Interstate CRE Investment on The Rise

Capital Movement Between States On the Rise

• Increased out-of-state buyer activity
• Secondary and tertiary markets claiming larger share of total CRE sales volume

Advantages of Out-of-State Investing

• Geographic diversification may mitigate risk
• Wider range of assets and yields available
• Unique market forces may create opportunities

Considerations for CRE Investors

• Influx of out-of-state capital has contributed to yield compressions across market types
• Out-of-state buyers may have different decision drivers and objectives, could pay premium
• Marcus & Millichap provides:
  • Buyers with access to nationwide inventory
  • Sellers with a national pool of buyers

*As of trailing 12 months through 2Q 2022
Sources: Marcus & Millichap Research Services, MNet

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What the Fed Hike and GDP Decline Mean for CRE Investors

GDP Contracts for Second Quarter in a Row

• GDP growth negative in 2Q; Not necessarily a recession
• Labor market, consumption and manufacturing performed well in 1H 2022
• Each markets will experience varying headwinds

Fed Implements Another Aggressive Rate Hike

• Fed raised overnight rates 75 bps on July 27
• Aggressive action a response to high inflation
• Puts overnight rate in 2.25%-2.50% range, on par with July 2019

Considerations for CRE Investors

• Fundamentals remain strong for most properties
• Core economic drivers in place to support property space demand
• Investors recalibrating strategies to adapt to more fluid investment climate

*Through 2Q
Sources: Marcus & Millichap Research Services, BEA

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Has CRE Momentum Shifted to the Suburbs?

Was the Suburban Migration Purely a Pandemic Trend?

• Migration from urban core underway before pandemic
• Driven by aging millennials forming families
• Fueled demand for single-family homes

Population Shift Already Being Felt

• Suburban CRE has largely outperformed
• Demographics to sustain trend
• Companies adapting to tight labor market, jobs following employees to suburbs

Considerations for CRE Investors

• Long-term trends will persist beyond health crisis; sustaining demand for many suburban properties
• Urban revival underway, but gradual
• Return-to-office plans could change with economy and job market

*As of 2022
Sources: Marcus & Millichap Research Services, U.S. Census Bureau, National Association of Realtors

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What Investors Should Know About The Latest Inflation Data

Inflation Rose at Highest Pace in 41 Years

• Driven by energy prices, CPI inflation surged 9.1% in June over last year
• Declines in fuel and commodities prices may ease inflationary pressure

Aggressive Fed Action Expected

• Fed likely to raise interest rates by 75-100 bps on July 27
• Abundant capital continues to target CRE; Mitigates risk of market softening

Implications for CRE

• Financial market volatility benefits stable investments such as CRE
• Inflation resistant properties favored
• Higher yield secondary/tertiary markets increasingly favored
• Commercial assets with rent escalators and properties with short-leases or value-add opportunities favored

*Through June; 10-Year Treasury through July 14
Sources: Marcus & Millichap Research Services, BLS, Federal Reserve

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What Would a Recession Mean for CRE Investors?

No Consensus on Timing of Next Recession

• Robust job gains, strong wage growth and steady retail sales suggest steady growth outlook
• However, exorbitant inflation, rising rates and falling stocks could slow spending, inducing a recession

How Severe Could the Next Recession Be?

• Both Health Crisis and Financial Crisis recessions hit economy and CRE hard, unlikely to happen again
• Recessions in 1981 and 1990 most comparable; preceded by high inflation and strong Fed action
• Full impact varies greatly by location and asset type

CRE Has Performed Well Through Most Recessions

• Returns for all property types softened in the 80’s, dipped negative in ‘91; Apartment saw the smallest declines
• Retail and Office experienced substantial downward pressure, followed by strong, steady growth
• Industrial had similar impact, but returns have outperformed in last few years

*Through 1Q
Trailing 12-month average; Includes Apartment, Retail, Office, Industrial, and Hotel properties
Sources: Marcus & Millichap Research Services, NCREIF

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Why Is the U.S. a Top Destination for Foreign CRE Investors?

Upswing in Foreign Investment Into U.S. CRE

• Foreign investment totaled $72B in last 12 months, double the amount at the height of the pandemic
• On average, makes up 10% of total investment in U.S. CRE
• Canada led foreign investment, followed by Singapore, China, Germany and South Korea

Economic Outlook Supports Long-Term Investments

• Low unemployment, job creation and robust consumer spending suggest strong economic growth
• While labor shortages and inflation remain headwinds, underlying demand drivers will sustain CRE performance

U.S. Offers Market Stability and Higher Yields

• Average U.S. CRE cap rate is about 5.9%, higher than 5.5% in the U.K., 5.3% in Canada and 4.7% in Germany
• Investors willing to outbid local investors to place capital in specific secure assets and markets
• Global economic shifts may bring more foreign investors to U.S. – Creates new opportunities for the right sellers

*Trailing 12 months through 1Q
Includes apartment, retail, office, industrial, and hotel sales $2.5 million and greater
Sources: Marcus & Millichap Research Services, Real Capital Analytics

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