Eco & Market analysis question in real estate

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ANALYSIS

VITALITYRELATIVE COSTS LIVING BUSINESS RELATIVE OF LIFE

Best=1, Worst=378Best=1, Worst=403

STRENGTHS & WEAKNESSES

U.S.=100%

SHORT TERM

FORECAST RISKS

LONG TERM

RISK EXPOSURE 2019-2024

BUSINESS CYCLE STATUS

MOODY’S RATING

ECONOMIC DRIVERS

Highest=1 Lowest=403

EMPLOYMENT GROWTH RANK

Best=1, Worst=410

2018-2020 2018-2023 QUALITY

MOODY’S ANALYTICS / Précis® U.S. Metro / November 2019

MANUFAC

TURING

HIGH TECH

LOGISTICS

2013 2014 2015 2016 2017 2018 INDICATORS 2019 2020 2021 2022 2023 2024 232.6 243.9 252.6 261.8 277.9 298.3 Gross metro product (C12$ bil) 312.9 321.2 329.6 342.2 352.1 362.6 3.6 4.9 3.5 3.7 6.1 7.4 % change 4.9 2.6 2.6 3.8 2.9 3.0 1,502.3 1,543.6 1,592.8 1,644.2 1,685.5 1,725.1 Total employment (ths) 1,774.9 1,810.7 1,817.2 1,841.5 1,859.7 1,875.4 2.9 2.7 3.2 3.2 2.5 2.3 % change 2.9 2.0 0.4 1.3 1.0 0.8 5.3 4.6 4.1 3.7 3.6 3.4 Unemployment rate (%) 3.2 2.6 3.0 3.0 2.9 2.9 3.0 10.0 6.5 6.5 7.2 9.2 Personal income growth (%) 7.2 5.7 4.9 6.4 5.9 5.6 71.3 75.4 79.6 83.8 87.2 88.9 Median household income ($ ths) 90.7 94.2 96.9 100.4 104.1 107.7 2,791.8 2,843.1 2,896.6 2,954.3 3,007.3 3,048.1 Population (ths) 3,089.9 3,134.4 3,177.9 3,219.2 3,261.2 3,304.2 1.8 1.8 1.9 2.0 1.8 1.4 % change 1.4 1.4 1.4 1.3 1.3 1.3 31.0 34.0 36.5 40.2 35.2 24.1 Net migration (ths) 25.1 27.5 26.5 24.5 25.5 26.6 6,404 6,294 6,393 6,956 6,983 6,643 Single-family permits (#) 6,201 7,255 8,600 11,116 11,734 11,321 10,221 11,882 15,718 14,668 15,383 16,094 Multifamily permits (#) 15,545 14,234 14,402 17,801 18,699 18,772 212.0 231.9 253.5 284.5 323.5 359.0 FHFA house price (1995Q1=100) 366.9 375.4 388.8 405.4 427.8 457.7

Recent Performance. There is little that can shake Seattle-Bellevue-Everett’s economy. Despite troubles at top employer Boeing, the metro division enters the 10th year of its expan- sion with plenty of wind in its sails. Job and labor force gains have accelerated over the past year, and residential and commercial construction is firming after a hiccup late last year. Steadfast tech is the source of the economy’s vigor, and robust hiring by mature firms and smaller com- panies alike sustains a growing labor force. Hous- ing affordability is a rare blemish on an otherwise sterling economy; though house price apprecia- tion is no longer outpacing incomes, two years of double-digit gains have eroded potential buyers’ purchasing power.

Flight risk. Tough times at Boeing dampen the near-term outlook for aerospace manufac- turing, but the factory sector will find its foot- ing next year as the firm resolves concerns over the flightworthiness of its flagship 737 MAX. The latest iteration of Boeing’s best-selling jet was grounded in March following two fa- tal crashes; subsequent tests by the Federal Aviation Administration revealed additional safety risks that prolonged its review. With in- ventories of the popular plane stacking up, the aerospace giant dialed back production at its Renton plant. Local suppliers have responded in kind. According to the ISM-Western Wash- ington index, a proxy for manufacturing con- ditions in the Puget Sound, factory output has risen less quickly in the six months since the jet’s grounding.

Although the MAX is unlikely to return to the skies before the middle of next year, rapid growth in regional air travel in the United States and globally will sustain demand for new aircraft. Automation will limit the need for labor, but ris- ing production will place a floor under the firm’s 70,000-strong local workforce.

