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Pearls of Wisdom 2017 Forecast Transcript Thursday, December 7, 2017 Oregon Convention Center 30th Annual IREM® Forecast Breakfast

Brought to you by: IREM® Oregon-Columbia River Chapter No. 29 30th Annual IREM® Forecast Breakfast

December 7, 2017

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® Highlights of the 2017 IREM Forecast Breakfast ®

Thank you to Our Generous Sponsors Forecast Breakfast Committee

2017 IREM ® Industry Partner – Breakfast Sponsors

2017 Speaker Panel Master of Ceremonies

Gerard C.S. Mildner, PhD Portland State University

Office Multifamily Retail Industrial Investment Sales

Lana Baldock

Cushman & Wakefield

Jordan Carter

Kidder Mathews

Jeff Olson

Commercial Realty Advisors

Stuart Skaug

CBRE, Inc.

MaryKay West

Colliers International

Oregon-Columbia River Chapter No. 29—Volunteers • • •

Chapter Officers Executive Council & Members at Large Committee Chairs

IREM Industry Partner Program 2017 IREM ® Industry Partners

Becoming an Accredited Management Organization ® ®

Featured AMO ® Sponsors & AMO ® Firm Members

Oregon-Columbia River Chapter No. 29—Membership Academic Members Associate Members

Becoming an Accredited Residential Manager Accredited Residential Managers Becoming a CPM® Candidate

®

®

Certified Property Manager ® Candidates

Becoming a Certified Property Manager® Certified Property Managers ®

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Thank You to our Pearl Sponsor:

Gold Sponsors:

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2017 Forecast Breakfast Committee Tara Platt CPM® • Specht Properties • Chair Caroline Karl, CPMC® • C & R Real Estate Laura Barry, CPM®, ARM® • CBRE, Inc. Jessica Gies, CPM® • Kidder Mathews Katrin Arp • J.R. Johnson, Inc. Ronda Butler • Raindrop Supply Valorie Cochran, CPM® • Melvin Mark Properties Sarah Haws • Fast Signs Loyda Timmins • Norris & Stevens Traci Twitchell, CPM® • Colliers International Julie L. Scott, CPM

®

• Newmark Knight Frank

Corey Petersen • Pacific Landscape Management Steve Platt • LandCare Transcript Design: Julie L. Scott, CPM® • Newmark Knight Frank

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Pearls of Wisdom Presentations

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30th Annual IREM ® Forecast Breakfast Master of Ceremonies Gerard C.S. Mildner PhD Director, Center for Real Estate Portland State University 631 SW Harrison, Room 270 Portland, Oregon, 97207-0751 (503) 725-5175 http://www.pdx.edu/realestate

Dr. Gerard Mildner is an Associate Professor of Real Estate Finance and Academic Director at the PSU Center for Real Estate. He teaches in the areas of urban economics, housing economics, corporate finance and public finance. His research is focused on the economics of local government, including growth management, rent control, municipal sports stadiums, housing markets, land use regulation, and urban transportation. Dr. Mildner obtained his Ph.D. in Economics from New York University and holds a B.A. in Public Affairs from the University of Chicago.

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Pearls of Wisdom Office

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30th Annual IREM ® Forecast Breakfast Office Lana Baldock, CCIM

Managing Director 200 SW Market Street, #200 | Portland, OR 97201 Direct: 503 279 1775 | Mob: 503 706 2980 lana.baldock@cushwake.com

Lana joined Cushman & Wakefield in January 2007 specializing in office transactions in the Pacific Northwest. Prior to joining Cushman & Wakefield, Ms. Baldock spent twelve years with CB Richard Ellis. She has actively participated in nearly 900 lease and sale transactions representing more than 10.7 million square feet with gross consideration of over $1.5 billion. Ms. Baldock has been involved in nearly 1 million sf of ground up developments and has participated in office and office/flex property dispositions with a value of over $200 million. In addition to representing tenants in multimarkets, Ms. Baldock is currently represents agency leasing assignments for institutional clients totaling approximately 1.6 million square feet.

Education / Affiliations Lana graduated from Portland State University with a B.S. in Sociology in 1993. She is a Certified Commercial Investment Member (CCIM) and is a licensed Real Estate Broker in the State of Oregon and the State of Washington. She has served on the Board of Directors for the Commercial Association of Realtors (CAR) in which she served as Treasurer and the Chair of the Public Relations Committee. Lana is a S.M.A.R.T. (Start Making a Reader Today) volunteer, an amateur equestrian and enjoys spending time with her family outdoors and traveling.

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30th Annual IREM ® Forecast Breakfast Office National Economy The U.S. economy has entered a Goldilocks scenario, one that is not too hot or too cold, but “just about right”. Real GDP is on track to grow slightly better than 2% in 2017, generating just under 2 million new jobs this year. In addition, the economy’s temperature also seems to be “just about right” for consumers. Confidence is hovering at a near-15 year high, retail sales are accelerating at a 5% rate year-over-year and credit is flowing. In addition, the global economy is also firing back up: world nominal GDP growth is expected to be four times greater this year than it was last year, bolstering global trade and business confidence. Office-using industries have churned out an impressive number of jobs this year so far. Even as total non-farm employment decelerated over the last two years, gains in finance, insurance, professional/technical services, and administration led a job creation spree that recently hit a cyclical peak. In the first half of 2017, these industries added jobs at an average year-overyear pace of 794,000—or 66,200 per month. Declines in information employment averaged 32,000 over that same timeframe and dampened headline figures slightly. This year we have the downshift in the information sector making office-using job growth appear stronger in 2016 on an annual basis even though the market is still strong. For 2017, total office-using job growth is forecasted to reach 619,500 before slowing in 2018 to 519,000. The combination of these trends and a robust economic backdrop suggests that demand for office space will remain healthy. Just under 50 million square feet (MSF) of net absorption is anticipated this year across the U.S.— tempering further from last year’s pace—before dropping below 40 MSF in 2018. 30th Annual IREM® Forecast Breakfast

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30th Annual IREM ® Forecast Breakfast Office In the face of new supply, demand will not keep pace, allowing vacancy rates to tick upward by the end of 2017 – continuing into 2018, for the first time during this cycle. On an annual basis, vacancy rates will average 13.3% this year, an increase of 10 basis points (BPS) from 2016 and 10 BPS below next year’s expected vacancy rate of 13.4%. National asking rents will rise at a slower rate over the next few years, averaging $30.54 per square foot (PSF) in 2017, a 4.7% increase from the 2016 average of $29.16 PSF, before rising in 2018. Still, pockets of relative strength and weakness remain, and while overall deceleration is a theme, some markets will buck that trend. Leasing fundamentals in secondary and tertiary cities—where, with a few exceptions, supply is constrained—will even look robust. New supply is heavily concentrated, but mostly in markets where vacancy rates are low relative to historical averages. The 11 markets with more than 1.0 MSF of total deliveries so far this year have accounted for more than three-fifths of all new supply, or 17.9 MSF of the total 28.4 MSF completed year-to-date. All but three of these markets registered vacancy rate increases, although most of the increases were softened by demand reaching 10.5 MSF in those markets. Vacancy rates still declined in Seattle, Phoenix and Charlotte. Year-over-year asking rent growth in these three markets averaged 5.5% in 17Q2, more than 100 BPS above the U.S. average of 4.3%. Federal fiscal stimulus remains a possibility, and one that we consider most likely to be implemented in 2018. Our assumed $500 billion stimulus (including tax cuts and spending increases, especially on defense) over the 10-year window is estimated to increase the deficit via deficit-financing, causing the debt-to-GDP ratio to rise, from 76.7% today to 95.0% in 2027. It is also expected to add 30 BPS to overall GDP growth in 2018 and just less than 10 BPS to GDP growth in 2019. If policy developments disappoint, it is still possible that the ensuing effects on confidence could lead to a panic sell-off in equity markets.

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30th Annual IREM ® Forecast Breakfast Office For now, the tailwinds from an improving labor market and a reemergence of trade and investment activity are powerful. Add to that mix a consumer who has been spending more than initially expected, especially in the second quarter and third quarters of 2017. This year’s expected 2.1% real GDP growth rate is not a function of government stimulus inflating the figures; rather it is a reflection of most sectors performing better than they did last year. With some added juice on the federal spending side, that GDP growth rate will likely accelerate next year before tapering off. This prolonged economic cycle will carry real estate fundamentals with it. We are close to or at the peak of the cycle, but the question is how long we will be here and how dramatic will a down turn be. Nationally, this expansion cycle is tracking to be the longest in the Post-World War II era. The longest period of expansion was 10 years, ending in 2001. Portland Metro Area With approximately 1.6 million square feet of office space expected to deliver over the next two years, the Portland market is predicted to soften, as net absorption is not anticipated to keep pace with the upcoming office deliveries hitting the market. It is likely that rents could possibly decrease as the market shifts from a landlord-favorable market to a tenant-favorable one. Despite this, the overall vacancy rate dropped 60 BPS quarter-to-quarter to close at 10.6%, which was to be expected as no significant available product delivered in the third quarter. The Central Business District (CBD) vacancy rate fell 20 BPS from the previous quarter to 10.2%, while the suburban markets recorded a decline of 80 BPS to 11.1%. The third quarter witnessed overall net absorption increasing to 306,999 SF, a rise of 44,990 SF from the second quarter.

