Top Five Trends of 2015 That Apartment Investors Must Track January 7, 2015

Millennials Drive Housing Demand

U.S. Population 20-34 Year Olds 20-34 Year Old Population (Mil.)

70

5-Year Growth: 1,400,000

Millennial Propensity to Rent**

66

62

68%

58

* Forecast ** 2013 American Community Survey Sources: Marcus & Millichap Research Services, U.S. Census Bureau, BLS

20 14 20 16 * 20 18 * 20 20 *

20 12

20 10

20 08

20 06

20 04

20 02

20 00

19 98

19 96

19 94

19 92

19 90

54

Rental Demand Growth

Population Growth

400

2.0%

300

1.5%

200

1.0%

100

0.5%

0

0.0%

* Estimate ** Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

20 13 20 14 * 20 15 **

20 12

20 11

20 10

20 09

20 08

20 07

20 06

20 05

-1.0%

20 04

-200

20 03

-0.5%

20 02

-100

20-34 Year Old Population Growth

Young Adult Rental Demand Growth (000s)

Growth in Rental Demand From Young Adults vs. 20-34 Year Old Population Growth

0.9 -8.7 Million

0.0 +10.6 Million*

+8.2 Million

-0.9

-1.8

* Estimate ** Forecast Sources: Marcus & Millichap Research Services, BLS

20 13 20 14 * 20 15 **

20 12

20 11

20 10

20 09

20 08

20 07

20 06

20 05

20 04

20 02

20 01

20 03

2015 Forecast: 3.1 Million

-2.7

20 00

Quarterly Job Growth (Millions)

Employment Gains Accelerating Likely to Lift Wage Growth in 2015

Young Adults Finding Work as Unemployment Tightens Unemployment Rate

Millennial Unemployment Rate**

13%

255 bps

8%

6%

Long-Term Average: 7.4% 130 bps

Rate

11%

180 bps Unemployment Rate: 5.8%

Long-Term Average: 6.1%

Long-Term Spread: 130 bps

19 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 1 20 1 1 20 2 20 13 14 *

3%

Millennial Unemployment Rate: 7.6%

* Through November ** 20-34 age cohort Sources: Marcus & Millichap Research Services, BLS

National Rank by Metro Five-Year Millennial Apartment Demand Growth* Propensity to Rent**

20-34 Year Old Population Growth

Potential Demand Growth

Dallas-Ft. Worth

71.6%

122,200

87,500

Phoenix

67.2%

102,100

68,600

Atlanta

67.2%

100,400

67,400

Houston

68.6%

89,800

61,600

Los Angeles

82.9%

73,100

60,600

Washington, D.C.

68.6%

71,600

49,100

New York

85.3%

56,400

48,100

Las Vegas

72.1%

60,800

43,800

Orlando

70.1%

61,400

43,100

Charlotte

65.3%

62,300

40,700

U.S. Total

67.7%

1,432,000

969,400

Top 10 Metros

* 2015-2019 ** Based on 2012 American Community Survey; 2013 for U.S. total Sources: Marcus & Millichap Research Services, U.S. Census Bureau

Millennials Drive Housing Demand

Housing Market May Begin Shift

Six-Year Plunge in Single-Family Construction Has Generated Strong Pent-Up Demand Household Growth

2.0 2000-2007 Oversupply: 2.0M

2008-2015* Undersupply: 3.9M

1.5

1.0

0.5

0.0

19 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 1 20 1 1 20 2 20 13 1 20 4* 15 *

Single-Family Home Completions (Mil.) and Household Growth (Mil.)

Single-Family Home Construction

* Forecast Sources: Marcus & Millichap Research Services, U.S. Census Bureau

Housing Market Flattening; Financing Availability May Boost Activity Median Home Prices

650

Condo

$225

$200

$175

20 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20 13 14 *

$150

Y-O-Y Change

+6% +1%

Single-Family and Condo

550

Y-O-Y Change

450 +2%

350

250 20 2003 0 20 4 2005 0 20 6 2007 2008 0 20 9 2010 1 20 1 2012 20 13 14 *

Single-Family

Home Sales (000s)

Median Price (000s)

$250

Existing Home Sales

* Through November Sources: Marcus & Millichap Research Services, National Association of Realtors

Median Home Payment Driven by Interest Rates Gap With Apartment Rents Likely to Widen in 2015 $1,800

Home Payment

Apartment Rent

Monthly Payment

$1,500

$1,200

$596

$96

-$138

$900

20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 20 * 15 **

$600

* Estimate ** Forecast; assumes 0.5% rise in mortgage rates Mortgage payments based on quarterly median home price for a 30-year fixed rate conventional mortgage, 90% LTV, and 1.5% taxes and insurance Sources: Marcus & Millichap Research Services, MPF Research, Freddie Mac, National Association of Realtors

Lower Risk Markets Based on Home Mortgage Payment and Rent Gap Least Affordable Markets

3Q 2014 Monthly Home Payment

3Q 2014 Average Rent

Affordability Gap

Manhattan*

$7,300

$3,261

$4,039

San Francisco

$5,857

$2,690

$3,167

San Jose

$4,919

$2,271

$2,648

Oakland

$4,015

$1,787

$2,228

Orange County

$3,877

$1,699

$2,178

San Diego

$2,825

$1,532

$1,293

Los Angeles

$2,484

$1,738

$746

Seattle

$2,000

$1,263

$737

Washington, D.C.

