Modest Retail Expansion Continues as Economic Recovery Moderates

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Q1 2012 | RETAIL

UNITED STATES

HIGHLIGHTS

Modest Retail Expansion Continues as Economic Recovery Moderates ANN T. NATUNEWICZ Manager, Retail Research | USA MARKET INDICATORS

• Retail

Q1 2012 VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE *Projected, relative to prior period

U.S. RETAIL MARKET*

SUMMARY STATISTICS, Q1 2012 Vacancy Rate: 10.3% Change from Q4 2011: -0.1% Net Absorption: 781,000 Square Feet New Construction: 1.7 Million Square Feet Under Construction: 4.9 Million Square Feet Asking Rents Per Square Foot Shopping Center Space: $15.50 Change from Q4 2011: Flat Source: CoStar *Select Colliers markets

www.colliers.com

Q2 2012*

executives confirmed during Q4 earnings calls that they are expanding 2012 capital expenditures, with many allocating more funds to technology upgrades for integration of their in-store and online programs.

• Major

corporate restructurings (Sears) and store closures (Best Buy) continue to generate headlines as larger tenants begin downsizing their portfolios.

• The

recent wave of retailer acquisition announcements demonstrates that, as pricing for Core real estate assets remains high, private equity groups and retail companies are shifting strategy to invest capital more directly in the sector.

• One

quarter into 2012, we assess our performance against the “Nine Trends to Watch” we predicted back in January.

2012 has begun well for the retail real estate sector. The year’s lead-off burst of improvement in top-line indicators—most notably employment trends—spilled over to spike consumer confidence levels, which have been further bolstered by continued strengthening in the manufacturing sector and a mild winter that freed up cash for broad-based retail spending. Retail sales year-to-date have exceeded expectations, brightening the industry’s mood as we head into the annual ICSC RECon convention in Las Vegas. However, definitive signs of a self-sustaining recovery continue to elude us, and we face risks that make the next several quarters critical. Worries remain about the strength of consumer spending, buoyed by pent-up demand, and how long it can continue in the absence of real wage growth and job gains that will lower unemployment. Politics and geopolitics also threaten the recovery, as we don’t expect the relative calm of the first quarter to hold through the year. Before our next report comes out, the Supreme Court will deliver its ruling on the constitutionality of the Affordable Care Act., which will reenergize public sentiment on both sides and set off a wave of budget adjustments. Overseas, Eurozone attention shifted from Greece to much larger debt issues in Spain amid confirmation that at least eight European Union (EU) countries are now in recession. Middle East saber-rattling reminds us how quickly higher gas prices could shift consumer dollars away from discretionary spending. In spite of all the risks, none of which are new, we remain cautiously optimistic that retail performance in 2012 will exceed the muted expectations predicted for the year. Executive commentary, both tenant and landlord, on Q4 earnings calls suggests that—for many in the industry—we have already turned the corner.


HIGHLIGHTS | Q1 2012 | RETAIL | UNITED STATES

Economic Recap The Dow Jones Industrial Average (DJIA) ended the first quarter at 13,212.04, up 8% from its 2011 close. In April, the market gave back about one-third of that gain amid increasing concerns about acute Eurozone liquidity issues expanding to Spain; Middle East hostilities between Iran and Israel; and rising energy prices. Still, for the majority of Americans, the stock market is the largest dayto-day indicator of economic strength, and higher equity prices have spilled over to lift public confidence. Ascertaining where we are in the economic recovery remains a murky, inconclusive process because the major factor that precipitated the recession—the housing bubble—is far from being healed. To make sense of things, the chart at right summarizes the economic indicators that Colliers follows to pinpoint where the U.S. is in the economic cycle. These indicators fall into one of two categories. 1) they track a dataset that may not be an official Leading Economic Indicator (LEI), but we have found over time to better mirror the direction of economic activity; or 2) they are so widely reported that they weigh on market sentiment regardless of their predictive power. The national unemployment rate is an example of the latter. Despite differing definitions for the labor force and later revisions to data, equities markets and consumer behavior react strongly to the monthly jobs reports. Our Q1 scorecard showed mixed results. Advance U.S. GDP data for the first quarter show that the economy expanded at a 2.2% annual growth rate, held back by government spending cutbacks even as warmer weather boosted car sales and construction. China’s export-driven economy, a bellwether for global growth, slowed to an 8.1% annual rate; and Germany, which has yet to release its Q1 GDP data, is expected to narrowly avoid a recession. Here in the U.S., higher gasoline prices have hurt the Small Business Optimism Index, which appears more sensitive to them than are households, for the time being. Retail sales, including automobiles, were up for the quarter. Also, the National Restaurant Performance Index, which reflects restaurant owners’ optimism, reached its highest level since the recession. Taken together, our economic variables reflect a modest slowdown within a generally improving economy. To further support that trend, revised employment data showed that job growth was larger than previously estimated for most U.S. cities. The chart at right illustrates that each of the 15 largest job markets (led by New York, Houston, and Dallas) gained positions. Although the national unemployment rate remains stubbornly high, anecdotal data indicates that businesses are rethinking their hiring plans for 2012. Recent survey results from the National Association of Business Economics reveal that 39% of respondents versus 27% in January’s survey, expect hiring will pick up in their companies or industries during the next six months, versus 27% in January’s survey.. If this sentiment translates into actual hiring activity, job growth has the potential to exert a much stronger influence on GDP growth for the balance of the year. P. 2

