Aegon Asset Management is the global investment management brand of the Aegon Group N.V. and is comprised of Aegon USA Investment Management, LLC (Aegon Asset Management US), Aegon USA Realty Advisors, LLC (Aegon Real Assets US), Kames Capital plc (Kames Capital) and

other Aegon affiliates. Aegon Asset Management US, Aegon Real Assets US and Kames Capital are SEC registered investment advisers.

For institutional investor use only

Aegon Real Assets US

US CREMARKETINSIGHTSDecember 2019

Applied Research

CONTENTS

2 Big picture update

3 Economic outlook

4 Real estate equity

5 Capital markets

6 Sector overview: Apartments

7 Sector overview: Industrial

8 Sector overview: Office

9 Sector overview: Retail

10 Property sector outlook

Big picture update

• Tension surrounding trade negotiations has eased in recent weeks and continued rate cuts by the Federal Reserve (Fed) have contributed to improved sentiment in the financial markets. This is reflected in some yield curve steepening and the stock market hitting fresh highs.

• Since July, the Federal Open Market Committee (FOMC) has reduced the federal funds rate three times to a current 1.5 to 1.75 percent target range in October. The committee continued to cite “…implications of [negative] global developments for the economic outlook as well as muted inflation pressures.”1

• The term premium between 3-month and 10-year US Treasury yields began the third quarter in negative territory and bottomed out a negative 52 basis points in August. Since, market optimism increased the long-end of the curve while Fed action pushed the short-end lower. The yield curve finished October in positive territory. Despite recent increases in the 10-year US Treasury yield, it has remained below 2% since July 2019.2

• According to the “advanced” estimate, real gross domestic product (GDP) increased at an annualized rate of 1.9 percent in the third quarter, bolstered by 2.9% growth in personal consumption expenditures. Private domestic investment remained in negative territory detracting from growth in both the third and second quarters as well.3

• October payroll gains surpassed market expectations with an average of 176,000 jobs added over the three months ending in October, and 167,000 per month thus far in 2019. This is slightly lower than the 2018 average of 223,000 jobs per month and reflects the diminishing availability of labor. The unemployment rate stands at 3.6 percent and the labor force participation rate is the highest in over six years.4

• The NCREIF Property Index (NPI) reported a trailing four-quarter return of 6.2%, down from 7.2% a year ago. The moderating trend is predominately attributed to lower capital appreciation. Properties belonging to the NPI continue to exhibit strong operating fundamentals with aggregate occupancy rates near their highest levels on record. The NPI is specific to the US and measures unlevered commercial real estate (CRE) returns.5

NCREIF Property Index Year-over-Year change (1990 – Q3 2019)

Source: NCREIF Property Index Detail Report as of September 30, 2019.

With the end of 2019 approaching, economic growth has been moderating largely inline with expectations from the beginning of the year. Tight labor market conditions have slowed job creation from a year ago, but gains remain solid and point to continued growth in economic activity. Household spending continues to increase at a solid pace and is helping to offset weakness in fixed business investment. These economic conditions have translated into less robust leasing activity across property sectors but supply constraints are helping to maintain balanced fundamentals. Rent growth continues to trend above the rate of inflation for the majority of geographies and property sectors, with some showing much stronger increases than others.

NOI Growth

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BIG PICTURE UPDATE

Economic outlook• Our baseline macroeconomic outlook calls for continued albeit slower

economic growth for 2020. A trade armistice, if it materializes and holds, coupled with recent rate cuts by the Fed adds confidence to baseline expectations. However, the fragility of trade talks still balances risks to the downside as does ongoing weak global economic growth. These risks overwhelm the positive boost to US housing that the rate cuts have promoted in recent months.

• Following the October rate cut, Fed Chairman Powell’s comments and the FOMC’s official statement provided no clear path forward for future action. Our expectation is that the FOMC will follow data releases closely and respond to signs of weakening if they appear. We believe further rate cuts in 2020 are not out of the question.

