U.S. Retail MarketView Q4 2012

Availability rate 12.8%

CBRE Global Research and Consulting

Net absorption 6.2 MSF

construction completions 2.5 MSF

Q-o-Q Total retail sales change 1.5% *Arrows indicate change from previous quarter.

Cautious Optimism for Retail in 2013 Executive Summary • Emerging markets are expected to lead global retail sales in 2013. • Despite political headwinds, retailers closed out the 2012 holiday season on a relative high-note. • Prime Retail Highlights 2012: Flight-to-quality drives demand for retail real estate. • Retail Capital Markets: Growing investor appetite for retail assets. • Total retail transaction volume exceeded $18 billion in Q4 2012, which was the highest quarterly sales total since 2007. Investors continue to trade higher returns in favor of market liquidity and trophy assets in core markets. • Megatrend Spotlight: Aging demographics will dramatically alter retailing in the U.S.

Retail market fundamentals improved modestly in Q4 2012, as the national availability rate reached 12.8%, a decline of 30 basis points (bps) on a year-over-year basis.1 Overall, retail market fundamentals remained sluggish in 2012, but have been trending in the right direction since the retail recovery gained traction in 2011. The trajectory of consumer spending growth has been tempered by political uncertainties, particularly by ongoing federal taxation and sequesteration negotiations in Washington, D.C. Although improvement in the housing market brought some much-needed respite to consumer confidence levels—and, ultimately, retail sales—in Q3 2012, the prevailing political climate is 2013 expected to be a continued hindrance (Real Retail Sales Growth, 2013) to U.S. economic expansion through the first half of 2013. Despite the rally in Q3 2012, consumer sentiment dropped

Retail Sales Outlook

in January 2013 to its lowest level since December 2011,2 a sign of the negative effects of the “fiscal cliff” negotiations and a potential bellwether for consumer spending levels in Q1 2013. On the bright side, retailers were able to withstand the overall political headwinds and closed out 2012 on a relative high note, as total retail sales for December grew by 0.5%,3 exceeding consensus expectations for the holiday season. Globally, the 2013 outlook for retail sales is expected to be highly bifurcated, with sluggish sales growth expected in North America and declines across Europe. Emerging markets such as China and Brazil are expected to be momentum markets in 2013. CBRE Econometric Advisors, Q4 2012. Moody’s Analytics, January 2013; University of Michigan Consumer Sentiment Survey, January 2013. 3 Moody’s Analytics, January 2013. 1 2

Figure 1: 2013 Retail Sales Outlook

4.1% RUSSIA

2.0% CANADA 1.0% U.S.

1.0% U.K. -0.3% FRANCE

0.0% GERMANY

3.3% MEXICO

-3.7% SPAIN

-3.7% ITALY

• Market Spotlight: Technology and tourism drives demand in Union Square, San Francisco.

8.4% BRAZIL 9.6% ARGENTINA

12.3% CHINA -0.1% JAPAN 2.6% SOUTH KOREA

1.1% AUSTRALIA Source: IHS Global Insight, January 2013.

Source: IHS Global Insight, January 2013.

© 2013, CBRE, Inc.

improvement packages). As an example, overall availability rates in the international gateway markets of San Francisco and Miami both stood at 6.4% in Q4 2012, far below the overall national average of 12.8%.4 At the other end of the spectrum, overall activity in secondary markets remained cautious, as retailers need surety of performance, while capital continues to be concerned about re-lease and exit scenarios. Urban districts in secondary markets were appealing alternatives for occupiers experiencing “sticker shock” in prime markets.

Figure 2: Monthly U.S. Retail Sales Growth Figure 2: Monthly U.S. Retail Sales Growth 1.6%

Q4 2012

1.4% 1.2% 1.0% 0.8% 0.6% 0.2% 0.0% -0.2% -0.4% -0.6% -0.8%

Total Retail Sales

December 2012

November 2012

October 2012

September 2012

August 2012

July 2012

June 2012

May 2012

April 2012

March 2012

February 2012

-1.0%

January 2012

U.S. Retail | MarketView

0.4%

Retail Sales Excluding Auto

Source: Moody’s Analytics, January 2013.

