Get RRA's perspective on the current commercial real estate market directly from the CIO!

1. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
Q3 COMMERCIAL REAL ESTATE MARKET UPDATE
2018
A R I Z O N A
3 3 3 3 E A S T C A M E L B A C K R O A D , S U I T E 1 7 0
P H O E N I X , A Z 8 5 0 1 8
T E L 6 0 2 . 7 1 4 . 5 1 1 1
N E W Y O R K
3 0 1 W E S T 5 7 T H S T R E E T , S U I T E 1 4 A
N E W Y O R K , N Y 1 0 0 1 9
T E L 6 4 6 . 8 4 6 . 1 2 2 7

2. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
2
Values have had a good run but have leveled off.
V A L U E S
Green Street Advisors U.S. Commercial Property Price Index
Indexed to 100 in August 2007
‘98 ‘00 ‘02 ‘04 ‘06 ‘08 ‘10 ‘12 ‘14 ‘16 ‘18
August ‘07 = 100
125.1
61.2

3. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
3
N O T A D E B T - F U E L E D C Y C L E
Commercial mortgage debt outstanding
Multifamily mortgage debt outstanding
Office property values
Multifamily property values
Industrial property values
Retail property values
Luckily, debt levels have risen slower than values. We are not a debt-fueled cycle;
however…
‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17
Source: CoStar, Federal Reserve Financial Accounts of the US, Nareit
200
175
150
125
100
75
Index, 2010:Q1 = 100

4. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
4
…interest only loans continue to increase.
I N T E R E S T O N L Y L O A N S ↑
CMBS and Life Insurer Interest-Only% (Partial and Full IO)
(As of 17Q3) Sources: Trepp, ALCI, CoStar Porfolio Strategy
30%
40%
50%
60%
70%
80%
90%
‘18‘10‘07‘00 ‘15‘05 ‘13

5. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
5
Plateau in pricing leads to decreased transaction volume…
T R A N S A C T I O N V O L U M E ↓
‘13 ‘14 ‘15 ‘16 ‘17 ‘18
Source: Real Capital Analytics
YOY Change in Quarterly Acquisition Volume, All Property Types
50%
25%
0%
-
25%

6. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
6
…and CoStar predicts volume will drop an additional 5% in 2018;
however…
T R A N S A C T I O N V O L U M E W I L L C O N T I N U E T O ↓
YTD Transaction Volume YoY
‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17
80%
60%
40%
20%
0%
-20%
-40%
-60%
47%
26%
37%
17%
45
%
66%
52%
8%
36%
20% 22%
-3%
-12%
-56%-54%

7. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
7
D R Y P O W D E R ( C A S H / H I G H L I Q U I D A S S E T S ) ↑
Closed-End Private Real Estate Assets Under Management, 2000-2017

8. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
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…and investors are hungry to put it out.
I N V E S T O R B E H A V I O R
20152014 2016 2017 2018
Source: CBRE Research, Americas Investor Intentions Survey (2014-2018)
Purchase More
About the Same
Purchase Less
Purchasing Activity Intention Trend

9. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
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YOY apartment volume flat; industrial ↑ ; office, retail and hotel ↓
I N D U S T R I A L ↑ I N 2 0 1 8
Apartment
Office
Retail
Industrial
Hotel
Source: Moody’s RCA, Bloomberg, Nareit 2018
‘14‘13’12‘’11‘10‘09‘08‘07‘06‘05‘03‘02
Transactions in CRE (Billions of dollars, trailing 12 months)
‘15 ‘16 ‘17 ‘18‘04
1,600
1,400
1,200
1,000
800
600
400
200

10. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
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Not all property types have enjoyed the same appreciation.
N A T I O N A L P R O P E R T Y T Y P E I N D I C E S ( R C A C P P I )
APARTMENT
OFFICE – CBD
INDUSTRIAL
OFFICE - SUB
RETAIL
Dec ‘06 index = 100 Source: Real Capital Analytics
‘18‘15‘10‘07 ‘13
110
130
150
170
90
70
50

11. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
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Industrial and Multifamily continue to be the CRE investments of choice, while
retail and hotels are relatively shunned.
I N V E S T O R F A V O R I T E S
In the Americas, which property sector do you believe is the most attractive for
investment purchase in 2018?
Source: CBRE Research, Americas Investor Intentions Survey, 2017 and 2018
38%
50%
28%
20%
18%
14%
8%
10%
5%
4%
4%
2%
2018
2017
Industrial Multifamily Office Retail Other Hotel/Resorts

12. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
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Why do you consider investing in “alternative” sectors?
I N V E S T O R S A R E C O N C E R N E D W I T H V A L U A T I O N S
DIVERSIFICATION
TECHNOLOGICAL
ADVANCEMENT
URBANIZATION
MILLENIAL TRENDS
AGING POPULATION
OTHER
BENEFIT FROM STRUCTURAL
CHANGES IN DEMAND
PROTECTION AGAINST REAL
ESTATE DOWNTURNS
HIGHER INITIAL YIELDS

13. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
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V A L U A T I O N S = T O P I N V E S T O R C O N C E R N
Key Challenges Facing Private Real Estate Fund Managers in 2018
VALUATIONS
DEAL FLOW
INTEREST RATES
PERFORMANCE
VOLATILITY/UNCERTAINTY IN GLOBAL MARKETS
INTEREST RATES
EXIT ENVIRONMENT
FUNDRAISING
REGULATION
AVAILABILITY/PRICING OF DEBT FINANCING
FULFILLING INVESTOR DEMANDS
FEE PRESSURE
Source: Preqin Fund Manager Survey, November 2017
10%
11%
15%
16%
19%
19%
24%
24%
33%
37%
62%
Proportion of Respondents

14. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
14
…and are looking to CRE debt to take some of the risk off the table.
I N V E S T O R D E M A N D F O R C R E D E B T ↑
Share of investors actively pursuing alternative sectors, 2018 vs. 2017
2017 2018
Real Estate Debt 28% 32%
Retirement Living 18% 20%
Medical Office - 20%
Student Living 15% 17%
Health-care 13% 15%
Self-storage 12% 15%
Data Center 6% 13%
Life Sciences - 12%
Infrastructure 6% 11%
Single-family Residential 9% 10%
Cold Storage - 9%

15. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
15
Cap rates are around pre-recession lows and there is concern about
rising rates…
C A P R A T E S A R E L O W C O M P A R E D T O 2 0 0 8
Source: RCA, Bloomberg, Nareit
Percent
APT
OFFICE
RETAIL
INDUSTRIA
L
HOTEL
10-YR
Treasury
Yield
1
2
3
4
5
6
7
8
9
10
2004 2007 2010 2013 2016 20182001

16. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
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…but there is a historically weak correlation between Treasury rates and cap
rates…
C A P R A T E S
Source: Real Capital Analytics
10yr UST
Debt Spread
Equity Spread
Decomposition of US Cap Rates
‘18‘14 ‘16‘04 ‘06 ‘08 ‘10 ‘12
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%

17. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
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C A P R A T E T O 1 0 - Y E A R T - N O T E S P R E A D S A R E W I D E
…and cap rate spreads to 10-yr Treasury are still wide by historic standards.
Basis point spread to the yield on 10-year Treasury notes
APARTMENT
OFFICE
RETAIL
INDUSTRIAL
HOTEL
800
700
600
500
400
300
200
100
‘18‘14 ‘15 ‘16 ‘17‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13

18. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
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Going forward, NOI growth will contribute more to value increases than cap
rates will.
N O I C O N T R I B U T I O N
Cap rate contribution
NOI contribution
Price change
%changeoverayearago
‘17
‘09
‘06
‘98
‘93
‘89
‘11
20
15
10
5
0
-5
-10
-15
-20
Source: CoStar, Nareit

19. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
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C M B S I S S U A N C E B Y Y E A R
CMBS wall of maturities has passed…
> $450B CMBS were issued in 06-07, with many backed by 10-yr mortgages.
‘06 ‘07 ‘16 ‘17
Billionsofdollars
0
50
150
200
250
100
2007
2006
2016 2017
Source: Simfra, Nareit 2018

20. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
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…with banks picking up a lot of CMBS’s slack.
C O M M E R C I A L M O R T G A G E D E B T O U T S T A N D I N G
’17‘16‘15‘14‘13‘12‘11‘10‘09‘08‘07
CMBS
BANKS
LIFE INSUR.
mREITs
All others
Source: Federal Reserve Board Financial Accounts of the United States, Nareit 2018
BillionsofDollars
3,000
2,500
2,000
1,500
1,000
500

21. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
Banks
53%
Other
7%
REITs
4%
Agency CMBS
7%
Agencies
8%
CMBS
9%
Insurers
12%
Overall Holders of Commercial Real Estate Debt
21
Banks are over half the market and continue to grow.
H O L D E R S O F C R E D E B T
Source: Federal Reserve Board

22. T E D V A N B R U N T | C H I E F I N V E S T M E N T O F F I C E R | T V A N B R U N T @ R R A C O S . C O M
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Construction spending is still below long-run average share of GDP.
C O N S T R U C T I O N P U T - I N P L A C E
Retail
Health Care
Multifamily
Office
Lodging
Average,
1993-2018
Source: Census Bureau, Bureau of Economic Analysis, Haver Analytics , Nareit
2011
20082001
2017
1993
PercentofGDP
2.00
1.75
1.50
1.25
1.00
.75
.50
.25
0