Transcript Macro Economic Assumptions

Lancaster Commercial & Industrial
MARKET OVERVIEW
February 10, 2016
2016 Macro Economic Assumptions
Market Correction or Recession
GDP (2015 Average for 3 Quarters)
GDP (4th Quarter 2015 Estimated)
Total GDP
Consumer Price Index
Unemployment
• Nationally
• State
• Locally
10-Year Treasury (12/31/15)
Credit Environment
2016 Forecast
2015 Actual
2.17%
.70%
1.80%
1.75% to 2.00%
.70%
.75% to 1.00%
January - December
5.7% to 5.0%
5.1% to 5.0%
4.7% to 3.4%
5.0%
5.0%
3.5%
2.27%
2.25% to 2.50%
Very competitive,
new development
Ample availability, competitive
rates, tightening underwriting
National Drivers
 International instability.
 US “Safe Harbor” attracting international investment real estate and

treasuries.
Data shows challenging environment for global growth.
 Cheap oil.
 60K jobs lost in the US in 2015
 Every $.01/gallon drop at pump increases consumer spending by $1B
annually.
 Corporate profits at all-time high.
 Consumer confidence is highest since 2008.
 Tightening in labor markets, and increased wage pressure.
National Real Estate Overview
 Apartments: Pricing may have peaked in some markets; strong demand for
infill/mixed use developments.
 Industrial: Strongest demand from institutional lenders/investors; positive
absorption of 52 million SF in 2015.
 Hotels: RevPAR growing at twice the rate of GDP; growth in supply expected
to outpace growth in demand, diminishing the rate of future growth.
 CBD Office: Occupancy strongest in 24/7 gateway cities; rent growth 300 basis
points over suburban rent growth; asset class at historically low cap rates.
 Suburban Office: Continues a slow, but accelerating, road to recovery.
National Real Estate Overview
Cap Rate Summary
Apartments
Industrial
Suburban Hotels
Flex
CBD Office
Suburban Office
Neighborhood/Community Centers
Range
3.5%-8%
3%-7%
7%-10.5%
6.5%-9%
3.5%-8%
4.25%-9%
4.5%-9.5%
2015 Average
5.35%
5.48%
7.15%
7.15%
5.68%
6.36%
6.38%
Change
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With exception of multi-family in certain market, supply growth kept in check due to limited supply of
construction financing.
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With the exception of retail, occupancy rates are greater then 20 year average for each asset class.

Equity is abundant, looking for “Core” and “Core Plus” and “Value Added Opportunities.”
Source of CAP Rates is Price Waterhouse Cooper
Industrial
Not Sexy But Very Attractive!
 Favored asset class of lenders/investors.
 Vacancy fell to 8.5% down 40 basis points.
 New development at 40 million SF
 Absorption was 52 million SF
 Effective rents increasing 2.9% on average. 5.4% on new product.
 Robust development pipeline for big box warehouse.
Industrial Markets
Drivers Here For The Long Haul
 Economy of Consumption.
 Consumption expenditure as a percent of GDP has increased

from 60% in 1960 to 70% currently.
Between 2010 and 2015, retail sales grew at average rate of
2.44%, GDP grew at average rate of 1.78%.
 Technology (e-commerce) has been a positive “disruptive force” for
this asset class.
 Demand for “Final Mile” buildings has created a need for well
positioned warehouse space ranging from 30,000 SF to 75,000 SF.
Industrial Real Estate Cycle
Third Quarter 2015
Phase II - Expansion
Phase III - Hypersupply
11
National 2015
7
6
National 2014
5
1
8
Lancaster 2015
Philadelphia 2015
Phase I - Recovery
1
Phase IV - Recession
Source: Dividend Capital Research Cycle Monitor – Real Estate Market Cycles
Suburban Office
Steady As We Go
 Continues slow, but accelerating recovery.
 Office employment at pre-recession levels.
 Vacancy fell 50 basis points to 15.7%.
 New completion 16 million SF.
 Absorption was 32 million SF.
 Effective rents grew by 3.5%, up .09% from 2014.
 Rents have grown for 21 consecutive quarters.
 Investors\developers\tenants focusing on 18/7 cities.
 Second least favorite asset class among lenders/investors.
Office Drivers
For 2016 And Beyond
 TAMI (technology, advertising, media, information) replacing FIRE (finance,
insurance, real estate) as major demand generators.
 Employers are focused on “increasing productivity” versus “decreasing cost”.
 Talent acquisition and retention are key drives to location and design.
 Suburban (“urban” infill markets) gaining favor with employees/employers.
 Affordable housing, main street retail, walkability, access to

transportation.
Hip, cool, open spaces…not just for start ups anymore.
 Tenants prefer a variety of open areas, private and semi-private areas.
Office Real Estate Cycle
Third Quarter 2015
Phase II - Expansion
Phase III - Hypersupply
11
6
National 2014
1
3
National 2015
Philadelphia 2015
Lancaster 2015
Phase I - Recovery
1
Phase IV - Recession
Source: Dividend Capital Research Cycle Monitor – Real Estate Market Cycles
Apartments
Deja Vu Or New Paradigm?
 2015 Homeownership Rate:
 Nationally: 63.7%; 70 bps decline Y-O-Y.
 Northeast: 61.6%; 30 bps decline Y-O-Y.
 National Average 1960 to 1999: 64.3%.
 National Average 2000 to 2015: 67.0%.
 Millennials: Where will they land??

46% live in city, 9% want to move to suburbs today.
 24% live in suburbs, 5% want to move to city today.
Sources: NMHC, MPF Research, ULI
Multi-Family
Cyclical Or Perpetual?
 Perfect Future?
Suburban (“urban”) Infill.
 20-30 minute drive to city.
 Mixed use, walkable to office/retail.
 Close to mass transit.
 Access to good school.
 Despite glut of new supply, national vacancy rate was lowest
since 2001.