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30th Annual IREM ® Forecast Breakfast Office In leasing activity, Wells What’s Happening in Portland Office CRE Fargo signed for 103,279 Portland Submarket SF at Sunset Corporate 3Q 2017 Inventories Park and McAfee took CBD PORTLAND WEST 23,449,111 SF 91,768 SF at 55 West. 14,305,847 S F 10.2% 10.6% 1.6M S F 26.78 Vacancy 13.4% Both of these properties Vacancy are located within the 12 Mo. Forecast PORTLAND EAST Sunset Corridor submar4,212,078 S F ket. In the CBD, D.A. Da7.5% Vacancy VANCOUVER vidson & Co. inked 4,027,512 SF 7.0% 16,003 SF at KOIN Tower Vacancy while Zidell leased 12,323 SF at CH2M Center. In the 4th quarter, two significant transactions have occurred including Northwest Natural Gas and their commitment to relocate to 179,685 RSF at 3rd and Taylor in 2020, and AWS taking down five (5) full floors of the new Broadway Tower. Portland Market Overview

V A CANCY

N E T A B SORPTION

C O N STR UC TI ON

3 07 K S F

V ACANCY

NET A B SORPTI ON

A S K I NG R E N TS

$

C O N STR UC TI ON

A S KING R E N T S

The overall Portland average asking rent closed the third quarter at $26.78 PSF, up from $26.04 PSF in the second quarter and $25.79 PSF one year ago. The overall asking rent (all classes) increased to $30.58 PSF in the CBD and $23.15 PSF in the suburbs. Class A direct asking rents in the CBD were quoted at $33.99 PSF in the third quarter, up from $32.12 in the previous quarter. 30th Annual IREM® Forecast Breakfast

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30th Annual IREM ® Forecast Breakfast Office The dramatic increase in lease rates, 19.7% since 2014, is experiencing a slowdown with a 3.8% overall, year-overyear. Downtown has experienced the most change, 25.2% since 2014, slowing to 2.2% growth in the past 12 months. The increase in suburban rates has also been notable, about 12.4 % over the past three (3) years, 5.0% year-over-year. In the previous downturn there was a 4% decline in average asking rates, 10% for Class A, but we have achieved a new normal for asking rents in the market and any downturn is expected to be fairly shallow. Construction There is a healthy supply of office space under construction in downtown Portland. Notable new construction deliveries in the third quarter included: Under Armour at 108,698 square feet (SF) south of Downtown, and The FairHaired Dumbbell at 46,511 SF, close-in Eastside. Of the 1.6 MSF office space currently under construction or renovation in the CBD and delivering in 2017 and 2018, 42% is already spoken for. It is no surprise that construction costs have continued to rise, 11.42% nationally since 2014, 5.3% in the Portland Metro Area year over year. The 23.0 MSF downtown Portland office market has absorbed an average of 241,000 RSF per year over the past 7 years of expansion. If we continue at the same rate of net absorption the 1.6 MSF of new supply would take a little over 6 years to lease up. That said, with a current vacancy rate in the CBD of 10.6%, the vacancy rate is forecast to reach 15.4% when new developments are delivered. The last time this vacancy rate was seen in downtown Portland was 15 years ago. If the downtown market were to slow to 125k SF of absorption per year, vacancy would push up to 16.4% and would be the highest vacancy rate downtown in well over 20 years. 30th Annual IREM® Forecast Breakfast

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30th Annual IREM ® Forecast Breakfast Office The overall Portland Metro area averages approximately 606k RSF of net absorption annually. Once deliveries have been factored in, coupled with no new supply in the suburbs, the vacancy rate will likely be in the range of 11.4% to 14%, based upon historical trends. Suburbs vs CBD In Portland, there is the perception that tenants are leaving the suburbs in droves to relocate to a more urban location. But the fact is both markets have been performing well over the course of the current economic expansion. Many non-CBD properties are evolving to level the playing field somewhat with those buildings in the CBD. Numerous high quality and well-located suburban buildings have the advantage of free parking and are adding amenities. Those two items combined with (generally) lower costs can make a lot of sense for a tenant. That said, rents have been rising in the suburbs, however, with Class A figures on Kruse Way surpassing $30 PSF (full service) and with no new construction underway or planned in the immediate future, the market for prime space is likely to remain tight.

Meanwhile, there are certainly several tenants focusing on more urban locations including Autodesk planning a move to close-in eastside, WE Communications moving into the Pearl District, D.A. Davidson moving to the CBD and other notable tenants exploring options downtown. The positives include good public transit, numerous amenities within walking distance and options being added thanks to new construction or renovations. The negatives for a tenant include generally higher costs, difficult parking options and increasing traffic congestion.

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30th Annual IREM ® Forecast Breakfast Office At the end of the day, there has been no “one location fits all” in either the CBD or the suburbs. It comes down to what works best for each individual tenant. Thus far, both markets have succeeded in improving their fundamentals. Co-working Co-working space can be a great option for both local tenants that need their first office space and nationals that need to expand quickly or accommodate flexibly-scheduled employees. They provide convenient access to space with flexibility and numerous amenities. The most recent opening was WeWork in May, taking the top floor at Pioneer Place. Meanwhile, CentralOffice has committed to a new location with 22,000 RSF at 12th and Morrison while Industrious is in the market for up to 30,000 RSF.

Tech/Creative Demand In the past 5 years we have added 20,000 technology jobs and the Technology Association of Oregon predicts that another 10,000 jobs will be added in the next 9 years. That is a slight slowdown, but if the statistics are correct they show that for every 10 tech jobs there are three more jobs created in other fields, demand would equate to 750k – 1.0 MSF. Buildings committed to significant transformations will be rewarded with rising lease rates and occupancy; the tenants will benefit by having lobbies that serve as an extension of office space and an abundance of amenities. Showers, bike storage, artisan coffee and food options are a must for employee’s jobsatisfaction and employers are majorly factoring this into where they base their offices.

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30th Annual IREM ® Forecast Breakfast Office KOIN Tower did a terrific job with their lobby and One Main Place recently completed their renovations. PACWEST, Umpqua Bank Plaza, Congress Center, and Power + Light are all making significant investments and are on the right track to attract the tenant demand. Central Eastside, Slabtown Rents and Demand Demand has been increasing in Central Eastside and Slabtown as those markets have been maturing with new amenities, housing and parking options, ultimately resulting in rising rents and new construction. Slabtown is adding 118K SF at Leland James Center in 2017 and Tillamook County Creamery Assoc. occupied 45K SF in the submarket. On the Eastside, Westport Capital experienced a big win with Autodesk committing to move closer to their clients, taking down 90K RSF at Towne Storage for 2018 occupancy. 2018 Office Market Forecast Portland today finds itself on the radar – noted by many publications as trendy with a great quality of life and the benefit of being less expensive (compared to other major West Coast cities) and with numerous perks such as cultural and outdoor activities, great restaurants, good mass transit and an airport often ranked #1 in the nation. An additional benefit for employers is that Portland also has a healthy stock of office properties with lease rates that are very reasonable compared to markets in the Western U.S. The current talent pool, particularly for educated millennials looking for work, isn’t very deep, however that could change with increased in-migration. Some of the other trends we forecast going forward are as follows: •U.S. Economy to maintain a comfortable, sustainable stride; •Portland is expected to track closely with the national office market trends; •Rising vacancy rates will be supply-driven for most asset classes, demand

will continue; •Net absorption will be on par, if not slightly off, from 2017 levels; 30th Annual IREM® Forecast Breakfast

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30th Annual IREM ® Forecast Breakfast Office •Still not as heavily dependent on TECH as some other markets – not a bad

thing; •Cap on rental rate growth due to the wave of new supply; •Stabilized construction costs; •Increased supply of Co-Working sector space •Strong quality of life metrics (including lower cost of living) likely to drive employers and employees to Portland.

