INSIGHTSTRENDS OPPORTUNITIE S

++

Q4 2015

INCENTIVES GAIN IMPORTANCE IN SITE SELECTION DECISIONSBrad Migdal Executive Managing Director, Consulting Services Transwestern

INSIGHTSTRENDS OPPORTUNITIES

++

Q4 2015 EDITION

© 2015 TRANSWESTERN

Transwestern is a privately held real estate firm of collaborative entrepreneurs who deliver a higher level of personalized service – the Transwestern Experience. Specializing in Agency Leasing, Management, Tenant Advisory, Capital Markets, Research and Sustainability services, our fully integrated global enterprise adds value for investors, owners and occupiers of all commercial property types. We leverage market insights and operational expertise from members of the Transwestern family of companies specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 180 offices in 37 countries as part of a strategic alliance with BNP Paribas Real Estate. Experience Extraordinary at transwestern.com and @Transwestern.

EXTRAORDINARY PERFORMANCE FUELS STRATEGIC GROWTH A Message from Robert D. Duncan and Larry P. Heard

ECONOMIC OUTLOOK POSITIVE DESPITE ROUGH STARTDavid Versel and Jonathan Chambers Delta Associates

MULTIFAMILY DEVELOPERS ADDRESS SHIFTING NEEDS ACROSS A SPECTRUM OF RENTERSMark CulwellManaging DirectorTranswestern Development Co.

transwestern.com Q4 2015 INSIGHTS + TRENDS + OPPORTUNITIES

EXTRAORDINARY PERFORMANCE FUELS STRATEGIC GROWTH

The national economy continues along its somewhat erratic yet steadily improving course, and we continue to seize opportunities found in numerous pockets of geographic and product line improvement. U.S. consumer confidence continues to improve – an important trend since consumers represent more than two-thirds of our domestic economy. Foreign investment in U.S. real estate has been particularly robust and in 2015 the volume should double the $48-billion figure posted last year. This optimistic outlook is echoed by many economists who see continued expansion over the near term.

Transwestern has reaped the benefits of a generally healthy economy and is poised for its strongest financial performance since the company’s founding in 1978. The prudent investments we have made in people and platform have diversified our scope of services, enhanced our technology platform and expanded our geographic reach to meet the needs of real estate owners, investors and occupiers alike. Today our work product serves the most sophisticated owners and multi-market users in the country. The thought leadership included in this publication highlights some of this expertise, including our national research, site selection and economic incentives competency, and multifamily development capabilities. We are pleased to share these insights with the readers of Real Estate Forum.

The value driven by Transwestern’s family of companies has been recognized by our clients, team members and the industry at large. This year, Transwestern was the only full-service commercial real estate firm named to the Top 100 Workplaces for Millennials and the Top 100 Workplaces for Women by Great Place to Work® and Fortune. We are proud of the innovative programs and practices we have developed that appeal to a talented and diverse workforce. It is this unique culture that continues to attract the best and brightest professionals who desire a team-oriented approach alongside other high achievers to better serve their clients and their communities.

As we have designed our growth and expansion, our strategies have centered on how to ensure we continue to deliver – and enhance – the service we provide day to day, and market to market. We measure success by the performance of highly engaged teams, intently focused on creating extraordinary experiences for our clients, no matter the market conditions. This is how long-term relationships are built and what has been the foundation of our success for nearly four decades.

We look forward to continuing to serve you with a keen sense of focus and dedication today and into the future. All the best to you and yours as the holiday season approaches.

Very truly yours,

Robert D. Duncan Larry P. Heard Chairman Chief Executive Officer

A Message from Robert D. Duncan and Larry P. Heard

ECONOMIC OUTLOOK POSITIVE DESPITE ROUGH STARTAfter a slow start to the year, the U.S. economy performed very strongly during second-quarter 2015, but job growth weakened considerably during the third quarter, leading to renewed concerns about short-term economic performance. In spite of these concerns, most fundamentals remain positive and should drive continued growth through 2017.

GROSS DOMESTIC PRODUCT (GDP)

Real GDP growth for second-quarter 2015 was recently revised to 3.9 percent, a strong rebound from first quarter’s tepid 0.6 percent growth rate. The surge in growth was largely driven by strong gains in consumer spending stemming from low gas prices and increases in disposable income. The most recent report from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters projects real GDP growth to be 2.7 percent in third quarter and 2.8 percent in fourth quarter, for an overall growth rate of 2.3 percent in 2015. Looking further ahead, real GDP is predicted to average 2.8 percent in both 2016 and 2017 and 2.5 percent in 2018.

