Accelerated Sales Pace Continues, Development Pipeline Expands

Research & Forecast Report MINNEAPOLIS-ST. PAUL APARTMENT Spring 2017 Accelerated Sales Pace Continues, Development Pipeline Expands Overview With 2016 closing at the Twin Cities market s highest watermark in terms of total dollar sales volume ($1.5B), expectations for 2017 were somewhat moderate. Q1 2017 transactions are trending above $250M in sales volume. Activity is keeping pace with expectations from the past two years. On the development front, last year witnessed a relative dip in units delivered at 3,290. We are expecting 2017 to deliver above 5,000 units, placing multifamily new delivery at its highest point during the current cycle. Some of this is due to projects that did not reach completion at the end of 2016 as anticipated, but is an important data point given the consensus that we are approaching the top of the market cycle. Transaction Activity The multifamily investment market experienced a significant shift in investor focus from Class A to value-add deals over the past 12+ months. This was, in part, due to a lack of new inventory on the core/core+ side. Based on anecdotal evidence from many buyers who have purchased Class B and C properties in the Twin Cities with intended large-scale renovations, the results have been very positive. Execution plans vary between owners, but ROI in the low to mid teens is typically the targeted return threshold. Many projects have stabilized above these forecasts, spurring further interest in similar product. This holds true for urban and suburban properties. Everything from sprawling garden-style properties in suburbs like Richfield and Bloomington to small, well-located brownstones in Uptown and Lowry Hill have been successfully renovated. Another notable trend relates to affordable housing transactions. With the sheer number of Section 42 developments built in the late 1990s to early 2000s, many properties are reaching their 15-year compliance window. With owners contemplating whether to re-syndicate tax credits, opt-for a qualified contract (if permissible) or sell, the shadow market for Section 42 properties is large. We expect to see more of this type of property trade in the coming years. Market Indicators Relative to prior period Spring 2017 VACANCY RENTS TRANSACTION ACTIVITY CAP RATES

Apartment Construction: Completions by Date Units 2,500 2,000 1,500 1,000 500 0 2013 2014 2015 2016 2017 (forecast) Source: MPF Research The Development Pipline After a down year in terms of overall deliveries, it appears that metro area developers are making up for lost time. The Twin Cities apartment stock is set to grow overall by 1.8% or 4,973 units in 2017. This will outpace 2016 s 3,290 new units. Developers appetite for suburban vs urban sites seems to be spread fairly evenly, with a bias for the western suburbs. Elevated development activity is expected to sustain into the foreseeable future, given identified projects and permit volumes. The undersupply of new units in 2016 was a contributing factor to attaining 4.8% rent growth, a 6 year high water mark. This figure is uncharacteristic of the Twin Cities, which is traditionally a slow growth, high occupancy market. It remains to be seen whether higher rent growth is a temporary phenomenon, or the new norm as more and more national buyers set up shop in the metro area. Units Under Construction 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 Average Rent & Vacancy Apartment Sales $1,200 $1,150 7.0% 6.0% Quarterly Volume/Price Per Unit Minneapolis-St. Paul Apartment Average Monthly Rent Per Unit $1,100 $1,050 $1,000 $950 $900 $850 $800 2008 2009 2010 2011 2012 2013 2014 2015 2016 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Percent Vacant Total Sales Volume $700 $600 $500 $400 $300 $200 $100 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 Price Per Unit Average Monthly Rent Vacancy $0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $0 Source: MPF Research Total Quarterly Volume $ (mil) Source: Real Capital Analytics Avg. Price Per Unit 2 Minneapolis-St. Paul Research & Forecast Report Spring 2017 Apartment Colliers International

