Glenn R. Mueller, Ph.D. Professor University of Denver. Franklin L. Burns School of Real Estate & Construction Management & Dividend Capital Research

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1 Real Estate Cycles Glenn R. Mueller, Ph.D. Professor University of Denver Franklin L. Burns School of Real Estate & Construction Management & Real Estate Investment Strategist Dividend Capital Research

2 Macro Economic Factors driving R.E. Demand Population Growth = 3 million people EACH year GDP Growth 1 Employment Growth 2 1 Source: U.S. Bureau of Economic Analysis, 2015; Moody s, Source: U.S. Bureau of Labor Statistics, 2015; Moody s, 2015.

1 Source: U.S. Bureau of Labor Statistics, 2015; Moody s, 2015.

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3 1 Source: U.S. Bureau of Labor Statistics, 2015; Moody s, Macro Economic Factors driving R.E. Costs Inflation 1 Interest Rates YrTreas 3M LIBOR

4 Positive GDP Leads Employment Recovery Recessions last a year or less - Recovery & Growth cycles can be short of long GDP & EMP Growth Recessions Source: U.S. Bureau of Labor Statistics, December 2013; U.S. Bureau of Economic Analysis, December 2013; Moody s, 2013.

5 Employment Drives Demand 9,000,000 Real Estate Occupancy is Demand Driven by Employment Growth Real Estate a Delayed Mirror of the Economy 8,500,000 8,000,000 7,500,000 7,000,000 6,500,000 6,000,000 5,500,000 5,000,000 4,500,000 4,000,000 Industrial Office Retail Employment Source: CoStar Portfolio Strategy, January Employment & Property Occupied Stock is the top 54 MSA s covered by PPR

6 US Commercial Real Estate Cycle Follows US Economic Cycles 3 Key Metrics: Occupancies Rents Property Prices Source: Glenn Mueller, PhD

7 Market Cycle Analysis Physical Cycle Demand & Supply drive Occupancy Occupancy drives Rental Growth Occupancy + Rent = Income Growth

8 Market Cycle Quadrants Phase 2 - Expansion Phase 3 - Hyper-supply Demand/Supply Equilibrium Point Occupancy Long Term Occupancy Average Phase 1 - Recovery Phase 4 - Recession Source: Mueller, Real Estate Finance 1995 Time

9 Phase 2 - Expansion Phase 3 Hyper-supply Occupancy Rents Rise Rapidly Toward New Construction Levels Long Term Average Occupancy Below 3 Inflation 2 Rental Negative Growth Rental Growth High Rent Growth in Tight Market Demand/Supply Equilibrium Cost Feasible New Construction Rents Rent Growth Positive But 12 Declining 13 Physical Market Cycle Characteristics 14 -Below Inflation & 15 Negative Rent Growth 16 1 Phase 1 - Recovery Time Phase 4 - Recession

10 Phase 2 - Expansion Phase 3 Hyper-supply 30 year Historic National Office Rental Growth 11.0% Occupancy 10.5% % % % % 3.3% Long Term Average Occupancy 7 1.7% 6 6.7% % % -3.0% -1.0% 3 1.6% % Year Cycle - Periods % Phase 1 - Recovery Time Phase 4 - Recession Source: Mueller, Real Estate Finance 1998

11 Phase 2 - Expansion Phase 3 Hyper-supply 30 year Historic National Industrial Rental Growth % 8.3% 6.8% % Long Term Avg Occupancy 3.0% 6 5.1% % % % % 14 Occupancy 0.8% % % % 0.7% 30 Year Cycle - Periods % 1 2.8% Phase 1 - Recovery Time Phase 4 - Recession

12 National Property Type Cycle Locations Phase 2 Expansion Phase 3 Hypersupply Industrial R&D Flex+1 Retail Power Center+1 Retail Factory Outlet Industrial Warehouse Retail 1st Tier Regional Mall Retail Neighborhood / Community Hotel Full-Service Hotel Ltd. Service+1 1 Office Suburban Health Facility+1 Office Downtown Apartment LT Average Occupancy Phase 1 Recovery 4th Qtr 2016 Source: Mueller, 2017 Phase 4 Recession