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BELLWETHER ECONOMIC TRENDS VERSUS PRIOR QUARTER

TREND Chicago Fed Nat'l Activity Index (CFNAI) GDP U.S. GDP Hong Kong GDP Germany NFIB Small Business Optimism Index National Restaurant Performance Index Citibank Economic Surprise Index (CESI) CMBS retail delinquencies National Unemployment Rate Retail Sales growth (Commerce Dep't) Personal Income (% growth) Auto sales (annualized pace in millions)

Sources: National Restaurant Association, Fitch, Commerce Department, Citibank, National Federation of Independent Businesses

EMPLOYMENT GROWTH IN THE LARGEST JOB MARKETS, 2010-2011 Thousands 0

20

40

60

80 97,100

New York 65,000

Houston

60,800

Dallas Chicago

44,800 38,200

Detroit Los Angeles

35,400

Miami

32,700

Washington

32,600

Atlanta

30,300

Minneapolis

30,000

Seattle

24,900

Phoenix

23,900

Boston San Francisco-Oakland

100

16,800 14,100

Philadelphia 8,900 Source: Commerce Department, George Mason University Center for Regional Analysis


HIGHLIGHTS | Q1 2012 | RETAIL | UNITED STATES

SHOPPERS FINDING THE CONFIDENCE TO SPEND...FOR NOW Retail sales numbers brightened the Q1 economic picture: Consumer spending was a highlight in the otherwise muted advance Q1 GDP report, and both February and March numbers exceeded expectations. Residential repairs and remodeling continue to drive a large percentage of retail sales as homeowners feel more confident about future income. Spending strength was also evident in apparel and other discretionary categories. Tellingly, given the recent Best Buy store closings announcements (which we’ll discuss later in this report) electronics and appliances was the only retail category with negative yearover-year sales growth on a rolling 3-month average. Retail sales gains occurred in spite of sharply higher fuel prices, but cost savings on lower heating bills throughout this mild winter likely cushioned consumers’ wallets. Another explanation: This recovery has dragged on so long that people have come to expect $4.00-a-gallon (or higher) gas, especially in the travel-heavy spring and summer, and are adjusting their budgets accordingly by allocating more money to fuel and by driving less. Higher sales of fuel efficient cars—those that get more than 30 miles to the gallon—reflect more economical choices. The current pace of consumer sales remains at odds with sluggish growth in after-tax incomes. In the past several months, consumers dipped into savings to fund their purchases, dropping the personal savings rate to 3.8% in March, and took on more household debt. The widening spread between spending and income is not sustainable, and sets the stage for a consumer pullback later this year if job growth doesn’t materialize.

Current Conditions What follows is an overview of shopping center operating results for Colliers’ U.S. retail markets, along with a short discussion of a few trends we’ve been tracking this quarter that are impacting our national outlook. First quarter average shopping center rents came in at $15.51, essentially unchanged from both Q4 2011 and Q1 2011. Among individual property markets, San Francisco, Hawaii and Long Island led the country in operating metrics. Hawaii’s average rental rate, $33.97 was the best in the U.S., and its year-over-year percentage growth was one of the country’s highest. Long Island ($23.62) and three California markets —San Francisco ($27.56), San Jose/South Bay ($26.72), and Orange County ($22.82)—made up the rest of the top five. Markets with the largest year-over-year gains included Little Rock (+10.6%), RaleighDurham (+10.5%), Louisville (+7.6%), and Pittsburgh (4.6%). The lack of enough new Class A retail inventory continues to drive the landlord-tenant dynamic during the lease renewal process. Colliers retail professionals report that far fewer landlords are granting rent reductions as compared to 24 months ago when, in the words of one broker, “every option renewal was a negotiation.” Still, landlords must closely manage lease turnovers as many box retailers unveil smallerscale prototype stores, and retailers find new ways to extract concessions. Colliers is aware of several tenants that have been bypassing their lease administration personnel during the renewal process.

Instead, they are opting to retain local brokers to find alternative site(s) and introducing a concrete opportunity to relocate into the discussion. Within the Colliers market sample, vacancy rates edged downward slightly from 10.4% to 10.3%, with gainers and losers split approximately 50/50. Western Michigan, Detroit, Reno, Cincinnati, and Phoenix all recorded vacancy rates higher than 15%; but the two Michigan markets have improved year-over-year, a spillover effect from broader economic improvements within the manufacturing sector. Looking ahead, the sharp drop-off of space deliveries, and ongoing constraints on new construction activity, will likely put upward pressure on rents, pushing vacancy rates lower in high-demand, space-constrained submarkets.

IN THE SPOTLIGHT: BEST BUY On April 14, Best Buy released its list of 50 locations to be closed by the end of 2012, the bulk of them by late May. The closures represent just 3% of Best Buy’s approximately 1,100-store portfolio, but a significant percentage of the stores were victims of bad timing, having been opened since 2007 in markets hit hard by the housing crisis. The company reiterated its future strategy based on two platforms: 1) new store growth in 2012 to be focused on 100 new Best Buy Mobile locations, which currently number around 305 in the U.S.; 2) and downsizing many of its existing 45,000 SF stores to 30,000 SF when leases come up for renewal. Best Buy has suggested that it is considering alternative uses to sublease its space—potentially “store-within-astore” concepts—but so far has declined to provide more details.

