1. Twin Cities Apartment Market Conditions Winter 2014/2015 Brent Wittenberg – Marquette Advisors 612-392-2344 bwittenberg@marquetteadvisors.com

2. Apartment Trends – Winter 2014/15 Twin Cities remains one of the strongest apartment markets in the U.S.! –Sustained low vacancy (<3.0% metro); –Steady rent growth; –Strong demand fundamentals. Deep & diverse economy. Job Growth! In-migration fueling demand. Increasing propensity to rent – economic & lifestyle factors. Favorable demographics (Millenials and Boomers) Millenials fueling demand. Preference to rent; all income levels. Empty nesters too, but smaller numbers to date. Marquette Advisors

3. One of Strongest Markets in U.S. Marquette Advisors Source: Marcus & Millichap

4. Apartment Trends – Winter 2014/15 One of most active new construction markets in U. S. –Expect 12,000+ new units 2014-2016. Includes 3,500 in Downtown Mpls. –Major supply increases in Mpls creating competitive market. However, NOT a demand problem. Do NOT expect overbuilt submarkets. New product being absorbed; very limited use of concessions/incentives by apartment owners. –Healthy market experiencing absorption & temporary vacancy adjustment in active submarkets, expect market re-balance to 5.0% vacancy by late 2016. Marquette Advisors

7. Up to 12,000 new units 2014-2016 12,000 new units 2014- 2016

8. Marquette Advisors Rents & Vacancy by Submarket Marquette Advisors

9. Market Rents by Product Type

10. How many new apartments, and where? Marquette Advisors

11. New Apartments -- What are we building? A big splash with amenities. Design for single-person households Small, efficient units. Increasing popularity of Studio & “Alcove” floorplans Studio, Alcove, 1BR – 2/3+ of the unit mix today Fewer 2BRs – 20% today vs. 30% to 40% in past –Fits Millenial renter profile. Not necessarily empty nesters, with preference for larger 2+ BR floorplans. Marquette Advisors

12. Who is Renting? Demand for new, luxury product especially is driven by in-migration, job transfers. –Preference for well located, urban housing –Higher incomes, often less price sensitivity Also renters relocating/”upgrading” their housing w/in metro area. Limited cannibalization, however, of existing apartments. And older apartments able to quickly re-lease. Strong economy & job growth are keys to this. Millenials having major impact on market –Now are age 25-35 years old Empty nesters too, but in smaller numbers Other groups: young families (including immigrants), but larger rental homes and townhomes, rather than apartments Marquette Advisors

13. Population Growth by Age Marquette Advisors Note growth in ages 25-34 and 35-44 groups. Front end of Millenials aging into their 30’s now. Where will they want to live? What about boomers/empty nesters? Marquette Advisors

14. Why rent? Increasing propensity to rent, rather than buy. Why? Lifestyle Factors –Prefer urban locations (more rental options here than ownership) –Maintenance-free –Smaller household (single renters opting for Studio or 1BR living)….may not make sense to buy a larger condo or house –Design of modern apartments supports socialization – amenities, gathering spaces. Important to Millenials. –MOBILITY! -- Renting provides mobility. Could I sell my home? Marquette Advisors

15. Why rent? Economic Factors –Mobility – resale issue and timing –Cost factors. Income-qualified, perhaps. But what about savings? –Down payment requirement. 20%? $80-100,000+ in many cases, especially urban and popular suburban markets. –Lack of savings – high debt levels –College debt – MN ranks 4 th highest nationally. 70% have “significant” college debt. Avg. nearly $40,000 per student. Marquette Advisors

16. Twin Cities Market Outlook Market Rate Apt Construction: –Construction: +12,000 new units 2014-2016. –Demand: Market absorption 3,000+ units per year. –Expect temporary market vacancy adjustment, but demand generally in line with supply –Vacancy: 2015-2016: 3.8%-4.5% (predict will not exceed 5.0%) Demand fundamentals remain strong: –Strong economy: 30,000+ new jobs per year –Employee recruitment/retention key to success of economy. Requires attractive, appropriately designed and priced new housing! –Demographics: impact of Millenials. –Rent vs buy decision. Economics & lifestyle factors make renting attractive. –College enrollment trend. 440,000 in MN colleges vs. 350,000 10 years ago! –Avg. college graduate nearly $40k in debt – renting makes sense. Marquette Advisors

17. What’s Next Downtown/Uptown Minneapolis markets are hot. But what’s next? Not all can afford, or want to live in central cities. What about other locations? –Similar location fundamentals apply -- proximity to jobs, goods/services, dining/shopping, recreation, highway/transit access, walkability – “walk-score” Downtown St. Paul becoming more active. Light Rail Transit Corridors! Potential for SW-LRT What will Millenials want next? First wave of this group aging into early 30’s. What’s next after that Uptown apartment? Marquette Advisors