Figure 3: 2013 Outlook for Retail Construction at Outlook a Historic Low Figure 3: 2013 for Retail Construction at a Historic Low Completions and Absorption (MSF)

Availability Rate (%)

100

Forecast

14%

80

12%

60

10%

40

8%

20

6%

0

4%

-20

2%

-40

0%

2005

2006

2007

Completions (L)

2008

2009

2010

Net Absorption (L)

2011

2012

2013

2014

Prime Retail Highlights Activity in 2012 With demand for prime space outstripping supply, prime rent growth accelerated in 2012. Consumers continued to spend on leisure services throughout the year, which helped raise demand for space in tourism destinations such as New York, Washington, D.C., and San Francisco. Top-performing prime retail markets included the M Street corridor in Washington, D.C.’s Georgetown neighborhood, where achievable net prime rents surged by nearly 29% on a year-over-year basis to reach $225 per sq. ft. in Q4 2012. Given that the pace of rent growth has been primarily driven by a lack of supply, this trend is expected to continue in the first half of 2013 as construction levels will remain historically low. New supply along Fifth Avenue in New York City came online at historically high rates during 2012. As a result, prime rents in New York grew by 16.5% over the past year to reach an all-time high of $2,970 per sq. ft. in Q4 2012. Figure 4: Flight-to-Quality Continues to Drive Prime Rent Growth

Availability Rate (R)

Source: CBRE Econometric Advisors, Q4 2012.

In light of such uncertainties, international retailers are focused on expansion in emerging markets in Asia Pacific and Latin America. Meanwhile, there is cautious optimism for an acceleration of activity in the U.S. in the second half of 2013 after an expected resolution to debt ceiling and sequestration negotiations.

2

Flight-to-quality continued to be the overall theme for the retail real estate market in the U.S. as leasing conditions were highly bifurcated. International retailers—particularly luxury and fashion apparel retailers in the market for flagship stores—competed for prime space in core markets. Available space in core urban districts remained scarce and construction levels were at historic lows, driving rent appreciation and forcing potential tenants to secondary markets at lower costs (and appealing tenant

Net Prime Rent, Q4 2012 (US$/sq.ft./ annum)

Q4 2012 Y-o-Y Percent Change

$2,970

16.5%

City

Street/Centre

New York

Fifth Avenue (49th to 59th Streets)

San Francisco

Union Square

$575

15.0%

Los Angeles

Rodeo Drive

$550

5.8%

Chicago

Michigan Avenue

$480

0.0%

Miami

600/700 block of Lincoln Road

$250

25.0%

Washington, D.C.

M Street, Georgetown

$225

28.6%

Dallas/Fort Worth

Highland Park Village

$170

6.3%

Boston

Newbury Street

$150

15.4%

Philadelphia

Walnut Street

$135

8.0%

Seattle

6th & Pine

$83

10.7%

Denver

Cherry Creek

$57

7.5%

Source: CBRE Research, Q4 2012. 4

CBRE Econometric Advisors, Q4 2012.

Retail Capital MarketS Trends in 2012 Commercial real estate was a particularly strong asset class in 2012, with one-year total annualized returns exceeding 10.5%, according to the NCREIF Property Index (NPI). While equities was the top-performing asset class of 2012, traditional brick-and-mortar retailers, such as home improvement stores and apparel retailers, were stronger performers among S&P 500 companies.

Figure 7: Total Annualized Returns by Property Type Figure 7: Total Annualized Returns by Property Type Annualized Returns (%)

12% 10%

U.S. Retail | MarketView

Figure 5: Strong Performance forPerformance Real Estate Assets in 2012 Figure 5: Strong for Real Estate Assets in 2012

8% 6%

Annualized Returns (%) 20%

Q4 2012

14%

19.70%

4%

18% 2%

16.00%

16% 14% 12%

0% 11.78%

10%

Industrial

Apartment 1 Year

Office

Hotel

10 Years

Source: NCREIF, Q4 2012.

8.44%

8%

7.10%

6%

Figure 8: Total Annualized Returns RetailReturns Properties by Region Figure 8: Totalfor Annualized for Retail Properties by Region

4.66%

4% 2.02%

2% 0%

Retail

10.54%

1.74%

Annualized Returns (%)

2.41%

1.69%

13%

0.07% REITs(1)

Equities(2)

Real Property(3)

CPI(5)

Government Bonds(4)

1 Year

T-Bills(6) 12%

10 Years

Source: NCREIF, Q4 2012. (1)NAREIT Equity REIT Index, (2)Standard & Poors 500 Index, (3)NCREIF Property Index, (4)Barclays Capital Govt Bond, (5)Consumer Price Index, (6)90-day T-Bills

11%

Commercial real estate investors remained primarily attracted to trophy office assets in liquid and core markets in 2012. Nevertheless, investors with an appetite for yield were attracted to retail investment properties, as its total one-year return was the strongest of any property type in 2012.

10%

9%

Figure 6: Best-Performing Consumer Sectors in the Targeted S&P 500 Figure 6:Retailers in Equity Markets in 2012

8%

South

West 1 Year

Annual Index Value Price Change (%), 2012

S&P 500 GICS Sectors (%)

East

Midwest

10 Years

Source: NCREIF, Q4 2012.