The World is changing quickly – we should expect the unexpected as we look to 2018 and beyond. Exponential growth in technology is continuing at break neck speed. With self-driving cars and vertical transportation options on the horizon, 3D printing in construction, robotics, virtual reality and innovations in building design - there are potential disrupters around every corner. Tech buzz words for 2018 that apply to commercial real estate include Tech Stack, Virtual Reality, Predictive Analytics, Machine Learning, Interactive Dashboard, Business Intelligence, Automation, Augmented Reality, Application Programming Interface, Blockchain and Big Data. New Technology & Potential Disruptors Looking Forward

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Looking through the lens of commercial real estate, particularly office, it is an exciting time in Portland. We are close to – or at the peak of the cycle - but the question is how long will we be here and how impactful will the next downturn be?

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Pearls of Wisdom MultiFamily

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30th Annual IREM ® Forecast Breakfast MultiFamily Jordan Carter, J.D.

Senior Vice President, Partner 1 SW Columbia St #950, | Portland, OR 97258 503.221.2280 jcarter@kiddermathews.com

Jordan Carter is a Senior Vice President and Partner in the Portland office of Kidder Mathews. Since joining Kidder Mathews in 2006, his practice has primarily focused on representing clients in the sale and acquisition of multifamily properties, primarily in the Portland metropolitan area and along the I-5 corridor. He primarily focuses on private capital and smaller institutional transactions in the $2-30 million range. In the last two years, Jordan has closed 50+ transactions totaling over $250 million in value. He is a two time recipient of Kidder Mathews’ prestigious “Big Hitter” award, and tied with his partner, Clay Newton, as co-number one producers in the Portland office last year. As a licensed attorney in Oregon, prior to entering the commercial real estate profession, Jordan practiced law in Portland and assisted in his family’s construction business. His legal background and knowledge of the construction industry benefit his clients by bringing a unique perspective to help evaluate and facilitate multifamily transactions. Born and raised in Portland, Jordan earned his undergraduate degree, summa cum laude, from Oregon State University, where as a senior in 2001, he was recognized with the school’s most prestigious undergraduate award. He then earned a law degree from the University of Oregon and passed the Bar Exam in 2004. Jordan’s free time is spent with his wife of 12+ years and his three amazing young children. He enjoys spending time outdoors and coaching his kids in youth sports. When Jordan isn’t selling apartments, he uses his active law license to moonlight as a sports agent for Northwest Sports Management Group, a company he and a partner started, where they re-live their baseball glory days through representing major league baseball players from across the Northwest. 30th Annual IREM® Forecast Breakfast

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30th Annual IREM ® Forecast Breakfast MultiFamily Nearly every aspect of Portland’s multifamily market has been riding a wave that started growing as we emerged from the Great Recession back in 2010. However, signs indicate the wave may have crested, but no one seems sure whether it’ll come down with a crash or be long and drawn out. Some economists see more of a gradual winding down of the current expansion, as opposed to a “bust” that has followed most recent economic expansions. One thing is certain - the last seven years have seen many new highs that have combined to make, and keep, Portland one of the hottest apartment markets in the country. National Apartment Market: Nationally, the apartment market has been one of the most attractive commercial asset classes for some time. After impressive sales and rent growth numbers in 2015 and 2016, the national market started slower in 2017, resulting in flattening prices in some markets. While rents are still growing nationwide, the pace has slowed compared to 2015 and 2016’s record rent growth. Through September, rent growth had fallen to 2.3% year-over year. Seasonal impacts have been more apparent of late and higher-end rental markets have been most affected by the slowing rental market. Rents continue to eat up a record share of American’s disposable income, and the prime renter age group of 20-34 year olds continues to drive the overall apartment market. However, by 2030, the total population of U.S. residents aged 65 and older, who also make up a significant portion of the renter pool, is expected to increase up to 21%, 6% higher than it currently sits. Despite the appearance of overbuilding in some markets and the 480,000 units under construction this year across the country, apartment demand is still exorbitant and overall the U.S. remains in a period of undersupply for housing. The multifamily market’s share of residential permits has declined nationally since 2015; however, this is primarily due to the increase of single-family permitting that is still gaining steam. While new construction is affordable when compared to other primary west coast cities 30th Annual IREM® Forecast Breakfast

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30th Annual IREM ® Forecast Breakfast MultiFamily abundant across the country, it’s still below the waves seen in the ‘60’s, ‘70’s and ‘80’s, and has been declining since the peak in 2015. Additionally, most new apartment construction has been centered on high-end and urban-core properties, but continuing to leave lower- and middle-income areas undersupplied. Portland-Metro Apartment Market: Overall, market fundamentals in the Portland-metro area remain strong. The drivers include the pent-up under supply of apartment units, tight single family market, a growing economy with low unemployment, and in-migration of apartment renters that far surpass national averages. While economic growth has slowed overall since the peaks of 2014 and 2015, it remains robust. Many investors, especially those from larger west coast markets, see Portland as having made the turn from a small city to bona fide second tier city but still with room to grow. Portland’s commercial real estate pricing for investors and cost of living for renters remains relatively affordable when compared to other primary west coast cities. While new construction has been robust in the urban core, the ability to relieve the housing shortage in further out B and C locations remains constrained by Portland’s urban growth boundary, rising construction costs, and slowing rents needed to justify building in those areas. Additionally, instead of letting the market correct itself from the short-term bubble of new construction in the core, local politicians have decided to drive the ship and implement new policies on rent control, affordable housing, and soon to be seismic retrofitting for older buildings which will deter further growth of new units and rehab of older units that Portland desperately needs. Looking longer-term, despite all the new construction in the core, the result looks to be a market that remains undersupplied, creating the demand that drives rent growth.

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30th Annual IREM ® Forecast Breakfast MultiFamily Sales Market: Investor demand remains strong, but a lack of inventory has caused both the number of apartment sales and sales volume to decline significantly compared to the prior couple years. Through November, Portland’s fourcounty metro area is on track with 150 sales of 5+ unit buildings, totaling approximately $985 million in sales volume. These numbers are down nearly 40% from 2016’s 265 sales that totaled $2.9 billion. A significant decline has been seen in institutional sales ($25 million and over) where cap rate compression, slowing rent growth projections, and rising interest rates have inhibited their ability to achieve returns needed to justify investing in Portland. Buyer demand for apartments remains at all-time highs, but owners have been hesitant to list properties, perceivably due to the low inventory of properties to satisfy 1031 exchanges that many are looking to do. Statistics from Costar show that cap rates in 2017 have increased by 18 basis points over 2016, up to 5.63%. However, institutional cap rates are down 25 basis points, likely driven by the low cap rates commanded by larger new construction sales.

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30th Annual IREM ® Forecast Breakfast MultiFamily Private capital sales (under $25 million) in 2017 have seen cap rates tick up 12 basis points to 5.67%, while the average price/unit and price per/SF is also down from 2016, at $177,000 vs. $185,700 and $192 vs. $186, respectively. However, the main decline has been on the institutional side as private capital sales have seen a significant jump at $160,000/unit vs. $125,000/unit and $179/SF vs. $139/SF. Rents, Vacancy and Expenses: Over the last five years, Portland has ranked fourth in the nation for rent growth at an average growth of 6.5%, per Yardi Matrix. However, the supply of new construction units coming online, which coincides with a slowing absorption rate, has impacted both market-wide vacancy and rent growth. After rent growth ramped up in 2013 and peaked at 12.9% in early 2016, through 2017 the year-over growth was around 7%. By the end of August, rent growth had slowed to 1.7%, but a slight decrease of new deliveries and the sound economic drivers should have it leveling out around 2.5% by year-end. Areas in Portland seeing the greatest slowdown - to the point of decreasing rents – have been the core areas of NW and SW Portland, central & inner Southeast, where new construction is most prevalent.

Portland-Metro Apartment Market Update Average Rent ($) PSF

.

