Invesco Real Estate House View H1 2019 North America Market Outlook Invesco Real Estate Global Research Team

Global Asia Pacific Europe North America Timothy Bellman Thomas Au Mike Bessell Mike Sobolik Global Asia Pacific European North American Research Strategist Research Strategist Research Strategist Research Strategist

Sabrina Unger Catherine Chen Christian Eder Nicholas Buss Analyst Director Director Senior Director

Katherine Seamans Jerry Song Matthew Hall Joshua Bova Project Coordinator Vice President Director Analyst

Jade Tan Guy-Young Lamé Brock Lacy Associate Director Director Analyst

Lauren van Aanholt Julia Maurer Joyce Galvan Associate Director Analyst Associate

Invesco Real Estate locations

Atlanta  Beijing  Dallas  Hong Kong  Hyderabad  London  Luxembourg  Madrid  Milan  Munich  New York  Newport Beach  Paris  Prague  San Francisco  Seoul  Shanghai  Singapore  Sydney  Tokyo  Warsaw

Cover image: Austin, TX is a market inclusive of innovation hubs, the key driver of economic growth and office demand.

This document is for Professional Clients only in Dubai, Continental Europe (as defined in the important information), Ireland and the UK, for Qualified Investors in Switzerland, for Institutional Investors only in the United States, Australia and Singapore, and for Professional Investors only in Hong Kong and in Japan as defined under the Financial Instruments and Exchange Law of Japan. In Canada, the document is intended only for accredited investors as defined under National Instrument 45–106. It is not intended for2 andIn vescoshould Real not Estate be distributed House View to, orH1 relied 2019 upon North by, America the public Market or Outlookretail investors. Please do not redistribute this document. Contents

Executive summary 1-4

Macro themes 5-7

North American real estate market outlook 8-25

North American real estate strategy and execution 26-27 US real estate investment context – H1 2019 Create durable income; reduce volatility; take execution risk selectively

Macro environment: –– Fundamentals: Revenue growth is healthy yet is moderating throughout most market segments. –– Capital markets: Risk-taking is becoming more selective. Debt capital is plentiful.

Investment execution response: –– Sectors: Overweight industrial, apartment, and select specialty sectors. –– Bulk industrial: Buy or build state-of-the-art product in major supply chain markets. –– Infill industrial: Maximize access to consumers; minimize exposure to competitive stock. –– Apartment: Buy higher-yield assets with room to run for net operating income (NOI) growth. –– Retail: Seek service-oriented centers with tenant experiences not easily duplicated online. –– Office: Buy in high-growth innovation hubs with a compelling, hospitality-based work environment. –– Specialty: Seek to reduce portfolio volatility and avoid oversupplied locations. Image: E-commerce growth remains a dynamic driver of robust demand for warehouse and logistics space.

1 Invesco Real Estate House View H1 2019 North America Market Outlook Macro environment Growth slowing, fundamentals easing, risk selectivity, costs up

Macro economy: Growth is healthy, but is slowing –– Job openings exceed the pace of hiring; tight labor conditions limit growth. –– Tapering yield curve, drop in home sales, and tariff risk imply slowdown is coming. –– Yet, slow money supply growth supports low inflation expectations.

Fundamentals: Easing, but vary across sector and segments –– Industrial: Rising supply is still outstripped by robust demand. –– Retail: Weak store-based sales have led to anemic revenue growth. –– Apartment: Rent growth is challenged in supply-heavy locations. –– Office: Differentiated assets in innovation hubs are capturing outsized demand.

Capital markets: Risk-taking is becoming more selective –– Liquidity has contracted, particularly for assets valued above $150 million. –– Class B and C assets have experienced significant yield compression. –– Fewer foreign buyers and total bidders; outliers often set prices. –– Debt capital is plentiful.

Costs: Still rising, still challenging –– Property taxes rising abruptly and sharply; development costs are up. –– Amenity and personnel costs continue to rise among new apartments. –– High finish-out costs are needed to secure new office and retail tenants.

2 Invesco Real Estate House View H1 2019 North America Market Outlook Investment execution response Can’t control the cycle, but can control our choices in the cycle

Strengthen investment resiliency –– Favor durable income and higher yield to weather expected growth slowdown. –– Reduce leverage, simplify debt covenants and partnership structures. –– Extend debt maturities while conditions favor borrowers.

Sector allocation will increase in importance –– Sector performance differences can widen at economic turning points. –– Nothing is immune, but prefer apartment and industrial over office and retail. –– Capital demand for apartments is deeper and more stable than for commercial. –– Structural trends lend resilience to industrial, but weakness to retail.

But selection within sectors matters at least as much –– Technology and demographic trends are leading select assets to outperform. –– Industrial: Don’t compromise on infill location or bulk property attributes. –– Retail: Measure property viability by factors leading to strong store sales. –– Apartment: Seek higher yield, lower supply exposure and rents below top-of-market. –– Office: Don’t settle for non-premium locations and inefficient space.

