Real Estate Forecast 2017

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1 Real Estate Forecast 2017

2

3 Non-Renewals - Dead on Arrival Mortgage Insurance Deductibility Residential Mortgage Debt Forgiveness Residential Energy Savings Renewables Wind and Solar ObamaCare - Some Form, However

4 Soon-to-Happen Tax Changes????? Corporate Tax Cut 35 Percent to 15 Percent US Overseas Corporate Profit Repatriation Carried Interest Elimination ObamaCare 3.8% Investment Income Tax Cut Capital Gains Tax Cut Middle Class Tax Changes Some Up, Some Down

5 OECD Corporate Tax Rates Germany 42.2% 35.0% U.S. France 37.8% 34.4% France Italy 37.0% 30.0% Australia U.S. 35.0% 27.5% Italy Spain 25.0% 25.0% Spain Australia 34.0% 23.3% Japan Japan 30.0% 22.0% S Korea U.K 30.0% 20.0% U.K. Canada 29.1% 15.8% Germany S Korea 28.0% 15.0% Canada Germany 2,640 Basis Point Decline 62.6 Percent Tax Cut

6 OECD Corporate Tax Rates Germany 42.2% 35.0% U.S. France 37.8% 34.4% France Italy 37.0% 30.0% Australia U.S. 35.0% 27.5% Italy Spain 25.0% 25.0% Spain Australia 34.0% 23.3% Japan Japan 30.0% 22.0% S Korea U.K 30.0% 20.0% U.K. Canada 29.1% 15.8% Germany S Korea 28.0% 15.0% Canada Canada 1,410 Basis Point Decline 48.4 Percent Tax Cut

7 OECD Corporate Tax Rates Germany 42.2% 35.0% U.S. France 37.8% 34.4% France Italy 37.0% 30.0% Australia U.S. 35.0% 27.5% Italy Spain 25.0% 25.0% Spain Australia 34.0% 23.3% Japan Japan 30.0% 22.0% S Korea U.K 30.0% 20.0% U.K. Canada 29.1% 15.8% Germany S Korea 28.0% 15.0% Canada U.K. 1,010 Basis Point Decline 33.3 Percent Tax Cut

8 Mega Themes More Jobs Than Ever in History Retail Boom 14 Years to Run Entry Level Homebuyers Returning High-End Housing Retreating Inflation Potential -- UPS +4.9% Dec 26th Commercial Sales Cooling

9 76 Million Boomers 83 Million Millennials 19 to Million Millennials 16 to 35

10 Cleveland-Elyria MSA Jobs Jobs (Thousands) Seasonally Adjusted 1,100 1,075 1,050 1,025 1, % Prior 12 Months 8,000 Net New Jobs in Past 12-Months 950 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

11 U.S. Leisure & Hospitality Jobs Recession Millions of Jobs Seasonally-Adjusted % Past 12 Months 3.04% a Year Ago '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '

12 U.S. Net Job Gains Trailing 12-Months Jobs - Millions '11 '12 '13 '14 '15 '16

13 Undocumented Immigrant Workers National Bureau of Economic Research via Washington Post

14 Undocumented Immigrant Workers As Percentage of Total Segment Leisure & Hospitality 8.35% Construction 14.97% National Bureau of Economic Research & Bureau of Labor Statistics

15 Job-Growth - 12 Months Ending November 2016 Florida 3.22% Tennessee 1.90% Kentucky 0.82% Washington 3.06% Dist of Columbia 1.83% Arkansas 0.72% Utah 3.02% Texas 1.77% Illinois 0.72% Oregon 2.94% West Virginia 1.43% Pennsylvania 0.66% Nevada 2.74% Indiana 1.30% Iowa 0.64% Hawaii 2.45% Delaware 1.23% New Jersey 0.53% Idaho 2.38% Montana 1.17% Maine 0.44% South Dakota 2.37% Rhode Island 1.13% Vermont 0.13% California 2.32% Maryland 1.13% Connecticut 0.08% Georgia 2.28% New York 1.12% Mississippi -0.21% South Carolina 2.24% Minnesota 1.11% New Mexico -0.28% New Hampshire 2.21% Arizona 1.10% Kansas -0.28% Colorado 2.16% Wisconsin 1.05% Louisiana -0.32% Missouri 2.05% Nebraska 1.00% Alaska -0.86% Massachusetts 2.00% Virginia 0.96% Oklahoma -0.93% Michigan 1.96% Alabama 0.95% North Dakota -1.54% North Carolina 1.92% Ohio 0.91% Wyoming -3.09%

16 Job Growth 12 Months Ending November 2016 Nov Months Nov 2015 Percent Jobs-Thousands Job MSA-Division Change New Total Growth Akron 0.76% % Canton-Massillon 0.99% % Cincinnati 1.58% , % Cleveland-Elyria 0.76% 8.0 1, % Columbus 1.82% , % Dayton 1.23% % Lima 2.84% % Mansfield -0.95% (0.5) % Springfield -0.39% (0.2) % Toledo 1.95% % Weirton-Steubenville -0.92% (0.4) % Youngstown-Warren-Boardman -0.53% (1.2) %