 Y-O-Y Effective Rent Growth, 5.6% nationally, 3.8% northeast.
Multi-Family Real Estate Cycle
Third Quarter 2015
Phase II - Expansion
Phase III - Hypersupply
11
9
National 2015
Philadelphia 2015
Lancaster 2014
National 2014
6
1
1
Phase I - Recovery
Phase IV - Recession
Source: Dividend Capital Research Cycle Monitor – Real Estate Market Cycles
Retail
Shoppers Seek Experiences Over Stuff
 Grocery Anchored Centers – remain the preferred asset class.
 Rent Growth in 2015 – 2.7%, up from 2.0% in 2014.
 National Occupancy – all centers - up 80 basis points to 93.5%.
Source-ICSC/NCREIF – [September 2014-September 2015]
 Limited development opportunities in 2016, as demand lags long-run
averages.
Retail Trends For 2016 And Beyond
 Retail is top performing asset class of all asset classes 2 of last 3
years.
 Tenant mix continues to evolve. Restaurants and entertainment are
key. It’s all lifestyle oriented.
 Success at the ends of the barbell. “Value” and “luxury” segments
perform well, stores catering to mass market continue to struggle.
 Bricks and mortar retailers and on-line retailers are converging on
an omni-channel distribution platform.
 E-commerce share is just about 9%.
Source-PWC / ULI - Emerging Trends in Real Estate 2016
Retail Real Estate Cycle
Third Quarter 2015
Phase II - Expansion
Phase III - Hypersupply
11
National 2015
Lancaster 2015
6
National 2014
4
1
9
Philadelphia 2015
Phase I - Recovery
1
Phase IV - Recession
Source: Dividend Capital Research Cycle Monitor – Real Estate Market Cycles
2016 Underwriting Criteria for
Investment-Grade Real Estate
LTV
Vacancy
Cap
Rate
Residential
70-80%
5-7%
5-7%
Industrial
65-75%
10-15% 6.75-9%
2-2.30%
2.15% 4.15-4.45%
Office Suburban
60-75%
10-15%
7.5-9%
2-2.30%
2.15%
4.15-4.45%
Retail Anchored
65-75%
7-10%
7-7.5%
2-2.5%
2.15%
4.15-4.65%
Spread
10-Year
Treasury
1.90-2.25% 2.15%
All In
Rate
4.05-4.40%
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Research – Primary Research
 Secondary sources (CoStar, MLS, C&I Council)
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Industrial – Institutional-grade, for lease
 Over 10,000 SF in size
 Lancaster County market
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Office – Institutional-grade, for lease
 Over 5,000 SF in size
 Lancaster City, Manheim Township, East Hempfield, East Lampeter
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Retail – Statistics are provided by LCAR/C&I Council
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Owner occupied properties are excluded (e.g. Nordstrom and Urban Outfitters)
Major Office Changes

Class “A” performance impacted by McNeil Pharmaceutical
downsizing in Greenfield.

Class “B” had strong performance with large leases signed
at Burle, Liberty Place and 53 West James Street.

No new construction currently active.

Moderate volume of activity – 22 buildings had activity.
Lancaster Market Comparison
2012 – 2015
16-Year
Average
Class “A” Space
Absorption
Vacancy
Amount Constructed
Available Supply
2012
2013
2014
2015
40,010
5.9%
0
98,356
-146,368
13.6%
0
244,724
-12,320
13.9%
0
257,044
-10,447
14.8%
0
267,491
13,484
Class “B” Space
Absorption
Vacancy
Amount Constructed
Available Supply
22,414
20.2%
0
513,538
10,395
19.3%
0
503,143
6,753
19.0%
9,700
506,090
86,396
15.6%
0
419,694
-2,333
Business Center
Absorption
Vacancy
Amount Constructed
Available Supply
2,563
19.7%
0
240,404
58,165
15.7%
0
182,239
14,594
14.2%
0
167,645
18,690
12.6%
0
148,955
13,673
27,013
8,685
19,820
Major Industrial Changes

Gateway Business Park – Flex completed 105,432 SF – 60,000 SF
available.

499 Running Pump Road – 45,000 SF leased.
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Two new owner occupied warehouses under construction in Mount Joy
and East Hempfield. 165,000 SF speculative warehouse in Conewago
under construction.

Over 1,000,000 SF in proposed new construction being marketed.

Strong demand in 2015 with 18 properties having positive absorption.
Lancaster Market Comparison
2012 – 2015
2012
Industrial Space
Absorption
Vacancy
Amount Constructed
Available Supply
16-Year
Average
2013
2014
2015
-16,430
59,719
10.75%
10.33%
125,000
0
1,525,167 1,465,448
549,424
6.04%
0
916,024
37,011
5.73%
0
879,013
87,654
98,694
Flex Space
Absorption
Vacancy
Amount Constructed
Available Supply
11,370
8.4%
0
64,999
-22,352
11.3%
0
87,351
-2,345
11.6%
0
89,696
77,172
12.7%
105,432
117,956
15,050
Retail Space
Absorption
Vacancy
Amount Constructed
Available Supply
-41,135
8.9%
0
546,242
48,485
8.1%
0
497,757
56,464
7.35%
0
441,293
38,662
6.7%
0
402,631
61,381
22,203
67,121
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2007 – 2015 increase of 1,536 jobs (.6%).

Unemployment.
 November 2014 – 10,800 (4.1%).
 November 2015 – 10,400 (3.8%).

2015 Creation of 1,899 job (private sector).
 Retail positions -47.
 Office positions +377.
 Industrial positions -1,240.
 Health care +771.
 Accommodations & food +1,351.
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