$1.60 $1.50 $1.40 $1.30 $1.20 $1.10 $1.00 $0.90 $0.80

30% Increase

2013

2014

2015

2016

2017

Source: Multifamily NW

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30th Annual IREM ® Forecast Breakfast MultiFamily The highest percentage of rent growth has been in the outer eastside of town, as well as outer-SW Portland. According to the Fall Multifamily NW survey of over 52,000 units in the Portland-metro area, the average market vacancy rate was 4.37%, up from 3.71% at the same time in 2016. This is primarily due to the heavy influx of new deliveries coming online. Downtown Portland has seen the highest vacancy rates, at 5.7%, double from just six months prior, and a clear indication that in this submarket inventory is outpacing absorption. Outer northeast Portland, which has seen some of the least amount of new construction, has the lowest vacancy at 3.4%. Portland’s vacancy rate is still on par with the national average, and after the current wave of new construction subsides and is absorbed by 2019-2020, substantial demand should help alleviate concerns about an oversupplied market moving forward. The

Portland-Metro Apartment Market Update Average Vacancy Rate (%)

6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00%

2013

2014

2015

2016

2017

Source: Multifamily NW

The

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30th Annual IREM ® Forecast Breakfast MultiFamily The corresponding slowing rent growth and increased vacancies has had a trickle-down effect on existing product, where existing product which is starting to see occasional concessions and more rent adjustments to get units rented. On the expense side, a traditionally safe assumption is that most apartment expenses in the Portland-metro area will increase by approximately 3% each year. However, due to the voter approved $790 million Portland Public School bond measure and $258 million affordable housing bond measure that passed in May, Multnomah County residents had sticker shock when the new tax rolls came out in October, with most property taxes increasing in the 6-9% range. Rent Control

One of the hottest political topics heading into the summer’s state legislative session was whether the state was going to end its constitutional prohibition of local rent control programs and eliminate no-cause evictions. However, after passing through the House of Representatives, landlord activists scored a major victory when the proposed House Bill 2004 died in the Senate without a vote, leaving the current prohibition on rent control intact. Despite this ban on rent control, Portland politicians had already enacted their own form of rent control through a “housing emergency declaration” back in 2015, which required Portland landlords to pay tenants between $2,900-4,500 in relocation costs if they were evicted without cause or where rents are raised by 10% or more in a given year. Despite legal challenges that this was clearly the type of “rent control” banned by state law, a lower court ruled it wasn’t, and the case is now at the appeals court level. Portland’s “housing emergency declaration” was set to expire in October of 2017.

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30th Annual IREM ® Forecast Breakfast MultiFamily But despite slowing rent growth and a natural market correction, Portland’s City Council went ahead and extended the declaration by six months. In the meantime, Portland’s Mayor has pledged to bring a more permanent renter protection rule back to the City Council by the end of the year. Whether a more permanent rent control measure will stand up in court, as the temporary version has, is yet to be seen. New Construction Anyone who has driven around Portland during the last few years has seen the enormous amount of construction taking place, primarily in the core and close-in areas of town. The question within the local development community has been whether Portland is actually overbuilt, having surpassed the last cycle’s highs, or whether the market can sustain additional construction. Most developers seem to agree that the amount of luxury units has likely surpassed demand in the short-term, but outside of the core, the rest of the market remains underbuilt.

Portland-Metro Apartment Market Update Total # of Units Delivered 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

Source: CoStar

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30th Annual IREM ® Forecast Breakfast MultiFamily Additionally, the market has already been in self-correction mode as rents in the core have peaked and are retreating in some instances, which will naturally lead to fewer new projects in those areas. Currently, at least 30,000 units are proposed or under construction in Portland, but some would be several years out, and many are so preliminary they will likely never come to fruition. The majority of construction permitting is centered on the city core: in the Central Eastside, the Pearl District, and the Lloyd District. Although there’s a moderate slowdown in lease-ups of newly delivered units in the Downtown area, the market’s fundamentals remain strong as Portland continues to see growth in multiple demographic and economic categories, according to Oregon Economic Forecasts. In 2016, the Portland-metro area saw nearly 5,800 deliveries of new units and 7,300 permits issued. The market is on pace for a comparable year in 2017, with over 4,000 units having been delivered through August, estimated to be around 5,000 units by year-end. Additionally, roughly 7,300 permits have been issued through September, which would annualize to 9,700 permits – the highest number on record going back to the early 1970’s. Much of the application surge is for projects that were submitted before the city’s Inclusionary Zoning (IZ) policy was implemented in February of 2017, which requires new construction of 20+ unit buildings to set aside 20% of its units as low-income, and those with extended timelines for final delivery, due to the two-year review process for larger projects (often occurring in design overlay zones). In 2018, the Portland-metro should top 2017, with an estimated 6,500 deliveries projected. Again, primarily from developers who started the process before the IZ deadline. With a slowing market in the core and Portland’s increasing regulations and arduous entitlement process, some developers are refocusing their energy towards the suburbs, where they can find more affordable land costs, a strong rental market, low vacancies, and limited competition from other new construction properties. 30th Annual IREM® Forecast Breakfast

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30th Annual IREM ® Forecast Breakfast MultiFamily In 2016, Portland’s suburbs grew by 1.8% whereas the city grew at 1.4%. This corresponds to a national trend of heading towards a market rebalance between urban and suburban growth. Although growth is trending away from overbuilt central city areas (or “strengthening in suburban markets”), multifamily assets are still out-permitting single-family homes in Vancouver and in Beaverton, where new projects are re-creating the urban lifestyle in its downtown core (or main-street corridor), to attract millennials who prefer the live-work-play atmosphere, or 20-minute neighborhood model. Washington and Clark Counties have seen significant increases in multi-family housing permits. Clark County is on track for its busiest year since 1991. From a national perspective, multifamily apartment construction has begun to decline. Yet, even with the current dip, the number of annual permits has remained relatively constant; it is the single-family permits that have increased to affect the ratio. In July 2017, multifamily housing permitting was down -9.4% year-to-date. As a percentage of total housing permits, multifamily housing permits are also down -5.5% from the 2015 peak, landing at 33.7%. Permits for new multifamily projects in 2018 are expected to decrease around 11%, or 425,000 units. Recently, several executives from large publicly traded REIT’s indicated their plan to scale back their construction pipelines in the coming quarters, which some see as a sign that may help extend the run of increasing rents and values. Inclusionary Zoning: No doubt new construction permitting has slowed since the enactment of Portland’s Inclusionary Zoning (IZ) policy in February. Since that time, Portland has seen new permit applications nearly come to a grinding halt as developers continue to evaluate the financial impact of the City’s policy through the intertwinement of lower projected rents and ever increasing construction costs. In the two months preceding IZ’s implementation, Portland saw 5,000 units submitted for land-use review. In the six months that followed, there were zero 20+ unit apartment developments that had submitted applications. 30th Annual IREM® Forecast Breakfast

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30th Annual IREM ® Forecast Breakfast MultiFamily To date, it’s estimated that only 800-1,000 units have been submitted for land-use review, and of those, it’s estimated that 80% of those projects are slated to be fully affordable projects anyway. What has seemed to pick up steam, and predictably so, is an influx of 19 and under unit buildings that are not subject to the IZ requirements. The next year will be interesting in seeing the long-term impacts that IZ has on the market and if developers continue to dramatically pull back the reins, as they have done in the first 9 months following IZ’s enactment. While everyone seems to acknowledge that affordable housing is needed, it would deduce that adding any units, even luxury units, to a market that is undersupplied as a whole, would be better than adding very few units, which is the impact that IZ has had since its implementation. Once the current inventory of pre-IZ units are delivered, Portland will again be back to a position of gross undersupply, even in the core areas, as demand will continue to be high. URM Buildings: Another hot topic has involved the city of Portland’s recent efforts to implement new seismic retrofit requirements for its roughly 1,700 unreinforced masonry (URM) buildings, which includes about 270 apartment buildings. Many of these structures have aged well and add historic and architectural context that often defines the character of their neighborhoods. However, these primarily brick structures, built mostly during the 1870’s-1950’s, are seen as especially vulnerable during an earthquake. Current code only requires URM buildings to seismically tie-in roofing parapets when a full roof is replaced. This requirement makes sense, as 70% of fatalities from buildings in earthquakes involve parapets falling down on sidewalks below. But the City sees that as not enough. In November 2017, a city-appointed policy commission voted on a set of requirements to present to the City Council, which if passed, would force URM building owners to make mandatory upgrades.

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30th Annual IREM ® Forecast Breakfast MultiFamily These seismic upgrades would go beyond just roof parapets, to also include bolting a building’s floors to its exterior walls, in an effort to help prevent a total collapse. While the City Council likely won’t vote on a final policy until early-2018, URM owners are preparing for it to pass and trying to reconcile the additional costs with what financial incentives might be offered to help offset the costs (which are still up in the air). Owners will face tough choices with their individual properties, and Portland’s landscape of historic properties as a whole may be at risk. Cost estimates of these seismic upgrades vary, but could be as high as $50-70 per-square-foot for implementation, based on today’s dollars. As an example, that’s $500,000-$700,000 for a typical 10,000 SF building that owners would be facing over a 10-15 year period. Not a small chunk of change for many of these owners who have held these buildings generationally and rely on them as their primary source of income. Owners fear their URM property values will decline when this is passed and developers will take advantage by snapping up buildings at discounted rates and demolishing them to build new higher-density projects. This happened in San Francisco and Los Angeles after they implemented new seismic requirements, with 25% of the URM buildings eventually being torn down in San Francisco and 19% in Los Angeles. Forecast: Portland’s apartment market is poised to remain strong into the foreseeable future, fueled by strong market fundamentals, both on the economic and supply side. The wave of new construction will continue through 2019-2020 as the backlog of pre-IZ projects get finished which should sustain demand over the short-term. It’s evident the sales market has slowed dramatically during 2017 after the huge sales years in 2015 and 2016; however, it’s not due to a lack of investor demand. The feeling in the trenches seems to be that the market is returning more to normalcy, where everyone has to work a little bit harder. While our market is cyclical, it’s still a little early to see where we’re at in the cycle and how tall or deep the curve will be when all is said and done. It’ll probably take a couple more years before we really look back to see how 2017 stacked up in the grand scheme of Portland’s apartment market. But overall, the future remains bright.

