Economic & Commercial Real Estate Finance Outlook May 2017 Presented by Barbara Byrne Denham REIS, Inc. Jamie Woodwell Mortgage Bankers Association

Agenda The Economy Commercial Real Estate Markets CRE Finance Markets Outlook

The Economy

Economic Dashboard GDP Growth: 0.7% (SAAR, Q1 2017) Job Growth: 211,000 (SA, Apr. 2017) Unemployment Rate: 4.4% (SA, Apr. 2017) Participation Rate: 62.9% (SA, Apr. 2017) Year-over-year Change in Weekly Earnings: +2.55% (SA, Apr. 2017) Retail Sales: +4.8% (Year-over-year change, excl. motor vehicle & parts, Mar., 2017) Inflation: 2.0% (CPI-U year-over-year change, less food and energy, Mar. 2017)

The Current Expansion is Growing Slower So it has room to grow Source: Bureau of Economic Analysis

Labor Market Tightness - Implications Source: Bureau of Labor Statistics

Employment by Selected Industry Indexed to January 2008 = 100 Source: Bureau of Labor Statistics

Metro Areas are Seeing Most of the Job Growth

Total Employment Growth Top and Bottom Metros, Q1 2017 over Q1 2016 Source: Reis

Retail Sales, year-over-year change Source: Census

Changes in the Number of Owner- and Renter-occupied Households and Homeownership Rate Thousands of households Homeownership rate (%) Source: Mortgage Bankers Association and Census Bureau

The Millennial Progression Mortgage Bankers Association 7/18/2018 The Millennial Progression In 2014, 23 yo represented the largest 1 year age group of millennials (w 21-25 being the largest 5 year band) Peaks are in 2020 2025 and 2030 for the groups shown change in pop (2014-2024) 26-30 31-35 36-40 1,560,349 3,212,914 3,074,399 Source: Census 2014 National Population Projections Mortgage Bankers Association

CRE Fundamentals

National Apartment Market Supply & Demand Trends Source: Reis; Top 50 Primary Apartment Markets

National Apartment Market Quarterly Vacancy and Rent Statistics Source: Reis; 79 of 275 Apartment Markets

Top and Bottom Apartment Markets Year-Over-Year Comparisons Effective Revenue Per Unit, Percent Change 2016Q1 – 2017Q1 Source: Reis

National Office Market Supply & Demand Trends Source: Reis; Top 50 Primary Office Markets

National Office Market Quarterly Vacancy and Rent Statistics Source: Reis; 79 of 190 Office Markets.

Net Absorption per Added Employee has Changed

Top and Bottom Office Markets Year-Over-Year Comparisons Effective Revenue Per Square Foot, Percent Change 2016Q1 – 2017Q1 Source: Reis

National Retail Market Supply & Demand Trends Source: Reis; Top 50 Primary Retail Markets

National Retail Market Quarterly Vacancy and Rent Statistics Neighborhood and Community Shopping Centers Source: Reis; 77 of 190 Office Markets

Top and Bottom Retail Markets Year-Over-Year Comparisons Effective Revenue Per Square Foot, Percent Change 2016Q1 – 2017Q1 Source: Reis

Real-Estate Using Retail Sales Not as Bad as the Media has Portrayed

Industrial Powers Through Flex/R&D vacancies fell to 10.9%, a 20 basis point drop in the first quarter. Effective rents rose by 0.5% in the quarter, and 2.0% over the year – up by 20 bps versus 2016’s annual effective rent growth. Flex/R&D Warehouse/distribution vacancies fell by 10 basis points in the first quarter, to 10.1% Effective rents rose by 0.6% in the first quarter; 2.4% year- over-year. Warehouse/ Distribution Source: Reis

Self-Storage in the First Quarter First quarter occupancies weakened by 40 basis points in the fourth quarter, ending the year at 89.3%. There were still gains in occupancy for the year, with occupancies improving by 20 basis points over year-end 2016’s 89.1%. Year-over-year rent growth was 4.1% for the West region, followed by the South Atlantic. Source: Reis

Senior Housing Fundamentals Source: Reis

Student Housing in the First Quarter Updated figures reflect outlook from Fall 2016 to Fall 2017. Continued strength in properties that rent by the Bed, with vacancies expected to fall by 40 basis points to 4.3% by the start of Fall 2017. Vacancies drift upwards for properties that rent by the Unit, but vacancies still rock bottom low at 1.8%. In general, rent growth for properties that rent by the Bed appears stronger. Source: Reis

Affordable Housing Fundamentals National vacancies increased by 10 basis points in Q1 2017 at a very tight 1.7%. Asking rent growth for the US was 0.2%, but some metros like Charleston and Minneapolis saw growth of close to 1.0% for the quarter. Total coverage of 100 metros throughout the country; 31 metros saw a slight rent decline in the first quarter. Source: Reis

Cap Rate Spreads Against 10-Year Treasury Rate 2008Q1 – 2017Q1 Source: Reis

Summary and Conclusions GDP growth slowed in 2016 and early 2017, but this was not unexpected. Job Growth in 2017 has improved in most sectors except retail. Holding steady with our forecasts, but with a significantly wider band of uncertainty – both on the upside and the downside. Near term boost in economic activity may show up in stronger CRE fundamentals. Again, note higher uncertainty both on the upside and downside. More questions than answers in the new administration’s first 100+ days.