The trade war is a larger concern. Boeing will cut production of the twin-aisle 787 in response to softer growth along international routes, and further escalation would impair the outlook for manufacturing output and employment in SEA.

Tech titans. Despite headline-grabbing ex- pansions outside of Washington state, top tech employers Amazon and Microsoft will double down on their presence in the Puget Sound, fur- thering the virtuous cycle of jobs and investment that has made the Emerald City a global bas- tion of high tech. Amazon’s SEA workforce has grown by almost 25% in the two years since the completion of its new South Lake Union campus; Google’s new offices across the street will inten- sify competition for top tech talent. While SEA will continue to play home base to mature tech firms, rising venture capital inflows will support new firms; new establishments in software de- velopment and information technology employ a small but growing share of the tech workforce.

Affordability. Declining affordability and slower growth in mid-paying jobs pose a risk to the outlook for homebuilding. Although hous- ing affordability is about even with the national average, broad measures of affordability belie a skewed income distribution that has grown more so with the shift in SEA’s industrial base from manufacturing to information technology. While house price growth has slowed, earlier gains have dented affordability and threaten the outlook for home sales and new construction.

Propelled by tech, Seattle-Bellevue-Ever- ett will grow faster for longer, with job and income growth topping that in most other large metro areas well into next year. How- ever, troubles at Boeing, declining affordabili- ty, and the prospect of an extended trade war pose risks longer term.

Jesse Rogers November 2019

STRENGTHS » Global center for cloud-computing and software

development. » Highly trained, well-educated labor force. » Large port with connections to emerging Asian

markets. » Relatively high per capita income.

WEAKNESSES » Tech exposed to discretionary spending. » High business costs compared with emerging tech

hubs.

UPSIDE » Greater demand for cloud-computing and IT

services boosts hiring of tech workers. » Venture capital draws more startups. » Population gains further stimulate housing

demand.

DOWNSIDE » Trade tensions hurt sales of Boeing jets. » Housing affordability erodes faster. » Less freight traffic hurts trade, transport.

X X

COUNTY AS OF SEP 19, 2017Aaa

27 1st quintile

21142% Rank: 7

107%146%36 1st quintile

23 1st quintile

At Risk

Recovery

Mid Expansion

Late Expansion

In Recession

SEATTLE-BELLEVUE-EVERETT WA Data Buffet® MSA code: IUSA_DMSEA

MOODY’S ANALYTICS / Précis® U.S. Metro / November 2019

3-MO MA May 19 Jun 19 Jul 19 Aug 19 Sep 19 Oct 19 Employment, change, ths 6.7 7.8 8.0 5.6 4.4 3.5 Unemployment rate, % 3.5 3.4 3.3 3.2 3.1 3.0 Labor force participation rate, % 68.9 68.9 68.8 68.8 68.9 69.0 Average weekly hours, # 35.2 35.3 35.3 35.2 35.1 35.2 Industrial production, 2012=100 107.3 106.7 106.6 106.9 107.3 107.5 Residential permits, single-family, # 5,995 5,772 6,183 6,243 6,641 6,420 Residential permits, multifamily, # 20,127 15,882 14,934 13,576 16,851 13,784

Dec/Dec 2013 2014 2015 2016 2017 2018 Employment, change, ths 42.7 44.6 49.3 47.9 40.1 43.6