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Pearls of Wisdom Retail

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30th Annual IREM ® Forecast Breakfast Retail Jeff Olson

Broker/Principal 733 SW 2nd Ave, Suite 200 | Portland, OR 97204 Office: 503.274.0211 | Mobile: 503.957.1452 jeff@cra-nw.com

Jeff Olson is a broker and principal at Commercial Realty Advisors NW ("CRA") based in Portland, Oregon. Jeff specializes in retail brokerage throughout the Pacific Northwest, with a primary emphasis on retail tenant representation and shopping center leasing. Jeff was named as the Retail Broker of the Year by the Commercial Association of Brokers for Oregon & SW Washington ("CAB") in 2016, 2015, 2014, 2013, 2012, 2010 and 2009. Since starting with CRA in 2004, Jeff has focused on helping many national and regional retailers successfully expand throughout our market. Jeff's tenant clients include New Seasons Markets, 24 Hour Fitness, 7-Eleven, MOD Pizza, TopGolf, Chase Bank, T-Mobile, Dutch Bros Coffee, B-Fit, McDonald's, Pacific Dental, ATI Physical Therapy, Popeye's, Bi-Mart, and many others. On tenant expansion projects, Jeff spends substantial time helping each retailer analyze the market to best position their business to thrive. On shopping center leasing, Jeff and his team are actively assisting landlords in filling their retail portfolios with quality tenants. Jeff has handled the retail marketing of PacTrust's Orenco Station, Columbia Tech Center and Gateway Shopping Center developments. He works closely with Atlas Investments on their retail portfolio, including Uptown, Centerpointe, Greenway and Tanasbourne. In addition, Jeff has been instrumental in helping MAJ Development and Seven Hills Properties successfully expand their retail development resumes throughout Oregon and Washington. Jeff is a board member for the Commercial Association of Brokers, and a long-time member of the International Council of Shopping Centers (ICSC). Prior to entering the real estate industry, Jeff held several sales and management positions with CocaCola in both Oregon and Southern California, working primarily with retailers. Jeff was born and raised in Portland, Oregon. He graduated with a bachelor's degree from Washington State University. Jeff lives in West Linn with his wife and four sons. When Jeff is not working or carting his boys from one activity to another, he enjoys exercise and warm weather vacations.

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30th Annual IREM ® Forecast Breakfast Retail This year we have heard extreme commentary surrounding the retail industry. Next year’s IREM forecast might be delivered straight to your phone, with no need to leave the house. As we approach the 2017 holiday shopping season, countless news stories talk of the “Retail Apocalypse.” Some speculate that the days traveling anywhere for goods and services are numbered, replaced by online orders for direct home delivery within hours. There is no doubt that technological advancements have had a profound impact on the retail industry, but that is far from a new phenomenon. Dating back more than a century, grocers provided home delivery as a standard service while general merchandisers such has Sears made the bulk of their sales through catalogs. Fast forward to today and the catalogs have been replaced by smartphones, and deliveries are made by UPS, FedEx, and Uber drivers. But the fact remains that reRetail tail largely defines the charHistorical Perspective acter of a community. Grocery home Throughout the world, people delivery is not a new concept. congregate in retail shops, restaurants, bars, malls, shopping centers, entertainment Catalog sales… Not a new venues, movie theaters, and concept. 0 all sorts of other retail setRetail tings. In most communities, constantly the retail offerings reflect and evolves. help define that community. Now, the lines are becoming blurred as to WHERE RETAIL HAPPENS. People do not flock to New York City or London or San Brick Retailer Sales Brick & & Mortar Mortar vs. vs. E-commerce E-commerce Retailer Sales Francisco to tour office buildComparison Comparison (2016) (2016) US US Retail Retail Sales Sales (2016): (2016): $4.85 $4.85 Trillion Trillion ings or stroll through apart$482 Billion 6,363 Stores 8% ment complexes. The most 8% $482 Billion $178 Billion E-Commerce Brick E-Commerce powerful draw is always the Brick & & Mortar Mortar 9,750 Stores Sales Sales Sales Growth: Growth: Sales Growth: Growth: retail. And the same can be $53.3 $88.7 $53.3 Billion Billion $88.7 Billion Billion $136 Billion Billion $147 said for Portland, Oregon. As (15.6%) (1.0%) (15.6%) (1.0%) $116 Billion Portland has transitioned 741 Stores 92% 92% a quirky pit-stop $116 Billion from $115 Billion Brick E-commerce Brick & & Mortar Mortar Retail Retail Sales Sales E-commerce Retail Retail Sales Sales between the Bay Area and 741 Stores ““Omni Omni Channel” Channel” Retail Retail Strategy Strategy $16 Billion $115 Billion Seattle into a unique, internaDenoting Denoting or or relating relating to to aa type type of of retail retail that that integrates integrates the the 460 Stores different different methods methods of of shopping shopping available available to to consumers consumers tionally renowned West Coast (e.g., (e.g., online, online, in in aa physical physical store, store, or or by by phone). phone). hub, the retail components of our region have been instrumental. From food to apparel to outdoor experiences, retail continues to play a vital role in our economy. 30th Annual IREM® Forecast Breakfast

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30th Annual IREM ® Forecast Breakfast Retail According to the latest data, 84% of American households own a computer (91% in Oregon). 77% of Americans own a smartphone, increasing to 90% in the 18-49 age group. So the barriers to access of e-commerce are minimal. And still, less than 10% of all retail sales occur online. Headlines would suggest that Amazon and online shopping are dominating the retail industry, but the facts paint a different picture: 90% of all shopping is still done in stores. Yes, the percentage growth of ecommerce is outpacing conventional brick and mortar retail (though off of a much smaller base), and Amazon dominates in terms of online market share. However, this past year the total dollar growth of conventional retail outweighed that of online ($88.7B v. $53.3B), and the total number of retail store openings outnumbered closures. Just as we have seen Amazon expand further into physical locations with the acquisition of Whole Foods, we have seen conventional retailers expanding deeper into hybrid online offerings such as Fred Meyer’s ClickList, and Order Pickup instore from retailers like Target and Nordstrom.

2017 Retailers Expanding vs. Contracting 4,162 New Stores from these 16 Banners

Plans for 2017 Store Count Decline

-1200

-1000

-800

-600

-400

-200

Radio Shack

Dollar General

Payless Shoesource

Dollar Tree

Ascena

7-Eleven

rue21

Couch Tard

Gymboree

Aldi

The Limited

O'Reilly Auto

Family Christian

Autozone

hhgregg

GNC

Sears

TJX

Gamestop

Tractor Supply

bebe

Sally Beauty

Children's Place

Five Below

Wet Seal

Lidi

Croc's

Ulta

Kmart

Casey's

JC Penney

SportsClips

0

0

200

400

600

800

1000

1200

1400

2017 Retailers Expanding vs. Contracting 14,248 Openings | 10,168 Closures Segment Supermarkets Drug Stores Superstores/WH Clubs Department Stores Specialty Hardgoods Specialty Soft goods Mass Merchandisers Convenience Stores Bar/Restaurants Fast Food

Net Store Growth 674 345 82 -400 153 -3133 1905 1700 728 2026

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4,080 Net Store Openings

Not quite a “Retail Apocalypse”

December 7, 2017

The point is, retailers and retail landlords are forced to adapt constantly, and those driving factors run deeper than ecommerce. There was speculation for years that the growth of Walmart and other mass merchandisers would spell the end for other retailers.

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30th Annual IREM ® Forecast Breakfast Retail Interestingly, the proliferation of Walmart likely prepared some formidable retailers to compete with Amazon and the growth of online retailing. Amazon, like Walmart, is a brand, and a retailer from which you can essentially buy anything. Both proactively and reactively, many major retail competitors have incorporated online shopping and home delivery into their brick and mortar strategies. The lines have become blurred as to exactly WHERE RETAIL HAPPENS. Examples of this exist everywhere. Consumers are now looking online at fashion websites and Instagram posts before heading to the Retail Innovations & Challenges mall. Shoppers may now see Threats to future growth… so mething while walk ing through a retail store and grab their phone and order it online. Perhaps they see a couch or paIncreasing costs of labor & construction New Concepts… tio set while walking through Costco and have it shipped to their house without even conInnovative urban Shop online then pick-up at the versing with a store employee. store footprints. store. re·tail ther·a·py (noun) The industry term that has Shopping in order to make oneself feel happier. emerged is Omni Channel, or having an Omni Channel strategy. The goal being to serve consumers wherever and whenever they desire your products, be it in-store or online. Mixed use retail spaces don’t function for many retailers.