• But, even with interest rate accommodation, we believe economic growth prospects for 2020 have very limited upside given the tightness in labor availability. With unemployment at 3.6%, labor force growth has become a ceiling on job creation. Difficulty filling job openings was reported widely in the Fed’s Beige Book in October.6 Some relief could emerge from increasing labor force participation which has not recovered to pre-recession levels. But, even with its recent improvement, its path appears to be range-bound.

• In addition, interest rate accommodation appears to have little power to stimulate investment spending where weakness is due to uncertainty surrounding US and global economic growth prospects and the upheaval in trade terms. Lower interest rates stimulate investor risk appetite for existing assets and raise the risk of asset price bubbles. The Fed is watching.

Real GDP and employment growth

Sources: US Bureau of Labor Statistics, October 30, 2019. Bureau of Economic Analysis, October 30, 2019. Employment figures reflect private and government non-farm jobs.

Core personal consumption expenditure (PCE) inflation and 10-yr Treasury

Sources: US Bureau of Economic Analysis, September 30, 2019 and US Department of Treasury, September 30, 2019.

Corporate bond and cap rate spread

Sources: Aegon Real Assets US. Bloomberg - US Corporate B Rated Bond OAS, as of September 30, 2019. NCREIF Transaction Cap Rates, as of September 30, 2019. Federal Reserve – 10-year UST, as of September 30, 2019.

Sources: Aegon AM US as of November 17, 2019. Includes historical data sources from Bureau of Economic Analysis, Congressional Budget Office, Haver Analytics. Fed Funds percent reflects upper-bounds of target range.

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Core PCE Inflation 10-year Treasury

Aegon Asset Management US Economic Forecasts

2017 2018 2019F

GDP (Real %, YoY) 2.30 2.90 2.25

Unemployment (%) 4.40 3.90 3.60

Core PCE 1.60 1.90 1.70

Fed Funds (Upper Bound, %)

1.50 2.50 1.75

Tsy10 (%) 2.41 2.72 1.75

2020F 2021F

GDP (Real %, YoY) 1.80 1.60

Unemployment (%) 3.80 4.00

Core PCE 1.90 1.80

Fed Funds (Upper Bound, %)

1.25 1.25

Tsy10 (%) 1.75 1.85

ECONOMIC OUTLOOK

Real estate equity

• The trailing one-year return for the NCREIF National Property Index (NPI), a measure of unleveraged returns, was 6.2% in the third quarter compared to 7.2% for the one-year period ending Q3 2018.5 The composition of return continues to be focused on property income generation as the appreciation component of the NPI delivered only 1.7% of the 6.2% total return.

• The weakening in total return was not uniform across metro markets, with several top 25 metros enjoying stronger total return versus the prior period.5

• Industrial property performance outpaced other sectors with a trailing four-quarter return of 13.6% for the period. At the other end of the spectrum, retail property returns totaled only 1.4% versus 3.9% a year ago.5

• Within certain property sectors, subtypes continue to show broad dispersion in performance. For example, garden apartments have returned 8.1% over the last year compared to the high-rise return of 4.1%. The retail sector is also showing a wide range of outcomes with neighborhood retail the leading performer.5

• The NCREIF Fund Index for Open-ended Diversified Core Equity (NFI-ODCE) returned 5.6% gross of fees and inclusive of leverage for the year ending September 30, 2019. Over the last ten years, the NFI-ODCE has an annual return of 10.9%. Diversified Core Equity typically reflects lower risk CRE investment strategies that utilize low leverage levels.5

• In the third quarter, NFI-ODCE investor contributions decreased 12.6% from the same time period a year prior, but remain at healthy levels. Net investor cash flows have been negative over the past year as redemptions and distributions have outpaced contributions in the last four quarters.5

Return comparison

Sources: Corporate Bonds and EM Debt - Bloomberg, September 30, 2019. NAREIT, September 30, 2019. NCREIF, September 30, 2019. S&P Dow Jones Indices, September 30, 2019.

NFI-ODCE investor cash flow trends (four quarter rolling total, $Bn)†

†The Open End Diversified Core Equity (ODCE) fund is a capitalization-weighted index based on each fund’s Net Invested Capital, which is defined as Beginning Market Value Net Assets (BMV), adjusted for Weighted Cash Flows (WCF) during the period. Annual rates (Appreciation + Income). Source: NCREIF. As of September 30, 2019

Top 25 metros by total return (third quarter)‡

Source: NPI - NCREIF, September 30, 2019. ‡Limited to NCREIF markets with greater than 40 properties.

