Aegon Asset Management is the global investment management brand of the Aegon Group N.V. and is comprised of Aegon USA Investment Management, LLC (Aegon Asset Management US), Aegon USA Realty Advisors, LLC (Aegon Real Assets US), Kames Capital plc (Kames Capital) and

other Aegon affiliates. Aegon Asset Management US, Aegon Real Assets US and Kames Capital are SEC registered investment advisers.

For institutional investor use only

Aegon Real Assets US

US CREMARKETINSIGHTSSeptember 2019

Applied Research

CONTENTS

2 Big picture update

3 Economic outlook

4 Real estate equity

5 Capital markets

6 Sector overview: Apartments

7 Sector overview: Industrial

8 Sector overview: Office

9 Sector overview: Retail

10 Property sector outlook

Big picture update

• Citing muted inflation, global uncertainties, and as a preventative measure against perceived future downside risks, the Federal Open Market Committee (FOMC) cut the federal funds rate by 25 bps in their late July meeting. This was in line with their goal to “sustain the expansion,” and the first rate cut since the financial crisis.2 The FOMC also ended its balance sheet reduction program two months earlier than expected.

• At the same time, financial markets are continuing to push the 10-year US Treasury yield lower year-to-date and the yield curve remains inverted.3 With the decline, we have observed mixed reactions but an increasing number of CRE lenders are using interest rate floors when pricing new opportunities.

• The US economy grew at a 2.1% rate in the second quarter of 2019. Although the previous quarter had a higher headline number, volatile factors such as inventories and net exports contributed to more than half of that total growth rate. In the second quarter, the largest component of GDP, personal consumption expenditures, was much stronger, growing at an annualized rate of 4.3%. However, gross private domestic investment declined 5.5% on an annualized basis which may weigh on future economic growth.4

• The labor market has continued on solid footing. A total of 471,000 nonfarm jobs were created during the second quarter, an average of 157,000 per month. The third quarter of 2019 started in similar fashion with 164,000 new jobs added in July. The unemployment rate is currently near its lowest point in 50 years with a reading of 3.7% in June and July.5 With so little labor market slack, economic growth prospects are becoming constrained by labor force and productivity growth rates.

• CRE transaction volume rebounded from a decline in the first quarter as second quarter volume increased 2.3% from a year ago and 15.5% from the prior quarter. The Commercial Property Price Index (CPPI) advanced 6.5% in the trailing 4 quarters ending June 2019. Prices accelerated this quarter, rising from the 6.0% year-over-year growth ending Q1 2019.6

• The NCREIF National Property Index (NPI), which measures unlevered commercial real estate returns, has continued to moderate. The trailing four-quarter return, at 6.5%, is the weakest since the beginning of the real estate recovery in 2010.1

• Despite the moderating NPI, operating fundamentals remain strong with income growth for properties in the NPI totaling 4.76% in Q2 2019 compared to 4.38% a year ago. This is supported by healthy space fundamentals as vacancy rates are near their lowest levels since 2000.1

NCREIF Property Index Year-over-Year change (1990 – Q2 2019)

Source: NCREIF Property Index Detail Report as of June 30, 2019.

So far in the second half of 2019, commercial real estate (CRE) operating fundamentals remain healthy across most property sectors and geographies. Occupancy rates continue to trend above their long-term averages and growth in net operating income has re-accelerated as of late, outpacing general inflation by a healthy margin.1 In addition, calmer financial market conditions relative to the end of 2018 have been accompanied by a rebound in property transaction volume after a first quarter drop off. However, the macroeconomic foundation for CRE performance is wobbling as economic growth prospects weaken and downside risks accumulate. Specific risks related to US-China trade conflict and Brexit deadlines cloud the macroeconomic outlook. Financial markets reactions to the accumulating risks are palpable especially in the inverted yield curve. Yet, if all goes well, we believe US economic growth will continue along the +/-2% trend line defined by labor force demographics and productivity growth providing a solid basis for ongoing CRE performance.