New Apartment Construction ELK RIVER OTSEGO RAMSEY 10 ANOKA ROGERS Proposed!!! HAM LAKE ANDOVER 35 COLUMBUS (47) FOREST LAKE Under Construction (36) Recently Completed (74) 61 DAYTON COON RAPIDS CHAMPLIN HANOVER BLAINE HUGO LINO LAKES 65 610 10 BROOKLYN PARK MAPLE GROVE CORCORAN 35E MOUNDS VIEW SHOREVIEW NORTH OAKS 169 FRIDLEY 6 55 6 NEW HOPE 4 MEDINA ARDEN NEW HILLS BRIGHTON BROOKLYN CENTER LITTLE CANADA PLYMOUTH ROSEVILLE 12 WAYZATA ORONO MAPLEWOOD GOLDEN VALLEY 6 36 12 61 VADNAIS HEIGHTS 35E OAKDALE 3 ST. LOUIS PARK MINNETONKA MOUND 100 55 7 ST. PAUL HOPKINS 169 10 35E MINNEAPOLIS EDINA WEST ST. PAUL 62 VICTORIA EDEN PRAIRIE CHANHASSEN 212 CHASKA 212 5 4 4 61 4 MENDOTA HEIGHTS RICHFIELD WOODBURY 52 SHOREWOOD BLOOMINGTON EAGAN 35E INVER GROVE HEIGHTS 52 COTTAGE GROVE MINNEAPOLIS 169 65 13 SHAKOPEE BURNSVILLE SAVAGE APPLE VALLEY PRIOR LAKE ROSEMOUNT 55 280 LAKEVILLE 35 FARMINGTON 21 55 52 Minneapolis-St. Paul Research & Forecast Report Spring 2017 Apartment Colliers International 3

Largest Market Transactions The three largest transactions over the past 6 months have a lot in common with each other: 1980 s built, class B, suburban location, and most notably, all purchased by institutional capital. Historically institutional capital in Minnesota has targeted class A and core assets. See page 6 for more information on these transactions. Economic Overview The Twin Cities continues to boast one of the lowest metro area unemployment rates in the country at 3.1%. This is largely due to the 16 fortune 500 companies that headquarter in the Twin Cities. These include: United Health Group, Target, U.S. Bancorp, General Mills, and Xcel Energy to name a few. With the help of these large corporations, the Twin Cities is expected to add 32,000 jobs in 2017, an increase of 20% from the year prior. Those jobs are paying a median household income of $72,000, which is 29% above the U.S. norm. The 6th largest employer in the state is the University of Minnesota with a workforce of 25,960. It is also the 8th largest university nationally. This is an important contributing factor to the Twin Cities highly educated workforce with 41.6% of the working age population having achieved a bachelor s degree or higher. This ranks the metro as having the 12th most highly educated workforce in the country. The Mark at Eden Prairie Eden Prairie 1986 508 units $166,831 per unit The largest force driving rental demand in the Twin Cities market is the 55+ age group, which has grown by 20.6% over the last 5 years. This is followed by 4.9% growth in the 20-34 year old age group over the same time period. Minneapolis was ranked as a top 10 city for Millennials in 2016 by Forbes due to its expanding job market, high employee satisfaction and above average median income. We expect these metrics to create increased growth in the younger renting demographics moving into the future. 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 4.8%, contrary to its history as a slow-growth market. The Woods of Burnsville Burnsville 1984 400 units $127,500 per unit Monthly Employment Trends Bristol Village Bloomington 1987 290 units $175,000 per unit Year-Over-Year Employment Change (%) Minneapolis-St. Paul 4 3 2 1 0 2008 (1) 2009 2010 2011 2012 2013 2014 2015 2016 2017 (2) (3) (4) (5) (6) 4 Minneapolis-St. Paul Research & Forecast Report Spring 2017 Apartment Colliers International