JOB GROWTH

Employment growth has cooled off somewhat in recent months after very strong performance during the first several months of 2015. As of July 2015, the U.S. has added 3 million jobs during the preceding 12 months, but performance dipped in August and September. The 12-month job growth figure as of September 2015 was down to 2.7 million, and the monthly change from August to September was just 142,000, well below the projected gain of 200,000 jobs.

David Versel Senior Vice President Delta Associates

Jonathan Chambers Associate Delta Associates

GDP PERCENT CHANGE

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

ANNU

AL G

DP C

HANG

E IN

200

9 CO

NSTA

NT D

OLLA

RS

2007 2008 2009 2010 2011 2012 2013 2014 2015Note: Quarters are seasonally adjusted at annual rates.

Source: Bureau of Economic Analysis, Delta Associates; October 2015.

PAYROLL JOB GROWTH

0

0.5

1

1.5

2

2.5

3

3.5 Private SectorPublic Sector

NEW

PAY

ROLL

JOB

S (M

ILLI

ONS)

Year-Over-Year

Note: Data are not seasonally adjusted.Source: Bureau of Labor Statistics, Delta Associates; October 2015.

Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June July Aug. Sept.2014 2015

The private sector continues to account for the overwhelming majority of job additions, with 2.5 million net new positions added during the period. However, public sector job growth has been steadily increasing, with 178,000 net new jobs added during the same period – the highest net additions since March 2010. The top four sectors for job gains have been Professional/Business Services, Education/Health Services, Leisure/Hospitality and Retail Trade. These four sectors alone added 1.9 million new jobs, accounting for 70 percent of net job growth. All major employment sectors gained jobs during the past 12 months, including the federal government, which had been shedding jobs for the past several years.

UNEMPLOYMENT

Initial unemployment claims have decreased steadily since peaking in March 2009. As of October 3, 2015, initial unemployment claims stood at 267,500 based on a four-week seasonally adjusted moving average. This is 24 percent below the 15-year average of 352,604. The seasonally adjusted unemployment rate declined to 5.1 percent as of September 2015, down from 6.0 percent one year earlier. This decline occurred despite the labor force increasing 2.1 percent during the same time period. Unemployment claims should continue to progressively decrease and the unemployment rate should hold steady or marginally decline through the rest of the year and beyond, as the national economic expansion continues.

WAGE GROWTH

An ongoing area of concern for the national economy is the national average hourly wage, which has increased at a slow rate since the end of the recession. During the 12 months ending September 2015, the average hourly wage only increased by 2.2 percent from one year prior. By comparison, in 2007 – prior to the recession – the average hourly wage increased by 3.0 percent each month on a year-over-year basis. Disproportionate job creation in lower-paying industries is partially to blame for the lack of significant growth in wages. In addition, the changing composition of the workforce to a younger generation and job seekers accepting jobs for which they are overqualified are also likely responsible. Regardless, wage growth is typically a lagging indicator of a growing economy and this metric is likely to improve in the next few years as low unemployment causes firms to compete for talent.

transwestern.com Q4 2015 INSIGHTS + TRENDS + OPPORTUNITIES

PAYROLL JOB GROWTH

0 100 200 300 400 500 600 700Federal Government

InformationOther Services

Wholesale TradeManufacturing

Construction/MiningTransportation/Utilities

Financial ActivitiesState and Local Government

Retail TradeLeisure/Hospitality

Education/HealthProfessional/Business Services

JOB CHANGE (THOUSANDS)

12 Months Ending September 2015

Note: Data are not seasonally adjusted.Source: Bureau of Labor Statistics, Delta Associates; October 2015.

INITIAL UNEMPLOYMENT CLAIMS

250

300

350

400

450

500

550

600

650700

INIT

IAL U

NEM

PLOY

MEN

T CLA

IMS

(THO

USAN

DS)

Four-Week Moving Average

15-Year Average = 352,604

Peak in Initial Unemployment Claims (not shown) Week of 3/28/09 = 659,250

Week of 10/03/15 = 270,750

2009 2010 2011 2012 2013 2014 2015Note: Data are seasonally adjusted.

Source: Federal Reserve Bank of St. Louis, Delta Associates; October 2015.