Active management will be a differentiator –– Get ahead of lease expirations; assert efforts to drive NOI growth. –– Deal with challenging tenant credit issues while demand remains positive. –– Be selective on cap-ex.

3 Invesco Real Estate House View H1 2019 North America Market Outlook Investment performance tradeoffs: Yield and revenue growth With slower growth expected, seek higher yield and durable income

Return tradeoffs between yields and revenue growth Macro environment: –– Fundamentals remain in good shape across Yield most sectors and markets. Low High –– But revenue growth is expected to moderate as the cycle lengthens and matures. High Investment execution response: Early cycle strategy as growth High probability of over- –– Seek relatively higher-yield opportunities accelerates performance because of lower revenue growth expectations. Requires great care in Ideal, but less common –– But do not compromise on property income underwriting presently durability. –– Commit to asset quality and credit quality. –– Commit to market and location selection with a clear long-term demand growth High probability of under- Late-cycle strategy as growth premise. performance decelerates –– Consider lower-yield opportunities in cases that provide a clear path to achieving strong More assets come into this Careful asset selection needed income growth at the property level. Revenue growth Revenue category with slow growth, to ensure durable income strong capital demand conditions. Low

“High” and “Low” refers to whether revenue growth or yield for an asset is high or low compared to other assets for a given point in time. It does not refer to whether something is high or low compared to historical values.

4 Invesco Real Estate House View H1 2019 North America Market Outlook Macro themes

Revenue growth is healthy, yet moderating. Tight labor availability is constraining the pace of hiring, which is moderating the pace of tenant demand.

Capital market risk-taking is becoming more selective. Liquidity is becoming thin for larger transactions and equity transactions are seeing fewer bidders, whereas debt is plentiful.

Easing of Treasury yields potentially means less cap rate compression. The current posture of the Federal Reserve to place a hold on moving interest rates higher means real estate cap rates could experience less expansion should the economy move into recession.

NOI growth of late is greatest for industrial, followed by apartment. NOI growth within sectors is differentiated by competitive levels of new supply for apartments, location and asset quality for office, and type of center and location quality for retail. Yield/cap rate spreads to Treasuries Easing of Treasury yields potentially means less cap rate expansion

Yield/cap rate spreads to 10-year Treasury In March, the Federal Reserve signaled they may NPI current value cap rate (LHS) LTA spread +/-1 std. deviation (RHS) be finished with raising short-term interest rates 10-year Treasury (LHS) • Spread (RHS) for 2019.

10 450 The Fed also suggested a possibility of reducing short-term rates in 2020. 9 400 Cap rate spread to 10-year Treasury (basis points) The 10-year Treasury yield fell in response to this 8 news, reflecting a weaker economic outlook. 350

7 If prevailing 10-year rates hold through the 300 remainder of this cycle, real estate yields/cap 6 rates could experience less expansion should the 250 economy move into recession. 5 200 This means that a potential reduction in real 4 estate prices could be less severe than it otherwise would have been if Treasury yields had 150 3 continued to increase.

100 2

50 10-year Treasury/NPI current value cap rate (%) rate cap value current Treasury/NPI 10-year 1

0 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 *2019 Notes: Historical average spreads reflect period from Q1 1995 to Q4 2018. Data reflects current value weighted market yields/cap rates and spreads to 10-year US Treasury bonds. *Data for Q1 2019 reflects the differences between average yields/cap rates in Q4 2018 and the average 10-year US Treasury yield in Q1 2019 to date through March 21 (2.68%). LTA = long-term average. Note: This corresponds to the *2019 in the chart. Source: Invesco Real Estate based on data from NCREIF and Moody’s Analytics as of March 2019 6 Invesco Real Estate House View H1 2019 North America Market Outlook Market trends by sector NOI growth of late is greatest for industrial, followed by apartment

Industrial Retail Recent NOI growth has been around 8%-10% Recent NOI growth has been around 0%-2%

–– Net operating growth is at record highs. –– Class A malls are sharply outperforming others. –– Demand is matching robust supply levels. –– Power center occupancy continues to slip. –– Tenant demand is strong for both bulk and infill. –– Grocery-anchored occupancy held in 2018. –– Capital demand is very competitive. –– Risks are weighted to the downside. –– Yield/cap rate spreads are below the normal –– Yield/cap rate spreads are below long-term average. range.

Apartment Office Recent NOI growth has been around 4%-5% Recent NOI growth has been around 2%-3%

–– Demand growing, especially for B/C product –– Best assets have pricing power; others –– Oversupply at top end of rental range do not. –– Easier to raise rents on renewal leases –– Robust demand and supply in innovation hubs –– Property taxes still spiking in some areas –– New supply is well-leased; rents are rising. –– Yield/cap rate spreads are below long-term –– Tepid demand for older “value” office average. –– Tenant finish costs are rising. –– Yield/cap rate spreads at low end of normal range

Note: NOI growth estimates from NCREIF for annual periods ending in Q3 and Q4 2018, respectively. Yield/cap rate spread summaries are based on an average 10-year US Treasury yield for Q1 2019 to date through March 21 of 2.68% and historical market value weight cap rate spreads from 1995 to 2018 according to NCREIF.

