Will 2016 Be the Last Hurrah for Commercial Real Estate? Presented By: John Chang First Vice-President Marcus & Millichap Research Services

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1 Will 2016 Be the Last Hurrah for Commercial Real Estate? Presented By: John Chang First Vice-President Marcus & Millichap Research Services

2 Rising Uncertainty Creating Headwinds for Commercial Real Estate

3 Expansion Periods (Months) Current Expansion Longer Than Average Growth Cycle Is the End Near? Average: 58 Months Current* * Through March 2016, 82 Months Sources: Marcus & Millichap Research Services, National Bureau of Economic Research

4 Annualized Quarterly Percent Change U.S. GDP Enters Seventh Year of Growth; 2016 Outlook Positive but Still Choppy GDP Growth Consumer Confidence 10% 140 5% 0% -5% -10% * Through 1Q Sources: Marcus & Millichap Research Services, BEA, The Conference Board * Consumer Confidence Index

5 Price per Barrel (Mar Dollars) Inflation-Adjusted Crude Oil Prices Tumble Good for Consumers, but Risks Reemerge $160 Annual Gas Savings per Driver: $540 Arab Spring $120 $80 Iraq Invaded Kuwait Long-Term Average: $54.23 $40 Great Recession $0 Asian Financial Crisis Invasion of Iraq * * Through April 22, 2016 ** Since 2014 trough Oil prices for West Texas Intermediate crude Sources: Marcus & Millichap Research Services, Oil Price Information Service, BLS, Federal Reserve

6 Dollar Volume (Bil.) Bay Area Venture Capital Steps Back But Still Elevated by Long-Term Measures $10.0 Dollar Volume Deals 600 $7.5 $5.0 $2.5 $ * * Through 1Q Sources: Marcus & Millichap Research Services, PwC/NVCA Money Tree Report, Thomson Reuters Number of Deals

7 Dow Jones Index International Forces Collide with Wall Street Stock Prices Increasingly Volatile 19,000 18,000 Dow Jones Fell 1954 Points (11.0%) in 14 Days 17,000 16,000 Dow Jones Fell 1879 Points (10.7%) in 5 Days 15, * * Through April 22, 2016 Sources: Marcus & Millichap Research Services, Dow Jones

8 Economic Momentum Still Has Strength

9 Quarterly Job Growth (Millions) Employment Growth Durable and Remarkably Stable Million +8.2 Million Million* Total: 2,744, Forecast: 2,500, Months of Continuous Gains Monthly Average: 203,000 Jobs * * Through 1Q Sources: Marcus & Millichap Research Services, BLS, economy.com

10 National Employment Rank by Metro Y-O-Y Percent Change Through March 2016 Top 10 Metros Absolute Change Percent Change Bottom 10 Metros Absolute Change Percent Change San Francisco 44, % Orlando 47, % Austin 39, % Dallas-Fort Worth 128, % Salt Lake City 40, % Nashville 32, % San Jose 36, % Jacksonville 22, % Phoenix 65, % Portland 36, % U.S. Total 2,802, % Houston 10, % Cleveland 9, % Indianapolis 12, % Kansas City 13, % Northern New Jersey 27, % Milwaukee 11, % St. Louis 22, % Minneapolis 34, % Miami 20, % Chicago 85, % U.S. Total 2,802, % Oakland: (25,400, 2.3%) Sources: Marcus & Millichap Research Services, BLS

11 Recession Year-Over-Year Change Retail Sales (Billions) U.S. Core Retail Sales Building Steady Momentum - Growth Supporting Economy 8% 20-Year Average: 4.1% $350 $1,001/person 4% $ % 0% $270 $866/person -4% $ % 16* $ * * Through March Core retail sales excludes auto and gasoline sales Sources: Marcus & Millichap Research Services, U.S. Census Bureau

12 Median Price (000s) Home Sales (000s) Single-Family Prices Exceed Prior Peak; Home Sales Maintain Momentum Median Home Prices Existing Home Sales $250 Single-Family Condo Y-O-Y Change 650 Single-Family and Condo $225 +6% +4% 550 Y-O-Y Change $ % $ $ * * * Through March Sources: Marcus & Millichap Research Services, National Association of Realtors

