A Message from Tom LawyerCover Story:

The Case for Cross-Border Investment Steve Pumper

Q4 2018

Experiential Amenities

Carla Powell

Elections and Corrections

Jonathan Chambers

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, Asset Services, Occupier Solutions, Capital Markets and Research, 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 33 U.S. offices and assists clients from more than 219 offices in 37 countries through strategic alliances with France-based BNP Paribas Real Estate and Canada-based Devencore. Experience Extraordinary at transwestern.com and @Transwestern.

© 2018 TRANSWESTERN

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Q4 2018

December brought news of a cease-fire in the tariff battle between Washington and Beijing. While many remain skeptical that negotiations will bring a

positive and lasting outcome, a dialogue between the two nations is a necessary and welcome step toward that goal.

In this issue of Insights, our cover story examines cross-border investment in U.S. commercial real estate when synchronized global growth is giving way to flat performance in many of the world’s economies. Although investors in some of those regions have stepped back, others have quickened their pace.

Remarkably, overall cross-border investment volume into U.S. real estate increased over the past 12 months, due almost entirely to outsized acquisition and development activity by Canadian investors. It appears that the greatest near-term opportunities to help clients place cross-border capital will involve our neighbors to the north.

It seems we could not have chosen a better time to launch our strategic alliance with Canada-based Devencore, announced in October (visit twurls.com/devencore for more information). With a long history of success and guiding principles similar to our own, Devencore’s full-service real estate platform extends our reach across Canada and better enables both of our firms to serve clients throughout North America.

Also in this issue, we provide economic context for a healthy but cautious real estate outlook for 2019 and explore the increasing importance of experiential amenities for multifamily properties.

We submit these insights for your consideration and look forward to assisting in the pursuit of your business goals in the New Year.

Warm regards,

Tom LawyerPresident, Transwestern Commercial Services

A Message from Tom Lawyer

transwestern.com

Steve PumperExecutive Managing PartnerCapital Markets

THE CASE FORCROSS-BORDER INVESTMENT

* Through Q3. Source: Real Capital Analytics, Transwestern.

0

5%

10 %

15 %

20 %

25 %

0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

200 7 200 8 200 9 201 0 201 1 201 2 201 3 201 4 201 5 201 6 201 7 201 8*

% of total US transaction volume

Cross-border investment into the U.S.Trailing 4-quarter data Total volume in billions

5

Q4 2018

Foreign investment in U.S. commercial real estate has been on an upswing this year, but growth is flattening in most of the world’s economies. What does the end

of synchronized global growth mean for this vital segment of the investment market?

Remember that investors seek out U.S. properties for several reasons. Some want exposure to investment returns that may be unavailable at home. Others want to preserve wealth by purchasing assets likely to retain value. Some buy portfolios to rapidly access U.S. markets through existing supply chains, distribution networks or other platforms.

While recent increases in stock market volatility and trade concerns may deter some international investors, those same events may increase the motivation for others to stake claims on U.S. real estate.

Highlights from a strong yearCross-border deal volume in the U.S. accelerated to more than $76 billion for the 12 months through the third quarter, according to Real Capital Analytics (RCA). The lion’s share of that trade was Canadian investments, which grew to $32.2 billion for the period, or 41 percent of all cross-border transactions in the U.S.

Canadians typically lead the pack of international buyers in the U.S. In a country with a population smaller than California’s, Canadian real estate players that want to grow are naturally attracted to the U.S. due to its proximity and similar mindsets, customs and even laws. Buoyed by a mutually hospitable business climate between the two countries, Canadian developers, investors, pension funds and insurance companies have invested heavily in U.S. real estate since the 1970s.

“While recent increases in stock market volatility

and trade concerns may deter some international

investors, those same events may increase the motivation for others to stake claims on

U.S. real estate.”

THE CASE FORCROSS-BORDER INVESTMENT

France$8.7B

Germany

U.S. cross-border investment by countryIn billions | Trailing 4-quarter data through Q3 2018

Top cross-border marketsIn billions | Trailing 4-quarter data through Q3 2018Investment source:

$4.9B Germany

$5.8BChina

Singapore$7.4B

France$8.7B

Canada$32.2B Year-over-year change

59%

-16%

21%

-54%

788%

Manhattan

Los Angeles

Chicago

Dallas

Houston

Canada Asia Mid-east Europe Rest of world

Source: Real Capital Analytics, Transwestern.Source: Real Capital Analytics, Transwestern.

$9.4B

$5.7B

$3.9B

$2.9B

$2.8B

transwestern.com

development. Los Angeles, Chicago, San Francisco and the District of Columbia also are popular destinations for those investments.

