CRE DEBT MARKETS RESEARCH/DATA/TRENDS/RISK ANALYTICS

OUTLOOK FOR THE ECONOMY & COMMERCIAL REAL ESTATE

Ohio Bankers Day • April 2018 • Columbus

Sam Chandan PhD FRICSFounder Chandan Economics &Larry & Klara Silverstein Chair in Real Estate Investment & DevelopmentNYU SPS Schack Institute of Real Estate

www.samchandan.com samchandan

GLOBAL GROWTH OUTLOOK

Source: International Monetary Fund; As of January 2018

Projected 2018 Real GDP Growth

2.3%6.6%

1.2%

7.4%

2.7%

2.1%

1.5%

2.3%

1.9%

DOMESTIC ECONOMY

Source: St Louis Fed, Bureau of Economic Analysis, WSJ; Through Q4 2017. Forecast as of February 2018

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1982 1986 1990 1994 1998 2002 2006 2010 2014 2018

Real Gross Domestic ProductYoY % Change

WSJ Economic Survey Forecast

AVG2.1%

AVG2.6%

AVG3.7%

AVG4.1%

DOMESTIC ECONOMY

Source: WSJ Economic Forecasting Survey; As of March 2018

0% 10% 20% 30% 40% 50% 60% 70%

Yes, inflation will be higher

No, inflation will be about the same

Yes, inflation will be lower

Q: Do you expect tariffs will significantly affect the outlook for U.S. inflation in the medium term?WSJ Economic Forecasting Survey

DOMESTIC ECONOMY

Source: Bureau of Economic Analysis, WSJ Economic Forecasting Survey; Through 2017, Survey as of March 2018

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

2000 2002 2004 2006 2008 2010 2012 2014 2016

US Trade Balance with ChinaIn Billions of $

0% 20% 40% 60%

Upside

Downside

Balanced

Q: Is the risk to your GDP growth forecast for the next 12 months more to the upside or downside? WSJ Economic Forecasting Survey

Imports from ChinaExports to ChinaUS Trade Deficit with China

BUSINESS CONDITIONS

Source: National Federation of Independent Business Owners, WSJ Economic Forecasting Survey; Through January 2018

17%

19%

21%

23%

25%

27%

29%

31%

2013 2014 2015 2016 2017 2018

Small Business Expectations for Capital ExpendituresNet-Percent of Small Business Expecting an Outlayin the Next 3-6 Months, 3MMA

3.31%

Economist Projections for Year End-2018 DataFeb 2017 vs. Feb 2018WSJ Economic Forecasting Survey

Year-Prior Today

10-year Treasury

GDP

CPI Inflation

Unemployment Rate

2.46%

2.40%

4.40%

3.13%

2.83%

2.23%

3.77%

POLITICAL FUTURES

Source: PredictIt; Through March 8th, 2018

55%

60%

65%

70%

75%

80%

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Probability Trump Remains in Office Through 2018Based on Political Futures Prices

GLOBAL FINANCIAL MARKETS

Source: Yahoo Finance, S&P; Through April 2nd, 2018

1,300

1,500

1,700

1,900

2,100

2,300

2,500

2,700

2,900

3,100

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

2013 2014 2015 2016 2017 2018

Shanghai Composite Index and S&P 500

S&P 500(Right Axis)

SSE Composite index(Left Axis)

BOND MARKETS & INTEREST RATES

Source: CME Group, OECD, Federal Reserve Bank of St Louis; Through March 8th, 2018

-1%

1%

3%

5%

7%

9%

11%

13%

15%

17%

1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018

Great Treasury Bull Run

Germany

United States

2.78%

LABOR MARKET

Source: Bureau of Labor Statistics, Chandan; Through February 2018

1990/1991Recession

2001 Recession

2008/2009 Recession

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

0 4 8 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76

Change in

Em

plo

yment

(Fro

m P

eak)

Months Following Peak in Employment

May 2014

As of February 2018Change From Prior Cyclical Employment Level Peak

+5.9%

Change From Cyclical Employment Level Trough

+12.5%

Employment Loss and Time to Recovery During and Following Recessions

LABOR MARKET

Source: Bureau of Labor Statistics; Through February 2018

-1000

-800

-600

-400

-200

0

200

400

600

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Total EmploymentMoM Net Change, In Thousands of Persons, Seasonally Adjusted

-101k -167k +176k +221k +206k +196k

LABOR MARKET

Source: Bureau of Labor Statistics, US Employment and Training Administration; Through February 2018

Unemployment(Right Axis)

Initial Claims(Left Axis)

0%

2%

4%

6%

8%

10%

12%

0

100

200

300

400

500

600

700

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Initial Unemployment Claims & U3 UnemploymentInitial Claims in Thousands of Persons

Note: U3 Unemployment is defined as the percentage of the labor force that is without jobs and have looked for work within the past four weeks.