PRÉCIS® U.S. METRO • Seattle-Bellevue-Everett WA

SEA WA U.S. 09 10 11 12 13 14 15 16 17 18 19

90 95

100 105 110 115 120 125 130

14 15 16 17 18 19 -4

-2

SEA WA U.S. 14 15 16 17 18 19

58 60 62 64 66 68 70 72

SEA WA U.S. 09 10 11 12 13 14 15 16 17 18 19F 20F 21F 22F 23F

90 95

100 105 110 115 120 125 130

W l ▼▲ W l ▼▲

W l ▼▲

SEA WA U.S. 98 01 04 07 10 13 16 19

50 100 150 200 250 300 350

SEA WA U.S. 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6

SEA WA U.S. 0 1 2 3 4 5 6 7

SEA WA U.S. 96 98 00 02 04 06 08 10 12 14 16 18

60 80

100 120 140 160 180 200 220

Overvalued Undervalued 98 01 04 07 10 13 16 19

-30

-20

-10

% CHANGE YR AGO, 3-MO MA Oct 18 Apr 19 Oct 19 Total 2.3 2.3 3.3 Mining -0.1 -0.1 0.0 Construction 6.2 4.1 3.7 Manufacturing 1.3 3.9 4.8 Trade 1.1 0.2 0.0 Trans/Utilities 2.6 5.9 5.1 Information 7.8 6.0 6.2 Financial Activities 2.5 3.0 6.7 Prof & Business Svcs. 2.4 1.8 4.0 Edu & Health Svcs. 3.2 4.0 5.1 Leisure & Hospitality 3.6 4.0 3.0 Other Services 2.1 4.1 2.9 Government -1.9 -3.0 0.2

FORECAST VS. 6 MO PRIOR

2-Yr 5-Yr

3-DIGIT NAICS LEVEL, 6-MO MA

Sources: BLS, Moody’s Analytics

ECONOMIC HEALTH CHECK BUSINESS CYCLE INDEX

RELATIVE EMPLOYMENT PERFORMANCE

CURRENT EMPLOYMENT TRENDS

Source: Moody’s Analytics

Sources: BLS, Moody’s AnalyticsSources: BLS, Moody’s Analytics

Sources: BLS, Moody’s Analytics

% CHANGE YR AGO

Government Goods producing Private services

HOUSE PRICE

Sources: FHFA, Moody’s Analytics

Better than prior 3-mo MA Unchanged from prior 3-mo MA Worse than prior 3-mo MA Sources: BLS, Census Bureau, Moody’s Analytics

VACANCY RATES HOMEOWNER, % HOUSES FOR SALE

DIFFUSION INDEX

HOUSE PRICE TRENDS

Sources: NAR, Moody’s Analytics

GREATER THAN 100=MORE AFFORDABLE

HOUSING AFFORDABILITY

Sources: FHFA, Moody’s Analytics

JAN 2009=100

JAN 2009=100 1998Q1=100, NSA

RENTAL, % INVENTORY FOR RENT

Sources: Census Bureau, ACS, Moody’s Analytics, 2018

LO W

H IG

Ths % of total

MOODY’S ANALYTICS / Précis® U.S. Metro / November 2019

PRÉCIS® U.S. METRO • Seattle-Bellevue-Everett WA

Source: Moody’s Analytics, 2018

98%

100

134 100

SEA U.S.

0.42

0.00

0.20

0.40

0.60

0.80

1.00

Location Employees NAICS Industry Quotient (ths)

3364 Aerospace product & parts manuf. 16.3 88.4 5112 Software publishers 14.4 54.7 5415 Computer systems design & related srvcs. 1.9 40.5 6221 General medical and surgical hospitals 0.7 32.8 GVL Local Government 0.8 127.0 GVS State Government 1.2 65.6 5613 Employment services 0.8 32.3 2382 Building equipment contractors 1.1 23.2 7225 Restaurants and other eating places 0.9 101.0 6241 Individual and family services 1.3 32.2 4451 Grocery stores 0.9 26.5 7139 Other amusement and recreation industries 1.1 15.3

Source: Moody’s Analytics, 2018

Federal 21,571 State 61,102 Local 135,672

2018

SEA 176.4 10.2

U.S. 14,296.2 9.6

SEA 191.3 11.1

U.S. 7,261.0 4.9

Boeing Co. 64,300 Amazon 45,000 Microsoft Corp. 43,031 University of Washington 30,200 Providence Health & Services 17,553 Walmart Inc. 16,000 Fred Meyer Stores 15,500 Starbucks Corp. 11,239 Swedish Health Services 10,758 Costco Wholesale Corp. 9,264 Nordstrom Inc. 8,982 Alaska Air Group Inc. 7,403 Group Health Cooperative 7,271 Naval Station Everett 5,950 Virginia Mason Medical Center 5,611 Madigan Army Medical Center 5,554 T-Mobile 5,500 Washington State University 5,437 Quality Food Centers 5,400 Target 5,200

Source: Puget Sound Business Journal, 2018

Product $ mil Food and kindred products ND Chemicals ND Primary metal manufacturing ND Fabricated metal products ND Machinery, except electrical 1,304.5 Computer and electronic products 3,961.2 Transportation equipment 42,936.1 Miscellaneous manufacturing ND Other products 6,314.1 Total 59,742.9

Destination $ mil Africa ND Asia 32,101.8 European Union 11,290.8 Canada & Mexico 7,465.5 South America 985.8 Rest of world ND Total 59,742.9

% of GDP 15.2 Rank among all metro areas 30

Sources: BEA, International Trade Administration, Moody’s Analytics, 2018

129,246 108,910 92,001

SEA WA U.S.

