Text on screen: PIMCO

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Text on screen: How will working from home change the office market?

Megan Walters: A recent survey by JLL showed that in the survey that they had conducted

Text on screen: Dr. Megan Walters, Global Head of Research, Allianz Real Estate

about 56% of companies were waiting until the second half of 2021, the second half of this year to make the decision whether to return to the office.

Images on screen: Corporate office buildings

But one of the areas, where there is a very strong consensus is the idea of a hybrid model where many people would like to choose to work from home on a flexible basis. And three out of four firms surveyed said that they felt they would probably expect about 20% of their workforce to work from home on average two days a week.

Text on screen: Firms anticipate increasing individual floor space by 20% per person

Images on screen: Corporate office interiors

And over half the firms expected to increase the amount of floor space per person when people did return to the office by as much as about 20% for health and hygiene factors and primarily to accommodate perhaps different styles of working that might be much more collaborative.

On balance, the working from home factor kind of seems to come out evenly, but in any situation, in any economic downturn, there will be some companies, some organizations that have not survived the pandemic terribly well, and they will need to give back space.

And so we might see vacancy space coming to the market from an economic perspective almost regardless of what happens from working for home.

Text on screen: What are some of the key trends we see affecting the core office market going forward?

Francois Trausch, Global CEO & CIO, Allianz Real Estate

Francois Trausch: A clear path to a carbon footprint reduction is definitely something which we are observing in terms of what investors and tenants are looking for in that different acquisition.

Images on screen: Corporate office buildings

Text on screen: TITLE – What core real estate investors and tenants are looking for in offices, BULLETS - Reduced carbon footprint, Well-located in city centers, Greater amenities, Mixed-use space

And that's something which we are paying increasing attention to meaning have a clear path to reduce carbon footprint in all the office assets we are acquiring. A second theme, which we're looking at is well located central offices.

The other aspect of course, we're looking for is high tenant experience. Tenants want more amenities, they want more technology in their buildings. Then finally, I should add that mixed use concept also becoming more and more popular in acquisitions. It can even go back to very old historical buildings.

Even old buildings are able to be transformed and be very attractive, especially if you can position them as mixed use buildings, mixing up different usages in one asset.

Text on screen: Have we seen distress emerge across the office market?

Text on screen: John Murray, Global Head, Private Commercial Real Estate, PIMCO

John Murray: What you're seeing today in our portfolio and really nationwide is limited tenant defaults today. If you even look at CMBS as a barometer, less than 2% of the CMBS universe has office loans that are in delinquency. So again, tenants aren't defaulting, but

Text on screen: Less than 2% of U.S. commercial mortgage-backed securities have office loans in delinquency

Images on screen: Corporate office buildings

I would be concerned about secondary office and secondary locations, which you think about your typical tenant. There could be a 15,000 foot small law firm partner owned that hasn't de-densified yet. That's where you're going to see those pressure, but that will accumulate over time and build again in 2022 and beyond.

But in terms of our investment activity, we've been somewhat contrarian, we've actually acquired two vacant office complexes in Silicon Valley over the past nine months.

Text on screen: Opportunities in R&D-focused office spaces

Images on screen: Silicon Valley office buildings

In Silicon Valley, these are heavy R&D research and development types of markets, and you really can't test hardware at home. So we see less pressure on those markets and we felt the broad paint brush against the office market was a little bit overblown.

Text on screen: Capital is returning to select areas of the office market

Images on screen: San Francisco and New York skyline

Lastly, I'll note that, we are seeing capital come back to the office market, particularly in those New York and San Francisco in those limited transactions. As a real-time example, we recently pursued a lease-up office deal in Manhattan where bidding competition accelerated quite dramatically over the last 60 days, ultimately resulting in the winning bid, going about 10% plus above broker guidance. So similar to the housing market today, you're seeing capital come back and you're seeing some, actually some accelerated bidding activity.

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Text on screen: PIMCO 50 1971-2021

JLL Account Pulse Survey, February 2021

Disclosure

IMPORTANT NOTICE

Please note that the following contains the opinions of the manager as of the date noted and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.

All investments contain risk and may lose value. Investments in residential/commercial mortgage loans and commercial real estate debt are subject to risks that include prepayment, delinquency, foreclosure, risks of loss, servicing risks and adverse regulatory developments, which risks may be heightened in the case of non-performing loans. The funds will also have exposure to such risks through its investments in mortgage and asset-backed securities, which are highly complex instruments that may be sensitive to changes in interest rates and subject to early repayment risk. Private Credit funds will also be subject to real estate-related risks, which include new regulatory or legislative developments, the attractiveness and location of properties, the financial condition of tenants, potential liability under environmental and other laws, as well as natural disasters and other factors beyond the fund’s control. Equity investments may decline in value due to both real and perceived general market, economic and industry conditions, while debt investments are subject to credit, interest rate and other risks. Investing in banks and related entities is a highly complex field subject to extensive regulation, and investments in such entities or other operating companies may give rise to control person liability and other risks. In addition, there can be no assurance that PIMCO’s strategies with respect to any investment will be capable of implementation or, if implemented, will be successful. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets.

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CMR2021-0719-1723836