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18 U.S. Real Retail & Food Service Sales $ Billions Seasonally Adjusted $190 $180 $170 $160 $150 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

19 Light Weight Vehicle Sales Millions Seasonally Adjusted Annual Rate '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Bureau of Economic Analysis

20 NE Ohio Home Sales Number Per Month 6,000 5,000 4,000 3,000 2,000 1,000 0 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

21 NE Ohio Existing Home Sales Average Number Per Month For Prior 12 Months +3.81% 4,500 4,000 3,500 3,000 2,500 2,000 1,500 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

22 Northeast Ohio Existing Home Prices Average Price Prior 12 Month Average $175 $ % $125 $100 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16

23 New Jobs Per New Permit Normal is 1.25 to 1.5 New Jobs Months to to to Ending Jun Net New Jobs Per New Dwelling Permit Normal is 1.25 to 1.5 New Jobs 12 Months Ending Jun Cleveland MSA

24 Fed Funds Target Rate Increases Basis Months Number Points Duration Increases Increase June June June May March February Feb Average Median Source: Federal Reserve Bank of New York

25 Current Rates Rates November 1, Year Treasury 1.81% 30-Year Residential 3.54% Month Outlook Rate Increase Impact - Basis Points Lower Quartile /3rd Median Quartile Treasury Forecasts Months Lower Quartile 2.97% 1/3rd 3.54% Median Quartile 4.12% 30-Year Residential Rates Months Lower Quartile 4.71% 1/3rd 5.28% Median Quartile 5.86% * 30-Year Residential = 10-Yr +174 bp

26 10 Year Treasury Rate Increase Mon Nov % Wed Jan % 61 Basis Points 33.3% Gain

27 Cleveland Commercial Real Estate Sales Volume $ Billions Trailing 12 Months $2.5 Q % Year-Over-Year $2.0 $1.5 $1.0 $0.5 $0.0 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 Property and Portfolio Sales $2.5 Million and Up

28 Income Approach to Valuation Value = Income Capitalization Rate

29 Commercial Real Estate Cap Rates Percent All Property Types, 4 Quarter Moving Average 10% 9% 8% 7% 6% 5% 4% Property and Portfolio Sales $2.5 Million and Up '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 US Manhattan Cleveland

30 Commercial Real Estate Cap Rates & 10-Year Treasury Percent All Property Types, End of Quarter & Quarterly Average Treasury Rates Property and Portfolio Sales $2.5 Million and Up '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 End of Quarter Cap Rates Quarterly Average

31 Correlation Coefficients - Cap Rates & T-Bonds Quarterly Data - Q Q Correlation Coefficeints Pearson's Product Spearman's Moment Rank Correlation Coefficient % % P-Value % % Probabilty 99.99% 99.99%

32 Commercial Capitalization Rates & 10 Year T-Bonds Quarterly - Q Q Year Capitalization Treasury Rate Rate Average 7.21% 3.37% Median 6.88% 3.53% Maximum 8.96% 5.42% Minimum 6.19% 1.49% Source: Real Capital Analystics, Federal Reserve

33 Commercial Real Estate Cap Rates & 10-Year Treasury Percent All Property Types, End of Quarter TTM Treasury Rate Property and Portfolio Sales $2.5 Million and Up '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 10-Year Treasury TTM Cap Rates

34 Commercial Capitalization Rates & TTM 10 Year T-Bonds Quarterly - Q Q Year Spread Capitalization Treasury Basis Rate Rate Points Average 7.21% 3.46% Median 6.88% 3.49% Maximum 8.96% 5.32% Minimum 6.19% 1.61% Source: Real Capital Analystics, Federal Reserve

35 Commercial Capitalization Rates Q Cap Rate 6.29% 10-Year T-Bond Basis Point Spread Currently 12 to 40 Basis Points Off Norm Value Compression to 6.0 Percent

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38 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 West Texas Intermediate Crude Oil Price Recession $ Per Barrel $140 $120 $100 $80 $60 $40 $20 0 $0

39 4-Jan-02 6-Dec-02 7-Nov-03 8-Oct-04 9-Sep Aug Jul Jun May Apr Mar Feb Jan Dec Nov Oct Sep-16 North American Drilling Rig Counts Number of Operating Rigs 2,500 2,000 1,500 1,

40 $550 Savings Per Driver Vs 2014

41 2017 Issues, Positives & Concerns Return of ARMS & Second Loans Faltering High-End Residential Sales Retracting Commercial Sales Inflation UPS +4.9% December 26 th Midwest Land Values Oil Sub-$60.

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