EFTA01388632

The supply of private debt seems relatively secure. Bank regulators have expressed some concerns regarding banks' exposure to CRE loans (the Office of the Comptroller of the Currency has flagged a loosening of underwriting standards).17 Perhaps responding to such concerns, the Federal Reserve's second quarter 2016 loan officer survey indicated that banks are tightening lending standards on commercial mortgages, particularly in the multifamily space.18 Nevertheless, attractive margins on mortgage loans (4%-5%) relative to deposit rates (0%) create a powerful incentive for banks to continue to grow their portfolios. la' 3.3 Commercial Real Estate Total Returns The commercial real estate market cooled at the beginning of 2016 amid a turbulent financial environment. Still, the asset class performed well on both a historical and a relative basis. While NPI total returns of 10.6% (trailing four quarters) in the second quarter 2016 were down from 13.3% in 2015, they were in line with their 5-year average (11.9%) and well above their 10-year average (7.6%). Moreover, they compared favorably with returns on stocks (4.0%) and bonds (6.7%) over the year.20 The near-term outlook for commercial real estate has improved somewhat over the past six months. While the economic environment is fluid, recent data suggests that growth has picked up from its winter lull. Real estate fundamentals are robust and NOls are growing vigorously, even as corporate earnings sag. The financial stress that gripped markets earlier this year resurfaced briefly after the UK's Brexit vote, but has since receded. And interest rates have dropped to historic lows around the world, raising the potential for increased debt and equity flows, both domestic and foreign, into U.S. real estate. We expect that total returns will moderate over the next five years but remain quite healthy on a relative basis (see Exhibit 6). Income returns will be weaker than in the past. reflecting today's lower cap rates. But NOI growth is expected to be much stronger, underpinned by low vacancy rates, persistent demand, and moderate conslruction. Eitstit 6. CRE Total Returns 14% 2% 0% -2% 8 0% -01% 1981-2010 12.2% 4 4% 2011-2015 • Income Return Cap Rate She « NOI Growth • Total 2.6% -1.9% Forecast (2016-2020) &Nate ;CREiF (iSbav): Can) MM' Paaroinnosnt gonna's!) alto as of .7.10. Past rent ormK6 n iNt.a. I fon, fauna tto nionnot iN W 9'. MIb tkOnoad '10ftlee of Mrs CanOr ogee of the Carron.... 'Sesrannura RIM Perwmtve: July 2016. Fetfeal Reserve Senior Loan OngeoS Survey. Dme es 01 June 2016 1' Real Capflal Anafyhos. Dela as of March 2016. 2.2 NCREIF. Onto as of March 2016 10 U.S. Real Estate Strategic Outlook I September 2016 CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0092296 CONFIDENTIAL SDNY_GM_00238480 EFTA01388632