0 20 40 60 80 100 120 140

COMPARATIVE EMPLOYMENT AND INCOME % OF TOTAL EMPLOYMENT AVERAGE ANNUAL EARNINGS Sector SEA WA U.S. SEA WA U.S. Mining 0.0 0.1 0.5 $62,026 $55,817 $103,785 Construction 5.9 6.3 4.9 $93,873 $80,182 $68,455 Manufacturing 9.4 8.4 8.5 $107,598 $91,769 $83,365 Durable 81.9 70.2 62.6 nd $102,472 $86,331 Nondurable 18.1 29.8 37.4 nd $66,733 $78,483 Transportation/Utilities 3.4 3.4 4.0 $75,613 $59,106 $60,890 Wholesale Trade 4.3 4.0 3.9 $102,091 $89,164 $88,316 Retail Trade 11.1 11.3 10.6 $77,531 $54,880 $35,245 Information 6.7 3.9 1.9 $204,667 $179,197 $119,417 Financial Activities 5.0 4.6 5.7 $60,009 $49,639 $59,540 Prof. and Bus. Services 15.2 12.5 14.1 $89,200 $74,854 $71,767 Educ. and Health Services 12.8 14.4 15.9 $64,970 $60,170 $56,400 Leisure and Hosp. Services 10.0 10.1 11.0 $39,334 $31,563 $29,108 Other Services 3.5 3.6 3.9 $48,457 $42,833 $38,639 Government 12.7 17.2 15.1 $89,717 $82,930 $78,273

Sources: Percent of total employment — BLS, Moody’s Analytics, 2018, Average annual earnings — BEA, Moody’s Analytics, 2017

SEA WA U.S. 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4

EMPLOYMENT AND INDUSTRY ENTREPRENEURSHIP

Due to U.S. fl uctuations Relative to U.S.

TOP EMPLOYERS

PUBLIC

INDUSTRIAL DIVERSITY

EMPLOYMENT VOLATILITY

Due to U.S.

Most Diverse (U.S.)

Least Diverse

Not due to U.S. M

LEADING INDUSTRIES BY WAGE TIER HIGH-TECH

EMPLOYMENT

HOUSING-RELATED EMPLOYMENT

BUSINESS COSTS

Source: Moody’s Analytics

U.S.=100

EXPORTS

PRODUCTIVITY

Total

Unit labor

Energy

State and local taxes

Offi ce rent

REAL OUTPUT PER WORKER, $

EMPLOYMENT IN NEW COMPANIES, % OF TOTAL

Sources: BEA, Moody’s Analytics, 2017

2012 2017

Sources: Census Bureau, Moody’s Analytics, avg 2012-2016

NET MIGRATION, #

MOODY’S ANALYTICS / Précis® U.S. Metro / November 2019

SEA U.S.

Sources: Census Bureau, ACS, Moody’s Analytics, 2018

MSE WA U.S.

08 09 10 11 12 13 14 15 16 17 18 30

INTO SEATTLE WA Number of

Migrants Tacoma WA 11,182 Los Angeles CA 3,888 Portland OR 3,686 New York NY 2,648 Phoenix AZ 2,312 San Diego CA 2,194 Chicago IL 2,114 San Jose CA 2,007 San Francisco CA 1,945 Oakland CA 1,904 Total in-migration 108,247

FROM SEATTLE WA Tacoma WA 18,442 Portland OR 3,552 Phoenix AZ 2,671 Bremerton WA 2,577 Los Angeles CA 2,358 Spokane WA 2,041 Bellingham WA 2,014 Olympia WA 1,989 Mount Vernon WA 1,916 San Jose CA 1,462 Total out-migration 98,824

Net migration 9,423

Index 2018 Rank* Gini coefficient 0.46 217 Palma ratio 3.3 128 Poverty rate 8.8% 363

*Most unequal=1; Most equal=403

8 22

0 2 4 6 8 10

Net Migration, SEA

15 16 17 18 0

10,000

20,000

30,000

40,000

50,000

0 5 10 15 20 25 30

0 5 10 15 20

SEA U.S.