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BIG PICTURE UPDATE

Economic outlook• The Federal Reserve FOMC cut rates in late July for the first time

since the beginning of the recovery. Citing global uncertainty and tempered inflationary pressures, the cut was described as a mid-cycle adjustment. As outlined by Aegon Asset Management US’ rates strategist in a recent publication, FOMC Meeting: Like Christmas with Crazy Uncle Carlos, our firm outlook currently calls for another 50 bps in cuts to the fed funds rate by the end of 2019 and 100 bps by mid-year 2020.

• The easing coincided with the slowing of US economic growth to a 2.1% annualized rate in the second quarter. Although the first quarter had a higher 3.1% headline number, volatile factors such as inventories and net exports contributed to more than half of that growth rate. The largest component of GDP, personal consumption expenditures, was much stronger in the second quarter growing at an annualized rate of 4.3%. However, gross private domestic investment declined 5.5% on an annualized basis which may weigh on future economic growth.4

• Aegon Asset Management continues to expect moderating economic growth throughout the next year in line with the consensus of economic forecasters. Additionally, we believe risks to the outlook remain skewed to the downside because of slowing global growth, trade uncertainties, and the rising possibility of a no-deal Brexit.

• Based on our base case economic outlook and current supply projections, it is expected that CRE fundamentals will remain stable through 2019 and support continued advancement in rent levels.

Real GDP and employment growth

Sources: US Bureau of Labor Statistics, July 5, 2019. Bureau of Economic Analysis, July 26, 2019. Employment figures reflect private and government non-farm jobs.

Core personal consumption expenditure (PCE) inflation and 10-yr Treasury

Sources: US Bureau of Economic Analysis, July 30, 2019 and US Department of Treasury, June 30, 2019

Corporate bond and cap rate spread

Sources: Aegon Real Assets US. Bloomberg - US Corporate B Rated Bond OAS, as of June 30, 2019. NCREIF Transaction Cap Rates, as of June 30, 2019. Federal Reserve – 10-year UST, as of June 30, 2019.

Sources: Aegon AM US as of July 15, 2019. Includes historical data sources from Bureau of Economic Analysis, Congressional Budget Office, Haver Analytics

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Core PCE Inflation 10-year Treasury

Aegon Asset Management US Economic Forecasts

2017 2018 2019F

GDP (Real %, YoY) 2.30 2.90 2.25

Unemployment (%) 4.40 3.90 3.60

Core PCE 1.60 1.90 1.80

Fed Funds (Upper Bound, %)

1.50 2.50 2.00

Tsy10 (%) 2.41 2.72 2.00

2020F 2021F

GDP (Real %, YoY) 1.80 1.30

Unemployment (%) 3.90 4.40

Core PCE 1.90 1.70

Fed Funds (Upper Bound, %)

1.50 1.25

Tsy10 (%) 2.00 1.75

ECONOMIC OUTLOOK

Real estate equity

• The trailing one-year return for NPI, a measure of unleveraged returns, was 6.5% in the second quarter compared to 7.2% for the one-year period ending Q2 2018.1

• Industrial property performance outpaced other sectors with a trailing four-quarter return of 13.9% for the period. At the other end of the spectrum, retail property returns totaled only 1.8% versus 4.6% a year ago.1

• Within certain property sectors, subtypes continue to show broad dispersion in performance. For example, garden apartments have returned 8.3% over the last year compared to the high-rise return of 4.6%. The retail sector is also showing a wide range of outcomes with neighborhood retail the leading performer.1

• The NCREIF Fund Index for Open-ended Diversified Core Equity (NFI-ODCE) returned 6.4% gross of fees for the year ending June 30, 2019. The quarterly gross capital appreciation return was negative for the first time since 2010. Diversified Core Equity typically reflects lower risk CRE investment strategies that utilize low leverage levels.1

• In the second quarter, NFI-ODCE investor contributions decreased 17.6% from the same time period a year prior, but remain at healthy levels. Redemptions and distributions were down 32.3% from the first quarter. Net investor cash flows have been negative over the past year as redemptions and distributions have outpaced contributions in the last three quarters.1

Return comparison

Sources: Corporate Bonds and EM Debt - Bloomberg, June 30, 2019. NAREIT, June 30, 2019. NCREIF, June 30, 2019. S&P Dow Jones Indices, June 30, 2019.

