Manulife US REIT - Annual Report 2021

MANULIFE US REIT 30 Green Shoots for Offices Despite COVID-19 The ongoing COVID-19 pandemic and emergence of new variants continued to disrupt the U.S. office market. Many corporations had announced their plans to return to the office after the Labor Day holiday in September, encouraged by rising vaccination rates in the first half of the year. However, the emergence of the Delta and Omicron variants in the summer and in late 2021 caused them to put those plans on hold. In tandem, the weighted average physical occupancy of MUST’s properties increased from 10.0% in January 2021 to 23.0% in July 2021, but largely plateaued and only inched up to 30.0% through the year end. Despite the uncertainty around the pandemic, leasing momentum recovered especially in the second half of the year. In MUST’s portfolio, from 1H to 2H2021, the proportion of new/expansion leases increased ~2.6X to 28.1% of leases executed, while the WALE increased from 2.8 years to 5.1 years. Net effective rents (NERs) also improved 3.4% from US$37.96 to US$39.26 over the same period, as tenant concessions eased. MUST even achieved a Fitwel certification for Michelson for providing building features and amenities that improve the health and productivity of tenants amid the pandemic. More details can be found on page 103 in the Sustainability Report. Across the U.S., 4Q2021 was the first quarter of positive net leasing absorption since the onset of COVID-19 at 5.4 million sq ft. Leasing volume showed consistent quarterly gains over the course of 2021, rising 13.8% to 44.6 million sq ft from 3Q to 4Q2021. Full-year office leasing volume was 14.6% above 2020 at 156.9 million sq ft, while the term length of leases signed in the U.S. increased for four consecutive quarters to an average of 7.8 years in 4Q2021. Concurrently, TIs and free rent incentives showed a steady decline, especially in the second half, falling 11.4% from US$72.76 psf to US$64.44 psf, and from 8.9 months to 8.2 months, respectively, from 3Q to 4Q2021. These trends signal a vote of confidence that the U.S. office market is on the mend. WALE (years) Tls (US$) Free Rent (months) Lease Volume (m sq ft) Tenure (years) NERs (US$) Renewals (sq ft NLA) New/Expansion (sq ft NLA) ~305,000 sq ft ~349,000 sq ft 1H2021 2H2021 ~2.6X 92.1% 71.9% 7.9% 28.1% 1H2021 2H2021 +82.1% 2.8 5.1 1H2021 2H2021 +3.4% 37.96 76.98 27.0 74.52 34.7 72.76 39.2 44.6 39.26 2Q2021 2Q2021 3Q2021 3Q2021 1Q2021 1Q2021 4Q2021 4Q2021 -11.4% +13.8% 8.7 7.1 8.9 7.4 8.9 7.7 8.2 7.8 Proportion of New/Expansion Leases Increased ~2.6X Longer WALE for Leases Executed Net Effective Rents Improved Higher Leasing Volume and Longer Tenure TIs and Free Rent Easing Operational Review Source: JLL US Market Office Overview 4Q2021. 64.44