Commercial Real Estate Banking

FEBRUARYBREAKFAST PROGRAM CAPITAL MARKETS FORECAST 2017 SPONSORED BY: Commercial Real Estate Banking James Payne Senior Vice President, Seattle Market Manager 1

Agenda 1. Banking Industry Overall 2. Current Topics in CRE Banking 3. U.S. Bank Commercial Real Estate U.S. BANK 3 Been a good last 7 months KBW Bank Index (BKX) consists of 24 banking stocks and is widely served as the benchmark for the banking sector. Up 52% since end of June 2016 Source: Bloomberg.com on 2/8/17 U.S. BANK 4 2

More Good Times For Banking Strong Q4 Earnings Record Stock Prices Outstanding performance in 2016 with record net income, EPS, and Revenue Expect Rising Interest Rates Possible Banking Regulation (Dodd-Frank) Reform Well positioned to grow and deliver to our shareholders in 2017 Q4 Earnings were a strong end to another record year U.S. BANK 5 Hot Topic within CRE banking High Volatility Commercial Real Estate (HVCRE) is your construction loan classified as HVCRE or Not? Generally two primary items for consideration: 1) Minimum Cash Equity contributed by Borrower > 15% of As - Completed Appraised Value. -Does not include appreciated land value 2) Borrower internally generated capital must stay within the Project/Borrower. Item #2 is generally the grey area with little guidance from the regulators. When is the loan considered permanent? When are Borrower Distributions allowed, if any? If HVCRE loan = costs for both the Bank and Borrower U.S. BANK 6 3

CRE Industry: Do we need to worry? Are we in the later stage of the current real estate cycle? Construction delays coupled with rising costs and labor shortage Multi-Family Supply concerns Most projects are luxury with a high-price point Still have rent growth but it is slowing Concessions starting Where is the retail market going? The Haves vs. The Have-Not's Will some of the concerning national trends show up here in Seattle? U.S. BANK 7 U.S. Bank Commercial Real Estate Approx. 400 CRE professionals in 29 CRE offices 31% Multi-Family, 21% Office, 16% Lodging, 13% Retail, 5% Industrial, 14% Other Areas of Focus: Lending, Capital Markets, Deposit & Treasury Management U.S. BANK 8 4

U.S. Bank Commercial Real Estate CRE Loan Growth In Millions CRE Deposit Growth In Millions $27,000 $26,000 $25,000 $24,000 $23,000 $22,000 $21,000 $20,000 $19,000 $18,000 $17,000 $16,000 $15,000 $14,000 $13,000 $12,000 $11,000 2012 2013 2014 2015 2016 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 2012 2013 2014 2015 2016 U.S. BANK 9 U.S. Bank Commercial Real Estate Residence Inn (Downtown Seattle) Lincoln Square Expansion (Bellevue) Vive Apartments (Ballard) 929 Office Tower (Bellevue) U.S. BANK 10 5

OFFICE & INDUSTRIAL CAPITAL MARKETS REAL ESTATE INVESTMENT MANAGEMENT CLARION PARTNERS Dean Rostovsky, Director March 2017 200 NEWPORT AVENUE: QUINCY, MASSACHUSETTS REAL ESTATE INVESTMENT MANAGEMENT WWW.CLARIONPARTNERS.COM WWW.CLARIONPARTNERS.COM FOR USE WITH INSTITUTIONS ONLY. NOT FOR USE WITH THE INVESTING PUBLIC. 2016 Themes Office Continuation of yield starvation Lack of core fund/odce buyers for office Greater participation by other types of buyers Private Foreign REITs Pricing of high quality strong! 12 REAL ESTATE INVESTMENT MANAGEMENT WWW.CLARIONPARTNERS.COM 6