NFI-ODCE investor cash flow trends (four quarter rolling total, $Bn)†

†The Open End Diversified Core Equity (ODCE) fund is a capitalization-weighted index based on each fund’s Net Invested Capital, which is defined as Beginning Market Value Net Assets (BMV), adjusted for Weighted Cash Flows (WCF) during the period. Annual rates (Appreciation + Income). Source: NCREIF. As of June 30,2019

Top 25 metros by total return (second quarter)‡

Sources: NPI – NCREIF, as of June 30, 2019. ‡Limited to NCREIF markets with greater than 40 properties.

Source: NCREIF Property Index Detail Report. As of June 30, 2019. †Central business district.

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NPI 6.5% 7.2% -0.7%

All Apartment 5.8% 6.5% -0.7%

Garden 8.3% 9.6% -1.3%

Highrise 4.6% 4.9% -0.3%

Lowrise 6.2% 6.9% -0.7%

All Office 6.8% 6.5% 0.3%

CBD 6.3% 6.0% 0.4%

Suburban 7.4% 7.4% 0.1%

All Industrial 13.9% 14.1% -0.2%

R&D 11.7% 14.4% -2.7%

Flex 12.3% 12.8% -0.5%

Warehouse 13.9% 14.1% -0.2%

Other 13.6% 16.0% -2.4%

All Retail 1.8% 4.6% -2.8%

Community 3.3% 5.4% -2.0%

Neighborhood 5.0% 6.4% -1.4%

Power Center 2.2% 4.6% -2.5%

Regional -1.1% 3.1% -4.3%

Super Regional 0.5% 4.3% -3.8%

REAL ESTATE EQUITY

Capital markets

• Corporate bond spreads jumped to their highest levels of 2019 in May before declining to near year-to-date lows in June following rate cut speculation. Treasury rates at the long-end of the curve have consistently fallen through the first half of 2019 leading to yield curve inversion. Mortgage spreads behaved differently with an increased number of lenders implementing rate floors and others increasing spreads.

• Second quarter property transaction volume rebounded after a first quarter pull back with volume up 15.5% from last quarter.6 We observed increased lending opportunities in the second quarter, consistent with the increase in property transactions.

• Overall, sources of CRE capital remain diverse with no overt signs of excess.

Historical spreads (Corporate A, BBB & CML) January 2012 - June 2019

Sources: Corporate Bonds – Bloomberg Barclays. Aegon Real Assets US Commercial Mortgage Mark-to-Market Matrix - A/A+ Internal rating using Proprietary CML pricing matrix, developed and maintained by Aegon Real Assets US as of June 30, 2019.

Commercial mortgage commitments (Life companies — trailing four quarters, quarter-over-quarter change)

Source: American Council of Life Insurers (ACLI). As of May 29, 2019.

US lender composition

Sources: Aegon Real Assets US. Real Capital Analytics. As of May 13, 2019.

CRE transaction volume and commercial property price index Trailing four quarter — all property types

Sources: Real Capital Analytics – US Capital Trends Report, July 25, 2019.

Source: Real Capital Analytics. As of July 24, 2019.

5

Transaction volume by property type

Q2 19 Q2 18 YoY changes

All Office $37.6 B $28.9 B 29.8%

CBD $14 B $10.7 B 30.9%

Suburban $23.5 B $18.2 B 29.2%

All Industrial $17.3 B $19.9 B -12.8%

Flex $3.3 B $4.8 B -31.4%

Warehouse $14 B $15 B -6.8%

All Apartment $43.2 B $36.4 B 18.5%

Garden $28.7 B $23.7 B 21.2%

Mid/Highrise $14.5 B $12.7 B 13.6%

All Retail $14.6 B $21.6 B -32.2%

Strip Center $7.2 B $15.7 B -54.0%

Mall & Other $7.4 B $5.9 B 26.1%

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CAPITAL MARKETS

Apartments

• Apartment vacancy was 5.74% in the second quarter of 2019, a decrease from 6.00% a year ago.8 Apartment appraisal cap rates averaged 4.36% during the quarter compared to 4.38% a year prior.1

