Lancaster Commercial & Industrial MARKET OVERVIEW February 10, 2016

2016 Macro Economic Assumptions 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 Market Correction or Recession 2015 Actual 2.17%.70% 1.80%.70% January - December 5.7% to 5.0% 5.1% to 5.0% 4.7% to 3.4% 2.27% Very competitive, new development 2016 Forecast 1.75% to 2.00%.75% to 1.00% 5.0% 3.5% 2.25% to 2.50% 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  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  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 Range2015 AverageChange Apartments3.5%-8%5.35%  Industrial 3%-7%5.48%  Suburban Hotels 7%-10.5%7.15%  Flex6.5%-9%7.15%  CBD Office 3.5%-8%5.68%  Suburban Office 4.25%-9%6.36%  Neighborhood/Community Centers 4.5%-9.5% 6.38%   With exception of multi-family in certain market, supply growth kept in check due to limited supply of construction financing.  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.

Phase II - Expansion Phase IV - Recession Phase III - Hypersupply Phase I - Recovery 1 1 Industrial Real Estate Cycle Third Quarter National 2014 Lancaster National 2015 Source: Dividend Capital Research Cycle Monitor – Real Estate Market Cycles 8 Philadelphia 2015

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  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 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.

Phase II - Expansion Phase IV - Recession Phase III - Hypersupply Phase I - Recovery 1 1 Office Real Estate Cycle Third Quarter National Source: Dividend Capital Research Cycle Monitor – Real Estate Market Cycles National 2015 Philadelphia 2015 Lancaster 2015

 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. Apartments Deja Vu Or New Paradigm? Sources: NMHC, MPF Research, ULI

Multi-Family Cyclical Or Perpetual?  Perfect Future?  Suburban (“urban”) Infill.  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  Y-O-Y Effective Rent Growth, 5.6% nationally, 3.8% northeast.

Phase II - Expansion Phase IV - Recession Phase III - Hypersupply Phase I - Recovery 1 1 Multi-Family Real Estate Cycle Third Quarter National Source: Dividend Capital Research Cycle Monitor – Real Estate Market Cycles National 2015 Philadelphia 2015 Lancaster

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  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

Phase II - Expansion Phase IV - Recession Phase III - Hypersupply Phase I - Recovery 1 1 Retail Real Estate Cycle Third Quarter National Source: Dividend Capital Research Cycle Monitor – Real Estate Market Cycles Philadelphia Lancaster 2015 National 2015

Cap10-YearAll In LTVVacancyRateSpreadTreasuryRate Residential70-80%5-7%5-7% %2.15% % Industrial65-75%10-15%6.75-9%2-2.30% 2.15% % Office Suburban60-75%10-15%7.5-9% % 2.15% % Retail Anchored65-75%7-10%7-7.5%2-2.5% 2.15% % 2016 Underwriting Criteria for Investment-Grade Real Estate

 Research – Primary Research  Secondary sources (CoStar, MLS, C&I Council)  Industrial – Institutional-grade, for lease  Over 10,000 SF in size  Lancaster County market  Office – Institutional-grade, for lease  Over 5,000 SF in size  Lancaster City, Manheim Township, East Hempfield, East Lampeter  Retail – Statistics are provided by LCAR/C&I Council  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.

16-Year Average Class “A” Space Absorption 40, ,368-12,320-10,44713,484 Vacancy 5.9%13.6%13.9%14.8% Amount Constructed000027,013 Available Supply 98, ,724257,044267,491 Class “B” Space Absorption 22,41410,3956,75386,396-2,333 Vacancy20.2%19.3%19.0%15.6% Amount Constructed009,70008,685 Available Supply513,538503,143506,090419,694 Business Center Absorption 2,56358,16514,59418,69013,673 Vacancy19.7%15.7%14.2%12.6% Amount Constructed000019,820 Available Supply240,404182,239167,645148,955 Lancaster Market Comparison 2012 – 2015

Major Industrial Changes  Gateway Business Park – Flex completed 105,432 SF – 60,000 SF available.  499 Running Pump Road – 45,000 SF leased.  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.

16-Year Average Industrial Space Absorption -16,43059,719549,42437,01187,654 Vacancy 10.75%10.33%6.04%5.73% Amount Constructed 125, ,694 Available Supply1,525,1671,465,448916,024879,013 Flex Space Absorption 11,370-22,352-2,34577,17215,050 Vacancy8.4%11.3%11.6%12.7% Amount Constructed000105,43222,203 Available Supply 64,99987,35189,696117,956 Retail Space Absorption-41,13548,48556,46438,66261,381 Vacancy8.9%8.1%7.35%6.7% Amount Constructed000067,121 Available Supply546,242497,757441,293402,631 Lancaster Market Comparison 2012 – 2015

 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  Industrial positions -1,240.  Health care  Accommodations & food +1,351.

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