Spotlight Trend: Value-Add The Data In our Fall 2016 market report we discussed an expansion in the acquisition criteria of many large area and national buyers from strictly core/core+ product, to include value-add opportunities as well. This was brought on, in part, by increased competition from national buyers in the class A arena, as well as, a three year low in new unit deliveries. With a full year of value-add investing in the rear view mirror, evidence of the strategy can be found in analysis of current market statistics. The most telling of which is the 7.1% annual rent growth that has occurred in buildings built prior to 1970. The next closest build decade is the 1970 s with a 5.7% annual rent growth figure. This increase in rents has not been at the expense of occupancy either, as pre-1970 s building owners continue to enjoy some of the highest occupancy seen market-wide at 98.3% (1970 s build are at the top with 98.4%). Having this type of average rent increase while retaining tenants points us to the explanation that many of these building operators are pursuing a value-add strategy to drive demand and boost rents. The Turnaround Story: Value-Add in Action It is clear that value-add strategies have become a popular investment vehicle in the Twin Cities. We have observed many of these transactions in recent years, but wanted to understand the financial mechanics from an operational point of view. Our example is right outside of Uptown in the West Calhoun neighborhood. The 100-plus unit property was built in the 1970s, and the current owner purchased it in the early 2000 s. They have been renovating units opportunistically as they turnover. We followed the turnover of a one bedroom, one bathroom unit, with original finishes from the 1970 s. The bulk of the renovation focused on two predictable areas: the kitchen and the bathroom. Other improvements included luxury vinyl planking in the entryway and white trim and doors installed throughout the unit. From an ROI perspective, these aesthetic improvements typically yield the highest return in terms of rental rate increases. The renovation cost breakdown is approximated as follows: One-time renovation upgrade costs Annual Rent Change by Year Built 8% 7% 6% 5% 4% 3% 2% 1% 0% 2011 100% 99% 98% 97% 96% 95% % 93% 2011 2012 Occupancy by Year Built 2012 2013 2013 2014 2014 2015 2015 2016 2016 2000+ 2000s 1990s 1980s 1970s Pre-1970 2000+ 2000s 1990s 1980s 1970s Pre-1970 Kitchen Cabinets and Coutertops $2,500 Microwave $200 Bathroom Floor Tiles $200 Bathroom Floor Vanity $400 Doors and Trim $400 Vinyl Flooring $1,300 Labor $3,400 Total $8,400 In its original state, this one-bedroom was commanding $1,065 per month. After a one-month renovation during the Winter of 2017, management had no problem leasing the unit at $1,165 for a net rent increase of $100. Assuming that operating expenses remain the same after renovations, the annualized cap rate of this investment comes out to 14.29%. The actual rate could be even higher when an operator takes into account the long-term maintenance savings of vinyl flooring versus carpet, or if they install high efficiency appliances. In a tight market, where multifamily properties are being acquired at all-time low cap rates, savvy investors are now hitting their return targets through value-add development. Minneapolis-St. Paul Research & Forecast Report Spring 2017 Apartment Colliers International 5

Significant Apartment Sale Activity BUILDING CITY SIZE (UNITS) YEAR BUILT BUYER SELLER SALE PRICE PRICE PER UNIT SALE DATE The Mark at Eden Prairie Eden Prairie 508 1986 Invesco $84,750,000 $166,831 2/6/2017 The Woods of Burnsville Burnsville 400 1984 Resource Real Estate Waterton Associates $51,000,000 $127,500 12/23/2016 Bristol Village Apartments Bloomington 290 1987 TH Real Estate Dominium $50,750,000 $175,000 3/15/2017 City Walk Woodbury 208 2006 LeCesse Development Corporation TA Realty $43,650,000 $209,856 1/17/2017 White Bear Woods White Bear Lake 304 1988 Timberland LivCor $43,500,000 $143,092 10/3/2016 The Felix Burnsville 348 1986 Equus Capital $41,000,000 $117,816 10/14/2016 Gabella at Parkside Apple Valley 196 2015 Bigos Management IMH Financial Corporation $38,500,000 $196,429 12/21/2016 Twelve 501 Burnsville 335 1986 Town Management $35,350,000 $105,522 1/18/2017 Hinton Heights Rental Homes Cottage Grove 249 1995 Curtis Capital Group Belgarde Enterprises $32,000,000 $128,514 2/28/2017 The Fitzgerald Burnsville 240 1988 Equus Capital $31,500,000 $131,250 10/14/2016 The Waters of Plymouth Minneapolis 108 2013 PGIM Real Estate Shelter Corporation $25,000,000 $231,481 11/10/2016 Lexington Hills Eagan 168 1988 Monument Real Estate Service Curtis Capital Group $22,250,000 $132,440 12/15/2016 The Waters of Edina Edina 139 2013 PGIM Real Estate Shelter Corporation $18,401,350 $132,383 11/10/2016 Chestnut Apartments Eden Prairie 159 1974 Belgarde Enterprises $17,550,000 $110,377 3/10/2017 Laguna Apartments Minneapolis 45 2016 Peter Michael Heinemann TLP Services $17,000,000 $377,778 3/16/2017 Canabury Hill Little Canada 111 1977 Scott Weber Ted Glasrud Associates $9,300,000 $83,784 11/22/2016 Highcrest Apartments Vadnais Heights 102 1972 Scott Weber Persaud Properties $8,100,000 $79,412 3/14/2017 Sunfish Lake Apartments West Saint Paul 48 1970 Peter Eisenhuth Nile L & Lucinda Hallett $7,500,000 $122,951 2/28/2017 Astor Place Edina 44 1968 Boisclair Corporation Scott Weber $7,150,000 $162,500 11/14/2016 Courtly Park Townhomes Woodbury 76 1989 Courtly Commercials Madison Equities $6,800,000 $89,474 3/9/2017 Groveland Terrace Maple Grove 48 1997 Randolph Street Realty Capital Scott Weber $6,800,000 $141,667 11/16/2016 The Parkway Minneapolis 70 1919 TE Miller Development Inroads Capital $6,525,000 $93,214 2/9/2017 Whitney Grove Townhomes Apple Valley 56 1981 CommonBond Communities Oaks Properties $5,650,000 $100,893 1/17/2017 Arden Court New Brighton 62 1965 Girard Management Columbia Management $5,500,000 $88,710 1/30/2017 6 Minneapolis-St. Paul Research & Forecast Report Spring 2017 Apartment Colliers International

