Macro Trends

• US CRE is estimated to be a $20.7 trillion market • Institutional investors have been steadily increasing their allocation to real estate, as high as 13% of total portfolio. • Same trend for individual investors: According to CNBC, 75% of high-net-worth investors between the age of 21-42 with at least $3M to invest expect above average returns and are increasing allocations to real estate. • Cash flowing assets offer tax efficient wealth creation in a strong currency like $USD • Real estate provides long term inflation hedge • Real estate reduces exposure to volatile stock market investments

Current US Market Conditions
Coming out of an unprecedented dislocation caused by the pandemic, the overarching theme of 2022
has been persistent high inflation and Federal Reserve’s policy changes in response to it.

High Inflation / Recession Fears
• Aggressive FED policy of increasing rates is causing fears of recession in 2023
• Higher interest rates result in higher borrowing costs, lower leverage and tighter lending terms
• This means lower return on investment and pressure on asset valuations

Cap Rates
• Going-in cap rate expansion started happening and will continue
• Investors are underwriting higher exit cap rates and less aggressive leasing

Real Estate Investment Volume
• Bid – Ask gap between buyers and sellers may take 6-12 months to narrow.
• Investment volume has decreased, and institutional capital is waiting for the market to stabilize.

Loan Maturities
According to Trepp, $53 billion of CMBS loans with debt coverage ratio < 1.25x are maturing in 2023
• $17 billion of these loans belong to properties with <80% occupancy
• Operating margins are down even for high growth markets and asset classes due to expense inflation
• Rent growth is plateauing and likely to go back to normal levels in 2024
• This is likely to create distress in the market

US Multifamily Rental Market
As the largest investment category, it’s important to track trends for US multifamily
• Fundamentals are strong
• Home ownership is expensive for many Americans: Rent vs. Own analysis indicates Rent
• After the pandemic, rents have grown exponentially, as high as 20%+ in major markets
• Population growth, life-style changes and “work from home” trend pushed Sunbelt and Southeast markets into new records for rent growth
• Due to the “lower barrier to entry” aspect, construction activity and delivery of new units have been robust, thus normalizing rent growth assumptions for these markets
• In prime markets like New York inflation related rent growth may be plateauing, but fundamentals remain strong due to supply constraints
• Regulation (Tenant act in 2019, expired tax abatement program and red tape for government funding for affordable housing), high construction and land costs are constraining factors
• Demand always outpaces supply in New York due to job creation and population growth.