1 Hot off the Press: Leveraging Initial Findings from the BOMA International 2017 EER Report

2 Joanne Arnold, BOMA InternationalBrooke Barnecut, Kilroy Realty Justin McIntyre, USAA Real Estate Company Marta Schantz, Waypoint Building Group

3 Background on the BOMA EER

4 The Experience Exchange ReportWhat is the Office EER and the Industrial EER? Uses of the Office EER and Industrial EER Topline Findings from the 2017 Office EER and Industrial EER User Experience Submitting Data to the 2018 Office EER and Industrial EER Q & A The Office EER is the commercial real estate’s oldest, largest and most comprehensive office building benchmarking resource while the Industrial EER is only three years old and is a one-of-a-kind publication. EER reports are sold as a subscription. A subscription is good for up to one year, or until the new reports are released each June. EER Presentation

5 The Experience Exchange ReportOnline at eer.boma.org Office EER Property income & expense info published since 1920 Survey and reports online since 2008 Industrial EER Property income & expense info published since 2015 One-of-a-kind resource Subscription-based; unlimited access to reports for one calendar year Compare to prior years with trend reports The Office EER is the commercial real estate’s oldest, largest and most comprehensive office building benchmarking resource while the Industrial EER is only three years old and is a one-of-a-kind publication. EER reports are sold as a subscription. A subscription is good for up to one year, or until the new reports are released each June. EER Presentation

6 The Experience Exchange ReportUses of the Office EER and Industrial EER Compare data that closely matches your building—size, age, height, submarket, tenancies, building type and building class. Get a quick snapshot of market occupancy rates as they correlate to NOI (Net Operating Income). Discover where your building service contracts are over or under market averages and use the data to help rebid your contracts. Identify and plan for operating improvement EER Presentation

7 The Experience Exchange ReportUses of the Office EER and Industrial EER (cont.) Fine tune your planning by drilling down into the major expense categories Communicate metrics to owners and investors more effectively Verify market data from brokers Use as a resource for advocacy efforts when reaching out to state and local officials regarding legislation, regulation or codes that can affect your bottom line EER Presentation

8 Key 2017 EER Topline Findings

9 Office NOI Note: Negative values shown are expenses and are technically not negative amounts EER Presentation

10 Office OpEx 2011-2016 Office OpEx increased +3.6% from 2015-2016Cleaning +11.1% R&M +6.3% Security +12.7% Admin +2.7% Roads/Grounds -3.4% Utilities -1.5% OpEx Items ($/sq ft) EER Presentation

11 Office Market Rises and FallsThe rising and peaking markets are in which vacancy is decreasing, demand is increasing, rental rates are rising, and new supply is rising – a landlord-favorable market The falling and bottoming markets are in which vacancy is increasing, demand is waning, rental rates are falling, and there is over-supply in the market – a tenant-favorable market The CRE cycle continues around this clock again and again, and different markets across the U.S. reach these phases around the “clock” at different periods in time Source: JLL EER Presentation

12 Total OpEx by Region ($/sq ft) Regional OpEx ComparisonOffice Key Insights Total OpEx by Region ($/sq ft) Regional OpEx Comparison EER Presentation

13 Deep Dive: Medical Office BuildingsOpEx items ($/sq ft) Total OpEx ($/sq ft) ’15-’16 % Δ +8.70% +10.94% +5.87% -3.55% +11.53% -1.08% ‘11-’16 % Δ ’15-’16 % Δ +10.87% +8.01% +13.89% +14.02% +4.37% +11.07% -5.08% +1.06% +5.03% +0.42% EER Presentation % Δ

14 Deep Dive: Real Estate TaxesNational Real Estate Taxes ($/sq ft) Taxes Vary State by State, City by City National Taxes up 20% YoY from Northeast has biggest increase: NY, NJ Highest Tax Increases from : CT, +37% OH, +35% TX, +22% Highest Taxes Overall ($/sq ft): NY, $11.09 DC, $9.79 MA, $7.27 $ / Sq Ft EER Presentation

15 Deep Dive: Building InsuranceReal Estate Insurance expenses rose after three straight years of decline National Real Estate Insurance decreased -3.3% from , fueled by a steady stream of entrants into the commercial insurance market, multiple years of minimal catastrophes, and fewer purchases of re-insurance YoY from showed a +7.1% increase, perhaps due to regulatory restraints, risk management, and interest rates in the market National Real Estate Insurance ($/sq ft) $ / Sq Ft https://www.dfwb2bcfo.com/property-and-casualty-insurance-rates-continue-to-rise-2/ EER Presentation

16 National Utilities Items ($/sq ft) 2011-2016Deep Dive: Utilities National Utilities Items ($/sq ft) Nationwide Utilities OpEx decreased -1.5% , aligns with Dept of Energy data Electricity prices and consumption fell: $/kWh -2.5% , Usage -0.3% Gas prices and consumption fell: $/MMBtu -8.2%, Usage -2.5% From , total utilities dropped -3.09% Electricity -5.77% Water/Sewer % Natural Gas -32.8% Other Utilities % $ / Sq Ft $ / Sq Ft Source: Department of Energy, EIA EER Presentation

17 Industrial NOI EER Presentation

18 Industrial OpEx OpEx Items($/sq ft) Industrial OpEx increased 5.8% from Driven by increases in Admin (+8.5%) and R&M (+11.8%) Utilities (+0.5%) and Roads/Grounds (+0.4%) relatively flat $ / Sq Ft EER Presentation

19 Industrial Key Insights 2015-2016Total OpEx by Region ($/sq ft) Regional OpEx Comparison All regions increased total OpEx (no significant difference) Admin expense increased most in Northeast Taxes decreased in Midwest, increased in all other regions EER Presentation

20 Deep Dive: E-Commerce E-commerce consumer expectations of next- or same-day delivery is accelerating, causing logistics modeling to skew to shorter drive times Growth in e–commerce has led to strong demand for separate reverse logistics (returns) and final-mile (delivery) facilities in local markets Facilities with favorable ceiling heights (24+ ft) and good column spacing are seeing activity, while older facilities with lower ceilings and tighter spacing struggle to attract buyers/tenants. Slow evolution of New Construction due to price differential of existing product and construction costs EER Presentation

21 Deep Dive: DistributionTotal OpEx ($/sq ft) Operating Expense items ($/sq ft) EER Presentation

22 Deep Dive: Repairs & MaintenanceR&M Items ($/sq ft) Industrial R&M increased by +11.8% from Driven mostly by increase in exterior building maintenance costs Remaining R&M line items are relatively flat $ / Sq Ft EER Presentation

23 USAA Portfolio-Wide EER Use Case Study

24 Kilroy Property Manager EER Use Case Study

25 Submitting Data to the 2018 Office EER and Industrial EER

26 Joanne Arnold, BOMA InternationalBrooke Barnecut, Kilroy Realty Justin McIntyre, USAA Real Estate Company Marta Schantz, Waypoint Building Group