Cycle Forecast Real Estate Market Cycles Second Quarter 2018 Estimates

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Cycle Forecast Real Estate Market Cycles Second Quarter 20 Estimates The Congressional Budget Office (CBO) is forecasting Gross Domestic Product (GDP) at rates below 2.0% for the next 0 years and employment growth slowing from.% in 20 to below.0% for the next 0 years. The Federal Reserve (the Fed) is finally acknowledging slow economic growth may not produce inflation above 2.0% (their target maximum rate) and the Fed appears to be holding on any additional interest rate increases for the foreseeable future. Combining moderate demand growth factors of GDP and employment with the low operating cost factors of inflation and interest rates bodes very well for commercial real estate. We continue to forecast 20 and 20 to have increased commercial real estate occupancy and rent growth in most of the property sectors. Office occupancies are forecast to improve 0.% in 2Q, with rents improving 0.4% quarter-over-quarter. Industrial occupancies are forecast to improve 0.% in 2Q, with rents improving 0.% quarter-over-quarter. Apartment occupancies are forecast to decline 0.% in 2Q, with rents improving 0.% quarter-over-quarter. Retail occupancies are forecast to be flat in 2Q, with rents improving 0.3% quarter-over-quarter. Hotel occupancies are forecast to decline 0.2% in 2Q, with room rates improving.% quarter-over-quarter. National Property Type Cycle Forecast 2 3 4 Retail Neighborhood / Community Retail Factory Outlet Office Downtown Health Facility Office Suburban Retail Power Center 0 2 Industrial R&D Flex+ Industrial Warehouse Retail st Tier Regional Malls Hotel Full-Service Hotel Ltd. Service 3 Apartment 4 2Q 20 ESTIMATE Phase Recovery Source: Mueller, 20 National Property Type Cycle Forecast graph shows relative positions of sub-property types major markets are reviewed inside. Glenn R. Mueller, Ph.D. 303.3.32 glenn.mueller@blackcreekgroup.com

The cycle monitor analyzes occupancy movements in five property types in 4 MSAs. Market cycle analysis should enhance investment-decision capabilities for investors and operators. The five property type cycle charts summarize almost 300 individual models that analyze occupancy levels and rental growth rates to provide the foundation for long-term investment success. Commercial real estate markets are cyclical due to the lagged relationship between demand and supply for physical space. The long-term occupancy average is different for each market and each property type. Long-term occupancy average is a key factor in determining rental growth rates a key factor that affects commercial real estate returns. Market Cycle Quadrants Source: Mueller, Real Estate Finance, 20. Rental growth rates can be characterized in different parts of the market cycle, as shown below. Source: Mueller, Real Estate Finance, 20.

Office Forecast Office occupancies are forecast to improve 0.% in 2Q, producing a 0.4% increase year-over-year. Our forecast model continues to estimate an occupancy plateau near 0% over the next two years hence the national office average occupancy at point in the cycle could stay there for a while. Remember that point is green as it is the cost feasible rent level where new construction is justified by the rent levels in the marketplace. Note that 2, or more than half of the 4 markets we cover, are at or above point in the growth phase of the cycle. New office construction has been moderate in the past seven years and we believe that should continue for at least the next few years, allowing a reasonable demand / supply balance. The current national average cap rate for office is.% and the forecast to move to.% over the next year. National average office rents are expected to increase 0.4% in 2Q and be up.% year-over-year. Office Market Cycle FORECAST 2nd Quarter, 20 Estimates 2 Chicago N. New Jersey Stamford 3 4 Wash DC Atlanta Boston Charlotte Cincinnati Denver Detroit Indianapolis+ Long Island Cleveland Las Vegas Norfolk Los Angeles Memphis Milwaukee Minneapolis Philadelphia San Antonio Seattle St. Louis Baltimore+ Columbus Dallas FW East Bay Ft. Lauderdale Hartford Kansas City Miami Oklahoma City Orange County Phoenix Pittsburgh Portland NATION Jacksonville+2 New Orleans New York Palm Beach Raleigh-Durham Richmond Sacramento Salt Lake 0 2 Orlando+2 Riverside+ San Diego Tampa Austin+ Honolulu+ Nashville+ San Francisco+ San Jose 3 Houston 4 Phase Recovery Source: Mueller, 20 Note: The -largest office markets make up 0% of the total square footage of office space we monitor. Thus, the -largest office markets are in bold italic type to help distinguish how the weighted national average is affected. Markets that have moved since the previous quarter are now shown with a + or - symbol next to the market name and the number of positions the market has moved is also shown, i.e., +, +2 or -, -2. Markets do not always go through smooth forward-cycle movements and can regress, or move backward in their cycle position when occupancy levels reverse their usual direction. This can happen when the marginal rate of change in demand increases (or declines) faster than originally estimated or if supply growth is stronger (or weaker) than originally estimated.

