My 1 ATV/\killul Anny iguan- [Ir II I ?ff??i i; I Flt. Hy -?gm i: . A 1! mw~ liking Commercial Market Report Executive Summary THIRD QUARTER ���� Dear Clients and Colleagues, Westchester’s real estate markets are in good health and enjoying the support of a continued economic expansion. Technology, health care and communication industries, powerful engines of growth of today’s economy, are broadening their presence in the County. These businesses are finding a highly educated workforce to recruit and affluent consumers to service. Small business confidence remains elevated which bodes well for smaller properties -- an important component of Westchester’s real estate stock. Multifamily residential demand is robust nationwide. Completions are meeting demand relieving market tightness. Yardi Matrix and Bisnow LLC.’s National Newsletter report that national multifamily rents were flat during the third quarter. In Westchester, apartment demand continues to grow. Household interest remains robust although year-to-date net absorption is lagging compared to this time last year. Effective rent per unit climbed 3% from the fourth quarter of 2016 and 0.4% from prior quarter, according to Costar data. Developers are acquiring sites near transportation hubs which renters prefer. Retailers and restaurants cluster around these hubs creating a concentration of amenities that attract consumers of all ages and strengthens real estate demand. As construction costs soar and skilled labor shortages accentuate, supply of new multifamily apartments is likely to slow. Lower deliveries are likely to limit competition and support occupancy and pricing over the next few quarters. Warehouse space demand continues to exceed supply in the Westchester areas south of I-287. The industrial sector has had strong momentum on the back of new retail consumption patterns that require direct fulfillment from distribution centers. At quarter-end Westchester’s industrial and flex properties had achieved price gains of 6.8% versus a year ago. Despite secular changes that are eroding demand for traditional store-based retailers, other users of retail space are emerging. Consumption of services that enhance broadly defined wellness are gaining share of consumer’ disposable income. Examples are niche fitness offerings, urgent care establishments and specialized tutoring services. In addition, many physician practices are now seeking the exposure, consumer traffic and visibility provided by store-front retail formats. Westchester is benefiting from this trend. During the quarter, retail space experienced a modest improvement in occupancy, up 0.2%, and a more meaningful increase in rent, up over 1%. Shifts in retail preferences are occurring rapidly and creating opportunities to re-purpose assets with the cost of transformation being shared by all market participants that ultimately benefit: owners, tenants and consumers. Declining office space requirements - partly a result of business consolidations and workplace sharing - have impacted office demand across regions. However, Westchester office occupancy increased 0.7% during the quarter helped by a very active leasing by a variety of large medical service tenants. Average pricing for office space modestly weakened during the quarter. In summary, Westchester real estate fundamentals are making solid gains. However, despite a healthy economy, investment sales are only 36% of the third quarter of 2016 level. Buyers and sellers continue to struggle to find common pricing ground that can lead to a transaction. Real estate income drivers are changing and these changes have increased investors’ risk perception. However, we continue to think economic growth will encourage buyers to be more optimistic about real estate income prospects. At the same time, changes in the interest rate environment may act to motivate some owners to capture today’s robust pricing. Houlihan Lawrence Commercial Group is ready to help you evaluate market fundamentals and provide our professional advice as you consider present needs and the future of your real estate assets. THE COMMERCIAL MARKET REPORT IS PREPARED BY Teresa Marziano Real Estate Salesperson Houlihan Lawrence Commercial Group 800 Westchester Ave., Suite 402-S Rye Brook, NY 10573 Westchester’s Real Estate Market Benefits f rom Low Unemployment WESTCHESTER COUNTY EMPLOYMENT S TAT I S T I C S N OT S E A S O N A L LY A DJ U S T E D Westchester’s unemployment rate is near the lowest levels since 2009. Despite challenges faced by some traditional industries, such as retail, innovation is gradually reallocating economic resources. For example, new Health and Personal Care concepts are creating retail jobs while traditional soft goods retailers shrink. Unemployment Rate in Westchester County, NY PERCENT 10 8 6 4 2002 2004 2006 2008 2010 2012 2014 2016 