CBRE Global Research and Consulting

U.S. RetailMarketView Q3 2013

The U.S.-wide retail availability rate remained relatively stable during Q3 2013, edging up slightly, or 10 basis points (bps), during the quarter to 12.3%. On a year-over-year basis, however, the availability rate was down 60 basis points. Net absorption in Neighborhood & Community Centers over the past four

quarters totaled more than 23 million sq. ft., with the baseline forecast showing increased demand for space in 2014 and 2015 (Figure 1). The year-to-date top performers include Dallas, Houston and Phoenix, which each posted at least 1 million sq. ft. of positive net absorption through the first nine months of the year.

Retail fundamentals stabilize but demand expected to pick up in 2014

Q-o-Q ToTal reTail sales change1.1%

consTrucTion compleTions**1.1 msF

*arrows indicate change from previous quarter.**neighborhood & community centers

source: cBre econometric advisors, Q3 2013.

Figure 1: Retail Expansion Expected to Pick up in 2014

neT aBsorpTion**38 KsF

availaBiliTy raTe**12.3%

© 2013, CBRE, Inc.

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-40,000

-20,000

Completions and Absorption (MSF)100,000

80,000

40,000

60,000

20,000

Completions (L) Net Absorption (L) Availability Rate (R)

0

Availability Rate (%)

0

2

14

12

8

10

6

4

FORECAST

Executive Summary

• The national availability rate inched up10 basis points during Q3 2013 to 12.3%.

• Prime asking rents along Fifth Avenue in New York increased to an all-time high of $3,150 per sq. ft. in Q3 2013.

• Prime asking rents continued to stabilize during Q3 2013, with nine of the 12 surveyed U.S. markets tracked by CBRE reporting no quarterly change in Q3 2013.

• Total returns from retail assets outperformed all other property types in Q3 2013, with unlevered annualized one-year returns at 13.22%, according to NCREIF.

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Click above to watch Naveen Jaggi, Senior Managing Director, Retailer Representation, Americas, discuss the U.S. retail market’s performance during Q3 2013.

source: u.s. census Bureau, october 2013.

Figure 2: Retail Sales Growth Slowed in Q3 2013

Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13

Monthly Change in Retail Sales (%)

Total Retail Sales Retail Sales Excluding Auto

-0.4

-0.2

0

1.2

1

0.6

0.8

0.4

0.2

ConSUMER ConditionSTotal retail sales expanded by 1.1% in Q3 2013, as slow sales in September—primarily a result of weak auto sales—offset stronger retail sales seen during July and August. The growth rate experienced in Q3 2013 was below the 1.4% average quarterly growth for the current business cycle (since 2010). However, the drop in retail sales was not entirely unexpected as the sector experienced robust growth perfor-mance in Q2 2013 and the base had been at elevated levels since June.

Since reaching its highest reading in five years in June, con-sumer confidence has declined amid growing concerns during the period preceding the government shutdown and debt ceiling crisis, which began right after the end of the quarter (Figure 4). Nonetheless, the National Retail Federation (NFR) estimates that the average holiday shopper will spend about $738 on gifts, décor and more in Q4 2013. Although this is less on a per person basis than last year, NRF projects that more consumers will participate in the holiday season than last year, estimating that holiday sales will grow by 3.9% to $602 billion in 2013.

Despite the lackluster performance of retail fundamentals in August and September, the long-term trajectory of the U.S. economy is more promising heading into 2014. The housing recovery is poised to accelerate throughout next year, benefiting housing-related retailers whose sales are still below pre-recession peaks.

source: economic policy uncertainty index, november 2013.

Figure 3: Economic Policy Uncertainty Leading Up To October Government Shutdown

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2013

0

300

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BalancedBudget Act

BlackMonday

1st Gulf War

Asian/Russian Crises

2000Presidential

Election

September 11

2nd Gulf WarLehman

Summer DebtCeiling and

Euro Debt

Lead-up to October

GovernmentShutdown

source: conference Board, november 2013.