7 Invesco Real Estate House View H1 2019 North America Market Outlook Real estate market outlook

Industrial: We expect e-commerce growth to continue to create robust opportunities for both bulk and infill properties. New supply will affect bulk product the most, by far. Our selection of infill product will focus on access to local consumer markets and labor pools, whereas opportunities to buy or build bulk product will focus on markets that play prominently in the national supply chain.

Retail: Slow to moderate consumer spending growth is expected in storefront real estate, which could lead to additional store closures and continued soft rental conditions. Headwinds to storefront demand call for a highly selective focus on service-oriented centers with tenant experiences that cannot be easily duplicated online.

Apartment: Demand remains healthy. Locations without excessive concentrations of new supply should continue to experience stronger rent growth than high-supply locations. Properties with top-end rents for their local areas may also experience challenging rent growth conditions. Rent growth for renewal leases should continue to outpace the rental growth for new leases. Our focus is on investments with high income durability, low exposure to new supply and relatively higher yields.

Office: Innovation hub locations and higher-quality assets have pricing power. Other segments of office tend not to have pricing power. Our focus is on innovation hub locations and high-quality product that can deliver a compelling, hospitality-based work environment.

Specialty sectors: Healthcare sectors have provided steady, moderate NOI growth and low correlations to economic growth. Self- storage can deliver strong NOI growth in locations not experiencing excessive new supply growth. We will seek opportunities in locations with lower supply growth to curb portfolio volatility. Industrial: Investment execution Robust demand broadly supports bulk and infill strategies

Annual net operating income growth per quarter Investment behaviors we pursue: NPI-Industrial, past 10 years (%) –– Invest where expected growth will compensate for spread between price and replacement cost. –– Bulk acquisitions: In markets with large 15 regional populations and large seaports –– Development: In large port/large population, distribution hubs, and high-growth markets –– Infill acquisitions: High-density locations in 10 high-growth markets with low space per capita –– Accept less functionality for infill properties. –– Require more functionality for lower-density bulk locations with vulnerability to new supply. 5 Investment behaviors we avoid: –– Avoid buying in locations exposed to tax incentives for new development. –– Avoid short lease terms in low-density, 0 supply-vulnerable locations. –– Limit exposure to third-party logistics tenants.

-5

-10 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Invesco Real Estate based on data from NCREIF through Q4 2018

9 Invesco Real Estate House View H1 2019 North America Market Outlook Industrial: Bulk demand drivers Supply chain drives greatest demand to large ports/populations

Inbound containers (Mil.) Investment performance in the Los Angeles, • 2010 • 2018 Riverside, and New York industrial markets has outperformed the NPI significantly and West Coast East Coast/Gulf consistently.

5 Largest seaports with high Drivers of outperformance: populations remain the most –– Home to the nation’s highest volume ports attractive bulk markets serving the US supply chain 4 –– Outsized regional populations –– High population densities and supply barriers

Trade policy uncertainty could marginally 3 influence performance in these markets.

Yet, the indelible role of these markets in the 2 nation’s supply chain should continue to set them apart in regard to bulk demand and relative investment performance.

0 Virginia Oakland Houston New York New Baltimore Savannah Vancouver Charleston Seattle-Tac Long Beach Long Los Angeles Los Source: Invesco Real Estate based on data from individual port authorities as of February 2019

10 Invesco Real Estate House View H1 2019 North America Market Outlook Industrial: Infill demand drivers Demand for speedier delivery is driving logistics closer to consumers

Average daily parcel deliveries in US by major companies (Mil.) E-commerce has caused domestic parcel • UPS Ground • FedEx Ground • USPS Parcel Select deliveries to double since 2010.

35 The “last mile” of the delivery chain is expensive (about 50% of total delivery cost).

30 This is creating sortation and delivery demand for infill industrial product in large, densely populated markets. 25 This product is often older and may come with functional challenges, but locations with high 20 population densities make this an acceptable tradeoff.

Infill product may also offer the potential 15 to be converted to other uses.

0 2010 2011 2012 2013 2014 2015 2016 2017 2018 Note: UPS: Calendar year; FedEx: Fiscal year ending May 31; USPS: Fiscal year ending Sep. 30. Trends would be accentuated if data for Amazon delivery services were available.