13 Office Market Cycle Analysis 4th Quarter, 2016 Expansion Hypersupply 1 N. New Jersey 2 Chicago Stamford Wash DC 3 Norfolk Atlanta+1 Dallas FW Denver Detroit+1 Ft. Lauderdale+1 Indianapolis+1 Jacksonville+1 Kansas City Los Angeles+2 Memphis Baltimore+1 Boston+1 Cincinnati+1 Cleveland+1 East Bay+2 Hartford Las Vegas+1 Long Island+1 San Antonio+1 St. Louis+1 Miami Milwaukee+1 Minneapolis+1 New York Oklahoma City+1 Philadelphia+1 Phoenix Portland Seattle-1 NATION Charlotte+1 Columbus+2 Honolulu Orange County+1 Orlando+1 Palm Beach+1 Pittsburgh Richmond+1 Riverside Sacramento San Jose Tampa+1 Austin New Orleans+2 Raleigh-Durham Salt Lake San Diego Nashville+1 San Francisco+2 12 Houston LT Average Occupancy Recovery Source: Mueller, 2017 Recession

14 1 Expansion Industrial Market Cycle Analysis 4th Quarter, 2016 Norfolk Stamford+2 7 Baltimore+1 Cleveland+1 Jacksonville+1 Memphis+1 Philadelphia Phoenix+1 Sacramento Wash DC LT Average Occupancy Boston Columbus Ft. Lauderdale Indianapolis Las Vegas Long Island+1 Atlanta Austin Charlotte+1 Chicago Cincinnati Dallas FW Denver-1 Detroit+1 East Bay+1 Hartford Honolulu Los Angeles Miami Minneapolis+1 Nashville+1 Milwaukee+1 Oklahoma City Orange County+1 Richmond+1 St. Louis+1 Tampa NATION New Orleans+1 New York N. New Jersey Orlando+1 Palm Beach Pittsburgh Portland Raleigh-Durham+1 Riverside San Antonio San Diego San Francisco San Jose Seattle Houston Kansas City Salt Lake Hypersupply Recovery Source: Mueller, 2017 Recession

15 Apartment Market Cycle Analysis 4th Quarter, 2016 Expansion LT Average Occupancy Recovery Source: Mueller, 2017 Cleveland Columbus Dallas FW East Bay Honolulu-1 Jacksonville Las Vegas Long Island Minneapolis New Orleans Atlanta Austin Baltimore Boston Charlotte-1 Chicago Cincinnati Detroit Hartford+1 Indianapolis+1 Kansas City+1 Los Angeles New York Orange County Orlando Phoenix Riverside Sacramento Salt Lake San Diego Seattle St. Louis 13 Memphis Miami Milwaukee+1 N. New Jersey Norfolk Palm Beach Philadelphia Raleigh-Durham+1 Richmond San Antonio+1 San Francisco Wash DC NATION Hypersupply Denver+1 Ft. Lauderdale+1 Nashville Oklahoma City Pittsburgh Portland San Jose Stamford Tampa Houston Recession 1

16 Retail Market Cycle Analysis 4th Quarter, Expansion Chicago Cincinnati+1 Cleveland+1 Jacksonville+1 Kansas City Las Vegas N. New Jersey Oklahoma City Orange County Philadelphia+1 Phoenix Riverside+1 Sacramento St. Louis Columbus Milwaukee+1 Norfolk+1 Ft. Lauderdale+1 Nashville+2 Richmond 8 Austin Dallas FW Denver East Bay Houston Indianapolis Long Island+1 Los Angeles Miami Minneapolis LT Average Occupancy Atlanta+1 Charlotte+1 Detroit+1 Hartford Memphis+1 Stamford+1 Orlando+1 Palm Beach Portland Salt Lake San Antonio San Diego Seattle Tampa Wash DC NATION Baltimore+1 Boston New Orleans+1 New York Pittsburgh Raleigh-Durham San Francisco Honolulu San Jose 13 Hypersupply Recovery Source: Mueller, 2017 Recession