Source: NCREIF Property Index Detail Report. As of September 30, 2019.

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NPI 6.2% 7.2% -0.9%

All Apartment 5.4% 6.4% -0.9%

Garden 8.1% 9.3% -1.2%

Highrise 4.1% 4.9% -0.7%

Lowrise 5.8% 7.2% -1.4%

All Office 6.5% 6.8% -0.3%

CBD 5.9% 6.3% -0.4%

Suburban 7.5% 7.6% -0.1%

All Industrial 13.6% 14.2% -0.5%

R&D 11.9% 15.5% -3.6%

Flex 11.3% 13.6% -2.3%

Warehouse 13.8% 14.1% -0.3%

Other 11.7% 3.1% 8.6%

All Retail 1.4% 3.9% -2.5%

Community 2.4% 5.1% -2.7%

Neighborhood 4.6% 6.5% -1.8%

Power Center 1.3% 5.1% -3.8%

Regional -0.3% 1.0% -1.3%

Super Regional 0.6% 3.2% -2.5%

REAL ESTATE EQUITY

Capital markets

• 10-year Treasury yields are well below year-to-date highs but have increased from their August lows following Fed action and improving trade sentiment. Corporate bond spreads have changed very little in recent months implying stable investor risk appetite despite economic uncertainties.

• The appetite for commercial mortgages remained strong among life insurance lenders in the third quarter of 2019. Based on conversations at industry conferences, we expect lender competition to remain strong into next year. So far, lenders have competed predominately on pricing with underwriting remaining largely disciplined. We have also observed lenders increasingly pursuing niche strategies in the marketplace.

• Through the first half of 2019, bank lenders have been successful in capturing a slight increase in market share from CMBS, Agency, and insurance lenders.

• According to the Fed’s survey of senior loan officers, bank lending standards tightened on all types of CRE loans over the third quarter. A modest share of banks also reported weaker demand for construction and land loans.7

• Commercial property transactions have eased somewhat in 2019 with third quarter volume down 6% from last year according to Real Capital Analytics. At the same time, third quarter transactions were significantly stronger than the pace recorded in the first quarter of 2019 implying re-invigoration in investor appetites.8

Historical spreads (Corporate A, BBB & CML) January 2012 - September 2019

Sources: Corporate Bonds – Bloomberg Barclays. Aegon Real Assets US Commercial Mortgage Mark-to-Market Matrix - A/A+ Internal rating using Proprietary CML pricing matrix, developed and maintained by Aegon Real Assets US as of September 30, 2019.

Commercial mortgage commitments (Life companies — trailing four quarters, quarter-over-quarter change)

Source: American Council of Life Insurers (ACLI). As of June 30, 2019.

US lender composition

Sources: Real Capital Analytics – US Capital Trends Report, June 30, 2019.

CRE transaction volume and commercial property price index Trailing four quarter — all property types

Sources: Aegon Real Assets US. Real Capital Analytics. As of September 30, 2019.

Source: Real Capital Analytics. As of September 30, 2019.

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Transaction volume by property type

Q3 19 Q3 18 YoY changes

All Office $32.5 B $35 B -7.0%

CBD $13.3 B $11.9 B 11.6%

Suburban $19.3 B $23.1 B -16.5%

All Industrial $40.6 B $24.9 B 62.8%

Flex $6.5 B $4.9 B 31.7%

Warehouse $34.1 B $20 B 70.5%

All Apartment $46 B $49.6 B -7.3%

Garden $29.5 B $30.5 B -3.1%

Mid/Highrise $16.4 B $19.1 B -14.1%

All Retail $14.4 B $31.7 B -54.5%

Strip Center $8.8 B $25.1 B -65.0%

Mall & Other $5.6 B $6.6 B -14.3%

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CAPITAL MARKETS

Apartments

• National apartment vacancy was 5.8% in the third quarter of 2019, a decrease from 6.2% a year ago, according to CoStar. Apartment vacancy rates have decreased in a majority of the most populous metros from a year ago but fewer than noted in prior quarters. Rent growth has stayed strong with a vast majority of metros having greater than 2% year-over-year increases.9