TRENDS IN 2012 CAPITAL EXPENDITURES SPENDING In the wake of e-commerce’s breakout 2011 holiday season, many retailers and landlords reallocated 2012 capital expenditures to better execute changes in corporate strategy. While real estate—both new store openings and brand-driven, value-add remodels—remain extremely important, technology, and specifically omnichannel integration, is receiving a larger share of investment dollars. Companies’ much-improved balance sheets, combined with executive optimism about retail sales growth (or reacting to real or perceived competition, from peers seemingly farther along in the process) is giving them the confidence to spend. Continued on page 5

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HIGHLIGHTS | Q1 2012 | RETAIL | UNITED STATES

UNITED STATES | SHOPPING CENTER MARKET STATISTICS INVENTORY* MAR 31, 2012 (SF)

MARKET

Atlanta, GA Bakersfield, CA Baltimore, MD Boise, ID Boston, MA Charleston, SC Charlotte, NC Chicago, IL Cincinnati, OH Cleveland, OH Columbia, SC Columbus, OH Dallas/Ft. Worth, TX Denver, CO Detroit, MI Fresno, CA Ft. Lauderdale-Broward, FL Green Bay, WI Greenville/Spartanburg, SC Hartford, CT Hawaii Houston, TX Indianapolis, IN Jacksonville, FL Kansas City, MO-KS Las Vegas, NV Little Rock, AK Long Island, NY Los Angeles – Inland Empire, CA Los Angeles, CA Louisville, KY Memphis, TN Miami/Dade County, FL Milwaukee, WI Minneapolis, MN Nashville, TN New Jersey – Northern Oakland/East Bay, CA Oklahoma City, OK Omaha, NE Orange County, CA Orlando, FL Palm Beach County, FL Philadelphia, PA Phoenix, AZ Pittsburgh, PA Portland, OR Raleigh/Durham/Chapel Hill, NC Reno, NV Sacramento, CA San Diego, CA San Francisco, CA San Jose/South Bay, CA Savannah, GA Seattle/Puget Sound, WA St. Louis, MO Stockton, CA Tampa/St Petersburg, FL Washington, D.C. West Michigan Westchester County, NY U.S. Total/Average

137,993,778 9,334,413 45,662,377 13,401,247 85,506,660 13,557,823 51,179,333 160,774,489 35,231,254 48,047,436 15,081,440 31,562,315 148,863,355 70,757,844 70,302,526 25,112,875 48,479,631 6,675,173 29,414,966 42,469,330 17,227,473 150,610,402 39,917,465 35,949,309 38,952,663 44,207,894 14,941,882 51,153,190 85,568,983 149,273,678 27,863,930 30,483,415 45,309,493 33,796,472 66,257,866 30,090,634 91,549,575 40,522,772 26,705,202 32,602,343 64,207,993 61,056,897 35,205,074 149,456,139 104,098,105 32,622,148 34,567,207 38,390,173 10,102,766 51,191,549 53,894,584 9,481,931 30,497,569 6,447,682 57,339,963 54,506,512 19,190,543 86,593,139 81,635,449 32,248,955 50,455,718 3,205,583,002

UNDER NEW SUPPLY CONSTRUCTION YTD 2012 (SF) (SF)

173,104 20,617 7,610 0 8,250 0 23,897 0 12,000 0 0 0 46,793 20,010 0 0 35,000 0 10,500 6,052 0 142,000 0 69,141 0 195,000 0 0 35,406 23,593 20,928 0 0 0 66,076 0 0 62,772 0 0 0 89,518 0 101,113 78,000 155,539 0 12,209 0 17,000 0 0 0 0 81,690 4,921 0 0 120,000 7,700 34,535 1,680,974

*Community and Neighborhood Centers. Source: CoStar, Colliers Research

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18,871 0 266,975 8,260 203,899 0 67,667 11,587 0 6,000 0 45,491 502,686 288,138 68,795 19,940 65,252 0 0 19,500 88,870 561,000 0 0 0 0 22,000 314,562 104,717 136,152 6,500 138,679 6,500 82,000 0 12,263 40,000 18,835 2,500 53,800 47,000 5,000 11,578 51,326 92,961 10,000 6,000 7,699 0 0 186,920 0 145,935 0 274,757 132,496 147,465 43,732 161,073 0 380,000 4,885,381

VACANCY RATE MAR 31, 2011 (%)

14.6 8.5 7.9 11.9 6.9 10.0 12.1 12.2 14.4 12.9 8.2 13.7 13.3 10.4 15.9 11.5 11.0 12.6 11.5 8.7 3.9 7.8 12.9 13.0 14.6 11.3 8.2 4.9 11.8 6.7 11.6 13.0 6.1 11.9 7.3 10.6 8.9 7.1 11.2 11.5 6.2 12.0 11.2 9.6 16.0 7.2 8.5 8.5 14.6 13.8 7.7 5.1 7.2 7.8 10.7 10.8 11.3 11.0 7.5 18.3 6.4 10.4

VACANCY RATE MAR 31, 2012 (%)

14.9 10.1 8.2 11.6 6.9 10.3 11.8 12.3 15.2 13.9 9.2 11.9 13.9 9.9 15.5 12.6 9.3 14.6 9.2 8.4 4.2 7.2 11.5 12.9 14.3 11.6 8.0 4.9 11.4 6.8 10.7 13.5 5.4 11.6 5.8 10.8 10.0 6.0 10.3 11.3 7.5 11.2 10.6 9.7 16.7 6.5 8.9 9.4 15.2 13.4 8.0 3.9 6.7 8.1 10.1 11.1 11.4 10.4 7.6 17.3 7.1 10.3