Industrial Forecast Industrial occupancies are forecast to improve 0.% in 2Q and increase 0.% year-over-year. E-commerce, at % of all industrial space leased, has lots of room to grow and industry experts estimate it could take a decade for all retailers to build out their distribution systems. This continued new demand reinforces our forecast for peak occupancy levels being sustained through 20 and into 20 at this point in time. Remember that peak occupancy is also described as economic equilibrium where demand and supply grow at the same rate. Industrial is the easiest of all property types to develop and build, so long construction lead times are not necessary. This means that new speculative construction starts can be adjusted quickly and over-supply potentially avoided. The current national average cap rate for industrial is.% and is forecast to move to.% over the next year. We expect rents to increase 0.% in 2Q and increase 3.% year-over-year. Industrial Market Cycle FORECAST 2nd Quarter, 20 Estimates Atlanta Baltimore+ Boston Charlotte Chicago Cincinnati Columbus Dallas FW Detroit East Bay Ft. Lauderdale Hartford Honolulu Houston Indianapolis Jacksonville+ Kansas City Las Vegas- Long Island Los Angeles Miami Milwaukee Minneapolis Nashville New Orleans New York N. New Jersey Norfolk+ Oklahoma City Orange County Orlando Palm Beach Philadelphia Phoenix+ Pittsburgh Portland Raleigh-Durham Richmond Riverside Sacramento San Diego San Francisco Seattle St. Louis Tampa Wash DC NATION 2 3 4 0 Cleveland Memphis Stamford+ 2 3 Austin+ Denver+ Salt Lake+ San Antonio+ San Jose+ 4 Phase Recovery Source: Mueller, 20 Note: The 2-largest industrial markets make up 0% of the total square footage of industrial space we monitor. Thus, the 2-largest industrial markets are in bold italic type to help distinguish how the weighted national average is affected. Markets that have moved since the previous quarter are now shown with a + or - symbol next to the market name and the number of positions the market has moved is also shown, i.e., +, +2 or -, -2. Markets do not always go through smooth forward-cycle movements and can regress, or move backward in their cycle position when occupancy levels reverse their usual direction. This can happen when the marginal rate of change in demand increases (or declines) faster than originally estimated or if supply growth is stronger (or weaker) than originally estimated.