• Apartment transaction volume increased 18.5% from a year ago, totaling $43.2 billion. This was an increase of 15.9% from the first quarter total of $37.3 billion.6

• Apartment property prices increased 7.28% year-over-year in the second quarter, down from 12.36% gain a year ago. Year-over-year price growth has moderated every quarter since the first quarter of 2018.6

• With robust demand, apartment vacancies have been slowly decreasing throughout the past few quarters with rent growth trends accelerating. Second quarter rent growth for the trailing 12 months was reported at 3.39% compared to 3.06% a year ago.7

• Vacancy rates decreased from a year ago in 36 of the 54 most populous metro areas accompanied by strengthening rent growth.7

• According to the NPI, garden style apartments have been the strongest performing subtype over the last year with unlevered returns of 8.25% compared to 5.79% for all apartments.1

• Fundamentals and investment performance remain favorable for the apartment sector with increasingly expensive single-family home prices, tight for-sale inventory and resilient job growth continuing to fuel strong demand. Apartment construction is moderating but remains concentrated at the higher end of the quality spectrum out of the reach of middle-income renters-by-necessity.

Supply and demand fundamentals

Source: CoStar Realty Information Inc., annual data as of June 30, 2019. 2019 reflects trailing four quarters ending Q2 2019.

Performance

Source: NCREIF Property Index (unlevered) - Equal weighted appraisal cap rate as of year-end or most recent in current year, current year returns reflect trailing four-quarters, as of June 30, 2019.

Apartments top 54 metropolitan statistical areas (MSAs) (Year-over-Year rent growth)

Source: CoStar Realty Information Inc.; Aegon Real Assets US as of June 30, 2019.

Apartments top 54 MSAs (Year-over-Year vacancy rate change)

Source: CoStar Realty Information Inc.; Aegon Real Assets US as of June 30, 2019.

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SECTOR OVERVIEW - APARTMENTS

Industrial

• The industrial vacancy rate increased slightly to 4.95% from 4.82% a year ago.8 Industrial cap rates fell to 4.81%, a decrease of 26 bps from 5.07% in the second quarter of 2018.1

• Transaction volume for industrial properties for the second quarter totaled $17.3 billion, down 12.8% from a year ago.6

• Industrial property prices had the strongest performance of any property sector in the second quarter, increasing 13.28% over the last year. This is up substantially from the 7.34% growth a year ago.6

• Industrial asking rent for the second quarter advanced 5.48% year-over year, slower than the 6.37% increase for the prior four quarters ending June 30,2018.7

• The industrial sector continued to be the highest returning of the four main property sectors in the NPI with unlevered total return at 13.87% for the year ending June 30, 2019.1

• Warehouse properties continue to dominate transactions, accounting for 80.8% of all industrial sales up from 75.6% a year ago.6

• Vacancy rates increased in over half of the most populous metro areas for the second straight quarter. However, fundamentals remain tight with 98% of those metro areas producing at least 2% rent growth over the last year.7

• Overall, fundamentals and investment performance in the industrial sector have outperformed the other three main property types by a wide margin over the last year.1 While occupancy rates have decreased from recent highs in many metros, they continue to trend well above their long-term averages. This provides a cushion against the weakening cyclical drivers of demand. At the same time, structural demand remains strong as on-line sales expansion continues to feed the need for warehouse space.

Supply and demand fundamentals

Source: CoStar Realty Information Inc., annual data as of June 30, 2019. 2019 reflects trailing four quarters ending Q2 2019.

Performance

Source: NCREIF Property Index (unlevered) - Equal weighted appraisal cap rate as of year-end or most recent in current year, current year returns reflect trailing four-quarters, as of June 30, 2019.

Industrial top 54 MSAs (Year-over-Year rent growth)

Sources: CoStar Realty Information Inc.; Aegon Real Assets US as of June 30, 2019.

Industrial top 54 MSAs (Year-over-Year vacancy rate change)

Sources: CoStar Realty Information Inc.; Aegon Real Assets US as of June 30, 2019.