YTD ABSORPTION 2012 (SF)

209,191 (55,664) 4,356 (29,605) 87,121 (73,380) (149,908) (142,053) 26,860 (78,446) (1,242) 11,757 227,755 (8,023) 68,694 (20,307) 156,131 (6,270) 59,463 (21,986) 6,750 (352,000) 76,522 (203,985) (60,806) 163,597 40,453 98,002 159,130 41,004 78,501 29,674 34,666 41,643 93,128 (155,561) (110,251) 90,781 101,728 64,162 (294,681) 225,612 (99,307) 70,026 216,656 206,124 (171,785) (10,589) (61,281) 245,425 (92,006) 12,586 (176,608) 22,548 321,234 (83,899) (89,535) 192,184 (120,235) 28,821 (61,819) 781,053

QUOTED RENT MAR 31, 2012 (US$PSF)

13.07 15.70 18.66 11.94 14.97 13.96 12.77 15.59 10.73 11.02 10.81 12.16 13.13 13.92 12.46 13.60 17.14 10.02 9.13 13.27 33.97 14.71 11.67 13.22 12.03 16.56 10.18 23.62 17.59 22.47 11.50 10.73 22.28 11.32 13.50 13.24 19.54 21.16 10.01 11.57 22.82 14.85 16.91 14.58 13.90 12.06 16.77 15.84 15.80 16.68 20.79 27.56 26.72 14.69 18.41 12.56 15.43 13.43 22.52 9.34 18.90 15.50

YTD CHANGE IN RENT (%)

(1.66) 2.82 0.43 (2.69) (3.29) 2.50 (1.77) (1.76) (1.38) (2.04) (5.34) (4.25) (0.08) (1.28) (0.80) 2.56 (1.15) (3.75) (3.28) (3.14) 7.57 (0.81) (0.77) (3.78) 2.04 (11.54) 10.65 (1.75) (2.55) (2.77) 5.70 0.66 2.91 (6.14) (0.07) (2.79) (0.91) (2.26) (1.09) (0.60) 1.24 (3.19) (3.54) 1.39 (6.65) 4.60 (7.86) 10.54 (0.57) (4.96) (2.16) (3.06) 1.91 (0.41) 0.88 1.21 0.52 1.21 (0.66) (4.21) 1.50 (0.82)


HIGHLIGHTS | Q1 2012 | RETAIL | UNITED STATES

Having decided to spend more on integration, retailers have multiple options to invest in omnichannel. The chart at right, based on research conducted earlier this year, breaks out key categories of technology spending. Not surprisingly, general integration and mobile upgrades led the list, with social media and fulfillment also high priorities. The survey did not ask specifically about expanded distribution, but several retailers including Dillard’s and Family Dollar will open new facilities in the next two years to enhance their capacity. The spacing of existing brick-and-mortar locations also provides a huge opportunity for fulfillment: Macy’s has already launched a program to use store inventory to deliver to nearby areas. Despite companies’ willingness to invest in technology, omnichannel integration remains in its infancy. Not every company will spend its dollars wisely, which raises the question: What types of technology investments strategies pay off immediately and which ones take time to monetize? Retailers artfully dodge specific questions about the tenets and success of their exact programs, but based on what they’ve revealed through over-performance, we can draw some conclusions for good places to invest money. 1) Universality, from integrating multiple brands under a single web site to being able to shop all brands or with one “shopping cart” in multiple channels. Women’s clothier Athleta, an online concept that has migrated to brick-and-mortar within the past two years, believes that incorporating all of its parent’s (The Gap) brands under a single web site greatly improves the customer experience. 2) Automation in store merchandising and assortment planning. These focused technology upgrades allow companies to better match consumer trends to initial shipments, and then execute smooth adjustments when products sell through differently than planned. Being able to shift inventory between stores generates revenues and protects profit margins, as an item stocked in a store whose clientele don’t buy it must be sold at a discount to clear it from the shelves. 3) Interactivity: making the store experience both connected with yet distinct from the online experience, and incorporating systems where the consumer can provide feedback in each part of the value chain. The Robin Report recently called out Uniqlo, Zara, and H&M—interestingly, three non-U.S. brands—for having honed a technology-driven, seamless process driven by their customers, and maintaining the built-in flexibility to adjust to changing preferences and competitors’ product offerings. In the next 12–24 months, as companies expand their technology investments, Colliers will be watching their sales, margins, and market share to ascertain which programs are generating the most goodwill and bottom-line results.

GROUND-UP DEVELOPMENT SHOWING SIGNS OF LIFE According to Q1 data from CoStar, delivery of retail space remains well below its historical average. Recent announcements from several major developers suggest that the market (both brokerage and lending) may finally be ready to support a ground-up development that is neither an outlet mall nor a grocery-anchored strip center. The largest projects, to be built by Taubman Centers, are both high-end regional malls anchored by Saks Fifth Avenue: one in Sarasota, Florida (the epicenter of the Florida housing market meltdown and an already competitive retail market), and the other in San Juan, Puerto Rico (Nordstrom is the other anchor in PR).

