Perspectives on U.S. investment

beneath the tip of the iceberg

Ninth Annual Outlook on the Commercial Real Estate Market

Sean CoghlanDirectorInvestment Research

January 2016

After a historic year with mixed signals, investor sentiment

cautiously bullish heading into 2016

2

Source: JLL Research

Solid domestic job growth shows no signs of weakness

3

+292,000(63 consecutive months

of growth)1-month net change

+2,650,000(+1.9% y-o-y)

12-month change

+796,000

10-year average annual growth

5.0%

Unemployment rate

-60bp

12-month change in unemployment

7.0%

10-year average unemployment

5,383,000(+11.0% y-o-y)

Job openings

5,137,000(+0.6% y-o-y)

Hires

2,779,000(+1.9% y-o-y)

Quits

Source: JLL Research, Bureau of Labor Statistics

4

Leading the world as we’ve known it to change

Steady rise of allocations to real estate

Foreign capital & FIRPTA

Record levels of opportunistic fund raising

Source: JLL Research

Federal funds rate increase

The future path for rates? Fed & Market paths divergent

5

The Fed sees four 25 basis point increases in 2016; The futures market is now betting on just one

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Oct-15

Nov-15

Dec-15

Jan-16

Feb

-16

Mar-16

Apr-16

May-16

Jun-16

Jul-1

6Aug

-16

Sep

-16

Oct-16

Nov-16

Dec-16

Jan-17

Feb

-17

Mar-17

Apr-17

May-17

Jun-17

Jul-1

7

Aug

-17

Sep

-17

Oct-17

Nov-17

Dec-17

Jan-18

Feb

-18

Mar-18

Apr-18

May-18

Jun-18

Jul-1

8Aug

-18

Sep

-18

Oct-18

Nov-18

Dec-18

Longer-run

Fed

eral fund

s rate expectations (%

)

End-2018

End-2016

End-2017

Longer-runImplied Rate from Fed Fund Futures, Jan. 14, 2015

Median of FOMC participants midpoint of target range or target level, latest forecast (Dec. 16, 2015)

Source: JLL Research, CME Group, Federal Reserve

U.S. property clock shows momentum across sectors:

Markets tightening, rents growing, construction rising

6

Peaking market

Falling market

Rising market

Bottoming market

Multifamily

Hotel, Industrial

CBD office

Suburban office

Retail

Source: JLL Research, NCREIF

Sun Belt—with 13.1 million square feet of office absorption—

and diversified markets continue to gain momentum

7

NYC and DC (*excludes Midtown South)

Tech markets (*includes Midtown South)

Energy markets

Sun Belt

All other markets

70.0%

29.7%

6.4%

2010

5.1%

33.5%

19.0%

18.4%

23.9%

2011

37.5%

26.0%

29.1%

7.4%

2012

11.1%

21.6%

22.3%

18.6%

26.4%

2013

13.7%

23.1%

15.3%

20.1%

27.8%

2014

0.9%

31.3%

4.1%

23.6%

40.2%

2015

Source: JLL Research – figures denote share of annual office net absorption

Market fundamentals driving investment activity, up 25.1 percent

in 2015 and positioned to surpass 2007 peak in 2016

8

$0.0

$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

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

Total investmen

t sale volumes (b

illions of $US)

Multifamily Industrial Office Retail Hotels Forecast

24%

Forecasted

FY 2016:

~10%

22%

19%

Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m; Includes portfolio, entity-level transactions)

25%

Secondary office momentum realized in 2015 with 11 markets

exceeding $1.0b, led by Atlanta, Dallas-Forth and Philadelphia

9

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Secon

dary market office volum

es (m

illions of $US)

2014 2015

Source: JLL Research (Assets larger than 50,000 s.f.)

Which secondary markets rising to the top this cycle? The

NERDS

10

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

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

Cap

rates (%

)

Primary markets Secondary markets NERDS markets

Source: JLL Research, NCREIF

Prior cycle

Current cycle

Depth of portfolio and entity-level transactions expanding

11

In search of yield and scale, large, structured transactions rising via portfolio and entity-level investment

Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m; Excludes hotels)

26.6%23.3%

21.5%

27.2% 26.5%

30.9%

48.7%

22.5%20.3%

24.2%

28.3%25.6%

33.8%

28.4%

34.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

$-

$50.0

$100.0

$150.0

$200.0

$250.0

$300.0

$350.0

$400.0

$450.0

$500.0

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

Investmen

t sale volumes (b

illions of $

US)

Portfolio Single asset Portfolios (as a % of total activity)

What do higher interest rates mean for private RE performance?

12

Bad for Bonds, But Not Necessarily for Private Real Estate: US Example Below

• Since 1980, years with 50 basis point + increases in Fed Funds rate

YearIncrease in Fed Funds Rate

YE Fed Funds Rate Target

Real Estate Return

(NCREIF ODCE)S&P 500 Return

Corporate Bond Return

2006 +100 bps 5.25% 16.3% 15.8% 4.6%

2005 +200 bps 4.25% 21.4% 4.9% 2.0%

2004 +125 bps 2.25% 13.1% 10.9% 5.6%

2000 +100 bps 6.50% 14.3% -9.1% 9.3%

1999 +75 bps 5.50% 13.2% 21.0% -1.6%

1994 +250 bps 5.50% 6.1% 1.3% -3.5%

1988 +187 bps 8.75% 7.3% 12.4% 8.0%

1987 +88 bps 6.88% 6.7% 2.0% 2.6%

1983 +100 bps 9.50% 13.2% 17.3% 8.2%

Best in Year Middle in Year Worst in Year

In 8 of last 9 years when the Fed Funds rate has increased US real estate has out-performed bonds. US private real estate also outperformed equities in 6 of the last 9 years when the Fed Funds rate increased.

Source: LaSalle Investment Management, Bloomberg

13

In the driver’s seat – Key dynamics to watch in 2016

Capital supply-demand imbalance

Secondary market momentum tested

Offensive, value add capital focused on non-core

Diversification of foreign capital

Real estate M&A

Source: JLL Research

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