Apartment Forecast Apartment occupancies are forecast to decline 0.% in 2Q, and decrease 0.4% year-over-year. The good news is apartment groundbreakings declined in July 20, the first time in five years. This may be the result of tighter development loan standards and the market fully recognizing the oversupply situation. Hopefully, this is the start of a trend moving supply growth back in line with demand over the next few years. Recent articles about millennials buying homes point to their continued desires for less space, more location flexibility and the challenge of college debt and adequate down-payments. The current national average cap rate for apartment is.0% and the forecast is a move to.2% over the next year. The national apartment asking rental rate is expected to increase 0.% in 2Q and we estimate a.3% rent increase year-over-year. Apartment Market Cycle FORECAST 2nd Quarter, 20 Estimates 3 4 2 Honolulu Las Vegas Minneapolis Norfolk-2 Riverside Sacramento San Diego St. Louis 0 Chicago East Bay Hartford Indianapolis Jacksonville Long Island 2 Atlanta Austin Baltimore Boston Cleveland Columbus Dallas FW Ft. Lauderdale Kansas City Memphis Los Angeles Orange County Phoenix San Antonio San Francisco San Jose- Seattle 3 4 New Orleans New York N. New Jersey Philadelphia Portland Raleigh Durham+ Salt Lake Stamford- Wash DC NATION Charlotte Cincinnati Denver Detroit Miami Milwaukee Oklahoma City Orlando Palm Beach+ Pittsburgh Richmond Tampa Houston Nashville Phase Recovery Source: Mueller, 20 Note: The 0-largest apartment markets make up 0% of the total square footage of multifamily space we monitor. Thus, the 0-largest apartment markets are in bold italic type to help distinguish how the weighted national average is affected. Markets that have moved since the previous quarter are now shown with a + or - symbol next to the market name and the number of positions the market has moved is also shown, i.e., +, +2 or -, -2. Markets do not always go through smooth forward-cycle movements and can regress, or move backward in their cycle position when occupancy levels reverse their usual direction. This can happen when the marginal rate of change in demand increases (or declines) faster than originally estimated or if supply growth is stronger (or weaker) than originally estimated.

Retail Forecast Retail occupancy is forecast to be flat in 2Q and increase 0.% year-over-year. Experience based retail including restaurant, bar, brewery, health, game and other activates continue to grow as millennials want to spend some time doing things away from their apartments. E-commerce storage for same day delivery is also expected to fill some older retail space in certain locations. New supply is forecast to be low in retail as lender caution continues. The current national average cap rate for retail is.% and the forecast to stay at.% over the next year. Retail rental rates are expected to increase 0.3% in 2Q and.% year-over-year. Retail Market Cycle FORECAST 2nd Quarter, 20 Estimates 3 4 2 Phase Recovery Cincinnati+ Detroit Jacksonville+ Las Vegas+ Milwaukee+ Oklahoma City+ Philadelphia Atlanta Chicago Cleveland Columbus Kansas City Memphis 0 N. New Jersey Norfolk Orange County Phoenix Riverside St. Louis Source: Mueller, 20 Baltimore Boston Denver East Bay Ft. Lauderdale Long Island Los Angeles Miami Minneapolis New Orleans New York Orlando Charlotte+ Hartford+2 Nashville+ Stamford+2 NATION Palm Beach Pittsburgh Portland Raleigh-Durham Richmond San Antonio San Diego San Francisco San Jose Seattle Tampa Wash DC 2 Austin Dallas FW+ Honolulu Houston Indianapolis+ Sacramento+2 Salt Lake+ 3 4 Note: The -largest retail markets make up 0% of the total square footage of retail space we monitor. Thus, the -largest retail markets are in bold italic type to help distinguish how the weighted national average is affected. Markets that have moved since the previous quarter are now shown with a + or - symbol next to the market name and the number of positions the market has moved is also shown, i.e., +, +2 or -, -2. Markets do not always go through smooth forward-cycle movements and can regress, or move backward in their cycle position when occupancy levels reverse their usual direction. This can happen when the marginal rate of change in demand increases (or declines) faster than originally estimated or if supply growth is stronger (or weaker) than originally estimated.