PREFERRED TECHNOLOGY INVESTMENT(S) (% of 2012 CapEx)

Better E-commerce Platform Mobile Commerce More Social Media Better Order Management Advanced Web Analytics Better Site Search Better CRM Customer Reviews/Ratings 0

20

40

60

80

Source: Internet Retailer Note: Survey respondents were allowed to make more than one selection.

Outlet centers continue their rapid expansion, with more than a dozen projects currently under construction for delivery between now and Holiday 2013. On the specialty side, landlords for new projects—and those looking to replace tenants in existing ones—have their pick of a plethora of quick-serve restaurants, dollar stores, and auto parts chains, categories that are dominating retail expansion in 2012-2013.

GOVERNMENT BEAT Supreme Court arguments in the health-care reform legislation began in late March. The “Individual Mandate” clause has generated the most attention, debate, and “what if” analysis. If, come June, the high court finds any part of the act to be unconstitutional, its decision would provide significant reassurance to business leaders that have held back on investments, including hiring, until they better understood the potential cost ramifications. If the act stands, we expect it will kick off a volatile summer in the equities markets until more clarity emerges on how the various statutes will be enacted. Both the retail and the lodging industries cheered a recent executive order to streamline the U.S. visa process for visitors from two highpotential tourist markets, Brazil and China. Signed in January, the order will both simplify and shorten the visa application process as it aims to increase non-immigrant visa processing capacity by 40% this year. Lengthy waits for U.S. visas have deterred tourists: The U.S.’ share of international tourism dollars fell from 17% in 2000 to 12% in 2010, losing ground to France and Canada. Brazilian and Chinese tourists eagerly snap up luxury goods here in the U.S, to avoid high local taxes in their home markets and receive assurance that they are buying authentic product. Look for outlet malls, couture shops on High Streets, and premium hotels to benefit from increased traffic and spending. Continued on page 8 COLLIERS INTERNATIONAL |

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HIGHLIGHTS | Q1 2012 | RETAIL | UNITED STATES

UNITED STATES | RETAILER REPORT CARD RETAILER

MOST RECENT % CHG IN Y-O-Y % CHG IN Y-O-Y REPORTING SALES SALES PERIOD (MOST RECENT QTR) PREVIOUS QTR

DEPARTMENT STORES

COMMENTS

OUTLOOK

Belk Dillard's JCPenney Macy's Nordstrom Neiman Marcus Saks Fifth Avenue

Q4 2011 Q4 2011 Q4 2011 Q4 2011 Q4 2011 Q2 2012 Q4 2011

5.0 3.0 (1.8) 5.2 7.1 9.0 7.7

6.6 5.0 (1.6) 4.0 7.9 8.0 5.8

$600M in technology, branding investment driving revenue, net income gains record 2011 EPS; opening 850K SF warehouse in AR; far less promotional comp sales hurt by exit from catalog; debt downgrades; huge corporate downsizing category leader in multichannel integration; online sales up 40% in FY 2011 will end 2012 with more Rack than full-line stores—first time in its history strongest sales growth in women's shoes, bags, beauty, and in Texas, SE, W handbags, fine jewelry, clothing boosted Q4 sales; upping tech investments

Sears (U.S.) The Bon-Ton

Q1 2012 Q4 2011

(1.0) (2.6)

(4.1) (5.9)

overall sales still down, but double-digit increases in apparel and footwear piloting smaller stores in niche markets, shifting more SF to growth categories

Q3 2012 Q4 2011 Q4 2011 Q2 2012

8.5 3.4 7.6 8.0 / 7.0

6.7 1.7 4.0 10.0/6.0

transactions +5.6%, average ticket +3%, acquisition by Ares/CPPIB complete record U.S. operating profit, EPS; shift away from Toys to Seasonal paid off consumables drove traffic; testing “store-within-a-store” in Bed, Bath, & Beyond will ramp back up to 20-30 new stores/year in FY 2013

Q3 2011 Q4 2011 Q4 2011 Q2 2012 Q4 2011 Q4 2011 Q4 2011 Q4 2012 Q3 2012 Q4 2012

6.5 7.3 5.6 4.5 (2.1) 7.0 2.2 6.0 (3.2) 1.5

6.3 4.8 5.2 4.1 2.1 5.0 4.3 3.0 (4.6) 1.3

anticipating strong '12 growth with new DG Market, DG Plus stores 4th largest quarterly comp sales increase since 1999; 315 new stores in 2012 2012 CapEx up $40M on new stores; strongest comps in men's, accessories margins improving on higher sales of private label brands 2012 guidance lower than expected; may be shifting focus to lower pricing low inventories bolstered profit margins, increased merchandise turns momentum continues in grocery, household, Canada; 230 remodels in '12 increasing growth plans for Marmaxx, Homegoods; still confident in Europe sales dropped on lower traffic and avg. ticket; new online platform coming missed earnings, but stealing share from competitors through pricing focus

