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RETAIL MARKET RESEARCH – YEAR END 2012

RETAIL MARKET RESEARCH – YEAR END 2012. NATIONAL RETAIL OUTLOOK.

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RETAIL MARKET RESEARCH – YEAR END 2012

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  1. RETAIL MARKET RESEARCH – YEAR END 2012

  2. NATIONAL RETAIL OUTLOOK • The industry sidestepped a full-bore, over-the-cliff death spiral. The worst is over, and we’re seeing more upside than expected. Now, more optimistic investors and owners exhale in relief, crediting a significant limitation on new supply for making the difference. • Retailers are expanding again, retail sales posted a solid 6.5 percent annualized gain, upscale retail roars back, affluent Americans continue to shop, and chains gravitate to these most-favored shopping destinations where rents increase and vacancies decline precipitously. • Some stressed power centers manage to recoup by filling empty stores with new big-box tenants, and basic bread-and-butter, grocery-anchored retail in established infill markets registers solid income oriented performance too. • In a world of economic hurt and fear, the United States still represents good relative value and ranks internationally as the premier safe real estate investment haven. Foreign money will continue ample inflows into American property markets from all compass points unless the federal government fails to address the next debt ceiling looming crisis. • On the other hand, the retail industry continues to see contraction in the face of competition from web retailers. As web sales nibble away at bricks-and-mortar margins retailers reduce store square footage and rely more on clicks-and-bricks strategies than bricks alone. • Consolidating major chains increasingly abandon Class B and C regional centers, financially challenged mom-and pop stores leave half-empty strips along suburban boulevards and many other commodity properties are suffering from physical deterioration, face repurposing into churches, light manufacturing facilities, or whatever—just not stores. • Retail real estate appears positioned to endure a very long, slow, but dramatic transformation in how and where people shop. Prime neighborhood necessity shopping centers with groceries and pharmacy anchors will continue to thrive. • Sales of retail properties in 2012 totaled $52.8 Billion, up 20% from 2011. The volume was propelled mostly by the Q4 volume as nearly half of the quarter's volume occurred in December. Many seller were motivated to close deals before the end of the year due to the rise in taxes but the magnitude of the surge could not have happen without increased buyer's appetite. • Retail prices improved only slightly as prices are still constrained by distressed properties and by broadening of investments in higher yielding secondary markets. • As investors tentatively advance further along the risk spectrum chasing yield, core real estate becomes overpriced. Plowing money into top properties at sub-5 percent cap rates looks unproductive, especially if and when interest rates inevitably go up. Hungry investors pay above replacement cost for pricey, well leased core properties. Those buyers will have no choice except to sit on these acquisitions for a while. Conditions aren’t right for flipping, and there will be no easy plays. • The chase for yield slowly diverts more money beyond the highly favored global gateways into secondary markets where tighter pricing will be a true trend in 2013, especially when credit markets return to more normal states. Banks, institutional investors, and real estate investment trusts (REITs) spin out more Class B and C product they want off their books.

  3. ORLANDO MSA • The Orlando - Kissimmee MSA is comprised of Lake, Orange, Osceola and Seminole Counties and is home to many tourist attractions such as Walt Disney World, Universal Studios, Sea World, Kennedy Space Center which make this city the number one tourist destination in the world. • MSA Population: 2,171,360 • Population growth estimate: 1.9% Second highest in Florida. • Unemployment: 8.6% • Employment growth estimate: 1.9% • Average HH Income: $95,316 Compared to $123,440 for the top metros in U.S. (Moody's). • Tourism and construction, two sectors heavily devastated by the recession, are now leading the Orlando area economy in recovery. Employment in the local Construction sector as of October was up 11.1% from just 12 months earlier and the Leisure and Hospitality sector was up by 3.3%. Also on the mend is the local housing market. Persistent job and income growth in Orlando is driving an increase in home sales. Sales were up 14.0% in October year-over-year with a median selling price increase of 9.24%. • Orlando’s economy has thrived as well as a result of strong population growth. Annual increases above 3.0% were common pre-2006. After falling nearly to the national rate, local population growth is again on the rise. Moody’s Economy.com projects a 1.9% increase in 2012 to be followed by a gain of 2.4% in 2013. Recovery, following severe recessionary setbacks, finally is taking hold in the local retail real estate market thanks to the return of expansion and the job market.