0%

2%

4%

6%

8%

10%

12%

1980 1985 1990 1995 2000 2005 2010 2015*

UNEM

PLOY

MEN

T RAT

E

UNEMPLOYMENT RATE

Rece

ssio

ns

Note: *Through September 2015; seasonally adjusted.Source: Bureau of Labor Statistics, Delta Associates; October 2015.

* Data available starting March 2007.Source: Bureau of Labor Statistics, Delta Associates; October 2015.

0%

1%

2%

3%

4%

5%

2007* 2008 2009 2010 2011 2012 2013 2014 2015

AVERAGE HOURLY EARNINGS

12-M

ONTH

PER

CENT

AGE

GROW

TH

Average 2007 – 2008 = 3.3%

Average 2009 – 2014 = 2.1%

CORPORATE PROFITS

U.S. corporate profits totaled $2.08 trillion during second-quarter 2015 on an annualized basis, up 3.4 percent from $2.01 trillion in the preceding quarter. Corporate profits have largely plateaued in recent years, as more companies are taking a cautious approach of buying back shares and slowly increasing dividends. Companies are continuing to weigh options on how to best deploy earnings and profits and, in many cases, are showing a preference for mergers and acquisitions over riskier, capital-intensive projects that could rock the boat for shareholders. However, the recent increases in hiring indicate that corporate leaders are becoming more confident about consumer demand.

HOUSING MARKET

The average existing home sales price was $272,100 in August 2015, up 2.9 percent from $264,200 in August 2014. The growth rate of home prices has largely stabilized in 2015 as expanding inventories of homes for sale in many metro areas has eased pricing pressure. The annualized pace of existing home sales increased to 5.3 million in August 2015, up from 4.9 million in 2014 – a growth rate of 8.2 percent. The current sales pace is the fastest seen since the national housing crash began in 2007. Inventory for new and existing homes remains tight, and average days-on-market are still at relatively low levels. Gains in employment should lead to additional market growth in the near future.

$40

$60

$80

$100

$120

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

2008 2009 2010 2011 2012 2013 2014 2015*

Corporate ProfitsS&P 500 12-Month EPS

CORP

ORAT

E PR

OFIT

S (T

RILL

IONS

)

CORPORATE PRE-TAX PROFITS

S&P 500 12-MONTH EPS

$20

Note: *Through June 2015, seasonally adjusted at annual rates.Yearly data are not seasonally adjusted. EPS reflect operating earnings as of June 2015.

Source: Bureau of Economic Analysis, Standard and Poor's, Delta Associates; October 2015.

ANNUAL CHANGE IN EXISTING HOME SALE PRICES

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2008 2009 2010 2011 2012 2013 2014 2015

PERC

ENT C

HANG

E FO

R M

EDIA

N PR

ICE

OF S

INGL

E-FA

MIL

Y HO

MES

Note: Data reflect 20-city composite index.Source: Standard and Poor/Case-Shiller, Delta Associates; October 2015.

3

3.5

4

4.5

5

5.5

6

6.5

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*

Number of Existing Home Sales†

Average Existing Home Sales Price

EXISTING HOME SALES VS. SALES PRICE

AVERAGE SALES PRICE (THOUSANDS)NUM

BER

OF S

ALES

(MIL

LION

S)

$210

$220

$230

$240

$250

$260

$270

$280

*Data as of August 2015. †Seasonally adjusted annual sales rate.Source: National Association of Realtors, Delta Associates; October 2015.

INFLATION AND INTEREST RATES

Inflation remained flat during the 12 months ending August 2015, with a strong dollar and lower domestic energy prices keeping prices in check. This is well below the Federal Reserve’s benchmark of a 2.0 percent increase, which has been a contributing factor to the delay in raising the federal funds rate. Recent stock market woes on Wall Street brought about by a faltering Chinese economy and extremely low oil prices also led the Federal Open Market Committee to decline to raise rates in their September meeting. The federal funds rate is, however, widely expected to be raised before the end of 2015.

OUTLOOK

Job growth and consumer spending have fueled mostly healthy economic growth over the first three quarters of 2015. Increased hiring is set to push the unemployment rate down further, even as the labor force participation rate continues to rise. These factors should eventually lead to better compensation for workers, as companies compete for the best-qualified employees. The reduced slack should put upward pressure on inflation and interest rates as well. All of these factors point to sustained economic growth over the next few years.