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SECTOR OVERVIEW - INDUSTRIAL

Office

• The national office vacancy rate decreased to 9.60% in the second quarter of 2019 from 9.93% in the second quarter of 2018.8 Office cap rates decreased slightly to 5.00%, down from 5.12% the year prior.1

• Transaction volume for office properties in the second quarter totaled $37.6 billion, up 29.8% from Q2 2018.6

• In Q2 2019, office property prices increased 4.00% year-over-year, smaller than the 7.46% price gain in Q2 2018.6

• The annualized asking rent growth for the office sector in the quarter was 2.34% versus 2.84% a year ago.8

• According to NCREIF data, unlevered total return performance over the last year has favored properties with suburban locations (7.44%) over those with central business district locations (6.35%). For the office sector as a whole, total return amounted to 6.79%.1

• Vacancy rates decreased in 65% of the top metro areas contributing to stronger than 2% rent growth in 35 of the top 54 metro areas over the last year.7

• Transaction data indicates suburban volume accounted for 62.7% of overall office sales in the second quarter compared to 63.0% in the year prior.6

• Fundamentals in the office sector have been largely stable with modest growth in national rent metrics. Looking deeper into the data, we are observing a bifurcation in operating performance across geographies. Specifically, it appears that very high occupancy costs in primary office markets like New York City and San Francisco are helping to boost fundamentals in more affordable nearby secondary markets that benefit from proximity to gateway markets and/or talent rich labor pools. Technology continues to be a major driver of new demand this cycle.

Supply and demand fundamentals

Source: CoStar Realty Information Inc., annual data as of June 30, 2019. 2019 reflects trailing four quarters ending Q2 2019.

Performance

Source: NCREIF Property Index (unlevered) - Equal weighted appraisal cap rate as of year-end or most recent in current year, current year returns reflect trailing four-quarters, as of June 30, 2019.

Office top 54 MSAs (Year-over-Year rent growth)

Sources: CoStar Realty Information Inc.; Aegon Real Assets US as of June 30, 2019.

Office top 54 MSAs (Year-over-Year vacancy rate change)

Sources: CoStar Realty Information Inc.; Aegon Real Assets US as of June 30, 2019.

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SECTOR OVERVIEW - OFFICE

Retail

• Retail vacancy was stable over the year ending June 30, 2019 at 4.48%, compared to 4.50% a year prior.8 Retail property appraisal cap rates increased in Q2 2019 to 5.25% from 5.15% in Q2 2018.1

• Retail transaction volume fell in the second quarter, down 32.2% year-over-year.6

• For the 12 months ending June 30, 2019, retail property prices increased modestly by 1.57%, less than the 2.54% gain ending June 30, 2018.6

• Retail asking rent grew 1.45% year-over-year in Q2 2019 weaker by more than 100 bps from the growth rate in Q2 2018.7

• E-commerce sales as a percent of total retail sales increased from 9.2% to 10.2% in the first quarter of 2019 from a year prior on a non-seasonally adjusted basis according to the US Census Bureau.8

• According to the NPI, a measure of unlevered real estate returns, total return for the retail sector was 1.76% for the 12 months ending June 30, 2019. This is the lowest return among the four major property types.1

• Subdued demand continues to challenge operating fundamentals within the retail property sector and rent growth remains mild at best. Tariffs on consumer goods may soon become an added hurdle for the sector that is already dealing with on-line competition and tenant bankruptcies. At the same time, space vacated by weak tenants is providing opportunity for renovation and re-tenanting in stronger properties albeit with costly cap ex.

Supply and demand fundamentals

Source: CoStar Realty Information Inc., annual data as of June 30, 2019. 2019 reflects trailing four quarters ending Q2 2019.

Performance

Source: NCREIF Property Index (unlevered) - Equal weighted appraisal cap rate as of year-end or most recent in current year, current year returns reflect trailing four-quarters, as of June 30, 2019.

Retail top 54 MSAs (Year-over-Year rent growth)

Sources: CoStar Realty Information Inc.; Aegon Real Assets US as of June 30, 2019.

Retail top 54 MSAs (Year-over-Year vacancy rate change)

Sources: CoStar Realty Information Inc.; Aegon Real Assets US as of June 30, 2019.