Figure 4: Consumer Confidence Decline Due To Temporary Headwinds

Conference Board Consumer Confidence Index, 1985=100

50

6570

5560

10095

8590

8075

Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13Overall Present Conditions Expectations

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PRiME REtail REntSContinuing the stabilization theme from Q2 2013, prime asking rents in nine of the 12 surveyed U.S. markets tracked by CBRE reported no quarterly change in Q3 2013, though most markets posted increases on a year-over-year basis. Strong employment trends in tech- and energy-centric markets such as Seattle, Boston, San Francisco, Austin, Dallas and Houston have helped to attract retailers for high-quality space in prime submarkets. In the majority of surveyed markets, the primary driver of prime rent growth has been a lack of supply, as retail construction levels remain at a historic low.

In Miami, although prime asking rents along Lincoln Road have stabilized in the past two quarters, prime rents for the highest quality assets, at $300 per sq. ft., was nearly 28% higher than Q3 2012. In New York, prime asking rents along Fifth Avenue remained above the $3,000 per sq. ft. threshold, increasing to an all-time high of $3,150 per sq. ft. in Q3 2013. International retailers and high tourism levels continued to buoy demand, though some retailers have grown cautious given the high prices. Looking to the west coast, demand for prime space in Los Angeles remained high, especially for spaces between 1,500 to 5,000 sq. ft. Nevertheless, CBRE brokers report that a prime rent plateau may be near and rents could begin to stabilize along Rodeo Drive due to a modest slowdown in demand from luxury retailers in 2014. In San Francisco, strong international tourism, as well as the region’s strong base of young professionals, contributed to an increase in retailer activity in Union Square.

REtail CaPital MaRkEtSAccording to Real Capital Analytics, retail investment sales volume totaled $19.2 billion in Q3 2013 (Figure 6) as major portfolio trades, including three blockbuster deals, pushed transaction volumes to 2007 levels. Looking to the debt markets, CMBS remained the most active lender for retail deals, accounting for 45% of origination volume in Q3 2013. As of the end of the quarter, annual CMBS lending for retail transactions was on pace to double 2012 levels.

Market District Retail SubtypePrime Retail Net Rents,

Q3 2013 ($USD/sq. ft./annum)Broker Prime Retail

Rents 6 Month Outlook

New York, NY Fifth Avenue (49th to 59th Streets) High Street $3,150 =

Los Angeles, CA Rodeo Drive High Street $580 =

San Francisco, CA Union Square High Street $575

Chicago, IL Michigan Avenue High Street $480

Honolulu, HI Kalakaua Avenue High Street $420 =

Miami, FL 600/700 Block of Lincoln Road High Street $300 =

Washington, D.C. M Street, Georgetown High Street $225 =

Dallas, TX Highland Park Village Shopping Center $170

Boston, MA Newbury Street High Street $150

Philadelphia, PA Walnut Street High Street $120

Seattle, WA 6th & Pine High Street $85 =

Denver, CO Cherry Creek Shopping Center $64

Figure 5: Prime Rent Growth Stable Across Major U.S. Markets

source: cBre research, Q3 2013.

source: real capital analytics, Q3 2013.

Figure 6: Retail Sales Transaction Activity

2005 2006 2007 2008 2009 2010 2011 2012 2013

Transaction Volume (in Billions) Cap Rate

$-

$30 10%

9%

8%

7%

6%

5%

$25

$15

$20

$10

$5

Strip Centers Transaction Volume (L) Mall & Other Transaction (L) Average U.S. Cap Rate, All Retail (R)

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Investors’ search for yield continued to increase, with sales volume in higher-yielding non-major markets expanding by more than 30% year-to-date compared to 13% year-to-date growth for major markets.1 As a result of the increase in sales activity in secondary markets, pricing has significantly accelerated since Q2 2012 (Figure 8). The expected unwind-ing of the Federal Reserve’s quantitative easing program and a possible increase in interest rates in 2014 have made value-add deals and non-core markets more attractive across

all property types, and has made retail assets particularly competitive.

According to NCREIF, total returns from retail assets continued to outperform all other property types in Q3 2013, with unle-vered annualized one-year returns at 13.22%. Benchmarked against other asset classes, 10 year annualized total returns from retail property even outperformed REITs (Figure 9) in Q3 2013.

note: all returns from real property reported on an unlevered basis.source: ncreiF property index, nareiT equity reiT index, s&p 500 index, Barclays capital

govertment Bond, consumer price index, 90-Day T-Bills.