17 1 Expansion Cincinnati+2 Milwaukee 5 Cleveland Hartford+1 Norfolk+1 6 Hotel Market Cycle Analysis 4th Quarter, 2016 Columbus+2 Kansas City Orange County+3 Raleigh-Durham+1 Richmond+1 Sacramento+1 Salt Lake Stamford+2 Oklahoma City+2 9 Atlanta Baltimore+1 Boston Charlotte Chicago Dallas FW Denver Detroit East Bay Ft. Lauderdale Honolulu Jacksonville Las Vegas Long Island Los Angeles 10 Riverside+1 11 Miami Nashville New Orleans Orlando Palm Beach Phoenix Portland San Antonio San Diego San Francisco San Jose Seattle St. Louis Tampa Wash DC NATION 12 Austin Houston Minneapolis New York N. New Jersey+2 Philadelphia+1 13 LT Average Occupancy Hypersupply Pittsburgh Recovery Source: Mueller, 2017 Recession

18 1970s Cycle Factors Driving The First Half Cycle (5 Year) Strong Demand from the 1960s that stopped Recession 1974 Capital Flow - Mortgage REITs produced oversupply Factors Driving The Second Half Cycle (5 Year) Baby Boom Generation Goes to Work = Demand Capital Flow Shut Down = no supply = Lenders Recover Markets tighten and reach peak occupancy 1979 (5% vacancy)

19 1970s Office Demand & Supply 8% 6% 4% 2% Oversupply Years Demand Baby Boomers Go To Work Supply 0% Source: FW Dodge, CB Commercial, BLS, Mueller

20 1980s Cycle Factors Driving The First Half Cycle (5 Year) 1979 Tight market pushed rents & prices up Inflation pushed prices higher 1981 Tax Act attracted taxable investors Thrift Deregulation allowed capital to flow Factors Driving The Second Half Cycle (5 Year) 1986 Tax Act slowed taxable investors - not tax free Poor stock market attracted Pension & Foreign capital Rising R.E. prices masked poor income returns

21 10% 8% 6% 4% 2% 1980s Office Demand & Supply Demand Oversupply Years Supply 0% Source: FW Dodge, CB Commercial, BLS, Mueller

22 1990s Cycle Factors Driving The First Half Cycle (5 Year) Moderate / stable demand growth (1991 recession minor) Oversupply & Foreclosures shut down construction Excess space Absorbed Markets Recover Factors Driving The Second Half Cycle (5 Year) Moderate Demand growth Continued Oversupply Absorbed - Return Performance improved Construction Constrained caused rents & prices to rise More Efficient Markets matched supply to demand

23 3.0% 2.5% 2.0% 1.5% 1990s Office Demand & Supply Demand Oversupply Absorbed Supply Demand Supply Matched 1.0% 0.5% 0.0% Source: FW Dodge, CB Commercial, BLS, Mueller

24 2000s Cycle Globalization stable but slower U.S. economic growth Technology vs manufacturing economy Market Data available Feedback loop = demand / supply balance Millennial Generation started entering workforce Public Markets (R.E. Capital markets more efficient) Supply Constraints (labor, steel & concrete costs, infrastructure)

25 3.0% 2.5% 2.0% 2000s US Office Demand & Supply Office Demand & Supply Supply Reacted to Demand Pick Up 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% Supply Reacted to Demand Slow Down Demand Supply Source: CoStar Portfolio Strategy, Mueller 2016.