Source: Invesco Real Estate based on data from company reports as of February 2019

11 Invesco Real Estate House View H1 2019 North America Market Outlook Industrial: Metro area criteria for infill investments Look for high demand growth, low supply, scale, stable occupancy

Industrial small box space (50-199K square feet) per capita, Q4 2018 Best metro conditions: Markets with low supply per capita and high demand (population) growth 35 (upper left quadrant) Best relative Prefer metros with higher and Austin conditions less volatile occupancy rates Worst metro conditions: Markets with high 30 supply and low demand growth (lower right Raleigh quadrant) 25 Orlando Houston San Antonio Dallas Charlotte In markets with low supply but low demand 20 Las Vegas Phoenix W Palm Seattle Denver growth (lower left), we highly prefer Beach Ft Worth Salt Lake City Wash DC Nashville opportunities in large markets with scale Jacksonville Portland Atlanta 15 Miami Tampa Ft. Lauderdale (e.g., New York). Oakland San Jose San Francisco SacramentoRiverside Columbus Indianapolis Kansas City 10 San Diego Vallejo Tucson In markets with high demand growth but Orange CountyBoston Minneapolis New York Stamford Louisville excessive supply (upper right), we prefer micro Ventura Baltimore Los Angeles 5 Honolulu Philadelphia S Central PA Cincinnati locations with histories of higher and less volatile Wilmington Albuq Trenton Allentown Memphis St. Louis Milwaukee Long Island Newark Chicago occupancy rates.

Population growth 2008-18 (%) growth Population Hartford Dayton 0 Pittsburgh Toledo

-5 Prefer metros with larger populations Worst relative conditions -10 10 20 30 40 50 60 Industrial small box space per capita (50-199K boxes, square feet)

Source: Invesco Real Estate based on data from CBRE-EA and Moody’s Analytics as of February 2019

12 Invesco Real Estate House View H1 2019 North America Market Outlook Retail: Investment execution Downside sector risks compel a focus on “only the best”

Annual net operating income growth per quarter Investment behaviors we pursue: NPI-Retail, past 10 years (%) –– Sell assets with material incurable deficiencies. –– Favor high population density locations and mixed-use settings for enhanced traffic. 15 –– Favor formats with less vulnerability to e-commerce (e.g., experiences, services, food). –– Actively manage tradeoffs between new retail concepts versus low/weak tenant 10 credit history. –– Actively manage co-tenancy risk.

Investment behaviors we avoid: –– Avoid opportunities lacking a clear path to 5 property income growth. –– Avoid buying assets with mediocre-to-weak store sales and low population density. –– Avoid being lured to a “next best” location. 0 –– Avoid centers with outsized boxes that cannot be easily demised.

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-10 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Invesco Real Estate based on data from NCREIF through Q4 2018

13 Invesco Real Estate House View H1 2019 North America Market Outlook Retail: Sales in physical stores versus online Slow store sales growth supports asset preference for “only the best”

US net growth in adjusted retail sales by channel (US$ bn) Annual retail sales growth in 2001 to 2018: • Online sales • Physical store sales –– Physical store sales have grown by 2.7%/year. –– Online retail sales have grown by 18%/year. $150 Physical stores’ capture share of retail sales growth: –– In 2001-10 period, 79% share 100 –– In 2011-18 period, down to 64% share –– In 2018, down to 57% share

Implications for retail center investment 50 strategy: –– Underweight retail given the risk of an economic inflection point and the shift toward online sales. 0 –– Asset selection should focus on only the best locations and assets. –– Asset selection should consider the ability of an asset to accommodate fulfillment and -50 customer return activity. –– Be prepared to lean back into retail following a recession, especially if new supply remains low.

-100 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Invesco Real Estate based on data from the U.S. Census Bureau through Q4 2018

14 Invesco Real Estate House View H1 2019 North America Market Outlook Retail: Retailer financial health Actively manage anchor risk

Self-assessment of financial health Several anchor categories are merely surviving (% of respondents; survey of 300 retail C-suite executives) or struggling in regards to financial health. • Thriving • Surviving • Struggling Pure-play e-commerce platforms are in much 100 5 11 20 4 3 better shape. 13 55 61 Expect more store closures and vacated 90 64 anchor spaces. 84 80 63 Get ahead of lease expirations, especially those involving a vulnerable anchor. 70 Work to replace tenants of weaker credit with 60 more stable tenancy.

50 Consider selling centers with large spaces that do not demise efficiently. 40 40 35 30 25 20 17 10

0 Department Pure-play Specialty Discount store Big box e-commerce

Thriving: Profitable and experiencing robust growth Surviving: Stable and breaking even Struggling: Unprofitable and/or losing out to competition

Source: Invesco Real Estate based on data from BDO 2019 Retail Rationalized Survey as of February 2019

15 Invesco Real Estate House View H1 2019 North America Market Outlook Retail: Real estate pricing and store productivity Sales erosion leads to impairment of values; avoid low sales centers

Mall store sales and implied cap rates, Q4 2018 Green Street Advisors draw a strong negative correlation between the productivity of mall store sales and implied private retail property 35 cap rates.

This relationship should also hold true 30 for other retail real estate sub-classes.