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SECTOR OVERVIEW - RETAIL

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The archived content contains information that is historical in nature and may be outdated. This material is provided for informational purposes only and should not be relied upon for investment decisions.

This material is to be used for institutional investors and not for any other purpose. The information included in this document should not be construed as investment advice or a recommendation for the purchase or sale of any security, loan, interest in real estate, or other investment. This material contains general information only on economic and investment matters; it should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information does not take into account any investor’s investment objectives, particular needs or financial situation. The value of any investment may fluctuate. This information has been developed internally and may incorporate third party data, text, images and other content deemed to be reliable; however, Aegon Real Assets US does not guarantee the accuracy, adequacy, or completeness of such information. Any opinions, estimates and projections included herein constitute the current judgement of the author as of the date of this document. Aegon Real Assets US has no obligation to update, modify or amend this document or to otherwise notify the reader in the event that any matter stated herein, or if any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes or is determined to be inaccurate.

This document contains “forward-looking statements” which are based on the firm’s beliefs, as well as on a number of assumptions concerning future events based on information currently available. These statements involve certain risks, uncertainties

and assumptions which are difficult to predict. Consequently, such statements cannot be guarantees of future performance and actual outcomes and returns may differ materially from statements set forth herein. In addition, this material contains information regarding market outlook, rates of return, market indicators and other statistical information that is not intended and should not be considered an indication of the results of any Aegon Real Assets US-managed portfolio.

This material contains the current opinions of the authors and not necessarily those of Aegon Real Assets US and such opinions are subject to change without notice.This material is intended for illustrative and discussion purposes only. There is no guarantee that any investment or portfolio strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate their ability to invest over the long-term, especially during periods of increased market volatility. Results for certain charts and graphs are included for illustrative purposes only and should not be relied upon to assist or inform the making of any investment decisions.

Aegon Real Assets US, an indirect wholly owned subsidiary of Aegon N.V., is a US-based investment adviser registered with the Securities and Exchange Commission (SEC) and part of Aegon Asset Management, the global investment management brand of Aegon Group. Recipient shall not distribute, publish, sell, license or otherwise create derivative works using any of the content of this report without the prior written consent of Aegon Real Assets US, 6300 C Street SW, Cedar Rapids, IA 52499.

©2019 Aegon Real Assets US

1National Council of Real Estate Fiduciaries, as of June 30 20192Federal Open Market Committee Press Release, July 31, 20193Department of Treasury, August 5, 20194Bureau of Economic Analysis, Gross Domestic Product Second Quarter 2019, July 26, 20195Bureau of Labor Statistics, The Employment Situation – July 2019, August 2, 20196Real Capital Analytics, as of June 30, 20197CoStar Realty Information Inc., as of June 30, 20198US Census Bureau, Quarterly Retail E-Commerce Sales, May 17, 2019

Martha Peyton, PhD, Managing Director mpeyton@aegonusa.com

Brad Bohl, Director brbohl@aegonusa.com

Aegon Real Assets’ Applied Research Group utilizes primary and secondary research to monitor commercial real estate property fundamentals, capital markets, and macroeconomic conditions. Our platform applies both qualitative and quantitative techniques in its contribution to an investment outlook.

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Disclosure

Property sector outlook Top 50 metros*

Under Construction as % of Inventory

Q219 Vacancy Rate**

Q218 Vacancy Rate**

Metros w/Rising Vacancy Rate

Q219 YoY Rent Growth**

Q218 YoY Rent Growth**

Aegon Real Assets Sector

Outlook

Apartment 4.45% 5.96% 6.23% 16 3.53% 3.24% Favorable

Industrial 1.66% 4.78% 4.54% 28 5.68% 6.10% Favorable

Office 4.45% 5.96% 6.23% 16 3.36% 3.17% Neutral

Retail 0.68% 4.39% 4.45% 26 2.14% 3.08% Cautious

*Top 50 by Metro Areas by Population; CoStar Realty Information Inc., Aegon Real Assets US; as of June 30, 2019. **Equal Weighted Average

PROPERTY SECTOR OUTLOOK