Significantly, Houston ranked in the top five U.S. markets for cross-border investment through the third quarter behind Manhattan, Los Angeles, Chicago and Dallas. The Energy City’s standing as a favored market is owed almost entirely to Canadian investments, reflecting a shared emphasis on the energy sector.

As 2018 draws to a close, however, slowing economic growth abroad and rising interest rates at home have begun to prey on the investor’s psyche, evident in recent stock market volatility. Fortunately, the U.S. commercial real estate sector is positioned to continue to draw foreign investment as the global markets adjust to these and other challenges.

A powerful drawThe national economy is showing resilience in the face of global headwinds. Growth in gross domestic product (GDP) slowed to 3.5 percent in the third quarter from 4.2 percent in the second quarter. We expect that growth to continue at a moderate pace of perhaps 2 percent in 2019.

By contrast, European GDP slowed to 0.7 percent in the third quarter and Japan’s economy contracted 1.2 percent in the same period. China has posted several quarters of decelerating

This year’s Canadian activity marks an all-time high. In fact, Canadian investment lifted overall volume that would otherwise have shown a slight decline: Excluding Canada’s contributions, cross-border buying of U.S. real estate contracted to $45.6 billion in the year ended September. Investments from Asian sources slowed by 22 percent from the previous year. Canadian investment exceeded that of France, Singapore, China, Germany, Hong Kong and Japan combined, RCA found.

Retail properties generated the most acquisition volume from foreign buyers, chiefly through purchases of companies with retail portfolios. Volume in the sector mushroomed more than eight-fold from the year-ago period and accounted for a third of all cross-border volume, RCA found. Industrial is another current favorite that nearly rivaled central business district (CBD) office in acquisitions by foreign investors.

Volume is declining for international buyers’ usual mainstays of CBD office and apartments, but that shift may reflect supply constraints more than waning interest in those property types. A recent report by Hodes Weill and Associates and Cornell University, authors of the Institutional Real Estate Allocations Monitor, concluded that the U.S. remains the preferred destination for commercial real estate investment, but institutions are increasingly turning to Europe and Asia for acquisitions due to a scarcity of attractive opportunities here.

Foreign buyers tend to buy in major gateway markets, with Manhattan at the top of the list for both acquisitions and

7

Q4 2018

growth. Indeed, the U.S. is one of the few remaining major economies with a growth story to tell. That is a powerful draw to investors seeking wealth creation in commercial real estate.

Supply is an ongoing challenge for investors seeking well-located, stabilized properties or core real estate. A large portion of those assets – favored by institutions for their bond-like returns – changed hands in 2015, and because core investors tend to hold assets for seven or more years, few of those properties will be marketed for individual sale before 2022.

Many assets will trade in 2019 through mergers and acquisitions, however, or the acquisition of entities that own real estate. Fundraising for M&A has been on the rise for the past 24 months and accelerated this year. Entity-level cross-border transactions totaled $26.9 billion in the 12 months ended September, up 390 percent year over year, RCA reported.

A strong dollar relative to foreign currencies may lead other properties to market in 2019. For example, if European asset values in a portfolio contract but dollar-denominated assets retain their value, it can leave the portfolio owner over-weighted in U.S. real estate.

Investor efforts to correct imbalances of this kind may require the sale of some U.S. properties. That will create welcome acquisition opportunities for the many institutions that are under-weighted in commercial real estate in relation to target investment levels.

A safe havenWealth preservation becomes a more significant investment driver in periods of uncertainty. Investors have used U.S. real estate as a haven historically, and that dynamic promises to draw additional capital here as global markets flatten and contract.

Given the diverse economic conditions unfolding globally, the coming year will likely bring cross-border investors to the American real estate market from both camps, with many seeking wealth creation and others desiring a safe harbor for capital.

Steve PumperSteve.Pumper@transwestern.com972.774.2559

“The U.S. commercial real estate sector is positioned to continue

to draw foreign investment.”

DevencoreRobust cross-border investment volumes underscore the important role that Canadians and other foreign investors play in the U.S. real estate market. Transwestern’s recently launched relationship with Canada-based Devencore, a full-service commercial real estate firm, expands both firms’ capacity to assist clients with cross-border transactions.

Learn more about the alliance at: twurls.com/devencore

Q4 2018

Cortona at Forest ParkSt. Louis, Missouri

transwestern.com

“Amenities often trump location in the selection

of a home.”

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Q4 2018

Multifamily owners and managers cannot afford to underestimate the importance of amenities in the

choice of a place to live. Competition is fierce and pits multifamily managers not only against rival apartments in pursuit of renters, but also against the single-family market.