CRE Finance

Multifamily and Other Commercial Mortgage Delinquency Rates Among Major Investors Bank & Thrift (90+ day delinquency or nonaccrual) CMBS (30+ day delinquency including REO) Life Companies (60+ day delinquency including in process of foreclosure) Fannie Mae and Freddie Mac (60+ day delinquency) Source: FDIC, Wells Fargo Securities and Intex, ACLI, Fannie Mae and Freddie Mac.

CMBS Delinquency Rate (%) Source: Trepp, Morgan Stanley Research

1998-2007 Vintage Conduit CMBS Balance, 60d+ including FC/REO and Delinquency Rate Source: JPMorgan Securities

Mortgage Bankers Association 7/18/2018 Change in Outstanding Balance of Commercial and Multifamily Mortgages ($billions) Source: MBA CREF Database Mortgage Bankers Association

Commercial/Multifamily Mortgage Debt Outstanding ($millions) Source: MBA Commercial and Multifamily Mortgage Debt Outstanding

Commercial/Multifamily Mortgage Servicing Firms, by Share of UPB of Primary and Master Servicing 73% >75% of balance in one source Source: MBA

Commercial/Multifamily Mortgage Bankers Originations Mortgage Bankers Association 7/18/2018 Commercial/Multifamily Mortgage Bankers Originations $billions Source: MBA CREF Database Mortgage Bankers Association

Mortgage Bankers Originations, by Property Type ($billions) Source: MBA

Mortgage Bankers Originations, by Capital Source ($billions) Source: MBA

Different Capital Sources, Different Drivers Banks – CRE Fundamentals, Regulatory Guidance, HVCRE Life Companies – Alternative Investment Options GSEs – Lending Caps, Housing Goals, Duty to Serve CMBS – Bond Markets, Risk Retention, Fundamental Review of the Trading Book FHA – Rates, Construction, MAP Guide, MIP for Affordable

Commercial & Multifamily Mortgage Bankers Originations in 2016 – 10-year, Fixed Rate Loans Source: MBA, Characteristics of Commercial and Multifamily Originations

BANKS: Year-to-date Originations for Banks ($billions) Source: MBA CREF Database

LIFE INSURANCE COMPANIES: Year-to-date Originations for Life Insurance Companies ($billions) Source: MBA CREF Database

FANNIE MAE AND FREDDIE MAC: Quarterly Originations for GSEs ($billions) Source: MBA CREF Database

CMBS: Originations for CMBS ($billions) Source: MBA CREF Database

CMBS: Spreads to Swaps (basis points) Source: MBA and CMAlert

OUTLOOK

UPB of Non-Bank Commercial/ Multifamily Mortgages, by Year of Maturity ($billions) Source: MBA Annual Commercial/Multifamily Loan Maturity Volume

UPB of Non-Bank Multifamily Mortgages, by Year of Maturity ($billions) Source: MBA Annual Commercial/Multifamily Loan Maturity Volume

Mortgage Bankers Association 7/18/2018 Current Unpaid Principal Balance of Non-bank Commercial/multifamily Loans Maturing, by Year $Billions Source: MBA CREF Database Mortgage Bankers Association

Mortgage Bankers Association 7/18/2018 Commercial/Multifamily Property Sales, Mortgage Bankers Originations and Non-bank Maturities ($millions) n.a. n.a. n.a. n.a. Source: MBA CREF Database and Real Capital Analytics NOTE: Maturities not available prior to 2009 Mortgage Bankers Association

Mortgage Bankers Association 7/18/2018 Actual and Forecast Commercial/Multifamily Mortgage Bankers Originations $millions Source: MBA CREF Database Mortgage Bankers Association

Commercial and Multifamily Property Prices and Mortgage Debt Outstanding (Index: Nov. 2007 = 100) Source: MBA and Moody’s/RCA

Contributions to Commercial Property Price Changes

Mortgage Bankers Association 7/18/2018 Historical Mortgage Rates, NOIs and Property Prices Relative to Current Levels Life Company Fixed Rate Mortgage Rate (Percent) Moody’s/RCA Property Prices (Index: 2016 Nov. = 100) NCREIF NOIs (Index: 2016 Q4 = 100) Source: ACLI, NCREIF, Moody’s/RCA Mortgage Bankers Association

Ten-Year Treasury Yields Actual and Q4 Philly Fed Forecasts Percent Source: Federal Reserve Board, Federal Reserve Bank of Philadelphia

Mortgage Bankers Association 7/18/2018 Contact Information Jamie Woodwell Vice President | Commercial Real Estate Research MBA 202-557-2936 jwoodwell@mba.org Barbara Byrne Denham Senior Economist Reis, Inc. (212) 921-1122 | extension 286 barbara.denham@reis.com Twitter: @bbdeconomist Mortgage Bankers Association