Investment Outlook United States | Q1 2016 WHAT TO KNOW JLL | United States | Investment Outlook | Q1 2016 2 WHAT YOU The effects of recent capital markets volatility on transactions is being WILL FIND felt in early 2016, and the sheer bumpiness of this volatility is further reflected in shifts throughout the quarter itself across global financial WHERE and real estate capital markets. What started with elevated VIX levels, TO FIND IT atypical downward S&P trending with crude oil pricing and a broad lack of consensus around Federal Reserve policy has since shifted into VIX index declines by less than half the quarter’s peak. Regardless of what some believe to be newfound, near-term stability, current pricing levels, 4 Top 7 investment themes cycle longevity concerns and a heightened sensitivity to risk have brought volatility into the real estate capital markets, driving an 11.2 11 Office 12 Overview percent decline in first-quarter volumes with early cautionary sentiment 13 Key investment themes 18 Notable transactions expected to impact second-quarter volumes. However, strong property fundamentals, a robust and historic level of active capital and alleviated 19 Industrial 20 Overview investor angst is expected to drive flat to moderate declines in activity 21 Key investment themes 25 Notable transactions at year-end. Despite volume declines, pricing dynamics broadly remain 26 Multifamily resilient, with spread levels healthy and cap rates compressing 31 Overview 27 basis points on average over the last 12 months across sectors. With 28 Key investment themes Notable transactions 32 the latter stages of the cycle, the risk of macro or sector pressures 33 Retail impacting markets naturally increases. 34 Overview 35 Key investment themes 39 Notable transactions THIS YEAR we are monitoring markets closely with a keen eye on a few factors: 40 Lodging • Impact of new regulations, referendums, elections 41 Overview and the Fed 42 Key investment themes • Shifts to currently controlled financing standards 45 Notable transactions • Value-add underwriting 46 Net Lease • Foreign investment levels • Weak points in property markets, notably in 47 Overview 48 Key investment themes multifamily construction 51 Notable transactions THE EFFECTS JLL | United States | Investment Outlook | Q1 2016 3 TOP INVESTMENT THEMES After a bumpy January and February spur heightened caution in markets, signs of stability emerge 1. late in Q1 2016 started off with uncertainty in the equity markets due to fears of a throughout the first-quarter as investors closely monitored OPEC’s global economic slowdown. This came amid a heightened focus on the willingness to negotiate an agreement to curtail oil production to a slowing Chinese economy and plunging oil prices. These market jitters manageable amount. As a result, the markets rode the roller coaster of were felt throughout January, averaging 24 on the CBOE Volatility Index volatile crude oil pricing throughout the quarter, having declined nearly (VIX) and reaching a peak of 29, its highest level since September 2015. 12.0 percent in the month of January alone and reached a 13-year low While January might have been the most volatile month, February also had below $27. While still at compressed levels, oil pricing has been trending instances of heightened volatility, as when the S&P 500 sank to 1,829—its up in March and early April with four-week, rolling pricing growth lowest point since April 2014. Since January’s lows and February’s bottom, averaging 16.1 percent as of April 12. As the market has been gaining however, the market has rebounded. From its lowest point, the S&P has ground, the atypically strong correlation between oil and markets rebounded 14.3 percent and is now up 2.6 percent on the year. With this, diverged for a short period of time but has since converged again. In the the VIX index declined to as low as 13 in early April, less than half of the near term, a continued focus on oil pricing is warranted, providing an quarter’s peak and the lowest level on the indicator since August 2015. atypical yet relevant indictor for sentiment and the stability of the markets. The decoupling of the two will be reliant on increased certainty Oil pricing has been a key factor in the decline and more recent rebound of from OPEC on near-term production. the equity markets. The commodity and S&P 500 were correlated Volatility in the public markets drops after a bumpy six months 40 2,500 Volatility Index China slowdown; Fear