Oversupply of vacant grocery boxes.

Store destinations exclusively for online order & pick--up.

More on-line Options

According to the latest data, 84% of American households own a computer (91% in Oregon). 77% of Americans own a smartphone, increasing to 90% in the 18-49 age group. So the barriers to access of e-commerce are minimal… And still, less than 10% of all retail sales occur online. Headlines would suggest that Amazon and online shopping are dominating the retail industry, but the facts paint a different picture. Yes, the percentage growth of e-commerce is outpacing conventional brick and mortar retail, and Amazon dominates in terms of online market share. However, this past year the total dollar growth of conventional retail outweighed that of online ($88.7B v. $53.3B), and the total number of retail store openings outnumbered closures.

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30th Annual IREM ® Forecast Breakfast Retail Locally, the statistics surrounding retail vacancy and absorption are interesting, but not always particularly significant to investment decisions by retailers or retail landlords. Retail locations and trade areas all offer different characteristics, and are less of a commodity than other real estate product types.

In the Portland market, retail vacancy remains quite low at 4.4%. There are multiple unique factors in our market that help keep retail from being overbuilt. The fact that Oregon has no sales tax eliminates the incentive for jurisdictions to overentitle land for retail. Good retail locations in the Portland Metro Area are still difficult to come by. While much of the new development today is mixed-use with apartments or offices above ground floor retail, retailers still largely struggle with that configuration in Portland. Even as bike and pedestrian friendly as Portland is, we still do not have the extreme density required in most areas of the city to support retail without the basic elements that most retailers need: parking, signage, visibility, easy access, loading, and preferably strong co-tenancy in the form of an anchor tenant. While there are a few examples of where anchor tenants and parking have been blended well with apartments, most retailers are still seeking conventional shopping center formats. And while an apartment development might have several hundred units above to support the ground floor retail, most retailers need consumer trade areas of 10,000 to 50,000 customers to succeed, sometime more. Moving forward, retail real estate will continue to be the category that offers businesses the greatest exposure for their brands, with the best visibility, accessibility, traffic, signage, and convenience... attributes that are valued by numerous uses. Retail landlords have never pigeonholed themselves into believing that shopping centers needed to be filled exclusively with grocery and apparel retail. As shopping patterns adapt, retail spaces have long been coveted by banks and credit unions, medical, dental, fitness, health and beauty, and other uses that enhance our lifestyles. E-commerce will evolve as retail always has, and play a substantial complimentary role with brick and mortar retail in our busy lives. Retail is not just about obtaining goods and services. Retail helps fill our need for human interaction and experiences. That is something an online purchase cannot replace.

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Pearls of Wisdom Industrial

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30th Annual IREM ® Forecast Breakfast Industrial Stuart Skaug, SIOR

Senior Vice President 1300 SW Fifth Ave. Suite 3000 | Portland, OR 97201 Office: 503.221.4822 stuart.skaug@cbre.com

Stuart Skaug serves as a Senior Vice President at CBRE, where he specializes in providing both strategic and executional advisory service exclusively to owners and occupiers of industrial real estate. His ability to consistently integrate and align the objectives of each client with executable real estate solutions is a cornerstone of his practice. Stuart has been recognized as one of the most successful and trusted commercial real estate advisors in the Portland/Southwest Washington market. During the course of his career, he has successfully negotiated millions of square feet of industrial sales and leasing transactions on behalf of his occupier and owner clients, personally averaging nearly 1 million square feet per year the past 9 years. Stuart Skaug serves as a First Vice President at CBRE, where he specializes in providing both strategic and executional advisory service exclusively to owners and occupiers of industrial real estate. Stuart has been recognized as one of the most successful and trusted commercial real estate advisors in the Portland/Southwest Washington market. During the course of his career, he has successfully negotiated millions of square feet of industrial sales and leasing transactions on behalf of his occupier and owner clients, personally averaging nearly 1 million square feet per year the past 9 years.

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30th Annual IREM ® Forecast Breakfast Industrial Industrial real estate has been one of the strongest performers in all of commercial real estate for several years: Perceptions of industrial real estate have transformed considerably. Warehouses and distribution centers were once overlooked for the more fashionable asset classes of office and retail in well-located markets; many buyers thought industrial had minimal growth potential. However, over the past 5-10 years, industrial real estate has evolved into an attractive property sector, with logistics facilities becoming more sophisticated and market fundamentals strengthening due to new consumer buying preferences. By nearly any metric, the industrial asset class has been setting categorical records for the past several years. Although starting to show some signs of softening, demand has never been stronger, with national absorption reaching 157 MSF in 2017, and vacancy dipping below 5% . The supply side has struggled to keep up, even with rents hitting $0.57 and completions at 143 MSF. Portland’s industrial stats reflect very similar trends. Consider: • Vacancy hit an all time low of sub 3%, • Industrial Cap rates hit a new records of 4.8% this year • Rents have grown by 50% since 2007, when shell rates peaked at $0.40 – today, class A rents of $0.60 deals are starting to stack up. • Average annual absorption for the past 5 years has been 4 MMSF. From a supply and demand standpoint, we are now in the longest ever period of imbalance, going on 8 years at this point. Demand has historically been more volatile, but in this cycle has been much more steady.

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30th Annual IREM ® Forecast Breakfast Industrial Speculative construction has been strong but disciplined. So far, 2M SF of new spec product has been delivered in 2017, of which 900k SF has been leased. There is still 900k SF under construction, which will deliver between now and January. If we continue our 5 year average rate of absorption, we can expect to absorb this remaining product in 6.4 months. E-commerce is having a big impact on industrial real estate, but brick & mortar is NOT dead! One of the obvious drivers of demand for industrial real estate is e-commerce growth. Changing consumer preferences are driving greater interest in “last touch” facilities and perhaps less functional urban infill locations as

redevelopment opportunities.

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30th Annual IREM ® Forecast Breakfast Industrial According to CBRE Research, every $1BB in e-commerce sales translates into 1.25M SF of net absorption of industrial space. E-commerce sales rose $5.3B during 2Q17 which translates to over 6 MSF of net absorption related to e-commerce alone. Anyone who has read the headlines the past couple months knows Portland is experiencing this right now. Supply-chain modernization has led to a warehouse development boom in primary markets that handle the bulk of goods distribution. However, now the need for a deeper supply-chain presence to cover regional locations is accelerating growth in secondary markets like ours. Amazon had less than 500,000 SF of warehouse space in Portland as of the first quarter this year, and is now under construction on 3 facilities totaling almost 5 MSF of warehouse floor area in Portland area alone.

Brick & Mortar While its true that Amazon and other dot com retailers are growing dramatically, this is not the end of brick and mortar retail as we know it. Although most retail sales growth is in non-store sales, most stores sales are not collapsing. Brick and mortar still represents 90%+ of all retail sales in the US, and store sales in several categories like clothing, grocery, and healthcare are all in significant double digit growth over the past 10 years. Three good examples of traditionally stalwart brick and mortar companies include Nordstrom, Anthropolgie, and and JCrew each of whom have seen 22%-36% of their total revenue earned online. 30th Annual IREM® Forecast Breakfast

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30th Annual IREM ® Forecast Breakfast Industrial The truth is, traditional store retailers still occupy significantly more industrial space than e-commerce users. Yet, as many large brick and mortar brands are still growing, moving away from stores exclusively, they are branching into omni-channel models that have huge implications for industrial real estate. Omni channel refers to order placing and fulfillment from numerous retail channels including stores, web, franchises, catalogue, and “m-commerce” or mobile commerce. And while many retailers have struggled to figure out how to build a solid omni-channel network, more and more are starting to get there. Developing a strong omni-channel strategy is really about developing a strong supply chain strategy. Another reason stores won’t go away is because e-commerce is expensive! Consider: • Free delivery is expensive. • Returns are even more expensive. • 2 M tons (4 B pounds) of retail returns sent to landfills annually. • $260BB in lost revenue in 2014. • Currently only about 19% of the top 250 retailers say they can fulfill omni-channel demand profitably.