25 Hence, expectations of investment performance should include a clear understanding of current and expected store sales. 20 Key factors that drive store sales include local trade area strength, retailer strength, 15 co-tenancy and encumbrance issues, and physical Cap rate (%) rate Cap property characteristics.

10 Favor retail in mixed-use settings that increases traffic and enhances densification, contributing to store sales productivity. 5

0 0 200 400 600 800 1000 1200 Store sales per square foot ($)

Note: Each diamond represents average store sales by implied cap rate groupings and includes analysis of 1,214 assets.

Source: Invesco Real Estate based on data from Green Street Advisors as of February 2019

16 Invesco Real Estate House View H1 2019 North America Market Outlook Apartment: Investment execution Focus on higher-yield and stable income; treat spending judiciously

Annual net operating income growth per quarter Investment behaviors we pursue: NPI-Apartment, past 10 years (%) –– Focus buys on higher-yield, stable-income assets with lower near-term supply exposure. –– Buy quality assets with rental discount to top- 15 of-market. –– Account for outsized tax risk when selecting locations and markets. –– Commit to “defensive” spending growth 10 to compete in high-supply areas. –– Taper spending in low-supply areas where such tapering will not impair values. –– Stabilize revenues through tenant retention. 5 –– Push rents on renewal leases. Investment behaviors we avoid: –– Avoid buying in over-supplied locations. –– Avoid rehabs with incurable attributes. 0 –– Avoid buying low-yield assets lacking a clear path to producing favorable income growth.

-5

-10 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Invesco Real Estate based on data from NCREIF through Q4 2018

17 Invesco Real Estate House View H1 2019 North America Market Outlook Apartment: Submarket supply risk Prefer locations and metros with lower exposure to new supply

% of units in submarkets adding inventory at a faster pace than the nation New supply volumes are dampening the pace (2014-18) of rent growth in a number of locations. In some metros the new supply is widespread; 0 20 40 60 80 100 in others it is highly concentrated. Sacramento Los Angeles Oakland San Diego Less stock New supply growth in some metros, Los Angeles Riverside exposed to high for example, is growing faster than the US Las Vegas supply growth Chicago average in only one or two submarkets. Newark San Francisco Orange County Contrast that with Raleigh, for example, where Philadelphia Fort Worth almost all submarkets are experiencing growth New York of new supply faster than the US average pace. Houston San Jose Atlanta All other factors held constant, opportunities Baltimore Phoenix for stronger rent growth will likely be found in West Palm Beach metros with fewer submarkets exposed to high Tampa Miami supply growth. Boston Fort Lauderdale More stock Minneapolis exposed to high Washington DC supply growth Salt Lake City Dallas Seattle Portland Denver Nashville Austin San Antonio Orlando Charlotte Raleigh Source: Invesco Real Estate based on data from CBRE-EA as of March 2019

18 Invesco Real Estate House View H1 2019 North America Market Outlook Apartment: Rent positioning within submarkets Prefer quality assets with rents meaningfully below top-of-market

Percentage spread between top-quartile and next-quartile submarket Submarkets with narrow spreads between rent levels top-quartile rents and next-quartile rents face constraints to rent growth in the near term. Examples of submarkets with wide spreads (%) Los Angeles West LA 33 Locations with wide spreads are places where next-quartile rents have room to rise. New York Upper East Side 77 San Jose Mountainview 28 These are also locations where value-add strategies have a better chance of success. Examples of submarkets with narrow spreads (%) Los Angeles Pasadena 10 New York Queens County 8 San Francisco South of Market 9

Note: Of the 357 submarkets analyzed, the median percentage spread between top-quartile and next- quartile rents was 15.2%. Submarkets were required to have at least 16 properties to be included in the analysis. Of the 357 submarkets analyzed, 103 have gaps between top-quartile and next-quartile rents of 20% or higher.

Source: Invesco Real Estate based on data from Axiometrics as of March 2019

19 Invesco Real Estate House View H1 2019 North America Market Outlook Apartment: Tenant renewal and rent growth Focus efforts on tenant retention and rent growth of renewal leases

Apartment renewal conversion rate (4-quarter moving average, %) Tenants are tending to stay in place longer than in the past. 53 Rent growth on renewal leases recently has been 52 exceeding rent growth on new leases, particularly 51 in locations exposed to high levels of new supply. 50 49 Focus asset management efforts on tenant 48 retention and tenant renewal rent growth. 47 46 45 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Apartment rent growth (4-quarter moving average, %) New leases Renewal leases

8 6 4 2 0 -2 -4 -6 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Invesco Real Estate based on data from RealPage as of February 2019

20 Invesco Real Estate House View H1 2019 North America Market Outlook Office: Investment execution Maintain tech/creative tenant focus to drive outperformance

Annual net operating growth per quarter Investment behaviors we pursue: NPI-Office, past 10 years (%) –– Buy functional, differentiated assets that are attractive to tenant demand in 15 innovation hubs. –– Buy buildings designed to maximize the flexibility of tenant finishes. –– Consider the price/replacement cost 10 relationship. –– Create space plan flexibility for tenant growth. –– Prefer enterprise and shared revenue co- working models over pure-play co-working. –– Secure term in exchange for tenant 5 improvement spending on new leases. –– Identify and mitigate credit risk.