over first Fed rate China & Global S&P 500 RMB devaluation hike; Falling uncertainty; Oil 2,300 35 commodity prices falls below $27 2,100 1,900 30 China slowdown; Oil falls below $40; Fed 1,700 Falling commodity rate hike angst 25 prices; 1,500 Currency volatility Greece debt S&P 500 crisis 1,300 Volatility Index 20 1,100 900 15 Fed rate hike 700 10 500 15 15 15 16 15 15 16 15 15 16 16 Jul- 15 15 15 15 15 Oct- Apr- Apr- Jun- Jan- Jan- Feb- Mar- Feb- Mar- Aug- Sep- Nov- Dec- May- Source: JLL Research, CBOE, Bloomberg (data as of April 6, 2016) 6/2 6/23 11/8 12/24 Key OPEC Meeting, “Brexit” U.S. presidential CMBS regulation dates Vienna vote election goes into effect to FOMC FOMC FOMC FOMC FOMC meeting meeting meeting meeting meeting watch 6/16–17 7/28–29 9/16–17 10/27–28 12/15–16 JLL | United States | Investment Outlook | Q1 2016 4 All eyes on OPEC: Concerns about oil and global growth is being reflected in atypical correlations to equity markets Historically not correlated Strong correlation in 2016 60 2,150 2,070 42 55 2,100 40 50 2,020 38 2,050 45 1,970 36 40 Recent 2,000 divergence 34 S&P 500 S&P 500 Crude oil price 1,920 Crude oil price 35 32 1,950 Correlation 30 back on 30 1,900 1,870 S&P 500 25 28 Crude Oil 1,850 20 1,820 26 Jul-15 Apr-15 Oct-15 Apr-16 Jan-15 Jun-15 Jan-16 Feb-15 Mar-15 Feb-16 Mar-16 Nov-15 Dec-15 Aug-15 Sep-15 Apr-16 Apr-16 May-15 Jan-16 Jan-16 Jan-16 Jan-16 Feb-16 Feb-16 Feb-16 Feb-16 Mar-16 Mar-16 Mar-16 Mar-16 Source: JLL Research, CBOE, Bloomberg 2. CMBS pricing follows the wave of market volatility with recent signs of needed stability During the first-quarter, financial market volatility caused CMBS new issued deal or designate a B-piece buyer to take on that risk. This goes issuance to briefly halt. CMBS new issuance dropped to $19.0 billion into effect in December of this year. The direct impact of risk retention is versus $27.0 billion this time last year, a 29.6 percent decline. With this still unknown, but the overwhelming consensus among the investor decline, spreads to swaps for AAA CMBS widened on a weekly basis, community indicates that CMBS pricing will be negatively impacted with reaching levels as high as 170 basis points versus 90 basis points during spreads likely to widen. Given recent volatility in the CMBS space, the same period last year. The unreliability of pricing in the market competing lenders such as life companies, banks and, more recently, impacted deal closings, leading CMBS to fall out of favor on recent debt funds are filling the gap with debt funds especially, popular in acquisitions and refinancings. Full-year new issuance estimates have secondary and tertiary markets. Life company lenders also recently since been significantly reduced to approximately $60.0 billion, a nearly committed $63.4 billion to commercial mortgages at the end of 2015, the 40.0 percent year-over-year decline. Issuance declines will be further highest in 11 years. Relative to levels earlier in the quarter, however, impacted by the modification to Dodd-Frank risk retention, which CMBS spreads have since tightened with declining market volatility, requires CMBS issuers to retain a 5.0 percent portion of every new exhibiting needed stabilization in pricing in the sector. CMBS issuance takes a hit with market volatility Equity market volatility causes gradual increase in CMBS Spreads $250.0 40 165 170 170 165 180 140 160 35 127.5130 $200.0 120 140 30 114.5 99 120 Volatility Index 25 90 90 90.5 $150.0 100 20 80 $100.0 (bps) 15 60 10 $50.0 40 5 CMBS issuance (billions of $US) issuance (billions of CMBS 20 $0.0 0 0 Monthly Peak AAA Spreads to Swaps 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Jul-15 Apr-15 Apr-16 Oct-15 Jun-15 Jan-16 Mar-15 Feb-16 Mar-16 Aug-15 Sep-15 Nov-15 Dec-15 May-15 2016 YTD Source: JLL Research, Bloomberg, Commercial Mortgage Alert (through March 31, 2015) Source: JLL Research, Commercial Mortgage Alert (data as of April 1, 2016) JLL | United States | Investment Outlook | Q1 2016 5 Capital deployment pressures heighten with increased caution, decline in deal flow and 3. continued discipline So far in 2016, closed-end real estate funds have not raised capital equal to the expanded global buyer pool, increased caution, decreased deal to that of the historic year in 2015. Fundraising for real estate started the flow early in the year and continued discipline in markets. year with $12.7 billion through the first-quarter of 2016, a decline of 27.0 percent from this time last year.