Transition to Value-Add Focus Drives Sale Activity

Research & Forecast Report MINNEAPOLIS- APARTMENT Fall 2016 Transition to Value-Add Focus Drives Sale Activity Overview In 2016, the Twin Cities multifamily investment landscape has witnessed a significant shift from core/core+ to value-add in terms of transaction activity and investor interest. While 2015 included a number of notable new build and pre-sale transactions to institutional and private equity investors, 2016 would be best characterized as a flock to value-add deals. Transaction Activity While construction activity remains strong, the appetite for pre sale and recently stabilized product has waned to some extent. This is also seen in the more limited capital pipeline to fund new development, as projects are more heavily scrutinized and investors have become very selective about size, submarket and delivery timeline. That said, interest in large value-add deals has soared. Cap rates have compressed noticeably on these deals as investors chase the limited pipeline of available properties. Unlike other national secondary markets, the Twin Cities continues to show a relatively restricted listing environment, which accounts for some of the cap rate compression. The more significant piece appears to be the widespread success investors have seen through implementing value-add programs on older product. Whether the budget calls for a limited in-unit and common area refresh or a heavy construction plan to renovate the entire property, buyers are able to push rents to match the required ROI for the capital outlay. Market Indicators Relative to prior period Fall 2016 VACANCY RENTS TRANSACTION ACTIVITY CAP RATES Despite the continued supply limitations, the Twin Cities are on pace for a record level of transaction volume in dollars and will easily eclipse the $1 billion mark, the high water mark for the market last year. As of the date this report was published, transaction activity approaches $800 million.

Apartment Construction: Completions by Date Units 2,500 2,000 1,500 1,000 500 0 2013 2014 2015 YTD 2016 Q3/Q4 2016 (forecast) Source: MPF Research Units Under Construction Monthly Employment Trends 10,000 8,000 6,000 4,000 2,000 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Under Construction Completions Source: MPF Research Year-Over-Year Employment Change (%) Minneapolis-St. Paul 4 3 2 1 0 (1) 2008 2009 2010 2011 2012 2013 2014 2015 2016 (2) (3) (4) (5) (6) New Construction The largest factor driving on-average rent increases has been the continuous introduction of new Class A inventory, which command by far the highest rent per square foot. Over the last four quarters, the metro area has received over 5,000 new units, with close to 4,000 units slated to be delivered over the next twelve months. So while construction activity is slowing moderately, it is unlikely there will be any major interruptions in new deliveries. Like 2015, a slow shift from urban to suburban development has kept overall construction numbers healthy. Interestingly, assuming units built after 2000 are predominantly Class A and units built before 1970 are predominantly Class C, a large gulf in occupancy exists between the two product types, measuring roughly 450 basis points. This measures the difference in occupancy between units built after 2000 (.2 percent) and those built before 1970 (98.7 percent). Furthermore, annualized changes in revenue show that Class A income appreciation has fluctuated and is currently 1.8 percent, while Class C has risen quarterover-quarter 9 consecutive times and now sits at 5.7 percent. This points to increased competition among Class A operators as new product floods the market, which has led to concessions and decreased profit margins. Real estate taxes undoubtedly play a role in affecting income as well. Market Statistics The Minneapolis St. Paul economy continues to boast one of the lowest unemployment rates in the country, currently hovering around 3.4 percent. With over 28,000 jobs added in the last 12 months, the wider metro area benefits from the headquarters of 16 Fortune 500 companies as well as large local employers like the University of Minnesota. The local workforce ranks 11th in the country in terms of education with 41 percent achieving a bachelor s degree or higher and an average annual household income of $69,000, topping the national average by 29 percent. 2 Minneapolis-St. Paul Research & Forecast Report Fall 2016 Apartment Colliers International