• The NPI apartment sector produced a 5.4% total return for the most recent four quarters composed of 4.3% income return and 1.1% appreciation. Garden style apartments have been the best performing subtype over the last year with unlevered returns of 8.1% compared to 5.4% for all apartments.5

• Apartment equal-weighted appraisal cap rates were 4.2% for the third quarter of 2019 compared to 4.3% a year prior.5

• Apartment transaction volume decreased 7.3% from a year ago, totaling $45.97 billion. The third quarter transaction volume increased 0.2% from the second quarter total of $45.89 billion.8

• Overall, fundamentals remain strong and have even accelerated over the last year with vacancy rates down from a year ago and rent growth increasing. The acceleration in fundamentals has been unique to the apartment sector and is being fueled by sustained demand and moderating construction activity. Healthy labor markets and barriers to homeownership are key drivers of the favorable outlook.

Supply and demand fundamentals

Source: CoStar Reality Information Inc., annual data as of September 30, 2019. 2019 reflects trailing four quarters ending Q3 2019.

Performance

Source: NCREIF Property Index (unlevered) - Equal weighted appraisal cap rate as of year-end or most recent in current year, current year returns reflect trailing 4-quarter average, as of September 30, 2019.

Apartments top 54 metropolitan statistical areas (MSAs) (Year-over-Year rent growth)

Source: CoStar Realty Information Inc.; Aegon Real Assets US as of September 30, 2019.

Apartments top 54 MSAs (Year-over-Year vacancy rate change)

Source: CoStar Realty Information Inc.; Aegon Real Assets US as of September 30, 2019.

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SECTOR OVERVIEW - APARTMENTS

Industrial

• The national industrial vacancy rate increased to 5.1% from 4.7% a year ago according to CoStar, due to lighter new demand. Industrial asking rent for the third quarter of 2019 advanced 5.1% year-over year, slower than the 6.4% increase from a year prior.9

• For the third straight quarter, over half of the most populous metro areas saw vacancy rates increase, but rent growth continues to outpace inflation in the vast majority of geographies.9

• The NPI industrial sector produced a 13.6% total return for the most recent four quarters, far exceeding the number two sector performance of 5.4% for apartments. Income accounted for 4.7% of industrial return while appreciation generated a booming 8.6% in return.5

• Industrial cap rates associated with NPI appraisals pulled in to 6.1% on an equal-weighted basis, a decrease of 30 bps from 6.4% in the second quarter and a 34 bps drop from 6.4% a year ago.5

• Trailing four-quarter transaction volume for industrial properties is up 30.5% from a year ago. Warehouse properties continue to dominate industrial transaction volume, accounting for 81.1% of all industrial sales slightly up from 81% a year ago.8

• Fundamentals, sentiment, and investment performance are, by most metrics, the strongest among the main property sectors. However, growth trends have been moderating with slower economic growth contributing to less robust demand relative to a year ago. Coupled with elevated construction activity, vacancy rates have increased off record lows in a majority of major metros but remain tight by historical standards. Secular trends in e-commerce provide additional cushion against decelerating cyclical demand drivers.

Supply and demand fundamentals

Source: CoStar Realty Information Inc., annual data as of September 30, 2019. 2019 reflects trailing four quarters ending Q3 2019.

Performance

Source: NCREIF Property Index (unlevered) - Equal weighted appraisal cap rate as of year-end or most recent in current year, current year returns reflect trailing 4-quarter average, as of September 30, 2019.

Industrial top 54 MSAs (Year-over-Year rent growth)

Sources: CoStar Realty Information Inc.; Aegon Real Assets US as of September 30, 2019.

Industrial top 54 MSAs (Year-over-Year vacancy rate change)

Sources: CoStar Realty Information Inc.; Aegon Real Assets US as of September 30, 2019.