4.1%

224k

LABOR MARKET

Source: Bureau of Labor Statistics; Through December 2017

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Job Openings & HiresIn Millions of Persons

5.8m

5.5m

Hires

Openings

LABOR MARKET

Source: Bureau of Labor Statistics; Through December 2017

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Ratio of Job Openings to Unemployed Persons & Wage GrowthWage Growth Measured as YoY % Change in Average Hourly Earnings

Job Openings to Unemployed Persons (Left Axis)Wage Growth (Right Axis)

R2

.57R2

.06

LABOR MARKET

Source: National Federation of Independent Business Owners; Through January 2018

0%

5%

10%

15%

20%

25%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Small Business Wage Plans% of Businesses Expecting Higher Compensation Plans 6-Months Ahead;3-Month Moving Average

21.3%

18.7%

Source: New York Fed Consumer Expectations Housing Survey; As of February 2017

0%

10%

20%

30%

40%

50%

60%

70%

80%

Bachelor's orHigher

Less thanBachelor's

$60k or more Under $60k Under 50 Over 50

Education Level Income Level Age

Net Preference to Own vs RentBy Demographics and Year

HOUSING TENURE

-6%

2015 2017+11%

Source: Census Bureau; Through Q4 2017

HOUSING TENURE

15%

16%

17%

18%

19%

20%

21%

22%

23%

54%

56%

58%

60%

62%

64%

66%

68%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Home Rentership RateBy Age

35 and Under (Left Axis)65+ (Right Axis)

Source: Census Bureau; Through Q4 2017

30%

31%

32%

33%

34%

35%

36%

37%

38%

4%

5%

6%

7%

8%

9%

10%

11%

12%

2000 2002 2004 2006 2008 2010 2012 2014 2016

Rental Vacancy Rate and Rentership Rate

HOUSING TENURE

Rental Vacancy Rate (Left Axis)Rentership Rate (Right Axis)

$0

$20

$40

$60

$80

$100

$120

$140

$160

Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4

2013 2014 2015 2016 2017

Multifamily and Commercial Sales VolumesIn Billions $, Properties and Portfolios $2.5m and Larger

CommercialMultifamily

Source: Real Capital Analytics, Mortgage Bankers Association; Through Q4 2017

APARTMENT & COMMERCIAL INVESTMENT

APARTMENT & COMMERCIAL INVESTMENT

Source: Moody’s, Real Capital Analytics; Through January 2018

0

20

40

60

80

100

120

140

160

180

200

2001 2003 2005 2007 2009 2011 2013 2015 2017

Moody / RCA's Commercial Property Price IndicesBy Property Type, December 2006 = 100

Multifamily

Industrial

OfficeRetail

APARTMENT INVESTMENT

Source: Chandan Economics, Arbor Commercial Mortgage; Through Q4 2017

All Transactions

Small Balance

3%

4%

5%

6%

7%

8%

9%

10%

2002 2005 2008 2011 2014 2017

Multifamily Cap Rates

0

20

40

60

80

100

120

140

160

2002 2005 2008 2011 2014 2017

Spread Between Small Balance and All Multifamily Cap Rates

28 BPS

123BPS

74 BPS

APARTMENT INVESTMENT

Source: Chandan Economics, Federal Reserve, FDIC; Through Q4 2017

$0

$200

$400

$600

$800

$1,000

$1,200

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Multifamily Mortgages Outstanding by Lender GroupExcludes Construction Loans; In Billions $