Average Monthly Rent Per Unit Average Rent & Vacancy $1,200 $1,150 $1,100 $1,050 $1,000 $950 $900 $850 $800 2008 2009 2010 2011 2012 2013 2014 2015 2016 Average Monthly Rent Vacancy Source: MPF Research 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Percent Vacant The Covington Now-familiar national multifamily investors such as Weidner Apartment Homes continue to make a name for themselves in the Twin Cities multifamily market, expanding their presence and developing a sizeable portfolio with acquisitions such as The Covington in Bloomington. Apartment Sales Total Sales Volume $700 $600 $500 $400 $300 $200 $100 $0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 Price Per Unit Total Quarterly Volume $ (mil) Avg. Price Per Unit Source: Real Capital Analytics Great employment opportunities, paired with a healthy population growth rate averaging around 1% per annum over the last five years has led to a strong rental market. This strength is best exemplified by the 97.6% occupancy rate, which is just 20 basis points below its two-year high. Surprisingly, the metro has also experienced the highest rental rate growth in the Midwest at 3.6%, contrary to its history as a slow-growth market. Excelsior & Grand New investors are continuing to join the market, including The Connor Group and New York Life Real Estate. The Connor Group recently purchased Excelsior on Grand in St. Louis Park, and New York Life made a splash with the acquisition of Fountain Place in Eden Prairie. We are still seeing steady multifamily absorption in most submarkets, with the exception of the Minneapolis CBD, due to the recent delivery of a large number of units. New household formation and job growth are fueling the absorption of these new units. Millennials are still renters by choice and are delaying major life events that lead to home ownership. Additionally, homeownership rates have been declining for baby boomers in the past two years. We expect homeownership to continue to trend lower until an eventual bottoming in 2018. All of these factors point to continued absorption of the new multifamily units coming on line in the near future. Minneapolis-St. Paul Research & Forecast Report Fall 2016 Apartment Colliers International 3

MAPLE GROVE PLYMOUTH 610 169 BROOKLYN PARK 6 GOLDEN VALLEY BROOKLYN CENTER FRIDLEY 65 BLAINE SHOREVIEW ARDEN HILLS ROSEVILLE 36 LINO LAKES NORTH OAKS VADNAIS LITTLE CANADA MAPLEWOOD HUGO 6 Spotlight On: St. Louis Park ST. 100 LOUIS MINNEAPOLIS 4 PARK MINNETONKA 7 EDEN PRAIRIE SHAKOPEE EDINA SAVAGE 13 62 RICHFIELD BLOOMINGTON BURNSVILLE 5 EAGAN MENDOTA WEST 4 4 10 52 INVER GROVE ROSEMOUNT 6 Over the last four quarters, St. Louis Park has received 296 new units of inventory, with 511 more under construction. During the current real estate cycle, multifamily development has primarily been focused on the West End area at the corner of Interstate 3 and Highway 100. Not forgotten is the other end of St. Louis Park, which is anchored by the recently sold Excelsior & Grand mixed-use development and the well-established retail and residential neighborhoods surrounding it. Development sites are popping up along Excelsior Boulevard and Minnetonka Boulevard east of Highway 100, which serves as the primary transit corridor into Uptown for the west metro. The area offers easy access to the lakes and links to major highways, which is a driver for tenants who work outside of the downtown areas. Currently 148 units (included in the 511 above) are underway, with more slated for delivery in 2017 and early 2018. Verge, St. Louis Park These new additions will test submarket absorption, as occupancy is already below the overall metro Class A average by 1.5%. This is in part due to its reputation as one of the most expensive suburban rental submarkets, where the average monthly Class A rent is just shy of $1,700. The byproduct of this heavy development will most likely be a temporary lull in occupancy as new units are leased up. A similar event was observed in the 2nd quarter of 2015 where St. Louis Park Class A occupancy dropped to 88.5%, as 537 new units were brought to market, but occupancy rebounded to 92.3% in the subsequent quarter. To aid in the occupancy recovery, it is likely that renters will be offered concession packages to deal with short-term lease-up challenges. But if history is an indicator, we expect new developments to stabilize and reduce concessions in time given the high level of demand to live in this first ring suburb. The Flats at West End, St. Louis Park 4 Minneapolis-St. Paul Research & Forecast Report Fall 2016 Apartment Colliers International