There are more renters by choice in the United States today than 10 years ago, as many residents who can afford single-family homes choose apartment living instead. Renters may value the convenience of a well-located multifamily complex over the comparative isolation of purely residential suburbs, or they may thrive on a constant buzz of human interaction in communal spaces, which can be elusive in single-family neighborhoods.

We’ve found that amenities often trump location in the selection of a home, because fabulous facilities and an exciting event calendar can win over potential residents even if that decision gives them a longer work commute. In fact, the growing popularity of flexible work schedules and telecommuting often remove commuting from the equation: People who work from home will be chiefly interested in onsite amenities and convenient access to dining, shopping and recreation.

Experiential Amenities

Carla Powell Vice President, Residential ManagementBalke Brown Transwestern

Differentiate Multifamily Offerings

transwestern.com

Unfettered to an offsite workplace, many renters include multiple submarkets in searching for a new home. In St. Louis, for example, searches frequently extend from the Central West End to West St. Louis County and beyond, a vast market area and the focus of intensive high-end multifamily development. That means property managers must vie for residents across larger geographies than they did a decade ago.

With so many options within renters’ reach, the right combination of facilities and programming can make the difference between leasing success and debilitating vacancy.

Here are a few keys to a winning strategy.

Make social settingsThe pool, clubhouse and firepit have stood the test of time as popular places for residents to gather and socialize, but these aren’t the only options. Consider adding gourmet coffee bars or working with third-party providers for barista services during peak usage hours. Walkable chess boards and over-sized, outdoor versions of board games in courtyards often see extensive use. Any space where people gather and socialize can reinforce residents’ feelings of community and belonging.

Embrace teleworkersWhether residents work at home daily or on occasion, they will appreciate the ability to use common areas as secondary or even primary work or study space. Take a cue from office leasing and find ways to integrate tables, seating options, power outlets and Wi-Fi in lobbies and other common spaces. Some properties have even converted sections of clubhouses into cubicle-sized office enclosures, available for resident use either on a first-come, first-served basis or rented monthly. The latter option often appeals to residents during transitions at their regular place of employment, such as during a move or renovation.

Provide experiencesProgramming keeps residents interested and involved. Pool parties were among the first events to bring multifamily communities together, but successful properties now offer events that span the seasons. Cooking classes are season-agnostic, for example. Restaurants and other third-party vendors can do much of the legwork.

Not everyone will come down to the clubhouse for book club or to watch football, so managers must try to find things most people can enjoy, then mix it up to suit a variety of tastes. One of our properties recently hosted an ‘80s throwback party with great success. Big hair and parachute pants may not resonate with every crowd, so managers must match programming to resident preferences. This leads to our next point.

“Property managers must vie for residents across

larger geographies than they did a decade ago.”

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Q4 2018

Communicate regularly with residentsGood managers listen to residents, systematically soliciting feedback and ascertaining interests through surveys, social media and in-person conversations. Every community serves a unique demographic profile. Ask not only what programs to offer, but also whether to offer them in the day or evening, weeknights or on weekends. After an event, learn what worked and what aspects could be improved, then adjust to make each subsequent undertaking the best yet.

Amenities, and experiential amenities in particular, differentiate the best multifamily properties. Our experience shows that fabulous facilities and an exciting event calendar are a powerful combination for winning over potential residents.

Carla Powell Carla@2bresidential.com 314.283.6931

Consumer price indexAll urban consumers

-2%0%2%4%6%8%

10%12%14%16%

Note: *CPI-U and PCEPI through October 2018. Data reflect 12-month percent change. Source: Federal Reserve Economic Database, Delta Associates; November 2018.

1980 1990 2000 2010 2018*1985 1995 2005 2015

Data are non seasonally adjusted monthly averages. 30-Year Treasury not issued between March 2002-Dec. 2005.Source: Federal Reserve Economic Data, Delta Associates; November 2018.

Selected U.S. Government interest rates

0

1%

2%

3%

4%

5%

6%

7%

20182000 2002 2004 2006 2008 2010 2012 2014 2016

E�ective federal funds rate 10-year Treasury 30-year Treasury

Note: Seasonally adjusted at annual rates.Source: Bureau of Economic Analysis, Delta Associates; November 2018.

GDP percent change2009 constant dollars

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Note: Seasonally adjusted at annual rates.

Source: Bureau of Economic Analysis, Delta Associates; November 2018.