Hotel Forecast Hotel occupancy is forecast to decrease 0.2% in 2Q and decline 0.% year-over-year. The new starts underway now produce completions in 20 that should keep hotel in the hypersupply phase of the cycle at point 2. With a small occupancy decline in 2Q, it appears that Q may have been the peak of the cycle. If construction slows by a small amount over the next year, occupancies could trend back up toward peak occupancy levels. The current national average cap rate for hotel is.0% and the forecast to move to.2% over the next year. Occupancies are high enough that we expect good room rate growth over the next year. Room rate growth is expected to increase.% in 2Q and annual room rate growth is expected to be 3.% yearover-year. Hotel Market Cycle FORECAST 2nd Quarter, 20 Estimates Cleveland 2 3 Norfolk Stamford- 4 Hartford Cincinnati Columbus- Indianapolis Raleigh-Durham- Memphis Milwaukee Orange County Riverside- Honolulu Jacksonville Las Vegas Minneapolis- New Orleans Palm Beach Phoenix Salt Lake+ San Francisco 0 2 Kansas City- Sacramento Atlanta Baltimore Boston Chicago Detroit+ East Bay Los Angeles Miami Richmond San Antonio Nashville Portland San Jose Seattle+ St. Louis+ Tampa Wash DC NATION 3 Charlotte+ Dallas FW Denver Ft. Lauderdale+ Long Island+ New York N. New Jersey+ Orlando Philadelphia San Diego Austin Houston Oklahoma City+ Pittsburgh 4 Phase Recovery Source: Mueller, 20 Note: The 4-largest hotel markets make up 0% of the total square footage of hotel space that we monitor. Thus, the 4-largest hotel markets are in boldface italics to help distinguish how the weighted national average is affected. Markets that have moved since the previous quarter are now shown with a + or - symbol next to the market name and the number of positions the market has moved is also shown, i.e., +, +2 or -, -2. Markets do not always go through smooth forward-cycle movements and can regress, or move backward in their cycle position when occupancy levels reverse their usual direction. This can happen when the

marginal rate of change in demand increases (or declines) faster than originally estimated or if supply growth is stronger (or weaker) than originally estimated.

Market Cycle Analysis Explanation Supply and demand interaction is important to understand. Starting in Recovery Phase I at the bottom of a cycle (see chart below), the marketplace is in a state of oversupply from either previous new construction or negative demand growth. At this bottom point, occupancy is at its trough. Typically, the market bottom occurs when the excess construction from the previous cycle stops. As the cycle bottom is passed, demand growth begins to slowly absorb the existing oversupply and supply growth is nonexistent or very low. As excess space is absorbed, vacancy rates fall, allowing rental rates in the market to stabilize and even begin to increase. As this recovery phase continues, positive expectations about the market allow landlords to increase rents at a slow pace (typically at or below inflation). Eventually, each local market reaches its long-term occupancy average, whereby rental growth is equal to inflation. In Expansion Phase II, demand growth continues at increasing levels, creating a need for additional space. As vacancy rates fall below the long-term occupancy average, signaling that supply is tightening in the marketplace, rents begin to rise rapidly until they reach a cost-feasible level that allows new construction to commence. In this period of tight supply, rapid rental growth can be experienced, which some observers call rent spikes. (Some developers may also begin speculative construction in anticipation of cost-feasible rents if they are able to obtain financing). Once cost-feasible rents are achieved in the marketplace, demand growth is still ahead of supply growth a lag in providing new space due to the time to construct. Long expansionary periods are possible and many historical real estate cycles show that the overall up-cycle is a slow, longterm uphill climb. As long as demand growth rates are higher than supply growth rates, vacancy rates will continue to fall. The cycle peak point is where demand and supply are growing at the same rate or equilibrium. Before equilibrium, demand grows faster than supply; after equilibrium, supply grows faster than demand. Hypersupply Phase III of the real estate cycle commences after the peak / equilibrium point # where demand growth equals supply growth. Most real estate participants do not recognize this peak / equilibrium s passing, as occupancy rates are at their highest and well above long-term averages, a strong and tight market. During Phase III, supply growth is higher than demand growth (hypersupply), causing vacancy rates to rise back toward the long-term occupancy average. While there is no painful oversupply during this period, new supply completions compete for tenants in the marketplace. As more space is delivered to the market, rental growth slows. Eventually, market participants realize that the market has turned down and commitments to new construction should slow or stop. If new supply grows faster than demand once the long-term occupancy average is passed, the market falls into Phase IV. Recession Phase IV begins as the market moves past the long-term occupancy average with high supply growth and low or negative demand growth. The extent of the market down-cycle will be determined by the difference (excess) between the market supply growth and demand growth. Massive oversupply, coupled with negative demand growth (that started when the market passed through long-term occupancy average in 4), sent most U.S. office markets into the largest down-cycle ever experienced. During Phase IV, landlords realize that they will quickly lose market share if their rental rates are not competitive. As a result, they then lower rents to capture tenants, even if only to cover their buildings fixed expenses. Market liquidity is also low or nonexistent in this phase, as the bid ask spread in property prices is too wide. The cycle eventually reaches bottom as new construction and completions cease, or as demand growth turns up and begins to grow at rates higher than that of new supply added to the marketplace. Source: Mueller, Real Estate Finance, 20. This research currently monitors five property types in 4 major markets. We gather data from numerous sources to evaluate and forecast market movements. The market cycle model we developed looks at the interaction of supply and demand to estimate future vacancy and rental rates. Our individual market models are combined to create a national average model for all U.S. markets. This model examines the current cycle locations for each property type and can be used for asset allocation and acquisition decisions.