5 Minneapolis-St. Paul Research & Forecast Report Fall 2016 Apartment Colliers International 7 5 65 36 62 13 610 100 52 61 61 10 10 12 52 61 10 52 169 212 169 169 35 35 6 4 6 3 6 4 4 4 HUGO EAGAN BLAINE MINNEAPOLIS LAKEVILLE PLYMOUTH DAYTON ORONO MEDINA ROSEMOUNT LINO LAKES ANDOVER CORCORAN SHAKOPEE BLOOMINGTON HAM LAKE EDINA GRANT COLUMBUS RAMSEY MAPLE GROVE WOODBURY EDEN PRAIRIE BURNSVILLE MINNETONKA SAVAGE FOREST LAKE CHANHASSEN COON RAPIDS OTSEGO COTTAGE GROVE CHASKA MAPLEWOOD PRIOR LAKE FRIDLEY ROSEVILLE OAKDALE LAKE ELMO BROOKLYN PARK APPLE VALLEY FARMINGTON SHOREVIEW INVER GROVE ANOKA CHAMPLIN ROGERS RICHFIELD ARDEN HILLS GOLDEN VALLEY NORTH OAKS ST. LOUIS PARK WAYZATA MENDOTA NEW HOPE HOPKINS VADNAIS BROOKLYN CENTER NEW BRIGHTON ST. MICHAEL WEST LITTLE CANADA ELK RIVER MOUNDS VIEW 65 280 MINNEAPOLIS ROSEVILLE GOLDEN VALLEY ST. ANTHONY FALCON (33) Proposed Under Construction Recently Completed (54) (66) New Apartment Construction

Significant Apartment Sale Activity BUILDING CITY SIZE (UNITS) YEAR BUILT BUYER SELLER SALE PRICE PRICE PER UNIT Fountain Place Eden Prairie 490 1987 Excelsior & Grand Saint Louis Park New York Life Real Estate Investors Hampshire Hill Bloomington 534 1986 Investcorp Group TIAA $79,800,000 $162,857 337 2003 The Connor Group TOLD Development Co. $76,799,885 $227,892 Redwood Capital Group, LLC $68,050,000 $127,434 Burlington Saint Paul 427 1988 Abacus Capital Group LLC TH Real Estate $64,000,000 $149,883 The Covington Bloomington 250 2014 Weidner Apartment Homes Metro Park East Minneapolis 1 2014 DRA Advisors, LLC Dunbar Development Corporation Fountain Residential Partners $48,0,000 $1,200 $47,500,000 $244,845 The Addison Shakopee 290 2005 White Oak Partners The Praedium Group $47,500,000 $163,793 Southwind Village Burnsville 320 1989 Investcorp Group Virtu Investments $45,311,000 $141,597 Royal Oaks of Eagan Eagan 231 1987 Timberland Partners TIAA $34,950,000 $151,299 Cinnamon Ridge Eagan 264 1985 Darcom Construction, Inc. LivCor, LLC $33,950,000 $128,598 The Paragon Bloomington 216 1972 The Meadows of Coon Rapids Colonial Village Aspen Glen Coon Rapids 148 1992 Fowler Property Acquisitions, LLC Monarch Investment and Management Group Eagan 188 1972 Abacus Capital Group LLC New Brighton Sentinel Management Company, LLC $20,750,000 $96,065 Sherman Associates, Inc. $18,750,000 $126,689 Sentinel Management Company, LLC $18,300,000 $97,340 172 1979 Related Midwest, LLC Metroplex, Inc. $15,750,000 $91,570 Century North Oakdale 177 1972 Vitus Group StuartCo $14,725,000 $83,192 Oak Glen of Edina Edina 64 1981 Related Midwest, LLC Metroplex, Inc. Coze Flats Minneapolis 48 2014 Johnson Brothers Liquor Company $10,001,471 $156,273 Solhem Companies $9,400,000 $195,833 Como By The Lake Saint Paul 99 1985 Aeon 900 Como Lake Lp $8,850,000 $89,3 Cottage Terrace Saint Paul 126 1967 Preferred Management R.W. Johnson Properties $7,900,000 $62,698 Golden Star Saint Paul 109 1966 Aeon North Lake Property Management $7,880,935 $72,302 The Meadowlands Shoreview 50 1981 The Related Companies Metroplex, Inc. $7,500,000 $170,4 Cottage Villas of Arden Hills Arden Hills 60 19 Homel Realty Park Place LLC $7,000,000 $116,667 Lowry Grove Minneapolis 120 1950 Continental Property Group Skywood Columbia Heights Century Commons Saint Paul 39 1989 Lowry Grove Partnership, LLP $6,000,000 $50,000 73 1963 QT Rentals Alexander A. Levitan $5,450,000 $74,658 MBJ Development Corporation Steven Scott Management $5,175,000 $132,692 Minnehaha Saint Paul 60 1967 David Nigh At Home $5,100,000 $85,000 The President Studios Minneapolis 48 1916 Maven Real Estate Partners Kashi Associates LLC $4,100,000 $85,417 6 Minneapolis-St. Paul Research & Forecast Report Fall 2016 Apartment Colliers International