Investment behaviors we avoid: 0 –– Assets not in/adjacent to innovation hubs –– Chasing yield in last-in/first-out locations –– Properties with incurable inefficiencies –– Outsized exposure to co-working tenants -5

-10 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Invesco Real Estate based on data from NCREIF through Q4 2018

21 Invesco Real Estate House View H1 2019 North America Market Outlook Office: Innovation hubs drive the sector’s revenue growth Locations with tech and innovation concentrations tend to outperform

Revenue index (Q1 2010=100) Innovation hubs account for: Innovation centers Rest –– 10% of total US office stock as of 2010 –– 20% of the sector’s net absorption in this cycle 190 –– 30% of the sector’s revenue growth in this cycle –– Innovation tenants have shown they will pay 180 high rent for buildings that are well-tailored to their needs and wants. 170 –– Outsized revenue growth of innovation hubs reflects the outsized growth of economic 160 output by technology and innovation sectors. –– Tech and innovation sectors are expected to 150 remain the dominant drivers of long-term economic growth. 140 –– Hence, these economic sectors should continue to drive future office location 130 demand, which is why we continue to expect outperformance long-term in this segment, 120 even if an economic downturn were to create short-term volatility. 110

100

90 2010 2011 2012 2013 2014 2015 2016 2017 2018

Innovation hubs: San Francisco (City of San Francisco); San Jose (Palo Alto, Mountain View, Cupertino, Santa Clara, Sunnyvale, North San Jose); Los Angeles (West LA/Beverly Hills/Century City); Seattle (Downtown Seattle); Portland (Downtown Portland); Austin; Boston (Cambridge, South Station/Fort Point Channel); New York (Midtown South)

Source: Invesco Real Estate based on data from CBRE-EA as of February 2019

22 Invesco Real Estate House View H1 2019 North America Market Outlook Office: Innovation hub returns have dominated the sector Share is rising, but remains low enough to drive differentiated returns

Annual total returns (%) Share of NPI-Office located in innovation hubs Periods ending in Q4 2018 (% of ending market value per quarter) • Innovation hubs • Rest of office • NPI

14 36

34 12.3 12 32

30 10 10.1 9.2 9.3 9.3 28

8 26 7.5 7.2 7.1 6.7 24 6 22 5.3 5.4 5.1 20 4 18

2 16

14 0

1 Year 3 Years 5 Years 10 Years 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

23 Invesco Real Estate House View H1 2019 North America Market Outlook Office: Relative tenant exposure by market Unicorns and co-working are more concerning than FAANGS exposure

Relative tenant exposure based on share of total stock Exposure characteristics: FAANGS Unicorns Co-working FAANGS San Jose Very high Moderate Low –– Expected to remain the dominant driver of future office tenant demand Seattle Very high Low Low –– Yet, potential for short-term moderate volatility San Francisco High Moderate Moderate in an economic downturn –– Potential for increased regulation could curb Austin Moderate Very low Low growth; potential for anti-trust actions could New York Low Very low Moderate increase demand. –– Hold existing exposures and manage near-term Los Angeles Low Very low Low lease expirations. Denver Low Very low Low Unicorns Chicago Low Very low Low –– Potential for demand volatility if firms cannot Boston Low Very low Low achieve IPO capitalization prior to a cyclical inflection point Portland Low Very low Low –– Hence, assess balance sheet to make tenant- specific decisions. Dallas Very low Very low Low Atlanta Very low Very low Low Co-working –– Enterprise and shared revenue models are Salt Lake City Very low Very low Very low preferred over pure-play co-working. Washington DC Very low Very low Low –– Most operators have not been through a full economic cycle. Share of total stock: Very high: >10%; high: 5-10%; moderate: 2-5%; low: 0.5-2%; very low: <0.5% FAANGS: Space occupied by Facebook, Apple, Amazon, Netflix, Google and Salesforce Unicorns: Space occupied by private VC-backed companies; valuations >$1 billion (excludes co-working) Co-working: Estimate of space occupied by co-working companies (including Regus)

Source: Invesco Real Estate based on data from CoStar and CBRE-EA as of February 2019

24 Invesco Real Estate House View H1 2019 North America Market Outlook Specialty sectors: Cycle durability and portfolio construction Triangulate the tradeoffs among growth, volatility and correlations

