Alony Hetz — AGM Information 2024

Mar 13, 2024

Office Market Outlook

Prepared for Alony Hetz Properties & Investments Ltd 2024 Capital Markets Annual Meeting

March 2024

Disclaimer: This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.

Macroeconomic Outlook for 2024

Uncertainty remains, but momentum should build as the year progresses

Growth

Growth to be slower, but still mostly positive in 2024—with momentum building in H2

Inflation/Prices

Inflation is falling, but prices remain elevated, and risks remain

Interest rates

Policy rates have peaked, but central banks may hold higher for longer than markets expect

Risks & uncertainty

Another year of elevated geopolitical tensions, policy risks, and election uncertainty

Uncertainty around the growth outlook is wide – many forecasts incorporate positive and negative views

2024 GDP growth forecast (% YoY)

Forecast range Median forecast

Source: JLL Research

3 | © 2024 Jones Lang LaSalle IP, Inc. All rights reserved.

U.S. 10 Year Treasury Yield (%)

Future office demand considerations: Balancing cyclical and long-term factors

Cyclical Factors

Economic growth

Growth outlook is expected to be weak, but mostly positive, for major economies in 2024, with momentum expected to build in the latter half of the year

Job growth

Firms continue to recruit more than they are laying off, leaving job vacancy rates elevated compared to historic norms

Long Term Factors

Hybrid-working

Employers are finalizing hybrid work policies, with a wave of major employers recently reversing remote-first work

Sustainable buildings

Sustainable buildings are likely to drive greater interest from occupiers on account of the reduced operating and energy costs

Rising cost

Inflation is falling, but price levels are expected to remain elevated

Return-to-work metrics

Office re-entry rates have improved and reached a postpandemic high in 2023, surpassing and plateauing around 50% overall

Office utilization

Ratio of unassigned seating to dedicated desks is increasing as some employees trade assigned spaces for locational flexibility

Flight-to-quality

Tenants are upgrading their offices with premium amenities and hospitality services to help lure remote workers back to the office

U.S. re-entry rates reflect growing dominance of three-day workweek; further gains in office attendance will likely be incremental

63.5% 30% 35% 40% 45% 50% 55% 60% 65% 70% Jan-22 Feb-22 Mar-22 Apr-22 May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 Jul-23 Aug-23 Sep-23 Oct-23 Nov-23 Dec-23

Placer.AI weekly average attendance rate

Source: JLL Research,Placer.ai, KPMG

5 | © 2024 Jones Lang LaSalle IP, Inc. All rights reserved.

KPMG 2023 CEO Outlook

of CEOs believe hybrid schedules will transition back to pre-pandemic attendance frequency by 2026

Company	Initial Policy	Current/Announced Policy
Fidelity Investments	1/4 weeks	2/4 weeks
Deutsche Bank	3 days/week	4 days/week
Deere	2 days/week	4 days/week
L'Oreal	3 days/week	3 days/week + 2 Fri./month
UPS	3 days/week	5 days/week
JPMorgan	3 days/week	5 days/week
Disney	3 days/week	4 days/week
USAA	3 days/week	4 days/week
Boeing	3 days/week	4-5 days/week
Geico	2 days/week	4 days/week
BlackRock	3 days/week	4 days/week
Verizon	1 day/week	3-4 days/week
Nike	3 days/week	4 days/week
Nationwide Insurance	1 day/week	2 days/week
Daimler Trucks	2 days/week	4 days/week

Office utilization is increasing as the ratio of unassigned seating to dedicated desks increases

