2016 NMHC Research ForumApril 6-7, 2016

Is the Long Upswing Still on Track?Philip Martin Head of ResearchWaterton

Apartment Sector Demand and Growth Catalysts Shifting

2

• DECLINING homeownership rates and accessibility, apartment vacancies and capitalization rates GIVING WAY to a greater reliance on:• The resumption of job and income growth

• The resumption of household formation growth

• Relative housing value

• Changing attitudes towards housing and lifestyle, across a greater number of age-cohorts

• The execution of value-add investment and capital allocation strategies by experienced owners/managers

We Anticipate Aggregate Housing Demand to Outpace Supply…

3

Incremental housing demand forecasted to outpace supply Household formation growth to total housing completion” ratio 1.15x vs. 0.83x LTA

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

1.4x

1.6x

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

Forecasted Household Formation Growth to Total Housing Completions (single & multi-family)

Source: Waterton, U.S. Census, Zellman and Associates

Annual "Household Formation" forecasted to exceed "Total Housing Completions"

Long Term Average = 0.83x

…With Apartments Continuing to Benefit Across Many Metro Markets

4

Forecasted apartment demand outpacing national and LTA’s in many large metropolitan markets

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

Total Forecasted Job Growth to Apartment Completions (5 Year)

Source: Axiometrics, FRED

Historical National Average: 5.1x

Apartment DEMAND Factors Include an Improving Economic Backdrop, Especially Among the 25-34 Age-Cohort…

5

70%

72%

74%

76%

78%

80%

82%Percentage of 25-34 Age-Cohort Employed "Full Time"

Source: FRED

Pre 2008 Historical Average = 78%

Employment and Economic Current Long Term AverageUnited States Job Growth (5-year forecast) 1.70% 1.10%Aggregate Employment to Population 59.80% 61.70%Employed Full Time - 25-34 Age-Cohort 77.00% 78.00%Aggregate Job Openings 5,600,000 3,800,000Professional Services Job Openings 1,000,000 700Initial Jobless Claims (4 week moving average) 270,250 362,500Unemployment Rate 5.00% 6.10%Under-Employment Rate 9.80% 10.30%Unemployment Rate - 25-34 Age-Cohort 5.20% 6.10%

…and Improving “Real” Wage Growth…

6

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Annualized "Real" Household Income Growth

Source: FRED

…and the Favorable Relative Housing Affordability of Apartments Across Many Metros In Terms of “Rent to Income”…

7

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Median Rent to Income Ratio - "A" v "B" Apartment Communities

Rent to Income Ratio ("A") Rent to Income Ratio ("B")Source: Axiometrics

Long term average = 26%

…and as Compared to Homeownership

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• Renting vs. homeownership in many large metro markets continues to favor apartments

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

160.0%

Median Aggregate Rent to Homeownership Cost Ratio

Source: Axiometrics, REIS, ESRI

National Average: 92%

Homeownership requires a $30,000-$60,000 down-payment among the major metropolitan markets (10%-20% LTV for "median" home)

"Renting" more affordable than "homeownership"

Favorable Apartment Demand Against A Backdrop of an “Overall” Housing Shortage

9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500(0

00)

Single Family Housing Supply Below Long Term Averages

Single Family Housing Permits New Single Family Homes For Sale

Existing "For Sale" Single Family Housing Inventory Months Supply of Single Family Homes (right axis)Source: FRED

Aggregate Housing Supply Current Long Term AverageAnnual Institutional Quality Apartment Unit Growth (5-year forecast, % change) 1.60% 1.70%Annualized Apartment Unit Growth (5-year forecast) 350,000 250,000-275,000Annualized Single Family/Condo Unit Growth (5-year forecast) 1,100,000 1,200,000Homeownership Rate - Quarterly 63.50% 65.70%Month's Supply of Existing Single Family Homes 5.0-5.5 6.5

Risks to Consider

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• Increasing aggregate housing supply • pent-up single family housing demand?• Apartment rental rate spreads – new vs. existing

• Potentially improving and more competitive global investment landscape• reluctant existing investors have incrementally greater investment choices?• reduced incremental investor interest?

• Lack of employment and/or income growth momentum

• Interest rate volatility

• Housing affordability

• GSE reform

• Global economic uncertainty

2016 NMHC Research ForumApril 6-7, 2016

Is the Long Upswing Still on Track?Jim Clayton Head of Investment Strategy & AnalyticsCornerstone Real Estate Advisers

SEARCHING FOR CLARITY…IMPLICATIONS FOR APARTMENTS?

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PRICE AND RENT RECOVERIES BY PROPERTY SECTOR

13

CPPI = Commercial Property Price Index

Sources: Cornerstone, Moody’s/RCA, CBRE-EA (4Q 2015).

-2%

-1%

0%

1%

2%

3%

4%

5%

2010-2014 2015-2019

ApartmentOffice - CBDOffice - Sub.IndustrialRetail

Forecasts as of 4Q15

-20%

-10%

0%

10%

20%

30%

40%

50%

AbovePeak

Not yet back to

peak

Average Annual Rent Growth (%)CBRE-EA Rent Index Inflation

Moody’s/RCA CPPI Recovery 4Q15 Level as a % of 2007 Peak Pricing

OCCUPANCY TRENDS ACROSS SECTORS & MARKETS

Source: Cornerstone, CBRE-EA (4Q 2015)

75

80

85

90

95

100

75 80 85 90 95 100

2 ye

ar f

orec

ast

Current Occupancy Rate (4Q 2015)

Office

80

85

90

95

100

80 85 90 95 100

2 ye

ar fo

reca

st

Current Occupancy Rate (4Q 2015)

Industrial

80

85

90

95

100

80 85 90 95 100

2 ye

ar fo

reca

st

Current Occupancy Rate (4Q 2015)

Retail

90

92

94

96

98

100

90 92 94 96 98 100

2 ye

ar fo

reca

stCurrent Occupancy Rate (4Q 2015)

Apartments

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CYCLICAL & STRUCTURAL CONSIDERATIONS

-2

-1

0

1

2

3

4

1900

Rent

Time Source: Cornerstone Research

Investment Themes Economy + demographicand

societal shifts => continued opportunity, but evolving

Portfolio tilt away from “beta” toward “alpha” BUT balance with downside protection

Submarket and asset selection are key today

Supply risks are concentrated and may be “different this time”

Urban core revitalization and densifying outer nodes

Obsolescence of stock

DEMOGRAPHIC & OTHER STRUCTURAL TAILWINDS

0

20

40

60

80

1980 1990 2000 2007 2013

% Living with Parents% Ever Been Married

25-29 Year Olds Are “Different” Today

Source: Cornerstone, U.S. Census and “Millennials, Baby Boomers, and Rebounding Multifamily Home Construction,” by Jordan Rappaport, Federal Reserve Bank of Kansas Economic Review, Second Quarter 2015

by Lynn Fisher and Jamie Woodwell, Mortgage Bankers Association, July 2015.