  4. ORLANDO MSA • Orlando remains dependent on its established sources of growth, tourism, housing and population growth. As long as the national economy continues to progress, these segments of the local economy should expand as well. • Orlando is investing in huge infrastructure projects that will dramatically reshape Central Florida over the next few years. The push into life science began in 2006 with the Lake Nona projects, one of the largest in the world with a bio-medical park of over 7,000 acres. • The State funded a new medical school for the University of Central Florida, followed by Sanford-Burnham Medical Research Institute, MD Anderson Cancer Center, a new Veteran Affairs Medical center, Nemours Children Hospital, Valencia Community College and more. Employment in Lake Nona area is expected to reach 4,000 by year end. • Mass transit officially broke ground this year with the Sun Rail commuter rail system that will eventually connect 61 miles from Deland to Poinciana. Future plans include connecting the rail to Orlando’s International Airport, Lake Nona, International Drive Tourist Area and Innovation way towards UCF. The new Amway arena opened in 2011 and construction also continues on the new Dr. Phillips Center for the performing arts. It is expected to be completed in April 2014. The Department of Transportation is working on plans to upgrade the I-4 Highway with new flyovers, HOV and toll lanes. • The Orlando economy was left with little to hold onto once the recession swept away its major pillars—an inflow of tourist dollars, population in migration and residential development. • The labor market continues to grow but the pace has moderated considerably. Orlando’s recovery is expected to gain considerable momentum in 2012 and 2013 thanks to the gains in education, healthcare, technology and tourism.

  5. LEASING TRENDS Rent growth remains stingy. At $17.34 psf and $14.83 psf, third quarter mean asking and effective rates for community and neighborhood shopping center space were up 0.3%. With fourth quarter’s portion of new supply, vacancy in the community and neighborhood shopping center market could rise additionally by year-end before a definitive downward trend takes hold in 2013. Positive growth at about 1.0% is expected in 2013. The vacancy rate in neighborhood and community centers, while nearly flat, continues to inch up slightly amid unsteady demand. Thus vacancy in this sector closed the latest quarter at 13.8%, up 10 basis points for the period and a return to the first quarter cyclical high. The near-100,000 square feet of community-neighborhood sector space that arrived on line in two projects year-to-date through the third quarter (both in April) were accompanied by only 26,000 square feet of net absorption market-wide. The total for the third quarter alone was negative 40,000 square feet. Fourth quarter, additionally, is expected to see 192,000 square feet deliver in three additional neighborhood centers, two of which, with 125,400 square feet between them, delivered in November. Meanwhile, an 114,000-square-foot community center expansion commenced in October in southeast Orlando. The development of large-format projects has been largely absent. Only one power center, a 400,000-square-foot project planned for Clermont, is found in the current development pipeline. Osceola County commissioners have approved Compass Center for International Commerce), a $1.2 billion retail-hotel-commercial development proposed for a site across the street from Osceola Heritage Park in Kissimmee. The plans call for 1.5 million square feet of “wholesale/retail space.”

  6. TRANSACTIONS The total year-to-date sals volume for 47 transactions in 2012 was $290 million. Mean selling prices for the latest quarter and year-to date were $142 psf. Respective mean cap rates were 8.8% and 8.3% . In third quarter’s largest sale, second-largest in a year, PX Regency Village LP paid American Commercial Realty Corporation $16.0 million ($177 psf) for the 90,311-square-foot Regency Village neighborhood center in Orlando. The sale closed at the end of August at an 8.0% cap rate. The property, built in 2002, was 3.0% vacant at date of sale.

  7. SUBMARKET OVERVIEW

  8. CAP RATES The 12-month rolling cap rate per the end of the latest quarter in Orlando and Tampa was notably lower, at 7.7% and 7.1% respectively, down 60 basis points from a year earlier. Third quarter power center vacancy rates in Orlando and Tampa were at 8.9% and 5.5% respectively, down 150 basis points for this quarter alone. The third quarter national rate was notably lower at 6.1%. The forth quarter mean asking rent for local non-anchor power center space in Orlando and Tampa was $23.87 psf and $22.75 psf respectively.