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SECTOR OVERVIEW - INDUSTRIAL

Office

• The national office vacancy rate decreased to 9.7% in the third quarter of 2019, down from 9.8% a year ago, according to CoStar. Average asking rent for the office sector was $33.68 per square foot in the third quarter, up from $32.90 the previous year.9

• Vacancy rates decreased in a slight majority of metro areas. Similarly, metro level rent growth trends are largely balanced around inflation.9

• According to the NCREIF-NPI, the office sector had an unlevered total return of 6.5% over the last year. Income generated 4.4% of that with appreciation of 2.0%. Suburban properties returned 7.5% compared to central business district location’s returns of 5.9%.5

• Office cap rates associated with NPI property appraisals increased slightly to 5.9% on an equal-weighted basis, up from 5.7% the year prior.5

• Transaction volume for office properties in the third quarter totaled $32.55 billion, down 6.9% from a year prior. Transaction data indicates suburban volume was responsible for 59.2% of overall office sales in the third quarter of 2019 compared to 66.0% last year.8

• Occupancy remains above long-term averages, but leasing activity within the office sector has decelerated from a year ago. The recent failure of WeWork to go public will likely create additional demand disruptions over the near-term. We estimate that WeWork has accounted for slightly less than 9 percent of net office absorption for the year ending June 2019 despite having a relatively small footprint in the overall office market. Their influence is greatest in gateway and technology markets where their domestic expansion efforts have been predominately concentrated.

Supply and demand fundamentals

Source: CoStar Realty Information Inc., annual data as of September 30, 2019. 2019 reflects trailing four quarters ending Q3 2019.

Performance

Source: NCREIF Property Index (unlevered) - Equal weighted appraisal cap rate as of year-end or most recent in current year, current year returns reflect trailing four-quarters, as of September 30, 2019.

Office top 54 MSAs (Year-over-Year rent growth)

Sources: CoStar Realty Information Inc.; Aegon Real Assets US as of September 30, 2019.

Office top 54 MSAs (Year-over-Year vacancy rate change)

Sources: CoStar Realty Information Inc.; Aegon Real Assets US as of September 30, 2019.

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SECTOR OVERVIEW - OFFICE

Retail

• The national retail vacancy rate remained largely unchanged from a year ago at 4.5%. Despite tight vacancy rates, rent growth at the national level and for a majority of metro areas continued to lag the 2% generally associated with inflation.9

• The retail sector delivered a very anemic total return of just 1.4%, according to the NCREIF-NPI down 35 basis points from the year prior. This total return performance is the lowest of the four major property sectors. Within subsectors, neighborhood center properties led at 4.6%.5

• NPI equal-weighted appraisal cap rates for retail properties increased to 5.3% from the previous year’s 5.1%.5

• Reflecting continued negative sentiment, trailing four-quarter transaction volume for retail properties was down 25.8% in the third quarter from a year ago.8

• E-commerce sales growth is the ongoing existential challenge for retail properties with steady incursion continuing. E-commerce as a percent of total retail sales increased to 10.7% in the second quarter of 2019, up from 9.8% a year ago on a non-seasonally adjusted basis according to the US Census Bureau.10

• Sentiment of the sector remains low. According to the NPI, the retail property sector has exhibited negative capital appreciation for six consecutive quarters. It is the only one of the main property sectors to report negative appreciation since 2010. Poor sentiment is largely driven by e-commerce competition which has stifled new demand this cycle and contributed to tenant bankruptcies and mass store closures. Despite the challenges, overall occupancy rates remain relatively steady for properties in the NPI due to limited construction activity.

Supply and demand fundamentals

Source: CoStar Realty Information Inc., annual data as of September 30, 2019. 2019 reflects trailing four quarters ending Q3 2019.

Performance

Source: NCREIF Property Index (unlevered) - Equal weighted appraisal cap rate as of year-end or most recent in current year, current year returns reflect trailing four-quarters, as of September 30, 2019.

Retail top 54 MSAs (Year-over-Year rent growth)

Sources: CoStar Realty Information Inc.; Aegon Real Assets US as of September 30, 2019.

Retail top 54 MSAs (Year-over-Year vacancy rate change)

Sources: CoStar Realty Information Inc.; Aegon Real Assets US as of September 30, 2019.