Q4 2011 Q4 2011 Q2 2012 Q4 2011 Q4 2011 Q4 2011 Q4 2011 Q4 2011 Q4 2011 Q4 2011 Q4 2011

5.3 8.0 (3.2) (4.0) 3.0 1.3 7.0 6.0 9.3 flat 9.7

5.5 9.1 (4.1) (5.0) (3.0) 2.6 9.0 5.0 7.2 (4.0) 6.0

adjusting merchandising to expand color selection and fashion SKUs FY 2011 sales up from $428/PSF to $462/PSFa beat earnings on strong Spring/Summer sales, provided higher '12 guidance int'l business better; now operates in 39 countries; 2011 Net Direct sales +20% gaining market share at expense of margins; launching a new chain this year Hot Topic +2.2%, Torrid -3.2%; raised Q4 earnings guidance higher 2012 CapEx to expand Victoria's Secret real estate, add more PINK men's, accessories led Q4 comp growth; starting to look at U.K., Asia locations promotion-driven sales and marketing continue; tuxedo rentals way up results improved after terrible Q3; still evaluating “strategic alternatives” record Q4 and FY 2011 results; planning 50 new stores for 2012

Q4 2011 Q4 2011 Q4 2011 Q4 2012 Q4 2011

6.8 6.1 3.4 10.3 7.0

4.1 3.8 0.7 7.0 7.3

opening new 800K e-commerce fulfillment center, ~40 stores in 2012 boosted by above-average temps, sluggish housing market creating more DIY Q4 sales comps positive across the entire U.S.; focus on e-commerce, Canada higher gross margins, right mix balance of full-price and promotional product record FY 2011 earnings; e-commerce now 38% of total company revenue Nook, digital content growth continues to offset declines in hard-copy sales

DISCOUNTERS

99 Cents Only Big Lots Cost Plus Costco (U.S, with/excl. fuel) Dollar General Dollar Tree DSW Family Dollar Kohl's Ross Target TJ Maxx Tuesday Morning Walmart (U.S.) SPECIALTY APPAREL

Ann Taylor The Buckle Destination Maternity The Gap H&M Hot Topic Limited Brands J. Crew Men’s Wearhouse Talbots Zumiez HOME

Bed Bath & Beyond Home Depot (U.S.) Lowe's Pier 1 Williams-Sonoma HOBBY

Barnes & Noble

Q3 2012

2.8

(0.6)

Best Buy

Q4 2012

(2.4)

0.9

focused on Best Buy Mobile expansion, cutting $800M in costs, CEO resigned

Cabela's

Q1 2012

4.2

1.7

2nd consecutive record quarter; Club VISA program contributing to upside

GameStop (global)

Q4 2011

(3.6)

(0.6)

revenues missed but new and pre-owned software sales trending up

Office Depot (N. America)

Q4 2011

(5.0)

(2.0)

small-format stores succeeding at retaining ~90% of larger stores' revenues

OfficeMax PetSmart

Q4 2011 Q4 2011

0.2 5.5

(4.3) 6.1

closing up to 35 U.S. stores; majority of $75-$100M CapEx going to technology double-digit growth in services; added cat toys to Martha Stewart line

Staples (N. America)

Q4 2011

2.0

(1.0)

renewed 90% of '11 leases below option rent; 150 leases up for renewal in '12

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HIGHLIGHTS | Q1 2012 | RETAIL | UNITED STATES

UNITED STATES | RETAILER REPORT CARD (CONTINUED) RETAILER

MOST RECENT % CHG IN Y-O-Y % CHG IN Y-O-Y REPORTING SALES SALES PERIOD (MOST RECENT QTR) PREVIOUS QTR

COMMENTS

OUTLOOK

RESTAURANTS

Applebee's BJ's Restaurants Bob Evans (total) Brinker Int'l (company owned) Buffalo Wild Wings (owned) Burger King (U.S./Canada) Cheesecake Factory Chipotle Darden (Basic/SpeDenny's Domino's Dunkin' Brands Einstein Noah Kona Grill, Inc. Krispy Kreme McDonald's (U.S.) O'Charley's, Inc. Panera Bread Pei Wei P.F. Chang's Ruby Tuesday, Inc. Ruth's Hospitality Ruth's Chris Mitchell's Fish Market Starbucks (U.S.) Yum! Brands (U.S.)

Q1 2012 Q1 2012 Q3 2012

1.2 3.3 0.1

1.0 5.1 (2.7)

95% franchised as of Q1 2012; sold 39 company-owned locations in VA rolling out new menu in May, launching guest loyalty program in July Mimi's negative comps holding back growth in Bob Evans results

Q3 2012

3.8

1.7

well-received steak upgrades at Chili’s; corporate POS system rollout continues

Q1 2012

9.2

8.9

expanded national advertising program

Q4 2011

(2.0)

flat

remains weakest BK division worldwide; hurt by competitors' promotions

Q1 2012 Q1 2012 Q3 2012 Q4 2011 Q4 2011 Q4 2011 Q4 2011 Q4 2011 Q4 2012 Q1 2012 Q4 2011 Q4 2011 Q1 2012 Q1 2012 Q3 2012 Q4 2011 Q4 2011 Q4 2011 Q2 2012 Q4 2011

2.6 12.7 4.1 / 5.8 1.6 6.8 7.4 1.2 7.8 8.3 8.9 0.9 5.9 (1.7) (0.6) (5.0)

2.7 11.1 1.8 / 3.9 0.9 3.0 5.6 1.0 10.6 4.0 7.1 0.4 6.0 (1.9) (2.4) (4.2)

7.7 0.4 8.0 1.0

2.6 (0.7) 9.0 (3.0)

7th consecutive quarter of comp sales growth new president/CEO an expert in positioning for "growth and profitability" 4.7M U.S. loyalty members; largest retailer mobile payment program in N.A. 60 restaurants per 1M people in U.S.; 2 per 1M in Top 10 emerging markets