Home Improvement Stores

Figure 9: Total Returns by Retail Subtype Figure 9: Total Returns by Retail Subtype

Internet Retail Apparel Retail

One-Year Annualized Returns (%)

Hypermarkets & Super Centers Drug Retail

Super Regional Centers

Automotive Retail Food Retail

Single Tenant

General Merchandise Stores Food Distributors

Neighborhood Centers

Department Stores Homefurnishing Retail

Fashion/Specialty Centers

Specialty Stores Power Centers

Computer & Electronics Retail -40%

-20%

0%

20%

40%

60%

Retail investment transactions activity totaled $18.4 billion in Q4 2012, the highest quarterly total since 2007,5 as numerous investors rushed to close deals in December in order to avoid higher taxes in 2013. Although capital market trends have yet to reach peak levels, the surge in sales volume suggests a growing buyer appetite for retail assets. © 2013, CBRE, Inc.

3

Regional Centers

Source: Standard & Poor’s, February 2013.

Community Centers 5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

Source: NCREIF, Q4 2012. 5

Real Capital Analytics, Q4 2012.

Figure 10:10: Retail PropertyProperty Capital Markets Trends Markets Trends Figure Retail Capital

U.S. Retail | MarketView

U.S. Retail Sales Volume ($ Billions) $30

10%

$25

9%

Figure 11: Investment Strategies Focused Figure 11: Investment Strategies Focused on Core/Liquid Markets in 2012 on Core/Liquid Markets in 2012 9%

8%

Average Retail Capitalization Rate, 2012

Q4 2012

Low interest rates continued to push cap rates downward in core markets such as Manhattan. Investors also favored liquid markets in view of global macroeconomic headwinds. Capital flows are expected to increase in retail properties in 2013. Nervous institutional investors are looking more favorably on retail assets as the segment continues to improve.

DALLAS BOSTON PHOENIX

7%

SEATTLE

EAST BAY

LOS ANGELES

SAN DIEGO

6%

NYC BOROUGHS MANHATTAN

5%

$20 8% $15

4% 50

7%

100

$10

200

250

300

350

Note: Size of the bubble reflects total transaction sales volume in US$. Source: Real Capital Analytics, Q4 2012.

6%

CBRE Econometric Advisors, Q4 2012.

7% 20

6% 5%

15

4% 10

3% 2%

5

U.S. Population (L)

85 & Over

75 - 79 Years

80 - 84 Years

65 - 69 Years

70 - 74 Years

60 - 64 Years

50 - 54 Years

55 - 59 Years

45 - 49 Years

35 - 39 Years

40 - 44 Years

25 - 29 Years

1% 0%

Share of Total U.S. Population (R)

Source: U.S. Census Bureau, 2010.

Figure 13: Megatrend Spotlight: Figure 13: Megatrend Spotlight: U.S. Age Demographic Shifts Austin, TX, Demographic Shifts Share of Total Population (%) 10% 9% 8% 7% 6% 5% 4% 3% 2%

Austin-Round Rock-San Marcos, TX Metro Area

85 & Over

80 - 84 Years

75 - 79 Years

70 - 74 Years

65 - 69 Years

60 - 64 Years

55 - 59 Years

50 - 54 Years

45 - 49 Years

40 - 44 Years

0%

35 - 39 Years

1%

30 - 34 Years

A second shift in underlying demographics may have mixed results for retail. Echo boomers—children of the baby boomer generation—continue to enter the workforce and have generally migrated to urban centers. This generation is roughly the size of the baby boomer generation, but has drastically different purchasing preferences. Echo boomers are more likely to spend on entertainment and nightlife and favor urban lifestyles over suburban markets. As an example, the age demographics of the Austin, Texas, metropolitan area varies significantly from national averages, with the share of echo boomers to total population exceeding national averages and baby boomers comprising a significantly less share of the regional population base. The migration of echo boomers to Austin, Texas, much of whom were initially lured by university enrollment, is also due to the burgeoning employment in the high-tech sector, which has brought purchasing power to the region. The overall availability rate for the Austin metropolitan market declined from 13.1% in Q4 2011 to 11.8% in Q4 2012.6

8%

Baby Boomers

Echo Boomers

30 - 34 Years

Megatrend Spotlight: U.S. Demographic Shifts Shifts in demographic age cohorts of the U.S. population are expected to dramatically alter retailing in the U.S. as baby boomers enter retirement years. Overall, retail is expected to be negatively impacted by this trend, given that this generation of more than 80 million people is expected to curtail spending after exiting the workforce. This may be offset by alternative real estate strategies for retail properties. For example, retail health clinics are expected to be a leading alternative use for vacant retail space in aging metropolitan regions where demand for medical care continues to rise.

Share of Population (%)

25 - 29 Years

Source: Real Capital Analytics, Q4 2012.