Same-store net operating income growth per sector Health care and student housing appear less sensitive to business cycles than Average traditional sectors. annual NOI Correlation Health care has had very low volatility, growth, with GDP an attractive attribute for a portfolio in the past 5 NOI growth (lagged event of an economic downturn. years volatility 1 year) Sector 2014-18 2005-18 2005-18 Self-storage has shown higher cyclical sensitivity, Apartment Strong growth, 7.1 3.7 0.25 but with higher NOI growth. defensive in a slowdown Self-storage asset selection should focus Industrial Strong growth, positive 7.4 5.0 0.55 on locations with low stock per capita or structural drivers places where new supply is replacing much Retail Slow growth, negative 2.7 2.9 0.54 older stock. structural drivers Office Moderate growth, 4.9 3.6 0.46 cycle dependent Health care Slow, steady growth, 2.8 0.9 -0.05 not cycle dependent Self-storage Strong growth, 6.1 3.7 0.57 cycle dependent Student Slow growth, 2.5 3.0 0.19 housing not cycle dependent Same-store REIT NOI growth based on weighted averages of companies in Green Street’s coverage universe. Health care includes seniors housing, nursing homes, medical office and life science.

Source: Invesco Real Estate based on data from NCREIF (apartment, industrial, retail, office) and Green Street Advisors (health care, self-storage, student housing) as of April 2019

25 Invesco Real Estate House View H1 2019 North America Market Outlook Real estate sector strategy and execution

Strategy themes: Given our view of moderating revenue growth and narrowing risk preferences, our overall strategic focus remains fixed on creating durable income, reducing volatility and taking execution risk selectively.

Sector opportunities: We intend to mildly overweight the industrial and apartment sectors, along with select specialty sectors. We remain optimistic about office opportunities for best locations and functionally distinctive assets, but not much else.

Execution: We believe that active management can be a differentiator in times of slowing revenue growth. We intend to manage lease expirations, strengthen tenant credit and be judicious about expenses and capital improvements. US core direct target weights by sector, H1 2019 Overweight industrial, apartment and select specialty sectors

IRE long-term strategic ranges and tactical targets (%) Apartment: Mild overweight ü Positive demand (yet curbed by homebuying) Current ODCE weights (Q4 2018) Target tactical weights ü • Long-term strategic range Durable occupancy if downturn occurs x Supply levels are high (moderating somewhat). 50 x Weaker short-term rent growth

Office: Mild underweight ü Differentiated product is attractive. 40 x Rents exceed long-term trend line. x Labor tightness to restrain leasing

Industrial: Mild overweight ü Robust demand from e-commerce 30 ü Best relative rent growth in short term x Pricing aggressive to long-term norms x Rents far exceed long-term trend line.

20 Retail: Strong underweight ü Past outperformer in downturns ü Consumers to boost near-term demand ü Supply is extremely low versus the past. 10 x E-commerce is a major disruption. x Challenging to fill vacancies and raise rents x Tenants still reducing sizes and counts of stores 0 Apartment Ofﬁce Industrial Retail Other Other: Mild overweight ü Increased investor acceptance Mild overweight / underweight: 0.0% to 2.5% above/below midpoint of the strategic allocation range Overweight / underweight: 2.5% to 5.0% above/below midpoint of the strategic allocation range ü Higher yields; comparable income durability Strong overweight / underweight: 5.0% to 7.5% above/below midpoint of the strategic allocation range ü Strong demand for medical office, seniors housing Source: Invesco Real Estate based on data from NCREIF through Q4 2018 x Supply up for seniors housing, self-storage