26 2010s Cycle Slow Economic Growth 2% GDP the norm? Economic Cycle Longer? Low Interest Rate Environment 2% 10/Year Treasury average? Millennial Generation workforce Millennial Generation consumer Technology Baby Boomers retiring Sustainability Employment Growth drives commercial demand

27 Stock Growth Recovering Supply growth started increase in 2013 from a 42 year low Source: Costar Portfolio Strategy, January 2015

28 2010s US Office Demand & Supply Office Demand & Supply 1.2% 1.0% Supply Reacted to Demand Pick Up Forecast 0.8% 0.6% 0.4% 0.2% 0.0% Demand Supply Source: CoStar Portfolio Strategy, Mueller 2016.

29 Occupancy Rent Correlation 79% Rents Overall +52.2% Recession +49.2% Recession +17.1% Recession +16.9% -10.8% -11% -9.3%

30 1 Expansion 2 Albuquerque Chicago N. New Jersey Stamford Wash DC Office Market Cycle FORECAST 4th Quarter, 2017 Estimates Atlanta Boston+1 Cincinnati Denver Detroit+1 Jacksonville+1 Long Island+1 Los Angeles+1 Memphis+1 Milwaukee Minneapolis+1 Philadelphia San Antonio+1 Seattle-1 St. Louis Baltimore Cleveland Indianapolis Las Vegas+1 Norfolk Charlotte Columbus+1 Dallas FW +1 East Bay+2 Ft. Lauderdale+1 Hartford+2 Kansas City+1 Miami Oklahoma City+2 Orange County Orlando+1 Phoenix Pittsburgh Portland Riverside NATION+1 New Orleans+1 New York+1 Palm Beach+1 Raleigh-Durham Richmond+2 Sacramento Tampa Austin Honolulu+1 Nashville Salt Lake San Diego+1 San Francisco+2 San Jose Hypersupply 13 Houston 14 LT Average Occupancy Recovery Source: Mueller, 2017 Recession

31 Occupancy Rent Correlation 79% Rents Overall +40.1% Recession +23.9% +13% Recession +20% -4% -12.9%

32 1 Expansion 2 3 Recovery 4 5 Industrial Market Cycle FORECAST 4th Quarter, 2017 Estimates 7 Norfolk+1 Stamford LT Average Occupancy 6 Baltimore+2 Cleveland+1 Ft. Lauderdale Jacksonville Las Vegas Memphis+1 Philadelphia Phoenix+1 Wash DC+1 NATION Source: Mueller, 2017 Atlanta-1 Austin Boston+1 Charlotte Chicago Cincinnati-1 Columbus Dallas FW-1 Detroit East Bay Hartford-1 Honolulu Indianapolis Kansas City-1 Long Island+1 Los Angeles Miami Milwaukee+1 Minneapolis Nashville New Orleans New York N. New Jersey Oklahoma City+1 Orange County+1 Orlando Palm Beach-1 Pittsburgh Portland Raleigh-Durham Richmond+1 Riverside Sacramento+1 San Antonio San Diego San Jose-1 San Francisco Seattle St. Louis+1 Tampa Hypersupply Denver Houston-1 Salt Lake Recession 1

33 Occupancy Rent Correlation 70% Rents Overall +55.3% +22.5% +12.4% Recession +25.9% -1.2% -4.3%

34 Apartment Market Cycle FORECAST 4th Quarter, 2017 Estimates Expansion Hypersupply LT Average Occupancy Columbus Honolulu-1 Las Vegas Minneapolis Riverside Sacramento San Diego St. Louis Atlanta Baltimore Chicago Detroit East Bay Hartford Indianapolis Jacksonville 12 Austin-1 Boston Charlotte-1 Cleveland Dallas FW Ft. Lauderdale Kansas City Milwaukee+1 Memphis New Orleans New York Long Island Los Angeles Orange County-1 Philadelphia Raleigh-Durham San Antonio San Francisco-1 Seattle N. New Jersey Oklahoma City-1 Orlando+1 Palm Beach Phoenix Pittsburgh Portland Salt Lake San Jose-1 Wash DC NATION Cincinnati Denver+1 Miami Nashville Norfolk Richmond Stamford Tampa Houston Recovery Source: Mueller, 2017 Recession