Significant Apartment Sale Activity BUILDING CITY SIZE (UNITS) YEAR BUILT BUYER SELLER SALE PRICE PRICE PER UNIT 1600 Douglas Golden Valley 1959 Domicile MSP Golden Valley Arms Anderson Kathleen & Kenneth $4,000,000 $68,966 Golden Valley 51 1967 Hornig Companies, Inc. Mildred S Hanson, MD $4,000,000 $78,431 West Virginian Richfield 47 1970 Dean M Akins Keith Backhuas $3,900,000 $82,979 Lily Lake Terrace Stillwater 45 1970 METIS Greeley Associates Llc $3,520,000 $78,222 Laurel Curve Minneapolis 102 1900 Maven Real Estate Partners Persaud Properties $3,350,000 $32,843 Cliff House Burnsville 42 1973 Baja Realty, LLC Durand & Associates $3,179,000 $75,690 Francia Minneapolis 12 1916 Koudaisyoukou Co LTD Birmingham Woods Riverwood South Urban Vintage $2,600,000 $216,667 Saint Paul 28 1983 Raymond Simpson PAK Properties $2,325,000 $83,036 Anoka 29 1978 Aalo Corp 149 Virginia St Saint Paul 23 1950 Sun Place Saint Paul 30 1971 Aeon Well Maintained Larry and Kathleen Cramer $2,200,000 $75,862 Scott M. Weber $2,185,000 $95,000 North Lake Property Management $2,169,065 $72,302 76 Stevens St Saint Paul 29 1963 76 Stevens LLC Mattson Rentals LLC $1,952,1 $67,343 Stevens Square Minneapolis 25 1925 Mint Properties Johnson, Chris $1,925,000 $74,038 Fremont Court Bloomington 23 1962 Eisenhuth Peter A & Jennifer L Schultz, Thomas & Micheline $1,787,000 $77,696 Day Bridge Court Minneapolis 20 1964 2640 2nd Ave S Franklin Props $1,470,000 $73,500 87 Prior Ave Saint Paul 13 1915 Paul F Berg Grand Heritage Properties, LLC $1,400,000 $107,692 1472 Larpenteur Ave Falcon Heights 20 18 Kleinman Realty Scott M. Weber $1,350,000 $67,500 441 Lynnhurst Saint Paul 18 1967 EquiMax Real Estate, LLC. Stoffel Ronald R $1,300,000 $72,222 Nevada Minneapolis 24 1962 Kramer Saxl Group LLC Barry and Barbara R Greenberg $1,253,750 $52,240 3127 Pleasant Ave Minneapolis 17 1964 EIG Property Management Hunt Properties, LLC $1,224,000 $72,000 2120 Garfield Ave Minneapolis 11 1918 Kanata Properties Homel Realty $1,210,000 $110,000 2125 10th Ave Minneapolis 17 1969 Pink Poodle LLC Cedar Lake LLC $1,200,100 $70,5 2205 Bryant Ave S Minneapolis 6 1956 Maven Real Estate Partners Minneapolis Commercial Connection $1,131,000 $188,500 1522 Grand Avenue Saint Paul 10 1964 At Home Kelly Muske $1,125,000 $112,500 The Antonoff Minneapolis 18 1929 Feddersen Properties Daniel Carlson $1,044,000 $58,000 McCarrons Roseville 17 1959 McCarrons Saint Paul 17 1961 Minneapolis Commercial Connection Minneapolis Commercial Connection Carl & Eleanor Seidel $1,017,848 $59,873 Carl & Eleanor Seidel $1,017,848 $59,873 Minneapolis-St. Paul Research & Forecast Report Fall 2016 Apartment Colliers International 7

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