2017 Themes Rate rise continuation?... impacts? Presumed extension of economic/real estate cycle Election (presumed) economic positives Tax policy, infrastructure spending, deregulation Election (presumed) negatives Trade and labor Real estate fundamentals strong 13 REAL ESTATE INVESTMENT MANAGEMENT WWW.CLARIONPARTNERS.COM Los Angeles Office Investment Sales Colorado Center 233 Wilshire Blvd. 1299 Ocean Ave. The Bluffs at Playa Vista The Spruce Goose Hangar 14 REAL ESTATE INVESTMENT MANAGEMENT WWW.CLARIONPARTNERS.COM 7

Seattle Office Investment Sales West 8 th Amazon Phase VII Hill 7 Urban Union Amazon Phase VIII 15 REAL ESTATE INVESTMENT MANAGEMENT WWW.CLARIONPARTNERS.COM US: Strongest Industrial Recovery in History Key drivers: e-commerce, consumer spending, international trade, improving home construction and sales A logistics chain overhaul in progress: urbanization and growing consumer desire for faster home delivery 2016 net absorption: new supply = 1.4 : 1 Supply pipeline growing, new construction concentrated in top-performing markets Functional/locational obsolescence! a significant driver for new development U.S. INDUSTRIAL FUNDAMENTALS 2013 2014 2015 2016 Availability Rate (LTA=10.3%) 10.8% 9.8% 8.9% 8.2% Absorption % of Stock 2.0% 1.9% 1.9% 1.9% Supply % of Stock 0.6% 1.0% 1.2% 1.3% Rent Growth 3.6% 4.8% 5.3% 6.6% Source: CBRE-EA, NCREIF, Clarion Partners Investment Research, Q4 2016 (rent data estimated as of Q3) Note: Past performance is not indicative of future performance. LTA = long-term average. 16 REAL ESTATE INVESTMENT MANAGEMENT WWW.CLARIONPARTNERS.COM 8

Los Angeles County Industrial Fundamentals As of Q4 2016 The Brickyard 939 million sf 3.9 million sf absorption 1.1% vacant 4.7 million under construction Strong rent trend Source: CBRE Research 17 REAL ESTATE INVESTMENT MANAGEMENT WWW.CLARIONPARTNERS.COM Greater Seattle Industrial Fundamentals As of Q4 2016 Kent Valley Industrial Portfolio 267 million sf 4 million sf absorption 2.6% vacant 4.7 million under construction Strong rent trend Source: Colliers 18 REAL ESTATE INVESTMENT MANAGEMENT WWW.CLARIONPARTNERS.COM 9

SEATTLE INVESTMENT MARKET OFFICE & INDUSTRIAL FEBRUARY 15, 2017 KEY INVESTMENT THEMES: SEATTLE INDUSTRIAL & OFFICE INDUSTRIAL RECORD SALE VOLUMES RECORD LOW VACANCY RATES DEMAND > SUPPLY INVESTORS STRETCHING TO SMALLER TRANSATIONS OFFICE NEAR RECORD SALE VOLUMES STRONG FUNDAMENTALS CHANGE IN BUYER PROFILE DISPARITY IN CBD VS SUBURBAN STRANDED TRANSACTIONS 20 10

PUGET SOUND INDUSTRIAL RENT & VACANCY $0.65 $0.60 $0.55 $0.50 $0.45 $0.40 $0.35 Blended Rent, NNN (left axis) Vacancy (right axis) 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% $0.30 Source: CBRE Research 2009 2010 2011 2012 2013 2014 2015 2016 0% 21 PUGET SOUND INDUSTRIAL INVESTMENT VELOCITY Total Sale Price in Billions $3.0 $2.5 $2.0 $1.7 $2.5 $2.3 $1.5 $1.0 $0.5 $0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Real Capital Analytics 22 11

PUGET SOUND OFFICE RENT & VACANCY $37.00 $35.00 Class A Asking Rent, FS (left axis) Vacancy (right axis) 25% 20% $33.00 $31.00 $29.00 15% 10% $27.00 5% $25.00 Source: CBRE Research 2009 2010 2011 2012 2013 2014 2015 2016 0% 23 TRANSACTION VOLUME COMPARISON OFFICE PRODUCT Billions $14.0 $12.0 $10.0 Western U.S. 2015: $47B 2016: $48B $8.0 $6.0 $4.0 $2.0 $0.0 2015 Sales Volume 2016 Sales Volume 24 12