13 Unique Dynamics Restraining Interest Rates U.S. 10-Year Treasury Yield Sources: Marcus & Millichap Research Services, Federal Reserve Board

14 Rate Inflation Risk Edging Higher 10-Year Treasury Range-Bound Core Inflation 10-Year Treasury 8% 6% 10-Year Treasury Long-Term Average: 4.13% 4% 2% 0% Core Inflation Long-Term Average: 2.06% * * 10-Year treasury through April 20, 2016; Core inflation through March 2016 Sources: Marcus & Millichap Research Services, Federal Reserve, BLS

15 Positive Demographics Support Growth Outlook

16 Millennials: Diverse, Educated, Digital Dramatically Influencing All Real Estate 80 Million Millennials- Same as Population of Germany 10,000 Turn 21 Each Day Comprise 1 in 3 Workers $2.5T Spending Power 85% Own Smart Phones Most Educated Generation

17 Population (Millions) Millennials Cornerstone of Economic Outlook U.S Population by Age Million Year Old 5-Year Growth: 1,400, Million Living With Parents Millennial Propensity to Rent* 68% Age * As of 2014 Note: Total Baby Boomer Population 75 million. Total Millennial Population 80 million Sources: Marcus & Millichap Research Services, U.S. Census Bureau

18 Millennials: 23 Million Young Adults Untapped Potential

19 Apartment Investments Surpass Expectations Construction Rising

20 Completions (000s of Units) Apartment Construction Elevated but Demand Keeping Pace 300 Completions Vacancy Rate 10% % 6% 4% 2% Average Vacancy Rate * 0% * Forecast Sources: Marcus & Millichap Research Services, MPF Research

21 Average Vacancy Rate Bay Area Apartment Vacancy Rate Trends 12% 9% 6% * 2016 Vacancy* San Francisco: 3.6% San Jose: 3.7% Oakland: 3.1% U.S.: 4.2% 3% 0% San Francisco San Jose Oakland U.S. * Forecast Sources: Marcus & Millichap Research Services, MPF Research

22 Y-O-Y Percent Change Bay Area Apartment Effective Rent Growth Outpacing Strong National Performance 15% Bay Area United States 10% 5% 0% -5% -10% * * Forecast Bay Area includes San Francisco, San Jose, and Oakland Sources: Marcus & Millichap Research Services, MPF Research,

23 Total Transactions (000s) U.S. Apartment Investment Transaction Growth Pace Moderating in 2016 $1M-$10M $10M-$20M $20M * * Preliminary estimate for trailing 12-months through 1Q Includes sales $1 million and greater Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics

24 Average Price per Unit (000s) Dramatic Apartment Appreciation Supported by Performance Gains $ % $ % +22% $ % $100 $0 San Francisco San Jose Oakland U.S. Includes sales $1 million and greater Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics

25 Average Cap Rate Apartment Cap Rates Tightened Dramatically Yields Likely to Flatten 9.0% Bay Area United States 7.5% 200 bps 140 bps 6.0% 30 bps 90 bps 4.5% 3.0% Includes sales $1 million and greater Bay Area includes San Francisco, San Jose, and Oakland Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics

26 Office Investments Mount Slower Recovery, but Momentum Building

27 Completions (Mil. of Sq. Ft.) Office Construction Limited but Rising Supports Office Sector Recovery 160 Completions Vacancy Rate 20% % 16% 14% Average Vacancy Rate * 12% * Forecast Sources: Marcus & Millichap Research Services, CoStar Group, Inc.

28 Average Vacancy Rate Bay Area Office Vacancy Among Tightest in the Country 32% 24% * 2016 Vacancy* San Francisco: 8.6% San Jose: 8.1% Oakland: 9.9% U.S.: 14.8% 16% 8% 0% San Francisco San Jose Oakland U.S. * Forecast Sources: Marcus & Millichap Research Services, CoStar Group, Inc.

29 Y-O-Y Percent Change Bay Area Office Demand Supporting Outsized Asking Rent Growth 15.0% Bay Area United States 7.5% 0.0% -7.5% -15.0% * * Forecast Bay Area includes San Francisco, San Jose, and Oakland Sources: Marcus & Millichap Research Services, CoStar Group, Inc.