Q4 2011 Q1 2012 Q4 2012 Q4 2011 Q2 2012 Q2 2012

4.9 1.6/flat (1.9) 4.8 2.5 9.5

5.0 6.2/1.5 (2.9) 6.5 3.3 8.7

every supermarket department achieved positive comp sales $900M in planned 2012 CapEx; labor relations issues could distract in 2013 recorded quarterly loss; struggling to compete on cost; losing market share 2012 marks company's 100th year in business reported an $18M loss in what could be its last release as a public company 22% of portfolio is < 2 years old; new store deals are ~4,000 SF smaller

Q1 2012 Q4 2012 Q2 2012

8.4 3.0 (1.5)

2.5 2.0 2.5

Walgreens’ Express Scripts defectors providing a huge boost to Rx comps top-line results improved during FY 2012; enhanced customer loyalty programs ESRX dispute weighing on Rx sales comps (-3.9%) and scripts filled (-4.9%)

Q4 2011 Q2 2012 Q1 2012 Q4 2011

2.9 5.9 7.4 0.8

2.2 4.6 3.3 (0.4)

record profits, strong sales in both maintenance and "failure" products milder winter prompted higher sales of maintenance, discretionary products tech investment in electronic catalog; expanding in-store inventory by $80M suspended quarterly dividend, will be taken private at end of Q2 2012

California, Texas, Southeast, and Midwest remain chain’s strongest markets expanding ‘12 non-traditional marketing to expand sustainability messaging strong sales growth across all brands; opening world's largest lobster farm remains focused on value diner, emphasizing affordability earnings beat consensus; higher input prices, comps drove results planning to double its store portfolio by 2032 continued focus on menu enhancements, expanding catering services 8th consecutive qtr of positive traffic trends; 1st profitable year since 2004 2012 store openings: 15-25 U.S., 75 International traffic up despite price increases; strong acceptance of new breakfast options Fidelity announced that it will acquire this chain, continue to expand it projecting 7.0-7.5% comp sales growth for 2012 Centerbridge Partners taking company private no later than Q3 2012 earnings calls to be suspended during pending takeover by Centerbridge lowers guidance, closing 25 restaurants; acquired Lime Fresh Mexican Grill

GROCERY

Kroger (excl. fuel) Safeway (with/excl. Supervalu Weis Markets Winn-Dixie Whole Foods PHARMACY

CVS Rite Aid Walgreens AUTO

Advance Auto Parts AutoZone O'Reilly's Auto Parts Pep Boys

* Sources: Company Reports, Colliers Research

COLLIERS INTERNATIONAL |

P. 7


HIGHLIGHTS | Q1 2012 | RETAIL | UNITED STATES

GROCERY The grocery wars continue in 2012 as price competition intensifies and dominant grocers fight the market-share game to protect their turf in key markets. Walmart’s recommitment to lower prices beginning last fall upped the ante for its smaller and weaker competitors, as some have seen dramatically weaker financial results, especially margins, as they move to keep pace. Competition in the California market is especially intense, with Tesco’s Fresh and Easy among the brands that continue to struggle, even as it adds 45 new locations this year. Florida, another competitive market, may soon lose Albertson’s; the chain is rumored to be considering shuttering 13 of its 17 locations there. Proprietary analysis from Citigroup suggested that grocery chains were falling behind their non-grocery peers in their commitment to technology and technology investment. Supervalu continues to struggle after a rough quarter where it posted a loss, losing share to larger competitors Kroger and Safeway. As shopping center vacancy rates remain the highest among retail sector property types, landlords are working to secure alternate tenants. Recent trends have included lots of wellness/medical uses that require a high population concentration to generate foot traffic. Insurance companies, especially those that offer insurance from multiple providers, are another option that fits well within a groceryanchored space.

LOOKING AHEAD In our 2012 Outlook, released back in February, we made nine predictions. Let’s turn over the Magic-8 Ball and see how we’re doing so far with respect to each of them.

1) ANOTHER WILD RIDE FOR EQUITIES: “OUTLOOK GOOD” In the first part of 2012, equity markets moved primarily in one direction: up. As this report went to press, though, markets were wavering in a delayed reaction from a disappointing U.S. April jobs report and concerns about potential corporate debt downgrades. The Supreme Court’s health care decision, guaranteed to upset one half of the population, guarantees a bumpy start to the summer. Layer into that newly elected European leaders and the U.S. general election— it’s going to be a wild ride.

2) MANUFACTURING SURGES: “OUTLOOK GOOD” In the span of the past six weeks, this rating slipped from “Yes, Definitely” to “Ask Again Later” but has regained ground as of April’s strong ISM reading. March slowdowns in key Fed regional manufacturing indices and a disappointing durable goods number suggest that the sector’s recovery may be moderating. Although the initial reading on Q1 GDP wasn’t affected, we expect this late-quarter slowdown to weigh on business spending and manufacturing during Q2. Based on employment growth and still-positive business sentiment, though, manufacturing remains on track to contribute significantly to 2012 GDP growth. P. 8

| COLLIERS INTERNATIONAL

2012 TRENDS TO WATCH

“Magic 8-Ball” Performance Year To Date

Yes Definitely

Outlook Good

Ask Again Later

More Limited Editions More Strategic Acquisitions Manufacturing Surges Urban Infill Makes a Comeback Foreign Investors the U.S. Equities Market Volatility Experience Trumps Price Distressed Asset Pipeline Begins to Move Expanded Debt/Equity, Stringent Underwriting

3) MORE SHOPPERS CHOOSING EXPERIENCE OVER PRICE: “ASK AGAIN LATER” Many retailers’ margins took a hit in Q4 only to rebound somewhat in Q1 as price pressures on some input commodities eased. An exception to this would be in the grocery sector, where pricing remains extremely competitive. Based on improving margins and standout performance of many brands that don’t compete on price, it feels anecdotally like this trend is occurring, but not enough hard evidence exists yet.