TRANSACTION VELOCITY COMPARISON OFFICE PRODUCT 450 400 350 300 250 200 150 100 50 0 Western U.S. Deal Count Western U.S. 19% Decrease 2015 # of Sales 2016 # of Sales 25 PUGET SOUND OFFICE SALES VOLUME Consideration greater than $10 million $ Billions $7.0 $6.0 $6.1 Annual $ Volume $5.0 $4.5 $4.4 $4.7 $4.0 $3.0 $2.9 $3.3 $2.0 $1.5 $1.8 $1.2 $1.7 $1.9 $1.0 $0.5 $0.3 $0.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: 9pt, Dark Grey. 26 13

INVESTMENT RETURNS A TALE OF TWO PROFILES SUBURBANN ~ 7.0% Stabilized CAP Rates Multi-tenant, shorter lease terms Price PSF < Replacement Cost Limited Institutional/Foreign Demand Debt Financing comparable to CBD Sub5.0% 27 Stabilized CAP Rates Single-tenant, long term leases 2016 HANGOVER EFFECT TOTAL CONSIDERATION & NUMBER OF DEALS 103 TRANSACTIONS! $11.05 BILLION $4,000,000,000 30 $3,500,000,000 24 25 Total Consideration $3,000,000,000 $2,500,000,000 $2,000,000,000 $1,500,000,000 $1,000,000,000 20 11 14 10 15 7 20 15 10 Number of Deals $500,000,000 2 5 $0 Los Angeles Orange County San Diego Bay Area Portland Seattle Phoenix Denver 0 Total Consideration # of Deals 28 14

CAPITAL MARKETS OUTLOOK INSTITUTIONAL INVESTORS ARE INCREASING ALLOCATIONS INSTITUTIONAL INVESTORS REMAIN UNDERWEIGHT REAL ESTATE " " FOREIGN INVESTOR RATIONALE FOR U.S. REAL ESTATE U.S. REMAINS THE MOST FAVORED DESTINATION FOR REAL ESTATE INVESTMENT FOREIGN INVESTORS CONTINUE TO FAVOR LARGE GATEWAY U.S. CITIES 2016 Actual % Invested vs. 2016 & 2017 Target Allocations (1) Percent of Acquisitions Made by Cross-Border Buyers (2) 10.5% 10.3% $100,000 Foreign Investment in U.S. CRE Percent of Total 18% 10.0% 9.5% 9.0% 8.5% 8.0% 9.9% 8.9% 2016 Actual 2016 Target 2017 Expected 40 bps 100 bps 140 bps Transaction Volume ($M) $90,000 $80,000 $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 16% 14% 12% 10% 8% 6% 4% 2% 0% Foreign Capital Percentage of Total 29 Seattle-Bellevue-Everett Multifamily Overview 15

State of the Market Multifamily market dynamics supply and demand Seattle-Bellevue-Everett Largest supply in history and vacancy remains low because of the equally high absorption and job growth 60,000 50,000 9% 8% 7% 5 New jobs added per unit built 40,000 30,000 20,000 10,000 Units forecasted: under construction, planned or proposed 6% 5% 4% 3% 2% 1% 0% 9,367 Units delivered in 2016 9,298 Units absorbed in 2016 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Units Delivered Net Absorption Jobs Rent Growth Vacancy Rate Source: JLL Research, Dupre + Scott, CoStar PPR -1% 49,600 Jobs added in 2016 Source: ESRI Business Analytics, Dupre and Scott 31 Historic tri-county sales volume Sales Volume 100 units plus $5.0bn $4.0bn $3.0bn $2.0bn $1.0bn $.0bn 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 King County Pierce County Snohomish County Buyer profile 2016 2015 2014 2013 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Number of Units REIT Large Operator High Net Worth Government Advisor/Investment Manager/Fund JLL Sales Radius Sold February 2017 $141,000,000 $500,000 / Unit LIV Bel-Red Sold September 2016 $172,000,000 $381,375 / Unit Soren Sold August 2016 $45,553,000 $410,387 / Unit Tivalli Sold March 2016 $94,250,000 $246,084 / Unit Source: Yardi Matrix, Dupre and Scott 32 16