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30th Annual IREM ® Forecast Breakfast Industrial Where does Industrial go in 2018 and beyond? Big Picture

Change within industrial real estate is poised for even more disruption. Three areas to watch are: robotics, autonomous vehicles, and grocery sales online. Consider: •

Robotics. The application of artificial intelligence (“AI”) is absolutely exploding. In 2019, 60% of robotics sales will be for logistics operations. We have seen that a 1 MSF distribution center using automation can project to save $22M annually vs a non-automated facility. Autonomous Vehicles. AI is also trailblazing in autonomous vehicles. The technology still has a ways to go, but things like platooning are already being tested. Over the past two years, the number of US states introducing autonomous vehicle legislation has increased almost 50%. • Not all of these changes are without cost though, as the 1.7M truck driving jobs in the US will undoubtedly be affected, as well as the millions of warehouse labor jobs currently filled by humans. •

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30th Annual IREM ® Forecast Breakfast Industrial •

Online Grocery: the next frontier of e-commerce sales. Online food sales currently is almost nonexistent. When you consider that grocery sales represent nearly 40% of all food sales, you can see the opportunity. A 20% ecommerce penetration in grocery would equate to $140 BB in sales, which is why Jeff Bezos recently told his Alexa to buy Whole Foods.

Some predictions for 2018:

Portland Industrial

Regarding supply: • The roughly 2 MSF of mostly big box spec development remaining in North Portland will likely be absorbed in the next 12 months. • The supply side will start to taper speculative deliveries a bit heading into 2019. • Portland will continue to face a shortage of industrial land, unless policymakers are engaged. The recently updated Industrial Site Readiness Inventory shows that: • Almost 80% of remaining sites will take between 7-30+ months to entitle BEFORE DEVELOPMENT CAN BEGIN. This kills development. Most companies can’t wait that long. •Developers will be keenly focused on build to suit opportunities. Regarding Demand: • Corporate America will continue to evaluate the Portland region for large industrial requirements (300k SF to 1 MSF+) • Tenants will start to see more options and leverage as they evaluate their occupancy needs as absorption starts to cool slightly.

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30th Annual IREM ® Forecast Breakfast Industrial Capital Markets: Institutional investors will continue to scour Portland for higher yielding deals than are found in larger, Tier 1 markets. • Pricing will likely remain solid for the first half of 2018, with some potential for slight cap rate and yield expansion in the latter part of the year. •

Overall, Portland has a savvy, disciplined set of market participants, and a growing base of companies looking to establish operations here. We are bullish on Portland’s future, and look forward to seeing the next set of advances our market makes.

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Pearls of Wisdom Investment Sales

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30th Annual IREM ® Forecast Breakfast Investment Sales MaryKay West, CCIM

851 SW 6th Ave, # 1200 | Portland, OR 97204 Office: 503.223.3123 marykay.west@colliers.com

After 30 years in the real estate industry, MaryKay West is a leader in the leasing, acquisition and disposition of office, mixed-use and industrial properties in the Portland metropolitan area. Prior to 2002, MaryKay managed property for large institutional owners, supervised commercial Loan Administration and Market Research Departments, and provided oversight of new business development and property management takeovers. From 1989 through 1991, MaryKay was the asset manager for a one million square foot office portfolio on the West Coast. MaryKay is a licensed associate broker in Oregon, and holds the CCIM, Certified Green Broker and LEED Green Associate designations. PROFESSIONAL ACCOMPLISHMENTS • 2010, 2012 and 2015 – Top Five Producer (Norris, Beggs & Simpson) • 2011 – CAR Humanitarian of the Year • 2008, 2006 - CAR Bill Naito Award (Brewery Blocks sale) • 2007 - CCIM Transaction of the Year (Brewery Blocks sale) • 2006-2013, 2015 - CoStar Power Broker award • 2005 - SIOR Transaction of the Year • 1994-2006 - Institute of Real Estate Management’s (IREM®) Certified Property Manager (CPM®) designation; Awarded CPM® Candidate of the Year (twice) and CPM® of the Year

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30th Annual IREM ® Forecast Breakfast Investment Sales By now, it’s not news to any of you that we’re in the strongest AND longest real estate recovery in recent memory. To quote ULI’s Emerging Trends in Real Estate 2018, “We are in a long cycle, not in a boom/bust market. The key to the next few years is to expand horizons, market by market, property type by property type.” So, why is this happening? Why is this cycle lasting so long, why is Portland doing so well, and what are the risks we face in the coming year that might hasten the inevitable deceleration of the real estate market? First, the National Scene. Since 2010, our national ecoPortland Investment Market National Economic Scene: Steady Eddy! nomic recovery had been steady not spectacular. This Job Growth Median Household Income doesn’t lend itself to catchy headlines, but it points to solid Capital fundamentals, which bodes Debt & Equity Population well for us in the long run. Foreign & Domestic GDP growth, employment growth and national household income growth are all continuing on an upward trajectory. According to the Bureau of Economic Analysis, national Gross Domestic Product (GDP), grew slightly over 3% in 2Q and 3Q 2017.

The 50 largest U.S. cities experienced an average population growth of 6.7% between 2010 and 2015. U.S Median Household Incomes grew at an inflation-adjusted 2.5% between 2010 and 2015.

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30th Annual IREM ® Forecast Breakfast Investment Sales There is abundant capital seeking investment. Domestic companies have huge cash reserves, foreign companies are seeking a safe haven in the U.S., and as the stock market continue its run up, institutions are increasing their real dollar allocations for real estate in an effort to maintain a desired balance among asset classes. Why the Huge Interest in Secondary Markets? Portland Investment Market Why Secondary Markets?

• More “Room to Run” • Capital is Portable • Lack of Overbuilding • Foreign Capital Pushing Gateway Market Pricing • High Quality of Life • Competitive Cost to do Business

Secondary markets have “more room to run” than the 1st tier cities (also known as gateway cities) because competition amongst institutional investors hasn’t been quite so fierce and pricing has not been bid up as high.

Capital has become very portable as technology makes it much easier for investors to educate themselves on the nuances of multiple secondary markets.

We are not seeing the overbuilding which we saw in previous real estate cycles. Foreign capital looking for a safe haven in the United States is largely focused on 1st tier cities, resulting in bid up pricing. In comparison, secondary cities are still attractive relative value propositions. Secondary cities have a lot to offer residents and businesses, and they’re more affordable, which helps sustain future growth and demand.

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30th Annual IREM ® Forecast Breakfast Investment Sales Why Portland? #1 – It’s gotta be more than the beards & brews or donuts & tattoos! Why Portland?

Beards & Brews? Donuts & Tattoos?

Why Portland? U.S. City Rankings

in Job Growth

in Growth of Working Age College Grads

in Median Household Income Growth

in Population Growth

*Forbes ranks Portland of 25 on their 2017 America’s Fastest-Growing Cities list

Between 2013 and 2015, Portland had the second highest rate of job growth among the nation’s 50 Largest Cities. Our job base grew by 10%, which was more than twice the rate of national growth, and only Miami outpaced Portland, with a growth rate of 14%. We added just over 42,000 jobs, more than Salt Lake City, Las Vegas, and Milwaukie combined. Portland experienced the third largest increase in Median Household Income (MHHI) between 2010 and 2015. Our increase was 19%, more than seven times the national growth rate of 2.5%, and only Seattle and Austin outpaced Portland, logging 23% and 21% respectively. Cities that had lower increases in MHHI than Portland include Denver, Washington DC, San Francisco, Boston, New York, Chicago, Atlanta and Nashville. Portland is now the 8th wealthiest city in the U.S. Portland’s population grew by 8% from 2010 to 2015, and the growth didn’t stop there. One hundred people a day moved to Portland in 2016, and nearly 90 a day in 2017. Portland’s percentage growth was higher than the 6.7% average among the nation’s 50 largest cities, and ranks Portland 17th on the list of 50. Cities that grew more quickly include Austin, Seattle, Charlotte, Raleigh, Miami, Atlanta, Dallas and Nashville. Cities with slower rates of population growth include San Francisco, San Diego, Las Vegas, Los Angeles, New York, Philadelphia and Chicago. 30th Annual IREM® Forecast Breakfast

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30th Annual IREM ® Forecast Breakfast Investment Sales These stats are from the Bureau of Labor Statistics. Why Portland?

Corporate In-Migration

In addition to strong growth in our homegrown companies, we are finally experiencing the long awaited inmigration of large companies. Amazon, New Relic, SurveyMonkey, Google, eBay, and WaCom are just a few of the new tenants in our market.

Employment diversity – Once Hitting on all Cylinders heavily reliant on timber, fishing and agriculture, Port• Diverse Employment • Well-Educated • High Quality of Life • Fastest Growing U.S. Tech Market land’s diversified economy now includes technology, healthcare and education, with a special emphasis on clean technology, advanced manufacturing, software and active wear. Four of our major job sectors, each contribute between 10% and 20% of the City’s jobs, which mitigates the impact of any one sector downturn. Why Portland?