David VerselDavid.Versel@DeltaAssociates.com 202.778.3110

Jonathan Chambers Jonathan.Chambers@DeltaAssociates.com 202.778.3111

transwestern.com Q4 2015 INSIGHTS + TRENDS + OPPORTUNITIES

-2%

0%

2%

4%

6%

8%

10%

12%

14%

1980 1985 1990 1995 2000 2005 2010 2015*

PERC

ENTA

GE C

HANG

E

CPI-UPCEPI

INFLATION AND PERSONALCONSUMPTION EXPENDITURE INDEX

Note: *CPI-U and PCEPI through August 2015. Data reflects 12-month percentage change.Source: Federal Reserve Economic Database (FRED), Delta Associates; October 2015.

"JOB GROWTH AND CONSUMER SPENDING HAVE FUELED

MOSTLY HEALTHY ECONOMIC GROWTH OVER THE FIRST

THREE QUARTERS OF 2015."

INCENTIVES GAIN IMPORTANCE IN SITE SELECTION DECISIONSBuoyed by an increase in the U.S. gross domestic product, manufacturers are creating jobs and moving forward with real estate improvement plans, some of which have been mothballed since 2008. These growing companies are addressing over-crowded and obsolete buildings by consolidating and relocating into newer, more efficient industrial facilities. And when the headcount and anticipated job creation of these companies is significant enough to boost a local or regional economy, they are being offered lucrative economic incentives to assist in those efforts.

Owners and occupiers are advised to take advantage of today’s competitive environment in which cities, counties and states are battling each other to attract jobs. As a way to lure manufacturers to their communities, officials are increasingly willing to offer more than tax breaks, even promising cash upfront to land a company over a competing site. Year-end, in particular, is prime time for subsidy proposals to be distributed by elected officials seeking to deliver jobs promised during their campaigns. Ensuring the best offers are in hand when it comes time to make a real estate decision requires a thoughtful, integrated approach to site selection – one that weighs the incentives variable alongside the myriad other location criteria.

In third-quarter 2015, Transwestern’s brokerage and consulting professionals assisted Hoist Liftruck Manufacturing Inc. in identifying a 550,000-square-foot facility for acquisition and simultaneously secured a multi-million-dollar incentives package to support the company’s relocation. A more suitable facility combined with highly favorable economics prompted the manufacturer of high-capacity forklifts to move only 25 miles from property in Bedford Park, Illinois, to East Chicago, Indiana. The firm will shift approximately 300 jobs when it moves in January 2016; it is expected to employ 500 people in Indiana by 2022.

Hoist Liftruck is an example of a growing number of manufacturers that are basing real estate decisions, in part, on factors that have little to do with their physical space. Hoist specifically wanted to lower property taxes and operate in a workers’ compensation environment that is business-friendly.

Brad Migdal Executive Managing Director Consulting Services Transwestern

transwestern.com Q4 2015 INSIGHTS + TRENDS + OPPORTUNITIES

In order to preserve profit margins, manufacturers are re-examining all operating costs, such as sales, property and income tax; unemployment insurance; and the cost of power, natural gas, water, transportation and telecommunications, in addition to real estate costs. Therefore, the most successful incentive packages are collaborative proposals from government entities, utilities and employee training providers.

Texas has been the powerhouse in recruiting companies from other states, and multiple communities within the state offer subsidies as well. But this is by no means the only option for prudent manufacturers willing to take a multi-faceted view of their location criteria and the associated financial impact. Other states that offer aggressive packages include Georgia, Louisiana, South Carolina, Wisconsin, Illinois, Indiana and Florida. States such as New Mexico and Arkansas offer small business assistance, which may be a more appropriate route for some companies.

Creativity is oftentimes the key to unlocking the best solution in a site selection assignment. Transwestern secured approximately $5 million in incentives in Georgia for the relocation of a light assembly facility from Alabama. The site selection team, which included a supply chain specialist and an incentives expert, assisted the client in finding a greenfield site to accommodate a facility that met the growing company’s needs. The simultaneous negotiation helped the client and developer meet specific infrastructure requirements. Close collaboration with state, city and county officials, coupled with the power company, resulted in a package that created a strong public-private partnership for the organization.

For manufacturers, as operating costs rise, margins begin to diminish. Therefore, it makes sense to conduct a comprehensive assessment of human capital and real estate holdings to determine if an opportunity exists to reduce operating costs. In an ideal scenario, due diligence on potential sites goes hand-in-hand with the creation of stimulus packages during a site selection process. Using economic geography to maximize business opportunity by minimizing cost and risk is a sophisticated and financially rewarding way to position for future business success.