Personal consumption expendituresPercent change | 2009 constant dollars

-5%-4%-3%-2%-1%

01%2%3%4%5%6%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

transwestern.com

ELECTIONS AND CORRECTIONSThe Economy — and Concerns — are GrowingJonathan Chambers Vice President Delta Associates

Consumer price indexAll urban consumers

-2%0%2%4%6%8%

10%12%14%16%

Note: *CPI-U and PCEPI through October 2018. Data reflect 12-month percent change. Source: Federal Reserve Economic Database, Delta Associates; November 2018.

1980 1990 2000 2010 2018*1985 1995 2005 2015

Data are non seasonally adjusted monthly averages. 30-Year Treasury not issued between March 2002-Dec. 2005.Source: Federal Reserve Economic Data, Delta Associates; November 2018.

Selected U.S. Government interest rates

0

1%

2%

3%

4%

5%

6%

7%

20182000 2002 2004 2006 2008 2010 2012 2014 2016

E�ective federal funds rate 10-year Treasury 30-year Treasury

Note: Seasonally adjusted at annual rates.Source: Bureau of Economic Analysis, Delta Associates; November 2018.

GDP percent change2009 constant dollars

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

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Q4 2018

Stocks slideAfter a protracted summer rally, U.S. secondary markets abruptly plunged in October 2018, quickly wiping out year-to-date gains. Many stocks and indices slid into correction territory, particularly shares of large tech firms such as Facebook, Netflix and Alphabet. The stock market skid (which mirrored February’s slide) was primarily triggered by rising interest rates and fears of economic overheating.

Shortly before the skid, the Fed increased the federal funds rate for the third time in 2018 at its September meeting. Another quarter-percent hike is expected at the December meeting, with three more in 2019. Higher interest rates have raised borrowing costs for companies and driven up the value of the dollar, which hurts the overseas business of U.S. companies. The recent election and ongoing trade war with China has also heightened marketplace angst.

Late in the cycle, most economic indicators continue to show growth. However, recent instability in the

financial markets and political power shifts following the midterm elections create more uncertainty.

As the close of 2018 approaches, the nation’s economy is charging ahead. Despite the devastation wrought by Hurricane Florence in the Carolinas (estimated to cost up to $50 billion), U.S. gross domestic product (GDP) grew at a solid 3.5% annualized rate in the third quarter. The pace was a decline from the second quarter’s strong 4.2% spurt but a major improvement over the 2.8% growth rate in the third quarter of 2017.

Despite robust overall growth, a quick dive into the details reveals reason for mild concern. In the first quarter of 2018, nonresidential fixed investment growth skyrocketed to 11.7%—the highest annualized quarterly rate in nearly seven years—as new corporate tax cuts took effect. However, business investment growth began to diminish the following quarter and plunged to a middling 0.8% in the third quarter, suggesting that the corporate tax cut adrenaline boost has worn off.

Nevertheless, consumers are fueling the economic expansion. Renewed wage growth has offset higher borrowing costs, and personal consumption grew 4.0% in the third quarter, its fastest pace since the fourth quarter of 2014.

0%

1%

2%

3%

4%

5%

2007* 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Average hourly earnings12-month percentage growth | 2007- October 2018

*Data available starting March 2007Source: Bureau of Labor Statistics, Delta Associates; November 2018.

050

100150200250300350

DEC JAN FEB MARMAY JUN JUL AUG SEP OCT NOV20182017MAY JUN JUL AUG SEP OCTAPR

Payroll job growthThousands of new payroll jobs

Note: Data are seasonally adjusted.Source: Bureau of Labor Statistics, Delta Associates; November 2018.

Unemployment rate Recessions

Note: *Through October 2018; seasonally adjusted.Source: Bureau of Labor Statistics, Delta Associates; November 2018.

Average 2007 – 2008 = 3.3%

Average 2009 – 2017 = 2.2%

Average 2018 YTD = 2.8%

0

2%

4%

6%

8%

10%

12%

1980 1985 1990 1995 2000 2005 2010 2015 2018*

transwestern.com

U.S. existing home sales vs. sale price

*Data as of September 2018, seasonally adjusted annual sales rate. Source: National Association of Realtors, Delta Associates; November 2018.

Units sold in millions Average sale price in thousands

$200

$220

$240

$260

$280

$300

$320

3

3.5

4

4.5

5

5.5

6

6.5

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

U.S. corporate pretax profits

*Data available starting March 2007Source: Bureau of Labor Statistics, Delta Associates; November 2018.