• Traditional closed office layouts • Departure from traditional closed • Continued emphasis on collaboration • Open offices transition to activity comprised the dominant design, with office layouts and increased adoption drives increased adoption of open based working, providing different open office plans a more niche of open office plans featuring low or office plans – private offices become spaces for employees to self-select emerging concept. no partitions and a central working rarer and smaller. based on work preferences. area, designed to promote • Large private offices; not uncommon • Technology becomes deeply • Continued gradual shift away from collaboration. for executives to have private offices integrated to offices – computer private offices, plateauing of in excess of 500 s.f. • Introduction of first computer workstations become ubiquitous, downsizing of private offices. workstations, technology featured in increased infrastructure for hardware • Introduction of new technologies • Continued shift towards paperless offices more prominently which and wireless networks, first instances including copy machines and offices eliminates space needs for file necessitated new infrastructure to of remote work. computers. storage, increased adoption of manage cables. • Decreased reliance on paper begins technology leads to greater space • Design trends focused on improved • Growing focus on employee comfort: to eliminate space dedicated to file dedicated to technology employee experience: air improved furniture, natural light, storage. infrastructure. conditioning became widespread in improved aesthetics. offices in the 1950s, designs • Design begins to focus on • Design focuses on wellness and incorporated more vibrant color and sustainability and wellness, engagement: amenitized offices with patterns to create vibrant work introducing fitness centers, standing curated events and activities for environments. desks and other amenities. social engagement. 250-350 225-300 175-250 150-175	1950s 1960s	1970s	1980s	1990s	2000s	2010s	2020s
s.f. per employee s.f. per employee s.f. per employee s.f. per employee

Office flight-to-quality trend becoming structural

Structural shift in demand for highest quality assets

• A highly bifurcated market
• Focus on high-quality and differentiated space
• Construction pipeline peaking
• Accelerating obsolescence in Grade B and C space

Source: JLL Research

Quality will be a major determinant of future performance

Source: JLL Research, *Sizable share of assets will be converted to alternative uses, demolished or remain functionally challenged. Analysis reflects top 20 U.S. MSAs, office assets 100k+ s.f.

Rent growth in high-end product counterbalanced by persistent pressure from elevated concession packages and financing costs

Behind the U.S. flight to quality: Positive absorption, positive rent growth, lower cap rates and greater investor conviction

Average cap rate (%)

Average asking rent (\$ p.s.f.)

Net absorption by vintage

Next 5 years will expose widening divergence across product tiers

Percent Leased by Product Tier

\$40.19 \$46.33 \$28.26 \$31.61 \$24.04 \$19.95 \$20.81 \$15.48 \$10 \$15 \$20 \$25 \$30 \$35 \$40 \$45 \$50 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 Average Net Rental Rates by Product Tier Lifestyle Office (Tier 1) Radically reimagined product (Tier 2) Base Case Assumptions 15% change 12% change -18% change -26% change 5-Yr Change

Good bones w/ reposition potential (Tier 3) Functionally challenged (Tier 4)

Source: JLL Research; Analysis reflects top 20 U.S. MSAs, office assets 100k+ s.f.

Leasing activity remains disrupted, but is well-above pandemic lows

Gross leasing activity

Source: JLL Research, Note: Tan bars represent leasing volume by coworking providers and are excluded from pre-pandemic average

Sublease additions remained elevated but have slowed considerably from peak levels Net quarterly change in

Source: JLL Research

Groundbreakings have declined precipitously, potentially creating intense supply constraints in high-end product over the medium term

Source: JLL Research

Higher interest rate environment challenging buy/sell decisions; offices spreads projected to stabilize around +200 bps

*Assumes core/core plus assets with low to moderate leverage. CMBS spreads provided by JLL debt advisory business. Source: JLL Research, Bloomberg Finance L.P. (Current is as of February 16, 2024)

Office sector currently trading at a steep discount compared to the prior decade

Derwent (DLN) Implied cap rate vs. NAV premium

Source: JLL Research; Green Street, data as of 2/26/2024

What is needed for a meaningful capital markets recovery to set in?