• • • • •

Education, Health & Public Services – 19% Entertainment & Service – 16% Finance, Insurance & Real Estate – 14% Management & Support Services – 11% Tech, our strongest job sector, represents more than a quarter of downtown Portland jobs, with 95,000+ workers. We are considered the country’s fastest growing tech market.

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30th Annual IREM ® Forecast Breakfast Investment Sales •

Portland has a well-educated work force, with nearly 46% of Portland area workers possessing at least a bachelor’s degree.\Portland has a high quality of life; according to WalkScore.com, “Portland might be the most walking, bike, and public transit friendly city on the West Coast.” • 5.7% of workers walk to work vs the national average of 2.9%. • 7.2% of commuters bike to work, the highest percentage in the nation. • Our world class transit options include nearly 60 miles of MAX Light Rail track throughout the region, and 530 square miles are served by some kind of transit (bus, streetcar, aerial tram, WES Commuter Rail, or MAX) • Portland International Airport is consistently ranked by Travel + Leisure as the #1 airport in the country (2013 thru 2016). • Thriving food, beverage, and cultural scenes. • Abundance of outdoor recreation opportunities.

The cost of living and cost of doing business in Portland are still very affordable as compared to other major west coast cities. According to the Bureau of Economic Analysis, Portland’s cost of doing business is 4% lower than the national average. Additionally, our cost of living, compared to a national average index/benchmark of 100, is only 111. This compares very favorably to other major west coast cities including Seattle (121.4), San Francisco (164), San Jose (156) and Los Angeles (136.4). This information is from the US Census.

**Newest Accolade - Forbes just named Portland as the #1 Best Place for Businesses and Careers in 2017. **

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30th Annual IREM ® Forecast Breakfast Investment Sales #2—Our real estate fundamentals are strong across the board! All four asset classes are experiencing low vacancy, rental rate growth, positive absorption, and appropriate levels of development. None of our product types are overbuilt and there are high barriers to entry, including the Urban Growth Boundary, lack of development sites, and natural geographic constraints. Although 2017 sales across all product types dropped from the eye-popping levels of 2016, office and industrial still experienced strong activity, with retail and multifamily lagging somewhat behind. We’ve experienced significant interest from institutional investors over the past 36 to 48 months. This includes Beacon Capital Partners, Swift Real Estate Partners, GAW Capital, Goldman Sachs, Bixby Land Company, KBS, Sterling Bay, Stockbridge Capital and Lincoln Property Company to name a few. #3– Cap Rates and Pricing Over the past few years, Portland has not been “left out” of the cap rate compression phenomenon we’ve seen throughout the country. For the first time, we’ve seen cap rate compression across all four product types and aggressive pricing as well. Office – In 2017, we saw multiple CBD office sales transact at sub 5% cap rates. Pearl West, 1320 Broadway, Park Square Campus and Pioneer Tower all traded between 4.6% and 4.8% cap rates. Office pricing has seen huge increases in the past 24 to 36 months. Where previously no CBD office product had ever traded in excess of $350 PSF, we’ve seen several sales notching prices in excess of $400 PSF. This includes 1320 Broadway at $560 PSF and Pioneer Tower at $411 PSF. Pearl District pricing has also broken through a new barrier, pushing past $450 PSF in 2017. The Wieden + Kennedy Building sold for $583 PSF, the Vestas Building sold for $487 PSF, and Pearl West sold for $563 PSF. • Industrial – Cap rates tend to follow two tracks – for local, smaller projects, cap rates range between 6% and 6.5%; institutional projects are selling at cap rates as low as 4.5%. Pricing for institutional size and quality projects pushed past $110.00 PSF in 2017, with two properties being sold at $113 30th Annual IREM PSF. Forecast Breakfast December 7, 2017 Page —53— •

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30th Annual IREM ® Forecast Breakfast Investment Sales Multifamily – Cap rates have been extremely low in the past couple of years, with multiple transactions trading around a 4% cap rate. As with the other product types, the cap rates are dependent on size, quality and location. In general, multifamily cap rates range from the low 4% up to the mid 6%. Several projects sold in 2017 for more than $330,000 per unit, with one, The Waterline, reaching a high watermark of $387,000 per unit. (Source is Colliers International Market Research.) RISKS RISKS

What Risks Do We Face?

Risk our Market RiskFactors Factorsforfor our Market

A very competitive real estate environment. Portland is keeping company with Tampa and Miami; Nashville and Denver; Salt Lake City and Raleigh, NC. • Our metro area has an astonishing lack of ethnic diversity – we are the least diverse metro area in the ENTIRE United States, including the Midwest, making it more difficult to recruit and retain innovative talent. This can potentially hamper our ability to be competitive, which may reduce our attractiveness to companies looking to locate in Portland, particularly in the technology and creative sectors. • We are experiencing increasingly unaffordable housing – not necessarily in comparison to other west coast cities, but in relation to our own median household income. According to Zillow, Portland’s Median Singlefamily Home Price is now just under $406,000. This is an increase of 78% over the past five years, but our current median price benchmark is 51% lower than in Seattle, and 179% lower than in San Francisco. • Our metro area has very strong job growth, but it’s bifurcated at the low and high ends of the spectrum. We need middle income job growth, defined as approximately $70k/yr, so more employees can afford the rising costs of housing. Currently, Portland ranks 48th of the 50 Largest Cities in Middle-Wage job growth. (Source – Oregon Office of Economic Analysis) • Competition Competition ••Lack of Ethnic Diversity ••Rising Prices Lack Home of Ethnic Diversity ••Bifurcated Employment Rising Home Prices Growth • Regulatory Environment • Bifurcated Employment Growth • Lack of Institutional Grade Inventory to Sell Regulatory Environment ••Will the “new” Portland Continue in the Next Cycle? • Lack of Institutional Grade Inventory to Sell

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30th Annual IREM ® Forecast Breakfast Investment Sales Regulatory Environment – Regulation can have a big impact on real estate. Increased construction excise taxes, rising systems development fees, Inclusionary Zoning, and the specter of rent control are examples. • So many institutional size/grade properties have been sold over the past two to three years; how much more institutional product is left to change hands in this cycle? Institutions tend to be shorter-term holders of real estate than local and regional investors, however, institutions typically still need at least two to three years to implement an asset strategy before they sell a property, and that window (even on the short end) likely pushes past the end of this up-cycle. •

In the past, Portland was perceived somewhat as its own “insulated” economy. For the first time in a real estate cycle, Portland has experienced considerable in-migration by outside companies, substantial rent increases, significant development, and more institutional than local investor activity in this real estate cycle. We’re now considered part of the national conversation. The $64,000 question?? Will the new Portland live on into future cycles? Portland in 2018

What’s Next for Portland in 2018?

ULI’s Emerging Trends in Real Estate 2018 Investment Rankings

in Office

in Industrial

overall in Retail

in Multifamily

2018 looks to be a good year for Portland. ULI’s Emerging Trends in Real Estate 2018 Investment ranking projections are as follows: • #2 office market (We are bookended by Salt Lake City at #1 and Minneapolis/St.

Paul at #3.) • #5 retail market (Salt Lake City, Pittsburgh and San Jose are ranked 1, 2 and 3 respectively.) • #18 industrial market (Northern New Jersey, Denver, and Washington DC/ Northern VA are ranked 1, 2 and 3 respectively) 30th Annual IREM® Forecast Breakfast

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30th Annual IREM ® Forecast Breakfast Investment Sales #11 multifamily market (Pittsburgh, Salt Lake City and Ft. Lauderdale are ranked 1, 2 and 3 respectively.) • Overall, the #7 investment market in the country (Salt Lake City, Seattle and Austin are ranked 1, 2 and 3 respectively.) •

We’ll see continued in-migration of young, educated and talented folks and continued job growth. Also, look for more companies to enter the Portland market. The new Federal Reserve Chair has signaled multiple interest rate increases for 2018, making it more likely that cap rates will plateau and probably even begin to rise. Lenders will get a little more conservative with their underwriting, particularly with regards to vacancy and market leasing assumptions. However, there will still be lots of debt and equity looking for a home. In conclusion, Portland will be open for business in 2018 with continued institutional investor interest. 2018 investment sales volume will mirror 2017 or tail off somewhat, not necessarily due to concerns about our economy or our real estate fundamentals, but due to fewer large institutional sales. The market will turn in another 12 to 18 months, but it won’t be a crash landing – it looks to be a long, fairly smooth glide path as we go through the inevitable downturn marking the end of what has been a protracted and prosperous real estate cycle.

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Best Wishes for a Prosperous And Happy 2018 From IREM® Oregon-Columbia River Chapter No. 29 30th Annual IREM® Forecast Breakfast

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IREM 2017 Forecast Breakfast Transcript  
IREM 2017 Forecast Breakfast Transcript  
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