  9. TAMPA MSA • The Tampa - St. Petersburg -Clearwater MSA is comprised of Hernando, Hillsborough, Pasco and Pinellas Counties. Located on the west coast of Florida the region includes one of the busiest ports in the southeast, Tarpon Springs, Ybor City, Busch Gardens, University of South Florida and the University of Tampa and many tourist attractions. • According to data provided by the U.S. Bureau of Labor Statistics (BLS), seasonally unadjusted unemployment rate is at 9.0% in June for the Tampa-St. Petersburg-Clearwater MSA, down from 11.2% one year earlier. Moody's Economy.com reports a second quarter 2012 average household income of $93,864 for Tampa Bay compared to an average household incomes of $124,481 and $113,580 that are reported for the top metros in the nation and South Atlantic. The housing market, meanwhile, remains weak; the fledgling positive trends in housing seen around the nation remain largely absent from the Tampa Bay area market.. Metropolitan Statistical Area (MSA) homes sales were up 13.0% year-over-year. • MSA Population: 2,824,724 • Population growth estimate: 1.3% • Unemployment: 8.5% • Employment growth estimate: 1.9% • Average HH Income: $60,238 • Tampa-St. Petersburg ranked 99th of 102 metro areas surveyed with respect to strength of economic growth. Tampa Bay fell into an economic swoon well before the national recession sunk the nation as a whole. Tampa's recovery from the recession, while clearly under way, has been similarly weak. Total non-farm employment per the latest quarter was up 19,400 jobs (1.7%) from 12 months prior. home sales were up 35% in October year over year and the median selling price was up 9% while 40% of sales this year have been distressed. The improving economy is drawing new retailers to the area. The community-neighborhood shopping center space shows statistical validation of the positive turn, although recovery in this segment has been late in starting and is proceeding slowly. Net absorption took a positive turn in the fourth quarter of 2011 and has been positive since. The total year-to-date in 2012 through the third quarter alongside no new supply was positive 172,000 square feet. Vacancy ended the quarter at 11.8%, down 40 basis points year-to-date. Rent growth has turned a corner as well. Four consecutive years of substantial losses have been followed by the return of growth in 2012. At $14.24 psf and $12.47 psf, respective mean asking and effective lease rates for the latest quarter were up 1.1% since year end last year.

  10. TAMPA MSA • 52,000 square feet of positive net absorption shaved 20 basis points from the vacancy rate over the October/November period. Construction across the board remains limited for retail. Only one project of any description started in 2012: The Corner, a 35,000-square-foot neighborhood center in the Westshore area broke ground in July and will complete in March 2013. Other projects reported under construction include the 345,000-square-foot first phase of DeBartolo Development's Riverview Bell Plaza power center in Riverview on Highway 301 on the eastern shore of Tampa Bay. Construction began in 2009. The development of large-format projects, a major trend prior to the recession, particularly in suburban Pasco County, has all but ceased. No power center or regional center space completed construction in 2011 and none will finish in 2012. • The power center sector boasts favorable numbers. Third quarter vacancy was down 40 basis points year-over-year-and below the 6.1% third quarter national power center rate. The third quarter mean asking lease rate for local non-anchor power center space was $22.70 psf, up 1.2% year-over-year. More affordable prices compared with other coastal markets are attracting investors to the Tampa retail market. Buyers in search of the higher yields in value-add properties are plentiful, though not much product is listed. As a result, many of the distressed properties that come to the market receive multiple offers with cap rates in the double digits. Stabilized assets, meanwhile, are taking longer to sell, creating a large pool of listings. Buyers are very selective and cautious, and owners must be able to demonstrate long-term sustainable returns for deals to pencil out. • Measured by the quarter, the pace of retail property sales activity has been uneven. The year-to-date total for 59 sales was $301 million. The average selling price and mean cap rate for the quarter's deals were $111 psf and 8.6%, respectively. The 12- month rolling cap per quarter-end was down from a year earlier. While Tampa Bay's recovery is internally uneven, the gains outweigh the losses. Although Tampa lacks the substantial industrial base seen in some other Florida metro areas (Miami and Jacksonville, for example) and lacks substantial manufacturing and high-tech sectors, this trend likely will continue. With homes sales improving, supply on the market growing tighter and permitting activity on the rise, employment in construction may soon get a boost (even as other real estate sectors remain relatively inactive).

  11. LEASING TREND In the third quarter's largest sale, Sterling Corporation paid E&A Acquisition Ltd. Partnership $10.8 million ($110 psf) for the 98,323- square-foot Barclay Square neighborhood center in Largo. The deal closed in August at a 7.9% cap rate. The property was 18.0% vacant at time of sale. Since the quarter ended, an affiliate of New York-based Mason Asset Management paid Simon Property Group $24.6 million for the 678,377- square-foot DeSoto Square Mall enclosed regional shopping mall in Bradenton, GlobeSt.com reported in November.

  12. SUBMARKET OVERVIEW

  13. CONSTRUCTION & INVENTORY The information in this report is deemed to be reliable. Every effort was made to obtain accurate and complete information; however, no representation, warranty or guarantee, expressed or implied, may be made as to the accuracy or reliability of the information contained herein. Sources: Sean Glickman’s local market knowledge, Integra Realty sources, Reis Observer, Real Capital Analytics, CoStar Group, Inc., Data Quick, Core Logic, PriceWaterhouseCoopers, Wells Fargo Securities,Economy.com, Federal Reserve, MBAA, NAR, Real Capital Analytics, Glenn Mueller, Trepp, U.S. Census Bureau, Urban Land Institute, ICSC, Sites USA, Retail Planet, US Retail Centers, University of CFL, CBC NRT, Moody’s, WSJ & more. Sean Glickman Managing Director, Glickman Retail Group Director, Retail Investment Advisory, Coldwell Banker Commercial NRT

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