35 Occupancy Rent Correlation 67% +20.6% Recession Retail +15.3% Recession Rents Overall +31.5% -10.1% -1.6% -12.8%

36 Retail Market Cycle FORECAST 4th Quarter, 2017 Estimates 1 Expansion 2 3 Recovery 4 5 Columbus Philadelphia Milwaukee Norfolk+1 Oklahoma City Source: Mueller, 2017 Charlotte+1 Detroit+1 Nashville LT Average Atlanta Chicago Cincinnati+2 Cleveland+2 Hartford Jacksonville+1 Kansas City Las Vegas Memphis N. New Jersey Orange County Phoenix Riverside+1 Sacramento Stamford+1 St. Louis+1 Baltimore Boston Dallas FW Denver East Bay Indianapolis Long Island Los Angeles Miami Minneapolis New Orleans New York Orlando+1 11 Ft. Lauderdale+1 NATION Palm Beach Pittsburgh Portland Raleigh-Durham Richmond Salt Lake San Antonio San Diego San Francisco San Jose Seattle Tampa Wash DC Austin+1 Honolulu Houston 12 Occupancy Hypersupply Recession 1

37 Occupancy Rent Correlation 73% Rents Overall +75.2% Recession +38.4% Recession +28.4% +26.0% -0.1% -5.4% -12.2%

38 Hotel Market Cycle FORECAST 4th Quarter, 2017 Estimates Expansion Hypersupply Cleveland+1 Hartford Norfolk+1 Cincinnati+3 Indianapolis Milwaukee Oakland Stamford Memphis Oklahoma City Kansas City Orange County+3 Richmond+2 Salt Lake+1 Charlotte Detroit Honolulu Jacksonville Las Vegas Miami New Orleans San Francisco Seattle St. Louis-1 Tampa LT Average Occupancy Columbus+2 Raleigh-Durham+2 Sacramento+1 Atlanta+1 Baltimore+1 Boston Chicago+1 Dallas FW+2 East Bay+1 Ft. Lauderdale+1 Houston Long Island+1 Riverside+2 San Antonio Los Angeles+1 Minneapolis Nashville Palm Beach Phoenix+1 Portland San Diego San Jose Wash DC+1 NATION+1 13 Austin Denver+1 New York N. New Jersey+3 Orlando+1 Philadelphia+3 Pittsburgh Recovery Source: Mueller, 2017 Recession

39 Financial Cycle $Capital$ Flows affect Prices

40 Market Cycle Capital Flow Impact Capital Flows to Existing Properties Cost Feasible Rents Reached Hyper Supply LT Occupancy Avg. Capital Flows to New Construction

Commercial real estate are subject to real estate risks associated with operating and leasing properties.

41 Why Real Estate Fits an Investment Portfolio = SIZE U.S. Real Estate vs. Other Asset Classes Source: Bonds = SIFMA, January 2015; Equities = World Federation of Exchanges for Equities, January 2015; U.S. Real Estate = Moody s Real CPPI, January Commercial real estate are subject to real estate risks associated with operating and leasing properties. Additional risks include changes in economic conditions, interest rates, property values, and supply and demand, as well as possible environmental liabilities, zoning issues and natural disasters.

Source: Economic Report of the President, March

42 Nominal Returns during Low & High Inflation Periods Asset Class Returns (nominal = without inflation) Source: Economic Report of the President, March 2014; Analysis: How Inflation Affects a Portfolio, April 2014.

43 Real Returns during Low & High Inflation Periods REAL Asset Class Returns (inflation-adjusted) Source: Economic Report of the President, March 2014; Analysis: How Inflation Affects a Portfolio, April 2014.

44 Lump-Sum Performance $10,000 investment in 12 asset classes vs equally weighted portfolio for the 15-year period. Lump-sum Performance - August 1, 1999 July 31, 2014 Source: Lipper, Which Assets Perform When Inflation Is Low?, September 25, 2014.