Jobs and companies in Seattle Key companies driving job growth Larger tech companies and other headquarters are hiring rapidly to fill their new and expanding office footprints Estimated Employees: 40,000 (30,000 in Seattle) Projection: 80,500 by 2022 Location: South Lake Union -Will occupy 12M SF of office space by 2022 Estimated Employees: 1,900 Projection: 6,358 by 2019 Location: South Lake Union, Fremont and Kirkland -Approaching 1M SF in the region Estimated Employees: 1,000 Projection: 5,500 by 2018 Location: South Lake Union- -Dexter Station has room for 1,000 more employees -New lease at 1101 Westlake has room for 1,000 more -New lease at Arbor Blocks has room for 2,500 more Estimated Employees: 1,600 Projection: 4,500 by 2020 Location: Seattle (Interbay) and Bellevue -Looking to move HQ in Interbayto 500,000 SF from 320,000 SF Estimated Employees: 3,500 Projection: 4,500 in 2019 Location: Seattle (Interbay) -Moving Bellevue campus to Seattle, new location 12M SF total Estimated Employees: 800 Projection: New building has room for growth to 1,390 Location: Pioneer Square - Moved from long time HQ home in Federal Way Estimated Employees: 68,000 Projection: 80,479 in 2028 Location: University District -Master plan released with plans that anticipate up to 6M SF of space by 2028 Source: Dupre and Scott 33 Living in San Francisco versus Seattle Seattle paychecks go further Seattle leads the country in highest paid VP of engineering and director of product in a tech company 2016 4Q Office Vacancy Seattle-Bellevue 9.2% San Francisco 8.2% Average Office Rent Seattle-Bellevue $34.90 San Francisco $73.65 Office SF Under Construction Seattle-Bellevue 5.9M San Francisco 5.8M Category Seattle San Francisco Average Tech Engineer Salary $108,240 $110,554 State Income Tax $0 $10,282 Federal Income Tax $23,344 $23,992 1 BD High-rise Apartment per Year $33,600 $50,400 Disposable Income $51,296 $25,881 Source: JLL Research Tech firms from the San Francisco/Bay Area are seeking more economical value on office space rents in Seattle New to Seattle in 2016 Pinterest, Airbnb, mixpanel, Planet, Stripe 34 17

Renting versus buying Average mortgage payment versus average rent throughout the Seattle metro area Snohomish County Avg Rent: $1,297 Avg Rent 2012+: $1,575 Median Home Value: $477,413 Mortgage: $2,522 North Seattle Avg Rent: $1,521 Avg Rent 2012+: $1,785 Median Home Value: $568,675 Mortgage: $3,288 Seattle Core Avg Rent: $1,945 Avg Rent 2012+: $2,253 Median Home Value: $627,881 Mortgage: $3,622 South King County Avg Rent: $1,237 Avg Rent 2012+: $1,642 Median Home Value: $337,941 Mortgage: $1,942 Home ownership is more expensive than renting in major Seattle cities Eastside Avg Rent: $1,804 Avg Rent 2012+: $1,966 Median Home Value: $717,871 Mortgage: $4,129 Source: Mortgages calculated based on a 30-year loan, 3.85% interest rates, 1.25% property tax, 0.5% PMI David Young Multifamily Managing Director 206.607.1719 David.Young@am.jll.com Corey Marx Multifamily Managing Director 206.607.1726 Corey.Marx@am.jll.com Thank you COPYRIGHT JONES LANG LASALLE IP, INC. 2016 18