Total Multifamily Debt as of Q4 2017

+9.6%

Annual Change in Multifamily Debt

+16.3%

Largest One-Year Increase: Agency

-16.4%

Largest One-Year Decline: CMBS

2017 Trends

$1.3T

COMMERCIAL INVESTMENT

Source: Chandan Economics, Federal Reserve, FDIC; Through Q4 2017

$0

$500

$1,000

$1,500

$2,000

$2,500

1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Commercial Mortgages Outstanding by Lender GroupExcludes Construction Loans; In Billions $

Total Commercial Debt as of Q4 2017

+4.3%

Annual Change in Multifamily Debt

+10.2%

Largest One-Year Increase: Life Companies

-5.2%

Largest One-Year Decline: CMBS

2017 Trends

$2.7T

FINANCING TRENDS

Source: FDIC, Chandan Economics; Through Q4 2017

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Default Rate for Bank Commercial and Multifamily Mortgages

0.2%

4.7%

APARTMENT INVESTMENT

Source: Chandan Economics, Federal Reserve, FDIC; Through Q4 2017

-$10

-$5

$0

$5

$10

$15

$20

Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4 Q 2 3 4

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Quarterly Change in Multifamily Real Estate LoansHeld on Bank Balance Sheets; In Billions $

+$3.7B

+5.5%YoY

FINANCING TRENDS

Source: Chandan Economics, Real Estate Lenders Association

-60% -40% -20% 0% 20% 40%

Multifamily

Office

Retail

Industrial

Hotel

All

Net Share of Lenders Expecting Increase inLending VolumeBy Property Type

2015 2016 2017

Decrease | Increase

FINANCING TRENDS

Source: Chandan Economics, Real Estate Lenders Association

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Term Loans

Construction Loans

Net Share of Lenders Expecting Increase in Borrower DemandBy Year

2015

2016

2017

FINANCING TRENDS

Source: Chandan Economics, Real Estate Lenders Association

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

Multifamily

Office

Retail

Industrial

Hotel

All

Net Share of Lenders Expecting Easingin Lending StandardsBy Property Type

2015

2016

2017

Tightening | Easing

FINANCING TRENDS

Source: Chandan Economics, Real Estate Lenders Association

-20% -10% 0% 10% 20% 30% 40%

LTV

DSC

Debt Yields

Prop Quality

Prop Location

Sponsorship

Net Share of Lenders Expecting Increase in Appetite for Credit RiskBy Characteristic

2015

2016

2017

BUSINESS & REAL ESTATE CYCLES

Source: Chandan Economics, Real Estate Lenders Association

0% 10% 20% 30% 40% 50% 60%

Increase By More Than 5%

Increase By Less Than 5%

Remain Flat

Decline by less than 5%

Decline by more than 5%

Expected Change in Commercial Property Price By Year

2017

2018

BUSINESS & REAL ESTATE CYCLES

Source: National Bureau of Economic Research; As of April 2018

0

20

40

60

80

100

120

140

1945 1948/49 1953/54 1957/58 1960/61 1969/70 1973/75 1980 1981/82 1990/91 2001 2008/09 Current

Duration of Expansion Following Post-WWII RecessionsIn Months

Expansion Ending In Recession Year

Duration of Current Expansion

106 Months

Duration ofLongest Expansion

120 Months

14 Months

FORWARD LOOK

• Growth outlook subject to exogenous shocks; long-term growth challenges remain largely unaddressed

• Moderate economic growth, improving labor markets, and marginally higher interest rates imply flat appreciation

• Slow adaptation to changing space use patternsacross all property types, including smaller apartment units with more common spaces

• Lenders seek to tighten as growth in available debt outpaces remains elevated against risk-equivalent investment opportunities

FORWARD LOOK

Long-term, the convergence of changing behaviors and patterns of space use, migration in the relative costs and benefits of urban agglomeration, and chronic underinvestment in infrastructure is impairing real estate’s weight in the production function, American competitiveness, and the generational growth outlook

CRE DEBT MARKETS RESEARCH/DATA/TRENDS/RISK ANALYTICS

OUTLOOK FOR THE ECONOMY & COMMERCIAL REAL ESTATE

Ohio Bankers Day • April 2018 • Columbus

Sam Chandan PhD FRICSFounder Chandan Economics &Larry & Klara Silverstein Chair in Real Estate Investment & DevelopmentNYU SPS Schack Institute of Real Estate

www.samchandan.com samchandan