$2,173

$1,576

$597

Portland

$1,624

$1,035

$589

U.S. Average

$1,176

$1,166

$10

* Includes condominiums Mortgage payments based on 3Q 2014 median home price for a 30-year fixed rate conventional mortgage, 90% LTV, and 1.5% taxes and insurance Sources: Marcus & Millichap Research Services, MPF Research, Freddie Mac, National Association of Realtors, Douglas Elliman Real Estate

Higher Risk Markets Based on Home Mortgage Payment and Rent Gap Most Affordable Markets

3Q 2014 Monthly Home Payment

3Q 2014 Average Rent

Affordability Gap

Detroit

$482

$828

-$346

Cleveland

$686

$807

-$121

$1,147

$1,258

-$111

Tampa

$863

$931

-$68

Cincinnati

$769

$812

-$43

Atlanta

$887

$915

-$28

St. Louis

$782

$801

-$19

Indianapolis

$821

$752

$69

Columbus

$866

$785

$81

Kansas City

$887

$802

$85

U.S. Average

$1,176

$1,166

$10

Chicago

Mortgage payments based on 3Q 2014 median home price for a 30-year fixed rate conventional mortgage, 90% LTV, and 1.5% taxes and insurance Sources: Marcus & Millichap Research Services, MPF Research, Freddie Mac, National Association of Realtors

Housing Market May Begin Shift

Interest Rates Could Emerge as Major Factor

$160

$120

$80 Long-Term Average: $53.17

$40

* Through December Oil prices for West Texas Intermediate crude Sources: Marcus & Millichap Research Services, Energy Information Administration, BLS

20 12 20 14 *

20 10

20 08

20 06

20 04

20 02

20 00

19 98

19 96

19 94

19 92

19 90

19 88

$0

19 86

Price per Barrel (Nov. 2014 Dollars)

Inflation Adjusted Crude Oil Prices In Alignment with Long-Term Average

10%

5%

0%

-5%

* Estimate ** Forecast Sources: Marcus & Millichap Research Services, BEA

20 13 20 14 * 20 15 **

20 12

20 11

20 10

20 09

20 08

20 07

20 06

20 05

20 04

20 03

20 02

20 01

-10% 20 00

millions) Percent Change Annualized Starts (inQuarterly Industrial

U.S. GDP Growth Accelerates Numerous Drivers in Unison

Core Inflation vs. 10-Year Treasury 4%

Core Inflation 10-Year Avg. Core Inflation

10-Year Treasury 10-Year Avg. 10-Year Treasury 3.35%

2%

1.93%

1%

4.07%

10-Year Treasury:

6.78%

Core Inflation:

1.93%

10-Year Treasury:

3.35%

40-Year Average

10-Year Average

* Through November Sources: Marcus & Millichap Research Services, Federal Reserve, BLS

20 13

20 12

20 11

0% 20 10

Core Inflation:

20 14 *

Rate

3%

$0.0

0.0%

20 14

*

1.5%

20 13

$1.2

20 12

3.0%

20 11

$2.4

20 10

4.5%

20 09

$3.6

20 08

6.0%

20 07

$4.8

TIPS/TIPS Inflation Compensation/Agencies/Bills MBS Notes & Bonds 10-Year Treasury

* Through December 24 Sources: Marcus & Millichap Research Services, Federal Reserve

10-Year Treasury

Fed Holdings (Trillions)

Fed Holdings and 10-Year Treasury Rates

Interest Rates Could Emerge as Major Factor

Significant Construction Remains a Risk Factor

Apartment Vacancy vs. Construction Vacancy Rate 10%

200

8%

150

6%

100

4%

50

2%

0

0%

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 * **

250

* Estimate ** Forecast Sources: Marcus & Millichap Research Services, MPF Research

Average Vacancy Rate

Completions (000s of Units)

Completions

Permit Issuance/Unit Completions (000s)

0 Dallas-Ft. Worth Houston New York Seattle Washington, D.C. Los Angeles Austin Phoenix Denver Boston Atlanta San Antonio Chicago Northern NJ Orlando Minneapolis Portland Miami Charlotte San Francisco Ft. Lauderdale Orange County Philadelphia San Jose Indianapolis Kansas City San Diego Salt Lake City West Palm Beach Columbus Jacksonville Baltimore Milwaukee Pittsburgh Cincinnati Louisville Las Vegas St. Louis Oakland Detroit Cleveland New Haven Inland Empire Sacramento