45 Bond Values DROP as Interest Rates Rise 10 Year Treasury Yields e Average Total Return Peak = 3.9% Year Treasury Yields Average Total Return = 8.7% 9.00 Forecast 7.00 Average Yield = 5.95% Average Total Return = 1.9% Source: U.S. Treasury Federal Reserve Bank of St. Louis, May 2015; Moody s Forecast, 2015.

46 U.S. Commercial Property Prices & Transaction Volume Source: Real Capital Analytics, Inc., May 2016.

47 Public Debt Capital Flows 250 CMBS Issuance $ Billions Source: Commercial Mortgage Alert Commercial Mortgage Backed Securities

48 Real Commercial Property Price Index Current Price Recovery to 2007 Peak % CBD Office 134% Apartment 139% Industrial 103% Retail 99% Suburban Office 89% Source: Real Capital Analytics, Inc., May 2016.

49 Property Price Cycle Cap Rates Historic Cap Rates Cap Rates Office-CBD Office - suburban Industrial Retail - Regional Mall Apartments Hotels Source: Real Estate Research Corporation Chicago, December 2016.

50 Wide Yield to Bonds Attracting Capital Spread Between Cap Rates and 10-Year Treasury by Sector Source: Real Capital Analytics, 1Q 2016.

51 PLENTY OF CAPITAL FROM ALL SECTORS Buyer Composition User/Other Private Public Equity Fund Inst'l Cross-Border

52 Debt Capital: Credit Conditions Improving Composition of Lenders

GLOBAL CAPITAL TRENDS 2016 Rank Source Destination Vol ($m) YOY Chg Rank Source Destination Vol ($m) YOY Chg 1 China United States 14,355 54% 11 Qatar United States 3,179-31% 2 United States United

53 GLOBAL CAPITAL TRENDS 2016 Rank Source Destination Vol ($m) YOY Chg Rank Source Destination Vol ($m) YOY Chg 1 China United States 14,355 54% 11 Qatar United States 3,179-31% 2 United States United Kingdom 8,894-61% 12 United States Japan 3,011-33% 3 United States Germany 6,881-30% 13 United States Netherlands 2,848 24% 4 Germany United States 5,996-15% 14 Hong Kong United Kingdom 2,701-7% 5 United States France 3,938-37% 15 Canada United Kingdom 2,655-45% 6 South Korea United States 3,800 14% 16 Qatar Singapore 2,477 n/a 7 Singapore United Kingdom 3,428 4% 17 Israel United States 2,469 44% 8 Singapore United States 3,263-78% 18 Canada Germany 2,342-38% 9 Switzerland United States 3,245 4% 19 Hong Kong United States 2,304 50% 10 United States Australia 3,197 7% 20 Japan United States 2,283 88%

54 2008 Physical and Financial Cycle 2017 Physical Cycle Cycles can be Long or Short LONG economic expansion means LONG real estate UP Cycle Cycles can be driven by Demand or Supply Supply growth slowest in now increasing moderately Growth phase of cycle ? (depending on market & property type) 2016 Financial Cycle Capital flows affect prices volatile stock market & low bond rates Real estate more Stable & Safer investment? Debt financing harder in this cycle more cash down Low new construction Differentiate residential ownership versus commercial real estate to your investors!

55 QUESTIONS?

56 Topics Covered Economic Fundamentals 5 key Macro Economic Drivers of Real Estate Performance Economic Base Analysis Real Estate Physical Cycle Fundamentals Demand for Real Estate Supply of Real Estate Occupancy Cycles Rent Cycles Real Estate Financial Cycle Fundamentals Interest Rates Capital Flows Buyers Real Estate Prices Cap Rates

University of Denver. Dividend Capital Research

University of Denver. Dividend Capital Research Glenn R. Mueller, Ph.D. Professor University of Denver Franklin L. Burns School of Real Estate & Construction Management & Real Estate Investment Strategist Dividend Capital Research glenn.mueller@du.edu