Fed has to start taking interest rate down

Loan spreads have to stabilize

Investors' risk premium around recession risk must not worsen

Large money center banks have to return to the market

More clarity has to emerge around hybrid work's impact on office demand

ODCE ("Open end diversified core equity") funds marks need to reflect reality

Office capital markets themes for 2024

	Market Conditions Today
Rate sentiment has improved since the summer	• Sentiment on rates has improved markedly since the summer • Consensus is that there will be rate cuts by H2 2024, which would have a positive impact on cost of capital and therefore residual cap rates
Debt market conditions remain challenging; Seller financing is still a potent tool to transact	• Debt liquidity today varies substantially by both deal size and quality / profile of the underlying asset: • <\$75M loan sizes are generally gaining greater lender traction • Larger loans rely almost exclusively on CMBS / SASB (Single Asset Single Borrower) market, though exceptions have been made for high performing assets • For Tier 3 / 4 assets, the only options are from debt funds or existing sellers / lenders (who are offering future funding to fund leasing costs & TIs) • Money center banks, regional banks, life insurance companies are largely risk-off • CMBS / SASB market is starting to improve for other property types, indicating it could be possible for high-quality office assets in 2024 • Many institutional investors are beginning to raise debt funds to fill gap in A note space • Liquidity from CMBS, debt funds, insurance companies will payoff bank loans allowing banks to re-enter the market in 2025
Supply dynamics continue to look favorable for Tier 1 and well-located Tier 2 assets	• Net U.S. office supply loss is expected as soon as this year (2024) and we do not expect a meaningful pick-up in spec construction activity before 2030 • We are headed toward a "Great Basis Reset', particularly for Tier 3 & 4 assets during 2024 • Capital intensity (including Tis, free rent periods) remains high for offices and is acting as a drag on net effective rents, particularly for lower quality assets
Liquidity for office is expected to improve in 2024	• Private capital made up 76% of 2023 office investment activity • Institutional investors starting to believe the "right" office will provide alpha • Expectations are that there will be greater capital markets activity in 2024: • At the top end of the market (Tier 1 / 2), driven by opportunistic capital (HNW (High Net Worth) / Private / International / Private Equity) • At the lower end (Tier 3 / 4), driven by lender capitulation (short sales / loan sales / distressed processes)
Core cap rates have widened further with shifts in lending market	• Office asset values remain down 20-50+% depending on asset quality and location, with Tier 1 assets holding value better • Cap rates for core, new construction assets with WALT ranges from 6.5%-7.5% today • When the 10-year dipped below 4%, we began to see residual cap rate compression on underwriting • K-shape recovery for office assets leading to distressed sellers of commodity office
Specialist office operators will be more critical to future performance	• New standards for quality, amenitization, service and ESG will require a deeper level of operational expertise • Differentiated development, design and building operations and management will mitigate risks and unlock opportunities

Source: JLL Research

Washington, DC – Market Highlights

Key Market Themes

• Direct vacancy rates for trophy asset classes in the CBD are substantially lower compared to Class A and Class B/C office buildings
• Over the past 5 years, 96% of positive absorption occurred in Tier 1 assets, and we expect this to continue to be the case in the next 5 years, particularly as new deliveries fall below 500k SF by 2025
• Spillover demand from a tighter Tier 1 market will occur in welllocated Tier 2 assets, though this is not expected for a few years
• Tenants looking for Tier 1 spaces have started their searches earlier to secure the spaces they want
• Just three new buildings (1.0m s.f. total) are currently under construction, with 65% of the space pre-leased
• Metro ridership has been steadily increasing end ended 2023 at 60% of 2019 levels
• Sublease availability dipped in Q4 2023 to 3.3 m s.f.

New office construction by delivery year, 2010-2025

Direct vacant space (s.f.) by building class, Q4 2023

Source: JLL Research

Trophy assets in DC are seeing lower total vacancies and higher rent premiums than the rest of the market

Average direct asking rents by building class, Washington, DC 2008- Q4 2023

Washington, DC total vacancy – Trophy vs remainder of market, 2010 - 2023

*As part of a continuous process of data quality improvement, JLL Research re-evaluated market performance of all DC office buildings against their assigned building class. We reclassified buildings as needed to ensure consistency in class designation. Q4 2023 market statistics reflect the reclassified building set.