Figure 9: Institutional Retail Continues To Outperform

Benchmarking Asset Class Returns

Government Bonds

CPIT-Bills

Hotels

Equities

Retail Real Property

REITS

Apartments

All Real Property

Office Real Property

Industrial Real Property

-5 0 5 10 15 20 2510-Year Annualized Returns (%) 1-Year Annualized Returns (%)

note: major markets are Boston, chicago, los angeles, san Francisco, new york and Washington, D.c.source: real capital analytics, Q3 2013.

Figure 8: Pricing Accelerating In Non-Major Markets

Moody’s/RCA CPPI

75

95

115

235

215

175

195

155

135

2005 2006 2007 2008 2009 2010 2011 2012 2013Major Markets Non-Major Markets All Retail

source: real capital analytics, Q3 2013.

Figure 7: Cmbs Lending For Retail on Pace to Double in 2013

CMBS

Insurance

Internationl Banks

Regional & Local Banks

National Banks

Financial Other

1 real capital analytics, Q3 2013.

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Market Net Absorption, YTD (000’s Sq. Ft.) Q3 2013 Availability Rate (%) Y-o-Y Availability Rate Change (bps)

Albuquerque 127 11.6 -70

Atlanta 649 15.7 -40

Austin 272 11.1 -100

Baltimore 100 9.4 -80

Boston -52 9.7 -10

Charlotte 239 13.8 -110

Chicago 836 13.2 -60

Cincinnati 388 15.1 -170

Cleveland 47 17.0 -60

Columbus 206 11.8 -60

Dallas 1,637 13.6 -180

Denver 101 12.4 -80

Detroit 32 17.5 -10

Fort Lauderdale -63 11.8 20

Fort Worth 660 16.0 -210

Honolulu 70 6.6 -30

Houston 1,630 12.1 -120

Indianapolis 243 15.1 -60

Jacksonville 240 15.4 -10

Kansas City 76 15.1 -80

Las Vegas 149 16.1 -70

Long Island 276 8.4 10

Los Angeles 637 8.3 -40

Memphis 397 16.2 -210

Miami -47 6.6 0

Minneapolis 456 12.6 -160

Nashville 370 11.3 -180

New York -94 9.1 20

Oakland 409 7.9 -30

Oklahoma City 42 12.0 -40

Orange County 247 7.8 -40

Orlando 501 13.6 -110

Philadelphia 265 13.5 -10

Phoenix 1,099 15.4 -120

Pittsburgh 271 8.2 -110

Portland 227 10.3 -50

Providence 161 14.1 -20

Raleigh -132 11.1 60

Riverside 63 14.1 50

Sacramento 76 14.5 -30

Salt Lake City 65 11.6 -100

San Antonio 415 12.2 -100

San Diego 91 9.5 -20

San Francisco 81 5.8 -50

San Jose 277 6.9 -60

Seattle 260 10.5 -80

St. Louis 176 13.4 -20

Tampa -548 13.1 110

Washington, D.C. 653 8.5 -80

West Palm Beach -77 13.4 50

National 16,465 12.3 -60

Figure 10: Neighborhood, Community & Strip Centers Market Fundamentals, Q3 2013

source: cBre econometric advisors, Q3 2013.

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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.

Additional U.S. research produced by Global Research and Consulting can be found at www.cbre.com.us/research.

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.

conTacTsFor more information about this U.S. Retail MarketView, please contact:

Brook Scott Interim Head of Research, Americas and Head of Occupier Research, Americas CBRE Global Research and Consulting t: +1 415 772 0337 e: brook.scott@cbre.com

Todd Caruso Senior Managing Director Retail Agency Services, Americas t: +1 847 572 1480 e: todd.caruso@cbre.com

Anthony Buono Executive Managing Director Retail Services, Americas t: +1 619 696 8302 e: anthony.buono@cbre.com

John Vitou Senior Research Analyst and Retail Specialist CBRE Global Research and Consulting t: +1 415 772 0238 e: john.vitou@cbre.com Follow John on twitter: @JohnVitouCRE

Naveen Jaggi Senior Managing Director Retailer Representation, Americas t: +1 713 577 1654 e: naveen.jaggi@cbre.com

Andrea Walker Director, Head of Americas Research Publications and Data CBRE Global Research and Consulting t: +1 919 376 8608 e: andrea.walker@cbre.com

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