Population (in Millions) 25

20 - 24 Years

Average U.S. Retail Cap Rate (R)

20 - 24 Years

2012

15 - 19 Years

2011

10 - 14 Years

2010

15 - 19 Years

Retail Property Sales Volume (L)

2009

10 - 14 Years

2008

5 - 9 Years

2007

Under 5

2006

5 - 9 Years

2005

Figure 12: Megatrend Spotlight: Figure 12: Megatrend U.S. Age Demographic U.S.Spotlight: Demographic Shifts Shifts

Under 5

5%

$0

6

150

Number of Retail Property Transactions, 2012

$5

4

CHICAGO

U.S. Average

Source: U.S. Census Bureau, 2010.

© 2013, CBRE, Inc.

Q4 2012 U.S. Retail | MarketView

Photo Courtesy of Roger Bensel.11

Market Spotlight: Union Square, San Francisco Regional employment growth and a strong tourism market have fueled retailer demand for space in San Francisco’s Union Square—the prime shopping district of the Bay Area. Educational attainment and wages in the region are significantly above national averages. Per capita annual income in 2011 stood slightly above $74,000 in San Francisco, far above the national average of nearly $42,000.7 High-tech employment in the region has driven the recovery of the employment base. Total non-farm employment in San Francisco is expected to rise, with more than 20,000 new jobs to be created in 2013.8 The longerterm employment outlook for the region also remains bright, as Moody’s Analytics forecasts total non-farm employment to rise by nearly 11% between 2012 and 2016. Additionally, international tourism is helping to drive retailer demand for space on Union Square. San Francisco International Airport (SFO) expects passenger air travel to rise consistently over the next five years and leisure and hospitality services in 2013 will be bolstered by the hosting of the America’s Cup races.9

© 2013, CBRE, Inc.

Although retailers are generally reluctant to expand in the U.S., demand from luxury and fashion retailers is high on Union Square. The overall retail vacancy rate for the submarket stood at 2.6%, with approximately 250,000 sq. ft. of available space in Q4 2012.10 The tight market has driven prime retail rents to $575 per sq. ft. in Q4 2012, a year-over-year increase of 15%. The fierce competition from international retailers in the market for flagship stores has driven demand in more ubiquitous secondary markets with lower rents. Fast-fashion retailers continued to cluster in the southern portion of Union Square near Market Street. For the first time, large-scale retail developments are planned on Market Street, west of the Fifth Street intersection. The pace of leasing activity is expected to accelerate in the Mid-Market district due to major developments in the pipeline. Moody’s Analytics, 2012. Moody’s Analytics, 2012. 9 Moody’s Analytics, 2012. 10 CBRE Research, Q4 2012. 11 Photo herein is the property of the owner and use of this image without the express written permission of the owner is prohibited. 7 8

5

Figure 14: Market Spotlight: Union Square, San Francisco

Q4 2012 U.S. Retail | MarketView DISNEY

Source: CBRE Research, Q4 2012.

Figure 15: Major Union Square Deals, Q4 2012 Tenant

6

Location

Size (Sq. Ft.)

Levi’s

801 Market Street

25,000

Converse

838 Market Street

18,435

Salvatore Ferragamo

240 Post Street

10,883

Valentino

105 Grant Avenue

9,800

Steve Madden

33 Grant Avenue

3,706

Source: CBRE Research, Q4 2012.

© 2013, CBRE, Inc.

Q4 2012 U.S. Retail | MarketView

contacts For more information about this U.S. Retail MarketView, please contact: Asieh Mansour, Ph.D. Head of Research, Americas and Senior Managing Director CBRE Global Research and Consulting t: +1 415 772 0258 e: [email protected]

Anthony Buono Executive Managing Director Retail Services, Americas t: +1 619 696 8302 e: [email protected]

Naveen Jaggi Senior Managing Director Retailer Representation, Americas t: +1 713 577 1654 e: [email protected]

John Vitou Senior Research Analyst CBRE Global Research and Consulting t: +1 415 772 0238 e: [email protected]

Andrea Walker Director, Head of Americas Research Publications and Data CBRE Global Research and Consulting t: +1 919 376 8608 e: [email protected]

Follow Asieh on Twitter: @AsiehMansourCRE

Todd Caruso Senior Managing Director Retail Agency Services, Americas t: +1 847 572 1480 e: [email protected]

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Global Research and Consulting This report was prepared by the CBRE U.S. Research Team which forms part of CBRE Global Research and Consulting – a network of preeminent researchers and consultants who collaborate to provide real estate market research, econometric forecasting and consulting solutions to real estate investors and occupiers around the globe. Disclaimer Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of the CBRE Global Chief Economist.

© 2013, CBRE, Inc.

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