4) RETAILERS ROLL OUT MORE LIMITED EDITIONS AND EXCLUSIVES: “YES, DEFINITELY” Kohl’s successful American Idol rollout has been the latest example of the power of urgency to drive sell-throughs. There is a related angle here that we didn’t touch on earlier: in-store exclusives have become a defensive strategy for retailers, a way to prevent in-store comparison shopping by “scan and scram” shoppers on their mobile devices. Different model numbers confuse many mobile price comparison apps even if the product specs are similar.

5) MORE STRATEGIC ACQUISITIONS: “YES, DEFINITELY” As this report went to press, four major retail acquisitions were making headlines. Two of the four—Centerbridge Partners taking P.F. Chang’s and Collective Brands’ sale to a consortium of Wolverine Worldwide, Blum Capital, and Golden Gate Capital—were private equity groups opting to take the retailers private to reinvest and expand their businesses. The other two—Ascena’s acquition of Charming Shoppes and Bed Bath & Beyond’s all-cash offer for Cost Plus—demonstrate what we believe is a growing trend for retailers to deploy excess capital beyond reinvesting in their corporate infrastructure. With many retail companies still flush with cash, we expect more of these announcements in the coming months

6) DISTRESSED ASSET PIPELINE BEGINS TO MOVE: “ASK AGAIN LATER” Year-to-date, the level of retail transactions has yet to rebound, with volumes and pricing continuing to lag other property sectors. Retail transactions tracked by CoStar, with the exception of single-tenant net


HIGHLIGHTS | Q1 2012 | RETAIL | UNITED STATES

522 offices in 62 countries on 6 continents United States: 147 Canada: 37 Latin America: 19 Asia Pacific: 201 EMEA: 118 • $1.8

billion in annual revenue

billion square feet under management

• 1.25

• Over

12,300 professionals and staff

Retail professionals in 66 U.S. Offices

• 370

lease deals, still carry an average risk premium of 150–175 basis points above office and multifamily. Improvements in distressed housing may help retail. Ongoing low Treasury rates are enticing investors to snap up foreclosed residential properties and convert them to rental properties, a business CoreLogic estimates could reach $100 billion. Also, a recent CMBS deal —the first issuance of a non-performing loan portfolio in a decade—generated optimism that lenders and borrowers are finding creative ways to address the $17.3 billion in real estate loans coming due this year.

continue to refinance at attractive terms given their strong assets and credit histories. The issue now is with underwriting on leveraged loans, which are on the rise as buyouts, corporate acquisitions, and recapitalizations increase. In early April the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency announced a joint proposal urging banks to be more cautious in making loans. Although little in the proposal is new, it provides bank examiners with tools to address failed transactions and maintain tougher oversight over diversified, leveraged loan portfolios.

7) FOREIGN INVESTORS “OUTLOOK GOOD”

9) URBAN INFILL: “OUTLOOK GOOD”

THE U.S.:

Results from a recent survey by the Association of Foreign Investors in Real Estate (AFIRE) reconfirmed that U.S. debt and equity investments are attractive destinations for overseas capital. Nearly 60% of AFIRE respondents rated their interest in U.S. equity investments as either “somewhat stronger” or “much stronger” than those made in other countries, and 53% rated debt investments stronger. In light of economic instability in Europe and inflation risks elsewhere, improving U.S. property fundamentals and macro indicators are on track to continue generating additional investment interest.

8) EXPANDED CAPACITY, STRINGENT UNDERWRITING IN DEBT MARKETS: “ASK AGAIN LATER” Lending is back up, but so is concern that banks are relaxing their lending practices. Large corporate borrowers such as REITs

Expanding retailers both here and overseas are increasingly finding that there isn’t enough space available in the right locations to meet their needs. Rather than go too far afield from their target customers, they are partnering with municipalities and landlords to reconfigure space, especially those with footprints ranging from 5,000 to 20,000 square feet. The 2012 retail industry has benefitted from a combination of pent-up demand that has spurred consumer spending, a slight easing of underwriting standards that has begun to move lending, and historically low interest rates that have attracted investment capital from yield-seeking investors. Retail expansion and corporate reinvestment plans continue to reflect executive optimism, even as macroeconomic concerns threaten to stall the recovery later this year. It’ll be another quarter of wait-and-see on whether political instability or slowly strengthening economic fundamentals gain the upper hand.

COLLIERS INTERNATIONAL 601 Union Street, Suite 4800 Seattle, WA 98101 TEL +1 206 695 4200

FOR MORE INFORMATION Ann T. Natunewicz Manager, Retail Research | USA TEL +1 202 742 1105 EMAIL Ann.Natunewicz@colliers.com K.C. Conway, EMD, Market Analytics, contributed data and insights to this report. Lauren Chlebowski | Global Brand Designer

Copyright © 2012 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

Accelerating success. COLLIERS INTERNATIONAL |

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