27 Invesco Real Estate House View H1 2019 North America Market Outlook Investment risks or tailored for any audience. It does not take into account –– Italy by Invesco Asset Management SA Sede Secondaria, individual objectives, taxation position or financial needs. Via Bocchetto 6, 20123 Milan, Italy. The value of investments and any income This does not constitute a recommendation of any investment –– Japan by 1) Invesco Asset Management (Japan) Limited, will fluctuate (this may partly be the strategy for a particular investor. Investors should consult Roppongi Hills Mori Tower 14F, 6-10-1 Roppongi, Minato- result of exchange rate fluctuations) and a financial professional before making any investment ku, Tokyo 106-6114; Registration Number: The Director- decisions if they are uncertain whether an investment General of Kanto Local Finance Bureau (Kin-sho) 306; investors may not get back the full amount is suitable for them. Member of the Investment Trusts Association, Japan invested. Property and land can be difficult and the Japan Investment Advisers Association, and/or You may only reproduce, circulate and use this document (or 2) Invesco Global Real Estate Asia Pacific, Inc., Roppongi to sell, so investors may not be able to sell any part of it) with the consent of Invesco. This material may Hills Mori Tower 14F, 6-10-1 Roppongi, Minato-ku, Tokyo such investments when they want to. The contain statements that are “forward-looking statements.” 106-6114; Registration Number: The Director-General of These include, among other things, projections, forecasts, Kanto Local Finance Bureau (Kin-sho) 583; Member of the value of the property is generally a matter estimates of income, yield and return and are based on Investment Trusts Association, Japan and Type II Financial information available on the date hereof. They are based Instruments Firms Association. of an independent valuer’s opinion. upon certain beliefs, assumptions and expectations, which can change over time. Accordingly, forecasts are not reliable –– Luxembourg by both Invesco Real Estate Management S.a indicators of future performance. You should not place undue r.l., President Building, Avenue JF Kennedy 37A, L - 1855 Important information reliance on these forward-looking statements. Luxembourg and Invesco Asset Management SA, 18 rue This document is for Professional Clients only in Dubai, de Londres F-75009 Paris, France. Continental Europe, Ireland and the UK, for Qualified This document is issued in: –– the Netherlands by Invesco Asset Management S.A. Dutch Investors in Switzerland, for Institutional Investors only –– Australia by Invesco Australia Limited (ABN 48 001 693 in the United States, Australia and Singapore, and for Branch, Vinoly Building, Claude Debussylaan 26, 1082 MD 232), Level 26, 333 Collins Street, Melbourne, Victoria, Amsterdam, Netherlands. Professional Investors only in Hong Kong and in Japan as 3000, Australia which holds an Australian Financial defined under the Financial Instruments and Exchange Law Services Licence number 239916. –– Singapore by Invesco Asset Management Singapore Ltd, 9 of Japan. In Canada, the document is intended only for Raffles Place, #18-01 Republic Plaza, Singapore 048619. accredited investors as defined under National Instrument –– Austria by Invesco Asset Management Österreich – 45-106. It is not intended for and should not be distributed Zweigniederlassung der Invesco Asset Management –– Spain by Invesco Asset Management S.A. Sucursal en to, or relied upon by, the public or retail investors. Please Deutschland GmbH, Rotenturmstraße 16—18, 1010 España, C/Goya, 6 -3°, E28001 Madrid, Spain. do not redistribute this document. By accepting this Vienna, Austria. –– Sweden by Invesco Asset Management S.A. (France), document, you consent to communicate with us in English, –– Belgium by Invesco Asset Management SA Belgian Branch Swedish Filial, c/o Convendum, Jakobsbergsgatan 16, Box unless you inform us otherwise. (France), Avenue Louise 235, B-1050 Brussels, Belgium. 16404, 111 43 Stockholm, Sweden. For distribution of this document, Continental Europe is –– Canada by Invesco Canada Ltd., 5140 Yonge Street, Suite –– Switzerland by Invesco Asset Management (Schweiz) AG, defined as Austria, Belgium, Czech Republic, Denmark, 800, Toronto, Ontario, M2N 6X7, Canada. Talacker 34, CH-8001 Zürich, Switzerland. Finland, France, Germany, Hungary, Ireland, Italy, –– the Czech Republic by Invesco Real Estate s.r.o., Praha City –– the UK by Invesco Real Estate, a division of Invesco Luxembourg, Netherlands, Norway, Romania, Slovenia, Center, Klimentska 46, 110 02 Prague 1, Czech Republic. Asset Management Limited, Perpetual Park, Perpetual Slovakia, Spain and Sweden. Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, –– Denmark, Finland and Norway by Invesco Asset Management UK. Authorized and regulated by the Financial Conduct Source of all data is Invesco Real Estate, as of March 2019, SA, 18, rue de Londres, F-75009, Paris, France. Authority. unless otherwise stated. –– Dubai by Invesco Asset Management Limited, PO Box –– the United States of America by Invesco Advisers, Inc., 506599, DIFC Precinct Building No 4, Level 3, Office Where individuals or the Invesco Real Estate business have Two Peachtree Pointe, 1555 Peachtree Street N.E., 305, Dubai, United Arab Emirates. Regulated by the Dubai Atlanta, Georgia 30309, USA. expressed opinions, they are based on current market Financial Services Authority. conditions, they may differ from those of other investment professionals and are subject to change without notice. Target –– France by Invesco Asset Management S.A. 18, rue de figures, where mentioned, are not the actual allocations Londres, 75009 Paris. Authorized and regulated by the of a specific Invesco product. This document is marketing Autorité des marchés financiers in France. material and is not intended as a recommendation to invest –– Germany by Invesco Asset Management Deutschland in any particular asset class, security or strategy. Regulatory GmbH, An der Welle 5, 60322 Frankfurt am Main, requirements that require impartiality of investment/ Germany. investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. –– Hong Kong by Invesco Hong Kong Limited 景順投資管理 The information provided is for illustrative purposes only, it 有限公司, 41/F, Champion Tower, 3 Garden Road, Central, should not be relied upon as recommendations to buy or sell Hong Kong. securities or financial instruments. This marketing document –– Ireland by Invesco Real Estate Management S.a.r.l., is not an invitation to subscribe for shares in a fund or any President Building, Avenue JF Kennedy 37A, L - 1855 other investment product and is by way of information only, Luxembourg. it should not be considered financial advice. The information contained in this document may not have been prepared Invesco Real Estate Client Portfolio Managers

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