Brad Migdal Brad.Migdal@transwestern.com 312.775.2679

"CREATIVITY IS OFTENTIMES THE

KEY TO UNLOCKING THE BEST SOLUTION IN A SITE SELECTION

ASSIGNMENT."

MULTIFAMILY DEVELOPERS ADDRESS SHIFTING NEEDS ACROSS A SPECTRUM OF RENTERS Multifamily developers are preparing to deliver a large supply of projects over the next six to nine months, maintaining the sector’s status as the preferred product type in the country. Fueling this aggressive construction is pent-up demand from investors and renters, whose expectations are driving changes in the way multifamily complexes are developed, designed and financed. New trends are emerging in terms of preferred location, size of units, amenities, targeted demographic and financing structures as developers answer the continuing call for high-quality inventory.

One fresh approach to multifamily development involves “build-to-core” projects, which have materialized to meet demand from institutional investors. Competition to acquire well-located assets in primary markets is propelling investors to provide upfront development capital for complexes in which they will eventually take ownership. By engaging in a project two to three years earlier than they would otherwise, investors obtain the asset at a lower basis and eliminate a bidding war with other investors upon project completion. Transwestern Development Co. is facilitating one build-to-core project in Texas that garnered robust equity interest because of the strength of its urban, infill site.

Changes in multifamily design and amenities are tied to disparate renter demographics − millennials and baby boomers − and the needs of each of these groups. On one hand, the fact that almost half of multifamily demand is from baby boomers who are retiring and/or downsizing is driving developers to deliver larger units to accommodate renters who have been collecting possessions for decades. For example, at The Hayworth, a Transwestern Development Co. project under construction in Houston, the average unit size is 1,400 square feet, and the largest residence is 2,200 square feet – significantly larger than the national average of 1,102 square feet for new multi-housing construction starts in second-quarter 2015. Three-bedroom units, which most developers stopped building in the 1980s, are making a comeback, with two- and three-bedroom residences renting at a premium. In addition, developers are adding design features that appeal to baby boomers, who as a whole are accustomed to designated dining rooms and entertaining areas.

Mark CulwellManaging DirectorTranswestern Development Co.

On the opposite end of the spectrum are millennials, whose personal incomes are not growing as fast as rental rates, forcing them into smaller, more affordable units. Transwestern Development Co.’s newest project in Austin, Texas called Studio East, will feature studio units averaging 400 square feet, with the largest unit maxing out at 550 square feet. The studios will be fully furnished with Murphy beds, dining tables, couches and full-sized appliances. However, to make up for less living space in this and similar properties, developers are creating a variety of socialization and lounge areas scattered throughout their complexes where renters can entertain friends and family or simply hang out for a change of scenery. These Wi-Fi-equipped gathering areas are replacing the single, large entertainment area historically found in many multifamily projects.

Transportation preferences also are impacting multifamily development around the country, especially in legacy cities such as Boston, Seattle and San Francisco. Statistics indicate that, nationally, bicycle commuting rates have increased dramatically over the past decade and show no signs of subsiding, especially as municipalities make investments to ensure bike-friendly communities. As more millennials choose to use bikes, public transportation and other alternatives to automobiles, developers are seeking transit-oriented sites and ones near key employment nodes while

exploring opportunities to reduce the number of high-cost parking spaces. As an additional incentive to do so, government officials in certain markets are offering developers a density bonus, or the ability to construct more units than allowed by current zoning laws, in exchange for adding amenities such as secure bike storage, paved trails and bike repair service or “workshops.”

As the influx of new inventory hits the market over the coming months, there may be a little softening in rents and occupancy rates, with a slower pace of absorption. However, pent-up demand is expected to reinforce fundamentals by the end of 2016. While property performance will vary from market to market, investors and lenders aligning themselves with forward-thinking multifamily developers will be best positioned to capitalize on this popular segment of real estate.

Mark Culwell Mark.Culwell@transwestern.com 214.446.4503

transwestern.com Q4 2015 INSIGHTS + TRENDS + OPPORTUNITIES

“INVESTORS AND LENDERS ALIGNING THEMSELVES WITH FORWARD-THINKING MULTIFAMILY DEVELOPERS WILL BE BEST POSITIONED TO CAPITALIZE ON THIS POPULAR SEGMENT OF REAL ESTATE.”

transwestern.com

JOIN THE CONVERSATION