0

$20

$40

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0

$0.5

$1

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$2

$2.5

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

Corporate profits in trillions S&P 500 12-month EPS

Wage growth shows signs of lifeAs the expansion cycle approaches its (nearly unprecedented) 10th anniversary, most economic indicators have returned to or surpassed pre-recession levels. Wage growth has been abnormally sluggish in this cycle, however. Annual wage growth averaged nearly 3.5% between the dot-com bubble and Great Recession, but has remained well under 3% through the current recovery. Data for October 2018 showed wage growth finally breaking through its ceiling with a 3.1% annualized increase—the highest in almost a decade.

The renewed nominal growth in wages is promising on the surface, but shouldn’t elicit too much exuberance. Rising inflation has cut into wage gains, leaving only modestly increased purchasing power. Several theories attempt to explain why real wage growth has been stagnant, even amid low unemployment and record-high job openings.

One hypothesis is that productivity growth, which has slowed over the past decade, is holding back wage gains. Basic economic theory holds that the more product and revenue a

Midterm results preclude policy actionsDespite the healthy economy, the Republican Party suffered major losses in the House of Representatives on election night, including party control. The outcome largely reflected an electorate (particularly in suburban districts) focused on issues besides the economy, such as immigration and healthcare. Republicans fared better in the Senate, thanks to an advantageous map, and expanded their majority.

What this means for economic policy in the next couple of years is uncertain, but there will almost undoubtedly be greater legislative gridlock. Most immediately at risk will be the approval of the newly negotiated trade pact, the U.S.-Mexico-Canada Agreement. Many newly elected Democrats have already pledged to withhold support for the deal as currently written. Over the long term, outstanding issues such as healthcare, infrastructure spending, and the national debt will undoubtedly be points of contention. The risk of another federal government shutdown during 2019 also has increased substantially.

0%

1%

2%

3%

4%

5%

2007* 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Average hourly earnings12-month percentage growth | 2007- October 2018

*Data available starting March 2007Source: Bureau of Labor Statistics, Delta Associates; November 2018.

050

100150200250300350

DEC JAN FEB MARMAY JUN JUL AUG SEP OCT NOV20182017MAY JUN JUL AUG SEP OCTAPR

Payroll job growthThousands of new payroll jobs

Note: Data are seasonally adjusted.Source: Bureau of Labor Statistics, Delta Associates; November 2018.

Unemployment rate Recessions

Note: *Through October 2018; seasonally adjusted.Source: Bureau of Labor Statistics, Delta Associates; November 2018.

Average 2007 – 2008 = 3.3%

Average 2009 – 2017 = 2.2%

Average 2018 YTD = 2.8%

0

2%

4%

6%

8%

10%

12%

1980 1985 1990 1995 2000 2005 2010 2015 2018*

15

Q4 2018

U.S. existing home sales vs. sale price

*Data as of September 2018, seasonally adjusted annual sales rate. Source: National Association of Realtors, Delta Associates; November 2018.

Units sold in millions Average sale price in thousands

$200

$220

$240

$260

$280

$300

$320

3

3.5

4

4.5

5

5.5

6

6.5

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

U.S. corporate pretax profits

*Data available starting March 2007Source: Bureau of Labor Statistics, Delta Associates; November 2018.

0

$20

$40

$60

$80

$100

$120

$140

$160

0

$0.5

$1

$1.5

$2

$2.5

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018*

Corporate profits in trillions S&P 500 12-month EPS

“We expect wages to build upon recent

gains and slowly accelerate as worker shortages intensify.”

worker produces, the more valuable they are to the company and the more the company can afford to compensate them. Another possible explanation is that increasing business consolidation in many industries has weakened wage growth. Globalization, outsourcing and the declining influence of collective bargaining could also be a cause.

It’s most likely that all these factors have contributed to stagnant wage growth. However, we expect wages to build upon recent gains and slowly accelerate as worker shortages intensify.

Most economic indicators remain positiveThe national employment picture still looks good. In addition to the renewed growth of wages, the economy added 2.5 million net new jobs over the 12 months ended October 2018, including a solid 250,000 in October. Unemployment also holds at a nearly four-decade low of 3.7%.

The national housing market remains robust despite some dampening in response to higher interest rates. The average existing home price (seasonally adjusted) was $296,800 as of September 2018, according to the National Association of Realtors; that was a 2.5% increase from a year prior. Sales volume slowed to 5.15 million homes sold in September, however, a 4.1% decline from a year earlier.

The private sector continues to rake in profits buoyed by tax cuts. Annualized corporate profits before taxes totaled a whopping $2.24 trillion in the second quarter. Consumer price inflation also rose at a steady clip; the consumer price index increased 2.5% over the 12 months ended October 2018.

Spiking gasoline prices have been the primary inflation driver, rising 16.1% over the year through October.

Jonathan ChambersJonathan.Chambers@deltaassociates.com202.778.3111

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