Significant Apartment Sale Activity BUILDING CITY SIZE (UNITS) YEAR BUILT BUYER SELLER SALE PRICE PRICE PER UNIT SALE DATE Emerson Hill West Saint Paul 35 2006 Burnsville Commercial Investors Sherman Associates $4,820,000 $137,714 12/21/2016 1861-1871 Randolph Ave Saint Paul 16 1937 Scott Weber Ann Krebes $4,500,000 $281,250 3/31/2017 Windsor Court Minneapolis 84 1963 Pergola Management N/A-Internal $4,400,000 $52,381 3/28/2017 Celtic Crossing Osseo 32 2003 Highland Management Group Meer Companies $4,277,000 $133,656 2/1/2017 3400-3414 Tyler St NE Minneapolis 52 1959 Pergola Management Columbia Management $3,800,000 $73,077 1/18/2017 3725 Cedar Ave Minneapolis 41 1971 Baker Management Group The Apartment Shop $3,400,000 $82,927 11/1/2016 Cottages of Albertville Albertville 44 1999 Real Estate Equities Sterling Housing Corp $3,245,000 $73,750 12/22/2016 The Cluster Minneapolis 12 2012 Chad D. Kraft Lupe Development $3,200,000 $266,667 11/4/2016 Creekview Apartments Hopkins 37 1961 Midwest Apartment Brokers FCM Family LLLP $2,750,000 $74,324 2/8/2017 Centennial & Heritage Apartments Farmington 68 1973 Michael & Charity Seeger Scott Weber $4,100,000 $60,2 2/28/2017 Crown Commons Fridley 21 1999 Dan Kraft Blake Bonjean $2,450,000 $116,667 1/31/2017 Oakdale Terrace Townhomes Oakdale 17 1997 Oakdale Terrace, LLC Dominium $2,415,000 $142,059 1/24/2017 Interlachen Manor Edina 17 1967 2631 Columbus Ave Minneapolis 33 1972 Hornig Companies, Inc. Barry & Nancy Wallman Trust Victorsens Rentals $2,412,903 $141,935 12/29/2016 Ade Alabi $2,325,000 $70,455 12/13/2016 Indian Knoll Manor Mound 50 1980 Aeon HRA - City of Mound $2,120,000 $42,400 12/13/2016 Oaklawn Estates Edina 14 1963 Hornig Companies, Inc. Victorsens Rentals $1,987,097 $141,935 12/29/2016 Bell Lofts Minneapolis 25 1916 James M Hansen Sherman Associates $1,900,000 $76,000 12/27/2016 2901-2905 James Ave S Minneapolis 16 1914 15 W 22nd St Minneapolis 19 1915 Maven Real Estate Maven Real Estate Louis Jurisz $1,850,000 $115,625 11/1/2016 Ashish Aggarwal $1,558,000 $82,000 11/18/2016 860 10th Ave SE Minneapolis 12 1990 Bryan Spille Kevin F Sallblad $1,300,000 $108,333 12/16/2016 SE Flats I Minneapolis 16 1970 Folsom Land Llc Southeast Flats Llc $1,150,000 $71,875 3/31/2017 3057 14th Ave S Minneapolis 18 1960 10th Floor Brokers The Apartment Shop $1,122,000 $62,333 10/31/2016 30 Peters Pl Columbia Heights 23 1960 Pergola Management Robert G Ostlund $1,000,000 $43,478 2/1/2017 Minneapolis-St. Paul Research & Forecast Report Spring 2017 Apartment Colliers International 7

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