2015 Multifamily Permit Issuance vs. Number of Completions Unit Completions Multifamily Permit Issuance

32

24

16

8

* Forecast Sources: Marcus & Millichap Research Services, MPF Research, U.S. Census Bureau

Apartment Construction – Modest Risk Ranking 2014/2015 Completions and Job Growth Per Unit 2014* & 2015** Completions

2014* & 2015** Job Growth

Jobs Per Unit

2015 Vacancy Rate**

Inland Empire

2,600

64,000

24.6

4.0%

Las Vegas

2,400

52,000

21.7

6.4%

Sacramento

1,400

30,000

21.4

3.2%

Oakland

2,600

53,900

20.7

2.3%

St. Louis

2,600

50,000

19.2

6.0%

Detroit

1,500

25,000

16.7

4.1%

Cleveland

2,000

28,500

14.3

3.8%

Milwaukee

3,300

38,000

11.5

4.3%

Salt Lake City

5,200

58,000

11.2

4.4%

Los Angeles

18,700

199,000

10.6

3.0%

U.S. Total

448,000

6,000,000

13.4

4.8%

Top 10 Metros

* Estimate ** Forecast Sources: Marcus & Millichap Research Services, MPF Research

Apartment Construction – Elevated Risk Ranking 2014/2015 Completions and Job Growth Per Unit Bottom 10 Metros

2014* & 2015** Completions

2014* & 2015** Job Growth

Jobs Per Unit

2015 Vacancy Rate**

Northern NJ

12,300

28,000

2.3

3.4%

Washington, D.C.

29,900

80,500

2.7

5.2%

Charlotte

12,400

37,000

3.0

5.4%

Austin

23,000

69,200

3.0

4.3%

San Antonio

13,300

44,700

3.4

7.3%

Kansas City

5,200

17,500

3.4

5.3%

Columbus

6,200

24,400

3.9

4.0%

Seattle

22,000

105,000

4.8

4.0%

Denver

16,800

83,000

4.9

4.3%

Boston

15,000

83,200

5.5

4.0%

U.S. Total

448,000

6,000,000

13.4

4.8%

* Estimate ** Forecast Sources: Marcus & Millichap Research Services, MPF Research

Significant Construction Remains a Risk Factor

Cap Rates Compress at Macro Level Flat Trends for Some Markets

U.S. Apartment Price and Cap Rate Trends Cap Rate

* Trailing 12-months through 3Q Includes sales $1 million and greater Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc.

20 13 20 14 *

20 12

20 11

4% 20 10

$25 20 09

5%

20 08

$50

20 07

6%

20 06

$75

20 05

7%

20 04

$100

20 03

8%

20 02

$125

Average Cap Rate

Average Price per Unit (000s)

Average Price

Primary Markets’ Share of Apartment Dollar Volume $15M+ Trending Downward Percent in Primary Markets** 70%

$15

60%

$10

50%

$5

40%

$0

30%

20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10 20 11 20 12 20 13 20 14 *

$20

* Through 2Q ** Trailing 12-month average Includes sales $15 million and greater Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc.

Percent of Dollar Volume

Dollar Volume (Billions)

Primary Market Dollar Volume

Preferred

Primary

06

08

Repricing of Risk by Quality Reflected in Apartment Cap Rate Trends by Market Secondary

Tertiary

Average Cap Rate

9% 8% 7% 6% 5%

* Through 3Q Includes sales $1 million and greater Preferred Markets Include: NY, DC, BOS, SD, LA, OC, SJ, SF, SEA Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc.

14 *

13

12

11

10

09

07

05

04

4%

U.S. Apartment Cap Rate Trends Average Cap Rates vs. 10-Year Treasury Apartment Cap Rate

10-Year Treasury Rate Cap Rate LongTerm Avg.

Average Cap Rate

10% 8%

380 bps

390 bps 430 bps 390 bps

6%

100 bps

450 bps

4% 2%

350 bps 10-Yr Treasury Long-Term Avg.

19 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 1 20 1 1 20 2 20 13 14 *

0%

* Through December 31 Includes sales $1 million and greater Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics, Federal Reserve

National Apartment Rank by Metro Average Cap Rate Change Since 2010 Top 10 Metros

2010 Cap Rate

3Q 2014* Cap Rate

Basis Point Change

Detroit

10.9%

8.4%

-250

Orlando

8.8%

6.4%

-240

Salt Lake City

7.6%

5.4%

-220

Minneapolis

8.5%

6.5%

-200

Miami

8.4%

6.5%

-190

Milwaukee

9.5%

7.6%

-190

New York

6.6%

4.8%

-180

Atlanta

8.3%

6.6%

-170

Austin

7.7%

6.1%

-160

Cincinnati

9.4%

7.8%

-160

U.S. Average

7.2%

5.7%

-150

* Trailing 12-months through 3Q 2014 Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics

2015 National Apartment Report Now Available www.MarcusMillichap.com

Top Five Trends of 2015 That Apartment Investors Must Track January 7, 2015