Important Disclosures and Certifications I, Glenn R. Mueller, Ph.D. certify that the opinions and forecasts expressed in this research report accurately reflect my personal views about the subjects discussed herein; and I, Glenn R. Mueller, certify that no part of my compensation from any source was, is, or will be directly or indirectly related to the content of this research report. The views expressed in this commentary are the personal views of Glenn R. Mueller and do not necessarily reflect the views of Black Creek Group itself. The views expressed reflect the current views of Mr. Mueller as of the date hereof and neither Mr. Mueller nor Black Creek Group undertakes to advise you of any changes in the views expressed herein. The information contained in this report: (i) has been prepared or received from sources believed to be reliable but is not guaranteed; (ii) is not a complete summary or statement of all available data; (iii) does not constitute investment advice and is not an offer or recommendation to buy or sell any particular securities; and (iv) is not an offer to buy or sell any securities in the markets or sectors discussed in the report. The main purpose of this report is to provide a broad overview of the real estate market in general. Any estimates, projections or predictions given in this report are intended to be forward-looking statements. Although we believe that the expectations in such forward-looking statements are reasonable, we can give no assurance that any forward-looking statements will prove to be correct. Such estimates are subject to actual known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those projected. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained herein to reflect any change in our expectations or any change in circumstances upon which such statement is based. The opinions and forecasts expressed in this report are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Any opinions or forecasts in this report are not guarantees of how markets, sectors or individual securities or issuers will perform in the future, and the actual future performance of such markets, sectors or individual securities or issuers may differ. Further, any forecasts in this report have not been based on information received directly from issuers of securities in the sectors or markets discussed in the report. Black Creek Group, LLC disclaims any and all liability relating to this report, including, without limitation, any express or implied representations or warranties for statements or errors contained in, or omissions from, this report. Tax considerations, margin requirements, commissions and other transaction costs may significantly affect the economic consequences of any transaction concepts referenced in this commentary and should be reviewed carefully with one s investment and tax advisors. Investment concepts mentioned in this commentary may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not a guarantee of future results. Investing involves risk, including the possible loss of principal and fluctuation of value. Dr. Mueller serves as a Real Estate Investment Strategist with Black Creek Group. In this role, he provides investment advice to certain affiliates of Black Creek Group regarding the real estate market and the various sectors within that market. Mr. Mueller s compensation from Black Creek Group and its affiliates is not based on the performance of any investment advisory client, offering or product of Black Creek Group or its affiliates. Black Creek Group is a real estate investment management company that focuses on creating institutional-quality real estate financial products for individual and institutional investors. Certain affiliates of Black Creek Group also provide investment management services and advice to various investment companies, real estate investment trusts and other advisory clients about the real estate markets and sectors, including specific securities within these markets and sectors. Dr. Mueller may from time to time have personal investments in real estate, in securities of issuers in the markets or sectors discussed in this report, or in investment companies or other investment vehicles that invest in real estate and the real estate securities markets (including investment companies and other investment vehicles for which an affiliate of Black Creek Group may serve as investment adviser). Real estate investments purchased or sold based on the information in this report could directly benefit Dr. Mueller by increasing the value of his personal investments. 20 Black Creek Research, th Street, Suite 00, Denver, CO 0202 NOT A DEPOSIT NOT FDIC INSURED NOT GUARANTEED BY THE BANK MAY LOSE VALUE NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY BCG-MCF-AUG