pushed effective rent to an average of $1,91 per month, 2.1 percent higher than the same period a year ago. INVESTMENT HIGHLIGHTS: Transaction volume slipped roughly 1 percent over the past year, while dollar volume more than doubled to above $3 million, indicating deal flow moved toward larger assets in the county. Properties changed hands with prices per unit in the midto high-$1, range, with deal volume most active in the Getty Square, Park Hill and White Plains submarkets. * Forecast Sources: CoStar Group, Inc.; Real Capital Analytics

8 Multifamily Research Market Report Private, 6 Apartment Acquisitions By Buyer Type* Other, Cross-Border, 6% Equity Fund & Institutions, 2 Listed/REITs, 6% By WILLIAM E. HUGHES, Senior Vice President, Marcus & Millichap Capital Corporation Monetary policy in transition. Despite the Fed raising its benchmark short-term rate three times in seven months and signaling another rise before the end of the year, long-term rates have remained stable. The yield on the 1-year U.S. Treasury bond remained in the low- to mid-2 percent range throughout the second quarter of 217. The Federal Reserve wants to normalize monetary policy and, in addition to rate hikes, will likely start paring its balance sheet. Percent of Dollar Volume 1 75% 5 25% Apartment Mortgage Originations By Lender National Multi Housing Group Visit John Sebree First Vice President, National Director National Multi Housing Group Tel: (312) john.sebree@marcusmillichap.com * Trailing 12 months through 2Q17 Sources: CoStar Group, Inc.; Real Capital Analytics Gov't Agency Financial/Insurance Reg'l/Local Bank Nat'l Bank/Int'l Bank CMBS Pvt/Other CAPITAL MARKETS Sound economy a balancing act for Fed. With unemployment hovering in the low-4 percent range, the lowest level since 27, the Federal Reserve will remain vigilant regarding the possible rapid increase in inflation if wage growth takes off. Additionally, business confidence and job openings are near all-time highs. Businesses finally have the assurance to expand their footprints after years of tepid growth following the Great Recession. These conditions are allowing pent-up households to form, creating new apartment demand. The Fed, however, must now balance economic growth and job creation against wage growth and inflationary pressures. Underwriting discipline persists; ample debt capital remains. Overall, leverage on acquisition loans has continued to reflect disciplined underwriting, with LTVs typically ranging from 65 percent to 75 percent for most apartment properties. At the end of 2, the combination of higher rates, conservative lender underwriting and fiscal policy uncertainty encouraged some investor caution that slowed deal flow, a trend that has extended into 217. A potential easing of regulations on financial institutions, though, could liberate additional lending capacity and higher interest rates may also encourage additional lenders to participate. Prepared and edited by Aaron Martens Research Analyst Research Services For information on national apartment trends, contact: John Chang First Vice President Research Services Tel: (62) john.chang@marcusmillichap.com Price: $75 Marcus & Millichap J.D. Parker Senior Vice President Division Manager j.d.parker@marcusmillichap.com Manhattan Office: John Krueger Regional Manager Tel: (212) Fax: (212) john.krueger@marcusmillichap.com 26 Madison Avenue, Fifth Floor New York, NY 1 Brooklyn Office: John Horowitz Vice President Regional Manager Tel: (718) Fax: (718) john.horowitz@marcusmillichap.com One Metrotech Center, Suite 21 Brooklyn, NY 1121 The information contained in this report was obtained from sources deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, express or implied, may be made as to the accuracy or reliability of the information contained herein. Note: Metro-level employment growth is calculated based on the last month of the quarter/year. Sales data includes transactions valued at $1,, and greater unless otherwise noted. This is not intended to be a forecast of future events and this is not a guaranty regarding a future event. This is not intended to provide specific investment advice and should not be considered as investment advice. Sources: Marcus & Millichap Research Services; Bureau of Labor Statistics; CoStar Group, Inc.; Experian; National Association of Realtors; Moody s Analytics; Real Capital Analytics; MPF Research; TWR/Dodge Pipeline; U.S. Census Bureau.