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SECTOR OVERVIEW - RETAIL

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This material is to be used for institutional investors and not for any other purpose. The information included in this document should not be construed as investment advice or a recommendation for the purchase or sale of any security, loan, interest in real estate, or other investment. This material contains general information only on economic and investment matters; it should not be considered as a comprehensive statement on any matter and should not be relied upon as such. The information does not take into account any investor’s investment objectives, particular needs or financial situation. The value of any investment may fluctuate. This information has been developed internally and may incorporate third party data, text, images and other content deemed to be reliable; however, Aegon Real Assets US does not guarantee the accuracy, adequacy, or completeness of such information. Any opinions, estimates and projections included herein constitute the current judgement of the author as of the date of this document. Aegon Real Assets US has no obligation to update, modify or amend this document or to otherwise notify the reader in the event that any matter stated herein, or if any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes or is determined to be inaccurate.

This document contains “forward-looking statements” which are based on the firm’s beliefs, as well as on a number of assumptions concerning future events based on information currently available. These statements involve certain risks, uncertainties and assumptions which are difficult to predict. Consequently, such statements cannot be guarantees of future performance and actual outcomes and returns may differ materially from statements set forth herein. In addition, this material contains

information regarding market outlook, rates of return, market indicators and other statistical information that is not intended and should not be considered an indication of the results of any Aegon Real Assets US-managed portfolio.

This material contains the current opinions of the authors and not necessarily those of Aegon Real Assets US and such opinions are subject to change without notice. This material is intended for illustrative and discussion purposes only. There is no guarantee that any investment or portfolio strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate their ability to invest over the long-term, especially during periods of increased market volatility. Results for certain charts and graphs are included for illustrative purposes only and should not be relied upon to assist or inform the making of any investment decisions.

Aegon Real Assets US, an indirect wholly owned subsidiary of Aegon N.V., is a US-based investment adviser registered with the Securities and Exchange Commission (SEC) and part of Aegon Asset Management, the global investment management brand of Aegon Group. Recipient shall not distribute, publish, sell, license or otherwise create derivative works using any of the content of this report without the prior written consent of Aegon Real Assets US, 6300 C Street SW, Cedar Rapids, IA 52499.

©2019 Aegon Real Assets US

1Federal Reserve. Federal Open Market Committee Statement, October 30, 2019.2Department of Treasury, November 13, 2019.3Bureau of Economic Analysis. Gross Domestic Product Third Quarter 2019 (Advanced Estimate) October 30, 2019.4Bureau of Labor Statistics. Employment Situation, November 1, 2019.5National Council of Real Estate Fiduciaries (NCREIF), September 30, 2019.6Federal Reserve. The Beige Book, October 16, 2019.7Federal Reserve. October 2019 Senior Loan Officer Survey, November 4, 2019.8Real Capital Analytics, September 30, 2019.9CoStar Realty Information, Inc., September 30, 2019.10Census Bureau. Quarterly Retail E-Commerce Sales, August 19, 2019.

Martha Peyton, PhD, Managing Director mpeyton@aegonusa.com

Brad Bohl, Director brbohl@aegonusa.com

Aegon Real Assets’ Applied Research Group utilizes primary and secondary research to monitor commercial real estate property fundamentals, capital markets, and macroeconomic conditions. Our platform applies both qualitative and quantitative techniques in its contribution to an investment outlook.

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Disclosure

Property sector outlook Top 50 metros*

Under Construction as % of Inventory

Q319 Vacancy Rate**

Q318 Vacancy Rate**

Metros w/Rising Vacancy Rate

Q319 YoY Rent Growth**

Q318 YoY Rent Growth**

Aegon Real Assets Sector

Outlook

Apartment 4.31% 6.02% 6.25% 20 3.70% 3.62% Favorable

Industrial 1.76% 4.88% 4.42% 35 5.42% 6.28% Favorable

Office 1.98% 8.78% 8.79% 24 2.72% 3.96% Neutral

Retail 0.64% 4.40% 4.38% 28 2.03% 3.02% Cautious

*Top 50 by Metro Areas by Population; CoStar Realty Information Inc., Aegon Real Assets US; as of September 30, 2019. **Equal Weighted Average

PROPERTY SECTOR OUTLOOK