2017 THOUSANDS OF PERSONS YEAR All Employees: Retail Trade: Department Stores in Orange-RocklandWestchester, NY 12 10 8 2002 2004 2006 2008 2010 2012 2014 2016 2017 YEAR Sources: COSTAR, US. Bureau of Labor Statistics, Unemployment Rate in Westchester County, NY. Retail Trade Employees Data is Seasonally Adjusted. All data retrieved from FRED, Federal Reserve Bank of St. Louis; October 2017. HLCOMMERCI A LGROUP.COM 3 Small Business Optimism Rebounds in Q3 Confidence Evidenced by New Investments Planned SMALL BUSINESS OPTIMISM INDEX OCTOBER ���� INDEX 120 100 2002 2004 2006 2008 2010 2012 2014 2016 2017 YEAR Sources: NFIB Research Foundation, NFIB-sbet.org, COSTAR, US. Bureau of Labor Statistics, Unemployment Rate in Westchester County, NY. Retail Trade Employees Data is Seasonally Adjusted. All data retrieved from FRED, Federal Reserve Bank of St. Louis; October 2017. HLCOMMERCI A LGROUP.COM 4 Brisk Multifamily Demand and Robust Pricing Persist SOUTH OF I-��� Affordability and lifestyle flexibility have kept apartments as an attractive choice for new households in Westchester. Year-to-date absorption of newly delivered apartment units (South of I-287) has weakened from a record breaking 2016 level of 961 units to a still strong 730 or 1% of stock. Positive trends in Multifamily markets are also a reflection of the overall recovery in Westchester housing markets. W E S TC H E S T E R M U LT I FA M I LY Asking Rent Per Unit Vacancy Percentage ASKING RENT PER UNIT 3.0 $1,850 2.5 $1,800 2.0 $1,750 1.5 1.0 $1,700 0.5 $1,650 0.0 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 VACANCY PERCENTAGE 3.5 $1,900 Q3 2017 A L L -T R A N S A C T I O N S H O U S E P R I C E I N D E X F O R W E S T C H E S T E R C O U N T Y, N Y INDEX 200 150 2002 2004 2006 2008 2010 2012 2014 2016 YEAR Sources: COSTAR, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; October 2017 HLCOMMERCI A LGROUP.COM 5 Industrial/Flex Properties Show Continued Demand SOUTH OF I-��� Available data for Industrial/Flex properties masks the strength observed on the ground. Year-to-date Q3, Costar reports a modest negative net absorption equivalent to 0.2% of stock. Price has remained robust across the board, specially for newer properties and during the quarter rents increased by 3.8% driven by sub-let leases, according to Costar data. WESTCHESTER INDUSTRIAL/FLEX Vacancy Percentage All Service Type Rent overall VACANCY PERCENTAGE 7 $12 6 $10 5 $8 4 $6 3 $4 2 1 0 $2 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 0 ALL SERVICE TYPE RENT $14 8 Sources: COSTAR, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; October 2017 HLCOMMERCI A LGROUP.COM 6 Westchester Office and Retail Markets Have Positive Absorption in Q3 SOUTH OF I-��� Year to-date net absorption of office space has been positive in every quarter. Some price concessions appear to have emerged in Q3 as landlords seek better occupancy. Retail properties have also experienced positive absorption in 2017 although at more modest levels in Q3. Landlords are trying to capture improved pricing as vacancies stabilize. Vacancy Percentage Office Gross Rent Overall VACANCY PERCENTAGE 16 $27 14 $26 12 10 $25 8 $24 6 4 $23 2 0 $22 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 W E S TC H E S T E R R E TA I L – P R I C I N G M O D E S T LY R E B O U N D S Q1 2017 Q2 2017 Vacancy Percentage Q3 2017 OFFICE GROSS RENT OVERALL WESTCHESTER OFFICE PROPERTIES SHOW PRICE FLEXIBILITY AND GAIN OCCUPANCY All Service Type Rent Overall $29.0 5 $28.5 4 $28.0 3 $27.5 2 $27.0 HLCOMMERCI A LGROUP.COM 7 VACANCY PERCENTAGE Q3 2017 ALL SERVICE TYPE RENT OVERALL 6 $26.5 1 0 $26.0 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Sources: COSTAR, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; October 2017 Weaker Investment Activity in the Third Quarter 2017 SOUTH OF I-��� Investment sale data is less reliable than other fundamental information due to delays in reporting sale transaction details. Data available as of beginning of Q4 suggests that investment activity has weakened during the year. The gap between buyer and seller assessment of risk and expectations of returns has become more pronounced as the year progresses impacting investment activity. Low compensation for risk embedded in today’s real estate pricing, changing interest rate environment, uncertainty about possible changes in the tax code, are some of the reasons cited behind investor hesitation to engage and complete transactions. Dollar Volume (in millions) Median Price Per Building SF $200 $400 $175 $350 $150 $300 $125 $250 $100 $200 $75 $150 $100 $50 $50 $25 0 0 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 MEDIAN PRICE PER BUILDING SF DOLLAR VOLUME (IN MILLIONS) WESTCHESTER INVESTMENT SALES Sources: COSTAR, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; October 2017 HLCOMMERCI A LGROUP.COM 8