Source: JLL Research

Boston – Market Highlights

Key Market Themes

• Demand has increased across the city, but the continued "right sizing" of tenants will impact overall leasing velocity through 2024; similarly, it will take time for the market to process the more than 4MSF in sublease space
• Active tenant requirement in the city increased for the second straight quarter, setting up for an uptick in transaction activity in 2024 after subdued end of 2023
• Total level of the sublet space is decreasing, with the lowest total recorded since April of 2023
• Long-term tailwinds for the Boston market remain unchanged; the market remains one of the top clusters of talent and innovation and leasing activity is expected to pick up momentum in 2025 onward
• Between 2020-2022 there was nearly 4 MSF of positive net absorption in Tier 1 product; this flight to quality will continue going forward
• Deliveries will slow substantially through 2025 (with only four buildings slated to deliver across both years) and will be slow to resume, resulting in tighter occupancy and fundamentals for Tier 1 and 2 product

Average asking rents, Q1 2020 to Q4 2023

Total vacancy by asset class

Source: JLL Research

Several key indicators fuel optimism in the Boston office market

• Demand has increased for five consecutive quarters in Boston, with the average total demand increasing 73.9% and total number of requirements increasing 35.4% over that period.
• This wave of demand has a limited supply of available new construction to transact in, which should have a positive trickle-down effect across the second-generation Class A market.
• Analysis of upcoming lease expirations show that only ~35% of future tenants in the market are a high risk to meaningfully downsize from their current footprint across the city.
• While vacancy has risen to new highs, it is heavily concentrated within a small subset of underperforming assets, with only 10% of buildings in the city being responsible for more than 50% of the total vacancy.

Exposure to Future Downsizing Risk

1% of Buildings 10% of Buildings 25% of Buildings 50% of Buildings

Source: JLL Research

London – Market Highlights

Key Market Themes

• The market is expected to become more divided, with heightened activity centered around prime space, while lowerquality stock may face challenges in attracting tenants. Flight to quality remains evident with 58% of under offer for pre-let, newly built or refurbished stock
• Annual leasing volumes are anticipated to pick up in 2024 and should trend towards the long run average, but election timing may see some pause in activity. Uplift in preletting is anticipated as proportion of overall activity- focus on core locations
• Office deliveries are expected to slowdown from 2026 as costs and constrained financing options further limit high-quality space options. Vacancy is expected decline across all markets- City will see strongest contraction in supply

Central London take-up by quarter

Central London	Q4 2023	10-year quarterly average	Year-on-year change
Quarterly take-up (sq ft)	3.4 million	2.6 million
YTD take-up (sq ft)	9.7 million	10.2 million
Under offer (sq ft)	2.3 million	2.7 million
Active demand (sq ft)	12.2 million	9.2 million
Overall vacancy rate (%)	9.2%	5.7%
New build vacancy rate (%)	1.5%	1.0%
Speculative under construction (sq ft)	10.3 million	8.2 million
Quarterly investment volumes (£bn)	£1.6 billion	£3.4 billion
YTD investment volumes (£bn)	£6.6 billion	£13.7 billion

Central London vacancy rate, 2000- 2023 Q4

New and refurbished space expected to see stronger growth with decrease in vacancy

City new/refurbished vacancy rate West End new/refurbished vacancy

What are the big themes shaping our outlook to 2030?

Geopolitics	Future of Work	Technology	Sustainability	Capital
Military conflicts	Workplace experience	The AI era	Climate risk	Inflation & interest rates
Defense and security	New work models	Automation & robotics	Energy transition, renewables, clean tech	Debt super-cycle and financing gap
Deglobalization	Talent landscape	Quantum computing
Supply chain	Location strategies	Digital and "smart"	Net zero carbon	Real estate allocations / models
diversification	and future of cities	everything	Policy and regulation

Thank you!

Disclaimer: This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forward-looking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.