30 Total Transactions (000s) U.S. Office Transaction Velocity Elevated but Likely to Flatten $1M-$10M $10M-$20M $20M * * Trailing 12-months through 1Q Includes sales $1 million and greater Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics

31 Average Price per Sq. Ft. Bay Area Office Pricing Achieving Dramatic Increases $ % $ % $250-15% -5% $125 $0 San Francisco San Jose Oakland U.S. Includes sales $1 million and greater Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics

32 Average Cap Rate Office Cap Rate Still Higher Than Last Cycle 10.0% Bay Area United States 80 bps 8.5% 7.0% 5.5% 4.0% 2000 Includes sales $1 million and greater Bay Area includes San Francisco, San Jose, and Oakland Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics 180 bps 150 bps

33 Industrial Sector Being Reinvented New Drivers Spark Big Changes

34 Trillions of Dollars Strong Dollar Pressuring U.S. Exports but Import Containers Rising on Purchasing Power $6.0 Imports Exports $4.5 $3.0 $1.5 $0.0 Sources: Marcus & Millichap Research Services, BEA, IHS Maritime & Trade

35 Monthly ecommerce Sales (Billions) ecommerce Reshaping Industrial Investments; Internet Retailers Focus on Proximity $40 ecommerce now 11.4% of Total Retail $30 $20 $10 $ * Through February Sources: Marcus & Millichap Research Services, U.S. Census Bureau *

36 Completions (Mil. of Sq. Ft.) Industrial Construction Still Short of Last Cycle; Facilitates Record Vacancy Levels 300 Completions Vacancy Rate 12% % 8% 6% Average Vacancy Rate * 4% * Forecast Sources: Marcus & Millichap Research Services, CoStar Group, Inc.

37 Average Vacancy Rate Bay Area Industrial Vacancy Rates Exceptionally Tight 20% 15% * 2016 Vacancy* San Francisco: 3.7% San Jose: 7.0% Oakland: 4.8% U.S.: 6.0% 10% 5% 0% San Francisco San Jose Oakland U.S. * Forecast Sources: Marcus & Millichap Research Services, CoStar Group, Inc.

38 Y-O-Y Percent Change Bay Area vs. U.S. Industrial Average Asking Rent Growth Trends 20% Bay Area United States 10% 0% -10% -20% * * Forecast Bay Area includes San Francisco, San Jose, and Oakland Sources: Marcus & Millichap Research Services, CoStar Group, Inc.

39 Total Transactions (000s) U.S. Industrial Investment Activity Elevated Trends Point to Flattening Growth Pace $1M-$10M $10M-$20M $20M * * Trailing 12-months through 1Q Includes sales $1 million and greater Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics

40 Average Price per Sq. Ft. Bay Area Industrial Pricing Elevated, Oakland Getting a Boost $ % $ % $160-4% $80 +4% $0 San Francisco San Jose Oakland U.S. Includes sales $1 million and greater Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics

41 Average Cap Rate Bay Area Industrial Cap Rates Break Through Peak of Last Cycle 12% Bay Area United States 10% 120 bps 40 bps 8% 120 bps 190 bps 6% 4% Includes sales $1 million and greater Bay Area includes San Francisco, San Jose, and Oakland Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics

42 Will 2016 Be the Last Hurrah for Commercial Real Estate?

43 Average Rate 580 bps 460 bps 430 bps 480 bps 480 bps 440 bps Commercial Real Estate Yields Remain Exceptional; Long-Term Investment Outlook Positive Commercial Real Estate 10-Year Treasury Rate 12% Cap Rate Long-Term Avg. 9% 6% 3% 0% 10-Yr Treasury Long-Term Avg bps * Through April 27 Includes all apartment, office, retail and industrial sales $1 million and greater Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics *

44 2016: Paradise or Pandemonium?

45 Will 2016 Be the Last Hurrah for Commercial Real Estate? Presented By: John Chang First Vice-President Marcus & Millichap Research Services

U.S. Economic and Apartment Market Overview and Outlook. July 15, 2014

2014 U.S. Economic and Apartment Market Overview and Outlook July 15, 2014 U.S. Economic Overview U.S. GDP Growth Persistent Despite 1Q Polar Vortex Annualized Quarterly Percent Change 10% 5% 0% -5% -10%