0 5 10 15 20 25 30

2015 2016 2017 2018 Domestic 11,892 18,339 10,475 -464 Foreign 24,554 21,835 24,747 24,558 Total 36,446 40,174 35,222 24,094

Sources: IRS (top), 2016, Census Bureau, Moody’s Analytics

SEA WA U.S.

90.4%

Top Five Outside Sources of Workers Seattle WA Share Tacoma WA 6.1 Bremerton WA 0.9 Mount Vernon WA 0.4 Olympia WA 0.3 Bellingham WA 0.2

96.2%

Top Five Outside Sources of Jobs Seattle WA Share Tacoma WA 2.1 Mount Vernon WA 0.3 Bremerton WA 0.2 Olympia WA 0.2 Bellingham WA 0.1

Sources: Census Bureau, Moody’s Analytics, avg 2009-2013

RESIDENTS WHO WORK IN SEA WORKERS WHO LIVE IN SEA

PRÉCIS® U.S. METRO • Seattle-Bellevue-Everett WA

SEA

COMMUTER FLOWS

ECONOMIC DISENFRANCHISEMENT

Undereducated Balanced Overeducated

MIGRATION FLOWS

GENERATIONAL BREAKDOWN

SKILLS MISMATCH

EDUCATIONAL ATTAINMENT

% OF ADULTS 25 AND OLDER

< High school High school Some college College Graduate school

100

POPULATION BY AGE, %

U.S.

≥75 70-74 65-69 60-64 55-59 50-54 45-49 40-44 35-39 30-34 25-29 20-24 15-19 10-14

5-9 0-4

PER CAPITA INCOME

Sources: BEA, Moody’s Analytics

$ THS

POPULATION BY GENERATION, %

% OF TOTAL

Less than HS

High School

Some College

Associate’s

Bachelor’s

Graduate

Occupations Population

HOUSEHOLDS BY INCOME, %

Gen Z

Millennial

Gen X

Baby Boom

Silent & Greatest

0-19,999 20,000-39,999 40,000-59,999 60,000-74,999 75,000-99,999

100,000-124,999 125,000-149,999 150,000-199,999

200,000+

U.S.

NET MIGRATION, #

20 13

2018 SEA $81,471 WA $62,026 U.S. $54,446

Sources: Census Bureau, ACS, Moody’s Analytics, 2018

Sources: Census Bureau, Moody’s Analytics, 2018 Sources: Census Bureau, ACS, Moody’s Analytics, 2018 Sources: Census Bureau, Moody’s Analytics, 2018

MOODY’S ANALYTICS / Précis® U.S. Metro / November 2019

GEOGRAPHIC PROFILE

Sources: ACS, Moody’s Analytics

POPULATION DENSITY

MEDIAN HOUSEHOLD INCOME

AVERAGE COMMUTE TIME

POPULATION & HOUSING CHARACTERISTICS

Units Value Rank*

Total area sq mi 4,503.2 59

Total water area sq mi 300.4 76

Total land area sq mi 4,202.8 60

Land area - developable sq mi 1,662.6 68

Land area - undevelopable sq mi 2,540.2 53

Population density pop. to developable land 1,728.7 18

Total population ths 3,048.1 14

U.S. citizen at birth % of population 76.7 372

Naturalized U.S. citizen % of population 10.6 32

Not a U.S. citizen % of population 11.0 32

Median age 37.1 263

Total housing units ths 1,266.4 12

Owner occupied % of total 55.7 254

Renter occupied % of total 38.8 38

Vacant % of total 5.4 380

1-unit; detached % of total 55.9 357

1-unit; attached % of total 4.8 151

Multifamily % of total 36.6 22

Median year built 1983

* Areas & pop. density, out of 410 metro areas/divisions, including metros in Puerto Rico; all others, out of 403 metros.

Sources: Census Bureau, Moody’s Analytics, 2018 except land area 2010

PRÉCIS® U.S. METRO • Seattle-Bellevue-Everett WA

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Additional terms for Japan only: Moody’s Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody’s Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.